Swap Execution Facility Requirements and Real-Time Reporting Requirements, 9407-9430 [2020-02721]
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Federal Register / Vol. 85, No. 33 / Wednesday, February 19, 2020 / Proposed Rules
Dated: February 10, 2020.
Bruce Summers,
Administrator, Agricultural Marketing
Service.
[FR Doc. 2020–02952 Filed 2–18–20; 8:45 am]
BILLING CODE 3410–02–P
DEPARTMENT OF ENERGY
10 CFR Part 430
[EERE–2017–BT–TP–0004]
RIN 1904–AD84
Energy Conservation Program: Test
Procedures for Consumer
Refrigerators, Refrigerator-Freezers,
and Freezers
Office of Energy Efficiency and
Renewable Energy, Department of
Energy.
ACTION: Extension of public comment
period.
AGENCY:
On December 23, 2019, the
U.S. Department of Energy (‘‘DOE’’)
published a test procedure notice of
proposed rulemaking (‘‘NOPR’’) for
consumer refrigeration products. The
NOPR stated that written public
comments would be accepted until
February 21, 2020. On January 27, 2020,
DOE received a joint request from the
Northwest Energy Efficiency Alliance
(NEEA), the Natural Resources Defense
Council (NRDC), and Pacific Gas and
Electric Company (PG&E) to extend the
comment period for the NOPR by 60
days so that the data their teams are
collecting and analyzing could be
submitted to the docket and considered
by the DOE. On February 5, 2020, DOE
received a request from the Association
of Home Appliance Manufacturers
(AHAM) to extend the comment period
for the Test Procedure NOPR for
Consumer Refrigeration Products by 30
days. DOE has reviewed this request
and will be granting a 45 day extension
of the public comment period until
April 6, 2020.
DATES: The comment period for the
NOPR published on December 23, 2019
(84 FR 70842), is extended. DOE will
accept comments, data, and information
regarding this request for information
received no later than April 6, 2020.
ADDRESSES: Interested persons are
encouraged to submit comments using
the Federal eRulemaking Portal at
https://www.regulations.gov. Follow the
instructions for submitting comments.
Alternatively, interested persons may
submit comments, identified by docket
number EERE–2017–BT–TP–0004, by
any of the following methods:
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SUMMARY:
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1. Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
2. Email:
ConsumerRefrigFreezer2017TP0004@
ee.doe.gov. Include the docket number
EERE–2017–BT–TP–0004 in the subject
line of the message.
3. Postal Mail: Appliance and
Equipment Standards Program, U.S.
Department of Energy, Building
Technologies Office, Mailstop EE–5B,
1000 Independence Avenue SW,
Washington, DC 20585–0121.
Telephone: (202) 287–1445. If possible,
please submit all items on a compact
disc (‘‘CD’’), in which case it is not
necessary to include printed copies.
4. Hand Delivery/Courier: Appliance
and Equipment Standards Program, U.S.
Department of Energy, Building
Technologies Office, 950 L’Enfant Plaza
SW, 6th Floor, Washington, DC 20024.
Telephone: (202) 287–1445. If possible,
please submit all items on a CD, in
which case it is not necessary to include
printed copies.
No telefacsimilies (faxes) will be
accepted. For detailed instructions on
submitting comments and additional
information on this process, see section
III of this document.
Docket: The docket for this activity,
which includes Federal Register
notices, comments, and other
supporting documents/materials, is
available for review at https://
www.regulations.gov. All documents in
the docket are listed in the https://
www.regulations.gov index. However,
some documents listed in the index,
such as those containing information
that is exempt from public disclosure,
may not be publicly available.
The docket web page can be found at
https://www.regulations.gov/
#!docketDetail;D=EERE-2017-BT-TP0004. The docket web page contains
instructions on how to access all
documents, including public comments
in the docket. See section III for
information on how to submit
comments through https://
www.regulations.gov.
Dr.
Stephanie Johnson, U.S. Department of
Energy, Office of Energy Efficiency and
Renewable Energy, Building
Technologies Office, EE–5B, 1000
Independence Avenue SW, Washington,
DC 20585–0121. Telephone: (202) 287–
1943. Email:
ApplianceStandardsQuestions@
ee.doe.gov.
Mr. Pete Cochran, U.S. Department of
Energy, Office of the General Counsel,
GC–33, 1000 Independence Avenue SW,
Washington, DC 20585–0121.
FOR FURTHER INFORMATION CONTACT:
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9407
Telephone: (202) 586–9496. Email:
Peter.Cochran@hq.doe.gov.
For further information on how to
submit a comment, review other public
comments and the docket, contact the
Appliance and Equipment Standards
Program staff at (202) 287–1445 or by
email: ApplianceStandardsQuestions@
ee.doe.gov.
Signed in Washington, DC, on February 6,
2020.
Alexander N. Fitzsimmons,
Acting Deputy Assistant Secretary for Energy
Efficiency, Energy Efficiency and Renewable
Energy.
[FR Doc. 2020–03230 Filed 2–18–20; 8:45 am]
BILLING CODE 6450–01–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 36, 37, and 43
RIN 3038–AE94
Swap Execution Facility Requirements
and Real-Time Reporting
Requirements
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) proposes to amend certain
parts of its regulations relating to the
execution of package transactions on
swap execution facilities (‘‘SEFs’’); the
execution of block trades on SEFs; and
the resolution of error trades on SEFs.
These matters are currently the subject
of relief in certain no-action letters from
Commission staff.
DATES: Comments must be received on
or before April 20, 2020.
ADDRESSES: You may submit comments,
identified by RIN 3038–AE94, by any of
the following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this rulemaking and
follow the instructions on the Public
Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
Please submit your comments using
only one of these methods. Submissions
through the CFTC Comments Portal are
encouraged.
All comments must be submitted in
English, or if not, accompanied by an
SUMMARY:
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Federal Register / Vol. 85, No. 33 / Wednesday, February 19, 2020 / Proposed Rules
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 (‘‘FOIA’’),1 a petition
for confidential treatment of the exempt
information may be submitted according
to the procedures established in the
Commission’s regulations, 17 CFR
145.9.
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 the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under FOIA.
FOR FURTHER INFORMATION CONTACT:
Roger Smith, Special Counsel, (202)
418–5344, rsmith@cftc.gov, Division of
Market Oversight, Commodity Futures
Trading Commission, 525 West Monroe
Street, Suite 1100, Chicago, Illinois
60661, or Michael Penick, Senior
Economist, (202) 418–5279, mpenick@
cftc.gov, Office of the Chief Economist,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1151 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
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Table of Contents
I. Background
A. Parts 37 and 43 of the Commission’s
Regulations
B. Summary of Proposed Changes to Parts
36, 37, and 43
C. Consultation With Other U.S. Financial
Regulators
II. The Proposed Regulations
A. Execution of Package Transactions
1. Background
2. Proposed Addition of § 37.9(d) and
Amendment of § 37.9(a)(2)
3. Request for Comment
4. Existing § 37.3(a)
5. Proposed Addition of § 37.3(a)(4)
6. Request for Comment
7. Exemption of New Issuance Bond
Package Transaction From the Trade
Execution Requirement
8. Discussion of CEA Section 4(c)
Enumerated Factors
9. Request for Comment
15
U.S.C. 552.
