2020-28944
Federal Register, Volume 86 Issue 27 (Thursday, February 11, 2021)
[Federal Register Volume 86, Number 27 (Thursday, February 11, 2021)]
[Rules and Regulations]
[Pages 9224-9252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28944]
[[Page 9223]]
Vol. 86
Thursday,
No. 27
February 11, 2021
Part III
Commodity Futures Trading Commission
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17 CFR Part 37
Swap Execution Facilities; Final Rule
Federal Register / Vol. 86 , No. 27 / Thursday, February 11, 2021 /
Rules and Regulations
[[Page 9224]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 37
RIN 3038-AE25
Swap Execution Facilities
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting final rules (``Final Rules'') addressing
operational issues facing swap execution facilities (``SEF'') and their
market participants in connection with the Commission's regulatory
requirements for a SEF's audit trail data, financial resources, and
chief compliance officer (``CCO'').
DATES: This rule is effective May 12, 2021.
FOR FURTHER INFORMATION CONTACT: Nancy Markowitz, Deputy Director,
(202) 418-5453, [email protected]; Jonathan Lave, Associate Director,
(202) 418-5983, Division of Market Oversight; Eliezer Mishory, Special
Counsel, (202) 418-5609, [email protected], Division of Data; or
Michael Penick, Senior Economist, (202) 418-5279, [email protected],
Office of the Chief Economist, Commodity Futures Trading Commission,
Three Lafayette Centre, 1151 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background and Introduction
A. Statutory and Regulatory History
B. Summary of Final Rules
II. Audit Trail Requirements Related to Post-Execution Allocation
Information
A. Background and Proposed Rules
B. Summary of Comments
C. Final Rules
III. Financial Resources Requirements
A. Background and Overview of Proposed Rules
B. Sec. 37.1301--General Requirements
C. Sec. 37.1302--Types of Financial Resources
D. Sec. 37.1303--Liquidity of Financial Resources
E. Sec. 37.1304--Computation of Costs To Meet Financial
Resources Requirement
F. Sec. 37.1305--Valuation of Financial Resources
G. Sec. 37.1306--Reporting to the Commission
H. Sec. 37.1307--Delegation of Authority
IV. Chief Compliance Officer Requirements
A. Background and Overview of Proposed Rules
B. Sec. 37.1501(a)--Definitions
C. Sec. 37.1501(b)--Qualifications of Chief Compliance Officer
D. Sec. 37.1501(c)--Duties of Chief Compliance Officer
E. Sec. 37.1501(d)--Preparation of Annual Compliance Report
F. Sec. 37.1501(e)--Submission of Annual Compliance Report and
Related Matters
G. Sec. 37.1501(f)--Recordkeeping
H. Sec. 37.1501(g)--Delegation of Authority
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background and Introduction
A. Statutory and Regulatory History
Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'') \1\ amended the Commodity Exchange
Act (``CEA'' or ``Act'') \2\ to establish a comprehensive new swaps
regulatory framework that includes the registration and oversight of
SEFs.\3\ As amended, CEA section 1a(50) defines a SEF as a trading
system or platform that allows multiple participants to execute or
trade swaps with multiple participants through any means of interstate
commerce.\4\ CEA section 5h(a)(1) requires an entity to register as a
SEF prior to operating a facility for the trading or processing of
swaps.\5\ CEA section 5h(f) requires registered SEFs to comply with
fifteen core principles.\6\ Further, CEA section 2(h)(8) provides that
swap transactions subject to the clearing requirement in CEA section
2(h)(1)(A) \7\ must be executed on a designated contract market
(``DCM''), SEF, or a SEF that is exempt from registration pursuant to
CEA section 5h(g),\8\ unless (i) no DCM or SEF \9\ ``makes the swap
available to trade'' or (ii) the transaction is subject to a clearing
requirement exception pursuant to CEA section 2(h)(7).\10\
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, title VII, 124 Stat. 1376 (2010) (codified
as amended in various sections of 7 U.S.C.), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-12242a.pdf.
\2\ 7 U.S.C. 1 et seq.
\3\ 7 U.S.C. 7b-3 (adding CEA section 5h to establish a
registration requirement and regulatory regime for SEFs).
\4\ 7 U.S.C. 1a(50).
\5\ CEA section 5h(a)(1) states that no person may operate a
facility for the trading or processing of swaps unless the facility
is registered as a SEF or as a DCM under section 5h. 7 U.S.C. 7b-
3(a)(1).
\6\ 7 U.S.C. 7b-3(f). From herein, the term ``SEFs'' refers to
registered SEFs, unless otherwise indicated.
\7\ Section 723(a)(3) of the Dodd-Frank Act added a CEA section
2(h) to establish the clearing requirement for swaps. 7 U.S.C. 2(h).
CEA section 2(h)(1)(A) provides that it is unlawful for any person
to engage in a swap unless that person submits such swap for
clearing to a derivatives clearing organization that is registered
under the CEA or a derivatives clearing organization that is exempt
from registration under the CEA if the swap is required to be
cleared. 7 U.S.C. 2(h)(1)(A). CEA section 2(h)(2) specifies the
process for the Commission to review and determine whether a swap,
group, category, type, or class of swap should be subject to the
clearing requirement. 7 U.S.C. 2(h)(2). The Commission further
implemented the clearing determination process under part 50, which
also specifies the swaps currently subject to the requirement. 17
CFR part 50.
\8\ CEA section 2(h)(8)(A)(ii) contains a typographical error
that specifies CEA section 5h(f), rather than CEA section 5h(g), as
the provision that allows the Commission to exempt a SEF from
registration. Where appropriate, this reference is corrected in the
discussion herein.
\9\ CEA section 2(h)(8)(A)(i)-(ii) provides, with respect to
transactions involving swaps subject to the clearing requirement
that counterparties shall execute the transaction on a board of
trade designated as a contract market under section 5; or execute
the transaction on a swap execution facility registered under
section 5h or a swap execution facility that is exempt from
registration under section 5h(g) of the CEA. Given this reference in
CEA section 2(h)(8)(A)(ii), the Commission accordingly interprets
``swap execution facility'' in CEA section 2(h)(8)(B) to include a
swap execution facility that is exempt from registration pursuant to
CEA section 5h(g).
\10\ 7 U.S.C. 2(h)(8). This is referred to as the ``trade
execution requirement.''
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Pursuant to its discretionary rulemaking authority in CEA sections
5h(f)(1) and 8a(5), the Commission identified the relevant areas in
which the statutory SEF framework would benefit from additional rules
or regulations.\11\ Accordingly, in 2013, the Commission adopted part
37 of its regulations to implement a regulatory framework for SEFs and
for the trading and execution of swaps on such facilities (``2013 SEF
Rules'').\12\
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\11\ To implement the SEF core principles, Core Principle 1
provides that the Commission may, in its discretion, determine by
rule or regulation the manner in which SEFs comply with the core
principles. 7 U.S.C. 7b-3(f)(1)(B).
\12\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476 (Jun. 4, 2013) (``SEF Core Principles Final
Rule''); 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, 78 FR 33606 (Jun. 4,
2013).
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Subsequently, a number of SEFs and their market participants
requested relief from certain part 37 requirements they found in
practice to be operationally unworkable or unnecessarily burdensome. A
number of SEFs indicated that some of those requirements are
impractical or unachievable due to technology limitations, or are
incompatible with existing market practices. For example, as discussed
further below, a number of SEFs stated that the requirement to include
post-execution allocation information in audit trail data under Sec.
37.205 is operationally difficult and impractical to implement.\13\
Even where SEFs were able to comply with certain requirements, they
asserted that (i) the compliance costs are high, and (ii)
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compliance is unnecessary to satisfy their self-regulatory obligations
and the statutory SEF core principles. For instance, SEFs noted that
the financial resources requirements imposed by Core Principle 13
regulations are capital-intensive and broader than the specific costs
of compliance with SEF regulatory obligations.\14\ In response to
concerns regarding the financial resources requirement and other
requirements operationally difficult and impractical to implement,
Commission staff issued a combination of no-action relief and guidance
in the months and years following the adoption of part 37.\15\
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\13\ 17 CFR 37.205; see Section II, infra.
\14\ See Comment Letter from Wholesale Markets Brokers'
Association, Americas (``WMBAA''), Swap Execution Facility
Regulations, Made Available to Trade Determinations, and Swap
Trading Requirements at 5 (Mar. 11, 2016), http://www.wmbaa.com/wp-content/uploads/2016/06/WMBAA_Letter_to_CFTC_031116.pdf.
\15\ See, e.g., CFTC Staff Letter No. 17-54, Re: No-Action
Relief for Swap Execution Facilities from Certain Audit Trail
Requirements in Commission Regulation 37.205 Related to Post-
Execution Allocation Information at 2 (Oct. 31, 2017) (``CFTC Staff
Letter No. 17-54''); CFTC Staff Letter No. 15-26, Division of Market
Oversight Guidance on Calculating Projected Operating Costs by Swap
Execution Facilities (Apr. 23, 2015) (``CFTC Staff Letter No. 15-
26''); and CFTC Staff Letter No. 17-25, Division of Market Oversight
Guidance on Calculating Projected Operating Costs By Designated
Contract Markets and Swap Execution Facilities (Apr. 28, 2017)
(``CFTC Staff Letter No. 17-25''); CFTC Staff Letter No. 17-61, Re:
No-Action Relief for Swap Execution Facilities from Compliance with
the Timing Requirements of Commission Regulation 37.1501(f)(2)
Relating to Chief Compliance Officer Annual Compliance Reports and
Commission Regulation 37.1306(d) Relating to Fourth Quarter
Financial Reports at 2-3 (Nov. 20, 2017) (``CFTC Staff Letter No.
17-61'').
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In November 2018, the Commission issued a notice of proposed
rulemaking under CEA sections 5h(f)(1) and 8a(5), seeking to address
these issues by codifying relevant staff no-action relief or otherwise
resolving the concerns of SEFs and market participants.\16\ The
proposed rules (``Proposed Rules'') also set forth structural reforms
to the SEF regime beyond these operational fixes. In particular, the
Proposed Rules would have removed existing limitations on swap
execution methods,\17\ while expanding both the categories of swaps
that must be executed on a SEF, and the types of entities that must
register as SEFs. Commenters to the Proposed Rules uniformly favored
adopting certain of the narrower operational proposals.\18\ By
contrast, the Proposed Rules' broader market reforms elicited a number
of comments expressing hesitation regarding the expansive scope of the
proposed changes and recommending the Commission instead focus on more
targeted improvements to the existing swap trading regulatory
regime.\19\
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\16\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (Nov. 30, 2018).
\17\ Under Sec. 37.9(a), any transaction involving a swap
subject to the trade execution requirement in section 2(h)(8) of the
Act (``Required Transactions'') must be executed in accordance with
(i) an Order Book as defined in Sec. 37.3(a)(3); or (ii) a request
for quote (``RFQ'') to no fewer than three market participants in
conjunction with an Order Book. 17 CFR 37.9(a). Transactions not
subject to the trade execution requirement (``Permitted
Transactions'') may trade via any execution method.
\18\ See, e.g., Comment Letter from Bloomberg at A-6 (Mar. 15,
2019) (expressing support for proposed changes to financial
resources liquidity requirement) (``Bloomberg Letter''); Comment
Letter from Refinitiv at 11, 13-14 (Mar. 13, 2019) (``Refinitiv
Letter'') (expressing support for proposed changes to financial
resources and audit trail requirements); Comment Letter from WMBAA
(Mar. 15, 2019) (``2019 WMBAA Letter'') (expressing support for
proposed changes to financial resources, audit trail, and CCO
requirements).
\19\ See, e.g., Comment Letter from the Alternative Investment
Management Association at 1-2 (Feb. 25, 2019) (urging the CFTC ``to
approach any change to swap execution facilities and trade execution
in a phased and targeted manner, rather than adopt a wholesale
package of changes in a single rulemaking''); Comment Letter from
Managed Funds Association at 2-3 (Mar. 15, 2019) (expressing concern
with the breadth of the Proposed Rules and recommending targeted
rather than comprehensive changes to the swap trading framework);
Comment Letter from IATP at 3-4 (Mar. 15, 2019) (same); Comment
Letter from Securities Industry and Financial Markets Association at
1 (Mar. 15, 2019) (``SIFMA Letter'') (same); Comment Letter from
SIFMA Asset Management Group at 1 (Mar. 15, 2019) (same); Comment
Letter from Tradeweb Markets LLC at 1-2 (Mar. 14, 2019) (same);
Comment Letter from Wellington Management Company LLP at 1 (Mar. 15,
2019). See also Comment Letter from Futures Industry Association at
7-9 (Mar. 15, 2019) (stating proposed market reforms ``would present
tall operational challenges and impose substantial costs on all
market participants''); Comment Letter from Commodity Markets
Council at 2 (Mar. 15, 2019) (same).
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Accordingly, the Final Rules implement certain operationally-
focused proposals that received limited and generally positive feedback
from commenters--namely, targeted changes to requirements for a SEF's
audit trail data, financial resources, CCO governance, and timing of
CCO reports.
B. Summary of Final Rules
In summary, the Final Rules make the following changes to the SEF
regulatory regime:
(1) Audit trail data. The Final Rules eliminate the requirement of
a SEF to capture and retain post-execution allocation information in
its audit trail data.
(2) Financial resources. The Final Rules apply the existing Core
Principle 13 financial resources requirements to SEF operations in a
less burdensome manner, including through amendments to the existing
six-month liquidity requirement and the addition of new acceptable
practices providing further guidelines to SEFs for making a reasonable
calculation of their projected operating costs.
(3) CCO. The Final Rules streamline requirements for the CCO
position, allow SEF management to exercise greater discretion in CCO
oversight, and simplify the preparation and submission of the required
annual compliance report (``ACR'').
II. Audit Trail Requirements Related to Post-Execution Allocation
Information
A. Background and Proposed Rules
Existing Sec. 37.205(a) requires a SEF to capture and retain all
audit trail data necessary to detect, investigate, and prevent customer
and market abuses.\20\ This audit trail data must permit a SEF to track
a customer order from the time of receipt through fill, allocation, or
other disposition.\21\ Commission regulation 37.205(b)(2)(iv) requires
a SEF's audit trail program to include an electronic transaction
history database that identifies, among other things, each account to
which order fills are allocated.\22\
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\20\ 17 CFR 37.205(a). Such audit trail data must be sufficient
to reconstruct all indications of interest, RFQs, orders, and
trades.
\21\ Id.
\22\ 17 CFR 37.205(b)(2)(iv).
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During the SEF registration process starting fall 2013 through
spring 2016, numerous SEFs indicated that post-execution allocations
are made away from SEFs and typically occur between the clearing firm
or the customer and the derivatives clearing organization (``DCO'') or
at the middleware provider.\23\ Those SEFs represented they typically
do not have access to post-execution allocation information and are
unable to obtain this data from third parties, such as DCOs and swap
data repositories, due to confidentiality concerns. Based on these
representations, Commission staff issued no-action relief from this
requirement.\24\
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\23\ CFTC Staff Letter No. 15-68, Re: No-Action Relief for Swap
Execution Facilities from Certain Audit Trail Requirements in
Commission Regulation 37.205 Related to Post-Execution Allocation
Information (Dec. 22, 2015) at 2. As stated therein, ``[e]ven if
SEFs could obtain the information from DCOs, swap data repositories,
or middleware providers, or alternatively, from the counterparties
to the swap, the infrastructure necessary to securely transmit the
post-execution allocation information, such as an application-
programming interface or secure file transfer protocol site, is
currently not in place.''
\24\ Id.; CFTC Staff Letter No. 17-54.
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Recognizing the practical difficulties SEFs face in obtaining
information regarding allocations occurring away from the SEF after a
trade has been executed, the Commission proposed to eliminate the
requirements in
[[Page 9226]]
Sec. 37.205(a) and (b)(2) that a SEF capture post-execution allocation
information in its audit trail.\25\ Instead, the Proposed Rules only
require a SEF to capture and retain in its audit trail information
through the execution of a trade on the SEF.\26\ The Commission noted
that this change would be consistent with current swap market
practices.\27\
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\25\ 83 FR at 62005.
\26\ Id.
\27\ Id.
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B. Summary of Comments
Commenters support the proposal to eliminate the requirement to
capture and retain post-execution allocation information.\28\ According
to Refinitiv and WMBAA, SEFs remain unable to obtain post-execution
allocation information.\29\ WMBAA believes ``SEFs cannot and should not
be responsible for collecting trade allocation information when the
allocations occur away from the SEF'' and the proposed changes ``more
accurately reflect the capabilities of SEFs to capture audit trail
data.'' \30\ In WMBAA's view, the proposed changes to SEF audit trail
requirements ``will [not] lead to degradation of the ability to
reconstruct a trade and the environment in which it is traded.'' \31\
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\28\ Refinitiv Letter at 11 (``Refinitiv SEF supports the
elimination of the requirement to be able to track an order through
fill, allocation or other disposition, because SEFs generally do not
have access to most post-execution information.''); 2019 WMBAA
Letter at 12-13 (``The WMBAA supports the Commission's proposal
regarding audit trail requirements.'').
\29\ Refinitiv Letter at 11; 2019 WMBAA Letter at 12.
\30\ 2019 WMBAA Letter at 12.
\31\ Id. at 12-13.
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C. Final Rules
The Commission has determined, based on representations from SEFs,
that SEFs are unable to obtain post-execution allocation information
and is adopting the amendments to Sec. 37.205(a) and (b)(2) as
proposed. Moreover, the Commission is able to obtain post-execution
allocation information from other registered entities and market
participants, and is not aware that SEFs' reliance on the relief from
collecting and retaining post-execution allocation has raised any
regulatory concerns.
As commenters noted, post-execution allocation generally takes
place between the clearing firm or the customer and the DCO, or at the
middleware provider. DCOs are required to maintain records of all
information necessary to record allocation of bunched orders for
cleared swaps.\32\ In addition, under Sec. 1.35 managers of accounts
eligible for post-execution allocation must maintain records sufficient
to permit the reconstruction of the handling of the order from the time
of placement by the account manager to the allocation to individual
accounts, and introducing brokers, futures commission merchants, and
SEF members must similarly maintain records of each order subject to
post-execution allocation and the accounts to which the orders are
allocated.\33\ These required records must be made available to the
Commission upon request.\34\ Accordingly, the Commission expects that
it will continue to have access to post-execution allocation
information from these registered entities and market participants even
after SEFs are no longer required to capture this information.
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\32\ 17 CFR 39.20(a)(2).
\33\ 17 CFR 1.35(b)(5).
\34\ See 17 CFR 1.31(d), 1.35(b)(5).
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III. Financial Resources Requirements
A. Background and Overview of Proposed Rules
Core Principle 13 requires a SEF to have adequate financial,
operational, and managerial resources to discharge each of its
responsibilities.\35\ To achieve financial resource adequacy, a SEF
must maintain financial resources sufficient to cover its operating
costs for a period of at least one year, calculated on a rolling
basis.\36\ The Commission implemented Core Principle 13 by adopting
Sec. Sec. 37.1301 through 37.1307 to specify (i) the eligible types of
financial resources that may be counted toward compliance (Sec.
37.1302); (ii) the computation of projected operating costs (Sec.
37.1303); (iii) asset valuation requirements (Sec. 37.1304); (iv) a
liquidity requirement for required financial resources equal to six
months of a SEF's operating costs (Sec. 37.1305); and (v) reporting
obligations (Sec. 37.1306).\37\
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\35\ 7 U.S.C. 7b-3(f)(13).
\36\ Id.
\37\ 17 CFR 37.1301 through 37.1307.
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These regulations are intended to ensure that a SEF has financial
strength sufficient to discharge its responsibilities, maintain market
continuity, and withstand unpredictable market events.\38\ Since the
adoption of part 37 in 2013, the Commission received feedback from
several SEFs noting the existing requirements impose impractical and
unnecessary financial and operating burdens.\39\ Among other things,
SEFs contended the amount of financial resources a SEF is required to
maintain has proven to be unnecessary and shackles resources that
otherwise could be used towards operational growth and further
innovation.\40\ To address some of these concerns, Commission staff
issued two guidance documents regarding the calculation of operating
costs.\41\
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\38\ When the Commission adopted Sec. 37.1301(a), it recognized
that a SEF's financial strength is vital to ensure that the SEF can
discharge its core principle responsibilities. SEF Core Principles
Final Rule at 33538-33539.
\39\ See, e.g., WMBAA, Re: Project KISS at 5 (Sept. 29, 2017)
(``2017 WMBAA Letter'') https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61415&SearchText=.
\40\ Id. at 5.
\41\ CFTC Staff Letter No. 17-25; CFTC Staff Letter No. 15-26.
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Based on the Commission's experience with overseeing the financial
resources requirements, feedback previously received from SEFs, and the
Commission staff's experience with administering guidance on operating
costs, the Proposed Rules set forth several amendments to the Core
Principle 13 regulations, including the addition of acceptable
practices to Core Principle 13 in Appendix B to part 37.\42\ The intent
of the proposed amendments was to achieve a better balance between
ensuring SEF financial stability and promoting SEF growth and
innovation and reducing unnecessary costs.\43\
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\42\ 83 FR at 62025-62030.
\43\ Id. at 62025.
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As discussed in greater detail below, the Proposed Rules included:
(i) Clarification of the scope of operating costs that a SEF must cover
with adequate financial resources; (ii) acceptable practices for
calculating projected operating costs; (iii) amendments to the existing
six-month liquidity requirement for financial resources held by a SEF;
and (iv) streamlined and flexible requirements with respect to
financial reports filed with the Commission.
B. Sec. 37.1301--General Requirements 44
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\44\ In addition to finalizing the proposed amendments to Sec.
37.1301(a) and (c), the Commission also proposed amendments to Sec.
37.1301(b), which requires a SEF also operating as a DCO to comply
with the financial resource requirements for DCOs under Sec. 39.11.
Specifically, the Commission proposed to amend Sec. 37.1301(b) to
permit a SEF that also operates as a DCO to file a single financial
report under Sec. 39.11 that covers both the SEF and DCO. The
Commission is continuing to consider this proposed change and,
therefore, is not finalizing it as part of the Final Rules.
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Existing Sec. 37.1301(a) requires a SEF to maintain financial
resources sufficient to enable it to perform its functions in
compliance with the SEF core principles set forth in section 5h of the
Act (emphasis added).\45\ Existing Sec. 37.1301(c) specifies that a
SEF's financial resources shall be considered sufficient if their value
is ``at least equal
[[Page 9227]]
to'' the SEF's operating costs for a one-year period, calculated on a
rolling basis.\46\
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\45\ 17 CFR 37.1301(a).
