2013-12250

Federal Register, Volume 78 Issue 107 (Tuesday, June 4, 2013)[Federal Register Volume 78, Number 107 (Tuesday, June 4, 2013)]

[Rules and Regulations]

[Pages 33605-33632]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2013-12250]

[[Page 33605]]

Vol. 78

Tuesday,

No. 107

June 4, 2013

Part III

Commodity Futures Trading Commission

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17 CFR Parts 37 and 38

Process for a Designated Contract Market or Swap Execution Facility To

Make a Swap Available to Trade, Swap Transaction Compliance and

Implementation Schedule, and Trade Execution Requirement Under the

Commodity Exchange Act; Final Rule

Federal Register / Vol. 78 , No. 107 / Tuesday, June 4, 2013 / Rules

and Regulations

[[Page 33606]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 37 and 38

RIN 3038-AD18

Process for a Designated Contract Market or Swap Execution

Facility To Make a Swap Available to Trade, Swap Transaction Compliance

and Implementation Schedule, and Trade Execution Requirement Under the

Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

adopting regulations that establish a process for a designated contract

market (``DCM'') or swap execution facility (``SEF'') to make a swap

subject to the trade execution requirement pursuant to the Commodity

Exchange Act (``CEA''). The Commission is also adopting regulations to

establish a schedule to phase in compliance with the trade execution

requirement. The schedule will provide additional time for compliance

with this requirement.

DATES: The rules will become effective August 5, 2013.

FOR FURTHER INFORMATION CONTACT: Nhan Nguyen, Special Counsel, Division

of Market Oversight (``DMO'', 202-418-5932, [email protected]; Roger

Smith, Attorney Advisor, DMO, 202-418-5344, [email protected]; or David

Van Wagner, Chief Counsel, DMO, 202-418-5119, [email protected];

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Sections 37.10 and 38.12 of the Commission's Regulations--Final

Rules

A. Sections 37.10(a) and 38.12(a)--Procedure To Make a Swap

Available to Trade

1. Sections 37.10(a)(1) and 38.12(a)(1)--Required Submission

2. Sections 37.10(a)(2) and 38.12(a)(2)--Listing Requirement

3. Submission of a Group, Category, Type or Class of Swaps

4. Consideration of Swaps on Another SEF or DCM, or Bilateral

Transactions

B. Sections 37.10(b) and 38.12(b)--Factors to Consider To Make a

Swap Available to Trade

C. Sections 37.10(c) and 38.12(c)--Applicability

D. Sections 37.10(d) and 38.12(d)--Removal

E. Annual Review

F. Notice to the Public of Available To Trade Determinations

III. Sections 37.12 and 38.11 of the Commission's Regulations--Trade

Execution Compliance Schedule

IV. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

1. Proposed Information Provided by Reporting Entities/Persons

2. Summary of Comments and Commission Response

C. Cost-Benefit Considerations

1. Available-to-Trade Rule

a. Part 40 Process and Determination Factors

b. Applicability

c. Consideration of Section 15(a) Factors--Available-to-Trade

Rule

2. Trade Execution Compliance Schedule

V. List of Commenters

Text of the Regulations, Guidance and Acceptable Practices

I. Background

Section 723(a)(3) of the Dodd-Frank Act added section 2(h)(8) of

the Commodity Exchange Act (``CEA'') to require that swap transactions

subject to the clearing requirement must be traded on either a

designated contract market (``DCM'') or swap execution facility

(``SEF''), unless no DCM or SEF ``makes the swap available to trade''

or the transaction is not subject to the clearing requirement under

section 2(h)(7) (the ``trade execution requirement'').\1\

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\1\ For example, section 2(h)(7) of the CEA, as amended by

section 723 of the Dodd-Frank Act, provides an exception to the CEA

section 2(h)(1) clearing requirement (``the end-user exception'') if

one of the counterparties to a swap (i) is not a financial entity,

(ii) is using swaps to hedge or mitigate commercial risk, and (iii)

notifies the Commission how it generally meets its financial

obligations associated with entering into non-cleared swaps. 7 U.S.C

2(h)(7). Under the authority given by section 2(h)(7)(C)(ii) of the

CEA, the Commission has also adopted regulations to exempt certain

small banks, saving associations, farm credit system institutions,

and credit unions from the definition of ``financial entity,'' thus

potentially allowing the transactions of those entities to qualify

for an exemption from the clearing requirement. 17 CFR 50.5(d). The

Commission may determine that swap transactions exempted from the

clearing requirement pursuant to other statutory authority would

also not be subject to the section 2(h)(8) trade execution

requirement. For example, on April 11, 2013, the Commission

published final rules issued under section 4(c) of the CEA to exempt

swaps between certain affiliated entities (``inter-affiliates'')

within a corporate group from the clearing requirement. The

Commission determines that such swaps would not be subject to the

trade execution requirement.

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On December 14, 2011, the Commodity Futures Trading Commission

(``Commission'') proposed regulations to establish a process for a DCM

or SEF to notify the Commission that a swap is ``available to trade''

for purposes of the trade execution requirement (``Further Notice of

Proposed Rulemaking'' or ``FNPRM'').\2\ The proposed regulations would

be included in part 37 and part 38 of the Commission's regulations to

implement the available-to-trade provision in section 2(h)(8) of the

CEA. The comment period for the FNPRM ended on February 13, 2012. The

Commission received 32 written comments from members of the public and

hosted a public roundtable on this topic. Commission staff also

participated in several meetings with market participants.\3\ As a

result of the written comments received and dialogue with market

participants, the Commission in this final rule has revised and/or

eliminated certain provisions that were proposed in the FNPRM.

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\2\ Process for a Designated Contract Market or Swap Execution

Facility to Make a Swap Available to Trade, 76 FR 77728 (Dec. 14,

2011). Sections 5(d)(1) and 5h(f)(1) of the CEA require DCMs and

SEFs, respectively, to comply with any requirement that the

Commission may impose by rule or regulation pursuant to section

8a(5) of the CEA, 7 U.S.C. 12a(5), which authorizes the Commission

to promulgate such regulations as, in the judgment of the

Commission, that are reasonably necessary to effectuate any of the

provisions or to accomplish any of the purposes of the CEA. In

addition, section 721(b) of the Dodd-Frank Act provides the

Commission with authority to adopt rules to define ``[any] term

included in an amendment to the Commodity Exchange Act . . . made by

[the Dodd-Frank Act].'' 15 U.S.C. 8321, as enacted by section 721 of

the Dodd-Frank Act.

\3\ Meeting summaries are available through the Commission's Web

site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1125.

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On September 20, 2011, the Commission also proposed regulations to

establish a schedule to implement the trade execution requirement.\4\

The proposed regulations would be included in part 37 and part 38 of

the Commission's regulations. The comment period for the proposed

regulations ended on November 4, 2011. The Commission received 33

written comments from members of the public, and after consideration of

those comments, is adopting the final implementation schedule for the

trade execution requirement as proposed, but with certain

clarifications.

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\4\ Swap Transaction Compliance and Implementation Schedule:

Clearing and Trade Execution Requirements under Section 2(h) of the

CEA, 76 FR 58186 (Sep. 20, 2011).

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The final regulations adopted herein will become effective August

5, 2013.

II. Sections 37.10 and 38.12 of the Commission's Regulations--Final

Rules

As proposed in the FNPRM, Sec. Sec. 37.10 and 38.12 established a

process for a SEF or a DCM, respectively, to make a swap available to

trade under section 2(h)(8) of the CEA.

Proposed Sec. Sec. 37.10(a) and 38.12(a) set forth the

filing procedure that SEFs

[[Page 33607]]

and DCMs would utilize to demonstrate that a swap is available to

trade. Under the proposal, a SEF or DCM would be required to submit an

available-to-trade determination with the Commission under the rule

approval and self-certification procedures in part 40 of the

Commission's regulations.

Proposed Sec. Sec. 37.10(b) and 38.12(b) set forth eight

factors that a DCM or SEF may consider, as appropriate, to determine

that a swap is available to trade.\5\

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\5\ See infra note 90 and accompanying text.

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Proposed Sec. Sec. 37.10(c) and 38.12(c) required that

upon a determination that a swap is available to trade by a SEF or DCM,

all other DCMs and SEFs listing or offering that swap or an

economically equivalent swap for trading must also make those swaps

available to trade.

Proposed Sec. Sec. 37.10(d) and 38.12(d) required DCMs

and SEFs to perform an annual review and assessment of their

determinations.

A. Sections 37.10(a) and 38.12(a)--Procedure To Make a Swap Available

to Trade

1. Sections 37.10(a)(1) and 38.12(a)(1)--Required Submission

Under proposed Sec. Sec. 37.10(a) and 38.12(a), a SEF or DCM would

initially determine that a swap is available to trade and submit that

determination to the Commission, either for approval or self-

certification, pursuant to the rule filing procedures of part 40 of the

Commission's regulations.\6\

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\6\ See Sections 40.5 and 40.6 and Provisions Common to

Registered Entities, 76 FR 44776 (Jul. 27, 2011). The Commission

views a DCM or SEF's determination that a swap is available to trade

as a ``trading protocol'' that falls under the definition of a

``rule'' under Sec. 40.1 of the Commission's regulations. Section

40.1(i) defines a rule as ``any constitutional provision, article of

incorporation, bylaw, rule, regulation, resolution, interpretation,

stated policy, advisory, terms and conditions, trading protocol,

agreement or instrument corresponding thereto, including those that

authorize a response or establish standards for responding to a

specific emergency, and any amendment or addition thereto or repeal

thereof, made or issued by a registered entity or by the governing

board thereof or any committee thereof, in whatever form adopted.''

Therefore, SEFs and DCMs would be required to submit a determination

to the Commission for approval or self-certification under part 40

of the Commission's regulations.

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Under Sec. 40.5, a registered entity may request Commission

approval of a new rule prior to its implementation.\7\ The Commission

has a 45-day review period to review the request and may extend the

review period for an additional 45 days in specified circumstances.\8\

The Commission may also extend the review period beyond an additional

45 days, based on a written agreement with the registered entity.\9\

Under Sec. 40.6, a registered entity may submit a new rule to the

Commission under self-certification procedures. The Commission has 10

business days to review the rule before it is deemed certified and can

be made effective. The Commission, however, may stay the certification

for an additional 90 days, during which time it must provide a 30-day

public comment period.\10\ Under either procedure, the registered

entity must initially provide an explanation and analysis of the rule

and its compliance with the applicable provisions of the CEA, including

the core principles, and the Commission's regulations thereunder.\11\

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\7\ 17 CFR 40.5(a).

\8\ 17 CFR 40.5(c) and (d). In determining whether to extend the

review period, the Commission will consider whether the proposed

rule raises novel or complex issues, the submission is incomplete,

or the requestor does not respond completely to Commission questions

in a timely manner. 17 CFR 40.5(d)(1).

\9\ 17 CFR 40.5(d)(2).

\10\ 17 CFR 40.6(b) and (c). In determining whether to stay a

self-certification, the Commission will consider whether the rule

presents novel or complex issues; is accompanied by inadequate

explanation; or is potentially inconsistent with the CEA. 17 CFR

40.6(c)(1).

\11\ See 17 CFR 40.5(a)(5), 40.6(a)(7)(v).

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In the case of an available-to-trade determination, the

accompanying explanation and analysis in the submission would detail

the manner in which the SEF or DCM considered the factors in proposed

Sec. 37.10(b) or Sec. 38.12(b).\12\ At any time during its review

under Sec. 40.5 or during the 90-day review period under Sec. 40.6,

the Commission may notify the registered entity that it objects to the

proposed certification because it is inconsistent or appears to be

inconsistent with the CEA or the Commission's regulations.\13\

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\12\ See infra note 90 and accompanying text for a list of the

proposed determination factors in the FNPRM.

\13\ See 17 CFR 40.5(e), 40.6(c)(3).

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Upon the Commission approving a SEF's or DCM's available-to-trade

determination or permitting a SEF's or DCM's available-to-trade

determination certification to become effective, the swap involved

would be deemed available to trade. If that swap also is subject to the

clearing requirement, then the swap must be executed on a SEF as a

Required Transaction (as defined in part 37 of the Commission's

regulations) or on a DCM in order to satisfy the trade execution

requirement under section 2(h)(8) of the CEA. The Commission notes that

the trade execution requirement does not apply to swaps that are not

subject to the clearing requirement under section 2(h)(1) of the

CEA.\14\

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\14\ See supra note 1. The Commission addresses the methods by

which swaps that are subject to the trade execution requirement must

be executed on a SEF or DCM. Swaps that are subject to the trade

execution requirement (and are not block trades as defined under

Sec. 43.2 of the Commission's regulations) and that are traded on a

SEF are defined as Required Transactions under part 37 of the

Commission's regulations governing SEFs. Under Sec. 37.9(a)(2),

Required Transactions must be executed by either (1) an Order Book,

as defined in Sec. 37.3(a)(3); or (2) a Request for Quote System,

as defined in Sec. 37.9(a)(3), that operates in conjunction with an

Order Book. See Core Principles and Other Requirements for Swap

Execution Facilities (May 17, 2013). Swaps that are subject to the

trade execution requirement and traded on a DCM must be executed

pursuant to subpart J of part 38 of the Commission's regulations,

which implements revised DCM Core Principle 9 under section 5(d)(9)

of the CEA, as amended by section 735(b) of the Dodd-Frank Act. 7

U.S.C. 7(d)(9).

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Summary of Comments

With respect to the filing procedures set forth in proposed

Sec. Sec. 37.10(a) and 38.12(a), several commenters opposed the

procedures and recommended that all swaps subject to the clearing

requirement under section 2(h)(1) of the CEA should be subject to the

trade execution requirement because the Dodd-Frank Act does not specify

a separate process to make a swap available to trade.\15\ In this

regard, some commenters stated that under section 2(h)(8)(B) of the

CEA, swaps subject to the clearing requirement are automatically

subject to mandatory trade execution unless a SEF or DCM does not list

the swap for trading.\16\ Some commenters viewed the proposed procedure

as duplicative of the mandatory clearing determination process and

accordingly stated that the Commission should rely on the clearing

determination process to also determine whether a swap is available to

trade.\17\ The commenters further stated that utilizing the clearing

determination as the exclusive basis for finding that a swap is

available to trade would subject more swaps to the trade execution

[[Page 33608]]

requirement and further the objectives of the Dodd-Frank Act.\18\

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\15\ MarketAxess Comment Letter at 3; WMBAA Comment Letter at 3;

AFR Comment Letter at 3; SDMA Comment Letter at 3; ODEX Comment

Letter at 1.

\16\ MarketAxess Comment Letter at 2; AFR Comment Letter at 4;

ODEX Comment Letter at 1. Section 2(h)(8)(B) of the CEA states that

mandatory trade execution does not apply ``if no [DCM or SEF] makes

the swap available to trade'' (emphasis added). 7 U.S.C. 2(h)(8)(B).

\17\ SDMA Comment Letter at 4-5; WMBAA Comment Letter at 3;

MarketAxess Comment Letter at 3-5; AFR Comment Letter at 4. See

infra note 90 and accompanying text for a description of the

proposed determination factors. Under Sec. 39.5(a)(3)(ii)(A) of the

Commission's regulations, a mandatory clearing submission must

include information regarding the ``existence of significant

outstanding notional exposures, trading liquidity, and adequate

pricing data'' of a subject swap.

\18\ WMBAA Comment Letter at 2; MarketAxess Comment Letter at 9.

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In contrast, some commenters stated that the process for

determining whether a swap is available to trade is separate from the

process for determining whether a swap is subject to the clearing

requirement. Some of the commenters relied on the statutory language

\19\ and legislative history \20\ of the Dodd-Frank Act to support this

view, with some commenters arguing that ``available for trading''

should mean more than mere listing.\21\ As statutory support, several

commenters stated that section 2(h)(8) of the CEA specifies two

distinct prerequisites for subjecting a swap to mandatory trade

execution: (1) The swap must be subject to mandatory clearing and (2)

the swap must be made available to trade.\22\ Markit also noted that

the language of the clearing requirement under section 2(h)(1)-(2) of

the CEA, as enacted by the Dodd-Frank Act, does not address making a

swap available to trade.\23\ Further, AIMA noted that the clearing

determination factors differ from the proposed factors in an available-

to-trade determination.\24\

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\19\ Markit Comment Letter at 2; ICI Comment Letter at 3-4;

SIFMA AMG Comment Letter at 3; CEWG Comment Letter at 2; AIMA

Comment Letter at 1.

\20\ Some commenters cited the July 2010 Senate floor remarks of

U.S. Senator Blanche Lincoln, in which she stated that determining

whether a swap is available to trade should consist of more than

conducting a listing inquiry. According to Senator Lincoln, ``[t]he

[Commission] could consider, for example, whether there is a minimum

amount of liquidity such that the swap can actually be traded on the

facility. The mere `listing' of the swap by a [SEF], in and of

itself . . . should not be sufficient to trigger the Trade Execution

Requirement.'' Markit Comment Letter at 2 n.6; Chatham Comment

Letter at 2-3; ICI Comment Letter at 3-4.

\21\ Morgan Stanley Comment Letter at 3; Bloomberg Comment

Letter at 4; Sunguard Kiodex Comment Letter at 2; Spring Trading

Comment Letter at 3 (Jan. 12, 2012); ICI Comment Letter at 3-4.

\22\ SIFMA AMG Comment Letter at 3; ICI Comment Letter at 3;

CEWG Comment Letter at 2.

\23\ Markit Comment Letter at 2.

\24\ AIMA Comment Letter at 1.

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Some commenters also asserted that the mandatory clearing

determination and the proposed available-to-trade determination differ

from one another in practical respects.\25\ For example, SIFMA AMG

stated that whether a swap should be mandatorily cleared depends on

whether the swap (1) can be priced for a derivatives clearing

organization's (``DCO'') risk management purposes; and (2) is

standardized; therefore, unlike the available-to-trade determination,

liquidity is not a primary consideration.\26\ AIMA and Morgan Stanley

similarly commented that stated liquidity is considered in a clearing

determination to make certain that a DCO could adequately price the

swap to calculate margin requirements and fulfill risk management

requirements. They further stated that the minimum liquidity needed to

clear a swap is lower than the minimum liquidity needed to support

mandatory trade execution on a DCM or a SEF.\27\ Markit and FXall also

stated that differing tenors of a given swap would be clearable if any

tenor of that swap is cleared, but different tenors would have

significantly different liquidity characteristics.\28\

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\25\ MFA Comment Letter at 3; SIFMA AMG Comment Letter at 4;

Morgan Stanley Comment Letter at 4; AIMA Comment Letter at 1-2; FHLB

Comment Letter at 4 n.2; ICI Comment Letter at 3-4; Markit Comment

Letter at 3; FXall Comment Letter at 5.

\26\ SIFMA AMG Comment Letter at 4.

\27\ AIMA Comment Letter at 1-2; Morgan Stanley Comment Letter

at 4.

\28\ Markit Comment Letter at 3; FXall Comment Letter at 5.

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Therefore, commenters stated that only the more liquid swaps should

be available to trade \29\ to avoid negatively affecting swap pricing

and liquidity.\30\ Morgan Stanley and FXall stated that subjecting

illiquid swaps to the trade execution requirement would further reduce

liquidity in those swaps, as market participants would be reluctant to

reveal their trading interest in low volume markets; such premature

imposition of the trade execution requirement upon illiquid swaps would

likely result in increasing bid-ask spreads and trading costs.\31\ ICI

commented that the risks of low trading volume would drive market

participants to other markets.\32\

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\29\ MFA Comment Letter at 3; Markit Comment Letter at 2; FXall

Comment Letter at 2-3, CEWG Comment Letter at 2; JPMorgan Comment

Letter at 2; FHLB Comment Letter at 4 n.2; Morgan Stanley Comment

Letter at 3; Vanguard Comment Letter at 4; ICI Comment Letter at 3-

4; Chatham Comment Letter at 2.

\30\ Vanguard Comment Letter at 4; FXall Comment Letter at 5;

ICI Comment Letter at 4; Morgan Stanley Comment Letter at 3-4.

\31\ Morgan Stanley Comment Letter at 3; FXall Comment Letter at

5.

\32\ ICI Comment Letter at 4.

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MFA also commented that separate processes, with adequate

Commission oversight and public comment, would mitigate potential

``first-mover advantage'' issues.\33\

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\33\ MFA Comment Letter at 2. See infra discussion at note 41.

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Of the commenters who supported separate processes, some commenters

supported the proposed filing procedures.\34\ CBOE stated that

Sec. Sec. 40.5 and 40.6 allow for timely Commission review and have

been successfully utilized in other areas.\35\

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\34\ CBOE Comment Letter at 1-2; Spring Trading Comment Letter

at 2 (Jan. 12, 2012); AIMA Comment Letter at 3 (supporting use of

the Sec. 40.5 rule approval process only).

\35\ CBOE Comment Letter at 1-2.

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Other commenters, however, opposed the proposed filing

procedures.\36\ ISDA stated that neither Sec. 40.5 nor Sec. 40.6

should be used because an available-to-trade determination is neither a

trading protocol nor a rule.\37\ Some opposing commenters stated that

the Commission, not SEFs and DCMs, should determine whether a swap is

available to trade.\38\ Some commenters asserted that the Commission is

more qualified to make the determination based on its access to market

data.\39\ Several commenters also stated that SEFs and DCMs should not

make the determination because they may have a financial incentive-

based conflict of interest to maximize the number of swaps subject to

mandatory trade execution.\40\ Commenters expressed a related concern

that a SEF's or DCM's determination would be influenced by a desire to

gain a ``first-mover advantage,'' (i.e., acquiring market share in the

trading of a particular swap before other venues can list and develop

trading activity in that swap), which would lead to premature or ill-

advised mandatory trading of illiquid swaps on a SEF or DCM.\41\

Further, several commenters stated that neither Sec. 40.5 nor Sec.

40.6 would provide the Commission with adequate time to review rule

filings and to solicit public comment, which would allow SEFs and DCMs

to acquire this advantage \42\ and

[[Page 33609]]

make it hard for the Commission to reject a determination.\43\

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\36\ Markit Comment Letter at 5; ISDA Comment Letter at 4-5;

Bloomberg Comment Letter at 3; CEWG Comment Letter at 2-3; Morgan

Stanley Comment Letter at 5-6; AIMA Comment Letter at 2-3 (opposing

use of Sec. 40.6 certification process).

\37\ ISDA Comment Letter at 6.

\38\ Markit Comment Letter at 5-6; Vanguard Comment Letter at 5;

Geneva Energy Markets Comment Letter at 2; JPMorgan Comment Letter

at 1; CME Comment Letter at 4-5; FHLB Comment Letter at 3; FSR

Comment Letter at 4; FXall Comment Letter at 5-6; Morgan Stanley

Comment Letter at 5-6; CEWG Comment Letter at 6; ISDA Comment Letter

at 3-4, 6; Tradeweb Comment Letter at 4-5.

\39\ FHLB Comment Letter at 3-4; ISDA Comment Letter at 3;

Markit Comment Letter at 5; FXall Comment Letter at 6.

