# Revisions to Business Conduct and Swap Documentation Requirements for Swap Dealers and Major Swap Participants

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2025-23953

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 30, 2025
- **Citation:** 90 FR 61226

## 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:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“CFTC” or “Commission”) is adopting a final rule (the “Final Rule”) amending certain of the Commission's business conduct and documentation requirements applicable to swap dealers and major swap participants. The Final Rule provides 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, and makes certain other changes discussed herein. The adopted amendments supersede certain no-action positions issued by the Commission's Market Participants Division (“MPD”), which the Commission expects MPD to terminate in due course.

DATES:

The Final Rule is effective January 29, 2026.

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 Final Rule to amend certain business conduct standards for swap dealers (“SDs”) and major swap participants (“MSPs” and, together with SDs, “Swap Entities”)
1

contained in subpart H of part 23 of the Commission's regulations,
2

and to the swap trading relationship documentation rule for Swap Entities in § 23.504.
3

These amendments are intended to address certain long-standing issues with the Commission's external business conduct standards and swap trading relationship documentation rule, and are intended to supersede many long-standing no-action positions issued by MPD (together, the “Covered Staff Letters”) by codifying such positions in the Commission's regulations, as explained below.
4

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 is amending the external business conduct standards and the swap trading relationship documentation rule to provide an outcome comparable to such no-action positions, with certain modifications discussed below.

1
“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. 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
17 CFR part 23, subpart H.

3
17 CFR 23.504.

4
For purposes of the Final Rule, the Covered Staff Letters are 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 Final Rule refers 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, in due course, MPD will withdraw all of the no-action positions contained in the Covered Staff Letters necessary to reflect the amendments to Commission Regulations made by this Final Rule.
5

5
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
6

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.
7

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”).
8

6
7 U.S.C. 6s(h).

7
“Special Entity” is currently defined in § 23.401(c), 17 CFR 23.401(c) (redesignated as § 23.401(h), 17 CFR 23.401(h)), in the Final Rule text
infra
).

8

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”).
9

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.
10

9
17 CFR 23.431(a)(3)(i).

10
§ 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”).
11

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.
12

11
17 CFR 23.431(b).

12
§§ 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.
13

Pursuant to this rulemaking authority, the Commission adopted rules in subpart I of part 23 of its regulations.
14

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”).
15

13
7 U.S.C. 6s(i).

14

See
17 CFR part 23, subpart I.

15
§ 23.504, 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
16

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”). In support of their request, market participants informed staff 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. Market participants generally argued that: (1) because swaps of a type accepted for clearing by a derivatives clearing organization (“DCO”)
17

are sufficiently standardized, (especially if also executed on a designated contract market (“DCM”)
18

or swap execution facility (“SEF”)),
19

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 with respect to such swaps, 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.
20

16
CFTC Staff Letter 13-70 (Nov. 15, 2013), Re: No-Action Relief: Swaps Intended to be Cleared (“CFTC Staff Letter 13-70”).

17
“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.

18
“Designated contract market” is defined with “contract market” in § 1.3, 17 CFR 1.3.

19
“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.

20
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 by 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.”
21

To date, the Commission has issued exemptions from registration to four DCOs: ASX Clear (Futures) Pty Limited (“ASX”);
22

Japan Securities Clearing Corporation (“JSCC”);
23

Korea Exchange, Inc. (“KRX”);
24

OTC Clearing Hong Kong Limited (“OTC Clear”),
25

and Taiwan Futures Exchange Corporation (“TAIFEX”).
26

Any DCO that, as of any date of determination, is exempt from registration as a DCO under section 5b of the CEA,
27

including, without limitation, ASX, JSCC, KRX, OTC Clear and TAIFEX, is an “Exempt DCO” on such date for purposes of this Final Rule.

21
7 U.S.C. 7a-1(h).

22
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.

23
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 September 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 (“DCR”) 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.

24
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.

25
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.

26
On February 14, 2024, the Commission issued an Order of Exemption with respect to TAIFEX, which exempts TAIFEX from registering with the Commission as a DCO, subject to certain terms and conditions in the order,
available at https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizations/51878.

27
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.”
28

To date, the Commission has issued exemptions from SEF registration to facilities for the trading or processing of swaps from the European Union,
29

Singapore,
30

and Japan.
31

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,
32

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 Final Rule.

28
7 U.S.C. 7b-3(g).

29
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 (“UK NAL Exchanges”). Under this no-action position, UK NAL Exchanges 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.
The Commission expects that MPD will issue a no-action position for ITBC Swaps on UK NAL Exchanges after the publication of this Final Rule.

30
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.

31
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.

32
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.
33

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 its no-action position regarding documentation requirements under the STRD Requirement.
34

33
CFTC Staff Letter 23-01 at 1.

34

See id.
at 7-10.

The Commission has determined that the standardization that occurs when a type of swap is made available to trade on a DCM, SEF
35

or Exempt SEF and/or accepted for clearing on a DCO
36

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 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 determined that compliance with such requirements may represent a significant hinderance to the efficient trading of cleared swaps.

35

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.

36

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 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.
37

37
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 by 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 material economic 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 and terms 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, material economic terms, and a PTMMM of the swaps as required by § 23.431(a)(3).
38

38
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 the enumerated External Business Conduct Standards as they relate to certain covered transactions
39

executed under PB arrangements where the PB and trigger swap counterparty were each SDs registered with the Commission.
40

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.
41

39
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”).
See also
CFTC Staff Letter 25-10 (Apr. 9, 2025), Re: Staff Interpretation Regarding Certain Foreign Exchange Products.

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.

40

See
CFTC Staff Letter 13-11.

41

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”)
42

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.
43

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).
44

42
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).

