[Federal Register Volume 88, Number 164 (Friday, August 25, 2023)]
[Proposed Rules]
[Pages 58145-58157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17747]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 23 and 37
RIN 3038-AF34
Swap Confirmation Requirements for Swap Execution Facilities
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing amendments to its swap execution facility (SEF)
regulations related to uncleared swap confirmations, as well as
associated technical and conforming changes.
DATES: Comments must be received on or before October 24, 2023.
ADDRESSES: You may submit comments, identified by ``Swap Confirmation
Requirements for Swap Execution Facilities'' and RIN number 3038-AF34,
by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods.
Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.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 (FOIA), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established under
[[Page 58146]]
Sec. 145.9 of the Commission's regulations.\1\
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\1\ 17 CFR 145.9. The Commission's regulations referred to in
this release are found at 17 CFR Chapter I (2022), available on the
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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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 https://comments.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 the rulemaking 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
FOIA.
FOR FURTHER INFORMATION CONTACT: Roger Smith, Associate Chief Counsel,
(202) 418-5344, [email protected], Division of Market Oversight,
Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800,
Chicago, Illinois 60604; Stephen Kane, Research Economist, (202) 418-
5911, [email protected], or Madison Lau, Research Economist, (202) 418-
5276, [email protected], Office of the Chief Economist, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Regulatory History: The Part 37 Rules
B. Summary of Proposed Changes to Sec. 37.6
C. Consultation With Other U.S. Financial Regulators
II. Proposed Regulations
A. Sec. 37.6--Enforceability
1. Proposed Regulation Sec. 37.6(b)(1)--Uncleared Swap
Confirmations: Incorporation by Reference of Underlying Previously
Negotiated Agreements
2. Proposed Amendment to Sec. 37.6(b)--Timing of Swap
Transaction Confirmation
3. Proposed Amendment to Sec. 37.6(b)--Conflicting Terms
4. Proposed Clarification of Sec. 37.6(b)
5. Proposed Clarification of Sec. 37.6(a)
B. Proposed Amendments to Sec. 23.501(a)(4)(i)
III. Effective Date and Transition Period
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Regulatory History: The Part 37 Rules
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) amended the Commodity Exchange Act (CEA or Act) by
adding section 5h, which establishes registration requirements and core
principles for SEFs.\2\ The Commission implemented CEA section 5h by
adopting part 37 of its regulations, which, among other things, sets
forth operational requirements for SEFs and establishes various
requirements for the trading of swaps on SEFs.\3\ As part of the
implementing SEF regulations, the Commission adopted Sec. 37.6(b),
which requires a SEF to provide each counterparty to a swap transaction
that is entered into on or pursuant to the rules of the SEF--whether
cleared or uncleared--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.\4\ Pursuant to Sec.
37.6(b), the confirmation of all terms of the transaction must take
place at the same time as execution, subject to a limited exception for
certain information related to accounts included in bunched orders.\5\
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\2\ 7 U.S.C. 7b-3.
\3\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476 (June 4, 2013) (SEF Core Principles Final
Rule). The SEF Core Principles Final Rule also articulates, where
appropriate, guidance and acceptable practices for complying with
the SEF core principles set forth in CEA section 5h.
\4\ 17 CFR 37.6(b).
\5\ 17 CFR 37.6(b). Specific customer identifiers for accounts
included in bunched orders involving swaps need not be included in
confirmations provided by a SEF if the applicable requirements of 17
CFR 1.35(b)(5) are met.
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In November 2018, the Commission issued a comprehensive proposal to
amend the SEF regulatory framework.\6\ In the 2018 SEF Proposal, the
Commission proposed to amend Sec. 37.6(b) to establish separate swap
transaction documentation requirements for cleared and uncleared
swaps.\7\ For uncleared swap transactions, the Commission proposed to
amend Sec. 37.6(b) to require a SEF to provide the counterparties to
the transaction with a ``trade evidence record'' that would memorialize
the terms of the transaction agreed upon between the counterparties on
the SEF.\8\ Under the 2018 SEF Proposal, a ``trade evidence record''
was defined as a legally binding written documentation (electronic or
otherwise) that memorializes the terms of a swap transaction agreed
upon by the counterparties and legally supersedes any conflicting term
in any previous agreement (electronic or otherwise) that relates to the
swap transaction between the counterparties.\9\ In 2021, the Commission
withdrew the unadopted portions of the 2018 SEF Proposal,\10\ including
the proposed amendments to Sec. 37.6, from further consideration.\11\
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\6\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (Nov. 30, 2018) (2018 SEF Proposal).
\7\ Id.
\8\ Id. at 62096.
\9\ Id. at 61973; 62067.
\10\ The following final rulemakings of the Commission adopted
certain portions of the 2018 SEF Proposal: (i) Exemptions From Swap
Trade Execution Requirement, 86 FR 8993 (Feb. 11, 2021); and (ii)
Swap Execution Facilities, 86 FR 9224 (Feb. 11, 2021).
\11\ See Swap Execution Facilities and Trade Execution
Requirement, 86 FR 9304 (Feb. 12, 2021). The Commission notes that
because the 2018 SEF Proposal was withdrawn, comments on the
proposed amendments to Sec. 37.6(b) that were included in the 2018
SEF Proposal will not be part of the administrative record with
respect to the current proposal to amend Sec. 37.6(b). Further, the
Commission notes that while certain proposals and rationales
contained herein are similar, or in some cases identical, to
proposals or rationales set forth in the 2018 SEF Proposal, the
Commission believes that, overall, the context in which the current
discrete proposal to amend Sec. 37.6(b) is being adopted is very
different from the comprehensive foundational shift in the
regulatory framework for SEFs that was proposed in 2018. As such,
commenters should submit comments relevant to this current proposal
to amend Sec. 37.6(b); commenters who wish to reference prior
comment letters, including comment letters on the 2018 SEF Proposal,
should reference those prior comment letters as specifically as
possible.
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Pursuant to section 731 of the Dodd-Frank Act, which added section
4s(i) to the CEA,\12\ the Commission has adopted regulations to
prescribe documentation standards for swap dealers (SDs) and major swap
participants (MSPs) related to the timely and accurate confirmation,
processing, netting, documentation, and valuation of swaps. The
Commission adopted Sec. 23.501 to specifically address swap
confirmation requirements for SDs and MSPs, including for those swaps
executed on a SEF or designated contract market (DCM).\13\ Among other
things, Sec. 23.501 provides that any swap transaction executed on a
SEF or DCM shall be deemed to satisfy the swap confirmation
requirements set forth in Sec. 23.501, provided that the rules of the
SEF or DCM establish that confirmation of all terms of the transaction
shall take place at the same time as execution.\14\
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\12\ 7 U.S.C. 6s(i).
\13\ 17 CFR 23.501(a)(4)(i).
\14\ Id.
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B. Summary of Proposed Changes to Sec. 37.6
During the implementation of part 37, SEFs informed the Commission
that the confirmation requirement for uncleared swaps under Sec.
37.6(b) is operationally and technologically difficult and
[[Page 58147]]
impractical to implement. As discussed more fully below, Commission
staff from the Division of Market Oversight (DMO) acknowledged these
technological and operational challenges and provided no-action
positions for SEFs with respect to certain provisions of the
Commission's regulations related to uncleared swap confirmations.\15\
In particular, DMO most recently issued CFTC No-Action Letter No. 17-17
(NAL No. 17-17), which provides a no-action position with respect to
the obligation to obtain copies of underlying, previously negotiated
agreements between the counterparties, as discussed in greater detail
below, for a SEF that seeks for uncleared swaps to satisfy the
confirmation requirement in Sec. 37.6(b) by incorporating by reference
terms of such underlying agreements.\16\
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\15\ NAL No. 17-17, Re: Extension of No-Action Relief for Swap
Execution Facility Confirmation and Recordkeeping Requirements under
Commodity Futures Trading Commission Regulations 37.6(b), 37.1000,
37.1001, 45.2, and 45.3(a) (Mar. 24, 2017). NAL No. 17-17 extended
the no-action position previously provided by Commission staff. See
CFTC Letter No. 16-25, Re: Extension of No-Action Relief for Swap
Execution Facility Confirmation and Recordkeeping Requirements under
Commodity Futures Trading Commission Regulations 37.6(b), 37.1000,
37.1001, 45.2, and 45.3(a) (Mar. 14, 2016) (NAL No. 16-25); CFTC
Letter 15-25, Re: Extension of No-Action Relief for SEF Confirmation
and Recordkeeping Requirements under Commission Regulations 37.6(b),
37.1000, 37.1001, and 45.2, and Additional Relief for Confirmation
Data Reporting Requirements under Commission Regulation 45.3(a)
(Apr. 22, 2015) (NAL No. 15-25); and CFTC Letter No. 14-108, Staff
No-Action Position Regarding SEF Confirmations and Recordkeeping
Requirements under Certain Provisions Included in Regulations
37.6(b) and 45.2 (Aug. 18, 2014) (NAL No. 14-108). See also CFTC
Letter No. 13-58, Time-Limited No-Action Relief to Temporarily
Registered Swap Execution Facilities from Commission Regulation
37.6(b) for Non-Cleared Swaps in All Asset Classes (Sept. 30, 2013)
(NAL No. 13-58).
