Federal Register / Vol. 85, No. 33 / Wednesday, February 19, 2020 / Proposed Rules 9407

Dated: February 10, 2020. 1. Federal eRulemaking Portal: http:// Telephone: (202) 586–9496. Email: Bruce Summers, www.regulations.gov. Follow the [email protected]. Administrator, Agricultural Marketing instructions for submitting comments. For further information on how to Service. 2. Email: submit a comment, review other public [FR Doc. 2020–02952 Filed 2–18–20; 8:45 am] ConsumerRefrigFreezer2017TP0004@ comments and the docket, contact the BILLING CODE 3410–02–P ee.doe.gov. Include the docket number Appliance and Equipment Standards EERE–2017–BT–TP–0004 in the subject Program staff at (202) 287–1445 or by line of the message. email: ApplianceStandardsQuestions@ 3. Postal Mail: Appliance and ee.doe.gov. DEPARTMENT OF ENERGY Equipment Standards Program, U.S. Signed in Washington, DC, on February 6, 10 CFR Part 430 Department of Energy, Building 2020. Technologies Office, Mailstop EE–5B, Alexander N. Fitzsimmons, [EERE–2017–BT–TP–0004] 1000 Independence Avenue SW, Acting Deputy Assistant Secretary for Energy Washington, DC 20585–0121. RIN 1904–AD84 Efficiency, Energy Efficiency and Renewable Telephone: (202) 287–1445. If possible, Energy. Energy Conservation Program: Test please submit all items on a compact [FR Doc. 2020–03230 Filed 2–18–20; 8:45 am] disc (‘‘CD’’), in which case it is not Procedures for Consumer BILLING CODE 6450–01–P Refrigerators, Refrigerator-Freezers, necessary to include printed copies. and Freezers 4. Hand Delivery/Courier: Appliance and Equipment Standards Program, U.S. COMMODITY FUTURES TRADING AGENCY: Office of Energy Efficiency and Department of Energy, Building COMMISSION Renewable Energy, Department of Technologies Office, 950 L’Enfant Plaza Energy. SW, 6th Floor, Washington, DC 20024. 17 CFR Parts 36, 37, and 43 ACTION: Extension of public comment Telephone: (202) 287–1445. If possible, period. please submit all items on a CD, in RIN 3038–AE94 which case it is not necessary to include SUMMARY: On December 23, 2019, the printed copies. Swap Execution Facility Requirements U.S. Department of Energy (‘‘DOE’’) No telefacsimilies (faxes) will be and Real-Time Reporting published a test procedure notice of accepted. For detailed instructions on Requirements proposed rulemaking (‘‘NOPR’’) for submitting comments and additional AGENCY: Commodity Futures Trading consumer refrigeration products. The information on this process, see section Commission. NOPR stated that written public III of this document. ACTION: Notice of proposed rulemaking. comments would be accepted until Docket: The docket for this activity, February 21, 2020. On January 27, 2020, which includes Federal Register SUMMARY: The Commodity Futures DOE received a joint request from the notices, comments, and other Trading Commission (‘‘Commission’’ or Northwest Energy Efficiency Alliance supporting documents/materials, is ‘‘CFTC’’) proposes to amend certain (NEEA), the Natural Resources Defense available for review at http:// parts of its regulations relating to the Council (NRDC), and Pacific Gas and www.regulations.gov. All documents in execution of package transactions on Electric Company (PG&E) to extend the the docket are listed in the http:// swap execution facilities (‘‘SEFs’’); the comment period for the NOPR by 60 www.regulations.gov index. However, execution of block trades on SEFs; and days so that the data their teams are some documents listed in the index, the resolution of error trades on SEFs. collecting and analyzing could be such as those containing information These matters are currently the subject submitted to the docket and considered that is exempt from public disclosure, of relief in certain no-action letters from by the DOE. On February 5, 2020, DOE may not be publicly available. Commission staff. received a request from the Association The docket web page can be found at DATES: Comments must be received on of Home Appliance Manufacturers http://www.regulations.gov/ or before April 20, 2020. (AHAM) to extend the comment period #!docketDetail;D=EERE-2017-BT-TP- ADDRESSES: You may submit comments, for the Test Procedure NOPR for 0004. The docket web page contains identified by RIN 3038–AE94, by any of Consumer Refrigeration Products by 30 instructions on how to access all the following methods: days. DOE has reviewed this request documents, including public comments • CFTC Comments Portal: https:// and will be granting a 45 day extension in the docket. See section III for comments.cftc.gov. Select the ‘‘Submit of the public comment period until information on how to submit Comments’’ link for this rulemaking and April 6, 2020. comments through http:// follow the instructions on the Public DATES: The comment period for the www.regulations.gov. Comment Form. NOPR published on December 23, 2019 FOR FURTHER INFORMATION CONTACT: Dr. • Mail: Send to Christopher (84 FR 70842), is extended. DOE will Stephanie Johnson, U.S. Department of Kirkpatrick, Secretary of the accept comments, data, and information Energy, Office of Energy Efficiency and Commission, Commodity Futures regarding this request for information Renewable Energy, Building Trading Commission, Three Lafayette received no later than April 6, 2020. Technologies Office, EE–5B, 1000 Centre, 1155 21st Street NW, ADDRESSES: Interested persons are Independence Avenue SW, Washington, Washington, DC 20581. encouraged to submit comments using DC 20585–0121. Telephone: (202) 287– • Hand Delivery/Courier: Follow the the Federal eRulemaking Portal at 1943. Email: same instructions as for Mail, above. http://www.regulations.gov. Follow the ApplianceStandardsQuestions@ Please submit your comments using instructions for submitting comments. ee.doe.gov. only one of these methods. Submissions Alternatively, interested persons may Mr. Pete Cochran, U.S. Department of through the CFTC Comments Portal are submit comments, identified by docket Energy, Office of the General Counsel, encouraged. number EERE–2017–BT–TP–0004, by GC–33, 1000 Independence Avenue SW, All comments must be submitted in any of the following methods: Washington, DC 20585–0121. English, or if not, accompanied by an

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English translation. Comments will be B. Error Trades: Execution of Trades To forth other relevant regulations posted as received to https:// Correct Operational and Clerical Errors applicable to the fifteen core principles www.cftc.gov. You should submit only on Swap Execution Facilities with which a SEF must comply to 1. Background obtain and maintain registration with information that you wish to make 2. Proposed § 37.9(e) available publicly. If you wish the 3. Request for Comment the Commission. Commission to consider information C. Real-Time Public Reporting: Block Commission regulation 37.9 that you believe is exempt from Trade Definition prescribes the methods of execution that disclosure under the Freedom of 1. Existing § 43.2 a SEF must offer to market participants Information Act (‘‘FOIA’’),1 a petition 2. Proposed Amendment to § 43.2 to execute swap transactions on the for confidential treatment of the exempt 3. Request for Comment SEF. In particular, § 37.9 defines information may be submitted according III. Effective Date and Transition Period ‘‘Required Transactions’’ as swaps IV. Related Matters subject to the trade execution to the procedures established in the A. Regulatory Flexibility Act Commission’s regulations, 17 CFR B. Paperwork Reduction Act requirement. Section 37.9 also requires 145.9. C. Cost-Benefit Considerations a SEF to offer, as required methods of execution, either (i) an Order Book or The Commission reserves the right, D. Antitrust Considerations (ii) a request-for-quote system that sends but shall have no obligation, to review, I. Background a request-for-quote to no less than three pre-screen, filter, redact, refuse, or unaffiliated market participants and remove any or all of your submission A. Parts 37 and 43 of the Commission’s operates in conjunction with an Order from https://www.cftc.gov that it may Regulations Book (‘‘RFQ System’’) for the execution deem to be inappropriate for The Dodd-Frank Wall Street Reform of these transactions.7 Swaps that are publication, such as obscene language. and Consumer Protection Act (‘‘Dodd- not subject to the trade execution All submissions that have been redacted Frank Act’’) amended the Commodity requirement are defined as ‘‘Permitted or removed that contain comments on Exchange Act (‘‘CEA’’ or ‘‘Act’’) by Transactions,’’ for which a SEF may the merits of the rulemaking will be adding section 5h, which establishes offer any execution method and for registration requirements and core retained in the public comment file and which market participants may principles for swap execution facilities will be considered as required under the voluntarily trade on a SEF.8 The (‘‘SEFs’’).2 The Commission Administrative Procedure Act and other Commission’s regulations specify implemented section 5h by adopting applicable laws, and may be accessible additional requirements that correspond regulations that establish various under FOIA. to the use of an Order Book or RFQ trading requirements for swaps traded FOR FURTHER INFORMATION CONTACT: System to execute Required on SEFs 3 and articulating, where Roger Smith, Special Counsel, (202) Transactions.9 appropriate, guidance and acceptable 418–5344, [email protected], Division of Pursuant to section 727 of the Dodd- practices. In particular, the Commission Frank Act, the Commission also Market Oversight, Commodity Futures promulgated part 37 of its regulations to Trading Commission, 525 West Monroe established a regulatory framework for implement section 5h of the CEA and the real-time public reporting of swap Street, Suite 1100, Chicago, Illinois set forth the registration and operational 60661, or Michael Penick, Senior 4 transaction and pricing data, including requirements for SEFs. Among those swap block trades within CEA section Economist, (202) 418–5279, mpenick@ are requirements in part 37 specifying cftc.gov, Office of the Chief Economist, 2(a)(13).10 Part 43 of the Commission’s minimum trading functionality that a regulations implements section 727 of Commodity Futures Trading SEF must offer to participants for all Commission, Three Lafayette Centre, the Dodd-Frank Act by, among other listed swaps, i.e., an ‘‘order book,’’ as things, defining the requisite criteria for 1151 21st Street NW, Washington, DC defined in § 37.3 (‘‘Order Book’’); 5 20581. when a publicly reportable swap specifying the types of systems or transaction will be classified as a block SUPPLEMENTARY INFORMATION: platforms that a SEF must offer for trade, including the requirement that swaps trading, including swaps subject Table of Contents to the trade execution requirement clearing requirement be executed on or pursuant to 6 I. Background under CEA section 2(h)(8); and setting the rules of a DCM or SEF, or a SEF that is exempt A. Parts 37 and 43 of the Commission’s from registration, unless no DCM or SEF makes Regulations 2 7 U.S.C. 7b–3. such swaps available to trade (‘‘MAT’’) or such B. Summary of Proposed Changes to Parts 3 The Dodd-Frank Act also added to the CEA swaps qualify for the clearing exception under CEA certain provisions related to the trading of swaps on section 2(h)(7) (the ‘‘trade execution requirement’’). 36, 37, and 43 See 7 U.S.C. 2(h)(8). C. Consultation With Other U.S. Financial designated contract markets (‘‘DCMs’’). Given that almost all platform trading of swaps in the U.S. 7 17 CFR 37.9(a). With the exception of block Regulators occurs on SEFs, the Commission is not at this time trades, as defined in § 43.2 of the Commission’s II. The Proposed Regulations proposing to amend any regulatory requirements regulations, Required Transactions must be A. Execution of Package Transactions pertaining to DCMs within part 38 of the executed on a SEF’s Order Book or RFQ System. 1. Background Commission’s regulations. See 17 CFR 37.9(a)(2)(i). 2. Proposed Addition of § 37.9(d) and 4 Core Principles and Other Requirements for 8 17 CFR 37.9(c). Amendment of § 37.9(a)(2) Swap Execution Facilities, 78 FR 33476 (June 4, 9 For example, under § 37.9(b), the Commission 3. Request for Comment 2013) (hereinafter ‘‘SEF Core Principles Final implemented a fifteen-second time-delay 4. Existing § 37.3(a) Rule’’). requirement for Required Transactions that are pre- 5 arranged or pre-negotiated by a broker and 5. Proposed Addition of § 37.3(a)(4) 17 CFR 37.3(a)(2). An Order Book is defined as (i) an ‘‘electronic trading facility,’’ as that term is submitted as cross trades for execution through the 6. Request for Comment defined in CEA section 1a(16); (ii) a ‘‘trading SEF’s Order Book. This requirement allows a broker 7. Exemption of New Issuance Bond facility,’’ as that term is defined in CEA section or dealer to execute a Required Transaction by Package Transaction From the Trade 1a(51); or (iii) a trading system or platform in which trading against a customer’s order, or executing two Execution Requirement all market participants have the ability to enter customers’ orders against each other, through pre- 8. Discussion of CEA Section 4(c) multiple bids and offers, observe or receive bids negotiation or pre-arrangement, provided that one Enumerated Factors and offers entered by other market participants, and side of the transaction is exposed to the Order Book 9. Request for Comment transact on such bids and offers. See 17 CFR for fifteen seconds before the other side of the 37.3(a)(3). transaction is submitted for execution. See 17 CFR 6 CEA section 2(h)(8) requires that transactions 37.9(b). 1 5 U.S.C. 552. involving swaps subject to the CEA section 2(h)(1) 10 7 U.S.C. 2(a)(13).

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the swap transaction ‘‘occur[] away’’ on-SEF through flexible means of currently provides no-action relief for from a SEF’s trading system or platform, execution pursuant to § 37.9(c)(2), rather the swap components of certain but pursuant to the SEF’s rules and than through the required methods of categories of package transactions from procedures.11 Part 43 also sets forth the execution under § 37.9 for ‘‘Required the required methods of execution, and procedures for calculating appropriate Transactions.’’ In addition, the in some instances, from the trade minimum block sizes for each swap Commission is proposing to amend part execution requirement. asset class 12 and specifying the public 36 to include an exemption from the • The Commission proposes to reporting delays available for such trade execution requirement for swap amend part 37 to establish a principles- trades.13 transactions that are executed as a based approach for SEF error trade component of a package transaction that policies that incorporates relief from the B. Summary of Proposed Changes to also includes a component that is a new required methods of execution under Parts 36, 37, and 43 issuance bond (‘‘New Issuance Bond § 37.9 for Required Transactions for During the implementation of parts 37 package transactions’’). CFTC No-Action trades intended to resolve error trades.18 and 43, market participants and SEFs Letter No. 17–55 (‘‘NAL No. 17–55’’) 17 The amendment would enable SEFs to identified certain operational and permit market participants to execute compliance burdens related to various between two or more counterparties where: (i) At swaps transactions to correct requirements. To mitigate these least one component transaction is a Required operational or clerical errors using burdens, Commission staff issued to Transaction; (ii) execution of each component execution methods other than those transaction is contingent upon the execution of all SEFs and market participants time- other component transactions; and (iii) the required under § 37.9 for Required limited no-action relief from certain component transactions are priced or quoted Transactions. This proposal does not provisions of the CEA and the together as one economic transaction with seek to codify the specific conditions Commission’s regulations.14 Based on simultaneous or near-simultaneous execution of all contained in CFTC No-Action Letter No. components. this implementation experience, the 19 17 NAL No. 17–55, Re: Extension of No-Action 17–27 (‘‘NAL No. 17–27’’). Rather, this Commission believes it may be Relief from Sections 2(h)(8) and 5(d)(9) of the proposal is intended to capture the appropriate to amend the current SEF Commodity Exchange Act and from Commission intent of NAL No. 17–27 to permit regulatory framework to address the Regulations 37.3(a)(2) and 37.9 for Swaps Executed market participants to correct error following issues, which have been as Part of Certain Package Transactions (Oct. 31, 2017). NAL No. 17–55 extended no-action relief and trades in Required Transactions through 15 identified in staff no-action letters: related conditions previously granted by non-required methods of execution • The Commission proposes to Commission staff. See CFTC Letter No. 14–12, No- while ensuring flexibility for SEFs to amend part 37 to allow the swap Action Relief from the Commodity Exchange Act determine the most suitable error trade components of certain categories of Sections 2(h)(8) and 5(d)(9) and from Commission rules for their markets and 16 Regulation § 37.9 for Swaps Executed as Part of a ‘‘package transactions’’ to be executed Package Transaction (Feb. 10, 2014) (‘‘NAL No. 14– participants.20 12’’); CFTC Letter No. 14–62, No-Action Relief from 11 17 CFR 43.2. the Commodity Exchange Act Sections 2(h)(8) and Further, NAL No. 17–55 also applies to package 12 17 CFR 43.6. 5(d)(9) and from Commission Regulation § 37.9 for transactions occurring on a DCM. See supra note 3. Swaps Executed as Part of Certain Package 13 17 CFR 43.5(d). 18 The Commission notes that in addition to relief Transactions and No-Action Relief for Swap 14 As defined in § 140.99(a)(2) of the from the required methods of execution, staff has Execution Facilities from Compliance with Certain Commission’s regulations, a no-action letter is a also provided relief from § 37.203(a) of the Requirements of Commission Regulations written statement issued by a Division stating that Commission’s regulations, which prohibits ‘‘pre- § 37.9(a)(2), § 37.203(a) and § 38.152 for Package it will not recommend enforcement action to the arranged trading,’’ for offsetting trades and Transactions (May 1, 2014) (‘‘NAL No. 14–62’’); Commission for failure to comply with a specific correcting trades. See NAL No. 17–27, Re: No- CFTC Letter No. 14–121, Extension of No-Action provision of the Act or a Commission rule, Action Relief for Swap Execution Facilities and Relief for Swap Execution Facilities and Designated regulation, or order. A no-action letter represents Designated Contract Markets in Connection with Contract Markets from Compliance with Certain only the issuing Division’s position and binds only Swaps with Operational or Clerical Errors Executed Requirements of Commission Regulations that Division. 17 CFR 140.99(a)(2). on a Swap Execution Facility or Designated § 37.9(a)(2), § 37.203(a) and § 38.152 for Package 15 Contract Market (May 30, 2017). As discussed In November 2018, the Commission issued a Transactions (Sept. 30, 2014) (‘‘NAL No. 14–121’’); further below, the Commission does not, however, comprehensive proposal to amend the SEF CFTC Letter No. 14–137, Extension of No-Action view a regulatory amendment corresponding to that regulatory framework. See generally Swap Relief from the Commodity Exchange Act Sections Execution Facilities and Trade Execution 2(h)(8) and 5(d)(9) and from Commission relief as necessary. See infra note 70. 19 Requirement, 83 FR 61946 (Nov. 30, 2018) (‘‘2018 Regulation § 37.9 and Additional No-Action Relief This proposal also does not codify the SEF Proposal’’). Among other things, the 2018 SEF for Swap Execution Facilities from Commission supplemental conditions to NAL No. 17–27 Proposal addresses existing relief under various no- Regulation § 37.3(a)(2) for Swaps Executed as Part contained in CFTC No-Action Letter No. 20–01, Re: action letters as part of the proposal’s holistic of Certain Package Transactions (Nov. 10, 2014) Supplemental No-Action Relief for Swap Execution approach to amending the SEF regulatory (‘‘NAL No. 14–137’’); CFTC Letter No. 15–55, Facilities and Designated Contract Markets in framework. Given the complex, expansive, and Extension of No-Action Relief from the Commodity Connection with Swaps with Operational or comprehensive nature of the 2018 SEF Proposal, Exchange Act Sections 2(h)(8) and 5(d)(9) and from Clerical Errors Executed on a Swap Execution however, the Commission continues to evaluate it. Commission Regulation § 37.9 and No-Action Relief Facility or Designated Contract Market (Jan. 8, 2020) Therefore, the Commission is proposing rules for Swap Execution Facilities from Commission (‘‘NAL No. 20–01’’), conditions that allow market herein independent of that proposal. To be clear, Regulation § 37.3(a)(2) for Swaps Executed as Part participants to correct error trades that have been this rule proposal does not supersede the 2018 SEF of Certain Package Transactions (Oct. 15, 2015) accepted for clearing with an ex post facto review Proposal in any way. (‘‘NAL No. 15–55’’); and CFTC Letter No. 16–76, Re: by the SEF. As discussed below, nothing in this Further, while the proposals and rationales Extension of No-Action Relief from the Commodity proposal would prohibit SEFs from incorporating contained herein are, in some cases, identical or Exchange Act Sections 2(h)(8) and 5(d)(9) and from such conditions within their error trade rules. See similar to the proposals and rationales used in the Commission Regulation § 37.9 and No-Action Relief infra note 74. 2018 SEF Proposal, the Commission believes the for Swap Execution Facilities from Commission 20 NAL No. 17–27, Re: No-Action Relief for Swap context surrounding these two proposals Regulation § 37.3(a)(2) for Swaps Executed as Part Execution Facilities and Designated Contract distinguishes them in application and scope. While of Certain Package Transactions (Nov. 1, 2016) Markets in Connection with Swaps with the Commission received comments on the 2018 (‘‘NAL No. 16–76’’). NAL No. 17–55 also provided Operational or Clerical Errors Executed on a Swap SEF Proposal, the Commission believes that it is relief for package transactions where at least one Execution Facility or Designated Contract Market important for the public to be able to provide individual swap component is subject to the trade (May 30, 2017). NAL No. 17–27 extended no-action comments focused on the facts and circumstances execution requirement and all other components relief and related conditions previously granted by of the proposal at hand. Therefore, comments made are futures contracts (‘‘MAT/Futures package Commission staff. See CFTC Letter No. 16–58, Re: on the 2018 SEF Proposal relevant to this transactions’’). The Commission continues to No-Action Relief for Swap Execution Facilities and rulemaking should be resubmitted as comments to evaluate MAT/Futures package transactions and Designated Contract Markets in Connection with this rule proposal in order to be considered. their regulatory treatment. Therefore, this Swaps with Operational or Clerical Errors Executed 16 As used herein a package transaction consists rulemaking does not encompass MAT/Futures on a Swap Execution Facility or Designated of two or more component transactions executed package transactions. Continued

