# Revisions to Business Conduct and Swap Documentation Requirements for Swap Dealers and Major Swap Participants > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2025-18924 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** September 30, 2025 - **Citation:** 90 FR 47136 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 23 RIN 3038-AF38 Revisions to Business Conduct and Swap Documentation Requirements for Swap Dealers and Major Swap Participants AGENCY: Commodity Futures Trading Commission. ACTION: Notice of proposed rulemaking. SUMMARY: The Commodity Futures Trading Commission (“CFTC” or “Commission”) is proposing amendments to certain of the Commission's business conduct and documentation requirements applicable to swap dealers and major swap participants. These amendments would provide exceptions to compliance with such requirements when executing swaps that are: intended by the parties to be cleared contemporaneously with execution; or subject to prime broker arrangements that meet certain qualifying conditions. The proposed amendments would also make certain other changes discussed herein. The proposed amendments, if adopted, would supersede certain no-action positions issued by the Commission's Market Participants Division (“MPD”). DATES: Comments must be received on or before October 24, 2025. ADDRESSES: You may submit comments, identified by “ Revisions to Business Conduct and Swap Documentation Requirements for Swap Dealers and Major Swap Participants ” and RIN 3038-AF38, 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, 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 in § 145.9 of the Commission's regulations. 1 The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission 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 (“APA”) 2 and other applicable laws, and may be accessible under FOIA. 1 See 17 CFR 145.9. The Commission's regulations referred to in this release are found at 17 CFR chapter I (2025) and are accessible on the Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm . 2 5 U.S.C. 500 et seq. FOR FURTHER INFORMATION CONTACT: Frank N. Fisanich, Deputy Director, 202-418-5949, ffisanich@cftc.gov; Jacob Chachkin, Associate Director, 202-418-5496, jchachkin@cftc.gov; or Dina Moussa, Special Counsel, 202-418-5696, dmoussa@cftc.gov, Market Participants Division, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: I. Background The Commission is issuing this notice of proposed rulemaking (“Proposal”) to propose amendments to certain business conduct standards for swap dealers (“SDs”) and major swap participants (“MSPs” and, together with SDs, “Swap Entities”) 3 contained in subpart H of part 23 of the Commission's regulations, 4 and to the swap trading relationship documentation rule for Swap Entities in § 23.504. 5 These proposed amendments are intended to address certain long-standing issues with the Commission's external business conduct standards and swap trading relationship documentation rule, as explained below. 6 The Commission is aware that various market participants have argued that certain aspects of the external business conduct standards and swap trading relationship documentation rule have impeded the efficient trading of cleared swaps, either executed bilaterally between a counterparty and an SD or executed on or pursuant to the rules of a swap execution facility, and that other aspects of the external business conduct standards make compliance with such rules either impossible or impracticable in the context of swaps executed pursuant to prime brokerage arrangements in place prior to the implementation of the Commission's swap rules. As explained below in the discussions of the Covered Staff Letters, the Commission has observed that MPD's long-standing no-action positions set forth in the Covered Staff Letters appear to have addressed many of the issues raised by market participants and the Commission is not aware of any adverse consequences of such MPD no-action positions. Therefore, the Commission has preliminarily determined to propose that the external business conduct standards and the swap trading relationship documentation rule be amended to provide an outcome comparable to such no-action positions, with certain modifications discussed below. 3 “Swap dealer” is defined in section 1a(49) of the Commodity Exchange Act (“CEA”), 7 U.S.C. 1a(49); and § 1.3, 17 CFR 1.3. “Major swap participant” is defined in section 1a(33) of the CEA, 7 U.S.C. 1a(33); and § 1.3, 17 CFR 1.3. SDs and MSPs are collectively referred to as “Swap Entities” throughout this release. 4 17 CFR part 23, subpart H. 5 17 CFR 23.504. 6 The proposed amendments are also intended to supersede the no-action positions of MPD (formerly, the Division of Swap Dealer and Intermediary Oversight) contained in CFTC Staff Letters 12-58, 13-11, 13-12, 19-06, 23-01, and 25-09 (collectively, the “Covered Staff Letters”). To avoid confusion and simplify understanding, this Proposal will refer to no-action positions issued by the Division of Swap Dealer and Intermediary Oversight as no-action positions issued by its successor division, MPD. See CFTC Staff Letter 12-58 (Dec. 18, 2012), Re: Request for Relief Regarding Obligation to Provide Pre-Trade Mid-Market Mark for Certain Credit Default Swaps and Interest Rate Swaps (“CFTC Staff Letter 12-58”); CFTC Staff Letter 13-11 (April 30, 2013), Re: Time Limited Relief for Swap Dealers in Connection with Prime Brokerage Arrangements (“CFTC Staff Letter 13-11”); CFTC Staff Letter 13-12 (May 1, 2013), Re: Relief for Swap Dealers and Major Swap Participants Regarding the Obligation to Provide Certain Disclosures for Certain Transactions Under Regulation 23.431 (“CFTC Staff Letter 13-12”); CFTC Staff Letter 19-06 (March 22, 2019), Re: No-Action Position for Off-SEF Swaps Executed Pursuant to Prime Brokerage Arrangements (“CFTC Staff Letter 19-06”); CFTC Staff Letter 23-01 (Feb. 1, 2023), Re: Revised No-Action Positions for Swaps Intended to be Cleared (“CFTC Staff Letter 23-01”); and CFTC Staff Letter 25-09 (Apr. 4, 2025), Re: No-Action Position for Swap Dealers and Major Swap Participants Regarding the Obligation to Provide a Pre-Trade Mid-Market Mark under 17 CFR 23.431(a)(3)(i) (“CFTC Staff Letter 25-09”). CFTC Staff Letters 13-12 and 23-01 are revisions to previous CFTC Staff Letters, as described in the relevant Covered Staff Letters. CFTC Staff Letters are available on the Commission's website at https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm . Together, the Covered Staff Letters provided no-action positions regarding compliance with certain external business conduct standards (including certain required pre-trade disclosures) and documentation requirements applicable to Swap Entities in the context of: (1) swaps executed pursuant to prime broker arrangements between SDs acting as prime brokers and their customers; and (2) swaps executed by Swap Entities with counterparties where the parties to the swap intend the swap to be cleared contemporaneously with execution of such swap. The Commission expects that, upon the adoption of a final rule enacting this Proposal, MPD will withdraw some or all of the Covered Staff Letters as necessary to reflect the Commission's final rule. 7 7 The Commission notes that it is also changing inconsistencies found with respect to capitalization used throughout the regulatory text. A. Applicable Regulatory Requirements Section 4s(h) of the CEA 8 provides the Commission with both mandatory and discretionary rulemaking authority to impose business conduct standards on Swap Entities in their dealings with counterparties, including Special Entities. 9 Pursuant to this rulemaking authority, the Commission adopted rules in subpart H of part 23 of its regulations, which set forth business conduct standards for Swap Entities in their dealings with counterparties (the “External Business Conduct Standards”). 10 8 7 U.S.C. 6s(h). 9 “Special Entity” is defined in § 23.401(c), 17 CFR 23.401(c). 10 See generally Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012) (“Final EBCS Rulemaking”). The External Business Conduct Standards include certain pre-trade disclosures required to be made by Swap Entities to their counterparties that are not Swap Entities, security-based swap dealers, or security-based major swap participants, including a requirement under § 23.431(a)(3)(i) to disclose the price of the swap and the so-called “pre-trade mid-market mark” (the “PTMMM”; and such disclosure requirement, the “PTMMM Requirement”). 11 The PTMMM was intended to be the mid-market mark of the swap, not including any amount added by the Swap Entity for profit, credit reserve, hedging, funding, liquidity, or any other costs or adjustments. 12 11 17 CFR 23.431(a)(3)(i). 12 § 23.431(d)(2), 17 CFR 23.431(d)(2). See Final EBCS Rulemaking at 77 FR 9766 (where the Commission noted that “the spread between the quote and mid-market mark is relevant to disclosures regarding material incentives; and provides the counterparty with pricing information that facilitates negotiations and balances historical information asymmetry regarding swap prices.”). The External Business Conduct Standards also include a requirement under § 23.431(b) that an SD must provide counterparties that are not Swap Entities, security-based swap dealers, or security-based major swap participants with notice that the counterparty may request and consult on the design of a scenario analysis to allow the counterparty to assess its potential exposure in connection with a swap (the “Scenario Analysis Requirement”). 13 The scenario analysis, if requested, was required to (1) be completed over a range of assumptions, including severe downside stress scenarios that would result in significant loss; (2) disclose all non-proprietary material assumptions and calculation methodologies; and (3) consider any relevant analysis that an SD undertakes for its own risk management purposes. 14 13 17 CFR 23.431(b). 14 §§ 23.431(b)(2)-(4), 17 CFR 23.431(b)(2)-(4). Section 4s(i) of the CEA requires the Commission to adopt rules governing swap documentation for Swap Entities. 15 Pursuant to this rulemaking authority, the Commission adopted rules in subpart I of part 23 of its regulations. 16 These include § 23.504, which mandates that Swap Entities enter into swap trading relationship documentation (“STRD”) meeting the requirements of the rule with counterparties prior to execution of a swap (the “STRD Requirement”). 17 15 7 U.S.C. 6s(i). 16 See 17 CFR part 23, subpart I. 17 17 CFR 23.504. See generally Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (Sep. 11, 2012). B. Staff No-Action Positions 1. Intended To Be Cleared Swaps In 2013, MPD issued CFTC Staff Letter 13-70 18 following a request to provide a no-action position with respect to compliance with certain External Business Conduct Standards and the STRD Requirement in the context of swaps executed by SDs with counterparties where the parties to the swap intend to clear the swap contemporaneously with execution (such swaps are herein referred to as “Intended To Be Cleared Swaps” or “ITBC Swaps”). Market participants argued that the External Business Conduct Standards and the STRD Requirement significantly hindered the efficient execution and processing of swaps that were intended to be cleared ( i.e., so-called “straight-through-processing”) and that compliance with such regulatory requirements was unnecessary to achieve the Commission's regulatory goals. In support of this view, market participants generally argued that: (1) because swaps of a type accepted for clearing by a derivatives clearing organization (“DCO”) 19 are sufficiently standardized, (especially if also executed on a designated contract market (“DCM”) 20 or swap execution facility (“SEF”)) 21 and information about the risks and characteristics of such swaps is available from the DCO (or the DCM or SEF if executed there), the benefits of compliance by an SD with the disclosure and suitability requirements of the External Business Conduct Standards are to a large extent moot; and (2) because swaps, once cleared, are between the DCO and the market participant (not between the SD and its counterparty), there is no ongoing trading relationship between the SD and its counterparty and thus there is no need for the SD to comply with the on-boarding requirements of the External Business Conduct Standards or the STRD Requirement. 22 18 CFTC Staff Letter 13-70 (Nov. 15, 2013), Re: No-Action Relief: Swaps Intended to be Cleared (“CFTC Staff Letter 13-70”). 19 “Derivatives clearing organization” is defined in section 1a(15) of the CEA, 7 U.S.C. 1a(15); and § 1.3, 17 CFR 1.3. 20 “Designated contract market” is defined with “contract market” in § 1.3, 17 CFR 1.3. 21 “Swap execution facility” is defined in section 1a(50) of the CEA, 7 U.S.C. 1a(50); and § 1.3, 17 CFR 1.3. 22 Such compliance issues were not wholly unanticipated. See CFTC Staff Letter 13-70 at 4; see also Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” 77 FR 30596, 30610 n. 201 (May 23, 2012) (where the Commission stated “[b]y contrast, it may be appropriate, over time, to tailor the specific requirements imposed on swap dealers depending on the facility on which the swap dealer executes swaps. For example, the application of certain business conduct requirements may vary depending on how the swap is executed, and it may be appropriate, as the swap markets evolve, to consider adjusting certain of those requirements for swaps that are executed on an exchange or through particular modes of execution.”). In addition, in 2022, MPD recognized that the Commission had exempted a number of non-U.S. central clearing counterparties from registration as a DCO and a number of non-U.S. trading facilities from registration as a SEF. Specifically, section 5b(h) of the CEA authorizes the Commission to exempt, conditionally or unconditionally, a DCO from registration, if the Commission finds that the DCO is “subject to comparable, comprehensive supervision and regulation by . . . the appropriate government authorities in the home country of the organization.” 23 As of the date of this Proposal, the Commission has issued exemptions from registration to four derivatives clearing organizations: ASX Clear (Futures) Pty Limited (“ASX”); 24 Japan Securities Clearing Corporation (“JSCC”); 25 Korea Exchange, Inc. (“KRX”); 26 and OTC Clearing Hong Kong Limited (“OTC Clear”). 27 Any DCO that, as of any date of determination, is exempt from registration as a DCO under section 5b of the CEA, 28 including, without limitation, ASX, JSCC, KRX, and OTC Clear, is an “Exempt DCO” on such date for purposes of this Proposal. 