\16\ See NAL No. 17-17.
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The Commission proposes to amend Sec. 37.6(b) to codify this no-
action position, which would enable SEFs to incorporate such terms by
reference in an uncleared swap confirmation without being required to
obtain the underlying, previously negotiated agreements. Further, the
Commission proposes to amend Sec. 37.6(b), which currently requires
confirmation of all terms of a swap transaction to take place at the
same time as execution, to require such confirmation to take place ``as
soon as technologically practicable'' after the execution of the swap
transaction on the SEF for both cleared and uncleared swap
transactions. The Commission also proposes to amend Sec. 37.6(b) to
make clear that the SEF-provided confirmation under Sec. 37.6(b) shall
legally supersede any conflicting terms in a previous agreement, rather
than the entire agreement. In addition, the Commission proposes to make
conforming amendments to Sec. 23.501(a)(4)(i) to correspond with the
proposed amendments to Sec. 37.6(b).
Finally, the Commission proposes to make certain non-substantive
amendments to Sec. Sec. 37.6(a)-(b) to enhance clarity.
C. Consultation With Other U.S. Financial Regulators
In developing these rules, the Commission has consulted with the
Securities and Exchange Commission (SEC), pursuant to section 712(a)(1)
of the Dodd-Frank Act.\17\
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\17\ Dodd-Frank Act, Public Law 111-203, tit. VII, Sec.
712(a)(1), 124 Stat. 1376 (2010). On May 11, 2022, the SEC adopted
proposed rules for security-based swap execution facilities (SB
SEFs). See Rules Relating to Security-Based Swap Execution and
Registration and Regulation of Security-Based Swap Execution
Facilities, 87 FR 28872 (May 11, 2022) (SEC SB SEF Proposal). As
part of the SEC SB SEF Proposal, the SEC proposed SEC rule 242.812
(SEC Proposed Rule 812), which was modelled after existing Sec.
37.6 with some modifications. In particular, SEC Proposed Rule 812
would require an SB SEF to as soon as technologically practicable
after the time of execution of a transaction entered into on or
pursuant to the rules of the facility, provide a written record to
each counterparty of all of the terms of the transaction that were
agreed to on the facility, which shall legally supersede any
previous agreement regarding such terms. Id. at 28893. To date, the
SEC has not adopted the SEC SB SEF Proposal or SEC Proposed Rule
812.
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II. Proposed Regulations
A. Sec. 37.6--Enforceability
1. Proposed Sec. 37.6(b)(1)--Uncleared Swap Confirmations:
Incorporation by Reference of Underlying Previously Negotiated
Agreements
Commission Regulation 37.6(b) requires a SEF to provide each
counterparty to a swap transaction that is entered into on or pursuant
to the rules of the SEF, whether cleared or uncleared, with a
``confirmation''--a written record that contains all of the terms of
the transaction--at the time of execution.\18\ The terms of a swap
transaction include economic terms that are specific to the
transaction, e.g., swap product, price, and notional amount, and can
also include non-specific ``relationship terms'' that generally govern
all transactions between two counterparties--including, for example,
relationship-level default, margin, or governing law provisions.
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\18\ 17 CFR 37.6(b). See also 17 CFR 23.500(c) (providing a
similar definition of ``confirmation'' that is applicable to SDs and
MSPs).
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For uncleared swap transactions,\19\ the Commission is aware that
many relationship terms that may govern certain aspects of the
transaction are often negotiated and agreed upon in written
documentation between the counterparties prior to execution.\20\ The
Commission previously stated that, for purposes of satisfying the
requirements of Sec. 37.6(b), a SEF's confirmation terms for uncleared
swap transactions may incorporate by reference relevant terms set forth
in such underlying agreements, as long as those agreements have been
submitted to the SEF prior to execution.\21\ As applied, Sec. 37.6(b)
requires that the SEF incorporate this documentation by reference into
the issued confirmation, which is intended in part to provide SEF
participants with legal certainty with respect to the terms of
uncleared swap transactions.\22\
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\19\ The Commission notes that swap trading relationship
documentation is not required for swaps cleared by a derivatives
clearing organization. See 17 CFR 23.504(a)(1).
\20\ SEF Core Principles Final Rule at 33491 n.195. See
Confirmation, Portfolio Reconciliation, Portfolio Compression, and
Swap Trading Relationship Documentation Requirements for Swap
Dealers and Major Swap Participants, 77 FR 55904, 55906 (Sept. 11,
2012) (noting that swap counterparties have typically relied on the
use of industry-standard legal documentation to document their swap
trading relationships. This documentation, such as the ISDA Master
Agreement and related Schedule and Credit Support Annex (ISDA
Agreements), as well as related documentation specific to particular
asset classes, offers a framework for documenting uncleared swap
transactions between counterparties.); see also 17 CFR 23.504(b)
(noting that for uncleared swap transactions, Sec. 23.504(b)
requires written swap trading relationship documentation that
includes all terms governing the trading relationship between an SD
or MSP and its counterparty).
\21\ SEF Core Principles Final Rule at 33491 n.195. While the
Commission's statement specifically referenced the incorporation by
reference of previously negotiated terms from ``a freestanding
master agreement,'' the Commission recognizes that other previously
negotiated freestanding agreements similarly may contain terms that
are relevant to an uncleared swap confirmation.
\22\ To ensure that the SEF confirmation provides legal
certainty, the Commission has stated that counterparties choosing to
execute a swap transaction on or pursuant to the rules of a SEF must
have all terms, including possible long-term credit support
arrangements, agreed to no later than execution, such that the SEF
can provide a written confirmation inclusive of those terms. SEF
Core Principles Final Rule at 33491.
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The requirement that the underlying agreements be submitted to the
SEF prior to execution has, however, 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, including high financial, administrative, and logistical
burdens in order 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 relevant previous agreement between
[[Page 58148]]
counterparties.\23\ SEFs have also noted that the potential number of
previous agreements is considerable, given that SEF counterparties
often enter into agreements with many other parties and may have
multiple agreements for different asset classes.\24\
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\23\ Many of these agreements are maintained in paper form or as
scanned PDF files that are difficult to quickly digitize in a cost-
effective manner. See WMBAA, Request for Extended Relief from
Certain Requirements under Parts 37 and 45 Related to Confirmations
and Recordkeeping for Swaps Not Required or Intended to be Cleared
at 3 (Mar. 1, 2016). Further, some SEFs have cited the considerable
resource cost of obtaining the number of different agreements that
exist to accommodate different types of counterparties and asset
classes. Id.
\24\ Id.
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Commission staff from DMO has acknowledged these technological and
operational challenges and has accordingly granted no-action positions,
most recently in NAL No. 17-17.\25\ Based on these no-action positions,
many SEFs have incorporated by reference applicable relationship terms
from previously negotiated underlying agreements between counterparties
in confirmations for uncleared swaps, without obtaining copies of these
agreements prior to the execution of a swap and without maintaining
copies of such underlying agreements on an ongoing basis.\26\
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\25\ See supra note 15.
\26\ Id. As a condition of staff's no-action positions, a SEF
has been required to have a rule in its rulebook that requires its
participants to provide copies of the underlying agreements to the
SEF on request, as well as a rule in its rulebook that requires the
SEF to (i) request from a participant an underlying agreement upon
request from the Commission, and (ii) to furnish such agreement to
the Commission as soon as it is available.
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Based on its experience with the part 37 implementation, the
Commission acknowledges that cleared and uncleared swap transactions
raise different issues with respect to confirmation requirements \27\
and that the current Sec. 37.6(b) requirements create difficulties for
the latter type of swap transaction. As such, the Commission proposes
to amend Sec. 37.6(b) by adding Sec. 37.6(b)(1) to permit SEFs to
incorporate relevant terms from underlying, previously negotiated
agreements by reference in a confirmation for an uncleared swap
transaction without obtaining such incorporated agreements.\28\
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\27\ See supra note 19.
\28\ In addition to stating that DMO will not recommend
enforcement action if a SEF incorporates by reference relevant terms
from underlying, previously negotiated agreements in confirmations
for uncleared swap transactions, without obtaining copies of such
agreements, which the Commission proposes to codify in this release,
NAL No. 17-17 also provides no-action positions with respect to the
requirement to maintain copies of such agreements in order to comply
with SEF recordkeeping obligations under Sec. Sec. 37.1000,
37.1001, and 45.2. Among other things, these requirements obligate a
SEF to maintain records of all activities relating to the business
of the SEF. The Commission preliminary believes that allowing a SEF
to incorporate by reference relevant terms from the underlying,
previously negotiated agreements without obtaining such agreements
will rectify the compliance issues posed with respect to Sec. Sec.
37.1000, 37.1001, and 45.2. As a SEF would no longer be required to
obtain the underlying, previously negotiated agreements, the
Commission preliminarily believes that these agreements would not,
as a general category, constitute records relating to the SEF's
business for purposes of Sec. Sec. 37.1000, 37.1001, and 45.2. The
Commission notes, however, that if a SEF did obtain such an
underlying, previously negotiated agreement, including at the
request of the Commission or its staff or in connection with the
fulfillment of the SEF's regulatory obligations, the SEF would, with
respect to such agreement, need to comply with its recordkeeping
obligations under Sec. Sec. 37.1000, 37.1001, and 45.2. NAL No. 17-
17 also provides a no-action position with respect to the swap data
reporting requirements that apply to a SEF under Sec. 45.3(a). In
November 2020, the Commission amended its swap data reporting
regulations, which amendments included the removal of the term
``primary economic terms'' and ``confirmation data'' from Sec.