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• The Commission proposes to II. The Proposed Regulations concurrently or on a singular basis; in amend the definition of ‘‘block trade’’ in particular, negotiations for the pricing of A. Execution of Package Transactions § 43.2, which requires the execution of such package transactions may be based block trades pursuant to the rules of a 1. Background primarily on the components that are SEF to ‘‘occur[] away’’ from the SEF, Package transactions generally not subject to the trade execution requirement. Further, given the i.e., to be executed outside of any of the involve the execution of multiple individual liquidity and trading SEF’s trading systems or platforms. The component transactions together that characteristics of each component, amendment would enable SEFs to offer market participants consider to certain package transactions will have to non-Order Book methods of execution represent one economic transaction.23 trade through methods of execution that for market participants to execute swap The types of transactions that constitute are suitable for an illiquid and bespoke block trades on the SEF. The proposal a package transaction are wide-ranging component, which in many cases are codifies CFTC No-Action Letter No. 17– and diverse. In particular, there are not the required methods of package transactions that consist solely 60 (‘‘NAL No. 17–60’’) while also execution.26 allowing block trades for swaps that are of swaps subject to the trade execution Notwithstanding the complexity of not intended to be cleared (‘‘ITBC’’) to requirement; those that include a mix of their pricing and execution, the be executed on SEF via non-Order Book swaps subject to the trade execution Commission is aware of their benefits of methods of execution.21 requirement and swaps that are not; such package transactions. By executing those made up of swaps and non-swaps; multiple components together as part of The Commission believes that the and those comprised of both swaps that above-described amendments would a package transaction, market are and swaps that are not exclusively participants can improve transaction continue to effectuate the statutory SEF subject to the Commission’s provisions and better promote the 24 pricing and cost, increase execution jurisdiction. These components range efficiency, and decrease execution risk statutory SEF goals, as discussed below. from being very liquid and standardized 25 beyond what would have been possible C. Consultation With Other U.S. to being illiquid and bespoke. The if the market participant had executed Financial Regulators variety of package transactions derives, each component individually, i.e., in part, from the fact that the different ‘‘legged’’ or ‘‘legging’’ into the In developing these rules, the types of package transactions are fit for transaction.27 Commission has consulted with the distinct purposes. The Commission During the implementation of the Securities and Exchange Commission, understands that certain package trade execution requirement for certain pursuant to section 712(a)(1) of the transactions are utilized as tools within interest rate swaps and credit default Dodd-Frank Act.22 market participants’ portfolio swaps, SEFs and market participants management and hedging programs, informed the Commission that requiring Contract Market (June 10, 2016) (‘‘NAL No. 16–58’’); while other types of package swaps that are otherwise Required CFTC Letter 15–24, Re: No-Action Relief for Swap transactions are used to allow market Transactions—but are components of a Execution Facilities and Designated Contract participants to express views of the package transaction 28—to be executed Markets in Connection with Swaps with market—for example, by allowing Operational or Clerical Errors Executed on a Swap through the required methods of participants to trade the spread between 29 Execution Facility or Designated Contract Market execution under § 37.9 was in many (Apr. 22, 2015) (‘‘NAL No. 15–24’’); and CFTC certain products or different maturities cases impracticable and increased Letter No. 13–66, Time-Limited No-Action Relief in the same product. execution risks and operational for Swap Execution Facilities from Compliance Given the diverse characteristics of challenges. Market participants and with Certain Requirements of Commission the component transactions that may be SEFs informed the Commission that Regulation 37.9(a)(2) and 37.203(a) (Oct. 25, 2013) involved, the Commission understands (initial relief provided by Commission staff with these risks and challenges generally respect to error trades that are rejected from that package transactions often pose clearing)(‘‘NAL No. 13–66’’). NAL No. 17–27 also unique pricing and execution 26 For example, while a swap that is subject to the applies to swap transactions occurring on a DCM. characteristics. The Commission trade execution requirement is suitable to be See supra note 3. In addition, DMO recently understands that the negotiation or executed through the required methods of released NAL No. 20–01, which supplements the arrangement of each of these execution as an outright transaction, when that same swap is bundled together with an illiquid and conditions in NAL No. 17–27 to allow market components generally occurs participants, sua sponte, to correct error trades that bespoke component in a package transaction, the have been accepted to clearing with an ex post facto package transaction takes on the liquidity and review by the SEF. 23 See supra note 16. The Commission notes that trading profile of the illiquid and bespoke there are transactions that otherwise meet the component. 21 NAL No. 17–60, Re: Extension of No-Action package transaction definition but do not involve a 27 Relief for Swap Execution Facilities from Certain For example, a market participant seeking to swap subject to the trade execution requirement. ‘‘Block Trade’’ Requirements in Commission execute two component transactions independent While these transactions may colloquially be of one another, instead of executing the two Regulation 43.2 (Nov. 14, 2017). NAL No. 17–60 referred to as package transactions, the Commission components together in a package transaction, extended no-action relief and related conditions notes that such transactions are not the subject of would be forced to pay the bid/offer spread on each previously granted by Commission staff. See CFTC this proposal. leg, which in many cases is more costly and less Letter No. 16–74, Re: Extension of No-Action Relief 24 See infra note 36 for a more precise description efficient than paying the single bid/offer spread for for Swap Execution Facilities from Certain ‘‘Block of various package transactions. a package transaction composed of the same two Trade’’ Requirements in Commission Regulation To the extent that counterparties may be components. 43.2 (Oct. 7, 2016) (‘‘NAL No. 16–74’’); CFTC Letter facilitating package transactions that involve a 28 See supra note 16. Consistent with the No. 15–60, Re: Extension of No-Action Relief for ‘‘security,’’ as defined in section 2(a)(1) of the proposed definition of package transaction under Swap Execution Facilities from Certain ‘‘Block Securities Act of 1933 or section 3(a)(10) of the § 37.9(d) the Commission notes that, unless Trade’’ Requirements in Commission Regulation Securities Exchange Act of 1934, or any component otherwise stated, the term ‘‘swap component(s)’’ as 43.2 (Nov. 2, 2015) (‘‘NAL No. 15–60’’); and CFTC agreement, contract, or transaction over which the used herein refers to a swap component that is Letter No. 14–118, No-Action Relief for Swap Commission does not have exclusive jurisdiction, subject to the trade execution requirement under Execution Facilities from Certain ‘‘Block Trade’’ the Commission does not opine on whether such CEA section 2h(8), and therefore a Required Requirements in Commission Regulation 43.2 (Sept. activity complies with other applicable law and Transaction. 19, 2015) (‘‘NAL No. 14–118’’). NAL No. 17–60 only regulations. 29 As noted above, pursuant to § 37.9, SEFs must provides relief for swap block trades that are ITBC. 25 Some non-swap components may be subject to provide as the required methods of execution for 22 Dodd-Frank Act, Public Law 111–203, title VII, different regulatory requirements than the swap Required Transactions either an Order Book or an sec. 712(a)(1), 124 Stat. 1376 (2010). components in the package transactions. RFQ System.

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reflect (i) an initial lack of market provide relief for the swap components no-action relief, the Commission infrastructure available to trade and of certain package transactions where proposes to allow the Required clear certain package transactions; 30 relief is necessary for market Transaction swap component of the and (ii) the complex, bespoke, and participants to be able to effectively following three categories of package idiosyncratic nature of several execute the package transaction due to transactions to be executed via flexible categories of package transactions that specific attributes of such transactions. means of execution pursuant to precluded them from being suitable for § 37.9(c)(2): 2. Proposed Addition of § 37.9(d) and execution through required methods of (1) A package transaction where at Amendment of § 37.9(a)(2) execution.31 least one of the components is a swap In response to concerns from market In light of the complex nature of these exclusively within the Commission’s participants, Commission staff in the package transactions, the Commission jurisdiction that is not subject to the Division of Market Oversight (‘‘DMO’’) recognizes that the required methods of clearing requirement (‘‘MAT/Non-MAT provided a series of time-limited no- execution under § 37.9 may inhibit Uncleared’’); action relief in order to allow the swap market participants from tailoring the (2) A package transaction where at components of certain package execution of the swap component of the least one of the components is not a transactions to be executed through relevant package transactions. This may swap (excluding certain package flexible methods of execution on a SEF, force market participants to effect such transaction categories as discussed and in some cases completely away transactions on a leg-by-leg basis— below) (‘‘MAT/Non-Swap from a SEF. Over time, the initial dearth leading to increased execution and Instrument’’); 35 and of available market infrastructure to operational risk—or prevent them from (3) A package transaction where at trade and clear certain package engaging in the relevant package least one of the components is a swap transactions has diminished, especially transactions altogether, precluding for which the CFTC does not have for package transactions composed of effective hedging strategies and exclusive jurisdiction, e.g., a mixed liquid and standardized components. As decreasing market liquidity. Since swap (‘‘MAT/Non-Exclusive CFTC a result, Commission staff has allowed DMO’s issuance of this no-action relief, Swap’’).36 the relief for certain package the Commission has gained transactions to expire as the capabilities considerable knowledge and experience 35 Under proposed § 37.9(d)(3), consistent with and functionalities of market the no-action relief, this category specifically with the dynamics of the trading of excludes package transactions in which all non- participants and SEFs have progressed package transactions, particularly with swap components are U.S. Treasury securities to the point of permitting the swap respect to the existing no-action relief (‘‘U.S. Dollar Spreadover package transactions’’); component of various package from the required methods of execution. MAT/Futures package transactions; package transactions to be executed through the transactions in which all other non-swap Based on this knowledge and components are agency mortgage-backed securities 32 required methods of execution. The experience, the Commission believes (‘‘MAT/Agency MBS package transactions’’); and Commission notes that the expiration of that certain aspects of the current New Issuance Bond package transactions. See also relief has been successful for many requirements for the required methods Section II.A.7—Exemption of New Issuance Bond Package Transactions from the Trade Execution types of package transactions given (i) of execution under § 37.9 should be Requirement. market participants now actively trade enhanced to better account for the To the extent that counterparties may be the swap component of several types of complex nature of the relevant package facilitating package transactions that involve a package transactions through the transactions. ‘‘security,’’ as defined in section 2(a)(1) of the required methods of execution, and (ii) Securities Act of 1933 or section 3(a)(10) of the Therefore, the Commission proposes Securities Exchange Act of 1934, or any component the trading of such package transactions to add § 37.9(d) and amend § 37.9(a)(2) agreement, contract, or transaction over which the constitutes a significant portion of to permit the swap components of Commission does not have exclusive jurisdiction, swaps trading.33 certain package transactions to be the Commission does not opine on whether such Despite the progress, however, executed via flexible methods of activity complies with other applicable law and Commission staff has continued to regulations. execution pursuant to § 37.9(c)(2). The 36 The Commission notes that the swap Commission proposes to define a components of different categories of package 30 See, e.g., NAL No. 14–12 at 2–3 n.10 ‘‘package transaction’’ as a transaction transactions have been subject to time-limited no- (describing the inability of a DCO to simultaneously consisting of two or more component action relief provided by Commission staff from the screen and accept all components of a package trade execution requirement and required methods transaction for clearing). transactions executed between two or of execution. These categories of package 31 See, e.g., CFTC Public Roundtable: Trade more counterparties where: (i) At least transactions include those where: (i) Each of the Execution Requirements and Package Transactions, one component transaction is a components is a swap subject to the trade execution 72, 84–85 (Feb. 12, 2014), available at https:// Required Transaction; (ii) execution of requirement (‘‘MAT/MAT package transactions’’); www.cftc.gov/sites/default/files/idc/groups/public/ (ii) at least one of the components is subject to the @newsroom/documents/file/transcript021214.pdf each component transaction is trade execution requirement and each of the other (commenting on the challenges of applying required contingent upon the execution of all components is subject to the clearing requirement methods of execution to package transactions with other component transactions; and (iii) (‘‘MAT/Non-MAT (Cleared)’’); (iii) U.S. Dollar complex component swaps). the component transactions are priced Spreadover package transactions; (iv) MAT/Agency 32 See infra note 36 for an overview and MBS package transactions; (v) New Issuance Bond description of the evolution of the relief for package or quoted together as one economic package transactions; (vi) MAT/Futures package transactions. transaction with simultaneous or near- transactions; (vii) MAT/Non-MAT (Uncleared); 33 For example, according to publicly available simultaneous execution of all (viii) excluding aforementioned categories, MAT/ data from ClarusFT, nearly seventy percent of U.S. components.34 Based on this proposed Non-Swap Instruments; and (ix) MAT/Non- Dollar interest rate swaps trading in the inter-dealer Exclusive CFTC Swap. See NAL No. 14–12; NAL swap market were carried out as part of just a single definition and consistent with existing No. 14–62; NAL No. 14–121; NAL No. 14–137; NAL type of package transaction: U.S. Dollar Spreadover No. 15–55; NAL No. 16–76; and NAL No. 17–55. package transactions, as defined in note 35. See 34 See proposed § 37.9(d)(1). The Commission Over time, the swap components of the following Chris Barnes, USD Spreadovers and SEF Market notes that there are transactions which otherwise categories of package transactions were no longer Share, Clarus Financial Technology Blog (August meet the package transaction definition but do not provided relief: MAT/MAT package transactions, 14, 2018), available at https://www.clarusft.com/ involve a swap that is subject to the trade execution MAT/Non-MAT (Cleared) package transactions, usd-spreadovers-and-sef-market-share/. Further, requirement. While these transactions may U.S. Dollar Spreadover package transactions, and package transactions involving spreads and colloquially be referred to as package transactions, MAT/Agency MBS package transactions. As a butterflies of interest rate swaps make up a material the Commission notes that such transactions are not result, the swap components of these package amount of trading in the swaps markets. the subject of this proposal. See supra note 16. Continued

