Federal Register, Volume 78 Issue 107 (Tuesday, June 4, 2013)[Federal Register Volume 78, Number 107 (Tuesday, June 4, 2013)]
[Rules and Regulations]
[Pages 33605-33632]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12250]
[[Page 33605]]
Vol. 78
Tuesday,
No. 107
June 4, 2013
Part III
Commodity Futures Trading Commission
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17 CFR Parts 37 and 38
Process for a Designated Contract Market or Swap Execution Facility To
Make a Swap Available to Trade, Swap Transaction Compliance and
Implementation Schedule, and Trade Execution Requirement Under the
Commodity Exchange Act; Final Rule
Federal Register / Vol. 78 , No. 107 / Tuesday, June 4, 2013 / Rules
and Regulations
[[Page 33606]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 37 and 38
RIN 3038-AD18
Process for a Designated Contract Market or Swap Execution
Facility To Make a Swap Available to Trade, Swap Transaction Compliance
and Implementation Schedule, and Trade Execution Requirement Under the
Commodity Exchange Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
adopting regulations that establish a process for a designated contract
market (``DCM'') or swap execution facility (``SEF'') to make a swap
subject to the trade execution requirement pursuant to the Commodity
Exchange Act (``CEA''). The Commission is also adopting regulations to
establish a schedule to phase in compliance with the trade execution
requirement. The schedule will provide additional time for compliance
with this requirement.
DATES: The rules will become effective August 5, 2013.
FOR FURTHER INFORMATION CONTACT: Nhan Nguyen, Special Counsel, Division
of Market Oversight (``DMO'', 202-418-5932, [email protected]; Roger
Smith, Attorney Advisor, DMO, 202-418-5344, [email protected]; or David
Van Wagner, Chief Counsel, DMO, 202-418-5119, [email protected];
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Sections 37.10 and 38.12 of the Commission's Regulations--Final
Rules
A. Sections 37.10(a) and 38.12(a)--Procedure To Make a Swap
Available to Trade
1. Sections 37.10(a)(1) and 38.12(a)(1)--Required Submission
2. Sections 37.10(a)(2) and 38.12(a)(2)--Listing Requirement
3. Submission of a Group, Category, Type or Class of Swaps
4. Consideration of Swaps on Another SEF or DCM, or Bilateral
Transactions
B. Sections 37.10(b) and 38.12(b)--Factors to Consider To Make a
Swap Available to Trade
C. Sections 37.10(c) and 38.12(c)--Applicability
D. Sections 37.10(d) and 38.12(d)--Removal
E. Annual Review
F. Notice to the Public of Available To Trade Determinations
III. Sections 37.12 and 38.11 of the Commission's Regulations--Trade
Execution Compliance Schedule
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
1. Proposed Information Provided by Reporting Entities/Persons
2. Summary of Comments and Commission Response
C. Cost-Benefit Considerations
1. Available-to-Trade Rule
a. Part 40 Process and Determination Factors
b. Applicability
c. Consideration of Section 15(a) Factors--Available-to-Trade
Rule
2. Trade Execution Compliance Schedule
V. List of Commenters
Text of the Regulations, Guidance and Acceptable Practices
I. Background
Section 723(a)(3) of the Dodd-Frank Act added section 2(h)(8) of
the Commodity Exchange Act (``CEA'') to require that swap transactions
subject to the clearing requirement must be traded on either a
designated contract market (``DCM'') or swap execution facility
(``SEF''), unless no DCM or SEF ``makes the swap available to trade''
or the transaction is not subject to the clearing requirement under
section 2(h)(7) (the ``trade execution requirement'').\1\
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\1\ For example, section 2(h)(7) of the CEA, as amended by
section 723 of the Dodd-Frank Act, provides an exception to the CEA
section 2(h)(1) clearing requirement (``the end-user exception'') if
one of the counterparties to a swap (i) is not a financial entity,
(ii) is using swaps to hedge or mitigate commercial risk, and (iii)
notifies the Commission how it generally meets its financial
obligations associated with entering into non-cleared swaps. 7 U.S.C
2(h)(7). Under the authority given by section 2(h)(7)(C)(ii) of the
CEA, the Commission has also adopted regulations to exempt certain
small banks, saving associations, farm credit system institutions,
and credit unions from the definition of ``financial entity,'' thus
potentially allowing the transactions of those entities to qualify
for an exemption from the clearing requirement. 17 CFR 50.5(d). The
Commission may determine that swap transactions exempted from the
clearing requirement pursuant to other statutory authority would
also not be subject to the section 2(h)(8) trade execution
requirement. For example, on April 11, 2013, the Commission
published final rules issued under section 4(c) of the CEA to exempt
swaps between certain affiliated entities (``inter-affiliates'')
within a corporate group from the clearing requirement. The
Commission determines that such swaps would not be subject to the
trade execution requirement.
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On December 14, 2011, the Commodity Futures Trading Commission
(``Commission'') proposed regulations to establish a process for a DCM
or SEF to notify the Commission that a swap is ``available to trade''
for purposes of the trade execution requirement (``Further Notice of
Proposed Rulemaking'' or ``FNPRM'').\2\ The proposed regulations would
be included in part 37 and part 38 of the Commission's regulations to
implement the available-to-trade provision in section 2(h)(8) of the
CEA. The comment period for the FNPRM ended on February 13, 2012. The
Commission received 32 written comments from members of the public and
hosted a public roundtable on this topic. Commission staff also
participated in several meetings with market participants.\3\ As a
result of the written comments received and dialogue with market
participants, the Commission in this final rule has revised and/or
eliminated certain provisions that were proposed in the FNPRM.
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\2\ Process for a Designated Contract Market or Swap Execution
Facility to Make a Swap Available to Trade, 76 FR 77728 (Dec. 14,
2011). Sections 5(d)(1) and 5h(f)(1) of the CEA require DCMs and
SEFs, respectively, to comply with any requirement that the
Commission may impose by rule or regulation pursuant to section
8a(5) of the CEA, 7 U.S.C. 12a(5), which authorizes the Commission
to promulgate such regulations as, in the judgment of the
Commission, that are reasonably necessary to effectuate any of the
provisions or to accomplish any of the purposes of the CEA. In
addition, section 721(b) of the Dodd-Frank Act provides the
Commission with authority to adopt rules to define ``[any] term
included in an amendment to the Commodity Exchange Act . . . made by
[the Dodd-Frank Act].'' 15 U.S.C. 8321, as enacted by section 721 of
the Dodd-Frank Act.
\3\ Meeting summaries are available through the Commission's Web
site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1125.
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On September 20, 2011, the Commission also proposed regulations to
establish a schedule to implement the trade execution requirement.\4\
The proposed regulations would be included in part 37 and part 38 of
the Commission's regulations. The comment period for the proposed
regulations ended on November 4, 2011. The Commission received 33
written comments from members of the public, and after consideration of
those comments, is adopting the final implementation schedule for the
trade execution requirement as proposed, but with certain
clarifications.
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\4\ Swap Transaction Compliance and Implementation Schedule:
Clearing and Trade Execution Requirements under Section 2(h) of the
CEA, 76 FR 58186 (Sep. 20, 2011).
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The final regulations adopted herein will become effective August
5, 2013.
II. Sections 37.10 and 38.12 of the Commission's Regulations--Final
Rules
As proposed in the FNPRM, Sec. Sec. 37.10 and 38.12 established a
process for a SEF or a DCM, respectively, to make a swap available to
trade under section 2(h)(8) of the CEA.
Proposed Sec. Sec. 37.10(a) and 38.12(a) set forth the
filing procedure that SEFs
[[Page 33607]]
and DCMs would utilize to demonstrate that a swap is available to
trade. Under the proposal, a SEF or DCM would be required to submit an
available-to-trade determination with the Commission under the rule
approval and self-certification procedures in part 40 of the
Commission's regulations.
Proposed Sec. Sec. 37.10(b) and 38.12(b) set forth eight
factors that a DCM or SEF may consider, as appropriate, to determine
that a swap is available to trade.\5\
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\5\ See infra note 90 and accompanying text.
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Proposed Sec. Sec. 37.10(c) and 38.12(c) required that
upon a determination that a swap is available to trade by a SEF or DCM,
all other DCMs and SEFs listing or offering that swap or an
economically equivalent swap for trading must also make those swaps
available to trade.
Proposed Sec. Sec. 37.10(d) and 38.12(d) required DCMs
and SEFs to perform an annual review and assessment of their
determinations.
A. Sections 37.10(a) and 38.12(a)--Procedure To Make a Swap Available
to Trade
1. Sections 37.10(a)(1) and 38.12(a)(1)--Required Submission
Under proposed Sec. Sec. 37.10(a) and 38.12(a), a SEF or DCM would
initially determine that a swap is available to trade and submit that
determination to the Commission, either for approval or self-
certification, pursuant to the rule filing procedures of part 40 of the
Commission's regulations.\6\
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\6\ See Sections 40.5 and 40.6 and Provisions Common to
Registered Entities, 76 FR 44776 (Jul. 27, 2011). The Commission
views a DCM or SEF's determination that a swap is available to trade
as a ``trading protocol'' that falls under the definition of a
``rule'' under Sec. 40.1 of the Commission's regulations. Section
40.1(i) defines a rule as ``any constitutional provision, article of
incorporation, bylaw, rule, regulation, resolution, interpretation,
stated policy, advisory, terms and conditions, trading protocol,
agreement or instrument corresponding thereto, including those that
authorize a response or establish standards for responding to a
specific emergency, and any amendment or addition thereto or repeal
thereof, made or issued by a registered entity or by the governing
board thereof or any committee thereof, in whatever form adopted.''
Therefore, SEFs and DCMs would be required to submit a determination
to the Commission for approval or self-certification under part 40
of the Commission's regulations.
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Under Sec. 40.5, a registered entity may request Commission
approval of a new rule prior to its implementation.\7\ The Commission
has a 45-day review period to review the request and may extend the
review period for an additional 45 days in specified circumstances.\8\
The Commission may also extend the review period beyond an additional
45 days, based on a written agreement with the registered entity.\9\
Under Sec. 40.6, a registered entity may submit a new rule to the
Commission under self-certification procedures. The Commission has 10
business days to review the rule before it is deemed certified and can
be made effective. The Commission, however, may stay the certification
for an additional 90 days, during which time it must provide a 30-day
public comment period.\10\ Under either procedure, the registered
entity must initially provide an explanation and analysis of the rule
and its compliance with the applicable provisions of the CEA, including
the core principles, and the Commission's regulations thereunder.\11\
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\7\ 17 CFR 40.5(a).
\8\ 17 CFR 40.5(c) and (d). In determining whether to extend the
review period, the Commission will consider whether the proposed
rule raises novel or complex issues, the submission is incomplete,
or the requestor does not respond completely to Commission questions
in a timely manner. 17 CFR 40.5(d)(1).
\9\ 17 CFR 40.5(d)(2).
\10\ 17 CFR 40.6(b) and (c). In determining whether to stay a
self-certification, the Commission will consider whether the rule
presents novel or complex issues; is accompanied by inadequate
explanation; or is potentially inconsistent with the CEA. 17 CFR
40.6(c)(1).
\11\ See 17 CFR 40.5(a)(5), 40.6(a)(7)(v).
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In the case of an available-to-trade determination, the
accompanying explanation and analysis in the submission would detail
the manner in which the SEF or DCM considered the factors in proposed
Sec. 37.10(b) or Sec. 38.12(b).\12\ At any time during its review
under Sec. 40.5 or during the 90-day review period under Sec. 40.6,
the Commission may notify the registered entity that it objects to the
proposed certification because it is inconsistent or appears to be
inconsistent with the CEA or the Commission's regulations.\13\
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\12\ See infra note 90 and accompanying text for a list of the
proposed determination factors in the FNPRM.
\13\ See 17 CFR 40.5(e), 40.6(c)(3).
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Upon the Commission approving a SEF's or DCM's available-to-trade
determination or permitting a SEF's or DCM's available-to-trade
determination certification to become effective, the swap involved
would be deemed available to trade. If that swap also is subject to the
clearing requirement, then the swap must be executed on a SEF as a
Required Transaction (as defined in part 37 of the Commission's
regulations) or on a DCM in order to satisfy the trade execution
requirement under section 2(h)(8) of the CEA. The Commission notes that
the trade execution requirement does not apply to swaps that are not
subject to the clearing requirement under section 2(h)(1) of the
CEA.\14\
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\14\ See supra note 1. The Commission addresses the methods by
which swaps that are subject to the trade execution requirement must
be executed on a SEF or DCM. Swaps that are subject to the trade
execution requirement (and are not block trades as defined under
Sec. 43.2 of the Commission's regulations) and that are traded on a
SEF are defined as Required Transactions under part 37 of the
Commission's regulations governing SEFs. Under Sec. 37.9(a)(2),
Required Transactions must be executed by either (1) an Order Book,
as defined in Sec. 37.3(a)(3); or (2) a Request for Quote System,
as defined in Sec. 37.9(a)(3), that operates in conjunction with an
Order Book. See Core Principles and Other Requirements for Swap
Execution Facilities (May 17, 2013). Swaps that are subject to the
trade execution requirement and traded on a DCM must be executed
pursuant to subpart J of part 38 of the Commission's regulations,
which implements revised DCM Core Principle 9 under section 5(d)(9)
of the CEA, as amended by section 735(b) of the Dodd-Frank Act. 7
U.S.C. 7(d)(9).
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Summary of Comments
With respect to the filing procedures set forth in proposed
Sec. Sec. 37.10(a) and 38.12(a), several commenters opposed the
procedures and recommended that all swaps subject to the clearing
requirement under section 2(h)(1) of the CEA should be subject to the
trade execution requirement because the Dodd-Frank Act does not specify
a separate process to make a swap available to trade.\15\ In this
regard, some commenters stated that under section 2(h)(8)(B) of the
CEA, swaps subject to the clearing requirement are automatically
subject to mandatory trade execution unless a SEF or DCM does not list
the swap for trading.\16\ Some commenters viewed the proposed procedure
as duplicative of the mandatory clearing determination process and
accordingly stated that the Commission should rely on the clearing
determination process to also determine whether a swap is available to
trade.\17\ The commenters further stated that utilizing the clearing
determination as the exclusive basis for finding that a swap is
available to trade would subject more swaps to the trade execution
[[Page 33608]]
requirement and further the objectives of the Dodd-Frank Act.\18\
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\15\ MarketAxess Comment Letter at 3; WMBAA Comment Letter at 3;
AFR Comment Letter at 3; SDMA Comment Letter at 3; ODEX Comment
Letter at 1.
\16\ MarketAxess Comment Letter at 2; AFR Comment Letter at 4;
ODEX Comment Letter at 1. Section 2(h)(8)(B) of the CEA states that
mandatory trade execution does not apply ``if no [DCM or SEF] makes
the swap available to trade'' (emphasis added). 7 U.S.C. 2(h)(8)(B).
\17\ SDMA Comment Letter at 4-5; WMBAA Comment Letter at 3;
MarketAxess Comment Letter at 3-5; AFR Comment Letter at 4. See
infra note 90 and accompanying text for a description of the
proposed determination factors. Under Sec. 39.5(a)(3)(ii)(A) of the
Commission's regulations, a mandatory clearing submission must
include information regarding the ``existence of significant
outstanding notional exposures, trading liquidity, and adequate
pricing data'' of a subject swap.
\18\ WMBAA Comment Letter at 2; MarketAxess Comment Letter at 9.
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In contrast, some commenters stated that the process for
determining whether a swap is available to trade is separate from the
process for determining whether a swap is subject to the clearing
requirement. Some of the commenters relied on the statutory language
\19\ and legislative history \20\ of the Dodd-Frank Act to support this
view, with some commenters arguing that ``available for trading''
should mean more than mere listing.\21\ As statutory support, several
commenters stated that section 2(h)(8) of the CEA specifies two
distinct prerequisites for subjecting a swap to mandatory trade
execution: (1) The swap must be subject to mandatory clearing and (2)
the swap must be made available to trade.\22\ Markit also noted that
the language of the clearing requirement under section 2(h)(1)-(2) of
the CEA, as enacted by the Dodd-Frank Act, does not address making a
swap available to trade.\23\ Further, AIMA noted that the clearing
determination factors differ from the proposed factors in an available-
to-trade determination.\24\
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\19\ Markit Comment Letter at 2; ICI Comment Letter at 3-4;
SIFMA AMG Comment Letter at 3; CEWG Comment Letter at 2; AIMA
Comment Letter at 1.
\20\ Some commenters cited the July 2010 Senate floor remarks of
U.S. Senator Blanche Lincoln, in which she stated that determining
whether a swap is available to trade should consist of more than
conducting a listing inquiry. According to Senator Lincoln, ``[t]he
[Commission] could consider, for example, whether there is a minimum
amount of liquidity such that the swap can actually be traded on the
facility. The mere `listing' of the swap by a [SEF], in and of
itself . . . should not be sufficient to trigger the Trade Execution
Requirement.'' Markit Comment Letter at 2 n.6; Chatham Comment
Letter at 2-3; ICI Comment Letter at 3-4.
\21\ Morgan Stanley Comment Letter at 3; Bloomberg Comment
Letter at 4; Sunguard Kiodex Comment Letter at 2; Spring Trading
Comment Letter at 3 (Jan. 12, 2012); ICI Comment Letter at 3-4.
\22\ SIFMA AMG Comment Letter at 3; ICI Comment Letter at 3;
CEWG Comment Letter at 2.
\23\ Markit Comment Letter at 2.
\24\ AIMA Comment Letter at 1.
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Some commenters also asserted that the mandatory clearing
determination and the proposed available-to-trade determination differ
from one another in practical respects.\25\ For example, SIFMA AMG
stated that whether a swap should be mandatorily cleared depends on
whether the swap (1) can be priced for a derivatives clearing
organization's (``DCO'') risk management purposes; and (2) is
standardized; therefore, unlike the available-to-trade determination,
liquidity is not a primary consideration.\26\ AIMA and Morgan Stanley
similarly commented that stated liquidity is considered in a clearing
determination to make certain that a DCO could adequately price the
swap to calculate margin requirements and fulfill risk management
requirements. They further stated that the minimum liquidity needed to
clear a swap is lower than the minimum liquidity needed to support
mandatory trade execution on a DCM or a SEF.\27\ Markit and FXall also
stated that differing tenors of a given swap would be clearable if any
tenor of that swap is cleared, but different tenors would have
significantly different liquidity characteristics.\28\
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\25\ MFA Comment Letter at 3; SIFMA AMG Comment Letter at 4;
Morgan Stanley Comment Letter at 4; AIMA Comment Letter at 1-2; FHLB
Comment Letter at 4 n.2; ICI Comment Letter at 3-4; Markit Comment
Letter at 3; FXall Comment Letter at 5.
\26\ SIFMA AMG Comment Letter at 4.
\27\ AIMA Comment Letter at 1-2; Morgan Stanley Comment Letter
at 4.
\28\ Markit Comment Letter at 3; FXall Comment Letter at 5.
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Therefore, commenters stated that only the more liquid swaps should
be available to trade \29\ to avoid negatively affecting swap pricing
and liquidity.\30\ Morgan Stanley and FXall stated that subjecting
illiquid swaps to the trade execution requirement would further reduce
liquidity in those swaps, as market participants would be reluctant to
reveal their trading interest in low volume markets; such premature
imposition of the trade execution requirement upon illiquid swaps would
likely result in increasing bid-ask spreads and trading costs.\31\ ICI
commented that the risks of low trading volume would drive market
participants to other markets.\32\
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\29\ MFA Comment Letter at 3; Markit Comment Letter at 2; FXall
Comment Letter at 2-3, CEWG Comment Letter at 2; JPMorgan Comment
Letter at 2; FHLB Comment Letter at 4 n.2; Morgan Stanley Comment
Letter at 3; Vanguard Comment Letter at 4; ICI Comment Letter at 3-
4; Chatham Comment Letter at 2.
\30\ Vanguard Comment Letter at 4; FXall Comment Letter at 5;
ICI Comment Letter at 4; Morgan Stanley Comment Letter at 3-4.
\31\ Morgan Stanley Comment Letter at 3; FXall Comment Letter at
5.
\32\ ICI Comment Letter at 4.
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MFA also commented that separate processes, with adequate
Commission oversight and public comment, would mitigate potential
``first-mover advantage'' issues.\33\
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\33\ MFA Comment Letter at 2. See infra discussion at note 41.
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Of the commenters who supported separate processes, some commenters
supported the proposed filing procedures.\34\ CBOE stated that
Sec. Sec. 40.5 and 40.6 allow for timely Commission review and have
been successfully utilized in other areas.\35\
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\34\ CBOE Comment Letter at 1-2; Spring Trading Comment Letter
at 2 (Jan. 12, 2012); AIMA Comment Letter at 3 (supporting use of
the Sec. 40.5 rule approval process only).
\35\ CBOE Comment Letter at 1-2.
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Other commenters, however, opposed the proposed filing
procedures.\36\ ISDA stated that neither Sec. 40.5 nor Sec. 40.6
should be used because an available-to-trade determination is neither a
trading protocol nor a rule.\37\ Some opposing commenters stated that
the Commission, not SEFs and DCMs, should determine whether a swap is
available to trade.\38\ Some commenters asserted that the Commission is
more qualified to make the determination based on its access to market
data.\39\ Several commenters also stated that SEFs and DCMs should not
make the determination because they may have a financial incentive-
based conflict of interest to maximize the number of swaps subject to
mandatory trade execution.\40\ Commenters expressed a related concern
that a SEF's or DCM's determination would be influenced by a desire to
gain a ``first-mover advantage,'' (i.e., acquiring market share in the
trading of a particular swap before other venues can list and develop
trading activity in that swap), which would lead to premature or ill-
advised mandatory trading of illiquid swaps on a SEF or DCM.\41\
Further, several commenters stated that neither Sec. 40.5 nor Sec.
40.6 would provide the Commission with adequate time to review rule
filings and to solicit public comment, which would allow SEFs and DCMs
to acquire this advantage \42\ and
[[Page 33609]]
make it hard for the Commission to reject a determination.\43\
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\36\ Markit Comment Letter at 5; ISDA Comment Letter at 4-5;
Bloomberg Comment Letter at 3; CEWG Comment Letter at 2-3; Morgan
Stanley Comment Letter at 5-6; AIMA Comment Letter at 2-3 (opposing
use of Sec. 40.6 certification process).
\37\ ISDA Comment Letter at 6.
\38\ Markit Comment Letter at 5-6; Vanguard Comment Letter at 5;
Geneva Energy Markets Comment Letter at 2; JPMorgan Comment Letter
at 1; CME Comment Letter at 4-5; FHLB Comment Letter at 3; FSR
Comment Letter at 4; FXall Comment Letter at 5-6; Morgan Stanley
Comment Letter at 5-6; CEWG Comment Letter at 6; ISDA Comment Letter
at 3-4, 6; Tradeweb Comment Letter at 4-5.
\39\ FHLB Comment Letter at 3-4; ISDA Comment Letter at 3;
Markit Comment Letter at 5; FXall Comment Letter at 6.
