Federal Register, Volume 86 Issue 28 (Friday, February 12, 2021) 
[Federal Register Volume 86, Number 28 (Friday, February 12, 2021)]
[Proposed Rules]
[Pages 9304-9307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28945]

Proposed Rules
                                                Federal Register

This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.


Federal Register / Vol. 86, No. 28 / Friday, February 12, 2021 /
Proposed Rules

[[Page 9304]]



17 CFR Parts 9, 36, 37, 38, 39, and 43

RIN 3038-AE25

Swap Execution Facilities and Trade Execution Requirement

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule; partial withdrawal.


SUMMARY: On November 30, 2018, the Commodity Futures Trading Commission
(``CFTC'' or the ``Commission'') published a ``Swap Execution
Facilities and Trade Execution Requirement'' notice of proposed
rulemaking (``NPRM'') in the Federal Register. While the Commission has
adopted certain proposals from the NPRM, in light of feedback the
Commission received in response to the remaining proposals in the NPRM,
the Commission has determined to not proceed with those unadopted
proposals relating to the regulation of swap execution facilities
(``SEFs'') and the trade execution requirement (``Determination''). In
separate final rules, the Commission adopted the following portions of
the NPRM: Two exemptions, pursuant to Commodity Exchange Act (``CEA'')
section 4(c), from the trade execution requirement in CEA section
2(h)(8); and final rules related to audit trail requirements for post-
trade allocations, SEF financial resource requirements, and SEF chief
compliance officer requirements (collectively, the ``Final Rules''). As
such, this withdrawal does not impact or alter any of those sections of
the NPRM that are being adopted in the Final Rules. In light of the
Determination, the Commission has decided to withdraw the unadopted
portions of the NPRM.

DATES: The Commission is withdrawing unadopted portions of the proposed
rule published in the Federal Register on November 30, 2018 at 83 FR
61946 as of February 12, 2021. The affected portions of the proposed
rule are described in SUPPLEMENTARY INFORMATION.

ADDRESSES: Comments previously submitted in response to the NPRM remain
on file at the Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581 and may also be
accessed via the CFTC Comments Portal: https://comments.cftc.gov.

FOR FURTHER INFORMATION CONTACT: Roger Smith, Associate Chief Counsel,
Division of Market Oversight, (202) 418-5344, [email protected],
Commodity Futures Trading Commission, 525 West Monroe Street, Suite
1100, Chicago, IL 60661; or David E. Aron, Acting Associate Director,
Division of Data, (202) 418-6621, [email protected], Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.

SUPPLEMENTARY INFORMATION: On November 30, 2018, the Commission
published the NPRM, which proposed a comprehensive foundational shift
in the regulatory framework for SEFs.\1\ In particular, if adopted, the
NPRM would have, among other things, (i) required that certain swaps
broking entities, including interdealer brokers, and aggregators of
single-dealer platforms register as SEFs pursuant to the registration
requirement under CEA section 5h(a)(1); \2\ (ii) broadened the scope of
the trade execution requirement, but provided certain exemptions; (iii)
allowed a SEF to offer flexible execution methods for swaps subject to
the trade execution requirement; and (iv) established disclosure-based
trading and execution rules applicable to any SEF execution method. In
conjunction with flexible execution methods, the Commission also
proposed limits on the scope of trading-related communications (``pre-
execution communications'') that SEF participants may conduct away from
a SEF's trading system or platform, as well as proficiency requirements
for certain SEF employees who facilitate trading. Additionally, the
Commission proposed amendments to impartial access rules that would
provide a SEF with greater flexibility to structure its access
requirements, and to tailor its rule enforcement program and
disciplinary procedures and sanctions, to its trading operations and
market. The proposed rules also would have made non-substantive
amendments and various conforming changes to other Commission

    \1\ See the NPRM, 83 FR 61946 (Nov. 30, 2018), available at:
    \2\ 7 U.S.C. 7b-3(a)(1).

