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2010-32358

  • Federal Register, Volume 76 Issue 5 (Friday, January 7, 2011)[Federal Register Volume 76, Number 5 (Friday, January 7, 2011)]

    [Proposed Rules]

    [Pages 1214-1259]

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

    [FR Doc No: 2010-32358]

    [[Page 1213]]

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    Part II

    Commodity Futures Trading Commission

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    17 CFR Part 37

    Core Principles and Other Requirements for Swap Execution Facilities;

    Proposed Rule

    Federal Register / Vol. 76 , No. 5 / Friday, January 7, 2011 /

    Proposed Rules

    [[Page 1214]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 37

    RIN Number 3038-AD18

    Core Principles and Other Requirements for Swap Execution

    Facilities

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of Proposed Rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is proposing new rules, and guidance and acceptable practices

    to implement the new statutory provisions enacted by Title VII of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed

    rules, guidance, and acceptable practices, which apply to the

    registration and operation of a new type of regulated entity named a

    swap execution facility, implement the new statutory framework that,

    among other things, adds a new Section 5h to the Commodity Exchange Act

    (``CEA'') concerning the registration and operation of swap execution

    facilities, and new Section 2(h)(8) to the CEA concerning the listing,

    trading and execution of swaps on swap execution facilities. The

    Commission requests comment on all aspects of the proposed rules,

    guidance and acceptable practices.

    DATES: Comments must be received on or before March 8, 2011.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD18,

    by any of the following methods:

    Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

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

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that may be exempt from disclosure under the Freedom of

    Information Act (``FOIA''),\1\ a petition for confidential treatment of

    the exempt information may be submitted according to the established

    procedures in Sec. 145.9.\2\

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    \1\ 5 U.S.C. 552.

    \2\ 17 CFR 145.9.

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    The Commission reserves the right, but shall have no obligation, to

    review, prescreen filter, redact, refuse, or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    FOIA.

    FOR FURTHER INFORMATION CONTACT: Riva Spear Adriance, Associate

    Director, 202-418-5494, radriance@cftc.gov, or Mauricio Melara,

    Attorney-Advisor, 202-418-5719, mmelara@cftc.gov, Division of Market

    Oversight, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Overview

    B. The Dodd-Frank Act

    II. The Proposed Regulations, Guidance and Acceptable Practices

    A. Adoption of New Regulations, Guidance and Acceptable

    Practices

    B. Proposed General Regulations Under Part 37

    C. Proposed Regulations, Guidance and Acceptable Practices for

    Compliance With the Core Principles

    III. Effective Date and Transition Period

    IV. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    C. Cost-Benefit Analysis

    V. Text of the Proposed Regulations, Guidance and Acceptable

    Practices

    I. Background

    A. Overview

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\ Title VII

    of the Dodd-Frank Act \4\ amended the CEA \5\ to establish a

    comprehensive new regulatory framework for swaps and security-based

    swaps. The legislation was enacted to reduce risk, increase

    transparency, and promote market integrity within the financial system

    by, among other things: (1) Providing for the registration and

    comprehensive regulation of swap dealers and major swap participants;

    (2) imposing clearing and trade execution requirements on standardized

    derivatives products; (3) creating robust recordkeeping and real-time

    reporting regimes; and (4) enhancing the Commission's rulemaking and

    enforcement authorities with respect to, among others, all registered

    entities and intermediaries subject to the Commission's oversight.

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    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-

    Frank Act may be accessed at http://www.cftc.gov./LawRegulation/

    OTCDERIVATIVES/index.htm.

    \4\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \5\ 7 U.S.C. 1 et seq.

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    The Dodd-Frank Act creates a new type of regulated marketplace:

    ``Swap execution facilities'' (``SEFs''),\6\ for which the Dodd-Frank

    Act establishes a comprehensive regulatory framework, including by:

    Section 733 (adding new Section 5h to the CEA to provide a regulatory

    framework of Commission oversight), Section 723(a)(3) (adding new

    Section 2(h)(8) to the CEA, to require, among other things, that swaps

    subject to the clearing requirement of Section 2(h)(1) of the CEA be

    executed either on a designated contract market (``DCM'') or on a SEF,

    unless no DCM or SEF made the swap ``available for trading''),\7\ and

    Section 733 of the Dodd-Frank Act (adding Section 5h(a)(1), requiring

    that no person may operate a facility for the trading or processing of

    swaps unless the facility is registered as a SEF or as a DCM).

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    \6\ This new regulatory framework includes: (i) Registration,

    operation and compliance requirements for SEFs and (ii) fifteen core

    principles. Applicants and registered SEFs are required to comply

    with the core principles as a condition of obtaining and maintaining

    their registration as a SEF. The definition of swap execution

    facility is added in Section 721 of the Dodd-Frank Act, amending

    Section 1a of the CEA. 7 U.S.C. 1a(50).

    \7\ See Section 723 of the Dodd-Frank Act.

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    In enacting the Dodd-Frank Act, Congress directed that rules and

    regulations required by the provisions of Title VII be promulgated by

    the later of either 360 days of its enactment or, to the extent that a

    rulemaking is required by Dodd-Frank, not less than 60 days after the

    publication of that final rule.\8\ Consistent with Congress' directive,

    this release proposes amendments to Part 37 of the Commission's

    regulations to

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    implement Sections 723(a)(3) and 733 of the Dodd-Frank Act.\9\

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    \8\ See Section 754 of the Dodd-Frank Act.

    \9\ See Section 754 of the Dodd-Frank Act. Please also note that

    Section 734 of the Dodd-Frank Act deletes the provision of the CEA

    that provided for Derivatives Transaction Execution Facilities

    (``DTEFs''), which previously were regulated under Part 37,

    replacing those provisions with regulations establishing the

    regulatory requirements for SEFs.

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    B. The Dodd-Frank Act

    Section 723(a)(3) of the Dodd-Frank Act amends Section 2(h) of the

    CEA, providing that, with respect to transactions involving a swap

    subject to the clearing requirement of paragraph 2(h)(1),

    counterparties must execute the transaction on a DCM or a SEF.\10\ This

    ``exchange trading'' requirement does not apply if no DCM or SEF

    ``makes the swap available to trade'' or if the exceptions to the

    clearing requirement apply.\11\

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    \10\ See Section 2(h)(8) of the CEA, as enacted by Section

    723(a)(3) of the Dodd-Frank Act. The Dodd-Frank Act also eliminates

    the swaps exemption under former Section 2(g) of the CEA, supporting

    the requirement that trading and processing of cleared swaps must

    occur on a DCM or a SEF as well as expanding the types of products

    that can be listed and traded on a DCM to include swaps. The

    Commission is proposing provisions for the trading of swaps on a DCM

    in a separate rulemaking. See also Notice of Proposed Rulemaking

    Relating to Core Principles and Other Requirements for Designated

    Contract Markets approved for publication by the Commission at an

    open meeting on Dec. 1, 2010 and expected to be published shortly in

    the Federal Register (to be codified at 17 CFR part 38) (the ``DCM

    NPRM''). This Notice is available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister120110b.pdf (last

    visited on Dec. 8, 2010).

    \11\ See Section 2(h)(8)(B) of the CEA, as enacted by Section

    723(a)(3) of the Dodd-Frank Act. Newly amended Section 2(h)(7) of

    the CEA provides for exceptions to the clearing requirement when one

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

    is using the swap to hedge or mitigate commercial risk, and (iii)

    notifies the Commission how it meets its financial obligations

    associated with entering into a non-cleared swap.

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    Section 733 of the Dodd-Frank Act adopts new Section 5h of the CEA,

    providing that: (i) No person may operate a facility for the trading or

    processing of swaps, unless the facility is registered as a SEF or as a

    DCM; (ii) to be registered and maintain registration, a SEF must comply

    with fifteen enumerated core principles and any requirement that the

    Commission may impose by rule or regulation; and (iii) the Commission

    has the authority to prescribe rules governing the regulation of SEFs.

    The proposed regulations, guidance and acceptable practices will

    implement the regulatory obligations that each SEF must meet in order

    to comply with Section 5h of the CEA both initially upon registration

    and on an ongoing basis. The Commission requests comments on all

    aspects of its proposal.

    II. The Proposed Regulations, Guidance and Acceptable Practices

    A. Adoption of New Regulations, Guidance and Acceptable Practices

    The Dodd-Frank Act amended the CEA to provide that, under new

    Section 5h, the Commission may in its discretion determine by rule or

    regulation the manner in which DCMs and SEFs comply with the core

    principles. In consideration of the novel nature of SEFs and also based

    on its experience in overseeing DCMs' compliance with core principles,

    the Commission carefully assessed which SEF core principles would

    benefit from regulations, providing legal certainty and clarity to the

    marketplace, and which core principles would benefit from guidance or

    acceptable practices, where flexibility is more appropriate. Based on

    that evaluation, the Commission is proposing a combination of

    regulations, guidance and acceptable practices for the oversight and

    regulation of SEFs.

    B. Proposed General Regulations Under Part 37

    The Commission is proposing to organize Part 37 to include new

    subparts A through P. Proposed Subpart A would include general Sec.

    37.1 through 37.11.\12\ While in this rulemaking, the Commission is

    proposing Sec. Sec. 37.1 through 37.11, it notes that Sec. 37.19,

    addressing conflicts of interest, was proposed in a separate

    rulemaking.\13\ Subparts B through P would establish relevant

    regulations applicable to each of the 15 core principles.\14\

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    \12\ These sections apply both to applicants for registration

    and registered SEFs, clarify which provisions are applicable to

    trading on SEFs, provide for SEF registration processes (including

    processes for the vacation, reinstatement, and transfer of a SEF

    registration), and provide general requirements regarding: (i) The

    listing and trading of swaps; (ii) the responsibility, upon request

    of the Commission, to respond to requests for information and

    demonstrations of compliance with core principles, and to provide

    information and certifications upon transfers of equity interest;

    (iii) the enforceability of a SEF's swap transactions under certain

    conditions, (iv) limitations on the use of data collected for

    regulatory purposes, (v) the need for a board of trade that operates

    a trading facility that has been designated as a DCM by the

    Commission and also intends to operate a SEF to separately register

    the entity that will operate as a SEF, (vi) the appropriate

    execution of swaps based on the type of transaction and order

    interaction, and (vii) the periodic assessment of the method by

    which swaps are made available for trading.

    \13\ 75 FR 63732 (October 18, 2010).

    \14\ Each subpart begins with a regulation containing the

    language of the core principle.

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    1. Subpart A--General Provisions

    a. Scope--Proposed Sec. 37.1

    Proposed Sec. 37.1 provides that Part 37 will apply to entities

    that are registered SEFs or that are submitting an application for SEF

    registration under Section 5h of the CEA, and clarifies that Part 37

    does not restrict the eligibility of SEFs to operate under the

    provisions of Parts 38 or 49 of this Chapter.

    b. Applicable Provisions--Proposed Sec. 37.2

    Proposed Sec. 37.2 lists those Commission regulations that are

    applicable to SEFs, and provides that SEFs must comply with, in

    addition to the requirements in Part 37, the proposed Part 43

    requirements regarding the real time reporting of swaps and the

    determination of appropriate block size for swaps, the proposed Part 45

    requirements for data elements, recordkeeping and reporting of swap

    information to swap data repositories (``SDRs''), the proposed Part 46

    requirements for business continuity and disaster recovery, the

    proposed Part 49 requirements regarding SDRs, and the proposed Part 151

    position limits requirements.\15\

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    \15\ The Commission notes that because some of the proposed

    rulemakings are either ongoing or forthcoming, this proposed list of

    applicable sections under proposed Sec. 37.2 may be subject to

    further revisions pending the final rules for each respective

    rulemaking.

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    c. Requirements for Registration--Proposed Sec. 37.3

    i. Application Procedures--Proposed Sec. 37.3(a)

    Proposed Sec. 37.3 sets forth the application and approval

    procedures for registration of new SEFs. The provision would require

    that all SEF applications, reinstatements of registrations, requests

    for transfer of registrations, requests for withdrawal of application

    for registration, and vacation of registrations must be filed

    electronically with the Secretary of the Commission, in the form and

    manner as provided by the Commission.\16\

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    \16\ This amendment also would ensure consistency with the

    process used for filing rule and product submissions under Parts 38,

    39 and 40 of the Commission's regulations. See 17 CFR Parts 38, 39

    and 40.

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    To assist prospective applicants, the Commission proposes to

    include an application form under Appendix A to Part 37 (``Form SEF'');

    the proposed form would also be used for any updates or amendments for

    registration that are not required to be submitted under Part 40 of

    this Chapter.\17\ Each applicant will be required to provide the

    Commission with documents and descriptions pertaining to its: (i)

    Business

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    organization, (ii) financial resources, (iii) compliance program and

    (iv) technological capabilities.

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    \17\ The Commission also is requiring tailored application forms

    for the designation of DCMs and the registration of Designated

    Clearing Organizations and Swap Data Repositories.

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    Other than the specific requirements necessitated by the core

    principles, the majority of information required under the Form SEF

    consists of information that Commission staff has historically found

    necessary considering DCM applications. The Commission expects that

    similar information will be necessary to assess applications for SEF

    registration. Proposed Sec. 37.3(a)(1) requires that, at a minimum,

    all applicants must complete the application form and provide the

    necessary information and documentation in order to initiate the SEF

    registration review process. The determination when a submission is

    complete will be at the sole discretion of the Commission. The

    Commission will review Form SEF and, at the conclusion of its review,

    by order either: (i) Grant registration; (ii) deny the application for

    registration; or (iii) grant registration subject to Commission-

    established conditions.

    SEF applicants will be required to provide various documents

    describing the applicant's legal and financial status. SEF applicants

    must also submit copies of any applicable rules and regulations (as

    defined in Sec. 40.1),\18\ disclose any affiliates and a brief

    description of the nature of the affiliation, and submit copies of any

    agreements between the SEF and third parties that would assist the

    applicant in complying with its duties under the CEA.

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    \18\ See 75 FR. 67282, 67292 (November 2, 2010).

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    Applicants will be required to demonstrate operational capability

    through documentation, including technical manuals and third party

    service provider agreements. Proposed Sec. 37.3 also requires that

    each applicant request and obtain from the Commission a unique,

    extensible, alphanumeric code for the purpose of identifying the SEF

    pursuant to the swap recordkeeping and reporting requirements under

    proposed Part 45.\19\

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    \19\ This requirement stems from the Commission's authority,

    under Section 728 of the Dodd-Frank Act, to establish standards and

    requirements related to reporting and recordkeeping for swaps. In

    particular, the Commission is required to adopt consistent data

    element standards for ``registered entities,'' which include SEFs.

    Proposed Part 45 will set forth the recordkeeping and reporting

    requirements of each SEF with respect to swap transactions on or

    through its facility. Proposed Sec. 37.3 codifies the obligation of

    SEFs to comply with the provisions of proposed Part 45. See 75 FR

    76574 (December 8, 2010).

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    ii. Procedures for Temporary Grandfather Relief--Proposed Sec. 37.3(b)

    Section 754 of the Dodd-Frank Act provides that: ``[u]nless

    otherwise provided in this title, the provisions of this subtitle

    [Subtitle A--Regulation of Over-the-Counter Swaps Markets] shall take

    effect on the later of 360 days after the date of enactment of this

    subtitle [i.e., July 15, 2011], or, to the extent a provision of this

    subtitle requires a rulemaking, not less than 60 days after publication

    of the final rule or regulation implementing such provision of this

    subtitle.''

    The Commission anticipates that, upon the effective date of this

    Part 37, it may receive a large number \20\ of applications for SEF

    registration from entities that currently provide a marketplace for the

    listing and trading of swaps. The Commission notes that it would be

    difficult to carry out and complete an appropriate and comprehensive

    review of all such applications during the period between publication

    of the final rulemaking and the effective date of this Part 37. Any

    consequent delay in the processing of these SEF applications could

    adversely impact SEF applicants, undermine the efficient implementation

    of the Dodd-Frank Act, create legal uncertainty for market participants

    and adversely affect the swaps market.

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    \20\ The Commission notes that although the public estimate

    regarding the expected number of applications ranges from 30 to 40,

    certain market participants have noted that the number of SEFs could

    exceed 100.

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    Therefore, proposed Sec. 37.3(b) permits the Commission, upon the

    request of an applicant, to grant temporary grandfather relief to

    qualifying entities that, due to their operations, will be required to

    register as a SEF in order to continue operating as of the effective

    date of the regulations. The proposed temporary grandfather relief

    would be optional and would enable a qualifying entity to operate

    without SEF registration on a short-term basis during the pendency of

    the application review process on the condition that it otherwise

    operate in conformance with all SEF requirements under the Dodd-Frank

    Act. This approach is intended to avoid undue market disruption as well

    as to ensure continuity of the business operations of an existing

    entity that, at the time that Part 37 becomes effective,\21\ is

    providing a marketplace for the trading of swaps. The temporary relief

    would also allow the Commission to implement registration requirements

    of the Dodd-Frank Act for SEFs while providing the Commission

    sufficient time to fully review the application of a SEF. Each SEF that

    qualifies for temporary relief would be subject to Section 5h of the

    CEA and related regulations during the period in which the Commission

    is reviewing the SEF's application of registration.

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    \21\ See Section 754 of the Dodd-Frank Act.

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    The Commission notes that it previously issued orders providing

    grandfather relief to exempt commercial markets (``ECMs'') and exempt

    boards of trade (``EBOTs''), allowing them to continue to operate as

    EBOTs and ECMs after the effective date of the Dodd-Frank Act (July 15,

    2011) (``ECM and EBOT grandfather relief orders'').\22\ The relief

    under proposed Sec. 37.3(b) would be consistent with the ECM and EBOT

    grandfather relief orders. In addition, the Commission notes that the

    grandfather relief under proposed Sec. 37.3(b) would also be available

    for entities that are currently operating pursuant to another exemption

    or exclusion provided under the CEA (prior to its amendment by the

    Dodd-Frank Act) as of the effective date of this Part 37.\23\

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    \22\ See Orders Regarding the Treatment of Petitions Seeking

    Grandfather Relief for Exempt Commercial Markets and Exempt Boards

    of Trade (``ECM and EBOT grandfather relief''). 75 FR 56513

    (September 10, 2010). The Commission's Orders set forth various

    conditions for such grandfather relief, including the filing of a

    relief petition and a SEF or DCM application with the Commission.

    \23\ See CEA Sections 2(d), 2(e), 2(g) and 2(h)(1)-(2).

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    As a condition for receiving temporary grandfather relief, the

    applicant must: (1) File a complete application, as required under

    proposed Sec. 37.3(a),\24\ on the proposed application form, Form SEF,

    under Appendix A to Part 37; (2) notify the Commission, at the time of

    its submission of the application, of its interest in operating under

    the temporary relief; (3) provide transaction data that substantiates

    that the execution or trading of swaps has occurred and continues to

    occur on the applicant's trading system or platform at the time the

    applicant submits the request; and (4) provide a certification that the

    applicant believes that its operation on a temporary basis will meet

    the requirements of Part 37 of the CEA, as adopted by the Commission.

    Since the purpose of the temporary relief is to provide an appropriate

    process to ensure continuity of the business operations during the

    pendency of the review of an application, the temporary grandfather

    relief would expire on the earlier of: (i) The date that the Commission

    grants or denies registration of the SEF, or (ii) the

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    date that the Commission rescinds the temporary relief. Additionally,

    the temporary relief would not be a permanent provision of Part 37.

    Proposed Sec. 37.3(b) provides for a ``sunset'' provision so that

    temporary grandfather relief would terminate 365 days from the

    effective date of proposed Sec. 37.3(b).

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    \24\ As noted above, the determination of when a submission on

    Form SEF is complete is at the sole discretion of the Commission.

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    iii. Procedures for Transfer of Registration--Proposed Sec. 37.3(d)

    The Commission is proposing Sec. 37.3(d) to formalize the

    procedures that a SEF must follow when requesting the transfer of its

    registration, in anticipation of a corporate event (e.g., a merger,

    corporate reorganization, or change in corporate domicile) which

    results in the transfer of all or substantially all of the SEF's assets

    to another legal entity. Under proposed Sec. 37.3(d), the SEF would

    submit to the Commission a request for transfer no later than three

    months prior to the anticipated corporate change, with a limited

    exception.\25\

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    \25\ The proposed rule would require that where a SEF does not

    know or could not have reasonably known three months prior to the

    anticipated change, it shall be required to file the request as soon

    as it knows of the change.

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    Proposed Sec. 37.3(d) also would require, as a condition of

    approval, that the SEF submit a representation that it is in compliance

    with the CEA, including the SEF core principles, and the Commission's

    regulations. In addition, the SEF would have to submit various

    representations by the transferee regarding its duties and obligations.

    Proposed Sec. 37.3(d) also provides that the Commission will

    review any requests for transfer of registration as soon as

    practicable, and such request will be approved or denied pursuant to a

    Commission order.

    d. Procedures for Listing Products and Implementing Rules--Proposed

    Sec. 37.4

    Proposed Sec. 37.4 conforms to the proposed changes to existing

    Sec. Sec. 40.3 (Voluntary submission of new products for Commission

    review and approval) and 40.5(b) (Voluntary submission of rules for

    Commission review and approval),\26\ in the Commission's separate rule

    proposal pertaining to ``Provisions Common to Registered Entities.''

    \27\

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    \26\ Proposed Sec. 40.3 is amended to require additional

    information to be provided by registered entities that submit new

    products for the Commission's review and approval. Proposed Sec.

    40.5(b) codifies a new standard for the review of new rules or rule

    amendments as established under the Dodd-Frank Act.

    \27\ 75 FR 67282 (November 2, 2010).

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    e. Information Relating to Swap Execution Facility Compliance--Proposed

    Sec. 37.5

    Under proposed Sec. 37.5(a), upon request by the Commission, a SEF

    must file with the Commission certain information related to its

    business as a SEF, in the form and manner as specified by the

    Commission. Under proposed Sec. 37.5(b), the Commission may demand

    that a SEF file a written demonstration regarding its compliance with

    any specified core principles. The information requested under proposed

    Sec. 37.5(a) and (b) provides for information requests to entities

    regarding compliance with the conditions for registration made for any

    oversight purpose.\28\

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    \28\ In this regard, for example, the Commission may request

    SEFs to provide information relating to their operations or their

    practices in connection with its general oversight responsibilities

    under the CEA, in connection with the Commission's formulation of

    statements of acceptable practice, or in connection with a

    particular SEF's compliance with particular core principles or other

    conditions of its registration.

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    The Commission believes that on occasion, SEFs will enter into

    equity interest transfers that result in a change in ownership. In

    those situations, Commission staff must determine whether the change in

    ownership will impact adversely the operations of the SEF or the SEF's

    ability to comply with the core principles and the Commission's

    regulations. The Commission is proposing Sec. 37.5 to ensure that SEFs

    remain mindful of their self-regulatory responsibilities when

    negotiating the terms of significant equity interest transfers, and to

    improve the Commission staff's ability to undertake a timely and

    effective due diligence review of the impact, if any, of such

    transfers.

    Proposed Sec. 37.5(c) would require SEFs to file with the

    Commission a notice of the equity interest transfer of ten percent or

    more, with certain documents providing information on the transfer, no

    later than the business day \29\ following the date on which the SEF

    enters into a firm obligation to transfer the equity interest.\30\ The

    proposed regulation requires that the SEF keep the Commission apprised

    of the projected date that the transaction resulting in the equity

    interest transfer will be consummated, and must provide to the

    Commission any new agreements or modifications to the original

    agreement(s) filed pursuant to proposed Sec. 37.5(c). The SEF must

    notify the Commission of the consummation of the transaction on the day

    on which it occurs. The proposed regulation will enable staff to

    consider whether any conditions contained in an equity transfer

    agreement(s) are inconsistent with the self-regulatory responsibilities

    of a SEF or with any of the core principles.

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    \29\ ``Business day'' is defined in Commission Sec. 40.1.

    \30\ The Commission is proposing a 10 percent threshold because

    it believes that a change in ownership of such magnitude may have an

    impact on the operations of the swap execution facility. The

    Commission believes that such impact may be present even if the

    change in ownership does not constitute a change in control. For

    example, if one entity holds a minority 10 percent equity share in

    the SEF, it may have a more significant voice in the operation of

    the SEF than five entities each with a minority 2 percent equity

    share. Given the potential impact that a change in ownership might

    have on the operations of a SEF, the Commission believes that it is

    appropriate to require such SEF to certify after such change that it

    continues to comply with all obligations under the CEA and

    Commission regulations.

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    The Commission believes when there is a 10% or greater change in

    ownership, the SEF itself is the more appropriate entity to provide a

    certification of its continued compliance with all regulatory

    obligations. Accordingly, proposed Sec. 37.5(c)(3) would require that

    if there is a change in ownership,\31\ the SEF must certify, no later

    than two business days following the date on which the change in

    ownership occurs, that the SEF meets all of the requirements of Section

    5h of the CEA and the provisions of Part 37 of the Commission's

    regulations.

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

    \31\ The Commission's regulations consistently identify a

    financial or ownership interest of ten percent or more as material

    and indicative of the ability to influence the activities of an

    entity or trading in an account. See, e.g., Core Principle 5,

    Acceptable Practices, and Core Principle 14, Application Guidance,

    in Appendix B to Part 38 of the Commission's regulations. 17 CFR

    part 38, Appendix B.

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

    Request for Comment:

    The Commission notes that there are differences in the proposed

    notification requirements for changes in the ownership of SEFs,

    derivative clearing organizations (``DCOs''), DCMs, and SDRs.\32\ The

    Commission requests comment on the proposed notification requirements

    under 37.5(c) and, more specifically, the extent to which there should

    be uniformity or differentiation in procedures applied to different

    types of registrants.

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

    \32\ See, supra note 10, DCM NPRM; also the Notice of Proposed

    Rulemaking Relating to Swap Data Repositories, approved for

    publication by the Commission at an open meeting on November 19,

    2010 and expected to be published shortly in the Federal Register

    (to be codified at 17 CFR part 49). This Notice is available at

    http://www.cftc.gov/stellent/groups/public/@otherif/documents/ifdocs/federalregister112210d.pdf (last visited on Dec. 8, 2010);

    and other appropriate future rulemakings.

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

    [[Page 1218]]

    f. Enforceability of Executed Swaps--Proposed Sec. 37.6

    Proposed Sec. 37.6 is intended to provide legal certainty to

    market participants transacting in swaps. Under Sec. 37.6(a), a

    transaction entered into on or pursuant to the rules of a registered

    SEF will not be void, voidable, subject to rescission or otherwise

    invalidated or rendered unenforceable as a result of: (1) A violation

    by the registered SEF of the provisions of Section 5h of the CEA or

    Part 37; or (2) any Commission proceeding to alter or supplement a

    rule, term or condition under Section 8a(7) of the CEA, to declare an

    emergency under Section 8a(9) of the CEA, or any other proceeding the

    effect of which is to alter, supplement, or require a registered SEF to

    adopt a specific term or condition, trading rule or procedure, or to

    take or refrain from taking a specific action.

    In other rules proposed by the Commission, a swap confirmation is

    defined as the consummation (electronically or otherwise) of legally

    binding documentation (electronic or otherwise) that memorializes the

    agreement of the counterparties to all of the terms of a swap.\33\

    Proposed Sec. 37.6(b) provides that a confirmation must be in writing

    (whether electronic or otherwise) and must legally supersede any

    previous agreement (electronically or otherwise). For swaps executed on

    a SEF, the SEF will provide the counterparties with a definitive

    written record of the terms of their agreement, which will serve as a

    confirmation of the swap. The proposed regulation on swap confirmations

    would require that parties have full written agreement on all terms of

    a swap at the same time as execution.

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

    \33\ See 75 FR 76140 (December 7, 2010); and 75 FR 76574

    (December 8, 2010).

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

    g. Prohibited Use of Data Collected for Regulatory Purposes--Proposed

    Sec. 37.7

    In fulfilling their regulatory and compliance obligations, the

    Commission expects that SEFs will often require market participants to

    provide proprietary data or personal information. Proposed Sec. 37.7

    prohibits a SEF from using information generated by market participants

    for purposes of meeting regulatory and compliance obligations for

    marketing products or for other commercial purposes.\34\ The Commission

    notes that nothing in this regulation prohibits a SEF from sharing such

    information with another SEF or DCM offering swaps for trading for

    regulatory purposes.

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

    \34\ The Commission notes that, in the recent notice of proposed

    rulemaking for Business Affiliate Marketing and Disposal of Consumer

    Information Rules, it proposed rules prohibiting futures commission

    merchants (``FCMs'') (and other intermediaries) from using certain

    consumer information received from an affiliate to make a

    solicitation for marketing purposes. In addition, rules were

    proposed requiring FCMs to develop a written disposal program to the

    extent that such FCMs possess consumer information. The underlying

    policy for these rules is to protect the privacy of customer

    information. Similarly, Proposed Sec. 37.7 is intended to protect

    market participants' information provided to a SEF for regulatory

    purposes from its use to advance the commercial interests of the

    SEF.

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

    h. Boards of Trade Operating Both a Designated Contract Market and a

    Swap Execution Facility--Proposed Sec. 37.8

    Proposed Sec. 37.8 implements CEA Section 5h(c) by requiring that

    a board of trade that operates a trading facility that has been

    designated as a DCM by the Commission and also intends to operate an

    entity for the execution or trading of swaps: (1) Must separately

    register such entity as a SEF under Part 37; and (2) may use the same

    electronic trade execution system for executing swaps that it uses for

    its DCM operations, provided that, the entity clearly identifies to

    market participants whether the execution or trading of a swaps is

    taking place on the DCM or the SEF.\35\

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

    \35\ Section 5h(c) of the CEA provides:

    IDENTIFICATION OF FACILITY USED TO TRADE SWAPS BY CONTRACT

    MARKETS.--A board of trade that operates a contract market shall, to

    the extent that the board of trade also operates a swap execution

    facility and uses the same electronic trade execution system for

    listing and executing trades of swaps on or through the contract

    market and the swap execution facility, identify whether the

    electronic trading of such swaps is taking place on or through the

    contract market or the swap execution facility.

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

    i. Permitted Execution Methods--Sec. 37.9

    This rule proposal will provide market participants with the choice

    of a number of means to access the market and execute trades therein.

    This flexibility would allow market participants to use requests for

    quotes, indications of interest, or executable quotes to consummate a

    trade. It would allow SEFs to use a variety of different trading

    systems or platforms as long as market participants have the ability to

    access the market and execute trades as discussed below.

    i. SEF Definition

    The term `swap execution facility' means 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.\36\

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

    \36\ CEA Section 1a(50).

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

    Market participants currently use a number of different methods for

    transacting swaps, including: brokers who facilitate trades over the

    telephone (commonly referred to as ``voice brokers''); hybrid voice and

    electronic trading systems; fully electronic inter-dealer brokerage

    systems; single-dealer trading platforms; various versions of ``request

    for quote'' platforms (including platforms that allow more than one

    customer to submit requests for quotes to, and receive responses from,

    multiple dealers); and order books. The Commission does not believe

    that all of these methods comply with the statutory definition of a

    SEF, especially the ``multiple participant to multiple participant''

    requirement thereunder. Specifically, as discussed below, the

    Commission notes that entities offering the following services do not

    comply with the statutory definition of a SEF: one-to-one voice

    services for the execution or trading of swaps (other than for the

    execution of block trades),\37\ single-dealer platforms, and services

    that solely provide for the processing of swaps.

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

    \37\ As proposed, a block trade is a swap of a large notional or

    principal amount that is transacted off-exchange, pursuant to the

    rules of a SEF or DCM, and that is greater than the minimum block

    trade size set by the SEF or DCM. As proposed, a SEF or DCM must set

    the minimum block size for a particular swap contract at an amount

    greater than the appropriate minimum block size for the appropriate

    category of swap instrument in which such swap contract is

    categorized. See 75 FR 76140 (December 7, 2010).

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

    The SEF definition requires at a minimum the existence of a

    ``trading system or platform.'' The Commission notes that the terms

    ``trading system'' and ``platform'' are not defined under the Dodd-

    Frank Act or anywhere in the CEA. Based on the SEF definition under the

    Dodd-Frank Act, the Commission interprets trading system and platform

    to include, but not be limited to, the term ``trading facility'' as

    defined in CEA Section 1a(51).\38\ In addition, as discussed in detail

    below, the Commission believes that any other method that allows

    multiple market participants to have the ability to execute or trade

    swaps by accepting

    [[Page 1219]]

    bids and offers made by other multiple participants in the facility or

    system, through any means of interstate commerce, may qualify as an

    acceptable trade execution method for an entity that wishes to register

    as a SEF.

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

    \38\ See CEA Section 1a(51). In this context, a trading facility

    requires ``a physical or electronic facility or system in which

    multiple participants have the ability to execute or trade

    agreements, contracts, or transactions (i) by accepting bids or

    offers made by other participants that are open to multiple

    participants in the facility or system; or (ii) through the

    interaction of multiple bids or multiple offers within a system with

    a pre-determined non-discretionary automated trade matching and

    execution algorithm.''

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

    In order for an entity to meet the definition of a SEF and satisfy

    the SEF registration requirements, multiple parties must have the

    ``ability to execute or trade swaps by accepting bids and offers made

    by multiple participants'' and such participants must be provided

    impartial access to the market. The Commission believes that an

    acceptable SEF platform or system must provide at least a basic

    functionality to allow market participants the ability to make

    executable bids or offers and indicative quotes, and to display them to

    multiple parties, including all other parties participating in the SEF,

    if the market participants wish to do so. As set forth in proposed

    Sec. 37.9(b) and discussed below, the Commission proposes that a SEF

    also must provide market participants with the ability to make a bid,

    make an offer, hit a bid, or lift an offer, and may provide the ability

    to request a bid and request an offer. Accordingly, market participants

    would not have to receive a ``request for quote'' \39\ from another

    market participant in order to make a bid or offer or to execute a

    trade with other market participants. In addition to this basic

    functionality whereby market participants would have the ability to

    access all other market participants, a SEF could also provide a

    multiple-to-multiple request for quote trading system for those market

    participants that do not wish to display their bids, offers, or

    requests to all other market participants. A SEF's chosen approach(es)

    would be described in its registration application, to be evaluated by

    the Commission during the application process. Once operational, the

    Commission would be able to empirically evaluate the SEF's treatment of

    executable bids and offers as compared to responses to requests for

    quotes to ensure ongoing compliance with the definition of a SEF, the

    SEF registration requirements, and the core principles.

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

    \39\ See infra, Section II.C.2.i.v for further discussion of

    ``request for quote'' systems.