\46\ 17 CFR 37.1301(c).
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Certain SEFs expressed concerns that existing Sec. 37.1301(a),
when read in conjunction with existing Sec. 37.1301(c), requires that
SEFs include operational costs in the financial resources calculation,
even if those costs relate to functions that are not germane to
discharging SEF core principle responsibilities.\47\ According to those
SEFs, the requirement that SEFs maintain capital to cover such costs
unnecessarily prevents SEFs from allocating that capital to operational
growth and innovation.\48\
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\47\ See 2017 WMBAA Letter at 6 (stating the financial resource
requirements should focus on fixed costs required for compliance,
rather than variable costs and staff-related costs that are not
essential).
\48\ Id.
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1. Proposed Rules
In the notice of proposed rulemaking, the Commission acknowledged
some SEF operational costs may not be necessary to comply with a SEF
core principle or Commission regulation and, therefore, should not be
included when calculating the adequacy of the SEF's financial
resources.\49\ For example, a SEF may incur costs related to product
research, business development, and advertising. Incurring costs to
engage in these activities is unrelated to compliance with a SEF core
principle or Commission regulation. Accordingly, the Commission
proposed to eliminate Sec. 37.1301(c), and instead amend Sec.
37.1301(a) to require a SEF to maintain adequate financial resources to
cover the operating costs of activities needed to ``comply'' with the
SEF core principles, rather than ``perform its functions in compliance
with'' the core principles.\50\
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\49\ 83 FR at 62025-62026.
\50\ The Proposed Rules consolidated existing Sec. 37.1301(a)
and (c) into a single amended Sec. 37.1301(a).
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The Commission also proposed to amend Sec. 37.1301(a) to require a
SEF to maintain financial resources adequate to comply with
``applicable Commission regulations.'' This amendment was intended to
clarify that a SEF's obligation to maintain adequate financial
resources extends to those resources necessary to comply with any
additional regulatory requirements the Commission has promulgated.\51\
The Commission noted SEFs already are complying with this clarification
in practice.\52\
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\51\ This requirement is currently in effect, and the proposed
rules simply clarified the requirement without substantively
expanding it. Under Core Principle 1, a SEF must comply with any
rule or regulation promulgated by the Commission pursuant to section
8a(5) of the Act. 17 CFR 37.100. For a SEF to discharge its
responsibilities pursuant to Core Principle 13, which include
complying with the SEF core principles, it is required to ensure
that its financial resources are adequate to comply with those rules
or regulations.
\52\ 83 FR 62026.
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Under proposed Sec. 37.1301(a), a SEF need not maintain financial
resources to cover the costs of activities (e.g., product research,
business development, or advertising) unrelated to compliance with a
core principle or Commission regulation. The Commission stated the
proposed rule offers a better and more balanced regulatory approach to
implementing Core Principle 13 requirements, noting that under the
proposed rule, SEFs would be able to allocate capital to other areas,
thereby furthering the goals of promoting SEF growth and
innovation.\53\ Thus, the Commission concluded, the proposed rule would
achieve a better balance between ensuring that a SEF is financially
stable and providing the SEF discretion to allocate its limited
resources towards growth and innovation.\54\ Further, in proposing this
rule, the Commission aimed to remove a potential barrier for new SEF
entrants that might be deterred by the relatively higher capital costs
required under existing regulations.\55\
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\53\ Id.
\54\ Id.
\55\ Id.
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The Commission also proposed several technical changes in order to
align proposed Sec. 37.1301(a) with Core Principle 13's requirements.
Core Principle 13's requirements are ongoing, prompting the Commission
to propose requiring a SEF to maintain adequate financial resources on
an ``ongoing basis.'' The Commission also proposed to replace the word
``sufficient'' with ``adequate'' while adopting additional language to
specify a SEF's financial resources are ``adequate'' if their value
``exceeds,'' rather than is ``at least equal to,'' one year's worth of
operating costs,\56\ calculated on a rolling basis pursuant to the
requirements for calculating such costs under proposed Sec. 37.1303.
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\56\ The Commission also proposed an amendment to refer to
``projected operating costs'' instead of ``operating costs'' to
conform to existing Sec. 37.1303, 17 CFR 37.1303, and Sec.
37.1307, 17 CFR 37.1307, both of which refer to ``projected
operating costs.'' During informal discussions, Commission staff and
SEFs generally have referred to SEFs' ``projected operating costs.''
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2. Summary of Comments
Refinitiv and WMBAA support the proposed changes to the general
financial resource requirements.\57\ They believe financial resources
for certain SEF personnel and activities are not necessary for
compliance with the SEF core principles or Commission regulations and
the costs associated with these personnel and activities could be
appropriately excluded in calculating projected operating costs.\58\
WMBAA also believes the amendments will encourage SEF innovation and
lower barriers to entry for new entities seeking to operate as
SEFs.\59\
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\57\ Refinitiv Letter at 13; 2019 WMBAA Letter at 21.
\58\ Id.
\59\ 2019 WMBAA Letter at 21.
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WMBAA requested the Commission allow a SEF to use a credit facility
to meet the general financial resources requirement.\60\ In addition,
WMBAA stated the statutory requirement a SEF maintain adequate
financial resources to cover one year of operating costs is unnecessary
and burdensome.\61\ According to WMBAA, this amount of resources is not
needed for a SEF to wind down its operations. Unlike futures contracts
that are proprietary to, and traded exclusively on, a particular
exchange, swaps of a particular type can and do trade on multiple SEFs,
making it relatively easy to transfer trading to another SEF in the
event of a wind-down.\62\
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\60\ Id. In the preamble to the 2013 SEF Core Principles Final
Rule, the Commission stated a SEF is allowed to include a credit
facility to comply with the six-month liquid resources requirement
(where its liquid assets on hand are insufficient) under Sec.
37.1305, 17 CFR 37.1305, but otherwise is not allowed to include
such a facility to demonstrate compliance with the one-year general
requirement. 2013 SEF Core Principles Final Rule at 33540.
\61\ 2019 WMBAA Letter at 21.
\62\ Id.
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3. Final Rule
The Commission is adopting the amendments to Sec. 37.1301(a) and
eliminating Sec. 37.1301(c) as proposed. The Commission believes it is
unnecessary to require a SEF to maintain financial resources for
activities beyond those required to comply with a SEF core principle or
Commission regulation. Limiting the financial resources requirement to
the costs of activities necessary to comply with the SEF core
principles and Commission regulations is expected to reduce barriers to
growth, innovation, and entry. The Commission believes this approach
strikes an appropriate balance between ensuring a SEF's financial
stability and allowing the SEF discretion in allocating resources.\63\
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\63\ This approach is consistent with the discretion granted to
SEFs in the statutory core principles framework and other aspects of
the Commission's financial resource requirements for SEFs. See 7
U.S.C. 7b-3(f)(1)(B) (granting a SEF reasonable discretion in
establishing the manner in which it complies with the SEF core
principles, unless the Commission provides otherwise by rule); 17
CFR 37.1303 (granting a SEF reasonable discretion in calculating its
projected operating costs for purposes of 17 CFR 37.1301).
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[[Page 9228]]
The Commission views WMBAA's request to permit the use of a credit
facility to meet the general financial resources requirement as a
substantive amendment to its regulations that is beyond the scope of
the Proposed Rules. As a result, the Commission is not addressing the
request in the Final Rules. However, the Commission may take the
request into consideration for future rulemakings.
The Final Rules do not address WMBAA's comment that it is
unnecessary and burdensome for a SEF to maintain financial resources
covering a full year's operating costs, as this is a requirement set
forth in the Act.\64\
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\64\ 7 U.S.C. 7b-3(f)(13)(B) (providing that the financial
resources of a swap execution facility shall be considered to be
adequate if the value of the financial resources exceeds the total
amount that would enable the swap execution facility to cover the
operating costs of the swap execution facility for a 1-year period,
as calculated on a rolling basis).
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C. Sec. 37.1302--Types of Financial Resources
Existing Sec. 37.1302 sets forth the types of financial resources
available to a SEF to satisfy the general financial resources
requirement.\65\ These resources include the SEF's own capital, meaning
its assets minus liabilities calculated in accordance with U.S.
generally accepted accounting principles (``U.S. GAAP''), and any other
financial resources deemed acceptable by the Commission.\66\
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\65\ 17 CFR 37.1302.
\66\ Id.
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1. Proposed Rules
The Commission proposed to amend the current regulation to refer to
generally accepted accounting principles ``in the United States'' in
order to conform to the proposed amendments to Sec. 37.1306 described
further below.
2. Summary of Comments
The Commission received no comments on the proposed changes.
3. Final Rules
The Commission is adopting the amendment to Sec. 37.1302 as
proposed. This change will conform to the adopted amendments to Sec.
37.1306 described further below.
D. Sec. 37.1303--Liquidity of Financial Resources
Existing Sec. 37.1305 requires a SEF to maintain unencumbered,
liquid financial assets, i.e., cash and/or highly liquid securities,
equal to at least six months of a SEF's operating costs.\67\ If any
portion of a SEF's financial resources is not sufficiently liquid, a
SEF is permitted to take into account a committed line of credit or
similar facility to meet this requirement.\68\ In adopting this rule in
2013, the Commission explained that the liquidity requirement is
intended to ensure that a SEF could continue to operate and wind down
its operations in an orderly fashion, if necessary.\69\ The Commission
also determined that a six-month period would be an accurate assessment
of how long it would take for a SEF to wind down in an orderly manner,
absent support for alternative time frames.\70\
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\67\ 17 CFR 37.1305.
\68\ Id.
\69\ The Commission stated that the purpose of the liquidity
requirement is so that all SEFs have liquid financial assets to
allow them to continue to operate and to wind down in an orderly
fashion and that the Commission viewed a six-month period as
appropriate for a wind-down period. SEF Core Principles Final Rule
at 33540.
\70\ Id.
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1. Proposed Rules
Since the adoption of part 37, many SEFs have maintained that a
six-month minimum liquidity requirement is more than is necessary and
some of their liquid assets could be better applied toward growth of
the SEFs.\71\ Consistent with that feedback, the Commission observed
that the wind-downs and ownership changes of several registered trading
platforms, including SEFs and DCMs, were completed within much shorter
time frames.\72\ Based on this experience, the Commission acknowledged
the existing six-month requirement is not necessary in all
circumstances and a SEF may be better-positioned to determine the
amount of liquid financial resources required to continue its
operations and to conduct an orderly winddown.
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\71\ See 2017 WMBAA Letter at 5 (arguing a shorter liquidity
requirement would allow for a SEF to allocate capital for
innovation).
\72\ For example, the Commission noted that the DCM Green
Exchange LLC had its designation vacated and ceased operations.
Similarly, the DCM Kansas City Board of Trade was acquired by CME
Group Inc. and had its designation vacated; it ultimately ceased
operations. In each case, the Commission observed a relatively
expeditious process.
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In light of this experience, the Commission proposed to renumber
Sec. 37.1305 as Sec. 37.1303 and amend the minimum liquid assets
requirement to equal the greater of (i) three months of projected
operating costs, calculated on a rolling basis; or (ii) the projected
costs needed to wind down the swap execution facility's operations.\73\
While recognizing that it rejected a three-month requirement in the SEF
Core Principles Final Rule absent support for a shorter time frame,\74\
the Commission stated it had since come to believe, based on its
experience and the feedback discussed above, that the potentially
shorter proposed time frame would be sufficient to fulfill the goal of
ensuring a SEF can continue to operate and, if necessary, wind down its
SEF operations in an orderly fashion.\75\
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\73\ 83 FR at 62027.
\74\ SEF Core Principles Final Rule at 33540.
\75\ 83 FR at 62027.
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The Commission further noted that under the proposed change, SEFs
would be able to use the resources previously allocated to the liquid
asset requirement to invest in other areas of SEF operations.\76\
Accordingly, compared to the existing static six-month requirement, the
Commission stated a liquid resources requirement of the ``greater of''
either (i) three months of projected operating costs or (ii) projected
wind-down costs better ensures an orderly wind down for SEFs and a more
efficient allocation of resources for SEFs estimating a wind-down
period less than six months.\77\ The Commission further stated
requiring SEFs to maintain the greater of three months of projected
operating costs or the SEF's projected costs for an orderly wind down
of its business better protects against the risk of failure in the
unlikely event that a SEF requires a wind-down period of longer than
six months.\78\
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\76\ Id.
\77\ Id.
\78\ Id.
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The Commission also proposed an amendment to clarify that a SEF can
overcome any deficiency in satisfying this requirement by obtaining a
committed line of credit or similar facility in an amount at least
equal to the deficiency.
2. Summary of Comments
Refinitiv and Bloomberg support the proposed rule and believe the
proposed three-month minimum liquid asset requirement better reflects a
SEF's liquidity needs for day-to-day operations and, if necessary, for
winding down operations.\79\ Refinitiv supports focusing the liquid
financial resources requirement on the cost of unwinding the SEF in an
orderly
[[Page 9229]]
manner.\80\ Bloomberg believes a SEF's wind-down period will generally
be no more than three months and that the revised liquidity requirement
``will release capital that can be deployed by a SEF to promote
innovation, while also promoting stability by ensuring that a SEF
retains sufficient capital on reserve.'' \81\
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\79\ Refinitiv Letter at 13; Bloomberg Letter at A-6.
\80\ Refinitiv Letter at 13.
\81\ Bloomberg Letter at A-6.
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WMBAA requested the Commission allow SEFs to count all commissions
receivable, aged less than three months, towards their liquid financial
resources calculation.\82\ WMBAA believes permitting the use of liquid
receivables would not impair a SEF's ability to perform its core
functions, but would enable a SEF to avoid locking up cash
unnecessarily. According to WMBAA, payment of these commissions
typically occurs within one to two months, and thus would be available
to cover operating costs or a wind-down.\83\ WMBAA also urged the
Commission to allow revolving subordinated debt as a liquid asset in
the financial resource requirement.\84\
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\82\ 2019 WMBAA Letter at 21.
\83\ Id.
\84\ Id.
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3. Final Rules
The Commission is adopting Sec. 37.1303 as proposed. Requiring a
SEF to maintain liquid financial resources equal to the greater of
three months of projected operating costs or its projected wind-down
costs will ensure that SEFs have sufficient resources for day-to-day
operations as well as winding down operations if needed, while freeing
capital for innovation and expansion in the SEF's business where
appropriate.
The Commission notes that under existing Sec. 37.1303, amended as
Sec. 37.1304, the Commission may review the methodologies used in the
calculation of a SEF's projected costs needed to wind down the swap
execution facility's operations and may require changes as appropriate.
Some examples a SEF may use to support its conclusion include: The
tenor of the contracts listed on the facility, the listing of the SEF's
contracts on other facilities, the ability of participants to close out
positions and trade on a different SEF and, in the event the SEF's
swaps are cleared, the ability of participants to clear swaps at the
same DCO as they currently utilized if they had to trade on a different
facility.
Finally, WMBAA's requests to include additional types of resources
as liquid assets are beyond the scope of this rulemaking. The
Commission may consider including additional types of liquid assets in
a future rulemaking.
E. Sec. 37.1304--Computation of Costs To Meet Financial Resources
Requirement 85
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\85\ The Commission is renaming this section, previously titled
``Computation of Projected Operating Costs to Meet Financial
Resource Requirement,'' to reflect the requirement to calculate
wind-down costs as well as operating costs.
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Existing Sec. 37.1303 requires a SEF to make a reasonable
calculation of its projected operating costs, each fiscal quarter over
a twelve-month period, to determine the amount of financial resources
needed to comply with the financial resource requirement.\86\ The rule
further provides a SEF reasonable discretion to determine the
methodology to compute its projected operating costs, although the
Commission may review the SEF's methodology and require the SEF to make
changes as appropriate.\87\
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\86\ 17 CFR 37.1303.
\87\ Id.
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1. Proposed Rules and Acceptable Practices
The Commission proposed to renumber Sec. 37.1303 as Sec. 37.1304
and amend the rule to add the requirement that a SEF make a reasonable
calculation of projected wind-down costs, providing discretion in
adopting the methodology for calculating such costs. The Commission
stated the proposed amendment is consistent with the reasonable
discretion already provided for calculating projected operating costs
and corresponds to proposed Sec. 37.1303, which incorporates the
calculation of a SEF's wind-down costs into the liquidity
determination.\88\ The Commission proposed two additional amendments to
Sec. 37.1303. First, the Commission proposed to add a reference to
amended Sec. 37.1303 to require that a SEF calculate projected
operating costs to determine how to comply with the liquidity
requirement. Second, the Commission proposed to eliminate the reference
to the twelve-month requirement, given that proposed Sec. 37.1301(a)
establishes that the financial resource requirement applies on a one-
year, rolling basis.
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\88\ 83 FR 62028.
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The Commission also proposed to include acceptable practices to
Core Principle 13 in Appendix B associated with proposed Sec. 37.1304.
The proposed acceptable practices expound upon the reasonable
discretion that SEFs have for computing projected operating costs in
determining their financial resource requirements, consistent with
existing guidance provided by Commission staff.\89\ Among other things,
these acceptable practices further explain which operating costs are
not necessary to comply with the SEF core principles and the
Commission's regulations and therefore need not be considered in a
SEF's financial resources calculation under revised Sec. 37.1301.
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\89\ The proposed acceptable practices to Core Principle 13 in
Appendix B are based, in part, upon existing Division of Market
Oversight (``DMO'') staff guidance. See CFTC Staff Letter No. 15-26
and CFTC Staff Letter No. 17-25.
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Specifically, the proposed acceptable practices state that
calculations of projected operating costs, i.e., those that are
necessary for a SEF to comply with the SEF core principles and
applicable Commission regulations, should be based on the SEF's current
business model and anticipated business volume. The proposed acceptable
practices specify that a SEF may exclude certain expenses in making a
``reasonable'' calculation of projected operating costs. These include,
among others, the following expenses: Marketing and development costs;
variable commissions paid to SEF trading specialists, the payment of
which is contingent on whether the SEF collects associated revenue from
transactions on its systems or platforms; \90\ and costs for SEF
personnel who are not necessary to enable a SEF to comply with the core
principles and Commission regulations.\91\ Further, a SEF may exclude
any non-cash costs, including depreciation and amortization. The
exclusion of these expenses is consistent with the financial resource
and liquidity requirements in proposed Sec. 37.1301 because these
expenses are not necessary for a SEF to comply with the SEF core
principles or Commission regulations.
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\90\ See CFTC Staff Letter No. 17-25.
\91\ For example, if a SEF requires a certain number of SEF
trading specialists to operate a voice-based or voice-assisted
trading system or platform, but hires additional personnel to
enhance its operations to benefit market participants, then the SEF
would only need to include the minimum number of trading specialists
required to operate the trading system or platform based on its
current business volume and take into account any projected increase
or decrease in business volume in its projected operating cost
calculations.
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In addition, the proposed acceptable practices specify that a SEF
in calculating projected operating costs may prorate, but not exclude,
certain expenses. The Commission recognizes some costs may be only
partially attributable to a SEF's compliance with the SEF core
principles and regulatory requirements. Therefore, only those
attributed costs need to be included in a SEF's projected operating
costs. Accordingly, a SEF may prorate
[[Page 9230]]
expenses shared with affiliates, e.g., the costs of administrative
staff or seconded employees the SEF shares with affiliates. Further, a
SEF may also prorate expenses that are attributable, in part, to
operational aspects of the SEF business that are not required to comply
with the SEF core principles, e.g., costs of a SEF's office space, to
the extent that it is also used to house marketing personnel. In
prorating any such expense, however, a SEF must document and justify
those prorated expenses pursuant to proposed requirements under
proposed Sec. 37.1306, discussed further below.\92\
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\92\ The proposed acceptable practices also allowed a SEF
offering more than one bona fide execution method to include the
costs of only one of those methods in calculating projected
operating costs, with the goal of mitigating disincentives for SEFs
to offer a multiplicity of execution methods. This proposed change
was intended to be consistent with the Proposed Rule's removal of
existing limitations on execution methods for Required Transactions.
Because the Final Rules are not implementing the Proposed Rule's
expansion of permissible execution methods for Required
Transactions, the Commission is not finalizing this proposed
acceptable practice at this time.
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2. Summary of Comments
WMBAA supports the proposed acceptable practices.\93\ Refinitiv
concurs with the Commission's understanding that many SEF expenses are
shared with affiliates or are partly attributable to activities not
necessary for compliance with the SEF core principles and Commission
regulations and supports allowing SEFs to prorate such expenses.\94\
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\93\ 2019 WMBAA Letter at 22. WMBAA requested that the
Commission clarify the meaning of ``bona fide'' execution method for
purposes of calculating operating costs of SEF execution methods. As
noted above, the Commission at this time is not finalizing the
proposed acceptable practice regarding treatment of operating costs
for multiple execution methods.
\94\ See Refinitiv Letter at 13-14.
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3. Final Rules and Acceptable Practices
The Commission is adopting Sec. 37.1304 and the acceptable
practices as proposed. The requirement to calculate wind-down costs
corresponds to the amendments the Commission is adopting in amended
Sec. 37.1303 discussed above, which incorporate the calculation of a
SEF's wind-down costs into the liquidity requirement. The reasonable
discretion provided for calculation of wind-down costs is already
provided to SEFs for their calculations of projected operating costs.
The Commission believes the acceptable practices added to Appendix
B to part 37 will assist SEFs in complying with amended Sec.
37.1304.\95\ These acceptable practices are consistent with the Final
Rules' amendments to Sec. 37.1301, which focus a SEF's financial
resource requirement on covering the costs of compliance with SEF
statutory and regulatory obligations, rather than the costs of all
operations of a SEF or operations of its affiliates.
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\95\ As noted, the Commission at this time is not finalizing the
proposed acceptable practice allowing a SEF offering multiple bona
fide execution methods to count the costs of only one execution
method toward its projected operating costs, for the reasons stated
above. See note 92, supra.
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F. Sec. 37.1305--Valuation of Financial Resources
Existing Sec. 37.1304--``Valuation of financial resources''--
requires a SEF, at least once each fiscal quarter, to compute the
current market value of each financial resource used to meet its
financial resources requirement under Sec. 37.1301.\96\ The
requirement is designed to address the need to update valuations when
there may have been material fluctuations in market value that could
affect a SEF's ability to satisfy its financial resource
requirement.\97\ When valuing a financial resource, the SEF must reduce
the value, as appropriate, to reflect any market or credit risk
specific to that particular resource, i.e., apply a haircut.\98\
---------------------------------------------------------------------------
\96\ 17 CFR 37.1304.
