Post-Trade Name Give-Up on Swap Execution Facilities, 72262-72273 [2019-27895]

Download as PDF 72262 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules (e) Unsafe Condition This AD was prompted by reports of cracks of the upper splice fittings. The FAA is issuing this AD to address cracks of the upper splice fittings, which could result in undetected fatigue cracks of the bulkhead splice fitting, lead to failure in the critical attach structure and loss of the horizontal stabilizer, and adversely affect the structural integrity of the airplane. (f) Compliance Comply with this AD within the compliance times specified, unless already done. (g) Required Actions Except as specified by paragraph (h) of this AD: At the applicable times specified in the ‘‘Compliance’’ paragraph of Boeing Alert Requirements Bulletin 747–53A2899 RB, dated April 5, 2019, do all applicable actions identified in, and in accordance with, the Accomplishment Instructions of Boeing Alert Requirements Bulletin 747–53A2899 RB, dated April 5, 2019. Note 1 to paragraph (g): Guidance for accomplishing the actions required by this AD can be found in Boeing Alert Service Bulletin 747–53A2899, dated April 5, 2019, which is referred to in Boeing Alert Requirements Bulletin 747–53A2899 RB, dated April 5, 2019. khammond on DSKJM1Z7X2PROD with PROPOSALS (h) Exceptions to Service Information Specifications (1) For purposes of determining compliance with the requirements of this AD: Where Boeing Alert Requirements Bulletin 747–53A2899 RB, dated April 5, 2019, uses the phrase ‘‘the original issue date of Requirements Bulletin 747–53A2899 RB,’’ this AD requires using ‘‘the effective date of this AD.’’ (2) Where Boeing Alert Requirements Bulletin 747–53A2899 RB, dated April 5, 2019, specifies contacting Boeing for repair instructions: This AD requires doing the repair using a method approved in accordance with the procedures specified in paragraph (i) of this AD. (i) Alternative Methods of Compliance (AMOCs) (1) The Manager, Seattle ACO Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the manager of the certification office, send it to the attention of the person identified in paragraph (j)(1) of this AD. Information may be emailed to: 9ANM-Seattle-ACO-AMOC-Requests@faa.gov. (2) Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/ certificate holding district office. (3) An AMOC that provides an acceptable level of safety may be used for any repair, modification, or alteration required by this AD if it is approved by The Boeing Company Organization Designation Authorization VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 (ODA) that has been authorized by the Manager, Seattle ACO Branch, FAA, to make those findings. To be approved, the repair method, modification deviation, or alteration deviation must meet the certification basis of the airplane, and the approval must specifically refer to this AD. (j) Related Information (1) For more information about this AD, contact Bill Ashforth, Aerospace Engineer, Airframe Section, FAA, Seattle ACO Branch, 2200 South 216th St., Des Moines, WA 98198; phone and fax: 206–231–3520; email: bill.ashforth@faa.gov. (2) For service information identified in this AD, contact Boeing Commercial Airplanes, Attention: Contractual & Data Services (C&DS), 2600 Westminster Blvd., MC 110–SK57, Seal Beach, CA 90740–5600; telephone 562–797–1717; internet https:// www.myboeingfleet.com. You may view this referenced service information at the FAA, Transport Standards Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206–231–3195. Issued in Des Moines, Washington, on December 17, 2019. Michael Kaszycki, Acting Director, System Oversight Division, Aircraft Certification Service. [FR Doc. 2019–27929 Filed 12–30–19; 8:45 am] BILLING CODE 4910–13–P COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 37 RIN 3038–AE79 Post-Trade Name Give-Up on Swap Execution Facilities Commodity Futures Trading Commission. ACTION: Proposed rule. AGENCY: The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is proposing a rule to prohibit ‘‘post-trade name give-up’’ practices related to trading on swap execution facilities. SUMMARY: Comments must be received on or before March 2, 2020. ADDRESSES: You may submit comments, identified by ‘‘Post-Trade Name GiveUp on Swap Execution Facilities’’ and RIN number 3038–AE79, by any of the following methods: • The Agency’s Website: https:// comments.cftc.gov. Follow the instructions for submitting comments. • Mail: Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st Street NW, Washington, DC 20581. DATES: PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 • Hand Delivery/Courier: Same as Mail, above. All comments must be submitted in English or, if not, accompanied by an English translation. Comments will be posted as received to https:// www.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act,1 a petition for confidential treatment of the exempt information may be submitted according to the procedures established in Commission Regulation 145.9.2 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://www.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of this proposed rule will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the Freedom of Information Act. FOR FURTHER INFORMATION CONTACT: Alexandros Stamoulis, Special Counsel, (646) 746–9792, astamoulis@cftc.gov, Division of Market Oversight, Commodity Futures Trading Commission, 140 Broadway, 19th Floor, New York, NY 10005. SUPPLEMENTARY INFORMATION: I. Introduction The Commission is proposing to amend part 37 of the Commission’s regulations to prohibit ‘‘post-trade name give-up’’ practices for swaps that are anonymously executed on a SEF and are intended to be cleared. Proposed § 37.9(d) of the Commission’s regulations would prohibit a SEF from directly or indirectly, including through a third-party service provider, disclosing the identity of a counterparty to a swap that is executed anonymously and intended to be cleared. The proposed regulation would also require SEFs to establish and enforce rules that prohibit any person from effectuating such a disclosure. The Commission is proposing this prohibition on post-trade name give-up after considering the comments received in response to its November 2018 request for public comment regarding the practice (the 15 U.S.C. 552. CFR 145.9. Commission regulations referred to herein are found at 17 CFR chapter I. 2 17 E:\FR\FM\31DEP1.SGM 31DEP1 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules ‘‘Name Give-Up Release’’).3 The Commission believes that prohibiting the practice of post-trade name give-up for cleared swaps would promote swaps trading and competition on SEFs, as well as promote fair competition among market participants. Additionally, it would advance the congressional objectives underlying the prohibition against swap data repositories disclosing the identity of cleared swap counterparties. The Commission also preliminarily believes that post-trade name give-up for cleared swaps may be inconsistent with the requirement that SEFs provide market participants with impartial access to trading on SEFs. khammond on DSKJM1Z7X2PROD with PROPOSALS II. Background The Commission issued the Name Give-Up Release to seek public comment on the practice of post-trade name give-up on SEFs for swaps intended to be cleared. As described in the release, some SEFs facilitate this practice by disclosing the identities of swap counterparties to one another after a trade is matched anonymously. A SEF may effectuate such disclosure through either its own trade protocols 4 or through a third-party service provider that it utilizes to process and route transactions to a derivatives clearing organization (‘‘DCO’’) for clearing.5 Prior to the issuance of the Name GiveUp Release, the Commission had been aware of views that such disclosure deters some market participants from trading on SEF platforms that employ the practice. In the Name Give-Up Release, the Commission questioned the 3 Post-Trade Name Give-up on Swap Execution Facilities, 83 FR 61571 (Nov. 30, 2018) (‘‘Name Give-Up Release’’). 4 For swaps executed anonymously on a SEF electronic order book, where participants may enter anonymous bids and offers, the disclosure of a counterparty’s identity may occur through an electronic notification provided by the SEF after the trade is matched and executed. In certain voicebased SEF trading systems, a SEF employee who matches bids and offers may provide such notification to the counterparties. 5 Post-trade name give-up may occur through third-party middleware and associated trade processing services that provide counterparties with various trade details captured from SEF trading systems, including the identity of the party on the other side of a trade. The Commission has provided that SEFs may use such third-party services to route trades to DCOs if the routing complies with § 37.702(b). See Core Principles and Other Requirements for SEFs, 78 FR 33476, 33535 (June 4, 2013) (‘‘SEF Core Principles Final Rule’’). Thirdparty trade processing services commonly used for SEF trades include those offered by IHS Markit. IHS Markit submitted a comment letter in response to the Name Give-Up Release. Although it did not express a particular view on the merits of post-trade name give-up practices, IHS Markit did confirm that its derivatives processing platform supports fully anonymous SEF trading that may be selected by a SEF for any SEF trade—a so called ‘‘no-name give up workflow option.’’ IHS Markit Letter at 1–2. VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 necessity of the practice with respect to cleared swaps that are anonymously executed on a SEF. While the Commission acknowledged that the practice may be necessary for trading in uncleared swaps, i.e., to manage counterparty credit risk,6 it stated that the rationale with respect to cleared swaps is ‘‘less clear cut.’’ 7 The Commission also summarized some of the general views on post-trade name give-up of various industry participants and requested public comment on the merits of the practice and whether the Commission should prohibit it.8 The Commission received thirteen comment letters to the Name Give-Up Release, many of which expounded further on the views summarized in the release.9 The majority of commenters opposed the practice of post-trade name give-up for anonymously-executed swaps submitted to clearing, and requested that the Commission adopt an explicit prohibition.10 One comment letter, from the Securities Industry and Financial Markets Association (‘‘SIFMA’’) on behalf of a majority of its swap dealer members who have expressed a view,11 expressed support for the practice and concern about the effects of a prohibition.12 The Commission has reviewed and considered these comment letters in issuing this proposed rulemaking. 6 For uncleared swaps, post-trade name give-up enables a market participant to perform a creditcheck on a potential counterparty prior to finalizing the transaction. Due to the bilateral nature of an uncleared swap agreement, the practice also allows counterparties to manage credit exposure and payment obligations with respect to those transactions. 7 Name Give-Up Release at 61571. 8 See Name Give-Up Release at 61572. 9 All comment letters submitted in response to the Name Give-Up Release are available through the Commission’s website at https://comments.cftc.gov/ PublicComments/CommentList.aspx?id=2935. 10 The following commenters support a prohibition on post-trade name give-up: Americans for Financial Reform (‘‘AFR’’); Better Markets; David Blinkly; Federal Home Loans Banks (‘‘FHLBanks’’); FIA Principal Traders Group (‘‘FIA PTG’’); Investment Company Institute (‘‘ICI’’); Managed Funds Association (‘‘MFA’’); Robert Rutkowski; SIFMA Asset Management Group (‘‘SIFMA AMG’’); UBS Securities (‘‘UBS’’); and Vanguard. 11 SIFMA, however, acknowledged in its comment letter that the views among its swap dealer members on post-trade name give-up are not uniform. SIFMA Letter at 1. 12 The Commission notes that this letter is separate and distinct from the letter submitted by SIFMA AMG, and the views espoused by SIFMA in this letter contrast with the views represented by SIFMA AMG, which supported a prohibition on post-trade name give-up. SIFMA AMG members represent various U.S. and global asset management firms. SIFMA AMG Letter at 1, n.1. PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 72263 A. Comments Concerning the Necessity of Post-Trade Name Give-Up for Cleared Swaps Nearly all of the comment letters to the Name Give-Up Release asserted that post-trade name give-up is not justified for swaps submitted to a DCO for clearing.13 Some commenters acknowledged that the practice may be necessary for uncleared swaps, which expose counterparties to bilateral credit risk,14 but noted that the clearing process mitigates that risk.15 Commenters further asserted that straight-through processing makes posttrade name give-up unnecessary.16 According to commenters, straightthrough processing promotes clearing efficiency, and therefore, obviates the need for counterparties to fulfill swaprelated legal or operational tasks that would require disclosing their identities.17 The Managed Funds Association (‘‘MFA’’) stated that it ‘‘strongly believes that there is no legitimate commercial, operational, credit or legal justification for name give-up on SEFs for anonymouslyexecuted cleared swaps.’’ 18 SIFMA, to the contrary, asserted that ‘‘even in connection with cleared swaps, there are frequently operational, credit/ settlement, and legal considerations that necessitate [post-trade name giveup].’’ 19 B. Comments Concerning Effects on Competition and Liquidity Commenters support prohibiting posttrade name give-up based on concerns that disclosing a counterparty’s identity after a trade is executed can lead to 13 AFR Letter at 4; Better Markets Letter at 2; Blinkly Letter at 1; FHLBanks Letter at 2; FIA PTG Letter at 1; ICI Letter at 2–3; MFA Letter at 2; Rutkowski Letter at 4; SIFMA AMG Letter at 14; Vanguard Letter at 10. UBS stated that the practice should end absent a ‘‘compelling’’ justification. UBS Letter at 1. 14 FHLBanks, for example, stated that the disclosure of counterparty identity for uncleared swaps is necessary to generate and update trading records, calculate counterparty credit risk exposures, issue margin calls, and conduct other related operational tasks. FHLBanks Letter at 2. 15 FHLBanks Letter at 2; FIA PTG Letter at 1; ICI Letter at 2; MFA Letter at 2; ICI Letter at 3. See also FIA PTG Letter at 1 (stating that clearing leaves no credit, operational or legal exposures between the counterparties). 16 FHLBanks Letter at 2; ICI Letter at 3; MFA Letter at 2–3; SIFMA AMG Letter at 14. 17 FHLBanks Letter at 2 (stating that the clearing process occurs within ‘‘moments’’ after execution); MFA Letter at 2–3 (stating that straight-through processing ensures that the anonymously-executed swap is quickly submitted to, and accepted or rejected by, a DCO). 18 MFA Letter at 2. 19 SIFMA Letter at 6 (furthermore asserting that post-trade name give up ‘‘helps enable parties to address operational errors and resulting risks’’). E:\FR\FM\31DEP1.SGM 31DEP1 72264 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS harmful ‘‘information leakage.’’ 20 MFA stated that prior to trading on a SEF with post-trade name give-up a participant must be comfortable with any participant on the venue potentially learning of its trading activity, because the participant has no control over who it will be matched with.21 SIFMA Asset Management Group (‘‘SIFMA AMG’’) stated that information leakage resulting from post-trade name give-up occurs in an ‘‘uncontrolled’’ manner that allows others in the market to anticipate a participant’s objectives.22 The Federal Home Loan Banks (‘‘FHLBanks’’), the Investment Company Institute (‘‘ICI’’), and Vanguard similarly commented that such disclosure could expose a counterparty’s trading positions, strategies, and/or objectives.23 ICI further asserted that dealers would benefit by using this information to anticipate a buy-side client’s trading intentions and potentially offer less favorable terms and pricing to that client in subsequent bilateral swap transactions.24 FHLBanks stated that such disclosure is particularly problematic for end users who use swaps to hedge their business exposure.25 Commenters who oppose post-trade name give-up asserted that concerns about information leakage have broadly hindered participation and competition on SEFs.26 MFA stated that post-trade name give-up has precluded buy-side participants who are concerned with the prospect of information leakage from accessing the ‘‘unique’’ liquidity pools and trading protocols available on SEFs 20 Better Markets Letter at 2; FHLBanks Letter at 2; ICI Letter at 3–4; MFA Letter at 4; SIFMA AMG Letter at 15; Vanguard Letter at 10. 21 MFA Letter at 4 (describing post-trade name give-up as ‘‘an unattractive proposition that undermines the anonymous nature of the trading protocol’’). 22 SIFMA AMG Letter at 15. 23 FHLBanks Letter at 2; ICI Letter at 3; Vanguard Letter at 10 (stating that counterparty identity disclosure additionally exposes trading practices and other sensitive information). 24 ICI Letter at 4. See also Better Markets Letter at 2 (noting that disclosure confers ‘‘trading advantages’’ upon dealers that collect and analyze this information). 25 FHLBanks Letter at 3. 26 MFA Letter at 2 (identifying post-trade name give-up as a ‘‘significant impediment’’ to investors’ ability to trade on anonymous order books where post-trade name give-up is practiced); FHLBanks Letter at 2–3 (stating that post-trade name give-up has discouraged buy-side participants from trading on SEFs using the practice); ICI Letter at 4 (suggesting that buy-side participants avoid harms caused by information leakage by avoiding SEFs that require post-trade name give-up of intended-tobe-cleared swaps); UBS Letter at 1 (stating that posttrade name give-up dis-incentivizes certain market participants from trading on anonymous limit order book SEFs); VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 that practice post-trade name give-up.27 In contrast, according to MFA, dealers have access to all SEFs, which provides them with certain informational advantages over other market participants.28 Several commenters, including MFA, believe that ‘‘incumbent’’ dealers that are traditional swap liquidity providers continue to insist that SEFs facilitate the practice of post-trade name give-up in order to discourage additional competition in the dealer-to-dealer SEF market.29 Many commenters stated that prohibiting post-trade name give-up would promote greater participation and competition in the swaps market, thereby potentially improving swap liquidity. FHLBanks, for example, believes that a prohibition would increase competition, reduce market fragmentation, and increase participation on central limit order books, which would lead to deeper liquidity pools and better pricing.30 Better Markets and MFA similarly asserted that a prohibition would increase swap liquidity by diversifying the pool of SEF participants to include new liquidity providers.31 ICI and SIFMA AMG also suggested that buyside participants would be likely to participate on SEFs they had previously avoided if post-trade name give-up were prohibited.32 Commenters further claim that increasing competition and participation on SEFs with a post-trade name give-up prohibition would establish a more efficient swaps trading market 33 with less information asymmetry among market participants.34 SIFMA’s letter, on the other hand, argued that prohibiting post-trade name give-up is unnecessary and would harm liquidity in the swaps market. SIFMA stated that many market participants trade willingly on a SEF trading 27 MFA Letter at 4. platform with post-trade name giveup.35 SIFMA noted that buy-side participants who are concerned by posttrade name give-up already have the option of using ‘‘fully anonymous’’ central limit order book platforms that some SEFs currently offer.36 SIFMA further noted, however, that trading on these platforms is currently minimal, which SIFMA argues reflects a lack of market demand for fully anonymous trading.37 SIFMA argued, therefore, that prohibiting post-trade name give-up would be ‘‘unfair’’ to participants who choose not to trade fullyanonymously.38 SIFMA also argued that a ‘‘bifurcated market’’ dynamic with post-trade name give-up is needed to promote liquidity in the swaps market.39 In the dealer-to-dealer market, where dealers hedge their risks from dealer-to-client trading, SIFMA stated that pre-trade anonymity allows dealers to stream liquidity without attribution and observe available liquidity on the SEF, while post-trade name give-up helps them to price their liquidity based on client relationships, which involves assessing how that liquidity and underlying capital is allocated among clients over time and across different liquidity pools.40 Counterparty disclosure, according to SIFMA, allows dealers to price that liquidity more accurately and offer better pricing.41 SIFMA asserted that prohibiting posttrade name give-up would undermine these benefits, precluding dealers from providing such client-based pricing, and would limit their ability to choose how to manage risk.42 ICI, MFA, and SIFMA AMG disputed SIFMA’s claim that capital and liquidity allocation requires the continued use of post-trade name give-up.43 SIFMA AMG expressed skepticism about the ability of SEF systems or platforms with anonymous trading to provide that benefit, given that pre-trade anonymity does not allow dealers to choose their 28 Id. 29 AFR Letter at 4 (asserting that post-trade name give-up allows dealers to retaliate against other competing liquidity providers or otherwise provides additional ways to discourage competition); Better Markets Letter at 2 (stating that a ‘‘handful’’ of dealers have prevented SEFs from eliminating the practice in order to limit access to liquidity from a small number of dealers); Blinkly Letter at 1 (stating that the practice helps to preserve ‘‘dealer control’’ of profits in the swaps markets); FIA PTG Letter at 1 (stating that the practice allows incumbent liquidity providers to monitor the presence of new liquidity providers seeking to enter the cleared swaps market); MFA Letter at 4 (referring to the practice as a ‘‘policing mechanism’’ to deter buy-side participation); Rutkowski Letter at 5 (same comment as AFR). 30 FHLBanks Letter at 3. 31 Better Markets at 2; MFA Letter at 6. 32 See ICI Letter at 2, 4; SIFMA AMG Letter at 15. 33 ICI Letter at 2; SIFMA AMG Letter at 15. 34 MFA Letter at 6. PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 35 SIFMA Letter at 5 (disputing the belief that participants who trade anonymously also want to remain anonymous post-execution). 36 Id. 37 Id. at 3 (asserting that the lack of liquidity on those SEF platforms demonstrates that ‘‘a substantial cross-segment’’ of participants prefer to trade with post-trade name give-up). 38 Id. 39 SIFMA Letter at 4–5 (explaining that dealers provide liquidity to clients and hedge residual risks in the dealer-to-dealer market). 40 Id. at 4. 41 Id. at 5 (stating that dealers are ‘‘incentivized and able to provide their best pricing to clients with whom they have strong relationships’’). 42 Id. (noting that dealers are ‘‘comfortable’’ trading their client risks in existing liquidity pools). 