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

    ii. One-to-One Voice and Single-Dealer Platforms

    The Commission notes that one-to-one voice services and single-

    dealer platforms do not satisfy the statutory requirement under CEA

    Section 1a(50) that ``multiple participants have the ability to execute

    or trade swaps by accepting bids and offers made by multiple

    participants in the facility or system''. The nature of these types of

    trading systems or platforms, where transactions are negotiated or

    consummated via a one-to-one or one-to-many basis, do not provide the

    ability for participants to conduct multiple-to-multiple execution or

    trading. The Commission also notes that CEA Sections 5h(f)(2)(A)(ii)

    and (2)(B)(i) require that SEFs provide market participants with

    impartial access to their markets, and that SEFs must adopt rules with

    respect to any limitations they place on access. Entities operating

    either one-to-one voice services or single-dealer platforms, by

    definition, limit the provision of liquidity to single dealers or

    liquidity providers, thus excluding other participants from filling

    those roles, in non-compliance with the impartial market access

    requirements applicable to SEFs under the CEA.

    iii. Processing of Swaps

    In regard to entities that offer, with respect to swaps

    transactions, processing services exclusively, the Commission notes

    that Section 5h(a)(1) of the CEA states ``[n]o person may operate a

    facility for the trading or processing of swaps, unless the facility is

    registered as a [SEF] or as a [DCM] under this section.'' In addition,

    Section 5h(b) states that a registered SEF may ``(A) make available for

    trading any swap, and (B) facilitate trade processing of any swap.''

    Although these provisions could be read to require the registration of

    entities that engage in trade processing (but not trade execution) as

    SEFs, the Commission believes that entities that operate exclusively as

    swap processors do not meet the SEF definition (and should not be

    required to register as SEFs) because: (1) They do not provide (as

    required by the definition) the ability to ``execute or trade'' a swap;

    and (2) the definition does not include the term ``process.''

    iv. Trading Systems or Platforms

    When determining what types of trading systems qualify to register

    as a SEF, the Commission takes into account, in addition to

    consideration of the SEF definition as discussed above, the core

    principles applicable to SEFs \40\ as well as the goals provided in

    Section 733 of the Dodd-Frank Act: (1) Bringing greater pre-trade price

    transparency to swap transactions; and (2) bringing more swaps trading

    onto regulated trading systems or platforms.\41\ Therefore, the

    Commission interprets the SEF registration requirements to necessitate

    that the trading system or platform: (a) Provide multiple participants

    with the ability to make bids and offers to other multiple participants

    or to accept bids or offers made by other multiple participants; (b)

    promote pre-trade price transparency; (c) ensure that the trading of

    swaps on the trading system or platform is in accordance with the SEF

    core principles, the registration requirements and the Commission's

    regulations; and (d) provide all market participants with impartial

    access to the SEF's market.

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

    \40\ See e.g., Sections 5h(f)(2)(A)(ii) and (2)(B)(i) (Core

    Principle 2, requiring the provision of impartial access). See also

    infra, Section II.C.2.a. (discussing the provision of impartial

    access under to Core Principle 2).

    \41\ See CEA Section 5h(e) (Stating twin goals regarding the

    promotion of ``the trading of swaps on swap execution facilities''

    and ``pre-trade price transparency in the swaps market'').

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

    The Commission believes that, to register as a SEF or to maintain

    registration, an applicant or SEF must provide market participants with

    the ability to make executable quotes on either side of a swap

    transaction and to take the opposite side of a trade from participants

    who seek to enter into transactions on such contract. The ``multiple

    participant to multiple participant'' requirement, when read in

    conjunction with the impartial access requirement (i.e., the Core

    Principle 2 requirement that the SEF must ``provide market participants

    with impartial access to the market'') requires that each SEF provide

    any market participant with the ability to make any bid or offer

    transparent to all other market participants of the SEF. In addition,

    the ``ability to execute or trade'' statutory provision means that the

    SEF must provide market participants with the ability to post both firm

    and indicative quotes on a centralized screen such that they can be

    executed or traded against by other multiple market participants. Under

    the proposal, it is a market participant's prerogative to make a bid or

    offer available to all other market participants in the trading system

    or platform without an invitation to join an auction process. Willing

    counterparties should have the ability to execute swap trades by

    accepting such bids or offers. The Commission believes there could be a

    number of ways for a SEF to provide this functionality, including but

    not limited to having an order book.

    Additionally, SEFs must make indicative quote functionalities

    available, such that market participants could provide non-executable

    quotes or indicative quotes through the SEF that are visible and

    accessible to all other market participants. Such functionalities could

    include electronic,

    [[Page 1220]]

    streaming indicative quotes, or other methods for providing market

    participants with indicative quotes. Indicative quotes provide

    additional information about pricing and help inform market

    participants as they consider hedging and investment strategies, as

    well as when considering whether and how to execute a trade (either

    through a request for quote or through an existing executable quote).

    The Commission believes that indicative quotes are consistent with the

    statute's goal of achieving pre-trade price transparency.

    The Commission believes that SEFs can utilize various trading

    systems and platforms that provide market participants with the ability

    to post executable bids or offers for display to multiple potential

    counterparties. A trading system or platform that provides this minimum

    multiple-to-multiple functionality, as described above, also may

    include other functionalities that provide multiple participants with

    the ability to access multiple market participants, but not necessarily

    the entire market if the participant so chooses. These may include

    certain request for quote systems, as described below, or other systems

    that meet the SEF definition and comply with the core principles.\42\

    Hence, although at times a market participant may desire to interact

    with a limited number of market participants (i.e., fewer than the

    entire market) and are permitted to do so under the proposal, market

    participants that desire to access the entire market must be provided

    with the ability to do so as well.

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

    \42\ As previously noted, one-to-one voice systems and single-

    dealer platforms do not satisfy the listed factors.

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

    v. Execution Methods

    Proposed Sec. 37.9 will allow market participants to have the

    choice of a number of means to access and execute within a SEF's

    marketplace. There would not be any requirements for pre-trade

    transparency for: (1) Blocks; (2) trades subject to the end user

    exceptions; or (3) contracts which are not ``made available for

    trading.'' Thus the requirements for pre-trade transparency (e.g.,

    posting both firm and indicative quotes on a centralized electronic

    screen accessible to all market participants) \43\ for trades executed

    on a SEF would only relate in the context of transactions in swaps

    which are: (1) Subject to the mandatory clearing requirement; (2)

    ``made available for trading'' on a SEF; and (3) too small to be a

    block trade under part 45. For these three types of transactions, SEFs

    could permit their market participants to trade via requests for

    quotes, indications of interest, or executable quotes.

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

    \43\ See also, proposed Sec. 37.205(b)(1).

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

    As stated in the preceding section, Section 5h(e) of the CEA sets

    forth Congress' goals with respect to SEFs: The promotion of ``the

    trading of swaps on swap execution facilities'' and ``pre-trade price

    transparency in the swaps market.'' \44\ The Commission believes that

    these goals can be achieved for swap transactions that are subject to

    the CEA execution requirements, are made available for trading, and are

    not block trades by providing for the execution of such swap

    transactions on trading systems or platforms that give market

    participants the option to post both firm and indicative quotes or

    accept bids and offers that are transparent to the entire market.\45\

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

    \44\ See CEA Section 5h(e).

    \45\ While currently such systems are often used by traders in

    order to account for counterparty risk, it is important to note that

    there is no counterparty risk for swaps that are cleared.

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

    Under proposed Sec. 37.9, applicants and registered SEFs must

    offer trading services to facilitate the ability of market participants

    to make executable bids or offers and to display them to multiple

    parties. Transactions may be executed by providing market participants

    with a number of execution methods from which to choose, including: (1)

    ``Request for quote'' systems that provide market participants the

    ability to interact with multiple participants but less than the entire

    market, as described below; (2) systems that allow market participants

    to display executable bids and offers on a centralized, electronic

    screen to the entire market; or (3) other systems that comply with the

    core principles.

    Additionally, under the proposal, SEFs must provide a general

    timing requirement applicable to traders such as brokers who have the

    ability to execute against a customer's trade or are entering a trade

    for two customers on opposite sides of the transaction. Under the

    proposal, a broker would have to provide a minimum pause before

    entering the second side (whether for its own account or for a second

    customer), thus ``showing'' other market participants the terms of a

    request for quote from its customer, and providing other market

    participants the opportunity to join in the trade. The Commission

    proposes to require a minimum pause of 15 seconds between entry of two

    potentially matching customer-broker swap orders or two potentially

    matching customer-customer swap orders on SEFs.

    (A) Request for Quote Systems

    As proposed by the Commission, the steps taken by market

    participants in order to complete a transaction using an acceptable

    request for quote system are similar to the steps taken in the

    marketplace today (i.e., a market participant transmits a request to

    counterparties for bids or offers and chooses to transact with one of

    the respondents to the request). However, to ensure that multiple

    participants have the ability to reach multiple counterparties, the

    Commission proposes to require SEFs to provide that market participants

    transmit a request for quote to at least five potential counterparties

    in the trading system or platform. The Commission notes that, under the

    proposal, acceptable request for quote systems offered by SEFs could be

    designed such that requests for quotes are visible to all market

    participants with access to the trading system or platform, but should

    permit requesters the option of making a request for quote visible to

    the entire market. Additionally, the proposal provides that an

    acceptable request for quote system may allow for a transaction to be

    consummated if the original request to five potential counterparties

    receives fewer than five responses.\46\

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

    \46\ The proposal also provides that request for quote systems

    include trading systems or platforms in which multiple market

    participants view real-time electronic streaming quotes, both firm

    and indicative, from multiple potential counterparties on a

    centralized electronic screen, and have the ability to accept a firm

    streaming quote and complete the transaction or based on an

    indicative streaming quote, issue a request for quote to no less

    than five market participants and upon receipt of a responsive

    quote, have the option to complete the transaction. See proposed

    Sec. 37.9(a)(1)(v).

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

    Under the proposal, SEFs that utilize request for quote systems

    must also furnish liquidity providers with the ability to post both

    executable bids or offers and indicative quotes. The terms of any such

    ``resting'' executable bids or offers would be displayed to the

    requester along with any other specific bids or offers included in the

    responses to its request for quote. Upon receipt of the responses and

    the appropriate resting bids or offers, the original requester would

    have the option to execute the transaction. The Commission believes

    that SEFs that utilize request for quote systems must ensure that any

    competitive resting bids or offers be taken into account and

    communicated to the requester along with any bids or offers included

    with responses to requests for quotes. While the Commission does not

    believe it appropriate to prescribe a method of integration as part of

    this rulemaking,

    [[Page 1221]]

    the Commission would expect each SEF to describe its chosen integration

    mechanism as part of its application.

    The Commission believes its proposed approach to the use of request

    for quote systems by SEFs is consistent with the statute and promotes:

    (a) The ability of multiple participants to make bids and offers to

    other multiple participants or to accept bids or offers made by other

    multiple participants; (b) pre-trade price transparency; (c) the

    trading of swaps on a regulated trading system or platform in

    accordance with the registration requirements and the Commission's

    regulations; and (d) the ability for all market participants to receive

    impartial access to all other market participants. The Commission

    further believes that this feature would help encourage price

    competition within the market.

    (B) ``By Any Means of Interstate Commerce''

    For block trades, swaps not subject to clearing, and bespoke or

    illiquid swaps, the Commission interprets the statute's language ``by

    any means of interstate commerce'' to allow execution methods that may

    include voice. This method of execution is consistent with the use of

    voice in the futures markets for executing block trades, where in light

    of the size of the trades, pre-trade transparency is not required. It

    is also possible that a SEF might choose to offer to facilitate

    bilateral trading for those transactions not bound by the CEA's

    execution requirements and, therefore, the use of voice may be

    acceptable. The Commission notes that with respect to these types of

    transactions, market participants may have an interest in choosing

    their counterparty in light of the credit risk involved. Voice

    transactions must be entered into some form of electronic affirmation

    system immediately upon execution.

    With regard to swaps available for trading that are not blocks,

    trading systems or platforms facilitating the execution of such swaps

    via voice exclusively are not multiple participant to multiple

    participant and do not provide for pre-trade transparency. While not

    acceptable as the sole method of execution of swaps required to be

    traded on a SEF or DCM, the Commission believes voice would be

    appropriate for a market participant to communicate a message to an

    employee of the SEF, whether requests for quotes, indications of

    interest, or firm quotes. For instance, voice-based communications in

    the proposed SEF context may occur in certain circumstances, such as

    when an agent: (1) Assists in executing a trade for a client,

    immediately entering the terms of the trade into the SEF's electronic

    system; or (2) enters a bid, offer or request for quote immediately

    into a SEF's electronic multiple-to-multiple trading system or

    platform. In all cases, the employee of the SEF must promptly provide

    transparency and comply with audit trail requirements, including by the

    immediately entering into the trading system or platform any orders or

    requests for quote that are immediately executable, or, if not,

    immediately creating an electronic record with the order or request for

    quote entered into the trading system or platform as soon as

    practicable. The core principles and these rules would fully apply to

    such communications including but not limited to the transparency,

    audit trail, impartial access and standards for requests for quotes.

    Request for Comment:

    The Commission seeks public comment regarding the trading systems

    or platforms described in this section. In addition, the Commission

    asks the public to respond to the specific questions below.

    Does the proposal appropriately implement the statutory

    directive that a SEF provide multiple participants with the ability to

    execute or trade swaps by accepting bids and offers made by multiple

    participants in the facility or system? If not, how should the

    Commission best carry out the intent of Congress in the registration

    and oversight of SEFs?

    The Commission interprets the ``multiple participant to

    multiple participant'' requirement (in conjunction with the impartial

    access requirement) as requiring that the facility provide the ability

    for any market participant to make any bid or offer transparent to the

    entire market, if the market participant chooses to do so. Should the

    Commission be explicit as to the means or methods which can be used to

    fulfill this functionality? If so, in addition to an order book, what

    other means or models should be included in the final regulations?

    In light of the ``multiple participant to multiple

    participant'' requirement, the Commission has proposed that requests

    for quotes be requested of at least five possible respondents. Is this

    the appropriate minimum number of respondents that the Commission

    should require to potentially interact with a request for quote? If

    not, what is an appropriate minimum number? Some pre-proposal

    commenters have suggested that market participants should transmit a

    request for quote to ``more than one'' market participant. The

    Commission is interested in receiving public comment on this matter.

    Should the Commission determine that other models of

    execution satisfy the statutory ``multiple participant to multiple

    participant'' requirement as well as the pre-trade price transparency

    and open access policy objectives under the Dodd-Frank Act?

    Does the proposal properly implement the provision in the

    SEF definition regarding having the ability to execute or trade swaps

    ``through any means of interstate commerce''?

    In general, does the proposal properly implement the CEA's

    goal to promote both the trading of swaps on SEFs and pre-trade price

    transparency? Should there be other characteristics the Commission

    should consider? If so, what are they?

    What level of pre-trade transparency should be required to

    promote price discovery, competition and the trading of swaps on SEFs?

    Should the Commission consider requiring a request for quote method

    that provides for transparency in the request for quote process in

    addition to the posting of any resting bids/offers on its trading

    system or platform? Should all orders and quotes be displayed to all

    participants or should alternative engagement rules apply on a pre-

    trade basis?

    Should SEFs be required to communicate executable bids/

    offers to issuers of requests for quotes? Also, should any such

    executable bids/offers be provided any priority during the request for

    quote process? Should market participants have an obligation to

    consider and/or execute against an executable bid/offer if it is

    competitive?

    Should SEFs be required to make responses to requests for

    quotes transparent to all market participants? If so, when should this

    information be provided to the market? Prior to execution? At the time

    of execution? Subsequent to execution?

    Would the SEF provisions in the Dodd-Frank Act support a

    requirement that swaps that meet a certain level of trading activity be

    limited to trading through order books? If so, what level of trading

    activity would be the appropriate level at which to mandate trading

    exclusively on an order book? Should any such analysis be done on a

    product or asset-class basis?

    Should swap processors be subject to the registration

    requirements for SEFs?

    j. Swaps Made Available for Trading--Proposed Sec. 37.10

    The Dodd-Frank Act requires that transactions involving swaps

    subject to

    [[Page 1222]]

    the clearing requirement be executed on a SEF or DCM.\47\ This trade

    execution requirement will not apply if (i) the Commission has not made

    a determination regarding the clearing requirement with respect to the

    swap,\48\ (ii) an eligible counterparty availed itself of an exception

    to the clearing requirement and does not wish to transact the swap on a

    SEF or DCM, or (iii) no DCM or SEF ``makes the swap available to

    trade.'' \49\

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

    \47\ CEA Section 2(h)(8).

    \48\ CEA Section 2(h)(1).

    \49\ CEA Section 2(h)(8).

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

    The Commission proposes to require SEFs to make periodic

    assessments to determine whether a swap has been made available for

    trading. To that end, proposed Sec. 37.10 requires each SEF to

    annually conduct an assessment and provide a report to the Commission

    regarding the determination that the swaps it offers are made available

    for trading thereunder. With respect to the determination that swaps

    are made available to trade, the SEF may consider frequency of

    transactions and open interest, and any additional factors requested by

    the Commission.

    Request for Comment:

    The Commission seeks general public comment regarding the meaning

    of ``made available for trading.'' In addition, the Commission asks the

    public to respond to the specific questions below.

    In addition to the frequency of transactions and open

    interest, should the Commission request that SEFs consider the number

    of market participants trading a particular swap? If so, should a

    minimum number of participants be required, for example, should the

    swap be traded by more than two participants? More than three?

    Should the Commission request that SEFs consider any other

    factors or processes to make the determination that swaps are made

    available for trading?

    k. Identification of Non-Cleared Swaps or Swaps Not Made Available To

    Trade--Proposed Sec. 37.11

    The Commission acknowledges that certain market participants may

    desire to avail themselves of the benefits of trading on SEFs (e.g.,

    automated confirmation of trades, straight-through processing) with

    respect to trades that are not otherwise required to be executed on a

    SEF or DCM. In particular, market participants might want to effect

    swap transactions on SEFs or DCMs regarding swaps that have not been

    determined to come under the clearing mandate of Section 2(h) of the

    CEA, transactions that are excepted from the clearing requirements as

    provided under Section 2(h)(7) of the CEA, and transactions regarding

    swaps determined to not be available for trading pursuant to Commission

    Sec. 37.10. Proposed Sec. 37.11 requires that if a SEF determines to

    provide for trading of swaps that are excepted from the clearing

    requirements, the SEF must clearly identify to market participants that

    the particular swap is to be transacted pursuant to one of the

    applicable exemptions from execution and clearing.

    C. Proposed Regulations, Guidance and Acceptable Practices for

    Compliance With the Core Principles

    As noted above, this rulemaking establishes the relevant

    regulations, guidance and acceptable practices applicable to the 15

    core principles. As proposed, the regulations applicable to the 15 core

    principles are set out in separate subparts to Part 37, Subparts B

    through P, which includes a codification within each subpart of the

    statutory language of the respective core principle. The guidance and

    acceptable practices are set out in Appendix B.

    1. Subpart B--Core Principle 1 (Compliance With Core Principles)

    Under Core Principle 1, compliance with the core principles, and

    any other rule or regulation that the Commission may impose under

    Section 8a(5) of the CEA, is a condition of obtaining and maintaining

    registration as a SEF.\50\ The Commission proposes to codify the

    statutory text of Core Principle 1 in proposed Sec. 37.100. SEFs will

    have reasonable discretion in establishing the manner in which they

    comply with the core principles.

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

    \50\ CEA Section 5h(f)(1)(A).

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

    2. Subpart C--Core Principle 2 (Compliance With Rules)

    a. Background

    Core Principle 2 requires a SEF to establish and enforce compliance

    with its rules,\51\ including by: (1) Establishing various rules to

    deter abuses; and (2) having the capacity to detect, investigate, and

    enforce such rules.\52\ Similarly, under Core Principle 2, a SEF must

    establish and enforce rules to provide any eligible contract

    participant (``ECP'') and any independent software vendor (``ISV'')

    \53\ with impartial access to the market and to capture information

    that the SEF may use in establishing whether rule violations have

    occurred.\54\ Additionally, SEF Core Principle 2 requires a SEF to

    establish rules governing the operations of the trading platform and

    provide rules relating to the mandatory clearing requirement under

    Section 2(h)(8).\55\The Commission proposes to implement these

    requirements through Sec. Sec. 37.200-37.207.

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

    \51\ CEA Section 5h(f)(2)(A).

    \52\ CEA Section 5h(f)(2)(C) requires SEFs to establish rules

    specifying trading procedures to be used in entering and executing

    orders traded or posted on the trading platform, including block

    trades. The sentence annotated by this footnote also captures 2(B).

    \53\ The Commission notes that examples of independent software

    vendors include: Smart order routers, trading software companies

    that develop front-end trading applications, and aggregators of

    transaction data. Smart order routing generally involves scanning of

    the market for the best-displayed price and then routing orders to

    that market for execution. Software that serves as a front-end

    trading application is typically used by traders to input orders,

    monitor quotations and view a record of the transactions completed

    during a trading session. Aggregators of transaction data provide

    access to news, analytics and execution services. The Commission

    believes that transparency and trading efficiency would be enhanced

    as a result of innovations in this field for market services. For

    instance, certain providers of market services with access to

    multiple trading systems or platforms could provide consolidated

    transaction data from such trading systems or platforms to market

    participants.

    \54\ CEA Section 5h(f)(2)(B).

    \55\ CEA Section 2(h)(8) requires counterparties transacting in

    swaps that are subject to the clearing requirement of Section 2(h)

    to execute the transaction on a DCM or a SEF, unless no DCM or SEF

    ``makes the swap available to trade'' or the swap transaction is

    subject to the clearing exception under Section 2(h)(7). The

    sentence annotated by this footnote captures both 2(C) and 2(D).

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

    Although SEFs are a new type of regulated exchange, the Commission

    notes that the statutory text for SEF Core Principle 2 is largely a

    compilation of established regulatory principles applicable to DCMs. As

    a result, proposed Sec. Sec. 37.200-37.207, implementing SEF Core

    Principle 2, set forth requirements for establishing and enforcing

    rules, providing access, conducting trade practice surveillance, and

    implementing audit trail requirements and disciplinary rules, that are

    analogous to those found in the proposed regulations for DCM Core

    Principles 2, 10, and 13. In addition, proposed Sec. Sec. 37.200-

    37.207 also address elements of Core Principle 2 that are not

    implicated by these DCM core principles.

    b. Operation of a Swap Execution Facility and Compliance With Rules--

    Proposed Sec. 37.201

    Proposed Sec. 37.201 addresses the requirement to establish and

    enforce rules. More specifically, the core principle requires that a

    SEF establish and enforce compliance with its rules.\56\A SEF is also

    required to

    [[Page 1223]]

    establish rules governing the operation of the trading platform.\57\

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

    \56\ CEA Section 5h(f)(2)(A)(i).

    \57\ CEA Section 5h(f)(2)(C).

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

    Proposed Sec. 37.201 addresses these elements by requiring SEFs to

    establish rules governing the members' and market participants' use of

    their markets, including rules specifying trading procedures for

    entering and executing orders traded or posted on the trading platform,

    including block trades. Proposed Sec. 37.201(b) further requires SEFs

    to establish and impartially enforce compliance with the rules of the

    SEF, including, but not limited to: (1) The terms and conditions of any

    swaps traded or processed on or through the SEF; (2) access rules for

    the SEF; (3) trade practice rules; (4) audit trail requirements; (5)

    disciplinary rules; and (6) mandatory trading requirements.

    c. Access Requirements--Proposed Sec. 37.202

    Proposed Sec. 37.202 addresses Core Principle 2's requirement that

    SEFs provide any ECP and any ISV with impartial access to the market,

    and that they adopt rules with respect to any limitations they place on

    access.\58\ In that regard, proposed Sec. 37.202(a) requires a SEF to

    provide any ECP and any ISV with impartial access to its market(s) and

    market services (including any indicative quote screens or any similar

    pricing data displays), which includes establishing criteria that are

    impartial, transparent, and applied in a fair and nondiscriminatory

    manner and levying equal fees for participants receiving comparable

    access to, or services from, the SEF. The purpose of the proposed

    impartial access requirements is to prevent a SEF's owners or operators

    from using discriminatory access requirements as a competitive tool

    against certain participants. Access to a SEF should be determined, for

    example, on the SEF's impartial evaluation of an applicant's

    disciplinary history and financial and operational soundness against

    objective, pre-established criteria. Any participant should be able to

    demonstrate financial soundness either by showing that it is a clearing

    member of a DCO that clears products traded on that SEF or by showing

    that it has clearing arrangements in place with such a clearing member.

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

    \58\ CEA Section 5h(f)(2)(A)(ii) and (2)(B)(i).

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

    Proposed Sec. 37.202(b) requires that, prior to granting a

    participant access to its markets, a SEF must require each member or

    market participant to consent to its jurisdiction.\59\ Finally,

    proposed Sec. 37.202(c) requires a SEF to establish and impartially

    enforce its rules governing any decision to deny, suspend, or

    permanently bar participants' access to the SEF, including when such

    decisions are part of a disciplinary or emergency action taken by the

    SEF.

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

    \59\ Consent may be obtained in the form of a written agreement

    at the time that a member or market participant is granted access to

    the SEF.

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

    Request for Comment:

    The Commission solicits specific public comments regarding the

    sufficiency of proposed Sec. 37.202.

    In particular, the Commission is interested to know

    whether additional regulations are necessary to ensure that a SEF can

    assert jurisdiction over any person or entity executing swaps on the

    SEF, either for their own account or on behalf of another's account.

    The Commission also requests public comments on proposed

    Sec. Sec. 37.202(a) and 37.202(c), which are intended to ensure that

    similarly situated persons and entities receive equal access to a SEF's

    trading platform and services, and that similar access and services be

    charged a similar fee.

    In addition, the Commission wants to know whether the

    proposed regulations seeking to prohibit a SEF from abusing its

    authority to deny or suspend access via disciplinary or emergency

    procedures are sufficient to prohibit discrimination by a SEF against

    competitors or for inappropriate business reasons.

    d. Rule Enforcement Program--Proposed Sec. 37.203

    Proposed Sec. 37.203 addresses SEF Core Principle 2's requirement

    that SEFs establish and enforce trading and trade processing rules that

    will deter abuses and have the capacity to investigate and enforce

    those rules.\60\

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

    \60\ CEA Section 5h(f)(2)(B).

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

    Proposed regulation 37.203(a) addresses abusive trading practices

    by requiring SEFs to prohibit specific practices in connection with

    intermediated and non-intermediated trading activities,\61\ as well as

    any other manipulative or disruptive trading practices prohibited by

    the CEA or by the Commission pursuant to Commission regulation.

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

    \61\ The prohibited practices include: trading ahead of customer

    orders, trading against customer orders, accommodation trading, and

    improper cross-trading. Specific trading practice violations that

    must be prohibited by all SEFs include: Front-running, wash trading,

    pre-arranged trading, fraudulent trading, money passes, and any

    other trading practices that the SEF deems to be abusive. These

    practices are a compilation of abusive trading practices that DCMs

    already prohibit, and include trading practices that Congress

    expressly prohibited in Section 747 of the Dodd-Frank Act. Section

    747 of the Dodd-Frank Act amends section 4c(a) of the CEA by adding

    three disruptive practices, which make it:

    Unlawful for any person to engage in any trading, practice, or

    conduct on or subject to the rules of a registered entity that--

    (A) Violates bids or offers;

    (B) Demonstrates intentional or reckless disregard for the

    orderly execution of transactions during the closing period; or

    (C) Is of the character of, or is commonly known to the trade

    as, ``spoofing'' (bidding or offering with the intent to cancel the

    bid or offer before execution).

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

    Subsection (b) of the proposed regulation requires that a SEF have

    arrangements and resources for effective rule enforcement, including

    the authority to collect information and examine books and records of

    members and market participants. The Commission believes that SEFs must

    have appropriate resources to enforce all of its rules, including the

    ability to perform effective trade practice surveillance. Furthermore,

    a SEF must have the authority to examine books and records for all

    market participants. The Commission believes that a SEF can best

    administer its compliance and rule enforcement obligations by having

    the ability to reach the books and records of all market participants.

    Next, subsection (c) of proposed Sec. 37.203 requires that a SEF

    maintain sufficient compliance resources to conduct effective and

    timely audit trail reviews, trade practice surveillance, market

    surveillance, and real-time monitoring. A SEF must also monitor its

    staff size annually to ensure that it is appropriate to effectively

    perform those functions. A SEF's staff size also must be sufficient to

    address unusual or unanticipated market or trading events while

    continuing to effectively conduct routine self-regulatory duties.

    Proposed Sec. 37.203 reflects the Commission's belief that sufficient

    compliance staff are essential to the effectiveness of a SEF's self-

    regulatory program.

    While requiring sufficient staff, proposed Sec. 37.203(c) does not

    require that staff size be determined based on a specific formula.

    Rather, it permits the individual SEF to determine what size staff it

    needs to effectively perform its self-regulatory responsibilities.\62\

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

    \62\ In making this determination, the proposed regulation

    requires that a SEF take into account specific facts and

    circumstances (e.g., volume of trading, the number of swaps listed,

    number of traders, etc.), as well as any other factors suggesting

    the need for increased resources. A factor that may suggest the need

    for increased compliance resources is a prolonged surge in trading

    volume or a prolonged period of price volatility.

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

    Proposed Sec. 37.203(d) requires SEFs to maintain an automated

    trade surveillance system capable of detecting

    [[Page 1224]]

    and investigating potential trade practice violations. At a minimum, a

    SEF's systems must be capable of generating alerts on at least a trade

    date plus one day (T+1) basis to help staff focus on potential

    violations and anomalies found in trade data.\63\ They must also

    provide compliance staff the ability to sort, query and analyze

    voluminous amounts of data. In order to detect and prosecute the

    abusive trading practices enumerated in proposed Sec. 37.203(a), a

    SEF's automated surveillance system must maintain all trade and order

    data, including order modifications and cancellations. In addition, a

    SEF's automated trade surveillance system must provide users with the

    ability to compute retain, and compare trading statistics; compute

    profit and loss; and reconstruct the sequence of trading activity. The

    proposed regulation reflects the Commission's belief that a SEF must

    have automated surveillance systems that are equivalent to those of a

    DCM in order to fulfill its trade practice surveillance requirements.

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

    \63\ These systems typically differ from those systems used for

    real-time market monitoring. The requirements for real-time market

    monitoring can be found in proposed Commission Sec. 37.203(e).

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

    Subsection (e) of proposed Sec. 37.203 requires SEFs to conduct

    real-time market monitoring of all trading activity on its trading

    platform, in order to ensure orderly trading and to identify and

    correct any market or system anomalies. The Commission's proposed

    regulation requires that any price adjustments or trade cancellations

    be transparent to the market and subject to clear and fair publicly

    available standards.

    Next, proposed Sec. 37.203(f) requires SEFs to establish

    procedures for conducting investigations and the requirements for an

    investigation report. Subsection (f)(1) requires that a SEF have

    procedures to conduct investigations of possible rule violations and

    subsection (f)(2) requires that an investigation be completed within a

    timely manner (generally defined as 12 months after an investigation is

    opened, absent mitigating circumstances).\64\

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

    \64\ Mitigating circumstances may include: the complexity of the

    investigation, the number of firms or individuals involved as

    potential wrongdoers, the number of potential violations to be

    investigated, and the volume of documents and data to be examined

    and analyzed by compliance staff.

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

    Subsections (f)(3) and (f)(4) of proposed Sec. 37.203 set forth

    what must be included in an investigation report. Subsection (f)(3)

    requires that when compliance staff believes there is a reasonable

    basis for finding a violation, the investigation report must include

    the potential wrongdoer's disciplinary history. Similarly, subsection

    (f)(4) requires that an investigation report include the potential

    wrongdoer's disciplinary history when compliance staff recommends that

    a warning letter be issued. The Commission believes that prior

    disciplinary history is critical information that a disciplinary

    committee should consider when either issuing a warning letter or

    assessing an appropriate penalty as part of any settlement decision or

    hearing.\65\

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

    \65\ As noted below in the discussion of proposed Sec.

    37.206(n), a SEF's disciplinary committee should review a member's

    complete disciplinary history when determining appropriate sanctions

    and impose meaningful sanctions on members who repeatedly violate

    the same or similar rules to discourage recidivist activity.

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

    Subsection (f)(5) of proposed Sec. 37.203 provides that a SEF may

    authorize its compliance staff to issue a warning letter or to

    recommend that a disciplinary committee issue a warning letter.

    However, the proposed regulation prohibits SEFs from issuing more than

    one warning letter, in lieu of stronger disciplinary action, for the

    same violation during a rolling 12-month period.\66\

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

    \66\ For purposes of this regulation, the Commission does not

    consider a ``reminder letter'' or such other similar letter to be

    any different than a warning letter. While a warning letter may be

    appropriate for a first-time violation, the Commission does not

    believe that more than one warning letter in a rolling 12-month

    period, whether for the same or similar violations is ever

    appropriate. A policy of issuing repeated warning letters to members

    and market participants who violate the same or similar rules,

    rather than issuing meaningful sanctions, reduces the effectiveness

    of a SEF's rule enforcement program.

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

    Finally, proposed Sec. 37.203(g) requires a SEF to adopt and

    enforce any additional rules that it believes are necessary to comply

    with the requirements of proposed Sec. 37.203.

    Request for Comment:

    The Commission requests public comment on proposed Sec. 37.203.

    In particular, the Commission requests public comment on

    the abusive trading practices enumerated in subsection 37.203(a). These

    practices are identical to the abusive trading practices prohibited in

    DCM trading.

    The Commission also solicits comments regarding the types

    of abusive trading practices that should be prohibited on a SEF's

    trading platform, particularly whether SEFs and DCMs are likely to face

    similar types of trading abuses by market participants, whether

    additional or different trading practices should be prohibited on a

    SEF, and whether SEFs should be required to have the same types of

    trade practice surveillance and real-time market monitoring programs as

    DCMs.

    Finally, the Commission requests comments on whether the

    investigatory reports prepared by DCM compliance staff as a prelude to

    formal disciplinary proceedings, and included in these proposed

    regulations, are needed within SEFs.

    e. Regulatory Services Provided by a Third Party--Proposed Sec. 37.204

    Proposed Sec. 37.204 permits a SEF to utilize the services of a

    registered futures association or another registered entity for

    assistance in performing certain self-regulatory functions.\67\

    However, SEFs remain responsible for the execution of these functions

    and for compliance with their associated core principles. In this

    regard, the Commission notes that the Dodd-Frank Act does not confer on

    SEFs the same right to delegate certain core principle compliance

    functions as that conferred to DCMs, pursuant to Section 5c(b) of the

    CEA.

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

    \67\ Self-regulatory functions include, for example, trade

    practice surveillance; market surveillance; real-time market

    monitoring; investigations of possible rule violations; and

    disciplinary actions.

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

    The proposed regulation requires that any SEF that contracts with a

    third-party regulatory service provider ensure that the provider has

    sufficient capacity and resources to render timely and effective

    regulatory services. The SEF must also oversee the quality of

    regulatory services provided on its behalf, and must retain exclusive

    authority with respect to all substantive decisions made by its

    regulatory service provider.\68\ The proposed regulation also specifies

    that any instances where a SEF's actions differ from those recommended

    by its regulatory provider must be documented and explained in writing.

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

    \68\ Such decisions include, but are not limited to, those

    involving the cancellation of trades, the issuance of disciplinary

    charges against members or market participants, denials of access to

    the trading platform, and any decision to open an investigation into

    a possible rule violation.

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

    Request for Comment:

    The Commission requests public comment on proposed Sec. 37.204.