43
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.

44

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)
45

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.
46

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 and other material economic terms of the mirror swap are determined based on those of the trigger swap 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.
47

45
17 CFR 23.431(a) and (b).

46
§ 23.431(c), 17 CFR 23.431(c).

47
CFTC Staff Letter 19-06 at 3.

The Commission has 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).
48

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),
49

and, to the Commission's knowledge, has not resulted in any adverse consequences.

48
17 CFR 23.431(a) and (b).

49
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)
50

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);
51

(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.
52

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.
53

Swaps executed anonymously on a SEF or DCM are excepted from the requirement to disclose a PTMMM pursuant to § 23.431(c).
54

50

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.

51
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.

52

Id.
at 6.

53

Id.
at 6-7.

54
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 swaps or index credit default swaps,
55

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.
56

55
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.

56
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. CFTC Staff Letter 25-09 stated that it would remain in effect until the adoption by the Commission of a regulation addressing the PTMMM Requirement. This Final Rule addresses the PTMMM Requirement.

II. Summary of the Proposal and Comments Received

On September 30, 2025, the Commission approved and subsequently published in the
Federal Register
a Notice of Proposed Rulemaking (the “Proposal” or “Proposed Rule”)
57

proposing amendments to the External Business Conduct Standards and the STRD Requirement to provide exceptions to compliance with such requirements when executing swaps that are: (1) ITBC Swaps; or (2) subject to prime broker arrangements that meet certain qualifying conditions. The Proposal also proposed certain other changes discussed herein, including eliminating the PTMMM Requirement and the Scenario Analysis Requirement, and proposed a simplifying amendment 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.”

57
Notice of Proposed Rulemaking,
Revisions to Business Conduct Requirements for Swap Dealers and Major Swap Participant
s, 90 FR 47136 (Sept. 30, 2025).

58
17 CFR 23.401.

The Commission requested comments on all aspects of the Proposed Rule and on many specific questions listed in the Proposal. The comment period for the Proposal closed on November 14, 2025.
59

The Commission received a total of four comment letters, all of which were relevant to the Proposal.
60

All of these letters supported the Proposal broadly but only the ISDA/SIFMA Letter and the Citadel Letter suggested specific changes to portions of the Proposal, which are discussed in the relevant sections below.

59
The comment period was originally scheduled to end on October 24, 2025, but was extended as a result of a lapse in appropriations.
See
Order of the Commodity Futures Trading Commission Relating to the Continuation, Shutdown, and Resumption of Certain Commission Operations in the Event of a Lapse in Appropriations, 90 FR 47556, 47558 (Oct. 2, 2025).

60
All comments on the Proposal are
available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7624&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1.
The four comment letters are from Citadel Securities (“Citadel”) (the “Citadel Letter”); Immutifi Inc.; the International Swaps and Derivatives Association, Inc. (“ISDA”) and the Securities Industry and Financial Markets Association (“SIFMA”) (the “ISDA/SIFMA Letter”); and Kelly Moore.

A. Pre-Trade Mid-Market Mark Disclosure Requirement

As discussed above, Commission Regulation § 23.431(a)(3)(i) currently requires pre-trade disclosures by Swap Entities to their counterparties that are not Swap Entities, security-based swap dealers, or security-based major swap participants, including the PTMMM.

1. Proposal

In the Proposal, the Commission proposed to eliminate the Swap Entity PTMMM Requirement set forth in § 23.431(a)(3)(i)
61

in its entirety. The Commission cited several reasons for proposing this change based on its experience since 2013 when it first required Swap Entity compliance with the External Business Conduct Standards. First, 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,”
62

it received suggestions from several commenters, in their responses to a request for comments and recommendations under the Commission's “Project KISS” in 2017,
63

requesting that the Commission 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”),
64

which are deemed sufficiently sophisticated to enter into over-the-counter swaps.
65

61
17 CFR 23.431(a)(3)(i).

62
Final EBCS Rulemaking at 77 FR 9766.

63

See generally
Project KISS, 82 FR 23765 (May 24, 2017).

64
“Eligible contract participant” is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18).

65

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.

Second, MPD's issuance of the no-action positions 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 or other material economic terms 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.
66

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.
67

66

See
CFTC Staff Letters 12-58 and 13-12.

67

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 light of these circumstances, the Commission noted its preliminary belief in the Proposal that the PTMMM Requirement provides no utility to counterparties and may delay execution to the disadvantage of counterparties, and that the elimination of the PTMMM Requirement supports the Commission's goal of increasing the efficiency of the swaps market.

In addition to the foregoing, the Commission noted in the Proposal that the PTMMM Requirement, unlike the uncleared swap daily mark disclosure requirement promulgated in § 23.431(d)(2),
68

was not required by the amendments to the CEA contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
69

Thus, elimination of the PTMMM disclosure requirement would not contradict any counterparty protection otherwise required by the Dodd-Frank Act. Further, the Commission noted that elimination of the PTMMM disclosure requirement would serve to harmonize the Commission's rules governing swap dealing with those of the SEC because 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.
70

68
17 CFR 23.431(d)(2).

69

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 the amendments to the daily mark disclosure requirement in the Final Rule.

70

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).

2. Comments Received and Final Rule

Only the ISDA/SIFMA Letter specifically addressed the proposed elimination of the PTMMM Requirement. It supported elimination unequivocally, agreeing with the Commission's reasoning for elimination in the Proposal, and noting that the PTMMM Requirement presumes an imbalance of information that does not exist in practice. After considering this comment, and having received no comments in support of the positive utility of receiving a PTMMM, the Commission has determined that elimination of the PTMMM Requirement will support the Commission's goal of increasing the efficiency of the swaps market by: (1) reducing unnecessary burdens and cost, (2) allowing for more timely trade execution, and (3) harmonizing the Commission's rules governing swap dealing with those of the SEC. Thus, the Commission is eliminating the PTMMM Requirement in its entirety as proposed 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 final rule text
infra.

