Swap Execution Facilities and Trade Execution Requirement

Federal RegisterNov 30, 2018

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 9, 36, 37, 38, 39, and 43

RIN 3038-AE25

Swap Execution Facilities and Trade Execution Requirement

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Proposed rule.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is proposing amendments to regulations relating to the trade execution requirement under the Commodity Exchange Act (“CEA” or “Act”) and amendments to existing regulations relating to swap execution facilities (“SEFs”) and designated contract markets (“DCMs”). Among other amendments, the proposed rules apply the SEF registration requirement to certain swaps broking entities and aggregators of single-dealer platforms; broaden the scope of the trade execution requirement to include all swaps subject to the clearing requirement under the Act that a SEF or a DCM lists for trading; allow SEFs to offer flexible execution methods for all swaps that they list for trading; amend straight-through processing requirements; and amend the block trade definition. The proposed rules, which also include non-substantive amendments and various conforming changes to other Commission regulations, reflect the Commission's enhanced knowledge and experience with swaps trading characteristics and would further the Dodd-Frank Act's statutory goals for SEFs,

i.e.,

promote more SEF trading and pre-trade price transparency in the swaps market. Further, the proposed rules are intended to strengthen the existing swaps regulatory framework by reducing unnecessary complexity, costs, and other burdens that impede SEF development, innovation, and growth.

DATES:

Comments must be received on or before February 13, 2019.

ADDRESSES:

You may submit comments, identified by “Swap Execution Facilities and Trade Execution Requirement” and RIN 3038-AE25, by any of the following methods:

•

CFTC Comments Portal: https://comments.cftc.gov

. Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form.

•

Mail:

Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

•

Hand Delivery/Courier:

Follow the same instructions as for Mail, above.

Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged.

All comments must be submitted in English, or if not, be accompanied by an English translation. Comments will be posted as received to

https://comments.cftc.gov

. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (“FOIA”), a petition for confidential treatment of the exempt information may be submitted according to the procedures established under § 145.9 of the Commission's regulations.

17 CFR 145.9.

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all submissions from

https://comments.cftc.gov

that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT:

Nhan Nguyen, Special Counsel, (202) 418-5932,

nnguyen@cftc.gov

; Roger Smith, Special Counsel, (202) 418-5344,

rsmith@cftc.gov

; or David Van Wagner, Chief Counsel, (202) 418-5481,

dvanwagner@cftc.gov

, Division of Market Oversight; Michael Penick, Senior Economist, (202) 418-5279,

mpenick@cftc.gov

, Office of the Chief Economist, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background and Introduction

A. Statutory Background: The Dodd-Frank Act

B. Regulatory History: The Part 37 Rules

1. Challenges of Existing Regulatory Approach

a. Lack of MAT Determinations

b. Swaps Market Characteristics

c. Operational Complexities and Costs

C. Proposed Approach

D. Summary of Proposed Revisions

E. Consultation With Other U.S. Financial Regulators

II. Part 9—Rules Relating To Review of Exchange Disciplinary, Access Denial or Other Adverse Actions

III. Part 36—Trade Execution Requirement

IV. Part 37—Subpart A: General Provisions

A. § 37.1—Scope

B. § 37.2—Applicable Provisions and Definitions

1. § 37.2(a)—Applicable Provisions

2. § 37.2(b)—Definition of “Market Participant”

a. Applicability of § 37.404(b) to Market Participants

b. SEF Jurisdiction Over Clients of Market Participants

C. § 37.3—Requirements and Procedures for Registration

1. § 37.3(a)—Requirements for Registration

a. Footnote 88

b. Single-Dealer Aggregator Platforms

c. Swaps Broking Entities, Including Interdealer Brokers

(1) Structure and Operations of Swaps Broking Entities, Including Interdealer Brokers

(2) SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers

d. Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps Trading Facilities

(1) Proposed Delay of SEF Registration Requirement

(2) Proposed Conditions for Delay of SEF Registration Requirement

2. § 37.3(a)(2) Through (3)—Minimum Trading Functionality and Order Book Definition

3. § 37.3(b)—Procedures for Registration

a. Elimination of Temporary Registration

b. § 37.3(b)(1)—Application for Registration

(1) Form SEF Exhibits—Business Organization

(2) Form SEF Exhibits—Financial Information

(3) Form SEF Exhibits—Compliance

(4) Form SEF Exhibits—Operational Capability

(5) Other Form SEF Amendments

(6) Request for Legal Entity Identifier

c. § 37.2(b)(2)—Request for Confidential Treatment

d. § 37.3(b)(3)—Amendment of Application for Registration

e. § 37.3(b)(4)—Effect of Incomplete Application

f. § 37.3(b)(5)—Commission Review Period

g. § 37.3(b)(6)—Commission Determination

4. § 37.3(c)—Amendment to an Order of Registration

5. § 37.3(d)—Reinstatement of Dormant Registration

6. § 37.3(e)—Request for Transfer of Registration

7. § 37.3(f)—Request for Withdrawal of Application for Registration

8. § 37.3(g)—Request for Vacation of Registration

9. § 37.3(h)—Delegation of Authority

D. § 37.4—Procedures for Implementing Rules

E. § 37.5—Provision of Information Relating to a Swap Execution Facility

1. § 37.5(a)—Request for Information

2. § 37.5(b)—Demonstration of Compliance

3. § 37.5(c)—Equity Interest Transfer

4. § 37.5(d)—Delegation of Authority

F. § 37.6—Enforceability

1. § 37.6(a)—Enforceability of Transactions

2. § 37.6(b)—Swap Documentation

a. § 37.6(b)(1)—Legally Binding Documentation

b. § 37.6(b)(2)—Requirements for Swap Documentation

G. § 37.7—Prohibited Use of Data Collected for Regulatory Purposes

H. § 37.8—Boards of Trade Operating Both a Designated Contract Market and a Swap Execution Facility

I. § 37.9—Methods of Execution for Required and Permitted Transactions; § 37.10—Process for a Swap Execution Facility To Make a Swap Available to Trade; § 37.12—Trade Execution Compliance Schedule; § 38.11—Trade Execution Compliance Schedule; § 38.12—Process for a Designated Contract Market To Make a Swap Available to Trade

1. Trade Execution Requirement and MAT Process

2. Execution Method Requirements

3. Implementation of Existing Requirements

4. Proposed Approach

a. § 36.1(a)—Trade Execution Requirement

b. Elimination of Required Execution Methods

V. Part 37—Subpart B: Core Principle 1 (Compliance With Core Principles)

VI. Part 37 Regulations Related to SEF Execution Methods—Subpart C: Core Principle 2 (Compliance With Rules)

A. § 37.201—Requirements for Swap Execution Facility Execution Methods

1. § 37.201(a)—Required Swap Execution Facility Rules

a. § 37.201(a)(1)—Trading and Execution Protocols and Procedures

b. § 37.201(a)(2)—Discretion

c. § 37.201(a)(3)—Market Pricing Information

2. § 37.203(a)—Pre-Arranged Trading Prohibition; § 37.9(b)—Time Delay Requirement

a. § 37.201(b)—Pre-Execution Communications

(1) Exception for Swaps Not Subject to the Trade Execution Requirement

(2) § 37.201(b)(1)—Exception for Package Transactions

3. § 37.201(c)—SEF Trading Specialists

a. § 37.201(c)(1)—Definition of “SEF Trading Specialist”

b. § 37.201(c)(2)—Fitness

c. § 37.201(c)(3)—Proficiency Requirements

d. § 37.201(c)(4)—Ethics Training

(1) Guidance to Core Principle 2 in Appendix B—Ethics Training

e. § 37.201(c)(5)—Standards of Conduct

f. § 37.201(c)(6)—Duty To Supervise

g. § 37.201(c)(7)—Additional Sources for Compliance

VII. Additional Part 37 Regulations—Subpart C: Core Principle 2 (Compliance With Rules)

A. § 37.202—Access Requirements

1. § 37.202(a)—Impartial Access to Markets, Market Services, and Execution Methods

a. § 37.202(a)(1)—Impartial Access Criteria

(1) Application of Impartial Access Requirement

(i) Eligibility and Onboarding Criteria

(ii) Access to Execution Methods

(iii) Use of Discretion

b. § 37.202(a)(2)—Fees

2. § 37.202(b)—Limitations on Access

3. § 37.202(c)—Eligibility

4. § 37.202(d)—Jurisdiction

B. § 37.203—Rule Enforcement Program

1. § 37.203(a)—Abusive Trading Practices Prohibited

2. § 37.203(b)—Authority To Collect Information

3. § 37.203(c)—Compliance Staff and Resources

4. § 37.203(d)—Automated Trade Surveillance System

5. § 37.203(e)—Error Trade Policy

a. Error Trades—Swaps Submitted for Clearing

b. Current SEF Error Trade Policies

c. § 37.203(e)—Error Trade Policy

6. § 37.203(f)—Investigations

7. § 37.203(g)—Additional Sources for Compliance

C. § 37.204—Regulatory Services Provided by a Third Party

1. § 37.204(a)—Use of Regulatory Service Provider Permitted

2. § 37.204(b)—Duty To Supervise Regulatory Service Provider

3. § 37.204(c)—Delegation of Authority

D. § 37.205—Audit Trail

1. § 37.205(a)—Audit Trail Required

2. § 37.205(b)—Elements of an Acceptable Audit Trail Program

a. § 37.205(b)(1)—Original Source Documents; § 37.205(b)(2)—Transaction History Database; § 37.205(b)(3)—Electronic Analysis Capability

3. § 37.205(c)—Audit Trail Reconstruction

E. § 37.206—Disciplinary Procedures and Sanctions

1. § 37.206(a)—Enforcement Staff

2. § 37.206(b)—Disciplinary Program

3. § 37.206(c)—Hearings

4. § 37.206(d)—Decisions

5. § 37.206(e)—Disciplinary Sanctions

6. § 37.206(f)—Warning Letters

7. § 37.206(g)—Additional Sources for Compliance

F. Part 9—Rules Relating To Review of Exchange Disciplinary, Access Denial or Other Adverse Actions

VIII. Part 37—Subpart D: Core Principle 3 (Swaps Not Readily Susceptible to Manipulation)

A. § 37.301—General Requirements

1. Appendix C—Demonstration of Compliance That a Swap Contract Is Not Readily Susceptible to Manipulation

IX. Part 37—Subpart E: Core Principle 4 (Monitoring of Trading and Trade Processing)

A. § 37.401—General Requirements

B. § 37.402—Additional Requirements for Physical-Delivery Swaps

C. § 37.403—Additional Requirements for Cash-Settled Swaps

D. § 37.404—Ability To Obtain Information

E. § 37.405—Risk Controls for Trading

F. § 37.406—Trade Reconstruction

G. § 37.407—Regulatory Service Provider; § 37.408—Additional Sources for Compliance

X. Part 37—Subpart F: Core Principle 5 (Ability To Obtain Information)

A. § 37.501—Establish and Enforce Rules

B. § 37.502—Provide Information to the Commission

C. § 37.503—Information-Sharing

D. § 37.504—Prohibited Use of Data Collected for Regulatory Purposes

XI. Part 37—Subpart G: Core Principle 6 (Position Limits or Accountability)

A. § 37.601—Additional Sources for Compliance; Guidance to Core Principle 6 in Appendix B

XII. Part 37—Subpart H: Core Principle 7 (Financial Integrity of Transactions); § 39.12—Participant and Product Eligibility

A. § 37.701—Required Clearing

B. § 37.702—General Financial Integrity

1. § 37.702(a)—Minimum Financial Standards

2. § 37.702(b) and § 39.12(b)(7)—Time Frame for Clearing

a. “Prompt and Efficient” Standard and AQATP Standard

b. Proposed Approach to Straight-Through Processing

(1) § 37.702(b)(1) and § 39.12(b)(7)(i)(A)—“Prompt, Efficient, and Accurate” Standard

(2) § 39.12(b)(7)(ii)—AQATP Standard for Registered DCOs

(3) § 37.702(b)(2) Through (3)—Pre-Execution Credit Screening

3. Applicability of § 37.702(b) to SEFs That Do Not Facilitate Clearing

C. § 37.703—Monitoring for Financial Soundness

XIII. Part 37—Subpart I: Core Principle 8 (Emergency Authority)

A. § 37.801—Additional Sources for Compliance

XIV. Part 37—Subpart J: Core Principle 9 (Timely Publication of Trading Information)

XV. Part 37—Subpart K: Core Principle 10 (Recordkeeping and Reporting)

XVI. Part 37—Subpart L: Core Principle 11 (Antitrust Considerations)

XVII. Part 37—Subpart M: Core Principle 12 (Conflicts of Interest)

XVIII. Part 37—Subpart N: Core Principle 13 (Financial Resources)

A. § 37.1301—General Requirements

1. § 37.1301(a)

2. § 37.1301(b)

3. § 37.1301(c)