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B. Error Trades: Execution of Trades To
Correct Operational and Clerical Errors
on Swap Execution Facilities
1. Background
2. Proposed § 37.9(e)
3. Request for Comment
C. Real-Time Public Reporting: Block
Trade Definition
1. Existing § 43.2
2. Proposed Amendment to § 43.2
3. Request for Comment
III. Effective Date and Transition Period
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Parts 37 and 43 of the Commission’s
Regulations
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (‘‘DoddFrank Act’’) amended the Commodity
Exchange Act (‘‘CEA’’ or ‘‘Act’’) by
adding section 5h, which establishes
registration requirements and core
principles for swap execution facilities
(‘‘SEFs’’).2 The Commission
implemented section 5h by adopting
regulations that establish various
trading requirements for swaps traded
on SEFs 3 and articulating, where
appropriate, guidance and acceptable
practices. In particular, the Commission
promulgated part 37 of its regulations to
implement section 5h of the CEA and
set forth the registration and operational
requirements for SEFs.4 Among those
are requirements in part 37 specifying
minimum trading functionality that a
SEF must offer to participants for all
listed swaps, i.e., an ‘‘order book,’’ as
defined in § 37.3 (‘‘Order Book’’); 5
specifying the types of systems or
platforms that a SEF must offer for
swaps trading, including swaps subject
to the trade execution requirement
under CEA section 2(h)(8); 6 and setting
27
U.S.C. 7b–3.
Dodd-Frank Act also added to the CEA
certain provisions related to the trading of swaps on
designated contract markets (‘‘DCMs’’). Given that
almost all platform trading of swaps in the U.S.
occurs on SEFs, the Commission is not at this time
proposing to amend any regulatory requirements
pertaining to DCMs within part 38 of the
Commission’s regulations.
4 Core Principles and Other Requirements for
Swap Execution Facilities, 78 FR 33476 (June 4,
2013) (hereinafter ‘‘SEF Core Principles Final
Rule’’).
5 17 CFR 37.3(a)(2). An Order Book is defined as
(i) an ‘‘electronic trading facility,’’ as that term is
defined in CEA section 1a(16); (ii) a ‘‘trading
facility,’’ as that term is defined in CEA section
1a(51); or (iii) a trading system or platform in which
all market participants have the ability to enter
multiple bids and offers, observe or receive bids
and offers entered by other market participants, and
transact on such bids and offers. See 17 CFR
37.3(a)(3).
6 CEA section 2(h)(8) requires that transactions
involving swaps subject to the CEA section 2(h)(1)
3 The
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forth other relevant regulations
applicable to the fifteen core principles
with which a SEF must comply to
obtain and maintain registration with
the Commission.
Commission regulation 37.9
prescribes the methods of execution that
a SEF must offer to market participants
to execute swap transactions on the
SEF. In particular, § 37.9 defines
‘‘Required Transactions’’ as swaps
subject to the trade execution
requirement. Section 37.9 also requires
a SEF to offer, as required methods of
execution, either (i) an Order Book or
(ii) a request-for-quote system that sends
a request-for-quote to no less than three
unaffiliated market participants and
operates in conjunction with an Order
Book (‘‘RFQ System’’) for the execution
of these transactions.7 Swaps that are
not subject to the trade execution
requirement are defined as ‘‘Permitted
Transactions,’’ for which a SEF may
offer any execution method and for
which market participants may
voluntarily trade on a SEF.8 The
Commission’s regulations specify
additional requirements that correspond
to the use of an Order Book or RFQ
System to execute Required
Transactions.9
Pursuant to section 727 of the DoddFrank Act, the Commission also
established a regulatory framework for
the real-time public reporting of swap
transaction and pricing data, including
swap block trades within CEA section
2(a)(13).10 Part 43 of the Commission’s
regulations implements section 727 of
the Dodd-Frank Act by, among other
things, defining the requisite criteria for
when a publicly reportable swap
transaction will be classified as a block
trade, including the requirement that
clearing requirement be executed on or pursuant to
the rules of a DCM or SEF, or a SEF that is exempt
from registration, unless no DCM or SEF makes
such swaps available to trade (‘‘MAT’’) or such
swaps qualify for the clearing exception under CEA
section 2(h)(7) (the ‘‘trade execution requirement’’).
See 7 U.S.C. 2(h)(8).
7 17 CFR 37.9(a). With the exception of block
trades, as defined in § 43.2 of the Commission’s
regulations, Required Transactions must be
executed on a SEF’s Order Book or RFQ System.
See 17 CFR 37.9(a)(2)(i).
8 17 CFR 37.9(c).
9 For example, under § 37.9(b), the Commission
implemented a fifteen-second time-delay
requirement for Required Transactions that are prearranged or pre-negotiated by a broker and
submitted as cross trades for execution through the
SEF’s Order Book. This requirement allows a broker
or dealer to execute a Required Transaction by
trading against a customer’s order, or executing two
customers’ orders against each other, through prenegotiation or pre-arrangement, provided that one
side of the transaction is exposed to the Order Book
for fifteen seconds before the other side of the
transaction is submitted for execution. See 17 CFR
37.9(b).
10 7 U.S.C. 2(a)(13).
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the swap transaction ‘‘occur[] away’’
from a SEF’s trading system or platform,
but pursuant to the SEF’s rules and
procedures.11 Part 43 also sets forth the
procedures for calculating appropriate
minimum block sizes for each swap
asset class 12 and specifying the public
reporting delays available for such
trades.13
B. Summary of Proposed Changes to
Parts 36, 37, and 43
During the implementation of parts 37
and 43, market participants and SEFs
identified certain operational and
compliance burdens related to various
requirements. To mitigate these
burdens, Commission staff issued to
SEFs and market participants timelimited no-action relief from certain
provisions of the CEA and the
Commission’s regulations.14 Based on
this implementation experience, the
Commission believes it may be
appropriate to amend the current SEF
regulatory framework to address the
following issues, which have been
identified in staff no-action letters: 15
• The Commission proposes to
amend part 37 to allow the swap
components of certain categories of
‘‘package transactions’’ 16 to be executed
11 17
CFR 43.2.
CFR 43.6.
13 17 CFR 43.5(d).
14 As defined in § 140.99(a)(2) of the
Commission’s regulations, a no-action letter is a
written statement issued by a Division stating that
it will not recommend enforcement action to the
Commission for failure to comply with a specific
provision of the Act or a Commission rule,
regulation, or order. A no-action letter represents
only the issuing Division’s position and binds only
that Division. 17 CFR 140.99(a)(2).
15 In November 2018, the Commission issued a
comprehensive proposal to amend the SEF
regulatory framework. See generally Swap
Execution Facilities and Trade Execution
Requirement, 83 FR 61946 (Nov. 30, 2018) (‘‘2018
SEF Proposal’’). Among other things, the 2018 SEF
Proposal addresses existing relief under various noaction letters as part of the proposal’s holistic
approach to amending the SEF regulatory
framework. Given the complex, expansive, and
comprehensive nature of the 2018 SEF Proposal,
however, the Commission continues to evaluate it.
Therefore, the Commission is proposing rules
herein independent of that proposal. To be clear,
this rule proposal does not supersede the 2018 SEF
Proposal in any way.
Further, while the proposals and rationales
contained herein are, in some cases, identical or
similar to the proposals and rationales used in the
2018 SEF Proposal, the Commission believes the
context surrounding these two proposals
distinguishes them in application and scope. While
the Commission received comments on the 2018
SEF Proposal, the Commission believes that it is
important for the public to be able to provide
comments focused on the facts and circumstances
of the proposal at hand. Therefore, comments made
on the 2018 SEF Proposal relevant to this
rulemaking should be resubmitted as comments to
this rule proposal in order to be considered.
