Public Statements & Remarks

Keynote Address by CFTC Commissioner J. Christopher Giancarlo

TabbFORUM, Fixed Income 2015: Perfect Storm Navigating the Confluence, New York, New York

A Pro-Reform Reconsideration of the CFTC Swaps Trading Rules

January 29, 2015

Introduction

Thank you for the kind introduction. I have been in this audience so many times, it is quite amazing to be addressing you today.

Let me begin with the disclaimer that my remarks today reflect my own views and do not necessarily reflect the views of the Commodity Futures Trading Commission (CFTC or Commission), my fellow Commissioners or the CFTC staff.

For those of you who don’t know, I play the banjo. Do you know why playing the banjo is a lot like throwing a javelin blindfolded? It is because you don't have to be very good to get people's attention. That probably also applies to being a CFTC Commissioner, at least in my case.

Actually, playing the banjo is probably not the most unusual qualification I have for serving on the CFTC. There is also the fact that I am a Jets fan from New Jersey. I spent my summers “down the shore.” I never worked on a farm, Capitol Hill or the Chicago Board of Trade. Yet, today I am one of four Commissioners of the U.S. Commodity Futures Trading Commission. What an amazing country this is!

Yet, my most unusual qualification I have for the job is probably that I may well be the most long-standing advocate of swaps market reform from either political party to serve as a CFTC Commissioner.

In fact, I was pro-reform before most people in Washington knew the difference between a CLO, a CDO or a CDS.

I spent over thirteen years in the global swaps industry as a senior executive of a U.S. wholesale brokerage firm. I helped finance, build and acquire swaps trading platforms and the software and technology that supports them. I helped establish that firm’s operations in market centers from Seoul, Korea to Nyon, Switzerland and from Johannesburg, South Africa to Sugarland, Texas.

When I first left law practice in 2000 and entered the swaps industry, I was struck by the fact that swaps brokerage was a regulatorily recognized activity in most overseas trading markets, but not in the U.S. I always felt this omission was somewhat detrimental to the ability of the U.S. to become a true global leader in swaps trading and execution.

In the years before the financial crisis, I came to see that certain reforms would improve the swaps industry. In the mid-2000s, I became a supporter of greater central counterparty (CCP) clearing of swaps when I saw how its emergence in the energy swaps markets increased trading and market participation.

In 2005, I led an effort to develop a clearing facility for credit default swaps (CDS). That initiative ultimately led to the creation of ICE Clear Credit, the world’s leading clearer of credit derivative products.

Six years ago, I saw how the lack of regulatory transparency into swaps counterparty credit risk exacerbated the financial crisis. I remember very well an early morning phone call the second week of September 2008. It was from one of the principle U.S. bank prudential regulators. He was asking about widely gapping credit spreads in bank CDS protection, including Lehman Brothers. The regulator wanted to understand what was going on in trading markets. After a short conversation, the offer was made to explain the current market situation to him face-to-face. He looked in his calendar and suggested a date in mid-October. I thought “sure, but it all may be over by then.”

It became clear to me then that regulators needed to have a far more transparent window into swap counterparty credit risk.

So as you can see, by the time Congress began drafting the bills that would become Title VII of the Dodd-Frank Act,1 I was already a confirmed advocate for its three key pillars of:

  • CCP clearing;
  • Swap data reporting; and
  • Regulated swaps execution.

My support for these reforms is not driven by academic theory or political ideology. It is driven by a lifetime of professional and commercial experience. I simply believe that well-regulated markets are good for American business and job creation.

That is why I am pro-reform. That is why I support clearing more swaps through CCPs, reporting swap trades to trade repositories and executing swaps on regulated trading platforms.

Now, it is time to get those reforms right. We are not there yet.

I commend the CFTC for its generally successful implementation of CCP clearing implemented in a measured, gradual fashion. I say, “well done, CFTC.”