\40\ Bloomberg Comment Letter at 2; CME Comment Letter at 4-5;
FHLB Comment Letter at 3; Markit Comment Letter at 5; CEWG Comment
Letter at 2; ISDA Comment Letter at 3; Morgan Stanley Comment Letter
at 5-6; AIMA Comment Letter at 2; Vanguard Comment Letter at 5;
Geneva Energy Markets Comment Letter at 2; JPMorgan Comment Letter
at 2.
\41\ FXall Comment Letter at 6-7; Bloomberg Comment Letter at 2;
Tradeweb Comment Letter at 2-3; FSR Comment Letter at 2; ISDA
Comment Letter at 3; CME Comment Letter at 4; Morgan Stanley Comment
Letter at 5-6.
\42\ UBS Comment Letter at 1; Chatham Comment Letter at 3; AIMA
Comment Letter at 2; ISDA Comment Letter at 3-5; CEWG Comment Letter
at 3; Markit Comment Letter at 5-6; Morgan Stanley Comment Letter at
5.
\43\ Markit Comment Letter at 6; ISDA Comment Letter at 3; ICI
Comment Letter at 5.
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Several commenters offered alternative approaches to the proposed
process. Bloomberg recommended a separate standalone rule.\44\ Several
commenters, however, recommended that the Commission establish a
``pilot program'' to phase in the available-to-trade process by
initially deeming certain highly liquid swaps as available to trade
(and therefore making them subject to the trade execution requirement)
for a fixed time period. Commenters stated that this approach would
provide market participants and trading venues with time to adjust to
the trade execution requirement \45\ and minimize market disruptions
caused during implementation.\46\
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\44\ Bloomberg Comment Letter at 3 n.10.
\45\ Vanguard Comment Letter at 4; FSR Comment Letter at 5;
JPMorgan Comment Letter at 2.
\46\ Markit Comment Letter at 3; Tradeweb Comment Letter at 3-4.
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MarketAxess and CME recommended that only swaps that have been
determined to be subject to the clearing requirement should be subject
to an available-to-trade determination.\47\ Both commenters argued that
determining whether a swap is available to trade, for purposes of the
trade execution requirement, would be legally insignificant unless a
swap is required to be cleared first, and thus believe that the
Commission should first determine which swaps will be subject to the
clearing requirement.\48\
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\47\ CME Comment Letter at 3; MarketAxess Comment Letter at 7-8.
\48\ Id.
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Bloomberg also noted that the Commission has the authority under
Sec. 5c(c) of the CEA to deny an available-to-trade determination only
if it is ``inconsistent with'' the CEA or the Commission's regulations
and requested clarification on how the Commission would interpret this
term in this context.\49\
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\49\ Bloomberg Comment Letter at 3 n.10.
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Commission Determination
The Commission is adopting the proposed available-to-trade process,
subject to modifications discussed herein. The Commission agrees with
commenters who assert that the CEA's statutory language supports an
available-to-trade determination that is separate from a mandatory
clearing determination.\50\ In response to comments, the Commission has
determined that at this time, it will only review available-to-trade
submissions for swaps that it has first determined to be subject to the
clearing requirement under Sec. 39.5 of the Commission's
regulations.\51\ The Commission believes that adopting a sequenced
approach in such a manner is consistent with the trade execution
requirement under section 2(h)(8) of the CEA because the trade
execution mandate only applies if a swap is (1) subject to mandatory
clearing and (2) made available to trade by a SEF or DCM.\52\
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\50\ In response to comments that the Dodd-Frank Act does not
condition mandatory trade execution of a swap on an affirmative
Commission determination, the Commission further notes that section
8a(5) of the CEA authorizes the Commission to promulgate such
regulations as, in its judgment, are reasonably necessary to
effectuate any of the provisions or to accomplish any of the
purposes of the CEA. 7 U.S.C. 12a(8). Further, section 721(b) of the
Dodd-Frank Act provides the Commission with authority to adopt rules
to define ``[any] term included in an amendment to the Commodity
Exchange Act . . . made by [the Dodd-Frank Act].'' 15 U.S.C. 8321,
as enacted by section 721 of the Dodd-Frank Act. Additionally,
sections 5(d)(1) and 5h(f)(1) of the CEA require DCMs and SEFs,
respectively, to comply with any requirement that the Commission may
impose by rule or regulation pursuant to section 8a(5) of the CEA.
\51\ Section 39.5 of the Commission's regulations sets forth a
process under which the Commission will review swaps to determine
whether the swaps are required to be cleared.
\52\ Section 50.25 of the Commission's regulations establishes a
schedule to phase in compliance with the clearing requirement by
category of market participant. Category 1 entities, which include a
swap dealer, a security-based swap dealer, a major swap participant,
a major security-based swap participant, or an active fund, have 90
days to comply with the clearing requirement. Category 2 entities,
which include a commodity pool, private fund, or person
predominantly engaged in activities that are in the business of
banking or that are financial in nature, have 180 days to comply
with the clearing requirement. Certain third-party subaccounts and
all other swap transactions receive 270 days to comply with the
clearing requirement. See Swap Transaction Compliance and
Implementation Schedule: Clearing Requirement under Section 2(h) of
the CEA, 77 FR 44441 (July 20, 2012). The Commission notes that it
will accept for review available-to-trade determinations for swaps
determined to be subject to the clearing requirement, prior to the
applicable date for compliance.
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The clearing determination process, which the Commission notes is
not initiated by a SEF or DCM, primarily focuses on the ability to
mitigate risk through clearing by a DCO and the five statutory factors
under section 2(h)(2)(D) of the CEA.\53\ In particular with respect to
risk management, the Commission considers whether imposing the clearing
requirement would mitigate systemic risk through the collateralization
of risk exposures, which includes counterparty credit risk that arises
between two counterparties to an uncleared swap.\54\ In this regard,
the Commission assesses whether a particular class of swaps has
sufficient liquidity for risk management purposes, i.e., pricing and
margining of the cleared swaps.\55\ The Commission has noted in the
context of clearing for interest rate swaps, for example, that DCOs do
not focus on the liquidity of specific individual swaps from a risk
management perspective, but rather on a portfolio basis.\56\ In
contrast, the available-to-trade determination process will be
initiated by a SEF or DCM and may focus primarily on whether a swap has
sufficient trading liquidity to be subject to mandatory trade
execution.
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\53\ To make a clearing determination, the Commission must
consider five factors: (1) The existence of significant outstanding
notional exposures, trading liquidity, and adequate pricing data;
(2) the availability of rule framework, capacity, operational
expertise and resources, and credit support infrastructures to clear
the contract on terms that are consistent with the material terms
and trading conventions on which the contract is then traded; (3)
the effect on the mitigation of systemic risk, taking into account
the size of the market for such contract and the resources of the
DCO available to clear the contract; (4) the effect on competition,
including appropriate fees and charges applied to clearing; and (5)
the existence of reasonable legal certainty in the event of the
insolvency of the relevant derivatives clearing organization or one
or more of its clearing members with regard to the treatment of
customer and swap counterparty positions, funds, and property. 7
U.S.C. 2(h)(2)(D)(ii)(I)-(IV), as enacted by section 723 of the
Dodd-Frank Act.
\54\ 77 FR 74285. In the Commission's clearing requirement final
rule, certain classes of credit default swaps (CDS) and interest
rate swaps (IRS) would become subject to the clearing requirement,
i.e., cleared by a registered DCO. Per section 2(h)(2)(D)(ii) of the
CEA, the Commission considered the effect of clearing those classes
of swaps on mitigating systemic risk. With respect to the proposed
CDS indices, the Commission believes that mandatory clearing would
(1) mitigate counterparty credit risk by allowing a DCO to become
the buyer to every seller of those indices, and vice versa; and (2)
collateralize risk exposures by allowing a DCO to calculate and
collect initial margin and guaranty fund contributions. 77 FR 74297-
98. With respect to the IRS proposed to be cleared, the Commission
believes that the three DCOs that have submitted clearing
determinations--CME, LCH, and IDCH--would (1) mitigate counterparty
credit risk by establishing themselves as a central counterparty to
reduce the number of open bilateral contracts; and (2) facilitate
collateral efficiency through a central counterparty clearing
approach. 77 FR 74312.
\55\ For example, the Commission has noted that higher trading
liquidity in swaps would assist DCOs in end-of-day settlement
procedures, as well as in managing the risk of CDS portfolios,
particularly in mitigating the liquidity risk associated with
unwinding a portfolio of a defaulting clearing member. 77 FR 47176.
\56\ Specifically, liquidity is viewed by a DCO as a function of
whether a portfolio of swaps has common specifications that are
determinative of their economic characteristics, such that a DCO can
price and risk manage the portfolio in a default situation. 77 FR
74301.
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With respect to the proposed procedure to determine that a swap is
available to trade, the Commission is adopting the rule as proposed and
codifying the proposed rule text to Sec. Sec. 37.10(a)(1) and
38.12(a)(1).\57\ The part
[[Page 33610]]
40 procedures provide a reasonable approach by allowing DCMs and SEFs--
the entities responsible for listing or offering the swaps for trading
and supporting related trading activity--to initially determine whether
a swap is available to trade, and therefore, subject to the trade
execution requirement. The Commission notes that although it will have
access to market data, SEFs and DCMs will have sufficient expertise and
experience with respect to swaps trading to make an initial
determination and to submit that determination to the Commission under
the part 40 procedures. Accordingly, the part 40 procedures provide
SEFs and DCMs with the flexibility to make an initial available-to-
trade determination while allowing for appropriate Commission review
and regulatory oversight, as well as an opportunity for public comment.
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\57\ In response to ISDA's comment that neither 17 CFR 40.5 nor
Sec. 40.6 should apply because an available-to-trade determination
is neither a trading protocol nor a rule, the Commission notes that
the definition of ``rule'' under 17 CFR 40.1(h) of the Commission's
regulations would encompass an available-to-trade determination.
Section 40.1(h) defines ``rule'' as ``any constitutional provision,
article of incorporation, bylaw, rule, regulation, resolution,
interpretation, stated policy, term and condition, trading protocol,
agreement or instrument corresponding thereto, in whatever form
adopted, and any amendment or addition thereto or repeal thereof,
made or issued by a registered entity . . . .'' The Commission views
an available-to-trade determination as a ``trading protocol.''
---------------------------------------------------------------------------
The Commission also believes that the part 40 procedures should
afford sufficient time for market participants to offer public comment
on available-to-trade submissions and for the Commission to review such
submissions and any related comments. In this regard, for swaps
submitted by a SEF or DCM under the Sec. 40.5 rule approval process or
the Sec. 40.6 rule certification process, initial available-to-trade
determinations may present novel and complex issues that will warrant
retention for an additional review.\58\ Under Sec. 40.6(c)(2) of the
Commission's regulations, interested parties would have sufficient
opportunity to comment on the certification during a 30-day mandatory
public comment period. Therefore, swaps self-certified as available to
trade may initially be subject to a review period of up to 100
days.\59\ Similarly, for swaps submitted under the Sec. 40.5 rule
approval process that present novel or complex issues, the review
period for initial rule approval submissions may be extended for at
least additional 45 days for the same reason.\60\ The Commission notes
that it routinely solicits public comments for Sec. 40.5 rule approval
submissions and anticipates that market participants would be similarly
able to provide the Commission with comments on available-to-trade
filings.
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\58\ Under Sec. Sec. 40.5(d)(1) and 40.6(c) of the Commission's
regulations, the Commission may stay the certification of a new rule
or rule amendment that, among other things, presents ``novel or
complex issues that require additional time'' to review or analyze.
\59\ Under 17 CFR 40.6(c)(3), a new rule subject to a stay would
become effective, pursuant to its certification, at the expiration
of the 90-day review period unless the Commission withdraws the stay
prior to that time, or the Commission notifies the registered entity
during the 90-day period that it objects to the proposed
certification on the grounds that the proposed rule or rule
amendment is inconsistent with the CEA or the Commission's
regulations.
\60\ As noted, under 17 CFR 40.5(d)(2), the Commission may
extend the review period beyond an additional 45 days based on
written agreement with the submitting SEF or DCM.
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The Commission expects that over time, available-to-trade filings
should present fewer novel or complex issues, thereby not warranting
extensions of the applicable review period; SEFs and DCMs would likely
submit swap determinations that are similar to previous submissions and
the Commission would become more experienced with the process. The
Commission, however, will continue to consider whether to stay rule
certifications or rule approval submissions on a case-by-case basis.
In response to Bloomberg's request for clarification, the
Commission notes that whether a SEF's or DCM's initial determination is
``inconsistent'' with the CEA and the Commission's rules and
regulations would depend upon the SEF's or DCM's analysis and
application of the determination factors to the swap submitted as
available to trade, as discussed further below. The Commission also
notes that a determination could also be deemed inconsistent if it does
not consider one or more of the required factors, or the swap otherwise
does not meet other prerequisites established in the submission
process, discussed further below.
2. Sections 37.10(a)(2) and 38.12(a)(2)--Listing Requirement
The FNPRM requested comment on (1) whether the Commission should
allow a SEF or DCM to submit an available-to-trade determination for a
swap under proposed Sec. Sec. 37.10(a) and 38.12(a) if the SEF or DCM
making the submission does not itself list that swap for trading; and
(2) if so, whether the Commission would allow that SEF or DCM to
consider the same swap or an economically equivalent swap that trades
on another SEF, DCM, or primarily or solely in bilateral
transactions.\61\
---------------------------------------------------------------------------
\61\ 76 FR 77733.
---------------------------------------------------------------------------
Summary of Comments
Several commenters recommended that a SEF or DCM must list the swap
that it submits for an available-to-trade determination.\62\ For
example, Spring Trading and SIFMA AMG recommended that a SEF or DCM
must list a swap for at least 90 days before submitting its
determination.\63\ ISDA recommended that a SEF or DCM must list the
swap during the 6-month period that it proposed for Commission review
of the available-to-trade determination.\64\ ISDA noted that the lack
of a listing requirement would incentivize SEFs and DCMs to try to
submit as many determinations as possible merely to promote centralized
trading.\65\ According to some commenters, the Commission or the
trading facility could evaluate the data gathered \66\ and obtain
experience \67\ during the listing period to determine whether the swap
should be made available to trade. SDMA, however, recommended that a
SEF or DCM should be allowed to submit a determination for a swap that
it does not list.\68\
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\62\ Eaton Vance Management Comment Letter at 3; SIFMA AMG
Comment Letter at 10; UBS Comment Letter at 2; Morgan Stanley
Comment Letter at 6 n.6; ISDA Comment Letter at 7; Tradeweb Comment
Letter at 5.
\63\ SIFMA AMG Comment Letter at 10; Spring Trading Comment
Letter at 3 (Jan. 12, 2012).
\64\ ISDA Comment Letter at 7. ISDA proposed eliminating the
proposed Sec. 40.6 certification process and stated that the
Commission should establish a minimum 6-month review period for
determinations submitted by a SEF or DCM.
\65\ ISDA Comment Letter at 6.
\66\ ISDA Comment Letter at 7; SIFMA AMG Comment Letter at 10;
Spring Trading Comment Letter at 3.
\67\ Tradeweb Comment Letter at 5; UBS Comment Letter at 2;
Morgan Stanley Comment Letter at 6 n.6.
\68\ SDMA Comment Letter at 9.
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Commission Determination
The Commission agrees with commenters who support a listing
requirement and is amending the proposed rule text to adopt new
Sec. Sec. 37.10(a)(2) and 38.12(a)(2), which requires a SEF or DCM to
certify that it is listing the swap for which it submits an available-
to-trade determination.\69\ The Commission believes that an initial
determination that a swap is available to trade should be made by a SEF
or a DCM that offers the swap for trading.\70\
[[Page 33611]]
The Commission, however, is not adopting a minimum listing period so as
to avoid delaying the determination process, and hence implementation
of the trade execution requirement as discussed below. The Commission
also notes, as discussed further below, that a SEF or DCM is allowed to
consider activity in the same swap listed on another SEF or DCM as well
as the amount of off-exchange activity in the same swap.
---------------------------------------------------------------------------
\69\ The Commission notes that such swap would be certified or
approved under Sec. 40.2 or Sec. 40.3 of the Commission's
regulations prior to listing the swap for trading.
\70\ Bloomberg requested that a SEF submitting an available-to-
trade determination for a particular swap would be able to
incorporate by reference, in its submission, information and
analysis already completed by a DCO and the Commission as part of
the mandatory clearing determination process with respect to that
swap. Bloomberg Comment Letter at 4-5. In response to Bloomberg's
request, the Commission views the part 40 process as flexible and
would allow relevant information from a clearing determination to be
referenced in an available-to-trade submission. The Commission,
however, emphasizes that such information leading to an affirmative
clearing determination would not automatically indicate that a swap
is available to trade.
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3. Submission of a Group, Category, Type or Class of Swaps
The FNPRM requested comment on (1) whether the Commission should
allow a SEF or DCM to submit its available-to-trade determination for a
``group, category, type or class of swaps'' based on the factors
proposed in Sec. Sec. 37.10(b) and 38.12(b) of the FNPRM; and (2) how
``group, category, type or class of swaps'' should be defined.\71\
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\71\ 76 FR 77733.
---------------------------------------------------------------------------
Summary of Comments
Some commenters stated that the Commission should allow SEFs and
DCMs to submit determinations for a group, category, type, or class of
swap.\72\ In defining ``group, category, type, or class'' of swap, AIMA
stated that the Commission should take into account specific
characteristics of certain swaps to avoid subjecting certain illiquid
swaps to mandatory trade execution.\73\
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\72\ Spring Trading Comment Letter at 5 (Jan. 12, 2012); AIMA
Comment Letter at 2; SDMA Comment Letter at 7; AFR Comment Letter at
2 (inferring that mandatory trade execution should be determined for
a ``class'' of swaps).
\73\ AIMA Comment Letter at 2.
---------------------------------------------------------------------------
Other commenters, however, expressed concern about making
determinations based on group, category, type or class of swap.\74\
SIFMA AMG and CEWG commented that swaps within a potential ``group''
may feature different liquidity and trading patterns,\75\ while Markit
and ISDA stated that liquidity may differ significantly even among
different tenors of a given swap.\76\ ISDA and Morgan Stanley also
highlighted the difficulty at the outset of defining ``group, category,
type or class of swap.'' \77\ Markit stated that determinations should
be allowed for individual swaps and then applied to ``buckets'' of
maturities and tenors.\78\
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\74\ Markit Comment Letter at 2-3; SIFMA AMG Comment Letter at
11; CEWG Comment Letter at 3-4; ISDA Comment Letter at 10; UBS
Comment Letter at 2; Morgan Stanley Comment Letter at 9.
\75\ SIFMA AMG Comment Letter at 11; CEWG Comment Letter at 4.
With respect to energy commodities, CEWG provided Henry Financial
LD1 Fixed Swap, Henry Financial LD4 Fixed Swap, and ICE's Physical
Basis LD1, which differ in contract size and term, as examples of
swaps within a potential group or class that each possess different
liquidity characteristics, thereby warranting individual
determinations. SIFMA AMG also noted that the liquidity of interest
rate swaps differs significantly depending on time to maturity.
\76\ Markit Comment letter at 2; ISDA Comment Letter at 11. ISDA
offered the Federal Reserve Bank of New York's analysis of trade
data as a demonstration of varying trading volumes for different
tenors of credit default swaps.
\77\ Morgan Stanley Comment Letter at 9.
\78\ Markit Comment Letter at 2. Markit defines ``buckets'' as
groups of maturities and tenors for a given swap that have similar
liquidity measures.
---------------------------------------------------------------------------
Commission Determination
The Commission is allowing SEFs and DCMs to submit determinations
for a group, category, type or class of swap to provide greater
efficiency to the available-to-trade determination process. To address
commenters' concerns that swaps within a group, category, type or class
may have different liquidity and trading characteristics, a SEF or DCM
must address, in its submission, the applicable determination factor or
factors apply to all of the swaps within that group, category, type or
class. Further, a SEF and DCM will be allowed to define the scope of
the group, category, type or class of swap that it determines is
available to trade.\79\ To the extent that a SEF or DCM possesses
flexibility to define that scope, however, the Commission still may
approve or deem only part or some of the swaps within that group,
category, type or class as available to trade, based on its review.\80\
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\79\ The Commission notes that for clearing determinations under
Sec. 39.5, it may define a particular group, category, type or
class of swaps for purposes of a clearing determination based on
several considerations. 76 FR 44468. To the extent that such a
determination is informative as to whether a proposed group,
category, type or class of swap that is defined by a SEF or DCM is
available to trade, the Commission may take those considerations
into account. For example, a SEF or a DCM could define a group,
category, type or class of interest rate swaps based on
characteristics that include the nature of the payments streams
(e.g., fixed-to-floating, floating-to-floating, forward rate
agreement (FRA), or overnight indexed swap (OIS)); currency (e.g.,
U.S. dollar, euro, British pound, Japanese yen); floating rate index
referenced (e.g., LIBOR, EURIBOR); and stated termination date
(e.g., 1-year, 2-year, 5-year, 10-year).
\80\ Where the Commission does not approve or deem all of the
swaps within a group, category, type or class submitted by a SEF or
DCM as available to trade, DMO would notify the SEF or DCM of such
an action.
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4. Consideration of Swaps on Another SEF or DCM, or Bilateral
Transactions
The FNPRM requested comment on whether the Commission should allow
a SEF or DCM, in evaluating the factors under proposed Sec. Sec.
37.10(b) and 38.12(b), to consider (1) the same swap or an economically
equivalent swap on another SEF or DCM; and (2) the amount of activity
in the same swap or an economically equivalent swap available primarily
or solely in bilateral transactions.\81\
---------------------------------------------------------------------------
\81\ 76 FR 77733.
---------------------------------------------------------------------------
Summary of Comments
Several commenters stated that a SEF or DCM should be able to
consider relevant swap activity on other SEFs and DCMs when making an
available-to-trade determination.\82\ Vanguard commented that
determining whether a ``meaningful'' portion of trading in the swap
occurs on a SEF or DCM is important in determining that a swap is
available to trade.\83\ SIFMA AMG stated that the existence of a liquid
trading environment on SEFs and DCMs could indicate that a swap could
be made available to trade without harm to liquidity.\84\ FXall stated
that determinations should be based on a swap's marketwide trading
patterns, so as to avoid unintended effects on liquidity.\85\
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\82\ MFA Comment Letter at 3; Spring Trading Comment Letter at 6
(Jan. 12, 2012); Markit Comment Letter at 3 (discussing importance
of marketwide data); Vanguard Comment Letter at 5; SIFMA AMG Comment
Letter at 6; AIMA Comment Letter at 2; Morgan Stanley Comment Letter
at 6 n.6; FXall Comment Letter at 6 n.18; CBOE Comment Letter at 3.
\83\ Vanguard Comment Letter at 5.
\84\ SIFMA AMG Comment Letter at 6.
\85\ FXall Comment Letter at 6 n.18.
---------------------------------------------------------------------------
Some commenters also stated that a SEF or DCM should be able to
consider swaps executed on a bilateral basis.\86\ CBOE stated that
considering a swap's trading activity only on a SEF or DCM would
otherwise incentivize market participants to minimize centralized
trading in order to limit the number of swaps made available to
trade.\87\ SIFMA AMG stated that examining the bilateral market could
reveal a liquid trading environment, but could then raise questions as
to whether a swap should be made available to trade.\88\ MFA and
Vanguard recommended that the Commission utilize data for on- and off-
[[Page 33612]]
exchange trading to make the available-to-trade process more
objective.\89\
---------------------------------------------------------------------------
\86\ MFA Comment Letter at 3; SIFMA AMG Comment Letter at 6;
Markit Comment Letter at 3; FXall Comment Letter at 6; Vanguard
Comment Letter at 5; Spring Trading Comment Letter (Jan. 12, 2012)
at 6; CBOE Comment Letter at 3; AIMA Comment Letter at 2; Morgan
Stanley Comment Letter at 6; SDMA Comment Letter at 7.