\40\ Bloomberg Comment Letter at 2; CME Comment Letter at 4-5;

FHLB Comment Letter at 3; Markit Comment Letter at 5; CEWG Comment

Letter at 2; ISDA Comment Letter at 3; Morgan Stanley Comment Letter

at 5-6; AIMA Comment Letter at 2; Vanguard Comment Letter at 5;

Geneva Energy Markets Comment Letter at 2; JPMorgan Comment Letter

at 2.

\41\ FXall Comment Letter at 6-7; Bloomberg Comment Letter at 2;

Tradeweb Comment Letter at 2-3; FSR Comment Letter at 2; ISDA

Comment Letter at 3; CME Comment Letter at 4; Morgan Stanley Comment

Letter at 5-6.

\42\ UBS Comment Letter at 1; Chatham Comment Letter at 3; AIMA

Comment Letter at 2; ISDA Comment Letter at 3-5; CEWG Comment Letter

at 3; Markit Comment Letter at 5-6; Morgan Stanley Comment Letter at

5.

\43\ Markit Comment Letter at 6; ISDA Comment Letter at 3; ICI

Comment Letter at 5.

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Several commenters offered alternative approaches to the proposed

process. Bloomberg recommended a separate standalone rule.\44\ Several

commenters, however, recommended that the Commission establish a

``pilot program'' to phase in the available-to-trade process by

initially deeming certain highly liquid swaps as available to trade

(and therefore making them subject to the trade execution requirement)

for a fixed time period. Commenters stated that this approach would

provide market participants and trading venues with time to adjust to

the trade execution requirement \45\ and minimize market disruptions

caused during implementation.\46\

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\44\ Bloomberg Comment Letter at 3 n.10.

\45\ Vanguard Comment Letter at 4; FSR Comment Letter at 5;

JPMorgan Comment Letter at 2.

\46\ Markit Comment Letter at 3; Tradeweb Comment Letter at 3-4.

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MarketAxess and CME recommended that only swaps that have been

determined to be subject to the clearing requirement should be subject

to an available-to-trade determination.\47\ Both commenters argued that

determining whether a swap is available to trade, for purposes of the

trade execution requirement, would be legally insignificant unless a

swap is required to be cleared first, and thus believe that the

Commission should first determine which swaps will be subject to the

clearing requirement.\48\

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\47\ CME Comment Letter at 3; MarketAxess Comment Letter at 7-8.

\48\ Id.

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Bloomberg also noted that the Commission has the authority under

Sec. 5c(c) of the CEA to deny an available-to-trade determination only

if it is ``inconsistent with'' the CEA or the Commission's regulations

and requested clarification on how the Commission would interpret this

term in this context.\49\

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\49\ Bloomberg Comment Letter at 3 n.10.

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Commission Determination

The Commission is adopting the proposed available-to-trade process,

subject to modifications discussed herein. The Commission agrees with

commenters who assert that the CEA's statutory language supports an

available-to-trade determination that is separate from a mandatory

clearing determination.\50\ In response to comments, the Commission has

determined that at this time, it will only review available-to-trade

submissions for swaps that it has first determined to be subject to the

clearing requirement under Sec. 39.5 of the Commission's

regulations.\51\ The Commission believes that adopting a sequenced

approach in such a manner is consistent with the trade execution

requirement under section 2(h)(8) of the CEA because the trade

execution mandate only applies if a swap is (1) subject to mandatory

clearing and (2) made available to trade by a SEF or DCM.\52\

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\50\ In response to comments that the Dodd-Frank Act does not

condition mandatory trade execution of a swap on an affirmative

Commission determination, the Commission further notes that section

8a(5) of the CEA authorizes the Commission to promulgate such

regulations as, in its judgment, are reasonably necessary to

effectuate any of the provisions or to accomplish any of the

purposes of the CEA. 7 U.S.C. 12a(8). Further, section 721(b) of the

Dodd-Frank Act provides the Commission with authority to adopt rules

to define ``[any] term included in an amendment to the Commodity

Exchange Act . . . made by [the Dodd-Frank Act].'' 15 U.S.C. 8321,

as enacted by section 721 of the Dodd-Frank Act. Additionally,

sections 5(d)(1) and 5h(f)(1) of the CEA require DCMs and SEFs,

respectively, to comply with any requirement that the Commission may

impose by rule or regulation pursuant to section 8a(5) of the CEA.

\51\ Section 39.5 of the Commission's regulations sets forth a

process under which the Commission will review swaps to determine

whether the swaps are required to be cleared.

\52\ Section 50.25 of the Commission's regulations establishes a

schedule to phase in compliance with the clearing requirement by

category of market participant. Category 1 entities, which include a

swap dealer, a security-based swap dealer, a major swap participant,

a major security-based swap participant, or an active fund, have 90

days to comply with the clearing requirement. Category 2 entities,

which include a commodity pool, private fund, or person

predominantly engaged in activities that are in the business of

banking or that are financial in nature, have 180 days to comply

with the clearing requirement. Certain third-party subaccounts and

all other swap transactions receive 270 days to comply with the

clearing requirement. See Swap Transaction Compliance and

Implementation Schedule: Clearing Requirement under Section 2(h) of

the CEA, 77 FR 44441 (July 20, 2012). The Commission notes that it

will accept for review available-to-trade determinations for swaps

determined to be subject to the clearing requirement, prior to the

applicable date for compliance.

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The clearing determination process, which the Commission notes is

not initiated by a SEF or DCM, primarily focuses on the ability to

mitigate risk through clearing by a DCO and the five statutory factors

under section 2(h)(2)(D) of the CEA.\53\ In particular with respect to

risk management, the Commission considers whether imposing the clearing

requirement would mitigate systemic risk through the collateralization

of risk exposures, which includes counterparty credit risk that arises

between two counterparties to an uncleared swap.\54\ In this regard,

the Commission assesses whether a particular class of swaps has

sufficient liquidity for risk management purposes, i.e., pricing and

margining of the cleared swaps.\55\ The Commission has noted in the

context of clearing for interest rate swaps, for example, that DCOs do

not focus on the liquidity of specific individual swaps from a risk

management perspective, but rather on a portfolio basis.\56\ In

contrast, the available-to-trade determination process will be

initiated by a SEF or DCM and may focus primarily on whether a swap has

sufficient trading liquidity to be subject to mandatory trade

execution.

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\53\ To make a clearing determination, the Commission must

consider five factors: (1) The existence of significant outstanding

notional exposures, trading liquidity, and adequate pricing data;

(2) the availability of rule framework, capacity, operational

expertise and resources, and credit support infrastructures to clear

the contract on terms that are consistent with the material terms

and trading conventions on which the contract is then traded; (3)

the effect on the mitigation of systemic risk, taking into account

the size of the market for such contract and the resources of the

DCO available to clear the contract; (4) the effect on competition,

including appropriate fees and charges applied to clearing; and (5)

the existence of reasonable legal certainty in the event of the

insolvency of the relevant derivatives clearing organization or one

or more of its clearing members with regard to the treatment of

customer and swap counterparty positions, funds, and property. 7

U.S.C. 2(h)(2)(D)(ii)(I)-(IV), as enacted by section 723 of the

Dodd-Frank Act.

\54\ 77 FR 74285. In the Commission's clearing requirement final

rule, certain classes of credit default swaps (CDS) and interest

rate swaps (IRS) would become subject to the clearing requirement,

i.e., cleared by a registered DCO. Per section 2(h)(2)(D)(ii) of the

CEA, the Commission considered the effect of clearing those classes

of swaps on mitigating systemic risk. With respect to the proposed

CDS indices, the Commission believes that mandatory clearing would

(1) mitigate counterparty credit risk by allowing a DCO to become

the buyer to every seller of those indices, and vice versa; and (2)

collateralize risk exposures by allowing a DCO to calculate and

collect initial margin and guaranty fund contributions. 77 FR 74297-

98. With respect to the IRS proposed to be cleared, the Commission

believes that the three DCOs that have submitted clearing

determinations--CME, LCH, and IDCH--would (1) mitigate counterparty

credit risk by establishing themselves as a central counterparty to

reduce the number of open bilateral contracts; and (2) facilitate

collateral efficiency through a central counterparty clearing

approach. 77 FR 74312.

\55\ For example, the Commission has noted that higher trading

liquidity in swaps would assist DCOs in end-of-day settlement

procedures, as well as in managing the risk of CDS portfolios,

particularly in mitigating the liquidity risk associated with

unwinding a portfolio of a defaulting clearing member. 77 FR 47176.

\56\ Specifically, liquidity is viewed by a DCO as a function of

whether a portfolio of swaps has common specifications that are

determinative of their economic characteristics, such that a DCO can

price and risk manage the portfolio in a default situation. 77 FR

74301.

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With respect to the proposed procedure to determine that a swap is

available to trade, the Commission is adopting the rule as proposed and

codifying the proposed rule text to Sec. Sec. 37.10(a)(1) and

38.12(a)(1).\57\ The part

[[Page 33610]]

40 procedures provide a reasonable approach by allowing DCMs and SEFs--

the entities responsible for listing or offering the swaps for trading

and supporting related trading activity--to initially determine whether

a swap is available to trade, and therefore, subject to the trade

execution requirement. The Commission notes that although it will have

access to market data, SEFs and DCMs will have sufficient expertise and

experience with respect to swaps trading to make an initial

determination and to submit that determination to the Commission under

the part 40 procedures. Accordingly, the part 40 procedures provide

SEFs and DCMs with the flexibility to make an initial available-to-

trade determination while allowing for appropriate Commission review

and regulatory oversight, as well as an opportunity for public comment.

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\57\ In response to ISDA's comment that neither 17 CFR 40.5 nor

Sec. 40.6 should apply because an available-to-trade determination

is neither a trading protocol nor a rule, the Commission notes that

the definition of ``rule'' under 17 CFR 40.1(h) of the Commission's

regulations would encompass an available-to-trade determination.

Section 40.1(h) defines ``rule'' as ``any constitutional provision,

article of incorporation, bylaw, rule, regulation, resolution,

interpretation, stated policy, term and condition, trading protocol,

agreement or instrument corresponding thereto, in whatever form

adopted, and any amendment or addition thereto or repeal thereof,

made or issued by a registered entity . . . .'' The Commission views

an available-to-trade determination as a ``trading protocol.''

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The Commission also believes that the part 40 procedures should

afford sufficient time for market participants to offer public comment

on available-to-trade submissions and for the Commission to review such

submissions and any related comments. In this regard, for swaps

submitted by a SEF or DCM under the Sec. 40.5 rule approval process or

the Sec. 40.6 rule certification process, initial available-to-trade

determinations may present novel and complex issues that will warrant

retention for an additional review.\58\ Under Sec. 40.6(c)(2) of the

Commission's regulations, interested parties would have sufficient

opportunity to comment on the certification during a 30-day mandatory

public comment period. Therefore, swaps self-certified as available to

trade may initially be subject to a review period of up to 100

days.\59\ Similarly, for swaps submitted under the Sec. 40.5 rule

approval process that present novel or complex issues, the review

period for initial rule approval submissions may be extended for at

least additional 45 days for the same reason.\60\ The Commission notes

that it routinely solicits public comments for Sec. 40.5 rule approval

submissions and anticipates that market participants would be similarly

able to provide the Commission with comments on available-to-trade

filings.

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\58\ Under Sec. Sec. 40.5(d)(1) and 40.6(c) of the Commission's

regulations, the Commission may stay the certification of a new rule

or rule amendment that, among other things, presents ``novel or

complex issues that require additional time'' to review or analyze.

\59\ Under 17 CFR 40.6(c)(3), a new rule subject to a stay would

become effective, pursuant to its certification, at the expiration

of the 90-day review period unless the Commission withdraws the stay

prior to that time, or the Commission notifies the registered entity

during the 90-day period that it objects to the proposed

certification on the grounds that the proposed rule or rule

amendment is inconsistent with the CEA or the Commission's

regulations.

\60\ As noted, under 17 CFR 40.5(d)(2), the Commission may

extend the review period beyond an additional 45 days based on

written agreement with the submitting SEF or DCM.

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The Commission expects that over time, available-to-trade filings

should present fewer novel or complex issues, thereby not warranting

extensions of the applicable review period; SEFs and DCMs would likely

submit swap determinations that are similar to previous submissions and

the Commission would become more experienced with the process. The

Commission, however, will continue to consider whether to stay rule

certifications or rule approval submissions on a case-by-case basis.

In response to Bloomberg's request for clarification, the

Commission notes that whether a SEF's or DCM's initial determination is

``inconsistent'' with the CEA and the Commission's rules and

regulations would depend upon the SEF's or DCM's analysis and

application of the determination factors to the swap submitted as

available to trade, as discussed further below. The Commission also

notes that a determination could also be deemed inconsistent if it does

not consider one or more of the required factors, or the swap otherwise

does not meet other prerequisites established in the submission

process, discussed further below.

2. Sections 37.10(a)(2) and 38.12(a)(2)--Listing Requirement

The FNPRM requested comment on (1) whether the Commission should

allow a SEF or DCM to submit an available-to-trade determination for a

swap under proposed Sec. Sec. 37.10(a) and 38.12(a) if the SEF or DCM

making the submission does not itself list that swap for trading; and

(2) if so, whether the Commission would allow that SEF or DCM to

consider the same swap or an economically equivalent swap that trades

on another SEF, DCM, or primarily or solely in bilateral

transactions.\61\

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\61\ 76 FR 77733.

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Summary of Comments

Several commenters recommended that a SEF or DCM must list the swap

that it submits for an available-to-trade determination.\62\ For

example, Spring Trading and SIFMA AMG recommended that a SEF or DCM

must list a swap for at least 90 days before submitting its

determination.\63\ ISDA recommended that a SEF or DCM must list the

swap during the 6-month period that it proposed for Commission review

of the available-to-trade determination.\64\ ISDA noted that the lack

of a listing requirement would incentivize SEFs and DCMs to try to

submit as many determinations as possible merely to promote centralized

trading.\65\ According to some commenters, the Commission or the

trading facility could evaluate the data gathered \66\ and obtain

experience \67\ during the listing period to determine whether the swap

should be made available to trade. SDMA, however, recommended that a

SEF or DCM should be allowed to submit a determination for a swap that

it does not list.\68\

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\62\ Eaton Vance Management Comment Letter at 3; SIFMA AMG

Comment Letter at 10; UBS Comment Letter at 2; Morgan Stanley

Comment Letter at 6 n.6; ISDA Comment Letter at 7; Tradeweb Comment

Letter at 5.

\63\ SIFMA AMG Comment Letter at 10; Spring Trading Comment

Letter at 3 (Jan. 12, 2012).

\64\ ISDA Comment Letter at 7. ISDA proposed eliminating the

proposed Sec. 40.6 certification process and stated that the

Commission should establish a minimum 6-month review period for

determinations submitted by a SEF or DCM.

\65\ ISDA Comment Letter at 6.

\66\ ISDA Comment Letter at 7; SIFMA AMG Comment Letter at 10;

Spring Trading Comment Letter at 3.

\67\ Tradeweb Comment Letter at 5; UBS Comment Letter at 2;

Morgan Stanley Comment Letter at 6 n.6.

\68\ SDMA Comment Letter at 9.

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Commission Determination

The Commission agrees with commenters who support a listing

requirement and is amending the proposed rule text to adopt new

Sec. Sec. 37.10(a)(2) and 38.12(a)(2), which requires a SEF or DCM to

certify that it is listing the swap for which it submits an available-

to-trade determination.\69\ The Commission believes that an initial

determination that a swap is available to trade should be made by a SEF

or a DCM that offers the swap for trading.\70\

[[Page 33611]]

The Commission, however, is not adopting a minimum listing period so as

to avoid delaying the determination process, and hence implementation

of the trade execution requirement as discussed below. The Commission

also notes, as discussed further below, that a SEF or DCM is allowed to

consider activity in the same swap listed on another SEF or DCM as well

as the amount of off-exchange activity in the same swap.

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\69\ The Commission notes that such swap would be certified or

approved under Sec. 40.2 or Sec. 40.3 of the Commission's

regulations prior to listing the swap for trading.

\70\ Bloomberg requested that a SEF submitting an available-to-

trade determination for a particular swap would be able to

incorporate by reference, in its submission, information and

analysis already completed by a DCO and the Commission as part of

the mandatory clearing determination process with respect to that

swap. Bloomberg Comment Letter at 4-5. In response to Bloomberg's

request, the Commission views the part 40 process as flexible and

would allow relevant information from a clearing determination to be

referenced in an available-to-trade submission. The Commission,

however, emphasizes that such information leading to an affirmative

clearing determination would not automatically indicate that a swap

is available to trade.

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3. Submission of a Group, Category, Type or Class of Swaps

The FNPRM requested comment on (1) whether the Commission should

allow a SEF or DCM to submit its available-to-trade determination for a

``group, category, type or class of swaps'' based on the factors

proposed in Sec. Sec. 37.10(b) and 38.12(b) of the FNPRM; and (2) how

``group, category, type or class of swaps'' should be defined.\71\

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\71\ 76 FR 77733.

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Summary of Comments

Some commenters stated that the Commission should allow SEFs and

DCMs to submit determinations for a group, category, type, or class of

swap.\72\ In defining ``group, category, type, or class'' of swap, AIMA

stated that the Commission should take into account specific

characteristics of certain swaps to avoid subjecting certain illiquid

swaps to mandatory trade execution.\73\

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\72\ Spring Trading Comment Letter at 5 (Jan. 12, 2012); AIMA

Comment Letter at 2; SDMA Comment Letter at 7; AFR Comment Letter at

2 (inferring that mandatory trade execution should be determined for

a ``class'' of swaps).

\73\ AIMA Comment Letter at 2.

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Other commenters, however, expressed concern about making

determinations based on group, category, type or class of swap.\74\

SIFMA AMG and CEWG commented that swaps within a potential ``group''

may feature different liquidity and trading patterns,\75\ while Markit

and ISDA stated that liquidity may differ significantly even among

different tenors of a given swap.\76\ ISDA and Morgan Stanley also

highlighted the difficulty at the outset of defining ``group, category,

type or class of swap.'' \77\ Markit stated that determinations should

be allowed for individual swaps and then applied to ``buckets'' of

maturities and tenors.\78\

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\74\ Markit Comment Letter at 2-3; SIFMA AMG Comment Letter at

11; CEWG Comment Letter at 3-4; ISDA Comment Letter at 10; UBS

Comment Letter at 2; Morgan Stanley Comment Letter at 9.

\75\ SIFMA AMG Comment Letter at 11; CEWG Comment Letter at 4.

With respect to energy commodities, CEWG provided Henry Financial

LD1 Fixed Swap, Henry Financial LD4 Fixed Swap, and ICE's Physical

Basis LD1, which differ in contract size and term, as examples of

swaps within a potential group or class that each possess different

liquidity characteristics, thereby warranting individual

determinations. SIFMA AMG also noted that the liquidity of interest

rate swaps differs significantly depending on time to maturity.

\76\ Markit Comment letter at 2; ISDA Comment Letter at 11. ISDA

offered the Federal Reserve Bank of New York's analysis of trade

data as a demonstration of varying trading volumes for different

tenors of credit default swaps.

\77\ Morgan Stanley Comment Letter at 9.

\78\ Markit Comment Letter at 2. Markit defines ``buckets'' as

groups of maturities and tenors for a given swap that have similar

liquidity measures.

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Commission Determination

The Commission is allowing SEFs and DCMs to submit determinations

for a group, category, type or class of swap to provide greater

efficiency to the available-to-trade determination process. To address

commenters' concerns that swaps within a group, category, type or class

may have different liquidity and trading characteristics, a SEF or DCM

must address, in its submission, the applicable determination factor or

factors apply to all of the swaps within that group, category, type or

class. Further, a SEF and DCM will be allowed to define the scope of

the group, category, type or class of swap that it determines is

available to trade.\79\ To the extent that a SEF or DCM possesses

flexibility to define that scope, however, the Commission still may

approve or deem only part or some of the swaps within that group,

category, type or class as available to trade, based on its review.\80\

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\79\ The Commission notes that for clearing determinations under

Sec. 39.5, it may define a particular group, category, type or

class of swaps for purposes of a clearing determination based on

several considerations. 76 FR 44468. To the extent that such a

determination is informative as to whether a proposed group,

category, type or class of swap that is defined by a SEF or DCM is

available to trade, the Commission may take those considerations

into account. For example, a SEF or a DCM could define a group,

category, type or class of interest rate swaps based on

characteristics that include the nature of the payments streams

(e.g., fixed-to-floating, floating-to-floating, forward rate

agreement (FRA), or overnight indexed swap (OIS)); currency (e.g.,

U.S. dollar, euro, British pound, Japanese yen); floating rate index

referenced (e.g., LIBOR, EURIBOR); and stated termination date

(e.g., 1-year, 2-year, 5-year, 10-year).

\80\ Where the Commission does not approve or deem all of the

swaps within a group, category, type or class submitted by a SEF or

DCM as available to trade, DMO would notify the SEF or DCM of such

an action.

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4. Consideration of Swaps on Another SEF or DCM, or Bilateral

Transactions

The FNPRM requested comment on whether the Commission should allow

a SEF or DCM, in evaluating the factors under proposed Sec. Sec.

37.10(b) and 38.12(b), to consider (1) the same swap or an economically

equivalent swap on another SEF or DCM; and (2) the amount of activity

in the same swap or an economically equivalent swap available primarily

or solely in bilateral transactions.\81\

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\81\ 76 FR 77733.

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Summary of Comments

Several commenters stated that a SEF or DCM should be able to

consider relevant swap activity on other SEFs and DCMs when making an

available-to-trade determination.\82\ Vanguard commented that

determining whether a ``meaningful'' portion of trading in the swap

occurs on a SEF or DCM is important in determining that a swap is

available to trade.\83\ SIFMA AMG stated that the existence of a liquid

trading environment on SEFs and DCMs could indicate that a swap could

be made available to trade without harm to liquidity.\84\ FXall stated

that determinations should be based on a swap's marketwide trading

patterns, so as to avoid unintended effects on liquidity.\85\

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\82\ MFA Comment Letter at 3; Spring Trading Comment Letter at 6

(Jan. 12, 2012); Markit Comment Letter at 3 (discussing importance

of marketwide data); Vanguard Comment Letter at 5; SIFMA AMG Comment

Letter at 6; AIMA Comment Letter at 2; Morgan Stanley Comment Letter

at 6 n.6; FXall Comment Letter at 6 n.18; CBOE Comment Letter at 3.

\83\ Vanguard Comment Letter at 5.

\84\ SIFMA AMG Comment Letter at 6.

\85\ FXall Comment Letter at 6 n.18.

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Some commenters also stated that a SEF or DCM should be able to

consider swaps executed on a bilateral basis.\86\ CBOE stated that

considering a swap's trading activity only on a SEF or DCM would

otherwise incentivize market participants to minimize centralized

trading in order to limit the number of swaps made available to

trade.\87\ SIFMA AMG stated that examining the bilateral market could

reveal a liquid trading environment, but could then raise questions as

to whether a swap should be made available to trade.\88\ MFA and

Vanguard recommended that the Commission utilize data for on- and off-

[[Page 33612]]

exchange trading to make the available-to-trade process more

objective.\89\

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\86\ MFA Comment Letter at 3; SIFMA AMG Comment Letter at 6;

Markit Comment Letter at 3; FXall Comment Letter at 6; Vanguard

Comment Letter at 5; Spring Trading Comment Letter (Jan. 12, 2012)

at 6; CBOE Comment Letter at 3; AIMA Comment Letter at 2; Morgan

Stanley Comment Letter at 6; SDMA Comment Letter at 7.