B. § 37.1302—Types of Financial Resources

C. § 37.1303—Liquidity of Financial Resources

D. § 37.1304—Computation of Costs To Meet Financial Resources Requirement

1. Acceptable Practices to Core Principle 13 in Appendix B

E. § 37.1305—Valuation of Financial Resources

F. § 37.1306—Reporting to the Commission

1. § 37.1306(a)

2. § 37.1306(b)

3. § 37.1306(c)

4. § 37.1306(d)

5. § 37.1306(e)

G. § 37.1307—Delegation of Authority

XIX. Part 37—Subpart O: Core Principle 14 (System Safeguards)

A. § 37.1401(c)

B. § 37.1401(g)—Program of Risk Analysis and Oversight Technology Questionnaire

C. § 37.1401(j)

XX. Part 37—Subpart P: Core Principle 15 (Designation of Chief Compliance Officer)

A. § 37.1501—Chief Compliance Officer

1. § 37.1501(a)—Definitions

2. § 37.1501(b)—Chief Compliance Officer

a. Acceptable Practices to Core Principle 15 in Appendix B

3. § 37.1501(c)—Duties of Chief Compliance Officer

4. § 37.1501(d)—Preparation of Annual Compliance Report

5. § 37.1501(e)—Submission of Annual Compliance Report and Related Matters

6. § 37.1501(f)—Recordkeeping

7. § 37.1501(g)—Delegation of Authority

XXI. Part 36—Trade Execution Requirement

A. § 36.1—Trade Execution Requirement

1. § 36.1(a)—Trade Execution Requirement

2. § 36.1(b)—Exemption for Certain Swaps Listed Only by Exempt SEFs

a. Discussion of CEA Section 4(c) Enumerated Factors

3. § 36.1(c)—Exemption for Swap Transactions Excepted or Exempted From the Clearing Requirement Under Part 50

a. Discussion of CEA Section 4(c) Enumerated Factors

4. § 36.1(d)—Exemption for Swaps Executed With Bond Issuance

a. Discussion of CEA Section 4(c) Enumerated Factors

5. § 36.1(e)—Exemption for Swaps Executed Between Affiliates That Elect To Clear

a. Discussion of CEA Section 4(c) Enumerated Factors

B. § 36.2—Registry of Registered Entities Listing Swaps Subject to the Trade Execution Requirement; Appendix A to Part 36—Form TER

C. § 36.3—Trade Execution Requirement Compliance Schedule

1. § 36.3(c)(1)—Category 1 Entities

2. § 36.3(c)(2)—Category 2 Entities

3. § 36.3(c)(3)—Other Counterparties

4. § 36.3(e)—Future Compliance Schedules

XXII. Part 43—§ 43.2—Definition of “Block Trade”

A. § 43.2—Definition—Block Trade; § 37.203(a)—Elimination of Block Trade Exception to Pre-Arranged Trading

XXIII. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

1. Information Provided by Reporting Entities/Persons

a. § 37.3(a)—Requirements for Registration

b. § 37.3(b)—Procedures for Registration

c. § 37.3(c)—Amendment to an Order of Registration

d. § 37.5(c)—Provision of Information Relating to a Swap Execution Facility

e. § 37.6(b)(1)—Legally Binding Documentation

f. § 37.203(d)—Automated Trade Surveillance System

g. § 37.203(e)—Error Trade Policy

h. § 37.205(a)—Audit Trail Required

i. § 37.205(b)—Elements of an Acceptable Audit Trail Program

j. § 37.205(c)—Audit Trail Reconstruction

k. §§ 37.206(b)-(d)—Disciplinary Program

l. § 37.401—General Requirements for Monitoring of Trading and Trade Processing

m. § 37.1301(b)—General Requirements for Financial Resources

n. § 37.1306—Financial Reporting to the Commission

o. § 37.1401(g)—Program of Risk Analysis and Oversight Technology Questionnaire

p. § 37.1501(d)—Preparation of Annual Compliance Report

q. Part 36—Trade Execution Requirement

2. Information Collection Comments

C. Cost-Benefit Considerations

1. Introduction

2. Baseline

3. SEF Registration

a. Overview

(1) Application of SEF Registration Requirement

(2) SEF Registration Process and Related Forms

b. Benefits

(1) Application of SEF Registration Requirement

(2) SEF Registration Process and Related Forms

c. Costs

(1) Application of SEF Registration Requirement

(2) SEF Registration Process and Related Forms

d. Section 15(a) Factors

(1) Protection of Market Participants and the Public

(2) Efficiency, Competitiveness, and Financial Integrity of Markets

(3) Price Discovery

(4) Sound Risk Management Practices

(5) Other Public Interest Considerations

4. Market Structure and Trade Execution

a. Overview

(1) Elimination of Minimum Trading Functionality and Execution Method Requirements

(2) Trade Execution Requirement and Elimination of MAT Process

(3) Pre-Execution Communications and Block Trades

(4) Impartial Access

b. Benefits

(1) Elimination of Minimum Trading Functionality and Execution Method Requirements

(2) Trade Execution Requirement and Elimination of MAT Process

(3) Pre-Execution Communications and Block Trades

(4) Impartial Access

c. Costs

(1) Elimination of Minimum Trading Functionality and Execution Method Requirements

(2) Trade Execution Requirement and Elimination of MAT Process

(3) Pre-Execution Communications and Block Trades

(4) Impartial Access

d. Section 15(a) Factors

(1) Protection of Market Participants and the Public

(2) Efficiency, Competitiveness, and Financial Integrity of Markets

(3) Price Discovery

(4) Sound Risk Management Practices

(5) Other Public Interest Considerations

5. Compliance and SRO Responsibilities

a. Overview

(1) SEF Trading Specialists

(2) Rule Compliance and Enforcement

(i) Definition of “Market Participant”

(ii) Audit Trail and Surveillance Program

(iii) Compliance and Disciplinary Programs

(iv) Regulatory Service Provider

(3) Error Trade Policy

(4) Chief Compliance Officer

(5) Recordkeeping, Reporting, and Information-Sharing

(i) Equity Interest Transfer

(ii) Confirmation and Trade Evidence Record

(iii) Information-Sharing

(6) System Safeguards

b. Benefits

(1) SEF Trading Specialists

(2) Rule Compliance and Enforcement

(i) Definition of “Market Participant”

(ii) Audit Trail and Surveillance Program

(iii) Compliance and Disciplinary Programs

(iv) Regulatory Service Provider

(3) Error Trade Policy

(4) Chief Compliance Officer

(5) Recordkeeping, Reporting, and Information-Sharing

(i) Equity Interest Transfer

(ii) Confirmation and Trade Evidence Record

(iii) Information-Sharing

(6) System Safeguards

c. Costs

(1) SEF Trading Specialists

(2) Rule Compliance and Enforcement

(i) Definition of “Market Participant”

(ii) Audit Trail and Surveillance Program

(iii) Compliance and Disciplinary Programs

(iv) Regulatory Service Provider

(3) Error Trade Policy

(4) Chief Compliance Officer

(5) Recordkeeping, Reporting, and Information-Sharing

(i) Equity Interest Transfer

(ii) Confirmation and Trade Evidence Record

(iii) Information-Sharing

(6) System Safeguards

d. Section 15(a) Factors

(1) Protection of Market Participants and the Public

(2) Efficiency, Competitiveness, and Financial Integrity of Markets

(3) Price Discovery

(4) Sound Risk Management Practices

(5) Other Public Interest Considerations

6. Design and Monitoring of Swaps

a. Overview

(1) Swaps Not Readily Susceptible to Manipulation

(2) Monitoring of Trading and Trade Processing

b. Benefits

(1) Swaps Not Readily Susceptible to Manipulation

(2) Monitoring of Trading and Trade Processing

c. Costs

(1) Swaps Not Readily Susceptible to Manipulation

(2) Monitoring of Trading and Trade Processing

d. Section 15(a) Factors

(1) Protection of Market Participants and the Public

(2) Efficiency, Competitiveness, and Financial Integrity of Markets

(3) Price Discovery

(4) Sound Risk Management Practices

(5) Other Public Interest Considerations

7. Financial Integrity of Transactions

a. Overview

b. Benefits

c. Costs

d. Section 15(a) Factors

(1) Protection of Market Participants and the Public

(2) Efficiency, Competitiveness, and Financial Integrity of Markets

(3) Price Discovery

(4) Sound Risk Management Practices

(5) Other Public Interest Considerations

8. Financial Resources

a. Overview

b. Benefits

c. Costs

d. Section 15(a) Factors

(1) Protection of Market Participants and the Public

(2) Efficiency, Competitiveness, and Financial Integrity of Markets

(3) Price Discovery

(4) Sound Risk Management Practices

(5) Other Public Interest Considerations

D. Antitrust Considerations

I. Background and Introduction

A. Statutory Background: The Dodd-Frank Act

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)

amended the Commodity Exchange Act (“CEA” or “Act”)

to establish a comprehensive new swaps regulatory framework that includes the registration and the oversight of swap execution facilities (“SEFs”).

As amended, CEA section 1a(50) defines a SEF as a trading system or platform that allows multiple participants to execute or trade swaps with multiple participants through any means of interstate commerce.

CEA section 5h(a)(1) establishes the SEF registration requirement, which requires an entity to register as a SEF prior to operating a facility for the trading or processing of swaps.

CEA section 5h(f) requires registered SEFs to comply with fifteen core principles.

Further, the trade execution requirement in CEA section 2(h)(8) provides that swap transactions that are subject to the clearing requirement in CEA section 2(h)(1)(A)

must be executed on a DCM, SEF, or a SEF that is exempt from registration pursuant to CEA section 5h(g) (“Exempt SEF”),

unless no DCM or SEF

“makes the swap available to trade” or the related transaction is subject to a clearing requirement exception pursuant to CEA section 2(h)(7).

See

Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, tit. VII, 124 Stat. 1376 (2010) (codified as amended in various sections of 7 U.S.C.),

available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-12242a.pdf

7 U.S.C. 1

et seq.

7 U.S.C. 7b-3 (adding a new CEA section 5h to establish a registration requirement and regulatory regime for SEFs).

As amended by the Dodd-Frank Act, CEA section 1a(50) specifically defines a “swap execution facility” as a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that facilitates the execution of swaps between persons; and is not a designated contract market. 7 U.S.C. 1a(50).

CEA section 5h(a)(1) states that no person may operate a facility for the trading or processing of swaps unless the facility is registered as a SEF or as a DCM under section 5h. 7 U.S.C. 7b-3(a)(1).

7 U.S.C. 7b-3(f).

Section 723(a)(3) of the Dodd-Frank Act added a new CEA section 2(h) to establish the clearing requirement for swaps. 7 U.S.C. 2(h). CEA section 2(h)(1)(A) provides that it is unlawful for any person to engage in a swap unless that person submits such swap for clearing to a derivatives clearing organization that is registered under the Act or a derivatives clearing organization that is exempt from registration under this Act if the swap is required to be cleared. 7 U.S.C. 2(h)(1)(A). CEA section 2(h)(2) specifies the process for the Commission to review and determine whether a swap, group, category, type or class of swap should be subject to the clearing requirement. 7 U.S.C. 2(h)(2). The Commission further implemented the clearing determination process under part 50, which also specifies the swaps that are currently subject to the requirement. 17 CFR part 50.

The Commission notes that CEA section 2(h)(8)(A)(ii) contains a typographical error that specifies CEA section 5h(f), rather than CEA section 5h(g), as the provision that allows the Commission to exempt a SEF from registration. Where appropriate, the Commission corrects this reference in the discussion herein.

CEA sections 2(h)(8)(A)(i)-(ii) provide that with respect to transactions involving swaps subject to the clearing requirement, counterparties shall execute the transaction on a board of trade designated as a contract market under section 5; or execute the transaction on a swap execution facility registered under 5h or a swap execution facility that is exempt from registration under section 5h(g) of the Act. Given this reference in CEA section 2(h)(8)(A)(ii), the Commission accordingly interprets “swap execution facility” in CEA section 2(h)(8)(B) to include a swap execution facility that is exempt from registration pursuant to CEA section 5h(g).

B. Regulatory History: The Part 37 Rules

Pursuant to its discretionary rulemaking authority in CEA sections 5h(f)(1) and 8a(5), the Commission identified the relevant areas in which the statutory SEF framework would benefit from additional rules or regulations.

Accordingly, the Commission adopted the part 37 rules to implement a regulatory framework for SEFs and for the trading and execution of swaps

on such facilities.

Among other provisions, subpart A to part 37 applies the SEF registration requirement to facilities that meet the statutory SEF definition; specifies a minimum trading functionality that a SEF must offer to participants for all listed swaps,

i.e.,

an “Order Book”;

and specifies the process for a SEF to make a swap “available to trade” (“MAT”),

i.e.,

required to be executed on a SEF or DCM pursuant to the trade execution requirement.

Subpart A also defines swaps subject to the trade execution requirement as “Required Transactions” and requires a SEF to offer either (i) an Order Book or (ii) a request-for-quote system that sends a request-for-quote to no less than three unaffiliated market participants and operates in conjunction with an Order Book (“RFQ System”) for the execution of these transactions.

