In the aftermath of the 2008 global financial crisis, the G20 leaders met in Pittsburgh, Pennsylvania.[1]  This meeting resulted in an agreement among the G20 leaders to bring transparency and oversight to the then-unregulated swaps market.[2]  Emerging in the 1980s, the swaps market remained unregulated for decades, operating with little to no transparency and causing significant integrity concerns for the global financial market.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)[3] amended the Commodity Exchange Act (CEA) and introduced a framework for the regulation of swaps that imposed central clearing and trade execution requirements, registration and comprehensive regulation of swap dealers, and recordkeeping and real-time reporting requirements. Under the Dodd-Frank Act, standardized swap transactions that are subject to the clearing mandate and designated made-available-to-trade must be executed on a registered or exempt designated contract market (DCM) or swap execution facility (SEF).[4]

Section 5h of the CEA prohibits a person from operating “a facility for the trading or processing of swaps unless the facility is registered as a [SEF] or as a [DCM] under this section.”[5]  A SEF, as a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, actively facilitates swap transactions in our markets by facilitating the execution of swaps between persons. Additionally, as registered platforms, SEFs play an active role in price discovery and transparency and policing and reporting swap transactions in an effort to monitor systemic risk.

Implementing the statutory mandate of the CEA, the Commission adopted new rules and principles for SEFs in 2013.[6] In the adopting release, the Commission noted several of the key goals of the Dodd-Frank Act, including greater pre- and post-trade transparency, which results in lower costs for investors, businesses, and consumers; lower risk to the swap market and economy; and enhanced market integrity to protect market participants and the greater public.[7] With these goals in mind, the Commission adopted the Part 37 regulations including Regulation 37.6.

Part 37 sets forth the operational requirements for SEFs and trading swaps on SEFs.  The Commission adopted Regulation 37.6 and, in the adopting release, explained that this regulation was “intended to provide market participants who execute swap transactions on or pursuant to the rules of a SEF with legal certainty with respect to such transactions.”[8]

Specifically, CFTC Regulation 37.6(b) “requires, for uncleared transactions executed on or pursuant to the rules of a SEF, that the SEF ‘must have all terms . . . agreed to no later than execution, such that the SEF can provide a written confirmation inclusive of those terms at the time of execution and report complete, non-duplicative, and non-contradictory data to an SDR as soon as technologically practicable after execution.’”[9]  Further, CFTC Regulation 37.6 explicitly stated that a “‘swap execution facility shall provide each counterparty with written documentation of all terms of the transaction to serve as confirmation of such transaction.’”[10]

Since the adoption of Regulation 37.6(b), some have expressed concerns regarding the feasibility of complying with the regulation.[11]  In 2014,[12] 2015,[13] 2016,[14] and 2017,[15] the Division of Market Oversight issued no-action letters offering guidance and exempted relief.

In March of 2017, the Commission provided relief for SEFs with respect to the following requirements:  1) SEFs’ obligation to obtain documents incorporated by reference in a swap confirmation issued under Regulation 37.6(b) prior to issuing the confirmation; 2) SEFs’ obligation maintain such documents as records; and 3) SEFs’ obligation to report terms contained in such documents that are confirmation data.[16]  The Commission issued guidance and exemptive relief based on concerns that SEFs had been unable to develop a practicable and cost-effective method to request, accept, and maintain a library of the underlying previously-negotiated freestanding agreements between counterparties.

The proposal before us today seeks to codify the no-action relief provided in NAL 17-17 and address a decade of concerns voiced by SEFs.  I support the proposal and look forward to carefully considering the comments we receive to determine the best path forward to protect our markets through the stability of SEFs while balancing practical approaches to implementing our regulatory requirements.  I am hopeful the comments submitted in response to the proposal will answer some of the explicit questions set out in the release text as well as support the drafting of final rules that create clarity for SEFs and our markets.

I want to thank the staff of the Division of Market Oversight and in the Office of General Counsel—Roger Smith, Nora Flood, Jake Chachkin, Dina Moussa, Carlene Kim, Laura Badian, Paul Schlichting, Kenny Wright, Stephen Kane, and Madison Lau—for their diligent and thoughtful work on these proposed amendments.