\87\ CBOE Comment Letter at 3.

\88\ SIFMA AMG Comment Letter at 6.

\89\ MFA Comment Letter at 3; Vanguard Comment Letter at 5.

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Commission Determination

The Commission will allow a SEF or DCM to consider activity in the

same swap listed on another SEF or DCM and the amount of off-exchange

activity in the same swap when determining whether a swap is available

to trade. The Commission agrees with commenters that since the

available-to-trade determination applies marketwide, a SEF or DCM

should be able to consider activity on other SEFs and DCMs, as well as

activity that takes place off-exchange, to the extent that such

information becomes available. Information about trading activity in

the entire swaps marketplace would better inform market participants

about how the swap trades in the overall market and provide interested

parties with additional information and analysis to comment upon. More

comprehensive information would also better inform the Commission in

its evaluation of the available-to-trade submission. The Commission

also believes that consideration of off-exchange trading could provide

additional data and insight about a swap's trading patterns, e.g.,

trading volume or numbers and types of market participants, that would

help a SEF or a DCM address one or more of the determination factors

under Sec. Sec. 37.10(b) and 38.12(b).

B. Sections 37.10(b) and 38.12(b)--Factors To Consider To Make a Swap

Available To Trade

Proposed Sec. Sec. 37.10(b) and 38.12(b) required a SEF or DCM to

consider, as appropriate, the following factors with respect to a swap

that it determines is available to trade: (1) Whether there are ready

and willing buyers and sellers; (2) the frequency or size of

transactions on SEFs, DCMs, or of bilateral transactions; (3) the

trading volume on SEFs, DCMs, or of bilateral transactions; (4) the

number and types of market participants; (5) the bid/ask spread; (6)

the usual number of resting firm or indicative bids and offers; (7)

whether a SEF's trading system or platform or a DCM's trading facility

will support trading in the swap; or (8) any other factor that the SEF

or DCM may consider relevant.\90\ Under the proposed rule, no single

factor would be dispositive, as the DCM or SEF could consider any one

factor or any combination of factors in its determination that a swap

is available to trade.

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\90\ As noted above, the Commission believes that the mere

listing or offering for trading of a swap on a DCM or SEF does not

mean that the swap is available to trade.

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Summary of Comments

Commenters expressed general support for the first seven proposed

factors.\91\ Some commenters stated, however, that SEFs and DCMs should

be required to consider specific factors.\92\ Some commenters also

offered additional factors to consider, such as the ability to

establish connectivity with new market participants without imposing

undue burden; \93\ the level of pre-trade transparency in the existing

market; \94\ and market depth and market breadth.\95\

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\91\ MFA Comment Letter at 2; Markit Comment Letter at 3;

Tradeweb Comment Letter at 3 (proposing a pilot program based on the

proposed factors); Bloomberg Comment Letter at 4; ICI Comment Letter

at 4-5; Vanguard Comment Letter at 4; SIFMA AMG Comment Letter at 5;

Geneva Energy Markets Comment Letter at 2; Spring Trading Comment

Letter at 4 (Jan. 12, 2012); AIMA Comment Letter at 1; CME Comment

Letter at 6; FHLB Comment Letter at 4.

\92\ For example, ISDA recommended that whether a SEF lists and

supports trading in a swap should be a prerequisite. ISDA Comment

Letter at 8. FSR emphasized that broad market participation must be

shown. FSR Comment Letter at 7. Some commenters requested that SEFs

and DCMs be required to consider both the size and frequency of swap

transactions on SEFs, DCMs, and in bilateral transactions. AIMA

Comment Letter at 2; ICI Comment Letter at 5 n.13; SIFMA AMG Comment

Letter at 6.

\93\ FSR Comment Letter at 4.

\94\ Geneva Energy Markets Comment Letter at 2.

\95\ SDMA Comment Letter at 7. According to SDMA, a market depth

test consists of calculating the sum of available bids and offers at

or near the current price for a swap at a particular time, while a

market breadth test consists of calculating the sum of market depth

for a particular swap or class of swaps.

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Other commenters opposed the proposed factors.\96\ In particular,

several commenters objected to the use of ``any other factor'' in a

determination.\97\ Eaton Vance Management and ISDA, for example,

considered ``any other factor'' to be too broad and subjective and

thought that it would incentivize SEFs and DCMs to make illiquid swaps

available to trade.\98\ ICI stated that the Commission would

effectively delegate its authority to establish available-to-trade

standards by allowing a SEF or DCM to use this factor alone.\99\ CEWG

similarly stated that use of non-enumerated factors by a SEF or DCM

would create ``uncertainty and variability'' in the process.\100\

---------------------------------------------------------------------------

\96\ For example, SDMA considered the factors to be duplicative

of the mandatory clearing determination factors set forth in section

2(h)(2)(D) of the CEA, and therefore burdensome and costly. SDMA

Comment Letter at 5.

\97\ Eaton Vance Management Comment Letter at 2; ISDA Comment

Letter at 8; ICI Comment Letter at 5; CEWG Comment Letter at 3.

\98\ Eaton Vance Management Comment Letter at 2; ISDA Comment

Letter at 8.

\99\ ICI Comment Letter at 5.

\100\ CEWG Comment Letter at 3.

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Some commenters also objected to allowing a SEF or DCM to make an

available-to-trade determination based on any one proposed factor and

some recommended that SEFs and DCMs be required to consider all of the

factors.\101\ Vanguard and SIFMA AMG asserted that all of the factors

are relevant \102\ and that consideration of all factors would be

consistent with the mandatory clearing determination process.\103\

CBOE, however, contended that required consideration of all the factors

would frustrate Congress's intent for greater transparency,

competition, and oversight of the swaps market.\104\

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\101\ FHLB Comment Letter at 3; CEWG Comment Letter at 3; Eaton

Vance Management Comment Letter at 3 (adopting ICI's

recommendation); ICI Comment Letter at 2, 5; Vanguard Comment Letter

at 4; Bloomberg Comment Letter at 4; SIFMA AMG Comment Letter at 5;

Chatham Comment Letter at 3; AIMA Comment Letter at 2. Markit stated

that this approach would grant ``unfettered discretion'' to SEFs and

DCMs to disregard a swap's actual liquidity, Markit Comment Letter

at 3. MarketAxess stated that the Commission would lack any basis to

reject a determination. MarketAxess Comment Letter at 8.

\102\ Vanguard Comment Letter at 4; SIFMA AMG Comment Letter at

5.

\103\ SIFMA AMG Comment Letter at 5.

\104\ CBOE Comment Letter at 2.

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Several commenters requested that the Commission set objective

threshold criteria for the proposed factors.\105\ Commenters stated

that without objective criteria, a SEF or DCM would otherwise have

unlimited discretion \106\ to act in its financial self-interest \107\

by determining that a swap is available to trade. Some commenters,

however, acknowledged the difficulty of developing objective liquidity

measurements.\108\

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\105\ Markit Comment Letter at 3; Spring Trading Comment Letter

at 4; AIMA Comment Letter at 4; Bloomberg Comment Letter at 4; FXall

Comment Letter at 6; Eaton Vance Management Comment Letter at 3; ICI

Comment Letter at 5-6; FSR Comment Letter at 3, 6-7. Some commenters

recommended that the swap must (1) trade a minimum number of times

each day; (2) feature a minimum number of market participants

trading it; and (3) meet an overall notional trading volume over a

set period of time. Vanguard Comment Letter at 5; ISDA Comment

Letter at 7; SIFMA AMG Comment Letter at 5, 7. Morgan Stanley

recommended that the swap must (1) have resting bids and offers on

the applicable SEF or DCM for at least half of the relevant trading

hours for the 90-day period prior to a determination; and (2) have

been traded an average of at least 5 times per day during the same

period. Morgan Stanley Comment Letter at 4, 6. JPMorgan recommended

that the swap must show an actual level of liquidity on the

applicable DCM or SEF during a sample period of at least 180 days

prior to the submission. JPMorgan Comment Letter at 1.

\106\ Morgan Stanley Comment Letter at 4.

\107\ FSR Comment Letter at 3; Morgan Stanley Comment Letter at

5; ICI Comment Letter at 6.

\108\ ICI Comment Letter at 6; Markit Comment Letter at 3; SIFMA

AMG Comment Letter at 5-6.

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[[Page 33613]]

Some commenters recommended imposing additional requirements on

SEFs and DCMs with respect to considering the proposed factors. For

example, SIFMA AMG recommended that a SEF or DCM must provide detailed

reasoning and supporting evidence for the factors that it has

considered.\109\ CEWG recommended that a SEF or DCM should provide an

explanation to the Commission, subject to public comment, when it

believes that certain factors do not apply.\110\

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\109\ SIFMA AMG Comment Letter at 2.

\110\ CEWG Comment Letter at 3.

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Commission Determination

The Commission is adopting the rule as proposed under final

Sec. Sec. 37.10(b) and 38.12(b), subject to two modifications and

minor technical corrections. The Commission acknowledges commenters'

concerns regarding the consideration of ``any other factor'' and thus

is removing that factor from the final rule. The Commission believes

that removing this factor will provide market participants with a more

precise set of factors from which a swap may be made available to

trade, thereby improving clarity, lessening uncertainty regarding how a

determination may be made, and promoting a more consistent

determination process. Further, given the adoption of a listing

requirement, the Commission is removing an additional factor--whether a

SEF's or DCM's trading facility or platform will support trading in the

swap. This factor contemplated, among other things, whether the SEF or

DCM lists the swap for trading on its trading facility or platform.

Therefore, in light of the listing requirement, this factor is

redundant.

As discussed above, the Commission has determined in this final

rule that a SEF or DCM may consider activity in the same swap listed on

another SEF or DCM and the amount of off-exchange activity in the same

swap.\111\ Therefore, the Commission is amending the second and third

determination factors in proposed Sec. Sec. 37.10(b)(2) and (3) and

38.12(b)(2) and (3) to remove duplicative language related to this

matter.

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\111\ See supra Section II.A.4--Consideration of Swaps on

Another SEF or DCM, or Bilateral Transactions for the Commission's

discussion.

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The Commission believes that the remaining enumerated factors

provide a sufficient framework from which SEFs, DCMs, the Commission

and market participants may evaluate whether a swap is subject to the

trade execution requirement. While each of the enumerated factors is an

indicator of trading activity and may be relevant in a determination,

the Commission believes that no single factor must always be

considered, nor must a SEF or DCM consider more than one factor in a

determination. Therefore, the Commission believes that satisfying any

one of the determination factors would sufficiently indicate that the

contract is available to trade. By adopting a more flexible approach,

SEFs and DCMs will be able to accommodate swaps with different trading

characteristics that can be supported in a centralized trading

environment. The Commission does not believe that it is necessary for a

SEF or DCM to analyze and demonstrate compliance with every factor in a

submission.

In response to SIFMA AMG's recommendation that a SEF or DCM should

be required to provide detailed reasoning and supporting evidence for

the factors considered, the Commission notes that Sec. Sec. 40.5(a)(5)

and 40.6(a)(7) each requires submissions to contain an explanation and

analysis of the determination, including the factors considered and its

compliance with the CEA and Commission regulations. The Commission

expects such an explanation and analysis to be clear and informative as

to how the factor or factors apply to the swap.

The Commission declines to adopt additional factors in the final

rule as suggested by several commenters. The Commission believes that

the enumerated factors provide a sufficient framework to allow: (1) A

SEF or DCM to consider whether a swap should be subject to the trade

execution requirement; (2) market participants to evaluate a

determination and provide public comment; and (3) the Commission to

evaluate a SEF's or DCM's determination that a swap is available to

trade. Further, the Commission believes that the enumerated factors are

broad in nature and incorporate many of the concepts recommended by

commenters.

The Commission acknowledges commenters' request for establishing

objective criteria associated with the factors and reiterates the view

expressed in the FNPRM that as centralized trading develops and the

Commission gains experience in oversight of swap markets, the

Commission could then consider adopting objective criteria in a future

rulemaking based upon an empirical analysis of swap trading data.

C. Sections 37.10(c) and 38.12(c)--Applicability

Proposed Sec. Sec. 37.10(c)(1) and 38.12(c)(1) required that upon

the Commission deeming that a swap is available to trade based on a SEF

or DCM submission, all other SEFs and DCMs listing or offering for

trading such swap and/or any economically equivalent swap must make

those swaps available to trade for purposes of the trade execution

requirement under section 2(h)(8) of the CEA. The Commission defined

``economically equivalent swap'' under proposed Sec. Sec. 37.10(c)(2)

and 38.12(c)(2) as a swap that the SEF or DCM determines to be

economically equivalent with another swap after consideration of each

swap's material pricing terms. The Commission also noted that if a DCM

or SEF makes a swap available to trade, then the proposed rule would

not require other DCMs and SEFs to list or offer that swap, or an

economically equivalent swap, for trading.

Summary of Comments

Some commenters expressed general support for the economic

equivalence requirement because it would enforce marketwide compliance

with the trade execution requirement,\112\ increase liquidity, and

promote a more efficient available-to-trade process by allowing SEFs

and DCMs to rely on existing determinations.\113\ Many commenters,

however, viewed the proposed definition of ``economically equivalent

swap'' as excessively broad \114\ and vague.\115\ Some commenters

stated that the proposed definition would create uncertainty about

which swaps are available to trade.\116\ Other commenters stated that

the vagueness of the proposed definition would allow SEFs and DCMs to

subject more swaps to mandatory trade execution,\117\ thereby allowing

illiquid swaps to be available to trade.\118\ In addition, MarketAxess

and CEWG commented that the proposed requirement is not prescribed

[[Page 33614]]

by statute.\119\ Morgan Stanley and AIMA stated that the concept itself

is inherently ``elusive and subjective.'' \120\ Other commenters

thought that the process would create uncertainty as to which swaps are

subject to mandatory trade execution.\121\ SIFMA AMG stated that swaps

with slightly different characteristics, e.g., time to maturity, could

differ in the requisite liquidity, yet both be determined to be

available to trade based on economic equivalence.\122\

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\112\ Tradeweb Comment Letter at 5.

\113\ SDMA Comment Letter at 7.

\114\ Eaton Vance Management Comment Letter at 3; CEWG Comment

Letter at 5; Chatham Comment Letter at 4.

\115\ FXall Comment Letter at 7; ICI Comment Letter at 8; ISDA

Comment Letter at 9; Morgan Stanley Comment Letter at 8-9; Spring

Trading Comment Letter at 1 (Feb. 13, 2012); UBS Comment Letter at

2; Chatham Comment Letter at 4-5.

\116\ MFA Comment Letter at 5; ICI Comment Letter at 8; AIMA

Comment Letter at 3.

\117\ MFA Comment Letter at 5; FXall Comment Letter at 7; ICI

Comment Letter at 8; FHLB Comment Letter at 3; Morgan Stanley

Comment Letter at 8; CEWG Comment Letter at 5-6; SIFMA AMG Comment

Letter at 9; ISDA Comment Letter at 9; AIMA Comment Letter at 4;

MarketAxess Comment Letter at 8-9.

\118\ CEWG Comment Letter at 5; FXall Comment Letter at 7;

JPMorgan Comment Letter at 3; Chatham Comment Letter at 4.

\119\ MarketAxess Comment Letter at 9; CEWG Comment Letter at 5.

\120\ Morgan Stanley Comment Letter at 8; AIMA Comment Letter at

3 (based on the multitude of factors that affect the economic terms

of a swap).

\121\ AIMA Comment Letter at 3; Morgan Stanley Comment Letter at

8; ICI Comment Letter at 8; MFA Comment Letter at 5; SIFMA AMG

Comment Letter at 10; ISDA Comment Letter at 9; Sunguard Kiodex

Comment Letter at 2; FXall Comment Letter at 7.

\122\ SIFMA AMG Comment Letter at 9. Several other commenters,

though not all in support of eliminating the proposed requirement,

also acknowledged that two otherwise identical swaps would also

possess different liquidity characteristics if cleared at different

clearinghouses. FSR Comment Letter at 3; Morgan Stanley Comment

Letter at 9; Spring Trading Comment Letter at 2 (Feb. 13, 2012).

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To prevent evasion of the trade execution requirement through

slight modification of a swap's terms, some commenters recommended that

the Commission should rely on its anti-evasion authority under section

6(e) of the CEA.\123\

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\123\ SIFMA AMG Comment Letter at 10; CEWG Comment Letter at 5;

ISDA Comment Letter at 9; AIMA Comment Letter at 4; Morgan Stanley

Comment Letter at 9.

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Commission Determination

At this time, the Commission is adopting the rule as proposed with

certain modifications under a new subsection titled, ``Applicability,''

for SEFs or DCMs that list or offer the same swap for trading. The

Commission, however, is not adopting the proposed definition of

economically equivalent swaps. The Commission intended the economic

equivalence requirement as a means to avoid knowing or reckless evasion

of the trade execution requirement, which could potentially occur if a

SEF or DCM, acting in concert with a market participant, lists and

allows trading of swaps with slightly amended terms to a swap

previously determined to be available to trade. Given that the factors

that could be considered may vary across different asset classes and

products, the Commission recognizes the complexity of determining

economic equivalence between swaps. Further, based on the comments

received, the Commission has determined that it is not feasible, for

purposes of determining which swaps are available to trade, to define

``economic equivalent'' with sufficient precision and clarity.

The Commission is also amending the rule text to clarify that once

a swap is determined to be available to trade under part 40 of the

Commission's regulations (i.e., the Commission approves a SEF's or

DCM's available-to-trade submission under Sec. 40.5 or the submission

is deemed as certified under Sec. 40.6), then all other SEFs and DCMs

that choose to list or offer the swap for trading must do so in

accordance with the trade execution requirement.\124\ Subsequent SEFs

and DCMs will not be required to submit separate available-to-trade

determinations to the Commission for a particular swap after it has

been determined to be available to trade. Importantly, no SEF or DCM is

required to list or offer a swap for trading even if another SEF or DCM

has determined it is available to trade. Once a swap is available for

trade for purposes of section 2(h)(8), however, that swap may only be

executed on a SEF or DCM.

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\124\ See supra note 14 for a discussion of the methods by which

swaps that are subject to the trade execution requirement must be

executed on a SEF or DCM.

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In response to commenters who recommended that the Commission rely

on its existing anti-evasion authority, the Commission notes that its

anti-evasion authority as constituted under section 6(e) of the CEA

would not apply to SEFs and DCMs.\125\ Section 6(e)(5), however, would

apply to the actions of certain market participants--swap dealers and

major swap participants in particular--that are carried out to evade

the trade execution requirement.

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\125\ Section 6(e)(5) of the CEA, as amended by section

741(b)(11) of the Dodd-Frank Act, prescribes that ``[a]ny swap

dealer or major swap participant that knowing or recklessly evades

or participates in or facilitates evasion of the requirements of

section 2(h) [of the CEA] shall be liable . . .'' (emphasis added).

7 U.S.C. 9a.

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D. Sections 37.10(d) and 38.12(d)--Removal

The proposed rule requested comment on (1) whether the Commission

should specify a process where a swap may be determined to be no longer

available to trade; and (2) if so, whether the part 40 processes should

be used for this process. The proposed rule also requested comment on

whether such a determination should apply only to the SEF or DCM that

seeks to make the swap no longer available to trade.\126\

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\126\ 76 FR 77734.

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Summary of Comments

Several commenters responded to the Commission's request for

comments related to whether the Commission should specify a process

whereby a swap that has been determined to be available to trade may no

longer be available to trade. Several commenters supported the

development of a process under which a swap could be determined to be

no longer available to trade for the purposes of the trade execution

requirement. Commenters recommended that the Commission retain the

authority to make such a determination \127\ based on the Commission's

access to data demonstrating a swap's overall liquidity \128\ and the

desire to prevent a SEF or DCM from making conflicting determinations

with respect to the same swap.\129\ ISDA, however, recommended that

market participants should be able to submit to the Commission that a

swap is no longer available to trade because they would have experience

and relevant knowledge of market trends and changes.\130\

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\127\ MFA Comment Letter at 4; FXall Comment Letter at 7-8; ICI

Comment Letter at 7; SIFMA AMG Comment Letter at 11-12; Spring

Trading Comment Letter at 7 (Jan. 12, 2012); ISDA Comment Letter at

8-9; JPMorgan Comment Letter at 2.

\128\ ISDA Comment Letter at 8-9; MFA Comment Letter at 4.

\129\ FXall Comment Letter at 8; MFA Comment Letter at 4.

\130\ ISDA Comment Letter at 8-9.

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Some commenters recommended use of the same factors as those used

when making a determination that a swap is available to trade, albeit

with objective thresholds.\131\ FXall asserted that using objective

criteria would render the removal process ``transparent and

impartial.'' \132\

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\131\ MFA Comment Letter at 4; ICI Comment Letter at 7-8; FXall

Comment Letter at 7-8.

\132\ FXall Comment Letter at 8.

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Some commenters recommended that a determination that a swap is no

longer available to trade should be subject to public notice and

comment.\133\ Accordingly, ICI recommended against using the procedures

under Sec. Sec. 40.5 and 40.6 because they lack adequate opportunity

for public comment.\134\ MFA also recommended that the Commission

provide public notice after a swap is determined to be no longer

available to trade.\135\

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\133\ FXall Comment Letter at 8; ICI Comment Letter at 7; Spring

Trading Comment Letter at 7.

\134\ ICI Comment Letter at 7.

\135\ MFA Comment Letter at 5.

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Some commenters stated that a determination that a swap is no

longer available to trade should only apply to the petitioning SEF or

DCM.\136\ Spring Trading and SDMA stated that to apply the

determination on a marketwide

[[Page 33615]]

basis would otherwise unfairly penalize other non-petitioning SEFs or

DCMs.\137\ ICI and MFA, however, stated that the determination should

apply to all SEFs and DCMs that list or offer the swap for

trading.\138\ ICI stated that applying the determination to only one

SEF or DCM would be inconsistent with the trade execution

requirement.\139\

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\136\ Spring Trading Comment Letter at 7-8 (Jan. 12, 2012); SDMA

Comment Letter at 10.

\137\ Id.

\138\ MFA Comment Letter at 4-5; ICI Comment Letter at 8.

\139\ ICI Comment Letter at 8.

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Commission Determination

The Commission is not adopting a separate process for a SEF or DCM

to submit a determination that a swap is no longer available to trade.

Rather, the Commission believes that where all SEFs and DCMs that had

listed a swap for trading, including the SEF or DCM that submitted the

initial available-to-trade determination under part 40, no longer list

that swap for trading on their respective facility or platform, (i.e.,

all such SEFs and DCMs have ``de-listed'' the swap),\140\ then the

Commission would deem the swap to be no longer available to trade. In

such a case, trading in the swap would no longer be subject to the

trade execution requirement. The Commission believes that this approach

is consistent with section 2(h)(8) of the CEA, which states a swap

would otherwise not be subject to the trade execution requirement if,

among other things, no SEF or DCM makes it available to trade.