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While, as noted above, the swap flexible methods of execution for the participants would be prevented from components of several types of package swap components of these package entering or effectively entering into the transactions have been successfully transactions, they would potentially be package transaction, nullifying the transitioned to SEF and are executed via forced to break the package transaction package transaction’s purpose and the required methods of execution, the into its individual components, benefits as a hedging and portfolio Commission believes that the types of otherwise known as ‘‘legging’’ into the management tool. Based on its package transactions covered by this transaction. The Commission experience with the existing no-action proposal may not be suitable to be understands from market participants relief, the Commission believes that this traded through the required methods of that legging into a package transaction is proposal would allow market execution due to their specific inefficient and increases transaction participants to utilize flexible methods characteristics. In particular, the costs and execution risks. Given that of execution for the swap component of Commission recognizes that these components of package transactions are the relevant package transaction, package transactions contain each priced or quoted together as part of thereby ensuring that market components that are illiquid and one economic transaction, the participants are able to continue to bespoke, such as swaptions, or contain Commission recognizes the utilize these effective hedging tools. components that are subject to impracticality of breaking the package Finally, the Commission believes that regulatory requirements other than or in transaction into individual legs or its proposed approach would advance addition to the CEA and the components in order to trade the swap the SEF statutory goal of promoting Commission’s regulations issued components via the required methods of trading on SEFs.38 The proposed rule thereunder.37 execution under § 37.9. provides relief from execution method The Commission believes that if Based on its experience with the requirements that are generally intended market participants are unable to utilize existing no-action relief, the to help promote trading on SEFs. Commission believes that the proposed However, the relevant package transactions must be executed through the required addition of § 37.9(d) and amendment of transactions are not suitable for trading methods of execution under § 37.9(a). § 37.9(a) will allow market participants via such required methods of execution, Currently, the swap components of the following to choose the most suitable execution as discussed above. Accordingly, the categories of package transactions receive no-action method for their package transactions, relief from the required methods of execution under Commission believes that in this case § 37.9 under NAL No. 17–55: (i) MAT/Non-MAT which will decrease execution risks, flexibility with respect to execution (Uncleared) package transactions; (ii) MAT/Non- improve efficiency, and decrease methods will better promote trading of Swap Instruments package transactions (subject to transaction costs because market such component swaps on SEFs, the exclusions previously discussed); and (iii) participants will no longer be forced to MAT/Non-Exclusive CFTC Swap package consistent with the statutory SEF goals. transactions. The proposed addition of § 37.9(d) is leg into transactions. Given the inherent consistent with the relief from the required methods complexity of the relevant package 3. Request for Comment of execution under NAL No. 17–55. Within this transactions, the Commission believes The Commission requests comment section, the term ‘‘relevant package transactions,’’ that this proposal ensures that market on all aspects of proposed § 37.9(d) and unless context requires otherwise, refers to these three categories of package transactions. participants are able to trade these the proposed amendment of § 37.9(a)(2). In addition to the relief from the required package transactions in the most The Commission also invites specific methods of execution in § 37.9, NAL No. 17–55 also effective, efficient, transparent, and comments on the following: provides relief from the trade execution for the economical manner. SEFs would be able (1) Is the proposed definition of swap components of MAT/Futures package to offer, and market participants would ‘‘package transaction’’ in proposed transactions and New Issuance Bond Package transactions. As discussed above, the Commission be able to utilize, methods of execution § 37.9(d)(1) appropriate? Please explain is still evaluating MAT/Futures package that best suit the characteristics of the why or why not. transactions. See supra note 17. relevant package transaction being (2) Is the proposed definition’s Further, as discussed in more detail below, the traded. The Commission believes this condition that the ‘‘execution of each Commission is proposing to exempt the swap would preserve the benefits and component transaction is contingent components of New Issuance Bond package transactions from the trade execution requirement. purpose of executing such package upon the execution of all other This is consistent with the relief currently provided transactions. component transactions’’ clear in its to New Issuance Bond package transactions under In addition to causing inefficient meaning? If not, please explain how the NAL No. 17–55. To the extent that counterparties execution and increasing risks and cost, Commission should clarify this may be facilitating package transactions that involve a ‘‘security,’’ as defined in section 2(a)(1) forcing the swap components of the provision. of the Securities Act of 1933 or section 3(a)(10) of relevant package transactions through (3) Similarly, is the proposed the Securities Exchange Act of 1934, or any required methods of execution may also definition’s condition that ‘‘[t]he component agreement, contract, or transaction over limit the commercial utility of such component transactions are priced or which the Commission does not have exclusive jurisdiction, the Commission does not opine on transactions or entirely frustrate the quoted together as one economic whether such activity complies with other purposes of entering in such package transaction’’ clear in its meaning? If not, applicable law and regulations. transactions in the first place. For please explain how the Commission 37 The Commission will continue to evaluate example, the Commission understands should clarify this provision. these categories of package transactions for new that in some of the relevant package (4) Is it clear what is meant within the developments in execution methods on SEFs and may in the future revise the categories of package transactions, (i) the swap component proposed definition’s statement that transactions in which the swap component is serves as the hedging instrument to execution of all component transactions eligible to be executed through flexible means of other instruments in the package is to be ‘‘simultaneous or near- execution. For example, the Commission notes that transaction, or (ii) the package simultaneous’’? If not, please explain Tradeweb Markets Inc. recently released an electronic trading method for package transactions transaction as a whole may be utilized how the Commission should clarify this involving swaps and bonds. Such transactions— as part of a market participant’s provision. provided they are not U.S. Dollar Spreadover portfolio management program. If the (5) Is the proposed addition of package transactions—would fall under the MAT/ swap component of such package § 37.9(d)(2) for MAT/Non-MAT Non-Swap Instruments category of package transactions. Therefore, the Commission asks in this transactions were impractical or unable (Uncleared) package transactions proposal whether the proposed package transaction to be executed due to the required categories are appropriate. methods of execution, market 38 See 7 U.S.C. 7b–3(e).

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appropriate? Please explain why or why facility; 39 (ii) a trading facility; 40 or (iii) package transactions covered by this not. a trading system or platform in which proposed amendment. The text of (6) Is the proposed addition of all market participants in the trading proposed § 37.3(a)(4) makes clear that § 37.9(d)(3) for MAT/Non-Swap package system or platform have the ability to § 37.3(a)(2) of the Commission’s transactions appropriate? Please explain enter multiple bids and offers, observe regulations would continue to apply to why or why not. or receive bids and offers entered by such swap components and SEFs would (7) Are the categories of package other market participants, and transact be required to offer Order Books for transactions that are excluded from on such bids and offers.’’ 41 these Required Transactions as outright § 37.9(d)(3) appropriate? Please explain Generally speaking, it may be transactions. why or why not. complex to apply the existing Order As noted above,42 executing Required (8) Are there additional package Book requirement in § 37.3(a)(2) to the Transaction swap components of certain transactions that should be excluded swap components of the package package transactions through the from § 37.9(d)(3)? transactions covered by this proposed required methods of execution is operationally complex, and in many (9) Is the proposed addition of amendment. In some situations, instances, impracticable. Given that the § 37.9(d)(4) for MAT/Non-Exclusive § 37.3(a)(2) may require that a SEF Commission has preliminarily CFTC Swap package transactions maintain separate Order Books for the determined that it is infeasible or appropriate? Please explain why or why same type of swap: One Order Book for inefficient to facilitate swap not. when the swap is executed as a single transaction (referred to as an ‘‘outright components of these package (10) Are there additional types or transaction’’), and a separate Order Book transactions through the required categories of package transactions not for when the swap is executed as part methods of execution, which includes covered in this proposal for which the of a package transaction. In fact, an Order Book under § 37.3(a), it Commission should allow the swap multiple Order Books could be required logically follows that requiring SEFs to component to be executed through the for the same type of swap if it were offer an Order Book for the swap flexible means of execution in included as part of multiple types of components of package transactions § 37.9(c)(2)? Please explain in detail package transactions. The Commission would be superfluous. why or why not. understands that, in part because of the Finally, the Commission believes that (11) Should the Commission allow availability of relief under the staff not requiring SEFs to offer an Order swap components to be executed via letters described above, SEFs have put Book for the swap components of the flexible methods of execution where a in place relatively few Order Books for relevant package transactions would package transaction contains more than swaps to be executed as part of the help reduce operating costs for SEFs, as four components or legs, regardless of package transactions covered by this they would no longer be required to the types of components? proposed amendment, and any such operate and maintain order book (12) In addition to U.S. Dollar Order Books in place are not actively systems that are not suitable for trading Spreadover package transactions, are used. the swap components of the relevant there additional package transactions package transactions. Instead of with sovereign debt components for 5. Proposed Addition of § 37.3(a)(4) employing resources to build (or which the Commission should exclude The Commission proposes to add attempt to build) and support an unused the swap component from flexible § 37.3(a)(4), which would allow SEFs or underutilized Order Book for the methods of execution? Please explain not to offer an Order Book for the swap swap components of certain package why or why not. components of the package transactions transactions, the proposal would instead (13) Should the Commission allow all covered by this proposed amendment: provide a SEF with the flexibility to swap components of a package (i) MAT/Non-MAT Uncleared package determine how to allocate its resources, transaction to be executed via flexible transactions; (ii) MAT/Non-Swap particularly as it relates to developing means of execution where a single swap Instrument package transactions; and methods of execution that are better component subject to the trade (iii) MAT/Non-Exclusive CFTC Swap suited to trading the relevant package execution requirement is above the package transactions. However, this transactions.43 applicable block size? Please explain proposal would not alter any 6. Request for Comment why or why not. requirement applicable to such swap (14) Should the Commission allow a components to the extent they are The Commission requests comment package transaction composed of a executed in transactions that are not on all aspects of proposed § 37.3(a)(4). Credit Default Swap (‘‘CDS’’) index The Commission also invites comments swap subject to the trade execution 39 CEA section 1a(16) defines ‘‘electronic trading specifically on the following: requirement and a CDS index swap that facility’’ as a trading facility that (i) operates by (15) Is the addition of § 37.3(a)(4) means of an electronic or telecommunications is several series off-the-run to be appropriate? network; and (ii) maintains an automated audit trail (16) Should the Commission still executed through flexible means of of bids, offers, and the matching of orders or the execution? Please explain why or why execution of transactions on the facility. 7 U.S.C. require SEFs to offer an Order Book for not. 1a(16). MAT/Non-MAT (Uncleared) package 40 CEA section 1a(51) defines ‘‘trading facility’’ as transactions as defined in § 37.9(d)(2)? 4. Existing § 37.3(a) a person or group of persons that constitutes, (17) Should the Commission still maintains, or provides a physical or electronic require SEFs to offer an Order Book for An Order Book is one of the two facility or system in which multiple participants required methods of execution under have the ability to execute or trade agreements, contracts, or transactions by accepting bids or offers 42 See section II.A.1—Background and section § 37.9(a). The Commission designated made by other participants that are open to multiple II.A.2—Proposed Addition of § 37.9(d) and an Order Book as the ‘‘minimum trading participants in the facility or system; or through the Amendment of § 37.9(a)(2). functionality’’ each SEF must maintain interaction of multiple bids or multiple offers 43 The Commission notes that nothing in this and offer for each swap that it lists for within a system with a pre-determined non- proposal would preclude a SEF from offering an discretionary automated trade matching and Order Book if it is able to develop an Order Book trading. An Order Book is defined under execution algorithm. 7 U.S.C. 1a(51)(A). solution that is effective in trading the swap § 37.3(a)(3) as (i) an electronic trading 41 17 CFR 37.3(a)(3). component of certain package transactions.

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the swap components of MAT/Non- individual swap component that is on a SEF, even if a SEF were able to Swap package transactions as defined in subject to the trade execution offer flexible means of execution, as the § 37.9(d)(3)? requirement and at least one individual Commission is proposing for swap (18) Should the Commission still component that is a bond 47 issued and components of other package require SEFs to offer an Order Book for sold in the primary market.48 An transactions within this proposal.52 MAT/Non-Exclusive CFTC Swap underwriter (on behalf of an issuer) Therefore, consistent with current no- package transactions as defined in arranges the issuance of a bond action relief provided by Commission § 37.9(d)(4)? packaged with a fixed-to-floating staff, the Commission proposes to (19) Are there additional types of interest rate swap (‘‘IRS’’) that features exempt swap components of a New package transactions that the the issuer as a counterparty. The terms Issuance Bond package transaction from Commission should consider allowing of the IRS, which include tenor and the trade execution requirement. The SEFs to not offer Order Books for? payment terms, typically match the proposed exemption would establish (20) Should the Commission allow terms of the bond issuance. By issuing that a ‘‘package transaction’’ consists of SEFs not to offer an Order Book for a bond with a fixed-to-floating IRS, two or more component transactions swaps that are not subject to the trade issuers are able to effectively turn fixed- executed between two or more execution requirement but are rate liabilities into variable-rate counterparties, where (i) at least one components of any package transaction? liabilities, or vice versa.49 To match the component transaction is subject to the Would this lead to additional types of terms between these two components trade execution requirement in section package transactions being listed and and facilitate the bond issuance in an 2(h)(8) of the Act; (ii) execution of each traded on SEFs? efficient and cost-effective manner, the component transaction is contingent 7. Exemption of New Issuance Bond IRS component is customized and upon the execution of all other Package Transactions From the Trade negotiated in a manner that closely component transactions; and (iii) the Execution Requirement corresponds to the bond issuance component transactions are priced or process. quoted together as one economic The Commission proposes to establish Given the process under which the transaction with simultaneous or near- an exemption to the trade execution 50 swap is negotiated, this type of simultaneous execution of all requirement for swap transactions that package transaction has not been components.53 The Commission are components of a ‘‘New Issuance conducive to execution on a SEF trading recognizes the inherent challenges in Bond’’ package transaction.44 The system or platform. The Commission trading or executing these swap Commission believes that exempting notes that the no-action relief that has components on a SEF or DCM and, these types of transactions from the been provided by Commission staff for therefore, recognizes the benefits of trade execution requirement is these swaps components reflects the continuing to allow market participants authorized by, and would be consistent ongoing lack of an available execution to maintain established market practices with the objectives of, CEA section method on an appropriate trading with respect to this type of package 4(c).45 This proposed approach is 51 venue. Based on the integral role of transaction. consistent with the time-limited no- the bond issuance in facilitating the action relief provided by Commission component swap execution, the 8. Discussion of CEA Section 4(c) staff for this category of package Commission believes that the IRS Enumerated Factors 46 transactions. component is not suitable for execution Section 4(c) of the CEA grants the New Issuance Bond package Commission the authority to exempt transactions include at least one 47 The Commission notes that this proposed any transaction or class of transactions, exemption would not apply to swap components of including swaps, from certain 44 The Commission notes that both this proposal package transactions that include sovereign debt, and the 2018 SEF Proposal propose to exempt New such as U.S. Treasury bonds, notes, and bills. provisions of the CEA, including the Issuance Bond package transactions from the trade 48 The Commission understands that a bond Commission’s clearing requirement, in execution requirement under section 2(h)(8) of the issued and sold in the primary market that may order to ‘‘promote responsible economic CEA. See 2018 SEF Proposal at 62039. However, constitute part of a package transaction is a ‘‘security,’’ as defined in section 2(a)(1) of the or financial innovation and fair while these proposals and the supporting rationales 54 are nearly identical, these two proposals are Securities Act of 1933 or section 3(a)(10) of the competition.’’ Section 4(c)(2) of the dissimilar in practical effect and scope. Under the Securities Exchange Act of 1934. To the extent that CEA further provides that the 2018 SEF Proposal, the Commission proposed to counterparties may be facilitating package Commission may not grant exemptive apply the trade execution requirement to all swaps transactions that involve a security, or any relief unless it determines that: (i) The that are subject to the clearing requirement in component agreement, contract, or transaction over section 2(h)(1) of the CEA and are listed on a SEF which the Commission does not have exclusive exemption is appropriate for the or a DCM. The 2018 SEF Proposal thus would have jurisdiction, the Commission does not opine on transaction and consistent with the significantly expanded the scope of swaps that are whether such activity complies with other public interest; (ii) the exemption is subject to the trade execution requirement, applicable law and regulations. consistent with the purposes of the including materially expanding the requirement to 49 For example, a bond issuer seeks to pay numerous forward starting interest rate swaps variable rates on its bonds, but prospective CEA; (iii) the transaction will be entered which are used as the swap components for New investors may seek a fixed rate of return. By into solely between ‘‘appropriate Issuance Bond package transactions. Contrastingly, arranging a New Issuance Bond package persons;’’ and (iv) the exemption will this proposal would not alter the scope of swaps transaction, the bond issuer can issue a fixed-rate not have a material adverse effect on the that are currently subject to the trade execution bond and simultaneously enter into an offsetting requirement, the majority of which are not swaps IRS. The IRS enables the issuer to receive a fixed ability of the Commission or any that are used as a component in New Issuance Bond rate that matches the fixed rate on its bond to be contract market to discharge its package transactions. This means that the proposal issued, while paying the variable rate that it regulatory or self-regulatory to exempt New Issuance Bond package transaction originally sought. Ultimately, this arrangement may responsibilities under the CEA. In under the 2018 SEF Proposal would have a allow the bond issuer to issue the fixed-rate bond significantly broader impact on the market than the at a lower cost. enacting section 4(c), Congress noted proposed exemption within this proposal. 50 The Commission notes that these types of 45 7 U.S.C. 6(c). package transactions differ from other package 52 See Section II.A.2. 46 See supra note 36 (describing the no-action transactions that involve the purchase or sale of a 53 The Commission notes that this definition is relief from the trade execution requirement security in the secondary market, given that they consistent with the proposed definition for package provided by Commission staff for categories of involve the issuance of a new security. transaction in § 37.9(d)(1). package transactions). 51 See NAL No. 17–55 at 2–3. 54 7 U.S.C 6(c).