The Commission notes that its repeal of the PTMMM Requirement herein renders the MPD no-action positions in CFTC Staff Letters 12-58, 13-12, and 25-09 moot; it therefore expects that MPD will withdraw such positions in due course.

B. Scenario Analysis Requirement

As discussed above, § 23.431(b) currently requires Swap Entities to provide certain disclosures related to scenario analysis prior to entering into a swap with a counterparty (other than a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant) that is not made available for trading on a DCM or SEF. Such disclosures include that a Swap Entity must (1) notify the counterparty that it can request and consult on the design of a scenario analysis to allow the counterparty to assess its potential exposure in connection with the swap; (2) upon request of the counterparty, provide a scenario analysis, which is designed in consultation with the counterparty and done over a range of assumptions, including severe downside stress scenarios that would result in a significant loss; (3) disclose all material assumptions and explain the calculation methodologies used to perform any requested scenario analysis (a swap dealer, however, is not required to disclose confidential, proprietary information about any model it may use to prepare the scenario analysis); and (4) in designing any requested scenario analysis, consider any relevant analyses that the swap dealer undertakes for its own risk management purposes, including analyses performed as part of its “New Product Policy” specified in § 23.600(c)(3).

1. Proposal

In the Proposal, the Commission proposed to eliminate the Scenario Analysis Requirement set forth in § 23.431(b)
71

in its entirety based on its experience over the last decade since Swap Entity compliance with the External Business Conduct Standards was required, noting its belief that it provides no utility to counterparties.

71
17 CFR 23.431(b).

In adopting the Scenario Analysis Requirement in 2012, the Commission 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.”
72

However, the Commission learned from several market participants, in responding to a request for comments and

recommendations under the Commission's “Project KISS” in 2017,
73

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 and thus advocated that the Commission eliminate the Scenario Analysis Requirement or restrict the availability of scenario analysis.
74

72
Final EBCS Rulemaking at 77 FR 9743, n. 125.

73

See generally
Project KISS at 82 FR 23765.

74

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.

In the Proposal, the Commission also stated that elimination of the Scenario Analysis Requirement would serve to harmonize the Commission's rules governing swap dealing with those of the SEC noting 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. Further, the Commission noted that scenario analysis was not required by the amendments to the CEA made by the Dodd-Frank Act and thus was wholly the product of Commission rulemaking.
75

75

See e.g.,
Final EBCS Rulemaking at 77 FR 9762 (where the Commission discusses that the rule is discretionary and not mandatory).

2. Comments Received and Final Rule

Only the ISDA/SIFMA Letter specifically addressed the proposed elimination of the Scenario Analysis Requirement.
76

It supported elimination unequivocally, agreeing with the Commission's reasoning for elimination in the Proposal, noting that it is extremely rare for scenario analysis to be requested and stating the associations' view that scenario analysis is of little utility to buy-side counterparties.
77

Having considered this comment and having received no comments opposed to the elimination of the Scenario Analysis Requirement, the Commission agrees with commenters that the Scenario Analysis Requirement has proven to have little utility to counterparties. Thus, the Commission is adopting the elimination of the Scenario Analysis Requirement as proposed by replacing paragraph (b) of § 23.431 with “[RESERVED],” as reflected in the final rule text
infra.

76

See
ISDA/SIFMA Letter at 1-3.

77

Id.
at 3.

C. Daily Mark Disclosure Requirement

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 the term “daily mark” or describe how it was to be calculated.
78

Thus, the Commission promulgated § 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
§ 23.153, 17 CFR 23.153 (collection and posting of variation margin); and § 23.155, 17 CFR 23.155 (calculation 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 the 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.

1. Proposal

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 proposed to reorganize § 23.431(d) such that paragraphs (d)(1) and (d)(2) would address the requirements for, and cover the exceptions from, respectively, the daily mark requirement for cleared swaps (as discussed in Section II.C below), and paragraph (d)(3) would address the

requirements for, and cover the exceptions from, the daily mark requirement for uncleared swaps, including a description of the daily mark for uncleared swaps to 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 goal of this proposed change was to harmonize the daily mark disclosure requirement in § 23.431(d)(2) with the Commission's uncleared swap margin rules and swap data reporting rules.

2. Comments Received and Final Rule

Only the ISDA/SIFMA Letter specifically addressed the proposed change to the daily mark disclosure requirements. ISDA/SIFMA generally supported the Commission amending its daily mark requirements; however, rather than revising it as proposed, ISDA/SIFMA suggested that a better, more streamlined approach would be to (1) amend the definition of “daily mark” to provide Swap Entities with more flexibility in determining the mark, while still maintaining requirements for Swap Entities to disclose the methodologies and assumptions used to prepare the daily mark; and (2) eliminate the daily mark requirement for all non-cleared swaps that are subject to daily variation margining, arguing that this approach would better enable firms to align their daily mark disclosures under Commission Regulations with the methodologies they use for other purposes, whether for reporting, daily mark disclosures under SEC rules, internal valuation purposes, or otherwise. ISDA/SIFMA further argued that, given the institutional nature of the swap market, disclosure of the daily mark methodologies and assumptions, as provided in proposed § 23.431(d)(4), should provide counterparties with sufficient information to understand the daily marks they receive.