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\140\ In some instances, a swap that is available to trade

potentially should no longer be subject to the trade execution

requirement, but not all SEFs and DCMs have de-listed the swap. In

such a case, the Commission may choose to review the available-to-

trade status of such a swap, under Sec. 40.2(b) or Sec.

40.3(a)(10) of the Commission's regulations, which authorizes

Commission staff to request, on an ongoing basis, additional

information, evidence, or data that meets the requirements of the

CEA or the Commission's regulations or policies thereunder. Further,

market participants may request that the Commission, under section

8a(7) of the CEA, designate a swap to be no longer available to

trade. Under section 8a(7), the Commission could initiate a

proceeding to amend a SEF or DCM's available-to-trade designation of

a swap if such a change is necessary for . . . the protection of

traders'' with respect to ``other trading requirements.'' First,

however, the Commission must request in writing that the change be

made and provide for appropriate notice and opportunity for hearing.

The Commission, however, acknowledges that the section 8a(7) process

is complex and emphasizes that the process should only be invoked

where a swap clearly should not remain available to trade, but a SEF

or DCM has declined a request to initiate a new assessment.

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Where all SEFs and DCMs no longer list that swap for trading--

denoting that open interest in that swap does not exist on any facility

or platform \141\--the Commission would deem the swap as no longer

available to trade because that swap would no longer meet any of the

determination factors. The Commission, which will maintain and update a

list of the SEFs and DCMs that list those available-to-trade swaps,

will have access to the information and the ability to make the

determination, without requiring a separate process. In response to

FXall, the Commission believes that this approach would be transparent

and impartial. In response to MFA's recommendation, the Commission will

inform the public that a swap is no longer available to trade via

notice pursuant to new Sec. Sec. 37.10(d) and 38.12(d) (``Removal'').

The Commission is also delegating authority to the Director of the

Division of Market Oversight to issue notice in this instance.

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\141\ Under Sec. 40.6(a) of the Commission's regulations, the

Commission would receive notice that a SEF or DCM has de-listed a

swap through a submission, submitted in compliance with Sec. Sec.

40.6(a)(1) and (2) and 40.6(a)(7).

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E. Annual Review

Proposed Sec. Sec. 37.10(d) and 38.12(d) required that a SEF or

DCM perform an annual review and assessment of each swap that it has

made available to trade. The proposed rule envisioned that an annual

review would ensure that SEFs and DCMs evaluate on a regular basis

whether swaps previously determined to be available to trade should

continue to be ``available to trade'' for the purposes of the trade

execution requirement. In the annual review and assessment, SEFs and

DCMs would be required to consider the proposed factors in Sec. Sec.

37.10(b) and 38.12(b), respectively. Upon completion of the annual

review, a SEF or DCM would be required to provide the Commission with

an electronic report of the review and assessment, including any

supporting information or data, no later than 30 days after its fiscal

year end. The proposed rule requested comment on whether SEFs and DCMs

should conduct the review and assessment.

Summary of Comments

Several commenters supported the proposed annual review

requirement.\142\ Tradeweb, however, requested that the Commission

clarify the effect of the proposed annual review process.\143\ Some

commenters stated that additional reviews were necessary because swaps

could become illiquid between scheduled annual reviews, yet still be

subject to the trade execution requirement. Thus, they recommended more

frequent reviews, such as on a quarterly basis.\144\ Several

commenters, however, stated that the Commission, rather than SEFs,

should conduct the review and assessment for similar reasons as those

offered in support of allowing the Commission to exclusively determine

whether a swap is available to trade.\145\ CME, for example,

recommended that the Commission conduct the review by obtaining data

from SDRs in order to minimize overall costs.\146\

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\142\ Tradeweb Comment Letter at 5; CME Comment Letter at 7;

Spring Trading Comment Letter at 7 (Jan. 12, 2012).

\143\ Tradeweb Comment Letter at 5.

\144\ Morgan Stanley Comment Letter at 8; MFA Comment Letter at

4-5; ISDA Comment Letter at 8; AIMA Comment Letter at 2-3; Eaton

Vance Management Comment Letter at 4; ICI Comment Letter at 7;

Markit Comment Letter at 4; Vanguard Comment Letter at 6; JPMorgan

Comment Letter at 2; SIFMA AMG Comment Letter at 11; FSR Comment

Letter at 3-4.

\145\ Markit Comment Letter at 4; MFA Comment Letter at 4;

Vanguard Comment Letter at 6; SIFMA AMG Comment Letter at 11. CME

recommended that the Commission conduct the review of all existing

available-to-trade determinations within 30 days of December 31 of

each year to minimize costs and administrative burdens. For

determinations submitted after June 30 of a given year, the annual

review would occur within 30 days of December 31 of the following

year. CME Comment Letter at 7.

\146\ CME Comment Letter at 7.

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Some commenters further recommended that market participants have

the opportunity to participate in the process. Tradeweb recommended

that reviews and assessments be subject to public comment because of

their market impact.\147\

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\147\ Tradeweb Comment Letter at 5.

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Other commenters opposed the proposed requirement. WMBAA stated

that an annual review and assessment would be arbitrary, time-

consuming, and offers insufficient regulatory value.\148\ Sunguard

Kiodex asserted that periodic reviews would cause swaps' available-to-

trade status to fluctuate, therefore negating the benefit of an initial

determination.\149\ WMBAA and SDMA recommended that a SEF or DCM be

able to rely solely on the clearing determination review instead and

annually renew its self-certification without submitting a report.\150\

---------------------------------------------------------------------------

\148\ WMBAA Comment Letter at 4.

\149\ Sunguard Kiodex Comment Letter at 2.

\150\ SDMA Comment Letter at 10; WMBAA Comment Letter at 4.

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With respect to the factors to be considered in an annual review,

some commenters supported use of the proposed determination factors in

Sec. Sec. 37.10(b) and 38.12(b).\151\ Eaton Vance Management

recommended that a SEF or DCM must affirmatively report each factor

that a swap meets to continue to

[[Page 33616]]

be available to trade.\152\ Other commenters stated that the Commission

should establish objective review and assessment criteria.\153\

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\151\ Spring Trading Comment Letter at 7 (Jan. 12, 2012); Eaton

Vance Management Comment Letter at 4; Tradeweb Comment Letter at 5;

SIFMA AMG Comment Letter at 11; MFA Comment Letter at 4; Markit

Comment Letter at 4.

\152\ Eaton Vance Management Comment Letter at 4.

\153\ SIFMA AMG Comment Letter at 11; MFA Comment Letter at 4;

Markit Comment Letter at 4; AIMA Comment Letter at 3.

---------------------------------------------------------------------------

ICI and Eaton Vance Management requested that the electronic

reports to be submitted to the Commission also be made available to the

public.\154\

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\154\ ICI Comment Letter at 7; Eaton Vance Management Comment

Letter at 2.

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Commission Determination

The Commission is not adopting the proposed annual review

requirement. The Commission intended the requirement to ensure that a

SEF or DCM would regularly evaluate trading for the swaps that it has

determined to be available to trade for purposes of the trade execution

requirement. Based on the approach adopted for determining that a swap

is no longer available to trade, however, the Commission believes that

requiring SEFs and DCMs to submit a review or assessment is not

necessary. A SEF or DCM will likely review, on an ongoing basis,

whether swaps listed or offered for trading on its system or platform

should continue to be listed or offered for trading. Such a review

would likely consider one or more factors that are similar to those

that can be used to determine if a swap is available to trade. Further,

if the Commission believes that a review of a swap's available-to-trade

status is warranted, then it may request that SEFs and DCMs submit

relevant information to conduct that review under Sec. Sec. 40.2(b)

and 40.3(a)(10) of the Commission's regulations, respectively.\155\

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\155\ See supra note 140. Under 17 CFR 40.2(b) and 40.3(a)(10),

when requested by Commission staff, a SEF or DCM is required to

submit additional evidence, information, or data that demonstrates

that a swap listed for trading meets the CEA's requirements or the

Commission's regulations. Under Sec. Sec. 37.5 and 38.5 of the

Commission's regulations, respectively, the Commission may also

request a SEF or DCM to file information related to its business as

a SEF or DCM, including trading information, in a particular form,

manner, and time as specified.

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F. Notice to the Public of Available To Trade Determinations

The Commission noted in the FNPRM that Sec. Sec. 40.5 and 40.6

provide a process for notifying the public that a SEF or DCM has made

an available-to-trade determination--SEFs and DCMs are required to post

a notice and a copy of the rule submission on their respective Web

sites concurrent with their filings at the Commission. The Commission

stated that it would also post the filings on its Web site. The

Commission also stated that it would assess the feasibility of posting

notices of all swaps that are determined to be available to trade on an

easily accessible page on its Web site. Commenters supported the

proposal to provide notice to market participants through a central

location on the Commission's Web site.\156\ SIFMA AMG stated that a

list would help market participants comply with the rules.\157\

---------------------------------------------------------------------------

\156\ ICI Comment Letter at 10; Bloomberg Comment Letter at 3

n.9; SIFMA AMG Comment Letter at 12-13; AIMA Comment Letter at 4.

SIFMA AMG and AIMA also recommended that such a centralized location

could be operated by an independent third party.

\157\ SIFMA AMG Comment Letter at 13. SIFMA AMG requested that

the Commission establish the Web site location prior to designating

any swaps as available to trade. Id. In response to SIFMA AMG's

comment, the Commission anticipates that this Web page will be

established as soon as technologically feasible, and may or may not

occur prior to the effective date of this rule. CME also requested

that the Commission publish a list, on its Web site and in the

Federal Register, of all swaps under current assessment. CME Comment

Letter at 7. The Commission notes that Sec. Sec. 40.5 and 40.6

filings will already be posted on its Web site.

---------------------------------------------------------------------------

The Commission agrees with commenters that a centralized list would

help market participants, as well as SEFs and DCMs, comply with the

Commission's rules and regulations related to the trade execution

requirement. Therefore, the Commission will post such determinations on

its Web site where market participants can readily ascertain which

swaps have been determined to be available to trade, and therefore

subject to the trade execution requirement, including the SEFs and DCMs

that list or offer those swaps for trading.

III. Sections 37.12 and 38.11 of the Commission's Regulations--Trade

Execution Compliance Schedule

Proposed Sec. Sec. 37.12(a) and 38.11(a) required market

participants to comply with the trade execution requirement under

section 2(h)(8) of the CEA upon the later of (1) the applicable

deadline established under the compliance schedule for the clearing

requirement for a swap,\158\ or (2) 30 days after the swap is first

made available to trade on either a SEF or DCM.\159\ In the proposed

rule, the Commission noted that while the available-to-trade

determination could precede the clearing requirement and vice versa,

the trade execution requirement would not be in effect until the

clearing requirement takes effect.\160\ The Commission sought comment

as to whether 30 days would be sufficient for necessary technological

linkages to be established between (1) DCOs, DCMs, and SEFs; and (2)

DCMs, SEFs, and market participants.\161\

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\158\ The Commission proposed to phase in compliance with the

clearing requirement, and the trade execution requirement thereof,

by category of market participant. As proposed, Category 1 entities,

which included a swap dealer, a security-based swap dealer, a major

swap participant, a major security-based swap participant, or an

active fund, would have 90 days to comply with the clearing

requirement. Category 2 entities, which include a commodity pool,

private fund, employee benefit plan, or person predominantly engaged

in activities that are in the business of banking or are financial

in nature, would have 180 days to comply with the clearing

requirement. Certain third-party subaccounts and all other swap

transactions would receive 270 days to comply with the clearing

requirement. With the exception of removing employee benefit plans

from Category 2 and allowing such plans 270 days to comply with the

clearing requirement, the Commission adopted this compliance

schedule generally as proposed. See Swap Transaction Compliance and

Implementation Schedule: Clearing Requirement under Section 2(h) of

the CEA, 77 FR 44441 (July 20, 2012).

\159\ See Swap Transaction Compliance and Implementation

Schedule: Clearing and Trade Execution Requirements under Section

2(h) of the CEA, 76 FR 58186 (Sep. 20, 2011). In this final rule,

the Commission is finalizing the compliance and implementation

schedule for the trade execution requirement, and therefore,

addresses the relevant comments submitted in response to this

proposed rule.

\160\ 76 FR 77731 n.38.

\161\ 76 FR 58192.

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Summary of Comments

Some commenters generally supported the proposed compliance

schedule for the trade execution requirement,\162\ but Tradeweb

commented that a 30-day implementation period may not be sufficient for

a class of swaps that is available to trade for the first time and

recommended that the Commission maintain the authority to set an

appropriate implementation period on a case-by-case basis for a class

of swaps, with input from SEFs, DCMs, and market participants.\163\

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\162\ Chris Barnard Comment Letter at 2 (Sep. 23, 2011);

Tradeweb Comment Letter at 2-4 (Nov. 4, 2011); Better Markets

Comment Letter at 2 (Nov. 4, 2011).

\163\ Tradeweb Comment Letter at 4.

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Several commenters recommended that the trade execution requirement

should become effective only after the clearing requirement is fully

implemented.\164\ MFA commented that allowing mandatory trade execution

to become effective simultaneously with mandatory clearing would

potentially dilute market participants' resources to comply with both

requirements.\165\ MFA also recommended that all market participants be

required to comply with

[[Page 33617]]

the trade execution requirement at the same time, rather than through a

phased-in approach, to avoid fragmenting market liquidity.\166\

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\164\ AIMA Comment Letter at 3 (Nov. 3, 2011); MarkitSERV

Comment Letter at 5 (Nov. 2011); Citadel Comment Letter at 5 (Nov.

4, 2011); MFA Comment Letter at 7 (Nov. 4, 2011); Vanguard Comment

Letter at 5 (Nov. 4, 2011) (recommending 180-day compliance period

between the effective date of the clearing requirement and the trade

execution requirement).

\165\ MFA Comment Letter at 10-11.

\166\ Id. at 12.

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Other commenters stated that the proposed schedule does not afford

adequate time for market participants to comply with the trade

execution requirement, particularly with regards to the proposed 30-day

post-determination implementation period.\167\ JPMorgan and UBS stated

that where a SEF or DCM submits a swap as available to trade using

Sec. 40.6, market participants could be required to transfer their

existing trading in that swap onto a SEF or DCM within only 40 days of

the submission.\168\

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\167\ JPMorgan Comment Letter at 3-4; UBS Comment Letter at 2;

ICI Comment Letter at 5 (Nov. 4, 2011); CME Comment Letter at 2

(Nov. 4, 2011); Westpac Comment Letter at 3 (Nov. 4, 2011); Regional

Banks Comment Letter at 7 (Nov. 4, 2011); FHLBanks Comment Letter at

5 (Nov. 4, 2011); ICI Comment Letter at 9; ISDA Comment Letter at

11; AIMA Comment Letter at 2-3; UBS Comment Letter at 2; ISDA

Comment Letter at 11; ACLI Comment Letter at 2.

\168\ JPMorgan Comment Letter at 3; UBS Comment Letter at 2.

Based on proposed Sec. Sec. 37.12(a) and 38.11(a), commenters

assumed that 30 days after the swap is made available to trade falls

upon the later date than the applicable compliance date for the

clearing requirement.

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Some commenters noted that implementing new infrastructure,

standards, and procedures necessary to comply with the trade execution

requirement would require a longer post-determination period.\169\ For

example, FHLBanks commented that new infrastructure and procedures are

necessary to ensure that swaps are properly submitted to a

counterparty's FCM and to a DCO.\170\ Some commenters also cited the

need for market participants to develop adequate connectivity \171\ and

to obtain trading access \172\ to a SEF or DCM. CME commented that

DCOs, DCMs, and SEFs would not likely be able to establish the

requisite technological linkages within the proposed 30-day

implementation period,\173\ while ICI commented that smaller market

participants could need more than 30 days to connect to a SEF or DCM

offering an actively traded swap.\174\ Other commenters noted that

market participants would also need time to complete applicable

documentation and agreements.\175\ Some commenters further stated that

a longer implementation period would promote greater competition among

trading venues and mitigate a SEF's or DCM's attempt to capture market

share.\176\

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\169\ JPMorgan Comment Letter at 3-4; ISDA Comment Letter at 11;

FHLBanks Comment Letter at 5 (Nov. 4, 2011); Westpac Comment Letter

at 2-3 (Nov. 4, 2011).

\170\ FHLBanks Comment Letter at 5 (Nov. 4, 2011).

\171\ FSR Comment Letter at 4; Bloomberg Comment Letter at 5;

ICI Comment Letter at 8; ISDA Comment Letter at 11; Eaton Vance

Management Comment Letter at 3; Chatham Comment Letter at 4; SIFMA

AMG Comment Letter at 9; CME Comment Letter at 6-7; Westpac Comment

Letter at 3 (Nov. 21, 2011); ICI Comment Letter at 5 (Nov. 4, 2011).

\172\ MFA Comment Letter at 4; Vanguard Comment Letter at 6;

SIFMA AMG Comment Letter at 9; AIMA Comment Letter at 3; CME Comment

Letter at 6-7.

\173\ CME Comment Letter at 2 (Nov. 4, 2011).

\174\ ICI Comment Letter at 5 (Nov. 4, 2011).

\175\ SIFMA AMG Comment Letter at 9; ICI Comment Letter at 9;

AIMA Comment Letter at 3; CME Comment Letter at 7; ISDA Comment

Letter at 11; Westpac Comment Letter at 3; FIA/ISDA/SIFMA Comment

Letter at 8 (Nov. 4, 2011).

\176\ Chatham Comment Letter at 4; FXall Comment Letter at 7;

ICI Comment Letter at 8; SIFMA AMG Comment Letter at 9.

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Commenters provided several suggestions for a longer post-

determination period. Several commenters recommended a 90-day period

after a swap is made available to trade,\177\ while Chatham and FSR

recommended at least a 6-month period.\178\ SIFMA AMG recommended an

implementation period of at least 90 days after the swap becomes

subject to the trade execution requirement,\179\ while some commenters

recommended a similar period of at least 6 months,\180\ particularly

for market participants who are neither swap dealers or major swap

participants.\181\ SIFMA AMG and Vanguard stated that the period could

be shortened over time as market participants become more experienced

with centralized trading.\182\

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\177\ FXall Comment Letter at 7; ICI Comment Letter at 9; CME

Comment Letter at 6-7; Vanguard Comment Letter at 6; Bloomberg

Comment Letter at 5; Westpac Comment Letter at 3 (Nov. 4, 2011).

\178\ Chatham Comment Letter at 4; FSR Comment Letter at 4.

\179\ SIFMA AMG Comment Letter at 9.

\180\ Eaton Vance Management Comment Letter at 3; ISDA Comment

Letter at 11.

\181\ Westpac Comment Letter at 3 (Nov. 4, 2011); FHLBanks

Comment Letter at 5 (Nov. 4, 2011).

\182\ SIFMA AMG Comment Letter at 9; Vanguard Comment Letter at

6.

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Commission Determination

The Commission is adopting Sec. Sec. 37.12(a) and (b) and 38.11(a)

and (b) as proposed with minor technical corrections, but is also

amending the proposed rule text to clarify that market participants

must comply with the trade execution requirement upon the later of (1)

the applicable deadline established under the compliance schedule for

the clearing requirement for a swap,\183\ or (2) 30 days after the

available-to-trade determination for that swap is deemed approved under

Sec. 40.5 or deemed certified under Sec. 40.6 by the Commission as

available to trade. As noted earlier, the Commission anticipates that

because of the novel nature of the available-to-trade determinations,

the initial determinations would likely be subject to a stay under

Sec. 40.6 for an additional 90-day review period or an extension of

the 45-day review period under Sec. 40.5 for an additional 45 days.

Accordingly, the Commission's part 40 rule review procedures should

provide market participants with adequate advance notice of the

possible application of the trade execution requirement to a particular

swap. The Commission believes that this period, along with the

subsequent 30-day post-determination implementation period, is a

sufficient amount of time for SEFs, DCMs, and market participants to

become familiar and comply with the trade execution requirement. Taken

in concert with the implementation schedule adopted for swaps subject

to clearing requirement, the Commission also believes that this time is

sufficient with respect to mandatory trade execution for an individual

swap or a group, type, category, or class of swaps.\184\

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\183\ See supra note 52.

\184\ See id.

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To the extent that the phased-in compliance schedule for the

clearing requirement previously adopted by the Commission may lead to

phased-in compliance with the trade execution requirement, the

Commission supports this approach. The Commission believes that the

phased-in schedule for the former requirement--which accounts for a

market participant's ability to comply based on risk profile,

compliance burden, resources, and expertise--also applies with respect

to compliance with the latter requirement. The Commission further notes

that the concerns about fragmenting market liquidity caused by a

phased-in approach are mitigated by (1) the phasing-in of similar

entities, who transact similar volumes of swaps, under similar

timelines and (2) the relatively compact timeframe in which market

participants in all three clearing implementation and compliance

categories must comply with the trade execution requirement.\185\

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\185\ See id.

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Finally, the Commission notes that a trading facility could still

clear and list a swap for trading after it is determined to be subject

to the trade execution requirement, but prior to the effective date.

[[Page 33618]]

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') requires federal agencies,

in promulgating regulations, to consider the impact of those

regulations on small entities.\186\ The Commission has previously

established certain definitions of ``small entities'' to be used by the

Commission in evaluating the impact of its regulations on small

entities in accordance with the RFA.\187\ The Commission has previously

determined that DCMs and SEFs are not ``small entities'' for purposes

of the RFA.\188\ The subject of this rulemaking also provides a

compliance schedule for a new statutory requirement, section 2(h)(8) of

the CEA, and does not itself impose significant new regulatory

requirements.\189\ Accordingly, the Commission received no comments on

the Chairman's certification of the impact of the rules contained

herein on small entities. Therefore, the Chairman, on behalf of the

Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rule

will not have a significant economic impact on a substantial number of

small entities.

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\186\ 5 U.S.C. 601 et seq.

\187\ 47 FR 18681-31 (Apr. 30, 1982).

\188\ See 47 FR 18618, 18619 (Apr. 30, 1982) discussing DCMs; 66

FR 45604, 45609 (Aug. 29, 2001) discussing DTEFs; 76 FR 1214, 1235

discussing SEFs.

\189\ 76 FR 58193.

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B. Paperwork Reduction Act

The Paperwork Reduction Act (``PRA'') \190\ imposes certain

requirements on federal agencies in connection with their conducting or

sponsoring any collection of information as defined by the PRA. An

agency may not conduct or sponsor, and a registered entity is not

required to respond to, a collection of information unless it displays

a currently valid control number by the Office of Management and Budget

(``OMB''). This final rule contains new collection of information

requirements within the meaning of the PRA. Accordingly, in connection

with the FNPRM, the Commission submitted an information collection

requested, titled ``Parts 37 and 38--Process for a Swap Execution

Facility or Designated Contract Market to Make a Swap Available to

Trade'' and supporting documentation to OMB for its review and approval

in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, and requested

that OMB approve and assign a new control number for the collections of

information covered by the FNPRM. Additionally, pursuant to 44 U.S.C.

