2013-12242

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

[Rules and Regulations]

[Pages 33475-33604]

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

[FR Doc No: 2013-12242]

[[Page 33475]]

Vol. 78

Tuesday,

No. 107

June 4, 2013

Part II

Commodity Futures Trading Commission

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17 CFR Part 37

Core Principles and Other Requirements for Swap Execution Facilities;

Final Rule

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

and Regulations

[[Page 33476]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 37

RIN 3038-AD18

Core Principles and Other Requirements for Swap Execution

Facilities

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

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

implement certain statutory provisions enacted by Title VII of the

Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank

Act''). The final rules, guidance, and acceptable practices, which

apply to the registration and operation of a new type of regulated

entity named a swap execution facility (``SEF''), implement the Dodd-

Frank Act's new statutory framework that, among other requirements,

adds a new section 5h to the Commodity Exchange Act (``CEA'' or

``Act'') concerning the registration and operation of SEFs, and adds a

new section 2(h)(8) to the CEA concerning the execution of swaps on

SEFs.

DATES: The rules will become effective August 5, 2013, with the

exception of regulation 37.3(b)(5) (17 CFR 37.3(b)(5)), which shall

become effective August 5, 2015.

Compliance date: October 2, 2013, except that: (a) From August 5,

2013 until October 2, 2014 market participants may comply with the

minimum market participant requirement in regulation 37.9(a)(3) (17 CFR

37.9(a)(3)) by transmitting a request for a quote to no less than two

market participants; and (b) each affected entity shall comply with the

warning letter requirement in regulation 37.206(f) (17 CFR 37.206(f))

no later than August 5, 2014.

FOR FURTHER INFORMATION CONTACT: Amir Zaidi, Special Counsel, 202-418-

6770, [email protected], Alexis Hall-Bugg, Special Counsel, 202-418-6711,

[email protected], or David Van Wagner, Chief Counsel, 202-418-5481,

[email protected], Division of Market Oversight; Michael Penick,

Senior Economist, 202-418-5279, [email protected], or Sayee Srinivasan,

Research Analyst, 202-418-5309, [email protected], Office of the

Chief Economist, Commodity Futures Trading Commission, Three Lafayette

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Swaps and Title VII of the Dodd-Frank Act

B. SEF Notice of Proposed Rulemaking

II. Part 37 of the Commission's Regulations--Final Rules

A. Adoption of Regulations, Guidance, and Acceptable Practices

B. General Regulations (Subpart A)

1. Sec. 37.1--Scope

2. Sec. 37.2--Applicable Provisions

3. Sec. 37.3--Requirements for Registration

4. Sec. 37.4--Procedures for Listing Products and Implementing

Rules

5. Sec. 37.5--Information Relating to Swap Execution Facility

Compliance

6. Sec. 37.6--Enforceability

7. Sec. 37.7--Prohibited Use of Data Collected for Regulatory

Purposes

8. Sec. 37.8--Boards of Trade Operating Both a Designated

Contract Market and a Swap Execution Facility

9. Sec. 37.9--Permitted Execution Methods

10. Sec. 37.10--Swaps Made Available for Trading

11. Sec. 37.11--Identification of Non-Cleared Swaps or Swaps

Not Made Available To Trade

C. Regulations, Guidance, and Acceptable Practices for

Compliance With the Core Principles

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

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

(a) Sec. 37.200--Core Principle 2--Compliance With Rules

(b) Sec. 37.201--Operation of Swap Execution Facility and

Compliance With Rules

(d) Sec. 37.203--Rule Enforcement Program

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

(f) Sec. 37.205--Audit Trail

(g) Sec. 37.206--Disciplinary Procedures and Sanctions

(h) Sec. 37.207--Swaps Subject to Mandatory Clearing

3. Subpart D--Core Principle 3 (Swaps Not Readily Susceptible to

Manipulation)

4. Subpart E--Core Principle 4 (Monitoring of Trading and Trade

Processing)

(a) Sec. 37.401--General Requirements

(b) Sec. 37.402--Additional Requirements for Physical-Delivery

Swaps

(d) Sec. 37.404--Ability To Obtain Information

(e) Sec. 37.405--Risk Controls for Trading

(f) Sec. 37.406--Trade Reconstruction

(g) Sec. 37.407--Additional Rules Required

5. Subpart F--Core Principle 5 (Ability To Obtain Information)

(a) Sec. 37.501--Establish and Enforce Rules

(b) Sec. 37.502--Collection of Information

(d) Sec. 37.504--Information-Sharing Agreements

6. Subpart G--Core Principle 6 (Position Limits or

Accountability)

7. Subpart H--Core Principle 7 (Financial Integrity of

Transactions)

(a) Sec. 37.701--Mandatory Clearing

(b) Sec. 37.702--General Financial Integrity

8. Subpart I--Core Principle 8 (Emergency Authority)

(a) Sec. 37.801--Additional Sources for Compliance

9. Subpart J--Core Principle 9 (Timely Publication of Trading

Information)

10. Subpart K--Core Principle 10 (Recordkeeping and Reporting)

11. Subpart L--Core Principle 11 (Antitrust Considerations)

12. Subpart M--Core Principle 12 (Conflicts of Interest)

13. Subpart N--Core Principle 13 (Financial Resources)

(a) Sec. 37.1301--General Requirements

(b) Sec. 37.1302--Types of Financial Resources

(d) Sec. 37.1304--Valuation of Financial Resources

(e) Sec. 37.1305--Liquidity of Financial Resources

(f) Sec. 37.1306--Reporting Requirements

14. Subpart O--Core Principle 14 (System Safeguards)

(a) Sec. 37.1401--Requirements

15. Subpart P--Core Principle 15 (Designation of Chief

Compliance Officer)

(a) Sec. 37.1501--Chief Compliance Officer

III. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Cost Benefit Considerations

1. Introduction

2. SEF Market Structure

3. Registration

4. Recordkeeping and Reporting

5. Compliance

6. Monitoring and Surveillance

7. Financial Resources

8. Emergency Operations and System Safeguards

IV. List of Commenters

V. Text of Final Regulations, Guidance, and Acceptable Practices

I. Background

A. Swaps and Title VII of the Dodd-Frank Act

Historically, swaps have traded in over-the-counter (``OTC'')

markets, rather than on regulated exchanges given their exemption from

regulation.\1\ The OTC swaps market is less transparent than exchange-

traded futures and securities markets. This lack of transparency was a

major contributor to the 2008 financial crisis because regulators and

market participants lacked visibility to identify and assess the

implications of swaps market exposures and counterparty

relationships.\2\ As a result, on July 21,

[[Page 33477]]

2010, President Obama signed the Dodd-Frank Act,\3\ which tasked the

Commission with overseeing a large portion of the U.S. swaps market.

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\1\ See Commodity Futures Modernization Act of 2000, Public Law

106-554, 114 Stat. 2763 (2000).

\2\ See The Financial Crisis Inquiry Commission, The Financial

Crisis Inquiry Report: Final Report of the National Commission on

the Causes of the Financial and Economic Crisis in the United States

(Official Government Edition), at 299, 352, 363-364, 386, 621 n. 56

(2011), available at http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf. The Commission has

acknowledged, however, that the benefits of enhanced market

transparency are not boundless, particularly in swap markets with

limited liquidity. See Procedures to Establish Appropriate Minimum

Block Sizes for Large Notional Off-Facility Swaps and Block Trades,

77 FR 15460, 15466 (proposed Mar. 15, 2012). In implementing these

regulations, the Commission has taken into account the benefits and

concerns related to market transparency.

\3\ Dodd-Frank Wall Street Reform and Consumer Protection Act,

Public Law 111-203, 124 Stat. 1376 (2010).

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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 (``SB-swaps''). A key goal of the Dodd-Frank Act

is to bring greater pre-trade and post-trade transparency to the swaps

market. Pre-trade transparency with respect to the swaps market refers

to making information about a swap available to the market, including

bid (offers to buy) and offer (offers to sell) prices, quantity

available at those prices, and other relevant information before the

execution of a transaction. Such transparency lowers costs for

investors, consumers, and businesses; lowers the risks of the swaps

market to the economy; and enhances market integrity to protect market

participants and the public. The Dodd-Frank Act also ensures that a

broader universe of market participants receive pricing and volume

information by providing such information upon the completion of every

swap transaction (i.e., post-trade transparency).\6\ By requiring the

trading of swaps on SEFs and designated contract markets (``DCMs''),

all market participants will benefit from viewing the prices of

available bids and offers and from having access to transparent and

competitive trading systems or platforms.

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\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.

\6\ See Financial Stability Board, Implementing OTC Derivatives

Market Reforms, at 41 (Oct. 25, 2010), available at http://www.financialstabilityboard.org/publications/r_101025.pdf;

Technical Committee of the International Organization of Securities

Commissions, Transparency of Structured Finance Products Final

Report, at 17, 21 (Jul. 2010), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD326.pdf.

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In addition to facilitating greater transparency and trading of

swaps on SEFs, Title VII of the Dodd-Frank Act establishes a

comprehensive regulatory framework, including registration, operation,

and compliance requirements for SEFs.\7\ For example, section 733 of

the Dodd-Frank Act sets forth a broad registration provision that

requires any person who operates a facility for the trading of swaps to

Frank Act amended the CEA to define SEF as a trading platform where

multiple participants have the ability to execute swaps by accepting

bids and offers made by multiple participants in the platform.\9\

Furthermore, section 723 of the Dodd-Frank Act set forth a trade

execution requirement, which states that swap transactions subject to

the clearing requirement must be executed on a DCM or SEF, unless no

DCM or SEF makes the swap available to trade or for swap transactions

subject to the clearing exception under CEA section 2(h)(7).\10\

Section 733 of the Dodd-Frank Act provided that 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.\11\

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\7\ See CEA section 5h, as enacted by section 733 of the Dodd-

Frank Act; 7 U.S.C. 7b-3. This 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.

\8\ CEA section 5h(a)(1), as enacted by section 733 of the Dodd-

Frank Act; 7 U.S.C. 7b-3(a)(1).

\9\ CEA section 1a(50), as amended by section 721 of the Dodd-

Frank Act; 7 U.S.C. 1a(50).

\10\ CEA section 2(h)(8), as amended by section 723 of the Dodd-

Frank Act; 7 U.S.C. 2(h)(8).

\11\ CEA section 5h, as enacted by section 733 of the Dodd-Frank

Act; 7 U.S.C. 7b-3.

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B. SEF Notice of Proposed Rulemaking

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 SEFs comply with the core

principles.\12\ In consideration of both the novel nature of SEFs and

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, on January 7, 2011, the Commission proposed a

combination of regulations, guidance, and acceptable practices for the

registration, oversight, and regulation of SEFs (``SEF NPRM'').\13\

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\12\ CEA section 5h(f)(1); 7 U.S.C. 7b-3(f)(1).

\13\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR 1214 (proposed Jan. 7, 2011).

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The SEF NPRM provided, among other requirements, the following:

(1) Procedures for temporary and full SEF registration.\14\

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\14\ Id. at 1238.

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(2) A minimum trading functionality requirement that all SEFs must

offer,\15\ which took into account the SEF definition,\16\ the core

principles applicable to SEFs,\17\ and the goals provided in section

733 of the Dodd-Frank Act.\18\ The minimum trading functionality

required a SEF to provide a centralized electronic trading screen upon

which any market participant can post both executable and non-

executable bids and offers that are transparent to all other market

participants of the SEF.\19\ For a trader who has the ability to

execute against its customer's order or to execute two customers'

orders against each other, the SEF NPRM also required the trader be

subject to a 15 second time delay between the entry of those two

orders.\20\ In addition, the proposal allowed a Request for Quote

(``RFQ'') System \21\ that operates in conjunction with the SEF's

minimum trading functionality.\22\ Finally, the SEF NPRM stated that a

SEF may offer other functionalities in conjunction with the minimum

trading functionality, as long as those functionalities meet the SEF

definition and comply with the core principles.\23\

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\15\ Id. at 1241.

\16\ CEA section 1a(50); 7 U.S.C. 1a(50).

\17\ CEA section 5h(f); 7 U.S.C. 7b-3(f).

\18\ The goals of section 733 of the Dodd-Frank Act are to

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

transparency in the swaps market. CEA section 5h(e); 7 U.S.C. 7b-

3(e).

\19\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1241.

\20\ Id.

\21\ Id.

\22\ By ``in conjunction with the SEF's minimum trading

functionality,'' the Commission means that the SEF NPRM required a

SEF to offer the minimum trading functionality, and if that SEF also

offered an RFQ System, it was required to communicate any bids or

offers resting on the minimum trading functionality to the RFQ

requester along with the responsive quotes. See the discussion below

regarding ``Taken Into Account and Communicated'' Language in the

RFQ System Definition under Sec. 37.9(a)(1)(ii)--Request for Quote

System in the preamble for further details.

\23\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1220.

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(3) The classification of swap transactions into two categories:

Required Transactions (i.e., transactions subject to the trade

execution mandate under section 2(h)(8) of the CEA and not block

trades) and Permitted Transactions (i.e., transactions not

[[Page 33478]]

subject to the clearing and trade execution mandates, illiquid or

bespoke swaps, or block trades).\24\ Under the SEF NPRM, Required

Transactions were required to be executed on the minimum trading

functionality, an Order Book meeting the minimum trading functionality,

or an RFQ System (in conjunction with the minimum trading

functionality).\25\ The SEF NPRM also allowed a SEF to provide

additional methods of execution for Permitted Transactions, including

Voice-Based Systems.\26\

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\24\ Id. at 1241.

\25\ Id.

\26\ Id.

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(4) Regulations, guidance, and acceptable practices to implement

the 15 core principles specified in section 5h(f) of the Act.\27\

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\27\ Id. at 1241-1253, 1256-1258.

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The initial comment period for the SEF NPRM ended on March 8, 2011.

Subsequently, the Commission reopened the comment period until June 3,

2011, as part of its global extension of comment periods for various

rulemakings implementing the Dodd-Frank Act.\28\ After the second

comment period ended, the Commission continued to accept and consider

late comments, which it did until April 30, 2013.\29\ The Commission

received approximately 107 comment letters on the SEF NPRM from members

of the public.\30\ The Chairman and Commissioners, as well as the

Commission staff, participated in numerous meetings with

representatives of single dealer platforms, interdealer brokers, DCMs,

trade associations, OTC market participants, potential SEF applicants,

and other interested parties.\31\ In addition, the Commission consulted

with the Securities and Exchange Commission (``SEC'') and international

regulators on numerous occasions.

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\28\ Reopening and Extension of Comment Periods for Rulemakings

Implementing the Dodd-Frank Wall Street Reform and Consumer

Protection Act, 76 FR 25274 (May 4, 2011). The Commission extended

the applicable comment periods to provide the public an additional

opportunity to comment on the proposed new regulatory framework. The

Commission also opened an additional comment period, which ended on

June 10, 2011, to provide the public an opportunity to comment on

the Commission's phased implementation of the Act, as amended,

including its implementation of section 733 of Dodd-Frank Act. Joint

Public Roundtable on Issues Related to the Schedule for Implementing

Final Rules for Swaps and Security-Based Swaps Under the Dodd-Frank

Wall Street Reform and Consumer Protection Act, 76 FR 23221 (Apr.

26, 2011).

\29\ The Commission also held two roundtables touching on issues

related to the SEF NPRM: (1) ``Available to Trade'' Provision for

Swap Execution Facilities and Designated Contract Markets; and (2)

Proposed Regulations Implementing Core Principle 9 for Designated

Contract Markets. Transcripts are available through the Commission's

Web site at http://www.cftc.gov/PressRoom/Events/2012Events/index.htm.

\30\ A list of the full names and abbreviations of commenters to

the SEF NPRM is included in section IV at the end of this release.

The Commission notes that many commenters submitted more than one

comment letter. Additionally, all comment letters that pertain to

the SEF NPRM, including those from the additional comment periods

related to implementation of the final Dodd-Frank rules, are

contained in the SEF rulemaking comment file and are available

through the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=955.

\31\ Meeting summaries are available through the Commission's

Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=955.

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II. Part 37 of the Commission's Regulations--Final Rules

A. Adoption of Regulations, Guidance, and Acceptable Practices

In this final rulemaking, the Commission is adopting many of the

proposed regulations that each SEF must meet in order to comply with

section 5h of the CEA, both initially upon registration and on an

ongoing basis, and related guidance, and acceptable practices. As a

result of the written comments received and dialogue and meetings with

the public, the Commission has revised or eliminated a number of

regulations that were proposed in the SEF NPRM, and in a number of

instances, has codified guidance and/or acceptable practices in lieu of

the proposed regulations. In determining the scope and content of the

final SEF regulations, the Commission has carefully considered the

costs and benefits for each rule with particular attention to the

public comments. Additionally, the Commission has taken into account

the concerns raised by commenters regarding the potential effects of

specific rules on SEFs offering different swap contracts and trading

systems or platforms and the importance of the statutory differences

between SEFs and DCMs. The Commission addresses these issues below in

its discussion of specific rule provisions.

The Commission also notes that the SEC has proposed rules related

to security-based SEFs (``SB-SEFs'') as required under section 763 of

the Dodd-Frank Act (``SB-SEF NPRM'').\32\ Section 712(a) of the Dodd-

Frank Act states that before commencing any rulemaking regarding swap

execution facilities, the Commission ``shall consult and coordinate to

the extent possible with the Securities and Exchange Commission and the

prudential regulators for the purposes of assuring regulatory

consistency and comparability . . . .'' \33\ The Commission has also

received several comments stating that the Commission and the SEC

should harmonize their rules as much as possible.\34\

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\32\ Registration and Regulation of Security-Based Swap

Execution Facilities, 76 FR 10948 (proposed Feb. 28, 2011).