43 ICI Letter at 3 (describing the allocation explanation as ‘‘not a compelling reason’’); MFA Letter at 3; SIFMA AMG Letter at 14. E:\FR\FM\31DEP1.SGM 31DEP1 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules counterparty nor allocate their capital or liquidity to a specific counterparty.44 MFA similarly commented that if a dealer wanted to allocate capital or liquidity to a specific counterparty, then it would use a disclosed SEF trading platform, not one that facilitates anonymous execution.45 ICI argued that allowing certain participants to enter into swaps only with counterparties that are ‘‘preferred customers’’ does not promote liquidity, fairness, or competition.46 MFA also disagreed with SIFMA’s claim that market liquidity would be adversely impacted by a prohibition. MFA believes that if a dealer chooses to offer less liquidity, then the increased competition arising from a prohibition on post-trade give-up would offset that loss.47 MFA further noted that a liquidity reduction has not transpired in other markets that feature fully anonymous trading.48 SIFMA also claimed that dealers may be unwilling or unable to participate in fully anonymous SEF trading environments without post-trade name give-up because such environments would allow SEF buy-side participants to ‘‘game’’ the market more successfully.49 Several other commenters, however, stated that such behavior is not only unlikely,50 but is also prohibited under the Commodity Exchange Act (‘‘CEA’’ or ‘‘Act’’), Commission regulations, and SEF rules; 51 and that post-trade name giveup is, in any case, not an appropriate 44 SIFMA AMG Letter at 14. Letter at 3. 46 ICI Letter at 3. 47 Id. 48 Id. 49 SIFMA Letter at 3. As described in the Name Give-Up Release, dealers are reportedly concerned that buy-side clients who participate on dealer-todealer order books may undercut prices from dealers by posting aggressive bids or offers and then soliciting dealers through a request for quote on a dealer-to-client platform, hoping to motivate dealers to provide more favorable quotes based on those aggressive prices posted in the order book. Name Give-Up Release at 61572. 50 FIA PTG, MFA, and SIFMA AMG asserted that no evidence exists that this behavior occurs in other markets with fully anonymous trading. FIA PTG Letter at 1; MFA Letter at 3; SIFMA AMG Letter at 14–15. FHLBanks and MFA noted that this behavior would carry reputational risk, and therefore, is unlikely to occur. FHLBanks Letter at 3, n.7; MFA Letter at 3. See also MFA Letter at 2 (stating that a SEF participant would otherwise defy self-interest by posting such aggressive bids or offers, given that other order book participants would quickly execute against those bids or offers). 51 FHLBanks Letter at 3, n.7 (characterizing market ‘‘gaming’’ as ‘‘intentional manipulation of the market’’); MFA Letter at 3 (noting legal and regulatory risks of ‘‘gaming’’ the market); ICI Letter at 3 (noting that existing CFTC rules and SEF rules regarding market conduct and trading practices address ‘‘gaming’’ concerns). khammond on DSKJM1Z7X2PROD with PROPOSALS 45 MFA VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 mechanism to address such potential market abuse.52 III. Discussion Based on its preliminary consideration of public comments and experience with implementing the SEF framework over the course of several years, the Commission proposes to prohibit post-trade name give-up practices for swaps that are anonymously executed on a SEF and are intended to be cleared. Proposed § 37.9(d)(1) would prohibit a SEF from directly or indirectly, including through a third-party service provider, disclosing the identity of a counterparty to a swap that is executed anonymously and intended to be cleared. The proposed rule, however, further specifies that the prohibition would not apply where such disclosure is otherwise required by the CEA or the Commission’s regulations.53 Proposed § 37.9(d)(2) would require a SEF to establish and enforce rules that prohibit any person, including through a thirdparty service provider, from effectuating such a disclosure. Finally, proposed § 37.9(d)(3) clarifies that the prohibition would not apply with respect to uncleared swaps, or with respect to any method of execution whereby the identity of a counterparty is disclosed prior to execution of the swap. The Commission believes that this proposed rule would advance the statutory objectives of promoting swaps trading on SEFs and promoting fair competition among market participants. The Commission additionally believes that it would advance the congressional objectives underlying the existing prohibition against swap data repositories disclosing the identities of cleared swap counterparties. Finally, the Commission also preliminarily believes that post-trade name give-up may impede the policy objectives underlying the impartial access requirement applicable to SEFs. 52 SIFMA AMG Letter at 15 (stating that the Commission’s rules on disruptive trading practices and SEF market oversight more appropriately address such behavior than post-trade name giveup). The Commission notes that, notwithstanding the concerns articulated by SIFMA related to potential market ‘‘gaming,’’ to the extent that any such behavior violates the CEA or Commission regulations, it is subject to investigation and disciplinary action by SEFs and enforcement action by the Commission. SEFs are required to conduct ongoing monitoring and surveillance to monitor and detect fictitious posting of bids and offers on their trading platforms, as well as prosecute trading violations through established SEF disciplinary programs. 53 This would include, for example, requirements relating to a SEF’s obligation to disclose counterparty identities to a derivatives clearing organization or swap data repository. PO 00000 Frm 00016 Fmt 4702 Sfmt 4702 72265 The Commission emphasizes that the prohibition as proposed applies to a limited scope of trading platforms, i.e., only those that facilitate anonymous trading of cleared swaps. The Commission views the practice of posttrade name give-up as an ancillary posttrade protocol—the prohibition of which limits neither the manner in which participants post bids and offers, nor how those bids and offers interact with one another. The prohibition is also not meant to mandate or favor ‘‘allto-all’’ trading platforms. Rather, it is meant to encourage more diverse participation and greater competition on existing pre-trade anonymous SEF platforms for cleared swaps. Under the proposed rule, name-disclosed execution methods would still be permitted, and post-trade name give-up would continue to be permitted for uncleared swaps. A. Promoting Swaps Trading on SEFs and Fair Competition Among Market Participants CEA section 8a(5) authorizes the Commission to make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of this Act.54 Further, CEA section 5h(e) establishes that the goal of the SEF regulatory regime is to promote swaps trading on SEFs and promote pretrade price transparency in the swaps market.55 CEA section 3(a) identifies swaps trading to be part of a ‘‘national public interest’’ that, among other things, provides a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.56 CEA section 3(b) further specifies that the CEA’s purpose is to ‘‘foster’’ that interest by promoting fair competition among market participants.57 For the reasons discussed below, the Commission believes that prohibiting the practice of post-trade name give-up for swaps that are anonymously executed on a SEF and are intended to be cleared is reasonably necessary to advance the objectives of the aforementioned provisions of the Act. The Commission believes that despite available liquidity for cleared products on certain SEF platforms, the range and number of active participants on such 54 7 U.S.C. 12(a)(5). U.S.C. 7b–3(e). 56 7 U.S.C. 5(a) (stating that the transactions subject to the CEA are affected with a national public interest). 57 7 U.S.C. 5(b). 55 7 E:\FR\FM\31DEP1.SGM 31DEP1 72266 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules platforms may be limited due to market participants’ concerns about information leakage and anticompetitive behavior made possible by post-trade name give-up.58 The Commission believes that fully anonymous trading (i.e., without post-trade name give-up) would likely encourage more participants to trade on those platforms.59 Greater participation, in turn, would advance the goals of promoting trading and competition on SEFs. The Commission also believes that the proposed rule may advance the CEA’s goal of fostering ‘‘fair competition’’ among market participants by reducing opportunities for information leakage. Furthermore, the Commission preliminarily believes that encouraging a greater number, and a more diverse set, of market participants to anonymously post bids and offers on these affected SEFs may promote greater interaction and competition between market participants, which should allow these platforms to act as more efficient mechanisms for price discovery. B. SDR Information Privacy Requirements khammond on DSKJM1Z7X2PROD with PROPOSALS CEA section 21(c)(6) requires a swap data repository (‘‘SDR’’) to maintain the privacy of any and all swap transaction information that it receives from a swap dealer, counterparty, or any other registered entity. The Commission implemented this requirement under § 49.17 of the Commission’s regulations to address the scope of access that market participants may have to swap transaction data held by an SDR. For swaps executed anonymously on a SEF and cleared in accordance with the Commission’s straight-through processing requirements, § 49.17(f)(2) explicitly limits this access by prohibiting a counterparty to a swap from accessing (i) the identity of the other counterparty or its clearing member; or (ii) the legal entity identifier of the other counterparty or its clearing member.60 In implementing this rule, the Commission clarified that this swap transaction information is subject to the statutory privacy protections because, in 58 See supra notes 26–29 and accompanying text. See also infra note 73. 59 The majority of comment letters submitted in response to the Name Give-Up Release, as well as prior market participant commentary, indicate a strong interest among certain market participants who are not currently trading on these SEF platforms to do so if post-trade name give-up is prohibited. See, e.g., Transcript of CFTC Market Risk Advisory Committee Meeting (Apr. 2, 2015) (‘‘2015 MRAC Meeting Transcript’’) at 133 et seq., available at https://www.cftc.gov/About/ CFTCCommittees/MarketRiskAdvisoryCommittee/ mrac_meetings.html. 60 17 CFR 49.17(f)(2). VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 the Commission’s view, swap counterparties would not know one another’s identity if the swap is submitted to clearing via straightthrough processing.61 The Commission believes that posttrade name give-up undercuts the intent of this requirement and the congressional objectives underlying CEA section 21(c)(6).62 Allowing a SEF to disclose a counterparty’s identity is contrary to the purpose of prohibiting access to this information at an SDR under § 49.17(f)(2), given that a counterparty can obtain this knowledge from another source. Therefore, prohibiting post-trade name give-up would help to advance the objectives underlying the statutory privacy protections under CEA section 21(c)(6) and the Commission’s regulations thereunder that apply to this information. C. Impartial Access CEA section 5h(f)(2)(B)—a provision within statutory SEF Core Principle 2— requires a SEF to establish and enforce trading, trade processing, and participation rules that, among other things, provide market participants with impartial access to the market.63 The Commission implemented this statutory requirement by adopting § 37.202. Section 37.202(a) requires a SEF to provide any eligible contract participant (‘‘ECP’’) 64 with impartial access to its market(s) and market services, provided that the facility has, among other things, criteria governing such access that are 61 Swap Data Repositories—Access to SDR Data by Market Participants, 79 FR 16673–16674 (Mar. 26, 2014). 62 The congressional objective to maintain the privacy of trading information, including trader identities, is also apparent elsewhere in the CEA. See, e.g., CEA Section 8(a), 7 U.S.C. 12(a) (prohibiting the Commission from publication of data and information that would disclose the business transactions or market positions of any person and trade secrets or names of customers). See also § 1.59(b)(1)(ii) of the Commission’s regulations prohibiting self-regulatory organization employees from disclosing material, non-public information obtained in the course of the employee’s employment. In addition, § 1.59(d)(ii) separately prohibits an employee, governing board member, committee member or consultant from disclosing material, non-public information obtained through special access related to the performance of their duties. The Commission promulgated § 1.59 based on its stated belief that the concept underlying CEA section 8(a) should apply with equal force to employees and governing members of self-regulatory organizations. See Activities of Self-Regulatory Organization Employees and Governing Members Who Possess Material, Non-Public Information, 50 FR 24533, 24535 (June 11, 1985). 63 7 U.S.C. 7b–3(f)(2)(B). 64 CEA section 2(e), 7 U.S.C. 2(e), limits swaps trading on SEFs to ‘‘eligible contract participants,’’ as defined under CEA section 1a(18), 7 U.S.C. 1a(18). PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 impartial, transparent and applied in a fair and non-discriminatory manner.65 In adopting § 37.202, the Commission explained that ‘‘impartial’’ means ‘‘fair, unbiased, and unprejudiced.’’ 66 The Commission further stated the requirement would allow participants to ‘‘compete on a level playing field’’ and allow additional liquidity providers to participate on SEFs, thereby improving swaps pricing and market efficiency.67 Statutory SEF Core Principle 2 allows a SEF to adopt access limitations, but any such limitations must be consistent with the impartial access requirements.68 For example, the Commission has stated that certain feebased limitations would be permissible based on ‘‘legitimate business justifications.’’ 69 While a SEF may impose different access criteria among different groups of ECPs, the Commission also stated that ‘‘similarly situated’’ ECPs must be treated in a similar manner.70 In practice, SEFs have adopted certain access limitations that affect a participant’s ability to utilize a trading platform, such as prerequisites for trading on certain platforms or interacting with certain participants. Some of these prerequisites reflect the nature of the swap involved, such as whether the swap is cleared or uncleared.71 A SEF may apply such access limitations on its participants based on legitimate business justifications.72 In any case, a SEF’s access limitations must be applied in a fair and non-discriminatory manner, 65 17 CFR 37.202(a). This requirement also applies to any independent software vendor. 66 SEF Core Principles Final Rule at 33508. 67 Id. 68 Id. (a SEF may use its own reasonable discretion to determine its access criteria, provided that the criteria are impartial, transparent and applied in a fair and non-discriminatory manner, and are not anti-competitive). 69 Id. at 33509 (stating that a SEF may offer different access fees under § 37.202(a)(3) pursuant to legitimate business justifications). 70 Id. 71 For example, a SEF may limit trading access for uncleared swaps to those market participants who have existing underlying documentation to execute such swaps with other potential counterparties. Such prerequisites have been found to be in violation of impartial access requirements when applied to trading cleared swaps, however. See infra note 75. 72 For example, SEFs have been permitted to require participants to have certain trading enablements in place with a minimum percentage of other participants on the platform prior to trading uncleared swaps. This approach allows participants to appropriately manage bilateral counterparty risk of uncleared swaps, while also allowing the SEF to promote active and orderly trading by ensuring that a requisite number of participants can interact with one another. E:\FR\FM\31DEP1.SGM 31DEP1 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules and should not be intended to prevent or disincentivize participation on a SEF. The practice of post-trade name giveup in isolation may not be discriminatory because participants would generally be eligible to onboard to the SEFs and trade on systems or platforms that equally subject all participants to post-trade identity disclosure. However, the practice may have resulted in a discriminatory effect against certain market participants.73 The practice, in turn, may have deterred these participants from joining or trading in a meaningful way on SEFs that facilitate post-trade name give-up, thereby limiting competition on these SEFs. The Commission preliminarily believes that this undermines the policy goals of the impartial access requirement to ensure that market participants can compete on a level playing field and to allow additional liquidity providers to participate on SEFs.74 Market participants who prefer post-trade name give-up may argue that a prohibition instead discriminates against them, but the Commission’s preliminary assessment is that promoting a fully anonymous trading environment would better fulfill the goals of impartial access on SEFs. The Commission believes that—with respect to operational, credit and settlement, and legal issues in particular—there is generally no imperative for post-trade name give-up if a swap is executed on a SEF and submitted to a DCO for clearing.75 The Commission, however, recognizes that post-trade name give-up could be necessary for certain cleared swaps that are components of a package transaction that includes an uncleared component that creates bilateral credit, operational, or legal exposures that the counterparties must manage on an ongoing basis.76 The Commission is therefore requesting additional public comment on the necessity and scope of an exception to the proposed rule for package transactions. With respect to SIFMA’s assertion that certain other circumstances may still arise that would require counterparty disclosure,77 the Commission generally agrees with other commenters that straight-through processing should obviate that need.78 Nevertheless, the Commission is requesting additional public comment on whether any operational, credit and settlement, legal, or similar issues exist that would still require post-trade name give-up for an intended-to-be-cleared swap, outside of those swaps that are components of certain package transactions. IV. Request for Comment The Commission requests comment on all aspects of proposed § 37.9(d) including, but not limited to, responses to the comments provided in the Name Give-Up Release. In particular, the Commission requests comments on whether the proposed regulation would advance the statutory and regulatory goals and the requirements discussed in the previous section. In commenting on the potential effects of the proposed rule, the Commission requests background information, actual market examples, best practice principles, and expectations for possible impacts on competition, market structure, and liquidity. The Commission encourages commenters to provide supporting data, statistics, and any other relevant information. In addition, the Commission requests comment on the following questions: (1) Does post-trade name give-up undermine the Commission’s stated goals of impartial access to (i) ensure 76 See khammond on DSKJM1Z7X2PROD with PROPOSALS 73 See supra notes 26–29 and accompanying text; 2015 MRAC Meeting Transcript at 133 et seq. The Commission notes that some market participants have asserted that post-trade name give-up has enabled anticompetitive behavior and unfair competition. See supra note 29 and accompanying text; MRAC Meeting Transcript at 133 at 169, 171. 74 See supra note 67 and accompanying text. 75 The Commission notes that mechanisms or agreements used to address bilateral counterparty risk have been viewed as inconsistent with impartial access when applied to cleared swaps because they limit a participant’s ability to trade on SEFs without justification. For example, Commission staff previously viewed a SEF’s application of such ‘‘enablement mechanisms’’ with respect to cleared swaps as ‘‘prohibited discriminatory treatment’’ that is inconsistent with the impartial access requirements under § 37.202. Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer and Intermediary Oversight Guidance on Application of Certain Commission Regulations to Swap Execution Facilities at 1–2 (Nov. 14, 2013). VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 MFA Letter at 6; SIFMA Letter at 6. Letter at 6. 78 See supra notes 16–18 and accompanying text. The Commission has previously stated that the ‘‘acceptance or rejection for clearing in close to real time is crucial for both effective risk management and for the efficient operation of trading venues.’’ Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management, 77 FR 21278, 21285 (Apr. 9, 2012). Commission staff has also issued guidance that discusses appropriate practices to ensure prompt and efficient clearing. Staff Guidance on Swaps Straight-Through Processing (Sept. 26, 2013). In instances where a swap containing an error has been accepted for clearing, a SEF may facilitate the correction of the error without disclosing a counterparty’s identity, such as by facilitating the execution and submission of an offsetting swap to clearing. See CFTC Letter No. 17–27, Re: No-Action Relief for Swap Execution Facilities and Designated Contract Markets in Connection with Swaps with Operational or Clerical Errors Executed on a Swap Execution Facility or Designated Contract Market (May 30, 2017) at 1, n.2. 77 SIFMA PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 72267 market participants can compete on a level playing field, and (ii) allow additional liquidity providers to participate on SEFs? Please explain why or why not, and include any supporting data. (2) Should the Commission narrow the scope of the proposed prohibition on post-trade name give-up to apply only to swaps that are required to be cleared under section 2(h)(1) of the Act, or alternatively, only to swaps that are subject to the trade execution requirement under section 2(h)(8) of the Act? Why or why not? (3) How, if at all, would a prohibition on post-trade name give-up affect pretrade price transparency on a SEF operating an anonymous central limit order book? (4) How would the proposed prohibition on post-trade name give-up affect existing liquidity on SEFs? How would the proposed prohibition affect liquidity on central limit order books? Would the proposed prohibition indirectly affect liquidity on namedisclosed request for quote systems? If so, how? In particular, please provide substantiating data, statistics, and any other quantifiable information related to any such comments. (5) Please explain the nature of any potential new liquidity on SEFs that may result from the proposed prohibition. For example, would liquidity increase due to a greater number of market participants trading and/or would liquidity increase due to additional market makers competing on affected SEFs? (6) How, if at all, would the proposed prohibition on post-trade name give-up affect trading protocols such as auctions, portfolio compression, and/or workup sessions? (7) Is trading on a SEF platform with post-trade name give-up for anonymously executed, intended-to-becleared swaps preferable to a fullydisclosed platform for a swap dealer’s capital allocation purposes? If so, why? (8) Please describe how post-trade name give-up currently helps swap dealers make markets in swaps, if at all. (9) If the Commission were to prohibit post-trade name give-up as proposed in this notice, then how might that affect the prices that swap dealers quote to buy-side participants on SEFs operating name-disclosed, request for quote platforms? (10) How does the price for a given swap listed on a SEF operating an anonymous central limit order book compare to the price for an equivalent swap listed on a SEF operating a namedisclosed request for quote system? How does the practice of post-trade name E:\FR\FM\31DEP1.SGM 31DEP1 72268 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS give-up relate to any such difference in price? (11) Are there certain cleared swap classes for which post-trade name giveup serves a particularly important role for swap dealers for market-making or hedging purposes that would be adversely affected by a prohibition? (12) How many and what types of additional liquidity providers (e.g., funds, proprietary trading firms, highfrequency traders) might join affected SEFs if post-trade name give-up were prohibited? Would these new participants be particularly interested in trading certain kinds of swap transactions (e.g., spread trades)? Would these new participants be floor traders, swap dealers, or another type of entity? (13) What other effects would a prohibition on post-trade name give-up have on the swap market? (14) Should the Commission provide an exception to the prohibition on posttrade name give-up for swaps that are components of package transactions involving an uncleared swap? To what extent are such package transactions anonymously traded, given the involvement of an uncleared swap at the outset? (15) If the Commission provides an exception with respect to package transactions, should it include an exception for package transactions involving any non-swap instrument, including Treasury securities? Should such an exception apply to the swap components if such non-swap instrument components are also executed anonymously and intended to be cleared? (16) Excluding swaps that are components of certain package transactions, what, if any, operational, credit and settlement, legal, or similar issues exist that would still require posttrade name give-up for a swap that is intended to be cleared? (17) Are there any alternatives to the proposed prohibition on name give-up that would better achieve the regulatory objectives stated above? For example, could these objectives be better accomplished through additional guidance or enforcement activity to address applications of post-trade name give-up that are inconsistent with the impartial access requirement? V. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (‘‘RFA’’) 79 requires federal agencies to consider whether the rules they propose will have a significant economic impact 79 5 U.S.C. 601 et seq. VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 on a substantial number of small entities and, if so, to provide an analysis regarding the economic impact on those entities. The regulation proposed herein will affect SEFs. The Commission has previously determined that SEFs are not ‘‘small entities’’ for the purpose of the RFA.80 Therefore, the Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the regulation proposed herein will not have a significant economic impact on a substantial number of small entities. B. Paperwork Reduction Act The Paperwork Reduction Act (‘‘PRA’’) 81 imposes certain requirements on Federal agencies, including the Commission, in connection with their conducting or sponsoring any collection of information, as defined by the PRA. 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. The Commission has previously received a control number from OMB that includes the collection of information associated with Part 37 of the Commission’s regulations. The title for this collection of information is ‘‘Core Principles and Other Requirements for Swap Execution Facilities, OMB control number 3038– 0074.’’ 82 Collection 3038–0074 is currently in force with its control number having been provided by OMB. However, the rule proposed herein does not impose any new recordkeeping or information collection requirements, and therefore contains no requirements subject to the PRA. C. Cost-Benefit Considerations Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders.83 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 80 See SEF Core Principles Final Rule at 33548. U.S.C. 3501 et seq. 82 See OMB Control No. 3038–0074, https:// www.reginfo.gov/public/do/PRAOMB History?ombControlNumber=3038-0074. 83 7 U.S.C. 19(a). 81 44 PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 benefits resulting from its discretionary determinations with respect to the Section 15(a) factors. The Commission is proposing to amend part 37 of the Commission’s regulations to prohibit ‘‘post-trade name give-up’’ practices for swaps that are anonymously executed on a SEF and are intended to be cleared. Proposed § 37.9(d) of the Commission’s regulations would prohibit a SEF from directly or indirectly, including through a third-party service provider, disclosing the identity of a counterparty to a swap that is executed anonymously and intended to be cleared. The proposed regulation would also require SEFs to establish and enforce rules that prohibit any person from effectuating such a disclosure. The baseline for this consideration of costs and benefits with respect to the proposal herein is the status quo, which includes the existing practice of posttrade name give-up for cleared swaps on some SEFs, and the current regulatory requirements that do not explicitly prohibit post-trade name give-up for cleared swaps that are executed anonymously. The Commission emphasizes that the proposed prohibition will not apply to uncleared swaps or SEF trading systems and platforms that are not pre-trade anonymous. Proposed § 37.202(d)(3) clarifies that the prohibition would not apply with respect to uncleared swaps, or with respect to any method of execution whereby the identity of a counterparty is disclosed prior to execution of the swap. Some swaps trading on SEFs today occurs on ‘‘disclosed’’ trading systems and platforms that provide the identities of potential counterparties to one another before execution occurs. Such is the case, for example, with certain request for quote systems offered by SEFs. The Commission notes that this consideration of costs and benefits is based on the understanding that the swaps market functions internationally, with many transactions involving U.S. firms taking place across international boundaries, with some Commission registrants being organized outside of the United States, with leading industry members typically conducting operations both within and outside the United States, and with industry members commonly following substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the below discussion of costs and benefits refers to the effects of the proposed rules on all swaps activity subject to the proposed and amended regulations, whether by E:\FR\FM\31DEP1.SGM 31DEP1 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules virtue of the activity’s physical location in the United States or by virtue of the activity’s connection with or effect on U.S. commerce under CEA section 2(i).84 The Commission has endeavored to assess the expected costs and benefits of the proposed rulemaking in quantitative terms, where possible. In situations where the Commission is unable to quantify the costs and benefits, the Commission identifies and considers the costs and benefits of the proposed rule in qualitative terms. The lack of data and information to estimate those costs and benefits is attributable in part to the nature of the proposed rule and uncertainty about the potential responses of market participants to the implementation of the proposed rule. The Commission recognizes that potential indirect costs and benefits of the proposed prohibition on post-trade name give-up, i.e., those relating to effects on trading behavior, liquidity, and competition, may be impossible to accurately predict or quantify prior to implementation of the proposed rule. khammond on DSKJM1Z7X2PROD with PROPOSALS 1. Costs The Commission’s preliminary assessment is that the direct costs for SEFs of implementing and complying with proposed § 37.9(d) would not be material. Proposed § 37.9(d)(1) would prohibit SEFs from directly or indirectly, including through a thirdparty service provider, disclosing the identity of a counterparty to a swap that is executed anonymously and intended to be cleared. Only SEFs that currently practice post-trade name give-up for cleared swaps would be required to take action to comply with proposed § 37.9(d)(1), and the Commission’s preliminary understanding is that the costs of adjusting affected SEF protocols in order to comply would be negligible.85 However, the Commission 84 Section 2(i)(1) applies the swaps provisions of both the Dodd-Frank Act and Commission regulations promulgated under those provisions to activities outside the United States that have a direct and significant connection with activities in, or effect on, commerce of the United States. 7 U.S.C. 2(i). Section 2(i)(2) makes them applicable to activities outside the United States that contravene Commission rules promulgated to prevent evasion of Dodd-Frank. 85 See, e.g., Peter Madigan, ‘‘CFTC to Test Role of Anonymity in SEF Order Book Flop,’’ Risk.net (Nov. 21, 2014) (according to one SEF official, ‘‘the revealing of the name is a legacy behavior and it’s not necessary that we reveal it. Should we be told not to by the regulators, we will flick a switch and the world will go on. It will not be a profound change and it’s not going to require re-engineering the system’’), available at https://www.risk.net/riskmagazine/feature/2382497/cftc-to-test-role-ofanonymity-in-sef-order-book-flop. See also supra note 5 (SEFs that use IHS Markit services to route trades can select an already available ‘‘no-name give up workflow option’’). VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 requests that SEFs that presently employ post-trade name give-up for cleared swaps comment on this proposal and provide estimates of any direct costs they would incur in complying with proposed § 37.9(d)(1). Proposed § 37.9(d)(2) would require SEFs to establish and enforce rules to prohibit any person from directly or indirectly, including through a thirdparty service provider, disclosing the identity of a counterparty to a swap that is executed anonymously and intended to be cleared. Complying with § 37.9(d)(2) would require a SEF to file such rules with the Commission in accordance with part 40 of the Commission’s regulations. The Commission estimates that filing such rules may take up to 50 hours which is unlikely to be a major cost burden on SEFs. The Commission anticipates that the direct cost of complying with proposed § 37.9(d) for market participants and third-party service providers should be at or near zero. With respect to potential indirect costs of the proposed rule, SIFMA has suggested that a prohibition on posttrade name give-up may impair the ability of incumbent liquidity providers to manage risk and provide liquidity which in turn would be ‘‘likely to worsen pricing that dealers can offer to clients.’’ 86 Although the Commission is aware of the concerns raised by SIFMA, it is not, at this time, convinced that prohibiting post-trade name give up would increase the costs of trading swaps for end users and other swap dealer clients. The Commission preliminarily believes that negative pricing effects on SEFs would be unlikely to result, as competition from new market participants and incumbent liquidity providers that continue to provide liquidity should offset this possibility. However, the Commission requests additional comments relating to the risks and costs of such an outcome. The Commission also requests public comment regarding any additional indirect costs of the proposed rule. 2. Benefits The Commission believes that implementing the proposed rule may improve liquidity on SEFs, particularly on affected SEF order books. The practice of post-trade name give-up has reportedly deterred a significant segment of market participants from making markets on or otherwise participating on affected SEFs. The Commission expects that some of these market participants would choose to 86 SIFMA PO 00000 Letter at 4. Frm 00020 Fmt 4702 Sfmt 4702 72269 participate on these SEFs if the Commission were to prohibit the practice, leading to increased liquidity. Increased liquidity could benefit market participants by making it easier to execute transactions, especially larger transactions, quickly and without undue price impact. As discussed below, Commission staff has reviewed several empirical event studies, which focus specifically on the effect of post-trade anonymity on market liquidity. Most of these studies, such as those discussed below, document an improvement in liquidity. The Commission notes that the markets that are the subjects of these studies are not the same as U.S. swaps markets and are mostly not dealeroriented markets. Some of the markets studied are also deeper and more liquid than the U.S. swaps market. The Commission requests public comment on the validity or applicability of the papers discussed below, as well as any other studies that may be instructive. One of the early empirical studies focused on the implementation of posttrade anonymity on the London Stock Exchange after the introduction of a central counterparty to electronic equity trading in February 2001.87 Prior to this change, the market was pre-trade anonymous, but the two parties involved in a trade were informed about each other’s identities once the transaction was completed. The authors found that post-trade anonymity resulted in higher market depth and lower spreads and execution costs. Liquidity improvements were more pronounced for small stocks and stocks with higher trading concentration, which are expected to exhibit large exogenous information asymmetries. Such stocks may be more analogous to swap markets than larger stocks with less trading concentration. Post-trade anonymity seemed to benefit mostly those who traded repeatedly and traded the largest volumes. The authors argue that ‘‘bilateral disclosure of trader identities harms traders who are known to account for a sizable portion of total volume and who trade repeatedly in the same direction because it facilitates anticipation of their orders.’’ 88 Another study explored a post-trade anonymity reform introduced by the Oslo Stock Exchange between 2008 and 2010. During this period, the 25 most traded stocks on the Oslo Stock Exchange were periodically selected to trade fully anonymously, while the broker identities of traders involved in 87 Freiderich, S. and R. Payne (2014), ‘‘Trading anonymity and order anticipation,’’ Journal of Financial Markets, 21, 1–24. 88 Id. E:\FR\FM\31DEP1.SGM 31DEP1 72270 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS transactions on all other stocks were released to all market participants after each transaction. This study found that post-trade anonymity led to lower bidask spreads and higher volume. These results seemed to be driven by increased trading from institutional investors, who split their orders into multiple smaller transactions potentially to reduce information leakage and price impact. The author found that ‘‘anonymity increases liquidity in part by reducing the liquidity providers’ adverse selection costs. However, the increase in stock liquidity is also partly driven by a reduction in liquidity provider revenues.’’ 89 Another study examined the 2008 transition of equity trading in Helsinki, Reykjavik, and the five most traded stocks in Stockholm where broker codes were removed from all real-time market data feeds. It also examined the 2009 reversal of this change. The findings suggested that liquidity, measured by quoted spreads, price impact, and limit order book depth, ‘‘improves when anonymous post-trade reporting is introduced, and liquidity worsens when anonymous post-trade reporting is reversed.’’ 90 However, results were weaker during the reversal, which the authors attribute to other contemporaneous factors. A study exploring the effects of posttrade anonymity on the German electronic trading platform Xetra showed that concealing broker identities from their counterparties resulted in lower execution costs.91 An empirical study focusing on the information content of broker identities provided a potential explanation for the improvement in liquidity documented in many of the aforementioned event studies. It showed that the disclosure of broker identities allowed information leakage, even though participants sometimes used multiple brokers and mixed signal strategies to potentially hide their trading intentions.92 The authors of this study suggested that the documented improvement in liquidity, associated with greater anonymity, may 89 Meling, T.G., ‘‘Anonymous Trading in Equities’’ (2018 working paper), available at https:// ssrn.com/abstract=2656161. 90 Dennis, P.J., and Sandas, P., ‘‘Does Trading Anonymously Enhance Liquidity?’’ (2019 working paper), available at https://ssrn.com/ abstract=2516933. The original change in post-trade transparency was reversed for all stocks, except the five most traded stocks in Helsinki. 91 Hachmeister, A. and Schiereck, D., ‘‘Dancing in the dark: Post-trade anonymity, liquidity and informed trading’’ (2010), Review of Quantitative Finance and Accounting, 34, 145–177. 92 Linnainmaa, J., Saar, G., ‘‘Lack of anonymity and the inference from order flow’’ (2012), Review of Financial Studies, 25, 1414–1456. VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 have come at the expense of information efficiency, as prices potentially adjusted to order flow information more slowly under increased anonymity. Because this study relied on Finnish data during the period of 2000 to 2001, the authors also conjectured that algorithmic trading could potentially allow informed investors to hide their orders better, but it could also enable proprietary traders to uncover informed order flow. Some studies did not find that implementing post-trade anonymity improved liquidity. One such study, investigating the impact of post-trade anonymity from the perspective of liquidity providers in a dealer market, showed that the 2003 introduction of post-trade anonymity on the Nasdaq platform did not improve best quotes. The author concluded that ‘‘introducing anonymity on [the] Nasdaq platform did not lead to an increase in competition between market makers.’’ 93 Moreover, a study on the South Korea Exchange argued that revealing the expost order flow of major brokers to the entire market led to an improvement in liquidity. It investigated the effects of public disclosure of the identities of the top five brokers and their trades. Notably, this disclosure occurred just twice per day. Trading volume was higher in the setting without post-trade anonymity. Moreover, while realized spreads were lower when broker identities were disclosed, price impact costs were higher. The authors argued that ‘‘these findings strongly indicate that providing broker IDs induces more competition among liquidity providers that lowers the realized spread and, as indicated by higher market impact costs, provides more rapid dissemination of information, which in turn provides market efficiency.’’ 94 Commission staff also reviewed several theoretical studies, which presented models with various levels of post-trade transparency in different settings and could offer some insight on post-trade anonymity, although they did not directly compare it to the case of bilateral disclosure of counterparty identities right after each trade. The predictions of these models were mixed. One theoretical study, focused on the post-trade public disclosure of insiders in equity markets, argues that public disclosure of insider trades accelerates 93 Benhami, K., ‘‘Liquidity providers’ valuation of anonymity: The Nasdaq Market Makers evidence’’ (2006 working paper), available at https:// www.cass.city.ac.uk/__data/assets/pdf_file/0005/ 78737/2Benhami.pdf. 94 Pham, T.P., et al., ‘‘Intra-day Revelation of Counterparty Identity in the World’s Best-Lit Market,’’ (2016 working paper), available at https:// ssrn.com/abstract=2644149. PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 the price discovery process and reduces trading costs.95 These predictions suggested that post-trade anonymity could strengthen asymmetric information in the market, subsequently reducing liquidity by exacerbating the market maker’s adverse selection problem. However, another study argued that the effect of anonymity on liquidity could also be positive, if the information acquisition is endogenous, because then anonymity could potentially bolster market participants’ incentives to acquire information.96 Another study on the disclosure of insider trades developed a model where the insider is risk averse and showed that the insider is encouraged to trade less aggressively on his private information, weakening both informational efficiency and market liquidity.97 This finding suggests that post-trade anonymity could encourage informed traders to trade more aggressively on their private information, facilitating price discovery and improving market liquidity. Another study suggested that the presence of order anticipation strategies, often referred to as ‘‘back running,’’ alters the trading strategies of institutional and retail investors, in an effort to avoid being detected.98 The authors predicted that fundamental investors introduce random noise in their strategies to avoid being detected. However, surprisingly, when the accuracy of the back runners’ signals is high their profits may be reduced, especially if there are many of them. The practice of post-trade name giveup was explicitly addressed in a theoretical study that was cited in a comment letter to the Name Give-Up Release from Americans for Financial Reform (‘‘AFR’’).99 This study modeled the investor choice between over-thecounter (‘‘OTC’’) markets and electronic order books, and assessed the value of OTC markets for market quality and total welfare.100 The authors showed 95 Huddhart, S., J., Hughes and Levine, ‘‘Public Disclosure and Dissimulation of Insider Trades’’ (2001), Econometrica, 69, 665–681. 96 Rindi, B., ‘‘Informed Traders as Liquidity Providers: Anonymity Liquidity and Price Formation,’’ (2008), Review of Finance, 12, 497– 532. 97 Buffa, A.M., ‘‘Insider Trade Disclosure, Market Efficiency, and Liquidity’’ (2014 working paper), available at https://ssrn.com/abstract=1102126. 98 Yang, L. and Zhu, H., ‘‘Back-Running: Seeking and Hiding Fundamental Information in Order Flows’’ (2019), The Review of Financial studies, forthcoming, available at https://ssrn.com/ abstract=2583915. 99 AFR Letter at 4–5. 100 Lee, T. and Wang, C., ‘‘Why Trade Over-theCounter? When Investors Want Price Discrimination’’ (2019 working paper), available at https://ssrn.com/abstract=3087647. E:\FR\FM\31DEP1.SGM 31DEP1 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules that, although the presence of OTC markets increases total volume and decreases the average spread, it can still harm total welfare 101 if the adverse selection costs are low, i.e., in markets with limited informed speculators and high trading activity in OTC markets. This is because ‘‘uninformed’’ investors (i.e., profit-indifferent, hedging traders) are more likely to be offered lower spreads in OTC markets, while spreads widen for ‘‘informed’’ investors (speculators). The practice of post-trade name give-up allows dealers, who offer liquidity both through requests for quotes and in the electronic order book, to detect the trading motives of their counterparties and lower their adverse selection costs. ‘‘Given low OTC market share in swaps, eliminating [post-trade name give-up] is predicted to increase welfare, decrease total volume and widen average spread. Specifically, spreads on swaps exchanges are predicted to decline while the OTC spreads are expected to increase.’’ 