3506(c)(2)(B), the Commission, in the FNPRM, requested comments from

the public on the proposed information collection requirements in order

to, among other items, evaluate the necessity of the proposed

collections of information and minimize the burden of the information

collection requirements on respondents. On September 12, 2012, OMB

assigned control number 3038-0099 to this collection of information,

but withheld final approval pending the Commission's resubmission of

the information collection, which includes a description of the

comments received on the collection and the Commission's responses

thereto.

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\190\ 44 U.S.C. 3501 et seq.

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With respect to the adoption of Sec. Sec. 37.12(a) and 38.11(a)--

the trade execution compliance schedule--as stated in the prior

proposed rule, this requirement will not require a new collection of

information from any persons or entities.\191\

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\191\ 76 FR 58193.

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The Commission protects proprietary information according to the

Freedom of Information Act and 17 CFR part 145, ``Commission Records

and Information.'' In addition, section 8(a)(1) of the CEA strictly

prohibits the Commission, unless specifically authorized by the CEA,

from making public ``data and information that would separately

disclose the business transactions or market positions of any person

and trade secrets or names of customers.'' \192\ The Commission is also

required to protect certain information contained in a government

system of records according to the Privacy Act of 1974.\193\

---------------------------------------------------------------------------

\192\ 7 U.S.C. 12(a)(1).

\193\ 5 U.S.C. 552a.

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1. Proposed Information Provided by Reporting Entities/Persons

In the FNPRM, the Commission estimated that 50 registered entities

will be required to file part 40 rule submissions and annual reports.

Based on the previously estimated hours of burden under part 40 and

the estimated additional time that a SEF or DCM would require to review

applicable factors and data to make a determination, the Commission

estimated that the hourly burden for a SEF or DCM under proposed

Sec. Sec. 37.10(a) and 38.12(a) to submit an available-to-trade

determination would be 8 hours per submission. The Commission, however,

did not provide an average annual hours of burden for each SEF or DCM

to submit available-to-trade determinations under proposed Sec. Sec.

37.10(a) and 38.12(a) because, as stated in the FNPRM, it is not

feasible to determine the number of part 40 rule submission filings, on

average, that each SEF or DCM would submit, as the number of swap

contracts to be traded on a DCM or SEF and the number of those swaps

that a SEF or DCM will eventually submit as available to trade is

presently unknown.

2. Summary of Comments and Commission Response

Sections 37.10(a) and 38.12(a)--Process To Make a Swap Available To

Trade

MarketAxess and SDMA characterized the proposed approach as

burdensome and commented that it would require SEFs to expend a

significant amount of time and resources.\194\ MarketAxess recommended

an alternative ``recognition and notification'' process in which a SEF

or DCM provides notice to the Commission that a swap is available to

trade when it becomes subject to the clearing requirement.\195\

MarketAxess stated that this approach would allow SEFs to use their

resources in a more efficient manner.\196\ SDMA supported the part 40

approach, but stated that a SEF should determine if a swap is available

to trade based on whether the swap is required to be cleared, not based

on the enumerated factors.\197\ Sunguard Kiodex also recommended an

alternative approach--a real-time ``illiquidity'' test that would

temporarily permit off-facility trading in a swap based on certain

market observations--that would require less time and reduce

costs.\198\ WMBAA and Spring Trading commented that the Commission's

estimate of the hours of burden for a SEF or DCM to make an available-

to-trade determination are too low based on the different types of

personnel that would be involved in a determination.\199\ Spring

Trading estimated that each rule filing would require at least 15-20

hours.\200\

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\194\ MarketAxess Comment Letter at 7-8; SDMA Comment Letter at

4-5.

\195\ MarketAxess Comment Letter at 6.

\196\ Id. at 7.

\197\ SDMA Comment Letter at 6-7.

\198\ Sunguard Kiodex Comment Letter at 3.

\199\ WMBAA Comment Letter at 5; Spring Trading Comment Letter

at 5 (Jan. 12, 2012).

\200\ Id.

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The Commission notes that the alternative approaches proposed by

commenters would eliminate a separate formal determination process. As

stated in the preamble, however, the Commission believes that

determining whether a swap is available to trade and whether a swap

should be mandatorily cleared should remain separate

[[Page 33619]]

processes because each inquiry addresses different concerns. Further,

adopting a real-time ``illiquidity'' test would require objective

criteria, which the Commission has declined to adopt at this time.

The Commission acknowledges the comments from WMBAA and Spring

Trading regarding the resources required to make a determination.

Therefore, the Commission is revising its estimate of the hours of

burden to reflect the addition of additional personnel that would

process and analyze trading data, for which the Commission estimates

this hourly burden to be 8 hours per submission. The Commission is also

adopting a listing requirement in the final rule under new Sec. Sec.

37.10(a)(2) and 38.12(a)(2), which requires a SEF or DCM to certify

that it is listing the swap for which it submits an available-to-trade

determination. The Commission notes that the listing process is

governed by Sec. Sec. 40.2 and 40.3 of the Commission's regulations,

for which it has previously estimated the average hourly burden to be 2

hours per submission in a previous rulemaking.\201\

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\201\ 76 FR 77734.

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Accordingly, the Commission revises its estimate of the total

hourly burden to be 16 hours per submission.

C. Cost-Benefit Considerations

Introduction

Title VII of the Dodd-Frank Act seeks to prevent a repeat of the

harm caused by the 2008 financial crisis by establishing a

comprehensive new regulatory framework for swaps and security-based

swaps.\202\ Among other things, the legislation seeks to promote market

integrity, reduce risk, and increase transparency within the financial

system and swaps markets. Consistent with the view that several

weaknesses contributed to the crisis,\203\ Title VII establishes a

multidimensional regulatory approach designed to ``mitigate costs and

risks to taxpayers and the financial system.'' \204\ Provisions

designed to move the transaction of swaps from primarily opaque, over-

the-counter (``OTC'') markets--which traditionally feature bilateral

negotiation and execution--to registered swap execution facilities

(``SEFs'') and designated contract markets (``DCMs'')--which provide

market participants and the public with improved swap market

transparency--represent an important element of this approach.

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\202\ Dodd-Frank Act section 701, et seq.

\203\ See, e.g., Financial Crisis Inquiry Commission, ``The

Financial Crisis Inquiry Report: Final Report of the National

Commission on the Causes of the Financial and Economic Crisis in the

United States'' at xxiv (Jan. 2011), available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf. (listing

uncontrolled leverage; lack of transparency, capital and collateral

requirements; speculation; interconnection among firms; and

concentrations of risk in the market as contributing factors).

\204\ S. Rep. No. 111-176, at 92 (2010).

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In particular, section 733 of the Dodd-Frank Act amended the CEA

to, among other things, move swap trading and execution to SEFs and

DCMs.\205\ Section 723(a)(3) of the Dodd-Frank Act added a trade

execution requirement,\206\ which requires that swap transactions

subject to the clearing requirement under section 2(h)(1) of the CEA be

executed on a SEF or a DCM, unless no SEF or DCM ``makes the swap

available to trade'' or the clearing exception under section 2(h)(7) of

the CEA applies.\207\ Taken together, these provisions are intended to

transform the swaps market from one in which prices for bilaterally-

negotiated contracts are privately quoted--typically by dealers who,

unlike non-dealer market participants (typically the ``buy-side''),

enjoy asymmetric information advantages--to one in which bid/offer

prices for swap contracts are accessible to multiple market

participants to compare, assess, and accept or reject.\208\ With this

release, in conjunction with the Commission's final rulemaking

establishing SEFs\209\ and the final rulemaking defining appropriate

minimum block sizes for swaps,\210\ the Commission is implementing the

trade execution requirement.

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\205\ SEFs are a new type of regulated marketplace modeled

largely on the existing Commission-regulated DCM structure. Section

1a(50) of the CEA, as enacted by section 721 of the Dodd-Frank Act,

defines a SEF as ``a trading system or platform in which multiple

participants have the ability to execute or trade swaps by accepting

bids and offers made by multiple participants in the facility or

system, through any means of interstate commerce, including any

trading facility, that (A) facilitates the execution of swaps

between persons; and (B) is not a designated contract market.'' 7

U.S.C. 1a(50). Section 5h(a)(1) of the CEA, as amended by the

section 733 of the Dodd-Frank Act, prohibits any person from

operating a facility for the trading and processing of swaps unless

the facility is registered as a SEF or a DCM. 7 U.S.C. 7b-3(a)(1).

\206\ CEA section 2(h)(8), 7 U.S.C. 2(h)(8).

\207\ 7 U.S.C. 2(h)(7).

\208\ Asymmetric information exists when one counterparty to a

transaction has more or better information than the other

counterparty. In some instances, a dealer could have an information

advantage over a non-dealer, and vice versa. Abuse of this advantage

is likely to contribute to market failure. By definition, bilateral

negotiations imply lower levels of transparency of orders, quotes,

trades and transaction prices. In the context of swap markets, as

dealers are on one side of a large fraction of trades, they are

privy to better information on prevailing market conditions and

valuations relative to their non-dealer counterparties. See ``An

Analysis of OTC Interest Rate Derivatives Transactions: Implications

for Public Reporting,'' Michael Fleming, John Jackson, Ada Li, Asani

Sarkar, and Patricia Zobel, Federal Reserve Bank of New York Staff

Reports, no. 557, at 6 n.14 (Mar. 2012). Major derivatives dealer

activity accounts for 89 percent of the total interest rate swap

activity in notional terms. Id.

\209\ See Core Principles and Other Requirements for Swap

Execution Facilities (May 16, 2013).

\210\ See Procedures to Establish Appropriate Minimum Block

Sizes for Large Notional Off-Facility Swaps and Block Trades (May

16, 2013).

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In this release, the Commission is adopting final rules (1)

specifying the process by which a swap is made ``available to trade,''

thereby making it subject to the trade execution requirement under

section 2(h)(8) of the CEA (``available-to-trade rule''); and (2)

establishing the compliance schedule of the trade execution

requirement, following a Commission determination that a swap is both

required to be cleared and is available to trade (``trade execution

compliance schedule'').\211\ More specifically, these rules allow SEFs

and DCMs to designate swaps that they list or offer for trading as

``available to trade,'' \212\ thereby requiring market participants who

transact such swaps (and who are subject to the clearing requirement

under section 2(h)(1)(A) of the CEA) to comply with the trade execution

requirement in carrying out these transactions. Swaps that are subject

to the trade execution requirement (and are not block trades as defined

under Sec. 43.2 of the Commission's regulations) must be executed in

accordance with other separately promulgated rules that implement the

Dodd-Frank Act's swap exchange trading requirements and are intended to

provide improved price transparency for swap transactions.\213\

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\211\ CEA section 2(h)(8), 7 U.S.C. 2(h)(8).

\212\ See supra note 1.

\213\ The rules establishing SEFs focus on measures to promote

pre-trade transparency and trade execution of swaps. To comply with

the trade execution requirement, swaps that are traded on a SEF must

be executed as Required Transactions. Under Sec. 37.9(a)(2),

Required Transactions must be executed by either (1) an Order Book,

as defined in Sec. 37.3(a)(3); or (2) a Request for Quote System,

as defined in Sec. 37.9(a)(3). See Core Principles and Other

Requirements for Swap Execution Facilities (May 16, 2013). Swaps

that are subject to the trade execution requirement, under section

2(h)(8) of the CEA, and traded on a DCM must be executed pursuant to

subpart J of part 38 of the Commission's regulations, which

implements revised DCM Core Principle 9 under section 5(d)(9) of the

CEA, as amended by section 735(b) of the Dodd-Frank Act. 7 U.S.C.

7(d)(9).

---------------------------------------------------------------------------

Operating in concert with the statutory requirements and other

rules,\214\ the rules adopted in this rulemaking are designed to

provide a process that fosters swaps becoming available to trade, and

therefore subject to the trade execution requirement; this,

[[Page 33620]]

indirectly will counter information asymmetry and in turn, the

informational advantage enjoyed by dealers to the potential detriment

of other market participants. In this way, these rules will promote a

competitive market environment with improved price discovery and

characterized by narrower spreads and more reliable prices. Ultimately,

these rules will benefit the financial system as a whole by creating a

more efficient marketplace where market participants will be able to

take into account the price at which recent transactions have occurred

when determining at what price to quote or place orders.

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\214\ See part 37 and subpart J of part 38 of the Commission's

regulations.

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The Commission believes that some of the costs related to the

application of these rules are a consequence of the Congressional trade

execution requirement under section 2(h)(8) of the CEA. For example,

those market participants who are not eligible for the end-user

exception under section 2(h)(7) of the CEA\215\ will not have the

option to execute swaps made available to trade on a bilateral basis,

even if they consider it more costly or less convenient to execute

trades on a SEF or a DCM. As described further below, the Commission

was cognizant of these costs in adopting these final rules, and has,

where appropriate, attempted to mitigate the costs while observing CEA

section 2(h)(8).

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\215\ The Commission may determine that swap transactions

exempted from the section 2(h)(1) clearing requirement pursuant to

other statutory authority would also not be subject to the section

2(h)(8) trade execution requirement. See supra note 1.

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The Statutory Mandate To Consider the Costs and Benefits of the

Commission's Action: Section 15(a) of the CEA

Section 15(a) \216\ of the CEA requires the Commission to consider

the costs and benefits of its actions before promulgating a regulation

under the CEA or issuing certain orders. Section 15(a) further

specifies that the costs and benefits shall be evaluated in light of

the following five broad areas of market and public concern: (1)

Protection of market participants and the public; (2) efficiency,

competitiveness, and financial integrity of futures markets; (3) price

discovery; (4) sound risk management practices; and (5) other public

interest considerations. The Commission considers the costs and

benefits resulting from its discretionary determinations with respect

to the section 15(a) factors.

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\216\ CEA section 15(a), 7 U.S.C. 19(a).

---------------------------------------------------------------------------

In this rulemaking to implement the trade execution requirement,

the Commission is exercising its discretion to adopt the available-to-

trade rule and the trade execution compliance schedule. The discussion

that follows considers the section 15(a) factors for each set of rules

separately. Prior to the section 15(a) consideration for each set of

rules, the Commission discusses the costs, benefits, and alternatives

to the approach adopted in these final rules as well as relevant

comment letters.\217\ With respect to the available-to-trade rule,

costs, benefits, and alternatives are further broken out and discussed

separately for various components of the process--Part 40 Process and

Determination Factors, and Applicability.

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\217\ The Commission solicited comments to aid its consideration

of the costs and benefits resulting from (1) the proposed available-

to-trade rule, 76 FR 77733, and (2) the proposed trade execution

compliance schedule. 76 FR 58192.

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Quantifying the costs and benefits to SEFs and DCMs is not

reasonably feasible for many aspects of the available-to-trade rule

because costs will depend, among other things, on the future business

decisions of SEFs and DCMs. The Commission expects that the costs and

benefits with respect to the available-to-trade rule will vary, based

on the specific circumstances of the individual SEFs, DCMs, and market

participants. Where the Commission is unable to quantify the costs and

benefits, the Commission identifies and considers the costs and

benefits of these rules in qualitative terms.

Given the novelty of the trade execution requirement--the mandatory

trading of swaps on a new type of entity, SEFs, or on DCMs--the

Commission is inherently limited by a lack of available data in

attempting to quantify the costs and benefits of implementing the trade

execution compliance schedule. As discussed further below, the

Commission is not aware of any analog to another requirement that would

provide information that is sufficient to ascertain such costs and

benefits in quantitative terms. Accordingly, the Commission identifies

and considers the costs and benefits of the compliance schedule in

qualitative terms.

1. Available-to-Trade Rule

a. Part 40 Process and Determination Factors

Final Sec. Sec. 37.10 and 38.12 govern the process that a SEF or

DCM must use to determine whether a swap is available to trade for

purposes of the trade execution requirement. For a swap to be subject

to the trade execution requirement under section 2(h)(8) of the CEA, a

SEF or DCM must have first determined that a swap is available to

trade. The Commission views this determination as a trading protocol

issued by the SEF or DCM (and therefore as a ``rule,'' as defined in

Sec. 40.1 of the Commission's regulations); as a rule, the SEF or DCM

must submit the determination to the Commission in accordance with the

procedures contained in part 40 of the Commission's regulations. Final

Sec. Sec. 37.10(a) and 38.12(a) set forth the procedure for a SEF or

DCM to submit the determination under Sec. 40.5 or Sec. 40.6 of the

Commission's regulations.

Final Sec. Sec. 37.10(b) and 38.12(b) require a SEF or DCM to

consider, as appropriate, six factors with respect to each swap when

determining whether a swap is available to trade: (1) Whether there are

ready and willing buyers and sellers; (2) the frequency or size of

transactions; (3) the trading volume; (4) the number and types of

market participants; (5) the bid/ask spread; or (6) the usual number of

resting firm or indicative bids and offers. No single factor must

always be considered as to whether a swap is available to trade;

therefore, the SEF or DCM may consider any one or more of the factors

in its initial determination. In its submission to the Commission under

Sec. 37.10(a) or Sec. 38.12(a), a SEF or DCM must describe how it

considered the factors that it deems appropriate.

Costs

Costs to SEFs and DCMs

In the proposed rule, the Commission estimated that conducting the

assessment and submission process in Sec. Sec. 37.10(a) and (b) and

38.12(a) and (b) could be performed internally by one compliance

personnel of the SEF or DCM over approximately eight hours on average.

The Commission further estimated that the cost per hour for one

compliance personnel to be $43.25 per hour; \218\ therefore, it would

cost each SEF and DCM $346 per rule submission to comply with the

proposed requirements.\219\ The Commission also noted that this

estimate was general in nature and that it would be difficult to

determine the number of hours involved with reasonable precision, given

the novelty of the process.\220\ The

[[Page 33621]]

Commission solicited comments on the costs associated with Sec. Sec.

37.10(a) and (b) and 38.12(a) and (b), i.e., assessing whether a swap

is available to trade and submitting a determination pursuant to part

40 of the Commission's regulations.\221\

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\218\ See Report on Management & Professional Earnings in the

Securities Industry 2010, Securities Industry and Financial Markets

Association at 4 (Sept. 2010). The report lists the average total

annual compensation for a compliance specialist (intermediate) as

$58,878. The Commission estimated the personnel's hourly cost by

assuming an 1,800 hour work year and by multiplying by 1.3 to

account for overhead and other benefits.

\219\ 76 FR 77735.

\220\ The Commission also noted that certain additional factors

could affect these estimates, such as the complexity of the swap's

terms. Id.

\221\ Id.

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Some commenters claimed that the Commission's estimate for the

number of personnel required to carry out the process was low.\222\ For

example, WMBAA stated that the Commission under-estimated the different

types of personnel that would be required to make an available-to-trade

determination, which include information technology professionals,

operations staff, legal and compliance staff, and management.\223\

Spring Trading anticipated that the Commission would require large

amounts of data and analysis from SEFs and DCMs to support their

determinations; therefore, the costs required to make a determination

and submit a filing would be similar to the effort required by a DCM to

assess whether a new futures contract is susceptible to

manipulation.\224\ WMBAA also asserted that the initial costs of

implementing the new procedure would be higher than the Commission's

proposed projection.\225\ MarketAxess commented that the process would

require SEFs to expend significant resources, which would pose a

barrier to entry and lead to fewer trading platforms for market

participants.\226\

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\222\ WMBAA Comment Letter at 5; Spring Trading Comment Letter

at 5 (Jan. 12, 2012).

\223\ WMBAA Comment Letter at 5.

\224\ Spring Trading Comment Letter at 5 (Jan. 12, 2012). The

Commission has noted that the costs of compliance with DCM Core

Principle 3--Contracts Not Readily Subject to Manipulation, as

codified in Sec. 38.200 of the Commission's regulations--consist of

supplying supporting information and documentation to justify the

contract specifications of a new product. That process is governed

by the product listing submission procedures codified in Sec. Sec.

40.2 and 40.3 of the Commission's regulations.

\225\ Id.

\226\ MarketAxess Comment Letter at 9.

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Commenters did not provide alternative numerical estimates or

discuss the magnitude of costs that would be imposed by the

determination process. Based on the qualitative comments received from

WMBAA and Spring Trading, however, the Commission is revising its

estimated cost of conducting the assessment and submission process to

reflect the addition of an economist to the estimate of necessary

personnel. The Commission agrees with Spring Trading that SEFs and DCMs

may analyze trading data in considering the factors under Sec. Sec.

37.10(b) and 38.12(b); the compliance personnel would likely be

assisted by an economist in carrying out such an analysis over

approximately eight hours on average. Further, the Commission is also

revising its estimates based on updated wage rate data. The

Commission's updated estimate of the cost per hour for one compliance

personnel is $42.16 per hour \227\ and $64.60 per hour for one

economist.\228\

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\227\ See Report on Management & Professional Earnings in the

Securities Industry 2011, Securities Industry and Financial Markets

Association at 4 (Oct. 2011). The FRPRM calculated the proposed

estimate for the assessment and submission process based on salary

information in the 2010 report. See supra note 218. The 2011 report

lists the average total annual compensation for a compliance

specialist (intermediate) as $58,371. The Commission estimated the

personnel's hourly cost by assuming an 1,800 hour work year and by

multiplying by 1.3 to account for overhead and other benefits.

\228\ See Bureau of Labor Statistics, U.S. Department of Labor,

Occupational Outlook Handbook, 2012-13 Edition, Economists, http://www.bls.gov/ooh/life-physical-and-social-science/economists.htm. The

report lists the average total annual compensation for an economist

as $89,450. The Commission estimated the personnel's hourly cost by

assuming an 1,800 hour work year and by multiplying by 1.3 to

account for overhead and other benefits.

---------------------------------------------------------------------------

The Commission is also adopting a listing requirement under final

Sec. Sec. 37.10(a)(2) and 38.12(a)(2) that requires the SEF or DCM to

demonstrate that they have listed or offered for trading the swap for

which they are submitting an available-to-trade determination. A SEF or

DCM incurs costs to list or offer a swap for trading pursuant to Sec.

40.2 and 40.3 of the Commission's regulations, which requires a product

filing that includes, among other things, a ``concise explanation and

analysis'' of the product, that the Commission has acknowledged as de

minimis.\229\ Although a SEF or DCM may decide to list a product for

trading without a desire to submit an available-to-trade determination,

to the extent that the SEF or DCM lists a product exclusively to meet

the requirements of Sec. Sec. 37.10(a)(2) or 38.12(a)(2), the

Commission estimates that it would take one compliance personnel

approximately 2 hours, on average, to submit a product filing.

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\229\ For further Commission discussion of the costs associated

with listing or offering a product for trading under Sec. Sec. 40.2

and 40.3 of the Commission's regulations, see Provisions Common to

Registered Entities, 76 FR 44776, 44787 (Jul. 27, 2011).

---------------------------------------------------------------------------

Therefore, the Commission estimates that it would cost a SEF and

DCM a maximum of $938.40 per rule submission filing to comply with

final Sec. Sec. 37.10(a) and (b) and 38.12(a) and (b).