\33\ 15 U.S.C. 8302(a)(1).

\34\ Tradeweb Comment Letter at 3-4 (Jun. 3, 2011); Reuters

Comment Letter 3-4 (Mar. 8, 2011); FSR Comment Letter at 10-11 (Mar.

8, 2011); WMBAA Comment Letter at 10-11 (Mar. 8, 2011).

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The Commission has coordinated with the SEC to harmonize the SEF

and SB-SEF requirements to the extent possible and has taken into

consideration the comments for greater harmonization between the SEF

and SB-SEF regulations. However, there may be appropriate differences

in the approach that each agency may take regarding the regulation of

SEFs and SB-SEFs. Cognizant of the different products and markets

regulated by the SEC and the Commission, the SEC recognized in its SB-

SEF NPRM that there may be differences in the approach that each agency

may take regarding the regulation of SEFs and SB-SEFs.\35\

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\35\ Registration and Regulation of Security-Based Swap

Execution Facilities, 76 FR at 10950.

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Similarly, the Commission is mindful that swaps may also trade on

DCMs. Thus, in addition to its efforts to coordinate its approach with

the SB-SEF regulations, the Commission also seeks, where possible, to

harmonize the final SEF regulations with the DCM regulations in order

to minimize regulatory differences between SEFs and DCMs in those

instances where Congress enacted similar core principles for the two

types of registered entities. In addition, some differences in the

agencies' regulatory oversight regimes may be attributed to the fact

that, unlike the SEC that is only responsible for overseeing trading in

SB-swaps, such as single-name securities and narrow-based security

indexes, the Commission is charged with the oversight of swaps trading

over a broad range of asset categories. Consequently, the Commission

has taken into account the varied characteristics of those underlying

commodities in formulating the regulatory responsibilities of SEFs.

In the preamble sections below, the Commission responds to the

substantive comments submitted in response to the SEF NPRM. The

Commission reviewed and considered all comments in adopting this final

rulemaking. Further, the final regulations include a number of

technical revisions and non-substantive changes to the proposed rule

text intended to clarify certain provisions, standardize terminology

[[Page 33479]]

within this part 37, conform terminology to that used in other parts of

the Commission's regulations, and more precisely state regulatory

standards and requirements. For example, a minimum trading

functionality requirement was in proposed Sec. 37.9, which has been

moved to the registration section under final Sec. 37.3 to clarify

that this functionality is required in order to register as a SEF. The

final regulations will become effective 60 days after their publication

in the Federal Register.

B. General Regulations (Subpart A)

The regulations in this final rulemaking are codified in subparts A

through P under part 37 of the Commission's regulations. The general

regulations consisting of Sec. Sec. 37.1 through 37.9 are codified in

subpart A, and the regulations applicable to each of the 15 core

principles are codified in subparts B through P, respectively.\36\

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\36\ Subparts B through P begin with a regulation containing the

language of the core principle in the Act.

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1. Sec. 37.1--Scope

Proposed Sec. 37.1 provided that part 37 applies to entities that

are registered SEFs, have been registered SEFs, or are applying to

become registered SEFs. The proposed rule also stated that part 37 does

not restrict the eligibility of SEFs to operate under the provisions of

parts 38 or 49 of this chapter.

(a) Commission Determination

The Commission received no comments on this section and is adopting

the provision as proposed.\37\

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\37\ The Commission has removed the phrase ``has been

registered'' from proposed Sec. 37.1 because a SEF that has been

registered is the same as a SEF that is registered.

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2. Sec. 37.2--Applicable Provisions

Proposed Sec. 37.2 listed the Commission regulations that, in

addition to part 37, will be applicable to SEFs, including regulations

that have been codified and are proposed to be codified upon the

Commission's finalization of the rulemakings implemented pursuant to

the Dodd-Frank Act.

(a) Commission Determination

Although it received no comments on this section, the Commission is

revising proposed Sec. 37.2 to generally state that SEFs shall comply

with, in addition to part 37, all applicable Commission regulations,

and to only cite those specific provisions whose applicability to SEFs

may not be apparent. The Commission notes that a separate rulemaking

adopted conforming changes to existing regulations to clarify the pre-

Dodd Frank provisions applicable to SEFs.\38\ There are, however,

certain existing regulations that will apply to SEFs that the separate

rulemaking did not address. Accordingly, for clarity purposes, the

Commission is specifically stating that Sec. 1.60 \39\ and part 9 \40\

of its regulations will apply to SEFs. These revisions will eliminate

the need for the Commission to continually update Sec. 37.2 when new

regulations with which SEFs must comply are codified.

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\38\ Adaptation of Regulations to Incorporate Swaps, 77 FR 66288

(Nov. 2, 2012). The Commission may promulgate a second phase of

conforming changes to its regulations once more rules relating to

swaps are finalized.

\39\ The term ``contract market'' used in Sec. 1.60 of the

Commission's regulations should be interpreted to include a SEF for

purposes of applying the requirements of Sec. 1.60 to a SEF. 17 CFR

1.60.

\40\ The term ``exchange'' used in part 9 of the Commission's

regulations should be interpreted to include a SEF for purposes of

applying the requirements of part 9 to a SEF. 17 CFR part 9.

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3. Sec. 37.3--Requirements for Registration \41\

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\41\ The Commission is renaming the title of this section from

``Requirements for Registration'' to ``Requirements and Procedures

for Registration'' to provide greater clarity. The Commission is

also restructuring the order of Sec. 37.3 to provide clarity.

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Proposed Sec. 37.3 established, among other procedures,

application procedures for temporary and full registration of new SEFs,

and procedures for the transfer of a registration. To assist

prospective SEF applicants, the SEF NPRM included under appendix A to

part 37 an application form titled Form SEF. Form SEF included

information that an applicant would be required to provide to the

Commission in order for the Commission to make a determination

regarding the applicant's request for SEF registration.

With respect to which entities must register as a SEF, the SEF NPRM

stated that in order for an entity to meet the SEF definition 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.\42\ In this regard, the SEF NPRM stated that

one-to-one voice services and single dealer platforms do not satisfy

the SEF definition because multiple participants do not have the

ability to execute or trade swaps with multiple participants.\43\ In

addition, the SEF NPRM stated that entities that operate exclusively as

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

required to register.\44\ Although the SEF NPRM stated that the

registration provision in CEA section 5h(a)(1) could be read to require

the registration of entities that solely engage in trade

processing,\45\ it stated that such entities do not meet the SEF

definition and should not be required to register as SEFs because: (1)

They do not provide the ability to execute or trade a swap as required

by the SEF definition; and (2) the SEF definition does not include the

term ``process.'' \46\

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\42\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1219.

\43\ Id.

\44\ Id.

\45\ CEA section 5h(a)(1) states that ``[n]o person may operate

a facility for the trading or processing of swaps unless the

facility is registered as a swap execution facility or designated

contract market. . . .'' 7 U.S.C. 7b-3(a)(1).

\46\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1219.

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The SEF NPRM also noted that CEA section 2(h)(8) requires that

transactions involving swaps subject to the clearing requirement be

executed on a DCM or SEF, unless no DCM or SEF makes such swaps

available to trade or such swaps qualify for the clearing exception

under CEA section 2(h)(7).\47\ In this regard, the SEF NPRM stated that

market participants may desire to avail themselves of the benefits of

trading on SEFs for swaps that are not subject to the CEA section

2(h)(8) trade execution requirement, but it also acknowledged that such

swaps are not required to be executed on a SEF or DCM.\48\

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\47\ Id. at 1221-22. CEA sections 2(h)(7) and 2(h)(8); 7 U.S.C.

2(h)(7) and 2(h)(8). See discussion below under Sec. 37.10--Swaps

Made Available for Trading in the preamble for further details

regarding this process.

\48\ Id. at 1222.

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(a) Requirements for Registration

(1) Summary of Comments

Several commenters asserted that the proposed rule is ambiguous as

to who must register as a SEF as required under CEA section 5h(a)(1)

and requested clarification.\49\ For example, UBS stated that the

Commission should clarify that ``the SEF registration requirement in

[CEA section 5h(a)(1)] only applies to platforms that meet the SEF

definition.'' \50\ In addition, Barclays

[[Page 33480]]

commented that the language of CEA section 5h(a)(1) should not be read

broadly to require SEF registration for any platform or system that

executes or processes swaps to the extent it is deemed to be a

``facility'' without considering whether such swaps are or are not

subject to the CEA section 2(h)(8) trade execution mandate.\51\

Similarly, Bloomberg noted the broad language under the CEA section

5h(a)(1) registration requirement, and stated that if Congress intended

that all swaps be traded on a SEF or DCM, then the trade execution

mandate under CEA section 2(h)(8) would be unnecessary.\52\ The

Commission also received comments and specific requests for a

Commission determination as to whether certain business models or

services must register as a SEF, including one-to-many platforms, blind

auction platforms, aggregation services or portals, portfolio

compression services, risk mitigation services, and swap processing

services.

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\49\ CEA section 5h(a)(1) states that ``[n]o person may operate

a facility for the trading or processing of swaps unless the

facility is registered as a swap execution facility or designated

contract market. . . .'' 7 U.S.C. 7b-3(a)(1). UBS Comment Letter at

1-2 (May 18, 2012); UBS Comment Letter at 2-3 (Nov. 2, 2011);

Barclays Comment Letter at 2 (Jun. 3, 2011); Deutsche Comment Letter

at 6 (Mar. 8, 2011); Bloomberg Comment Letter at 3 (Mar. 8, 2011);

State Street Comment Letter at 3 (Mar. 8, 2011); CME Comment Letter

at 8 (Mar. 8, 2011).

\50\ UBS Comment Letter at 1 (May 18, 2012). The Commission

notes that UBS submitted 2 comment letters on May 18, 2012.

\51\ Barclays Comment Letter at 2 (Jun. 3, 2011).

\52\ Bloomberg Comment Letter at 3 (Mar. 8, 2011).

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(i) One-to-Many Systems or Platforms

AFR opined that single dealer or one-to-many platforms do not meet

the SEF definition in CEA section 1a(50), which refers to a system in

which multiple parties have the ability to execute or trade swaps by

accepting bids or offers from multiple participants.\53\ Similarly,

IECA stated that SEFs should operate in a way that publicly reveals

market prices, and that preserving the ``one-to-one'' pricing model of

existing dealer systems is inconsistent with the SEF definition.\54\

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\53\ AFR Comment Letter at 3-4 (Mar. 8, 2011). JP Morgan also

commented that it agrees with the Commission that a single dealer

platform cannot qualify as a SEF because it fails to satisfy the

``multiple to multiple'' language in the SEF definition. JP Morgan

Comment Letter at 3 (Mar. 8, 2011).

\54\ IECA Comment Letter at 3 (May 24, 2011).

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(ii) Blind Auction Systems or Platforms

Nodal commented that a blind auction platform should be able to

meets the SEF definition because multiple participants have the ability

to execute swap transactions by accepting bids and offers made by

multiple participants albeit without the pre-trade posting of bids or

offers.\56\ Nodal explained that its platform allows participants to

submit firm bids and offers without the disclosure of the terms of

those bids and offers to other participants, and that the auction

algorithmically processes the bids and offers to match participants

efficiently.\57\ Nodal further explained that auction volume is awarded

to participants at the same price and at a price equal to or better

than the participants' auction order.\58\

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\55\ Nodal Comment Letter at 2-3 (Jun. 3, 2011); Nodal Comment

Letter at 2-3 (Mar. 8, 2011). Nodal also expressed support for blind

auction platforms in its comment letter to the Second Amendment to

July 14, 2011 Order for Swap Regulation Notice of Proposed

Amendment, 77 FR 28819 (proposed May 16, 2012).

\56\ Nodal Comment Letter at 3 (Mar. 8, 2011).

\57\ Id.

\58\ Id. at 2.

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(iii) Aggregation Services or Portals

UBS and Bloomberg requested clarification whether aggregator

services are required to register as SEFs.\59\ UBS stated that an

aggregator service will provide customers with the ability to access

the best available liquidity and pricing on multiple SEFs through the

aggregator's screen so that customers will not have to connect to each

SEF individually.\60\ UBS stated that an aggregator service should not

be required to register as a SEF because the transaction is executed on

the relevant SEF's platform.\61\

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\59\ UBS Comment Letter at 1 (May 18, 2012); Meeting with UBS

dated Mar. 27, 2012; Meeting with Bloomberg dated Jan. 18, 2012. See

also UBS Comment Letter at 1 (Nov. 2, 2011).

\60\ Meeting with UBS dated Mar. 27, 2012. See also UBS Comment

Letter at 1 (Nov. 2, 2011).

\61\ Meeting with UBS dated Mar. 27, 2012.

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(iv) Services Facilitating Portfolio Compression and Risk Mitigation

Transactions

Several commenters sought clarification that portfolio compression

and risk mitigation services are not required to register as SEFs.\62\

According to TriOptima, its portfolio compression service provides a

netting mechanism that reduces the outstanding trade count and

outstanding gross notional value of swaps in participants' portfolios

by terminating or modifying existing trades.\63\ Specifically,

TriOptima stated that prospective participants may sign up for a

scheduled compression cycle and the participants must provide detailed

data about their respective portfolios and risk tolerances.\64\ Other

than to update mark-to-market values shortly before the compression

cycle is run, prospective participants have no further input into the

compression process, which is entirely controlled by the compression

algorithm.\65\ On a specified date, TriOptima runs the compression

cycle, which produces a set of proposed transactions for each

participant.\66\ The proposed transactions, if effected, would

terminate or modify participants' existing trades in order to reduce

the outstanding trade count and outstanding gross notional value of

swaps in the participants' portfolios.\67\ Each participant receives

only details of the proposed compression transactions to which it is a

party, but all of the compression transactions must be accepted in

order for the particular compression cycle to occur.\68\ If a single

participant declines to agree to the proposed compression transactions,

then the entire compression cycle fails and the pre-compression swap

transactions remain in effect.\69\ TriOptima contended that such

services do not perform the role of a trade execution venue so they

should not be regulated as a SEF.\70\

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\62\ Meeting with ICAP and TriOptima dated Sep. 6, 2012; Meeting

with ICAP dated Aug. 29, 2012; Meeting with ICE dated Jul. 25, 2012;

WMBAA Comment Letter at 3 (Jul. 18, 2011); ICAP Comment Letter at 2

(Jul. 7, 2011); TriOptima Comment Letter at 1 (Mar. 8, 2011).

\63\ TriOptima Comment Letter at 2, 4 (Mar. 8, 2011).

\64\ Id. at 2. The service does not place any constraints on the

number of positions or risk tolerances of prospective participants.

Id.

\65\ Id. at 3.

\66\ Id.

\67\ Id.

\68\ Id.

\69\ Id.

\70\ Id.

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ICAP stated that its bulk risk mitigation service assists market

participants in managing their risk exposures by identifying offsetting

risk requirements and executing new offsetting trades among those

participants.\71\ Specifically, ICAP stated that its risk mitigation

service sets the curve and price for all trades based on a survey of

market making entities, such as banks, or other entities that are

willing to provide quotes, as well as price quotes on DCMs.\72\ All

prospective participants in a particular risk mitigation run are first

shown the curve and prices for transactions along the curve.\73\

Subsequently, the prospective participants provide ICAP with data about

any of their positions of their choosing and their acceptable risk

tolerances.\74\ ICAP then runs a proprietary algorithm, which produces

a set of proposed transactions for each participant.\75\ The proposed

transactions, if effected, would result in new trades for the

participants that enable them to manage their exposures to market,

credit, or other sources of

[[Page 33481]]

risk.\76\ All transactions must be accepted in order for a particular

risk mitigation run to occur.\77\ If a single participant declines to

agree to the proposed risk mitigation transactions, then the entire

risk mitigation run fails and the existing swap transactions remain in

effect.\78\ While its bulk risk mitigation services result in market

participants entering into new trades, ICAP commented that such

services do not meet the SEF definition because they do not permit

participants to trade in real-time, negotiate price, or initiate

directional trades.\79\

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\71\ Meeting with ICAP dated Aug. 29, 2012; ICAP Comment Letter

at 1, 4 (Jul. 7, 2011).

\72\ Meeting with ICAP dated Aug. 29, 2012; ICAP Comment Letter

at 4 (Jul. 7, 2011).

\73\ Id.

\74\ Id. The service does not place any constraints on the

number of positions or risk tolerances of prospective participants.

Id.

\75\ Id.

\76\ Id.

\77\ Id.

\78\ Id.

\79\ ICAP Comment Letter at 2 (Jan. 16, 2013); ICAP Comment

Letter at 4 (Jul. 7, 2011).