I also continue to support successful completion of the CFTC’s data reporting mandate, which remains a work in progress.

I am, however, critical of the CFTC’s swaps trading rules. I believe they are fundamentally flawed for a number of reasons:

  • Because they inappropriately adopt a U.S.-centric futures regulatory model that supplants human discretion with overly complex and highly prescriptive rules;
  • Because they are largely incompatible with the distinct liquidity, trading and market structure characteristics of the global swaps markets;
  • Because they fragment swaps trading into numerous artificial market segments and drive global market participants away from transacting with entities subject to CFTC swaps regulation;
  • Because they exacerbate the already inherent challenge in swaps trading – adequate liquidity – and thus increase market fragility and the systemic risk that the Dodd-Frank reforms were predicated on reducing; and
  • Last, but foremost, because they do not do what Dodd-Frank expressly required them to do. They simply do not comply with the clear provisions of the law.

Congress got much of Title VII of Dodd-Frank right. Congress laid out a straightforward and flexible swaps trading regulatory framework well-suited to the episodic nature of swaps liquidity and swaps market dynamics. Unfortunately, the CFTC’s implementation of the swaps trading rules widely misses the congressional mark.

Earlier this morning, I issued a White Paper analyzing the mismatch between the CFTC’s swaps regulatory framework and the inherent dynamics of global swaps markets and the adverse consequences that have resulted. That White Paper is available at CFTC.gov. The Tabb Forum has also posted a copy online. I would like to use this opportunity to provide you with an overview of the White Paper.

Before, I do, however, I want to emphasize that my criticism is of particular CFTC rules and policies. It is not directed at the dedicated CFTC staff, who work diligently under the direction of the CFTC Chairman and Commission. They are undoubtedly committed to implementing and overseeing a successful swaps regulatory framework. They are good people charged with an impossible task.

The CFTC’s Flawed Swaps Trading Regulatory Framework

Let me now discuss a few of the key flaws in the swaps rules, starting with: Limits on Methods of Trade Execution.

CFTC rules for swap execution facilities (SEFs) create two categories of swaps transactions: Required Transactions2 and Permitted Transactions.3 Required Transactions must be executed in an order book (Order Book)4 or an RFQ system in which a request for a quote is sent to three participants operating in conjunction with an Order Book (RFQ System).5 Permitted Transactions allow for any method of execution,6 but SEFs must also offer an Order Book for such transactions.7

Ladies and gentlemen, there is simply no statutory support for the CFTC’s “required” and “permitted” distinctions. There is no support for segmenting swaps into two categories or for limiting one of those categories to two methods of execution. Rather, Congress's SEF definition encompasses a platform where multiple participants have the ability to execute swaps with multiple participants through any means of interstate commerce, including a trading facility.8 Congress clearly provided this broad and flexible definition to allow execution methods beyond an Order Book or RFQ System for all swaps, not just some swaps. The statutory language contains a multiple-to-multiple participant trading requirement, not an all-to-all trading requirement. The CFTC Order Book obligation is, simply, made up out of thin air.

Congress further permitted SEFs to offer swaps trading “through any means of interstate commerce.”9 The CFTC rules acknowledge this phrase but construe it narrowly to allow for voice and other “means” of execution only within the limited Order Book and RFQ System execution methods.10 Yet, the lawyers in the audience know that the phrase “interstate commerce” has a rich and well-developed constitutional history, which U.S. federal courts have interpreted to cover almost an unlimited range of commercial and technological enterprise.11 The CFTC’s narrow construct is disingenuous and not supported by the courts’ long-established interpretation of the Commerce Clause.

Congress could have required SEFs to offer certain limited execution methods, but chose not to do so. Congress could have limited swap execution to the trading facility execution method that futures exchanges are required to use.12 Congress did not do so. Congress could have preserved references to “electronic execution” included in early drafts of the Dodd-Frank Act, but did not do so in the final statutory text.13

Electronic order books may be the standard method of trade execution in the futures markets, but that is not the case with swaps. Congress understood that, given swaps’ generally episodic liquidity, a broad variety of execution methods are necessary. Congress did not seek to alter swaps natural trading and execution dynamics. Since Congress has spoken in the Dodd-Frank Act, we at the CFTC do not have the authority to do otherwise.

