Vol. 78 Tuesday, No. 107 June 4, 2013

Part II

Commodity Futures Trading Commission

17 CFR Part 37 Core Principles and Other Requirements for Swap Execution Facilities; Final Rule

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COMMODITY FUTURES TRADING SUPPLEMENTARY INFORMATION: (a) § 37.701—Mandatory Clearing COMMISSION (b) § 37.702—General Financial Integrity Table of Contents (c) § 37.703—Monitoring for Financial 17 CFR Part 37 I. Background Soundness A. Swaps and Title VII of the Dodd-Frank 8. Subpart I—Core Principle 8 (Emergency RIN 3038–AD18 Act Authority) B. SEF Notice of Proposed Rulemaking (a) § 37.801—Additional Sources for Core Principles and Other II. Part 37 of the Commission’s Regulations— Compliance Requirements for Swap Execution Final Rules 9. Subpart J—Core Principle 9 (Timely Facilities A. Adoption of Regulations, Guidance, and Publication of Trading Information) Acceptable Practices 10. Subpart K—Core Principle 10 AGENCY: Commodity Futures Trading B. General Regulations (Subpart A) (Recordkeeping and Reporting) Commission. 1. § 37.1—Scope 11. Subpart L—Core Principle 11 (Antitrust ACTION: Final rule. 2. § 37.2—Applicable Provisions Considerations) 3. § 37.3—Requirements for Registration 12. Subpart M—Core Principle 12 SUMMARY: The Commodity Futures 4. § 37.4—Procedures for Listing Products (Conflicts of Interest) Trading Commission (‘‘Commission’’ or and Implementing Rules 13. Subpart N—Core Principle 13 ‘‘CFTC’’) is adopting new rules, 5. § 37.5—Information Relating to Swap (Financial Resources) guidance, and acceptable practices to Execution Facility Compliance (a) § 37.1301—General Requirements (b) § 37.1302—Types of Financial implement certain statutory provisions 6. § 37.6—Enforceability 7. § 37.7—Prohibited Use of Data Collected Resources enacted by Title VII of the Dodd-Frank for Regulatory Purposes (c) § 37.1303—Computation of Financial Wall Street Reform and Consumer 8. § 37.8—Boards of Trade Operating Both Resource Requirement Protection Act (‘‘Dodd-Frank Act’’). The a Designated Contract Market and a (d) § 37.1304—Valuation of Financial final rules, guidance, and acceptable Swap Execution Facility Resources practices, which apply to the 9. § 37.9—Permitted Execution Methods (e) § 37.1305—Liquidity of Financial registration and operation of a new type 10. § 37.10—Swaps Made Available for Resources of regulated entity named a swap Trading (f) § 37.1306—Reporting Requirements execution facility (‘‘SEF’’), implement 11. § 37.11—Identification of Non-Cleared 14. Subpart O—Core Principle 14 (System Swaps or Swaps Not Made Available To Safeguards) the Dodd-Frank Act’s new statutory Trade (a) § 37.1401—Requirements framework that, among other C. Regulations, Guidance, and Acceptable 15. Subpart P—Core Principle 15 requirements, adds a new section 5h to Practices for Compliance With the Core (Designation of Chief Compliance the Commodity Exchange Act (‘‘CEA’’ or Principles Officer) ‘‘Act’’) concerning the registration and 1. Subpart B—Core Principle 1 (a) § 37.1501—Chief Compliance Officer operation of SEFs, and adds a new (Compliance With Core Principles) III. Related Matters section 2(h)(8) to the CEA concerning 2. Subpart C—Core Principle 2 A. Regulatory Flexibility Act the execution of swaps on SEFs. (Compliance With Rules) B. Paperwork Reduction Act (a) § 37.200—Core Principle 2— C. Cost Benefit Considerations DATES: The rules will become effective Compliance With Rules 1. Introduction August 5, 2013, with the exception of (b) § 37.201—Operation of Swap Execution 2. SEF Market Structure regulation 37.3(b)(5) (17 CFR 37.3(b)(5)), Facility and Compliance With Rules 3. Registration which shall become effective August 5, (c) § 37.202—Access Requirements 4. Recordkeeping and Reporting 2015. (d) § 37.203—Rule Enforcement Program 5. Compliance Compliance date: October 2, 2013, (e) § 37.204—Regulatory Services Provided 6. Monitoring and Surveillance except that: (a) From August 5, 2013 by a Third Party 7. Financial Resources until October 2, 2014 market (f) § 37.205—Audit Trail 8. Emergency Operations and System (g) § 37.206—Disciplinary Procedures and Safeguards participants may comply with the Sanctions minimum market participant IV. List of Commenters (h) § 37.207—Swaps Subject to Mandatory V. Text of Final Regulations, Guidance, and requirement in regulation 37.9(a)(3) (17 Clearing Acceptable Practices CFR 37.9(a)(3)) by transmitting a request 3. Subpart D—Core Principle 3 (Swaps Not for a quote to no less than two market Readily Susceptible to Manipulation) I. Background 4. Subpart E—Core Principle 4 (Monitoring participants; and (b) each affected entity A. Swaps and Title VII of the Dodd- shall comply with the warning letter of Trading and Trade Processing) (a) § 37.401—General Requirements Frank Act requirement in regulation 37.206(f) (17 (b) § 37.402—Additional Requirements for CFR 37.206(f)) no later than August 5, Historically, swaps have traded in Physical-Delivery Swaps over-the-counter (‘‘OTC’’) markets, 2014. (c) § 37.403—Additional Requirements for FOR FURTHER INFORMATION CONTACT: Cash-Settled Swaps rather than on regulated exchanges 1 Amir Zaidi, Special Counsel, 202–418– (d) § 37.404—Ability To Obtain given their exemption from regulation. 6770, [email protected], Alexis Hall-Bugg, Information The OTC swaps market is less Special Counsel, 202–418–6711, (e) § 37.405—Risk Controls for Trading transparent than exchange-traded (f) § 37.406—Trade Reconstruction futures and securities markets. This lack [email protected], or David Van (g) § 37.407—Additional Rules Required Wagner, Chief Counsel, 202–418–5481, of transparency was a major contributor 5. Subpart F—Core Principle 5 (Ability To to the 2008 financial crisis because [email protected], Division of Obtain Information) Market Oversight; Michael Penick, (a) § 37.501—Establish and Enforce Rules regulators and market participants Senior Economist, 202–418–5279, (b) § 37.502—Collection of Information lacked visibility to identify and assess [email protected], or Sayee Srinivasan, (c) § 37.503—Provide Information to the the implications of swaps market Commission exposures and counterparty Research Analyst, 202–418–5309, 2 [email protected], Office of the Chief (d) § 37.504—Information-Sharing relationships. As a result, on July 21, Agreements Economist, Commodity Futures Trading 6. Subpart G—Core Principle 6 (Position 1 See Commodity Futures Modernization Act of Commission, Three Lafayette Centre, Limits or Accountability) 2000, Public Law 106–554, 114 Stat. 2763 (2000). 1155 21st Street NW., Washington, DC 7. Subpart H—Core Principle 7 (Financial 2 See The Financial Crisis Inquiry Commission, 20581. Integrity of Transactions) The Financial Crisis Inquiry Report: Final Report of

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2010, President Obama signed the framework, including registration, the registration, oversight, and Dodd-Frank Act,3 which tasked the operation, and compliance requirements regulation of SEFs (‘‘SEF NPRM’’).13 Commission with overseeing a large for SEFs.7 For example, section 733 of The SEF NPRM provided, among portion of the U.S. swaps market. the Dodd-Frank Act sets forth a broad other requirements, the following: Title VII of the Dodd-Frank Act 4 registration provision that requires any (1) Procedures for temporary and full amended the CEA 5 to establish a person who operates a facility for the SEF registration.14 comprehensive new regulatory trading of swaps to register as a SEF or (2) A minimum trading functionality framework for swaps and security-based as a DCM.8 In addition, section 721 of requirement that all SEFs must offer,15 swaps (‘‘SB-swaps’’). A key goal of the the Dodd-Frank Act amended the CEA which took into account the SEF Dodd-Frank Act is to bring greater pre- to define SEF as a trading platform definition,16 the core principles trade and post-trade transparency to the where multiple participants have the applicable to SEFs,17 and the goals swaps market. Pre-trade transparency ability to execute swaps by accepting provided in section 733 of the Dodd- with respect to the swaps market refers bids and offers made by multiple Frank Act.18 The minimum trading to making information about a swap participants in the platform.9 functionality required a SEF to provide available to the market, including bid Furthermore, section 723 of the Dodd- a centralized electronic trading screen (offers to buy) and offer (offers to sell) Frank Act set forth a trade execution upon which any market participant can prices, quantity available at those requirement, which states that swap post both executable and non- prices, and other relevant information transactions subject to the clearing executable bids and offers that are before the execution of a transaction. requirement must be executed on a transparent to all other market 19 Such transparency lowers costs for DCM or SEF, unless no DCM or SEF participants of the SEF. For a trader investors, consumers, and businesses; makes the swap available to trade or for who has the ability to execute against its lowers the risks of the swaps market to swap transactions subject to the clearing customer’s order or to execute two the economy; and enhances market exception under CEA section 2(h)(7).10 customers’ orders against each other, the integrity to protect market participants Section 733 of the Dodd-Frank Act SEF NPRM also required the trader be and the public. The Dodd-Frank Act provided that to be registered and subject to a 15 second time delay 20 also ensures that a broader universe of maintain registration, a SEF must between the entry of those two orders. market participants receive pricing and In addition, the proposal allowed a comply with fifteen enumerated core 21 volume information by providing such principles and any requirement that the Request for Quote (‘‘RFQ’’) System information upon the completion of that operates in conjunction with the Commission may impose by rule or 22 every swap transaction (i.e., post-trade regulation.11 SEF’s minimum trading functionality. transparency).6 By requiring the trading Finally, the SEF NPRM stated that a SEF of swaps on SEFs and designated B. SEF Notice of Proposed Rulemaking may offer other functionalities in contract markets (‘‘DCMs’’), all market conjunction with the minimum trading participants will benefit from viewing The Dodd-Frank Act amended the functionality, as long as those the prices of available bids and offers CEA to provide that, under new section functionalities meet the SEF definition and from having access to transparent 5h, the Commission may in its and comply with the core principles.23 and competitive trading systems or discretion determine by rule or (3) The classification of swap platforms. regulation the manner in which SEFs transactions into two categories: In addition to facilitating greater comply with the core principles.12 In Required Transactions (i.e., transactions transparency and trading of swaps on consideration of both the novel nature subject to the trade execution mandate SEFs, Title VII of the Dodd-Frank Act of SEFs and its experience in overseeing under section 2(h)(8) of the CEA and not establishes a comprehensive regulatory DCMs’ compliance with core principles, block trades) and Permitted the Commission carefully assessed Transactions (i.e., transactions not the National Commission on the Causes of the which SEF core principles would Financial and Economic Crisis in the United States benefit from regulations, providing legal 13 Core Principles and Other Requirements for (Official Government Edition), at 299, 352, 363–364, certainty and clarity to the marketplace, Swap Execution Facilities, 76 FR 1214 (proposed 386, 621 n. 56 (2011), available at http://fcic- Jan. 7, 2011). _ and which core principles would static.law.stanford.edu/cdn media/fcic-reports/ 14 Id. at 1238. fcic_final_report_full.pdf. The Commission has benefit from guidance or acceptable 15 Id. at 1241. acknowledged, however, that the benefits of practices, where flexibility is more 16 enhanced market transparency are not boundless, CEA section 1a(50); 7 U.S.C. 1a(50). appropriate. Based on that evaluation, 17 particularly in swap markets with limited liquidity. CEA section 5h(f); 7 U.S.C. 7b–3(f). See Procedures to Establish Appropriate Minimum on January 7, 2011, the Commission 18 The goals of section 733 of the Dodd-Frank Act Block Sizes for Large Notional Off-Facility Swaps proposed a combination of regulations, are to promote the trading of swaps on SEFs and and Block Trades, 77 FR 15460, 15466 (proposed guidance, and acceptable practices for to promote pre-trade price transparency in the Mar. 15, 2012). In implementing these regulations, swaps market. CEA section 5h(e); 7 U.S.C. 7b–3(e). the Commission has taken into account the benefits 19 Core Principles and Other Requirements for and concerns related to market transparency. 7 See CEA section 5h, as enacted by section 733 Swap Execution Facilities, 76 FR at 1241. 3 Dodd-Frank Wall Street Reform and Consumer of the Dodd-Frank Act; 7 U.S.C. 7b–3. This 20 Id. Protection Act, Public Law 111–203, 124 Stat. 1376 regulatory framework includes: (i) Registration, 21 Id. operation, and compliance requirements for SEFs (2010). 22 By ‘‘in conjunction with the SEF’s minimum and (ii) fifteen core principles. Applicants and 4 Pursuant to section 701 of the Dodd-Frank Act, trading functionality,’’ the Commission means that registered SEFs are required to comply with the Title VII may be cited as the ‘‘Wall Street the SEF NPRM required a SEF to offer the minimum core principles as a condition of obtaining and Transparency and Accountability Act of 2010.’’ trading functionality, and if that SEF also offered an maintaining their registration as a SEF. 5 7 U.S.C. 1 et seq. RFQ System, it was required to communicate any 8 CEA section 5h(a)(1), as enacted by section 733 6 See Financial Stability Board, Implementing bids or offers resting on the minimum trading of the Dodd-Frank Act; 7 U.S.C. 7b–3(a)(1). OTC Derivatives Market Reforms, at 41 (Oct. 25, functionality to the RFQ requester along with the 9 2010), available at http://www.financialstability CEA section 1a(50), as amended by section 721 responsive quotes. See the discussion below board.org/publications/r_101025.pdf; Technical of the Dodd-Frank Act; 7 U.S.C. 1a(50). regarding ‘‘Taken Into Account and Committee of the International Organization of 10 CEA section 2(h)(8), as amended by section 723 Communicated’’ Language in the RFQ System Securities Commissions, Transparency of of the Dodd-Frank Act; 7 U.S.C. 2(h)(8). Definition under § 37.9(a)(1)(ii)—Request for Quote Structured Finance Products Final Report, at 17, 21 11 CEA section 5h, as enacted by section 733 of System in the preamble for further details. (Jul. 2010), available at http://www.iosco.org/ the Dodd-Frank Act; 7 U.S.C. 7b–3. 23 Core Principles and Other Requirements for library/pubdocs/pdf/IOSCOPD326.pdf. 12 CEA section 5h(f)(1); 7 U.S.C. 7b–3(f)(1). Swap Execution Facilities, 76 FR at 1220.

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subject to the clearing and trade Commissioners, as well as the regulators for the purposes of assuring execution mandates, illiquid or bespoke Commission staff, participated in regulatory consistency and swaps, or block trades).24 Under the SEF numerous meetings with representatives comparability ....’’33 The NPRM, Required Transactions were of single dealer platforms, interdealer Commission has also received several required to be executed on the brokers, DCMs, trade associations, OTC comments stating that the Commission minimum trading functionality, an market participants, potential SEF and the SEC should harmonize their Order Book meeting the minimum applicants, and other interested rules as much as possible.34 trading functionality, or an RFQ System parties.31 In addition, the Commission The Commission has coordinated (in conjunction with the minimum consulted with the Securities and with the SEC to harmonize the SEF and trading functionality).25 The SEF NPRM Exchange Commission (‘‘SEC’’) and SB–SEF requirements to the extent also allowed a SEF to provide additional international regulators on numerous possible and has taken into methods of execution for Permitted occasions. consideration the comments for greater harmonization between the SEF and Transactions, including Voice-Based II. Part 37 of the Commission’s 26 SB–SEF regulations. However, there Systems. Regulations—Final Rules (4) Regulations, guidance, and may be appropriate differences in the acceptable practices to implement the A. Adoption of Regulations, Guidance, approach that each agency may take 15 core principles specified in section and Acceptable Practices regarding the regulation of SEFs and 5h(f) of the Act.27 In this final rulemaking, the SB–SEFs. Cognizant of the different The initial comment period for the Commission is adopting many of the products and markets regulated by the SEF NPRM ended on March 8, 2011. proposed regulations that each SEF SEC and the Commission, the SEC Subsequently, the Commission must meet in order to comply with recognized in its SB–SEF NPRM that reopened the comment period until June section 5h of the CEA, both initially there may be differences in the 3, 2011, as part of its global extension upon registration and on an ongoing approach that each agency may take of comment periods for various regarding the regulation of SEFs and basis, and related guidance, and 35 rulemakings implementing the Dodd- acceptable practices. As a result of the SB–SEFs. 28 Similarly, the Commission is mindful Frank Act. After the second comment written comments received and that swaps may also trade on DCMs. period ended, the Commission dialogue and meetings with the public, Thus, in addition to its efforts to continued to accept and consider late the Commission has revised or coordinate its approach with the SB– comments, which it did until April 30, eliminated a number of regulations that SEF regulations, the Commission also 2013.29 The Commission received were proposed in the SEF NPRM, and seeks, where possible, to harmonize the approximately 107 comment letters on in a number of instances, has codified final SEF regulations with the DCM the SEF NPRM from members of the guidance and/or acceptable practices in regulations in order to minimize public.30 The Chairman and lieu of the proposed regulations. In regulatory differences between SEFs and determining the scope and content of 24 DCMs in those instances where Id. at 1241. the final SEF regulations, the 25 Congress enacted similar core principles Id. Commission has carefully considered 26 for the two types of registered entities. Id. the costs and benefits for each rule with 27 Id. at 1241–1253, 1256–1258. In addition, some differences in the particular attention to the public 28 Reopening and Extension of Comment Periods agencies’ regulatory oversight regimes comments. Additionally, the for Rulemakings Implementing the Dodd-Frank may be attributed to the fact that, unlike Commission has taken into account the Wall Street Reform and Consumer Protection Act, the SEC that is only responsible for 76 FR 25274 (May 4, 2011). The Commission concerns raised by commenters overseeing trading in SB-swaps, such as extended the applicable comment periods to regarding the potential effects of specific provide the public an additional opportunity to single-name securities and narrow- rules on SEFs offering different swap comment on the proposed new regulatory based security indexes, the Commission contracts and trading systems or framework. The Commission also opened an is charged with the oversight of swaps additional comment period, which ended on June platforms and the importance of the trading over a broad range of asset 10, 2011, to provide the public an opportunity to statutory differences between SEFs and comment on the Commission’s phased categories. Consequently, the DCMs. The Commission addresses these implementation of the Act, as amended, including Commission has taken into account the issues below in its discussion of specific its implementation of section 733 of Dodd-Frank varied characteristics of those Act. Joint Public Roundtable on Issues Related to rule provisions. the Schedule for Implementing Final Rules for The Commission also notes that the underlying commodities in formulating Swaps and Security-Based Swaps Under the Dodd- SEC has proposed rules related to the regulatory responsibilities of SEFs. Frank Wall Street Reform and Consumer Protection In the preamble sections below, the security-based SEFs (‘‘SB–SEFs’’) as Act, 76 FR 23221 (Apr. 26, 2011). Commission responds to the substantive 29 required under section 763 of the Dodd- The Commission also held two roundtables comments submitted in response to the touching on issues related to the SEF NPRM: (1) Frank Act (‘‘SB–SEF NPRM’’).32 Section SEF NPRM. The Commission reviewed ‘‘Available to Trade’’ Provision for Swap Execution 712(a) of the Dodd-Frank Act states that Facilities and Designated Contract Markets; and (2) and considered all comments in Proposed Regulations Implementing Core Principle before commencing any rulemaking regarding swap execution facilities, the adopting this final rulemaking. Further, 9 for Designated Contract Markets. Transcripts are the final regulations include a number available through the Commission’s Web site at Commission ‘‘shall consult and http://www.cftc.gov/PressRoom/Events/2012Events/ coordinate to the extent possible with of technical revisions and non- index.htm. the Securities and Exchange substantive changes to the proposed 30 A list of the full names and abbreviations of Commission and the prudential rule text intended to clarify certain commenters to the SEF NPRM is included in provisions, standardize terminology section IV at the end of this release. The Commission notes that many commenters comments.cftc.gov/PublicComments/ submitted more than one comment letter. CommentList.aspx?id=955. 33 15 U.S.C. 8302(a)(1). Additionally, all comment letters that pertain to the 31 Meeting summaries are available through the 34 Tradeweb Comment Letter at 3–4 (Jun. 3, 2011); SEF NPRM, including those from the additional Commission’s Web site at http://comments.cftc.gov/ Reuters Comment Letter 3–4 (Mar. 8, 2011); FSR comment periods related to implementation of the PublicComments/CommentList.aspx?id=955. Comment Letter at 10–11 (Mar. 8, 2011); WMBAA final Dodd-Frank rules, are contained in the SEF 32 Registration and Regulation of Security-Based Comment Letter at 10–11 (Mar. 8, 2011). rulemaking comment file and are available through Swap Execution Facilities, 76 FR 10948 (proposed 35 Registration and Regulation of Security-Based the Commission’s Web site at http:// Feb. 28, 2011). Swap Execution Facilities, 76 FR at 10950.

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within this part 37, conform rulemaking adopted conforming meet the SEF definition and should not terminology to that used in other parts changes to existing regulations to clarify be required to register.44 Although the of the Commission’s regulations, and the pre-Dodd Frank provisions SEF NPRM stated that the registration more precisely state regulatory applicable to SEFs.38 There are, provision in CEA section 5h(a)(1) could standards and requirements. For however, certain existing regulations be read to require the registration of example, a minimum trading that will apply to SEFs that the separate entities that solely engage in trade functionality requirement was in rulemaking did not address. processing,45 it stated that such entities proposed § 37.9, which has been moved Accordingly, for clarity purposes, the do not meet the SEF definition and to the registration section under final Commission is specifically stating that should not be required to register as § 37.3 to clarify that this functionality is § 1.60 39 and part 9 40 of its regulations SEFs because: (1) They do not provide required in order to register as a SEF. will apply to SEFs. These revisions will the ability to execute or trade a swap as The final regulations will become eliminate the need for the Commission required by the SEF definition; and (2) effective 60 days after their publication to continually update § 37.2 when new the SEF definition does not include the in the Federal Register. regulations with which SEFs must term ‘‘process.’’ 46 comply are codified. The SEF NPRM also noted that CEA B. General Regulations (Subpart A) section 2(h)(8) requires that transactions 3. § 37.3—Requirements for The regulations in this final involving swaps subject to the clearing Registration 41 rulemaking are codified in subparts A requirement be executed on a DCM or through P under part 37 of the Proposed § 37.3 established, among SEF, unless no DCM or SEF makes such Commission’s regulations. The general other procedures, application swaps available to trade or such swaps regulations consisting of §§ 37.1 through procedures for temporary and full qualify for the clearing exception under 37.9 are codified in subpart A, and the registration of new SEFs, and CEA section 2(h)(7).47 In this regard, the regulations applicable to each of the 15 procedures for the transfer of a SEF NPRM stated that market core principles are codified in subparts registration. To assist prospective SEF participants may desire to avail B through P, respectively.36 applicants, the SEF NPRM included themselves of the benefits of trading on under appendix A to part 37 an 1. § 37.1—Scope SEFs for swaps that are not subject to application form titled Form SEF. Form the CEA section 2(h)(8) trade execution Proposed § 37.1 provided that part 37 SEF included information that an requirement, but it also acknowledged applies to entities that are registered applicant would be required to provide that such swaps are not required to be SEFs, have been registered SEFs, or are to the Commission in order for the executed on a SEF or DCM.48 applying to become registered SEFs. The Commission to make a determination proposed rule also stated that part 37 regarding the applicant’s request for SEF (a) Requirements for Registration does not restrict the eligibility of SEFs registration. (1) Summary of Comments to operate under the provisions of parts With respect to which entities must 38 or 49 of this chapter. register as a SEF, the SEF NPRM stated Several commenters asserted that the that in order for an entity to meet the proposed rule is ambiguous as to who (a) Commission Determination SEF definition and satisfy the SEF must register as a SEF as required under The Commission received no CEA section 5h(a)(1) and requested registration requirements, multiple 49 comments on this section and is parties must have the ability to execute clarification. For example, UBS stated adopting the provision as proposed.37 or trade swaps by accepting bids and that the Commission should clarify that ‘‘the SEF registration requirement in offers made by multiple participants.42 2. § 37.2—Applicable Provisions [CEA section 5h(a)(1)] only applies to In this regard, the SEF NPRM stated that platforms that meet the SEF Proposed § 37.2 listed the one-to-one voice services and single definition.’’ 50 Commission regulations that, in dealer platforms do not satisfy the SEF In addition, Barclays addition to part 37, will be applicable to definition because multiple participants SEFs, including regulations that have 44 Id. do not have the ability to execute or 45 been codified and are proposed to be CEA section 5h(a)(1) states that ‘‘[n]o person trade swaps with multiple may operate a facility for the trading or processing codified upon the Commission’s participants.43 In addition, the SEF of swaps unless the facility is registered as a swap finalization of the rulemakings NPRM stated that entities that operate execution facility or designated contract implemented pursuant to the Dodd- exclusively as swap processors do not market. . . .’’ 7 U.S.C. 7b–3(a)(1). Frank Act. 46 Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1219. (a) Commission Determination 38 Adaptation of Regulations to Incorporate 47 Id. at 1221–22. CEA sections 2(h)(7) and Swaps, 77 FR 66288 (Nov. 2, 2012). The 2(h)(8); 7 U.S.C. 2(h)(7) and 2(h)(8). See discussion Although it received no comments on Commission may promulgate a second phase of below under § 37.10—Swaps Made Available for this section, the Commission is revising conforming changes to its regulations once more Trading in the preamble for further details proposed § 37.2 to generally state that rules relating to swaps are finalized. regarding this process. 39 The term ‘‘contract market’’ used in § 1.60 of 48 SEFs shall comply with, in addition to Id. at 1222. the Commission’s regulations should be interpreted 49 CEA section 5h(a)(1) states that ‘‘[n]o person part 37, all applicable Commission to include a SEF for purposes of applying the may operate a facility for the trading or processing regulations, and to only cite those requirements of § 1.60 to a SEF. 17 CFR 1.60. of swaps unless the facility is registered as a swap specific provisions whose applicability 40 The term ‘‘exchange’’ used in part 9 of the execution facility or designated contract to SEFs may not be apparent. The Commission’s regulations should be interpreted to market. . . .’’ 7 U.S.C. 7b–3(a)(1). UBS Comment include a SEF for purposes of applying the Letter at 1–2 (May 18, 2012); UBS Comment Letter Commission notes that a separate requirements of part 9 to a SEF. 17 CFR part 9. at 2–3 (Nov. 2, 2011); Barclays Comment Letter at 41 The Commission is renaming the title of this 2 (Jun. 3, 2011); Deutsche Comment Letter at 6 36 Subparts B through P begin with a regulation section from ‘‘Requirements for Registration’’ to (Mar. 8, 2011); Bloomberg Comment Letter at 3 containing the language of the core principle in the ‘‘Requirements and Procedures for Registration’’ to (Mar. 8, 2011); State Street Comment Letter at 3 Act. provide greater clarity. The Commission is also (Mar. 8, 2011); CME Comment Letter at 8 (Mar. 8, 37 The Commission has removed the phrase ‘‘has restructuring the order of § 37.3 to provide clarity. 2011). been registered’’ from proposed § 37.1 because a 42 Core Principles and Other Requirements for 50 UBS Comment Letter at 1 (May 18, 2012). The SEF that has been registered is the same as a SEF Swap Execution Facilities, 76 FR at 1219. Commission notes that UBS submitted 2 comment that is registered. 43 Id. letters on May 18, 2012.

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commented that the language of CEA firm bids and offers without the entirely controlled by the compression section 5h(a)(1) should not be read disclosure of the terms of those bids and algorithm.65 On a specified date, broadly to require SEF registration for offers to other participants, and that the TriOptima runs the compression cycle, any platform or system that executes or auction algorithmically processes the which produces a set of proposed processes swaps to the extent it is bids and offers to match participants transactions for each participant.66 The deemed to be a ‘‘facility’’ without efficiently.57 Nodal further explained proposed transactions, if effected, considering whether such swaps are or that auction volume is awarded to would terminate or modify participants’ are not subject to the CEA section participants at the same price and at a existing trades in order to reduce the 2(h)(8) trade execution mandate.51 price equal to or better than the outstanding trade count and outstanding Similarly, Bloomberg noted the broad participants’ auction order.58 gross notional value of swaps in the language under the CEA section 5h(a)(1) 67 (iii) Aggregation Services or Portals participants’ portfolios. Each registration requirement, and stated that participant receives only details of the if Congress intended that all swaps be UBS and Bloomberg requested proposed compression transactions to traded on a SEF or DCM, then the trade clarification whether aggregator services which it is a party, but all of the 59 execution mandate under CEA section are required to register as SEFs. UBS compression transactions must be 2(h)(8) would be unnecessary.52 The stated that an aggregator service will accepted in order for the particular Commission also received comments provide customers with the ability to compression cycle to occur.68 If a single and specific requests for a Commission access the best available liquidity and participant declines to agree to the determination as to whether certain pricing on multiple SEFs through the proposed compression transactions, business models or services must aggregator’s screen so that customers then the entire compression cycle fails register as a SEF, including one-to-many will not have to connect to each SEF and the pre-compression swap 60 platforms, blind auction platforms, individually. UBS stated that an transactions remain in effect.69 aggregation services or portals, portfolio aggregator service should not be TriOptima contended that such services compression services, risk mitigation required to register as a SEF because the do not perform the role of a trade services, and swap processing services. transaction is executed on the relevant execution venue so they should not be SEF’s platform.61 (i) One-to-Many Systems or Platforms regulated as a SEF.70 (iv) Services Facilitating Portfolio ICAP stated that its bulk risk AFR opined that single dealer or one- Compression and Risk Mitigation mitigation service assists market to-many platforms do not meet the SEF Transactions participants in managing their risk definition in CEA section 1a(50), which exposures by identifying offsetting risk refers to a system in which multiple Several commenters sought requirements and executing new parties have the ability to execute or clarification that portfolio compression offsetting trades among those trade swaps by accepting bids or offers and risk mitigation services are not participants.71 Specifically, ICAP stated from multiple participants.53 Similarly, required to register as SEFs.62 that its risk mitigation service sets the IECA stated that SEFs should operate in According to TriOptima, its portfolio curve and price for all trades based on a way that publicly reveals market compression service provides a netting a survey of market making entities, such prices, and that preserving the ‘‘one-to- mechanism that reduces the outstanding as banks, or other entities that are one’’ pricing model of existing dealer trade count and outstanding gross notional value of swaps in participants’ willing to provide quotes, as well as systems is inconsistent with the SEF 72 definition.54 portfolios by terminating or modifying price quotes on DCMs. All prospective existing trades.63 Specifically, participants in a particular risk (ii) Blind Auction Systems or Platforms TriOptima stated that prospective mitigation run are first shown the curve Nodal commented that a blind participants may sign up for a and prices for transactions along the 73 auction platform should be able to scheduled compression cycle and the curve. Subsequently, the prospective register as a SEF.55 Nodal contended participants must provide detailed data participants provide ICAP with data that its blind auction platform meets the about their respective portfolios and risk about any of their positions of their SEF definition because multiple tolerances.64 Other than to update mark- choosing and their acceptable risk 74 participants have the ability to execute to-market values shortly before the tolerances. ICAP then runs a swap transactions by accepting bids and compression cycle is run, prospective proprietary algorithm, which produces a offers made by multiple participants participants have no further input into set of proposed transactions for each 75 albeit without the pre-trade posting of the compression process, which is participant. The proposed bids or offers.56 Nodal explained that its transactions, if effected, would result in platform allows participants to submit 57 Id. new trades for the participants that 58 Id. at 2. enable them to manage their exposures 51 Barclays Comment Letter at 2 (Jun. 3, 2011). 59 UBS Comment Letter at 1 (May 18, 2012); to market, credit, or other sources of 52 Bloomberg Comment Letter at 3 (Mar. 8, 2011). Meeting with UBS dated Mar. 27, 2012; Meeting 53 AFR Comment Letter at 3–4 (Mar. 8, 2011). JP with Bloomberg dated Jan. 18, 2012. See also UBS 65 Id. at 3. Comment Letter at 1 (Nov. 2, 2011). Morgan also commented that it agrees with the 66 Id. 60 Meeting with UBS dated Mar. 27, 2012. See Commission that a single dealer platform cannot 67 Id. qualify as a SEF because it fails to satisfy the also UBS Comment Letter at 1 (Nov. 2, 2011). 68 Id. ‘‘multiple to multiple’’ language in the SEF 61 Meeting with UBS dated Mar. 27, 2012. 69 Id. definition. JP Morgan Comment Letter at 3 (Mar. 8, 62 Meeting with ICAP and TriOptima dated Sep. 70 2011). 6, 2012; Meeting with ICAP dated Aug. 29, 2012; Id. 54 IECA Comment Letter at 3 (May 24, 2011). Meeting with ICE dated Jul. 25, 2012; WMBAA 71 Meeting with ICAP dated Aug. 29, 2012; ICAP 55 Nodal Comment Letter at 2–3 (Jun. 3, 2011); Comment Letter at 3 (Jul. 18, 2011); ICAP Comment Comment Letter at 1, 4 (Jul. 7, 2011). Nodal Comment Letter at 2–3 (Mar. 8, 2011). Nodal Letter at 2 (Jul. 7, 2011); TriOptima Comment Letter 72 Meeting with ICAP dated Aug. 29, 2012; ICAP also expressed support for blind auction platforms at 1 (Mar. 8, 2011). Comment Letter at 4 (Jul. 7, 2011). in its comment letter to the Second Amendment to 63 TriOptima Comment Letter at 2, 4 (Mar. 8, 73 Id. July 14, 2011 Order for Swap Regulation Notice of 2011). 74 Id. The service does not place any constraints Proposed Amendment, 77 FR 28819 (proposed May 64 Id. at 2. The service does not place any on the number of positions or risk tolerances of 16, 2012). constraints on the number of positions or risk prospective participants. Id. 56 Nodal Comment Letter at 3 (Mar. 8, 2011). tolerances of prospective participants. Id. 75 Id.

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risk.76 All transactions must be accepted in section 1a(50) of the Act and the the CEA section 2(h)(8) trade execution in order for a particular risk mitigation trade execution requirement in section requirement may be executed on either run to occur.77 If a single participant 2(h)(8) of the Act. As noted in the SEF a registered SEF (i.e., a facility that declines to agree to the proposed risk NPRM, the Commission views the CEA meets the SEF definition) or an mitigation transactions, then the entire section 5h(a)(1) registration alternative entity that is not required to risk mitigation run fails and the existing requirement 84 as applying only to register as a SEF (e.g., see one-to-many swap transactions remain in effect.78 facilities that meet the SEF definition in system or platform discussion below).88 While its bulk risk mitigation services CEA section 1a(50).85 Section 1a(50) of This clarification is consistent with the result in market participants entering the Act defines a SEF as ‘‘a trading Commission’s acknowledgement in the into new trades, ICAP commented that system or platform in which multiple SEF NPRM that swap transactions that such services do not meet the SEF participants have the ability to execute are not subject to the CEA section definition because they do not permit or trade swaps by accepting bids and 2(h)(8) trade execution requirement participants to trade in real-time, offers made by multiple participants in would not have to be executed on a negotiate price, or initiate directional the facility or system, through any registered SEF.89 trades.79 means of interstate commerce, including The Commission believes that its any trading facility, that—(A) Facilitates interpretation of the registration (v) Swap Processing Services the execution of swaps between provision in CEA section 5h(a)(1) is In its first comment letter, persons; and (B) is not a designated consistent with the statute and helps MarkitSERV agreed with the SEF NPRM contract market.’’ 86 Accordingly, the further the goals provided in CEA that entities operating exclusively as Commission is revising proposed § 37.3 section 5h, which are to promote the swap processors should not have to to clarify the scope of the registration trading of swaps on SEFs and to register as SEFs because they only requirement, which states that ‘‘[a]ny promote pre-trade price transparency in provide post-execution services that person operating a facility that offers a the swaps market. Although the facilitate clearing and settlement, not trading system or platform in which registration provision is written in broad services relating to the execution of more than one market participant has language and could be read to require swaps.80 However, in a subsequent the ability to execute or trade swaps the registration of any facility for the comment letter, after the SEC’s with more than one other market trading or processing of swaps, the proposed rule that would require certain participant on the system or platform Commission notes that other statutory providers of post-trade services to shall register the facility as a swap provisions appear to narrow the register with the SEC as clearing execution facility under this part 37 or registration requirement. For example, agencies, MarkitSERV recommended as a designated contract market under the CEA section 2(h)(8) trade execution that the Commission regulate entities part 38 of this chapter.’’ 87 requirement and CEA section 5h(d)(2), that perform the confirmation and The Commission also clarifies that which states that ‘‘[f]or all swaps that processing of swaps.81 While swap transactions that are not subject to are not required to be executed through MarkitSERV acknowledged that the a swap execution facility . . . such SEC’s authority under the Securities and 84 CEA section 5h(a)(1) states that ‘‘[n]o person trades may be executed through any Exchange Act of 1934 to regulate swap may operate a facility for the trading or processing other available means of interstate of swaps unless the facility is registered as a swap 90 processors as a clearing agency has no execution facility or as a designated contract commerce[,]’’ when read together, parallel in the CEA, MarkitSERV market. . . .’’ 7 U.S.C. 7b–3(a)(1). contemplate alternative entities that are recommended that the Commission 85 See Core Principles and Other Requirements for not required to register as SEFs and may Swap Execution Facilities, 76 FR at 1219 execute those swaps that are not register such entities to avoid (explaining that entities that operate exclusively as unnecessarily inconsistent swap processors do not meet the SEF definition and 88 regulations.82 MarkitSERV should not be required to register as a SEF despite The Commission notes that it is not tying the the broad language in the CEA section 5h(a)(1) registration requirement in CEA section 5h(a)(1) to recommended that the Commission the trade execution requirement in CEA section require swap processors to register as a registration provision). 86 CEA section 1a(50); 7 U.S.C. 1a(50). The 2(h)(8), such that only facilities trading swaps sub-category of SEFs because CEA Commission notes that the Secretary of the Treasury subject to the trade execution requirement would be section 5h(a)(1) references the issued a written determination pursuant to CEA required to register as a SEF. Therefore, a facility would be required to register as a SEF if it operates processing of swaps.83 sections 1a(47)(E) and 1b that foreign exchange swaps and foreign exchange forwards should not be in a manner that meets the SEF definition even (2) Commission Determination regulated as swaps under the CEA, and therefore though it only executes or trades swaps that are not should be exempted from the definition of the term subject to the trade execution mandate. The In response to commenters’ requests ‘‘swap’’ under the CEA. See Determination of Commission also notes that transactions involving for clarification regarding the Foreign Exchange Swaps and Foreign Exchange swaps on SEFs that are subject to the trade execution mandate are considered to be ‘‘Required registration requirement, the Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). Accordingly, if a facility Transactions’’ under part 37 of the Commission’s Commission is clarifying how it offers a trading system or platform solely for the regulations, whereas ‘‘Permitted Transactions’’ are interprets the broad registration execution or trading of foreign exchange swaps or transactions not involving swaps that are subject to provision in section 5h(a)(1) of the Act foreign exchange forwards, then the facility would the trade execution mandate. As discussed further below, the regulatory obligations which pertain to in coordination with the specific not be required to register as a SEF. 87 The Commission is adding this new provision Permitted Transactions differ from, and are requirements for a SEF’s structure found to § 37.3(a)(1). As a result, proposed § 37.3(a) is somewhat less rigorous than, those for Required adopted as § 37.3(b), proposed § 37.3(b) is adopted Transactions. See discussion below regarding 76 Id. as § 37.3(c), proposed § 37.3(c) is adopted as Permitted Transactions under § 37.9(a)(1)(iv)— Required Transactions and § 37.9(a)(1)(v)— 77 Id. § 37.3(d), proposed § 37.3(d) is adopted as § 37.3(e), Permitted Transactions in the preamble. See also 78 Id. proposed § 37.3(e) is adopted as § 37.3(f), and proposed § 37.3(f) is adopted as § 37.3(g). The SEF Process for a Designated Contract Market or Swap 79 ICAP Comment Letter at 2 (Jan. 16, 2013); ICAP Execution Facility To Make a Swap Available To Comment Letter at 4 (Jul. 7, 2011). NPRM stated that certain entities such as one-to-one voice services and single-dealer platforms do not Trade, 76 FR 77728 (proposed Dec. 14, 2011) 80 MarkitSERV Comment Letter at 6 (Mar. 8, provide the ability for participants to conduct (discussing the process by which a swap is 2011). multiple-to-multiple execution or trading because determined to be subject to the trade execution 81 MarkitSERV Comment Letter at 1–2 (Jun. 3, they limit the provision of liquidity to a single requirement in CEA section 2(h)(8)). 2011). liquidity provider. Core Principles and Other 89 Core Principles and Other Requirements for 82 Id. at 3–4. Requirements for Swap Execution Facilities, 76 FR Swap Execution Facilities, 76 FR at 1222. 83 Id. at 5. at 1219. 90 CEA section 5h(d)(2); 7 U.S.C. 7b–3(d)(2).

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required to be executed on a SEF (i.e., (ii) Blind Auction Systems or Platforms (iv) Services Facilitating Portfolio those swaps that are not subject to the The Commission understands from Compression and Risk Mitigation CEA section 2(h)(8) trade execution commenters that a blind auction system Transactions requirement). The Commission is or platform, as described above, allows The Commission notes that portfolio interpreting the CEA section 5h(a)(1) market participants to submit firm bids compression services provide a netting registration provision in a manner that and offers without disclosure of the mechanism that reduces the outstanding is consistent with the SEF definition in terms of those bids and offers to other trade count and outstanding gross CEA section 1a(50), the trade execution participants. Such bids and offers are notional value of swaps in two or more requirement in CEA section 2(h)(8), and matched through a pre-determined swap counterparties’ portfolios.95 To CEA section 5h(d)(2), as discussed algorithm. The Commission believes achieve this result, a portfolio above. that an entity that provides such a blind compression service, for example, may The following discussion is not auction system or platform would meet wholly terminate or change the notional intended to comprehensively cover the SEF definition in CEA section 1a(50) value of some or all of the swaps which entities are required to register as because more than one market submitted by the counterparties for a SEF. Whether a particular entity falls participant has the ability to execute or inclusion in the portfolio compression within the scope of CEA section 5h(a)(1) trade swaps with more than one other exercise and, depending on the depends on all of the relevant facts and market participant on the system or methodology employed, replace the circumstances of the entity’s operations. platform. Accordingly, an entity that terminated swaps with other swaps The Commission is mindful that any provides such a blind auction system or rule attempting to capture all of the whose combined notional value (or platform would have to register as a SEF some other measure of risk) is less than possible configurations of facilities that under section 5h(a)(1) of the Act. provide for the execution or trading of the combined notional value (or some (iii) Aggregation Services or Portals other measure of risk) of the terminated swaps may be or become over-inclusive 96 or under-inclusive in light of swaps in the compression exercise. The Commission understands that The swap counterparties’ risk profiles technological changes and the ever certain entities may seek to provide evolving swaps market.91 However, in are not materially changed as a result of their users with the ability to access the portfolio compression exercise. response to commenters’ requests, the multiple SEFs and the market Commission is providing examples of The Commission does not believe that participants thereon, but do not provide a portfolio compression service, as how it would interpret the CEA section for execution on their aggregation 5h(a)(1) registration requirement with described above, provides for the services as execution occurs on one of execution or trading of swap respect to certain categories of better those individual SEFs. The Commission understood facilities. transactions between counterparties believes that an entity that provides because the compression service is (i) One-to-Many Systems or Platforms such an aggregation service would not providing a netting mechanism whereby meet the SEF definition in CEA section The Commission continues to believe the outstanding trade count and 1a(50) because it is only providing a that a one-to-many system or platform outstanding gross notional value of portal through which its users may on which the sponsoring entity is the swaps in two or more swap access multiple SEFs and swaps are not counterparty to all swap contracts counterparties’ portfolios are reduced. executed or traded through the service. executed through the system or platform Therefore, an entity providing such a Accordingly, an entity that provides would not meet the SEF definition in portfolio compression service would not such an aggregation service or portal section 1a(50) of the Act and, therefore, meet the SEF definition in section would not have to register as a SEF 1a(50) of the Act and would not have to would not be required to register as a 93 SEF under section 5h(a)(1) of the Act. In under section 5h(a)(1) of the Act. register as a SEF under section 5h(a)(1) the Commission’s view, such a system However, the Commission notes that to of the Act.97 or platform does not meet the SEF the extent that an aggregation service or The Commission understands from definition because it limits the portal itself provides a trading system or commenters that certain entities provide provision of liquidity to a single platform whereby more than one market liquidity provider (i.e., the sponsoring participant has the ability to execute or multiple users. These services would have to entity). Accordingly, market trade swaps with more than one other register as a SEF under section 5h(a)(1) of the Act. market participant on the system or The Commission notes that if other types of ISVs participants do not have the ability to provide a system or platform whereby more than conduct multiple-to-multiple execution platform, the aggregation service would one participant has the ability to execute or trade 94 or trading on such a trading system or be required to register as a SEF. swaps with more than one other participant on the platform. The Commission notes, system or platform, then they would also have to To Trade, 76 FR 77728 (proposed Dec. 14, 2011) register as a SEF under section 5h(a)(1) of the Act. however, that transactions in swaps that (discussing the process by which a swap is See discussion below regarding ISVs under are subject to the trade execution determined to be subject to the trade execution § 37.202(a)—Impartial Access by Members and mandate, under CEA section 2(h)(8), requirement in CEA section 2(h)(8)). The trade Market Participants in the preamble. must be executed on a DCM or SEF and, execution requirement provides an exception to the 95 Confirmation, Portfolio Reconciliation, requirement for swap transactions subject to the Portfolio Compression, and Swap Trading accordingly, may not be executed on a clearing exception under CEA section 2(h)(7). Relationship Documentation Requirements for 92 one-to-many system or platform. 93 The Commission notes that footnote 423 below Swap Dealers and Major Swap Participants, 77 FR classifies aggregator platforms as a type of 55904, 55932 (Sep. 11, 2012). 91 The Commission notes that entities seeking independent software vendor (‘‘ISV’’). Therefore, 96 Id. at 55960. guidance concerning their SEF registration other types of ISVs would not have to register as 97 The Commission notes, however, that obligations may request such further guidance from a SEF if they only provide their users with the transactions in swaps that are subject to the trade the Division of Market Oversight (‘‘DMO’’). ability to access multiple SEFs, but do not provide execution mandate, under CEA section 2(h)(8), 92 Transactions in swaps that are subject to the for execution or trading of swaps. See discussion must be executed on a DCM or SEF and, clearing requirement in CEA section 2(h)(1) and below regarding ISVs under § 37.202(a)—Impartial accordingly, may not be executed on a portfolio ‘‘made available to trade’’ would be subject to the Access by Members and Market Participants in the compression service (unless no DCM or SEF makes trade execution requirement. See CEA sections preamble. the swap available to trade or the swap transaction 2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8). See 94 For example, some aggregation services may is excepted or exempted from clearing under CEA also Process for a Designated Contract Market or provide their users with a portal to multiple SEFs section 2(h)(7) or as otherwise provided by the Swap Execution Facility To Make a Swap Available and also execute swap transactions between their Commission).

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risk mitigation services, as described participants execute such risk mitigating functionalities trigger the registration above, that operate to assist market trades on the DCM and not through a requirement, the Commission is moving participants in managing their separate non-DCM service. As such, risk proposed § 37.9(b)(2) to final exposures to market, credit, and other mitigation services are providing an § 37.3(a)(2). As discussed in the SEF sources of risk. These risk mitigation alternative avenue to execute certain NPRM, an entity that must register as a services may redistribute or mitigate swap transactions between SEF under CEA section 5h(a)(1) must market participants’ risks, but they do counterparties. ensure that its operations comply with not provide a netting mechanism. To Furthermore, the Commission the minimum trading functionality redistribute or mitigate risk, a risk believes that the confluence of trading requirement.100 The minimum trading mitigation service, for example, may interests from a diverse range of functionality requirement in proposed allow market participants to identify motivations (e.g., risk mitigating and § 37.9(b)(2) provided that an applicant elements of risk in their respective risk taking trades) brings depth to the seeking registration as a SEF must, at a portfolios and to submit information marketplace and helps to build liquid minimum, offer trading services to about these risks to the service. The risk markets. If the Commission did not facilitate Required Transactions by mitigation service may set the prices for require these risk mitigation services to providing market participants with the all points along the maturity or credit register as SEFs, then market ability to post both firm and indicative curve for all trades and the service’s participants would be able to execute quotes on a centralized electronic screen proprietary algorithm produces a set of certain swap transactions away from the accessible to all market participants proposed transactions for each SEF, which would hurt liquidity and who have access to the SEF. participant. If all participants accept the also the trading of swaps on SEFs. This (1) Summary of Comments proposed transactions, then the new would contradict one of the goals in trades are executed. section 5h of the Act, which is to Several commenters stated that the In the Commission’s view, such an promote the trading of swaps on SEFs.99 minimum trading functionality is entity would meet the SEF definition in For the reasons mentioned above, the similar to an order book, which is not CEA section 1a(50) because more than Commission believes that an entity that required by the SEF definition.101 In one market participant has the ability to provides such a risk mitigation service this regard, Commissioner Sommers execute swaps with more than one other would have to register as a SEF under offered a dissent to the SEF NPRM, market participant on the system or section 5h(a)(1) of the Act. However, the which was published as Appendix 3 to platform.98 In response to ICAP’s Commission notes that such entities that notice.102 Commissioner Sommers’ comment that such services do not meet may not have to register as a SEF if they dissent asserted that the minimum the SEF definition because they do not only provide the analytical services that trading functionality requirement is not permit participants to trade in real-time, produce the proposed risk mitigation mandated by the Dodd-Frank Act.103 In negotiate price, or initiate directional transactions and the execution of those addition, Commissioner Sommers’ trades, the Commission notes that the transactions occurs elsewhere and, in dissent argued for a broader SEF definition does not require any of particular, the execution of those interpretation of the terms ‘‘trading these stated characteristics. As noted transactions that are subject to the trade system’’ and ‘‘platform,’’ which are above, the outcome of a successful risk execution mandate occurs on a SEF. included in the statutory SEF definition mitigation run is the execution of new so that SEFs can offer a broader model trades between multiple participants at (v) Swap Processing Services for executing swaps.104 Many prices accepted by those multiple As noted in the SEF NPRM, entities commenters also stated that the SEF participants. that solely engage in trade processing definition only requires that the facility Additionally, the Commission notes would not meet the SEF definition in provide multiple participants with the that there are alternative avenues to CEA section 1a(50) because they do not ‘‘ability’’ to execute or trade swaps by managing the same risks that risk provide the ability to execute or trade a accepting bids and offers made by mitigation services manage, including swap as required by the definition. ‘‘multiple participants’’ and, thus, the bringing the risk mitigating orders to the Accordingly, swap processing services definition does not require making bids open market. For instance, a market would not have to register as a SEF or offers transparent to the entire market participant could assess the various risk under CEA section 5h(a)(1). Consistent but rather to multiple participants.105 elements in its portfolio using with this distinction, the Commission Better Markets commented that the appropriate tools, and then decide on a declines to create a sub-category of SEFs Commission’s minimum trading set of trades to mitigate these risks. The for processing services that would be market participant could choose to subject to some limited subset of SEF 100 Core Principles and Other Requirements for execute these trades through a risk core principles as requested by Swap Execution Facilities, 76 FR at 1219. 101 Reuters Comment Letter at 3–4 (Dec. 12, 2011); mitigation service, a SEF, or a DCM. In MarkitSERV. Rosen et al. Comment Letter at 8–9 (Apr. 5, 2011); fact, in the DCM context, market Finally, the Commission notes that WMBAA Comment Letter at 4, 9 (Mar. 8, 2011); platforms seeking guidance concerning ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 2011); 98 The Commission also notes that ICAP’s Web the SEF registration obligations and its FXall Comment Letter at 4–5 (Mar. 8, 2011). sites for its Reset and ReMatch risk mitigation Commissioner Sommers’ dissent to the SEF NPRM. services support the notion that these services are application to their particular See Core Principles and Other Requirements for executing trades between counterparties. ICAP’s operations may request informal Swap Execution Facilities, 76 FR at 1259. Reset Web site states that ‘‘[t]he new RESET guidance from the Division of Market 102 Core Principles and Other Requirements for matching engine allows for unilateral matching Oversight (‘‘DMO’’). Swap Execution Facilities, 76 FR at 1259. with hedging. No longer is it necessary to have an 103 Id. offsetting position for each trade to be executed.’’ (b) § 37.9(b)(2)—Minimum Trading 104 Id. See http://www.reset.net/aboutus.php. A press Functionality (Final § 37.3(a)(2)) 105 Reuters Comment Letter at 3–4 (Dec. 12, 2011); article regarding ReMatch states that ‘‘ReMatch Rosen et al. Comment Letter at 8 (Apr. 5, 2011); addresses the problem of minimal or no exit To further clarify what functionalities ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 2011); liquidity . . . [by] enabling market participants to a SEF must provide if it is required to CME Comment Letter at 7–8 (Mar. 8, 2011); FXall exit positions that they may otherwise have been Comment Letter at 4–5 (Mar. 8, 2011); Barclays unable to.’’ See http://www.icap.com/news-events/ register as a SEF, as opposed to what Comment Letter at 5 (Mar. 8, 2011); MarketAxess in-the-news/news/2011/rematch-expands-service- Comment Letter at 32–33 (Mar. 8, 2011); WMBAA into-us-financials.aspx. 99 CEA section 5h(e); 7 U.S.C. 7b–3(e). Comment Letter at 8 (Mar. 8, 2011).

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functionality requirement is an overly Commissioner Sommers, that an order multiple participants to execute swaps broad interpretation of the SEF book is not required by the SEF by accepting bids and offers made by definition because it allows a SEF to be definition, the Commission believes that multiple participants through any almost any type of system or an Order Book, as defined in final means of interstate commerce.119 The platform.106 Therefore, it recommended § 37.3(a)(3), is consistent with the SEF Commission notes that a DCM must that the Commission narrowly interpret definition and promotes the goals operate as a trading facility and in the multiple participant to multiple provided in section 733 of the Dodd- conjunction with that trading facility is participant requirement so that the Frank Act.113 This interpretation is also also permitted to utilize additional scope of acceptable execution methods consistent with the SEF NPRM, as the execution methods; however, those has rational boundaries.107 Commission noted that it took into additional execution methods are Several commenters expressed account these requirements when limited by the requirements set forth in concern about the requirement to post proposing the minimum trading DCM Core Principle 9, for which there indicative quotes.108 Nodal and other functionality requirement.114 is no identical core principle for SEFs. commenters expressed concern that The Commission notes, however, that indicative quotes could be used for Finally, given the changes to the the final regulations provide SEFs with minimum trading functionality manipulative purposes.109 Tradeweb additional flexibility in the execution commented that, under the proposal, requirement, the Commission notes that methods for Required Transactions by SEFs are not required to offer indicative SEFs operating an anonymous order allowing SEFs to offer an RFQ System book system would be required to offer quote functionality. The Commission in conjunction with an Order Book, as agrees with commenters that indicative indicative quotes due to the minimum described below, to permit market trading functionality requirement, quotes would not be appropriate for participants to access multiple market certain trading systems or platforms which would not be suitable for participants, but not necessarily the 110 complying with the Order Book anonymous order book marketplaces. 115 entire market. The Commission also definition in final § 37.3(a)(3) (e.g., (2) Commission Determination notes that a SEF may petition the central limit order books facilitating Commission under § 13.2 of the The Commission reiterates its view in only anonymous trading). Commission’s regulations to amend its the SEF NPRM that an entity that must regulations to include additional (c) § 37.9(a)(1)(i)—Order Book (Final register as a SEF under CEA section execution methods for Required § 37.3(a)(3)) 5h(a)(1) must ensure that its operations Transactions.116 The final regulations comply with the minimum trading further allow a SEF to utilize ‘‘any The Commission is also moving functionality requirement.111 The means of interstate commerce’’ in proposed § 37.9(a)(1)(i) to final Commission reaffirms that an acceptable § 37.3(a)(3) given the relocation of, and SEF system or platform must provide at providing the execution methods in § 37.9(a)(2)(i)(A) or (B) (i.e., an Order changes to, the minimum trading least a minimum functionality to allow functionality section as discussed market participants the ability to make Book or an RFQ System that operates in conjunction with an Order Book, as above. Proposed § 37.9(a)(1)(i) defined executable bids and offers, and to 117 the term ‘‘Order Book’’ to mean: (A) An display them to all other market described below). The Commission also notes that a SEF may provide any electronic trading facility, as that term is participants on the SEF. The defined in section 1a(16) of the Act; 120 Commission is adopting a revised method of execution for Permitted Transactions.118 By allowing SEFs to (B) a trading facility, as that term is version of proposed § 37.9(b)(2), which defined in section 1a(51) of the Act; 121 now requires a SEF to provide an Order offer additional methods of execution, and permitting flexible means for (C) a trading system or platform in Book as defined in final § 37.3(a)(3) (i.e., which all market participants in the an electronic trading facility, a trading executing swaps through these methods of execution, as discussed below, the trading system or platform can enter facility, or a trading system or platform multiple bids and offers, observe bids in which all market participants have Commission is effectuating the Congressional direction to allow and offers entered by other market the ability to enter multiple bids and participants, and choose to transact on offers, observe or receive bids and 113 CEA section 1a(50); 7 U.S.C. 1a(50). In section such bids and offers; or (D) any such offers, and transact on such bids and 5h(e) of the Act, Congress provided a ‘‘rule of offers) because, as noted by several construction’’ to guide the Commission’s 119 CEA section 1a(50); 7 U.S.C. 1a(50). commenters, the proposed minimum interpretation of certain SEF provisions (stating that 120 The term ‘‘electronic trading facility’’ means the goals of section 5h of the Act are to ‘‘promote trading functionality description is ‘‘a trading facility that—(A) operates by means of the trading of swaps on [SEFs] and to promote pre- similar to the proposed definition of an an electronic or telecommunications network; and trade price transparency in the swaps market’’). 7 112 (B) maintains an automated audit trail of bids, Order Book. In response to U.S.C. 7b–3(e). offers, and the matching of orders or the execution comments, like the one provided by 114 Core Principles and Other Requirements for of transactions on the facility.’’ CEA section 1a(16); Swap Execution Facilities, 76 FR at 1219. 7 U.S.C. 1a(16). The Commission notes that, under 106 Better Markets Comment Letter at 6–7 (Mar. 8, 115 See discussion below under § 37.9(a)(1)(ii)— section 1a(16) of the Act, the term ‘‘electronic 2011). Request for Quote System in the preamble. trading facility’’ incorporates the definition of 107 Id. 116 See discussion below under § 37.9(b)(1) and ‘‘trading facility’’ as that term is defined under 108 Nodal Comment Letter at 3–4 (Mar. 8, 2011); (b)(4)—Execution Methods for Required section 1a(51) of the Act. ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); Transactions in the preamble. Section 13.2 will 121 The term ‘‘trading facility’’ means ‘‘a person SIFMA AMG Comment Letter at 9 (Mar. 8, 2011); allow the Commission to consider if a broader or group of persons that constitutes, maintains, or ICE Comment Letter at 3 (Mar. 8, 2011); Tradeweb model for executing on SEFs, consistent with the provides a physical or electronic facility or system Comment Letter at 6 (Mar. 8, 2011). suggestion in Commissioner Sommers’ dissent, in which multiple participants have the ability to 109 Nodal Comment Letter at 3–4 (Mar. 8, 2011); would be appropriate on a case-by-case basis, in execute or trade agreements, contracts, or ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); conformance with the CEA and the Commission’s transactions—(i) by accepting bids or offers made SIFMA AMG Comment Letter at 9 (Mar. 8, 2011); regulations. Core Principles and Other by other participants that are open to multiple ICE Comment Letter at 3 (Mar. 8, 2011). Requirements for Swap Execution Facilities, 76 FR participants in the facility or system; or (ii) through 110 Tradeweb Comment Letter at 6 (Mar. 8, 2011). at 1259. the interaction of multiple bids or multiple offers 111 Core Principles and Other Requirements for 117 See discussion below under § 37.9(b)(1) and within a system with a pre-determined non- Swap Execution Facilities, 76 FR at 1219. (b)(4)—Execution Methods for Required discretionary automated trade matching and 112 The Commission is renumbering proposed Transactions in the preamble. execution algorithm.’’ CEA section 1a(51)(A); § 37.9(b)(2) to § 37.3(a)(2). 118 See § 37.9(c)(2). 7 U.S.C. 1a(51)(A).

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other trading system or platform as may deemed appropriate, register the governmental authorities in the home be determined by the Commission. applicant as a SEF subject to conditions. country of the facility.133 The Commission observes that the SEC and (1) Summary of Comments (1) Summary of Comments other regulators have not implemented Better Markets commented that the The Commission received several comparable, comprehensive supervision definition of an ‘‘order book’’ should comments encouraging the and regulation to the Commission’s SEF specify that SEF systems must operate harmonization of the registration regulatory scheme at this time. The pursuant to a best price, first-in-time procedures for SEFs with the SEC’s Commission also observes that, it must 122 trade matching algorithm. registration procedures for SB–SEFs.127 comprehensively review and (2) Commission Determination In this regard, MarketAxess understand a SEF’s proposed trading recommended that the Commission models and operations, which will The Commission is adopting the rule allow an SEC-registered SB–SEF to facilitate trading for a more diverse as proposed, subject to the modification notice register with the Commission.128 described below.123 The Commission universe of financial instruments and WMBAA recommended that the underlying commodities than SB–SEFs. notes that the Dodd-Frank Act does not Commission and the SEC adopt a mandate that the Commission specify or Therefore, at this time, the Commission common application form, which would is not allowing for exempt SEFs. require a particular trade-matching provide for a smoother, timelier algorithm for modes of execution transition to the new regulatory In response to Tradeweb’s comment provided by SEFs. Therefore, a SEF has regime.129 about separate applications, the the discretion to use a matching Tradeweb requested that the Commission clarifies that a SEF algorithm such as a price-time, price- Commission confirm that SEF applicant does not need to file separate size-time, or pro-rata allocation, applicants do not need to file separate applications for each mode of execution provided, however, that such matching applications for each mode of execution that it will offer to market participants, algorithm is published in the SEF’s that it will offer to participants, but its application, as noted in Exhibit rulebook and submitted to the provided that the application clearly Q to Form SEF, must describe each Commission for review and approval as 134 identifies the different features of the mode of execution offered. part of the registration application. The separate marketplaces and that each Additionally, in response to Commission is eliminating proposed feature is in compliance with the MarketAxess’s comment about § 37.9(a)(1)(i)(D) because, as discussed rules.130 Additionally, MarketAxess amendments to Form SEF after the in § 37.9 below, a SEF may petition the requested clarification that the Commission registers a SEF, the Commission under § 13.2 to amend Commission does not intend proposed Commission is revising proposed § 37.9(a)(2) to include additional 135 § 37.3(a)(6) to require amendments to § 37.3(a)(6) and Form SEF to clarify execution methods for Required that an amended Form SEF is required Transactions.124 Form SEF after the Commission approves an application.131 for a SEF applicant amending a pending (d) § 37.3(a)—Application application for registration or for a SEF Procedures 125 (2) Commission Determination requesting an amendment to its order of registration. Otherwise, once registered, Proposed § 37.3(a) set forth the The Commission is adopting § 37.3(a) application and approval procedures for and Form SEF as proposed, subject to a SEF must file any amendments to the registration of new SEFs. The certain modifications discussed Form SEF as a submission under part 40 proposed rule required a SEF applicant below.132 The Commission notes that of the Commission’s regulations or as to apply to the Commission by there is no CEA provision which specified by the Commission (e.g., by electronically filing the proposed Form provides for SEF notice registration for filing quarterly financial resources SEF.126 The proposed rule also provided SB–SEFs. The Commission does note, reports pursuant to § 37.1306 or by that the Commission would either however, that section 5h(g) of the Act filing an amended Form SEF). As stated approve or deny the application or, if provides that the Commission ‘‘may in the SEF NPRM, the Commission exempt’’ a SEF from registration if the clarifies that if any information 122 Better Markets Comment Letter at 7 (Mar. 8, facility is subject to comparable, contained in Form SEF is or becomes 2011). comprehensive supervision and inaccurate for any reason, even after a 123 The Commission is renumbering proposed regulation by the SEC, a prudential SEF is registered, the SEF must § 37.9(a)(1)(i) to § 37.3(a)(3). The Commission is regulator, or the appropriate promptly make the appropriate revising the definition in proposed § 37.9(a)(1)(i)(C) corrections with the Commission.136 by replacing the word ‘‘can’’ with the phrase ‘‘have the ability to’’ and deleting the words ‘‘choose to.’’ 127 See Registration and Regulation of Security- The Commission is adding final Based Swap Execution Facilities, 76 FR 10948 The Commission is also adding the words ‘‘or § 37.3(b)(5) to the rule text that requires receive’’ after the word ‘‘observe’’ so that the (proposed Feb. 28, 2011). Tradeweb Comment definition is technology neutral. See ‘‘Through Any Letter at 3–4 (Jun. 3, 2011); MarketAxess Comment the Commission to review an Means of Interstate Commerce’’ Language in the Letter at 20–21 (Mar. 8, 2011); WMBAA Comment application for registration as a SEF SEF Definition discussion below under §§ 37.9(b)(1) Letter at 14 (Mar. 8, 2011); FSR Comment Letter at pursuant to the 180-day timeframe and 10–11 (Mar. 8, 2011); Reuters Comment Letter at 3– and (b)(4)—Execution Methods for Required procedures specified in CEA section Transactions in the preamble for further details. 4 (Mar. 8, 2011). 124 See discussion below under § 37.9(b)(1) and 128 MarketAxess Comment Letter at 20–21 (Mar. (b)(4)—Execution Methods for Required 8, 2011). 133 CEA section 5h(g); 7 U.S.C. 7b–3(g). Transactions in the preamble. 129 WMBAA Comment Letter at 14 (Mar. 8, 2011). 134 The Commission notes that subsequent 125 The Commission is renaming the title of this 130 Tradeweb Comment Letter at 13 (Mar. 8, modifications to a SEF’s modes of execution or any section from ‘‘Application Procedures’’ to 2011). additional SEF modes of execution would ‘‘Procedures for Full Registration’’ to provide 131 MarketAxess Comment Letter at 29 (Mar. 8, constitute rules; therefore, the SEF must submit greater clarity. 2011). such rules to the Commission for review pursuant 126 Proposed Form SEF, as set forth in proposed 132 The Commission is renumbering proposed to the procedures under part 40 of the appendix A to part 37, was to be used for initial § 37.3(a) to § 37.3(b) and making several non- Commission’s regulations. or temporary registration as a SEF as well as for any substantive revisions to this provision and Form 135 The Commission is renumbering proposed amendments to an applicant’s status otherwise not SEF for clarity. The Commission is also moving § 37.3(a)(6) to § 37.3(b)(3). required to be submitted under part 40 of the proposed § 37.3(a)(7) regarding delegated authority 136 Core Principles and Other Requirements for Commission’s regulations. to the Director of DMO to § 37.3(h). Swap Execution Facilities, 76 FR at 1238.

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6(a).137 This section will be effective for regulations applicable to swap qualifying for temporary relief.140 In this SEF applicants who submit their execution facilities. regard, MarketAxess recommended that applications for registration as a SEF on the Commission revise proposed (e) § 37.3(b)—Temporary Grandfather or after two years from the effective date § 37.3(b)(1)(ii) to permit SEF applicants, Relief From Registration 138 of part 37. The Commission is adopting as an alternative to providing this provision so that SEF applicants are Proposed § 37.3(b) provided that an transaction data, to provide materials treated comparably to DCM applicants applicant for SEF registration may substantiating that the applicant’s who currently are subject to the 180-day request that the Commission grant the system is operational and therefore Commission review period under CEA applicant temporary grandfather relief could facilitate trading in listed swaps section 6(a). Although Congress did not from the registration requirement. The upon receiving temporary registration impose a 180-day review period for temporary relief would allow the from the Commission.141 SEFs, the Commission believes that applicant to continue operating during Further, several commenters harmonization of the review periods for the pending application review process. recommended alternative certification DCM and SEF applicants is appropriate Under the proposed rule, to receive standards under proposed 142 given the fact that both are registered temporary relief, the applicant was § 37.3(b)(1)(iii). Bloomberg, for entities for the trading of swaps. The required to provide the following example, recommended that SEFs be Commission also believes that this information to the Commission: (1) An required to certify only that they have requirement will provide greater application for SEF registration implemented rules ‘‘reasonably certainty for SEF applicants regarding submitted in compliance with proposed designed to ensure’’ compliance with 143 the time period for the Commission’s § 37.3(a); (2) a notification of its interest part 37. Similarly, MarketAxess review of their applications. in operating under the temporary relief; recommended a more flexible Finally, the Commission is clarifying (3) transaction data substantiating that certification requirement because the standard upon which the swaps have been traded and continue to compliance with certain core principles Commission will grant or deny be traded on the applicant’s trading will need to await the build-out registration. Proposed § 37.3(a)(1) stated functionality of third-party regulatory system or platform at the time of its 144 that ‘‘[t]he Commission shall approve or application submission; and (4) a service providers. In addition, Phoenix commented that deny the application or, if deemed certification that the applicant believes to avoid any market disruptions, the appropriate, register the applicant as a that it will meet the requirements of part Commission should permit SEF swap execution facility subject to 37 of the Commission’s regulations conditions.’’ In addition, proposed applicants to operate under temporary when it operates under temporary relief. § 37.3(a)(2) stated that ‘‘[t]he application relief while awaiting a Commission must include information sufficient to Under proposed § 37.3(b)(2), an determination to either grant or deny demonstrate compliance with the core applicant’s grant of temporary relief the temporary relief request.145 principles specified in Section 5h of the would expire on the earlier of: (1) The MarketAxess also noted that the Act.’’ Consistent with these provisions, date that the Commission grants or Commission should not ‘‘tie its own the Commission is clarifying in final denies SEF registration; or (2) the date hands’’ by imposing a fixed one-year § 37.3(b)(6) that: (i) The Commission that the Commission rescinds the post-effective time period for reviewing will issue an order granting registration temporary relief. Proposed § 37.3(b)(3) SEF applications.146 contained a sunset date for the upon a Commission determination, in (ii) Comments on DCM Eligibility its own discretion, that the applicant temporary relief provision of 365 days has demonstrated compliance with the following the effective date of the final CME commented that if a DCM has Act and the Commission’s regulations SEF regulations. Finally, the listed cleared swaps prior to the applicable to swap execution facilities; Commission proposed that the SEF adoption of the final rules, then there is (ii) if deemed appropriate, the rules, which include the requirements no reason to exclude them from Commission may issue an order for temporary relief, would be effective applying for temporary relief.147 NYSE granting registration subject to 90 days after their publication in the Liffe recommended that temporary relief conditions; and (iii) the Commission Federal Register. remain available to DCMs either as long as it is available to SEF applicants or on may issue an order denying registration (1) Summary of Comments upon a Commission determination, in an ongoing basis so that a DCM required its own discretion, that the applicant (i) Comments on Temporary under DCM Core Principle 9 to delist a has not demonstrated compliance with Grandfather Relief futures contract at any point in the future would be allowed to seek the Act and the Commission’s MarketAxess commented that the

phrase ‘‘temporary grandfather relief’’ is 140 137 CEA section 6(a); 7 U.S.C. 8(a). The MarketAxess Comment Letter at 16–17 (Mar. Commission notes that under CEA section 6(a), if ambiguous and recommended that the 8, 2011); MFA Comment Letter at 4–5 (Mar. 8, the Commission notifies an applicant that its Commission rename ‘‘temporary 2011). application is materially incomplete and specifies grandfather relief’’ to ‘‘temporary 141 MarketAxess Comment Letter at 16–17 (Mar. the deficiencies in the application, the running of registration.’’ 139 8, 2011). the 180-day period is stayed from the time of such 142 MarketAxess Comment Letter at 4 (Jun. 3, notification. The Commission also notes that if an With respect to the substance of this 2011); Bloomberg Comment Letter at 5 (Jun. 3, applicant does not provide a complete Form SEF as provision, some commenters expressed 2011); State Street Comment Letter at 6–7 (Mar. 8, provided for under § 37.3(b)(1)(i), the Commission concern that the existing trading activity 2011); WMBAA Comment Letter at 14–15 (Mar. 8, will notify the applicant, pursuant to § 37.3(b)(4), 2011); Tradeweb Comment Letter at 13 (Mar. 8, that its application will not be deemed to have been requirement in proposed § 37.3(b)(1)(ii) 2011); MarketAxess Comment Letter at 17–19 (Mar. submitted for purposes of the Commission’s review. would prevent new entities from 8, 2011). By ‘‘complete’’ Form SEF, the Commission means 143 Bloomberg Comment Letter at 5 (Jun. 3, 2011). that the SEF applicant provides appropriately 138 144 MarketAxess Comment Letter at 17–19 (Mar. responsive answers to each of the informational and The Commission is renaming the title of this 8, 2011). exhibit items set forth in Form SEF. The section from ‘‘Temporary Grandfather Relief from 145 Commission notes that if the application is not Registration’’ to ‘‘Temporary Registration’’ to Phoenix Comment Letter at 2 (Mar. 7, 2011). deemed to have been submitted for purposes of the provide greater clarity. 146 MarketAxess Comment Letter at 20 (Mar. 8, Commission’s review, then the 180-day review 139 MarketAxess Comment Letter at 16 (Mar. 8, 2011). period (when effective) will not have commenced. 2011). 147 CME Comment Letter at 11 (Mar. 8, 2011).

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temporary relief from registration as a temporary registration provision as appropriately responsive answers to SEF.148 promoting competition between SEFs by each of the informational and exhibit providing fair opportunities for new items set forth in Form SEF. The (iii) Comments on 90-Day Effective Date entities to establish trading operations Commission notes that it will review a of Regulations in competition with incumbents. SEF applicant’s Form SEF to ensure that Some commenters recommended a The Commission is deleting the it is complete, and will not conduct any longer time period for the effective date certification requirement under substantive review of the form before of the final regulations to provide proposed § 37.3(b)(1)(iii) because it is granting or denying temporary applicants with additional time to unnecessary. The Commission notes, as registration. The Commission notes that implement the large number of changes stated in the SEF NPRM, that once a this temporary registration process is required.149 Nodal commented that the SEF applicant is granted temporary similar to the notice registration process short effective date will disadvantage registration it must comply with all followed by the Commission in the smaller exchanges because its provisions of the Act and the context of other types of registrations.157 supporting external parties will likely Commission’s regulations that are The Commission will review SEF prioritize compliance obligations in applicable to SEFs.154 applicants’ submissions on a rolling order to be responsive to the largest The Commission is revising the basis and the Commission will issue exchanges first.150 MarketAxess and temporary registration provisions to notices either granting or denying NFA recommended that the clarify in final § 37.3(c)(1) that a SEF temporary registration.158 The Commission provide SEF applicants 180 applicant may apply for temporary Commission believes that providing a days after adoption of the final rules to registration if it submits a complete clear and streamlined path to temporary comply with the final SEF regulations in Form SEF and a temporary registration registration will minimize the potential light of forthcoming operational notice.155 The Commission is also for regulatory arbitrage, ensure a level challenges.151 However, SDMA revising the temporary registration playing field, and promote competition supported the 90-day effective date and provisions to require a SEF applicant among SEFs. urged the Commission to be vigilant in that is already operating a swaps-trading The Commission stresses that a grant preventing further delays that platform, in reliance upon either an of temporary registration does not mean undermine the realization of the goals of exemption granted by the Commission that the Commission has determined the Dodd-Frank Act.152 or some form of no-action relief granted that a SEF applicant is fully compliant by the Commission staff, to include in (2) Commission Determination with the Act and Commission the temporary registration notice a regulations, nor does it guarantee that a (i) Temporary Grandfather Relief certification that it is operating pursuant SEF applicant will eventually be The Commission agrees with to such exemption or no-action relief. granted full SEF registration. After MarketAxess that ‘‘temporary The Commission also clarifies that a granting a SEF applicant temporary registration’’ is more accurate than SEF applicant may submit such registration, the Commission will ‘‘temporary grandfather relief’’ and is temporary registration application after review the applicant’s application to accordingly making such change. the final SEF regulations are published assess whether the applicant is fully Additionally, based on the comments, in the Federal Register until the compliant with the requirements of the the Commission is adopting proposed termination of the temporary Act and the Commission’s regulations § 37.3(b) as final § 37.3(c) subject to a registration provision pursuant to final applicable to SEFs. During such number of modifications.153 § 37.3(c)(5).156 assessment, the Commission may The Commission further agrees with Pursuant to final § 37.3(c)(1), the request from the SEF applicant MarketAxess and other commenters that Commission notes that it will grant a additional information in order to make the trading activity requirement as SEF applicant temporary registration a determination whether to issue a final proposed in § 37.3(b)(1)(ii) may limit upon a Commission determination that order of registration. temporary registration to incumbent the applicant has provided a complete The Commission is also revising the platforms. Therefore, the Commission is Form SEF as part of its registration temporary registration provisions to eliminating the trading activity application and submitted a notification clarify in final § 37.3(c)(2) that an requirement and will permit all SEF requesting that the Commission grant applicant cannot operate as a SEF under applicants to apply for temporary temporary registration. If an applicant temporary registration until the registration if they meet the has not met these requirements, the applicant receives a notice from the requirements under final § 37.3(c)(1). Commission may deny its request for Commission or the Commission staff The Commission views the revised temporary registration. By ‘‘complete’’ granting temporary registration.159 In Form SEF, the Commission means that response to Phoenix’s comment about a 148 NYSE Liffe Comment Letter at 3–4 (Sep. 2, the SEF applicant provides SEF operating while its temporary 2011). registration is pending, the Commission 149 AIMA Comment Letter at 3 (Jun. 10, 2011); 154 Core Principles and Other Requirements for does not believe that a SEF applicant Nodal Comment Letter at 3–5 (Jun. 3, 2011); Swap Execution Facilities, 76 FR at 1216. should be allowed to operate as a SEF WMBAA Comment Letter at 4–5 (Jun. 3, 2011); 155 The applicant must comply with all of the CME Comment Letter at 6 (Jun. 3, 2011); requirements in final § 37.3(b)(1)(i) and must MarketAxess Comment Letter at 19 (Mar. 8, 2011); submit a temporary registration notice to the 157 See discussion below regarding swap dealer NFA Comment Letter at 2–3 (Mar. 8, 2011); Commission to qualify for temporary registration. and major swap participant provisional registration WMBAA Comment Letter at 12–13 (Mar. 8, 2011); See Final § 37.3(c)(1) of the Commission’s rules. ICAP Comment Letter at 6 (Mar. 8, 2011); Nodal regulations. 158 The Commission is delegating to the Director Comment Letter at 4–5 (Mar. 8, 2011). 156 The Commission notes that certain entities of DMO, upon consultation with the General 150 Nodal Comment Letter at 4 (Jun. 3, 2011); may continue to operate under current exemptions Counsel, the authority to issue a notice granting or Nodal Comment Letter at 4 (Mar. 8, 2011). while their SEF applications are pending, as long denying temporary registration. See Final § 37.3(h) 151 MarketAxess Comment Letter at 19 (Mar. 8, as the entities submit a complete application (i.e., of the Commission’s regulations. 2011); NFA Comment Letter at 2–3 (Mar. 8, 2011). the SEF applicant provides substantive answers to 159 This provision is contained in final § 37.3(c)(2) 152 SDMA Comment Letter at 12 (Mar. 8, 2011). each of the informational and exhibit items set forth of the Commission’s regulations. This rule also 153 The Commission is renumbering proposed in Form SEF) and temporary registration notice states that in no case may an applicant begin § 37.3(b) to § 37.3(c) and making several non- before the effective date of the final SEF regulations. operating as a temporarily registered SEF until the substantive revisions for clarity. See CFTC No-Action Letter 12–48 (Dec. 11, 2012). effective date of the SEF regulations.

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under temporary registration before the The Commission is extending the 365- § 37.3(c)(6) to allow for such an Commission has had a chance to review day sunset provision for temporary exemption.162 The Commission notes the application to ensure that it is registration to two years from the that a DCM is subject to a higher complete. The Commission’s review is effective date of these regulations in regulatory standard than a SEF such that especially merited given the final § 37.3(c)(5).161 Given that the a non-dormant DCM who seeks to create Commission’s decision to permit projected number of temporary SEF a new SEF in order to transfer one or temporary registration of entities that registrations may exceed 20 and the more of its contracts should be able to have not previously traded swaps. resource constraints faced by the meet many of the SEF requirements. The Commission believes that Commission, the Commission may not Therefore, the Commission believes permitting entities to operate as be able to complete its registration that, on an ongoing basis, an operational temporarily registered SEFs, reviews, enable SEFs to remedy any DCM that also seeks to register as a SEF notwithstanding the lack of a identified deficiencies, and ultimately in order to transfer one or more of its substantive review of the SEF’s grant or deny full registration for all of contracts (whether the transfer of the application by the Commission, is not a the SEF applicants within the proposed contract is motivated by DCM Core novel concept and has been followed by 365-day period. Extending the Principle 9 or another reason) may the Commission in other contexts where temporary registration provision will request SEF temporary registration. provide the Commission with adequate it is important to allow entities to (iii) 90-Day Effective Date of Regulations quickly reach the market, before an time to review the SEF registration extensive Commission review. For applications while ensuring that SEFs The Commission is shortening the instance, under the Commission’s swap can continue their operations under proposed 90-day effective date to 60 dealer and major swap participant temporary registration, without days subsequent to publication in the registration rules, provisional interruption, until the Commission Federal Register. In consideration of the registration is granted upon the filing of decides on their application for full comments received and the availability an application and documentation registration. of the Commission staff resources, the demonstrating compliance or the ability The Commission is also revising final Commission has determined to use its to comply with the CEA section 4s § 37.3(c)(5) to state that the temporary discretion to establish alternative dates requirements in effect on such date— registration provision will not terminate for the commencement of its and not after review and approval of the for an applicant who applies for enforcement of regulatory provisions documentation by the National Futures temporary registration before the and is setting a general compliance date Association (‘‘NFA’’), as the termination of the temporary of 120 days subsequent to Federal registration provision and has not been 163 Commission’s delegee.160 On and after Register publication. With this use of granted or denied registration under the date on which NFA confirms that an effective date and compliance date, § 37.3(b)(6) by the time of the the applicant has demonstrated its a prospective SEF that is already termination of the temporary initial compliance with the applicable operating a swaps-trading platform in registration provision. In addition, final requirements, the provisional reliance on a Commission staff relief § 37.3(c)(5) states that such an applicant registration of the applicant ceases and letter (e.g., CFTC No-Action Letter 12– may operate as a SEF under temporary the applicant becomes registered as an 48) could submit a SEF application and registration upon receipt of a notice SD or an MSP, as the case may be. receive temporary registration before from the Commission granting part 37’s effective date so that it might The Commission envisions the SEF temporary registration until the begin operating as a SEF upon that temporary registration process as Commission grants or denies full effective date.164 Alternatively, if such a operating in a similar fashion, with the registration pursuant to § 37.3(b)(6). On prospective SEF took additional time to Commission reviewing each application the termination date of the temporary prepare its SEF application, it would for completeness alone before granting registration provision, the Commission have the option of forestalling the temporary registration. Subsequently, will review such applicant’s application submission of its application until after and concurrent with the temporarily pursuant to the 180-day Commission the effective date, so long as it registered SEF’s early operations, the review period and procedures in submitted its SEF application by the Commission would conduct a § 37.3(b)(5). These revisions will ensure compliance date. comprehensive review of the that a temporarily registered SEF who The Commission believes that this application for compliance with all does not have a full registration in place combination of a 60-day effective date applicable SEF requirements. by the time the temporary registration and a 120-day compliance date The Commission is revising proposed provision terminates will not have to subsequent to Federal Register § 37.3(b)(2) regarding the expiration of stop operating on such termination date. publication for prospective SEF temporary registration to remove the applicants establishes a transition (ii) DCM Eligibility ability of the Commission to rescind period that appropriately balances the temporary registration. The Commission The Commission is withdrawing Commission’s need to provide notes that the SEF NPRM did not proposed § 37.3(b)(1)(ii) regarding the regulatory certainty to potential provide a standard for the Commission existing trading activity requirement so applicants through issuance of final SEF to rescind temporary registration. an operational DCM that seeks to create regulations and the Commission’s Instead, in final § 37.3(c)(3), the a new SEF would be able to qualify for statutory directives to both promote fair Commission may rely on its ability to temporary SEF registration. In deny full registration, which will also consideration of NYSE Liffe’s comment 162 This provision is contained in final § 37.3(c)(6) cause temporary registration to expire. that temporary SEF registration for an of the Commission’s regulations. Therefore, the Commission believes that existing DCM should not be subject to 163 See Heckler v. Chaney, 470 U.S. 821 (1985). the ability to rescind temporary the sunset provision, the Commission is 164 This scenario is not limited to a prospective registration is unnecessary. SEF that is already operating a swaps-trading revising proposed § 37.3(b) in final platform in reliance on a Commission staff relief letter. As noted above, all SEF applicants may apply 160 Registration of Swap Dealers and Major Swap 161 This provision is contained in final § 37.3(c)(5) for temporary registration if they meet the Participants, 77 FR 2613 (Jan. 19, 2012). of the Commission’s regulations. requirements under final § 37.3(c)(1).

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competition between swaps trading this section and is adopting § 37.3(f) as modifications. The Commission is venues 165 and promote the trading of proposed.170 removing many of the details from the swaps on SEFs.166 The new transition proposed rule, which are already 4. § 37.4—Procedures for Listing contained in part 40 of the period ensures swaps market continuity, Products and Implementing Rules preserves competition between swaps Commission’s regulations, and is trading venues, and facilitates the Proposed § 37.4 detailed the approval instead referring SEFs to part 40.176 The orderly restructuring of the swaps and self-certification procedures under Commission is also removing the CEA market in compliance with the Act and part 40 of the Commission’s regulations section 15(b) consideration provision regulations thereunder. The that SEF applicants and SEFs must because, when reviewing any SEF rule, Commission believes that the 60-day follow to submit its products and rules the Commission is already required to effective date and the 120-day to the Commission. Proposed § 37.4 also take into consideration the provisions compliance date approach will provide provided that a SEF may request that under section 15(b) of the Act. prospective SEF applicants with the Commission consider, under the In response to WMBAA’s comments 171 sufficient time to comply with the final provisions of section 15(b) of the Act, that SEFs should not be required to seek Commission approval of their products regulations and, if they choose, to any of the SEF’s rules or policies. and rules, the Commission notes that a prepare an application for temporary (a) Summary of Comments SEF is a registered entity under the Act registration. WMBAA commented that SEFs and pursuant to section 5c(c) of the Act, (f) § 37.3(c)—Reinstatement of Dormant should not be required to seek registered entities must submit product Registration Commission approval for their products terms and conditions and rules to the and rules.172 WMBAA recommended Commission for approval or under self- Proposed § 37.3(c) provided that SEFs be allowed to submit to the certification procedures.177 In addition, procedures for a dormant SEF to Commission a simple self-certification the Commission notes that CME’s reinstate its registration. The that they complied with the applicable comments were addressed in the part 40 Commission received no comments on requirements.173 CME stated that the rulemaking and are outside the scope of this section and is adopting § 37.3(c) as proposed procedures for listing this rulemaking.178 The Commission proposed.167 products would increase the burdens also clarifies that temporarily registered associated with new product SEFs may list swaps or submit rules (g) § 37.3(d)—Request for Transfer of submissions and rule changes and through the Commission’s approval or Registration would create new and costly self-certification procedures under part Proposed § 37.3(d) provided bureaucratic inefficiencies, competitive 40 of this chapter, and that the timelines procedures that a SEF must follow when disadvantages in the global marketplace, under those procedures shall apply. 174 seeking to transfer its registration from and impediments to innovation. 5. § 37.5—Information Relating to Swap its current legal entity to a new legal MarketAxess recommended that the Execution Facility Compliance entity as a result of a corporate event. Commission revise proposed § 37.4 to Proposed § 37.5(a) required a SEF to The Commission received no comments clarify that temporarily registered SEFs may list swaps through the file with the Commission information on this section and is adopting § 37.3(d) related to its business as a SEF as as proposed.168 Commission’s approval or self- certification procedures.175 specified in the Commission’s request. (h) § 37.3(e)—Request for Withdrawal of Proposed § 37.5(b) required a SEF to file Application for Registration (b) Commission Determination with the Commission a written The Commission is adopting demonstration of compliance with the Proposed § 37.3(e) provided that a proposed § 37.4 subject to certain core principles. Proposed § 37.5(d) SEF applicant may withdraw its delegated the Commission’s authority to application for registration. The 170 The Commission is renumbering proposed seek information as set forth in § 37.5(b) Commission received no comments on § 37.3(f) to § 37.3(g) and making several non- to the Director of DMO or such other this section and is adopting § 37.3(e) as substantive revisions for clarity. employee as the Director may designate. 171 proposed.169 CEA section 15(b) requires the Commission to Proposed § 37.5(c) required a SEF to take into consideration the public interest to be file with the Commission a notice of the (i) § 37.3(f)—Request for Vacation of protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the transfer of ten percent or more of its Registration objectives of the Act, as well as the policies and equity no later than the business day purposes of the Act. 7 U.S.C. 19(b). following the date on which the SEF Proposed § 37.3(f) provided that a SEF 172 WMBAA Comment Letter at 15–16 (Mar. 8, may vacate its registration. The 2011). enters into a firm obligation to transfer 179 Commission received no comments on 173 Id. the equity interest. The proposed rule 174 CME Comment Letter at 10, 13 (Feb. 22, 2011). also required that the notification CME also provided its comments to the rulemaking include any relevant agreement and a 165 Section 3(b) of the Act lists the promotion of titled Provisions Common to Registered Entities, 76 representation from the SEF that it ‘‘fair competition among boards of trade, other FR 44776 (Jul. 27, 2011). In addition, rather than markets, and market participants’’ as a purpose of repeat its comments that pertain to both the DCM meets all of the requirements of section the Act. 7 U.S.C. 5(b). and SEF NPRMs, CME incorporated its entire DCM 5h of the Act and Commission 166 Section 5h(e) of the Act lists the promotion of rulemaking comment letter dated Feb. 22, 2011 as regulations adopted thereunder. ‘‘the trading of swaps on swap executive facilities’’ Exhibit A to its SEF comment letter dated Mar. 8, Additionally, the proposed rule as one goal of the Act. 7 U.S.C. 7b–3(e). 2011. The Commission notes these comments by 167 The Commission is renumbering proposed referencing the Feb. 22, 2011 date of CME’s DCM § 37.3(c) to § 37.3(d) and making several non- comment letter. The Commission is also changing 176 17 CFR part 40. substantive revisions for clarity. CME’s reference to ‘‘DCM’’ to ‘‘SEF’’ for these 177 CEA section 5c(c); 7 U.S.C. 7a–2(c). 168 The Commission is renumbering proposed comments. 178 See Provisions Common to Registered Entities, § 37.3(d) to § 37.3(e) and making several non- 175 MarketAxess Comment Letter at 19 (Mar. 8, 76 FR 44776 (Jul. 27, 2011). substantive revisions for clarity. 2011). Tradeweb similarly commented that a SEF 179 See generally Core Principles and Other 169 The Commission is renumbering proposed applicant should be able to introduce new products Requirements for Swap Execution Facilities, 76 FR § 37.3(e) to § 37.3(f) and making several non- while it is operating under temporary relief. at 1217 (explaining the proposed ten percent substantive revisions for clarity. Tradeweb Comment Letter at 13 (Mar. 8, 2011). threshold).