    In particular, the Commission requests comments on the

    supervisory and decision-making relationship that should exist between

    a SEF and a third-party regulatory service provider.

    The Commission also seeks public comment on the types of

    information that SEFs and their regulatory service providers should be

    required to share with other SEFs and regulatory service providers, in

    order to conduct effective surveillance of fungible swap products

    trading on multiple SEFs.

    [[Page 1225]]

    Finally, because SEFs are not permitted to delegate core

    principle compliance functions, as are DCMs, are there any additional

    conditions that the Commission should impose on SEFs' use of third-

    party regulatory service providers?

    f. Audit Trail Requirements--Proposed Sec. 37.205

    Proposed Sec. 37.205 addresses SEF Core Principle 2's requirements

    that a SEF be able to capture information that may be used to determine

    whether rule violations have occurred.\69\ Proposed Sec. 37.205

    requirements are akin to the DCM regulations addressing audit trail

    requirements.\70\

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

    \69\ CEA Section 5h(f)(2)(B)(ii).

    \70\ For further explanation of the elements of an effective

    audit trail, see supra note 10, DCM NPRM.

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

    Proposed Sec. 37.205 requires that a SEF establish an audit trail,

    and sets forth the elements of an effective audit trail and the

    requirements for effective audit trail enforcement.\71\ The Commission

    believes that these requirements will help to ensure that SEFs can

    appropriately monitor and investigate any potential customer and market

    abuse. Additionally, the audit trail data captured by SEFs must be

    sufficient to reconstruct all transactions promptly, and to provide

    evidence of any rule violations that may have occurred.

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

    \71\ Subsection (a) of the proposed regulation establishes the

    overarching requirements for SEFs' audit trail programs, while

    Subsection (b) prescribes the four elements of an acceptable audit

    trail program and Subsection (c) prescribes the elements of an

    effective audit trail enforcement program.

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

    Subsection (b)(1) of the proposed regulation requires that a SEF's

    audit trail include original source documents, defined to include

    unalterable, sequentially-identified records on which trade execution

    information is originally recorded, whether manually or electronically.

    It also requires that customer order records demonstrate the terms of

    the order, the unique account identifier that relates to the account

    owner, and the time of the order entry. Subsection (b)(2) of the

    proposed regulation requires that a SEF's audit trail program include a

    transaction history database to facilitate rapid access and analysis of

    all original source documents. Subsection (b)(2) also specifies the

    trade information that must be included in a transaction history

    database.\72\ Subsection (b)(3) of the proposed regulation requires

    that a SEF's audit trail program have electronic analysis capability

    for all data in its transaction history database and enable the SEF to

    reconstruct trades in order to identify possible rule violations.

    Subsection (b)(4) requires that a SEF's audit trail program include the

    ability to safely store all audit trail data, and to retain it in

    accordance with the recordkeeping requirements of SEF Core Principle 10

    and its associated regulations. Safe storage capability also requires a

    SEF to protect its audit trail data from unauthorized alteration,

    accidental erasure or other loss.

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

    \72\ For example, mandatory information includes a history of

    all orders and trades; all data input in the trade matching system

    for purposes of clearing; the categories of participant for which

    each trade is executed (i.e., the customer type indicator or ``CTI''

    codes); timing and sequencing data sufficient to reconstruct

    trading; and identification of each account to which fills are

    allocated.

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

    Subsection (c) of proposed Sec. 37.205 is organized in two parts.

    First, subsection (c)(1) requires that a SEF develop an effective audit

    trail enforcement program, which must, at a minimum, review all members

    and market participants annually to verify their compliance with all

    applicable audit trail requirements. Subsection (c)(1) also sets forth

    minimum review criteria for an electronic trading audit trail that must

    be carried out by each SEF. Finally, subsection (c)(2) requires that

    SEFs develop programs to ensure effective enforcement of their audit

    trail and recordkeeping requirements, including a requirement that SEFs

    levy meaningful sanctions when deficiencies are found. Sanctions may

    not include more than one warning letter or other non-financial

    penalty, in lieu of stronger disciplinary action, for the same

    violation within a rolling twelve-month period.

    Request for Comment:

    The Commission seeks public comment on the proposed audit trail and

    audit trail enforcement requirements for SEFs.

    The Commission seeks specific public comment on whether

    such requirements should be similar for both SEFs and DCMs.

    Should SEFs be subject to additional requirements beyond

    the proposed regulations? Are there elements of the proposed

    regulations that are inappropriate for SEFs?

    For example, is the CTI code system used by DCMs to denote

    different types of futures participants also necessary for swap

    transactions on SEFs?

    What specific data points should a SEF's audit trail

    enforcement program seek to verify?

    g. Disciplinary Procedures and Sanctions--Proposed Sec. 37.206

    Proposed Sec. 37.206 addresses SEF Core Principle 2's requirement

    that SEFs establish and enforce participation rules to deter abuse, and

    have the capacity to investigate and enforce such abuses.\73\

    Subsection (a) of the proposed regulation requires that a SEF establish

    and maintain sufficient enforcement staff and resources to effectively

    and promptly prosecute possible rule violations within the jurisdiction

    of the SEF. Subsection (a) also provides that a SEF's enforcement staff

    may not include members of the SEF or persons whose interests conflict

    with their enforcement duties. Moreover, a member of the enforcement

    staff may not operate under the direction or control of any person or

    persons with trading privileges at the SEF. These provisions seek to

    ensure the independence of enforcement staff, and help promote

    disciplinary procedures that are free of potential conflicts of

    interest.

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

    \73\ See CEA Section 5h(f)(2)(B). In general, the proposed

    regulations addressing disciplinary procedures for SEFs parallel the

    disciplinary procedure regulations for DCMs. The proposed

    regulations pursuant to DCM Core Principle 13 are also similar to

    the text of the disciplinary procedures in part 8, which the

    Commission found to be the model for many DCMs' disciplinary

    programs. 17 CFR 8.01 et seq. DCMs were exempt from Part 8 pursuant

    to Sec. 38.2; however, the predecessor DCM Core Principle 13

    offered the disciplinary procedures in Part 8 as an example of

    appropriate disciplinary procedures.

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

    Subsection (b) requires SEFs to establish one or more Review Panels

    and one or more Hearing Panels (together, ``disciplinary panels'').

    Neither panel may include members of the SEF's compliance staff or any

    person involved in adjudicating any other stage of the same

    proceeding.\74\ The proposed regulation provides that a Review Panel

    must be responsible for determining whether a reasonable basis exists

    for finding a violation of SEF rules, and for authorizing the issuance

    of a notice of charges, while a separate Hearing Panel must be

    responsible for adjudicating the matter and issuing sanctions.\75\

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

    \74\ Disciplinary panels must also adhere to the composition

    requirement of Sec. 40.9(c)(3)(ii), as proposed, which provides

    that ``Each Disciplinary Panel shall include at least one person who

    would not be disqualified from serving as a Public Director by Sec.

    1.3(ccc)(1)(i)-(vi) and (2) of this chapter (a ``Public

    Participant''). Such Public Participant shall chair each

    Disciplinary Panel. In addition, any registered entity specified in

    paragraph (c)(3)(i) of this section shall adopt rules that would, at

    a minimum: (A) Further preclude any group or class of participants

    from dominating or exercising disproportionate influence on a

    Disciplinary Panel and (B) Prohibit any member of a Disciplinary

    Panel from participating in deliberations or voting on any matter in

    which the member has a financial interest.'' See 75 FR 63752

    (October 18, 2010).

    \75\ The Commission notes that, while proposed Sec. 37.206(b)

    requires SEFs to empanel distinct bodies to issue charges and to

    adjudicate charges in a particular matter, SEFs may determine for

    themselves whether their Review and Hearing Panels are separate

    standing panels or ad hoc bodies whose members are chosen from a

    larger ``disciplinary committee'' to serve in one capacity or the

    other for a particular disciplinary matter. The purposes of separate

    Review and Hearing Panels is to help ensure adjudication of

    disciplinary matters by separating a decision to issue charges from

    a hearing on the merits of a matter.

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

    [[Page 1226]]

    Subsection (c) of the proposed regulation requires a Review Panel

    to promptly review an investigation report received pursuant to

    proposed Sec. 37.203(f)(3), and to take action within 30 days of

    receipt. The Commission believes that prompt disciplinary action

    provides the best opportunity for witnesses to recall conversations,

    facts, and other information relevant to the matter, and transmits a

    clear signal to the market and to market participants that violations

    of exchange rules will not be tolerated. Subsection (c) also specifies

    the range of actions which a Review Panel may take upon receiving a

    completed investigation report. Subsection (d) describes the minimally

    acceptable contents of any notice of charges (``notice'') issued by a

    Review Panel. The notice must adequately state the acts, conduct, or

    practices in which the respondent is alleged to have engaged; state the

    rule(s) alleged to have been violated; and prescribe the period within

    which a hearing may be requested. Further, the notice must advise the

    respondent charged that he or she is entitled, upon request, to a

    hearing on the charges.\76\ Subsection (e), in turn, specifies a

    respondent's right to be represented by any counsel or representative

    of his choosing upon receiving a notice of charges and in all

    succeeding stages of the disciplinary process. Subsection (f) requires

    that a respondent must be given a reasonable period of time to file an

    answer to a charges.\77\ Subsection (g) provides that, if a respondent

    admits or fails to deny any of the alleged violations a Hearing Panel

    may find that the violations admitted or not denied have been

    committed.\78\ Subsection (h) requires that in every instance where a

    respondent has requested a hearing on a charge that he or she denies,

    or on a sanction set by the Hearing Panel pursuant to proposed Sec.

    37.206(g), the respondent must be given the opportunity for a hearing

    in accordance with the requirements of proposed Sec. 37.206(j).

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

    \76\ The proposed regulations permit a SEF to adopt rules

    providing that the failure to request a hearing within the time

    prescribed in the notice, except for good cause, must be deemed a

    waiver of the right to a hearing and that the failure to answer or

    deny expressly a charge must be deemed to be an admission of such

    charge.

    \77\ Subsection (f) also permits a SEF, through its rules, to

    require that: (1) The answer must be in writing and include a

    statement that the respondent admits, denies or does not have and is

    unable to obtain sufficient information to admit or deny each

    allegation; (2) failure to file an answer on a timely basis shall be

    deemed an admission of all allegations in the notice of charges; and

    (3) failure in an answer to deny expressly a charge shall be deemed

    to be an admission of such charge.

    \78\ In addition, if a SEF adopts a rule concerning the

    admission or failure to deny charges pursuant to Proposed Sec.

    37.206(f), then Subsections (g)(1) through (g)(3) of the proposed

    regulation provide that: (1) The Hearing Panel must impose a

    sanction for each violation found to have been committed; (2) the

    SEF must promptly notify the respondent in writing of any sanction

    to be imposed and advise the respondent that they may request a

    hearing on such sanction within the period of time stated in the

    notice; and (3) the rules of the SEF may provide that if the

    respondent fails to request a hearing within the period of time

    stated in the notice, then the respondent will be deemed to have

    accepted the sanction.

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

    Subsection (i) provides the procedures a SEF must follow when it

    settles a disciplinary case. The provision states that the rules of a

    SEF may permit a respondent to submit a written offer of settlement any

    time after an investigation report is completed. The disciplinary panel

    presiding over the matter may accept the offer of settlement, but may

    not alter the terms of the offer unless the respondent agrees.

    Subsection (i) requires a disciplinary panel that accepts a settlement

    offer to issue a written decision specifying the rule violations it has

    reason to believe were committed, and any sanction imposed, including

    any order of restitution where customer harm has been demonstrated.

    Significantly, proposed Sec. 37.206(i)(3) also provides that if an

    offer of settlement is accepted without the agreement of a SEF's

    enforcement staff, the decision must carefully explain the panel's

    acceptance of the settlement.\79\

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    \79\ Subsection (i) allows a respondent to withdraw his or her

    offer of settlement at any time before final acceptance by a

    disciplinary panel. If an offer is withdrawn after submission, or is

    rejected by a disciplinary panel, the respondent must not be deemed

    to have made any admissions by reason of the offer of settlement and

    must not be otherwise prejudiced by having submitted the offer of

    settlement.

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

    Subsection (j) requires a SEF to adopt rules that provide certain

    minimum requirements for any hearing conducted pursuant to a notice of

    charges. In general, Subsections (j)(1)(i) through (j)(1)(vi) require

    that the SEF: (1) Provide a fair hearing; (2) permit respondents to

    examine evidence relied on by enforcement staff in presenting the

    notice of charges; (3) require enforcement and compliance staffs to be

    parties to the hearing and enforcement staff to present their case on

    those charges and sanctions that are the subject of the hearing; (4)

    permit respondents to appear personally at the hearing, to cross-

    examine and call witnesses and to present evidence; (5) require that

    persons within its jurisdiction who are called as witnesses participate

    in the hearing and produce evidence; and (6) transcribe and retain a

    copy of the hearing. Additionally, subsection (j)(2) specifies that the

    rules of the SEF may provide that a sanction be summarily imposed upon

    any person within its jurisdiction whose actions impede the progress of

    a hearing.

    Subsection (k) details the procedures that a Hearing Panel must

    follow in rendering disciplinary decisions. The provision requires that

    all decisions include: (1) A notice of charges or a summary of the

    charges; (2) an answer, if any, or a summary of the answer; (3) a

    summary of the evidence produced at the hearing or, where appropriate

    incorporation by reference in the investigation report; (4) a statement

    of findings and conclusions with respect to each charge, and a careful

    explanation of the evidentiary and other bases for such findings and

    conclusions with respect to each charge; (5) an indication of each

    specific rule which the respondent was found to have violated; and (6)

    a declaration of any penalty imposed against the respondent, including

    the basis for such sanctions and the effective date of such sanctions.

    Subsection Proposed Sec. 37.206(l) provides the procedures that a

    SEF must follow in the event that the SEF's rules authorize an appeal

    of adverse decisions in all or in certain classes of cases.\80\

    Notably, the proposed Sec. requires a SEF that permits appeals by

    disciplinary respondents to also permit appeals by its enforcement

    staff. This provision reflects the Commission's belief that SEF

    enforcement staff must have the discretion to appeal disciplinary panel

    decisions that, for example, do not adequately sanction a respondent's

    violative conduct. Subsection (m) requires that each SEF establish

    rules setting forth when a decision rendered under this subsection C

    will become the final decision of the SEF.

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

    \80\ For SEFs that permit appeals, the language in subsections

    (l)(1) through (l)(4) of proposed Sec. 37.206 generally require the

    SEF to: (1) Establish an appellate panel that is authorized to hear

    appeals; (2) ensure that the appellate panel composition is

    consistent with Sec. 40.9(c)(3)(iii) and not include any members of

    the SEF's compliance staff, or any person involved in adjudicating

    any other stage of the same proceeding; (3) except for good cause

    shown, the appeal or review must be conducted solely on the record

    before the Hearing Panel, the written exceptions field by the

    parties, and the oral or written arguments of the parties; and (4)

    promptly following the appeal or review proceeding, the board of

    appeals must issue a written decision and provide a copy to the

    respondent. The Commission notes that a respondent has certain

    rights of appeal to the Commission under Part 9 of the Commission's

    regulations.

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

    Subsection (n) requires that every disciplinary sanction imposed by

    a SEF must be commensurate with the

    [[Page 1227]]

    violations committed and must be clearly sufficient to deter recidivism

    or similar violations by other market participants. Additionally, the

    proposed regulation requires that, in the event of demonstrated

    customer harm, any disciplinary sanction must include full customer

    restitution. In evaluating appropriate sanctions, the proposed

    regulation requires the SEF to take into account a respondent's

    disciplinary history.\81\

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

    \81\ Proposed Sec. 37.203(f)(3) also requires that a copy of a

    member or market participant's disciplinary history be included in

    the compliance staff's investigation report.

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

    Subsection (o) permits a SEF to adopt a summary fine schedule for

    violations of rules relating to timely submission of accurate records

    required for clearing or verifying each day's transactions. The

    proposed regulation makes clear that a SEF should issue no more than

    one warning letter in a rolling 12-month period for the same violation

    before sanctions are imposed. Additionally, the proposed regulation

    specifies that a summary fine schedule must provide for progressively

    larger fines for recurring violations. The Commission believes that

    these provisions will serve to discourage recidivist behavior.

    Finally, subsection (p) provides that a SEF may impose an immediate

    sanction upon a reasonable belief that such action is necessary to

    protect the best interest of the marketplace. The proposed regulation

    also provides that any emergency action taken by the SEF must be

    performed in accordance with certain procedural safeguards.

    Request for Comment:

    The Commission seeks public comment on proposed Sec. 37.206.

    In particular, comments should address whether SEFs should

    be subject to the detailed disciplinary procedures proposed herein. The

    proposed disciplinary procedures emphasize procedural safeguards for

    respondents, including a clear separation between SEF personnel

    recommending the issuance of charges, review panels determining whether

    charges should be issued, and hearing panels adjudicating cases on the

    merits. Are these disciplinary procedures sufficient for SEFs? Or,

    should SEFs instead utilize a more streamlined disciplinary process

    that features, for example, a robust staff summary fine program rather

    than formal disciplinary hearings.

    Finally, given the significant financial resources of the

    ECPs conducting swap transactions on SEFs, should Commission

    regulations provide more detailed guidelines on the appropriate size of

    any financial penalties levied by SEFs for violative conduct? Should

    any such guidelines take cognizance of the financial resources of

    potential respondents?

    h. Swaps Subject to Mandatory Clearing--Proposed Sec. 37.207

    Proposed Sec. 37.207 mandates that SEFs provide rules that require

    swap dealers or major swap participants, who trade a swap subject to

    the mandatory clearing requirement under Section 2(h)(1), to execute

    the transaction on either a DCM or a SEF. However, swap dealers or

    major swap participants are not required to execute such transactions

    if no DCM or SEF makes the swap available to trade.

    3. Subpart D--Core Principle 3 (Swaps Not Readily Susceptible to

    Manipulation)

    Under Core Principle 3, Congress required that SEFs offer for

    trading swaps that are not readily susceptible to manipulation. The

    Commission notes that the statutory language of Core Principle 3 is

    substantively identical to the counterpart core principle under Section

    5(d)(3) of the CEA as applicable to DCMs. Historically, DCMs complied

    with the requirements of Section 5(d)(3) by using as guidance the

    provisions of Guideline No. 1, contained in Appendix A to Part 40. In a

    separate release, the Commission proposes certain revisions to the

    former Guideline No. 1, including: (i) Amending the provisions to

    include swap transactions, (ii) re-titling the guidance as

    ``Demonstration of compliance that a contract is not readily

    susceptible to manipulation,'' and (iii) re-designating the guidance to

    be included under Appendix C to Part 38.\82\

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

    \82\ See, supra note 10, DCM NPRM.

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

    Accordingly, proposed Sec. 37.301 requires that, applicants and

    SEFs must provide to the Commission the information required under

    Appendix C to Part 38 for purposes of demonstrating to the Commission

    that their swap contracts are not readily susceptible to manipulation.

    Under Appendix B to Part 37, the guidance for compliance with Core

    Principle 3 focuses on the selection and construction of the price

    index on which the swaps' cash flows are based. If obtained from a

    private third-party, the company should be independent and reputable.

    Moreover, the third party should use a sound, well-documented

    methodology that protects the index from manipulation. If the SEF

    itself determines the price index, then it should take precautions to

    safeguard against attempts to artificially influence the index. In this

    regard, if the price index is based on a survey of cash market sources,

    then the SEF should maintain a list of such entities which all should

    be reputable sources with knowledge of the cash market. In addition,

    the sample of sources polled should be representative of the cash

    market, and the poll should be conducted at a time when trading in the

    cash market is active. The cash-settlement survey should include a

    minimum of four independent entities if such sources do not take

    positions in the commodity (e.g., if the survey list is comprised

    exclusively of brokers) or at least eight independent entities if such

    sources trade for their own accounts (e.g., if the survey list is

    comprised of dealers or commercial users).

    4. Subpart E--Core Principle 4 (Monitoring of Trading and Trade

    Processing)

    Under Core Principle 4, Congress required that SEFs must take an

    active role in preventing manipulation, price distortion and

    disruptions of the delivery or cash settlement process. Accordingly,

    the proposed regulations under Subpart E of Part 37 clarify the related

    responsibilities for applicants and SEFs to monitor trading activities

    and prevent market disruptions.

    a. General Requirements--Proposed Sec. 37.401

    Proposed Sec. 37.401 requires that applicants and SEFs must

    collect, monitor and evaluate data to detect and prevent manipulative

    activity. Proposed Sec. 37.401 also requires that applicants and SEFs

    have the ability to conduct real-time monitoring of trading and

    comprehensive and accurate trade reconstructions.

    As noted above in its discussion of the need for automated tools in

    connection with Core Principle 2 requirements, the Commission believes

    that it would be difficult, if not impossible, to monitor for market

    disruptions in markets with high transaction volume and a large number

    of trades unless the SEF has installed automated trading alerts to

    detect many types of potential violations of exchange or Commission

    rules. Accordingly, the Commission proposes in Sec. 37.401 to require

    that, where the SEF cannot reasonably demonstrate that its manual

    processes are effective in detecting and preventing abuses, the SEF

    must implement automated trading alerts to detect potential problems.

    [[Page 1228]]

    Request for Comment:

    The Commission seeks public comment on whether in any rule the

    Commission may adopt in this matter, SEFs should be required to monitor

    the extent of high frequency trading, and whether automated trading

    systems should include the ability to detect and flag high frequency

    trading anomalies.

    b. Additional Requirements for Physical-Delivery Swaps--Proposed Sec.

    37.402

    For physical delivery swaps, proposed Sec. 37.402 requires that

    SEFs monitor each swap's terms and conditions as well as take

    meaningful corrective action to allow market participants to continue

    to use the market to make sound hedging decisions and for price

    discovery.

    c. Additional Requirements for Cash-Settled Swaps--Proposed Sec.

    37.403

    Over the past several years, there has been a growth in markets

    that are linked, for example, where the settlement price of one market

    is linked to the prices established in another market. As a result,

    traders may have incentives to disrupt or manipulate prices in the

    reference market in order to influence the prices in the linked market.

    The Commission believes that in such situations SEFs must monitor

    trading in the market to which its swap is linked. Accordingly,

    proposed Sec. 37.403 requires that, where a swap is settled by

    reference to the price of an instrument traded in another venue the SEF

    must either have an information sharing agreement with the other venue

    or be able to independently determine that positions or trading in the

    reference instrument are not being manipulated to affect positions or

    trading in its swap.

    d. Ability To Obtain Information--Proposed Sec. 37.404

    To ensure that SEFs have the ability to properly assess the

    potential for price manipulation, price distortions, and the disruption

    of the delivery or cash-settlement process, proposed Sec. 37.404

    provides that SEFs require that traders in their market keep and make

    available records of their activity in underlying commodities and

    related derivatives markets and swaps.

    e. Risk Controls for Trading--Proposed Sec. 37.405

    Proposed Sec. 37.405 requires that a SEF have effective risk

    controls to reduce the potential risk of market disruptions and ensure

    orderly market conditions. In the current futures markets, DCMs have

    implemented a variety of risk controls to avoid market disruptions

    through restrictions on order entry, including daily price limits,

    price/quantity bands, and trading pauses. In order to prevent market

    disruptions due to sudden volatile price movements, proposed Sec.

    37.405 requires SEFs to have in place effective risk controls,

    including but not limited to pauses and/or halts to trading in the

    event of extraordinary price movements that may result in distorted

    prices or trigger market disruptions. Such risk controls can, among

    other things, allow time for participants to analyze the market impact

    of new information that may have caused a sudden market move, allow new

    orders to come into a market that has moved dramatically, and allow

    traders to assess and secure their capital needs in the face of

    potential margin calls. Moreover, where a swap is linked to, or a

    substitute for, other swaps on the SEF or other trading venues,

    including where a swap is based on the level of an equity index, risk

    controls should be coordinated with those on the similar markets or

    trading venues, to the extent possible.

    The desirability of coordination of various risk controls, for

    example, ``circuit breakers'' in equities and their various derivatives

    including futures and options, recently has been the subject of

    discussions by regulators and the industry. The Commission believes

    that pauses and halts are effective risk management tools and must be

    implemented by SEFs to facilitate orderly markets. These basic risk

    controls also have proven to be effective and necessary in preventing

    market disruptions. The Commission recognizes that pauses and halts are

    only one category of risk controls and that additional controls may be

    necessary to further reduce the potential for market disruptions. Such

    controls may include price collars or bands,\83\ maximum order size

    limits,\84\ stop loss order protections,\85\ kill buttons,\86\ and

    others.

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

    \83\ Price bands would prevent clearly erroneous orders from

    entering the trading system, including ``fat finger'' errors, by

    automatically rejecting orders priced outside of a range of

    reasonability.

    \84\ Maximum order size limitations would prevent entry into the

    trading system of an order that exceeds a maximum quantity

    established by the SEF.

    \85\ Stop loss orders would be triggered if the market declines

    to a level pre-selected by the person entering the order. This

    mechanism would provide that when the market declines to the

    trader's pre-selected stop level for such an order, the order would

    become a limit order executable only down to a price within the

    range of reasonability permitted by the system, instead of becoming

    a market order.

    \86\ Kill buttons would give clearinghouses associated with a

    SEF the ability to delete open orders and quotes and reject entry of

    new orders or quotes in instances where a trader breaches its

    obligations with the clearinghouse. See FIA Market Access Risk

    Management Recommendations, p. 10 (April 2010).

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

    Request for Comment:

    The Commission is considering mandating in this rulemaking risk

    controls that are appropriate and/or necessary. Accordingly, the

    Commission invites comments on the appropriateness of these and other

    controls that could supplement trading halts or pauses. The Commission

    also invites comments on the following additional questions:

    Which risk controls should be mandated and how?

    What types of pauses and halts are necessary and

    appropriate for particular market conditions?

    What other risk controls are appropriate or necessary to

    reduce the risk of market disruptions?

    f. Trade Reconstruction--Proposed Sec. 37.406

    Under Core Principle 4, Congress required that SEFs have the

    ability to comprehensively and accurately reconstruct all trading on

    its facility. Proposed Sec. 37.406 sets forth this requirement,

    including the requirement that audit-trail data and reconstructions be

    made available to the Commission upon request.

    g. Additional Rules Required--Proposed Sec. 37.407

    Proposed Sec. 37.407 requires SEFs to adopt and enforce any

    additional rules that it believes are necessary to comply with the

    requirements of Subpart E.

    5. Subpart F--Core Principle 5 (Ability To Obtain Information)

    The proposed regulations under Subpart F require an applicant and a

    SEF to have the ability and authority, necessary Core Principle 5, to

    obtain necessary information to perform its obligations.

    6. Subpart G--Core Principle 6 (Position Limits or Accountability)

    Under Core Principle 6, Congress required that SEFs adopt for each

    swap, as is necessary and appropriate, position limits or position

    accountability. In addition, Congress required that, for any contract

    that is subject to a Federal position limit under CEA Section 4a(a),

    the SEF shall set its position limits at a level no higher than the

    position limitation established by the Commission in its Part 151

    regulations. Proposed Sec. 37.601 requires that each SEF must comply

    with the requirements of Part 151 in order to be in compliance with

    Core Principle 6.

    [[Page 1229]]

    7. Subpart H--Core Principle 7 (Financial Integrity of Transactions)

    Proposed Sec. 37.700 sets out the financial integrity requirements

    for transactions on a SEF, as required under Core Principle 7. Under

    such core principle, a SEF must establish and enforce rules to ensure

    the financial integrity of swaps entered on or through the facilities

    of the SEF, including the clearing and settlement of the swaps. The

    requirements of proposed Sec. 37.700 depend, in part, on whether the

    swap is cleared.\87\

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    \87\ The Commission interprets the mandatory clearing

    requirement in Section 723(a)(3) of the Dodd-Frank Act to mean that

    a DCO must clear a swap for any DCM or SEF that requests such

    clearing services, so long as the DCO offers the swap. In addition,

    a DCO that is clearing particular swaps must also clear the same

    swaps when listed on DCMs or SEFs, whether affiliated or

    unaffiliated, on a nondiscriminatory basis.

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

    Under proposed Sec. 37.702(a), a SEF must ensure that all its

    members meet the definition of ``eligible contract participant'' under

    CEA Section 1(a)(18). Under proposed Sec. 37.702(b), for swaps cleared

    by a DCO, a SEF must ensure that it has the capacity to route

    transactions to the DCO. With respect to swaps that are not required to

    be cleared, a SEF must impose additional requirements to ensure the

    financial integrity of the transaction,\88\ including requiring the

    transacting member to have entered into a credit arrangement for the

    transaction, demonstrate an ability to exchange collateral, and have

    appropriate credit filters in place. The Commission believes that these

    additional requirements are necessary in light of the fact that

    uncleared swaps will not have the risk management protections of a DCO.

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

    \88\ Separately, if the SEF determines to allow swap

    transactions that are not cleared, the SEF must have provisions to

    determine that the swap meets the exemption to the clearing

    requirement provided under section 2(h)(7) of the CEA, as amended by

    the Dodd-Frank Act.

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

    The Commission requests comment on whether these standards are

    appropriate financial integrity safeguards for SEFs. Specifically, the

    Commission solicits comment regarding how SEF members would demonstrate

    sufficient credit documentation and ability to exchange collateral.

    Request for Comment:

    The Commission seeks public comment on the proposed rule, and

    specifically on the following questions:

    Whether SEFs should provide additional controls to permit

    FCMs to manage their risks? If so, what specific direct access controls

    and procedures should SEFs implement?

    Should such controls be mandatory?

    8. Subpart I--Core Principle 8 (Emergency Authority)

    Under Core Principle 8, a SEF must provide for emergency

    situations. Based upon its experience with DCMs, and in recognition of

    the fact that individual SEFs may have different approaches to handling

    emergency action, proposed Sec. 37.801 refers to the guidance in

    Appendix B to Part 37 to demonstrate compliance with Core Principle 8.

    The guidance reflects the Commission's belief that there should be

    an increased emphasis on cross-market coordination of emergency actions

    and SEFs should have alternate lines of communication and approval

    procedures in order to address emergencies in real time.

    The Commission's experience has demonstrated that there are some

    specific requirements that at a minimum should be followed and these

    requirements are incorporated under the proposed guidance.

    Specifically, the SEF should have procedures and guidelines for

    decision-making and implementation of emergency intervention in the

    market. The SEF should have the authority to perform various actions,

    including without limitation: Liquidating or transferring open

    positions in the market,\89\ suspending or curtailing trading in any

    swap, and taking such market actions as the Commission may direct. In

    addition, the guidance notes that SEFs must provide prompt notification

    and explanation to the Commission of the exercise of emergency

    authority, and that information on all regulatory actions carried out

    pursuant to a SEF's emergency authority should be included in a timely

    submission of a certified rule.

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    \89\ In situations where a swap is traded on more than one

    platform, emergency action to liquidate or transfer open interest

    must be directed, or agreed to, by the Commission or Commission

    staff.

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

    9. Subpart J--Core Principle 9 (Timely Publication of Trading

    Information)

    Under Core Principle 9, Congress required that SEFs make available

    to the public timely information on price, trading volume, and other

    trading data on swaps to the extent prescribed by the Commission.

    Congress also required a SEF to have the capability of electronically

    capturing trade information for those transactions that occur on the

    trading system or platform. These matters are addressed in separate

    releases.\90\ Proposed Sec. 37.901 requires that SEFs comply with the

    real-time swap reporting and swap reporting and recordkeeping

    requirements being separately proposed by the Commission.

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

    \90\ See, supra note 10, DCM NPRM; 75 FR 76140 (December 7,

    2010); and 75 FR 76574 (December 8, 2010).

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

    Request for Comment:

    In order to address all relevant considerations with respect to the

    reporting requirements of Core Principle 9, the Commission seeks

    general comments and asks the public to respond to the specific

    questions below.

    For interest rate swaps, because the term life on an

    interest rate swap can be one of a large number of possible periods

    along a yield curve, what would be an appropriate manner to display

    prices?

    Would prices for interest rate swaps be meaningful or

    misleading and why?

    If the prices are misleading, what useful information

    should be displayed at the end of the trading day?

    Please identify any other swap products that have similar

    price reporting issues and address how the prices for that product

    should be reported to provide a summary of the trading for that day.

    10. Subpart K--Core Principle 10 (Recordkeeping and Reporting)

    Core Principle 10 establishes a three-part recordkeeping and

    reporting requirement applicable to all SEFs, which the Commission

    proposes to implement through proposed Sec. Sec. 37.1001-37.1003.\91\

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

    \91\ CEA Section 5h(f)(10)(A) requires all SEFs to: Maintain

    records of all activities relating to the business of each SEF,

    including a complete audit trail, for a period of at least five

    years; report to the Commission, in a form and manner acceptable to

    the Commission, such information as the Commission determines to be

    necessary or appropriate; and keep records relating to swaps defined

    in CEA Section 1a(47)(A)(v) open to inspection and examination by

    the Securities and Exchange Commission. CEA Section 5h(f)(10)(B)

    requires the Commission to ``adopt data collection and reporting

    requirements for swap execution facilities that are comparable to

    corresponding requirements for derivatives clearing organizations

    and swap data repositories.'' The Commission's data standards are

    included in proposed rules in Part 45 of the Commission's

    regulations.

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

    Proposed Sec. 37.1001 largely codifies the statutory language of

    Core Principle 10. In addition, it clarifies that investigatory and

    disciplinary files are included in the records that a SEF must

    maintain, and requires that a SEF comply with the recordkeeping

    requirements of Sec. 1.31.\92\

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    \92\ The Commission notes that it has always considered audit

    trails and investigatory and disciplinary files as a part of the

    records which a DCM is required to maintain and which the Commission

    is permitted to request and to examine. In this respect, the

    proposed regulation merely codifies existing Commission practice.

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

    By incorporating Sec. 1.31, proposed Sec. 37.1001 effectively

    requires that SEF books and records be readily accessible for the first

    2 years of the minimum 5-

    [[Page 1230]]

    year statutory period and be open to inspection by any representatives

    of the Commission or the United States Department of Justice.\93\ The

    SEF, at its own expense, must promptly provide either a copy or the

    original books or records upon request.

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    \93\ Proposed Sec. 37.1001 also effectively incorporates Sec.

    1.31(b)'s description of the permissible methods of storing books

    and records. Consequently, a SEF may store its books and records as

    prescribed by Sec. 1.31(b)(1)(ii). Among other criteria, Sec.

    1.31(b)(1)(ii) defines electronic storage media as ``any digital

    storage medium or system that preserves the records exclusively in a

    non-rewritable, non-erasable format [and] verifies automatically the

    quality and accuracy of the storage media recording process * * *.''

    SEFs must, at all times, have the facilities to immediately produce

    and be prepared to present legible hard-copy images of such records.

    Additionally, SEF's must keep only Commission-required records on

    the media, store a duplicate of the record at a separate location,

    and organize and maintain an accurate index of all information

    maintained on both the original and duplicate storage media. SEFs

    that use electronic storage media are also required to develop and

    maintain an audit system to track the initial entry of original or

    duplicate records and any subsequent changes made thereafter.