16 As used herein a package transaction consists
of two or more component transactions executed
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on-SEF through flexible means of
execution pursuant to § 37.9(c)(2), rather
than through the required methods of
execution under § 37.9 for ‘‘Required
Transactions.’’ In addition, the
Commission is proposing to amend part
36 to include an exemption from the
trade execution requirement for swap
transactions that are executed as a
component of a package transaction that
also includes a component that is a new
issuance bond (‘‘New Issuance Bond
package transactions’’). CFTC No-Action
Letter No. 17–55 (‘‘NAL No. 17–55’’) 17
between two or more counterparties where: (i) At
least one component transaction is a Required
Transaction; (ii) execution of each component
transaction is contingent upon the execution of all
other component transactions; and (iii) the
component transactions are priced or quoted
together as one economic transaction with
simultaneous or near-simultaneous execution of all
components.
17 NAL No. 17–55, Re: Extension of No-Action
Relief from Sections 2(h)(8) and 5(d)(9) of the
Commodity Exchange Act and from Commission
Regulations 37.3(a)(2) and 37.9 for Swaps Executed
as Part of Certain Package Transactions (Oct. 31,
2017). NAL No. 17–55 extended no-action relief and
related conditions previously granted by
Commission staff. See CFTC Letter No. 14–12, NoAction Relief from the Commodity Exchange Act
Sections 2(h)(8) and 5(d)(9) and from Commission
Regulation § 37.9 for Swaps Executed as Part of a
Package Transaction (Feb. 10, 2014) (‘‘NAL No. 14–
12’’); CFTC Letter No. 14–62, No-Action Relief from
the Commodity Exchange Act Sections 2(h)(8) and
5(d)(9) and from Commission Regulation § 37.9 for
Swaps Executed as Part of Certain Package
Transactions and No-Action Relief for Swap
Execution Facilities from Compliance with Certain
Requirements of Commission Regulations
§ 37.9(a)(2), § 37.203(a) and § 38.152 for Package
Transactions (May 1, 2014) (‘‘NAL No. 14–62’’);
CFTC Letter No. 14–121, Extension of No-Action
Relief for Swap Execution Facilities and Designated
Contract Markets from Compliance with Certain
Requirements of Commission Regulations
§ 37.9(a)(2), § 37.203(a) and § 38.152 for Package
Transactions (Sept. 30, 2014) (‘‘NAL No. 14–121’’);
CFTC Letter No. 14–137, Extension of No-Action
Relief from the Commodity Exchange Act Sections
2(h)(8) and 5(d)(9) and from Commission
Regulation § 37.9 and Additional No-Action Relief
for Swap Execution Facilities from Commission
Regulation § 37.3(a)(2) for Swaps Executed as Part
of Certain Package Transactions (Nov. 10, 2014)
(‘‘NAL No. 14–137’’); CFTC Letter No. 15–55,
Extension of No-Action Relief from the Commodity
Exchange Act Sections 2(h)(8) and 5(d)(9) and from
Commission Regulation § 37.9 and No-Action Relief
for Swap Execution Facilities from Commission
Regulation § 37.3(a)(2) for Swaps Executed as Part
of Certain Package Transactions (Oct. 15, 2015)
(‘‘NAL No. 15–55’’); and CFTC Letter No. 16–76, Re:
Extension of No-Action Relief from the Commodity
Exchange Act Sections 2(h)(8) and 5(d)(9) and from
Commission Regulation § 37.9 and No-Action Relief
for Swap Execution Facilities from Commission
Regulation § 37.3(a)(2) for Swaps Executed as Part
of Certain Package Transactions (Nov. 1, 2016)
(‘‘NAL No. 16–76’’). NAL No. 17–55 also provided
relief for package transactions where at least one
individual swap component is subject to the trade
execution requirement and all other components
are futures contracts (‘‘MAT/Futures package
transactions’’). The Commission continues to
evaluate MAT/Futures package transactions and
their regulatory treatment. Therefore, this
rulemaking does not encompass MAT/Futures
package transactions.
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currently provides no-action relief for
the swap components of certain
categories of package transactions from
the required methods of execution, and
in some instances, from the trade
execution requirement.
• The Commission proposes to
amend part 37 to establish a principlesbased approach for SEF error trade
policies that incorporates relief from the
required methods of execution under
§ 37.9 for Required Transactions for
trades intended to resolve error trades.18
The amendment would enable SEFs to
permit market participants to execute
swaps transactions to correct
operational or clerical errors using
execution methods other than those
required under § 37.9 for Required
Transactions. This proposal does not
seek to codify the specific conditions
contained in CFTC No-Action Letter No.
17–27 (‘‘NAL No. 17–27’’).19 Rather, this
proposal is intended to capture the
intent of NAL No. 17–27 to permit
market participants to correct error
trades in Required Transactions through
non-required methods of execution
while ensuring flexibility for SEFs to
determine the most suitable error trade
rules for their markets and
participants.20
Further, NAL No. 17–55 also applies to package
transactions occurring on a DCM. See supra note 3.
18 The Commission notes that in addition to relief
from the required methods of execution, staff has
also provided relief from § 37.203(a) of the
Commission’s regulations, which prohibits ‘‘prearranged trading,’’ for offsetting trades and
correcting trades. See NAL No. 17–27, Re: NoAction 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). As discussed
further below, the Commission does not, however,
view a regulatory amendment corresponding to that
relief as necessary. See infra note 70.
19 This proposal also does not codify the
supplemental conditions to NAL No. 17–27
contained in CFTC No-Action Letter No. 20–01, Re:
Supplemental 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 (Jan. 8, 2020)
(‘‘NAL No. 20–01’’), conditions that allow market
participants to correct error trades that have been
accepted for clearing with an ex post facto review
by the SEF. As discussed below, nothing in this
proposal would prohibit SEFs from incorporating
such conditions within their error trade rules. See
infra note 74.
20 NAL 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). NAL No. 17–27 extended no-action
relief and related conditions previously granted by
Commission staff. See CFTC Letter No. 16–58, 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
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• The Commission proposes to
amend the definition of ‘‘block trade’’ in
§ 43.2, which requires the execution of
block trades pursuant to the rules of a
SEF to ‘‘occur[] away’’ from the SEF,
i.e., to be executed outside of any of the
SEF’s trading systems or platforms. The
amendment would enable SEFs to offer
non-Order Book methods of execution
for market participants to execute swap
block trades on the SEF. The proposal
codifies CFTC No-Action Letter No. 17–
60 (‘‘NAL No. 17–60’’) while also
allowing block trades for swaps that are
not intended to be cleared (‘‘ITBC’’) to
be executed on SEF via non-Order Book
methods of execution.21
The Commission believes that the
above-described amendments would
continue to effectuate the statutory SEF
provisions and better promote the
statutory SEF goals, as discussed below.
C. Consultation With Other U.S.
Financial Regulators
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In developing these rules, the
Commission has consulted with the
Securities and Exchange Commission,
pursuant to section 712(a)(1) of the
Dodd-Frank Act.22
Contract Market (June 10, 2016) (‘‘NAL No. 16–58’’);
CFTC Letter 15–24, 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
(Apr. 22, 2015) (‘‘NAL No. 15–24’’); and CFTC
Letter No. 13–66, Time-Limited No-Action Relief
for Swap Execution Facilities from Compliance
with Certain Requirements of Commission
Regulation 37.9(a)(2) and 37.203(a) (Oct. 25, 2013)
(initial relief provided by Commission staff with
respect to error trades that are rejected from
clearing)(‘‘NAL No. 13–66’’). NAL No. 17–27 also
applies to swap transactions occurring on a DCM.