102 The Commission finds these studies potentially instructive, along with assertions provided by the majority of commenters, to indicate that overall liquidity may be improved by proposed § 37.9(d). Moreover the Commission is concerned with assertions that the status quo facilitates information asymmetries and hinders access and participation on affected SEF trading systems for many market participants. The Commission believes that the proposed rule may benefit market participants by reducing these information asymmetries and could increase participation on these SEF platforms. The Commission requests additional public comment regarding potential benefits of the proposed rule. c. Price Discovery The Commission believes that the proposed rule may encourage a greater number of market participants to anonymously post bids and offers on affected SEFs, which may promote greater interaction and competition between market participants, thereby allowing these platforms to act as more efficient mechanisms for price discovery. d. Sound Risk Management Practices Similarly, increased participation and competition on SEFs and decreased information asymmetry among market participants is likely to enhance SEF trading as a mechanism for risk management. e. Other Public Interest Considerations Post-trade name give-up is inconsistent with Commission regulations intended to protect the privacy of a swap counterparty’s trading information. Prohibiting post-trade name give-up would help to effectuate the statutory privacy protections under CEA section 21(c)(6) that apply to this information. The proposed rule is intended to protect market participants and the public by advancing the statutory goals of promoting swaps trading on SEFs and fostering fair competition among market participants. Further, the Commission believes the practice of post-trade name give-up may be inconsistent with the policy goals of the SEF impartial access requirements which are intended to allow participants to compete on a level playing field and allow additional liquidity providers to participate on SEFs. 4. Request for Comment The Commission invites public comment on all aspects of the costbenefit considerations herein, 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 rule are reasonably quantifiable, the Commission requests that they provide data, statistics and any other information that will assist the Commission in quantification. Finally, the Commission requests comment on the academic literature related to posttrade anonymity, including comments on the validity or applicability of the papers the Commission has discussed herein and any other studies the Commission should review. 101 Welfare is the expected sum of all market participants’ payoffs. 102 Id. at 26–27. D. Antitrust Considerations Section 15(b) of the CEA requires the Commission to take into consideration 3. Section 15(a) Factors a. Protection of Market Participants and the Public khammond on DSKJM1Z7X2PROD with PROPOSALS b. Efficiency, Competitiveness, and Financial Integrity of the Markets The proposed rule is intended to enhance competitiveness in the swap markets by removing an effective barrier to participation on SEFs for many market participants who are concerned with the prospect of information leakage. The Commission expects participation on SEFs to increase as a result, leading to greater competition. VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 PO 00000 Frm 00022 Fmt 4702 Sfmt 4702 72271 the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of this Act, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract market or registered futures association established pursuant to section 17 of this Act.103 The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission requests comment on whether the proposed rule implicates any other specific public interest to be protected by the antitrust laws. The Commission has considered the proposed rule to determine whether it is anticompetitive and has preliminarily identified no anticompetitive effects. In particular, the Commission preliminarily believes that the proposed amendments to part 37 will promote competition on SEFs. The Commission requests comment on whether the proposed rule is anticompetitive and, if it is, what the anticompetitive effects are. Because the Commission has preliminarily determined that the proposed rule is not anticompetitive and has no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the Act. The Commission requests comment on whether there are less anticompetitive means of achieving the relevant purposes of the Act that would otherwise be served by adopting the proposed rule. List of Subjects in 17 CFR Part 37 Swaps, Swap execution facilities. For the reasons stated in the preamble, the Commodity Futures Trading Commission proposes to amend 17 CFR part 37 to read as follows: PART 37—SWAP EXECUTION FACILITIES 1. 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. 2. In § 37.9, add paragraph (d) to read as follows: ■ 103 7 E:\FR\FM\31DEP1.SGM U.S.C. 19(b). 31DEP1 72272 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules § 37.9 Methods of execution for required and permitted transactions. * * * * * (d) Counterparty anonymity. (1) Except as otherwise required under the Act or the Commission’s regulations, a swap execution facility shall not directly or indirectly, including through a third-party service provider, disclose the identity of a counterparty to a swap that is executed anonymously and intended to be cleared. (2) A swap execution facility shall establish and enforce rules that prohibit any person from directly or indirectly, including through a third-party service provider, disclosing the identity of a counterparty to a swap that is executed anonymously and intended to be cleared. (3) The provisions in paragraphs (d)(1) and (d)(2) of this section shall not apply with respect to uncleared swaps, or with respect to any method of execution whereby the identity of a counterparty is disclosed prior to execution of the swap. Issued in Washington, DC, on December 20, 2019, 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 Post-Trade Name GiveUp on Swap Execution—Commission Voting Summary and Commissioners’ Statements Appendix 1—Commission Voting Summary On this matter, Chairman Tarbert and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative. Appendix 2—Joint Statement of Chairman Heath Tarbert, Commissioner Rostin Behnam, and Commissioner Dan M. Berkovitz khammond on DSKJM1Z7X2PROD with PROPOSALS It is a hallmark of American exchange-style trading systems that the buyer and seller of a given financial instrument have no reason to know—and do not know—the identity of one another.1 Trading anonymity can be viewed as a great equalizer, leveling the playing field for counterparties of all sizes and types by allowing traders to enter and exit the market without exposing their trading positions and strategies.2 As a result, 1 See, e.g., Peter A. McKay, CME and CBOT to Close Loophole, Wall St. J. (Apr. 15, 2006) (‘‘When stocks are traded on public exchanges, investors generally don’t know who they are buying from or selling to. On futures exchanges, most investors expect the same thing when trading electronically.’’). 2 See, e.g., Peter Madigan, CFTC to Test Role of Anonymity in SEF Order Book Flop, Risk (Nov. 21, 2014) (noting arguments that anonymity creates a VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 markets with pre- and post-trade anonymity are generally not only fairer, but also feature greater liquidity and greater competition between market participants.3 Before the adoption of central clearing for standardized swaps, post-trade disclosure of counterparty identities was the norm in swaps markets because of the need to manage counterparty credit risk. For example, Party A would ask its broker to enter into a fiveyear interest rate swap to exchange a fixed payment for a floating rate. The broker would find (often through another broker) Party B, who would be willing to take the other side of the swap. Post-trade, the identities of Party A and B would be revealed to one another. A five-year bilateral relationship would thus ensue, wherein both parties would need to monitor their counterparty’s respective ability to make good on their obligations. But times have now changed. The Dodd-Frank Act has encouraged—and in some instances required—centralized clearing for classes of swaps that are sufficiently standardized and liquid to be cleared through a central counterparty, i.e., a derivatives clearinghouse.4 As is the case for more egalitarian market); Managed Funds Association (‘‘MFA’’), Position Paper: Why Eliminating Post-Trade Name Disclosure Will Improve the Swaps Market 8 (Mar. 31, 2015) (arguing that ‘‘markets should remain anonymous to create a level playing field for all participants’’); CFTC Market Risk Advisory Committee, Panel Discussion: Market’s Response to the Introduction of SEFs 139 (Apr. 2, 2015) (‘‘MRAC Meeting Transcript’’) (noting buy-side reticence to use SEF order books with name give-up because of potential uncontrolled information leakage); see also Testimony of Stephen Berger, Citadel LLC, Before the Subcomm. on Commodity Exchanges, Energy, & Credit of the H. Comm. on Ag., Hearing to Review the Impact of G–20 Clearing and Trade Execution Requirements (June 14, 2016) (testifying on behalf of MFA) (asserting that lack of post-trade anonymity ‘‘creates an uneven playing field and impairs competition’’). 3 See, e.g., MRAC Meeting Transcript, supra note 2, at 154 (explaining that anonymous order books have facilitated liquidity and diverse participation in markets for other instruments, such as equities and futures); S. Freiderich & R. Payne, Trading Anonymity and Order Anticipation, 21 Journal of Financial Markets 1–24 (2014) (finding that posttrade anonymity improved market liquidity, particularly for small stocks and stocks with concentrated trading, which may be more analogous to swaps); T.G. Meling, Anonymous Trading in Equities (2018 working paper) (also finding that post-trade anonymity improved market liquidity); P. J Dennis & P. Sandas, Does Trading Anonymously Enhance Liquidity? (2019 working paper) (same); A. Hachmeister & D. Schiereck, Dancing in the Dark: Post-Trade Anonymity, Liquidity, and Informed Trading, 34 Review of Quantitative Finance and Accounting 145–177 (2010) (same); J. Linnainmaa & G. Saar, Lack of Anonymity and the Inference from Order Flow, 25 Review of Financial Studies 1,414– 1,456 (2012) (same). 4 Commodity Exchange Act (‘‘CEA’’) section 2(h)(8), 7 U.S.C. 2(h)(8); see also Committee on Capital Markets Regulation, The Global Financial Crisis: A Plan for Regulatory Reform iii (May 2009), https://www.capmktsreg.org/wp-content/uploads/ 2018/10/The-Global-FInancial-Crisis-A-Plan-forRegulatory-Reform.pdf (‘‘If clearinghouses were to clear CDS contracts and other standardized derivatives, like foreign exchange and interest rate swaps, systemic risk could be substantially reduced by more netting, centralized information on the exposures of counterparties, and the collectivization of losses.’’). PO 00000 Frm 00023 Fmt 4702 Sfmt 4702 exchange-listed products, a cleared swap no longer exposes the respective parties to the risk of non-performance. Rather than Party A and Party B being obligated to one another under the terms of the swap, the clearinghouse steps in between the parties to the trade and takes on the counterparty credit risk of both sides.5 Consequently, anonymous trading is now possible for large swaths of the U.S. swaps markets. Yet a number of swap execution facilities (‘‘SEFs’’) still retain a vestige of the old bilateral over-the-counter markets, even for transactions that are centrally cleared: The practice of ‘‘post-trade name give-up.’’ That is, the SEF will provide the identity of each swap counterparty to the other after a trade has been executed anonymously. Given the advent of clearing, many have reasonably questioned the policy rationale for post-trade name give-up for cleared swaps, and still others have gone further, criticizing the practice as anticompetitive and an obstacle to broad and diverse participation on SEFs. We support today’s proposed rule (‘‘Proposal’’) to prohibit post-trade name give-up for swaps that are executed anonymously via a SEF and intended to be cleared.6 We believe that the Proposal serves two key objectives of the Commission’s governing statute: (1) Promoting swaps trading on SEFs 7 and (2) promoting fair competition among market participants, including through impartial access to a SEF’s trading platform.8 The Proposal could also help attract a diverse set of additional market participants who have been deterred from trading on these platforms by the practice of post-trade name give-up, but remain interested in bringing liquidity and competition to SEFs if there is a level playing field. The Proposal is in large part based upon responses to the Commission’s November 2018 request for comment on post-trade name give-up.9 A large majority of commenters saw no sufficient justification for the practice with respect to cleared swaps, given the absence of counterparty credit risk attending such swaps.10 These 5 See Robert S. Steigerwald, Federal Reserve Bank of Chicago, Central Counterparty Clearing, in Understanding Derivatives: Markets and Infrastructure (2013) (explaining that through novation, the original contract is replaced by two contracts, with the central counterparty becoming buyer to the seller and seller to the buyer). 6 Of note, the proposed prohibition would not apply to trading protocols that involve pre-trade counterparty disclosure, such as a typical requestfor-quote process. 7 CEA section 5h(e), 7 U.S.C. 7b–3(e). 8 CEA section 3(b), 7 U.S.C. 5(b) (listing fair competition among market participants as a goal of the CEA); CEA section 5h(f)(2)(B)(i) (requiring a SEF to establish and enforce rules to provide participants impartial access to the market). 9 CFTC Request for Comment on Post-Trade Name Give-Up on Swap Execution Facilities, 83 FR 61,571, 61,572 (Nov. 30, 2018). 10 See, e.g., Investment Company Institute (‘‘ICI’’) Letter at 3; FHLBanks Letter at 2; Futures Industry Association Principal Traders Group (‘‘FIA PTG’’) Letter at 1; MFA Letter at 2; SIFMA AMG Letter at 14; Vanguard Letter at 2; Better Markets Letter at 2, 66. This seems particularly to be the case in light of pre-trade credit check and straight-through E:\FR\FM\31DEP1.SGM 31DEP1 Federal Register / Vol. 84, No. 250 / Tuesday, December 31, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS commenters acknowledged arguments that dealers use the practice to allocate capital to preferred customers as part of an overall cross-marketing strategy. However, they either did not find this rationale legitimate or believed that it does not justify potential harms resulting from name give-up.11 Commenters identified several such harms. A principal concern was the risk of information leakage allowing counterparties to glean a SEF participant’s trading positions and strategies.12 Commenters also expressed concern that disclosure of counterparty identities could run counter to the ‘‘impartial access’’ requirement for SEFs. Under this view, SEF participants can (and purportedly do) use name give-up to discriminate against counterparties whose trading practices they believe are harmful.13 A large majority of commenters stated that the concerns discussed above have inhibited buy-side participation on SEFs employing name giveup.14 In their view, prohibiting the practice would enhance liquidity on SEFs. Empirical studies on the effects of post-trade anonymity—in U.S. securities markets and in a wide range of foreign financial markets— bolster this view.15 We note that one response to the request for comment argued that post-trade anonymity could prompt dealers to withdraw from SEFs. The comment expressed concerns that the prohibition could on net reduce liquidity on SEFs.16 Yet we have seen processing requirements that minimize the time between trade execution and acceptance for clearing. 11 E.g., ICI Letter at 3; MFA Letter at 3; SIFMA AMG Letter at 14. 12 E.g., FHLBanks Letter at 3; ICI Letter at 3–4; MFA Letter at 4; Vanguard Letter at 10. 13 E.g., FIA PTG Letter at 1; ICI Letter at 3; MFA Letter at 4. 14 E.g., ICI Letter at 3–4; MFA Letter at 4; SIFMA AMG Letter at 15; see also MRAC Meeting Transcript, supra note 2 (multiple panelists and committee members arguing that name give-up impairs buy-side SEF participation). 15 See supra note 3. We note that at least one study of a U.S. securities trading platform found that post-trade anonymity had no impact on the quality of price quotes on the platform. K. Benhami, Liquidity Providers’ Valuation of Anonymity: The Nasdaq Market Makers Evidence (2006 working paper). Another study on the South Korea Exchange found that post-trade disclosure of the order flow of major brokers to the entire market improved liquidity. T.P. Pham et al., Intra-day Revelation of Counterparty Identity in the World’s Best-Lit Market (2016 working paper). On balance, however, the liquidity and other benefits of anonymous trading in financial markets appear well established. 16 See Securities Industry & Financial Markets Ass’n (‘‘SIFMA’’) Letter at 1, 3–4. We also note the argument that post-trade anonymity allows participants to ‘‘game’’ the market. Under this scenario, a buy-side customer may undercut prices from dealers by posting aggressive orders to a dealer-to-dealer SEF’s order book, then soliciting dealers through a request for quote on a dealer-toclient SEF in the hope that the dealers will provide more favorable quotes based on the order book pricing. See, e.g., Request for Comment, 83 FR at 61,572; Tom Osborn, How to Game a SEF: Banks Fear Arrival of Arbitrageurs, Risk (Mar. 19, 2014); Madigan, supra note 2. We urge commenters to submit any evidence or indicia that such gaming is in fact occurring in other fully anonymous markets or would occur on SEFs if the proposed prohibition VerDate Sep<11>2014 16:29 Dec 30, 2019 Jkt 250001 predictions of a drought in liquidity time and time again with respect to swaps regulatory reform. For example, it was used to oppose the clearing requirement of the Dodd-Frank Act and the Commission’s 2013 SEF trading rules.17 Such predictions have not proven accurate thus far.18 Thus, to be persuaded that the Proposal would have net liquidity-reducing effects, we will need convincing evidence. While we remain open to all commenters’ viewpoints, we currently believe that SEF trading that starts anonymous should remain anonymous. This belief is consistent with the Commission’s past views regarding a swap that is executed anonymously on a SEF.19 Demonstrating otherwise will require more than hypothetical scenarios or anecdotal statements. We look forward to reviewing comments on the Proposal and working with all external stakeholders to address this issue in a way that enhances SEF liquidity, ensures impartial access, and promotes increased and fair competition.20 Appendix 3—Supporting Statement of Commissioner Brian Quintenz I will vote in favor of today’s proposal to prohibit post-trade name give-up practices were implemented. We preliminarily believe that such conduct could constitute a disruptive trading practice or market manipulation prohibited by the CEA and potentially also subject to SEF disciplinary action. Such conduct may be best addressed by regulatory or self-regulatory authorities as appropriate, rather than via SEF participant ‘‘self-help’’ effectuated via name giveup. 17 See, e.g., International Swaps & Derivatives Ass’n (‘‘ISDA’’), Swap Execution Facilities: Can They Improve the Structure of OTC Derivatives Markets? 14–15 (Mar. 2011) (arguing that proposed SEF rules would reduce liquidity); SIFMA, SIFMA Strongly Disagrees with CFTC’s Final SEF Rules (May 29, 2013) (same); Terry Flanagan, Wholesale Brokers Criticize CFTC, Markets Media (Oct. 3, 2011) (same). 18 See, e.g., Lynn Riggs et al., CFTC, Swap Trading after Dodd-Frank: Evidence from Index CDS, at 6, 52 (Aug. 17, 2019) (finding that SEFtraded index credit default swap markets are working relatively well following the Dodd-Frank reforms, though there is always room for improvement); Evangelos Benos, Richard Payne, & Michalis Vasios, Centralized Trading, Transparency, and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd-Frank Act, Bank of England Staff Working Paper No. 580, at 31 (May 2018) (finding liquidity improvement for swaps subject to the SEF trading mandate); ISDA Comment Letter on 2018 SEF Proposed Rule, at 2 (‘‘Certain aspects of the current swaps trading framework work well, and there have been some enhancements in market functioning, including improved liquidity and pre- and posttrade price transparency.’’); ISDA, SwapsInfo (Sept. 30, 2019) (finding that SEF-traded credit derivatives represented 78.4% of total traded notional and 79.7% of trade count, and SEF-traded interest rate derivatives represented 55.4% of total traded notional and 60.9% of trade count). 19 Swap Data Repositories—Access to SDR Data by Market Participants, 79 FR 16,673 (Mar. 26, 2014). 20 Our thanks to the staff of the Commission’s Division of Market Oversight (‘‘DMO’’), Office of the General Counsel, and Office of the Chief Economist who drafted and reviewed this proposal, particularly Aleko Stamoulis and Vince McGonagle of DMO. PO 00000 Frm 00024 Fmt 4702 Sfmt 4702 72273 for swaps that are anonymously executed on a swap execution facility (‘‘SEF’’) and cleared (‘‘Proposal’’) in order for the Commission to receive further comment on the Proposal’s potential market structure impact. In November 2018, the Commission issued a request for public comment regarding the practice of post-trade name give-up.1 The overwhelming majority of comment letters to that release opposed post-trade name give-up and requested that the Commission explicitly prohibit the practice. The Proposal before us today was heavily informed by those commenters’ perspectives. The Proposal rightly notes that for anonymously executed and cleared trades, the need for market participants to know the identity of their counterparties for credit risk, legal, or operational purposes was obviated by the central clearing of swaps. However, I have concerns about the government banning an established trading practice that supports liquidity in the dealer-to-dealer swaps market. Post-trade name give-up serves an important market function in enhancing swap dealers’ own risk management needs resulting from their client exposures. The Commission should understand how banning post-trade name give-up could impact dealers’ ability to hedge efficiently. The Proposal assumes, without the benefit of a fulsome analysis of CFTC swap data, that banning post-trade name give-up would promote greater participation, liquidity, and fair competition on SEFs. Hoping to confirm if these assumptions are correct, the Proposal asks a series of basic questions about the differences between SEFs that are predominantly dealer-to-client platforms versus inter-dealer SEFs, including differences regarding liquidity providers, types of products actively traded, and pricing. Mandating changes to market structure in the hopes of increasing competition and liquidity, but without a full understanding of how these changes may implicate fundamental market dynamics, is a path that gives me great pause. I encourage all interested parties to provide written comments and data wherever possible in order to further the Commission’s understanding of how banning this trading practice may positively or negatively impact the liquidity on these two historically different types of trading platforms and on the dealer-driven liquidity provision of swaps trading generally. I also encourage commenters to consider if there are alternatives to a government-imposed ban that could achieve the same regulatory objectives. I would like to thank staff of the Division of Market Oversight for including several additional questions at my request designed to solicit targeted feedback on the potential effects of this Proposal. [FR Doc. 2019–27895 Filed 12–30–19; 8:45 am] BILLING CODE 6351–01–P 1 Post-Trade Name Give-up on Swap Execution Facilities, 83 FR 61571 (Nov. 30, 2018). E:\FR\FM\31DEP1.SGM 31DEP1