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that the purpose of the provision is to scope of section 4(c)(3)(K) of the CEA.56 that all component transactions are to be give the Commission a means of The Commission noted that the executed on a ‘‘simultaneous or near- providing certainty and stability to elements of the ECP definition (as set simultaneous’’ basis? If not, please existing and emerging markets so that forth in section 1a(18)(A) of the CEA explain how the Commission should financial innovation and market and Commission regulation 1.3) clarify this provision. development can proceed in an effective generally are more restrictive than the (26) Are there additional swap 55 and competitive manner. comparable elements of the enumerated components of different types or 57 The Commission believes that ‘‘appropriate person’’ definition. categories of package transactions that exempting swap components of New Given that only ECPs are permitted to should be exempt from the trade Issuance Bond package transactions enter into swaps off of a DCM, there is execution requirement? If so, then from the trade execution requirement no risk that a non-ECP or a person who please describe in detail why such swap would be consistent with the objectives does not satisfy the requirements for an components of these types or categories of CEA section 4(c). ‘‘appropriate person’’ could enter into a of package transactions should be The Commission recognizes the New Issuance Bond package transaction exempt from the trade execution using this proposed exemption. importance of new bond issuances in requirement. helping market participants to raise Therefore, the Commission believes that capital and fund origination loans for the class of persons eligible to rely on B. Error Trades: Execution of Trades To businesses and homeowners. The the exemption for New Bond Issuance Correct Operational and Clerical Errors Commission recognizes that allowing package transactions will be limited to on Swap Execution Facilities ‘‘appropriate persons’’ within the scope the swap components of New Issuance 1. Background Bond package transactions to be of section 4(c)(3) of the CEA. executed away from a SEF or DCM— 9. Request for Comment The Commission notes that SEFs have consistent with current market The Commission requests comment adopted policies to identify and resolve practice—is integral to facilitating the on all aspects of the proposed error trades as part of the rules and bond issuance. Further, the Commission exemption of swap components of New procedures that govern their respective recognizes that the proposed exemption Issuance Bond package transactions trading and trade processing operations. is limited in nature, i.e., the swap from the trade execution requirement Errors in SEF transactions, as observed transaction remains subject to all other under proposed § 36.1(a), including by the Commission, may be operational applicable Commission rules and whether the proposed exemptive relief or clerical in nature and attributable to regulations. is consistent with the public interest either the SEF, the counterparties to the Therefore, the Commission and the other requirements of CEA transaction, the counterparties’ preliminarily believes that the proposed section 4(c). As noted above, the 2018 intermediaries, or the clearing members exemption from the trade execution SEF Proposal contained a nearly involved. Clerical errors, in particular, requirement for swap components of identical provision. Comments made on may occur in the process of entering New Issuance Bond package the 2018 SEF Proposal that are relevant trade details into a SEF’s trading system transactions is appropriate and would to this rulemaking must be resubmitted and may relate to the swap’s terms and be consistent with the public interest to be considered. The Commission conditions, such as price, size, or and purposes of the CEA. specifically requests comment on the direction, as well as counterparty or The Commission further believes that following questions: clearing member identities. The the proposed regulation would not have (21) Pursuant to its authority in CEA adoption of error trade policies by SEFs a material adverse effect on the ability section 4(c), should the Commission reflects the importance of addressing of the Commission or any SEF or DCM exempt the swap components of a New errors to ensure that counterparties are to discharge its regulatory or self- Issuance Bond package transaction from able to execute swap transactions as regulatory duties under the CEA. The the trade execution requirement? intended on a SEF, which promotes a Commission notes that the exemption is (22) Is the proposed definition of fair and orderly trading market for SEF limited in scope and the swap ‘‘package transaction’’ in proposed market participants.58 components subject to this exemption § 36.1(a)(1) appropriate? Under the current SEF regulatory are still required to be reported to a (23) Is it clear what is meant within framework, however, resolving error swap data repository pursuant to parts the proposed definition when it states trades for swaps subject to the 43 and 45 of the Commission’s that the ‘‘execution of each component Commission’s required methods of regulations. Further, the Commission transaction is contingent upon the execution and straight-through retains its special call, anti-fraud, and execution of all other component processing requirements has occurred anti-evasion authorities, which will transactions’’? If not, please explain pursuant to no-action relief provided by enable it to adequately discharge its how the Commission should clarify this Commission staff on an ongoing basis. regulatory responsibilities under the provision. Since 2013, the Division of Clearing and (24) Is it clear what is meant within CEA. Risk (‘‘DCR’’) and DMO (together, the the proposed definition when it states The Commission notes that under the ‘‘Divisions’’) have issued time-limited that ‘‘[t]he component transactions are proposed exemption, swap transactions no-action relief to allow counterparties priced or quoted together as one would still be entered into solely to correct swap ‘‘error trades’’— economic transaction’’? If not, please between eligible contract participants transactions containing an ‘‘operational (‘‘ECPs’’), whom the Commission explain how the Commission should clarify this provision. believes, for purposes of this proposal, 58 The Commission notes that the guidance to to be appropriate persons. Previously, (25) Is it clear what is meant within the proposed definition when it states Core Principle 4 in Appendix B cites ‘‘clear error- the Commission determined that ECPs trade and order-cancellation’’ policies as a type of are appropriate persons within the trading risk control that could be part of an 56 Clearing Exemption for Swaps Between Certain acceptable program for preventing market Affiliated Entities, 78 FR 21750, 21754 (Apr. 11, disruptions. 17 CFR part 37 app. B (guidance to 55 House Conf. Report No. 102–978, 1992 2013). Core Principle 4—paragraph (a)(5)—‘‘Risk controls U.S.C.C.A.N. 3179, 3213. 57 Id. for trading’’).

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or clerical error’’ 59—involving swaps that SEFs should have rules stating that from the notice.65 For offsetting and designated as Required Transactions, trades that are rejected from clearing are correcting transactions to error trades which are subject both to the clearing ‘‘void ab initio.’’ 63 Accordingly, that a DCO has accepted for clearing, the requirement and the trade execution executed swaps that a DCO rejects from Divisions specified that such execution requirement.60 This relief, as described clearing would be deemed void, and submission to clearing of those further below, has facilitated corrections including swaps that are rejected due to transactions must occur no later than where the error trade has either been (i) an operational or clerical error by the three days after the error trade was rejected by a DCO from clearing due to SEF or the counterparties. Where the executed.66 the error; or (ii) accepted for clearing, counterparties still seek to execute the 2. Proposed § 37.9(e) and therefore requires correction transaction as intended, void ab initio through an offsetting trade. Pursuant to compels the counterparties to execute a The Commission proposes to amend the relief, SEFs may provide new transaction between one another the SEF regulatory framework by adding counterparties with a bilateral, with the corrected terms. Where the subsection (e) to § 37.9 to establish a ‘‘corrective’’ execution process for counterparties seek to execute a flexible SEF error trade policy standard Required Transactions that does not correcting swap that is a Required that would, among other things, satisfy the required methods of Transaction, the no-action relief allows incorporate the intent of the existing no- execution under § 37.9(a)(2) for swaps SEFs to accept bilaterally-arranged action relief in NAL No. 17–27 for subject to the trade execution swaps from the counterparties for resolving errors in Required requirement. execution and submission for clearing, Transactions. Proposed § 37.9(e)(2)(i) For error trades rejected from clearing rather than requiring them to execute would specify that a SEF must maintain by a DCO, the no-action relief has the correcting swap through an Order rules and procedures that are fair, provided operational flexibility from the Book or RFQ System. transparent, consistent, and allow for required methods of execution that timely resolution of an ‘‘error trade,’’ as For error trades accepted for clearing otherwise apply in conjunction with the defined under proposed by a DCO in spite of an operational or Commission’s ‘‘straight-through § 37.9(e)(1)(ii).67 This proposed clerical error in the swap, the no-action processing’’ requirements for swaps standard would apply to any error trade relief has provided similar operational submitted to a DCO for clearing.61 To that occurs on a SEF, regardless of flexibility from the prescribed execution promote the ‘‘near[-]instantaneous whether the swap is submitted for methods under § 37.9(a)(2).64 acceptance or rejection of each trade [for clearing or not. The Commission clearing],’’ 62 the Divisions issued a Accordingly, the relief allows SEFs to believes that the proposed standard is a 2013 staff guidance expressing the view accept a bilaterally arranged swap from flexible approach that also clarifies the the counterparties for execution and key principles that any SEF’s error trade 59 The Divisions previously defined ‘‘operational submission for clearing that (i) policy should address. or clerical error’’ as any type of error other than a economically offsets the initial error Further, under proposed § 37.9(e)(2)(i) rejection from clearing due to credit reasons. See trade that was accepted from clearing; SEFs must have error trade rules and NAL No. 17–27 at 1 n.2. and (ii) corrects the initial error trade 60 See NAL No. 13–66. In April 2015, staff issued procedures that require market additional no-action relief, which not only with corrected terms as originally participants to provide prompt notice to reinstated the previous time-limited no-action relief intended by the counterparties. the SEF of an error trade and, as from NAL No. 13–66 for SEFs from the The Divisions also attached certain requirements of § 37.9(a)(2) and § 37.203(a) for error 65 Id. at 6. trades rejected from clearing, but also provided conditions to this no-action relief that, 66 relief for error trades accepted for clearing in NAL among other things, specified timing Id. In addition, for error trades that are No. 15–24. Commission staff subsequently extended requirements for submitting these accepted for clearing, DMO issued NAL No. 20–01, which supplements NAL No. 17–27 to allow market the relief provided in NAL No. 15–24 in June 2016 transactions to a SEF for execution and with NAL No. 16–58. This relief was most recently participants, sua sponte, to correct error trades that extended in May 2017 by NAL No. 17–27 and to a DCO for clearing. For transactions have been accepted for clearing with an ex post would expire on the effective date of any applicable correcting error trades that a DCO has facto review by the SEF. For error trades accepted changes in the Commission’s regulations. rejected from clearing, the Divisions for clearing and corrected under the relief in NAL Commission staff in DMO recently issued NAL No. No. 20–01, DMO specified that such error trades 20–01, which supplements NAL No. 17–27 to allow specified that the counterparties must would need to be corrected no later than 24 hours market participants, sua sponte, to correct error execute the transaction on a SEF, and after the error trade was executed. See NAL No. 20– trades that have been accepted for clearing. In the SEF must submit the transaction for 01 at 4. 67 instances where market participants correct an error clearing, as quickly as technologically As proposed, an ‘‘error trade’’ would be defined trade sua sponte, NAL No. 20–01 requires an ex as any trade executed on or subject to the rules of post facto review by the SEF of the error trade, practicable after receipt of notice of the a swap execution facility that contains an offsetting trade, and correcting trade on a T+1 basis. rejection by the DCO to the clearing operational or clerical error. With respect to Such review must consider whether a transaction members, but no later than one hour ‘‘package transactions,’’ as defined under proposed cancellation or price adjustment will adversely § 37.9(d)(1), the Commission deems the submission impact market integrity, facilitate market of the component transactions in a sequence that manipulation or other illegitimate activity, or 63 2013 Staff STP Guidance at 5. The 2013 Staff causes a rejection from clearing of an individual otherwise violate the CEA, Commission regulations, STP Guidance also addresses other elements of component to constitute an operational error that or the SEF’s rules. ‘‘straight-through processing’’ for swap transactions, could be resolved through a correcting trade under 61 The Commission’s ‘‘straight-through including void ab initio. See 2018 SEF Proposal at proposed § 37.9(e)(2)(i)(A). Market participants had processing’’ requirements address the process of 61999–62002, 62019–62024. The Commission notes previously informed the Commission that an routing transactions from execution through that it proposed to address certain provisions from individual component transaction may be rejected clearing. See Customer Clearing Documentation, the 2013 Staff STP Guidance in the 2018 SEF from clearing if prematurely submitted because the Timing of Acceptance for Clearing, and Clearing Proposal, including a clarification that mandatory risk of that component, in isolation, could cause a Member Risk Management, 77 FR 21278, 21283 application of void ab initio would be limited to trader to exceed its credit limit. Under a different (Apr. 9, 2012) (‘‘Timing of Acceptance for Clearing swap transactions that are rejected from clearing for submission sequence of component transactions to Final Rule’’). The Commission has previously stated credit-related reasons; for rejections arising from the DCO, however, the net risk of all of those that the ‘‘acceptance or rejection for clearing in clerical or operational errors, the proposed transactions may not have exceeded the credit limit, close to real time is crucial for both effective risk clarifications would allow a SEF to adopt other thereby avoiding the rejection. The Commission management and for the efficient operation of corrective approaches that may not involve emphasizes, however, the use of a corrective trade trading venues.’’ Id. at 21285. execution of a offsetting trade or a correcting trade. may only apply to the rejected component and 62 Staff Guidance on Swaps Straight-Through Id. at 62000–62001. As noted above, this proposal otherwise would not apply to the other legs of the Processing at 2 (Sept. 26, 2013)(‘‘2013 Staff STP is independent of the 2018 SEF Proposal. package transaction that have been accepted for Guidance’’). 64 See NAL No. 17–27 at 5. clearing.

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applicable, the corresponding correcting Consistent with the existing no-action manner that is best suited to its trading trade and offsetting trade.68 This notice relief, this approach would continue to and trade processing operations.74 need not be separate from the error trade provide flexibility in the execution The proposed rules, however, would correction process. methods that a SEF may offer to also adopt some limitations that are The Commission believes that such a counterparties to execute offsetting and similar to the existing no-action relief, requirement is important to facilitate correcting trades that involve swaps that including specified timeframes for SEFs’ fulfillment of their self-regulatory are Required Transactions.71 Based on executing and submitting these trades obligations. In particular, the its experience with the existing no- for clearing. For correcting trades Commission believes that providing a action relief, the Commission believes associated with an error trade that has SEF prompt notice that an error trade that this flexibility would continue to been rejected from clearing, proposed has occurred on its trading system(s) or promote SEF operational efficiency by § 37.9(e)(2)(i)(A) would require the SEF platform(s) will further enable it to allowing SEFs to offer error trade to submit the correcting trade for facilitate direct supervision of it markets protocols that are tailored to their clearing to the registered DCO or exempt in order to determine whether a rule markets and to allow identification and DCO as soon as technologically violation has occurred as required under resolution of operational and clerical practicable, but no later than one hour § 37.203(b) as well as enhance its ability errors in a timely manner. Without such after notice of the rejection to the to carry out real-time market monitoring flexibility, market participants with an relevant clearing members. For an of all trading activity on its system(s) or error in Required Transactions would offsetting trade and a correcting trade platform(s) to identify disorderly trading otherwise be prohibited from associated with an error trade that and any market or system anomalies determining how to resolve the error already has been accepted for clearing, pursuant to § 37.203(e).69 between themselves by entering into an proposed § 37.9(e)(2)(i)(B) would offsetting trade or a new trade with the Proposed § 37.9(e) would also require require the SEF to submit both types of correct terms due to the execution a SEF to adopt rules to resolve error trades to the registered DCO or exempt method requirements under § 37.9(a)(2), trades that involve swaps submitted for DCO as soon as technologically which require that all Required clearing. For an error trade rejected from practicable, but no later than three days Transactions be traded via either an clearing and therefore deemed void ab after the registered DCO or exempt DCO Order Book or RFQ System. accepted the error trade for clearing.75 initio, proposed § 37.9(e)(2)(i)(A) would The Commission also believes that the require a SEF to permit the proposed approach would further the 74 Under the proposal’s principles-based counterparties to subsequently execute a SEF statutory goals of promoting trading approach, the Commission notes that a SEF would correcting trade, as defined in proposed on SEFs and pre-trade price not be prohibited from incorporating the conditions § 37.9(e)(1)(i), through any method of transparency in the swaps market.72 The contained within NAL No. 17–27, or implementing execution offered by the SEF. For an rules that allow market participants, sua sponte, to proposed rules provide flexibility to correct error trades that have been accepted for error trade that has been accepted for depart from required execution methods clearing with an ex post facto review by the SEF clearing, proposed § 37.9(e)(2)(i)(B) that are otherwise intended to advance of the error trade, offsetting trade, and correcting would require a SEF to permit the those statutory goals; allowing trade on a T+1 basis as is contemplated by NAL No. counterparties to subsequently execute 20–01. Further, this proposal would not preclude counterparties to correctly and SEFs from deploying error trade rules and both an offsetting trade, as defined in efficiently execute swaps with the procedures which consider whether a transaction proposed § 37.9(e)(1)(iii), and a intended terms and conditions, cancellation or price adjustment will adversely correcting trade through any method of however, enhances market integrity on impact market integrity, facilitate market execution offered by the SEF.70 manipulation or other illegitimate activity, or SEFs, which promotes SEF otherwise violate the CEA, Commission regulations, participation. Additionally, the or the SEF’s rules. However, regardless of the error 68 To the extent a SEF implements error trade proposed rules would also help to trade rules and procedures that a SEF may adopt, rules and procedures that allow market participants ensure that trade data, which market the Commission notes that pursuant to this to correct error trades sua sponte with an ex post proposal such rules must be fair, transparent, and facto review by the SEF, that the SEF must require participants rely upon to inform their consistent. For example, in a scenario where a SEF that market participants notify it of the subsequent swaps trading decisions, accurately is unsure as to how to address an error, the SEF may correcting and offsetting trades. Conversely, a SEF reflects prevailing market pricing at any have rules which make it clear that the SEF will that adopts error trades rules and procedures in given time. seek guidance and consent from both counterparties which the SEF is responsible for correcting the error The Commission notes that the to the error trade before correcting the error trade. trade, that SEF would not be required to have The Commission believes that such rule would be market participants notify it of the subsequent existing no-action relief is currently fair as it considers the positions of both correcting and offsetting trades. Regardless of the subject to several conditions applicable counterparties and is transparent as it makes clear type of error trade rules and procedures a SEF to SEFs and counterparties—for what the SEF will do in a specific scenario. adopts, it is required to adopt rules and procedures example, SEFs must affirmatively 75 The Commission notes that the supplemental which require its market participants to provide conditions contained in NAL No. 20–01 require prompt notice to it of an error trade that has determine, or determine after an ex post error trades that have been accepted to clearing to occurred on its trading system(s) or platform(s). facto review, that an error trade has be corrected as soon as technologically practicable 69 See 17 CFR 37.203(b); 17 CFR 37.203(e). occurred.73 Except as incorporated in but no later than 24 hours after the error trade was 70 NAL No. 17–27 also provided relief from the proposed rules herein, the executed. See NAL No. 20–01 at 4. However, as § 37.203(a), which prohibits pre-arranged trading, noted above, the Commission intends for this for offsetting trades and correcting trades. The Commission intends for the proposed proposal to provide a SEF with the flexibility to Commission, however, does not view a regulatory approach to otherwise provide SEFs address such aspects of its error trade policy in a amendment corresponding to that relief as with the flexibility to address such manner that is best suited to its trading and trade necessary. The existing prohibition already aspects of its error trade policy in a processing operations. As such, SEFs may continue provides an exception to that prohibition by to have error trade rules and procedures that are allowing a SEF to adopt trading practices that are contemplated in both NAL No. 17–27 and NAL No. certified or approved by the Commission pursuant 71 The Commission notes that swaps that are 20–01 for error trades that have been accepted for to part 40 of the Commission’s regulations. See 17 Permitted Transactions, including those that are clearing. Therefore, the Commission is proposing CFR 37.203(a). Accordingly, the Commission submitted to a DCO for clearing, may already be that an error trade that has already been accepted anticipates that a SEF would implement proposed executed through any method of execution offered for clearing would be required to be corrected as § 37.9(e) by self-certifying or adopting rules subject by a SEF pursuant to § 37.9(c)(2). soon as technologically practicable, but no later to Commission review under part 40 that specify 72 See 7 U.S.C. 7b–3(e). than three days after the registered DCO or exempt the manner in which counterparties may execute 73 See NAL No. 17–27 at 5–7 and NAL No. 20– DCO accepted the error trade for clearing, as this offsetting and correcting trades. 01 at 4–5. Continued