\97\ SEF Core Principles Final Rule at 33539.
\98\ A ``haircut'' is a deduction taken from the value of an
asset to reserve for potential future adverse price movement in such
asset. Id. at 33539 n.772.
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1. Proposed Rules
The Commission proposed to renumber existing Sec. 37.1304 as Sec.
37.1305 and amend the provision to add a reference to the liquidity
requirement under amended Sec. 37.1303. This would clarify that
compliance with amended Sec. 37.1303 requires a SEF to utilize the
current market value of the applicable financial resources as computed
pursuant to Sec. 37.1304.
2. Summary of Comments
The Commission did not receive any comments on this amendment.
3. Final Rules
The Commission is adopting Sec. 37.1305 as proposed, confirming
that compliance with the liquidity requirement under amended Sec.
37.1303 requires a SEF to utilize the current market value of the
applicable financial resources.
G. Sec. 37.1306--Reporting to the Commission
1. Sec. 37.1306(a)
Existing Sec. 37.1306 establishes a SEF's financial reporting
requirements.\99\ Commission regulation 37.1306(a)(1) provides that at
the end of each fiscal quarter or upon Commission request, a SEF must
report to the Commission (i) the amount of financial resources
necessary to meet the financial resources requirement of Sec. 37.1301,
and (ii) the value of each financial resource available to meet those
requirements as calculated under Sec. 37.1304.\100\ Commission
regulation 37.1306(a)(2) additionally requires a SEF to provide the
Commission each fiscal quarter with a financial statement, including a
balance sheet, income statement, and statement of the cash flows of the
SEF or its parent company.\101\ In lieu of submitting its own financial
statements, a SEF may submit the financial statements of its parent
company.\102\
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\99\ 17 CFR 37.1306.
\100\ 17 CFR 37.1306(a)(1).
\101\ 17 CFR 37.1306(a)(2).
\102\ Id.
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i. Proposed Rules
The Commission proposed several amendments to Sec. 37.1306(a).
First, the Commission proposed to require a SEF to prepare its
financial statements in accordance with U.S. GAAP. For a SEF that is
not domiciled in the U.S., and is not otherwise required to prepare its
financial statements in accordance with U.S. GAAP, the Proposed Rules
allowed the SEF to prepare its statements in accordance with either the
International Financial Reporting Standards issued by the International
Accounting Standards Board, or such comparable international standard
as the Commission may accept in its discretion. The Commission noted
the quality and transparency of SEF financial reports submitted under
the current reporting requirement have varied and stated the U.S. GAAP-
based requirement would promote consistency and better ensure a minimum
reporting standard across financial submissions.\103\
---------------------------------------------------------------------------
\103\ 83 FR 62029.
---------------------------------------------------------------------------
The Commission also proposed to require a SEF to provide its own
financial statements, rather than allow a SEF the option of submitting
the statements of its parent company. The Commission noted it may lack
jurisdiction over a SEF's parent company or its affiliates, and in such
instances, the Commission could not consider the parent company's
financial resources in determining whether the
[[Page 9231]]
SEF alone possesses adequate financial resources.\104\ The Commission
stated a separate SEF financial statement would more clearly
demonstrate evidence of the SEF's compliance with Core Principle
13.\105\
---------------------------------------------------------------------------
\104\ Id.
\105\ Id.
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The Commission also proposed revisions to Sec. 37.1306(a)(1) to
add appropriate references to amended Sec. 37.1303 and amended Sec.
37.1305. In addition to specifying the amount of financial resources
necessary to comply with Sec. 37.1301, a SEF's quarterly report would
have to include the amount of financial resources necessary to comply
with the liquidity requirement in amended Sec. 37.1303. Further, the
amounts specified in the report would have to be based on the current
market value of each financial resource and computed as reasonable
calculations of the SEF's projected operating costs and wind-down
costs.
The Proposed Rules also posed several questions to commenters on
reporting requirements for SEFs. These included whether a SEF's
financial reports should be required to be audited and whether
financial reporting should be required on a semiannual rather than a
quarterly basis.
ii. Summary of Comments
WMBAA supports requiring a SEF's financial statements be prepared
in accordance with U.S. GAAP or its equivalent for non-U.S. SEFs,
concurring with the Commission's view that such a requirement would
promote comparability across SEFs.\106\
---------------------------------------------------------------------------
\106\ WMBAA Letter at 23.
---------------------------------------------------------------------------
WMBAA objects to requiring a SEF's financial reports be audited,
contending audited reports would not improve oversight. WMBAA reasoned
that an auditing firm would not provide a complete assessment because
it likely would be unable or unwilling to opine on certain unique
aspects of a SEF's financial resources calculations, including
projection of costs based on historical or estimated costs.\107\
Further, WMBAA argued the costs associated with an audited report are
high and would pose a barrier to entry for new SEFs.\108\
---------------------------------------------------------------------------
\107\ Id. at 22. WMBAA also stated that an auditing firm would
be unlikely to opine on whether an execution method is ``bona fide''
for purposes of the proposed acceptable practices related to Sec.
37.1303. As noted above, the meaning of ``bon fide'' is not relevant
since the Commission is not finalizing the proposed acceptable
practice regarding the calculation of costs of different execution
methods.
\108\ Id.
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WMBAA also believes the current reporting requirement--quarterly
financial reports--is sufficient to ensure capital adequacy, but that a
semi-annual and annual report would also be adequate to achieve the
goal of Commission oversight.\109\ According to WMBAA, if the
Commission adopts less frequent financial reporting, a SEF should be
required to maintain all related documents and support for further
inspection.\110\ However, WMBAA asserted a SEF should not be required
to maintain, in between each report, the supplemental documents
required under existing Sec. 37.1306(c).\111\ Rather, WMBAA contends a
SEF should be able to maintain a balance sheet with financial resources
and liquidity calculations based on the most recent filing.\112\
---------------------------------------------------------------------------
\109\ Id. at 22-23.
\110\ Id. at 22.
\111\ Existing Sec. 37.1306(c) requires a SEF to provide the
Commission with supplemental documentation to its quarterly reports,
including documentation used to calculate its financial
requirements; documentation showing the basis for financial resource
valuations and liquidity requirements; and copies of relevant
agreements supporting the SEF's calculations.
\112\ WMBAA Letter at 22.
---------------------------------------------------------------------------
The Commission did not receive any comments on its proposal to
require SEFs to submit their own financial statements rather than those
of their parent entities.
iii. Final Rules
The Commission is adopting the proposal requiring financial
statements submitted as part of a SEF's quarterly financial reports to
conform to U.S. GAAP or comparable foreign standards. As supported by
commenters' feedback, the Commission continues to believe conforming
financial statements to U.S. GAAP or comparable foreign standards will
enhance the quality and transparency of SEFs' financial reporting and
facilitate assessments of SEFs' financial conditions.
The Commission is adopting, as proposed, the requirement for a SEF
to provide its own financial statements (including balance sheet),
rather than the financial statements of its parent. This change will
provide the Commission with a more accurate picture of the SEFs' assets
to ensure a SEF has adequate financial resources.\113\
---------------------------------------------------------------------------
\113\ The Commission is finalizing the amendments to Sec.
37.1306(a)(1) as proposed.
---------------------------------------------------------------------------
The Commission will not adopt the requirement that financial
statements be audited. As noted by commenters, the Commission has the
ability to request additional information from a SEF if warranted, and
the Commission does not believe the benefits of a blanket auditing
requirement would justify the costs to SEF operators at this time.
Finally, the Commission will retain the existing quarterly
reporting requirement for SEFs, rather than moving to a semiannual
reporting requirement. Quarterly reports are necessary for the
Commission to remain current with the SEF's financial condition in a
manner that semiannual reports would not. Timely financial information
will be particularly important to the Commission as it monitors the
transition to a relatively less stringent liquidity requirement for
SEFs' financial resources under the Final Rules.\114\
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\114\ See Section III.D., supra.
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2. Sec. 37.1306(c) \115\
---------------------------------------------------------------------------
\115\ Existing Sec. 37.1306(b), 17 CFR 37.1306(b), requires a
SEF to make its financial resource calculations on the last business
day of its fiscal quarter. The Commission proposed an amendment to
Sec. 37.1306(b) adding the word ``applicable'' before ``fiscal
quarter'' in the existing rule text. The Commission is finalizing
this amendment as proposed.
---------------------------------------------------------------------------
Existing Sec. 37.1306(c) sets forth documentation requirements for
a SEF's financial reporting obligations.\116\ Commission regulation
37.1306(c)(1) requires a SEF to provide the Commission with sufficient
documentation explaining the methodology used to calculate its
financial resource requirements under Sec. 37.1301.\117\ Commission
regulation 37.1306(c)(2) requires a SEF to provide sufficient
documentation explaining the basis for its valuation and liquidity
determinations.\118\ To provide such documentation, Sec. 37.1306(c)(3)
requires SEFs to provide copies of certain agreements that evidence or
otherwise support its conclusions.\119\
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\116\ 17 CFR 37.1306(c).
\117\ 17 CFR 37.1306(c)(1).
\118\ 17 CFR 37.1306(c)(2).
\119\ 17 CFR 37.1306(c)(3).
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i. Proposed Rules
Based on the proposed amendments to the Core Principle 13
regulations described above, the Commission proposed conforming
amendments to Sec. 37.1306(c) that would require a SEF to specify the
methodology used to compute its financial resources and liquidity
requirements. Proposed Sec. 37.1306(c)(1) requires documentation to be
sufficient to enable the Commission to determine whether the SEF has
made reasonable calculations of projected operating and wind-down costs
under Sec. 37.1303. Proposed Sec. 37.1306(c)(2)(i) through (iv) \120\
requires the SEF, at a minimum, to (i) list all of its expenses,
without
[[Page 9232]]
exclusion; (ii) identify all of those expenses the SEF excluded or
prorated in its projected operating cost calculations and explain the
basis for excluding or prorating any expenses; (iii) include
documentation related to any committed line of credit or similar
facility used to meet the liquidity requirement; \121\ and (iv)
identify estimates of all of the costs and the projected amount of time
required for any wind down of operations, including the basis for those
estimates.
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\120\ The Commission proposed to consolidate Sec. 37.1306(c)(1)
through (3) into Sec. 37.1306(c)(1) through (2) and adopt the
proposed requirements as described.
\121\ The Commission also proposed to eliminate the language in
existing Sec. 37.1306(c)(3) regarding copies of insurance coverage
or other arrangements evidencing or otherwise supporting the SEF's
conclusions. The Commission noted that proposed Sec. 37.1306(c)
requires a SEF to provide sufficient documentation explaining the
methodology used to compute its financial resource requirements.
Therefore, if insurance coverage or other arrangements are necessary
to explain a SEF's methodology, then the SEF must submit such
documentation. The Commission noted, however, that such
documentation may not be required in all cases; proposed Sec.
37.1306(c)(2) provides minimum requirements.
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The proposed requirement would create regulatory certainty by
codifying the no-action relief, permitting SEFs to maintain their
existing practices and avoid legal exposure arising out of a SEF's
inability to comply with regulations.\122\ The proposed requirements
would ensure that a SEF can establish that it has sufficient financial
resources, particularly in light of the discretion provided to SEFs to
compute projected operating costs and wind-down costs. The Commission
noted its belief that maintaining the general obligation for each SEF
to identify all of its expenses in its financial report, including
those corresponding to activities not needed for compliance or
otherwise are excluded or prorated from projected operating costs, is
appropriate on an ongoing basis.\123\
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\122\ See CFTC Staff Letter No. 17-25 at 4.
\123\ 83 FR 62030.
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The Commission further stated proposed Sec. 37.1306(c)(2)(i)
through (iv) would address the current lack of adequate documentation
or insufficient identification of excluded or prorated expenses by some
SEFs in submitting their projected operating costs based on Commission
staff guidance.\124\ The Commission predicted that adding greater
specificity to the existing requirement would mitigate the time and
resources required to determine a SEF's compliance with the financial
resources requirements.\125\
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\124\ Id.
\125\ Id.
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ii. Summary of Comments
The Commission did not receive any comments on the proposed
amendments to Sec. 37.1306(c).
iii. Final Rules
The Commission is adopting the amendments to Sec. 37.1306(c) as
proposed. The enhanced specificity in documentation requirements will
save time and effort for both Commission and SEF personnel by reducing
the need for multiple iterations of communications and submissions in
order to assess a SEF's compliance with the financial resources
requirements. The requirement to provide documentation of projected
wind-down costs corresponds to the incorporation under the revised
rules of wind-down costs into a SEF's liquidity requirement and the
requirement to compute such costs in addition to operating costs.
3. Sec. 37.1306(d)
Existing Sec. 37.1306(d) requires a SEF to file its financial
report no later than 40 calendar days after the end of each of the
SEF's first three fiscal quarters, and no later than 60 calendar days
after the end of the SEF's fourth fiscal quarter, or at such later time
as the Commission may permit.\126\ Multiple SEFs noted difficulties in
meeting the 60-day deadline for the fourth-quarter report, explaining:
``[a]t year end, finance departments are required to prepare annual and
quarterly reports for all entities within a particular group. This
requires information gathering from numerous sources, preparation of a
consolidated audit, complying with various statutory reporting
requirements, as well as budgeting and forecasting for the pending
year.'' \127\ Noting the difficulties SEFs face in meeting their
obligation to submit an annual compliance report concurrently with the
fourth-quarter financial report, Commission staff provided no-action
relief allowing 30 additional days for submission of a SEF's fourth-
quarter financial report and its annual compliance report.\128\
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\126\ 17 CFR 37.1306(d).
\127\ CFTC Staff Letter No. 17-61 (Nov. 20, 2017) (quoting no-
action relief request letter from 360 Trading Networks, Inc.; Cboe
SEF, LLC (f/d/b/a Bats Hotspot SEF, LLC); Chicago Mercantile
Exchange, Inc.; GTX SEF, LLC; LatAm SEF, LLC; LedgerX LLC; Tradition
SEF, Inc.; and trueEX LLC).
\128\ Id.
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i. Proposed Rules
The Commission proposed to extend the due date for SEFs' fourth-
quarter report from 60 to 90 days following the end of the quarter. The
revised due date would conform to the proposed revisions to the due
date for the SEF annual compliance report under proposed Sec.
37.1501(e)(2), discussed below. The Commission recognized that
preparing multiple year-end reports for concurrent submission,
including a fourth-quarter financial report and an annual compliance
report, imposes resource constraints on SEFs.\129\ The Commission
stated such potential constraints justify an additional 30 days to
prepare and concurrently file the SEF's fourth-quarter financial report
along with its annual compliance report.\130\
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\129\ 83 FR 62030.
\130\ Id.
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ii. Summary of Comments
The Commission did not receive any comments on the proposed
extension of the deadline for submission of the fourth-quarter
financial report.
iii. Final Rules
The extended deadline for fourth-quarter financial reports is being
adopted as proposed. The Commission continues to believe the resource
constraints facing SEFs at year-end justify an additional 30 days to
prepare the fourth-quarter financial report. The Commission has not
experienced difficulties in monitoring SEFs' financial condition as a
result of the 30-day extension currently available under Commission
staff no-action relief.
4. Sec. 37.1306(e)
i. Proposed Rules
The Commission proposed to add a new Sec. 37.1306(e) requiring
each SEF to provide notice to the Commission of its noncompliance with
the financial resource requirements no later than 48 hours after the
SEF knows or reasonably should know of its noncompliance.\131\ The
Commission noted that in some instances, the Commission has not been
informed of a SEF's noncompliance with the financial resource
requirements until the filing of a quarterly financial report. Prompt
notification of noncompliance is necessary for the Commission to
conduct proper market oversight and ensure market stability on an
ongoing basis.\132\ The proposed requirement would ensure the necessary
prompt notification.
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\131\ For example, if a SEF knows or reasonably should know that
its assets will no longer cover its projected operating costs for
the next twelve months, as calculated on a rolling basis, the SEF
would be required to notify the Commission within 48 hours.
\132\ 83 FR 62030.
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[[Page 9233]]
ii. Summary of Comments
The Commission did not receive any comments on proposed Sec.
37.1306(e).
iii. Final Rules
The Commission is adopting Sec. 37.1306(e) as proposed. The
Commission continues to believe prompt notification of noncompliance is
necessary for it to perform its oversight functions and ensure market
stability.
H. Sec. 37.1307--Delegation of Authority
Existing Sec. 37.1307(a) delegates authority to the Director of
DMO, or other staff as the Director may designate, to perform certain
functions that are reserved to the Commission under the Core Principle
13 regulations, including reviewing the methodology used to compute
projected operating costs.\133\
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\133\ 17 CFR 37.1307(a).
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1. Proposed Rules
The Commission proposed to amend Sec. 37.1307(a)(2) to
additionally delegate the authority to review and make changes to the
methodology used by a SEF to determine the market value of its
financial resources under amended Sec. 37.1304 and the methodology
that SEFs use to determine their wind-down costs under amended Sec.
37.1305. Further, the Commission would delegate the ability to request
and receive the additional documentation related to calculation
methodologies required under Sec. 37.1306(c) and receive required
notifications of noncompliance under Sec. 37.1306(e). The proposed
amendments also include several additional technical amendments based
on the proposed amendments to Core Principle 13 regulations, as
described above.
2. Summary of Comments
The Commission did not receive any comments on the proposed
delegations of authority.
3. Final Rules
The Commission is adopting the additional provisions for delegation
of authority as proposed. These delegation provisions will facilitate
prompt and efficient determinations of the adequacy of SEF financial
resources, consistent with the existing delegation authority under
Sec. 37.1307(a).
IV. Chief Compliance Officer Requirements
A. Background and Overview of Proposed Rules
Statutory Core Principle 15 requires each SEF to designate a CCO
and sets forth its corresponding duties.\134\ Among other
responsibilities, the CCO is required to ensure that the SEF complies
with the CEA and applicable rules and regulations, and is required to
establish and administer required policies and procedures.\135\ Core
Principle 15 also requires the CCO to prepare and file an ACR to the
Commission.\136\ The Commission promulgated requirements under Sec.
37.1501 to implement these requirements.\137\
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\134\ 7 U.S.C. 7b-3(f)(15). The Commission codified Core
Principle 15 under Sec. 37.1500. 17 CFR 37.1500.
\135\ 7 U.S.C. 7b-3(f)(15)(B)(iv) through (v).
\136\ 7 U.S.C. 7b-3(f)(15)(D).
\137\ 17 CFR 37.1501.
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The Proposed Rules set forth several amendments to Sec. 37.1501
based on the Commission's experience since the part 37 implementation.
These amendments streamline CCO requirements, allow SEF management to
exercise discretion in CCO oversight, and simplify the preparation and
submission of the ACR.
B. Sec. 37.1501(a)--Definitions
Core Principle 15 requires the CCO to report directly to the SEF's
``board [of directors]'' or ``senior officer'' \138\ and consult either
to resolve conflicts of interest.\139\ Existing Sec. 37.1501(a)
defines ``board of directors'' \140\ but does not define ``senior
officer.'' \141\ In the SEF Core Principles Final Rule, the Commission
stated it would not adopt a definition of ``senior officer,'' but noted
the statutory term would only include the most senior executive officer
of the legal entity registered as a SEF.\142\
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\138\ 7 U.S.C. 7b-3(f)(15)(B)(i).
\139\ 7 U.S.C. 7b-3(f)(15)(B)(iii).
\140\ Section 37.1501(a) defines ``board of directors'' as the
board of directors of a SEF, or for those SEFs whose organizational
structure does not include a board of directors, a body performing a
function similar to a board of directors. 17 CFR 37.1501(a).
\141\ 17 CFR 37.1501(a). The CEA likewise does not define the
term ``senior officer'' in this context.
\142\ SEF Core Principles Final Rule at 33544.
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1. Proposed Rules
The Commission proposed to relabel paragraph (a) as
``Definitions,'' and define ``senior officer'' as the chief executive
officer or other equivalent officer of the SEF. The Commission stated
defining ``senior officer'' would clarify the permissible reporting
lines for the CCO and provide specificity to the Commission's proposed
amendments to the Core Principle 15 regulations, as described
below.\143\ The Commission also proposed additional, technical changes.
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\143\ 83 FR 62023.
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2. Summary of Comments
WMBAA supports the proposed amendments to add a definition of
senior officer.\144\
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\144\ 2019 WMBAA Letter at 23.
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3. Final Rules
The Commission is adopting Sec. 37.1501(a) as proposed. The
Commission continues to believe the definition of senior officer will
clarify a CCO's permissible reporting lines consistent with Core
Principle 15.
C. Sec. 37.1501(b)--Chief Compliance Officer
Existing Sec. Sec. 37.1501(b)-(c) set forth certain baseline
requirements for the SEF CCO position. Commission regulation
37.1501(b)--``Designation and qualifications of chief compliance
officer''-- requires a SEF to designate an individual to serve as the
CCO; requires the CCO to have the authority and resources to help
fulfill the SEF's statutory and regulatory duties, including
supervisory authority over compliance staff; and establishes minimum
qualifications for the designated CCO.\145\ Commission regulation
37.1501(c)--``Appointment, supervision, and removal of chief compliance
officer''--establishes the respective authorities of the SEF board of
directors and senior officer to designate, supervise, and remove a CCO;
and requires the CCO to meet with the SEF's board of directors and
regulatory oversight committee (``ROC'') on an annual and quarterly
basis, respectively, and provide them with information as
requested.\146\
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\145\ 17 CFR 37.1501(b).
\146\ 17 CFR 37.1501(c).
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1. Proposed Rules
The Commission proposed to amend, clarify, or eliminate various
existing requirements under Sec. 37.1501(b) and (c) and consolidate
the remaining provisions into Sec. 37.1501(b). The Commission proposed
to eliminate rules that are duplicative of Core Principle 15, including
requirements that a SEF designate a CCO \147\ and the CCO report
directly to the board of directors or the senior officer.\148\ The
Commission also proposed to eliminate the existing ROC-related
requirements from part 37.\149\
[[Page 9234]]
Core Principle 15 does not require a SEF to establish a ROC and the
Commission has not finalized a rule that establishes requirements for a
ROC.
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\147\ The Commission proposed to eliminate this requirement
under existing Sec. 37.1501(b)(1), which the Commission proposed to
retitle ``Authority of chief compliance officer'' from ``Chief
compliance officer required.''
\148\ The Commission proposed to eliminate this requirement
under existing Sec. 37.1501(c)(2) because it is duplicative of
statutory Core Principle 15.
\149\ These requirements include a mandatory quarterly meeting
with the ROC under existing Sec. 37.1501(c)(1)(iii), and the
requirement that the CCO provide self-regulatory program information
to the ROC under existing Sec. 37.1501 (c)(1)(iv).