Let me now address Block Transactions. The CFTC block trade definition, specifically, the “occurs away” requirement, is another example of artificial market segmentation. The CFTC defines a block trade as “a publicly reportable swap transaction that: (1) involves a swap that is listed on a registered SEF or designated contract market (DCM); (2) ‘occurs away’ from the registered SEF’s or DCM’s trading system or platform; and (3) has a notional or principal amount at or above the appropriate minimum block size applicable to such swap….”14

The block trade definition is a holdover from the futures model.15 In the futures market, block trades occur away from the DCM’s trading facility as an exception to the centralized market requirement given the price and liquidity risk of executing these large-sized trades.16

In today’s global swaps market, however, there are no “on-platform” and “away-from-platform” execution distinctions. OTC swaps trade in very large sizes. These swaps are not constrained to trading facilities, but trade through one of a variety of execution methods appropriate for the product’s trading liquidity.

Again, Congress recognized these differences by not imposing on SEFs an open and competitive centralized market requirement. Rather, Congress expressly authorized delayed reporting for swap block transactions.17 Congress got it right.

We at the CFTC have got the swaps block trade definition wrong. There is no statutory support for the “occurs away” requirement. The requirement creates an arbitrary and confusing segmentation between non-block trades “on-SEF” and block trades “off-SEF.” The “off-SEF” requirement undermines the legislative goal of encouraging swaps trading on SEFs.18

It needs to be changed.

Made Available to Trade. Congress included a trade execution requirement in the Commodity Exchange Act that requires SEF execution for swaps subject to the clearing mandate.19 In an innocuous exception to this requirement, Congress stated that the trade execution requirement does not apply if no SEF “makes the swap available to trade.”20

Based on nothing other than these six words, the CFTC has created an entire new regulatory mandate that is now known as the “made available to trade” or MAT process.21 Yet, a plain reading of Dodd-Frank’s trade execution requirement shows that Congress never intended to create such a regulatory framework around the six words. Unlike the clearing mandate, Congress provided no regulatory process for moving some swaps on-SEF and keeping others off.22

Congress could have specified a regulatory mandate for the trade execution requirement as it did for the clearing mandate, but chose not to. Congress was aware that, unlike futures that begin life on an exchange where they may or may not attract liquidity, newly developed swaps products are initially traded bilaterally and only move to a platform once trading liquidity is assured. Congress’s trade execution requirement is merely conditioned by the simple logic that a clearing mandated swap must be executed on a SEF provided that the particular swap is sufficiently liquid that some SEF makes it available to trade (i.e., offers the swap for trading). This logical condition was not meant to serve as the basis for a new CFTC regulatory process.

This MAT process would not even be necessary if the CFTC allowed SEFs to offer swaps trading through “any means of interstate commerce” exactly as Congress authorized. In short, the MAT process is not supported by the text of Dodd-Frank and should be withdrawn.

I would like to now discuss Impartial Access. Dodd-Frank requires SEFs to have rules to provide market participants with impartial access to the market and to establish rules regarding any limitation on access.23 For some reason, agency staff appear to view these provisions as requiring SEFs to serve every type of market participant in an all-to-all market structure. Given the Dodd-Frank Act’s reference to limitations on access and its flexible SEF definition, however, efforts to require SEFs to serve every type of market participant in all-to-all marketplaces are unsupportable.

There is no mandate for an all-to-all swaps market structure in the Dodd-Frank Act. It is another holdover from futures. Congress knew that there are separate dealer-to-client and dealer-to-dealer swaps markets, just as there are in many other mature financial markets. This structure is driven by the episodic liquidity characteristics of the underlying swaps products. This dynamic has not changed post-Dodd-Frank and the impartial access provisions do not give the CFTC authority to re-engineer the market structure of swaps trading.