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(v) Swap Processing Services

In its first comment letter, MarkitSERV agreed with the SEF NPRM

that entities operating exclusively as swap processors should not have

to register as SEFs because they only provide post-execution services

that facilitate clearing and settlement, not services relating to the

execution of swaps.\80\ However, in a subsequent comment letter, after

the SEC's proposed rule that would require certain providers of post-

trade services to register with the SEC as clearing agencies,

MarkitSERV recommended that the Commission regulate entities that

perform the confirmation and processing of swaps.\81\ While MarkitSERV

acknowledged that the SEC's authority under the Securities and Exchange

Act of 1934 to regulate swap processors as a clearing agency has no

parallel in the CEA, MarkitSERV recommended that the Commission

regulations.\82\ MarkitSERV recommended that the Commission require

swap processors to register as a sub-category of SEFs because CEA

section 5h(a)(1) references the processing of swaps.\83\

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\80\ MarkitSERV Comment Letter at 6 (Mar. 8, 2011).

\81\ MarkitSERV Comment Letter at 1-2 (Jun. 3, 2011).

\82\ Id. at 3-4.

\83\ Id. at 5.

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(2) Commission Determination

In response to commenters' requests for clarification regarding the

registration requirement, the Commission is clarifying how it

interprets the broad registration provision in section 5h(a)(1) of the

Act in coordination with the specific requirements for a SEF's

structure found in section 1a(50) of the Act and the trade execution

requirement in section 2(h)(8) of the Act. As noted in the SEF NPRM,

the Commission views the CEA section 5h(a)(1) registration requirement

\84\ as applying only to facilities that meet the SEF definition in CEA

section 1a(50).\85\ Section 1a(50) of the Act defines a SEF as ``a

trading system or platform in which multiple participants have the

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

multiple participants in the facility or system, through any means of

interstate commerce, including any trading facility, that--(A)

Facilitates the execution of swaps between persons; and (B) is not a

designated contract market.'' \86\ Accordingly, the Commission is

revising proposed Sec. 37.3 to clarify the scope of the registration

requirement, which states that ``[a]ny person operating a facility that

offers a trading system or platform in which more than one market

participant has the ability to execute or trade swaps with more than

one other market participant on the system or platform shall register

the facility as a swap execution facility under this part 37 or as a

designated contract market under part 38 of this chapter.'' \87\

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\84\ CEA section 5h(a)(1) states that ``[n]o person may operate

a facility for the trading or processing of swaps unless the

facility is registered as a swap execution facility or as a

designated contract market. . . .'' 7 U.S.C. 7b-3(a)(1).

\85\ See Core Principles and Other Requirements for Swap

Execution Facilities, 76 FR at 1219 (explaining that entities that

operate exclusively as swap processors do not meet the SEF

definition and should not be required to register as a SEF despite

the broad language in the CEA section 5h(a)(1) registration

provision).

\86\ CEA section 1a(50); 7 U.S.C. 1a(50). The Commission notes

that the Secretary of the Treasury issued a written determination

pursuant to CEA sections 1a(47)(E) and 1b that foreign exchange

swaps and foreign exchange forwards should not be regulated as swaps

under the CEA, and therefore should be exempted from the definition

of the term ``swap'' under the CEA. See Determination of Foreign

Exchange Swaps and Foreign Exchange Forwards Under the Commodity

Exchange Act, 77 FR 69694 (Nov. 20, 2012). Accordingly, if a

facility offers a trading system or platform solely for the

execution or trading of foreign exchange swaps or foreign exchange

forwards, then the facility would not be required to register as a

SEF.

\87\ The Commission is adding this new provision to Sec.

37.3(a)(1). As a result, proposed Sec. 37.3(a) is adopted as Sec.

37.3(b), proposed Sec. 37.3(b) is adopted as Sec. 37.3(c),

proposed Sec. 37.3(c) is adopted as Sec. 37.3(d), proposed Sec.

37.3(d) is adopted as Sec. 37.3(e), proposed Sec. 37.3(e) is

adopted as Sec. 37.3(f), and proposed Sec. 37.3(f) is adopted as

Sec. 37.3(g). The SEF NPRM stated that certain entities such as

one-to-one voice services and single-dealer platforms do not provide

the ability for participants to conduct multiple-to-multiple

execution or trading because they limit the provision of liquidity

to a single liquidity provider. Core Principles and Other

Requirements for Swap Execution Facilities, 76 FR at 1219.

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

The Commission also clarifies that swap transactions that are not

subject to the CEA section 2(h)(8) trade execution requirement may be

executed on either a registered SEF (i.e., a facility that meets the

SEF definition) or an alternative entity that is not required to

below).\88\ This clarification is consistent with the Commission's

acknowledgement in the SEF NPRM that swap transactions that are not

subject to the CEA section 2(h)(8) trade execution requirement would

not have to be executed on a registered SEF.\89\

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

\88\ The Commission notes that it is not tying the registration

requirement in CEA section 5h(a)(1) to the trade execution

requirement in CEA section 2(h)(8), such that only facilities

trading swaps subject to the trade execution requirement would be

required to register as a SEF. Therefore, a facility would be

required to register as a SEF if it operates in a manner that meets

the SEF definition even though it only executes or trades swaps that

are not subject to the trade execution mandate. The Commission also

notes that transactions involving swaps on SEFs that are subject to

the trade execution mandate are considered to be ``Required

Transactions'' under part 37 of the Commission's regulations,

whereas ``Permitted Transactions'' are transactions not involving

swaps that are subject to the trade execution mandate. As discussed

further below, the regulatory obligations which pertain to Permitted

Transactions differ from, and are somewhat less rigorous than, those

for Required Transactions. See discussion below regarding Permitted

Transactions under Sec. 37.9(a)(1)(iv)--Required Transactions and

Sec. 37.9(a)(1)(v)--Permitted Transactions in the preamble. See

also Process for a Designated Contract Market or Swap Execution

Facility To Make a Swap Available To Trade, 76 FR 77728 (proposed

Dec. 14, 2011) (discussing the process by which a swap is determined

to be subject to the trade execution requirement in CEA section

2(h)(8)).

\89\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1222.

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

The Commission believes that its interpretation of the registration

provision in CEA section 5h(a)(1) is consistent with the statute and

helps further the goals provided in CEA section 5h, which are to

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

transparency in the swaps market. Although the registration provision

is written in broad language and could be read to require the

registration of any facility for the trading or processing of swaps,

the Commission notes that other statutory provisions appear to narrow

the registration requirement. For example, the CEA section 2(h)(8)

trade execution requirement and CEA section 5h(d)(2), which states that

``[f]or all swaps that are not required to be executed through a swap

execution facility . . . such trades may be executed through any other

available means of interstate commerce[,]'' \90\ when read together,

contemplate alternative entities that are not required to register as

SEFs and may execute those swaps that are not

[[Page 33482]]

required to be executed on a SEF (i.e., those swaps that are not

subject to the CEA section 2(h)(8) trade execution requirement). The

Commission is interpreting the CEA section 5h(a)(1) registration

provision in a manner that is consistent with the SEF definition in CEA

section 1a(50), the trade execution requirement in CEA section 2(h)(8),

and CEA section 5h(d)(2), as discussed above.

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

\90\ CEA section 5h(d)(2); 7 U.S.C. 7b-3(d)(2).

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

The following discussion is not intended to comprehensively cover

which entities are required to register as a SEF. Whether a particular

entity falls within the scope of CEA section 5h(a)(1) depends on all of

the relevant facts and circumstances of the entity's operations. The

Commission is mindful that any rule attempting to capture all of the

possible configurations of facilities that provide for the execution or

trading of swaps may be or become over-inclusive or under-inclusive in

light of technological changes and the ever evolving swaps market.\91\

However, in response to commenters' requests, the Commission is

providing examples of how it would interpret the CEA section 5h(a)(1)

registration requirement with respect to certain categories of better

understood facilities.

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

\91\ The Commission notes that entities seeking guidance

concerning their SEF registration obligations may request such

further guidance from the Division of Market Oversight (``DMO'').

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

(i) One-to-Many Systems or Platforms

The Commission continues to believe that a one-to-many system or

platform on which the sponsoring entity is the counterparty to all swap

contracts executed through the system or platform would not meet the

SEF definition in section 1a(50) of the Act and, therefore, would not

be required to register as a SEF under section 5h(a)(1) of the Act. In

the Commission's view, such a system or platform does not meet the SEF

definition because it limits the provision of liquidity to a single

liquidity provider (i.e., the sponsoring entity). Accordingly, market

participants do not have the ability to conduct multiple-to-multiple

execution or trading on such a trading system or platform. The

Commission notes, however, that transactions in swaps that are subject

to the trade execution mandate, under CEA section 2(h)(8), must be

executed on a DCM or SEF and, accordingly, may not be executed on a

one-to-many system or platform.\92\

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

\92\ Transactions in swaps that are subject to the clearing

requirement in CEA section 2(h)(1) and ``made available to trade''

would be subject to the trade execution requirement. See CEA

sections 2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8). See also

Process for a Designated Contract Market or Swap Execution Facility

To Make a Swap Available To Trade, 76 FR 77728 (proposed Dec. 14,

2011) (discussing the process by which a swap is determined to be

subject to the trade execution requirement in CEA section 2(h)(8)).

The trade execution requirement provides an exception to the

requirement for swap transactions subject to the clearing exception

under CEA section 2(h)(7).

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

(ii) Blind Auction Systems or Platforms

The Commission understands from commenters that a blind auction

system or platform, as described above, allows market participants to

submit firm bids and offers without disclosure of the terms of those

bids and offers to other participants. Such bids and offers are matched

through a pre-determined algorithm. The Commission believes that an

entity that provides such a blind auction system or platform would meet

the SEF definition in CEA section 1a(50) because more than one market

participant has the ability to execute or trade swaps with more than

one other market participant on the system or platform. Accordingly, an

entity that provides such a blind auction system or platform would have

to register as a SEF under section 5h(a)(1) of the Act.

(iii) Aggregation Services or Portals

The Commission understands that certain entities may seek to

provide their users with the ability to access multiple SEFs and the

market participants thereon, but do not provide for execution on their

aggregation services as execution occurs on one of those individual

SEFs. The Commission believes that an entity that provides such an

aggregation service would not meet the SEF definition in CEA section

1a(50) because it is only providing a portal through which its users

may access multiple SEFs and swaps are not executed or traded through

the service. Accordingly, an entity that provides such an aggregation

service or portal would not have to register as a SEF under section

5h(a)(1) of the Act.\93\ However, the Commission notes that to the

extent that an aggregation service or portal itself provides a trading

system or platform whereby more than one market participant has the

ability to execute or trade swaps with more than one other market

participant on the system or platform, the aggregation service would be

required to register as a SEF.\94\

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\93\ The Commission notes that footnote 423 below classifies

aggregator platforms as a type of independent software vendor

(``ISV''). Therefore, other types of ISVs would not have to register

as a SEF if they only provide their users with the ability to access

multiple SEFs, but do not provide for execution or trading of swaps.

See discussion below regarding ISVs under Sec. 37.202(a)--Impartial

Access by Members and Market Participants in the preamble.

\94\ For example, some aggregation services may provide their

users with a portal to multiple SEFs and also execute swap

transactions between their multiple users. These services would have

to register as a SEF under section 5h(a)(1) of the Act. The

Commission notes that if other types of ISVs provide a system or

platform whereby more than one participant has the ability to

execute or trade swaps with more than one other participant on the

system or platform, then they would also have to register as a SEF

under section 5h(a)(1) of the Act. See discussion below regarding

ISVs under Sec. 37.202(a)--Impartial Access by Members and Market

Participants in the preamble.

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

(iv) Services Facilitating Portfolio Compression and Risk Mitigation

Transactions

The Commission notes that portfolio compression services provide a

netting mechanism that reduces the outstanding trade count and

outstanding gross notional value of swaps in two or more swap

counterparties' portfolios.\95\ To achieve this result, a portfolio

compression service, for example, may wholly terminate or change the

notional value of some or all of the swaps submitted by the

counterparties for inclusion in the portfolio compression exercise and,

depending on the methodology employed, replace the terminated swaps

with other swaps whose combined notional value (or some other measure

of risk) is less than the combined notional value (or some other

measure of risk) of the terminated swaps in the compression

exercise.\96\ The swap counterparties' risk profiles are not materially

changed as a result of the portfolio compression exercise.

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\95\ Confirmation, Portfolio Reconciliation, Portfolio

Compression, and Swap Trading Relationship Documentation

Requirements for Swap Dealers and Major Swap Participants, 77 FR

55904, 55932 (Sep. 11, 2012).

\96\ Id. at 55960.

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The Commission does not believe that a portfolio compression

service, as described above, provides for the execution or trading of

swap transactions between counterparties because the compression

service is providing a netting mechanism whereby the outstanding trade

count and outstanding gross notional value of swaps in two or more swap

counterparties' portfolios are reduced. Therefore, an entity providing

such a portfolio compression service would not meet the SEF definition

in section 1a(50) of the Act and would not have to register as a SEF

under section 5h(a)(1) of the Act.\97\

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\97\ The Commission notes, however, that transactions in swaps

that are subject to the trade execution mandate, under CEA section

2(h)(8), must be executed on a DCM or SEF and, accordingly, may not

be executed on a portfolio compression service (unless no DCM or SEF

makes the swap available to trade or the swap transaction is

excepted or exempted from clearing under CEA section 2(h)(7) or as

otherwise provided by the Commission).

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

The Commission understands from commenters that certain entities

provide

[[Page 33483]]

risk mitigation services, as described above, that operate to assist

market participants in managing their exposures to market, credit, and

other sources of risk. These risk mitigation services may redistribute

or mitigate market participants' risks, but they do not provide a

netting mechanism. To redistribute or mitigate risk, a risk mitigation

service, for example, may allow market participants to identify

elements of risk in their respective portfolios and to submit

information about these risks to the service. The risk mitigation

service may set the prices for all points along the maturity or credit

curve for all trades and the service's proprietary algorithm produces a

set of proposed transactions for each participant. If all participants

accept the proposed transactions, then the new trades are executed.

In the Commission's view, such an entity would meet the SEF

definition in CEA section 1a(50) because more than one market

participant has the ability to execute swaps with more than one other

market participant on the system or platform.\98\ In response to ICAP's

comment that such services do not meet the SEF definition because they

do not permit participants to trade in real-time, negotiate price, or

initiate directional trades, the Commission notes that the SEF

definition does not require any of these stated characteristics. As

noted above, the outcome of a successful risk mitigation run is the

execution of new trades between multiple participants at prices

accepted by those multiple participants.

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

\98\ The Commission also notes that ICAP's Web sites for its

Reset and ReMatch risk mitigation services support the notion that

these services are executing trades between counterparties. ICAP's

Reset Web site states that ``[t]he new RESET matching engine allows

for unilateral matching with hedging. No longer is it necessary to

have an offsetting position for each trade to be executed.'' See

http://www.reset.net/aboutus.php. A press article regarding ReMatch

states that ``ReMatch addresses the problem of minimal or no exit

liquidity . . . [by] enabling market participants to exit positions

that they may otherwise have been unable to.'' See http://www.icap.com/news-events/in-the-news/news/2011/rematch-expands-service-into-us-financials.aspx.

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

Additionally, the Commission notes that there are alternative

avenues to managing the same risks that risk mitigation services

manage, including bringing the risk mitigating orders to the open

market. For instance, a market participant could assess the various

risk elements in its portfolio using appropriate tools, and then decide

on a set of trades to mitigate these risks. The market participant

could choose to execute these trades through a risk mitigation service,

a SEF, or a DCM. In fact, in the DCM context, market participants

execute such risk mitigating trades on the DCM and not through a

separate non-DCM service. As such, risk mitigation services are

providing an alternative avenue to execute certain swap transactions

between counterparties.

Furthermore, the Commission believes that the confluence of trading

interests from a diverse range of motivations (e.g., risk mitigating

and risk taking trades) brings depth to the marketplace and helps to

build liquid markets. If the Commission did not require these risk

mitigation services to register as SEFs, then market participants would

be able to execute certain swap transactions away from the SEF, which

would hurt liquidity and also the trading of swaps on SEFs. This would

contradict one of the goals in section 5h of the Act, which is to

promote the trading of swaps on SEFs.\99\

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

\99\ CEA section 5h(e); 7 U.S.C. 7b-3(e).

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

For the reasons mentioned above, the Commission believes that an

entity that provides such a risk mitigation service would have to

Commission notes that such entities may not have to register as a SEF

if they only provide the analytical services that produce the proposed

risk mitigation transactions and the execution of those transactions

occurs elsewhere and, in particular, the execution of those

transactions that are subject to the trade execution mandate occurs on

a SEF.

(v) Swap Processing Services

As noted in the SEF NPRM, entities that solely engage in trade

processing would not meet the SEF definition in CEA section 1a(50)

because they do not provide the ability to execute or trade a swap as

required by the definition. Accordingly, swap processing services would

not have to register as a SEF under CEA section 5h(a)(1). Consistent

with this distinction, the Commission declines to create a sub-category

of SEFs for processing services that would be subject to some limited

subset of SEF core principles as requested by MarkitSERV.

Finally, the Commission notes that platforms seeking guidance

concerning the SEF registration obligations and its application to

their particular operations may request informal guidance from the

Division of Market Oversight (``DMO'').

(b) Sec. 37.9(b)(2)--Minimum Trading Functionality (Final Sec.

37.3(a)(2))

To further clarify what functionalities a SEF must provide if it is

required to register as a SEF, as opposed to what functionalities

trigger the registration requirement, the Commission is moving proposed

Sec. 37.9(b)(2) to final Sec. 37.3(a)(2). As discussed in the SEF

NPRM, an entity that must register as a SEF under CEA section 5h(a)(1)

must ensure that its operations comply with the minimum trading

functionality requirement.\100\ The minimum trading functionality

requirement in proposed Sec. 37.9(b)(2) provided that an applicant

seeking registration as a SEF 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 SEF.