See supra note 3. In addition, DMO recently
released NAL No. 20–01, which supplements the
conditions in NAL No. 17–27 to allow market
participants, sua sponte, to correct error trades that
have been accepted to clearing with an ex post facto
review by the SEF.
21 NAL No. 17–60, Re: Extension of No-Action
Relief for Swap Execution Facilities from Certain
‘‘Block Trade’’ Requirements in Commission
Regulation 43.2 (Nov. 14, 2017). NAL No. 17–60
extended no-action relief and related conditions
previously granted by Commission staff. See CFTC
Letter No. 16–74, Re: Extension of No-Action Relief
for Swap Execution Facilities from Certain ‘‘Block
Trade’’ Requirements in Commission Regulation
43.2 (Oct. 7, 2016) (‘‘NAL No. 16–74’’); CFTC Letter
No. 15–60, Re: Extension of No-Action Relief for
Swap Execution Facilities from Certain ‘‘Block
Trade’’ Requirements in Commission Regulation
43.2 (Nov. 2, 2015) (‘‘NAL No. 15–60’’); and CFTC
Letter No. 14–118, No-Action Relief for Swap
Execution Facilities from Certain ‘‘Block Trade’’
Requirements in Commission Regulation 43.2 (Sept.
19, 2015) (‘‘NAL No. 14–118’’). NAL No. 17–60 only
provides relief for swap block trades that are ITBC.
22 Dodd-Frank Act, Public Law 111–203, title VII,
sec. 712(a)(1), 124 Stat. 1376 (2010).
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II. The Proposed Regulations
A. Execution of Package Transactions
1. Background
Package transactions generally
involve the execution of multiple
component transactions together that
market participants consider to
represent one economic transaction.23
The types of transactions that constitute
a package transaction are wide-ranging
and diverse. In particular, there are
package transactions that consist solely
of swaps subject to the trade execution
requirement; those that include a mix of
swaps subject to the trade execution
requirement and swaps that are not;
those made up of swaps and non-swaps;
and those comprised of both swaps that
are and swaps that are not exclusively
subject to the Commission’s
jurisdiction.24 These components range
from being very liquid and standardized
to being illiquid and bespoke.25 The
variety of package transactions derives,
in part, from the fact that the different
types of package transactions are fit for
distinct purposes. The Commission
understands that certain package
transactions are utilized as tools within
market participants’ portfolio
management and hedging programs,
while other types of package
transactions are used to allow market
participants to express views of the
market—for example, by allowing
participants to trade the spread between
certain products or different maturities
in the same product.
Given the diverse characteristics of
the component transactions that may be
involved, the Commission understands
that package transactions often pose
unique pricing and execution
characteristics. The Commission
understands that the negotiation or
arrangement of each of these
components generally occurs
23 See supra note 16. The Commission notes that
there are transactions that otherwise meet the
package transaction definition but do not involve a
swap subject to the trade execution requirement.
While these transactions may colloquially be
referred to as package transactions, the Commission
notes that such transactions are not the subject of
this proposal.
24 See infra note 36 for a more precise description
of various package transactions.
To the extent that counterparties may be
facilitating package transactions that involve a
‘‘security,’’ as defined in section 2(a)(1) of the
Securities Act of 1933 or section 3(a)(10) of the
Securities Exchange Act of 1934, or any component
agreement, contract, or transaction over which the
Commission does not have exclusive jurisdiction,
the Commission does not opine on whether such
activity complies with other applicable law and
regulations.
25 Some non-swap components may be subject to
different regulatory requirements than the swap
components in the package transactions.
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concurrently or on a singular basis; in
particular, negotiations for the pricing of
such package transactions may be based
primarily on the components that are
not subject to the trade execution
requirement. Further, given the
individual liquidity and trading
characteristics of each component,
certain package transactions will have to
trade through methods of execution that
are suitable for an illiquid and bespoke
component, which in many cases are
not the required methods of
execution.26
Notwithstanding the complexity of
their pricing and execution, the
Commission is aware of their benefits of
such package transactions. By executing
multiple components together as part of
a package transaction, market
participants can improve transaction
pricing and cost, increase execution
efficiency, and decrease execution risk
beyond what would have been possible
if the market participant had executed
each component individually, i.e.,
‘‘legged’’ or ‘‘legging’’ into the
transaction.27
During the implementation of the
trade execution requirement for certain
interest rate swaps and credit default
swaps, SEFs and market participants
informed the Commission that requiring
swaps that are otherwise Required
Transactions—but are components of a
package transaction 28—to be executed
through the required methods of
execution 29 under § 37.9 was in many
cases impracticable and increased
execution risks and operational
challenges. Market participants and
SEFs informed the Commission that
these risks and challenges generally
26 For example, while a swap that is subject to the
trade execution requirement is suitable to be
executed through the required methods of
execution as an outright transaction, when that
same swap is bundled together with an illiquid and
bespoke component in a package transaction, the
package transaction takes on the liquidity and
trading profile of the illiquid and bespoke
component.
27 For example, a market participant seeking to
execute two component transactions independent
of one another, instead of executing the two
components together in a package transaction,
would be forced to pay the bid/offer spread on each
leg, which in many cases is more costly and less
efficient than paying the single bid/offer spread for
a package transaction composed of the same two
components.
28 See supra note 16. Consistent with the
proposed definition of package transaction under
§ 37.9(d) the Commission notes that, unless
otherwise stated, the term ‘‘swap component(s)’’ as
used herein refers to a swap component that is
subject to the trade execution requirement under
CEA section 2h(8), and therefore a Required
Transaction.
29 As noted above, pursuant to § 37.9, SEFs must
provide as the required methods of execution for
Required Transactions either an Order Book or an
RFQ System.
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reflect (i) an initial lack of market
infrastructure available to trade and
clear certain package transactions; 30
and (ii) the complex, bespoke, and
idiosyncratic nature of several
categories of package transactions that
precluded them from being suitable for
execution through required methods of
execution.31
In response to concerns from market
participants, Commission staff in the
Division of Market Oversight (‘‘DMO’’)
provided a series of time-limited noaction relief in order to allow the swap
components of certain package
transactions to be executed through
flexible methods of execution on a SEF,
and in some cases completely away
from a SEF. Over time, the initial dearth
of available market infrastructure to
trade and clear certain package
transactions has diminished, especially
for package transactions composed of
liquid and standardized components. As
a result, Commission staff has allowed
the relief for certain package
transactions to expire as the capabilities
and functionalities of market
participants and SEFs have progressed
to the point of permitting the swap
component of various package
transactions to be executed through the
required methods of execution.32 The
Commission notes that the expiration of
relief has been successful for many
types of package transactions given (i)
market participants now actively trade
the swap component of several types of
package transactions through the
required methods of execution, and (ii)
the trading of such package transactions
constitutes a significant portion of
swaps trading.33
Despite the progress, however,
Commission staff has continued to
30 See, e.g., NAL No. 14–12 at 2–3 n.10
(describing the inability of a DCO to simultaneously
screen and accept all components of a package
transaction for clearing).
