I support today’s final rule that codifies through rulemaking two issues concerning swap execution facilities (SEFs) currently addressed in staff no-action letters.  I am pleased that this final rule will provide market participants with much needed regulatory certainty in the areas of “package transactions” (a series of related transactions sometimes including non-swap components) and the correction of erroneous trades.  With the benefit of six-plus years of implementation experience, and multiple extensions of each of these no-action letters, it is long overdue for the Commission to codify and clarify its policy on each of these important issues.

With regard to package transactions, the amendments recognize the need to provide flexible means of execution for swaps that are negotiated and executed concurrently with other components of a larger, integrated transaction.  This flexibility has proved workable since 2014.[1]  In codifying current permissible practices with regard to the resolution of erroneous trades, [2] the final rule similarly permits SEFs to allow market participants to execute offsetting or correcting trades through any method of execution offered by the SEF.  These amendments will facilitate the prompt identification and correction of error trades, thereby minimizing market participants’ exposure to market, credit, and operational risks.

I have long disagreed with the overly restrictive mandate on permissible SEF methods of execution.  While Dodd Frank’s amendments to the Commodity Exchange Act define a SEF as a trading system facilitating multiple-to-multiple trading activity “through any means of interstate commerce,”[3] the CFTC saw fit to only allow for two methods (RFQ and CLOB) to be used in connection with a swap subject to the trade execution requirement (“Required Transactions”).[4]  By dictating how Required Transactions are executed, the current regime forecloses any number of alternatives that could create liquidity on SEFs and better address the highly variable, bespoke nature of many swaps.  I believe the Commission should follow the law and further expand the allowed methods of execution for Required Transactions to any form that is truly multiple-to-multiple, which would allow SEFs to experiment with new means of execution tailored to the bespoke liquidity of a wide variety of critical risk management products.  Similarly, in the area of block trades, I recently expressed concern when the Commission raised the block size threshold, thereby reducing the population of swaps that can be negotiated through alternative means.[5]

Lastly, I hope the Commission promptly finalizes additional provisions of the SEF ruleset that the Commission has proposed revising.  These areas include making more practical the SEF financial resources requirement and codifying an exemption from the trade execution requirement for swaps between affiliated counterparties. Resolving these issues through final rules will promote the liquidity and transparency of SEFs.