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required the SEF to notify the The Commission is adopting proposed Commission regulations thereunder Commission of the consummation of the § 37.5(c) with certain revisions with the equity interest transfer transaction on the day on which it discussed below. notification, as requested by CME. The occurs. Furthermore, the proposed rule The Commission is revising § 37.5(c) Commission agrees with CME that this required that, upon the transfer of the to provide that a SEF must submit to the requirement is more appropriate upon equity interest, the SEF certify, no later Commission a notification of each consummation of the equity interest than two business days following the transaction involving the transfer of fifty transfer, rather than with the initial date on which the change in ownership percent or more of the equity interest in notification. Therefore, the Commission occurs, that the SEF meets all of the the SEF, and that such notification must is maintaining the certification requirements of section 5h of the Act be provided at the earliest possible time, requirement upon consummation of the and Commission regulations adopted but in no event later than the open of equity interest transfer as proposed in thereunder. the business day that is ten business the SEF NPRM. days following the date in which the With respect to the other comments, (a) Summary of Comments SEF enters into a firm obligation 185 to the Commission believes that the notice The Commission did not receive any transfer the equity interest. However, in requirements should not be limited to comments on proposed § 37.5(a), (b), or all cases, the Commission notes that a privately-held companies as the (d). The Commission did, however, SEF must provide the Commission staff Commission’s objective is to ensure that receive comments on the equity interest with sufficient time, prior to equity transfers do not negatively transfer provisions in proposed consummating the equity interest impact the operations of registered § 37.5(c). transfer, to review and consider the entities. The Commission must oversee CME commented that the submissions implications of the change in and ensure the continued compliance of required to be simultaneously filed with ownership, including whether the all SEFs with the core principles and the initial notification of an equity change in ownership will adversely the Commission’s regulations. In order interest transfer do not lend themselves impact the operations of the SEF or the to fulfill its oversight obligations, and to to preparation within the 24-hour time SEF’s ability to comply with the core ensure that SEFs maintain compliance frame proposed in the rules.180 CME principles and the Commission’s with their self-regulatory obligations, further commented that the regulations thereunder. the Commission must receive a notice of representation of compliance with the The Commission acknowledges an equity interest transfer. The requirements of CEA section 5h and the CME’s concern regarding the one Commission acknowledges the Commission’s regulations adopted business day time period for filing the suggestion by Better Markets to lower thereunder would be more appropriate supporting documents with the equity the equity interest transfer threshold to if required upon consummation of the interest transfer notification. Thus, in five percent; however, the Commission equity interest transfer, rather than with addition to extending the time period to believes that the revisions to § 37.5(c) the initial notification.181 up to ten business days for a SEF to file will still allow the Commission to fulfill MarketAxess commented that public notification with the Commission, the its oversight obligations, while reducing companies should not have to file a Commission is revising the rule to the costs for SEFs to comply with the notice of an equity interest transfer eliminate the requirement that specific equity interest transfer requirements. because the ownership structure of a documents be provided with the Finally, the Commission is revising public company does not implicate the notification. Rather, the Commission is the rule to remind SEFs that if any control and influence concerns raised revising the rule text to clarify that upon aspect of an equity interest transfer by the Commission in its proposal, and receiving a notification of the equity requires the SEF to file a rule as defined shareholders are already obligated interest transfer, the Commission may in part 40 of the Commission under the SEC’s regulations to report request appropriate documentation regulations, then the SEF must comply threshold acquisitions of equity pursuant to its authority under § 37.5 of with the rule submission requirements interests within ten days of such an the Commission’s regulations. For of section 5c(c) of the CEA and part 40 acquisition.182 example, such documentation may of this chapter, and all other applicable Lastly, Better Markets recognized the include, but is not limited to: (i) Commission regulations. important implications of transferring Relevant agreement(s), including any 6. § 37.6—Enforceability control in a regulated marketplace and preliminary agreements (not including Section 37.6 is intended to provide it recommended that the Commission draft documents); (ii) associated changes market participants who execute swap lower the transfer threshold for to relevant corporate documents; (iii) a transactions on or pursuant to the rules reporting to five percent as similarly chart outlining any new ownership or of a SEF with legal certainty with required by the SEC for public equity corporate or organizational structure, if respect to such transactions. In that 183 transfers. available; and (iv) a brief description of regard, proposed § 37.6(a) established the purpose and any impact of the (b) Commission Determination that any transaction entered into, on, or equity interest transfer. pursuant to the rules of a SEF cannot be The Commission is adopting § 37.5(a), The Commission is deleting the voided, rescinded, or held (b), and (d) as proposed subject to requirement for a SEF to provide a unenforceable as a result of: (1) The SEF certain non-substantive clarifications.184 representation of compliance with violating any provision of section 5h of section 5h of the Act and the 180 CME Comment Letter at 13 (Feb. 22, 2011). the CEA or part 37; (2) any Commission 181 proceeding to alter or supplement a Id. encompass such information as it states that, upon 182 MarketAxess Comment Letter at 29 (Mar. 8, the Commission’s request, a SEF shall file with the rule, term, or condition under section 2011). Commission information related to its business as 8a(7) of the CEA or to declare an 183 Better Markets Comment Letter at 21–22 (Mar. a SEF. emergency under section 8a(9) of the 8, 2011). 185 The Commission interprets ‘‘firm obligation’’ CEA; or (3) any other proceeding the 184 The Commission is removing the reference to to mean when a SEF enters into a letter of intent ‘‘information relating to data entry and trade or any other document that demonstrates a SEF’s effect of which is to alter or supplement details’’ in proposed § 37.5(a) because it is firm intent to transfer its equity interest as a specific term or condition or trading unnecessary. The rule text is broad enough to described in § 37.5(c). rule or procedure, or require a registered

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SEF to adopt a specific term or memorialized in an ISDA Master counterparties, the Commission has condition, trading rule or procedure, or Agreement.189 MarkitSERV further determined to revise § 37.6(b) to state to take or refrain from taking a specific stated that the confirmation terms explicitly that a ‘‘swap execution action. Proposed § 37.6(b) required that provided by a SEF may not be able to facility shall provide each counterparty’’ all transactions executed on or pursuant accommodate the specificity of such a with written documentation of all terms to the rules of a SEF include written master agreement, thus making the of the transaction to serve as documentation memorializing all terms SEF’s confirmation inadequate for confirmation of such transaction. In of the swap transaction, the legal effect purposes of complying with the response to MarketAxess’s comments, of which is to supersede any previous Commission’s regulations.190 the Commission notes that § 37.6(b) is agreement between the counterparties. Similarly, the Energy Working Group consistent with the requirement in final The proposed rule also required that the expressed concern over the provision’s part 45 of the Commission’s regulations confirmation of all terms of the requirement that the SEF’s confirmation that a SEF report confirmation data transaction take place at the same time supersede any previous agreement consisting of all terms of a transaction as execution.186 between the transacting parties, noting to a swap data repository (‘‘SDR’’) for that this language appears to prevent a each swap executed on or pursuant to (a) Summary of Comments master agreement from operating the rules of the SEF.194 Three commenters addressed the between counterparties transacting on a With regard to the specific comments practicality of a SEF confirming all SEF.191 The Energy Working Group also received about the role of master terms of a transaction at the same time stated that confirmation cannot take agreements in the written confirmation as execution. MarketAxess place at the same time as execution provided by a SEF, the Commission has recommended that a SEF be responsible because they are two distinct steps in determined that counterparties choosing for confirming only the swap creation the swap transaction process.192 to execute a transaction not submitted data in its possession at the time of for clearing on or pursuant to the rules (b) Commission Determination execution, consistent with the of a SEF must have all terms, including Commission’s approach in its proposed The Commission is adopting § 37.6(a) possible long-term credit support part 45 regulations.187 MarketAxess also as proposed.193 The Commission is also arrangements, agreed to no later than requested that the Commission clarify adopting § 37.6(b) as proposed subject to execution, such that the SEF can that SEFs are only responsible for the two revisions discussed below. provide a written confirmation inclusive producing a confirmation for swaps Although the comments received of those terms at the time of execution entered into on, and not just pursuant regarding proposed § 37.6(b) did not cite and report complete, non-duplicative, to the rules of, a SEF.188 ambiguity in the SEF NPRM regarding a and non-contradictory data to an SDR as MarkitSERV stated that when SEF’s affirmative duty to provide soon as technologically practicable after counterparties choose to execute a swap confirmation documentation to execution.195 This requirement, as on a SEF that is not subject to the mentioned above, is necessary to clearing mandate and not submitted for 189 MarkitSERV Comment Letter at 4–5 (Mar. 8, provide market participants who clearing to a clearinghouse, the parties 2011). execute swap transactions on or will require a long-term credit 190 Id. MarkitSERV also expressed concern that the SEF NPRM is conflating the concepts of pursuant to the rules of a SEF with legal relationship to be in place, often confirmation and affirmation with the audit trail certainty with respect to such requirements in proposed § 37.205. For example, transactions, and to promote the 186 The Commission proposed § 37.6(b) to MarkitSERV sought clarification regarding the SEF Commission’s policy goal of achieving facilitate the process contemplated by the NPRM’s statement that ‘‘[v]oice transactions must confirmation definition. A swap ‘‘confirmation’’ is be entered into some form of electronic affirmation ‘‘straight-through processing’’ of swap defined as the consummation (electronically or system immediately upon execution.’’ Core otherwise) of legally binding documentation Principles and Other Requirements for Swap 194 Part 45 requires a SEF to report all (electronic or otherwise) that memorializes the Execution Facilities, 76 FR at 1221. Given the audit confirmation data and all primary economic terms agreement of the counterparties to all of the terms trail requirement in proposed § 37.205(b)(1), which data as defined in part 23 and § 45.1 of the of a swap. A confirmation must be in writing states that SEFs that ‘‘permit intermediation must Commission’s regulations for each swap executed (whether electronic or otherwise) and must legally require that all orders or requests for quotes on or pursuant to the rules of the SEF as soon as supersede any previous agreement (electronically or received by phone that are executable be technologically practicable after execution of the otherwise). 17 CFR 45.1; Swap Data Recordkeeping immediately entered into the trading system or swap. 17 CFR 45.3; Swap Data Recordkeeping and and Reporting Requirements, 77 FR 2136, 2197 (Jan. platform[,]’’ MarkitSERV recommended that the Reporting Requirements, 77 FR 2136, 2199 (Jan. 13, 13, 2012). Commission use the term ‘‘electronic processing 2012). Part 45 defines confirmation data as ‘‘all of 187 MarketAxess Comment Letter at 28–29 (Mar. system’’ instead of ‘‘electronic affirmation system’’ the terms of a swap matched and agreed upon by 8, 2011). Proposed § 45.3 required that for all because audit trail records and affirmation are the counterparties in confirming the swap.’’ Id. at transactions executed on a SEF, regardless of different concepts. Id. at 1244. MarkitSERV 2197. whether the swap was cleared, the SEF would be Comment Letter at 4, 6 (Mar. 8, 2011). ABC/CIEBA 195 The Commission notes that swap trading responsible for reporting to a swap data repository also sought clarification as to whether SEFs must relationship documentation is not required for only the primary economic terms of the transaction enter Permitted Transactions into an affirmation swaps cleared by a derivatives clearing in its possession at the time of execution, and that system, and if so, ABC/CIEBA noted that the SEF organization. See § 23.504(a)(1) of the Commission’s reporting of confirmation data consisting of all NPRM is inconsistent with other rules. ABC/CIEBA regulations. The Commission also notes that the terms of the transaction would be the responsibility Comment Letter at 7–8 (Mar. 8, 2011). The commenters’ concerns are most relevant to those of either the derivatives clearing organization (if Commission notes that the final SEF rules do not transactions that are truly bespoke, not subject to cleared) or one of the counterparties (if uncleared). require the use of an ‘‘electronic affirmation the clearing mandate, and not voluntarily cleared. Swap Data Recordkeeping and Reporting system.’’ The Commission also clarifies that There is no reason why a SEF’s written Requirements, 75 FR 76574, 76580–81 (proposed confirmation and the creation of an audit trail in confirmation terms cannot incorporate by reference Dec. 8, 2010). As adopted by the Commission, § 37.205 are two separate and distinct requirements. the privately negotiated terms of a freestanding however, § 45.3 requires a SEF to report both the In addition, the Commission notes that § 37.205(b) master agreement for these types of transactions, primary economic terms data as well as all merely establishes the requirement that SEFs must provided that the master agreement is submitted to confirmation data consisting of all transaction terms capture audit trail data for regulatory purposes and the SEF ahead of execution and the counterparties for each swap executed on or pursuant to the rules does not address affirmation, confirmation, or the ensure that nothing in the confirmation terms of the SEF as soon as technologically practicable public reporting or dissemination of such data. contradict the standardized terms intended to be after execution of the swap. 17 CFR 45.3; Swap Data 191 Energy Working Group Comment Letter at 5 incorporated from the master agreement. See also Recordkeeping and Reporting Requirements, 77 FR (Mar. 8, 2011). Real-Time Public Reporting of Swap Transaction 2136, 2199 (Jan. 13, 2012). 192 Id. Data, 77 FR 1182, 1193 (Jan. 9, 2012) (discussing 188 MarketAxess Comment Letter at 29 (Mar. 8, 193 The Commission is making certain non- confirmation and incorporating documents by 2011). substantive revisions to § 37.6(a) for clarity. reference).

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transactions in order to facilitate orderly 7. § 37.7—Prohibited Use of Data execution and related to market markets, whether bilateral or facility Collected for Regulatory Purposes surveillance activities.207 traded.196 Furthermore, the Commission Proposed § 37.7 prohibited a SEF from (b) Commission Determination believes that credit-support using for commercial purposes The Commission is adopting § 37.7 as arrangements for uncleared transactions proprietary data or personal information can impact the ultimate price of a swap, proposed, subject to certain that it obtains from or on behalf of any and thus should be agreed to no later modifications. In response to the person for regulatory purposes. The than the time of trade execution in order commenters, the Commission is purpose of this provision was to protect to promote the statutory goal of pre- modifying the proposed rule to allow customer privacy and prevent a SEF trade price transparency.197 SEFs to use proprietary data or personal from using such information to advance information for business or marketing Finally, in response to the Energy 199 Working Group’s comment that its commercial interests. purposes if the person from whom it confirmation cannot take place at the (a) Summary of Comments collects or receives such information same time as execution, the Commission clearly consents to the use of its Several commenters recommended is revising § 37.6(b) to state that ‘‘. . . information in such manner. The that the Commission adopt a more specific customer identifiers for Commission is also revising the flexible approach toward the use of data accounts included in bunched orders proposed rule to prohibit a SEF from collected for regulatory purposes.200 involving swaps need not be included conditioning access to its facility based CME, for example, stated that a SEF in confirmations provided by a swap upon such consent. The Commission execution facility if the applicable should be allowed to use information believes that the consent requirement requirements of § 1.35(b)(5) of this that is provided for both regulatory and will protect persons by allowing them to chapter are met.’’ The Commission non-regulatory purposes for commercial first weigh the benefits and purposes, as long as transparent rules or consequences of allowing a SEF to make acknowledges that for bunched orders 201 the post-execution allocation of trades is policies are in place. Some commercial use of their information. In required for confirmation. The above commenters believed that commercial response to CME’s comment about revisions to § 37.6 are consistent with use should be allowed, provided that information provided for both Commission regulation 1.35(b)(5) and market participants’ identities are regulatory and non-regulatory purposes, protected 202 or prior consent is the Commission notes that a SEF may provide sufficient time for the post- 203 execution allocation of bunched orders, obtained. For example, FSR believed use information that it receives for both but allow SEFs to meet the requirement that commercial use should be allowed regulatory and non-regulatory purposes for aggregate data as long as the sources for business or marketing purposes if that confirmation takes place at the 204 same time as execution.198 of the information are not revealed. the source of the information clearly However, SIFMA AMG stated that, consents to the use in such a manner. 196 The OTC Derivatives Supervisors’ Group, a given the broad authority under the In response to comments about the collaboration of market participant leadership proposed rules for SEFs to acquire definition of ‘‘proprietary data and headed by the Federal Reserve Bank of New York, information, the term ‘‘proprietary data’’ personal information,’’ the Commission recognized the potential of electronic trading to is too narrow to adequately protect facilitate the objectives of straight-through declines to adopt a further definition processing in the wake of the 2008 financial crisis. market participants from improper and is maintaining a flexible approach. See Confirmation, Portfolio Reconciliation, and disclosure.205 Freddie Mac requested However, the Commission notes that Portfolio Compression Requirements for Swap that the Commission strengthen the some examples of proprietary data and Dealers and Major Swap Participants, 75 FR 81519, proposed rule to additionally prohibit 81521–22 (proposed Dec. 28, 2010) (noting that personal information would include ‘‘[t]imely and accurate confirmation of transactions any SEF from asserting ownership rights information that separately discloses is critical for all downstream operational and risk over the trading information of any business transactions, market positions, management processes, including the correct transacting party.206 or trade secrets. The Commission calculation of cash flows and discharge of Finally, WMBAA requested that the settlement obligations as well as accurate recommends that SEFs define these measurement of counterparty credit exposures.’’). Commission clarify the meaning of terms in their rulebooks, which will be 197 See CEA section 5h(e); 7 U.S.C. 7b–3(e) ‘‘proprietary data or personal subject to Commission review during (stating that the goal of this section is to promote information,’’ and recommended the SEF registration process. pre-trade price transparency in the swaps market). limiting the rule to information obtained While straight-through processing may not be as outside the ordinary course of trade 8. § 37.8—Boards of Trade Operating relevant to credit risk associated with transactions Both a Designated Contract Market and executed on or pursuant to the rules of a SEF but a Swap Execution Facility not submitted for clearing, the data and real-time Confirmation, Portfolio Reconciliation, Portfolio reporting requirements already finalized by the Compression, and Swap Trading Relationship Proposed § 37.8(a) required that a Commission mandate reporting by the SEF of all Documentation Requirements for Swap Dealers and board of trade that operates a DCM and swap transaction terms ‘‘as soon as technologically Major Swap Participants, 77 FR 55904, 55923 (Sep. practicable’’ in order to effectuate the statutory 11, 2012) for further details. also intends to operate a SEF must mandate of post-trade price transparency. See 17 199 Core Principles and Other Requirements for separately register the SEF under part CFR 43.3(b)(1) (real-time reporting); 17 CFR Swap Execution Facilities, 76 FR at 1218 n. 34. 37, and on an ongoing basis, comply 45.3(a)(1) (swap data recordkeeping and reporting 200 MarketAxess Comment Letter at 31 (Mar. 8, with the core principles under section requirements). This allowance of a slight timing 2011); FSR Comment Letter at 9 (Mar. 8, 2011); ICE 5h of the Act and the part 37 regulations delay, however, is meant to account for ‘‘the Comment Letter at 5–6 (Mar. 8, 2011); CME prevalence, implementation and use of technology Comment Letter at 14 (Feb. 22, 2011). issued thereunder. Proposed § 37.8(b) by comparable market participants,’’ and not post- 201 CME Comment Letter at 14 (Feb. 22, 2011). implemented CEA section 5h(c) by execution confirmation of other terms such as credit 202 requiring a board of trade that operates agreements for uncleared swaps. See, e.g., 17 CFR MarketAxess Comment Letter at 31 (Mar. 8, 43.2; Real-Time Public Reporting of Swap 2011); FSR Comment Letter at 9 (Mar. 8, 2011). both a DCM and SEF and uses the same Transaction Data, 77 FR 1182, 1191 (Jan. 9, 2012) 203 CME Comment Letter at 14 (Feb. 22, 2011); electronic trade execution system for (discussing the definition of ‘‘as soon as MarketAxess Comment Letter at 31 (Mar. 8, 2011). executing and trading swaps on both 204 technologically practicable’’). FSR Comment Letter at 9 (Mar. 8, 2011). registered entities to clearly identify to 198 See 17 CFR 1.35; Customer Clearing 205 SIFMA AMG Comment Letter at 15–16 (Mar. Documentation, Timing of Acceptance for Clearing, 8, 2011). market participants for each swap and Clearing Member Risk Management, 77 FR 206 Freddie Mac Comment Letter at 5 (Mar. 8, 21278, 21286–287, 306 (Apr. 9, 2012); 2011). 207 WMBAA Comment Letter at 17 (Mar. 8, 2011).

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whether the execution or trading of such 9. § 37.9—Permitted Execution (a) § 37.9(a)(1)(iv)—Required swaps is taking place on the DCM or the Methods 213 Transactions and § 37.9(a)(1)(v)— SEF.208 Permitted Transactions As mentioned above, the SEF NPRM Proposed § 37.9(a)(1)(iv) defined (a) Summary of Comments required a SEF to offer a minimum Required Transactions as transactions CME stated that the rules of a DCM trading functionality (i.e., a centralized that are subject to the execution and SEF would clearly identify, as electronic trading screen upon which requirements under the Act and are necessary, the trade platform upon any market participant can post both made available for trading pursuant to which a swap was being executed, firm and indicative bids and offers that § 37.10, and are not block trades. rendering the requirements of proposed are transparent to all other market Proposed § 37.9(a)(1)(v) defined § 37.8 unnecessary.209 CME requested participants of the SEF). The SEF NPRM Permitted Transactions as transactions that the Commission clarify whether provided that Required Transactions that meet any of the following proposed § 37.8 created additional (i.e., transactions subject to the trade requirements: (A) Are block trades; (B) substantive obligations on the part of execution mandate under section 2(h)(8) are not swaps subject to the Act’s DCMs and SEFs given that market of the CEA and not block trades) must clearing and execution requirements; or participants often interface with (C) are illiquid or bespoke swaps. electronic platforms via proprietary or be executed through the SEF’s third-party front end systems not under minimum trading functionality, Order (1) Summary of Comments the control of DCMs or SEFs.210 Book meeting the minimum trading functionality, or RFQ System that Several commenters recommended (b) Commission Determination operates in conjunction with the SEF’s revisions to the definition of Permitted Transactions.216 To ensure that there are The Commission is adopting § 37.8(a) minimum trading functionality.214 The no gaps between the definitions of as proposed, subject to one revision. SEF NPRM made it clear that for Required Transactions and Permitted Proposed § 37.8(a) only addressed the Required Transactions, pre-trade Transactions, MarketAxess SEF registration and compliance of a 215 transparency must be met. The SEF recommended that the proposed board of trade that already operates a NPRM also allowed a SEF to provide definition of Permitted Transactions in DCM and intends to operate a SEF. To additional execution methods for § 37.9(a)(1)(v) be revised to include all address all situations regarding DCM Permitted Transactions (i.e., transactions that are not Required and SEF registration and compliance, transactions not subject to the clearing Transactions as defined in proposed the Commission is revising § 37.8(a) to and trade execution mandates, illiquid § 37.9(a)(1)(iv).217 Freddie Mac apply to ‘‘[a]n entity that intends to or bespoke swaps, and block trades), recommended that the Commission operate both a [DCM] and a [SEF].’’ The including Voice-Based System. rule requires the entity to separately revise the proposed definition of register the DCM and SEF pursuant to The Commission is restructuring the Permitted Transactions to incorporate order of the rule text in § 37.9 and this hedging transactions by any end-user part 38 and part 37 of the Commission’s 218 regulations, respectively, and to comply corresponding preamble discussion to (i.e., non-dealer) counterparty. with the applicable core principles and provide clarity. Despite the order of 216 Additionally, WMBAA commented that the regulations. other preamble sections, which distinction between Required Transactions and As to CME’s comments regarding generally follows the order of the SEF Permitted Transactions is not required or § 37.8(b), the Commission clarifies that NPRM, the Commission’s preamble authorized by the CEA. WMBAA Comment Letter it would not be sufficient for a board of discussion of § 37.9 generally follows at 6–7 (Mar. 8, 2011). In this regard, the trade that operates both a DCM and a Commission notes that the CEA sets out specific the order of the restructured rule text. trading requirements for swaps that are subject to SEF to simply have rules that identify Additionally, as discussed above in the the trade execution mandate. See CEA sections whether a transaction is being executed registration section, the Commission is 2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8). To on the DCM or the SEF. The meet these statutory requirements, final § 37.9(a)(1) moving the minimum trading Commission notes that section 5h(c) of defines these swaps as Required Transactions and functionality and Order Book sections provides specific methods of execution for such the Act clearly requires a board of trade from proposed § 37.9 to final § 37.3. swaps. To distinguish these swaps from other that operates both a DCM and a SEF to swaps that are not subject to the trade execution identify to market participants whether mandate, the Commission defines such swaps in each swap is being executed on the board of trade would be able to use the same final § 37.9(c)(1) as Permitted Transactions and 211 electronic trade execution system for executing and allows these swaps to be voluntarily traded on a DCM or the SEF. Accordingly, a trading swaps on the DCM and on the SEF (i.e., a SEF by using any method of execution. See consolidated DCM/SEF trading screen trading facility). The Commission also notes that discussion below regarding execution methods for must identify whether the execution is § 37.8(b) implements CEA section 5h(c), which uses Required and Permitted Transactions under occurring on the DCM or the SEF, the term ‘‘board of trade.’’ § 37.9(b)(1) and (b)(4)—Execution Methods for 213 The Commission is renaming the title of this Required Transactions and § 37.9(c)—Execution irrespective of how proprietary or third- Methods for Permitted Transactions in the party front end systems eventually section from ‘‘Permitted Execution Methods’’ to ‘‘Methods of Execution for Required and Permitted preamble. 217 present that data to market Transactions’’ to provide greater clarity. MarketAxess Comment Letter at 32 (Mar. 8, 212 2011). Similarly, ISDA/SIFMA and the Energy participants. 214 By ‘‘in conjunction with the SEF’s minimum Working Group requested clarity regarding the trading functionality,’’ the Commission means that definition of Permitted Transactions. ISDA/SIFMA 208 CEA section 5h(c); 7 U.S.C. 7b–3(c). the SEF NPRM required a SEF to offer the minimum Comment Letter at 7 (Mar. 8, 2011); Energy Working 209 CME Comment Letter at 14 (Feb. 22, 2011). trading functionality, and if that SEF also offered an Group Comment Letter at 4 (Mar. 8, 2011). 210 RFQ System, it was required to communicate any Id. 218 Freddie Mac Comment Letter at 3 (Mar. 8, 211 The Commission notes that only eligible bids or offers resting on the minimum trading 2011). Similarly, MFA recommended that the contract participants may execute a swap on a SEF functionality to the RFQ requester along with the Commission expand the definition of Permitted so a board of trade that operates both a DCM and responsive quotes. See the discussion below Transactions to include other transactions, such as a SEF must ensure that its SEF does not allow for regarding ‘‘Taken Into Account and exchanges for physical, exchanges for swaps, and non-eligible contract participant trading on the SEF. Communicated’’ Language in the RFQ System linked or packaged transactions. MFA Comment See CEA section 2(e); 7 U.S.C. 2(e). Definition under § 37.9(a)(1)(ii)—Request for Quote Letter at 8 (Mar. 8, 2011). The Commission 212 The Commission notes that it is not replacing System in the preamble for further details. interprets MFA’s comment to be a request that the the term ‘‘board of trade’’ in § 37.8(b) with the term 215 Core Principles and Other Requirements for Commission create through rulemaking an ‘‘entity’’ as in § 37.8(a) because in § 37.8(b) only a Swap Execution Facilities, 76 FR at 1220. Continued

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Additionally, the Coalition commented transactions must be effected on a SEF, such, block trades are not subject to the that the Commission should define but may be subject to special rules.223 execution methods for Required illiquid or bespoke transactions to (2) Commission Determination Transactions and Permitted include typical end-user trades.219 Transactions in final § 37.9(a)(2) and Several commenters also commented To ensure that there is consistency in § 37.9(c)(2), respectively.229 on the reference to block trades in the the definitions, and in response to definition of Permitted Transactions.220 MarketAxess’s comment, the (b) § 37.9(a)(1)(ii)—Request for Quote ISDA/SIFMA commented that the Commission is: (1) Revising the System definition of block trade in part 43 of definition of Required Transaction to the Commission’s regulations should mean any transaction involving a swap Proposed § 37.9(a)(1)(ii)(A) defined an apply to blocks executed on a SEF.221 that is subject to the trade execution RFQ System as a trading system or Tradeweb sought confirmation that requirement in section 2(h)(8) of the platform in which a market participant block size trades in swaps that are Act 224; and (2) revising the definition of must transmit a request for quote to buy required to be cleared and made Permitted Transaction to mean any or sell a specific instrument to no less available to trade would not be subject transaction not involving a swap that is than five market participants in the to the minimum trading requirements subject to the trade execution trading system or platform, to which all for Required Transactions, but would be requirement in section 2(h)(8) of the such market participants may respond. required to be reported to and processed Act.225 The Commission is not revising Under the proposed rule, any bids or through a SEF in a manner prescribed the definition of Permitted Transaction offers resting on the trading system or by the SEF.222 Similarly, GFI requested to explicitly include ‘‘hedging platform pertaining to the same the Commission to confirm that block transactions involving end-users’’ or instrument must be taken into account ‘‘typical end-user’’ transactions because and communicated to the requester exception to the CEA section 2(h)(8) trade execution the Commission’s revisions to the along with the responsive quotes. requirement similar to the centralized market definition of Permitted Transaction are In addition, proposed trading exception established by DCM Core consistent with the CEA section 2(h)(8) Principle 9 for certain exchange of futures for § 37.9(a)(1)(ii)(B) defined an RFQ 226 related positions. See CEA section 5(d)(9); 7 U.S.C. trade execution requirement. System as a trading system or platform With respect to the treatment of block 7(d)(9); see also Regulation of Noncompetitive in which multiple market participants Transactions Executed on or Subject to the Rules of transactions, the Commission notes that can both: (1) View real-time electronic a Contract Market, 63 FR 3708 (Jan. 26, 1998). The the definition of block trade in part 43 Commission notes that while DCM Core Principle streaming quotes, both firm and of the Commission’s regulations applies 9 does permit certain exceptions to the centralized indicative, from multiple potential market trading requirements, such exceptions are to such transactions involving swaps all premised on there being some ‘‘bona fide that are listed on a SEF.227 The counterparties on a centralized business purpose’’ for the exception. MFA does not Commission also notes that the electronic screen; and (2) have the offer a specific bona fide business purpose for any option to complete a transaction by: (i) of its three suggested off-exchange exceptions, nor definition of block trade states, in part, is the Commission aware of any. In addition, MFA that block trades occur away from the Accepting a firm streaming quote, or (ii) does not explain why an exchange of swaps for registered SEF’s or DCM’s trading transmitting a request for quote to no swaps transaction, where each leg of the transaction system or platform and is executed less than five market participants, based can presumably be executed on a SEF, needs to be upon an indicative streaming quote, executed off-exchange. The Commission observes pursuant to the registered SEF’s or that should swaps based on physical commodities DCM’s rules and procedures.228 As taking into account any resting bids or become subject to the trade execution mandate, offers that have been communicated to there might be some bona fide business purpose for 223 GFI Comment Letter at 4 (Mar. 8, 2011). the requester along with any responsive executing exchanges of swaps for physicals 224 transactions. However, the market participants who The Commission is renumbering proposed quotes. Finally, proposed are most likely to engage in such transactions are § 37.9(a)(1)(iv) to § 37.9(a)(1). Several commenters § 37.9(a)(1)(ii)(C) provided that an RFQ also likely to be eligible for the end-user exception requested clarification from the Commission System means any such other trading in CEA section 2(h)(7). As an initial matter, the whether inter-affiliate trades would be subject to Commission observes that swaps based on physical the CEA section 2(h)(8) trade execution system or platform as may be commodities may be subject to the trade execution requirement. JP Morgan Comment Letter at 5 (Jun. determined by the Commission. requirement if the Commission determines that they 3, 2011); Rosen et al. Comment Letter at 20–21 (Apr. are subject to the clearing requirement under CEA 5, 2011); Coalition Comment Letter at 5 (Mar. 8, (1) Summary of Comments section 2(h)(1) and part 50 of the Commission’s 2011); ISDA/SIFMA Comment Letter at 11 (Mar. 8, regulations. Should the circumstances arise where 2011). See Clearing Exemption for Swaps Between (i) Comments on RFQ System Definition the Commission is determining whether physical Certain Affiliated Entities, 77 FR 50425 (proposed and Transmission to Five Market commodity swaps should become subject to the Aug. 21, 2012) for further details. Participants clearing requirement and there are parties who seek 225 The Commission is renumbering proposed to engage in exchanges of swaps for physicals § 37.9(a)(1)(v) to § 37.9(c)(1). In general, some commenters stated transactions that are not eligible for the end-user 226 See CEA section 2(h)(8) trade execution exception, the Commission could at that time requirement discussion above under § 37.3— that the Commission’s definition of an entertain requests to permit a trade execution Requirements for Registration; see also discussion RFQ System imposes rigid requirements requirement exception for swaps that are below under § 37.9(c)—Execution Methods for that are not supported by the SEF components of such exchanges of swaps for Permitted Transactions. definition.230 Other commenters stated physicals transactions. However, for the above 227 Section 43.2 of the Commission’s regulations reason, the Commission believes that a broad states that ‘‘block trade’’ means a publicly that the defined RFQ System preserves exception for such off-exchange transactions in the reportable swap transaction that: (1) Involves a ‘‘the single-dealer status quo,’’ threatens absence of bona fide business purposes could swap that is listed on a registered SEF or DCM; (2) to diminish the transparency and undermine the trade execution requirement by Occurs away from the registered SEF’s or DCM’s efficiency of the regulated swaps allowing market participants to execute swaps trading system or platform and is executed pursuant subject to the trade execution requirement to the registered SEF’s or DCM’s rules and bilaterally rather than on a SEF or DCM. procedures; (3) Has a notional or principal amount 229 The Commission notes that the execution 219 Coalition Comment Letter at 8 (Mar. 8, 2011). at or above the appropriate minimum block size methods for Required Transactions in final 220 ISDA/SIFMA Comment Letter at 10 (Mar. 8, applicable to such swap; and (4) Is reported subject § 37.9(a)(2) excludes block trades. 2011); Tradeweb Comment Letter at 5 (Mar. 8, to the rules and procedures of the registered SEF 230 Rosen et al. Comment Letter at 10 (Apr. 5, 2011); GFI Comment Letter at 4 (Mar. 8, 2011). or DCM and the rules described in this part, 2011); Goldman Comment Letter at 2 (Mar. 8, 2011); 221 ISDA/SIFMA Comment Letter at 10 (Mar. 8, including the appropriate time delay requirements ISDA/SIFMA Comment Letter at 2 (Mar. 8, 2011); 2011). set forth in § 43.5 of this part. 17 CFR 43.2. FXall Comment Letter at 7–8 (Mar 8, 2011); SIFMA 222 Tradeweb Comment Letter at 5 (Mar. 8, 2011). 228 Id. AMG Comment Letter at 4–5 (Mar. 8, 2011).

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market, and is inconsistent with the various concerns with this requirement, the commenters noted that it will be Dodd-Frank Act.231 including the potential for increased difficult and costly to enter into hedging As noted above, § 37.9(a)(1)(ii) of the trading costs,235 decreased liquidity,236 transactions.241 SEF NPRM contained a requirement that decreased transparency,237 and breaking In this regard, some commenters a market participant transmit an RFQ to trades into smaller sizes.238 Several noted that the SEC’s SB–SEF no less than five market participants. In commenters specifically noted that the proposal 242 permitted RFQs to be the SEF NPRM, the Commission five market participant requirement may transmitted to one or more SEF specifically asked for public comment result in increased spreads for participant(s).243 Morgan Stanley on whether five is the appropriate participants because non-executing commented that, given the impact of minimum number of respondents that market participants in the RFQ could signaling transactions to multiple the Commission should require to ‘‘front run’’ the transaction in market participants, as trade size grows, potentially interact with a request for anticipation of the executing market participants may receive better quote.232 The Commission also asked participant’s forthcoming and offsetting execution if their RFQs are transmitted for public comment on the appropriate transactions.239 Many of these to fewer than five participants.244 minimum number, if not five.233 The commenters additionally noted that Similarly, MetLife commented that Commission received the following these risks would be most pronounced participants should have the flexibility comments regarding the five market in illiquid swaps or large-sized trades to determine the appropriate number of participant requirement and has (i.e., transactions approaching the block respondents for a particular trade, responded to those comments below. trade threshold).240 As a result, many of which could vary based on the size and Several commenters objected to the liquidity of the trade.245 Additionally, requirement in proposed § 37.9(a)(1)(ii) (Mar. 8, 2011); Global FX Comment Letter at 3 (Mar. Commissioner Sommers’ dissent that a market participant transmit an 8, 2011); TruMarx Comment Letter at 6 (Mar. 8, 2011); Coalition Comment Letter at 5–7 (Mar. 8, suggested an alternative approach to RFQ to no less than five market RFQ Systems that would permit a 234 2011); WMBAA Comment Letter at 6 (Mar. 8, 2011); participants. The commenters raised CME Comment Letter at 8 (Mar. 8, 2011); Morgan market participant to transmit an RFQ to Stanley Comment Letter at 2–3 (Mar. 2, 2011); ‘‘more than one’’ potential 231 IECA Comment Letter at 3 (May 24, 2011); CanDeal Comment Letter at 2–3 (Feb. 25, 2011). The 246 Mallers et al. Comment Letter at 3–5 (Mar. 21, Commission notes that some commenters in counterparty. 2011); AFR Comment Letter at 4, 5 (Mar. 8, 2011). addressing this provision used the term ‘‘liquidity Other commenters, however, stated The Mallers et al. comment letter represents the providers’’ to refer to the minimum number of that an RFQ should be transmitted to all view of a number of high frequency trading firms: ‘‘market participants’’ that must receive RFQs. See, participants on the SEF.247 Mallers et al. Allston Trading, LLC, Atlantic Trading USA LLC, e.g., Tradeweb Comment Letter at 5 (Jun. 3, 2011); Bluefin Trading LLC, Chopper Trading LLC, DRW AII Comment Letter at 5 (Jun. 2, 2011); Bloomberg stated that participants would not be Holdings, LLC, Eagle Seven, LLC, Endeavor Comment Letter at 2 (Mar. 8, 2011); FXall Comment disadvantaged by disclosing an RFQ to Trading, LLC, GETCO, Hard Eight Futures, LLC, Letter at 9 (Mar. 8, 2011); FSR Comment Letter at the entire market for transactions below HTG Capital Partners, IMC Financial Markets, 3 (Mar. 8, 2011). The Commission clarifies that the Infinium Capital Management LLC, Kottke proposed five market participant requirement did Comment Letter at 3 (Mar. 8, 2011); Coalition Associates, LLC, Liger Investments Limited, not imply any requirement that the requested Comment Letter at 5–6 (Mar. 8, 2011); Morgan Marquette Partners, LP, Nico Holdings LLC, Optiver market participants operate in any particular Stanley Comment Letter at 2 (Mar. 2, 2011). US LLC, Quantlab Financial, LLC, RGM Advisors, manner, such as one that regularly provides 241 LLC, Traditum Group LLC, WH Trading, and XR liquidity or makes markets in the particular swap. FHLB Comment Letter at 12 (Jun. 3, 2011); AII Trading LLC. 235 Eaton Vance Comment Letter at 2 (Feb. 17, Comment Letter at 5 (Jun. 2, 2011); Bloomberg Comment Letter at 2–3 (Mar. 8, 2011); FXall 232 Core Principles and Other Requirements for 2012); JP Morgan Comment Letter at 2–3 (Mar. 8, Comment Letter at 8–9 (Mar. 8, 2011); BlackRock Swap Execution Facilities, 76 FR at 1221. The 2011); BlackRock Comment Letter at 4 (Mar. 8, Comment Letter at 3–4 (Mar. 8, 2011); MetLife Commission asked, ‘‘[i]n light of the ‘multiple 2011); MetLife Comment Letter at 3 (Mar. 8, 2011); Comment Letter at 3 (Mar. 8, 2011); SIFMA AMG participant to multiple participant’ requirement, the Global FX Comment Letter at 3 (Mar. 8, 2011); Comment Letter at 5–6 (Mar. 8, 2011); Barclays Commission has proposed that requests for quotes Morgan Stanley Comment Letter at 2 (Mar. 2, 2011); Comment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMA be requested of at least five possible respondents. CanDeal Comment Letter at 2–3 (Feb. 25, 2011). Comment Letter at 3 (Mar. 8, 2011); ABC/CIEBA Is this the appropriate minimum number of 236 Tradeweb Comment Letter at 5 (Jun. 3, 2011); Comment Letter at 6 (Mar. 8, 2011); Global FX respondents that the Commission should require to Traccr Limited Comment Letter at 2 (Jun. 3, 2011); Comment Letter at 3 (Mar. 8, 2011); Coalition potentially interact with a request for quote? If not, FHLB Comment Letter at 12 (Jun. 3, 2011); JP Comment Letter at 5–6 (Mar. 8, 2011); Morgan what is an appropriate minimum number? Some Morgan Comment Letter at 2–3 (Mar. 8, 2011); Stanley Comment Letter at 2 (Mar. 2, 2011). pre-proposal commenters have suggested that BlackRock Comment Letter at 3 (Mar. 8, 2011); 242 market participants should transmit a request for Tradeweb Comment Letter at 7 (Mar. 8, 2011); Registration and Regulation of Security-Based quote to ‘more than one’ market participant. The MetLife Comment Letter at 3 (Mar. 8, 2011); Swap Execution Facilities, 76 FR 10948 (proposed Commission is interested in receiving public CanDeal Comment Letter at 2–3 (Feb. 25, 2011). Feb. 28, 2011). comment on this matter.’’ Id. 237 Tradeweb Comment Letter at 5 (Jun. 3, 2011); 243 Reuters Comment Letter at 6 (Dec. 12, 2011); 233 Id. MetLife Comment Letter at 3 (Mar. 8, 2011). Traccr Limited Comment Letter at 2 (Jun. 3, 2011); 238 AII Comment Letter at 5 (Jun. 2, 2011); Rosen et al. 234 Representative Garrett et al. Comment Letter at BlackRock Comment Letter at 4 (Mar. 8, 2011). Comment Letter at 11 (Apr. 5, 2011); JP Morgan 1 (Apr. 5, 2013); Eaton Vance Comment Letter at 2 239 FHLB Comment Letter at 12 (Jun. 3, 2011); AII Comment Letter at 5 (Mar. 8, 2011); Reuters (Feb. 17, 2012); Reuters Comment Letter at 6 (Dec. Comment Letter at 5 (Jun. 2, 2011); Bloomberg Comment Letter at 3 (Mar. 8, 2011); Tradeweb 12, 2011); Tradeweb Comment Letter at 5 (Jun. 3, Comment Letter at 2–3 (Mar. 8, 2011); FXall Comment Letter at 7 (Mar. 8, 2011); FSR Comment 2011); Traccr Limited Comment Letter at 2 (Jun. 3, Comment Letter at 8–9 (Mar. 8, 2011); BlackRock Letter at 3 (Mar. 8, 2011); MetLife Comment Letter 2011); FHLB Comment Letter at 12–13 (Jun. 3, Comment Letter at 3–4 (Mar. 8, 2011); MetLife at 3 (Mar. 8, 2011); SIFMA AMG Comment Letter 2011); AII Comment Letter at 5 (Jun. 2, 2011); Rosen Comment Letter at 3 (Mar. 8, 2011); SIFMA AMG at 5 (Mar. 8, 2011); Deutsche Comment Letter at 4 et al. Comment Letter at 11 (Apr. 5, 2011); JP Comment Letter at 5–6 (Mar. 8, 2011); Barclays (Mar. 8, 2011); MarketAxess Comment Letter at 31 Morgan Comment Letter at 2–3 (Mar. 8, 2011); Comment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMA (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3 Bloomberg Comment Letter at 2–3 (Mar. 8, 2011); Comment Letter at 3 (Mar. 8, 2011); ABC/CIEBA (Mar. 8, 2011); Global FX Comment Letter at 3 (Mar. FXall Comment Letter at 8–9 (Mar. 8, 2011); Reuters Comment Letter at 6 (Mar. 8, 2011); Global FX 8, 2011); Goldman Comment Letter at 2 (Mar. 8, Comment Letter at 3 (Mar. 8, 2011); BlackRock Comment Letter at 3 (Mar. 8, 2011); Coalition 2011); TruMarx Comment Letter at 6 (Mar. 8, 2011). Comment Letter at 3–4 (Mar. 8, 2011); Tradeweb Comment Letter at 5–6 (Mar. 8, 2011); Morgan 244 Comment Letter at 7 (Mar. 8, 2011); FSR Comment Stanley Comment Letter at 2 (Mar. 2, 2011). Morgan Stanley Comment Letter at 2 (Mar. 2, Letter at 3 (Mar. 8, 2011); MFA Comment Letter at 240 FHLB Comment Letter at 12 (Jun. 3, 2011); AII 2011). 6 (Mar. 8, 2011); MetLife Comment Letter at 2–3 Comment Letter at 5 (Jun. 2, 2011); Bloomberg 245 MetLife Comment Letter at 3 (Mar. 8, 2011). (Mar. 8, 2011); SIFMA AMG Comment Letter at 5– Comment Letter at 2–3 (Mar. 8, 2011); FXall 246 Core Principles and Other Requirements for 7 (Mar. 8, 2011); Deutsche Comment Letter at 3–4 Comment Letter at 8–9 (Mar. 8, 2011); MetLife Swap Execution Facilities, 76 FR at 1259. (Mar. 8, 2011); MarketAxess Comment Letter at 31 Comment Letter at 3 (Mar. 8, 2011); SIFMA AMG 247 IECA Comment Letter at 3 (May 24, 2011); (Mar. 8, 2011); Barclays Comment Letter at 5–6 Comment Letter at 5–6 (Mar. 8, 2011); Barclays Mallers et al. Comment Letter at 4–5 (Mar. 21, (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3 Comment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMA 2011); Better Markets Comment Letter at 9 (Mar. 8, (Mar. 8, 2011); ABC/CIEBA Comment Letter at 6 Comment Letter at 3 (Mar. 8, 2011); Global FX 2011); AFR Comment Letter at 4–5 (Mar. 8, 2011).

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the block trade threshold, which would thought that the ‘‘taken into account and requirement could raise the same not move the market.248 In their view, communicated’’ language should mean information leakage concerns as with the five market participant requirement that a SEF must only communicate to the five market participant would allow a participant to conduct the RFQ requester the resting bids and requirement.263 semi-private deals with a few favored offers, and that the RFQ requester has FSR commented that market participants to the exclusion of other sole discretion to either respond to, or participants receiving the RFQ should market participants, which would ignore, these resting bids and offers.257 have relevant information about the ultimately decrease liquidity and create ISDA/SIFMA and SIFMA AMG identity of the RFQ requester.264 a substantial barrier to entry to the requested clarification that the resting However, Tradeweb commented that the swaps market.249 On the other hand, bids and offers do not include indicative Commission should not impose a SDMA supported the five market prices.258 Several commenters also specific requirement that the identity of participant requirement.250 In its view, stated that SEFs should not be required the RFQ requester be disclosed or this requirement promotes price to inform the providers of resting bids anonymous.265 FSR also stated that discovery and liquidity, whereas the and offers of the RFQs; otherwise, the SEFs should not be required to publish single market participant model RFQ system would be subject to market RFQs until after the trade has been facilitates abusive trading practices, abuse by opportunistic third parties completed, and then only as part of such as pre-arranged trading and seeking market information, and the aggregated disclosures.266 Finally, State ‘‘painting the screen’’ (i.e., posting of requirement would open up RFQs Street requested that the Commission non-competitive quotes to confuse the beyond the minimum number of clarify that an RFQ System is not market).251 participants.259 required to provide functionality to make RFQs visible to the entire market, (ii) Comments on ‘‘Taken Into Account (iii) Comments on RFQ Disclosure although it may voluntarily choose to do and Communicated’’ Language in the Issues so.267 RFQ System Definition AFR and Better Markets stated that (2) Commission Determination Some commenters recommended that SEFs should be required to disclose the Commission delete the requirement RFQ responses to all market Based on the comments, the that resting orders be ‘‘taken into participants.260 For example, AFR Commission is adopting proposed account and communicated’’ to the RFQ commented that responses to RFQs § 37.9(a)(1)(ii) as final § 37.9(a)(3), requester.252 FXall and Barclays stated subject to a number of modifications should be made transparent to all 268 that this requirement is not necessary market participants prior to trade discussed below. because the RFQ requester already has execution, which would serve the (i) RFQ System Definition and the ability to view the resting orders on statutory goal of pre-trade price Transmission to Five Market the SEF’s minimum trading transparency and would increase price Participants 253 functionality or Order Book. Several competition.261 Several commenters commenters stated that this requirement The Commission is adopting the objected to the recommendation by AFR definition of RFQ System in proposed is mandating that SEFs offer RFQ 262 and Better Markets. Some of these § 37.9(a)(1)(ii)(A), subject to certain systems in conjunction with the SEF’s commenters noted that such a minimum trading functionality, which modifications described below. As is not required.254 Similarly, JP Morgan explained in the SEF NPRM, the Tradeweb Comment Letter at 8 (Mar. 8, 2011); FSR Commission believes that an RFQ stated that the resting order Comment Letter at 5 (Mar. 8, 2011); MetLife functionality is not mandated by the Comment Letter at 3 (Mar. 8, 2011); SIFMA AMG System, as defined in § 37.9, operating statute.255 Comment Letter at 9 (Mar. 8, 2011); MarketAxess in conjunction with a SEF’s minimum Comment Letter at 32 (Mar. 8, 2011); Barclays Several commenters requested trading functionality (i.e., Order Book) Comment Letter at 7 (Mar. 8, 2011); ABC/CIEBA is consistent with the SEF definition clarification regarding the interaction Comment Letter at 6–7 (Mar. 8, 2011); ISDA/SIFMA between resting bids and offers and the Comment Letter at 3–4; Evolution Comment Letter and promotes the goals provided in RFQ system.256 Some commenters at 5–6 (Mar. 8, 2011). section 733 of the Dodd-Frank Act, 257 JP Morgan Comment Letter at 5–6 (Mar. 8, which are to: (1) Promote the trading of 2011); FSR Comment Letter at 5 (Mar. 8, 2011); 248 swaps on SEFs and (2) promote pre- Mallers et al. Comment Letter at 4 (Mar. 21, MetLife Comment Letter at 3 (Mar. 8, 2011); SIFMA 2011). AMG Comment Letter at 9 (Mar. 8, 2011); trade price transparency in the swaps 269 249 Id. MarketAxess Comment Letter at 32 (Mar. 8, 2011); market. The Commission notes that 250 SDMA Comment Letter at 3 (Mar. 8, 2011). See ABC/CIEBA Comment Letter at 6–7 (Mar. 8, 2011); the RFQ System definition requires also Better Markets Comment Letter at 2 (Apr. 12, ISDA/SIFMA Comment Letter at 3–4 (Mar. 8, 2011); SEFs to provide market participants the 2013) and Allston et al. Comment Letter at 1 (Feb. Evolution Comment Letter at 5–6 (Mar. 8, 2011). ability to access multiple market 28, 2013). 258 ISDA/SIFMA Comment Letter at 3–4 (Mar. 8, 251 SDMA Comment Letter at 5 (Feb. 28, 2013); 2011); SIFMA AMG Comment Letter at 9 (Mar. 8, participants, but not necessarily the SDMA Comment Letter at 3 (Mar. 8, 2011). 2011). entire market, in conformance with the 252 Tradeweb Comment Letter at 5 (Jun. 3, 2011); 259 FXall Comment Letter at 9–10 (Mar. 8, 2011); SEF definition. JP Morgan Comment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3–4 (Mar. 8, 2011); The Commission agrees with SDMA FXall Comment Letter at 9–10 (Mar. 8, 2011); SIFMA AMG Comment Letter at 9 (Mar. 8, 2011). that the proposed five market SIFMA AMG Comment Letter at 9 (Mar. 8, 2011); FSR also commented that the provider of the resting Barclays Comment Letter at 7 (Mar. 8, 2011); bid should not be provided with information about Tradeweb Comment Letter at 6 (Mar. 8, 2011). the identity of the RFQ requester. FSR Comment 263 Tradeweb Comment Letter at 7 (Mar. 8, 2011); 253 FXall Comment Letter at 9 (Mar. 8, 2011); Letter at 5 (Mar. 8, 2011). State Street Comment Letter at 4 (Mar. 8, 2011); Barclays Comment Letter at 7 (Mar. 8, 2011). 260 AFR Comment Letter at 3 (Feb. 27, 2013); AFR Deutsche Comment Letter at 4 (Mar. 8, 2011). 264 254 ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, Comment Letter at 5 (Mar. 8, 2011); Better Markets FSR Comment Letter at 3 (Mar. 8, 2011). 2011); FXall Comment Letter at 4 (Mar. 8, 2011); Comment Letter at 8 (Mar. 8, 2011). 265 Tradeweb Comment Letter at 8 (Mar. 8, 2011). MarketAxess Comment Letter at 33 (Mar. 8, 2011); 261 AFR Comment Letter at 5 (Mar. 8, 2011). 266 FSR Comment Letter at 3 (Mar. 8, 2011). SIFMA AMG Comment Letter at 4 (Mar. 8, 2011). 262 Rosen et al. Comment Letter at 14 (Apr. 5, 267 State Street Comment Letter at 4 (Mar. 8, 255 JP Morgan Comment Letter at 5 (Mar. 8, 2011). 2011); MarketAxess Comment Letter at 32 (Mar. 8, 2011). 256 Reuters Comment Letter at 1 (Jun. 13, 2012); 2011); Barclays Comment Letter at 10 (Mar. 8, 268 The Commission is renumbering proposed Rosen et al. Comment Letter at 12–14 (Apr. 5, 2011); 2011); Tradeweb Comment Letter at 7–8 (Mar. 8, § 37.9(a)(1)(ii) to § 37.9(a)(3). JP Morgan Comment Letter at 5–6 (Mar. 8, 2011); 2011); State Street Comment Letter at 4 (Mar. 8, 269 Core Principles and Other Requirements for FXall Comment Letter at 9–10 (Mar. 8, 2011); 2011); Deutsche Comment Letter at 4 (Mar. 8, 2011). Swap Execution Facilities, 76 FR at 1220–21.

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participant requirement would promote Commission also believes that the three already choose to send an RFQ to pre-trade price transparency, as the RFQ market participant requirement, with multiple market participants. Tradeweb, requester would be required to solicit the two market participant phase-in for example, noted that in its experience executable orders, on a pre-trade basis, period, appropriately balances the in the U.S. Treasuries market, market from a larger group of potential benefits of pre-trade price transparency participants on average send an RFQ to responders.270 A broader group of and the information leakage concerns three market participants.273 In potential responders, in turn, raised by commenters. The revision addition, the Commission understands encourages price competition between from five to three minimum market that many pension and other managed the potential responders to the RFQ and participants will also provide market funds with fiduciary obligations may provide a more reliable assessment participants with greater flexibility in routinely obtain quotes from at least of market value than SEF functionality sending RFQs for Required three market participants in certain that would permit a market participant Transactions, while still complying with securities markets. The Commission to rely on a quote from a single RFQ the statutory SEF definition and believes that the three market requestee. The Commission nevertheless promoting pre-trade price transparency. participant requirement, with the two recognizes commenters’ concerns about The Commission has also determined market participant transition period, the proposed five market participant to clarify that the market participants supports a common industry practice of requirement, such as the potential for required for inclusion in an RFQ in all querying multiple market participants, increased trading costs and information cases may not be affiliated with or while still complying with the statutory leakage to the non-executing market controlled by the RFQ requester and SEF definition and promoting the goals participants in the RFQ. To address may not be affiliated with or controlled provided in section 733 of the Dodd- these concerns, while still complying by each other, and is revising final Frank Act. with the multiple-to-multiple § 37.9(a)(3) to clarify this point.272 For Furthermore, the Commission requirement in the statutory SEF an RFQ requester to send an RFQ to believes that the three minimum market definition and promoting the goals of another entity who is affiliated with or participant requirement heightens the pre-trade price transparency and trading controlled by the RFQ requester is probability that multiple participants of swaps on SEFs provided in section inconsistent with the purpose of will respond to an RFQ and, thus, will 733 of the Dodd-Frank Act, the requiring that RFQs be sent to more than facilitate the pricing improvements Commission is requiring that a market one market participant, as explained attendant to competition among RFQ participant transmit an RFQ to no less both in the SEF NPRM and this release. responders. The Commission is aware of than two market participants during a The Commission notes that if an RFQ is numerous legal, business, and phase-in compliance period and, transmitted to one non-affiliate and two technological issues that could prevent subsequent to that period, to no less affiliates of the requester or if an RFQ a market participant from responding to than three market participants.271 The is transmitted to three requestees who a specific RFQ. The Commission notes, Commission believes, as noted above, are affiliates of each other, then the for example, that DCM market maker that sending an RFQ to a greater number policy objective of promoting the goal of programs often require participants to of market participants increases the pre-trade price transparency and quote two-sided markets for 75 to 85 potential for price competition among complying with the multiple-to- percent of the trading day.274 Therefore, responders and provides a more reliable multiple requirement in the SEF a participant in the market maker assessment of market value. The definition could be undermined. The program may not provide quotes for a Commission is also concerned that such portion of the trading day. While there 270 The Commission notes that a SEF market an outcome could disincentivize entities is no guarantee that even a minimum participant may send an RFQ to the entire market. from responding to an RFQ, which market participant requirement will See id. at 1220 and discussion below. The would reduce price competition and Commission also notes that there are generally two ensure that multiple responses are distinct differences between the requirements liquidity. available for all RFQs, it increases the finalized in this release and the RFQ-type The Commission believes, moreover, probability that the goal of pre-trade functionality offered by DCMs. First, RFQ that the three market participant price transparency is achieved and that functionality used by DCMs disseminates RFQs to requirement is consistent with current a competitive market exists for all all market participants. Second, the responses to the market practice where, in certain RFQs take the form of executable bids or offers that market participants. are entered into the DCM’s order book or other markets, many market participants Finally, the Commission believes that centralized market, such that orders from any setting the minimum RFQ requirement market participant, not just the one submitting the 272 The Commission notes that ‘‘affiliate’’ means: RFQ, can be matched against such responsive bids (i) One party, directly or indirectly, holds a majority at a uniform number for all Required or offers. Although the Commission considered a ownership interest in the other party, and the party Transactions in all asset classes minimum RFQ-to-all requirement similar to the that holds the majority interest in the other party provides regulatory and market current practice in DCMs, given that swaps tend to reports its financial statements on a consolidated efficiencies and is appropriate for the be less standardized than futures, the Commission basis under Generally Accepted Accounting believes that rules pertaining to the execution Principles or International Financial Reporting SEF market structure at this particular methods for SEFs should provide appropriate Standards, and such consolidated financial time. SEFs and market participants will flexibility for market participants trading swaps. statements include the financial results of the benefit from a clear and uniform The Commission notes that the less restrictive majority-owned party; or (ii) a third party, directly standard that would not require them to minimum market participant requirement or indirectly, holds a majority ownership interest in established by part 37 reflects the more flexible both parties, and the third party reports its financial be subject to different minimum RFQ statutory provisions for SEFs as compared to DCMs. statements on a consolidated basis under Generally requirements, and to monitor 271 The Commission clarifies that the three market Accepted Accounting Principles or International compliance with such requirements, for participant requirement does not imply any Financial Reporting Standards, and such every swap or class of swaps subject to requirement that the requested market participants consolidated financial statements include the operate in any particular manner, such as a financial results of both of the parties. A party or requirement that such participants be dedicated third party directly or indirectly holds a majority 273 Tradeweb Comment Letter at 7 (Mar. 8, 2011). liquidity providers or market makers in the ownership interest if it directly or indirectly holds 274 The Commission understands that such particular swap. The RFQ requester may send the a majority of the equity securities of an entity, or provisions are in place to accommodate various RFQ to any three market participants on the RFQ the right to receive upon dissolution, or the operational and other reasons that could cause a system, subject to the affiliate prohibition discussed contribution of, a majority of the capital of a market participant to not comply with the quoting below. See supra footnote 234 for further details. partnership. See Commission regulation 50.52. obligations.

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the CEA section 2(h)(8) trade execution The Commission notes that some trade execution mandate of section requirement. commenters expressed concerns about 2(h)(8) of the CEA). For the reasons discussed above, at the risks with respect to information With respect to commenters’ concerns this time, the Commission believes that leakage for illiquid swaps or large-size about the potential winner’s curse for the three market participant trades, and the potential risk of a large-sized trades, the Commission requirement implements the multiple- winner’s curse for the market notes that block trades would not be to-multiple requirement in the statutory participant whose quote is accepted by subject to the execution methods for SEF definition and will create an the RFQ requester. According to the Required Transactions, including the commenters, the other market appropriate level of pre-trade price three market participant requirement.282 participants in the RFQ will be aware of transparency for Required Transactions Therefore, excluding block trades from the RFQ, and some or all of those (i.e., transactions involving swaps that the execution methods for Required participants will attempt to front-run are subject to the trade execution Transactions will address the potential the trades by the winning responder to mandate of section 2(h)(8) of the CEA) risk of a winner’s curse for such trades. for market participants initiating RFQs. hedge or layoff the risk from the RFQ transaction.278 The Commission also clarifies that SEFs However, the Commission is also aware are not required to display a requester’s of the fact that a phased implementation With respect to commenters’ concerns about the potential winner’s curse for RFQ to market participants not of this requirement will assist market participating in the RFQ.283 participants and prospective SEFs to illiquid swaps, the Commission clarifies make an efficient transition from the that the minimum market participant The Commission believes, in response swap industry’s current market requirement only applies to RFQ to commenters’ concerns about structure to the more transparent Systems for Required Transactions (i.e., increased trading costs, that an execution framework set forth in these transactions involving swaps that are increased number of participants final rules. Therefore, to provide market subject to the trade execution mandate receiving and responding to RFQs will participants, SEFs, and the swaps of section 2(h)(8) of the CEA); such tighten the bid-ask spreads, and result industry with time to adapt to the new swaps generally should be more liquid in lower transaction costs for market SEF regime, the Commission is phasing- than swaps that are not subject to the participants. The Commission notes that in the three market participant trade execution mandate because they the relationship between spreads and requirement. From the effective date of are subject to the clearing mandate of the industry practice for the minimum section 2(h)(1) of the CEA and are made number of RFQ recipients will vary the final SEF regulations until one year 279 from the compliance date of these final available to trade. In this regard, the across swaps and over time. Further, the regulations, a market participant Commission notes that the interest rate Commission believes that as SEFs transmitting an RFQ for Required swaps and credit default swaps that the compete to grow their swaps trading Transactions under § 37.9(a)(2) must Commission has determined are volumes and deliver improved liquidity still comply with the RFQ definition in required to be cleared under CEA and lower transaction costs for their section 2(h)(1) (and are likely to be § 37.9(a)(3), but may transmit the quote customers, the final rules in this release subject to the trade execution mandate to no less than two market will provide them with the flexibility to of CEA section 2(h)(8)) are some of the participants.275 experiment with different minimum most liquid swaps.280 The Commission Some comments expressed support numbers of recipients that is higher than also notes that 77 swap dealers have the minimum articulated in this for the SEC’s SB–SEF proposal, which registered with the Commission and allows for one-to-one RFQs. If the regulation. The final RFQ requirement nearly all of them make markets in such will provide some protection to RFQ Commission eliminated the multiple swaps.281 Further, SEFs may offer RFQ requesters that at least a minimum market participant requirement and systems without the three market number of market participants will instead permitted RFQ requesters to participant requirement for Permitted receive their RFQs, and thus increase send RFQs to a single market Transactions (i.e., transactions not the likelihood of receiving multiple, participant, then the multiple- involving swaps that are subject to the participant-to-multiple-participant competitive quotes. requirement in the SEF definition and 278 To the extent such risks potentially exist for Finally, the Commission is deleting the pre-trade price transparency goal Required Transactions, the reduction of the the additional definition of RFQ System would be undermined. In this regard, minimum market participant requirement from the in proposed § 37.9(a)(1)(ii)(B) because it proposed five will help mitigate this risk. the Commission notes that while the 284 279 Clearing Requirement Determination Under is unnecessary. A SEF that chooses to SEC’s SB–SEF proposal allows for one- Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, offer an RFQ System to facilitate to-one RFQs, it proposed to fulfill the 2012); Process for a Designated Contract Market or Required Transactions is required to multiple to multiple requirement by Swap Execution Facility To Make a Swap Available offer the RFQ System in conjunction mandating full order interaction or best To Trade, 76 FR 77728 (proposed Dec. 14, 2011). 280 with the SEF’s Order Book, which 276 Clearing Requirement Determination Under execution for RFQs. Under the SEC’s Section 2(h) of the CEA, 77 FR 74284. The would encompass the requirements in SB–SEF proposal, an RFQ requester Commission notes that these swaps already went proposed § 37.9(a)(1)(ii)(B)(1) and must execute against the best priced through a Commission determination process that included a five factor review, including a liquidity orders of any size within and across a 282 review. Id. ISDA, in its letter requesting interpretive See definition of block trade in § 43.2 of the SEF’s modes of execution, a relief regarding the obligation to provide a pre-trade Commission’s regulations. requirement that the Commission is not mid-market mark, recognized that many of the 283 Similarly, as noted below, SEFs are not recommending at this time.277 swaps that the Commission has determined are required to display responses to an RFQ to anyone required to be cleared under CEA section 2(h)(1) are but the RFQ requester. ‘‘highly-liquid, exhibit narrow bid-ask spreads and 284 The Commission is also deleting the catch-all 275 The Commission notes that the affiliate are widely quoted by SD/MSPs in the marketplace RFQ definition in proposed § 37.9(a)(1)(ii)(C) as it prohibition in § 37.9(a)(3) applies during the . . . ’’ ISDA Comment Letter at 2 (Nov. 30, 2012). is unnecessary. As discussed below, a SEF may interim RFQ-to-2 period. 281 The Commission recognizes that not all swap petition the Commission under § 13.2 to amend 276 Registration and Regulation of Security-Based dealers will be active in all Required Transactions. § 37.9(a)(2) to include additional execution methods Swap Execution Facilities, 76 FR at 10953–54, The Commission also notes that of the 77 currently for Required Transactions. See discussion below 10971–74. registered swap dealers, 35 swap dealers are not under § 37.9(b)(1) and (b)(4)—Execution Methods 277 Id. affiliated with any other swap dealers. for Required Transactions in the preamble.

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(2)(i).285 Additionally, a market The Commission also clarifies that the each of its market participants with participant is already required to send resting bids and offers being equal priority in receiving requests for an RFQ to three market participants, communicated are not required to quotes and in transmitting and which would also be the case if it is include indicative prices, to the extent displaying for execution responsive based upon an indicative quote as stated that indicative prices are facilitated by orders. The SEF does not need to in proposed § 37.9(a)(1)(ii)(B)(2)(ii).286 the Order Book, and that SEFs are not establish a minimum latency or specific required to inform the providers of the (ii) ‘‘Taken Into Account and period of time for the transmission of resting bids and offers on the Order Communicated’’ Language in the RFQ responsive orders, provided that the Book of the RFQs. System Definition SEF’s rulebook and prohibition on (iii) RFQ Disclosure Issues transmission and display priorities are To address commenters’ concern that appropriately designed to prevent the SEF NPRM was ambiguous with The Commission is clarifying that market participants from seeking to respect to the communication SEFs are not required to disclose avoid the three market participant requirement, the Commission is responses to RFQs to all market requirement. A SEF’s RFQ System and modifying the definition of RFQ System participants. While the Commission rulebook must account for this in proposed § 37.9(a)(1)(ii)(A) to state understands that the RFQ functionality prohibition. that a SEF must provide the RFQ offered by some DCMs disseminates requester: (1) With any firm resting bid responses to RFQs to all market (c) § 37.9(a)(1)(iii)—Voice-Based System or offer in the same instrument from any participants, it also notes that the less Proposed § 37.9(a)(1)(iii) defined of the SEF’s Order Books at the same restrictive disclosure requirement for Voice-Based System as a trading system time as the first responsive bid or offer SEFs reflects the more flexible statutory or platform in which a market is received by the RFQ requester and (2) provisions for SEFs as compared to participant executes or trades a with the ability to execute against such DCMs. As noted in the SEF NPRM, a Permitted Transaction using a firm resting bids or offers along with the market participant may access fewer telephonic line or other voice-based responsive orders.287 For example, a market participants than the entire service. market participant transmits an RFQ to market in certain situations.288 In three market participants to buy a US $1 response to FSR’s and Tradeweb’s (1) Commission Determination million notional 10-year fixed-to- comments about the identity of the RFQ The Commission did not receive any floating US$ LIBOR interest rate swap. requester, the Commission clarifies that comments on the definition of Voice- Any firm offer resting on the SEF’s it is not imposing a specific requirement Based System. However, the Order Book for a 10-year fixed-to- that the identity of the RFQ requester be Commission is deleting the definition of floating US$ LIBOR interest rate swap disclosed or anonymous. The Voice-Based System in proposed must be transmitted to the RFQ Commission is also not providing a § 37.9(a)(1)(iii) given its decision below requester at the same time that the first specific requirement regarding the to allow SEFs to provide any execution responsive offer is received by the RFQ publishing of the ‘‘request’’ for a quote method for Permitted Transactions. requester. The SEF must provide the and notes that SEFs must comply with (d) §§ 37.9(b)(1) and (b)(4)—Execution RFQ requester with the ability to lift the all reporting obligations as required in Methods for Required Transactions firm offers and execute against any of the Act and Commission’s regulations. the responsive orders. The final rule Finally, as noted in the SEF NPRM, Proposed § 37.9(b)(1) stated that requires that SEFs communicate any acceptable RFQ Systems must permit Required Transactions may be executed resting bid or offer pertaining to the RFQ requesters the option to make an on an Order Book or an RFQ System. As same instrument back to the RFQ RFQ visible to the entire market.289 noted in the SEF NPRM, a SEF must requester, while the requester retains offer the minimum trading functionality the discretion to decide whether to (iv) Other RFQ Issues in proposed § 37.9(b)(2) (i.e., a execute against the resting bids or offers As noted in the SEF NPRM, an centralized electronic screen with the or responsive orders. acceptable RFQ System may allow for a ability to post both firm and indicative Similar to the three market participant transaction to be consummated if the quotes visible to all market requirement, the Commission believes original request to five potential participants).291 Therefore, the SEF that the communication requirement counterparties receives fewer than five NPRM provided that Required promotes pre-trade price transparency responses.290 Although the Commission Transactions must be executed through and the trading of swaps on SEFs, as the received no comment letters on this the SEF’s minimum trading RFQ requester will have the ability to issue, some commenters in meetings functionality, Order Book that meets the access competitive quotes and quote asked the Commission to clarify the minimum trading functionality, or RFQ providers will be able to have their amount of time required to elapse before System that operates in conjunction quotes viewed by the RFQ requester. the RFQ requester can execute against with the minimum trading the responsive quotes since fewer than functionality.292 The SEF NPRM made it 285 See discussion below under § 37.9(b)(1) and five responses may be received. As clear that for Required Transactions, (b)(4)—Execution Methods for Required 293 Transactions in the preamble. As noted above in the such, the Commission is modifying the pre-trade transparency must be met. registration section, a SEF is not required to offer RFQ System definition in final Additionally, proposed § 37.9(b)(4) indicative quotes. § 37.9(a)(3) to state that a SEF must stated that the Commission may, in its 286 Id. ensure that its trading protocols provide discretion, require a SEF to offer a 287 The Commission is renumbering proposed § 37.9(a)(1)(ii)(A) to § 37.9(a)(3). The Commission different trading method for a particular 288 notes that after the RFQ responses and resting bids Core Principles and Other Requirements for swap. or offers on the Order Book are communicated to Swap Execution Facilities, 76 FR at 1220 (stating For Required Transactions, the SEF the RFQ requester, the RFQ requester may make a that market participants may desire to interact with NPRM did not provide for a specific counter request or order as long as it is submitted a limited number of market participants (i.e., fewer to 3 market participants, whether it be to the same than the entire market) and are permitted to do so 3 market participants as the original RFQ request, under the proposal). 291 Id. at 1219–20. 3 different market participants, or some 289 Id. 292 Id. combination of both. 290 Id. 293 Id. at 1220.

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execution method incorporating voice. prices.301 Other commenters supported stated that the Commission should The proposal stated that trading systems the use of order book structures and allow any execution method for or platforms facilitating the execution of RFQ models for Required Required Transactions as long as it Required Transactions via voice Transactions.302 SDMA, for example, meets the multiple participant to exclusively are not multiple participant stated that all cleared swaps should be multiple participant requirement in the to multiple participant and do not executed through a central limit order SEF definition and the other statutory provide for pre-trade price book or an RFQ System.303 requirements for SEFs.311 transparency.294 However, the SEF Nodal recommended that the Commission explicitly include blind Furthermore, some members of the NPRM noted that, while not acceptable industry requested that the Commission as the sole method of execution for auctions as an acceptable method of 304 clarify in the final rules whether ‘‘work- Required Transactions, voice would be execution for Required Transactions. 305 up’’ sessions would be considered an appropriate under certain circumstances Nodal commented that pre-trade transparency for Required Transactions acceptable method of execution for 312 such as for a market participant to 306 Required Transactions. GFI explained communicate an order to a SEF’s should not apply to blind auctions. Nodal articulated its view that the twin one example of a work-up session employee or for a SEF’s employee to goals of pre-trade transparency and where, after a trade is executed on an assist a market participant in executing promoting on-exchange trading of swaps order book, one of the counterparties to a trade.295 The SEF NPRM stated that on SEFs should be balanced against the trade may wish to buy or sell the core principles and the each other, instead of being read in additional quantities of the same Commission’s regulations would fully conjunction with one another.307 instrument at the previously executed apply to such communications, price.313 In this case, the parties initiate including, but not limited to, (ii) Comments on ‘‘Through Any Means a work-up session to execute such transparency, audit trail, impartial of Interstate Commerce’’ Language in additional quantity.314 After the initial access, and standards for RFQs.296 the SEF Definition counterparty exercises its right of first Although the SEF NPRM did not Given the phrase ‘‘through any means refusal, other market participants may provide for a specific execution method of interstate commerce’’ in the CEA also join in the trade at the previously incorporating voice for Required section 1a(50) SEF definition, many executed price.315 Transactions, it did contemplate the commenters supported the use of (iii) Comments on Liquidity-Based possibility of certain functionalities that multiple methods of execution, such as Execution Mandates operate in conjunction with the SEF’s voice, for Required Transactions on a 297 308 JP Morgan, for example, stated minimum trading functionality. In SEF. Several commenters stated that the that the SEF NPRM assumes that SEFs this regard, the SEF NPRM stated that, Dodd-Frank Act does not require certain will always be electronic platforms, in addition to the SEF’s minimum methods of trading, such as an order which it contended, appears to directly trading functionality, a SEF may offer book, based upon the amount of trading contradict the phrase ‘‘through any other functionalities that provide activity in a particular instrument.316 multiple participants with the ability to means of interstate commerce’’ in the SEF definition.309 According to MarketAxess contended that nothing in access multiple participants, but not the Dodd-Frank Act supports the necessarily the entire market, if the WMBAA, the phrase ‘‘through any means of interstate commerce’’ in the requirement in proposed § 37.9(b)(4) market participant so chooses.298 The that methods of execution on a SEF SEF NPRM noted that certain defined SEF definition supports multiple methods of execution for Required should be based upon characteristics of RFQ Systems or other systems that meet 317 Transactions on a SEF, including a a particular swap. MarketAxess the SEF definition and comply with the combination of voice and electronic stated that such a requirement would core principles applicable to SEFs may systems.310 In this regard, WMBAA create uncertainty regarding a SEF’s qualify.299 operational structure 318 and, according (1) Summary of Comments 301 Mallers et al. Comment Letter at 3 (Mar. 21, to Tradeweb, would likely decrease the 2011). trading activity and liquidity of those (i) Comments on Execution Methods for 302 Tradeweb Comment Letter at 4 (Jun. 3, 2011); swaps subject to the requirement.319 On Required Transactions SDMA Comment Letter at 2 (Mar. 8, 2011); the other hand, AFR contended that Deutsche Comment Letter at 3 (Mar. 8, 2011); MFA mandatorily cleared swaps meeting a Some commenters supported the use Comment Letter at 5–6 (Mar. 8, 2011); MetLife Comment Letter at 2 (Mar. 8, 2011); Barclays certain level of trading activity should of order books for Required Comment Letter at 4 (Mar. 8, 2011); Bloomberg Transactions.300 For example, Mallers et Comment Letter at 2 (Mar. 8, 2011); BlackRock 311 al. contended that a central order book Comment Letter at 4–5 (Mar. 8, 2011). WMBAA Comment Letter at 5 (Mar. 8, 2011). 303 312 Meetings with ICAP dated Mar. 21, 2012, Mar. market structure for all Required SDMA Comment Letter at 2 (Mar. 8, 2011). 304 Nodal Comment Letter at 3 (Mar. 8, 2011). 9, 2012, Feb. 16, 2012, Feb. 14, 2012; Meetings with GFI dated Mar. 14, 2012, Feb. 16, 2012; Meeting Transactions provides the most accurate 305 Id. at 2–3; Nodal Comment Letter at 3 (Jun. 3, valuation of the market, reduces 2011). with WMBAA dated Feb. 16, 2012; ICAP Comment 306 Letter at 4 (Mar. 8, 2011). systemic risks, and results in better See discussion above under § 37.3— 313 Requirements for Registration in the preamble for Meetings with GFI dated Mar. 14, 2012, Feb. a description of Nodal’s blind auction. 16, 2012. 294 Id. at 1221. 314 307 Nodal Comment Letter at 2 (Mar. 8, 2011). Id. 295 Id. 315 308 Representative Scott Garrett Comment Letter Id. 296 Id. at 1 (Feb. 27, 2013); WMBAA Comment Letter at 2– 316 Rosen et al. Comment Letter at 10 (Apr. 5, 297 Id. at 1220. 3 (Jul. 18, 2011); WMBAA Comment Letter at 6–8 2011); Barclays Comment Letter at 11 (Mar. 8, 298 Id. (Jun. 3, 2011); Rosen et al. Comment Letter at 15 2011); ISDA/SFMA Comment Letter at 5 (Mar. 8, 299 Id. (Apr. 5, 2011); JP Morgan Comment Letter at 6 (Mar. 2011); Tradeweb Comment Letter at 6 (Mar. 8, 300 Mallers et al. Comment Letter at 3 (Mar. 21, 8, 2011); WMBAA Comment Letter at 4–6 (Mar. 8, 2011); MarketAxess Comment Letter at 33 (Mar. 8, 2011); Better Markets Comment Letter at 5–6 (Mar. 2011); ICAP Comment Letter at 3, 4–5 (Mar. 8, 2011). 8, 2011); AFR Comment Letter at 4 (Mar. 8, 2011). 2011); ISDA/SIFMA Comment Letter at 4–5 (Mar. 8, 317 MarketAxess Comment Letter at 33 (Mar. 8, Similarly, SDMA supports the sole use of order 2011); CME Comment Letter at 7–8 (Mar. 8, 2011). 2011). books for certain products. SDMA Comment Letter 309 JP Morgan Comment Letter at 6 (Mar. 8, 2011). 318 Id. at 2 (Apr. 30, 2013). 310 WMBAA Comment Letter at 2 (Jul. 18, 2011). 319 Tradeweb Comment Letter at 6 (Mar. 8, 2011).

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only be traded through order book SEF should not result in eliminating the use of the phrase ‘‘any means of systems.320 need to provide some degree of pre- interstate commerce,’’ the Commission trade transparency. Therefore, even is not limiting the means of execution (2) Commission Determination when recognizing the importance of or communication that a SEF may (i) Execution Methods for Required promoting the trading of swaps on SEFs, utilize in implementing the required Transactions some degree of pre-trade transparency execution methods for Required The Commission is revising proposed must be met for Required Transactions in § 37.9(a)(2)(i)(A) or (B), § 37.9(b)(1) as final § 37.9(a)(2) to clarify Transactions.326 As a result, the provided that the chosen execution that each Required Transaction that is Commission is declining to accept method satisfies the requirements not a block trade as defined in § 43.2 of Nodal’s recommendation to explicitly provided in § 37.3(a)(3) for Order Books the Commission’s regulations shall be include blind auctions as an acceptable or in § 37.9(a)(3) for Request for Quote executed on a SEF in accordance with method of execution for Required Systems. In this regard, the Commission one of the following methods of Transactions under this rulemaking.327 notes that as the swaps market evolves, SEFs may develop new means of execution: (1) An Order Book as defined (ii) ‘‘Through Any Means of Interstate in § 37.3(a)(3) or (2) an RFQ System, as execution or communication for use in Commerce’’ Language in the SEF implementing the required execution defined in § 37.9(a)(3), that operates in Definition conjunction with an Order Book.321 As methods. Although the Commission explained in this final rulemaking, the In consideration of the comments notes that its regulations are technology Commission believes that these regarding possible limitations on how neutral given the ‘‘any means of execution methods are consistent with the Commission interprets the phrase interstate commerce’’ language, it also the SEF definition and promote the ‘‘through any means of interstate emphasizes that, regardless of the means goals provided in section 733 of the commerce’’ in the SEF definition, the of interstate commerce utilized, a SEF Dodd-Frank Act. The Commission Commission is revising the final rule must comply with the Act and the notes, however, that a SEF may petition text to clarify that in providing either Commission’s regulations, including the § 37.9 execution method, impartial the Commission under § 13.2 of the one of the execution methods for access, audit trail, and surveillance Commission’s regulations to amend Required Transactions in requirements. Furthermore, all § 37.9(a)(2) to include additional § 37.9(a)(2)(i)(A) or (B) of this final transactions on the SEF must comply execution methods.322 This ability of rulemaking (i.e., Order Book or RFQ System that operates in conjunction with the SEF’s rules. SEFs to petition the Commission For example, to meet the RFQ System replaces similar provisions in the SEF with an Order Book), a SEF may for purposes of execution and definition for Required Transactions, a NPRM that were included in the Order SEF must satisfy all of the following Book and RFQ System definitions and communication use ‘‘any means of interstate commerce,’’ including, but not functions, and in doing so, all or some provides SEFs with additional of these functions may be performed flexibility as existing execution methods limited to, the mail, internet, email, and telephone, provided that the chosen over the telephone: (1) Receiving a evolve or new methods are request from a market participant to developed.323 execution method satisfies the requirements provided in § 37.3(a)(3) for execute a trade, (2) submitting that In keeping with the statutory request to at least 3 market participants instruction that the Dodd-Frank Act goal Order Books or in § 37.9(a)(3) for Request for Quote Systems.328 With this in accordance with the RFQ System of SEFs is to both ‘‘promote the trading definition, (3) communicating the RFQ of swaps on swap execution facilities 326 responses and resting bids or offers on and to promote pre-trade price The Commission notes below that pre-trade transparency can help promote the trading of swaps the Order Book to the RFQ requester, 324 transparency in the swaps market’’ on SEFs. See the Introduction section of the Cost and (4) executing the transaction. The (emphasis added), the Commission is Benefit Considerations section for further details. Commission notes that regardless of the 327 reaffirming its view articulated in the The Commission further notes that this means of interstate commerce utilized, SEF NPRM that these goals can be determination does not accept Nodal’s assertion that ‘‘this type of blind auction trading platform is including the telephone, the SEF must achieved for Required Transactions by permissible on DCMs.’’ See Nodal Comment Letter submit the transaction into its system or providing for the execution of such at 3 (Mar. 8, 2011). platform so that the SEF is able to transactions on trading systems or 328 The Commission interprets the phrase comply with the Act and the platforms that allow market participants ‘‘through any means of interstate commerce’’ in Commission’s regulations, including to post bids and offers or accept bids CEA § 1a(50) to allow a SEF to utilize a variety of means of execution or communication, including, audit trail, clearing, and reporting and offers that are transparent to the but not limited to, telephones, internet requirements. Given the different means entire market.325 Promoting trading on a communications, and electronic transmissions. of interstate commerce that a SEF may Overstreet v. North Shore Corp., 318 U.S. 125, 129– utilize for purposes of communication 320 AFR Comment Letter at 5–6 (Mar. 8, 2011). 30 (1943) (in general, ‘‘instrument’’ of interstate commerce is to be interpreted broadly); United and execution in implementing the 321 The Commission is renumbering proposed States v. Barlow, 568 F.3d 215, 220 (5th Cir. 2009) execution methods for Required § 37.9(b)(1) to § 37.9(a)(2). (‘‘It is beyond debate that internet and email are 322 See 17 CFR 13.2 for further details. This will Transactions in § 37.9(a)(2)(i)(A) or (B), facilities or means of interstate commerce.’’); United the Commission notes that it must allow the Commission to consider if a broader States v. Weathers, 169 F.3d 336, 341 (6th Cir. model for executing on SEFs, consistent with the 2000) (‘‘It is generally well established that evaluate each system or platform to suggestion in Commissioner Sommers’ dissent, telephones, even when used intrastate, constitute determine whether it meets the would be appropriate on a case-by-case basis, in instrumentalities of interstate commerce.’’); SEC v. conformance with the CEA and the Commission’s requirements of § 37.9(a)(2). Solucorp Indus., 274 F.Supp.2d 379, 419 (S.D.N.Y. The Commission, in order to provide regulations. Core Principles and Other 2003) (defendants ‘‘used the means and Requirements for Swap Execution Facilities, 76 FR instrumentalities of interstate commerce, including, further clarity regarding the means of at 1259. among other things, the mails and wires, including 323 See proposed § 37.9(a)(1)(i)(D) and the Internet, news wires and telephone lines’’ to means they employ, must comply with all of the § 37.9(a)(1)(ii)(C). commit securities fraud). While the Commission’s substantive SEF requirements, including, but not 324 CEA section 5h(e); 7 U.S.C. 7b–3(e) (emphasis interpretation of ‘‘any means of interstate limited to, requirements that pertain to execution. added). commerce’’ allows a SEF to utilize a wide variety For example, a SEF using the telephone to execute 325 Core Principles and Other Requirements for of execution or communication means, all SEFs, Required Transactions must satisfy the execution Swap Execution Facilities, 76 FR at 1220. regardless of the execution or communication requirements set forth in § 37.9(a)(2)(i)(A) or (B).

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interstate commerce that a SEF may provide further clarity regarding work- Commission believes that, if properly utilize in order to satisfy the execution up sessions, is providing the following conducted, work-up sessions may methods for Required Transactions in two examples, which the Commission enhance price discovery and foster § 37.9(a)(2), is providing the following intends to be instructive, though not liquidity. example, which the Commission comprehensive. The Commission notes The Commission believes that a work- intends to be instructive, though not that the following examples are two up session would be a trading protocol comprehensive. The Commission types of work-up session that may be and, thus, constitute a rule under § 40.1 emphasizes that the following example acceptable: of the Commission’s regulations. Any should not be construed as bright-line • After two counterparties execute a such rule or amendment thereto must be rules: transaction on a SEF’s Order Book, the codified and included in a SEF’s • RFQ System example—a market SEF may establish a short time period rulebook in accordance with the rule participant calls an employee of the SEF for a work-up session. The SEF must review or approval procedures of part with a request for a quote to buy or sell open up the work-up session to all 40 of the Commission’s regulations or a swap subject to the trade execution market participants so that they may during the SEF application process. requirement in CEA section 2(h)(8). The trade an additional quantity of the same Additionally, all transactions executed SEF employee disseminates the request instrument at the same price previously through a work-up session must comply for a quote to no less than three market executed by the initial counterparties. In with the SEF’s rules. The Commission participants on the SEF (directly or addition, any resting bids or offers on staff will provide informal guidance to through other SEF employees or both) the SEF’s Order Book equal to or better SEF applicants on whether such work- by telephone, email, instant messaging, than the work-up session price must be up sessions are in compliance with the squawk box, some other means of included in the work-up session.331 The Act and the Commission’s regulations. communication, or some combination SEF may provide the initial (iii) Liquidity-Based Execution thereof. Based on the responses of these counterparties execution priority in the work-up session. Mandates market participants, the SEF employee • communicates the responsive bids or After two counterparties execute a The Commission is deleting proposed offers and the resting bids or offers on transaction on a SEF’s RFQ System, the § 37.9(b)(4). Given the incipience of the the SEF’s Order Book 329 to the RFQ SEF may establish a short time period regulated swaps market, at this time, the requester by one of the above referenced for a work-up session. The SEF must Commission is not imposing a means of communication. The RFQ open up the work-up session to all requirement for specific methods of requester communicates acceptance of market participants so that they may execution for Required Transactions one of the bids or offers to the SEF trade an additional quantity of the same based upon the amount of trading employee by one of the above instrument at the same price previously activity in such transactions. executed by the initial counterparties. In referenced means of communication. addition, any resting bids or offers on (e) § 37.9(b)(3)—Time Delay The SEF employee informs those two the SEF’s Order Book equal to or better Requirement market participants by one of the above than the work-up session price must be referenced means of communication Proposed § 37.9(b)(3) stated that SEFs included in the work-up session.332 The that the swap transaction is executed. must require that traders who have the SEF may provide the initial The SEF employee enters the ability to execute against a customer’s counterparties execution priority in the transaction into the SEF’s system or order or to execute two customers work-up session. platform so that the SEF is able to against each other be subject to a 15- The SEF must have rules governing second timing delay between the entry comply with the Act and the the operation of any work-up Commission’s regulations, including of the two orders, such that one side of mechanism, including the length of the the potential transaction is disclosed audit trail, clearing, and reporting session, any priorities accorded the requirements. The Commission views and made available to other market counterparties to the transaction that participants before the second side of this example as demonstrating triggered the work-up session, and the the potential transaction (whether for acceptable uses of different means of handling of any orders submitted during the trader’s own account or for a second interstate commerce while meeting the the session that are not executed. A SEF customer) is submitted for execution. RFQ System method of execution in must also have systems or procedures in The SEF NPRM stated that this § 37.9(a)(2). place to ensure that a work-up session requirement will provide other market In response to commenters, the is accessible by, and work-up session participants the opportunity to join in Commission will generally allow work- information (e.g., the work-up session’s the trade.333 up sessions if such trading protocols are trade price and ongoing volume) is utilized after a transaction is executed available to, all market participants. The (1) Summary of Comments on the SEF’s Order Book or RFQ 330 SDMA and Mallers et al. supported System. The Commission, in order to conducted on a SEF’s trading platform. See block trade definition in § 43.2 of the Commission’s the proposed 15-second delay 329 See final § 37.9(a)(3) and the preamble for regulations; see also Rules Prohibiting the requirement as necessary to increase details regarding the communication of the resting Aggregation of Orders To Satisfy Minimum Block price transparency and market bids or offers on the Order Book to the RFQ Sizes or Cap Size Requirements, and Establishing integrity.334 Mallers et al. stated that the Eligibility Requirements for Parties to Block Trades, requester. 15-second rule provides a meaningful 330 The Commission notes that a work-up 77 FR 38229 (proposed Jun. 27, 2012). Accordingly, transaction does not qualify as a block trade even each individual transaction that is part of the work- opportunity for other SEF participants if an individual market participant’s transactions as up transaction must be reported as it occurs to execute against the individual sides part of the work-up transaction has a notional or pursuant to the SEF’s reporting obligations. of the cross transaction, and that such 331 principal amount at or above the appropriate These resting bids or offers would be included crossing delays have been successfully minimum block size applicable to such swap. The at the work-up session price. The Commission notes Commission believes that the concepts of work-up that ‘‘equal to or better than the work-up session transactions and block trades are mutually price’’ means any resting bids that are equal to or 333 Core Principles and Other Requirements for exclusive. Block trades are executed pursuant to a greater than the work-up price or any resting offers Swap Execution Facilities, 76 FR at 1220. SEF’s rules, but negotiated and executed off of the that are equal to or less than the work-up price. 334 Mallers et al. Comment Letter at 5 (Mar. 21, SEF’s trading platform. A work-up transaction is 332 Id. 2011); SDMA Comment Letter at 4 (Mar. 8, 2011).

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implemented in the futures markets.335 with market participants and SEFs, set customer orders.353 In addition to However, several commenters objected the delay at 1–3 seconds depending on ensuring a minimum level of pre-trade to the 15-second delay requirement.336 the complexity of the product.344 FXall price transparency, the Commission Some commenters stated that there is no stated that each SEF should be able to believes that the time delay requirement statutory authority for the timing delay decide upon the appropriate delay, will incentivize competition between requirement.337 Commenters also stated taking into account the particular market participants.354 The Commission that the timing delay will increase characteristics of that market.345 is revising proposed § 37.9(b)(3) to prices and expose traders to market Several commenters requested clarify the purpose of the time delay risk.338 Freddie Mac, for example, stated clarification that the 15-second delay requirement as described above. that liquidity providers may increase requirement only applies to SEFs that In response to ABC/CEIBA’s comment prices to account for anticipated market operate an Order Book and not an RFQ about any limitations on pre-execution movements.339 Some commenters also System.346 In this regard, SIFMA AMG communications, the Commission notes noted that the timing delay requirement commented that the timing delay should that a SEF that allows pre-execution may lead to unwillingness on the part not apply to an RFQ System because communications must adopt rules of dealers to provide liquidity because firm quotes transmitted in response to regarding such communications that they will not know whether they will an RFQ would already be exposed to the have been certified to or approved by ultimately serve as their customers’ market.347 However, Better Markets the Commission.355 The Commission principal counterparty or merely as contended that the requirement should also notes that orders that result from their executing agent.340 apply to responsive orders in RFQ pre-execution communications would ABC/CIEBA commented that the systems.348 be subject to the time delay requirement proposed rule is unclear as to what Finally, some commenters requested in the final rule text. The Commission limitations, if any, apply to pre- that the Commission clarify the term notes that pre-execution execution communications.341 ABC/ ‘‘trader’’ in the proposed rule.349 communications are communications CIEBA recommended that the WMBAA stated that it is not clear between market participants for the Commission revise the proposed rule to whether the term ‘‘trader’’ refers to a purpose of discerning interest in the permit pre-execution communications counterparty, broker, or another execution of a transaction prior to the between counterparties as long as entity.350 SIFMA AMG noted that the exposure of the market participants’ parties comply with the requirement to timing delay should not apply to asset orders (i.e., price, size, and other terms) execute the trade on the SEF.342 managers executing trades on behalf of to the market. Any communication that Several commenters recommended their clients.351 involves discussion of the size, side of that the Commission provide flexibility market, or price of an order, or a (2) Commission Determination with respect to the time period of the potentially forthcoming order, timing delay.343 Goldman recommended The Commission is adopting the time constitutes a pre-execution that the Commission, in consultation delay requirement for Required communication. Transactions in proposed § 37.9(b)(3) as The Commission acknowledges 335 Mallers et al. Comment Letter at 5 (Mar. 21, final § 37.9(b)(1), subject to the commenters’ concerns that the time 2011). modifications described below.352 The delay requirement should take into 336 WMBAA Comment Letter at 3 (Jul. 18, 2011); Commission clarifies that the purpose of account a product’s characteristics. FHLB Comment Letter at 13 (Jun. 3, 2011); WMBAA Comment Letter at 9 (Jun. 3, 2011); Rosen et al. the time delay requirement is to ensure Therefore, the Commission believes that Comment Letter at 15–16 (Apr. 5, 2011); BlackRock a minimum level of pre-trade price the 15-second time delay requirement Comment Letter at 6 (Mar. 8, 2011); Global FX transparency for Required Transactions should serve as a default time delay. Comment Letter at 3–4 (Mar. 8, 2011); JP Morgan on a SEF’s Order Book by allowing other The Commission is revising the rule to Comment Letter at 7 (Mar. 8, 2011); Evolution Comment Letter at 6 (Mar. 8, 2011); WMBAA market participants the opportunity to allow SEFs to adjust the time period of Comment Letter at 7 (Mar. 8, 2011); SIFMA AMG join or participate in a trade where a the delay, based upon liquidity or other Comment Letter at 7 (Mar. 8, 2011); TruMarx broker or dealer engages in some form product-specific considerations as Comment Letter at 7 (Mar. 8, 2011); Deutsche of pre-arrangement or pre-negotiation of stated in final § 37.9(b)(2). The Comment Letter at 5 (Mar. 8, 2011); FCC Comment Letter at 2 (Mar. 8, 2011); Phoenix Comment Letter a transaction and then attempts, through Commission notes that such at 2–3 (Mar. 7, 2011). the SEF’s Order Book, to either adjustments and accompanying 337 WMBAA Comment Letter at 3 (Jul. 18, 2011); internalize the order by executing justifications, as well as any WMBAA Comment Letter at 9 (Jun. 3, 2011); opposite a customer or cross two establishment of a 15-second time delay WMBAA Comment Letter at 7 (Mar. 8, 2011); requirement at a SEF, must be submitted SIFMA AMG Comment Letter at 8 (Mar. 8, 2011); Deutsche Comment Letter at 5 (Mar. 8, 2011); MFA 344 Goldman Comment Letter at 3 (Mar. 8, 2011). Comment Letter at 8 (Mar. 8, 2011). 345 FXall Comment Letter at 10 (Mar. 8, 2011). 353 The Commission clarifies that the exposure of 338 FHLB Comment Letter at 13 (Jun. 3, 2011); 346 Reuters Comment Letter at 5 (Dec. 12, 2011); ‘‘orders’’ subject to the 15 second time delay into BlackRock Comment Letter at 6 (Mar. 8, 2011); Rosen et al. Comment Letter at 15–16 (Apr. 5, 2011); the Order Book in final § 37.9(b)(1) means exposure WMBAA Comment Letter at 7–8 (Mar. 8, 2011); Goldman Comment Letter at 3 (Mar. 8, 2011); of the price, size, and other terms of the orders. SIFMA AMG Comment Letter at 7 (Mar. 8, 2011); Global FX Comment Letter at 3–4 (Mar. 8, 2011); 354 The Commission also notes that the time delay FCC Comment Letter at 2 (Mar. 8, 2011). ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); requirement is similar to certain timing delays for 339 Freddie Mac Comment Letter at 3 (Mar. 8, Barclays Comment Letter at 9 (Mar. 8, 2011); FSR cross trades applicable to futures transactions 2011). Comment Letter at 7 (Mar. 8, 2011). executed on DCMs where one side of a potential transaction (i.e., price, size, and other terms) is 340 WMBAA Comment Letter at 9 (Jun. 3, 2011); 347 SIFMA AMG Comment Letter at 7 (Mar. 8, 2011). exposed to the market for a certain period of time BlackRock Comment Letter at 6 (Mar. 8, 2011); MFA before the second side of the potential transaction 348 Better Markets Comment Letter at 9 (Mar. 8, Comment Letter at 9 (Mar. 8, 2011); Phoenix is submitted for execution. See, e.g., NYMEX rule 2011). Comment Letter at 3 (Mar. 7, 2011). 533, which provides for a 5-second delay for futures 349 341 ABC/CIEBA Comment Letter at 9 (Mar. 8, WMBAA Comment Letter at 7 (Mar. 8, 2011); and a 15-second delay for options, available at 2011). SIFMA AMG Comment Letter at 8 (Mar. 8, 2011); http://www.cmegroup.com/rulebook/NYMEX/1/ 342 Id. at 10. FSR Comment Letter at 6–7 (Mar. 8, 2011). 5.pdf. 350 343 Reuters Comment Letter at 5 (Dec. 12, 2011); WMBAA Comment Letter at 7 (Mar. 8, 2011). 355 See, e.g., CME Rule 539.C Pre-Execution Goldman Comment Letter at 3 (Mar. 8, 2011); ISDA/ 351 SIFMA AMG Comment Letter at 8 (Mar. 8, Communications Regarding Globex Trades, SIFMA Comment Letter at 6 (Mar. 8, 2011); FXall 2011). available at http://www.cmegroup.com/rulebook/ Comment Letter at 10 (Mar. 8, 2011); MFA 352 The Commission is renumbering proposed CME/I/5/39.html (setting forth rules regarding pre- Comment Letter at 8–9 (Mar. 8, 2011). § 37.9(b)(3) to § 37.9(b)(1). execution communications in the DCM context).

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for the Commission’s review pursuant to trading functionality in § 37.9(b) to (g) Future Review 357 the procedures described in part 40 of execute Permitted Transactions. Consistent with the Commission’s the Commission’s regulations. (1) Summary of Comments practice of reviewing and monitoring its The Commission is clarifying that the regulatory programs, the Commission 15-second time delay requirement is not SIFMA AMG stated that the directs the Commission staff to conduct applicable to trades that are executed Commission should not limit the a general review of SEFs’ experience through an RFQ System. As noted execution modalities available to market with the execution methods prescribed above, the purpose of the time delay participants who execute Permitted in Commission regulations 37.3(a)(2) requirement is to ensure a minimum Transactions on a SEF.358 SIFMA AMG (minimum trading functionality), level of pre-trade price transparency for also stated that no statutory basis exists 37.3(a)(3) (Order Book), and 37.9 Required Transactions on a SEF’s Order for regulatory execution requirements (execution methods for Required and Book. The Commission notes that an for Permitted Transactions.359 Permitted Transactions and time delay RFQ System already provides pre-trade Additionally, several commenters stated requirement for Required Transactions). price transparency to the RFQ requester that the Commission should not If appropriate, the review should and that a dealer attempting to cross or prescribe execution methods for swaps include any Commission staff internalize trades through an RFQ executed off a SEF.360 recommendations regarding possible System would be subject to such pre- modifications to Commission trade price transparency. As such, the (2) Commission Determination regulations 37.3(a)(2), 37.3(a)(3), or 37.9 Commission is revising the rule text to that are consistent with the Act (e.g., a The Commission is revising proposed clarify that the 15-second time delay recommendation to modify the § 37.9(c)(1) to state that a SEF may offer requirement only applies to a SEF’s minimum number of RFQ requestees any method of execution for each Order Book. required by the RFQ definition, Permitted Transaction.361 The Finally, the Commission is replacing including whether a trading protocol in Commission agrees that it should not which the minimum number of RFQ the term ‘‘traders’’ in proposed limit the execution methods that are § 37.9(b)(3) with the phrase ‘‘brokers or requestees differed by swap class or available to market participants or another category would be appropriate). dealers.’’ The Commission intended the require market participants to utilize provision to apply only to brokers or The Commission staff’s review should certain execution methods for Permitted be completed within four years of the dealers attempting to internalize or Transactions, which are not required to cross trades through a SEF’s Order Book effective date of these final SEF be executed on a SEF. The Commission and acknowledges that the proposal was regulations, within which time the clarifies, however, that, in accordance unclear with respect to the meaning of Commission believes that staff will have with the minimum trading functionality the term ‘‘traders.’’ 356 In response to gained sufficient experience and will requirement in final § 37.3(a)(2), a SEF SIFMA AMG’s concern, the Commission have three years’ worth of data with does not have sufficient information at must offer an Order Book for Permitted respect to the execution methods. Transactions. The Commission further this time to make a determination 10. § 37.10—Swaps Made Available for clarifies that a market participant has whether asset managers executing trades Trading on behalf of their clients would be the option to utilize the Order Book or The Dodd-Frank Act added section subject to the time delay requirement. any other method of execution that a 2(h)(8) of the CEA to require that The Commission staff will work with SEF provides for Permitted transactions involving swaps subject to SEFs to determine if the time delay Transactions. Additionally, the the clearing requirement must be requirement applies to asset managers Commission clarifies that this section executed either on a DCM or SEF, or other market participants. only applies to Permitted Transactions listed or traded on a SEF, and that this unless no DCM or SEF makes the swap (f) § 37.9(c)—Execution Methods for section does not apply to transactions ‘‘available to trade’’ or the related Permitted Transactions not listed or traded on a SEF.362 Finally, transaction is subject to the clearing the Commission is deleting proposed exception under section 2(h)(7) (i.e., the Proposed § 37.9(c)(1) provided that end-user exception).363 In the SEF § 37.9(c)(2) given the deletion to Permitted Transactions may be executed NPRM, the Commission proposed to proposed § 37.11 as described below. by an Order Book, RFQ System, a Voice- require SEFs to conduct annual Based System, or any such other system assessments and to submit reports to the for trading as may be permitted by the 357 The SEF NPRM stated that pre-trade price transparency is not required for Permitted Commission regarding whether it has 364 Commission. In addition, proposed Transactions. Core Principles and Other made a swap available to trade. In the § 37.9(c)(2) stated that a registered SEF Requirements for Swap Execution Facilities, 76 FR DCM notice of proposed rulemaking may submit a request to the Commission at 1220. (‘‘NPRM’’),365 the Commission did not to offer trading services to facilitate 358 SIFMA AMG Comment Letter at 10 (Mar. 8, establish any obligation for DCMs under Permitted Transactions, and that when 2011). 359 section 2(h)(8) of the Act. After doing so, the SEF must certify its Id. 360 Rosen et al. Comment Letter at 19–20 (Apr. 5, reviewing the SEF NPRM comments compliance with § 37.11 (Identification 2011); Deutsche Comment Letter at 6 (Mar. 8, 2011); regarding the proposed available to of non-cleared swaps or swaps not made FSR Comment Letter at 8 (Mar. 8, 2011); Global FX trade process, and in light of the fact available to trade). As noted in the SEF Comment Letter at 3 (Mar. 8, 2011); Barclays that the DCM NPRM did not establish NPRM, market participants would not Comment Letter at 10 (Mar. 8, 2011); ABC/CIEBA Comment Letter at 7 (Mar. 8, 2011). any obligation for DCMs under section be required to utilize the minimum 361 The Commission is renumbering proposed § 37.9(c)(1) to § 37.9(c)(2). 363 CEA sections 2(h)(7) and 2(h)(8); 7 U.S.C. 356 For example, a futures commission merchant 362 This section does not apply to those entities 2(h)(7) and 2(h)(8). or other market participant acting in the role of a that do not have to register as a SEF. As noted above 364 Core Principles and Other Requirements for broker who has the ability to execute against its in the registration section, swap transactions that Swap Execution Facilities, 76 FR at 1241. customer’s order or to execute two of its customers’ are not subject to the CEA section 2(h)(8) trade 365 Core Principles and Other Requirements for orders against each other would be subject to the execution requirement would not have to be Designated Contract Markets, 75 FR 80572 time delay requirement. executed on a registered SEF. (proposed Dec. 22, 2010).