31 See, e.g., CFTC Public Roundtable: Trade
Execution Requirements and Package Transactions,
72, 84–85 (Feb. 12, 2014), available at https://
www.cftc.gov/sites/default/files/idc/groups/public/
@newsroom/documents/file/transcript021214.pdf
(commenting on the challenges of applying required
methods of execution to package transactions with
complex component swaps).
32 See infra note 36 for an overview and
description of the evolution of the relief for package
transactions.
33 For example, according to publicly available
data from ClarusFT, nearly seventy percent of U.S.
Dollar interest rate swaps trading in the inter-dealer
swap market were carried out as part of just a single
type of package transaction: U.S. Dollar Spreadover
package transactions, as defined in note 35. See
Chris Barnes, USD Spreadovers and SEF Market
Share, Clarus Financial Technology Blog (August
14, 2018), available at https://www.clarusft.com/
usd-spreadovers-and-sef-market-share/. Further,
package transactions involving spreads and
butterflies of interest rate swaps make up a material
amount of trading in the swaps markets.
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provide relief for the swap components
of certain package transactions where
relief is necessary for market
participants to be able to effectively
execute the package transaction due to
specific attributes of such transactions.
2. Proposed Addition of § 37.9(d) and
Amendment of § 37.9(a)(2)
In light of the complex nature of these
package transactions, the Commission
recognizes that the required methods of
execution under § 37.9 may inhibit
market participants from tailoring the
execution of the swap component of the
relevant package transactions. This may
force market participants to effect such
transactions on a leg-by-leg basis—
leading to increased execution and
operational risk—or prevent them from
engaging in the relevant package
transactions altogether, precluding
effective hedging strategies and
decreasing market liquidity. Since
DMO’s issuance of this no-action relief,
the Commission has gained
considerable knowledge and experience
with the dynamics of the trading of
package transactions, particularly with
respect to the existing no-action relief
from the required methods of execution.
Based on this knowledge and
experience, the Commission believes
that certain aspects of the current
requirements for the required methods
of execution under § 37.9 should be
enhanced to better account for the
complex nature of the relevant package
transactions.
Therefore, the Commission proposes
to add § 37.9(d) and amend § 37.9(a)(2)
to permit the swap components of
certain package transactions to be
executed via flexible methods of
execution pursuant to § 37.9(c)(2). The
Commission proposes to define a
‘‘package transaction’’ as a transaction
consisting of two or more component
transactions executed between two or
more counterparties where: (i) At least
one component transaction is a
Required Transaction; (ii) execution of
each component transaction is
contingent upon the execution of all
other component transactions; and (iii)
the component transactions are priced
or quoted together as one economic
transaction with simultaneous or nearsimultaneous execution of all
components.34 Based on this proposed
definition and consistent with existing
34 See proposed § 37.9(d)(1). The Commission
notes that there are transactions which otherwise
meet the package transaction definition but do not
involve a swap that is subject to the trade execution
requirement. While these transactions may
colloquially be referred to as package transactions,
the Commission notes that such transactions are not
the subject of this proposal. See supra note 16.
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9411
no-action relief, the Commission
proposes to allow the Required
Transaction swap component of the
following three categories of package
transactions to be executed via flexible
means of execution pursuant to
§ 37.9(c)(2):
(1) A package transaction where at
least one of the components is a swap
exclusively within the Commission’s
jurisdiction that is not subject to the
clearing requirement (‘‘MAT/Non-MAT
Uncleared’’);
(2) A package transaction where at
least one of the components is not a
swap (excluding certain package
transaction categories as discussed
below) (‘‘MAT/Non-Swap
Instrument’’); 35 and
(3) A package transaction where at
least one of the components is a swap
for which the CFTC does not have
exclusive jurisdiction, e.g., a mixed
swap (‘‘MAT/Non-Exclusive CFTC
Swap’’).36
35 Under proposed § 37.9(d)(3), consistent with
the no-action relief, this category specifically
excludes package transactions in which all nonswap components are U.S. Treasury securities
(‘‘U.S. Dollar Spreadover package transactions’’);
MAT/Futures package transactions; package
transactions in which all other non-swap
components are agency mortgage-backed securities
(‘‘MAT/Agency MBS package transactions’’); and
New Issuance Bond package transactions. See also
Section II.A.7—Exemption of New Issuance Bond
Package Transactions from the Trade Execution
Requirement.
To the extent that counterparties may be
facilitating package transactions that involve a
‘‘security,’’ as defined in section 2(a)(1) of the
Securities Act of 1933 or section 3(a)(10) of the
Securities Exchange Act of 1934, or any component
agreement, contract, or transaction over which the
Commission does not have exclusive jurisdiction,
the Commission does not opine on whether such
activity complies with other applicable law and
regulations.
36 The Commission notes that the swap
components of different categories of package
transactions have been subject to time-limited noaction relief provided by Commission staff from the
trade execution requirement and required methods
of execution. These categories of package
transactions include those where: (i) Each of the
components is a swap subject to the trade execution
requirement (‘‘MAT/MAT package transactions’’);
(ii) at least one of the components is subject to the
trade execution requirement and each of the other
components is subject to the clearing requirement
(‘‘MAT/Non-MAT (Cleared)’’); (iii) U.S. Dollar
Spreadover package transactions; (iv) MAT/Agency
MBS package transactions; (v) New Issuance Bond
package transactions; (vi) MAT/Futures package
transactions; (vii) MAT/Non-MAT (Uncleared);
(viii) excluding aforementioned categories, MAT/
Non-Swap Instruments; and (ix) MAT/NonExclusive CFTC Swap. See NAL No. 14–12; NAL
No. 14–62; NAL No. 14–121; NAL No. 14–137; NAL
No. 15–55; NAL No. 16–76; and NAL No. 17–55.
Over time, the swap components of the following
categories of package transactions were no longer
provided relief: MAT/MAT package transactions,
MAT/Non-MAT (Cleared) package transactions,
U.S. Dollar Spreadover package transactions, and
MAT/Agency MBS package transactions. As a
result, the swap components of these package
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While, as noted above, the swap
components of several types of package
transactions have been successfully
transitioned to SEF and are executed via
the required methods of execution, the
Commission believes that the types of
package transactions covered by this
proposal may not be suitable to be
traded through the required methods of
execution due to their specific
characteristics. In particular, the
Commission recognizes that these
package transactions contain
components that are illiquid and
bespoke, such as swaptions, or contain
components that are subject to
regulatory requirements other than or in
addition to the CEA and the
Commission’s regulations issued
thereunder.37
The Commission believes that if
market participants are unable to utilize
transactions must be executed through the required
methods of execution under § 37.9(a).
Currently, the swap components of the following
categories of package transactions receive no-action
relief from the required methods of execution under
§ 37.9 under NAL No. 17–55: (i) MAT/Non-MAT
(Uncleared) package transactions; (ii) MAT/NonSwap Instruments package transactions (subject to
the exclusions previously discussed); and (iii)
MAT/Non-Exclusive CFTC Swap package
transactions. The proposed addition of § 37.9(d) is
consistent with the relief from the required methods
of execution under NAL No. 17–55. Within this
section, the term ‘‘relevant package transactions,’’
unless context requires otherwise, refers to these
three categories of package transactions.
In addition to the relief from the required
methods of execution in § 37.9, NAL No. 17–55 also
provides relief from the trade execution for the
swap components of MAT/Futures package
transactions and New Issuance Bond Package
transactions. As discussed above, the Commission
is still evaluating MAT/Futures package
transactions. See supra note 17.