Swaps that are not subject to the trade execution requirement are defined as “Permitted Transactions,” for which a SEF may offer any execution method and for which market participants may voluntarily trade on a SEF.

The Commission's regulations specify additional requirements that correspond to the use of an Order Book or RFQ System to execute Required Transactions.

Subparts B through O

set forth regulations that further implement each of the fifteen SEF core principles in CEA section 5h(f). Appendix B provides further guidance and acceptable practices associated with the SEF core principles.

To implement the SEF core principles, Core Principle 1 provides that the Commission may, in its discretion, determine by rule or regulation the manner in which SEFs comply with the core principles. 7 U.S.C. 7b-3(f)(1)(B).

The Commission notes that, unless otherwise stated, the terms “trades,” “transactions,” and “swaps” are used interchangeably in the discussion herein.

Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476 (Jun. 4, 2013) (“SEF Core Principles Final Rule”); Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act, 78 FR 33606 (Jun. 4, 2013) (“MAT Final Rule”).

17 CFR 37.3(a)(2). An Order Book is defined as (i) an “electronic trading facility,” as that term is defined in CEA section 1a(16); (ii) a “trading facility,” as that term is defined in CEA section 1a(51); or (iii) a trading system or platform in which all market participants have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers. 17 CFR 37.3(a)(3).

17 CFR 37.10. Given that swaps subject to the trade execution requirement may also be executed on a DCM, the Commission adopted the same process for a registered DCM to make a swap “available to trade” in part 38. 17 CFR 38.12. Accordingly, discussion in this notice with respect to the application of the trade execution requirement or the MAT process to SEFs should be interpreted to also apply to DCMs.

17 CFR 37.9(a). With the exception of block trades, as defined under § 43.2, Required Transactions must be executed on a SEF's Order Book or RFQ System. 17 CFR 37.9(a)(2)(i).

17 CFR 37.9(c).

See infra

notes 85 (15-second time delay for the entry of pre-arranged or pre-negotiated transactions

to an Order Book) and 242 (additional requirements for RFQ Systems) and accompanying discussion.

17 CFR part 37 app. B.

These rules reflect a more limited and prescriptive regulatory approach to implementing the statutory provisions and promoting the statutory goals of section 5h of the Act,

i.e.,

promoting the trading of swaps on SEFs and promoting pre-trade price transparency in the swaps market.

In particular, the Commission focused on achieving pre-trade price transparency by mandating a minimum trading functionality requirement for all swaps listed on a SEF and two specific, limited execution methods for Required Transactions. The Commission adopted the Order Book requirement both as a minimum trading functionality for SEF registration and as an execution method for Required Transactions.

To provide some execution flexibility for Required Transactions,

the Commission also allowed SEFs to offer an RFQ System, as described above.

To further the goal of pre-trade price transparency with respect to trading via an RFQ System, however, the Commission required that an RFQ must be submitted to three unaffiliated market participants and that a requester receive applicable firm bids and offers from the Order Book in addition to any RFQ responses.

Recognizing that only certain swaps are well-suited to be traded and executed through an Order Book or RFQ System, the Commission interpreted the trade execution requirement in CEA section 2(h)(8), in particular the phrase “makes the swap available to trade,” to have a scope of application that is consistent with the use of these methods. Accordingly, the Commission interpreted the phrase, which the Act does not otherwise define, to implement a voluntary MAT process for determining the swaps that must be executed on a SEF; this process primarily focuses on whether a swap has “sufficient trading liquidity” to be executed via an Order Book or RFQ System.

7 U.S.C. 7b-3(e) (specifying the rule of construction for CEA section 5h).

17 CFR 37.3(a)(2) (minimum trading functionality requirement); 17 CFR 37.9(a)(2)(i)(A) (Required Transactions requirement).

SEF Core Principles Final Rule at 33564-65.

17 CFR 37.9(a)(3).

SEF Core Principles Final Rule at 33497, 33499.

MAT Final Rule at 33609 (noting that a MAT determination may focus on whether a swap is sufficiently liquid to be subject to the trade execution requirement).

The Commission noted that the prescribed trading methods, such as the Order Book, are consistent with the SEF definition in CEA section 1a(50) of the Act as they allow multiple market participants to post bids or offers and accept bids and offers that are transparent to multiple market participants.

The Commission stated that the RFQ System is consistent with the SEF definition because it requires market participants to be able to access multiple market participants, but not necessarily the entire market.

Further, in response to commenters' feedback that the Commission's approach is inconsistent with the Act, the Commission stated that the limited execution methods for Required Transactions are consistent with the phrase “through any means of interstate commerce” in the SEF definition because a SEF “may for purposes of execution and communication use `any means of interstate commerce,' including, but not limited to, the mail, internet, email, and telephone, provided that the chosen execution method satisfies the requirements . . . for Order Books or . . . for [RFQ Systems].”

The Commission also noted that a SEF may provide any method of execution for Permitted Transactions as further justification for its approach under the Act.

SEF Core Principles Final Rule at 33501.

Id.

at 33496.

Id.

at 33501.

Id.

at 33484.

In adopting a regulatory framework that would effectuate the statutory SEF provisions and goals, the Commission relied in part upon its experience with the futures market, including DCM oversight and DCM core principles implementation.

While the Commission did provide flexibility for certain swap requirements relative to the DCM rules,

the Commission sought, where possible, to harmonize SEF regulations with DCM regulations based on the similarities in the statutory core principles between SEFs and DCMs, and the ability of both types of entities to offer swaps for trading and execution.

Id.

at 33477.

For example, the RFQ System requirement for Required Transactions on SEFs is less restrictive than the RFQ-to-all approach that is used by some DCMs. The Commission decided that the former approach was more appropriate for SEFs due to the less standardized nature of the swaps market. SEF Core Principles Final Rule at 33497 n.270.

Id.

at 33478, 33553 (noting the similarities between the statutory requirements for SEFs and DCMs).

1. Challenges of Existing Regulatory Approach

The Commission's existing regulatory approach has transitioned some degree of swaps trading and market participants to SEFs, but has also created several challenges for swaps trading on SEFs, as described below.

a. Lack of MAT Determinations

The voluntary, SEF-driven MAT determination process has resulted in a limited set of products that are required to be executed on SEFs. Since 2014, SEFs have submitted a limited number of swaps, relative to the scope of swaps subject to the clearing requirement, as “available to trade” to the Commission.

The swaps that SEFs have submitted—“on-the-run” index credit default swaps (“CDS”) and fixed-to-floating interest rate swaps (“IRS”) in benchmark tenors—are generally the most standardized and liquid swaps contracts.

Beyond this initial set of MAT determinations, the Commission has not received any filings for additional swaps despite the subsequent expansion of the clearing requirement.

The lack of additional determinations is partly attributable to market participants' concerns over the Commission's required methods of execution for Required Transactions.

Based on those concerns, SEFs have not pursued making additional swaps subject to the trade execution requirement. This lack of additional submissions has effectively limited the number of swaps that must be executed on SEFs which has limited the amount of trading and liquidity formation occurring on SEFs.

For a list of MAT determinations that have been submitted to the Commission,

see

CFTC, Industry Oversight, Industry Filings, Swaps Made Available to Trade Determination,

https://sirt.cftc.gov/sirt/sirt.aspx?Topic=%20SwapsMadeAvailableToTradeDetermination

. For a current list of swaps that have been made “available to trade” and are subject to the trade execution requirement,

see

CFTC, Industry Oversight, Industry Filings, Swaps Made Available to Trade,

https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf

. For a list of swaps subject to the clearing requirement,

see

17 CFR 50.4;

See also

Division of Market Oversight Guidance on Swap Execution Facility Jurisdiction (Feb. 10, 2014) (“2014 Staff Jurisdiction Guidance”).

17 CFR 37.206.

In practice, SEFs have created various participation categories, including “direct access,” “direct market access,” and “sponsored access” to describe how persons connect to their trading systems or platforms. For example, the Commission understands that “direct access” generally refers to participants who have been granted trading privileges by a SEF and utilize their own proprietary means,

e.g.,

trading credentials and/or front-end interface, to participate directly on the SEF.

In contrast, “direct market access” or “sponsored access” generally describe arrangements in which a person uses a SEF participant's means, including trading credentials and/or front-end systems, to participate directly on the SEF. For example, many SEFs allow persons to access their systems or platforms by using the credentials and/or front-end functionality provided by a SEF participant, such as a futures commission merchant (“FCM”) serving as a clearing member on the SEF or an IB.

Finally, some persons may participate on a SEF via an agency execution model by directing an intermediary,

e.g.,

an FCM or an IB, to submit orders or request quotes on their behalf.

The Commission notes that “direct access” also refers to participants who may onboard and utilize a SEF's own front-end application to trade swaps on the SEF's systems or platforms.

The Commission notes that some SEFs refer to such persons as “customers” of a SEF trading participant.

Notwithstanding these categories, SEFs have generally relied on the existing description of “market participant” in the SEF Core Principles Final Rule preamble to establish jurisdiction over all of these participants that access the SEF and trade swaps on a direct or indirect basis. Given this established reliance and the continued use of this term under the proposed rules, the Commission seeks to codify the definition of “market participant” in part 37. The Commission proposes to define “market participant” as any person who accesses a SEF (i) through direct access provided by a SEF; (ii) through access or functionality provided by a third-party; or (iii) through directing an intermediary that accesses a SEF on behalf of such person to trade on its behalf. As a threshold matter, the Commission notes that since these persons are currently considered “market participants,” they are already subject to a SEF's jurisdiction. The Commission believes that persons accessing a SEF through the various means described above interact with other market participants on the SEF and have the ability to engage in abusive trading practices. Therefore, they should continue to be subject to a SEF's jurisdiction, including disciplinary procedures and recordkeeping obligations.

Although a person who directs an intermediary to trade on its behalf does not interact with other market participants in the same manner, the Commission believes that such a person could engage in abusive trading activity by using more than one intermediary to place orders that result in an abusive trading practice. For example, a person seeking to achieve a wash result could structure a transaction or a series of transactions through separate intermediaries, which may give the appearance of bona fide purchases and sales, but where the trades have been entered into without the intent to take a bona fide market position. While persons do not typically access a SEF in this manner, the Commission is mindful that the part 37 rules do not preclude this access method and notes that some SEFs currently facilitate agency-based trading. Accordingly, the Commission believes that a SEF must continue to have jurisdiction and disciplinary authority over these persons in order to effectively investigate misconduct and prosecute rule violations that occur on the SEF.

a. Applicability of § 37.404(b) to Market Participants

The Commission notes in particular that this proposed definition of “market participant” would apply to the recordkeeping requirements under § 37.404(b). Section 37.404(b) requires a SEF to adopt rules that require its market participants to keep records of their trading, including records of their activity in any index or instrument used as a reference price, the underlying

commodity, and related derivatives markets.

Participants who trade on a SEF via direct access and participants who use the access or functionality of another participant to trade on a SEF have primary access to these types of records of their own trading. Further, the Commission believes persons who direct an intermediary to trade on their behalf are best situated to maintain the records required by § 37.404(b). The Commission understands that such intermediaries would likely only have access to records of swaps activity occurring on the SEF, not necessarily activity by their customers in the index or instruments used as a reference price, the underlying commodity, and related derivatives markets. Consequently, the Commission believes that as “market participants” under the proposed definition, they should be subject to the recordkeeping requirements under § 37.404(b).

17 CFR 37.404(b).

The Commission notes that the proposed “market participant” definition, or the discussion herein, does not alter any person's obligations under § 1.35. 17 CFR 1.35.

b. SEF Jurisdiction Over Clients of Market Participants

The proposed “market participant” definition would not capture clients of asset managers who, as market participants of a SEF, trade on a SEF on their clients' behalf.

The Commission recognizes that based on general industry practice, these clients have given their respective asset managers broad discretion to execute transactions in various financial products in different markets, including swaps. When asset managers trade on a client's behalf based on that discretion, such trading typically occurs without specific knowledge by the client as to whether such transactions are occurring on a SEF or the identity of the SEFs involved. While the clients themselves ultimately are the named counterparties to any transactions executed on their behalf, the asset managers are the participants accessing the SEF, and as such, are subject to the “market participant” definition and the obligations thereunder, including the SEF's jurisdiction. The Commission notes that asset managers—not their clients—access the SEF and sign onboarding documentation subjecting them to the SEF's jurisdiction. Since clients of asset managers would not be captured under the proposed market participant definition, a SEF would not be required to subject these clients to jurisdiction under proposed § 37.202(d).

The Commission notes that in the SEF Core Principles Final Rule, one commenter expressed concern that the vague use of the term “market participant” could potentially subject dealers' customers, and thus asset managers and their clients, to onerous requirements. SEF Core Principles Final Rule at 33506.