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2(h)(8) of the CEA, the Commission C. Regulations, Guidance, and executing orders traded or posted on the determined to separately issue a further Acceptable Practices for Compliance facility, including block trades.373 notice of proposed rulemaking to With the Core Principles Finally, Core Principle 2 requires a SEF establish a process for a DCM or SEF to As noted above, this final part 37 to provide by its rules that when a swap make a swap available to trade under rulemaking establishes the relevant dealer or major swap participant enters section 2(h)(8) of the Act.366 The regulations, guidance, and acceptable into or facilitates a swap that is subject Commission may implement the practices applicable to the 15 core to the mandatory clearing requirement available to trade provision in a separate principles that SEFs are required to of section 2(h) of the Act, the swap rulemaking. comply with initially and on a dealer or major swap participant is continuing basis as part of the responsible for complying with the 11. § 37.11—Identification of Non- conditions of registration. The mandatory trading requirement under Cleared Swaps or Swaps Not Made regulations applicable to the 15 core section 2(h)(8) of the Act.374 In the SEF Available to Trade principles are set out in separate NPRM, the Commission proposed to Proposed § 37.11 required a SEF that subparts B through P to part 37, which codify the statutory text of Core Principle 2 in proposed § 37.200, and chooses to offer swaps: (1) Not subject includes a codification within each subpart of the statutory language of the adopts that rule as proposed. to the clearing mandate under section respective core principle. The guidance 2(h) of the Act, (2) that are subject to the (1) Summary of Comments and acceptable practices are set out in end-user exception from the clearing appendix B to part 37. mandate under section 2(h)(7) of the Some commenters expressed general Act, or (3) that have not been made 1. Subpart B—Core Principle 1 concerns regarding the proposed rules 375 available to trade pursuant to § 37.10 of (Compliance With Core Principles) under Core Principle 2. FXall and State Street believed that the proposed the Commission’s regulations to clearly Core Principle 1 requires a SEF to rules under Core Principle 2 would identify to market participants that the comply with the core principles set require a SEF to act as a de facto self- particular swap is to be executed forth in CEA section 5h(f) and any regulatory organization (‘‘SRO’’) and bilaterally between the parties pursuant requirement that the Commission may impose burdens that would impede the to one of the applicable exemptions impose by rule or regulation pursuant to growth of the swaps market.376 These from execution and clearing. CEA section 8a(5) as a condition of commenters also noted that the obtaining and maintaining registration (a) Summary of Comments as a SEF.369 Additionally, Core proposed requirements were too similar Principle 1 provides a SEF with to the regulations applicable to DCMs, MarketAxess expressed concern that which would place SEFs at a proposed § 37.11 could be read to reasonable discretion in establishing the manner in which it complies with the disadvantage compared to DCMs given require that all transactions described in core principles unless the Commission that SEFs will operate in a competitive the provision must only be executed determines otherwise by rule or environment while DCMs operate in a bilaterally, and not on a SEF.367 To 377 regulation.370 In the SEF NPRM, the monopolistic environment. ICE urged address this concern, MarketAxess Commission proposed to codify the the Commission to limit its prescriptive requested the Commission clarify that statutory text of Core Principle 1 in rulemaking to issues that it believes 378 § 37.11 requires a SEF choosing to proposed § 37.100, and adopts that rule require specific, binding rules. In this facilitate Permitted Transactions to as proposed. regard, several commenters identify to market participants why the recommended that the Commission particular swap is a Permitted 2. Subpart C—Core Principle 2 adopt greater flexibility in Transaction (i.e., falls under one of the (Compliance With Rules) implementing Core Principle 2.379 three categories described in the (a) § 37.200—Core Principle 2— Some commenters recommended provision).368 Compliance With Rules limiting the scope of the proposed rules under Core Principle 2.380 Specifically, (b) Commission Determination Core Principle 2 requires a SEF to establish and enforce compliance with WMBAA argued that SEFs may not be The Commission believes that its rules, including the terms and able to satisfy all of the requirements of proposed § 37.11 is unnecessary and conditions of the swaps traded or the proposed rules given that SEFs therefore is deleting it in its entirety. processed on or through the SEF and cannot be held responsible for what Market participants should have any limitations on access to the SEF.371 sufficient notice of the swaps subject to It also requires a SEF to establish and 373 CEA section 5h(f)(2)(C); 7 U.S.C. 7b–3(f)(2)(C). the clearing and trade execution enforce trading, trade processing, and 374 CEA section 5h(f)(2)(D); 7 U.S.C. 7b–3(f)(2)(D). participation rules that will deter abuses 375 FXall Comment Letter at 3–4, 11 (Mar. 8, requirements. Therefore, in conjunction 2011); State Street Comment Letter at 5–6 (Mar. 8, with the definitions contained in part 37 and have the capacity to detect, 2011); ICE Comment Letter at 2 (Mar. 8, 2011); 372 as adopted, market participants will investigate, and enforce those rules. WMBAA Comment Letter at 18 (Mar. 8, 2011). know which swaps are Required A SEF must also establish rules 376 FXall Comment Letter at 3–4, 11 (Mar. 8, 2011); State Street Comment Letter at 5–6 (Mar. 8, Transactions and which swaps are governing the operation of the facility, including rules specifying trading 2011). Permitted Transactions, and thus the 377 procedures to be used in entering and Id. execution methods deemed acceptable 378 ICE Comment Letter at 2 (Mar. 8, 2011). for each. 379 Reuters Comment Letter at 4 (Mar. 8, 2011); 369 CEA section 5h(f)(1)(A); 7 U.S.C. 7b–3(f)(1)(A). FXall Comment Letter at 3–4, 11 (Mar. 8, 2011); ICE 370 CEA section 5h(f)(1)(B); 7 U.S.C. 7b–3(f)(1)(B). Comment Letter at 2 (Mar. 8, 2011); State Street 366 Process for a Designated Contract Market or 371 CEA section 5h(f)(2)(A); 7 U.S.C. 7b–3(f)(2)(A). Comment Letter at 5–6 (Mar. 8, 2011). Swap Execution Facility To Make a Swap Available 372 CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). 380 WMBAA Comment Letter at 18 (Mar. 8, 2011); To Trade, 76 FR 77728 (proposed Dec. 14, 2011). This section also requires a SEF to provide market FXall Comment Letter at 11 (Mar. 8, 2011); 367 MarketAxess Comment Letter at 33–34 (Mar. participants with impartial access to the market and MarketAxess Comment Letter at 34 (Mar. 8, 2011); 8, 2011). to capture information that may be used in SIFMA AMG Comment Letter at 14–15 (Mar. 8, 368 Id. at 34. establishing whether rule violations have occurred. 2011).

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happens on a competitor’s platform.381 requirements of the rules, to satisfy modifications. To address the comment Similarly, FXall believed that SEFs statutory obligations. by MarketAxess, the Commission notes would not have the requisite market In response to WMBAA’s and FXall’s that proposed § 37.201(b)(6) contained a data to conduct meaningful compliance comments regarding certain limitations drafting error, and therefore is replacing oversight.382 SIFMA AMG believed that faced by SEFs in terms of oversight, the the term ‘‘mandatory clearing’’ with the Commission’s vague use of the terms Commission recognizes the limitations ‘‘mandatory trading.’’ The Commission ‘‘members,’’ ‘‘market participants,’’ and faced by SEFs with respect to position also notes that the citation to ‘‘part 45’’ ‘‘participants’’ could potentially subject monitoring, cross-market surveillance, in proposed § 37.201(a) should instead dealers’ customers, and thus asset and rule enforcement and addresses cite to ‘‘part 43.’’ Therefore, the managers and their clients, to ‘‘onerous’’ them in the context of comments Commission is modifying the final rule requirements of multiple SEFs.383 received below. In response to SIFMA to include these technical changes. Therefore, SIFMA AMG requested AMG’s comment about the ambiguous Additionally, the Commission notes clarification that a SEF’s rules would use of terms, the Commission clarifies only regulate entities that actually that ‘‘market participant’’ when used that a SEF must establish and enforce execute transactions on the SEF.384 with respect to a SEF means a person rules for its employees. These rules that directly or indirectly effects must be reasonably designed to prevent (2) Commission Determination transactions on the SEF. This includes violations of the Act and the rules of the In response to comments by FXall and persons with trading privileges on the Commission.390 Towards that end, the State Street about treating SEFs as SROs, SEF and persons whose trades are Commission also notes that a SEF must the Commission notes that like DCMs, it intermediated. The Commission also have systems in place reasonably views SEFs as SROs and amended the clarifies that ‘‘member’’ has the meaning designed to ensure that its employees Commission’s regulations to include set forth in CEA section 1a(34).386 are operating in accordance with the them as SROs.385 Treating a SEF as an SEF’s rules.391 For example, a SEF that SRO is consistent with a SEF’s self- (b) § 37.201—Operation of Swap is utilizing an RFQ System in regulatory obligations pursuant to CEA Execution Facility and Compliance conjunction with an Order Book for section 5h(f). Therefore, where With Rules Required Transactions must establish appropriate, the Commission is Proposed § 37.201(a) required a SEF rules specifying order handling adopting surveillance, audit trail, to establish rules governing the procedures for its employees who investigation, enforcement, and other operation of the SEF, including rules receive and execute orders over the requirements for SEFs. specifying trading procedures for telephone, email, instant messaging, In response to commenters’ concerns entering and executing orders traded or squawk box, some other method of that the proposed requirements were posted on the SEF, including block communication, or some combination similar to the regulations applicable to trades.387 Proposed § 37.201(b) further thereof so that the employees may DCMs, the Commission believes that required a SEF to establish and comply with the RFQ System adopting similar requirements for both impartially enforce compliance with its requirements as specified in final types of entities is warranted given the rules, including, but not limited to: (1) § 37.9(a)(3).392 similar statutory self-regulatory The terms and conditions of any swaps obligations for both types of entities. traded or processed on or through the Furthermore, the Commission notes Given that both DCMs and SEFs, SEF; (2) access to the SEF; (3) trade that a SEF’s employees have certain regardless of whether they are new or practice rules; (4) audit trail obligations under the Commission’s existing entities, are required to fulfill requirements; (5) disciplinary rules; and existing regulations. For example, under similar self-regulatory functions, the (6) mandatory clearing requirements.388 § 1.59, a SEF’s employees are prohibited Commission does not believe that this from disclosing for any purpose (1) Summary of Comments approach will adversely affect inconsistent with the performance of its competition between DCMs and SEFs. MarketAxess recommended that the official duties any material, non-public In response to commenters’ requests Commission withdraw proposed information obtained through special for less prescriptive rules and greater § 37.201(b)(6), which required a SEF to access related to the performance of its flexibility in applying the rules, the adopt and enforce mandatory clearing duties.393 Commission is moving various requirements, on the basis that clearing Finally, the Commission notes that provisions of the proposed rules to of a swap occurs outside of a SEF’s main under § 1.2 of the Commission’s guidance and eliminating other responsibility to facilitate the regulations, a SEF is liable for the acts, 389 provisions, as discussed below. The transaction. omissions, or failures of its employees provisions that are adopted as final (2) Commission Determination rules reflect the Commission’s opinion 390 The Commission is adopting § 37.201 The Commission notes that under of what is required, at a minimum, for § 37.1501(d), a duty of the Chief Compliance Officer any SEF to comply with the core as proposed, subject to two is to establish and administer written policies and principles. SEFs may take any procedures reasonably designed to prevent additional steps necessary, beyond the 386 CEA section 1a(34) defines ‘‘member’’ as ‘‘an violations of the Act and the rules of the individual, association, partnership, corporation, or Commission. trust—(A) owning or holding membership in, or 391 The Commission notes that under 381 WMBAA Comment Letter at 18 (Mar. 8, 2011). admitted to membership representation on, the § 37.1501(d), a duty of the Chief Compliance Officer 382 FXall Comment Letter at 11 (Mar. 8, 2011). registered entity . . . or (B) having trading is to take reasonable steps to ensure compliance 383 SIFMA AMG Comment Letter at 14–15 (Mar. privileges on the registered entity. . . .’’ 7 U.S.C. with the Act and the rules of the Commission, and 8, 2011). 1a(34). to establish and administer a compliance manual 384 Id. 387 The Commission notes that § 37.201(a) designed to promote compliance with applicable 385 See Adaptation of Regulations to Incorporate codifies CEA section 5h(f)(2)(C). 7 U.S.C. 7b– laws, rules, and regulations. Swaps, 77 FR 66288 (Nov. 2, 2012). Section 1.3(ee) 3(f)(2)(C). 392 See WMBAA Comment Letter at 2 (Feb. 15, states that a self-regulatory organization ‘‘means a 388 The Commission notes that § 37.201(b) 2013) (explaining that employees of a SEF provide contract market (as defined in § 1.3(h)), a swap codifies certain sections of CEA section 5h(f)(2). 7 services such as disseminating bids and offers, execution facility (as defined in § 1.3(rrrr)), or a U.S.C. 7b–3(f)(2). helping to understand market conditions, and registered futures association under section 17 of 389 MarketAxess Comment Letter at 34 (Mar. 8, executing transactions between counterparties). the Act.’’ Id. at 66318. 2011). 393 Commission regulation 1.59(d).

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acting within the scope of their disrupt business models such as that of to ISVs because the Dodd-Frank Act employment.394 inter-dealer brokers whose model is does not require SEFs to provide ISVs intimately tied to the idea of serving as with impartial access.409 MarketAxess (c) § 37.202—Access Requirements an intermediary to wholesale liquidity further commented that the Commission Proposed § 37.202 addressed Core providers.401 Similarly, Rosen et al. must permit a SEF to restrict access to Principle 2’s requirements that SEFs recommended that SEFs should be able an ISV who would use such direct provide market participants with to use selective access criteria such as access to provide a competitive impartial access to the market and that objective minimum capital or credit advantage to another SEF or DCM.410 SEFs adopt and enforce rules with requirements or limits on participation Similarly, WMBAA stated that SEFs respect to any limitations placed on to objective classes of sophisticated could qualify as ISVs in order to seek access to the SEF.395 market participants.402 MarketAxess access to competitors’ trading systems (1) § 37.202(a)—Impartial Access by commented that the meaning of the term or platforms, which would defeat the Members and Market Participants 396 ‘‘impartial’’ is unclear and existing structure of competitive sources recommended that the Commission of liquidity.411 Bloomberg commented Proposed § 37.202(a) required that a revise proposed § 37.202(a)(1) as that the SEF NPRM’s characterization of SEF provide any eligible contract follows: ‘‘Criteria that are transparent ISV is too broad; 412 therefore, an ISV participant (‘‘ECP’’) and any and objective and are applied in a fair may be able to replicate the services of independent software vendor (‘‘ISV’’) and nondiscriminatory manner[.]’’ 403 a SEF without having to register as a with impartial access to its market(s) Tradeweb noted that, because it offers SEF.413 Bloomberg also requested that and market services (including any multiple marketplaces, its access criteria the Commission clarify that a user of an indicative quote screens or any similar may reasonably differ for each mode of ISV service must be a participant of a pricing data displays), providing: (1) execution and within one mode of SEF in order to access the SEF’s data Access criteria that are impartial, execution given that each market will transparent, and applied in a fair and and/or to execute swap transactions on offer different services and may have 414 nondiscriminatory manner; (2) a process that SEF. different types of participants.404 Under proposed § 37.202(a)(2), for confirming ECP status prior to being Mallers et al. supported the impartial MarketAxess recommended that SEFs granted access to the SEF; and (3) access requirement and its purpose of comparable fees for participants be permitted to rely on a written or preventing a SEF’s owners or operators electronically signed representation by a receiving comparable access to, or from using discriminatory access services from, the SEF. participant seeking access to the SEF requirements as a competitive tool regarding its status as an ECP.415 405 (i) Summary of Comments against certain participants. Mallers MarketAxess stated that SEFs may then et al. stated that impartial access is a Several commenters sought adopt rules to require that the prerequisite to having an open market in clarification that SEFs would be participant notify the SEF immediately which ECPs can compete on a level permitted to use their own reasonable of any change to its status after the playing field, and that the participation discretion to determine individual participant makes the representation.416 of additional liquidity providers will access criteria, provided that the criteria Better Markets commented that improve the pricing and efficiency of are impartial, transparent, and applied proposed § 37.202(a)(3) should make the market and reduce systemic risk.406 in a fair and non-discriminatory clear that any form of preferential access SDMA also supported the impartial manner.397 In this regard, ISDA/SIFMA to a SEF through fee arrangements access requirement and stated that the commented that a SEF should be able to should not be allowed because it would ability to obtain intellectual property 417 limit access to its trading systems or defeat the goal of impartial access. platforms to certain types of market licenses and the amount of royalties for However, MarketAxess stated that SEFs participants in order to maintain the intellectual property licenses should be should be able to provide their market financial integrity and operational safety fair and not used to create participants with volume discounts and of the trading platform.398 JP Morgan anticompetitive advantages for a other pricing arrangements as long as particular SEF or group of market such discounts and arrangements are also stated that a SEF should be able to 407 limit access to certain types of market participants. UBS requested that the based upon objective criteria that are participants such as swap dealers.399 JP Commission clarify in the final applied uniformly.418 rulemaking that SEFs may not exclude Morgan commented, however, that the (ii) Commission Determination SEF NPRM’s preamble language about or discriminate against participants financial and operational soundness is providing agency services solely as a The Commission is adopting 408 problematic because it would not allow result of engaging in these activities. § 37.202(a) as proposed, subject to the SEFs to limit access to certain types of MarketAxess and WMBAA stated that market participants.400 This could a SEF should be able to restrict access 409 MarketAxess Comment Letter at 24 (Mar. 8, 2011); WMBAA Comment Letter at 19 (Mar. 8, 401 Id. 2011). 394 Commission regulation 1.2. 402 Rosen et al. Comment Letter at 17 (Apr. 5, 410 MarketAxess Comment Letter at 25 (Mar. 8, 395 CEA section 5h(f)(2)(A)(ii) and (2)(B)(i); 7 2011). 2011). U.S.C. 7b–3(f)(2)(A)(ii) and (2)(B)(i). 403 411 WMBAA Comment Letter at 19 (Mar. 8, 2011). 396 The Commission is renaming the title of this MarketAxess Comment Letter at 23–24 (Mar. 412 See Core Principles and Other Requirements section from ‘‘Impartial Access by Members and 8, 2011). 404 for Swap Execution Facilities, 76 FR at 1222 n. 53 Market Participants’’ to ‘‘Impartial Access to Tradeweb Comment Letter at 10 (Mar. 8, (providing examples of ISVs). Markets and Market Services’’ to provide greater 2011). 413 clarity. 405 Mallers et al. Comment Letter at 2–3 (Mar. 21, Meeting with Bloomberg dated Jan. 18, 2012. 414 397 Reuters Comment Letter at 5 (Mar. 8, 2011); 2011). Id. Goldman Comment Letter at 4 (Mar. 8, 2011); 406 Id. at 3. 415 MarketAxess Comment Letter at 25 (Mar. 8, Tradeweb Comment Letter at 10 (Mar. 8, 2011). 407 SDMA Comment Letter at 4–5 (Mar. 8, 2011). 2011). 398 ISDA/SIFMA Comment Letter at 11 (Mar. 8, 408 UBS Comment Letter II at 1 (May 18, 2012). 416 Id. 2011). UBS submitted two comment letters on May 18, 417 Better Markets Comment Letter at 11–12 (Mar. 399 JP Morgan Comment Letter at 11 (Mar. 8, 2012. The Commission is referencing UBS’s 8, 2011). 2011). comment letter regarding impartial access as ‘‘UBS 418 MarketAxess Comment Letter at 25 (Mar. 8, 400 Id. Comment Letter II.’’ 2011).

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modifications discussed below.419 The its access criteria, provided that the deciding whether or not to grant an ISV Commission does not believe that the criteria are impartial, transparent and access. In response to MarketAxess’s statute allows a SEF to adopt rules that applied in a fair and non-discriminatory and WMBAA’s comments regarding limit access as requested by ISDA/ manner, and are not anti-competitive. ISVs providing a competitive advantage SIFMA, JP Morgan, and Rosen et al. The In response to Tradeweb’s comment to other SEFs, the Commission notes statutory language of Core Principle 2 about different access criteria for that SEFs may set rules for ISVs so they requires that SEFs establish and enforce different markets, the Commission notes do not misuse data, for example, by participation rules, including means to that a SEF may establish different access providing the data to another SEF for provide market participants with criteria for each of its markets. Core purely competitive reasons to the impartial access to the market, and that Principle 2 does not specify whether exclusion of market participants. The SEFs adopt and enforce rules with impartial access criteria must be the Commission also notes that SEFs may respect to any limitations they place on same for all of a SEF’s markets or may charge fees to ISVs based on the access access (emphasis added).420 As stated in differ for each market. Therefore, the or services they receive from the SEF. the SEF NPRM, the Commission Commission believes that it is within its In response to Bloomberg’s comments, reiterates that the purpose of the discretion to allow a SEF to establish the Commission agrees that ISVs should impartial access requirements is to different access criteria for each of its not be able to replicate the services of prevent a SEF’s owners or operators markets. However, the Commission a SEF without having to register as a from using discriminatory access reiterates that the access criteria must be SEF. The Commission notes that an ISV requirements as a competitive tool impartial and must not be used as a that merely provides a service to SEFs against certain ECPs or ISVs. The competitive tool against certain ECPs or will not, merely because it provides Commission also agrees with Mallers et ISVs. The Commission also reiterates such a service, be deemed to be a SEF al. who stated that the impartial access that each similarly situated group of as defined in CEA section 1a(50). requirement allows ECPs to compete on ECPs and ISVs must be treated However, pursuant to the registration a level playing field, and that the similarly. requirements in final § 37.3(a), if an ISV participation of additional liquidity In response to MarketAxess’s and offers a trading system or platform in providers will improve the pricing and WMBAA’s comments regarding ISVs, which more than one market participant efficiency of the market and reduce the Commission notes that Congress has the ability to execute or trade swaps systemic risk. As such, the Commission required SEFs to establish participation with more than one other market believes that access to a SEF should be rules, including means to provide participant on that system or platform, determined, for example, based on a market participants with impartial then the ISV has to register as a SEF.424 SEF’s impartial evaluation of an access to the market.422 The The Commission also notes that the user applicant’s disciplinary history and Commission believes that ISVs 423 of an ISV must have been granted access financial and operational soundness provide market participants with by a SEF in order to access that SEF’s against objective, pre-established additional opportunities to access SEFs data and/or to execute a swap criteria. As one example of such criteria, and that, similar to ECPs, SEFs should transaction on that SEF through the any ECP should be able to demonstrate apply impartial criteria in a fair and ISV.425 financial soundness either by showing non-discriminatory manner when The Commission notes that under that it is a clearing member of a § 37.202(a)(2), a SEF that is determining derivatives clearing organization 422 CEA section 5h(f)(2)(B)(i); 7 U.S.C. whether to grant an ECP access to its (‘‘DCO’’) that clears products traded on 7b–3(f)(2)(B)(i). WMBAA also commented that ISVs facilities may rely on a signed should comply with a SEF’s rules, the SEF core representation of its ECP status.426 By that SEF or by showing that it has principles, and the oversight or supervision by the clearing arrangements in place with SEF in the same manner as a market participant. not prescribing a process, the such a clearing member. WMBAA Comment Letter at 19 (Mar. 8, 2011). The Commission is providing SEFs with In this regard, the Commission Commission disagrees with WMBAA’s comment flexibility and discretion on how to because ISVs provide market participants with meet this requirement. The Commission believes that the impartial access greater options to access SEFs and ISVs are not requirement of Core Principle 2 does not executing swaps on a SEF as are market also notes that for SEFs that permit allow a SEF to limit access to its trading participants. Therefore, the Commission believes intermediation, customers of ECPs must systems or platforms to certain types of that ISVs should not be subject to the same also be ECPs.427 In this regard, a SEF requirements as market participants. must obtain a signed representation ECPs or ISVs as requested by some 423 The Commission notes that examples of commenters.421 The Commission notes independent software vendors include: smart order 424 that the rule states ‘‘impartial’’ criteria routers, trading software companies that develop See Aggregation Services or Portals discussion above under § 37.3—Requirements for Registration and not ‘‘selective’’ criteria as front-end trading applications, and aggregator platforms. Smart order routing generally involves in the preamble. The Commission notes that recommended by some commenters. scanning of the market for the best-displayed price footnote 423 above classifies aggregator platforms as The Commission is using the term and then routing orders to that market for a type of ISV so the discussion in this section ‘‘impartial’’ as intended in the statute. execution. Software that serves as a front-end regarding ISVs also applies to aggregator platforms. 425 ‘‘Impartial’’ should be interpreted in the trading application is typically used by traders to The Commission notes, however, that the user input orders, monitor quotations, and view a record of an ISV may not need to have been granted access ordinary sense of the word: fair, of the transactions completed during a trading to the SEF if the ISV is only providing a composite unbiased, and unprejudiced. Subject to session. As noted above in the registration section, quote or top level quote for multiple SEFs. these requirements, a SEF may use its aggregator platforms generally provide a portal to 426 The Commission is replacing the term own reasonable discretion to determine market participants so that they can access multiple ‘‘participant’’ in proposed § 37.202(a)(2) with the SEFs, but do not provide for execution as execution term ‘‘eligible contract participant’’ in final remains on SEFs. Aggregator platforms may also § 37.202(a)(2) because the term ‘‘participant’’ was 419 The Commission is also making certain non- provide access to news and analytics. The not defined in the SEF NPRM and the revised term substantive clarifications to the rule. Commission believes that transparency and trading more clearly communicates the persons to whom 420 CEA sections 5h(f)(2)(A)(ii) and (2)(B)(i); 7 efficiency would be enhanced as a result of this rule applies. In this regard, the Commission U.S.C. 7b–3(f)(2)(A)(ii) and (2)(B)(i). innovations in this field for market services. For notes that, prior to granting a person access to its 421 In this regard, the Commission is clarifying in instance, certain providers of market services with facility, a SEF must obtain confirmation from the response to UBS’s comment that a SEF may not access to multiple trading systems or platforms person of its ECP status. exclude or discriminate against a market participant could provide consolidated transaction data from 427 For example, the Commission notes that a providing agency services subject to any limitation such trading systems or platforms to market customer of a futures commission merchant must be on such services contained in this final rulemaking. participants. an ECP and a customer of a broker must be an ECP.

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from an intermediary that its customers participate in the SEF’s investigative SEF’s ultimate recourse against a market are ECPs. and disciplinary processes.433 participant is to deny such market To address comments submitted in Similarly, Bloomberg requested that participant access to the SEF and, if connection with proposed § 37.202(a)(3) the Commission clarify that proposed appropriate, refer the market participant regarding fees, the Commission clarifies § 37.202(b) would only apply to a SEF’s to the Commission. The Commission that § 37.202(a)(3) neither sets nor limits members and not customers of members has the authority to issue broader 434 the fees that SEFs may charge. A SEF whose orders are executed on a SEF. sanctions for market participants who may establish different categories of Bloomberg stated that, rather than commit SEF rule violations that also ECPs or ISVs seeking access to, or subject all market participants to a SEF’s violate the CEA and Commission services from, the SEF, but may not jurisdiction, it would be sufficient and regulations. Therefore, the Commission discriminate with respect to fees within more practical for each SEF member to expects that a SEF would not only a particular category.428 The provide to the SEF specific information sanction market participants as 435 Commission notes that § 37.202(a)(3) is about its customers. WMBAA noted appropriate, but also refer matters to the not designed to be a rigid requirement that a SEF may only exercise Commission for additional action when that fails to take into account legitimate jurisdiction over a market participant necessary. The Commission does not business justifications for offering with respect to its own rules and that agree that this action absolves SEFs different fees to different categories of the SEF’s ultimate sanction would be to from their responsibility to establish entities seeking access to the SEF. For ban a market participant from its trading jurisdiction over members and market 436 example, a SEF may consider the system or platform. WMBAA also participants. stated that prohibiting a market services it receives from members such (3) § 37.202(c)—Limitations on Access as market making services when it participant from trading on one determines its fee structure. particular SEF has little utility because Proposed § 37.202(c) required a SEF a market participant could continue to to establish and impartially enforce (2) § 37.202(b)—Jurisdiction execute swaps on other SEFs.437 rules governing any decision to allow, deny, suspend, or permanently bar Proposed § 37.202(b) required that (ii) Commission Determination participants’ access to the SEF, prior to granting any ECP access to its The Commission is adopting including when such decisions are facilities, a SEF must require that the § 37.202(b) as proposed. While made as part of a disciplinary or ECP consents to its jurisdiction. acknowledging the comments described emergency action taken by the SEF. (i) Summary of Comments above, the Commission believes that § 37.202(b) codifies jurisdictional (i) Commission Determination CME recommended that the requirements necessary to effectuate the Although no comments were received Commission withdraw the proposed statutory mandate of Core Principle 2 on § 37.202(c), the Commission is rule.429 CME contended that requiring that a SEF shall have the capacity to adopting the proposed rule subject to clearing firms to obtain every customer’s detect, investigate, and enforce rules of one modification.439 The Commission is consent to the regulatory jurisdiction of the SEF.438 In the Commission’s view, replacing the term ‘‘participant’’ with each SEF would be costly.430 Moreover, jurisdiction must be established by a ‘‘eligible contract participant’’ because CME commented that even if such SEF prior to granting eligible contract the term ‘‘participant’’ was not defined consent were obtained, the proposed participants access to its markets in in the SEF NPRM and the revised term rule would be entirely ineffective in order to effectively investigate and more clearly communicates the persons achieving the Commission’s desired sanction persons that violate SEF rules. to whom this rule applies.440 The outcome.431 CME explained that if a In particular, a SEF should not be in the Commission notes that § 37.202(c) non-member, who had consented to the position of asking market participants to implements Core Principle 2’s SEF’s jurisdiction under the proposed voluntarily submit to its jurisdiction requirement regarding limitations on rule, committed a rule violation and and cooperate in investigatory access to the SEF.441 proceedings after a potential rule subsequently elected not to cooperate in (d) § 37.203—Rule Enforcement Program the investigation or disciplinary violation has been found. Similarly, process, the SEF’s only recourse would market participants should have Proposed § 37.203 required a SEF to be to deny the non-member access and, advanced notice that their trading establish and enforce trading, trade if appropriate, refer the matter to the practices are subject to the rules of a processing, and participation rules that Commission.432 CME further explained SEF, including rules that require will deter abuses and have the capacity that a SEF’s enforcement options, and cooperating in investigatory and to detect, investigate, and enforce those the regulatory outcomes, do not change disciplinary processes. rules.442 based on whether or not there is a For the avoidance of doubt, the (1) § 37.203(a)—Abusive Trading record of the non-member consenting to Commission clarifies that the scope of Practices Prohibited jurisdiction, but rather depend on § 37.202(b) is not limited to members. whether the non-member chooses to To the contrary, all members and market Proposed § 37.203(a) required a SEF participants of a SEF, as defined above to prohibit certain abusive trading 428 The Commission is replacing the term under § 37.200, are within the scope of practices, including front-running, wash ‘‘participant’’ in proposed § 37.202(a)(3) with the § 37.202(b). trading, pre-arranged trading, fraudulent terms ‘‘eligible contract participants’’ and In response to CME’s and WMBAA’s ‘‘independent software vendors’’ in final comments, the Commission notes that a 439 The Commission is making certain non- § 37.202(a)(3) because the term ‘‘participant’’ was substantive clarifications to the rule. not defined in the SEF NPRM and the revised terms 440 For the avoidance of doubt, the Commission 433 more clearly communicates the persons to whom Id. notes that this rule applies to the SEF’s members this rule applies. 434 Bloomberg Comment Letter at 6 (Mar. 8, 2011). and market participants. 429 CME Comment Letter at 17 (Feb. 22, 2011). 435 Id. 441 CEA section 5h(f)(2)(A)(ii); 7 U.S.C. 430 Id. at 16. 436 WMBAA Comment Letter at 19 (Mar. 8, 2011). 7b–3(f)(2)(A)(ii). 431 Id. 437 Id. 442 The Commission notes that § 37.203 codifies 432 Id. 438 CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). CEA section 5h(f)(2)(B). 7 U.S.C. 7b–3(f)(2)(B).

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trading, money passes, and any other trading practices, including exploiting a In response to WMBAA’s comment trading practices that the SEF deems to large quantity or block trade, price that the enumerated abusive trading be abusive. The proposed rule further spraying (which it views as a form of practices are more suited to DCMs obligated a SEF to ‘‘prohibit any other front-running), rebate harvesting, and rather than SEFs, the Commission manipulative or disruptive trading layering the market (which it analogizes believes that similar prohibitions are practices prohibited by the Act or by the to spoofing).449 necessary to promote consistent Commission pursuant to Commission (ii) Commission Determination protection for all market participants regulations.’’ SEFs permitting across the swaps market. Therefore, the intermediation were required to prohibit The Commission is adopting Commission believes that the additional trading practices, such as proposed § 37.203(a), subject to one enumerated abusive trading practices trading ahead of customer orders, modification described below. In should be prohibited by DCMs and trading against customer orders, response to CME’s and ABC/CIEBA’s SEFs. The Commission notes that accommodation trading, and improper comments regarding the perceived requiring SEFs to proscribe trading cross trading. As explained in the SEF vagueness of the enumerated trading practices which are prohibited by the NPRM, prohibited trading practices practices, the Commission notes that the Act and Commission regulations does include those proscribed by section 747 enumerated abusive trading practices not create any additional obligations of the Dodd-Frank Act.443 reflect the trading practices that are beyond the existing statutory and typically accepted as prohibited (i) Summary of Comments regulatory requirements applicable to all conduct by regulators and derivatives SEFs. CME and ABC/CIEBA commented exchanges in the industry. In the SEF The Commission agrees with that the proposed rule is problematic NPRM, the Commission stated that the WMBAA and Better Markets that other because it enumerated prohibited trade proposed prohibited trading practices abusive trading practices may exist. In practices without specifically defining are a compilation of abusive trading 444 450 this regard, § 37.203(a) provides a non- them. CME stated that SEFs should practices that DCMs already prohibit. exhaustive, non-exclusive list. The have reasonable discretion to establish The Commission also noted in the final regulations adopted in this final release rules appropriate to their markets that DCM rulemaking that the prohibited provide a SEF with reasonable are consistent with the CEA and that trading practices are typically already 445 451 discretion to establish rules that satisfy the core principles. CME prohibited in DCM rulebooks. prohibit additional abusive trading questioned, in particular, how to Although the Commission believes, as practices. Additionally, not only must a interpret the proposed prohibition on noted by CME, that a SEF should have SEF prohibit any other trading practices pre-arranged trading with respect to reasonable discretion to establish rules that a SEF deems abusive,452 it must rules that allow for block trading, for its markets, the Commission also establish and enforce rules that will exchange for related position believes, at a minimum, that a SEF must deter abuses under statutory Core transactions, and pre-execution prohibit the abusive trading practices Principle 2.453 Therefore, if a SEF communications subject to specified identified in the rule. identifies additional abusive trading conditions.446 In response to CME’s comment about WMBAA contended that the how to interpret the prohibition on pre- practices that are likely to occur on its enumerated abusive trading practices arranged trading with respect to rules trading systems and platforms, then the appear more commonly in markets with that allow for block trading and other SEF is required, by statute and retail participants, and therefore are types of trading, the Commission is Commission regulation, to prohibit such more likely to occur on a DCM rather amending proposed § 37.203(a) to abusive trading practices. The than a SEF.447 Accordingly, WMBAA clarify that a SEF must prohibit pre- Commission anticipates that as SEFs recommended that the Commission arranged trading, except for block trades gain experience with exchange-listed include in the final rule abusive trading permitted under part 43 of the swaps, it may periodically revisit the practices that are more likely to occur Commission’s regulations or other types list of prohibited abusive trading on a SEF.448 Finally, Better Markets of transactions certified to or approved practices under § 37.203(a). recommended that the Commission by the Commission pursuant to the (2) § 37.203(b)—Capacity to Detect and expand its list of prohibited trade procedures under part 40 of the Investigate Rule Violations practices to ban certain high-frequency Commission’s regulations. This change clarifies that these types of transactions Proposed § 37.203(b) required a SEF 443 Core Principles and Other Requirements for will not be subject to the prohibition on to have arrangements and resources for Swap Execution Facilities, 76 FR at 1223 n.61. pre-arranged trading. The Commission effective rule enforcement, which Section 747 of the Dodd-Frank Act amended CEA also clarifies, as discussed above under included a SEF’s authority to collect section 4c(a) to make it unlawful for any person to information and examine books and engage in any trading, practice, or conduct on or the time delay requirement, that the subject to the rules of a registered entity that—(A) prohibition on pre-arranged trading records of SEF members and market violates bids or offers; (B) demonstrates intentional does not limit pre-execution participants. As discussed in the or reckless disregard for the orderly execution of communications between market preamble to the SEF NPRM, the transactions during the closing period; or (C) is, is Commission believes that a SEF can best of the character of, or is commonly known to the participants, subject to the rules of the trade as, spoofing (bidding or offering with the SEF. Accordingly, SEFs that permit pre- administer its compliance and rule intent to cancel the bid or offer before execution). execution communications must enforcement obligations by having the See Antidisruptive Practices Authority, 76 FR establish and enforce rules relating to ability to reach the books and records of 14943 (proposed Mar. 18, 2011) for proposed 454 interpretive guidance on these three new statutory such communications. all market participants. Proposed provisions of CEA section 4c(a)(5). § 37.203(b) also required a SEF’s 444 ABC/CIEBA Comment Letter at 9 (Mar. 8, 449 Better Markets Comment Letter at 13–17 (Mar. arrangements and resources to facilitate 2011); CME Comment Letter at 17–18 (Feb. 22, 8, 2011). 2011). 450 Core Principles and Other Requirements for 452 See Final § 37.203(a) in the Commission’s 445 CME Comment Letter at 17 (Feb. 22, 2011). Swap Execution Facilities, 76 FR at 1223. regulations. 446 Id. at 17–18. 451 Core Principles and Other Requirements for 453 CEA section 5h(f)(2); 7 U.S.C. 7b–3(f)(2). 447 WMBAA Comment Letter at 20 (Mar. 8, 2011). Designated Contract Markets, 77 FR 36612, 36626 454 Core Principles and Other Requirements for 448 Id. (Jun. 19, 2012). Swap Execution Facilities, 76 FR at 1223.

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the direct supervision of the market and necessary to detect and prosecute rule decrease.464 Accordingly, MarketAxess the analysis of data collected to violations. In response to FXall’s suggested that the Commission remove determine whether a rule violation has comment, the Commission clarifies that the term ‘‘formally’’ and clarify that the occurred. the requirement for a SEF to have the evaluation of compliance resources authority to examine books and records could result in either an increase or (i) Summary of Comments does not require a SEF to conduct a full decrease in compliance staff and FXall and CME requested that the regulatory examination program. resources.465 Commission clarify the provision in However, the Commission notes that in (ii) Commission Determination proposed § 37.203(b) that requires a SEF addition to the SEF’s obligations to have the authority to examine the pursuant to § 37.203(b), the audit trail The Commission is adopting books and records of its members and requirements in § 37.205(c)(2) require a § 37.203(c) as proposed, subject to one market participants.455 Specifically, SEF to establish a program for effective modification discussed below.466 The CME expressed concern that the enforcement of its audit trail and Commission agrees in part with proposed rule would subject non- recordkeeping requirements, which WMBAA’s recommendation that some registered market participants to would require the examination of books SEF compliance staff can be shared recordkeeping requirements that and records. among affiliated entities under the currently apply only to member, appropriate circumstances. However, registrants, and direct access clients of (3) § 37.203(c)—Compliance Staff and such arrangements would require prior its platform, which it does not believe Resources review by the Commission staff and would be effective.456 CME also Proposed § 37.203(c)(1) provided that appropriate legal documentation commented that the proposed rule does a SEF must establish and maintain between the affiliated entities with not detail which books, records, and sufficient compliance staff and respect to any shared staff (e.g., information a SEF must be able to resources to conduct a number of secondment or regulatory services obtain from its non-member market enumerated tasks, such as audit trail agreements that define responsibilities; 457 participants. FXall expressed concern reviews, trade practice surveillance, establish decision-trees for matters of that the requirement for a SEF to have market surveillance, and real-time regulatory consequence; and provide for the authority to examine the books and monitoring. Proposed § 37.203(c)(2) exclusive authority and responsibility records of its members and market required a SEF to continually monitor by each SEF with respect to matters on participants could be interpreted to the size and workload of its compliance its markets). The Commission also require a SEF to conduct a full staff and, on at least an annual basis, emphasizes that any sharing of 458 regulatory examination program. formally evaluate the need to increase compliance staff does not diminish each FXall, therefore, recommended that the its compliance staff and resources. The SEF’s obligation to maintain sufficient Commission clarify that this proposed rule also set forth certain staff to meet its own regulatory needs. requirement only applies as may be factors that a SEF should consider in The Commission believes that necessary for a SEF to investigate a determining the appropriate level of compliance resources may not be shared specific potential rule violation that the compliance staff and resources. between non-affiliated SEFs given SEF has detected in the ordinary course potential conflict issues. However, the of its trade practice surveillance routine (i) Summary of Comments Commission recognizes that a SEF may or has otherwise been brought to its Two commenters sought clarification provide regulatory services to a non- 459 attention. regarding a SEF’s compliance affiliated SEF pursuant to a regulatory services agreement. (ii) Commission Determination resources.460 WMBAA requested that the Commission clarify whether the The Commission believes that a SEF The Commission is adopting may take into consideration the staff resources and staff of a compliance § 37.203(b) as proposed, subject to the and resources of its regulatory service department may be shared with following modification. To address provider when evaluating the affiliates or between multiple SEFs, and CME’s concerns about the scope of sufficiency of its own compliance staff. if so, how these shared resources would proposed § 37.203(b), the Commission is Regardless of whether a SEF utilizes a be considered in meeting the replacing the term ‘‘market participant’’ regulatory service provider or shares its requirements for sufficient compliance with ‘‘persons under investigation.’’ The compliance staff with an affiliate, the staff and resources.461 WMBAA also Commission recognizes that using the Commission emphasizes that the SEF requested clarification as to whether a term ‘‘market participant’’ could must maintain sufficient internal SEF could consider its third party significantly increase the regulatory compliance staff to oversee the quality responsibilities for SEFs. Thus, the service provider’s resources and staff for and effectiveness of the regulatory Commission clarifies that § 37.203(b) purposes of evaluating the adequacy of 462 services provided and to make certain places upon a SEF an affirmative its compliance staff and resources. regulatory decisions, as required by obligation to have the authority to MarketAxess believed that the process § 37.204. examine books and records from its by which a SEF must conduct a formal Finally, the Commission is deleting members and from any persons under evaluation of its compliance resources proposed § 37.203(c)(2), which required 463 investigation for effective enforcement was unclear. MarketAxess also noted that a SEF monitor the size and of its rules. The Commission also notes that while the findings of such an workload of its compliance staff on a that the books and records collected by evaluation could result in the need to continuous basis and, on at least an the SEF should encompass all increase a SEF’s compliance staff and annual basis, formally evaluate the need information and documents that are resources, it could also result in a to increase its compliance resources and

455 FXall Comment Letter at 11–12 (Mar. 8, 2011); 460 WMBAA Comment Letter at 21 (Mar. 8, 2011); 464 Id. CME Comment Letter at 18 (Feb. 22, 2011). MarketAxess Comment Letter at 35 (Mar. 8, 2011). 465 Id. 456 CME Comment Letter at 18 (Feb. 22, 2011). 461 WMBAA Comment Letter at 21 (Mar. 8, 2011). 466 The Commission is making certain non- 457 Id. 462 Id. substantive clarifications to proposed § 37.203(c)(1). 458 FXall Comment Letter at 11–12 (Mar. 8, 2011). 463 MarketAxess Comment Letter at 35 (Mar. 8, The Commission is also renumbering proposed 459 Id. 2011). § 37.203(c)(1) to § 37.203(c).

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staff. The Commission believes that the of high-frequency traders that will Although the Commission obligation that a SEF monitor the transact on SEFs.471 acknowledges the merits of the recommendation by Better Markets to adequacy of its compliance staff and (ii) Commission Determination resources are implicit in proposed include time stamps at intervals § 37.203(c)(1). The final rule provides The Commission is adopting consistent with the capabilities of high- greater flexibility to SEFs in proposed § 37.203(d), subject to two frequency traders, the Commission does determining their approach to modifications discussed below. First, not believe that it is necessary to modify monitoring their compliance resources. the Commission is moving the § 37.203(d) to address this concern. As requirement that an automated trade discussed in § 37.401 below, there are (4) § 37.203(d)—Automated Trade surveillance system maintain all data efforts underway both within and Surveillance System reflecting the details of each order outside of the Commission to define and entered into the trading system to final develop approaches for better Proposed § 37.203(d) required a SEF § 37.205(b). The Commission believes monitoring of high-frequency and to maintain an automated trade that § 37.205(b) is a more logical place algorithmic trading.473 However, while surveillance system capable of detecting in the Commission’s rules to address the rule does not specify the granularity and investigating potential trade this aspect of a SEF’s automated of time-stamped data, a SEF’s automated practice violations. The proposed rule surveillance system because it also trade surveillance system should have also required that an acceptable specifies the requirements for a SEF’s the ability to readily determine the automated trade surveillance system audit trail program, including a history sequence in which orders are entered. must have the capability to generate of all orders and trades. This reflects the Commission’s belief alerts on a trade date plus one day (T+1) Second, the Commission is deleting that an automated trade surveillance basis to assist staff in detecting potential the word ‘‘investigating’’ from proposed system should time-stamp data with the violations. The automated trade § 37.203(d) to remove any confusion, as granularity necessary to conduct surveillance system, among other noted by CME. The Commission notes, effective surveillance of all trade-related requirements, must maintain all trade in response to CME’s comment, that the activity, including high-frequency and order data, including order final rules do not require a SEF’s trading, while leaving the details of the modifications and cancellations, and automated trade surveillance system to system to the SEF. must have the capability to compute, conduct the actual investigations. The The Commission notes that the retain, and compare trading statistics; Commission believes that the actual accurate time-stamping of data is compute trade gains and losses; and investigation would be carried out by a particularly important for SEFs that use reconstruct the sequence of trading SEF’s compliance staff with the an RFQ System, including an RFQ activity. assistance of automated surveillance System with a voice component. For tools. (i) Summary of Comments such SEFs, the accurate time-stamping In response to CME’s comment of both their Order Book and RFQ CME and WMBAA expressed concern pertaining to the breadth of the rule, the System activity is critical for ensuring about the capabilities required of an Commission believes that effective both that the SEF itself has a robust automated trade surveillance system surveillance of trading markets requires surveillance system and that the under the proposed rule.467 Specifically, that a SEF maintain an automated trade Commission is able to monitor the SEF’s CME stated that it has been unable to surveillance system capable of detecting adherence to part 37’s Order Book-RFQ design an automated surveillance trade practice violations to assist System integration requirements. compliance staff in analyzing large data system that automates the actual sets and investigating patterns of (5) § 37.203(e)—Real-Time Market investigation of potential trade practice conduct that may go otherwise Monitoring violations.468 CME also challenged the unnoticed. The Commission also use of what it deemed as ‘‘broad and Proposed § 37.203(e) required a SEF believes that the analytical tools ambiguous’’ terms to describe the to conduct real-time market monitoring enumerated in the rule are a necessary required capabilities of such a system, of all trading activity on its electronic component of an effective trade and recommended that the Commission trading platform to ensure orderly surveillance system. This rule, as consider applying a more flexible, core trading and to identify market or system modified, therefore fulfills the statutory principles-based approach to anomalies. The proposed rule further requirement of Core Principle 2 by implementing the requirement.469 required a SEF to have the authority to assisting the SEF in detecting, WMBAA argued that it would be adjust prices and cancel trades when investigating, and enforcing trading needed to mitigate ‘‘market disrupting impossible to create an automated trade rules that will deter abuses.472 surveillance system with the events’’ caused by platform The Commission acknowledges the malfunctions or errors in orders capabilities described in the proposed inter-SEF surveillance limitations rule without knowledge of a submitted by market participants. In expressed by WMBAA. The addition, proposed § 37.203(e) required participant’s complete trading activity, Commission notes that the purpose of including trading activity that takes that any trade price adjustments or trade § 37.203(d) is to ensure that a SEF’s cancellations be transparent to the place on other SEFs.470 compliance staff has the necessary tools market and subject to standards that are Better Markets recommended that to detect, analyze, and investigate clear, fair, and publicly available. data recorded by an automated trade potential trade practice violations on the surveillance system be time-stamped at SEF’s trading systems or platforms; it (i) Summary of Comments intervals consistent with the capabilities does not obligate a SEF to establish a CME stated that the proposed cross-market trade practice surveillance standards would be difficult for any SEF 467 CME Comment Letter at 19–20 (Feb. 22, 2011); program. to reasonably meet because they require WMBAA Comment Letter at 21 (Mar. 8, 2011). 468 CME Comment Letter at 19–20 (Feb. 22, 2011). 471 Better Markets Comment Letter at 18 (Mar. 8, 473 See discussion below regarding high- 469 Id. at 20. 2011). frequency trading under § 37.401—General 470 WMBAA Comment Letter at 21 (Mar. 8, 2011). 472 CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). Requirements in the preamble.

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monitoring of all trading activity on a market monitoring so that it can Commission also acknowledges the platform to ensure orderly trading.474 effectively monitor its markets. The validity of SIFMA AMG’s concern that CME also reiterated its belief that the Commission also believes that the rule any adjustment to a swap transaction proposed rules are overly prescriptive correctly mandates that a SEF conduct should also be reflected by entities and recommended that the Commission real-time market monitoring of all involved in the clearing and processing provide application guidance instead of trading activity that occurs on its system of the swap. However, since imposing a rule.475 WMBAA requested or platform in order to detect disorderly such a requirement on entities involved clarification that a SEF’s obligation to trading and market or system anomalies, in the clearing and processing of swaps conduct real-time market monitoring and take appropriate regulatory action. is outside the scope of this SEF does not include the requirement to The Commission believes that this rule rulemaking, the Commission declines to conduct automated trade surveillance fulfills the statutory requirement of Core address this issue in these final rules. under § 37.203(d).476 Principle 2, which requires a SEF to The Commission also rejects ISDA/ Two commenters opined on the have the capacity to detect, investigate, SIFMA’s recommendation to define the requirement for a SEF to modify or and enforce trading rules that will deter term ‘‘market disrupting events,’’ as it cancel a swap transaction.477 SIFMA abuses.482 does not believe that a rule definition AMG argued that a SEF should not be In response to WMBAA’s comment, could reasonably capture the universe of able to modify or cancel a swap the Commission clarifies that a SEF’s potentially market disrupting events. transaction under any circumstances obligation to conduct real-time market The Commission notes that industry without the express consent of the monitoring does not encompass the definitions for terms such as ‘‘market counterparties.478 SIFMA AMG also automated trade surveillance disrupting events’’ generally only stated that if counterparties consent to requirement in § 37.203(d). The establish a process or framework for an adjustment, then clearing entities, Commission notes that while real-time counterparties and other third parties to executing brokers, DCMs, and market monitoring and trade practice determine whether such an event has middleware platforms should also make surveillance are both self-regulatory occurred and can be subject to the appropriate adjustment.479 ISDA/ functions assigned to all SEFs, these challenge, resulting in delayed SIFMA recommended that the functions are generally independent and determinations with limited utility for Commission adopt a uniform standard serve different purposes. As discussed effective trade monitoring. Although the 480 for ‘‘market disrupting events.’’ in the SEF NPRM, market monitoring is Commission believes that coordination Better Markets stated that a SEF’s conducted on a real-time basis so that a among SEFs regarding market obligation to conduct real-time market SEF can take mitigating action against disrupting events may be appropriate, monitoring should include monitoring any market or system anomalies on its and encourages SEFs to do so, the orders and cancellations that are time- trading system or platform.483 Trade Commission is not defining ‘‘market stamped at intervals consistent with the practice surveillance, on the other hand, disrupting events’’ at this time. The capabilities of high-frequency traders to involves reconstructing and analyzing Commission may provide examples at a identify abusive high frequency trading order, trade, and other data post- 481 later time once it gains further strategies. execution to identify potential knowledge regarding the types of market (ii) Commission Determination violations and anomalies found in trade disrupting events that are likely to occur data.484 Further, as noted in the SEF The Commission is adopting on a SEF. NPRM, the automated trade surveillance proposed § 37.203(e), subject to one In response to the comment by Better system typically differs from the system modification. The Commission agrees Markets about high-frequency trading, used to conduct real-time market the Commission declines to modify with CME that real-time market 485 monitoring cannot ‘‘ensure’’ orderly monitoring. proposed § 37.203(e) to include The Commission disagrees with trading at all times, but the Commission concepts related specifically to high- SIFMA AMG’s comment that a SEF 486 believes that such monitoring must frequency trading at this time. The should not be able to modify or cancel identify disorderly trading when it Commission believes that a SEF’s real- a swap transaction under any occurs. Accordingly, the Commission is time market monitoring system should circumstances without the express modifying proposed § 37.203(e) to be structured to conduct effective consent of the counterparties. The require a SEF to conduct real-time market monitoring for all order and Commission believes that a SEF should market monitoring ‘‘to identify trade types, including, but not limited disorderly trading,’’ instead of ‘‘to have the authority to modify or cancel to, high frequency trading. ensure orderly trading.’’ a swap transaction without the consent of the counterparties under certain (6) § 37.203(f)—Investigations and In response to CME’s comment that Investigation Reports the rule is overly prescriptive, the limited circumstances. For example, a Commission believes that § 37.203(e) SEF should be able to cancel a trade Proposed § 37.203(f) required a SEF to grants a SEF the flexibility to determine when such trade was executed due to a establish procedures for conducting the best way to conduct real-time technological error on the part of the investigations, provided timelines for SEF. Further, the Commission believes completing such investigations, detailed 474 CME Comment Letter at 21 (Feb. 22, 2011). that the rule’s requirement that any the requirements of an investigation 475 Id. at 20–21. modifications or cancellations by the report, and provided for warning letters. 476 WMBAA Comment Letter at 21 (Mar. 8, 2011). SEF be transparent to the market and (i) § 37.203(f)(1)—Procedures 477 SIFMA AMG Comment Letter at 14 (Mar. 8, subject to standards that are clear, fair, 2011); ISDA/SIFMA Comment Letter at 13 (Mar. 8, and publicly available will provide Proposed § 37.203(f)(1) required a SEF 2011). to have procedures that require its 478 SIFMA AMG Comment Letter at 14 (Mar. 8, protection to counterparties. The 2011). compliance staff to conduct 479 Id. 482 CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). investigations of possible rule 480 ISDA/SIFMA Comment Letter at 13 (Mar. 8, 483 Core Principles and Other Requirements for 2011). Swap Execution Facilities, 76 FR at 1224. 486 See discussion below regarding high- 481 Better Markets Comment Letter at 18 (Mar. 8, 484 Id. at 1223–24. frequency trading under § 37.401—General 2011). 485 Id. at 1224. Requirements in the preamble.

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violations. The proposed rule required unclear, the Commission confirms that (iii) § 37.203(f)(3)—Investigation Reports that an investigation be commenced a SEF may contract with a regulatory When a Reasonable Basis Exists for upon the Commission staff’s request or service provider, as provided for under Finding a Violation upon discovery of information by the § 37.204, whose staff may perform the Proposed § 37.203(f)(3) required a SEF indicating a possible basis for functions assigned to a SEF’s SEF’s compliance staff to submit an finding that a violation has occurred or compliance staff under this rule. In this investigation report for disciplinary will occur. regard, the Commission also notes that action any time staff determined that a (A) Summary of Comments the SEF must maintain sufficient reasonable basis existed for finding a internal compliance staff to oversee the rule violation. The proposed rule also CME argued that the proposed rule quality and effectiveness of the enumerated the items that must be diminishes a SEF’s discretion to included in the investigation report, determine the matters that warrant a regulatory services provided on its including the market participant’s formal investigation because at the time behalf, and to make certain regulatory disciplinary history. of discovery or upon receipt of decisions, as required by § 37.204. information, and before any review has (ii) § 37.203(f)(2)—Timeliness (A) Summary of Comments occurred, there will always be ‘‘a CME and ICE commented on the possible basis’’ that a violation has Under proposed § 37.203(f)(2), the requirement that a respondent’s 487 occurred or will occur. CME agreed Commission required that investigations disciplinary history be included in the that formal written referrals from the be completed in a timely manner, investigation report that is submitted to Commission, law enforcement defined as 12 months after an a Review Panel.494 CME asserted that a authorities, other regulatory agencies, or investigation is opened, absent respondent’s disciplinary history would other SROs should result in a formal enumerated mitigating circumstances. only be relevant if a prior offense is an investigation in every instance.488 (A) Summary of Comments element of proof for the potential rule However, CME contended that a SEF violation under review.495 ICE should have reasonable discretion to CME generally supported the commented that only substantive determine how it responds to violations in the respondent’s history complaints, leads, and other types of proposed rule, but recommended that the list of possible mitigating would be relevant to the Review Panel’s referrals, including the discretion to 496 circumstances also include the domicile deliberations. follow-up with a less formal inquiry in CME commented that rule violations 489 of the subjects and cooperative certain situations. can range from very minor to egregious enforcement matters since the SEF may MarketAxess expressed concern that and not every rule violation merits not have independent control over the the proposed rule is not clear as to formal disciplinary action.497 CME pace of the investigation.492 CME also whether a SEF can contract its argued that warning letters are sufficient investigations to its regulatory service requested that the Commission clarify to address minor rule violations, rather 490 provider. MarketAxess recommended that the twelve month period for than the issuance of a formal that the Commission modify the completing an investigation referenced investigatory report.498 proposed rule by replacing ‘‘compliance in proposed § 37.203(f)(2) is separate MarketAxess stated that the proposed staff’’ with ‘‘swap execution facility’’ to from the time period necessary to rule does not specify to whom the clarify that a regulatory service provider prosecute an investigation.493 investigation reports must be submitted, that is responsible for a SEF’s rule (B) Commission Determination and recommended that the reports be enforcement program can conduct submitted to the SEF’s Chief 491 investigations on behalf of the SEF. The Commission is adopting Compliance Officer, consistent with (B) Commission Determination § 37.203(f)(2) as proposed. The Core Principle 15.499 The Commission is adopting Commission believes that a 12-month (B) Commission Determination period to complete an investigation is § 37.203(f)(1) as proposed, subject to The Commission is adopting certain modifications described below. appropriate and timely. Although the Commission agrees with CME that § 37.203(f)(3) as proposed, subject to one The Commission confirms that in modification. The Commission agrees additional mitigating factors could certain circumstances a SEF should with CME and ICE that a respondent’s justifiably contribute to a delay in have reasonable discretion regarding disciplinary history is not always completing an investigation within a 12- whether or not to open an investigation, relevant to the determination of whether as noted by CME. Accordingly, the month period, the Commission notes the respondent has committed a further Commission is amending proposed that the factors included in the violation of a SEF’s rules. Accordingly, § 37.203(f)(1) to provide that an proposed rule were not intended to be the Commission is removing this investigation must be commenced by an exhaustive list of mitigating requirement from the final rule. The the SEF upon the receipt of a request circumstances. In the Commission’s Commission notes, however, that all from Commission staff or upon the view, the factors listed in the proposed disciplinary sanctions, including discovery or receipt of information that rule represent some of the more sanctions imposed pursuant to an indicates a ‘‘reasonable basis’’ for common examples that could delay accepted settlement offer, must take into finding that a violation may have completion of an investigation within account the respondent’s disciplinary occurred or will occur. the 12-month period. The Commission history. In response to MarketAxess’s also confirms that § 37.203(f)(2) only comment that the proposed rule is applies to the investigation phase of a 494 ICE Comment Letter at 7 (Mar. 8, 2011); CME matter, and is separate from the time Comment Letter at 22, 35 (Feb. 22, 2011). 487 CME Comment Letter at 21 (Feb. 22, 2011). period necessary to prosecute an 495 CME Comment Letter at 35 (Feb. 22, 2011). 488 496 Id. investigation. ICE Comment Letter at 7 (Mar. 8, 2011). 489 Id. 497 CME Comment Letter at 22 (Feb. 22, 2011). 490 MarketAxess Comment Letter at 35 (Mar. 8, 498 Id. 2011). 492 CME Comment Letter at 21 (Feb. 22, 2011). 499 MarketAxess Comment Letter at 36 (Mar. 8, 491 Id. at 35–36. 493 Id. at 21–22. 2011).

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The Commission confirms, as the concept of warning letters because certain modifications, including recommended by CME, that ‘‘minor the Commission does not believe that a converting a portion of the rule to transgressions’’ can be addressed by a SEF would need to limit the number of guidance in appendix B to part 37. SEF’s compliance staff with the warning letters that can be issued when The Commission is maintaining in the issuance of warning letters as discussed a rule violation has not been found. The final rule the limitation on the number below in § 37.203(f)(5). However, as Commission notes, however, that this of warning letters issued. The further discussed below in modification does not impact the Commission acknowledges the § 37.203(f)(5), no more than one warning limitation on the number of warning comments from CME and ICE letter may be issued to the same person letters that may be issued by a concerning the issuance of warning or entity found to have committed the disciplinary panel or by compliance letters, but believes that to ensure that same rule violation more than once staff to the same person or entity for the warning letters serve as effective within a rolling 12-month period.500 same violation committed more than deterrents and to preserve the value of Finally, the Commission clarifies that once in a rolling 12-month period when disciplinary sanctions, no more than a SEF’s compliance staff should submit a rule violation has been found. The one warning letter may be issued to the all completed investigation reports to Commission clarifies, in response to same person or entity found to have the member or members of the SEF’s CME’s comment, that a SEF may committed the same rule violation more compliance department responsible for authorize its compliance staff to close a than once within a rolling 12-month reviewing such reports and determining case administratively and issue a period.509 As discussed in the SEF the next steps in the process, such as warning letter without disciplinary NPRM, while a warning letter may be whether to refer the matter to the SEF’s panel approval when a reasonable basis appropriate for a first-time violation, the disciplinary panel or authorized does not exist for finding a rule Commission does not believe that more compliance staff under § 37.206(c). violation. than one warning letter in a rolling 12- month period for the same violation is (iv) § 37.203(f)(4)—Investigation Reports (v) § 37.203(f)(5)—Warning Letters ever appropriate.510 Further, a policy of When No Reasonable Basis Exists for Proposed § 37.203(f)(5) provided that issuing repeated warning letters, rather Finding a Violation a SEF may authorize its compliance staff than issuing meaningful sanctions, to Proposed § 37.203(f)(4) required to issue a warning letter or to market participants who repeatedly compliance staff to prepare an recommend that a disciplinary violate the same rules reduces the investigation report upon concluding an committee issue a warning letter. The effectiveness of a SEF’s rule investigation and determining that no proposed rule also prohibited a SEF enforcement program.511 reasonable basis exists for finding a rule from issuing more than one warning However, in response to commenters’ violation. If the investigation report letter to the same person or entity for concerns, the Commission is narrowing recommended that a disciplinary panel the same potential violation during a the application of this rule to warning should issue a warning letter, then the rolling 12-month period. letters that contain an affirmative investigation report must also include a finding that a rule violation has (A) Summary of Comments copy of the warning letter and the occurred. Therefore, the Commission is market participant’s disciplinary Some commenters opposed the removing the provision in the proposed history, including copies of warning proposed limitation on the number of rule that a warning letter issued in letters. warning letters issued during a rolling accordance with this section is not a 12-month period.504 CME contended (A) Summary of Comments penalty or an indication that a finding that the rule does not consider of a violation has been made. To remain CME noted that its Market Regulation important factors that are relevant to a consistent with the modifications to Department currently has the authority SEF when evaluating potential proposed § 37.203(f)(3) and (f)(4), the to administratively close a case and sanctions in a disciplinary matter.505 Commission is also deleting the issue a warning letter without CME believed that the SEF should have proposed requirement that investigation disciplinary committee approval.501 discretion to determine the appropriate reports required by paragraphs (f)(3) and Accordingly, CME recommended that actions in all cases based on the (f)(4) of this section must include a copy the Commission amend the proposed ‘‘totality of the circumstances.’’ 506 ICE of the warning letter issued by rule to reflect that a SEF will also have stated that this limitation would compliance staff. such authority.502 discourage self-reporting of violations As noted above, the Commission (B) Commission Determination because of the lack of discretion in a agrees with CME’s comment that minor resulting penalty assessment.507 transgressions can be addressed by a The Commission is adopting MarketAxess requested that the SEF’s compliance staff issuing a § 37.203(f)(4) as proposed, subject to one Commission adopt a more uniform warning letter. Accordingly, in order to 503 modification. The Commission is approach with respect to warning provide a SEF with flexibility in this eliminating the provision that discussed letters, permitting them to be issued as regard, the Commission is moving this a sanction or an indication of a finding provision of the rule to the guidance in 500 The Commission notes that a SEF’s issuance 508 of a warning letter for the violation of a SEF rule of a violation in all SEF contexts. appendix B to part 37. The text of the guidance provides that the rules of a neither precludes the Commission from taking an (B) Commission Determination enforcement action against the recipient of the SEF may authorize its compliance staff warning letter based upon the same underlying The Commission is adopting to issue a warning letter to a person or conduct, nor does it provide a defense against any proposed § 37.203(f)(5), subject to such Commission enforcement action. entity under investigation or to 501 CME Comment Letter at 21 (Feb. 22, 2011). 504 502 Id. ICE Comment Letter at 7 (Mar. 8, 2011); CME 509 For purposes of this rule, the Commission 503 Comment Letter at 22 (Feb. 22, 2011). does not consider a ‘‘reminder letter’’ or such other Similar to § 37.203(f)(3), the Commission notes 505 that a SEF’s compliance staff should submit all CME Comment Letter at 22 (Feb. 22, 2011). similar letter to be any different than a warning completed investigation reports to the member or 506 Id. letter. members of the SEF’s compliance department 507 ICE Comment Letter at 7 (Mar. 8, 2011). 510 Core Principles and Other Requirements for responsible for reviewing such reports and 508 MarketAxess Comment Letter at 36 (Mar. 8, Swap Execution Facilities, 76 FR at 1224. determining the next steps to take. 2011). 511 Id.

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recommend that a disciplinary panel However, MarketAxess argued that the to provide timely and effective take such action. Commission should permit an entity regulatory services for SEFs. that is not a registered futures The Commission recognizes the (7) § 37.203(g)—Additional Rules association or another registered entity concerns that WMBAA and others have Required with the Commission to perform with respect to SEFs conducting market- Proposed § 37.203(g) required a SEF regulatory services on behalf of a SEF, wide surveillance activities. As to adopt and enforce any additional such as the Financial Industry discussed elsewhere in this final rules that it believes are necessary to Regulatory Authority (‘‘FINRA’’).514 In rulemaking,520 an individual SEF may comply with the requirements of the alternative, MarketAxess have limited ability to monitor trading § 37.203. recommended that the Commission activities across markets since (i) Commission Determination should permit SEFs, if desired, to form individual swaps may be listed on a joint venture to create a special multiple SEFs (as well as any DCMs The Commission did not receive any regulatory service provider for SEFs that listing swaps). The Commission clarifies comments on proposed § 37.203(g); would not be a registered entity.515 that a SEF (or a regulatory service however, the Commission is moving Similarly, several commenters provider on a SEF’s behalf), under Core this rule to the guidance in appendix B supported a centralized, common Principle 2 and the Commission’s to part 37. The Commission believes regulatory organization (‘‘CRO’’) that regulations thereunder, is only that this requirement is already implicit would facilitate compliance with SEF responsible for surveillance and rule in Core Principle 2 and need not be core principles.516 In this regard, enforcement of the SEF’s systems and addressed separately as a final rule. WMBAA stated that a CRO would platforms, and Core Principle 2 does not Additionally, moving proposed establish a uniform SEF standard of impose a cross-market surveillance § 37.203(g) to guidance provides SEFs conduct, streamline the Commission’s requirement on a SEF.521 Therefore, the with added flexibility in adopting evaluation of each SEF registration final rules do not require the use of a additional rules that it believes are application, and conduct effective single industry-wide CRO to assist SEFs necessary to comply with the rules surveillance of fungible swap products with cross-market surveillance. While related to Core Principle 2. Consistent trading on multiple SEFs.517 not requiring it, the final rules also do with this determination, the MarketAxess and Tradeweb requested not prohibit the use of a single industry- Commission is replacing proposed clarification on how the Commission wide CRO. § 37.203(g) with final § 37.203(g) (titled will assess and approve regulatory In response to MarketAxess’s and ‘‘Additional sources for compliance’’) service providers.518 In this regard, Tradeweb’s comments regarding the that simply permits SEFs to rely upon Tradeweb commented that SEFs should Commission’s assessment and approval the guidance in appendix B to part 37 have flexibility in contracting with third of regulatory service providers, the to demonstrate to the Commission party service providers, so long as the Commission notes that it will assess and compliance with § 37.203. SEF uses reasonable diligence and acts approve the use of such service (e) § 37.204—Regulatory Services in a manner consistent with market providers during the full registration Provided by a Third Party practice.519 process. The Commission also notes that Exhibit N to Form SEF requests (ii) Commission Determination (1) § 37.204(a)—Use of Third-Party executed or executable copies of any 512 Provider Permitted The Commission is adopting agreements with regulatory service Proposed § 37.204(a) allowed a SEF to § 37.204(a) as proposed, subject to two providers. contract with a registered futures modifications. In response to Finally, the Commission is modifying association or another registered entity MarketAxess’s comment about non- § 37.204(a) to make clear that a SEF may to assist in complying with the SEF core registered entities performing regulatory use the services of a regulatory service principles, as approved by the services, the Commission is revising the provider for the provision of services to Commission. The proposed rule also proposed rule to allow FINRA to assist assist the SEF in complying with ‘‘the stated that a SEF that elects to use the SEFs in complying with the core Act and Commission regulations services of a regulatory service provider principles. The Commission notes that thereunder’’ rather than simply the SEF must ensure that such provider has the FINRA has provided similar regulatory core principles as stated in proposed capacity and resources to provide timely services for the securities industry for § 37.204(a). The modification aligns the and effective regulatory services. The many years and may serve as a self- rule text with what the Commission has proposed rule further stated that a SEF regulatory organization for SB–SEFs. always intended to be the range of a will at all times remain responsible for Therefore, the Commission believes that SEF’s self-regulatory obligations. the performance of any regulatory allowing FINRA to serve as a regulatory (2) § 37.204(b)—Duty To Supervise services received, for compliance with service provider for SEFs is appropriate Third Party 522 the SEF’s obligations under the Act and because FINRA is likely to have the Commission regulations, and for the qualifications, capacity, and resources Proposed § 37.204(b) required that a regulatory service provider’s SEF maintain sufficient compliance staff performance on its behalf. 2011); Bloomberg Comment Letter at 4–5 (Mar. 8, to supervise any services performed by 2011); NFA Comment Letter at 1 (Mar. 8, 2011). 514 (i) Summary of Comments MarketAxess Comment Letter at 15 (Mar. 8, 520 See, e.g., discussion under § 37.203(d)— 2011). Commenters generally supported the Automated Trade Surveillance System and Core 515 Id. Principle 6—Position Limits or Accountability in Commission’s proposal to allow third 516 Parity Energy Comment Letter at 5 (Mar. 25, the preamble. 513 parties to provide regulatory services. 2011); WMBAA Comment Letter at 22 (Mar. 8, 521 The Commission notes that other core 2011); FXall Comment Letter at 12 (Mar. 8, 2011). principles, such as Core Principle 4, and the 512 The Commission is renaming the title of this 517 WMBAA Comment Letter at 22 (Mar. 8, 2011). Commission’s regulations thereunder may require section from ‘‘Use of Third-Party Provider 518 MarketAxess Comment Letter at 15 (Mar. 8, SEFs to conduct certain cross-market monitoring. Permitted’’ to ‘‘Use of Regulatory Service Provider 2011); Tradeweb Comment Letter at 10 (Mar. 8, 522 The Commission is renaming the title of this Permitted’’ to provide greater clarity. 2011). section from ‘‘Duty to Supervise Third Party’’ to 513 MarketAxess Comment Letter at 14–15 (Mar. 519 Tradeweb Comment Letter at 10 (Mar. 8, ‘‘Duty to Supervise Regulatory Service Provider’’ to 8, 2011); Reuters Comment Letter at 5 (Mar. 8, 2011). provide greater clarity.

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a regulatory service provider. The SEF have complete and timely that a SEF must retain exclusive proposed rule also required that the SEF knowledge of relevant work performed authority in this regard. Cancelling hold regular meetings with its by the SEF’s regulatory service provider trades is an important exercise of a regulatory service provider to discuss on its behalf. The Commission also SEF’s authority over its markets and current work and other matters of believes that this knowledge can only be market participants. Cancelled trades regulatory concern, as well as conduct acquired through periodic reviews and may have meaningful economic periodic reviews of the adequacy and regular meetings required under consequences to the swap effectiveness of services provided on its § 37.204(b). counterparties involved in the behalf. In addition, proposed § 37.204(b) transaction, and may be the subject of required a SEF to carefully document (3) § 37.204(c)—Regulatory Decisions Required From the SEF contention between the counterparties if the reviews and make them available to they do not both agree to the the Commission upon request. Proposed § 37.204(c) required a SEF cancellation. The Commission that utilizes a regulatory service (i) Summary of Comments emphasizes that permanent, provider to retain exclusive authority consequential decisions must remain Two commenters recommended that over all substantive decisions made by with the SEF. the Commission adopt a more flexible its regulatory service provider, rule with respect to a SEF’s duty to including the cancellation of trades, (f) § 37.205—Audit Trail supervise its regulatory service issuance of disciplinary charges, denials provider.523 In this regard, NFA of access to the trading platform for Proposed § 37.205 implements Core recommended that the Commission disciplinary reasons, and any decision Principle 2’s requirement that SEFs provide flexibility to a SEF and its to open an investigation into a possible capture information that may be used in regulatory service provider to mutually rule violation. Further, the proposed establishing whether rule violations 531 determine the necessary process for a rule required a SEF to document any have occurred. Accordingly, SEF to supervise its regulatory service instance where its actions differed from proposed § 37.205 required a SEF to provider.524 CME recommended that the those recommended by its regulatory establish procedures to capture and Commission move the rule to guidance service provider. retain information that may be used in or acceptable practices.525 In particular, establishing whether rule violations CME pointed to the requirements that a (i) Summary of Comments have occurred. The proposed rule, along SEF conduct periodic reviews of the CME objected to the idea that all with its subparts, established the services provided and hold regular decisions concerning the cancellation of requirements of an acceptable audit trail meetings with the regulatory service trades remain in the exclusive authority program and the enforcement of such provider to discuss ongoing of the SEF.529 CME contended that a program. investigations, trading patterns, market SEF may be better served by granting (1) § 37.205(a)—Audit Trail Required participants, and any other matters of such authority to a regulatory service 526 regulatory concern. CME stated that provider because such decisions require Proposed § 37.205(a) required a SEF ‘‘[w]hile it may well be that it is prompt decision-making.530 to capture and retain all audit trail data constructive for the [SEF] to hold (ii) Commission Determination so that the SEF has the ability to detect, regular meetings with its service investigate, and prevent customer and provider and ‘discuss market The Commission is adopting market abuses. The proposed rule also participants,’ the core principle should § 37.204(c) as proposed, subject to two provided that the audit trail data must stand on its own and the [SEF] should modifications. First, the Commission is be sufficient to reconstruct all have the flexibility to determine how removing the requirement that a transactions within a reasonable period best to demonstrate compliance with the decision to open an investigation reside of time and to provide evidence of any core principle.’’ 527 exclusively with the SEF. The final rule rule violations that may have occurred. grants a SEF the latitude to determine (ii) Commission Determination Proposed § 37.205(a) further provided whether investigations will be opened that the audit trail must permit the SEF The Commission is adopting by the SEF, by its regulatory service § 37.204(b) as proposed.528 The provider, or some combination of the to track a customer order from the time Commission acknowledges the two. The Commission believes that of receipt through fill, allocation, or commenters’ desire for a flexible opening investigations is an other disposition, and must include approach, but notes that a SEF that administrative task and does not both order and trade data. elects to use a regulatory service necessarily imply the threat of formal (i) Summary of Comments provider remains responsible for the disciplinary action or sanctions against regulatory services received and for a market participant. Second, the WMBAA requested that the compliance with the Act and Commission is amending the rule to Commission establish a common format Commission regulations. The SEF clarify that when a SEF documents for audit trail data to ensure consistency therefore must properly supervise the instances when its actions differ from among all SEFs and to make the quality and effectiveness of the those recommended by its regulatory information easier for the Commission regulatory services provided on its service provider, the SEF must include to use and review when investigating behalf. The Commission believes that the reasons for the course of action customer and market abuses.532 proper supervision will require that a recommended by the regulatory service (ii) Commission Determination provider and the reasons why the SEF 523 NFA Comment Letter at 2 (Mar. 8, 2011); CME chose a different course of action. The Commission is adopting Comment Letter at 18–19 (Feb. 22, 2011). The Commission disagrees with 524 NFA Comment Letter at 2 (Mar. 8, 2011). § 37.205(a) as proposed, subject to the 525 CME Comment Letter at 19 (Feb. 22, 2011). CME’s comment concerning the 526 Id. at 18–19. ‘‘cancellation of trades’’ and believes 531 CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b– 527 Id. at 19. 3(f)(2)(B)(ii). 528 The Commission is making certain non- 529 CME Comment Letter at 19 (Feb. 22, 2011). 532 WMBAA Comment Letter at 22–23 (Mar. 8, substantive clarifications to § 37.204(b). 530 Id. 2011).

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modifications described below.533 The The Commission believes that execution platforms ‘‘through any Commission believes that the WMBAA’s suggestion to establish a means of interstate commerce.’’ 536 requirement that SEFs capture and common format for audit trail data may Better Markets commented that audit retain all audit trial data is essential to provide some value for SEFs that wish trail records, such as records of ensuring that SEFs can capture to coordinate and establish such a customers’ orders and their disposition, information to establish whether rule standard. However, the intent of the must be time-stamped at intervals that violations have occurred, as required by final rules is to require that a SEF are consistent with the capabilities of Core Principle 2.534 Additionally, the establish and maintain an effective audit high-frequency traders that use SEFs.537 creation and retention of a trail program, not to dictate the method comprehensive audit trail will enable or form for maintaining such (ii) Commission Determination SEFs to properly reconstruct any and all information. Importantly, the rule, by The Commission is adopting market and trading events and to not being prescriptive, provides SEFs proposed § 37.205(b), subject to the conduct a thorough forensic review of with flexibility to determine the manner modifications discussed below. The all market information. The Commission and the technology necessary and Commission is clarifying that ‘‘time of believes that the ability to reconstruct appropriate to meet the requirements. trade execution’’ must be included in markets in such a manner is a The Commission notes, nevertheless, the data points of an acceptable audit fundamental element of a SEF’s that staff from the Commission’s Office trail, and is noting this clarification in surveillance and rule enforcement of Data and Technology will coordinate final § 37.205(b)(1). The Commission is programs. Consistent with these with SEFs to establish standards for the also revising proposed § 37.205(b)(2) to principles, the Commission is submission of audit trail data to the specify that a transaction history modifying § 37.205(a) to clarify that the Commission. database must include a history of ‘‘all audit trail data must be sufficient to (2) § 37.205(b)—Elements of an indications of interest, requests for reconstruct trades and sufficient to Acceptable Audit Trail Program quotes, orders, and trades entered into reconstruct indications of interest, a [SEF’s] trading system or platform, requests for quotes, and orders within a Proposed § 37.205(b)(1) required a including all order modifications and reasonable period of time. SEF’s audit trail to include original cancellations.’’ Further, the Commission Both the proposed and final rules in source documents, on which trade is revising proposed § 37.205(b)(3) to § 37.205(a) require that a SEF ‘‘capture execution information was originally specifically state that a SEF’s electronic and retain all audit trail data necessary recorded, as well as records for analysis capability must provide it with to detect, investigate, and prevent customer orders, whether or not they the ‘‘ability to reconstruct indications of customer and market abuses’’ (emphasis were filled. The proposed rule also interest, requests for quotes, orders, and added). The Commission notes that required that a SEF that permits trades, and identify possible trading information required to detect abuses intermediation must require all violations.’’ The revisions to may in some cases include all executable orders or RFQs received over § 37.205(b)(2) and (b)(3), subject to the communications between market the telephone to be immediately entered additions of the indications of interest participants and a SEF’s trading system into the trading system or platform. and requests for quotes language, reflect or platform. The Commission also notes Proposed § 37.205(b)(2) required that a regulatory requirements previously that a SEF’s obligation to capture in its SEF’s audit trail program include a proposed as part of § 37.203(d), but, as transaction history database and audit trail all data necessary to detect, noted above, the Commission is moving specified the trade information required investigate, and prevent customer and these requirements to final § 37.205(b). to be included in the database. Proposed market abuses is not altered by the Additionally, the Commission is § 37.205(b)(3) required the audit trail nature of the trading system or platform revising proposed § 37.205(b)(2) by program to also have electronic analysis that a SEF may choose to utilize, replacing the customer type indicators capability for the transaction history including a system or platform that, for listed in the proposed rule with the term database. Proposed § 37.205(b)(4) example, utilizes the telephone. For ‘‘customer type indicator code.’’ required the audit trail program to example, an acceptable audit trail for a In response to WMBAA’s comment include the ability to safely store all SEF with a telephone component regarding indications of interest, the audit trail data and to retain it in should include communications Commission believes that retaining accordance with the recordkeeping between the SEF’s employees and their information about indications of interest requirements of SEF Core Principle 10 customers, as well as any provides another important detail of an and its associated regulations. communications between employees as audit trail, just as information of filled, they work customer indications of (i) Summary of Comments unfilled, or cancelled orders provides interest, requests for quotes, orders, and WMBAA commented that the important information for the SEF. This trades. An acceptable audit trail must requirement for records to be retained information enables a SEF to fulfill its capture the totality of communications for customer orders should not apply to statutory duty under Core Principle 2, (including, but not limited to, indications of interest because it would which requires a SEF to capture telephone, instant messaging, email, extend beyond the Commission’s information that may be used in written records, and electronic statutory authority and the audit trail establishing whether rule violations communications within a trading 538 requirements currently in place in other have occurred. Absent this system or platform) that could be financial markets, and would be information, SEFs would be limited in necessary to detect, investigate, and unnecessarily costly and their ability to monitor their markets prevent customer and market abuses, as burdensome.535 WMBAA also and to detect, investigate, and prevent required by both proposed and final commented that the audit trail customer and market abuses and trading § 37.205(a). requirements must permit the retention 536 of relevant information through various Id. 533 The Commission is making certain non- 537 Better Markets Comment Letter at 18 (Mar. 8, substantive clarifications to § 37.205(a). modes because SEFs may operate trade 2011). 534 CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b– 538 CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b– 3(f)(2)(B)(ii). 535 WMBAA Comment Letter at 23 (Mar. 8, 2011). 3(f)(2)(B)(ii).

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rule violations. However, as discussed retain all audit trail data necessary to regarding the applicability of audit trail above, the Commission has removed the detect, investigate, and prevent requirements to SEFs that utilize the requirement for SEFs to offer indicative customer and market abuses.’’ It is the telephone in providing the execution quote functionality, which should Commission’s intent throughout methods in § 37.9(a)(2) applies equally reduce the costs of complying with the § 37.205 to ensure that all SEFs’ audit to SEFs that use non-telephonic means audit trail requirements.539 trails are equally comprehensive and of communication (e.g., instant In response to WMBAA’s comment effective regardless of the means of messaging or email). In all cases, the about the flexibility of audit trail interstate commerce that a SEF may operative requirement is to capture in requirements to accommodate various provide to meet the execution methods the audit trail and the transaction methods of execution, the Commission in § 37.9(a)(2)(i)(A) or (B). history database the totality of notes that proposed § 37.205(b) did not Although § 37.205 sets forth a unified communications that could be necessary discriminate based on the method of set of audit trail requirements for all to detect, investigate, and prevent execution. Given the Commission’s methods of execution, the Commission customer and market abuses. clarification that a SEF may utilize any notes that a SEF, for example, that means of interstate commerce in utilizes the telephone as a means of The Commission acknowledges the providing the execution methods in interstate commerce in providing the comment by Better Markets regarding § 37.9(a)(2)(i)(A) or (B), the Commission execution methods in § 37.9(a)(2)(i)(A) time-stamping audit trail records at emphasizes that no matter how an or (B) may comply with the audit trail intervals that are consistent with the indication of interest, request for quote, requirements by utilizing different capabilities of high-frequency traders. or order is communicated or a trade is technologies than a SEF that does not While the audit trail rules do not specify executed, an audit trail that satisfies the utilize the telephone. For example, the the granularity of time-stamped data, requirements set forth in § 37.205 must Commission believes that a SEF that the Commission believes that the audit be created. utilizes the telephone may comply with trail rules adopted herein, particularly The Commission is also making the audit trail requirements in the requirements that a SEF retain and certain conforming changes to § 37.205(a) for oral communications by maintain all data necessary to permit it § 37.205(b)(1) to harmonize its recording all such communications that to reconstruct trading, will help to provisions with the Commission’s relate to swap transactions, and all ensure that audit trail records are time- determination that a SEF may utilize communications that may subsequently stamped with the granularity necessary any means of interstate commerce in result in swap transactions. Such to reconstruct trades and investigate recordings must allow for providing the execution methods in possible trading violations, including reconstruction of communications § 37.9(a)(2)(i)(A) or (B). First, the for high-frequency trading.540 Commission is adding ‘‘indications of between the SEF and its customers; interest’’ to the items that must be reconstruction of internal and external (3) § 37.205(c)—Enforcement of Audit immediately captured in the audit trail communications involving SEF Trail Requirements pursuant to § 37.205(b)(1). Second, employees who are ascertaining or while proposed § 37.205(b)(1) required providing indications of interest, Proposed § 37.205(c)(1) required that that all executable orders or requests for requests for quotes, or orders; a SEF conduct reviews, at least quotes ‘‘be immediately entered into the reconstruction of executed transactions; annually, of its members and market trading system or platform,’’ provide evidence of any rule violations; participants to verify their compliance § 37.205(b)(1) as adopted requires that track a customer’s order; and capture with the SEF’s audit trail and such information be immediately order and trade data as required under recordkeeping requirements. Proposed ‘‘captured in the audit trail.’’ This § 37.205(a). § 37.205(c)(1) also set forth minimum approach more accurately reflects the The Commission also believes that a review criteria. Proposed § 37.205(c)(2) intent of § 37.205, whose purpose is to SEF that utilizes the telephone may required that a SEF develop a program ensure an adequate audit trail, rather comply with the original source for effective enforcement of its audit than to address the operation of a SEF’s document requirement in § 37.205(b)(1) trail and recordkeeping requirements, trading system or platform. for oral communications by retaining including a requirement that a SEF levy each recording’s original media. By Accordingly, the final rules in meaningful sanctions when deficiencies storing the recordings in a digital § 37.205(b)(1) include conforming are found. Proposed § 37.205(c)(2) also database and supplementing it with changes that remove the reference in stated that sanctions may not include additional data as necessary, the proposed § 37.205(b)(1) to orders or more than one warning letter for the requests for quotes ‘‘that are Commission believes that a SEF that utilizes the telephone may comply with same violation within a rolling twelve- executable,’’ and also remove the month period. qualification that a SEF’s obligation to the transaction history database capture information in the audit trail is requirement in § 37.205(b)(2) for oral (i) Summary of Comments dependent on whether the SEF permits communications. Additionally, the intermediation. Finally, the final rules Commission believes that a SEF that Some commenters stated that annual remove the additional audit trail utilizes the telephone may comply with audits are unnecessary and unduly requirement in proposed § 37.205(b)(1) the electronic analysis capability in for orders and requests for quotes that § 37.205(b)(3) for oral communications 540 The Commission notes, as stated above under by ensuring that its digital database of § 37.203(d)—Automated Trade Surveillance System cannot be immediately entered into the in the preamble, that the accurate time stamping of trading system or platform. These recordings is capable of being searched and analyzed. The Commission notes, data is particularly important for SEFs that use an clarifications are consistent with the RFQ System, including an RFQ System with a voice Commission’s intention in § 37.205(a) however, that § 37.205(b) does not component. For such SEFs, the accurate time that a SEF’s audit trail ‘‘capture and establish an affirmative requirement to stamping of both their Order Book and RFQ System create recordings of oral activity is critical for ensuring both that the SEF itself has a robust audit trail system and that the 539 See discussion above regarding Minimum communications if the audit trail Commission is able to monitor the SEF’s adherence Trading Functionality under § 37.3—Requirements requirements are met through other to part 37’s Order Book-RFQ System integration for Registration in the preamble. methods. The discussion above requirements.

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burdensome.541 CME commented that staff finds an actual rule violation, FXall stated that, unlike DCMs, retail annual audits of all SEF market rather than just the suspicion of a customers will not be participants on participants would be costly and violation. This change is consistent with SEFs; therefore, the same level of unproductive, and should instead apply the revisions in other sections protection afforded to DCM participants at the clearing firm level.542 discussing warning letters.545 is not required for SEFs.549 Some MarketAxess recommended that the In response to MarketAxess’s commenters recommended that the Commission require a single entity or recommendation that a single entity proposed disciplinary procedures self-regulatory organization, such as conduct the audit of each SEF market should be streamlined through the use FINRA or NFA, to conduct the audit of participant, the Commission believes of a staff summary fine program.550 each SEF market participant.543 that a SEF can monitor market Some commenters also requested that Tradeweb commented that the proposed participants on its own platform SEFs be granted greater flexibility to annual audit review requirement is not without relying upon a single cross- establish their own disciplinary required of DCMs and, as such, should market self-regulatory organization. procedures.551 Tradeweb stated that the not be required of SEFs.544 However, a SEF may use a regulatory proposed disciplinary procedures service provider pursuant to § 37.204 to would impose significant costs on SEFs (ii) Commission Determination assist it in complying with the and should be contracted to a central, The Commission is adopting requirements under § 37.205(c). third-party self-regulatory § 37.205(c) as proposed, subject to In response to Tradeweb’s comment organization.552 certain modifications as discussed that the annual audit review (ii) Commission Determination below. The Commission disagrees with requirement is not required of DCMs, commenters who assert that the annual the Commission notes that it adopted a The Commission’s evaluation of audit review requirement is similar requirement for DCMs under public comments with respect to unnecessary, unduly burdensome, § 38.553 of the Commission’s proposed § 37.206 is based on its costly, and unproductive. Through its regulations, to apply to all members and understanding that a SEF’s obligation to experience with DCMs and DCOs, the persons and firms subject to the DCM’s establish adequate disciplinary rules is Commission has learned that sampling- recordkeeping rules.546 The implicit in the statutory language of based reviews of audit trail and Commission believes that similar Core Principle 2, which requires, in recordkeeping requirements are requirements are appropriate because, part, that a SEF establish and enforce inadequate to ensure compliance with as noted above, SEFs, like DCMs, must trading, trade processing, and audit trail rules. The Commission have accurate and consistent access to participation rules to deter abuse and believes that the requirements under all data needed to reconstruct all have the capacity to investigate and § 37.205(c) are necessary to ensure that transactions in their markets, including enforce such rules.553 The Commission SEFs have accurate and consistent indications of interest, requests for also takes note of public comments access to all data needed to reconstruct quotes, orders, and trades, and to detect, requesting greater flexibility in the all transactions in their markets and to investigate, and prevent customer and application of SEF disciplinary rules. provide evidence of customer and market abuses. Accordingly, consistent with both its market abuses. Absent reliable audit statutory mandate and its evaluation of trail data, a SEF’s ability to detect or (g) § 37.206—Disciplinary Procedures the public comments received, the investigate customer or market abuses and Sanctions Commission is adopting elements of may be severely diminished. (1) § 37.206—Disciplinary Procedures § 37.206 as proposed, while also moving However, in response to commenters’ and Sanctions to guidance or eliminating other parts of concerns that the rule is burdensome, the proposed rules.554 the Commission is narrowing the scope Proposed § 37.206 addressed SEF The Commission believes that the of the proposed rule by removing the Core Principle 2’s requirement that SEFs specific disciplinary rules retained in reference to ‘‘market participants’’ and establish and enforce trading, trade the final rules are those that are instead stating that the annual audit processing, and participation rules to essential to the promotion of market review requirement only applies to deter abuse, and have the capacity to integrity by ensuring that SEF markets 547 members and those persons and firms investigate and enforce such abuses. are free of fraud or abuse, and also that are subject to the SEF’s Proposed § 37.206 provided that SEFs helping to provide basic procedural recordkeeping rules. As a result of this must establish trading, trade processing, fairness for SEF disciplinary revision, the Commission declines to and participation rules that will deter adopt CME’s recommendation to require abuses and have the capacity to enforce 549 FXall Comment Letter at 12 (Mar. 8, 2011). annual audit trail reviews only at the such rules through prompt and effective 550 MarketAxess Comment Letter at 23 (Mar. 8, clearing firm level. disciplinary action. 2011), WMBAA Comment Letter at 24 (Mar. 8, 2011); FXall Comment Letter at 12 (Mar. 8, 2011). The Commission is maintaining (i) Summary of Comments 551 FXall Comment Letter at 12 (Mar. 8, 2011); proposed § 37.205(c)(2) as a rule to ICAP Comment Letter at 6 (Mar. 8, 2011); Reuters ensure that SEFs impose meaningful Some commenters generally stated Comment Letter at 4 (Mar. 8, 2011); WMBAA sanctions for violations of audit trail that the proposed disciplinary Comment Letter at 23 (Mar. 8, 2011); State Street Comment Letter at 5 (Mar. 8, 2011). and recordkeeping rules. However, the procedures go beyond the statute and intent of Congress.548 In this regard, 552 Tradeweb Comment Letter at 10 (Mar. 8, Commission is revising the rule to 2011). Parity Energy also commented that the clarify that the limit on warning letters proposed disciplinary rules will impose 545 only applies where a SEF’s compliance See, e.g., discussion above under unnecessary costs and create unnecessary § 37.203(f)(5)—Warning Letters in the preamble. duplication and the possibility of conflicting rules. 546 Core Principles and Other Requirements for Parity Energy Comment Letter at 4 (Mar. 25, 2011). 541 Tradeweb Comment Letter at 6 (Jun. 3, 2011); Designated Contract Markets, 77 FR at 36704. 553 CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). MarketAxess Comment Letter at 22 (Mar. 8, 2011); 547 CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). 554 The Commission is also revising § 37.206 to CME Comment Letter at 33 (Feb. 22, 2011). 548 MarketAxess Comment Letter at 23 (Mar. 8, include the term ‘‘member’’ in addition to the term 542 CME Comment Letter at 33 (Feb. 22, 2011). 2011); ABC/CIEBA Comment Letter at 11 (Mar. 8, ‘‘market participant’’ in order to provide greater 543 MarketAxess Comment Letter at 22 (Mar. 8, 2011); FXall Comment Letter at 12 (Mar. 8, 2011); detail and clarity. The Commission notes, as 2011). ICAP Comment Letter at 5–6 (Mar. 8, 2011); State described above in § 37.200, that the term ‘‘market 544 Tradeweb Comment Letter at 6 (Jun. 3, 2011). Street Comment Letter at 5 (Mar. 8, 2011). participant’’ encompasses SEF ‘‘members.’’