    Proposed Sec. 37.1001 also incorporates Sec. Sec. 1.31(c) and

    1.31(d), which expand upon the requirements established by proposed

    Sec. 37.1001. Section 1.31(c) requires that record-keepers who

    employ an electronic storage system certify with Commission that the

    system meets the requirements of an electronic storage media as

    defined in Sec. 1.31(b)(1)(ii). Section 1.31(d) states that trading

    cards, documents on which trade information is originally recorded

    in writing, certain written orders, and paper copies of certain

    electronically filed forms and reports with original signatures must

    be retained in hard-copy for the requisite time period. Finally,

    proposed Sec. 37.1001 also requires that SEFs comply with the

    recordkeeping requirements applicable to swaps in proposed Part 45.

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

    The statutory regime for SEFs established by the Dodd-Frank Act

    envisions ongoing Commission oversight of SEFs and their trading

    activity. Such oversight will resemble, in concept, the oversight

    already conducted by the Commission with respect to DCMs. Accordingly,

    proposed Sec. 37.1002 requires that SEFs report to the Commission any

    information necessary or appropriate for the Commission to perform its

    oversight duties. The proposed regulation does not articulate specific

    information that must be provided to the Commission; instead, it

    establishes the general requirement that SEFs must provide any relevant

    data requested by the Commission in a form and manner acceptable to the

    Commission.\94\

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    \94\ The Commission anticipates that the records it will

    routinely request will include, for example, daily trading records,

    board of directors' meeting minutes, investigatory and disciplinary

    files, information regarding resources allocated to compliance

    functions, and other records used in the Commission's trade practice

    surveillance program and rule enforcement review program.

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

    Proposed Sec. 37.1003 codifies Core Principle 10's statutory

    requirement that a SEF keep any records relating to security-based swap

    agreements defined in Section 1a(47)(A)(v) of the CEA open to

    inspection and examination by the Securities and Exchange Commission

    (``SEC'').\95\

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    \95\ CEA Section 5h(f)(10)(A)(iii).

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    11. Subpart L--Core Principle 11 (Antitrust Considerations)

    Core Principle 11 governs the antitrust obligations of SEFs.\96\

    This SEF core principle is substantially similar to DCM Core Principle

    19.\97\ The Commission believes that the existing guidance applicable

    to DCM Core Principle 19 remains appropriate. Accordingly, the

    Commission proposes to codify the statutory text of Core Principle 11

    into proposed Sec. 37.1100. Additionally, proposed Sec. 37.1101

    refers applicants and SEFs to the guidance in Appendix B to Part 37 for

    purposes of demonstrating compliance with proposed Sec. 37.1100.

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    \96\ Part 38 contains guidance governing compliance with former

    Core Principle 18. 17 CFR part 38, App. B.

    \97\ Prior to the Dodd-Frank Act, the DCM core principle on

    antitrust considerations was numbered as DCM Core Principle 18.

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    12. Subpart M--Core Principle 12 (Conflicts of Interest)

    Core Principle 12 governs conflicts of interest. Like Core

    Principle 11, Core Principle 12 is substantially similar to both the

    DCM and the DCO conflicts of interest core principles, as amended by

    the Dodd-Frank Act.\98\ As a result, the Commission proposes to handle

    Core Principle 12 consistent with its handling of those DCM and DCO

    core principles. This release proposes to codify the statutory text of

    the core principle in proposed Sec. 37.1200. The applicable

    regulations implementing this core principle were proposed in a

    separate release titled ``Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities Regarding the Mitigation of Conflicts of Interest.'' \99\

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    \98\ DCM Core Principle 16 and DCO Core Principle P, both as

    amended by the Dodd-Frank Act.

    \99\ 75 FR 63732 (October 18, 2010).

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    13. Subpart N--Core Principle 13 (Financial Resources)

    Core Principle 13 requires that a SEF have adequate financial

    resources to discharge its responsibilities. In particular, SEFs must

    maintain financial resources sufficient to cover operating costs for a

    period of at least one year, calculated on a rolling basis.

    a. General Rule

    Under proposed Sec. 37.1301(b), SEFs that also operate as DCOs are

    also subject to the financial resource requirements for DCOs in

    proposed Sec. 39.11. Proposed Sec. 37.1301(c) would require that SEFs

    maintain sufficient financial resources to cover operating costs for at

    least one year, calculated on a rolling basis--i.e., at all times. The

    one year period is required under the CEA. The Commission believes that

    a one-year timeframe would allow a SEF's business to wind down in an

    orderly fashion and should generally enhance the financial integrity of

    the markets.\100\

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    \100\ Some foreign regulatory authorities already have similar

    requirements for the equivalent entities they regulate. For example,

    the UK Financial Services Authority's (``FSA'') recognition

    requirements for UK recognized investment exchanges and UK

    recognized clearing houses (collectively, ``UK recognized bodies'')

    include the maintenance of financial resources sufficient to ensure

    that the UK recognized body would be able to complete an orderly

    closure or transfer of its business without being prevented from

    doing so by insolvency or lack of available funds. Section 2.3.7 of

    the FSA Recognition Requirements calls for a UK recognized body to

    have at all times liquid financial assets amounting to at least six

    months' operating costs and net capital of at least that amount.

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

    The one-year period also is consistent with established accounting

    standards, under which an entity's ability to continue as a going

    concern comes into question if there is evidence that the entity may be

    unable to continue to meet its obligations in the next 12 months

    without substantial disposition of assets outside the ordinary course

    of business, restructuring of debt, externally forced revisions of its

    operations, or similar actions.\101\

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    \101\ See American Institute of Certified Public Accountants

    Auditing Standards Board Statement of Auditing Standards No. 59, The

    Auditor's Consideration of an Entity's Ability to Continue as a

    Going Concern, as amended.

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    b. Types of Financial Resources

    Under proposed Sec. 37.1302, financial resources available to SEFs

    to satisfy the applicable financial requirements would include the

    SEF's own capital (assets in excess of liabilities) and any other

    financial resource deemed acceptable by the Commission. A SEF would be

    able to request an informal interpretation from CFTC staff on whether

    or not a particular financial resource would be acceptable.

    Request for Comment:

    The Commission invites commenters to recommend particular financial

    resources for inclusion in the final regulation.

    c. Computation of Financial Resource Requirement

    Proposed Sec. 37.1303 would require that a SEF, at the end of each

    fiscal quarter, make a reasonable calculation of the financial

    resources it needs to meet the requirements of proposed

    [[Page 1231]]

    Sec. 37.1301. In the first instance, the SEF would have reasonable

    discretion in determining how to make this calculation, the Commission

    may require changes as appropriate.

    d. Valuation of Financial Resources

    Proposed Sec. 37.1304 would require that SEFs, no less frequently

    than quarterly, calculate the current market value of each financial

    resource used to meet their obligations under these proposed

    regulations. Additionally, SEFs would have to perform the valuation at

    other times as appropriate. This provision is designed to address the

    need to update valuations in circumstances where there may have been

    material fluctuations in market value that could impact a SEF's ability

    to meet its obligations under proposed Sec. 37.1301. When valuing a

    financial resource, a SEF would be required to reduce the value, as

    appropriate, to reflect any market or credit risk specific to that

    particular resource, i.e., apply a haircut.\102\

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    \102\ The Commission would permit each SEF to exercise its

    discretion in determining the applicable haircuts. However, such

    haircuts are subject to Commission review and must be acceptable to

    the Commission.

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    e. Liquidity of Financial Resources

    Proposed Sec. 37.1305 would require that SEFs maintain

    unencumbered liquid financial assets, such as cash or highly liquid

    securities, equal to at least six months' operating costs. The

    Commission believes that having six months' worth of unencumbered

    liquid financial assets would give a SEF time to liquidate the

    remaining financial assets it would need to continue operating for the

    last six months of the required one-year period. If a SEF does not have

    six months' worth of unencumbered liquid financial assets, it would be

    allowed to use a committed line of credit or similar facility to

    satisfy this requirement.

    The Commission notes that a committed line of credit or similar

    facility is not listed in proposed Sec. 37.1302 as a financial

    resource available to a SEF to satisfy the requirements of proposed

    Sec. 37.1301. A SEF may only use such resources to meet the liquidity

    requirements of proposed Sec. 37.1305.

    f. Reporting Requirements

    Under proposed Sec. 37.1306, at the end of each fiscal quarter, or

    at any time upon Commission request, SEFs would be required to report

    to the Commission: (i) The amount of financial resources necessary to

    meet the requirements set forth in the regulation; and (ii) the value

    of each financial resource available to meet those requirements. A SEF

    would also have to provide the Commission with a financial statement,

    including the balance sheet, income statement, and statement of cash

    flows, of the SEF or of its parent company, as appropriate.

    14. Subpart O--Core Principle 14 (System Safeguards)

    Core Principle 14 requires that SEFs: (1) Establish and maintain a

    program of risk oversight to identify and minimize sources of

    operational risk through the development of appropriate controls and

    procedures and the development of automated systems that are reliable,

    secure, and have adequate scalable capacity; (2) establish and maintain

    emergency procedures, backup facilities, and a plan for disaster

    recovery that allow for the timely recovery and resumption of

    operations; and (3) periodically conduct tests to verify that backup

    resources are sufficient to ensure continued order processing and trade

    matching, price reporting, market surveillance, and maintenance of a

    comprehensive and accurate audit trail. Proposed Sec. 37.1401 would

    establish system safeguards requirements for all SEFs, pursuant to Core

    Principle 14.

    The proposed rule would require that a SEF's program of risk

    analysis and oversight address six categories of risk analysis and

    oversight, including: Information security; business continuity-

    disaster recovery (``BC-DR'') planning and resources, capacity and

    performance planning; systems operations; systems development and

    quality assurance; and physical security and environmental controls.

    Because automated systems play a central and critical role in

    today's electronic financial market environment, oversight of core

    principle compliance by SEFs with respect to automated systems is an

    essential part of effective oversight of the trading of swaps.

    Sophisticated computer systems will be crucial to a SEF's ability to

    meet its obligations and responsibilities. SEF compliance with

    generally accepted standards and best practices with respect to the

    development, operation, reliability, security and capacity of automated

    systems can reduce the frequency and severity of automated system

    security breaches or functional failures, thereby augmenting efforts to

    mitigate systemic risk.

    15. Subpart P--Core Principle 15 (Designation of Chief Compliance

    Officer)

    Section 5h(f)(15) of the CEA, as added by Section 733 of the Dodd-

    Frank Act, creates an internal regulatory framework for all SEFs, with

    the position of chief compliance officer (``CCO'') serving as a focal

    point for compliance with the CEA and applicable Commission

    regulations. The four-part structure of Section 5h(f)(15) requires,

    first, that every SEF designate an individual to serve as CCO. Second,

    it enumerates specific duties for CCOs and establishes their

    responsibilities within a SEF. Third, it requires CCOs to design the

    procedures establishing the handling, management response, remediation,

    retesting, and closing of noncompliance issues. Fourth, it outlines the

    requirements of a mandatory annual report from SEFs to the Commission,

    which must be prepared and signed by a SEF's CCO. The Commission

    proposes to implement Section 5h(f)(15) of the CEA through proposed

    Sec. 37.1501, which further develops the already robust CCO

    requirements enacted by the Dodd-Frank Act. Section 5h(f)(15) of the

    CEA and proposed Sec. 37.1501 are summarized below.

    The first provision of Section 5h(f)(15)-5h(f)(15)(A)--provides

    only for the self-explanatory requirement that each SEF designate an

    individual to serve as its CCO. The second provision of Section

    5h(f)(15) offers a detailed description of a CCO's role within a SEF.

    Specifically, Section 5h(f)(15)(B) includes six enumerated duties

    incumbent upon all CCOs, and thereby outlines the internal regulatory

    structure of a SEF as contemplated by the Dodd-Frank Act. The

    enumerated duties of CCOs include: (1) Reporting directly to the SEF's

    board of directors or to its senior officer; (2) reviewing an SEF's

    compliance with the requirements and core principles described in

    Section 5h; (3) resolving any conflicts of interest that may arise, in

    consultation with the board of directors or the senior officer of the

    SEF; (4) establishing and administering any policy or procedure that is

    required to be established by a SEF pursuant to Section 5h; (5)

    ensuring compliance with the CEA, including rules prescribed by the

    Commission pursuant to Section 5h; and (6) establishing procedures for

    the remediation of noncompliance issues identified by the CCO. The

    third provision of Section 5h(f)(15) provides that the CCO in

    establishing and following appropriate procedures shall design such

    procedures for the handling, management response, remediation,

    retesting, and closing of noncompliance issues.

    Finally, the fourth provision of Section 5h(f)(15)-5h(f)(15)(D)--

    requires CCOs to prepare and sign annual compliance reports on behalf

    of their

    [[Page 1232]]

    SEFs. The annual compliance reports must describe a SEF's compliance

    with the CEA and Commission regulations. They must also describe the

    policies and procedures of the SEF, including the code of ethics and

    conflict of interest policies. In addition, the annual compliance

    reports must include ``a certification that, under penalty of law, the

    report is accurate and complete.'' The annual compliance report must be

    furnished to the Commission as it may prescribe.

    Proposed subpart P develops each of these statutory provisions in

    greater detail and grants CCOs the regulatory authority necessary to

    fulfill responsibilities in each regard.

    a. Definition of Board of Directors--Proposed Sec. 37.1501(a)

    Proposed Sec. 37.1501(a) defines ``board of directors'' as ``the

    board of directors of a swap execution facility or for those swap

    execution facilities whose organizational structure does not include a

    board of directors, a body performing a function similar to a board of

    directors.'' The proposed definition reflects the various forms of

    business associations which a SEF could conceivably take, including

    forms which do not include a corporate board of directors. It also

    reflects the flexibility in Section 733 of the Dodd-Frank Act, which

    refers, for example, to ``a body performing a function similar to a

    board'' in discussing the duties of a CCO pursuant to Section

    5h(f)(15)(B)(iii) of the CEA.

    Request for Comment:

    The Commission requests comment on the following:

    Should the Commission develop additional rules around the

    types of bodies which may perform board-like functions at a SEF,

    depending on their business form?

    Should the proposed definition of board of directors

    appropriately address issues related to parent companies, subsidiaries,

    affiliates, and SEFs located in foreign jurisdictions? Does the

    proposed rule allow for sufficient flexibility with regard to a SEF's

    business structure?

    b. Designation and Qualifications of Chief Compliance Officer--Proposed

    Sec. 37.1501(b)

    Proposed Sec. 37.1501(b)(1) requires a SEF to establish the

    position of CCO, designate an individual to serve in that capacity and

    provide that individual with the authority and resources to develop and

    enforce policies and procedures necessary to fulfill the duties set

    forth for CCOs in the Dodd-Frank Act and Commission regulations. In

    addition, proposed Sec. 37.1501(b)(1) provides that CCOs must have

    supervisory authority over all staff acting in furtherance of the CCO's

    statutory and regulatory obligations. In short, proposed Sec.

    37.1501(b)(1) establishes CCOs as the focal point of a SEF's regulatory

    compliance functions.

    Proposed Sec. 37.1501(b)(2) details minimum competency standards

    for CCOs. It requires that CCOs have the background and skills

    necessary to fulfill the responsibilities of the position, and

    prohibits anyone who would be disqualified from registration under

    Sections 8a(2) or 8a(3) of the CEA from serving as a CCO. Although the

    CCO would not be required to register with the Commission, as the

    primary individual with responsibility for ensuring a SEF's legal

    compliance, the Commission believes that CCOs should meet the same

    standard as those individuals who are required to register, as set

    forth in the list of statutory disqualifications under Sections 8a(2)

    and (3) of the CEA. These standards largely consist of a high degree of

    responsibility and requirements relating to integrity and honesty in

    financial and business dealings. Section 37.1501(b)(2) also requires

    that a CCO not serve as general counsel of a SEF. This prohibition

    reflects the Commission's belief that granting these dual roles to a

    single individual is incompatible with effective regulation and self-

    regulation.\103\

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    \103\ As conceived by the Commission, SEF CCOs have overall

    responsibility for SEFs' compliance programs. CCOs must be neutral

    fact-finders, and must be able to act in the interest of effective

    compliance regardless of the persons, entities, or conduct that may

    be the subject of investigation. In contrast, an entity's general

    counsel serves as the legal counsel and defender of a company and

    seeks to avoid or negate related legal risks. A second basis for the

    separation of the general counsel and CCO roles is the Commission's

    determination that an individual acting as CCO should not be in a

    position to assert attorney-client privilege against the Commission.

    If a SEF's CCO were also its general counsel, much of the

    information about its compliance program could potentially be

    protected from third-party review, including the Commission's, under

    the shroud of attorney-client privilege. While there may be

    circumstances where the attorney-client privilege could be asserted

    by a SEF, the Commission believes that such circumstances do not

    include the areas of responsibility assigned to CCOs by the CEA or

    Commission regulations.

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

    Request for Comment:

    The Commission is seeking comment on whether additional limitations

    should be placed on persons who may be designated as a CCO.

    The Commission requests comment on whether the provisions

    of proposed Sec. 37.1501(b) are sufficient to ensure that a CCO has

    the authority and resources necessary to fulfill his or her statutory

    and regulatory obligations.

    The Commission also requests comment regarding the

    qualifications that should be required of a CCO, and whether the

    requirements expressed in proposed Sec. 37.1501(b) are sufficient.

    Should there be additional restrictions placed on who is

    qualified to be designated as a CCO? The Commission requests comment on

    whether restricting a CCO from serving as the General Counsel or other

    attorney within the legal department of a SEF would sufficiently

    address conflict of interest concerns?

    c. Appointment, Supervision, and Removal of Chief Compliance Officer--

    Proposed Sec. 37.1501(c)

    Taken together, proposed Sec. Sec. 37.1501(c)(1), 37.1501(c)(2),

    and 37.1501(c)(3) provide the supervisory regime applicable to CCOs.

    Proposed Sec. 37.1501(c) requires that a CCO be appointed by a

    majority of the SEF's board of directors or senior officer, and that a

    majority of the board or senior officer be responsible for approving

    the CCO's compensation. A SEF must notify the Commission within two

    business days of appointing a new CCO. The proposed regulation also

    requires the CCO to meet at least annually with the board of directors

    to discuss the effectiveness of the CCO's administration of the

    compliance policies adopted by the registrant. The meeting or meetings

    would create an opportunity for a CCO and the directors to speak freely

    about any sensitive issues of concern to any of them, including any

    reservations about the cooperativeness or compliance practices of the

    registrant's management. The Commission's governance proposals require

    that each SEF's board of directors include a board-level regulatory

    oversight committee (``ROC'') consisting exclusively of public

    directors.\104\ The Commission believes

    [[Page 1233]]

    that ROCs will help to mitigate potential conflicts of interest within

    a SEF by introducing an independent perspective to board

    deliberations.\105\ The Commission also believes that both CCOs and

    ROCs will be strengthened in their regulatory work and independence

    through close cooperation and coordination. Although a CCO is not

    required to report to his or her ROC, proposed Sec. 37.1501(c)(1)

    provides that a CCO must meet with the ROC quarterly to discuss matters

    of mutual concern and share information. These meetings will create an

    opportunity for a CCO and the ROC to speak freely about potentially

    sensitive issues, including any reservations by the CCO regarding the

    SEF's management. They will also facilitate the ROC's oversight

    responsibilities, and allow the CCO to seek assistance and

    institutional support from the ROC as necessary.

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

    \104\ Proposed Sec. 37.1501(a) defines board of directors for

    purposes of subpart P as follows: ``the board of directors or board

    of governors of a swap execution facility, or equivalent governing

    body of a swap execution facility or of an entity operating a swap

    execution facility.'' The proposed definition reflects the various

    forms of business associations which a SEF could take, including

    forms which do not include a corporate board of directors. With

    respect to boards of directors and ROCs, the Commission notes that

    in a separately proposed series of regulations governing conflicts

    of interest within SEFs, DCMs, and DCOs, the Commission proposes a

    number of governance measures that impact the proposed regulations

    for CCOs. First, proposed Sec. 40.9(b)(1)(i) requires a SEF's board

    of directors to be composed of at least 35%, but no less than two,

    public directors. Second, proposed Sec. 40.9(b)(2) prohibits a SEF

    from ``permit[ing] itself to be operated by any entity'' that does

    not adhere to the board composition requirements of 40.9(b)(1)(i).

    Third, proposed Sec. 37.19(b)(3) requires a SEF to have a board-

    level ROC consisting exclusively of public directors.

    \105\ See proposed Sec. 37.19(b)(1) for a description of a

    ROC's role in overseeing the performance of a CCO and effectiveness,

    efficiency, and independence of a SEF's regulatory and self-

    regulatory programs.

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

    Finally, proposed Sec. 37.1501(c)(1) also provides that the senior

    officer of a SEF may assume responsibility for appointing the CCO and

    approving his or her compensation.

    Proposed Sec. 37.1501(c)(2) addresses routine oversight of a SEF's

    CCO. It allows a SEF with a board of directors to grant oversight

    authority to either its board or to its senior officer. The proposed

    regulation is modeled on the terms of Section 5h(f)(15)(B)(i) of the

    CEA, which requires a CCO to ``report directly to the board or to the

    senior officer of the facility.''

    Request for Comment:

    The Commission requests comment regarding the appropriate reporting

    relationship for the CCO of a SEF that has both a senior officer and a

    board of directors.

    In such cases, should a CCO report to the SEF's board

    rather than to its senior officer?

    What potential conflicts of interest might arise if a CCO

    reports to the senior officer rather than to the board, and how might

    those conflicts be mitigated?

    In addition, the Commission requests comment regarding

    whether ``senior officer'' of a SEF should be a defined term, and if

    so, how the term should be defined.

    d. Removal of CCO--Proposed Sec. 37.1501(c)(3)

    Proposed Sec. 37.1501(c)(3) requires approval of a majority of an

    SDR's board of directors to remove a CCO. The Commission believes that

    these removal provisions will help insulate CCOs and their decision-

    making from day-to-day commercial pressures that they may otherwise

    experience. If a SEF does not have a board, the proposed regulation

    provides that the CCO may be removed by its senior officer. Proposed

    Sec. 37.1501(c)(3) also requires an SDR to notify the Commission in

    writing within two business days of the removal or voluntary departure

    of its CCO by providing a statement describing the circumstances

    surrounding his or her departure.\106\ The Commission believes that

    this provision will help protect CCOs from undue influence or

    retaliatory termination by the board or the senior officer of the SEF.

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    \106\ Upon the departure of a CCO, proposed Sec. 37.1501(c)(3)

    requires a SEF to appoint an interim CCO immediately and a permanent

    replacement as soon as practicable.

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

    Proposed Sec. Sec. 37.1501(c)(1) and 37.1501(c)(3) seek to provide

    a SEF's CCO with a measure of independence from management in the

    performance of his or her duties, and to ensure that such duties are

    executed in the most effective and impartial manner possible.

    Request for Comment:

    The Commission requests comment on any additional measures that

    should be required to adequately protect CCOs from undue influence in

    the performance of their duties. The Commission is particularly

    interested in how it might offer such protection to a CCO who reports

    to his or her senior officer, either at the SEF's choosing or because

    the SEF does not have a board of directors. In addition, the Commission

    also requests comment on whether the provision that would require a

    majority of a board of directors to remove the CCO is sufficiently

    specific.

    e. Duties of the Chief Compliance Officer--Proposed Sec. 37.1501(d)

    Proposed Sec. 37.1501(d) details the duties of a CCO, as well as

    his or her authority within a SEF. The proposed regulation codifies and

    expands upon the CCO duties already set forth in Section 5h(f)(15)(B)

    of the CEA. These duties include overseeing and reviewing compliance

    with the CEA and Commission regulations, as well as resolving, in

    consultation with the board of directors or the senior officer, any

    conflicts of interest that may arise. The proposed regulation also

    lists a number of potential conflicts that may confront a CCO. The list

    of conflicts of interest indicates the types of conflicts that the

    Commission believes a SEF's CCOs should be aware of, but it is not

    exhaustive.

    Proposed Sec. 37.1501(d) also requires that the CCO establish and

    administer a written code of ethics and policies and procedures

    designed to prevent violations of the CEA and Commission regulations.

    Section 37.1501(d) also requires that a CCO establish and administer

    written policies and procedures, including a ``compliance manual,''

    designed to prevent violations of the CEA and Commission

    regulations.\107\

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    \107\ By ``compliance manual,'' the Commission means a detailed

    internal handbook explaining to SEF staff the resources and

    procedures that they are to use in monitoring trading, conducting

    investigations, documenting their work, and making findings and

    recommendations to supervisory staff regarding trading in any swap

    or other conduct by SEF members and market participants that is

    subject to SEF rules. The Commission believes that such written

    documentation will serve as a useful guide for the SEF's management

    and staff. It will also help the Commission evaluate the SEF's

    compliance and adherence to its own internal standards.

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

    The Commission believes that such written documentation will serve

    as a useful guide for the SEF's management and staff, as well as for

    swap participants who will be trading on the SEF. It will also help the

    Commission to evaluate the SEF's compliance and adherence to its own

    internal standards. Finally, proposed Sec. 37.1501(d) requires that a

    CCO establish and follow procedures for the remediation and closing of

    any noncompliance issues that are identified. To assist the CCO in

    meeting this responsibility, proposed Sec. 37.1501(b)(1), summarized

    above, grants a CCO oversight authority over all compliance functions

    and staff acting in furtherance of those compliance functions. The

    CCO's authority would also extend to any activities performed by the

    SEF to verify that other entities are in compliance with applicable

    laws and regulations, such as the verification of the timeliness of

    reporting certain swap data, pursuant to proposed Sec. 37.901. The

    Commission recognizes that the staff that assists a CCO may not be

    dedicated to the CCO full-time; however, the proposed regulation would

    ensure that a CCO has authority over any staff and resources while they

    are acting in furtherance of compliance functions.

    Section 37.1501(d), for example, reflects the statutory text of the

    Dodd-Frank Act by requiring that a CCO review and ensure a SEF's

    compliance

    [[Page 1234]]

    with the CEA and Commission regulations. It also reflects a CCO's

    responsibilities with respect to the regulation of members and market

    participants utilizing a SEF's trading platform. In this regard,

    Section 37.1501(d)(8) requires that a CCO supervise a SEF's self-

    regulatory program with respect to trade practice surveillance; market

    surveillance; real-time market monitoring; compliance with audit trail

    requirements; enforcement and disciplinary proceedings; and audits,

    examinations, and other regulatory responsibilities with respect to

    members and market participants. Similarly, Section 37.1501(d)(9)

    requires that a CCO supervise the effectiveness and sufficiency of any

    regulatory services provided to the SEF by a registered futures

    association or other registered entity in accordance with Sec.

    37.204.\108\

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

    \108\ See proposed Sec. 37.204 (governing a SEF's use of third-

    party regulatory service providers and its duty to supervise such

    providers and any services received).

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

    Request for Comment:

    The Commission requests comment regarding proposed Sec.

    37.1501(d). Comments should address any additional CCO duties which the

    Commission should include in the proposed regulation. In addition, they

    should specifically address a CCO's role in managing conflicts of

    interest within a SEF, the types of conflicts which commenters believe

    might arise within a SEF, and how and by whom those conflicts should be

    resolved.

    f. Preparation and Submission of Annual Compliance Report--Proposed

    Sec. Sec. 37.1501(e) and 37.1501(f)

    Section 5h(f)(15)(D) of the CEA requires a CCO to prepare an annual

    compliance report. As discussed above, the Commission believes that

    this annual compliance report should give the Commission a complete and

    accurate picture of a SEF's compliance program. Proposed Sec.

    37.1501(e) details the information that must be included in the annual

    compliance report. The report must include: (i) A description of the

    SEF's written policies and procedures, code of ethics and conflicts of

    interest policies; (ii) a detailed review of the SEF compliance with

    Section 5h of the CEA, including an assessment by the CCO of the

    effectiveness of the SEF's policies and procedures in ensuring

    compliance with Section 5h of the CEA and a discussion of areas for

    improvement; (iii) a description of any material changes to the

    policies and procedures that were made to these since the last annual

    compliance report; (iv) a description of the financial, managerial,

    operational, and staffing resources set aside for the SEF's compliance

    program, including a description of the SEF's compliance program,

    describing resources set aside for the SEF's self-regulatory

    responsibilities. An annual compliance report must also provide: a

    detailed description and review of the SEF's self-regulatory program,

    which includes a description of staff associated with self-regulation,

    a catalogue of investigations and disciplinary actions taken, and a

    review of the performance of disciplinary committees and panels; (v) a

    description of any material compliance matters, including instances of

    noncompliance, that were identified in the year prior to the filing of

    the report; and (vi) any objections to the annual compliance report by

    the board or senior officer of the SEF. In addition to the above

    information, proposed Sec. 37.1501(e) also requires the annual report

    to include a certification by the CCO that, under penalty of law, the

    compliance report is accurate and complete.

    Proposed Sec. 37.1501(f)(1) sets forth the procedures for the

    review of the annual compliance report by the board of directors of the

    SEF or senior officer, prior to submission to the Commission. While the

    board or senior officer has a chance to review the annual compliance

    report before submission, the report is not subject to their approval.

    Proposed Sec. 37.1501(f)(1) explicitly prohibits the board or senior

    officer from forcing the CCO to make any material changes to the

    report. The purpose of this review is to permit the members of the

    board or the senior officer to provide the Commission with any

    objections they might have to the report. The Commission believes that

    the prohibition against the board and senior officer making changes to

    the annual compliance report will allow the CCO to make a complete and

    accurate assessment of the SEF's compliance program.

    Proposed Sec. 37.1501(f)(2) describes the process for submission

    of the report to the Commission. The proposed regulation requires that

    the annual compliance report be electronically provided to the

    Commission not more than 60 days after the end of the calendar year. If

    a CCO determines that an annual compliance report filed with the

    Commission has a material error or if material non-compliance is

    identified after filing, proposed Sec. 37.1501(f)(3) would require a

    SEF to promptly file an amended report. This amended report must also

    include the certification by the CCO as to the accuracy and

    completeness made in the initial submission of the report. If a CCO is

    unable to file an annual compliance report within 60 days of the end of

    the calendar year, proposed Sec. 37.1501(f)(4) would permit a CCO to

    request the Commission to grant an extension of time to file its

    compliance report based on substantial undue hardship. Extensions for

    the filing deadline would be granted at the discretion of the

    Commission. Additionally, to protect the trade secrets of the SEF and

    the security of the data held by the SEF, the proposed regulation

    requires that annual compliance reports filed pursuant to Sec. 37.1501

    be treated as exempt from mandatory public disclosure for purposes of

    FOIA and the Sunshine Act and parts 145 and 147 of Commission

    regulations.

    Request for Comment:

    The Commission requests comment on its proposed regulations

    regarding the preparation and submission of a SEF's annual compliance

    report.

    Should the annual compliance report contain additional

    content beyond what is proposed in Sec. 37.1501(e)? Are additional

    provisions necessary to ensure that a SEF's board of directors cannot

    adversely influence the content of an annual compliance report as

    drafted by the CCO?

    In the alternative, are additional provisions necessary to

    ensure that individual directors or other SEF employees have an

    adequate opportunity to register any concerns or objections they might

    have to the contents of an annual compliance report?

    The Commission also requests comment relating to insulating a SEF's

    CCO from undue influence or coercion.

    Should the Commission adopt a regulation that prohibits an

    officer, director or employee of the SEF or related person to coerce,

    manipulate, mislead, or fraudulently influence the CCO in performing

    his or her duties?

    Is it necessary to adopt regulations to address potential

    conflicts between and among a SEF's compliance, commercial, and

    ownership interests?

    If so, what should such regulations entail, and what

    specific conflicts of interest should they address?

    g. Recordkeeping--Proposed Sec. 37.1501(g)

    Proposed Sec. 37.1501(g) details SEFs' recordkeeping requirements

    for records relating to a CCO's areas of responsibility. This proposed

    regulation requires a SEF to maintain: (i) A copy of its written

    policies and procedures,

    [[Page 1235]]

    including its code of ethics and conflicts of interest policies; (ii)

    copies of all materials created in furtherance of the chief compliance

    officer's self-regulatory duties, including records of any

    investigations or disciplinary actions taken by the SEF; (iii) copies

    of all materials, including written reports provided to the board of

    directors in connection with review of the annual report, as well as

    the board minutes or other similar written records, that record the

    submission of the annual compliance report to an SEF's board of

    directors or its senior officer; and (iv) any other records relevant to

    an SEF's annual report. The records required to be maintained pursuant

    to this section are designed to provide Commission staff with a basis

    to determine whether a SEF has complied with the CEA and applicable

    Commission regulations. The Commission also wants to preserve its

    ability to reconstruct why certain information was included or excluded

    in an annual report, in the event that such reconstruction becomes

    necessary under a future audit or investigation.

    The SEF would be required to maintain these records in accordance

    with Sec. 1.31 of the Commission's regulations. Following Sec. 1.31,

    all records must be kept for a period of five years.

    Request for Comment:

    The Commission requests comment regarding whether the requirements

    of proposed Sec. 37.1501(g) are sufficient to create a complete and

    easily auditable record of a board of directors' or senior officer's

    review of an annual compliance report to ensure that the report, as

    drafted by the CCO, was not altered.

    III. Effective Date and Transition Period

    The statutory deadline for final regulations is July 15, 2011.

    Final regulations may become effective sixty (60) days after their

    publication in the Federal Register, but no earlier than July 15, 2011.

    The Commission is proposing that the effective date for the proposed

    regulations be 90 days after publication of final regulations in the

    Federal Register. The Commission believes that the effective date would

    be appropriate to allow potential SEFs and market participants time to

    adapt to the new regulatory regime for the trading of swaps in an

    efficient and orderly manner. In addition, the Commission believes that

    this would give any entities then operating a marketplace for the

    execution or trading of swaps adequate time to submit a SEF application

    and meet the conditions to receive relief under the grandfather

    provisions.

    Request for Comment:

    The Commission requests comment on whether the proposed effective

    date is appropriate and, if not, the Commission further requests

    comment on possible alternative effective dates and the basis for any

    such alternative dates.

    IV. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \109\ requires Federal

    agencies, in promulgating regulations, to consider the impact of those

    regulations on small businesses. The regulations adopted herein will

    affect SEFs. 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.\110\ In its previous determinations, the

    Commission has concluded that DCMs, derivatives transaction execution

    facilities (``DTEFs''), ECMs, EBOTs and DCOs are not small entities for

    the purpose of the RFA.\111\

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

    \109\ 5 U.S.C. 601 et seq.

    \110\ 47 FR 18618-21 (Apr. 30, 1982).

    \111\ 47 FR 18618, 18619 (April 30, 1982) discussing contract

    markets; 66 FR 42256, 42268 (August 10, 2001) discussing derivatives

    transaction execution facilities, exempt commercial markets and

    exempt boards of trade; and 66 FR 45604, 45609 (August 29, 2001)

    discussing DCOs.