Given that these clients give broad trading discretion to their asset managers, the Commission believes that requiring an asset manager who accesses and conducts actual trading on a SEF to submit to the SEF's jurisdiction is sufficient. This approach ensures that SEFs have the ability to take disciplinary action against the individual or entity—the asset manager—that could actually engage in potentially abusive trading practices on the SEF. The Commission notes that this logic would apply in other circumstances where a client gives broad trading discretion to another person to trade and execute swap transactions on the client's behalf. Therefore, these situations would not fall within the third prong of the “market participant” definition as described above because the client is not “directing” the intermediary to trade on its behalf.

With respect to recordkeeping, the Commission understands that asset managers typically maintain records of swap transactions on SEFs to which their clients are named counterparties. Although asset managers would likely not have complete records of their clients' trading activity in the index or instruments used as a reference price, the underlying commodity, and related derivatives markets under § 37.404(b), the Commission does not believe that SEFs would need these client records for regulatory purposes to the extent that the client is not directing the asset manager to trade on its behalf, but rather allowing the asset manager to exercise discretion in trading swaps. Therefore, the potential risks of manipulation, price distortion, and disruptions of the delivery or cash settlement process, which a SEF is required to prevent through trade monitoring under Core Principle 4, may be less attributable to such clients. To the extent that such risks may exist, however, the Commission believes it is sufficient for SEFs to have access to records that relate to the asset manager, who is conducting the actual swaps trading activity.

Request for Comment

The Commission requests comment on all aspects of proposed § 37.2(b). The Commission is particularly interested in the impact of the scope of the proposed “market participant” definition on various constituencies and, therefore, requests comment on the following questions:

(1)

Is the Commission's proposed definition of “market participant” clear and complete? Please comment on any aspect of the definition that you believe is not clear or adequately addressed.

(2)

Should the proposed definition of “market participant” distinguish between clients that give up complete trading discretion to an asset manager or another SEF participant and clients that do not so give up discretion or only give up partial discretion? If so, on what basis should the definition establish such a distinction?

(3)

Do customers currently access a SEF through an intermediary,

e.g.,

an FCM or IB, and direct that intermediary to trade on their behalf through an agency-based approach? If this is not common, could this method of accessing a SEF become more common in the future? If so, under what circumstances would this occur? Is the third prong of the proposed “market participant” definition appropriate, which would include a person who directs an intermediary that accesses a SEF to trade on its behalf? If not, then why?

(4)

Are there any other methods that are either currently being used or could be used to access a SEF? Are there any other examples of how a person could access a SEF through access or functionality provided by a third party? What type of abusive trading practices, if any, could a customer attempt to conduct if the customer directs its trading through an intermediary such as an FCM or an IB? Please provide examples.

(5)

What type of abusive trading practices, if any, could a client of an asset manager conduct if the client gives up complete trading discretion to the asset manager? Please provide examples. If the client allows an asset manager to exercise discretion in trading swaps, what are the risks of manipulation, price distortion, and disruptions of the delivery or cash settlement process that may be attributable to the client?

(6)

Does a SEF's ability to monitor trading to prevent such risks require it to have access to client trading records that include activity in the index or instrument used as a reference price, the underlying commodity, and related derivatives markets? Are there any trading records that are currently created and maintained by clients of asset managers that would not also be retained by the asset managers? If so, please describe such records. Should SEFs receive such records for regulatory purposes?

C. § 37.3—Requirements and Procedures for Registration

1. § 37.3(a)—Requirements for Registration

The Commission proposes to renumber paragraph (a)(1) to subsection (a) based on the proposed elimination of the minimum trading functionality requirement under § 37.3(a)(2) and the Order Book definition under § 37.3(a)(3) described below.

CEA section 5h(a)(1) establishes the SEF registration requirement and specifies that no person may operate a facility for the trading or processing of swaps unless the facility is registered as a SEF or as a DCM.

In adopting the SEF Core Principles Final Rule, the Commission affirmed its view under existing § 37.3(a)(1) that the broad registration requirement in CEA section 5h(a)(1) applies only to facilities that meet the SEF definition in CEA section 1a(50).

In furtherance of CEA section 5h(a)(1), existing § 37.3(a)(1) states that any person operating a facility that offers a trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform shall register the facility as a SEF or as a DCM.

The Commission believed that this interpretation of the statutory SEF registration requirement would help further the statutory SEF goals of promoting swaps trading on SEFs and promoting pre-trade price transparency in the swaps market.

CEA section 5h(a)(1) states that no person may operate a facility for the trading or processing of swaps unless the facility is registered as a swap execution facility or as a designated contract market. 7 U.S.C. 7b-3(a)(1).

SEF Core Principles Final Rule at 33481. The statutory SEF definition in CEA section 1a(50) provides that a SEF is a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that facilitates the execution of swaps between persons; and is not a designated contract market. 7 U.S.C. 1a(50).

17 CFR 37.3(a)(1). In addition to SEFs, existing § 37.3(a)(1) also references registration as a DCM. While the trading of swaps may occur through either a SEF or a DCM, CEA section 2(e) limits the trading of swaps on SEFs to ECPs. Both ECPs and non-ECPs may trade swaps through a DCM. 7 U.S.C. 2(e).

SEF Core Principles Final Rule at 33481.

As discussed further below, the Commission is proposing to apply the SEF registration requirement to several types of entities. The Commission does not intend for the discussion in this notice to exhaustively address which entities must register as a SEF. Rather, a determination of whether an entity must register as a SEF pursuant to CEA section 5h(a)(1) would depend on an evaluation of the operations of the entity, in particular whether it meets the SEF definition under CEA section 1a(50).

The Commission notes that the preamble to the SEF Core Principles Final Rule addresses the applicability of the SEF registration requirement in CEA section 5h(a)(1) to several types of entities that facilitate swaps activity. SEF Core Principles Final Rule at 33479-84. The Commission maintains its approach to these types of entities with respect to the registration requirement, except as discussed herein.

See infra

Section IV.C.1.b.—Single-Dealer Aggregator Platforms (addressing the SEF registration requirement with respect to single-dealer aggregator platforms).

a. Footnote 88

As noted above, the Commission has stated that the SEF registration requirement in CEA section 5h(a)(1)

only applies to facilities that meet the statutory SEF definition in CEA section 1a(50).

In footnote 88 of the preamble to the SEF Core Principles Final Rule, the Commission specifically stated that the SEF registration requirement is not limited by the trade execution requirement in CEA section 2(h)(8), “such that only facilities trading swaps subject to the trade execution requirement would be required to register as a SEF.

Therefore, a facility is required to register as a SEF if it operates in a manner that meets the statutory SEF definition even though it only executes or trades swaps that are not subject to the trade execution [requirement].”

The Commission adopted this approach despite several comments to the proposed part 37 regulations, stating that registration as a SEF should only be required if an entity both met the SEF definition and offered swaps subject to the trade execution requirement.

The Commission stated that its approach to this issue is consistent with the statutory SEF registration requirement, the statutory SEF definition, and the trade execution requirement; the Commission also held that its approach promotes the statutory SEF goals.

7 U.S.C. 5h(a)(1).

7 U.S.C. 1a(50).

SEF Core Principles Final Rule at 33481 n.88.

Id.

at 33479-80.

Id.

at 33481-82.

The Commission proposes to codify this existing approach to the SEF registration requirement by amending § 37.3(a)(1) to state that a person operating a facility that meets the statutory SEF definition must register as a SEF without regard to whether the swaps that it lists for trading are subject to the trade execution requirement. This proposed amendment is intended to clarify that the trade execution requirement is not a determinant of whether an entity must register as a SEF by codifying the requirement that an entity must register as a SEF if it permits trading or execution of any swap, including swaps that are not subject to the trade execution requirement, in a manner consistent with the statutory SEF definition,

i.e.,

trading or execution on a “multiple-to-multiple” basis among market participants.

Request for Comment

The Commission requests comment on all aspects of the proposed amendment to § 37.3(a).

b. Single-Dealer Aggregator Platforms

In the preamble to the SEF Core Principles Final Rule, the Commission evaluated the application of the statutory SEF registration requirement to various swaps market entities, including “aggregation services or portals” (“SEF Aggregator Portals”) and “one-to-many systems or platforms” (“Single-Dealer Platforms”).

The Commission generally determined that SEF Aggregator Portals and Single-Dealer Platforms do not meet the statutory SEF definition and therefore are not required to register as SEFs.

SEF Core Principles Final Rule at 33481-83.

See id.

As the Commission has gained greater knowledge and experience with the swaps market, however, it has become aware of a different type of a trading system or platform that implicates the SEF registration requirement—trading systems or platforms that aggregate Single-Dealer Platforms (“Single-Dealer Aggregator Platforms”). Specifically, a Single-Dealer Aggregator Platform typically operates a trading system or platform that aggregates multiple Single-Dealer Platforms and, thus, enables multiple dealer participants to provide executable bids and offers, often via two-way quotes, to multiple non-dealer participants on the system or platform. Those non-dealer participants are thus able to view, execute, or trade swaps posted to the Single-Dealer Aggregator Platform's system or platform from multiple dealer participants. These types of systems or platforms, however, have not registered their operations as SEFs.

The Commission believes that the type of trading system or platform provided by Single-Dealer Aggregator Platforms should be subject to the SEF registration requirement because it meets the SEF definition in CEA section 1a(50) by allowing multiple participants to trade swaps by accepting bids and offers made by multiple participants in the facility or system.

7 U.S.C. 1a(50).

While a Single-Dealer Aggregator Platform has elements that resemble a Single-Dealer Platform, which is a type of entity that does not trigger the SEF registration requirement,

the Commission believes that both types of platforms are distinguishable from one another. In the preamble to the SEF Core Principles Final Rule, the Commission characterized Single-Dealer Platforms as systems or platforms in which a single dealer serves as a single liquidity provider by exclusively providing all bids and offers against which its customers,

i.e.,

participants, trade or execute swaps.

Accordingly, the dealer serves as the counterparty to all swaps executed on its trading system or platform.

Unlike the “one-to-many” nature of a Single-Dealer Platform, however, a Single-Dealer Aggregator Platform comports with the SEF definition in CEA section 1a(50) by providing a trading system or platform where multiple dealers send or stream bids and offers to multiple participants, thereby subjecting them to SEF registration.

SEF Core Principles Final Rule at 33482.

Id.

See id.

The Commission also believes that Single-Dealer Aggregator Platforms are distinguishable from SEF Aggregator Portals. SEF Aggregator Portals are services or portals that enable market participants to access multiple SEFs, each of which provides a trading system or platform that facilitates the trading or execution of swaps between multiple participants. In the preamble to the SEF Core Principles Final Rule, the Commission stated that a SEF Aggregator Portal does not meet the statutory SEF definition because it merely provides a portal through which its users may access multiple SEFs, rather than providing a venue for the trading or execution of swaps.

A SEF Aggregator Portal does not provide a trading system or platform where multiple participants have the ability to execute or trade swaps with multiple participants within its facility; rather, the multiple-to-multiple participant execution or trading occurs on the SEF and not the SEF Aggregator Portal. A Single-Dealer Aggregator Platform, in contrast, acts as more than a mere portal because it provides a system or platform for multiple-to-multiple participant swaps trading or execution, thereby subjecting it to the SEF registration requirement.

Although the Commission maintains that a SEF Aggregator Portal is generally not required to register as a SEF, such a system or platform may be subject to the Act and Commission regulations as an IB, as defined in CEA section 1a(31), given that its activity may constitute soliciting or accepting orders to be routed to SEFs. 7 U.S.C. 1a(31).

Request for Comment

The Commission requests comment on all aspects of the proposed application of the SEF registration requirement to Single-Dealer Aggregator Platforms. The Commission may consider alternatives to the proposed application of the registration requirement to Single-Dealer Aggregator Platforms and requests comment on the following questions:

(7)

Is the Commission's position that Single-Dealer Aggregator Platforms meet the SEF definition appropriate? Please explain.

(8)

Should the Commission apply the SEF registration requirement to any other type of entity or activity? If so, please describe the type of entity and/or activity at issue.

(9)

What factors, if any, would prevent a Single-Dealer Aggregator Platform from complying with the SEF registration requirement?

(10)

Is the Commission's existing position that SEF Aggregator Portals and Single-Dealer Platforms do not satisfy the statutory SEF definition appropriate? Please explain.

c. Swaps Broking Entities, Including Interdealer Brokers

In the preamble to SEF Core Principles Final Rule, the Commission specified whether the SEF registration requirement would apply to several specific types of entities,

but did not address whether the requirement would apply to swaps broking entities,

i.e.,

interdealer brokers, most of whom are registered with the Commission as IBs and traditionally facilitate swaps trading in the over-the-counter (“OTC”) markets.

As discussed below, the Commission believes that the activities of these entities—firms operating trading systems or platforms that facilitate swaps trading primarily between swap dealers—trigger the SEF registration requirement because they allow multiple participants to

trade

swaps with multiple participants in a manner consistent with the language of CEA sections 5h(a)(1) and 1a(50) (emphasis added). In light of existing market practices, the Commission believes that it is necessary to apply the SEF registration requirement to ensure that the multiple-to-multiple “trading” that occurs on such trading systems or platforms is subject to the Act and Commission's regulations as regulated SEFs. This application is consistent with Congressional intent, as evidenced by the statutory SEF registration requirement and SEF definition, and is further consistent with the statutory SEF goals.