\87\ CBOE Comment Letter at 3.
\88\ SIFMA AMG Comment Letter at 6.
\89\ MFA Comment Letter at 3; Vanguard Comment Letter at 5.
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Commission Determination
The Commission will allow a SEF or DCM to consider activity in the
same swap listed on another SEF or DCM and the amount of off-exchange
activity in the same swap when determining whether a swap is available
to trade. The Commission agrees with commenters that since the
available-to-trade determination applies marketwide, a SEF or DCM
should be able to consider activity on other SEFs and DCMs, as well as
activity that takes place off-exchange, to the extent that such
information becomes available. Information about trading activity in
the entire swaps marketplace would better inform market participants
about how the swap trades in the overall market and provide interested
parties with additional information and analysis to comment upon. More
comprehensive information would also better inform the Commission in
its evaluation of the available-to-trade submission. The Commission
also believes that consideration of off-exchange trading could provide
additional data and insight about a swap's trading patterns, e.g.,
trading volume or numbers and types of market participants, that would
help a SEF or a DCM address one or more of the determination factors
under Sec. Sec. 37.10(b) and 38.12(b).
B. Sections 37.10(b) and 38.12(b)--Factors To Consider To Make a Swap
Available To Trade
Proposed Sec. Sec. 37.10(b) and 38.12(b) required a SEF or DCM to
consider, as appropriate, the following factors with respect to a swap
that it determines is available to trade: (1) Whether there are ready
and willing buyers and sellers; (2) the frequency or size of
transactions on SEFs, DCMs, or of bilateral transactions; (3) the
trading volume on SEFs, DCMs, or of bilateral transactions; (4) the
number and types of market participants; (5) the bid/ask spread; (6)
the usual number of resting firm or indicative bids and offers; (7)
whether a SEF's trading system or platform or a DCM's trading facility
will support trading in the swap; or (8) any other factor that the SEF
or DCM may consider relevant.\90\ Under the proposed rule, no single
factor would be dispositive, as the DCM or SEF could consider any one
factor or any combination of factors in its determination that a swap
is available to trade.
---------------------------------------------------------------------------
\90\ As noted above, the Commission believes that the mere
listing or offering for trading of a swap on a DCM or SEF does not
mean that the swap is available to trade.
---------------------------------------------------------------------------
Summary of Comments
Commenters expressed general support for the first seven proposed
factors.\91\ Some commenters stated, however, that SEFs and DCMs should
be required to consider specific factors.\92\ Some commenters also
offered additional factors to consider, such as the ability to
establish connectivity with new market participants without imposing
undue burden; \93\ the level of pre-trade transparency in the existing
market; \94\ and market depth and market breadth.\95\
---------------------------------------------------------------------------
\91\ MFA Comment Letter at 2; Markit Comment Letter at 3;
Tradeweb Comment Letter at 3 (proposing a pilot program based on the
proposed factors); Bloomberg Comment Letter at 4; ICI Comment Letter
at 4-5; Vanguard Comment Letter at 4; SIFMA AMG Comment Letter at 5;
Geneva Energy Markets Comment Letter at 2; Spring Trading Comment
Letter at 4 (Jan. 12, 2012); AIMA Comment Letter at 1; CME Comment
Letter at 6; FHLB Comment Letter at 4.
\92\ For example, ISDA recommended that whether a SEF lists and
supports trading in a swap should be a prerequisite. ISDA Comment
Letter at 8. FSR emphasized that broad market participation must be
shown. FSR Comment Letter at 7. Some commenters requested that SEFs
and DCMs be required to consider both the size and frequency of swap
transactions on SEFs, DCMs, and in bilateral transactions. AIMA
Comment Letter at 2; ICI Comment Letter at 5 n.13; SIFMA AMG Comment
Letter at 6.
\93\ FSR Comment Letter at 4.
\94\ Geneva Energy Markets Comment Letter at 2.
\95\ SDMA Comment Letter at 7. According to SDMA, a market depth
test consists of calculating the sum of available bids and offers at
or near the current price for a swap at a particular time, while a
market breadth test consists of calculating the sum of market depth
for a particular swap or class of swaps.
---------------------------------------------------------------------------
Other commenters opposed the proposed factors.\96\ In particular,
several commenters objected to the use of ``any other factor'' in a
determination.\97\ Eaton Vance Management and ISDA, for example,
considered ``any other factor'' to be too broad and subjective and
thought that it would incentivize SEFs and DCMs to make illiquid swaps
available to trade.\98\ ICI stated that the Commission would
effectively delegate its authority to establish available-to-trade
standards by allowing a SEF or DCM to use this factor alone.\99\ CEWG
similarly stated that use of non-enumerated factors by a SEF or DCM
would create ``uncertainty and variability'' in the process.\100\
---------------------------------------------------------------------------
\96\ For example, SDMA considered the factors to be duplicative
of the mandatory clearing determination factors set forth in section
2(h)(2)(D) of the CEA, and therefore burdensome and costly. SDMA
Comment Letter at 5.
\97\ Eaton Vance Management Comment Letter at 2; ISDA Comment
Letter at 8; ICI Comment Letter at 5; CEWG Comment Letter at 3.
\98\ Eaton Vance Management Comment Letter at 2; ISDA Comment
Letter at 8.
\99\ ICI Comment Letter at 5.
\100\ CEWG Comment Letter at 3.
---------------------------------------------------------------------------
Some commenters also objected to allowing a SEF or DCM to make an
available-to-trade determination based on any one proposed factor and
some recommended that SEFs and DCMs be required to consider all of the
factors.\101\ Vanguard and SIFMA AMG asserted that all of the factors
are relevant \102\ and that consideration of all factors would be
consistent with the mandatory clearing determination process.\103\
CBOE, however, contended that required consideration of all the factors
would frustrate Congress's intent for greater transparency,
competition, and oversight of the swaps market.\104\
---------------------------------------------------------------------------
\101\ FHLB Comment Letter at 3; CEWG Comment Letter at 3; Eaton
Vance Management Comment Letter at 3 (adopting ICI's
recommendation); ICI Comment Letter at 2, 5; Vanguard Comment Letter
at 4; Bloomberg Comment Letter at 4; SIFMA AMG Comment Letter at 5;
Chatham Comment Letter at 3; AIMA Comment Letter at 2. Markit stated
that this approach would grant ``unfettered discretion'' to SEFs and
DCMs to disregard a swap's actual liquidity, Markit Comment Letter
at 3. MarketAxess stated that the Commission would lack any basis to
reject a determination. MarketAxess Comment Letter at 8.
\102\ Vanguard Comment Letter at 4; SIFMA AMG Comment Letter at
5.
\103\ SIFMA AMG Comment Letter at 5.
\104\ CBOE Comment Letter at 2.
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Several commenters requested that the Commission set objective
threshold criteria for the proposed factors.\105\ Commenters stated
that without objective criteria, a SEF or DCM would otherwise have
unlimited discretion \106\ to act in its financial self-interest \107\
by determining that a swap is available to trade. Some commenters,
however, acknowledged the difficulty of developing objective liquidity
measurements.\108\
---------------------------------------------------------------------------
\105\ Markit Comment Letter at 3; Spring Trading Comment Letter
at 4; AIMA Comment Letter at 4; Bloomberg Comment Letter at 4; FXall
Comment Letter at 6; Eaton Vance Management Comment Letter at 3; ICI
Comment Letter at 5-6; FSR Comment Letter at 3, 6-7. Some commenters
recommended that the swap must (1) trade a minimum number of times
each day; (2) feature a minimum number of market participants
trading it; and (3) meet an overall notional trading volume over a
set period of time. Vanguard Comment Letter at 5; ISDA Comment
Letter at 7; SIFMA AMG Comment Letter at 5, 7. Morgan Stanley
recommended that the swap must (1) have resting bids and offers on
the applicable SEF or DCM for at least half of the relevant trading
hours for the 90-day period prior to a determination; and (2) have
been traded an average of at least 5 times per day during the same
period. Morgan Stanley Comment Letter at 4, 6. JPMorgan recommended
that the swap must show an actual level of liquidity on the
applicable DCM or SEF during a sample period of at least 180 days
prior to the submission. JPMorgan Comment Letter at 1.
\106\ Morgan Stanley Comment Letter at 4.
\107\ FSR Comment Letter at 3; Morgan Stanley Comment Letter at
5; ICI Comment Letter at 6.
\108\ ICI Comment Letter at 6; Markit Comment Letter at 3; SIFMA
AMG Comment Letter at 5-6.
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[[Page 33613]]
Some commenters recommended imposing additional requirements on
SEFs and DCMs with respect to considering the proposed factors. For
example, SIFMA AMG recommended that a SEF or DCM must provide detailed
reasoning and supporting evidence for the factors that it has
considered.\109\ CEWG recommended that a SEF or DCM should provide an
explanation to the Commission, subject to public comment, when it
believes that certain factors do not apply.\110\
---------------------------------------------------------------------------
\109\ SIFMA AMG Comment Letter at 2.
\110\ CEWG Comment Letter at 3.
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Commission Determination
The Commission is adopting the rule as proposed under final
Sec. Sec. 37.10(b) and 38.12(b), subject to two modifications and
minor technical corrections. The Commission acknowledges commenters'
concerns regarding the consideration of ``any other factor'' and thus
is removing that factor from the final rule. The Commission believes
that removing this factor will provide market participants with a more
precise set of factors from which a swap may be made available to
trade, thereby improving clarity, lessening uncertainty regarding how a
determination may be made, and promoting a more consistent
determination process. Further, given the adoption of a listing
requirement, the Commission is removing an additional factor--whether a
SEF's or DCM's trading facility or platform will support trading in the
swap. This factor contemplated, among other things, whether the SEF or
DCM lists the swap for trading on its trading facility or platform.
Therefore, in light of the listing requirement, this factor is
redundant.
As discussed above, the Commission has determined in this final
rule that a SEF or DCM may consider activity in the same swap listed on
another SEF or DCM and the amount of off-exchange activity in the same
swap.\111\ Therefore, the Commission is amending the second and third
determination factors in proposed Sec. Sec. 37.10(b)(2) and (3) and
38.12(b)(2) and (3) to remove duplicative language related to this
matter.
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\111\ See supra Section II.A.4--Consideration of Swaps on
Another SEF or DCM, or Bilateral Transactions for the Commission's
discussion.
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The Commission believes that the remaining enumerated factors
provide a sufficient framework from which SEFs, DCMs, the Commission
and market participants may evaluate whether a swap is subject to the
trade execution requirement. While each of the enumerated factors is an
indicator of trading activity and may be relevant in a determination,
the Commission believes that no single factor must always be
considered, nor must a SEF or DCM consider more than one factor in a
determination. Therefore, the Commission believes that satisfying any
one of the determination factors would sufficiently indicate that the
contract is available to trade. By adopting a more flexible approach,
SEFs and DCMs will be able to accommodate swaps with different trading
characteristics that can be supported in a centralized trading
environment. The Commission does not believe that it is necessary for a
SEF or DCM to analyze and demonstrate compliance with every factor in a
submission.
In response to SIFMA AMG's recommendation that a SEF or DCM should
be required to provide detailed reasoning and supporting evidence for
the factors considered, the Commission notes that Sec. Sec. 40.5(a)(5)
and 40.6(a)(7) each requires submissions to contain an explanation and
analysis of the determination, including the factors considered and its
compliance with the CEA and Commission regulations. The Commission
expects such an explanation and analysis to be clear and informative as
to how the factor or factors apply to the swap.
The Commission declines to adopt additional factors in the final
rule as suggested by several commenters. The Commission believes that
the enumerated factors provide a sufficient framework to allow: (1) A
SEF or DCM to consider whether a swap should be subject to the trade
execution requirement; (2) market participants to evaluate a
determination and provide public comment; and (3) the Commission to
evaluate a SEF's or DCM's determination that a swap is available to
trade. Further, the Commission believes that the enumerated factors are
broad in nature and incorporate many of the concepts recommended by
commenters.
The Commission acknowledges commenters' request for establishing
objective criteria associated with the factors and reiterates the view
expressed in the FNPRM that as centralized trading develops and the
Commission gains experience in oversight of swap markets, the
Commission could then consider adopting objective criteria in a future
rulemaking based upon an empirical analysis of swap trading data.
C. Sections 37.10(c) and 38.12(c)--Applicability
Proposed Sec. Sec. 37.10(c)(1) and 38.12(c)(1) required that upon
the Commission deeming that a swap is available to trade based on a SEF
or DCM submission, all other SEFs and DCMs listing or offering for
trading such swap and/or any economically equivalent swap must make
those swaps available to trade for purposes of the trade execution
requirement under section 2(h)(8) of the CEA. The Commission defined
``economically equivalent swap'' under proposed Sec. Sec. 37.10(c)(2)
and 38.12(c)(2) as a swap that the SEF or DCM determines to be
economically equivalent with another swap after consideration of each
swap's material pricing terms. The Commission also noted that if a DCM
or SEF makes a swap available to trade, then the proposed rule would
not require other DCMs and SEFs to list or offer that swap, or an
economically equivalent swap, for trading.
Summary of Comments
Some commenters expressed general support for the economic
equivalence requirement because it would enforce marketwide compliance
with the trade execution requirement,\112\ increase liquidity, and
promote a more efficient available-to-trade process by allowing SEFs
and DCMs to rely on existing determinations.\113\ Many commenters,
however, viewed the proposed definition of ``economically equivalent
swap'' as excessively broad \114\ and vague.\115\ Some commenters
stated that the proposed definition would create uncertainty about
which swaps are available to trade.\116\ Other commenters stated that
the vagueness of the proposed definition would allow SEFs and DCMs to
subject more swaps to mandatory trade execution,\117\ thereby allowing
illiquid swaps to be available to trade.\118\ In addition, MarketAxess
and CEWG commented that the proposed requirement is not prescribed
[[Page 33614]]
by statute.\119\ Morgan Stanley and AIMA stated that the concept itself
is inherently ``elusive and subjective.'' \120\ Other commenters
thought that the process would create uncertainty as to which swaps are
subject to mandatory trade execution.\121\ SIFMA AMG stated that swaps
with slightly different characteristics, e.g., time to maturity, could
differ in the requisite liquidity, yet both be determined to be
available to trade based on economic equivalence.\122\
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\112\ Tradeweb Comment Letter at 5.
\113\ SDMA Comment Letter at 7.
\114\ Eaton Vance Management Comment Letter at 3; CEWG Comment
Letter at 5; Chatham Comment Letter at 4.
\115\ FXall Comment Letter at 7; ICI Comment Letter at 8; ISDA
Comment Letter at 9; Morgan Stanley Comment Letter at 8-9; Spring
Trading Comment Letter at 1 (Feb. 13, 2012); UBS Comment Letter at
2; Chatham Comment Letter at 4-5.
\116\ MFA Comment Letter at 5; ICI Comment Letter at 8; AIMA
Comment Letter at 3.
\117\ MFA Comment Letter at 5; FXall Comment Letter at 7; ICI
Comment Letter at 8; FHLB Comment Letter at 3; Morgan Stanley
Comment Letter at 8; CEWG Comment Letter at 5-6; SIFMA AMG Comment
Letter at 9; ISDA Comment Letter at 9; AIMA Comment Letter at 4;
MarketAxess Comment Letter at 8-9.
\118\ CEWG Comment Letter at 5; FXall Comment Letter at 7;
JPMorgan Comment Letter at 3; Chatham Comment Letter at 4.
\119\ MarketAxess Comment Letter at 9; CEWG Comment Letter at 5.
\120\ Morgan Stanley Comment Letter at 8; AIMA Comment Letter at
3 (based on the multitude of factors that affect the economic terms
of a swap).
\121\ AIMA Comment Letter at 3; Morgan Stanley Comment Letter at
8; ICI Comment Letter at 8; MFA Comment Letter at 5; SIFMA AMG
Comment Letter at 10; ISDA Comment Letter at 9; Sunguard Kiodex
Comment Letter at 2; FXall Comment Letter at 7.
\122\ SIFMA AMG Comment Letter at 9. Several other commenters,
though not all in support of eliminating the proposed requirement,
also acknowledged that two otherwise identical swaps would also
possess different liquidity characteristics if cleared at different
clearinghouses. FSR Comment Letter at 3; Morgan Stanley Comment
Letter at 9; Spring Trading Comment Letter at 2 (Feb. 13, 2012).
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To prevent evasion of the trade execution requirement through
slight modification of a swap's terms, some commenters recommended that
the Commission should rely on its anti-evasion authority under section
6(e) of the CEA.\123\
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\123\ SIFMA AMG Comment Letter at 10; CEWG Comment Letter at 5;
ISDA Comment Letter at 9; AIMA Comment Letter at 4; Morgan Stanley
Comment Letter at 9.
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Commission Determination
At this time, the Commission is adopting the rule as proposed with
certain modifications under a new subsection titled, ``Applicability,''
for SEFs or DCMs that list or offer the same swap for trading. The
Commission, however, is not adopting the proposed definition of
economically equivalent swaps. The Commission intended the economic
equivalence requirement as a means to avoid knowing or reckless evasion
of the trade execution requirement, which could potentially occur if a
SEF or DCM, acting in concert with a market participant, lists and
allows trading of swaps with slightly amended terms to a swap
previously determined to be available to trade. Given that the factors
that could be considered may vary across different asset classes and
products, the Commission recognizes the complexity of determining
economic equivalence between swaps. Further, based on the comments
received, the Commission has determined that it is not feasible, for
purposes of determining which swaps are available to trade, to define
``economic equivalent'' with sufficient precision and clarity.
The Commission is also amending the rule text to clarify that once
a swap is determined to be available to trade under part 40 of the
Commission's regulations (i.e., the Commission approves a SEF's or
DCM's available-to-trade submission under Sec. 40.5 or the submission
is deemed as certified under Sec. 40.6), then all other SEFs and DCMs
that choose to list or offer the swap for trading must do so in
accordance with the trade execution requirement.\124\ Subsequent SEFs
and DCMs will not be required to submit separate available-to-trade
determinations to the Commission for a particular swap after it has
been determined to be available to trade. Importantly, no SEF or DCM is
required to list or offer a swap for trading even if another SEF or DCM
has determined it is available to trade. Once a swap is available for
trade for purposes of section 2(h)(8), however, that swap may only be
executed on a SEF or DCM.
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\124\ See supra note 14 for a discussion of the methods by which
swaps that are subject to the trade execution requirement must be
executed on a SEF or DCM.
---------------------------------------------------------------------------
In response to commenters who recommended that the Commission rely
on its existing anti-evasion authority, the Commission notes that its
anti-evasion authority as constituted under section 6(e) of the CEA
would not apply to SEFs and DCMs.\125\ Section 6(e)(5), however, would
apply to the actions of certain market participants--swap dealers and
major swap participants in particular--that are carried out to evade
the trade execution requirement.
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\125\ Section 6(e)(5) of the CEA, as amended by section
741(b)(11) of the Dodd-Frank Act, prescribes that ``[a]ny swap
dealer or major swap participant that knowing or recklessly evades
or participates in or facilitates evasion of the requirements of
section 2(h) [of the CEA] shall be liable . . .'' (emphasis added).
7 U.S.C. 9a.
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D. Sections 37.10(d) and 38.12(d)--Removal
The proposed rule requested comment on (1) whether the Commission
should specify a process where a swap may be determined to be no longer
available to trade; and (2) if so, whether the part 40 processes should
be used for this process. The proposed rule also requested comment on
whether such a determination should apply only to the SEF or DCM that
seeks to make the swap no longer available to trade.\126\
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\126\ 76 FR 77734.
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Summary of Comments
Several commenters responded to the Commission's request for
comments related to whether the Commission should specify a process
whereby a swap that has been determined to be available to trade may no
longer be available to trade. Several commenters supported the
development of a process under which a swap could be determined to be
no longer available to trade for the purposes of the trade execution
requirement. Commenters recommended that the Commission retain the
authority to make such a determination \127\ based on the Commission's
access to data demonstrating a swap's overall liquidity \128\ and the
desire to prevent a SEF or DCM from making conflicting determinations
with respect to the same swap.\129\ ISDA, however, recommended that
market participants should be able to submit to the Commission that a
swap is no longer available to trade because they would have experience
and relevant knowledge of market trends and changes.\130\
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\127\ MFA Comment Letter at 4; FXall Comment Letter at 7-8; ICI
Comment Letter at 7; SIFMA AMG Comment Letter at 11-12; Spring
Trading Comment Letter at 7 (Jan. 12, 2012); ISDA Comment Letter at
8-9; JPMorgan Comment Letter at 2.
\128\ ISDA Comment Letter at 8-9; MFA Comment Letter at 4.
\129\ FXall Comment Letter at 8; MFA Comment Letter at 4.
\130\ ISDA Comment Letter at 8-9.
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Some commenters recommended use of the same factors as those used
when making a determination that a swap is available to trade, albeit
with objective thresholds.\131\ FXall asserted that using objective
criteria would render the removal process ``transparent and
impartial.'' \132\
---------------------------------------------------------------------------
\131\ MFA Comment Letter at 4; ICI Comment Letter at 7-8; FXall
Comment Letter at 7-8.
\132\ FXall Comment Letter at 8.
---------------------------------------------------------------------------
Some commenters recommended that a determination that a swap is no
longer available to trade should be subject to public notice and
comment.\133\ Accordingly, ICI recommended against using the procedures
under Sec. Sec. 40.5 and 40.6 because they lack adequate opportunity
for public comment.\134\ MFA also recommended that the Commission
provide public notice after a swap is determined to be no longer
available to trade.\135\
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\133\ FXall Comment Letter at 8; ICI Comment Letter at 7; Spring
Trading Comment Letter at 7.
\134\ ICI Comment Letter at 7.
\135\ MFA Comment Letter at 5.
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Some commenters stated that a determination that a swap is no
longer available to trade should only apply to the petitioning SEF or
DCM.\136\ Spring Trading and SDMA stated that to apply the
determination on a marketwide
[[Page 33615]]
basis would otherwise unfairly penalize other non-petitioning SEFs or
DCMs.\137\ ICI and MFA, however, stated that the determination should
apply to all SEFs and DCMs that list or offer the swap for
trading.\138\ ICI stated that applying the determination to only one
SEF or DCM would be inconsistent with the trade execution
requirement.\139\
---------------------------------------------------------------------------
\136\ Spring Trading Comment Letter at 7-8 (Jan. 12, 2012); SDMA
Comment Letter at 10.
\137\ Id.
\138\ MFA Comment Letter at 4-5; ICI Comment Letter at 8.
\139\ ICI Comment Letter at 8.
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Commission Determination
The Commission is not adopting a separate process for a SEF or DCM
to submit a determination that a swap is no longer available to trade.