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

    While SEFs are new entities to be regulated by the Commission

    pursuant to the Dodd-Frank Act,\112\ in a recent rulemaking

    proposal,\113\ the Commission proposed that SEFs should not be

    considered as small entities for the purpose of the RFA. The Dodd-Frank

    Act defines a SEF to mean ``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.'' \114\ In its

    recent rulemaking, the Commission proposed that SEFs not be considered

    to be ``small entities'' for essentially the same reasons that DCMs and

    DCOs have previously been determined not to be small entities. These

    reasons include the fact that the Commission designates a DCM or

    registers a DCO only when it meets specific criteria including

    expenditure of sufficient resources to establish and maintain adequate

    self-regulatory programs. Likewise, the Commission will register an

    entity as a SEF only after it has met specific criteria including the

    expenditure of sufficient resources to establish and maintain an

    adequate self-regulatory program. In addition, once registered, a SEF

    will be required to comply with the additional requirements set forth

    in the final form of this proposed Part 37 rulemaking. In addition, the

    Commission proposes that SEFs should not be considered small entities

    based on, among other things, the central role SEFs will play in the

    national regulatory scheme overseeing the trading of swaps. Not only

    will SEFs play a vital role in the national economy, but they will be

    subject to Commission oversight with statutory duties to enforce the

    regulations adopted by their own governing bodies.

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

    \112\ Dodd Frank Wall Street Reform and Consumer Protection Act,

    Pub. L. 111-203, 124 Stat. 1376 (2010).

    \113\ 75 FR 63745-46 (October 18, 2010).

    \114\ See CEA Section 1a(50). The Commission anticipates

    proposing regulations that would further specify those entities that

    must register as a SEF. The Commission does not believe that such

    proposals would alter its determination that a SEF is not a ``small

    entity'' for purposes of the RFA.

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

    Accordingly, the Commission does not expect the regulations, as

    proposed herein, to have a significant economic impact on a substantial

    number of small entities. Therefore, the Chairman, on behalf of the

    Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the

    proposed regulations will not have a significant economic impact on a

    substantial number of small entities. The Commission invites the public

    to comment on whether SEFs covered by these rules should be considered

    small entities for purposes of the RFA.

    B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \115\ 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 person is not required to

    respond to, a collection of information unless it displays a currently

    valid control number. This proposed rulemaking will result in new

    collection of information requirements within the meaning of the PRA.

    The Commission therefore is submitting this proposal to the Office of

    Management and Budget (OMB) for review in accordance with 44 U.S.C.

    3507(d) and 5 CFR 1320.11. The title for this collection of information

    is ``Part 37--Swap Execution Facilities'' (OMB control number 3038-

    NEW). If adopted, responses to this collection of information would be

    mandatory. The Commission will protect proprietary

    [[Page 1236]]

    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.'' \116\ The Commission is also required to protect certain

    information contained in a government system of records according to

    the Privacy Act of 1974.\117\

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

    \115\ 44 U.S.C. 3501 et seq.

    \116\ 7 U.S.C. 12(a)(1).

    \117\ 5 U.S.C. 552a.

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

    1. Collection of Information--Regulations Relating to Part 37, Swap

    Execution Facilities

    The proposed regulations require each respondent to file

    information with the Commission. For instance, SEFs must file

    applications with the Commission for registration pursuant to Sec.

    37.3. SEFs must either request approval with, or certify to, the

    Commission rules and products, pursuant to Sec. 37.4. SEFs must

    disclose information related to prices, trading volume, and other

    trading data on swaps pursuant to Core Principle 9 (Timely Publication

    of Trading Information).

    Commission staff has previously estimated hourly burdens for DCMs

    and DTEFs pursuant to the Commodity Futures Modernization Act of 2000

    (``CFMA'').\118\ More recently, Commission staff estimated hourly

    burdens for ECMs with significant price discovery contracts

    (``SPDCs''). While the Commission has no way of knowing the exact

    hourly burden upon a registered entity prior to implementation of the

    regulations governing that registered entity, staff believes the

    estimated burden for a SEF would be within the range of previously

    estimated hours of burden for the above registered entities. Those

    hourly burdens are noted below:

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

    \118\ Appendix E of Public Law 106-554, 114 Stat. 2763 (2000).

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

    Initial estimate of DCM's annual burden \119\: 300 hours per DCM.

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

    \119\ 66 FR 38992 (June 22, 2000).

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

    Estimate of DCM's annual burden as of 2006 \120\: 370 hours per

    DCM.

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

    \120\ 71 FR 38748 (July 7, 2006).

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

    Current estimate of DCM's annual burden \121\: 440 hours per DCM.

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

    \121\ See, supra note 10, DCM NPRM.

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

    Initial estimate of DTEF's annual burden \122\: 200 hours per DTEF.

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

    \122\ 65 FR 38993 (June 22, 2000).

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

    Initial estimate of ECM's with SPDCs annual burden \123\: 233 hours

    per ECM.

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

    \123\ 73 FR 75901 (December 12, 2008).

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

    Based on the proposed regulations, Commission staff believes that a

    SEF will have more reporting responsibilities than an ECM with a SPDC

    and a DTEF, but fewer reporting hours than a DCM (as most recently

    calculated).\124\ Based on its experience with administering registered

    entities' submission requirements since implementation of the CFMA,

    Commission staff estimates an annual reporting burden for SEFs to be an

    average of the above noted estimates for DCMs, DTEFs and ECMs with

    SPDCs.

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

    \124\ ECMs with SPDCs are subject to 9 core principles, DTEFs

    are subject to 9 core principles, DCMs are currently subject to 18

    core principles, (but will be subject to 23 core principles upon

    finalization of the Part 38 regulations implementing the Dodd-Frank

    Act). SEFs will be subject to 15 core principles upon finalization

    of the regulations to implement the Dodd-Frank Act.

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

    Staff estimates that each respondent would, on average, have an

    annual burden of 308 hours of reporting time. Staff estimates that 30-

    40 SEFs will register with the Commission as a result of the Dodd-Frank

    Act.\125\ Accordingly, the burden in terms of hours would in the

    aggregate be 308 hours annually per respondent and 10,780 hours

    annually for all respondents.

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

    \125\ For hourly reporting requirements, an average of 35 SEFs

    was used for calculation purposes.

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

    Commission staff estimates that respondents could expend up to

    $16,016 annually based on an hourly rate of $52 to comply with the

    proposed regulations. This would result in an aggregated cost of

    $560,560 per annum (35 respondents x $16,016).

    Estimated Number of respondents: 35.

    Annual Responses by each respondent: 1.

    Total annual responses: 35.

    Quarterly responses by each respondent: 4.

    Total quarterly responses: 140.

    Estimated average hours per response: 308.

    Aggregate annual reporting burden: 10,780.

    2. Information Collection Comments

    Copies of the supporting statements for the collections of

    information from the Commission to OMB are available by visiting

    RegInfo.gov. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission will

    consider public comments on the proposed information requirements in

    order to:

    (1) Evaluate whether the proposed collections of information are

    necessary for the proper performance of the functions of the

    Commission, including whether the information will have a practical

    use;

    (2) Evaluate the accuracy of the estimated burden of the

    proposed information collection requirements, including the degree

    to which the methodology and the assumptions that the Commission

    employed were valid;

    (3) Enhance the quality, utility, and clarity of the information

    proposed to be collected; and

    (4) Minimize the burden of the proposed information collection

    requirements on DCOs, DCMs, and SEFs, including through the use of

    appropriate automated, electronic, mechanical, or other

    technological information collection techniques, e.g., permitting

    electronic submission of responses.

    Organizations and individuals desiring to submit comments on the

    proposed information collection requirements should contact the Office

    of Information and Regulatory Affairs, Office of Management and Budget

    by fax at (202) 395-6566 or by e-mail at OIRAsubmission@omb.eop.gov.

    Please provide the Commission with a copy of submitted comments so that

    they may be summarized and address in the final rulemaking. Refer to

    the ADDRESSES section of this notice of proposed rulemaking for comment

    submission instructions to the Commission.

    OMB is required to make a decision concerning the proposed

    information collection requirements between 30 and 60 days after

    publication of this Release in the Federal Register. Therefore, a

    comment to OMB is best assured of receiving full consideration if OMB

    receives it within 30 days of publication of this Release. Nothing in

    the foregoing affects the deadline enumerated above for public comment

    to the Commission on the proposed regulations.

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA \126\ requires that the Commission

    consider the costs and benefits of its actions before issuing a

    regulation under the CEA. By its terms, Section 15(a) does not require

    the Commission to quantify the costs and benefits of a new rule or

    determine whether the benefits of the rulemaking outweigh its costs;

    rather, Section 15(a) requires the Commission to ``consider'' the costs

    and benefits of its actions.

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

    \126\ 7 U.S.C. 19(a).

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

    Section 15(a) further specifies that costs and benefits shall be

    evaluated in light of 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. Accordingly, the Commission could, in its

    discretion, give greater weight to any one of the five considerations

    and could, in its discretion, determine that,

    [[Page 1237]]

    notwithstanding its costs, a particular rule was necessary or

    appropriate to protect the public interest or to effectuate any of the

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

    Summary of Proposed Requirements

    The proposed rulemaking would provide, pursuant to the Dodd-Frank

    Act, for the trading or processing of swaps on a registered SEF subject

    to 15 core principles. This rulemaking will implement, in Part 37 of

    the Commission's regulations, these provisions of the CEA. The proposal

    includes regulations as well as guidance and acceptable practices to

    implement these core principles. In general, the proposed regulations

    implementing core principles for SEFs are consistent with the existing

    or proposed regulations for similar or identical core principles

    applicable to DCMs.

    Costs

    As highlighted by recent events in the global credit markets,

    transacting of swaps in unregulated, over-the-counter markets does not

    contribute to the goal of stability in the broader financial markets.

    The public would continue to be at risk to such financial instability

    if certain derivatives were allowed to trade over the counter rather

    than on regulated exchanges. SEFs that determine to register with the

    Commission in order to provide for the transacting of swaps will be

    subject to core principles for transacting of swaps. If swaps were

    allowed to continue to be transacted bilaterally, rather than on the

    regulated market of a SEF, price discovery and transparency in the

    swaps markets would continue to be inhibited. These procedures are

    mandatory pursuant to the Dodd-Frank Act and any additional costs

    associated with these procedures are required by the implementation of

    the Dodd-Frank Act.

    Benefits

    The Commission believes that the benefits of the rulemaking are

    significant. The proposed regulations provide for the transacting of

    swaps on SEFs. SEFs will compete with DCMs that make certain swaps

    available for trading, while certain swaps will continue to transact

    bilaterally. This competition will benefit the marketplace. Providing

    market participants with the ability to trade certain swaps openly and

    competitively on a SEF complying with all of the SEF core principles as

    well as on DCMs complying with DCM core principles will provide market

    participants with additional choices and will enhance price

    transparency resulting in protection of market participants and the

    public. The proposed regulations will necessitate that SEFs that

    determine to make certain swaps available for trading will have to

    coordinate with DCOs in order to effect clearing and thus be subject to

    the DCO's risk management and margining procedures.

    Request for Comment:

    The Commission invites public comment on its cost-benefit

    considerations. Commenters are also invited to submit any data or other

    information that they may have quantifying or qualifying the costs and

    benefits of the proposal with their comment letters.

    V. Text of the Proposed Regulations, Guidance and Acceptable Practices

    List of Subjects in 17 CFR Part 37

    Swaps, Swap execution facilities, Registration application,

    Registered entities, Reporting and recordkeeping requirements.

    In light of the foregoing, and pursuant to authority in the CEA,

    and, in particular, Sections 3, 5, 5c(c), 8a(5) and 21 of the CEA, the

    Commission hereby proposes to revise part 37 of Title 17 of the Code of

    Federal Regulations to read as follows:

    PART 37--SWAP EXECUTION FACILITIES

    Subpart A--General Provisions

    Sec.

    37.1 Scope.

    37.2 Applicable provisions.

    37.3 Requirements for registration.

    37.4 Procedures for listing products and implementing rules.

    37.5 Information relating to swap execution facility compliance.

    37.6 Enforceability.

    37.7 Prohibited use of data collected for regulatory purposes.

    37.8 Boards of trade operating both a designated contract market and

    a swap execution facility.

    37.9 Permitted execution methods.

    37.10 Assessments regarding transactional tiers or platform and

    swaps made available for trading.

    37.11 Identification of non-cleared swaps or swaps not made

    available to trade.

    Subpart B--Compliance with Core Principles

    Sec.

    37.100 Core Principle 1--Compliance with core principles.

    Subpart C--Compliance with Rules

    Sec.

    37.200 Core Principle 2--Compliance with rules.

    37.201 Operation of swap execution facility and compliance with

    rules.

    37.202 Access requirements.

    37.203 Rule enforcement program.

    37.204 Regulatory services provided by a third party.

    37.205 Audit trail requirements.

    37.206 Disciplinary procedures and sanctions.

    37.207 Swaps subject to mandatory clearing.

    Subpart D--Swaps Not Readily Susceptible to Manipulation

    Sec.

    37.300 Core Principle 3--Swaps not readily susceptible to

    manipulation.

    37.301 General requirement.

    Subpart E--Monitoring of Trading and Trade Processing

    Sec.

    37.400 Core Principle 4--Monitoring of trading and trade processing.

    37.401 General requirements.

    37.402 Additional requirements for physical-delivery swaps.

    37.403 Additional requirements for cash-settled swaps.

    37.404 Ability to obtain information.

    37.405 Risk controls for trading.

    37.406 Trade reconstruction.

    37.407 Additional rules required.

    Subpart F--Ability to Obtain Information

    Sec.

    37.500 Core Principle 5--Ability to obtain information.

    37.501 Establish and enforce rules.

    37.502 Collection of information.

    37.503 Provide information to the commission.

    37.504 Information-sharing agreements.

    Subpart G--Position Limits or Accountability

    Sec.

    37.600 Core Principle 6--Position limits or accountability.

    37.601 Position limits or accountability.

    Subpart H--Financial Integrity of Transactions

    Sec.

    37.700 Core Principle 7--Financial integrity of transactions.

    37.701 Mandatory clearing.

    37.702 General financial integrity.

    37.703 Monitoring for financial soundness.

    Subpart I--Emergency Authority

    Sec.

    37.800 Core Principle 8--Emergency authority.

    37.801 Additional sources for compliance.

    Subpart J--Timely Publication of Trading Information

    Sec.

    37.900 Core Principle 9--Timely publication of trading information.

    37.901 General requirement.

    37.902 Capacity of swap execution facility.

    Subpart K--Recordkeeping and Reporting

    Sec.

    37.1000 Core Principle 10--Recordkeeping and reporting.

    [[Page 1238]]

    37.1001 Recordkeeping required.

    37.1002 Reporting to the commission required.

    37.1003 Inspection and examination by the Securities and Exchange

    Commission.

    Subpart L--Antitrust Considerations

    Sec.

    37.1100 Core Principle 11--Antitrust considerations.

    37.1101 Additional sources for compliance.

    Subpart M--Conflicts of Interest

    Sec.

    37.1200 Core Principle 12--Conflicts of interest.

    Subpart N--Financial Resources

    Sec.

    37.1300 Core Principle 13--Financial resources.

    37.1301 General requirements.

    37.1302 Types of financial resources.

    37.1303 Computation of financial resource requirement.

    37.1304 Valuation of financial resources.

    37.1305 Liquidity of financial resources.

    37.1306 Reporting requirements.

    Subpart O--System Safeguards

    Sec.

    37.1400 Core Principle 14--System safeguards.

    37.1401 Requirements.

    Subpart P--Designation of Chief Compliance Officer

    Sec.

    37.1500 Core Principle 15--Designation of Chief Compliance Officer.

    37.1501 Chief Compliance Officer.

    Appendix A to Part 37--Form SEF

    Appendix B to Part 37--Guidance on, and Acceptable Practices in,

    Compliance with Core Principles

    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).

    Subpart A--General Provisions

    Sec. 37.1 Scope.

    The provisions of this part 37 shall apply to every swap execution

    facility that is registered, has been registered or is applying to

    become registered as a swap execution facility under Section 5h of the

    Act. Provided, however, nothing in this provision affects the

    eligibility of swap execution facilities to operate under the

    provisions of Parts 38 or 49 of this Chapter.

    Sec. 37.2 Applicable provisions.

    A swap execution facility, the swap execution facility's operator

    and transactions traded on or through a swap execution facility under

    Section 5h of the Act shall comply with the requirements of this part

    37, and Sec. Sec. 1.3, 1.12(e), 1.31, 1.37(c)-(d), 1.52, 1.59(d),

    1.60, 1.63(c), 1.67, 33.10, part 9, parts 15 through 21, part 40, part

    41, part 43, part 45, part 46, part 49, part 151, and part 190 of this

    chapter, including any related definitions and cross-referenced

    sections.

    Sec. 37.3 Requirements for registration.

    (a) Application procedures. (1) An applicant seeking registration

    as a swap execution facility must file electronically an application

    for registration with the Secretary of the Commission, in the form and

    manner as provided by the Commission. The Commission shall approve or

    deny the application or, if deemed appropriate, register the applicant

    as a swap execution facility subject to conditions.

    (2) The application must include information sufficient to

    demonstrate compliance with the core principles specified in Section 5h

    of the Act. The Application Form SEF consists of instructions, general

    questions and a list of Exhibits (documents, information and evidence)

    the Commission requires in order to be able to determine whether an

    applicant is able to comply with the core principles. An application

    will not be considered to be materially complete unless the applicant

    has submitted, at a minimum, the Exhibits as required in Application

    Form SEF. If the application is not materially complete, the Commission

    shall notify the applicant that the application will not be deemed to

    have been submitted for purposes of the Commission's review.

    (3) An applicant seeking registration must request from the

    Commission a unique, extensible, alphanumeric code for the purpose of

    identifying the swap execution facility pursuant to Part 45 of this

    chapter.

    (4) An applicant seeking registration must identify with

    particularity any information in the application that will be subject

    to a request for confidential treatment pursuant to Sec. 145.9 of this

    Chapter.

    (5) Section 40.8 of this Chapter sets forth those sections of the

    application that will be made publicly available, notwithstanding a

    request for confidential treatment pursuant to Sec. 145.9 of this

    Chapter.

    (6) If any information contained in the application or any Exhibit

    is or becomes inaccurate for any reason, an amendment to the

    application or a submission filed under Part 40 of this Chapter must be

    filed promptly correcting such information.

    (7) 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, upon

    consultation with the General Counsel or the General Counsel's

    delegate, authority to notify the applicant seeking registration that

    the application is materially incomplete and the review is stayed. The

    Director may submit to the Commission for its consideration any matter

    that has been delegated in this paragraph. Nothing in this paragraph

    prohibits the Commission, at its election, from exercising the

    authority delegated in this paragraph.

    (b) Temporary Grandfather Relief from Registration. Concurrent with

    the completion of the application procedures under paragraph (a) of

    this section, an applicant may submit a notice requesting that the

    Commission grant the applicant temporary grandfather relief from the

    registration requirement, allowing it to continue operating during the

    pendency of the application process.

    (1) The Commission may grant such request for temporary grandfather

    relief from the registration requirement if the applicant has:

    (i) Satisfied all the requirements under paragraph (a) of this

    section,

    (ii) Provided transaction data that substantiates that the

    execution or trading of swaps has occurred and continues to occur on

    the applicant's trading system or platform at the time the applicant

    submits the request, and

    (iii) Provided a certification that the applicant believes that

    when it operates under temporary grandfather relief it will meet the

    requirements of this Part 37.

    (2) The temporary grandfather relief for a swap execution facility

    shall expire on the earlier of:

    (i) The date that the Commission grants or denies registration of

    the swap execution facility; or

    (ii) The date that the Commission rescinds the temporary

    grandfather relief provided to the swap execution facility.

    (3) The grant of temporary grandfather relief from the registration

    requirement by the Commission does not affect the right of the

    Commission to grant or deny permanent registration as provided under

    paragraph (a)(1) of this section. This paragraph shall terminate 365

    days from the effectiveness of this regulation.

    (c) Reinstatement of dormant registration. Before making any swaps

    available for trading, a dormant swap execution facility as defined in

    Sec. 40.1 of this Chapter must reinstate its registration under the

    procedures of paragraph (a) of this section; provided, however, that an

    application for reinstatement may rely upon previously submitted

    materials that still pertain to,

    [[Page 1239]]

    and accurately describe, current conditions.

    (d) Request for transfer of registration. (1) Request for transfer

    of registration. A swap execution facility that wants to request the

    transfer of its registration from its current legal entity to a new

    legal entity, as a result of a corporate reorganization or otherwise,

    must file a request with the Commission for approval to transfer the

    registration. Such request must be filed electronically with the

    Secretary of the Commission at its Washington, DC headquarters at

    submissions@cftc.gov and the Division of Market Oversight at

    DMOSubmissions@cftc.gov.

    (2) Timing of submission. The request must be filed no later than

    three months prior to the anticipated corporate change; provided that

    the swap execution facility may file a request with the Commission

    later than three months prior to the anticipated change if the swap

    execution facility does not know and reasonably could not have known of

    the anticipated change three months prior to the anticipated change. In

    such event, the swap execution facility shall be required to

    immediately file the request with the Commission as soon as it knows of

    such change with an explanation as to the timing of the request.

    (3) Required information. The request shall include the following:

    (i) The underlying agreement that governs the corporate change;

    (ii) A narrative description of the corporate change, including the

    reason for the change and its impact on the swap execution facility,

    including its governance, and operations, and its impact on the rights

    and obligations of market participants;

    (iii) A discussion of the transferee's ability to comply with the

    Act, including the core principles applicable to swap execution

    facilities, and the Commission's regulations thereunder;

    (iv) The governing documents of the transferee, including but not

    limited to articles of incorporation and bylaws;

    (v) The transferee's rules marked to show changes from the current

    rules of the swap execution facility;

    (vi) A representation by the transferee that it:

    (A) Will be the surviving corporation and successor-in-interest to

    the transferor swap execution facility and will retain and assume,

    without limitation, all the assets and liabilities of the transferor;

    (B) Will assume responsibility for complying with all applicable

    provisions of the Act and the Commission's regulations promulgated

    thereunder, including Part 37 and Appendices thereto;

    (C) Will assume, maintain and enforce all rules implementing and

    complying with these core principles, including the adoption of the

    transferor's rulebook, as amended in the request, and that any such

    amendments will be submitted to the Commission pursuant to Section

    5c(c) of the Act and Part 40 of the Commission's regulations; and

    (D) Will comply with all self-regulatory responsibilities except if

    otherwise indicated in the request, and will maintain and enforce all

    self-regulatory programs.

    (vii) A representation by the transferee that upon the transfer:

    (A) It will assume responsibility for and maintain compliance with

    product core principles for all swaps previously made available for

    trading through the transferor, whether by certification or approval;

    and

    (B) That none of the proposed rule changes will affect the rights

    and obligations of any participant.

    (viii) A representation by the transferee that market participants

    will be notified of all changes to the transferor's rulebook prior to

    the transfer and will be further notified of the concurrent transfer of

    the registration to the transferee upon Commission approval and

    issuance of an order permitting this transfer.

    (4) Commission determination. The Commission will review a request

    as soon as practicable and such request will be approved or denied

    pursuant to a Commission order and based on the Commission's

    determination as to the transferee's ability to continue to operate the

    swap execution facility in compliance with the Act and the Commission's

    regulations thereunder.

    (e) Request for withdrawal of application for registration. An

    applicant for registration may withdraw its application submitted

    pursuant to paragraph (a) of this section by filing such a request with

    the Commission at its Washington, DC headquarters. Withdrawal of an

    application for registration shall not affect any action taken or to be

    taken by the Commission based upon actions, activities or events

    occurring during the time that the application for registration was

    pending with the Commission.

    (f) Request for vacation of registration. A swap execution facility

    may vacate its registration under Section 7 of the Act by filing

    electronically such a request with the Commission at its Washington, DC

    headquarters. Vacation of registration shall not affect any action

    taken or to be taken by the Commission based upon actions, activities

    or events occurring during the time that the swap execution facility

    was registered by the Commission.

    Sec. 37.4 Procedures for Listing Products and Implementing Rules.

    (a) Request for Commission approval of rules and products. (1) An

    applicant for designation, or a swap execution facility, may request

    that the Commission approve under Section 5c(c) of the Act, any or all

    of its rules and contract terms and conditions, and subsequent

    amendments thereto, prior to their implementation or, notwithstanding

    the provisions of Section 5c(c)(2) of the Act, at anytime thereafter,

    under the procedures of Sec. Sec. 40.3 or 40.5 of this chapter, as

    applicable. A swap execution facility should label a swap in its rules

    as ``Listed for trading pursuant to Commission approval,'' if the swap

    and its terms or conditions have been submitted to the Commission for

    approval, and it may label as ``Approved by the Commission'' only those

    rules that have been so approved.

    (2) Notwithstanding the timeline under Sec. Sec. 40.3(b) and

    40.5(b) of this Chapter, the operating rules and terms and conditions

    of swaps submitted for Commission approval that have been submitted at

    the same time as an application for swap execution facility

    registration or an application under Sec. 37.3(c) to reinstate the

    registration of a dormant swap execution facility as defined in Sec.

    40.1 of this Chapter, or while one of the foregoing is pending, will be

    deemed approved by the Commission no earlier than when the swap

    execution facility is deemed to be registered or reinstated.

    (b) Self-certification of rules and products. Rules of a swap

    execution facility and subsequent amendments thereto, including both

    the operational rules and the terms or conditions of swaps listed for

    trading on the facility, not voluntarily submitted for prior Commission

    approval pursuant to paragraph (a) of this regulation, must be

    submitted to the Commission with a certification that the rule or rule

    amendment of the swap complies with the Act or rules thereunder

    pursuant to the procedures of Sec. 40.2 or Sec. 40.6 of this Chapter,

    as applicable.

    (c) Section 15 consideration. An applicant for registration, or a

    registered swap execution facility, may request that the Commission

    consider under the provisions of Section 15(b) of the Act any of the

    swap execution facility's rules or policies, including both the

    operational rules and the terms or conditions of swaps listed for

    trading.

    [[Page 1240]]

    Sec. 37.5 Information Relating to Swap Execution Facility Compliance.

    (a) Requests for information. Upon request by the Commission, a

    swap execution facility must file with the Commission such information

    related to its business as a swap execution facility, including

    information relating to data entry and trade details, in the form and

    manner and within the time as specified by the Commission in its

    request.

    (b) Demonstration of compliance. Upon request by the Commission, a

    swap execution facility must file with the Commission a written

    demonstration, containing such supporting data, information and

    documents, in the form and manner and within such time as the

    Commission may specify, that the swap execution facility is in

    compliance with one or more core principles as specified in the

    request, or that is requested by the Commission to satisfy its

    obligations under the Act.

    (c) Equity interest transfers. (1) Equity transfer notification.

    Upon entering into any agreement(s) that could result in an equity

    interest transfer of ten percent or more in the swap execution

    facility, the swap execution facility must file a notification of the

    equity interest transfer with the Secretary of the Commission at its

    Washington, DC headquarters at submissions@cftc.gov and the Division of

    Market Oversight at DMOSubmissions@cftc.gov, no later than the business

    day, as defined in Sec. 40.1 of this Chapter, following the date on

    which the swap execution facility enters into a firm obligation to

    transfer the equity interest.

    (2) Required information. The notification must include and be

    accompanied by: Any relevant agreement(s), including any preliminary

    agreements; any associated changes to relevant corporate documents; a

    chart outlining any new ownership or corporate or organizational

    structure; a brief description of the purpose and any impact of the

    equity interest transfer; and a representation from the swap execution

    facility that it meets all of the requirements of Section 5h of the Act

    and Commission regulations adopted thereunder. The swap execution

    facility must keep the Commission apprised of the projected date that

    the transaction resulting in the equity interest transfer will be

    consummated, and must provide to the Commission any new agreements or

    modifications to the original agreement(s) filed pursuant to this

    section. The swap execution facility must notify the Commission of the

    consummation of the transaction on the day on which it occurs.

    (3) Certification. (i) Upon a transfer of an equity interest of ten

    percent or more in a swap execution facility, the swap execution

    facility must file with the Secretary of the Commission at its

    Washington, DC headquarters, at submissions@cftc.gov, and the Division

    of Market Oversight, at DMOSubmissions@cftc.gov, a certification that

    the swap execution facility meets all of the requirements of Section 5h

    of the Act and Commission regulations adopted thereunder, no later than

    two business days, as defined in Sec. 40.1 of this Chapter, following

    the date on which the equity interest of ten percent or more was

    acquired. Such certification must state whether changes to any aspects

    of the swap execution facility's operations were made as a result of

    such change in ownership, and include a description of any such

    change(s).

    (ii) The certification required under paragraph (c)(3) of this

    section may rely on and be supported by reference to an application for

    registration or prior filings made pursuant to a product or rule

    submission requirement, along with any necessary new filings, including

    new filings that provide any and all material updates of prior

    submissions.

    (d) Delegation of authority. The Commission hereby delegates, until

    it orders otherwise, the authority set forth in paragraph (b) of this

    regulation 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 Director may submit to the Commission for its consideration

    any matter that has been delegated in this paragraph. Nothing in this

    paragraph prohibits the Commission, at its election, from exercising

    the authority delegated in this paragraph.

    Sec. 37.6 Enforceability.

    (a) A transaction entered into on or pursuant to the rules of a

    registered swap execution facility shall not be void, voidable, subject

    to rescission or otherwise invalidated or rendered unenforceable as a

    result of:

    (1) A violation by the registered swap execution facility of the

    provisions of Section 5h of the Act or this part 37; or

    (2) Any Commission proceeding to alter or supplement a rule, term

    or condition under Section 8a(7) of the Act, to declare an emergency

    under Section 8a(9) of the Act, or any other proceeding the effect of

    which is to alter, supplement, or require a registered swap execution

    facility to adopt a specific term or condition, trading rule or

    procedure or to take or refrain from taking a specific action.

    (b) A transaction entered into on or pursuant to the rules of a

    registered swap execution facility shall include written documentation

    that memorializes all of the terms of the transaction and legally

    supersedes any previous agreement. The confirmation of all terms of the

    transaction shall take place at the same time as execution.

    Sec. 37.7 Prohibited use of data collected for regulatory purposes.

    A swap execution facility may not use for business or marketing

    purposes any proprietary data or personal information it collects or

    receives, from or on behalf of any person, for the purpose of

    fulfilling its regulatory obligations; provided, however, that a swap

    execution facility, where necessary, may share such information with

    one or more swap execution facilities, or designated contract markets

    registered with the Commission, for regulatory purposes.

    Sec. 37.8 Boards of trade operating both a designated contract market

    and a swap execution facility.

    (a) A board of trade that operates a designated contract market and

    intends to also operate a swap execution facility must separately

    register the swap execution facility, pursuant to the swap execution

    facility registration requirements set forth in this Part 37, and on an

    ongoing basis, comply with the core principles under Section 5h of the

    Act, and the regulations under this part 37.

    (b) A board of trade that operates both a designated contract

    market and a swap execution facility, and that uses the same electronic

    trade execution system for executing and trading swaps that it uses for

    executing and trading swaps on the designated contract market must

    clearly identify to market participants for each swap whether the

    execution or trading of such swaps is taking place on the designated

    contract market or on the swap execution facility.

    Sec. 37.9 Permitted execution methods.

    (a) Definitions. (1) As used in this part 37:

    (i) Order Book means:

    (A) An electronic trading facility, as that term is defined in

    section 1a(16) of the Act;

    (B) A trading facility, as that term is defined in section 1a(51)

    of the Act;

    (C) A trading system or platform in which all market participants

    in the trading system or platform can enter multiple bids and offers,

    observe bids and offers entered by other market participants, and

    choose to transact on such bids and offers; or

    [[Page 1241]]

    (D) Any such other trading system or platform as may be determined

    by the Commission.

    (ii) Request for Quote System means:

    (A) A trading system or platform in which a market participant must

    transmit a request for a quote to buy or sell a specific instrument to

    no less than five market participants in the trading system or

    platform, to which all such market participants may respond. Any bids

    or offers resting on the trading system or platform pertaining to the

    same instrument must be taken into account and communicated to the

    requester along with the responsive quotes; or

    (B) A trading system or platform in which multiple market

    participants can both:

    (1) View real-time electronic streaming quotes, both firm and

    indicative, from multiple potential counterparties on a centralized

    electronic screen; and

    (2) Have the option to complete a transaction by:

    (i) Accepting a firm streaming quote, or

    (ii) Transmitting a request for quote to no less than five market

    participants, based upon an indicative streaming quote, taking into

    account any resting bids or offers that have been communicated to the

    requester along with any responsive quotes; or

    (C) Any such other trading system or platform as may be determined

    by the Commission.

    (iii) Voice-Based System means a trading system or platform in

    which a market participant executes or trades a Permitted Transaction

    using a telephonic line or other voice-based service.

    (iv) Required Transactions means transactions that are subject to

    the execution requirements under this Act and are made available for

    trading pursuant to Sec. 37.10, and are not block trades.

    (v) Permitted Transactions means transactions that meet any of

    these requirements:

    (A) Are block trades;

    (B) Are not swaps subject to the Act's clearing and execution

    requirements, or

    (C) Are illiquid or bespoke swaps.

    (b) Required Transactions. (1) Required Transactions may be

    executed on an Order Book or a Request for Quote System.

    (2) An applicant seeking registration as a swap execution facility

    must, at a minimum, offer trading services to facilitate Required

    Transactions by providing market participants with the ability to post

    both firm and indicative quotes on a centralized electronic screen

    accessible to all market participants who have access to the swap

    execution facility.

    (3) Swap execution facilities must require that traders who have

    the ability to execute against a customer's order or to execute two

    customers against each other be subject to a 15 second timing delay

    between the entry of those two orders, such that one side of the

    potential transaction is disclosed and made available to other market

    participants before the second side of the potential transaction

    (whether for the trader's own account or for a second customer), is

    submitted for execution.

    (4) The Commission may, in its discretion, determine to require the

    swap execution facility to provide its participants a different trading

    method for a particular swap.

    (c) Permitted Transactions. (1) Permitted Transactions may be

    executed by an Order Book, Request for Quote System, a Voice-Based

    System, or any such other system for trading as may be permitted by the

    Commission.

    (2) A registered swap execution facility may submit a request to

    the Commission to offer trading services to facilitate Permitted

    Transactions. When submitting such request, the swap execution facility

    must certify its compliance with Sec. 37.11.

    Sec. 37.10 Swaps made available for trading.

    (a) A swap execution facility must conduct an annual review (or at

    the Commission's request) of whether the swap execution facility has

    made a swap available for trading.

    (b) When conducting reviews and assessments regarding whether the

    swap execution facility has made a swap available for trading, a swap

    execution facility may consider:

    (1) The frequency of transactions in this or similar swaps;

    (2) The open interest in this or similar swaps; and

    (3) Any other factor requested by the Commission.

    (c)(1) If at least one swap execution facility has made the same or

    an economically equivalent swap available for trading, all swap

    execution facilities are required to treat the swap as made available

    for trading.

    (2) After conducting its review and assessment of whether a swap is

    made available for trading, the swap execution facility must provide

    electronically to the Commission a report of its assessment not more

    than 30 days after completion of the assessment.