As noted in the preamble to the SEF Core Principles Final Rule, the Commission received comments characterizing the SEF registration requirement as ambiguous and requesting that the Commission provide clarification with respect to certain entities. SEF Core Principles Final Rule at 33479-81. In response, the Commission provided examples of how the SEF registration requirement would or would not apply to “certain categories of better understood facilities.”

Id.

at 33482-84. These categories included (i) one-to-many systems or platforms; (ii) blind auction systems or platforms; (iii) aggregation services or portals; (iv) services facilitating portfolio compression and risk mitigation transactions; and (v) swap processing services. The Commission, however, emphasized that these examples do not “comprehensively” address all entities that are subject to SEF registration and urged participants to seek clarification from the Commission as to how the registration requirement applied to their particular operations.

Id.

at 33482.

“Interdealer broker,” as used in this notice, refers to an interdealer broker entity or operation in the aggregate and not to a particular individual,

i.e.,

an associated person, who works as a broker within the entity or operation. The Commission, however, considers such individuals to constitute part of the interdealer broker's trading system or platform.

See infra

Section VI.A.1.—§ 37.201(a)—Required Swap Execution Facility Rules (specifying proposed rules for SEF execution methods that apply to activities of SEF trading specialists who facilitate swaps trading or execution by, among other things, conducting broking-like functions).

The Commission understands that the proposed interpretation may require certain non-domestic operations—in particular, foreign swaps broking entities, such as foreign interdealer broker operations—to seek SEF registration or an exemption from SEF registration pursuant to CEA section 5h(g), provided that they fall within the Commission's jurisdiction.

Given the potentially complex issues that may arise for these entities from the Commission's proposed application of the SEF registration requirement, the Commission proposes below to delay the compliance date of the requirement with respect to such entities and their operations. This proposed delay would allow the Commission to further develop its cross-border regulatory regime, including the achievement of additional comparability determinations with foreign regulators regarding their respective regulatory frameworks for swap trading venues located within their respective jurisdictions,

i.e.,

foreign multilateral swaps trading

facilities, which would include foreign swaps broking entities as described below. Such a determination would allow such operations to seek an exemption from SEF registration. A delay would also provide time to foreign swaps broking entities to determine an appropriate course of action for their respective operations.

Pursuant to CEA section 5h(g), the Commission may exempt a facility from SEF registration upon a finding that it is subject to “comparable, comprehensive supervision and regulation” under the rules and regulations of the facility's home country. 7 U.S.C. 7b-3(g).

See infra

Section IV.C.1.d.—Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps Trading Facilities.

The Commission notes that potential courses of action for such entities may include seeking SEF or DCM registration; reorganizing into an existing affiliated SEF; working with the appropriate regulator within their home country to seek an exemption from registration pursuant to CEA section 5h(g); or adjusting their activity to avoid the Commission's jurisdiction.

(1) Structure and Operations of Swaps Broking Entities, Including Interdealer Brokers

Since adopting part 37, the Commission has developed a deeper understanding of the swaps market and has observed how swaps broking entities, including interdealer brokers, have structured themselves in relation to the current SEF regulatory framework. Interdealer broker trading systems or platforms facilitate swaps trading between multiple customers by negotiating or arranging swaps through voice-based or voice-assisted systems that combine voice functionalities with electronic systems such as order books. Swap dealers currently use these trading systems or platforms for several purposes, including obtaining market color or maintaining pre-trade anonymity in the course of trading. Specifically, an interdealer broker typically “works” customer orders by issuing RFQs-to-all among other customers and negotiating or arranging any resultant bids or offers. Once the interdealer broker arranges a reciprocating bid and reciprocating offer, it sets a price for a specific swap transaction for a particular product, which in many cases enables a subsequent “trade work-up” session.

Finally, the interdealer broker will either facilitate the execution of the transaction(s) if the broker is part of a SEF's trading system or platform

or will otherwise route the pre-arranged transaction(s) to a SEF for execution if the broker is not a part of the registered SEF.

For a description of a “trade work-up” session,

see infra

note 269.

As discussed below, persons operating within these SEFs that facilitate swaps trading are commonly referred to as “trading specialists” or “execution specialists.”

See infra

Section VI.A.3.—§ 37.201(c)—SEF Trading Specialists.

The Commission notes that interdealer brokers have adopted varying approaches to structuring themselves in relation to the SEF regulatory framework. Some interdealer brokers have registered components of their trading systems or platforms as SEFs. Other interdealer brokers have operated very similar trading systems or platforms outside of the structure of a SEF, often through registered IB entities, and have interacted with a SEF solely as participants of the SEF.

As SEF participants, they submit transactions, which have already been arranged on those trading systems or platforms, to the SEF for execution. Notably, many interdealer brokers have maintained the latter approach by operating both a SEF platform and a non-SEF trading system or platform simultaneously, using the latter to facilitate the interaction of bids and offers and bringing the resulting arranged swaps to the SEF for execution.

In becoming participants on a SEF, interdealer brokers typically meet the SEF's access criteria prior to onboarding, which provides them with trading privileges on the SEF. As SEF participants, they are subject to the SEF's jurisdiction, including all applicable disciplinary rules, similar to any other SEF participant. Where the SEF offers its participants the ability to submit pre-arranged or pre-negotiated transactions for execution, an interdealer broker SEF participant will route transactions it has arranged between its customers or clients, who are also SEF participants, for execution on the SEF.

This bifurcated approach has existed despite the close similarities among interdealer broker trading systems or platforms, whether they are registered or not as SEFs—they offer trading systems or platforms that facilitate the trading of swaps between multiple participants. This approach, however, has been justified by the execution of the swap on a SEF; as noted, the interdealer brokers that conduct activity on non-SEF platforms ultimately route the pre-arranged transactions to a SEF where they are executed. This approach seems premised on the view that because the execution occurs on a registered SEF, the facilitating interdealer broker does not need to register as a SEF, notwithstanding its role in negotiating or arranging the transaction(s).

To facilitate trading in Required Transactions outside the SEF, these interdealer broker trading systems or platforms typically operate outside of SEFs pursuant to the time delay requirement for Required Transactions under § 37.9(b).

Under § 37.9(b), the Commission implemented a fifteen-second time-delay requirement for Required Transactions that are pre-arranged or pre-negotiated by a broker and submitted as cross trades for execution through the SEF's Order Book. This requirement allows a broker or dealer to execute a Required Transaction by trading against a customer's order or executing two customers' orders against each other through pre-negotiation or pre-arrangement, provided that one side of the transaction is exposed to the Order Book for fifteen seconds before the other side of the transaction is submitted for execution. The time delay is intended to provide other market participants with an opportunity to execute against the first order.

In practice, however, the time delay requirement has enabled interdealer brokers to facilitate “trading” of swaps

i.e.,

the negotiating or arranging of swaps transactions outside the SEF, through the interdealer brokers' multiple-to-multiple trading systems or platforms. Negotiating or arranging consists of facilitating the interaction of bids and offers.

Once the transaction is pre-negotiated or pre-arranged through the interdealer broker's multiple-to-multiple trading system or platform, the interdealer broker routes the pre-arranged transaction to the SEF, where one side of the transaction is exposed for fifteen seconds on the Order Book prior to the entry of the other side for execution.

17 CFR 37.9(b).

SEF Core Principles Final Rule at 33503.

See infra

note 322 and accompanying discussion (describing the policy reason for the § 37.9(b) time delay requirement).

See infra

Section VI.A.2.a.—§ 37.201(b)—Pre-Execution Communications (discussion of how pre-execution communications between market participants constitute “trading”).

For swaps that are not subject to the trade execution requirement,

i.e.,

Permitted Transactions, SEFs have allowed their market participants to conduct trading via pre-execution communications away from their respective facilities and then submit the resulting transaction, with the price, terms, and conditions already agreed upon between the participants, to the SEF's trade capture functionality for execution.

The Commission notes that several SEFs affiliated with interdealer brokers offer this type of functionality based in part on the execution flexibility allowed under § 37.9(c)(2) for Permitted Transactions,

i.e.,

a SEF may offer any method of execution for such swaps. Accordingly, interdealer brokers submit Permitted Transactions that have been negotiated or arranged through their trading systems or platforms to an affiliated SEF without being subject to any corresponding order exposure (

e.g.,

a fifteen-second time-delay).

Coupled

with the ability to submit Required Transactions in accordance with the time delay requirement, these arrangements essentially enable the operation of multiple-to-multiple trading systems or platforms for a broad range of swaps outside of the SEF regulatory framework.

For further discussion of this execution method,

see infra

Section VI.A.2.—§ 37.203(a)—Pre-Arranged Trading Prohibition; § 37.9—Time Delay Requirement.

The Commission has also observed that other swaps broking entities that are not affiliated with a SEF similarly negotiate or arrange transactions

away from a registered SEF and subsequently submit those transactions to a registered SEF for execution. These types of transactions, however, are less common and constitute a smaller portion of the overall volume of relevant transactions discussed herein.

(2) SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers

Based on the statutory SEF registration requirement and SEF definition, the associated SEF goals, the Commission's experience and knowledge from implementing part 37, and its evaluation of trading practices that have developed under the current SEF regulatory framework with respect to swaps broking entities that include interdealer brokers, the Commission proposes that a trading system or platform operated by such an entity must register as a SEF pursuant to CEA section 5h(a)(1) and § 37.3(a).

The Commission believes that such trading systems or platforms conform to the statutory SEF definition because they allow multiple participants to

trade

swaps by accepting bids and offers made by multiple participants in that facility or system (emphasis added). As described above, these trading systems or platforms facilitate the negotiation or arrangement of swap transactions through the interaction of bids and offers. The Commission believes that this “trading” activity should occur within a SEF, regardless of whether the product is subject to the trade execution requirement.

Accordingly, entities operating these types of trading systems or platforms should be subject to the SEF registration requirement.

Although the Commission's description of swaps broking entities above focuses on the dealer-to-dealer market, the Commission clarifies that any person operating a system or platform for multiple-to-multiple participant swaps

trading

as described herein must register as a SEF consistent with CEA section 5h(a)(1) and § 37.3(a) (emphasis added).

The Commission notes that this view is consistent with the proposed amendment to § 37.3(a) to clarify that a person operating a facility that meets the statutory SEF definition must register as a SEF without regard to whether the swaps that it lists for trading are subject to the trade execution requirement.

See supra

Section IV.C.1.a.—Footnote 88. As part of the proposed elimination of the prescriptive execution methods under § 37.9 for Required Transactions, the Commission is proposing to eliminate the time delay requirement under § 37.9(b).

See infra

Section VI.A.2.—§ 37.203(a)—Pre-Arranged Trading Prohibition; § 37.9(b)—Time Delay Requirement. Based on this proposed elimination and the adoption of a flexible approach to SEF execution methods, the Commission notes that rules permitting the pre-arrangement or pre-negotiation of a swap transaction subject to a time delay requirement would no longer be needed or allowed.

In addition to negotiation or arrangement that occurs through a swaps broking entity, the Commission believes that negotiation or arrangement that occurs directly between participants should also occur within a SEF. The Commission is proposing to require SEFs to have rules that prohibit market participants from engaging in pre-execution communications,

i.e.,

negotiation or arrangement of swaps, away from a SEF's trading system or platform, subject to certain exceptions.

See infra

Section VI.A.2.a.—§ 37.201(b)—Pre-Execution Communications.

In addition to the statutory basis for this application, the Commission's proposed approach would advance the Dodd-Frank goals of promoting swaps trading on SEFs and pre-trade price transparency.

The Commission believes that the operation of multiple-to-multiple swaps trading systems or platforms by swaps broking entities, including interdealer brokers outside of SEFs has frustrated these statutory goals and moved liquidity formation away from SEFs. To promote both trading on SEFs and pre-trade price transparency, the Commission believes that the activities associated with swaps trading should occur on SEFs consistent with the SEF registration requirement. Allowing such activities to occur away from a SEF and submitting any resulting transactions to a SEF for execution effectively makes the SEF a trade-booking or post-trade processing engine, which is inconsistent with the statutory language and goals of the CEA related to SEFs.

7 U.S.C. 7b-3(e).

The Commission also believes that requiring these types of swaps broking entities to register as SEFs would help to consistently apply the SEF regulatory framework over a segment of swaps trading activity that is very similar to registered SEF activity. Interdealer brokers currently operate trading systems or platforms outside of the SEF regulatory framework, yet act as participants on SEFs, resulting in multiple-to-multiple trading that is opaque not only to the SEF where the negotiated or arranged trade is eventually routed to for execution, but also to the Commission and the general marketplace. Although many interdealer brokers are registered as IBs pursuant to CEA section 4f and are subject to the Commission's rules and regulations,

the Commission believes that these requirements are neither intended nor sufficient for the regulation and oversight of such interdealer brokers' multiple-to-multiple trading activity. The Commission believes that Congress would not have created SEFs and added the word “trading” in the statutory SEF registration requirement and SEF definition if it intended that an IB framework would be sufficient for swaps “trading.” Given that these interdealer brokers operate trading systems or platforms outside of the SEF regulatory framework that are very similar to the activity that occurs on trading systems or platforms that are located within interdealer brokers' registered affiliated SEFs,

the Commission believes such activity would be more appropriately subject to a SEF-specific regulatory framework. This approach would achieve the policy goal of applying more consistent regulatory treatment to very similar swaps market activity.