45.3(a). See Swap Data Recordkeeping and Reporting Requirements, 85
FR 75503 (Nov. 25, 2020) (Amended Part 45 Rules). Currently, SEFs
are required to report as specified in the technical specification
published on the Commission's website, available at https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_18_RealTimeReporting/index.htm. As relevant in this context, the
technical specification sets out the required validations and
message types, including when, for swap data reporting purposes,
specific data fields are mandatory, conditional, or optional. For
example, the technical specification distinguishes between
transaction, collateral, and valuation reporting. In general, SEFs
will report transaction message types and not valuation and
collateral message types. Those data elements in the technical
specification relevant to on-SEF transactions that are contained in
the transaction message type are readily available for a SEF to
fulfil its reporting obligations under Commission regulations in
part 45. As further evidence of this, the defined term
``confirmation data'' no longer exists in Sec. 45.3(a). Therefore,
the no-action position stated in Staff Letter 17-17 that ``the
Division will not recommend that the Commission take enforcement
action against a SEF for failure to report certain confirmation data
pursuant to Commission Regulation 45.3(a) . . .'' (See NAL No. 17-17
at 3-4) has not been in effect since the implementation of the
Commission's Amended Part 45 Rules. Staff have not received a
related, updated request for no-action position with respect to SEF
reporting requirements. The Commission preliminarily believes the
Amended Part 45 Rules and the associated technical specification
requirements eliminate the need for the no-action position related
to Sec. 45.3(a) in NAL No. 17-17. Finally, the Commission is not
proposing to codify certain conditions from NAL No. 17-17, including
conditions that require a SEF to have rules in its rulebook that (i)
require a SEF confirmation to state, where applicable, that it
incorporates by reference the terms of the underlying previously
negotiated freestanding agreements between the counterparties, and
(ii) state that in the event of any inconsistency between a SEF
confirmation and the underlying previously negotiated freestanding
agreements, the terms of the SEF confirmation legally supersede any
contradictory terms and that require the SEF's confirmations to
state the same. The Commission preliminarily believes that the
proposed amendments herein, if adopted, would clarify the
requirements for uncleared swap confirmations issued by SEFs in a
manner that obviates the need to codify these conditions. See also
the discussion, infra, of those conditions in NAL No. 17-17 that
address the SEF's ability to obtain, upon request, copies of the
underlying previously negotiated freestanding agreements that have
been incorporated by reference into an uncleared swap confirmation.
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The Commission preliminarily believes, following staff's
observation of SEFs and market participants operating under the
existing no-action position in NAL No. 17-17 and precursor no-action
letters, that proposed Sec. 37.6(b)(1) would not compromise the legal
certainty of confirmations issued by SEFs for uncleared swap
transactions, and that proposed Sec. 37.6(b)(1) is a financially and
logistically appropriate alternative for SEFs to comply with the
confirmation requirement under Sec. 37.6(b) as it applies to uncleared
swaps.\29\ The approach set forth in proposed Sec. 37.6(b)(1) should
address the technological and operational challenges that have
prevented SEFs from fully complying with Sec. 37.6(b), by reducing the
administrative burdens for SEFs, who would not be required to obtain
and maintain a library of every relevant previously negotiated
agreement between counterparties, and for market participants
themselves, who would not be required to submit to the SEF all of their
relevant underlying documentation with other potential counterparties
on the SEF.
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\29\ The proposed amendment would also preserve the legal
certainty of the terms of swap transactions for market participants.
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As more fully discussed below, the Commission expects that proposed
Sec. 37.6(b)(1) will reduce the cost of SEFs' compliance with the
confirmation requirement in Sec. 37.6(b).
Therefore, the Commission proposes to amend Sec. 37.6(b) by adding
Sec. 37.6(b)(1) to permit SEFs to incorporate underlying, previously
negotiated agreements by reference in a confirmation for an uncleared
swap transaction without obtaining such incorporated agreements.
In order to avail themselves of the no-action position under NAL
No. 17-17, SEFs must have rules in their rulebooks that, among other
things; \30\ (1) require ``participants to provide copies of the
underlying previously negotiated freestanding agreements to the SEF on
request;'' and (2) require ``the SEF to request from participants the
underlying previously negotiated freestanding agreements on request
from the Commission and [require] the SEF to furnish such documents to
the Commission as soon as they are available.'' \31\ The Commission
[[Page 58149]]
preliminarily believes that the existing requirements for SEFs under
the CEA and the Commission's part 37 regulations sufficiently account
for these conditions of NAL No. 17-17, such that these conditions do
not need to be incorporated as specific conditions of proposed new
Sec. 37.6(b)(1).
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\30\ See also note 28, supra.
\31\ See NAL No. 17-17 at 4.
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In particular, SEF Core Principle 5 and the implementing part 37
regulations require, among other things, that a SEF establish and
enforce rules that will allow the SEF to obtain any necessary
information to perform any of the functions described in section 5h of
the Act; establish and enforce rules that will allow the SEF to have
the ability and authority to obtain sufficient information to allow it
to fully perform its operational, risk management, governance, and
regulatory functions and any requirements under part 37; have rules
that allow for its examination of books and records kept by the market
participants on its facility; and provide information to the Commission
on request.\32\ The Commission believes that, pursuant to these
requirements and as necessary to carry out its statutory and regulatory
functions, a SEF has the ability and authority to request copies of the
underlying agreements that are incorporated by reference into a
confirmation for an uncleared swap transaction and to provide such
agreements to the Commission upon request.\33\
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\32\ 7 U.S.C. 7b-3(f)(5); 17 CFR 37.500-503.
\33\ Further the Commission also has the ability to request
information from the SEF under 17 CFR 37.5(a), which requires a SEF
to file with the Commission information related to its business as a
SEF upon the Commission's request. See 17 CFR 37.5.
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Request for Comment
The Commission requests comments on all aspects of proposed Sec.
37.6(b)(1). In particular, the Commission requests comment on the
following questions:
(1) Should the Commission allow a SEF to issue a confirmation for
an uncleared swap transaction that does not, as currently contemplated
under Sec. 37.6(b), include all the terms of the transaction, for
example by only including in the confirmation the terms agreed to on
the SEF? If so, should the Commission amend Sec. 23.501 accordingly?
(2) Should the Commission require a SEF to establish and enforce
exchange rules that specifically require participants to maintain
copies of all agreements incorporated by reference into an uncleared
swap confirmation?
(3) Taking into account a SEF's obligations under SEF Core
Principle 5 and the associated part 37 regulations, should the
Commission require a SEF to establish and enforce exchange rules
specifically requiring market participants to provide the SEF upon
request with a copy of any document or agreement incorporated by
reference into an uncleared swap confirmation?
(4) Taking into account the Commission's authorities under Sec.
37.5 and Sec. 37.1000, should the Commission adopt an express
requirement for a SEF to furnish to the Commission upon request a copy
of any document or agreement incorporated by reference into an
uncleared swap confirmation?
(5) Is the term ``agreement'' within proposed Sec. 37.6(b)(1)
broad enough to capture the types of documentation governing swap
trading relationships that may need to be incorporated by reference
into an uncleared swap confirmation?
2. Proposed Amendment to Sec. 37.6(b)--Timing of Swap Transaction
Confirmation
Section 37.6(b) requires that confirmation of all the terms of a
swap transaction entered into on or pursuant to the rules of a SEF must
take place at the same time as execution, except for a limited
exception for certain information related to accounts included in
bunched orders.\34\ The Commission proposes to amend this timing
requirement and instead require a confirmation of all the terms of a
swap a transaction as soon as technologically practicable after the
execution of a swap transaction on the SEF.\35\
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\34\ 17 CFR 37.6(b). Specific customer identifiers for accounts
included in bunched orders involving swaps need not be included in
confirmations provided by a SEF if the applicable requirements of
Sec. 1.35(b)(5) are met. See 17 CFR 1.35(b)(5), which provides that
specific customer account identifiers for accounts included in
bunched orders executed on DCMs or SEFs need not be recorded at time
of order placement or upon report of execution if the requirements
set forth in Sec. 1.35(b)(5)(i)-(v) are met.
\35\ The Commission notes that in the context of real-time
public reporting, it has defined as soon as technologically
practicable to mean as soon as possible, taking into consideration
the prevalence, implementation, and use of technology by comparable
market participants. 17 CFR 43.2. The meaning of this term, as
proposed in Sec. 37.6(b) herein, would be consistent with this
definition, except applying to comparable SEFs. For example, for
purposes of taking into consideration the prevalence, implementation
and use of technology by comparable SEFs, the Commission would
expect that fully electronic SEFs would be comparable to one
another, while SEFs that utilize more manual processes, such as
voice, would be comparable to each other.