Rather, the Commission believes that where all SEFs and DCMs that had
listed a swap for trading, including the SEF or DCM that submitted the
initial available-to-trade determination under part 40, no longer list
that swap for trading on their respective facility or platform, (i.e.,
all such SEFs and DCMs have ``de-listed'' the swap),\140\ then the
Commission would deem the swap to be no longer available to trade. In
such a case, trading in the swap would no longer be subject to the
trade execution requirement. The Commission believes that this approach
is consistent with section 2(h)(8) of the CEA, which states a swap
would otherwise not be subject to the trade execution requirement if,
among other things, no SEF or DCM makes it available to trade.
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\140\ In some instances, a swap that is available to trade
potentially should no longer be subject to the trade execution
requirement, but not all SEFs and DCMs have de-listed the swap. In
such a case, the Commission may choose to review the available-to-
trade status of such a swap, under Sec. 40.2(b) or Sec.
40.3(a)(10) of the Commission's regulations, which authorizes
Commission staff to request, on an ongoing basis, additional
information, evidence, or data that meets the requirements of the
CEA or the Commission's regulations or policies thereunder. Further,
market participants may request that the Commission, under section
8a(7) of the CEA, designate a swap to be no longer available to
trade. Under section 8a(7), the Commission could initiate a
proceeding to amend a SEF or DCM's available-to-trade designation of
a swap if such a change is necessary for . . . the protection of
traders'' with respect to ``other trading requirements.'' First,
however, the Commission must request in writing that the change be
made and provide for appropriate notice and opportunity for hearing.
The Commission, however, acknowledges that the section 8a(7) process
is complex and emphasizes that the process should only be invoked
where a swap clearly should not remain available to trade, but a SEF
or DCM has declined a request to initiate a new assessment.
---------------------------------------------------------------------------
Where all SEFs and DCMs no longer list that swap for trading--
denoting that open interest in that swap does not exist on any facility
or platform \141\--the Commission would deem the swap as no longer
available to trade because that swap would no longer meet any of the
determination factors. The Commission, which will maintain and update a
list of the SEFs and DCMs that list those available-to-trade swaps,
will have access to the information and the ability to make the
determination, without requiring a separate process. In response to
FXall, the Commission believes that this approach would be transparent
and impartial. In response to MFA's recommendation, the Commission will
inform the public that a swap is no longer available to trade via
notice pursuant to new Sec. Sec. 37.10(d) and 38.12(d) (``Removal'').
The Commission is also delegating authority to the Director of the
Division of Market Oversight to issue notice in this instance.
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\141\ Under Sec. 40.6(a) of the Commission's regulations, the
Commission would receive notice that a SEF or DCM has de-listed a
swap through a submission, submitted in compliance with Sec. Sec.
40.6(a)(1) and (2) and 40.6(a)(7).
---------------------------------------------------------------------------
E. Annual Review
Proposed Sec. Sec. 37.10(d) and 38.12(d) required that a SEF or
DCM perform an annual review and assessment of each swap that it has
made available to trade. The proposed rule envisioned that an annual
review would ensure that SEFs and DCMs evaluate on a regular basis
whether swaps previously determined to be available to trade should
continue to be ``available to trade'' for the purposes of the trade
execution requirement. In the annual review and assessment, SEFs and
DCMs would be required to consider the proposed factors in Sec. Sec.
37.10(b) and 38.12(b), respectively. Upon completion of the annual
review, a SEF or DCM would be required to provide the Commission with
an electronic report of the review and assessment, including any
supporting information or data, no later than 30 days after its fiscal
year end. The proposed rule requested comment on whether SEFs and DCMs
should conduct the review and assessment.
Summary of Comments
Several commenters supported the proposed annual review
requirement.\142\ Tradeweb, however, requested that the Commission
clarify the effect of the proposed annual review process.\143\ Some
commenters stated that additional reviews were necessary because swaps
could become illiquid between scheduled annual reviews, yet still be
subject to the trade execution requirement. Thus, they recommended more
frequent reviews, such as on a quarterly basis.\144\ Several
commenters, however, stated that the Commission, rather than SEFs,
should conduct the review and assessment for similar reasons as those
offered in support of allowing the Commission to exclusively determine
whether a swap is available to trade.\145\ CME, for example,
recommended that the Commission conduct the review by obtaining data
from SDRs in order to minimize overall costs.\146\
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\142\ Tradeweb Comment Letter at 5; CME Comment Letter at 7;
Spring Trading Comment Letter at 7 (Jan. 12, 2012).
\143\ Tradeweb Comment Letter at 5.
\144\ Morgan Stanley Comment Letter at 8; MFA Comment Letter at
4-5; ISDA Comment Letter at 8; AIMA Comment Letter at 2-3; Eaton
Vance Management Comment Letter at 4; ICI Comment Letter at 7;
Markit Comment Letter at 4; Vanguard Comment Letter at 6; JPMorgan
Comment Letter at 2; SIFMA AMG Comment Letter at 11; FSR Comment
Letter at 3-4.
\145\ Markit Comment Letter at 4; MFA Comment Letter at 4;
Vanguard Comment Letter at 6; SIFMA AMG Comment Letter at 11. CME
recommended that the Commission conduct the review of all existing
available-to-trade determinations within 30 days of December 31 of
each year to minimize costs and administrative burdens. For
determinations submitted after June 30 of a given year, the annual
review would occur within 30 days of December 31 of the following
year. CME Comment Letter at 7.
\146\ CME Comment Letter at 7.
---------------------------------------------------------------------------
Some commenters further recommended that market participants have
the opportunity to participate in the process. Tradeweb recommended
that reviews and assessments be subject to public comment because of
their market impact.\147\
---------------------------------------------------------------------------
\147\ Tradeweb Comment Letter at 5.
---------------------------------------------------------------------------
Other commenters opposed the proposed requirement. WMBAA stated
that an annual review and assessment would be arbitrary, time-
consuming, and offers insufficient regulatory value.\148\ Sunguard
Kiodex asserted that periodic reviews would cause swaps' available-to-
trade status to fluctuate, therefore negating the benefit of an initial
determination.\149\ WMBAA and SDMA recommended that a SEF or DCM be
able to rely solely on the clearing determination review instead and
annually renew its self-certification without submitting a report.\150\
---------------------------------------------------------------------------
\148\ WMBAA Comment Letter at 4.
\149\ Sunguard Kiodex Comment Letter at 2.
\150\ SDMA Comment Letter at 10; WMBAA Comment Letter at 4.
---------------------------------------------------------------------------
With respect to the factors to be considered in an annual review,
some commenters supported use of the proposed determination factors in
Sec. Sec. 37.10(b) and 38.12(b).\151\ Eaton Vance Management
recommended that a SEF or DCM must affirmatively report each factor
that a swap meets to continue to
[[Page 33616]]
be available to trade.\152\ Other commenters stated that the Commission
should establish objective review and assessment criteria.\153\
---------------------------------------------------------------------------
\151\ Spring Trading Comment Letter at 7 (Jan. 12, 2012); Eaton
Vance Management Comment Letter at 4; Tradeweb Comment Letter at 5;
SIFMA AMG Comment Letter at 11; MFA Comment Letter at 4; Markit
Comment Letter at 4.
\152\ Eaton Vance Management Comment Letter at 4.
\153\ SIFMA AMG Comment Letter at 11; MFA Comment Letter at 4;
Markit Comment Letter at 4; AIMA Comment Letter at 3.
---------------------------------------------------------------------------
ICI and Eaton Vance Management requested that the electronic
reports to be submitted to the Commission also be made available to the
public.\154\
---------------------------------------------------------------------------
\154\ ICI Comment Letter at 7; Eaton Vance Management Comment
Letter at 2.
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Commission Determination
The Commission is not adopting the proposed annual review
requirement. The Commission intended the requirement to ensure that a
SEF or DCM would regularly evaluate trading for the swaps that it has
determined to be available to trade for purposes of the trade execution
requirement. Based on the approach adopted for determining that a swap
is no longer available to trade, however, the Commission believes that
requiring SEFs and DCMs to submit a review or assessment is not
necessary. A SEF or DCM will likely review, on an ongoing basis,
whether swaps listed or offered for trading on its system or platform
should continue to be listed or offered for trading. Such a review
would likely consider one or more factors that are similar to those
that can be used to determine if a swap is available to trade. Further,
if the Commission believes that a review of a swap's available-to-trade
status is warranted, then it may request that SEFs and DCMs submit
relevant information to conduct that review under Sec. Sec. 40.2(b)
and 40.3(a)(10) of the Commission's regulations, respectively.\155\
---------------------------------------------------------------------------
\155\ See supra note 140. Under 17 CFR 40.2(b) and 40.3(a)(10),
when requested by Commission staff, a SEF or DCM is required to
submit additional evidence, information, or data that demonstrates
that a swap listed for trading meets the CEA's requirements or the
Commission's regulations. Under Sec. Sec. 37.5 and 38.5 of the
Commission's regulations, respectively, the Commission may also
request a SEF or DCM to file information related to its business as
a SEF or DCM, including trading information, in a particular form,
manner, and time as specified.
---------------------------------------------------------------------------
F. Notice to the Public of Available To Trade Determinations
The Commission noted in the FNPRM that Sec. Sec. 40.5 and 40.6
provide a process for notifying the public that a SEF or DCM has made
an available-to-trade determination--SEFs and DCMs are required to post
a notice and a copy of the rule submission on their respective Web
sites concurrent with their filings at the Commission. The Commission
stated that it would also post the filings on its Web site. The
Commission also stated that it would assess the feasibility of posting
notices of all swaps that are determined to be available to trade on an
easily accessible page on its Web site. Commenters supported the
proposal to provide notice to market participants through a central
location on the Commission's Web site.\156\ SIFMA AMG stated that a
list would help market participants comply with the rules.\157\
---------------------------------------------------------------------------
\156\ ICI Comment Letter at 10; Bloomberg Comment Letter at 3
n.9; SIFMA AMG Comment Letter at 12-13; AIMA Comment Letter at 4.
SIFMA AMG and AIMA also recommended that such a centralized location
could be operated by an independent third party.
\157\ SIFMA AMG Comment Letter at 13. SIFMA AMG requested that
the Commission establish the Web site location prior to designating
any swaps as available to trade. Id. In response to SIFMA AMG's
comment, the Commission anticipates that this Web page will be
established as soon as technologically feasible, and may or may not
occur prior to the effective date of this rule. CME also requested
that the Commission publish a list, on its Web site and in the
Federal Register, of all swaps under current assessment. CME Comment
Letter at 7. The Commission notes that Sec. Sec. 40.5 and 40.6
filings will already be posted on its Web site.
---------------------------------------------------------------------------
The Commission agrees with commenters that a centralized list would
help market participants, as well as SEFs and DCMs, comply with the
Commission's rules and regulations related to the trade execution
requirement. Therefore, the Commission will post such determinations on
its Web site where market participants can readily ascertain which
swaps have been determined to be available to trade, and therefore
subject to the trade execution requirement, including the SEFs and DCMs
that list or offer those swaps for trading.
III. Sections 37.12 and 38.11 of the Commission's Regulations--Trade
Execution Compliance Schedule
Proposed Sec. Sec. 37.12(a) and 38.11(a) required market
participants to comply with the trade execution requirement under
section 2(h)(8) of the CEA upon the later of (1) the applicable
deadline established under the compliance schedule for the clearing
requirement for a swap,\158\ or (2) 30 days after the swap is first
made available to trade on either a SEF or DCM.\159\ In the proposed
rule, the Commission noted that while the available-to-trade
determination could precede the clearing requirement and vice versa,
the trade execution requirement would not be in effect until the
clearing requirement takes effect.\160\ The Commission sought comment
as to whether 30 days would be sufficient for necessary technological
linkages to be established between (1) DCOs, DCMs, and SEFs; and (2)
DCMs, SEFs, and market participants.\161\
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\158\ The Commission proposed to phase in compliance with the
clearing requirement, and the trade execution requirement thereof,
by category of market participant. As proposed, Category 1 entities,
which included a swap dealer, a security-based swap dealer, a major
swap participant, a major security-based swap participant, or an
active fund, would have 90 days to comply with the clearing
requirement. Category 2 entities, which include a commodity pool,
private fund, employee benefit plan, or person predominantly engaged
in activities that are in the business of banking or are financial
in nature, would have 180 days to comply with the clearing
requirement. Certain third-party subaccounts and all other swap
transactions would receive 270 days to comply with the clearing
requirement. With the exception of removing employee benefit plans
from Category 2 and allowing such plans 270 days to comply with the
clearing requirement, the Commission adopted this compliance
schedule generally as proposed. See Swap Transaction Compliance and
Implementation Schedule: Clearing Requirement under Section 2(h) of
the CEA, 77 FR 44441 (July 20, 2012).
\159\ See Swap Transaction Compliance and Implementation
Schedule: Clearing and Trade Execution Requirements under Section
2(h) of the CEA, 76 FR 58186 (Sep. 20, 2011). In this final rule,
the Commission is finalizing the compliance and implementation
schedule for the trade execution requirement, and therefore,
addresses the relevant comments submitted in response to this
proposed rule.
\160\ 76 FR 77731 n.38.
\161\ 76 FR 58192.
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Summary of Comments
Some commenters generally supported the proposed compliance
schedule for the trade execution requirement,\162\ but Tradeweb
commented that a 30-day implementation period may not be sufficient for
a class of swaps that is available to trade for the first time and
recommended that the Commission maintain the authority to set an
appropriate implementation period on a case-by-case basis for a class
of swaps, with input from SEFs, DCMs, and market participants.\163\
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\162\ Chris Barnard Comment Letter at 2 (Sep. 23, 2011);
Tradeweb Comment Letter at 2-4 (Nov. 4, 2011); Better Markets
Comment Letter at 2 (Nov. 4, 2011).
\163\ Tradeweb Comment Letter at 4.
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Several commenters recommended that the trade execution requirement
should become effective only after the clearing requirement is fully
implemented.\164\ MFA commented that allowing mandatory trade execution
to become effective simultaneously with mandatory clearing would
potentially dilute market participants' resources to comply with both
requirements.\165\ MFA also recommended that all market participants be
required to comply with
[[Page 33617]]
the trade execution requirement at the same time, rather than through a
phased-in approach, to avoid fragmenting market liquidity.\166\
---------------------------------------------------------------------------
\164\ AIMA Comment Letter at 3 (Nov. 3, 2011); MarkitSERV
Comment Letter at 5 (Nov. 2011); Citadel Comment Letter at 5 (Nov.
4, 2011); MFA Comment Letter at 7 (Nov. 4, 2011); Vanguard Comment
Letter at 5 (Nov. 4, 2011) (recommending 180-day compliance period
between the effective date of the clearing requirement and the trade
execution requirement).
\165\ MFA Comment Letter at 10-11.
\166\ Id. at 12.
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Other commenters stated that the proposed schedule does not afford
adequate time for market participants to comply with the trade
execution requirement, particularly with regards to the proposed 30-day
post-determination implementation period.\167\ JPMorgan and UBS stated
that where a SEF or DCM submits a swap as available to trade using
Sec. 40.6, market participants could be required to transfer their
existing trading in that swap onto a SEF or DCM within only 40 days of
the submission.\168\
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\167\ JPMorgan Comment Letter at 3-4; UBS Comment Letter at 2;
ICI Comment Letter at 5 (Nov. 4, 2011); CME Comment Letter at 2
(Nov. 4, 2011); Westpac Comment Letter at 3 (Nov. 4, 2011); Regional
Banks Comment Letter at 7 (Nov. 4, 2011); FHLBanks Comment Letter at
5 (Nov. 4, 2011); ICI Comment Letter at 9; ISDA Comment Letter at
11; AIMA Comment Letter at 2-3; UBS Comment Letter at 2; ISDA
Comment Letter at 11; ACLI Comment Letter at 2.
\168\ JPMorgan Comment Letter at 3; UBS Comment Letter at 2.
Based on proposed Sec. Sec. 37.12(a) and 38.11(a), commenters
assumed that 30 days after the swap is made available to trade falls
upon the later date than the applicable compliance date for the
clearing requirement.
---------------------------------------------------------------------------
Some commenters noted that implementing new infrastructure,
standards, and procedures necessary to comply with the trade execution
requirement would require a longer post-determination period.\169\ For
example, FHLBanks commented that new infrastructure and procedures are
necessary to ensure that swaps are properly submitted to a
counterparty's FCM and to a DCO.\170\ Some commenters also cited the
need for market participants to develop adequate connectivity \171\ and
to obtain trading access \172\ to a SEF or DCM. CME commented that
DCOs, DCMs, and SEFs would not likely be able to establish the
requisite technological linkages within the proposed 30-day
implementation period,\173\ while ICI commented that smaller market
participants could need more than 30 days to connect to a SEF or DCM
offering an actively traded swap.\174\ Other commenters noted that
market participants would also need time to complete applicable
documentation and agreements.\175\ Some commenters further stated that
a longer implementation period would promote greater competition among
trading venues and mitigate a SEF's or DCM's attempt to capture market
share.\176\
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\169\ JPMorgan Comment Letter at 3-4; ISDA Comment Letter at 11;
FHLBanks Comment Letter at 5 (Nov. 4, 2011); Westpac Comment Letter
at 2-3 (Nov. 4, 2011).
\170\ FHLBanks Comment Letter at 5 (Nov. 4, 2011).
\171\ FSR Comment Letter at 4; Bloomberg Comment Letter at 5;
ICI Comment Letter at 8; ISDA Comment Letter at 11; Eaton Vance
Management Comment Letter at 3; Chatham Comment Letter at 4; SIFMA
AMG Comment Letter at 9; CME Comment Letter at 6-7; Westpac Comment
Letter at 3 (Nov. 21, 2011); ICI Comment Letter at 5 (Nov. 4, 2011).
\172\ MFA Comment Letter at 4; Vanguard Comment Letter at 6;
SIFMA AMG Comment Letter at 9; AIMA Comment Letter at 3; CME Comment
Letter at 6-7.
\173\ CME Comment Letter at 2 (Nov. 4, 2011).
\174\ ICI Comment Letter at 5 (Nov. 4, 2011).
\175\ SIFMA AMG Comment Letter at 9; ICI Comment Letter at 9;
AIMA Comment Letter at 3; CME Comment Letter at 7; ISDA Comment
Letter at 11; Westpac Comment Letter at 3; FIA/ISDA/SIFMA Comment
Letter at 8 (Nov. 4, 2011).
\176\ Chatham Comment Letter at 4; FXall Comment Letter at 7;
ICI Comment Letter at 8; SIFMA AMG Comment Letter at 9.
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Commenters provided several suggestions for a longer post-
determination period. Several commenters recommended a 90-day period
after a swap is made available to trade,\177\ while Chatham and FSR
recommended at least a 6-month period.\178\ SIFMA AMG recommended an
implementation period of at least 90 days after the swap becomes
subject to the trade execution requirement,\179\ while some commenters
recommended a similar period of at least 6 months,\180\ particularly
for market participants who are neither swap dealers or major swap
participants.\181\ SIFMA AMG and Vanguard stated that the period could
be shortened over time as market participants become more experienced
with centralized trading.\182\
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\177\ FXall Comment Letter at 7; ICI Comment Letter at 9; CME
Comment Letter at 6-7; Vanguard Comment Letter at 6; Bloomberg
Comment Letter at 5; Westpac Comment Letter at 3 (Nov. 4, 2011).
\178\ Chatham Comment Letter at 4; FSR Comment Letter at 4.
\179\ SIFMA AMG Comment Letter at 9.
\180\ Eaton Vance Management Comment Letter at 3; ISDA Comment
Letter at 11.
\181\ Westpac Comment Letter at 3 (Nov. 4, 2011); FHLBanks
Comment Letter at 5 (Nov. 4, 2011).
\182\ SIFMA AMG Comment Letter at 9; Vanguard Comment Letter at
6.
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Commission Determination
The Commission is adopting Sec. Sec. 37.12(a) and (b) and 38.11(a)
and (b) as proposed with minor technical corrections, but is also
amending the proposed rule text to clarify that market participants
must comply with the trade execution requirement upon the later of (1)
the applicable deadline established under the compliance schedule for
the clearing requirement for a swap,\183\ or (2) 30 days after the
available-to-trade determination for that swap is deemed approved under
Sec. 40.5 or deemed certified under Sec. 40.6 by the Commission as
available to trade. As noted earlier, the Commission anticipates that
because of the novel nature of the available-to-trade determinations,
the initial determinations would likely be subject to a stay under
Sec. 40.6 for an additional 90-day review period or an extension of
the 45-day review period under Sec. 40.5 for an additional 45 days.
Accordingly, the Commission's part 40 rule review procedures should
provide market participants with adequate advance notice of the
possible application of the trade execution requirement to a particular
swap. The Commission believes that this period, along with the
subsequent 30-day post-determination implementation period, is a
sufficient amount of time for SEFs, DCMs, and market participants to
become familiar and comply with the trade execution requirement. Taken
in concert with the implementation schedule adopted for swaps subject
to clearing requirement, the Commission also believes that this time is
sufficient with respect to mandatory trade execution for an individual
swap or a group, type, category, or class of swaps.\184\
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\183\ See supra note 52.
\184\ See id.
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To the extent that the phased-in compliance schedule for the
clearing requirement previously adopted by the Commission may lead to
phased-in compliance with the trade execution requirement, the
Commission supports this approach. The Commission believes that the
phased-in schedule for the former requirement--which accounts for a
market participant's ability to comply based on risk profile,
compliance burden, resources, and expertise--also applies with respect
to compliance with the latter requirement. The Commission further notes
that the concerns about fragmenting market liquidity caused by a
phased-in approach are mitigated by (1) the phasing-in of similar
entities, who transact similar volumes of swaps, under similar
timelines and (2) the relatively compact timeframe in which market
participants in all three clearing implementation and compliance
categories must comply with the trade execution requirement.\185\
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\185\ See id.
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Finally, the Commission notes that a trading facility could still
clear and list a swap for trading after it is determined to be subject
to the trade execution requirement, but prior to the effective date.
[[Page 33618]]
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires federal agencies,
in promulgating regulations, to consider the impact of those
regulations on small entities.\186\ The Commission has previously
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its regulations on small
entities in accordance with the RFA.\187\ The Commission has previously
determined that DCMs and SEFs are not ``small entities'' for purposes
of the RFA.\188\ The subject of this rulemaking also provides a
compliance schedule for a new statutory requirement, section 2(h)(8) of
the CEA, and does not itself impose significant new regulatory
requirements.\189\ Accordingly, the Commission received no comments on
the Chairman's certification of the impact of the rules contained
herein on small entities. Therefore, the Chairman, on behalf of the
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rule
will not have a significant economic impact on a substantial number of
small entities.
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\186\ 5 U.S.C. 601 et seq.
\187\ 47 FR 18681-31 (Apr. 30, 1982).
\188\ See 47 FR 18618, 18619 (Apr. 30, 1982) discussing DCMs; 66
FR 45604, 45609 (Aug. 29, 2001) discussing DTEFs; 76 FR 1214, 1235
discussing SEFs.
\189\ 76 FR 58193.