After considering these comments, the Commission has determined to amend its daily mark requirement under § 23.431(d) with some modifications from the Proposal. Specifically, at the suggestion of commenters, the Commission has determined to provide Swap Entities with greater flexibility in determining how to calculate daily marks for uncleared swaps, concluding that such flexibility would be a simpler way of achieving the Commission's goal in the Proposal of harmonizing the daily mark requirement with the other daily swap valuation requirements in the Commission's uncleared swap margin and swap reporting rules. In adopting the amendments to the daily mark requirement, the Commission notes that “daily mark” is not defined in the CEA and the Commission is persuaded by the comments of ISDA/SIFMA that disclosure of the methodology and assumptions required under final § 23.431(d)(4) is sufficient for counterparties to Swap Entities to determine for themselves the value of the daily mark received. In addition, the Commission has determined that, with respect to swaps subject to daily variation margin delivery requirements, whether subject to the Commission's variation requirements set forth in § 23.150 through § 23.161 or otherwise, notice of variation margin amounts necessarily entails valuation of each swap and thus such delivery requirements fulfill the Swap Entity's requirement to provide a daily mark under section 4s(h)(3)(B) of the CEA. Variation margin amounts are the change in the net present value of a swap since the last time the variation margin amount was exchanged between the parties. The daily mark is essentially the net present value of the swap, thus notice of variation margin amounts is materially equivalent to notice of the daily mark.

To effect these changes, the Final Rule excludes swaps subject to daily variation margining from the requirements of § 23.431(d)(3) and (4) and removes the requirement that the daily mark be the mid-market mark of the swap in § 23.431(d)(3) and related text, as reflected in the final rule text
infra.

D. New and Amended Definitions in § 23.401

In the Proposal, the Commission proposed adding several 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 discussed below.

91
17 CFR 23.401.

1. Definition of ITBC Swap

a. Proposal

The Commission proposed to add a new eight-prong definition of “ITBC Swap” to the definitions in § 23.401 applicable to subpart H of part 23 of the Commission's regulations.
92

92

Id.

In the Proposal, the Commission explained that defining “ITBC Swap” in § 23.401 was intended to clearly describe the criteria and conditions that a swap must meet to be eligible for the various proposed exceptions from the disclosure, information collection, and documentation requirements of the External Business Conduct Standards and the STRD Requirement (hereinafter, the “ITBC Compliance Exceptions”), each of which are explained in the relevant sections below.
93

The Commission noted that, other than what has been described in the Proposal, the criteria and conditions within 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.

93

See
§§ 23.402-23.451 and § 23.594; 17 CFR 23.402-23.451 and 23.504.

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.
94

“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.

94

See
Proposed Rule, 90 FR at 47143.

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 Commission noted in the Proposal that 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. 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. The Commission explained that 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

In the Proposal, the Commission explained that this proposed 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.
98

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. 22-31 and accompanying text.

97

See
17 CFR 1.3.

98

See
Proposed Rule, 90 FR at 47144.

Sixth, the Commission proposed that 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 (the “Breakage Condition”).
99

The Commission explained that, generally, this condition, as proposed, was 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.
100

The Commission noted that, 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. In the Proposal, the Commission preliminarily determined that the same is not true where a breakage agreement is requested by the counterparty.
101

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. Accordingly, the Commission stated its intent 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.
102

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).

99

Id.

100

Id.

101

See
Proposed Rule, 90 FR at 47144.

102

See id.

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 (the “Clearing Submission Condition”).
103

The Commission explained that this proposed condition sets forth a standard for
submission
of the swap for clearing to a DCO or Exempt DCO and 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)
104

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).
105

The Commission included 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.
106

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.
107

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.

103

See id.

104
17 CFR 23.506.

105
17 CFR 23.610.

106

See
Proposed Rule, 90 FR at 47144.

107

See id.

Eighth, the Commission proposed 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
(the “Void
Ab Initio
Condition”).
108

As explained in the Proposal, this was 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.
109

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 the Commission maintained a prohibition on Swap Entities requiring breakage agreements as a condition to entering into a swap.

108

See id.

109

See
Proposed Rule, 90 FR at 47144.

The Commission stated that compliance with this condition as proposed 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.
110

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
(a “Void
Ab Initio
Agreement”).
111

That is, the swap will be deemed to have never been executed. The Commission recognized 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 a Void
Ab Initio
Agreement could be documented.
112

However, the Commission noted its preliminary belief that 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.,
a Void
Ab Initio
Agreement may be a term of the swap agreed at execution).
113

110

See
CFTC Staff Guidance Letter (Sept. 26, 2013), Re: Staff Guidance on Swaps Straight-Through-Processing, at 6 (stating that DMO and DCR 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.

111

See
Proposed Rule, 90 FR at 47144.

112

See id.

113

See id.

b. Comments Received and Final Rule

Only the ISDA/SIFMA Letter and Citadel Letter specifically addressed the proposed definition of “ITBC Swap.”

ISDA/SIFMA firmly supported providing relief for ITBC Swaps and generally supported the Commission's proposed definition of an ITBC Swap but noted three specific concerns.

First, ISDA/SIFMA noted that the Breakage Condition could be read to imply that a Swap Entity may not raise the topic of a breakage or similar agreement with a counterparty. It argues that a Swap Entity must be permitted to initiate discussion about how to address ITBC Swaps with its counterparty as a matter of good risk management, and such discussions—whether at the request of the Swap Entity or its counterparty—do not indicate that either party is entering into the swap without the requisite intention that the swap will not be a cleared swap.

Second, ISDA/SIFMA stated that the Commission should explicitly clarify that, under the Clearing Submission Condition, Swap Entities are not responsible for guaranteeing that their counterparties will take the necessary steps for submission (outside of reasonably designed policies and procedures), as Swap Entities are only able to control their own actions and processes.