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respondents. While the SEF NPRM notes that it views SEFs as SROs,557 implicit in the requirement to maintain noted that the SEF disciplinary with all the attendant self-regulatory adequate enforcement staff and procedures parallel those for DCMs,555 responsibilities to establish and enforce resources. the Commission has determined that the rules necessary to promote market (3) § 37.206(b)—Disciplinary Panels level of protection offered by the integrity and the protection of market proposed rules was more appropriate for participants. Such responsibilities Proposed § 37.206(b)(1) required a markets that include retail participants, include the adherence to, and SEF to establish one or more Review in contrast to SEFs, whose participants maintenance of, disciplinary Panels and one or more Hearing Panels. are limited to ECPs.556 Consequently, procedures. The Commission notes that The composition of both panels was the Commission is moving to guidance a SEF may utilize the services of a third- required to meet the composition numerous procedural protections set party regulatory service provider for requirements of proposed forth in the proposed rules that are more assistance in performing its self- § 40.9(c)(3)(ii) 558 and could not include tailored to retail participants, including regulatory functions, as provided for in any members of the SEF’s compliance the requirements relating to the issuance § 37.204. staff or any person involved in of a notice of charges, and a adjudicating any other stage of the same (2) § 37.206(a)—Enforcement Staff respondent’s right to representation, proceeding. Proposed § 37.206(b)(2) right to answer charges, and right to Proposed § 37.206(a) required that a provided that a Review Panel must be request a hearing. SEF establish and maintain sufficient responsible for determining whether a The remaining final rules provide an enforcement staff and resources to reasonable basis exists for finding a essential framework that the effectively and promptly prosecute violation of SEF rules and for Commission believes adequately possible rule violations within the SEF’s authorizing the issuance of a notice of ensures the effectiveness of a SEF’s jurisdiction. Proposed § 37.206(a) also charges. If a notice of charges is issued, disciplinary program. Accordingly, the required a SEF to monitor the size and proposed § 37.206(b)(3) provided that a Commission is maintaining the workload of its enforcement staff Hearing Panel must be responsible for proposed disciplinary rules that annually. In addition, proposed adjudicating the matter and issuing represent the most critical components § 37.206(a) included provisions to sanctions. of a disciplinary program, including the ensure the independence of the (i) Summary of Comments requirements that a SEF: (1) Establish enforcement staff and to help promote disciplinary panels that meet certain disciplinary procedures that are free of MetLife supported the proposed rule composition requirements; (2) levy potential conflicts of interest. and agreed that SEFs should maintain a meaningful disciplinary sanctions to clear separation between disciplinary (i) Commission Determination deter recidivism; and (3) issue no more bodies that recommend the issuance of than one warning letter per rolling 12- In response to the general comments charges and those responsible for month period for the same violation by requesting greater flexibility regarding adjudicating matters.559 CME stated that the same respondent. The Commission disciplinary procedures, the the Commission should not require a believes that with these modifications, Commission is moving all of the prescriptive approach to disciplinary § 37.206 strikes the appropriate balance requirements of proposed § 37.206(a) to panels, as SEFs may develop structures between providing the flexibility guidance, except for the critical that clearly satisfy the objective of the requested by the commenters and requirement that a SEF maintain core principle, but that may not ensuring that SEFs comply with their sufficient enforcement staff and precisely comply with the rule text.560 statutory obligation under Core resources. The Commission believes CME illustrated two practices it Principle 2. that sufficient enforcement staff and believed may be precluded by the text Some commenters recommended that resources are essential to the effective of proposed § 37.206(b): (1) CME’s the proposed disciplinary procedures performance of a SEF’s disciplinary Market Regulation staff determines should be streamlined through the use program and are necessary to comply whether certain non-egregious rule of a summary fine program. The with Core Principle 2. Without a violations merit referral to a Review Commission believes that, while sufficient enforcement staff and Panel and they issue warning letters on summary fines may be appropriate for resources, a SEF would be unable to an administrative basis; and (2) CME’s some disciplinary matters, such as promptly investigate and adjudicate hearing panel adjudicates a disciplinary recordkeeping violations, many potential rule violations and deter case prior to the issuance of charges disciplinary matters are dynamic and future violations. To maintain require the balancing of multiple unique consistency with the revisions to 558 Section 40.9(c)(3)(ii), as proposed, in the separate release titled Requirements for Derivatives facts and circumstances, which cannot proposed § 37.203(c)(2), the Clearing Organizations, Designated Contract be addressed through a summary fine Commission is deleting from the rule Markets, and Swap Execution Facilities Regarding program. Therefore, the Commission the reference that a SEF monitor the size the Mitigation of Conflicts of Interest, provided that declines to adopt a summary fine and workload of its enforcement staff ‘‘Each Disciplinary Panel shall include at least one person who would not be disqualified from serving program in lieu of disciplinary annually to provide greater flexibility to as a Public Director by § 1.3(ccc)(1)(i)–(vi) and (2) procedures. SEFs in determining their approach to of this chapter (a ‘‘Public Participant’’). Such Public In response to Tradeweb’s comment monitoring their enforcement resources. Participant shall chair each Disciplinary Panel. In about contracting out certain aspects of Nonetheless, the Commission believes addition, any registered entity specified in a SEF’s disciplinary functions to a paragraph (c)(3)(i) of this section shall adopt rules that a SEF’s obligation to monitor its that would, at a minimum: (A) Further preclude any central third-party, the Commission enforcement staff and resources is group or class of participants from dominating or exercising disproportionate influence on a 555 Core Principles and Other Requirements for 557 See Adaptation of Regulations to Incorporate Disciplinary Panel and (B) Prohibit any member of Swap Execution Facilities, 76 FR at 1225 n. 73. Swaps, 77 FR 66288 (Nov. 2, 2012). Section 1.3(ee) a Disciplinary Panel from participating in 556 The Commission also believes that guidance is states that a self-regulatory organization ‘‘means a deliberations or voting on any matter in which the more appropriate for the SEF disciplinary contract market (as defined in § 1.3(h)), a swap member has a financial interest.’’ 75 FR 63732, procedures because the SEF core principles do not execution facility (as defined in § 1.3(rrrr)), or a 63752 (proposed Oct. 18, 2010). have a parallel to DCM Core Principle 13, which registered futures association under section 17 of 559 MetLife Comment Letter at 6 (Mar. 8, 2011). specifically discusses disciplinary procedures. the Act.’’ Id. at 66318. 560 CME Comment Letter at 35 (Feb. 22, 2011).

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pursuant to a supported settlement basis existed for finding a violation or within which a hearing may be agreement.561 that prosecution was unwarranted, or requested. Paragraphs (1) and (2) of the (3) direct that the person or entity proposed rule permitted a SEF to adopt (ii) Commission Determination alleged to have committed a violation be rules providing that: (1) The failure to The Commission is adopting served with a notice of charges if the request a hearing within the time § 37.206(b) as proposed, subject to Review Panel determined that a prescribed in the notice, except for good certain modifications described below. reasonable basis existed for finding a cause, may be deemed a waiver of the The Commission considered violation and adjudication was right to a hearing; and (2) the failure to commenters’ views and believes that the warranted. answer or expressly deny a charge may proposed rule can be modified to be deemed to be an admission of such (i) Summary of Comments provide additional flexibility without charge. diminishing its purpose. Accordingly, CME agreed that an investigation final § 37.206(b) will require SEFs to report should include the subject’s (i) Commission Determination have one or more disciplinary panels, disciplinary history; however, CME Although no comments were received without imposing a specific requirement disagreed with the requirement in on proposed § 37.206(d), the for SEFs to maintain a Review Panel and proposed § 37.203(f) that the Commission believes that it can provide a Hearing Panel.562 However, even disciplinary history be included in the SEFs with additional flexibility by under this single-panel approach, version of the investigation report sent moving the entire rule to the guidance individuals who determine to issue to the Review Panel.563 CME believed in appendix B to part 37.565 Moreover, charges in a particular disciplinary that the disciplinary history should not since paragraphs (1) and (2) of proposed matter may not also adjudicate the be considered by the Review Panel at all § 37.206(d) allowed, but did not require, matter. Therefore, final § 37.206(b) when determining whether to issue a SEF to issue rules regarding failures to permits flexibility in the structure of formal charges, arguing that a request a hearing and expressly answer SEFs’ disciplinary bodies, but not in the participant’s disciplinary history is not or deny a charge, the Commission basic prohibition, supported by MetLife, relevant to the consideration of whether believes that the language in these against vesting the same individuals it committed a further violation of SEF paragraphs is better suited as guidance with the authority to both issue and rules.564 rather than a rule. adjudicate charges in the same matter. The modifications reflected in final (ii) Commission Determination (6) § 37.206(e)—Right to Representation § 37.206(b), together with the revisions In response to the general comments Proposed § 37.206(e) provided for a made to the text of proposed § 37.206(d) requesting greater flexibility, the respondent’s right, upon receiving a that will now be included as guidance, Commission is eliminating all of notice of charges, to be represented by as discussed below, provide additional proposed § 37.206(c) except for legal counsel or any other representative flexibility by permitting SEFs to rely on paragraph (3) of the proposed rule. In of its choosing in all succeeding stages their authorized compliance staff, rather addition, the Commission is adding of the disciplinary process. language to paragraph (3) to provide than on a disciplinary panel, to issue (i) Summary of Comments disciplinary charges. However, the SEFs with the flexibility to allow Commission notes that the adjudication authorized compliance staff to review CME commented that this rule should of charges must still be performed by a an investigation report and determine be limited to avoid conflicts of interest disciplinary panel. whether a notice of charges should be in representation and, accordingly, Finally, the Commission is adopting issued in a particular matter. The requested that the rule be revised to the composition and conflicts Commission is also revising the text of clarify that a respondent may not be requirements for disciplinary panels paragraph (3) to follow the single-panel represented by: (1) A member of the with one modification, by replacing the approach provided for in § 37.206(b). SEF’s disciplinary committees; (2) a reference to § 40.9(c)(3)(ii) with a Proposed § 37.206(c)(3), with the member of the SEF’s Board of Directors; reference to the more general ‘‘part 40 revisions described above, is being (3) an employee of the SEF; or (4) a of this chapter’’ to accommodate any re- incorporated into proposed § 37.206(d). person substantially related to the enumeration that may occur with As described below, all of proposed underlying investigation, such as a respect to proposed § 40.9(c)(3)(ii). § 37.206(d) is being moved to the material witness or other respondent.566 guidance in appendix B to part 37. (4) § 37.206(c)—Review of Investigation (ii) Commission Determination Report (5) § 37.206(d)—Notice of Charges The Commission is moving proposed Proposed § 37.206(c) required a Proposed § 37.206(d) described the § 37.206(e) in its entirety to the Review Panel to promptly review an minimally acceptable contents of a guidance in appendix B to part 37, investigation report received pursuant notice of charges issued by a Review subject to the following modification. to proposed § 37.203(f)(3), and to take Panel. Specifically, proposed The Commission is amending the one of the following actions within 30 § 37.206(d) provided that a notice of language to incorporate CME’s days of receipt: (1) Promptly direct charges must adequately state the acts, recommendation. The guidance states compliance staff to conduct further conduct, or practices in which the that upon being served with a notice of investigation if the Review Panel respondent is alleged to have engaged; charges, a respondent should have the determined that additional investigation state the rule(s) alleged to have been right to be represented by legal counsel or evidence was needed, (2) direct that violated; advise the respondent that he or any other representative of its no further action be taken if the Review is entitled, upon request, to a hearing on choosing in all succeeding stages of the Panel determined that no reasonable the charges; and prescribe the period disciplinary process, except by any

561 Id. 563 CME Comment Letter at 35 (Feb. 22, 2011). 565 As mentioned above, the Commission is 562 The Commission notes that it is replacing 564 Id. While the Commission largely agrees with moving paragraph (3) of proposed § 37.206(c) to the specific panel names (i.e., Review Panel and CME’s comment, the Commission directs interested text of proposed § 37.206(d) that will now be Hearing Panel) with a generic reference to the parties to § 37.203(f) for a further discussion of the included as guidance. ‘‘disciplinary panel’’ throughout part 37. required components of investigation reports. 566 CME Comment Letter at 35 (Feb. 22, 2011).

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member of the SEF’s board of directors respondent will be deemed to have even within the guidance, the or disciplinary panel, any employee of accepted the sanction. Commission is also removing the the SEF, or any person substantially proposed rule’s reference to a SEF’s (i) Commission Determination related to the underlying investigations, ability to limit hearings to only those such as a material witness or Although the Commission did not charges denied and/or sanctions set by respondent. The Commission believes receive comments on proposed the Hearing Panel under proposed that this revision appropriately § 37.206(g), the Commission is moving § 37.206(g) for which a hearing has been addresses the conflicts of interest noted the entire rule, with certain requested. by CME. modifications, to the guidance in appendix B to part 37.568 Given that (10) § 37.206(i)—Settlement Offers (7) § 37.206(f)—Answer to Charges proposed § 37.206(g) allowed, but did Proposed § 37.206(i) provided the Proposed § 37.206(f) required that a not require, a SEF to issue rules procedures that a SEF must follow if it respondent be given a reasonable period regarding a respondent’s admission or permits the use of settlements to resolve of time to file an answer to a notice of failure to deny charges, the Commission disciplinary cases. Paragraph (1) of the charges. The proposed rule also believes that the proposed rule is better proposed rule stated that the rules of a provided that the rules of a SEF may suited as guidance rather than a rule. SEF may permit a respondent to submit prescribe certain aspects of the answer, The Commission also believes that a written offer of settlement any time which were enumerated in paragraphs adopting the proposed rule as guidance, after the investigation report is (1) through (3).567 rather than a rule, will provide SEFs completed. The proposed rule also greater flexibility in administering their permitted the disciplinary panel (i) Commission Determination obligations, consistent with the general presiding over the matter to accept the Although no comments were received comments seeking the same. offer of settlement, but prohibited the on proposed § 37.206(f), the Furthermore, the Commission is panel from altering the terms of the offer Commission is moving the entire rule to modifying the text of proposed unless the respondent agreed. In the guidance in appendix B to part 37, § 37.206(g)(2) that will now be included addition, paragraph (2) of the proposed with certain modifications, in order to as guidance to clarify that a respondent rule provided that the rules of the SEF provide SEFs with greater flexibility to may request a hearing ‘‘within the may allow a disciplinary panel to adopt their own disciplinary period of time, which should be stated permit the respondent to accept a procedures. The Commission is also in the notice.’’ sanction without admitting or denying condensing the guidance by replacing (9) § 37.206(h)—Denial of Charges and the rule violations upon which the paragraphs (1) through (3) with language Right to Hearing sanction is based. making clear that any rules adopted by Proposed § 37.206(h) required that in Paragraph (3) of the proposed rule a SEF governing the requirements and every instance where a respondent has stated that a disciplinary panel timeliness of a respondent’s answer to a requested a hearing on a charge that is accepting a settlement offer must issue notice of charges should be ‘‘fair, denied, or on a sanction set by the a written decision specifying the rule equitable, and publicly available.’’ Hearing Panel pursuant to proposed violations it has reason to believe were (8) § 37.206(g)—Admission or Failure § 37.206(g), the respondent must be committed, and any sanction imposed, To Deny Charges given the opportunity for a hearing in including any order of restitution where customer harm has been demonstrated. Proposed § 37.206(g) provided that a accordance with the requirements of proposed § 37.206(j). Proposed Paragraph (3) also provided that if an SEF may adopt rules whereby a offer of settlement is accepted without respondent who admits or fails to deny § 37.206(h) also gave SEFs the option to adopt rules that provided, except for the agreement of a SEF’s enforcement any of the charges alleged in the notice good cause, the hearing must be staff, then the decision must adequately of charges may be found by the Hearing concerned only with those charges support the Hearing Panel’s acceptance Panel to have committed the violations denied and/or sanctions set by the of the settlement. Finally, paragraph (4) charged. If a SEF adopted such rules, Hearing Panel under proposed of the proposed rule allowed a paragraphs (1) through (3) of the § 37.206(g) for which a hearing has been respondent to withdraw his or her offer proposed rule provided that: (1) The requested. of settlement at any time before final Hearing Panel must impose a sanction acceptance by a disciplinary panel. If an for each violation found to have been (i) Commission Determination offer is withdrawn after submission, or committed; (2) the Hearing Panel must The Commission received no is rejected by a disciplinary panel, the promptly notify the respondent in comments on proposed § 37.206(h), but respondent must not be deemed to have writing of any sanction to be imposed is moving the entire rule, with certain made any admissions by reason of the and advise the respondent that it may modifications, to the guidance in offer of settlement and must not be request a hearing on such sanction appendix B to part 37.569 In order to otherwise prejudiced by having within a specified period of time; and provide SEFs with further flexibility, submitted the offer of settlement. (3) the rules of the SEF may provide that (i) Commission Determination if the respondent fails to request a 568 The Commission notes that the text that will hearing within the period of time now be included as guidance is being modified to Although the Commission received no specified in the notice, then the reflect the single-panel approach adopted in § 37.206(b), replacing specific panel names with a comments on proposed § 37.206(i), the generic reference to the ‘‘disciplinary panel.’’ Commission is moving the entire rule, 567 These aspects were that: (1) The answer must 569 The Commission is revising the proposed rule with certain modifications, to the be in writing and include a statement that the to reflect the single-panel approach adopted in guidance in appendix B to part 37.570 respondent admits, denies, or does not have and is § 37.206(b), replacing specific panel names with a unable to obtain sufficient information to admit or generic reference to the ‘‘disciplinary panel.’’ The deny each allegation; (2) failure to file an answer Commission is also removing the references to 570 The Commission notes that the text that will on a timely basis shall be deemed an admission of proposed §§ 37.206(g) and (j) given that the now be included as guidance is being modified to all allegations in the notice of charges; and (3) Commission is moving proposed § 37.206(g) to reflect the single-panel approach adopted in failure in an answer to deny expressly a charge guidance, and either eliminating or moving certain § 37.206(b), replacing specific panel names with a shall be deemed to be an admission of such charge. provisions of proposed § 37.206(j) to guidance. generic reference to the ‘‘disciplinary panel.’’

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The Commission believes that adopting of the hearing be made and be a part of (13) § 37.206(l)—Right to Appeal 572 the proposed rule as guidance, rather the record of the proceeding. The Proposed § 37.206(l) provided the than a rule, will provide SEFs greater Commission is eliminating proposed procedures that a SEF must follow in flexibility in administering their § 37.206(j)(1)(vii), a discretionary rule the event that the SEF’s rules permit an obligations, consistent with the general that in certain cases allowed for the cost appeal. For SEFs that permit appeals, comments seeking the same. of transcribing the record of the hearing the language in paragraphs (1) through Furthermore, the Commission is to be borne by the respondent. The (4) of proposed § 37.206(l) generally revising the guidance text to make it Commission is moving the remainder of required the SEF to: (1) Establish an consistent with its modifications to the proposed § 37.206(j) to the guidance in appellate panel; (2) ensure that the customer restitution provisions adopted appendix B to part 37. The Commission appellate panel composition is below with respect to proposed believes that these revisions are consistent with § 40.9(c)(iv) and not § 37.206(n). appropriate given commenters’ requests include any members of the SEF’s (11) § 37.206(j)—Hearings for greater flexibility to establish their compliance staff or any person involved in adjudicating any other stage of the Proposed § 37.206(j) required a SEF to own disciplinary procedures. same proceeding; (3) conduct the appeal adopt rules that provide certain The Commission agrees with CME’s solely on the record before the Hearing minimum procedural safeguards for any comment that a SEF should be Panel, except for good cause shown; and hearing conducted pursuant to a notice permitted to withhold certain (4) issue a written decision of the board of charges. In general, proposed documents from a respondent in certain of appeals and provide a copy to the §§ 37.206(j)(1)(i) through (j)(1)(vii) circumstances. Therefore, the respondent. required the following: (i) A fair Commission is revising the text of hearing; (ii) authority for a respondent proposed § 37.206(j)(1)(ii), which will (i) Commission Determination to examine evidence relied on by now be included in guidance, to provide Although the Commission received no enforcement staff in presenting the that a SEF may withhold documents comments on proposed § 37.206(l), the charges; (iii) the SEF’s enforcement and that: (i) Are privileged or constitute Commission is moving the entire rule to compliance staffs to be parties to the attorney work product; (ii) were the guidance in appendix B to part hearing and the enforcement staff to prepared by an employee of the SEF but 37.574 Given that proposed § 37.206(l) present its case on the charges and will not be offered in evidence in the allowed, but did not require, a SEF to sanctions; (iv) the respondent to be disciplinary proceedings; (iii) may issue rules regarding a respondent’s entitled to appear personally at the disclose a technique or guideline used right to appeal, the Commission believes hearing, to cross-examine and call in examinations, investigations, or that the proposed rule is better suited as witnesses, and to present evidence; (v) enforcement proceedings; or (iv) guidance rather than a rule. The the SEF to require persons within its disclose the identity of a confidential Commission also believes that adopting jurisdiction who are called as witnesses source. the proposed rule as guidance, rather to participate in the hearing and than a rule, will provide SEFs greater produce evidence; (vi) a copy of the (12) § 37.206(k)—Decisions flexibility in administering their hearing be made and be a part of the Proposed § 37.206(k) required a obligations, consistent with the general record of the proceeding if the Hearing Panel, promptly following a comments seeking the same. respondent requested the hearing; and (vii) the rules of the SEF may provide hearing conducted in accordance with (14) § 37.206(m)—Final Decisions that the cost of transcribing the record proposed § 37.206(j), to render a written Proposed § 37.206(m) required that be borne by the respondent in certain decision based upon the weight of the each SEF establish rules setting forth circumstances. Additionally, proposed evidence and to provide a copy to the when a decision rendered under § 37.206(j)(2) specified that the rules of respondent. Paragraphs (1) through (6) § 37.206 will become the final decision the SEF may provide that a sanction be detailed the items to be included in the of the SEF. summarily imposed upon any person decision. (i) Commission Determination within its jurisdiction whose actions (i) Commission Determination impede the progress of a hearing. Although the Commission received no The Commission received no comments on proposed § 37.206(m), the (i) Summary of Comments comments on proposed § 37.206(k) and Commission is moving the entire rule to CME recommended that proposed is adopting the rule as proposed with § 37.206(j)(1)(ii) be revised so that a certain non-substantive clarifications.573 574 The Commission notes that the reference to respondent may not access protected § 40.9(c)(iv) in the proposed rule was a technical error. Instead, proposed § 37.206(l) should have attorney work product, attorney-client 572 The Commission is renumbering proposed referenced the composition requirements of an communications, and investigative work § 37.206(j) to § 37.206(c). The Commission is also appellate panel outlined in proposed product (e.g., investigation and revising the proposed rule to reflect the single-panel § 40.9(c)(3)(iii). However, to accommodate any re- exception reports).571 approach adopted in § 37.206(b), replacing specific enumeration that may occur with respect to panel names with a generic reference to the proposed § 40.9(c)(3)(iii), the Commission is (ii) Commission Determination ‘‘disciplinary panel.’’ The Commission is also replacing the mistaken reference to § 40.9(c)(iv) revising the reference to § 37.206(l) in proposed with a more general reference to part 40 in the The Commission is partially adopting § 37.206(j)(1)(vi) given that it is moving proposed guidance text. See Requirements for Derivatives proposed § 37.206(j), and is either § 37.206(l) to guidance. Clearing Organizations, Designated Contract eliminating or moving to guidance the 573 The Commission is renumbering proposed Markets, and Swap Execution Facilities Regarding § 37.206(k) to § 37.206(d). The Commission is also the Mitigation of Conflicts of Interest, 75 FR 63732, remaining portion of the rule. The revising the reference to § 37.206(j) in proposed 63752 (proposed Oct. 18, 2010). The Commission is Commission is maintaining as a rule the § 37.206(k) given that the Commission has either also revising the reference to § 37.206(k) in provisions requiring the following: (1) eliminated or moved to guidance many of the proposed § 37.206(l)(4) to § 37.206(d) given the Hearings must be fair; and (2) if a provisions of proposed § 37.206(j). The Commission renumbering in § 37.206. Finally, the Commission is also revising the proposed rule to reflect the is revising the proposed rule to reflect the single- respondent requested a hearing, a copy single-panel approach adopted in § 37.206(b), panel approach adopted in § 37.206(b), replacing replacing specific panel names with a generic specific panel names with a generic reference to the 571 CME Comment Letter at 36 (Feb. 22, 2011). reference to the ‘‘disciplinary panel.’’ ‘‘disciplinary panel.’’

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the guidance in appendix B to part 37. sanctions may not be recognized and (i) Summary of Comments The Commission believes that adopting enforced consistently across SEFs. CME objected to the restriction of one the proposed rule as guidance rather However, each SEF is a distinct entity warning letter per rolling 12-month than a rule provides a SEF with with its own rulebook and set of period.582 MarketAxess also requested additional flexibility to establish disciplinary procedures. Therefore, each that the Commission adopt a uniform disciplinary procedures to meet its SEF must determine the sanctions that approach with respect to warning obligations pursuant to Core Principle 2. are appropriate for its own market and letters, either permitting warning letters (15) § 37.206(n)—Disciplinary Sanctions thus the same conduct may result in as a sanction or an indication of a different sanctions at different SEFs. finding of a violation in all SEF Proposed § 37.206(n) required that The Commission does not believe that contexts.583 disciplinary sanctions imposed by a SEF such sanction variation supports the must be commensurate with the mandatory recognition of sanctions (ii) Commission Determination violations committed and must be across SEFs. However, if a SEF believes The Commission is partially adopting clearly sufficient to deter recidivism or that it is important to recognize and proposed § 37.206(o) and is converting similar violations by other market enforce sanctions against market the remaining portion of the rule to participants. In addition, the proposed participants imposed by other SEFs or guidance in appendix B to part 37.584 rule required that a SEF take into DCMs, then the SEF may implement The Commission is maintaining as a account a respondent’s disciplinary appropriate rules. rule the provision in the proposed rule history when evaluating appropriate The Commission agrees with that prohibits a SEF from issuing more sanctions. The proposed rule further WMBAA that any disciplinary sanction than one warning letter per rolling 12- required that in the event of imposed by a SEF should be published month period for the same violation. As demonstrated customer harm, any and made available to market discussed above, the Commission disciplinary sanction must include full participants. Commission Regulation believes that in order to ensure that customer restitution. 9.11(a) requires that ‘‘[w]henever an warning letters serve as effective (i) Summary of Comments exchange decision pursuant to which a deterrents, and to preserve the value of disciplinary sanctions, no more than WMBAA recommended that any disciplinary action or access denial one warning letter may be issued to the limitation of a market participant’s action is to be imposed has become same person or entity found to have access to a SEF imposed in response to final, the exchange must, within thirty committed the same rule violation a rule violation should be recognized days thereafter, provide written notice within a rolling 12-month period.585 and enforced consistently among all of such action to . . . the 580 While a warning letter may be SEFs.575 WMBAA also recommended Commission ....’’ The appropriate for a first-time violation, the that any disciplinary sanction imposed Commission has issued guidance that an Commission does not believe that more by a SEF should be published and made exchange may comply with § 9.11(a) by than one warning letter in a rolling 12- available to market participants.576 Such transmitting or delivering the notice to month period for the same violation is requirements, WMBAA argued, are NFA to be included in NFA’s Background Affiliation Status ever appropriate.586 necessary in order to prevent market However, in response to participants from gaming the system Information Center database, which is available to the public online.581 The MarketAxess’s comment, the and maintaining access to markets after Commission is narrowing the violations.577 Commission also notes that a SEF may adopt rules regarding the publishing of application of this rule to warning (ii) Commission Determination disciplinary sanctions imposed by the letters that contain an affirmative The Commission is adopting SEF. finding that a rule violation has occurred. Additionally, in order to proposed § 37.206(n), subject to certain (16) § 37.206(o)—Summary Fines for provide flexibility, the compliance date modifications.578 The Commission is Violations of Rules Regarding Timely of this rule will be one year from the revising proposed § 37.206(n) to clarify Submission of Records effective date of the final SEF rules so that a respondent’s disciplinary history that persons and entities may adapt to should be taken into account in all Proposed § 37.206(o) permitted a SEF the new SEF regime. The Commission is sanction determinations, including to adopt a summary fine schedule for converting the remainder of proposed sanctions imposed pursuant to an violations of rules relating to the timely § 37.206(o) to guidance in appendix B to accepted settlement offer. Furthermore, submission of accurate records required part 37 because the proposed rule the Commission is revising proposed for clearing or verifying each day’s transactions. Under the proposed rule, a allowed, but did not require, a SEF to § 37.206(n) so that it does not require adopt a summary fine schedule. customer restitution if the amount of SEF may permit its compliance staff to restitution or the recipient cannot be summarily impose minor sanctions (17) § 37.206(p)—Emergency reasonably determined.579 against persons within the SEF’s Disciplinary Actions jurisdiction for violating such rules. The The Commission acknowledges Proposed § 37.206(p) provided that a proposed rule made clear that a SEF’s WMBAA’s comment that disciplinary SEF may impose a sanction, including summary fine schedule must not permit 575 WMBAA Comment Letter at 23 (Mar. 8, 2011). more than one warning letter in a rolling 582 CME Comment Letter at 36 (Feb. 22, 2011). 576 Id. 12-month period for the same violation 583 MarketAxess Comment Letter at 36 (Mar. 8, 577 Id. at 24. before sanctions are imposed and must 2011). 578 The Commission is renumbering proposed provide for progressively larger fines for 584 The Commission is renumbering proposed § 37.206(n) to § 37.206(e). recurring violations. § 37.206(o) to § 37.206(f). The Commission is also 579 The Commission notes that commenters to the retitling this section as ‘‘Warning letters.’’ DCM rulemaking requested this change and, after 585 For purposes of this rule, the Commission considering the comments, the Commission 580 Section 37.2 states that a SEF shall comply does not consider a ‘‘reminder letter’’ or such other believes that this revision should also be applicable with part 9 of the Commission’s regulations. similar letter to be any different than a warning to SEFs. Core Principles and Other Requirements 581 NFA’s Background Affiliation Status letter. for Designated Contract Markets, 77 FR at 36654– Information Center database is available at http:// 586 See Core Principles and Other Requirements 55. www.nfa.futures.org/basicnet/. for Swap Execution Facilities, 76 FR at 1224.

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a suspension, or take other summary pursuant to its own rules.591 SEFs should have in place appropriate action against a person or entity subject MarketAxess also noted that proposed systems and controls to identify and to its jurisdiction upon a reasonable § 37.207 is identical to proposed manage situations where the market or belief that such immediate action is § 37.200(d) and therefore is individual swap contract may be necessary to protect the best interest of unnecessary.592 WMBAA commented susceptible to manipulation or fraud.597 the marketplace. The proposed rule also that there is no statutory basis to impose GFI commented that once the provided that any emergency action the requirement in proposed Commission has declared a swap taken by the SEF must be in accordance § 37.207.593 subject to mandatory clearing, a SEF with certain procedural safeguards as should not be required to ensure that (2) Commission Determination enumerated in the proposed rule.587 the contract is not readily susceptible to The Commission agrees with manipulation since such activity would (i) Commission Determination MarketAxess that proposed § 37.207 is be redundant.598 According to GFI, the Although the Commission received no identical to § 37.200(d) and is therefore Commission would not make a swap comments on proposed § 37.206(p), the eliminating proposed § 37.207. In subject to mandatory clearing unless it Commission is moving the entire rule to response to WMBAA’s comment, the believed that the swap is not subject to the guidance in appendix B to part 37 Commission notes that § 37.200(d) manipulation.599 because it is a discretionary rule.588 The recites the statutory text of Core Commission also believes that adopting Principle 2 and thus provides the (b) Commission Determination the proposed rule as guidance, rather statutory basis for codification of the The Commission is adopting § 37.301 than a rule, will provide SEFs greater statutory text as a regulation.594 To as proposed, subject to certain flexibility in administering their address FXall’s and MarketAxess’s modifications for clarity. The obligations, consistent with the general concerns, the Commission clarifies that Commission is deleting from the rule comments seeking the same. a SEF’s rules pursuant to § 37.200(d) the references to prior approval or self- The Commission is also codifying need only apply to swaps executed on certification for new product new § 37.206(g) 589 (titled ‘‘Additional or pursuant to the rules of that SEF. submissions under part 40 of the sources for compliance’’) that permits Commission’s regulations because those 3. Subpart D—Core Principle 3 (Swaps SEFs to refer to the guidance and/or details are covered under § 37.4 and part Not Readily Susceptible to acceptable practices in appendix B to 40. The Commission is also adding to Manipulation) part 37 to demonstrate to the the rule a reference to the guidance and/ Commission compliance with the Core Principle 3 requires that a SEF or acceptable practices in appendix B to requirements of § 37.206. permit trading only in swaps that are part 37. This reference was not readily susceptible to inadvertently omitted from the SEF (h) § 37.207—Swaps Subject to 595 manipulation. In the SEF NPRM, the NPRM. Mandatory Clearing Commission proposed to codify the In response to GFI’s comments, the Proposed § 37.207 required that a SEF statutory text of Core Principle 3 in Commission notes that section 5h of the provide rules that when a swap dealer proposed § 37.300, and adopts that rule Act requires that a SEF permit trading or major swap participant enters into or as proposed. only in swaps that are not readily facilitates a swap transaction subject to To demonstrate to the Commission susceptible to manipulation.600 The the mandatory clearing requirement compliance with Core Principle 3, Commission notes that this is a separate under section 2(h) of the Act, the swap proposed § 37.301 required a SEF to and distinct requirement for a SEF to dealer or major swap participant shall submit new swap contracts in advance comply with, as opposed to the be responsible for complying with the to the Commission pursuant to part 40 Commission determination as to mandatory trading requirement under of the Commission’s regulations, and whether a swap is subject to mandatory section 2(h)(8) of the Act. provide to the Commission the clearing. The Commission does not have information required under appendix C the authority under CEA section 4(c)(1) (1) Summary of Comments to part 38. The Commission also to exempt SEFs from complying with FXall stated that proposed § 37.207 proposed guidance for compliance with the core principles. could be read to require a SEF to be Core Principle 3 under appendix B to The Commission notes that the responsible for policing the conduct of part 37, which noted the importance of requirement that a SEF permit trading in swap dealers and major swap the reference price for a swap contract. swaps that are not readily susceptible to participants generally, and not only The guidance also stated that Core manipulation requires a SEF to be with respect to their trading on such Principle 3 requires that the reference responsible for the terms and conditions SEF.590 In this regard, MarketAxess price used by a swap not be readily of the swap contracts which trade on its stated that a SEF’s obligation to require susceptible to manipulation. facility. To meet this requirement, the swap dealers and major swap (a) Summary of Comments 596 participants to comply with the Susceptible to Manipulation. The Commission has mandatory trading requirement should Reuters generally supported Core addressed Argus’s comments in the DCM final Principle 3, and the requirement that rulemaking, Core Principles and Other only extend to swaps that are executed Requirements for Designated Contract Markets, 77 FR at 36633–34. The Commission also notes that in 587 The Commission notes that, pursuant to § 9.11 591 MarketAxess Comment Letter at 34 (Mar. 8, CME’s SEF rulemaking comment letter dated Mar. and § 37.2, SEFs must provide the Commission with 2011). 8, 2011 and DCM rulemaking comment letter dated notice of any disciplinary actions that they take, 592 Id. Feb. 22, 2011, it commented on the Commission’s including emergency disciplinary actions. 593 WMBAA Comment Letter at 24 (Mar. 8, 2011). guidance in appendix C to part 38. The Commission 588 The Commission is also revising the reference 594 CEA section 5h(f)(2)(D); 7 U.S.C. 7b–3(f)(2)(D). has also addressed CME’s comments in the DCM to § 37.206(j) in proposed § 37.206(p)(ii) given that 595 CEA section 5h(f)(3); 7 U.S.C. 7b–3(f)(3). final rulemaking, Core Principles and Other Requirements for Designated Contract Markets, 77 the Commission has either eliminated or moved to 596 The Commission notes that in Argus’s joint FR at 36632–34. guidance many of the provisions of proposed DCM and SEF rulemaking comment letter dated 597 § 37.206(j). Feb. 22, 2011, it commented on Core Principle 3 Reuters Comment Letter at 5 (Mar. 8, 2011). 589 The Commission notes that this paragraph’s and specifically, the Commission’s guidance in 598 GFI Comment Letter at 4–5 (Mar. 8, 2011). numbering is due to the renumbering of § 37.206. appendix C to part 38—Demonstration of 599 Id. at 5. 590 FXall Comment Letter at 11 (Mar. 8, 2011). Compliance That a Contract is Not Readily 600 CEA section 5h(f)(3); 7 U.S.C. 7b–3(f)(3).

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guidance includes items that a SEF prevent manipulation, price distortions movements,’’ ‘‘unusual trading should consider in developing swap and, where possible, disruptions of the volumes,’’ and ‘‘impairments to market contract terms and conditions for both delivery or cash-settlement process. liquidity’’ does not provide a SEF with physical delivery and cash-settled Proposed § 37.401(b) required a SEF to sufficient clarity with respect to what contracts. The Commission recognizes monitor and evaluate general market specific capabilities satisfy the that a SEF may permit trading in a wide data in order to detect and prevent standard.608 Similarly, ICE requested range of swaps, some standardized and manipulative activity that would result that the Commission delete the phrase others customized and complex. The in the failure of the market price to ‘‘impairments to market liquidity’’ from Commission staff is available to consult reflect the normal forces of supply and the rule, arguing that the wording is with SEFs should questions arise demand. Proposed § 37.401(c) required vague and has no foundation in the core regarding the information that SEFs a SEF to have the capacity to conduct principle.609 should submit to the Commission to real-time monitoring of trading and satisfy the requirements of Core comprehensive and accurate trade ICE and CME also expressed concern Principle 3, especially for the SEF’s reconstruction. Further, the proposed regarding the real-time monitoring of 610 more customized and complex swap rule required that intraday trade position limits. ICE stated that real- contracts. The Commission will take monitoring must include the capacity to time monitoring of position limits may into account these considerations when detect abnormal price movements, be flawed given that option deltas determining whether a SEF satisfies the unusual trading volumes, impairments change throughout the day, the requirements of Core Principle 3. to market liquidity, and position-limit destination of allocated and give-up transactions are not immediately 4. Subpart E—Core Principle 4 violations. Finally, proposed § 37.401(d) required a SEF to have either manual known, and off-exchange transactions (Monitoring of Trading and Trade 611 Processing) processes or automated alerts that are may not be reported in real-time. effective in detecting and preventing CME stated that effective real-time Under Core Principle 4, a SEF must trading abuses. The Commission noted monitoring of position limits is establish and enforce rules or terms and in the SEF NPRM preamble that it challenging given that the identical conditions defining, or specifications would be difficult, if not impossible, for contract will frequently trade in detailing trading procedures to be used a SEF to monitor for market disruptions multiple competitive venues.612 in entering and executing orders traded in markets with high transaction volume In response to the Commission’s on or through the facilities of the SEF and a large number of trades unless the and procedures for trade processing of questions in the SEF NPRM regarding SEF installed automated trading high frequency trading, CME raised swaps on or through the facilities of the alerts.603 SEF.601 Core Principle 4 also requires a concerns over the absence of a SEF to monitor trading in swaps to (1) Summary of Comments definition for high frequency trading, prevent manipulation, price distortion, Several commenters sought which CME claimed can include many 613 and disruptions of the delivery or cash clarification that proposed § 37.401 different trading strategies. CME settlement process through surveillance, limits a SEF’s oversight of market questioned whether the Commission compliance, and disciplinary practices participant activity to its own SEF.604 had unique concerns about high and procedures, including methods for Tradeweb, for example, commented that frequency traders, and further remarked conducting real-time monitoring of a SEF cannot ensure that a marketplace that the Commission has not articulated trading and comprehensive and accurate other than its own has not been what purpose would be served by trade reconstructions.602 In the SEF manipulated to affect the SEF’s swaps singling out high frequency trading for NPRM, the Commission proposed to because the SEF will not have enough special monitoring.614 CME stated, codify the statutory text of Core information about the other however, that it has the capability to Principle 4 in proposed § 37.400, and marketplaces.605 monitor the messaging frequency of adopts that rule as proposed. WMBAA requested that the participants in their markets and can As discussed above under Core Commission clarify what it means by quickly and easily identify which Principle 3, the Commission recognizes ‘‘individual traders’’ and ‘‘market participants generate high messaging that a SEF may permit trading in a wide activity’’ in proposed § 37.401(a).606 traffic.615 With respect to the ability of range of swaps, some standardized and WMBAA also sought clarification automated trading systems to detect and others customized and complex. The regarding what constitutes ‘‘general flag high frequency trading anomalies, Commission staff is available to consult market data’’ in proposed § 37.401(b).607 CME commented that it is unclear what with SEFs should questions arise CME commented that the specific types of anomalies would be regarding how to satisfy the Commission’s requirements for real- uniquely of concern in the context of a requirements of Core Principle 4, time monitoring in proposed § 37.401(c) high frequency trader as opposed to any especially for the SEF’s more are overly broad, and stated that other type of trader.616 CME noted that customized and complex swap requiring real-time monitoring its systems were designed to identify contracts. The Commission will take capabilities across every instrument for anomalies or transaction patterns that into account these considerations when vague terms such as ‘‘abnormal price determining whether a SEF satisfies the violate their rules or might otherwise be requirements of Core Principle 4. 603 Core Principles and Other Requirements for 608 CME Comment Letter at 24 (Feb. 22, 2011). Swap Execution Facilities, 76 FR at 1227. (a) § 37.401—General Requirements 609 ICE Comment Letter at 4 (Mar. 8, 2011). 604 Bloomberg Comment Letter 3–4 (Jun. 3, 2011); 610 Proposed § 37.401(a) required a SEF Parity Energy Comment Letter at 4 (Mar. 25, 2011); ICE Comment Letter at 4 (Mar. 8, 2011); CME Comment Letter at 24 (Feb. 22, 2011). to collect and evaluate data on Tradeweb Comment Letter at 11 (Mar. 8, 2011); MarketAxess Comment Letter at 22 (Mar. 8, 2011); 611 ICE Comment Letter at 4 (Mar. 8, 2011). individual traders’ market activity on an WMBAA Comment Letter at 25 (Mar. 8, 2011). 612 CME Comment Letter at 24 (Feb. 22, 2011). ongoing basis in order to detect and 605 Tradeweb Comment Letter at 11 (Mar. 8, 613 Id. at 25. 2011). 614 Id. 601 CEA section 5h(f)(4); 7 U.S.C. 7b–3(f)(4). 606 WMBAA Comment Letter at 25 (Mar. 8, 2011). 615 Id. 602 Id. 607 Id. 616 Id.

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indicative of some other risk to the price for its swaps as compared to the frequency trading. The Commission is orderly functioning of the markets.617 prices on its markets. encouraged that there are efforts The Commission is also revising the underway both within and outside of (2) Commission Determination rule to clarify that: (a) Real-time the Commission, to define and develop The Commission is adopting § 37.401 monitoring is to detect and, when approaches for better monitoring of as proposed, subject to certain necessary, resolve abnormalities; and (b) high-frequency and algorithmic trading. modifications, including converting reconstructing trading activity is to This is particularly evident from recent portions of the rule to guidance in detect instances or threats of work done at the request of the appendix B to part 37.618 manipulation, price distortion, and Commission’s Technology Advisory To address commenters’ concerns disruptions. Committee (‘‘TAC’’).622 Further, the whether § 37.401 requires a SEF to In the guidance, the Commission is United Kingdom government’s Foresight monitor market activity beyond its own clarifying that monitoring of trading Project also commissioned a recently market, the Commission notes that the activity in listed swaps should be released report on the future of Act requires a SEF to monitor trading in designed to prevent manipulation, price computer trading in financial markets, distortion, and disruptions. The swaps to prevent manipulation, price which aims to assess the risks and Commission believes that SEFs should distortion, and disruptions of the benefits of automated buying and have rules in place that allow it to 623 delivery or cash settlement process.619 selling. These efforts may assist the intervene to prevent or reduce market Given this statutory requirement, there Commission’s further development of a disruptions given such requirement in are certain instances where a SEF must regulatory framework for high frequency Core Principle 4. The Commission also monitor market activity beyond its own trading activities. notes that once a threatened or actual market.620 As noted below, a SEF must disruption is detected, the SEF should (b) § 37.402—Additional Requirements assess whether trading in a third-party take steps to prevent the disruption or for Physical-Delivery Swaps index or instrument used as a reference reduce its severity. price or the underlying commodity for Proposed § 37.402 required, for In the guidance, the Commission is physical-delivery swaps, that a SEF its listed swaps is being used to affect also clarifying what activities should be 621 monitor each swap’s terms and prices on its market. The included in real-time monitoring as Commission, however, provides conditions, monitor the adequacy of compared to what activities may be deliverable supplies, assess whether flexibility to SEFs by not prescribing in done on a T+1 basis. The Commission the regulations the specific methods for supplies are available to those making believes that monitoring of price physical delivery and saleable by those monitoring. To provide additional movements and trading volumes in flexibility, in instances where a SEF can taking delivery, and monitor the order to detect, and when necessary, ownership of deliverable supplies. demonstrate to the Commission that resolve abnormalities should be trading activity off the SEF’s facility is Proposed § 37.402 also required that a accomplished in real time in order to SEF address any conditions that are not relevant to threats of manipulation, achieve, as much as possible, the causing price distortions or market distortion, or disruption for trading statute’s emphasis on preventive disruptions. conducted on its own facility, then the actions. It is acceptable, however, to SEF may limit monitoring to trading have a program that detects instances or (1) Summary of Comments activity on its own facility. threats of manipulation, price CME commented that proposed In response to WMBAA’s concerns distortion, and disruptions on at least a § 37.402 should be an acceptable regarding the clarification of certain T+1 basis, incorporating any additional practice instead of a prescriptive rule.624 terms in § 37.401(a), the Commission is data that is available on such T+1 basis, Parity Energy commented that in a revising the rule text to change the term including trade reconstruction data. The market where numerous SEFs permit ‘‘individual traders’’ to ‘‘market Commission notes that it dropped the trading in identical swaps, requiring participants’’ as ‘‘individual traders’’ requirements for a SEF to monitor for each SEF to monitor the adequacy, size, was meant to apply to a SEF’s market ‘‘impairments to market liquidity’’ and and ownership of deliverable supply as participants. The Commission also ‘‘position limit violations’’ given well as the delivery locations and clarifies that ‘‘market activity’’ means its commenters’ concerns about the commodity characteristics is market participants’ ‘‘trading’’ activity. difficulty of such monitoring. duplicative, unmanageable, and creates In § 37.401(b), ‘‘general market data’’ The Commission is moving to the risk of conflicting conclusions.625 means that a SEF shall monitor and guidance the requirement to have evaluate general market conditions automated alerts in proposed 622 § 37.401(d). The Commission believes See, e.g., ‘‘Recommendations on Pre-Trade related to its swaps. For example, a SEF Practices for Trading Firms, Clearing Firms and must monitor the pricing of the that automated trading alerts, preferably Exchanges involved in Direct Market Access,’’ Pre- underlying commodity or a third-party in real time, are the most effective Trade Functionality Subcommittee of the CFTC’s index or instrument used as a reference means of detecting market anomalies. Technology Advisory Committee (Mar. 1, 2011) However, a SEF may demonstrate that (‘‘TAC Subcommittee Recommendations’’), available at http://www.cftc.gov/ucm/groups/ 617 Id. its manual processes are effective. public/@swaps/documents/dfsubmission/ 618 The Commission is moving proposed As for the Commission’s inquiry in tacpresentation030111_ptfs2.pdf. The Commission § 37.401(d) to the guidance in appendix B to part the SEF NPRM about requiring notes that the subcommittee report was submitted 37 and moving the ‘‘trade reconstruction’’ language additional monitoring of high frequency to the TAC and made available for public comment, in proposed § 37.401(c) to final § 37.401(d). but no final action has been taken by the full 619 CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). trading, the Commission believes that a committee. 620 Refer to the guidance under Core Principle 4 SEF should be capable of monitoring all 623 See UK Government Office for Science, in appendix B to part 37 for examples of methods types of trading that may occur on its Foresight Project, The Future of Computer Trading for monitoring market activity beyond a SEF’s own facility, including trading that may be in Financial Markets (working paper), available at market. characterized as ‘‘high frequency.’’ The http://www.bis.gov.uk/foresight/our-work/projects/ 621 See discussion below under § 37.403— current-projects/computer-trading/working-paper. Additional Requirements for Cash-Settled Swaps Commission has decided not to 624 CME Comment Letter at 25 (Feb. 22, 2011). and § 37.404—Ability To Obtain Information in the implement, at this time, further rules 625 Parity Energy Comment Letter at 4 (Mar. 25, preamble. pertaining to the monitoring of high 2011).

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(2) Commission Determination which the swap will be settled, (2) Commission Determination The Commission is adopting § 37.402 particularly where an index price is The Commission is adopting § 37.403 published based upon transactions that as proposed, subject to certain as proposed, subject to certain 628 modifications, including converting are executed off the SEF. Argus noted modifications, including converting portions of the rule to guidance in that if a SEF is required to perform this portions of the rule to guidance in monitoring function, a SEF may choose appendix B to part 37.626 In response to appendix B to part 37.637 The Act not to list the swap and market comments and to provide SEFs with requires SEFs to monitor trading in participants would not have a hedging greater flexibility, the Commission is swaps to prevent disruptions of the cash instrument.629 Argus also commented revising the requirement in proposed settlement process.638 However, in that the cost to monitor transactions that § 37.402(a)(2) 627 so that SEFs only have response to Argus’s comment about the are executed off of the SEF could be to monitor the ‘‘availability’’ of the costs of proposed § 37.403(a)(1), the prohibitive.630 commodity supply instead of Commission has removed from the rule Several commenters expressed the requirement that a SEF monitor the monitoring whether the supply is concern about the requirement in ‘‘adequate.’’ The Commission is also availability and pricing of the proposed § 37.403(b) that a SEF have an commodity making up the index to removing from proposed § 37.402 the information sharing agreement with, or requirements that SEFs monitor specific which the swap will be settled. Section monitor positions or trading in, another 37.403(a) 639 now requires that a SEF details of the supply, marketing, and venue when a swap listed on the SEF is ownership of the commodity to be monitor the pricing of the reference settled by reference to the price of an price used to determine cash flows or physically delivered. Instead, appendix instrument traded on another venue.631 B to part 37 lists guidance for settlement. The Commission believes ICE stated that the proposal places an that SEFs must monitor the pricing of monitoring conditions that may cause a undue burden on SEFs to monitor physical-delivery swap to become the reference price in order to comply positions held at other trading venues, with Core Principle 4’s requirement to susceptible to price manipulation or and that this requirement would be distortion, including monitoring the prevent manipulation, price distortion, more efficiently facilitated by a central and disruptions of the cash settlement general availability of the commodity regulatory body such as the specified by the swap, the commodity’s process. As noted in the SEF NPRM, Commission.632 market participants may have incentives general characteristics, the delivery Similarly, CME stated that the locations, and, if available, information to disrupt or manipulate reference Commission is uniquely situated to add prices for cash-settled swaps.640 on the size and ownership of deliverable regulatory value to the industry by supplies. Moving these specific details Although no comments were received reviewing for potential cross-venue rule on proposed § 37.403(a)(2),641 the to guidance will provide SEFs with violations because the Commission is additional flexibility in meeting their Commission is revising the rule so that the central repository for position the requirement for monitoring the monitoring obligations associated with information delivered to it on a daily continued appropriateness of the physical-delivery swaps. basis in a common format across all methodology for deriving the reference (c) § 37.403—Additional Requirements venues.633 CME asserted that the SEF price only applies when the reference for Cash-Settled Swaps NPRM’s proposed alternative of price is formulated and computed by requiring SEFs and their customers to Proposed § 37.403(a) required, for the SEF. In order to reduce the burden report information that the Commission on SEFs, the Commission is clarifying in cash-settled swaps, that a SEF monitor: already receives or will be receiving is (a) The availability and pricing of the new § 37.403(c) that when the reference an onerous burden.634 CME further price relies on a third-party index or commodity making up the index to asserted that the SEF NPRM’s other which the swap is settled and; (b) the instrument, including an index or proposed alternative, that the SEF enter instrument traded on another venue, the continued appropriateness of the into an information-sharing agreement SEF must only monitor the ‘‘continued methodology for deriving the index for with the other venue, will result in appropriateness’’ of the index or SEFs that compute their own indices. additional costs to both entities and that instrument as opposed to specifically Where a swap is settled by reference to it may not be practical or prudent for a monitoring the ‘‘continued the price of an instrument traded in SEF to enter into such an agreement appropriateness of the methodology’’ for another venue, proposed § 37.403(b) with the other venue.635 deriving the index. To provide SEFs required that the SEF either have an Finally, Nodal stated that a SEF that with greater flexibility, the Commission information sharing agreement with the is a party to an industry agreement such is moving the other requirements for other venue or be able to independently as the International Information Sharing monitoring in proposed § 37.403(a)(2) to determine that positions or trading in Memorandum of Understanding and the guidance in appendix B to part 37. the reference instrument are not being Agreement should satisfy the Specifically, the guidance notes that if manipulated to affect positions or information sharing requirement in the a SEF computes its own reference price, trading in its swap. proposed rule by virtue of such it should promptly amend any (1) Summary of Comments agreement.636 methodologies or impose new methodologies as necessary to resolve Argus expressed concern regarding 628 Argus Comment Letter at 6 (Feb. 22, 2011). threats of disruption or distortions. For the requirement in proposed 629 Id. § 37.403(a)(1) for a SEF to monitor the 630 Id. at 7. 637 The Commission is renumbering proposed availability and pricing of the 631 Parity Energy Comment Letter at 5 (Mar. 25, § 37.403(a)(1) and (a)(2) to § 37.403(a), (b), and (c). commodity making up the index to 2011); ICE Comment Letter at 4–5 (Mar. 8, 2011); The Commission is moving proposed § 37.403(b) to Nodal Comment Letter at 5 (Mar. 8, 2011); CME § 37.404(a). Comment Letter at 11 (Mar. 8, 2011). 638 626 The Commission is renumbering proposed CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 632 § 37.402(a)(1) and (a)(2) to § 37.402(a) and (b), ICE Comment Letter at 4–5 (Mar. 8, 2011). 639 Final § 37.403(a) was proposed § 37.403(a)(1). respectively. The Commission is deleting or moving 633 CME Comment Letter at 11 (Mar. 8, 2011). 640 Core Principles and Other Requirements for to guidance proposed § 37.402(a)(3), (a)(4), and (b). 634 Id. Swap Execution Facilities, 76 FR at 1228. 627 Proposed § 37.402(a)(2) is now final 635 Id. 641 The Commission is renumbering proposed § 37.402(b). 636 Nodal Comment Letter at 5 (Mar. 8, 2011). § 37.403(a)(2) to § 37.403(b).

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reference prices that rely upon a third- (1) Summary of Comments comment, the Commission notes that party index or instrument, the CME commented that the Commission the nature of records covered varies Commission notes in the guidance that should specify in acceptable practices with the type of market and a market the SEF should conduct due diligence to the types of records that traders are participant’s involvement, but would ensure that the reference price is not required to keep under proposed generally include purchases, sales, susceptible to manipulation. § 37.404(a).643 WMBAA commented ownership, production, processing, and With respect to commenters’ concerns that the requirement for a SEF to force use of swaps, the underlying about the requirement in proposed traders to maintain trading and financial commodity, and other derivatives that § 37.403(b) for a SEF to have an records is not required under the have some relationship to, or effect on, information-sharing agreement with, or CEA.644 the market participant’s trading in the monitor positions or trading in, another listed swap. venue when a swap listed on the SEF is (2) Commission Determination The Commission is also deleting the settled by reference to the price of an The Commission is adopting § 37.404 requirements under proposed instrument traded on another venue, the as proposed, subject to certain § 37.404(b) and replacing it, in the Commission notes that the Act requires modifications, including providing guidance, with a more general SEFs to monitor trading in swaps to guidance in appendix B to part 37.645 As requirement for a SEF to demonstrate prevent disruptions of the cash noted above in the discussion of that it can obtain position and trading settlement process.642 Given this § 37.403, the Commission is moving to information directly from market statutory requirement, the Commission § 37.404 the requirement for a SEF to participants or, if not available from believes that a SEF must have access to assess whether trading in swaps listed them, through information-sharing sufficient information to determine on its market, in the index or instrument agreements. Moreover, the guidance for whether trading in the instrument or used as a reference price, or in the this rule allows a SEF to limit the index used as a reference price for its underlying commodity for its swaps is acquisition of such information to those listed swaps is being used to affect being used to affect prices in its market participants who conduct prices on its market. The Commission is market.646 substantial trading on its facility. The adopting this general requirement, but is With respect to CME’s and WMBAA’s Commission is making this change in moving it to § 37.404 where it more comments on proposed § 37.404(a),647 response to commenters’ concerns, as logically belongs. the Commission disagrees that this rule noted in other sections, about obtaining position information because a SEF will Although, as CME noted, the is unnecessary or that the requirements not have the capability to monitor Commission does obtain certain should instead be codified as acceptable trading activities conducted on other position information in the large-trader practices. Core Principle 4 requires a trading venues.649 reporting systems for swaps, the SEF to monitor trading in swaps to Commission may not routinely obtain prevent manipulation, price distortion, (e) § 37.405—Risk Controls for Trading and disruptions.648 In its experience such position information, including Proposed § 37.405 required that a SEF where a SEF’s swap settles to the price regulating the futures market, the Commission has found market have risk controls to reduce the of a non-U.S. index or instrument. potential risk of market disruptions, However, in response to ICE’s and participants’ records to be an invaluable tool in its surveillance efforts, and including, but not limited to, market CME’s concerns and to reduce the restrictions that pause or halt trading in burden on SEFs, the Commission is believes that a SEF should have direct access to such information in order to market conditions prescribed by the removing from the rule text the SEF. Additionally, the rule provided requirement for SEFs to assess discharge its obligations under the SEF core principles, including Core that where a SEF’s swap is linked to, or ‘‘positions’’ and is moving it to the Principle 4. However, the Commission a substitute for, other swaps on the SEF guidance in appendix B to part 37. The notes that in the guidance for this rule, or on other trading venues, including Commission is also moving to the a SEF may limit the application of this where a swap is based on the level of guidance the specific methods for a SEF requirement to those market an equity index, such risk controls must to obtain information to assess whether participants who conduct substantial be coordinated with those on the similar trading in the reference market is being trading activity on its facility, which is markets or trading venues, to the extent used to affect prices on its market. The consistent with the Commission’s possible. guidance also allows SEFs to limit such similar requirements that large traders The preamble of the SEF NPRM information gathering to market keep records for futures trading under recognized that pauses and halts are participants that conduct substantial § 18.05 and for swaps trading under only one category of risk controls, and trading on its facility. § 20.6 of the Commission’s regulations. that additional controls may be necessary to further reduce the potential (d) § 37.404—Ability To Obtain The Commission also notes that the for market disruptions.650 The SEF Information requirement for market participants to keep such records is sound commercial NPRM preamble specifically listed Proposed § 37.404(a) provided that a practice, and that market participants several risk controls that the SEF must have rules that require traders are likely already maintaining such Commission believed may be in its swaps to keep and make available trading records. In response to CME’s appropriate, including price collars or records of their activity in underlying bands, maximum order size limits, stop loss order protections, kill buttons, and commodities and related derivatives 643 CME Comment Letter at 26 (Feb. 22, 2011). markets and swaps. Proposed 644 WMBAA Comment Letter at 26 (Mar. 8, 2011). any others that may be suggested by 651 § 37.404(b) required that a SEF with 645 The Commission is changing the phrase commenters. customers trading through ‘‘traders in its swaps’’ to ‘‘its market participants’’ intermediaries have a large-trader to provide clarity. 649 See, e.g., comments below under Core reporting system or other means to 646 The Commission notes that this requirement is Principle 6—Position Limits or Accountability in now in § 37.404(a). the preamble. obtain position information. 647 The Commission notes that this requirement is 650 Core Principles and Other Requirements for now in § 37.404(b). Swap Execution Facilities, 76 FR at 1228. 642 CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 648 CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 651 Id.

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(1) Summary of Comments work constructively with registered controls should be adapted to the 661 Several commenters asserted that a entities to facilitate coordination. unique characteristics of the markets to which they apply. A SEF implementing SEF should have some discretion to (2) Commission Determination any such additional risk controls should determine the specific risk controls that The Commission is adopting 652 consider the balance between avoiding are implemented within its markets. proposed § 37.405, subject to certain CME commented that the marketplace a market disruption while not impeding modifications, including converting a a market’s price discovery function. would benefit from some portion of the rule to the guidance in standardization of the types of pre-trade Controls that unduly restrict a market’s appendix B to part 37. As stated in the ability to respond to legitimate market risk controls employed by SEFs and SEF NPRM, the Commission believes other trading venues, and expressed events will interfere with price that pauses and halts are effective risk discovery. Accordingly, consistent with support for an acceptable practices management tools that must be framework that includes pre-trade many of the comments on this subject, implemented by a SEF to facilitate the Commission is enumerating specific quantity limits, price banding, and orderly markets.662 Automated risk messaging throttles, but argued that the types of risk controls, in addition to control mechanisms, including pauses pauses and halts, that a SEF may specific parameters of such controls and halts, have proven to be effective should be determined by each SEF.653 implement in the guidance rather than and necessary in preventing market in the rule, in order to provide a SEF ICE recommended that the Commission disruptions in the futures market and, with greater discretion to select among take a flexible approach to risk controls therefore, will remain as part of the rule. the enumerated risk controls, or to so as not to hinder innovation in As noted by SDMA, the Pre-Trade developing new mechanisms to prevent Functionality Subcommittee of the TAC create new risk controls that meet the market disruptions.654 ICE did, issued a report that recommended the unique characteristics of its markets. A however, recommend that the implementation of several trade risk SEF will also have discretion in Commission expressly require a SEF to controls at the exchange level.663 The determining the parameters for the have pre-trade risk controls or checks, controls recommended in the selected controls. which are especially important in thinly Subcommittee report were consistent, in Additionally, in response to CME’s traded markets where RFQs are more large part, with the trade controls concern about the requirement to common.655 referenced in the preamble to the SEF coordinate risk controls, the SDMA supported the requirement in NPRM, and which are being adopted in Commission is moving this language proposed § 37.405, but noted that the the guidance in appendix B to part from proposed § 37.405 to the guidance. rule should include pre-trade and post- 37.664 The TAC accepted the Specifically, a SEF with a swap that is trade risk control requirements that are Subcommittee report, which specifically fungible with, linked to, or a substitute uniform across the market.656 SDMA recommended that exchanges for other swaps on the SEF or on other noted that a uniform approach would implement pre-trade limits on order trading venues, should, to the extent create a much needed single regulatory size, price collars around the current practicable, coordinate its risk controls approach to risk management across the price, intraday position limits (of a type with any similar controls placed on derivatives market, enhance market that represent financial risk to the those other swaps. The guidance also integrity, and decrease systemic risk.657 clearing member), message throttles, states that if a SEF’s swap is based on SDMA agreed with the best practices for and clear error-trade and order- the level of an equity index, such risk pre-trade and post-trade risk controls as cancellation policies.665 The controls should, to the extent noted in the Pre-Trade Functionality Subcommittee report also noted that practicable, be coordinated with any Subcommittee of the CFTC TAC’s ‘‘[s]ome measure of standardization of similar controls placed on national Recommendations on Pre-Trade pre-trade risk controls at the exchange security exchanges. Practices for Trading Firms, Clearing level is the cheapest, most effective and (f) § 37.406—Trade Reconstruction Firms and Exchanges involved in Direct most robust path to addressing the Market Access.658 Commission’s concern [for preserving Under Core Principle 4, Congress Finally, CME objected to the 666 market integrity].’’ required that a SEF have the ability to requirement to coordinate risk The Commission believes that the comprehensively and accurately controls.659 CME stated that a SEF implementation of specific types of reconstruct all trading on its facility.667 should retain the flexibility to other risk controls is generally desirable, Proposed § 37.406 set forth this determine and implement risk controls but also recognizes that such risk requirement, including the requirement that it believes are necessary to protect that audit-trail data and reconstructions the integrity of its markets.660 CME 661 Id. be made available to the Commission in recommended that the Commission 662 Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1228. a form, manner, and time as determined 663 by the Commission. 652 ICE Comment Letter at 5 (Mar. 8, 2011); TAC Subcommittee Recommendations (Mar. 1, 2011). Tradeweb Comment Letter at 11 (Mar. 8, 2011); (1) Summary of Comments CME Comment Letter at 27 (Feb. 22, 2011). 664 The preamble to the SEF NPRM specifically 653 CME Comment Letter at 27 (Feb. 22, 2011). mentioned daily price limits, order size limits, trading pauses, stop logic functionality, among CME commented that audit trail data 654 ICE Comment Letter at 5 (Mar. 8, 2011). others. Core Principles and Other Requirements for 655 is extremely detailed and voluminous Id. Swap Execution Facilities, 76 FR at 1228. 656 and that SEFs should be given adequate SDMA Comment Letter at 5 (Mar. 8, 2011). 665 TAC Subcommittee Recommendations at 4–5 657 Id. at 6. time to prepare the trading data before (Mar. 1, 2011). The TAC discussed this report’s 668 658 Id. See TAC Subcommittee Recommendations findings at its meeting on March 1, 2011. See it is supplied to the Commission. In (Mar. 1, 2011). The report recommended several Transcript of Third Meeting of Technology this regard, CME recommended that the pre-trade risk controls for implementation at the Advisory Committee (Mar. 1, 2011) available at wording ‘‘in a form, manner, and time exchange level, which were largely consistent with http://www.cftc.gov/ucm/groups/public/ as determined by the Commission’’ be the pre-trade controls listed in the preamble to the @newsroom/documents/file/ SEF NPRM. tac_030111_transcript.pdf. 659 CME Comment Letter at 26 (Feb. 22, 2011). 666 TAC Subcommittee Recommendations at 4 667 CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 660 Id. (Mar. 1, 2011). 668 CME Comment Letter at 27 (Feb. 22, 2011).

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replaced with ‘‘such reasonable time as information to allow it to fully perform comments, the Commission notes that determined by the Commission.’’ 669 its operational, risk management, Core Principle 5 requires a SEF to governance, and regulatory functions establish and enforce rules that will (2) Commission Determination and any requirements under part 37, allow it to obtain any necessary The Commission is revising the rule including the capacity to carry out information to perform any of its so that a SEF shall be required to make international information-sharing functions described in section 5h of the audit trail data and reconstructions agreements as the Commission may Act. The Act and the Commission’s available to the Commission ‘‘in a form, require. regulations provide a SEF with the legal manner, and time that is acceptable to authority to collect such information. As (1) Commission Determination the Commission.’’ The Commission mentioned in § 37.204 above, a SEF may notes that it will work with SEFs to The Commission received no contract with a regulatory service provide them with adequate time to comments on proposed § 37.501 and is provider to perform regulatory services supply such information to the adopting the rule as proposed. The on behalf of a SEF. Thus, a SEF may Commission. Commission believes that § 37.501 enter into a third party regulatory appropriately implements the (g) § 37.407—Additional Rules Required service provider agreement for the requirement in Core Principle 5 for a collection of information under Proposed § 37.407 required a SEF to SEF to establish and enforce rules that § 37.502. Additionally, as mentioned in adopt and enforce any additional rules will allow the SEF to obtain any § 37.404 above, the Act requires SEFs to that it believes are necessary to comply necessary information to perform any of monitor trading in swaps to prevent with the requirements of subpart E of its functions described in section 5h of manipulation, price distortion, and part 37. the Act.671 disruptions through surveillance, (1) Commission Determination (b) § 37.502—Collection of Information compliance, and disciplinary practices and procedures.677 The Commission Although the Commission did not Proposed § 37.502 required a SEF to believes that market participant records receive any comments on the proposed have rules that allow it to collect are a valuable tool in conducting an rule, the Commission is revising the rule information on a routine basis, allow for effective surveillance program; thus, a to state that applicants and SEFs may the collection of non-routine data from SEF should have direct access to such refer to the guidance and/or acceptable its participants, and allow for its information in order to discharge its practices in appendix B to part 37 to examination of books and records kept obligations under the core principles. demonstrate to the Commission by the traders on its facility. The Commission notes that market compliance with the requirements of (1) Summary of Comments participants are likely maintaining section 37.400. The Commission is also trading records as part of sound moving proposed § 37.407 to new WMBAA commented that aside from business practices so requiring SEFs to § 37.408, titled ‘‘Additional sources for participants who contractually agree to have rules that allow them to access compliance.’’ provide information, a SEF does not such information should not present a In new § 37.407, titled ‘‘Regulatory possess the legal authority to obtain 672 burden. To address MarketAxess’s service provider,’’ the Commission is such information. Additionally, comment about ‘‘non-routine data,’’ the clarifying that a SEF can comply with WMBAA stated that the burden to Commission clarifies that ‘‘non-routine the regulations in subpart E through a collect information should be placed 673 data’’ means the collection of data on an dedicated regulatory department or by upon counterparties. In the ad-hoc basis, such as data that may be contracting with a regulatory service alternative, WMBAA stated that the collected during an investigation. provider pursuant to § 37.204. Commission should require a SEF and its participants to enter into third party (c) § 37.503—Provide Information to the 5. Subpart F—Core Principle 5 (Ability service provider agreements for the Commission To Obtain Information) collection of the required Proposed § 37.503 required a SEF to Core Principle 5 requires a SEF to: (a) information.674 MarketAxess provide information in its possession to Establish and enforce rules that will commented that it is not clear what is the Commission upon request, in a form allow the facility to obtain any meant by ‘‘non-routine data’’ in and manner that the Commission necessary information to perform any of proposed § 37.502 and that the rule approves. the functions described in section 5h of should make clear that a SEF is only the Act, (b) provide the information to required to collect and maintain (1) Commission Determination the Commission on request, and (c) have participant information that is directly The Commission received no the capacity to carry out international related to such participants’ activity comments on proposed § 37.503 and is information-sharing agreements as the conducted pursuant to the SEF’s adopting the rule as proposed. The Commission may require.670 In the SEF rules.675 Commission believes that § 37.503 NPRM, the Commission proposed to appropriately implements the (2) Commission Determination codify the statutory text of Core requirement in Core Principle 5 for a Principle 5 in proposed § 37.500, and The Commission is adopting § 37.502 SEF to provide information to the adopts that rule as proposed. as proposed.676 In response to Commission on request.678 WMBAA’s and MarketAxess’s (a) § 37.501—Establish and Enforce (d) § 37.504—Information-Sharing Rules 671 CEA section 5h(f)(5)(A); 7 U.S.C. 7b–3(f)(5)(A). Agreements Proposed § 37.501 required a SEF to 672 WMBAA Comment Letter at 26 (Mar. 8, 2011). Proposed § 37.504 required a SEF to establish and enforce rules that will 673 Id. share information with other regulatory allow the SEF to have the ability and 674 Id. organizations, data repositories, and 675 MarketAxess Comment Letter at 37 (Mar. 8, authority to obtain sufficient 2011). reporting services as required by the 676 The Commission is changing the terms 669 Id. ‘‘participants’’ and ‘‘traders’’ to ‘‘market 677 CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 670 CEA section 5h(f)(5); 7 U.S.C. 7b–3(f)(5). participants’’ to provide clarity. 678 CEA section 5h(f)(5)(B); 7 U.S.C. 7b–3(f)(5)(B).

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Commission or as otherwise necessary compliance with the limit set by the limits of market participants based upon and appropriate to fulfill its self- Commission and the limit, if any, set by the trading activity that takes place only regulatory and reporting the SEF.682 In the SEF NPRM, the on the SEF’s platform.689 Tradeweb also responsibilities. The proposed rule also Commission proposed to codify the requested confirmation from the stated that appropriate information- statutory text of Core Principle 6 in Commission that a SEF must only sharing agreements can be established proposed § 37.600, and adopts that rule monitor its market participants’ position with such entities or the Commission as proposed. Proposed § 37.601 repeated limits or positions in particular can act in conjunction with the SEF to the requirements in § 37.600 and instruments with respect to positions carry out such information sharing. required that SEFs establish position entered into on its own platforms.690 limits in accordance with the (b) Commission Determination (1) Summary of Comments requirements set forth in part 151 of the WMBAA commented that the Commission’s regulations. In response to commenters concerns proposed rule could be interpreted to about monitoring position limits, the require a SEF to share information with (a) Summary of Comments Commission is removing the its competitors, unless the information Several commenters stated that SEFs requirements in § 37.601. Instead, final is disseminated by a neutral third party will have difficulty enforcing position § 37.601 states that until such time that pursuant to a services agreement.679 limitations.683 Many of these compliance is required under part 151 WMBAA also requested clarification commenters noted that SEFs will lack of this chapter,691 a SEF may refer to the regarding the circumstances in which knowledge of a market participant’s guidance and/or acceptable practices in the Commission would determine to activity on other venues, and that will appendix B to part 37 to demonstrate to carry out information sharing itself, as prevent a SEF from being able to the Commission compliance with the opposed to a SEF entering into calculate the true position of a market requirements of § 37.600. information-sharing agreements with participant.684 In this regard, Phoenix The guidance provides a SEF with the relevant entity.680 stated that market participants will be reasonable discretion to comply with allowed to trade on multiple SEFs so § 37.600, including considering part 150 (2) Commission Determination any one SEF’s information concerning a of the Commission’s regulations.692 The The Commission is adopting § 37.504 market participant’s position will be guidance also states that for Required as proposed, subject to one virtually meaningless, as the market Transactions as defined in § 37.9, a SEF modification. The Commission is participant may sell a large position on may demonstrate compliance with revising the rule to change the term one SEF and simultaneously buy the § 37.600 by setting and enforcing ‘‘reporting services’’ to ‘‘third party data same amount of the instrument on position limitations or position reporting services.’’ The Commission another SEF.685 WMBAA recommended accountability levels only with respect clarifies that the term ‘‘reporting that a common regulatory organization to trading on the SEF’s own market. For services’’ was meant to refer to or third party regulatory service example, a SEF could satisfy the independent third parties that would provider monitor position limits position accountability requirement by provide trading data on a public basis because they will have the capability to setting up a compliance program that and was not meant to include ensure coordinated oversight of the continuously monitors the trading competitor SEFs. To address WMBAA’s trading activity on multiple SEFs and activity of its market participants and comment about information sharing, the the ability to implement disciplinary has procedures in place for remedying Commission clarifies that a SEF may action if needed.686 Reuters and any violations of position levels. For work with the Commission to fulfill its Phoenix recommended that the Permitted Transactions as defined in information sharing requirements in the Commission or its designee monitor § 37.9, a SEF may demonstrate absence of agreements with SDRs, position limits.687 Alice recommended compliance with § 37.600 by setting and regulatory bodies, or third party data that, for cleared swaps, DCOs maintain enforcing position accountability levels reporting services. Given that each SEF position limits, and when a swap is or sending the Commission a list of is unique, a particular SEF would need cleared by multiple DCOs, one DCO Permitted Transactions traded on the to contact the Commission to discuss would be the primary for a given SEF. Therefore, a SEF is not required to how the information sharing participant and the other DCOs would monitor its market participants’ activity requirements could be fulfilled. report positions to that DCO.688 on other venues with respect to Despite the concerns raised by other monitoring position limits. 6. Subpart G—Core Principle 6 (Position commenters, Phoenix noted that, if In response to comments that a Limits or Accountability) required, a SEF can monitor position common regulatory organization or the Core Principle 6 requires that a SEF Commission should monitor position adopt for each swap, as is necessary and 682 Id. limits, the Commission notes that Core appropriate, position limits or position 683 Bloomberg Comment Letter at 3–4 (Jun. 3, Principle 6 places the responsibility on 2011); Alice Comment Letter at 5 (May 31, 2011); a SEF to adopt and monitor position accountability to reduce the potential Rosen et al. Comment Letter at 22 (Apr. 5, 2011); threat of market manipulation or WMBAA Comment Letter at 27 (Mar. 8, 2011); limits. The Dodd-Frank Act does not congestion.681 In addition, Core Tradeweb Comment Letter at 11 (Mar. 8, 2011); mandate that a common regulatory Principle 6 requires that for any contract Reuters Comment Letter at 6 (Mar. 8, 2011); organization or the Commission monitor Phoenix Comment Letter at 3 (Mar. 7, 2011). that is subject to a federal position limit position limits. The Dodd-Frank Act 684 WMBAA Comment Letter at 2 (Apr. 11, 2013); also does not provide the Commission under CEA section 4a(a), the SEF set its Bloomberg Comment Letter at 3–4 (Jun. 3, 2011); position limits at a level no higher than Rosen et al. Comment Letter at 22 (Apr. 5, 2011); with the authority to exempt a SEF from the position limitation established by WMBAA Comment Letter at 27 (Mar. 8, 2011); the Commission and monitor positions Tradeweb Comment Letter at 11 (Mar. 8, 2011); 689 Phoenix Comment Letter at 4 (Mar. 7, 2011). Phoenix Comment Letter at 3 (Mar. 7, 2011). 690 Tradeweb Comment Letter at 11 (Mar. 8, established on or through the SEF for 685 Phoenix Comment Letter at 3–4 (Mar. 7, 2011). 2011). 686 WMBAA Comment Letter at 27 (Mar. 8, 2011). 691 See Position Limits for Derivatives, 76 FR 679 WMBAA Comment Letter at 27 (Mar. 8, 2011). 687 Reuters Comment Letter at 6 (Mar. 8, 2011); 4752 (proposed Jan. 26, 2011). 680 Id. Phoenix Comment Letter at 4 (Mar. 7, 2011). 692 Part 150 of the Commission’s regulations 681 CEA section 5h(f)(6); 7 U.S.C. 7b–3(f)(6). 688 Alice Comment Letter at 5 (May 31, 2011). contains the current position limits regime.

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certain core principles. Therefore, the Commission has determined is exempt Commission has determined to revise Commission is providing a SEF with from registration.’’ The Commission is the rule text as suggested by ISDA/ flexibility to adopt and monitor position deleting proposed § 37.701(a), which SIFMA. If the Commission determines limits as described above. referred to the end-user exception under to exercise its authority to exempt DCOs CEA section 2(h)(7) because, as from applicable registration 7. Subpart H—Core Principle 7 modified, the final rule text clarifies that (Financial Integrity of Transactions) requirements, the Commission would any swaps that are required to be likely address, among other things, the Core Principle 7 requires a SEF to cleared or that are voluntarily cleared conditions and limitations applicable to establish and enforce rules and must be cleared through a registered clearing swaps for customers subject to procedures for ensuring the financial DCO, or a DCO that the Commission has section 4d(f) of the Act.700 integrity of swaps entered on or through determined is exempt from registration. Until such time as the Commission the facilities of the SEF, including the The Commission notes that swaps that determines to exercise its authority to clearance and settlement of the swaps are subject to the clearing requirement exempt DCOs from the applicable 693 pursuant to section 2(h)(1) of the Act. must be submitted for clearing, except registration requirement, SEFs must In the SEF NPRM, the Commission where the swap may be eligible for an route all swaps through registered proposed to codify the statutory text of exception or exemption from the DCOs, which are the appropriate Core Principle 7 in proposed § 37.700, clearing requirement pursuant to either entities to perform the clearing and adopts that rule as proposed. the exception provided under section functions under CEA section 2(h)(1) at (a) § 37.701—Mandatory Clearing 694 2(h)(7) of the Act and § 50.50 of the this time. Registered DCOs are subject to Commission’s regulations, or an the CEA, the Commission’s regulations, Proposed § 37.701 required exemption provided under part 50 of and its regulatory programs. Among transactions executed on or through a the Commission’s regulations. The rule other things, registered DCOs are SEF to be cleared through a Commission also provides that counterparties that registered DCO unless the transaction is supervised for compliance with the elect to clear a swap that is not required Commission’s regulations, and excepted from clearing under section to be cleared may do so voluntarily 2(h)(7) of the Act or the swap is not subjected to ongoing risk surveillance through a Commission-registered DCO, and regular examinations. subject to the clearing requirement or a DCO that the Commission has under section 2(h)(1) of the Act. In consideration of MarketAxess’s determined is exempt from registration. comment that a SEF should be able to (1) Summary of Comments In response to ISDA/SIFMA’s rely on a representation from an end- recommendation that the rule be ISDA/SIFMA commented that section user that it qualifies for the CEA section amended to permit the use of exempt 2(h)(7) exception, the Commission 2(h)(1) of the CEA provides that swaps DCOs, the Commission is mindful that subject to the clearing requirement must clarifies that a SEF is not obligated to CEA section 2(h)(1) provides that swaps make any determinations with respect be submitted for clearing to a registered subject to the clearing requirement must DCO or a DCO that is exempt from to applicability of the exceptions to the be submitted for clearing to a registered clearing requirement. registration; however, proposed § 37.701 DCO or a DCO that is exempt from requires that transactions executed registration under the Act. The (b) § 37.702—General Financial Integrity through a SEF be cleared only through 695 Commission further notes that under Proposed § 37.702(a) required a SEF a Commission-registered DCO. ISDA/ CEA section 5b(h), the Commission has SIFMA recommended that the rule be to provide for the financial integrity of discretionary authority to exempt DCOs, its transactions by establishing amended to permit the use of exempt conditionally or unconditionally, from DCOs.696 MarketAxess recommended minimum financial standards for its the applicable DCO registration members. At a minimum, a SEF would that proposed § 37.701 be revised to requirements.698 Specifically, section permit a SEF to rely on a representation have to ensure that its members meet 5b(h) of the Act provides that ‘‘[t]he the definition of ‘‘eligible contract from an end-user that it qualifies for the Commission may exempt, conditionally section 2(h)(7) exemption.697 participant’’ under CEA section 1(a)(18). or unconditionally, a derivatives Proposed § 37.702(b) required a SEF, for (2) Commission Determination clearing organization from registration transactions cleared by a DCO, to have The Commission is adopting § 37.701 under this section for the clearing of the capacity to route transactions to the as proposed, subject to certain revisions. swaps if the Commission determines DCO in a manner acceptable to the DCO that the [DCO] is subject to comparable, The Commission is modifying § 37.701 for purposes of ongoing risk comprehensive supervision and to state that ‘‘[t]ransactions executed on management. In proposed § 37.702(c), regulation by the Securities and or through the swap execution facility for transactions that are not cleared by Exchange Commission or the that are required to be cleared under a DCO, a SEF must require members to appropriate government authorities in section 2(h)(1)(A) of the Act or are demonstrate that they: (1) Have entered the home country of the voluntarily cleared by the into credit arrangement documentation organization.’’ 699 Thus, the Commission counterparties shall be cleared through for the transaction, (2) have the ability has discretion to exempt from a Commission-registered derivatives to exchange collateral, and (3) meet any registration DCOs that, at a minimum, clearing organization, or a derivatives credit filters that the SEF may adopt. are subject to comparable and clearing organization that the Proposed § 37.702(d) required a SEF to comprehensive supervision by another implement any additional safeguards 693 CEA section 5h(f)(7); 7 U.S.C. 7b–3(f)(7). regulator. 694 The Commission notes that it has not The Commission is renaming the title of this 700 The Commission will address any necessary section from ‘‘Mandatory Clearing’’ to ‘‘Required yet exercised its discretionary authority revisions to part 37 at such time as it determines Clearing’’ to be consistent with terminology used in to exempt DCOs from registration. to exercise its discretionary authority to exempt the CEA and the Commission’s regulations. Notwithstanding that there are no DCOs from certain DCO registration requirements. 695 ISDA/SIFMA Comment Letter at 13 (Mar. 8, exempt DCOs at this time, the For example, if exempt DCOs are limited to clearing 2011). for only certain types of market participants, then 696 Id. the Commission will take action to ensure that SEF 697 MarketAxess Comment Letter at 38 (Mar. 8, 698 CEA section 5b(h); 7 U.S.C. 7a–1(h). market participants have impartial access to swap 2011). 699 Id. clearing through registered DCOs.

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that may be required by Commission not be accepted for clearing for credit or acceptable to the DCO for purposes of regulations. other reasons.711 In such cases and clearing; and (b) by coordinating with depending on the SEF’s rules under each DCO to which it submits (1) Summary of Comments Core Principle 7, parties that execute transactions for clearing, in the Bloomberg commented, with respect through the SEF either would face one development of rules and procedures to to proposed § 37.702(a), that a SEF another in an uncleared, bilateral facilitate prompt and efficient should be able to determine a market transaction or would potentially owe transaction processing in accordance participant’s ability to meet any amounts arising from the trade not being with the requirements of § 39.12(b)(7) of minimum financial standards by virtue accepted for clearing.712 Therefore, the Commission’s regulations.718 of confirming that the participant has Goldman recommended that parties In response to MarketAxess’s access to a DCO either as a member or should be able to learn the identities of comment about affirmation hubs, the through an intermediary.701 According their counterparty when transacting in Commission notes that § 37.702(b), as to Bloomberg, it is not necessary to set cleared and uncleared swaps.713 adopted in April 2012, requires a SEF to separate, duplicative financial (2) Commission Determination route a swap to a DCO in a manner requirements at the SEF level that are acceptable to the DCO.719 If the DCO redundant to the exhaustive financial The Commission has considered the views the use of an affirmation hub as requirements that will be associated comments received and is adopting an acceptable means for routing the 702 with access to a DCO. § 37.702(a) as proposed. In response to swap, the routing otherwise complies With respect to proposed § 37.702(b), Bloomberg’s comment about setting with § 37.702(b), and the trade is Reuters agreed that SEFs should assure financial requirements at the SEF level, processed in accordance with the the secure and prompt routing to a DCO the Commission disagrees that a SEF standards set forth in §§ 1.74, 39.12, for swap transactions subject to the should be able to determine a member’s 703 23.506, and 23.610 of the Commission’s clearing requirement. MarketAxess ability to meet any minimum financial regulations, then the use of an commented that SEFs should be able to standards by virtue of confirming that affirmation hub for routing a swap to a send a trade to the DCO via an the member has access to a DCO. The 704 DCO for clearing would be permissible. affirmation hub. Use of affirmation Commission notes that a DCO only In consideration of the comments hubs, according to MarketAxess, would screens clearing members, and not with respect to uncleared swaps, the allow SEFs to enjoy lower costs and is customers, according to financial 705 Commission is eliminating proposed preferred by its clients. standards. Therefore, unless a SEF § 37.702(c). The Commission agrees The Commission received several member is also a clearing member, the with commenters that requiring SEFs to comments with regard to proposed SEF will not be able to determine the monitor the credit and collateral § 37.702(c). The Energy Working Group member’s ability to meet any minimum arrangements of parties transacting noted that proposed § 37.702(c) should financial standards by virtue of be narrower in scope and that a SEF uncleared swaps goes beyond the scope confirming that the member has access of what should be expected of a SEF. To should be able to fulfill its obligation by to a DCO. The Commission also notes ensuring that the counterparties have address Goldman’s comments that there is no affirmative obligation for requesting that the Commission entered into bilateral credit support a DCO to ensure that its members, arrangements.706 MarketAxess wrote mandate that a SEF’s rules require customers, or counterparties are ECPs. identification of the counterparties prior that a SEF is not in a position to Therefore, a SEF must ensure that its determine whether members’ credit to a swap transaction, the Commission members qualify as ECPs and may rely believes that a SEF should retain filters or exchanges of collateral are on representations from its members to sufficient.707 Reuters noted that the discretion in this regard. Finally, the fulfill this requirement.714 Commission is deleting proposed existence of credit and/or collateral Last year, the Commission adopted arrangements should be primarily a § 37.702(d) as it is unnecessary because 708 rules regarding the processing of cleared a SEF must already implement matter between the counterparties. trades.715 In that rulemaking, the ISDA/SIFMA commented that the safeguards as required by Commission Commission proposed a new regulations. Commission should not create new § 37.702(b) 716 and adopted a revised collateral requirements for end-users 717 (c) § 37.703—Monitoring for Financial 709 § 37.702(b) regarding cleared swaps transacting through a SEF. ABC/ traded through a SEF. That final rule Soundness CIEBA commented that proposed required a SEF to provide for the Proposed § 37.703 required a SEF to § 37.702(c) would impose costly 710 financial integrity of its transactions that monitor its members’ compliance with burdens on SEFs. are cleared by a DCO: (a) By ensuring Goldman noted that there are the SEF’s minimum financial standards that it has the capacity to route circumstances where a swap that is and routinely receive and promptly transactions to the DCO in a manner subject to the clearing requirement may review financial and related information from its members. 711 Goldman Comment Letter at 5 (Mar. 8, 2011). 701 Bloomberg Comment Letter at 5 (Mar. 8, 2011). 712 Id. (1) Summary of Comments 702 Id. 713 Id. 703 Reuters Comment Letter at 6 (Mar. 8, 2011). ABC/CIEBA commented that this 714 The Commission notes that under 704 requirement would create significant MarketAxess Comment Letter at 35 (Mar. 8, § 37.202(a)(2), a SEF that permits intermediation 2011). must also obtain signed representations from barriers to entry, stifle competition, and 705 Id. intermediaries that their customers are ECPs. lead to higher transaction costs.720 FXall 706 Energy Working Group Comment Letter at 5 715 Customer Clearing Documentation, Timing of commented that like DCMs, SEFs (Mar. 8, 2011). Acceptance for Clearing, and Clearing Member Risk should be permitted to delegate their 707 MarketAxess Comment Letter at 37 (Mar. 8, Management, 77 FR 21278 (Apr. 9, 2012). financial surveillance functions to the 2011). 716 Requirements for Processing, Clearing, and 708 Reuters Comment Letter at 6 (Mar. 8, 2011). Transfer of Customer Positions, 76 FR 13101, 709 ISDA/SIFMA Comment Letter at 13 (Mar. 8, 13109–10 (proposed Mar. 10, 2011). 718 Id. 2011). 717 Customer Clearing Documentation, Timing of 719 Id. 710 ABC/CEIBA Comment Letter at 11 (Mar. 8, Acceptance for Clearing, and Clearing Member Risk 720 ABC/CEIBA Comment Letter at 11 (Mar. 8, 2011). Management, 77 FR at 21309. 2011).

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Joint Audit Committee to the extent that increased emphasis on cross-market that the Core Principle 8 rules should its members are registered with NFA.721 coordination of emergency actions. In adopt uniform standards and that those For non-NFA members, FXall that regard, the proposed guidance standards must consider the interaction recommended that SEFs be permitted to provided that, in consultation and between SEFs, DCMs, clearing delegate financial surveillance cooperation with the Commission, a organizations, swap data repositories, obligations to the members’ primary SEF should have the authority to and other market-wide institutions.730 financial regulator or otherwise intervene as necessary to maintain outsource such duties to a third party markets with fair and orderly trading (2) Commission Determination service provider.722 and to prevent or address manipulation The Commission is adopting § 37.801 or disruptive trading practices, whether (2) Commission Determination as proposed, with certain modifications the need for intervention arises to the guidance in appendix B to part The Commission agrees with the exclusively from the SEF’s market or as 37. The Commission acknowledges commenters that burdensome financial part of a coordinated, cross-market commenters concerns regarding a SEF’s surveillance obligations may lead to intervention. The proposed guidance ability to liquidate or transfer open higher transaction costs. Therefore, in also provided that in situations where a positions; however, the statute requires consideration of the comments, the swap is traded on more than one a SEF to have the authority to liquidate Commission is revising § 37.703 to state platform, emergency action to liquidate or transfer open positions.731 The that a SEF must monitor its members to or transfer open interest must be as Commission expects that SEFs would ensure that they continue to qualify as directed, or agreed to, by the establish such authority over open ECPs. With regard to the comment Commission or the Commission’s staff. positions through their rules and/or requesting delegation of the proposed The proposed guidance also clarified participant agreements and that the § 37.703 responsibilities to the Joint that the SEF should have rules that Audit Committee, the Commission notes exercise of any such authority would, allow it to take market actions as may consistent with the statute, be done in that final § 37.703, as revised, obviates be directed by the Commission. the need for any such delegation. Under coordination with the Commission and In addition to providing for rules, relevant DCOs. final § 37.703, a SEF need only ensure procedures, and guidelines for that its members remain ECPs and may emergency intervention, the guidance The Commission is making slight rely on representations from its noted that SEFs should provide prompt revisions to the guidance to clarify that members. notification and explanation to the SEFs retain the authority to Commission of the exercise of independently respond to emergencies 8. Subpart I—Core Principle 8 in an effective and timely manner (Emergency Authority) emergency authority, and that information on all regulatory actions consistent with the nature of the Core Principle 8 requires a SEF to carried out pursuant to a SEF’s emergency, as long as all such actions adopt rules to provide for the exercise emergency authority should be included taken by the SEF are made in good faith of emergency authority, in consultation in a timely submission of a certified to protect the integrity of the markets. or cooperation with the Commission, as rule. The Commission believes that market is necessary and appropriate, including emergencies can vary with the type of the authority to liquidate or transfer (1) Summary of Comments market and any number of unusual open positions in any swap or to Several commenters expressed circumstances so SEFs need flexibility suspend or curtail trading in a swap.723 concern about a SEFs ability to liquidate to carry out emergency actions. The In the SEF NPRM, the Commission or transfer open positions.725 Bloomberg Commission believes that the guidance proposed to codify the statutory text of stated that, because a SEF will not hold strikes a reasonable balance between the Core Principle 8 in proposed § 37.800, a participant’s swap positions, the need for flexibility and the need for 724 and adopts that rule as proposed. Commission should only require that a standards in the case of coordinated (a) § 37.801—Additional Sources for SEF adopt rules requiring it to cross-market intervention. Compliance coordinate with a DCO to facilitate the 9. Subpart J—Core Principle 9 (Timely liquidation or transfer of positions Proposed § 37.801 referred applicants Publication of Trading Information) during an emergency.726 Similarly, and SEFs to the guidance and/or WMBAA noted that a SEF will not acceptable practices in appendix B to Core Principle 9 requires a SEF to maintain counterparty positions and part 37 to demonstrate compliance with make public timely information on thus it may not possess the ability to price, trading volume, and other trading Core Principle 8. The guidance reflected 727 the Commission’s belief that the need liquidate or transfer those positions. data on swaps to the extent prescribed 732 for emergency action may also arise Reuters stated that liquidating open by the Commission. It also requires a from related markets traded on other positions does not fall within a trading SEF to have the capacity to platforms and that there should be an platform’s traditional role in the electronically capture and transmit market.728 trade information for those transactions CME stated that SEFs must have the 733 721 FXall Comment Letter at 13 (Mar. 8, 2011). that occur on its facility. In the SEF 722 Id. flexibility and independence necessary NPRM, the Commission proposed to 729 723 CEA section 5h(f)(8); 7 U.S.C. 7b–3(f)(8). to address market emergencies. codify the statutory text of Core 724 The Commission notes that Commission Alternatively, ISDA/SIFMA commented Principle 9 in proposed § 37.900. regulation 40.6(a)(6)(i) provides that any SEF rule Proposed § 37.901 required that, for that establishes general standards or guidelines for 725 Bloomberg Comment Letter at 4 (Jun. 3, 2011); swaps traded on or through a SEF, the taking emergency actions must be submitted to the Bloomberg Comment Letter at 5–6 (Mar. 8, 2011); Commission pursuant to regulation 40.6(a). WMBAA Comment Letter at 28 (Mar. 8, 2011); SEF report specified swap data as Relatedly, Commission regulation 40.6(a)(6)(ii) Reuters Comment Letter at 7 (Mar.8, 2011). provides particular emergency actions shall be filed 726 730 with the Commission ‘‘prior to [its] Bloomberg Comment Letter at 4 (Jun. 3, 2011); ISDA/SIFMA Comment Letter at 13 (Mar. 8, implementation, or, if not practicable, . . . at the Bloomberg Comment Letter at 5–6 (Mar. 8, 2011). 2011). earlier possible time after implementation, but in no 727 WMBAA Comment Letter at 28 (Mar. 8, 2011). 731 CEA section 5h(f)(8); 7 U.S.C. 7b–3(f)(8). event more than twenty-four hours after 728 Reuters Comment Letter at 7 (Mar. 8, 2011). 732 CEA section 5h(f)(9); 7 U.S.C. 7b–3(f)(9). implementation.’’ 729 CME Comment Letter at 28 (Feb. 22, 2011). 733 Id.

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provided under part 43 734 and part reporting.740 The Commission also notes repetitive of paragraphs (a)(2) and (a)(3) 45 735 of the Commission’s regulations that it codified § 16.01 in the final DCM of § 37.1000. In response to and meet the requirements of part 16 of rulemaking, and in that rulemaking, the MarketAxess’s comment, the the Commission’s regulations. Proposed Commission states that it considered the Commission notes that a SEF may § 37.902 required a SEF to have the proposed reporting standard put forth utilize the services of a regulatory capacity to electronically capture trade by Eris, but the Commission believes service provider pursuant to § 37.204 to information with respect to transactions that the more detailed reporting assist the SEF in complying with its executed on the facility. obligations under § 16.01 are warranted responsibilities under Core Principle 10. at this time in light of the novelty of In response to CME’s comment, the (a) Summary of Comments swaps trading on regulated Commission notes that in accordance 741 In response to the Commission’s exchanges. with Core Principle 10 and § 1.31 of the Commission’s regulations, a SEF should questions in the SEF NPRM about end- 10. Subpart K—Core Principle 10 retain ‘‘any’’ records relevant to swaps of-day price reporting for interest rate (Recordkeeping and Reporting) swaps and the Commission’s proposed defined in section 1a(47)(A)(v) of the Core Principle 10 establishes revisions to § 16.01,736 Eris stated the Act and that the SEF should leave such recordkeeping and reporting following: (1) It is reasonable to require records open to inspection and requirements for SEFs.742 In the SEF a market to report publicly each trade examination for a period of five years. NPRM, the Commission proposed to The Commission staff also consulted (including instrument, price, and codify the statutory text of Core volume) intra-day, as soon as the trade with representatives from the SEC, who Principle 10 in proposed § 37.1000, and confirmed that the SEC’s relevant occurs; (2) daily open interest should be adopts that rule as proposed. published publicly in a summary recordkeeping requirements typically Proposed § 37.1001 required a SEF to extend for a period of five years.745 fashion and should be grouped in maintain records of all business maturity buckets based on the activities, including a complete audit 11. Subpart L—Core Principle 11 remaining tenor of each instrument; (3) trail, investigatory files, and (Antitrust Considerations) as to end-of-day pricing, a clearing disciplinary files, in a form and manner Core Principle 11 governs the house will settle contracts based upon a acceptable to the Commission for at antitrust obligations of SEFs.746 In the market-driven curve, and the least five years in accordance with the SEF NPRM, the Commission proposed methodology, as well as the inputs and requirements of section 1.31 and part 45 to codify the statutory text of Core components, of the curve should be of this chapter. Proposed § 37.1002 Principle 11 in proposed § 37.1100, and made transparent to the full trading required a SEF to report to the adopts that rule as proposed. community; and (4) the clearing house Commission such information that the Additionally, proposed § 37.1101 should publish the specific settlement Commission determines to be necessary referred applicants and SEFs to the value applied to each cleared swap in or appropriate for it to perform its 737 guidance in appendix B to part 37 for the daily mark-to-market process. duties. Proposed § 37.1003 required a purposes of demonstrating compliance Eris also stated that SEFs and DCMs SEF to keep records relating to swaps with proposed § 37.1100. should be held to the same reporting defined in section 1a(47)(A)(v) of the 738 standard in this respect. CEA open to inspection and (a) Summary of Comments MarketAxess commented that examination by the SEC. NGSA commented that if SEFs are proposed § 37.900(b) and § 37.902 are allowed to select the SDR to which SEF- duplicative and that proposed § 37.902 (a) Summary of Comments executed swaps are reported, there is a should be withdrawn.739 MarketAxess stated that a SEF should threat of anticompetitive tying of swap be permitted to use a regulatory service data reporting services from a particular (b) Commission Determination provider with respect to its SDR to the SEF’s services, which may 747 The Commission is adopting § 37.900 recordkeeping and reporting harm competition among SDRs. 743 and § 37.901 as proposed. The requirements. CME commented that Accordingly, NGSA recommended that Commission acknowledges proposed § 37.1003 does not provide the Commission amend the proposed MarketAxess’s comment that § 37.902 is any guidance as to what records will rules to explicitly prohibit a SEF from duplicative to § 37.900(b) and thus is need to be retained and for how long tying the swap data reporting services of 744 withdrawing § 37.902. In response to they must be retained. a particular SDR to the swap execution services provided by such SEF and from Eris’s comment about the same (b) Commission Determination reporting standards for SEFs and DCMs entering into an exclusive agreement The Commission is adopting that list swaps, the Commission notes § 37.1001 as proposed. The Commission 745 that a SEF, similar to a DCM, must meet See Registration and Regulation of Security- is also withdrawing proposed § 37.1002 Based Swap Execution Facilities, 76 FR at 10982, the same requirements under part 16 of and § 37.1003 because they are 11063 (Proposed Rule 818(b) requires SB–SEFs to the Commission’s regulations for swaps keep books and records ‘‘for a period of not less than five years, the first two years in an easily 740 The Commission notes that § 16.00 is accessible place). Rule 17a–1(b) (240.17a–1(b) 734 17 CFR part 43; Real-Time Reporting of Swap applicable to a SEF only to the extent that such SEF requires national securities exchanges, among Transaction Data, 77 FR 1182 (Jan. 9, 2012). has clearing members and lists options on physicals others, to keep books and records for a period of 735 17 CFR part 45; Swap Data Recordkeeping and for trading. Section 16.01 is applicable to a SEF for not less than five years, the first two years in an Reporting Requirements, 77 FR 2136 (Jan. 13, 2012). all swaps and options traded thereon. Section 16.02 easily accessible place, subject to a destruction and 736 The Commission proposed certain revisions to is applicable to a SEF only to the extent that such disposition provisions, which allows exchanges to § 16.01 in the DCM NPRM. See Core Principles and SEF lists options for trading. destroy physical documents pursuant to an effective Other Requirements for Designated Contract 741 Core Principles and Other Requirements for and approved plan regarding such destruction and Markets, 75 FR 80572 (proposed Dec. 22, 2010) for Designated Contract Markets, 77 FR 36612, 36642 transferring/indexing of such documents onto some further details. (Jun. 19, 2012). recording medium.). 17 CFR 240.17a–1(b). 737 Eris Comment Letter at 5 (Mar. 8, 2011). 742 CEA section 5h(f)(10); 7 U.S.C. 7b–3(f)(10). 746 CEA section 5h(f)(11); 7 U.S.C. 7b–3(f)(11). 738 Id. 743 MarketAxess Comment Letter at 39 (Mar. 8, 747 NGSA Comment Letter at 2 (Jun. 8, 2012). 739 MarketAxess Comment Letter at 39 (Mar. 8, 2011). DTCC also raised this concern in its comment letter. 2011). 744 CME Comment Letter at 38 (Feb. 22, 2011). DTCC Comment Letter at 3 (Jun. 10, 2011).