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B. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \190\ imposes certain
requirements on federal agencies in connection with their conducting or
sponsoring any collection of information as defined by the PRA. An
agency may not conduct or sponsor, and a registered entity is not
required to respond to, a collection of information unless it displays
a currently valid control number by the Office of Management and Budget
(``OMB''). This final rule contains new collection of information
requirements within the meaning of the PRA. Accordingly, in connection
with the FNPRM, the Commission submitted an information collection
requested, titled ``Parts 37 and 38--Process for a Swap Execution
Facility or Designated Contract Market to Make a Swap Available to
Trade'' and supporting documentation to OMB for its review and approval
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, and requested
that OMB approve and assign a new control number for the collections of
information covered by the FNPRM. Additionally, pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission, in the FNPRM, requested comments from
the public on the proposed information collection requirements in order
to, among other items, evaluate the necessity of the proposed
collections of information and minimize the burden of the information
collection requirements on respondents. On September 12, 2012, OMB
assigned control number 3038-0099 to this collection of information,
but withheld final approval pending the Commission's resubmission of
the information collection, which includes a description of the
comments received on the collection and the Commission's responses
thereto.
---------------------------------------------------------------------------
\190\ 44 U.S.C. 3501 et seq.
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With respect to the adoption of Sec. Sec. 37.12(a) and 38.11(a)--
the trade execution compliance schedule--as stated in the prior
proposed rule, this requirement will not require a new collection of
information from any persons or entities.\191\
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\191\ 76 FR 58193.
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The Commission protects proprietary information according to the
Freedom of Information Act and 17 CFR part 145, ``Commission Records
and Information.'' In addition, section 8(a)(1) of the CEA strictly
prohibits the Commission, unless specifically authorized by the CEA,
from making public ``data and information that would separately
disclose the business transactions or market positions of any person
and trade secrets or names of customers.'' \192\ The Commission is also
required to protect certain information contained in a government
system of records according to the Privacy Act of 1974.\193\
---------------------------------------------------------------------------
\192\ 7 U.S.C. 12(a)(1).
\193\ 5 U.S.C. 552a.
---------------------------------------------------------------------------
1. Proposed Information Provided by Reporting Entities/Persons
In the FNPRM, the Commission estimated that 50 registered entities
will be required to file part 40 rule submissions and annual reports.
Based on the previously estimated hours of burden under part 40 and
the estimated additional time that a SEF or DCM would require to review
applicable factors and data to make a determination, the Commission
estimated that the hourly burden for a SEF or DCM under proposed
Sec. Sec. 37.10(a) and 38.12(a) to submit an available-to-trade
determination would be 8 hours per submission. The Commission, however,
did not provide an average annual hours of burden for each SEF or DCM
to submit available-to-trade determinations under proposed Sec. Sec.
37.10(a) and 38.12(a) because, as stated in the FNPRM, it is not
feasible to determine the number of part 40 rule submission filings, on
average, that each SEF or DCM would submit, as the number of swap
contracts to be traded on a DCM or SEF and the number of those swaps
that a SEF or DCM will eventually submit as available to trade is
presently unknown.
2. Summary of Comments and Commission Response
Sections 37.10(a) and 38.12(a)--Process To Make a Swap Available To
Trade
MarketAxess and SDMA characterized the proposed approach as
burdensome and commented that it would require SEFs to expend a
significant amount of time and resources.\194\ MarketAxess recommended
an alternative ``recognition and notification'' process in which a SEF
or DCM provides notice to the Commission that a swap is available to
trade when it becomes subject to the clearing requirement.\195\
MarketAxess stated that this approach would allow SEFs to use their
resources in a more efficient manner.\196\ SDMA supported the part 40
approach, but stated that a SEF should determine if a swap is available
to trade based on whether the swap is required to be cleared, not based
on the enumerated factors.\197\ Sunguard Kiodex also recommended an
alternative approach--a real-time ``illiquidity'' test that would
temporarily permit off-facility trading in a swap based on certain
market observations--that would require less time and reduce
costs.\198\ WMBAA and Spring Trading commented that the Commission's
estimate of the hours of burden for a SEF or DCM to make an available-
to-trade determination are too low based on the different types of
personnel that would be involved in a determination.\199\ Spring
Trading estimated that each rule filing would require at least 15-20
hours.\200\
---------------------------------------------------------------------------
\194\ MarketAxess Comment Letter at 7-8; SDMA Comment Letter at
4-5.
\195\ MarketAxess Comment Letter at 6.
\196\ Id. at 7.
\197\ SDMA Comment Letter at 6-7.
\198\ Sunguard Kiodex Comment Letter at 3.
\199\ WMBAA Comment Letter at 5; Spring Trading Comment Letter
at 5 (Jan. 12, 2012).
\200\ Id.
---------------------------------------------------------------------------
The Commission notes that the alternative approaches proposed by
commenters would eliminate a separate formal determination process. As
stated in the preamble, however, the Commission believes that
determining whether a swap is available to trade and whether a swap
should be mandatorily cleared should remain separate
[[Page 33619]]
processes because each inquiry addresses different concerns. Further,
adopting a real-time ``illiquidity'' test would require objective
criteria, which the Commission has declined to adopt at this time.
The Commission acknowledges the comments from WMBAA and Spring
Trading regarding the resources required to make a determination.
Therefore, the Commission is revising its estimate of the hours of
burden to reflect the addition of additional personnel that would
process and analyze trading data, for which the Commission estimates
this hourly burden to be 8 hours per submission. The Commission is also
adopting a listing requirement in the final rule under new Sec. Sec.
37.10(a)(2) and 38.12(a)(2), which requires a SEF or DCM to certify
that it is listing the swap for which it submits an available-to-trade
determination. The Commission notes that the listing process is
governed by Sec. Sec. 40.2 and 40.3 of the Commission's regulations,
for which it has previously estimated the average hourly burden to be 2
hours per submission in a previous rulemaking.\201\
---------------------------------------------------------------------------
\201\ 76 FR 77734.
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Accordingly, the Commission revises its estimate of the total
hourly burden to be 16 hours per submission.
C. Cost-Benefit Considerations
Introduction
Title VII of the Dodd-Frank Act seeks to prevent a repeat of the
harm caused by the 2008 financial crisis by establishing a
comprehensive new regulatory framework for swaps and security-based
swaps.\202\ Among other things, the legislation seeks to promote market
integrity, reduce risk, and increase transparency within the financial
system and swaps markets. Consistent with the view that several
weaknesses contributed to the crisis,\203\ Title VII establishes a
multidimensional regulatory approach designed to ``mitigate costs and
risks to taxpayers and the financial system.'' \204\ Provisions
designed to move the transaction of swaps from primarily opaque, over-
the-counter (``OTC'') markets--which traditionally feature bilateral
negotiation and execution--to registered swap execution facilities
(``SEFs'') and designated contract markets (``DCMs'')--which provide
market participants and the public with improved swap market
transparency--represent an important element of this approach.
---------------------------------------------------------------------------
\202\ Dodd-Frank Act section 701, et seq.
\203\ See, e.g., 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'' at xxiv (Jan. 2011), available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf. (listing
uncontrolled leverage; lack of transparency, capital and collateral
requirements; speculation; interconnection among firms; and
concentrations of risk in the market as contributing factors).
\204\ S. Rep. No. 111-176, at 92 (2010).
---------------------------------------------------------------------------
In particular, section 733 of the Dodd-Frank Act amended the CEA
to, among other things, move swap trading and execution to SEFs and
DCMs.\205\ Section 723(a)(3) of the Dodd-Frank Act added a trade
execution requirement,\206\ which requires that swap transactions
subject to the clearing requirement under section 2(h)(1) of the CEA be
executed on a SEF or a DCM, unless no SEF or DCM ``makes the swap
available to trade'' or the clearing exception under section 2(h)(7) of
the CEA applies.\207\ Taken together, these provisions are intended to
transform the swaps market from one in which prices for bilaterally-
negotiated contracts are privately quoted--typically by dealers who,
unlike non-dealer market participants (typically the ``buy-side''),
enjoy asymmetric information advantages--to one in which bid/offer
prices for swap contracts are accessible to multiple market
participants to compare, assess, and accept or reject.\208\ With this
release, in conjunction with the Commission's final rulemaking
establishing SEFs\209\ and the final rulemaking defining appropriate
minimum block sizes for swaps,\210\ the Commission is implementing the
trade execution requirement.
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\205\ SEFs are a new type of regulated marketplace modeled
largely on the existing Commission-regulated DCM structure. Section
1a(50) of the CEA, as enacted by section 721 of the Dodd-Frank 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.'' 7
U.S.C. 1a(50). Section 5h(a)(1) of the CEA, as amended by the
section 733 of the Dodd-Frank Act, prohibits any person from
operating a facility for the trading and processing of swaps unless
the facility is registered as a SEF or a DCM. 7 U.S.C. 7b-3(a)(1).
\206\ CEA section 2(h)(8), 7 U.S.C. 2(h)(8).
\207\ 7 U.S.C. 2(h)(7).
\208\ Asymmetric information exists when one counterparty to a
transaction has more or better information than the other
counterparty. In some instances, a dealer could have an information
advantage over a non-dealer, and vice versa. Abuse of this advantage
is likely to contribute to market failure. By definition, bilateral
negotiations imply lower levels of transparency of orders, quotes,
trades and transaction prices. In the context of swap markets, as
dealers are on one side of a large fraction of trades, they are
privy to better information on prevailing market conditions and
valuations relative to their non-dealer counterparties. See ``An
Analysis of OTC Interest Rate Derivatives Transactions: Implications
for Public Reporting,'' Michael Fleming, John Jackson, Ada Li, Asani
Sarkar, and Patricia Zobel, Federal Reserve Bank of New York Staff
Reports, no. 557, at 6 n.14 (Mar. 2012). Major derivatives dealer
activity accounts for 89 percent of the total interest rate swap
activity in notional terms. Id.
\209\ See Core Principles and Other Requirements for Swap
Execution Facilities (May 16, 2013).
\210\ See Procedures to Establish Appropriate Minimum Block
Sizes for Large Notional Off-Facility Swaps and Block Trades (May
16, 2013).
---------------------------------------------------------------------------
In this release, the Commission is adopting final rules (1)
specifying the process by which a swap is made ``available to trade,''
thereby making it subject to the trade execution requirement under
section 2(h)(8) of the CEA (``available-to-trade rule''); and (2)
establishing the compliance schedule of the trade execution
requirement, following a Commission determination that a swap is both
required to be cleared and is available to trade (``trade execution
compliance schedule'').\211\ More specifically, these rules allow SEFs
and DCMs to designate swaps that they list or offer for trading as
``available to trade,'' \212\ thereby requiring market participants who
transact such swaps (and who are subject to the clearing requirement
under section 2(h)(1)(A) of the CEA) to comply with the trade execution
requirement in carrying out these transactions. Swaps that are subject
to the trade execution requirement (and are not block trades as defined
under Sec. 43.2 of the Commission's regulations) must be executed in
accordance with other separately promulgated rules that implement the
Dodd-Frank Act's swap exchange trading requirements and are intended to
provide improved price transparency for swap transactions.\213\
---------------------------------------------------------------------------
\211\ CEA section 2(h)(8), 7 U.S.C. 2(h)(8).
\212\ See supra note 1.
\213\ The rules establishing SEFs focus on measures to promote
pre-trade transparency and trade execution of swaps. To comply with
the trade execution requirement, swaps that are traded on a SEF must
be executed as Required Transactions. Under Sec. 37.9(a)(2),
Required Transactions must be executed by either (1) an Order Book,
as defined in Sec. 37.3(a)(3); or (2) a Request for Quote System,
as defined in Sec. 37.9(a)(3). See Core Principles and Other
Requirements for Swap Execution Facilities (May 16, 2013). Swaps
that are subject to the trade execution requirement, under section
2(h)(8) of the CEA, and traded on a DCM must be executed pursuant to
subpart J of part 38 of the Commission's regulations, which
implements revised DCM Core Principle 9 under section 5(d)(9) of the
CEA, as amended by section 735(b) of the Dodd-Frank Act. 7 U.S.C.
7(d)(9).
---------------------------------------------------------------------------
Operating in concert with the statutory requirements and other
rules,\214\ the rules adopted in this rulemaking are designed to
provide a process that fosters swaps becoming available to trade, and
therefore subject to the trade execution requirement; this,
[[Page 33620]]
indirectly will counter information asymmetry and in turn, the
informational advantage enjoyed by dealers to the potential detriment
of other market participants. In this way, these rules will promote a
competitive market environment with improved price discovery and
characterized by narrower spreads and more reliable prices. Ultimately,
these rules will benefit the financial system as a whole by creating a
more efficient marketplace where market participants will be able to
take into account the price at which recent transactions have occurred
when determining at what price to quote or place orders.
---------------------------------------------------------------------------
\214\ See part 37 and subpart J of part 38 of the Commission's
regulations.
---------------------------------------------------------------------------
The Commission believes that some of the costs related to the
application of these rules are a consequence of the Congressional trade
execution requirement under section 2(h)(8) of the CEA. For example,
those market participants who are not eligible for the end-user
exception under section 2(h)(7) of the CEA\215\ will not have the
option to execute swaps made available to trade on a bilateral basis,
even if they consider it more costly or less convenient to execute
trades on a SEF or a DCM. As described further below, the Commission
was cognizant of these costs in adopting these final rules, and has,
where appropriate, attempted to mitigate the costs while observing CEA
section 2(h)(8).
---------------------------------------------------------------------------
\215\ The Commission may determine that swap transactions
exempted from the section 2(h)(1) clearing requirement pursuant to
other statutory authority would also not be subject to the section
2(h)(8) trade execution requirement. See supra note 1.
---------------------------------------------------------------------------
The Statutory Mandate To Consider the Costs and Benefits of the
Commission's Action: Section 15(a) of the CEA
Section 15(a) \216\ of the CEA requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors.
---------------------------------------------------------------------------
\216\ CEA section 15(a), 7 U.S.C. 19(a).
---------------------------------------------------------------------------
In this rulemaking to implement the trade execution requirement,
the Commission is exercising its discretion to adopt the available-to-
trade rule and the trade execution compliance schedule. The discussion
that follows considers the section 15(a) factors for each set of rules
separately. Prior to the section 15(a) consideration for each set of
rules, the Commission discusses the costs, benefits, and alternatives
to the approach adopted in these final rules as well as relevant
comment letters.\217\ With respect to the available-to-trade rule,
costs, benefits, and alternatives are further broken out and discussed
separately for various components of the process--Part 40 Process and
Determination Factors, and Applicability.
---------------------------------------------------------------------------
\217\ The Commission solicited comments to aid its consideration
of the costs and benefits resulting from (1) the proposed available-
to-trade rule, 76 FR 77733, and (2) the proposed trade execution
compliance schedule. 76 FR 58192.
---------------------------------------------------------------------------
Quantifying the costs and benefits to SEFs and DCMs is not
reasonably feasible for many aspects of the available-to-trade rule
because costs will depend, among other things, on the future business
decisions of SEFs and DCMs. The Commission expects that the costs and
benefits with respect to the available-to-trade rule will vary, based
on the specific circumstances of the individual SEFs, DCMs, and market
participants. Where the Commission is unable to quantify the costs and
benefits, the Commission identifies and considers the costs and
benefits of these rules in qualitative terms.
Given the novelty of the trade execution requirement--the mandatory
trading of swaps on a new type of entity, SEFs, or on DCMs--the
Commission is inherently limited by a lack of available data in
attempting to quantify the costs and benefits of implementing the trade
execution compliance schedule. As discussed further below, the
Commission is not aware of any analog to another requirement that would
provide information that is sufficient to ascertain such costs and
benefits in quantitative terms. Accordingly, the Commission identifies
and considers the costs and benefits of the compliance schedule in
qualitative terms.
1. Available-to-Trade Rule
a. Part 40 Process and Determination Factors
Final Sec. Sec. 37.10 and 38.12 govern the process that a SEF or
DCM must use to determine whether a swap is available to trade for
purposes of the trade execution requirement. For a swap to be subject
to the trade execution requirement under section 2(h)(8) of the CEA, a
SEF or DCM must have first determined that a swap is available to
trade. The Commission views this determination as a trading protocol
issued by the SEF or DCM (and therefore as a ``rule,'' as defined in
Sec. 40.1 of the Commission's regulations); as a rule, the SEF or DCM
must submit the determination to the Commission in accordance with the
procedures contained in part 40 of the Commission's regulations. Final
Sec. Sec. 37.10(a) and 38.12(a) set forth the procedure for a SEF or
DCM to submit the determination under Sec. 40.5 or Sec. 40.6 of the
Commission's regulations.
Final Sec. Sec. 37.10(b) and 38.12(b) require a SEF or DCM to
consider, as appropriate, six factors with respect to each swap when
determining whether a swap is available to trade: (1) Whether there are
ready and willing buyers and sellers; (2) the frequency or size of
transactions; (3) the trading volume; (4) the number and types of
market participants; (5) the bid/ask spread; or (6) the usual number of
resting firm or indicative bids and offers. No single factor must
always be considered as to whether a swap is available to trade;
therefore, the SEF or DCM may consider any one or more of the factors
in its initial determination. In its submission to the Commission under
Sec. 37.10(a) or Sec. 38.12(a), a SEF or DCM must describe how it
considered the factors that it deems appropriate.
Costs
Costs to SEFs and DCMs
In the proposed rule, the Commission estimated that conducting the
assessment and submission process in Sec. Sec. 37.10(a) and (b) and
38.12(a) and (b) could be performed internally by one compliance
personnel of the SEF or DCM over approximately eight hours on average.
The Commission further estimated that the cost per hour for one
compliance personnel to be $43.25 per hour; \218\ therefore, it would
cost each SEF and DCM $346 per rule submission to comply with the
proposed requirements.\219\ The Commission also noted that this
estimate was general in nature and that it would be difficult to
determine the number of hours involved with reasonable precision, given
the novelty of the process.\220\ The
[[Page 33621]]
Commission solicited comments on the costs associated with Sec. Sec.
37.10(a) and (b) and 38.12(a) and (b), i.e., assessing whether a swap
is available to trade and submitting a determination pursuant to part
40 of the Commission's regulations.\221\
---------------------------------------------------------------------------
\218\ See Report on Management & Professional Earnings in the
Securities Industry 2010, Securities Industry and Financial Markets
Association at 4 (Sept. 2010). The report lists the average total
annual compensation for a compliance specialist (intermediate) as
$58,878. The Commission estimated the personnel's hourly cost by
assuming an 1,800 hour work year and by multiplying by 1.3 to
account for overhead and other benefits.
\219\ 76 FR 77735.
\220\ The Commission also noted that certain additional factors
could affect these estimates, such as the complexity of the swap's
terms. Id.
\221\ Id.
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Some commenters claimed that the Commission's estimate for the
number of personnel required to carry out the process was low.\222\ For
example, WMBAA stated that the Commission under-estimated the different
types of personnel that would be required to make an available-to-trade
determination, which include information technology professionals,
operations staff, legal and compliance staff, and management.\223\
Spring Trading anticipated that the Commission would require large
amounts of data and analysis from SEFs and DCMs to support their
determinations; therefore, the costs required to make a determination
and submit a filing would be similar to the effort required by a DCM to
assess whether a new futures contract is susceptible to
manipulation.\224\ WMBAA also asserted that the initial costs of
implementing the new procedure would be higher than the Commission's
proposed projection.\225\ MarketAxess commented that the process would
require SEFs to expend significant resources, which would pose a
barrier to entry and lead to fewer trading platforms for market
participants.\226\
---------------------------------------------------------------------------
\222\ WMBAA Comment Letter at 5; Spring Trading Comment Letter
at 5 (Jan. 12, 2012).
\223\ WMBAA Comment Letter at 5.
\224\ Spring Trading Comment Letter at 5 (Jan. 12, 2012). The
Commission has noted that the costs of compliance with DCM Core
Principle 3--Contracts Not Readily Subject to Manipulation, as
codified in Sec. 38.200 of the Commission's regulations--consist of
supplying supporting information and documentation to justify the
contract specifications of a new product. That process is governed
by the product listing submission procedures codified in Sec. Sec.
40.2 and 40.3 of the Commission's regulations.
\225\ Id.
\226\ MarketAxess Comment Letter at 9.
---------------------------------------------------------------------------
Commenters did not provide alternative numerical estimates or
discuss the magnitude of costs that would be imposed by the
determination process. Based on the qualitative comments received from
WMBAA and Spring Trading, however, the Commission is revising its
estimated cost of conducting the assessment and submission process to
reflect the addition of an economist to the estimate of necessary
personnel. The Commission agrees with Spring Trading that SEFs and DCMs
may analyze trading data in considering the factors under Sec. Sec.
37.10(b) and 38.12(b); the compliance personnel would likely be
assisted by an economist in carrying out such an analysis over
approximately eight hours on average. Further, the Commission is also
revising its estimates based on updated wage rate data. The
Commission's updated estimate of the cost per hour for one compliance
personnel is $42.16 per hour \227\ and $64.60 per hour for one
economist.\228\
---------------------------------------------------------------------------
\227\ See Report on Management & Professional Earnings in the
Securities Industry 2011, Securities Industry and Financial Markets
Association at 4 (Oct. 2011). The FRPRM calculated the proposed
estimate for the assessment and submission process based on salary
information in the 2010 report. See supra note 218. The 2011 report
lists the average total annual compensation for a compliance
specialist (intermediate) as $58,371. The Commission estimated the
personnel's hourly cost by assuming an 1,800 hour work year and by
multiplying by 1.3 to account for overhead and other benefits.
\228\ See Bureau of Labor Statistics, U.S. Department of Labor,
Occupational Outlook Handbook, 2012-13 Edition, Economists, http://www.bls.gov/ooh/life-physical-and-social-science/economists.htm. The
report lists the average total annual compensation for an economist
as $89,450. The Commission estimated the personnel's hourly cost by
assuming an 1,800 hour work year and by multiplying by 1.3 to
account for overhead and other benefits.
---------------------------------------------------------------------------
The Commission is also adopting a listing requirement under final
Sec. Sec. 37.10(a)(2) and 38.12(a)(2) that requires the SEF or DCM to
demonstrate that they have listed or offered for trading the swap for
which they are submitting an available-to-trade determination. A SEF or
DCM incurs costs to list or offer a swap for trading pursuant to Sec.
40.2 and 40.3 of the Commission's regulations, which requires a product
filing that includes, among other things, a ``concise explanation and
analysis'' of the product, that the Commission has acknowledged as de
minimis.\229\ Although a SEF or DCM may decide to list a product for
trading without a desire to submit an available-to-trade determination,
to the extent that the SEF or DCM lists a product exclusively to meet
the requirements of Sec. Sec. 37.10(a)(2) or 38.12(a)(2), the
Commission estimates that it would take one compliance personnel
approximately 2 hours, on average, to submit a product filing.
---------------------------------------------------------------------------
\229\ For further Commission discussion of the costs associated
with listing or offering a product for trading under Sec. Sec. 40.2
and 40.3 of the Commission's regulations, see Provisions Common to
Registered Entities, 76 FR 44776, 44787 (Jul. 27, 2011).
---------------------------------------------------------------------------
Therefore, the Commission estimates that it would cost a SEF and
DCM a maximum of $938.40 per rule submission filing to comply with
final Sec. Sec. 37.10(a) and (b) and 38.12(a) and (b).