Third, ISDA/SIFMA stated that they have practical concerns regarding the implementation of the Void
Ab Initio
Condition in the context of Exempt SEFs that do not impose void
ab initio
rules. They note that entering into a Void
Ab Initio
Agreement at the point of execution is not practical given actual trading practices on Exempt SEFs and, therefore, should not be required. Instead, they argue that the Commission should allow for more flexibility by enabling Swap Entities to determine how to address such rejected transactions. Under this approach, for ITBC Swaps executed on Exempt SEFs that do not impose void
ab initio
requirements, they ask that a Swap Entity may choose to either put breakage agreements in place with its counterparties prior to execution (so long as such breakage agreements are not a condition to trading), or may otherwise have a Void
Ab Initio
Agreement in place, prior to execution. They argue this approach is not only more operationally-feasible but would also be consistent with the Commission's position for bilaterally executed ITBC swaps.

With respect to the Void
Ab Initio
Condition, Citadel, on the other hand, strongly recommended that the Commission maintain a requirement that any ITBC Swap executed on a DCM, SEF, or Exempt SEF be deemed void
ab initio
if such swap fails to clear. Citadel argued that the Commission's goal of facilitating exchange trading of cleared swaps would not be advanced by allowing for ITBC Swaps traded on a DCM, SEF, or Exempt SEF to be subject to breakage or other types of agreements that would allow such swaps to survive a failure to clear.

After considering these comments, the Commission has determined to adopt a definition of “ITBC Swap” with certain modifications from the Proposal.

First, the Commission is revising the Clearing Submission Condition by replacing the word “ensures” in the proposed definition with the words “takes reasonable measures to ensure,” as shown in the final rule text,
infra.
This change is meant to clarify that a Swap Entity does not have to accept liability for a failure of its counterparty to take the necessary steps for clearing. Further, the Commission intends that this condition will be satisfied, with respect to a counterparty, where a Swap Entity has entered into an agreement with such counterparty that require the counterparty to submit the swap for clearing to a DCO or Exempt DCO, as applicable, as quickly after execution as would be technologically practicable if fully automated systems were used.

Second, the Commission is modifying the Void
Ab Initio
Condition, as reflected in paragraph (8) of the ITBC Swap definition in the final rule text
infra,
to provide that, where a swap is executed on or pursuant to the rules of an Exempt SEF and the rules of such Exempt SEF do not provide for a swap rejected from clearing to be deemed void
ab initio,
the condition will be satisfied solely if the parties have prior to or at execution of the swap (1) entered into a Void
Ab Initio
Agreement, or (2) agreed that a breakage agreement or similar arrangement (as contemplated in the Breakage Condition (condition 6 of the ITBC Swap definition discussed above)) applies to the swap. The Commission is adopting additional language (as reflected in the final rule text
infra
) in the Void
Ab Initio
Condition in paragraphs (7) and (8) to make clear that the terms of any such breakage agreement or similar arrangement must take into account the Swap Entity's regulatory obligations under the External Business Conduct Standards and the STRD Requirement, including those that are required to be completed prior to execution of a swap with a non-Swap Entity counterparty.

Similarly, the Commission is modifying paragraph (7) of the definition of “ITBC Swap” as reflected in the final rule text,
infra,
to require that parties to a bilaterally executed swap have prior to or at execution of the swap (i) entered into a Void
Ab Initio
Agreement, or (ii) agreed that a breakage agreement or similar arrangement (as contemplated in the Breakage Condition discussed above) applies to the swap. The Commission noted in the Proposal that it did not include a void
ab initio
requirement for bilateral swaps to allow for counterparties to Swap Entities to request these types of breakage arrangements under certain circumstances;
114

however, the Commission did not include a related condition in the rule text in the Proposal. As a technical addition, the Commission is now adding that condition, as it has determined that, as discussed in the Proposal,
115

either a

Void
Ab Initio
Agreement or such breakage arrangement or similar arrangement must exist for a bilateral swap to be an ITBC Swap eligible for the exceptions for ITBC Swaps provided in this Final Rule.

114

See
Proposed Rule, 90 FR at 47144.

115

See
Proposed Rule, 90 FR at 47144, questions 10, 11, and 12.

The additional flexibility the Commission is providing around the Void
Ab Initio
Condition is intended to address practical concerns raised by ISDA/SIFMA with respect to the operation of the Void
Ab Initio
Condition on Exempt SEFs, as initially proposed. With respect to the comment of Citadel discussed above, the Commission has determined that because (1) it would be impractical for the Commission to revisit the various orders that it has previously granted to Exempt SEFs to impose conditions that would require such Exempt SEFs to have rules requiring that swaps that fail to clear are void
ab initio,
and (2) it would likely be impracticable for a Swap Entity to enter into a Void Ab Initio Agreement at the point of execution for swaps executed on an Exempt SEF, the Commission will not make the Void
Ab Initio
Condition applicable to ITBC Swaps executed on an Exempt SEF to the same extent that such condition in paragraph (8) applies to swaps executed on a DCM or SEF, provided, however, that in any case and as required by the Breakage Condition, a Swap Entity does not make entering into a breakage agreement a pre-condition to entering into an ITBC Swap.
116

116

See
paragraph 8 of the definition of ITBC Swap in the final rule text
infra,
which states that provided that if the swap is executed on or pursuant to the rules of an Exempt SEF and the rules of the Exempt SEF do not provide for a swap rejected from clearing to be deemed void
ab initio,
the parties have agreed prior to or at execution that if such swap is rejected from clearing, the swap is deemed to be void
ab initio,
or the parties, prior to execution, have entered into a breakage agreement or similar arrangement that addresses the disposition of such rejected swap and includes arrangements that will permit a Swap Entity to comply with the requirements of subparts H and I of part 23 of chapter I with respect to the rejected swap.

