2018-24643
Federal Register, Volume 83 Issue 231 (Friday, November 30, 2018)
[Federal Register Volume 83, Number 231 (Friday, November 30, 2018)]
[Proposed Rules]
[Pages 61571-61573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24643]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 83, No. 231 / Friday, November 30, 2018 /
Proposed Rules
[[Page 61571]]
COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
RIN Number 3038-AE79
Post-Trade Name Give-Up on Swap Execution Facilities
AGENCY: Commodity Futures Trading Commission.
ACTION: Request for comment.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is requesting public comment regarding the practice of ``post-trade
name give-up'' on swap execution facilities.
DATES: Comments must be received on or before January 29, 2019.
ADDRESSES: You may submit comments, identified by ``Post-Trade Name
Give-Up on Swap Execution Facilities'' and RIN number 3038-AE79, by any
of the following methods:
The agency's website: http://comments.cftc.gov. Follow the
instructions for submitting comments.
Mail: Secretary of the Commission, Commodity Futures
Trading Commission, Three Lafayette Center, 1155 21st Street NW,
Washington, DC 20581.
Hand Delivery/Courier: Same as Mail, above.
All comments must be submitted in English or, if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act,\1\ a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in Commission Regulation 145.9.\2\
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\1\ 5 U.S.C. 552.
\2\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of this request for comment will be retained in the public
comment file and will be considered as required under the
Administrative Procedure Act and other applicable laws, and may be
accessible under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Aleko Stamoulis, Special Counsel,
(202) 418-5714, [email protected]; or Nhan Nguyen, Special Counsel,
(202) 418-5932, [email protected], Division of Market Oversight,
Commodity Futures Trading Commission, 1155 21st Street NW, Washington,
DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
Historically, swaps traded in over-the-counter (``OTC'') markets
rather than on regulated exchanges. Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act'') \3\
amended the Commodity Exchange Act (``CEA'' or ``Act'') \4\ to
establish a new regulatory framework for swaps. This new framework
included, among other reforms, the registration and regulation of swap
execution facilities (``SEFs'') \5\ and the mandatory clearing of
certain swaps by derivatives clearing organizations (``DCOs'').\6\ SEFs
and DCOs have since become a significant part of swaps trading
infrastructure and have helped to transition a large portion of swaps
trading from unregulated, uncleared OTC markets to regulated trading
venues and central clearing.
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\3\ Public Law 111-203, 124 Stat. 1376 (2010).
\4\ 7 U.S.C. 1 et seq.
\5\ See CEA section 5h, as enacted by section 733 of the Dodd-
Frank Act; 7 U.S.C. 7b-3. See also Core Principles and Other
Requirements for SEFs, 78 FR 33476 (June 4, 2013).
\6\ See Section 2(h)(1)(A) of the CEA, as enacted by section 723
of the Dodd-Frank Act; 7 U.S.C. 2(h)(1)(A). In 2012, the Commission
issued final rules to implement the clearing requirement
determination under section 723 of the Dodd-Frank Act. The final
rules required certain classes of credit default swaps and interest
rate swaps to be cleared by DCOs registered with the Commission.
Clearing Requirement Determination Under Section 2(h) of the CEA, 77
FR 74284 (Dec. 13, 2012).
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Many swaps are traded on SEFs through trading methods and protocols
that are electronic, voice-based, or a hybrid of both; and that provide
for anonymous trade execution, trade execution on a name-disclosed
basis, or a combination thereof. This variety of trading methods and
protocols has developed because of the broad and diverse range of
products traded in the swaps market that trade mostly episodically
rather than on a continuous basis. The decision by a market participant
to use one execution method or another depends on considerations such
as the type of swap, transaction size, complexity, the swap's liquidity
at a given time, the number of potential liquidity providers, and the
associated desire to minimize potential information leakage and front-
running risks.
``Post-trade name give-up'' is a long-standing market practice in
many swaps markets and originated as a necessary practice in OTC
markets for uncleared swaps. Post-trade name give-up refers to the
practice of disclosing the identity of each swap counterparty to the
other after a trade has been matched anonymously. In the case of
uncleared swaps, post-trade name give-up enables a market participant
to perform a credit-check on its counterparty prior to finalizing a
trade. Due to the bilateral counterparty relationship that exists in an
uncleared swap agreement, post-trade name give-up is also necessary in
order to keep track of credit exposure and payment obligations with
respect to individual counterparties.