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The Commission believes that the proposed standard--as soon as
technologically practicable after execution--would continue to promote
the Commission's goals of providing swap counterparties with legal
certainty in a prompt manner, while also being consistent with other
Commission requirements related to swap confirmations.\36\
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\36\ For example, Sec. Sec. 23.501(a)(1) and 23.501(a)(2)
require that an SD or MSP issue a confirmation or acknowledgement
for a swap transaction (as applicable) to its counterparty ``as soon
as technologically practicable . . .'' See 17 CFR 23.501(a)(1)-(2).
Further, the Commission notes that the proposed standard is
consistent with the SEC's proposed standard for SB SEFs in SEC
Proposed Rule 812. See SEC SB SEF Proposal at 28893.
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In addition, for a block trade that is executed ``away from'' a
SEF,--i.e., outside of the SEF's trading system or platform, but still
``pursuant to the rules'' of the SEF for purposes of the Sec. 37.6(b)
confirmation requirement--a SEF would be unaware of the execution of
the trade until the counterparties report the trade details to the SEF.
From a temporal perspective, the SEF would consequently be unable to
confirm all terms of the block trade at the same time as execution.
The Commission believes that the proposed standard reflects
existing SEF capabilities while maintaining the Commission's goal of
providing swap counterparties with legal certainty for transactions.
Given the Commission's understanding that SEFs are complying with the
at the same time as execution timing standard in existing Sec. 37.6(b)
for non-block swap transactions or block transactions executed on the
SEF, the Commission expects that the impact of the proposed as soon as
technologically practicable timing standard for confirmations for such
swap transactions would not be substantive.\37\ Rather, the proposal
would take into account practical realities for confirming block trades
executed away from the SEF but pursuant to the rules of the SEF, while
ensuring that confirmation for all SEF-executed trades takes place in
as prompt a manner as possible.
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\37\ See supra note 35.
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Therefore, the Commission proposes to require a SEF to confirm the
terms of a swap transaction ``as soon as technologically practicable''
after the execution of the swap transaction on the SEF.
Request for Comment
The Commission requests comments on all aspects of the as soon as
technologically practicable after execution standard proposed for
confirmations pursuant to Sec. 37.6(b). In particular, the Commission
requests comment on the following questions:
(6) Is the Commission's proposal to require a SEF to confirm the
terms of a swap transaction ``as soon as technologically practicable''
after the execution of the transaction on the SEF
[[Page 58150]]
an appropriate time frame? Should the Commission require that the SEF
issue the confirmation by no later than a specified time for swap block
trades that are executed away from the SEF but pursuant to the SEF's
rules, such as within 10 minutes of execution as this is consistent
with various SEF rulebooks that require swap block trades executed away
from the SEF to be reported to the SEF within 10 minutes of execution?
(7) Should as soon as technologically practicable mean something
different for purposes of Sec. 37.6(b) than the definition of as soon
as technologically practicable set forth at Sec. 43.2? If so, what
should the definition be?
3. Proposed Amendment to Sec. 37.6(b)--Conflicting Terms
The Commission proposes to amend Sec. 37.6(b) to make clear that
the terms of a swap confirmation issued by a SEF shall legally
supersede any conflicting terms of a previous agreement (emphasis
added).\38\ As SEFs will now be able to incorporate underlying,
previously negotiated agreements by reference into confirmations for
uncleared swap transactions, this proposed amendment will help ensure
legal certainty with respect to the terms of such transactions, and
will also clarify the continuing applicability of those terms in the
underlying agreements that do not conflict with the confirmation and
that may, for example, govern the counterparties' non-SEF
transactions.\39\
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\38\ While this amendment would apply with respect to both
cleared and uncleared swap transactions executed on or pursuant to
the rules of the SEF, the Commission notes that swap trading
relationship documentation is not required for swaps cleared by a
derivatives clearing organization. See 17 CFR 23.504(a)(1).
\39\ In the SEF Core Principles Final Rule, the Commission noted
that the counterparties to the uncleared swap transaction would need
to ensure that nothing in the confirmation terms contradicted the
standardized terms intended to be incorporated from the underlying
agreement. SEF Core Principles Final Rule at 33491, n.195.
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As a condition of relying on the no-action position in NAL No. 17-
17, SEFs must have rules which state that ``in the event of any
inconsistency between a SEF confirmation and the underlying previously
negotiated freestanding agreements, the terms of the SEF confirmation
legally supersede any contradictory terms.'' \40\ As such, this
proposed amendment would also provide the benefits of continuing to
allow SEFs that rely on NAL No. 17-17 to maintain market practices
established under NAL No. 17-17 and precursor no-action letters.
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\40\ See NAL No. 17-17 at 4.
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Request for Comment
The Commission requests comments on all aspects of the proposal to
amend Sec. 37.6(b) to make clear that the terms of a swap confirmation
issued by a SEF ``shall legally supersede any conflicting terms of a
previous agreement.'' In particular, the Commission requests comment on
the following questions:
(8) Does the proposed amendment provide sufficient legal certainty
with respect to any contradictory terms that may be contained within
previous agreements that are incorporated into an uncleared swap
confirmation by reference?
(9) For uncleared swaps, to avoid any conflict between the terms of
the swap and the SEF's confirmation, should the Commission require that
the SEF's confirmation specifically state that the terms of the
confirmation legally supersede any conflicting terms in underlying
previously negotiated agreements that have been incorporated by
reference?
(10) Should the Commission maintain the current requirement that
the confirmation legally supersede any previous agreement? Why or why
not?
4. Proposed Clarification of Sec. 37.6(b)
Section 37.6(b) provides that a SEF shall 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.
The Commission proposes a non-substantive amendment to Sec.
37.6(b) to change the phrase ``entered into'' to ``executed'' in order
to provide greater consistency within Sec. 37.6(b). Currently Sec.
37.6(b) uses ``entered into'' and ``executed'' interchangeably. This
non-substantive amendment would, in conjunction with the proposed non-
substantive amendment to Sec. 37.6(a) discussed below, ensure
consistent use of ``executed'' throughout Sec. 37.6.
5. Proposed Clarification of Sec. 37.6(a)
Section 37.6(a) is intended to provide market participants with
legal certainty with respect to swap transactions on a SEF and
generally clarifies that a swap transaction entered into on or pursuant
to the rules of a SEF cannot be void, voidable, subject to rescission,
otherwise invalidated, or rendered unenforceable due to a violation by
the SEF of section 5h of the Act or part 37 of the Commission's
regulations or any proceeding that alters or supplements a rule, term
or condition that governs such swap or swap transaction.\41\
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\41\ 17 CFR 37.6(a).
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The Commission proposes a non-substantive amendment to Sec.
37.6(a) to change the phrase ``entered into'' to ``executed'' in order
to provide greater consistency within Sec. 37.6. Currently Sec. 37.6
uses ``entered into'' and ``executed'' interchangeably. This non-
substantive amendment would amend Sec. 37.6(a) to use ``executed''
and, in conjunction with the proposed non-substantive amendment to
Sec. 37.6(b) discussed above, would ensure consistent use of
``executed'' throughout Sec. 37.6.
B. Proposed Amendments to Sec. 23.501(a)(4)(i)
The Commission proposes two amendments to Sec. 23.501(a)(4)(i) to
conform to the proposed amendments to Sec. 37.6(b). Section
23.501(a)(4)(i) provides that a swap transaction executed on a SEF or
DCM will be deemed to satisfy the swap confirmation requirements set
forth for SDs and MSPs in Sec. 23.501(a), provided that the rules of
the SEF or DCM establish that confirmation of all terms of the
transaction shall take place at the same time as execution. First, the
Commission proposes to clarify that the safe harbor for SDs and MSPs in
Sec. 23.501(a)(4)(i) also applies to swap transactions executed
pursuant to the rules of a SEF or DCM, i.e., block trades executed away
from the SEF's or DCM's trading system or platform. This clarification
is consistent with the definition of ``block trade'' under Sec. 43.2.
Second, the Commission proposes to amend Sec. 23.501(a)(4)(i) to
conform to the proposed amendments to Sec. 37.6(b), which would permit
confirmation of all terms of a swap transaction as soon as
technologically practicable following execution.\42\
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\42\ The Commission notes that while DCMs may provide
confirmations for swap block trades executed away from but pursuant
to the rules of the DCM, DCMs do not have a regulatory obligation
analogous to the current regulatory obligation under Sec. 37.6(b)
for SEFs to provide such confirmations.
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Request for Comment
The Commission requests comments on the proposed conforming changes
to Sec. 23.501(a)(4)(i).
III. Effective Date and Transition Period
The Commission proposes that the effective date for the final
regulations be 30 days after publication of final regulations in the
Federal Register. The Commission preliminarily believes that such an
effective date would allow SEFs and market participants sufficient time
to adapt to the amended confirmation rules in an efficient and orderly
manner.