    Sec. 37.11 Identification of non-cleared swaps or swaps not made

    available to trade.

    (a) A swap execution facility may allow:

    (1) The execution and trading of swaps that have not been

    determined to be subject to the clearing mandate under Section 2(h) of

    the Act;

    (2) Transactions subject to an exception from the clearing mandate

    provided under Section 2(h)(7) of the Act; or

    (3) The execution and trading of swaps that have not been made

    available for trading pursuant to Sec. 37.10.

    (b) A swap execution facility that chooses to offer to facilitate

    bilateral trading for swaps detailed in paragraph (a) of this section

    must clearly identify to market participants that the particular swap

    is to be executed bilaterally between the parties pursuant to one of

    the applicable exemption from execution and clearing.

    Subpart B--Compliance With Core Principles

    Sec. 37.100 Core Principle 1--Compliance with Core Principles.

    (a) In general. To be registered, and maintain registration, as a

    swap execution facility, the swap execution facility shall comply

    with--

    (1) All core principles described in Section 5h of the Act; and

    (2) Any requirement that the Commission may impose by rule or

    regulation pursuant to Section 8a(5) of the Act.

    (b) Reasonable Discretion of a Swap Execution Facility. Unless

    otherwise determined by the Commission by rule or regulation, a swap

    execution facility described in paragraph (a) of this section shall

    have reasonable discretion in establishing the manner in which the swap

    execution facility complies with the core principles described in

    Section 5h of the Act.

    Subpart C--Compliance With Rules

    Sec. 37.200 Core Principle 2--Compliance with rules.

    A swap execution facility shall:

    (a) Establish and enforce compliance with any rule of the swap

    execution facility, including the terms and conditions of the swaps

    traded or processed on or through the swap execution facility and any

    limitation on access to the swap execution facility;

    (b) Establish and enforce trading, trade processing, and

    participation rules that will deter abuses and have the capacity to

    detect, investigate, and enforce those rules, including means to

    provide market participants with impartial access to the market and to

    capture information that may be used in establishing whether rule

    violations have occurred;

    [[Page 1242]]

    (c) Establish rules governing the operation of the facility,

    including rules specifying trading procedures to be used in entering

    and executing orders traded or posted on the facility, including block

    trades; and

    (d) Provide by its rules that, when a swap dealer or major swap

    participant enters into or facilitates a swap that is subject to the

    mandatory clearing requirement of Section 2(h), the swap dealer or

    major swap participant shall be responsible for compliance with the

    mandatory trading requirement under Section 2(h)(8) of the Act.

    Sec. 37.201 Operation of swap execution facility and compliance with

    rules.

    (a) A swap execution facility must establish rules governing the

    operation of the swap execution facility, including, but not limited

    to, rules specifying trading procedures to be followed by members and

    market participants when entering and executing orders traded or posted

    on the swap execution facility, including block trades, as defined in

    part 45 of this chapter, if offered.

    (b) A swap execution facility must establish and impartially

    enforce compliance with the rules of the swap execution facility,

    including, but not limited to--

    (1) The terms and conditions of any swaps traded or processed on or

    through the swap execution facility;

    (2) Access to the swap execution facility;

    (3) Trade practice rules;

    (4) Audit trail requirements;

    (5) Disciplinary rules; and

    (6) Mandatory clearing requirements.

    Sec. 37.202 Access requirements.

    (a) Impartial access by members and market participants. A swap

    execution facility shall provide any eligible contract participant and

    any independent software vendor with impartial access to its market(s)

    and market services (including any indicative quote screens or any

    similar pricing data displays), providing--

    (1) Criteria that are impartial, transparent, and applied in a fair

    and nondiscriminatory manner;

    (2) A process by which participants provide the swap execution

    facility with written or electronic confirmation of their status as

    eligible contract participants, as defined by the Act and Commission

    regulations, prior to being granted access to the swap execution

    facility; and

    (3) Comparable fees for participants receiving comparable access

    to, or services from, a swap execution facility.

    (b) Jurisdiction. Prior to granting any eligible contract

    participant access to its facilities, a swap execution facility must

    require that the eligible contract participant consents to its

    jurisdiction.

    (c) Limitations on access. A swap execution facility must establish

    and impartially enforce rules governing any decision to allow, deny,

    suspend, or permanently bar participants' access to the swap execution

    facility, including such decisions when made as part of a disciplinary

    or emergency action taken by the swap execution facility.

    Sec. 37.203 Rule enforcement program.

    A swap execution facility must establish and enforce trading, trade

    processing, and participation rules that will deter abuses and it must

    have the capacity to detect, investigate and enforce those rules.

    (a) Abusive Trading Practices Prohibited. A swap execution facility

    must prohibit abusive trading practices on its markets by members and

    market participants. Specific trading practices that must be prohibited

    by all swap execution facilities include front-running, wash trading,

    pre-arranged trading, fraudulent trading, money passes and any other

    trading practices that a swap execution facility deems to be abusive.

    In addition, a swap execution facility also must prohibit any other

    manipulative or disruptive trading practices prohibited by the Act or

    by the Commission pursuant to Commission regulation. Swap execution

    facilities that permit intermediation must prohibit customer-related

    abuses including, but not limited to, trading ahead of customer orders,

    trading against customer orders, accommodation trading, and improper

    cross trading.

    (b) Capacity to Detect and Investigate Rule Violations. A swap

    execution facility must have arrangements and resources for effective

    enforcement of its rules. Such arrangements must include the authority

    to collect information and documents on both a routine and non-routine

    basis, including the authority to examine books and records kept by the

    swap execution facility's members and by market participants. A swap

    execution facility's arrangements and resources must also facilitate

    the direct supervision of the market and the analysis of data collected

    to determine whether a rule violation has occurred.

    (c) Compliance Staff and Resources. (1) Sufficient compliance

    staff. A swap execution facility must establish and maintain sufficient

    compliance department resources and staff to ensure that it can conduct

    effective audit trail reviews, trade practice surveillance, market

    surveillance and real-time market monitoring. The swap execution

    facility's compliance staff must also be sufficient to address unusual

    market or trading events as they arise, and to conduct and complete

    investigations in a timely manner, as set forth in Sec. 37.203(f).

    (2) Ongoing monitoring of compliance staff resources. A swap

    execution facility must monitor the size and workload of its compliance

    staff on a continuous basis and, on at least an annual basis, formally

    evaluate the need to increase its compliance resources and staff. In

    determining the appropriate level of compliance resources and staff,

    the swap execution facility should consider trading volume increases,

    the number of new products or swaps listed for trading, any new

    responsibilities assigned to compliance staff, the results of any

    internal review demonstrating that work is not completed in an

    effective or timely manner, the recommendation of any Commission rule

    enforcement review or evaluation of the swap execution facility and any

    other factors suggesting the need for increased resources and staff.

    (d) Automated Trade Surveillance System. A swap execution facility

    must maintain an automated trade surveillance system capable of

    detecting and investigating potential trade practice violations. Such

    system must maintain all data reflecting the details of each order

    entered into the trading system or platform, including all order

    modifications and cancellations, and maintain all data reflecting

    transactions executed on the swap execution facility. The automated

    system must load and process daily orders and trades no later than 24

    hours after the completion of the trading day. In addition, the

    automated trade surveillance system must have the capability to detect

    and flag specific trade execution patterns and trade anomalies;

    compute, retain, and compare trading statistics; compute trade gains,

    losses, and futures-equivalent positions; reconstruct the sequence of

    market activity; perform market analyses; and enable system users to

    perform in-depth analyses and ad hoc queries of trade-related data.

    (e) Real-time Market Monitoring. A swap execution facility must

    conduct real-time market monitoring of all trading activity on its

    electronic trading platform(s) to ensure orderly trading and identify

    any market or system anomalies. A swap execution facility must have the

    authority to adjust trade prices or cancel trades when necessary to

    mitigate market disrupting events caused by malfunctions in its

    electronic trading platform(s) or errors in orders submitted by members

    and market participants. Any trade price

    [[Page 1243]]

    adjustments or trade cancellations must be transparent to the market

    and subject to standards that are clear, fair, and publicly available.

    (f) Investigations and Investigation Reports. (1) Procedures. A

    swap execution facility must establish and maintain procedures that

    require its compliance staff to conduct investigations of possible rule

    violations. An investigation must be commenced upon the receipt of a

    request from Commission staff or upon the discovery or receipt of

    information (such as data produced by automated surveillance systems)

    by the swap execution facility that, in the judgment of its compliance

    staff, indicates a possible basis for finding that a violation has

    occurred or will occur.

    (2) Timeliness. Each compliance staff investigation must be

    completed in a timely manner. Absent mitigating factors, a timely

    manner is no later than 12 months after the date that an investigation

    is opened. Mitigating factors that may reasonably justify an

    investigation taking longer than 12 months to complete include the

    complexity of the investigation, the number of firms or individuals

    involved as potential wrongdoers, the number of potential violations to

    be investigated, and the volume of documents and data to be examined

    and analyzed by compliance staff.

    (3) Investigation reports when a reasonable basis exists for

    finding a violation. Compliance staff must submit a written

    investigation report for disciplinary action in every instance in which

    compliance staff determines from surveillance or from an investigation

    that a reasonable basis exists for finding a rule violation. The

    investigation report must include the reason the investigation was

    initiated; a summary of the complaint, if any; the relevant facts;

    compliance staff's analysis and conclusions; and a recommendation as to

    whether disciplinary action should be pursued. The report must also

    include the member or market participant's disciplinary history at the

    swap execution facility, including copies of warning letters.

    (4) Investigation reports when no reasonable basis exists for

    finding a violation. If after conducting an investigation compliance

    staff determines that no reasonable basis exists for finding a

    violation, it must prepare a written report including the reason the

    investigation was initiated; a summary of the complaint, if any; the

    relevant facts; compliance staff's analysis and conclusions; and if

    applicable, any recommendation that a disciplinary committee issue a

    warning letter in accordance with Sec. 37.203(f)(5). If compliance

    staff recommends that a warning letter be issued to a member or market

    participant pursuant to Sec. 37.203(f)(5), the investigation report

    must include a copy of the letter as well as the member or market

    participant's disciplinary history at the swap execution facility,

    including copies of warning letters.

    (5) Warning letters. In addition to the action required to be taken

    under Sec. Sec. 37.203(f)(3) and 37.203(f)(4), the rules of a swap

    execution facility may authorize compliance staff to issue a warning

    letter to a person or entity under investigation or to recommend that a

    disciplinary committee take such an action. A warning letter issued in

    accordance with this section is not a penalty or an indication that a

    finding of a violation has been made. A copy of a warning letter issued

    by compliance staff must be included in the investigation report

    required by Sec. Sec. 37.203(f)(3) and 37.203(f)(4). No more than one

    warning letter for the same potential violation may be issued to the

    same person or entity during a rolling 12-month period.

    (g) Additional Rules Required. A swap execution facility must adopt

    and enforce any additional rules that it believes are necessary to

    comply with the requirements of Sec. 37.203.

    Sec. 37.204 Regulatory services provided by a third party.

    (a) Use of third-party provider permitted. A swap execution

    facility may choose to contract with a registered futures association

    or another registered entity, as such terms are defined under the Act,

    (collectively, ``regulatory service provider''), for the provision of

    services to assist in complying with the core principles, as approved

    by the Commission. Any swap execution facility that chooses to contract

    with a regulatory service provider must ensure that its regulatory

    service provider has the capacity and resources necessary to provide

    timely and effective regulatory services, including adequate staff and

    automated surveillance systems. A swap execution facility will at all

    times remain responsible for the performance of any regulatory services

    received, for compliance with the swap execution facility's obligations

    under the Act and Commission regulations, and for the regulatory

    service provider's performance on its behalf.

    (b) Duty to supervise third party. A swap execution facility that

    elects to use the service of a regulatory service provider must retain

    sufficient compliance staff to supervise the quality and effectiveness

    of the regulatory services provided on its behalf. Compliance staff of

    the swap execution facility must hold regular meetings with the

    regulatory service provider to discuss ongoing investigations, trading

    patterns, market participants, and any other matters of regulatory

    concern. A swap execution facility must also conduct periodic reviews

    of the adequacy and effectiveness of services provided on its behalf.

    Such reviews must be documented carefully and made available to the

    Commission upon request.

    (c) Regulatory decisions required from the swap execution facility.

    A swap execution facility that elects to use the service of a

    regulatory service provider must retain exclusive authority in all

    substantive decisions made by its regulatory service provider,

    including but not limited to decisions involving the cancellation of

    trades, the issuance of disciplinary charges against members or market

    participants, denials of access to the trading platform for

    disciplinary reasons, and any decision to open an investigation into a

    possible rule violation. A swap execution facility must document any

    instances where its actions differ from those recommended by its

    regulatory service provider.

    Sec. 37.205 Audit trail.

    A swap execution facility must establish procedures to capture and

    retain information that may be used in establishing whether rule

    violations have occurred.

    (a) Audit Trail Required. A swap execution facility must capture

    and retain all audit trail data necessary to detect, investigate and

    prevent customer and market abuses. Such data must be sufficient to

    reconstruct all transactions within a reasonable period of time and to

    provide evidence of any violations of the rules of the swap execution

    facility. An acceptable audit trail must also permit the swap execution

    facility to track a customer order from the time of receipt through

    fill, allocation, or other disposition, and must include both order and

    trade data.

    (b) Elements of an Acceptable Audit Trail Program. (1) Original

    source documents. A swap execution facility's audit trail must include

    original source documents. Original source documents include

    unalterable, sequentially-identified records on which trade execution

    information is originally recorded, whether recorded manually or

    electronically. Records for customer orders (whether filled, unfilled

    or cancelled, each of which shall be retained or electronically

    captured) must reflect the terms of the order, a unique account

    identifier that relates

    [[Page 1244]]

    back to the account(s) owner(s) and the time of order entry. Swap

    execution facilities that permit intermediation must require that all

    orders or requests for quotes received by phone that are executable be

    immediately entered into the trading system or platform. If an order or

    request for quote cannot be immediately entered into the trading system

    or platform, an electronic record that includes the account identifier

    that relates to the account owner, time of receipt, and terms of the

    order or request for quote must immediately be created, and the order

    or request for quote must be entered into the trading system or

    platform as soon as practicable.

    (2) Transaction history database. A swap execution facility's audit

    trail program must include an electronic transaction history database.

    An adequate transaction history database includes a history of all

    orders and trades, and also includes:

    (i) All data that are input into the trade entry or matching system

    for the transaction to match and clear;

    (ii) The categories of participant for which each trade is

    executed, including whether the person executing a trade was executing

    it for his/her own account or an account for which he/she has

    discretion, his/her clearing member's house account, the account of

    another member or the account of any other customer;

    (iii) Timing and sequencing data adequate to reconstruct trading;

    and

    (iv) Identification of each account to which fills are allocated.

    (3) Electronic analysis capability. A swap execution facility's

    audit trail program must include electronic analysis capability with

    respect to all audit trail data in the transaction history database. An

    adequate electronic analysis capability must permit the sorting and

    presentation of data in the transaction history database so as to

    reconstruct trading and identify possible trading violations with

    respect to both customer and market abuse.

    (4) Safe storage capability. A swap execution facility's audit

    trail program must include the capability to safely store all audit

    trail data retained in its transaction history database. Such safe

    storage capability must include the capability to store all data in the

    database in a manner that protects it from unauthorized alteration, as

    well as from accidental erasure or other loss. Data must be retained in

    accordance with the recordkeeping requirements of Core Principle 10 for

    swap execution facilities and the associated regulations in subpart K

    of this part 37.

    (c) Enforcement of Audit Trail Requirements. (1) Annual audit trail

    and recordkeeping reviews. A swap execution facility must enforce its

    audit trail and recordkeeping requirements through at least annual

    reviews of all members and market participants to verify their

    compliance with the swap execution facility's audit trail and

    recordkeeping requirements. Such reviews must include, but are not

    limited to, reviews of randomly selected samples of front-end audit

    trail data for order routing systems; a review of the process by which

    user identifications are assigned and user identification records are

    maintained; a review of usage patterns associated with user

    identifications to monitor for violations of user identification rules;

    and reviews of account numbers and customer type indicator codes in

    trade records to test for accuracy and improper use.

    (2) Enforcement program required. A swap execution facility must

    establish a program for effective enforcement of its audit trail and

    recordkeeping requirements. An effective program must identify members

    and market participants that have failed to maintain high levels of

    compliance with such requirements, and levy meaningful sanctions when

    deficiencies are found. Sanctions must be sufficient to deter

    recidivist behavior, and may not include more than one warning letter

    for the same violation within a rolling twelve month period.

    Sec. 37.206 Disciplinary procedures and sanctions.

    A swap execution facility must establish trading, trade processing,

    and participation rules that will deter abuses and have the capacity to

    enforce such rules through prompt and effective disciplinary action.

    (a) Enforcement staff. A swap execution facility must establish and

    maintain sufficient enforcement staff and resources to effectively and

    promptly prosecute possible rule violations within the disciplinary

    jurisdiction of the swap execution facility. A swap execution facility

    must also monitor the size and workload of its enforcement staff

    annually, and increase its enforcement resources and staff as

    appropriate. The enforcement staff may not include either members of

    the swap execution facility or persons whose interests conflict with

    their enforcement duties. A member of the enforcement staff may not

    operate under the direction or control of any person or persons with

    trading privileges at the swap execution facility. A swap execution

    facility's enforcement staff may operate as part of the swap execution

    facility's compliance department.

    (b) Disciplinary panels. (1) Disciplinary panels required. A swap

    execution facility must establish one or more Review Panels and one or

    more Hearing Panels (collectively, ``disciplinary panels'') that are

    authorized to fulfill their obligations under the rules of this

    Subpart. Disciplinary panels must meet the composition requirements of

    Sec. 40.9(c)(3)(ii), and must not include any members of the swap

    execution facility's compliance staff, or any person involved in

    adjudicating any other stage of the same proceeding.

    (2) Review panels. A swap execution facility's Review Panel(s) must

    be responsible for determining whether a reasonable basis exists for

    finding a violation of swap execution facility rules, and for

    authorizing the issuance of notices of charges against persons alleged

    to have committed violations if the Review Panel believes that the

    matter should be adjudicated.

    (3) Hearing Panels. A swap execution facility's Hearing Panel(s)

    must be responsible for adjudicating disciplinary cases pursuant to a

    notice of charges authorized by a Review Panel, and must also be

    responsible for such other duties as are specified in this Subpart.

    (c) Review of investigation report. Promptly after receiving a

    completed investigation report pursuant to Sec. 37.203(f)(3), a Review

    Panel must promptly review the report and, within 30 days of such

    receipt, must take one of the following actions:

    (1) If the Review Panel determines that additional investigation or

    evidence is needed, it must promptly direct the compliance staff to

    conduct further investigation.

    (2) If the Review Panel determines that no reasonable basis exists

    for finding a violation or that prosecution is otherwise unwarranted,

    it may direct that no further action be taken. Such determination must

    be in writing, and must include a written statement setting forth the

    facts and analysis supporting the decision.

    (3) If the Review Panel determines that a reasonable basis exists

    for finding a violation and adjudication is warranted, it must direct

    that the person or entity alleged to have committed the violation be

    served with a notice of charges and must proceed in accordance with the

    rules of this section.

    (d) Notice of charges. A notice of charges must adequately state

    the acts, conduct, or practices in which the respondent is alleged to

    have engaged; state the rule, or rules, alleged to have been violated

    (or about to be violated);

    [[Page 1245]]

    and prescribe the period within which a hearing on the charges may be

    requested. The notice must also advise the respondent charged that he

    is entitled, upon request, to a hearing on the charges; and if the

    rules of the swap execution facility so provide:

    (1) The failure to request a hearing within the period prescribed

    in the notice, except for good cause, may be deemed a waiver of the

    right to a hearing; and

    (2) The failure to answer or to deny expressly a charge may be

    deemed to be an admission of such charge.

    (e) Right to representation. Upon being served with a notice of

    charges, a respondent must have the right to be represented by legal

    counsel or any other representative of its choosing in all succeeding

    stages of the disciplinary process.

    (f) Answer to charges. A respondent must be given a reasonable

    period of time to file an answer to a notice of charges. The rules of a

    swap execution facility may require that:

    (1) The answer must be in writing and include a statement that the

    respondent admits, denies, or does not have and is unable to obtain

    sufficient information to admit or deny each allegation. A statement of

    a lack of sufficient information shall have the effect of a denial of

    an allegation;

    (2) Failure to file an answer on a timely basis shall be deemed an

    admission of all allegations contained in the notice of charges; and

    (3) Failure in an answer to deny expressly a charge shall be deemed

    to be an admission of such charge.

    (g) Admission or failure to deny charges. The rules of a swap

    execution facility may provide that if a respondent admits or fails to

    deny any of the charges, a Hearing Panel may find that the violations

    alleged in the notice of charges for which the respondent admitted or

    failed to deny any of the charges have been committed. If the swap

    execution facility's rules so provide, then:

    (1) The Hearing Panel must impose a sanction for each violation

    found to have been committed;

    (2) The Hearing Panel must promptly notify the respondent in

    writing of any sanction to be imposed pursuant to Sec. 37.206(g)(1)

    and advise the respondent that it may request a hearing on such

    sanction within a specified period of time;

    (3) The rules of a swap execution facility may provide that if a

    respondent fails to request a hearing within the period of time

    specified in the notice, the respondent will be deemed to have accepted

    the sanction.

    (h) Denial of charges and right to hearing. In every instance where

    a respondent has requested a hearing on a charge that is denied, or on

    a sanction set by the Hearing Panel pursuant to Section 37.206(g), the

    respondent must be given an opportunity for a hearing in accordance

    with the requirements of Sec. 37.206(j). The swap execution facility's

    rules may provide that, except for good cause, the hearing must be

    concerned only with those charges denied and/or sanctions set by the

    Hearing Panel under Sec. 37.206(g) for which a hearing has been

    requested.

    (i) Settlement offers. (1) The rules of a swap execution facility

    may permit a respondent to submit a written offer of settlement at any

    time after the investigation report is completed. The disciplinary

    panel presiding over the matter may accept the offer of settlement, but

    may not alter the terms of a settlement offer unless the respondent

    agrees.

    (2) The rules of a swap execution facility may provide that, in its

    discretion, a disciplinary panel may permit the respondent to accept a

    sanction without either admitting or denying the rule violations upon

    which the sanction is based.

    (3) If an offer of settlement is accepted, the panel accepting the

    offer must issue a written decision specifying the rule violations it

    has reason to believe were committed, including the basis or reasons

    for the panel's conclusions, and any sanction to be imposed, which must

    include full customer restitution where customer harm is demonstrated.

    If an offer of settlement is accepted without the agreement of the

    enforcement staff, the decision must adequately support the Hearing

    Panel's acceptance of the settlement. Where applicable, the decision

    must also include a statement that the respondent has accepted the

    sanctions imposed without either admitting or denying the rule

    violations.

    (4) The respondent may withdraw his or her offer of settlement at

    any time before final acceptance by a panel. If an offer is withdrawn

    after submission, or is rejected by a disciplinary panel, the

    respondent must not be deemed to have made any admissions by reason of

    the offer of settlement and must not be otherwise prejudiced by having

    submitted the offer of settlement.

    (j) Hearings. (1) A swap execution facility must adopt rules that

    provide for the following minimum requirements for any hearing

    conducted pursuant to a notice of charges:

    (i) The hearing must be fair, must be conducted before members of

    the Hearing Panel, and must be promptly convened after reasonable

    notice to the respondent. The formal rules of evidence need not apply;

    nevertheless, the procedures for the hearing may not be so informal as

    to deny a fair hearing. No member of the Hearing Panel for the matter

    may have a financial, personal, or other direct interest in the matter

    under consideration.

    (ii) In advance of the hearing, the respondent must be entitled to

    examine all books, documents, or other evidence in the possession or

    under the control of the swap execution facility that are to be relied

    upon by the enforcement staff in presenting the charges contained in

    the notice of charges or that are relevant to those charges.

    (iii) The swap execution facility's enforcement and compliance

    staffs must be parties to the hearing, and the enforcement staff must

    present their case on those charges and sanctions that are the subject

    of the hearing.

    (iv) The respondent must be entitled to appear personally at the

    hearing, must be entitled to cross-examine any persons appearing as

    witnesses at the hearing, and must be entitled to call witnesses and to

    present such evidence as may be relevant to the charges.

    (v) The swap execution facility must require that persons within

    its jurisdiction who are called as witnesses participate in the hearing

    and produce evidence. It must make reasonable efforts to secure the

    presence of all other persons called as witnesses whose testimony would

    be relevant.

    (vi) If the respondent has requested a hearing, a copy of the

    hearing must be made and must become a part of the record of the

    proceeding. The record must be one that is capable of being accurately

    transcribed; however, it need not be transcribed unless the transcript

    is requested by Commission staff or the respondent, the decision is

    appealed pursuant to Sec. 37.206(l), or is reviewed by the Commission

    pursuant to Section 8c of the Act or part 9 of this chapter. In all

    other instances, a summary record of a hearing is permitted.

    (vii) The rules of a swap execution facility may provide that the

    cost of transcribing the record of the hearing must be borne by a

    respondent who requests the transcript, appeals the decision pursuant

    to Sec. 37.206(l), or whose application for Commission review of the

    disciplinary action has been granted. In all other instances, the cost

    of transcribing the record must be borne by the swap execution

    facility.

    (2) The rules of a swap execution facility may provide that a

    sanction may be summarily imposed upon any person within its

    jurisdiction whose actions impede the progress of a hearing.

    [[Page 1246]]

    (k) Decisions. Promptly following a hearing conducted in accordance

    with Sec. 37.206(j), the Hearing Panel must render a written decision

    based upon the weight of the evidence contained in the record of the

    proceeding and must provide a copy to the respondent. The decision must

    include:

    (1) The notice of charges or a summary of the charges;

    (2) The answer, if any, or a summary of the answer;

    (3) A summary of the evidence produced at the hearing or, where

    appropriate, incorporation by reference of the investigation report;

    (4) A statement of findings and conclusions with respect to each

    charge, and a complete explanation of the evidentiary and other basis

    for such findings and conclusions with respect to each charge;

    (5) An indication of each specific rule that the respondent was

    found to have violated;

    (6) A declaration of all sanctions imposed against the respondent,

    including the basis for such sanctions and the effective date of such

    sanctions.

    (l) Right to appeal. The rules of a swap execution facility may

    permit the parties to a proceeding to appeal promptly an adverse

    decision of the Hearing Panel in all or in certain classes of cases.

    Such rules may require a party's notice of appeal to be in writing and

    to specify the findings, conclusions, or sanctions to which objection

    are taken. If the rules of a swap execution facility permit appeals,

    then both the respondent and the enforcement staff must have the

    opportunity to appeal and the swap execution facility must provide for

    the following:

    (1) The swap execution facility must establish an appellate panel

    that must be authorized to hear appeals of respondents. In addition,

    the rules of a swap execution facility may provide that the appellate

    panel may, on its own initiative, order review of a decision by the

    Hearing Panel within a reasonable period of time after the decision has

    been rendered.

    (2) The composition of the appellate panel must be consistent with

    Sec. 40.9(c)(iv), and must not include any members of the swap

    execution facility's compliance staff, or any person involved in

    adjudicating any other stage of the same proceeding. The rules of a

    swap execution facility must provide for the appeal proceeding to be

    conducted before all of the members of the board of appeals or a panel

    thereof.

    (3) Except for good cause shown, the appeal or review must be

    conducted solely on the record before the Hearing Panel, the written

    exceptions filed by the parties, and the oral or written arguments of

    the parties.

    (4) Promptly following the appeal or review proceeding, the board

    of appeals must issue a written decision and must provide a copy to the

    respondent. The decision issued by the board of appeals must adhere to

    all the requirement of Sec. 37.206(k), to the extent that a different

    conclusion is reached from that issued by the Hearing Panel.

    (m) Final decisions. Each swap execution facility must establish

    rules setting forth when a decision rendered pursuant to this section

    will become the final decision of such swap execution facility.

    (n) Disciplinary sanctions. All disciplinary sanctions imposed by a

    swap execution facility or its disciplinary panels must be commensurate

    with the violations committed and must be clearly sufficient to deter

    recidivism or similar violations by other market participants. All

    disciplinary sanctions must take into account the respondent's

    disciplinary history. In the event of demonstrated customer harm, any

    disciplinary sanction must also include full customer restitution.

    (o) Summary fines for violations of rules regarding timely

    submission of records. A swap execution facility may adopt a summary

    fine schedule for violations of rules relating to the timely submission

    of accurate records required for clearing or verifying each day's

    transactions. A swap execution facility may permit its compliance

    staff, or a designated panel of swap execution facility officials, to

    summarily impose minor sanctions against persons within the swap

    execution facility's jurisdiction for violating such rules. A swap

    execution facility's summary fine schedule may allow for warning

    letters to be issued for first-time violations or violators, provided

    that no more than one warning letter may be issued per rolling 12-month

    period for the same violation. If adopted, a summary fine schedule must

    provide for progressively larger fines for recurring violations.

    (p) Emergency disciplinary actions. (1) A swap execution facility

    may impose a sanction, including suspension, or take other summary

    action against a person or entity subject to its jurisdiction upon a

    reasonable belief that such immediate action is necessary to protect

    the best interest of the marketplace.

    (2) Any emergency disciplinary action must be taken in accordance

    with a swap execution facility's procedures that provide for the

    following:

    (i) If practicable, a respondent must be served with a notice

    before the action is taken, or otherwise at the earliest possible

    opportunity. The notice must state the action, briefly state the

    reasons for the action, and state the effective time and date, and the

    duration of the action.

    (ii) The respondent must have the right to be represented by legal

    counsel or any other representative of its choosing in all proceedings

    subsequent to the emergency action taken. The respondent must be given

    the opportunity for a hearing as soon as reasonably practicable and the

    hearing must be conducted before the Hearing Panel pursuant to the

    requirements of Sec. 37.206(j).

    (iii) Promptly following the hearing provided for in this rule, the

    swap execution facility must render a written decision based upon the

    weight of the evidence contained in the record of the proceeding and

    must provide a copy to the respondent. The decision must include a

    description of the summary action taken; the reasons for the summary

    action; a summary of the evidence produced at the hearing; a statement

    of findings and conclusions; a determination that the summary action

    should be affirmed, modified, or reversed; and a declaration of any

    action to be taken pursuant to the determination, and the effective

    date and duration of such action.

    Sec. 37.207 Swaps subject to mandatory clearing.

    A swap execution facility shall provide by its rules that when a

    swap dealer or major swap participant enters into or facilitates a swap

    transaction that is subject to the mandatory clearing requirement of

    Section 2(h) of the Act, the swap dealer or major swap participant

    shall be responsible for compliance with the mandatory trading

    requirement under Section 2(h)(8).

    Subpart D--Swaps Not Readily Susceptible to Manipulation

    Sec. 37.300 Core Principle 3--Swaps not readily susceptible to

    manipulation.

    The swap execution facility shall permit trading only in swaps that

    are not readily susceptible to manipulation.

    Sec. 37.301 General requirement.

    (a) To demonstrate to the Commission compliance with the

    requirements of Sec. 37.300, a swap execution facility must submit new

    swap contracts in advance to the Commission pursuant to part 40 of this

    chapter, either by:

    (1) Requesting prior approval from the Commission; or

    (2) Self-certification for new product submissions.

    [[Page 1247]]

    (b) Furthermore, the swap execution facility must provide evidence

    that the swap complies with Core Principle 3 by providing the

    applicable information as set forth in appendix C to part 38--

    Demonstration of Compliance that a contract is not readily susceptible

    to manipulation.

    Subpart E--Monitoring of Trading and Trade Processing

    Sec. 37.400 Core Principle 4--Monitoring of trading and trade

    processing.

    The swap execution facility shall:

    (a) Establish and enforce rules or terms and conditions defining,

    or specifications detailing:

    (1) Trading procedures to be used in entering and executing orders

    traded on or through the facilities of the swap execution facility; and

    (2) Procedures for trade processing of swaps on or through the

    facilities of the swap execution facility; and

    (b) Monitor trading in swaps to prevent manipulation, price

    distortion, and disruptions of the delivery or cash settlement process

    through surveillance, compliance, and disciplinary practices and

    procedures, including methods for conducting real-time monitoring of

    trading and comprehensive and accurate trade reconstructions.

    Sec. 37.401 General requirements.

    A swap execution facility must:

    (a) Collect and evaluate data on individual traders' market

    activity on an ongoing basis in order to detect and prevent

    manipulation, price distortions and, where possible, disruptions of the

    delivery or cash-settlement process;

    (b) Monitor and evaluate general market data in order to detect and

    prevent manipulative activity that would result in the failure of the

    market price to reflect the normal forces of supply and demand;

    (c) Have the capacity to conduct real-time monitoring of trading

    and comprehensive and accurate trade reconstruction. The monitoring of

    intraday trading must include the capacity to detect abnormal price

    movements, unusual trading volumes, impairments to market liquidity,

    and position-limit violations; and

    (d) Have either manual processes or automated alerts that are

    effective in detecting and preventing trading abuses.

    Sec. 37.402 Additional requirements for physical-delivery swaps.

    (a) For physical-delivery swaps, the swap execution facility must:

    (1) Monitor a swap's terms and conditions;

    (2) Monitor that the deliverable supply is adequate so that the

    swap will not be conducive to price manipulation or distortion;

    (3) Assess whether the deliverable commodity reasonably can be

    expected to be available to traders responsible for making the delivery

    and salable or usable by traders receiving delivery at its market value

    in normal cash marketing channels; and

    (4) When available, monitor data related to the size and ownership

    of deliverable supplies.

    (b) The swap execution facility must continually monitor the

    appropriateness of the swap's terms and conditions, including the

    delivery instrument, the delivery locations and location differentials,

    and the commodity characteristics and related differentials. The swap

    execution facility must act promptly to address the conditions that are

    causing price distortions or market disruptions, including, when

    appropriate, changes to contract terms.

    Sec. 37.403 Additional requirements for cash-settled swaps.

    (a) For cash-settled swaps, the swap execution facility must

    monitor:

    (1) The availability and pricing of the commodity making up the

    index to which the swap will be settled; and

    (2) The continued appropriateness of the methodology for deriving

    the index. For those swap execution facilities that compute their own

    indices, they must promptly amend any methodologies that result, or are

    likely to result, in manipulation, price distortions, or market

    disruptions, or must impose new methodologies to resolve the threat of

    disruptions or distortions.

    (b) If a swap listed on a swap execution facility is settled by

    reference to the price of a swap traded in another venue, including a

    price or index derived from prices on another swap execution facility,

    the swap execution facility must have an information sharing agreement

    with the other venue or swap execution facility. In lieu of an

    information sharing agreement, the swap execution facility must have

    the capacity to assess whether positions or trading in the swap or

    commodity to which its swap is cash-settled are being manipulated in

    order to affect prices on its market.

    Sec. 37.404 Ability to obtain information.