Impartial access must not be confused with open access. Impartial access, as the Commission noted in the preamble to the final SEF rules, means “fair, unbiased, and unprejudiced” access.24 This means that a SEF should apply this standard to its participants; it does not mean that a SEF is forced to serve every type of participant in an all-to-all futures-style marketplace. Only Congress could have imposed an all-to-all trading mandate; it chose NOT to do so.

Void Ab Initio. CFTC staff has issued guidance stating that any swap trade that is executed on a SEF and that is not accepted for clearing is invalid from the beginning or “void ab initio.”25

The CFTC’s void ab initio policy has no support in the Dodd-Frank Act. There are legitimate reasons, such as operational or clerical errors, that cause trades to be rejected from clearing. The void ab initio policy creates a competitive disadvantage for the U.S. swaps market relative to the U.S. futures market, which does not have such a policy. Further, the void ab initio policy may well introduce additional risk into the system when a participant enters into a series of swaps to hedge its risk, but one or more swaps is declared void ab initio. In this case, the participant will not be correctly hedged, which creates additional market and execution risk.

Lastly, Core Principles. Congress provided a core-principles based framework for SEFs.26 It based this framework on the CFTC’s historical core principles-based regulatory regime for DCMs.27 Although the SEF core principles contain certain regulatory obligations, Dodd-Frank did not instruct the CFTC to take a prescriptive rules-based approach. In fact, the statute provides SEFs with reasonable discretion to comply with the core principles.28 The CFTC should draw on its long and successful experience as a principles-based regulator to implement a flexible core principles-based approach for SEFs that aligns with inherent swaps market dynamics.

Adverse Consequences of the CFTC’s Swaps Trading Regulatory Framework

I have reviewed for you some of the chief flaws in the CFTC swaps trading rules. Let me now address some of the adverse consequences for U.S. financial markets.

Foremost among the problems is the reluctance of global market participants to transact with entities subject to CFTC swaps regulation. Traditionally, users of swaps products chose to do business with global financial institutions based on factors such as quality of service, product expertise, financial resources and professional relationships. Now, those criteria are secondary to the question of the institution’s regulatory profile. Non-U.S. persons are avoiding financial firms bearing the scarlet letters of “U.S. person” in certain swaps products to steer clear of the CFTC’s problematic regulations.

This avoidance by non-U.S. person market participants of the ill-designed U.S. swaps trading rules is fragmenting global swaps markets between U.S. persons and non-U.S. persons and driving away global capital.29 It is fostering smaller, disconnected liquidity pools and less efficient and more volatile pricing. Market fragmentation is exacerbating the inherent challenge of swaps trading – adequate liquidity.

Divided markets are more brittle, posing a risk of failure in times of economic stress or crisis. Fragmentation increases firms’ operational risks as they structure themselves to avoid U.S. rules and now must manage multiple liquidity pools in different jurisdictions. Fragmentation also increases trading firms’ operational and structural complexity and reduces their efficiency in the markets. In short, market fragmentation caused by the CFTC’s ill-designed trading rules – and the application of those rules abroad – is harming liquidity and increasing the systemic risk that the Dodd-Frank Act was predicated on reducing.

In addition to global market fragmentation, the CFTC’s unwarranted slicing and dicing of swaps trading into a series of novel regulatory categories, such as Required Transactions and Permitted Transactions and block transactions “off-SEF” and non-blocks “on-SEF,” each with their corresponding execution methods, has fragmented domestic swaps trading into an artificial series of smaller and smaller pools of trading liquidity, increasing market inefficiencies. So long as such disparate segments remain, U.S. swaps markets face a self-imposed liquidity challenge compared to non-U.S. markets.