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Consistent with Core Principle 15, which requires a CCO to report
to the SEF's board of directors or senior officer, the Commission
proposed amendments under Sec. 37.1501(b) to allow a SEF's senior
officer to have the same oversight responsibilities over the CCO as the
board of directors. First, the Commission proposed to allow a CCO to
consult with the board of directors or senior officer of the SEF as the
CCO develops the SEF's policies and procedures.\150\ Second, the
Commission proposed to allow a CCO to meet with the senior officer of
the SEF on an annual basis, in lieu of an annual meeting with the board
of directors.\151\ Third, the Commission proposed to allow a CCO to
provide self-regulatory program information to the SEF's senior
officer, in addition to the board of directors.\152\
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\150\ The Commission proposed the amendment under proposed Sec.
37.1501(b)(1)(i).
\151\ The Commission proposed to renumber existing Sec.
37.1501(c)(1)(iii) to Sec. 37.1501(b)(5), based on the proposed
consolidation of existing paragraphs (b) and (c), amend the
requirement as described, and title the paragraph ``Annual meeting
with the chief compliance officer.''
\152\ The Commission proposed to renumber existing Sec.
37.1501(c)(1)(iv) to Sec. 37.1501(b)(6), based on the proposed
consolidation of existing paragraphs (b) and (c), amend the
requirement as described, title the paragraph ``Information
requested of the chief compliance officer,'' and make additional,
technical changes.
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The Commission further proposed to eliminate the limitations on
authority to remove a CCO, which currently restricts CCO removal
authority to a majority of the board, or in the absence of a board, a
senior officer.\153\ Instead, the Commission proposed a simplified
requirement under proposed Sec. 37.1501(b) to establish that (i) the
board or the senior officer may appoint or remove a CCO; \154\ and (ii)
the SEF must notify the Commission within two business days of the
appointment or removal (on an interim or permanent basis) of a
CCO.\155\ Based on its experience, the Commission recognized that in
many instances, the senior officer may be better positioned than the
board of directors to provide day-to-day oversight of the SEF and the
CCO, as well as to determine whether to remove a CCO.\156\ Therefore,
consistent with Core Principle 15, the Commission believes a SEF's
senior officer should have equivalent CCO oversight authority as the
SEF's board of directors. This proposed amendment is consistent with
Core Principle 15, which does not mandate a voting percentage to
approve or remove a CCO. The Commission also believes these proposed
amendments would allow a SEF to more appropriately designate, appoint,
supervise, and remove a CCO based on the SEF's particular corporate
structure, size, and complexity, and also continue to ensure a level of
independence for a CCO consistent with Core Principle 15.\157\
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\153\ The Commission proposed to eliminate this requirement
under existing Sec. 37.1501(c)(3). In addition to the changes
discussed herein, the Commission proposed to renumber existing Sec.
37.1501(c)(1)(ii) to Sec. 37.1501(b)(4) and title the paragraph
``Compensation of the chief compliance officer.''
\154\ The Commission proposed to consolidate and amend the
requirements under existing Sec. 37.1501(c)(1)(i) in part, which
addresses the appointment of a CCO by the board or senior officer,
with existing Sec. 37.1501(c)(3)(i), which currently addresses the
removal of a CCO. Based on the proposed consolidation of existing
paragraphs (b) and (c), the Commission proposed to renumber this
consolidated provision to paragraph (b)(3), retitle the consolidated
provision to ``Appointment and removal of chief compliance
officer,'' and make additional, technical changes.
\155\ The Commission notes that notification to the Commission
of the appointment and removal of a CCO is currently required under
existing Sec. 37.1501(c)(1)(i) and existing Sec.
37.1501(c)(3)(ii), respectively. Based on the proposed consolidation
of existing paragraphs (b) and (c), the Commission proposed to
consolidate and amend these notification requirements, and renumber
the consolidated requirement to Sec. 37.1501(b)(3)(i).
\156\ 83 FR 62033.
\157\ Id.
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Based on the proposed consolidation of existing Sec. 37.1501(b)
and (c), the Commission also proposed several technical amendments to
the remaining provisions under proposed Sec. 37.1501(b), including the
renumbering of certain existing provisions.\158\
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\158\ The Commission proposed to renumber the requirements under
existing Sec. 37.1501(b)(2)--``Qualifications of chief compliance
officer''--to proposed Sec. 37.1501(b)(2)(i) and (ii). The
Commission also proposed to retitle existing Sec.
37.1501(c)(1)(ii), which specifies that the board or the senior
officer must approve the CCO's compensation, to ``Compensation of
the chief compliance officer.'' Based on the proposed consolidation
of existing Sec. 37.1501(b) and (c), the Commission proposed to
renumber this requirement to Sec. 37.1501(b)(4).
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2. Proposed Acceptable Practice
The Commission proposed to adopt a new acceptable practice to Core
Principle 15 in Appendix B providing, in determining whether the
background and skills of a potential CCO are appropriate for fulfilling
the responsibilities of the role of the CCO, a SEF has the discretion
to base its determination on the totality of the qualifications of the
potential CCO, including, but not limited to, compliance experience,
related career experience, training, and any other relevant factors
related to the position. The Commission stated a non-exclusive list
provides the clarity that SEFs sought regarding a CCO's requisite
qualifications, and also provides a board of directors and senior
officer reasonable flexibility in appointing a CCO.\159\ The proposed
acceptable practice also states a SEF should be especially vigilant
regarding potential conflicts of interest when appointing a CCO.
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\159\ 83 FR 62033.
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3. Summary of Comments
WMBAA supports the proposed amendments to Sec. 37.1501(b) and (c).
According to WMBAA, the Commission's revised rules should eliminate
duplicative or unnecessary requirements, streamline existing
provisions, and thereby allow SEFs to meet their statutory and
regulatory obligations in a more effective and less burdensome
manner.\160\
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\160\ 2019 WMBAA Letter at 24.
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4. Final Rules and Acceptable Practice
The Commission is adopting the amendments to Sec. 37.1501(b) and
(c) as proposed. These changes will mitigate potential confusion by
removing requirements that are duplicative of provisions in Core
Principle 15 and references to governance structures, such as the ROC,
that are not required by statute or regulation. The Commission believes
the amendments granting the SEF's senior officer additional oversight
authority over the CCO better reflects the reality that the senior
officer is often better-positioned than the board of directors to
facilitate a CCO's effectiveness on a day-to-day basis, while still
maintaining the CCO's independence to an appropriate degree.
Further, the acceptable practice on qualifications of a CCO will
provide SEFs with additional clarity on appropriate considerations in
selecting a CCO, without limiting permissible considerations to the
enumerated list. As stated in the acceptable practice, the Commission
continues to stress the importance of considering potential conflicts
of interest in appointing a CCO.
D. Sec. 37.1501(c)--Duties of Chief Compliance Officer 161
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\161\ The Commission is renumbering existing Sec. 37.1501(d) to
Sec. 37.1501(c).
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Existing Sec. 37.1501(d)--``Duties of chief compliance officer''--
requires a CCO, at a minimum, to: (i) Oversee and review the SEF's
compliance with the Act and Commission regulations; \162\ (ii) resolve
any conflicts of interest that may
[[Page 9235]]
arise, including in certain enumerated circumstances; \163\ (iii)
establish and administer written policies and procedures reasonably
designed to prevent violations of the Act and Commission regulations;
\164\ (iv) take reasonable steps to ensure compliance with the Act and
Commission regulations; \165\ (v) establish procedures for the
remediation of noncompliance issues identified by the CCO through
certain specified protocols; \166\ (vi) establish and follow
appropriate procedures for the handling, management response,
remediation, retesting, and closing of noncompliance issues; \167\
(vii) establish and administer a compliance manual and a written code
of ethics; \168\ (viii) supervise a SEF's self-regulatory program;
\169\ and (ix) supervise the effectiveness and sufficiency of any
regulatory services provided to the SEF in accordance with Sec.
37.204.\170\
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\162\ 17 CFR 37.1501(d)(1).
\163\ 17 CFR 37.1501(d)(2). A CCO is specifically required to
address conflicts between (i) business considerations and compliance
requirements; (ii) business considerations and the requirement that
the SEF provide fair, open, and impartial access under Sec. 37.202;
and (iii) a SEF's management and board members. 17 CFR
37.1501(d)(2)(i) through (iii).
\164\ 17 CFR 37.1501(d)(3).
\165\ 17 CFR 37.1501(d)(4).
\166\ 17 CFR 37.1501(d)(5).
\167\ 17 CFR 37.1501(d)(6).
\168\ 17 CFR 37.1501(d)(7).
\169\ 17 CFR 37.1501(d)(8).
\170\ 17 CFR 37.1501(d)(9).
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1. Proposed Rules
The Commission proposed to consolidate certain existing provisions
of Sec. 37.1501(d) (to be renumbered as Sec. 37.1501(c)), specify a
CCO may identify noncompliance matters through ``any means'' in
addition to the currently prescribed means, and clarify that the
procedures followed to address noncompliance issues must be
``reasonably designed'' by the CCO to handle, respond, remediate,
retest, and resolve noncompliance issues identified by the CCO.\171\
The Proposed Rules acknowledged that a CCO may not be able to design
procedures that detect all possible noncompliance issues and noted that
a CCO may utilize a variety of resources to identify noncompliance
issues beyond a limited set of means.
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\171\ Existing paragraph Sec. 37.1501(d)(5) requires a CCO to
establish procedures for remediation of noncompliance issues
identified through a compliance office review, look-back, internal
or external audit finding, self-reported error, or validated
complaint. Existing paragraph Sec. 37.1501(d)(6) requires a CCO to
establish and follow appropriate procedures for the handling,
management response, remediation, retesting, and closing of
noncompliance issues. The Commission proposed to consolidate and
amend these requirements, and renumber the consolidated requirement
to paragraph Sec. 37.1501(c)(5).
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The Commission also proposed to amend the CCO's duty to resolve
conflicts of interest.\172\ First, the CCO would be required to take
``reasonable steps'' to resolve ``material'' conflicts of interest that
may arise.\173\ This proposed amendment reflects the Commission's view
that the current requirement is overly broad and impractical because a
CCO cannot be reasonably expected to successfully resolve every
potential conflict of interest that may arise. The Commission further
proposed to eliminate the existing enumerated conflicts of interest to
avoid any inference that they are an exhaustive list of conflicts that
a CCO must address.\174\
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\172\ The Commission proposed to renumber existing Sec.
37.1501(d)(2), which addresses the CCO's duty to resolve conflicts
of interest, to Sec. 37.1501(c)(2) and amend the requirement as
described.
\173\ The Commission also proposed to eliminate ``a body
performing a function similar to the board of directors'' under
proposed Sec. 37.1501(c)(2) (existing Sec. 37.1501(d)(2)), as this
phrase is already included in the definition of ``board of
directors'' under Sec. 37.1501(a).
\174\ These provisions are currently set forth under existing
Sec. 37.1501(d)(2)(i) through (iii). The Commission also proposed
additional, technical changes to existing Sec. 37.1501(d), (d)(1),
d(7) and d(8), to renumber them as Sec. 37.1501(c), (c)(1), (c)(6)
and (c)(7), respectively and to renumber existing paragraph Sec.
37.1501(c)(9) as Sec. 37.1501(c)(8).
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The Commission stated these proposed amendments would not weaken
the CCO's statutory duty to address conflicts of interest, but rather
reflect the CCO's practical ability to detect and resolve
conflicts.\175\ Moreover, the proposed amendments reflected the
Commission's belief that a CCO should have discretion to determine the
conflicts that are material to the SEF's ability to comply with the Act
and the Commission's regulations.\176\
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\175\ 84 FR 62034.
\176\ Id.
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2. Summary of Comments
WMBAA supports the proposed changes to the CCO's duties.\177\
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\177\ 2019 WMBAA Letter at 25.
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3. Final Rules
The amendments are being finalized as proposed, with one exception.
The Commission notes the list of potential conflicts that a CCO should
resolve under existing Sec. 37.1500(d)(2) does not create an inference
that they are an exhaustive list of conflicts that a CCO must address
but, instead, provides useful examples, and the list will not be
eliminated as proposed.\178\ The Commission continues to believe the
amendments do not weaken the CCO's duties to identify and address
conflicts of interest. Rather, the amendments reflect the practical
reality that, in the Commission's experience, a CCO cannot be
reasonably expected to successfully detect and resolve every potential
conflict of interest that may arise.
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\178\ The list will be re-designated as Sec. 37.1501(c)(2)(i)
through (iv).
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E. Sec. 37.1501(d)--Preparation of Annual Compliance Report
179
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\179\ The Commission is renumbering existing Sec. 37.1501(e) to
Sec. 37.1501(d).
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Existing Sec. 37.1501(e)--``Preparation of annual compliance
report''--requires the CCO to annually prepare and sign an ACR that, at
a minimum, (i) describes the SEF's written policies and procedures,
including the code of ethics and conflicts of interest policies; \180\
(ii) reviews the SEF's compliance with the Act and Commission
regulations in conjunction with the SEF's policies and procedures;
\181\ (iii) provides a self-assessment of the effectiveness of the
SEF's policies and procedures, including areas of improvement and
related recommendations for the SEF's compliance program or resources;
\182\ (iv) lists material changes to the policies and procedures; \183\
(v) describes the SEF's financial, managerial, and operational
resources, including compliance program staffing and resources, a
catalogue of investigations and disciplinary actions, and a review of
the disciplinary committee's performance; \184\ (vi) describes any
material compliance matters identified through certain enumerated
mechanisms (e.g., compliance office review or lookback), and explains
how they were resolved; \185\ and (vii) certifies that, to the best of
the CCO's knowledge and reasonable belief and under penalty of law, the
ACR report is accurate and complete.\186\
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\180\ 17 CFR 37.1501(e)(1).
\181\ 17 CFR 37.1501(e)(2)(i).
\182\ 17 CFR 37.1501(e)(2)(ii) through (iii).
\183\ 17 CFR 37.1501(e)(3).
\184\ 17 CFR 37.1501(e)(4).
\185\ 17 CFR 37.1501(e)(5).
\186\ 17 CFR 37.1501(e)(6).
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After part 37 was implemented, the Commission gained experience and
received feedback on the ACR requirements. The Commission determined
that some of the required ACR content provides it with minimal
meaningful insight into a SEF's compliance program. For example, some
of the content is duplicative of information obtained by the Commission
from other reporting channels, such as the system-related information
that a SEF must file pursuant to Core Principle 14 and rule
certifications filed pursuant to part 40 of
[[Page 9236]]
the Commission's regulations.\187\ Various SEF CCOs also have provided
feedback that certain ACR content requires substantial time to prepare
and includes some information that does not change frequently.\188\
SEFs requested that the Commission simplify those requirements and
provide additional time to file the reports. To this end, the
Commission notes many SEFs have not provided sufficient assessments
whether their respective policies and procedures (e.g., rulebooks,
compliance manuals, conflict of interest policies, codes of ethics,
governance documentation, and third-party service agreements) comply
with the Act and Commission regulations.
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\187\ Among other information required to be submitted to the
Commission pursuant to part 40, a SEF is required to provide the
Commission with amendments to its rulebook and compliance manual.
\188\ See CFTC Staff Letter No. 17-61 (citing testimonials from
SEFs that the preparation of an ACR requires an extensive
information-gathering process, including review and documentation of
information gathered on an entity-wide basis).
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1. Proposed Rules
Based upon its experience in reviewing ACRs, the Commission
proposed certain amendments to eliminate duplicative or unnecessary
information requirements and streamline existing requirements, thereby
reducing unnecessary regulatory burdens and compliance costs associated
with certain aspects of ACRs. The Commission also proposed certain
amendments to enhance the usefulness of ACRs by enabling the Commission
to better assess the effectiveness of a SEF's compliance and self-
regulatory programs.
Under the proposed approach, a SEF would no longer need to include
in its ACR either a review of all the Commission regulations applicable
to a SEF or an identification of the written policies and procedures
designed to ensure compliance with the Act and Commission
regulations.\189\ Instead, under proposed Sec. 1501(d)(1), a SEF would
be required to include in the ACR a description and self-assessment of
the effectiveness of the SEF's written policies and procedures to
``reasonably ensure'' compliance with the Act and applicable Commission
regulations. The Commission stated its belief that this approach is
more closely aligned with the corresponding provisions of Core
Principle 15 and would still allow the Commission to properly assess
the SEF's compliance and self-regulatory programs.\190\ Similarly, the
Commission also proposed to eliminate a required discussion of the
SEF's compliance staffing and structure; a catalogue of investigations
and disciplinary actions taken over the last year; and a review of
disciplinary committee and panel performance.\191\ A SEF would continue
to be required to describe in its ACR the SEF's financial, managerial,
and operational resources set aside for compliance.\192\ By refining
the scope of information a SEF would be required to include in its ACR,
the Commission intended to allow SEFs to devote their resources to
providing more detailed--and ultimately better-quality--information
that will better facilitate assessments of compliance.
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\189\ The Commission proposed to eliminate these requirements in
the introductory language of existing Sec. 1501(e)(2) and Sec.
1501(e)(2)(i).
\190\ 83 FR 62035. As proposed, a SEF would continue to be
required to describe the SEF's written policies and procedures,
consistent with Core Principle 15. In addition to the required
description, the Commission proposed to consolidate and amend
existing Sec. 37.1501(e)(2)(ii), which requires a SEF to provide in
the ACR a self-assessment as to the effectiveness of its policies
and procedures, with existing Sec. 37.1501(e)(1), and renumber the
consolidated requirement to Sec. 37.1501(d)(1). Further, the
Commission proposed to consolidate and amend existing Sec.
37.1501(e)(2)(iii), which requires an ACR to discuss areas for
improvement and recommend potential or prospective changes or
improvements to a SEF's compliance program and resources, with
existing Sec. 37.1501(e)(3) and renumber the consolidated
requirement to Sec. 37.1501(d)(2). The Commission expects the CCO
will provide more nuanced and in-depth discussions through these
consolidated provisions, rather than merely providing generalized
responses.
\191\ The Commission proposed to eliminate these requirements
under existing Sec. 37.1501(e)(4).
\192\ The Commission proposed to renumber the remaining
requirements under existing Sec. 37.1501(e)(4) to Sec.
37.1501(d)(3) and adopt technical amendments.
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To enhance the Commission's ability to assess a SEF's written
policies and procedures regarding compliance matters, the Commission
also proposed to require a SEF to discuss only material noncompliance
matters and explain the corresponding actions taken to resolve such
matters.\193\ The Commission stated requiring SEFs to focus on
describing material noncompliance matters, rather than describing all
compliance matters in similar depth, would streamline this requirement
and provide more useful information to the Commission.\194\ Further,
the Commission proposed to eliminate the enumerated mechanisms for
identifying noncompliance issues, conforming to the ability of a CCO to
establish procedures to identify noncompliance issues through ``any
means,'' as described above.\195\
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\193\ The Commission proposed to renumber this requirement under
existing Sec. 37.1501(e)(5) to Sec. 37.1501(d)(4) and adopt the
amendments as described above and additional, technical changes.
\194\ 83 FR 62035.
\195\ See Section IV.D., supra. The Commission proposed to
eliminate these enumerated mechanisms from the ACR requirements
under existing paragraph (e)(5).
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Consistent with these proposed amendments, the Commission also
proposed to limit a SEF CCO's certification of an ACR's accuracy and
completeness to ``all material respects'' of the report.\196\ The
Commission recognized CCOs have been hesitant to certify that an entire
ACR is accurate and complete under the penalty of the law, without
regard to whether a potential inaccuracy or omission would be a
material error or not. The Commission believed the proposed change
would appropriately address SEF CCOs' concerns regarding potential
liability while ensuring the material accuracy of an ACR submitted to
the Commission.\197\
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\196\ The Commission proposed to renumber existing Sec.
37.1501(e)(6) to Sec. 37.1501(d)(5) and amend the requirement as
described.
\197\ 83 FR 62035.
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2. Summary of Comments
Refinitiv and WMBAA support the proposed amendments to the
preparation of the ACR.\198\ Refinitiv believes the ACR is unduly
burdensome to prepare in its current form in comparison to the
regulatory benefits of much of the information required to be provided;
and the proposed amendments would more closely harmonize a SEF's ACR
requirements with ACR requirements for a swap dealers or futures
commission merchants. Refinitiv supports the proposal to eliminate the
requirement to include a chart identifying a specific policy or
procedure reasonably designed to ensure compliance with each individual
regulation and paragraph of a regulation. In Refinitiv's view, the
proposed requirements regarding CCO reports would ensure a proper
compliance review on an annual basis without the unnecessary costs
incurred in connection with producing such a chart.
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\198\ 2019 WMBAA Letter at 25-26; Refinitiv Letter at 14.
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3. Final Rules
The Commission is adopting the amended requirements for preparation
of an ACR as proposed. The streamlined content requirements will allow
SEF CCOs to focus on providing complete and accurate information on the
compliance matters that are most critical to the Commission's oversight
of SEFs, and allow the Commission to conduct a more efficient and
effective
[[Page 9237]]
review of an ACR and assessment of a SEF's compliance.
F. Sec. 37.1501(e)--Submission of Annual Compliance Report and Related
Matters 199
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\199\ The Commission is renumbering existing Sec. 37.1501(f) to
Sec. 37.1501(e).
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Existing Sec. 37.1501(f)(1) requires a CCO to provide the ACR to
the board or, in the absence of a board, the senior officer for
review.\200\ The board of directors and senior officer may not require
the CCO to change the ACR.\201\ The SEF's board minutes, or a similar
written record, must reflect the submission of the ACR to the board of
directors or senior officer and any subsequent discussion of the
report.\202\ Additionally, the SEF must concurrently file the ACR and
the fourth-quarter financial statements with the Commission within 60
calendar days of the end of the SEF's fiscal year end.\203\ The CCO
must certify and promptly file an amended ACR with the Commission upon
the discovery of any material error or omission in the report.\204\ A
SEF may request an extension of the ACR filing deadline based on
substantial, undue hardship in filing the ACR on time.\205\
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\200\ 17 CFR 37.1501(f)(1).
\201\ Id.
\202\ Id.
\203\ 17 CFR 37.1501(f)(2).
\204\ 17 CFR 37.1501(f)(3).
\205\ 17 CFR 37.1501(f)(4).