7 U.S.C. 6f(a). Part 3 sets forth the registration and regulatory requirements for IBs, among other registered entities. 17 CFR part 3. Among those requirements, IBs are required to register with the National Futures Association (“NFA”) and therefore are also subject to the NFA rules and regulations. 17 CFR 3.2. The Commission further notes that § 155.4 sets forth trading standards for IBs. 17 CFR 155.4. For a description of additional IB-related Commission requirements,

see infra

note 341.

The Commission emphasizes that an interdealer broker that solely solicits or accepts individual or single bids or offers and introduces them to an exchange, such as a SEF, would not be required to register as a SEF because it would not be facilitating the “trading,”

i.e.,

negotiating or arranging of swaps between multiple market participants consistent with the SEF registration requirement. Such brokers would be able to continue to engage in such solicitation or acceptance in conformance with the IB definition. 7 U.S.C. 1a(31).

Requiring interdealer brokers to either register as SEFs or carry out their multiple-to-multiple trading activities within a SEF would also enhance market integrity and monitoring because such activities would become subject to the SEF core principles and regulations, as well as direct regulatory oversight of a SEF in its capacity as a self-regulatory organization (“SRO”).

For example, Core Principle 2 requires SEFs to establish and enforce trading, trade processing, and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules, including means to capture information that may be used in establishing whether rule violations have occurred.

These requirements enable SEFs to more comprehensively monitor for, among other things, potential abusive trading practices such as fraud and manipulation.

The

Commission notes that establishing SEF monitoring and surveillance requirements over activity in the interdealer broker market is especially beneficial based on the role of interdealer brokers in the manipulation of ISDAFIX, a benchmark for swap rates and spreads for IRS; and the London Interbank Offered Rate (“LIBOR”), an average benchmark for short-term interest rates used to determine floating rates for IRS.

17 CFR 1.3 (definition of “self-regulatory organization”).

7 U.S.C. 7b-3(f)(2)(B).

Given that the interdealer brokers are participants of the SEFs to which they submit negotiated or arranged transactions for execution, the Commission notes that SEFs still have jurisdiction over that activity and could investigate

suspected prohibited activity and issue sanctions where appropriate, pursuant to the SEF's self-regulatory obligations.

See, e.g.,

Enforcement Order re: Société Générale S.A. Attempted Manipulation and False Reporting of LIBOR and Euribor, CFTC Docket No. 18-14 (June 4, 2018);

see also

Enforcement Order re: JP Morgan Chase Bank, N.A. Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark, CFTC Docket No. 18-15 (June 18, 2018).

Accordingly, the Commission proposes that swaps broking entities, including interdealer brokers, that offer a trading system or platform in which more than one market participant has the ability to

trade

any swap with more than one other market participant on the system or platform, shall register as a SEF or seek an exemption from registration pursuant to CEA section 5h(g) (emphasis added). Where an entity operates both a registered SEF and an affiliated swaps broking entity—such as an interdealer broker—that negotiates or arranges trades via a non-SEF trading system or platform and participates on the affiliated SEF as a market participant, the swaps broking entity could also comply with the SEF registration requirement by integrating its non-SEF trading system or platform into its affiliated SEF. The Commission believes that this proposed application of the SEF registration provision in CEA section 5h(a)(1), which the Commission continues to interpret in conjunction with the SEF definition in CEA section 1a(50), is consistent with the statute and helps further the statutory SEF goals provided in CEA section 5h.

The Commission proposes to delay the application of the SEF registration requirement with respect to swaps broking entities, including interdealer brokers, for a period of six months, subject to certain conditions and starting from the compliance date of any final rule adopted from this proposed rulemaking. Swaps broking entities, including interdealer brokers, that meet the conditions set forth below would be able to continue to maintain their current practice of facilitating the negotiating or arranging of swaps transactions between multiple participants and routing those swaps transactions to SEFs for execution.

Without the six-month delay period, the Commission believes that applying the SEF registration requirement to these entities would disrupt their operations and further fragment swaps liquidity.

As discussed below, the Commission is proposing § 37.201(b) to prohibit the use of pre-execution communications by market participants away from a SEF's trading system or platform.

See infra

Section VI.A.2.a.—§ 37.201(b)—Pre-Execution Communications. The Commission notes that to the extent swaps broking entities, including interdealer brokers, engage in such communications in the course of negotiating or arranging transactions and submitting them to a SEF for execution, the prohibition—if adopted via a final rule—would not apply during the six-month period.

As applied to swaps broking entities, including interdealer brokers—most of whom are registered with the Commission as IBs—the Commission proposes that the six-month delay from the SEF registration requirement would be subject to the following conditions:

(i) All swap transactions that are traded on a swaps broking entity, including an interdealer broker, must be routed for execution to a SEF; and

(ii) The swaps broking entity, including an interdealer broker, must provide electronically the following information with respect to itself to the Secretary of the Commission at

submissions@cftc.gov

and the Commission's Division of Market Oversight (“Division” or “DMO”) at

DMOSubmissions@cftc.gov

100

The Commission anticipates that the effective date of any final rule would be established ninety days from the publication of the rule in the

Federal Register

. The Commission believes that the proposed ninety-day period would provide swaps broking entities, including interdealer brokers seeking to avail themselves of the six-month compliance date delay with a sufficient opportunity to compile and submit this information to the Commission.

Upon a DMO determination that a swaps broking entity's notice is complete, the Commission proposes to post these notices on the Commission's website under the “Industry Filings” page. This proposed approach would effectively maintain the status quo for these swaps broking entities for the proposed six-month delay period.

The Commission notes that the proposed six-month delay for swaps broking entities, including interdealer brokers, does not affect any other requirements under the CEA or the Commission's regulations. In particular, this delayed compliance date would not affect the application of CEA section 2(e) and its requirement that only ECPs be permitted to trade swaps on SEFs.

101

7 U.S.C. 2(e).

See supra

note 61.

As part of this proposed transition period, swaps broking entities, including interdealer brokers, would be able to route their transactions to a SEF for execution. Furthermore, during this period, counterparties subject to the trade execution requirement would be able to satisfy that requirement by trading via a swaps broking entity, including an interdealer broker, that routes the transactions to a SEF for execution.

Request for Comment

The Commission requests comment on all aspects of the proposed application of the SEF registration requirement to swaps broking entities. The Commission may consider alternatives to the proposed application of the requirement and requests comment on the following questions:

(11)

Is the Commission's view that swap broking entities, including interdealer brokers, meet the SEF definition appropriate? Please explain why or why not. Is it clear what activity falls within the SEF registration requirement and SEF definition, including the meaning of “trading”? If not, please explain.

(12)

Should the Commission apply the SEF registration requirement to any other type of entity or activity?

(13)

What factors, if any, would prevent a swaps broking entity, including an interdealer broker, from complying with the SEF registration requirement or from seeking an exemption from registration pursuant to CEA section 5h(g)?

(14)

Is the proposed six-month delay period sufficient to allow swaps broking entities, including interdealer brokers, time to seek registration or alter their operations in compliance with the SEF registration requirements? Why or why not?

(15)

Should the Commission allow swaps broking entities, including interdealer brokers, to route swap transactions to exempt SEFs during this six-month delay period? Why or why not?

d. Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps Trading Facilities

As discussed above, the Commission has observed that swaps broking

entities, including interdealer brokers, have utilized various business structures to operate in a bifurcated manner,

i.e.,

a SEF and a non-SEF trading system or platform. One common structure consists of an entity that serves as a parent to a registered SEF entity and several affiliated broker entities that negotiate or arrange trades and participate exclusively on the affiliated SEF as market participants. While many of those broker entities are domestically domiciled, a significant number of them are also located in numerous foreign jurisdictions.

102

Similar to domestic swaps broking entities, these foreign swaps broking entities are not currently registered as SEFs, but are typically registered with the Commission as IBs.

103

These entities often serve as hubs for liquidity within their particular jurisdiction during non-U.S. trading hours—operating trading systems or platforms that facilitate the negotiating or arranging of transactions for multiple U.S. persons with local customers and the routing of those transactions to an affiliated SEF for execution.

104

These foreign swaps broking entities' trading systems or platforms are very similar to those operated by swaps broking entities within in the U.S., such that they provide more than one market participant with the ability to

trade

swaps with more than one other market participant (emphasis added). Therefore, the Commission proposes that these foreign swaps broking entities are “foreign multilateral swaps trading facilities,” which are foreign facilities that operate a trading system or platform where multiple participants have the ability to execute or trade swaps with multiple market participants.

102

Based on discussions with market participants, the Commission is aware of foreign swaps broking entities that are interdealer brokers located in numerous foreign jurisdictions, including Australia, Brazil, Canada, Chile, Colombia, Hong Kong, Japan, Mexico, Singapore, and South Korea, that participate on SEFs. The Commission is also aware that interdealer brokers domiciled in the European Union (“EU”) operate as investment firms that operate Multilateral Trading Facilities (“MTFs”) and Organized Trading Facilities (“OTFs”). The Commission notes that it has exempted certain MTFs and OTFs located in the EU from registration as SEFs pursuant to CEA section 5h(g).

See infra

note 109 (describing December 2017 exemptive order issued by the Commission to certain MTFs and OTFs based on comparability determination).

103

See supra

note 93 (general description of Commission requirements with respect to IBs).

104

For purposes of this discussion, the term “U.S. person” identifies those persons who, under the Commission's interpretation, could be expected to satisfy the jurisdictional nexus set forth in CEA section 2(i) based on their swap activities, either on an individual or aggregate basis.

See

Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations; Rule, 78 FR 45292, 45301 (Jul. 26, 2013) (“2013 Cross-Border Guidance”).

Consistent with the proposal regarding the SEF registration requirement above, such foreign multilateral swaps trading facilities, including foreign swaps broking entities, would be required to register as a SEF or seek an exemption from SEF registration if their activity falls within the jurisdictional reach of the Commission pursuant to CEA section 2(i). Pursuant to CEA section 2(i), activities outside of the U.S. are not subject to the swap provisions of the CEA, including any rules prescribed or regulations promulgated thereof, unless those activities either have a “direct and significant connection” with activities in, or effect on, commerce of the United States; or contravene any rule or regulation established to prevent evasion of a Dodd-Frank Act-enacted provision of the CEA.

105

The Commission expects that it will clarify the cross-border jurisdictional reach of the SEF registration requirement in the future for foreign multilateral swaps trading facilities, including foreign swaps broking entities, pursuant to CEA section 2(i).

106

To the extent that a foreign multilateral swaps trading facility's activities are determined to fall within the Commission's jurisdictional reach, the facility would be required to register as a SEF or seek an exemption from SEF registration.

107

105

7 U.S.C. 2(i).

106

In November 2013, DMO issued guidance regarding the application of the SEF registration requirement to foreign multilateral swaps trading facilities. Division of Market Oversight Guidance on Application of Certain Commission Regulations to Swap Execution Facilities (Nov. 15, 2013). The guidance specified that a foreign multilateral swaps trading platform that provides U.S. persons or persons located in the United States (including personnel and agents of non-U.S. persons located in the United States) (“U.S.-located persons”) with the ability to trade or execute swaps on or pursuant to the rules of the platform, either directly or indirectly through an intermediary, would be expected to register as a SEF or DCM.

Id.

at 2. The guidance listed two non-exhaustive factors to determine whether a foreign platform met this registration requirement: (i) Whether a foreign multilateral swaps trading facility directly solicits or markets its services to U.S. persons or U.S.-located persons; or (ii) whether a significant portion of the market participants who a foreign multilateral swaps trading facility permits to effect transactions are U.S. persons or U.S.-located persons.

Id.

at 2 n.8. The guidance further specified DMO's belief that U.S. persons and U.S.-located persons generally comprise those persons whose activities have the requisite “direct and significant” connection with activities in, or effect on, commerce of the United States within the meaning of CEA section 2(i).

Id.

at 2. The guidance also stated DMO's view that a multilateral swaps trading facility's provision of the ability to trade or execute swaps on or through the platform to U.S. persons or U.S.-located persons may create the requisite connection under CEA section 2(i) for purposes of the SEF/DCM registration requirement.

Id.

Subsequently, the Commission learned that many foreign multilateral swaps trading facilities prohibited U.S. persons and U.S-located persons from accessing their facilities due to the uncertainty that the guidance created with respect to SEF registration. The Commission understands that these prohibitions reflect concerns that U.S. persons and U.S.-located persons accessing their facilities would trigger the SEF registration requirement. As noted above, the Commission expects to address the application of CEA section 2(i) to foreign multilateral swaps trading facilities, including foreign swaps broking entities, in the future.