Further, as discussed in more detail below, the
Commission is proposing to exempt the swap
components of New Issuance Bond package
transactions from the trade execution requirement.
This is consistent with the relief currently provided
to New Issuance Bond package transactions under
NAL No. 17–55. To the extent that counterparties
may be facilitating package transactions that
involve a ‘‘security,’’ as defined in section 2(a)(1)
of the Securities Act of 1933 or section 3(a)(10) of
the Securities Exchange Act of 1934, or any
component agreement, contract, or transaction over
which the Commission does not have exclusive
jurisdiction, the Commission does not opine on
whether such activity complies with other
applicable law and regulations.
37 The Commission will continue to evaluate
these categories of package transactions for new
developments in execution methods on SEFs and
may in the future revise the categories of package
transactions in which the swap component is
eligible to be executed through flexible means of
execution. For example, the Commission notes that
Tradeweb Markets Inc. recently released an
electronic trading method for package transactions
involving swaps and bonds. Such transactions—
provided they are not U.S. Dollar Spreadover
package transactions—would fall under the MAT/
Non-Swap Instruments category of package
transactions. Therefore, the Commission asks in this
proposal whether the proposed package transaction
categories are appropriate.
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flexible methods of execution for the
swap components of these package
transactions, they would potentially be
forced to break the package transaction
into its individual components,
otherwise known as ‘‘legging’’ into the
transaction. The Commission
understands from market participants
that legging into a package transaction is
inefficient and increases transaction
costs and execution risks. Given that
components of package transactions are
each priced or quoted together as part of
one economic transaction, the
Commission recognizes the
impracticality of breaking the package
transaction into individual legs or
components in order to trade the swap
components via the required methods of
execution under § 37.9.
Based on its experience with the
existing no-action relief, the
Commission believes that the proposed
addition of § 37.9(d) and amendment of
§ 37.9(a) will allow market participants
to choose the most suitable execution
method for their package transactions,
which will decrease execution risks,
improve efficiency, and decrease
transaction costs because market
participants will no longer be forced to
leg into transactions. Given the inherent
complexity of the relevant package
transactions, the Commission believes
that this proposal ensures that market
participants are able to trade these
package transactions in the most
effective, efficient, transparent, and
economical manner. SEFs would be able
to offer, and market participants would
be able to utilize, methods of execution
that best suit the characteristics of the
relevant package transaction being
traded. The Commission believes this
would preserve the benefits and
purpose of executing such package
transactions.
In addition to causing inefficient
execution and increasing risks and cost,
forcing the swap components of the
relevant package transactions through
required methods of execution may also
limit the commercial utility of such
transactions or entirely frustrate the
purposes of entering in such package
transactions in the first place. For
example, the Commission understands
that in some of the relevant package
transactions, (i) the swap component
serves as the hedging instrument to
other instruments in the package
transaction, or (ii) the package
transaction as a whole may be utilized
as part of a market participant’s
portfolio management program. If the
swap component of such package
transactions were impractical or unable
to be executed due to the required
methods of execution, market
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participants would be prevented from
entering or effectively entering into the
package transaction, nullifying the
package transaction’s purpose and
benefits as a hedging and portfolio
management tool. Based on its
experience with the existing no-action
relief, the Commission believes that this
proposal would allow market
participants to utilize flexible methods
of execution for the swap component of
the relevant package transaction,
thereby ensuring that market
participants are able to continue to
utilize these effective hedging tools.
Finally, the Commission believes that
its proposed approach would advance
the SEF statutory goal of promoting
trading on SEFs.38 The proposed rule
provides relief from execution method
requirements that are generally intended
to help promote trading on SEFs.
However, the relevant package
transactions are not suitable for trading
via such required methods of execution,
as discussed above. Accordingly, the
Commission believes that in this case
flexibility with respect to execution
methods will better promote trading of
such component swaps on SEFs,
consistent with the statutory SEF goals.
3. Request for Comment
The Commission requests comment
on all aspects of proposed § 37.9(d) and
the proposed amendment of § 37.9(a)(2).
The Commission also invites specific
comments on the following:
(1) Is the proposed definition of
‘‘package transaction’’ in proposed
§ 37.9(d)(1) appropriate? Please explain
why or why not.
(2) Is the proposed definition’s
condition that the ‘‘execution of each
component transaction is contingent
upon the execution of all other
component transactions’’ clear in its
meaning? If not, please explain how the
Commission should clarify this
provision.
(3) Similarly, is the proposed
definition’s condition that ‘‘[t]he
component transactions are priced or
quoted together as one economic
transaction’’ clear in its meaning? If not,
please explain how the Commission
should clarify this provision.
(4) Is it clear what is meant within the
proposed definition’s statement that
execution of all component transactions
is to be ‘‘simultaneous or nearsimultaneous’’? If not, please explain
how the Commission should clarify this
provision.
(5) Is the proposed addition of
§ 37.9(d)(2) for MAT/Non-MAT
(Uncleared) package transactions
38 See
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appropriate? Please explain why or why
not.
(6) Is the proposed addition of
§ 37.9(d)(3) for MAT/Non-Swap package
transactions appropriate? Please explain
why or why not.
(7) Are the categories of package
transactions that are excluded from
§ 37.9(d)(3) appropriate? Please explain
why or why not.
(8) Are there additional package
transactions that should be excluded
from § 37.9(d)(3)?
(9) Is the proposed addition of
§ 37.9(d)(4) for MAT/Non-Exclusive
CFTC Swap package transactions
appropriate? Please explain why or why
not.
(10) Are there additional types or
categories of package transactions not
covered in this proposal for which the
Commission should allow the swap
component to be executed through the
flexible means of execution in
§ 37.9(c)(2)? Please explain in detail
why or why not.
(11) Should the Commission allow
swap components to be executed via
flexible methods of execution where a
package transaction contains more than
four components or legs, regardless of
the types of components?
(12) In addition to U.S. Dollar
Spreadover package transactions, are
there additional package transactions
with sovereign debt components for
which the Commission should exclude
the swap component from flexible
methods of execution? Please explain
why or why not.
(13) Should the Commission allow all
swap components of a package
transaction to be executed via flexible
means of execution where a single swap
component subject to the trade
execution requirement is above the
applicable block size? Please explain
why or why not.
(14) Should the Commission allow a
package transaction composed of a
Credit Default Swap (‘‘CDS’’) index
swap subject to the trade execution
requirement and a CDS index swap that
is several series off-the-run to be
executed through flexible means of
execution? Please explain why or why
not.
4. Existing § 37.3(a)
An Order Book is one of the two
required methods of execution under
§ 37.9(a). The Commission designated
an Order Book as the ‘‘minimum trading
functionality’’ each SEF must maintain
and offer for each swap that it lists for
trading. An Order Book is defined under
§ 37.3(a)(3) as (i) an electronic trading
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facility; 39 (ii) a trading facility; 40 or (iii)
a trading system or platform in which
all market participants in the trading
system or platform have the ability to
enter multiple bids and offers, observe
or receive bids and offers entered by
other market participants, and transact
on such bids and offers.’’ 41
Generally speaking, it may be
complex to apply the existing Order
Book requirement in § 37.3(a)(2) to the
swap components of the package
transactions covered by this proposed
amendment. In some situations,
§ 37.3(a)(2) may require that a SEF
maintain separate Order Books for the
same type of swap: One Order Book for
when the swap is executed as a single
transaction (referred to as an ‘‘outright
transaction’’), and a separate Order Book
for when the swap is executed as part
of a package transaction. In fact,
multiple Order Books could be required
for the same type of swap if it were
included as part of multiple types of
package transactions. The Commission
understands that, in part because of the
availability of relief under the staff
letters described above, SEFs have put
in place relatively few Order Books for
swaps to be executed as part of the
package transactions covered by this
proposed amendment, and any such
Order Books in place are not actively
used.