    (a) The swap execution facility must have rules that require

    traders in its swaps to keep records of their trading, including

    records of their activity in the underlying commodity and related

    derivatives markets and make such records available, upon request, to

    the swap execution facility and the Commission.

    (b) A swap execution facility with customers trading through

    intermediaries must either use a comprehensive large-trader reporting

    system (LTRS) or be able to demonstrate that it can obtain position

    data from other sources in order to conduct an effective surveillance

    program.

    Sec. 37.405 Risk controls for trading.

    The swap execution facility must establish and maintain risk

    control mechanisms to reduce the potential risk of market disruptions,

    including but not limited to market restrictions that pause or halt

    trading in market conditions prescribed by the swap execution facility.

    If a swap is linked to, or a substitute for, other swaps on the swap

    execution facility or on other trading venues, such risk controls must,

    to the extent practicable, be coordinated with any similar controls

    placed on those other swaps. If a swap is based on the level of an

    equity index, such risk controls must, to the extent practicable, be

    coordinated with any similar controls placed on national security

    exchanges.

    Sec. 37.406 Trade reconstruction.

    The swap execution facility must have the ability to

    comprehensively and accurately reconstruct all trading on its trading

    facility. All audit-trail data and reconstructions must be made

    available to the Commission in a form, manner, and time as determined

    by the Commission.

    Sec. 37.407 Additional rules required.

    A swap execution facility must adopt and enforce any additional

    rules that it believes are necessary to comply with the requirements of

    subpart E of this part.

    Subpart F--Ability To Obtain Information

    Sec. 37.500 Core Principle 5--Ability To Obtain Information.

    The swap execution facility shall:

    (a) Establish and enforce rules that will allow the facility to

    obtain any necessary information to perform any of the functions

    described in this section;

    (b) Provide the information to the Commission on request; and

    (c) Have the capacity to carry out such international information-

    sharing agreements as the Commission may require.

    Sec. 37.501 Establish and enforce rules.

    A swap execution facility must establish and enforce rules that

    will allow the swap execution facility to have the ability and

    authority to obtain sufficient information to allow it to fully perform

    its operational, risk

    [[Page 1248]]

    management, governance, and regulatory functions and any requirements

    under this part 37, including the capacity to carry out international

    information-sharing agreements as the Commission may require.

    Sec. 37.502 Collection of information.

    A swap execution facility must have rules that allow it to collect

    information on a routine basis, allow for the collection of non-routine

    data from its participants, and allow for its examination of books and

    records kept by the traders on its facility.

    Sec. 37.503 Provide information to the Commission.

    A swap execution facility shall provide information in its

    possession to the Commission upon request, in a form and manner that

    the Commission approves.

    Sec. 37.504 Information-sharing agreements.

    A swap execution facility shall share information with other

    regulatory organizations, data repositories, and reporting services as

    required by the Commission or as otherwise necessary and appropriate to

    fulfill its self-regulatory and reporting responsibilities. Appropriate

    information-sharing agreements can be established with such entities or

    the Commission can act in conjunction with the swap execution facility

    to carry out such Information Sharing.

    Subpart G--Position Limits or Accountability

    Sec. 37.600 Core Principle 6--Position limits or accountability.

    (a) In general. To reduce the potential threat of market

    manipulation or congestion, especially during trading in the delivery

    month, a swap execution facility that is a trading facility shall adopt

    for each of the contracts of the facility, as is necessary and

    appropriate, position limitations or position accountability for

    speculators.

    (b) Position limits. For any contract that is subject to a position

    limitation established by the Commission pursuant to Section 4a(a) of

    the Act, the swap execution facility shall:

    (1) Set its position limitation at a level no higher than the

    Commission limitation; and

    (2) Monitor positions established on or through the swap execution

    facility for compliance with the limit set by the Commission and the

    limit, if any, set by the swap execution facility.

    Sec. 37.601 Position limits or accountability.

    (a) To reduce the potential threat of market manipulation or

    congestion, especially during trading in the delivery month, a swap

    execution facility that is a trading facility shall adopt for each of

    the contracts on the facility, as is necessary and appropriate,

    position limitations or position accountability for speculators.

    (b) For any contract that is subject to a position limitation

    established by the Commission pursuant to Section 4a(a), the swap

    execution facility shall:

    (1) Set its position limitation at a level no higher than the

    Commission limitation;

    (2) Monitor positions established on or through the swap execution

    facility for compliance with the limit set by the Commission and the

    limit, if any, set by the swap execution facility.

    (c) The swap execution facility must establish the position limits

    in accordance with the requirements set forth in part 151.

    Subpart H--Financial Integrity of Transactions

    Sec. 37.700 Core Principle 7--Financial integrity of transactions.

    The swap execution facility shall establish and enforce rules and

    procedures for ensuring the financial integrity of swaps entered on or

    through the facilities of the swap execution facility, including the

    clearance and settlement of the swaps pursuant to Section 2(h)(1) of

    the Act.

    Sec. 37.701 Mandatory clearing.

    Transactions executed on or through the swap execution facility

    must be cleared through a Commission-registered derivatives clearing

    organization unless:

    (a) The transaction is exempted from clearing under Section 2(h)(7)

    of the Act; or

    (b) The Commission has not determined that the clearing requirement

    under Section 2(h)(1) is applicable.

    Sec. 37.702 General financial integrity.

    A swap execution facility must provide for the financial integrity

    of its transactions:

    (a) By establishing minimum financial standards for its members,

    which shall, at a minimum, require that members qualify as an eligible

    contract participant as defined in Section 1a (18) of the Act;

    (b) For transactions cleared by a derivatives clearing

    organization, by ensuring that the swap execution facility has the

    capacity to route transactions to the derivative clearing organization

    in a manner acceptable to the derivatives clearing organization for

    purposes of ongoing risk management;

    (c) For transactions not cleared by a derivatives clearing

    organization, by requiring members to demonstrate that they:

    (1) Have entered into credit arrangement documentation for the

    transaction;

    (2) Have the ability to exchange collateral; and

    (3) Meet any credit filters that may be adopted by the swap

    execution facility; and

    (d) By implementing any additional safeguards as may be required by

    Commission regulations.

    Sec. 37.703 Monitoring for financial soundness.

    A swap execution facility must monitor members' compliance with the

    swap execution facility's minimum financial standards and, therefore,

    must routinely receive and promptly review financial and related

    information from its members.

    Subpart I--Emergency Authority

    Sec. 37.800 Core Principle 8--Emergency authority.

    The swap execution facility shall adopt rules to provide for the

    exercise of emergency authority, in consultation or cooperation with

    the Commission, as is necessary and appropriate, including the

    authority to liquidate or transfer open positions in any swap or to

    suspend or curtail trading in a swap.

    Sec. 37.801 Additional sources for compliance.

    Applicants and swap execution facilities may refer to the guidance

    and/or acceptable practices in appendix B to part 37 to demonstrate to

    the Commission compliance with the requirements of Sec. 37.800.

    Subpart J--Timely Publication of Trading Information

    Sec. 37.900 Core Principle 9--Timely publication of trading

    information.

    (a) In general. The swap execution facility shall make public

    timely information on price, trading volume, and other trading data on

    swaps to the extent prescribed by the Commission.

    (b) Capacity of swap execution facility. The swap execution

    facility shall be required to have the capacity to electronically

    capture and transmit trade information with respect to transactions

    executed on the facility.

    [[Page 1249]]

    Sec. 37.901 General requirement.

    With respect to swaps traded on or through a swap execution

    facility, each swap execution facility must:

    (a) Report specified swap data as provided under part 43 and part

    45 of this Chapter; and

    (b) Meet the requirements of part 16 of this chapter.

    Sec. 37.902 Capacity of swap execution facility.

    The swap execution facility must have the capacity to

    electronically capture trade information with respect to transactions

    executed on the facility.

    Subpart K--Recordkeeping and Reporting

    Sec. 37.1000 Core Principle 10--Recordkeeping and reporting.

    (a) In general. A swap execution facility shall:

    (1) Maintain records of all activities relating to the business of

    the facility, including a complete audit trail, in a form and manner

    acceptable to the Commission for a period of 5 years;

    (2) Report to the Commission, in a form and manner acceptable to

    the Commission, such information as the Commission determines to be

    necessary or appropriate for the Commission to perform the duties of

    the Commission under the Act; and

    (3) Keep any such records relating to swaps defined in Section

    1a(47)(A)(v) of the Act open to inspection and examination by the

    Securities and Exchange Commission.

    (b) Requirements. The Commission shall adopt data collection and

    reporting requirements for swap execution facilities that are

    comparable to corresponding requirements for derivatives clearing

    organizations and swap data repositories.

    Sec. 37.1001 Recordkeeping required.

    A swap execution facility must maintain records of all activities

    relating to the business of the facility, in a form and manner

    acceptable to the Commission, for a period of at least 5 years. A swap

    execution facility must maintain such records, including a complete

    audit trail for all swaps executed on or subject to the rules of the

    swap execution facility, investigatory files, and disciplinary files,

    in accordance with the requirements of Sec. 1.31 and part 45 of this

    chapter.

    Sec. 37.1002 Reporting to the commission required.

    A swap execution facility must report to the Commission, in a form

    and manner acceptable to the Commission, such information as the

    Commission determines to be necessary or appropriate for the Commission

    to perform its duties under the Act.

    Sec. 37.1003 Inspection and examination by the Securities and

    Exchange Commission.

    A swap execution facility must keep any such records relating to

    swaps defined in Section 1a(47)(A)(v) of the Act open to inspection and

    examination by the Securities and Exchange Commission.

    Subpart L--Antitrust Considerations

    Sec. 37.1100 Core Principle 11--Antitrust considerations.

    Unless necessary or appropriate to achieve the purposes of this

    Act, the swap execution facility shall not:

    (a) Adopt any rules or take any actions that result in any

    unreasonable restraint of trade; or

    (b) Impose any material anticompetitive burden on trading or

    clearing.

    Sec. 37.1101 Additional sources for compliance.

    Applicants and swap execution facilities may refer to the guidance

    and/or acceptable practices in appendix B to part 37 to demonstrate to

    the Commission compliance with the requirements of Sec. 37.1100.

    Subpart M--Conflicts of Interest

    Sec. 37.1200 Core Principle 12--Conflicts of interest.

    The swap execution facility shall:

    (a) Establish and enforce rules to minimize conflicts of interest

    in its decision-making process; and

    (b) Establish a process for resolving the conflicts of interest.

    Subpart N--Financial Resources

    Sec. 37.1300 Core Principle 13--Financial resources.

    (a) In general. The swap execution facility shall have adequate

    financial, operational, and managerial resources to discharge each

    responsibility of the swap execution facility.

    (b) Determination of resource adequacy. The financial resources of

    a swap execution facility shall be considered to be adequate if the

    value of the financial resources exceeds the total amount that would

    enable the swap execution facility to cover the operating costs of the

    swap execution facility for a one-year period, as calculated on a

    rolling basis.

    Sec. 37.1301 General requirements.

    (a) A swap execution facility shall maintain financial resources

    sufficient to enable it to perform its functions in compliance with the

    core principles set forth in Section 5h of the Act.

    (b) An entity that operates as both a swap execution facility and a

    derivatives clearing organization also shall comply with the financial

    resource requirements of Sec. 39.11.

    (c) Financial resources shall be considered sufficient if their

    value is at least equal to a total amount that would enable the swap

    execution facility, or applicant for designation as such, to cover its

    operating costs for a period of at least one year, calculated on a

    rolling basis.

    Sec. 37.1302 Types of financial resources.

    Financial resources available to satisfy the requirements of Sec.

    37.1301 may include:

    (a) The swap execution facility's own capital; and

    (b) Any other financial resource deemed acceptable by the

    Commission.

    Sec. 37.1303 Computation of financial resource requirement.

    A swap execution facility shall, on a quarterly basis, based upon

    its fiscal year, make a reasonable calculation of its projected

    operating costs over a twelve-month period in order to determine the

    amount needed to meet the requirements of Sec. 37.1301. The swap

    execution facility shall have reasonable discretion in determining the

    methodology used to compute such projected operating costs. The

    Commission may review the methodology and require changes as

    appropriate.

    Sec. 37.1304 Valuation of financial resources.

    At appropriate intervals, but not less than quarterly, a swap

    execution facility shall compute the current market value of each

    financial resource used to meet its obligations under Sec. 37.701.

    Reductions in value to reflect market and credit risk (haircuts) shall

    be applied as appropriate.

    Sec. 37.1305 Liquidity of financial resources.

    The financial resources allocated by the swap execution facility to

    meet the requirements of Sec. 37.1301 must include unencumbered,

    liquid financial assets (i.e., cash and/or highly liquid securities)

    equal to at least six months' operating costs. If any portion of such

    financial resources is not sufficiently liquid, the swap execution

    facility may take into account a committed line of credit or similar

    facility for the purpose of meeting this requirement.

    Sec. 37.1306 Reporting requirements.

    (a) Each fiscal quarter, or at any time upon Commission request, a

    swap execution facility shall:

    [[Page 1250]]

    (1) Report to the Commission:

    (i) The amount of financial resources necessary to meet the

    requirements of Sec. 37.1301; and

    (ii) The value of each financial resource available, computed in

    accordance with the requirements of Sec. 37.1304;

    (2) Provide the Commission with a financial statement, including

    the balance sheet, income statement, and statement of cash flows of the

    swap execution facility or of its parent company;

    (b) The calculations required by this Sec. 37.1306 shall be made

    as of the last business day of the swap execution facility's fiscal

    quarter.

    (c) The swap execution facility shall provide the Commission with:

    (1) Sufficient documentation explaining the methodology used to

    compute its financial requirements under Sec. 37.1301;

    (2) Sufficient documentation explaining the basis for its

    determinations regarding the valuation and liquidity requirements set

    forth in Sec. Sec. 37.1304 and 37.1305; and

    (3) Copies of any agreements establishing or amending a credit

    facility, insurance coverage, or other arrangement evidencing or

    otherwise supporting the swap execution facility's conclusions.

    (d) The report required by this Sec. 37.1306 shall be filed not

    later than 17 business days after the end of the swap execution

    facility's fiscal quarter, or at such later time as the Commission may

    permit, in its discretion, upon request by the swap execution facility.

    Subpart O--System Safeguards

    Sec. 37.1400 Core Principle 14--System safeguards.

    The swap execution facility shall:

    (a) Establish and maintain a program of risk analysis and oversight

    to identify and minimize sources of operational risk, through the

    development of appropriate controls and procedures, and automated

    systems, that:

    (1) Are reliable and secure; and

    (2) Have adequate scalable capacity;

    (b) Establish and maintain emergency procedures, backup facilities,

    and a plan for disaster recovery that allow for:

    (1) The timely recovery and resumption of operations; and

    (2) The fulfillment of the responsibilities and obligations of the

    swap execution facility; and

    (c) Periodically conduct tests to verify that the backup resources

    of the swap execution facility are sufficient to ensure continued:

    (1) Order processing and trade matching;

    (2) Price reporting;

    (3) Market surveillance; and

    (4) Maintenance of a comprehensive and accurate audit trail.

    Sec. 37.1401 Requirements.

    (a) Each swap execution facility shall:

    (1) Establish and maintain a program of risk analysis and oversight

    to identify and minimize sources of operational risk through the

    development of appropriate controls and procedures and the development

    of automated systems that are reliable, secure, and have adequate

    scalable capacity;

    (2) Establish and maintain emergency procedures, backup facilities,

    and a plan for disaster recovery that allow for the timely recovery and

    resumption of operations and the fulfillment of the responsibilities

    and obligations of the swap execution facility; and

    (3) Periodically conduct tests to verify that backup resources are

    sufficient to ensure continued order processing and trade matching,

    transmission of matched orders to a designated clearing organization

    for clearing, price reporting, market surveillance, and maintenance of

    a comprehensive and accurate audit trail.

    (b) A swap execution facility's program of risk analysis and

    oversight with respect to its operations and automated systems must

    address each of the following categories of risk analysis and

    oversight:

    (1) Information security;

    (2) Business continuity-disaster recovery (``BC-DR'') planning and

    resources;

    (3) Capacity and performance planning;

    (4) Systems operations;

    (5) Systems development and quality assurance; and

    (6) Physical security and environmental controls.

    (c) In addressing the categories of risk analysis and oversight

    required under paragraph (b) of this section, a swap execution facility

    should follow generally accepted standards and best practices with

    respect to the development, operation, reliability, security, and

    capacity of automated systems.

    (d) A swap execution facility must maintain a BC-DR plan and BC-DR

    resources, emergency procedures, and backup facilities sufficient to

    enable timely recovery and resumption of its operations and resumption

    of its ongoing fulfillment of its responsibilities and obligations as a

    swap execution facility following any disruption of its operations.

    Such responsibilities and obligations include, without limitation,

    order processing and trade matching; transmission of matched orders to

    a designated clearing organization for clearing, where appropriate;

    price reporting; market surveillance; and maintenance of a

    comprehensive audit trail. The swap execution facility's BC-DR plan and

    resources generally should enable resumption of trading and clearing of

    swaps executed on the swap execution facility during the next business

    day following the disruption. Swap execution facilities determined by

    the Commission to be critical financial markets are subject to more

    stringent requirements in this regard, set forth in Section 40.9 of the

    Commission's regulations.

    (e) A swap execution facility that is not determined by the

    Commission to be a critical financial market satisfies the requirement

    to be able to resume trading and clearing during the next business day

    following a disruption by maintaining either:

    (1) Infrastructure and personnel resources of its own that are

    sufficient to ensure timely recovery and resumption of its operations

    and resumption of its ongoing fulfillment of its responsibilities and

    obligations as a swap execution facility following any disruption of

    its operations; or

    (2) Contractual arrangements with other swap execution facilities

    or disaster recovery service providers, as appropriate, that are

    sufficient to ensure continued trading and clearing of swaps executed

    on the swap execution facility, and ongoing fulfillment of all of the

    swap execution facility's responsibilities and obligations with respect

    to such swaps, in the event that a disruption renders the swap

    execution facility temporarily or permanently unable to satisfy this

    requirement on its own behalf.

    (f) A swap execution facility must notify Commission staff promptly

    of all:

    (1) Electronic trading halts and systems malfunctions;

    (2) Cyber security incidents or targeted threats that actually or

    potentially jeopardize automated system operation, reliability,

    security, or capacity; and

    (3) Any activation of the swap execution facility's BC-DR plan.

    (g) A swap execution facility must give Commission staff timely

    advance notice of all:

    (1) Planned changes to automated systems that may impact the

    reliability, security, or adequate scalable capacity of such systems;

    and

    (2) Planned changes to the swap execution facility's program of

    risk analysis and oversight.

    [[Page 1251]]

    (h) A swap execution facility must provide to the Commission upon

    request current copies of its BC-DR plan and other emergency

    procedures, its assessments of its operational risks, and other

    documents requested by Commission staff for the purpose of maintaining

    a current profile of the swap execution facility's automated systems.

    (i) A swap execution facility must conduct regular, periodic,

    objective testing and review of its automated systems to ensure that

    they are reliable, secure, and have adequate scalable capacity. It must

    also conduct regular, periodic testing and review of its BC-DR

    capabilities. Both types of testing should be conducted by qualified,

    independent professionals. Such qualified independent professionals may

    be independent contractors or employees of the swap execution facility,

    but should not be persons responsible for development or operation of

    the systems or capabilities being tested. Pursuant to Core Principle 10

    under Section 5h of the Act (Recordkeeping and Reporting), and

    Sec. Sec. 37.1000 through 37.1003, the swap execution facility must

    keep records of all such tests, and make all test results available to

    the Commission upon request.

    (j) To the extent practicable, a swap execution facility should:

    (1) Coordinate its BC-DR plan with those of the market participants

    upon whom it depends to provide liquidity, in a manner adequate to

    enable effective resumption of activity in its markets following a

    disruption causing activation of the swap execution facility's BC-DR

    plan;

    (2) Initiate and coordinate periodic, synchronized testing of its

    BC-DR plan and the BC-DR plans of the market participants upon whom it

    depends to provide liquidity; and

    (3) Ensure that its BC-DR plan takes into account the BC-DR plans

    of its telecommunications, power, water, and other essential service

    providers.

    (k) Part 46 of this chapter governs the obligations of those

    registered entities that the Commission has determined to be critical

    financial markets, with respect to maintenance and geographic dispersal

    of disaster recovery resources sufficient to meet a same-day recovery

    time objective in the event of a wide-scale disruption. Section 40.9

    establishes the requirements for core principle compliance in that

    respect.

    Subpart P--Designation of Chief Compliance Officer

    Sec. 37.1500 Core Principle 15--Designation of Chief Compliance

    Officer.

    (a) In general. Each swap execution facility shall designate an

    individual to serve as a chief compliance officer.

    (b) Duties. The chief compliance officer shall:

    (1) Report directly to the board or to the senior officer of the

    facility;

    (2) Review compliance with the core principles in this subsection;

    (3) In consultation with the board of the facility, a body

    performing a function similar to that of a board, or the senior officer

    of the facility, resolve any conflicts of interest that may arise;

    (4) Be responsible for establishing and administering the policies

    and procedures required to be established pursuant to this section;

    (5) Ensure compliance with the Act and the rules and regulations

    issued under the Act, including rules prescribed by the Commission

    pursuant to this section; and

    (6) Establish procedures for the remediation of noncompliance

    issues found during compliance office reviews, look backs, internal or

    external audit findings, self-reported errors, or through validated

    complaints.

    (c) Requirements for procedures. In establishing procedures under

    paragraph (b)(6) of this section, the chief compliance officer shall

    design the procedures to establish the handling, management response,

    remediation, retesting, and closing of noncompliance issues.

    (d) Annual reports. (1) In general. In accordance with rules

    prescribed by the Commission, the chief compliance officer shall

    annually prepare and sign a report that contains a description of:

    (i) The compliance of the swap execution facility with the Act; and

    (ii) The policies and procedures, including the code of ethics and

    conflict of interest policies, of the swap execution facility.

    (2) Requirements. The chief compliance officer shall:

    (i) Submit each report described in clause (1) with the appropriate

    financial report of the swap execution facility that is required to be

    submitted to the Commission pursuant to this section; and

    (ii) Include in the report a certification that, under penalty of

    law, the report is accurate and complete.

    Sec. 37.1501 Chief Compliance Officer.

    (a) Definition of Board of Directors. For purposes of this part 37,

    the term ``board of directors'' means the board of directors of a

    registered swap execution facility, or for those swap execution

    facilities whose organizational structure does not include a board of

    directors, a body performing a function similar to a board of

    directors.

    (b) Designation and qualifications of chief compliance officer.

    (1) Chief Compliance Officer Required. Each registered swap

    execution facility shall establish the position of chief compliance

    officer, and designate an individual to serve in that capacity.

    (i) The position of chief compliance officer shall carry with it

    the authority and resources to develop and enforce policies and

    procedures necessary to fulfill the duties set forth for chief

    compliance officers in the Act and Commission regulations.

    (ii) The chief compliance officer shall have supervisory authority

    over all staff acting in furtherance of the chief compliance officer's

    statutory, regulatory, and self-regulatory obligations.

    (2) Qualifications of Chief Compliance Officer. The individual

    designated to serve as chief compliance officer shall have the

    background and skills appropriate for fulfilling the responsibilities

    of the position.

    (i) No individual disqualified from registration pursuant to

    Sections 8a(2) or 8a(3) of the Act may serve as a chief compliance

    officer.

    (ii) The chief compliance officer may not be a member of the swap

    execution facility's legal department and may not serve as its general

    counsel.

    (c) Appointment, Supervision, and Removal of Chief Compliance

    Officer. (1) Appointment and Compensation of Chief Compliance Officer

    Determined by Board of Directors. A registered swap execution

    facility's chief compliance officer shall be appointed by its board of

    directors. The board of directors must also approve the compensation of

    the chief compliance officer and shall meet with the chief compliance

    officer at least annually. The chief compliance officer shall also meet

    with the regulatory oversight committee, as defined in Sec. 37.19(b),

    at least quarterly. The chief compliance officer shall provide any

    information regarding the swap execution facility's regulatory program

    that is requested by the board of directors or the regulatory oversight

    committee. The appointment of the chief compliance officer and approval

    of the chief compliance officer's compensation shall require the

    approval of a majority of the board of directors. The senior officer of

    the swap execution facility may fulfill these responsibilities. A swap

    execution facility shall notify

    [[Page 1252]]

    the Commission of the appointment of a new chief compliance officer

    within two business days of such appointment.

    (2) Supervision of Chief Compliance Officer. A swap execution

    facility's chief compliance officer shall report directly to the board

    of directors or to the senior officer of the swap execution facility,

    at the swap execution facility's discretion.

    (3) Removal of Chief Compliance Officer by Board of Directors.

    Removal of a registered swap execution facility's chief compliance

    officer shall require the approval of a majority of the swap execution

    facility's board of directors. If the swap execution facility does not

    have a board of directors, then the chief compliance officer may be

    removed by the senior officer of the swap execution facility. The swap

    execution facility shall notify the Commission and explain the reasons

    for the departure within two business days. The swap execution facility

    shall immediately appoint an interim chief compliance officer, and

    shall appoint a permanent chief compliance officer as soon as

    reasonably practicable. The swap execution facility shall notify the

    Commission within two business days of appointing any new chief

    compliance officer, whether interim or permanent.

    (d) Duties of Chief Compliance Officer. The chief compliance

    officer's duties shall include, but are not limited to, the following:

    (1) Overseeing and reviewing the swap execution facility's

    compliance with Section 5h of the Act and any related rules adopted by

    the Commission;

    (2) In consultation with the board of directors, a body performing

    a function similar to the board, or the senior officer of the swap

    execution facility, resolving any conflicts of interest that may arise:

    (i) Conflicts between business considerations and compliance

    requirements;

    (ii) Conflicts between business considerations and the requirement

    that the registered swap execution facility provide fair, open, and

    impartial access as set forth in Sec. 37.202 of this part; and;

    (iii) Conflicts between a registered swap execution facility's

    management and members of the board of directors;

    (3) Establishing and administering written policies and procedures

    reasonably designed to prevent violation of the Act and any rules

    adopted by the Commission;

    (4) Ensuring compliance with the Act and Commission regulations

    relating to agreements, contracts, or transactions, and with Commission

    regulations under Section 5h of the Act;

    (5) Establishing procedures for the remediation of noncompliance

    issues identified by the chief compliance officer through a compliance

    office review, look-back, internal or external audit finding, self-

    reported error, or validated complaint;

    (6) Establishing and following appropriate procedures for the

    handling, management response, remediation, retesting, and closing of

    noncompliance issues;

    (7) Establishing a compliance manual designed to promote compliance

    with the applicable laws, rules, and regulations and administering a

    written code of ethics designed to prevent ethical violations and to

    promote honesty and ethical conduct;

    (8) Supervising the swap execution facility's self-regulatory

    program with respect to trade practice surveillance; market

    surveillance; real-time market monitoring; compliance with audit trail

    requirements; enforcement and disciplinary proceedings; audits,

    examinations, and other regulatory responsibilities with respect to

    members and market participants (including ensuring compliance with, if

    applicable, financial integrity, financial reporting, sales practice,

    recordkeeping, and other requirements); and

    (9) Supervising the effectiveness and sufficiency of any regulatory

    services provided to the swap execution facility by a registered

    futures association or other registered entity in accordance with Sec.

    37.204.

    (e) Annual Compliance Report Prepared by Chief Compliance Officer.

    The chief compliance officer shall, not less than annually, prepare an

    annual compliance report, that at a minimum, contains the following

    information covering the time period since the date on which the swap

    execution facility became registered with the Commission or since the

    end of the period covered by a previously filed annual compliance

    report, as applicable:

    (1) A description of the registered swap execution facility's

    written policies and procedures, including the code of ethics and

    conflict of interest policies;

    (2) A review of applicable Commission regulations and each

    subsection and core principle of Section 5h of the Act, that, with

    respect to each:

    (i) Identifies the policies and procedures that ensure compliance

    with each subsection and the core principle, including each duty

    specified in Section 5h(f)(15)(B);

    (ii) Provides a self-assessment as to the effectiveness of these

    policies and procedures; and

    (iii) Discusses areas for improvement, and recommends potential or

    prospective changes or improvements to its compliance program and

    resources;

    (3) A list of any material changes to compliance policies and

    procedures since the last annual compliance report;

    (4) A description of the financial, managerial, and operational

    resources set aside for compliance with respect to the Act and

    Commission regulations, including a description of the registered swap

    execution facility's self-regulatory program's staffing and structure,

    a catalogue of investigations and disciplinary actions taken since the

    last annual compliance report, and a review of the performance of

    disciplinary committees and panels;

    (5) A description of any material compliance matters, including

    noncompliance issues identified through a compliance office review,

    look-back, internal or external audit finding, self-reported error, or

    validated complaint, and explains how they were resolved;

    (6) Any objections to the annual compliance report by those persons

    who have oversight responsibility for the chief compliance officer; and

    (7) A certification by the chief compliance officer that, to the

    best of his or her knowledge and reasonable belief, and under penalty

    of law, the annual compliance report is accurate and complete.

    (f) Submission of Annual Compliance Report by Chief Compliance

    Officer to the Commission.

    (1) Prior to submission of the annual compliance report to the

    Commission, the chief compliance officer shall provide the annual

    compliance report to the board of the registered swap execution

    facility for its review. If the swap execution facility does not have a

    board, then the annual compliance report shall be provided to the

    senior officer for their review. Members of the board and the senior

    officer may not require the chief compliance officer to make any

    changes to the report. Submission of the report to the board or the

    senior officer, and any subsequent discussion of the report, shall be

    recorded in board minutes or similar written record, as evidence of

    compliance with this requirement.

    (2) The annual compliance report shall be provided electronically

    to the Commission not more than 60 days after the end of the registered

    swap execution facility's fiscal year.

    (3) Promptly upon discovery of any material error or omission made

    in a previously filed compliance report, the chief compliance officer

    shall file an amendment with the Commission to

    [[Page 1253]]

    correct any material error or omission. An amendment shall contain the

    oath or certification required under paragraph (e)(7) of this section.

    (4) A registered swap execution facility may request the Commission

    for an extension of time to file its compliance report based on

    substantial, undue hardship. Extensions for the filing deadline may be

    granted at the discretion of the Commission.

    (5) Annual compliance reports filed pursuant to this section will

    be treated as exempt from mandatory public disclosure for purposes of

    the Freedom of Information Act and the Government in the Sunshine Act

    and parts 145 and 147 of this chapter, but will be available for

    official use by any official or employee of the United States and any

    State, by any self-regulatory organization of which the person filing

    the report is a member, and by any other person to whom the Commission

    believes disclosure is in the public interest.

    (g) Recordkeeping. (1) The registered swap execution facility must

    maintain:

    (i) A copy of the written policies and procedures, including the

    code of ethics and conflicts of interest policies adopted in

    furtherance of compliance with the Act and Commission regulations;

    (ii) Copies of all materials created in furtherance of the chief

    compliance officer's duties listed in paragraphs (d)(6) and (d)(7) of

    this section, including records of any investigations or disciplinary

    actions taken by the swap execution facility;

    (iii) Copies of all materials, including written reports provided

    to the board of directors or senior officer in connection with the

    review of the annual compliance report under paragraph (f)(1) of this

    section and the board minutes or similar written record of such review,

    that record the submission of the annual compliance report to the board

    of directors or senior officer; and

    (iv) Any records relevant to the registered swap execution

    facility's annual compliance report, including, but not limited to,

    work papers and other documents that form the basis of the report, and

    memoranda, correspondence, other documents, and records that are (A)

    created, sent or received in connection with the annual compliance

    report and (B) contain conclusions, opinions, analyses, or financial

    data related to the annual compliance report.

    (2) The registered swap execution facility shall maintain records

    in accordance with Sec. 1.31 and part 45 of this chapter.

    Appendix A to Part 37--Form SEF

    COMMODITY FUTURES TRADING COMMISSION

    FORM SEF

    SWAP EXECUTION FACILITY

    APPLICATION OR AMENDMENT TO APPLICATION FOR REGISTRATION

    REGISTRATION INSTRUCTIONS

    Intentional misstatements or omissions of material fact may

    constitute federal criminal violations (7 U.S.C. Sec. 13 and 18 U.S.C.

    Sec. 1001) or grounds for disqualification from registration.

    DEFINITIONS

    Unless the context requires otherwise, all terms used in the Form

    SEF have the same meaning as in the Commodity Exchange Act, as amended

    (``Act''), and in the General Rules and Regulations of the Commodity

    Futures Trading Commission (``Commission'') thereunder.

    GENERAL INSTRUCTIONS

    1. Form SEF and Exhibits thereto are to be filed with the

    Commission by applicants for registration as a swap execution facility,

    or by a swap execution facility amending such registration, pursuant to

    Section 5h of the Act and the Commission's regulations thereunder.

    Applicants may prepare their own Form SEF but must follow the format

    prescribed herein. Upon the filing of an application for registration

    in accordance with the instructions provided herein, the Commission

    will publish notice of the filing and afford interested persons an

    opportunity to submit written data, views and arguments concerning such

    application. No application for registration shall be effective unless

    the Commission, by order, grants such registration.

    2. For the purposes of this Form, the term ``Applicant'' shall

    include any applicant for registration as a swap execution facility or

    any registered swap execution facility that is seeking an amendment to

    its order of registration.

    3. Individuals' names, except the executing signature in Item 11,

    shall be given in full (Last Name, First Name, Middle Name).

    4. Signatures on all copies of the Form SEF filed with the

    Commission can be executed electronically. If the Form SEF is filed by

    a limited liability company, it must be signed in the name of the

    limited liability company by a member duly authorized to sign on the

    limited liability company's behalf; if filed by a partnership, it shall

    be signed in the name of the partnership by a general partner duly

    authorized; if filed by an unincorporated organization or association

    which is not a partnership, it shall be signed in the name of such

    organization or association by the managing agent--i.e., a duly

    authorized person who directs or manages or who participates in the

    directing or managing of its affairs; if filed by a corporation, it

    shall be signed in the name of the corporation by a principal officer

    duly authorized.

    5. If Form SEF is being filed as an application for registration,

    all applicable items must be answered in full. If any item is not

    applicable, indicate by ``none,'' ``not applicable,'' or ``N/A'' as

    appropriate.

    6. For the purposes of this Form SEF, the term ``Applicant'' shall

    include any applicant for registration as a swap execution facility or

    any swap execution facility that is amending Form SEF.

    7. Under Section 5h of the Act and the Commission's regulations

    thereunder, the Commission is authorized to solicit the information

    required to be supplied by this Form SEF from any Applicant seeking

    registration as a swap execution facility and from any registered swap

    execution facility. Disclosure of the information specified on this

    Form SEF is mandatory prior to the start of the processing of an

    application for registration as a swap execution facility. The

    information provided with this Form SEF will be used for the principal

    purpose of determining whether the Commission should grant or deny

    registration to an Applicant. The Commission further may determine that

    other and additional information is required from the Applicant in

    order to process its application. Except in cases where confidential

    treatment is requested by the Applicant and granted by the Commission,

    pursuant to the Freedom of Information Act and the rules of the

    Commission thereunder, information supplied on this Form SEF will be

    included routinely in the public files of the Commission and will be

    available for inspection by any interested person. A Form SEF which is

    not prepared and executed in compliance with applicable requirements

    and instructions may be returned as not acceptable for filing.