The CFTC’s swaps trading regime is also threatening the survival of many SEFs. The CFTC’s prescriptive and burdensome rules have ensured that operating a SEF is an expensive, legally intensive activity.30 It may drive consolidation in the industry providing trading counterparties with less choice of where and how to execute swaps transactions.

Further, the swaps trading rules are hindering technological innovation. In 1899, U.S. Patent Commissioner Charles H. Duell is said to have pronounced that “everything that can be invented has been invented.”31 Not to be outdone, the CFTC’s SEF rules pre-suppose that order book and RFQ methodologies are today and will always remain the only suitable technological means for U.S. swaps execution. These restrictive SEF rules close U.S. swaps markets to promising technological development while the rest of the world proceeds ahead in financial market innovation.

The swaps rules also appear to contain an unstated bias against human discretion in swaps execution. The bias is seen in a range of CFTC positions, such as:

  • Allowing only two specific types of execution methods for Required Transactions;32
  • Requiring an RFQ System to operate in conjunction with an Order Book;33
  • Requiring an RFQ to be sent to three market participants;34
  • Placing various conditions around basis risk mitigation services;35 and
  • Showing aversion to Dutch Auction systems that utilize professional discretion in setting auction prices.36

Yet, there is just no legal support in Title VII of Dodd-Frank for restricting human discretion in swaps execution.

Isn’t it odd that, while the CFTC is busy trying to restrict human interaction in swaps markets, the U.S.’s most successful financial marketplace – the IPO markets – are trumpeting the importance of “human touch” in their markets.37 They assert the human element as a key safeguard against the type of runaway technical errors that plagued Facebook’s 2012 IPO, when more than 30,000 buy and sell orders were either canceled or delayed.38 It would be a regulatory failure to restrict human involvement and interaction in the $691 trillion swaps markets and herd trading onto automated electronic platforms, where software failures and technical glitches could someday cause a “flash crash” unlike anything yet seen in global markets.

In an odd twist, the CFTC’s insistence upon RFQ systems and centralized, order driven markets to execute swaps transactions has the potential to open U.S. swaps markets to algorithmic and high-frequency trading (HFT) that are not currently a factor in swaps markets. It is unclear how those who support the CFTC’s impetus for electronic central limit order book (CLOB) execution of swaps, yet decry HFT in today’s equities and futures markets, will reconcile these views when the enormous but humanly-managed swaps markets are launched into unmanned hyperspace by HFT algorithmic trading technologies.

For these reasons and more, that I have set out in my White Paper, I am of the firm view that CFTC swaps trading rules:

  • Do not accord with congressional intent;
  • Have not enhanced market transparency; and
  • Have not decreased the systemic risk that the Dodd-Frank Act was premised on reducing.

Alternative Swaps Trading Regulatory Framework

I propose an alternative swaps trading regulatory framework that is pro-reform and fully aligned with the express statutory framework of Title VII of the Dodd-Frank Act. My proposed swaps regulatory framework is built upon five key tenets:

  • Comprehensiveness;
  • Cohesiveness;
  • Flexibility;
  • Professionalism; and
  • Transparency.

The first tenet is to subject a comprehensive range of U.S. swaps trading activity to CFTC oversight. In this respect, I acknowledge the CFTC’s broad SEF requirement for registration.39 My approach supports that comprehensive requirement, but insists that the scope of regulatory coverage be fully set forth in clear and definitive rule text and not buried in footnotes, staff advisories or no-action letters.

As of January 13, 2015, CFTC staff have had to issue 250 no-action letters, 42 exemptive letters and 42 statements of guidance, interpretation and advice to implement its Dodd-Frank mandates. That is a total of 334 – and counting – miscellaneous communications without formal Commission rule-making. There is something clearly wrong with our swaps regulatory framework if it requires that much staff work to put it in place. We need a better set of rules.