5. Proposed Addition of § 37.3(a)(4)
The Commission proposes to add
§ 37.3(a)(4), which would allow SEFs
not to offer an Order Book for the swap
components of the package transactions
covered by this proposed amendment:
(i) MAT/Non-MAT Uncleared package
transactions; (ii) MAT/Non-Swap
Instrument package transactions; and
(iii) MAT/Non-Exclusive CFTC Swap
package transactions. However, this
proposal would not alter any
requirement applicable to such swap
components to the extent they are
executed in transactions that are not
39 CEA section 1a(16) defines ‘‘electronic trading
facility’’ as a trading facility that (i) operates by
means of an electronic or telecommunications
network; and (ii) maintains an automated audit trail
of bids, offers, and the matching of orders or the
execution of transactions on the facility. 7 U.S.C.
1a(16).
40 CEA section 1a(51) defines ‘‘trading facility’’ as
a person or group of persons that constitutes,
maintains, or provides a physical or electronic
facility or system in which multiple participants
have the ability to execute or trade agreements,
contracts, or transactions by accepting bids or offers
made by other participants that are open to multiple
participants in the facility or system; or through the
interaction of multiple bids or multiple offers
within a system with a pre-determined nondiscretionary automated trade matching and
execution algorithm. 7 U.S.C. 1a(51)(A).
41 17 CFR 37.3(a)(3).
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9413
package transactions covered by this
proposed amendment. The text of
proposed § 37.3(a)(4) makes clear that
§ 37.3(a)(2) of the Commission’s
regulations would continue to apply to
such swap components and SEFs would
be required to offer Order Books for
these Required Transactions as outright
transactions.
As noted above,42 executing Required
Transaction swap components of certain
package transactions through the
required methods of execution is
operationally complex, and in many
instances, impracticable. Given that the
Commission has preliminarily
determined that it is infeasible or
inefficient to facilitate swap
components of these package
transactions through the required
methods of execution, which includes
an Order Book under § 37.3(a), it
logically follows that requiring SEFs to
offer an Order Book for the swap
components of package transactions
would be superfluous.
Finally, the Commission believes that
not requiring SEFs to offer an Order
Book for the swap components of the
relevant package transactions would
help reduce operating costs for SEFs, as
they would no longer be required to
operate and maintain order book
systems that are not suitable for trading
the swap components of the relevant
package transactions. Instead of
employing resources to build (or
attempt to build) and support an unused
or underutilized Order Book for the
swap components of certain package
transactions, the proposal would instead
provide a SEF with the flexibility to
determine how to allocate its resources,
particularly as it relates to developing
methods of execution that are better
suited to trading the relevant package
transactions.43
6. Request for Comment
The Commission requests comment
on all aspects of proposed § 37.3(a)(4).
The Commission also invites comments
specifically on the following:
(15) Is the addition of § 37.3(a)(4)
appropriate?
(16) Should the Commission still
require SEFs to offer an Order Book for
MAT/Non-MAT (Uncleared) package
transactions as defined in § 37.9(d)(2)?
(17) Should the Commission still
require SEFs to offer an Order Book for
42 See section II.A.1—Background and section
II.A.2—Proposed Addition of § 37.9(d) and
Amendment of § 37.9(a)(2).
43 The Commission notes that nothing in this
proposal would preclude a SEF from offering an
Order Book if it is able to develop an Order Book
solution that is effective in trading the swap
component of certain package transactions.
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the swap components of MAT/NonSwap package transactions as defined in
§ 37.9(d)(3)?
(18) Should the Commission still
require SEFs to offer an Order Book for
MAT/Non-Exclusive CFTC Swap
package transactions as defined in
§ 37.9(d)(4)?
(19) Are there additional types of
package transactions that the
Commission should consider allowing
SEFs to not offer Order Books for?
(20) Should the Commission allow
SEFs not to offer an Order Book for
swaps that are not subject to the trade
execution requirement but are
components of any package transaction?
Would this lead to additional types of
package transactions being listed and
traded on SEFs?
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7. Exemption of New Issuance Bond
Package Transactions From the Trade
Execution Requirement
The Commission proposes to establish
an exemption to the trade execution
requirement for swap transactions that
are components of a ‘‘New Issuance
Bond’’ package transaction.44 The
Commission believes that exempting
these types of transactions from the
trade execution requirement is
authorized by, and would be consistent
with the objectives of, CEA section
4(c).45 This proposed approach is
consistent with the time-limited noaction relief provided by Commission
staff for this category of package
transactions.46
New Issuance Bond package
transactions include at least one
44 The Commission notes that both this proposal
and the 2018 SEF Proposal propose to exempt New
Issuance Bond package transactions from the trade
execution requirement under section 2(h)(8) of the
CEA. See 2018 SEF Proposal at 62039. However,
while these proposals and the supporting rationales
are nearly identical, these two proposals are
dissimilar in practical effect and scope. Under the
2018 SEF Proposal, the Commission proposed to
apply the trade execution requirement to all swaps
that are subject to the clearing requirement in
section 2(h)(1) of the CEA and are listed on a SEF
or a DCM. The 2018 SEF Proposal thus would have
significantly expanded the scope of swaps that are
subject to the trade execution requirement,
including materially expanding the requirement to
numerous forward starting interest rate swaps
which are used as the swap components for New
Issuance Bond package transactions. Contrastingly,
this proposal would not alter the scope of swaps
that are currently subject to the trade execution
requirement, the majority of which are not swaps
that are used as a component in New Issuance Bond
package transactions. This means that the proposal
to exempt New Issuance Bond package transaction
under the 2018 SEF Proposal would have a
significantly broader impact on the market than the
proposed exemption within this proposal.
45 7 U.S.C. 6(c).
46 See supra note 36 (describing the no-action
relief from the trade execution requirement
provided by Commission staff for categories of
package transactions).
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individual swap component that is
subject to the trade execution
requirement and at least one individual
component that is a bond 47 issued and
sold in the primary market.48 An
underwriter (on behalf of an issuer)
arranges the issuance of a bond
packaged with a fixed-to-floating
interest rate swap (‘‘IRS’’) that features
the issuer as a counterparty. The terms
of the IRS, which include tenor and
payment terms, typically match the
terms of the bond issuance. By issuing
a bond with a fixed-to-floating IRS,
issuers are able to effectively turn fixedrate liabilities into variable-rate
liabilities, or vice versa.49 To match the
terms between these two components
and facilitate the bond issuance in an
efficient and cost-effective manner, the
IRS component is customized and
negotiated in a manner that closely
corresponds to the bond issuance
process.
Given the process under which the
swap is negotiated,50 this type of
package transaction has not been
conducive to execution on a SEF trading
system or platform. The Commission
notes that the no-action relief that has
been provided by Commission staff for
these swaps components reflects the
ongoing lack of an available execution
method on an appropriate trading
venue.51 Based on the integral role of
the bond issuance in facilitating the
component swap execution, the
Commission believes that the IRS
component is not suitable for execution
47 The Commission notes that this proposed
exemption would not apply to swap components of
package transactions that include sovereign debt,
such as U.S. Treasury bonds, notes, and bills.