[[Page 58151]]
Request for Comment
The Commission requests comment on whether the proposed effective
date is appropriate and, if not, the Commission further requests
comment on possible alternative effective dates and the basis for any
such alternative dates.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires Federal agencies, in
promulgating regulations, to consider whether the regulations they
propose will have a significant economic impact on a substantial number
of small entities and, if so, provide a regulatory flexibility analysis
with respect to such impact.\43\ The regulations proposed herein will
affect SEFs and their market participants. The Commission has
previously established certain definitions of ``small entities'' to be
used by the Commission in evaluating the impact of its regulations on
small entities in accordance with the RFA.\44\ The Commission
previously concluded that SEFs are not small entities for the purpose
of the RFA.\45\ The Commission has also previously stated its belief in
the context of relevant rulemakings that SEFs' market participants,
which are all required to be eligible contract participants (ECPs) \46\
as defined in section 1a(18) of the CEA,\47\ are not small entities for
purposes of the RFA.\48\ Therefore, the Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
proposed regulations will not have a significant economic impact on a
substantial number of small entities.
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\43\ 5 U.S.C. 601 et seq.
\44\ 47 FR at 18618-21 (Apr. 30, 1982).
\45\ SEF Core Principles Final Rule at 33548 (citing, among
others, 47 FR 18618, 18621 (Apr. 30, 1982) (discussing DCMs).
\46\ 17 CFR 37.703.
\47\ 7 U.S.C. 1(a)(18).
\48\ 66 FR 20740, 20743 (Apr. 25, 2001) (stating that ECPs by
the nature of their definition in the CEA should not be considered
small entities).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq. (PRA),
imposes certain requirements on Federal agencies (including the
Commission) in connection with conducting or sponsoring any
``collection of information,'' \49\ as defined by the PRA. Among its
purposes, the PRA is intended to minimize the paperwork burden to the
private sector, to ensure that any collection of information by a
government agency is put to the greatest possible uses, and to minimize
duplicative information collections across the government.\50\
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\49\ See 44 U.S.C. 3502(3)(A).
\50\ See 44 U.S.C. 3501.
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The PRA applies to all information, regardless of form or format,
whenever the government is obtaining, causing to be obtained, or
soliciting information, and includes required disclosure to third
parties or the public, of facts or opinions, when the information
collection calls for answers to identical questions posed to, or
identical reporting or recordkeeping requirements imposed on, ten or
more persons.\51\ The PRA requirements have been determined to include
not only mandatory, but also voluntary information collections, and
include both written and oral communications.\52\ The Commission may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid Office
of Management and Budget (OMB) control number.
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\51\ See 44 U.S.C. 3502(3).
\52\ See 5 CFR 1320.3(c)(1).
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This proposed rulemaking affects regulations that contain
collections of information for which the Commission has previously
received control numbers from OMB. The titles for these collections of
information are ``Swap Documentation, OMB control number 3038-0088''
and ``Core Principles and Other Requirements for Swap Execution
Facilities, OMB control number 3038-0074.'' This proposal, if adopted,
would modify the information collection requirements associated with
OMB control number 3038-0074, as discussed below. The Commission
therefore is submitting this proposal to the OMB for its review in
accordance with the PRA.\53\
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\53\ See 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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1. OMB Collection 3038-0088--Swap Documentation
The Commission proposes two amendments to Sec. 23.501(a)(4)(i) to
conform to the proposed amendments to Sec. 37.6(b). Section
23.501(a)(4)(i) provides that a swap transaction executed on a SEF or
DCM will be deemed to satisfy the swap confirmation requirements set
forth for SDs and MSPs in Sec. 23.501(a), provided that the rules of
the SEF or DCM establish that confirmation of all terms of the
transaction shall take place at the same time as execution. First, the
Commission proposes to clarify that the safe harbor for SDs and MSPs in
Sec. 23.501(a)(4)(i) also applies to swap transactions executed
pursuant to the rules of a SEF or DCM, i.e., block trades executed away
from the SEF's or DCM's trading system or platform. Second, the
Commission proposes to amend Sec. 23.501(a)(4)(i) to conform to the
proposed amendments to Sec. 37.6(b), which would permit confirmation
of all terms of a swap transaction as soon as technologically
practicable following execution.
The Commission does not believe that these proposed amendments
would substantively or materially modify any existing information
collection burdens. Accordingly, the Commission is retaining its
existing estimates for the burden associated with the information
collections under OMB Collection 3038-0088.\54\
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\54\ See Amended Supporting Statement for Currently Approved
Information Collection, Swap Documentation, OMB Control Number 3038-
0088 (Oct. 24, 2022), available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202210-3038-007.
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2. OMB Collection 3038-0074--Core Principles and Other Requirements for
Swap Execution Facilities
Under existing Sec. 37.6(b), a SEF is required to provide each
counterparty to a swap transaction, whether cleared or uncleared, that
is entered into on or pursuant to the rules of the SEF, with a written
``confirmation'' that contains all of the terms of the transaction.
With respect to an uncleared swap transaction, a SEF may comply with
the requirement to include in the confirmation all of the terms of the
transaction, by incorporating by reference relevant terms set forth in
underlying, previously negotiated agreements between the
counterparties, as long as the SEF has obtained these agreements prior
to execution of the transaction.\55\
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\55\ SEF Core Principles Final Rule at 33491 n.195.
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The proposed rulemaking would add new Sec. 37.6(b)(1), which would
permit SEFs to incorporate by reference in a confirmation relevant
terms set forth in underlying, previously negotiated agreements without
being required to obtain these agreements.
The Commission preliminarily believes that this proposed approach
would address technological and operational challenges that have
prevented SEFs from fully complying with Sec. 37.6(b), by reducing the
administrative burdens for SEFs, who would not be required to request,
accept, and maintain a library of every relevant previously negotiated
agreement between counterparties.
As a result, the Commission believes that the proposed rulemaking
would
[[Page 58152]]
reduce a SEF's annual recurring information collection burden for
uncleared swap transactions. The Commission estimates that proposed
Sec. 37.6(b)(1) would reduce annual recurring information collection
burdens by one-third from 563 hours per SEF to 375 hours per SEF.\56\
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\56\ The Commission previously estimated that the information
collections related to Sec. 37.6 would take SEFs approximately 1.5
hours per SEF participant and that on average, a SEF has about 375
participants. For purposes of estimating the number of burden hours
that the proposed regulations would eliminate, however, the
Commission is revising its previous estimate and will assume the
relevant process would take SEFs approximately 1.0 hours per SEF
participant. Accordingly, 375 participants x 1.0 hour per
participant = 375 estimated burden hours. For information about the
Commission's previous estimate. See Supporting Statement for New and
Revised Information Collections, Core Principles and Other
Requirements for Swap Execution Facilities, OMB Control Number 3038-
0074, note 12 (Apr. 15, 2021), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202104-3038-001.
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The aggregate annual estimates for the reporting burden associated
with Sec. 37.6(b), as proposed to be amended, would be as follows:
Estimated Number of Respondents: 23.
Estimated Average Burden Hours per Respondent: 375 hours.
Estimated Total Annual Burden on Respondents: 8,625 hours.
Frequency of Collection: On occasion.
There are no capital costs or operating and maintenance costs
associated with this collection.
3. Information Collection Comments
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. The Commission will consider public
comments on this proposed collection of information in:
(1) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(2) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(3) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(4) Minimizing the burden of the proposed information collection
requirements on those who are to respond, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC
20581, (202) 418-5714 or from https://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that comments can be summarized and addressed in the final rulemaking,
and please refer to the ADDRESSES section of this rulemaking for
instructions on submitting comments to the Commission. OMB is required
to make a decision concerning the proposed information collection
requirements between 30 and 60 days after publication of this release
in the Federal Register. Therefore, a comment to OMB is best assured of
receiving full consideration if OMB receives it within 30 calendar days
of publication of this release. Nothing in the foregoing affects the
deadline enumerated above for public comment to the Commission on the
proposed rules.
C. Cost-Benefit Considerations
1. Background
Section 15(a) of the CEA \57\ requires the Commission to ``consider
the costs and benefits'' of its actions before promulgating a
regulation under the CEA or issuing certain orders. CEA section 15(a)
further specifies that the costs and benefits shall be evaluated in
light of five broad areas of market and public concern: (1) protection
of market participants and the public; (2) efficiency, competitiveness,
and financial integrity of futures markets; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the CEA
section 15(a) factors.
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\57\ 7 U.S.C. 19(a).
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The Commission is proposing to amend certain rules in parts 23 and
37 of its regulations relating to the confirmation by CFTC-regulated
exchanges, in particular SEFs, of the terms of swap transactions.
The baseline against which the Commission considers the costs and
benefits of these proposed rule amendments is the statutory and
regulatory requirements of the CEA and Commission regulations now in
effect, in particular CEA section 5h and certain rules in parts 23 and
37 of the Commission's regulations. The Commission, however, notes that
as a practical matter many SEFs and market participants have adopted
some current practices based upon a no-action position provided by
Commission staff that the proposed rule amendments generally would
codify. As such, to the extent that SEFs and market participants have
relied on this no-action position, the actual costs and benefits of the
proposed rule amendments as realized in the market may not be as
significant.
In some instances, it is not reasonably feasible to quantify the
costs and benefits to SEFs and certain market participants with respect
to certain factors, for example, market integrity. Notwithstanding
these types of limitations, however, the Commission otherwise
identifies and considers the costs and benefits of these proposed rule
amendments in qualitative terms.