The second tenet of my proposal is regulatory cohesiveness. We must remove the CFTC’s artificial slicing and dicing of swaps markets. We must do away with these odd categories of Required Transactions and Permitted Transactions and with block transactions “off-SEF” and non-blocks “on-SEF.” Instead, all CFTC-regulated swaps trading should fall within the same, cohesive and undivided regulatory framework.

The third tenet of my alternative framework is flexibility. The CFTC must adhere to Dodd-Frank’s express prescription for flexibility in swaps trading.40 That means that swaps market participants must be allowed to choose from the broadest possible array of methods of swaps execution that comply with the statutory SEF definition. Those include:

  • Electronic CLOBs;
  • Simple order books;
  • RFQ systems;
  • Electronic Dutch Auctions;
  • Hybrid electronic and voice execution methods;
  • Full voice-based execution methods; and
  • Work-up.

It also includes any other “means of interstate commerce” that may today or someday in the future satisfy swaps customer trading and liquidity requirements. U.S. swaps markets must be reopened to business and technological innovation. Technology is improving American lives today in many ways, from hailing a taxi with Uber and connecting with business colleagues on LinkedIn. Technological innovations are also transforming capital markets in areas such as raising money for business start-ups through Kickstarter and consumer borrowing through Payoff. These innovations lower barriers to entry, reduce costs and open markets to a broader range of participants. Unfortunately, the CFTC’s swaps rules would prevent such technological innovation in the U.S. swaps markets.

Customer choice and technological innovation, not regulators, must determine the various means of interstate commerce utilized in the swaps market. That is clearly what Congress intended. That is surely the American way.

My proposal would further do away with the CFTC’s unworkable MAT process that is not authorized by Dodd-Frank. Yet, eliminating the MAT process will only work if SEFs are allowed to offer swaps execution through “any means of interstate commerce.” My proposal would also give a plain reading to the requirement for impartial access that does not confuse it with open access. Dodd-Frank did not call into being any particular swaps market structure, such as existing separate dealer-to-dealer and dealer-to-customer markets or combined all-to-all markets. Therefore, regulators must leave participants in the marketplace to determine the optimal market structure based on their swaps trading needs and objectives.

My approach would also better accommodate established and beneficial swaps market practices. It would allow SEFs to implement clear, workable error trade policies to address the situation where an executed swaps transaction is rejected from clearing. It would end the void ab initio policy that is not statutorily sound. The proposal would further treat the SEF core principles as true principles as Congress intended and not as rigid rule sets.

The fourth tenet of my alternative framework is to enhance professionalism in the swaps market by setting standards of conduct for swaps market personnel. This is consistent with the current approach of advanced overseas regulators, such as the UK’s Financial Conduct Authority that look to supervise professional behavior in overseas financial markets. Rather than implementing highly prescriptive swaps trading rules here in the U.S. that limit intermediaries’ discretion, my approach is to establish standards that would enhance the knowledge, professionalism and ethics of personnel in the U.S. swaps markets who exercise discretion in facilitating swaps execution, as well as certain supporting compliance and operations personnel.

Isn’t it remarkable that today, if you want to trade a share of Microsoft, you go to a broker who has passed a Series 7 exam confirming his or her product knowledge, skills and abilities in the marketplace.41 If you want to trade corn futures on the CME you may speak to an introducing broker (IB) who has passed the Series 3 exam confirming his or her futures markets proficiency.42 Yet, brokers handling billion dollar CDS and interest rate swap trades are not required to pass any exams whatsoever.

In the U.S. there is currently no standardized measurement of one’s knowledge and qualification to act with discretion in the largest and, arguably, most systemically important financial market – swaps. My proposal would look to established precedents, such as the NFA’s Series 3 exam and rules for IBs and other members, as well as FINRA’s Series 7 exam and rules for broker-dealers, as a guide and modify them to apply to swaps trading and markets.