107

The Commission discusses further below the potential implications for foreign multilateral swaps trading facilities offering swaps that are subject to the trade execution requirement to applicable counterparties.

Such facilities that do not wish to register as a SEF and prefer to comply with the regulatory requirements of their home country may seek an exemption from SEF registration pursuant to CEA section 5h(g) either directly or via the auspices of their home country regulator. Pursuant to CEA section 5h(g), the Commission may exempt facilities from SEF registration if the facility is subject to comparable, comprehensive supervision and regulation on a consolidated basis by the appropriate governmental authorities in the home country of the facility.

108

Based on this provision, the Commission issued an order in December 2017 that exempts certain MTFs and OTFs authorized within the EU from the SEF registration requirement based on a finding that their respective regulatory frameworks satisfy the standard for granting an exemption from the SEF registration requirement pursuant to CEA section 5h(g).

109

At this time, the Commission has neither adopted a formal regulatory framework for granting an exemption pursuant to this provision nor has it granted exemptive relief to facilities in other jurisdictions beyond the 2017 order to EU-based MTFs and OTFs.

108

7 U.S.C. 7b-3(g).

109

Order Exempting MTFs and OTFs Authorized Within the EU from SEF Registration Requirement (Dec. 8, 2017) (“2017 MTF and OTF Exemptive Order”). The order established this finding with respect to EU-wide legal requirements—including, in particular, requirements under the EU's new Markets in Financial Instruments Regulation (“MiFIR”), the EU's amended Markets in Financial Instruments Directive (“MiFID II”), and the EU's Market Abuse Regulation—that establish regulatory frameworks for MTFs and OTFs. Pursuant to this finding, the Commission provided specific exemptions to several MTFs and OTFs.

Id.

at app. A.

(1) Proposed Delay of SEF Registration Requirement

Given that the Commission intends to address the cross-border jurisdictional reach of the Commission's SEF registration requirement in the future, the Commission proposes to delay the compliance date of the registration

requirement only with respect to foreign swaps broking entities, including foreign interdealer brokers, that currently facilitate trading,

i.e.,

negotiation or arrangement, of swaps transactions for U.S. persons (“Eligible Foreign Swaps Broking Entities”) for a period of two years, subject to certain conditions and starting from the effective date of any final rule adopted from this notice.

The proposed delay period would not apply to foreign swaps broking entities that do not currently facilitate trading,

i.e.,

negotiation or arrangement, of swaps transactions for U.S. persons, given that their operations would not be materially affected by the proposed application of the SEF registration requirement to swaps broking entities. Further, the proposed delay period would not apply to foreign multilateral swaps trading facilities, as described above, that are not foreign swaps broking entities. Such facilities are not subject to the Commission's proposed application of the SEF registration requirement, and therefore, are already required to register as a SEF pursuant to the SEF registration requirement or seek an exemption pursuant to CEA section 5h(g). Similarly, the Commission notes that MTFs and OTFs located in the EU may not rely on this delay and instead must seek an exemption from SEF registration pursuant to the terms of the Commission's 2017 exemptive order.

110

2017 MTF and OTF Exemptive Order.

Eligible Foreign Swaps Broking Entities that meet the conditions set forth below would be able to continue to maintain the current practice of facilitating the negotiation or arrangement of swaps transactions between multiple participants and routing those swaps transactions to SEFs or Exempt SEFs for execution.

111

Without the two-year period, the Commission believes that applying the SEF registration requirement to these entities would disrupt their operations and fragment swaps liquidity.

111

As discussed below, the Commission is proposing § 37.201(b) to prohibit the use of pre-execution communications by market participants away from a SEF's trading system or platform.

See infra

Section VI.A.2.a.—§ 37.201(b)—Pre-Execution Communications. The Commission notes that to the extent Eligible Foreign Swaps Broking Entities engage in such communications in the course of negotiating or arranging transactions and submitting them to a SEF for execution, the prohibition—if adopted via a final rule—would not apply during the two-year period.

During this period, the Commission anticipates that it will address what constitutes a “direct and significant connection with activities in, or effect on, commerce of the United States” for foreign multilateral swaps trading facilities, including foreign swaps broking entities, under CEA section 2(i).

112

The proposed delay would also provide the Commission with time to develop any threshold standards for the application of CEA section 2(i) to the SEF registration requirement in CEA section 5h(a)(1). While the Commission has yet to determine standards in this area, the Commission notes that any such standard could include a

de minimis

component, whereby the activity of U.S. persons below some defined quantitative threshold on a particular foreign multilateral swaps trading facility would not trigger a need for SEF registration.

112

7 U.S.C. 2(i).

The Commission notes that counterparties that are required to comply with the trade execution requirement may only satisfy the requirement by executing a swap on a SEF, a DCM, or an Exempt SEF.

113

Accordingly, any foreign multilateral swaps trading facility that seeks to offer such swaps to such counterparties for trading must be registered as a SEF or DCM or obtain an exemption from SEF registration pursuant to CEA section 5h(g), regardless of whether that trading system or platform meets the standards (or any future standards the Commission may develop) for CEA section 2(i),

i.e.,

a “direct and significant connection,” to trigger SEF registration. As noted above, the proposed delay would not apply to these foreign multilateral swaps trading facilities. Similarly, upon the expiration of the proposed two-year delay, any Eligible Foreign Swaps Broking Entity that seeks to offer such swaps to such counterparties for trading on its trading system or platform must be registered as a SEF or DCM or obtain an exemption from SEF registration pursuant to CEA section 5h(g).

113

For a discussion of which counterparties must comply with the Category A Transaction-Level Requirements, including the trade execution requirement,

see

2013 Cross-Border Guidance at 45350-59 app. D.

During this time, the Commission could formalize a regulatory framework for providing exemptions from the SEF registration requirement for foreign multilateral swaps trading facilities, including foreign swaps broking entities, that meet that CEA section 2(i) standard. The proposed two-year delay not only could provide the Commission with sufficient time to formalize this framework, which would require standards and processes for evaluating exemption requests, but also give Eligible Foreign Swaps Broking Entities more time to determine their best course of action,

i.e.,

seek SEF registration with the Commission or obtain a CEA section 5h(g) exemption from registration. Accordingly, the proposed delay would further provide the Commission and regulators in foreign jurisdictions with additional time to evaluate such registration applications or requests for exemption received from Eligible Foreign Swaps Broking Entities.

With respect to exemptions, the Commission anticipates that most foreign swaps broking entities and other foreign multilateral swaps trading facilities would seek to comply with the rules and regulations of their home countries, and thus, seek an exemption from SEF registration. The Commission further anticipates that the issuance of such exemptions may take some time based upon the large number of jurisdictions in which these operations are currently located.

114

Thus, the Commission believes that it would be beneficial to provide more time for evaluation of exemption requests because exempting such comparably-regulated foreign entities from SEF registration, similar to other deference initiatives, should generally reduce market fragmentation, regulatory arbitrage, and duplicative or conflicting regulatory requirements, while increasing the potential for harmonized regulatory standards on a global level. Further, the Commission anticipates that any future determination process for granting exemptions from SEF registration would ensure that foreign and domestic multilateral swaps trading facilities, which operate in a similar fashion to one another, are all held to comparable regulatory standards.

114

See supra

note 102 (listing the foreign jurisdictions where swaps broking entities operate).

The Commission further believes that this proposal should create strong incentives for foreign jurisdictions to establish or bolster their own robust regulatory regimes for swaps trading. Such measures would also be consistent with the commitment made among the G-20 countries in 2009 “to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage.”

115

To the extent that foreign swaps broking entities and other foreign multilateral swaps trading facilities operate in foreign jurisdictions that currently do not have or are not expected to have

comparable and comprehensive supervision and regulation, such facilities would be subject to the proposed SEF registration requirement if their operations create a “direct and significant” connection to activities in, or effect on, commerce of the United States under CEA section 2(i).

115

Group of Twenty, “G-20 Leaders' Statement: The Pittsburgh Summit 7 (Sept. 24-25, 2009),

https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf

(2) Proposed Conditions for Delay of SEF Registration Requirement

As applied to Eligible Foreign Swaps Broking Entities—most of whom are registered with the Commission as IBs—the Commission proposes that the two-year delay from the SEF registration requirement be subject to the following conditions:

(i) All swap transactions involving U.S. persons that are traded on an Eligible Foreign Swaps Broking Entity must be routed for execution to a SEF or an Exempt SEF;

116

and

116

For a current list of Exempt SEFs,

see

2017 MTF and OTF Exemptive Order at app. A.

(ii) The Eligible Foreign Swaps Broking Entities must provide the following information electronically to the Secretary of the Commission at

submissions@cftc.gov

and DMO at

DMOSubmissions@cftc.gov

: (i) Entity name as it appears in the entity's charter; (ii) name and address of the entity's ultimate parent company; (iii) any names under which the entity does business; (iv) address of principal executive office; (v) a contact person's name, address, phone number, and email address; (vi) asset classes and swap products for which the entity facilitates trading; (vii) certification that the entity currently arranges or negotiates swap transactions for U.S. persons; (viii) the entity's home country regulator or regulators; and (ix) any registrations, authorizations, or licenses held by the entity in its home country.

117

The Commission anticipates that the effective date of any final rule would be established ninety days from the publication of the rule in the

Federal Register

. The Commission believes that a ninety-day effective date would provide Eligible Foreign Swaps Broking Entities seeking a two-year compliance date delay with sufficient opportunity to compile and submit the requisite information to the Commission.

Upon a DMO determination that an Eligible Foreign Swaps Broking Entity's notice is complete, the Commission would post these notices on the Commission's website under the “Industry Filings” page. This proposed approach would effectively maintain the status quo for these Eligible Foreign Swaps Broking Entities during the two-year compliance date delay period. The Commission notes that the proposed two-year delay for Eligible Foreign Swaps Broking Entities does not affect any other requirements under the CEA or the Commission's regulations. In particular, this delayed compliance date would not affect the application of CEA section 2(e) and its limitation of SEF and Exempt SEF trading to ECPs.

118

7 U.S.C. 2(e).

See supra

note 61.

As part of this proposed transition period, Eligible Foreign Swaps Broking Entities would be able to route their transactions to either a SEF or an Exempt SEF for execution. Furthermore, during this two-year delay, counterparties subject to the trade execution requirement would be able to satisfy that requirement by trading via an Eligible Foreign Swaps Broking Entity that routes the transactions to either a SEF or an Exempt SEF for execution.

In light of these considerations, the Commission notes that the issue of whether an Eligible Foreign Swaps Broking Entity routes a transaction to a SEF or an Exempt SEF during the proposed two-year time delay period would have practical implications for the counterparties involved in the transaction with respect to complying with Commission reporting and clearing requirements. For swap transactions that are routed to a SEF for execution, the SEF would be responsible for compliance with (i) the real-time reporting requirements under part 43 of the Commission's regulations and (ii) the regulatory reporting requirements under part 45 of the Commission's regulations.

119

Counterparties to a swap transaction that is routed to an Exempt SEF for execution would be responsible for the reporting requirements set forth in both part 43 and part 45, unless there is a substituted compliance determination by the Commission with respect to those requirements.

120

119

In connection with swap transactions executed on a SEF, the Commission notes that the part 45 regulations continue to apply to counterparties that are subject to such reporting requirements. 17 CFR part 45.

120

Exempt SEFs may report transactions on behalf of counterparties as a service provider; the counterparties, however, retain ultimate responsibility for reporting.

Further, for swap transactions routed to a SEF that are intended to be cleared or subject to the clearing requirement, the SEF would be responsible for routing the swap transaction to a Commission-registered derivatives clearing organization (“DCO”) or a clearing organization that has been exempted from DCO registration by the Commission pursuant to CEA section 5b(h),

i.e.,

Exempt DCO, for clearing.

121

For swap transactions routed to an Exempt SEF for execution that are intended to be cleared or are subject to the clearing requirement, the Commission notes that the following clearing-related requirements would to apply to such swap transactions:

121

See

17 CFR 37.700-702.

(i) When a swap transaction executed by a U.S. person on such an Exempt SEF is a “customer” position subject to CEA section 4d, the transaction, if intended to be cleared, must be cleared through a Commission-registered FCM at a Commission-registered DCO;

(ii) When a swap transaction executed by a U.S. person on such an Exempt SEF is a “proprietary” position under Commission regulation 1.3(y), the transaction, if intended to be cleared, must be cleared either through a Commission-registered DCO or an Exempt DCO; and

(iii) When a swap transaction is subject to the Commission's clearing requirement, the transaction must be cleared either through a Commission-registered DCO or an Exempt DCO, provided that consistent with (i) above, the transaction must be cleared through a Commission-registered FCM at a Commission-registered DCO and cannot be cleared through an Exempt DCO if the transaction is a “customer” position subject to CEA section 4d.