23 7 U.S.C. 7a-1(h). 24 On August 18, 2015, the Commission issued an Order of Exemption with respect to ASX, which exempts ASX from registering with the Commission as a DCO, subject to certain terms and conditions in the order, available at https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations . 25 On October 26, 2015, the Commission issued an Order of Exemption with respect to JSCC, which exempts JSCC from registering with the Commission as a DCO, subject to certain terms and conditions in the order, available at https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations . The Commission issued an amended exemptive order on May 15, 2017, which expanded the scope of products that JSCC is permitted to clear as an Exempt DCO, subject to several conditions set forth in the order, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf . The Commission issued a further amended exemptive order on Sept. 12, 2025, which permitted JSCC to clear interest rate swaps denominated in Japanese yen for clearing members of JSCC on behalf of U.S. persons, available at https://www.cftc.gov/media/12671/JSCC%20AmendedExemptionOrder_09-12-2025/download . MPD and the Commission's Division of Clearing and Risk recently published CFTC Staff Letter 25-32 (Sept. 12, 2025) which provided JSCC and its clearing members with a no-action position for clearing certain yen-denominated interest rate swaps for U.S. persons, subject to certain terms and conditions set forth in the letter. 26 On October 26, 2015, the Commission issued an Order of Exemption with respect to KRX, which exempts KRX from registering with the Commission as a DCO, subject to certain terms and conditions in the order, available at https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations . 27 On December 21, 2015, the Commission issued an Order of Exemption with respect to OTC Clear, which exempts OTC Clear from registering with the Commission as a DCO, subject to certain terms and conditions in the order, available at https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations . 28 7 U.S.C. 7a-1. Similarly, section 5h(g) of the CEA authorizes the Commission to exempt, conditionally or unconditionally, a SEF from registration, if the Commission finds that 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.” 29 As of the date of this Proposal, the Commission has issued exemptions from SEF registration to facilities for the trading or processing of swaps from the European Union, 30 Singapore, 31 and Japan. 32 Any facilities for the trading or processing of swaps that, as of any date of determination, are exempt from registration as a SEF under section 5h(g) of the CEA, 33 including, without limitation, any Exempt EU Trading Venue, Exempt SG Trading Venue, or Exempt Japan Trading Venue is an “Exempt SEF” on such date for purposes of this Proposal. 29 7 U.S.C. 7b-3(g). 30 On December 8, 2017, the Commission issued an Order of Exemption with respect to multilateral trading facilities (“MTFs”) and organised trading facilities (“OTFs”) authorized in the European Union (“EU”) (the “EU Exemptive Order”). See EU Exemptive Order, as most recently amended by the Third Amendment to Appendix A to Order of Exemption (October 26, 2022), available at https://www.cftc.gov/media/7896/EuropeanUnionThirdAmendmentAppendixA_CEASection5hgOrder/download . The EU Exemptive Order exempts each of the MTFs and OTFs listed in Appendix A thereto, as such Appendix A may be amended by the Commission from time to time (the “Exempt EU Trading Venues”), from registration with the Commission as a SEF. In response to the withdrawal of the United Kingdom (“UK”) from the EU, commonly referred to as “Brexit,” CFTC staff from the Division of Market Oversight (“DMO”) issued a no-action position addressing certain UK MTFs and OTFs that had previously benefitted from the EU Exemptive Order. Under this no-action position, specified UK MTFs and OTFs may operate on much the same basis as an Exempt EU Trading Venue, subject to the terms of the letter, without DMO recommending that the Commission take an enforcement action against them for failure to register with the CFTC as a SEF. See, most recently, CFTC Staff Letter No. 24-11 (Aug. 28, 2024), available at https://www.cftc.gov/csl/24-11/download . 31 On March 13, 2019, the Commission issued an Order of Exemption with respect to approved exchanges (“AEs”) and recognized market operators (“RMOs”) authorized in Singapore (the “SG Exemptive Order,” available at https://www.cftc.gov/sites/default/files/2019-03/SingaporeCEASection5hgOrder.pdf ), as most recently amended by the “Third Amendment to Appendix A to Order of Exemption,” dated July 31, 2024 ( available at https://www.cftc.gov/media/11046/SingaporeThirdAmendmentAppendixA_CEASection5hgOrder/download ). The SG Exemptive Order exempts each of the AEs and RMOs listed in Appendix A thereto, as such Appendix A may be amended by the Commission from time to time (the “Exempt SG Trading Venues”), from registration with the Commission as a SEF. 32 On July 11, 2019, the Commission issued an Order of Exemption with respect to electronic trading platforms (“ETPs”) registered in Japan (the “Japan Exemptive Order”) and, together with the EU Exemptive Order and the SG Exemptive Order, the “SEF Exemptive Orders,” available at https://www.cftc.gov/media/2216/JapaneseCEASection5hgOrder/download . The Japan Exemptive Order exempts each ETP listed in Appendix A thereto, as such Appendix A may be amended by the Commission from time to time (the “Exempt Japan Trading Venues”), from registration with the Commission as a SEF. 33 7 U.S.C. 7b-3(g). Because Swap Entities that are otherwise subject to the Commission's External Business Conduct Standards and documentation requirements are free to execute swaps on Exempt SEFs and clear swaps on Exempt DCOs pursuant to, and subject to the conditions of, the foregoing Commission actions, MPD recognized that execution by Swap Entities of ITBC Swaps on an Exempt SEF and/or clearing of such ITBC Swaps on an Exempt DCO should be treated the same as swaps executed on DCMs or SEFs and/or cleared on DCOs. Consequently, MPD issued CFTC Staff Letter 23-01, which superseded CFTC Staff Letter 13-70 in its entirety. 34 CFTC Staff Letter 23-01 provided a revised MPD no-action position which incorporates, expands on, and refines the MPD no-action position presented in CFTC Staff Letter 13-70 with regard to compliance with certain External Business Conduct Standards by Swap Entities and clarifies the no-action position regarding documentation requirements under the STRD Requirement. 35 34 CFTC Staff Letter 23-01 at 1. 35 See id. at 7-10. The Commission has preliminarily determined that the standardization that occurs when a type of swap is made available to trade on a SEF 36 or Exempt SEF and/or accepted for clearing on a DCO 37 or Exempt DCO generally entails a material increase in the amount of information that is available about that type of swap. Prices, daily marks, and volume information become available and therefore market participants are able to research and track how such swaps respond to changing market conditions, providing insight into the risks and characteristics of a particular type of swap for non-swap entity counterparties to evaluate independently. The standardization may also allow parties to transact in smaller or larger notional amounts to suit their needs than may be available for an uncleared swap and to more easily find willing counterparties if they need to increase, decrease, or exit a certain position. Due to the standardization and concomitant increase in the information available and additional trade management flexibility, the Commission has preliminarily determined that the public policy goals of the disclosure and suitability requirements of the External Business Conduct Standards have been met by other means, and thus compliance by a Swap Entity with the disclosure and suitability requirements are unnecessary for ITBC Swaps. Further, the Commission has preliminarily determined that compliance with such requirements may represent a significant hinderance to the efficient trading of cleared swaps. 36 See, e.g., 17 CFR 40.2(a)(3), which requires a SEF seeking to list a new product to provide an explanation and analysis of the new product and the product's terms and conditions. 37 See, e.g., 17 CFR 39.5(b), which requires a DCO seeking to clear a new type of swap to provide information on the outstanding notional exposures, trading liquidity, and adequate pricing data, as well as product specifications, legal documentation, contract terms, and standard practices for managing life cycle events. The Commission has also preliminarily determined that because swaps, once cleared, are between the DCO and the market participant (not between the Swap Entity and its counterparty) and there is no ongoing trading relationship between the Swap Entity and its counterparty, compliance by a Swap Entity with the on-boarding requirements of the External Business Conduct Standards or the STRD Requirement represents a significant hinderance to the efficient trading of cleared swaps. 2. Prime Broker Arrangements In 2013, MPD recognized that execution of swaps pursuant to long-standing conditions present in swap prime broker arrangements prevalent in the swap market made compliance with certain requirements under the External Business Conduct Standards by SDs operating as prime brokers (“PBs”) impossible due to the structure and information flows of these arrangements. 38 38 Such compliance difficulties were not wholly unanticipated. See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” 77 FR 30596, 30610 n. 201 (May 23, 2012) (where the Commission stated “[b]y contrast, it may be appropriate, over time, to tailor the specific requirements imposed on swap dealers depending on the facility on which the swap dealer executes swaps. For example, the application of certain business conduct requirements may vary depending on how the swap is executed, and it may be appropriate, as the swap markets evolve, to consider adjusting certain of those requirements for swaps that are executed on an exchange or through particular modes of execution.”). PBs engaging in these swaps provide credit intermediation for their PB customers while permitting such customers to solicit prices from a wide variety of swap market participants. The PB customer agrees on a price and other critical terms of a swap with a potential swap counterparty, but the swap is actually executed at that price and on those terms between the PB and the counterparty chosen by the PB's customer (the “trigger swap”). The PB, in turn, then enters into a matching swap with its customer (the “mirror swap”). Thus, the customer has the advantage of seeking favorable prices while maintaining a credit relationship with only its PB, simplifying its operations and benefiting from collateral netting. The PB enters into two equal but opposite swaps and thus all but eliminates its market risk and has only credit risk to its customer and the trigger swap counterparty ( i.e., credit intermediation). However, because the PB arrangement permits the PB customer to seek prices from various counterparties, the PB cannot know the price or the exact terms of the swap before the PB is obligated to execute both the trigger swap and the mirror swap. This lack of information may prevent a PB that is an SD from complying with certain pre-trade regulatory obligations under the External Business Conduct Standards, most notably the pre-trade disclosure of the price and a PTMMM of the swaps as required by § 23.431(a)(3). 39 39 17 CFR 23.431(a)(3). Recognizing these structural and informational hurdles to compliance with the External Business Conduct Standards, MPD issued a no-action position in CFTC Staff Letter 13-11 with respect to enumerated External Business Conduct Standards as they relate to certain covered transactions 40 executed under PB arrangements where the PB and trigger swap counterparty were each SDs registered with the Commission. 41 Specifically, MPD stated that it would not recommend an enforcement action against such SDs if the PB allocated its responsibilities under the relevant External Business Conduct Standards to the SD that is the trigger swap counterparty, subject to certain other conditions provided in CFTC Staff Letter 13-11. 42 40 Pursuant to section 1a(47)(E) of the CEA, the U.S. Secretary of the Treasury (“Secretary”) was vested with the authority to determine whether foreign exchange swaps and foreign exchange forwards should be regulated as swaps under the CEA, provided that the Secretary made a written determination satisfying certain criteria specified in section 1b of the CEA. See 7 U.S.C. 1a(47)(E) (citing 7 U.S.C. 1b). On November 16, 2012, the Secretary issued a written determination that foreign exchange swaps and forwards should not be regulated as swaps as defined under the CEA. See U.S. Treasury Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012) (“Treasury Determination”). The term “covered transaction” means a swap, as defined in section 1(a)(47) of the CEA and § 1.3, other than swaps subject to the clearing requirement of section 2(h)(1)(A) of the CEA and part 50 of the Commission's regulations, and physically-settled foreign exchange forwards and swap agreements that have been exempted from the definition of swap under the Treasury Determination. See CFTC Staff Letter 13-11 and Treasury Determination. 41 See CFTC Staff Letter 13-11. 42 Id. at 6-10. In addition, MPD recognized that many trigger swap counterparties transacting in the market for foreign exchange swaps and forwards that were exempted from the swap definition pursuant to the Treasury Determination (“Exempt FX Transactions”) 43 were not SDs. Although such transactions are exempted from the swap definition, SDs executing Exempt FX Transactions remain obligated to comply with the External Business Conduct Standards. 44 However, where the trigger swap counterparty is not an SD, such counterparty could not meet the conditions of CFTC Staff Letter 13-11 regarding allocation of certain External Business Conduct Standards between SDs. Thus, CFTC Staff Letter 13-11 presented a more straightforward and limited no-action position with respect to Exempt FX Transactions executed under a PB arrangement where the PB is a registered SD and the trigger swap counterparty is not registered with the Commission as an SD, providing a no-action position only with respect to a failure to comply with the disclosure requirements of §§ 23.431(a)(3)(i) and 23.431(b). 