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addition to these proposed timeframes, correcting trade to resolve an error trade the CEA, Commission regulations, or the proposed § 37.9(e)(2)(ii) would prohibit rejected from clearing for non-credit SEF’s rules? counterparties from executing a second reasons? If not, please provide an (38) Does § 37.9(e) sufficiently address correcting trade to fix an error trade if alternative timeframe and explain why potential situations in which a the initial correcting trade is rejected such an alternative would be more component of a package transaction is from clearing. appropriate. rejected from clearing by the relevant The Commission believes that these (29) Is the proposed timeframe registered DCO or exempt DCO because proposed limitations are consistent with adequate for submitting an offsetting of the sequencing of the components of the goal of promoting straight-through trade and correcting trade to resolve an the package transaction submitted for processing. The proposed timing error trade accepted for clearing? If not, clearing at the registered DCO or exempt requirements, in particular, are intended please provide an alternative timeframe DCO? With respect to proposed to provide a SEF and the counterparties and explain why such an alternative § 37.9(e), are there any other issues that to an error trade with an appropriate would be more appropriate. should be addressed regarding package amount of time to identify and resolve (30) Under proposed § 37.9(e)(2)(i), transactions? error trades, while also minimizing SEFs must have rules which require (39) Should the same error trade delays to achieving prompt and efficient market participants to provide prompt policy also be available to correct any clearing of transactions. Similarly, notice to the SEF that an error trade has errors contained in a correcting trade or limiting the number of instances in occurred. Is it clear what is meant by an offsetting trade, or should the which counterparties may attempt to ‘‘prompt notice’’ in § 37.9(e)(2)(i)? If not, number of corrections be limited? If an correct an error trade would also help to please explain how the Commission initial correcting trade or offsetting trade facilitate prompt and efficient clearing should clarify this provision. that is executed to correct an error trade by incentivizing the counterparties to (31) Should the Commission require contains an operational or clerical error, accurately execute their correcting trade that notification to a SEF of an error should the counterparties be allowed to as quickly as possible. The Commission, trade occur within a specified submit another correcting trade or however, seeks additional public timeframe? If so, what is the appropriate offsetting trade? comment regarding this proposed time frame for that notification to occur? (40) Should the Commission require limitation, as well as the (32) If a SEF adopts error trade rules SEFs to notify its market when it appropriateness of the proposed and procedures that allow market receives notice from a market timeframes. participants to sua sponte correct an participant that an error trade has error trade with an ex post facto review occurred? 3. Request for Comment by the SEF, should the Commission (41) Should the Commission prescribe The Commission requests comment allow the SEF to have rules permitting different error trade rules and on all aspects of proposed § 37.9(e). As market participants to withhold notice procedures depending on the status (i.e., noted above, the 2018 SEF Proposal also of the error trade until the market Required Transactions or Permitted discussed this topic. Comments made participant notifies the SEF of the Transactions) of the original swap on the 2018 SEF Proposal that are correcting trade and, as applicable, the transaction? Please explain why or why relevant to this rulemaking must be offsetting trade? not. resubmitted to be considered. The (33) Should the Commission require (42) Are there any conditions in NAL Commission also invites comments SEFs to affirmatively determine, or No. 17–27 or supplemental NAL No. specifically on the following: determine after an ex post facto review, 20–01 not contained within this (27) The Commission notes that that an error trade has occurred? Why or proposal that the Commission should § 37.203(e) already specifies that a SEF why not? require SEFs to adopt in their error trade may resolve errors by adjusting trade (34) If a SEF should affirmatively rules and procedures? If so, please prices or canceling trades to mitigate determine that an error trade had explain in detail why such conditions ‘‘market disrupting events;’’ such action occurred, what is the appropriate time are necessary and appropriate to be by a SEF must be ‘‘transparent to the frame for that declaration to occur? required in SEF error trade rules and market and subject to standards that are (35) If a SEF should determine that an procedures. clear, fair, and publicly available.’’ error trade has occurred after an ex post C. Real-Time Public Reporting: Block Should the Commission adopt a single facto review, what is the appropriate Trade Definition rule for all error trades under proposed time frame for that review and § 37.9(e) that is similar to this standard, determination to occur? 1. Existing § 43.2 or is the proposed standard, i.e., ‘‘fair, (36) If a SEF should affirmatively Section 43.2 defines a swap ‘‘block transparent, consistent, [and] allow for determine that an error trade had trade’’ as a publicly reportable swap timely resolution’’ more appropriate? If occurred, should the SEF’s review transaction that (i) involves a swap that the Commission should maintain consider whether a transaction is listed on a SEF or DCM; (ii) occurs separate standards, please explain why. cancellation or price adjustment will away from the SEF’s or DCM’s trading (28) Is the proposed timeframe adversely impact market integrity, system or platform and is executed adequate for the submission of a facilitate market manipulation or other pursuant to the SEF’s or DCM’s rules illegitimate activity, or otherwise violate and procedures; (iii) has a notional or is the longest timeframe for correcting such error the CEA, Commission regulations, or the principal amount at or above the trades as contemplated in both NAL No. 17–27 and SEF’s rules? appropriate minimum block trade size NAL No. 20–01. Nonetheless, the Commission is (37) If a SEF should determine that an applicable to such swap; and (iv) is seeking comment on whether three days is an error trade has occurred after an ex post appropriate timeframe for error trades that have reported subject to the rules or been accepted for clearing to be corrected. Further, facto review, should the SEF’s review procedures of the SEF or DCM and the despite the proposed outer limit of three days for consider whether a transaction rules set forth under part 43, including correcting error trades that have been accepted for cancellation or price adjustment will the appropriate time delay requirements clearing, the Commission notes that SEFs and adversely impact market integrity, 76 market participants are expected to correct such set forth under § 43.5. In specifying error trades as soon as technologically practicable facilitate market manipulation or other as is proposed under § 37.9(e)(2)(i)(B). illegitimate activity, or otherwise violate 76 17 CFR 43.2.

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these elements, the Commission noted that, in many cases, clearing believes that permitting execution of considered the treatment of block trades FCMs are unable to conduct pre- block trades on a SEF’s non-Order Book in various swap and non-swap execution credit screening for such trading systems or platforms furthers the markets.77 In particular, the block trades because they are unaware statutory SEF goal of promoting the Commission looked to the futures that a block trade has occurred away trading of swaps on SEFs.89 Moreover, markets, where futures block trades are from a SEF until after it has been for swap block trades that are ITBC and permissible, privately-negotiated executed and reported to the SEF.83 executed on a SEF’s non-Order Book transactions that equal or exceed a Accordingly, SEFs were unable to trading system or platform, the DCM’s specified minimum quantity of facilitate pre-execution credit checks for Commission believes that the proposed futures or options contracts and is block trades. revised definition would (i) allow FCMs executed away from the DCM’s DMO acknowledged this operational to conduct pre-execution credit centralized market but pursuant to its challenge and accordingly has granted screenings in accordance with § 1.73; rules.78 Accordingly, the Commission’s ongoing no-action relief from the and (ii) allow SEFs to facilitate those regulatory definition of a ‘‘block trade’’ requirement that swap block trades screenings in accordance with the for swaps closely tracks this futures ‘‘occur away’’ from a SEF.84 Based on Commission’s proposed requirement market concept of a block trade. Commission staff no-action relief under § 37.702(b).90 Similar to futures block trades, the provided in NAL No. 17–60, a SEF may Further, the Commission notes that Commission requires that swap block allow market participants to execute this revised block trade definition is trades ‘‘occur away’’ from a SEF’s or a swap block trades that are ITBC 85 on a consistent with the provisions of the DCM’s trading system or platform, but SEF’s non-Order Book trading system or Dodd-Frank Act. CEA section 2(a)(13), pursuant to the SEF’s or a DCM’s rules platform.86 As a result, FCMs and SEFs as amended by the Dodd-Frank Act, and procedures.79 The Commission have been able to comply with their directs the Commission to prescribe clarified the ‘‘block trade’’ definition by respective pre-execution credit criteria for determining what constitutes stating that ‘‘[a]ny swap that is executed screening obligations. a block trade and to establish on a SEF or a DCM’s trading system or The Commission proposes to revise appropriate post-trade reporting time platform, regardless of whether it is for the ‘‘block trade’’ definition under delays. The provision, however, does a size at or above the appropriate § 43.2 in order to allow market not set forth any pre-trade requirements, minimum block size for such swap, is participants to utilize a SEF’s non-Order such as a requirement that the not a block trade under this definition. Book trading system or platform while transaction be executed away from a . . .’’ 80 Accordingly, to receive the still allowing swap block trades to SEF. In addition, the Commission fifteen-minute public reporting delay ‘‘occur away’’ from a SEF.87 The believes that allowing participants to that block trades are entitled to under proposed revision to the ‘‘block trade’’ use a SEF’s non-Order Book § 43.5(d), the swap transaction not only definition not only allows swap block functionalities to execute swap block must have a notional amount at or above trades that are ITBC to be executed on trades is consistent with the the appropriate minimum block size, a SEF’s non-Order Book trading system Commission’s regulatory approach to but must also ‘‘occur away’’ from the or platform—as is currently provided for mitigate risks of information leakage SEF’s or the DCM’s trading system or in NAL No. 17–60—but the proposed (i.e., a ‘‘winner’s curse’’) as market platform.81 definition would also permit swap block participants can use the functionality of 2. Proposed Amendment to § 43.2 trades that are not ITBC to be executed the SEF to execute a block trade in a on SEF.88 The Commission believes that manner that will not disclose the order During the part 37 implementation having a single set of block trade rules to the entire market.91 SEFs currently process, SEFs and market participants for both ITBC and non-ITBC swap block provide various modes of execution to informed the Commission that for swap trades will help to reduce operational enable market participants to execute a transactions that are intended to be complexity for both SEFs and market block trade on the SEF without cleared, requiring that such swaps participants. Further, the Commission providing disclosure of the block trade ‘‘occur away’’ from a SEF’s trading to the market or to multiple market system or platform creates an issue with of such purported execution is not in violation of participants.92 carrying out pre-execution credit the pre-execution credit check requirement under Finally, the Commission believes that screening.82 These market participants Commission regulation 1.73. NAL No. 17–60 n.9. permitting swap block trades to be The Commission understands that currently no executed on a SEF’s non-Order Book 77 Real-Time Public Reporting of Swap mechanism exists to enable a pre-execution credit Transaction Data, 75 FR 76140, 76159 (proposed check where blocks are executed away from a SEF; trading platforms while also allowing Dec. 7, 2010) (discussion of block trades with however, this proposal does not preclude them to ‘‘occur away’’ from a SEF respect to futures). participants from developing and using such a provides SEFs increased flexibility. In 78 Id. mechanism in the future. 83 particular, SEFs will be able to provide 79 17 CFR 43.2. NAL No. 17–60 at 2. 84 execution methods for swap block 80 Procedures To Establish Appropriate Minimum NAL No. 17–60; NAL No. 16–74; NAL No. 15– Block Sizes for Large Notional Off-Facility Swaps 60; NAL No. 14–118. and Block Trades, 78 FR 32866, 32904 n.425 (May 85 As used herein, swaps that are ITBC are swaps 89 See 7 U.S.C. 7b–3(e). 31, 2013). (i) of a type accepted for clearing by a DCO, and 90 The Commission notes that proposed 81 CEA section 2(a)(13) requires the Commission (ii) intended to be submitted for clearing § 37.702(b) applies to SEFs that list (i) swaps that to establish rules that govern the real-time reporting contemporaneously with execution. NAL No. 17–60 are subject to the clearing requirement; and/or (ii) of swap transaction and pricing data to the public, n.2. swaps that are not subject to the clearing but also directs the Commission, among other 86 NAL No. 17–60 at 2–3. requirement, but for which the SEF facilitates things, to prescribe rules that specify the 87 The Commission notes that it has proposed to processing and routing to a DCO for clearing. appropriate reporting time delay for block trades, address the issue of block trades on SEFs in the 91 SEF Core Principles Final Rule, 78 FR 33498, including the criteria for determining what 2018 SEF Proposal. As noted above, this proposal 33562, and 33563. constitutes a block trade. 7 U.S.C. 2(a)(13). is independent of the 2018 SEF Proposal. 92 For example, the Commission has observed that 82 For the avoidance of doubt, the Commission 88 The Commission notes that in the 2018 SEF some SEFs offer a ‘‘RFQ-to-one’’ functionality that believes that if the parties purport to execute a Proposal, it proposed for all SEF swap block trades allows counterparties to bilaterally negotiate a block block trade away from the SEF without first to be executed on the SEF. The Commission trade between two potential counterparties, without obtaining a credit check, an FCM clearing member continues to evaluate this proposal. See supra note requiring disclosure of the potential trade to other that clears such trade and does not have knowledge 15. market participants on a pre-trade basis.

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trades that are most suitable, efficient, on possible alternative effective dates possible uses, and to minimize and cost-effective for the product being and the basis for any such alternative duplicative information collections traded, the SEF’s market, and its market dates. across the government.100 participants. IV. Related Matters The PRA applies to all information, 3. Request for Comment regardless of form or format, whenever A. Regulatory Flexibility Act the government is obtaining, causing to The Commission requests comment be obtained, or soliciting information, on all aspects of the proposed revision The Regulatory Flexibility Act 93 and includes required disclosure to to the definition of ‘‘block trade’’ in (‘‘RFA’’) requires Federal agencies, in third parties or the public, of facts or § 43.2. The 2018 SEF Proposal also promulgating regulations, to consider proposed revisions to this definition. the impact of those regulations on small opinions, when the information Comments made on the 2018 SEF businesses. The regulations adopted collection calls for answers to identical Proposal that are relevant to this herein will affect SEFs and their market questions posed to, or identical participants. The Commission has reporting or recordkeeping requirements rulemaking must be resubmitted to be 101 considered. The Commission also previously established certain imposed on, ten or more persons. The invites comments specifically on the definitions of ‘‘small entities’’ to be used PRA requirements have been following: by the Commission in evaluating the determined to include not only (43) Is the Commission’s proposed impact of its regulations on small mandatory, but also voluntary 94 revision to the definition of ‘‘block entities in accordance with the RFA. information collections, and include trade’’ appropriate? If not, how should The Commission previously concluded both written and oral the Commission amend the proposed that SEFs are not small entities for the communications.102 The Commission 95 definition? purpose of the RFA. The Commission may not conduct or sponsor, and a (44) Should the Commission continue has also previously stated its belief in person is not required to respond to, a to permit market participants to execute the context of relevant rulemakings that collection of information unless it ITBC swap block trades away from but SEFs’ market participants, which are all displays a currently valid Office of pursuant to the rules of a SEF? Please required to be eligible contract Management and Budget (‘‘OMB’’) 96 explain why or why not. participants (‘‘ECPs’’) as defined in control number. section 1a(18) of the CEA,97 are not (45) Should the Commission continue This proposed rulemaking contains small entities for purposes of the RFA.98 to permit market participants to execute collections of information for which the Therefore, the Chairman, on behalf of non-ITBC swap block trades away from Commission has previously received the Commission, hereby preliminarily but pursuant to the rules of a SEF? control numbers from OMB. The titles certifies, pursuant to 5 U.S.C. 605(b), Please explain why or why not. for these collections of information are that the regulations will not have a (46) Should the Commission prohibit ‘‘Real-Time Public Reporting and Block significant economic impact on a swap block trades that are subject to the Trades, OMB control number 3038– substantial number of small entities. trade execution requirement from 0070’’ and ‘‘Core Principles and Other ‘‘occurring away’’ from a SEF but The Commission invites the public to comment on whether SEFs and SEF Requirements for Swap Execution pursuant to its rules? Facilities, OMB control number 3038– (47) Should the Commission further market participants covered by these proposed rules should be considered 0074.’’ This proposed rulemaking would limit or prohibit the execution of swap not impose any new information block trades through an RFQ system, as small entities for the purpose of the collection requirements from any defined in § 37.9(a)(3)? For example, RFA. persons or entities that require approval should the Commission limit the B. Paperwork Reduction Act of OMB under the PRA. number of market participants that may receive a RFQ for a swap block trade The Paperwork Reduction Act of C. Cost-Benefit Considerations that is intended to be executed on the 1995, 44 U.S.C. 3501 et seq. (‘‘PRA’’) SEF? Please explain why or why not. imposes certain requirements on Section 15(a) of the CEA 103 requires (48) Should the Commission allow Federal agencies (including the the Commission to consider the costs swap block trades to be executed Commission) in connection with and benefits of its actions before through an Order Book, as defined in conducting or sponsoring any promulgating a regulation under the § 37.3(a)(3)? Please explain why or why ‘‘collection of information,’’ 99 as CEA or issuing certain orders. Section not. defined by the PRA. Among its 15(a) further specifies that the costs and purposes, the PRA is intended to benefits shall be evaluated in light of III. Effective Date and Transition Period minimize the paperwork burden to the five broad areas of market and public The Commission proposes that the private sector, to ensure that any concern: (1) Protection of market effective date for the proposed collection of information by a participants and the public; (2) regulations be 60 days after publication government agency is put to the greatest efficiency, competitiveness, and of final regulations in the Federal financial integrity of futures markets; (3) Register. The Commission preliminarily 93 5 U.S.C. 601 et seq. price discovery; (4) sound risk believes that such an effective date 94 47 FR 18618—18621 (Apr. 30, 1982). management practices; and (5) other would allow SEFs and market 95 SEF Core Principles Final Rule, 78 FR 33476, 33548 (June 4, 2013) (citing 47 FR 18618, 18621 public interest considerations. The participants sufficient time to adapt to (Apr. 30, 1982) (discussing DCMs); 66 FR 42256, Commission considers the costs and the amended and additional rules in an 42268 (Aug. 10, 2001) (discussing DTFs, ECMs, and benefits resulting from its discretionary efficient and orderly manner. EBOTs); and 66 FR 45604, 45609 (Aug. 29, 2001) determinations with respect to the (discussing registered DCOs)). section 15(a) factors. Request for Comment 96 17 CFR 37.703. 97 7 U.S.C. 1(a)(18). The Commission requests comment 100 See 44 U.S.C. 3501. 98 66 FR 20740, 20743 (Apr. 25, 2001) (stating that 101 on whether the proposed effective date ECPs by the nature of their definition in the CEA See 44 U.S.C. 3502(3). is appropriate and, if not, the should not be considered small entities). 102 See 5 CFR 1320.3(c)(1). Commission further requests comment 99 See 44 U.S.C. 3502(3)(A). 103 7 U.S.C. 19(a).