    In response to the NPRM, the Commission received fifty-six comment
letters from SEFs, market participants, industry trade associations,
public interest organizations, and other interested parties. The NPRM
comprehensively sought to amend the SEF regulatory framework. For
example, one commenter characterized the NPRM as a ``fundamental
reconstruction of the `SEF ecosystem,' '' and ``[the NPRM would] change
many of the ways in which market participants interact with, and trade
on, SEFs. This reconstruction of the existing ecosystem would present
tall operational challenges and impose substantial costs on all market
participants. . . .'' \3\ Several commenters expressed concern over the
magnitude of changes behind the NPRM. Therefore, to avoid potential and
unintended adverse market impacts caused by comprehensive and far-
reaching changes, several commenters preferred that the Commission
adopt a more ``targeted'' approach.

    \3\ Futures Industry Association (``FIA'') Letter at 7.

    The Commission, at the time, proposed the NPRM based on particular
views regarding the need for a comprehensive revamping of the
regulatory framework for SEFs. In light of feedback the Commission
received in response to the NPRM, and upon further consideration, the
Commission believes that rather than comprehensively amending the
fundamentals underpinning the SEF regime, the Commission should instead
work to improve the SEF framework through targeted rulemakings that
address distinct issues. The Commission agrees with commenters that
this approach will help the Commission avoid unintended adverse market
impacts caused by the comprehensive and far-reaching changes of the
    Therefore, the Commission has determined to withdraw the unadopted
portions of the pending NPRM in order to allow the Commission to
propose and

[[Page 9305]]

adopt targeted rulemakings to address specific SEF issues or

    \4\ Concurrently with this withdrawal, the Commission is
adopting the Final Rules to implement various proposals from the
NPRM. One of the Final Rules adopted two CEA section 4(c) exemptions
from the trade execution requirement. Specifically, this final
rulemaking adopted proposed Sec.  36.1(c) and Sec.  36.1(e), which
were respectively re-numbered as Sec.  36.1(b) and Sec.  36.1(c) in
the adopting release. See Exemption from Swap Execution Requirement,
published in yesterday's issue of the Federal Register. The other
adopted various proposals related to audit trail requirements for
post-trade allocations, SEF financial resource requirements, and SEF
chief compliance officer requirements. In particular, these final
rules addressed the proposals for Sec. Sec.  37.205(a) and (b)(2);
37.1301; 37.1302; 37.1303; 37.1304; 37.1305; 37.1306; 37.1307; and
37.1501. See Swap Execution Facilities, published in yesterday's
issue of the Federal Register. This withdrawal does not impact or
alter any of the Final Rules.

    Issued in Washington, DC, on December 23, 2020, by the
Christopher Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of
Federal Regulations.

Appendices to Swap Execution Facilities and Trade Execution
Requirement--Commission Voting Summary, Chairman's Statement, and
Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.

Appendix 2--Statement of Support of Chairman Heath P. Tarbert

    Nearly two thousand years ago, the Stoic philosopher and
statesman Seneca the Younger observed that ``every new beginning
comes from some other beginning's end.'' This remains as true today
as it was then, and as it was in the 1990s when the band Semisonic
built a song around it.
    I vote today in support of withdrawing the remaining unadopted
portions of the November 2018 Swap Execution Facilities (``SEF'')
and Trade Execution Requirement proposal (``SEF Proposal''). With
the beginning of a new SEF landscape based on other rules we are
announcing today, it is appropriate to bring that proposal--which
was itself a beginning of sorts--to an end.
    The SEF Proposal, which was championed by my predecessor
Chairman Chris Giancarlo, was comprehensive in that it sought to
codify staff no-action relief and otherwise resolve operational
concerns of SEFs and market participants. It also set forth
structural reforms to the SEF regime beyond these operational fixes.
The SEF Proposal reflected a great deal of time, effort, and
thought, and resulted in several rules ultimately adopted by the
Commission. I am grateful indeed for Chairman Giancarlo's thought
leadership and the path that the SEF Proposal set our agency upon.
    In particular, our Commission yesterday adopted from the SEF
Proposal: (1) Two exemptions, pursuant to Commodity Exchange Act
(``CEA'') section 4(c), from the trade execution requirement in CEA
section 2(h)(8); and (2) final rules related to audit trail
requirements for post-trade allocations, SEF financial resource
requirements, and SEF chief compliance officer requirements. With
respect to the unadopted portions of the SEF Proposal, the feedback
received from market participants and the public made clear that
moving forward would require significantly more work and a re-
proposal of the rules. Therefore, I believe it is appropriate to
withdraw those unadopted elements. Doing so is also consistent with
our Commission's reasoning for withdrawing Regulation AT a few
months ago--we can start a new beginning only once we have ended the
prior beginning.