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with any SDR to report all swaps to considered to be adequate if the value financial resources to cover six months such SDR.748 of such resources exceeds the total of its operating costs.755 Similarly, amount that would enable the SEF to TruMarx contended that SEFs should (b) Commission Determination cover its operating costs for a period of not have such stringent financial The Commission is adopting at least one year, calculated on a rolling resources standards because a SEF is a § 37.1101 and the corresponding basis.752 In the SEF NPRM, the trading platform and, therefore, will not guidance in appendix B to part 37 as Commission proposed to codify the carry on its books the risks of positions proposed and declines to revise the statutory text of Core Principle 13 in and trades executed on it.756 Rather, proposed rules as NGSA recommends. proposed § 37.1300, and adopts that rule TruMarx stated that risk will be borne The Commission notes that under Core as proposed. by the principals entering into the Principle 11, SEFs may not adopt any transactions, their clearing brokers, and (a) § 37.1301—General Requirements rule or take any action that results in clearing houses.757 any unreasonable restraint of trade or Proposed § 37.1301 set forth the Alternatively, SDMA noted that it impose any material anticompetitive financial resources requirements for would be disruptive to the market if a burden on trading or clearing. The SEFs in order to implement Core SEF went into bankruptcy.758 Therefore, Commission believes that Core Principle Principle 13. Proposed § 37.1301(a) it contended that 12 months of working 11 adequately addresses NGSA’s required a SEF to maintain financial capital is the absolute minimum amount concern. The Commission also notes resources sufficient to enable it to of financial resources that SEFs should that it has not limited a SEF’s choice of perform its functions in compliance have, and recommend that the DCOs. The Commission believes that with the SEF core principles. Proposed Commission require that SEFs have 18 SDRs and DCOs should be able to § 37.1301(b) required an entity operating months of working capital.759 compete for a SEF’s business subject to as both a SEF and a DCO to comply with (2) Commission Determination the anticompetitive considerations both the SEF financial resources under Core Principle 11. Additionally, requirements and the DCO financial The Commission is adopting the Commission notes that multiple resources requirements in § 39.11.753 § 37.1301 as proposed.760 To address the SEFs are likely to trade the same swap Proposed § 37.1301(c) stated that concerns about the financial resources contracts so market participants will be financial resources would be considered requirement, the Commission notes that able to choose the appropriate SEF to sufficient if their value is at least equal Core Principle 13 requires each SEF to trade swaps based on SDR and other to a total amount that would enable the maintain adequate financial resources to considerations. SEF, or applicant for designation as discharge its responsibilities.761 In order such, to cover its operating costs for a to fulfill this responsibility, the core 12. Subpart M—Core Principle 12 period of at least one year, calculated on principle states that the financial (Conflicts of Interest) a rolling basis. resources of a SEF shall be considered Core Principle 12 governs conflicts of to be adequate if the value of the interest.749 In the SEF NPRM, the (1) Summary of Comments financial resources exceeds the total Commission proposed to codify the Several commenters raised concerns amount that would enable the SEF to statutory text of Core Principle 12 in about the financial resources cover its operating costs for a period of proposed § 37.1200, and adopts that rule requirement to cover one year of one year, calculated on a rolling as proposed. As noted in the SEF operating costs. Parity Energy basis.762 NPRM, the substantive regulations recommended that the Commission In response to comments that Core implementing Core Principle 12 were interpret ‘‘operating costs of a swap Principle 13 should be interpreted to proposed in a separate release titled execution facility for a 1-year period’’ to mean the cost to wind-down a SEF’s ‘‘Requirements for Derivatives Clearing be the cost to the SEF of an orderly operations, the Commission notes that Organizations, Designated Contract wind-down of operations, where the such an interpretation would require Markets, and Swap Execution Facilities SEF is one of many execution avenues SEFs to have significantly less financial Regarding the Mitigation of Conflicts of for standardized, cleared swaps and its resources. The Commission believes Interest.’’ 750 Until such time as the failure would have minimal impact on that a SEF’s financial strength is vital to Commission may adopt the substantive market risk or stability.754 Phoenix ensure that the SEF can discharge its rules implementing Core Principle 12, recommended that because a SEF does not take or hold positions in any of the 755 Phoenix Comment Letter at 4 (Mar. 7, 2011). SEFs have reasonable discretion to 756 products traded on it, an orderly wind- TruMarx Comment Letter at 7 (Mar. 8, 2011). comply with this core principle as 757 Id. stated in § 37.100. down of a SEF should take six months 758 SDMA Comment Letter at 12 (Mar. 8, 2011). so SEFs should be required to maintain 759 13. Subpart N—Core Principle 13 Id. 760 The Commission is making a technical change (Financial Resources) 752 Id. due to the fact that the cross reference in Core Principle 13 requires a SEF to 753 See Derivatives Clearing Organization General § 37.1301(b) should include ‘‘of this chapter’’ at the have adequate financial, operational, Provisions and Core Principles, 76 FR 69334 (Nov. end of the reference in order to comply with federal 8, 2011). Commission regulation § 39.11 establishes regulatory guidelines. Accordingly, the Commission and managerial resources to discharge requirements that a DCO will have to meet in order is revising § 37.1301(b) to read: ‘‘An entity that each of its responsibilities.751 In to comply with DCO Core Principle B (Financial operates as both a swap execution facility and a particular, Core Principle 13 states that Resources), as amended by the Dodd-Frank Act. derivatives clearing organization shall also comply a SEF’s financial resources are Amended Core Principle B requires a DCO to with the financial resources requirements of section possess financial resources that, at a minimum, 39.11 of this chapter.’’ The Commission is also exceed the total amount that would enable the DCO removing the phrase ‘‘or applicant for designation 748 NGSA Comment Letter at 5 (Jun. 8, 2012). to meet its financial obligations to its clearing as such’’ from § 37.1301(c) because it is 749 CEA section 5h(f)(12); 7 U.S.C. 7b–3(f)(12). members notwithstanding a default by the clearing unnecessary. Section 37.3 and Form SEF read 750 Requirements for Derivatives Clearing member creating the largest financial exposure for together make clear that an applicant must comply Organizations, Designated Contract Markets, and the DCO in extreme but plausible conditions; and with the financial resources requirement. Swap Execution Facilities Regarding the Mitigation enable the DCO to cover its operating costs for a 761 CEA section 5h(f)(13)(A); 7 U.S.C. 7b– of Conflicts of Interest, 75 FR 63732 (proposed Oct. period of one year, as calculated on a rolling basis. 3(f)(13)(A). 18, 2010). 754 Parity Energy Comment Letter at 6 (Mar. 25, 762 CEA section 5h(f)(13)(B); 7 U.S.C. 7b– 751 CEA section 5h(f)(13); 7 U.S.C. 7b–3(f)(13). 2011). 3(f)(13)(B).

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core principle responsibilities in (2) Commission Determination Commission regarding the calculation of 770 accordance with the CEA and that those The Commission is revising proposed projected operating costs. This costs are greater than the cost to wind- § 37.1302(a) to state that a SEF’s own flexibility would be limited if the down operations. Based on its capital means its assets minus its Commission prescribed specific experience regulating DCMs and DCOs, liabilities calculated in accordance with methodologies for computing projected the Commission has learned that U.S. Generally Accepted Accounting operating costs in the rule text. In financial strength is vital to market Principles (‘‘GAAP’’). The Commission response to MarketAxess’s comment, continuity and the ability of an entity to believes that if a particular financial the Commission notes that SEFs may withstand unpredictable market events, resource is an asset under GAAP, then work with the Commission staff to and believes that one year of operating it is appropriate for inclusion in the create an appropriate methodology for expenses on a rolling basis is calculation for this rule. If a particular computing such operating costs. appropriate. For these reasons, the financial resource is not an asset under (d) § 37.1304—Valuation of Financial Commission also disagrees with GAAP, but based upon the facts and Resources TruMarx’s argument that SEFs should circumstances a SEF believes that the not have such stringent financial particular financial resource should be Proposed § 37.1304 required a SEF, resources standards because they will acceptable, the Commission staff will not less than quarterly, to compute the not hold the risks of positions and work with the SEF to determine current market value of each financial trades. whether such resource is acceptable. In resource used to meet its obligations this regard, the Commission is clarifying under proposed § 37.1301. The (b) § 37.1302—Types of Financial that the language in final § 37.1302(b) is proposed rule required SEFs to perform Resources intended to provide flexibility to both the valuation at other times as Proposed § 37.1302 set forth the type SEFs and the Commission in appropriate. As stated in the SEF of financial resources available to satisfy determining other acceptable types of NPRM, the rule is designed to address the requirements of proposed § 37.1301. financial resources on a case-by-case the need to update valuations in The proposed rule stated that financial basis. circumstances where there may have resources may include: (a) The SEF’s Finally, the Commission notes that it been material fluctuations in market own capital; and (b) Any other financial may not have jurisdiction over a SEF’s value that could impact a SEF’s ability resource deemed acceptable by the parent company or its affiliates; to meet its obligations under proposed 771 Commission. The Commission invited therefore, the Commission cannot § 37.1301. The proposed rule comment regarding particular financial consider the parent company’s or required that, when valuing a financial resources to be included in the final affiliates’ financial resources in resource, the SEF reduce the value, as determining whether the SEF possesses regulation.763 appropriate, to reflect any market or adequate financial resources. credit risk specific to that particular 772 (1) Summary of Comments (c) § 37.1303—Computation of Financial resource (i.e., apply a haircut). The Resource Requirement 768 SEF NPRM stated that the Commission Several commenters recommended would permit SEFs to exercise that the Commission include specific Proposed § 37.1303 required a SEF, discretion to determine applicable examples of financial resources that each fiscal quarter, to make a reasonable haircuts, which would be subject to might satisfy the requirement. Phoenix calculation of its projected operating Commission review and acceptance.773 recommended that the Commission costs over a twelve-month period to include in final § 37.1302 the following determine the amount needed to meet (1) Summary of Comments financial resources: assets of a parent the requirements of proposed § 37.1301. MarketAxess commented that company that wholly owns the SEF, Proposed § 37.1303 provided SEFs with proposed § 37.1304 did not prescribe and, subject to § 37.1304 (Valuation of reasonable discretion to determine the specific methodologies for valuing financial resources), the SEF’s accounts methodology used to compute such 764 financial resources and recommended receivable from SEF members. projected operating costs. The proposed that the Commission provide a safe Phoenix contended that as long as the rule authorized the Commission to harbor for specific methodologies.774 parent company has committed to review the methodology and require guarantee the financial resource changes as appropriate. (2) Commission Determination obligations of the SEF, those assets (1) Summary of Comments The Commission is adopting should be available to the SEF, and that § 37.1304 as proposed.775 As with amounts owed to a SEF by its customers MarketAxess noted that the proposed are easily obtainable by a SEF.765 CME regulations do not prescribe specific 770 believed that Congress intended the methodologies for computing projected The Commission is revising the language of operating costs and recommended that § 37.1303 for clarity. term ‘‘financial resources’’ to be 771 Core Principles and Other Requirements for construed broadly and include anything the Commission provide a safe harbor Swap Execution Facilities, 76 FR at 1231. of value at the SEF’s disposal, including for specific methodologies.769 772 A ‘‘haircut’’ is a deduction taken from the 766 value of an asset to reserve for potential future operating revenues. Reuters (2) Commission Determination recommended that assets of affiliated adverse price movements in such asset. 773 Core Principles and Other Requirements for entities within a corporate group should The Commission is adopting § 37.1303 as proposed because it Swap Execution Facilities, 76 FR at 1231 n. 102. be acceptable types of financial 774 MarketAxess Comment Letter at 39 (Mar. 8, resources.767 provides flexibility to both SEFs and the 2011). 775 MarketAxess noted that § 37.1304 contains a 768 The Commission is renaming the title of this typographical error as it mistakenly cross-references 763 Core Principles and Other Requirements for section from ‘‘Computation of Financial Resource proposed § 37.701, which relates to the mandatory Swap Execution Facilities, 76 FR at 1230. Requirement’’ to ‘‘Computation of Projected clearing requirement, instead of proposed 764 Phoenix Comment Letter at 5 (Mar. 7, 2011). Operating Costs to Meet Financial Resource § 37.1301. The Commission has made this technical 765 Id. Requirement’’ to provide greater clarity. change in the final rule. Additionally, the 766 CME Comment Letter at 37 (Feb. 22, 2011). 769 MarketAxess Comment Letter at 39 (Mar. 8, Commission is revising the language of § 37.1304 767 Reuters Comment Letter at 8 (Mar. 8, 2011). 2011). for clarity.

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§ 37.1303, § 37.1304 provides flexibility liquid asset requirement to only those resource available to meet those to both SEFs and the Commission SEFs whose failure could impact market requirements. Proposed § 37.1306(a)(2) regarding the valuation of financial stability.781 SDMA, however, required a SEF to provide the resources. This flexibility would be recommended that the Commission Commission with a financial statement, limited if the Commission prescribed require SEFs to have at least 12 months including balance sheet, income specific methodologies for valuing of unencumbered capital.782 statement, and statement of cash flows financial resources in the rule text. In (2) Commission Determination of the SEF or of its parent company. response to MarketAxess’s comment, Proposed § 37.1306(b) required the Commission notes that SEFs may The Commission is adopting calculations to be made on the last work with the Commission staff to § 37.1305 as proposed. The Commission business day of the SEF’s fiscal quarter. create an appropriate methodology for views a six month period as appropriate Proposed § 37.1306(c) required a SEF valuing such financial resources. for a wind down period and notes that to provide the Commission with commenters did not provide any sufficient documentation explaining the (e) § 37.1305—Liquidity of Financial support for alternative time frames. In Resources methodology it used to calculate its response to Parity Energy’s comment, financial requirements and the basis for Proposed § 37.1305 required a SEF’s the Commission notes that the purpose its valuation and liquidity financial resources to include of the liquidity requirement is so that all determinations. The proposed rule also unencumbered, liquid financial assets SEFs have liquid financial assets to required the SEF to provide copies of (i.e., cash and/or highly liquid allow them to continue to operate and any agreements establishing or securities) equal to at least six months’ to wind down in an orderly fashion. amending a credit facility, insurance operating costs. As noted in the SEF Therefore, the Commission is not coverage, or any similar arrangement NPRM, the Commission believes that limiting the liquidity requirement to that evidences or otherwise supports its the requirement to have six months’ only those SEFs whose failure could conclusions. worth of unencumbered, liquid impact market stability. In this regard, Finally, proposed § 37.1306(d) financial assets would provide a SEF the Commission notes that the statutory required SEFs to file the report no later time to liquidate the remaining financial financial resources requirements apply than 17 business days 784 from the end assets it would need to continue to all SEFs and are necessary to ensure of its fiscal quarter but allowed SEFs to operating for the last six months of the core principle compliance. The statute request an extension of time from the 776 required one-year period. The does not distinguish SEFs’ financial Commission. proposed rule stated that if any portion resources based on their market impact. of such financial resources is not The Commission also notes that it is (1) Summary of Comments sufficiently liquid, the SEF may take using the term ‘‘unencumbered’’ in CME wrote that it would not be into account a committed line of credit § 37.1305 in the normal commercial feasible for SEFs to comply with the or similar facility to satisfy this sense to refer to assets that are not proposed filing deadline of 17 business requirement. As stated in the SEF subject to a security interest or other days from the end of a SEF’s fiscal NPRM, a SEF may only use a committed adverse claims. By ‘‘committed line of quarter.785 CME recommended a line of credit or similar facility to meet credit or similar facility,’’ the reporting deadline of 40 calendar days the liquidity requirements set forth in Commission means a committed, after the end of each fiscal quarter and § 37.1305.777 Accordingly, the SEF irrevocable contractual obligation to 60 calendar days after the end of the NPRM stated that a committed line of provide funds on demand with fiscal year, which it noted is consistent credit or similar facility is not available preconditions limited to the execution with the SEC’s reporting to a SEF to satisfy the financial of appropriate agreements. For example, requirements.786 CME also sought resources requirements of § 37.1301.778 a facility with a material adverse clarification that consolidated financial (1) Summary of Comments financial condition restriction would statements covering multiple registered not be acceptable. The purpose of this entities satisfy the reporting Several commenters recommended requirement is for a SEF to have no requirements.787 alternate liquidity requirements to the impediments to accessing its line of MarketAxess stated that the proposed six months of operating costs. CME credit at the time it needs liquidity. reporting requirements are unnecessary commented that the liquidity Further, SEFs are encouraged to and burdensome, and recommended measurement is only relevant in the periodically check their line of credit that the Commission allow a senior context of winding-down operations, arrangements to confirm that no officer of the SEF to represent to the and claimed that a three-month period, operational difficulties are present. Commission that the SEF satisfies the rather than a six-month period, is a 788 (f) § 37.1306—Reporting financial resources requirements. more accurate assessment of how long it Two commenters discussed 779 Requirements 783 would take for a SEF to wind down. disclosure of the reports. CME Similarly, Phoenix recommended that a Proposed § 37.1306(a)(1) required recommended that the Commission SEF be required to maintain liquid that, at the end of each fiscal quarter, or clarify that filings made in compliance assets equal to three months of at any time upon Commission request, with the proposed financial resources operating expenses.780 Parity Energy a SEF report to the Commission: (i) The regulations are confidential.789 commented that the Commission should amount of financial resources necessary tailor financial requirements to a SEF’s to meet the requirements of § 37.1301; 784 This filing deadline is consistent with the size and market impact and and (ii) the value of each financial deadline imposed on FCMs for the filing of monthly recommended limiting the six month financial reports. See 17 CFR 1.10(b) for further 781 Parity Energy Comment Letter at 6 (Mar. 25, details. 776 Core Principles and Other Requirements for 2011). 785 CME Comment Letter at 38 (Feb. 22, 2011). Swap Execution Facilities, 76 FR at 1231. 782 SDMA Comment Letter at 12 (Mar. 8, 2011). 786 Id. 777 Id. 783 The Commission is renaming the title of this 787 Id. 778 Id. section from ‘‘Reporting Requirements’’ to 788 MarketAxess Comment Letter at 40 (Mar. 8, 779 CME Comment Letter at 37 (Feb. 22, 2011). ‘‘Reporting to the Commission’’ to provide greater 2011). 780 Phoenix Comment Letter at 4 (Mar. 7, 2011). clarity. 789 CME Comment Letter at 38 (Feb. 22, 2011).

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However, SIFMA AMG commented that The Commission further clarifies that analysis and oversight address six SEFs should submit to the Commission it does not intend to make financial categories of risk analysis and oversight, and make available for public comment resources reports public. However, including: Information security; evidence demonstrating sufficient where such information is, in fact, business continuity-disaster recovery resources.790 confidential, the Commission (‘‘BC–DR’’) planning and resources; encourages SEFs to submit a written capacity and performance planning; (2) Commission Determination request for confidential treatment of systems operations; systems The Commission is adopting such filings under the Freedom of development and quality assurance; and § 37.1306 as proposed, subject to certain Information Act (‘‘FOIA’’), pursuant to physical security and environmental amendments to the filing deadlines.791 the procedures established in section controls. Proposed § 37.1401(c) The Commission agrees with CME that 145.9 of the Commission’s suggested that a SEF follow generally 792 the proposed 17 business day filing regulations. The determination of accepted standards and best practices deadline may be burdensome. In the whether to disclose or exempt such when addressing the categories of risk final rule, the Commission is extending information in the context of a FOIA analysis and oversight. Proposed § 37.1401(d) and (e) also the 17 business day proposed filing proceeding would be governed by the required each SEF to maintain a BC–DR deadline to 40 calendar days for the provisions of part 145 and any other plan, BC–DR resources, emergency fiscal quarter reports and to 60 calendar relevant provision. Finally, the Commission is adding procedures, and backup facilities days for the fiscal year-end report, new § 37.1307 titled ‘‘Delegation of sufficient to enable timely recovery and which will also harmonize the filing Authority’’ to the final SEF rules to resumption of its operations and deadlines with the SEC’s requirements delegate authority to the Director of ongoing fulfillment of its for its Form 10–Q and Form 10–K. The DMO to perform certain functions that responsibilities and obligations as a SEF Commission also clarifies that are reserved to the Commission under following any disruption, either through consolidated financial statements must subpart N. sufficient infrastructure and personnel disclose all relevant and appropriate resources of its own or through figures such that a determination of the 14. Subpart O—Core Principle 14 sufficient contractual arrangements with sufficiency of financial resources of a (System Safeguards) other SEFs or disaster recovery service SEF can be made without additional Core Principle 14 pertains to the providers. If the Commission requests for information from the entity. establishment of system safeguards and determines that a SEF is a critical In such case, consolidated financial requires SEFs to: (1) Establish and financial market, then that SEF would statements would comply with the maintain a program of risk analysis and be subject to more stringent reporting requirements. oversight to identify and minimize requirements, set forth in § 40.9 of the In response to MarketAxess’s sources of operational risk through the Commission’s regulations. comment that the reporting development of appropriate controls The proposed rule also required each requirements are unnecessary and and procedures and the development of SEF to notify the Commission staff of burdensome, the Commission believes automated systems that are reliable, various system security-related events, that prudent financial management secure, and have adequate scalable including prompt notice of all electronic requires SEFs to prepare and review capacity; (2) establish and maintain trading halts and systems malfunctions financial reports on a regular basis and emergency procedures, backup (proposed § 37.1401(f)(1)), cyber- expects that SEFs would regularly facilities, and a plan for disaster security incidents (proposed review their finances. In this regard, the recovery that allow for the timely § 37.1401(f)(2)), and any activation of Commission notes that because of the recovery and resumption of operations the SEF’s BC–DR plan (proposed importance of this requirement, a mere and the fulfillment of the § 37.1401(f)(3)). In addition, the representation by a senior officer is responsibilities and obligations of the proposed rule required each SEF to insufficient for verification that the SEF SEF; and (3) periodically conduct tests provide the Commission staff with meets its financial obligations. The to verify that backup resources are timely advance notice of all planned quarterly reporting required by sufficient to ensure continued order changes to automated systems that may § 37.1306 will adequately provide the processing and trade matching, price impact the reliability, security, or Commission with assurance that a SEF reporting, market surveillance, and adequate scalable capacity of such satisfies its financial resources maintenance of a comprehensive and systems (proposed § 37.1401(g)(1)) and requirements. The Commission notes accurate audit trail.793 In the SEF planned changes to programs of risk that DCMs and DCOs have similar NPRM, the Commission proposed to analysis and oversight (proposed financial resources reporting obligations codify the statutory text of Core § 37.1401(g)(2)). and does not believe that SEFs should Principle 14 in proposed § 37.1400, and The proposed rule also required each be treated differently. The Commission adopts that rule as proposed. SEF to provide relevant documents to the Commission (proposed § 37.1401(h)) also believes that much of the (a) § 37.1401—Requirements information required by the reports and to conduct regular, periodic, should be readily available to a Proposed § 37.1401(a) required a SEF objective testing and review of its sophisticated organization, which the to: Establish and maintain a program of automated systems (proposed Commission expects would regularly risk analysis and oversight; establish § 37.1401(i)). Moreover, proposed account for its financial resources. As and maintain emergency procedures, § 37.1401(j) required each SEF, to the such, the Commission notes that the backup facilities, and a plan for disaster extent practicable, to coordinate its BC– cost of submitting these reports to the recovery; and periodically conduct tests DR plan with those of the market Commission would be de minimis. to verify that backup resources are participants upon whom it depends to sufficient. Proposed § 37.1401(b) provide liquidity, to initiate coordinated testing of such plans, and to ensure that 790 SIMFA AMG Comment Letter at 13 (Mar. 8, required that a SEF’s program of risk 2011). its BC–DR plan takes into account the 791 The Commission is also making certain non- 792 17 CFR 145.9. BC–DR plans of relevant substantive clarifications to § 37.1306. 793 CEA section 5h(f)(14); 7 U.S.C. 7b–3(f)(14). telecommunications, power, water, and

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other essential service providers. proposed, subject to the modifications appendix E to part 40 of the Finally, proposed § 37.1401(k) stated described below. Commission’s regulations, which that part 46 of the Commission’s Although the Commission did not describes the Commission’s criteria for regulations governs the obligations of receive related comments, the determining whether a SEF is a critical entities determined to be critical Commission is eliminating proposed financial market.803 Appendix E to part financial markets, with respect to § 37.1401(a) because this paragraph is 40 describes the evaluation and maintenance and geographical dispersal repetitious of proposed rule § 37.1400. notification process for SEFs once of disaster recovery resources. The Commission is also moving the designated as a critical financial following portions of proposed market.804 (1) Summary of Comments § 37.1401 to the guidance in appendix B With respect to the references to CME objected to what it considers to to part 37 because the rules as proposed § 40.9 regarding critical financial be an overly broad requirement in provided SEFs with a degree of markets in proposed § 37.1401(d) and proposed § 37.1401(f)(1) to notify the discretion: (1) Proposed § 37.1401(c) 37.1401(k), the Commission notes that Commission staff promptly of all suggesting that a SEF follow generally § 40.9, which was proposed in a electronic trading halts and systems accepted standards and best practices in separate rulemaking,805 is not yet final. malfunctions.794 CME stated that the addressing the categories of its risk However, SEFs deemed critical financial required reporting should be limited analysis and oversight program; (2) the markets will be subject to the only to material system failures.795 CME portion of proposed § 37.1401(i) requirements set forth in § 40.9 upon its also objected to proposed suggesting that a SEF’s testing of its effective date. The Commission further § 37.1401(g)(1), stating that the automated systems and BC–DR notes that the reference to part 46 in requirement that SEFs provide the capabilities be conducted by qualified, proposed § 37.1401(k) was a technical Commission with timely advance notice independent professionals; and (3) error. Instead, the proposed rule should of all planned changes to automated proposed § 37.1401(j) suggesting that a have referenced part 40. Accordingly, systems that may impact the reliability, SEF coordinate its BC–DR plan with the Commission is replacing the security, or adequate scalable capacity those of others.802 Given that these mistaken reference to part 46 with a of such systems is overly burdensome, proposed provisions provided SEFs reference to part 40. and not cost effective.796 Additionally, with a degree of discretion, the 15. Subpart P—Core Principle 15 CME stated that the proposed Commission believes that they are better (Designation of Chief Compliance § 37.1401(g)(2) requirement that SEFs suited as guidance rather than rules, and Officer) provide timely advance notice of all as guidance, SEFs will have greater Core Principle 15 establishes the planned changes to their program of risk flexibility in administering their position and duties of chief compliance analysis and oversight is too broad and obligations. officer (‘‘CCO’’).806 Core Principle 15 generally unnecessary.797 Finally, CME In response to CME’s comments, the noted that it does not control, or Commission is revising proposed also requires the CCO to design generally have access to, the details of § 37.1401(f)(1) to provide that SEFs only procedures to establish the handling, the disaster recovery plans of its major need to promptly notify the Commission management response, remediation, retesting, and closing of noncompliance vendors.798 staff of all material system malfunctions. issues.807 The statute also requires a MarketAxess and WMBAA sought With respect to planned changes to automated systems or programs of risk CCO to prepare and sign an annual clarification of the criteria used to compliance report that is filed with the determine which SEFs are ‘‘critical analysis and oversight, the Commission is revising proposed § 37.1401(g) to Commission.808 In addition, Core financial markets,’’ as referenced in Principle 15 requires the CCO to include proposed § 37.1401(d).799 require timely advance notification of all material changes to automated in the report a certification that, under (2) Commission Determination systems and to programs of risk analysis penalty of law, the report is accurate and oversight. The Commission believes and complete.809 In the SEF NPRM, the As noted in the SEF NPRM, that these revisions are appropriate Commission proposed to codify the automated systems play a central and because the scope of the proposed rules statutory text of Core Principle 15 in critical role in today’s electronic may have been too broad as CME noted. proposed § 37.1500, and adopts that rule financial market environment, and the The Commission notes that proposed as proposed. oversight of core principle compliance § 37.1401(j) does not require SEFs to by SEFs with respect to automated (a) § 37.1501—Chief Compliance Officer control or have access to the details of systems is an essential part of effective the disaster recovery plans of its major Proposed § 37.1501 implemented the oversight of swaps market.800 Advanced vendors. Rather, the requirement in the statutory provisions of Core Principle 15 computer systems are fundamental to a proposed rule, which is being adopted and granted CCOs the authority SEF’s ability to meet its obligations and as guidance, suggests coordination to necessary to fulfill their responsibilities. responsibilities under the core the extent possible. (1) § 37.1501(a)—Definition of Board of principles.801 Accordingly, the In response to comments from Directors Commission is adopting § 37.1401 as WMBAA and MarketAxess, the Proposed § 37.1501(a) defined ‘‘board Commission is revising proposed 794 of directors’’ as the board of directors of CME Comment Letter at 36 (Feb. 22, 2011). § 37.1401(d) to include a reference to 795 Id. 796 Id. at 37. 803 Business Continuity and Disaster Recovery, 75 802 As a result of these changes, proposed section 797 Id. FR 42633 (proposed Jul. 22, 2010). The Commission (b) is adopted as section (a), proposed section (d) 798 Id. notes that this rulemaking is not yet final. is adopted as section (b), proposed section (e) is 804 Id. at 42639. 799 MarketAxess Comment Letter at 40 (Mar. 8, adopted as section (c), proposed section (f) is 805 Id. at 42638–39. 2011); WMBAA Comment Letter at 28 (Mar. 8, adopted as section (d), proposed section (g) is 806 2011). adopted as section (e), proposed section (h) is CEA section 5h(f)(15); 7 U.S.C. 7b–3(f)(15). 800 Core Principles and Other Requirements for adopted as section (f), proposed section (i) is 807 Id. Swap Execution Facilities, 76 FR at 1231. adopted as section (g), and proposed section (k) is 808 Id. 801 Id. adopted as section (h). 809 Id.

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a swap execution facility or for those commenters stated that the traditional modifications described below. In swap execution facilities whose and proper role of a CCO is to advise general, the Commission disagrees with organizational structure does not management on compliance issues and the commenters who believe that a include a board of directors, a body that management has the authority to CCO’s function is solely to monitor and performing a function similar to a board enforce compliance policies and advise on compliance issues. These of directors. procedures.813 The commenters commenters do not provide any recommended that the Commission statutory support for this view and their (i) Commission Determination revise the proposed rules to give effect position appears to conflict with the The Commission received no to the well-established and critical statutory responsibilities of a CCO as set comments on § 37.1501(a) and is distinction between a CCO and forth in the Act. In particular, CEA adopting the rule as proposed. management.814 section 5h(f)(15)(B) requires a CCO to Some commenters stated that the ‘‘resolve any conflicts of interest that (2) § 37.1501(b)—Designation and proposed rules should not prohibit a Qualifications of Chief Compliance may arise’’ and to ‘‘ensure compliance CCO from serving as the SEF’s general 822 Officer with this Act.’’ These duties suggest counsel or as a member of the SEF’s that a CCO is intended to be more than Proposed § 37.1501(b)(1) required a legal department.815 WMBAA noted that just an advisor, and must have the SEF to establish a CCO position and to it is not uncommon for a company’s appropriate authority to enforce policies designate an individual to serve in that CCO to be its general counsel.816 and procedures related to his or her capacity. Proposed § 37.1501(b)(1)(i) Similarly, CME noted that many CCOs areas of responsibility. The Commission required that a SEF provide its CCO have certain other job responsibilities, believes that such authority is with the authority and resources to most typically in related ‘‘control areas’’ particularly important for a SEF CCO, develop and enforce policies and such as the Legal Department or Internal given the CCO’s responsibility in procedures necessary to fulfill its Audit.817 Additionally, MarketAxess overseeing a SEF’s self-regulatory statutory and regulatory duties. In stated that this prohibition could programs. addition, proposed § 37.1501(b)(1)(ii) prevent a smaller SEF from structuring However, to clarify the CCO’s provided that CCOs must have its internal management in the most supervisory authority, the Commission supervisory authority over all staff efficient manner.818 Parity Energy is amending proposed § 37.1501(b)(1)(ii) acting in furtherance of the CCO’s recommended that this requirement to state that ‘‘[t]he chief compliance statutory, regulatory, and self-regulatory only apply to SEFs that could have a officer shall have supervisory authority obligations. substantial impact on market risk and over all staff acting at the direction of Proposed § 37.1501(b)(2) required that stability if they were to fail.819 However, the chief compliance officer’’ (emphasis a CCO have the appropriate background Tradeweb and Better Markets expressed added). This modification provides and skills to fulfill the responsibilities support for a dedicated CCO position greater clarity as to the SEF staff that of the position. Proposed independent of a SEF’s legal must be under the managerial oversight 820 § 37.1501(b)(2)(i) prohibited anyone department. Better Markets also of a CCO by emphasizing that such staff who would be disqualified from commented that in situations where includes persons necessary for SEFs to registration under CEA sections 8a(2) or there are a number of affiliated fulfill their self-regulatory obligations, 8a(3) from serving as a CCO.810 organizations, a single senior CCO including compliance staff (e.g., trade Proposed § 37.1501(b)(2)(ii) prohibited a should have overall responsibility for practice and market surveillance staff CCO from being a member of the SEF’s each affiliated and controlled entity, and enforcement staff). The Commission legal department or its general even if the individual entities have notes that other SEF staff are not 821 counsel.811 CCOs. captured by the requirements of (i) Summary of Comments (ii) Commission Determination § 37.1501(b)(1). The Commission is withdrawing The Commission is adopting Some commenters stated that by proposed § 37.1501(b)(2)(ii), which § 37.1501(b) as proposed, subject to two mandating that the CCO have the prohibits the CCO from serving as a authority and resources to ‘‘enforce’’ a SEF’s general counsel or as a member of the Feb. 7, 2011 date of CME’s DCO comment letter SEF’s policies and procedures, the regarding CCOs. The Commission is also changing its legal department. In the SEF NPRM, proposed rules change the traditional CME’s reference to ‘‘DCO’’ to ‘‘SEF’’ for these the Commission noted that there is role of a CCO and give the CCO comments. potentially a conflict of interest present authority that should be reserved for 813 WMBAA Comment Letter II at 2–6 (Mar. 8, if a CCO serves as a SEF’s general senior management.812 These 2011); FXall Comment Letter at 14–15 (Mar. 8, 2011); CME Comment Letter at 5–6 (Feb. 7, 2011). counsel or as a member of its legal 823 814 WMBAA Comment Letter II at 6 (Mar. 8, department. However, the 810 See Core Principles and Other Requirements 2011); FXall Comment Letter at 14–15 (Mar. 8, Commission has determined that the for Swap Execution Facilities, 76 FR at 1232 2011); CME Comment Letter at 6 (Feb. 7, 2011). (discussing the reasons for this requirement). potential costs of hiring additional staff 815 WMBAA Comment Letter II at 6–7 (Mar. 8, 811 to satisfy the requirement in proposed Id. 2011); MarketAxess Comment Letter at 27 (Mar. 8, 812 WMBAA Comment Letter II at 2–6 (Mar. 8, 2011); ICE Comment Letter at 6–7 (Mar. 8, 2011); § 37.1501(b)(2)(ii) may impose an 2011); FXall Comment Letter at 14–15 (Mar. 8, CME Comment Letter at 3 (Feb. 7, 2011). excessive burden on SEFs, particularly 2011); CME Comment Letter at 5–6 (Feb. 7, 2011). 816 WMBAA Comment Letter II at 6 (Mar. 8, smaller SEFs. WMBAA submitted two comment letters to the SEF 2011). Although the Commission is rulemaking comment file on Mar. 8, 2011. The 817 CME Comment Letter at 3 (Feb. 7, 2011). second comment letter referred to herein as eliminating proposed § 37.1501(b)(2)(ii) 818 ‘‘WMBAA Comment Letter II’’ only pertains to the MarketAxess Comment Letter at 27 n. 31 (Mar. from the final SEF rules, the SEF NPRM’s proposed CCO provisions. 8, 2011). Commission notes that a conflict of 819 Parity Energy Comment Letter at 6 (Mar. 25, Additionally, rather than repeat its comments interest may compromise a CCO’s regarding the CCO provisions that pertain to both 2011). the DCO and SEF NPRMs, CME incorporated its 820 Tradeweb Comment Letter at 12 (Mar. 8, entire DCO rulemaking comment letter regarding 2011); Better Markets Comment Letter at 19 (Mar. 822 CEA sections 5h(f)(15)(B)(iii) and (v); 7 U.S.C. CCOs dated Feb. 7, 2011 as Exhibit B to its SEF 8, 2011). 7b–3(f)(15)(B)(iii) and (v). comment letter dated Mar. 8, 2011. The 821 Better Markets Comment Letter at 19 (Mar. 8, 823 Core Principles and Other Requirements for Commission notes these comments by referencing 2011). Swap Execution Facilities, 76 FR at 1232, n. 103.

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ability to effectively fulfill his or her remove a CCO. If a SEF does not have AFR and Better Markets responsibilities as a CCO, and that such a board of directors, the proposed rule recommended, however, that the rules conflicts may be more likely to arise provided that the CCO may be removed for CCO’s appointment, compensation, when a CCO is also employed as the by its senior officer. Proposed supervision, and removal be SEF’s general counsel or within its legal § 37.1501(c)(3) also required a SEF to strengthened.832 AFR recommended department. Therefore, the Commission notify the Commission of, and explain that CCOs be responsible only to a SEF’s expects that as soon as any conflict of the reasons for, the departure of the ROC.833 It argued that CCO interest becomes apparent, a SEF will CCO within two business days. In independence may only be ensured by immediately implement contingency addition, proposed § 37.1501(c)(3) vesting oversight of the position measures. For example, a SEF may required a SEF to immediately appoint exclusively in public directors.834 reassign the conflicted matter to an an interim CCO, to appoint a permanent Similarly, Better Markets recommended alternate employee who does not report CCO as soon as reasonably practicable, that decisions relating to a CCO’s to the CCO and who does not possess and to notify the Commission within designation, compensation, and a conflict of interest. The Commission two business days of appointing any termination should be the sole believes that a SEF’s Regulatory new interim or permanent CCO. responsibility of the independent Oversight Committee (‘‘ROC’’) 824 members of the board of directors.835 (i) Summary of Comments should regularly monitor for potential (ii) Commission Determination conflicts of interest in its oversight of Some commenters requested that the the CCO, and should be particularly Commission define the term ‘‘senior The Commission is adopting involved in the oversight of any matter officer’’ and provided § 37.1501(c) as proposed, subject to in which a CCO was recused. recommendations.825 FXall several modifications described The Commission disagrees with the recommended that the Commission below.836 In response to commenters’ recommendation by Better Markets to define the term ‘‘senior officer’’ to requests to define the term ‘‘senior require a single senior CCO to have include the SEF’s president, chief officer,’’ the Commission believes, based responsibility over multiple affiliated executive officer, chief legal officer, or on the statutory language that requires registered entities, some of which would other officer with ultimate supervisory a CCO to report directly to the ‘‘board be required by the CEA and Commission authority for the SEF entity.826 CME or to the senior officer,’’ that ‘‘senior regulations to have their own CCOs. recommended that the term ‘‘senior officer’’ would only include the most Such a situation might cause officer’’ be defined to include the senior senior executive officer of the legal unnecessary confusion and dilute CCO officer of a division that is engaged in entity that is registered as a SEF. accountability at the individual entity SEF activities rather than the senior In response to the commenters’ level. Additionally, the Commission officer of a larger corporation.827 requests for greater flexibility, the believes that the proposed rule is Commenters also requested that the Commission believes that proposed sufficient to manage instances where Commission grant a SEF greater § 37.1501(c) generally strikes the there are a number of affiliated flexibility in determining how a CCO is appropriate balance between flexibility organizations within a corporate family. appointed, compensated, supervised, and ensuring that a SEF’s CCO is In these instances, each SEF would be and removed.828 In this regard, WMBAA insulated from day-to-day commercial required to appoint its own CCO. stated that a CCO should be permitted pressures. The proposed rules provide a to satisfy the statutory requirement of degree of flexibility by allowing a SEF’s (3) § 37.1501(c)—Appointment, reporting to the board of directors or a board of directors or senior officer to Supervision, and Removal of Chief senior officer by reporting to a ROC.829 appoint, set the compensation of, and Compliance Officer MarketAxess commented that the supervise the CCO. The proposed rules Proposed § 37.1501(c)(1) required that proposed requirements for a majority of also protect the CCO from undue a CCO’s appointment and compensation the board of directors to approve the influence by requiring that the board of be approved by a majority of the SEF’s appointment, compensation, and directors or the senior officer (if the SEF board of directors or its senior officer. removal of the CCO go beyond the does not have a board of directors) be Proposed § 37.1501(c)(1) also required a statutory mandate and would effectively responsible for removing the CCO and CCO to meet with the SEF’s board of place the CCO at the same level as the that the CCO meet with the board of directors at least annually and the ROC SEF’s senior officer.830 CME argued that directors at least annually and with the at least quarterly, and to provide any each SEF should be given the flexibility ROC at least quarterly. In response to information requested regarding the to take additional steps beyond those CME’s comment about additional SEF’s regulatory program. In addition, required in the proposed rule, based on flexibility beyond the rules, the proposed § 37.1501(c)(1) required a SEF the SEF’s particular corporate structure, Commission notes that § 37.1501(c) sets to notify the Commission of the size, and complexity, to ensure an forth minimum standards so a SEF may appointment of a new CCO within two appropriate level of independence for implement additional measures if it business days of such appointment. its CCO.831 deems doing so necessary to insulate the Proposed § 37.1501(c)(2) required a CCO CCO from undue influence. The to report directly to the board of 825 FXall Comment Letter at 14 (Mar. 8, 2011); Commission encourages SEFs to review Tradeweb Comment Letter at 12 n.8 (Mar. 8, 2011); directors or to the senior officer of the CME Comment Letter at 2–3 (Feb. 7, 2011). and enact conflict mitigation procedures SEF, at the SEF’s discretion. Proposed 826 FXall Comment Letter at 14 (Mar. 8, 2011). as appropriate for their specific § 37.1501(c)(3) required approval of a 827 CME Comment Letter at 2–3 (Feb. 7, 2011). majority of a SEF’s board of directors to 828 Tradeweb Comment Letter at 6 (Jun. 3, 2011); 832 AFR Comment Letter at 6 (Mar. 8, 2011); MarketAxess Comment Letter at 26 (Mar. 8, 2011); Better Markets Comment Letter at 19–20 (Mar. 8, 2011). 824 See Requirements for Derivatives Clearing WMBAA Comment Letter II at 7 (Mar. 8, 2011); 833 Organizations, Designated Contract Markets, and Tradeweb Comment Letter at 12 (Mar. 8, 2011). AFR Comment Letter at 6 (Mar. 8, 2011). Swap Execution Facilities Regarding the Mitigation 829 WMBAA Comment Letter II at 7 (Mar. 8, 834 Id. of Conflicts of Interest, 75 FR 63732, 63747–48 2011). 835 Better Markets Comment Letter at 19–20 (Mar. (proposed Oct. 18, 2010). Proposed § 37.19(b) 830 MarketAxess Comment Letter at 26 (Mar. 8, 8, 2011). describes the role of the ROC. The Commission 2011). 836 The Commission is making certain non- notes that this rule is not yet final. 831 CME Comment Letter at 9 (Feb. 7, 2011). substantive revisions to § 37.1501(c) for clarity.

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corporate and/or organizational with section 5h of the CEA and related reasonably ensure compliance with the structure. Commission regulations; (2) in Act and Commission regulations.842 However, the Commission is revising consultation with the board of directors CME also took issue with the proposed § 37.1501(c) in six respects. or the senior officer, resolving any requirement in proposed First, the Commission is modifying conflicts of interest that may arise; (3) § 37.1501(d)(6), which requires a CCO to proposed § 37.1501(c)(1) to more clearly establishing and administering written ‘‘follow’’ appropriate procedures for the state that the CCO is obligated to meet policies and procedures reasonably handling, management response, with the board of directors at least designed to prevent violations of the remediation, retesting, and closing of annually and with the ROC at least CEA and Commission regulations; (4) noncompliance issues.843 CME quarterly, even if the CCO was ensuring compliance with the CEA and requested that the Commission appointed by, or is supervised by, the Commission regulations relating to eliminate this requirement, which it senior officer of the facility. Second, to agreements, contracts, or transactions, believes is a function of senior clarify a CCO’s duty to provide and with Commission regulations management.844 Additionally, WMBAA information to a SEF’s board of directors issued under section 5h of the CEA; (5) recommended that the Commission or ROC, the Commission is modifying establishing procedures for the delete proposed § 37.1501(d)(8) and proposed § 37.1501(c)(1) to state that remediation of noncompliance issues (d)(9), regarding the supervision of a ‘‘[t]he chief compliance officer shall identified by the CCO; (6) establishing SEF’s self-regulatory program and any provide any information regarding the and following appropriate procedures regulatory service provider, because swap execution facility’s self-regulatory for noncompliance issues; (7) these functions should be the program that is requested by the board establishing a compliance manual and responsibility of management.845 of directors or the regulatory oversight administering a code of ethics; (8) (ii) Commission Determination committee’’ (emphasis added). Third, supervising a SEF’s self-regulatory the Commission is eliminating the program; and (9) supervising the The Commission is adopting requirement in proposed § 37.1501(c)(1) effectiveness and sufficiency of any § 37.1501(d) as proposed, subject to that a CCO’s appointment and regulatory services provided to the SEF. certain modifications described below. compensation require the approval of a The Commission is revising proposed majority of a SEF’s board of directors. (i) Summary of Comments § 37.1501(d)(2) to clarify that the list of The Commission believes that board of enumerated conflicts of interest is not director approval is a sufficient Better Markets and CME commented exhaustive.846 The Commission is not requirement for appointment, and that a on proposed § 37.1501(d)(2) regarding adopting the recommendation by Better 837 SEF should have appropriate discretion conflicts of interest. Better Markets Markets to require the CCO to consult to determine the voting percentage recommended that the Commission with both the independent members of necessary to appoint a CCO or revise proposed § 37.1501(d)(2) to the board of directors and the senior determine salary. Fourth, the require a CCO to consult with both the officer when resolving conflicts of Commission is eliminating the independent members of the board of interest. Considering the statutory requirement in proposed § 37.1501(c)(3) directors and the senior officer when provisions of CEA section 5h, the that a SEF explain the reason for the resolving conflicts of interest, which are Commission believes that it is 838 departure of a CCO within two business particularly contentious. CME unnecessary to require the CCO to do so. days. The Commission believes that the requested that the Commission revise However, the Commission notes that specific reason for the departure may be proposed § 37.1501(d)(2) to require a § 37.1501(d)(2) sets forth minimum unnecessary in most instances. CCO to establish policies and standards so a SEF may institute higher However, the Commission will have the procedures reasonably designed to standards, such as requiring its CCO to opportunity to investigate the reason for resolve any conflicts of interest that may consult with both the independent 839 the departure if it so desires because a arise. Although CME conceded that members of the board of directors and SEF must notify the Commission of a the language in proposed § 37.1501(d)(2) the senior officer when resolving CCO’s departure within two business mirrors the language in the Act, it conflicts of interest. The Commission days. Fifth, the Commission is believes that Congress did not intend for also declines to adopt CME’s eliminating the requirement in proposed the CCO to resolve conflicts in the recommendation regarding conflicts of 840 § 37.1501(c)(3) that a SEF immediately executive or managerial sense. interest. As CME acknowledged, the appoint an interim CCO, and appoint a Several commenters argued that Commission is following the statutory new permanent CCO as soon as proposed § 37.1501(d)(4), requiring a language in its implementation of reasonably practicable, upon the CCO to ‘‘ensure’’ compliance with the § 37.1501(d)(2). removal of a CCO. The Commission Act and Commission regulations, is an In response to commenters’ concerns believes that the requirement to appoint impracticable standard.841 Instead, about the requirement to ‘‘ensure’’ a new CCO is implicit in § 37.1501(b)(1), many of these commenters compliance in proposed § 37.1501(d)(4), which requires that a SEF designate an recommended alternative language, individual to serve as CCO. Finally, the which generally stated that the CCO put 842 Tradeweb Comment Letter at 6–7 (Jun. 3, Commission is eliminating the in place policies and procedures that 2011); Tradeweb Comment Letter at 12 (Mar. 8, requirement in proposed § 37.1501(c)(3) 2011); CME Comment Letter at 4 (Feb. 7, 2011). that a SEF notify the Commission 843 CME Comment Letter at 6 (Feb. 7, 2011). 837 Better Markets Comment Letter at 20 (Mar. 8, 844 within two business days of appointing Id. 2011); CME Comment Letter at 6 (Feb. 7, 2011). 845 WMBAA Comment Letter II at 6 (Mar. 8, a new CCO because this requirement is 838 Better Markets Comment Letter at 19, 20 (Mar. 2011). already included in § 37.1501(c)(1). 8, 2011). 846 The Commission notes that the preamble to 839 CME Comment Letter at 6 (Feb. 7, 2011). the SEF NPRM already clarified this point. To (4) § 37.1501(d)—Duties of Chief 840 Id. provide additional clarity, the Commission is Compliance Officer 841 Tradeweb Comment Letter at 6–7 (Jun. 3, clarifying this point in the final rule by adding the 2011); WMBAA Comment Letter II at 5–6 (Mar. 8, word ‘‘including’’ before the list of enumerated Proposed § 37.1501(d) generally listed 2011); MarketAxess Comment Letter at 26 (Mar. 8, conflicts of interest. See Core Principles and Other the following CCO duties: (1) 2011); Tradeweb Comment Letter at 12 (Mar. 8, Requirements for Swap Execution Facilities, 76 FR Overseeing and reviewing compliance 2011); CME Comment Letter at 4 (Feb. 7, 2011). at 1233.

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the Commission is modifying the rule to (5) § 37.1501(e)—Annual Compliance compliance issues that were not state that the CCO shall take ‘‘reasonable Report Prepared by Chief Compliance properly addressed.’’ 853 MarketAxess steps to ensure compliance with the Act Officer 848 recommended that the Commission and the rules of the Commission.’’ The Proposed § 37.1501(e) generally remove proposed § 37.1501(e)(6) Commission understands that a single enumerated the following information because in its opinion other persons individual cannot guarantee compliance that must be included in the annual should be able to correct the CCO’s with the CEA and Commission compliance report: (1) A description of annual report.854 regulations. The Commission believes the SEF’s written policies and MarketAxess and FSR expressed their that this modification is responsive to procedures, including the code of ethics concern that the CCO’s certification of commenters’ concerns and is consistent and conflicts of interest policies; (2) a the annual compliance report in with the final rules for other registered detailed review of the SEF’s compliance proposed § 37.1501(e)(7) may impose 847 entities. The Commission is also with CEA section 5h and Commission strict liability on a CCO where the removing the reference to ‘‘agreements, regulations, which, among other report contains even a minor and contracts, or transactions’’ in proposed requirements, identifies the policies and insignificant error.855 These § 37.1501(d)(4) to more closely follow procedures that ensure compliance with commenters recommended adding a the language in the Act. In making this the core principles; (3) a list of any materiality qualifier to the modification, the Commission does not material changes to the compliance certification.856 Additionally, both FXall intend to modify any substantive policies and procedures since the last and CME recommended that the SEF’s obligations of the CCO with regard to annual compliance report; (4) a senior officer, not the CCO, certify the agreements, contracts, or transactions to description of staffing and resources set accuracy of the annual compliance the extent that these documents aside for the SEF’s compliance program; report.857 implicate the Act or Commission (5) a description of any material (ii) Commission Determination regulations under the Act. compliance matters, including instances In order to clarify differences between of noncompliance; (6) any objections to The Commission is adopting the SEF NPRM’s preamble and rule text the annual compliance report by those § 37.1501(e) as proposed, subject to regarding proposed § 37.1501(d)(7), the persons who have oversight certain modifications described below. Commission is revising the rule to state responsibility for the CCO; and (7) a The Commission disagrees with the that the CCO’s duties include certification by the CCO that, to the best comments from FXall and CME ‘‘[e]stablishing and administering a of his or her knowledge and reasonable regarding the complexity and the compliance manual designed to belief, and under penalty of law, the burden of the annual compliance report. promote compliance with the applicable annual compliance report is accurate The annual compliance report is meant laws, rules, and regulations . . .’’ and complete. to provide the Commission with a (emphasis added). The Commission also detailed account of a SEF’s compliance disagrees with CME and WMBAA that (i) Summary of Comments with the CEA and Commission the requirements in proposed FXall and CME asserted that the regulations, as well as a detailed § 37.1501(d)(6), (d)(8), and (d)(9) are information required to be included in account of a SEF’s self-regulatory functions of management. These the annual compliance report is too program. The Commission believes that provisions, as discussed above, require detailed.849 FXall, for example, the level of detail the proposed rules a CCO to establish and follow commented that the requirements for require, including the requirement that appropriate procedures regarding the annual compliance report go beyond the annual report include a description noncompliance issues, supervise the those set forth in the Dodd-Frank Act of all noncompliance issues identified, SEF’s self-regulatory program, and and that producing the report will is necessary to ensure that the supervise the effectiveness and consume considerable resources.850 Commission can determine the sufficiency of any regulatory service FXall proposed alternative effectiveness of a SEF’s compliance and provider. As noted above, the requirements, which it believes would self-regulatory programs.858 Commission disagrees with the be more in-line with the requirements in However, in response to comments, commenters who believe that a CCO’s the Dodd-Frank Act.851 the Commission is revising proposed function is solely to monitor and advise With respect to the requirement in § 37.1501(e)(2)(i) to require that the on compliance issues. Finally, the proposed § 37.1501(e)(2)(i) to identify annual compliance report identify ‘‘the Commission is revising proposed policies and procedures that ‘‘ensure’’ policies and procedures that are § 37.1501(d)(9) to remove the references compliance with the core principles, designed to ensure compliance with to ‘‘registered futures association’’ and FXall and CME stated that policies and each subsection and core principle, ‘‘other registered entity’’ and, instead, procedures cannot ‘‘ensure’’ or guaranty including each duty specified in section adding a reference to ‘‘regulatory service compliance, but can only be reasonably 5h(f)(15)(B) of the Act . . .’’ (emphasis provider’’ given the inclusion of FINRA designed to result in compliance.852 added). The Commission is also as a regulatory service provider under CME also recommended that the removing proposed § 37.1501(e)(6), § 37.204. requirement in proposed § 37.1501(e)(5) which requires the annual compliance to describe any material compliance report to include any objections by 847 See, e.g., Swap Data Repositories: Registration matters be revised to require the report Standards, Duties and Core Principles, 76 FR 54538, to identify ‘‘any material non- 853 CME Comment Letter at 7–8 (Feb. 7, 2011). 54584 (Sept. 1, 2011) (stating that the duties of an 854 SDR’s CCO include ‘‘[t]aking reasonable steps to MarketAxess Comment Letter at 26 (Mar. 8, ensure compliance with the Act and Commission by Chief Compliance Officer’’ to ‘‘Preparation of 2011). regulations . . .’’); Derivatives Clearing Annual Compliance Report.’’ 855 MarketAxess Comment Letter at 26 (Mar. 8, Organization General Provisions and Core 849 FXall Comment Letter at 16–17 (Mar. 8, 2011); 2011); FSR Comment Letter at 10 (Mar. 8, 2011). Principles, 76 FR 69334, 69434 (Nov. 8, 2011) CME Comment Letter at 7–8 (Feb. 7, 2011). 856 Id. (stating that the duties of a DCO’s CCO include 850 FXall Comment Letter at 16 (Mar. 8, 2011). 857 FXall Comment Letter at 15 (Mar. 8, 2011); ‘‘[t]aking reasonable steps to ensure compliance 851 See id. for details regarding FXall’s proposed CME Comment Letter at 8 (Feb. 7, 2011). with the Act and Commission regulations . . .’’). alternatives. 858 In this regard, the Commission disagrees with 848 The Commission is renaming the title of this 852 FXall Comment Letter at 17 (Mar. 8, 2011); CME’s recommendation regarding proposed section from ‘‘Annual Compliance Report Prepared CME Comment Letter at 7 (Feb. 7, 2011). § 37.1501(e)(5).

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those persons who oversee the CCO.859 CCO to promptly file an amendment to board of directors or the senior officer The Commission believes that the board an annual compliance report upon to make changes to the report would of directors 860 may append its own discovery of any material error or prevent the CCO from making a comments if desired, but the statutory omission. Proposed § 37.1501(f)(4) complete and accurate assessment of a text and the Commission’s allowed a SEF to request an extension SEF’s compliance program. The implementing regulations do not require of time to file its compliance report Commission has determined not to it. based on substantial, undue hardship. adopt the recommendation by Better The Commission disagrees with the Finally, proposed § 37.1501(f)(5) stated Markets that the board of directors comments from MarketAxess and FSR that annual compliance reports will be approve the annual compliance report regarding the inclusion of a materiality treated as exempt from mandatory or detail any disagreement. The qualifier to the certification public disclosure for purposes of Commission believes that requiring the requirement. The Commission believes FOIA 863 and the Sunshine Act 864 and board of directors to approve the report that the current certification sufficiently parts 145 and 147 of the Commission’s increases the risk that the CCO would be protects the CCO from being held regulations. subject to undue influence by the board strictly liable for any minor inaccuracies or by management. The Commission (i) Summary of Comments because it includes a ‘‘knowledge’’ and notes that the board of directors may ‘‘reasonable belief’’ qualifier. The Some commenters stated that include its own opinion of the annual Commission also disagrees with CME’s proposed § 37.1501(f)(1) should be compliance report if it disagrees with and FXall’s comments to have the SEF’s modified to allow the board of directors the CCO’s assessment. The Commission CEO, instead of the CCO, certify the or the senior officer to make changes to believes that the rule strikes the accuracy of the annual compliance the annual compliance report.865 These appropriate balance between ensuring report. While the CEA does not commenters generally argued that the that the board of directors cannot explicitly require that the CCO certify CCO should be accountable to adversely influence the content of the the report, it does require that the CCO management and, by not permitting the annual compliance report and granting ‘‘annually prepare and sign’’ the report, board of directors or the senior officer the board the opportunity to express its and that the report ‘‘include a to revise the report, the proposed rule opinion of the report to the certification that, under penalty of law, undermines the authority of the board of Commission. the compliance report is accurate and directors.866 Better Markets The Commission is revising proposed complete.’’ 861 The Commission believes recommended that the CCO should be § 37.1501(f)(2) to clarify that a SEF shall that these two requirements read required to present his or her finalized submit its annual compliance report to together provide sufficient basis for the report to the board of directors and the Commission concurrently with the CCO to certify that the report is accurate executive management prior to its SEF’s filing of its fourth fiscal quarter and complete. However, the submission.867 Better Markets further financial report pursuant to § 37.1306. Commission is modifying § 37.1501(e) recommended that the independent The Commission is making this to explicitly state that the CCO ‘‘sign’’ directors and/or the Audit Committee, technical correction because CEA the annual compliance report in order to as well as the entire board of directors, section 5h(f)(15)(D)(ii) sets forth such a follow the statutory text more closely. review and approve the report or detail requirement, which was inadvertently (6) § 37.1501(f)—Submission of Annual where and why it disagrees with any omitted from the proposed rules.870 Compliance Report by Chief provision before submission to the Additionally, the Commission is 868 Compliance Officer to the Commission. withdrawing proposed § 37.1501(f)(5). Commission 862 With respect to proposed The Commission acknowledges CME’s § 37.1501(f)(5), CME recommended that concern regarding the public release of Proposed § 37.1501(f)(1) required, the Commission expressly state that annual compliance reports and clarifies among other items, that the CCO annual compliance reports are that the Commission does not intend to provide the annual compliance report to confidential documents that are not make annual compliance reports public. the board of directors or the senior subject to public disclosure by listing However, where such information is, in officer for review, prior to submission to such reports as a specifically exempt fact, confidential, the Commission the Commission. The proposed rule also item in Commission regulation 145.5.869 encourages SEFs to submit a written stated that the board of directors or the (ii) Commission Determination request for confidential treatment of senior officer may not require the CCO such filings under FOIA, pursuant to the to make any changes to the report. The Commission is adopting procedures established in section 145.9 Proposed § 37.1501(f)(2) required that § 37.1501(f) as proposed, subject to two of the Commission’s regulations.871 The the annual compliance report be modifications described below. The determination of whether to disclose or electronically provided to the Commission has determined not to exempt such information in the context Commission not more than 60 days after adopt the commenters’ recommendation of a FOIA proceeding would be the end of the SEF’s fiscal year. to allow the board of directors or the governed by the provisions of part 145 Proposed § 37.1501(f)(3) required the senior officer to make changes to the and any other relevant provision. annual compliance report. The 859 As a result of this deletion, the Commission Commission believes that allowing the (7) § 37.1501(g)—Recordkeeping is adopting proposed § 37.1501(e)(7) as § 37.1501(e)(6). Proposed § 37.1501(g)(1) generally 863 5 U.S.C. 552. 860 If a SEF does not have a board of directors, stated that a SEF must maintain the 864 then the senior officer of the SEF may append his 5 U.S.C. 552b(b). following records: (i) A copy of written or her own comments if desired. 865 FXall Comment Letter at 17–18 (Mar. 8, 2011); policies and procedures adopted in WMBAA Comment Letter II at 7 (Mar. 8, 2011); 861 CEA section 5h(f)(15)(D); 7 U.S.C. 7b– furtherance of compliance with the Act 3(f)15)(D). MarketAxess Comment Letter at 26 (Mar. 8, 2011). 866 and Commission regulations; (ii) copies 862 The Commission is renaming the title of this Id. section from ‘‘Submission of Annual Compliance 867 Better Markets Comment Letter at 20 (Mar. 8, Report by Chief Compliance Officer to the 2011). 870 CEA section 5h(f)(15)(D)(ii); 7 U.S.C. 7b– Commission’’ to ‘‘Submission of Annual 868 Id. 3(f)(15)(D)(ii). Compliance Report.’’ 869 CME Comment Letter at 9 (Feb. 7, 2011). 871 17 CFR 145.9.

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of all materials created in furtherance of will affect SEFs. The Commission has SEF NPRM, requested comments from the CCO’s duties listed in paragraphs previously established certain the public on the proposed information (d)(6) and (d)(7) of proposed § 37.1501; definitions of ‘‘small entities’’ to be used collection requirements in order to, (iii) copies of all materials in connection by the Commission in evaluating the among other items, evaluate the with the review and submission of the impact of its regulations on small necessity of the proposed collections of annual compliance report; and (iv) any entities in accordance with the RFA.877 information and minimize the burden of records relevant to a SEF’s annual In addition, the Commission has the information collection requirements report. Proposed § 37.1501(g)(2) previously determined that DCMs, on respondents.882 required a SEF to maintain these records derivatives transaction execution On April 28, 2011, OMB assigned in accordance with § 1.31 and part 45 of facilities (‘‘DTEFs’’), exempt commercial control number 3038–0074 to this the Commission’s regulations. markets (‘‘ECMs’’), exempt boards of collection of information, but withheld final approval pending the (i) Summary of Comments trade (‘‘EBOTs’’), and DCOs are not small entities for the purpose of the Commission’s resubmission of the MarketAxess commented that the RFA.878 information collection, which includes final rule should provide an exception While SEFs are new entities to be a description of the comments received 872 for legally privileged materials. regulated by the Commission pursuant on the collection and the Commission’s MarketAxess argued that it is to the Dodd-Frank Act,879 in the SEF responses thereto. The Commission has unreasonable for the Commission to NPRM the Commission proposed that revised some of its proposed estimates take the position that a CCO should not SEFs should not be considered as small of the number of mandatory responses be able to receive privileged advice from entities for the purpose of the RFA for in order to clarify the Commission’s counsel in an effort to comply with essentially the same reasons that DCMs original intent; otherwise, the proposed these new, complex, and uncertain and DCOs have previously been burden hour estimates are being 873 rules. determined not to be small entities.880 adopted as discussed herein. The (ii) Commission Determination The Commission received no comments Commission has submitted the revised on the impact of the rules contained information collection request to OMB The Commission is adopting for its review, which will be made § 37.1501(g) as proposed.874 The herein on small entities. Therefore, the Chairman, on behalf of the Commission, available by OMB at http:// Commission does not believe that www.reginfo.gov/public/do/PRAMain. § 37.1501(g) changes existing hereby certifies, pursuant to 5 U.S.C. 605(b), that the regulations will not have As noted in the SEF NPRM, the Commission policies regarding the Commission will protect proprietary assertion of attorney-client privilege by a significant economic impact on a substantial number of small entities. information according to the Freedom of registrants. As stated in the SEF NPRM, Information Act and 17 CFR part 145, the Commission designed § 37.1501(g) B. Paperwork Reduction Act ‘‘Commission Records and to ensure that the Commission staff The Paperwork Reduction Act Information.’’ In addition, section would be able to obtain the necessary 881 8(a)(1) of the CEA strictly prohibits the information to determine whether a SEF (‘‘PRA’’) imposes certain requirements on federal agencies in Commission, unless specifically has complied with the CEA and authorized by the CEA, from making applicable regulations.875 The connection with their conducting or sponsoring any collection of public ‘‘data and information that Commission believes that proposed would separately disclose the business § 37.1501(g) properly accomplishes this information as defined by the PRA. An agency may not conduct or sponsor, and transactions or market positions of any goal. person and trade secrets or names of Finally, the Commission is adding a person is not required to respond to, 883 a collection of information unless it customers.’’ The Commission is also new § 37.1501(h) titled ‘‘Delegation of required to protect certain information displays a currently valid control authority’’ to the final SEF rules to contained in a government system of number issued by the Office of delegate authority to the Director of records according to the Privacy Act of Management and Budget (‘‘OMB’’). This DMO to grant or deny a swap execution 1974.884 facility’s request for an extension of final rulemaking contains new time to file its annual compliance report collection of information requirements 1. Proposed Collection of Information under paragraph (f)(4) of § 37.1501. within the meaning of the PRA. In the SEF NPRM, the Commission Accordingly, in connection with the III. Related Matters estimated that each SEF respondent SEF NPRM, the Commission submitted would have an average annual reporting A. Regulatory Flexibility Act an information collection request, titled burden of 308 hours.885 In deriving this ‘‘Core Principles and Other The Regulatory Flexibility Act estimate, the Commission compared the Requirements for Swap Execution (‘‘RFA’’) 876 requires federal agencies, in reporting requirements for other entities Facilities,’’ to OMB for its review and promulgating regulations, to consider that fall under the Commission’s approval in accordance with 44 U.S.C. the impact of those regulations on small regulatory oversight, such as an Exempt 3507(d) and 5 CFR 1320.11. entities. The regulations adopted herein Commercial Market with a significant Additionally, pursuant to 44 U.S.C. price discovery contract (‘‘SPDC ECM’’), 886 872 MarketAxess Comment Letter at 27 (Mar. 8, 3506(c)(2)(B), the Commission, in the a DTEF, and a DCM. Specifically, the 2011). Commission estimated that a SEF will 873 Id. 877 See 47 FR 18618–21 (Apr. 30, 1982). have more reporting requirements than 878 874 The Commission is making certain non- See 47 FR 18618, 18619 (Apr. 30, 1982) a SPDC ECM and a DTEF, but fewer substantive clarifications to § 37.1501(g). In discussing DCMs; 66 FR 42256, 42268 (Aug. 10, addition, the Commission is revising the citation to 2001) discussing DTEFs, ECMs, and EBOTs; and 66 paragraphs ‘‘(d)(6) and (d)(7)’’ in proposed FR 45604, 45609 (Aug. 29, 2001) discussing DCOs. 882 Core Principles and Other Requirements for § 37.1501(g)(1)(ii) to cite to paragraphs ‘‘(d)(8) and 879 Dodd Frank Wall Street Reform and Consumer Swap Execution Facilities, 76 FR at 1236. (d)(9).’’ The Commission notes that this was a Protection Act, Public Law 111–203, 124 Stat. 1376 883 7 U.S.C. 12(a)(1). drafting error. (2010). 884 5 U.S.C. 552a. 875 Core Principles and Other Requirements for 880 Core Principles and Other Requirements for 885 Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1235. Swap Execution Facilities, 76 FR at 1235. Swap Execution Facilities, 76 FR at 1236. 876 5 U.S.C. 601 et seq. 881 44 U.S.C. 3501 et seq. 886 Id.

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reporting requirements than a DCM (as Commission estimated that respondents Commission’s requirements. Given such most recently calculated).887 The may expend up to $16,016 annually to differing requirements, the Commission Commission employed an average of its comply with the proposed also notes that Form SEF may differ most recent hourly burdens for DCMs, regulations.895 This would result in an from the SEC’s registration form. DTEFs, and SPDC ECMs.888 Those aggregate cost across all SEF With respect to temporary hourly burdens provided in the SEF respondents of $560,560 per annum (35 registration, the Commission has NPRM are noted below: respondents × $16,016).896 The SEF eliminated the requirement from the Current estimate of DCM’s annual NPRM also provided the following SEF NPRM that an applicant provide burden: 440 hours per DCM 889 summary of estimates: transaction data that substantiates that Initial estimate of DTEF’s annual Estimated number of respondents: 35 the execution or trading of swaps has 890 burden: 200 hours per DTEF Annual responses by each respondent: 1 occurred and continues to occur on the Initial estimate of SPDC ECM’s annual Total annual responses: 35 applicant’s trading system or platform at burden: 233 hours per ECM 891 Quarterly responses by each respondent: the time the applicant submits its In the SEF NPRM, the Commission 4 temporary registration request. The estimated that 30 to 40 SEFs will Total quarterly responses: 140 Commission has also eliminated the register with the Commission as a result certification requirement that an 892 Estimated average hours per response: of the Dodd-Frank Act. Therefore, the 308 applicant believes that when it operates Commission estimated the annual Aggregate annual reporting hours under temporary registration it will aggregate hour burden for all burden: 10,780 897 meet the requirements of part 37 of the respondents to be 10,780 hours.893 Commission’s regulations. Instead, the Based on an hourly rate of $52,894 the 2. Summary of Comments and Commission has revised the temporary Commission Response registration provisions to require a SEF 887 Id. SPDC ECMs were subject to 9 core applicant that is already operating a principles, DTEFs were subject to 9 core principles, While no commenter directly and DCMs are subject to 23 core principles. SEFs addressed the proposed aggregate swaps-trading platform, in reliance will be subject to 15 core principles. Id. at 1236 n. burden hour estimate, the Commission upon either an exemption granted by 124. did receive comments related to the the Commission or some form of no- 888 Id. at 1236. costs of various recordkeeping and action relief granted by the Commission 889 After passage of the Commodity Futures staff, to include in the temporary Modernization Act of 2000 and a switch to the core reporting requirements in the proposed principles framework for DCMs, the Commission rules. registration notice a certification that it estimated that the recordkeeping and reporting is operating pursuant to such exemption obligations imposed by part 38 would total 300 (a) § 37.3—Requirements and or no-action relief. The Commission burden hours per DCM. See A New Regulatory Procedures for Registration believes that these revisions will not Framework for Trading Facilities, Intermediaries and Clearing Organizations, 66 FR 42256, 42268 WMBAA commented that the materially affect the proposed part 37 (Aug. 10, 2001); 66 FR 14262, 14268 (proposed Mar. Commission could reduce the regulatory information collection estimate. 9, 2001). In 2007, the Commission amended the burden of the registration procedures by (b) § 37.4—Procedures for Listing acceptable practices in part 38 for minimizing reconciling its Form SEF with the SEC’s conflicts of interest, estimating that the Products and Implementing Rules amendments would increase the information registration form such that a potential collection and reporting burden by an additional 70 SEF will have to fill out only one CME commented that the proposed hours per DCM. See Conflicts of Interest in Self- form.898 Similarly, MarketAxess stated product and rule certification process Regulation and Self-Regulatory Organizations that it is costly and inefficient for a SEF substantially increased the (‘‘SROs’’), 72 FR 6936, 6957 (Feb. 14, 2007); 71 FR 38740, 38748 (proposed Jul. 7, 2006). Most recently, that is required to be registered by both documentation burden, which in turn the Commission adopted revisions to part 38 to the Commission and SEC to go through would increase the cost and amount of implement the Dodd-Frank Act, estimating that the two full registration processes, and that time it takes to list new products and revisions would increase the information collection the Commission instead should permit implement new rules, with no and reporting burden by an additional 70 hours per 900 DCM. See Core Principles and Other Requirements ‘‘notice’’ or ‘‘passport’’ registration of an corresponding benefit to the public. for Designated Contract Markets, 77 FR 36612, SB–SEF already registered with the While CME cited the 8,300 additional 36662 (Jun. 19, 2012). The average for purposes of SEC.899 While the Commission aggregate hours that product and rule the initial burden hour estimate for SEFs averages acknowledges notice registration under submissions were estimated to impose both initial estimates for DCMs with the other most 901 recent estimates. section 5h(g) of the Act, it notes that the on all registered entities, the 890 A New Regulatory Framework for Trading registration requirements for SEFs may Commission notes that this figure was Facilities, Intermediaries and Clearing differ from the registration requirements already accounted for in the Organizations, 66 FR at 42268; 66 FR at 14268. for SB–SEFs and thus the Commission Commission’s information collection 891 Significant Price Discovery Contracts on must conduct an independent review of estimate in the part 40 rulemaking titled Exempt Commercial Markets, 74 FR 12178, 12187 (Mar. 23, 2009); 73 FR 75888, 75902 (proposed Dec. a SEF applicant’s registration ‘‘Provisions Common to Registered 902 12, 2008). application to ensure that the potential Entities.’’ Therefore, the burden 892 Core Principles and Other Requirements for SEF’s proposed trading models and Swap Execution Facilities, 76 FR at 1236. For operations comply with the 900 CME Comment Letter at 10, 13 (Feb. 22, 2011). hourly reporting requirements, an average of 35 901 Id. at 10. SEFs was used for calculation purposes. Id. at 1236 902 Provisions Common to Registered Entities, 76 n. 125. Senior Treasury/Cash Management Manager as published in the SIFMA Report and dividing that FR 44776, 44789 (Jul. 27, 2011). The Commission 893 Id. at 1236. figure by 2,000 annual work hours to arrive at the also notes that the annual burden hour estimate for 894 In arriving at a wage rate for the hourly costs hourly rate of $52. DCMs that was used to calculate the annual burden imposed, the Commission consulted the hour estimate for SEFs in this part 37 rulemaking 895 Core Principles and Other Requirements for Management and Professional Earnings in the did not include the recordkeeping and reporting Swap Execution Facilities, 76 FR at 1236. Securities Industry Report, published in 2010 by hours accounted for in the part 40 rulemaking’s 896 the Securities Industry and Financial Markets Id. information collection estimate. Therefore, there is 897 × Association (SIFMA Report). The wage rate is a 308 average hours per respondent 35 no double counting of hours for product and rule composite (blended) wage rate arrived at by respondents = 10,780 total hours/year. Id. submissions. Furthermore, the Commission notes averaging the mean annual salaries of an Assistant/ 898 WMBAA Comment Letter at 14 (Mar. 8, 2011). that, similar to the DCM rulemaking, many of the Associate General Counsel, an Assistant 899 MarketAxess Comment Letter at 20–21 (Mar. collection burdens associated with this part 37 Compliance Director, a Senior Programmer, and a 8, 2011). Continued

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associated with that information information collection costs associated facility. The Commission notes that the collection is not duplicated here. with this rule is covered by the requirement for market participants to Commission’s information collection keep such records is sound commercial (c) § 37.5(c)—Equity Interest Transfers estimate. practice, and that market participants CME commented that the ‘‘level of are likely already maintaining such (e) § 37.203(f)—Investigations and immediacy’’ contemplated by the 24- trading records; therefore, the Investigation Reports hour timeframe for submitting Commission believes that the revision agreements with the notification to the CME stated that minor transgressions above will not materially affect the Commission of an equity interest could be handled effectively through the proposed part 37 information collection transfer in proposed § 37.5(c) may be issuance of a warning letter rather than estimate. unrealistic.903 CME further commented a formal investigatory report.906 As that the representation of compliance explained in the preamble, the (h) § 37.703—Monitoring for Financial with the requirements of CEA section 5h Commission clarifies that warning Soundness and the Commission’s regulations letters may be issued for minor FXall commented that SEFs would be adopted thereunder would be more transgressions; however, no more than burdened by the ‘‘onerous financial appropriate if required upon one warning letter may be issued to the surveillance obligations’’ of proposed consummation of the equity interest same person or entity found to have § 37.703, which include the routine transfer, rather than with the initial committed the same rule violation more review of members’ financial records.909 notification.904 In this final rulemaking, than once within a rolling 12-month The Commission agrees that the Commission has revised proposed period. The Commission also clarifies burdensome financial surveillance § 37.5(c) to remove references to specific that the limit on the number of warning obligations may lead to higher documents that must be provided with letters is not applicable when a rule transaction costs; therefore, as discussed the equity transfer notification, and violation has not been found. The in the preamble, the Commission has instead provided that the Commission Commission believes that these revised the proposed rule to state that may request supporting documentation. clarifications will not materially affect SEFs must monitor their market The Commission has also revised the the proposed part 37 information participants to ensure that they continue proposed rule to increase the threshold collection estimate. to qualify as ECPs. The Commission of when a SEF must file an equity (f) § 37.205—Audit Trail believes that this revision will not interest transfer notification with the materially affect the proposed part 37 Commission from ten percent to fifty WMBAA commented that the information collection estimate and is percent and has extended the time proposed audit trail requirement in thus maintaining the estimate. period for a SEF to file the notification § 37.205(b) to retain records of customer to up to ten business days from one orders should not apply to indicative (i) § 37.1306—Financial Resources business day under the proposed rule. quotes because it would be burdensome Reporting to the Commission In addition, the Commission has deleted and costly.907 As discussed in the MarketAxess commented that the the requirement for a SEF to provide a preamble, the Commission believes that financial resources reporting representation of compliance with this requirement is necessary so that a requirements are unnecessary and section 5h of the Act and the SEF has a complete picture of all trading burdensome and recommended that the Commission regulations thereunder activity in order to carry out its statutory Commission allow a senior officer of the with the equity interest transfer mandate to monitor its markets to detect SEF to represent to the Commission that notification, as requested by CME. The abusive trading practices and trading it satisfies the financial resources Commission notes that these revisions rule violations. The Commission requirements.910 The Commission should slightly reduce the burden of the accounted for this recordkeeping disagrees with MarketAxess and, as information collection requirements for requirement in the proposed burden discussed in the preamble, believes that those respondents who are not hour estimate; therefore, the estimate much of the information required by the requested to provide supporting remains unaffected. reports should be readily available to a documentation. (g) § 37.404—Ability to Obtain SEF in the ordinary course of business. (d) § 37.202(b)—Jurisdiction Information The Commission’s proposed burden CME stated that it would be costly for hour estimate includes this reporting WMBAA commented that the requirement. a SEF to obtain every customer’s requirement for SEFs to mandate that consent to its regulatory jurisdiction as traders maintain trading and financial (j) § 37.1401—System Safeguards 905 required by proposed § 37.202(b). As records is not required under the Act.908 Requirements noted in the preamble, the Commission The Commission notes that market CME commented that the believes that jurisdiction must be participants’ trading records are an requirements to notify the Commission established by a SEF prior to granting invaluable tool in its surveillance efforts staff of all system security-related events members and market participants access and believes that a SEF should have and all planned changes to automated to its markets in order to effectuate the direct access to such information in systems that may impact the reliability, statutory mandate of Core Principle 2 order to discharge its obligations under security, or scalability of the systems are that a SEF shall have the capacity to the SEF core principles. However, as overly burdensome.911 As noted in the detect, investigate, and enforce rules of noted in the preamble, the Commission the SEF. The Commission notes that any preamble, the Commission has revised states in the guidance that SEFs may the rule to only require notification of limit the application of this requirement material system malfunctions and rulemaking are covered by other existing or pending to those market participants who collections of information. Therefore, only those material planned system changes. While burdens that are not covered elsewhere are conduct substantial trading on their included in this collection of information. 909 FXall Comment Letter at 3 (Mar. 8, 2011). 903 CME Comment Letter at 13 (Feb. 22, 2011). 906 Id. at 22. 910 MarketAxess Comment Letter at 40 (Mar. 8, 904 Id. 907 WMBAA Comment Letter at 23 (Mar. 8, 2011). 2011). 905 Id. at 16. 908 Id. at 26. 911 CME Comment Letter at 36–37 (Feb 22, 2011).

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these revisions should decrease the to the SEF’s performance of its self- and reporting requirements of this final regulatory burden imposed by the rule, regulatory responsibilities. part 37 rulemaking.918 In aggregate, this the Commission believes that, given the As discussed above, the methodology will result in a cost to all SEF infrequent nature of the information used to formulate the proposed estimate respondents of $582,120 per annum collection requirement as originally was an average of other registered based on 35 expected respondents. This proposed, the effect of the revisions entities. Due to the relatively low aggregate cost estimate has been should be de minimis and therefore not magnitude of changes made to the adjusted from the estimate in the SEF affect the proposed burden hour mandatory information collection NPRM to account for updated wage rate estimate. provisions in this final part 37 data.919 (k) § 37.1501(e)—Preparation of Annual rulemaking, the Commission has C. Cost Benefit Considerations Compliance Report determined not to alter its proposed estimate of 308 hours per SEF 1. Introduction FXall commented that the information respondent. By definition, averages are Section 15(a) of the Commodity required by the proposed regulations to meant to serve as only a reference point; Exchange Act (‘‘CEA’’ or ‘‘Act’’) be included in the annual compliance the Commission understands that due to mandates that the Commodity Futures report is too detailed and will be too both discretionary and mandatory Trading Commission (‘‘Commission’’ or costly to compile.912 The Commission is requirements, some SEFs may go above ‘‘CFTC’’) consider the costs and benefits not persuaded by FXall’s comment, and the final estimate of 308 hours to of the regulations that it is adopting in notes that the annual compliance report complete mandatory information this rulemaking to implement the is meant to be the primary tool by which collection requirements, while others statutory requirements for the the Commission can evaluate the may stay below. The Commission is, registration and operation of swap effectiveness of a SEF’s compliance and however, adjusting the proposed execution facilities (‘‘SEFs’’), a new type self-regulatory programs, thus requiring estimate of annual and quarterly of regulated marketplace for the trading a high level of detail. The Commission’s responses to clarify the Commission’s and execution of financial derivative proposed burden hour estimate includes original intent. In this regard, the contracts known as swaps.920 In the annual compliance report Commission is adding an estimated considering the costs and benefits of the requirement. average hours per response number final SEF regulations, the Commission 3. Final Burden Estimate below, which is based on 5 responses has grouped the same into the following The final regulations require each per year (1 annual response and 4 categories—SEF Market Structure, respondent to file information with the quarterly responses) per respondent. Registration, Recordkeeping and Commission. For instance, SEF Estimated number of respondents: 35 Reporting, Compliance, Monitoring and Annual responses by each respondent: Surveillance, Financial Resources and applicants must file registration 913 applications with the Commission 1 Integrity, and Emergency Operations pursuant to § 37.3. SEFs must record, Total annual responses: 35 and System Safeguards. Quarterly responses by each respondent: report, and disclose information related Several preliminary matters, however, 1 914 to prices, trading volume, and other provide background for the Total quarterly responses: 140 915 trading data for swaps pursuant to Core Commission’s consideration of the costs Estimated average hours per response: Principles 9 and 10 (‘‘Timely and benefits of the rules adopted in this 62 916 release. Discussed in this Introduction Publication of Trading Information’’ and Aggregate annual reporting hours section, these preliminary matters are: ‘‘Recordkeeping and Reporting’’). In burden: 10,780 (a) The circumstances and events that general, the collections of information form the backdrop for the statutory are required to demonstrate a SEF’s Therefore, the Commission estimates requirements that this rulemaking operational capability and are a tool by that based on 35 registered SEFs, this implements; (b) the Commission’s which both the SEF and the final part 37 rulemaking will result in statutory mandate to consider costs and Commission can evaluate the 10,780 information collection hours 917 benefits and its methodology for doing effectiveness of a SEF’s self-regulatory across all respondents. so; and (c) the estimated aggregate costs programs. 4. Aggregate Information Burden of forming and operating a SEF. The mandatory information collections are contained in several of The Commission concludes that new 918 See supra footnote 894 for a discussion of the the general provisions being adopted in information collection 3038–0074 will result in each SEF respondent wage rate. The Commission has revised the wage subpart A, as well as in certain rate to $54 per hour based on data from the 2011 regulations implementing Core expending, on average, $16,632 SIFMA Report. Principles 2, 3, 4, 5, 7, 8, 9, 10, 13, 14, annually based on an hourly wage rate 919 While the Commission recognizes that some of $54 to comply with the recordkeeping estimates cited in the following cost-benefit and 15. Generally, the information consideration section suggest that reporting and collections covered in this final part 37 recordkeeping requirements may result in a much 913 Under § 37.1501, the SEF’s CCO is required to higher aggregate cost to SEFs and market rulemaking are not covered in other submit to the Commission annually a compliance existing collections or collections that participants, it notes that all of the estimates report. provided therein account for more than pure are being established in connection with 914 Under § 37.1306, a SEF is required to submit recordkeeping and reporting costs subject to the other Dodd-Frank rulemakings, and to the Commission each fiscal quarter a report of PRA. Therefore, the Commission has not considered pertain to the following general its financial resources available to meet the those estimates for purposes of reaching its final financial resources requirements of Core Principle categories of recordkeeping and burden hour estimate and aggregate cost projection. 13. 920 CEA section 15(a); 7 U.S.C. 19(a). A more 915 × × reporting: registration; submissions 1 quarterly response 4 quarters per year complete explanation of this statutory requirement related to material changes in the SEF’s 35 respondents. is provided below. See infra section 1(b) of this Cost operations or business structure; 916 308 average burden hours per respondent/5 Benefit Considerations section. Swaps, futures, and compliance; financial resources reports, responses total per year (1 annual response and 4 options are collectively referred to as derivatives— quarterly responses) = 61.6 average hours per contracts used by market participants to hedge and an annual report by the CCO related response. against the risk of a future change in prices, such 917 5 responses total per year × 61.6 average hours as commodity prices, interest rates, and exchange 912 FXall Comment Letter at 16 (Mar. 8, 2011). per response × 35 respondents. rates.

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(a) Background also adopted rules further defining the spreads (the difference between the bid term ‘‘swap.’’ 926 and the offer price) and fees. Relative to An appreciation of certain their non-dealer (usually ‘‘buy-side’’) (2) The Execution and Regulation of background elements is helpful to counterparties, these dealers enjoy Swaps Prior to the Dodd-Frank Act understand the costs and benefits of this asymmetric information advantages.929 rulemaking. These are: (i) The definition Unlike futures contracts which are The Commodity Futures Modernization of the derivative financial transactions regulated by the Commission and are Act of 2000 (‘‘CFMA’’)—which largely (i.e., swaps) that will be executed on listed for trading on exchanges called excluded swaps transacted between SEFs; (ii) the execution and regulation designated contract markets (‘‘DCMs’’), ‘‘eligible contract participants’’ 930 from of swaps prior to the Dodd-Frank Act; swap transactions (excluding some regulation under the CEA—reinforced (iii) the 2008 financial crisis and the exchange-traded options encompassed this outcome.931 Swaps remained role of the over-the-counter (‘‘OTC’’) by the post-Dodd-Frank Act definition) largely insulated from regulation prior swaps market; (iv) the new regulatory evolved off-exchange—largely to to the enactment of the Dodd-Frank regime to reform the swaps market in provide customized solutions for unique Act.932 Title VII of the Dodd-Frank Act; and, risk management needs that exchange- more specifically, (v) the role and traded products addressed less 929 Asymmetric information exists when one purpose of SEFs within the Title VII effectively—lending themselves to the party to a transaction has more or better information regulatory regime. Each of these often used label of ‘‘OTC derivatives.’’ than the other. In the context of the swaps market, Accordingly, many swap transactions as dealers are always on one side of a large fraction background elements is discussed of trades, it is highly likely that they will have below. prior to the Dodd-Frank Act were better information on prevailing market conditions negotiated privately OTC between and valuations compared to their non-dealer (1) The Definition of a Swap counterparties.927 In these situations, counterparties. See Michael Fleming, John Jackson, only the counterparties knew that the Ada Li, Asani Sarkar & Patricia Zobel, ‘‘An Analysis Congress defined the term ‘‘swap’’ in of OTC Interest Rate Derivatives Transactions: swap transaction was taking place, and the Dodd-Frank Act.921 The statutory Implications for Public Reporting,’’ Federal Reserve regulators and other market participants definition of the term ‘‘swap’’ includes, Bank of New York Staff Reports, No. 557, at 6 n. lacked access to pricing information 14 (Mar. 2012), available at http:// in part, any agreement, contract, or _ during the negotiation phase (pre-trade) www.newyorkfed.org/research/staff reports/ transaction ‘‘that provides for any sr557.pdf. Major derivatives dealer activity and after the agreement was purchase, sale, payment, or delivery accounts for 89% of the total interest rate swap consummated (post-trade). While (other than a dividend on an equity activity in notional terms. Id. centralized exchanges permit multiple 930 CEA section 1a(18); 7 U.S.C. 1a(18). security) that is dependent on the market participants to compare, assess, 931 Under the CFMA, prior to the adoption of occurrence, nonoccurrence, or the accept, or reject bids (offers to buy) and Title VII of the Dodd-Frank Act, swaps based on extent of the occurrence of an event or exempt commodities—including energy and asks (offers to sell), the privately metals—could be traded among eligible contract contingency associated with a potential negotiated OTC market provided little, financial, economic, or commercial participants without CFTC regulation, but certain if any, pre- or post-trade CEA provisions against fraud and manipulation 922 consequence.’’ The statutory transparency.928 continued to apply to these markets. No statutory definition, among other things, In a typical privately negotiated OTC exclusions were provided for swaps on agricultural generally includes options (other than commodities by the CFMA, although they could be swap transaction, a customer for a swap traded under certain regulatory exemptions options on futures) as well as is likely to obtain a private quote from, provided by the CFTC prior to its enactment. Swaps transactions that now or in the future and bilaterally negotiate contract terms based on securities were subject to certain SEC are commonly known to the trade as with, one of a small number of market- enforcement authorities, but the SEC was swaps.923 The definition also articulates prohibited from prophylactic regulation of such making dealers. These dealers, often swaps. See Commodity Futures Modernization Act a broad range of underlying interests large financial institutions, may stand of 2000, Pub. L. 106–554, 114 Stat. 2763 (2000). The upon which a swap may be based: ‘‘1 or ready to take either a long position (if Financial Crisis Inquiry Commission majority found more interest or other rates, currencies, they want to buy) or a short position (if that the CFMA ‘‘effectively shielded OTC commodities, securities, instruments of derivatives from virtually all regulation or they want to sell), profiting from oversight,’’ and ‘‘OTC derivatives markets boomed’’ indebtedness, indices, quantitative in the law’s wake, increasing ‘‘more than measures, or other financial or 926 See Further Definition of ‘‘Swap,’’ ‘‘Security- sevenfold’’ after the CFMA was enacted. See The economic interests or property of any Based Swap,’’ and ‘‘Security-Based Swap Financial Crisis Inquiry Commission, The Financial kind . . .’’ 924 or ‘‘the occurrence, Agreement’’; Mixed Swaps; Security-Based Swap Crisis Inquiry Report: Final Report of the National Agreement Recordkeeping, 77 FR 48208 (Aug. 13, Commission on the Causes of the Financial and nonoccurrence, or the extent of the 2012). Economic Crisis in the United States (Official occurrence of any event or contingency 927 The Commission notes that privately Government Edition), at 48, 364 (2011) (hereinafter associated with a potential financial, negotiated swap transactions between the ‘‘FCIC Report’’), available at http://www.gpo. economic, or commercial counterparties is only one method to execute or gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf. consequence.’’ 925 In a joint rulemaking trade a swap transaction in the OTC market. 932 Legislative history indicates that in enacting Counterparties in the OTC market may execute or the Dodd-Frank Act, Congress recognized that OTC with the Securities and Exchange trade swap transactions through many trading market opacity, combined with the availability of Commission (‘‘SEC’’), the Commission methods such as order books, RFQ systems, or superior price information primarily to dealers, systems that incorporate electronic and voice limited the ability of swaps customers ‘‘to shop for components. the best price or rate.’’ See Mark Jickling & Kathleen 921 See Dodd-Frank Act section 721(a)(21), adding 928 Absent a centralized trading mechanism such Ann Ruane, ‘‘The Dodd-Frank Wall Street Reform CEA section 1a(47). 7 U.S.C. 1a(47). as a limit order book, buyers and sellers ‘‘negotiated and Consumer Protection Act: Title VII, 922 CEA section 1a(47)(A)(ii); 7 U.S.C. terms privately, often in ignorance of prices Derivatives,’’ Cong. Research Serv., R41398, at 7 1a(47)(A)(ii). currently available from other potential (Aug. 30, 2010). See also S. Rep. No. 111–176, at 923 CEA section 1a(47)(A)(i) & (iv); 7 U.S.C. counterparties and with limited knowledge of 30 (2010) (‘‘Information on [OTC derivative 1a(47)(A)(i) & (iv). Futures are not within the trades recently negotiated elsewhere in the market. contract] prices and quantities is opaque. . . . This definition of swap and remain separately subject to OTC markets are thus said to be relatively opaque; can lead to inefficient pricing and risk assessment requirements of the CEA. See CEA section investors are somewhat in the dark about the most for derivatives users and leave regulators ill- 1a(47)(B)(i); 7 U.S.C. 1a(47)(B)(i). attractive available terms and conditions and about informed about risks building up throughout the 924 CEA section 1a(47)(A)(i) & (iii); 7 U.S.C. whom to contact for attractive terms.’’ Darrell financial system’’). Ben Bernanke, Chairman of the 1a(47)(A)(i) & (iii). Duffie, Dark Markets: Asset Pricing and Information Board of Governors of the Federal Reserve System, 925 CEA section 1a(47)(A)(ii); 7 U.S.C. Transmission in Over-the-Counter Markets 1 stated, ‘‘[a]t times [during the crisis], the complexity 1a(47)(A)(ii). (Princeton University Press) (2012). and diversity of derivatives instruments also posed

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From these beginnings, the hinder efficient pricing, and that the but a combination of several,938 Title VII unregulated swaps market has expanded lack of information about outstanding does not provide for a single- exponentially over the last thirty years. positions and exposures could ‘‘leave dimensional fix. Rather, it weaves According to the Bank for International regulators ill-informed about the risks together a multidimensional regulatory Settlements (‘‘BIS’’), the global OTC building up in the financial system. . . . construct designed to ‘‘mitigate costs derivatives market measures at over Lack of transparency in the massive and risks to taxpayers and the financial $647 trillion in notional size.933 OTC market intensified systemic fears system.’’ 939 (3) The 2008 Financial Crisis and the during the crisis about interrelated (5) The Role and Purpose of SEFs Role of the OTC Swaps Market derivatives exposures from counterparty Within the Title VII Regulatory Regime risk.’’ 935 As regulators did not have a In the fall of 2008, the United States clear view into how OTC derivatives One of the most important goals of the experienced a financial crisis that led to were being used, they also feared that Dodd-Frank Act is to bring transparency millions of Americans losing their jobs, ‘‘the complexity and limited to the opaque OTC swaps market. It is millions of families losing their homes, transparency of the market reinforced generally accepted that when markets and thousands of small businesses the potential for excessive risk- are open and transparent, prices are closing their doors. The BIS taking. . . .’’ 936 more competitive and markets are more characterized 2008 as a year that efficient.940 The legislative history of escalated for ‘‘what many had hoped (4) The New Regulatory Regime To the Dodd-Frank Act indicates that would be merely . . . manageable Reform the Swaps Market in Title VII of Congress viewed exchange trading as a market turmoil [to] a full-fledged global the Dodd-Frank Act mechanism to ‘‘provide pre- and post- crisis.’’ 934 Faced with what policy trade transparency for end users, market makers at the time perceived as a grave On July 21, 2010, President Obama participants, and regulators.’’ 941 As threat that without immediate and signed the Dodd-Frank Act into law. such, exchange trading was intended as unprecedented government action U.S. Title VII of the Dodd-Frank Act ‘‘a price transparency mechanism’’ that and global credit markets would freeze, established a comprehensive new complements Title VII’s separate central the federal government mounted an regulatory framework for swaps and clearing requirement to mitigate extraordinary intervention at great cost charged the Commission and the SEC counterparty risk.942 Additionally, to the American taxpayer to buttress the with oversight of the more than $300 legislative history reveals a 937 stability of the U.S. financial system. trillion domestic swaps market. The Congressional expectation that, over While there were multiple causes of legislation was enacted, among other time, exchange trading of swaps would the financial crisis, unregulated swaps reasons, to promote market integrity reduce transaction costs, enhance played an important role. Swaps within the financial system, reduce risk, market efficiency, and counter the contributed significantly to the and increase transparency, including by: ability of dealers to extract economic interconnectedness between banks, (i) Providing for the registration and rents from higher bid/ask spreads at the investment banks, hedge funds, and comprehensive regulation of swap expense of other market participants.943 other financial entities. As the swaps dealers and major swap participants; (ii) Consistent with this purpose, the market grew, additional participation imposing clearing and trade execution Dodd-Frank Act amended the CEA to added risk to the already highly- requirements on swaps; (iii) creating a create SEFs, a new type of regulated leveraged and interconnected market. rigorous recordkeeping and real-time marketplace, and promotes swap trading Accordingly, swaps concentrated and reporting regime; and (iv) enhancing the and execution on them. The statutory heightened risks in the financial system rulemaking and enforcement authority requirements for SEFs are similar to the and to the public. of the Commission with respect to, requirements for the existing The crisis elevated concern among among others, all registered entities, Commission-regulated futures market, regulators that the opaque structure of including SEFs. These various elements which incorporates pre-trade and post- the OTC swaps market and the work in concert to provide the trade transparency aspects not present consequent lack of information about Commission with a comprehensive view in the OTC swaps market. SEFs will swap prices and quantities would of the entire swaps market, furthering allow buyers and sellers to meet in an the Commission’s ability to monitor the open, centralized marketplace, where problems. Financial firms sometimes found it quite market. Consistent with the view that difficult to fully assess their own net derivatives prices are publicly available. As exposures or to communicate to counterparties and the vulnerability of the OTC derivatives statutorily defined, a SEF is ‘‘a trading regulators the nature and extent of those exposures. market during the financial crisis was The associated uncertainties helped fuel losses of not attributable to a single weakness, 938 See FCIC Report at xxiv (listing uncontrolled confidence that contributed importantly to the leverage; lack of transparency, capital and collateral liquidity problems I mentioned earlier. The recent requirements; speculation; interconnection among legislation addresses these issues by requiring that 935 S. Rep. No. 111–176, at 30 (2010). firms; and concentrations of risk in the market as derivatives contracts be traded on exchanges or 936 See Darrell Duffie, Ada Li & Theo Lubke, contributing factors). other regulated trading facilities when possible and ‘‘Policy Perspectives on OTC Derivatives Market 939 that they be centrally cleared.’’ ‘‘Too Big To Fail: Infrastructure,’’ Federal Reserve Bank of New York S. Rep. No. 111–176, at 92 (2010). Expectations and Impact of Extraordinary Staff Reports, No. 424, at 1 (Mar. 2010), available 940 See academic research discussed below. Government Intervention and the Role of Systemic at http://www.newyorkfed.org/research/ 941 S. Rep. No. 111–176, at 34 (2010). Risk in the Financial Crisis: Hearing Before the staff_reports/sr424.pdf. 942 Id. at 33–34 (quoting former CFTC Chair Financial Crisis Inquiry Commission,’’ 11 (Sep. 2, 937 See Section 733 of the Dodd-Frank Act, which Brooksley Born, the report states ‘‘ ‘[w]hile central 2010) (statement of Ben Bernanke, Chairman, Board adopted CEA section 5h regarding registration, clearing would mitigate counterparty risk, central of Governors of the Federal Reserve System), operation, and compliance requirements for SEFs. clearing alone is not enough. . . . [e]xchange available at http://fcic-static.law.stanford.edu/ 7 U.S.C. 7b–3. See also Section 723(a)(3) of the trading is also essential in order to provide price _ cdn media/fcic-testimony/2010-0902-Bernanke.pdf. Dodd-Frank Act, which amended CEA section 2(h) discovery, transparency, and meaningful regulatory 933 The Bank for International Settlements, to add CEA section 2(h)(8) setting forth a trade oversight of trading and intermediaries.’ ’’). Quarterly Review, at A 131 (Sep. 2012), available execution requirement. 7 U.S.C. 2(h)(8). Similarly, 943 Id. at 34 (quoting Stanford University at http://www.bis.org/statistics/otcder/dt1920a.pdf. the Dodd-Frank Act authorized the SEC to regulate Professor Darrel Duffie, ‘‘ ‘[t]he relative opaqueness 934 The Bank for International Settlements, 79th security-based swaps. See Section 763 of the Dodd- of the OTC market implies that bid/ask spreads are Annual Report, at 23 (2009), available at http:// Frank Act, which amended the Securities and in many cases not being set as competitively as they www.bis.org/publ/arpdf/ar2009e2.pdf, for a broader Exchange Act of 1934 to add section 3D of the would be on exchanges. . . . [t]his entails a loss in discussion of the development of the crisis. Exchange Act, among other provisions. market efficiency.’ ’’).