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1. Background based on the understanding that the transactions; 106 and (3) MAT/Non- The Commission is proposing to swaps market functions internationally, Exclusive CFTC Swap package amend certain rules in parts 36, 37, and with many transactions involving U.S. transactions. 43 of its regulations relating to the firms taking place across international In addition, the Commission is execution of certain package boundaries, with some Commission proposing to exempt the swap transactions on SEFs; the resolution of registrants being organized outside of components of these three types of error trades on SEFs; and the execution the United States, with leading industry package transactions from the of block trades on SEFs. members typically conducting requirement in § 37.3 that the SEF offer The baseline against which the operations both within and outside the an Order Book for every swap listed for Commission considers the costs and United States, and with industry trading on the SEF, while continuing to benefits of these proposed rules is the members commonly following require that SEFs offer an Order Book statutory and regulatory requirements of substantially similar business practices for outright transactions in every swap the CEA and Commission regulations wherever located. Where the listed for trading on the SEF. Finally, now in effect, in particular CEA section Commission does not specifically refer the Commission is proposing to use its 5h and certain rules in parts 37 and 43 to matters of location, the discussion of exemptive authority pursuant to CEA of the Commission’s regulations. The costs and benefits below refers to the section 4(c) to exempt swap transactions Commission, however, notes that as a effects of the proposed rules on all that are executed as a component of a package transaction that includes a practical matter SEFs and market swaps activity subject to the proposed component that is a new issuance bond participants have adopted some current and amended regulations, whether by from the trade execution requirement practices based upon no-action relief virtue of the activity’s physical location provided by Commission staff that is under section 2(h)(8) of the Act. in the United States or by virtue of the Benefits: The proposed rule would time-limited in nature.104 As such, to activity’s connection with or effect on the extent that SEFs and market allow market participants to choose the U.S. commerce under CEA section most suitable execution method for each participants have relied on relevant staff 2(i).105 no-action letters, the actual costs and package transaction and will allow SEFs benefits of the proposed rules as 2. Package Transactions to continue to offer flexible execution realized in the market may not be as methods for these package transactions significant. The Commission proposes to add rather than only offer the required In some instances, it is not reasonably § 37.9(d) and amend § 37.9(a)(2) to methods of execution for swaps subject feasible to quantify the costs and permit the swap components of certain to the trade execution requirement. The benefits to SEFs and certain market package transactions to be executed via Commission expects this would reduce participants with respect to certain flexible methods of execution pursuant execution risks, improve efficiency, and factors, for example, market integrity. to § 37.9(c)(2). The Commission decrease transaction costs as market Notwithstanding these types of proposes to define a ‘‘package participants would be able to avoid limitations, however, the Commission transaction’’ for the purpose of the legging into transactions, that is, otherwise identifies and considers the proposed rule as a transaction entering into each part of the package costs and benefits of these rules in consisting of two or more component separately. The Commission notes that qualitative terms. transactions executed between two or these benefits are currently available to The following consideration of costs more counterparties where (i) at least market participants through existing no- and benefits is organized according to one component transaction is subject to action relief. The Commission further the rules and rule amendments the trade execution requirement in believes that the proposed rule would proposed in this release. For each rule, section 2(h)(8) of the Act; (ii) execution provide the liquidity and transparency the Commission summarizes the of each component transaction is benefits of increased trading of proposed amendments and identifies contingent upon the execution of all component swaps on SEFs, as without and discusses the costs and benefits other component transactions; and (iii) the proposed flexibility market attributable to such rule. The the component transactions are priced participants would be unable or Commission, where applicable, then or quoted together as one economic unwilling to trade such swap considers the costs and benefits of the transaction with simultaneous or near- components through SEFs’ required proposed rules in light of the five public simultaneous execution of all methods of execution.107 interest considerations set out in section components. Based on this proposed 15(a) of the CEA. definition and consistent with existing 106 Under proposed § 37.9(d)(3), consistent with The Commission notes that this the no-action relief, this category specifically no-action relief, the Commission excludes U.S. Dollar Spreadover package consideration of costs and benefits is proposes to allow the swap component transactions; MAT/Futures package transactions, of the following three categories of MAT/Agency MBS package transactions; and New 104 In its discussion of alternatives, the package transactions to be executed via Issuance Bond package transactions. Commission believes it is also relevant to consider 107 Further, while the proposed rules also provide the costs and benefits of the proposed regulations flexible means of execution pursuant to flexibility from the required methods of execution in comparison to circumstances in which such no- § 37.9(c)(2): (1) MAT/Non-MAT that are otherwise intended to help promote pre- action relief has expired and is no longer available. Uncleared package transactions; (2) trade transparency on SEFs, the Commission notes The Commission further notes that in connection MAT/Non-Swap Instrument package that permitting market participants to use flexible with NAL No. 16–58 and its extension NAL No. 17– methods of execution is consistent with how 27 (relief related to clerical or operational error package transactions are treated within other trade resolution), market participants specifically 105 Section 2(i)(1) applies the swaps provisions of jurisdictions. For example, in the European Union requested that the Commission undertake both the Dodd-Frank Act and Commission (‘‘EU’’) certain package transactions (including rulemakings to establish a permanent solution for regulations promulgated under those provisions to package transactions for which the Commission addressing these clerical and operational errors, activities outside the United States that ‘‘have a currently requires the swap component to be rather than merely extending the previous NAL direct and significant connection with activities in, executed through the required methods of relief. See NAL No. 16–58 and NAL No. 17–27. In or effect on, commerce of the United States[.]’’ 7 execution, such as U.S. Dollar Spreadover package contrast, previous requests for no-action relief from U.S.C. 2(i). Section 2(i)(2) makes them applicable to transactions) are eligible to be waived from the EU’s market participants for the NALs which preceded activities outside the United States that contravene transparency regime. The Commission believes that NAL No.16–58 and NAL No. 17–27 were merely for Commission rules promulgated to prevent evasion this proposal strikes an appropriate balance temporary relief. of Dodd-Frank. Continued

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The Commission believes that not have not been able to design an protection of market participants. While requiring SEFs to offer an Order Book execution method suitable for this protecting market participants also for the swap components of the three particular type of package, rendering it benefits the public, the Commission has types of relevant package transactions impracticable to execute these packages not identified any further effect of the would benefit SEFs by helping them to on-SEF. While the swap components of proposal on protection of the public. reduce operating costs, as they would many swap/new-issuance bond b. Efficiency, Competitiveness, and no longer be required to operate and packages executed today are not Financial Integrity of the Markets maintain an Order Book for trading currently subject to the trade execution those swaps that are components of requirement,108 the proposed rule The proposed amendments would those package transactions. However, would ensure that those transactions enhance efficiency by enabling market SEFs would need to retain the would remain exempt in the event the participants to continue to execute the availability of Order Books for those trade execution requirement is relevant packages in a single transaction swaps executed as outright transactions. expanded to include more types of with an appropriate execution method, Further, as discussed above, given the swaps. rather than via the inefficient process of illiquid and bespoke nature of various Costs: The proposed amendments to legging into the package one component components within the relevant package allow flexible execution methods for at a time. The proposed amendments transactions, the Commission certain package transactions and the would also enhance financial integrity acknowledges that the Order Book is not proposed exemption for package by enabling market participants to the ideal method of execution for many transactions that include a new issuance continue to avoid the execution risk such transactions. Therefore, the bond should not impose costs on market associated with potential adverse price Commission anticipates that if SEFs are participants since they only provide movements while attempting to leg a not required to provide an Order Book flexibility to market participants and do transaction. The Commission has not for relevant package transactions that not require them to change their current identified any likely effects of the are not suitable for Order Book trading, trade practices. Moreover, to the extent proposed amendments on competition SEFs will be able to more effectively that market participants are relying on in the swap markets. The Commission employ their resources, and no longer existing no-action relief, they could expects that, since there are few, if any, face the prospect of being required to continue to implement existing industry active Order Books for swaps as provide Order Books that will not be practice. The Commission believes that components of the relevant package utilized given the complex, illiquid, and current SEF rules typically allow transactions, SEFs will not use proposed bespoke nature of various components participants to utilize flexible execution § 37.3(a)(4) to remove active Order of the relevant package transactions. methods pursuant to the existing no- Books that are providing competitive The Commission believes that the action relief, but to the extent that SEFs markets. proposal to exempt swap transactions need to modify their rules to incorporate c. Price Discovery that are executed as a component of a the proposed amendments, they may Package transactions are typically package transaction that includes a incur modest costs. component that is a new issuance bond As noted, not requiring SEFs to offer executed at a single price for the entire from the trade execution requirement an Order Book for the swap components package, rather than at the prices of the will ensure that market participants of the relevant package transactions may individual components. The proposed such as bond underwriters and issuers enable SEFs to reduce operating costs. amendments would continue to allow can continue to execute these packages Since any existing Order Books for swap the relevant package transactions to be (where the new-issuance bond is hedged components of the relevant package executed using the execution methods by an interest rate swap with tenor and transactions are not actively used and that are designed to facilitate price payment terms that typically match the are not practicable for market discovery in these packages. For terms of the bond issuance) off-SEF. As participants to use, removing these packages that include new issuance discussed above, this proposed Order Books (and not requiring SEFs to bonds, the proposed exemption will exemption may facilitate new bond create such Order Books) should not permit price discovery to occur at the issuances, which may benefit capital impose significant costs on market appropriate venue. The Commission formation by helping market participants. believes that the proposed § 37.3(a)(4), participants to raise capital and fund which would exempt swaps that are origination loans for businesses and Section 15(a) Factors part of the relevant package transactions homeowners. Moreover, in light of the a. Protection of Market Participants and from the Order Book requirement, involvement of the bond issuer and the the Public would not materially inhibit price underwriter in arranging and executing discovery since the Commission a package transaction in conjunction The Commission believes that the anticipates that SEFs would retain with a new issuance bond and the proposed amendments and exemption Order Books where price discovery is unique negotiation and fit-for-purpose will protect market participants from occurring and that currently price nature of these package transactions, the the risks associated with legging into the discovery is not occurring in Order Commission understands that it remains relevant packages by enabling market Books for swap components of the difficult or impossible to trade these participants to enter into package package transactions addressed within package transactions on a SEF. SEFs transactions using appropriate this proposal. execution methods. Permitting SEFs to between promoting pre-trade transparency and eliminate the Order Book for use when d. Sound Risk Management Practices ensuring that U.S. markets and their participants swaps are components of package The Commission believes that the are not unnecessarily burdened. See Regulation transactions should not impact (EU) 2016/1033 of the European Parliament and of proposal will continue to promote the Council of 23 June 2016 amending Regulation sound risk management by facilitating (EU) No 600/2014 on markets in financial 108 For example, the swap component may be a the execution of package transactions as instruments, Regulation (EU) No 596/2014 on forwarding-starting swap whose start date market participants consider package market abuse and Regulation (EU) No 909/2014 on corresponds to the issuance date of the bond. improving securities settlement in the European Forward starting swaps are not currently subject to transactions to often be useful and Union and on central securities depositories. the trade execution requirement. appropriate instruments for

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management and transfer of risk and to Proposed § 37.9(e) would also require the Order Book or RFQ System, which avoid the execution risks associated a SEF to adopt rules to resolve error would likely make it impossible to with legging of transactions. trades that involve swaps submitted for recreate the trade as originally intended. clearing. For an error trade rejected from These difficulties could dissuade SEFs e. Other Public Interest Considerations clearing and therefore deemed void ab from being actively involved in the error The proposed exemption from the initio, proposed § 37.9(e)(2)(i)(A) would trade resolution process and market trade execution requirement for the require a SEF to permit the participants from executing swaps on a swap components of packages involving counterparties to subsequently execute a SEF. The Commission believes that the new issuance bonds may help promote correcting trade, as defined in proposed proposal would avoid these potential capital formation by facilitating the § 37.9(e)(1)(i), through any method of difficulties. issuance of bonds to raise capital. The execution offered by the SEF. For an The Commission preliminarily Commission has not identified any error trade that has been accepted for believes that, given that the proposed other effect of the proposed rules and clearing, proposed § 37.9(e)(2)(i)(B) amendments are largely consistent with proposed exemption regarding package would require a SEF to permit the current industry practice, SEFs and transactions on other public interest counterparties to subsequently execute market participants may likely have considerations. both an offsetting trade, as defined in already realized much of the benefit of proposed § 37.9(e)(1)(iii), and a proposed § 37.9(e). The Commission Request for Comment correcting trade through any method of preliminarily believes, however, that the The Commission requests comment execution offered by the SEF. proposed rules additionally would on the costs and benefits of all aspects The proposed rule includes some provide a tangible benefit to market of the proposed amendments related to limitations that are similar to the participants on a longer-term basis by certain package transactions, including existing no-action relief, including allowing market participants to the discussion of the section 15(a) specified timeframes for executing and continue utilizing policies and protocols factors. Comments made on the 2018 submitting these trades for clearing. For which the Commission understands correcting trades associated with an most SEFs adopted in reliance upon the SEF Proposal that are relevant to this error trade that has been rejected from relief provided in existing no-action rulemaking should be resubmitted to be clearing, proposed § 37.9(e)(2)(i)(A) letters to resolve error trades. considered. The Commission requests would require the SEF to submit the The proposed rule does not require comment on the alternatives discussed correcting trade for clearing to the that a SEF affirmatively determine that above as well as any other alternatives registered DCO or exempt DCO as soon an error trade has occurred, either that commenters believe present a as technologically practicable, but no before resolution or via an ex post facto superior cost-benefit profile to the later than one hour after notice of the review. The Commission preliminarily proposed amendments. Commenters are rejection to the relevant clearing believes that such a requirement, which requested to provide data and any other members. For an offsetting trade and a is in the existing no-action relief, would information or statistics to support their correcting trade associated with an error impose unnecessary costs on SEFs and position. In particular, to the extent trade that already has been accepted for market participants, and potentially commenters believe that the costs or clearing, proposed § 37.9(e)(2)(i)(B) impair the efficiency of the error trade benefits of any aspect of the proposed would require the SEF to submit both resolution process. To the extent that rules are reasonably quantifiable, the types of trades to the registered DCO or SEFs and market participants are Commission requests that they provide exempt DCO as soon as technologically currently availing themselves of current data and any other information or practicable, but no later than three days no-action relief, they may realize statistics to assist the Commission in after the registered DCO or exempt DCO reduced costs under the proposed rule. quantification. accepted the error trade for clearing. In The proposed requirement under 3. Error Trades addition to these proposed timeframes, § 37.9(e)(2)(i) that market participants proposed § 37.9(e)(2)(ii) would prohibit provide prompt notice to a SEF of an The Commission proposes to add counterparties from executing a second error trade and, as applicable, the subsection (e) to § 37.9 to establish a correcting trade to fix an error trade if corresponding correcting trade and flexible SEF error trade policy standard the initial correcting trade is rejected offsetting trade would benefit SEFs in that would, among other things, from clearing. carrying out their self-regulatory incorporate the intent of the existing no- However, the proposed rule does not obligations. In particular, the action relief in NAL No. 17–27 for include certain additional conditions Commission believes that providing resolving errors in Required applicable to SEFs and counterparties SEFs prompt notice that an error trade Transactions. Proposed § 37.9(e)(2)(i) that are contained in the no-action relief has occurred on their trading system(s) would specify that a SEF must maintain under NAL No. 17–27 or NAL No. 20– or platform(s) would enhance their rules and procedures that are ‘‘fair, 01. For example, the no-action relief in ability to carry real-time market transparent, consistent’’ and ‘‘allow for NAL No. 17–27 requires that a SEF must monitoring of all trading activity on timely resolution’’ of an ‘‘error trade,’’ make an affirmative finding that an their system(s) or platform(s) to identify as defined under proposed alleged error trade has occurred and disorderly trading and any market or § 37.9(e)(1)(ii). This proposed standard must have rules setting forth the system anomalies or violations of SEF would apply to any error trade that procedures for making such a finding. rules. occurs on a SEF, regardless of whether Benefits: Absent an adoption of these The Commission also believes that the or not the swap is submitted for proposed rules, both SEFs and market proposed amendments will facilitate the clearing. Further, under proposed participants would need to comply with goal of promoting consistency in the § 37.9(e)(2)(i), SEFs must have error the existing Commission regulations, swaps market with respect to how errors trade rules and procedures that require notwithstanding the significant are evaluated and resolved. First, the that market participants provide prompt procedural and logistical difficulties of proposed amendments would require all notice to the SEF of an error trade and, doing so. In particular, market SEFs to adopt such policies. To the as applicable, correcting and offsetting participants would have to resolve error extent SEFs have not yet implemented trades. trades in Required Transactions using such policies, the proposed