45 43 In CFTC Staff Letter 13-11, “Exempt FX Transactions” are defined as physically-settled foreign exchange forwards and swap agreements that have been exempted from the definition of swap by the U.S. Department of Treasury. Id. (citing Treasury Determination). 44 Notwithstanding the Treasury Determination, section 1a(47)(E)(iv) of the CEA provides that “any party to a foreign exchange swap or forward that is a swap dealer or major swap participant shall conform to the business conduct standards contained in section 4s(h) [of the CEA].” 7 U.S.C. 1a(47)(E)(iv). Thus, Swap Entities are required to comply with the External Business Conduct Standards with respect to Exempt FX Transactions. 45 See CFTC Staff Letter 13-11 at 10 (stating that no-action position is only applicable with respect to a failure to comply with the disclosure requirements of 17 CFR 23.431(a)(3)(i) and 23.431(b)). Finally, in 2019, MPD recognized that certain PB transactions executed anonymously on SEFs raised additional structural and informational hurdles to compliance with the disclosure requirements of §§ 23.431(a) and (b) 46 in the context of PB arrangements. Commission regulation 23.431(c) provides that §§ 23.431(a) and (b) do not apply to swaps executed by an SD on a SEF where the SD does not know the identity of its counterparty prior to execution. 47 In the PB context, this exception from the disclosure requirements of §§ 23.431(a) and (b) would apply to the trigger swap between the SD acting as a PB (a “PB/ SD”) and the trigger swap counterparty that is executed anonymously on a SEF, but the mirror swap between the PB/SD and its PB customer would not be executed anonymously or on a SEF, and thus would not qualify for the exemption. However, the price of the mirror swap is determined based on the price at which the trigger swap is executed on the SEF, and therefore, it would be impossible for the PB/SD to provide the disclosures required by §§ 23.431(a) and (b) to its PB customer prior to being obligated to enter into the mirror swap. Recognizing this structural obstacle to compliance with §§ 23.431(a) and (b), MPD provided a no-action position in CFTC Staff Letter 19-06 stating that it would not recommend an enforcement action against a PB/SD for failure to make the disclosures required by §§ 23.431(a) and (b) to its customer in relation to the mirror swap where the trigger swap is executed anonymously on a SEF. 48 46 17 CFR 23.431(a) and (b). 47 § 23.431(c), 17 CFR 23.431(c). 48 CFTC Staff Letter 19-06 at 3. The Commission has preliminarily determined that PB arrangements common in the swaps and Exempt FX Transaction markets prior to promulgation of the External Business Conduct Standards present significant structural and informational hurdles to compliance with the disclosure requirements of §§ 23.431(a) and (b). 49 The Commission has also observed that the long-standing MPD no-action position set forth in CFTC Staff Letter 13-11 (as extended to off-SEF swaps in CFTC Staff Letter 19-06) appears to have sufficiently addressed these significant structural and informational hurdles to compliance with the disclosure requirements of §§ 23.431(a) and (b), 50 and, to the Commission's knowledge, has not resulted in any adverse consequences. Thus, the Commission is proposing to amend its regulations to provide an outcome comparable to such no-action position, as discussed below. 49 17 CFR 23.431(a) and (b). 50 17 CFR 23.431(a) and (b). 3. Pre-Trade Mid-Market Mark No-Action Positions In 2013, MPD provided a no-action position in CFTC Staff Letter 13-12 (which was a revision of CFTC Staff Letter 12-42) 51 stating that it would not recommend enforcement action against a Swap Entity for its failure to disclose an otherwise required PTMMM to a counterparty so long as the transaction was a foreign exchange swap, foreign exchange forward, or vanilla foreign exchange option of six-months or less that is physically settled, where: (1) each currency is one of the “BIS 31 Currencies” ( i.e., a specified, widely-traded currency); 52 (2) real-time tradeable bid and offer prices for the transaction are available electronically to the counterparty; and (3) the counterparty agrees in advance that the Swap Entity need not disclose the PTMMM. 53 CFTC Staff Letter 13-12 also provided a no-action position regarding the disclosure of a PTMMM for Exempt FX Transactions entered into by Swap Entities anonymously on electronic trading facilities that are not registered with the Commission as SEFs or DCMs, reasoning that because Exempt FX Transactions are not swaps per the Treasury Determination, such transactions need not be executed on SEFs or DCMs, but should be treated the same as swaps executed on SEFs or DCMs. 54 Swaps executed anonymously on a SEF or DCM are excepted from the requirement to disclose a PTMMM pursuant to § 23.431(c). 55 51 See CFTC Staff Letter 12-42 (Dec. 6, 2022), Re: Request for Relief Regarding Obligation to Provide Pre-Trade Mid-Market Mark for Certain Foreign Exchange Transactions. 52 Specifically, CFTC Staff Letter 13-12 defined the “BIS 31 Currencies” to be the U.S. dollar, Euro, Japanese yen, Pound sterling, Australian dollar, Swiss franc, Canadian dollar, Hong Kong dollar, Swedish krona, New Zealand dollar, Korean won, Singapore dollar, Norwegian krona, Mexican peso, Indian rupee, Russian rouble, Chinese renminbi, Polish zloty, Turkish lira, South African rand, Brazilian real, Danish krone, New Taiwan dollar, Hungarian forint, Malaysian ringgit, Thai baht, Czech koruna, Philippine peso, Chilean peso, Indonesian rupiah, and Israeli new shekel. Id. at 5, n. 16. 53 Id. at 6. 54 Id. at 6-7. 55 17 CFR 23.431(c). MPD provided a substantially similar no-action position in CFTC Staff Letter 12-58, stating that it would not recommend enforcement action against a Swap Entity for failure to disclose a PTMMM for certain widely-traded interest rate swap or index credit default swaps, 56 provided that real-time tradeable bid and offer prices for the relevant swap are available electronically to the counterparty on a DCM or SEF, and the counterparty agrees in advance that the Swap Entity need not disclose the PTMMM. 57 56 Specifically, CFTC Staff Letter 12-58 covered: (1) untranched credit default swaps referencing the on-the-run and most recent off-the run series of the following indices: CDX.NA.IG 5Y, CDX.NA.HY 5Y, iTraxx Europe 5Y and iTraxx Europe Crossover 5yr; and (2) interest rate swaps (A) in the “fixed-for-floating swap class” (as such term is used in § 50.4(a), 17 CFR 50.4(a)) denominated in USD or EUR, (B) for which the remaining term to the scheduled termination date is no more than 30 years, and (C) that have the specifications set out in § 50.4, 17 CFR 50.4. Id. at 1. 57 CFTC Staff Letter 12-58 at 4. Finally, MPD provided a no-action position in CFTC Staff Letter 25-09, stating that it would not recommend that the Commission commence an enforcement action against a Swap Entity for failure to satisfy the PTMMM Requirement for its non-Swap Entity counterparties. MPD issued CFTC Staff Letter 25-09 in response to a request from certain trade associations representing a wide breadth of swap market participants who argued that: (1) the PTMMM Requirement does not provide any significant informational value to a Swap Entity's counterparties; (2) the PTMMM Requirement imposes significant operational burdens on Swap Entities and, at worst, impedes the prompt execution of swaps transactions; and (3) the elimination of the PTMMM Requirement would further harmonize the Commission's regulations with those of the United States (“U.S.”) Securities and Exchange Commission (“SEC”) applicable to security-based swap dealers and major security-based swap participants, which do not require disclosure of a PTMMM in relation to security-based swaps. The no-action position in CFTC Staff Letter 25-09 will remain in effect until the adoption by the Commission of a regulation addressing the PTMMM Requirement, such as this Proposal. As discussed below, the Commission has preliminarily determined that the PTMMM Requirement provides no useful information to counterparties and delays efficient execution; and is, thus, proposing to eliminate the PTMMM Requirement in its entirety. The Commission notes that its repeal of the PTMMM Requirement in a final rule would render the MPD no-action positions in CFTC Staff Letters 12-58, 13-12, and 25-09 moot; and it would therefore expect that MPD would withdraw such positions in due course. II. Proposed Amendments The Commission is proposing certain amendments to the External Business Conduct Standards and the STRD Requirement, as described in this Section, that would provide exceptions to compliance with such requirements when executing swaps that are: (1) intended by the parties to be cleared contemporaneously with execution; or (2) subject to prime broker arrangements that meet certain qualifying conditions. The proposed amendments would also make certain other changes discussed herein, including eliminating the PTMMM Requirement. In addition, as a simplifying amendment as discussed above, the Commission is proposing to replace each reference in the External Business Conduct Standards to “swap dealer and major swap participant” with a reference to “swap entity,” as defined in § 23.401 58 to mean “a swap dealer or major swap participant.” 58 17 CFR 23.401. The Commission requests comment on all aspects of the proposed amendments described below and has inserted more specific questions and requests for comment in numerical order in the discussion below. The Commission requests that commenters refer to the specific question number or request for comment in any response, if applicable. A. Proposed Elimination of the Pre-Trade Mid-Market Mark Disclosure Requirement The Commission is requesting comment on a proposal that the Swap Entity PTMMM Requirement set forth in § 23.431(a)(3)(i) 59 be eliminated in its entirety. This would be accomplished by deleting paragraphs (i) and (ii) of § 23.431(a)(3) and moving the price disclosure requirement currently in such paragraph (i) and the compensation disclosure requirement currently in such paragraph (ii) into paragraphs (2) and (3) of § 23.431(a), respectively, as reflected in the proposed rule text infra. 59 17 CFR 23.431(a)(3)(i). The Commission has several reasons for making this proposal based on its experience since 2013 when Swap Entity compliance with the External Business Conduct Standards was first required. Although the Commission believed that the PTMMM Requirement would provide counterparties with “pricing information that facilitates negotiations and balances historical information asymmetry regarding swap pricing,” 60 several commenters, in responding to a request for comments and recommendations under the Commission's “Project KISS” in 2017, 61 stated that the Commission should eliminate or revise the PTMMM Requirement, arguing that, among other things, the requirement: (1) creates unnecessary burdens and costs; (2) is of minimal to no utility to counterparties; (3) hampers trading flow by delaying execution; (4) creates confusion; and (5) is unnecessary for counterparties because such counterparties must be eligible contract participants (“ECPs,”) 62 which are deemed sufficiently sophisticated to enter into over-the-counter swaps. 63 The Commission preliminarily believes that the PTMMM Requirement provides no utility to counterparties and may delay execution to the disadvantage of counterparties. Accordingly, elimination of the PTMMM Requirement would support the Commission's goal of increasing the efficiency of the swaps market. The Commission requests comment on this aspect of the Proposal as noted below. 60 Final EBCS Rulemaking at 77 FR 9766. 61 See generally Project KISS, 82 FR 23765 (May 24, 2017). 62 “Eligible contract participant” is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18). 63 See Project KISS comments of the Securities Industry and Financial Markets Association, the Financial Services Roundtable, the Foreign Exchange Professionals Association, and State Street Corporation, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1809. The Commission also preliminarily believes that the no-action positions provided by MPD in the Covered Staff Letters show that the PTMMM Requirement has been unworkable in a wide variety of contexts in which uncleared swaps are executed between Swap Entities and their non-Swap Entity counterparties. This includes swaps executed pursuant to PB arrangements where a PB that is an SD does not know the price of a swap until after it is obligated to enter into the swap. It also includes, as discussed above, ITBC Swaps where the Swap Entities do not know the identity of their counterparty prior to execution, and widely-traded, highly-liquid swaps where the disclosure of a PTMMM is redundant because bid/offer prices are readily available to potential counterparties from trading and price information platforms. 64 Additionally, MPD has provided a no-action position regarding the disclosure of PTMMMs in the context of the LIBOR transition (swaps needing amendment to switch reference rates away from LIBOR) where the PTMMM Requirement applies, but is not relevant to the subject matter of the swap amendment. 65 64 See CFTC Staff Letters 12-58 and 13-12. 65 See CFTC Staff Letter 20-23 (Aug. 31, 2020), Re: Revised No-Action Positions to Facilitate an Orderly Transition of Swaps from Inter-Bank Offered Rates to Alternative Benchmarks, available at https://www.cftc.gov/csl/20-23/download. In addition to the foregoing, the Commission notes that the PTMMM Requirement, unlike the uncleared swap daily mark disclosure requirement promulgated in § 23.431(d)(2), 66 was not required by the amendments to the CEA contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). 67 Thus, elimination of the PTMMM disclosure requirement would not contradict any counterparty protection otherwise required by the Dodd-Frank Act. Further, the Commission also notes that the SEC does not require security-based swap dealers or security-based major swap participants to provide a PTMMM when entering into security-based swaps; 68 thus, elimination of the PTMMM disclosure requirement would serve to harmonize the Commission's rules governing swap dealing with those of the SEC. 66 17 CFR 23.431(d)(2). 