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\100\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1219.

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(1) Summary of Comments

Several commenters stated that the minimum trading functionality is

similar to an order book, which is not required by the SEF

definition.\101\ In this regard, Commissioner Sommers offered a dissent

to the SEF NPRM, which was published as Appendix 3 to that notice.\102\

Commissioner Sommers' dissent asserted that the minimum trading

functionality requirement is not mandated by the Dodd-Frank Act.\103\

In addition, Commissioner Sommers' dissent argued for a broader

interpretation of the terms ``trading system'' and ``platform,'' which

are included in the statutory SEF definition so that SEFs can offer a

broader model for executing swaps.\104\ Many commenters also stated

that the SEF definition only requires that the facility provide

multiple participants with the ``ability'' to execute or trade swaps by

accepting bids and offers made by ``multiple participants'' and, thus,

the definition does not require making bids or offers transparent to

the entire market but rather to multiple participants.\105\ Better

Markets commented that the Commission's minimum trading

[[Page 33484]]

functionality requirement is an overly broad interpretation of the SEF

definition because it allows a SEF to be almost any type of system or

platform.\106\ Therefore, it recommended that the Commission narrowly

interpret the multiple participant to multiple participant requirement

so that the scope of acceptable execution methods has rational

boundaries.\107\

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\101\ Reuters Comment Letter at 3-4 (Dec. 12, 2011); Rosen et

al. Comment Letter at 8-9 (Apr. 5, 2011); WMBAA Comment Letter at 4,

9 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 5-6 (Mar. 8, 2011);

FXall Comment Letter at 4-5 (Mar. 8, 2011). Commissioner Sommers'

dissent to the SEF NPRM. See Core Principles and Other Requirements

for Swap Execution Facilities, 76 FR at 1259.

\102\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1259.

\103\ Id.

\104\ Id.

\105\ Reuters Comment Letter at 3-4 (Dec. 12, 2011); Rosen et

al. Comment Letter at 8 (Apr. 5, 2011); ISDA/SIFMA Comment Letter at

5-6 (Mar. 8, 2011); CME Comment Letter at 7-8 (Mar. 8, 2011); FXall

Comment Letter at 4-5 (Mar. 8, 2011); Barclays Comment Letter at 5

(Mar. 8, 2011); MarketAxess Comment Letter at 32-33 (Mar. 8, 2011);

WMBAA Comment Letter at 8 (Mar. 8, 2011).

\106\ Better Markets Comment Letter at 6-7 (Mar. 8, 2011).

\107\ Id.

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Several commenters expressed concern about the requirement to post

indicative quotes.\108\ Nodal and other commenters expressed concern

that indicative quotes could be used for manipulative purposes.\109\

Tradeweb commented that, under the proposal, SEFs operating an

anonymous order book system would be required to offer indicative

quotes due to the minimum trading functionality requirement, which

would not be suitable for anonymous order book marketplaces.\110\

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\108\ Nodal Comment Letter at 3-4 (Mar. 8, 2011); ISDA/SIFMA

Comment Letter at 6 (Mar. 8, 2011); SIFMA AMG Comment Letter at 9

(Mar. 8, 2011); ICE Comment Letter at 3 (Mar. 8, 2011); Tradeweb

Comment Letter at 6 (Mar. 8, 2011).

\109\ Nodal Comment Letter at 3-4 (Mar. 8, 2011); ISDA/SIFMA

Comment Letter at 6 (Mar. 8, 2011); SIFMA AMG Comment Letter at 9

(Mar. 8, 2011); ICE Comment Letter at 3 (Mar. 8, 2011).

\110\ Tradeweb Comment Letter at 6 (Mar. 8, 2011).

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(2) Commission Determination

The Commission reiterates its view in the SEF NPRM that an entity

that must register as a SEF under CEA section 5h(a)(1) must ensure that

its operations comply with the minimum trading functionality

requirement.\111\ The Commission reaffirms that an acceptable SEF

system or platform must provide at least a minimum functionality to

allow market participants the ability to make executable bids and

offers, and to display them to all other market participants on the

SEF. The Commission is adopting a revised version of proposed Sec.

37.9(b)(2), which now requires a SEF to provide an Order Book as

defined in final Sec. 37.3(a)(3) (i.e., an electronic trading

facility, a trading facility, or a trading system or platform in which

all market participants have the ability to enter multiple bids and

offers, observe or receive bids and offers, and transact on such bids

and offers) because, as noted by several commenters, the proposed

minimum trading functionality description is similar to the proposed

definition of an Order Book.\112\ In response to comments, like the one

provided by Commissioner Sommers, that an order book is not required by

the SEF definition, the Commission believes that an Order Book, as

defined in final Sec. 37.3(a)(3), is consistent with the SEF

definition and promotes the goals provided in section 733 of the Dodd-

Frank Act.\113\ This interpretation is also consistent with the SEF

NPRM, as the Commission noted that it took into account these

requirements when proposing the minimum trading functionality

requirement.\114\

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\111\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1219.

\112\ The Commission is renumbering proposed Sec. 37.9(b)(2) to

Sec. 37.3(a)(2).

\113\ CEA section 1a(50); 7 U.S.C. 1a(50). In section 5h(e) of

the Act, Congress provided a ``rule of construction'' to guide the

Commission's interpretation of certain SEF provisions (stating that

the goals of section 5h of the Act are to ``promote the trading of

swaps on [SEFs] and to promote pre-trade price transparency in the

swaps market''). 7 U.S.C. 7b-3(e).

\114\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1219.

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The Commission notes, however, that the final regulations provide

SEFs with additional flexibility in the execution methods for Required

Transactions by allowing SEFs to offer an RFQ System in conjunction

with an Order Book, as described below, to permit market participants

to access multiple market participants, but not necessarily the entire

market.\115\ The Commission also notes that a SEF may petition the

Commission under Sec. 13.2 of the Commission's regulations to amend

its regulations to include additional execution methods for Required

Transactions.\116\ The final regulations further allow a SEF to utilize

``any means of interstate commerce'' in providing the execution methods

in Sec. 37.9(a)(2)(i)(A) or (B) (i.e., an Order Book or an RFQ System

that operates in conjunction with an Order Book, as described

below).\117\ The Commission also notes that a SEF may provide any

method of execution for Permitted Transactions.\118\ By allowing SEFs

to offer additional methods of execution, and permitting flexible means

for executing swaps through these methods of execution, as discussed

below, the Commission is effectuating the Congressional direction to

allow multiple participants to execute swaps by accepting bids and

offers made by multiple participants through any means of interstate

commerce.\119\ The Commission notes that a DCM must operate as a

trading facility and in conjunction with that trading facility is also

permitted to utilize additional execution methods; however, those

additional execution methods are limited by the requirements set forth

in DCM Core Principle 9, for which there is no identical core principle

for SEFs.

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\115\ See discussion below under Sec. 37.9(a)(1)(ii)--Request

for Quote System in the preamble.

\116\ See discussion below under Sec. 37.9(b)(1) and (b)(4)--

Execution Methods for Required Transactions in the preamble. Section

13.2 will allow the Commission to consider if a broader model for

executing on SEFs, consistent with the suggestion in Commissioner

Sommers' dissent, would be appropriate on a case-by-case basis, in

conformance with the CEA and the Commission's regulations. Core

Principles and Other Requirements for Swap Execution Facilities, 76

FR at 1259.

\117\ See discussion below under Sec. 37.9(b)(1) and (b)(4)--

Execution Methods for Required Transactions in the preamble.

\118\ See Sec. 37.9(c)(2).

\119\ CEA section 1a(50); 7 U.S.C. 1a(50).

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Finally, given the changes to the minimum trading functionality

requirement, the Commission notes that SEFs are not required to offer

indicative quote functionality. The Commission agrees with commenters

that indicative quotes would not be appropriate for certain trading

systems or platforms complying with the Order Book definition in final

Sec. 37.3(a)(3) (e.g., central limit order books facilitating only

anonymous trading).

The Commission is also moving proposed Sec. 37.9(a)(1)(i) to final

Sec. 37.3(a)(3) given the relocation of, and changes to, the minimum

trading functionality section as discussed above. Proposed Sec.

37.9(a)(1)(i) defined the term ``Order Book'' to mean: (A) An

electronic trading facility, as that term is defined in section 1a(16)

of the Act; \120\ (B) a trading facility, as that term is defined in

section 1a(51) of the Act; \121\ (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

[[Page 33485]]

other trading system or platform as may be determined by the

Commission.

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\120\ The term ``electronic trading facility'' means ``a trading

facility that--(A) operates by means of an electronic or

telecommunications network; and (B) maintains an automated audit

trail of bids, offers, and the matching of orders or the execution

of transactions on the facility.'' CEA section 1a(16); 7 U.S.C.

1a(16). The Commission notes that, under section 1a(16) of the Act,

the term ``electronic trading facility'' incorporates the definition

of ``trading facility'' as that term is defined under section 1a(51)

of the Act.

\121\ The term ``trading facility'' means ``a person or group of

persons that constitutes, maintains, or provides 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.''

CEA section 1a(51)(A); 7 U.S.C. 1a(51)(A).

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

(1) Summary of Comments

Better Markets commented that the definition of an ``order book''

should specify that SEF systems must operate pursuant to a best price,

first-in-time trade matching algorithm.\122\

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\122\ Better Markets Comment Letter at 7 (Mar. 8, 2011).

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

(2) Commission Determination

The Commission is adopting the rule as proposed, subject to the

modification described below.\123\ The Commission notes that the Dodd-

Frank Act does not mandate that the Commission specify or require a

particular trade-matching algorithm for modes of execution provided by

SEFs. Therefore, a SEF has the discretion to use a matching algorithm

such as a price-time, price-size-time, or pro-rata allocation,

provided, however, that such matching algorithm is published in the

SEF's rulebook and submitted to the Commission for review and approval

as part of the registration application. The Commission is eliminating

proposed Sec. 37.9(a)(1)(i)(D) because, as discussed in Sec. 37.9

below, a SEF may petition the Commission under Sec. 13.2 to amend

Sec. 37.9(a)(2) to include additional execution methods for Required

Transactions.\124\

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\123\ The Commission is renumbering proposed Sec. 37.9(a)(1)(i)

to Sec. 37.3(a)(3). The Commission is revising the definition in

proposed Sec. 37.9(a)(1)(i)(C) by replacing the word ``can'' with

the phrase ``have the ability to'' and deleting the words ``choose

to.'' The Commission is also adding the words ``or receive'' after

the word ``observe'' so that the definition is technology neutral.

See ``Through Any Means of Interstate Commerce'' Language in the SEF

Definition discussion below under Sec. Sec. 37.9(b)(1) and (b)(4)--

Execution Methods for Required Transactions in the preamble for

further details.

\124\ See discussion below under Sec. 37.9(b)(1) and (b)(4)--

Execution Methods for Required Transactions in the preamble.

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(d) Sec. 37.3(a)--Application Procedures \125\

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\125\ The Commission is renaming the title of this section from

``Application Procedures'' to ``Procedures for Full Registration''

to provide greater clarity.

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Proposed Sec. 37.3(a) set forth the application and approval

procedures for the registration of new SEFs. The proposed rule required

a SEF applicant to apply to the Commission by electronically filing the

proposed Form SEF.\126\ The proposed rule also provided that the

Commission would either approve or deny the application or, if deemed

appropriate, register the applicant as a SEF subject to conditions.

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\126\ Proposed Form SEF, as set forth in proposed appendix A to

part 37, was to be used for initial or temporary registration as a

SEF as well as for any amendments to an applicant's status otherwise

not required to be submitted under part 40 of the Commission's

regulations.

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(1) Summary of Comments

The Commission received several comments encouraging the

harmonization of the registration procedures for SEFs with the SEC's

registration procedures for SB-SEFs.\127\ In this regard, MarketAxess

recommended that the Commission allow an SEC-registered SB-SEF to

notice register with the Commission.\128\ WMBAA recommended that the

Commission and the SEC adopt a common application form, which would

provide for a smoother, timelier transition to the new regulatory

regime.\129\

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\127\ See Registration and Regulation of Security-Based Swap

Execution Facilities, 76 FR 10948 (proposed Feb. 28, 2011). Tradeweb

Comment Letter at 3-4 (Jun. 3, 2011); MarketAxess Comment Letter at

20-21 (Mar. 8, 2011); WMBAA Comment Letter at 14 (Mar. 8, 2011); FSR

Comment Letter at 10-11 (Mar. 8, 2011); Reuters Comment Letter at 3-

4 (Mar. 8, 2011).

\128\ MarketAxess Comment Letter at 20-21 (Mar. 8, 2011).

\129\ WMBAA Comment Letter at 14 (Mar. 8, 2011).

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Tradeweb requested that the Commission confirm that SEF applicants

do not need to file separate applications for each mode of execution

that it will offer to participants, provided that the application

clearly identifies the different features of the separate marketplaces

and that each feature is in compliance with the rules.\130\

Additionally, MarketAxess requested clarification that the Commission

does not intend proposed Sec. 37.3(a)(6) to require amendments to Form

SEF after the Commission approves an application.\131\

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\130\ Tradeweb Comment Letter at 13 (Mar. 8, 2011).

\131\ MarketAxess Comment Letter at 29 (Mar. 8, 2011).

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(2) Commission Determination

The Commission is adopting Sec. 37.3(a) and Form SEF as proposed,

subject to certain modifications discussed below.\132\ The Commission

notes that there is no CEA provision which provides for SEF notice

registration for SB-SEFs. The Commission does note, however, that

section 5h(g) of the Act provides that the Commission ``may exempt'' a

SEF from registration if the facility is subject to comparable,

comprehensive supervision and regulation by the SEC, a prudential

regulator, or the appropriate governmental authorities in the home

country of the facility.\133\ The Commission observes that the SEC and

other regulators have not implemented comparable, comprehensive

supervision and regulation to the Commission's SEF regulatory scheme at

this time. The Commission also observes that, it must comprehensively

review and understand a SEF's proposed trading models and operations,

which will facilitate trading for a more diverse universe of financial

instruments and underlying commodities than SB-SEFs. Therefore, at this

time, the Commission is not allowing for exempt SEFs.

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\132\ The Commission is renumbering proposed Sec. 37.3(a) to

Sec. 37.3(b) and making several non-substantive revisions to this

provision and Form SEF for clarity. The Commission is also moving

proposed Sec. 37.3(a)(7) regarding delegated authority to the

Director of DMO to Sec. 37.3(h).

\133\ CEA section 5h(g); 7 U.S.C. 7b-3(g).

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In response to Tradeweb's comment about separate applications, the

Commission clarifies that a SEF applicant does not need to file

separate applications for each mode of execution that it will offer to

market participants, but its application, as noted in Exhibit Q to Form

SEF, must describe each mode of execution offered.\134\ Additionally,

in response to MarketAxess's comment about amendments to Form SEF after

the Commission registers a SEF, the Commission is revising proposed

Sec. 37.3(a)(6) \135\ and Form SEF to clarify that an amended Form SEF

is required for a SEF applicant amending a pending application for

registration or for a SEF requesting an amendment to its order of

registration. Otherwise, once registered, a SEF must file any

amendments to Form SEF as a submission under part 40 of the

Commission's regulations or as specified by the Commission (e.g., by

filing quarterly financial resources reports pursuant to Sec. 37.1306

or by filing an amended Form SEF). As stated in the SEF NPRM, the

Commission clarifies that if any information contained in Form SEF is

or becomes inaccurate for any reason, even after a SEF is registered,

the SEF must promptly make the appropriate corrections with the

Commission.\136\

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\134\ The Commission notes that subsequent modifications to a

SEF's modes of execution or any additional SEF modes of execution

would constitute rules; therefore, the SEF must submit such rules to

the Commission for review pursuant to the procedures under part 40

of the Commission's regulations.

\135\ The Commission is renumbering proposed Sec. 37.3(a)(6) to

Sec. 37.3(b)(3).

\136\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1238.

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The Commission is adding final Sec. 37.3(b)(5) to the rule text

that requires the Commission to review an application for registration

as a SEF pursuant to the 180-day timeframe and procedures specified in

CEA section

[[Page 33486]]

6(a).\137\ This section will be effective for SEF applicants who submit

their applications for registration as a SEF on or after two years from

the effective date of part 37. The Commission is adopting this

provision so that SEF applicants are treated comparably to DCM

applicants who currently are subject to the 180-day Commission review

period under CEA section 6(a). Although Congress did not impose a 180-

day review period for SEFs, the Commission believes that harmonization

of the review periods for DCM and SEF applicants is appropriate given

the fact that both are registered entities for the trading of swaps.

The Commission also believes that this requirement will provide greater

certainty for SEF applicants regarding the time period for the

Commission's review of their applications.

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\137\ CEA section 6(a); 7 U.S.C. 8(a). The Commission notes that

under CEA section 6(a), if the Commission notifies an applicant that

its application is materially incomplete and specifies the

deficiencies in the application, the running of the 180-day period

is stayed from the time of such notification. The Commission also

notes that if an applicant does not provide a complete Form SEF as

provided for under Sec. 37.3(b)(1)(i), the Commission will notify

the applicant, pursuant to Sec. 37.3(b)(4), that its application

will not be deemed to have been submitted for purposes of the

Commission's review. By ``complete'' Form SEF, the Commission means

that the SEF applicant provides appropriately responsive answers to

each of the informational and exhibit items set forth in Form SEF.