With respect to MarketAxess's comment, the Commission does not

believe that the costs associated with the determination process pose a

barrier to entry for trading platforms. The rule does not affirmatively

require a SEF or DCM to first submit to the Commission that a swap is

available to trade via a part 40 filing in order to list or offer that

swap for trading on its platform. If one SEF or DCM makes the swap

available to trade through the part 40 process, then other SEFs and

DCMs who subsequently choose to list or trade the swap are only

required to do so through methods of execution consistent with the

trade execution requirement. The Commission notes that in order to

register and operate as a SEF, a trading platform or facility must

already be able to demonstrate that they offer certain minimum

functionality in terms of methods of execution (i.e., a central limit

order book (``CLOB'') or request-for-quote (``RFQ'') system).\230\

---------------------------------------------------------------------------

\230\ See Core Principles and Other Requirements for Swap

Execution Facilities (May 16, 2013).

---------------------------------------------------------------------------

The Commission specifically designed the process to mitigate costs

by allowing SEFs and DCMs to utilize existing personnel and

infrastructure to carry out the determination and submission process

under part 40 procedures. Further, the process affords SEFs and DCMs

the flexibility to consider any one or more enumerated factors in

determining that a swap is available to trade. This flexibility will

allow them to tailor their considerations, while also managing costs of

research and analysis, by selecting from a range of factors. Moreover,

the Commission believes that the costs will decrease for both SEFs and

DCMs as they become more familiar with using the part 40 procedures to

make a swap available to trade. The Commission also believes that the

part 40 process will require fewer resources as centralized trading

develops and SEFs and DCMs become more familiar with the types of swaps

that can be made available to trade.

The Commission believes that Spring Trading's comparison between

the costs of the process and the costs to assess whether a new futures

contract is susceptible to manipulation rests on a flawed analogy. The

costs of the latter are based upon the Commission's annual burden hours

estimate, in the aggregate, for the information collection requirements

under Sec. Sec. 40.2 and 40.3 of the Commission's regulations,\231\

estimated per registered entity to be 200 hours based on 100 responses

and an estimated average of 2 hours per

[[Page 33622]]

response.\232\ The Commission's estimate of 18 hours to comply with

final Sec. Sec. 37.10(a) and (b) and 38.12(a) and (b), however, is

based upon a single submission of an available-to-trade

determination.\233\ It is not feasible at this time to estimate the

average number of rule submissions that a SEF or DCM will file per

year; therefore, the Commission believes that the burden hours estimate

for the information collection requirements under Sec. Sec. 40.2 and

40.3 is not illustrative here.

---------------------------------------------------------------------------

\231\ 76 FR 44790.

\232\ Id.

\233\ As discussed above, the Commission estimates the

assessment and submission process in Sec. Sec. 37.10(a) and (b) and

38.12(a) and (b) for each submission will be performed by one

compliance personnel and one economist over approximately eight

hours each on average. In addition, the Commission estimates that it

would take one compliance personnel approximately 2 hours, on

average, to comply with the listing prerequisite under Sec. Sec.

37.10(a)(2) and 38.12(a)(2) by submitting a product filing.

---------------------------------------------------------------------------

Costs to Market Participants

Some commenters also stated that the process would impose direct

costs on market participants. For example, Chatham stated that end-

users would have to expend resources to monitor whether swaps are

subject to the trade execution requirement, and if so, connect to a SEF

or DCM that offers or lists that swap for trading.\234\

---------------------------------------------------------------------------

\234\ Chatham Comment Letter at 2.

---------------------------------------------------------------------------

Some commenters also expressed concern that the available-to-trade

determination process would impose indirect costs on market

participants. These commenters maintained that SEFs and DCMs would be

incentivized to exploit the process by indiscriminately determining

that swaps are available to trade. Making determinations in this

manner, they claimed, would lead to illiquid swaps trading on a SEF or

DCM, which could result in increasing swap price volatility; increased

spreads; misleading market prices; and front-running behavior.\235\

Chatham commented that end-users would encounter higher hedging and

swap execution costs, particularly from swap dealers passing on the

costs of higher volatility.\236\ ISDA stated that those costs would

deter market participants from executing hedge transactions.\237\ FSR

stated that improper determinations by a SEF or DCM, such as one

primarily driven by the desire to capture market share rather than on

the merits, would compel market participants to avail themselves of

exemptions to the trade execution requirement, thus undermining the

goal of promoting a centralized trading market.\238\

---------------------------------------------------------------------------

\235\ AIMA Comment Letter at 1; CME Comment Letter at 6; Morgan

Stanley Comment Letter at 3; CEWG Comment Letter at 4.

\236\ Chatham Comment Letter at 2.

\237\ ISDA Comment Letter at 4.

\238\ FSR Comment Letter at 2.

---------------------------------------------------------------------------

Notwithstanding the fact that commenters did not provide data to

support or monetize their cost concerns, the Commission has

qualitatively considered their comments about the direct and indirect

costs of the available-to-trade determination process. First, with

respect to the direct costs cited by Chatham--that end-users would have

to follow which swaps are subject to mandatory trade execution and

connect to a SEF or DCM to trade that swap--these costs are primarily

attributable to the statutory trade execution requirement and not to

the Commission's action in this final rule. The costs incurred by

market participants to connect to a SEF or DCM are attendant to

complying with the trade execution requirement. While the number of

swaps subject to the trade execution requirement will be affected by

this final rule in conjunction with business decisions by SEFs and

DCMs, market participants (as well as SEFs and DCMs) would incur these

costs for any swap subject to the statutory trade execution

requirement. While commenters did not provide any quantitative

estimates regarding connectivity costs, the Commission understands that

clearing firms' connectivity services to DCMs can be bundled into the

clearing services provided by clearing firms, and expects that this

will occur at SEFs as well. Hence, the connectivity costs arising

directly from the trade execution requirement are likely to be subsumed

into the costs of complying with the mandatory clearing

requirement.\239\ It is also possible that SEFs and DCMs will bundle

connectivity costs into transaction fees. Moreover, SEFs and DCMs have

an incentive to keep connectivity costs low in order to attract market

participants.

---------------------------------------------------------------------------

\239\ Depending on their individual business needs, market

participants could also use connectivity services provided by

independent software vendors to trade swaps subject to the trade

execution requirement. These costs may also be bundled into

transaction fees. The Commission also notes that it is typically the

case that for most new contracts, DCMs tend to waive execution and

other fees during the initial six to twelve months after listing,

and such fee waivers are meant to help mitigate any incremental

costs for market participants to connect to a new platform or trade

a new product.

---------------------------------------------------------------------------

Further, while there may be some attendant search costs, the

Commission's approach in this final rule greatly minimizes the costs to

market participants to monitor whether a SEF or DCM is subject to the

trade execution requirement. Under existing practice for part 40 rule

submissions, the Commission will post a notice and copy of all

available-to-trade submissions on its Web site. The Commission also

intends to establish an updated, centralized list of all of the swaps

that are available to trade. This will provide market participants with

a single reference for knowing whether a particular swap has been

determined to be available to trade.

With respect to the potential indirect costs imposed upon market

participants if illiquid swaps are made available to trade and become

subject to the trade execution requirement, the Commission acknowledges

the concerns of commenters. The Commission, however, believes that the

part 40 process is appropriate and well-suited to moderate this

possibility and views the adopted determination factors as probative of

whether an actual trading market exists.\240\ Mandating SEFs and DCMs

to consider these factors prior to making a determination will compel

them at the outset to internally consider the benefits versus the costs

that will be incurred to list and subsequently support trading in a

particular swap. The Commission also believes that the transparency of

the process (e.g., submissions must be posted on the submitting SEF or

DCM's Web site and will be posted on the Commission's Web site as

well), coupled with Commission review and potential for public comment,

provides an important backstop to protect the integrity of the

determinations that are submitted.

---------------------------------------------------------------------------

\240\ The Commission believes that market participants can use

any or each of the factors to demonstrate that active trading is

occurring for a particular swap. For example, a high frequency of

transactions, narrow bid/ask spread, or large trading volume would

indicate execution of transactions for that swap. A large number of

buyers or sellers, or a large number of resting firm or indicative

bids and offers would also indicate an active market based on the

presence of market participants seeking to execute transactions in

that swap.

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Benefits

The process set forth in Sec. Sec. 37.10 and 38.12 will advance

the Congressional goal of promoting swap execution and developing a

centralized trading market that facilitates price discovery in the

manner as described below.

Most importantly, the adopted process in the final rule will

provide an up-to-date, singular reference for SEFs, DCMs, and market

participants for identifying which swaps are available to trade, and

therefore subject to the trade execution requirement. Sections 37.10(a)

and 38.12(a) prescribe the use of the part 40 process for the

submission of rules for Commission review and approval (Sec. 40.5) or

the self-certification

[[Page 33623]]

of rules (Sec. 40.6).\241\ Under these processes, SEFs and DCMs must

submit an initial available-to-trade determination to the Commission

either for rule approval or as a self-certification; both require

Commission review. If appropriate, the Commission may approve a Sec.

40.5 or Sec. 40.6 rule submission within the designated timeframes.

SEFs and DCMs will be familiar with this process; part 40 is already

used by DCMs for other rule filings and similarly will be used by SEFs

going forward. Part 40 further requires SEFs and DCMs to post a copy

and notice of their submissions on their respective Web sites; the

Commission also posts that information on its own Web site. Therefore,

the adopted process will allow market participants to know (1) whether

a particular swap has been submitted as available to trade; (2) whether

that swap has been deemed as available to trade by the Commission; and

(3) when the swap was made or will be made available to trade. In those

submissions, SEFs and DCMs must consider the six enumerated factors

under Sec. Sec. 37.10(b) and 38.12(b) as appropriate, which provides

other SEFs, DCMs, and market participants with information about the

basis for determining that a swap is available to trade.

---------------------------------------------------------------------------

\241\ Part 40 of the Commission's regulations governs regulatory

obligations of registered entities, which include DCMs and SEFs

under section 1(a)(40) of the CEA, with respect to, among other

things, the certification or approval of new products for trading;

and the certification or approval of rules governing the SEF or DCM.

---------------------------------------------------------------------------

The process adopted in Sec. Sec. 37.10 and 38.12 also increases

transparency for market participants and the public. Under part 40,

submissions must contain an explanation of how the SEF or DCM

determined that a swap is available to trade, including the

consideration of one or more of the relevant factors listed in

Sec. Sec. 37.10(b) and 38.12(b), as well as a brief explanation of any

substantive opposing views. The part 40 process allows the Commission

to go back to the submitting entity in the case that an insufficient

explanation of the determination is provided.\242\ In addition, when

warranted (e.g., when a submission presents novel or complex issues),

market participants and the public will have the opportunity to provide

public comment on the merits of the SEF or DCM's submission directly

through the Commission's Web site.\243\ Therefore, part 40 will not

only inform market participants of the justifications for and against

an available-to-trade determination, but provides an opportunity for

market participants and the public to submit their own views as well.

---------------------------------------------------------------------------

\242\ Under rule approval process, the Commission may extend the

review period of a determination submitted if, among other things,

the submission is incomplete. Sec. 40.5(d)(1). Under the self-

certification process, the Commission may stay the certification if,

among other things, the rule submission is accompanied by an

inadequate explanation. Sec. 40.6(c)(1).

\243\ Under Sec. 40.6(c)(2) of the Commission's regulations,

the Commission will provide a 30-day public comment period where the

available-to-trade determination submitted is subject to a stay

because, among other things, it presents novel or complex issues

that require additional time to analyze. As discussed in section

II.A.1 of the preamble to the final rule, the Commission will also

provide an opportunity to submit public comment for determinations

submitted to the Commission under the Sec. 40.5 rule approval

process. See supra notes 58-60 and accompanying text.

---------------------------------------------------------------------------

The adopted process also provides SEFs and DCMs with flexibility in

determining whether a swap is available to trade. Under Sec. Sec.

37.10(b) and 38.12(b), a SEF or DCM may consider any one or more of the

enumerated factors in its initial determination, given that the

Commission believes that no single factor must always be considered.

Accordingly, this approach allows SEFs and DCMs to submit swaps with

different trading characteristics to the Commission as available to

trade. Rather than require SEFs and DCMs to respond to a rigid set of

determination criteria, this flexibility was designed to encourage SEFs

and DCMs to make a broader range of swaps subject to the trade

execution requirement.

The Commission anticipates that these benefits will produce a more

efficient process and consistent determinations over time. Under the

part 40 procedures, SEFs and DCMs will submit to the Commission, for

further review with the potential for public comment, an initial

determination of whether a swap is available to trade. This approach

will (1) benefit market participants during the initial stages of

implementation by providing them, in circumstances as described above,

with an opportunity to comment on determinations and (2) help the

Commission track and maintain a record of which swaps are subject to

the trade execution requirement.

The transparency and flexibility offered under the adopted

processes will further the development of a centralized trading market,

consistent with the objectives of the Dodd-Frank Act.\244\ By requiring

a submission that details the analysis and justifications behind an

available-to-trade determination, the part 40 procedures provide the

Commission with a well-established protocol for reviewing whether swaps

should be subject to the trade execution requirement. The procedures

set forth in the final rule provide the building blocks for the

development of a robust and liquid centralized trading market,

consisting of a diverse array of offered or listed swaps, thus inviting

market participation. Competition between SEFs and DCMs is expected to

increase the number of swaps available for trading on SEFs and DCMs,

thereby encouraging innovation and inviting broader market

participation. Growth in swaps trading on SEFs and DCMs will benefit

market participants by increasing price transparency and facilitating

price discovery.

---------------------------------------------------------------------------

\244\ See CEA section 5h(e), as enacted by section 733 of the

Dodd-Frank Act, 7 U.S.C. 7b-3(e) (stating that one of the Act's

objectives is ``to promote the trading of swaps on swap execution

facilities and to promote pre-trade price transparency in the swaps

market''); CEA section 5(d)(9)(A), as amended by section 735(b) of

the Dodd-Frank Act, 7 U.S.C. 7(d)(9) (stating under a DCM core

principle that ``the board of trade shall provide a competitive,

open and efficient market and mechanism for executing transactions

that protects the price discovery process of trading in the

centralized market of the board of trade'').

---------------------------------------------------------------------------

Consideration of Alternatives

Several commenters recommended that swaps subject to the clearing

requirement should be subject to the trade execution requirement

without an additional available-to-trade determination. Some of these

commenters stated that the CEA does not specify a formal process with

determination factors.\245\ Other commenters asserted that the clearing

determination considers a swap's trading liquidity and therefore

already addresses whether the swap should be subject to mandatory trade

execution.\246\ Several commenters stated that requiring trading

facilities to consider the enumerated factors in an available-to-trade

determination would be ``inefficient and burdensome'' and waste limited

regulatory resources.\247\ MarketAxess asserted that allowing a SEF or

DCM to (1) recognize that a swap is available to trade based on the

clearing determination and (2) notify the Commission that it is listing

the swap, thereby making the swap subject to

[[Page 33624]]

mandatory trade execution, would not require the Commission, or a SEF

or DCM to expend any resources.\248\

---------------------------------------------------------------------------

\245\ MarketAxess Comment Letter at 3; WMBAA Comment Letter at

3; AFR Comment Letter at 2-3; ODEX Comment Letter at 1; SDMA Comment

Letter at 3-4.

\246\ SDMA Comment Letter at 4-5; WMBAA Comment Letter at 3;

MarketAxess Comment Letter at 5. AFR claimed that a DCO can only

clear a class of swaps if a reasonable level of market liquidity is

demonstrated; otherwise, the DCO could not establish the

statistically expected loss levels in a liquidation of positions so

as to set an initial margin level. AFR Comment Letter at 4.

\247\ SDMA Comment Letter at 5-6; WMBAA Comment Letter at 3;

MarketAxess Comment Letter at 7-8.

\248\ MarketAxess Comment Letter at 7-8.

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The Commission considered the costs and benefits of subjecting

swaps to mandatory trade execution based on whether the swap must be

cleared rather than through a separate available-to-trade

determination. While the Commission recognizes that adopting a distinct

determination process may impose some additional costs on SEFs and

DCMs, it believes that these costs are warranted by the benefits that

market participants will realize from the process: transparency and

knowledge that only swaps that are either deemed certified or approved

by the Commission as available to trade are subject to the trade

execution requirement. This process insulates against SEFs or DCMs

engaging in inconsistent or improper determinations to subject swaps to

the trade execution requirement. As previously stated, the Commission

expects the cost of making a determination to decrease over time as

SEFs, DCMs, and market participants become more knowledgeable about the

process and gain more experience in considering the factors to make a

swap available to trade.

Several commenters proposed that the Commission, not SEFs and DCMs,

should maintain the exclusive authority to determine whether a swap is

available to trade.\249\ Commenters expressed concern that illiquid

swaps would become subject to the trade execution requirement if SEFs

and DCMs were allowed to make the determination based on their

incentives to maximize the number of swaps traded on a facility or

platform.\250\ CME stated a Commission-based review of whether a swap

is available to trade would lead to a more ``logical and efficient''

use of Commission and industry resources.\251\

---------------------------------------------------------------------------

\249\ Markit Comment Letter at 5-6; Vanguard Comment Letter at

5; Geneva Energy Markets Comment Letter at 2; JPMorgan Comment

Letter at 1; CME Comment Letter at 4-5; FHLB Comment Letter at 3;

FSR Comment Letter at 4; FXall Comment Letter at 5-6; Morgan Stanley

Comment Letter at 5-6; CEWG Comment Letter at 6; ISDA Comment Letter

at 3-4, 6; Tradeweb Comment Letter at 4-5.

\250\ Bloomberg Comment Letter at 2; Vanguard Comment Letter at

5; Geneva Energy Markets Comment Letter at 2; JPMorgan Comment

Letter at 1-2; CME Comment Letter at 4-5; FHLB Comment Letter at 3;

ISDA Comment Letter at 3-4; Markit Comment Letter at 5; CEWG Comment

Letter at 2; Morgan Stanley Comment Letter at 5-6; AIMA Comment

Letter at 2; FXall Comment Letter at 6-7; Tradeweb Comment Letter at

2-3; FSR Comment Letter at 2.

\251\ CME Comment Letter at 4-5.

---------------------------------------------------------------------------

The Commission believes that benefits are maximized under the

approach adopted, rather than an alternative under which the Commission

would hold sole authority to determine whether a swap is available to

trade. The part 40 approach leverages the trading expertise of SEFs and

DCMs to determine whether a swap is available to trade, while the

Commission's authority to review these determinations under part 40

will help ensure that they are appropriate. The Commission expects that

SEFs and DCMs will have an understanding of the markets that they list

for trading and will regularly communicate with market participants

about liquidity in their markets. Accordingly, the Commission believes

that SEFs and DCMs are best positioned to make appropriate available-

to-trade determinations. Relying on SEFs and DCMs, who would be

incentivized to make swaps available to trade, to initiate the

determination process in consultation with market participants will

also facilitate innovation and promote swaps trading in accordance with

section 5h(e) of the CEA. By allowing SEFs and DCMs to make these

determinations, the Commission will be able to focus on its

responsibilities in conducting market oversight.

The Commission has also considered whether a SEF or DCM should be

able to submit an available-to-trade determination for a swap that it

does not list or offer for trading. While SDMA responded in the

affirmative,\252\ several other commenters stated that a SEF or DCM

should be required to list the swap for a period of time prior to

submitting a determination.\253\ ISDA stated that the lack of such a

requirement would otherwise incentivize SEFs and DCMs to submit as many

determinations as possible, merely to promote centralized trading.\254\

---------------------------------------------------------------------------

\252\ SDMA Comment Letter at 9.

\253\ Eaton Vance Management Comment Letter at 3; SIFMA AMG

Comment Letter at 10; UBS Comment Letter at 2; Morgan Stanley

Comment Letter at 6 n.6; ISDA Comment Letter at 7; Tradeweb Comment

Letter at 5.

\254\ ISDA Comment Letter at 6.

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The Commission has determined that a listing requirement supports

the integrity of the available-to-trade determination process.

Moreover, the Commission expects that a SEF or DCM will have no

business incentive to submit an available-to-trade determination for a

swap that it has no intention of listing for trading. While the

Commission recognizes that the listing SEF or DCM will likely incur

some cost to submit an available to trade determination, the Commission

believes that those costs would necessarily be accompanied by a stream

of benefits once the swap is subject to the trade execution

requirement. Accordingly, the Commission has adopted a listing

requirement under new Sec. Sec. 37.10(a)(2) and 38.12(a)(2). As

discussed above, the Commission believes that a SEF or DCM will incur

de minimis costs to list or offer a swap for trading under the part 40

procedures for listing a product for trading--the Commission estimates

that it would take one compliance personnel approximately 2 hours, on

average, to submit a product filing.

The Commission has also considered the costs and benefits of, and

requested comment on, whether or not a SEF or DCM should (1) be allowed

to submit its available-to-trade determination for a ``group, category,

type or class of swap''; and (2) be allowed to consider the

determination factors under Sec. Sec. 37.10(b) and 38.12(b) for the

same swap on another SEF or DCM, or activity primarily or solely in

bilateral transactions. Because each of the adopted provisions is

permissive rather than compulsory in nature, neither should impose

costs upon SEFs and DCMs relative to the alternative of not providing

such allowances. SEFs and DCMs will internally analyze the costs and

benefits before availing themselves of either provision, and forego the

opportunity if not warranted by the perceived benefits. Should a SEF or

DCM choose to submit a ``group, category, type or class of swap,'' the

adopted approach would impose fewer costs than requiring a submission

for each individual swap.

The Commission has identified the benefits of both provisions

relative to the alternatives of not providing such allowances. First,

allowing a SEF or DCM to submit a determination for a group, category,

type or class of swap would promote economies of scale and streamline

the process for SEFs, DCMs, and the Commission; rather than submit

separate determinations for individual swaps with similar

characteristics, a SEF or DCM may elect to include them in a single

filing.\255\ Based on its review, however, the Commission may approve

or deem only part or some of the swaps within that group, category,

type or class as available to trade. Second, allowing a SEF or DCM to

consider activity in the same swap that is listed on another trading

platform or in the bilateral market would yield information about how

that swap trades in the overall market and better inform market

participants and the Commission

[[Page 33625]]

about how the swap may trade in a centralized environment.

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\255\ The Commission notes that it also considers swaps as a

group, category, type or class in other instances, such as for

clearing determinations. See supra note 79.

---------------------------------------------------------------------------

A number of commenters recommended that the Commission pursue an

alternative approach that would establish objective threshold criteria

for the determination factors.\256\ For example, Markit and FSR

commented that without objective thresholds, SEFs and DCMs would not be

able to determine that a swap is available to trade with regards to its

liquidity.\257\ ICI and Eaton Vance Management stated that buy-side

market participants would indirectly incur higher trading costs in the

event that a swap with limited liquidity were to trade on a SEF or

DCM.\258\

---------------------------------------------------------------------------

\256\ Markit Comment Letter at 3; Spring Trading Comment Letter

at 4; AIMA Comment Letter at 4; Bloomberg Comment Letter at 4; FXall

Comment Letter at 6; Vanguard Comment Letter at 5; SIFMA AMG Comment

Letter at 5; JPMorgan Comment Letter at 1; ISDA Comment Letter at 7;

Eaton Vance Management Comment Letter at 3; ICI Comment Letter at 6;

Morgan Stanley Comment Letter at 6; FSR Comment Letter at 6-7.