In the following consideration of costs and benefits, the
Commission first identifies and discusses the benefits and costs
attributable to the proposed rule amendments. The Commission, where
applicable, then considers the costs and benefits of the proposed rule
amendments in light of the five public interest considerations set out
in Sec. 15(a) of the CEA.
The Commission notes that this consideration of costs and benefits
is based on its understanding that the swaps market functions
internationally with: (1) transactions that involve U.S. entities
occurring across different international jurisdictions; (2) some
entities organized outside of the United States that are registered
with the Commission; and (3) some entities that typically operate both
within and outside the United States and that follow substantially
similar business practices wherever located. Where the Commission does
not specifically refer to matters of location, the discussion of costs
and benefits below refers to the effects of the proposed rule
amendments on all relevant swaps activity, whether based on its actual
occurrence in the United States or on its connection with or effect on
U.S. commerce.\58\
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\58\ See, e.g., 7 U.S.C. 2(i).
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[[Page 58153]]
The Commission generally requests comment on all aspects of its
cost-benefit considerations, including the identification and
assessment of any costs or benefits not discussed herein; the potential
costs and benefits of the alternatives that the Commission discussed in
this release; data and any other information to assist or otherwise
inform the Commission's ability to quantify or qualitatively describe
the costs and benefits of the proposed rule amendments; and
substantiating data, statistics, and any other information to support
positions posited by commenters with respect to the Commission's
discussion. Commenters may also suggest other alternatives to the
proposed approach where the commenters believe that the alternatives
would be appropriate under the CEA and would provide a more appropriate
cost-benefit profile.
2. Proposed Amendments to 37.6(b)
a. Benefits
Under existing Sec. 37.6(b), a SEF is required to provide each
counterparty to a swap transaction that is entered into on or pursuant
to the rules of the SEF, with a written ``confirmation'' at the time of
execution that contains all of the terms of the transaction. SEFs may
satisfy the requirements under existing Sec. 37.6(b) for uncleared
swap transaction confirmations by incorporating by reference, in the
confirmation, the relevant terms set forth in underlying, previously
negotiated agreements between the counterparties, as long as such
agreements have been submitted to the SEF prior to execution.
Absent an adoption of proposed new Sec. 37.6(b)(1), which would
allow SEFs to incorporate relevant terms set forth in such underlying
agreements without being required to obtain the agreements, SEFs would
need to comply with the existing requirements under Sec. 37.6(b) for
uncleared swap confirmations, notwithstanding the significant burdens
of doing so. The Commission understands that the financial,
administrative, and logistical burdens to collect and maintain
bilateral transaction agreements from any individual counterparties
would be high. SEFs have stated that they are unable to develop a cost-
effective method to request, accept and maintain a library of every
relevant previous agreement between counterparties.\59\ SEFs have also
noted that the potential number of previous agreements is considerable,
given that SEF counterparties often enter into agreements with many
other parties and may have multiple agreements for different asset
classes.\60\
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\59\ See WMBAA, Request for Extended Relief from Certain
Requirements under Parts 37 and 45 Related to Confirmations and
Recordkeeping for Swaps Not Required or Intended to be Cleared at 3
(Mar. 1, 2016).
\60\ Id.
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The Commission preliminarily believes that the proposed addition of
Sec. 37.6(b)(1) should benefit both SEFs and market participants by
decreasing the financial, administrative, and logistical burdens to
execute an uncleared swap on a SEF. Not only would a SEF not be
required to expend time and resources to gather and maintain all of the
underlying relationship documentation between all possible
counterparties on the SEF, but market participants would also not be
required to expend time and resources in gathering and submitting this
documentation to the SEF, including any amendments or updates to that
documentation. Moreover, the Commission preliminarily believes that not
requiring SEFs to obtain the underlying relationship documentation
would eliminate associated financial, logistical and administrative
burdens.
The Commission notes that these benefits are currently available to
market participants through the existing no-action position provided by
Commission staff in NAL No. 17-17. As such, to the extent that SEFs,
and by extension market participants, have relied on the existing no-
action position to avoid the above described financial, operational and
logistical burdens, through the incorporation by reference of relevant
terms set forth in underlying relationship documentation, they have
been availing themselves of the benefits from these reduced burdens.
The Commission also recognizes that many SEFs have already expended
resources to implement technological and operational changes needed to
avail themselves of the no-action position under NAL No. 17-17. The
proposed amendments would preclude the need to expend additional
resources to negate those changes.
Further, the proposed rule amendments do not propose to change the
existing requirement for a SEF to issue a confirmation for all terms of
a swap transaction for uncleared swaps. To the extent that a SEF were
to not issue a confirmation that includes or incorporates by reference
all of the terms of an uncleared swap transaction, the counterparties
to the swap may be subject to other Commission regulations that impose
those obligations, and therefore, increased costs. For example, where
one of the counterparties to an uncleared swap transaction is an SD or
MSP, Sec. 23.501 requires that the SD or MSP issue a confirmation for
the transaction as soon as technologically practicable.\61\
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\61\ See 17 CFR 23.501(a).
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SEFs should also benefit from the proposed requirement to confirm
transaction terms ``as soon as technologically'' practicable after
execution, rather than at the same time as execution. As noted above,
the Commission preliminarily believes that this proposal would continue
to promote the Commission's goals of providing the swap counterparties
with legal certainty in a prompt manner.
b. Costs
With respect to uncleared swaps, the proposed addition of Sec.
37.6(b)(1) could reduce the financial integrity of transactions on SEFs
compared to the current rule. There could be a greater risk of
misunderstanding between the counterparties to a swap transaction if
SEFs do not provide all the terms of a transaction at the time of
execution. Even when underlying agreements are incorporated by
reference, confusion could arise from issues such as multiple versions
of an agreement with the same labeling, or missing sections. However,
the Commission does not expect that this risk will materially reduce
the integrity of the swaps market. The Commission notes that the
relevant underlying agreements usually establish relationship terms
between counterparties that govern all trading between them in
uncleared swaps, and do not generally concern the terms of specific
transactions.
To the extent that SEFs are relying on the existing no-action
position provided by Commission staff in NAL No. 17-17, they could
continue to implement existing industry practice related to
confirmations for uncleared swap transactions which should not impose
costs on SEFs. But to the extent that SEFs need to modify their rules
or procedures in light of the proposed amendments, such as removing the
SEF rules required as conditions under NAL No. 17-17, they may incur
modest costs.
c. Consideration of Alternatives
The relevant no-action position set forth in NAL No. 17-17, upon
which the proposal is based, is subject to withdrawal by Commission
staff. In addressing alternatives to adopting the proposed amendments
to Sec. 37.6(b), the Commission considered the costs and benefits
associated with withdrawal of the no-action position in NAL No. 17-17,
which would obligate SEFs and
[[Page 58154]]
market participants to satisfy the requirements of existing Sec.
37.6(b). The Commission preliminarily believes that adopting the
proposed amendments to Sec. 37.6(b), and the conforming amendments set
forth in this proposal, would help to maintain the benefits previously
articulated in the SEF Core Principles Final Rule, but also reduce
related costs for SEFs with respect to confirmation requirements.\62\
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\62\ The Commission recognized the important benefits provided
by the Sec. 37.6(b) confirmation requirements in the cost-benefit
considerations to the SEF Core Principles Final Rule. Among those
benefits, the Commission stated that the requirements would (i)
provide legal certainty to market participants; (ii) promote
accuracy for counterparties regarding exposure levels with other
counterparties; and (iii) reduce costs and risks involved with
resolving error trade disputes between counterparties. SEF Core
Principles Final Rule at 33570.
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d. Section 15(a) Factors
(1) Protection of Market Participants and the Public
The proposed rule amendments should continue to promote the legal
certainty of swap transactions executed on SEFs. The proposed
amendments to Sec. 37.6 for uncleared swaps, and the conforming
amendments set forth in this proposal, would clarify compliance
requirements, consistent with the position taken by Commission staff in
NAL No. 17-17, while helping to maintain the protection of market
participants and the public.
(2) Efficiency, Competitiveness, and Financial Integrity of Markets
The proposed amendments to Sec. 37.6 for uncleared swaps, and the
conforming amendments set forth in this proposal, would ease compliance
for SEFs and market participants on a longer-term basis, i.e., by
providing a regulatory solution beyond the corresponding no-action
position provided by Commission staff in NAL No. 17-17. This may
improve the efficiency of the swap markets with respect to issuing and
transmitting swap confirmations to counterparties. In particular, SEFs
would attain greater operational efficiency because they would not be
required to develop an infrastructure for collecting and maintaining
all relevant underlying, previously negotiated agreements.
As noted above, with respect to uncleared swaps, the proposed
addition of Sec. 37.6(b)(1) could reduce the financial integrity of
transactions on SEFs compared to the current rule. There could be a
greater risk of misunderstanding between the counterparties to a swap
transaction if SEFs do not provide all the terms of a transaction at
the time of execution. Even when underlying agreements are incorporated
by reference, confusion could arise from issues such as multiple
versions of an agreement with the same labeling, or missing sections.