The Commission notes that if the application is not deemed to have

been submitted for purposes of the Commission's review, then the

180-day review period (when effective) will not have commenced.

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Finally, the Commission is clarifying the standard upon which the

Commission will grant or deny registration. Proposed Sec. 37.3(a)(1)

stated that ``[t]he Commission shall approve or deny the application

or, if deemed appropriate, register the applicant as a swap execution

facility subject to conditions.'' In addition, proposed Sec.

37.3(a)(2) stated that ``[t]he application must include information

sufficient to demonstrate compliance with the core principles specified

in Section 5h of the Act.'' Consistent with these provisions, the

Commission is clarifying in final Sec. 37.3(b)(6) that: (i) The

Commission will issue an order granting registration upon a Commission

determination, in its own discretion, that the applicant has

demonstrated compliance with the Act and the Commission's regulations

applicable to swap execution facilities; (ii) if deemed appropriate,

the Commission may issue an order granting registration subject to

conditions; and (iii) the Commission may issue an order denying

registration upon a Commission determination, in its own discretion,

that the applicant has not demonstrated compliance with the Act and the

Commission's regulations applicable to swap execution facilities.

(e) Sec. 37.3(b)--Temporary Grandfather Relief From Registration \138\

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

\138\ The Commission is renaming the title of this section from

``Temporary Grandfather Relief from Registration'' to ``Temporary

Registration'' to provide greater clarity.

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

Proposed Sec. 37.3(b) provided that an applicant for SEF

registration may request that the Commission grant the applicant

temporary grandfather relief from the registration requirement. The

temporary relief would allow the applicant to continue operating during

the pending application review process. Under the proposed rule, to

receive temporary relief, the applicant was required to provide the

following information to the Commission: (1) An application for SEF

registration submitted in compliance with proposed Sec. 37.3(a); (2) a

notification of its interest in operating under the temporary relief;

(3) transaction data substantiating that swaps have been traded and

continue to be traded on the applicant's trading system or platform at

the time of its application submission; and (4) a certification that

the applicant believes that it will meet the requirements of part 37 of

the Commission's regulations when it operates under temporary relief.

Under proposed Sec. 37.3(b)(2), an applicant's grant of temporary

relief would expire on the earlier of: (1) The date that the Commission

grants or denies SEF registration; or (2) the date that the Commission

rescinds the temporary relief. Proposed Sec. 37.3(b)(3) contained a

sunset date for the temporary relief provision of 365 days following

the effective date of the final SEF regulations. Finally, the

Commission proposed that the SEF rules, which include the requirements

for temporary relief, would be effective 90 days after their

publication in the Federal Register.

(1) Summary of Comments

(i) Comments on Temporary Grandfather Relief

MarketAxess commented that the phrase ``temporary grandfather

relief'' is ambiguous and recommended that the Commission rename

``temporary grandfather relief'' to ``temporary registration.'' \139\

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

\139\ MarketAxess Comment Letter at 16 (Mar. 8, 2011).

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

With respect to the substance of this provision, some commenters

expressed concern that the existing trading activity requirement in

proposed Sec. 37.3(b)(1)(ii) would prevent new entities from

qualifying for temporary relief.\140\ In this regard, MarketAxess

recommended that the Commission revise proposed Sec. 37.3(b)(1)(ii) to

permit SEF applicants, as an alternative to providing transaction data,

to provide materials substantiating that the applicant's system is

operational and therefore could facilitate trading in listed swaps upon

receiving temporary registration from the Commission.\141\

Further, several commenters recommended alternative certification

standards under proposed Sec. 37.3(b)(1)(iii).\142\ Bloomberg, for

example, recommended that SEFs be required to certify only that they

have implemented rules ``reasonably designed to ensure'' compliance

with part 37.\143\ Similarly, MarketAxess recommended a more flexible

certification requirement because compliance with certain core

principles will need to await the build-out functionality of third-

party regulatory service providers.\144\

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\140\ MarketAxess Comment Letter at 16-17 (Mar. 8, 2011); MFA

Comment Letter at 4-5 (Mar. 8, 2011).

\141\ MarketAxess Comment Letter at 16-17 (Mar. 8, 2011).

\142\ MarketAxess Comment Letter at 4 (Jun. 3, 2011); Bloomberg

Comment Letter at 5 (Jun. 3, 2011); State Street Comment Letter at

6-7 (Mar. 8, 2011); WMBAA Comment Letter at 14-15 (Mar. 8, 2011);

Tradeweb Comment Letter at 13 (Mar. 8, 2011); MarketAxess Comment

Letter at 17-19 (Mar. 8, 2011).

\143\ Bloomberg Comment Letter at 5 (Jun. 3, 2011).

\144\ MarketAxess Comment Letter at 17-19 (Mar. 8, 2011).

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In addition, Phoenix commented that to avoid any market

disruptions, the Commission should permit SEF applicants to operate

under temporary relief while awaiting a Commission determination to

either grant or deny the temporary relief request.\145\ MarketAxess

also noted that the Commission should not ``tie its own hands'' by

imposing a fixed one-year post-effective time period for reviewing SEF

applications.\146\

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\145\ Phoenix Comment Letter at 2 (Mar. 7, 2011).

\146\ MarketAxess Comment Letter at 20 (Mar. 8, 2011).

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

(ii) Comments on DCM Eligibility

CME commented that if a DCM has listed cleared swaps prior to the

adoption of the final rules, then there is no reason to exclude them

from applying for temporary relief.\147\ NYSE Liffe recommended that

temporary relief remain available to DCMs either as long as it is

available to SEF applicants or on an ongoing basis so that a DCM

required under DCM Core Principle 9 to delist a futures contract at any

point in the future would be allowed to seek

[[Page 33487]]

temporary relief from registration as a SEF.\148\

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\147\ CME Comment Letter at 11 (Mar. 8, 2011).

\148\ NYSE Liffe Comment Letter at 3-4 (Sep. 2, 2011).

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(iii) Comments on 90-Day Effective Date of Regulations

Some commenters recommended a longer time period for the effective

date of the final regulations to provide applicants with additional

time to implement the large number of changes required.\149\ Nodal

commented that the short effective date will disadvantage smaller

exchanges because its supporting external parties will likely

prioritize compliance obligations in order to be responsive to the

largest exchanges first.\150\ MarketAxess and NFA recommended that the

Commission provide SEF applicants 180 days after adoption of the final

rules to comply with the final SEF regulations in light of forthcoming

operational challenges.\151\ However, SDMA supported the 90-day

effective date and urged the Commission to be vigilant in preventing

further delays that undermine the realization of the goals of the Dodd-

Frank Act.\152\

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\149\ AIMA Comment Letter at 3 (Jun. 10, 2011); Nodal Comment

Letter at 3-5 (Jun. 3, 2011); WMBAA Comment Letter at 4-5 (Jun. 3,

2011); CME Comment Letter at 6 (Jun. 3, 2011); MarketAxess Comment

Letter at 19 (Mar. 8, 2011); NFA Comment Letter at 2-3 (Mar. 8,

2011); WMBAA Comment Letter at 12-13 (Mar. 8, 2011); ICAP Comment

Letter at 6 (Mar. 8, 2011); Nodal Comment Letter at 4-5 (Mar. 8,

2011).

\150\ Nodal Comment Letter at 4 (Jun. 3, 2011); Nodal Comment

Letter at 4 (Mar. 8, 2011).

\151\ MarketAxess Comment Letter at 19 (Mar. 8, 2011); NFA

Comment Letter at 2-3 (Mar. 8, 2011).

\152\ SDMA Comment Letter at 12 (Mar. 8, 2011).

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(2) Commission Determination

(i) Temporary Grandfather Relief

The Commission agrees with MarketAxess that ``temporary

registration'' is more accurate than ``temporary grandfather relief''

and is accordingly making such change. Additionally, based on the

comments, the Commission is adopting proposed Sec. 37.3(b) as final

Sec. 37.3(c) subject to a number of modifications.\153\

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\153\ The Commission is renumbering proposed Sec. 37.3(b) to

Sec. 37.3(c) and making several non-substantive revisions for

clarity.

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The Commission further agrees with MarketAxess and other commenters

that the trading activity requirement as proposed in Sec.

37.3(b)(1)(ii) may limit temporary registration to incumbent platforms.

Therefore, the Commission is eliminating the trading activity

requirement and will permit all SEF applicants to apply for temporary

registration if they meet the requirements under final Sec.

37.3(c)(1). The Commission views the revised temporary registration

provision as promoting competition between SEFs by providing fair

opportunities for new entities to establish trading operations in

competition with incumbents.

The Commission is deleting the certification requirement under

proposed Sec. 37.3(b)(1)(iii) because it is unnecessary. The

Commission notes, as stated in the SEF NPRM, that once a SEF applicant

is granted temporary registration it must comply with all provisions of

the Act and the Commission's regulations that are applicable to

SEFs.\154\

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

\154\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1216.

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The Commission is revising the temporary registration provisions to

clarify in final Sec. 37.3(c)(1) that a SEF applicant may apply for

temporary registration if it submits a complete Form SEF and a

temporary registration notice.\155\ The Commission is also revising the

temporary registration provisions to require a SEF applicant that is

already operating a swaps-trading platform, in reliance upon either an

exemption granted by the Commission or some form of no-action relief

granted by the Commission staff, to include in the temporary

registration notice a certification that it is operating pursuant to

such exemption or no-action relief. The Commission also clarifies that

a SEF applicant may submit such temporary registration application

after the final SEF regulations are published in the Federal Register

until the termination of the temporary registration provision pursuant

to final Sec. 37.3(c)(5).\156\

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\155\ The applicant must comply with all of the requirements in

final Sec. 37.3(b)(1)(i) and must submit a temporary registration

notice to the Commission to qualify for temporary registration. See

Final Sec. 37.3(c)(1) of the Commission's regulations.

\156\ The Commission notes that certain entities may continue to

operate under current exemptions while their SEF applications are

pending, as long as the entities submit a complete application

(i.e., the SEF applicant provides substantive answers to each of the

informational and exhibit items set forth in Form SEF) and temporary

registration notice before the effective date of the final SEF

regulations. See CFTC No-Action Letter 12-48 (Dec. 11, 2012).

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Pursuant to final Sec. 37.3(c)(1), the Commission notes that it

will grant a SEF applicant temporary registration upon a Commission

determination that the applicant has provided a complete Form SEF as

part of its registration application and submitted a notification

requesting that the Commission grant temporary registration. If an

applicant has not met these requirements, the Commission may deny its

request for temporary registration. By ``complete'' Form SEF, the

Commission means that the SEF applicant provides appropriately

responsive answers to each of the informational and exhibit items set

forth in Form SEF. The Commission notes that it will review a SEF

applicant's Form SEF to ensure that it is complete, and will not

conduct any substantive review of the form before granting or denying

temporary registration. The Commission notes that this temporary

registration process is similar to the notice registration process

followed by the Commission in the context of other types of

registrations.\157\ The Commission will review SEF applicants'

submissions on a rolling basis and the Commission will issue notices

either granting or denying temporary registration.\158\ The Commission

believes that providing a clear and streamlined path to temporary

registration will minimize the potential for regulatory arbitrage,

ensure a level playing field, and promote competition among SEFs.

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\157\ See discussion below regarding swap dealer and major swap

participant provisional registration rules.

\158\ The Commission is delegating to the Director of DMO, upon

consultation with the General Counsel, the authority to issue a

notice granting or denying temporary registration. See Final Sec.

37.3(h) of the Commission's regulations.

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The Commission stresses that a grant of temporary registration does

not mean that the Commission has determined that a SEF applicant is

fully compliant with the Act and Commission regulations, nor does it

guarantee that a SEF applicant will eventually be granted full SEF

registration. After granting a SEF applicant temporary registration,

the Commission will review the applicant's application to assess

whether the applicant is fully compliant with the requirements of the

Act and the Commission's regulations applicable to SEFs. During such

assessment, the Commission may request from the SEF applicant

additional information in order to make a determination whether to

issue a final order of registration.

The Commission is also revising the temporary registration

provisions to clarify in final Sec. 37.3(c)(2) that an applicant

cannot operate as a SEF under temporary registration until the

applicant receives a notice from the Commission or the Commission staff

granting temporary registration.\159\ In response to Phoenix's comment

about a SEF operating while its temporary registration is pending, the

Commission does not believe that a SEF applicant should be allowed to

operate as a SEF

[[Page 33488]]

under temporary registration before the Commission has had a chance to

review the application to ensure that it is complete. The Commission's

review is especially merited given the Commission's decision to permit

temporary registration of entities that have not previously traded

swaps.

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\159\ This provision is contained in final Sec. 37.3(c)(2) of

the Commission's regulations. This rule also states that in no case

may an applicant begin operating as a temporarily registered SEF

until the effective date of the SEF regulations.

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The Commission believes that permitting entities to operate as

temporarily registered SEFs, notwithstanding the lack of a substantive

review of the SEF's application by the Commission, is not a novel

concept and has been followed by the Commission in other contexts where

it is important to allow entities to quickly reach the market, before

an extensive Commission review. For instance, under the Commission's

swap dealer and major swap participant registration rules, provisional

registration is granted upon the filing of an application and

documentation demonstrating compliance or the ability to comply with

the CEA section 4s requirements in effect on such date--and not after

review and approval of the documentation by the National Futures

Association (``NFA''), as the Commission's delegee.\160\ On and after

the date on which NFA confirms that the applicant has demonstrated its

initial compliance with the applicable requirements, the provisional

registration of the applicant ceases and the applicant becomes

registered as an SD or an MSP, as the case may be.

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\160\ Registration of Swap Dealers and Major Swap Participants,

77 FR 2613 (Jan. 19, 2012).

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The Commission envisions the SEF temporary registration process as

operating in a similar fashion, with the Commission reviewing each

application for completeness alone before granting temporary

registration. Subsequently, and concurrent with the temporarily

registered SEF's early operations, the Commission would conduct a

comprehensive review of the application for compliance with all

applicable SEF requirements.

The Commission is revising proposed Sec. 37.3(b)(2) regarding the

expiration of temporary registration to remove the ability of the

Commission to rescind temporary registration. The Commission notes that

the SEF NPRM did not provide a standard for the Commission to rescind

temporary registration. Instead, in final Sec. 37.3(c)(3), the

Commission may rely on its ability to deny full registration, which

will also cause temporary registration to expire. Therefore, the

Commission believes that the ability to rescind temporary registration

is unnecessary.

The Commission is extending the 365-day sunset provision for

temporary registration to two years from the effective date of these

regulations in final Sec. 37.3(c)(5).\161\ Given that the projected

number of temporary SEF registrations may exceed 20 and the resource

constraints faced by the Commission, the Commission may not be able to

complete its registration reviews, enable SEFs to remedy any identified

deficiencies, and ultimately grant or deny full registration for all of

the SEF applicants within the proposed 365-day period. Extending the

temporary registration provision will provide the Commission with

adequate time to review the SEF registration applications while

ensuring that SEFs can continue their operations under temporary

registration, without interruption, until the Commission decides on

their application for full registration.

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\161\ This provision is contained in final Sec. 37.3(c)(5) of

the Commission's regulations.

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The Commission is also revising final Sec. 37.3(c)(5) to state

that the temporary registration provision will not terminate for an

applicant who applies for temporary registration before the termination

of the temporary registration provision and has not been granted or

denied registration under Sec. 37.3(b)(6) by the time of the

termination of the temporary registration provision. In addition, final

Sec. 37.3(c)(5) states that such an applicant may operate as a SEF

under temporary registration upon receipt of a notice from the

Commission granting temporary registration until the Commission grants

or denies full registration pursuant to Sec. 37.3(b)(6). On the

termination date of the temporary registration provision, the

Commission will review such applicant's application pursuant to the

180-day Commission review period and procedures in Sec. 37.3(b)(5).

These revisions will ensure that a temporarily registered SEF who does

not have a full registration in place by the time the temporary

registration provision terminates will not have to stop operating on

such termination date.

(ii) DCM Eligibility

The Commission is withdrawing proposed Sec. 37.3(b)(1)(ii)

regarding the existing trading activity requirement so an operational

DCM that seeks to create a new SEF would be able to qualify for

temporary SEF registration. In consideration of NYSE Liffe's comment

that temporary SEF registration for an existing DCM should not be

subject to the sunset provision, the Commission is revising proposed

Sec. 37.3(b) in final Sec. 37.3(c)(6) to allow for such an

exemption.\162\ The Commission notes that a DCM is subject to a higher

regulatory standard than a SEF such that a non-dormant DCM who seeks to

create a new SEF in order to transfer one or more of its contracts

should be able to meet many of the SEF requirements. Therefore, the

Commission believes that, on an ongoing basis, an operational DCM that

also seeks to register as a SEF in order to transfer one or more of its

contracts (whether the transfer of the contract is motivated by DCM

Core Principle 9 or another reason) may request SEF temporary

registration.

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\162\ This provision is contained in final Sec. 37.3(c)(6) of

the Commission's regulations.