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 84, Number 250 (Tuesday, December 31, 2019)]
[Proposed Rules]
[Pages 72262-72273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27895]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 37

RIN 3038-AE79


Post-Trade Name Give-Up on Swap Execution Facilities

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing a rule to prohibit ``post-trade name give-up'' 
practices related to trading on swap execution facilities.

DATES: Comments must be received on or before March 2, 2020.

ADDRESSES: You may submit comments, identified by ``Post-Trade Name 
Give-Up on Swap Execution Facilities'' and RIN number 3038-AE79, by any 
of the following methods:
     The Agency's Website: https://comments.cftc.gov. Follow the 
instructions for submitting comments.
     Mail: Secretary of the Commission, Commodity Futures 
Trading Commission, Three Lafayette Center, 1155 21st Street NW, 
Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail, above.
    All comments must be submitted in English or, if not, accompanied 
by an English translation. Comments will be posted as received to 
https://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act,\1\ a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Commission Regulation 145.9.\2\
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    \1\ 5 U.S.C. 552.
    \2\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of this proposed rule will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Alexandros Stamoulis, Special Counsel, 
(646) 746-9792, [email protected], Division of Market Oversight, 
Commodity Futures Trading Commission, 140 Broadway, 19th Floor, New 
York, NY 10005.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    The Commission is proposing to amend part 37 of the Commission's 
regulations to prohibit ``post-trade name give-up'' practices for swaps 
that are anonymously executed on a SEF and are intended to be cleared. 
Proposed Sec.  37.9(d) of the Commission's regulations would prohibit a 
SEF from directly or indirectly, including through a third-party 
service provider, disclosing the identity of a counterparty to a swap 
that is executed anonymously and intended to be cleared. The proposed 
regulation would also require SEFs to establish and enforce rules that 
prohibit any person from effectuating such a disclosure. The Commission 
is proposing this prohibition on post-trade name give-up after 
considering the comments received in response to its November 2018 
request for public comment regarding the practice (the

[[Page 72263]]

``Name Give-Up Release'').\3\ The Commission believes that prohibiting 
the practice of post-trade name give-up for cleared swaps would promote 
swaps trading and competition on SEFs, as well as promote fair 
competition among market participants. Additionally, it would advance 
the congressional objectives underlying the prohibition against swap 
data repositories disclosing the identity of cleared swap 
counterparties. The Commission also preliminarily believes that post-
trade name give-up for cleared swaps may be inconsistent with the 
requirement that SEFs provide market participants with impartial access 
to trading on SEFs.
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    \3\ Post-Trade Name Give-up on Swap Execution Facilities, 83 FR 
61571 (Nov. 30, 2018) (``Name Give-Up Release'').
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II. Background

    The Commission issued the Name Give-Up Release to seek public 
comment on the practice of post-trade name give-up on SEFs for swaps 
intended to be cleared. As described in the release, some SEFs 
facilitate this practice by disclosing the identities of swap 
counterparties to one another after a trade is matched anonymously. A 
SEF may effectuate such disclosure through either its own trade 
protocols \4\ or through a third-party service provider that it 
utilizes to process and route transactions to a derivatives clearing 
organization (``DCO'') for clearing.\5\ Prior to the issuance of the 
Name Give-Up Release, the Commission had been aware of views that such 
disclosure deters some market participants from trading on SEF 
platforms that employ the practice. In the Name Give-Up Release, the 
Commission questioned the necessity of the practice with respect to 
cleared swaps that are anonymously executed on a SEF. While the 
Commission acknowledged that the practice may be necessary for trading 
in uncleared swaps, i.e., to manage counterparty credit risk,\6\ it 
stated that the rationale with respect to cleared swaps is ``less clear 
cut.'' \7\ The Commission also summarized some of the general views on 
post-trade name give-up of various industry participants and requested 
public comment on the merits of the practice and whether the Commission 
should prohibit it.\8\
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    \4\ For swaps executed anonymously on a SEF electronic order 
book, where participants may enter anonymous bids and offers, the 
disclosure of a counterparty's identity may occur through an 
electronic notification provided by the SEF after the trade is 
matched and executed. In certain voice-based SEF trading systems, a 
SEF employee who matches bids and offers may provide such 
notification to the counterparties.
    \5\ Post-trade name give-up may occur through third-party 
middleware and associated trade processing services that provide 
counterparties with various trade details captured from SEF trading 
systems, including the identity of the party on the other side of a 
trade. The Commission has provided that SEFs may use such third-
party services to route trades to DCOs if the routing complies with 
Sec.  37.702(b). See Core Principles and Other Requirements for 
SEFs, 78 FR 33476, 33535 (June 4, 2013) (``SEF Core Principles Final 
Rule''). Third-party trade processing services commonly used for SEF 
trades include those offered by IHS Markit. IHS Markit submitted a 
comment letter in response to the Name Give-Up Release. Although it 
did not express a particular view on the merits of post-trade name 
give-up practices, IHS Markit did confirm that its derivatives 
processing platform supports fully anonymous SEF trading that may be 
selected by a SEF for any SEF trade--a so called ``no-name give up 
workflow option.'' IHS Markit Letter at 1-2.
    \6\ For uncleared swaps, post-trade name give-up enables a 
market participant to perform a credit-check on a potential 
counterparty prior to finalizing the transaction. Due to the 
bilateral nature of an uncleared swap agreement, the practice also 
allows counterparties to manage credit exposure and payment 
obligations with respect to those transactions.
    \7\ Name Give-Up Release at 61571.
    \8\ See Name Give-Up Release at 61572.
---------------------------------------------------------------------------

    The Commission received thirteen comment letters to the Name Give-
Up Release, many of which expounded further on the views summarized in 
the release.\9\ The majority of commenters opposed the practice of 
post-trade name give-up for anonymously-executed swaps submitted to 
clearing, and requested that the Commission adopt an explicit 
prohibition.\10\ One comment letter, from the Securities Industry and 
Financial Markets Association (``SIFMA'') on behalf of a majority of 
its swap dealer members who have expressed a view,\11\ expressed 
support for the practice and concern about the effects of a 
prohibition.\12\ The Commission has reviewed and considered these 
comment letters in issuing this proposed rulemaking.
---------------------------------------------------------------------------

    \9\ All comment letters submitted in response to the Name Give-
Up Release are available through the Commission's website at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2935.
    \10\ The following commenters support a prohibition on post-
trade name give-up: Americans for Financial Reform (``AFR''); Better 
Markets; David Blinkly; Federal Home Loans Banks (``FHLBanks''); FIA 
Principal Traders Group (``FIA PTG''); Investment Company Institute 
(``ICI''); Managed Funds Association (``MFA''); Robert Rutkowski; 
SIFMA Asset Management Group (``SIFMA AMG''); UBS Securities 
(``UBS''); and Vanguard.
    \11\ SIFMA, however, acknowledged in its comment letter that the 
views among its swap dealer members on post-trade name give-up are 
not uniform. SIFMA Letter at 1.
    \12\ The Commission notes that this letter is separate and 
distinct from the letter submitted by SIFMA AMG, and the views 
espoused by SIFMA in this letter contrast with the views represented 
by SIFMA AMG, which supported a prohibition on post-trade name give-
up. SIFMA AMG members represent various U.S. and global asset 
management firms. SIFMA AMG Letter at 1, n.1.
---------------------------------------------------------------------------

A. Comments Concerning the Necessity of Post-Trade Name Give-Up for 
Cleared Swaps

    Nearly all of the comment letters to the Name Give-Up Release 
asserted that post-trade name give-up is not justified for swaps 
submitted to a DCO for clearing.\13\ Some commenters acknowledged that 
the practice may be necessary for uncleared swaps, which expose 
counterparties to bilateral credit risk,\14\ but noted that the 
clearing process mitigates that risk.\15\ Commenters further asserted 
that straight-through processing makes post-trade name give-up 
unnecessary.\16\ According to commenters, straight-through processing 
promotes clearing efficiency, and therefore, obviates the need for 
counterparties to fulfill swap-related legal or operational tasks that 
would require disclosing their identities.\17\ The Managed Funds 
Association (``MFA'') stated that it ``strongly believes that there is 
no legitimate commercial, operational, credit or legal justification 
for name give-up on SEFs for anonymously-executed cleared swaps.'' \18\ 
SIFMA, to the contrary, asserted that ``even in connection with cleared 
swaps, there are frequently operational, credit/settlement, and legal 
considerations that necessitate [post-trade name give-up].'' \19\
---------------------------------------------------------------------------

    \13\ AFR Letter at 4; Better Markets Letter at 2; Blinkly Letter 
at 1; FHLBanks Letter at 2; FIA PTG Letter at 1; ICI Letter at 2-3; 
MFA Letter at 2; Rutkowski Letter at 4; SIFMA AMG Letter at 14; 
Vanguard Letter at 10. UBS stated that the practice should end 
absent a ``compelling'' justification. UBS Letter at 1.
    \14\ FHLBanks, for example, stated that the disclosure of 
counterparty identity for uncleared swaps is necessary to generate 
and update trading records, calculate counterparty credit risk 
exposures, issue margin calls, and conduct other related operational 
tasks. FHLBanks Letter at 2.
    \15\ FHLBanks Letter at 2; FIA PTG Letter at 1; ICI Letter at 2; 
MFA Letter at 2; ICI Letter at 3. See also FIA PTG Letter at 1 
(stating that clearing leaves no credit, operational or legal 
exposures between the counterparties).
    \16\ FHLBanks Letter at 2; ICI Letter at 3; MFA Letter at 2-3; 
SIFMA AMG Letter at 14.
    \17\ FHLBanks Letter at 2 (stating that the clearing process 
occurs within ``moments'' after execution); MFA Letter at 2-3 
(stating that straight-through processing ensures that the 
anonymously-executed swap is quickly submitted to, and accepted or 
rejected by, a DCO).
    \18\ MFA Letter at 2.
    \19\ SIFMA Letter at 6 (furthermore asserting that post-trade 
name give up ``helps enable parties to address operational errors 
and resulting risks'').
---------------------------------------------------------------------------

B. Comments Concerning Effects on Competition and Liquidity

    Commenters support prohibiting post-trade name give-up based on 
concerns that disclosing a counterparty's identity after a trade is 
executed can lead to

[[Page 72264]]

harmful ``information leakage.'' \20\ MFA stated that prior to trading 
on a SEF with post-trade name give-up a participant must be comfortable 
with any participant on the venue potentially learning of its trading 
activity, because the participant has no control over who it will be 
matched with.\21\ SIFMA Asset Management Group (``SIFMA AMG'') stated 
that information leakage resulting from post-trade name give-up occurs 
in an ``uncontrolled'' manner that allows others in the market to 
anticipate a participant's objectives.\22\ The Federal Home Loan Banks 
(``FHLBanks''), the Investment Company Institute (``ICI''), and 
Vanguard similarly commented that such disclosure could expose a 
counterparty's trading positions, strategies, and/or objectives.\23\ 
ICI further asserted that dealers would benefit by using this 
information to anticipate a buy-side client's trading intentions and 
potentially offer less favorable terms and pricing to that client in 
subsequent bilateral swap transactions.\24\ FHLBanks stated that such 
disclosure is particularly problematic for end users who use swaps to 
hedge their business exposure.\25\
---------------------------------------------------------------------------

    \20\ Better Markets Letter at 2; FHLBanks Letter at 2; ICI 
Letter at 3-4; MFA Letter at 4; SIFMA AMG Letter at 15; Vanguard 
Letter at 10.
    \21\ MFA Letter at 4 (describing post-trade name give-up as ``an 
unattractive proposition that undermines the anonymous nature of the 
trading protocol'').
    \22\ SIFMA AMG Letter at 15.
    \23\ FHLBanks Letter at 2; ICI Letter at 3; Vanguard Letter at 
10 (stating that counterparty identity disclosure additionally 
exposes trading practices and other sensitive information).
    \24\ ICI Letter at 4. See also Better Markets Letter at 2 
(noting that disclosure confers ``trading advantages'' upon dealers 
that collect and analyze this information).
    \25\ FHLBanks Letter at 3.
---------------------------------------------------------------------------

    Commenters who oppose post-trade name give-up asserted that 
concerns about information leakage have broadly hindered participation 
and competition on SEFs.\26\ MFA stated that post-trade name give-up 
has precluded buy-side participants who are concerned with the prospect 
of information leakage from accessing the ``unique'' liquidity pools 
and trading protocols available on SEFs that practice post-trade name 
give-up.\27\ In contrast, according to MFA, dealers have access to all 
SEFs, which provides them with certain informational advantages over 
other market participants.\28\ Several commenters, including MFA, 
believe that ``incumbent'' dealers that are traditional swap liquidity 
providers continue to insist that SEFs facilitate the practice of post-
trade name give-up in order to discourage additional competition in the 
dealer-to-dealer SEF market.\29\
---------------------------------------------------------------------------

    \26\ MFA Letter at 2 (identifying post-trade name give-up as a 
``significant impediment'' to investors' ability to trade on 
anonymous order books where post-trade name give-up is practiced); 
FHLBanks Letter at 2-3 (stating that post-trade name give-up has 
discouraged buy-side participants from trading on SEFs using the 
practice); ICI Letter at 4 (suggesting that buy-side participants 
avoid harms caused by information leakage by avoiding SEFs that 
require post-trade name give-up of intended-to-be-cleared swaps); 
UBS Letter at 1 (stating that post-trade name give-up dis-
incentivizes certain market participants from trading on anonymous 
limit order book SEFs);
    \27\ MFA Letter at 4.
    \28\ Id.
    \29\ AFR Letter at 4 (asserting that post-trade name give-up 
allows dealers to retaliate against other competing liquidity 
providers or otherwise provides additional ways to discourage 
competition); Better Markets Letter at 2 (stating that a ``handful'' 
of dealers have prevented SEFs from eliminating the practice in 
order to limit access to liquidity from a small number of dealers); 
Blinkly Letter at 1 (stating that the practice helps to preserve 
``dealer control'' of profits in the swaps markets); FIA PTG Letter 
at 1 (stating that the practice allows incumbent liquidity providers 
to monitor the presence of new liquidity providers seeking to enter 
the cleared swaps market); MFA Letter at 4 (referring to the 
practice as a ``policing mechanism'' to deter buy-side 
participation); Rutkowski Letter at 5 (same comment as AFR).
---------------------------------------------------------------------------

    Many commenters stated that prohibiting post-trade name give-up 
would promote greater participation and competition in the swaps 
market, thereby potentially improving swap liquidity. FHLBanks, for 
example, believes that a prohibition would increase competition, reduce 
market fragmentation, and increase participation on central limit order 
books, which would lead to deeper liquidity pools and better 
pricing.\30\ Better Markets and MFA similarly asserted that a 
prohibition would increase swap liquidity by diversifying the pool of 
SEF participants to include new liquidity providers.\31\ ICI and SIFMA 
AMG also suggested that buy-side participants would be likely to 
participate on SEFs they had previously avoided if post-trade name 
give-up were prohibited.\32\ Commenters further claim that increasing 
competition and participation on SEFs with a post-trade name give-up 
prohibition would establish a more efficient swaps trading market \33\ 
with less information asymmetry among market participants.\34\
---------------------------------------------------------------------------

    \30\ FHLBanks Letter at 3.
    \31\ Better Markets at 2; MFA Letter at 6.
    \32\ See ICI Letter at 2, 4; SIFMA AMG Letter at 15.
    \33\ ICI Letter at 2; SIFMA AMG Letter at 15.
    \34\ MFA Letter at 6.
---------------------------------------------------------------------------

    SIFMA's letter, on the other hand, argued that prohibiting post-
trade name give-up is unnecessary and would harm liquidity in the swaps 
market. SIFMA stated that many market participants trade willingly on a 
SEF trading platform with post-trade name give-up.\35\ SIFMA noted that 
buy-side participants who are concerned by post-trade name give-up 
already have the option of using ``fully anonymous'' central limit 
order book platforms that some SEFs currently offer.\36\ SIFMA further 
noted, however, that trading on these platforms is currently minimal, 
which SIFMA argues reflects a lack of market demand for fully anonymous 
trading.\37\ SIFMA argued, therefore, that prohibiting post-trade name 
give-up would be ``unfair'' to participants who choose not to trade 
fully-anonymously.\38\ SIFMA also argued that a ``bifurcated market'' 
dynamic with post-trade name give-up is needed to promote liquidity in 
the swaps market.\39\ In the dealer-to-dealer market, where dealers 
hedge their risks from dealer-to-client trading, SIFMA stated that pre-
trade anonymity allows dealers to stream liquidity without attribution 
and observe available liquidity on the SEF, while post-trade name give-
up helps them to price their liquidity based on client relationships, 
which involves assessing how that liquidity and underlying capital is 
allocated among clients over time and across different liquidity 
pools.\40\ Counterparty disclosure, according to SIFMA, allows dealers 
to price that liquidity more accurately and offer better pricing.\41\ 
SIFMA asserted that prohibiting post-trade name give-up would undermine 
these benefits, precluding dealers from providing such client-based 
pricing, and would limit their ability to choose how to manage 
risk.\42\
---------------------------------------------------------------------------

    \35\ SIFMA Letter at 5 (disputing the belief that participants 
who trade anonymously also want to remain anonymous post-execution).
    \36\ Id.
    \37\ Id. at 3 (asserting that the lack of liquidity on those SEF 
platforms demonstrates that ``a substantial cross-segment'' of 
participants prefer to trade with post-trade name give-up).
    \38\ Id.
    \39\ SIFMA Letter at 4-5 (explaining that dealers provide 
liquidity to clients and hedge residual risks in the dealer-to-
dealer market).
    \40\ Id. at 4.
    \41\ Id. at 5 (stating that dealers are ``incentivized and able 
to provide their best pricing to clients with whom they have strong 
relationships'').
    \42\ Id. (noting that dealers are ``comfortable'' trading their 
client risks in existing liquidity pools).
---------------------------------------------------------------------------

    ICI, MFA, and SIFMA AMG disputed SIFMA's claim that capital and 
liquidity allocation requires the continued use of post-trade name 
give-up.\43\ SIFMA AMG expressed skepticism about the ability of SEF 
systems or platforms with anonymous trading to provide that benefit, 
given that pre-trade anonymity does not allow dealers to choose their

[[Page 72265]]

counterparty nor allocate their capital or liquidity to a specific 
counterparty.\44\ MFA similarly commented that if a dealer wanted to 
allocate capital or liquidity to a specific counterparty, then it would 
use a disclosed SEF trading platform, not one that facilitates 
anonymous execution.\45\ ICI argued that allowing certain participants 
to enter into swaps only with counterparties that are ``preferred 
customers'' does not promote liquidity, fairness, or competition.\46\ 
MFA also disagreed with SIFMA's claim that market liquidity would be 
adversely impacted by a prohibition. MFA believes that if a dealer 
chooses to offer less liquidity, then the increased competition arising 
from a prohibition on post-trade give-up would offset that loss.\47\ 
MFA further noted that a liquidity reduction has not transpired in 
other markets that feature fully anonymous trading.\48\
---------------------------------------------------------------------------

    \43\ ICI Letter at 3 (describing the allocation explanation as 
``not a compelling reason''); MFA Letter at 3; SIFMA AMG Letter at 
14.
    \44\ SIFMA AMG Letter at 14.
    \45\ MFA Letter at 3.
    \46\ ICI Letter at 3.
    \47\ Id.
    \48\ Id.
---------------------------------------------------------------------------

    SIFMA also claimed that dealers may be unwilling or unable to 
participate in fully anonymous SEF trading environments without post-
trade name give-up because such environments would allow SEF buy-side 
participants to ``game'' the market more successfully.\49\ Several 
other commenters, however, stated that such behavior is not only 
unlikely,\50\ but is also prohibited under the Commodity Exchange Act 
(``CEA'' or ``Act''), Commission regulations, and SEF rules; \51\ and 
that post-trade name give-up is, in any case, not an appropriate 
mechanism to address such potential market abuse.\52\
---------------------------------------------------------------------------

    \49\ SIFMA Letter at 3. As described in the Name Give-Up 
Release, dealers are reportedly concerned that buy-side clients who 
participate on dealer-to-dealer order books may undercut prices from 
dealers by posting aggressive bids or offers and then soliciting 
dealers through a request for quote on a dealer-to-client platform, 
hoping to motivate dealers to provide more favorable quotes based on 
those aggressive prices posted in the order book. Name Give-Up 
Release at 61572.
    \50\ FIA PTG, MFA, and SIFMA AMG asserted that no evidence 
exists that this behavior occurs in other markets with fully 
anonymous trading. FIA PTG Letter at 1; MFA Letter at 3; SIFMA AMG 
Letter at 14-15. FHLBanks and MFA noted that this behavior would 
carry reputational risk, and therefore, is unlikely to occur. 
FHLBanks Letter at 3, n.7; MFA Letter at 3. See also MFA Letter at 2 
(stating that a SEF participant would otherwise defy self-interest 
by posting such aggressive bids or offers, given that other order 
book participants would quickly execute against those bids or 
offers).
    \51\ FHLBanks Letter at 3, n.7 (characterizing market ``gaming'' 
as ``intentional manipulation of the market''); MFA Letter at 3 
(noting legal and regulatory risks of ``gaming'' the market); ICI 
Letter at 3 (noting that existing CFTC rules and SEF rules regarding 
market conduct and trading practices address ``gaming'' concerns).
    \52\ SIFMA AMG Letter at 15 (stating that the Commission's rules 
on disruptive trading practices and SEF market oversight more 
appropriately address such behavior than post-trade name give-up). 
The Commission notes that, notwithstanding the concerns articulated 
by SIFMA related to potential market ``gaming,'' to the extent that 
any such behavior violates the CEA or Commission regulations, it is 
subject to investigation and disciplinary action by SEFs and 
enforcement action by the Commission. SEFs are required to conduct 
ongoing monitoring and surveillance to monitor and detect fictitious 
posting of bids and offers on their trading platforms, as well as 
prosecute trading violations through established SEF disciplinary 
programs.
---------------------------------------------------------------------------

III. Discussion

    Based on its preliminary consideration of public comments and 
experience with implementing the SEF framework over the course of 
several years, the Commission proposes to prohibit post-trade name 
give-up practices for swaps that are anonymously executed on a SEF and 
are intended to be cleared. Proposed Sec.  37.9(d)(1) would prohibit a 
SEF from directly or indirectly, including through a third-party 
service provider, disclosing the identity of a counterparty to a swap 
that is executed anonymously and intended to be cleared. The proposed 
rule, however, further specifies that the prohibition would not apply 
where such disclosure is otherwise required by the CEA or the 
Commission's regulations.\53\ Proposed Sec.  37.9(d)(2) would require a 
SEF to establish and enforce rules that prohibit any person, including 
through a third-party service provider, from effectuating such a 
disclosure. Finally, proposed Sec.  37.9(d)(3) clarifies that the 
prohibition would not apply with respect to uncleared swaps, or with 
respect to any method of execution whereby the identity of a 
counterparty is disclosed prior to execution of the swap.
---------------------------------------------------------------------------

    \53\ This would include, for example, requirements relating to a 
SEF's obligation to disclose counterparty identities to a 
derivatives clearing organization or swap data repository.
---------------------------------------------------------------------------

    The Commission believes that this proposed rule would advance the 
statutory objectives of promoting swaps trading on SEFs and promoting 
fair competition among market participants. The Commission additionally 
believes that it would advance the congressional objectives underlying 
the existing prohibition against swap data repositories disclosing the 
identities of cleared swap counterparties. Finally, the Commission also 
preliminarily believes that post-trade name give-up may impede the 
policy objectives underlying the impartial access requirement 
applicable to SEFs.
    The Commission emphasizes that the prohibition as proposed applies 
to a limited scope of trading platforms, i.e., only those that 
facilitate anonymous trading of cleared swaps. The Commission views the 
practice of post-trade name give-up as an ancillary post-trade 
protocol--the prohibition of which limits neither the manner in which 
participants post bids and offers, nor how those bids and offers 
interact with one another. The prohibition is also not meant to mandate 
or favor ``all-to-all'' trading platforms. Rather, it is meant to 
encourage more diverse participation and greater competition on 
existing pre-trade anonymous SEF platforms for cleared swaps. Under the 
proposed rule, name-disclosed execution methods would still be 
permitted, and post-trade name give-up would continue to be permitted 
for uncleared swaps.