67 See section 4s(h)(3)(B)(iii)(II) of the CEA, 7 U.S.C. 6s(h)(3)(B)(iii)(II). See Section II.C, infra, for a discussion of proposed amendments to the daily mark disclosure requirement in § 23.431(d)(2), 17 CFR 23.431(d)(2). 68 See § 240.15Fh-3(b), 17 CFR 240.15Fh-3(b); see also SEC, Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, 81 FR 29960, 30145 (May 13, 2016) (“SEC EBCS Final Rulemaking”). Question 01: Should the Commission eliminate the PTMMM disclosure requirement from § 23.431(a)(3)? 69 Why or why not? 69 17 CFR 23.431(a)(3). Question 02: If the commenter finds the PTMMM beneficial, please describe in detail the benefits of receiving the PTMMM. Please describe whether the PTMMM is beneficial for a particular type of swap and why the PTMMM disclosure requirement should be retained for each type of swap identified. B. Proposed Elimination of the Scenario Analysis Requirement The Commission is requesting comment on a proposal that the Scenario Analysis Requirement set forth in § 23.431(b) 70 be eliminated in its entirety. This would be accomplished by replacing subparagraph (b) of § 23.431 with “[RESERVED],” as reflected in the proposed rule text infra. 70 17 CFR 23.431(b). The Commission is making this proposal to eliminate the Scenario Analysis Requirement based on its experience since 2013, when Swap Entity compliance with the External Business Conduct Standards was first required. The Commission notes that the Scenario Analysis Requirement was not required by the Dodd-Frank Act amendments to the CEA. 71 The Commission also notes that the SEC does not require security-based swap dealers to provide a scenario analysis, by request or otherwise, when entering into security-based swaps; thus, elimination of the Scenario Analysis Requirement would serve to harmonize the Commission's rules governing swap dealing with those of the SEC. 72 In addition to the foregoing, the Commission has several reasons to propose elimination of the Scenario Analysis Requirement based on its experience over the last decade. 71 See e.g., Final EBCS Rulemaking at 77 FR 9762 (where the Commission discusses that the rule is discretionary and not mandatory). 72 See § 240.15Fh-3(b), 17 CFR 240.15Fh-3(b); see also SEC EBCS Final Rulemaking at 81 FR 30145. In adopting the Scenario Analysis Requirement in 2012, the Commission stated that it believed the requirement would assist to “materially enhance the ability of counterparties to assess the merits of entering into any particular swap transaction and reduce information asymmetries between swap dealers . . . and their counterparties.” 73 However, in responding to a request for comments and recommendations under the Commission's “Project KISS” in 2017, 74 several commenters stated that the Commission should eliminate the Scenario Analysis Requirement or restrict the availability of scenario analysis, arguing that the current requirement provides little to no utility to counterparties, goes beyond typical risk disclosures, and incorporates extremely complex and subjective judgments about the probable or possible future market states and their relevance to a particular transaction. 75 The Commission preliminarily believes that the Scenario Analysis Requirement provides no utility to counterparties, and the Commission should eliminate it in its entirety. The Commission requests comment on this aspect of the Proposal as noted below. 73 Final EBCS Rulemaking at 77 FR 9743, n. 125. 74 See generally Project KISS at 82 FR 23765. 75 See Project KISS comments of the Securities Industry and Financial Markets Association, State Street Corporation, and the Foreign Exchange Professionals Association, available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1809. Question 03: Should the Commission eliminate the Scenario Analysis Requirement from § 23.431(b)? 76 Why or why not? 76 17 CFR 23.431(b). Question 04: If the commenter finds the Scenario Analysis Requirement helpful, please describe in detail the benefits of requesting and receiving a scenario analysis. Please describe whether a scenario analysis is beneficial for a particular type of swap and why the Scenario Analysis Requirement should be retained for each type of swap identified. Please also describe if there are any types of swaps for which the Commission should mandate scenario analysis, even without the prior request of the counterparty? Question 05: Do counterparties to SDs find SDs willing and able to provide scenario analysis upon request? Question 06: Do counterparties feel pressured not to request a scenario analysis as permitted by the Scenario Analysis Requirement? If so, how is such pressure presented? C. Proposed Amendment of the Daily Mark Disclosure Requirement The Commission is proposing to amend the daily mark disclosure requirement in § 23.431(d)(2) 77 to harmonize such requirement with the Commission's uncleared swap margin rules and swap data reporting rules. 77 17 CFR 23.431(d)(2). Section 4s(h)(3)(B) of the CEA required the Commission to adopt disclosure requirements for Swap Entities, including a requirement that a Swap Entity disclose a daily mark for uncleared swaps entered into with non-Swap Entities, but did not define “daily mark” or describe how it was to be calculated. 78 Thus, the Commission issued § 23.431(d)(2), which currently describes the daily mark as the “mid-market mark of the swap [not including] amounts for profit, credit reserve, hedging, funding, liquidity, or any other costs or adjustments.” 79 The STRD Requirement in § 23.504 also requires Swap Entities to agree in writing with counterparties that are also Swap Entities or financial entities (as defined in § 23.500(e)) 80 regarding the process for determining the value of each swap at any time from the execution to the termination, maturity, or expiration of the swap. 81 78 7 U.S.C. 6s(h)(3)(B)(iii)(II). 79 17 CFR 23.431(d)(2). 80 17 CFR 23.500(e). 81 § 23.504(b)(4)(i), 17 CFR 23.504(b)(4)(i). However, although the swap data reporting rules in part 45 of the Commission's regulations define “valuation data” by cross-referencing § 23.431, 82 appendix 1 to part 45 defines “valuation amount” (one of several elements that make up “valuation data”) to mean the “[c]urrent value of the outstanding contract. Valuation amount is expressed as the exit cost of the contract or components of the contract, i.e., the price that would be received to sell the contract (in the market in an orderly transaction at the valuation date).” 83 Commission regulation 45.4(c)(2)(i) requires current valuation data for each outstanding swap to be reported to a swap data repository each business day. 84 82 See § 45.1, 17 CFR 45.1 (defining “valuation data” as “the data elements necessary to report information about the daily mark of the transaction, pursuant to section 4s(h)(3)(B)(iii) of the Act, and to § 23.431 of this chapter, if applicable, as specified in appendix 1 to this part.”). 83 17 CFR part 45, appendix 1. 84 § 45.4(c)(2)(i), 17 CFR 45.4(c)(2)(i). In contrast, the Commission's uncleared margin rules 85 require Swap Entities to calculate and to collect or post variation margin from or to counterparties that are Swap Entities or financial entities each business day. 86 “Variation margin” is defined in § 23.151 to mean “collateral provided by a party to its counterparty to meet the performance of its obligation under one or more uncleared swaps between the parties as a result of a change in value of such obligations since the trade was executed or the last time such collateral was provided,” 87 whereas the “variation margin amount” is defined in § 23.151 as “the cumulative mark-to-market change in value to a covered swap entity of an uncleared swap, as measured from the date it is entered into (or in the case of an uncleared swap that has a positive or negative value to a covered swap entity on the date it is entered into, such positive or negative value plus any cumulative mark-to-market change in value to the covered swap entity of an uncleared swap after such date), less the value of all variation margin previously collected, plus the value of all variation margin previously posted with respect to such uncleared swap.” 88 Swap Entities are required to calculate the variation margin amount each business day pursuant to § 23.155 using methods, procedures, rules, and inputs that, to the maximum extent practicable, rely on recently-executed transactions, valuations provided by independent third parties, or other objective criteria. 89 Such methods are required to be documented in margin documentation required by § 23.158. 90 85 §§ 23.150-23.161, 17 CFR 23.150 through 23.161. 86 See § 23.155, 17 CFR 23.155 (calculation of variation margin); and § 23.153, 17 CFR 23.153 (collection and posting of variation margin). 87 See 17 CFR 23.151 (providing definitions applicable to margin requirements). 88 Id. 89 17 CFR 23.155. 90 See § 23.158(b)(1), 17 CFR 23.158(b)(1) (stating “[t]he margin documentation shall specify the methods, procedures, rules, inputs, and data sources to be used for determining the value of uncleared swaps for purposes of calculating variation margin.”). Thus, based on the foregoing, on any business day, a Swap Entity may be required to calculate the valuation of a swap for three different purposes using three similar but not identical criteria for purposes of: (1) providing the daily mark of the swap to its counterparty under § 23.431(d)(2); (2) reporting valuation data for the swap to a swap data repository under § 45.4(c)(2); and (3) calculating the variation margin amount for the swap under § 23.155. To harmonize these similar but not identical calculations so that a Swap Entity is only required to make a single calculation of the valuation of the swap, the Commission is proposing to amend § 23.431(d)(2) (renumbered as § 23.431(d)(3) in the proposed rule text infra ) such that the daily mark for uncleared swaps will be “the estimated price that would be received by the counterparty to sell (expressed as a positive number), or be paid by the counterparty to transfer (expressed as a negative number), the uncleared swap in the market in an orderly transaction.” The proposed rule would also require the daily mark to be calculated in accordance with the methodology agreed to in the swap trading relationship documentation required by § 23.504, and if applicable, § 23.158 of the Commission's uncleared swap margin rules. The Commission believes that under this formulation non-Swap Entity counterparties would receive the daily mark required by section 4s(h)(3)(B) of the CEA, but a Swap Entity would only be required to calculate the valuation of a swap once daily and use the result of such calculation to provide the daily mark to its counterparty in compliance with § 23.431, and, if otherwise required, use such result for reporting valuation data to a swap data repository in compliance with § 45.4 and for purposes of calculating the variation margin amount in compliance with § 23.155. Question 07: Should the Commission revise the daily mark calculation and disclosure requirement as set forth above? Why or why not? Question 08: Will the formulation of the daily mark disclosure requirement as proposed permit a Swap Entity to perform a single daily calculation of the valuation of a swap that meets the criteria for compliance with the daily mark, data reporting, and variation margin requirements? If not, why not? Could the formulation be adjusted such that it could achieve the goal of harmonizing the three required calculations? Question 09: Are there reasons why the daily mark disclosure requirement should remain distinct from the calculation of valuation data for swap reporting purposes or variation margin purposes? Please explain. D. New and Amended Definitions in § 23.401 The Commission is proposing to add new definitions to § 23.401 91 and to amend a number of existing definitions in such section solely for the purposes of the subpart. These new and amended definitions are explained below. Each new definition would be placed in alphabetical order in § 23.401, as the section is proposed to be renumbered to account for the new definitions as shown in the proposed rule text infra. 91 17 CFR 23.401. 1. Definition of ITBC Swap The Commission is proposing to add a new definition of “ITBC Swap” to the definitions in § 23.401 applicable to subpart H of part 23 of the Commission's regulations. 92 The definition of “ITBC Swap” is intended to clearly describe the criteria and conditions that a swap must meet to be eligible for the various exceptions from disclosure and information collection requirements of the External Business Conduct Standards proposed in this Proposal that specify that the exception applies to ITBC Swaps, and the STRD Requirement set forth in §§ 23.402 through 23.451 and § 23.504 (referred to hereinafter as the “ITBC Compliance Exceptions”). 93 Each of the ITBC Compliance Exceptions is explained below in the discussion of the proposed amendments to §§ 23.402 through 23.451 and § 23.504. 94 Other than as described below, the criteria and conditions in the proposed definition are substantially the same as the conditions necessary to qualify for the MPD no-action position set forth in CFTC Staff Letter 23-01. 92 17 CFR 23.401. 93 See 17 CFR 23.402-451 and 23.504. 94 See Sections II.E through II.L infra. First, under the Proposal, one of the parties to the swap must be a swap entity, as defined in new § 23.401(j) to mean an SD or MSP. “Swap entity” is used throughout the definitions and the proposed amendments to refer to an SD or MSP. The External Business Conduct Standards and the STRD Requirement only apply to Swap Entities. Thus, swaps where no Swap Entity is a counterparty have no need to qualify for the ITBC Compliance Exceptions. Second, the swap would be required to be of a type accepted for clearing by a DCO registered with the Commission or an Exempt DCO. 95 Only swaps that are of a type accepted for clearing by a DCO or Exempt DCO qualify for the ITBC Compliance Exceptions. Thus, even if a Swap Entity and its counterparty enter into a swap that they intend to clear, but the swap is not of a type accepted for clearing on a DCO or Exempt DCO, such swap would not qualify for the ITBC Compliance Exceptions. 