For trades that are cleared, however, the rationale for post-trade
name give-up is less clear cut. That is because a DCO enables each
party to substitute the credit of the DCO for the credit of the
parties, thereby eliminating individual credit risk and counterparty
exposure. Swaps that are intended to be cleared are subject to pre-
execution credit checks and straight-through processing requirements,
effectively eliminating counterparty risk and, presumably, the need for
market participants to know the identities of counterparties to
anonymously matched trades.
Post-trade name give-up continues today in some swaps markets,
including with respect to swaps that are anonymously executed and
cleared.
[[Page 61572]]
Such disclosure may be made by a SEF as part of its trading protocols,
or through middleware used for trade processing and routing trades to
DCOs. For example, when a swap is matched using a voice-based execution
method, a SEF employee may verbally disclose to a party the name of the
other party to the trade. For swaps executed electronically on an
anonymous order book, disclosure of counterparty names can occur
through an electronic notification provided by the SEF after the trade
is matched. Post-trade name give-up can also occur through third-party
middleware and associated trade processing and affirmation services
that provide counterparties with various trade details captured from
SEF trading systems, including the identity of the party on the other
side of a trade.\7\
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\7\ Trade affirmation refers to a process that occurs after a
trade is executed whereby counterparties verify and affirm the
details of the trade before submitting it for settlement. Third-
party trade processing and affirmation services commonly used for
SEF trades include MarkitWire and ICE Link. The Commission has
provided that SEFs may use such services to route trades to DCOs if
the routing complies with Sec. 37.702(b). See Core Principles and
Other Requirements for SEFs, 78 FR 33476, 33535 (June 4, 2013).
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As the swaps market increasingly becomes a cleared market, the
Commission believes that it is reasonable to ask whether the post-trade
name give-up practice continues to serve a valid industry purpose in
facilitating swaps trading. A variety of views exist on both sides of
this issue, depending on one's position in the market. Some industry
participants have criticized the continued practice of post-trade name
give-up in cleared swaps markets. During a meeting of the Commission's
Market Risk Advisory Committee held in April 2015, several participants
in a panel on SEFs identified post-trade name give-up as a concern with
respect to SEF trading.\8\ Post-trade name give-up is said to deter
buy-side participation on some SEFs due to the prospect of information
leakage, whereby disclosing the identity of a market participant could
potentially expose the participant's trading intentions, strategies,
positions, or other sensitive information to competitors or dealers.\9\
Some industry participants have also alleged that post-trade name give-
up serves as a policing mechanism used by swaps dealers to retaliate
against non-dealer firms that attempt to trade on interdealer
markets.\10\ Such interdealer markets provide for competitive execution
of large-sized trades at wholesale prices. Buy-side participants that
have interest in trading on interdealer markets and otherwise meet
participation criteria to join these platforms are said to be deterred
because of post-trade name give-up.\11\ Based on these concerns,
critics of post-trade name give-up have argued that the practice is
anticompetitive, hinders liquidity, and lacks credible justification in
cleared swaps markets where participants are not exposed to
counterparty credit risk.\12\
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\8\ See Transcript of CFTC Market Risk Advisory Committee
Meeting (April 2, 2015) (``MRAC Transcript'') at 133 et seq.,
available at https://www.cftc.gov/About/CFTCCommittees/MarketRiskAdvisoryCommittee/mrac_meetings.html.
\9\ See MRAC Transcript at 142-144, 164. See also Managed Funds
Association Position Paper: Why Eliminating Post-Trade Name
Disclosure Will Improve the Swaps Market (Mar. 31, 2015) (``MFA
Position Paper''), p. 4-5. The Commission notes that other factors,
such as the current lack of certain trading features, e.g., the
ability to calculate volume-weighted average pricing on an order
book may have also deterred buy-side participation on certain SEFs.
\10\ See In re: Interest Rate Swaps Antitrust Litigation, 261
F.Supp.3d 430, 458-59 (S.D.N.Y. 2017) (``The compulsory disclosure
of swap counterparties, plaintiffs claim, serves as a policing
mechanism, allowing the Dealers to retaliate against entities that
attempt to trade on all-to-all platforms.'').