With respect to MarketAxess's comment, the Commission does not
believe that the costs associated with the determination process pose a
barrier to entry for trading platforms. The rule does not affirmatively
require a SEF or DCM to first submit to the Commission that a swap is
available to trade via a part 40 filing in order to list or offer that
swap for trading on its platform. If one SEF or DCM makes the swap
available to trade through the part 40 process, then other SEFs and
DCMs who subsequently choose to list or trade the swap are only
required to do so through methods of execution consistent with the
trade execution requirement. The Commission notes that in order to
register and operate as a SEF, a trading platform or facility must
already be able to demonstrate that they offer certain minimum
functionality in terms of methods of execution (i.e., a central limit
order book (``CLOB'') or request-for-quote (``RFQ'') system).\230\
---------------------------------------------------------------------------
\230\ See Core Principles and Other Requirements for Swap
Execution Facilities (May 16, 2013).
---------------------------------------------------------------------------
The Commission specifically designed the process to mitigate costs
by allowing SEFs and DCMs to utilize existing personnel and
infrastructure to carry out the determination and submission process
under part 40 procedures. Further, the process affords SEFs and DCMs
the flexibility to consider any one or more enumerated factors in
determining that a swap is available to trade. This flexibility will
allow them to tailor their considerations, while also managing costs of
research and analysis, by selecting from a range of factors. Moreover,
the Commission believes that the costs will decrease for both SEFs and
DCMs as they become more familiar with using the part 40 procedures to
make a swap available to trade. The Commission also believes that the
part 40 process will require fewer resources as centralized trading
develops and SEFs and DCMs become more familiar with the types of swaps
that can be made available to trade.
The Commission believes that Spring Trading's comparison between
the costs of the process and the costs to assess whether a new futures
contract is susceptible to manipulation rests on a flawed analogy. The
costs of the latter are based upon the Commission's annual burden hours
estimate, in the aggregate, for the information collection requirements
under Sec. Sec. 40.2 and 40.3 of the Commission's regulations,\231\
estimated per registered entity to be 200 hours based on 100 responses
and an estimated average of 2 hours per
[[Page 33622]]
response.\232\ The Commission's estimate of 18 hours to comply with
final Sec. Sec. 37.10(a) and (b) and 38.12(a) and (b), however, is
based upon a single submission of an available-to-trade
determination.\233\ It is not feasible at this time to estimate the
average number of rule submissions that a SEF or DCM will file per
year; therefore, the Commission believes that the burden hours estimate
for the information collection requirements under Sec. Sec. 40.2 and
40.3 is not illustrative here.
---------------------------------------------------------------------------
\231\ 76 FR 44790.
\232\ Id.
\233\ As discussed above, the Commission estimates the
assessment and submission process in Sec. Sec. 37.10(a) and (b) and
38.12(a) and (b) for each submission will be performed by one
compliance personnel and one economist over approximately eight
hours each on average. In addition, the Commission estimates that it
would take one compliance personnel approximately 2 hours, on
average, to comply with the listing prerequisite under Sec. Sec.
37.10(a)(2) and 38.12(a)(2) by submitting a product filing.
---------------------------------------------------------------------------
Costs to Market Participants
Some commenters also stated that the process would impose direct
costs on market participants. For example, Chatham stated that end-
users would have to expend resources to monitor whether swaps are
subject to the trade execution requirement, and if so, connect to a SEF
or DCM that offers or lists that swap for trading.\234\
---------------------------------------------------------------------------
\234\ Chatham Comment Letter at 2.
---------------------------------------------------------------------------
Some commenters also expressed concern that the available-to-trade
determination process would impose indirect costs on market
participants. These commenters maintained that SEFs and DCMs would be
incentivized to exploit the process by indiscriminately determining
that swaps are available to trade. Making determinations in this
manner, they claimed, would lead to illiquid swaps trading on a SEF or
DCM, which could result in increasing swap price volatility; increased
spreads; misleading market prices; and front-running behavior.\235\
Chatham commented that end-users would encounter higher hedging and
swap execution costs, particularly from swap dealers passing on the
costs of higher volatility.\236\ ISDA stated that those costs would
deter market participants from executing hedge transactions.\237\ FSR
stated that improper determinations by a SEF or DCM, such as one
primarily driven by the desire to capture market share rather than on
the merits, would compel market participants to avail themselves of
exemptions to the trade execution requirement, thus undermining the
goal of promoting a centralized trading market.\238\
---------------------------------------------------------------------------
\235\ AIMA Comment Letter at 1; CME Comment Letter at 6; Morgan
Stanley Comment Letter at 3; CEWG Comment Letter at 4.
\236\ Chatham Comment Letter at 2.
\237\ ISDA Comment Letter at 4.
\238\ FSR Comment Letter at 2.
---------------------------------------------------------------------------
Notwithstanding the fact that commenters did not provide data to
support or monetize their cost concerns, the Commission has
qualitatively considered their comments about the direct and indirect
costs of the available-to-trade determination process. First, with
respect to the direct costs cited by Chatham--that end-users would have
to follow which swaps are subject to mandatory trade execution and
connect to a SEF or DCM to trade that swap--these costs are primarily
attributable to the statutory trade execution requirement and not to
the Commission's action in this final rule. The costs incurred by
market participants to connect to a SEF or DCM are attendant to
complying with the trade execution requirement. While the number of
swaps subject to the trade execution requirement will be affected by
this final rule in conjunction with business decisions by SEFs and
DCMs, market participants (as well as SEFs and DCMs) would incur these
costs for any swap subject to the statutory trade execution
requirement. While commenters did not provide any quantitative
estimates regarding connectivity costs, the Commission understands that
clearing firms' connectivity services to DCMs can be bundled into the
clearing services provided by clearing firms, and expects that this
will occur at SEFs as well. Hence, the connectivity costs arising
directly from the trade execution requirement are likely to be subsumed
into the costs of complying with the mandatory clearing
requirement.\239\ It is also possible that SEFs and DCMs will bundle
connectivity costs into transaction fees. Moreover, SEFs and DCMs have
an incentive to keep connectivity costs low in order to attract market
participants.
---------------------------------------------------------------------------
\239\ Depending on their individual business needs, market
participants could also use connectivity services provided by
independent software vendors to trade swaps subject to the trade
execution requirement. These costs may also be bundled into
transaction fees. The Commission also notes that it is typically the
case that for most new contracts, DCMs tend to waive execution and
other fees during the initial six to twelve months after listing,
and such fee waivers are meant to help mitigate any incremental
costs for market participants to connect to a new platform or trade
a new product.
---------------------------------------------------------------------------
Further, while there may be some attendant search costs, the
Commission's approach in this final rule greatly minimizes the costs to
market participants to monitor whether a SEF or DCM is subject to the
trade execution requirement. Under existing practice for part 40 rule
submissions, the Commission will post a notice and copy of all
available-to-trade submissions on its Web site. The Commission also
intends to establish an updated, centralized list of all of the swaps
that are available to trade. This will provide market participants with
a single reference for knowing whether a particular swap has been
determined to be available to trade.
With respect to the potential indirect costs imposed upon market
participants if illiquid swaps are made available to trade and become
subject to the trade execution requirement, the Commission acknowledges
the concerns of commenters. The Commission, however, believes that the
part 40 process is appropriate and well-suited to moderate this
possibility and views the adopted determination factors as probative of
whether an actual trading market exists.\240\ Mandating SEFs and DCMs
to consider these factors prior to making a determination will compel
them at the outset to internally consider the benefits versus the costs
that will be incurred to list and subsequently support trading in a
particular swap. The Commission also believes that the transparency of
the process (e.g., submissions must be posted on the submitting SEF or
DCM's Web site and will be posted on the Commission's Web site as
well), coupled with Commission review and potential for public comment,
provides an important backstop to protect the integrity of the
determinations that are submitted.
---------------------------------------------------------------------------
\240\ The Commission believes that market participants can use
any or each of the factors to demonstrate that active trading is
occurring for a particular swap. For example, a high frequency of
transactions, narrow bid/ask spread, or large trading volume would
indicate execution of transactions for that swap. A large number of
buyers or sellers, or a large number of resting firm or indicative
bids and offers would also indicate an active market based on the
presence of market participants seeking to execute transactions in
that swap.
---------------------------------------------------------------------------
Benefits
The process set forth in Sec. Sec. 37.10 and 38.12 will advance
the Congressional goal of promoting swap execution and developing a
centralized trading market that facilitates price discovery in the
manner as described below.
Most importantly, the adopted process in the final rule will
provide an up-to-date, singular reference for SEFs, DCMs, and market
participants for identifying which swaps are available to trade, and
therefore subject to the trade execution requirement. Sections 37.10(a)
and 38.12(a) prescribe the use of the part 40 process for the
submission of rules for Commission review and approval (Sec. 40.5) or
the self-certification
[[Page 33623]]
of rules (Sec. 40.6).\241\ Under these processes, SEFs and DCMs must
submit an initial available-to-trade determination to the Commission
either for rule approval or as a self-certification; both require
Commission review. If appropriate, the Commission may approve a Sec.
40.5 or Sec. 40.6 rule submission within the designated timeframes.
SEFs and DCMs will be familiar with this process; part 40 is already
used by DCMs for other rule filings and similarly will be used by SEFs
going forward. Part 40 further requires SEFs and DCMs to post a copy
and notice of their submissions on their respective Web sites; the
Commission also posts that information on its own Web site. Therefore,
the adopted process will allow market participants to know (1) whether
a particular swap has been submitted as available to trade; (2) whether
that swap has been deemed as available to trade by the Commission; and
(3) when the swap was made or will be made available to trade. In those
submissions, SEFs and DCMs must consider the six enumerated factors
under Sec. Sec. 37.10(b) and 38.12(b) as appropriate, which provides
other SEFs, DCMs, and market participants with information about the
basis for determining that a swap is available to trade.
---------------------------------------------------------------------------
\241\ Part 40 of the Commission's regulations governs regulatory
obligations of registered entities, which include DCMs and SEFs
under section 1(a)(40) of the CEA, with respect to, among other
things, the certification or approval of new products for trading;
and the certification or approval of rules governing the SEF or DCM.
---------------------------------------------------------------------------
The process adopted in Sec. Sec. 37.10 and 38.12 also increases
transparency for market participants and the public. Under part 40,
submissions must contain an explanation of how the SEF or DCM
determined that a swap is available to trade, including the
consideration of one or more of the relevant factors listed in
Sec. Sec. 37.10(b) and 38.12(b), as well as a brief explanation of any
substantive opposing views. The part 40 process allows the Commission
to go back to the submitting entity in the case that an insufficient
explanation of the determination is provided.\242\ In addition, when
warranted (e.g., when a submission presents novel or complex issues),
market participants and the public will have the opportunity to provide
public comment on the merits of the SEF or DCM's submission directly
through the Commission's Web site.\243\ Therefore, part 40 will not
only inform market participants of the justifications for and against
an available-to-trade determination, but provides an opportunity for
market participants and the public to submit their own views as well.
---------------------------------------------------------------------------
\242\ Under rule approval process, the Commission may extend the
review period of a determination submitted if, among other things,
the submission is incomplete. Sec. 40.5(d)(1). Under the self-
certification process, the Commission may stay the certification if,
among other things, the rule submission is accompanied by an
inadequate explanation. Sec. 40.6(c)(1).
\243\ Under Sec. 40.6(c)(2) of the Commission's regulations,
the Commission will provide a 30-day public comment period where the
available-to-trade determination submitted is subject to a stay
because, among other things, it presents novel or complex issues
that require additional time to analyze. As discussed in section
II.A.1 of the preamble to the final rule, the Commission will also
provide an opportunity to submit public comment for determinations
submitted to the Commission under the Sec. 40.5 rule approval
process. See supra notes 58-60 and accompanying text.
---------------------------------------------------------------------------
The adopted process also provides SEFs and DCMs with flexibility in
determining whether a swap is available to trade. Under Sec. Sec.
37.10(b) and 38.12(b), a SEF or DCM may consider any one or more of the
enumerated factors in its initial determination, given that the
Commission believes that no single factor must always be considered.
Accordingly, this approach allows SEFs and DCMs to submit swaps with
different trading characteristics to the Commission as available to
trade. Rather than require SEFs and DCMs to respond to a rigid set of
determination criteria, this flexibility was designed to encourage SEFs
and DCMs to make a broader range of swaps subject to the trade
execution requirement.
The Commission anticipates that these benefits will produce a more
efficient process and consistent determinations over time. Under the
part 40 procedures, SEFs and DCMs will submit to the Commission, for
further review with the potential for public comment, an initial
determination of whether a swap is available to trade. This approach
will (1) benefit market participants during the initial stages of
implementation by providing them, in circumstances as described above,
with an opportunity to comment on determinations and (2) help the
Commission track and maintain a record of which swaps are subject to
the trade execution requirement.
The transparency and flexibility offered under the adopted
processes will further the development of a centralized trading market,
consistent with the objectives of the Dodd-Frank Act.\244\ By requiring
a submission that details the analysis and justifications behind an
available-to-trade determination, the part 40 procedures provide the
Commission with a well-established protocol for reviewing whether swaps
should be subject to the trade execution requirement. The procedures
set forth in the final rule provide the building blocks for the
development of a robust and liquid centralized trading market,
consisting of a diverse array of offered or listed swaps, thus inviting
market participation. Competition between SEFs and DCMs is expected to
increase the number of swaps available for trading on SEFs and DCMs,
thereby encouraging innovation and inviting broader market
participation. Growth in swaps trading on SEFs and DCMs will benefit
market participants by increasing price transparency and facilitating
price discovery.
---------------------------------------------------------------------------
\244\ See CEA section 5h(e), as enacted by section 733 of the
Dodd-Frank Act, 7 U.S.C. 7b-3(e) (stating that one of the Act's
objectives is ``to promote the trading of swaps on swap execution
facilities and to promote pre-trade price transparency in the swaps
market''); CEA section 5(d)(9)(A), as amended by section 735(b) of
the Dodd-Frank Act, 7 U.S.C. 7(d)(9) (stating under a DCM core
principle that ``the board of trade shall provide a competitive,
open and efficient market and mechanism for executing transactions
that protects the price discovery process of trading in the
centralized market of the board of trade'').
---------------------------------------------------------------------------
Consideration of Alternatives
Several commenters recommended that swaps subject to the clearing
requirement should be subject to the trade execution requirement
without an additional available-to-trade determination. Some of these
commenters stated that the CEA does not specify a formal process with
determination factors.\245\ Other commenters asserted that the clearing
determination considers a swap's trading liquidity and therefore
already addresses whether the swap should be subject to mandatory trade
execution.\246\ Several commenters stated that requiring trading
facilities to consider the enumerated factors in an available-to-trade
determination would be ``inefficient and burdensome'' and waste limited
regulatory resources.\247\ MarketAxess asserted that allowing a SEF or
DCM to (1) recognize that a swap is available to trade based on the
clearing determination and (2) notify the Commission that it is listing
the swap, thereby making the swap subject to
[[Page 33624]]
mandatory trade execution, would not require the Commission, or a SEF
or DCM to expend any resources.\248\
---------------------------------------------------------------------------
\245\ MarketAxess Comment Letter at 3; WMBAA Comment Letter at
3; AFR Comment Letter at 2-3; ODEX Comment Letter at 1; SDMA Comment
Letter at 3-4.
\246\ SDMA Comment Letter at 4-5; WMBAA Comment Letter at 3;
MarketAxess Comment Letter at 5. AFR claimed that a DCO can only
clear a class of swaps if a reasonable level of market liquidity is
demonstrated; otherwise, the DCO could not establish the
statistically expected loss levels in a liquidation of positions so
as to set an initial margin level. AFR Comment Letter at 4.
\247\ SDMA Comment Letter at 5-6; WMBAA Comment Letter at 3;
MarketAxess Comment Letter at 7-8.
\248\ MarketAxess Comment Letter at 7-8.
---------------------------------------------------------------------------
The Commission considered the costs and benefits of subjecting
swaps to mandatory trade execution based on whether the swap must be
cleared rather than through a separate available-to-trade
determination. While the Commission recognizes that adopting a distinct
determination process may impose some additional costs on SEFs and
DCMs, it believes that these costs are warranted by the benefits that
market participants will realize from the process: transparency and
knowledge that only swaps that are either deemed certified or approved
by the Commission as available to trade are subject to the trade
execution requirement. This process insulates against SEFs or DCMs
engaging in inconsistent or improper determinations to subject swaps to
the trade execution requirement. As previously stated, the Commission
expects the cost of making a determination to decrease over time as
SEFs, DCMs, and market participants become more knowledgeable about the
process and gain more experience in considering the factors to make a
swap available to trade.
Several commenters proposed that the Commission, not SEFs and DCMs,
should maintain the exclusive authority to determine whether a swap is
available to trade.\249\ Commenters expressed concern that illiquid
swaps would become subject to the trade execution requirement if SEFs
and DCMs were allowed to make the determination based on their
incentives to maximize the number of swaps traded on a facility or
platform.\250\ CME stated a Commission-based review of whether a swap
is available to trade would lead to a more ``logical and efficient''
use of Commission and industry resources.\251\
---------------------------------------------------------------------------
\249\ Markit Comment Letter at 5-6; Vanguard Comment Letter at
5; Geneva Energy Markets Comment Letter at 2; JPMorgan Comment
Letter at 1; CME Comment Letter at 4-5; FHLB Comment Letter at 3;
FSR Comment Letter at 4; FXall Comment Letter at 5-6; Morgan Stanley
Comment Letter at 5-6; CEWG Comment Letter at 6; ISDA Comment Letter
at 3-4, 6; Tradeweb Comment Letter at 4-5.
\250\ Bloomberg Comment Letter at 2; Vanguard Comment Letter at
5; Geneva Energy Markets Comment Letter at 2; JPMorgan Comment
Letter at 1-2; CME Comment Letter at 4-5; FHLB Comment Letter at 3;
ISDA Comment Letter at 3-4; Markit Comment Letter at 5; CEWG Comment
Letter at 2; Morgan Stanley Comment Letter at 5-6; AIMA Comment
Letter at 2; FXall Comment Letter at 6-7; Tradeweb Comment Letter at
2-3; FSR Comment Letter at 2.
\251\ CME Comment Letter at 4-5.
---------------------------------------------------------------------------
The Commission believes that benefits are maximized under the
approach adopted, rather than an alternative under which the Commission
would hold sole authority to determine whether a swap is available to
trade. The part 40 approach leverages the trading expertise of SEFs and
DCMs to determine whether a swap is available to trade, while the
Commission's authority to review these determinations under part 40
will help ensure that they are appropriate. The Commission expects that
SEFs and DCMs will have an understanding of the markets that they list
for trading and will regularly communicate with market participants
about liquidity in their markets. Accordingly, the Commission believes
that SEFs and DCMs are best positioned to make appropriate available-
to-trade determinations. Relying on SEFs and DCMs, who would be
incentivized to make swaps available to trade, to initiate the
determination process in consultation with market participants will
also facilitate innovation and promote swaps trading in accordance with
section 5h(e) of the CEA. By allowing SEFs and DCMs to make these
determinations, the Commission will be able to focus on its
responsibilities in conducting market oversight.
The Commission has also considered whether a SEF or DCM should be
able to submit an available-to-trade determination for a swap that it
does not list or offer for trading. While SDMA responded in the
affirmative,\252\ several other commenters stated that a SEF or DCM
should be required to list the swap for a period of time prior to
submitting a determination.\253\ ISDA stated that the lack of such a
requirement would otherwise incentivize SEFs and DCMs to submit as many
determinations as possible, merely to promote centralized trading.\254\
---------------------------------------------------------------------------
\252\ SDMA Comment Letter at 9.
\253\ Eaton Vance Management Comment Letter at 3; SIFMA AMG
Comment Letter at 10; UBS Comment Letter at 2; Morgan Stanley
Comment Letter at 6 n.6; ISDA Comment Letter at 7; Tradeweb Comment
Letter at 5.
\254\ ISDA Comment Letter at 6.
---------------------------------------------------------------------------
The Commission has determined that a listing requirement supports
the integrity of the available-to-trade determination process.
Moreover, the Commission expects that a SEF or DCM will have no
business incentive to submit an available-to-trade determination for a
swap that it has no intention of listing for trading. While the
Commission recognizes that the listing SEF or DCM will likely incur
some cost to submit an available to trade determination, the Commission
believes that those costs would necessarily be accompanied by a stream
of benefits once the swap is subject to the trade execution
requirement. Accordingly, the Commission has adopted a listing
requirement under new Sec. Sec. 37.10(a)(2) and 38.12(a)(2). As
discussed above, the Commission believes that a SEF or DCM will incur
de minimis costs to list or offer a swap for trading under the part 40
procedures for listing a product for trading--the Commission estimates
that it would take one compliance personnel approximately 2 hours, on
average, to submit a product filing.
The Commission has also considered the costs and benefits of, and
requested comment on, whether or not a SEF or DCM should (1) be allowed
to submit its available-to-trade determination for a ``group, category,
type or class of swap''; and (2) be allowed to consider the
determination factors under Sec. Sec. 37.10(b) and 38.12(b) for the
same swap on another SEF or DCM, or activity primarily or solely in
bilateral transactions. Because each of the adopted provisions is
permissive rather than compulsory in nature, neither should impose
costs upon SEFs and DCMs relative to the alternative of not providing
such allowances. SEFs and DCMs will internally analyze the costs and
benefits before availing themselves of either provision, and forego the
opportunity if not warranted by the perceived benefits. Should a SEF or
DCM choose to submit a ``group, category, type or class of swap,'' the
adopted approach would impose fewer costs than requiring a submission
for each individual swap.
The Commission has identified the benefits of both provisions
relative to the alternatives of not providing such allowances. First,
allowing a SEF or DCM to submit a determination for a group, category,
type or class of swap would promote economies of scale and streamline
the process for SEFs, DCMs, and the Commission; rather than submit
separate determinations for individual swaps with similar
characteristics, a SEF or DCM may elect to include them in a single
filing.\255\ Based on its review, however, the Commission may approve
or deem only part or some of the swaps within that group, category,
type or class as available to trade. Second, allowing a SEF or DCM to
consider activity in the same swap that is listed on another trading
platform or in the bilateral market would yield information about how
that swap trades in the overall market and better inform market
participants and the Commission
[[Page 33625]]
about how the swap may trade in a centralized environment.
---------------------------------------------------------------------------
\255\ The Commission notes that it also considers swaps as a
group, category, type or class in other instances, such as for
clearing determinations. See supra note 79.
---------------------------------------------------------------------------
A number of commenters recommended that the Commission pursue an
alternative approach that would establish objective threshold criteria
for the determination factors.\256\ For example, Markit and FSR
commented that without objective thresholds, SEFs and DCMs would not be
able to determine that a swap is available to trade with regards to its
liquidity.\257\ ICI and Eaton Vance Management stated that buy-side
market participants would indirectly incur higher trading costs in the
event that a swap with limited liquidity were to trade on a SEF or
DCM.\258\
---------------------------------------------------------------------------
\256\ Markit Comment Letter at 3; Spring Trading Comment Letter
at 4; AIMA Comment Letter at 4; Bloomberg Comment Letter at 4; FXall
Comment Letter at 6; Vanguard Comment Letter at 5; SIFMA AMG Comment
Letter at 5; JPMorgan Comment Letter at 1; ISDA Comment Letter at 7;
Eaton Vance Management Comment Letter at 3; ICI Comment Letter at 6;
Morgan Stanley Comment Letter at 6; FSR Comment Letter at 6-7.