95 See Section I.B.1., supra, for a discussion of Exempt DCOs. Third, the parties to the swap would be required to execute the swap with the present intention that the swap will be cleared contemporaneously with execution. The ITBC Compliance Exceptions would not be available for a swap that is entered bilaterally between two parties who then decide later that they would like to submit the swap for clearing. As discussed in the seventh condition below requiring submission of an ITBC Swap to a DCO or Exempt DCO as soon as practicable, a swap that is not intended to be cleared contemporaneously with execution means that there will be a trading relationship between the Swap Entity and its counterparty for some material period of time, which would necessitate compliance by the Swap Entity with the Commission's swap reporting, disclosure, and uncleared swap margin rules. While parties are free to enter into swaps that they intend to clear but are not cleared contemporaneously with execution, such swaps would not be ITBC Swaps and such swaps would not qualify for the ITBC Swap Compliance Exceptions. Fourth, if the swap is intended to be cleared on a DCO, the Swap Entity and its counterparty would be required to either be clearing members of the DCO or have entered into an agreement with a clearing member of the DCO ( i.e., a futures commission merchant (“FCM”)) for clearing of swaps of the same type as the swap intended to be cleared. This condition is necessary to ensure that a swap that the Swap Entity and its counterparty intend to be cleared contemporaneously with execution can actually be cleared on the DCO. A Swap Entity or a counterparty that is not a clearing member of the DCO, or that has not entered into an agreement with an FCM that is a clearing member of the DCO covering the type of swap intended to be cleared, cannot actually clear the swap, no matter the intention of the parties to the swap. Fifth, if the swap is intended to be cleared on an Exempt DCO, the Swap Entity and its counterparty would be required to be eligible to clear the swap on the Exempt DCO in accordance with the terms and conditions of the Exempt DCO's Order of Exemption from Registration issued by the Commission. Each Exempt DCO is exempt from registration pursuant to a unique order issued by the Commission, which may contain conditions and limitations to the Exempt DCO's ability to clear certain products for or on behalf of U.S. Persons pursuant to that order. 96 Most importantly, clearing members of some Exempt DCOs that are U.S. Persons (as defined in the exemption orders) may only clear swaps for themselves and those affiliates that meet the definition of “proprietary account” in § 1.3. 97 This eligibility condition is necessary to ensure that a swap that the Swap Entity and its counterparty intend to be cleared contemporaneously with execution can actually be cleared on the Exempt DCO. A Swap Entity or a counterparty that is not eligible to clear a swap on an Exempt DCO or has not entered into an agreement with a clearing member of the Exempt DCO covering the type of swap intended to be cleared cannot actually clear the swap, no matter the intention of the parties to the swap. 96 See Section I.B.1., supra, n. 24-27, and accompanying text. 97 See 17 CFR 1.3. Sixth, the Swap Entity would be prohibited from requiring its counterparty or the counterparty's clearing member ( i.e., the counterparty's FCM) to enter into a breakage agreement or similar agreement as a condition to executing the swap intended to be cleared, but would not prohibit a Swap Entity from entering into a breakage or similar agreement at the request of a counterparty. Generally, this condition is meant to ensure that the parties to such swap are entering into the swap with the expectation that the swap will be cleared and would not enter into the swap absent such expectation. In the Commission's preliminary view, where a Swap Entity requires a breakage agreement pursuant to which parties agree in advance that if the swap does not clear then either the swap will be considered a bilateral swap between the parties or one party will owe a “breakage” payment to the other party to compensate such party for costs or damages incurred due to the failure to clear is evidence that the Swap Entity may not be entering into the swap with the requisite intention that the swap will be a cleared swap. The Commission has preliminarily determined that the same is not true where a breakage agreement is requested by the counterparty. In such case, the Commission believes it is more likely that the counterparty's main concern is that its intended position be established by the swap, whether cleared or uncleared. The Commission recognizes that because this condition would permit a counterparty to a Swap Entity to request a breakage agreement it is necessary to also modify the void ab initio condition from the form it was presented in CFTC Staff Letter 23-01, as detailed below in the discussion of condition eight. Seventh, the Swap Entity would be required to ensure that the swap is submitted for clearing as quickly after execution as would be technologically practicable if fully automated systems were used. This proposed condition sets forth a standard for submission of the swap for clearing to a DCO or Exempt DCO. It would be in addition to the obligations in § 23.506 (which requires a Swap Entity to coordinate prompt and efficient swap transaction processing with the DCO) 98 and § 23.610 (which requires the Swap Entity to accept or reject each trade submitted to the DCO for clearing as quickly as would be technologically practicable if fully automated systems were used). 99 The Commission preliminarily expects this condition to ensure that a swap executed with the intention to be cleared is actually submitted for clearing as soon as possible after execution. The proposed ITBC Compliance Exceptions are based on the concept that there will be no contractual or trading relationship between a Swap Entity and its counterparty with respect to a swap intended to be cleared, so it is crucial that there be no delay between execution and submission to clearing. For example, a delay in clearing of even one business day implicates compliance by the Swap Entity with the Commission's swap reporting, disclosure, and uncleared swap margin rules. 98 17 CFR 23.506. 99 17 CFR 23.610. Eighth, the Commission is proposing to require that if the swap is executed on a DCM, SEF, or Exempt SEF and is rejected from clearing, the swap must be void ab initio. This is a modification of the void ab initio conditions in CFTC Staff Letter 23-01, which stipulated that any ITBC Swap must be void ab initio if rejected from clearing, whether executed on a DCM, SEF, or Exempt SEF or executed bilaterally between a Swap Entity and its counterparty. This modification of the condition in CFTC Staff Letter 23-01 is necessitated by the Commission's recognition in condition six, discussed above, that a counterparty may request a breakage agreement from a Swap Entity while maintaining a prohibition on Swap Entities requiring breakage agreements as a condition to entering into a swap. Compliance with this condition may be accomplished by executing the swap on a SEF or DCM where such SEF or DCM is required to have rules requiring swaps submitted for clearing to be void ab initio if not cleared. 100 However, if the swap is not executed on a SEF, DCM, or Exempt SEF that has rules requiring swaps submitted for clearing to be void ab initio if not cleared, then it would be incumbent on the Swap Entity to ensure that it has agreed with its counterparty that if such swap intended to be cleared fails to clear, the swap will be deemed by the parties to be void ab initio. That is, the swap will be deemed to have never been executed. The Commission recognizes that Swap Entities routinely enter into swaps with counterparties that are intended to be cleared (whether anonymously or otherwise) and therefore may have no pre-existing relationship with such counterparties where an agreement regarding the status of swaps rejected from clearing could be documented. However, the Commission preliminarily believes such an agreement can be made part of the terms of the swap agreed at execution and would not require a separate agreement between the parties ( i.e., the agreement that a swap rejected from clearing shall be void ab initio may be a term of the swap agreed at execution). 100 See CFTC Staff Guidance Letter (Sept. 26, 2013), RE: Staff Guidance on Swaps Straight-Through-Processing, at 6 (stating that the Commission's Division of Market Oversight and Division of Clearing and Risk expect DCMs and SEFs to have rules stating that trades that are rejected from clearing are void ab initio), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/stpguidance.pdf. Question 10: The Commission intends that a counterparty to a Swap Entity could request a breakage agreement and thus a swap executed bilaterally between the parties that is rejected from clearing may not be void ab initio. For instance, where a counterparty intends to clear a swap but, if it fails to clear, still desires or needs the swap to exist to support a trading strategy, such counterparty may request that the Swap Entity enter into a breakage agreement that provides for an alternative to clearing if a swap fails to clear ( e.g., that the swap could become a bilateral swap between the Swap Entity and the counterparty). Thus, the Commission requests comment on whether the ITBC Swap definition conditions should be adjusted in some way to allow for a swap to survive a failure to clear pursuant to a breakage agreement requested by the counterparty (but not required by the Swap Entity)? The Commission notes that any such adjustment or alternative would have to account for compliance with the External Business Conduct Standards and the STRD Requirement. Question 11: Is the definition of ITBC Swap as proposed appropriately drafted to capture the conditions for the ITBC Compliance Exceptions set forth in this Proposal? Question 12: Should the definition be adjusted in any manner to better capture the Commission's intentions? Question 13: Should any prong of the definition be adjusted or eliminated? Why or why not? 2. Definition of A-ITBC Swap The Commission proposes to add a new definition of “A-ITBC Swap” to the definitions in § 23.401 101 applicable to subpart H of part 23 of the Commission's regulations. “A-ITBC Swap” would define an “Anonymous ITBC Swap” to be an ITBC Swap where the Swap Entity does not know the identity of the counterparty prior to execution of the swap. The proposed definition further explains that an A-ITBC Swap may be executed on or pursuant to the rules of a SEF, DCM, or Exempt SEF, or may be executed bilaterally between a Swap Entity and a counterparty (such as where a Swap Entity enters into a “block trade” with an asset manager that intends to allocate portions of a swap to various funds or accounts under management post-clearing). The Commission preliminarily believes a definition of “A-ITBC Swap” will be helpful to distinguish ITBC Swaps that are executed in circumstances where the Swap Entity knows the identity of its counterparty prior to execution from those that it does not for purposes of application of the proposed ITBC Compliance Exceptions. 101 17 CFR 23.401. Question 14: The Commission requests comment on whether the definition of A-ITBC Swap is accurate and fit for purpose or whether it should be adjusted or eliminated in favor of some other formulation? 3. Definition of Covered Transaction The Commission proposes to add a new definition of “Covered Transaction” to the definitions in § 23.401 102 applicable to subpart H of part 23 of the Commission's regulations. The definition of Covered Transaction is intended to encompass all transaction types that may be subject to a Prime Broker Arrangement (defined and explained infra ). As such, the proposed Covered Transaction definition encompasses swaps, as defined in section 1a(47) of the CEA, 103 but excludes swaps that are subject to the Commission's swap clearing requirement in section 2(h)(1)(A) of the CEA 104 and part 50 of the Commission's regulations. 105 In the Commission's preliminary understanding, swaps subject to Prime Broker Arrangements are exclusively uncleared swaps. The proposed definition of Covered Transactions would also include Exempt FX Transactions, which, as explained above, are not swaps (having been excluded from such definition by the Treasury Determination), but are nonetheless subject to the External Business Conduct Standards if entered into by a Swap Entity with a counterparty that is not a Swap Entity. 106 The Commission preliminarily intends for the definition of Covered Transaction to be substantially the same as the definition of such term set forth CFTC Staff Letters 13-11 and 19-06. 102 Id. 103 7 U.S.C. 1a(47). 104 7 U.S.C. 2(h)(1)(A). 105 17 CFR part 50; 17 CFR 50.1-50.79. 106 See Section I.B.2., supra, n. 40-42 and accompanying text. Question 15: Does the proposed definition of Covered Transaction adequately capture the universe of transactions that are currently subject to swap Prime Broker Arrangements, as defined in this Proposal? Question 16: Are there types of transactions falling under the Commission's jurisdiction that should be added to the definition of Covered Transaction or are there transaction types included in such definition that should be removed? Question 17: Should the definition of Covered Transaction include a catch-all to automatically include types of transactions that may in the future become subject to Commission jurisdiction? 4. Definition of Prime Broker Arrangement The Commission proposes to add a new definition of “Prime Broker Arrangement” to the definitions in § 23.401 107 applicable to subpart H of part 23 of the Commission's regulations. 108 The proposed definition of Prime Broker Arrangement is intended to universally encompass the various agreements and arrangements that constitute the credit intermediation service provided by a PB to their swap PB customers that allows such PB customers to seek prices on Covered Transactions from a variety of counterparties while only facing the PB for its ongoing obligations under Covered Transactions and allowing for collateral netting, but is also meant to recognize the roles of other parties, including, without limitation, executing dealers, intermediaries, and other PBs. 107 17 CFR 23.401. 108 17 CFR part 23, subpart H; 17 CFR 23.400-23.451. A Prime Broker Arrangement as proposed to be defined in § 23.401 would include at least one PB/SD and two or more other parties evidenced by a written agreement or agreements. 