A. Promoting Swaps Trading on SEFs and Fair Competition Among Market 
Participants

    CEA section 8a(5) authorizes the Commission to make and promulgate 
such rules and regulations as, in the judgment of the Commission, are 
reasonably necessary to effectuate any of the provisions or to 
accomplish any of the purposes of this Act.\54\ Further, CEA section 
5h(e) establishes that the goal of the SEF regulatory regime is to 
promote swaps trading on SEFs and promote pre-trade price transparency 
in the swaps market.\55\ CEA section 3(a) identifies swaps trading to 
be part of a ``national public interest'' that, among other things, 
provides a means for managing and assuming price risks, discovering 
prices, or disseminating pricing information through trading in liquid, 
fair and financially secure trading facilities.\56\ CEA section 3(b) 
further specifies that the CEA's purpose is to ``foster'' that interest 
by promoting fair competition among market participants.\57\ For the 
reasons discussed below, the Commission believes that prohibiting the 
practice of post-trade name give-up for swaps that are anonymously 
executed on a SEF and are intended to be cleared is reasonably 
necessary to advance the objectives of the aforementioned provisions of 
the Act.
---------------------------------------------------------------------------

    \54\ 7 U.S.C. 12(a)(5).
    \55\ 7 U.S.C. 7b-3(e).
    \56\ 7 U.S.C. 5(a) (stating that the transactions subject to the 
CEA are affected with a national public interest).
    \57\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    The Commission believes that despite available liquidity for 
cleared products on certain SEF platforms, the range and number of 
active participants on such

[[Page 72266]]

platforms may be limited due to market participants' concerns about 
information leakage and anticompetitive behavior made possible by post-
trade name give-up.\58\ The Commission believes that fully anonymous 
trading (i.e., without post-trade name give-up) would likely encourage 
more participants to trade on those platforms.\59\ Greater 
participation, in turn, would advance the goals of promoting trading 
and competition on SEFs. The Commission also believes that the proposed 
rule may advance the CEA's goal of fostering ``fair competition'' among 
market participants by reducing opportunities for information leakage. 
Furthermore, the Commission preliminarily believes that encouraging a 
greater number, and a more diverse set, of market participants to 
anonymously post bids and offers on these affected SEFs may promote 
greater interaction and competition between market participants, which 
should allow these platforms to act as more efficient mechanisms for 
price discovery.
---------------------------------------------------------------------------

    \58\ See supra notes 26-29 and accompanying text. See also infra 
note 73.
    \59\ The majority of comment letters submitted in response to 
the Name Give-Up Release, as well as prior market participant 
commentary, indicate a strong interest among certain market 
participants who are not currently trading on these SEF platforms to 
do so if post-trade name give-up is prohibited. See, e.g., 
Transcript of CFTC Market Risk Advisory Committee Meeting (Apr. 2, 
2015) (``2015 MRAC Meeting Transcript'') at 133 et seq., available 
at https://www.cftc.gov/About/CFTCCommittees/MarketRiskAdvisoryCommittee/mrac_meetings.html.
---------------------------------------------------------------------------

B. SDR Information Privacy Requirements

    CEA section 21(c)(6) requires a swap data repository (``SDR'') to 
maintain the privacy of any and all swap transaction information that 
it receives from a swap dealer, counterparty, or any other registered 
entity. The Commission implemented this requirement under Sec.  49.17 
of the Commission's regulations to address the scope of access that 
market participants may have to swap transaction data held by an SDR. 
For swaps executed anonymously on a SEF and cleared in accordance with 
the Commission's straight-through processing requirements, Sec.  
49.17(f)(2) explicitly limits this access by prohibiting a counterparty 
to a swap from accessing (i) the identity of the other counterparty or 
its clearing member; or (ii) the legal entity identifier of the other 
counterparty or its clearing member.\60\ In implementing this rule, the 
Commission clarified that this swap transaction information is subject 
to the statutory privacy protections because, in the Commission's view, 
swap counterparties would not know one another's identity if the swap 
is submitted to clearing via straight-through processing.\61\
---------------------------------------------------------------------------

    \60\ 17 CFR 49.17(f)(2).
    \61\ Swap Data Repositories--Access to SDR Data by Market 
Participants, 79 FR 16673-16674 (Mar. 26, 2014).
---------------------------------------------------------------------------

    The Commission believes that post-trade name give-up undercuts the 
intent of this requirement and the congressional objectives underlying 
CEA section 21(c)(6).\62\ Allowing a SEF to disclose a counterparty's 
identity is contrary to the purpose of prohibiting access to this 
information at an SDR under Sec.  49.17(f)(2), given that a 
counterparty can obtain this knowledge from another source. Therefore, 
prohibiting post-trade name give-up would help to advance the 
objectives underlying the statutory privacy protections under CEA 
section 21(c)(6) and the Commission's regulations thereunder that apply 
to this information.
---------------------------------------------------------------------------

    \62\ The congressional objective to maintain the privacy of 
trading information, including trader identities, is also apparent 
elsewhere in the CEA. See, e.g., CEA Section 8(a), 7 U.S.C. 12(a) 
(prohibiting the Commission from publication of data and information 
that would disclose the business transactions or market positions of 
any person and trade secrets or names of customers). See also Sec.  
1.59(b)(1)(ii) of the Commission's regulations prohibiting self-
regulatory organization employees from disclosing material, non-
public information obtained in the course of the employee's 
employment. In addition, Sec.  1.59(d)(ii) separately prohibits an 
employee, governing board member, committee member or consultant 
from disclosing material, non-public information obtained through 
special access related to the performance of their duties. The 
Commission promulgated Sec.  1.59 based on its stated belief that 
the concept underlying CEA section 8(a) should apply with equal 
force to employees and governing members of self-regulatory 
organizations. See Activities of Self-Regulatory Organization 
Employees and Governing Members Who Possess Material, Non-Public 
Information, 50 FR 24533, 24535 (June 11, 1985).
---------------------------------------------------------------------------

C. Impartial Access

    CEA section 5h(f)(2)(B)--a provision within statutory SEF Core 
Principle 2--requires a SEF to establish and enforce trading, trade 
processing, and participation rules that, among other things, provide 
market participants with impartial access to the market.\63\ The 
Commission implemented this statutory requirement by adopting Sec.  
37.202. Section 37.202(a) requires a SEF to provide any eligible 
contract participant (``ECP'') \64\ with impartial access to its 
market(s) and market services, provided that the facility has, among 
other things, criteria governing such access that are impartial, 
transparent and applied in a fair and non-discriminatory manner.\65\ In 
adopting Sec.  37.202, the Commission explained that ``impartial'' 
means ``fair, unbiased, and unprejudiced.'' \66\ The Commission further 
stated the requirement would allow participants to ``compete on a level 
playing field'' and allow additional liquidity providers to participate 
on SEFs, thereby improving swaps pricing and market efficiency.\67\
---------------------------------------------------------------------------

    \63\ 7 U.S.C. 7b-3(f)(2)(B).
    \64\ CEA section 2(e), 7 U.S.C. 2(e), limits swaps trading on 
SEFs to ``eligible contract participants,'' as defined under CEA 
section 1a(18), 7 U.S.C. 1a(18).
    \65\ 17 CFR 37.202(a). This requirement also applies to any 
independent software vendor.
    \66\ SEF Core Principles Final Rule at 33508.
    \67\ Id.
---------------------------------------------------------------------------

    Statutory SEF Core Principle 2 allows a SEF to adopt access 
limitations, but any such limitations must be consistent with the 
impartial access requirements.\68\ For example, the Commission has 
stated that certain fee-based limitations would be permissible based on 
``legitimate business justifications.'' \69\ While a SEF may impose 
different access criteria among different groups of ECPs, the 
Commission also stated that ``similarly situated'' ECPs must be treated 
in a similar manner.\70\
---------------------------------------------------------------------------

    \68\ Id. (a SEF may use its own reasonable discretion to 
determine its access criteria, provided that the criteria are 
impartial, transparent and applied in a fair and non-discriminatory 
manner, and are not anti-competitive).
    \69\ Id. at 33509 (stating that a SEF may offer different access 
fees under Sec.  37.202(a)(3) pursuant to legitimate business 
justifications).
    \70\ Id.
---------------------------------------------------------------------------

    In practice, SEFs have adopted certain access limitations that 
affect a participant's ability to utilize a trading platform, such as 
prerequisites for trading on certain platforms or interacting with 
certain participants. Some of these prerequisites reflect the nature of 
the swap involved, such as whether the swap is cleared or 
uncleared.\71\ A SEF may apply such access limitations on its 
participants based on legitimate business justifications.\72\ In any 
case, a SEF's access limitations must be applied in a fair and non-
discriminatory manner,

[[Page 72267]]

and should not be intended to prevent or disincentivize participation 
on a SEF.
---------------------------------------------------------------------------

    \71\ For example, a SEF may limit trading access for uncleared 
swaps to those market participants who have existing underlying 
documentation to execute such swaps with other potential 
counterparties. Such prerequisites have been found to be in 
violation of impartial access requirements when applied to trading 
cleared swaps, however. See infra note 75.
    \72\ For example, SEFs have been permitted to require 
participants to have certain trading enablements in place with a 
minimum percentage of other participants on the platform prior to 
trading uncleared swaps. This approach allows participants to 
appropriately manage bilateral counterparty risk of uncleared swaps, 
while also allowing the SEF to promote active and orderly trading by 
ensuring that a requisite number of participants can interact with 
one another.
---------------------------------------------------------------------------

    The practice of post-trade name give-up in isolation may not be 
discriminatory because participants would generally be eligible to 
onboard to the SEFs and trade on systems or platforms that equally 
subject all participants to post-trade identity disclosure. However, 
the practice may have resulted in a discriminatory effect against 
certain market participants.\73\ The practice, in turn, may have 
deterred these participants from joining or trading in a meaningful way 
on SEFs that facilitate post-trade name give-up, thereby limiting 
competition on these SEFs. The Commission preliminarily believes that 
this undermines the policy goals of the impartial access requirement to 
ensure that market participants can compete on a level playing field 
and to allow additional liquidity providers to participate on SEFs.\74\ 
Market participants who prefer post-trade name give-up may argue that a 
prohibition instead discriminates against them, but the Commission's 
preliminary assessment is that promoting a fully anonymous trading 
environment would better fulfill the goals of impartial access on SEFs.
---------------------------------------------------------------------------

    \73\ See supra notes 26-29 and accompanying text; 2015 MRAC 
Meeting Transcript at 133 et seq. The Commission notes that some 
market participants have asserted that post-trade name give-up has 
enabled anticompetitive behavior and unfair competition. See supra 
note 29 and accompanying text; MRAC Meeting Transcript at 133 at 
169, 171.
    \74\ See supra note 67 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that--with respect to operational, credit 
and settlement, and legal issues in particular--there is generally no 
imperative for post-trade name give-up if a swap is executed on a SEF 
and submitted to a DCO for clearing.\75\ The Commission, however, 
recognizes that post-trade name give-up could be necessary for certain 
cleared swaps that are components of a package transaction that 
includes an uncleared component that creates bilateral credit, 
operational, or legal exposures that the counterparties must manage on 
an ongoing basis.\76\ The Commission is therefore requesting additional 
public comment on the necessity and scope of an exception to the 
proposed rule for package transactions. With respect to SIFMA's 
assertion that certain other circumstances may still arise that would 
require counterparty disclosure,\77\ the Commission generally agrees 
with other commenters that straight-through processing should obviate 
that need.\78\ Nevertheless, the Commission is requesting additional 
public comment on whether any operational, credit and settlement, 
legal, or similar issues exist that would still require post-trade name 
give-up for an intended-to-be-cleared swap, outside of those swaps that 
are components of certain package transactions.
---------------------------------------------------------------------------

    \75\ The Commission notes that mechanisms or agreements used to 
address bilateral counterparty risk have been viewed as inconsistent 
with impartial access when applied to cleared swaps because they 
limit a participant's ability to trade on SEFs without 
justification. For example, Commission staff previously viewed a 
SEF's application of such ``enablement mechanisms'' with respect to 
cleared swaps as ``prohibited discriminatory treatment'' that is 
inconsistent with the impartial access requirements under Sec.  
37.202. Division of Clearing and Risk, Division of Market Oversight 
and Division of Swap Dealer and Intermediary Oversight Guidance on 
Application of Certain Commission Regulations to Swap Execution 
Facilities at 1-2 (Nov. 14, 2013).
    \76\ See MFA Letter at 6; SIFMA Letter at 6.
    \77\ SIFMA Letter at 6.
    \78\ See supra notes 16-18 and accompanying text. The Commission 
has previously stated that the ``acceptance or rejection for 
clearing in close to real time is crucial for both effective risk 
management and for the efficient operation of trading venues.'' 
Customer Clearing Documentation, Timing of Acceptance for Clearing, 
and Clearing Member Risk Management, 77 FR 21278, 21285 (Apr. 9, 
2012). Commission staff has also issued guidance that discusses 
appropriate practices to ensure prompt and efficient clearing. Staff 
Guidance on Swaps Straight-Through Processing (Sept. 26, 2013). In 
instances where a swap containing an error has been accepted for 
clearing, a SEF may facilitate the correction of the error without 
disclosing a counterparty's identity, such as by facilitating the 
execution and submission of an offsetting swap to clearing. See CFTC 
Letter No. 17-27, Re: No-Action Relief for Swap Execution Facilities 
and Designated Contract Markets in Connection with Swaps with 
Operational or Clerical Errors Executed on a Swap Execution Facility 
or Designated Contract Market (May 30, 2017) at 1, n.2.
---------------------------------------------------------------------------

IV. Request for Comment

    The Commission requests comment on all aspects of proposed Sec.  
37.9(d) including, but not limited to, responses to the comments 
provided in the Name Give-Up Release. In particular, the Commission 
requests comments on whether the proposed regulation would advance the 
statutory and regulatory goals and the requirements discussed in the 
previous section. In commenting on the potential effects of the 
proposed rule, the Commission requests background information, actual 
market examples, best practice principles, and expectations for 
possible impacts on competition, market structure, and liquidity. The 
Commission encourages commenters to provide supporting data, 
statistics, and any other relevant information.
    In addition, the Commission requests comment on the following 
questions:
    (1) Does post-trade name give-up undermine the Commission's stated 
goals of impartial access to (i) ensure market participants can compete 
on a level playing field, and (ii) allow additional liquidity providers 
to participate on SEFs? Please explain why or why not, and include any 
supporting data.
    (2) Should the Commission narrow the scope of the proposed 
prohibition on post-trade name give-up to apply only to swaps that are 
required to be cleared under section 2(h)(1) of the Act, or 
alternatively, only to swaps that are subject to the trade execution 
requirement under section 2(h)(8) of the Act? Why or why not?
    (3) How, if at all, would a prohibition on post-trade name give-up 
affect pre-trade price transparency on a SEF operating an anonymous 
central limit order book?
    (4) How would the proposed prohibition on post-trade name give-up 
affect existing liquidity on SEFs? How would the proposed prohibition 
affect liquidity on central limit order books? Would the proposed 
prohibition indirectly affect liquidity on name-disclosed request for 
quote systems? If so, how? In particular, please provide substantiating 
data, statistics, and any other quantifiable information related to any 
such comments.
    (5) Please explain the nature of any potential new liquidity on 
SEFs that may result from the proposed prohibition. For example, would 
liquidity increase due to a greater number of market participants 
trading and/or would liquidity increase due to additional market makers 
competing on affected SEFs?
    (6) How, if at all, would the proposed prohibition on post-trade 
name give-up affect trading protocols such as auctions, portfolio 
compression, and/or workup sessions?
    (7) Is trading on a SEF platform with post-trade name give-up for 
anonymously executed, intended-to-be-cleared swaps preferable to a 
fully-disclosed platform for a swap dealer's capital allocation 
purposes? If so, why?
    (8) Please describe how post-trade name give-up currently helps 
swap dealers make markets in swaps, if at all.
    (9) If the Commission were to prohibit post-trade name give-up as 
proposed in this notice, then how might that affect the prices that 
swap dealers quote to buy-side participants on SEFs operating name-
disclosed, request for quote platforms?
    (10) How does the price for a given swap listed on a SEF operating 
an anonymous central limit order book compare to the price for an 
equivalent swap listed on a SEF operating a name-disclosed request for 
quote system? How does the practice of post-trade name

[[Page 72268]]

give-up relate to any such difference in price?
    (11) Are there certain cleared swap classes for which post-trade 
name give-up serves a particularly important role for swap dealers for 
market-making or hedging purposes that would be adversely affected by a 
prohibition?
    (12) How many and what types of additional liquidity providers 
(e.g., funds, proprietary trading firms, high-frequency traders) might 
join affected SEFs if post-trade name give-up were prohibited? Would 
these new participants be particularly interested in trading certain 
kinds of swap transactions (e.g., spread trades)? Would these new 
participants be floor traders, swap dealers, or another type of entity?
    (13) What other effects would a prohibition on post-trade name 
give-up have on the swap market?
    (14) Should the Commission provide an exception to the prohibition 
on post-trade name give-up for swaps that are components of package 
transactions involving an uncleared swap? To what extent are such 
package transactions anonymously traded, given the involvement of an 
uncleared swap at the outset?
    (15) If the Commission provides an exception with respect to 
package transactions, should it include an exception for package 
transactions involving any non-swap instrument, including Treasury 
securities? Should such an exception apply to the swap components if 
such non-swap instrument components are also executed anonymously and 
intended to be cleared?
    (16) Excluding swaps that are components of certain package 
transactions, what, if any, operational, credit and settlement, legal, 
or similar issues exist that would still require post-trade name give-
up for a swap that is intended to be cleared?
    (17) Are there any alternatives to the proposed prohibition on name 
give-up that would better achieve the regulatory objectives stated 
above? For example, could these objectives be better accomplished 
through additional guidance or enforcement activity to address 
applications of post-trade name give-up that are inconsistent with the 
impartial access requirement?