\257\ Markit Comment Letter at 3; FSR Comment Letter at 3, 6-7.
\258\ ICI Comment Letter at 6; Eaton Vance Management Comment
Letter at 2-3.
---------------------------------------------------------------------------
The Commission does not deem the risk of limited liquidity swaps
becoming available to trade as significant relative to the benefits of
the final rule's flexible approach. As such, the Commission does not
believe that establishing objective threshold criteria would provide a
sufficient benefit to warrant imposing additional administrative
burdens--the Commission would first be required to determine which
swaps (among a wide variety) may potentially be available to trade, and
establish and update criteria for those swaps. Market participants
would then have to fulfill the burden of processing and analyzing trade
data to demonstrate that those criteria are met for swaps that they
submit. The rule, as adopted, allows the Commission to consider data
and other objective factors submitted by SEFs and DCMs, or the comments
from other market participants during the determination process. The
Commission will review and assess each available-to-trade submission to
ensure that it is consistent with the CEA and the Commission's
regulations. Further, the Commission believes that the adopted approach
promotes greater swaps trading on SEFs and DCMs, in accordance with the
statutory objectives of the CEA, by providing the flexibility to make
swaps with different trading characteristics available to trade, rather
than imposing rigid threshold criteria.
Several commenters recommended that SEFs and DCMs must consider and
demonstrate that a swap is available to trade based on more than one
factor.\259\ Many of these commenters stated that SEFs and DCMs should
be required to consider all of the enumerated factors; \260\ Vanguard
and SIFMA AMG, for example, supported this approach because they
believed that all of the factors are relevant in determining if a swap
is available to trade.\261\ Bloomberg commented that the factors are
all important indicators of an actual trading market and recommended
mandatory consideration of all of them, given the implications of
making a swap available to trade and potential conflicts of
interest.\262\ FHLB commented that a determination should be based on
multiple factors.\263\
---------------------------------------------------------------------------
\259\ FHLB Comment Letter at 3; Markit Comment Letter at 3; ICI
Comment Letter at 5; CEWG Comment Letter at 3.
\260\ Markit Comment Letter at 3; ISDA Comment Letter at 7;
Morgan Stanley Comment Letter at 4; FSR Comment Letter at 3; ICI
Comment Letter at 5; SIFMA AMG Comment Letter at 7.
\261\ Vanguard Comment Letter at 4; SIFMA AMG Comment Letter at
5.
\262\ Bloomberg Comment Letter at 4.
\263\ FHLB Comment Letter at 4.
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The Commission has considered the range of alternatives suggested
by some commenters with respect to more specific or mandatory
consideration of the determination factors, but believes that requiring
consideration of every factor or a specific set of factors would
require additional effort on the part of the SEFs or DCMs without
significant added benefit.\264\ In the event that a SEF's or DCM's
submission does not adequately support an available-to-trade
determination, the Commission, under part 40, may request additional
information in order to complete its review \265\ or extend the review
period. The adopted approach achieves the goal of making swaps
available for centralized trading, while allowing SEFs and DCMs the
flexibility to subject swaps with different trading characteristics to
the trade execution requirement.
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\264\ The Commission notes that a SEF or DCM, if it chooses, may
consider more than one factor in determining if a swap is available
to trade.
\265\ Under Sec. Sec. 40.5(c)(2)(ii) and 40.6(a)(8), the
Commission may request that a registered entity to supplement the
submission with additional information.
---------------------------------------------------------------------------
Several commenters supported incorporating a process for
determining whether a swap is no longer available to trade; \266\ some
recommended using the same factors as those used to determine whether a
swap is available to trade, albeit with objective thresholds.\267\
Commenters were split on the issue of applicability; some expressed
that a determination that a swap is no longer available to trade should
apply only to individual SEFs or DCMs,\268\ while others recommended
that such a determination should apply on a marketwide basis,
consistent with how the trade execution requirement is applied.\269\
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\266\ MFA Comment Letter at 4; FXall Comment Letter at 7-8; ICI
Comment Letter at 7; SIFMA AMG Comment Letter at 11-12; Spring
Trading Comment Letter at 7 (Jan. 12, 2012); ISDA Comment Letter at
8-9; JPMorgan Comment Letter at 2.
\267\ MFA Comment Letter at 4; ICI Comment Letter at 7-8; FXall
Comment Letter at 7-8.
\268\ Spring Trading Comment Letter at 7-8 (Jan. 12, 2012); SDMA
Comment Letter at 10.
\269\ MFA Comment Letter at 4-5; ICI Comment Letter at 8.
---------------------------------------------------------------------------
The Commission believes that inclusion at this time of a separate
process for determining that a swap is no longer available to trade is
unnecessary and unwarranted by the limited, if any, benefit that would
be afforded. In this circumstance, to impose a requirement for the last
SEF or DCM that ceases to list a swap for trading to submit an official
determination that the swap is no longer available to trade would be
unnecessary.\270\
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\270\ The Commission acknowledges the concern that the de-
listing of swaps by one or more SEFs or DCMs may affect the
liquidity in the market for such swaps, or could be a reflection of
reduced liquidity in such markets, and that such reduced liquidity
could affect the costs of executing such swaps on a SEF or DCM. In
such circumstances where swaps are de-listed by SEFs or DCMs,
however, the Commission may review the available-to-trade status of
such a swap under part 40 of the Commission's regulations;
additionally, section 8a(7) of the CEA affords market participants
an avenue to request the Commission to designate a swap as no longer
available to trade. See supra note 140.
---------------------------------------------------------------------------
The Commission proposed, and several commenters supported, a
requirement that each SEF or DCM (1) conduct an annual review and
assessment of each swap it has made available to trade to determine
whether or not each of these swaps should continue to be available to
trade; and (2) submit an electronic copy of the review and assessment,
including any supporting information or data, to the Commission no
later than 30 days after its fiscal year end. The Commission estimated
that it would cost each DCM an additional $1,730 per review to comply
with the proposed requirement.\271\ Some commenters recommended more
frequent reviews in order to identify illiquid swaps on a timelier
basis.\272\
---------------------------------------------------------------------------
\271\ 76 FR 77735.
\272\ Morgan Stanley Comment Letter at 8; MFA Comment Letter at
4-5; ISDA Comment Letter at 8; AIMA Comment Letter at 2-3; Eaton
Vance Management Comment Letter at 4; ICI Comment Letter at 7;
Markit Comment Letter at 4; Vanguard Comment Letter at 6; JPMorgan
Comment Letter at 2; SIFMA AMG Comment Letter at 11; FSR Comment
Letter at 3-4.
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[[Page 33626]]
Other commenters, however, opposed the requirement. MarketAxess
commented that conducting annual assessments would require SEFs and
DCMs to allocate substantial resources.\273\ WMBAA stated that the
proposed requirement is arbitrary, time-consuming, and offered
insufficient regulatory value, and that the costs and burdens of an
annual review would be higher than the Commission's projections.\274\
Sunguard Kiodex asserted that periodic reviews would cause swaps'
statuses to fluctuate, therefore negating the benefit of an initial
determination.\275\ WMBAA and SDMA alternatively recommended that a SEF
or DCM annually renew its self-certification based on the clearing
determination review.\276\
---------------------------------------------------------------------------
\273\ MarketAxess Comment Letter at 9.
\274\ WMBAA Comment Letter at 5.
\275\ Sunguard Kiodex Comment Letter at 2.
\276\ SDMA Comment Letter at 10; WMBAA Comment Letter at 4.
---------------------------------------------------------------------------
In line with its reasoning for not adopting a separate process for
determining that a swap is no longer available to trade, the Commission
is also not adopting an annual review and assessment requirement. A
swap will no longer be available to trade when all relevant SEFs and
DCMs have de-listed the swap; in the ordinary course of business, the
Commission believes that a SEF or DCM will already assess whether it
should continue to list or offer a swap for trading. Such an assessment
would likely consider similar factors, such as trading volume, to those
used to determine that a swap is available to trade. Therefore, the
Commission believes that imposing a separate review and assessment
requirement would necessitate duplicative and costly effort with
limited, if any, additional benefit. In response to commenters who
support more frequent reviews to identify illiquid swaps that should no
longer be available to trade, the Commission notes that market
participants themselves may request that a SEF or DCM review and assess
an available-to-trade determination. The Commission may also request
relevant information from SEFs and DCMs to conduct a review and
assessment.\277\
---------------------------------------------------------------------------
\277\ See supra note 155 and accompanying text.
---------------------------------------------------------------------------
b. Applicability
Sections 37.10(c) and 38.12(c) of the final rule require that once
a swap is deemed to be available to trade, then all other SEFs and DCMs
listing or offering the same swap must do so in accordance with the
trade execution requirement under section 2(h)(8) of the CEA.\278\ The
Commission did not identify alternatives to this requirement. Further,
the Commission also requested, but did not receive, comments on
alternatives to the proposed requirement.
---------------------------------------------------------------------------
\278\ See supra note 14.
---------------------------------------------------------------------------
Costs
The Commission anticipates that final Sec. Sec. 37.10(c) and
38.12(c) will impose some minimal costs for SEFs and DCMs related to
monitoring and identifying swaps to discern whether a swap is available
to trade on another SEF or DCM, and therefore would be subject to the
trade execution requirement. The Commission has almost entirely
eliminated these costs by assuming the responsibility for maintaining a
public record of all of the swaps that are subject to the trade
execution requirement in an accessible, central location on its Web
site.
The Commission solicited comments on the costs associated with
Sec. Sec. 37.10(c) and 38.10(c) and received one comment. WMBAA stated
that the ongoing surveillance necessary to determine which swaps have
been made available to trade would impose excessive costs on SEFs and
DCMs.\279\ WMBAA, however, did not provide an estimate of such costs or
further substantiate its claim. Therefore, the Commission does not deem
WMBAA's comment sufficient to alter its belief that these costs will be
minimal, given that the Commission will maintain on its Web site a
centralized list of all swaps that are available to trade.
---------------------------------------------------------------------------
\279\ WMBAA Comment Letter at 5.
---------------------------------------------------------------------------
Benefits
Sections 37.10(c) and 38.12(c) promote trading on SEFs and DCMs,
consistent with the trade execution requirement under section 2(h)(8)
of the CEA. Specifically, swaps traded on a SEF will be executed as
Required Transactions under Sec. 37.9 of the Commission's regulations,
which means that they will be executed via an Order Book or RFQ. Swaps
that are subject to the trade execution requirement and traded on a DCM
must be executed pursuant to subpart J of part 38 of the Commission's
regulations, which implements revised DCM Core Principle 9, as amended
by section 735(b) of the Dodd-Frank Act. Core Principle 9 requires DCMs
to ``provide a competitive, open, and efficient market and mechanism
for executing transactions that protects the price discovery process of
trading in the centralized market of the board of trade.'' Accordingly,
market participants in these swaps will benefit from the pre-trade
transparency and price discovery associated with trading on DCMs and
SEFs as well as the application of other DCM and SEF core principles.
The Commission also anticipates that greater competition among SEFs and
DCMs will lower bid-ask spreads and transaction costs for some market
participants.\280\
---------------------------------------------------------------------------
\280\ S. Rep. No. 111-176, at 34 (2010) (quoting International
Risk Analytics co-founder Christopher Whalen, ``[t]he absence of an
exchange trading mandate provides `supra-normal returns paid to the
dealers in the closed OTC derivatives market [and] are effectively a
tax on other market participants, especially investors who trade on
open, public exchanges''').
---------------------------------------------------------------------------
c. Consideration of Section 15(a) Factors--Available-to-Trade Rule
Protection of Market Participants and the Public
In crafting the final rule to provide a method for determining that
a swap is subject to the trade execution requirement under section
2(h)(8) of the CEA, the Commission has endeavored to create a regime
that foremost will protect market participants and the public. Under
the final rule, a SEF or DCM must consider certain factors specified by
the Commission under Sec. 37.10(b) or Sec. 38.12(b), respectively, in
determining that a swap is available to trade. A SEF or DCM must also
submit such determinations to the Commission, either for approval or
under self-certification procedures, pursuant to part 40 of the
Commission's regulations. Part 40 also requires SEFs and DCMs to post a
notice and a copy of rule submissions on their Web site concurrent with
the filing of the submissions with the Commission. The Commission,
consistent with current practice, will also post SEF and DCM rule
submission filings on its Web site. Therefore, under the final rule,
SEFs, DCMs, and market participants will have full information about
the factors that a SEF or DCM considered in determining that a swap is
available to trade, the procedure for a SEF or DCM to submit a swap as
available to trade, the swaps that are presently available to trade,
and the progress of swaps under review. Accordingly, the final rule
promotes the protection of market participants by ensuring transparency
in the available-to-trade process.
The final rule will also promote the protection of market
participants and the public by providing for Commission review and
encouraging public comment in appropriate circumstances. Under the
final rule, the Commission will review the SEF's or DCM's available-to-
trade determination. To facilitate this review, part 40 requires
[[Page 33627]]
SEFs and DCMs to provide the Commission with, and to post on their Web
sites, a brief explanation of any substantive opposing views in rule
filings, and allow for a public comment period when warranted.
The final rule also will promote the protection of market
participants and the public by ensuring that transactions in swaps that
are available to trade and subject to the trade execution requirement
are executed on regulated SEFs and DCMs in accordance with section
2(h)(8) of the CEA, rather than the bilateral OTC market. Therefore,
these swaps will be transacted with the pre-trade and post-trade
transparency that swap execution on SEFs and DCMs provide, reducing
search costs relative to the bilateral OTC market, and potentially
lowering bid-ask spreads.
At the same time, the final rule will further promote the
protection of market participants and the public by providing for a
Commission review of the available-to-trade process. SEFs and DCMs will
have considerable discretion on the application and consideration of
the factors to make swaps available to trade, which may vary depending
on the nature of the relevant swap market. This approach will enable
SEFs and DCMs to utilize their expertise in the markets in which they
list swaps for trading to determine which swaps should be available to
trade, subject to Commission review of these determinations to ensure
that they are consistent with the CEA and the Commission's regulations,
and therefore for market participants and the public.
Efficiency, Competitiveness, and Financial Integrity of the Markets
The final rule promotes the trading of swaps on SEFs and DCMs by
establishing a process that specifies when a swap is available to
trade; once a swap is deemed available to trade, that swap must be
traded on a SEF or DCM if it is subject to the clearing requirement.
Accordingly, the adopted process will promote market efficiency and
competitiveness by (1) informing market participants of when the trade
execution requirement applies and (2) prescribing the methods by which
all market participants may execute a particular swap, depending on
whether the trade execution requirement applies.
The final rule further promotes market efficiency by tasking SEFs
and DCMs with the primary responsibility and discretion to consider any
one or several factors in determining whether a swap is available to
trade. This approach reflects the Commission's view that SEFs and DCMs
have (or will have) the expertise and ability to form reasonable
conclusions about which swaps should be subject to the trade execution
requirement and which swaps should not be traded pursuant to mandatory
trade execution. By assigning primary responsibility to SEFs and DCMs
in this manner--subject to Commission review to assure consistency with
the CEA and the Commission's regulations--the Commission believes that
the final rule further promotes both market efficiency and integrity.
Further, by assuming the responsibility for maintaining an up-to-date
list of swaps made available to trade, the Commission is also
mitigating the search costs for market participants to identify whether
a swap is available to trade on SEF or a DCM, thereby promoting the
overall efficiency of the swaps markets for SEFs, DCMs and market
participants.
Price Discovery
As stated above, the final regulations are expected to promote the
trading of swaps on SEFs and DCMs. Swaps that are subject to the
clearing requirement must be executed on a SEF or DCM, in a manner
consistent with the trade execution requirement, if made available to
trade on a SEF or DCM. By providing the procedural mechanism to
establish when a swap is available to trade--an issue on which the
statute is silent--the rule operationalizes the trade execution
requirement. Accordingly, the rule reinforces price discovery promoted
through mandatory trade execution. For example, swaps traded on DCMs
that are made available to trade would be subject to DCM Core Principle
9, which requires DCMs to ``provide a competitive, open, and efficient
market and mechanism for executing transactions that protects the price
discovery process of trading in the centralized market of the board of
trade.'' \281\ Under Sec. 37.9 of the Commission's regulations, SEFs
will be required to provide an order book or an RFQ method of trade
execution that offers pre-trade price transparency for swaps listed or
offered for trading that are available to trade. This pre-trade
transparency promotes price discovery for swaps.
---------------------------------------------------------------------------
\281\ 7 U.S.C. 7(d)(9); subpart J of part 38 of the Commission's
regulations, which implements revised DCM Core Principle 9, as
amended by section 735(b) of the Dodd-Frank Act.
---------------------------------------------------------------------------
Sound Risk Management Practices
The enhanced pre-trade and post-trade transparency and price
discovery in contracts that have been made available to trade, and thus
subject to the trade execution requirement, under the procedures set
out in this rule will promote sound risk management practices by
ensuring that market participants and clearing organizations are able
to base their risk management decisions on publicly available prices
discovered on the competitive and efficient markets offered by SEFs and
DCMs. As trading on SEFs and DCMs is not relationship-based, as is
typical of trading in the OTC market, market participants will have
access to a broader range of risk management options in the form of
swaps that are available to trade.
Other Public Interest Considerations
The final regulations are not expected to affect public interest
considerations other than those identified above.
2. Trade Execution Compliance Schedule
Final Sec. Sec. 37.12 and 38.11 establishes a compliance schedule
following a determination that a swap is subject to the trade execution
requirement under section 2(h)(8) of the CEA. Market participants are
required to comply with the trade execution requirement upon the later
of (1) the applicable deadline established under the compliance and
implementation schedule for the clearing requirement for a swap under
section 2(h)(1) of the CEA; \282\ or (2) 30 days after the swap is
first made available to trade on either a SEF or DCM. Absent this final
rule, market participants would have been required to comply with the
trade execution requirement immediately after a swap is determined to
be available to trade and required to be cleared. To provide further
flexibility to registrants and market participants, the Commission is
exercising its discretion to stagger implementation of the trade
execution requirement.
---------------------------------------------------------------------------
\282\ The Commission has adopted the final compliance and
implementation schedule for the clearing requirement under section
50.25(b). Swap Transaction Compliance and Implementation Schedule:
Clearing Requirement Under Section 2(h) of the CEA, 77 FR 44441
(July 20, 2012). See supra note 158.
---------------------------------------------------------------------------
For reasons discussed below, the cost and benefits associated with
requiring mandatory trade execution immediately upon making a swap
available to trade and requiring it to be cleared, or after some longer
versus shorter period of delay, are not susceptible to meaningful
quantification. Costs and benefits associated with trade execution are
independent of costs and benefits of implementing mandatory trade
execution itself and pertain exclusively to the pace of implementation.
The Commission is not aware of any analog,
[[Page 33628]]
to either an immediate or delayed requirement, to comply with the trade
execution requirement that would produce data useful in estimating the
difference in costs and benefits between the two approaches.
Notwithstanding these limitations, the Commission identifies and
considers the costs and benefits of this rule in qualitative terms.
Costs
The Commission solicited comments regarding costs associated with
Sec. Sec. 37.12 and 38.11, including the costs and benefits of any
alternative compliance schedule proposed. Although the Commission
requested quantification of those costs discussed, commenters did not
provide specific estimates in dollar terms.
The Commission recognizes that the compliance schedule entails
certain initial costs to the market and public--in particular, a delay
in obtaining the benefits of pre-trade price transparency and price
discovery. The Commission believes, however, that such costs are
warranted because incurring them at the outset facilitates the ability
to more fully realize the intended pre-trade price transparency and
price discovery benefits upon the compliance date and thereafter. As
discussed below in connection with the benefits of this rule, this
compliance schedule provides market participants with sufficient time
to transition trading from the OTC markets to SEFs and DCMs. Absent
this window for transition, market participants would likely encounter
an impaired ability to manage their risks and adequately hedge their
positions. Further, the inability of market participants to execute
swaps on SEFs and DCMs as they engage in necessary transaction
activities would likely reduce liquidity in certain swaps and increase
transaction costs for other market participants.
In response to requests for comment on the compliance schedule,
some commenters stated that 30 days would be insufficient for market
participants to comply with the trade execution requirement.\283\ For
example, ISDA and AIMA expressed concern that such a compressed
schedule would preclude market participants from hedging their
exposures,\284\ while CME commented that DCOs, DCMs, and SEFs would not
be able to establish technological linkages within 30 days.\285\ MFA
stated that the Commission's compliance schedule could require
simultaneous compliance with the trade execution requirement and the
clearing requirement, which would require devoting resources to both
efforts and create a significant burden.\286\
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\283\ JPMorgan Comment Letter at 3-4; UBS Comment Letter at 2;
ICI Comment Letter at 5 (Nov. 4, 2011); CME Comment Letter at 2
(Nov. 4, 2011); Westpac Comment Letter at 3 (Nov. 4, 2011); Regional
Banks Comment Letter at 7 (Nov. 4, 2011); FHLBanks Comment Letter at
5 (Nov. 4, 2011); ICI Comment Letter at 9; ISDA Comment Letter at
11; AIMA Comment Letter at 2-3; ACLI Comment Letter at 2.
\284\ ISDA Comment Letter at 11; AIMA Comment Letter at 2-3.
\285\ CME Comment Letter at 2 (Nov. 4, 2011).
\286\ MFA Comment Letter at 10-11.
---------------------------------------------------------------------------
Given that the final rule does not impose a fixed 30-day
requirement, the Commission disagrees that the schedule is overly
costly or onerous. In response to commenters concerned that 30 days
would be insufficient to achieve compliance, the Commission notes that
the implementation period for the trade execution requirement may vary
depending on the timing of the available-to-trade determination and the
clearing determination. In some, if not many, instances, market
participants will have more than 30 days after a swap is made available
to trade to comply. For example, depending upon when a swap is deemed
as available to trade and the amount of time a particular market
participant is afforded to comply with the clearing requirement under
the Commission's final schedule (90 days, 180 days, or 270 days), the
30th day after a swap is deemed as available to trade pursuant to the
part 40 procedures may occur prior to the date in which the market
participant must comply with the clearing requirement. Further, part 40
review procedures will provide market participants advance awareness
that a swap may potentially be deemed as available to trade, during
which time market participants logically should undertake initial
transition planning in the event that the swap is ultimately deemed as
available to trade.\287\ Moreover, certain prerequisite activities,
such as establishing SEF or DCM connectivity, will be carried out
infrequently or on a one-time basis, such that a longer implementation
period would not be necessary when preparing to comply with the trade
execution requirement for future swap trading.\288\
---------------------------------------------------------------------------
\287\ Similarly, where a swap first becomes subject to the
clearing requirement before being made available to trade, the
clearing determination would alert market participants to the fact
that specific classes of swaps may become subject to the trade
execution requirement.
\288\ Under the Sec. Sec. 37.10(a)(2) and 38.12(a)(2) of the
final rule, a SEF or DCM that submits a swap as available to trade
must certify that it is listing it for trading on its own trading
system or platform. This requirement will ensure that a minimum
level of connectivity is present between a SEF or DCM and market
participants prior to determining whether it is available to trade.