109 Pursuant to such written agreements, the PB/SD, subject to any applicable pre-conditions, would be contractually obligated to enter into a Covered Transaction (as defined in § 23.401 and explained above) that constitutes a PB trigger transaction (the “Trigger Transaction”) 110 with a counterparty that may or may not be a Swap Entity, may be a PB customer of the PB/SD, an executing dealer, or another PB (the “Trigger Counterparty”) and for which the PB/SD has not determined the price. The execution of the Trigger Transaction must also obligate the PB/SD to enter into a second Covered Transaction (the “Mirror Transaction”) 111 with another counterparty that is not the Trigger Counterparty (the “Mirror Counterparty”), which is a PB customer of the PB/SD and to whom the PB/SD owes regulatory obligations under the External Business Conduct Standards. The terms and price of the Mirror Transaction, from the perspective of the PB/SD, must be substantially equal but opposite to the terms and price of the Trigger Transaction. 109 The Commission preliminarily believes that MSPs do not and would not act as PBs. 110 See § 43.2(a) for a definition of “trigger swap” used in the context of the Commission's swap reporting rules. 17 CFR 43.2(a). 111 See § 43.2(a) for a definition of “mirror swap” used in the context of the Commission's swap reporting rules. 17 CFR 43.2(a). The proposed “substantially equal but opposite” requirement is a recognition by the Commission that the terms and the price of a Mirror Transaction may be adjusted from those of a Trigger Transaction to allow for a spread or fee to be paid to the PB/SD, (or to an intermediary that has arranged the transaction), to compensate the PB/SD or the intermediary for providing the credit intermediation service evidenced by the Prime Broker Arrangement or the intermediary's services. The Commission also recognizes that the designation of a Trigger Transaction and a Mirror Transaction depends on the perspective of the parties to the transaction. For example, where two PBs are involved, the Mirror Transaction for one PB may be a Trigger Transaction for the second PB. The Commission is also aware that a single Trigger Transaction may trigger a string of transactions between various PBs and their PB customers, some of which could be both Trigger Transactions and Mirror Transactions. The intention of the proposed definition of Prime Broker Arrangement is to capture the essence of the concept of credit intermediation through swap PB arrangements as it relates to compliance with the External Business Conduct Standards. In the Commission's preliminary view, such essence lies in the fact that a PB/SD, due to its contractual obligations under the various forms of Prime Broker Arrangements, will, when certain specified pre-conditions are met, be contractually obligated to enter into a Covered Transaction for which it has not determined the price and simultaneously be obligated to enter into a substantially equal but opposite Covered Transaction, the price of which is determined based on the price of the first transaction. The Commission understands that where a PB/SD is entering into transactions with non-Swap Entity counterparties for which it has not determined the price prior to execution, it cannot comply with the price and PTMMM disclosure requirements of the External Business Conduct Standards. Question 18: Does the proposed definition of Prime Broker Arrangement adequately encompass the concept of swap PB arrangements as a credit intermediation service provided by PB/SDs? Why or why not? Question 19: Please comment on any adjustment or addition to the proposed definition of Prime Broker Arrangement that would better meet the Commission's intentions. 5. Definition of Qualified Prime Broker Arrangement The Commission proposes to add a new definition of “Qualified Prime Broker Arrangement” to the definitions in § 23.401 112 applicable to subpart H of part 23 of the Commission's regulations. 113 The definition of Qualified Prime Broker Arrangement incorporates conditions that, if met by a PB/SD's Prime Broker Arrangement with a particular non-Swap Entity counterparty (each a “PB Counterparty”), would permit the PB/SD to qualify for an exception to the price disclosure requirement in § 23.431(a)(3) 114 with respect to Covered Transactions with such PB Counterparty. Depending on whether the Commission determines to eliminate the PTMMM disclosure requirement (as discussed above), meeting the conditions to the definition of Qualified Prime Broker Arrangement would also permit a PB/SD to qualify for an exception to the PTMMM disclosure requirement in § 23.431(a)(3). 115 Such proposed conditions are explained below. 112 17 CFR 23.401. 113 17 CFR part 23, subpart H; 17 CFR 23.400-23.451. 114 17 CFR 23.431(a)(3). 115 Id.; see Section II.A., supra, for the Commission's discussion of its proposed elimination of the PTMMM. The Commission has preliminarily determined that providing an exception from the price disclosure obligation (and, if necessary, the PTMMM disclosure obligation) of an SD when entering into a swap pursuant to a Qualified Prime Broker Arrangement is a reasonable accommodation to the long-standing prime broker arrangements prevalent in the swaps market prior to promulgation of the External Business Conduct Standards. The Commission's view is based on the fact that Prime Broker Arrangements are entered into by swap counterparties seeking certain benefits, among which are: (1) the ability of swap counterparties to seek favorable pricing from a wide variety of market participants, rather than just a handful of SDs with which they may have trading relationships; (2) the credit intermediation provided by PBs that permits price shopping by swap counterparties but consolidates credit risk of the swap counterparty with only their PB(s); and (3) the consolidation of credit risk with only their PB(s) that permits for more efficient use of collateral through netting of positions with only their PB(s). In the Commission's preliminary view, an insistence on price disclosure (and, if necessary, a PTMMM disclosure) by an SD acting as a PB, a requirement that was intended to provide a benefit to non-Swap Entity counterparties, would undermine that very benefit and eliminate all of the other benefits of Prime Broker Arrangements to swap counterparties, forcing such counterparties to trade swaps only with a handful of SDs with the concomitant loss of competitive pricing. Thus, the Commission has determined to propose the following conditions for a Qualified Prime Broker Arrangement that would qualify for an exception to the price disclosure (and, if necessary, the PTMMM disclosure) requirement. First, to qualify as a Qualified Prime Broker Arrangement, the Prime Broker Arrangement between a PB/SD and its PB Counterparty would be required to contain an agreement in writing on the type, parameters, and limits of each potential Covered Transaction that may be entered into by the PB Counterparty with the PB/SD pursuant to the Prime Broker Arrangement (each, a “Permitted PB Transaction”). This proposed condition would require the PB/SD to: (1) Clearly delineate the types of transactions that the PB/SD will be obligated to enter into with the PB Counterparty pursuant to the Prime Broker Arrangement; (2) To list all of the pre-conditions to the PB/SD's obligation to enter into each type of Permitted PB Transaction; (3) To list all acceptable terms for each type of Permitted PB Transaction (such as tenor, payment terms, payment calculation terms, termination events, rate fallbacks, etc.); and (4) To set limits (credit, market, trade volume, etc.) for each type of Permitted PB Transaction. The purpose of this proposed condition is to ensure that, before execution of any Covered Transaction, the parties will know exactly what the PB/SD is required to execute with the PB Counterparty, thereby making compliance with the other conditions of the Qualified Prime Broker Arrangement definition possible. A PB/SD and its PB Counterparty would, of course, be free to update or adjust the parameters of Permitted PB Transactions at any time by agreeing to an amendment to their Prime Broker Arrangement. Second, the PB/SD, now knowing the types and terms of all possible Covered Transactions that may be executed with the PB Counterparty pursuant to their Prime Broker Arrangement, would be required to provide the PB Counterparty with all disclosures that would be necessary for the Prime Broker to comply with § 23.431(a) 116 other than the pre-trade disclosure of the price of any Permitted PB Transaction (and the PTMMM, if the Commission determines not to eliminate the PTMMM Requirement). If the Commission determines not to eliminate the scenario analysis requirement in § 23.431(b) 117 (as discussed above), the PB/SD would also be required to provide a scenario analysis of any Permitted PB Transaction if requested by the PB Counterparty (the §§ 23.431(a) and (b) required disclosures and, if requested, the scenario analysis, are hereinafter referred to as the “Regulatory Disclosures”). These Regulatory Disclosures would include material information concerning a Permitted PB Transaction provided in a manner reasonably designed to allow the PB Counterparty to assess: 116 17 CFR 23.431(a). 117 17 CFR 23.431(b); see Section II.B., supra, for the Commission's discussion of its proposed elimination of the Scenario Analysis Requirement in § 23.431(b). (1) The material risks of a particular type of Permitted PB Transaction, which may include market, credit, liquidity, foreign currency, legal, operational, and any other applicable risks; (2) The material characteristics of a particular type of Permitted PB Transaction, which would include the material economic terms of the Permitted PB Transaction, the terms relating to the operation of the Permitted PB Transaction, and the rights and obligations of the parties during the term of the Permitted PB Transaction; and (3) The material incentives and conflicts of interest that the PB/SD may have in connection with a particular type of Permitted PB Transaction, which would include any compensation or other incentive from any source other than the PB Counterparty that the PB/SD may receive in connection with a particular type of Permitted PB Transaction. 118 118 See § 23.431(a), 17 CFR 23.431. As proposed, the disclosure obligation of the PB/SD under this second condition would be limited to the PB/SD's knowledge and reasonable belief at the time of disclosure. The Commission would consider a PB/SD to have met this condition if such disclosure is substantially the same as its disclosures to non-PB Counterparties for the same types of Covered Transactions, so long as such disclosures to non-PB Counterparties are not found deficient. The Commission notes that this condition would impose an on-going disclosure requirement that must be updated to the extent the PB/SD becomes aware of information that would make a previous disclosure incorrect, incomplete, or misleading. Third, the PB/SD would be required to receive an acknowledgement from a PB Counterparty regarding various disclosures. The acknowledgement would state that: (1) the PB Counterparty has received the Regulatory Disclosures; and (2) the PB/SD has clarified or supplemented the Regulatory Disclosures as requested by the PB Counterparty in its sole discretion. Furthermore, the acknowledgement would provide that the PB/SD has no obligation to provide additional disclosures pursuant to section 4s(h)(3)(B)(i) of the CEA 119 or § 23.431(a) or (b) with respect to a Permitted PB Transactions so long as the PB/SD is not aware of information that would make the disclosure incorrect, incomplete, or misleading. PB Counterparties would be permitted to request updated disclosures in writing prior to execution. This proposed condition is not intended to release the PB/SD from its obligation to update the Regulatory Disclosures as necessary to meet the standard of the PB/SD's “knowledge and reasonable belief.” Rather, the purpose of the proposed condition is to make clear that once the PB/SD has met such standard and given the PB Counterparty an opportunity to request clarifications or supplements, there is a bright line drawn to show the end of the PB/SDs obligations for disclosure under § 23.431(a) and (b). 120 119 7 U.S.C. 6s(h)(3)(B)(i). 120 17 CFR 23.431(a) and (b). Finally, the PB/SD would be required to make and keep a record of the Prime Broker Arrangement and the required acknowledgement from its PB Counterparty until the expiration or termination of all Permitted PB Transactions executed pursuant to the Prime Broker Arrangement, and for five years thereafter, in accordance with the SD recordkeeping rule, § 23.203. 121 121 17 CFR 23.203. The Commission acknowledges that the proposed Qualified Prime Broker Arrangement set forth in this Proposal differs significantly from the MPD no-action position set forth in CFTC Staff Letter 13-11. The no-action position in CFTC Staff Letter 13-11 was conditioned, in part, on a PB/SD allocating its obligations under certain External Business Conduct Standards to another SD, effectively limiting some part of the prime brokerage market in swaps to participation only by SDs registered with the Commission. 122 The Commission preliminarily does not believe that allocation of regulatory responsibilities from one SD, which is responsible for compliance with such responsibilities, to another SD appropriately serves the purposes of the External Business Conduct Standards, which were mandated by the Dodd-Frank Act to provide counterparties with protections and information not previously required. In the Commission's preliminary view, the SD that is the actual counterparty to a swap with a PB Counterparty has the responsibility for performance of the swap and has the ongoing PB and trading relationship with the PB counterparty, and is therefore best incentivized to perform its regulatory responsibilities in compliance with the Commission's rules. The Commission notes that, absent the MPD no-action position, which was issued just days before compliance with the External Business Conduct Standards was required, existing Prime Broker Arrangements would likely have been significantly disrupted. However, the stop-gap nature of the MPD no-action position regarding allocation of responsibilities between SDs is less than ideal when the Commission is considering a permanent solution to the relationship between Prime Broker Arrangements and the External Business Conduct Standards. Thus, the Commission has preliminarily determined not to permit the allocation of regulatory responsibilities from one SD to another SD. 122 CFTC Staff Letter 13-11 at 5. However, the Commission notes that another part of the no-action position set forth in CFTC Staff Letter 13-11, applicable only to Exempt FX Transactions, was not conditioned on an allocation of External Business Conduct Standard obligations from one SD to another, but rather was predicated on MPD's view that the only obligations impossible or impracticable for a PB/SD to perform in the context of swap prime brokerage are the obligations to provide a pre-trade price and a PTMMM. 