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(iii) 90-Day Effective Date of Regulations

The Commission is shortening the proposed 90-day effective date to

60 days subsequent to publication in the Federal Register. In

consideration of the comments received and the availability of the

Commission staff resources, the Commission has determined to use its

discretion to establish alternative dates for the commencement of its

enforcement of regulatory provisions and is setting a general

compliance date of 120 days subsequent to Federal Register

publication.\163\ With this use of an effective date and compliance

date, a prospective SEF that is already operating a swaps-trading

platform in reliance on a Commission staff relief letter (e.g., CFTC

No-Action Letter 12-48) could submit a SEF application and receive

temporary registration before part 37's effective date so that it might

begin operating as a SEF upon that effective date.\164\ Alternatively,

if such a prospective SEF took additional time to prepare its SEF

application, it would have the option of forestalling the submission of

its application until after the effective date, so long as it submitted

its SEF application by the compliance date.

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\163\ See Heckler v. Chaney, 470 U.S. 821 (1985).

\164\ This scenario is not limited to a prospective SEF that is

already operating a swaps-trading platform in reliance on a

Commission staff relief letter. As noted above, all SEF applicants

may apply for temporary registration if they meet the requirements

under final Sec. 37.3(c)(1).

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The Commission believes that this combination of a 60-day effective

date and a 120-day compliance date subsequent to Federal Register

publication for prospective SEF applicants establishes a transition

period that appropriately balances the Commission's need to provide

regulatory certainty to potential applicants through issuance of final

SEF regulations and the Commission's statutory directives to both

promote fair

[[Page 33489]]

competition between swaps trading venues \165\ and promote the trading

of swaps on SEFs.\166\ The new transition period ensures swaps market

continuity, preserves competition between swaps trading venues, and

facilitates the orderly restructuring of the swaps market in compliance

with the Act and regulations thereunder. The Commission believes that

the 60-day effective date and the 120-day compliance date approach will

provide prospective SEF applicants with sufficient time to comply with

the final regulations and, if they choose, to prepare an application

for temporary registration.

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\165\ Section 3(b) of the Act lists the promotion of ``fair

competition among boards of trade, other markets, and market

participants'' as a purpose of the Act. 7 U.S.C. 5(b).

\166\ Section 5h(e) of the Act lists the promotion of ``the

trading of swaps on swap executive facilities'' as one goal of the

Act. 7 U.S.C. 7b-3(e).

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(f) Sec. 37.3(c)--Reinstatement of Dormant Registration

Proposed Sec. 37.3(c) provided procedures for a dormant SEF to

reinstate its registration. The Commission received no comments on this

section and is adopting Sec. 37.3(c) as proposed.\167\

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\167\ The Commission is renumbering proposed Sec. 37.3(c) to

Sec. 37.3(d) and making several non-substantive revisions for

clarity.

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(g) Sec. 37.3(d)--Request for Transfer of Registration

Proposed Sec. 37.3(d) provided procedures that a SEF must follow

when seeking to transfer its registration from its current legal entity

to a new legal entity as a result of a corporate event. The Commission

received no comments on this section and is adopting Sec. 37.3(d) as

proposed.\168\

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\168\ The Commission is renumbering proposed Sec. 37.3(d) to

Sec. 37.3(e) and making several non-substantive revisions for

clarity.

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(h) Sec. 37.3(e)--Request for Withdrawal of Application for

Registration

Proposed Sec. 37.3(e) provided that a SEF applicant may withdraw

its application for registration. The Commission received no comments

on this section and is adopting Sec. 37.3(e) as proposed.\169\

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\169\ The Commission is renumbering proposed Sec. 37.3(e) to

Sec. 37.3(f) and making several non-substantive revisions for

clarity.

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(i) Sec. 37.3(f)--Request for Vacation of Registration

Proposed Sec. 37.3(f) provided that a SEF may vacate its

registration. The Commission received no comments on this section and

is adopting Sec. 37.3(f) as proposed.\170\

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\170\ The Commission is renumbering proposed Sec. 37.3(f) to

Sec. 37.3(g) and making several non-substantive revisions for

clarity.

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4. Sec. 37.4--Procedures for Listing Products and Implementing Rules

Proposed Sec. 37.4 detailed the approval and self-certification

procedures under part 40 of the Commission's regulations that SEF

applicants and SEFs must follow to submit its products and rules to the

Commission. Proposed Sec. 37.4 also provided that a SEF may request

that the Commission consider, under the provisions of section 15(b) of

the Act,\171\ any of the SEF's rules or policies.

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\171\ CEA section 15(b) requires the Commission to take into

consideration the public interest to be protected by the antitrust

laws and endeavor to take the least anticompetitive means of

achieving the objectives of the Act, as well as the policies and

purposes of the Act. 7 U.S.C. 19(b).

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(a) Summary of Comments

WMBAA commented that SEFs should not be required to seek Commission

approval for their products and rules.\172\ WMBAA recommended that SEFs

be allowed to submit to the Commission a simple self-certification that

they complied with the applicable requirements.\173\ CME stated that

the proposed procedures for listing products would increase the burdens

associated with new product submissions and rule changes and would

create new and costly bureaucratic inefficiencies, competitive

disadvantages in the global marketplace, and impediments to

innovation.\174\ MarketAxess recommended that the Commission revise

proposed Sec. 37.4 to clarify that temporarily registered SEFs may

list swaps through the Commission's approval or self-certification

procedures.\175\

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\172\ WMBAA Comment Letter at 15-16 (Mar. 8, 2011).

\173\ Id.

\174\ CME Comment Letter at 10, 13 (Feb. 22, 2011). CME also

provided its comments to the rulemaking titled Provisions Common to

Registered Entities, 76 FR 44776 (Jul. 27, 2011). In addition,

rather than repeat its comments that pertain to both the DCM and SEF

NPRMs, CME incorporated its entire DCM rulemaking comment letter

dated Feb. 22, 2011 as Exhibit A to its SEF comment letter dated

Mar. 8, 2011. The Commission notes these comments by referencing the

Feb. 22, 2011 date of CME's DCM comment letter. The Commission is

also changing CME's reference to ``DCM'' to ``SEF'' for these

comments.

\175\ MarketAxess Comment Letter at 19 (Mar. 8, 2011). Tradeweb

similarly commented that a SEF applicant should be able to introduce

new products while it is operating under temporary relief. Tradeweb

Comment Letter at 13 (Mar. 8, 2011).

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(b) Commission Determination

The Commission is adopting proposed Sec. 37.4 subject to certain

modifications. The Commission is removing many of the details from the

proposed rule, which are already contained in part 40 of the

Commission's regulations, and is instead referring SEFs to part

40.\176\ The Commission is also removing the CEA section 15(b)

consideration provision because, when reviewing any SEF rule, the

Commission is already required to take into consideration the

provisions under section 15(b) of the Act.

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\176\ 17 CFR part 40.

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In response to WMBAA's comments that SEFs should not be required to

seek Commission approval of their products and rules, the Commission

notes that a SEF is a registered entity under the Act and pursuant to

section 5c(c) of the Act, registered entities must submit product terms

and conditions and rules to the Commission for approval or under self-

certification procedures.\177\ In addition, the Commission notes that

CME's comments were addressed in the part 40 rulemaking and are outside

the scope of this rulemaking.\178\ The Commission also clarifies that

temporarily registered SEFs may list swaps or submit rules through the

Commission's approval or self-certification procedures under part 40 of

this chapter, and that the timelines under those procedures shall

apply.

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\177\ CEA section 5c(c); 7 U.S.C. 7a-2(c).

\178\ See Provisions Common to Registered Entities, 76 FR 44776

(Jul. 27, 2011).

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5. Sec. 37.5--Information Relating to Swap Execution Facility

Compliance

Proposed Sec. 37.5(a) required a SEF to file with the Commission

information related to its business as a SEF as specified in the

Commission's request. Proposed Sec. 37.5(b) required a SEF to file

with the Commission a written demonstration of compliance with the core

principles. Proposed Sec. 37.5(d) delegated the Commission's authority

to seek information as set forth in Sec. 37.5(b) to the Director of

DMO or such other employee as the Director may designate.

Proposed Sec. 37.5(c) required a SEF to file with the Commission a

notice of the transfer of ten percent or more of its equity no later

than the business day following the date on which the SEF enters into a

firm obligation to transfer the equity interest.\179\ The proposed rule

also required that the notification include any relevant agreement and

a representation from the SEF that it meets all of the requirements of

section 5h of the Act and Commission regulations adopted thereunder.

Additionally, the proposed rule

[[Page 33490]]

required the SEF to notify the Commission of the consummation of the

transaction on the day on which it occurs. Furthermore, the proposed

rule required that, upon the transfer of the equity interest, the SEF

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 Act and Commission regulations

adopted thereunder.

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\179\ See generally Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1217 (explaining the proposed

ten percent threshold).

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(a) Summary of Comments

The Commission did not receive any comments on proposed Sec.

37.5(a), (b), or (d). The Commission did, however, receive comments on

the equity interest transfer provisions in proposed Sec. 37.5(c).

CME commented that the submissions required to be simultaneously

filed with the initial notification of an equity interest transfer do

not lend themselves to preparation within the 24-hour time frame

proposed in the rules.\180\ CME further commented that the

representation of compliance with the requirements of CEA section 5h

and the Commission's regulations adopted thereunder would be more

appropriate if required upon consummation of the equity interest

transfer, rather than with the initial notification.\181\

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\180\ CME Comment Letter at 13 (Feb. 22, 2011).

\181\ Id.

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MarketAxess commented that public companies should not have to file

a notice of an equity interest transfer because the ownership structure

of a public company does not implicate the control and influence

concerns raised by the Commission in its proposal, and shareholders are

already obligated under the SEC's regulations to report threshold

acquisitions of equity interests within ten days of such an

acquisition.\182\

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\182\ MarketAxess Comment Letter at 29 (Mar. 8, 2011).

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Lastly, Better Markets recognized the important implications of

transferring control in a regulated marketplace and it recommended that

the Commission lower the transfer threshold for reporting to five

percent as similarly required by the SEC for public equity

transfers.\183\

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\183\ Better Markets Comment Letter at 21-22 (Mar. 8, 2011).

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(b) Commission Determination

The Commission is adopting Sec. 37.5(a), (b), and (d) as proposed

subject to certain non-substantive clarifications.\184\ The Commission

is adopting proposed Sec. 37.5(c) with certain revisions discussed

below.

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\184\ The Commission is removing the reference to ``information

relating to data entry and trade details'' in proposed Sec. 37.5(a)

because it is unnecessary. The rule text is broad enough to

encompass such information as it states that, upon the Commission's

request, a SEF shall file with the Commission information related to

its business as a SEF.

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The Commission is revising Sec. 37.5(c) to provide that a SEF must

submit to the Commission a notification of each transaction involving

the transfer of fifty percent or more of the equity interest in the

SEF, and that such notification must be provided at the earliest

possible time, but in no event later than the open of the business day

that is ten business days following the date in which the SEF enters

into a firm obligation \185\ to transfer the equity interest. However,

in all cases, the Commission notes that a SEF must provide the

Commission staff with sufficient time, prior to consummating the equity

interest transfer, to review and consider the implications of the

change in ownership, including whether the change in ownership will

adversely impact the operations of the SEF or the SEF's ability to

comply with the core principles and the Commission's regulations

thereunder.

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\185\ The Commission interprets ``firm obligation'' to mean when

a SEF enters into a letter of intent or any other document that

demonstrates a SEF's firm intent to transfer its equity interest as

described in Sec. 37.5(c).

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The Commission acknowledges CME's concern regarding the one

business day time period for filing the supporting documents with the

equity interest transfer notification. Thus, in addition to extending

the time period to up to ten business days for a SEF to file

notification with the Commission, the Commission is revising the rule

to eliminate the requirement that specific documents be provided with

the notification. Rather, the Commission is revising the rule text to

clarify that upon receiving a notification of the equity interest

transfer, the Commission may request appropriate documentation pursuant

to its authority under Sec. 37.5 of the Commission's regulations. For

example, such documentation may include, but is not limited to: (i)

Relevant agreement(s), including any preliminary agreements (not

including draft documents); (ii) associated changes to relevant

corporate documents; (iii) a chart outlining any new ownership or

corporate or organizational structure, if available; and (iv) a brief

description of the purpose and any impact of the equity interest

transfer.

The Commission is deleting the requirement for a SEF to provide a

representation of compliance with section 5h of the Act and the

Commission regulations thereunder with the equity interest transfer

notification, as requested by CME. The Commission agrees with CME that

this requirement is more appropriate upon consummation of the equity

interest transfer, rather than with the initial notification.

Therefore, the Commission is maintaining the certification requirement

upon consummation of the equity interest transfer as proposed in the

SEF NPRM.

With respect to the other comments, the Commission believes that

the notice requirements should not be limited to privately-held

companies as the Commission's objective is to ensure that equity

transfers do not negatively impact the operations of registered

entities. The Commission must oversee and ensure the continued

compliance of all SEFs with the core principles and the Commission's

regulations. In order to fulfill its oversight obligations, and to

ensure that SEFs maintain compliance with their self-regulatory

obligations, the Commission must receive a notice of an equity interest

transfer. The Commission acknowledges the suggestion by Better Markets

to lower the equity interest transfer threshold to five percent;

however, the Commission believes that the revisions to Sec. 37.5(c)

will still allow the Commission to fulfill its oversight obligations,

while reducing the costs for SEFs to comply with the equity interest

transfer requirements.

Finally, the Commission is revising the rule to remind SEFs that if

any aspect of an equity interest transfer requires the SEF to file a

rule as defined in part 40 of the Commission regulations, then the SEF

must comply with the rule submission requirements of section 5c(c) of

the CEA and part 40 of this chapter, and all other applicable

Commission regulations.

6. Sec. 37.6--Enforceability

Section 37.6 is intended to provide market participants who execute

swap transactions on or pursuant to the rules of a SEF with legal

certainty with respect to such transactions. In that regard, proposed

Sec. 37.6(a) established that any transaction entered into, on, or

pursuant to the rules of a SEF cannot be voided, rescinded, or held

unenforceable as a result of: (1) The SEF violating any provision of

section 5h of the CEA or part 37; (2) any Commission proceeding to

alter or supplement a rule, term, or condition under section 8a(7) of

the CEA or to declare an emergency under section 8a(9) of the CEA; or

(3) any other proceeding the effect of which is to alter or supplement

a specific term or condition or trading rule or procedure, or require a

registered

[[Page 33491]]

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

or to take or refrain from taking a specific action. Proposed Sec.

37.6(b) required that all transactions executed on or pursuant to the

rules of a SEF include written documentation memorializing all terms of

the swap transaction, the legal effect of which is to supersede any

previous agreement between the counterparties. The proposed rule also

required that the confirmation of all terms of the transaction take

place at the same time as execution.\186\

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\186\ The Commission proposed Sec. 37.6(b) to facilitate the

process contemplated by the confirmation definition. 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. A confirmation must be in writing

(whether electronic or otherwise) and must legally supersede any

previous agreement (electronically or otherwise). 17 CFR 45.1; Swap

Data Recordkeeping and Reporting Requirements, 77 FR 2136, 2197

(Jan. 13, 2012).

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(a) Summary of Comments

Three commenters addressed the practicality of a SEF confirming all

terms of a transaction at the same time as execution. MarketAxess

recommended that a SEF be responsible for confirming only the swap

creation data in its possession at the time of execution, consistent

with the Commission's approach in its proposed part 45

regulations.\187\ MarketAxess also requested that the Commission

clarify that SEFs are only responsible for producing a confirmation for

swaps entered into on, and not just pursuant to the rules of, a

SEF.\188\

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\187\ MarketAxess Comment Letter at 28-29 (Mar. 8, 2011).

Proposed Sec. 45.3 required that for all transactions executed on a

SEF, regardless of whether the swap was cleared, the SEF would be

responsible for reporting to a swap data repository only the primary

economic terms of the transaction in its possession at the time of

execution, and that reporting of confirmation data consisting of all

terms of the transaction would be the responsibility of either the

derivatives clearing organization (if cleared) or one of the

counterparties (if uncleared). Swap Data Recordkeeping and Reporting

Requirements, 75 FR 76574, 76580-81 (proposed Dec. 8, 2010). As

adopted by the Commission, however, Sec. 45.3 requires a SEF to

report both the primary economic terms data as well as all

confirmation data consisting of all transaction terms for each swap

executed on or pursuant to the rules of the SEF as soon as

technologically practicable after execution of the swap. 17 CFR

45.3; Swap Data Recordkeeping and Reporting Requirements, 77 FR

2136, 2199 (Jan. 13, 2012).

\188\ MarketAxess Comment Letter at 29 (Mar. 8, 2011).

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MarkitSERV stated that when counterparties choose to execute a swap

on a SEF that is not subject to the clearing mandate and not submitted

for clearing to a clearinghouse, the parties will require a long-term

credit relationship to be in place, often memorialized in an ISDA

Master Agreement.\189\ MarkitSERV further stated that the confirmation

terms provided by a SEF may not be able to accommodate the specificity

of such a master agreement, thus making the SEF's confirmation

inadequate for purposes of complying with the Commission's

regulations.\190\

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\189\ MarkitSERV Comment Letter at 4-5 (Mar. 8, 2011).

\190\ Id. MarkitSERV also expressed concern that the SEF NPRM is

conflating the concepts of confirmation and affirmation with the

audit trail requirements in proposed Sec. 37.205. For example,

MarkitSERV sought clarification regarding the SEF NPRM's statement

that ``[v]oice transactions must be entered into some form of

electronic affirmation system immediately upon execution.'' Core

Principles and Other Requirements for Swap Execution Facilities, 76

FR at 1221. Given the audit trail requirement in proposed Sec.