\11\ The argument is that swap dealers threaten to shun
platforms in the interdealer markets that attempt to execute trades
between dealers and non-dealers.
\12\ See MRAC Transcript at 169-71; MFA Position Paper at 4-5,
8.
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Other industry participants have claimed that post-trade name give-
up is an important tool used to mitigate liquidity risk or the risk
that traders will game the market.\13\ Some participants argue that as
bank market-making capital becomes further constrained by
regulations,\14\ liquidity providers need to more precisely allocate
their bank capital among their customer base in coordination with their
overall bank cross-marketing strategies. Without the information
provided by post-trade name give-up, the ability to make such
allocations would become more difficult. As a result, liquidity
providers would be less willing to provide liquidity to the market,
especially in times of crisis, and charge higher prices to
customers.\15\ This outcome arguably would hurt all market
participants.
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\13\ See, e.g., Tom Osborn, How to game a Sef: Banks fear
arrival of arbitrageurs, Risk.net (Mar. 19, 2014).
\14\ Such post-financial crisis regulatory reforms include the
Volcker Rule, Basel III Accords, capital charges and other bank
capital-based restrictions. See Anthony J. Perrotta, Jr., An E-
Trading UST Market `Flash Crash'? Not So Fast, TABB Group, Nov. 24,
2014, http://tabbforum.com/opinions/an-e-trading-treasury-market-
`flash-crash'-not-so-fast (discussing regulatory capital constraints
and declining market liquidity).
\15\ Peter Madigan, CFTC to Test Role of Anonymity in Sef Order
Book Flop, Risk.net, Nov. 21, 2014, available at http://www.risk.net/risk-magazine/feature/2382497/cftc-to-test-role-of-anonymity-in-sef-order-book-flop. Short of exiting the market
entirely, some swaps dealers might become more selective in
providing liquidity (holding back in times of market stress and
volatility, for example) out of concern that they may not be able to
adequately hedge their risk in interdealer markets.
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Another reported concern is that buy-side clients may undercut
prices from dealers, for example, by posting aggressive bids or offers
on an interdealer order book and then soliciting dealers through a
request-for-quote (``RFQ'') on a dealer-to-client platform, hoping to
motivate dealers to provide more favorable quotes based on prices
posted in the order book.\16\ Post-trade name give-up is said to
mitigate these concerns because it can help to identify a client that
is attempting to game the market.
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\16\ See id.
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II. Request for Comment
The Commission requests comment from the public relating to the
practice of post-trade name give-up on SEF markets where trades are
anonymously executed and intended to be cleared. The Commission
encourages all comments, including relevant background information,
actual market examples, best practice principles, expectations for
possible impacts on market structure and market liquidity, and
estimates of any asserted costs and expenses. The Commission also
encourages substantiating data, statistics, and any other information
that supports any such comments. In particular, the Commission requests
comment on the following questions:
Question 1: What utility or benefits (e.g., commercial,
operational, legal, or other) does post-trade name give-up provide in
SEF markets where trades are anonymously executed and cleared? Is post-
trade name give-up a necessary or appropriate means to achieve such
benefits?
Question 2: Does post-trade name give-up result in any restraint of
trade, or impose any anticompetitive burden on swaps trading or
clearing?
Question 3: Should the Commission intervene to prohibit or
otherwise set limitations with respect to post-trade name give-up? If
so, what regulatory limitations should be set and how should they be
set in a manner that is consistent with the CEA? What would be the
potential costs and/or benefits of doing so? What might be the
potential impacts on liquidity, pricing, and trading behavior? Would a
prohibition cause dealers to remove liquidity from the market or charge
higher prices? Would new liquidity makers fully and consistently act in
the market to make up any shortfall in liquidity?
[[Page 61573]]
Question 4: Should post-trade name give-up be subject to customer
choice or SEF choice given the flexible execution methods in the
Commission's recent SEF notice of proposed rulemaking?
Issued in Washington, DC, on November 6, 2018, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Post-Trade Name Give-Up on Swap Execution Facilities--
Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
[FR Doc. 2018-24643 Filed 11-29-18; 8:45 am]
BILLING CODE 6351-01-P