123 That is the view that the Commission is proposing to adopt in this Proposal. In the Commission's preliminary view, a PB/SD that has entered into appropriate swap trading relationship documentation with a potential PB Counterparty in accordance with § 23.504 124 and has entered into a Qualified Prime Broker Arrangement in accordance with this Proposal would only be unable to provide a pre-trade price (and, if the Commission determines not to eliminate it as proposed, a PTMMM) to a PB Counterparty prior to entering into a Permitted PB Transaction as described in this Proposal. 123 Id. at 9-10. 124 17 CFR 23.504. Question 20: The Commission requests comment on all aspects of the proposed definition of Qualified Prime Broker Arrangement. Question 21: Is it possible for a PB/SD and a PB Counterparty to agree on the type, terms, and limits of each Covered Transaction that will be permitted to be executed under a Qualified Prime Broker Arrangement? Why or why not? Question 22: Would the requirement that the type and terms of Permitted PB Transactions be clearly delineated unduly limit the range of transactions that would otherwise be permitted under Prime Broker Arrangements? Please provide examples of existing Prime Broker Arrangements that allow for transaction types and terms that could not be adequately delineated in compliance with the proposed definition of Qualified Prime Broker Arrangement. Question 23: Is it possible to modify the terms of the definition of Qualified Prime Broker Arrangement in a way that would allow the PB/SD and its PB Counterparties to agree on the range and terms of Permitted PB Transactions such that a PB/SD could fulfill its disclosure obligations under § 23.431 (other than the pre-trade price and, if required, the PTMMM)? Question 24: Would the acknowledgement requirement as proposed provide SD/PB counterparties with adequate notice that an SD/PB has completed its disclosure requirements under § 23.431? 125 125 17 CFR 23.431. Question 25: Please note that, as explained above, the Commission does not intend to adopt a rule that would permit allocation of compliance obligations under the External Business Conduct Standards between SDs in the prime brokerage context, nor does it intend to permit the MPD no-action position set forth in CFTC Staff Letters 13-11 and 19-06 to continue indefinitely. Thus, if commenters find the Qualified Prime Broker Arrangement concept outlined in the Proposal to be unworkable, please provide a detailed alternative arrangement for the Commission's consideration. E. Proposed Amendments to § 23.402 In general, § 23.402 (General provisions) requires or allows Swap Entities to (a) have written policies and procedures reasonably designed to ensure compliance with the External Business Conduct Standards; (b) obtain “know-your-counterparty” (“KYC”) information about their swap counterparties; (c) reasonably rely on representations obtained from their swap counterparties; (d) agree with counterparties on how information required to be obtained or disclosed to swap counterparties will be communicated; and (e) comply with recordkeeping requirements. 126 126 See 17 CFR 23.402. The Commission proposes to amend § 23.402 by adding a new subparagraph (h) thereto that would state “Paragraph (b) and (c) of this section shall not apply to an ITBC Swap.” This proposed amendment would make clear that because ITBC Swaps are executed with counterparties with the intention to be cleared (and are generally void ab initio if such swaps fail to clear), there is no ongoing relationship between the Swap Entity and the counterparties for which the KYC or true name and owner provisions of § 23.402 serve a regulatory purpose. Specifically, because ITBC Swaps, once cleared, result in a new swap between the DCO or Exempt DCO and the swap counterparty, the Commission preliminarily believes that it may reasonably rely on the rules of such clearinghouses and the regulations applicable to FCMs to ensure that swap counterparties are adequately vetted for KYC purposes. 127 Additionally, because some ITBC Swaps may be A-ITBC Swaps, Swap Entities will not know, and may never know, the identity of the swap counterparty, making it impossible to comply with the requirements in subparagraphs (b) and (c) of § 23.402 that the Commission proposes to be disapplied. 127 See 31 CFR part 1026 and 17 CFR 42.2, which together require FCMs to establish customer identification and anti-money laundering programs. See also CME Clearing Member Application, available at: https://www.cmegroup.com/company/membership/files/application-and-clearing-agreement-writeable.pdf. Question 26: The Commission requests comment on all aspects of the proposed amendment to § 23.402. F. Proposed Amendments to § 23.430 In general, § 23.430 (Verification of counterparty eligibility) requires Swap Entities to (a) verify the ECP status of each swap counterparty; (b) verify whether a swap counterparty is a Special Entity (as defined in § 23.401); and (c) notify swap counterparties of any right to elect to be a Special Entity available under the definition of Special Entity in § 23.401(c)(6). Subparagraph (e) of § 23.430 provides that these verifications and notice requirements will not apply to swaps initiated on a DCM or, where the Swap Entity does not know the identity of the counterparty prior to execution, a SEF. 128 128 See 17 CFR 23.430. The Commission proposes to amend § 23.430(e) by adding a further provision stating that the verification and notice requirements will not apply to A-ITBC Swaps or to ITBC Swaps that are initiated on a DCM, SEF, or Exempt SEF. This proposed amendment would make clear that because ITBC Swaps are executed with counterparties with the intention to be cleared (and are generally void ab initio if such swaps fail to clear), there is no ongoing relationship between the relevant Swap Entity and the counterparties. Like for KYC purposes discussed above, the Commission preliminarily believes that it may reasonably rely on the rules of relevant clearinghouses, SEFs, and Exempt SEFs and the DCO rules applicable to FCMs as clearing members to ensure that swap counterparties are adequately vetted for ECP status. 129 129 The Commission notes that, pursuant to section 2(e) of the CEA, non-ECPs may execute swaps that are listed on a DCM, but not on a SEF, see 7 U.S.C. 2(e). Commission regulation 37.702, 17 CFR 37.702, requires a SEF to verify that its members are ECPs. Similarly, CME Rule 90005.C requires Clearing Members ( e.g., FCMs) to obtain a representation from each Participant for which it provides clearing services that such Participant is, and will be, an ECP at all times clearing services are provided. Additionally, with regard to A-ITBC Swaps, Swap Entities will not know, and may never know, the identity of the swap counterparty, making it impossible to comply with the verification and notification requirements of § 23.430. Question 27: The Commission requests comment on all aspects of the proposed amendment to § 23.430. G. Proposed Amendments to § 23.431 In general, § 23.431 requires Swap Entities to (a) disclose to non-Swap Entity counterparties the material risks, characteristics, incentives, and conflicts of interest of any swap prior to entering into the swap; (b) provide the pre-trade price and the PTMMM of a swap to a non-Swap Entity counterparty prior to entering into the swap; (c) provide a scenario analysis of a swap if requested by a non-Swap Entity counterparty prior to entering into the swap; (d) provide non-Swap Entity counterparties that enter into cleared swaps with the Swap Entity with notice of the counterparty's right to receive, upon request, the daily mark for such cleared swaps from the appropriate DCO; and (e) provide the daily mark of an executed uncleared swap to a non-Swap Entity counterparty to such swap as of each business day from the execution of the swap to its expiration or termination. 130 130 See 17 CFR 23.431. Subparagraph (c) of § 23.431 provides that the pre-trade disclosure obligations of §§ 23.431(a) and (b) will not apply to transactions that are initiated on a DCM or SEF where the Swap Entity does not know the identity of the counterparty prior to execution. 131 131 17 CFR 23.431(c). The Commission proposes to amend § 23.431 by: (1) Eliminating the PTMMM requirement as discussed in Section II.A. above; (2) Eliminating the Scenario Analysis Requirement as discussed in Section II.B. above; (3) Clarifying that a Swap Entity is not required to disclose to its counterparty information relating to the material characteristics of a particular swap to the extent that such characteristics are reflected in transaction documents that the counterparty has been provided prior to entering into the swap; 132 132 For the avoidance of doubt, this exclusion includes only those material characteristics of a particular swap that are expressly reflected in such transaction documentation and not, for example, the material risks or conflicts of interest that the particular swap may present. (4) Expanding the exception for pre-trade disclosures in subparagraph (c) to include (i) swaps executed anonymously on an Exempt SEF; (ii) A-ITBC Swaps; (iii) ITBC Swaps executed on a DCM, SEF, or Exempt SEF; and (iv) Permitted PB Transactions entered into pursuant to a Qualified Prime Broker Arrangement, as discussed in Section II.D.5. above; (5) Adding a new subparagraph (2) to § 23.431(d) (Daily mark) that would disapply the notice required to be given to cleared swap counterparties of the right to receive a daily mark from the clearing DCO for ITBC Swaps executed on a DCM, SEF or Exempt SEF and for any A-ITBC Swap; (6) Revising the uncleared daily mark requirement in § 23.431(d)(2) (renumbered as proposed to be (d)(3)) as discussed in Section II.C. above; and (7) Revising § 23.431(d)(3)(ii) (renumbered as proposed to be (d)(4)(ii)) to make clear that a Swap Entity may disclose to its non-Swap Entity counterparties that the daily mark provided to the counterparty each business day for existing swaps is an estimate only. These proposed amendments reflect the Commission's preliminary view that: (1) ITBC Swaps (including A-ITBC Swaps) are only swaps executed by a counterparty with the present intention to clear the swap and thus the counterparty has no need to receive notice of a right to receive a daily mark from the Swap Entity because the counterparty will face a clearing house; (2) Swap Entities do not know the identity of their counterparties to A-ITBC Swaps prior to execution; (3) Swaps may be executed by Swap Entities on or pursuant to the rules of Exempt SEFs and may clear swaps, if eligible, on Exempt DCOs; (4) Swaps accepted for clearing on a DCO or Exempt DCO (especially those also listed for trading on DCM, SEF, or Exempt SEF) are sufficiently standardized and information about the material risks and characteristics of such swaps are available from the DCO or Exempt DCO (and/or a DCM, SEF, or Exempt SEF, if traded there); and (5) The disclosure of information relating to material characteristics of a particular swap that are reflected in the transaction documentation for that swap would be duplicative. Question 28: The Commission requests comment on all aspects of the proposed amendment to § 23.431. H. Proposed Amendments to § 23.432 In general, § 23.432 requires Swap Entities to provide notice to their non-Swap Entity counterparties that the counterparty has the right to elect to clear a swap executed with the Swap Entity (assuming the swap is eligible for clearing on a DCO) and has the right to choose the DCO on which the swap will be cleared, if eligible. 133 133 See 17 CFR 23.432. The Commission proposes to amend §§ 23.432(a) and (b) by making clear that the notice must be given prior to entering into a swap. The Commission further proposes to amend § 23.432 by adding a new subparagraph (c) that would disapply the notice requirements of subparagraphs (a) and (b) to ITBC Swaps executed on a DCM, SEF, or Exempt SEF and to all A-ITBC Swaps. As discussed above, this proposed amendment reflects the Commission's preliminary view that: (1) ITBC Swaps are only those where the counterparty has the present intention to clear the swap prior to execution and thus has no need to receive notice of a right to clear the swap or choose the clearinghouse; and (2) Swap Entities do not know the identity of their counterparties to A-ITBC Swaps prior to execution. Question 29: The Commission requests comment on all aspects of the proposed amendment to § 23.432. I. Proposed Amendments to § 23.434 In general, § 23.434 requires SDs that recommend a swap or a swap trading strategy to a non-Swap Entity counterparty to have a reasonable basis to believe that such swap or swap trading strategy is suitable for the counterparty after engaging in reasonable diligence to ascertain the counterparty's investment strategy, trading objective, and ability to absorb potential losses. 134 134 See 17 CFR 23.434. However, § 23.434(b) provides a safe harbor, which, if complied with, deems the SD to have a reasonable basis to believe that the recommended swap or swap trading strategy is suitable for the counterparty. 135 The safe-harbor requires the SD to obtain a representation from its counterparty stating that the counterparty has complied in good faith with written policies and procedures that are reasonably designed to ensure that the persons responsible for evaluating any recommendation from an SD, and making trading decisions on behalf of the counterparty, are capable of doing so. This safe-harbor representation with respect to SD swap recommendations was incorporated into an industry-wide ISDA protocol in 2012. 136 By adherence to the ISDA protocol, counterparties to SDs incorporated the safe-harbor representation into the swap trading relationship documentation that such counterparties have entered into with each other entity that has also adhered to the ISDA protocol. To date, over 32,000 entities have adhered to the ISDA protocol. 137 Accordingly, the Commission preliminarily believes that all or nearly all SD counterparties have made the representation that they will independently evaluate any recommendation received from an SD and are capable of doing so. 135 See 17 CFR 23.434(b). 