---------------------------------------------------------------------------
Benefits
The compliance schedule set forth in final Sec. Sec. 37.12 and
38.11 will allow market participants to comply with the trade execution
requirement in an organized and timely manner, while mitigating
potential disruptions to trading during the transition. The schedule
will afford market participants the opportunity to resolve logistical
issues prior to trading swaps on a SEF or DCM,\289\ such as
establishing connectivity to a registered trading facility or platform;
notifying customers and completing or amending any applicable legal
documentation; and revising internal standards and procedures. The
additional time will facilitate a greater number of potential swap
counterparties who are prepared to participate in centralized trading,
thereby increasing competition, pre-trade price transparency, and price
discovery. Increasing the number of potential market participants will
also promote market liquidity and reduce the costs of using swaps to
manage risk.
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\289\ The Commission believes that DCMs will be prepared to
comply with the trade execution requirement to a certain extent
because they may have the infrastructure in place to facilitate the
trading of swaps. DCMs may require fewer technology, legal
arrangements, and changes to operational patterns. As the Commission
noted in the proposed rule, however, they may still have to update
their internal policies and procedures. 76 FR 58190.
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Consideration of Alternatives
Tradeweb commented that 30 days may not be sufficient to achieve
compliance for a class of swaps that is being made available to trade
for the first time, and recommended that the Commission set an
appropriate implementation period on a case-by-case basis, with input
from SEFs, DCMs, and market participants.\290\
---------------------------------------------------------------------------
\290\ Tradeweb Comment Letter at 4.
---------------------------------------------------------------------------
The Commission, however, believes that a case-by-case approach is
neither feasible nor necessary to establish an appropriate
implementation period for different classes of swaps. The data needed
to precisely determine the optimal time period--accommodating a
reasonable transition while not unduly delaying the benefits of trade
execution--does not yet exist; such data would be obtained from the
transition process itself. Further, the adopted approach will allow the
Commission to accommodate a large number of submissions for different
classes of swaps through the transition process. Accordingly, the
Commission believes that it is more appropriate to opt for an approach
that is flexible and provides market participants with notice and
[[Page 33629]]
certainty, rather than one that attempts to assign a definite time
period for swaps on a case-by-case basis.
The Commission views the ideal implementation period for a class of
swaps to depend on, among other factors, how the class of swaps is
defined, and the number and complexity of those swaps within that
class. This amount of time also depends on the nature, experience, and
resources of the market participant to whom the requirement applies.
The Commission's adopted approach accounts for the latter consideration
by incorporating the implementation periods for the clearing
requirement--90, 180, and 270 days--that are based on the type of
market participant.\291\ Where a swap first becomes subject to the
clearing requirement before being made available to trade, the clearing
determination would alert market participants to the fact that specific
classes of swaps may become subject to the trade execution requirement.
Therefore, the rule as adopted addresses Tradeweb's concern by
providing sufficient flexibility to accommodate different classes of
swaps, without the added complexity of instituting an compliance
schedule that applies on a case-by-case basis. In contrast, a case-by-
case approach would likely increase the administrative burden by
requiring an additional review and determination process, thereby
further delaying the benefits of the trade execution requirement.
---------------------------------------------------------------------------
\291\ See supra note 158.
---------------------------------------------------------------------------
Several commenters recommended a longer implementation period,
i.e., more than 30 days after a swap is made available to trade,
ranging from 90 to 180 days after a swap is made available to
trade.\292\ Some commenters also recommended establishing the
implementation period after the swap becomes subject to the trade
execution requirement.\293\ Other commenters recommended that the trade
execution requirement should not apply until full implementation of the
clearing requirement.\294\ Commenters generally stated that lengthening
the implementation period would provide market participants with
adequate time to establish new infrastructure, standards, and
procedures;\295\ develop adequate connectivity \296\ and obtain trading
access;\297\ and complete documentation and agreements.\298\ Tradeweb,
however, stated that 30 days would be adequate to comply with the trade
execution requirement for individual swaps.\299\
---------------------------------------------------------------------------
\292\ FXall Comment Letter at 7; ICI Comment Letter at 9; CME
Comment Letter at 6-7; Vanguard Comment Letter at 6; Bloomberg
Comment Letter at 5; Westpac Comment Letter at 3 (Nov. 4, 2011);
Chatham Comment Letter at 4; FSR Comment Letter at 4.
\293\ SIFMA AMG Comment Letter at 9; Eaton Vance Management
Comment Letter at 3; ISDA Comment Letter at 11; Westpac Comment
Letter at 3 (Nov. 4, 2011); FHLBanks Comment Letter at 5 (Nov. 4,
2011).
\294\ AIMA Comment Letter at 3 (Nov. 3, 2011); MarkitSERV
Comment Letter at 5 (Nov. 4, 2011); Citadel Comment Letter at 5
(Nov. 4, 2011); MFA Comment Letter at 7 (Nov. 4, 2011); Vanguard
Comment Letter at 5 (Nov. 4, 2011).
\295\ JPMorgan Comment Letter at 3-4; ISDA Comment Letter at 11;
FHLBanks Comment Letter at 5 (Nov. 4, 2011); Westpac Comment Letter
at 2-3 (Nov. 4, 2011).
\296\ FSR Comment Letter at 4; Bloomberg Comment Letter at 5;
ICI Comment Letter at 8; ISDA Comment Letter at 11; Eaton Vance
Management Comment Letter at 3; Chatham Comment Letter at 4; SIFMA
AMG Comment Letter at 9; CME Comment Letter at 6-7; Westpac Comment
Letter at 3 (Nov. 21, 2011); ICI Comment Letter at 5 (Nov. 4, 2011).
\297\ MFA Comment Letter at 4; Vanguard Comment Letter at 6;
SIFMA AMG Comment Letter at 9; AIMA Comment Letter at 3; CME Comment
Letter at 6-7.
\298\ SIFMA AMG Comment Letter at 9; ICI Comment Letter at 9;
AIMA Comment Letter at 3; CME Comment Letter at 7; ISDA Comment
Letter at 11; Westpac Comment Letter at 3; FIA/ISDA/SIFMA Comment
Letter at 8 (Nov. 4, 2011).
\299\ Tradeweb Comment Letter at 4 (Nov. 4, 2011).
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The Commission believes that the adopted approach appropriately
balances the benefits of attaining mandatory trade execution as
expeditiously as possible with the need for sufficient preparation time
for compliance. As noted above, 30 days represents a minimum duration
of time provided for compliance. Depending on when a swap is submitted
and deemed available to trade, market participants may also utilize the
time afforded under the clearing implementation schedule to complete
the requisite activities necessary to trade on a SEF or DCM. The
Commission also notes that the final rule requires that a SEF or DCM
submitting a swap as available to trade must already list it for
trading. This requirement will ensure that a minimum level of
connectivity is present between a SEF or DCM and market participants
prior to determining whether it is available to trade.
Consideration of Section 15(a) Factors--Trade Execution Compliance
Schedule Protection of Market Participants and the Public
An extended implementation period will help facilitate an orderly
transition of swaps trading to a centralized market structure. The
inability of SEFs and DCMs to comply with the trade execution
requirement by any particular designated date risks excluding market
participants from transacting swaps that are subject to mandatory trade
execution; this would reduce overall liquidity and increase the costs
of executing those swaps for other market participants. Thus, absent a
reasonable implementation schedule, market participants could
potentially be exposed to higher market risk due to increased costs of
hedging their positions or the inability to hedge their positions. The
implementation period allows for timely compliance and protects market
participants by mitigating the potential disruptions to the transition
to trading on a SEF or DCM.
Efficiency, Competitiveness, and Financial Integrity of the Markets
The implementation period promotes efficiency in the markets by
providing additional time for market participants to identify and
resolve technical or logistical issues related to trading on a SEF or
DCM in a manner consistent with the trade execution requirement. By
enabling a broader group of market participants to comply with the
trade execution requirement in a timely manner, the implementation
period will facilitate competition in the centralized market, which in
turn will promote greater pre-trade price transparency and price
integrity in the market.
Price Discovery
By providing adequate time to prepare for such trading, the
implementation period will facilitate an orderly transition to
centralized trading and mitigate instances in which some market
participants would not be prepared to enter the market by the given
compliance date. In doing so, the Commission is affording the
opportunity for the maximum number of potential swap counterparties to
participate, thereby enhancing the price discovery process.
Sound Risk Management Practices
The implementation period reflected in the final rule should ensure
that market participants have adequate time to comply with the trade
execution requirement and will be prepared to transact swaps on a SEF
or DCM. As a result, market participants should be able to maintain
hedges that have been executed through swap transactions, thereby
mitigating market and counterparty risks. Moreover, a compliance
schedule that facilitates SEF and DCM swap execution by the greatest
number of potential market participants, as does the final rule,
indirectly promotes market liquidity, thereby reducing the overall
costs of utilizing swaps for risk management purposes.
[[Page 33630]]
Other Public Interest Considerations
The final regulations are not expected to affect public interest
considerations other than those identified above.
V. List of Commenters
1. Alternative Investment Management Association (``AIMA'')
2. Americans for Financial Reform (``AFR'')
3. American Council of Life Insurers (``ACLI'')
4. Asset Management Group, Securities Industry and Financial Markets
Association (``SIFMA AMG'')
5. Bloomberg
6. CBOE Futures Exchange (``CBOE'')
7. Chatham Financial (``Chatham'')
8. Chris Barnard
9. Citadel
10. CME Group (``CME'')
11. Commercial Energy Working Group (``CEWG'')
12. Eaton Vance Management
13. Federal Home Loan Banks (``FHLB'')
14. Fifth Third Bank, PNC Bank, Regions Bank, U.S. Bank National
Association (``Regional Banks'')
15. Financial Services Roundtable (``FSR'')
16. Futures Industry Association (``FIA'')
17. FX Alliance (``FXall'')
18. Geneva Energy Markets, LLC
19. ICAP
20. International Swaps and Derivatives Association (``ISDA'')
21. Investment Company Institute (``ICI'')
22. Javelin Capital Markets
23. JP Morgan
24. Managed Funds Association (``MFA'')
25. MarketAxess Holdings, Inc. (``MarketAxess'')
26. Markit
27. MarkitSERV
28. Morgan Stanley
29. ODEX Group, Inc. (``ODEX'')
30. Spring Trading, LLC (``Spring Trading'')
31. Swaps & Derivatives Market Association (``SDMA'')
32. Sunguard Kiodex LLC (``Sunguard Kiodex'')
33. Tradeweb Markets LLC (``Tradeweb'')
34. UBS Securities LLC (``UBS'')
35. Vanguard
36. Westpac Banking Corporation (``Westpac'')
37. Wholesale Markets Brokers' Association, Americas (``WMBAA'')
List of Subjects
17 CFR Part 37
Registered entities, Reporting and recordkeeping requirements, Swap
execution facilities, Swaps.
17 CFR Part 38
Designated contract markets, Registered entities, Reporting and
recordkeeping requirements, Swaps.
For the reasons stated in the preamble, the Commission amends 17
CFR part 37 and part 38 as follows:
PART 37--SWAP EXECUTION FACILITIES
0
1. The authority citation for part 37 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
0
2. Subpart A, as amended elsewhere in this issue of the Federal
Register, is further amended by adding Sec. Sec. 37.10 through 37.12
to read as follows:
Subpart A--General Provisions
Sec.
* * * * *
37.10 Process for a swap execution facility to make a swap available
to trade.
37.11 [Reserved].
37.12 Trade execution compliance schedule.
Sec. 37.10 Process for a swap execution facility to make a swap
available to trade.
(a)(1) Required submission. A swap execution facility that makes a
swap available to trade in accordance with paragraph (b) of this
section, shall submit to the Commission its determination with respect
to such swap as a rule, as that term is defined by Sec. 40.1 of this
chapter, pursuant to the procedures under part 40 of this chapter.
(2) Listing requirement. A swap execution facility that makes a
swap available to trade must demonstrate that it lists or offers that
swap for trading on its trading system or platform.
(b) Factors to consider. To make a swap available to trade, for
purposes of section 2(h)(8) of the Act, a swap execution facility shall
consider, as appropriate, the following factors with respect to such
swap:
(1) Whether there are ready and willing buyers and sellers;
(2) The frequency or size of transactions;
(3) The trading volume;
(4) The number and types of market participants;
(5) The bid/ask spread; or
(6) The usual number of resting firm or indicative bids and offers.
(c) Applicability. Upon a determination that a swap is available to
trade on any swap execution facility or designated contract market
pursuant to part 40 of this chapter, all other swap execution
facilities and designated contract markets shall comply with the
requirements of section 2(h)(8)(A) of the Act in listing or offering
such swap for trading.
(d) Removal--(1) Determination. The Commission may issue a
determination that a swap is no longer available to trade upon
determining that no swap execution facility or designated contract
market lists such swap for trading.
(2) Delegation of Authority. (i) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Market
Oversight or such other employee or employees as the Director may
designate from time to time, the authority to issue a determination
that a swap is no longer available to trade.
(ii) The Director may submit to the Commission for its
consideration any matter that has been delegated in this section.
Nothing in this section prohibits the Commission, at its election, from
exercising the authority delegated in this section.
Sec. 37.11 [Reserved].
Sec. 37.12 Trade execution compliance schedule.
(a) A swap transaction shall be subject to the requirements of
section 2(h)(8) of the Act upon the later of:
(1) The applicable deadline established under the compliance
schedule provided under Sec. 50.25(b) of this chapter; or
(2) Thirty days after the available-to-trade determination
submission or certification for that swap is, respectively, deemed
approved under Sec. 40.5 of this chapter or deemed certified under
Sec. 40.6 of this chapter.
(b) Nothing in this section shall prohibit any counterparty from
complying voluntarily with the requirements of section 2(h)(8) of the
Act sooner than as provided in paragraph (a) of this section.
PART 38--DESIGNATED CONTRACT MARKETS
0
3. The authority citation for part 38 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as
amended by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376.
Subpart A--General Provisions
0
4. Add Sec. 38.11 to subpart A to read as follows:
[[Page 33631]]
Sec. 38.11 Trade execution compliance schedule.
(a) A swap transaction shall be subject to the requirements of
section 2(h)(8) of the Act upon the later of:
(1) The applicable deadline established under the compliance
schedule provided under Sec. 50.25(b) of this chapter; or
(2) Thirty days after the available-to-trade determination
submission or certification for that swap is, respectively, deemed
approved under Sec. 40.5 of this chapter or deemed certified under
Sec. 40.6 of this chapter.
(b) Nothing in this section shall prohibit any counterparty from
complying voluntarily with the requirements of section 2(h)(8) of the
Act sooner than as provided in paragraph (a) of this section.
0
5. Add Sec. 38.12 to subpart A to read as follows:
Sec. 38.12 Process for a designated contract market to make a swap
available to trade.
(a)(1) Required submission. A designated contract market that makes
a swap available to trade in accordance with paragraph (b) of this
section, shall submit to the Commission its determination with respect
to such swap as a rule, as that term is defined by Sec. 40.1 of this
chapter, pursuant to the procedures under part 40 of this chapter.
(2) Listing requirement. A designated contract market that makes a
swap available to trade must demonstrate that it lists or offers that
swap for trading on its trading system or platform.
(b) Factors to consider. To make a swap available to trade, for
purposes of section 2(h)(8) of the Act, a designated contract market
shall consider, as appropriate, the following factors with respect to
such swap:
(1) Whether there are ready and willing buyers and sellers;
(2) The frequency or size of transactions;
(3) The trading volume;
(4) The number and types of market participants;
(5) The bid/ask spread; or
(6) The usual number of resting firm or indicative bids and offers.
(c) Applicability. (1) Upon a determination that a swap is
available to trade on any designated contract market or swap execution
facility pursuant to part 40 of this chapter, all other designated
contract markets and swap execution facilities shall comply with the
requirements of section 2(h)(8)(A) of the Act in listing or offering
such swap for trading.
(d) Removal--(1) Determination. The Commission may issue a
determination that a swap is no longer available to trade upon
determining that no swap execution facility or designated contract
market lists such swap for trading.
(2) Delegation of Authority. (i) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Market
Oversight or such other employee or employees as the Director may
designate from time to time, the authority to issue a determination
that a swap is no longer available to trade.
(ii) The Director may submit to the Commission for its
consideration any matter that has been delegated in this section.
Nothing in this section prohibits the Commission, at its election, from
exercising the authority delegated in this section.
Issued in Washington, DC, on May 17, 2013, by the Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices To Process for a Designated Contract Market or Swap
Execution Facility to Make a Swap Available to Trade, Swap Transaction
Compliance and Implementation Schedule, and Trade Execution Requirement
Under the Commodity Exchange Act--Commission Voting Summary and
Statements of Commissioners
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton and
Wetjen voted in the affirmative; Commissioners Sommers and O'Malia
voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rulemaking to implement a process for swap
execution facilities (SEFs) and designated contract markets (DCMs)
to ``make a swap available to trade'' (MAT). Today's rule also
finalizes the Commission's separate rule proposal to phase in
compliance for the trade execution requirement.
Completion of these two rules facilitates the congressionally
mandated critical reform promoting pre-trade transparency in the
swaps market.
The trade execution provision of the Dodd-Frank Wall Street
Reform and Consumer Protection Act requires that swaps be traded on
SEFs or DCMs if they are (1) subject to mandatory clearing, and (2)
made available to trade. Such platforms allow multiple participants
the ability to trade swaps by accepting bids and offers made by
multiple participants with all participants given impartial access
to the market.
The MAT rule establishes a flexible process for a SEF or DCM to
make a swap available to trade. The SEFs and DCMs first will
determine which swaps they wish to make available to be traded on
their platforms. Then these determinations will be submitted to the
Commission either as self-certified by the trading platform or for
approval under the Commission's Part 40 rules.
The phase-in rule would provide market participants with 30 days
after the SEF's or DCM's self-certification or submission is deemed
approved prior to such swaps being subject to the trade execution
mandate.
Those swaps that are made available to trade and thus subject to
the trade execution requirement will be publicly posted on the
Commission's Web site.
Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia--May
16, 2013
I respectfully dissent from the Commission's approval today of
the rule establishing Process for a Designated Contract Market or
Swap Execution Facility to Make a Swap Available to Trade under
Section 2(h)(8) of the Commodity Exchange Act (CEA).
I supported the proposed rule because I wanted to solicit public
comment and engage market participants in an open discussion on how
the Commission should implement the available-to-trade provision in
section 2(h)(8) of the CEA.
During the comment period, the Commission received 33 comment
letters and held a roundtable \300\ to solicit public views on this
matter. The commenters provided various recommendations but in
general virtually all of them rejected the proposal; the Commission
would be hard pressed to point to one comment letter that supported
the Commission's approach. Unfortunately, despite this strong
feedback from the public, the Commission has chosen to follow its
original proposal.
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\300\ January 30, 2012.
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I recognize the challenge that the Commission is facing in
interpreting the ``make available to trade'' provision.
Unfortunately, Congress did not provide the Commission with any
guidance as to how and under what conditions the trade execution
mandate must be triggered. Nevertheless, a lack of direction from
Congress should not be an excuse for the Commission to come up with
an unworkable rule.
As I explain below, the rule provides illusory comfort that the
Commission will have a legal authority to review and, if necessary,
challenge a mandatory trading determination made by a Swap Execution
Facility (SEF) or Designated Contract Market (DCM). In fact, the
only authority that the Commission has is to ``rubber stamp'' a SEF
or DCM's initial determination.
Sections 40.5 and 40.6 of the Commission's Regulations Do Not Provide
an Appropriate Avenue for a Made Available-to-Trade Determination
I have deep reservations about the process that the Commission
is proposing for ``making a swap available to trade.''
First, the Commission's determination under the rule approval
process (Sec. 40.5) or the rule certification process (Sec. 40.6)
is
[[Page 33632]]
intended to apply to only one particular DCM or SEF that requested
such rule approval or submitted such rule certification. However,
under this rule, an available-to-trade determination has a far
reaching effect. It binds not only the requesting SEF or DCM but the
entire market, thus forcing all SEFs and all DCMs to trade a
particular swap by using more restrictive methods of execution.
Second, the Part 40 process does not give the Commission any
legal authority to object to a SEF or DCM's made available-to-trade
determination. Under the rule approval procedures, the Commission
must approve a rule unless such rule is inconsistent with the CEA or
the Commission's regulations.\301\ Similarly, a new rule subject to
stay will become effective, pursuant to its certification, unless
the rule is inconsistent with the CEA or the Commission's
regulations.\302\
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\301\ Commission Regulation Sec. 40.5(b)
\302\ Commission Regulation Sec. 40.6(c)(3).
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How will the Commission be able to point to a provision in the
CEA or in the regulations that is inconsistent with one or all
subjective factors?
The Commission's Determinations Must Be Based on Objective Criteria
In essence, the rule allows a SEF or a DCM to make a made
available-to-trade determination based solely on factors it deems
relevant, while ignoring other considerations that may be of vital
importance to the trading liquidity of a particular contract. The
Commission needs to require more than a simple ``consideration'' of
these factors.\303\
---------------------------------------------------------------------------
\303\ Commission Regulations Sec. 37.10(b) and 38.12(b).
---------------------------------------------------------------------------
The lack of specific objective criteria for determining trading
liquidity introduces uncertainty into the market and makes it
unfeasible for the Commission to have any meaningful regulatory
oversight over the made available-to-trade determination process.
The Commission's Factors Are Not Supported by Data
I agree with the commenters who requested that the Commission
implement a pilot program or perform an in-depth study of various
classes of swaps to determine the appropriate criteria for a made
available-to-trade determination.\304\ A better approach would be
for the Commission to review trading data currently submitted to the
Commission pursuant to the Swap Data Repository (SDR) rules and
after thorough analysis, come up with objective criteria that would
define trading liquidity. Instead, the Commission chose to implement
a flawed process that does not lead to any substantive analysis of
trading liquidity.
---------------------------------------------------------------------------
\304\ Tradeweb Markets Comment Letter at 3-5 (Feb. 13, 2012);
ISDA/SIFMA Comment Letter at 8-9 (March 8, 2011).
---------------------------------------------------------------------------
The Commission Failed to Establish a Process for Removing Made
Available-to-Trade Determinations
Without providing any reasoning, the Commission has decided that
only after all SEFs and all DCMs have de-listed a particular swap,
will such swap be deemed by the Commission to be no longer
available-to-trade.\305\ This process lacks any logical or legal
basis and is the exact opposite of what is required to make the
initial available-to-trade determination. The initial made
available-to-trade determination provides that, if one SEF or DCM
determines a swap to be made available to trade, then such swap is
deemed to be made available-to-trade on all SEFs or DCMs.
---------------------------------------------------------------------------
\305\ Commission Regulations Sec. Sec. 37.10(c), 37.10(d),
38.12(c), 38.12(d).
---------------------------------------------------------------------------
Again, the Commission neglects to analyze swap transaction data
that it receives from SDRs. In my view, if a swap does not have
sufficient trading liquidity to be traded in a more restrictive
manner on a SEF or DCM, as determined by the Commission's broader
view of market trading data, then such product must be determined by
the Commission to be no longer available-to-trade.
Conclusion
Due to the above concerns, I respectfully dissent from the
decision of the Commission to approve this final rule for
publication in the Federal Register.
[FR Doc. 2013-12250 Filed 6-3-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: June 4, 2013