In addition, the Commission is clarifying that that it does not intend the Breakage Condition to limit the ability of Swap Entities to discuss breakage agreements with their counterparties, either at their own behest or at that of their counterparty. Rather, the Breakage Condition solely prohibits Swap Entities from requiring a counterparty to enter into a breakage agreement as a condition to trading.

2. Definition of A-ITBC Swap

a. Proposal

The Commission proposed to add a new definition of “A-ITBC Swap” to the definitions in § 23.401
117

applicable to subpart H of part 23 of the Commission's regulations.
118

The Proposal defined an “A-ITBC Swap” or “Anonymous ITBC Swap” to mean an ITBC Swap (as defined in new § 23.401(d)) where the Swap Entity does not know the identity of the counterparty prior to execution of the swap.
119

The proposed definition 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).
120

In the Proposal, the Commission stated that a definition of “A-ITBC Swap” in § 23.401 will help 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.
121

117
17 CFR 23.401.

118

See
Proposed Rule, 90 FR at 47145.

119

See id.

120

See id.

121

See
Proposed Rule, 90 FR at 47145.

b. Comments Received and Final Rule

The Commission received no comments relating specifically to this definition and is adopting this term as proposed, as shown in the final rule text,
infra.

3. Definition of Covered Transaction

a. Proposal

The Commission proposed to add a new definition of “Covered Transaction” to the definitions in § 23.401
122

applicable to subpart H of part 23 of the Commission's regulations. The Proposal defined the term “Covered Transaction” to mean a swap, as defined in section 1a(47) of the Act and § 1.3 of chapter I (other than swaps subject to the clearing requirement of section 2(h)(1)(A) of the Act and part 50 of chapter I), and physically-settled foreign exchange forwards and swaps that have been exempted from the definition of swap by the U.S. Department of the Treasury.
123

The definition was intended to encompass all transaction types that may be subject to a Prime Broker Arrangement (defined and explained
infra
). As such, the proposed definition encompasses swaps, as defined in section 1a(47) of the CEA,
124

but excludes swaps that are subject to the Commission's swap clearing requirement in section 2(h)(1)(A) of the CEA
125

and part 50 of the Commission's regulations.
126

Based on the Commission's understanding, swaps subject to Prime Broker Arrangements are exclusively uncleared swaps. The proposed definition of Covered Transactions also included 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.
127

The Proposal explained that the Commission 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.
128

122
17 CFR 23.401.

123

See
Proposed Rule, 90 FR at 47162.

124
7 U.S.C. 1a(47).

125
7 U.S.C. 2(h)(1)(A).

126
17 CFR part 50; 17 CFR 50.1-50.79.

127

See
Proposed Rule, 90 FR at 47145.
See
Section I.B.2.,
supra,
n. 42-44 and accompanying text.

128

Id.

b. Comments Received and Final Rule

The Commission received no comments relating specifically to this definition and is adopting this term as proposed, as shown in the final rule text,
infra.

4. Definition of Prime Broker Arrangement

a. Proposal

The Commission proposed to add a new definition of “Prime Broker Arrangement” to the definitions in § 23.401
129

applicable to subpart H of part 23 of the Commission's regulations.
130

The definition was 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.
131

129
17 CFR 23.401.

130
17 CFR part 23, subpart H; 17 CFR 23.400-23.451.

131

See
Proposed Rule, 90 FR at 47145.

A Prime Broker Arrangement, as proposed, included at least one PB/SD and two or more other parties evidenced by a written agreement or agreements.
132

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”)
133

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”)
134

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.

132
Proposed Rule, 90 FR at 47145, n. 109 (stating that “[t]he Commission preliminarily believed that MSPs do not and would not act as PBs.”).

133

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).

134

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 in the Proposal was in 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.
135

In the Proposal, the Commission also recognized that the designation of a Trigger Transaction and a Mirror Transaction depends on the perspective of the parties to the transaction.
136

For example, where two PBs are involved, the Mirror Transaction for one PB may be a Trigger Transaction for the second PB. The Commission also acknowledged 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.
137

135

See
Proposed Rule, 90 FR at 47145.

136

See id.

137

See id.

The intention of the proposed definition of “Prime Broker Arrangement” was 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.
138

The Commission stated its preliminary view that 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.
139

The Commission acknowledged 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.
140

138

See
Proposed Rule, 90 FR at 47145.

139

See id.,
90 FR at 47145-47146.

140

See id.,
90 FR at 47145.

b. Comments Received and Final Rule

Only the ISDA/SIFMA Letter specifically addressed the proposed definition of “Prime Broker Arrangement.”

First, ISDA/SIFMA requested certain changes to the definition to account for a situation where a PB customer determines that the execution desk of its SD/PB provides better pricing than other executing dealers. Such customers may, in their own discretion, choose to price/execute with that desk for give-up to its SD/PB. ISDA/SIFMA argue that market practice is for PBs to maintain an appropriate level of separation between their sales and trading business (
i.e.,
the executing desk), including information barriers. Thus, in practice, the pricing and execution mechanics between a PB customer and the execution desk of that SD/PB is similar to pricing and execution with an external SD. The Commission considered this comment but declines to make the change requested by ISDA/SIFMA to the definition of “Prime Broker Arrangement.” In the scenario explained by ISDA/SIFMA, the same legal entity is both the executing dealer entering into the Trigger Transaction and the PB entering into the Mirror Transaction with the PB customer. Because the executing dealer and PB are both parts of the same legal entity, and that legal entity is a registered SD, the executing dealer is required under § 23.431(a) to disclose the material economic terms and the price of the swap prior to execution. Having made such disclosure, the legal entity that is the PB/SD has fulfilled the regulatory obligations that would otherwise be excepted by the Final Rule. Thus, the Commission has determined that there is no reason to include the change requested by ISDA/SIFMA to the definition of Prime Broker Arrangement because there is no need to provide an exception from the regulatory obligations of an SD/PB that acts as both the executing dealer and the PB. Further, the Commission does not believe that a Commission regulation is the appropriate place to account for the purely internal arrangements that an SD/PB may have between its PB desk and its swap trading desks.