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amendments will benefit market regulations imposed by the correcting trade and offsetting trade participants who will now be able to Commission, and market participants would promote protection of market correct error trades and avoid related and intermediaries are currently subject participants and the public by economic losses. Further, market to SEF policies and procedures. The enhancing a SEF’s ability to carry out its participants can obtain the benefit of proposed requirement that market market oversight and monitoring executing a swap transaction that participants provide prompt notice to a responsibilities. The Commission corrects an error trade with the terms SEF of an error trade and, as applicable, believes that the absence of a originally intended. the correcting trade and offsetting trade requirement in the proposed rule that Finally, some SEFs have already would impose modest costs on market SEFs must affirmatively determine, or implemented robust error trade participants, but, in practice, market determine after an ex post facto review, resolution policies pursuant to existing participants have likely needed to report that an error trade has occurred (which no-action relief, while other SEFs have error trades to SEFs in order to facilitate are conditions in the existing no-action not implemented robust error trade SEF determinations that an error trade relief under NAL No. 17–27 and NAL policies. This inconsistency among has occurred pursuant to NAL No. 17– No. 20–01) would not materially impact SEFs otherwise causes a ‘‘race to the 27, and would have had to report the the protection of market participants bottom’’ for SEFs’ compliance and correcting trade and offsetting trade in and the public. market oversight, as certain market order to facilitate the SEF’s ex post facto participants may prefer SEFs with less b. Efficiency, Competitiveness, and review pursuant to NAL No. 20–01. Not Financial Integrity of the Markets stringent error trade policies. As a requiring that a SEF find that an error result, SEFs that have implemented trade has occurred either before it has The proposed addition of § 37.9(e) robust error trade policies—and the been resolved or via an ex post facto may improve the efficiency and swaps market in general—will benefit review should impose only minor costs financial integrity of markets by by eliminating this potential ‘‘race to the on market participants associated with enabling counterparties to correct bottom,’’ and the Commission will changes in procedures to no longer operational or clerical errors in a swap underscore the importance of SEF request that a SEF make such a transaction. In particular, the proposed market oversight by adopting such determination. rules would help promote greater requirements in Commission The Commission notes that NAL No. trading accuracy in the market by regulations.109 17–27 and NAL No. 20–01 apply to both allowing counterparties to ultimately Costs: Similar to the conditions SEFs and DCMs, but the proposed rule carry out transactions as originally established by Commission staff in time- would apply only to SEFs. Therefore, intended, and would avoid unexpected limited no-action relief, the proposed the Commission believes that the trading losses caused by error trades. amendments would require SEFs to proposed rule would impose no costs on The proposed requirement under establish rules implementing various DCMs, and notes that no DCM is § 37.9(e)(2)(i) that market participants policies and procedures for resolving currently availing itself of the no-action provide prompt notice to a SEF of an error trades. Under the proposal, SEFs relief. error trade and, as applicable, the would have to submit new rules to the correcting trade and offsetting trade Commission pursuant to part 40 of the Section 15(a) Factors would enhance a SEF’s ability to carry Commission’s regulations. However, the a. Protection of Market Participants and out its market oversight and monitoring Commission understands that pursuant the Public responsibilities which helps promote to the existing no-action relief, most the financial integrity of its markets. SEFs currently have rules that otherwise The proposed addition of § 37.9(e) The Commission believes that the would comply with the proposed regarding error trades will protect absence of the no-action provision that regulations. SEFs may choose to adjust market participants and the public by SEFs must affirmatively determine that their rules in light of the absence in the providing SEFs with greater authority an error trade has occurred could proposed rules of the requirement in the under Commission regulations to enhance the efficiency of the error trade no-action relief that SEFs affirmatively resolve error trades. Further, by resolution process and would not determine that an error trade has providing SEFs with the authority to materially impact the competitiveness occurred.110 To the extent that SEFs permit counterparties to execute or financial integrity of the swap market must draft and submit new rules to the correcting trades and offsetting trades, on SEFs. Commission, the Commission estimates the proposed amendments would Absent these proposed rules, that the costs will be modest. protect market stability and counterparties would be required in The Commission preliminarily transparency by preventing potential certain circumstances to correct or re- believes that the proposed amendments losses to market participants in execute swap transactions in a less would not impose significant additional connection with error trades and efficient and effective manner on a SEF, costs on market participants and reducing instances in which market such as through the required methods of intermediaries, because resolving error participants rely on inaccurate pricing execution under § 37.9(a). The proposed trades is inherently costly regardless of information to inform their trading rules, which also require SEFs to adopt decisions. The proposed addition of certain policies and procedures for 109 The Commission notes that a robust error § 37.9(e) would also promote greater addressing error trades, should further trade resolution policy is also consistent with an transparency of the error trade promote efficiency in the resolution effective compliance and oversight program because resolution process to SEFs’ market process by providing market the ability to resolve error trades (i) helps protect participants as SEFs would be required market integrity by unwinding certain error trades participants that transact on multiple that otherwise would have an adverse effect on the to establish policies and procedures for SEFs with a more consistent approach market and (ii) promotes legal certainty by ensuring reviewing and determining how to across different platforms for correcting that market participants obtain the economic resolve alleged error trades. The error trades. position in the transaction that they intended. proposed requirement under 110 In light of the flexibility of the proposed rule, c. Price Discovery SEFs can continue to require such an affirmative § 37.9(e)(2)(i) that market participants declaration if the determine that such requirement provide prompt notice to a SEF of an The proposed addition of § 37.9(e) provides benefits to market participants or the SEF. error trade and, as applicable, the regarding error trades would enable

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SEFs to correct error trades containing also requests comment on any those changes. Further, incorporating a clerical or operational error while alternatives that commenters believe the current no-action relief in the maintaining the price discovery benefits present a superior cost-benefit profile to Commission’s regulations would associated with the pre-trade the proposed amendments. promote the statutory goal in CEA transparency requirements of § 37.9. In 4. Block Trades section 5h(e) of promoting swaps particular, the proposed rules would trading on SEFs. Finally, the proposed help promote price discovery by The Commission proposes amendment would permit SEFs to allowing counterparties, whose original amendments to the definition of block extend the benefits of executed swap trade has been cancelled upon rejection trade, set forth in § 43.2, to allow SEFs block trades on-SEF to uncleared swaps from clearing due to a clerical or to permit market participants to execute as well as ITBC swaps. operational error, to re-execute the trade swap block trades using a SEF’s trading system or platform, with the exception Costs: The Commission notes that the with the terms as originally intended. majority of SEFs have implemented the For error trades that have been accepted of the Order Book.111 Market participants could continue to execute a existing no-action relief. To the extent by a registered DCO or exempt DCO for that SEFs have implemented such relief, clearing, the proposed rules promote block trade away from the SEF’s trading system or platform, but pursuant to the they may incur modest costs in greater accuracy in the price discovery adjusting their rulebooks to, for process by allowing the counterparties SEF’s rules.112 This rule is similar to existing relief set out in NAL No. 17–60, example, include uncleared swaps in to correct the error trade by executing an their block trading provisions. Any SEF offsetting swap transaction and a but the proposed rule would apply to uncleared swaps as well ITBC swaps, that has not implemented the existing subsequent swap transaction with the no-action relief but wishes to implement terms as originally intended. while the existing no-action relief only applies to ITBC swaps. block trading rules consistent with the d. Sound Risk Management Practices Benefits: The Commission believes proposed amendment will incur The proposed addition of § 37.9(e) that permitting swap block trades to be somewhat higher, but still modest costs. regarding error trades may promote executed on SEFs pursuant to Section 15(a) Factors sound risk management practices by Commission regulation would provide providing SEFs with greater authority tangible benefits to market participants a. Protection of Market Participants and under Commission regulations to by allowing them to further utilize a the Public SEF’s trading systems and platforms facilitate error trade resolution. The The proposed amendment to the with the exception of the Order Book. proposed rules will help to mitigate definition of a swap block trade in To the extent that a SEF provides the potential losses to market participants § 43.2, which would allow for both ITBC most operationally- and cost-efficient arising out of trade cancellations, where and non-ITBC swap block trades to be method of executing swap block trades, the error trade is rejected from clearing, executed on a SEF’s non-Order Book the proposed amendment would help or arising from maintaining the position trading system or platform will provide market participants to continue of an unintended error trade. more options to market participants for realizing such benefits. Additionally, executing swap block trades without e. Other Public Interest Considerations allowing market participants to execute impeding the protection of market The Commission has not identified swap block trades on a SEF helps to participants and the public provided any effect of proposed § 37.9(e) on other facilitate the pre-execution screening of under existing Commission regulations. public interest considerations. transactions against risk-based limits in an efficient manner through SEF-based b. Efficiency, Competitiveness, and Request for Comment mechanisms. The Commission also Financial Integrity of the Markets The Commission invites public recognizes that many SEFs and market comment on all aspects of its cost participants have already expended The proposed amendment to the benefit considerations related to the resources to implement technological definition of block trade under § 43.2 to proposed amendments regarding SEFs’ and operational changes needed to avail allow cleared and uncleared swap block error trade policies, including the themselves of the no-action relief under trades to be executed on a SEF’s non- discussion of the section 15(a) factors. NAL No. 17–60. The proposed Order Book trading system or platform Comments made on the 2018 SEF amendments would preclude the need may improve the efficiency and Proposal that are relevant to this to expend additional resources to negate financial integrity of the swaps markets. rulemaking should be resubmitted to be The proposed amendments would considered. Commenters are requested 111 The Commission notes that a swap transaction provide market participants with the to provide data and any other with a notional size above the appropriate ability to execute block trades either on information or statistics to support their minimum block trade size could still be executed a SEF or away from, but pursuant to the on an Order Book, but would not qualify as a block position. In particular, to the extent trade, and therefore, would not receive a time delay rules of, a SEF. From an efficiency commenters believe that the costs or from public dissemination requirements set forth in perspective, such choice should allow benefits of any aspect of the proposed § 43.5(d). participants to choose the most rules are reasonably quantifiable, the 112 The Commission notes that § 43.6(g)(1)— operationally efficient and cost-efficient required notification of block trade election—would method of executing block trades. With Commission requests that they provide still apply to block trade transactions executed on data and any other information or the SEF via the SEF’s non-Order Book trading respect to the financial integrity of the statistics to assist the Commission in systems and platforms. For example, pursuant to swaps market, this proposed quantification. § 43.6(g)(1)(i), SEFs would need to implement a amendment would also facilitate the use mechanism by which the counterparties notify the of pre-trade credit screening The Commission requests comment SEF of the counterparties’ intention to have an on- on the impact of the proposed rule on SEF executed block trade treated as a block trade functionalities or protocols offered by market participants who may need to for reporting purposes. Additionally, pursuant to the SEF to fulfill its obligations under adjust their error trade rules and § 43.6(i)(2), a person transacting a cleared swap SEF Core Principle 7—Financial block trade on behalf of a customer would still need Integrity of Transactions.113 policies to comply with SEFs’ error to receive prior written instruction or consent from trade rules implemented to comply with the customer to transact the trade as a cleared swap proposed § 37.9(e). The Commission block trade on the SEF. See 17 CFR 43.6(i)(2). 113 17 CFR 37.700.

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c. Price Discovery present a superior cost-benefit profile to § 36.1 Exemptions to trade execution requirement. The Commission is not aware of the proposed amendments. Commenters significant effects on the price discovery are requested to provide data and any (a) A swap transaction that is process of the proposed amendment to other information or statistics to support executed as a component of a package the definition of block trade under their position. In particular, to the transaction that also includes a § 43.2 to allow block trades to be extent commenters believe that the costs component transaction that is the executed on a SEF’s non-Order Book or benefits of any aspect of the proposed issuance of a bond in a primary market trading system or platform. The rules are reasonably quantifiable, the is exempt from the trade execution Commission notes that block trades are Commission requests that they provide requirement in section 2(h)(8) of the currently not subject to the execution data and any other information or Act. methods for required transactions under statistics to assist the Commission in (1) For purposes of paragraph (a) of § 37.9, which are intended to promote quantification. this section, a package transaction consists of two or more component pre-trade price transparency pursuant to D. Antitrust Considerations section 5h of the CEA.114 Based on the transactions executed between two or previous recognition that market Section 15(b) of the CEA requires the more counterparties where: (i) At least one component transaction participants are likely to execute large- Commission to take into consideration is subject to the trade execution sized trades, i.e., block trades, in a the public interest to be protected by the requirement in section 2(h)(8) of the manner that would mitigate pre-trade antitrust laws and endeavor to take the information leakage concerns, the Act; least anticompetitive means of (ii) Execution of each component Commission does not anticipate that the achieving the objectives of the CEA, in transaction is contingent upon the proposed amendment would diminish issuing any order or adopting any execution of all other component the price discovery process for block Commission rule or regulation. The transactions; and trades executed on a SEF. Commission does not anticipate that the (iii) The component transactions are d. Sound Risk Management Practices proposed amendments to parts 36, 37, priced or quoted together as one and 43 would promote or result in anti- economic transaction with simultaneous The proposed amendment to allow competitive consequences or behavior. block trades to occur on the SEF (but or near-simultaneous execution of all However, the Commission encourages components. not on the SEF’s order book) may comments from the public with respect promote sound risk management (2) [Reserved] to any aspect of the proposal that maybe (b) [Reserved] practices by providing more options for perceived as potentially inconsistent the execution of block trades. In this with the antitrust laws or anti- PART 37—SWAP EXECUTION regard, the Commission notes that block competitive in nature. FACILITIES trading can facilitate risk management by providing a means for commercial List of Subjects ■ 2. The authority citation for part 37 firms to transact large orders without continues to read as follows: 17 CFR Part 36 the need for significant price Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a– concessions and resulting price Package transactions, Trade execution 2, 7b–3, and 12a, as amended by Titles VII uncertainty for parties to the transaction requirement. and VIII of the Dodd-Frank Wall Street that would occur if transacted on the Reform and Consumer Protection Act, Pub. L. centralized market. 17 CFR Part 37 111–203, 124 Stat. 1376. ■ e. Other Public Interest Considerations Block trades, Error trades, Package 3. In § 37.3, add paragraph (a)(4) to read as follows: The proposed amendments should transactions, Required methods of help promote SEF trading and pre-trade execution, Swap execution facilities, § 37.3 Requirements and procedures for price transparency, i.e., the statutory Swaps, Trade execution requirement. registration. goals set forth under section 5h(f)(2) of 17 CFR Part 43 (a) * * * the CEA with respect to SEFs.115 (4) A swap execution facility is not Block trades, Large notional off- required to provide an order book under Request for Comment facility swaps, Real-time public this section for transactions defined in The Commission requests comment reporting, Reporting and recordkeeping § 37.9(d)(2), (3), and (4), except that a on the costs and benefits of all aspects requirements. swap execution facility must provide an of the proposed amendments to permit order book under this section for For the reasons stated in the block trades to be executed on a SEF, Required Transactions that are preamble, the Commodity Futures including the discussion of the section components of transactions defined in Trading Commission proposes to amend 15(a) factors. Comments made on the § 37.9(d)(2), (3), and (4) when such 17 CFR chapter I as follows: 2018 SEF Proposal that are relevant to Required Transactions are not executed this rulemaking should be resubmitted ■ 1. Revise part 36 to read as follows: as components of transactions defined to be considered. The Commission in § 37.9(d)(2), (3), and (4). requests comment on the alternatives PART 36—TRADE EXECUTION * * * * * discussed above as well as any other REQUIREMENT ■ 4. In § 37.9, revise paragraph (a)(2)(i) alternatives that commenters believe Sec. introductory text and add paragraphs (d) 36.1 Exemptions to trade execution and (e) to read as follows: 114 The Commission stated its belief in the part 37 final rule release that an order book, as defined requirement. § 37.9 Methods of execution for required in § 37.3(a)(3), and the RFQ System, as defined in Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a– and permitted transactions. § 37.9(a)(3), are intended to promote the goals articulated in section 733 of the Dodd-Frank Act, 2, 7b–3, 2a2, and 21, as amended by Titles (a) * * * which include promoting pre-trade price VII and VIII of the Dodd-Frank Wall Street (2) * * * transparency. 78 FR 33484, 33497. Reform and Consumer Protection Act, Pub. L. (i) Each Required Transaction that is 115 7 U.S.C. 7b–3(e). 111–203, 124 Stat. 1376 (2010). not a block trade as defined in § 43.2 of

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this chapter shall be executed on a swap transaction that includes a component Commission has determined is exempt execution facility in accordance with swap that is not exclusively subject to from registration. one of the following methods of the Commission’s jurisdiction may be (ii) If a correcting trade is rejected execution except as provided in executed on a swap execution facility in from clearing, then a swap execution paragraph (d) or (e) of this section: accordance with paragraph (c)(2) of this facility shall not allow the * * * * * section as if it were a Permitted counterparties to execute another (d) Exceptions to required methods of Transaction. correcting trade. execution for package transactions. (1) (e) Resolution of operational and clerical error trades. (1) As used in this PART 43—REAL-TIME PUBLIC For purposes of this paragraph, a REPORTING package transaction consists of two or paragraph: more component transactions executed (i) Correcting trade means a trade ■ 5. The authority citation for part 43 between two or more counterparties executed and submitted for clearing to continues to read as follows: where: a registered derivatives clearing Authority: 7 U.S.C. 2(a), 12a(5) and 24a, as (i) At least one component transaction organization, or a derivatives clearing amended by Pub. L. 111–203, 124 Stat. 1376 is a Required Transaction; organization that the Commission has (2010). determined is exempt from registration, (ii) Execution of each component ■ 6. Revise § 43.2 to read as follows: transaction is contingent upon the with the same terms and conditions as execution of all other component an error trade other than any corrections § 43.2 Definitions. transactions; and to any operational or clerical error and As used in this part: (iii) The component transactions are the time of execution. Act means the Commodity Exchange priced or quoted together as one (ii) Error trade means any trade Act, as amended, 7 U.S.C. 1 et seq. economic transaction with simultaneous executed on or subject to the rules of a Affirmation means the process by or near-simultaneous execution of all swap execution facility that contains an which parties to a swap verify (orally, components. operational or clerical error. in writing, electronically or otherwise) (2) A Required Transaction that is (iii) Offsetting trade means a trade that they agree on the primary economic executed as a component of a package executed and submitted for clearing to terms of a swap (but not necessarily all transaction that includes a component a registered derivatives clearing terms of the swap). Affirmation may swap that is subject exclusively to the organization, or a derivatives clearing constitute ‘‘execution’’ of the swap or Commission’s jurisdiction, but is not organization that the Commission has may provide evidence of execution of subject to the clearing requirement determined is exempt from registration, the swap, but does not constitute under section 2(h)(1)(A) of the Act, may with terms and conditions that confirmation (or confirmation by be executed on a swap execution facility economically reverse an error trade that affirmation) of the swap. in accordance with paragraph (c)(2) of was accepted for clearing. Appropriate minimum block size this section as if it were a Permitted (2) Execution of correcting trades and means the minimum notional or Transaction; offsetting trades. (i) A swap execution principal amount for a category of (3) A Required Transaction that is facility shall maintain rules and swaps that qualifies a swap within such executed as a component of a package procedures that facilitate the resolution category as a block trade or large transaction that includes a component of error trades. Such rules shall be fair, notional off-facility swap. As soon as technologically practicable that is not a swap, as defined under transparent, and consistent; allow for means as soon as possible, taking into section 1a(47) of the Act, may be timely resolution; require market consideration the prevalence, executed on a swap execution facility in participants to provide prompt notice of implementation and use of technology accordance with paragraph (c)(2) of this an error trade—and, as applicable, offsetting and correcting trades—to the by comparable market participants. section as if it were a Permitted Asset class means a broad category of swap execution facility; and permit Transaction. This provision shall not commodities including, without market participants to: apply to: limitation, any ‘‘excluded commodity’’ (i) A Required Transaction that is (A) Execute a correcting trade, in as defined in section 1a(19) of the Act, executed as a component of a package accordance with paragraph (c)(2) of this with common characteristics underlying transaction in which all other non-swap section, regardless of whether it is a a swap. The asset classes include components are U.S. Treasury Required or Permitted Transaction, for interest rate, foreign exchange, credit, securities; an error trade that has been rejected equity, other commodity and such other (ii) A Required Transaction that is from clearing as soon as technologically asset classes as may be determined by executed as a component of a package practicable, but no later than one hour the Commission. transaction in which all other non-swap after a registered derivatives clearing Block trade means a publicly components are contracts for the organization, or a derivatives clearing reportable swap transaction that: purchase or sale of a commodity for organization that the Commission has (1) Involves a swap that is listed on future delivery; determined is exempt from registration, a registered swap execution facility or (iii) A Required Transaction that is provides notice of the rejection; or designated contract market; executed as a component of a package (B) Execute an offsetting trade and a (2) Is executed on a trading system or transaction in which all other non-swap correcting trade, in accordance with platform of a registered swap execution components are agency mortgage- paragraph (c)(2) of this section, facility that is not an order book as backed securities; and regardless of whether it is a Required or defined in § 37.3(a)(3) of this chapter, or (iv) A Required Transaction that is Permitted Transaction, for an error trade occurs away from a registered swap executed as a component of a package that was accepted for clearing as soon as execution facility’s or designated transaction that includes a component technologically practicable, but no later contract market’s trading system or transaction that is the issuance of a than three days after the error trade was platform and is executed pursuant to the bond in a primary market. accepted for clearing at a derivatives registered swap execution facility’s or (4) A Required Transaction that is clearing organization or a derivatives designated contract market’s rules and executed as a component of a package clearing organization that the procedures;