37.205(b)(1), which states that SEFs 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[,]'' MarkitSERV recommended that the Commission

use the term ``electronic processing system'' instead of

``electronic affirmation system'' because audit trail records and

affirmation are different concepts. Id. at 1244. MarkitSERV Comment

Letter at 4, 6 (Mar. 8, 2011). ABC/CIEBA also sought clarification

as to whether SEFs must enter Permitted Transactions into an

affirmation system, and if so, ABC/CIEBA noted that the SEF NPRM is

inconsistent with other rules. ABC/CIEBA Comment Letter at 7-8 (Mar.

8, 2011). The Commission notes that the final SEF rules do not

require the use of an ``electronic affirmation system.'' The

Commission also clarifies that confirmation and the creation of an

audit trail in Sec. 37.205 are two separate and distinct

requirements. In addition, the Commission notes that Sec. 37.205(b)

merely establishes the requirement that SEFs must capture audit

trail data for regulatory purposes and does not address affirmation,

confirmation, or the public reporting or dissemination of such data.

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Similarly, the Energy Working Group expressed concern over the

provision's requirement that the SEF's confirmation supersede any

previous agreement between the transacting parties, noting that this

language appears to prevent a master agreement from operating between

counterparties transacting on a SEF.\191\ The Energy Working Group also

stated that confirmation cannot take place at the same time as

execution because they are two distinct steps in the swap transaction

process.\192\

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\191\ Energy Working Group Comment Letter at 5 (Mar. 8, 2011).

\192\ Id.

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(b) Commission Determination

The Commission is adopting Sec. 37.6(a) as proposed.\193\ The

Commission is also adopting Sec. 37.6(b) as proposed subject to the

two revisions discussed below. Although the comments received regarding

proposed Sec. 37.6(b) did not cite ambiguity in the SEF NPRM regarding

a SEF's affirmative duty to provide confirmation documentation to

counterparties, the Commission has determined to revise Sec. 37.6(b)

to state explicitly that a ``swap execution facility shall provide each

counterparty'' with written documentation of all terms of the

transaction to serve as confirmation of such transaction. In response

to MarketAxess's comments, the Commission notes that Sec. 37.6(b) is

consistent with the requirement in final part 45 of the Commission's

regulations that a SEF report confirmation data consisting of all terms

of a transaction to a swap data repository (``SDR'') for each swap

executed on or pursuant to the rules of the SEF.\194\

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\193\ The Commission is making certain non-substantive revisions

to Sec. 37.6(a) for clarity.

\194\ Part 45 requires a SEF to report all confirmation data and

all primary economic terms data as defined in part 23 and Sec. 45.1

of the Commission's regulations for each swap executed on or

pursuant to the rules of the SEF as soon as technologically

practicable after execution of the swap. 17 CFR 45.3; Swap Data

Recordkeeping and Reporting Requirements, 77 FR 2136, 2199 (Jan. 13,

2012). Part 45 defines confirmation data as ``all of the terms of a

swap matched and agreed upon by the counterparties in confirming the

swap.'' Id. at 2197.

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With regard to the specific comments received about the role of

master agreements in the written confirmation provided by a SEF, the

Commission has determined that counterparties choosing to execute a

transaction not submitted for clearing on or pursuant to the rules of a

SEF must have all terms, including possible long-term credit support

arrangements, agreed to no later than execution, such that the SEF can

provide a written confirmation inclusive of those terms at the time of

execution and report complete, non-duplicative, and non-contradictory

data to an SDR as soon as technologically practicable after

execution.\195\ This requirement, as mentioned above, is necessary to

provide market participants who execute swap transactions on or

pursuant to the rules of a SEF with legal certainty with respect to

such transactions, and to promote the Commission's policy goal of

achieving ``straight-through processing'' of swap

[[Page 33492]]

transactions in order to facilitate orderly markets, whether bilateral

or facility traded.\196\ Furthermore, the Commission believes that

credit-support arrangements for uncleared transactions can impact the

ultimate price of a swap, and thus should be agreed to no later than

the time of trade execution in order to promote the statutory goal of

pre-trade price transparency.\197\

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\195\ The Commission notes that swap trading relationship

documentation is not required for swaps cleared by a derivatives

clearing organization. See Sec. 23.504(a)(1) of the Commission's

regulations. The Commission also notes that the commenters' concerns

are most relevant to those transactions that are truly bespoke, not

subject to the clearing mandate, and not voluntarily cleared. There

is no reason why a SEF's written confirmation terms cannot

incorporate by reference the privately negotiated terms of a

freestanding master agreement for these types of transactions,

provided that the master agreement is submitted to the SEF ahead of

execution and the counterparties ensure that nothing in the

confirmation terms contradict the standardized terms intended to be

incorporated from the master agreement. See also Real-Time Public

Reporting of Swap Transaction Data, 77 FR 1182, 1193 (Jan. 9, 2012)

(discussing confirmation and incorporating documents by reference).

\196\ The OTC Derivatives Supervisors' Group, a collaboration of

market participant leadership headed by the Federal Reserve Bank of

New York, recognized the potential of electronic trading to

facilitate the objectives of straight-through processing in the wake

of the 2008 financial crisis. See Confirmation, Portfolio

Reconciliation, and Portfolio Compression Requirements for Swap

Dealers and Major Swap Participants, 75 FR 81519, 81521-22 (proposed

Dec. 28, 2010) (noting that ``[t]imely and accurate confirmation of

transactions is critical for all downstream operational and risk

management processes, including the correct calculation of cash

flows and discharge of settlement obligations as well as accurate

measurement of counterparty credit exposures.'').

\197\ See CEA section 5h(e); 7 U.S.C. 7b-3(e) (stating that the

goal of this section is to promote pre-trade price transparency in

the swaps market). While straight-through processing may not be as

relevant to credit risk associated with transactions executed on or

pursuant to the rules of a SEF but not submitted for clearing, the

data and real-time reporting requirements already finalized by the

Commission mandate reporting by the SEF of all swap transaction

terms ``as soon as technologically practicable'' in order to

effectuate the statutory mandate of post-trade price transparency.

See 17 CFR 43.3(b)(1) (real-time reporting); 17 CFR 45.3(a)(1) (swap

data recordkeeping and reporting requirements). This allowance of a

slight timing delay, however, is meant to account for ``the

prevalence, implementation and use of technology by comparable

market participants,'' and not post-execution confirmation of other

terms such as credit agreements for uncleared swaps. See, e.g., 17

CFR 43.2; Real-Time Public Reporting of Swap Transaction Data, 77 FR

1182, 1191 (Jan. 9, 2012) (discussing the definition of ``as soon as

technologically practicable'').

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Finally, in response to the Energy Working Group's comment that

confirmation cannot take place at the same time as execution, the

Commission is revising Sec. 37.6(b) to state that ``. . . specific

customer identifiers for accounts included in bunched orders involving

swaps need not be included in confirmations provided by a swap

execution facility if the applicable requirements of Sec. 1.35(b)(5)

of this chapter are met.'' The Commission acknowledges that for bunched

orders the post-execution allocation of trades is required for

confirmation. The above revisions to Sec. 37.6 are consistent with

Commission regulation 1.35(b)(5) and provide sufficient time for the

post-execution allocation of bunched orders, but allow SEFs to meet the

requirement that confirmation takes place at the same time as

execution.\198\

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\198\ See 17 CFR 1.35; Customer Clearing Documentation, Timing

of Acceptance for Clearing, and Clearing Member Risk Management, 77

FR 21278, 21286-287, 306 (Apr. 9, 2012); Confirmation, Portfolio

Reconciliation, Portfolio Compression, and Swap Trading Relationship

Documentation Requirements for Swap Dealers and Major Swap

Participants, 77 FR 55904, 55923 (Sep. 11, 2012) for further

details.

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7. Sec. 37.7--Prohibited Use of Data Collected for Regulatory Purposes

Proposed Sec. 37.7 prohibited a SEF from using for commercial

purposes proprietary data or personal information that it obtains from

or on behalf of any person for regulatory purposes. The purpose of this

provision was to protect customer privacy and prevent a SEF from using

such information to advance its commercial interests.\199\

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\199\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1218 n. 34.

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(a) Summary of Comments

Several commenters recommended that the Commission adopt a more

flexible approach toward the use of data collected for regulatory

purposes.\200\ CME, for example, stated that a SEF should be allowed to

use information that is provided for both regulatory and non-regulatory

purposes for commercial purposes, as long as transparent rules or

policies are in place.\201\ Some commenters believed that commercial

use should be allowed, provided that market participants' identities

are protected \202\ or prior consent is obtained.\203\ For example, FSR

believed that commercial use should be allowed for aggregate data as

long as the sources of the information are not revealed.\204\

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\200\ MarketAxess Comment Letter at 31 (Mar. 8, 2011); FSR

Comment Letter at 9 (Mar. 8, 2011); ICE Comment Letter at 5-6 (Mar.

8, 2011); CME Comment Letter at 14 (Feb. 22, 2011).

\201\ CME Comment Letter at 14 (Feb. 22, 2011).

\202\ MarketAxess Comment Letter at 31 (Mar. 8, 2011); FSR

Comment Letter at 9 (Mar. 8, 2011).

\203\ CME Comment Letter at 14 (Feb. 22, 2011); MarketAxess

Comment Letter at 31 (Mar. 8, 2011).

\204\ FSR Comment Letter at 9 (Mar. 8, 2011).

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However, SIFMA AMG stated that, given the broad authority under the

proposed rules for SEFs to acquire information, the term ``proprietary

data'' is too narrow to adequately protect market participants from

improper disclosure.\205\ Freddie Mac requested that the Commission

strengthen the proposed rule to additionally prohibit any SEF from

asserting ownership rights over the trading information of any

transacting party.\206\

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\205\ SIFMA AMG Comment Letter at 15-16 (Mar. 8, 2011).

\206\ Freddie Mac Comment Letter at 5 (Mar. 8, 2011).

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Finally, WMBAA requested that the Commission clarify the meaning of

``proprietary data or personal information,'' and recommended limiting

the rule to information obtained outside the ordinary course of trade

execution and related to market surveillance activities.\207\

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\207\ WMBAA Comment Letter at 17 (Mar. 8, 2011).

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(b) Commission Determination

The Commission is adopting Sec. 37.7 as proposed, subject to

certain modifications. In response to the commenters, the Commission is

modifying the proposed rule to allow SEFs to use proprietary data or

personal information for business or marketing purposes if the person

from whom it collects or receives such information clearly consents to

the use of its information in such manner. The Commission is also

revising the proposed rule to prohibit a SEF from conditioning access

to its facility based upon such consent. The Commission believes that

the consent requirement will protect persons by allowing them to first

weigh the benefits and consequences of allowing a SEF to make

commercial use of their information. In response to CME's comment about

information provided for both regulatory and non-regulatory purposes,

the Commission notes that a SEF may use information that it receives

for both regulatory and non-regulatory purposes for business or

marketing purposes if the source of the information clearly consents to

the use in such a manner.

In response to comments about the definition of ``proprietary data

and personal information,'' the Commission declines to adopt a further

definition and is maintaining a flexible approach. However, the

Commission notes that some examples of proprietary data and personal

information would include information that separately discloses

business transactions, market positions, or trade secrets. The

Commission recommends that SEFs define these terms in their rulebooks,

which will be subject to Commission review during the SEF registration

process.

8. Sec. 37.8--Boards of Trade Operating Both a Designated Contract

Market and a Swap Execution Facility

Proposed Sec. 37.8(a) required that a board of trade that operates

a DCM and also intends to operate a SEF must separately register the

SEF under part 37, and on an ongoing basis, comply with the core

principles under section 5h of the Act and the part 37 regulations

issued thereunder. Proposed Sec. 37.8(b) implemented CEA section 5h(c)

by requiring a board of trade that operates both a DCM and SEF and uses

the same electronic trade execution system for executing and trading

swaps on both registered entities to clearly identify to market

participants for each swap

[[Page 33493]]

whether the execution or trading of such swaps is taking place on the

DCM or the SEF.\208\

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\208\ CEA section 5h(c); 7 U.S.C. 7b-3(c).

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(a) Summary of Comments

CME stated that the rules of a DCM and SEF would clearly identify,

as necessary, the trade platform upon which a swap was being executed,

rendering the requirements of proposed Sec. 37.8 unnecessary.\209\ CME

requested that the Commission clarify whether proposed Sec. 37.8

created additional substantive obligations on the part of DCMs and SEFs

given that market participants often interface with electronic

platforms via proprietary or third-party front end systems not under

the control of DCMs or SEFs.\210\

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\209\ CME Comment Letter at 14 (Feb. 22, 2011).

\210\ Id.

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(b) Commission Determination

The Commission is adopting Sec. 37.8(a) as proposed, subject to

one revision. Proposed Sec. 37.8(a) only addressed the SEF

registration and compliance of a board of trade that already operates a

DCM and intends to operate a SEF. To address all situations regarding

DCM and SEF registration and compliance, the Commission is revising

Sec. 37.8(a) to apply to ``[a]n entity that intends to operate both a

[DCM] and a [SEF].'' The rule requires the entity to separately

Commission's regulations, respectively, and to comply with the

applicable core principles and regulations.

As to CME's comments regarding Sec. 37.8(b), the Commission

clarifies that it would not be sufficient for a board of trade that

operates both a DCM and a SEF to simply have rules that identify

whether a transaction is being executed on the DCM or the SEF. The

Commission notes that section 5h(c) of the Act clearly requires a board

of trade that operates both a DCM and a SEF to identify to market

participants whether each swap is being executed on the DCM or the

SEF.\211\ Accordingly, a consolidated DCM/SEF trading screen must

identify whether the execution is occurring on the DCM or the SEF,

irrespective of how proprietary or third-party front end systems

eventually present that data to market participants.\212\

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\211\ The Commission notes that only eligible contract

participants may execute a swap on a SEF so a board of trade that

operates both a DCM and a SEF must ensure that its SEF does not

allow for non-eligible contract participant trading on the SEF. See

CEA section 2(e); 7 U.S.C. 2(e).

\212\ The Commission notes that it is not replacing the term

``board of trade'' in Sec. 37.8(b) with the term ``entity'' as in

Sec. 37.8(a) because in Sec. 37.8(b) only a board of trade would

be able to use the same electronic trade execution system for

executing and trading swaps on the DCM and on the SEF (i.e., a

trading facility). The Commission also notes that Sec. 37.8(b)

implements CEA section 5h(c), which uses the term ``board of

trade.''

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9. Sec. 37.9--Permitted Execution Methods \213\

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\213\ The Commission is renaming the title of this section from

``Permitted Execution Methods'' to ``Methods of Execution for

Required and Permitted Transactions'' to provide greater clarity.

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As mentioned above, the SEF NPRM required a SEF to offer a minimum

trading functionality (i.e., a centralized electronic trading screen

upon which any market participant can post both firm and indicative

bids and offers that are transparent to all other market participants

of the SEF). The SEF NPRM provided that Required Transactions (i.e.,

transactions subject to the trade execution mandate under section

2(h)(8) of the CEA and not block trades) must be executed through the

SEF's minimum trading functionality, Order Book meeting the minimum

trading functionality, or RFQ System that operates in conjunction with

the SEF's minimum trading functionality.\214\ The SEF NPRM made it

clear that for Required Transactions, pre-trade transparency must be

met.\215\ The SEF NPRM also allowed a SEF to provide additional

execution methods for Permitted Transactions (i.e., transactions not

subject to the clearing and trade execution mandates, illiquid or

bespoke swaps, and block trades), including Voice-Based System.

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\214\ By ``in conjunction with the SEF's minimum trading

functionality,'' the Commission means that the SEF NPRM required a

SEF to offer the minimum trading functionality, and if that SEF also

offered an RFQ System, it was required to communicate any bids or

offers resting on the minimum trading functionality to the RFQ

requester along with the responsive quotes. See the discussion below

regarding ``Taken Into Account and Communicated'' Language in the

RFQ System Definition under Sec. 37.9(a)(1)(ii)--Request for Quote

System in the preamble for further details.

\215\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1220.

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The Commission is restructuring the order of the rule text in Sec.

37.9 and this corresponding preamble discussion to provide clarity.

Despite the order of other preamble sections, which generally follows

the order of the SEF NPRM, the Commission's preamble discussion of

Sec. 37.9 generally follows the order of the restructured rule text.

Additionally, as discussed above in the registration section, the

Commission is moving the minimum trading functionality and Order Book

sections from proposed Sec. 37.9 to final Sec. 37.3.

(a) Sec. 37.9(a)(1)(iv)--Required Transactions and Sec.

37.9(a)(1)(v)--Permitted Transactions

Proposed Sec. 37.9(a)(1)(iv) defined Required Transactions as

transactions that are subject to the execution requirements under the

Act and are made available for trading pursuant to Sec. 37.10, and are

not block trades. Proposed Sec. 37.9(a)(1)(v) defined Permitted

Transactions as transactions that meet any of the following

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.