Second, ISDA/SIFMA requested changes to the definition of Prime Broker Arrangement to clearly recognize in the rule text that a Mirror Transaction may include a spread or fees to compensate a Prime Broker for providing the credit intermediation services. In the Proposal, as discussed above, the Commission had proposed that, from the perspective of the PB/SD, the Mirror Transaction must be “substantially” equal but opposite to the terms and price of the Trigger Transaction (but not identical), recognizing 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 an intermediary for providing the credit intermediation service evidenced by the Prime Broker Arrangement or the intermediary's services. ISDA/SIFMA request that the “substantially equal” language be replaced with an explicit recognition that a Mirror Transaction may contain a spread or fee that makes it somewhat different from the Trigger Transaction. The Commission has concluded that such explicit recognition would better address any ambiguity that may have existed in the Proposal on this point and has thus added clarifying language to the definition of “Prime Broker Arrangement,” as shown in the final rule text
infra.

5. Definition of Qualified Prime Broker Arrangement

a. Proposal

The Commission proposed to add a new definition of “Qualified Prime Broker Arrangement”
141

to the definitions in § 23.401
142

applicable to subpart H of part 23 of the Commission's regulations.
143

The definition incorporated 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 (and PTMMM Requirement, if applicable) in § 23.431(a)(3)
144

with respect to Covered Transactions with such PB Counterparty.
145

In the Proposal, the Commission 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.
146

This view was 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).
147

In the Proposal, the Commission expressed its view that an insistence on price 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.
148

Thus, the Commission proposed the following conditions for a Qualified Prime Broker Arrangement that would qualify for an exception to the price disclosure.

141

See
Proposed Rule, 90 FR at 47146.

142
17 CFR 23.401.

143
17 CFR part 23, subpart H; 17 CFR 23.400-23.451.

144
17 CFR 23.431(a)(3).

145

See
Proposed Rule, 90 FR at 47146.

146

See id.

147

See id.

148

See
Proposed Rule, 90 FR at 47146.

First, to qualify as a Qualified Prime Broker Arrangement under the Proposed Rule, 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”).
149

This proposed condition would require the PB/SD to:

149

See id.

(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.
150

150

Id.

As discussed in the Proposal, the purpose of this proposed condition was 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.
151

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.
152

151

See id.

152

See
Proposed Rule, 90 FR at 47146.

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)
153

other than the pre-trade disclosure of the price of any Permitted PB Transaction (and the PTMMM, if applicable).
154

The Proposal also noted that if the Commission determined not to eliminate the scenario analysis requirement in § 23.431(b)
155

(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”).
156

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:

153
17 CFR 23.431(a).

154

See
Proposed Rule, 90 FR at 47146.

155
17 CFR 23.431(b);
see
Section II.B.,
supra,
for the Commission's discussion of its elimination of the Scenario Analysis Requirement.

156

See
Proposed Rule, 90 FR at 47146.

(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.
157

157

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.
158

In the Proposal, the Commission also stated that it 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 noted that this proposed 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.

158

See
Proposed Rule, 90 FR at 47147.

Third, the PB/SD would be required under the Proposed Rule to receive an acknowledgement from a PB Counterparty regarding various disclosures.
159

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.
160

Furthermore, under the Proposal, 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
161

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.
162

PB Counterparties would be permitted to request updated disclosures in writing prior to execution. This proposed condition was 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.”
163

Rather, the Commission explained that 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).
164

159

See id.

160

See id.

161
7 U.S.C. 6s(h)(3)(B)(i).

162

See
Proposed Rule, 90 FR at 47147.

163

See id.

164

See id.
(citing 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.
165

165
17 CFR 23.203.

b. Comments Received and Final Rule

Only the ISDA/SIFMA Letter specifically addressed the proposed definition of “Qualified Prime Broker Arrangement.” ISDA/SIFMA recommended two changes to the definition as discussed below.

First, ISDA/SIFMA recommended that the definition be changed to clarify that the pre-trade disclosures required by the definition would not include the price of a swap (as proposed by the Commission) but also would not include the material economic terms of a swap, arguing that, like the price, the material economic terms of a particular swap are negotiated by the PB customer with its executing counterparty without the knowledge of the SD/PB. The Commission agrees that an SD/PB would not know the exact economic terms of a swap prior to execution, even if it has agreed with a PB customer on all of the possible permutations of the terms that could be agreed and provided all required disclosures, to the best of the SD/PBs knowledge and reasonable belief.
166

Thus, the Commission has determined to make the recommended change to the definition of Qualified Prime Broker Arrangement, as reflected in the final rule text
infra.

166

See
paragraph (2) of the definition of Qualified Prime Broker Arrangement.