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1. Proposed Rules
The Commission proposed several amendments to the ACR submission
procedures. First, the Commission proposed to provide SEFs with an
additional 30 days to file the ACR with the Commission, but no later
than 90 calendar days after a SEF's fiscal year end.\206\ The
Commission recognized that in addition to the ACR, SEFs have other
reporting obligations, such as the fourth-quarter financial report
required to be submitted under Core Principle 13 and other year-end
reports; and SEFs have indicated that these multiple reporting
obligations present resource constraints on SEFs and their CCOs.\207\
In addition to an extended deadline, the Commission proposed to replace
the ``substantial and undue hardship'' standard required for filing ACR
extensions with a ``reasonable and valid'' standard.\208\ Further, the
Commission proposed to eliminate the requirement that each SEF must
document the submission of the ACR to the SEF's board of directors or
senior officer in board minutes or some other similar written
record,\209\ noting that the Core Principle 15 recordkeeping
requirement under proposed Sec. 37.1501(f), discussed below, would
incorporate this requirement.\210\ The Commission also proposed to
require the CCO to submit an amended ACR to the SEF's board of
directors--or, in the absence of a board of directors, the senior
officer of the SEF--for review prior to submitting the amended ACR to
the Commission; this approach is the same as the requirements that
exist for submitting an initial ACR.\211\
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\206\ The Commission proposed to renumber existing Sec.
37.1501(f)(2) to Sec. 37.1501(e)(2), amend the requirement as
described, and adopt additional, technical amendments to the
existing language. The Commission also proposed to add a title to
this paragraph--``Submission of annual compliance report to the
Commission.''
\207\ 83 FR 62036.
\208\ The Commission proposed to renumber existing Sec.
37.1501(f)(4) to Sec. 37.1501(e)(4) and amend the provision as
described. The Commission also proposed to add a title--``Request
for extension.''
\209\ The Commission proposed to eliminate this requirement
under existing paragraph (f)(1).
\210\ Existing Sec. 37.1501(g) sets forth recordkeeping
requirements for SEFs related to the CCO's duties. As discussed
below, the Commission is amending those requirements.
\211\ The Commission proposed to renumber existing Sec.
37.1501(f)(3) to Sec. 37.1501(e)(3) and add a title--``Amendments
to annual compliance report.'' The Commission proposed to adopt this
requirement under Sec. 37.1501(e)(3)(i). Under proposed Sec.
37.1501(e)(3)(ii), an amended ACR would be subject to the amended
certification requirement, i.e., a CCO must certify that the ACR is
accurate and complete in all material respects. The Commission also
proposed to renumber existing Sec. 37.1501(f) to Sec. 37.1501(e)
and change the title to ``Submission of annual compliance report and
related matters.'' The Commission also proposed to renumber existing
Sec. 37.1501(f)(1) to Sec. 37.1501(e)(1), adopt additional,
technical amendments to the existing language, and add a title--
``Furnishing the annual compliance report prior to submission to the
Commission.''
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2. Summary of Comments
WMBAA supports the proposed amendments to the ACR submission
requirements.\212\
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\212\ 2019 WMBAA Letter at 27.
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3. Final Rules
The amendments to the ACR submission requirements are being
finalized as proposed. Given other relevant end-of-year reporting
requirements, including the SEF's required fourth-quarter financial
report (as well as any reporting required of the SEF's affiliates under
other regulatory regimes), the Commission continues to believe a 30-day
extension of the submission timeline and a less stringent ``reasonable
and valid'' standard for further extensions will facilitate more
accurate and useful reporting to the Commission.\213\ The additional
requirements for board of directors or senior officer review of an
amended ACR will likewise foster increased accuracy and precision in
regulatory reporting.
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\213\ A SEF requesting an extension must identify the
circumstances creating a reasonable and valid need for the
extension. The Commission--and, when exercising the delegated
authority discussed below, the Director of the Division of Market
Oversight--reserves the discretion to determine that the rationale
proffered by the SEF is not objectively reasonable and valid.
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G. Sec. 37.1501(f)--Recordkeeping 214
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\214\ The Commission is renumbering existing paragraph (g) to
paragraph (f).
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Existing Sec. 37.1501(g)(1) requires a SEF to maintain a copy of
written policies and procedures adopted in furtherance of compliance
with the Act and the Commission's regulations; \215\ copies of all
materials created in furtherance of the CCO's duties under existing
Sec. 37.1501(d)(8) and (9); \216\ copies of all materials in
connection with the review and submission of the ACR; \217\ and any
records relevant to the ACR.\218\ Existing Sec. 37.1501(g)(2) requires
the SEF to maintain these records in accordance with Sec. 1.31 and
part 45 of the Commission's regulations.\219\
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\215\ 17 CFR 37.1501(g)(1)(i).
\216\ 17 CFR 37.1501(g)(1)(ii).
\217\ 17 CFR 37.1501(g)(1)(iii).
\218\ 17 CFR 37.1501(g)(1)(iv).
\219\ 17 CFR 37.1501(g)(2).
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1. Proposed Rules
The Commission proposed to streamline the recordkeeping
requirements that pertain to the CCO's duties and the preparation and
submission of the ACR. Specifically, the Commission proposed to revise
Sec. 37.1501(f) to require a SEF to keep all records demonstrating
compliance with the duties of the CCO and the preparation and
submission of the ACR consistent with the recordkeeping requirements
under Sec. Sec. 37.1000 and 37.1001.\220\
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\220\ 17 CFR 37.1501(f); 17 CFR 37.1000 and 37.1001.
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2. Summary of Comments
The Commission did not receive any comments on the proposed
amendments to the CCO's recordkeeping requirements.
3. Final Rules
The Commission is adopting the recordkeeping requirements as
proposed. The Commission believes the simplified requirements will
better ensure access to relevant compliance information.
[[Page 9238]]
H. Sec. 37.1501(g)--Delegation of Authority 221
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\221\ The Commission is renumbering existing Sec. 37.1501(h) to
Sec. 37.1501(g).
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Existing Sec. 37.1501(h)--``Delegation of authority''--delegates
the authority to grant or deny a SEF's request for an extension of time
to file its ACR to the Director of DMO.\222\ In addition to renumbering
this provision based on the amendments described above, the Commission
proposed to adopt additional, technical amendments that conform to the
proposed amendments to the Core Principle 15 regulations discussed
above. The Commission received no comments on the proposal and is
adopting the amendments as proposed.
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\222\ 17 CFR 37.1501(h).
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V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires federal agencies,
in promulgating rules, to consider the impact of those rules on small
entities.\223\ The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on small entities in accordance with
the RFA.\224\ The changes to part 37 adopted herein would have a direct
effect on the operations of SEFs. The Commission has previously
certified that SEFs \225\ are not small entities for purpose of the
RFA. Accordingly, the Commission does not believe the Final Rules will
have a significant economic impact on a substantial number of small
entities. Therefore, the Chairman, on behalf of the Commission,
pursuant to 5 U.S.C. 605(b), hereby certifies that the Final Rules will
not have a significant economic impact on a substantial number of small
entities.
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\223\ See 5 U.S.C. 601 et seq.
\224\ See Policy Statement and Establishment of ``Small
Entities'' for purposes of the Regulatory Flexibility Act, 47 FR
18618 (Apr. 30, 1982).
\225\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476, 33548 (June 4, 2013).
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B. Paperwork Reduction Act
1. Background
The Paperwork Reduction Act of 1995 (``PRA'') \226\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring a collection of
information as defined by the PRA. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number issued
by the Office of Management and Budget (``OMB'').
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\226\ 44 U.S.C. 3501 et seq.
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The rule amendments adopted herein will result in the revision of a
collection of information for which the Commission has previously
received a control number from OMB: OMB Control Number 3038-0074, Core
Principles and Other Requirements for Swap Execution Facilities. The
responses to this collection of information are mandatory.
The Commission did not receive any comments regarding its PRA
burden analysis in the preamble to the notice of proposed rulemaking.
The Commission is revising information collection number 3038-0074 to
reflect the adoption of amendments to part 37 of its regulations, as
discussed below, but does not believe the regulations as adopted impose
any other new collections of information that require approval of OMB
under the PRA.
2. New Information Collection Requirements and Related Burden Estimates
\227\
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\227\ This discussion does not include information collection
requirements that are included under other Commission regulations
and related OMB control numbers. Specifically, the discussion does
not include OMB control number 3038-0052, which covers, among other
things, information collections arising in part 38 (other than the
information collections related to Sec. 38.12) or OMB control
number 3038-0099, which covers the information collections related
to the ``available to trade'' determination (MAT determination)
process under Sec. Sec. 37.10 and 38.12.
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Currently, there are approximately 19 SEFs registered with the
Commission that may be impacted by this rulemaking and, in particular,
the collection of information contained herein and discussed below.
i. Audit Trail Requirements Related to Post-Execution Allocation
Information
Existing Sec. 37.205(a) requires a SEF to capture and retain all
audit trail data necessary to detect, investigate, and prevent customer
and market abuses. Existing Sec. 37.205(b)(2)(iv) requires a SEF's
audit trail program to include an electronic transaction history
database that identifies, among other things, each account to which
order fills are allocated. The Commission proposed to eliminate the
requirements in Sec. 37.205(a) and (b)(2)(iv) that a SEF capture post-
execution allocation information in its audit trail. Instead, the
Commission proposed to require that SEFs capture in their audit trail
information only through execution on the SEF. The Commission is
adopting the amendments as proposed.
As noted in the Proposed Rules, to the extent that the Commission
is providing SEFs with greater discretion in fulfilling their
information collection obligations with respect to audit trail
requirements under Sec. 37.205, the Commission estimates and assumes
SEFs will continue to fulfill their information collection burdens in a
manner similar to the status quo. Accordingly, amended Sec. 37.205(a)
and (b) will not substantively or materially affect a SEF's total
information collection burden hours. With respect to Sec. 37.205(a),
the Commission's proposal to eliminate such information collections
will not result in a net change to a SEF's aggregate burden hours
because the 2016 Part 37 PRA Renewal already considered such relief and
non-compliance with such requirements in its revised estimate.
ii. Financial Resources Requirements
Core Principle 13 requires a SEF to have adequate financial,
operational, and managerial resources to discharge its
responsibilities. To achieve financial resource adequacy, a SEF must
maintain financial resources sufficient to cover its operating costs
for a period of at least one year, calculated on a rolling basis. The
Commission implemented Core Principle 13 by adopting Sec. Sec. 37.1301
through 37.1307 to specify: (i) The eligible types of financial
resources that may be counted toward compliance (Sec. 37.1302); (ii)
the computation of projected operating costs (Sec. 37.1303); (iii)
valuation requirements (Sec. 37.1304); (iv) a liquidity requirement
for those financial resources that is equal to six months of a SEF's
operating costs (Sec. 37.1305); and (v) reporting obligations (Sec.
37.1306). These regulations are intended to ensure that a SEF has
financial strength sufficient to discharge its responsibilities,
maintain market continuity, and withstand unpredictable market events.
The Commission proposed several amendments to the Core Principle 13
regulations to achieve a better balance between ensuring SEF financial
stability, promoting SEF growth and innovation, and reducing
unnecessary costs. The proposed rules: (i) Clarify the scope of
operating costs that a SEF must cover with adequate financial
resources; (ii) set forth acceptable practices, based on existing
Commission staff guidance, that address the discretion that a SEF has
when calculating projected operating costs pursuant to proposed Sec.
37.1304; (iii) amend the existing six-month liquidity requirement for
financial resources held by a SEF; and (iv) streamline requirements
with respect to financial reports filed with
[[Page 9239]]
the Commission. The Commission also proposed amendments to clarify
certain existing requirements, including the renumbering of several
provisions to present the requirements in a more cohesive manner.
The Commission is adopting the amendments to Sec. Sec. 37.1301
through 37.1307 as proposed. With respect to two questions posed in the
notice of proposed rulemaking, the Commission will not adopt the
requirement that financial statements be audited, and the Commission
will retain the existing quarterly reporting requirement for SEFs,
rather than moving to a semiannual reporting requirement.
As stated in the notice of proposed rulemaking, the Commission
estimates the amendment to Sec. 37.1301(b) will decrease the annual
recurring information collection burden hours by five burden hours; the
amendment to Sec. 37.1306 will increase the annual recurring
information collection burden hours by 10 burden hours and not impose
an initial, non-recurring burden; and the amendment to Sec. 37.1306(c)
will impose an initial, non-recurring information collection of 20
burden hours and five annual recurring information collection burden
hours after the initial year to update the information. Other than as
discussed above, the Commission believes the amendment to Sec.
37.1306(c) will not impose new information collection burdens on SEFs
or substantively or materially modify existing burdens.
iii. Chief Compliance Officer Requirements
Statutory Core Principle 15 requires each SEF to designate a CCO
and sets forth its corresponding duties. Among other responsibilities,
the CCO is required to ensure the SEF complies with the CEA and
applicable rules and regulations, and to establish and administer
required policies and procedures. Core Principle 15 also requires the
CCO to prepare and file an ACR to the Commission. The Commission
promulgated requirements under Sec. 37.1501 to implement these
requirements.
The Commission proposed several amendments to Sec. 37.1501 based
on the Commission's experience since the part 37 implementation. These
amendments streamline CCO requirements; allow SEF management to
exercise discretion in CCO oversight; and simplify the preparation and
submission of the ACR. Specifically, the proposed changes: (i) Add the
definition of ``senior officer;'' (ii) eliminate the existing ROC-
related requirements; (iii) allow the SEF's senior officer to have the
same oversight responsibilities over the CCO as the board; (iv)
eliminate the limitations on authority to remove the CCO, which
currently restricts that removal authority to a majority of the board,
or in the absence of a board, the senior officer; (v) add a new
acceptable practice to Core Principle 15 in Appendix B associated with
Sec. 37.1501(b)(2)(i), which requires the CCO to have the background
and skills appropriate to the position and states that a SEF should be
especially vigilant regarding potential conflicts of interest when
appointing the CCO; (vi) adopt several amendments to clarify and
streamline the CCO's duties, including refining the scope of the CCO's
duty to taking only ``reasonable steps'' to resolve ``material''
conflicts of interest that may arise; and (vii) make other amendments,
including elimination of duplicative rules and renumbering and
consolidation of existing provisions. The amendments are being
finalized as proposed, with one exception. The Commission is not
eliminating the list of potential conflicts that the CCO should resolve
under existing Sec. 37.1501(d)(2).
With respect to the ACR, existing Sec. 37.1501(e) requires the CCO
to prepare and sign annually an ACR that, at a minimum: (i) Describes
the SEF's written policies and procedures; (ii) reviews the SEF's
compliance with the Act and Commission regulations; (iii) provides a
self-assessment of the effectiveness of the SEF's policies and
procedures; (iv) lists material changes to the policies and procedures;
(v) describes the SEF's financial, managerial, and operational
resources; (vi) describes any material compliance matters identified
through certain enumerated mechanisms and explains how they were
resolved; and (vii) certifies that, to the best of the CCO's knowledge
and reasonable belief and under penalty of law, the ACR is accurate and
complete.
The Commission proposed several amendments to simplify the ACR
submission procedures including: Providing SEFs with an additional 30
days to file the ACR with the Commission, but no later than 90 calendar
days after a SEF's fiscal year end, and requiring the CCO to submit an
amended ACR to the SEF's board or, in the absence of a board, the
senior officer of the SEF, for review prior to submitting the amended
ACR to the Commission. The proposed rules also would streamline the
recordkeeping requirements that pertain to the CCO's duties and the
preparation and submission of the ACR. The amendments to the ACR
preparation, submission and recordkeeping requirements are being
adopted and finalized as proposed.
As stated in the notice of proposed rulemaking, the Commission
estimates the amendment to Sec. 37.1501(d) will reduce annual
recurring information collection burden hours by approximately 10
burden hours per SEF. The amendment to Sec. 37.1501(d)(3) will reduce
annual recurring information collection burden hours by approximately
five burden hours per SEF. The amendment to Sec. 37.1501(d)(4) will
reduce annual recurring information collection burden hours per SEF by
three burden hours. The amendment to Sec. 37.1501(d)(5) will reduce
annual recurring information collection burden hours per SEF/CCO by 10
burden hours.
C. Cost-Benefit Considerations
1. Introduction
Section 15(a) 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.\228\ 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: (i)
Protection of market participants and the public; (ii) efficiency,
competitiveness, and financial integrity of futures markets; (iii)
price discovery; (iv) sound risk management practices; and (v) other
public interest considerations.
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\228\ 7 U.S.C. 19(a).
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2. Background
The Commission is finalizing several of the Proposed Rules. First,
the Final Rules eliminate the requirement that a SEF capture post-
execution allocation information in its audit trail data. Second,
regarding financial resources, the Final Rules finalize amendments to
the existing six-month liquidity requirement and add new acceptable
practices that provide further guidance to SEFs for making a reasonable
calculation of their projected operating costs. Finally, the Final
Rules streamline requirements for the CCO position; allow SEF
management to exercise discretion in CCO oversight; and simplify the
preparation and submission of the required ACR.
The baseline against which the Commission considers the costs and
benefits of the Final Rules is the statutory and regulatory
requirements of the CEA and Commission regulations now in effect, in
particular CEA section
[[Page 9240]]
2(h)(8) and certain rules in part 37 of the Commission's regulations.
The Commission, however, notes that as a practical matter, SEFs have
adopted some current practices included in the Final Rules based upon
no-action relief and guidance provided by Commission staff that is
time-limited in nature.\229\ As such, to the extent that SEFs and
market participants have relied on relevant Commission staff no-action
relief or Commission staff guidance, the actual costs and benefits of
the Final Rules may not be as significant.
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\229\ CFTC Staff Letter No. 17-54 (post-execution allocation
data); CFTC Staff Letter No. 17-61 (timing of the ACR submission).
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In some instances, it is not reasonably feasible to quantify the
costs and benefits with respect to certain factors, for example, price
discovery or market integrity. Notwithstanding these limitations,
however, the Commission otherwise identifies and considers the costs
and benefits of these rules in qualitative terms. The Commission did
not receive any comments from commenters which quantified or attempted
to quantify the costs and benefits of these rules.
The following consideration of costs and benefits is organized
according to the rules and rule amendments finalized in this
rulemaking. For each rule, the Commission summarizes the Final Rules,
and identifies and discusses the costs and benefits attributable to
each rule. The Commission, where applicable, then considers the costs
and benefits of the Final Rules in light of the five public interest
considerations set out in section 15(a) of the CEA.
The Commission notes that this consideration of costs and benefits
is based on the understanding that the swaps market functions
internationally, with many transactions involving U.S. firms taking
place across international boundaries, with some Commission registrants
being organized outside of the U.S., with leading industry members
typically conducting operations both within and outside the U.S., and
with industry members commonly following substantially similar business
practices wherever located. Where the Commission does not specifically
refer to matters of location, the discussion of costs and benefits
below refers to the effects of the Final Rules on all swaps activity
subject to the final new and amended regulations, whether by virtue of
the activity's physical location in the U.S. or by virtue of the
activity's connection with activities in, or effect on, U.S. commerce
under CEA section 2(i).\230\
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\230\ Section 2(i)(1) applies the swaps provisions of both the
Dodd-Frank Act and Commission regulations promulgated under those
provisions to activities outside the United States that have a
direct and significant connection with activities in, or effect on,
commerce of the United States. 7 U.S.C. 2(i). Section 2(i)(2) makes
them applicable to activities outside the United States that
contravene Commission rules promulgated to prevent evasion of the
Dodd-Frank Act.
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3. Audit Trail
i. Overview
Existing Sec. 37.205(a) requires a SEF to capture and retain all
audit trail data necessary to detect, investigate and prevent customer
and market abuses.\231\ This audit trail data must permit a SEF to
track a customer order from the time of receipt through fill,
allocation, or other disposition.\232\ Existing Sec. 37.205(b)(2)(iv)
requires a SEF's audit trail program to include an electronic
transaction history database that identifies, among other things, each
account to which order fills are allocated.\233\
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\231\ 17 CFR 37.205(a). Such audit trail data must be sufficient
to reconstruct all indications of interest, RFQs, orders, and
trades.
\232\ Id.
\233\ 17 CFR 37.205(b)(2)(iv).
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Recognizing the practical difficulties that SEFs face in obtaining
information regarding allocations that occur away from the SEF after a
trade has been executed, the Commission is eliminating the requirements
in Sec. 37.205(a) and (b)(2)(iv) that a SEF capture post-execution
allocation information in its audit trail.\234\ Instead, the Final
Rules require a SEF to capture in its audit trail information only
through execution on the SEF.\235\ The Commission has noted that this
change would be consistent with current swap market practice.\236\
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\234\ 83 FR at 62005.
\235\ Id.
\236\ Id.
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ii. Benefits
Post-execution allocations are made away from SEFs and typically
occur between the clearing firm or the customer and the DCO, or at the
middleware provider.\237\ In general, SEFs do not have access to post-
execution allocation information and are unable to obtain such data
from third parties, such as DCOs and swap data repositories, due to
confidentiality concerns. Commission staff has issued no-action relief
from this requirement.\238\ This rulemaking creates regulatory
certainty by codifying the no-action relief, which will permit SEFs to
maintain their existing practice and avoid any legal exposure due to a
SEF's inability to comply with regulations.
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\237\ CFTC Staff Letter No. 17-54. SEFs have noted that even if
they could obtain the information from DCOs, swap data repositories,
or middleware providers, or alternatively, from the counterparties
to the swap, the infrastructure necessary to securely transmit the
post-execution allocation information, such as an application-
programming interface or secure file transfer protocol site, is
currently not in place.
\238\ Id.
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iii. Costs
The changes to the existing audit trail requirements may reduce the
scope of information captured in a SEF's audit trail, but the
Commission believes that these changes are not likely to affect
materially the protection of market participants and the public. The
Commission notes that post-execution allocation information has
generally not been captured because SEFs have operated under no-action
relief, which was provided by Commission staff due to the general
inability of SEFs to access this information. Thus, although the
elimination of the requirement to capture and retain post-execution
allocation information is a regulatory change, it should not have a
material effect on the status quo.
iv. Section 15(a) Factors
(1) Protection of Market Participants and the Public
The Commission believes the revised audit trail requirements
provide a nearly identical level of protection to market participants
and the public as provided under the existing rules. As noted above,
SEFs generally do not capture post-execution allocation information in
their audit trail because SEFs have operated under no-action relief,
which was provided by Commission staff due to the general inability of
SEFs to access this information. Moreover, the Commission is able to
obtain post-execution allocation information from other registered
entities and is not aware that SEFs' reliance on the relief from
collecting post-execution allocation information has raised any
regulatory concerns. Thus, elimination of the requirement that SEFs
capture and retain post-execution allocation information should not
have a material effect on the level of protection for market
participants and the public relative to the status quo, although it is
a regulatory change.