(1) Summary of Comments

Several commenters recommended revisions to the definition of

Permitted Transactions.\216\ To ensure that there are no gaps between

the definitions of Required Transactions and Permitted Transactions,

MarketAxess recommended that the proposed definition of Permitted

Transactions in Sec. 37.9(a)(1)(v) be revised to include all

transactions that are not Required Transactions as defined in proposed

Sec. 37.9(a)(1)(iv).\217\ Freddie Mac recommended that the Commission

revise the proposed definition of Permitted Transactions to incorporate

hedging transactions by any end-user (i.e., non-dealer)

counterparty.\218\

[[Page 33494]]

Additionally, the Coalition commented that the Commission should define

illiquid or bespoke transactions to include typical end-user

trades.\219\

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\216\ Additionally, WMBAA commented that the distinction between

Required Transactions and Permitted Transactions is not required or

authorized by the CEA. WMBAA Comment Letter at 6-7 (Mar. 8, 2011).

In this regard, the Commission notes that the CEA sets out specific

trading requirements for swaps that are subject to the trade

execution mandate. See CEA sections 2(h)(1) and 2(h)(8); 7 U.S.C.

2(h)(1) and 2(h)(8). To meet these statutory requirements, final

Sec. 37.9(a)(1) defines these swaps as Required Transactions and

provides specific methods of execution for such swaps. To

distinguish these swaps from other swaps that are not subject to the

trade execution mandate, the Commission defines such swaps in final

Sec. 37.9(c)(1) as Permitted Transactions and allows these swaps to

be voluntarily traded on a SEF by using any method of execution. See

discussion below regarding execution methods for Required and

Permitted Transactions under Sec. 37.9(b)(1) and (b)(4)--Execution

Methods for Required Transactions and Sec. 37.9(c)--Execution

Methods for Permitted Transactions in the preamble.

\217\ MarketAxess Comment Letter at 32 (Mar. 8, 2011).

Similarly, ISDA/SIFMA and the Energy Working Group requested clarity

regarding the definition of Permitted Transactions. ISDA/SIFMA

Comment Letter at 7 (Mar. 8, 2011); Energy Working Group Comment

Letter at 4 (Mar. 8, 2011).

\218\ Freddie Mac Comment Letter at 3 (Mar. 8, 2011). Similarly,

MFA recommended that the Commission expand the definition of

Permitted Transactions to include other transactions, such as

exchanges for physical, exchanges for swaps, and linked or packaged

transactions. MFA Comment Letter at 8 (Mar. 8, 2011). The Commission

interprets MFA's comment to be a request that the Commission create

through rulemaking an exception to the CEA section 2(h)(8) trade

execution requirement similar to the centralized market trading

exception established by DCM Core Principle 9 for certain exchange

of futures for related positions. See CEA section 5(d)(9); 7 U.S.C.

7(d)(9); see also Regulation of Noncompetitive Transactions Executed

on or Subject to the Rules of a Contract Market, 63 FR 3708 (Jan.

26, 1998). The Commission notes that while DCM Core Principle 9 does

permit certain exceptions to the centralized market trading

requirements, such exceptions are all premised on there being some

``bona fide business purpose'' for the exception. MFA does not offer

a specific bona fide business purpose for any of its three suggested

off-exchange exceptions, nor is the Commission aware of any. In

addition, MFA does not explain why an exchange of swaps for swaps

transaction, where each leg of the transaction can presumably be

executed on a SEF, needs to be executed off-exchange. The Commission

observes that should swaps based on physical commodities become

subject to the trade execution mandate, there might be some bona

fide business purpose for executing exchanges of swaps for physicals

transactions. However, the market participants who are most likely

to engage in such transactions are also likely to be eligible for

the end-user exception in CEA section 2(h)(7). As an initial matter,

the Commission observes that swaps based on physical commodities may

be subject to the trade execution requirement if the Commission

determines that they are subject to the clearing requirement under

CEA section 2(h)(1) and part 50 of the Commission's regulations.

Should the circumstances arise where the Commission is determining

whether physical commodity swaps should become subject to the

clearing requirement and there are parties who seek to engage in

exchanges of swaps for physicals transactions that are not eligible

for the end-user exception, the Commission could at that time

entertain requests to permit a trade execution requirement exception

for swaps that are components of such exchanges of swaps for

physicals transactions. However, for the above reason, the

Commission believes that a broad exception for such off-exchange

transactions in the absence of bona fide business purposes could

undermine the trade execution requirement by allowing market

participants to execute swaps subject to the trade execution

requirement bilaterally rather than on a SEF or DCM.

\219\ Coalition Comment Letter at 8 (Mar. 8, 2011).

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Several commenters also commented on the reference to block trades

in the definition of Permitted Transactions.\220\ ISDA/SIFMA commented

that the definition of block trade in part 43 of the Commission's

regulations should apply to blocks executed on a SEF.\221\ Tradeweb

sought confirmation that block size trades in swaps that are required

to be cleared and made available to trade would not be subject to the

minimum trading requirements for Required Transactions, but would be

required to be reported to and processed through a SEF in a manner

prescribed by the SEF.\222\ Similarly, GFI requested the Commission to

confirm that block transactions must be effected on a SEF, but may be

subject to special rules.\223\

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\220\ ISDA/SIFMA Comment Letter at 10 (Mar. 8, 2011); Tradeweb

Comment Letter at 5 (Mar. 8, 2011); GFI Comment Letter at 4 (Mar. 8,

2011).

\221\ ISDA/SIFMA Comment Letter at 10 (Mar. 8, 2011).

\222\ Tradeweb Comment Letter at 5 (Mar. 8, 2011).

\223\ GFI Comment Letter at 4 (Mar. 8, 2011).

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(2) Commission Determination

To ensure that there is consistency in the definitions, and in

response to MarketAxess's comment, the Commission is: (1) Revising the

definition of Required Transaction to mean any transaction involving a

swap that is subject to the trade execution requirement in section

2(h)(8) of the Act \224\; and (2) revising the definition of Permitted

Transaction to mean any transaction not involving a swap that is

subject to the trade execution requirement in section 2(h)(8) of the

Act.\225\ The Commission is not revising the definition of Permitted

Transaction to explicitly include ``hedging transactions involving end-

users'' or ``typical end-user'' transactions because the Commission's

revisions to the definition of Permitted Transaction are consistent

with the CEA section 2(h)(8) trade execution requirement.\226\

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\224\ The Commission is renumbering proposed Sec.

37.9(a)(1)(iv) to Sec. 37.9(a)(1). Several commenters requested

clarification from the Commission whether inter-affiliate trades

would be subject to the CEA section 2(h)(8) trade execution

requirement. JP Morgan Comment Letter at 5 (Jun. 3, 2011); Rosen et

al. Comment Letter at 20-21 (Apr. 5, 2011); Coalition Comment Letter

at 5 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 11 (Mar. 8, 2011).

See Clearing Exemption for Swaps Between Certain Affiliated

Entities, 77 FR 50425 (proposed Aug. 21, 2012) for further details.

\225\ The Commission is renumbering proposed Sec. 37.9(a)(1)(v)

to Sec. 37.9(c)(1).

\226\ See CEA section 2(h)(8) trade execution requirement

discussion above under Sec. 37.3--Requirements for Registration;

see also discussion below under Sec. 37.9(c)--Execution Methods for

Permitted Transactions.

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With respect to the treatment of block transactions, the Commission

notes that the definition of block trade in part 43 of the Commission's

regulations applies to such transactions involving swaps that are

listed on a SEF.\227\ The Commission also notes that the definition of

block trade states, in part, that block trades occur away from the

registered SEF's or DCM's trading system or platform and is executed

pursuant to the registered SEF's or DCM's rules and procedures.\228\ As

such, block trades are not subject to the execution methods for

Required Transactions and Permitted Transactions in final Sec.

37.9(a)(2) and Sec. 37.9(c)(2), respectively.\229\

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\227\ Section 43.2 of the Commission's regulations states that

``block trade'' means a publicly reportable swap transaction that:

(1) Involves a swap that is listed on a registered SEF or DCM; (2)

Occurs away from the registered SEF's or DCM's trading system or

platform and is executed pursuant to the registered SEF's or DCM's

rules and procedures; (3) Has a notional or principal amount at or

above the appropriate minimum block size applicable to such swap;

and (4) Is reported subject to the rules and procedures of the

registered SEF or DCM and the rules described in this part,

including the appropriate time delay requirements set forth in Sec.

43.5 of this part. 17 CFR 43.2.

\228\ Id.

\229\ The Commission notes that the execution methods for

Required Transactions in final Sec. 37.9(a)(2) excludes block

trades.

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(b) Sec. 37.9(a)(1)(ii)--Request for Quote System

Proposed Sec. 37.9(a)(1)(ii)(A) defined an RFQ System as a trading

system or platform in which a market participant must transmit a

request for 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. Under the proposed rule, 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.

In addition, proposed Sec. 37.9(a)(1)(ii)(B) defined an RFQ System

as 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. Finally, proposed Sec. 37.9(a)(1)(ii)(C) provided

that an RFQ System means any such other trading system or platform as

may be determined by the Commission.

(1) Summary of Comments

(i) Comments on RFQ System Definition and Transmission to Five Market

Participants

In general, some commenters stated that the Commission's definition

of an RFQ System imposes rigid requirements that are not supported by

the SEF definition.\230\ Other commenters stated that the defined RFQ

System preserves ``the single-dealer status quo,'' threatens to

diminish the transparency and efficiency of the regulated swaps

[[Page 33495]]

market, and is inconsistent with the Dodd-Frank Act.\231\

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\230\ Rosen et al. Comment Letter at 10 (Apr. 5, 2011); Goldman

Comment Letter at 2 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 2

(Mar. 8, 2011); FXall Comment Letter at 7-8 (Mar 8, 2011); SIFMA AMG

Comment Letter at 4-5 (Mar. 8, 2011).

\231\ IECA Comment Letter at 3 (May 24, 2011); Mallers et al.

Comment Letter at 3-5 (Mar. 21, 2011); AFR Comment Letter at 4, 5

(Mar. 8, 2011). The Mallers et al. comment letter represents the

view of a number of high frequency trading firms: Allston Trading,

LLC, Atlantic Trading USA LLC, Bluefin Trading LLC, Chopper Trading

LLC, DRW Holdings, LLC, Eagle Seven, LLC, Endeavor Trading, LLC,

GETCO, Hard Eight Futures, LLC, HTG Capital Partners, IMC Financial

Markets, Infinium Capital Management LLC, Kottke Associates, LLC,

Liger Investments Limited, Marquette Partners, LP, Nico Holdings

LLC, Optiver US LLC, Quantlab Financial, LLC, RGM Advisors, LLC,

Traditum Group LLC, WH Trading, and XR Trading LLC.

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As noted above, Sec. 37.9(a)(1)(ii) of the SEF NPRM contained a

requirement that a market participant transmit an RFQ to no less than

five market participants. In the SEF NPRM, the Commission specifically

asked for public comment on whether five is the appropriate minimum

number of respondents that the Commission should require to potentially

interact with a request for quote.\232\ The Commission also asked for

public comment on the appropriate minimum number, if not five.\233\ The

Commission received the following comments regarding the five market

participant requirement and has responded to those comments below.

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\232\ Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR at 1221. The Commission asked, ``[i]n 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.'' Id.

\233\ Id.

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Several commenters objected to the requirement in proposed Sec.

37.9(a)(1)(ii) that a market participant transmit an RFQ to no less

than five market participants.\234\ The commenters raised various

concerns with this requirement, including the potential for increased

trading costs,\235\ decreased liquidity,\236\ decreased

transparency,\237\ and breaking trades into smaller sizes.\238\ Several

commenters specifically noted that the five market participant

requirement may result in increased spreads for participants because

non-executing market participants in the RFQ could ``front run'' the

transaction in anticipation of the executing market participant's

forthcoming and offsetting transactions.\239\ Many of these commenters

additionally noted that these risks would be most pronounced in

illiquid swaps or large-sized trades (i.e., transactions approaching

the block trade threshold).\240\ As a result, many of the commenters

noted that it will be difficult and costly to enter into hedging

transactions.\241\

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\234\ Representative Garrett et al. Comment Letter at 1 (Apr. 5,

2013); Eaton Vance Comment Letter at 2 (Feb. 17, 2012); Reuters

Comment Letter at 6 (Dec. 12, 2011); Tradeweb Comment Letter at 5

(Jun. 3, 2011); Traccr Limited Comment Letter at 2 (Jun. 3, 2011);

FHLB Comment Letter at 12-13 (Jun. 3, 2011); AII Comment Letter at 5

(Jun. 2, 2011); Rosen et al. Comment Letter at 11 (Apr. 5, 2011); JP

Morgan Comment Letter at 2-3 (Mar. 8, 2011); Bloomberg Comment

Letter at 2-3 (Mar. 8, 2011); FXall Comment Letter at 8-9 (Mar. 8,

2011); Reuters Comment Letter at 3 (Mar. 8, 2011); BlackRock Comment

Letter at 3-4 (Mar. 8, 2011); Tradeweb Comment Letter at 7 (Mar. 8,

2011); FSR Comment Letter at 3 (Mar. 8, 2011); MFA Comment Letter at

6 (Mar. 8, 2011); MetLife Comment Letter at 2-3 (Mar. 8, 2011);

SIFMA AMG Comment Letter at 5-7 (Mar. 8, 2011); Deutsche Comment

Letter at 3-4 (Mar. 8, 2011); MarketAxess Comment Letter at 31 (Mar.

8, 2011); Barclays Comment Letter at 5-6 (Mar. 8, 2011); ISDA/SIFMA

Comment Letter at 3 (Mar. 8, 2011); ABC/CIEBA Comment Letter at 6

(Mar. 8, 2011); Global FX Comment Letter at 3 (Mar. 8, 2011);

TruMarx Comment Letter at 6 (Mar. 8, 2011); Coalition Comment Letter

at 5-7 (Mar. 8, 2011); WMBAA Comment Letter at 6 (Mar. 8, 2011); CME

Comment Letter at 8 (Mar. 8, 2011); Morgan Stanley Comment Letter at

2-3 (Mar. 2, 2011); CanDeal Comment Letter at 2-3 (Feb. 25, 2011).

The Commission notes that some commenters in addressing this

provision used the term ``liquidity providers'' to refer to the

minimum number of ``market participants'' that must receive RFQs.

See, e.g., Tradeweb Comment Letter at 5 (Jun. 3, 2011); AII Comment

Letter at 5 (Jun. 2, 2011); Bloomberg Comment Letter at 2 (Mar. 8,

2011); FXall Comment Letter at 9 (Mar. 8, 2011); FSR Comment Letter

at 3 (Mar. 8, 2011). The Commission clarifies that the proposed five

market participant requirement did not imply any requirement that

the requested market participants operate in any particular manner,

such as one that regularly provides liquidity or makes markets in

the particular swap.

\235\ Eaton Vance Comment Letter at 2 (Feb. 17, 2012); JP Morgan

Comment Letter at 2-3 (Mar. 8, 2011); BlackRock Comment Letter at 4

(Mar. 8, 2011); MetLife Comment Letter at 3 (Mar. 8, 2011); Global

FX Comment Letter at 3 (Mar. 8, 2011); Morgan Stanley Comment Letter

at 2 (Mar. 2, 2011); CanDeal Comment Letter at 2-3 (Feb. 25, 2011).

\236\ Tradeweb Comment Letter at 5 (Jun. 3, 2011); Traccr

Limited Comment Letter at 2 (Jun. 3, 2011); FHLB Comment Letter at

12 (Jun. 3, 2011); JP Morgan Comment Letter at 2-3 (Mar. 8, 2011);

BlackRock Comment Letter at 3 (Mar. 8, 2011); Tradeweb Comment

Letter at 7 (Mar. 8, 2011); MetLife Comment Letter at 3 (Mar. 8,

2011); CanDeal Comment Letter at 2-3 (Feb. 25, 2011).

\237\ Tradeweb Comment Letter at 5 (Jun. 3, 2011); MetLife

Comment Letter at 3 (Mar. 8, 2011).

\238\ BlackRock Comment Letter at 4 (Mar. 8, 2011).

\239\ FHLB Comment Letter at 12 (Jun. 3, 2011); AII Comment

Letter at 5 (Jun. 2, 2011); Bloomberg Comment Letter at 2-3 (Mar. 8,

2011); FXall Comment Letter at 8-9 (Mar. 8, 2011); BlackRock Comment

Letter at 3-4 (Mar. 8, 2011); MetLife Comment Letter at 3 (Mar. 8,

2011); SIFMA AMG Comment Letter at 5-6 (Mar. 8, 2011); Barclays

Comment Letter at 5-6 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3

(Mar. 8, 2011); ABC/CIEBA Comment Letter at 6 (Mar. 8, 2011); Global

FX Comment Letter at 3 (Mar. 8, 2011); Coalition Comment Letter at

5-6 (Mar. 8, 2011); Morgan Stanley Comment Letter at 2 (Mar. 2,

2011).

\240\ FHLB Comment Letter at 12 (Jun. 3, 2011); AII Comment

Letter at 5 (Jun. 2, 2011); Bloomberg Comment Letter at 2-3 (Mar. 8,

2011); FXall Comment Letter at 8-9 (Mar. 8, 2011); MetLife Comment

Letter at 3 (Mar. 8, 2011); SIFMA AMG Comment Letter at 5-6 (Mar. 8,

2011); Barclays Comment Letter at 5-6 (Mar. 8, 2011); ISDA/SIFMA

Comment Letter at 3 (Mar. 8, 2011); Global FX Comment Letter at 3

(Mar. 8, 2011); Coalition Comment Letter at 5-6 (Mar. 8, 2011);

Morgan Stanley Comment Letter at 2 (Mar. 2, 2011).

\241\ FHLB Comment Letter at 12 (Jun. 3, 2011); AII Comment