Now, my call for swaps broker testing is getting a lot of headlines today, but enhancing the professionalism of swaps brokers is only worth doing if they are allowed to exercise professional discretion in flexible methods of swaps execution as Congress intended.

It is surely pointless and unsupportable otherwise.

The last tenet of my framework focuses on promoting swaps trading and market liquidity as a prerequisite to increased transparency. To date, pre-trade price transparency has been greatly emphasized to the detriment of liquidity in the swaps trading rules.

Yet, no meaningful increase in swaps market transparency has been achieved by CFTC rules requiring Order Books that no one is using.

Requiring Order Books was not how Congress balanced the goals of SEF trading. The right way to promote price transparency is through a proportioned focus on promoting swaps trading and market transparency as Congress intended. Instead of taking a prescriptive approach to swaps execution that drives away participants, this framework would allow the market to innovate and provide execution through “any means of interstate commerce.” That way, participants could choose the execution method that meets their needs based upon a swap’s liquidity characteristics, which in turn, promotes trading on SEFs and liquidity. In other words, promoting swaps trading and market liquidity will lead to the enhanced price transparency that Congress sought to achieve.

Conclusion

In drawing to a close, let me say that I believe that many of the adverse consequences of the CFTC’s swaps trading rules could be reversed if the rules were redesigned in a much simpler and effective manner and if they were in accord with the clear provisions of Title VII of the Dodd-Frank Act.

I propose an alternative, pro-reform approach to regulating swaps trading. It encompasses a comprehensive, yet flexible regulatory framework that is true to congressional intent and aligns with swaps market dynamics. It is built upon five broad tenets: comprehensiveness, cohesiveness, flexibility, professionalism and transparency.

A smarter and more flexible swaps regulatory approach would eschew the artificial slicing and dicing of U.S. trading liquidity and unwarranted restrictions on means of execution that are unsupported by the law.

Rather, it would enable the U.S. to take the global lead in measured and smart regulation of swaps trading. It would allow American businesses to more efficiently hedge commercial risks, promoting economic growth. It would stimulate the American economy and job creation.

For decades the CFTC has been a competent and effective regulator of U.S. exchange-traded derivatives. The opportunity is at hand to continue that excellence in regulating swaps markets. It is time to seize that opportunity.

Thank you very much for your time.

I will be happy to take a few questions.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

2 17 C.F.R. 37.9(a)(1).

3 17 C.F.R. 37.9(c)(1).

4 17 C.F.R. 37.3(a)(2), 37.3(a)(3), and 37.9(a)(2).

5 17 C.F.R. 37.9(a)(2) and 37.9(a)(3).

6 17 C.F.R. 37.9(c)(2).

7 17 C.F.R. 37.3(a)(2); Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33,476, 33,504 (Jun. 4, 2013) (SEF Rule).

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

9 Id.

10 17 C.F.R. 37.9(a)(2)(ii); SEF Rule at 33,501-502. The Commission states that “in providing either one of the execution methods for Required Transactions in § 37.9(a)(2)(i)(A) or (B) of this final rulemaking (i.e., Order Book or RFQ System that operates in conjunction with an Order Book), a SEF may for purposes of execution and communication use ‘any means of interstate commerce,’ including, but not limited to, the mail, internet, email, and telephone, provided that the chosen execution method satisfies the requirements provided in § 37.3(a)(3) for Order Books or in § 37.9(a)(3) for Request for Quote Systems.” SEF Rule at 33,501.

11 See, e.g., Gonzales v. Raich, 545 U.S. 1, 17 (2005); Katzenbach v. McClung, 379 U.S. 294, 302 (1964); Wickard v. Filburn, 317 U.S. 111, 125 (1942).

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

13 Compare S. 3217, 111th Cong. § 720 (as reported by S. Comm. on Banking, Housing, and Urban Affairs, Apr. 15, 2010) (defining a SEF as “an electronic trading system” and discussing electronic execution of trades), with 7 U.S.C. 1a(50) (defining a SEF as “a trading system or platform” without reference to electronic execution).