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system or platform in which multiple transforms the swaps market from one In response to commenters who participants have the ability to execute in which prices for bilaterally- question the Congressionally-directed or trade swaps by accepting bids and negotiated contracts are privately goal of pre-trade price transparency and offers made by multiple participants in quoted—often by dealers with an the Commission’s implementation of the facility or system, through any informational advantage—to one in that goal, the Commission notes that means of interstate commerce, including which bid/offer prices for swap there is a body of research that tends to any trading facility, that (A) facilitates contracts are accessible to multiple be generally supportive, albeit based on the execution of swaps between market participants to compare, assess, experience in other markets, as persons; and (B) is not a designated accept, or reject. By improving price discussed below. Although this research contract market.’’ 944 transparency, the new provisions was not critical to or relied upon by the With this rulemaking, in conjunction should reduce information asymmetry Commission in its decision-making of with the separate made available to and, in turn, the informational how to best implement Congress’ goal of trade rulemaking 945 and the swaps advantage enjoyed by a small number of promoting pre-trade price transparency, block rulemaking,946 the Commission is dealers to the detriment of other market it does provide a useful counterpoint to implementing the Dodd-Frank Act’s participants.953 These provisions benefit many of the general comments raised by trade execution mandate.947 Pursuant to the financial system as a whole by commenters and therefore merits brief this trade execution requirement, creating more efficient market places, mention. transactions involving swaps subject to where market participants will take into While there are no studies on the the clearing requirement in CEA section account the price at which recent effect of pre-trade transparency in the 2(h)(1) 948 must be executed on a SEF or transactions have occurred when swaps market, empirical research on the a DCM, unless no SEF or DCM ‘‘makes determining at what price to display likely effects of transparency on market the swap available to trade’’ or the quotes or orders. participants exists in other markets, related transaction is subject to the As discussed, this rulemaking furthers including the equity market, which has clearing exception under CEA section Congress’ goal of promoting pre-trade transparency, and the 949 2(h)(7). Further, no facility may be transparency in the swaps market.954 corporate bond market, which has a operated for the trading or processing of The goal of pre-trade transparency on similar market structure to the OTC swaps unless first registered as a SEF or SEFs is statutorily mandated in the swaps market and has post-trade 950 DCM. SEFs are required to comply Dodd-Frank Act.955 Notwithstanding the transparency.957 While academics have with 15 statutorily enumerated core fact that Congress directed the a range of perspectives on market 951 principles, as well as any other Commission to construe the statute in structure and transparency issues,958 the requirements that the Commission light of this goal, some commenters empirical research discussed below and 952 prescribes by rule or regulation. have questioned the benefits of the throughout this document supports the Taken together, these statutory Commission’s proposals in furtherance general proposition that a lack of pre- provisions provide the framework that of that goal.956 and post-trade transparency, which are characteristics of any dark, opaque 944 CEA section 1a(50), as amended by section 953 While the SEF rules focus on measures to market, generally increases search and 721 of the Dodd-Frank Act. 7 U.S.C. 1a(50). promote pre-trade price transparency and trade ‘‘Trading facility’’ is also a statutorily defined term. transaction costs, and negatively execution, they complement other Commission See CEA section 1a(51); 7 U.S.C. 1a(51). impacts price discovery. rules pertaining to real-time reporting (part 43 of 945 The Commission separately proposed rules to the Commission’s regulations) and swap data While some commenters contend that determine whether a swap is ‘‘made available to recordkeeping and reporting (part 45 of the pre-trade price transparency trade’’ for purposes of the trade execution Commission’s regulations). The addition of the CEA requirement in CEA section 2(h)(8). Process for a requirements would increase costs for section 5h rules for registration, operation, and Designated Contract Market or Swap Execution market participants, there is academic compliance of SEFs to this mix results in a suite Facility To Make a Swap Available To Trade, 76 FR of rules covering all critical aspects of the trading support for the general proposition that 77728 (proposed Dec. 14, 2011). process—pre-trade, trade, and post-trade. increased transparency will actually 946 The Commission separately proposed rules to 954 Pre-trade transparency is defined as ‘‘the determine minimum block trade sizes for swaps. dissemination of current bid and ask quotations, 957 Since the execution methods for Required The corporate bond markets are generally depths, and information about limit orders away Transactions excludes block trades, this rulemaking comparable to the OTC swap markets in terms of from the best prices. Post-trade transparency refers affects the scope of the trade execution mandate. the large number of instruments traded, with to the public and timely transmission of See Procedures to Establish Appropriate Minimum potentially a large overlap of market participants. information on past trades, including execution Block Sizes for Large Notional Off-Facility Swaps Additionally, any single issuer will have multiple time, volume and price.’’ See Ananth Madhavan, and Block Trades, 77 FR 15460 (proposed Mar. 15, bonds outstanding, with different maturity dates David Porter & Daniel Weaver, ‘‘Should securities 2012). and coupons. Some potential SEF registrants will markets be transparent?,’’ 8 Journal of Financial likely be firms operating trading platforms for 947 See Section 723(a)(3) of the Dodd-Frank Act, Markets 265, 268 (Aug. 2005). See also Larry Harris, corporate bonds. which amended the CEA to add section 2(h)(8). 7 Trading and Exchanges—Market Microstructure for 958 U.S.C. 2(h)(8). For example, Larry Harris notes that market Practitioners 102 (Oxford University Press) (2003) participants might be ‘‘ambivalent about 948 See Section 723(a)(3) of the Dodd-Frank Act, (hereinafter Harris, ‘‘Trading and Exchanges’’). transparency,’’ and explains that traders ‘‘favor which amended the CEA to add section 2(h)(1). 7 955 See section 733 of the Dodd-Frank Act, adding transparency when it allows them to see more of U.S.C. 2(h)(1). CEA section 5h. 7 U.S.C. 7b–3. Under section 5h, what other traders are doing, but they oppose it 949 See Section 723(a)(3) of the Dodd-Frank Act, Congress provided an explicit rule of construction, when it requires that they reveal more of what they which amended the CEA to add section 2(h)(7). 7 stating that ‘‘[t]he goal of this section is to promote are doing. Generally, those who know the least U.S.C. 2(h)(7). The Commission separately the trading of swaps on swap execution facilities about market conditions most favor transparency. proposed rules to determine whether a swap is and to promote pre-trade price transparency in the Those who know the most oppose transparency ‘‘made available to trade’’ for purposes of the trade swaps market.’’ CEA section 5h(e); 7 U.S.C. 7b–3(e). because they do not want to give up their execution requirement in CEA section 2(h)(8). 956 See, e.g., ISDA Research Staff & NERA informational advantages.’’ The Commission also Process for a Designated Contract Market or Swap Economic Consulting, Costs and Benefits of recognizes that there is a continuum of markets Execution Facility To Make a Swap Available To Mandatory Electronic Execution Requirements for occupying ‘‘various points between high and low Trade, 76 FR 77728 (proposed Dec. 14, 2011). Interest Rate Products, ISDA Discussion Papers transparency.’’ See Harris, ‘‘Trading and 950 CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1). Series, Number Two, at 1, 4 (Nov. 2011) (added to Exchanges,’’ at 101. See also ISDA Research Notes, 951 CEA section 5h(f); 7 U.S.C. 7b–3(f). the public comment file for the SEF rulemaking on ‘‘Transparency and over-the-counter derivatives: 952 CEA section 5h(f)(1)(A); 7 U.S.C. 7b–3(f)(1)(A). Nov. 10, 2011) (hereinafter ‘‘ISDA Discussion The role of transaction transparency,’’ No. 1, at 2– Further, CEA section 5h(h) mandates that the Paper’’); ISDA/SIFMA Comment Letter at 5–6 (Mar. 3 (2009), available at http://www2.isda.org/ Commission prescribe rules governing SEF 8, 2011); MetLife Comment Letter at 2–3 (Mar. 8, attachment/MTY4NA==/ISDA-Research- regulation. 7 U.S.C. 7b–3(h). 2011). Notes1.pdf.

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lower costs for market participants,959 the take-it-or-leave-it aspect of the Academic research into the impact of ‘‘help them predict future price changes, negotiation process in the bond markets pre-trade transparency on market to predict when their orders will (which is also present in the OTC swaps quality in the context of the equity execute, and to evaluate their brokers’ market) ‘‘limits one’s ability to obtain markets is an active area of research. As performance,’’ 960 and will improve the multiple quotations before committing buy and sell interest at the best bid and quality of execution they receive from to trade.’’ 964 offer price is widely available to all the marketplace.961 Greater More generally, this area of research, market participants in these markets, transparency in general can increase also called search and matching theory, they are not necessarily analogous to the market liquidity by reducing ‘‘offers a framework for studying OTC swap markets, where such information asymmetry between frictions in real-world transactions and information is simply not available. informed and less informed market has led to new insights into the working Nevertheless, research in this area is participants, and greater pre-trade of markets.’’ 965 This research shows notable because the equity markets have transparency also helps improve price that ‘‘even with very minor search costs pre-trade transparency, and Congress discovery by promoting competition and with a large number of sellers, a has mandated pre-trade transparency on among liquidity providers.962 search and matching environment SEFs. Various research papers examine Academic research supports the view would deliver a rather large departure the impact of changes in relative levels that a lack of pre-trade transparency from the outcome under perfect of pre-trade transparency within a affects trading costs because it competition (which would prevail if the specific trading venue or exchange, and contributes to frictions in the search search costs were zero).’’ 966 This depending on the specific process, which in turn can translate into ‘‘Diamond paradox’’ 967 is of relevance circumstances of each such event, higher transaction costs and impact to this rulemaking because given search market participants’ behavior can be equilibrium prices and allocations. costs, no matter how small, the presence influenced, which in turn can impact Given the lack of pre-trade transparency of multiple dealers can result in trades liquidity and costs.970 and the absence of centralized markets being transacted at the single monopoly (i.e., exchanges) in the OTC swaps price.968 This highlights the importance research comparing transactions costs between market, market participants will likely of reducing the costs that exist when a equity and corporate and municipal bond markets. See Terrence Hendershott & Ananth Madhavan, contact multiple dealers sequentially by market is dominated by a small number phone or by some other electronic ‘‘Click or Call? Auction versus Search in the Over- of dealers—in other words, an the-Counter Market,’’ Working Paper, at 2 (Mar. 19, 963 means of communication. oligopoly.969 2012) (hereinafter Hendershott & Madhavan, ‘‘Click Bessembinder and Maxwell explain that or Call’’). They explain that despite improvements in the post-trade transparency in both corporate and 964 See Bessembinder & Maxwell, municipal bond markets, transaction costs are 959 Discussing the trade-off between higher costs ‘‘Transparency,’’ at 223 (explaining that in addition higher compared to equivalent-sized equity trades to liquidity providers and the lower costs to to the cost of conducting the search, market due to ‘‘the lack of pre-trade transparency that institutional investors from greater post-trade participants are exposed to the additional cost from confers rents to dealers.’’ Id. transparency in the corporate bond markets, the fact that a dealer’s quote is only good ‘‘as long 970 Bessembinder & Maxell conclude that while as the breath is warm’’). Comparing execution cost Empirical research evaluating the impact of ‘‘[T]raders employed by insurance companies and in the equity and corporate bond markets, Edwards, transparency on market quality are typically in the investment management firms bear costs associated Harris & Piwowar theorize that despite the fact that context of natural experiments when there is a with decreases in service provided by bond dealers corporate bonds are less risky than equity (in the change in the set of trading rules in a particular . . . these higher costs are offset by lower trade same company), differences in pre- and post-trade market. Madhavan, Porter & Weaver examined the execution costs that . . . benefit the investors who transparency between the two markets contribute to outcomes when the Toronto Stock Exchange ultimately own the bonds transacted. . .’’ See higher transaction costs in the bond markets. See increased transparency levels for stocks traded on Hendrik Bessembinder & William Maxwell, Amy Edwards, Lawrence Harris & Michael the floor and on the screen, and found that it ‘‘Markets: Transparency and the Corporate Bond Piwowar, ‘‘Corporate Bond Market Transactions reduced the earnings of specialists (or liquidity Market,’’ 22 Journal of Economic Perspectives 217, Costs and Transparency,’’ 62 Journal of Finance providers); lower order flows from them in turn 232–33 (Spring 2008) (hereinafter Bessembinder & 1421, 1438 (Jun. 2007) (hereinafter Edwards et al., reduced market depth and caused the market to Maxwell, ‘‘Transparency’’). ‘‘Transaction Costs and Transparency’’). exhibit increased price volatility and higher 960 Harris, ‘‘Trading and Exchanges,’’ at 101. transaction costs. See Ananth Madhavan, David 965 See ‘‘Markets with Search Frictions,’’ The 961 Porter & Daniel Weaver, ‘‘Should securities markets It is instructive to note the view that Royal Swedish Academy of Sciences, at 1 (Oct. 11, be transparent?,’’ 8 Journal of Financial Markets 265 transparency is ‘‘not an objective per se but rather 2010), available at http://www.nobelprize.org/ (Aug. 2005). Eom, Ok & Park focus on the impact a means for ensuring the proper functioning of the nobel_prizes/economics/laureates/2010/advanced- of changes in the display in the level of depth of market.’’ See Marco Avellaneda & Rama Cont, economicsciences2010.pdf. the limit order book in the Korean equity market ‘‘Transparency in Credit Default Swap Markets,’’ 966 Finance Concepts, at 3 (Jul. 2010), available at Id. at 5. and find evidence of positive effects on market 967 http://www.finance-concepts.com/images/fc/ See Peter Diamond, ‘‘A Model of Price quality measured in terms of depth, volume and CDSMarketTransparency.pdf. Adjustment,’’ 3 Journal of Economic Theory 156 quoted spreads, but beyond a point, these effects 962 Pagano & Ro¨ell explain the regulatory policy (Jun. 1971). taper-off, and can even become negative. See Kyong support for pre-trade transparency as a means ‘‘to 968 See Darrell Duffie, Nicolae Gaˆrleanu & Lasse Shik Eom, Jinho Ok & Jong Ho Park, ‘‘Pre-trade enable ordinary traders to check for themselves Heje Pedersen, ‘‘Valuation in Over-the-Counter transparency and market quality,’’ 10 Journal of whether they have gotten a fair price.’’ Comparing Markets,’’ 20 The Review of Financial Studies 1865, Financial Markets 319 (Nov. 2007). In another the price formation in auction and dealer markets, 1888–89 (Nov. 2007) (hereinafter Duffie et al., paper, Boehmer, Saar & Yu present evidence that they find that greater transparency generates lower ‘‘Valuation in OTC Markets’’) for a series of when the New York Stock Exchange took specific trading costs for uninformed traders on average, examples of markets where search costs impact steps to display limit-order book information to although not necessarily for every trade size. See price discovery, adversely resulting in prices traders off the exchange floor, ‘‘an increase in pre- Marco Pagano & Ailsa Ro¨ell, ‘‘Transparency and diverging from competitive market outcomes. trade transparency affects investors’ trading Liquidity: A Comparison of Auction and Dealer 969 An oligopoly is a market form in which a strategies and can improve certain dimensions of Markets with Informed Trading,’’ 51 Journal of market or industry is dominated by a small number market quality.’’ See Ekkehart Boehmer, Gideon Finance 579 (Jun. 1996). Research referenced later of sellers (oligopolists)—dealers or market makers Saar & Lei Yu, ‘‘Lifting the Veil: An Analysis of Pre- in the release has found that such competition can in the context of the OTC swaps markets. While the trade Transparency at the NYSE,’’ 60 The Journal reduce revenues and increase costs and risks for traditional research into oligopolistic behavior has of Finance 783 (Apr. 2005). Additionally, in a paper liquidity providers, thus causing them to reduce focused on attempts by firms to collude, which highlighting the impact of pre-trade transparency their participation in the markets. could potentially result in non-competitive or on price discovery, and highlighting the risks of 963 Many of the existing electronic trading monopoly pricing for the rest of the market, the driving trading activity to competing markets, platforms for bonds and for swaps display search literature explains that the monopoly pricing Hendershott & Jones found that when the Island indicative quotes, but the Commission is not aware is due to the presence of search costs. Indicative of electronic communications network stopped of research on the quality of these indicative quotes, the potential impact of such oligopolistic behavior displaying its limit order book in certain exchange- and of their likely impact on price discovery and by dealers in an environment with low pre-trade traded funds (‘‘ETFs’’), ETF prices adjusted more market quality in terms of transaction costs. transparency, Hendershott & Madhavan reference Continued

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While the literature from the equity (b) The Statutory Mandate To Consider Commission’s final regulations are markets referenced above focuses on the Costs and Benefits of the intended to mitigate that risk, and, changes in relative levels of pre-trade Commission’s Action: Section 15(a) of therefore, serve an important if transparency, research from the the CEA unquantifiable public benefit. While the corporate bond markets also directly Section 15(a) of the CEA requires the benefits of effective regulation are addresses the benefits from bringing Commission to consider the costs and difficult to value in dollar terms, the post-trade transparency into dark benefits of its actions before Commission believes that they are no markets. Edwards, Harris, and Piwowar promulgating a regulation under the less important to consider given the examine trading costs in the corporate CEA or issuing certain orders.975 CEA Commission’s mission to protect both bond market using a record of every section 15(a) further specifies that the market users and the public. corporate bond trade reported on the costs and benefits shall be evaluated in Additionally, where appropriate, in TRACE 971 system between January 2003 light of the following five broad areas of response to the cost concerns of some and January 2005.972 In their paper, they market and public concern: (1) commenters, the Commission, as discussed below, adopted cost- find evidence that post-trade Protection of market participants and mitigating alternatives presented by transparency through TRACE has the public; (2) efficiency, competitiveness, and financial integrity commenters where doing so would still lowered transaction costs in the achieve the goals of the Dodd-Frank Act. corporate bond market and that higher of futures markets; (3) price discovery; (4) sound risk management practices; The discussion of costs and benefits post-transparency has helped improve that follows begins with an liquidity in this market.973 Summarizing and (5) other public interest 976 informational discussion of the findings from studies by other considerations. The Commission considers below the costs and benefits aggregate estimated costs of forming and researchers on the impact of TRACE on resulting from its discretionary operating a SEF. Although these costs market participants, Bessembinder and determinations with respect to the are mostly attributable to Congress’ Maxwell confirm that it has helped section 15(a) factors. mandate that there be SEFs, they provide a level playing field—in the To aid the Commission in its provide useful context for the costs and context of information regarding current consideration of the costs and benefits benefits attributable to the prices at which various corporate bonds resulting from its regulations, the Commission’s action of implementing are being traded.974 Commission requested in the SEF that mandate in this rulemaking. NPRM that commenters provide data Relatedly, the Commission believes that and supporting information which many of the costs that arise from the slowly, and there was ‘‘substantial price discovery quantify or qualify the costs and application of the final rules are a movement from ETFs to the futures market.’’ See benefits of the proposed rules.977 While consequence of the Congressional trade Terrence Hendershott & Charles M. Jones, ‘‘Island execution mandate of section 2(h)(8) of Goes Dark: Transparency, Fragmentation, and a number of industry commenters Regulation,’’ 18 The Review of Financial Studies expressed the general view that the CEA, as well as the Congressional 743 (Fall 2005). implementing and complying with the goals to promote the trading of swaps on 971 The Trade Reporting and Compliance Engine proposed rules would come at SEFs and to promote pre-trade price (‘‘TRACE’’) is operated by the Financial Industry considerable cost and that the proposed transparency in the swaps market in Regulatory Authority (‘‘FINRA’’), and facilitates the rules would be burdensome,978 the section 5h(e) of the CEA. For example, mandatory reporting of OTC secondary market Commission only received one those market participants who are not transactions in eligible fixed income securities. All eligible for the CEA section 2(h)(7) end broker/dealers who are FINRA member firms have comment quantifying the costs that may 979 user exception will no longer have the an obligation to report transactions in corporate result from the proposed regulations. bonds to TRACE under an SEC-approved set of In meetings requested by potential SEF option to execute Required Transactions rules. See http://www.finra.org/Industry/ registrants during the comment period, bilaterally even when they consider it Compliance/MarketTransparency/TRACE/for the Commission staff invited those more costly or less convenient to further details. entities to provide specific data to execute trades on a SEF (or a DCM). As 972 See Edwards et al., ‘‘Transaction Costs and support general assertions that the described more fully below, the Transparency,’’ at 1426. As with OTC swaps, given proposed regulations would be costly. Commission has considered these costs that there is no pre-trade transparency in the Again, no such information was in adopting these final rules, and has, corporate bond markets, bid-ask spreads, a key where appropriate, attempted to determinant of transaction costs, have to be provided. In another effort to gather estimated using specialized econometric such data, the Commission staff mitigate the costs while observing the techniques. In this paper, they assume that there initiated follow-up contacts with certain express direction of Congress in CEA has been no change in the market structure (in potential SEFs regarding their projected sections 2(h)(8) and 5h(e). terms of execution methods) before and after expenses in light of the Commission’s After the discussion of the aggregate TRACE. proposed regulations. The product of costs of forming and operating a SEF, 973 In a related paper on the impact of higher these conversations is reflected in the the Commission’s consideration of costs transparency on liquidity, research examining the cost estimates included in this release. and benefits is organized into seven impact of higher post-trade transparency on the categories: (1) SEF Market Structure; (2) liquidity of the BBB-rated corporate bond market While certain costs are amenable to shows that ‘‘overall, adding transparency has either quantification, other costs are not easily Registration; (3) Recordkeeping and a neutral or a positive effect on liquidity.’’ Id. at monetized, such as the costs to the Reporting; (4) Compliance; (5) 1438. public of another financial crisis. The Monitoring and Surveillance; (6) 974 Bessembinder & Maxwell point out that prior Financial Resources and Integrity; and to the introduction of TRACE, ‘‘customers found it 975 CEA section 15(a); 7 U.S.C. 19(a). (7) Emergency Operations and System difficult to know whether their trade price reflected 976 Id. Safeguards. For each category,980 the market conditions .... With transaction 977 See Core Principles and Other Requirements reporting, customers are able to assess the for Swap Execution Facilities, 76 FR 1214, 1237 980 The costs and benefits of Core Principle 12 are competitiveness of their own trade price by (proposed Jan. 7, 2011). discussed in connection with a separate proposed comparing it to recent and subsequent transactions 978 See, e.g., FXall Comment Letter at 2–4 (Mar. rulemaking entitled Requirements for Derivatives in the same and similar issues.’’ Bessembinder & 8, 2011); CME Comment Letter at 2 (Mar. 8, 2011). Clearing Organizations, Designated Contract Maxwell, ‘‘Transparency,’’ at 226. 979 See ISDA Discussion Paper (Nov. 2011). Markets, and Swap Execution Facilities Regarding

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Commission summarizes the final Finally, in some instances, repositories using unique product regulations; describes and responds to quantification of costs to certain market identifiers; a Chief Compliance Officer; comments discussing the costs and participants is not reasonably feasible and disaster recovery.988 ISDA also benefits; 981 assesses alternatives, because costs will depend on the size, identified major operating costs to including those raised by commenters; structure, and product offering of a SEF, include the cost of compensation and and considers the costs and benefits in which are likely to have considerable benefits for staff, leasing office space, light of the five factors set out in CEA variation, or because required maintaining and upgrading operational section 15(a), which expressly requires information or data will not exist until infrastructure and systems, maintaining the Commission to consider the costs after a SEF commences operation as a sufficient financial resources to cover and benefits of ‘‘the action of the registrant. In other instances—for operating costs for at least one year, Commission.’’ 982 In this regard, as with example with respect to protection of maintaining an independent board of the aggregate costs of forming and market participants and the public— governors, and maintaining emergency operating a SEF attributable to Congress, suitable metrics to quantify costs and backup facilities.989 benefits simply do not exist. where the Commission merely codifies In another comment letter, a statutory requirement, the Notwithstanding the above-mentioned MarketAxess stated that the SEC’s cost Commission believes that there is no act limitations, the Commission identifies estimates in its proposed rulemaking for of discretion for consideration under and considers the costs and benefits of security-based SEFs (‘‘SB–SEFs’’), were CEA section 15(a). For example, for each these rules in qualitative terms. ‘‘generally realistic and accurate core principle, the first section of the (c) Estimated Aggregate Costs of estimates of the costs of establishing and Commission’s regulations is a Forming and Operating a SEF operating a SB–SEF’’ and that these codification of the statutory language of estimates would be ‘‘comparable to, and the core principle as a rule and, In its discussion paper, ISDA thus relevant for, calculation of costs for accordingly, there is no Commission act estimated the cost of establishing a new 984 a SEF.’’ 990 of discretion and thus no costs and SEF to be $7.4 million, and estimated ongoing operating costs to be nearly $12 The SEC estimated that the cost of benefits for the Commission to consider 985 under section 15(a). In other cases, such million per year. ISDA based its cost forming an SB–SEF is approximately as Core Principle 1, the rule simply estimates on a survey of groups which $15–20 million, including the first year codifies the text of the core principle, included a ‘‘small number of (large) of operation.991 These costs included a and thus will not be discussed as it is Buy-Side firms and the 16 largest software and product development dealers.’’ 986 ISDA’s estimate is based on outside the scope of section 15(a). estimate of $6.5–10 million for the first a trading architecture that includes an The Commission expects that the year and ongoing technology and order matching engine, and a Request costs and benefits will vary based on the maintenance costs of $2–4 million.992 for Quote system or other means of specific circumstances of the individual The SEC also estimated that it would interstate commerce that will allow entity seeking registration as a SEF. For cost approximately $50,000–$3 million members to show (and see) bids and example, some SEF-like execution for an operator of an existing platform offers.987 In addition, ISDA’s estimate platforms that currently operate in the to modify its platform to conform to the includes costs associated with: systems OTC marketplace may generally already statute and the SEC’s proposed rules, to capture and retain data necessary to have the infrastructure to comply with depending on the enhancements that create an audit trail for at least 5 years; the Commission’s regulations without would be required by the final an electronic analysis capability and the regulations.993 the need for sizeable additional ability to collect and evaluate market expenditures. For these potential SEF data on a daily basis; a real-time In the Commission staff’s follow-up registrants, the regulations may occasion electronic monitoring system to detect conversations, potential SEFs stated that minimal incremental costs above their and deter manipulation, distortion, and the costs associated with the SEF NPRM existing cost structure. In contrast, market disruption; reporting transaction may differ from the SEC’s cost estimates potential SEF registrants that are not information to the Commission and data in various areas. For example, one currently operating in the OTC commenter estimated first-year software marketplace, registered as a DCM, or 984 ISDA Discussion Paper at 30–31 (Nov. 2011). and product development costs of $4 operating as an exempt board of trade While the ISDA discussion paper is largely million rather than the $6.5–10 million will likely lack existing infrastructure concerned with the costs and benefits resulting estimated by the SEC. Another and may incur costs, at times from the statute and regulations implemented by other rulemakings, relevant portions are discussed commenter stated that existing entities significant, in both physical and human in this release. ISDA’s estimate includes the costs will be able to leverage existing capital to meet the requirements of the of: registering with the Commission; developing an technology at minimal cost, and that regulations.983 Accordingly, where electronic system capable of providing market there is no real cost associated with the appropriate and possible to account for participants with the ability to make bids and offers to multiple participants and capable of maintaining rulemaking from a technology these differences, the Commission has safe storage capacity; developing and maintaining perspective if an entity is not a startup. attempted to express costs and benefits electronic analysis, reporting, and monitoring As stated above, ISDA’s estimates also as a range, sometimes one that is wide. software; developing new products; drafting contractual arrangements with SEF users and differed from those of the SEC, vendors; drafting market rules and policies; and including estimated initial software the Mitigation of Conflicts of Interest, 75 FR 63732 developing emergency backup procedures and development costs of $1 million and (proposed Oct. 18, 2010). systems. 981 The Commission notes that a number of these 985 Id. at 31–32. This estimate includes the cost 988 Id. at 30. regulations also refer to requirements that are of compensation and benefits for staff, leasing office 989 contained in other rulemakings, some that have space, maintaining and upgrading operational Id. at 31. been finalized and others that have not. The costs infrastructure and systems, maintaining sufficient 990 MarketAxess Comment Letter at 5 (Jun. 3, and benefits of these regulations have been, or will financial resources to cover operating costs for at 2011). be, discussed in those other rulemakings. least one year, maintaining an independent board 991 Registration and Regulation of Security-Based 982 CEA section 15(a); 7 U.S.C. 19(a). of governors, and maintaining emergency backup Swap Execution Facilities, 76 FR 10948, 11041 983 The Commission notes that these registrants facilities. (proposed Feb. 28, 2011). will also incur costs to meet the statutory 986 Id. at 31, 34. 992 Id. requirements. 987 Id. at 29. 993 Id.

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initial product development costs of release may overstate the costs of requirement in section 2(h)(8) of the $1.25 million.994 complying with the rules. Based on the Act 999) or Permitted Transactions (i.e., In the Commission staff’s follow-up Commission staff’s follow-up any transaction not involving a swap conversations, potential SEFs stated that discussions with potential SEFs, it that is subject to the trade execution total ongoing costs would range from appears that most SEFs will be entering requirement in section 2(h)(8) of the $3.5 million to $5 million per year. into agreements with regulatory service Act). These potential SEFs also told the providers for the provision of these Pursuant to final § 37.9(a)(2), market Commission staff that it would cost functions. In fact, the Commission participants may only execute Required them approximately $2 million to understands that many potential SEFs Transactions using either the SEF’s conform to the statute and the have already entered into formal Order Book or an RFQ System that will Commission’s proposed rules, including agreements with a regulatory service transmit a request for a quote to at least contracting with the National Futures provider. The Commission notes that three market participants and that Association (‘‘NFA’’) to perform competition among regulatory service operates in conjunction with the Order regulatory services. providers, including NFA and the Book. In contrast, while SEFs must offer While the Commission believes that Financial Industry Regulatory an Order Book for Permitted the various cost estimates (including Authority, may result in additional cost Transactions, market participants may those for SB–SEFs and those reflecting savings for SEFs that choose to execute Permitted Transactions on a costs imposed by statute) can be used as outsource compliance obligations. SEF using any method of execution.1000 a rough guide to the costs that would be incurred to establish and operate a SEF, 2. SEF Market Structure (3) Request for Quote (‘‘RFQ’’) System the Commission notes that the majority (a) Background for Required Transactions of these costs are necessary to establish (1) Minimum Trading Functionality The RFQ System definition in final and operate any platform for the trading (Order Book) § 37.9(a)(3) requires that each market of swaps, as a number of firms had participant transmit a request for a already done prior to the enactment of Final § 37.3(a)(2) requires that each quote to at least three market the Dodd-Frank Act. The Commission SEF provide its market participants with participants, with each of these market believes that the additional costs of a minimum trading functionality participants being given the opportunity 996 modifying a platform to comply with referred to as an Order Book, which to respond. As described in greater the Commission’s regulations to the Commission believes is consistent detail in the preamble, permitting RFQ implement the statute represent a with the SEF definition and promotes requesters to send RFQs to a single relatively modest proportion of these the goals provided in section 733 of the market participant would undermine 997 costs. Dodd-Frank Act. As noted in the the multiple participant to multiple preamble, the Commission is (1) Regulatory Costs participant requirement in the SEF withdrawing the proposed requirement definition and the goal of pre-trade price Pursuant to final § 37.204 adopted in that SEFs offer indicative quote transparency.1001 The three market this release, SEFs may utilize a functionality because the Commission participant requirement will help the regulatory service provider for believes that, at this time, such a RFQ requester benefit from price 998 assistance in performing certain self- requirement is unnecessary. competition among multiple RFQ regulatory functions, including, among (2) Methods of Execution on a SEF responders and thus promotes price others, trade practice surveillance, discovery. In addition, final § 37.9(a)(3) Final § 37.9 governs the execution market surveillance, real-time market requires that any firm bid or offer methods that are available on a SEF and monitoring, investigations of possible pertaining to the same instrument classifies transactions executed on a rule violations, and disciplinary resting on any of the SEF’s Order Books 995 SEF as either Required Transactions actions. The costs described in this must be communicated to the RFQ (i.e., any transaction involving a swap cost benefit consideration section reflect requester at the same time the first that is subject to the trade execution the costs that a SEF is likely to face if responsive bid or offer is received by it does not choose to utilize the services such requester. of a regulatory service provider. To the 996 An Order Book means: (i) An electronic trading facility, as that term is defined in section (4) Time Delay Requirement extent that utilizing a regulatory service 1a(16) of the Act; (ii) a trading facility, as that term provider is more cost-effective for a SEF is defined in section 1a(51) of the Act; or (iii) a Final § 37.9(b)(1) sets forth a time than performing the functions trading system or platform in which all market delay requirement for a broker or dealer independently, the quantitative and participants in the trading system or platform have the ability to enter multiple bids and offers, observe who has the ability to execute against its qualitative cost discussions in this or receive bids and offers entered by other market participants, and transact on such bids and offers. 999 Transactions that are subject to the trade 994 ISDA Discussion Paper at 32 (Nov. 2011). See Final § 37.3(a)(3) of the Commission’s execution requirement of CEA section 2(h)(8) are ISDA’s paper also contained a discussion of the regulations. subject to the clearing requirement of CEA section costs likely to be faced by dealers and buy-side 997 CEA section 1a(50) defines a SEF as ‘‘a trading 2(h)(1) and are ‘‘available to trade’’ on a SEF or users of interest rate swaps that must be executed system or platform in which multiple participants DCM. See Process for a Designated Contract Market on regulated exchanges. Some of these costs result have the ability to execute or trade swaps by or Swap Execution Facility To Make a Swap from statutory requirements that were not the accepting bids and offers made by multiple Available To Trade, 76 FR 77728 (proposed Dec. 14, product of Commission discretion, while other participants in the facility or system, through any 2011). costs are likely to derive from regulations being means of interstate commerce . . .’’ 7 U.S.C. 1a(50). 1000 The SEF NPRM provided that Permitted implemented in other rulemakings. Other costs In section 5h(e) of the Act, Congress provided a Transactions may be executed by an Order Book, simply reflect the cost of doing business and are not ‘‘rule of construction’’ to guide the Commission’s RFQ System, Voice-Based System, or any such directly imposed by Commission regulations. interpretation of certain SEF provisions (stating that other system for trading as may be permitted by the Accordingly, these costs are beyond the scope of the goals of section 5h of the Act are to ‘‘promote Commission. Core Principles and Other this rulemaking and will not be discussed in this the trading of swaps on [SEFs] and to promote pre- Requirements for Swap Execution Facilities, 76 FR release. trade price transparency in the swaps market’’). 7 at 1241. 995 Rule 37.204 permits SEFs to contract with a U.S.C. 7b–3(e). 1001 See RFQ System Definition and Transmission regulatory service provider for the provision of 998 See Minimum Trading Functionality to Five Market Participants discussion above under services to assist in compliance with the core discussion above under § 37.3—Requirements for § 37.9(a)(1)(ii)—Request for Quote System in the principles, as approved by the Commission. Registration in the preamble. preamble.

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customer’s order or to execute two of its that the minimum trading functionality (2) Costs to Market Participants customers’ orders against each other. is consistent with the SEF definition (i) General Costs These orders (i.e., price, size, and other and promotes the statutory goals of pre- terms) are subject to a 15-second time trade price transparency and trading on In its discussion paper, ISDA delay between the entry of the two SEFs provided in section 733 of Dodd- described what it asserted would be the orders, such that one side of the Frank.1004 Nevertheless, the likely costs and benefits of what it potential transaction is disclosed and Commission has adopted cost-mitigating labeled the ‘‘electronic execution made available to other market alternatives identified by commenters, mandate,’’ that is, mandating the participants before the second side of including: (1) Deleting the requirement execution of interest rate swaps on the potential transaction is submitted that indicative bids and offers must be DCMs or on SEFs.1006 According to for execution. This time delay posted on a SEF’s Order Book; (2) ISDA, ‘‘[t]he study indicates that the EE requirement is similar to certain timing allowing work-up sessions 1005 where mandate [electronic execution delays applicable to futures transactions the original counterparties to a trade mandate], in all likelihood, will bring executed on DCMs, which are also and other market participants can trade little benefit to the market while adding designed to promote pre-trade additional quantities of a swap at the significantly to the costs of using transparency by allowing other market previously executed price; and (3) derivatives.’’1007 ISDA stated that the participants the opportunity to allowing SEFs to use any means of electronic execution mandate will result participate in the transaction and thus interstate commerce in providing the in higher bid/ask spreads and prevent any two market participants execution methods for Required significant operational, technological, from crossing a bilaterally (off- Transactions in § 37.9(a)(2)(i)(A) or (B) and compliance costs for those exchange) negotiated trade. The of this final rulemaking (i.e., Order Book transacting in interest rate swaps.1008 Commission notes that the 15-second or RFQ System that operates in ISDA further stated that these costs will requirement is a default time delay; the conjunction with an Order Book). Not be borne by end users and may force final rule also permits SEFs to adjust having to display indicative quotes will some participants to withdraw from the this time delay requirement based upon likely reduce the programming costs for market with ‘‘virtually no effect on a swap’s liquidity or other product- SEFs, since they will not need to small end users.’’ 1009 ISDA stated that specific characteristics. program that functionality into the the electronic execution mandate is both platform. The Commission believes the unnecessary and counterproductive as (b) Costs requirement to communicate any firm electronic trading is already developing (1) Costs to SEFs bid or offer will marginally add to the rapidly as users take advantage of the (i) Minimum Trading Functionality programming costs for SEFs and is existing choice in execution venues.1010 (Order Book) and Methods of Execution included in the $250,000 estimate According to ISDA, the electronic on a SEF provided above. As commenters have execution mandate will take away users’ described, work-up sessions are part of choice, create inefficiencies, and In the Commission staff’s follow-up current OTC market practice, and the discourage innovation.1011 ISDA stated conversations with potential SEFs, one Commission believes that this that the electronic execution mandate commenter noted that it would cost additional flexibility for market will impose new costs because: approximately $250,000 to upgrade its participants to execute transactions in existing system to provide the required SEFs themselves need to be established, the SEF context will promote the minimum trading functionality, while licensed and operated. Buy-Side users will trading of swaps on SEFs consistent face significant technology and operational another stated that there is no real cost with CEA section 5h(e). challenges as well as increased regulatory associated with the rulemaking from a reporting requirements. Dealers will have to technology perspective if an entity is (ii) Time Delay Requirement upgrade infrastructure to deal with already operating a trading platform, A SEF will incur some additional automated trading and comply with and that an existing platform could programming costs as a result of the increased regulatory reporting and record- become compliant with the rule by requirement that a SEF must provide for keeping. All participants will face increased leveraging existing technology at reconciliations, oversight and reporting a 15-second time delay in certain requirements as well. Finally, regulators will minimal cost. The Commission believes circumstances. The Commission did not that these estimates are reasonable for need additional staff to properly oversee the receive any specific estimates of these new markets.1012 existing platforms. Though the programming costs and notes that the Commission is not requiring that rule permits a SEF to adjust the According to ISDA, the aggregate systems be upgraded once they have minimum time delay requirement based market-wide ‘‘set up costs are estimated achieved compliance with the rules, it upon a swap’s liquidity or other to exceed $750 million and annual costs expects that SEFs may have business 1013 product-specific characteristics. For may run to $250 million.’’ incentives to incur ongoing In terms of benefits, ISDA concluded example, less liquid contracts may need programming costs to upgrade their that: a longer time delay than more liquid systems. contracts. Transparency and market access may ISDA/SIFMA noted that the minimum improve marginally for small financial trading functionality may limit 1004 In section 5h(e) of the Act (as adopted by entities that use IRS [interest rate swaps] but competition by increasing costs to section 733 of the Dodd-Frank Act), Congress any benefit they receive will be very modest applicants that would otherwise prefer provided a ‘‘rule of construction’’ to guide the relative to the added costs of execution. to offer solely RFQ functionality.1002 As Commission’s interpretation of certain SEF discussed in the preamble to this provisions (stating that the goals of section 5h of the 1006 ISDA Discussion Paper at 20–21 (Nov. 2011). 1003 Act are to ‘‘promote the trading of swaps on [SEFs] 1007 Id. at 1. release, the Commission believes and to promote pre-trade price transparency in the 1008 Id. at 4. swaps market’’). 7 U.S.C. 7b–3(e). 1009 Id. 1002 ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 1005 As described earlier, a work-up session refers 1010 2011). to a practice wherein once a trade has been Id. 1003 See Minimum Trading Functionality executed, one of the counterparties to the trade can 1011 Id. discussion above under § 37.3—Requirements for express an interest in transacting additional volume 1012 Id. at 24. Registration in the preamble. at the same price. 1013 Id. at 4.

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Indeed, the imposition of clearing and the ‘‘electronic execution mandate,’’ this in the market on a level playing field, higher fees that will result from the EE rulemaking does not require that market and will likely enhance price discovery Mandate [electronic execution mandate] and participants execute swaps in Required in the swaps market. Moreover, as other provisions of DFA [Dodd-Frank Act] Transactions electronically, since SEFs noted, section 5h(e) of the CEA states may cause these and other participants to reduce their activity or even withdraw from will be allowed to use any means of that a purpose of SEFs is to promote the IRS market.1014 interstate commerce in providing the pre-trade transparency in the swaps execution methods for such transactions market.1023 ISDA asserted that transaction costs as described in § 37.9(a)(2)(ii). According to ISDA, market for OTC trades in interest rate swaps are Nevertheless, the Commission addresses participants asserted that bid-ask already low with levels of transparency below many of ISDA’s comments spreads in interest rate swaps will that market participants consider regarding the statutory trading mandate widen after SEFs begin trading.1024 The sufficient, and that trading in a for interest rate swaps. Commission notes that such predictions regulated market or on an exchange Further, while commenters did not are speculative and are not based on does not guarantee a more efficient submit any data to support or refute data, which does not yet exist because market because traders often get better ISDA’s estimates, during follow-up calls SEFs have yet to begin trading. 1015 execution off-exchange. ISDA with potential SEFs, one commenter Moreover, during the Commission staff’s further asserted that liquidity in OTC stated that the U.S. credit default swap follow-up conversations, other market interest rate swaps is at least as good as market experiences approximately 1,350 participants (potential SEFs) shared liquidity in exchange-traded futures trades per day. If interest rate swaps and information illustrating that after the contracts, especially outside of the most other swaps are included, the total financial crisis, participation by dealers liquid futures contract months, and that number of trades per day is likely to be or liquidity providers increased on their market participants predicted that bid- a much higher figure. In turn, this trading platforms. These sources stated ask spreads in interest rate swaps would would imply that the execution costs that in some instances, new entrants increase after the execution mandate per trade are likely to be lower than now account for over a quarter of the takes effect.1016 ISDA’s estimate, which was based on total business transacted on such ISDA also estimated that the market platforms. The Commission believes as a whole will need to absorb at least only 1,000 trades per day. The Commission notes that while that, holding all else constant, increased an additional $400 million in annual SEFs are expected to list for trading a participation and competition among expenses as a result of the changes wide variety of swaps, ISDA’s comment liquidity providers should result in implemented in connection with the addresses only the costs and benefits tighter spreads and greater depth, both Dodd-Frank Act, and that assuming applicable to the interest rate swap key components of improved SEFs will execute 1,000 trades a day market. The interest rate swap market is liquidity.1025 (comparable to what ISDA states is the However, to promote the trading of current number of transactions in the one of the most liquid swap markets and is characterized by relatively tight bid- swaps on SEFs, the Commission’s final OTC market), this will amount to rules, as mentioned above, further 1017 ask spreads, a high level of notional execution costs of $1,280 per trade. increase the flexibility regarding the As a result, ISDA stated that dealer costs principal, and relatively high volume compared to other swap markets, trading platforms that a SEF may offer will be passed on to end users and will for Required Transactions (which the cause participants to withdraw from the including credit default swaps. Most 1018 other swap markets, especially many of Commission expects will include many market, discouraging innovation. interest rate swap contracts).1026 In The Commission notes that a majority the instruments like credit derivatives addition, as discussed above,1027 work- of the costs identified by ISDA result which contributed to the financial up sessions will allow market from statutory requirements that were crisis, are less liquid than the interest participants to continue using certain not the product of Commission rate swap market and thus will benefit existing market practices, which will discretion. For example, the more from the enhanced pre-trade and help facilitate the transition of swap requirements that certain swaps must be post-trade price transparency and executed on a SEF or DCM,1019 and that centralized marketplaces that will be markets to SEFs. To support its comments on the no person may operate a facility for the available on SEFs. potentially adverse impact of moving trading or processing of swaps unless While it may be true, as ISDA asserts, interest rate swaps to centralized the facility is registered as a SEF or as that some buy-side users contend that execution platforms, ISDA provided a DCM,1020 are statutory requirements. current levels of price transparency in data on bid-offer spreads from both Additionally, CEA section 5h(e) the interest rate swap market are interest rate swap markets and contains a rule of construction that adequate, the Commission notes that an states ‘‘[t]he goal of this section is to increase in pre-trade transparency 1023 CEA section 5h(e); 7 U.S.C. 7b–3(e). promote the trading of swaps on swap benefits the public because it will allow all market participants (not just those 1024 ISDA Discussion Paper at 2–4 (Nov. 2011). execution facilities and to promote pre- 1025 See Hendershott & Madhavan, ‘‘Click or trade price transparency in the swaps with a strong business relationship with Call,’’ at 2; Darrell Duffie, Nicolae Gaˆrleanu & Lasse 1022 market.’’ 1021 The interest rate swaps a particular swap dealer) to transact Heje Pedersen, ‘‘Over-the-Counter Markets,’’ 73 discussed by ISDA are included in these Econometrica 1815 (Nov. 2005) (hereinafter Duffie 1022 et al., ‘‘OTC Markets’’). statutory requirements. Moreover, The ISDA comment ignores the liquidity risk inherent in the current bilateral interest rate swap 1026 See, e.g., Minimum Trading Functionality notwithstanding ISDA’s use of the term market. It addresses the cost of entering into a new discussion above under § 37.3—Requirements for position, but not of unwinding it. If a buy-side firm Registration in the preamble and ‘‘Through Any 1014 Id. at 36. wishes to unwind a swap in the OTC market, it will Means of Interstate Commerce’’ Language in the 1015 Id. at 20–21. typically have to complete the unwind trade with SEF Definition discussion above under § 37.9(b)(1) and (b)(4)—Execution Methods for Required 1016 Id. at 2–4, 20–21. the original counterparty or swap dealer. Given that the dealer is aware of the true trading interest of the Transactions in the preamble. 1017 Id. at 35. buy-side firm, the quote might be one-sided 1027 See ‘‘Through Any Means of Interstate 1018 Id. at 4. favoring the dealer. Assuming sufficient liquidity, Commerce’’ Language in the SEF Definition 1019 CEA section 2(h)(8); 7 U.S.C. 2(h)(8). any anonymous trading platform will pose a lower discussion above under § 37.9(b)(1) and (b)(4)— 1020 CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1). unwind risk/cost to most non-dealer or buy-side Execution Methods for Required Transactions in the 1021 CEA section 5h(e); 7 U.S.C. 7b–3(e). firms. preamble.

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exchange-traded futures markets.1028 to $1,280 per trade.1031 However, running the transaction in anticipation The Commission notes that interest rate transaction volume has increased of the executing market participant’s swap dealers use exchange-traded dramatically in securities markets and forthcoming and offsetting interest rate futures, primarily the DCM futures markets that have migrated transactions.1035 Commenters Eurodollar futures, to hedge the to electronic trading platforms (such as additionally stated that the risks exposures that arise from their interest order books) from open outcry and other associated with the five market rate swap dealing activity. A dealer non-electronic trading environments. participant requirement would be most seeking to hedge an interest rate swap This volume increase is due to a pronounced in illiquid swaps or large- using Eurodollar futures will typically tendency for typical transaction sizes to sized trades (i.e., transactions trade a strip of Eurodollar futures.1029 In be much smaller on electronic order approaching the block trade 1036 its comparisons of typical bid-offer book markets and also because order threshold). Some commenters also spreads in exchange-traded interest rate books attract participation from new stated that the five market participant futures and in OTC interest rate swaps, and alternate sources of liquidity, requirement would negatively impact 1037 ISDA provided spreads in the front including participants using automated liquidity. 1032 While the Commission believes that month Treasury bond and Treasury note trading strategies. Transactions the five market participant requirement futures contracts and the relatively levels increased in the securities and promotes the statutory goal of pre-trade illiquid interest rate swap futures futures markets when trading moved to transparency because the RFQ requester contracts, but not the highly liquid electronic platforms, and the Commission believes that it is likely will have access to quotes from a larger Eurodollar futures contract.1030 As that the number of transactions in the group of potential responders, the noted, the Eurodollar futures contract is swap markets will increase as swap Commission is sensitive to commenters’ the primary vehicle used by interest rate trading migrates to SEFs and DCMs. The concerns about this requirement, such swap dealers to hedge their residual Commission is unaware of any as the potential for increased trading interest rate exposure. Therefore, the comments or studies indicating that costs and information leakage to the Commission believes that Eurodollar transaction sizes in the swap markets non-executing market participants in futures bid-offer spreads are a more will remain unchanged when they move the RFQ. To address these concerns, appropriate metric for comparison to to electronic platforms. while still complying with the statutory interest rate swap bid-ask spreads than SEF definition and promoting the goals the interest rate swap futures contracts (ii) RFQ–5 Market Participant provided in section 733 of the Dodd- bid-ask spreads used by ISDA. Likewise, Requirement Frank, the Commission is revising final Eurodollar futures are more closely Several commenters stated that the § 37.9(a)(3) so that a market participant related to the OTC interest rate swap five market participant requirement in must transmit an RFQ to no less than market and more useful for hedging proposed § 37.9(a)(1)(ii) is likely to three market participants. interest rate swap positions than increase costs, but commenters did not As noted in the preamble, the Treasury futures contracts. Thus, provide any data to support this Commission believes that the three Eurodollar futures are also a better assertion.1033 MetLife stated that market participant requirement is metric for comparison to interest rate disclosure of a large expected trade by consistent with current market practice swaps than Treasury futures. RFQ to five swap dealers would likely where, in certain markets, many market Underlying ISDA’s comment is an result in a material widening of bid/ask participants already choose to send an implicit assumption that moving swaps spreads and increased hedging costs, as RFQ to multiple market participants, to electronic trading platforms will not swap dealers will pass on to their while still complying with the statutory result in any major changes to the customers the cost of protecting SEF definition and promoting the goal number of transactions that occur. In themselves against potential adverse of pre-trade transparency. Additionally, the Commission computing its cost estimates, ISDA price movements due to the required pre-trade transparency.1034 Some believes that adopting a minimum assumes that the number of trades on commenters specifically noted that market participant requirement of fewer SEFs will be comparable to the number these adverse price movements would than three (e.g., a minimum of two of trades that occur in the OTC market be due to non-executing market market participants) will expose market today. As noted above, ISDA states that, participants receiving the RFQ front- participants to a higher risk of not assuming SEFs will execute 1,000 trades receiving multiple responses to their a day, total execution costs will amount 1031 See ISDA Discussion Paper at 35 (Nov. 2011). RFQs. The receipt of multiple responses A recent paper by the New York Federal Reserve increases the likelihood that the 1028 ISDA Discussion Paper at 12–20 (Nov. 2011). estimated 2,500 trades/day in the interest rate swap requestor will execute at the best 1029 market. See Michael Fleming, John Jackson, Ada Li, A strip of Eurodollar futures contracts is a possible price. The Commission has position consisting of a sequence of contract Asani Sarkar, & Patricia Zobel, ‘‘An Analysis of months, for example, a position consisting of the OTC Interest Rate Derivatives Transactions: learned that business or technology March 2013, June 2013, September 2013, and Implications for Public Reporting,’’ Federal Reserve reasons may prevent any given market December 2013 Eurodollar futures contracts. This Bank of New York Staff Reports, No. 557, at 2 (Mar. participant from responding to a position is economically equivalent to a one year 2012), available at http://www.newyorkfed.org/ _ specific RFQ. For example, DCM market interest rate swap with quarterly payment dates on research/staff reports/sr557.pdf. the futures expiration dates. 1032 See, e.g., George H. K. Wang & Aysegul Ates, maker programs typically require 1030 According to the CME Group Web site, ‘‘When Size Matters: The Case of Equity Index participants to quote two-sided markets during the first eight months of 2012, Eurodollar Futures,’’ EFMA 2004 Basel Meetings Paper (Dec. for 75 to 85 percent of the trading day. futures contracts had a total volume of 2003); Samarth Shah & B. Wade Brorsen, Therefore, if the Commission ‘‘Electronic vs. Open Outcry: Side-by-Side Trading approximately 2300 million contracts. During that established a minimum market same period, the combined volume of CME Group’s of KCBT Wheat Futures,’’ 36 Journal of Agricultural interest rate swap futures contracts was only about and Resource Economics 48 (Apr. 2011). 312,000 contracts, approximately 1/10 of one 1033 See RFQ System Definition and Transmission 1035 See RFQ System Definition and Transmission percent of the volume in Eurodollar futures to Five Market Participants discussion above under to Five Market Participants discussion above under contracts. See http://www.cmegroup.com/ § 37.9(a)(1)(ii)—Request for Quote System in the § 37.9(a)(1)(ii)—Request for Quote System in the wrappedpages/web_monthly_report/ preamble. preamble. Web_Volume_Report_CMEG.pdf, updated monthly 1034 MetLife Comment Letter at 2–3 (Mar. 8, 1036 Id. and viewed in September 2012. 2011). 1037 Id.; ISDA Discussion Paper at 2 (Nov. 2011).

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participant requirement of two, there competition sufficient to reduce the would allow ‘‘semi-private side deals’’ could be instances where one market quoted bid-ask spread. to take place, and that in light of the participant does not respond to the As stated by commenters, in a market 2008 financial crisis, the ‘‘costs and RFQ, leaving the RFQ requester with with high levels of pre-trade risks of permitting private RFQ markets only a single response. While there is no transparency, concerns about leakage of [remained] high.’’ 1047 guarantee that even a minimum of three trading interest typically grow with As noted above, the Commission market participants will ensure that trade size; a market participant posting agrees that a broader group of potential multiple responses are available for all a bid or offer in the order book, or responders will encourage price RFQs at all times, it increases the sending a request for a quote to multiple competition and provide a fairer probability that the goal of pre-trade dealers, will typically be concerned that assessment of market value; however, price transparency is achieved and that information about their trading interest the Commission is mindful of concerns a competitive market is created for will adversely impact the market price. that the five RFQ recipient model may market participants. However, empirical research by impose additional costs, especially for Hendershott and Madhavan illiquid and bespoke swaps. Following In response to the concerns raised by demonstrates that standard-sized (as the practice for futures on DCMs, the commenters about increased trading opposed to large size) trades are more Commission could have required that costs, the Commission also notes that likely to be traded on an RFQ RFQs be disseminated to all market research in the corporate bond market system.1044 For these trade sizes, market participants.1048 However, the supports the view that RFQ systems in participants believe that the benefits Commission recognizes that swaps tend general increase search options for from lowering search costs mitigate to be less standardized than futures; investors, and that the competition that concerns about information leakage.1045 therefore, the rules pertaining to the ensues among market participants On the other hand, for larger trades (i.e., execution methods for SEFs should results in lower bid-ask spreads.1038 block trades), leakage concerns could provide the requisite flexibility to One paper by Hendershott and dominate any expected savings in market participants trading swaps. As Madhavan provides evidence that by search costs from participating in the such, the Commission is implementing allowing a market participant to order book or RFQ system, and larger the minimum three market participant negotiate simultaneously with multiple trades are more likely to be executed requirement. The Commission also participants, and thus not be though a bilateral bargaining process. believes that the three market constrained by the limitations of the The Commission’s understanding of this participant requirement reflects the sequential search process as discussed potential trade-off between lower search more flexible statutory provisions for above, RFQ systems contribute to a costs and higher leakage risk is SEFs as compared to DCMs. statistically significant reduction in generally consistent with the results While commenters have not transaction costs for quote from Hendershott and Madhavan submitted any data on the potential requesters.1039 described above. These findings are impact of the proposed five market Specifically, the authors compare relevant for the final rules’ exclusion of participant requirement from the potential information leakage and front- transaction costs across two different block-sized trades from the execution running risks, the Commission believes market structures, one with an RFQ and methods for Required Transactions. that the three market participant one with a traditional OTC structure, While some commenters stated that requirement adopted in this final release and find that investors are more likely the five market participant requirement does not necessarily introduce a new to use RFQ systems when their costs are would result in excessive and costly disclosure, other commenters argued source of risk for market participants as high because increased RFQ these risks to the extent that they exist participation reduces their transaction that the requirement would result in 1040 insufficient transparency, comparing the are present in the current OTC market. costs. This is so because competition The Commission also believes that the among dealers lowers costs.1041 While proposed requirement to the current status quo of private OTC markets, prices of bids and offers made in Hendershott and Madhavan’s estimates response to RFQs will reflect any for transaction costs in the corporate where large swap dealers can choose to 1046 subsequent hedging risks by the bond market are consistent with those only interact with one another. According to Mallers et al., because the responders, and the potential winner’s reported by others,1042 access to RFQ curse to the extent one exists will, if at market data, plus their choice of SEF NPRM would permit a market participant to interact with a limited all, be realized only if the market econometric model, help them obtain number of market participants (i.e., less participant does not price this risk fully deeper insights into the reasons for than the entire market), the proposal into its quote. Nonetheless, the revision differences in costs across different from five to three market participants types of bonds.1043 This research in the 1044 Id. at 15, 18, 28. should help to mitigate this potential debt markets supports the final rules’ 1045 Id. A market participant sending an order to three market participant requirement the market is likely to be concerned about others 1047 Id. at 5. because it demonstrates that unless in the market being able to glean information 1048 The Commission notes that a SEF market multiple market participants receive the through the order. In the context of a firm sending participant may send an RFQ to the entire market. a large size trade, one substantially bigger than the Core Principles and Other Requirements for Swap RFQ, the quote requester will not be typical trade size, there will always be concern that Execution Facilities, 76 FR at 1220. Based on its able to generate a minimal level of the size of the order will be interpreted as experience with RFQ-to-all functionality offered by containing information, and elicit responses from DCMs, the Commission notes that there are two other market participants. Firms will typically be 1038 See Hendershott & Madhavan, ‘‘Click or distinct differences between these and the interested in ensuring that the size of the order does Call,’’ at 10–12. requirements finalized in this release. First, RFQs not have an adverse impact on the order price, or submitted to DCMs are disseminated to all market 1039 Id. at 10. the quotes from liquidity providers. Accordingly, participants. Second, the responses to the RFQs 1040 Id. at 14. while looking to execute such orders, firms will take the form of executable bids or offers that are 1041 Id. at 17. take steps to avoid leakage of the information of entered into the DCM’s order book or other 1042 See, e.g., Edwards et al., ‘‘Transaction Costs their trading interest beyond a very small group of centralized market, such that orders from any and Transparency,’’ 1421–51. potential counterparties. market participant, not just the one submitting the 1043 Hendershott & Madhavan, ‘‘Click or Call,’’ at 1046 Mallers et al. Comment Letter at 3–5 (Mar. 21, RFQ, can be matched against such responsive bids 1–4. 2011). or offers.

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risk, while still complying with the As noted in the preamble, the three original request to three potential statutory SEF definition and promoting market participants may not be affiliated counterparties receives fewer than three pre-trade price transparency and price with or controlled by the RFQ requester responses. Moreover, § 37.9(a)(2)(ii) competition. and may not be affiliated with or clarifies that in providing either one of Furthermore, regarding comments controlled by each other, and the the execution methods for Required concerns’ about the potential winner’s Commission is revising final § 37.9(a)(3) Transactions (i.e., an Order Book or an curse for illiquid swaps, the to clarify this point. The Commission RFQ System that operates in conjunction with an Order Book), a Commission notes that the three market believes that for an RFQ requester to send an RFQ to another entity who is swap execution facility may for participant requirement will only apply affiliated with or controlled by the RFQ purposes of execution and to transactions in swaps that are subject requester would undermine the benefits communication use any means of to the CEA section 2(h)(8) trade of the requirement. interstate commerce, including, but not execution mandate (i.e., transactions in The costs associated with the no- limited to, the mail, internet, email, and more liquid swaps, which are subject to affiliate rule may include, for example, telephone, provided that the chosen the clearing mandate and made the costs that a SEF would incur to execution method satisfies the available to trade, and not to illiquid upgrade its systems to create filters that requirements provided in § 37.3(a)(3) for 1049 and bespoke swaps). The would prevent RFQs from being sent to Order Books or in § 37.9(a)(3) for Commission also notes that the interest affiliated parties, but these costs could Request for Quote Systems. Finally, in rate swaps and credit default swaps that be mitigated or eliminated by, for order to provide market participants, the Commission has determined are example, the SEF requiring market SEFs, and the swaps industry generally required to be cleared under CEA participants accepting RFQs to disclose with additional time to adapt to the new section 2(h)(1) (and are likely to be their affiliations to potential RFQ SEF regime, the Commission is phasing- subject to the trade execution mandate requestors before a request is in the three market participant of CEA section 2(h)(8)) are some of the transmitted. Another possibility is for a requirement so that from the effective most liquid swaps.1050 Additionally, 77 SEF to monitor RFQs and cancel trades date of the SEF rule until one year after swap dealers have registered with the that it determines are made pursuant to the compliance date for the SEF rule, Commission and nearly all of them RFQs between affiliated parties. Yet RFQ requesters may transmit RFQs to make markets in such swaps.1051 SEFs another possibility is for the SEF to no less than two market participants may offer RFQ systems without the include in its rules a requirement that (rather than three). These provisions three market participant requirement for market participants must not transmit will likely significantly mitigate the Permitted Transactions (i.e., RFQs to their affiliates or to market likelihood and magnitude of the transactions not involving swaps that participants who are affiliated with each potential costs noted by commenters. are subject to the trade execution other. mandate of CEA section 2(h)(8)). In The primary benefit of this no-affiliate (iii) Time Delay Requirement response to commenters’ concerns about rule is to ensure that RFQs are sent to Some commenters stated that the rule the potential winner’s curse for large- three unaffiliated parties who can be requiring a 15-second time delay before sized trades, the Commission notes that expected to provide truly independent crossing a trade between two customers block-sized transactions would not be quotes. If an RFQ requester were to should be eliminated because it may subject to the execution methods for transmit an RFQ to one non-affiliate and impact liquidity or result in increased Required Transactions, including the two affiliates or if an RFQ requester costs.1054 FHLB stated that this three market participant transmits an RFQ to three requestees requirement would likely increase the requirement.1052 Therefore, excluding who are affiliates of each other, then the bid-ask spread, because ‘‘by waiting for block-sized transactions from the goal of pre-trade price transparency 15 seconds before entering into an execution methods for Required would be undermined (since the quotes offsetting transaction, brokers will be Transactions will address the potential might be coordinated or otherwise not exposed to risks associated with market risk of a winner’s curse for large-sized independent) and the RFQ could fluctuations and will have to pass the trades. effectively turn into an RFQ-to-one, costs of these risks along to its which is contrary to the statutory SEF customer.’’ 1055 No commenter provided 1049 Clearing Requirement Determination Under definition. The Commission also notes dollar estimates or data regarding these Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, that such an outcome could costs. 2012); Process for a Designated Contract Market or disincentivize entities from responding The time delay requirement (which Swap Execution Facility To Make a Swap Available To Trade, 76 FR 77728 (proposed Dec. 14, 2011). to an RFQ, which would reduce price only applies to a SEF’s Order Book and 1053 1050 Clearing Requirement Determination Under competition and liquidity. not to its RFQ System) supports the Section 2(h) of the CEA, 77 FR 74284. The The Commission clarifies that SEFs Congressional goal of pre-trade Commission notes that these swaps already went are not required to: (1) Display RFQs to transparency on SEFs by allowing other through a Commission determination process that market participants not participating in market participants the opportunity to included a five factor review, including a liquidity review. Id. ISDA, in its letter requesting interpretive the RFQ, (2) disclose RFQ responses to participate in a trade where dealer relief regarding the obligation to provide a pre-trade all market participants, or (3) disclose internalization or a dealer crossing mid-market mark, recognized that many of the the identity of the RFQ requester. The customers’ orders would otherwise swaps that the Commission has determined are Commission also clarifies that an reduce such pre-trade price required to be cleared under CEA section 2(h)(1) are 1056 ‘‘highly-liquid, exhibit narrow bid-ask spreads and acceptable RFQ System may allow for a transparency. The Commission are widely quoted by SD/MSPs in the marketplace transaction to be consummated if the . . .’’ ISDA Comment Letter at 2 (Nov. 30, 2012). 1054 See Time Delay Requirement discussion 1051 The Commission recognizes that not all swap 1053 As any trades emanating from an RFQ will be above under § 37.9—Permitted Execution Methods dealers will be active in all Required Transactions. subject to real time reporting, if a non-affiliated in the preamble. The Commission also notes that of the 77 swap respondent to an RFQ observes trades happening 1055 FHLB Comment Letter at 13 (Jun. 13, 2011). dealers, 35 swap dealers are not affiliated with any away from better or equal prices quoted by it, such 1056 Dealer internalized or cross-trades are not of the 77 swap dealers. respondents might be discouraged from responding open and competitive and may result in inferior 1052 See definition of block trade in § 43.2 of the to future RFQ requests, thus hurting market execution for one of the parties compared to Commission’s regulations. integrity. Continued

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believes that this requirement will placing an order or executing a trade, a The 15-second time delay minimize the possibility of dealer market participant will be able to view requirement is intended to limit dealer internalization and incentivize other bids and offers submitted to the internalization of trades (cross trades) competition between market SEF, including prices, quantities, and and to incentivize competition between participants. Absent this requirement, order book depth.1059 Access to such market participants. This requirement market participants would be free to information allows market participants will also promote pre-trade price conduct pre-execution communications to make informed trading decisions transparency of swaps executed on SEFs away from the centralized market and involving variables such as price, size, by allowing other market participants then ensure that the orders from such and timing, and to better assess the the opportunity to participate in the private negotiations are matched by quality of execution effected by their trade. The Commission’s final rules also coordinating their submission to the intermediaries. recognize that a one-size-fits-all SEF. Intermediaries will know that their approach to the time delay requirement Further, the Commission notes that market participants have information to is not appropriate for all swap products the costs outlined by commenters are assess the quality of executions and can on a SEF. Therefore, the final rules speculative, since SEFs have not yet send their business elsewhere if they are provide SEFs with an appropriate level begun operation. Moreover, the time not satisfied with their executions. of discretion to adjust the minimum delay requirement is similar to certain Thus, intermediaries will have greater time delay requirement based upon a timing delays adopted by DCMs, and the incentive to provide efficient execution swap’s liquidity or other product- Commission is not aware of evidence to their customers at competitive prices. specific characteristics. Moreover, the that those DCM rules are imposing Commission has clarified that the time In addition, an order book is an significant costs on participants in those delay requirement does not apply to the efficient method of execution of markets.1057 Nevertheless, the RFQ System. transactions for swaps that are subject to The Commission recognizes Commission’s final rules recognize that the CEA section 2(h)(8) trade execution a one-size-fits-all approach to the time commenters’ concerns, as discussed in mandate because it provides prompt this section, that there may be certain delay requirement is not appropriate for and fast executions of marketable orders all swap products and markets on a SEF. circumstances in which pre-trade price at market prices, while providing for a transparency may reduce overall market Accordingly, the Commission is revising variety of functionalities such as limit the proposed rule to allow a SEF to liquidity. Therefore, the Commission orders and stop-loss orders. The order has taken certain steps in the final adjust the duration of the time delay book functionality for such transactions requirement based upon a swap’s regulations to mitigate such benefit- will introduce core levels of pre-trade reducing effects (such as excluding liquidity or other product-specific transparency without hindering the characteristics. SEFs therefore will have block trades, tying the time-delay ability of SEFs and market participants requirement to a swap’s liquidity, the ability to reduce the costs described to deploy other market structures by the commenters, if they arise. clarifying the subset of swaps that are depending on the needs of the Required Transactions, and allowing (c) Benefits individual products and markets. SEFs to offer any method of execution As a whole, the minimum trading As discussed above, the benefits of for Permitted Transactions). pre-trade (and post-trade) transparency functionality (i.e., Order Book) and (2) Promotion of Trading on SEFs permissible execution methods generally flow from reducing established by §§ 37.3 and 37.9 advance information asymmetries.1060 In While the statutory goal of pre-trade the Congressional goals of promoting transparent markets, all market price transparency is reflected in the minimum trading functionality (i.e., pre-trade price transparency in the participants (and potential market Order Book) requirement, the swaps market and promoting trading of participants) have timely access to the regulations also provide a SEF with swaps on SEFs.1058 same public pricing information that insiders or professionals have, reducing additional flexibility for offering the (1) Promotion of Pre-Trade Price potential negotiating advantages. Also, trading and execution of swaps by Transparency in a transparent market, market providing additional execution methods The order book requirement is participants can better assess the quality (e.g., RFQ Systems along with the designed to ensure a base level of pre- of executions effected by their discretion to offer any method of trade transparency to all market intermediaries by comparing execution execution for Permitted Transactions). participants by providing for live prices against quotations and other The Commission believes that these executable bids and offers in Required transactions. A potential entrant can additional functionalities will provide Transactions. This requirement gives all view current price quotations as well as flexibility in methods of execution that market participants (and potential prices of recent trades in an instrument, will promote the trading of swaps on market participants) access to the same and can thereby assess whether it can SEFs, which in turn will promote price key information that swap dealers have, offer a better price. Market transparency transparency. For example, execution methods and including current information about the can thus provide incentives for new market structures in general can vary price of a particular swap, at the same participants to enter the market, depending on the product—simple or time. An order book with executable increasing competition, reducing complex, the state of development of the bids and offers will ensure that prior to concentration, and narrowing spreads. market—established or new, market participants—retail or institutional, and situations where the bid or offer is exposed to the 1059 See Duffie et al., ‘‘OTC Markets,’’ at 1827 market. Accordingly, DCM rules typically require (presenting results showing that bid-ask spreads are other related factors. The Commission that an order be exposed to an order book or trading lower if investors can find each other more easily). anticipates that the order book method pit before it can be crossed with another order. 1060 See, e.g., Transparency of Structured Finance will typically work well for liquid 1057 See, e.g., NYMEX rule 533, which provides Products (Final Report), Technical Committee of the Required Transactions (i.e., transactions for a 5-second delay for futures and a 15-second International Organization of Securities delay for options, available at http:// Commissions, at 17, 21 (Jul. 2010), available at involving swaps that are subject to the www.cmegroup.com/rulebook/NYMEX/1/5.pdf. http://www.iosco.org/library/pubdocs/pdf/ trade execution requirement under CEA 1058 CEA section 5h(e); 7 U.S.C. 7b–3(e). IOSCOPD326.pdf. section 2(h)(8)), but for less liquid

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Required Transactions, RFQ systems are The final rules establishing a market Commission expand the definition of expected to help facilitate trading. RFQ structure for SEFs, including the Permitted Transaction to include other systems are currently used by market provisions governing Order Books and transactions, such as exchanges of participants in the OTC swap market, RFQ Systems are designed to deliver swaps for physicals, exchanges of swaps many in conjunction with order book improved search capabilities to for swaps, and linked or packaged functionality. By providing a SEF with investors and better access to market transactions.1072 Each of these the flexibility to offer alternate makers. These provisions will facilitate alternatives is discussed below. execution methods to its market the shifting of trading to the centralized participants, the Commission is SEF market structure from the bilateral (1) Modification to the Number of RFQ leveraging best practices from current OTC market structure where investors Requests swap trading platforms. The additional may have limited ability to find one Numerous commenters recommended flexibility offered for the trading and another. that the Commission adopt the SEC’s execution of Permitted Transactions The importance of facilitating proposed approach for SB–SEFs by will allow a SEF to offer new, investors’ ability to find each other more innovative market structures to facilitate easily is highlighted by evidence in the allowing RFQs to be sent to one or more trading in these swaps that are not DGP paper of another dealer-centric market participants (while not subject to the trade execution market—the one prevailing at Nasdaq recommending that the Commission requirement under CEA section 2(h)(8), until the mid-1990s, where all trades adopt the SEC’s proposed order and thus may help to promote the had to be routed to a dealer.1066 interaction requirement), instead of trading of these swaps on SEFs. Notwithstanding competition among the requiring that RFQs be sent to at least Additionally, the RFQ system dealers, and the fact that there was both five market participants.1073 The benefit communication requirement helps pre- and post-trade transparency in the of this approach, cited favorably by promote the trading of swaps on SEFs equity markets, spreads at Nasdaq at some commenters, would be to protect and enhances price competition and that time were wider than at the New proprietary trading strategies and pre-trade price transparency by ensuring York Stock Exchange.1067 Though the mitigate hedging costs.1074 that RFQ requesters have access to latter had ‘‘a single specialist for each Other commenters, however, stated competitive prices, and that competitive stock, floor brokers can find and trade that only requiring RFQs to be sent to resting bids and offers left by market among themselves, and outside brokers one or more market participants would participants on the SEF will be can find each other and trade ‘around’ preserve the single-dealer status quo, 1068 transmitted to the RFQ requester for the specialist with limit orders.’’ would diminish the transparency and possible execution. Along these lines, the final rules efficiency of the regulated swaps provide for an anonymous but (3) Facilitating Search markets, and would be inconsistent transparent order book that will with the goals of the Dodd-Frank The Duffie, Gaˆrleanu, and Pedersen facilitate trading among market Act.1075 These commenters supported (‘‘DGP’’) approach reflects the typical participants directly without having to another alternative under which an RFQ search process, which involves route all trades through dealers. must be transmitted to all participants approaching intermediaries sequentially on the SEF.1076 In particular, one (similar to making phone calls to (d) Consideration of Alternatives commenter stated that participants different dealers asking for quotes); Some commenters recommended that would not be disadvantaged by strategic bargaining then ensues—prices the Commission modify the proposed negotiated reflect each investor’s or the five market participant requirement disclosing an RFQ to the entire market dealer’s alternatives to trade.1061 DGP’s from no less than five market for transactions below the block trade participants to either ‘‘one or more’’ 1069 threshold, which would not move the results show that both traded prices as 1077 well as transaction costs depend on or to all market participants.1070 Other market. In this commenter’s view, investors’ search abilities, access to commenters recommended an the proposed five market participant market makers, and investors’ alternative that would include some requirement would still allow a bargaining powers.1062 DGP’s results level of order interaction between the participant to conduct semi-private show that bid-ask spreads are lower if SEF’s order book functionality and RFQ deals with a few favored participants to investors can find each other more systems, including the order interaction the exclusion of other market easily, through market structures model proposed by the SEC for SB– participants, which would ultimately designed to allow them to negotiate SEFs.1071 MFA recommended that the decrease liquidity and create a simultaneously, instead of sequentially, with multiple, competing liquidity 1066 Id. at 1834–35. CIEBA Comment Letter at 6–7 (Mar. 8, 2011); ISDA/ providers.1063 Contrary to what 1067 Id.; see also Hendrik Bessembinder & Herbert SIFMA Comment Letter at 3–4; Evolution Comment M. Kaufman, ‘‘A Comparison of Trade Execution Letter at 5–6 (Mar. 8, 2011). commenters have stated, DGP reason Costs for NYSE and NASDAQ-Listed Stocks,’’ 32 1072 MFA Comment Letter at 8 (Mar. 8, 2011). that improvements in an investor’s The Journal of Financial and Quantitative Analysis 1073 See RFQ System Definition and Transmission ability to search for alternate 287 (Sep. 1997). to Five Market Participants discussion above under counterparties forces dealers to improve 1068 Duffie et al., ‘‘OTC Markets,’’ at 1834–35. § 37.9(a)(1)(ii)—Request for Quote System in the 1064 1069 See, e.g., Rosen et al. Comment Letter at 11 preamble. Under the SEC’s interpretation of the on their quoted prices and spreads. SB–SEF definition, such an RFQ system would Further, they demonstrate that those (Apr. 5, 2011). 1070 Mallers et al. Comment Letter at 4 (Mar. 21, provide multiple participants with the ability, but with better access to market makers (or 2011); AFR Comment Letter at 4–5 (Mar. 8, 2011). not the obligation, to transact with multiple other participants. Registration and Regulation of liquidity providers) receive tighter bid- 1071 Rosen et al. Comment Letter at 12–14 (Apr. Security-Based Swap Execution Facilities, 76 FR at 1065 5, 2011); JP Morgan Comment Letter at 5–6 (Mar. ask spreads. 10953. 8, 2011); FXall Comment Letter at 9–10 (Mar. 8, 1074 2011); Tradeweb Comment Letter at 8 (Mar. 8, See, e.g., Rosen et al. Comment Letter at 11 1061 See Duffie et al., ‘‘OTC Markets,’’ at 1818–20. 2011); FSR Comment Letter at 5 (Mar. 8, 2011); (Apr. 5, 2011). 1062 Id. at 1815. MetLife Comment Letter at 3 (Mar. 8, 2011); SIFMA 1075 See, e.g., Mallers et al. Comment Letter at 1063 Id. at 1827. AMG Comment Letter at 9 (Mar. 8, 2011); 3–5 (Mar. 21, 2011). 1064 Id. at 1817. MarketAxess Comment Letter at 32 (Mar. 8, 2011); 1076 Id. 1065 Id. Barclays Comment Letter at 7 (Mar. 8, 2011); ABC/ 1077 Id. at 4.

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substantial barrier to entry into the Organization (‘‘DCO’’) through which (e) Section 15(a) Factors 1078 swaps market. the position was entered into, even (1) Protection of Market Participants and The Commission considered the costs though a slightly better price may exist the Public and benefits of the above alternatives, for the same instrument at a different but believes that neither alternative DCO. This flexibility will allow market The final regulations, specifically the would satisfy the objectives of the participants to execute swap provisions requiring a minimum trading functionality (i.e., Order Book) and the Dodd-Frank Act. As noted by one transactions in accordance with the communication of any firm bid or offer commenter, only requiring that RFQs be unique execution requirements of each along with responses to the RFQ, sent to one market participant would transaction. preserve the status quo,1079 while promote the protection of market requiring that RFQs be sent to the entire (3) Expand Definition of Permitted participants and the public by market may not be feasible for certain Transaction promoting the statutory goals of less liquid swaps. Nevertheless, in light increased pre-trade transparency and of the comments, the Commission is Another alternative is to expand the trading on SEFs. Taken together, these reducing the required minimum number definition of Permitted Transaction to final rules should reduce the likelihood of recipients for RFQs in the final rule include other transactions, such as that market participants and SEFs from five to three. The Commission exchanges of swaps for physicals, execute swaps at non-market prices, expects that this will mitigate the exchanges of swaps for swaps, and thus protecting traders and members of concerns of commenters as discussed linked or packaged transactions. The the public that rely on the prices of above, while continuing to satisfy the Commission interprets MFA’s comment swaps facilitated or executed on SEFs. objectives of the Dodd-Frank Act. As suggesting this alternative to be a The rules should benefit market discussed above in connection with the request that the Commission create participants by reducing the potential RFQ to three market participant through rulemaking an exception to the rents extracted by dealers from requirement, the Commission views CEA section 2(h)(8) trade execution customers in opaque markets, ‘‘and three RFQ recipients as appropriately mandate similar to the centralized more so from less informed 1083 balancing between ensuring liquidity in market trading exception established by customers.’’ The Commission mitigates the costs to the swaps market and promoting pre- DCM Core Principle 9 for certain market participants by minimizing the trade price transparency. The exchange of futures for related positions risk of information leakage to other Commission further notes that the three (‘‘EFRPs’’).1082 RFQ recipient model will provide a market participants by clarifying that more reliable indicator of market value The Commission has determined not SEFs are not required to: (1) Display than a quote from a single RFQ to adopt this alternative, because a RFQs to market participants not responder. broad exception for the off-exchange participating in the RFQ, (2) disclose transactions described by MFA could RFQ responses to all market (2) Order Interaction undermine the trade execution participants, or (3) disclose the identity Another alternative was to allow for requirement by allowing market of the RFQ requester. one-to-one RFQs, but to mandate full participants to execute swaps subject to As discussed above, the Commission order interaction.1080 However, the trade execution requirement anticipates that the requirements in according to commenters, an order bilaterally rather than on a SEF or DCM. § 37.9 will result in better pricing and interaction requirement across trading The Commission notes that market liquidity and increased participation on platforms would impose significant participants with a bona fide business SEFs because market participants will architectural and operational costs on purpose for executing exchange of be able to trade on flexible platforms SEFs.1081 In particular, potential SEFs swaps for physicals in physical without compromising on pre- and post- were concerned that they would incur commodity swaps (should such swaps trade transparency. The final regulations also provide information and pricing significant expenses by having to create become subject to the trade execution benefits to market participants using an the technological capabilities necessary mandate) are likely to be eligible for the RFQ System because market to ensure that market participants end-user exception. The Commission is execute against the best price. participants seeking liquidity will have not currently aware of any bona fide The Commission did not propose this access to additional pricing information business purpose for executing such type of order interaction and has after disseminating an RFQ. The final declined to impose such a requirement transactions in financial swaps subject regulations increase the likelihood that herein. Accordingly, the final to the trade execution mandate. In light RFQ requesters will receive competing regulations respond to concerns of the end-user exception, the quotes from a larger group of regarding a transacting party’s ability to Commission expects that the costs responders. The Commission notes that take into consideration factors other associated with the Commission’s competition between multiple quote than price when choosing a determination will be minimal. The providers should result in tighter bid- counterparty or clearing entity, by, for Commission is aware that the swaps offer spreads for the RFQ requesters. example, offsetting an existing position market will evolve in ways that it does The rules promoting trading on SEFs cleared through the Derivatives Clearing not currently anticipate and is open to protect the public by encouraging revisiting this issue should a bona fide trading on regulated SEFs rather than on 1078 Id. business purpose arise to execute swaps unregulated OTC markets. Moreover, 1079 IECA Comment Letter at 3 (May 24, 2011). that are subject to the trade execution 1080 Under the SEC’s SB–SEF NPRM, an RFQ mandate in a manner recommended by 1083 Bessembinder & Maxwell, ‘‘Transparency,’’ at requester must execute against the best-priced the commenter. 226. Their conclusions in the context of post-trade orders of any size within and across an SB–SEF’s transparency introduced by the TRACE system can modes of execution. See Registration and be generalized to the improvement in pre-trade Regulation of Security-Based Swap Execution 1082 See CEA section 5(d)(9); 7 U.S.C. 7(d)(9). The transparency introduced through the minimum Facilities, 76 FR at 10953–54, 10971–74. Commission notes that DCM Core Principle 9 does trading functionality (i.e., Order Book) and the 1081 See, e.g., Tradeweb Comment Letter at 6 not explicitly permit DCMs to offer exchange of ability to negotiate simultaneously with multiple (Mar. 8, 2011). swaps for physicals or exchange of swaps for swaps. market participants through the RFQ system.

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some market participants may be end (without being forced to go through an shocks[,]’’ both of which are critical users that provide goods and services to intermediary as is the case in the elements of any efficient and effective the public (e.g., airlines or electric current OTC market structure), and by price discovery process.1091 utilities). To the extent that these end providing them a facility (via the RFQ The differentiation in execution users obtain better pricing due to these system) to simultaneously negotiate methods for Required and Permitted rules and are able to pass those cost with multiple market participants, the Transactions, and the ability to use ‘‘any savings to their customers and rules reduce the search costs inherent in means of interstate commerce’’ in shareholders, the public would gain the current OTC market structure as providing the execution methods for additional benefits from the pre-trade described by Duffie, Gaˆrleanu, and Required Transactions as described in transparency and promotion of trading Pedersen,1087 and thus promote a more § 37.9(a)(2)(ii), will allow a SEF to on SEFs. efficient and competitive market adjust its market structures for emerging structure for the swaps markets. In and less liquid markets by using a (2) Efficiency, Competitiveness, and another paper, Zhu addresses the variety of means of communication in Financial Integrity of the Markets 1084 requirement for a minimum of five providing the execution methods for The final regulations will improve the quote providers as a means to ‘‘increase Required Transactions and using any efficiency, competitiveness, and direct trading among ‘end-users’ and execution method the SEF deems financial integrity of the swaps market reduce the fraction of trading volume appropriate for Permitted Transactions. by providing a SEF with the flexibility that is conducted through This approach reflects the Commission’s to offer several execution methods for intermediaries.’’ 1088 Similarly, belief that the price discovery process Required Transactions to meet the needs Avellaneda and Cont emphasize the varies across markets and products. of market participants, including RFQ importance of market transparency as (4) Sound Risk Management Practices Systems, as well as the flexibility to ‘‘not an objective per se but rather a offer any execution method for means for ensuring the proper Centralized trading platforms have Permitted Transactions. This flexibility functioning of the market.’’ 1089 multiple checks and balances built into reflects the fact that there is a their systems designed to reduce continuum of markets occupying (3) Price Discovery operational risks (such as human error) ‘‘various points between high and low The final rules provide for pre-trade inherent in order submission, matching, transparency’’ 1085 and will allow transparency and promote trading on and confirmation. The Commission participants to efficiently execute trades SEFs, both of which will enhance price believes that adoption of centralized using various methods of execution discovery on a SEF. The minimum trading platforms for swaps trading on depending on the liquidity levels in trading functionality will allow non- a SEF will contribute to a system-wide particular products. For example, dealer firms with access to the SEF to reduction in operational risks, and will participants may execute more liquid compete with dealers by also placing help standardize risk management products on an Order Book, while bids and offers on the SEF. The 15 practices in the marketplace. This in executing less liquid products using second time delay requirement will turn will reduce overall transaction RFQ functionality. Final § 37.9, ensure a minimum level of pre-trade costs, and will, along with pre-trade specifically the provisions related to transparency by allowing other market transparency and the prospects for RFQ Systems (including the minimum participants the opportunity to improved price discovery discussed RFQ to three requirement) and the 15 participate in a privately negotiated earlier, encourage market participants to second time delay requirement for cross trade before it is crossed. The broader trade swaps on SEFs and thus aid in the trades, should also facilitate an increase participation and pre-trade transparency development of the swaps market. As in the number of market participants could increase market depth and markets are interlinked, the growth of that provide liquidity on SEFs by improve price discovery. Research by the swaps market will likely drive providing greater opportunities for those Zhu shows that execution methods growth of the futures and other market participants, which will similar to the RFQ system can help derivatives markets through the contribute to the competitiveness of the improve the dispersion of quote liquidity externality mechanism, which swaps market. information across a broader cross- in turn will improve the ability of a Research by Hendershott and section of market participants, the broader range of market participants to Madhavan supports the benefits of sensitivity of quoted prices to measure, hedge, and transfer their risks increased competition facilitated by information, and the ability of the through such contracts.1092 RFQ systems.1086 By enabling market market to aggregate information participants to meet each other directly distributed among multiple (5) Other Public Interest Considerations participants.1090 These conclusions The Commission has not identified 1084 The Commission notes that CEA § 15(a)(2)(B) support findings from research by any effects that these rules will have on requires the Commission to consider the costs and Duffie, Gaˆrleanu, and Pedersen that benefits of its actions in light of ‘‘considerations of other public interest considerations the efficiency, competitiveness, and financial ‘‘[s]earch frictions affect not only the other than those enumerated above. integrity of futures markets.’’ The Commission is average levels of asset prices but also also considering the costs and benefits of these the asset market’s resilience to aggregate 3. Registration rules in light of considerations of the efficiency, competitiveness, and financial integrity of ‘‘swap (a) Background markets.’’ 1087 Duffie et al., ‘‘OTC Markets,’’ at 1815. Section 5h(a)(1) of the Act provides 1088 1085 See ISDA Research Notes, ‘‘Transparency and Haoxiang Zhu, ‘‘Finding a Good Price in that no person may operate a facility for over-the-counter derivatives: The role of transaction Opaque Over-the-Counter Markets,’’ 25 The Review transparency,’’ No. 1, at 2–3 (2009), available at of Financial Studies 1255, 1264 (Apr. 2012). http://www2.isda.org/attachment/MTY4NA==/ 1089 Marco Avellaneda & Rama Cont, 1091 Duffie et al., ‘‘Valuation in OTC Markets,’’ at ISDA-Research-Notes1.pdf. ‘‘Transparency in Credit Default Swap Markets,’’ 1881. 1086 See Hendershott & Madhavan, ‘‘Click or Finance Concepts, at 3 (Jul. 2010), available at 1092 See Yakov Amihud, Haim Mendelson, & Beni Call,’’ at 3 (stating that ‘‘[T]he evolution of bilateral, http://www.finance-concepts.com/images/fc/ Lauterbach, ‘‘Market microstructure and securities sequential trading into an auction type framework’’ CDSMarketTransparency.pdf. values: Evidence from the Tel Aviv Stock (their definition of the RFQ system), ‘‘offers a path 1090 Haoxiang Zhu, ‘‘Finding a Good Price in Exchange,’’ 45 Journal of Financial Economics 365, from an over-the-counter market to centralized, Opaque Over-the-Counter Markets,’’ 25 The Review 378–80 (Sep. 1997) (discussing liquidity continuous trading’’). of Financial Studies 1255, 1257–58 (Apr. 2012). externalities in trading).