\257\ Markit Comment Letter at 3; FSR Comment Letter at 3, 6-7.

\258\ ICI Comment Letter at 6; Eaton Vance Management Comment

Letter at 2-3.

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The Commission does not deem the risk of limited liquidity swaps

becoming available to trade as significant relative to the benefits of

the final rule's flexible approach. As such, the Commission does not

believe that establishing objective threshold criteria would provide a

sufficient benefit to warrant imposing additional administrative

burdens--the Commission would first be required to determine which

swaps (among a wide variety) may potentially be available to trade, and

establish and update criteria for those swaps. Market participants

would then have to fulfill the burden of processing and analyzing trade

data to demonstrate that those criteria are met for swaps that they

submit. The rule, as adopted, allows the Commission to consider data

and other objective factors submitted by SEFs and DCMs, or the comments

from other market participants during the determination process. The

Commission will review and assess each available-to-trade submission to

ensure that it is consistent with the CEA and the Commission's

regulations. Further, the Commission believes that the adopted approach

promotes greater swaps trading on SEFs and DCMs, in accordance with the

statutory objectives of the CEA, by providing the flexibility to make

swaps with different trading characteristics available to trade, rather

than imposing rigid threshold criteria.

Several commenters recommended that SEFs and DCMs must consider and

demonstrate that a swap is available to trade based on more than one

factor.\259\ Many of these commenters stated that SEFs and DCMs should

be required to consider all of the enumerated factors; \260\ Vanguard

and SIFMA AMG, for example, supported this approach because they

believed that all of the factors are relevant in determining if a swap

is available to trade.\261\ Bloomberg commented that the factors are

all important indicators of an actual trading market and recommended

mandatory consideration of all of them, given the implications of

making a swap available to trade and potential conflicts of

interest.\262\ FHLB commented that a determination should be based on

multiple factors.\263\

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\259\ FHLB Comment Letter at 3; Markit Comment Letter at 3; ICI

Comment Letter at 5; CEWG Comment Letter at 3.

\260\ Markit Comment Letter at 3; ISDA Comment Letter at 7;

Morgan Stanley Comment Letter at 4; FSR Comment Letter at 3; ICI

Comment Letter at 5; SIFMA AMG Comment Letter at 7.

\261\ Vanguard Comment Letter at 4; SIFMA AMG Comment Letter at

5.

\262\ Bloomberg Comment Letter at 4.

\263\ FHLB Comment Letter at 4.

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The Commission has considered the range of alternatives suggested

by some commenters with respect to more specific or mandatory

consideration of the determination factors, but believes that requiring

consideration of every factor or a specific set of factors would

require additional effort on the part of the SEFs or DCMs without

significant added benefit.\264\ In the event that a SEF's or DCM's

submission does not adequately support an available-to-trade

determination, the Commission, under part 40, may request additional

information in order to complete its review \265\ or extend the review

period. The adopted approach achieves the goal of making swaps

available for centralized trading, while allowing SEFs and DCMs the

flexibility to subject swaps with different trading characteristics to

the trade execution requirement.

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\264\ The Commission notes that a SEF or DCM, if it chooses, may

consider more than one factor in determining if a swap is available

to trade.

\265\ Under Sec. Sec. 40.5(c)(2)(ii) and 40.6(a)(8), the

Commission may request that a registered entity to supplement the

submission with additional information.

---------------------------------------------------------------------------

Several commenters supported incorporating a process for

determining whether a swap is no longer available to trade; \266\ some

recommended using the same factors as those used to determine whether a

swap is available to trade, albeit with objective thresholds.\267\

Commenters were split on the issue of applicability; some expressed

that a determination that a swap is no longer available to trade should

apply only to individual SEFs or DCMs,\268\ while others recommended

that such a determination should apply on a marketwide basis,

consistent with how the trade execution requirement is applied.\269\

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\266\ MFA Comment Letter at 4; FXall Comment Letter at 7-8; ICI

Comment Letter at 7; SIFMA AMG Comment Letter at 11-12; Spring

Trading Comment Letter at 7 (Jan. 12, 2012); ISDA Comment Letter at

8-9; JPMorgan Comment Letter at 2.

\267\ MFA Comment Letter at 4; ICI Comment Letter at 7-8; FXall

Comment Letter at 7-8.

\268\ Spring Trading Comment Letter at 7-8 (Jan. 12, 2012); SDMA

Comment Letter at 10.

\269\ MFA Comment Letter at 4-5; ICI Comment Letter at 8.

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The Commission believes that inclusion at this time of a separate

process for determining that a swap is no longer available to trade is

unnecessary and unwarranted by the limited, if any, benefit that would

be afforded. In this circumstance, to impose a requirement for the last

SEF or DCM that ceases to list a swap for trading to submit an official

determination that the swap is no longer available to trade would be

unnecessary.\270\

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\270\ The Commission acknowledges the concern that the de-

listing of swaps by one or more SEFs or DCMs may affect the

liquidity in the market for such swaps, or could be a reflection of

reduced liquidity in such markets, and that such reduced liquidity

could affect the costs of executing such swaps on a SEF or DCM. In

such circumstances where swaps are de-listed by SEFs or DCMs,

however, the Commission may review the available-to-trade status of

such a swap under part 40 of the Commission's regulations;

additionally, section 8a(7) of the CEA affords market participants

an avenue to request the Commission to designate a swap as no longer

available to trade. See supra note 140.

---------------------------------------------------------------------------

The Commission proposed, and several commenters supported, a

requirement that each SEF or DCM (1) conduct an annual review and

assessment of each swap it has made available to trade to determine

whether or not each of these swaps should continue to be available to

trade; and (2) submit an electronic copy of the review and assessment,

including any supporting information or data, to the Commission no

later than 30 days after its fiscal year end. The Commission estimated

that it would cost each DCM an additional $1,730 per review to comply

with the proposed requirement.\271\ Some commenters recommended more

frequent reviews in order to identify illiquid swaps on a timelier

basis.\272\

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\271\ 76 FR 77735.

\272\ Morgan Stanley Comment Letter at 8; MFA Comment Letter at

4-5; ISDA Comment Letter at 8; AIMA Comment Letter at 2-3; Eaton

Vance Management Comment Letter at 4; ICI Comment Letter at 7;

Markit Comment Letter at 4; Vanguard Comment Letter at 6; JPMorgan

Comment Letter at 2; SIFMA AMG Comment Letter at 11; FSR Comment

Letter at 3-4.

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[[Page 33626]]

Other commenters, however, opposed the requirement. MarketAxess

commented that conducting annual assessments would require SEFs and

DCMs to allocate substantial resources.\273\ WMBAA stated that the

proposed requirement is arbitrary, time-consuming, and offered

insufficient regulatory value, and that the costs and burdens of an

annual review would be higher than the Commission's projections.\274\

Sunguard Kiodex asserted that periodic reviews would cause swaps'

statuses to fluctuate, therefore negating the benefit of an initial

determination.\275\ WMBAA and SDMA alternatively recommended that a SEF

or DCM annually renew its self-certification based on the clearing

determination review.\276\

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\273\ MarketAxess Comment Letter at 9.

\274\ WMBAA Comment Letter at 5.

\275\ Sunguard Kiodex Comment Letter at 2.

\276\ SDMA Comment Letter at 10; WMBAA Comment Letter at 4.

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In line with its reasoning for not adopting a separate process for

determining that a swap is no longer available to trade, the Commission

is also not adopting an annual review and assessment requirement. A

swap will no longer be available to trade when all relevant SEFs and

DCMs have de-listed the swap; in the ordinary course of business, the

Commission believes that a SEF or DCM will already assess whether it

should continue to list or offer a swap for trading. Such an assessment

would likely consider similar factors, such as trading volume, to those

used to determine that a swap is available to trade. Therefore, the

Commission believes that imposing a separate review and assessment

requirement would necessitate duplicative and costly effort with

limited, if any, additional benefit. In response to commenters who

support more frequent reviews to identify illiquid swaps that should no

longer be available to trade, the Commission notes that market

participants themselves may request that a SEF or DCM review and assess

an available-to-trade determination. The Commission may also request

relevant information from SEFs and DCMs to conduct a review and

assessment.\277\

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\277\ See supra note 155 and accompanying text.

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b. Applicability

Sections 37.10(c) and 38.12(c) of the final rule require that once

a swap is deemed to be available to trade, then all other SEFs and DCMs

listing or offering the same swap must do so in accordance with the

trade execution requirement under section 2(h)(8) of the CEA.\278\ The

Commission did not identify alternatives to this requirement. Further,

the Commission also requested, but did not receive, comments on

alternatives to the proposed requirement.

---------------------------------------------------------------------------

\278\ See supra note 14.

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Costs

The Commission anticipates that final Sec. Sec. 37.10(c) and

38.12(c) will impose some minimal costs for SEFs and DCMs related to

monitoring and identifying swaps to discern whether a swap is available

to trade on another SEF or DCM, and therefore would be subject to the

trade execution requirement. The Commission has almost entirely

eliminated these costs by assuming the responsibility for maintaining a

public record of all of the swaps that are subject to the trade

execution requirement in an accessible, central location on its Web

site.

The Commission solicited comments on the costs associated with

Sec. Sec. 37.10(c) and 38.10(c) and received one comment. WMBAA stated

that the ongoing surveillance necessary to determine which swaps have

been made available to trade would impose excessive costs on SEFs and

DCMs.\279\ WMBAA, however, did not provide an estimate of such costs or

further substantiate its claim. Therefore, the Commission does not deem

WMBAA's comment sufficient to alter its belief that these costs will be

minimal, given that the Commission will maintain on its Web site a

centralized list of all swaps that are available to trade.

---------------------------------------------------------------------------

\279\ WMBAA Comment Letter at 5.

---------------------------------------------------------------------------

Benefits

Sections 37.10(c) and 38.12(c) promote trading on SEFs and DCMs,

consistent with the trade execution requirement under section 2(h)(8)

of the CEA. Specifically, swaps traded on a SEF will be executed as

Required Transactions under Sec. 37.9 of the Commission's regulations,

which means that they will be executed via an Order Book or RFQ. Swaps

that are subject to the trade execution requirement and traded on a DCM

must be executed pursuant to subpart J of part 38 of the Commission's

regulations, which implements revised DCM Core Principle 9, as amended

by section 735(b) of the Dodd-Frank Act. Core Principle 9 requires DCMs

to ``provide a competitive, open, and efficient market and mechanism

for executing transactions that protects the price discovery process of

trading in the centralized market of the board of trade.'' Accordingly,

market participants in these swaps will benefit from the pre-trade

transparency and price discovery associated with trading on DCMs and

SEFs as well as the application of other DCM and SEF core principles.

The Commission also anticipates that greater competition among SEFs and

DCMs will lower bid-ask spreads and transaction costs for some market

participants.\280\

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\280\ S. Rep. No. 111-176, at 34 (2010) (quoting International

Risk Analytics co-founder Christopher Whalen, ``[t]he absence of an

exchange trading mandate provides `supra-normal returns paid to the

dealers in the closed OTC derivatives market [and] are effectively a

tax on other market participants, especially investors who trade on

open, public exchanges''').

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c. Consideration of Section 15(a) Factors--Available-to-Trade Rule

Protection of Market Participants and the Public

In crafting the final rule to provide a method for determining that

a swap is subject to the trade execution requirement under section

2(h)(8) of the CEA, the Commission has endeavored to create a regime

that foremost will protect market participants and the public. Under

the final rule, a SEF or DCM must consider certain factors specified by

the Commission under Sec. 37.10(b) or Sec. 38.12(b), respectively, in

determining that a swap is available to trade. A SEF or DCM must also

submit such determinations to the Commission, either for approval or

under self-certification procedures, pursuant to part 40 of the

Commission's regulations. Part 40 also requires SEFs and DCMs to post a

notice and a copy of rule submissions on their Web site concurrent with

the filing of the submissions with the Commission. The Commission,

consistent with current practice, will also post SEF and DCM rule

submission filings on its Web site. Therefore, under the final rule,

SEFs, DCMs, and market participants will have full information about

the factors that a SEF or DCM considered in determining that a swap is

available to trade, the procedure for a SEF or DCM to submit a swap as

available to trade, the swaps that are presently available to trade,

and the progress of swaps under review. Accordingly, the final rule

promotes the protection of market participants by ensuring transparency

in the available-to-trade process.

The final rule will also promote the protection of market

participants and the public by providing for Commission review and

encouraging public comment in appropriate circumstances. Under the

final rule, the Commission will review the SEF's or DCM's available-to-

trade determination. To facilitate this review, part 40 requires

[[Page 33627]]

SEFs and DCMs to provide the Commission with, and to post on their Web

sites, a brief explanation of any substantive opposing views in rule

filings, and allow for a public comment period when warranted.

The final rule also will promote the protection of market

participants and the public by ensuring that transactions in swaps that

are available to trade and subject to the trade execution requirement

are executed on regulated SEFs and DCMs in accordance with section

2(h)(8) of the CEA, rather than the bilateral OTC market. Therefore,

these swaps will be transacted with the pre-trade and post-trade

transparency that swap execution on SEFs and DCMs provide, reducing

search costs relative to the bilateral OTC market, and potentially

lowering bid-ask spreads.

At the same time, the final rule will further promote the

protection of market participants and the public by providing for a

Commission review of the available-to-trade process. SEFs and DCMs will

have considerable discretion on the application and consideration of

the factors to make swaps available to trade, which may vary depending

on the nature of the relevant swap market. This approach will enable

SEFs and DCMs to utilize their expertise in the markets in which they

list swaps for trading to determine which swaps should be available to

trade, subject to Commission review of these determinations to ensure

that they are consistent with the CEA and the Commission's regulations,

and therefore for market participants and the public.

Efficiency, Competitiveness, and Financial Integrity of the Markets

The final rule promotes the trading of swaps on SEFs and DCMs by

establishing a process that specifies when a swap is available to

trade; once a swap is deemed available to trade, that swap must be

traded on a SEF or DCM if it is subject to the clearing requirement.

Accordingly, the adopted process will promote market efficiency and

competitiveness by (1) informing market participants of when the trade

execution requirement applies and (2) prescribing the methods by which

all market participants may execute a particular swap, depending on

whether the trade execution requirement applies.

The final rule further promotes market efficiency by tasking SEFs

and DCMs with the primary responsibility and discretion to consider any

one or several factors in determining whether a swap is available to

trade. This approach reflects the Commission's view that SEFs and DCMs

have (or will have) the expertise and ability to form reasonable

conclusions about which swaps should be subject to the trade execution

requirement and which swaps should not be traded pursuant to mandatory

trade execution. By assigning primary responsibility to SEFs and DCMs

in this manner--subject to Commission review to assure consistency with

the CEA and the Commission's regulations--the Commission believes that

the final rule further promotes both market efficiency and integrity.

Further, by assuming the responsibility for maintaining an up-to-date

list of swaps made available to trade, the Commission is also

mitigating the search costs for market participants to identify whether

a swap is available to trade on SEF or a DCM, thereby promoting the

overall efficiency of the swaps markets for SEFs, DCMs and market

participants.

Price Discovery

As stated above, the final regulations are expected to promote the

trading of swaps on SEFs and DCMs. Swaps that are subject to the

clearing requirement must be executed on a SEF or DCM, in a manner

consistent with the trade execution requirement, if made available to

trade on a SEF or DCM. By providing the procedural mechanism to

establish when a swap is available to trade--an issue on which the

statute is silent--the rule operationalizes the trade execution

requirement. Accordingly, the rule reinforces price discovery promoted

through mandatory trade execution. For example, swaps traded on DCMs

that are made available to trade would be subject to DCM Core Principle

9, which requires DCMs to ``provide a competitive, open, and efficient

market and mechanism for executing transactions that protects the price

discovery process of trading in the centralized market of the board of

trade.'' \281\ Under Sec. 37.9 of the Commission's regulations, SEFs

will be required to provide an order book or an RFQ method of trade

execution that offers pre-trade price transparency for swaps listed or

offered for trading that are available to trade. This pre-trade

transparency promotes price discovery for swaps.

---------------------------------------------------------------------------

\281\ 7 U.S.C. 7(d)(9); subpart J of part 38 of the Commission's

regulations, which implements revised DCM Core Principle 9, as

amended by section 735(b) of the Dodd-Frank Act.

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Sound Risk Management Practices

The enhanced pre-trade and post-trade transparency and price

discovery in contracts that have been made available to trade, and thus

subject to the trade execution requirement, under the procedures set

out in this rule will promote sound risk management practices by

ensuring that market participants and clearing organizations are able

to base their risk management decisions on publicly available prices

discovered on the competitive and efficient markets offered by SEFs and

DCMs. As trading on SEFs and DCMs is not relationship-based, as is

typical of trading in the OTC market, market participants will have

access to a broader range of risk management options in the form of

swaps that are available to trade.

Other Public Interest Considerations

The final regulations are not expected to affect public interest

considerations other than those identified above.

2. Trade Execution Compliance Schedule

Final Sec. Sec. 37.12 and 38.11 establishes a compliance schedule

following a determination that a swap is subject to the trade execution

requirement under section 2(h)(8) of the CEA. Market participants are

required to comply with the trade execution requirement upon the later

of (1) the applicable deadline established under the compliance and

implementation schedule for the clearing requirement for a swap under

section 2(h)(1) of the CEA; \282\ or (2) 30 days after the swap is

first made available to trade on either a SEF or DCM. Absent this final

rule, market participants would have been required to comply with the

trade execution requirement immediately after a swap is determined to

be available to trade and required to be cleared. To provide further

flexibility to registrants and market participants, the Commission is

exercising its discretion to stagger implementation of the trade

execution requirement.

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\282\ The Commission has adopted the final compliance and

implementation schedule for the clearing requirement under section

50.25(b). Swap Transaction Compliance and Implementation Schedule:

Clearing Requirement Under Section 2(h) of the CEA, 77 FR 44441

(July 20, 2012). See supra note 158.

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For reasons discussed below, the cost and benefits associated with

requiring mandatory trade execution immediately upon making a swap

available to trade and requiring it to be cleared, or after some longer

versus shorter period of delay, are not susceptible to meaningful

quantification. Costs and benefits associated with trade execution are

independent of costs and benefits of implementing mandatory trade

execution itself and pertain exclusively to the pace of implementation.

The Commission is not aware of any analog,

[[Page 33628]]

to either an immediate or delayed requirement, to comply with the trade

execution requirement that would produce data useful in estimating the

difference in costs and benefits between the two approaches.

Notwithstanding these limitations, the Commission identifies and

considers the costs and benefits of this rule in qualitative terms.

Costs

The Commission solicited comments regarding costs associated with

Sec. Sec. 37.12 and 38.11, including the costs and benefits of any

alternative compliance schedule proposed. Although the Commission

requested quantification of those costs discussed, commenters did not

provide specific estimates in dollar terms.

The Commission recognizes that the compliance schedule entails

certain initial costs to the market and public--in particular, a delay

in obtaining the benefits of pre-trade price transparency and price

discovery. The Commission believes, however, that such costs are

warranted because incurring them at the outset facilitates the ability

to more fully realize the intended pre-trade price transparency and

price discovery benefits upon the compliance date and thereafter. As

discussed below in connection with the benefits of this rule, this

compliance schedule provides market participants with sufficient time

to transition trading from the OTC markets to SEFs and DCMs. Absent

this window for transition, market participants would likely encounter

an impaired ability to manage their risks and adequately hedge their

positions. Further, the inability of market participants to execute

swaps on SEFs and DCMs as they engage in necessary transaction

activities would likely reduce liquidity in certain swaps and increase

transaction costs for other market participants.

In response to requests for comment on the compliance schedule,

some commenters stated that 30 days would be insufficient for market

participants to comply with the trade execution requirement.\283\ For

example, ISDA and AIMA expressed concern that such a compressed

schedule would preclude market participants from hedging their

exposures,\284\ while CME commented that DCOs, DCMs, and SEFs would not

be able to establish technological linkages within 30 days.\285\ MFA

stated that the Commission's compliance schedule could require

simultaneous compliance with the trade execution requirement and the

clearing requirement, which would require devoting resources to both

efforts and create a significant burden.\286\

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\283\ JPMorgan Comment Letter at 3-4; UBS Comment Letter at 2;

ICI Comment Letter at 5 (Nov. 4, 2011); CME Comment Letter at 2

(Nov. 4, 2011); Westpac Comment Letter at 3 (Nov. 4, 2011); Regional

Banks Comment Letter at 7 (Nov. 4, 2011); FHLBanks Comment Letter at

5 (Nov. 4, 2011); ICI Comment Letter at 9; ISDA Comment Letter at

11; AIMA Comment Letter at 2-3; ACLI Comment Letter at 2.

\284\ ISDA Comment Letter at 11; AIMA Comment Letter at 2-3.

\285\ CME Comment Letter at 2 (Nov. 4, 2011).

\286\ MFA Comment Letter at 10-11.

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Given that the final rule does not impose a fixed 30-day

requirement, the Commission disagrees that the schedule is overly

costly or onerous. In response to commenters concerned that 30 days

would be insufficient to achieve compliance, the Commission notes that

the implementation period for the trade execution requirement may vary

depending on the timing of the available-to-trade determination and the

clearing determination. In some, if not many, instances, market

participants will have more than 30 days after a swap is made available

to trade to comply. For example, depending upon when a swap is deemed

as available to trade and the amount of time a particular market

participant is afforded to comply with the clearing requirement under

the Commission's final schedule (90 days, 180 days, or 270 days), the

30th day after a swap is deemed as available to trade pursuant to the

part 40 procedures may occur prior to the date in which the market

participant must comply with the clearing requirement. Further, part 40

review procedures will provide market participants advance awareness

that a swap may potentially be deemed as available to trade, during

which time market participants logically should undertake initial

transition planning in the event that the swap is ultimately deemed as

available to trade.\287\ Moreover, certain prerequisite activities,

such as establishing SEF or DCM connectivity, will be carried out

infrequently or on a one-time basis, such that a longer implementation

period would not be necessary when preparing to comply with the trade

execution requirement for future swap trading.\288\

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\287\ Similarly, where a swap first becomes subject to the

clearing requirement before being made available to trade, the

clearing determination would alert market participants to the fact

that specific classes of swaps may become subject to the trade

execution requirement.

\288\ Under the Sec. Sec. 37.10(a)(2) and 38.12(a)(2) of the

final rule, a SEF or DCM that submits a swap as available to trade

must certify that it is listing it for trading on its own trading

system or platform. This requirement will ensure that a minimum

level of connectivity is present between a SEF or DCM and market

participants prior to determining whether it is available to trade.

---------------------------------------------------------------------------

Benefits

The compliance schedule set forth in final Sec. Sec. 37.12 and

38.11 will allow market participants to comply with the trade execution

requirement in an organized and timely manner, while mitigating

potential disruptions to trading during the transition. The schedule

will afford market participants the opportunity to resolve logistical

issues prior to trading swaps on a SEF or DCM,\289\ such as

establishing connectivity to a registered trading facility or platform;

notifying customers and completing or amending any applicable legal

documentation; and revising internal standards and procedures. The

additional time will facilitate a greater number of potential swap

counterparties who are prepared to participate in centralized trading,

thereby increasing competition, pre-trade price transparency, and price

discovery. Increasing the number of potential market participants will

also promote market liquidity and reduce the costs of using swaps to

manage risk.