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \79\ requires federal 
agencies to consider whether the rules they propose will have a 
significant economic impact on a substantial number of small entities 
and, if so, to provide an analysis regarding the economic impact on 
those entities. The regulation proposed herein will affect SEFs. The 
Commission has previously determined that SEFs are not ``small 
entities'' for the purpose of the RFA.\80\ Therefore, the Chairman, on 
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 
605(b), that the regulation proposed herein will not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \79\ 5 U.S.C. 601 et seq.
    \80\ See SEF Core Principles Final Rule at 33548.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \81\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. 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. The Commission has previously 
received a control number from OMB that includes the collection of 
information associated with Part 37 of the Commission's regulations. 
The title for this collection of information is ``Core Principles and 
Other Requirements for Swap Execution Facilities, OMB control number 
3038-0074.'' \82\ Collection 3038-0074 is currently in force with its 
control number having been provided by OMB. However, the rule proposed 
herein does not impose any new recordkeeping or information collection 
requirements, and therefore contains no requirements subject to the 
PRA.
---------------------------------------------------------------------------

    \81\ 44 U.S.C. 3501 et seq.
    \82\ See OMB Control No. 3038-0074, https://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0074.
---------------------------------------------------------------------------

C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\83\ 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 
Section 15(a) factors.
---------------------------------------------------------------------------

    \83\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission is proposing to amend part 37 of the Commission's 
regulations to prohibit ``post-trade name give-up'' practices for swaps 
that are anonymously executed on a SEF and are intended to be cleared. 
Proposed Sec.  37.9(d) of the Commission's regulations would prohibit a 
SEF from directly or indirectly, including through a third-party 
service provider, disclosing the identity of a counterparty to a swap 
that is executed anonymously and intended to be cleared. The proposed 
regulation would also require SEFs to establish and enforce rules that 
prohibit any person from effectuating such a disclosure.
    The baseline for this consideration of costs and benefits with 
respect to the proposal herein is the status quo, which includes the 
existing practice of post-trade name give-up for cleared swaps on some 
SEFs, and the current regulatory requirements that do not explicitly 
prohibit post-trade name give-up for cleared swaps that are executed 
anonymously. The Commission emphasizes that the proposed prohibition 
will not apply to uncleared swaps or SEF trading systems and platforms 
that are not pre-trade anonymous. Proposed Sec.  37.202(d)(3) clarifies 
that the prohibition would not apply with respect to uncleared swaps, 
or with respect to any method of execution whereby the identity of a 
counterparty is disclosed prior to execution of the swap. Some swaps 
trading on SEFs today occurs on ``disclosed'' trading systems and 
platforms that provide the identities of potential counterparties to 
one another before execution occurs. Such is the case, for example, 
with certain request for quote systems offered by SEFs.
    The Commission notes that this consideration of costs and benefits 
is based on the understanding that the swaps market functions 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries, with some Commission registrants 
being organized outside of the United States, with leading industry 
members typically conducting operations both within and outside the 
United States, and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
below discussion of costs and benefits refers to the effects of the 
proposed rules on all swaps activity subject to the proposed and 
amended regulations, whether by

[[Page 72269]]

virtue of the activity's physical location in the United States or by 
virtue of the activity's connection with or effect on U.S. commerce 
under CEA section 2(i).\84\
---------------------------------------------------------------------------

    \84\ Section 2(i)(1) applies the swaps provisions of both the 
Dodd-Frank Act and Commission regulations promulgated under those 
provisions to activities outside the United States that have a 
direct and significant connection with activities in, or effect on, 
commerce of the United States. 7 U.S.C. 2(i). Section 2(i)(2) makes 
them applicable to activities outside the United States that 
contravene Commission rules promulgated to prevent evasion of Dodd-
Frank.
---------------------------------------------------------------------------

    The Commission has endeavored to assess the expected costs and 
benefits of the proposed rulemaking in quantitative terms, where 
possible. In situations where the Commission is unable to quantify the 
costs and benefits, the Commission identifies and considers the costs 
and benefits of the proposed rule in qualitative terms. The lack of 
data and information to estimate those costs and benefits is 
attributable in part to the nature of the proposed rule and uncertainty 
about the potential responses of market participants to the 
implementation of the proposed rule. The Commission recognizes that 
potential indirect costs and benefits of the proposed prohibition on 
post-trade name give-up, i.e., those relating to effects on trading 
behavior, liquidity, and competition, may be impossible to accurately 
predict or quantify prior to implementation of the proposed rule.
1. Costs
    The Commission's preliminary assessment is that the direct costs 
for SEFs of implementing and complying with proposed Sec.  37.9(d) 
would not be material. Proposed Sec.  37.9(d)(1) would prohibit SEFs 
from directly or indirectly, including through a third-party service 
provider, disclosing the identity of a counterparty to a swap that is 
executed anonymously and intended to be cleared. Only SEFs that 
currently practice post-trade name give-up for cleared swaps would be 
required to take action to comply with proposed Sec.  37.9(d)(1), and 
the Commission's preliminary understanding is that the costs of 
adjusting affected SEF protocols in order to comply would be 
negligible.\85\ However, the Commission requests that SEFs that 
presently employ post-trade name give-up for cleared swaps comment on 
this proposal and provide estimates of any direct costs they would 
incur in complying with proposed Sec.  37.9(d)(1). Proposed Sec.  
37.9(d)(2) would require SEFs to establish and enforce rules to 
prohibit any person from directly or indirectly, including through a 
third-party service provider, disclosing the identity of a counterparty 
to a swap that is executed anonymously and intended to be cleared. 
Complying with Sec.  37.9(d)(2) would require a SEF to file such rules 
with the Commission in accordance with part 40 of the Commission's 
regulations. The Commission estimates that filing such rules may take 
up to 50 hours which is unlikely to be a major cost burden on SEFs. The 
Commission anticipates that the direct cost of complying with proposed 
Sec.  37.9(d) for market participants and third-party service providers 
should be at or near zero.
---------------------------------------------------------------------------

    \85\ See, e.g., Peter Madigan, ``CFTC to Test Role of Anonymity 
in SEF Order Book Flop,'' Risk.net (Nov. 21, 2014) (according to one 
SEF official, ``the revealing of the name is a legacy behavior and 
it's not necessary that we reveal it. Should we be told not to by 
the regulators, we will flick a switch and the world will go on. It 
will not be a profound change and it's not going to require re-
engineering the system''), available at https://www.risk.net/risk-magazine/feature/2382497/cftc-to-test-role-of-anonymity-in-sef-order-book-flop. See also supra note 5 (SEFs that use IHS Markit 
services to route trades can select an already available ``no-name 
give up workflow option'').
---------------------------------------------------------------------------

    With respect to potential indirect costs of the proposed rule, 
SIFMA has suggested that a prohibition on post-trade name give-up may 
impair the ability of incumbent liquidity providers to manage risk and 
provide liquidity which in turn would be ``likely to worsen pricing 
that dealers can offer to clients.'' \86\ Although the Commission is 
aware of the concerns raised by SIFMA, it is not, at this time, 
convinced that prohibiting post-trade name give up would increase the 
costs of trading swaps for end users and other swap dealer clients. The 
Commission preliminarily believes that negative pricing effects on SEFs 
would be unlikely to result, as competition from new market 
participants and incumbent liquidity providers that continue to provide 
liquidity should offset this possibility. However, the Commission 
requests additional comments relating to the risks and costs of such an 
outcome. The Commission also requests public comment regarding any 
additional indirect costs of the proposed rule.
---------------------------------------------------------------------------

    \86\ SIFMA Letter at 4.
---------------------------------------------------------------------------

2. Benefits
    The Commission believes that implementing the proposed rule may 
improve liquidity on SEFs, particularly on affected SEF order books. 
The practice of post-trade name give-up has reportedly deterred a 
significant segment of market participants from making markets on or 
otherwise participating on affected SEFs. The Commission expects that 
some of these market participants would choose to participate on these 
SEFs if the Commission were to prohibit the practice, leading to 
increased liquidity. Increased liquidity could benefit market 
participants by making it easier to execute transactions, especially 
larger transactions, quickly and without undue price impact. As 
discussed below, Commission staff has reviewed several empirical event 
studies, which focus specifically on the effect of post-trade anonymity 
on market liquidity. Most of these studies, such as those discussed 
below, document an improvement in liquidity. The Commission notes that 
the markets that are the subjects of these studies are not the same as 
U.S. swaps markets and are mostly not dealer-oriented markets. Some of 
the markets studied are also deeper and more liquid than the U.S. swaps 
market. The Commission requests public comment on the validity or 
applicability of the papers discussed below, as well as any other 
studies that may be instructive.
    One of the early empirical studies focused on the implementation of 
post-trade anonymity on the London Stock Exchange after the 
introduction of a central counterparty to electronic equity trading in 
February 2001.\87\ Prior to this change, the market was pre-trade 
anonymous, but the two parties involved in a trade were informed about 
each other's identities once the transaction was completed. The authors 
found that post-trade anonymity resulted in higher market depth and 
lower spreads and execution costs. Liquidity improvements were more 
pronounced for small stocks and stocks with higher trading 
concentration, which are expected to exhibit large exogenous 
information asymmetries. Such stocks may be more analogous to swap 
markets than larger stocks with less trading concentration. Post-trade 
anonymity seemed to benefit mostly those who traded repeatedly and 
traded the largest volumes. The authors argue that ``bilateral 
disclosure of trader identities harms traders who are known to account 
for a sizable portion of total volume and who trade repeatedly in the 
same direction because it facilitates anticipation of their orders.'' 
\88\
---------------------------------------------------------------------------

    \87\ Freiderich, S. and R. Payne (2014), ``Trading anonymity and 
order anticipation,'' Journal of Financial Markets, 21, 1-24.
    \88\ Id.
---------------------------------------------------------------------------

    Another study explored a post-trade anonymity reform introduced by 
the Oslo Stock Exchange between 2008 and 2010. During this period, the 
25 most traded stocks on the Oslo Stock Exchange were periodically 
selected to trade fully anonymously, while the broker identities of 
traders involved in

[[Page 72270]]

transactions on all other stocks were released to all market 
participants after each transaction. This study found that post-trade 
anonymity led to lower bid-ask spreads and higher volume. These results 
seemed to be driven by increased trading from institutional investors, 
who split their orders into multiple smaller transactions potentially 
to reduce information leakage and price impact. The author found that 
``anonymity increases liquidity in part by reducing the liquidity 
providers' adverse selection costs. However, the increase in stock 
liquidity is also partly driven by a reduction in liquidity provider 
revenues.'' \89\
---------------------------------------------------------------------------

    \89\ Meling, T.G., ``Anonymous Trading in Equities'' (2018 
working paper), available at https://ssrn.com/abstract=2656161.
---------------------------------------------------------------------------

    Another study examined the 2008 transition of equity trading in 
Helsinki, Reykjavik, and the five most traded stocks in Stockholm where 
broker codes were removed from all real-time market data feeds. It also 
examined the 2009 reversal of this change. The findings suggested that 
liquidity, measured by quoted spreads, price impact, and limit order 
book depth, ``improves when anonymous post-trade reporting is 
introduced, and liquidity worsens when anonymous post-trade reporting 
is reversed.'' \90\ However, results were weaker during the reversal, 
which the authors attribute to other contemporaneous factors.
---------------------------------------------------------------------------

    \90\ Dennis, P.J., and Sandas, P., ``Does Trading Anonymously 
Enhance Liquidity?'' (2019 working paper), available at https://ssrn.com/abstract=2516933. The original change in post-trade 
transparency was reversed for all stocks, except the five most 
traded stocks in Helsinki.
---------------------------------------------------------------------------

    A study exploring the effects of post-trade anonymity on the German 
electronic trading platform Xetra showed that concealing broker 
identities from their counterparties resulted in lower execution 
costs.\91\
---------------------------------------------------------------------------

    \91\ Hachmeister, A. and Schiereck, D., ``Dancing in the dark: 
Post-trade anonymity, liquidity and informed trading'' (2010), 
Review of Quantitative Finance and Accounting, 34, 145-177.
---------------------------------------------------------------------------

    An empirical study focusing on the information content of broker 
identities provided a potential explanation for the improvement in 
liquidity documented in many of the aforementioned event studies. It 
showed that the disclosure of broker identities allowed information 
leakage, even though participants sometimes used multiple brokers and 
mixed signal strategies to potentially hide their trading 
intentions.\92\ The authors of this study suggested that the documented 
improvement in liquidity, associated with greater anonymity, may have 
come at the expense of information efficiency, as prices potentially 
adjusted to order flow information more slowly under increased 
anonymity. Because this study relied on Finnish data during the period 
of 2000 to 2001, the authors also conjectured that algorithmic trading 
could potentially allow informed investors to hide their orders better, 
but it could also enable proprietary traders to uncover informed order 
flow.
---------------------------------------------------------------------------

    \92\ Linnainmaa, J., Saar, G., ``Lack of anonymity and the 
inference from order flow'' (2012), Review of Financial Studies, 25, 
1414-1456.
---------------------------------------------------------------------------

    Some studies did not find that implementing post-trade anonymity 
improved liquidity. One such study, investigating the impact of post-
trade anonymity from the perspective of liquidity providers in a dealer 
market, showed that the 2003 introduction of post-trade anonymity on 
the Nasdaq platform did not improve best quotes. The author concluded 
that ``introducing anonymity on [the] Nasdaq platform did not lead to 
an increase in competition between market makers.'' \93\
---------------------------------------------------------------------------

    \93\ Benhami, K., ``Liquidity providers' valuation of anonymity: 
The Nasdaq Market Makers evidence'' (2006 working paper), available 
at https://www.cass.city.ac.uk/__data/assets/pdf_file/0005/78737/2Benhami.pdf.
---------------------------------------------------------------------------

    Moreover, a study on the South Korea Exchange argued that revealing 
the ex-post order flow of major brokers to the entire market led to an 
improvement in liquidity. It investigated the effects of public 
disclosure of the identities of the top five brokers and their trades. 
Notably, this disclosure occurred just twice per day. Trading volume 
was higher in the setting without post-trade anonymity. Moreover, while 
realized spreads were lower when broker identities were disclosed, 
price impact costs were higher. The authors argued that ``these 
findings strongly indicate that providing broker IDs induces more 
competition among liquidity providers that lowers the realized spread 
and, as indicated by higher market impact costs, provides more rapid 
dissemination of information, which in turn provides market 
efficiency.'' \94\
---------------------------------------------------------------------------

    \94\ Pham, T.P., et al., ``Intra-day Revelation of Counterparty 
Identity in the World's Best-Lit Market,'' (2016 working paper), 
available at https://ssrn.com/abstract=2644149.
---------------------------------------------------------------------------

    Commission staff also reviewed several theoretical studies, which 
presented models with various levels of post-trade transparency in 
different settings and could offer some insight on post-trade 
anonymity, although they did not directly compare it to the case of 
bilateral disclosure of counterparty identities right after each trade. 
The predictions of these models were mixed. One theoretical study, 
focused on the post-trade public disclosure of insiders in equity 
markets, argues that public disclosure of insider trades accelerates 
the price discovery process and reduces trading costs.\95\ These 
predictions suggested that post-trade anonymity could strengthen 
asymmetric information in the market, subsequently reducing liquidity 
by exacerbating the market maker's adverse selection problem. However, 
another study argued that the effect of anonymity on liquidity could 
also be positive, if the information acquisition is endogenous, because 
then anonymity could potentially bolster market participants' 
incentives to acquire information.\96\
---------------------------------------------------------------------------

    \95\ Huddhart, S., J., Hughes and Levine, ``Public Disclosure 
and Dissimulation of Insider Trades'' (2001), Econometrica, 69, 665-
681.
    \96\ Rindi, B., ``Informed Traders as Liquidity Providers: 
Anonymity Liquidity and Price Formation,'' (2008), Review of 
Finance, 12, 497-532.
---------------------------------------------------------------------------

    Another study on the disclosure of insider trades developed a model 
where the insider is risk averse and showed that the insider is 
encouraged to trade less aggressively on his private information, 
weakening both informational efficiency and market liquidity.\97\ This 
finding suggests that post-trade anonymity could encourage informed 
traders to trade more aggressively on their private information, 
facilitating price discovery and improving market liquidity. Another 
study suggested that the presence of order anticipation strategies, 
often referred to as ``back running,'' alters the trading strategies of 
institutional and retail investors, in an effort to avoid being 
detected.\98\ The authors predicted that fundamental investors 
introduce random noise in their strategies to avoid being detected. 
However, surprisingly, when the accuracy of the back runners' signals 
is high their profits may be reduced, especially if there are many of 
them.
---------------------------------------------------------------------------

    \97\ Buffa, A.M., ``Insider Trade Disclosure, Market Efficiency, 
and Liquidity'' (2014 working paper), available at https://ssrn.com/abstract=1102126.
    \98\ Yang, L. and Zhu, H., ``Back-Running: Seeking and Hiding 
Fundamental Information in Order Flows'' (2019), The Review of 
Financial studies, forthcoming, available at https://ssrn.com/abstract=2583915.
---------------------------------------------------------------------------

    The practice of post-trade name give-up was explicitly addressed in 
a theoretical study that was cited in a comment letter to the Name 
Give-Up Release from Americans for Financial Reform (``AFR'').\99\ This 
study modeled the investor choice between over-the-counter (``OTC'') 
markets and electronic order books, and assessed the value of OTC 
markets for market quality and total welfare.\100\ The authors showed

[[Page 72271]]

that, although the presence of OTC markets increases total volume and 
decreases the average spread, it can still harm total welfare \101\ if 
the adverse selection costs are low, i.e., in markets with limited 
informed speculators and high trading activity in OTC markets. This is 
because ``uninformed'' investors (i.e., profit-indifferent, hedging 
traders) are more likely to be offered lower spreads in OTC markets, 
while spreads widen for ``informed'' investors (speculators). The 
practice of post-trade name give-up allows dealers, who offer liquidity 
both through requests for quotes and in the electronic order book, to 
detect the trading motives of their counterparties and lower their 
adverse selection costs. ``Given low OTC market share in swaps, 
eliminating [post-trade name give-up] is predicted to increase welfare, 
decrease total volume and widen average spread. Specifically, spreads 
on swaps exchanges are predicted to decline while the OTC spreads are 
expected to increase.'' \102\
---------------------------------------------------------------------------

    \99\ AFR Letter at 4-5.
    \100\ Lee, T. and Wang, C., ``Why Trade Over-the-Counter? When 
Investors Want Price Discrimination'' (2019 working paper), 
available at https://ssrn.com/abstract=3087647.
    \101\ Welfare is the expected sum of all market participants' 
payoffs.
    \102\ Id. at 26-27.
---------------------------------------------------------------------------

    The Commission finds these studies potentially instructive, along 
with assertions provided by the majority of commenters, to indicate 
that overall liquidity may be improved by proposed Sec.  37.9(d). 
Moreover the Commission is concerned with assertions that the status 
quo facilitates information asymmetries and hinders access and 
participation on affected SEF trading systems for many market 
participants. The Commission believes that the proposed rule may 
benefit market participants by reducing these information asymmetries 
and could increase participation on these SEF platforms. The Commission 
requests additional public comment regarding potential benefits of the 
proposed rule.
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
    The proposed rule is intended to protect market participants and 
the public by advancing the statutory goals of promoting swaps trading 
on SEFs and fostering fair competition among market participants. 
Further, the Commission believes the practice of post-trade name give-
up may be inconsistent with the policy goals of the SEF impartial 
access requirements which are intended to allow participants to compete 
on a level playing field and allow additional liquidity providers to 
participate on SEFs.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The proposed rule is intended to enhance competitiveness in the 
swap markets by removing an effective barrier to participation on SEFs 
for many market participants who are concerned with the prospect of 
information leakage. The Commission expects participation on SEFs to 
increase as a result, leading to greater competition.
c. Price Discovery
    The Commission believes that the proposed rule may encourage a 
greater number of market participants to anonymously post bids and 
offers on affected SEFs, which may promote greater interaction and 
competition between market participants, thereby allowing these 
platforms to act as more efficient mechanisms for price discovery.
d. Sound Risk Management Practices
    Similarly, increased participation and competition on SEFs and 
decreased information asymmetry among market participants is likely to 
enhance SEF trading as a mechanism for risk management.
e. Other Public Interest Considerations
    Post-trade name give-up is inconsistent with Commission regulations 
intended to protect the privacy of a swap counterparty's trading 
information. Prohibiting post-trade name give-up would help to 
effectuate the statutory privacy protections under CEA section 21(c)(6) 
that apply to this information.
4. Request for Comment
    The Commission invites public comment on all aspects of the cost-
benefit considerations herein, 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 rule are reasonably quantifiable, the Commission requests that 
they provide data, statistics and any other information that will 
assist the Commission in quantification. Finally, the Commission 
requests comment on the academic literature related to post-trade 
anonymity, including comments on the validity or applicability of the 
papers the Commission has discussed herein and any other studies the 
Commission should review.