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the trading or processing of swaps notice granting temporary registration temporary registration and will not need unless the facility is registered as a SEF from the Commission has been received. to await final Commission approval or a DCM.1093 The SEF definition in The SEF NPRM required these before commencing SEF operation. CEA section 1a(50) defines a SEF as ‘‘a applicants to submit transaction data (c) Benefits trading system or platform in which substantiating that they are trading multiple participants have the ability to swaps. In response to comments, the As discussed above, based on the execute or trade swaps by accepting Commission is eliminating this statute as interpreted by the bids and offers made by multiple requirement from the final rule and is Commission, a facility that meets the participants in the facility or system, also extending the termination date of SEF definition would be required to through any means of interstate the proposed temporary registration register as a SEF. These facilities will, commerce, including any trading provision by one year. In addition, the as registered SEFs, have the benefit of facility, that—(A) Facilitates the Commission is shortening the proposed being able to offer Required execution of swaps between persons; effective date of the regulations from 90 Transactions for execution, while and (B) is not a designated contract days to 60 days subsequent to alternative entities that are not required market.’’ 1094 In accordance with these publication in the Federal Register. In to register as SEFs, including one-to- provisions, the Commission has connection with this change, the many systems or platforms, will only be clarified that a facility would be Commission is also using its discretion able to offer Permitted Transactions for required to register as a SEF if it offers to establish alternative dates for the execution. This will ensure, consistent a trading system or platform in which commencement of its enforcement of with the statute, a level playing field, more than one market participant has regulatory provisions and is setting a that all Required Transactions are the ability to execute or trade swaps general compliance date of 120 days executed on registered SEFs. This will with more than one other market subsequent to Federal Register provide market participants in Required participant on the system or publication. Transactions with the benefits platform.1095 In response to comments, associated with the minimum trading (b) Costs the Commission also provides examples functionality, core principles, and other of how it would interpret the In its discussion paper, ISDA requirements set out in this release. registration requirement for certain estimated the average cost of registration Additionally, the Commission’s entities. would be $333,000.1097 Based on the interpretation of the registration Section 37.3(a)(1) codifies this Commission staff’s follow-up requirement through a set of examples statutory registration requirement and discussions with commenters, the helps to clarify which facilities must § 37.3(b) requires, among other things, Commission estimates that the total cost register as a SEF. The Commission that applicants requesting approval of of completing and filing a registration believes that providing examples of how registration as a SEF must file a application with the Commission will it would interpret the CEA section complete Form SEF, which consists of be between $333,000 and $500,000. This 5h(a)(1) registration requirement will general questions and a list of exhibits range accounts for the time that will be ensure that a consistent set of metrics is that will enable the Commission to expended to prepare and file Form available to market participants while determine whether the applicant SEF.1098 evaluating the applicability of the complies with the core principles and As noted above, based on the statute registration requirements. Providing the Commission’s regulations. Form SEF as interpreted by the Commission, a specific examples will also mitigate the standardizes the information that an facility that meets the SEF definition costs potential registrants may incur in applicant must provide to the would be required to register as a SEF seeking advice on issues pertaining to Commission and includes and would incur the costs of registration. comprehensive instructions that will registration. These facilities would also Form SEF is designed to ensure that guide applicants through the be required to meet the minimum only applicants that comply with the process.1096 Section 37.3(b)(5) requires trading functionality and other Act and the Commission’s regulations the Commission to review any requirements of § 37.9. The costs and are registered as SEFs. Form SEF is application for registration as a SEF benefits of those requirements are expected to minimize the amount of submitted two years or later after the discussed above. The 180-day review time the Commission staff will need to effective date of part 37 pursuant to the period for SEF applications submitted review applications and reduce the need 180-day timeframe and procedures two years or later after the effective date for the Commission staff to request, and specified in CEA section 6(a). of part 37 is not expected to impose applicants to provide, supplementary Under § 37.3(c), SEF applicants may significant costs on applicants who information, which, in turn, benefits submit a notice to the Commission submit their applications sooner since potential SEFs by reducing the time it requesting temporary registration, they will be eligible for two years of takes to become fully registered. This allowing them to operate during the standardized registration process will pending application process once a 1097 ISDA Discussion Paper at 32 (Nov. 2011). provide applicants with legal certainty 1098 The Commission notes that the SEC regarding the type of information that is estimated that the one-time registration burden to 1093 required and will ensure that no CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1). prepare and file Form SB–SEF will be 1094 CEA section 1a(50); 7 U.S.C. 1a(50). approximately 100 hours for each new and existing applicant is given a competitive 1095 See Requirements for Registration discussion entity. See Registration and Regulation of Security- advantage in the application process. above under § 37.3—Requirements for Registration Based Swap Execution Facilities, 76 FR at 11024. Further, granting temporary in the preamble for further details. The SEC based this estimate on its experience with registration for up to two years will 1096 Sections 37.3(d)–(g) provide procedures for the registration process for national securities other actions involving registration, including exchanges, having last estimated the average time improve market continuity by allowing reinstating a dormant registration, requesting a it should take to fill out the securities exchange the Commission ample time to review transfer of registration, withdrawal of an registration form (Form 1) to be 47 hours. Id. The applications without jeopardizing an application for registration, and vacation of SEC adjusted this figure upwards to account for the applicant’s ability to operate pending registration. These procedures will further the greater resources that would be required initially in ability of the Commission to efficiently monitor lieu of an established framework and familiarity of Commission review. By withdrawing SEFs’ compliance with the core principles, and will the industry in order to gather supporting the existing trading activity requirement result in minimal administrative costs for SEFs. documentation and complete Form SB–SEF. in proposed § 37.3(b)(1)(ii), all SEF

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applicants, not only those operating market participants transacting any proposed risk management program existing platforms, may apply for swap on these platforms, whether or not through a series of detailed exhibits and temporary registration. The withdrawal they are subject to the trade execution submissions. These risks include risks of the trading activity requirement requirement, will benefit from the core associated with the SEF applicant’s should promote competition between principles and other requirements for financial resources and operational and SEFs by providing opportunities for SEFs (including the pre-trade market risks associated with trading on new entities to establish trading transparency available on SEFs), the SEF platform. The submission of operations that compete with existing especially those designed to protect exhibits relating to risk management, platforms. The 180-day review period market participants and the public. including Exhibits I–K (Financial for SEF applications submitted two Furthermore, given the critical role that Information) and M, O, and T years or later after the effective date of SEFs will play in the financial markets, (Compliance), will provide data and part 37 will provide any later SEF it is essential that the Commission information that will aid the applicants with the same review period conduct a comprehensive and thorough Commission staff’s analysis and as is applicable under the CEA to DCMs review of all SEF applications for evaluation of an applicant’s ability to and will provide greater certainty for registration. Such a review is important comply with the core principles. for the protection of market participants SEF applicants regarding the time (5) Other Public Interest Considerations period for the Commission’s review of and the public because it ensures that their applications. only qualified applicants who satisfy The Commission has not identified the statutory requirements and the any effects that these procedures will (d) Consideration of Alternatives Commission’s regulations thereunder have on other public interest Several commenters stated that the can operate as SEFs. Form SEF will considerations other than those Commission should harmonize its enable the Commission to efficiently enumerated above. registration procedures with the SEC in and accurately determine whether an 4. Recordkeeping and Reporting order to avoid unnecessary cost and applicant meets such requirements. duplication for SEFs.1099 In particular, (a) Background (2) Efficiency, Competitiveness, and Tradeweb stated that SEF applicants This release finalizes a series of Financial Integrity of the Markets should not have to file separate provisions governing the recordkeeping applications for each mode of execution, The Commission’s interpretation of and reporting responsibilities of SEFs and that where a SEF is offering both the registration provision to apply to and market participants.1101 Among swaps and security-based swaps, the facilities that meet the SEF definition, other requirements, these rules require SEF should only be required to file one along with the minimum trading each SEF to: (1) Provide the application for both agencies.1100 functionality requirement, will promote Commission with information about its The Commission recognizes that competition in the swaps market by business as a SEF (§§ 37.5(a), 37.503), substantially similar registration forms providing a level playing field for provide a written demonstration of and procedures could facilitate entities that meet the SEF definition. compliance with any core principle compliance and reduce regulatory costs The standardized registration (§ 37.5(b)), and provide notice of any for SEFs seeking dual registrations. The procedures and Form SEF will create an transaction involving the transfer of at Commission notes, however, that it efficient process that will reduce the least fifty percent of the equity interest must comprehensively review and resources associated with submitting in the SEF (§ 37.5(c)); (2) provide each understand a SEF’s proposed trading and reviewing completed applications. counterparty to a swap on the SEF with models and operations, which will The final rules promote market a written record of all of the terms of the facilitate trading for a more diverse competition by not discriminating transaction (§ 37.6(b)); 1102 and (3) universe of financial instruments and between new and existing platforms maintain records of all business underlying commodities than SB–SEFs. applying to register as SEFs. For activities, including a complete audit Accordingly, the Commission is not example, the elimination of the trail, investigatory files, and permitting notice registration to SEC- proposed existing trading activity disciplinary files, in a form and manner registered SB–SEFs. Additionally, in requirement for temporary registration acceptable to the Commission for at response to comments raised, the will ensure that new entities wishing to least 5 years (§ 37.1001). Commission clarified in the preamble qualify for temporary registration will A SEF must also: (1) Have the ability that a SEF applicant does not need to not be placed at a competitive to obtain the information necessary to file separate applications for each mode disadvantage to existing entities. The perform its self-regulatory of execution, but that its application required information in Form SEF responsibilities, including the authority must describe each mode of execution (Exhibits I–K—Financial Information to examine books and records offered. This should allay concerns that and M and T—Compliance) will allow (§§ 37.501, 37.502); (2) share multiple costly applications must be the Commission to evaluate each information with other regulatory filed with the Commission. applicant’s ability to operate a organizations, data repositories, and financially-sound SEF and to third-party data reporting services as (e) Section 15(a) Factors appropriately manage the risks required by the Commission (§ 37.504); (1) Protection of Market Participants and associated with its role in the financial (3) demonstrate that it has access to the Public markets. sufficient information to assess whether The interpretation of the registration (3) Price Discovery 1101 For example, section 37.901 states that SEFs provision to apply to facilities that meet The Commission has not identified the SEF definition will ensure that must report swap data as specified in parts 43 and any effects that these procedures will 45 and meet the requirements of part 16. This have on price discovery. provision references other Commission regulations, 1099 See Application Procedures discussion above the costs and benefits of which are discussed in under § 37.3—Requirements for Registration in the (4) Sound Risk Management Practices connection with those rulemakings. preamble. 1102 The discretionary costs and benefits specific 1100 Tradeweb Comment Letter at 3–4 (Jun. 3, The registration procedures will to the confirmation process are discussed in the 2011). require SEF applicants to examine their part 23 rulemaking for new confirmation standards.

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trading is being used to affect prices in or market participants beyond those obtaining such person’s consent to use its market (§ 37.404(a)); and (4) require attributable to Congressional mandate. its information for the purposes market participants to keep records of Final § 37.502 requires each SEF to described above. The Commission does their trading and make such records have rules that allow it to collect not prescribe the method by which a available to the SEF or the SEF’s information or examine books and SEF must obtain such consent, which regulatory service provider, and the records of participants, but imposes no provides flexibility to SEFs. Commission, upon request (§ 37.404(b)). affirmative obligations on SEFs to do so. The final rules also govern a SEF’s use Accordingly, the only direct costs (c) Benefits of data and records obtained from associated with § 37.502 are the de market participants, and prohibit a SEF minimis costs associated with writing The Dodd-Frank Act created a robust from using for business or marketing such rules. recordkeeping regime in order to reduce purposes proprietary or personal Final § 37.504 (information sharing risks associated with swaps trading, information that it collects from any agreements) codifies and implements increase transparency, and promote person unless the person clearly the Core Principle 5 requirement that a market integrity. Taken as a whole, the consents to the use of its information in SEF have the capacity to carry out recordkeeping and reporting regulations such a manner (§ 37.7). international information-sharing adopted in this release will provide a agreements as the Commission may SEF and the Commission with access to (b) Costs require. Accordingly, SEFs will bear the information that will enhance a SEF’s The costs associated with responding cost of responding to Commission ability to oversee its platforms and to requests for information or requests to share information with other markets and enable the Commission to demonstrations of compliance under regulatory organizations, data determine whether a SEF is operating in recordkeeping rules in § 37.5 will repositories, and third-party data compliance with the statute and the include the staff hours required to reporting services. The cost of Commission’s regulations. The prepare exhibits, draft responses, and responding to Commission requests to information-sharing requirement in submit materials. These costs will vary share information will vary depending § 37.504 will also provide cost-savings among SEFs depending upon the nature on the frequency and nature of the across market regulators by allowing the and frequency of Commission inquiries. requests. To the extent that it is SEF to serve as the focal point for The Commission is reducing the necessary for a SEF to enter into an collecting certain data instead of each reporting burden associated with final information sharing agreement, the SEF regulator duplicating efforts and § 37.5(c) (equity interest transfers) by may face additional costs such as collecting the information raising the threshold of when a SEF negotiating such agreement. However, independently. must file a notification with the these costs are unlikely to be significant Commission from 10 percent to 50 and will only be incurred should a SEF The confirmation requirement in percent, by increasing the time frame for determine that it is necessary to enter § 37.6(b) will provide market submitting such notification to 10 days into an information sharing agreement. participants with the certainty that rather than the next business day, and A market participant’s cost to transactions entered into on or pursuant by eliminating the proposed maintain records under § 37.404 (ability to the rules of a SEF will be legally requirement that SEFs must provide a to obtain information) should be enforceable on all parties to the series of documents and a minimal if, as expected, it is part of its transaction. The requirement that a SEF representation along with the normal business practice. As a result, a provide each counterparty with a notification of an equity transfer market participant’s additional cost to confirmation at the same time as interest. Under the final rules, the provide records to the SEF, and the execution will support the policy goal of Commission, upon receiving a SEF’s cost to request and process the straight-through processing to ensure notification of an equity interest records, will be nominal if, based upon that counterparties do not encounter transfer, may request appropriate the Commission’s experience with gaps in their records as to their exposure documentation of the transfer, but all DCMs, such requests are infrequent and level with other counterparties. This the documentation should already be in targeted to specific and significant will also reduce the costs and risks the possession of the SEF. Accordingly, market situations. involved in resolving disputes between a SEF that enters into agreements that Additionally, the Commission has counterparties to a trade; given could result in equity interest transfers moved to guidance the requirement dependency across trades, for example, of 50 percent of more will incur one- from proposed § 37.404(b) that a SEF if a participant has already unwound a time costs associated with preparing require customers engaging in position or taken a position via a trade and submitting the required notification intermediated trades to use a under dispute or hedged it, any delays for each event. comprehensive large-trader reporting or uncertainties in the confirmation will Further, final § 37.1001 (requirement system or be able to demonstrate that result in higher costs from having to to maintain business records including they can obtain position data from other further unwind such linked trades. audit trail, investigatory, and sources. This change should mitigate disciplinary files) codifies the costs by providing SEFs with greater The prohibition on the use by a SEF substantive requirements found in Core flexibility to identify particular methods of proprietary or personal information Principle 10. Accordingly, most, if not of compliance that suit their markets for business purposes without consent all, of the costs associated with this rule and business structures. (§ 37.7) will ensure that information are attributable to statutory mandate. The Commission is also amending provided to a SEF for regulatory Commenters did not mention any § 37.7 (use of proprietary or personal purposes will not be used to advance specific costs with respect to this rule. information) to allow SEFs to use the commercial interests of the SEF. The In addition, §§ 37.501 and 37.503 certain information for business or rule does, however, afford market (establish and enforce rules and provide marketing purposes if the person participants the flexibility to consent to information to the Commission) codify consents to the use of such information. a SEF’s use of their personal requirements that appear in the statute The costs imposed by this provision are information for commercial purposes, if and impose no additional costs on SEFs limited to the cost a SEF might incur in they so desire.

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(d) Section 15(a) Factors 5. Compliance burdensome, but did not provide any data in support.1103 (1) Protection of Market Participants and (a) Rule Writing and Enforcement the Public The Commission believes that having Under Core Principle 2, a SEF must a minimum level of resources in place The recordkeeping and reporting rules implement a number of rule-writing and for rule enforcement purposes is a will protect market participants and the enforcement-related provisions. Among critical element of a sufficient public by improving a SEF’s and the other requirements, a SEF must: (1) compliance program, and is necessary Commission’s ability to detect Establish a rulebook that addresses pursuant to the statutory mandate of manipulative or disruptive activity. critical areas of market protection Core Principle 2, which requires SEFs to This, in turn, may deter SEFs and (§ 37.201), including rules prohibiting have the capacity to detect, investigate, 1104 market participants from engaging in certain abusive trading practices and enforce its rules. SEFs may be practices that may harm other market (§ 37.203(a)), rules ensuring impartial able to reduce these costs by contracting participants and harm the public by access to the SEF’s trading system with a regulatory service provider. In placing the larger economy at risk. (§ 37.202), and rules governing internal addition, the Commission reduced the Additionally, certification of continued costs of the final rules by eliminating disciplinary procedures (§ 37.206); and compliance with the core principles the requirement in proposed (2) have resources for effective rule will enable the Commission to ensure § 37.203(c)(2) that a SEF monitor the enforcement, including sufficient that performance of SEF functions is size and workload of its compliance compliance staff and resources limited to only those entities that have staff on an ongoing basis and, on at least (§ 37.203(c)), authority to collect adequately demonstrated an ability to an annual basis, formally evaluate the comply with the Act and accompanying information and examine books and need to increase its compliance regulations. This will protect the public records (§ 37.203(b)), and procedures for resources and staff. The Commission by promoting trading on regulated SEFs conducting investigations into possible believes that the final rulemaking rather than OTC markets. While SEFs rule violations (§ 37.203(f)). The provides greater flexibility to SEFs in and the Commission may at times Commission is also clarifying that a SEF determining their approach to require access to market participants’ must establish and enforce rules for its monitoring their compliance resources. information for regulatory purposes, the employees that are reasonably designed With respect to the use of a third- rules also protect market participants by to prevent violations of the Act and the party regulatory service provider as stipulating that information they rules of the Commission. permitted under § 37.204 (Regulatory provide to SEFs for regulatory purposes Additionally, § 37.204 provides SEFs services provided by a third party), two is not used inappropriately to advance with the option to choose to contract commenters in follow-up conversations the commercial interests of the SEF with a regulatory service provider for indicated to the Commission staff that without their consent. the provision of services to assist in they each may contract (or have already complying with the CEA and contracted) with a regulatory service (2) Efficiency, Competitiveness, and provider to perform various compliance Financial Integrity of the Markets Commission regulations, provided that the SEF supervise the regulatory service functions at a cost of between $540,000 The recordkeeping and reporting rules provider and retain exclusive authority and $720,000 per year. This estimate promote financial integrity as they with respect to all substantive decisions represents the total cost of contracting a ensure that the Commission and SEFs made by the regulatory service provider SEF’s compliance functions to a will have access to information to on the SEF’s behalf. regulatory service provider. ensure that trading is conducted Additionally, ISDA estimates an pursuant to the regulatory requirements, (1) Costs assessment on SEFs of $45,000 per year to contract with a regulatory service and that SEFs have sufficient The costs associated with the rule- provider and $635,000 per year in dues documentation to detect, enforce, and writing and enforcement provisions deter potential rule violations. for membership to the regulatory service outlined above will consist mostly of provider.1105 Section 37.204 is intended (3) Price Discovery one-time administrative outlays such as to be a cost-saving provision that wages paid to attorneys and other The Commission has not identified mitigates the burden placed on SEFs by compliance personnel for time spent the rule enforcement program and, as any effects that these rules will have on drafting, reviewing, implementing, and price discovery considerations. stated by one commenter, this rule may updating rules. While new entities reduce a SEF’s overall costs by at least (4) Sound Risk Management Practices seeking to become SEFs would need to thirty percent. develop a rulebook, existing entities that SEFs that choose to contract with a Requiring that SEFs maintain audit already have written rules would only trail, investigatory files, disciplinary, regulatory service provider will need to incur the incremental expense of hire sufficient compliance staff to and other records will provide the updating them. Commission with access to data that supervise the quality and effectiveness will allow it to assess whether market SEFs will also incur the initial and of the services provided by the participants are manipulating or recurring costs associated with investing regulatory service provider, including otherwise disrupting trading in the in the resources and staff necessary to the cost of holding regular meetings swaps market. The Commission and provide effective rule enforcement. A with the regulatory service provider to SEFs can then take action to mitigate SEF must have sufficient staff and review and assess the adequacy of the these risks. resources, including resources to collect services provided. SEFs will also incur information and examine books and the cost of documenting any instances (5) Other Public Interest Considerations records, as well as automated systems to 1103 The Commission has not identified assist the compliance staff in carrying State Street Comment Letter at 5 (Mar. 8, out the SEF’s self-regulatory 2011). any effects that these rules will have on 1104 CEA section 5h(f)(2)(B); 7 U.S.C. other public interest considerations responsibilities. One commenter stated 7b–3(f)(2)(B). other than those enumerated above. that these requirements are overly 1105 ISDA Discussion Paper at 28 (Nov. 2011).

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in which their decisions differ from separate from a ‘‘review panel.’’ 1107 In that a violation may have occurred or those recommended by their regulatory response, the Commission removed the will occur; and deleted several service provider. proposed requirement to establish provisions.1109 separate hearing and review panels, The Commission has also moved part (2) Benefits instead allowing a SEF to establish one or all of several provisions to Establishing a rulebook and an or more disciplinary panels, which will, guidance.1110 By moving these effective rule enforcement program will among other things, issue notices of provisions to guidance, entities will ensure that SEFs have specific and charges, conduct hearings, render have the flexibility to tailor compliance transparent procedures for addressing written decisions, and impose programs to varying business models critical areas of market protection, and disciplinary sanctions. The final rule and trading platforms as well as that SEFs will have the resources will continue to achieve the goals of the unanticipated technological innovation needed to implement those procedures. proposed regulations by deterring or behavioral changes. While the In particular, the requirements that a violations of SEF rules, preventing Commission’s pairing of guidance and SEF offer impartial access, provide a fair recidivist behavior, and protecting regulations provides for a broad and and competitive market free of abusive respondents and customers harmed by flexible regulatory framework, it also trading practices, have sufficient violations of exchange rules. The promotes uniformity of safe and sound resources to oversee and monitor the procedures will achieve these goals operation such that market participants market, promptly investigate rule while also providing SEFs with greater and the public receive comparable violations, establish disciplinary flexibility to structure their disciplinary levels of protection irrespective of the procedures that will deter abuses, and bodies in a manner that best suits their particular SEF on which they transact. provide respondents with adequate business models and markets. The final safeguards will foster greater confidence (4) Section 15(a) Factors (Rule Writing rule is unlikely to impose additional and Enforcement) that SEFs will provide a fair and personnel expenditures on SEFs, as the competitive market free of trading Commission anticipates that SEFs, like (i) Protection of Market Participants and abuses. This confidence is likely to DCMs, will rely upon unpaid the Public result in increased trading of swaps on disciplinary panel members. The Together, the rule-writing and SEFs, improving liquidity and resulting Commission anticipates that any actual enforcement provisions described above in more competitive quotes. costs associated with the disciplinary ensure that SEFs adopt and enforce According to conversations with panel will be limited to de minimis operational rules that protect market commenters, SEFs that contract-out administrative expenses for convening participants and the public through certain regulatory functions to a hearings over which the panel presides, orderly SEF-traded markets that are regulatory service provider are likely to such as postage, facility rentals, and better protected from manipulative and realize significant cost savings from printing. disruptive conduct than pre-Dodd Frank economies of scale—one commenter The Commission notes that it has OTC markets. stated that contracting with a regulatory provided additional flexibility to SEFs Rules prohibiting abusive trade service provider would reduce a SEF’s by delaying the effective date of practices such as wash trades and front- overall costs by at least thirty percent. proposed § 37.206(o) to 1 year from the running are intended to deter such According to NFA’s Web site, it appears effective date of the SEF rules.1108 disruptive practices, and will protect that many potential SEFs have already Where a rule violation is found to have market participants transacting on the contracted with, or are in the process of occurred, this provision limits the SEF, as well as the general public, who contracting with, a regulatory service number of warning letters to one per may rely on prices derived from the provider.1106 Additionally, the rule rolling twelve month period for the market and who may be customers or governing the use of regulatory service same violation. The delay in the shareholders of market participants. providers ensures that SEFs will have effective date of this provision is likely The requirement that a SEF have the sufficient staff to adequately supervise to mitigate costs for persons and entities capacity to detect and investigate rule their regulatory service providers. By so that they may adapt to the new SEF violations, including adequate requiring that SEFs oversee the services regime. compliance staff and resources to provided by the regulatory service As recommended by commenters, the conduct automated trade surveillance provider, the rule will likely result in Commission has also adopted cost- cost savings to the SEF, as the failure of mitigating alternatives that will provide 1109 Deleted provisions include proposed a service provider to adequately fulfill SEFs with additional flexibility and § 37.203(c)(2) (ongoing monitoring of compliance its duties may result in costs to SEFs for staff and resources), the second sentence of discretion to implement disciplinary not meeting compliance obligations. proposed § 37.206(a) (annual review of enforcement and other enforcement programs in the staff), the majority of proposed § 37.206(c) (timely (3) Consideration of Alternatives manner they find most suited to their review of investigation reports), the last sentence of market. In particular, the Commission proposed § 37.206(h) (denial of charges and right to As referenced above, one of a SEF’s a hearing), and proposed § 37.206(j)(1)(vii) (cost of rule-writing obligations is to develop has: eliminated the requirement that an transcribing the record to be borne by the rules governing internal disciplinary investigation report include the member respondent). procedures, including rules governing or market participant’s disciplinary 1110 See second part of proposed § 37.206(a) disciplinary panels. CME stated that the history at the SEF; removed the (enforcement staff), proposed § 37.206(d) (notice of requirement that SEFs include a copy of charges), proposed § 37.206(e) (right to Commission should not provide a representation), proposed § 37.206(f) (answer to prescriptive approach to disciplinary a warning letter in an investigation charges), proposed § 37.206(g) (admission or failure panels in proposed § 37.206(b) by report; amended the standard for to deny charges), proposed § 37.206(h) (denial of requiring a ‘‘hearing panel’’ to be commencing an investigation from a charges and right to hearing), proposed § 37.206(i) ‘‘possible basis’’ to a ‘‘reasonable basis’’ (settlement of offers), the majority of proposed § 37.206(j) (hearings), proposed § 37.206(l) (right to 1106 See, e.g., ‘‘NFA Signs Agreement with ICAP appeal), proposed § 37.206(m) (final decisions), to provide Regulatory Services to ICAP’s Swap 1107 CME Comment Letter at 35 (Feb. 22, 2011). proposed § 37.206(o) (summary fines for violations Execution Facility’’ (Mar. 20, 2012), available at 1108 The Commission is renumbering proposed of rules regarding timely submission of records), http://www.nfa.futures.org/NFA-regulation/ § 37.206(o) to § 37.206(f). The Commission is also and proposed § 37.206(p) (emergency disciplinary regulationNewsRel.asp?ArticleID=3996. retitling this section as ‘‘Warning letters.’’ actions).

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and real-time monitoring (or contract that only those participants with a counsel, the Commission has eliminated with a regulatory service provider that sufficient level of sophistication and this restriction from the final rule. has the capacity to perform these financial resources are able to The final rule also outlines the functions on its behalf while participate. Similarly, requiring a SEF to procedures for oversight authority over maintaining ultimate responsibility), maintain minimum level of enforcement the CCO and for appointing and will improve a SEF’s ability to discover, resources will promote financial removing the CCO. The CCO must meet sanction, and prevent violations and integrity by ensuring that a SEF has with the board of directors at least trading practices that could harm sufficient resources to investigate annually and the Regulatory Oversight market participants and, indirectly, the wrongdoing and make aggrieved market Committee (‘‘ROC’’) at least quarterly. public. participants whole again. Moreover, The CCO must also prepare an annual SEF-initiated investigations are a markets where wrongdoing is detected compliance report containing a detailed chief tool in protecting market and deterred will operate more account of the SEF’s compliance with participants and the public because they efficiently. the CEA and Commission regulations, as provide the first opportunity to respond (iii) Price Discovery well as a detailed account of the SEF’s to rule violations. Rules allowing the self-regulatory program, and submit it to SEF to obtain information and inspect Many of the same rule provisions the SEF’s board of directors for review books and records will not only deter previously discussed that serve to and to the Commission. SEFs must potential abusive trading practices, but increase efficiency, liquidity, and maintain records pertaining to, among will also enable the SEF to detect any competitiveness will, by extension, other things, code of ethics and conflict manipulative or fraudulent activity improve price discovery, because the of interest policies, copies of all quickly and efficiently. Prompt and combination of increases in liquidity materials created in furtherance of the thorough investigations are essential to and competition will help create a CCO’s duties, and any records relevant detecting and remedying violations and marketplace in which the forces of to the SEF’s annual compliance report. ensuring that the violations do not harm supply and demand reflect more market participants, result in price accurate pricing. (1) Costs distortions, or contribute to systemic Timely investigations will increase Several commenters stated that the risks that can harm the economy. the likelihood that manipulation is proposed requirement that the CCO may In the event of demonstrated customer detected early-on and quickly remedied not be a member of the SEF’s legal harm, restitution damages are generally so that price discovery is not impaired. department and may not serve as its required to make that customer whole Additionally, a system of meaningful general counsel is prescriptive and again. Meaningful sanctions will serve sanctions will deter disruptive and unnecessary.1112 In response to these as a general deterrent by discouraging manipulative trade practices, providing comments, the Commission has others from engaging in violative a stable and competitive trading eliminated the proposed prohibition on conduct. environment more likely to foster price who may serve as CCO. Accordingly, a Impartial access requirements protect discovery. SEF may use its general counsel or a market participants from discriminatory (iv) Sound Risk Management Practices member of its legal department to serve treatment by prohibiting similarly as CCO. This change to the final rule The requirement that SEF participants situated market participants from should significantly reduce the expense confirm to the SEF that they meet the receiving different access terms and fee imposed by the proposed rule, which definition of an ECP helps assure the structures. would have necessitated the hiring of an The requirement that SEFs establish market that participants in SEF-traded markets have the skill, knowledge, and/ individual specifically to serve as CCO and enforce rules for its employees will at an estimated annual cost of protect market participants and the or financial resources necessary to enter 1113 into financially-sound transactions and $181,394. The cost of assigning the public by helping to ensure that role of CCO to an existing employee will employees operate in conformance with understand sound risk management practices. be significantly less. the Act and the rules of the Several commenters requested that Commission. (v) Other Public Interest Considerations the Commission grant SEFs more (ii) Efficiency, Competitiveness, and The Commission has not identified flexibility in determining how a CCO is Financial Integrity of the Markets any effects that these rules will have on appointed, compensated, supervised, and removed.1114 In response to these The requirement that a SEF have the other public interest considerations other than those enumerated above. comments, the Commission has capacity to detect and mitigate rule and removed the requirement in proposed trade practice violations, including the (b) Chief Compliance Officer ability to collect relevant information Section 37.1501 implements Core 1112 ICE Comment Letter at 6–7 (Mar. 8, 2011); and examine books and records, and the Principle 15 and requires each SEF to WMBAA Comment Letter at 6–7 (Mar. 8, 2011); requirement to establish and enforce designate an individual to serve as Chief MarketAxess Comment Letter at 27 (Mar. 8, 2011); rules for its employees will increase CME Comment Letter at 12–13 (Mar. 8, 2011). Compliance Officer (‘‘CCO’’) and to 1113 confidence in the financial integrity of This estimate is derived from the 2010 provide its CCO with the authority and edition of SIFMA’s annual report on Management the market by confirming to market resources to develop and enforce such and Professional Earnings in the Securities Industry participants that their orders and trades policies and procedures as are necessary (hereinafter ‘‘SIFMA Report’’). This figure reflects the median total annual compensation (including are handled pursuant to the posted rules for the CCO to fulfill its statutory and of the SEF. base salary and bonus) for a CCO in the securities regulatory duties.1111 While the industry. The Commission notes that this estimate In addition, impartial access proposed rule prohibited the CCO from only includes the cost of hiring a CCO. Although requirements will eliminate a potential serving as a member of the SEF’s legal not required by statute or rule, SEFs may also impediment to participation, resulting choose to hire additional staff at additional cost in department or as the SEF’s general in a more competitive market. At a order to support the CCO. 1114 Tradeweb Comment Letter at 12 (Mar. 8, minimum, as required by section 2(e) of 1111 There are no costs associated with 2011); WMBAA Comment Letter II at 7 (Mar. 8, the Act, market participants must meet § 37.1501(a), which simply defines ‘‘board of 2011); MarketAxess Comment Letter at 26 (Mar. 8, the definition of an ECP, which ensures directors.’’ 2011).

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§ 37.1501(c)(1) that a CCO’s report, rather than requiring the report and the Commission to periodically appointment and compensation requires to describe in detail the registrant’s assess, and evaluate where necessary, a majority vote of directors, as well as compliance with respect to each of the the SEF’s ability to comply with the the requirements in proposed numerous components of the CEA and core principles. Upon review of the § 37.1501(c)(3) that the SEF explain to Commission regulations.1118 compliance report, the SEF and the the Commission the reason for the After weighing the comments and Commission will be better able to CCO’s removal upon departure and that alternative proposals from FXall and determine whether the SEF has the SEF immediately appoint an interim CME, the Commission has determined appropriate programs in place to protect CCO and permanent CCO as soon as to adopt the rules as proposed, subject market participants and the public from reasonably practicable thereafter. The to certain revisions detailed in the market abuses. Commission notes that these revisions preamble.1119 The Commission declines Maintaining records as required under will provide the board of directors or to adopt commenters’ proposed § 37.1501 regarding a CCO’s efforts senior officer of the SEF with a degree alternatives because without the toward ensuring that the SEF complies of flexibility to appoint, compensate, detailed information required by statute with core principles provides a check and remove the CCO in the manner that in the annual compliance report against what is reported in the annual the SEF deems most appropriate. (including a self-assessment of policies compliance report. Access to these Several commenters also stated that and procedures designed to ensure records will assist the Commission in its the proposed requirement that CCOs compliance with each core principle, a determination of whether a SEF’s self- ensure ‘‘compliance with the Act and discussion of areas for improvement, regulatory program complies with the Commission regulations’’ is and a description of the SEF’s self- core principles and the Commission’s impracticable and overly burdensome, regulatory program’s staffing, structure, regulations. If the Commission as one individual cannot ensure and cataloguing of disciplinary actions), determines the self-regulatory program compliance of an entire the Commission would not have access is not sufficient, the Commission will be organization.1115 In response, the to the information it needs to ensure able to use information required by the Commission is modifying that each SEF is in compliance with the rule to take steps to remedy the § 37.1501(d)(4) to state that one of the CEA and Commission regulations. shortcomings and to prevent disruptions CCO’s duties shall include ‘‘taking (4) Section 15(a) Factors (Chief that could harm market participants and reasonable steps to ensure compliance Compliance Officer) the public. with the Act and Commission regulations.’’ This modification should (i) Protection of Market Participants and (ii) Efficiency, Competitiveness, and also reduce potential costs resulting the Public Financial Integrity of the Markets from this rule without diminishing its The requirements that a CCO oversee An effective CCO will implement benefits. the SEF’s compliance with the Act and measures that enhance the stability and efficiency of SEFs. Reliable and (2) Benefits Commission regulations and supervise the SEF’s self-regulatory program will financially-sound SEFs are essential for The rule ensures that each SEF has a ensure that the SEF monitors the stability of the derivatives markets central figure responsible for overseeing compliance with key provisions of the they serve. The CCO’s oversight of self- major areas of compliance with the CEA CEA designed to protect market regulatory programs and the annual and Commission regulations. The participants and the public (including compliance report will provide both the annual compliance report will enable a provisions governing trade practice and SEF and the Commission with an SEF and the Commission to evaluate the market surveillance, real-time market opportunity to assess the effectiveness effectiveness of the SEF’s self-regulatory monitoring, and financial reporting). To of the SEF’s self-regulatory programs programs and compliance with core the extent that the Commission’s and will help to detect and deter rule principles, and to take remedial actions regulations impose more specific or violations, increasing participation and and make recommendations to improve supplemental requirements when competition in the markets. the SEF’s self-regulatory programs in compared to those requirements Likewise, compliance reports will order to ensure that the SEF remains in explicitly imposed by section 5h(f)(15) allow the Commission to review the compliance with the core principles. of the CEA, those incremental costs are effectiveness of and order changes to (3) Consideration of Alternatives not likely to be significant. While it is self-regulatory programs, thus enabling possible that those incremental costs the market to function more efficiently With respect to the annual while promoting confidence and compliance report requirement in will be passed along to market participants, the size of those costs is attracting competition. A board that proposed § 37.1501(e), FXall stated that makes proactive changes to a SEF’s self- compiling the required information and likely to be negligible. The Commission believes the CCO regulatory programs based on the CCO’s preparing the report in a timely manner rules will protect market participants compliance report will build confidence annually will consume considerable and the public by promoting in the market and increase competition. resources.1116 FXall proposed an compliance with the core principles and alternative report that would request (iii) Price Discovery Commission regulations through the fewer pieces of information.1117 designation and effective functioning of The Commission has not identified Similarly, CME stated that the the CCO, and the establishment of a any effects that this rule will have on Commission should specify key areas framework for preparation of a price discovery. that should be discussed in the annual meaningful annual review of a SEF’s (iv) Sound Risk Management Policies compliance program. The annual 1115 Tradeweb Comment Letter at 6–7 (Jun. 3, The CCO rules and the required 2011); WMBAA Comment Letter II at 5–6 (Mar. 8, compliance report will allow the SEF annual compliance report will enhance 2011); MarketAxess Comment Letter at 26 (Mar. 8, a SEF’s risk management policies by 2011); Tradeweb Comment Letter at 12 (Mar. 8, 1118 CME Comment Letter at 7 (Feb. 7, 2011). 2011); CME Comment Letter at 4 (Feb. 7, 2011). 1119 See discussion above under § 37.1501(e)— enhancing the standards for a SEF’s 1116 FXall Comment Letter at 16 (Mar. 8, 2011). Annual Compliance Report Prepared by Chief compliance program. This in turn will 1117 Id. at 17. Compliance Officer in the preamble. emphasize risk management compliance

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because of its significance to the overall manipulation, price distortions, and trading and trade processing) and purpose and functioning of the SEF. other disruptions (§ 37.401); (5) and § 37.205 (audit trail). Compliance with the SEF core establish risk control mechanisms Additionally, in response to principles and related regulations (including pauses and halts) to prevent comments that the standards set forth in encompasses, among other things, and reduce the potential risk of market the proposed requirements for real-time procedures for ensuring the financial disruptions (§ 37.405). market monitoring are unreasonably integrity of swaps entered on or through high,1123 the Commission is modifying the facilities of the SEF, including the (1) Costs the final rule to require a SEF to clearance and settlement of swaps, As discussed above, potential SEFs conduct real-time market monitoring determination of resource adequacy, are likely to outsource these obligations designed to ‘‘identify’’ disorderly and system safeguards to establish and to a regulatory service provider at trading, instead of to ‘‘ensure’’ orderly maintain a program of risk analysis and significantly less cost than performing trading. The Commission believes that oversight. It is the responsibility of the them in-house.1121 Accordingly, the requiring SEFs to identify disorderly CCO to ensure that the SEF is compliant ongoing costs associated with these trading when it occurs, rather than to with the core principles and the rules would already be included in the ensure orderly trading at all times, will regulations thereunder, and is otherwise total annual cost of contracting with a likely mitigate the overall burden of the engaged in appropriate risk management regulatory service provider (plus the rule. Furthermore, in response to CME’s activities in accordance with the SEF’s cost of overseeing the service provider’s comment,1124 the Commission is own rules, policies, and procedures. compliance). deleting the word ‘‘investigating’’ from (v) Other Public Interest Considerations Should a potential SEF that is a new proposed § 37.203(d), thus clarifying entity choose to develop its own that a SEF’s automated trade The Commission has not identified automated trade surveillance, real-time surveillance system will not be expected any effects that these rules will have on market monitoring, and audit trail to conduct the actual investigation of other public interest considerations systems, it is likely to incur the costs of potential trade practice violations. This other than those enumerated above. developing and maintaining these deletion should further reduce costs for 6. Monitoring and Surveillance systems, as well as the cost of hiring and SEFs. maintaining adequate staff to administer Tradeweb and MarketAxess Core Principle 2 requires, among them. The staff necessary to carry out a commented that annual audits for other things, that each SEF establish and SEF’s obligations under these rules member and market participant enforce trading, trade processing, and would likely include analysts, compliance with the audit trail participation rules that will deter investigators, and systems and/or IT requirements pursuant to § 37.205(c)(1) abuses, and have the capacity to detect, are burdensome and unwarranted.1125 investigate, and enforce those rules, specialists. However, existing entities In the Commission staff’s follow-up including means to provide market may already receive the requisite data, conversation regarding costs, one participants with impartial access to the and may also have some infrastructure commenter asserted that this market and to capture information that in place to perform automated trade requirement will cost SEFs at least may be used in establishing whether surveillance and real-time market $300,000 annually. rule violations have occurred. monitoring. Accordingly, the incremental cost for existing entities To mitigate the costs associated with Additionally, Core Principle 4, in part, this provision, the Commission is requires each SEF to monitor trading in would be limited to investing in modifying the language in final swaps to prevent manipulation and enhancements to existing electronic § 37.205(c) so that it applies only to price distortion through surveillance, systems to ensure that data is captured members and persons and firms subject including methods of conducting real- in compliance with the rules and that to the SEF’s recordkeeping rules, rather time monitoring of trading and the systems themselves comply with the 1122 than to members and ‘‘market comprehensive and accurate trade rules. The Commission notes that a participants.’’ With this change, the reconstructions. SEF may use a unified monitoring system to jointly satisfy the Commission limits the number of (a) Monitoring of Trading requirements of § 37.401 (monitoring of entities that a SEF must audit, which The rules that implement Core should reduce the cost noted above Principles 2 and 4 will require a SEF to, 1121 The Commission notes, as described in the without any meaningful reduction in among other things: (1) Maintain an preamble, that a SEF that elects to use the services benefits because auditing those market of a regulatory service provider must retain certain participants subject to recordkeeping automated trade surveillance system decision-making authority and cannot outsource (§ 37.203(d)); (2) conduct real-time this authority to the regulatory service provider. rules will ensure complete coverage of market monitoring of all trading activity See, e.g., § 37.204(c)—Regulatory Decisions all activity pertinent to transactions on on its platform and have the authority Required from the Swap Execution Facility in the any given SEF. preamble. to cancel trades and adjust trade prices Finally, SEFs may also incur the one- 1122 For example, SEFs are required to comply time cost of programming risk controls when necessary (§ 37.203(e)); (3) with a unified set of audit trail requirements for all maintain an acceptable audit trail methods of execution. The Commission notes that such as pauses and halts, as well as on- program that enables the SEF to identify a SEF, for example, that utilizes the telephone as going costs to maintain and adjust such entities that are routinely non-compliant a means of interstate commerce in providing the controls. For some SEFs, the costs of execution methods in § 37.9(a)(2)(i)(A) or (B) may adding pause and halt functionality to and to levy meaningful sanctions comply with certain of the audit trail requirements (§ 37.205); 1120 (4) monitor trading in by recording all such communications that relate to swap contracts should be reduced since real-time and accurately reconstruct or result in swap transactions. Such recordings much of that technology is already trading activity in order to detect must allow for reconstruction of all relevant commercially available and would not communications between the SEF and its customers necessarily have to be developed in- or involving SEF employees. While it is common 1120 The Commission received no comments industry practice to make and retain electronic discussing the specific costs or benefits of § 37.406, time-stamped recordings of conversations, SEFs 1123 CME Comment Letter at 20 (Feb. 22, 2011). which requires SEFs to make audit trail data may incur costs to upgrade their recording systems 1124 Id. at 19–20. available to the Commission and is an explicit to ensure that they comply with all of the audit trail 1125 Tradeweb Comment Letter at 6 (Jun. 3, 2011); requirement of the statute. requirements. MarketAxess Comment Letter at 22 (Mar. 8, 2011).

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house.1126 As noted in the Pre-Trade system anomalies that could harm they apply, and that any controls should Functionality Subcommittee of the market participants and the public. consider the balance between avoiding CFTC Technology Advisory Committee These tools will improve SEF a market disruption while facilitating a report, the costs would largely be borne compliance staff’s ability to record, market’s price discovery function, the by the exchanges and would center recover, sort, and query voluminous Commission enumerated the other types around intellectual property, as many amounts of data in order to better detect of risk controls in guidance. exchanges develop, own, and manage potential rule violations and abusive Accordingly, a SEF will have discretion their own technology.1127 However, the trading practices that harm market to select and create risk controls to meet costs associated with implementing risk participants and market integrity. By the unique characteristics of its market controls were not described in detail in having the tools and data to identify and cost structure. these potential rule violations, a SEF the Pre-Trade Functionality Finally, in response to concerns about can quickly respond, mitigating their Subcommittee report and will likely a lack of flexibility in the proposed effects and helping to prevent them vary greatly from one SEF to another requirement to coordinate risk controls from generating systemic risk or other depending on the type of risk controls among other markets or exchanges,1130 severe problems. SEFs will also have the that will be implemented and the nature the Commission is moving the language tools and information needed to of the SEF’s trading platform. The in proposed § 37.405 to guidance.1131 prosecute rule violations supported by Commission received no comments The combination of rules and guidance evidence from audit trail data and order stating that risk controls cannot be pertaining to risk controls will ensure and trade information. These tools will implemented in a cost-effective manner that, at a minimum, SEFs implement not only allow SEFs to more effectively using commercially available pauses and halts, while also granting respond to rule violations and trading technology. As further noted in the Pre- SEFs the discretion to coordinate and abuses, but will also deter market Trade Functionality Subcommittee adopt additional risk controls in a participants from engaging in such report, ‘‘[s]ome measure of manner they find most cost effective conduct in the first place since market standardization of pre-trade risk and appropriate for their markets. controls at the exchange level is the participants will be aware that rule cheapest, most effective and most robust violations are likely to be detected. (4) Section 15(a) Factors (Monitoring of path to addressing the Commission’s While the provisions described above Trading) concern [for preserving market will increase the likelihood that SEFs (i) Protection of Market Participants and integrity].’’ 1128 will promptly identify market or system the Public The Commission notes that while it is anomalies, SEFs must also have systems requiring pauses and halts in the rule, in place to respond to such anomalies These rules will help ensure fair and it is also enumerating in guidance other after they occur. Risk controls such as equitable markets that are protected types of automated risk controls that automated trading pauses and halts can, from abusive trading practices or may be implemented by SEFs in order among other things, allow time for manipulative conditions, and will to give SEFs greater discretion to select market participants to analyze the ensure that rule violations and market among the enumerated risk controls or market impact of new information that disruptions that could harm market to create new risk controls. The may have caused a sudden market participants and the public may be Commission believes that this move, allow new orders to come into a prevented or detected, reconstructed, combination of rules and guidance will market that has moved dramatically, investigated, and prosecuted. The facilitate orderly markets while and allow traders to assess and secure absence of these regulations would maintaining a flexible environment that their capital needs in the face of result in an increased potential for facilitates cost-effective innovation and potential margin calls. Pauses and halts violations to go undetected and for development. are intended to apply in the event of market disruptions to create distorted extraordinary price movements that may (2) Benefits prices or systemic risks that could harm trigger or propagate systemic the economy and the public. These The automated trade surveillance disruptions. Accordingly, a SEF’s ability requirements will strengthen SEFs’ system, real-time monitoring, audit-trail, to pause or halt trading in certain oversight of their trading platforms, and trade reconstruction requirements circumstances and, importantly, to re- increase the likelihood of early will promote orderly trading and will start trading through the appropriate re- detection and prompt responses to rule ensure that SEFs have the capability to opening procedures, will allow SEFs to violations and market disruptions, and promptly identify and correct market or mitigate the propagation of shocks that result in stronger protection of market are of a systemic nature. participants and the general public from 1126 In a separate Dodd-Frank rulemaking, DCMs are now required to have the same types of risk (3) Consideration of Alternatives rule violations, trading abuses, and controls. See Core Principles and Other While commenters requested other market disruptions that could Requirements for Designated Contract Markets, 77 additional flexibility to determine the harm market participants and, directly FR 36612 (Jun. 19, 2012). or indirectly, the public and the 1127 risk controls that should be See ‘‘Recommendations on Pre-Trade economy as a whole. Practices for Trading Firms, Clearing Firms and implemented within their market,1129 Exchanges involved in Direct Market Access,’’ Pre- the Commission views pauses and halts Trade Functionality Subcommittee of the CFTC as effective risk management tools that 1130 CME Comment Letter at 26 (Feb. 22, 2011). Technology Advisory Committee (‘‘TAC 1131 The guidance provides that a SEF with a Subcommittee Recommendations’’), at 4 (Mar. 1, must be implemented to facilitate swap that is linked to, or a substitute for, other 2011), available at http://www.cftc.gov/ucm/ orderly markets. Moreover, in products, either on its market or on other trading groups/public/@swaps/documents/dfsubmission/ recognition that such risk controls venues, must, to the extent practicable, coordinate _ tacpresentation030111 ptfs2.pdf. The Commission should be adapted to the unique its risk controls with any similar controls placed on notes that the subcommittee report was submitted those other products. If a SEF’s swap is based on to the Technology Advisory Committee and made characteristics of the markets to which the level of an equity index, such risk controls available for public comment, but no final action must, to the extent practicable, be coordinated with has been taken by the full committee. 1129 See, e.g., ICE Comment Letter at 5 (Mar. 8, any similar controls placed on national security 1128 See TAC Subcommittee Recommendations at 2011); Tradeweb Comment Letter at 11 (Mar. 8, exchanges. See guidance to Core Principle 4 in 4 (Mar. 1, 2011). 2011); CME Comment Letter at 27 (Feb. 22, 2011). appendix B to part 37.

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(ii) Efficiency, Competitiveness, and settlement, the continued (ii) Benefits Financial Integrity of the Markets appropriateness of the methodology for When SEFs list contracts that are not These rules ensure that violations and the reference price for SEFs that derive readily susceptible to manipulation, market anomalies are detected and that price, and the continued they contribute to the integrity and promptly addressed and do not generate appropriateness of the third-party index stability of the marketplace by giving systemic risk or other problems that or instrument for reference prices that traders confidence that the prices could interfere with efficient and rely on such index or instrument associated with swaps reflect the true competitive markets. The requirements (§ 37.403); and (4) adopt position supply of and demand for the also help ensure that market prices are limitation or position accountability in underlying commodities or financial not distorted by prohibited activities. accordance with Commission instruments. Section 37.301, which 1133 The rules strengthen market confidence regulations (§ 37.601). implements the Core Principle 3 and enable the market to operate more (1) Swaps Not Readily Susceptible to requirement that SEFs permit trading efficiently by deterring rule violations Manipulation only in swaps that are not readily and by establishing conditions under susceptible to manipulation, will which trading will be paused or halted, (i) Costs promote an environment where swap thereby promoting efficient pricing and Compliance with these regulations prices are less likely to be subject to competitive trading. will impose costs equally on startups distortion and extreme volatility, (iii) Price Discovery and entities with existing trading allowing market participants to buy and platforms seeking SEF registration sell physical and financial products at Requiring SEFs to conduct effective fair prices and to hedge price risk monitoring and surveillance of their because all SEFs must monitor their contracts in accordance with the rules appropriately. markets and to have the capacity to The guidance outlined in appendix C detect rule violations will help ensure on an ongoing basis. However, SEFs have incentives to review their contracts to part 38 provides a reference for that legitimate trades and fundamental existing and new regulated markets for supply and demand information are to ensure they are not susceptible to manipulation even in the absence of the information that should be provided to accurately reflected in market prices. the Commission for new products and The mitigation of rule violations, which core principle or these rules. For example, SEFs have a business need to rule amendments based on best detract from the price discovery process practices developed over the past three in SEF markets, will promote develop products that provide market participants with reliable instruments decades by the Commission and other confidence in the prices market regulators. This guidance will likely participants use to hedge risk and that can be used for hedging and risk management. In order to do so, new and reduce the time and costs that regulated provide confidence in the price markets will incur in providing the discovery process. existing entities will need staff to research the underlying markets (at appropriate information and should (iv) Sound Risk Management Practices times using data from private sources) mitigate the need for extensive follow- The rules are designed to allow SEFs and to certify that the contract rules up discussions with the Commission. to better deter, detect, and address comply with Core Principle 3. SEFs The guidance also reduces the amount operational risks posed by trading likely will already have staff to ensure of time it takes the Commission staff to practices or trading activities. To the compliance with the applicable core analyze whether a new product or rule extent they deter overly risky actions by principles and should plan on legal staff amendment is in compliance with the market participants, the rules will lower devoting approximately four hours per CEA. potential losses and costs to SEFs and contract at a cost of approximately $400 (2) Monitoring of Physical-Delivery market participants and promote sound to review a swap’s compliance with Swaps risk management practices. Core Principle 3 as part of a sound (i) Costs (v) Other Public Interest Considerations business practice. The scale of these costs largely depends on how novel or While the Commission did not receive The Commission has not identified complex a contract is, how many comments discussing the costs of this any effects that these rules will have on contracts the SEF plans to list at any provision, the Commission is revising other public interest considerations given time, and whether listed swaps the requirement in proposed other than those enumerated above. are similar to each other. § 37.402(a)(2) 1134 so that SEFs only (b) Monitoring of Contracts The Commission notes that this have to monitor the availability of the commodity supply, instead of The Commission is adopting rules guidance will likely reduce the time and costs that regulated markets will incur monitoring whether the supply is that will require a SEF to: (1) Submit adequate. This reduced monitoring new swap contracts to the Commission in providing the appropriate information and will likely reduce the obligation should lower ongoing costs in advance of listing and trading and for SEFs since they will not have to demonstrate that the contracts are not amount of time it takes the Commission staff to analyze whether a new product make determinations regarding readily susceptible to manipulation adequacy of deliverable supply as (§ 37.301); 1132 (2) monitor physical or rule amendment is in compliance with the CEA. frequently as under the proposed rule, delivery swaps’ terms and conditions while achieving comparable benefit for and availability of the deliverable market participants and the public. 1133 commodity (§ 37.402); (3) monitor the Core Principle 6 requires that SEFs, for each Costs will be further reduced by the reference price of cash-settled swaps contract and as necessary and appropriate, adopt position limitation or position accountability, and Commission’s decision to remove from used to determine cash flow or that, for any contract that is subject to a position proposed § 37.402 the requirements that limitation established by the Commission pursuant SEFs monitor specific details of the 1132 SEFs must make this demonstration by to CEA section 4a(a), SEFs must set the position providing the information set forth in appendix C limit at a level not higher than the position supply, marketing, and ownership of the to part 38. See Core Principles and Other limitation established by the Commission. See Requirements for Designated Contract Markets, 77 Position Limits for Derivatives, 76 FR 4752 1134 Proposed § 37.402(a)(2) is now final FR at 36722. (proposed Jan. 26, 2011). § 37.402(b).

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commodity to be physically delivered. and obtaining information on traders’ manipulation and protect the public by Instead, final appendix B to part 37 lists activities in proposed § 37.403(a) and (b) creating an environment that fosters guidance for monitoring conditions that to guidance. The combination of rules prices that reflect actual market may cause a physical-delivery swap to and guidance implementing Core conditions. become susceptible to price Principle 4 will help ensure that the manipulation or distortion. Listing these cash settlement process is not (ii) Efficiency, Competitiveness, and details in guidance will provide SEFs susceptible to manipulation by Financial Integrity of the Markets with flexibility in meeting their providing rules and guidance on how to By providing guidance based on best monitoring obligations associated with meet the requirements of the core practices regarding what a SEF should physical-delivery swaps, which will principle, while providing SEFs with consider when developing a swap or likely further mitigate any burden the flexibility to adopt the most amending the terms and conditions of associated with compliance. The appropriate method of compliance in an existing swap, the contracts listed by Commission notes that a SEF may light of the nature of their contracts and SEFs, as a whole, should be more contract with a regulatory service market structure. reflective of the underlying cash market, provider to perform these duties at As discussed above, the Commission potentially a lower cost. thus providing for efficient hedging of notes that compliance with these commercial risk. Sections 37.402 and (ii) Benefits provisions can likely be outsourced to a 37.403 protect against disruptions and regulatory service provider at lower Section 37.402 requires that SEFs market manipulation, promote cost, and that on-going monitoring of competition, and promote the efficiency monitor physical-delivery swaps’ terms pricing could be handled by the and financial integrity of transactions in and conditions as they relate to the regulatory service provider. underlying commodity market and SEF markets because market mispricing monitor the availability of the supply of (ii) Benefits that is due to disruptions or the commodity specified by the delivery The § 37.403 requirement that a SEF manipulation interferes with a market’s requirements of the swap. Such monitor cash-settled swaps as they efficiency by limiting its ability to monitoring will allow SEFs to take relate to the reference price, instrument, reflect the value of the underlying appropriate steps to relieve the potential or index to which the swap is settled product. Markets that are prone to for market congestion or manipulation will reduce the potential for market disruption or manipulation have a in situations where participants’ ability disruptions or manipulations and severe competitive disadvantage to to make good on their delivery ensure that they are discovered and those without such problems. These obligations is threatened due to supply promptly addressed. The interconnected rules are designed to address and shortages, disruptions or shortages of nature of swap and underlying cash mitigate such problems for swap transportation, or disruptions due to markets may create incentives for transactions. weather or labor strikes. Any traders to disrupt or manipulate prices (iii) Price Discovery interference with the physical-delivery in the cash market in order to influence process will likely lead to disruptions in the prices in the swap market Manipulation or other market fair and orderly trading and (potentially to benefit the trader’s disruptions interfere with the price participants’ ability to properly manage position in the swap). Detecting and discovery process by artificially commercial risk. Moreover, close preventing this sort of manipulation distorting prices and preventing those monitoring of physical-delivery requires information on traders’ prices from properly reflecting the contracts helps prevent the activities in the cash-settled contract fundamental forces of supply and manipulation of prices, and the public and in, or related to, the underlying demand. These rules are designed to benefits from prices that reflect actual instrument or index to which it is detect and, where possible, prevent market conditions. settled. This rule ensures that SEFs have such market mispricing, and to detect (3) Monitoring of Cash-Settled Swaps the information and tools they need to disconnects between swaps and their (i) Costs accomplish their statutory duty to related market prices (e.g., between cash prevent manipulation and disruptions market prices and the prices of related Argus commented that monitoring of to the cash-settlement process. futures and swaps). trading in underlying price indexes will be costly, and that if SEFs are required (4) Section 15(a) Factors (Monitoring of (iv) Sound Risk Management Practices to monitor the availability and pricing Contracts) of the commodity that forms the basis of By following the best practices (i) Protection of Market Participants and outlined in the guidance in appendix C a price index (particularly where an the Public index price is published based upon to part 38 and the requirements of transactions that are executed off the The demonstration required by §§ 37.402 and 37.403, a SEF should DCM or SEF), the SEF may choose not § 37.301 and the monitoring minimize the susceptibility of a swap to to list the contract and thus traders will requirements in §§ 37.402 and 37.403 manipulation or price distortion at the lose a hedging instrument.1135 allow for a timely review by the time it is developing the contract’s In response to this comment, the Commission staff of the SEF’s terms and conditions. By performing Commission is amending the supporting analysis and data to this work early-on, a SEF should requirement in proposed § 37.403(a)(1) determine whether a contract is not minimize risks to its clearing house and that a SEF monitor the availability and readily susceptible to manipulation, and to market participants. Sound risk pricing of the commodity making up the to ensure that SEFs are able to management practices rely upon index to which the swap will be settled, adequately collect information on execution of hedge strategies at market to only require the SEF to monitor the market activity, including special prices that are free of manipulation or pricing. The Commission is also moving considerations for physical-delivery other disruptions. These rules are the other requirements for monitoring contracts and cash-settled contracts. As designed to facilitate hedging at prices a group, these rules protect market free of distortions that may be 1135 Argus Comment Letter at 6–7 (Feb. 22, 2011). participants by helping to prevent price preventable by adequate controls.

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(v) Other Public Interest Considerations on SEFs or market participants beyond arguing that a wind-down typically The Commission has not identified those imposed by statute. takes three months and that the any effects that these rules will have on With respect to the reporting proposed requirement of six months of requirements in § 37.1306, MarketAxess liquid assets should be reduced other public interest considerations 1139 other than those enumerated above. stated that the proposed requirements accordingly. The Commission are unnecessary and burdensome.1137 believes that three months’ worth of 7. Financial Resources and Integrity The Commission expects that most, if liquid financial assets is an insufficient (a) Background not all, SEFs would calculate and buffer to protect against events which prepare financial statements regularly. may threaten a SEF’s viability, and Section 37.1301 codifies the Core Accordingly, the Commission does not believes that six months of liquid assets Principle 13 requirement that a SEF believe that requiring SEFs to meet the will provide enough time for a SEF to must maintain sufficient financial quarterly reporting requirements liquidate its other assets so that it may resources to cover operating costs for at imposes a significant burden on SEFs. have adequate resources to operate for least one year, calculated on a rolling Extrapolation from the prepared up to one year, as required by the basis. The rules implementing Core financial statements should be relatively statute. Principle 13 also clarify the types of straightforward, but will require staff CME stated that it would not be financial resources available to SEFs to and technology resources to calculate, feasible for SEFs to comply with the satisfy the financial resources monitor, and report financial resources. proposed 17-business-day filing requirements (§ 37.1302) and require In follow-up conversations with the deadline for submission of the financial that each SEF, no less frequently than Commission staff, one commenter resources report and recommended an each fiscal quarter, calculate the indicated that the reporting alternative reporting deadline of 40 financial resources it needs to meet the requirements would costs SEFs about calendar days after the end of each fiscal financial resource requirements, as well $100,000 per year. Given the staffing quarter and 60 calendar days after the as the current market value of each and operational differences among end of each fiscal year.1140 financial resource (§§ 37.1303, 37.1304). SEFs, this cost will vary, perhaps The Commission is adopting the The rules also require SEFs to maintain significantly. alternative recommended by CME and is unencumbered liquid financial assets, extending the proposed 17-business-day such as cash or highly liquid securities, (c) Benefits filing deadline to 40 calendar days for equal to at least six months’ operating The financial resources provisions the first three quarters. The costs, or a committed line of credit or ensure the financial stability of SEFs, Commission’s adoption of this similar facility (§ 37.1305), and to report which promotes the integrity of the alternative will mitigate the costs of certain information regarding their markets and confidence of market preparing and submitting these reports financial resources to the Commission participants trading on SEFs. The as the new extended timeline will quarterly or upon request (§ 37.1306). requirement that SEFs maintain six harmonize the Commission’s Sections 37.701, 37.702, and 37.703 months’ worth of unencumbered liquid regulations with the SEC’s timelines for implement Core Principle 7 regarding financial assets (i.e., cash and/or highly submission of Form 10–Q. Similarly, the the financial integrity of transactions. liquid securities) will also promote Commission has extended the filing Section 37.701 requires transactions market integrity by ensuring that SEFs deadline to 60 days for the fourth executed on or through a SEF that are will have sufficient financial resources quarter report to harmonize the mandatorily or voluntarily cleared to be to continue to operate and wind-down Commission’s deadline with the SEC’s cleared through a Commission- in an orderly fashion, if necessary. In deadline for Form 10–K. registered DCO, or a DCO that the addition, the reporting requirements With respect to proposed § 37.703, Commission has determined is exempt will ensure that the Commission can FXall stated that SEFs would be from registration. Section 37.702 monitor the SEF’s compliance with Core burdened by the ‘‘onerous financial requires a SEF to establish minimum Principle 13. surveillance obligations’’ and financial standards for its members, Sections 37.702 and 37.703 promote recommended that a SEF, like a DCM, which at a minimum, requires that financial integrity by requiring SEFs to be able to delegate its financial members qualify as ECPs. Section establish minimum financial standards surveillance functions to the NFA Joint 37.703 requires a SEF to monitor its for its members and to ensure that they Audit Committee.1141 ABC/CIEBA members to ensure that they continue to continue to qualify as ECPs. stated that the rule would create qualify as ECPs. significant barriers to entry, stifle (d) Consideration of Alternatives (b) Costs competition, and lead to higher Phoenix recommended only requiring prices.1142 In response to these ISDA estimated that it would cost SEFs to maintain financial resources comments, the Commission has revised each SEF $1.4 million per year to necessary to operate for six months.1138 § 37.703 to remove a SEF’s financial comply with the financial resource As described above, the statute surveillance obligations and to only requirement.1136 The Commission notes mandates that a SEF maintain sufficient require that a SEF monitor its members that the requirement that a SEF financial resources to cover its operating to ensure that they continue to qualify maintain sufficient financial resources expenses for one year. Accordingly, the as ECPs. This amendment obviates the to cover its operating expenses for one Commission does not have the year appears in the statute itself, and discretion to consider alternative 1139 CME Comment Letter at 37 (Feb. 22, 2011); that the Commission does not have the financial resource requirements. Phoenix Comment Letter at 4–5 (Mar. 7, 2011). discretion to lower the financial SDMA, however, recommended that the CME and Phoenix proposed an Commission require that SEFs have at least 12 resource requirement. Accordingly, alternative liquidity requirement, months of unencumbered capital. SDMA Comment § 37.1301 imposes no additional costs Letter at 12 (Mar. 8, 2011). 1137 MarketAxess Comment Letter at 40 (Mar. 8, 1140 CME Comment Letter at 38 (Feb. 22, 2011). 1136 ISDA Discussion Paper at 32 (Nov. 2011). The 2011). 1141 FXall Comment Letter at 13 (Mar. 8, 2011). Commission notes that the components of this cost 1138 Phoenix Comment Letter at 4–5 (Mar. 7, 1142 ABC/CIEBA Comment Letter at 11 (Mar. 8, estimate are unclear. 2011). 2011).

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need to delegate any financial (4) Sound Risk Management Practices implementing Core Principle 14.1143 surveillance functions and minimizes The Commission recognizes that the the costs imposed by the rule. As a SEF By setting specific standards with costs of establishing and maintaining may rely on representations from its respect to how SEFs should assess and backup facilities could be substantial if members that they continue to qualify monitor the adequacy of their financial the applicant does not already have as ECPs, the costs of the rule should be resources, the financial resources rules these facilities in place to support de minimis and administrative in promote sound risk management another business area. The Commission nature. practices by SEFs and further the goal also notes that the requirement that a of minimizing systemic risk. SEF establish and maintain emergency (e) Section 15(a) Factors Sections 37.702 and 37.703 will procedures, backup facilities, and a plan (1) Protection of Market Participants and promote sound risk management for disaster recovery appears in the the Public practices by ensuring that SEF members statute and is not the product of The financial resources rules will have the financial resources necessary Commission discretion. protect market participants and the for proper management of the risk CME commented that the requirement public by establishing uniform associated with their swap positions. under proposed § 37.1401(g) that SEFs standards and a system of Commission These rules will also further the goal of provide the Commission with timely oversight that ensures that trading minimizing systemic risk. advance notice of all planned changes to automated systems that may impact the occurs on a financially stable facility, (5) Other Public Interest Considerations reliability of such systems is which in turn, will mitigate the risk of 1144 market disruptions, financial losses, and The Commission has not identified burdensome and not cost-effective. systemic problems that could arise from any effects that these rules will have on In response to this comment, the a SEF’s failure to maintain adequate other public interest considerations Commission is reducing the burden and financial resources. These requirements other than those enumerated above. cost associated with the proposed rule will enable a SEF to fulfill its by requiring a SEF to promptly advise 8. Emergency Operations and System the Commission only of all ‘‘significant’’ responsibilities of ensuring that trading Safeguards occurs on a liquid, fair, and financially system malfunctions, and to provide secure platform by maintaining (a) Background timely advance notification of only ‘‘material’’ changes to automated appropriate minimum financial The Commission’s guidance for Core resources on hand and on an ongoing systems or risk analysis and oversight Principle 8 addresses procedures for programs (the proposed rule required basis to sustain operations for a handling emergency situations. reasonable period of time. Additionally, notice of all system malfunctions and all Specifically, the guidance referenced in changes to programs of risk analysis and in the event that a SEF does have to § 37.801 provides that a SEF can comply wind down its operations, SEFs that oversight). with Core Principle 8 by having rules While no comments addressed the have sufficient amounts of liquid that allow it to intervene as necessary to subject directly, the Commission is also financial resources will be better maintain markets with fair and orderly moving several proposed provisions to positioned to close out trading in a trading and to prevent or address guidance.1145 The Commission believes manner not disruptive to market manipulation or disruptive trading that the combination of rules and participants or to members of the public practices by, among other things, guidance governing a SEF’s emergency who rely on SEF prices or who are imposing or modifying position limits, operations will provide SEFs with customers or shareholders of market intraday market restrictions, or special sufficient flexibility to develop optimal participants. margin requirements. emergency systems and procedures, (2) Efficiency, Competitiveness, and Section 37.1401 codifies Core while ensuring that SEFs will also take Financial Integrity of the Markets Principle 14 by requiring a SEF to specific measures to maintain markets The financial resources rules promote establish and maintain a program of risk with fair and orderly trading. analysis and oversight to identify and the financial integrity of the markets by (c) Benefits minimize sources of operational risk requiring SEFs to have adequate The guidance in appendix B to Core operating resources (i.e., operating (§ 37.1401(a)) and to maintain a business continuity-disaster recovery Principle 8 governing emergency resources sufficient to fund both current operations ensures that SEFs have operations and ensure operations for a (‘‘BC DR’’) plan and resources, emergency procedures, and backup flexible authority to take prompt, sufficient length of time in the future), decisive action to restore orderly trading and preventing those SEFs that lack facilities sufficient to enable timely these resources from expanding in ways recovery and resumption of its operations (§ 37.1401(b)). Under 1143 ISDA Discussion Paper at 32 (Nov. 2011). that may ultimately harm the broader 1144 §§ 37.1401(d)–(e), a SEF must notify the CME Comment Letter at 36–37 (Feb. 22, financial market (i.e., confining the 2011). Commission promptly of certain operations of SEFs to levels their 1145 The Commission is moving the following financial resources can support). significant systems malfunctions, provisions to guidance: (1) Proposed § 37.1401(c) including the activation of the SEF’s suggesting that a SEF follow generally accepted Sections 37.702 and 37.703 will standards and best practices in addressing the promote financial integrity by ensuring BC–DR plan, and must provide advance notice of any material planned changes categories of its risk analysis and oversight program; that SEFs establish minimum financial (2) the portion of proposed § 37.1401(d) discussing standards for their members and to automated systems or risk analysis the SEFs obligation to resume the trading and and oversight programs. clearing of swaps on the next business day monitor those members to ensure that following a disruption; (3) the portion of proposed they continue to qualify as ECPs. (b) Costs § 37.1401(i) suggesting that a SEF’s testing of its automated systems and business continuity-disaster (3) Price Discovery ISDA estimated that SEFs will spend recovery capabilities be conducted by qualified, an average of $1,116,000 initially and independent professionals; (4) proposed The Commission has not identified § 37.1401(j) discussing a SEF’s coordination of its any effects that these rules will have on $866,000 annually on disaster recovery business continuity-disaster recovery plan with price discovery. procedures covered by the regulations those of others.

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and respond to market behavior that market emergencies using the methods financial integrity of the markets by could cause significant financial losses that it deems to be most appropriate, ensuring that in emergency situations, and widespread systemic failures that provided that its actions are taken in trading remains uninterrupted and could harm market participants and the good faith and the Commission is transactional data and positions are not public. notified of such actions in a certified lost. Active and periodic testing of In addition, the rules implementing rule submission. emergency systems and procedures Core Principle 14 reflect generally promotes confidence in the markets, accepted standards and best practices (e) Section 15(a) Factors encouraging liquidity and stability. with respect to the development, (1) Protection of Market Participants and Safeguarding the reliability, security, operation, reliability, security, and the Public and capacity of a SEF’s computer capacity of automated systems, which systems is also essential to the The rules and guidance outlining will reduce the frequency and severity mitigation of system risk for the emergency procedures pursuant to Core of automated system security breaches financial system as a whole. The global Principles 8 and 14 protect market or functional failures, thereby OTC market is estimated to have in participants and the public through both augmenting efforts to mitigate systemic excess of $600 trillion in outstanding discretionary actions taken by a SEF’s risk and ensure market continuity in the contracts.1147 The ability of SEFs to management as well as through event of system failures. Ensuring the recover and resume trading promptly in automated risk analysis systems that resilience of the automated systems of a the event of a disruption in their trigger specific responses. Because SEF and the ability of a SEF to recover operations is important to the U.S. automated systems play a central and and resume trading promptly in the economy. Notice to the Commission critical role in today’s electronic event of a disruption of its operations concerning systems malfunctions, financial market environment, oversight will be crucial to the robust and systems security incidents, or events of core principle compliance by SEFs transparent systemic risk management leading to the activation of a SEF’s BC– with respect to automated systems is an framework established by the Dodd- DR plan will assist the Commission’s essential part of effective oversight of Frank Act. oversight and its ability to assess both futures and swaps markets. Based on the Commission’s systemic risk levels. It would present Emergency rules and procedures experience, these requirements reflect unacceptable risks to the U.S. financial provide SEFs with the authority and an best practices in the futures markets, system if swaps markets that comprise established process by which to where DCM compliance with generally critical components of the world intervene in markets during times of accepted standards and best practices financial system were to become crisis so that trading can continue in an with respect to the development, unavailable for an extended period of orderly manner to the extent possible operation, reliability, security, and time. capacity of automated systems can and so that potential harm to market reduce the frequency and severity of participants and the public can be (3) Price Discovery automated system security breaches or avoided. Any interruption in trading in a swap functional failures, thereby augmenting Timely reporting to the Commission on a SEF can distort the price discovery efforts to mitigate systemic risk. These of significant system malfunctions, process on other related swaps.1148 The practices will be well-served in the material planned changes to automated Commission views the emergency swaps markets as well. systems, and material planned changes operations rules adopted herein as Finally, notice to the Commission to programs of risk analysis and likely to facilitate the price discovery concerning systems malfunctions, oversight is necessary for the process by mitigating the risk of security incidents, or any events leading Commission to fulfill its responsibility operational market interruptions from to the activation of a SEF’s BC–DR plan to oversee the swaps markets. Timely disjoining the forces of supply and will assist the Commission’s oversight reporting will also augment the demand. The presence of emergency and its ability to assess systemic risk Commission’s efforts to monitor authority procedures signals to the levels and intervene when needed to systemic risk (which protects the market that a SEF is a financially sound protect market participants and the public), and ultimately further the place to trade, thus attracting greater public. protection of market participants and, liquidity which leads to more accurate indirectly, the public by ensuring that price discovery. (d) Consideration of Alternatives automated systems are available, CME stated that the regulations reliable, secure, have adequate scalable (4) Sound Risk Management Practices pursuant to Core Principle 8 should capacity, and are effectively overseen. Participants who use SEF-traded clarify that a SEF has flexibility and (2) Efficiency, Competitiveness, and swaps to manage commercial price risks independence to address market Financial Integrity of the Markets should benefit from markets that behave emergencies.1146 As discussed in further in an orderly and controlled fashion in detail in the preamble, the Commission A SEF that has policies and the face of emergency situations. If did not issue rules for compliance with procedures in place addressing its prices move in an uncontrolled fashion Core Principle 8. However, the emergency authority will be better due to a market emergency, those who Commission clarified its guidance to the positioned to promptly intervene in are managing risk may be forced to exit core principle and is adopting this cost- markets to respond to or eliminate the market as a result of unwarranted mitigating alternative by revising the conditions that may deter participation margin calls or the deterioration of their guidance to make clear that SEFs retain and detract from overall market capital. Those who want to enter the the authority to respond independently confidence, which could lead to to emergencies in an effective and diminished market efficiency, 1147 See Statistical release: OTC derivatives timely manner consistent with the competitiveness, and perceptions of statistics at end–December 2011, The Bank for nature of the emergency. Accordingly, a financial integrity. Sophisticated International Settlements (May 2012), available at http://www.bis.org/publ/otc_hy1205.htm. SEF will have flexibility to address computer systems capable of 1148 For example, one swap may base its prices on automatically predicting operational the prices of one or more other swaps traded on 1146 CME Comment Letter at 28 (Feb. 22, 2011). risks will enhance the efficiency and other SEFs.

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market to manage risk may be able to do 23. Edward Rosen, on behalf of certain 37.1 Scope. so only at prices that do not reflect the dealers (‘‘Rosen et al.’’) 37.2 Applicable provisions. actual supply and demand 24. Edward Rosen, on behalf of certain trade 37.3 Requirements and procedures for fundamentals, but have moved due to associations (‘‘Rosen et al. II’’) registration. 25. Eris Exchange (‘‘Eris’’) 37.4 Procedures for listing products and an uncontrolled emergency situation. 26. Evolution Markets (‘‘Evolution’’) implementing rules. Reliably functioning computer 27. Farm Credit Council (‘‘FCC’’) 37.5 Information relating to swap execution systems and networks are crucial to 28. Federal Home Loan Banks (‘‘FHLB’’) facility compliance. comprehensive risk management, and 29. Financial Services Roundtable (‘‘FSR’’) 37.6 Enforceability. prompt notice to the Commission 30. Freddie Mac 37.7 Prohibited use of data collected for concerning systems malfunctions, 31. FX Alliance (‘‘FXall’’) regulatory purposes. systems security incidents, or any 32. Geneva Energy Markets, LLC (‘‘Geneva’’) 37.8 Boards of trade operating both a events leading to the activation of a 33. GFI Group (‘‘GFI’’) designated contract market and a swap SEF’s BC–DR plan will assist the 34. Global FX Division AFME, SIFMA and execution facility. ASIFMA (‘‘Global FX’’) 37.9 Methods of execution for required and Commission in its oversight role and 35. Goldman, Sachs & Co. (‘‘Goldman’’) permitted transactions. bolster its ability to assess systemic risk 36. ICAP 37.10 [Reserved] levels. Adequate system safeguards and 37. Industrial Energy Consumers of America Subpart B—Compliance with Core timely notice to the Commission (‘‘IECA’’) Principles regarding the status of those safeguards 38. Intercontinental Exchange (‘‘ICE’’) are crucial to mitigation of potential 39. International Swaps and Derivatives 37.100 Core Principle 1—Compliance with systemic risks. Should an emergency Association (‘‘ISDA’’) core principles. render a SEF temporarily inoperable, 40. Joanna Mallers, on behalf of certain Subpart C—Compliance with Rules trading firms (‘‘Mallers et al.’’) market participants will continue to be 41. Joint CFTC–SEC Advisory Committee on 37.200 Core Principle 2—Compliance with able to mitigate their risk through open Emerging Regulatory Issues rules. positions transferred from the 42. JP Morgan 37.201 Operation of swap execution facility inoperable SEF to a functioning one 43. LCH.Clearnet Group Limited (‘‘LCH’’) and compliance with rules. with little to no gap in exposure. In the 44. Managed Funds Association (‘‘MFA’’) 37.202 Access requirements. event of a longer period of down-time, 45. MarketAxess Holdings (‘‘MarketAxess’’) 37.203 Rule enforcement program. 46. Markit 37.204 Regulatory services provided by a market participants could establish third party. functionally equivalent open positions 47. MarkitSERV 48. MetLife 37.205 Audit trail. to mimic the intended result of the 49. Morgan Stanley 37.206 Disciplinary procedures and swap. 50. National Futures Association (‘‘NFA’’) sanctions. (5) Other Public Interest Considerations 51. Natural Gas Supply Association Subpart D—Swaps Not Readily Susceptible (‘‘NGSA’’) to Manipulation The Commission has not identified 52. Nodal Exchange (‘‘Nodal’’) any effects that these rules will have on 53. NYSE Liffe U.S. (‘‘NYSE Liffe’’) 37.300 Core Principle 3—Swaps not readily other public interest considerations 54. Parity Energy susceptible to manipulation. 37.301 General requirements. other than those enumerated above. 55. Phoenix Partners Group (‘‘Phoenix’’) 56. Representative Scott Garrett Subpart E—Monitoring of Trading and IV. List of Commenters 57. Representatives Scott Garrett, Gregory Trade Processing Meeks, Robert Hurt, and Gwen Moore 1. Alice Corporation (‘‘Alice’’) 37.400 Core Principle 4—Monitoring of (‘‘Representative Garrett et al.’’) 2. Allston Holdings LLC, on behalf of certain trading and trade processing. 58. State Street Corporation (‘‘State Street’’) trading firms (‘‘Allston et al.’’) 37.401 General requirements. 59. Swap Execution Facilities Hearing 3. Alternative Investment Management 37.402 Additional requirements for Statements Association (‘‘AIMA’’) physical-delivery swaps. 60. Swaps & Derivatives Market Association 4. American Benefits Council/Committee on 37.403 Additional requirements for cash- (‘‘SDMA’’) the Investment of Employee Benefit settled swaps. 61. Thomson Reuters (‘‘Reuters’’) Assets (‘‘ABC/CIEBA’’) 37.404 Ability to obtain information. 62. Traccr Limited 5. Americans for Financial Reform (‘‘AFR’’) 37.405 Risk controls for trading. 63. Tradeweb Markets (‘‘Tradeweb’’) 6. Argus Media (‘‘Argus’’) 37.406 Trade reconstruction. 64. TriOptima 7. Asset Management Group, Securities 37.407 Regulatory service provider. 65. TruMarx Data Partners (‘‘TruMarx’’) Industry and Financial Markets 37.408 Additional sources for compliance. Association (‘‘SIFMA AMG’’) 66. UBS Securities LLC (‘‘UBS’’) 8. Association of Institutional Investors 67. Wholesale Markets Brokers’ Association, Subpart F—Ability to Obtain Information (‘‘AII’’) Americas (‘‘WMBAA’’) 37.500 Core Principle 5—Ability to obtain 9. Better Markets 68. Working Group of Commercial Energy information. 10. Barclays Firms (‘‘Energy Working Group’’) 37.501 Establish and enforce rules. 11. BlackRock List of Subjects in 17 CFR Part 37 37.502 Collection of information. 12. Bloomberg 37.503 Provide information to the 13. CanDeal.ca Inc. (‘‘CanDeal’’) Registered entities, Registration Commission. 14. CBOE Futures Exchange (‘‘CBOE’’) application, Reporting and 37.504 Information-sharing agreements. 15. Chris Barnard recordkeeping requirements, Swaps, Subpart G—Position Limits or 16. CME Group (‘‘CME’’) Swap execution facilities. 17. Coalition for Derivatives End-Users Accountability For the reasons discussed in the (‘‘Coalition’’) 37.600 Core Principle 6—Position limits or 18. Commissioner Jill Sommers preamble, the Commission revises 17 accountability. (‘‘Commissioner Sommers’’) CFR part 37 to read as follows: 37.601 Additional sources for compliance. 19. David Neal 20. Depository Trust & Clearing Corporation PART 37—SWAP EXECUTION Subpart H—Financial Integrity of (‘‘DTCC’’) FACILITIES Transactions 21. Deutsche Bank (‘‘Deutsche’’) 37.700 Core Principle 7—Financial integrity 22. Eaton Vance Management (‘‘Eaton Subpart A—General Provisions of transactions. Vance’’) Sec. 37.701 Required clearing.

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37.702 General financial integrity. § 37.2 Applicable provisions. (ii) Section 40.8 of this chapter sets 37.703 Monitoring for financial soundness. A swap execution facility shall forth those sections of the application Subpart I—Emergency Authority comply with the requirements of this that will be made publicly available, notwithstanding a request for 37.800 Core Principle 8—Emergency part and all other applicable authority. Commission regulations, including confidential treatment pursuant to 37.801 Additional sources for compliance. § 1.60 and part 9 of this chapter, and § 145.9 of this chapter. including any related definitions and (3) Amendment of application prior or Subpart J—Timely Publication of Trading cross-referenced sections. subsequent to full registration. An Information applicant amending a pending 37.900 Core Principle 9—Timely § 37.3 Requirements and procedures for application for registration as a swap publication of trading information. registration. execution facility or requesting an 37.901 General requirements. (a) Requirements for registration. (1) amendment to an order of registration Subpart K—Recordkeeping and Reporting Any person operating a facility that shall file an amended application offers a trading system or platform in electronically with the Secretary of the 37.1000 Core Principle 10—Recordkeeping which more than one market participant Commission in the manner specified by and reporting. has the ability to execute or trade swaps 37.1001 Recordkeeping. the Commission. A swap execution with more than one other market facility shall file any amendment to an Subpart L—Antitrust Considerations participant on the system or platform application subsequent to registration as 37.1100 Core Principle 11—Antitrust shall register the facility as a swap a submission under part 40 of this considerations. execution facility under this part or as chapter or as specified by the 37.1101 Additional sources for compliance. a designated contract market under part Commission. Subpart M—Conflicts of Interest 38 of this chapter. (4) Effect of incomplete application. If (2) Minimum trading functionality. A an application is incomplete pursuant to 37.1200 Core Principle 12—Conflicts of swap execution facility shall, at a paragraph (b)(1) of this section, the interest. minimum, offer an Order Book as Commission shall notify the applicant Subpart N—Financial Resources defined in paragraph (a)(3) of this that its application will not be deemed 37.1300 Core Principle 13—Financial section. to have been submitted for purposes of resources. (3) Order book means: the Commission’s review. 37.1301 General requirements. (i) An electronic trading facility, as (5) Commission review period. For an 37.1302 Types of financial resources. that term is defined in section 1a(16) of applicant who submits its application 37.1303 Computation of projected operating the Act; for registration as a swap execution costs to meet financial resource (ii) A trading facility, as that term is facility on or after August 5, 2015 the requirement. defined in section 1a(51) of the Act; or Commission shall review such 37.1304 Valuation of financial resources. (iii) A trading system or platform in application pursuant to the 180-day 37.1305 Liquidity of financial resources. which all market participants in the timeframe and procedures specified in 37.1306 Reporting to the Commission. trading system or platform have the 37.1307 Delegation of authority. section 6(a) of the Act. ability to enter multiple bids and offers, (6) Commission determination. (i) The Subpart O—System Safeguards observe or receive bids and offers Commission shall issue an order 37.1400 Core Principle 14—System entered by other market participants, granting registration upon a safeguards. and transact on such bids and offers. Commission determination, in its own 37.1401 Requirements. (b) Procedures for full registration. (1) discretion, that the applicant has Subpart P—Designation of Chief An applicant requesting registration as a demonstrated compliance with the Act Compliance Officer swap execution facility shall: and the Commission’s regulations (i) File electronically a complete Form 37.1500 Core Principle 15—Designation of applicable to swap execution facilities. chief compliance officer. SEF as set forth in appendix A to this If deemed appropriate, the Commission 37.1501 Chief compliance officer. part, or any successor forms, and all may issue an order granting registration Appendix A to Part 37—Form SEF information and documentation subject to conditions. Appendix B to Part 37—Guidance on, and described in such forms with the (ii) The Commission may issue an Acceptable Practices in, Compliance Secretary of the Commission in the form order denying registration upon a with Core Principles and manner specified by the Commission determination, in its own Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a– Commission; discretion, that the applicant has not 2, 7b–3, and 12a, as amended by Titles VII (ii) Provide to the Commission, upon demonstrated compliance with the Act and VIII of the Dodd-Frank Wall Street the Commission’s request, any and the Commission’s regulations Reform and Consumer Protection Act, Pub. L. additional information and applicable to swap execution facilities. 111–203, 124 Stat. 1376. documentation necessary to review an (c) Temporary registration. An application; and applicant seeking registration as a swap Subpart A—General Provisions (iii) Request from the Commission a execution facility may request that the § 37.1 Scope. unique, extensible, alphanumeric code Commission grant the applicant for the purpose of identifying the swap temporary registration by complying The provisions of this part shall apply execution facility pursuant to part 45 of with the requirements in paragraph to every swap execution facility that is this chapter. (c)(1) of this section. registered or is applying to become (2) Request for confidential treatment. (1) Requirements for temporary registered as a swap execution facility (i) An applicant requesting registration registration. The Commission shall grant under section 5h of the Commodity as a swap execution facility shall a request for temporary registration Exchange Act (‘‘the Act’’); provided, identify with particularity any upon a Commission determination that however, nothing in this provision information in the application that will the applicant has: affects the eligibility of swap execution be subject to a request for confidential (i) Completed all of the requirements facilities to operate under the provisions treatment pursuant to § 145.9 of this under paragraph (b)(1)(i) of this section; of parts 38 or 49 of this chapter. chapter. and

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(ii) Submitted a notice to the receipt of a notice from the Commission (iii) A discussion of the transferee’s Commission, concurrent with the filing granting such temporary registration ability to comply with the Act, of the application under paragraph until the Commission grants or denies including the core principles applicable (b)(1)(i) of this section, requesting that registration pursuant to paragraph (b)(6) to swap execution facilities, and the the Commission grant the applicant of this section. On the termination date Commission’s regulations thereunder; temporary registration. An applicant of paragraph (c) of this section, the (iv) The governing documents of the that is currently operating a swaps- Commission shall review such transferee, including, but not limited to, trading platform in reliance upon either applicant’s application pursuant to the articles of incorporation and bylaws; an exemption granted by the time period and procedures in (v) The transferee’s rules marked to Commission or some form of no-action paragraph (b)(5) of this section. show changes from the current rules of relief granted by the Commission staff (6) Temporary registration for the swap execution facility; shall include in such notice a applicants that are operational (vi) A representation by the transferee certification that the applicant is designated contract markets. An that it: operating pursuant to such exemption applicant that is an operational (A) Will be the surviving entity and or no-action relief. designated contract market and is also successor-in-interest to the transferor (iii) The Commission may deny a seeking to register as a swap execution swap execution facility and will retain request for temporary registration upon facility in order to transfer one or more and assume, without limitation, all of a Commission determination that the of its contracts may request that the the assets and liabilities of the applicant has not met the requirements Commission grant the applicant transferor; under paragraphs (c)(1)(i) and (c)(1)(ii) temporary registration by complying (B) Will assume responsibility for of this section. with the requirements in paragraph complying with all applicable (2) Operation pursuant to a grant of (c)(1) of this section. The termination of provisions of the Act and the temporary registration. An applicant temporary registration provision in Commission’s regulations promulgated may operate as a swap execution facility paragraph (c)(5) of this section shall not thereunder, including this part and under temporary registration upon apply to an applicant that is a non- appendices thereto; receipt of a notice from the Commission dormant designated contract market as (C) Will assume, maintain, and granting such temporary registration, described in this paragraph. enforce all rules implementing and but in no case may begin operating as (d) Reinstatement of dormant complying with the core principles a temporarily registered swap execution registration. A dormant swap execution applicable to swap execution facilities, facility before August 5, 2013. facility as defined in section 40.1 of this including the adoption of the (3) Expiration of temporary chapter may reinstate its registration transferor’s rulebook, as amended in the registration. The temporary registration under the procedures of paragraph (b) of request, and that any such amendments for a swap execution facility shall expire this section. The applicant may rely will be submitted to the Commission on the earlier of the date that: upon previously submitted materials if pursuant to section 5c(c) of the Act and (i) The Commission grants or denies such materials accurately describe the part 40 of this chapter; registration of the swap execution dormant swap execution facility’s (D) Will comply with all self- facility as provided under paragraph (b) conditions at the time that it applies for regulatory responsibilities except if of this section; reinstatement of its registration. otherwise indicated in the request, and (ii) The swap execution facility (e) Request for transfer of registration. will maintain and enforce all self- withdraws its application for (1) A swap execution facility seeking to regulatory programs; and registration pursuant to paragraph (f) of transfer its registration from its current (E) Will notify market participants of this section; or legal entity to a new legal entity as a all changes to the transferor’s rulebook (iii) Temporary registration terminates result of a corporate change shall file a prior to the transfer and will further pursuant to paragraph (c)(5) of this request for approval to transfer such notify market participants of the section. registration with the Secretary of the concurrent transfer of the registration to (4) Effect of temporary registration. A Commission in the form and manner the transferee upon Commission grant of temporary registration by the specified by the Commission. approval and issuance of an order Commission does not affect the right of (2) Timeline for filing a request for permitting this transfer. the Commission to grant or deny transfer of registration. A request for (vii) A representation by the registration as provided under transfer of registration shall be filed no transferee that upon the transfer: paragraph (b) of this section. later than three months prior to the (A) It will assume responsibility for (5) Termination of temporary anticipated corporate change; or in the and maintain compliance with core registration. Paragraph (c) of this section event that the swap execution facility principles for all swaps previously shall terminate two years from the could not have known of the anticipated made available for trading through the effective date of this regulation except change three months prior to the transferor, whether by certification or as provided for under paragraph (c)(6) of anticipated change, as soon as it knows approval; and this section and except for an applicant of such change. (B) None of the proposed rule changes who requested that the Commission (3) Required information. The request will affect the rights and obligations of grant the applicant temporary for transfer of registration shall include any market participant. registration by complying with the the following: (4) Commission determination. Upon requirements in paragraph (c)(1) of this (i) The underlying agreement that review of a request for transfer of section before the termination of governs the corporate change; registration, the Commission, as soon as paragraph (c) of this section and has not (ii) A description of the corporate practicable, shall issue an order either been granted or denied registration change, including the reason for the approving or denying the request. under paragraph (b)(6) of this section by change and its impact on the swap (f) Request for withdrawal of the time of the termination of paragraph execution facility, including its application for registration. An (c) of this section. Such an applicant governance and operations, and its applicant for registration as a swap may operate as a swap execution facility impact on the rights and obligations of execution facility may withdraw its under temporary registration upon market participants; application submitted pursuant to

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paragraph (b) of this section by filing a such terms and conditions, new rules, with the requirements of section 5c(c) of withdrawal request electronically with or rule amendments pursuant to the the Act and part 40 of this chapter, and the Secretary of the Commission. procedures under part 40 of this all other applicable Commission Withdrawal of an application for chapter. regulations. registration shall not affect any action (d) Any swap terms and conditions or (4) Certification. Upon a transfer of an taken or to be taken by the Commission rules submitted as part of an application equity interest of fifty percent or more based upon actions, activities, or events to reinstate the registration of a dormant in a swap execution facility, the swap occurring during the time that the swap execution facility, as defined in execution facility shall file application was pending with the § 40.1 of this chapter, shall be electronically with the Secretary of the Commission. considered for approval by the Commission at its Washington, DC (g) Request for vacation of Commission at the time the Commission headquarters at [email protected] registration. A swap execution facility approves the dormant swap execution and the Division of Market Oversight at may request that its registration be facility’s reinstatement of registration. [email protected], a vacated under section 7 of the Act by certification that the swap execution filing a vacation request electronically § 37.5 Information relating to swap facility meets all of the requirements of execution facility compliance. with the Secretary of the Commission. section 5h of the Act and the Vacation of registration shall not affect (a) Request for information. Upon the Commission regulations adopted any action taken or to be taken by the Commission’s request, a swap execution thereunder, no later than two business Commission based upon actions, facility shall file with the Commission days following the date on which the activities, or events occurring during the information related to its business as a equity interest of fifty percent or more time that the swap execution facility swap execution facility in the form and was acquired. was registered by the Commission. manner and within the time period as (d) Delegation of authority. The (h) Delegation of authority. The the Commission specifies in its request. Commission hereby delegates, until it Commission hereby delegates, until it (b) Demonstration of compliance. orders otherwise, the authority set forth orders otherwise, to the Director of the Upon the Commission’s request, a swap in this section to the Director of the Division of Market Oversight or such execution facility shall file with the Division of Market Oversight or such other employee or employees as the Commission a written demonstration, other employee or employees as the Director may designate from time to containing supporting data, information, Director may designate from time to time, upon consultation with the and documents that it is in compliance time. The Director may submit to the General Counsel or the General with one or more core principles or with Commission for its consideration any Counsel’s delegate, authority to notify its other obligations under the Act or the matter that has been delegated in this an applicant seeking registration that its Commission’s regulations as the paragraph. Nothing in this paragraph application is incomplete and that it Commission specifies in its request. The prohibits the Commission, at its will not be deemed to have been swap execution facility shall file such election, from exercising the authority submitted for purposes of the written demonstration in the form and delegated in this paragraph. Commission’s review, to notify an manner and within the time period as applicant seeking registration under the Commission specifies in its request. § 37.6 Enforceability. section 6(a) of the Act that its (c) Equity interest transfer—(1) Equity (a) A transaction entered into on or application is materially incomplete and interest transfer notification. A swap pursuant to the rules of a swap the running of the 180-day period is execution facility shall file with the execution facility shall not be void, stayed, and to notify an applicant Commission a notification of each voidable, subject to rescission, seeking temporary registration that its transaction that the swap execution otherwise invalidated, or rendered request is granted or denied. The facility enters into involving the transfer unenforceable as a result of: Director may submit to the Commission of fifty percent or more of the equity (1) A violation by the swap execution for its consideration any matter that has interest in the swap execution facility. facility of the provisions of section 5h been delegated in this paragraph. The Commission may, upon receiving of the Act or this part; Nothing in this paragraph prohibits the such notification, request supporting (2) Any Commission proceeding to Commission, at its election, from documentation of the transaction. alter or supplement a rule, term, or (2) Timing of notification. The equity exercising the authority delegated in condition under section 8a(7) of the Act interest transfer notice described in this paragraph. or to declare an emergency under paragraph (c)(1) of this section shall be section 8a(9) of the Act; or § 37.4 Procedures for listing products and filed electronically with the Secretary of (3) Any other proceeding the effect of implementing rules. the Commission at its Washington, DC which is to: (a) An applicant for registration as a headquarters at [email protected] (i) Alter or supplement a specific term swap execution facility may submit a and the Division of Market Oversight at or condition or trading rule or swap’s terms and conditions prior to [email protected], at the procedure; or listing the product as part of its earliest possible time but in no event (ii) Require a swap execution facility application for registration. later than the open of business ten to adopt a specific term or condition, (b) Any swap terms and conditions or business days following the date upon trading rule or procedure, or to take or rules submitted as part of a swap which the swap execution facility enters refrain from taking a specific action. execution facility’s application for into a firm obligation to transfer the (b) A swap execution facility shall registration shall be considered for equity interest. provide each counterparty to a approval by the Commission at the time (3) Rule filing. Notwithstanding the transaction that is entered into on or the Commission issues the swap foregoing, if any aspect of an equity pursuant to the rules of the swap execution facility’s order of registration. interest transfer described in paragraph execution facility with a written record (c) After the Commission issues the (c)(1) of this section requires a swap of all of the terms of the transaction order of registration, a swap execution execution facility to file a rule as which shall legally supersede any facility shall submit a swap’s terms and defined in part 40 of this chapter, then previous agreement and serve as a conditions, including amendments to the swap execution facility shall comply confirmation of the transaction. The

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confirmation of all terms of the for each swap whether the execution or (iii) The swap execution facility shall transaction shall take place at the same trading of such swaps is taking place on ensure that its trading protocols provide time as execution; provided that specific the designated contract market or on the each of its market participants with customer identifiers for accounts swap execution facility. equal priority in receiving requests for included in bunched orders involving quotes and in transmitting and swaps need not be included in § 37.9 Methods of execution for required displaying for execution responsive and permitted transactions. confirmations provided by a swap orders. execution facility if the applicable (a) Execution methods for required (b) Time delay requirement for requirements of § 1.35(b)(5) of this transactions. (1) Required transaction required transactions on an order chapter are met. means any transaction involving a swap book—(1) Time delay requirement. A that is subject to the trade execution swap execution facility shall require § 37.7 Prohibited use of data collected for requirement in section 2(h)(8) of the that a broker or dealer who seeks to regulatory purposes. Act. either execute against its customer’s (2) Execution methods. (i) Each A swap execution facility shall not order or execute two of its customers’ Required Transaction that is not a block use for business or marketing purposes orders against each other through the trade as defined in § 43.2 of this chapter any proprietary data or personal swap execution facility’s Order Book, shall be executed on a swap execution information it collects or receives, from following some form of pre-arrangement facility in accordance with one of the or on behalf of any person, for the or pre-negotiation of such orders, be following methods of execution: purpose of fulfilling its regulatory subject to at least a 15 second time delay (A) An Order Book as defined in obligations; provided, however, that a between the entry of those two orders swap execution facility may use such § 37.3(a)(3); or (B) A Request for Quote System, as into the Order Book, such that one side data or information for business or of the potential transaction is disclosed marketing purposes if the person from defined in paragraph (a)(3) of this section, that operates in conjunction and made available to other market whom it collects or receives such data participants before the second side of or information clearly consents to the with an Order Book as defined in § 37.3(a)(3). the potential transaction, whether for swap execution facility’s use of such the broker’s or dealer’s own account or data or information in such manner. A (ii) In providing either one of the execution methods set forth in for a second customer, is submitted for swap execution facility shall not execution. condition access to its market(s) or paragraph (a)(2)(i)(A) or (B) of this section, a swap execution facility may (2) Adjustment of time delay market services on a person’s consent to requirement. A swap execution facility the swap execution facility’s use of for purposes of execution and communication use any means of may adjust the time period of the 15 proprietary data or personal information second time delay requirement for business or marketing purposes. A interstate commerce, including, but not limited to, the mail, internet, email, and described in paragraph (b)(1) of this swap execution facility, where section, based upon a swap’s liquidity necessary for regulatory purposes, may telephone, provided that the chosen execution method satisfies the or other product-specific considerations; share such data or information with one however, the time delay shall be set for or more swap execution facilities or requirements provided in § 37.3(a)(3) for Order Books or in paragraph (a)(3) of a sufficient period of time so that an designated contract markets registered order is exposed to the market and other with the Commission. this section for Request for Quote Systems. market participants have a meaningful § 37.8 Boards of trade operating both a (3) Request for quote system means a opportunity to execute against such designated contract market and a swap trading system or platform in which a order. execution facility. market participant transmits a request (c) Execution methods for permitted (a) An entity that intends to operate for a quote to buy or sell a specific transactions. (1) Permitted transaction both a designated contract market and a instrument to no less than three market means any transaction not involving a swap execution facility shall separately participants in the trading system or swap that is subject to the trade register the two entities pursuant to the platform, to which all such market execution requirement in section 2(h)(8) designated contract market designation participants may respond. The three of the Act. procedures set forth in part 38 of this market participants shall not be (2) Execution methods. A swap chapter and the swap execution facility affiliates of or controlled by the execution facility may offer any method registration procedures set forth in this requester and shall not be affiliates of or of execution for each Permitted part. On an ongoing basis, the entity controlled by each other. A swap Transaction. shall comply with the core principles execution facility that offers a request § 37.10 [Reserved] for designated contract markets under for quote system in connection with section 5(d) of the Act and the Required Transactions shall provide the Subpart B—Compliance With Core regulations under part 38 of this chapter following functionality: Principles and the core principles for swap (i) At the same time that the requester execution facilities under section 5h of receives the first responsive bid or offer, § 37.100 Core Principle 1—Compliance the Act and the regulations under this the swap execution facility shall with core principles. part. communicate to the requester any firm (a) In general. To be registered, and (b) A board of trade, as defined in bid or offer pertaining to the same maintain registration, as a swap section 1a(6) of the Act, that operates instrument resting on any of the swap execution facility, the swap execution both a designated contract market and a execution facility’s Order Books, as facility shall comply with— swap execution facility and that uses defined in § 37.3(a)(3); (1) The core principles described in the same electronic trade execution (ii) The swap execution facility shall section 5h of the Act; and system for executing and trading swaps provide the requester with the ability to (2) Any requirement that the on the designated contract market and execute against such firm resting bids or Commission may impose by rule or on the swap execution facility shall offers along with any responsive orders; regulation pursuant to section 8a(5) of clearly identify to market participants and the Act.