Request for Comment

The Commission requests comment on all aspects of its proposed approach to SEF registration for Eligible Foreign Swaps Broking Entities, in particular the proposed two-year delay in the compliance date of any final rule. The Commission may consider alternatives to the proposed two-year delay and requests comment on the following questions:

(16)

Is the delay of two years for Eligible Foreign Swaps Broking Entities an adequate delay? If not, then how long of a delay should the Commission consider and why?

(17)

Are there additional considerations that the Commission should take into account in establishing this delay?

(18)

Are there additional conditions that the Commission should consider imposing on Eligible Foreign Swaps Broking Entities during this delay period?

2. §§ 37.3(a)(2)-(3)—Minimum Trading Functionality and Order Book Definition

In developing the regulatory framework for SEFs, the Commission adopted a “minimum trading functionality” requirement under § 37.3(a)(2) that requires a SEF to maintain and offer an Order Book for all

of the swaps that it lists for trading.

122

An Order Book is defined under § 37.3(a)(3) as (i) an electronic trading facility;

123

(ii) a trading facility;

124

or (iii) a trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers.

125

In the preamble to the SEF Core Principles Final Rule, the Commission acknowledged that the Order Book functionality does not have the requisite flexibility to serve as the ideal method of execution for a variety of swaps, in particular those that feature lower levels of liquidity.

126

The Commission nevertheless believed that an Order Book could establish a base level of pre-trade price transparency to all market participants and, therefore, required that each SEF offer an Order Book for all swaps that it lists for trading, including both swaps subject to the trade execution requirement and swaps not subject to the trade execution requirement.

127

122

17 CFR 37.3(a)(2).

123

CEA section 1a(16) defines “electronic trading facility” as a trading facility that (i) operates by means of an electronic or telecommunications network; and (ii) maintains an automated audit trail of bids, offers, and the matching of orders or the execution of transactions on the facility. 7 U.S.C. 1a(16).

124

CEA section 1a(51) defines “trading facility” as a person or group of persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions by accepting bids or offers made by other participants that are open to multiple participants in the facility or system; or through the interaction of multiple bids or multiple offers within a system with a pre-determined non-discretionary automated trade matching and execution algorithm. 7 U.S.C. 1a(51)(A).

125

17 CFR 37.3(a)(3).

126

SEF Core Principles Final Rule at 33564-65. In the preamble to the SEF Core Principles Final Rule, the Commission stated its anticipation that an Order Book would typically work well for liquid Required Transactions,

i.e.,

transactions involving swaps that are subject to the trade execution requirement. For less liquid Required Transactions, however, it anticipated that RFQ systems would help facilitate trading.”

Id.

127

SEF Core Principles Final Rule at 33564.

The Commission has observed that market participants have rarely used Order Books to trade swaps on SEFs despite their availability for all swaps listed by SEFs. Depending on the product involved, for example, order book trading typically ranges between “less than [one percent] to less than [three percent] of total CDS transactions” on SEFs, while order book trading constitutes between “less than [one percent] to approximately [twenty percent] of total IRS transactions. . . .”

128

The Commission believes that this low level of swaps trading on Order Books is attributable

129

to an Order Book's inability to support the broad and diverse range of products traded in the swaps market that trade episodically, rather than on a continuous basis.

130

Given the broad array of liquid and illiquid swaps listed on SEFs, mandating that a SEF offer an Order Book for all of these products has imposed significant operational and financial costs and burdens, particularly from a technological standpoint, with little benefit to most market participants who choose not to utilize them.

131

128

J. Christopher Giancarlo and Bruce Tuckman, Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps 49-50 (Apr. 26, 2018),

available at

https://www.cftc.gov/sites/default/files/2018-05/oce_chairman_swapregversion2whitepaper_042618.pdf

129

In addition to reasons stated above, the Commission acknowledges that the lack of swaps trading on SEF Order Books may also be attributed to other factors, such as concerns over “name give-up” practices and the current lack of certain trading features, such as the ability to calculate volume-weighted average pricing.

130

In their study of the index CDS market, Pierre Collin-Dufresne, Benjamin Junge, and Anders B. Trolle state that “[p]roponents of bringing all market participants onto one limit order book typically argue that it would (i) increase quote competition among dealers and (ii) allow clients to occasionally supply liquidity via limit orders thereby lowering overall transaction costs (although at the cost of execution risk). However, a limit order book arguably works best when trading is continuous and it is not necessarily optimal when trading is more episodic as is the case for index CDSs. For instance, Barclay, Hendershott, and Kotz (2006) document a precipitous drop in electronic trading (via limit order books) when Treasuries go off-the-run and trading volumes decline.” Pierre Collin-Dufresne, Benjamin Junge, & Anders B. Trolle,

Market Structure and Transaction Costs of Index CDSs

6 n.10 (Swiss Fin. Inst. Res. Paper No. 18-40, 2017) (“2017 Collin-Dufresne Research Paper”), citing Michael J. Barclay, Terrence Hendershott, & Kenneth Kotz,

Automation Versus Intermediation: Evidence from Treasuries Going Off the Run,

61 J. Fin. 2395, 2395-2414 (2006).

131

The Commission understands that these costs include regularly occurring software updates to electronic order book systems and other ongoing technology-related maintenance.

Therefore, based in part on its experience, the Commission proposes to eliminate the minimum trading functionality requirement and the regulatory Order Book definition. The Commission believes that eliminating the minimum trading functionality would help reduce operating costs for SEFs, as they would no longer be required to operate and maintain order book systems that are poorly suited for trading in less liquid swaps, and therefore, do not attract significant trading activity. Instead of employing resources to build and support a seldom-utilized trading system or platform, the proposed elimination provides a SEF with the flexibility to determine how to allocate its resources, particularly as it relates to developing methods of execution that are better suited to trading the products that it lists. As discussed below, other execution methods may be better suited to maximizing participation and concentrating liquidity formation on SEFs in episodically liquid swaps markets.

132

Therefore, removing this requirement may spur development and innovation in execution methods. The Commission also believes that eliminating this requirement may encourage SEFs to list new and different types of swaps, given that they would no longer have to incur the costs of operating and supporting Order Books. The Commission notes, however, that a SEF would be free to continue to offer an order book if it so chooses.

132

See infra

Section IV.I.4.b.—Elimination of Required Execution Methods.

The Commission adopted the minimum trading functionality requirement based in part on the goal of promoting pre-trade price transparency,

133

but acknowledges that the CEA does not explicitly prescribe the Order Book as a SEF minimum trading functionality. Accordingly, with the elimination of this requirement under § 37.3(a)(2), the only trading functionality obligation that a SEF must comply with on an ongoing basis is based upon the CEA section 1a(50) definition of SEF.

134

Therefore, the SEF must operate a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce.

135

To meet the SEF definition, a trading system or platform must provide multiple participants with the ability to accept bids and offers from other multiple participants within the facility or system. As long as multiple participants have the ability to accept bids and offers from other multiple participants within the facility or system, the facility or system will meet the SEF definition, regardless of how the multiple participants choose to interact with one another. Based on this more straightforward approach, the Commission expects that determining whether a particular system or platform

meets the SEF definition would generally be self-evident. Nevertheless, the Commission will continue to work with entities that seek interpretive guidance on the parameters of that definition.

136

133

7 U.S.C. 7b-3(e).

134

The Commission emphasizes that while the SEF definition in CEA section 1a(50) would serve as the baseline requirement for the type of trading systems or platforms that a SEF must maintain, it also provides the basic criterion to determine which types of trading systems or platforms are subject to the SEF registration requirement.

135

7 U.S.C. 1a(50).

136

Based on the Commission's proposed elimination of the Order Book as a minimum trading functionality requirement, the Commission clarifies one particular issue regarding the scope of the CEA section 1a(50) SEF definition. In the preamble to the SEF Core Principles Final Rule, the Commission expressed doubt as to whether an RFQ-to-one system met the multiple participant aspect of the SEF definition. SEF Core Principles Final Rule at 33498, 33561, and 33563. This view, articulated in the context of the Commission's discussion of RFQ Systems as a required method of execution, would suggest that an “RFQ-to-one” trading system or platform may, on its face, not meet the SEF definition. The Commission notes, however, that this view does not appropriately give meaning to the `ability' factor of the SEF definition. Therefore, the Commission seeks to clarify the application of the `ability' factor as it applies to RFQ-to-one transactions. The Commission believes that an entity that permits its market participants to use its RFQ-to-one functionality to issue concurrent or serial RFQs to multiple, different recipients would fit within the SEF definition, as it provides participants the “ability” to accept bids and offers from multiple participants within the trading system or platform.

3. § 37.3(b)—Procedures for Registration

137

Based on the elimination of the temporary registration requirements, the Commission proposes to retitle § 37.3(b) to “Procedures for registration” from “Procedures for full registration.” The Commission also proposes to add a title to § 37.3(b)(1)—“Application for registration.”

a. Elimination of Temporary Registration

To implement the SEF regulatory framework, the Commission established a temporary SEF registration regime to help minimize disruptions to incumbent platforms that had been operating prior to the adoption of part 37 and to allow new entities to compete with those incumbent platforms.

138

Section 37.3(c) sets forth the process for SEF applicants to apply for temporary SEF registration prior to the Commission's review of an application for full SEF registration. The temporary registration process, however, has expired pursuant to a two-year sunset provision established under § 37.3(c)(5).

139

Since the expiration of this process, the Commission has reviewed SEF applications pursuant to a 180-day Commission review period.

140

138

SEF Core Principles Final Rule at 33487.

139

The Commission notes that the part 37 regulations became effective on August 5, 2013. Accordingly, the temporary registration provisions expired on August 5, 2015, subject to certain exceptions.

140

17 CFR 37.3(b)(5).

Based on the expiration of the temporary registration regime, the Commission proposes to eliminate the provisions under existing § 37.3(c) and adopt various conforming changes to other provisions in proposed § 37.3(b) and proposed § 37.3(h), as discussed below.

b. § 37.3(b)(1)—Application for Registration

To request registration as a SEF, § 37.3(b)(1)(i) requires an applicant to electronically file a complete Form SEF, as set forth in Appendix A to part 37, with the Commission.

141

The Commission uses Form SEF, which is comprised of a series of different exhibits that require an applicant to provide details of its operations, to determine whether the applicant demonstrates compliance with the Act and applicable Commission's regulations.

142

Applicants must also use Form SEF to amend a pending application or to seek an amended registration order.

143

As part of the SEF registration process, an applicant must also request from the Commission a unique, extensible, alphanumeric identifier code for the purpose of identifying the SEF in connection with swap reporting requirements pursuant to part 45 of the Commission's regulations.

144

141

17 CFR 37.3(b)(1)(i).

142

The exhibits that comprise Form SEF concern the applicant's business organization (Exhibits A-H); financial information (Exhibits I-K); compliance (Exhibits L-U); and operational capability (Exhibit V). 17 CFR part 37 app. A.

143

17 CFR 37.3(b)(3); 17 CFR part 37 app. A.

144

17 CFR 37.3(b)(1)(iii).

Based on its experience with the SEF registration process, the Commission believes that some of the information requested under Form SEF has proven to be unnecessary to determine an applicant's compliance with the Act and applicable Commission regulations. The Commission also recognizes that some of the exhibit requirements are unclear in the amount of information required to be provided, thereby causing inconsistency across applications in the information received to evaluate compliance. The proposed changes to the part 37 framework, as discussed further herein, would also necessitate certain Form SEF revisions. Therefore, the Commission is proposing several amendments to Form SEF that would consolidate or eliminate several of the existing exhibits and also request some additional information. Further, the Commission is proposing several amendments to the Form SEF instructions. The Commission intends for these proposed changes to establish a clearer and more streamlined application process that would still provide the Commission with sufficient and appropriate information to determine compliance with the Act and Commission regulations.

(1) Form SEF Exhibits—Business Organization

The Commission proposes several amendments to the “Business Organization” exhibits—existing Exhibits A through H—of Form SEF.

145

The Commission is not proposing any substantive changes to Exhibit A, which requires an applicant to specify persons who own ten percent or more of the applicant's stock or otherwise may control or direct the applicant's management or policies; and Exhibit B, which requires an applicant to provide a list of present officers, directors and governors, or their equivalents. The Commission is proposing non-substantive amendments to Exhibit A to reorganize the existing requirements to paragraphs (a)-(b) and to revise the existing language accordingly.

First, the Commission proposes to consolidate certain existing exhibits, in particular (i) existing Exhibit G, which requires an applicant to submit various governance documents, into existing Exhibit C, which requires information regarding the applicant's board of directors;

146

and (ii) existing Exhibit F, which requires an analysis of the applicant's staffing, into existing Exhibit E, which requires a description of the personnel qualifications for each category of the applicant's professional employees.

147

Under the consolidated new Exhibit E, the Commission proposes to require more specific detail about the applicant's personnel structure, including personnel seconded to the applicant. As proposed, Exhibit E would require information about the reporting lines among the applicant's personnel; estimates of the number of non-management and non-supervisory employees; and a description of the duties, background, skills, and other qualifications for each officer, manager/supervisor, and any ot

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