14 17 C.F.R. 43.2.

15 See Alternative Executive, or Block Trading, Procedures for the Futures Industry, 64 FR 31195 (Jun. 10, 1999); Chicago Board of Trade's Proposal To Adopt Block Trading Procedures, 65 FR 58051 (Sep. 27, 2000).

16 17 C.F.R. 38.500; Execution of Transactions: Regulation 1.38 and Guidance on Core Principle 9, 73 FR 54097, 54099 (proposed Sep. 18, 2008).

17 CEA section 2(a)(13)(E); 7 U.S.C. 2(a)(13)(E).

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

19 CEA section 2(h)(8); 7 U.S.C. 2(h)(8).

20 Id.

21 CEA section 2(h)(8); 7 U.S.C. 2(h)(8); 17 C.F.R. 37.10, 37.12, 38.11 and 38.12; 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 33,606 (Jun. 4, 2013) (MAT Rule).

22 Compare CEA section 2(h)(1), 2(h)(2) and 2(h)(3); 7 U.S.C. 2(h)(1), 2(h)(2) and 2(h)(3), with CEA section 2(h)(8); 7 U.S.C. 2(h)(8).

23 CEA section 5h(f)(2); 7 U.S.C. 7b-3(f)(2).

24 SEF Rule at 33,508.

25 Staff Guidance on Swaps Straight-Through-Processing (Sep. 26, 2013), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/stpguidance.pdf.

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

27 CEA section 5(d); 7 U.S.C. 7(d) (2009); 17 C.F.R. part 38 (2009).

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

29 See Audrey Costabile Blater, Revisiting Cross-Border Fragmentation of Global OTC Derivatives: Mid-year 2014 Update, ISDA Research Note (Jul. 24, 2014), available at http://www2.isda.org/functional-areas/research/research-notes/. See also Amir Khwaja, A Review of 2014 US Swap Volumes and SEF Market Share, TABB Forum (Jan. 16, 2015), available at http://tabbforum.com/opinions/a-review-of-2014-us-swap-volumes-and-sef-market-share.

30 Catherine Contiguglia, Sef Boss Spends His Days ‘Worrying About Costs,’ Risk.net, Sep. 24, 2014, available at http://www.risk.net/risk-magazine/news/2371788/sef-boss-spends-his-days-worrying-about-costs.

31 Charles Holland Duell, Wikipedia, available at http://en.wikipedia.org/wiki/Charles_Holland_Duell. The statement has been debunked as apocryphal.

32 17 C.F.R. 37.9(a)(2).

33 Id. and 17. C.F.R. 37.9(a)(3).

34 17 C.F.R. 37.9(a)(3).

35 See also CFTC Letter No. 13-81, Time-Limited No-Action Relief from Required Transaction Execution Methods for Transactions that Result from Basis Risk Mitigation Services (Dec. 23, 2013), available at http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-81.pdf.

36 Apparently, an objection of the CFTC staff for Dutch Auction swap execution is that brokers have discretion in finding price points at which to commence an auction.

37 Sam Mamudi, Nasdaq Tries Human Beings to Stave Off IPO Poaching by Bid Board, Bloomberg, Jan. 6, 2015, available at http://www.bloomberg.com/news/2015-01-06/nasdaq-highlights-human-touch-in-ipo-process-to-fend-off-nyse.html.

38 Id.

39 17 C.F.R. 37.3(a)(1); SEF Rule at 33,481-483.

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

41 See Financial Industry Regulatory Authority (FINRA), General Securities Representative Qualification Examination (Series 7) Content Outline (2014), available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/industry/p124292.pdf.

42 See National Futures Association (NFA), NFA, Examination Subject Areas National Commodity Futures Exam, available at http://www.nfa.futures.org/NFA-registration/study-outlines/SO-Series3.pdf.

Last Updated: January 29, 2015