(2) Efficiency, Competitiveness, and Financial Integrity of the Markets
The Commission believes that there will be no substantive change to
the efficiency, competitiveness, and financial integrity of markets
because
[[Page 9241]]
SEFs will continue to capture information through execution in the
audit trail and the Commission has the ability to obtain post-execution
allocation information from other registrants. Further, the amendments
to Sec. 37.205 will not change the current status quo in the markets.
(3) Price Discovery
The Commission believes these rules will have no effect on price
discovery because they affect only how SEFs track and audit trades and
do not change what information is disclosed to market participants.
Further, the amendments to Sec. 37.205 will not change the current
status quo in the markets.
(4) Sound Risk Management Practices
The Commission believes these rules will have no material effect on
sound risk management practices because they do not change the status
quo and the Commission is not aware that SEFs' reliance on the no-
action relief from collecting post-execution allocation information has
raised any regulatory concerns.
(5) Other Public Interest Considerations
The Commission has not identified any effects that these rules will
have on public interest considerations other than those enumerated
above, nor did any commenter suggest one.
v. Consideration of Alternatives and Comments
Commenters support the proposal to eliminate the requirement to
capture and retain post-execution allocation information because SEFs
remain unable to obtain the information.\239\ Further, in WMBAA's view,
the proposal ``will [not] lead to degradation of the ability to
reconstruct a trade and the environment in which it is traded.'' \240\
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\239\ Refinitiv Letter at 11 (``Refinitiv SEF supports the
elimination of the requirement to be able to track an order through
fill, allocation or other disposition, because SEFs generally do not
have access to most post-execution information.''); 2019 WMBAA
Letter at 12-13 (``The WMBAA supports the Commission's proposal
regarding audit trail requirements.'').
\240\ 2019 WMBAA Letter at 12-13.
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4. Financial Resources
i. Overview
The Final Rules improve on the existing rules to apply the existing
Core Principle 13 financial resources requirements to SEF operations in
a more practical manner, including through amendments to the existing
six-month liquidity requirement and the addition of new acceptable
practices that provide further guidance to SEFs for making a reasonable
calculation of their projected operating costs.
Amended Sec. 37.1301 requires a SEF to maintain financial
resources in an amount adequate to cover only those projected operating
costs necessary to enable the SEF to comply with its core principle
obligations under section 5h of the Act and any applicable Commission
regulation for a one-year period, calculated on a rolling basis.\241\
In contrast, existing Sec. 37.1301 requires a SEF to maintain
sufficient financial resources to cover all of its operations for a
one-year period, calculated on a rolling basis, regardless of whether
such operating costs are necessary for the SEF to comply with its core
principle or other applicable Commission regulations.
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\241\ 37 CFR 37.1301.
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Pursuant to existing Sec. 37.1303, a SEF has reasonable discretion
to determine its financial obligations under Sec. 37.1301.\242\ The
Commission is adopting acceptable practices in Appendix B to Part 37
that offer guidance on the costs that a SEF may exclude in its
reasonable discretion when determining its projected operating costs
under Sec. 37.1301(a). The acceptable practices are based upon
financial resources guidance that was provided to the public by
Commission staff and discuss the scope of a SEF's reasonable discretion
for determining its obligations under Sec. Sec. 37.1301 and 37.1303,
as amended.
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\242\ Existing Sec. 37.1303 provides a SEF has reasonable
discretion in determining the methodology used to compute its
projected operating costs in order to determine the amount needed to
meet its requirements under Sec. 37.1301. Because the liquidity
requirement in existing Sec. 37.1305 is based upon a SEF's
financial requirement under Sec. 37.1301, the SEF's application of
its reasonable discretion also implicitly determines its liquidity
obligation under amended Sec. 37.1303. The Commission is adopting
additional, technical changes to Sec. 37.1302. The Commission is
renumbering Sec. 37.1304 to Sec. 37.1305 and is not adopting
substantive changes to the provision.
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Specifically, the financial resources guidance provides that a SEF
may reasonably exclude from its projected operating costs certain
expenses, including: (i) Costs attributable solely to sales, marketing,
business development, or recruitment; \243\ (ii) compensation and
related taxes and benefits for SEF employees whose functions are not
necessary to meet the SEF's regulatory responsibilities; \244\ (iii)
costs for acquiring and defending patents and trademarks for SEF
products and related intellectual property; (iv) magazine, newspaper,
and online periodical subscription fees; (v) tax preparation and audit
fees; (vi) to the extent not covered by item (ii) above, the variable
commissions that a voice-based SEF may pay to its employee-brokers,
calculated as a percentage of transaction revenue generated by the
voice-based SEF; and (vii) any non-cash costs, including depreciation
and amortization. The Commission similarly is incorporating this list
with certain conforming changes into the acceptable practices as costs
that the Commission believes may be reasonable for a SEF to exclude
from its projected operating cost calculations.\245\ Further, based on
the financial resources guidance, the acceptable practices clarify that
in order to determine its obligations under amended Sec. 37.1301(a), a
SEF may prorate, but not exclude, certain expenses in calculating
projected operating costs.\246\ In prorating these expenses, however, a
SEF needs to document, identify, and justify its decision to prorate
such expenses.
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\243\ The costs listed in this item (i) also include costs for
travel, entertainment, events and conferences to the extent that
such costs are not necessary to meet the SEF's regulatory
responsibilities.
\244\ For example, if a SEF requires a certain number of voice
brokers to run its voice/hybrid platform but hires additional voice
brokers to provide enhanced customer service, the SEF will need to
include only the minimum number of voice brokers to run its voice/
hybrid platform based on its current business volume, and taking
into account any projected increase or decrease in business volume,
in its projected operating cost calculations.
\245\ In order to conform to the change to Sec. 37.1301(a), the
Commission is slightly altering the wording of item (ii) to provide
that a SEF may exclude the costs of a SEF's employees that are not
necessary ``to comply with the core principles set forth in section
5h of the Act and any applicable Commission regulations[.]''
(emphasis added). Similarly, the financial resources guidance
provides that a reasonable calculation of projected operating
expenses must include all expenses necessary for a SEF ``to
discharge its responsibilities as a . . . SEF in compliance with the
CEA, the Commission's regulations, and the . . . SEF's rulebooks,''
which is consistent with existing Sec. 37.1301(a). However, in
order to conform with amended Sec. 37.1301(a), the acceptable
practices instead provide that a SEF must include all expenses
necessary for the SEF ``to comply'' with the core principles and any
applicable Commission regulations.
\246\ For example, a SEF will be permitted to prorate expenses
that are shared with affiliates, e.g., the costs of administrative
staff or seconded employees that a SEF shares with affiliates.
Further, a SEF is also permitted to prorate expenses that are
attributable in part to activities that are not required to comply
with the SEF core principles, e.g., costs of a SEF's office space to
the extent it also houses personnel whose costs may be excludable
under items (i) or (ii).
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Amended Sec. 37.1303 requires a SEF to maintain liquid assets in
an amount equal to the greater of (i) three months of projected
operating costs necessary to enable the SEF to comply with its core
principle obligations and applicable Commission regulations, or (ii)
the SEF's projected wind-down costs. In contrast, under existing rules,
a SEF
[[Page 9242]]
must maintain sufficient liquid assets to cover six months of projected
operating costs. As discussed above, the Commission is adopting
acceptable practices to provide further guidance on the costs that a
SEF, based on its reasonable discretion, may exclude from its projected
operating costs when determining its financial obligations under
amended Sec. 37.1303.
Amended Sec. 37.1306(a) requires a SEF's quarterly financial
submissions to conform to U.S. GAAP, or in the case of a non-U.S.
domiciled SEF that is not otherwise required to prepare U.S. GAAP-
compliant statements, to prepare its statements in accordance with
either the International Financial Reporting Standards issued by the
International Accounting Standards Board, or a comparable international
standard that the Commission may accept in its discretion. Amended
Sec. 37.1306(c) provides that a SEF's quarterly financial statements
must explicitly: (i) Identify all the SEF's expenses without any
exclusions; (ii) identify all expenses and corresponding amounts that
the SEF excluded or prorated when it determined its projected operating
costs; (iii) explain why the SEF excluded or prorated any expenses; and
(iv) identify and explain all costs necessary to wind down the SEF's
operations. Amended Sec. 37.1306(d) extends the deadline for a SEF's
fourth-quarter financial statement from 60 to 90 days after the end of
such fiscal quarter to conform to the extended deadline for a SEF's
annual compliance report. Amended Sec. 37.1306(e) is a new rule that
requires a SEF to provide notice no later than 48 hours after it knows
or reasonably should know it no longer meets its financial resources
obligations.
ii. Benefits
The Commission expects amended Sec. 37.1301(a) to reduce the total
financial assets that most SEFs must maintain because a SEF will only
be required to maintain sufficient resources to cover its operations
necessary to comply with its core principle obligations and applicable
Commission regulations, rather than all of its operating costs as is
required by existing Sec. 37.1301(a). With respect to Sec.
37.1301(a), the acceptable practices provide further guidance regarding
the scope of a SEF's reasonable discretion when determining the SEF's
financial requirements under amended Sec. 37.1301(a) to exclude
certain expenses from its projected operating cost calculations,
thereby reducing the amount of total financial assets that a SEF must
maintain under amended Sec. 37.1301(a). To the extent that the
acceptable practices generally adopt the Commission staff's existing
financial resources guidance, SEFs may already have realized the
benefits associated with reduced financial resources requirements.
The liquidity requirement in amended Sec. 37.1303 significantly
reduces the amount of liquid financial assets that must be maintained
by most SEFs. Currently, a SEF must maintain liquid financial assets
equal to six months of projected operating costs, while amended Sec.
37.1303 only requires most SEFs to maintain three months of projected
operating costs. As a result, amended Sec. 37.1303 is expected to
reduce the liquidity requirement for most SEFs by 50 percent.\247\ In
addition, a SEF currently must maintain liquid assets equal to six
months of operating costs even if the SEF's actual wind-down costs are
greater. For certain SEFs with wind-down costs that exceed six months
of operating costs, amended Sec. 37.1303 augments market integrity for
such SEFs by requiring them to maintain additional liquid assets to
cover their wind-down costs, even if the SEF's wind-down would exceed
six months, but in no event would a SEF be permitted to maintain less
than three months of operating costs.
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\247\ The Commission notes that the current liquidity
requirement in existing Sec. 37.1305, as well as amended Sec.
37.1303, permits a SEF to acquire a ``committed line of credit'' to
satisfy the liquidity requirement. However, the Commission notes
that most SEFs satisfy this requirement through maintaining liquid
assets rather than obtaining a line of credit. Accordingly, as a
practical matter, the Commission expects amended Sec. 37.1303 to
reduce the amount of liquid assets that a SEF must maintain.
Moreover, the Commission notes that there would be additional
associated costs if a SEF were to obtain a committed line of credit.
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Amended Sec. 37.1304 provides that a SEF must make a reasonable
calculation of projected wind-down costs, but has reasonable discretion
in adopting the methodology for calculating such costs. The finalized
acceptable practices expound upon the reasonable discretion that a SEF
has for computing its projected operating costs to exclude certain
expenses from its projected three months of operating cost
calculations.
The Commission believes the Final Rules provide SEFs with greater
flexibility in terms of establishing their financial resources. This,
in turn, may lead to greater efficiencies in terms of financing and
capital allocation and investment. However, the Commission
acknowledges, as discussed below, this flexibility may increase the
level of financial risk at the SEF.
Amended Sec. Sec. 37.1306(a) and (c) will increase transparency
and augment the Commission's oversight by requiring SEFs to provide
standardized, U.S. GAAP-compliant financial submissions that explicitly
identify any cost a SEF has excluded or prorated in determining its
projected operating costs. In its experience conducting ongoing SEF
oversight, Commission staff has devoted additional effort to obtain
appropriate clarity and sufficient documentation from SEFs. Therefore,
the Commission believes that establishing the minimum documentation
that a SEF must provide will mitigate the time and resources required
both by Commission staff in conducting its oversight and by SEFs in
responding to Commission staff's requests for additional information.
Final Sec. 37.1306(e) benefits market integrity by ensuring that the
Commission is aware of any non-compliance 48 hours after a SEF knows or
reasonably should know that it fails to satisfy its financial resources
obligations rather than when the SEF submits its quarterly financial
statement under Sec. 37.1306(a), increasing the Commission's ability
to promptly respond.
iii. Costs
Amended Sec. 37.1301(a) reduces the amount of financial resources
a SEF must maintain to an amount that will enable the SEF to comply
with its core principle obligations and applicable Commission
regulations for a one-year period, calculated on a rolling basis,
rather than in an amount necessary to cover all of the SEF's operations
as required under existing Sec. 37.1301(a). The acceptable practices
provide guidance on the costs that a SEF may exclude when determining
its obligations under amended Sec. 37.1301(a). As a result, amended
Sec. 37.1301(a) as supplemented by the acceptable practices likely
will induce SEFs to reduce the current level of total financial
resources that they maintain under Sec. 37.1301. In turn, this could
decrease market participants' confidence and could harm a SEF's
stability during adverse market conditions because the SEF may not have
adequate financial resources to cover its costs. However, the
Commission believes the potential harm to a SEF's financial stability
and to the market is minimal because amended Sec. 37.1301(a) addresses
only the amount of a SEF's total financial assets, which includes
illiquid assets, rather than focusing only on a SEF's liquid assets.
The Commission notes that illiquid assets are less important compared
to the amount of liquid financial assets that a SEF must maintain under
amended Sec. 37.1303 since it is more difficult for a SEF to timely
liquidate its illiquid assets to cover its operating
[[Page 9243]]
costs, especially during periods of market instability. Accordingly,
the Commission believes a SEF's liquid financial assets, which the
Commission addresses in amended Sec. 37.1303 below, is more important
for sustaining a SEF's financial health and continuing operations.
Amended Sec. 37.1303 may require some SEFs to maintain additional
liquid financial assets, compared to the current liquidity requirement,
where a SEF's wind-down costs exceed six months of operating costs.
However, as explained above in the discussion of benefits, the
Commission believes most SEFs do not have wind-down costs that exceed
six months of operating costs. Accordingly, amended Sec. 37.1303
should not increase the liquidity requirement for most SEFs.
Amended Sec. 37.1304 requires a SEF to incur an additional
marginal cost to calculate its wind-down costs, in addition to its
projected operating costs as currently required, in order to determine
its financial resources obligations under Sec. Sec. 37.1301 and
37.1303. The Commission estimates this change will impose an initial,
minimal, one-time cost for each SEF related to determining the length
of time and associated costs associated with an orderly wind down.
The Commission anticipates amended Sec. 37.1306(a) will impose
greater costs on a SEF. Specifically, amended Sec. 37.1306(a) requires
a SEF to submit U.S. GAAP-compliant quarterly reports. Because U.S.
GAAP-compliant financial statements generally require additional effort
compared to financial statements that are not U.S. GAAP-compliant, the
Commission estimates the proposed change will increase annual costs for
each SEF required to create U.S. GAAP-compliant financial reports.
The Commission does not believe amended Sec. 37.1306(c) will
increase costs. Under existing Sec. 37.1306(c), a SEF must provide
sufficient documentation explaining the methodology it used to compute
its financial resources requirements; accordingly, amended Sec.
37.1306(c) is merely clarifying the type of information that is already
required.\248\ Similarly, the Commission does not believe amended Sec.
37.1306(e) will materially increase costs since a SEF currently is
required to maintain continuous compliance with its financial resources
obligations. By requiring a SEF to notify the Commission within 48
hours of non-compliance, rather than informing the Commission through a
SEF's quarterly financial submission, amended Sec. 37.1306(e) could
impose a de minimis cost to prepare a notice from a non-compliant SEF.
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\248\ See Sec. 37.1306(c).
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iv. Section 15(a) Factors
(1) Protection of Market Participants and the Public
The Commission previously noted that the financial resources
requirements protect market participants and the public by establishing
uniform standards and a system of Commission oversight that ensures
trading occurs on a financially stable facility, which in turn,
mitigates the risk of market disruptions, financial losses, and system
problems that could arise from a SEF's failure to maintain adequate
financial resources.\249\ In the event that a SEF must wind down its
operations, amended Sec. 37.1303 explicitly requires a SEF to maintain
sufficient liquid financial resources to conduct an orderly wind down
of its operations, or three months of operating costs if greater than
the SEF's wind-down costs.\250\ The Commission believes the amended SEF
financial requirements are better calibrated to the inherent risks of a
SEF, and should result in greater efficiencies, but should not diminish
the financial integrity of the SEF.
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\249\ See Core Principles Final Rule at 33580.
\250\ As the Commission previously noted, a SEF with sufficient
amounts of liquid financial resources would be better positioned to
close out trading in a manner not disruptive to market participants
or to members of the public who rely on SEF prices. See Core
Principles Final Rule at 33580.
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Moreover, under amended Sec. 37.1306(e), a SEF is required to
provide notice no later than 48 hours after it knows or reasonably
should know that it no longer satisfies its financial resources
obligations, ensuring that the Commission can take prompt action to
protect market participants and the public. In contrast, the Commission
currently is notified of non-compliance in a SEF's quarterly financial
statements. Lastly, a SEF is required to submit U.S. GAAP-compliant
quarterly financial submissions under amended Sec. 37.1306(c) that
explicitly identify the costs a SEF has excluded or prorated in
determining its projected operating costs. As a result, the Commission
will more easily be able to compare SEFs' financial health and take
proactive steps to protect market participants and the public if the
Commission identifies a SEF with weak financial health or the
development of negative financial trends among SEFs that could endanger
market participants or the public.
(2) Efficiency, Competitiveness, and Financial Integrity of the Markets
Amended Sec. 37.1301(a) and Sec. 37.1303, as further supplemented
through the acceptable practices, together should benefit market
efficiency by reducing capital costs since SEFs are no longer required
to maintain an excessive amount of financial resources. Accordingly, a
SEF should be able to more efficiently allocate its financial
resources, which in turn should encourage market growth and innovation.
For example, as noted above, in the case of amended Sec. 37.1303, the
Commission expects most SEFs will need to hold approximately 50 percent
less liquid financial assets as reserve capital to cover operating
costs. The existing financial resources requirements can pose a burden
to a SEF that wishes to innovate, because they will impose higher
capital requirements if the SEF wishes to offer new or experimental
technology, execution methods, or related products and services. This
is especially so if such business lines, products, or services are not
expected to be immediately profitable or would have low margins.
The existing regulations may also discourage a SEF from offering
more capital intensive activities, such as execution methods that
involve human brokers compared to fully electronic trading that is less
capital intensive. Accordingly, the Commission believes the amended
financial resources requirements will be more neutral with respect to a
SEF's chosen technology and business model, and therefore should
encourage a greater variety of execution methods and related services
and products in the market place.
Reducing capital costs may promote the entry of new entrants into
the market by reducing start-up costs and initial capital requirements,
thereby further encouraging competition and innovation. The increase in
competition and innovation would depend on the extent to which
potential new entrants respond to this encouragement.
Amended Sec. 37.1306(e) should improve the financial integrity of
markets by requiring a SEF to notify the Commission within 48 hours
after it knows or reasonably should know that it no longer satisfies
its financial resources obligations, ensuring that the Commission can
take prompt action to protect market integrity. Lastly, amended Sec.
37.1306(c) improves SEF financial submissions by requiring U.S. GAAP-
compliant statements as well as clarifying that a SEF must explicitly
identify any costs that it has excluded
[[Page 9244]]
or prorated in determining its projected operating costs. These changes
should improve the Commission's ability to conduct its oversight
responsibilities to protect market integrity.
(3) Price Discovery
The Commission has not identified any effects of these rules on
price discovery.
(4) Sound Risk Management Practices
By establishing specific standards with respect to how SEFs should
assess and monitor the adequacy of their financial resources, the
financial resources rules should promote sound risk management
practices by SEFs. As noted above, amended Sec. 37.1303 requires a SEF
to identify its wind-down costs and associated timing and ensure it has
sufficient liquid assets to maintain an orderly wind down. Similarly,
amended Sec. 37.1306(c) requires a SEF to explain the basis of its
determination for its estimate of its wind-down costs and timing.
Amended Sec. 37.1306(e) requires a SEF to notify the Commission no
later than 48 hours after it knows or reasonably should know it no
longer satisfies its financial resources obligations. As a result, SEFs
will be required to ensure they maintain the necessary procedures to
identify, and to notify the Commission of, any non-compliance.
(5) Other Public Interest Considerations
The Commission has not identified any effects that these rules will
have on public interest considerations other than those enumerated
above, nor did any commenter suggest one.
v. Consideration of Alternatives and Comments
The Proposed Rule included requests for comment regarding possible
alternatives to the proposed reporting requirements for SEFs. These
included whether to require that a SEF's financial reports be audited,
and whether financial reporting should be required on a semiannual
rather than a quarterly basis.
WMBAA objected to the alternative of requiring that a SEF's
financial reports be audited, contending, as discussed further above,
that auditing reports would not improve oversight (i.e., would not
provide benefits).\251\ WMBAA also argued the costs associated with an
audited report are high and would pose a barrier to entry for new
SEFs.\252\ The Commission has determined not to adopt a requirement
that SEF financial reports be audited.
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\251\ 2019 WMBAA Letter at 21.
\252\ Id.
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Regarding the frequency of reports, WMBAA stated the current
reporting requirement of quarterly financial reports is sufficient for
ensuring capital adequacy, but that a semi-annual or annual report
would also be adequate if a SEF is required to maintain all related
documents and support for further inspection.\253\ The Commission
received no further comments comparing the costs and benefits of
quarterly reporting to those of less frequent reporting. The Commission
has determined to retain the existing quarterly reporting requirement
for SEFs so that the Commission can remain abreast of a SEF's financial
condition in a timely manner.
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\253\ Id.
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As noted above, commenters generally supported the proposed
financial resources rules and offered no relevant alternatives other
than those discussed above.\254\ Accordingly, the Commission is
generally finalizing the financial resources rules as proposed.
However, there are two proposed provisions that the Commission has
determined not to include in the Final Rules.
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\254\ Commenters did suggest several possible rules that, as
discussed above, are beyond the scope of this rulemaking. Should the
Commission propose any of these alternatives in the future, it will
consider their costs and benefits at that time.
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First, the Proposed Rule included amendments to Sec. 37.1301(b),
which requires a SEF that also operates as a DCO to also comply with
the financial resource requirements for DCOs under Sec. 39.11.
Specifically, the Commission proposed to amend Sec. 37.1301(b) to
permit SEFs that also operate as DCOs to file a single financial report
under Sec. 39.11 that covers both the SEF and DCO. The Commission is
not finalizing this proposed change as part of the Final Rules but is
continuing to consider it.