However, the Commission does not expect that this risk will materially
reduce the integrity of the swaps market. As noted above, the
Commission notes that the relevant underlying agreements usually
establish relationship terms between counterparties that govern all
trading between them in uncleared swaps, and do not generally concern
the terms of specific transactions. Moreover, the proposed rule
amendments could encourage financial integrity of the swap markets by,
among other things, providing clarity that the terms of an uncleared
swap confirmation issued by a SEF supersedes any conflicting terms in
underlying agreements between the counterparties that have been
incorporated by reference into the confirmation.
(3) Price Discovery
The Commission is not aware of significant effects on the price
discovery process from the proposed amendments to Sec. 37.6, and the
conforming amendments set forth in this proposal, regarding
confirmations.
(4) Sound Risk Management Practices
The proposed amendments to the confirmation requirements within
Sec. 37.6(b), and the conforming amendments set forth in this
proposal, would maintain the promotion of sound risk management
practices with respect to the requirement for SEFs to issue transaction
confirmations, i.e., by providing market participants with the
certainty that transactions executed on or pursuant to the rules of a
SEF will be legally enforceable with respect to all counterparties to
the transaction.\63\
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\63\ Id.
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(5) Other Public Interest Considerations
The Commission is identifying a public interest benefit in
codifying the no-action position in NAL 17-17, where the efficacy of
that position has been demonstrated. In such a situation, the
Commission believes it serves the public interest to engage in notice-
and-comment rulemaking, where it seeks and considers the views of the
public in amending its regulations, rather than for SEFs to continue to
rely on a staff provided no-action position that does not bind the
Commission, provides less long-term certainty, and offers a more
limited opportunity for public input.
Request for Comment
The Commission invites public comment on all aspects of its cost
benefit considerations, including the discussion of the section 15(a)
factors. Commenters are requested to provide data and any other
information or statistics to support their position. To the extent
commenters believe that the costs or benefits of any aspect of the
proposed rules are reasonably quantifiable, the Commission requests
that they provide data and any other information or statistics to
assist the Commission in quantification.
(11) The Commission preliminarily believes that SEFs are relying on
the no action position in NAL 17-17 and are not currently obtaining and
maintaining previously negotiated underlying agreements that are
incorporated by reference in uncleared swap transaction confirmations.
Is the Commission's understanding correct or are there SEFs that have
found practical ways to obtain and maintain such underlying agreements?
(12) If a SEF were required to comply with existing Sec. 37.6(b)
and obtain previously negotiated underlying agreements prior to
incorporating by reference terms from such agreements in uncleared swap
transaction confirmations, what costs and expenses would the SEF incur?
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anti-competitive means of achieving the
objectives of the CEA, in issuing any order or adopting any Commission
rule or regulation.\64\ The Commission does not anticipate that the
proposed amendments to parts 23 and 37 would promote or result in anti-
competitive consequences or behavior. However, the Commission
encourages comments from the public with respect to any aspect of the
proposal that may be perceived as potentially inconsistent with the
antitrust laws or anti-competitive in nature.
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\64\ 7 U.S.C. 19(b).
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List of Subjects
17 CFR Part 23
Confirmations, Swaps.
17 CFR Part 37
Swaps, Swap confirmations, Uncleared Swap Confirmations, Swap
execution facilities.
For the reasons stated in the preamble, the Commodity Futures
[[Page 58155]]
Trading Commission proposes to amend 17 CFR parts 23 and 37 to read as
follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for Part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Sta. 1641 (2010).
0
2. Revise Sec. 23.501(a)(4)(i) to read as follows:
Sec. 23.501 Swap confirmation.
(a) * * *
(4) * * *
(i) Any swap transaction executed on or pursuant to the rules of a
swap execution facility or designated contract market shall be deemed
to satisfy the requirements of this section, provided that the rules of
the swap execution facility or designated contract market establish
that confirmation of all terms of the transaction shall take place as
soon as technologically practicable after execution.
* * * * *
PART 37--SWAP EXECUTION FACILITIES
0
3. The authority citation for Part 37 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a, as
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.
0
4. Revise Sec. 37.6 to read as follows:
Sec. 37.6 Enforceability.
(a) A transaction executed on or pursuant to the rules of a swap
execution facility shall not be void, voidable, subject to rescission,
otherwise invalidated, or rendered unenforceable as a result of:
(1) A violation by the swap execution facility of the provisions of
section 5h of the Act or this part;
(2) Any Commission proceeding to alter or supplement a rule, term,
or condition under section 8a(7) of the Act or to declare an emergency
under section 8a(9) of the Act; or
(3) Any other proceeding the effect of which is to:
(i) Alter or supplement a specific term or condition or trading
rule or procedure; or
(ii) Require a swap execution facility to adopt a specific term or
condition, trading rule or procedure, or to take or refrain from taking
a specific action.
(b) A swap execution facility shall provide each counterparty to a
transaction that is executed on or pursuant to the rules of the swap
execution facility with a written record of all of the terms of the
transaction which shall legally supersede any conflicting terms of a
previous agreement and serve as a confirmation of the transaction. The
confirmation of all terms of the transaction shall take place as soon
as technologically practicable after execution; provided that specific
customer identifiers for accounts included in bunched orders involving
swaps need not be included in confirmations provided by a swap
execution facility if the applicable requirements of Sec. 1.35(b)(5)
of this chapter are met.
(1) For a confirmation of an uncleared swap transaction, the swap
execution facility may satisfy the requirements of this paragraph (b)
by incorporating by reference terms from underlying, previously
negotiated agreements governing such transaction between the
counterparties, without obtaining such incorporated agreements except
as otherwise necessary to fully perform its operational, risk
management, governance, or regulatory functions, or any requirements
under this part.
(2) [Reserved]
Issued in Washington, DC, on August 14, 2023, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Swap Confirmation Requirements for Swap Execution
Facilities--Voting Summary and Chairman's and Commissioners' Statements
Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson,
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Rostin Behnam
Today the Commission votes to propose amendments to Parts 23 and
37 of the Commission regulations to address longstanding issues with
the uncleared swap confirmation requirements under Rule 37.6(b).
During the initial implementation of Part 37, SEFs informed the CFTC
that the confirmation requirement for uncleared swaps was
operationally and technologically difficult and impractical to
implement. The Division of Market Oversight (DMO) investigated and
acknowledged these challenges and provided targeted no-action
positions for SEFs with respect to certain provisions of Commission
regulations throughout the last decade.\1\ I support this proposal
which represents sound judgment and clear consideration of the
issues.
---------------------------------------------------------------------------
\1\ See CFTC Letter No. 13-58, Time Limited No-Action Relief to
Temporarily Registered Swap Execution Facilities from Commission
Regulation 37.6(b) for non-Cleared Swaps in All Asset Classes (Sept.
30, 2013), https://www.cftc.gov/csl/13-58/download; CFTC Letter No.
14-108, Staff No-Action Position Regarding SEF Confirmations and
Recordkeeping Requirements under Certain Provisions Included in
Regulations 37.6(b) and 45.2 (Aug. 18, 2014), https://www.cftc.gov/csl/14-108/download; CFTC Letter No. 15-25, Extension of No-Action
Relief for SEF Confirmation and Recordkeeping Requirements under
Commission Regulations 37.6(b), 37.1000, 37.1001, and 45.2, and
Additional Relief for Confirmation Data Reporting Requirements under
Commission Regulation 45.3(a) (Apr. 22, 2015), https://www.cftc.gov/csl/15-25/download; CFTC Letter No. 16-25, Extension of No-Action
Relief for Swap Execution Facility Confirmation and Recordkeeping
Requirements under Commodity Futures Trading Commission Regulations
37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a) (Mar. 14, 2016),
https://www.cftc.gov/csl/16-25/download; and CFTC Letter No. 17-17,
Extension of No-Action Relief for Swap Execution Facility
Confirmation and Recordkeeping Requirements under Commodity Futures
Trading Commission Regulations 37.6(b), 37.1000, 37.1001, 45.2, and
45.3(a) (Mar. 24, 2017), https://www.cftc.gov/csl/17-17/download.
---------------------------------------------------------------------------
As there remains no workable solution that could effectuate the
original language of the relevant rule, and the currently applicable
staff letter has no explicitly set expiration date, the Commission
is proposing to amend Rule 37.6(b) to codify the staff no-action
position. The proposed amendment would enable SEFs to incorporate
terms by reference in an uncleared swap confirmation without being
required to obtain the underlying, previously negotiated agreements
between the counterparties. A proposed clarification and conforming
amendment to Rule 23.501 will clarify the consistent treatment of
trades executed away from a SEF or DCM and permit confirmation of
all terms of a swap transaction as soon as technologically
practicable following execution, as opposed to requiring
confirmation ``at the same time as execution.'' \2\ The simplicity
of these latter proposed amendments should not overshadow their
practical impact.
---------------------------------------------------------------------------
\2\ Commission Rule 23.501(a)(4)(i), 17 CFR 23.501(a)(4)(i).
---------------------------------------------------------------------------
Appendix 3--Statement of Commissioner Kristin N. Johnson
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.
---------------------------------------------------------------------------
\1\ Looking back at OTC derivative reforms--objectives, progress
and gaps, European Central Bank (Dec. 21, 2016), https://www.ecb.europa.eu/pub/pdf/other/eb201608_article02.en.pdf.
\2\ Id.