    Acceptance of this Form SEF, however, shall not constitute a finding

    that the Form SEF has been filed as required or that the information

    submitted is true, current or complete.

    UPDATING INFORMATION ON THE FORM SEF

    1. Part 37 of the Commission's regulations requires that if any

    [[Page 1254]]

    information contained in this application, or any supplement or

    amendment thereto, is or becomes inaccurate for any reason, an

    amendment to Form SEF, or a submission under Part 40, in either case

    correcting such information must be filed promptly with the Commission.

    2. Swap execution facilities filing Form SEF as an amendment need

    file only the facing page, the signature page (Item 10), and any pages

    on which an answer is being amended, together with any exhibits that

    are being amended. The submission of an amendment represents that the

    remaining items and exhibits remain true, current and complete as

    previously filed.

    WHERE TO FILE

    The Application Form SEF and appropriate exhibits must be filed

    electronically with the Secretary of the Commission in the form and

    manner as provided by the Commission.

    COMMODITY FUTURES TRADING COMMISSION

    FORM SEF

    SWAP EXECUTION FACILITY

    APPLICATION OR AMENDMENT TO APPLICATION FOR REGISTRATION

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

    Exact name of Applicant as specified in charter

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

    Address of principal executive offices

    [ballot] If this is an APPLICATION for registration, complete in

    full and check here

    [ballot] If this is an AMENDMENT to an application, or to an

    existing registration, list all items that are amended and check here

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

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

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

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

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

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

    GENERAL INFORMATION

    1. Name under which business of the swap execution facility will be

    conducted, if different than name specified on facing sheet:

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

    2. If name of swap execution facility is hereby amended, state

    previous swap execution facility name:

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

    3. Mailing address, if different than address specified on facing

    sheet:

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

    Number and Street

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

    City, State, Zip Code

    3(a). Additional contact information:

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

    Fax

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

    Phone

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

    Website

    4. List of principal office(s) and address(es) where swap execution

    facility activities are/will be conducted:

    Office

    Address

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

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

    BUSINESS ORGANIZATION

    5. Applicant is a:

    [ballot] Corporation

    [ballot] Partnership

    [ballot] Limited Liability Company

    [ballot] Other form of organization (specify)

    6. If Applicant is a corporation:

    a. Date of incorporation:

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

    b. State of incorporation:

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

    7. If Applicant is a partnership:

    a. Date of filing of partnership articles:

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

    b. State in which filed:

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

    8. If Applicant is a limited liability company:

    a. Date of filing of Articles of Organization/Certificate of

    Formation:

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

    b. State in which filed:

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

    9. Applicant agrees and consents that the notice of any proceeding

    before the Commission in connection with its application for

    registration as a swap execution facility may be given by sending such

    notice by certified mail or confirmed telegram to the officer specified

    or person named below at the address given.

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

    Name of person (if Applicant is a corporation, limited liability

    company or partnership, title of officer)

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

    Name of Applicant

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

    Number and Street

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

    City State Zip Code

    SIGNATURES

    10. The Applicant has duly caused this application or amendment to

    be signed on its behalf by the undersigned, hereunto duly authorized,

    this ---- day of ----------------, 20----. The Applicant and the

    undersigned represent hereby that all information contained herein is

    true, current and complete. It is understood that all required items

    and Exhibits are considered integral parts of this Form SEF and that

    the submission of any amendment represents that all unamended items and

    Exhibits remain true, current, and complete as previously filed.

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

    Name of Applicant

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

    Manual signature of Member, General Partner, Managing Agent, or

    Principal Agent

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

    Title

    EXHIBITS INSTRUCTIONS

    The following exhibits must be filed with the Commission by

    Applicants seeking registration as a swap execution facility, or by a

    registered swap execution facility amending its registration, pursuant

    to Section 5h of the Act and the Commission's regulations thereunder.

    The exhibits should be labeled according to the items specified in this

    Form SEF. If any exhibit is not applicable, please specify the exhibit

    letter and indicate by ``none,'' ``not applicable,'' or ``N/A'' as

    appropriate.

    If the applicant is a newly formed enterprise and does not have the

    financial statements required pursuant to Items 9 and 10 (Exhibits I

    and J) of this form, the applicant should provide pro forma financial

    statements for the most recent six months or since inception, whichever

    is less.

    EXHIBITS--BUSINESS ORGANIZATION

    1. Attach as Exhibit A, the name of any person(s) who own(s) ten

    percent (10%) or more of the Applicant's stock or who, either directly

    or indirectly, through agreement or otherwise, in any other manner, may

    control or direct the management or policies of Applicant.

    Provide as part of Exhibit A the full name and address of each such

    person and attach a copy of the agreement or, if there is none written,

    describe the agreement or basis upon which such person exercises or may

    exercise such control or direction.

    2. Attach as Exhibit B, a list of the present officers, directors,

    governors (and, in the case of an Applicant that is not a corporation,

    the members of all standing committees grouped by committee), or

    persons performing functions similar to any of the foregoing, of the

    swap execution facility or of any entity that performs the regulatory

    activities of the Applicant, indicating for each:

    a. Name

    b. Title

    [[Page 1255]]

    c. Dates of commencement and termination of present term of office

    or position

    d. Length of time each present officer, director, or governor has

    held the same office or position

    e. Brief account of the business experience of each officer and

    director over the last five (5) years

    f. Any other business affiliations in the derivatives and

    securities industry

    g. For directors, list any committees on which they serve and any

    compensation received by virtue of their directorship

    h. A description of:

    (1) Any order of the Commission with respect to such person

    pursuant to Section 5e of the Act;

    (2) Any conviction or injunction against such person within the

    past ten (10) years;

    (3) Any disciplinary action with respect to such person within the

    last five (5) years;

    (4) Any disqualification under Sections 8b and 8d of the Act;

    (5) Any disciplinary action under Section 8c of the Act; and

    (6) Any violation pursuant to Section 9 of the Act.

    3. Attach as Exhibit C, a narrative that sets forth the fitness

    standards for the Board of Directors and its composition including the

    number or percentage of public directors.

    4. Attach as Exhibit D, a narrative or graphic description of the

    organizational structure of the Applicant. Include a list of all

    affiliates of the Applicant and indicate the general nature of the

    affiliation. Note: If the swap execution facility activities of the

    Applicant are or will be conducted primarily by a division,

    subdivision, or other separate entity within the Applicant, corporation

    or organization, describe the relationship of such entity within the

    overall organizational structure and attach as Exhibit D a description

    only as it applies to the division, subdivision or separate entity, as

    applicable. Additionally, provide any relevant jurisdictional

    information, including any and all jurisdictions in which you or any

    affiliated entity are doing business, and registration status,

    including pending applications (e.g., country, regulator, registration

    category, date of registration). Provide the address for legal service

    of process for each jurisdiction, which cannot be a post office box.

    5. Attach as Exhibit E, a description of the personnel

    qualifications for each category of professional employees employed by

    the Applicant or the division, subdivision, or other separate entity

    within the Applicant as described in item 4.

    6. Attach as Exhibit F, an analysis of staffing requirements

    necessary to carry out operations of the Applicant as a swap execution

    facility and the name and qualifications of each key staff person.

    7. Attach as Exhibit G, a copy of the constitution, articles of

    incorporation, formation or association with all amendments thereto,

    partnership or limited liability agreements, and existing by-laws,

    operating agreement, rules or instruments corresponding thereto, of the

    Applicant. Include any additional governance fitness information not

    included in Exhibit C. Provide a certificate of good standing dated

    within one week of the date of the Form SEF.

    8. Attach as Exhibit H, a brief description of any material pending

    legal proceeding(s), other than ordinary and routine litigation

    incidental to the business, to which the Applicant or any of its

    affiliates is a party or to which any of its or their property is the

    subject. Include the name of the court or agency where the

    proceeding(s) are pending, the date(s) instituted, and the principal

    parties involved, a description of the factual basis alleged to

    underlie the proceeding(s), and the relief sought. Include similar

    information as to any proceeding(s) known to be contemplated by the

    governmental agencies.

    EXHIBITS--FINANCIAL INFORMATION

    9. Attach as Exhibit I:

    a. (i) Balance sheet, (ii) Statement of income and expenses, (iii)

    Statement of cash flows, and (iv) Statement of sources and application

    of revenues and all notes or schedules thereto, as of the most recent

    fiscal year of the applicant, or of its parent company, if applicable.

    If a balance sheet and any statements certified by an independent

    public accountant are available, that balance sheet and statement

    should be submitted as Exhibit I.

    b. Provide a narrative of how the value of the financial resources

    of the applicant is at least equal to a total amount that would enable

    the applicant to cover its operating costs for a period of at least one

    year, calculated on a rolling basis, and whether such financial

    resources include unencumbered, liquid financial assets (i.e. cash and/

    or highly liquid securities) equal to at least six months' operating

    costs.

    c. Attach copies of any agreements establishing or amending a

    credit facility, insurance coverage, or other arrangement evidencing or

    otherwise supporting the applicant's conclusions regarding the

    liquidity of its financial assets.

    d. Representations regarding sources and estimates for future

    ongoing operational resources.

    10. Attach as Exhibit J, a balance sheet and an income and expense

    statement for each affiliate of the swap execution facility that also

    engages in swap execution facility activities as of the end of the most

    recent fiscal year of each such affiliate, and each affiliate of the

    swap execution facility that engages in designated contract market

    activities.

    11. Attach as Exhibit K, the following:

    a. A complete list of all dues, fees and other charges imposed, or

    to be imposed, by or on behalf of Applicant for its swap execution

    facility services that are provided on an exclusive basis and identify

    the service or services provided for each such due, fee, or other

    charge.

    b. A description of the basis and methods used in determining the

    level and structure of the dues, fees and other charges listed in

    paragraph (a) of this item.

    c. If the Applicant differentiates, or proposes to differentiate,

    among its customers, or classes of customers in the amount of any dues,

    fees, or other charges imposed for the same or similar exclusive

    services, so state and indicate the amount of each differential. In

    addition, identify and describe any differences in the cost of

    providing such services, and any other factors, that account for such

    differentiations.

    EXHIBITS--COMPLIANCE

    12. Attach as Exhibit L, a narrative and supporting documents that

    may be provided under other Exhibits herein, that describe the manner

    in which the Applicant is able to comply with each core principle. The

    Applicant should include an explanation, and any other forms of

    documentation the Applicant thinks will be helpful to its explanation,

    demonstrating how the swap execution facility will be able to comply

    with each core principle. To the extent that the application raises

    issues that are novel, or for which compliance with a core principle is

    not self-evident, include an explanation of how that item and the

    application satisfy the core principles.

    13. Attach as Exhibit M, a copy of the Applicant's rules (as

    defined in Sec. 40.1 of the Commission's regulations) and any

    technical manuals, other guides or instructions for users of, or

    participants in, the market, including minimum financial standards for

    members or market participants. Include rules citing applicable federal

    position limits and

    [[Page 1256]]

    aggregation standards in Part 151 of the Commission's regulations and

    any facility set position limit rules. Include rules on publication of

    daily trading information with regards to the requirements of Part 16

    of the Commission's regulations. The Applicant should include an

    explanation, and any other forms of documentation the Applicant thinks

    will be helpful to its explanation, demonstrating how the swap

    execution facility will be able to comply with each core principle and

    how its rules, technical manuals, other guides or instructions for

    users of, or participants in, the market, or minimum financial

    standards for members or market participants provided in this Exhibit M

    help support the swap execution facility's compliance with the core

    principles.

    14. Attach as Exhibit N, executed or executable copies of any

    agreements or contracts entered into or to be entered into by the

    Applicant, including third party regulatory service provider or member

    or user agreements that enable or empower the Applicant to comply with

    applicable core principles. Identify (1) the services that will be

    provided; and (2) the core principles addressed by such agreement.

    15. Attach as Exhibit O, a copy of a compliance manual, and any

    other documents, that describe with specificity, the manner in which

    the Applicant will conduct trade practice, market and financial

    surveillance.

    16. Attach as Exhibit P, a description of the Applicant's

    disciplinary and enforcement protocols, tools, and procedures and the

    arrangements for alternative dispute resolution.

    17. Attach as Exhibit Q, as applicable, an explanation regarding:

    a. For trading systems or platforms that enable market participants

    to engage in transactions through an order book:

    (1) How the trading system or platform provides all orders and

    trades in an electronic form, and the timeliness in which the trading

    system or platform does so;

    (2) How all market participants have the ability to immediately see

    and have the ability to transact on all bids and offers through the

    applicant's electronic automated trade-matching system or platform; and

    (3) The trade matching algorithm and examples of how that algorithm

    works in various trading scenarios involving various types of orders.

    b. For trading systems or platforms that enable market participants

    to engage in transactions on request for quote systems:

    (1) How a market participant transmits a request for a quote to buy

    or sell a specific instrument to no less than five market participants

    in the trading system or platform, to which all such market

    participants may respond.

    (2) How resting bids or offers may be taken into account.

    c. For trading systems or platforms that enable market participants

    to engage in transactions via voice:

    (1) How the terms of voice-based transactions are entered into the

    electronic trading system or platform.

    d. How the timing delay described under Sec. 37.9 is incorporated

    into the trading system or platform.

    18. Attach as Exhibit R, a list of rules prohibiting specific trade

    practice violations.

    19. Attach as Exhibit S, a discussion of how trading data will be

    maintained by the swap execution facility.

    20. Attach as Exhibit T, a list of the name of the clearing

    organization(s) that will be clearing the Applicant's trades, and a

    representation that clearing members of that organization will be

    guaranteeing such trades.

    21. Attach as Exhibit U, any information (described with

    particularity) included in the application that will be subject to a

    request for confidential treatment pursuant to Sec. 145.9 of the

    Commission's regulations.

    EXHIBITS--OPERATIONAL CAPABILITY

    22. Attach as Exhibit V, information responsive to the Technology

    Questionnaire (link). The Technology Questionnaire focuses on

    information pertaining to the Applicant's program of risk analysis and

    oversight. Main topic areas include: information security; business

    continuity-disaster recovery planning and resources; capacity and

    performance planning; systems operations; systems development and

    quality assurance; and physical security and environmental controls.

    Appendix B to Part 37--Guidance on, and Acceptable Practices in,

    Compliance With Core Principles

    1. This appendix provides guidance on complying with core

    principles, both initially and on an ongoing basis, to maintain

    registration under Section 5h of the Act and this Part 37. Where

    provided, guidance is set forth in paragraph (a) following the

    relevant heading and can be used to demonstrate to the Commission

    compliance with the selected requirements of a core principle, under

    Sec. Sec. 37.3 and 37.5 of this Part 37. The guidance for the core

    principle is illustrative only of the types of matters a swap

    execution facility may address, as applicable, and is not intended

    to be used as a mandatory checklist. Addressing the issues set forth

    in this appendix would help the Commission in its consideration of

    whether the swap execution facility is in compliance with the

    selected requirements of a core principle; provided however, that

    the guidance is not intended to diminish or replace, in any event,

    the obligations and requirements of applicants and swap execution

    facilities to comply with the regulations provided under this Part

    37.

    2. Where provided, acceptable practices meeting selected

    requirements of core principles are set forth in paragraph (b)

    following the guidance. Swap execution facilities that follow

    specific practices outlined in the acceptable practices for a core

    principle in this appendix will meet the selected requirements of

    the applicable core principle; provided however, that the acceptable

    practice is not intended to diminish or replace, in any event, the

    obligations and requirements of applicants and swap execution

    facilities to comply with the regulations provided under this Part

    37. The acceptable practices are for illustrative purposes only and

    do not state the exclusive means for satisfying a core principle.

    Core Principle 1 of Section 5h of the Act--Compliance With Core

    Principles

    (A) In general. To be registered, and maintain registration, as

    a swap execution facility, the swap execution facility shall comply

    with--(i) all core principles described in Section 5h of the Act;

    and (ii) any requirement that the Commission may impose by rule or

    regulation pursuant to Section 8a(5) of the Act.

    (B) Reasonable Discretion of Swap Execution Facility. Unless

    otherwise determined by the Commission by rule or regulation, a swap

    execution facility described in paragraph (a) shall have reasonable

    discretion in establishing the manner in which the swap execution

    facility complies with the core principles described in Section 5h

    of the Act.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 2 of Section 5h of the Act--Compliance With Rules

    A swap execution facility shall:

    (A) Establish and enforce compliance with any rule of the swap

    execution facility, including the terms and conditions of the swaps

    traded or processed on or through the swap execution facility and

    any limitation on access to the swap execution facility;

    (B) Establish and enforce trading, trade processing, and

    participation rules that will deter abuses and have the capacity to

    detect, investigate, and enforce those rules, including means to

    provide market participants with impartial access to the market and

    to capture information that may be used in establishing whether rule

    violations have occurred;

    (C) Establish rules governing the operation of the facility,

    including rules specifying trading procedures to be used in entering

    and executing orders traded or posted on the facility, including

    block trades; and

    (D) Provide by its rules that, when a swap dealer or major swap

    participant enters into or facilitates a swap that is subject to the

    [[Page 1257]]

    mandatory clearing requirement of Section 2(h), the swap dealer or

    major swap participant shall be responsible for compliance with the

    mandatory trading requirement under Section 2(h)(8) of the Act.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 3 of Section 5h of the Act--Swaps Not Readily

    Susceptible to Manipulation

    The swap execution facility shall permit trading only in swaps

    that are not readily susceptible to manipulation.

    (a) Guidance.

    (1) In general, a swap contract is an agreement to exchange a

    series of cash flows over a period of time based on some reference

    price, which could be a single price, such as an absolute level or a

    differential, or a price index calculated based on multiple

    observations. Moreover, such a reference price may be reported by

    the swap execution facility itself or by an independent third party.

    When listing a swap for trading, a swap execution facility must

    ensure a swap's compliance with Core Principle 3, paying special

    attention to the reference price used to determine the cash flow

    exchanges. Specifically, Core Principle 3 requires that the

    reference price used by a swap not be readily susceptible to

    manipulation. As a result, when identifying a reference price, a

    swap execution facility should either: (i) Calculate its own

    reference price using suitable and well-established acceptable

    methods or (ii) carefully select a reliable third-party index.

    (2) The importance of the reference price's suitability for a

    given swap is similar to that of the final settlement price for a

    cash-settled futures. If the final settlement price is manipulated,

    then the swap contract does not serve its intended price discovery

    and risk management functions. Similarly, inappropriate reference

    prices cause the cash flows between the buyer and seller to differ

    from the proper amounts, thus benefitting one party and

    disadvantaging the other. Thus, careful consideration should be

    given to the potential for manipulation or distortion of the

    reference price.

    (3) For swaps that are settled by physical delivery or by cash

    settlement refer to guidance in Appendix C to Part 38--Demonstration

    of Compliance that a contract is not readily susceptible to

    manipulation, Section b(2) and Section c(5), respectively.

    (b) Acceptable Practices. [Reserved]

    Core Principle 4 of Section 5h of the Act--Monitoring of Trading and

    Trade Processing

    The swap execution facility shall:

    (A) Establish and enforce rules or terms and conditions

    defining, or specifications detailing:

    (1) Trading procedures to be used in entering and executing

    orders traded on or through the facilities of the swap execution

    facility; and

    (2) Procedures for trade processing of swaps on or through the

    facilities of the swap execution facility; and

    (B) Monitor trading in swaps to prevent manipulation, price

    distortion, and disruptions of the delivery or cash settlement

    process through surveillance, compliance, and disciplinary practices

    and procedures, including methods for conducting real-time

    monitoring of trading and comprehensive and accurate trade

    reconstructions.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 5 of Section 5h of the Act--Ability To Obtain

    Information

    The swap execution facility shall:

    (A) Establish and enforce rules that will allow the facility to

    obtain any necessary information to perform any of the functions

    described in this section;

    (B) Provide the information to the Commission on request; and

    (C) Have the capacity to carry out such international

    information-sharing agreements as the Commission may require.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 6 of Section 5h of the Act--Position Limits or

    Accountability

    (A) In general. To reduce the potential threat of market

    manipulation or congestion, especially during trading in the

    delivery month, a swap execution facility that is a trading facility

    shall adopt for each of the contracts of the facility, as is

    necessary and appropriate, position limitations or position

    accountability for speculators.

    (B) Position limits. For any contract that is subject to a

    position limitation established by the Commission pursuant to

    Section 4a(a) of the Act, the swap execution facility shall:

    (1) Set its position limitation at a level no higher than the

    Commission limitation; and

    (2) Monitor positions established on or through the swap

    execution facility for compliance with the limit set by the

    Commission and the limit, if any, set by the swap execution

    facility.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 7 of Section 5h of the Act--Financial Integrity of

    Transactions

    The swap execution facility shall establish and enforce rules

    and procedures for ensuring the financial integrity of swaps entered

    on or through the facilities of the swap execution facility,

    including the clearance and settlement of the swaps pursuant to

    Section 2(h)(1) of the Act.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 8 of Section 5h of the Act--Emergency Authority

    The swap execution facility shall adopt rules to provide for the

    exercise of emergency authority, in consultation or cooperation with

    the Commission, as is necessary and appropriate, including the

    authority to liquidate or transfer open positions in any swap or to

    suspend or curtail trading in a swap.

    (a) Guidance. In consultation and cooperation with the

    Commission, a swap execution facility should have the authority to

    intervene as necessary to maintain markets with fair and orderly

    trading and to prevent or address manipulation or disruptive trading

    practices, whether the need for intervention arises exclusively from

    the swap execution facility's market or as part of a coordinated,

    cross-market intervention. Swap execution facility rules should

    include procedures and guidelines for decision making and

    implementation of emergency intervention that avoid conflicts of

    interest in accordance with the provisions of 17 CFR 40.11, and

    include alternate lines of communication and approval procedures to

    address emergencies associated with real time events. To address

    perceived market threats, the swap execution facility should have

    rules that allow it to take emergency actions, including imposing or

    modifying position limits, imposing or modifying price limits,

    imposing or modifying intraday market restrictions, imposing special

    margin requirements, ordering the liquidation or transfer of open

    positions in any contract, ordering the fixing of a settlement

    price, extending or shortening the expiration date or the trading

    hours, suspending or curtailing trading in any contract,

    transferring customer contracts and the margin, or altering any

    contract's settlement terms or conditions, or, if applicable,

    providing for the carrying out of such actions through its

    agreements with its third-party provider of clearing or regulatory

    services. In situations where a swap is traded on more than one

    platform, emergency action to liquidate or transfer open interest

    must be as directed, or agreed to, by the Commission or the

    Commission's staff. The swap execution facility should also have

    rules that allow it to take market actions as may be directed by the

    Commission. The Commission should be notified promptly of the swap

    execution facility's exercise of emergency action, explaining its

    decision-making process, the reasons for using its emergency

    authority, and how conflicts of interest were minimized, including

    the extent to which the swap execution facility considered the

    effect of its emergency action on the underlying markets and on

    markets that are linked or referenced to the contracts traded on its

    facility, including similar markets on other trading venues.

    Information on all regulatory actions carried out pursuant to a swap

    execution facility's emergency authority should be included in a

    timely submission of a certified rule pursuant to Part 40 of this

    Chapter.

    (b) Acceptable Practices. [Reserved]

    Core Principle 9 of Section 5h of the Act--Timely Publication of

    Trading Information

    (A) In general. The swap execution facility shall make public

    timely information on price, trading volume, and other trading data

    on swaps to the extent prescribed by the Commission.

    (B) Capacity of swap execution facility. The swap execution

    facility shall be required to have the capacity to electronically

    capture and transmit trade information with respect to transactions

    executed on the facility.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 10 of Section 5h of the Act--Recordkeeping and Reporting

    (A) In general. A swap execution facility shall:

    (1) Maintain records of all activities relating to the business

    of the facility,

    [[Page 1258]]

    including a complete audit trail, in a form and manner acceptable to

    the Commission for a period of 5 years;

    (2) Report to the Commission, in a form and manner acceptable to

    the Commission, such information as the Commission determines to be

    necessary or appropriate for the Commission to perform the duties of

    the Commission under the Act; and

    (3) Keep any such records relating to swaps defined in Section

    1a(47)(A)(v) of the Act open to inspection and examination by the

    Securities and Exchange Commission.

    (B) Requirements. The Commission shall adopt data collection and

    reporting requirements for swap execution facilities that are

    comparable to corresponding requirements for derivatives clearing

    organizations and swap data repositories.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 11 of Section 5h of the Act--Antitrust Considerations

    Unless necessary or appropriate to achieve the purposes of this

    Act, the swap execution facility shall not:

    (A) Adopt any rules or take any actions that result in any

    unreasonable restraint of trade; or

    (B) Impose any material anticompetitive burden on trading or

    clearing.

    (a) Guidance. An entity seeking registration as a swap execution

    facility may request that the Commission consider under the

    provisions of Section 15(b) of the Act, any of the entity's rules,

    including trading protocols or policies, and including both

    operational rules and the terms or conditions of products listed for

    trading, at the time of registration or thereafter. The Commission

    intends to apply Section 15(b) of the Act to its consideration of

    issues under this core principle in a manner consistent with that

    previously applied to contract markets.

    (b) Acceptable Practices. [Reserved]

    Core Principle 12 of Section 5h of the Act--Conflicts of Interest

    The swap execution facility shall:

    (A) Establish and enforce rules to minimize conflicts of

    interest in its decision-making process; and

    (B) Establish a process for resolving the conflicts of interest.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 13 of Section 5h of the Act--Financial Resources

    (A) In general. The swap execution facility shall have adequate

    financial, operational, and managerial resources to discharge each

    responsibility of the swap execution facility.

    (B) Determination of resource adequacy. The financial resources

    of a swap execution facility shall be considered to be adequate if

    the value of the financial resources exceeds the total amount that

    would enable the swap execution facility to cover the operating

    costs of the swap execution facility for a one-year period, as

    calculated on a rolling basis.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 14 of Section 5h of the Act--System Safeguards

    The swap execution facility shall:

    (A) Establish and maintain a program of risk analysis and

    oversight to identify and minimize sources of operational risk,

    through the development of appropriate controls and procedures, and

    automated systems, that:

    (1) Are reliable and secure; and

    (2) Have adequate scalable capacity;

    (B) Establish and maintain emergency procedures, backup

    facilities, and a plan for disaster recovery that allow for:

    (1) The timely recovery and resumption of operations; and

    (2) The fulfillment of the responsibilities and obligations of

    the swap execution facility; and

    (C) Periodically conduct tests to verify that the backup

    resources of the swap execution facility are sufficient to ensure

    continued:

    (1) Order processing and trade matching;

    (2) Price reporting;

    (3) Market surveillance; and

    (4) Maintenance of a comprehensive and accurate audit trail.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 15 of Section 5h of the Act--Designation of Chief

    Compliance Officer

    (A) In general. Each swap execution facility shall designate an

    individual to serve as a chief compliance officer.

    (B) Duties. The chief compliance officer shall:

    (1) Report directly to the board or to the senior officer of the

    facility;

    (2) Review compliance with the core principles in this

    subsection;

    (3) In consultation with the board of the facility, a body

    performing a function similar to that of a board, or the senior

    officer of the facility, resolve any conflicts of interest that may

    arise;

    (4) Be responsible for establishing and administering the

    policies and procedures required to be established pursuant to this

    section;

    (5) Ensure compliance with the Act and the rules and regulations

    issued under the Act, including rules prescribed by the Commission

    pursuant to this section; and

    (6) Establish procedures for the remediation of noncompliance

    issues found during compliance office reviews, look backs, internal

    or external audit findings, self-reported errors, or through

    validated complaints.

    (C) Requirements for procedures. In establishing procedures

    under paragraph (b)(6), the chief compliance officer shall design

    the procedures to establish the handling, management response,

    remediation, retesting, and closing of noncompliance issues.

    (D) Annual reports.

    (1) In general. In accordance with rules prescribed by the

    Commission, the chief compliance officer shall annually prepare and

    sign a report that contains a description of:

    (i) The compliance of the swap execution facility with the Act;

    and

    (ii) The policies and procedures, including the code of ethics

    and conflict of interest policies, of the swap execution facility.

    (2) Requirements. The chief compliance officer shall:

    (i) Submit each report described in clause (1) with the

    appropriate financial report of the swap execution facility that is

    required to be submitted to the Commission pursuant to this section;

    and

    (ii) Include in the report a certification that, under penalty

    of law, the report is accurate and complete.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Dated: December 16, 2010.

    By the Commission.

    David A. Stawick,

    Secretary.

    Appendices to Core Principles and Other Requirements for Swap Execution

    Facilities--Commission Voting Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Chilton

    and O'Malia voted in the affirmative; Commissioner Sommers voted in

    the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking to fulfill Congress's mandate

    to have rules and core principles requirements for swap execution

    facilities (SEFs). The proposed rule also fulfills Congress's

    mandate to promote transparency through the trading of swaps on

    SEFS.

    The proposed rule will provide for all market participants an

    ability to execute or trade with other market participants. It will

    afford market participants with the ability to make firm bids or

    offers to all other market participants. It also will allow them to

    make indications of interest--or what is often referred to as

    ``indicative quotes''--to other participants. Furthermore, it will

    allow participants to request quotes from other market participants.

    These methods will provide hedgers, investors and Main Street

    businesses both the flexibility to execute and trade by a number of

    methods, but also the benefits of transparency and more market

    competition. I believe that transparency and competition in markets

    is consistent with Congress mandated in the definition of a swap

    execution facility, whereby all market participants can communicate

    with all market participants such that everybody gets the benefit of

    a competitive and transparent price discovery process.

    The proposal does allow participants, though, to do request for

    quotes, whereby they would reach out to a minimum number of other

    market participants for quotes. It also allows that, for block

    transactions, swap transactions involving non-financial end-users,

    swaps that are not ``made available for trading'' and bilateral

    transactions, market

    [[Page 1259]]

    participants can get the benefits of the swap execution facilities'

    greater transparency or, if they wish, would still be allowed to

    execute by voice or other means of trading.

    To fulfill Congress's mandate that, the rule requires SEFs to

    provide impartial access to market participants for trading on the

    platform or system.

    The proposed rule also would require SEFs to--on a yearly

    basis--state which contracts are deemed ``available for trading,''

    based on factors including trading activity and open interest. The

    rule, if finalized, goes into effect in January 2012. This will give

    the markets time to adapt, allow SEFs to tell the market what

    contracts are available for trading.

    Appendix 3--Statement of Commissioner Sommers

    I disagree with several aspects of the Swap Execution Facility

    (SEF) proposal the Commission is issuing today and seek public

    comment on alternative language for Section 37.9, Permitted

    Execution Methods.

    Dodd-Frank 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.'' As I have pointed out in my public

    speaking engagements over the past few months, the term ``trading

    facility'' is defined in the Commodity Exchange Act (Act), but the

    terms ``trading system'' and ``platform'' are not. By introducing

    these new, undefined terms into the Act, and by specifying that SEFs

    should facilitate the trading of swaps through any means of

    interstate commerce, I believe Congress intended a broad model for

    executing swaps on SEFs, both cleared, uncleared, liquid or bespoke.

    The goals identified by Dodd-Frank for registering SEFs are ``to

    promote the trading of swaps on swap execution facilities and to

    promote pre-trade price transparency in the swaps market.'' In my

    view, the best way to achieve these twin goals is to adopt a model

    that provides the maximum amount of flexibility as to the method of

    trading. Unfortunately, this proposal does not do that.

    Section 37.9, which governs the types of execution methods that

    SEFs may offer, is a key provision of this proposed regulation.

    While it permits alternative methods of execution, such as the

    trading facility model and the request for quote model, it also

    requires that to be registered as a SEF an applicant must, at a

    minimum, provide market participants ``with the ability to post both

    firm and indicative quotes on a centralized electronic screen

    accessible to all market participants who have access to the swap

    execution facility.'' In my view this provision is not mandated by

    Dodd-Frank and may limit competition by shutting out applicants who

    wish to offer request for quote services without this functionality.

    I believe this interpretation of the statute, and other requirements

    within this section, are far too restrictive.

    As a result of my concerns, we worked throughout the past week

    to include alternative language for Section 37.9 in the proposal. I

    believe this alternative language complies with Dodd-Frank and would

    promote both pre-trade price transparency and the trading of swaps

    on SEFs. Including the alternative would have given the public an

    opportunity to comment, in accordance with the Administrative

    Procedure Act, on both the alternative language and the language

    contained in the proposed rule. I am deeply disappointed that

    despite a commitment to a transparent process in promulgating the

    Dodd-Frank rules, the alternative language is not in the proposal

    today and we are not giving the public the opportunity to comment on

    it. That alternative language is set forth below.

    Sec. 37.9 Permitted Execution Methods.

    (a) Definitions.

    (1) As used in this Part 37:

    (i) Order Book System means:

    (A) An electronic trading facility, as that term is defined in

    section 1a(16) of the Act;

    (B) A trading facility, as that term is defined in section 1a(51)

    of the Act;

    (C) A trading system or platform in which all market participants

    in the trading system or platform can enter multiple bids and offers,

    observe bids and offers entered by other market participants, and

    choose to transact on such bids and offers; or

    (D) Any such other trading system or platform as may be determined

    by the Commission.

    (ii) Request for Quote System means:

    (A) A trading system or platform in which a market participant

    transmits a request for a quote to buy or sell a specific instrument to

    all other market participants in the trading system or platform to

    which all market participants may respond;

    (B) A trading system or platform in which a market participant

    transmits a request for a quote to buy or sell a specific instrument to

    more than one potential counterparty. Upon receipt of responsive quotes

    from any of the potential counterparties, the original requester may

    accept a responsive quote and complete a transaction with any one of

    the responsive counterparties;

    (C) A trading system or platform in which multiple market

    participants can both (i) view real-time electronic streaming quotes,

    both firm or indicative, from multiple potential counterparties on a

    centralized screen; and (ii) have the option to complete a transaction

    by (A) accepting a firm streaming quote, or (B) transmitting a request

    for a quote to more than one market participant, based upon an

    indicative streaming quote, taking into account any resting bids or

    offers that have been communicated to the requester along with any

    responsive quotes; or

    (D) Any such other trading system or platform as may be determined

    by the Commission.

    (iii) Voice-Based System means:

    (A) A trading system or platform in which a market participant

    executes or trades a swap using a telephonic line or other voice-based

    service.

    (2) Swaps subject the clearing requirements under the Act that are

    made available for trading pursuant to Sec. 37.10 may be executed or

    traded on an Order Book System, a Request for Quote System, or any such

    other trading system or platform as may be determined by the

    Commission.

    (3) Swaps not subject to the clearing requirements under the Act

    may be executed or traded on an Order Book System, a Request for Quote

    System, a Voice-Based System, or any such other trading system or

    platform as may be determined by the Commission.

    (4) A swap execution facility can be an Order Book System, a

    Request for Quote System, or any such other trading system or platform

    as may be determined by the Commission, or any combination of the

    aforementioned systems.

    [FR Doc. 2010-32358 Filed 1-6-11; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 10, 2011



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