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(3) Has a notional or principal amount with or immediately following the a swap that changes the pricing of the at or above the appropriate minimum affirmation of the swap. swap. block size applicable to such swap; and Futures-related swap means a swap (2) Examples of executed swaps that (4) Is reported subject to the rules and (as defined in section 1a(47) of the Act do not fall within the definition of procedures of the registered swap and as further defined by the publicly reportable swap may include: execution facility or designated contract Commission in implementing (i) Internal swaps between one- market and the rules described in this regulations) that is economically related hundred percent owned subsidiaries of part, including the appropriate time to a futures contract. the same parent entity; and delay requirements set forth in § 43.5. Large notional off-facility swap means (ii) Portfolio compression exercises. Business day means the twenty-four an off-facility swap that has a notional (3) These examples represent swaps hour day, on all days except Saturdays, or principal amount at or above the that are not at arm’s length and thus are Sundays and legal holidays, in the appropriate minimum block size not publicly reportable swap location of the reporting party or applicable to such publicly reportable transactions, notwithstanding that they registered entity reporting data for the swap transaction and is not a block do result in a corresponding change in swap. trade as defined in this section. the market risk position between two Business hours means the consecutive Major currencies means the parties. hours of one or more consecutive currencies, and the cross-rates between Real-time public reporting means the business days. the currencies, of Australia, Canada, reporting of data relating to a swap Cap size means, for each swap Denmark, New Zealand, Norway, South transaction, including price and category, the maximum notional or Africa, South Korea, Sweden, and volume, as soon as technologically principal amount of a publicly Switzerland. practicable after the time at which the reportable swap transaction that is Non-major currencies means all other swap transaction has been executed. publicly disseminated. currencies that are not super-major Reference price means a floating price Confirmation means the currencies or major currencies. series (including derivatives contract consummation (electronic or otherwise) Novation means the process by which prices and cash market prices or price of legally binding documentation a party to a swap transfers all of its indices) used by the parties to a swap (electronic or otherwise) that rights, liabilities, duties and obligations or swaption to determine payments memorializes the agreement of the under the swap to a new legal party made, exchanged or accrued under the parties to all terms of a swap. A other than the counterparty to the swap. terms of a swap contract. confirmation shall be in writing The transferee accepts all of the Remaining party means a party to a (electronic or otherwise) and shall transferor’s rights, liabilities, duties and swap that consents to a transferor’s legally supersede any previous obligations under the swap. A novation transfer by novation of all of the agreement (electronic or otherwise) is valid as long as the transferor and the transferor’s rights, liabilities, duties and relating to the swap. remaining party to the swap are given obligations under such swap to a Confirmation by affirmation means notice, and the transferor, transferee and transferee. remaining party to the swap consent to the process by which one party to a Reporting party means the party to a the transfer. swap acknowledges its assent to the swap with the duty to report a publicly Off-facility swap means any publicly complete swap terms submitted by the reportable swap transaction in reportable swap transaction that is not other party to the swap. If the parties to accordance with this part and section executed on or pursuant to the rules of a swap are using a confirmation service 2(a)(13)(F) of the Act. a registered swap execution facility or vendor, complete swap terms may be Super-major currencies means the designated contract market. submitted electronically by a party to Other commodity means any currencies of the European Monetary such vendor’s platform and the other commodity that is not categorized in the Union, Japan, the United Kingdom, and party may affirm such terms on such other asset classes as may be determined United States. platform. by the Commission. Swaps with composite reference Economically related means a direct Physical commodity swap means a prices means swaps based on reference or indirect reference to the same swap in the other commodity asset class prices that are composed of more than commodity at the same delivery that is based on a tangible commodity. one reference price from more than one location or locations, or with the same Public dissemination and publicly swap category. or a substantially similar cash market disseminate means to publish and make Transferee means a party to a swap price series. available swap transaction and pricing that accepts, by way of novation, all of Embedded option means any right, data in a non-discriminatory manner, a transferor’s rights, liabilities, duties but not an obligation, provided to one through the internet or other electronic and obligations under such swap with party of a swap by the other party to the data feed that is widely published and respect to a remaining party. swap that provides the party holding the in machine-readable electronic format. Transferor means a party to a swap option with the ability to change any Publicly reportable swap transaction that transfers, by way of novation, all of one or more of the economic terms of means: its rights, liabilities, duties and the swap as those terms previously were (1) Unless otherwise provided in this obligations under such swap, with established at confirmation (or were in part— respect to a remaining party, to a effect on the start date). (i) Any executed swap that is an transferee. Executed means the completion of the arm’s-length transaction between two Trimmed data set means a data set execution process. parties that results in a corresponding that has had extraordinarily large Execution means an agreement by the change in the market risk position notional transactions removed by parties (whether orally, in writing, between the two parties; or transforming the data into a logarithm electronically, or otherwise) to the terms (ii) Any termination, assignment, with a base of 10, computing the mean, of a swap that legally binds the parties novation, exchange, transfer, and excluding transactions that are to such swap terms under applicable amendment, conveyance, or beyond four standard deviations above law. Execution occurs simultaneous extinguishing of rights or obligations of the mean.

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Unique product identifier means a amendments recognize the need to provide despite my opposition to the overhaul, I unique identification of a particular flexible means of execution for swaps that are supported issuing the SEF proposal for level of the taxonomy of the product in negotiated and executed concurrently with public comment because it contained several an asset class or sub-asset class in other components of a larger, integrated policy changes which separately warranted transaction. further consideration. Market participants question, as further described in Second, the proposal adopts a principles- have spent a great deal of resources to build § 43.4(f) and appendix A to this part. based approach regarding SEF policies to systems and businesses that comply with our Such unique product identifier may correct operational or clerical errors.2 The existing SEF rules. Fundamental changes combine the information from one or proposal directs SEFs to adopt fair, amounting to an overhaul of the entire more of the data fields described in transparent, and consistent policies and system should only be done in circumstances appendix A. procedures that allow for the timely where there is a regulatory concern that Widely published means to publish resolution of error trades. SEFs would be necessitates action.3 Accordingly, in the past permitted to allow market participants to I have suggested we should focus on targeted and make available through electronic execute offsetting or correcting trades means in a manner that is freely reforms, such as codifying existing no-action through any method of execution offered by relief for SEFs.4 I warned that we should not available and readily accessible to the the SEF. I believe these amendments will allow issues with the broader vision of the public. facilitate the prompt identification and 2018 SEF proposal to distract us from making Issued in Washington, DC, on February 6, correction of error trades, thereby minimizing targeted changes.5 2020, by the Commission. market participants’ exposure to market, Today, the Commission proposes to limit credit, and operational risks. Christopher Kirkpatrick, changes to our existing SEF rules, Thirdly, the proposal recognizes the specifically focusing on the codification of Secretary of the Commission. difficulties associated with performing a pre- long-standing no-action relief regarding trade execution credit check on block trades package transactions, error trades, and block NOTE: The following appendices will not occurring away from a SEF’s trading system appear in the Code of Federal Regulations. trades. While I support today’s proposal, I do or platforms.3 Accordingly, it would permit have some concerns where I think we deviate block trades to be executed on a trading Appendices To Swap Execution Facility from the path of targeted codification. The system of the SEF that is not an order book, provisions in today’s proposal regarding Requirements and Real-Time Reporting thereby allowing FCMs to conduct pre- package transactions and block trades Requirements—Commission Voting execution credit screenings. The proposal basically mirror the existing no-action relief.6 Summary and Commissioners’ also continues to allow block trades to be However, the proposal regarding error trades Statements executed away from the SEF. does not.7 This proposal should in no way preclude Appendix 1—Commission Voting DMO currently provides no-action relief the Commission from considering additional from the required methods of execution Summary SEF no-action letters and policy issues under § 37.9 for trades intended to resolve through rulemaking. For example, codifying error trades.8 The existing relief provides a On this matter, Chairman Tarbert and the current no-action letter providing relief Commissioners Quintenz, Behnam, Stump, number of conditions, including a from the trade execution requirement for requirement that a SEF determine (either and Berkovitz voted in the affirmative. No inter-affiliate swaps, or providing greater Commissioner voted in the negative. prior to execution or within 24 hours after) clarity about permissible methods of that an error has occurred. Among other Appendix 2—Statement of Support of execution and minimum SEF trading things, the no-action relief requires that a Commissioner Brian D. Quintenz functionality are prime examples. In order to SEF have error trade rules that account for truly foster and promote market liquidity, whether a transaction cancellation or price transparency, innovation, and competition in I support today’s proposal that seeks to adjustment will adversely impact market the SEF marketplace, I believe these resolve through rulemaking three issues integrity or facilitate market manipulation or outstanding issues should be addressed. I currently addressed in staff no-action letters. other illegitimate activity.9 None of these I believe this proposal is an important first will support today’s proposal but remain step to provide market participants with hopeful that these and other important areas 3 much needed regulatory certainty while also can be addressed through rulemaking in the Rostin Behnam, Sowing the Seeds of Success in near future. 2020, Remarks of CFTC Commissioner Rostin promoting swap execution facility (SEF) Behnam at the 2019 ISDA Annual General Meeting, participation, though regulatory certainty Appendix 3—Statement of Concurrence Grand Hyatt Hong Kong, Hong Kong (Apr. 9, 2019), over additional current market practices is https://www.cftc.gov/PressRoom/ necessary as well. of Commissioner Rostin Behnam SpeechesTestimony/opabehnam13. Staff initially granted these requests for I respectfully concur in the Commission’s 4 Id. relief in 2013 and 2014, as SEFs were first proposal to amend certain swap execution 5 Id. coming into compliance with the facility (SEF) requirements and real-time 6 See CFTC No-Action Letter No. 17–55, Re: Commission’s then-new SEF regulatory reporting requirements. A little more than a Extension of No-Action Relief from Sections 2(h)(8) framework. With the benefit of six-plus years year ago, the Commission issued a proposal and 5(d)(9) of the Commodity Exchange Act and of implementation experience, and multiple that would have constituted a complete from Commission Regulations 37.3(a)(2) and 37.9 extensions of each of these no-action letters, overhaul of the existing regulatory framework for Swaps Executed as Part of Certain Package Transactions (Oct. 31, 2017); CFTC No-Action it is long overdue for the Commission to for SEFs.1 As I stated in my concurrence to codify and clarify its policy on each of these Letter No. 17–60, Re: Extension of No-Action Relief the 2018 SEF proposal, I do not believe that for Swap Execution Facilities from Certain ‘‘Block important issues. such an overhaul is necessary.2 However, Trade’’ Requirements in Commission Regulation First, the proposal would amend part 37 43.2 (Nov. 14, 2017). regulations to permit the swap components 2 These amendments address the relief currently 7 See CFTC No-Action Letter No. 17–27, Re: No- of certain categories of package transactions provided by CFTC No-Action Letters 17–27 (May Action Relief for Swap Execution Facilities and to be executed on-SEF through flexible 30, 2017) and 20–01 (Jan. 8, 2020). Designated Contract Markets in Connection with means of execution, rather than via the 3 These amendments address the relief currently Swaps with Operational or Clerical Errors Executed required methods of execution under Rule provided by CFTC No-Action Letter 17–60 (Nov. 14, on a Swap Execution Facility or Designated 37.9.1 In addition, the proposal would also 2017). Contract Market (May 30, 2017); CFTC No-Action include an exemption from the trade 1 Swap Execution Facilities and Trade Execution Letter No. 20–01 (‘‘NAL No. 20–01’’), Re: Supplemental No-Action Relief for Swap Execution execution requirement for swap transactions Requirement, 83 FR 61946 (proposed Nov. 30, 2018). Facilities and Designated Contract Markets in that are executed as a component of a new 2 Connection with Swaps with Operational or issuance bond package transaction. These Rostin Behnam, Statement of Concurrence of Commissioner Rostin Behnam Regarding Swap Clerical Errors Executed on a Swap Execution Execution Facilities and Trade Execution Facility or Designated Contract Market (Jan. 8, 1 These amendments address the relief currently Requirement (Nov. 5, 2018), https://www.cftc.gov/ 2020). provided by CFTC No-Action Letter 17–55 (Oct. 31, PressRoom/SpeechesTestimony/ 8 NAL 17–27. 2017). behnamstatement110518a. 9 Id.

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conditions appear in the error trade rules continue to evaluate the categories of package DEPARTMENT OF AGRICULTURE proposed today, and under the proposal SEFs transactions subject to the rule and revise the will no longer have any obligation to rule as necessary in the future to reflect Forest Service determine whether a trade is an error trade— developments in trading methodologies. the determination can instead be left entirely 36 CFR Part 242 to the parties to the trade. I look forward to Error Trades comments regarding whether this The Proposal also would amend part 37 to ‘‘principles-based’’ approach goes too far and DEPARTMENT OF THE INTERIOR fails to give market participants sufficient enable SEFs to permit market participants to clarity regarding error trades. use flexible methods of execution to correct Fish and Wildlife Service I support targeted, thoughtful reform of our error trades, and would require a SEF to SEF regulations, and I particularly applaud establish error trade policies that largely 50 CFR Part 100 staff’s efforts to provide market participants track the conditions set forth in prior no- with greater legal certainty through the action letters. Notably, the Proposal would [Docket No. FWS–R7–SM–2019–0092; codification of our existing no-action relief. require market participants to provide FXFR13350700640–201–FF07J00000] I look forward to the comments. prompt notice of an error trade to the SEF, RIN 1018–BE36 Appendix 4—Statement of enabling the SEF to fulfill its self-regulatory Commissioner Dan M. Berkovitz obligations. It would not alter the Subsistence Management Regulations requirement that SEFs must adopt rules for Public Lands in Alaska—2021–22 I am voting in favor of today’s proposed declaring that trades rejected from clearing and 2022–23 Subsistence Taking of rule that would amend certain Commission are deemed void ab initio. The Proposal also rules in parts 36, 37, and 43 relating to Fish and Shellfish Regulations includes the requirement under CFTC No- package transactions, block trades, and error AGENCY: Forest Service, Agriculture; transactions on swap execution facilities Action Letter No. 17–27 that after submitting (‘‘SEFs’’) (‘‘Proposal’’). Today’s amendments one error trade, market participants will not Fish and Wildlife Service, Interior. largely codify longstanding no-action letters be able to submit a second new trade with ACTION: Proposed rule. for limited categories of swaps transactions the original terms. These conditions facilitate regarding the required methods of execution. a SEF’s direct supervision of its markets, SUMMARY: This proposed rule would Generally, I support the codification of no- protect against abuse, and promote fair establish regulations for fish and action letters where, based on experience, competition. shellfish seasons, harvest limits, doing so is consistent with our statutory methods, and means related to taking of mandate, protects customers, provides Block Trades fish and shellfish for subsistence uses market participants with a greater level of The Proposal would revise the definition of during the 2021–2022 and 2022–2023 certainty, and promotes market integrity. ‘‘block trade’’ in Commission Regulation 43.2 regulatory years. The Federal Package Transactions to permit SEFs to offer non-Order Book Subsistence Board (Board) is on a This Proposal would amend part 37 to methods of execution for market participants schedule of completing the process of allow the swap components of certain to execute swap block trades on-SEF. Like revising subsistence taking of fish and package transactions—including those that package transactions, block trades shellfish regulations in odd-numbered are illiquid and bespoke and therefore not encompassed within the Proposal are a small years and subsistence taking of wildlife suitable for trading on-SEF—to be executed percentage of the number of swaps traded. A regulations in even-numbered years; on-SEF but through flexible methods of significant benefit of this Proposal is that it public proposal and review processes execution. In addition, the Proposal amends would facilitate pre-trade credit checks by part 36 to exempt from the trade execution take place during the preceding year. SEFs for block trades, in accordance with the requirement a swap in a package transaction The Board also addresses customary and involving a bond sold in the primary market SEF core principles. traditional use determinations during (‘‘new issuance bond transaction’’), which It is my preliminary view that this Proposal the applicable cycle. When final, the also is not conducive to trading on-SEF. would provide certainty to market resulting rulemaking will replace the Beginning in 2014, the Commission issued participants and increase trading efficiencies, existing subsistence fish and shellfish a series of no-action letters specifying while not compromising the Congressional taking regulations. This proposed rule permissible methods of execution for certain goal of moving standardized OTC derivative could also amend the general package transactions, which have enabled contracts to exchanges or electronic trading market participants and the agency to apply regulations on subsistence taking of fish platforms. I look forward to public comments and wildlife. the trading mandate to these transactions in on the anticipated effects of these a phased manner. As the market amendments, and I thank the staff of the DATES: infrastructure for the trading and clearing of Public meetings: The Federal swaps has improved, the trading mandate has Division of Market Oversight for their work on this Proposal. Subsistence Regional Advisory Councils been applied to the packages involving more will hold public meetings to receive liquid and standardized swap components.1 [FR Doc. 2020–02721 Filed 2–18–20; 8:45 am] comments and make proposals to The remaining package transactions that BILLING CODE 6351–01–P would be covered by today’s Proposal change this proposed rule March 2 represent a small percentage of swaps trading through March 26, 2020, and will hold on the most active SEFs. another round of public meetings to I encourage the industry to continue to discuss and receive comments on the develop systems that allow for increased proposals, and make recommendations execution of package trade swap components on the proposals to the Federal on-SEF. I also appreciate the Staff’s Subsistence Board, on several dates commitment, if this rule is finalized, to between August 18 and November 3, 1 For example, U.S. Dollar Spreadover package 2020. The Board will discuss and transactions account for nearly seventy percent of evaluate proposed regulatory changes interest rate swaps trading in the inter-dealer swap during a public meeting in Anchorage, market. No-action letters for these package AK, in January 2021. See transactions have expired and market participants SUPPLEMENTARY INFORMATION now actively trade the swap component of these for specific packages through required methods of trading. See information on dates and locations of Proposed Rule, Sect. II.A.1 and n.33. the public meetings.

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