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(b) Reasonable discretion of a swap (1) The terms and conditions of any accommodation trading, and improper execution facility. Unless otherwise swaps traded or processed on or through cross trading. Specific trading practices determined by the Commission by rule the swap execution facility; that shall be prohibited include front- or regulation, a swap execution facility (2) Access to the swap execution running, wash trading, pre-arranged described in paragraph (a) of this facility; trading (except for block trades section shall have reasonable discretion (3) Trade practice rules; permitted by part 43 of this chapter or in establishing the manner in which the (4) Audit trail requirements; other types of transactions certified to or swap execution facility complies with (5) Disciplinary rules; and approved by the Commission pursuant the core principles described in section (6) Mandatory trading requirements. to the procedures under part 40 of this 5h of the Act. § 37.202 Access requirements. chapter), fraudulent trading, money passes, and any other trading practices Subpart C—Compliance With Rules (a) Impartial access to markets and that a swap execution facility deems to market services. A swap execution be abusive. A swap execution facility § 37.200 Core Principle 2—Compliance facility shall provide any eligible with rules. shall also prohibit any other contract participant and any manipulative or disruptive trading A swap execution facility shall: independent software vendor with practices prohibited by the Act or by the (a) Establish and enforce compliance impartial access to its market(s) and Commission pursuant to Commission with any rule of the swap execution market services, including any regulation. indicative quote screens or any similar facility, including the terms and (b) Capacity to detect and investigate pricing data displays, provided that the conditions of the swaps traded or rule violations. A swap execution facility has: processed on or through the swap facility shall have arrangements and (1) Criteria governing such access that execution facility and any limitation on resources for effective enforcement of its are impartial, transparent, and applied access to the swap execution facility; rules. Such arrangements shall include in a fair and nondiscriminatory manner; (b) Establish and enforce trading, the authority to collect information and (2) Procedures whereby eligible trade processing, and participation rules documents on both a routine and non- contract participants provide the swap that will deter abuses and have the routine basis, including the authority to execution facility with written or capacity to detect, investigate, and examine books and records kept by the electronic confirmation of their status as enforce those rules, including means to swap execution facility’s members and eligible contract participants, as defined provide market participants with by persons under investigation. A swap by the Act and Commission regulations, impartial access to the market and to execution facility’s arrangements and prior to obtaining access; and capture information that may be used in resources shall also facilitate the direct (3) Comparable fee structures for establishing whether rule violations supervision of the market and the eligible contract participants and have occurred; analysis of data collected to determine independent software vendors receiving whether a rule violation has occurred. (c) Establish rules governing the comparable access to, or services from, operation of the facility, including rules the swap execution facility. (c) Compliance staff and resources. A specifying trading procedures to be used (b) Jurisdiction. Prior to granting any swap execution facility shall establish in entering and executing orders traded eligible contract participant access to its and maintain sufficient compliance staff or posted on the facility, including facilities, a swap execution facility shall and resources to ensure that it can block trades; and require that the eligible contract conduct effective audit trail reviews, (d) Provide by its rules that when a participant consent to its jurisdiction. trade practice surveillance, market swap dealer or major swap participant (c) Limitations on access. A swap surveillance, and real-time market enters into or facilitates a swap that is execution facility shall establish and monitoring. The swap execution subject to the mandatory clearing impartially enforce rules governing any facility’s compliance staff shall also be requirement of section 2(h) of the Act, decision to allow, deny, suspend, or sufficient to address unusual market or the swap dealer or major swap permanently bar eligible contract trading events as they arise, and to participant shall be responsible for participants’ access to the swap conduct and complete investigations in compliance with the mandatory trading execution facility, including when such a timely manner, as set forth in requirement under section 2(h)(8) of the decisions are made as part of a § 37.203(f). Act. disciplinary or emergency action taken (d) Automated trade surveillance by the swap execution facility. system. A swap execution facility shall § 37.201 Operation of swap execution maintain an automated trade facility and compliance with rules. § 37.203 Rule enforcement program. surveillance system capable of detecting (a) A swap execution facility shall A swap execution facility shall potential trade practice violations. The establish rules governing the operation establish and enforce trading, trade automated trade surveillance system of the swap execution facility, processing, and participation rules that shall load and process daily orders and including, but not limited to, rules will deter abuses and it shall have the trades no later than 24 hours after the specifying trading procedures to be capacity to detect, investigate, and completion of the trading day. The followed by members and market enforce those rules. automated trade surveillance system participants when entering and (a) Abusive trading practices shall have the capability to detect and executing orders traded or posted on the prohibited. A swap execution facility flag specific trade execution patterns swap execution facility, including block shall prohibit abusive trading practices and trade anomalies; compute, retain, trades, as defined in part 43 of this on its markets by members and market and compare trading statistics; compute chapter, if offered. participants. Swap execution facilities trade gains, losses, and swap-equivalent (b) A swap execution facility shall that permit intermediation shall positions; reconstruct the sequence of establish and impartially enforce prohibit customer-related abuses market activity; perform market compliance with the rules of the swap including, but not limited to, trading analyses; and support system users to execution facility, including, but not ahead of customer orders, trading perform in-depth analyses and ad hoc limited to— against customer orders, queries of trade-related data.

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(e) Real-time market monitoring. A shall prepare a written report including available to the Commission upon swap execution facility shall conduct the reason the investigation was request. real-time market monitoring of all initiated; a summary of the complaint, (c) Regulatory decisions required from trading activity on its system(s) or if any; the relevant facts; and the swap execution facility. A swap platform(s) to identify disorderly trading compliance staff’s analysis and execution facility that elects to use the and any market or system anomalies. A conclusions. service of a regulatory service provider swap execution facility shall have the (5) Warning letters. No more than one shall retain exclusive authority in all authority to adjust trade prices or cancel warning letter may be issued to the substantive decisions made by its trades when necessary to mitigate same person or entity found to have regulatory service provider, including, market disrupting events caused by committed the same rule violation but not limited to, decisions involving malfunctions in its system(s) or within a rolling twelve month period. the cancellation of trades, the issuance platform(s) or errors in orders submitted (g) Additional sources for compliance. of disciplinary charges against members by members and market participants. A swap execution facility may refer to or market participants, and denials of Any trade price adjustments or trade the guidance and/or acceptable access to the trading platform for cancellations shall be transparent to the practices in Appendix B of this part to disciplinary reasons. A swap execution market and subject to standards that are demonstrate to the Commission facility shall document any instances clear, fair, and publicly available. compliance with the requirements of where its actions differ from those (f) Investigations and investigation § 37.203. recommended by its regulatory service reports—(1) Procedures. A swap provider, including the reasons for the execution facility shall establish and § 37.204 Regulatory services provided by course of action recommended by the maintain procedures that require its a third party. regulatory service provider and the compliance staff to conduct (a) Use of regulatory service provider reasons why the swap execution facility investigations of possible rule permitted. A swap execution facility chose a different course of action. violations. An investigation shall be may choose to contract with a registered commenced upon the receipt of a futures association or another registered § 37.205 Audit trail. request from Commission staff or upon entity, as such terms are defined under A swap execution facility shall the discovery or receipt of information the Act, or the Financial Industry establish procedures to capture and by the swap execution facility that Regulatory Authority (collectively, retain information that may be used in indicates a reasonable basis for finding ‘‘regulatory service providers’’), for the establishing whether rule violations that a violation may have occurred or provision of services to assist in have occurred. will occur. complying with the Act and (a) Audit trail required. A swap (2) Timeliness. Each compliance staff Commission regulations thereunder, as investigation shall be completed in a execution facility shall capture and approved by the Commission. Any swap timely manner. Absent mitigating retain all audit trail data necessary to factors, a timely manner is no later than execution facility that chooses to detect, investigate, and prevent 12 months after the date that an contract with a regulatory service customer and market abuses. Such data investigation is opened. Mitigating provider shall ensure that such provider shall be sufficient to reconstruct all factors that may reasonably justify an has the capacity and resources indications of interest, requests for investigation taking longer than 12 necessary to provide timely and quotes, orders, and trades within a months to complete include the effective regulatory services, including reasonable period of time and to provide complexity of the investigation, the adequate staff and automated evidence of any violations of the rules number of firms or individuals involved surveillance systems. A swap execution of the swap execution facility. An as potential wrongdoers, the number of facility shall at all times remain acceptable audit trail shall also permit potential violations to be investigated, responsible for the performance of any the swap execution facility to track a and the volume of documents and data regulatory services received, for customer order from the time of receipt to be examined and analyzed by compliance with the swap execution through fill, allocation, or other compliance staff. facility’s obligations under the Act and disposition, and shall include both (3) Investigation reports when a Commission regulations, and for the order and trade data. reasonable basis exists for finding a regulatory service provider’s (b) Elements of an acceptable audit violation. Compliance staff shall submit performance on its behalf. trail program—(1) Original source a written investigation report for (b) Duty to supervise regulatory documents. A swap execution facility’s disciplinary action in every instance in service provider. A swap execution audit trail shall include original source which compliance staff determines from facility that elects to use the service of documents. Original source documents surveillance or from an investigation a regulatory service provider shall retain include unalterable, sequentially- that a reasonable basis exists for finding sufficient compliance staff to supervise identified records on which trade a rule violation. The investigation report the quality and effectiveness of the execution information is originally shall include the reason the regulatory services provided on its recorded, whether recorded manually or investigation was initiated; a summary behalf. Compliance staff of the swap electronically. Records for customer of the complaint, if any; the relevant execution facility shall hold regular orders (whether filled, unfilled, or facts; compliance staff’s analysis and meetings with the regulatory service cancelled, each of which shall be conclusions; and a recommendation as provider to discuss ongoing retained or electronically captured) to whether disciplinary action should be investigations, trading patterns, market shall reflect the terms of the order, an pursued. participants, and any other matters of account identifier that relates back to (4) Investigation reports when no regulatory concern. A swap execution the account(s) owner(s), the time of reasonable basis exists for finding a facility shall also conduct periodic order entry, and the time of trade violation. If after conducting an reviews of the adequacy and execution. Swap execution facilities investigation, compliance staff effectiveness of services provided on its shall require that all orders, indications determines that no reasonable basis behalf. Such reviews shall be of interest, and requests for quotes be exists for finding a rule violation, it documented carefully and made immediately captured in the audit trail.

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(2) Transaction history database. A identification rules; and reviews of shall not be required to be transcribed swap execution facility’s audit trail account numbers and customer type unless: program shall include an electronic indicator codes in trade records to test (i) The transcript is requested by transaction history database. An for accuracy and improper use. Commission staff or the respondent; adequate transaction history database (2) Enforcement program required. A (ii) The decision is appealed pursuant includes a history of all indications of swap execution facility shall establish a to the rules of the swap execution interest, requests for quotes, orders, and program for effective enforcement of its facility; or trades entered into a swap execution audit trail and recordkeeping (iii) The decision is reviewed by the facility’s trading system or platform, requirements. An effective program Commission pursuant to section 8c of including all order modifications and shall identify members and persons and the Act or part 9 of this chapter. In all cancellations. An adequate transaction firms subject to the swap execution other instances, a summary record of a history database also includes: facility’s recordkeeping rules that have hearing is permitted. (i) All data that are input into the failed to maintain high levels of (d) Decisions. Promptly following a trade entry or matching system for the compliance with such requirements, hearing conducted in accordance with transaction to match and clear; and impose meaningful sanctions when the rules of the swap execution facility, (ii) The customer type indicator code; deficiencies are found. Sanctions shall the disciplinary panel shall render a (iii) Timing and sequencing data be sufficient to deter recidivist behavior. written decision based upon the weight adequate to reconstruct trading; and No more than one warning letter shall of the evidence contained in the record (iv) Identification of each account to be issued to the same person or entity of the proceeding and shall provide a which fills are allocated. copy to the respondent. The decision (3) Electronic analysis capability. A found to have committed the same violation of audit trail or recordkeeping shall include: swap execution facility’s audit trail (1) The notice of charges or a program shall include electronic requirements within a rolling twelve month period. summary of the charges; analysis capability with respect to all (2) The answer, if any, or a summary audit trail data in the transaction history § 37.206 Disciplinary procedures and of the answer; database. Such electronic analysis sanctions. (3) A summary of the evidence capability shall ensure that the swap A swap execution facility shall produced at the hearing or, where execution facility has the ability to establish trading, trade processing, and appropriate, incorporation by reference reconstruct indications of interest, participation rules that will deter abuses of the investigation report; requests for quotes, orders, and trades, and have the capacity to enforce such (4) A statement of findings and and identify possible trading violations rules through prompt and effective conclusions with respect to each charge, with respect to both customer and disciplinary action, including and a complete explanation of the market abuse. suspension or expulsion of members or evidentiary and other basis for such (4) Safe storage capability. A swap findings and conclusions with respect to execution facility’s audit trail program market participants that violate the rules of the swap execution facility. each charge; shall include the capability to safely (5) An indication of each specific rule (a) Enforcement staff. A swap store all audit trail data retained in its that the respondent was found to have execution facility shall establish and transaction history database. Such safe violated; and maintain sufficient enforcement staff storage capability shall include the (6) A declaration of all sanctions and resources to effectively and capability to store all data in the imposed against the respondent, promptly prosecute possible rule database in a manner that protects it including the basis for such sanctions violations within the disciplinary from unauthorized alteration, as well as and the effective date of such sanctions. from accidental erasure or other loss. jurisdiction of the swap execution (e) Disciplinary sanctions. All Data shall be retained in accordance facility. disciplinary sanctions imposed by a with the recordkeeping requirements of (b) Disciplinary panels. A swap swap execution facility or its Core Principle 10 for swap execution execution facility shall establish one or disciplinary panels shall be facilities and the associated regulations more disciplinary panels that are commensurate with the violations in subpart K of this part. authorized to fulfill their obligations committed and shall be clearly (c) Enforcement of audit trail under the rules of this subpart. sufficient to deter recidivism or similar requirements—(1) Annual audit trail Disciplinary panels shall meet the violations by other market participants. and recordkeeping reviews. A swap composition requirements of part 40 of All disciplinary sanctions, including execution facility shall enforce its audit this chapter, and shall not include any sanctions imposed pursuant to an trail and recordkeeping requirements members of the swap execution accepted settlement offer, shall take into through at least annual reviews of all facility’s compliance staff or any person account the respondent’s disciplinary members and persons and firms subject involved in adjudicating any other stage history. In the event of demonstrated to the swap execution facility’s of the same proceeding. customer harm, any disciplinary recordkeeping rules to verify their (c) Hearings. A swap execution sanction shall also include full customer compliance with the swap execution facility shall adopt rules that provide for restitution, except where the amount of facility’s audit trail and recordkeeping the following minimum requirements restitution or to whom it should be requirements. Such reviews shall for any hearing: provided cannot be reasonably include, but are not limited to, reviews (1) The hearing shall be fair, shall be determined. of randomly selected samples of front- conducted before members of the (f) Warning letters. Where a rule end audit trail data for order routing disciplinary panel, and shall be violation is found to have occurred, no systems; a review of the process by promptly convened after reasonable more than one warning letter may be which user identifications are assigned notice to the respondent; and issued per rolling twelve month period and user identification records are (2) If the respondent has requested a for the same violation. maintained; a review of usage patterns hearing, a copy of the hearing shall be (g) Additional sources for compliance. associated with user identifications to made and shall become a part of the A swap execution facility may refer to monitor for violations of user record of the proceeding. The record the guidance and/or acceptable

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practices in Appendix B of this part to (c) Demonstrate an effective program § 37.405 Risk controls for trading. demonstrate to the Commission for conducting real-time monitoring of The swap execution facility shall compliance with the requirements of trading for the purpose of detecting and establish and maintain risk control § 37.206. resolving abnormalities; and mechanisms to prevent and reduce the (d) Demonstrate the ability to potential risk of market disruptions, Subpart D—Swaps Not Readily comprehensively and accurately Susceptible to Manipulation including, but not limited to, market reconstruct daily trading activity for the restrictions that pause or halt trading § 37.300 Core Principle 3—Swaps not purpose of detecting instances or threats under market conditions prescribed by readily susceptible to manipulation. of manipulation, price distortion, and the swap execution facility. The swap execution facility shall disruptions. § 37.406 Trade reconstruction. permit trading only in swaps that are § 37.402 Additional requirements for not readily susceptible to manipulation. physical-delivery swaps. The swap execution facility shall have the ability to comprehensively and For physical-delivery swaps, the swap § 37.301 General requirements. accurately reconstruct all trading on its execution facility shall demonstrate that To demonstrate to the Commission facility. All audit-trail data and it: compliance with the requirements of reconstructions shall be made available (a) Monitors a swap’s terms and § 37.300, a swap execution facility shall, to the Commission in a form, manner, conditions as they relate to the at the time it submits a new swap and time that is acceptable to the underlying commodity market; and contract in advance to the Commission Commission. pursuant to part 40 of this chapter, (b) Monitors the availability of the provide the applicable information as supply of the commodity specified by § 37.407 Regulatory service provider. the delivery requirements of the swap. set forth in Appendix C to part 38 of this A swap execution facility shall chapter—Demonstration of Compliance § 37.403 Additional requirements for cash- comply with the regulations in this That a Contract is not Readily settled swaps. subpart through a dedicated regulatory Susceptible to Manipulation. A swap (a) For cash-settled swaps, the swap department or by contracting with a execution facility may also refer to the execution facility shall demonstrate that regulatory service provider pursuant to guidance and/or acceptable practices in it monitors the pricing of the reference § 37.204. Appendix B of this part. price used to determine cash flows or § 37.408 Additional sources for Subpart E—Monitoring of Trading and settlement; compliance. Trade Processing (b) For cash-settled swaps listed on the swap execution facility where the A swap execution facility may refer to § 37.400 Core Principle 4—Monitoring of reference price is formulated and the guidance and/or acceptable trading and trade processing. computed by the swap execution practices in Appendix B of this part to The swap execution facility shall: facility, the swap execution facility shall demonstrate to the Commission (a) Establish and enforce rules or demonstrate that it monitors the compliance with the requirements of terms and conditions defining, or continued appropriateness of its § 37.400. specifications detailing: methodology for deriving that price; and (1) Trading procedures to be used in Subpart F—Ability to Obtain (c) For cash-settled swaps listed on Information entering and executing orders traded on the swap execution facility where the or through the facilities of the swap reference price relies on a third-party § 37.500 Core Principle 5—Ability to obtain execution facility; and index or instrument, including an index information. (2) Procedures for trade processing of or instrument traded on another venue, swaps on or through the facilities of the The swap execution facility shall: the swap execution facility shall swap execution facility; and (a) Establish and enforce rules that demonstrate that it monitors the (b) Monitor trading in swaps to will allow the facility to obtain any continued appropriateness of the index prevent manipulation, price distortion, necessary information to perform any of or instrument. and disruptions of the delivery or cash the functions described in section 5h of settlement process through surveillance, § 37.404 Ability to obtain information. the Act; compliance, and disciplinary practices (a) A swap execution facility shall (b) Provide the information to the and procedures, including methods for demonstrate that it has access to Commission on request; and conducting real-time monitoring of sufficient information to assess whether (c) Have the capacity to carry out such trading and comprehensive and accurate trading in swaps listed on its market, in international information-sharing trade reconstructions. the index or instrument used as a agreements as the Commission may § 37.401 General requirements. reference price, or in the underlying require. commodity for its listed swaps is being A swap execution facility shall: § 37.501 Establish and enforce rules. (a) Collect and evaluate data on its used to affect prices on its market. market participants’ market activity on (b) A swap execution facility shall A swap execution facility shall an ongoing basis in order to detect and have rules that require its market establish and enforce rules that will prevent manipulation, price distortions, participants to keep records of their allow the swap execution facility to and, where possible, disruptions of the trading, including records of their have the ability and authority to obtain physical-delivery or cash-settlement activity in the index or instrument used sufficient information to allow it to fully process; as a reference price, the underlying perform its operational, risk (b) Monitor and evaluate general commodity, and related derivatives management, governance, and market data in order to detect and markets, and make such records regulatory functions and any prevent manipulative activity that available, upon request, to the swap requirements under this part, including would result in the failure of the market execution facility or, if applicable, to its the capacity to carry out international price to reflect the normal forces of regulatory service provider, and the information-sharing agreements as the supply and demand; Commission. Commission may require.

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§ 37.502 Collection of information. Subpart H—Financial Integrity of Subpart J—Timely Publication of A swap execution facility shall have Transactions Trading Information rules that allow it to collect information on a routine basis, allow for the § 37.700 Core Principle 7—Financial § 37.900 Core Principle 9—Timely collection of non-routine data from its integrity of transactions. publication of trading information. market participants, and allow for its The swap execution facility shall (a) In general. The swap execution examination of books and records kept establish and enforce rules and facility shall make public timely by the market participants on its facility. procedures for ensuring the financial information on price, trading volume, and other trading data on swaps to the § 37.503 Provide information to the integrity of swaps entered on or through the facilities of the swap execution extent prescribed by the Commission. Commission. (b) Capacity of swap execution facility, including the clearance and A swap execution facility shall facility. The swap execution facility settlement of the swaps pursuant to provide information in its possession to shall be required to have the capacity to section 2(h)(1) of the Act. the Commission upon request, in a form electronically capture and transmit and manner that the Commission § 37.701 Required clearing. trade information with respect to approves. transactions executed on the facility. Transactions executed on or through § 37.504 Information-sharing agreements. the swap execution facility that are § 37.901 General requirements. A swap execution facility shall share required to be cleared under section With respect to swaps traded on or information with other regulatory 2(h)(1)(A) of the Act or are voluntarily through a swap execution facility, each organizations, data repositories, and cleared by the counterparties shall be swap execution facility shall: third-party data reporting services as cleared through a Commission- (a) Report specified swap data as required by the Commission or as registered derivatives clearing provided under part 43 and part 45 of otherwise necessary and appropriate to organization, or a derivatives clearing this chapter; and fulfill its self-regulatory and reporting organization that the Commission has (b) Meet the requirements of part 16 responsibilities. Appropriate determined is exempt from registration. of this chapter. information-sharing agreements can be established with such entities or the § 37.702 General financial integrity. Subpart K—Recordkeeping and Reporting Commission can act in conjunction with A swap execution facility shall the swap execution facility to carry out provide for the financial integrity of its § 37.1000 Core Principle 10— such information sharing. transactions: Recordkeeping and reporting. Subpart G—Position Limits or (a) By establishing minimum financial (a) In general. A swap execution Accountability standards for its members, which shall, facility shall: at a minimum, require that members (1) Maintain records of all activities § 37.600 Core Principle 6—Position limits qualify as an eligible contract relating to the business of the facility, or accountability. participant as defined in section 1a(18) including a complete audit trail, in a (a) In general. To reduce the potential of the Act; form and manner acceptable to the Commission for a period of five years; threat of market manipulation or (b) [Reserved] congestion, especially during trading in (2) Report to the Commission, in a the delivery month, a swap execution § 37.703 Monitoring for financial form and manner acceptable to the facility that is a trading facility shall soundness. Commission, such information as the adopt for each of the contracts of the Commission determines to be necessary A swap execution facility shall or appropriate for the Commission to facility, as is necessary and appropriate, monitor its members to ensure that they position limitations or position perform the duties of the Commission continue to qualify as eligible contract under the Act; and accountability for speculators. participants as defined in section 1a(18) (b) Position limits. For any contract (3) Keep any such records relating to of the Act. that is subject to a position limitation swaps defined in section 1a(47)(A)(v) of the Act open to inspection and established by the Commission pursuant Subpart I—Emergency Authority to section 4a(a) of the Act, the swap examination by the Securities and execution facility shall: § 37.800 Core Principle 8—Emergency Exchange Commission. (1) Set its position limitation at a level authority. (b) Requirements. The Commission no higher than the Commission shall adopt data collection and reporting The swap execution facility shall limitation; and requirements for swap execution (2) Monitor positions established on adopt rules to provide for the exercise facilities that are comparable to or through the swap execution facility of emergency authority, in consultation corresponding requirements for for compliance with the limit set by the or cooperation with the Commission, as derivatives clearing organizations and Commission and the limit, if any, set by is necessary and appropriate, including swap data repositories. the swap execution facility. the authority to liquidate or transfer open positions in any swap or to § 37.1001 Recordkeeping. § 37.601 Additional sources for suspend or curtail trading in a swap. A swap execution facility shall compliance. maintain records of all activities relating Until such time that compliance is § 37.801 Additional sources for to the business of the facility, in a form compliance. required under part 151 of this chapter, and manner acceptable to the a swap execution facility may refer to A swap execution facility may refer to Commission, for a period of at least five the guidance and/or acceptable the guidance and/or acceptable years. A swap execution facility shall practices in Appendix B of this part to practices in Appendix B of this part to maintain such records, including a demonstrate to the Commission demonstrate to the Commission complete audit trail for all swaps compliance with the requirements of compliance with the requirements of executed on or subject to the rules of the § 37.600. § 37.800. swap execution facility, investigatory

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files, and disciplinary files, in least equal to a total amount that would accordance with the requirements of accordance with the requirements of enable the swap execution facility to § 37.1304; § 1.31 and part 45 of this chapter. cover its operating costs for a period of (2) Provide the Commission with a at least one year, calculated on a rolling financial statement, including the Subpart L—Antitrust Considerations basis. balance sheet, income statement, and § 37.1100 Core Principle 11—Antitrust § 37.1302 Types of financial resources. statement of cash flows of the swap considerations. execution facility or of its parent Financial resources available to company; Unless necessary or appropriate to satisfy the requirements of § 37.1301 (b) The calculations required by achieve the purposes of the Act, the may include: paragraph (a) of this section shall be swap execution facility shall not: (a) The swap execution facility’s own (a) Adopt any rules or take any made as of the last business day of the capital, meaning its assets minus its actions that result in any unreasonable swap execution facility’s fiscal quarter. liabilities calculated in accordance with restraint of trade; or U.S. generally accepted accounting (c) The swap execution facility shall (b) Impose any material provide the Commission with: anticompetitive burden on trading or principles; and (1) Sufficient documentation clearing. (b) Any other financial resource deemed acceptable by the Commission. explaining the methodology used to § 37.1101 Additional sources for compute its financial requirements compliance. § 37.1303 Computation of projected under § 37.1301; operating costs to meet financial resource A swap execution facility may refer to requirement. (2) Sufficient documentation the guidance and/or acceptable explaining the basis for its practices in Appendix B of this part to A swap execution facility shall, each determinations regarding the valuation demonstrate to the Commission fiscal quarter, make a reasonable and liquidity requirements set forth in compliance with the requirements of calculation of its projected operating §§ 37.1304 and 37.1305; and § 37.1100. costs over a twelve-month period in order to determine the amount needed (3) Copies of any agreements establishing or amending a credit Subpart M—Conflicts of Interest to meet the requirements of § 37.1301. The swap execution facility shall have facility, insurance coverage, or other § 37.1200 Core Principle 12—Conflicts of reasonable discretion in determining the arrangement evidencing or otherwise interest. methodology used to compute such supporting the swap execution facility’s The swap execution facility shall: projected operating costs. The conclusions. (a) Establish and enforce rules to Commission may review the (d) The reports required by this minimize conflicts of interest in its methodology and require changes as section shall be filed not later than 40 decision-making process; and appropriate. calendar days after the end of the swap (b) Establish a process for resolving execution facility’s first three fiscal the conflicts of interest. § 37.1304 Valuation of financial resources. quarters, and not later than 60 calendar No less than each fiscal quarter, a days after the end of the swap execution Subpart N—Financial Resources swap execution facility shall compute facility’s fourth fiscal quarter, or at such § 37.1300 Core Principle 13—Financial the current market value of each later time as the Commission may resources. financial resource used to meet its permit, in its discretion, upon request (a) In general. The swap execution obligations under § 37.1301. Reductions by the swap execution facility. in value to reflect market and credit risk facility shall have adequate financial, § 37.1307 Delegation of authority. operational, and managerial resources to (‘‘haircuts’’) shall be applied as discharge each responsibility of the appropriate. (a) The Commission hereby delegates, until it orders otherwise, to the Director swap execution facility. § 37.1305 Liquidity of financial resources. (b) Determination of resource of the Division of Market Oversight or adequacy. The financial resources of a The financial resources allocated by such other employee or employees as swap execution facility shall be the swap execution facility to meet the the Director may designate from time to considered to be adequate if the value requirements of § 37.1301 shall include time, authority to: of the financial resources exceeds the unencumbered, liquid financial assets (1) Determine whether a particular total amount that would enable the (i.e., cash and/or highly liquid financial resource under § 37.1302 may swap execution facility to cover the securities) equal to at least six months’ be used to satisfy the requirements of operating costs of the swap execution operating costs. If any portion of such § 37.1301; facility for a one-year period, as financial resources is not sufficiently (2) Review and make changes to the calculated on a rolling basis. liquid, the swap execution facility may methodology used to compute projected take into account a committed line of operating costs under § 37.1303; § 37.1301 General requirements. credit or similar facility for the purpose (3) Request reports, in addition to (a) A swap execution facility shall of meeting this requirement. fiscal quarter reports, under maintain financial resources sufficient § 37.1306 Reporting to the Commission. § 37.1306(a); and to enable it to perform its functions in compliance with the core principles set (a) Each fiscal quarter, or at any time (4) Grant an extension of time to file forth in section 5h of the Act. upon Commission request, a swap fiscal quarter reports under § 37.1306(d). (b) An entity that operates as both a execution facility shall: (b) The Director may submit to the swap execution facility and a (1) Report to the Commission: Commission for its consideration any derivatives clearing organization shall (i) The amount of financial resources matter that has been delegated in this also comply with the financial resource necessary to meet the requirements of section. Nothing in this section requirements of § 39.11 of this chapter. § 37.1301; and prohibits the Commission, at its (c) Financial resources shall be (ii) The value of each financial election, from exercising the authority considered sufficient if their value is at resource available, computed in delegated in this section.

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Subpart O—System Safeguards generally should enable resumption of assessments of its operational risks, and trading and clearing of swaps executed other documents requested by § 37.1400 Core Principle 14—System on the swap execution facility during Commission staff for the purpose of safeguards. the next business day following the maintaining a current profile of the The swap execution facility shall: disruption. Swap execution facilities swap execution facility’s automated (a) Establish and maintain a program determined by the Commission to be systems. of risk analysis and oversight to identify critical financial markets pursuant to (g) A swap execution facility shall and minimize sources of operational Appendix E to part 40 of this chapter conduct regular, periodic, objective risk, through the development of are subject to more stringent testing and review of its automated appropriate controls and procedures, requirements in this regard, set forth in systems to ensure that they are reliable, and automated systems, that: § 40.9 of this chapter. secure, and have adequate scalable (1) Are reliable and secure; and (c) A swap execution facility that is capacity. A swap execution facility shall (2) Have adequate scalable capacity; not determined by the Commission to be also conduct regular, periodic testing (b) Establish and maintain emergency a critical financial market satisfies the and review of its business continuity- procedures, backup facilities, and a plan requirement to be able to resume its disaster recovery capabilities. Pursuant for disaster recovery that allow for: operations and resume its ongoing to Core Principle 10 under section 5h of (1) The timely recovery and fulfillment of its responsibilities and the Act (Recordkeeping and Reporting) resumption of operations; and obligations during the next business day and §§ 37.1000 through 37.1001, the (2) The fulfillment of the following any disruption of its swap execution facility shall keep responsibilities and obligations of the operations by maintaining either: records of all such tests, and make all swap execution facility; and (1) Infrastructure and personnel test results available to the Commission (c) Periodically conduct tests to verify resources of its own that are sufficient upon request. that the backup resources of the swap to ensure timely recovery and (h) Part 40 of this chapter governs the execution facility are sufficient to resumption of its operations and obligations of those registered entities ensure continued: resumption of its ongoing fulfillment of that the Commission has determined to (1) Order processing and trade its responsibilities and obligations as a be critical financial markets, with matching; swap execution facility following any respect to maintenance and geographic (2) Price reporting; disruption of its operations; or dispersal of disaster recovery resources (3) Market surveillance; and (2) Contractual arrangements with sufficient to meet a same-day recovery (4) Maintenance of a comprehensive other swap execution facilities or time objective in the event of a wide- and accurate audit trail. disaster recovery service providers, as scale disruption. Section 40.9 establishes the requirements for core § 37.1401 Requirements. appropriate, that are sufficient to ensure continued trading and clearing of swaps principle compliance in that respect. (a) A swap execution facility’s executed on the swap execution facility, Subpart P—Designation of Chief program of risk analysis and oversight and ongoing fulfillment of all of the Compliance Officer with respect to its operations and swap execution facility’s automated systems shall address each of responsibilities and obligations with § 37.1500 Core Principle 15—Designation the following categories of risk analysis respect to such swaps, in the event that of chief compliance officer. and oversight: a disruption renders the swap execution (a) In general. Each swap execution (1) Information security; facility temporarily or permanently (2) Business continuity-disaster facility shall designate an individual to unable to satisfy this requirement on its recovery planning and resources; serve as a chief compliance officer. own behalf. (b) Duties. The chief compliance (3) Capacity and performance (d) A swap execution facility shall officer shall: planning; notify Commission staff promptly of all: (1) Report directly to the board or to (4) Systems operations; (1) Electronic trading halts and the senior officer of the facility; (5) Systems development and quality material system malfunctions; (2) Review compliance with the core assurance; and (2) Cyber security incidents or principles in this subsection; (6) Physical security and targeted threats that actually or (3) In consultation with the board of environmental controls. potentially jeopardize automated system the facility, a body performing a (b) A swap execution facility shall operation, reliability, security, or function similar to that of a board, or the maintain a business continuity-disaster capacity; and senior officer of the facility, resolve any recovery plan and resources, emergency (3) Activations of the swap execution conflicts of interest that may arise; procedures, and backup facilities facility’s business continuity-disaster (4) Be responsible for establishing and sufficient to enable timely recovery and recovery plan. administering the policies and resumption of its operations and (e) A swap execution facility shall procedures required to be established resumption of its ongoing fulfillment of provide Commission staff timely pursuant to this section; its responsibilities and obligations as a advance notice of all material: (5) Ensure compliance with the Act swap execution facility following any (1) Planned changes to automated and the rules and regulations issued disruption of its operations. Such systems that may impact the reliability, under the Act, including rules responsibilities and obligations include, security, or adequate scalable capacity prescribed by the Commission pursuant without limitation, order processing and of such systems; and to section 5h of the Act; and trade matching; transmission of (2) Planned changes to the swap (6) Establish procedures for the matched orders to a designated clearing execution facility’s program of risk remediation of noncompliance issues organization for clearing, where analysis and oversight. found during compliance office reviews, appropriate; price reporting; market (f) A swap execution facility shall look backs, internal or external audit surveillance; and maintenance of a provide to the Commission, upon findings, self-reported errors, or through comprehensive audit trail. The swap request, current copies of its business validated complaints. execution facility’s business continuity- continuity-disaster recovery plan and (c) Requirements for procedures. In disaster recovery plan and resources other emergency procedures, its establishing procedures under

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paragraph (b)(6) of this section, the chief Appointment and compensation of chief (3) Establishing and administering compliance officer shall design the compliance officer. (i) A swap execution written policies and procedures procedures to establish the handling, facility’s chief compliance officer shall reasonably designed to prevent management response, remediation, be appointed by its board of directors or violations of the Act and the rules of the retesting, and closing of noncompliance senior officer. A swap execution facility Commission; issues. shall notify the Commission within two (4) Taking reasonable steps to ensure (d) Annual reports—(1) In general. In business days of appointing any new compliance with the Act and the rules accordance with rules prescribed by the chief compliance officer, whether of the Commission; Commission, the chief compliance interim or permanent. (5) Establishing procedures for the officer shall annually prepare and sign (ii) The board of directors or the remediation of noncompliance issues a report that contains a description of: senior officer shall approve the identified by the chief compliance (i) The compliance of the swap compensation of the chief compliance officer through a compliance office execution facility with the Act; and officer. review, look-back, internal or external (ii) The policies and procedures, (iii) The chief compliance officer shall audit finding, self-reported error, or including the code of ethics and conflict meet with the board of directors at least validated complaint; of interest policies, of the swap annually and the regulatory oversight (6) Establishing and following execution facility. committee at least quarterly. appropriate procedures for the handling, (2) Requirements. The chief (iv) The chief compliance officer shall management response, remediation, compliance officer shall: provide any information regarding the retesting, and closing of noncompliance (i) Submit each report described in swap execution facility’s self-regulatory issues; paragraph (d)(1) of this section with the program that is requested by the board (7) Establishing and administering a appropriate financial report of the swap of directors or the regulatory oversight compliance manual designed to execution facility that is required to be committee. promote compliance with the applicable submitted to the Commission pursuant (2) Supervision of chief compliance laws, rules, and regulations and a to section 5h of the Act; and officer. A swap execution facility’s chief written code of ethics designed to (ii) Include in the report a compliance officer shall report directly prevent ethical violations and to certification that, under penalty of law, to the board of directors or to the senior promote honesty and ethical conduct; (8) Supervising the swap execution the report is accurate and complete. officer of the swap execution facility, at facility’s self-regulatory program with the swap execution facility’s discretion. § 37.1501 Chief compliance officer. respect to trade practice surveillance; (3) Removal of chief compliance (a) Definition of board of directors. market surveillance; real-time market officer. (i) Removal of a swap execution For purposes of this part, the term monitoring; compliance with audit trail facility’s chief compliance officer shall ‘‘board of directors’’ means the board of requirements; enforcement and require the approval of a majority of the directors of a swap execution facility, or disciplinary proceedings; audits, swap execution facility’s board of for those swap execution facilities examinations, and other regulatory directors. If the swap execution facility whose organizational structure does not responsibilities with respect to members does not have a board of directors, then include a board of directors, a body and market participants (including the chief compliance officer may be performing a function similar to a board ensuring compliance with, if applicable, removed by the senior officer of the of directors. financial integrity, financial reporting, swap execution facility. (b) Designation and qualifications of sales practice, recordkeeping, and other (ii) The swap execution facility shall chief compliance officer—(1) Chief requirements); and compliance officer required. Each swap notify the Commission of such removal (9) Supervising the effectiveness and execution facility shall establish the within two business days. sufficiency of any regulatory services position of chief compliance officer and (d) Duties of chief compliance officer. provided to the swap execution facility designate an individual to serve in that The chief compliance officer’s duties by a regulatory service provider in capacity. shall include, but are not limited to, the accordance with § 37.204. (i) The position of chief compliance following: (e) Preparation of annual compliance officer shall carry with it the authority (1) Overseeing and reviewing the report. The chief compliance officer and resources to develop and enforce swap execution facility’s compliance shall, not less than annually, prepare policies and procedures necessary to with section 5h of the Act and any and sign an annual compliance report fulfill the duties set forth for chief related rules adopted by the that, at a minimum, contains the compliance officers in the Act and Commission; following information covering the time Commission regulations. (2) In consultation with the board of period since the date on which the swap (ii) The chief compliance officer shall directors, a body performing a function execution facility became registered have supervisory authority over all staff similar to the board of directors, or the with the Commission or since the end acting at the direction of the chief senior officer of the swap execution of the period covered by a previously compliance officer. facility, resolving any conflicts of filed annual compliance report, as (2) Qualifications of chief compliance interest that may arise, including: applicable: officer. The individual designated to (i) Conflicts between business (1) A description of the swap serve as chief compliance officer shall considerations and compliance execution facility’s written policies and have the background and skills requirements; procedures, including the code of ethics appropriate for fulfilling the (ii) Conflicts between business and conflict of interest policies; responsibilities of the position. No considerations and the requirement that (2) A review of applicable individual disqualified from registration the swap execution facility provide fair, Commission regulations and each pursuant to sections 8a(2) or 8a(3) of the open, and impartial access as set forth subsection and core principle of section Act may serve as a chief compliance in § 37.202; and; 5h of the Act, that, with respect to each: officer. (iii) Conflicts between a swap (i) Identifies the policies and (c) Appointment, supervision, and execution facility’s management and procedures that are designed to ensure removal of chief compliance office—(1) members of the board of directors; compliance with each subsection and

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core principle, including each duty previously filed annual compliance Appendix A to Part 37—Form SEF specified in section 5h(f)(15)(B) of the report, the chief compliance officer shall COMMODITY FUTURES TRADING Act; file an amendment with the COMMISSION (ii) Provides a self-assessment as to Commission to correct the material error the effectiveness of these policies and or omission. An amendment shall FORM SEF procedures; and contain the certification required under SWAP EXECUTION FACILITY (iii) Discusses areas for improvement paragraph (e)(6) of this section. APPLICATION OR AMENDMENT TO APPLICATION FOR REGISTRATION and recommends potential or (4) A swap execution facility may prospective changes or improvements to request from the Commission an Registration Instructions its compliance program and resources; extension of time to file its annual (3) A list of any material changes to Intentional misstatements or omissions of compliance report based on substantial, material fact may constitute federal criminal compliance policies and procedures undue hardship. Extensions of the filing violations (7 U.S.C. § 13 and 18 U.S.C. since the last annual compliance report; deadline may be granted at the § 1001) or grounds for disqualification from (4) A description of the financial, registration. managerial, and operational resources discretion of the Commission. set aside for compliance with respect to (g) Recordkeeping. (1) The swap DEFINITIONS the Act and Commission regulations, execution facility shall maintain: Unless the context requires otherwise, all including a description of the swap (i) A copy of the written policies and terms used in this Form SEF have the same meaning as in the Commodity Exchange Act, execution facility’s self-regulatory procedures, including the code of ethics as amended (‘‘Act’’), and in the General Rules program’s staffing and structure, a and conflicts of interest policies and Regulations of the Commodity Futures catalogue of investigations and adopted in furtherance of compliance Trading Commission (‘‘Commission’’) disciplinary actions taken since the last with the Act and Commission thereunder. annual compliance report, and a review regulations; For the purposes of this Form SEF, the of the performance of disciplinary term ‘‘Applicant’’ shall include any applicant (ii) Copies of all materials created in for registration as a swap execution facility, committees and panels; furtherance of the chief compliance (5) A description of any material any applicant amending a pending officer’s duties listed in paragraphs application, or any registered swap execution compliance matters, including (d)(8) and (d)(9) of this section, facility that is applying for an amendment to noncompliance issues identified including records of any investigations its order of registration. through a compliance office review, or disciplinary actions taken by the GENERAL INSTRUCTIONS look-back, internal or external audit swap execution facility; finding, self-reported error, or validated 1. This Form SEF, which includes complaint, and an explanation of how (iii) Copies of all materials, including instructions, a Cover Sheet, and required they were resolved; and written reports provided to the board of Exhibits (together, ‘‘Form SEF’’), is to be filed (6) A certification by the chief directors or senior officer in connection with the Commission by all Applicants, pursuant to section 5h of the Act and the compliance officer that, to the best of with the review of the annual compliance report under paragraph Commission’s regulations thereunder. his or her knowledge and reasonable Applicants may prepare their own Form SEF belief, and under penalty of law, the (f)(1) of this section and the board but must follow the format prescribed herein. annual compliance report is accurate minutes or a similar written record that Upon the filing of an application for and complete. documents the review of the annual registration or a registration amendment in (f) Submission of annual compliance compliance report by the board of accordance with the instructions provided report. (1) Prior to submission to the directors or senior officer; and herein, the Commission will publish notice Commission, the chief compliance (iv) Any records relevant to the swap of the filing and afford interested persons an opportunity to submit written data, views, officer shall provide the annual execution facility’s annual compliance and arguments concerning such application. compliance report to the board of report, including, but not limited to, No application for registration or registration directors of the swap execution facility work papers and other documents that amendment shall be effective unless the for its review. If the swap execution form the basis of the report, and Commission, by order, grants such facility does not have a board of memoranda, correspondence, other registration or amended registration. directors, then the annual compliance documents, and records that are 2. Individuals’ names, except the executing report shall be provided to the senior signature, shall be given in full (Last Name, (A) Created, sent, or received in First Name, Middle Name). officer for his or her review. Members of connection with the annual compliance 3. Signatures on all copies of the Form SEF the board of directors and the senior report and filed with the Commission can be executed officer shall not require the chief (B) Contain conclusions, opinions, electronically. If this Form SEF is filed by a compliance officer to make any changes analyses, or financial data related to the corporation, it shall be signed in the name of the corporation by a principal officer duly to the report. Submission of the report annual compliance report. to the board of directors or the senior authorized; if filed by a limited liability officer, and any subsequent discussion (2) The swap execution facility shall company, it shall be signed in the name of the limited liability company by a manager of the report, shall be recorded in board maintain records in accordance with § 1.31 and part 45 of this chapter. or member duly authorized to sign on the minutes or a similar written record, as limited liability company’s behalf; if filed by evidence of compliance with this (h) Delegation of authority. The a partnership, it shall be signed in the name requirement. Commission hereby delegates, until it of the partnership by a general partner duly (2) The annual compliance report orders otherwise, to the Director of the authorized; if filed by an unincorporated shall be submitted electronically to the Division of Market Oversight or such organization or association which is not a Commission not later than 60 calendar other employee or employees as the partnership, it shall be signed in the name of days after the end of the swap execution Director may designate from time to such organization or association by the time, authority to grant or deny a swap managing agent, i.e., a duly authorized facility’s fiscal year, concurrently with person who directs or manages or who the filing of the fourth fiscal quarter execution facility’s request for an participates in the directing or managing of financial report pursuant to § 37.1306. extension of time to file its annual its affairs. (3) Promptly upon discovery of any compliance report under paragraph 4. If this Form SEF is being filed as an material error or omission made in a (f)(4) of this section. application for registration, all applicable

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items must be answered in full. If any item COMMODITY FUTURES TRADING lllllllllllllllllllll is inapplicable, indicate by ‘‘none,’’ ‘‘not COMMISSION Main Phone Number Web site applicable,’’ or ‘‘N/A,’’ as appropriate. FORM SEF URL 5. Under section 5h of the Act and the Commission’s regulations thereunder, the SWAP EXECUTION FACILITY BUSINESS ORGANIZATION Commission is authorized to solicit the APPLICATION OR AMENDMENT TO 6. Applicant is a: information required to be supplied by this APPLICATION FOR REGISTRATION b Corporation Form SEF from any Applicant seeking Cover Sheet b registration as a swap execution facility and lllllllllllllllllllll Partnership from any registered swap execution facility. Exact name of Applicant as specified in b Limited Liability Company Disclosure by the Applicant of the charter b Other form of organization (specify) information specified on this Form SEF is lllllllllllllllllllll lllllllllllllllllllll mandatory prior to the start of the processing Address of principal executive offices 7. Date of incorporation or formation: of an application for, or an amendment to, b If this is an APPLICATION for lllllllllllllllllllll registration as a swap execution facility. The registration, complete in full and check here. 8. State of incorporation or information provided in this Form SEF will b If this is an AMENDMENT to an jurisdiction of organization: be used for the principal purpose of application, or to an existing order of lllllllllllllllllllll determining whether the Commission should registration, list all items that are amended 9. The Applicant agrees and consents grant or deny registration to an Applicant. and check here. lllllllllllllllllllll that the notice of any proceeding before The Commission may determine that the Commission in connection with this additional information is required from the lllllllllllllllllllll lllllllllllllllllllll application may be given by sending Applicant in order to process its application. lllllllllllllllllllll such notice by certified mail to the A Form SEF which is not prepared and person named below at the address executed in compliance with applicable GENERAL INFORMATION given. requirements and instructions may be 1. Name under which the business of lllllllllllllllllllll returned as not acceptable for filing. the swap execution facility is or will be Print Name and Title Acceptance of this Form SEF, however, shall conducted, if different than name lllllllllllllllllllll not constitute a finding that the Form SEF Name of Applicant has been filed as required or that the specified above (include acronyms, if lllllllllllllllllllll information submitted is true, current, or any): lllllllllllllllllllll Number and Street complete. 2. If name of swap execution facility lllllllllllllllllllll 6. Except in cases where confidential is being amended, state previous swap treatment is requested by the Applicant and City State Zip Code granted by the Commission pursuant to the execution facility name: lllllllllllllllllllll SIGNATURES Freedom of Information Act and the rules of 3. Contact information, including 10. The Applicant has duly caused the Commission thereunder, information mailing address if different than address supplied on this Form SEF will be included this application or amendment to be specified above: routinely in the public files of the signed on its behalf by the undersigned, lllllllllllllllllllll Commission and will be available for hereunto duly authorized, this lll inspection by any interested person. Number and Street day of llllll, 20ll. The lllllllllllllllllllll Applicant and the undersigned APPLICATION AMENDMENTS City State Country Zip Code represent hereby that all information 1. An Applicant amending a pending lllllllllllllllllllll contained herein is true, current, and application for registration as a swap Main Phone Number Fax complete. It is understood that all execution facility or requesting an lllllllllllllllllllll required items and Exhibits are amendment to an order of registration shall Web site URL Email Address considered integral parts of this Form file an amended Form SEF electronically 4. List of principal office(s) and SEF and that the submission of any with the Secretary of the Commission in the address(es) where swap execution amendment represents that all manner specified by the Commission. facility activities are/will be conducted: unamended items and Exhibits remain Otherwise, a swap execution facility shall file true, current, and complete as any amendment to this Form SEF as a Office previously filed. lllllllllllllllllllll submission under part 40 of the lllllllllllllllllllll Commission’s regulations or as specified by lllllllllllllllllllll lllllllllllllllllllll Name of Applicant the Commission. lllllllllllllllllllll 2. When filing this Form SEF for purposes Address Signature of Duly Authorized Person of amending a pending application or lllllllllllllllllllll lllllllllllllllllllll requesting an amendment to an order of lllllllllllllllllllll Print Name and Title of Signatory registration, Applicants must re-file the lllllllllllllllllllll Cover Sheet, amended if necessary and 5. If the Applicant is a successor to a COMMODITY FUTURES TRADING including an executing signature, and attach previously registered swap execution COMMISSION thereto revised Exhibits or other materials facility, please complete the following: FORM SEF marked to show changes, as applicable. The a. Date of succession submission of an amendment represents that lllllllllllllllllllll SWAP EXECUTION FACILITY the remaining items and Exhibits that are not b. Full name and address of APPLICATION OR AMENDMENT TO amended remain true, current, and complete predecessor registrant APPLICATION FOR REGISTRATION as previously filed. lllllllllllllllllllll Exhibits Instructions Name WHERE TO FILE lllllllllllllllllllll The following Exhibits must be filed This Form SEF must be filed electronically Number and Street with the Commission by each Applicant with the Secretary of the Commission in the lllllllllllllllllllll applying for registration as a swap manner specified by the Commission. City State Country Zip Code execution facility, or by a registered

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swap execution facility amending its (2) Any conviction or injunction against EXHIBITS—FINANCIAL INFORMATION registration, pursuant to section 5h of such person within the past ten (10) years; 9. Attach as Exhibit I: the Act and the Commission’s (3) Any disciplinary action with respect to a. (i) Balance sheet, (ii) Statement of regulations thereunder. The Exhibits such person within the last five (5) years; income and expenses, (iii) Statement of cash must be labeled according to the items (4) Any disqualification under sections 8b flows, and (iv) Statement of sources and and 8d of the Act; application of revenues and all notes or specified in this Form SEF. (5) Any disciplinary action under section The application must include a Table schedules thereto, as of the most recent fiscal 8c of the Act; and year of the Applicant, or of its parent of Contents listing each Exhibit required (6) Any violation pursuant to section 9 of company, if applicable. If a balance sheet and by this Form SEF and indicating which, the Act. any statement(s) certified by an independent if any, Exhibits are inapplicable. For any 3. Attach as Exhibit C, a narrative that sets public accountant are available, that balance Exhibit that is inapplicable, next to the forth the fitness standards for the Board of sheet and statement(s) should be submitted Exhibit letter specify ‘‘none,’’ ‘‘not Directors and its composition including the as Exhibit I. applicable,’’ or ‘‘N/A,’’ as appropriate. number and percentage of public directors. b. Provide a narrative of how the value of If the Applicant is a newly formed 4. Attach as Exhibit D, a narrative or the financial resources of the Applicant is at enterprise and does not have the graphic description of the organizational least equal to a total amount that would financial statements required pursuant structure of the Applicant. Include a list of enable the Applicant to cover its operating all affiliates of the Applicant and indicate the costs for a period of at least one year, to Items 9 and 10 (Exhibits I and J) of general nature of the affiliation. Note: If the calculated on a rolling basis, and whether this Form SEF, the Applicant should swap execution facility activities of the such financial resources include provide pro forma financial statements Applicant are or will be conducted primarily unencumbered, liquid financial assets (i.e., for the most recent six months or since by a division, subdivision, or other separate cash and/or highly liquid securities) equal to inception, whichever is less. entity within the Applicant, corporation, or at least six months’ operating costs. organization, describe the relationship of c. Attach copies of any agreements List of Exhibits such entity within the overall organizational establishing or amending a credit facility, EXHIBITS—BUSINESS structure and attach as Exhibit D a insurance coverage, or other arrangement evidencing or otherwise supporting the ORGANIZATION description only as it applies to the division, subdivision, or separate entity, as applicable. Applicant’s conclusions regarding the 1. Attach as Exhibit A, the name of Additionally, provide any relevant liquidity of its financial assets. any person who owns ten percent (10%) jurisdictional information, including any and d. Representations regarding sources and or more of the Applicant’s stock or who, all jurisdictions in which the Applicant or estimates for future ongoing operational either directly or indirectly, through any affiliated entity are doing business, and resources. 10. Attach as Exhibit J, a balance sheet and agreement or otherwise, in any other registration status, including pending applications (e.g., country, regulator, an income and expense statement for each manner, may control or direct the affiliate of the swap execution facility that management or policies of the registration category, date of registration). Provide the address for legal service of also engages in swap execution facility Applicant. activities or that engages in designated process for each jurisdiction, which cannot contract market activities as of the end of the Provide as part of Exhibit A the full be a post office box. most recent fiscal year of each such affiliate. name and address of each such person 5. Attach as Exhibit E, a description of the 11. Attach as Exhibit K, the following: and attach a copy of the agreement or, personnel qualifications for each category of a. A complete list of all dues, fees, and if there is none written, describe the professional employees employed by the agreement or basis upon which such other charges imposed, or to be imposed, by Applicant or the division, subdivision, or or on behalf of the Applicant for its swap person exercises or may exercise such other separate entity within the Applicant as execution facility services that are provided control or direction. described in Item 4. on an exclusive basis and identify the service 2. Attach as Exhibit B, a list of the 6. Attach as Exhibit F, an analysis of or services provided for each such due, fee, present officers, directors, governors staffing requirements necessary to carry out or other charge. (and, in the case of an Applicant that is the operations of the Applicant as a swap b. A description of the basis and methods not a corporation, the members of all execution facility and the name and used in determining the level and structure qualifications of each key staff person. standing committees, grouped by of the dues, fees, and other charges listed in 7. Attach as Exhibit G, a copy of the paragraph (a) of this item. committee), or persons performing constitution, articles of incorporation, functions similar to any of the foregoing, c. If the Applicant differentiates, or formation, or association with all proposes to differentiate, among its of the swap execution facility or of any amendments thereto, partnership or limited customers or classes of customers in the entity that performs the regulatory liability agreements, and existing by-laws, amount of any dues, fees, or other charges activities of the Applicant, indicating operating agreement, rules or instruments imposed for the same or similar exclusive for each: corresponding thereto, of the Applicant. services, describe and indicate the amount of a. Name Include any additional governance fitness each differential. In addition, identify and b. Title information not included in Exhibit C. describe any differences in the cost of c. Dates of commencement and termination Provide a certificate of good standing dated providing such services and any other factors of present term of office or position within one week of the date of this Form that account for such differentiations. d. Length of time each present officer, SEF. director, or governor has held the same 8. Attach as Exhibit H, a brief description EXHIBITS—COMPLIANCE office or position of any material pending legal proceeding(s), 12. Attach as Exhibit L, a narrative and any e. Brief account of the business experience of other than ordinary and routine litigation other form of documentation that may be each officer and director over the last five incidental to the business, to which the provided under other Exhibits herein, that (5) years Applicant or any of its affiliates is a party or describes the manner in which the Applicant f. Any other business affiliations in the to which any of its or their property is the is able to comply with each core principle. derivatives and securities industry subject. Include the name of the court or Such documentation must include a g. For directors, list any committees on agency where the proceeding(s) are pending, regulatory compliance chart setting forth which they serve and any compensation the date(s) instituted, the principal parties each core principle and providing citations to received by virtue of their directorship involved, a description of the factual basis the Applicant’s relevant rules, policies, and h. A description of: alleged to underlie the proceeding(s), and the procedures that address each core principle. (1) Any order of the Commission with relief sought. Include similar information as To the extent that the application raises respect to such person pursuant to section 5e to any proceeding(s) known to be issues that are novel or for which compliance of the Act; contemplated by the governmental agencies. with a core principle is not self-evident,

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include an explanation of how that item and (1) How a market participant transmits a principles are set forth in paragraph (b) the application satisfy the core principles. request for a quote to buy or sell a specific following the guidance. Swap execution 13. Attach as Exhibit M, a copy of the instrument to no less than three market facilities that follow specific practices Applicant’s rules (as defined in § 40.1 of the participants in the trading system or outlined in the acceptable practices for a core Commission’s regulations) and any technical platform, to which all such market principle in this appendix will meet the manuals, other guides, or instructions for participants may respond; selected requirements of the applicable core users of, or participants in, the market, (2) How resting bids or offers from the principle; provided however, that the including minimum financial standards for Applicant’s Order Book are communicated to acceptable practice is not intended to members or market participants. Include the requester; and diminish or replace, in any event, the rules citing applicable federal position limits (3) How a requester may transact on resting obligations and requirements of applicants and aggregation standards in part 151 of the bids or offers along with the responsive and swap execution facilities to comply with Commission’s regulations and any facility set orders. the regulations provided under this part 37. position limit rules. Include rules on c. How the timing delay described under The acceptable practices are for illustrative publication of daily trading information with § 37.9 of the Commission’s regulations is purposes only and do not state the exclusive regards to the requirements of part 16 of the incorporated into the trading system or means for satisfying a core principle. Commission’s regulations. The Applicant platform. 18. Attach as Exhibit R, a list of rules Core Principle 1 of Section 5h of the Act— should include an explanation and any other Compliance With Core Principles form of documentation that the Applicant prohibiting specific trade practice violations. thinks will be helpful to its explanation, 19. Attach as Exhibit S, a discussion of (A) In general. To be registered, and demonstrating how its rules, technical how trading data will be maintained by the maintain registration, as a swap execution manuals, other guides, or instructions for swap execution facility. facility, the swap execution facility shall users of, or participants in, the market, or 20. Attach as Exhibit T, a list of the name comply with—the core principles described minimum financial standards for members or of the clearing organization(s) that will be in section 5h of the Act; and any requirement market participants as provided in this clearing the Applicant’s trades, and a that the Commission may impose by rule or Exhibit M help support the swap execution representation that clearing members of that regulation pursuant to section 8a(5) of the facility’s compliance with the core organization will be guaranteeing such Act. principles. trades. (B) Reasonable discretion of swap 14. Attach as Exhibit N, executed or 21. Attach as Exhibit U, any information execution facility. Unless otherwise executable copies of any agreements or (described with particularity) included in the determined by the Commission by rule or contracts entered into or to be entered into application that will be subject to a request regulation, a swap execution facility by the Applicant, including third party for confidential treatment pursuant to § 145.9 described in paragraph (A) shall have of the Commission’s regulations. regulatory service provider or member or reasonable discretion in establishing the manner in which the swap execution facility user agreements that enable or empower the EXHIBITS—OPERATIONAL CAPABILITY Applicant to comply with applicable core complies with the core principles described 22. Attach as Exhibit V, information in section 5h of the Act. principles. Identify: (1) the services that will responsive to the Technology Questionnaire. (a) Guidance. [Reserved] be provided; and (2) the core principles This questionnaire focuses on information (b) Acceptable Practices. [Reserved] addressed by such agreement. pertaining to the Applicant’s program of risk 15. Attach as Exhibit O, a copy of any analysis and oversight. Main topic areas Core Principle 2 of Section 5h of the Act— compliance manual and any other documents include: information security; business Compliance With Rules that describe with specificity the manner in continuity-disaster recovery planning and A swap execution facility shall: which the Applicant will conduct trade resources; capacity and performance (A) Establish and enforce compliance with practice, market, and financial surveillance. planning; systems operations; systems any rule of the swap execution facility, 16. Attach as Exhibit P, a description of the development and quality assurance; and including the terms and conditions of the Applicant’s disciplinary and enforcement physical security and environmental swaps traded or processed on or through the protocols, tools, and procedures and, if controls. The questionnaire will be provided swap execution facility and any limitation on applicable, the arrangements for alternative to Applicants on the Commission’s Web site. access to the swap execution facility; dispute resolution. Appendix B to Part 37—Guidance on, (B) Establish and enforce trading, trade 17. Attach as Exhibit Q, an explanation processing, and participation rules that will regarding the operation of the Applicant’s and Acceptable Practices in, deter abuses and have the capacity to detect, trading system(s) or platform(s) and the Compliance with Core Principles investigate, and enforce those rules, manner in which the system(s) or platform(s) 1. This appendix provides guidance on including means to provide market satisfy any Commission rules, complying with core principles, both initially participants with impartial access to the interpretations, or guidelines regarding a and on an ongoing basis, to maintain market and to capture information that may swap execution facility’s execution methods, registration under section 5h of the Act and be used in establishing whether rule including the minimum trading functionality this part 37. Where provided, guidance is set violations have occurred; requirement in § 37.3(a)(2) of the forth in paragraph (a) following the relevant (C) Establish rules governing the operation Commission’s regulations. This explanation heading and can be used to demonstrate to of the facility, including rules specifying should include, as applicable, the following: the Commission compliance with the trading procedures to be used in entering and a. For trading systems or platforms that selected requirements of a core principle of executing orders traded or posted on the enable market participants to engage in this part 37. The guidance for the core facility, including block trades; and transactions through an order book: principle is illustrative only of the types of (D) Provide by its rules that when a swap (1) How the trading system or platform matters a swap execution facility may dealer or major swap participant enters into displays all orders and trades in an electronic address, as applicable, and is not intended to or facilitates a swap that is subject to the or other form, and the timeliness in which be used as a mandatory checklist. Addressing mandatory clearing requirement of section the trading system or platform does so; the issues set forth in this appendix would 2(h) of the Act, the swap dealer or major (2) How all market participants have the help the Commission in its consideration of swap participant shall be responsible for ability to see and have the ability to transact whether the swap execution facility is in compliance with the mandatory trading on all bids and offers; and compliance with the selected requirements of requirement under section 2(h)(8) of the Act. (3) An explanation of the trade matching a core principle; provided however, that the (a) Guidance. algorithm, if applicable, and examples of guidance is not intended to diminish or (1) Investigations and investigation how that algorithm works in various trading replace, in any event, the obligations and reports—Warning letters. The rules of a swap scenarios involving various types of orders. requirements of applicants and swap execution facility may authorize its b. For trading systems or platforms that execution facilities to comply with the compliance staff to issue a warning letter to enable market participants to engage in regulations provided under this part 37. a person or entity under investigation or to transactions through a request for quote 2. Where provided, acceptable practices recommend that a disciplinary panel take system: meeting selected requirements of core such an action.

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(2) Additional rules required. A swap (i) The disciplinary panel should impose a (ii) In advance of the hearing, the execution facility should adopt and enforce sanction for each violation found to have respondent should be entitled to examine all any additional rules that it believes are been committed; books, documents, or other evidence in the necessary to comply with the requirements of (ii) The disciplinary panel should possession or under the control of the swap § 37.203. promptly notify the respondent in writing of execution facility. The swap execution (3) Enforcement staff. A swap execution any sanction to be imposed pursuant to facility may withhold documents that: Are facility’s enforcement staff should not paragraph (7)(i) of this guidance and shall privileged or constitute attorney work include either members of the swap advise the respondent that it may request a product; were prepared by an employee of execution facility or persons whose interests hearing on such sanction within the period the swap execution facility but will not be conflict with their enforcement duties. A of time, which shall be stated in the notice; offered in evidence in the disciplinary member of the enforcement staff should not (iii) The rules of a swap execution facility proceedings; may disclose a technique or operate under the direction or control of any may provide that if a respondent fails to guideline used in examinations, person or persons with trading privileges at request a hearing within the period of time investigations, or enforcement proceedings; the swap execution facility. A swap stated in the notice, the respondent will be or disclose the identity of a confidential deemed to have accepted the sanction. source. execution facility’s enforcement staff may (8) Denial of charges and right to hearing. (iii) The swap execution facility’s operate as part of the swap execution In every instance where a respondent has enforcement and compliance staffs should be facility’s compliance department. requested a hearing on a charge that is parties to the hearing, and the enforcement (4) Notice of charges. If compliance staff denied, or on a sanction set by the staff should present their case on those authorized by a swap execution facility or a disciplinary panel, the respondent should be charges and sanctions that are the subject of swap execution facility disciplinary panel given an opportunity for a hearing in the hearing. determines, based upon reviewing an accordance with the rules of the swap (iv) The respondent should be entitled to investigation report pursuant to execution facility. appear personally at the hearing, should be § 37.203(f)(3), that a reasonable basis exists (9) Settlement offers. (i) The rules of a entitled to cross-examine any persons for finding a violation and adjudication is swap execution facility may permit a appearing as witnesses at the hearing, and warranted, it should direct that the person or respondent to submit a written offer of should be entitled to call witnesses and to entity alleged to have committed the settlement at any time after an investigation present such evidence as may be relevant to violation be served with a notice of charges report is completed. The disciplinary panel the charges. and should proceed in accordance with this presiding over the matter may accept the (v) The swap execution facility should guidance. A notice of charges should offer of settlement, but may not alter the require persons within its jurisdiction who adequately state the acts, conduct, or terms of a settlement offer unless the are called as witnesses to participate in the practices in which the respondent is alleged respondent agrees. hearing and produce evidence. The swap to have engaged; state the rule, or rules, (ii) The rules of a swap execution facility execution facility should make reasonable alleged to have been violated (or about to be may provide that, in its discretion, a efforts to secure the presence of all other violated); advise the respondent that it is disciplinary panel may permit the persons called as witnesses whose testimony entitled, upon request, to a hearing on the respondent to accept a sanction without would be relevant. charges; and prescribe the period within either admitting or denying the rule (vi) The rules of a swap execution facility which a hearing on the charges may be violations upon which the sanction is based. may provide that a sanction may be requested. If the rules of the swap execution (iii) If an offer of settlement is accepted, the summarily imposed upon any person within facility so provide, a notice may also advise: panel accepting the offer should issue a its jurisdiction whose actions impede the (i) That failure to request a hearing within written decision specifying the rule progress of a hearing. the period prescribed in the notice, except for violations it has reason to believe were (11) Right to appeal. The rules of a swap good cause, may be deemed a waiver of the committed, including the basis or reasons for execution facility may permit the parties to right to a hearing; and the panel’s conclusions, and any sanction to a proceeding to appeal promptly an adverse (ii) That failure to answer or to deny be imposed, which should include full decision of a disciplinary panel in all or in expressly a charge may be deemed to be an customer restitution where customer harm is certain classes of cases. Such rules may admission of such charge. demonstrated, except where the amount of require a party’s notice of appeal to be in (5) Right to representation. Upon being restitution or to whom it should be provided writing and to specify the findings, served with a notice of charges, a respondent cannot be reasonably determined. If an offer conclusions, or sanctions to which objection of settlement is accepted without the are taken. If the rules of a swap execution should have the right to be represented by agreement of the enforcement staff, the facility permit appeals, then both the legal counsel or any other representative of decision should adequately support the respondent and the enforcement staff should its choosing in all succeeding stages of the disciplinary panel’s acceptance of the have the opportunity to appeal and the swap disciplinary process, except by any member settlement. Where applicable, the decision execution facility should provide for the of the swap execution facility’s board of should also include a statement that the following: directors or disciplinary panel, any employee respondent has accepted the sanctions (i) The swap execution facility should of the swap execution facility, or any person imposed without either admitting or denying establish an appellate panel that should be substantially related to the underlying the rule violations. authorized to hear appeals of respondents. In investigations, such as a material witness or (iv) The respondent may withdraw his or addition, the rules of a swap execution respondent. her offer of settlement at any time before final facility may provide that the appellate panel (6) Answer to charges. A respondent acceptance by a disciplinary panel. If an offer may, on its own initiative, order review of a should be given a reasonable period of time is withdrawn after submission, or is rejected decision by a disciplinary panel within a to file an answer to a notice of charges. The by a disciplinary panel, the respondent reasonable period of time after the decision rules of a swap execution facility governing should not be deemed to have made any has been rendered. the requirements and timeliness of a admissions by reason of the offer of (ii) The composition of the appellate panel respondent’s answer to a notice of charges settlement and should not be otherwise should be consistent with part 40 of this should be fair, equitable, and publicly prejudiced by having submitted the offer of chapter, and should not include any available. settlement. members of the swap execution facility’s (7) Admission or failure to deny charges. (10) Hearings. (i) The swap execution compliance staff or any person involved in The rules of a swap execution facility may facility need not apply the formal rules of adjudicating any other stage of the same provide that if a respondent admits or fails evidence for a hearing; nevertheless, the proceeding. The rules of a swap execution to deny any of the charges, a disciplinary procedures for the hearing may not be so facility should provide for the appeal panel may find that the violations alleged in informal as to deny a fair hearing. No proceeding to be conducted before all of the the notice of charges for which the member of the disciplinary panel for the members of the appellate panel or a panel respondent admitted or failed to deny any of matter may have a financial, personal, or thereof. the charges have been committed. If the swap other direct interest in the matter under (iii) Except for good cause shown, the execution facility’s rules so provide, then: consideration. appeal or review should be conducted solely

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on the record before the disciplinary panel, at the hearing; a statement of findings and disruptions of the delivery or cash settlement the written exceptions filed by the parties, conclusions; a determination that the process through surveillance, compliance, and the oral or written arguments of the summary action should be affirmed, and disciplinary practices and procedures, parties. modified, or reversed; and a declaration of including methods for conducting real-time (iv) Promptly following the appeal or any action to be taken pursuant to the monitoring of trading and comprehensive review proceeding, the appellate panel determination, and the effective date and and accurate trade reconstructions. should issue a written decision and should duration of such action. (a) Guidance. The monitoring of trading provide a copy to the respondent. The (b) Acceptable Practices. [Reserved] activity in listed swaps should be designed decision issued by the appellate panel should to prevent manipulation, price distortion, Core Principle 3 of Section 5h of the Act— adhere to all the requirements of § 37.206(d) and disruptions of the physical-delivery and Swaps Not Readily Susceptible to to the extent that a different conclusion is cash settlement processes. The swap Manipulation reached from that issued by the disciplinary execution facility should have rules in place panel. The swap execution facility shall permit that allow it to intervene to prevent or reduce (12) Final decisions. Each swap execution trading only in swaps that are not readily such market disruptions. Once a threatened facility should establish rules setting forth susceptible to manipulation. or actual disruption is detected, the swap when a decision rendered pursuant to its (a) Guidance. execution facility should take steps to rules will become the final decision of such (1) In general, a swap contract is an prevent the market disruption or reduce its swap execution facility. agreement to exchange a series of cash flows severity. (13) Summary fines for violations of rules over a period of time based on some (1) General requirements. Real-time regarding timely submission of records. A reference price, which could be a single monitoring for market anomalies is the most swap execution facility may adopt a price, such as an absolute level or a effective, but the swap execution facility may summary fine schedule for violations of rules differential, or a price index calculated based also demonstrate that it has an acceptable relating to the failure to timely submit on multiple observations. Moreover, such a program if some of the monitoring is accurate records required for clearing or reference price may be reported by the swap accomplished on a T+1 basis. The monitoring verifying each day’s transactions. A swap execution facility itself or by an independent of trading should use automated alerts to execution facility may permit its compliance third party. When listing a swap for trading, detect abnormal price movements and staff, or a designated panel of swap execution a swap execution facility shall ensure a unusual trading volumes in real-time and facility officials, to summarily impose minor swap’s compliance with Core Principle 3, instances or threats of manipulation, price sanctions against persons within the swap paying special attention to the reference price distortion, and disruptions on at least a T+1 execution facility’s jurisdiction for violating used to determine the cash flow exchanges. basis. The T+1 detection and analysis should such rules. A swap execution facility’s Specifically, Core Principle 3 requires that incorporate any additional data that becomes summary fine schedule may allow for the reference price used by a swap not be available on a T+1 basis, including the trade warning letters to be issued for first-time readily susceptible to manipulation. As a reconstruction data. In some cases, a swap violations or violators. If adopted, a summary result, when identifying a reference price, a execution facility may demonstrate that its swap execution facility should either: fine schedule should provide for manual processes are effective. The swap Calculate its own reference price using progressively larger fines for recurring execution facility should continually monitor suitable and well-established acceptable violations. the appropriateness of its swaps’ terms and methods or carefully select a reliable third- (14) Emergency disciplinary actions. (i) A conditions, including the physical-delivery party index. swap execution facility may impose a requirements or reference prices used to (2) The importance of the reference price’s sanction, including suspension, or take other determine cash flows or settlement. The suitability for a given swap is similar to that summary action against a person or entity swap execution facility should act promptly of the final settlement price for a cash-settled subject to its jurisdiction upon a reasonable to address the conditions that are causing futures contract. If the final settlement price belief that such immediate action is price distortions or market disruptions, is manipulated, then the futures contract including, when appropriate, changes to necessary to protect the best interest of the does not serve its intended price discovery marketplace. and risk management functions. Similarly, contract terms. The swap execution facility (ii) Any emergency disciplinary action inappropriate reference prices cause the cash should be mindful that changes to contract should be taken in accordance with a swap flows between the buyer and seller to differ terms may affect whether a product is subject execution facility’s procedures that provide from the proper amounts, thus benefitting to the trade execution and clearing for the following: one party and disadvantaging the other. requirements of the Act. (A) If practicable, a respondent should be Thus, careful consideration should be given (2) Physical-delivery swaps. For physical- served with a notice before the action is to the potential for manipulation or delivery swaps, the swap execution facility taken, or otherwise at the earliest possible distortion of the reference price. should monitor for conditions that may cause opportunity. The notice should state the (3) For swaps that are settled by physical the swap to become susceptible to price action, briefly state the reasons for the action, delivery or by cash settlement refer to the manipulation or distortion, including: The and state the effective time and date, and the guidance in appendix C to part 38 of this general availability of the commodity duration of the action. chapter—Demonstration of Compliance That specified by the swap, the commodity’s (B) The respondent should have the right a Contract is not Readily Susceptible to characteristics, and the delivery locations; to be represented by legal counsel or any Manipulation, section b(2) and section c(5), and if available, information related to the other representative of its choosing in all respectively. size and ownership of deliverable supplies. proceedings subsequent to the emergency (b) Acceptable Practices. [Reserved] (3) Cash-settled swaps. For cash-settled action taken. The respondent should be given swaps, the swap execution facility should the opportunity for a hearing as soon as Core Principle 4 of Section 5h of the Act— monitor for pricing abnormalities in the reasonably practicable and the hearing Monitoring of Trading and Trade Processing index or instrument used to calculate the should be conducted before the disciplinary The swap execution facility shall: reference price. If the swap execution facility panel pursuant to the rules of the swap (A) Establish and enforce rules or terms computes its own reference price used for execution facility. and conditions defining, or specifications cash flows or settlement, it should promptly (C) Promptly following the hearing detailing: amend any methodologies that result, or are provided for in paragraph (14)(ii)(B) of this (1) Trading procedures to be used in likely to result, in manipulation, price guidance, the swap execution facility should entering and executing orders traded on or distortions, or market disruptions, or impose render a written decision based upon the through the facilities of the swap execution new methodologies to resolve the threat of weight of the evidence contained in the facility; and disruptions or distortions. If the swap record of the proceeding and should provide (2) Procedures for trade processing of execution facility relies upon a third-party a copy to the respondent. The decision swaps on or through the facilities of the swap index or instrument, including an index or should include a description of the summary execution facility; and instrument traded on another venue for the action taken; the reasons for the summary (B) Monitor trading in swaps to prevent swap reference price, it should conduct due action; a summary of the evidence produced manipulation, price distortion, and diligence to ensure that the reference price is

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not susceptible to manipulation and that the (B) Provide the information to the facility should have the authority to terms and conditions of the swap continue to Commission on request; and intervene as necessary to maintain markets comply with § 37.300. (C) Have the capacity to carry out such with fair and orderly trading and to prevent (4) Ability to obtain information. The swap international information-sharing agreements or address manipulation or disruptive trading execution facility shall demonstrate that it as the Commission may require. practices, whether the need for intervention has access to sufficient information to assess (a) Guidance. [Reserved] arises exclusively from the swap execution whether trading in swaps listed on its (b) Acceptable Practices. [Reserved] facility’s market or as part of a coordinated, market, in the index or instrument used as cross-market intervention. A swap execution Core Principle 6 of Section 5h of the Act— a reference price, or the underlying facility should have the flexibility and Position Limits or Accountability commodity for its listed swaps is being used independence to address market emergencies to affect prices on its market. The swap (A) In general. To reduce the potential in an effective and timely manner consistent execution facility should demonstrate that it threat of market manipulation or congestion, with the nature of the emergency, as long as can obtain position and trading information especially during trading in the delivery all such actions taken by the swap execution directly from the market participants that month, a swap execution facility that is a facility are made in good faith to protect the conduct substantial trading on its facility or trading facility shall adopt for each of the integrity of the markets. However, the swap through an information sharing agreement contracts of the facility, as is necessary and execution facility should also have rules that with other venues or a third-party regulatory appropriate, position limitations or position allow it to take market actions as may be service provider. If the position and trading accountability for speculators. directed by the Commission. Additionally, in information is not available directly from the (B) Position limits. For any contract that is situations where a swap is traded on more market participants in its markets, but is subject to a position limitation established by than one platform, emergency action to available through information sharing the Commission pursuant to section 4a(a) of liquidate or transfer open interest shall be as agreements with other trading venues or a the Act, the swap execution facility shall: directed, or agreed to, by the Commission or third-party regulatory service provider, the (1) Set its position limitation at a level no the Commission’s staff. Swap execution swap execution facility should cooperate in higher than the Commission limitation; and facility rules should include procedures and such information sharing agreements. The (2) Monitor positions established on or guidelines for decision-making and swap execution facility may limit the through the swap execution facility for implementation of emergency intervention application of the requirement for market compliance with the limit set by the that avoid conflicts of interest in accordance participants to keep and provide records of Commission and the limit, if any, set by the with the provisions of section 40.9 of this their activity in the index or instrument used swap execution facility. chapter, and include alternate lines of as a reference price, the underlying (a) Guidance. Until such time that communication and approval procedures to commodity, and related derivatives markets, compliance is required under part 151 of this address emergencies associated with real to only those market participants that chapter, a swap execution facility should time events. To address perceived market have reasonable discretion to comply with conduct substantial trading on its facility. threats, the swap execution facility should § 37.600, including considering part 150 of (5) Risk controls for trading. An acceptable have rules that allow it to take emergency this chapter. For Required Transactions as program for preventing market disruptions actions, including imposing or modifying defined in § 37.9, a swap execution facility shall demonstrate appropriate trading risk position limits, imposing or modifying price may demonstrate compliance with § 37.600 controls, in addition to pauses and halts. Risk limits, imposing or modifying intraday by setting and enforcing position limitations controls should be adapted to the unique market restrictions, imposing special margin or position accountability levels only with characteristics of the trading platform and of requirements, ordering the liquidation or respect to trading on the swap execution the markets to which they apply and should transfer of open positions in any contract, facility’s own market. For Permitted be designed to avoid market disruptions ordering the fixing of a settlement price, Transactions as defined in § 37.9, a swap extending or shortening the expiration date without unduly interfering with that market’s execution facility may demonstrate price discovery function. The swap execution compliance with § 37.600 by setting and or the trading hours, suspending or curtailing facility may choose from among controls that enforcing position accountability levels or trading in any contract, transferring customer include: pre-trade limits on order size, price sending the Commission a list of Permitted contracts and the margin, or altering any collars or bands around the current price, Transactions traded on the swap execution contract’s settlement terms or conditions, or, message throttles, daily price limits, and facility. if applicable, providing for the carrying out intraday position limits related to financial (b) Acceptable Practices. [Reserved] of such actions through its agreements with risk to the clearing member, or design other its third-party provider of clearing or types of controls, as well as clear error-trade Core Principle 7 of Section 5h of the Act— regulatory services. and order-cancellation policies. Within the Financial Integrity of Transactions (2) A swap execution facility should specific array of controls that are selected, The swap execution facility shall establish promptly notify the Commission of its the swap execution facility should set the and enforce rules and procedures for exercise of emergency action, explaining its parameters for those controls, so that the ensuring the financial integrity of swaps decision-making process, the reasons for specific parameters are reasonably likely to entered on or through the facilities of the using its emergency authority, and how serve the purpose of preventing market swap execution facility, including the conflicts of interest were minimized, disruptions and price distortions. If a swap clearance and settlement of the swaps including the extent to which the swap is fungible with, linked to, or a substitute for pursuant to section 2(h)(1) of the Act. execution facility considered the effect of its other swaps on the swap execution facility or (a) Guidance. [Reserved] emergency action on the underlying markets on other trading venues, such risk controls (b) Acceptable Practices. [Reserved] and on markets that are linked or referenced should, to the extent practicable, be to the contracts traded on its facility, coordinated with any similar controls placed Core Principle 8 of Section 5h of the Act— including similar markets on other trading on those other swaps. If a swap is based on Emergency Authority venues. Information on all regulatory actions the level of an equity index, such risk The swap execution facility shall adopt carried out pursuant to a swap execution controls should, to the extent practicable, be rules to provide for the exercise of emergency facility’s emergency authority should be coordinated with any similar controls placed authority, in consultation or cooperation included in a timely submission of a certified on national security exchanges. with the Commission, as is necessary and rule pursuant to part 40 of this chapter. (b) Acceptable practices. [Reserved] appropriate, including the authority to (b) Acceptable Practices. [Reserved] liquidate or transfer open positions in any Core Principle 5 of Section 5h of the Act— swap or to suspend or curtail trading in a Core Principle 9 of Section 5h of the Act— Ability To Obtain Information swap. Timely Publication of Trading Information The swap execution facility shall: (a) Guidance. (A) In general. The swap execution facility (A) Establish and enforce rules that will (1) A swap execution facility should have shall make public timely information on allow the facility to obtain any necessary rules that authorize it to take certain actions price, trading volume, and other trading data information to perform any of the functions in the event of an emergency, as defined in on swaps to the extent prescribed by the described in section 5h of the Act; § 40.1(h) of this chapter. A swap execution Commission.

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(B) Capacity of swap execution facility. and managerial resources to discharge each (b) Acceptable Practices. [Reserved] The swap execution facility shall be required responsibility of the swap execution facility. Core Principle 15 of Section 5h of the Act— to have the capacity to electronically capture (B) Determination of resource adequacy. Designation of Chief Compliance Officer and transmit trade information with respect The financial resources of a swap execution to transactions executed on the facility. facility shall be considered to be adequate if (A) In general. Each swap execution (a) Guidance. [Reserved] the value of the financial resources exceeds facility shall designate an individual to serve (b) Acceptable Practices. [Reserved] the total amount that would enable the swap as a chief compliance officer. execution facility to cover the operating costs (B) Duties. The chief compliance officer Core Principle 10 of Section 5h of the Act— of the swap execution facility for a one-year shall: Recordkeeping and Reporting period, as calculated on a rolling basis. (1) Report directly to the board or to the (A) In general. A swap execution facility (a) Guidance. [Reserved] senior officer of the facility; shall: (b) Acceptable Practices. [Reserved] (2) Review compliance with the core (1) Maintain records of all activities Core Principle 14 of Section 5h of the Act— principles in this subsection; relating to the business of the facility, System Safeguards (3) In consultation with the board of the including a complete audit trail, in a form facility, a body performing a function similar and manner acceptable to the Commission The swap execution facility shall: (A) Establish and maintain a program of to that of a board, or the senior officer of the for a period of five years; risk analysis and oversight to identify and facility, resolve any conflicts of interest that (2) Report to the Commission, in a form minimize sources of operational risk, through may arise; and manner acceptable to the Commission, the development of appropriate controls and (4) Be responsible for establishing and such information as the Commission procedures, and automated systems, that: administering the policies and procedures determines to be necessary or appropriate for (1) Are reliable and secure; and required to be established pursuant to this the Commission to perform the duties of the (2) Have adequate scalable capacity; section; Commission under the Act; and (B) Establish and maintain emergency (5) Ensure compliance with the Act and the (3) Keep any such records relating to swaps procedures, backup facilities, and a plan for rules and regulations issued under the Act, defined in section 1a(47)(A)(v) of the Act disaster recovery that allow for: including rules prescribed by the open to inspection and examination by the (1) The timely recovery and resumption of Commission pursuant to section 5h of the Securities and Exchange Commission. operations; and Act; and (B) Requirements. The Commission shall (2) The fulfillment of the responsibilities (6) Establish procedures for the adopt data collection and reporting and obligations of the swap execution remediation of noncompliance issues found requirements for swap execution facilities facility; and during compliance office reviews, look backs, that are comparable to corresponding (C) Periodically conduct tests to verify that internal or external audit findings, self- requirements for derivatives clearing the backup resources of the swap execution reported errors, or through validated organizations and swap data repositories. facility are sufficient to ensure continued: complaints. (a) Guidance. [Reserved] (1) Order processing and trade matching; (C) Requirements for procedures. In (b) Acceptable Practices. [Reserved] (2) Price reporting; establishing procedures under paragraph Core Principle 11 of Section 5h of the Act— (3) Market surveillance; and (B)(6) of this section, the chief compliance (4) Maintenance of a comprehensive and Antitrust Considerations officer shall design the procedures to accurate audit trail. establish the handling, management Unless necessary or appropriate to achieve (a) Guidance. response, remediation, retesting, and closing the purposes of the Act, the swap execution (1) Risk analysis and oversight program. In of noncompliance issues. facility shall not: addressing the categories of its risk analysis (D) Annual reports. (A) Adopt any rules or take any actions and oversight program, a swap execution (1) In general. In accordance with rules that result in any unreasonable restraint of facility should follow generally accepted trade; or standards and best practices with respect to prescribed by the Commission, the chief (B) Impose any material anticompetitive the development, operation, reliability, compliance officer shall annually prepare burden on trading or clearing. security, and capacity of automated systems. and sign a report that contains a description (a) Guidance. An entity seeking registration (2) Testing. A swap execution facility’s of: as a swap execution facility may request that testing of its automated systems and business (i) The compliance of the swap execution the Commission consider under the continuity-disaster recovery capabilities facility with the Act; and provisions of section 15(b) of the Act, any of should be conducted by qualified, (ii) The policies and procedures, including the entity’s rules, including trading protocols independent professionals. Such qualified the code of ethics and conflict of interest or policies, and including both operational independent professionals may be policies, of the swap execution facility. rules and the terms or conditions of products independent contractors or employees of the (2) Requirements. The chief compliance listed for trading, at the time of registration swap execution facility, but should not be officer shall: or thereafter. The Commission intends to persons responsible for development or (i) Submit each report described in clause apply section 15(b) of the Act to its operation of the systems or capabilities being (1) with the appropriate financial report of consideration of issues under this core tested. the swap execution facility that is required to principle in a manner consistent with that (3) Coordination. To the extent practicable, be submitted to the Commission pursuant to previously applied to contract markets. a swap execution facility should: section 5h of the Act; and (b) Acceptable Practices. [Reserved] (i) Coordinate its business continuity- (ii) Include in the report a certification disaster recovery plan with those of the that, under penalty of law, the report is Core Principle 12 of Section 5h of the Act— market participants it depends upon to accurate and complete. Conflicts of Interest: provide liquidity, in a manner adequate to (a) Guidance. [Reserved] The swap execution facility shall: enable effective resumption of activity in its (b) Acceptable Practices. [Reserved] (A) Establish and enforce rules to minimize markets following a disruption causing Issued in Washington, DC, on May 17, conflicts of interest in its decision-making activation of the swap execution facility’s 2013, by the Commission. process; and business continuity-disaster recovery plan; (B) Establish a process for resolving the (ii) Initiate and coordinate periodic, Melissa D. Jurgens, conflicts of interest. synchronized testing of its business Secretary of the Commission. (a) Guidance. [Reserved] continuity-disaster recovery plan with those (b) Acceptable Practices. [Reserved] of the market participants it depends upon to Appendices to Core Principles and provide liquidity; and Other Requirements for Swap Core Principle 13 of Section 5h of the Act— (iii) Ensure that its business continuity- Execution Facilities Financial Resources disaster recovery plan takes into account (A) In general. The swap execution facility such plans of its telecommunications, power, NOTE: The following appendices will not shall have adequate financial, operational, water, and other essential service providers. appear in the Code of Federal Regulations.

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Appendix 1—Commission Voting all its market participants. This is significant, trading environment. I am pleased to have Summary as for the first time, the broad public will be the commitment of Chairman Gensler who able to gain access and compete in this stated his intention to revisit the SEF rule if On this matter, Chairman Gensler and market with the assurance that their bids or it proves to conflict with international Commissioners Chilton, O’Malia and Wetjen offers will be communicated to the rest of the regulatory requirements making U.S. voted in the affirmative; Commissioner market. This provision alone will platforms uncompetitive or disadvantaged as Sommers voted in the negative. significantly enhance transparency and a result of this rulemaking. competition in the market. For SEFs to be successful, the Commission SEFs also will have the flexibility to offer Appendix 2—Statement of Chairman must be faithful to the express directives of Gary Gensler trading through requests for quotes. The rule provides that such requests would have to go Dodd-Frank and implement rules that are out to a minimum of three unaffiliated clear and promote efficient and fair trading. I support the final rulemaking on swap market participants before a swap that is As I explain below, the Commission’s rules execution facilities (SEFs). This rule is key to cleared, made available to trade and less than have fallen short of these objectives. fulfilling transparency reforms that Congress a block could be executed. There will be an mandated in the Dodd-Frank Wall Street The Rule’s Requirement To Send a Request Reform and Consumer Protection Act. initial phase-in period with a minimum of for Quote to Three Market Participants Is Congress included a trade execution two participants to smooth the transition. Not Supported by Law requirement in the law. This means that As long as the minimum functionality is met, as detailed in the rule, and the SEF Dodd-Frank seeks to ‘‘promote the trading swaps subject to mandatory clearing and on SEFs and to promote pre-trade price made available to trade would move to complies with these rules and the core transparency in the swaps market.’’ 1 To transparent trading platforms. Market principles, the SEF can conduct business participants would benefit from the price through any means of interstate commerce, advance these objectives, the rule must competition that comes from trading such as the Internet, telephone or even the permit SEFs to offer flexible execution platforms where multiple participants have mail. Thus, today’s rule is technology platforms that ensure pre-trade price the ability to trade swaps by accepting bids neutral. transparency, but at the same time, allow and offers made by multiple participants. Under these transparency reforms coupled participants (buy-side, sell-side, commercial Congress also said that the market with the Commission’s rule on making swaps firms) to execute various products with participants must have impartial access to available for trading, the trade execution different levels of trading liquidity at the these platforms. requirement will be phased in for market price acceptable to them. Farmers, ranchers, producers and participants, giving them time to comply. Thus, the success of a SEF is determined commercial companies that want to hedge a These reforms benefited from extensive by whether it will be able to meet the public comments. Moving forward, the CFTC risk by locking in a future price or rate would liquidity needs of various market will work with SEF applicants on get the benefit of the competition and participants. Although the rules allow a implementation. transparency that trading platforms, both Request for Quote (RFQ) to accommodate SEFs and designated contract markets Appendix 3—Concurring Statement of transactions in less liquid products to the (DCMs), will provide. Commissioner Scott D. O’Malia extent that such products are determined to These transparent platforms will give everyone looking to compete in the Today, the Commission votes to establish be made available to trade as provided in the 2 marketplace the ability to see the prices of a new trading venue, a Swap Execution Made Available to Trade rule, I am available bids and offers prior to making a Facility (SEF) that will allow market concerned that the requirement to broadcast decision on a transaction. By the end of this participants to access a more transparent a quote to at least three market participants year, a significant portion of interest rate and market and offer innovative trading is not supported by the statute and is not credit derivative index swaps would be in opportunities. Unlike the futures exchanges based on data analysis.3 full view to the marketplace before which are tied to a single clearinghouse, One way for the Commission to assess transactions occur. This is a significant shift trades executed on SEFs can be cleared at trading liquidity on a SEF and make toward market transparency from the status different clearinghouses, which will provide necessary adjustments to the RFQ quo. a new competitive execution space. For these requirement is to analyze transaction data Such common-sense transparency has reasons, I have always had high hopes for that the Commission now receives from SEFs. existed in the securities and futures markets Swap Data Repositories (SDRs). Over time, as I am pleased that the final rule has been since the historic reforms of the 1930s. liquidity increases and the market feels more revised to soften many of the proposed rough Transparency lowers costs for investors, confident about SEFs, there will be a natural businesses and consumers, as it shifts edges and should allow for a smooth progression for market participants to migrate information from dealers to the broader transition to this new trading environment. to more centralized execution platforms and public. It promotes competition and The final rule allows for a streamlined increases liquidity. temporary registration process to ensure that the role of the RFQ may be significantly As Congress made clear in the law, trading SEF platforms are not disadvantaged by reduced. But again, the Commission should on SEFs and DCMs would be required only regulatory delays that could stifle not come up with an unsubstantiated number when financial institutions transact with competition or provide a first-mover and declare it to be the law. Instead, the financial institutions. End-users would advantage. However, instead of Commission must make such determination benefit from access to the information on ‘‘rubberstamping’’ SEFs’ applications, a based on an evaluation of the SDR these platforms, but would not be required to better approach would have been to conduct transaction data. use them. a more substantive, but limited review of Further, companies would be able to applications by coming up with a Checklist 1 CEA section 5h(e). continue relying on customized that contains specific requirements and that 2 Commissioner Scott D. O’Malia Dissenting transactions—those not required to be takes into account work already done by the Statement, Process for a Designated Contract Market cleared—to meet their particular needs, as National Futures Association in reviewing or Swap Execution Facility to Make a Swap well as to enter into large block trades. the SEFs’ systems and rulebooks. Available to Trade under Section 2(h)(8) of the Consistent with Congress’ directive that I am also cautiously optimistic about the Commodity Exchange Act; Swap Transaction multiple parties have the ability to trade with Commission’s commitment to revisit the SEF Compliance and Implementation Schedule; Trade multiple parties on these transparent rule and other Commission’s rules to address Execution Requirement Under Section 2(h) of the Commodity Exchange Act (May 16, 2013). platforms, these reforms require that market regulatory conflicts with foreign 3 participants trade through an order book, and jurisdictions. Such regulatory disparities will A SEF is defined as a ‘‘trading system . . . in which multiple participants have the ability to . . . provide the flexibility as well to seek discourage U.S. and foreign traders from trade swaps by accepting bids and offers made by requests for quotes. doing business in the United States and multiple participants in the . . . system, through To be a registered SEF, the trading platform prompt them to move their businesses to any means of interstate commerce.’’ CEA section will be required to provide an order book to foreign jurisdictions with a less restrictive 1(a)(50).

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The Rule Should Have Provided Further methods.5 A better approach would have allowed by the CEA. Just because these Clarity Regarding Voice Execution. been to add voice to the rule text as the third transactions are not mentioned in the statute, method of execution on a SEF. SEFs, by definition, may execute swaps they don’t have to be banned by the ‘‘through any means of interstate The Rule Should Have Provided Clarity Commission’s rules. commerce.’’ 4 As I mentioned before, I Regarding Exchange of Swaps for Related I am glad that in the final rule, the strongly support the use of various methods Position Transactions Commission took a more reasonable of execution, including voice, to foster a For some unknown reason, the draft rule approach and now has committed to competitive trading environment on a SEF. I prohibited trades involving an Exchange of entertaining requests from market am pleased that the final rule acknowledges Swaps for Related Positions (ESRPs). Yet participants to permit off-exchange trades the ‘‘any means of interstate commerce’’ again, such ban would have caused the where swaps are components of exchanges of clause and provides for a role of voice and pendulum of the Commission’s regulations to swaps for physicals transactions. other means of execution. However, I remain continue its swing toward futures trading as the Commodity Exchange Act (CEA) Conclusion concerned that although the preamble to the expressly allows for bone fide Exchange of rule provides an example of a voice-based For the reasons stated above, I reluctantly Futures for Related Positions transactions. concur with the decision of the Commission method of execution, the rule text does not The Commission sought to ban ESRPs to approve this final rule. expressly allow for voice and other execution transactions because they were not expressly [FR Doc. 2013–12242 Filed 6–3–13; 8:45 am] 4 CEA section 1(a) (50). 5 Commission Regulation § 37.9. BILLING CODE 6351–01–P

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