Appendix 3--Statement of Support of Commissioner Brian D. Quintenz

    I will vote in favor of withdrawing the unadopted provisions
from the Commission's 2018 proposal comprehensively to amend the
regulations applicable to swap execution facilities (SEFs),\1\ but
only because the Commission has already adopted many of these
proposals, including in the areas of SEF financial resources, audit
trail data, and exceptions to the trade execution requirement, so
that the SEF ruleset becomes more practical for market participants.
I note that many of the finalized provisions are based on
longstanding no-action relief that has taken over eight years and a
Republican administration to rationalize the inadequate ruleset left
by the Commission's prior leadership.

    \1\ SEFs and Trade Execution Requirement, 83 FR 61946 (Nov. 30,

    I regret significantly, however, that certain aspects of the
2018 proposal have not been acted upon or debated as a Commission
since. In particular, the CEA as amended by Dodd Frank, legally
allows SEFs greater flexibility--specifically through ``any means of
interstate commerce'' \2\--in which methods of execution they may
offer for swaps subject to the trade execution requirement, than the
overly prescriptive and government-knows-best requirement that a SEF
may only provide either a RFQ-to-3 or a Central Limit Order Book
(CLOB) trading mechanism, as dictated by an existing CFTC rule.\3\
Indeed, such flexibility was recently requested by a wide range of
market participants during the period of COVID-inspired market
volatility and thin liquidity.\4\ If such trade execution
flexibility is necessary to support liquidity in a stressed
environment, why would it not benefit the markets more generally in
normal environments? Additionally, such flexibility is absolutely
consistent with the definition of a SEF set forth in the CEA, that
establishes a SEF as a multiple-to-multiple trading system.'' \5\

    \2\ Definition of SEF, sec. 1a(50) of the CEA.
    \3\ CFTC reg. 37.9(a).
    \4\ Comment letter from ISDA, dated May 22, 2020, in response to
the Commission's February 2020 proposal on SEF and Real-Time
Reporting requirements (85 FR 9407 (Feb. 19, 2020)).
    \5\ Definition of SEF, sec. 1a(50) of the CEA.

Appendix 4--Statement of Concurrence of Commissioner Rostin Behnam

    More than two years ago, in November 2018, the Commission voted
to propose a comprehensive overhaul of the existing framework for
swap execution facilities (SEFs).\1\ Today, the Commission issues
two rules finalizing aspects of the SEF Proposal and a withdrawal of
the SEF Proposal's unadopted provisions. This is the final step in a
long road. Last month, the Commission finalized rules emanating from
the SEF Proposal regarding codification of existing no-action
letters regarding, among other things, package transactions.\2\
Today's final rules and withdrawal complete the Commission's
consideration of the SEF Proposal.

    \1\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (Nov. 30, 2018) (the ``SEF Proposal'').
    \2\ Swap Execution Facility Requirements (Nov. 18, 2020),

    Back in November 2018, I expressed concern that finalization of
the SEF Proposal would reduce transparency, increase limitations on
access to SEFs, and add significant costs for market
participants.\3\ I also noted that, while the existing SEF framework
could benefit from targeted changes, particularly the codification
of existing no-action relief, the SEF framework has in many ways
been a success. I pointed out that the Commission's work to promote
swaps trading on SEFs has resulted in increased liquidity, while
adding pre-trade price transparency and competition. Nonetheless, I
voted to put the SEF Proposal out for public comment, anticipating
that the notice and comment process would guide the Commission in
identifying a narrower set of changes that would improve the current
SEF framework and better align it with the statutory mandate and the
underling policy objectives shaped after the 2008 financial
crisis.\4\ More than two years and many comment letters later, that
is exactly what has happened. The Commission has been precise and
targeted in its finalization of specific provisions from the SEF
Proposal that provide needed clarity to market participants and
promote consistency, competitiveness, and appropriate operational
flexibility consistent with the core principles.

    \3\ Statement of Concurrence of Commissioner Rostin Behnam
Regarding Swap Execution Facilities and Trade Execution Requirement,
    \4\ Id.