Second, ISDA/SIFMA recommended that the Commission delete the requirement that an SD/PB obtain an acknowledgement from its PB customers acknowledging receipt of the Regulatory Disclosures and also delete the requirement that an SD/PB retain a record of such acknowledgement and the Qualified Prime Broker Arrangement with each PB customer. ISDA/SIFMA argued that an SD/PB is already required by the Commission's SD recordkeeping rules to keep records of all of agreements entered into as part of its business of dealing in swaps and thus the recordkeeping proposal was redundant.
167

The Commission agrees that the recordkeeping proposal would be redundant with the Commission's recordkeeping rules for SDs and has thus determined to delete that portion of the Proposal, as reflected in the final rule text
infra.
For similar reasons, the Commission has determined to accept ISDA/SIFMA's recommendation that the Commission delete the requirement that an SD/PB obtain an acknowledgement from its PB Customers regarding the delivery of the Regulatory Disclosures and the SD/PBs obligations related thereto. As explained by ISDA/SIFMA, the acknowledgement requirement would entail a costly and burdensome exercise to amend or supplement existing documentation with each PB Customer without any concomitant benefit. ISDA/SIFMA argue that SDs are already required to keep full and complete records of its business of dealing in swaps, including all correspondence with customers and counterparties.
168

Thus, the Commission is confident that an SD/PB is required to keep adequate records of providing its PB customers with the Regulatory Disclosures required under the definition of Qualified Prime Broker Arrangement and of the Prime Broker Arrangement itself under currently existing recordkeeping requirements in the Commission's Regulations and has determined to delete the acknowledgement requirement as reflected in the final rule text
infra.

167

See e.g.,
17 CFR 23.201 and 17 CFR 23.202.

168

See e.g.,
17 CFR 23.201(a)(1)(i).

E. 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.
169

169

See
17 CFR 23.402.

1. Proposal

The Commission proposed to amend § 23.402 by adding a new paragraph (h) thereto that would state “Paragraph (b) and (c) of this section shall not apply to an ITBC Swap.”
170

This proposed amendment makes 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.
171

Specifically, because ITBC Swaps, once cleared, result in a new swap between the DCO or Exempt DCO and the swap counterparty, the Commission stated in the Proposed Rule that it 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.
172

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 paragraphs (b) and (c) of § 23.402 that the Commission proposed to be disapplied.
173

170

See
Proposed Rule, 90 FR at 47148.

171

See id.

172

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.

173

See
Proposed Rule, 90 FR at 47148.

2. Comments Received and Final Rule

The Commission received no specific comments with respect to the proposed amendment to § 23.402. Thus, the Commission is adopting this amendment as proposed as shown in the final rule text,
infra.

F. 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).
174

Paragraph (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.
175

174
17 CFR 23.401(c)(6) (redesignated as § 23.401(h)(6) in the Final Rule text
infra
).

175

See
17 CFR 23.430.

1. Proposal

The Commission proposed to amend § 23.430(e) by adding an additional 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.
176

As discussed in the Proposal, this 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.
177

Like for KYC purposes discussed above, the Commission stated its preliminary belief 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.
178

The Commission also added that, 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.

176

See
Proposed Rule, 90 FR at 47148.

177

See id.

178
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.

2. Comments Received and Final Rule

The Commission received no specific comments with respect to the proposed amendment to § 23.430. Thus, the Commission is adopting this amendment as proposed as shown in the rule text,
infra.

G. 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.
179

Paragraph (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.
180

179

See
17 CFR 23.431.

180
17 CFR 23.431(c).

1. Proposal

The Commission proposed 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;
181

(4) expanding the exception for pre-trade disclosures in paragraph (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 paragraph (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.
182

181
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.

182

See
Proposed Rule, 90 FR at 47147-47148.

The Proposal stated that these proposed amendments reflected 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.
183

183

Id.
at 47149.

2. Comments Received & Final Rule

Other than comments regarding the elimination of the PTMMM Requirement, the Scenario Analysis Requirement, the daily mark requirement, and the exceptions for ITBC Swaps and Qualified Prime Broker Arrangements discussed in Section II A, B, C, and D above, the Commission did not receive any substantive comments on the proposed amendments to Commission Regulation § 23.431. Thus, other than the changes discussed in Section II A, B, C, and D above, the Commission is adopting the Proposed amendments to § 23.431 as proposed as reflected in the final rule text
infra.

H. Amendments to § 23.432

In general, § 23.432 currently 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.
184

184

See
17 CFR 23.432.

1. Proposal

In the Proposal, the Commission proposed 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 proposed to amend § 23.432 by adding a new paragraph (c) that would disapply the notice requirements of paragraphs (a) and (b) to ITBC Swaps executed on a DCM, SEF, or Exempt SEF and to all A-ITBC Swaps.
185

185

See
Proposed Rule, 90 FR at 47149.

The Proposed Rule noted that this proposed amendment reflected 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.
186

186

Id.

2. Comments Received & Final Rule

The Commission received no comments with respect to the proposed amendment. Thus, the Commission is adopting the proposed amendments to § 23.432(a) and (b) to clarify that the notice must be given prior to entering into a swap; and is adding a new paragraph (c) that disapplies the notice requirements of paragraphs (a) and (b) to ITBC Swaps executed on a DCM, SEF, or Exempt SEF and to all A-ITBC Swaps as reflected in the final rule text
infra.

I. Amendments to § 23.434

In general, § 23.434 currently 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.
187

187

See
17 CFR 23.434.

However, § 23.434(b) currently also 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.
188

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.
189

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.
190

188

See
17 CFR 23.434(b).

189

See
ISDA August 2012 DF Protocol,
available at https://www.isda.org/protocol/isda-august-2012-df-protocol/.

190

See id.
for list of Adhering Parties.

1. Proposal

The Commission proposed to amend § 23.434 to add a new paragraph (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.
191

In making the Proposal, the Commission noted its preliminary determinations that (i) in light of the tremendous uptake of the ISDA protocol reference above, 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; (ii) 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; (iii) because (x) this information is available to counterparties from sources other than an SD counterparty; (y) ITBC Swap counterparties have no on-going

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2025-23953. Public record. Not legal advice.