Second, the proposed acceptable practices included a provision that
would have allowed a SEF offering more than one bona fide execution
method to include the costs of only one of those methods in calculating
projected operating costs, with the goal of mitigating the burden for
SEFs wishing to offer multiple execution methods. This proposed change
was intended to be consistent with the Proposed Rule's removal of
existing limitations on execution methods for Required Transactions.
The Final Rules are not implementing the Proposed Rule's expansion of
permissible execution methods for Required Transactions, nor is it
eliminating the minimum trading functionality requirement that a SEF
maintain an Order Book as one of its execution methods. Accordingly,
the Commission is not finalizing this particular proposed acceptable
practice at this time.
5. Chief Compliance Officer
i. Overview
The Commission is adopting several amendments to the CCO
regulations. First, the Commission is allowing the senior officer \255\
of a SEF to have the same oversight responsibilities with respect to
the CCO as the SEF's board of directors. Specifically, the Commission
is (i) amending existing Sec. 37.1501(b)(1)(i) to allow a CCO to
consult with either the board of directors or senior officer of the SEF
as the CCO develops the SEF's policies and procedures; (ii) amending
existing Sec. 37.1501(c)(1)(iii) \256\ to allow a CCO to meet with
either the senior officer of the SEF or the board of directors on an
annual basis; (iii) amending existing Sec. 37.1501(c)(1)(iv) \257\ to
allow a CCO to provide self-regulatory program information to the SEF's
senior officer or to the board of directors; and (iv) eliminating the
restriction under existing Sec. 37.1501(c)(3) that removal of the CCO
requires approval of a majority of the board of directors or the senior
officer if the SEF does not have a board of directors, and instead
permitting the board of directors or the senior officer to remove the
CCO under Sec. 37.1501(b)(3)(i).
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\255\ As discussed below, the Commission proposes to define
senior officer to mean the chief executive officer or other
equivalent officer of the SEF.
\256\ This requirement is in amended Sec. 37.1501(b).
\257\ This requirement is in amended Sec. 37.1501(b)(6).
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Second, the Commission is consolidating and amending existing Sec.
37.1501(d)(5) and (6) \258\ to allow a CCO to identify noncompliance
matters through ``any means,'' in addition to the currently prescribed
detection methods, and to clarify that the procedures followed to
address noncompliance issues must be ``reasonably designed'' by the CCO
to handle, respond, remediate, retest, and resolve noncompliance issues
identified by the CCO. The Commission is also amending the CCO's duty
to resolve conflicts of interest under existing Sec.
37.1501(d)(2).\259\ The Commission is refining the scope of the CCO's
duty to take ``reasonable steps'' to resolve ``material'' conflicts of
interest that may arise.
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\258\ This requirement is in amended Sec. 37.1501(c)(5).
\259\ This requirement is in amended Sec. 37.1501(c)(2).
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[[Page 9245]]
Third, the Commission is making certain amendments to the ACR
regulations in existing Sec. 37.1501(e) \260\ in order to remove
duplicative or unnecessary information requirements and streamline
existing requirements. The Commission is removing existing Sec.
37.1501(e)(2)(i), which requires a SEF to include in the ACR a review
of all of the Commission regulations applicable to the SEF and identify
the written policies and procedures designed to ensure compliance with
the Act and Commission regulations. The Commission is also eliminating
certain specific content required under existing Sec.
37.1501(e)(4).\261\ The Commission is amending existing Sec.
37.1501(e)(5) \262\ to require a SEF to only discuss material
noncompliance matters and explain the corresponding actions taken to
resolve such matters, rather than describing all compliance matters.
The Commission is amending existing Sec. 37.1501(e)(6) \263\ to limit
a SEF CCO's certification of an ACR's accuracy and completeness to
``all material respects'' of the report, rather than the entire report.
The Commission is streamlining and reorganizing the remaining ACR
content requirements, including consolidating the CCO's required
description of the SEF's policies and procedures under existing Sec.
37.1501(e)(1) \264\ with the CCO's required assessment of the
effectiveness of these policies and procedures under existing Sec.
37.1501(e)(2)(ii), and consolidating the CCO's required narrative of
any material changes made during the prior year along with any
recommended potential or prospective changes and areas of improvement
to the compliance program as required under existing Sec.
37.1501(e)(3) and existing Sec. 37.1501(e)(2)(iii),\265\ respectively.
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\260\ This requirement is in amended Sec. 37.1501(d).
\261\ This requirement is in amended Sec. 37.1501(d)(3). The
eliminated provisions currently require a discussion of the SEF's
compliance staffing and structure, a catalogue of investigations and
disciplinary actions taken over the last year, and a review of
disciplinary committee and panel performance.
\262\ This requirement is in amended Sec. 37.1501(d)(4).
\263\ This requirement is in amended Sec. 37.1501(d)(5).
\264\ This requirement is in amended Sec. 37.1501(d)(1).
\265\ This requirement is in amended Sec. 37.1501(d)(2).
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The Commission is finalizing several amendments to simplify the ACR
submission procedures. The Commission is amending existing Sec.
37.1501(f)(2) \266\ to provide SEFs with an additional 30 days to file
the ACR with the Commission. Additionally, the Commission is
eliminating the ``substantial and undue hardship'' standard required
for ACR extension requests and replacing it with a ``reasonable and
valid'' standard set forth in existing Sec. 37.1501(f)(4).\267\ The
Commission is amending existing Sec. 37.1501(f)(3) \268\ to require
that the CCO submit an amended ACR to the SEF's board of directors or,
in the absence of a board of directors, the senior officer of the SEF,
for review prior to submitting the amended ACR to the Commission.
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\266\ This requirement is in amended Sec. 37.1501(e)(2).
\267\ This requirement is in amended Sec. 37.1501(e)(4).
\268\ This requirement is in amended Sec. 37.1501(e)(3).
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In addition to these substantive changes, the Commission is
adopting a number of conforming, clarifying, and streamlining changes
that would not impose new costs or result in new benefits and are not
discussed below. The Commission is eliminating the CCO's obligations to
the ROC, including existing Sec. 37.1501(c)(1)(iii), which requires a
quarterly meeting with the ROC and existing Sec. 37.1501(c)(1)(iv),
which requires the CCO to provide self-regulatory program information
to the ROC. The Final Rule will not impact SEFs as there is no
requirement that a SEF have a ROC.
Additionally, the Commission is consolidating existing Sec.
37.1501(b) and (c) into final Sec. 37.1501(b). The Commission is
eliminating existing Sec. 37.1501(b)(1), which requires a SEF to
designate a CCO and existing Sec. 37.1501(c)(2), which requires the
CCO to report directly to the board of directors or the senior officer
of the SEF, as these requirements are already contained under Sec.
37.1500.
The Commission is eliminating the requirement under existing Sec.
37.1501(f)(1) that a SEF document the submission of the ACR to the
SEF's board of directors or senior officer in the board minutes or some
other similar written record. This requirement is already covered in
the general recordkeeping requirements in amended Sec. 37.1501(f),
which is existing Sec. 37.1501(g).
The Commission is finalizing an amendment to Sec. 37.1501(a)(2) to
define a ``senior officer'' as ``the chief executive officer or other
equivalent officer of the swap execution facility.'' \269\ Finally, the
Commission is adopting a new acceptable practice to Core Principle 15
in Appendix B that provides a non-exclusive list of factors that a SEF
may consider when evaluating an individual's qualifications to be a
CCO.\270\ This acceptable practice will provide a safe harbor and not
impose new obligations.
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\269\ In the SEF Core Principles Final Rule, the Commission did
not adopt a definition of ``senior officer,'' but noted that the
statutory term would only include the most senior executive officer
of the legal entity registered as a SEF. See SEF Core Principles
Final Rule at 33544.
\270\ 17 CFR part 37 app. B.
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ii. Benefits
The amendments give the senior officer the same authority as the
board of directors to oversee the CCO and provide SEFs with greater
opportunity to structure the management and oversight of the CCO based
on the SEF's particular corporate structure, size, and complexity. This
could increase efficiency and reduce costs. Additionally, the quality
of oversight of the CCO could improve if the senior officer is better
positioned than the board of directors to provide day-to-day oversight
of the CCO.
The amendments permit a CCO to use any means to identify
noncompliance issues and are less prescriptive than the existing rule,
which could increase efficiency and reduce costs. The amendment to
Sec. 37.1501(d) refines the scope of the required information in an
ACR and should make the ACR process more efficient and reduce costs.
The removal of Sec. 37.1501(e)(2)(i) and certain specific content set
forth under Sec. 37.1501(e)(4) should reduce the amount of time that a
CCO and his or her staff spend preparing the ACR.
Amended Sec. 37.1501(d)(4), which requires SEFs to focus on
describing material non-compliance matters, rather than describing all
compliance matters, should streamline the ACR requirement and provide
more useful information to the Commission. Additionally, the
clarification under Sec. 37.1501(e)(3) that the CCO must submit an
amended ACR to the SEF's board of directors or, in the absence of a
board of directors, the senior officer of the SEF, should reduce the
need for extensive follow-up discussions.
Finally, the amendment allowing SEFs more time to submit their ACRs
should reduce the time and resource burden on CCOs and SEFs' compliance
departments. This additional time should allow SEFs to fully complete
their ACRs and meet their other end-of-year reporting obligations such
as the fourth-quarter financial report. However, the Commission
understands that those SEFs that already may rely on Commission staff
no-action relief for an extra 30 days to complete the ACR may have
already availed themselves of the benefits associated with the extended
reporting deadline.
[[Page 9246]]
iii. Costs
The amendments to Sec. 37.1501(b) that authorize the senior
officer to oversee the CCO could impair the independence of the CCO,
and as a result, the CCO's oversight of the SEF. However, the
Commission believes this concern is mitigated by the Commission's
review of annual ACRs and its examination program.
The amendments eliminate requirements that the CCO identify
noncompliance matters using certain specified detection methods, design
procedures that detect and resolve all possible noncompliance issues,
and eliminate all potential conflicts of interest. These requirements
are replaced by more flexible standards, which could potentially allow
for some impairment of a CCO's oversight of the SEF's compliance in
some circumstances. However, the Commission believes the resulting
costs (in the form of potential adverse consequences) will not be
material because the amendments require a CCO to focus on material
aspects of the compliance program (e.g., material breaches and material
conflicts of interest). The Commission believes placing the focus on
material compliance issues, rather than all compliance issues, will not
adversely impact SEF compliance.
The amendments to Sec. 37.1501(e) that reduce the information
required in an ACR could make it more difficult for the Commission to
assess a SEF's compliance and self-regulatory programs. However, the
Commission does not anticipate that these changes will materially
impact the Commission's assessment, as the Commission already receives
or has access to such information from other sources. For example, the
Commission approves the SEF's compliance staffing and structure as part
of the SEF's registration or rule submission, and annual updates
provide minimal additional information, at best. In addition, SEFs
report finalized disciplinary actions to the NFA,\271\ and the
Commission is able to access this information through its oversight of
the NFA.
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\271\ See Sec. 9.11 (which states that whenever an exchange
decision pursuant to which a disciplinary action or access denial
action is to be imposed has become final, the exchange must, within
30 days thereafter, provide written notice of such action to the
person against whom the action was taken and notice to the National
Futures Association). 17 CFR 9.11.
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Finally, the amendment providing SEFs more time to submit their
ACRs could delay the Commission recognizing and addressing a SEF
compliance issue. However, the Commission anticipates that such risk is
mitigated to the extent that SEFs submit ACRs on the timeline set forth
in the Final Rules. The Commission's experience has not indicated that
delayed reporting pursuant to Commission staff no-action relief has
adversely impacted its ability to recognize and address compliance
issues in a timely manner.
iv. Section 15(a) Factors
(1) Protection of Market Participants and the Public
The Commission believes the changes to the existing SEF CCO
requirements are likely to better enable the Commission to protect
market participants and the public. Specifically, the Commission should
be better able to assess whether a SEF's policies and procedures
adversely impact a SEF's operations or its ability to comply with the
core principles or Commission's regulations, which are intended in part
to protect market participants.
The changes to the ACR requirements under amended Sec. 37.1501(d)
should better enable the Commission to assess the effectiveness of a
SEF's compliance and self-regulatory programs; this assessment is
intended, in part, to protect market participants. The amendments will
remove some of the duplicative and unnecessary content requirements and
require the ACR to focus on describing material non-compliance matters.
The Commission believes the new requirements will streamline the ACR
and provide more useful information to the Commission. Removing these
information requirements, e.g., requirements to review all Commission
regulations applicable to a SEF and to identify the written policies
and procedures enacted to foster compliance, will likely reduce the
amount of information in an ACR. However, the Commission has
determined, based on its experience with the existing requirements,
that this information generally does not enhance the usefulness of the
ACR.
(2) Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission is promoting the efficiency and integrity of a SEF's
market by allowing a more streamlined compliance approach that does not
require the board of directors to assume primary oversight
responsibility for the CCO. This streamlined approach should, in many
circumstances, permit CCOs to more efficiently make changes to the
regulatory program in response to potential trading violations, which
should aid in protecting the financial integrity of the market.
Furthermore, the focus of CCOs' duties on reasonably designed
procedures to address noncompliance issues and material conflicts of
interest should improve CCOs' effectiveness by specifying that this is
the appropriate standard. This increased effectiveness should permit
CCOs to better allocate resources to focus on detecting and deterring
material rule violations, which otherwise may harm the market's
efficiency, competitiveness, and integrity.
(3) Price Discovery
The Commission believes the changes to the CCO requirements will
not impede a CCO's ability to ensure compliance and are unlikely to
have a substantial impact on price discovery.
(4) Sound Risk Management Practices
The Commission believes the new CCO rules should promote sound risk
management practices. The gains in this regard will depend on the
quality and effective implementation of the policies and practices that
SEFs currently have in place and the new policies and procedures that
they will adopt due to the proposed amendments.
(5) Other Public Interest Considerations
The Commission has not identified any effects that these rules will
have on public interest considerations other than those enumerated
above, nor did any commenter suggest one.
v. Consideration of Alternatives and Comments
Commenters support the proposed changes. WMBAA supports the
amendments to add a definition of senior officer,\272\ to amend the
CCO's duties,\273\ to the preparation of the ACR,\274\ and to the ACR
submission requirements.\275\ Refinitiv supports the amendments to the
preparation of the ACR.\276\ The Commission did not receive any
comments on the proposed amendments to the CCO's recordkeeping
requirements.
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\272\ 2019 WMBAA Letter at 23.
\273\ Id. at 25.
\274\ Id. at 26.
\275\ Id. at 27.
\276\ Refinitiv Letter at 14.
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The Commission also proposed to eliminate the existing enumerated
conflicts of interest to avoid any inference that they are an
exhaustive list of conflicts that a CCO must address. The Commission
has determined that the list of potential conflicts that a CCO should
resolve under existing Sec. 37.1500(d)(2) does not create
[[Page 9247]]
confusion, but instead provides useful examples, and the list will not
be eliminated as proposed.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\277\ In the notice of proposed rulemaking, the
Commission requested comments on whether: (1) The proposed rulemaking
implicates any other specific public interest to be protected by the
antitrust laws; (2) the proposed rulemaking is anticompetitive; and (3)
there are less anticompetitive means of achieving the relevant purposes
of the CEA.
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\277\ 7 U.S.C. 19(b).
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The Commission does not anticipate that the amendments to part 37
that it is adopting in this rule will result in anticompetitive
behavior. The Commission received no comments on the antitrust
considerations of the proposed rules finalized herein.
List of Subjects in 17 CFR Part 37
Swap execution facilities.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 37 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.
0
2. Amend Sec. 37.205 by revising paragraph (a) and removing paragraph
(b)(2)(iv), the revision to read as follows:
Sec. 37.205 Audit trail.
(a) Audit trail required. A swap execution facility shall capture
and retain all audit trail data necessary to detect, investigate, and
prevent customer and market abuses. Such data shall be sufficient to
reconstruct all indications of interest, requests for quotes, orders,
and trades within a reasonable period of time and to provide evidence
of any violations of the rules of the swap execution facility. An
acceptable audit trail shall also permit the swap execution facility to
track a customer order from the time of receipt through execution on
the swap execution facility.
* * * * *
0
3. Revise subpart N to read as follows:
Subpart N--Financial Resources
Sec.
37.1300 Core Principle 13--Financial resources.
37.1301 General requirements.
37.1302 Types of financial resources.
37.1303 Liquidity of financial resources.
37.1304 Computation of costs to meet financial resources
requirement.
37.1305 Valuation of financial resources.
37.1306 Reporting to the Commission.
37.1307 Delegation of authority.
Sec. 37.1300 Core Principle 13--Financial resources.
(a) In general. The swap execution facility shall have adequate
financial, operational, and managerial resources to discharge each
responsibility of the swap execution facility.
(b) Determination of resource adequacy. The financial resources of
a swap execution facility shall be considered to be adequate if the
value of the financial resources exceeds the total amount that would
enable the swap execution facility to cover the operating costs of the
swap execution facility for a one-year period, as calculated on a
rolling basis.
Sec. 37.1301 General requirements.
(a) A swap execution facility shall maintain financial resources on
an ongoing basis that are adequate to enable it to comply with the core
principles set forth in section 5h of the Act and any applicable
Commission regulations. Financial resources shall be considered
adequate if their value exceeds the total amount that would enable the
swap execution facility to cover its projected operating costs
necessary for the swap execution facility to comply with section 5h of
the Act and applicable Commission regulations for a one-year period, as
calculated on a rolling basis pursuant to Sec. 37.1304.
(b) An entity that operates as both a swap execution facility and a
derivatives clearing organization shall also comply with the financial
resource requirements of Sec. 39.11 of this chapter.
Sec. 37.1302 Types of financial resources.
Financial resources available to satisfy the requirements of Sec.
37.1301 may include:
(a) The swap execution facility's own capital, meaning its assets
minus its liabilities calculated in accordance with generally accepted
accounting principles in the United States; and
(b) Any other financial resource deemed acceptable by the
Commission.
Sec. 37.1303 Liquidity of financial resources.
The financial resources allocated by the swap execution facility to
meet the ongoing requirements of Sec. 37.1301 shall include
unencumbered, liquid financial assets (i.e., cash and/or highly liquid
securities) equal to at least the greater of three months of projected
operating costs, as calculated on a rolling basis, or the projected
costs needed to wind down the swap execution facility's operations, in
each case as determined under Sec. 37.1304. If a swap execution
facility lacks sufficient unencumbered, liquid financial assets to
satisfy its obligations under this section, the swap execution facility
may satisfy this requirement by obtaining a committed line of credit or
similar facility in an amount at least equal to such deficiency.
Sec. 37.1304 Computation of costs to meet financial resources
requirement.
A swap execution facility shall each fiscal quarter, make a
reasonable calculation of its projected operating costs and wind-down
costs in order to determine its applicable obligations under Sec. Sec.
37.1301 and 37.1303. The swap execution facility shall have reasonable
discretion in determining the methodologies used to compute such
amounts. The Commission may review the methodologies and require
changes as appropriate.
Sec. 37.1305 Valuation of financial resources.
No less than each fiscal quarter, a swap execution facility shall
compute the current market value of each financial resource used to
meet its obligations under Sec. Sec. 37.1301 and 37.1303. Reductions
in value to reflect market and credit risk (``haircuts'') shall be
applied as appropriate.
Sec. 37.1306 Reporting to the Commission.
(a) Each fiscal quarter, or at any time upon Commission request, a
swap execution facility shall provide a report to the Commission that
includes:
(1) The amount of financial resources necessary to meet the
requirements of Sec. Sec. 37.1301 and 37.1303, computed in accordance
with the requirements of Sec. 37.1304, and the market value of each
available financial resource, computed in accordance with the
requirements of Sec. 37.1305; and
(2) Financial statements, including the balance sheet, income
statement, and statement of cash flows of the swap execution facility.
(i) The financial statements shall be prepared in accordance with
generally accepted accounting principles in the United States, prepared
in English, and denominated in U.S. dollars.
[[Page 9248]]
(ii) The financial statements of a swap execution facility that is
not domiciled in the United States, and is not otherwise required to
prepare financial statements in accordance with generally accepted
accounting principles in the United States, may satisfy the requirement
in paragraph (a)(2)(i) of this section if such financial statements are
prepared in accordance with either International Financial Reporting
Standards issued by the International Accounting Standards Board, or a
comparable international standard as the Commission may otherwise
accept in its discretion.
(b) The calculations required by paragraph (a) of this section
shall be made as of the last business day of the swap execution
facility's applicable fiscal quarter.
(c) With each report required under paragraph (a) of this section,
the swap execution facility shall also provide the Commission with
sufficient documentation explaining the methodology used to compute its
financial requirements under Sec. Sec. 37.1301 and 37.1303. Such
documentation shall:
(1) Allow the Commission to reliably determine, without additional
requests for information, that the swap execution facility has made
reasonable calculations pursuant to Sec. 37.1304; and
(2) Include, at a minimum:
(i) A total list of all expenses, without any exclusion;
(ii) All expenses and the corresponding amounts, if any, that the
swap execution facility excluded or prorated when determining its
operating costs, calculated on a rolling basis, required under
Sec. Sec. 37.1301 and 37.1303, and the basis for any determination to
exclude or prorate any such expenses;
(iii) Documentation demonstrating the existence of any committed
line of credit or similar facility relied upon for the purpose of
meeting the requirements of Sec. 37.1303 (e.g., copies of agreements
establishing or amending a credit facility or similar facility); and
(iv) All costs that a swap execution facility would incur to wind
down the swap execution facility's operations, the projected amount of
time for any such wind-down period, and the basis of its determination
for the estimation of its costs and timing.
(d) The reports and supporting documentation required by this
section shall be filed not later than 40 calendar days after the end of
the swap execution facility's first three fiscal quarters, and not
later than 90 calendar days after the end of the swap execution
facility's fourth fiscal quarter, or at such later time as the
Commission may permit, in its discretion, upon request by the swap
execution facility.
(e) A swap execution facility shall provide notice to the
Commission no later than 48 hours after it knows or reasonably should
know that it no longer meets its obligations under Sec. 37.1301 or
37.1303.
Sec. 37.1307 Delegation of authority.
(a) 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, authority
to:
(1) Determine whether a particular financial resource under Sec.
37.1302 may be used to satisfy the requirements of Sec. 37.1301;
(2) Review and make changes to the methodology used to compute
projected operating costs and wind-down costs under Sec. 37.1304 and
the valuation of financial resources under Sec. 37.1305;
(3) Request reports, in addition to those required in Sec.
