I support the Commission’s issuance of an Order of Registration (“Order”) regarding the application of AEGIS SEF, LLC (“Aegis”) to register as a swap execution facility (“SEF”).  The record before us demonstrates that Aegis, subject to conditions set forth in the Order, has demonstrated compliance with the Commodity Exchange Act and the Commission’s regulations, and therefore its registration as a SEF is appropriate.

But those who take a look at the Order may wonder why half of it is devoted to a discussion about SEF swap confirmations pursuant to Commission Rule 37.6(b)[1] and related regulations.[2]  I wish to make clear that this is not due to any deficiency on the part of Aegis.  Rather, it is due to a defect in the Commission’s rules.  A defect left on the books, despite the Commission’s awareness since 2014, requiring work-arounds and temporary no-action relief – the antithesis of regulatory clarity.   

The SEF Swap Confirmation Saga

Rule 37.6(b) requires that a SEF “provide each counterparty to a transaction that is entered into on or pursuant to the rules of the [SEF] with a written record of all of the terms of the transaction which shall legally supersede any previous agreement and serve as a confirmation of the transaction.”  When it adopted Rule 37.6(b), the Commission explained that, with respect to uncleared swaps, SEFs could satisfy the rule’s written confirmation requirement by incorporating by reference terms set forth in agreements previously negotiated by the counterparties,[3] provided that such agreements had been submitted to the SEF ahead of execution.[4]

There was just one problem:  The proviso that the SEF must obtain such documentation from the parties to an uncleared swap ahead of execution to incorporate into its confirmation simply was not workable.  As the Commission subsequently recognized, the proviso—

has created impractical burdens for SEFs.  Based upon feedback from SEFs, the Commission understands that SEFs have encountered many issues in trying to comply with the requirement for uncleared swaps, including high financial, administrative, and logistical burdens to collect and maintain bilateral transaction agreements from many individual counterparties.  SEFs have stated that they are unable to develop a cost-effective method to request, accept, and maintain a library of every previous agreement between counterparties.  SEFs have also noted that the potential number of previous agreements is considerable, given that SEF counterparties enter into agreements with many other parties and have multiple agreements for different asset classes.[5]

Cognizant that the Commission’s SEF confirmation rule does not work, Commission staff has done what it could.  Staff issued three conditional no-action letters during 2014-2016 to provide necessary relief; each letter expired after approximately one year.[6]  When the Commission still had not acted to address this issue by 2017, staff again extended the no-action relief “until the effective date of revised Commission regulations that establish a permanent, practicable SEF confirmation solution.”[7]

Fast forward five more years from 2017 to today, and “Commission regulations that establish a permanent, practicable SEF confirmation solution” are still nowhere in sight.  In fact, although the Commission has known for nearly a decade that its SEF confirmation rule is unworkable, a rulemaking to address the issue was unfortunately missing from the Commission’s “Agency Rule List” published in the Spring 2022 “Unified Agenda of Regulatory and Deregulatory Actions.”[8]

Enough is Enough

The Order we are approving regarding Aegis requires it to comply with the same conditions for swap confirmations that currently-registered SEFs must comply with to rely upon the existing no-action relief.  This is appropriate, in order to maintain a level playing field among SEFs.

But what is not appropriate is for the Commission to fail to fix the unworkable rule[9] while instead relying on patchwork band-aids such as the indefinite no-action relief that staff has properly granted to currently-registered SEFs, and bespoke conditions in an Order of Registration for new SEFs such as Aegis.  This inaction by the Commission is unfair to market participants, undermines the integrity of the Commission’s regulatory framework, and runs counter to a Core Value of the Commission – clarity through transparency to market participants about our rules and processes.[10]