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 anticompetitive means of achieving the 
purposes of this Act, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of this Act.\103\
---------------------------------------------------------------------------

    \103\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the proposed rule implicates any other 
specific public interest to be protected by the antitrust laws.
    The Commission has considered the proposed rule to determine 
whether it is anticompetitive and has preliminarily identified no 
anticompetitive effects. In particular, the Commission preliminarily 
believes that the proposed amendments to part 37 will promote 
competition on SEFs. The Commission requests comment on whether the 
proposed rule is anticompetitive and, if it is, what the 
anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
proposed rule is not anticompetitive and has no anticompetitive 
effects, the Commission has not identified any less anticompetitive 
means of achieving the purposes of the Act. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the Act that would otherwise be served by 
adopting the proposed rule.

List of Subjects in 17 CFR Part 37

    Swaps, Swap execution facilities.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 37 to read as follows:

PART 37--SWAP EXECUTION FACILITIES

0
1. 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
2. In Sec.  37.9, add paragraph (d) to read as follows:

[[Page 72272]]

Sec.  37.9   Methods of execution for required and permitted 
transactions.

* * * * *
    (d) Counterparty anonymity. (1) Except as otherwise required under 
the Act or the Commission's regulations, a swap execution facility 
shall not directly or indirectly, including through a third-party 
service provider, disclose the identity of a counterparty to a swap 
that is executed anonymously and intended to be cleared.
    (2) A swap execution facility shall establish and enforce rules 
that prohibit any person from directly or indirectly, including through 
a third-party service provider, disclosing the identity of a 
counterparty to a swap that is executed anonymously and intended to be 
cleared.
    (3) The provisions in paragraphs (d)(1) and (d)(2) of this section 
shall not apply with respect to uncleared swaps, or with respect to any 
method of execution whereby the identity of a counterparty is disclosed 
prior to execution of the swap.

    Issued in Washington, DC, on December 20, 2019, 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 Post-Trade Name Give-Up on Swap Execution--Commission 
Voting Summary and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Joint Statement of Chairman Heath Tarbert, Commissioner 
Rostin Behnam, and Commissioner Dan M. Berkovitz

    It is a hallmark of American exchange-style trading systems that 
the buyer and seller of a given financial instrument have no reason 
to know--and do not know--the identity of one another.\1\ Trading 
anonymity can be viewed as a great equalizer, leveling the playing 
field for counterparties of all sizes and types by allowing traders 
to enter and exit the market without exposing their trading 
positions and strategies.\2\ As a result, markets with pre- and 
post-trade anonymity are generally not only fairer, but also feature 
greater liquidity and greater competition between market 
participants.\3\
---------------------------------------------------------------------------

    \1\ See, e.g., Peter A. McKay, CME and CBOT to Close Loophole, 
Wall St. J. (Apr. 15, 2006) (``When stocks are traded on public 
exchanges, investors generally don't know who they are buying from 
or selling to. On futures exchanges, most investors expect the same 
thing when trading electronically.'').
    \2\ See, e.g., Peter Madigan, CFTC to Test Role of Anonymity in 
SEF Order Book Flop, Risk (Nov. 21, 2014) (noting arguments that 
anonymity creates a more egalitarian market); Managed Funds 
Association (``MFA''), Position Paper: Why Eliminating Post-Trade 
Name Disclosure Will Improve the Swaps Market 8 (Mar. 31, 2015) 
(arguing that ``markets should remain anonymous to create a level 
playing field for all participants''); CFTC Market Risk Advisory 
Committee, Panel Discussion: Market's Response to the Introduction 
of SEFs 139 (Apr. 2, 2015) (``MRAC Meeting Transcript'') (noting 
buy-side reticence to use SEF order books with name give-up because 
of potential uncontrolled information leakage); see also Testimony 
of Stephen Berger, Citadel LLC, Before the Subcomm. on Commodity 
Exchanges, Energy, & Credit of the H. Comm. on Ag., Hearing to 
Review the Impact of G-20 Clearing and Trade Execution Requirements 
(June 14, 2016) (testifying on behalf of MFA) (asserting that lack 
of post-trade anonymity ``creates an uneven playing field and 
impairs competition'').
    \3\ See, e.g., MRAC Meeting Transcript, supra note 2, at 154 
(explaining that anonymous order books have facilitated liquidity 
and diverse participation in markets for other instruments, such as 
equities and futures); S. Freiderich & R. Payne, Trading Anonymity 
and Order Anticipation, 21 Journal of Financial Markets 1-24 (2014) 
(finding that post-trade anonymity improved market liquidity, 
particularly for small stocks and stocks with concentrated trading, 
which may be more analogous to swaps); T.G. Meling, Anonymous 
Trading in Equities (2018 working paper) (also finding that post-
trade anonymity improved market liquidity); P. J Dennis & P. Sandas, 
Does Trading Anonymously Enhance Liquidity? (2019 working paper) 
(same); A. Hachmeister & D. Schiereck, Dancing in the Dark: Post-
Trade Anonymity, Liquidity, and Informed Trading, 34 Review of 
Quantitative Finance and Accounting 145-177 (2010) (same); J. 
Linnainmaa & G. Saar, Lack of Anonymity and the Inference from Order 
Flow, 25 Review of Financial Studies 1,414-1,456 (2012) (same).
---------------------------------------------------------------------------

    Before the adoption of central clearing for standardized swaps, 
post-trade disclosure of counterparty identities was the norm in 
swaps markets because of the need to manage counterparty credit 
risk. For example, Party A would ask its broker to enter into a 
five-year interest rate swap to exchange a fixed payment for a 
floating rate. The broker would find (often through another broker) 
Party B, who would be willing to take the other side of the swap. 
Post-trade, the identities of Party A and B would be revealed to one 
another. A five-year bilateral relationship would thus ensue, 
wherein both parties would need to monitor their counterparty's 
respective ability to make good on their obligations. But times have 
now changed.
    The Dodd-Frank Act has encouraged--and in some instances 
required--centralized clearing for classes of swaps that are 
sufficiently standardized and liquid to be cleared through a central 
counterparty, i.e., a derivatives clearinghouse.\4\ As is the case 
for exchange-listed products, a cleared swap no longer exposes the 
respective parties to the risk of non-performance. Rather than Party 
A and Party B being obligated to one another under the terms of the 
swap, the clearinghouse steps in between the parties to the trade 
and takes on the counterparty credit risk of both sides.\5\ 
Consequently, anonymous trading is now possible for large swaths of 
the U.S. swaps markets.
---------------------------------------------------------------------------

    \4\ Commodity Exchange Act (``CEA'') section 2(h)(8), 7 U.S.C. 
2(h)(8); see also Committee on Capital Markets Regulation, The 
Global Financial Crisis: A Plan for Regulatory Reform iii (May 
2009), https://www.capmktsreg.org/wp-content/uploads/2018/10/The-Global-FInancial-Crisis-A-Plan-for-Regulatory-Reform.pdf (``If 
clearinghouses were to clear CDS contracts and other standardized 
derivatives, like foreign exchange and interest rate swaps, systemic 
risk could be substantially reduced by more netting, centralized 
information on the exposures of counterparties, and the 
collectivization of losses.'').
    \5\ See Robert S. Steigerwald, Federal Reserve Bank of Chicago, 
Central Counterparty Clearing, in Understanding Derivatives: Markets 
and Infrastructure (2013) (explaining that through novation, the 
original contract is replaced by two contracts, with the central 
counterparty becoming buyer to the seller and seller to the buyer).
---------------------------------------------------------------------------

    Yet a number of swap execution facilities (``SEFs'') still 
retain a vestige of the old bilateral over-the-counter markets, even 
for transactions that are centrally cleared: The practice of ``post-
trade name give-up.'' That is, the SEF will provide the identity of 
each swap counterparty to the other after a trade has been executed 
anonymously. Given the advent of clearing, many have reasonably 
questioned the policy rationale for post-trade name give-up for 
cleared swaps, and still others have gone further, criticizing the 
practice as anticompetitive and an obstacle to broad and diverse 
participation on SEFs.
    We support today's proposed rule (``Proposal'') to prohibit 
post-trade name give-up for swaps that are executed anonymously via 
a SEF and intended to be cleared.\6\ We believe that the Proposal 
serves two key objectives of the Commission's governing statute: (1) 
Promoting swaps trading on SEFs \7\ and (2) promoting fair 
competition among market participants, including through impartial 
access to a SEF's trading platform.\8\ The Proposal could also help 
attract a diverse set of additional market participants who have 
been deterred from trading on these platforms by the practice of 
post-trade name give-up, but remain interested in bringing liquidity 
and competition to SEFs if there is a level playing field.
---------------------------------------------------------------------------

    \6\ Of note, the proposed prohibition would not apply to trading 
protocols that involve pre-trade counterparty disclosure, such as a 
typical request-for-quote process.
    \7\ CEA section 5h(e), 7 U.S.C. 7b-3(e).
    \8\ CEA section 3(b), 7 U.S.C. 5(b) (listing fair competition 
among market participants as a goal of the CEA); CEA section 
5h(f)(2)(B)(i) (requiring a SEF to establish and enforce rules to 
provide participants impartial access to the market).
---------------------------------------------------------------------------

    The Proposal is in large part based upon responses to the 
Commission's November 2018 request for comment on post-trade name 
give-up.\9\ A large majority of commenters saw no sufficient 
justification for the practice with respect to cleared swaps, given 
the absence of counterparty credit risk attending such swaps.\10\ 
These

[[Page 72273]]

commenters acknowledged arguments that dealers use the practice to 
allocate capital to preferred customers as part of an overall cross-
marketing strategy. However, they either did not find this rationale 
legitimate or believed that it does not justify potential harms 
resulting from name give-up.\11\
---------------------------------------------------------------------------

    \9\ CFTC Request for Comment on Post-Trade Name Give-Up on Swap 
Execution Facilities, 83 FR 61,571, 61,572 (Nov. 30, 2018).
    \10\ See, e.g., Investment Company Institute (``ICI'') Letter at 
3; FHLBanks Letter at 2; Futures Industry Association Principal 
Traders Group (``FIA PTG'') Letter at 1; MFA Letter at 2; SIFMA AMG 
Letter at 14; Vanguard Letter at 2; Better Markets Letter at 2, 66. 
This seems particularly to be the case in light of pre-trade credit 
check and straight-through processing requirements that minimize the 
time between trade execution and acceptance for clearing.
    \11\ E.g., ICI Letter at 3; MFA Letter at 3; SIFMA AMG Letter at 
14.
---------------------------------------------------------------------------

    Commenters identified several such harms. A principal concern 
was the risk of information leakage allowing counterparties to glean 
a SEF participant's trading positions and strategies.\12\ Commenters 
also expressed concern that disclosure of counterparty identities 
could run counter to the ``impartial access'' requirement for SEFs. 
Under this view, SEF participants can (and purportedly do) use name 
give-up to discriminate against counterparties whose trading 
practices they believe are harmful.\13\ A large majority of 
commenters stated that the concerns discussed above have inhibited 
buy-side participation on SEFs employing name give-up.\14\ In their 
view, prohibiting the practice would enhance liquidity on SEFs. 
Empirical studies on the effects of post-trade anonymity--in U.S. 
securities markets and in a wide range of foreign financial 
markets--bolster this view.\15\
---------------------------------------------------------------------------

    \12\ E.g., FHLBanks Letter at 3; ICI Letter at 3-4; MFA Letter 
at 4; Vanguard Letter at 10.
    \13\ E.g., FIA PTG Letter at 1; ICI Letter at 3; MFA Letter at 
4.
    \14\ E.g., ICI Letter at 3-4; MFA Letter at 4; SIFMA AMG Letter 
at 15; see also MRAC Meeting Transcript, supra note 2 (multiple 
panelists and committee members arguing that name give-up impairs 
buy-side SEF participation).
    \15\ See supra note 3. We note that at least one study of a U.S. 
securities trading platform found that post-trade anonymity had no 
impact on the quality of price quotes on the platform. K. Benhami, 
Liquidity Providers' Valuation of Anonymity: The Nasdaq Market 
Makers Evidence (2006 working paper). Another study on the South 
Korea Exchange found that post-trade disclosure of the order flow of 
major brokers to the entire market improved liquidity. T.P. Pham et 
al., Intra-day Revelation of Counterparty Identity in the World's 
Best-Lit Market (2016 working paper). On balance, however, the 
liquidity and other benefits of anonymous trading in financial 
markets appear well established.
---------------------------------------------------------------------------

    We note that one response to the request for comment argued that 
post-trade anonymity could prompt dealers to withdraw from SEFs. The 
comment expressed concerns that the prohibition could on net reduce 
liquidity on SEFs.\16\ Yet we have seen predictions of a drought in 
liquidity time and time again with respect to swaps regulatory 
reform. For example, it was used to oppose the clearing requirement 
of the Dodd-Frank Act and the Commission's 2013 SEF trading 
rules.\17\ Such predictions have not proven accurate thus far.\18\
---------------------------------------------------------------------------

    \16\ See Securities Industry & Financial Markets Ass'n 
(``SIFMA'') Letter at 1, 3-4. We also note the argument that post-
trade anonymity allows participants to ``game'' the market. Under 
this scenario, a buy-side customer may undercut prices from dealers 
by posting aggressive orders to a dealer-to-dealer SEF's order book, 
then soliciting dealers through a request for quote on a dealer-to-
client SEF in the hope that the dealers will provide more favorable 
quotes based on the order book pricing. See, e.g., Request for 
Comment, 83 FR at 61,572; Tom Osborn, How to Game a SEF: Banks Fear 
Arrival of Arbitrageurs, Risk (Mar. 19, 2014); Madigan, supra note 
2. We urge commenters to submit any evidence or indicia that such 
gaming is in fact occurring in other fully anonymous markets or 
would occur on SEFs if the proposed prohibition were implemented. We 
preliminarily believe that such conduct could constitute a 
disruptive trading practice or market manipulation prohibited by the 
CEA and potentially also subject to SEF disciplinary action. Such 
conduct may be best addressed by regulatory or self-regulatory 
authorities as appropriate, rather than via SEF participant ``self-
help'' effectuated via name give-up.
    \17\ See, e.g., International Swaps & Derivatives Ass'n 
(``ISDA''), Swap Execution Facilities: Can They Improve the 
Structure of OTC Derivatives Markets? 14-15 (Mar. 2011) (arguing 
that proposed SEF rules would reduce liquidity); SIFMA, SIFMA 
Strongly Disagrees with CFTC's Final SEF Rules (May 29, 2013) 
(same); Terry Flanagan, Wholesale Brokers Criticize CFTC, Markets 
Media (Oct. 3, 2011) (same).
    \18\ See, e.g., Lynn Riggs et al., CFTC, Swap Trading after 
Dodd-Frank: Evidence from Index CDS, at 6, 52 (Aug. 17, 2019) 
(finding that SEF-traded index credit default swap markets are 
working relatively well following the Dodd-Frank reforms, though 
there is always room for improvement); Evangelos Benos, Richard 
Payne, & Michalis Vasios, Centralized Trading, Transparency, and 
Interest Rate Swap Market Liquidity: Evidence from the 
Implementation of the Dodd-Frank Act, Bank of England Staff Working 
Paper No. 580, at 31 (May 2018) (finding liquidity improvement for 
swaps subject to the SEF trading mandate); ISDA Comment Letter on 
2018 SEF Proposed Rule, at 2 (``Certain aspects of the current swaps 
trading framework work well, and there have been some enhancements 
in market functioning, including improved liquidity and pre- and 
post-trade price transparency.''); ISDA, SwapsInfo (Sept. 30, 2019) 
(finding that SEF-traded credit derivatives represented 78.4% of 
total traded notional and 79.7% of trade count, and SEF-traded 
interest rate derivatives represented 55.4% of total traded notional 
and 60.9% of trade count).
---------------------------------------------------------------------------

    Thus, to be persuaded that the Proposal would have net 
liquidity-reducing effects, we will need convincing evidence. While 
we remain open to all commenters' viewpoints, we currently believe 
that SEF trading that starts anonymous should remain anonymous. This 
belief is consistent with the Commission's past views regarding a 
swap that is executed anonymously on a SEF.\19\ Demonstrating 
otherwise will require more than hypothetical scenarios or anecdotal 
statements.
---------------------------------------------------------------------------

    \19\ Swap Data Repositories--Access to SDR Data by Market 
Participants, 79 FR 16,673 (Mar. 26, 2014).
---------------------------------------------------------------------------

    We look forward to reviewing comments on the Proposal and 
working with all external stakeholders to address this issue in a 
way that enhances SEF liquidity, ensures impartial access, and 
promotes increased and fair competition.\20\
---------------------------------------------------------------------------

    \20\ Our thanks to the staff of the Commission's Division of 
Market Oversight (``DMO''), Office of the General Counsel, and 
Office of the Chief Economist who drafted and reviewed this 
proposal, particularly Aleko Stamoulis and Vince McGonagle of DMO.
---------------------------------------------------------------------------

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I will vote in favor of today's proposal to prohibit post-trade 
name give-up practices for swaps that are anonymously executed on a 
swap execution facility (``SEF'') and cleared (``Proposal'') in 
order for the Commission to receive further comment on the 
Proposal's potential market structure impact.
    In November 2018, the Commission issued a request for public 
comment regarding the practice of post-trade name give-up.\1\ The 
overwhelming majority of comment letters to that release opposed 
post-trade name give-up and requested that the Commission explicitly 
prohibit the practice. The Proposal before us today was heavily 
informed by those commenters' perspectives.
---------------------------------------------------------------------------

    \1\ Post-Trade Name Give-up on Swap Execution Facilities, 83 FR 
61571 (Nov. 30, 2018).
---------------------------------------------------------------------------

    The Proposal rightly notes that for anonymously executed and 
cleared trades, the need for market participants to know the 
identity of their counterparties for credit risk, legal, or 
operational purposes was obviated by the central clearing of swaps. 
However, I have concerns about the government banning an established 
trading practice that supports liquidity in the dealer-to-dealer 
swaps market. Post-trade name give-up serves an important market 
function in enhancing swap dealers' own risk management needs 
resulting from their client exposures. The Commission should 
understand how banning post-trade name give-up could impact dealers' 
ability to hedge efficiently.
    The Proposal assumes, without the benefit of a fulsome analysis 
of CFTC swap data, that banning post-trade name give-up would 
promote greater participation, liquidity, and fair competition on 
SEFs. Hoping to confirm if these assumptions are correct, the 
Proposal asks a series of basic questions about the differences 
between SEFs that are predominantly dealer-to-client platforms 
versus inter-dealer SEFs, including differences regarding liquidity 
providers, types of products actively traded, and pricing. Mandating 
changes to market structure in the hopes of increasing competition 
and liquidity, but without a full understanding of how these changes 
may implicate fundamental market dynamics, is a path that gives me 
great pause.
    I encourage all interested parties to provide written comments 
and data wherever possible in order to further the Commission's 
understanding of how banning this trading practice may positively or 
negatively impact the liquidity on these two historically different 
types of trading platforms and on the dealer-driven liquidity 
provision of swaps trading generally. I also encourage commenters to 
consider if there are alternatives to a government-imposed ban that 
could achieve the same regulatory objectives.
    I would like to thank staff of the Division of Market Oversight 
for including several additional questions at my request designed to 
solicit targeted feedback on the potential effects of this Proposal.

[FR Doc. 2019-27895 Filed 12-30-19; 8:45 am]
 BILLING CODE 6351-01-P

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