136 See ISDA August 2012 DF Protocol, available at https://www.isda.org/protocol/isda-august-2012-df-protocol/ . 137 See list of Adhering Parties, id. The Commission proposes to amend § 23.434 to add a new subparagraph (d) that would provide an exception from the requirements of § 23.434 for A-ITBC Swaps and for ITBC Swaps executed by an SD with a non-Swap Entity on a DCM, SEF, or Exempt SEF. As stated above, the Commission has preliminarily determined that swaps listed for trading on a DCM, SEF, or Exempt SEF, and accepted for clearing on a DCO or Exempt DCO, are sufficiently standardized, and sufficient information about the pricing and material risks and characteristics of such swaps are available from the DCM, SEF, or Exempt SEF and/or the DCO or Exempt DCO. Because (i) this information is available to counterparties from sources other than an SD counterparty; (ii) ITBC Swap counterparties have no on-going relationship with an SD counterparty with respect to ITBC Swaps; and (iii) the Commission preliminarily believes that all or nearly all ITBC Swap counterparties have represented to any potential SD counterparty that they are capable of independently evaluating any recommendation from the SD, the Commission has preliminarily determined that ITBC Swap counterparties will likely look to SDs only for competitive pricing. Thus, the Commission preliminarily believes that requiring an SD to have a reasonable basis to believe that a recommended swap or swap trading strategy is suitable for its ITBC Swap counterparties is unnecessary where adequate information about the risks and characteristic of an ITBC Swap is available to the counterparty from sources other than the SD and the suitability analysis otherwise required is a hinderance to the efficient trading of ITBC Swaps for both the SD and its counterparty. Further, SDs that are counterparties to A-ITBC swaps do not know, and may never know, the identity of their counterparties, making a suitability analysis impossible. The Commission considered but rejected the alternative of not proposing an exception from the requirements of § 23.434 for ITBC Swaps, reasoning that there is no need for such exception if an SD simply refrains from recommending a swap or swap trading strategy to ITBC Swap counterparties. If an SD does not recommend a swap or swap trading strategy to an ITBC Swap counterparty, then there is no need to comply with the requirement in § 23.434(a)(2) that the SD have a reasonable basis to believe that the recommended swap or swap trading strategy is suitable for such counterparty. The Commission has preliminarily determined, however, that the tremendous uptake of adherence to the ISDA protocol discussed above is persuasive evidence that SDs are not willing to enter into swaps with counterparties that have not made the representation necessary for an SD to rely on the safe-harbor in § 23.434(b). The Commission preliminarily understands that SDs are unwilling to take the risk that something communicated during swap negotiations will be seen as providing a recommendation despite the best efforts or policies and procedures of the SD designed to prevent sales and trading personnel from making any recommendation to swap counterparties. Thus, the Commission is concerned that not providing an exception from the requirements of § 23.434 would likely result in SDs refusing to enter into swaps with ITBC Swap counterparties from whom they have not received the safe-harbor representation. Such potential decrease in available ITBC Swap counterparties would frustrate the purposes of this aspect of the Proposal. Question 30: The Commission requests comment on all aspects of the proposed amendment to § 23.434. Question 31: The Commission requests comment on whether the Commission's reasoning for rejecting the alternative of not providing an exception from the requirements § 23.434 for ITBC Swaps is reasonable or whether the Commission should reconsider such alternative. J. Proposed Amendments to §§ 23.440 and 23.450 In general, §§ 23.440 and 23.450 concern requirements that SDs must comply with when acting as advisors to, and Swap Entities must comply with when entering into swaps with, Special Entities. 138 “Special Entity” is defined in § 23.401(c) 139 to be (1) a Federal agency; (2) a State, State agency, city, county, municipality, other political subdivision of a State, or any instrumentality, department, or a corporation of or established by a State or political subdivision of a State; (3) any employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002); (4) any governmental plan, as defined in Section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002); (5) any endowment, including an endowment that is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)); or (6) any employee benefit plan defined in Section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002), not otherwise defined as a Special Entity, that elects to be a Special Entity by notifying a swap entity of its election prior to entering into a swap with the particular swap entity. 138 See 17 CFR 23.440 and 450. 139 17 CFR 23.401(c). Pursuant to §§ 23.440 and 23.450, 140 Swap Entities that enter into swaps with, or that advise, Special Entities owe heightened duties to the Special Entity intended to ensure that swaps or swap trading strategies recommended by an SD to the Special Entity are in the best interests of the Special Entity; 141 or that, in acting as a counterparty to the Special Entity, the Swap Entity has a reasonable basis to believe that the Special Entity has a representative that satisfies the requirements of § 23.450(b) (a “Qualified Independent Representative” or “QIR”). 142 140 17 CFR 23.440 and 23.450. 141 See 17 CFR 23.440(c). 142 See 17 CFR 23.450(b). However, each of §§ 23.440 and 23.450 provides a safe harbor, which, if complied with, deems the SD to not be acting as an advisor to a Special Entity and/or have a reasonable basis to believe that the Special Entity has a QIR. 143 The safe-harbors require the SD to obtain certain representations from its Special Entity counterparties that were incorporated into an industry-wide ISDA protocol in 2012. 144 By adherence to the ISDA protocol, Special Entity counterparties to SDs incorporated the safe-harbor representations into the swap trading relationship documentation that such counterparties may have with each other entity that has also adhered to the ISDA protocol. As noted above, over 32,000 entities have adhered to the ISDA protocol, 145 so the Commission preliminarily believes that all or nearly all SD Special Entity counterparties have made the representations that allow SDs to rely on the safe-harbors under §§ 23.440 and 23.450. 143 See 17 CFR 23.440(b) and 17 CFR 23.450(d). 144 See ISDA August 2012 DF Protocol, available at https://www.isda.org/protocol/isda-august-2012-df-protocol/. 145 See list of Adhering Parties, id. The Commission proposes to amend § 23.440 to add a new subparagraph (e), which would provide an exception from the requirements of § 23.440 in two circumstances. First, the proposed amendment would provide an exception from the requirements of § 23.440 for A-ITBC Swaps ( i.e., ITBC Swaps executed with a Special Entity whose identity is not known to an SD prior to execution). Second, the proposed amendment would provide an exception from the requirements of § 23.440 only for ITBC Swaps initiated by a Special Entity on a DCM, SEF, or Exempt SEF whose identity is known to an SD prior to execution, but whose status as a Special Entity is not known to the SD. Section 4s(h)(4)(B) of the CEA provides that an SD that acts as an advisor to a Special Entity shall have a duty to act in the best interests of the Special Entity. 146 However, section 4s(h)(7) of the CEA provides an exception to this duty where a swap is initiated by a Special Entity on a DCM or a SEF and the SD does not know the identity of the counterparty to the transaction. 147 The Commission believes that this exception reflects Congressional intent to facilitate trading of cleared swaps on DCMs and SEFs in keeping with the G20 Leaders' Statement from the 2009 Pittsburgh Summit, committing its members to improving the OTC derivatives markets by, among other things, ensuring that standardized derivative contracts are traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties. Although section 4s(h)(7) of the CEA does not refer to clearing, it would be almost impossible for an SD to comply with its post-trade risk management and regulatory obligations for uncleared swaps if it does not know the identity of its counterparty prior to execution. 148 For example, the SD would need to ensure that it had appropriate documentation with the counterparty in place to comply with the STRD Requirement 149 and appropriate documentation and information about its counterparty to comply with the Commission's uncleared swap margin requirements. 150 Thus by default, any swap executed under the statutory exception would likely be intended to be cleared because the swap is anonymous. 146 See 7 U.S.C. 6s(h)(4)(B). 147 See 7 U.S.C. 6s(h)(7). 148 In addition to needing to know the identity of the counterparty to comply with regulatory requirements, an SD would not likely execute a swap on an anonymous basis unless the swap is intended to be cleared because the SD would not know the credit quality of the anonymous counterparty and therefore would not know how to price the swap or set other material terms for the uncleared, bilateral swap, such as margin levels or default provisions. 149 Commission regulation 23.504(a)(2), 17 CFR 23.504(a)(2), requires an SD to execute documentation meeting the requirements of the section prior to or contemporaneously with entering into a swap transaction with any counterparty. 150 See 17 CFR 23.158(a). In applying this interpretation of the exception in section 4s(h)(7) of the CEA, the Commission incorporated a similar exception from certain External Business Conduct Standards for swaps initiated on a DCM or SEF where a Swap Entity does not know the identity of its counterparty prior to execution, 151 again to facilitate the trading of cleared swaps on DCMs and SEFs. This exception allows counterparties to seek competitive pricing on standardized swaps that will be cleared from any willing counterparty on exchanges or electronic trading platforms without being tied to seeking pricing only from SDs with whom such counterparties have established a trading relationship. 151 See 17 CFR 23.402(b) and (c), 23.430(e), 23.431(c), 23.450(h), and 23.451(b). See also Final EBCS Rulemaking at 77 FR 9756, n. 307, 77 FR 9789, n. 746, 77 FR 9744, and 77 FR 9757. Thus, to further facilitate the trading of cleared swaps on DCMs, SEFs, and Exempt SEFs, in the context of ITBC Swaps initiated by a Special Entity on a DCM, SEF, or Exempt SEF, the Commission preliminarily interprets the condition in section 4s(h)(7) that the SD does not know the identity of the counterparty to be met not only where the SD is unaware of the name of the counterparty ( i.e., anonymous trading), but also where the SD is unaware of the status of the counterparty as a Special Entity, even if it knows the name of the counterparty. The Commission preliminarily considers this interpretation of “identity” as reasonable in the context of ITBC Swaps initiated by a Special Entity on a DCM, SEF, or Exempt SEF because the Commission preliminarily believes that this exception will facilitate trading of cleared swaps on exchanges or electronic platforms both generally and by Special Entities. In addition, for the reasons discussed above regarding the availability of information regarding the risks and characteristics of ITBC Swaps from sources other than an SD counterparty and the lack of any ongoing relationship with a counterparty to a cleared swap, the Commission preliminarily believes that Special Entities initiating swaps on a DCM, SEF, or Exempt SEF that are intended to be cleared would only be seeking competitive pricing from any willing counterparty. The initiating Special Entity cannot be entering into the ITBC Swap in reliance on the advice or recommendation of a particular SD that may be the willing counterparty providing the most competitive price if the SD does not even know the counterparty is a Special Entity. In other words, where a Special Entity is initiating an ITBC Swap on a DCM, SEF, or Exempt SEF, it is not concerned with the identity of its counterparty, and, in turn, its counterparty cannot possibly be providing advice to the Special Entity if it does not know the nature of the counterparty as a Special Entity. Thus, for purposes of the application of the duty imposed on SDs under section 4s(h)(4)(B) of the CEA to act in the best interests of a Special Entity when providing trading advice or a swap trading recommendation, the only salient aspect of the identity of a counterparty that initiates an ITBC Swap on a DCM, SEF, or Exempt SEF is whether the counterparty is in fact a known Special Entity. Where an SD has no actual knowledge that an ITBC Swap counterparty that initiates an ITBC Swap on a DCM, SEF, or Exempt SEF is, in fact, a Special Entity, the Commission preliminarily believes that such SD should not be deemed to know the “identity” of the counterparty to the transaction. The Commission notes that the exception in 4s(h)(7) applies only to swaps “initiated by a Special Entity” on a DCM or SEF. This language is incorporated into the exception in the proposed amendment to § 23.440(e)(3) to better track the exception provided in the CEA, but the Commission has preliminarily determined that “initiated by” has no special meaning in this context and is synonymous with “entered into by” or “executed by.” The Commission understands that taking the active step of trading swaps on DCMs, SEFs, or Exempt SEFs may take many forms such as posting a request-for-quote, submitting a bid or offer to a central limit order book, or accepting a standing or resting bid or offer submitted by another market participant to a central limit order book. The Commission has preliminarily determined that limiting the proposed exception in proposed § 23.440(e)(3) to only a subset of the variety of available trading methodologies ( i.e., only those trading methodologies that the Commission has determined would constitute “initiation by” a Special Entity) would unnecess [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2025-18924. Public record. Not legal advice.