37.1306, or additional documentation or information under Sec.
37.1306(a), (c), and (e); and
(4) Grant an extension of time to file fiscal quarter reports under
Sec. 37.1306(d).
(b) 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.
0
4. Revise Sec. 37.1501 to read as follows:
Sec. 37.1501 Chief compliance officer.
(a) Definitions. For purposes of this part, the term--
Board of directors means the board of directors of a swap execution
facility, or for those swap execution facilities whose organizational
structure does not include a board of directors, a body performing a
function similar to a board of directors.
Senior officer means the chief executive officer or other
equivalent officer of the swap execution facility.
(b) Chief compliance officer--(1) Authority of chief compliance
officer. (i) The position of chief compliance officer shall carry with
it the authority and resources to develop, in consultation with the
board of directors or senior officer, the policies and procedures of
the swap execution facility and enforce such policies and procedures to
fulfill the duties set forth for chief compliance officers in the Act
and Commission regulations.
(ii) The chief compliance officer shall have supervisory authority
over all staff acting at the direction of the chief compliance officer.
(2) Qualifications of chief compliance officer. (i) The individual
designated to serve as chief compliance officer shall have the
background and skills appropriate for fulfilling the responsibilities
of the position.
(ii) No individual disqualified from registration pursuant to
sections 8a(2) or 8a(3) of the Act may serve as a chief compliance
officer.
(3) Appointment and removal of chief compliance officer. (i) Only
the board of directors or the senior officer may appoint or remove the
chief compliance officer.
(ii) The swap execution facility shall notify the Commission within
two business days of the appointment or removal, whether interim or
permanent, of a chief compliance officer.
(4) Compensation of the chief compliance officer. The board of
directors or the senior officer shall approve the compensation of the
chief compliance officer.
(5) Annual meeting with the chief compliance officer. The chief
compliance officer shall meet with the board of directors or senior
officer of the swap execution facility at least annually.
(6) Information requested of the chief compliance officer. The
chief compliance officer shall provide any information regarding the
self-regulatory program of the swap execution facility as requested by
the board of directors or the senior officer.
(c) Duties of chief compliance officer. The duties of the chief
compliance officer shall include, but are not limited to, the
following:
(1) Overseeing and reviewing compliance of the swap execution
facility with section 5h of the Act and any related rules adopted by
the Commission;
(2) Taking reasonable steps, in consultation with the board of
directors or the senior officer of the swap execution facility, to
resolve any material conflicts of interest that may arise, including,
but not limited to:
(i) Conflicts between business considerations and compliance
requirements;
(ii) Conflicts between business considerations and the requirement
that the swap execution facility provide fair, open, and impartial
access as set forth in Sec. 37.202; and;
(iii) Conflicts between a swap execution facility's management and
members of the board of directors;
(3) Establishing and administering written policies and procedures
reasonably designed to prevent violations of the Act and the rules of
the Commission;
[[Page 9249]]
(4) Taking reasonable steps to ensure compliance with the Act and
the rules of the Commission;
(5) Establishing procedures reasonably designed to handle, respond,
remediate, retest, and resolve noncompliance issues identified by the
chief compliance officer through any means, including any compliance
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
(6) Establishing and administering a compliance manual designed to
promote compliance with the applicable laws, rules, and regulations and
a written code of ethics for the swap execution facility designed to
prevent ethical violations and to promote honesty and ethical conduct
by personnel of the swap execution facility;
(7) Supervising the self-regulatory program of the swap execution
facility with respect to trade practice surveillance; market
surveillance; real time market monitoring; compliance with audit trail
requirements; enforcement and disciplinary proceedings; audits,
examinations, and other regulatory responsibilities (including taking
reasonable steps to ensure compliance with, if applicable, financial
integrity, financial reporting, sales practice, recordkeeping, and
other requirements); and
(8) Supervising the effectiveness and sufficiency of any regulatory
services provided to the swap execution facility by a regulatory
service provider in accordance with Sec. 37.204.
(d) Preparation of annual compliance report. The chief compliance
officer shall, not less than annually, prepare and sign an annual
compliance report that covers the prior fiscal year. The report shall,
at a minimum, contain:
(1) A description and self-assessment of the effectiveness of the
written policies and procedures of the swap execution facility,
including the code of ethics and conflict of interest policies, to
reasonably ensure compliance with the Act and applicable Commission
regulations;
(2) Any material changes made to compliance policies and procedures
during the coverage period for the report and any areas of improvement
or recommended changes to the compliance program;
(3) A description of the financial, managerial, and operational
resources set aside for compliance with the Act and applicable
Commission regulations;
(4) Any material non-compliance matters identified and an
explanation of the corresponding action taken to resolve such non-
compliance matters; and
(5) A certification by the chief compliance officer that, to the
best of his or her knowledge and reasonable belief, and under penalty
of law, the annual compliance report is accurate and complete in all
material respects.
(e) Submission of annual compliance report and related matters--(1)
Furnishing the annual compliance report prior to submission to the
Commission. Prior to submission to the Commission, the chief compliance
officer shall provide the annual compliance report for review to the
board of directors of the swap execution facility or, in the absence of
a board of directors, to the senior officer of the swap execution
facility. Members of the board of directors and the senior officer
shall not require the chief compliance officer to make any changes to
the report.
(2) Submission of annual compliance report to the Commission. The
annual compliance report shall be submitted electronically to the
Commission not later than 90 calendar days after the end of the swap
execution facility's fiscal year. The swap execution facility shall
concurrently file the annual compliance report with the fourth-quarter
financial report pursuant to Sec. 37.1306.
(3) Amendments to annual compliance report. (i) Promptly upon
discovery of any material error or omission made in a previously filed
annual compliance report, the chief compliance officer shall file an
amendment with the Commission to correct the material error or
omission. The chief compliance officer shall submit the amended annual
compliance report to the board of directors, or in the absence of a
board of directors, to the senior officer of the swap execution
facility, pursuant to paragraph (e)(1) of this section.
(ii) An amendment shall contain the certification required under
paragraph (d)(5) of this section.
(4) Request for extension. A swap execution facility may request an
extension of time to file its annual compliance report from the
Commission. Reasonable and valid requests for extensions of the filing
deadline may be granted at the discretion of the Commission.
(f) Recordkeeping. The swap execution facility shall maintain all
records demonstrating compliance with the duties of the chief
compliance officer and the preparation and submission of annual
compliance reports consistent with Sec. Sec. 37.1000 and 37.1001.
(g) Delegation of authority. 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 grant or deny a request
for an extension of time for a swap execution facility to file its
annual compliance report under paragraph (e)(4) of this section. The
Director may submit to the Commission for its consideration any matter
that has been delegated in this paragraph. Nothing in this paragraph
prohibits the Commission, at its election, from exercising the
authority delegated in this paragraph.
0
5. Amend Appendix B to Part 37 by:
0
a. Under the heading ``Core Principle 13 of Section 5h of the Act--
Financial Resources,'' adding paragraph (b); and
0
b. Under the heading ``Core Principle 15 of Section 5h of the Act--
Designation of Chief Compliance Officer,'' adding paragraph (b).
The additions read as follows:
Appendix B to Part 37--Guidance on, and Acceptable Practices in,
Compliance With Core Principles
* * * * *
Core Principle 13 of Section 5h of the Act--Financial Resources
* * * * *
(b) Acceptable Practices--(1) Reasonable calculation of
projected operating costs. In connection with a swap execution
facility calculating its projected operating costs, the Commission
has determined that a reasonable calculation should include all
expenses necessary for the swap execution facility to comply with
the core principles set forth in section 5h of the Act and any
applicable Commission regulations. This calculation should be based
on the swap execution facility's current level of business and
business model, and should take into account any projected
modification to its business model (e.g., the addition or
subtraction of business lines or operations or other changes), and
any projected increase or decrease in its level of business over the
next 12 months. The Commission believes, however, that it may be
reasonable for a swap execution facility to exclude the following
expenses (``excludable expenses'') from its projected operating cost
calculations:
(i) Costs attributable solely to sales, marketing, business
development, product development, or recruitment and any related
travel, entertainment, event, or conference costs;
(ii) Compensation and related taxes and benefits for swap
execution facility personnel who are not necessary to ensure that
the swap execution facility is able to comply with the core
principles set forth in section 5h of the Act and any applicable
Commission regulations;
(iii) Costs for acquiring and defending patents and trademarks
for swap execution facility products and related intellectual
property;
(iv) Magazine, newspaper, and online periodical subscription
fees;
[[Page 9250]]
(v) Tax preparation and audit fees;
(vi) To the extent not covered by paragraphs (b)(1)(ii) or (iii)
of this Core Principle 13 of Section 5h of the Act--Financial
Resources, the variable commissions that a voice-based swap
execution facility may pay to its SEF trading specialists (as
defined under Sec. 37.201(c)), calculated as a percentage of
transaction revenue generated by the voice-based swap execution
facility. Unlike fixed salaries or compensation, such variable
commissions are not payable unless and until revenue is collected by
the swap execution facility; and
(vii) Any non-cash costs, including depreciation and
amortization.
(2) Prorated expenses. The Commission recognizes that, in the
normal course of a swap execution facility's business, there may be
an expense (e.g., typically related to overhead) that is only
partially attributable to a swap execution facility's ability to
comply with the core principles set forth in section 5h of the Act
and any applicable Commission regulations; accordingly, such expense
may need to be only partially attributed to the swap execution
facility's projected operating costs. For example, if a swap
execution facility's office rental space includes marketing
personnel and compliance personnel, the swap execution facility may
exclude the prorated office rental expense attributable to the
marketing personnel. In order to prorate an expense, a swap
execution facility should:
(i) Maintain sufficient documentation that reasonably shows the
extent to which an expense is partially attributable to an
excludable expense;
(ii) Identify any prorated expense in the financial reports that
it submits to the Commission pursuant to Sec. 37.1306; and
(iii) Sufficiently explain why it prorated any expense. Common
allocation methodologies that can be used include actual use,
headcount, or square footage. A swap execution facility may provide
documentation, such as copies of service agreements, other legal
documents, firm policies, audit statements, or allocation
methodologies to support its determination to prorate an expense.
(3) Expenses allocated among affiliates. The Commission
recognizes that a swap execution facility may share certain expenses
with affiliated entities, such as parent entities or other
subsidiaries of the parent. For example, a swap execution facility
may share employees (including employees on secondment from an
affiliate) that perform similar tasks for the affiliated entities or
may share office space with its affiliated entities. Accordingly,
the Commission believes that it would be reasonable, for purposes of
calculating its projected operating costs, for a swap execution
facility to prorate any shared expense that the swap execution
facility pays for, but only to the extent that such shared expense
is actually attributable to the affiliate and for which the swap
execution facility is reimbursed. Similarly, a reasonable
calculation of a swap execution facility's projected operating costs
must include the prorated amount of any expense paid for by an
affiliated entity to the extent that the shared expense is
attributable to the swap execution facility. In order to prorate a
shared expense, the swap execution facility should:
(i) Maintain sufficient documentation that reasonably shows the
extent to which the shared expense is attributable to and paid for
by the swap execution facility and/or affiliated entity;
(ii) Identify any shared expense in the financial reports that
it submits to the Commission; and
(iii) Sufficiently explain why it prorated any shared expense. A
swap execution facility may provide documentation, such as copies of
service agreements, other legal documents, firm policies, audit
statements, or allocation methodologies, that reasonably shows how
expenses are attributable to, and paid for by, the swap execution
facility and/or its affiliated entities to support its determination
to prorate an expense.
* * * * *
Core Principle 15 of Section 5h of the Act--Designation of Chief
Compliance Officer
* * * * *
(b) Acceptable Practices--(1) Qualifications of chief compliance
officer. In determining whether the background and skills of a
potential chief compliance officer are appropriate for fulfilling
the responsibilities of the role of the chief compliance officer,
the swap execution facility has the discretion to base its
determination on the totality of the qualifications of the potential
chief compliance officer, including, but not limited to, compliance
experience, related career experience, training, and any other
relevant factors to the position. A swap execution facility should
be especially vigilant regarding potential conflicts of interest
when appointing a chief compliance officer.
(2) [Reserved]
Issued in Washington, DC, on December 23, 2020, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices To Swap Execution Facilities--Commission Voting Summary and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Concurrence of Commissioner Rostin Behnam
More than two years ago, in November 2018, the Commission voted
to propose a comprehensive overhaul of the existing framework for
swap execution facilities (SEFs).\1\ Today, the Commission issues
two rules finalizing aspects of the SEF Proposal and a withdrawal of
the SEF Proposal's unadopted provisions. This is the final step in a
long road. Last month, the Commission finalized rules emanating from
the SEF Proposal regarding codification of existing no-action
letters regarding, among other things, package transactions.\2\
Today's final rules and withdrawal complete the Commission's
consideration of the SEF Proposal.
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\1\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (Nov. 30, 2018) (the ``SEF Proposal'').
\2\ Swap Execution Facility Requirements (Nov. 18, 2020),
https://www.cftc.gov/PressRoom/PressReleases/8313-20.
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Back in November 2018, I expressed concern that finalization of
the SEF Proposal would reduce transparency, increase limitations on
access to SEFs, and add significant costs for market
participants.\3\ I also noted that, while the existing SEF framework
could benefit from targeted changes, particularly the codification
of existing no-action relief, the SEF framework has in many ways
been a success. I pointed out that the Commission's work to promote
swaps trading on SEFs has resulted in increased liquidity, while
adding pre-trade price transparency and competition. Nonetheless, I
voted to put the SEF Proposal out for public comment, anticipating
that the notice and comment process would guide the Commission in
identifying a narrower set of changes that would improve the current
SEF framework and better align it with the statutory mandate and the
underling policy objectives shaped after the 2008 financial
crisis.\4\ More than two years and many comment letters later, that
is exactly what has happened. The Commission has been precise and
targeted in its finalization of specific provisions from the SEF
Proposal that provide needed clarity to market participants and
promote consistency, competitiveness, and appropriate operational
flexibility consistent with the core principles.
---------------------------------------------------------------------------
\3\ Statement of Concurrence of Commissioner Rostin Behnam
Regarding Swap Execution Facilities and Trade Execution Requirement,
https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement110518a.
\4\ Id.
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In addition to expressing substantive concerns about the
overbreadth of the SEF Proposal, I also voiced concerns that we were
rushing by having a comparatively short 75-day comment period.\5\ In
the end, the comment period was rightly extended, and the Commission
has taken the time necessary to carefully evaluate the
appropriateness of the SEF Proposal in consideration of its
regulatory and oversight responsibilities and the comments received.
I think that the consideration of the SEF Proposal is an example of
how the process is supposed to work. When we move too quickly toward
the finish line and without due consideration of the surrounding
environment, we risk making a mistake that will impact our markets
and market participants.
---------------------------------------------------------------------------
\5\ Id.
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Finally, I would like to address the Commission's separate vote
to withdraw the unadopted provisions of the SEF Proposal. In the
past, I have expressed concern with such withdrawals by an agency
that has historically prided itself on collegiality and
[[Page 9251]]
working in a bipartisan fashion.\6\ In the case of today's
withdrawal, the Commission has voted on all appropriate aspects of
the SEF Proposal through three rules finalized during the past
month. The Commission has voted unanimously on all of these rules,
including today's decision to withdraw the remainder from further
consideration. While normally a single proposal results in a single
final rule, in this instance, multiple final rules have been
finalized emanating from the SEF Proposal. This could lead to
confusion regarding the Commission's intentions regarding the many
unadopted provisions of the SEF Proposal. Under such circumstances,
I think it is appropriate to provide market participants with
clarity regarding the SEF Proposal. Accordingly, I will support
today's withdrawal of the SEF Proposal. But rather than viewing it
as a withdrawal of the SEF Proposal, I see it as an affirmation of
the success of the existing SEF framework and the careful process to
markedly improve the SEF framework in a measured and thoughtful way.
---------------------------------------------------------------------------
\6\ Rostin Behnam, Commissioner, CFTC, Dissenting Statement of
Commissioner Rostin Behnam Regarding Electronic Trading Risk
Principles (June 25, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement062520b.
---------------------------------------------------------------------------
Appendix 3--Statement of Commissioner Dan M. Berkovitz
I support the Commission's decision to withdraw its 2018
proposal to overhaul the regulation of swap execution facilities
(``SEFs'') \1\ (``2018 SEF NPRM'') and proceed instead with targeted
adjustments to our SEF rules (``Final Rules''). The two Final Rules
approved today will make minor changes to SEF requirements while
retaining the progress we have made in moving standardized swaps
onto electronic trading platforms, which has enhanced the stability,
transparency, and competitiveness of our swaps markets.\2\
---------------------------------------------------------------------------
\1\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (Nov. 30, 2018).
\2\ Dissenting Statement of Commissioner Dan M. Berkovitz
Regarding Proposed Rulemaking on Swap Execution Facilities and Trade
Execution Requirement (Nov, 5, 2018), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement110518a.
---------------------------------------------------------------------------
When the Commission issued the 2018 SEF NPRM, I proposed that we
enhance the existing swaps trading system instead of dismantling it.
For example, I urged the Commission to clarify the floor trader
exception to the swap dealer registration requirement and abolish
the practice of post-trade name give-up for cleared swaps. I am
pleased that the Commission already has acted favorably on both of
those matters. Today's rulemaking represents a further positive step
in this targeted approach.
Many commenters to the 2018 SEF NPRM supported this incremental
approach, advocating discrete amendments rather than wholesale
changes. Today, the Commission is adopting two Final Rules that
codify tailored amendments that received general support from
commenters. The first rule--Swap Execution Facilities--amends part
37 to address certain operational challenges that SEFs face in
complying with current requirements, some of which are currently the
subject of no-action relief or other Commission guidance. The second
rule--Exemptions from Swap Trade Execution Requirement--exempts two
categories of swaps from the trade execution requirement, both of
which are linked to exceptions to or exemptions from the swap
clearing requirement.
Swap Execution Facilities: Audit Trail Data, Financial Resources and
Reporting, and Requirements for Chief Compliance Officers
Commission regulations require a SEF to capture and retain all
audit trail data necessary to detect, investigate, and prevent
customer and market abuses, which currently includes identification
of each account to which fills are ultimately allocated.\3\
Following the adoption of these regulations, SEFs represented that
they are unable to capture post-execution allocation data because
the allocations occur away from the SEF, prompting CFTC staff to
issue no-action relief. Other parties, including DCOs and account
managers, must capture and retain post-execution allocation
information and produce it to the CFTC upon request, and SEFs are
required to establish rules that allow them obtain this allocation
information from market participants as necessary to fulfill their
self-regulatory responsibilities. Given that staff is not aware of
any regulatory gaps that have resulted from SEFs' reliance on the
no-action letter, codifying this alternative compliance framework is
appropriate.
---------------------------------------------------------------------------
\3\ 17 CFR 37.205(a), b(2)(iv).
---------------------------------------------------------------------------
This Swap Execution Facility final rule also will amend part 37
to tie a SEF's financial resource requirements more closely to the
cost of its operations, whether in complying with core principles
and Commission regulations or winding down its operations. Based on
its experience implementing the SEF regulatory regime, the
Commission believes that these amended resource requirements--some
of which simply reflect current practice--will be sufficient to
ensure that a SEF is financially stable while avoiding the
imposition of unnecessary costs. Additional amendments to part 37,
including requirements that a SEF must prepare its financial
statements in accordance with U.S. GAAP standards, identify costs
that it has excluded in determining its projected operated costs,
and notify the Commission within 48 hours if it is unable to comply
with its financial resource requirements, will further enhance the
Commission's ability to exercise it oversight responsibilities.
Finally, this rule makes limited changes to the Chief Compliance
Officer (``CCO'') requirements. As a general matter, I agree that
the Commission should clarify certain CCO duties and streamline CCO
reporting requirements where information is duplicative or not
useful to the Commission. Although the CCO requirements diverge
somewhat from those for futures commission merchants and swap
dealers, the role of SEFs is different and therefore,
standardization is not always necessary or appropriate. I expect
that the staff will continue to monitor the effects of all of the
changes adopted today and inform the Commission if it believes
further changes to our rules are needed.
Exemptions From Swap Trade Execution Requirement
Commodity Exchange Act (``CEA'') section 2(h)(8) specifies that
a swap that is excepted from the clearing requirement pursuant to
CEA section 2(h)(7) is not subject to the requirement to trade the
swap on a SEF. Accordingly, swaps that fall into the statutory swap
clearing exceptions (e.g., commercial end-users and small banks) are
also excepted from the trading mandate. However, the Commission has
also exempted from mandatory clearing swaps entered into by certain
entities (e.g., cooperatives, central banks, and swaps between
affiliates) using different exemptive authorities from section
2(h)(7).
The Exemptions from Swap Trade Execution Requirement final rule
affirms the link between the clearing mandate and the trading
mandate for swaps that are exempted from the clearing mandate under
authorities other than CEA section 2(h)(7). The additional clearing
exemptions are typically provided by the Commission to limited types
of market participants, such as cooperatives or central banks that
use swaps for commercial hedging or have financial structures or
purposes that greatly reduce the need for mandatory clearing and SEF
trading. In addition, limited data provided in the release indicates
that, at least up to this point in time, these exempted swaps
represent a small percentage of the notional amount of swaps traded.
This final rule also exempts inter-affiliate swaps from the
trade execution requirement. These swaps are exempted from the
clearing requirement primarily because the risks on both sides of
the swap are, at least in some respects, held within the same
corporate enterprise. As described in the final rule release, these
swaps may not be traded at arms-length and serve primarily to move
risk from one affiliate to another within the same enterprise.
Neither market transparency nor price discovery would be enhanced by
including these transactions within the trade execution mandate. For
these reasons, I am approving the Exemptions from Swap Trade
Execution Requirement final rule as a sensible exemption consistent
with the relevant sections of the CEA.
Conclusion
These two Final Rules provide targeted changes to the SEF
regulations based on experience from several years of implementing
them. These limited changes, together with the withdrawal of the
remainder of the 2018 SEF NPRM, effectively leave in place the basic
framework of the SEF rules as originally adopted by the Commission.
This framework has enhanced market transparency, improved
competition, lowered transaction costs, and resulted in better swap
prices for end users. While it may be appropriate to make other
incremental changes going forward, it is important that we affirm
the established regulatory program for SEFs to maintain
[[Page 9252]]
these benefits and facilitate further expansion of this framework.
I thank the staff of the Division of Market Oversight for their
work on these two rules and their helpful engagement with my office.
[FR Doc. 2020-28944 Filed 2-10-21; 8:45 am]
BILLING CODE 6351-01-P