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, [email protected], or Mauricio Melara,

Attorney-Advisor, 202-418-5719, [email protected], 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/idc/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.

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\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.

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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.

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\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.

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[[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.

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

(December 8, 2010).

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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.

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\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.

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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\

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\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.

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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\

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\36\ CEA Section 1a(50).

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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.

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\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).

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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.

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\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.''

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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.

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

``request for quote'' systems.

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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.

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\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'').

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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.

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

dealer platforms do not satisfy the listed factors.

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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.

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

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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\

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\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.

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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\

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\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).

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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\

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

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

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

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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.

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

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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.

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\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).

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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\

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

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

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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.

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

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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.

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\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.

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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\

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

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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.

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\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).

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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\

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\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.

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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.

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\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).

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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.

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

practice surveillance; market surveillance; real-time market

monitoring; investigations of possible rule violations; and

disciplinary actions.

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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.

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\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.

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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\

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\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.

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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.

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\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.

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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.

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\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.

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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.

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\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.

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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\

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\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.

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[[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).

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\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.

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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.

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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.

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\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.

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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\

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\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.

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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\

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\82\ See, supra note 10, DCM NPRM.

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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.

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\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).

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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.

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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.

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\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.

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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.

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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.

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\90\ See, supra note 10, DCM NPRM; 75 FR 76140 (December 7,

2010); and 75 FR 76574 (December 8, 2010).

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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\

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\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.

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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.

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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.

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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.

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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.

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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.

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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.

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\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.

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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.

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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.

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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\

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\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).

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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\

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\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.

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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.

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\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.

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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\

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\115\ 44 U.S.C. 3501 et seq.

\116\ 7 U.S.C. 12(a)(1).

\117\ 5 U.S.C. 552a.

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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:

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\118\ Appendix E of Public Law 106-554, 114 Stat. 2763 (2000).

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Initial estimate of DCM's annual burden \119\: 300 hours per DCM.

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\119\ 66 FR 38992 (June 22, 2000).

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Estimate of DCM's annual burden as of 2006 \120\: 370 hours per

DCM.

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\120\ 71 FR 38748 (July 7, 2006).

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Current estimate of DCM's annual burden \121\: 440 hours per DCM.

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\121\ See, supra note 10, DCM NPRM.

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Initial estimate of DTEF's annual burden \122\: 200 hours per DTEF.

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\122\ 65 FR 38993 (June 22, 2000).

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Initial estimate of ECM's with SPDCs annual burden \123\: 233 hours

per ECM.

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\123\ 73 FR 75901 (December 12, 2008).

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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.

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\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.

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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.

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\125\ For hourly reporting requirements, an average of 35 SEFs

was used for calculation purposes.

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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 [email protected]

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.

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\126\ 7 U.S.C. 19(a).

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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

[email protected] and the Division of Market Oversight at

[email protected]

(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 [email protected] and the Division of

Market Oversight at [email protected], 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 [email protected], and the Division

of Market Oversight, at [email protected], 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

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Exact name of Applicant as specified in charter

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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

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GENERAL INFORMATION

1. Name under which business of the swap execution facility will be

conducted, if different than name specified on facing sheet:

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2. If name of swap execution facility is hereby amended, state

previous swap execution facility name:

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3. Mailing address, if different than address specified on facing

sheet:

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Number and Street

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City, State, Zip Code

3(a). Additional contact information:

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Fax

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Phone

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Website

4. List of principal office(s) and address(es) where swap execution

facility activities are/will be conducted:

Office

Address

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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:

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b. State of incorporation:

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7. If Applicant is a partnership:

a. Date of filing of partnership articles:

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b. State in which filed:

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8. If Applicant is a limited liability company:

a. Date of filing of Articles of Organization/Certificate of

Formation:

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b. State in which filed:

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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.

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Name of person (if Applicant is a corporation, limited liability

company or partnership, title of officer)

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Name of Applicant

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Number and Street

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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.

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Name of Applicant

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Manual signature of Member, General Partner, Managing Agent, or

Principal Agent

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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