Statement of Commissioner Dan M. Berkovitz on Codification of Certain Swap Execution Facility Requirements; Final Rule
November 18, 2020
I support today’s final rule to amend parts 36 and 37 of the Commission’s regulations relating to the execution of package transactions and correction of error trades on swap execution facilities (SEFs). The final rule will further, in a flexible and cost-effective manner, the Congressional goal of promoting the trading of swaps on SEFs.
Beginning in 2014, the Commission issued a series of no-action letters specifying permissible methods of execution for certain package transactions, which enabled the agency to phase-in the application of the trade execution mandate for these transactions. As market infrastructure has evolved, the Commission has allowed portions of the relief for some package transactions to expire, leaving a narrow set of these transactions that still may be implemented through flexible methods of execution. Based on experience, the Commission has determined that flexible methods of execution are currently more appropriate for packages in which at least one of the components is (1) a swap not subject to the clearing requirement; (2) not a swap; or (3) a swap for which the CFTC does not have exclusive jurisdiction. Requiring that the swap components of these transactions be traded through the required methods of execution (i.e., Order Book or Request-for-Quote to a minimum of 3 counterparties) could force market participants to break up the package into their individual components, which would increase transaction costs and risks, and thereby defeat the economic purpose and efficiency of the package transaction. Commenters supported the rule as proposed. It is therefore appropriate for the Commission to codify that flexible methods of execution may be used for the swap components of this limited set of package transactions.
The final rule also exempts from the trade execution requirement swap transactions that are components of “new issuance bond” package transactions, and amends part 37 to provide flexibility in the execution methods a SEF may offer counterparties to correct clerical or operational errors. While providing additional flexibility for resolving error trades, the rule limits the number of instances in which such errors may be corrected, and preserves important protections to guard against abuse. Notably, the Commission requires market participants to provide prompt notice to a SEF of an error trade, enabling the SEF to conduct real-time market monitoring and fulfill other self-regulatory obligations. In addition, the rule makes clear that a SEF must maintain rules and procedures that are fair, transparent, incentivize timely resolution of an error trade, and allow for such resolution without disclosing the identity of counterparties to one another where the swaps trading is subject to the post-trade name give up prohibition.
Given the tailored nature of these amendments and the appropriate safeguards, I support this final rule. I thank the staff of the Division of Market Oversight for their work on this rule and their helpful engagement with my office.