---------------------------------------------------------------------------
In 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-
[[Page 58156]]
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.\4\ 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).\5\
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\3\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\4\ Ilya Beylin, Designing Regulation for Mobile Financial
Markets, 10 U. Cal. Irvine L. Rev. 497, 511 (2020).
\5\ 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, 33,606
(June 4, 2013) (codified at 17 CFR parts 37, 38).
---------------------------------------------------------------------------
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.'' \6\ 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.
---------------------------------------------------------------------------
\6\ 7 U.S.C. 7b-3(a).
---------------------------------------------------------------------------
Implementing the statutory mandate of the CEA, the Commission
adopted new rules and principles for SEFs in 2013.\7\ 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.\8\ With these goals in mind,
the Commission adopted the Part 37 regulations including Regulation
37.6.
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\7\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33,475 (Jun. 4, 2013) (codified in 17 CFR 37)
(hereinafter ``2013 SEF Core Principles Release'').
\8\ 2013 SEF Core Principles Release at 33,477.
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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.'' \9\
---------------------------------------------------------------------------
\9\ 2013 SEF Core Principles Release at 33,490.
---------------------------------------------------------------------------
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.' '' \10\ 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.' '' \11\
---------------------------------------------------------------------------
\10\ CFTC No-Action Letter 14-108 (Aug. 8, 2014) (quoting 2013
SEF Core Principles Release at 33,491), https://www.cftc.gov/csl/14-108/download.
\11\ 2013 SEF Core Principles Release at 33,491.
---------------------------------------------------------------------------
Since the adoption of Regulation 37.6(b), some have expressed
concerns regarding the feasibility of complying with the
regulation.\12\ In 2014,\13\ 2015,\14\ 2016,\15\ and 2017,\16\ the
Division of Market Oversight issued no-action letters offering
guidance and exempted relief.
---------------------------------------------------------------------------
\12\ Id.
\13\ CFTC No-Action Letter 14-108.
\14\ CFTC No-Action Letter 15-25 (Apr. 22, 2015), https://www.cftc.gov/csl/15-25/download.
\15\ CFTC No-Action Letter 16-25 (Mar. 14, 2016), https://www.cftc.gov/csl/16-25/download.
\16\ CFTC No-Action Letter 17-17 (Mar. 24, 2017), https://www.cftc.gov/csl/17-17/download.
---------------------------------------------------------------------------
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.\17\ 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.
---------------------------------------------------------------------------
\17\ CFTC No-Action Letter 17-17 (Mar. 24, 2017), https://www.cftc.gov/csl/17-17/download.
---------------------------------------------------------------------------
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.
Appendix 4--Statement of Commissioner Christy Goldsmith Romero
The regulation of swap markets, as mandated by Dodd-Frank Act
reforms, is predicated on transparency, reporting, and
recordkeeping. Swap execution facilities (SEF) registered with the
CFTC are required under core principle 10 to maintain records of all
activities, including a complete audit trail. Commission regulations
require a SEF to provide a confirmation of transactions to
counterparties, including a written record of all of the terms of
the transaction, and to obtain copies of underlying, previously
negotiated agreements between the counterparties.
From time to time, the Commission learns that its regulations
are technologically difficult to implement. In those situations, it
is prudent for the CFTC to revisit its regulations in order to keep
pace with technology. Revisiting our regulations provides a
permanent fix, rather than temporary no action relief that is
extended over and over again, as the Commission staff have done with
SEF confirmation requirements for uncleared swaps. This relief
previously relieved SEFs of the requirement to obtain copies of the
underlying, previously negotiated agreements between the
counterparties.
As a general rule, I believe we need to be careful about
proposing new rules that only codify no action relief from our
regulation, particularly no action relief that has been extended for
years. Instead, we should determine what we were trying to
accomplish with the regulation, if we still want to accomplish that,
and if there is another way to achieve that.
As the sponsor of the Technology Advisory Committee, I believe
that we should be forward looking in considering technological
innovations to bring the right fix when it comes to areas where
there have been technological obstacles to compliance with CFTC
regulations. Today, I support this rule because I support the idea
that we need to fix what has become a technological obstacle.
I look forward to public comment about whether this proposed fix
is the right permanent fix from a technological standpoint. I look
forward to public comment on whether this fix locks in a system that
may limit incentives for SEFs and other market participants to
innovate using new technology that could provide copies of the
underlying, previously negotiated agreements in compliance with the
rule. In our risk-based regulatory system, counterparties should
know who they are dealing with, and doing so requires swaps
participants to proactively revisit existing documents. I am
interested in public comment on whether the proposed fix would
disincentivize SEFs from digitizing legacy documents and agreements,
and requiring their market participants to do so as well. I am also
interested in public comment about whether these digitized documents
could be machine readable.
Digitized and/or machine-readable data could lower compliance
costs, and increase transparency. In the Financial Data Transparency
Act of 2022, which does not apply to the CFTC, other federal
financial regulatory agencies will be required to
[[Page 58157]]
develop data collection protocols and standards for machine
readability. Other federal financial regulators will push this
requirement to its registrants and supervised entities to collect,
maintain, and submit data pursuant to these data transparency
protocols and standards. This will impact registrants in our space
that are dual registered with those financial regulators, and who
will need to comply with those protocols and standards.
I look forward to hearing from members of industry, investor and
consumer advocates, academics, and other stakeholders on these
questions. I thank the staff for their work on this issue.
Appendix 5--Statement of Commissioner Caroline D. Pham
I support the Notice of Proposed Rulemaking on Swap Confirmation
Requirements for Swap Execution Facilities (SEF Confirmation
Proposal) because the Commission is finally fixing unworkable rules
that have defied the reality of market structure, legal
documentation, and operational processes since they were first
issued in 2013. I would like to thank Roger Smith, Nora Flood, and
Vince McGonagle in the Division of Market Oversight for their work
on the SEF Confirmation Proposal.
As I previously stated, the Commission must take action to fix
unworkable rules by codifying ``perpetual'' no-action relief through
notice-and-comment rulemaking as required by the Administrative
Procedure Act.\1\ I am pleased that we are doing so today.
---------------------------------------------------------------------------
\1\ Statement of Commissioner Caroline D. Pham on Conditional
Order of SEF Registration, U.S. Commodity Futures Trading Commission
(July 20, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement072022.
---------------------------------------------------------------------------
The Dodd-Frank Act amended the Commodity Exchange Act (CEA) to
establish the SEF regulatory framework in order to reduce risk,
promote transparency, and enhance market integrity for over-the-
counter (OTC) derivatives.\2\ Following that mandate, the CFTC
implemented Part 37, which requires, among other things, that SEFs
provide written final confirmation for uncleared swaps at the time
of execution.\3\ Moreover, Rule 37.6(b) requires that SEFs provide
each counterparty ``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.'' Contrary to its
intent, this requirement actually undermines legal certainty by
potentially voiding carefully negotiated and highly technical and
complex legal agreements.\4\ These provisions, while well-
intentioned, have proven impracticable (if not impossible) for both
SEFs and market participants. In fact, the requirement to provide
SEF confirmation at the time of execution is temporally impossible
for block trades, which are executed away from the SEF and then
submitted to the SEF afterwards.
---------------------------------------------------------------------------
\2\ Core Principles and Other Requirements for Swap Execution
Facilities, 76 FR 1213, 1214 (Jan. 7, 2011) (codified at 17 CFR part
37).
\3\ See 17 CFR 37.6(b) (``The confirmation of all terms of the
transaction shall take place at the same time as execution.'').
\4\ Id.
---------------------------------------------------------------------------
After hearing from the public, CFTC staff provided no-action
relief in 2014 that has been extended repeatedly in order to provide
a practical solution that could be implemented and would still
support the CFTC's public and regulatory transparency requirements.
For example, the no-action relief provided that SEFs could
incorporate prior agreements to a transaction by reference, instead
of receiving hundreds of thousands of pages of legal agreements,
such as bilateral counterparty swap trading relationship
documentation, and then attaching hundreds of pages to SEF
confirmations.\5\ This requirement was unworkable in light of Part
23 rules for swap dealers, and for a SEF to collect such legal
documentation from swap counterparties and then to maintain it
continuously on an ongoing basis (since these bilateral agreements
are occasionally revised), turns SEFs into giant legal document
repositories of questionable benefit.
---------------------------------------------------------------------------
\5\ See, e.g., NAL No. 17-17, Re: Extension of No-Action Relief
for Swap Execution Facility Confirmation and Recordkeeping
Requirements under Commodity Futures Trading Commission Regulations
37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a) (Mar. 24, 2017).
---------------------------------------------------------------------------
Once CFTC staff realized the unrealistic nature of these SEF
confirmation requirements, I believe the staff very prudently issued
no-action relief. And I believe that this was an appropriate
exercise of no-action relief because in the rush to implement the
Dodd-Frank Act, the Commission did not always get it right.
When we don't get it right, it is incumbent upon the Commission
to acknowledge technical and operational issues and fix them. I look
forward to public comment, particularly whether this proposal
sufficiently fixes the unworkable aspects of our existing rules.
Thank you.
[FR Doc. 2023-17747 Filed 8-24-23; 8:45 am]
BILLING CODE 6351-01-P