    In addition to expressing substantive concerns about the
overbreadth of the SEF Proposal, I also voiced concerns that we were
rushing by having a comparatively short 75-day comment period.\5\ In
the end, the comment period was rightly extended, and the Commission
has taken the time necessary to carefully evaluate the
appropriateness of the SEF Proposal in consideration of its
regulatory and oversight responsibilities and the comments received.
I think that the consideration of the SEF Proposal is an example of
how the process is supposed to

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work. When we move too quickly toward the finish line and without
due consideration of the surrounding environment, we risk making a
mistake that will impact our markets and market participants.

    \5\ Id.

    Finally, I would like to address the Commission's separate vote
to withdraw the unadopted provisions of the SEF Proposal. In the
past, I have expressed concern with such withdrawals by an agency
that has historically prided itself on collegiality and working in a
bipartisan fashion.\6\ In the case of today's withdrawal, the
Commission has voted on all appropriate aspects of the SEF Proposal
through three rules finalized during the past month. The Commission
has voted unanimously on all of these rules, including today's
decision to withdraw the remainder from further consideration. While
normally a single proposal results in a single final rule, in this
instance, multiple final rules have been finalized emanating from
the SEF Proposal. This could lead to confusion regarding the
Commission's intentions regarding the many unadopted provisions of
the SEF Proposal. Under such circumstances, I think it is
appropriate to provide market participants with clarity regarding
the SEF Proposal. Accordingly, I will support today's withdrawal of
the SEF Proposal. But rather than viewing it as a withdrawal of the
SEF Proposal, I see it as an affirmation of the success of the
existing SEF framework and the careful process to markedly improve
the SEF framework in a measured and thoughtful way.

    \6\ Rostin Behnam, Commissioner, CFTC, Dissenting Statement of
Commissioner Rostin Behnam Regarding Electronic Trading Risk
Principles (June 25, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement062520b.

Appendix 5--Statement of Commissioner Dan M. Berkovitz

    I support the Commission's decision to withdraw its 2018
proposal to overhaul the regulation of swap execution facilities
(``SEFs'') \1\ (``2018 SEF NPRM'') and proceed instead with targeted
adjustments to our SEF rules (``Final Rules''). The two Final Rules
approved today will make minor changes to SEF requirements while
retaining the progress we have made in moving standardized swaps
onto electronic trading platforms, which has enhanced the stability,
transparency, and competitiveness of our swaps markets.\2\

    \1\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (Nov. 30, 2018).
    \2\ Dissenting Statement of Commissioner Dan M. Berkovitz
Regarding Proposed Rulemaking on Swap Execution Facilities and Trade
Execution Requirement (Nov, 5, 2018), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement110518a.

    When the Commission issued the 2018 SEF NPRM, I proposed that we
enhance the existing swaps trading system instead of dismantling it.
For example, I urged the Commission to clarify the floor trader
exception to the swap dealer registration requirement and abolish
the practice of post-trade name give-up for cleared swaps. I am
pleased that the Commission already has acted favorably on both of
those matters. Today's rulemaking represents a further positive step
in this targeted approach.
    Many commenters to the 2018 SEF NPRM supported this incremental
approach, advocating discrete amendments rather than wholesale
changes. Today, the Commission is adopting two Final Rules that
codify tailored amendments that received general support from
commenters. The first rule--Swap Execution Facilities--amends part
37 to address certain operational challenges that SEFs face in
complying with current requirements, some of which are currently the
subject of no-action relief or other Commission guidance. The second
rule--Exemptions from Swap Trade Execution Requirement--exempts two
categories of swaps from the trade execution requirement, both of
which are linked to exceptions to or exemptions from the swap
clearing requirement.

Swap Execution Facilities: Audit Trail Data, Financial Resources
and Reporting, and Requirements for Chief Compliance Officers

    Commission regulations require a SEF to capture and retain all
audit trail data necessary to detect, investigate, and prevent
customer and market abuses, which currently includes identification
of each account to which fills are ultimately allocated.\3\
Following the adoption of these regulations, SEFs represented that
they are unable to capture post-execution allocation data because
the allocations occur away from the SEF, prompting CFTC staff to
issue no-action relief. Other parties, including DCOs and account
managers, must capture and retain post-execution allocation
information and produce it to the CFTC upon request, and SEFs are
required to establish rules that allow them obtain this allocation
information from market participants as necessary to fulfill their
self-regulatory responsibilities. Given that staff is not aware of
any regulatory gaps that have resulted from SEFs' reliance on the
no-action letter, codifying this alternative compliance framework is

    \3\ 17 CFR 37.205(a), b(2)(iv).