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\289\ The Commission believes that DCMs will be prepared to

comply with the trade execution requirement to a certain extent

because they may have the infrastructure in place to facilitate the

trading of swaps. DCMs may require fewer technology, legal

arrangements, and changes to operational patterns. As the Commission

noted in the proposed rule, however, they may still have to update

their internal policies and procedures. 76 FR 58190.

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Consideration of Alternatives

Tradeweb commented that 30 days may not be sufficient to achieve

compliance for a class of swaps that is being made available to trade

for the first time, and recommended that the Commission set an

appropriate implementation period on a case-by-case basis, with input

from SEFs, DCMs, and market participants.\290\

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\290\ Tradeweb Comment Letter at 4.

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The Commission, however, believes that a case-by-case approach is

neither feasible nor necessary to establish an appropriate

implementation period for different classes of swaps. The data needed

to precisely determine the optimal time period--accommodating a

reasonable transition while not unduly delaying the benefits of trade

execution--does not yet exist; such data would be obtained from the

transition process itself. Further, the adopted approach will allow the

Commission to accommodate a large number of submissions for different

classes of swaps through the transition process. Accordingly, the

Commission believes that it is more appropriate to opt for an approach

that is flexible and provides market participants with notice and

[[Page 33629]]

certainty, rather than one that attempts to assign a definite time

period for swaps on a case-by-case basis.

The Commission views the ideal implementation period for a class of

swaps to depend on, among other factors, how the class of swaps is

defined, and the number and complexity of those swaps within that

class. This amount of time also depends on the nature, experience, and

resources of the market participant to whom the requirement applies.

The Commission's adopted approach accounts for the latter consideration

by incorporating the implementation periods for the clearing

requirement--90, 180, and 270 days--that are based on the type of

market participant.\291\ Where a swap first becomes subject to the

clearing requirement before being made available to trade, the clearing

determination would alert market participants to the fact that specific

classes of swaps may become subject to the trade execution requirement.

Therefore, the rule as adopted addresses Tradeweb's concern by

providing sufficient flexibility to accommodate different classes of

swaps, without the added complexity of instituting an compliance

schedule that applies on a case-by-case basis. In contrast, a case-by-

case approach would likely increase the administrative burden by

requiring an additional review and determination process, thereby

further delaying the benefits of the trade execution requirement.

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\291\ See supra note 158.

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Several commenters recommended a longer implementation period,

i.e., more than 30 days after a swap is made available to trade,

ranging from 90 to 180 days after a swap is made available to

trade.\292\ Some commenters also recommended establishing the

implementation period after the swap becomes subject to the trade

execution requirement.\293\ Other commenters recommended that the trade

execution requirement should not apply until full implementation of the

clearing requirement.\294\ Commenters generally stated that lengthening

the implementation period would provide market participants with

adequate time to establish new infrastructure, standards, and

procedures;\295\ develop adequate connectivity \296\ and obtain trading

access;\297\ and complete documentation and agreements.\298\ Tradeweb,

however, stated that 30 days would be adequate to comply with the trade

execution requirement for individual swaps.\299\

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\292\ FXall Comment Letter at 7; ICI Comment Letter at 9; CME

Comment Letter at 6-7; Vanguard Comment Letter at 6; Bloomberg

Comment Letter at 5; Westpac Comment Letter at 3 (Nov. 4, 2011);

Chatham Comment Letter at 4; FSR Comment Letter at 4.

\293\ SIFMA AMG Comment Letter at 9; Eaton Vance Management

Comment Letter at 3; ISDA Comment Letter at 11; Westpac Comment

Letter at 3 (Nov. 4, 2011); FHLBanks Comment Letter at 5 (Nov. 4,

2011).

\294\ AIMA Comment Letter at 3 (Nov. 3, 2011); MarkitSERV

Comment Letter at 5 (Nov. 4, 2011); Citadel Comment Letter at 5

(Nov. 4, 2011); MFA Comment Letter at 7 (Nov. 4, 2011); Vanguard

Comment Letter at 5 (Nov. 4, 2011).

\295\ JPMorgan Comment Letter at 3-4; ISDA Comment Letter at 11;

FHLBanks Comment Letter at 5 (Nov. 4, 2011); Westpac Comment Letter

at 2-3 (Nov. 4, 2011).

\296\ FSR Comment Letter at 4; Bloomberg Comment Letter at 5;

ICI Comment Letter at 8; ISDA Comment Letter at 11; Eaton Vance

Management Comment Letter at 3; Chatham Comment Letter at 4; SIFMA

AMG Comment Letter at 9; CME Comment Letter at 6-7; Westpac Comment

Letter at 3 (Nov. 21, 2011); ICI Comment Letter at 5 (Nov. 4, 2011).

\297\ MFA Comment Letter at 4; Vanguard Comment Letter at 6;

SIFMA AMG Comment Letter at 9; AIMA Comment Letter at 3; CME Comment

Letter at 6-7.

\298\ SIFMA AMG Comment Letter at 9; ICI Comment Letter at 9;

AIMA Comment Letter at 3; CME Comment Letter at 7; ISDA Comment

Letter at 11; Westpac Comment Letter at 3; FIA/ISDA/SIFMA Comment

Letter at 8 (Nov. 4, 2011).

\299\ Tradeweb Comment Letter at 4 (Nov. 4, 2011).

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The Commission believes that the adopted approach appropriately

balances the benefits of attaining mandatory trade execution as

expeditiously as possible with the need for sufficient preparation time

for compliance. As noted above, 30 days represents a minimum duration

of time provided for compliance. Depending on when a swap is submitted

and deemed available to trade, market participants may also utilize the

time afforded under the clearing implementation schedule to complete

the requisite activities necessary to trade on a SEF or DCM. The

Commission also notes that the final rule requires that a SEF or DCM

submitting a swap as available to trade must already list it for

trading. This requirement will ensure that a minimum level of

connectivity is present between a SEF or DCM and market participants

prior to determining whether it is available to trade.

Consideration of Section 15(a) Factors--Trade Execution Compliance

Schedule Protection of Market Participants and the Public

An extended implementation period will help facilitate an orderly

transition of swaps trading to a centralized market structure. The

inability of SEFs and DCMs to comply with the trade execution

requirement by any particular designated date risks excluding market

participants from transacting swaps that are subject to mandatory trade

execution; this would reduce overall liquidity and increase the costs

of executing those swaps for other market participants. Thus, absent a

reasonable implementation schedule, market participants could

potentially be exposed to higher market risk due to increased costs of

hedging their positions or the inability to hedge their positions. The

implementation period allows for timely compliance and protects market

participants by mitigating the potential disruptions to the transition

to trading on a SEF or DCM.

Efficiency, Competitiveness, and Financial Integrity of the Markets

The implementation period promotes efficiency in the markets by

providing additional time for market participants to identify and

resolve technical or logistical issues related to trading on a SEF or

DCM in a manner consistent with the trade execution requirement. By

enabling a broader group of market participants to comply with the

trade execution requirement in a timely manner, the implementation

period will facilitate competition in the centralized market, which in

turn will promote greater pre-trade price transparency and price

integrity in the market.

Price Discovery

By providing adequate time to prepare for such trading, the

implementation period will facilitate an orderly transition to

centralized trading and mitigate instances in which some market

participants would not be prepared to enter the market by the given

compliance date. In doing so, the Commission is affording the

opportunity for the maximum number of potential swap counterparties to

participate, thereby enhancing the price discovery process.

Sound Risk Management Practices

The implementation period reflected in the final rule should ensure

that market participants have adequate time to comply with the trade

execution requirement and will be prepared to transact swaps on a SEF

or DCM. As a result, market participants should be able to maintain

hedges that have been executed through swap transactions, thereby

mitigating market and counterparty risks. Moreover, a compliance

schedule that facilitates SEF and DCM swap execution by the greatest

number of potential market participants, as does the final rule,

indirectly promotes market liquidity, thereby reducing the overall

costs of utilizing swaps for risk management purposes.

[[Page 33630]]

Other Public Interest Considerations

The final regulations are not expected to affect public interest

considerations other than those identified above.

V. List of Commenters

1. Alternative Investment Management Association (``AIMA'')

2. Americans for Financial Reform (``AFR'')

3. American Council of Life Insurers (``ACLI'')

4. Asset Management Group, Securities Industry and Financial Markets

Association (``SIFMA AMG'')

5. Bloomberg

6. CBOE Futures Exchange (``CBOE'')

7. Chatham Financial (``Chatham'')

8. Chris Barnard

9. Citadel

10. CME Group (``CME'')

11. Commercial Energy Working Group (``CEWG'')

12. Eaton Vance Management

13. Federal Home Loan Banks (``FHLB'')

14. Fifth Third Bank, PNC Bank, Regions Bank, U.S. Bank National

Association (``Regional Banks'')

15. Financial Services Roundtable (``FSR'')

16. Futures Industry Association (``FIA'')

17. FX Alliance (``FXall'')

18. Geneva Energy Markets, LLC

19. ICAP

20. International Swaps and Derivatives Association (``ISDA'')

21. Investment Company Institute (``ICI'')

22. Javelin Capital Markets

23. JP Morgan

24. Managed Funds Association (``MFA'')

25. MarketAxess Holdings, Inc. (``MarketAxess'')

26. Markit

27. MarkitSERV

28. Morgan Stanley

29. ODEX Group, Inc. (``ODEX'')

30. Spring Trading, LLC (``Spring Trading'')

31. Swaps & Derivatives Market Association (``SDMA'')

32. Sunguard Kiodex LLC (``Sunguard Kiodex'')

33. Tradeweb Markets LLC (``Tradeweb'')

34. UBS Securities LLC (``UBS'')

35. Vanguard

36. Westpac Banking Corporation (``Westpac'')

37. Wholesale Markets Brokers' Association, Americas (``WMBAA'')

List of Subjects

17 CFR Part 37

Registered entities, Reporting and recordkeeping requirements, Swap

execution facilities, Swaps.

17 CFR Part 38

Designated contract markets, Registered entities, Reporting and

recordkeeping requirements, Swaps.

For the reasons stated in the preamble, the Commission amends 17

CFR part 37 and part 38 as follows:

PART 37--SWAP EXECUTION FACILITIES

0

1. The authority citation for part 37 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as

amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform

and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

0

2. Subpart A, as amended elsewhere in this issue of the Federal

Register, is further amended by adding Sec. Sec. 37.10 through 37.12

to read as follows:

Subpart A--General Provisions

Sec.

* * * * *

37.10 Process for a swap execution facility to make a swap available

to trade.

37.11 [Reserved].

37.12 Trade execution compliance schedule.

Sec. 37.10 Process for a swap execution facility to make a swap

available to trade.

(a)(1) Required submission. A swap execution facility that makes a

swap available to trade in accordance with paragraph (b) of this

section, shall submit to the Commission its determination with respect

to such swap as a rule, as that term is defined by Sec. 40.1 of this

chapter, pursuant to the procedures under part 40 of this chapter.

(2) Listing requirement. A swap execution facility that makes a

swap available to trade must demonstrate that it lists or offers that

swap for trading on its trading system or platform.

(b) Factors to consider. To make a swap available to trade, for

purposes of section 2(h)(8) of the Act, a swap execution facility shall

consider, as appropriate, the following factors with respect to such

swap:

(1) Whether there are ready and willing buyers and sellers;

(2) The frequency or size of transactions;

(3) The trading volume;

(4) The number and types of market participants;

(5) The bid/ask spread; or

(6) The usual number of resting firm or indicative bids and offers.

(c) Applicability. Upon a determination that a swap is available to

trade on any swap execution facility or designated contract market

pursuant to part 40 of this chapter, all other swap execution

facilities and designated contract markets shall comply with the

requirements of section 2(h)(8)(A) of the Act in listing or offering

such swap for trading.

(d) Removal--(1) Determination. The Commission may issue a

determination that a swap is no longer available to trade upon

determining that no swap execution facility or designated contract

market lists such swap for trading.

(2) Delegation of Authority. (i) The Commission hereby delegates,

until it orders otherwise, to the Director of the Division of Market

Oversight or such other employee or employees as the Director may

designate from time to time, the authority to issue a determination

that a swap is no longer available to trade.

(ii) The Director may submit to the Commission for its

consideration any matter that has been delegated in this section.

Nothing in this section prohibits the Commission, at its election, from

exercising the authority delegated in this section.

Sec. 37.11 [Reserved].

Sec. 37.12 Trade execution compliance schedule.

(a) A swap transaction shall be subject to the requirements of

section 2(h)(8) of the Act upon the later of:

(1) The applicable deadline established under the compliance

schedule provided under Sec. 50.25(b) of this chapter; or

(2) Thirty days after the available-to-trade determination

submission or certification for that swap is, respectively, deemed

approved under Sec. 40.5 of this chapter or deemed certified under

Sec. 40.6 of this chapter.

(b) Nothing in this section shall prohibit any counterparty from

complying voluntarily with the requirements of section 2(h)(8) of the

Act sooner than as provided in paragraph (a) of this section.

PART 38--DESIGNATED CONTRACT MARKETS

0

3. The authority citation for part 38 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,

6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as

amended by the Dodd-Frank Wall Street Reform and Consumer Protection

Act, Pub. L. 111-203, 124 Stat. 1376.

Subpart A--General Provisions

0

4. Add Sec. 38.11 to subpart A to read as follows:

[[Page 33631]]

Sec. 38.11 Trade execution compliance schedule.

(a) A swap transaction shall be subject to the requirements of

section 2(h)(8) of the Act upon the later of:

(1) The applicable deadline established under the compliance

schedule provided under Sec. 50.25(b) of this chapter; or

(2) Thirty days after the available-to-trade determination

submission or certification for that swap is, respectively, deemed

approved under Sec. 40.5 of this chapter or deemed certified under

Sec. 40.6 of this chapter.

(b) Nothing in this section shall prohibit any counterparty from

complying voluntarily with the requirements of section 2(h)(8) of the

Act sooner than as provided in paragraph (a) of this section.

0

5. Add Sec. 38.12 to subpart A to read as follows:

Sec. 38.12 Process for a designated contract market to make a swap

available to trade.

(a)(1) Required submission. A designated contract market that makes

a swap available to trade in accordance with paragraph (b) of this

section, shall submit to the Commission its determination with respect

to such swap as a rule, as that term is defined by Sec. 40.1 of this

chapter, pursuant to the procedures under part 40 of this chapter.

(2) Listing requirement. A designated contract market that makes a

swap available to trade must demonstrate that it lists or offers that

swap for trading on its trading system or platform.

(b) Factors to consider. To make a swap available to trade, for

purposes of section 2(h)(8) of the Act, a designated contract market

shall consider, as appropriate, the following factors with respect to

such swap:

(1) Whether there are ready and willing buyers and sellers;

(2) The frequency or size of transactions;

(3) The trading volume;

(4) The number and types of market participants;

(5) The bid/ask spread; or

(6) The usual number of resting firm or indicative bids and offers.

(c) Applicability. (1) Upon a determination that a swap is

available to trade on any designated contract market or swap execution

facility pursuant to part 40 of this chapter, all other designated

contract markets and swap execution facilities shall comply with the

requirements of section 2(h)(8)(A) of the Act in listing or offering

such swap for trading.

(d) Removal--(1) Determination. The Commission may issue a

determination that a swap is no longer available to trade upon

determining that no swap execution facility or designated contract

market lists such swap for trading.

(2) Delegation of Authority. (i) The Commission hereby delegates,

until it orders otherwise, to the Director of the Division of Market

Oversight or such other employee or employees as the Director may

designate from time to time, the authority to issue a determination

that a swap is no longer available to trade.

(ii) The Director may submit to the Commission for its

consideration any matter that has been delegated in this section.

Nothing in this section prohibits the Commission, at its election, from

exercising the authority delegated in this section.

Issued in Washington, DC, on May 17, 2013, by the Commission.

Christopher J. Kirkpatrick,

Deputy Secretary of the Commission.

Note: The following appendices will not appear in the Code of

Federal Regulations.

Appendices To Process for a Designated Contract Market or Swap

Execution Facility to Make a Swap Available to Trade, Swap Transaction

Compliance and Implementation Schedule, and Trade Execution Requirement

Under the Commodity Exchange Act--Commission Voting Summary and

Statements of Commissioners

Appendix 1--Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Chilton and

Wetjen voted in the affirmative; Commissioners Sommers and O'Malia

voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

I support the final rulemaking to implement a process for swap

execution facilities (SEFs) and designated contract markets (DCMs)

to ``make a swap available to trade'' (MAT). Today's rule also

finalizes the Commission's separate rule proposal to phase in

compliance for the trade execution requirement.

Completion of these two rules facilitates the congressionally

mandated critical reform promoting pre-trade transparency in the

swaps market.

The trade execution provision of the Dodd-Frank Wall Street

Reform and Consumer Protection Act requires that swaps be traded on

SEFs or DCMs if they are (1) subject to mandatory clearing, and (2)

made available to trade. Such platforms allow multiple participants

the ability to trade swaps by accepting bids and offers made by

multiple participants with all participants given impartial access

to the market.

The MAT rule establishes a flexible process for a SEF or DCM to

make a swap available to trade. The SEFs and DCMs first will

determine which swaps they wish to make available to be traded on

their platforms. Then these determinations will be submitted to the

Commission either as self-certified by the trading platform or for

approval under the Commission's Part 40 rules.

The phase-in rule would provide market participants with 30 days

after the SEF's or DCM's self-certification or submission is deemed

approved prior to such swaps being subject to the trade execution

mandate.

Those swaps that are made available to trade and thus subject to

the trade execution requirement will be publicly posted on the

Commission's Web site.

Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia--May

16, 2013

I respectfully dissent from the Commission's approval today of

the rule establishing Process for a Designated Contract Market or

Swap Execution Facility to Make a Swap Available to Trade under

Section 2(h)(8) of the Commodity Exchange Act (CEA).

I supported the proposed rule because I wanted to solicit public

comment and engage market participants in an open discussion on how

the Commission should implement the available-to-trade provision in

section 2(h)(8) of the CEA.

During the comment period, the Commission received 33 comment

letters and held a roundtable \300\ to solicit public views on this

matter. The commenters provided various recommendations but in

general virtually all of them rejected the proposal; the Commission

would be hard pressed to point to one comment letter that supported

the Commission's approach. Unfortunately, despite this strong

feedback from the public, the Commission has chosen to follow its

original proposal.

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\300\ January 30, 2012.

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I recognize the challenge that the Commission is facing in

interpreting the ``make available to trade'' provision.

Unfortunately, Congress did not provide the Commission with any

guidance as to how and under what conditions the trade execution

mandate must be triggered. Nevertheless, a lack of direction from

Congress should not be an excuse for the Commission to come up with

an unworkable rule.

As I explain below, the rule provides illusory comfort that the

Commission will have a legal authority to review and, if necessary,

challenge a mandatory trading determination made by a Swap Execution

Facility (SEF) or Designated Contract Market (DCM). In fact, the

only authority that the Commission has is to ``rubber stamp'' a SEF

or DCM's initial determination.

Sections 40.5 and 40.6 of the Commission's Regulations Do Not Provide

an Appropriate Avenue for a Made Available-to-Trade Determination

I have deep reservations about the process that the Commission

is proposing for ``making a swap available to trade.''

First, the Commission's determination under the rule approval

process (Sec. 40.5) or the rule certification process (Sec. 40.6)

is

[[Page 33632]]

intended to apply to only one particular DCM or SEF that requested

such rule approval or submitted such rule certification. However,

under this rule, an available-to-trade determination has a far

reaching effect. It binds not only the requesting SEF or DCM but the

entire market, thus forcing all SEFs and all DCMs to trade a

particular swap by using more restrictive methods of execution.

Second, the Part 40 process does not give the Commission any

legal authority to object to a SEF or DCM's made available-to-trade

determination. Under the rule approval procedures, the Commission

must approve a rule unless such rule is inconsistent with the CEA or

the Commission's regulations.\301\ Similarly, a new rule subject to

stay will become effective, pursuant to its certification, unless

the rule is inconsistent with the CEA or the Commission's

regulations.\302\

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\301\ Commission Regulation Sec. 40.5(b)

\302\ Commission Regulation Sec. 40.6(c)(3).

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How will the Commission be able to point to a provision in the

CEA or in the regulations that is inconsistent with one or all

subjective factors?

The Commission's Determinations Must Be Based on Objective Criteria

In essence, the rule allows a SEF or a DCM to make a made

available-to-trade determination based solely on factors it deems

relevant, while ignoring other considerations that may be of vital

importance to the trading liquidity of a particular contract. The

Commission needs to require more than a simple ``consideration'' of

these factors.\303\

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\303\ Commission Regulations Sec. 37.10(b) and 38.12(b).

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The lack of specific objective criteria for determining trading

liquidity introduces uncertainty into the market and makes it

unfeasible for the Commission to have any meaningful regulatory

oversight over the made available-to-trade determination process.

The Commission's Factors Are Not Supported by Data

I agree with the commenters who requested that the Commission

implement a pilot program or perform an in-depth study of various

classes of swaps to determine the appropriate criteria for a made

available-to-trade determination.\304\ A better approach would be

for the Commission to review trading data currently submitted to the

Commission pursuant to the Swap Data Repository (SDR) rules and

after thorough analysis, come up with objective criteria that would

define trading liquidity. Instead, the Commission chose to implement

a flawed process that does not lead to any substantive analysis of

trading liquidity.

---------------------------------------------------------------------------

\304\ Tradeweb Markets Comment Letter at 3-5 (Feb. 13, 2012);

ISDA/SIFMA Comment Letter at 8-9 (March 8, 2011).

---------------------------------------------------------------------------

The Commission Failed to Establish a Process for Removing Made

Available-to-Trade Determinations

Without providing any reasoning, the Commission has decided that

only after all SEFs and all DCMs have de-listed a particular swap,

will such swap be deemed by the Commission to be no longer

available-to-trade.\305\ This process lacks any logical or legal

basis and is the exact opposite of what is required to make the

initial available-to-trade determination. The initial made

available-to-trade determination provides that, if one SEF or DCM

determines a swap to be made available to trade, then such swap is

deemed to be made available-to-trade on all SEFs or DCMs.

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\305\ Commission Regulations Sec. Sec. 37.10(c), 37.10(d),

38.12(c), 38.12(d).

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Again, the Commission neglects to analyze swap transaction data

that it receives from SDRs. In my view, if a swap does not have

sufficient trading liquidity to be traded in a more restrictive

manner on a SEF or DCM, as determined by the Commission's broader

view of market trading data, then such product must be determined by

the Commission to be no longer available-to-trade.

Conclusion

Due to the above concerns, I respectfully dissent from the

decision of the Commission to approve this final rule for

publication in the Federal Register.

[FR Doc. 2013-12250 Filed 6-3-13; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: June 4, 2013