    This Swap Execution Facility final rule also will amend part 37
to tie a SEF's financial resource requirements more closely to the
cost of its operations, whether in complying with core principles
and Commission regulations or winding down its operations. Based on
its experience implementing the SEF regulatory regime, the
Commission believes that these amended resource requirements--some
of which simply reflect current practice--will be sufficient to
ensure that a SEF is financially stable while avoiding the
imposition of unnecessary costs. Additional amendments to part 37,
including requirements that a SEF must prepare its financial
statements in accordance with U.S. GAAP standards, identify costs
that it has excluded in determining its projected operated costs,
and notify the Commission within 48 hours if it is unable to comply
with its financial resource requirements, will further enhance the
Commission's ability to exercise it oversight responsibilities.
    Finally, this rule makes limited changes to the Chief Compliance
Officer (``CCO'') requirements. As a general matter, I agree that
the Commission should clarify certain CCO duties and streamline CCO
reporting requirements where information is duplicative or not
useful to the Commission. Although the CCO requirements diverge
somewhat from those for futures commission merchants and swap
dealers, the role of SEFs is different and therefore,
standardization is not always necessary or appropriate. I expect
that the staff will continue to monitor the effects of all of the
changes adopted today and inform the Commission if it believes
further changes to our rules are needed.

Exemptions From Swap Trade Execution Requirement

    Commodity Exchange Act (``CEA'') section 2(h)(8) specifies that
a swap that is excepted from the clearing requirement pursuant to
CEA section 2(h)(7) is not subject to the requirement to trade the
swap on a SEF. Accordingly, swaps that fall into the statutory swap
clearing exceptions (e.g., commercial end-users and small banks) are
also excepted from the trading mandate. However, the Commission has
also exempted from mandatory clearing swaps entered into by certain
entities (e.g., cooperatives, central banks, and swaps between
affiliates) using different exemptive authorities from section
    The Exemptions from Swap Trade Execution Requirement final rule
affirms the link between the clearing mandate and the trading
mandate for swaps that are exempted from the clearing mandate under
authorities other than CEA section 2(h)(7). The additional clearing
exemptions are typically provided by the Commission to limited types
of market participants, such as cooperatives or central banks that
use swaps for commercial hedging or have financial structures or
purposes that greatly reduce the need for mandatory clearing and SEF
trading. In addition, limited data provided in the release indicates
that, at least up to this point in time, these exempted swaps
represent a small percentage of the notional amount of swaps traded.
    This final rule also exempts inter-affiliate swaps from the
trade execution requirement. These swaps are exempted from the
clearing requirement primarily because the risks on both sides of
the swap are, at least in some respects, held within the same
corporate enterprise. As described in the final rule release, these
swaps may not be traded at arms-length and serve primarily to move
risk from one affiliate to another within the same enterprise.
Neither market transparency nor price discovery would be enhanced by
including these transactions within the trade execution mandate. For
these reasons, I am approving the Exemptions from Swap Trade
Execution Requirement final rule as a sensible exemption consistent
with the relevant sections of the CEA.


    These two Final Rules provide targeted changes to the SEF
regulations based on experience from several years of implementing
them. These limited changes, together with the withdrawal of the
remainder of the 2018 SEF NPRM, effectively

[[Page 9307]]

leave in place the basic framework of the SEF rules as originally
adopted by the Commission. This framework has enhanced market
transparency, improved competition, lowered transaction costs, and
resulted in better swap prices for end users. While it may be
appropriate to make other incremental changes going forward, it is
important that we affirm the established regulatory program for SEFs
to maintain these benefits and facilitate further expansion of this
    I thank the staff of the Division of Market Oversight for their
work on these two rules and their helpful engagement with my office.

[FR Doc. 2020-28945 Filed 2-11-21; 8:45 am]