48 The Commission understands that a bond
issued and sold in the primary market that may
constitute part of a package transaction is a
‘‘security,’’ as defined in section 2(a)(1) of the
Securities Act of 1933 or section 3(a)(10) of the
Securities Exchange Act of 1934. To the extent that
counterparties may be facilitating package
transactions that involve a security, or any
component agreement, contract, or transaction over
which the Commission does not have exclusive
jurisdiction, the Commission does not opine on
whether such activity complies with other
applicable law and regulations.
49 For example, a bond issuer seeks to pay
variable rates on its bonds, but prospective
investors may seek a fixed rate of return. By
arranging a New Issuance Bond package
transaction, the bond issuer can issue a fixed-rate
bond and simultaneously enter into an offsetting
IRS. The IRS enables the issuer to receive a fixed
rate that matches the fixed rate on its bond to be
issued, while paying the variable rate that it
originally sought. Ultimately, this arrangement may
allow the bond issuer to issue the fixed-rate bond
at a lower cost.
50 The Commission notes that these types of
package transactions differ from other package
transactions that involve the purchase or sale of a
security in the secondary market, given that they
involve the issuance of a new security.
51 See NAL No. 17–55 at 2–3.
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on a SEF, even if a SEF were able to
offer flexible means of execution, as the
Commission is proposing for swap
components of other package
transactions within this proposal.52
Therefore, consistent with current noaction relief provided by Commission
staff, the Commission proposes to
exempt swap components of a New
Issuance Bond package transaction from
the trade execution requirement. The
proposed exemption would establish
that a ‘‘package transaction’’ consists of
two or more component transactions
executed between two or more
counterparties, where (i) at least one
component transaction is subject to the
trade execution requirement in section
2(h)(8) of the Act; (ii) execution of each
component transaction is contingent
upon the execution of all other
component transactions; and (iii) the
component transactions are priced or
quoted together as one economic
transaction with simultaneous or nearsimultaneous execution of all
components.53 The Commission
recognizes the inherent challenges in
trading or executing these swap
components on a SEF or DCM and,
therefore, recognizes the benefits of
continuing to allow market participants
to maintain established market practices
with respect to this type of package
transaction.
8. Discussion of CEA Section 4(c)
Enumerated Factors
Section 4(c) of the CEA grants the
Commission the authority to exempt
any transaction or class of transactions,
including swaps, from certain
provisions of the CEA, including the
Commission’s clearing requirement, in
order to ‘‘promote responsible economic
or financial innovation and fair
competition.’’ 54 Section 4(c)(2) of the
CEA further provides that the
Commission may not grant exemptive
relief unless it determines that: (i) The
exemption is appropriate for the
transaction and consistent with the
public interest; (ii) the exemption is
consistent with the purposes of the
CEA; (iii) the transaction will be entered
into solely between ‘‘appropriate
persons;’’ and (iv) the exemption will
not have a material adverse effect on the
ability of the Commission or any
contract market to discharge its
regulatory or self-regulatory
responsibilities under the CEA. In
enacting section 4(c), Congress noted
52 See
Section II.A.2.
Commission notes that this definition is
consistent with the proposed definition for package
transaction in § 37.9(d)(1).
54 7 U.S.C 6(c).
53 The
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that the purpose of the provision is to
give the Commission a means of
providing certainty and stability to
existing and emerging markets so that
financial innovation and market
development can proceed in an effective
and competitive manner.55
The Commission believes that
exempting swap components of New
Issuance Bond package transactions
from the trade execution requirement
would be consistent with the objectives
of CEA section 4(c).
The Commission recognizes the
importance of new bond issuances in
helping market participants to raise
capital and fund origination loans for
businesses and homeowners. The
Commission recognizes that allowing
the swap components of New Issuance
Bond package transactions to be
executed away from a SEF or DCM—
consistent with current market
practice—is integral to facilitating the
bond issuance. Further, the Commission
recognizes that the proposed exemption
is limited in nature, i.e., the swap
transaction remains subject to all other
applicable Commission rules and
regulations.
Therefore, the Commission
preliminarily believes that the proposed
exemption from the trade execution
requirement for swap components of
New Issuance Bond package
transactions is appropriate and would
be consistent with the public interest
and purposes of the CEA.
The Commission further believes that
the proposed regulation would not have
a material adverse effect on the ability
of the Commission or any SEF or DCM
to discharge its regulatory or selfregulatory duties under the CEA. The
Commission notes that the exemption is
limited in scope and the swap
components subject to this exemption
are still required to be reported to a
swap data repository pursuant to parts
43 and 45 of the Commission’s
regulations. Further, the Commission
retains its special call, anti-fraud, and
anti-evasion authorities, which will
enable it to adequately discharge its
regulatory responsibilities under the
CEA.
The Commission notes that under the
proposed exemption, swap transactions
would still be entered into solely
between eligible contract participants
(‘‘ECPs’’), whom the Commission
believes, for purposes of this proposal,
to be appropriate persons. Previously,
the Commission determined that ECPs
are appropriate persons within the
55 House Conf. Report No. 102–978, 1992
U.S.C.C.A.N. 3179, 3213.
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scope of section 4(c)(3)(K) of the CEA.56
The Commission noted that the
elements of the ECP definition (as set
forth in section 1a(18)(A) of the CEA
and Commission regulation 1.3)
generally are more restrictive than the
comparable elements of the enumerated
‘‘appropriate person’’ definition.57
Given that only ECPs are permitted to
enter into swaps off of a DCM, there is
no risk that a non-ECP or a person who
does not satisfy the requirements for an
‘‘appropriate person’’ could enter into a
New Issuance Bond package transaction
using this proposed exemption.
Therefore, the Commission believes that
the class of persons eligible to rely on
the exemption for New Bond Issuance
package transactions will be limited to
‘‘appropriate persons’’ within the scope
of section 4(c)(3) of the CEA.
that all component transactions are to be
executed on a ‘‘simultaneous or nearsimultaneous’’ basis? If not, please
explain how the Commission should
clarify this provision.
(26) Are there additional swap
components of different types or
categories of package transactions that
should be exempt from the trade
execution requirement? If so, then
please describe in detail why such swap
components of these types or categories
of package transactions should be
exempt from the trade execution
requirement.
9. Request for Comment
The Commission requests comment
on all aspects of the proposed
exemption of swap components of New
Issuance Bond package transactions
from the trade execution requirement
under proposed § 36.1(a), including
whether the proposed exemptive relief
is consistent with the public interest
and the other requirements of CEA
section 4(c). As noted above, the 2018
SEF Proposal contained a nearly
identical provision. Comments made on
the 2018 SEF Proposal that are relevant
to this rulemaking must be resubmitted
to be considered. The Commission
specifically requests comment on the
following questions:
(21) Pursuant to its authority in CEA
section 4(c), should the Commission
exempt the swap components of a New
Issuance Bond package transaction from
the trade execution requirement?
(22) Is the proposed definition of
‘‘package transaction’’ in proposed
§ 36.1(a)(1) appropriate?
(23) Is it clear what is meant within
the proposed definition when it states
that the ‘‘execution of each component
transaction is contingent upon the
execution of all other component
transactions’’? If not, please explain
how the Commission should clarify this
provision.
(24) Is it clear what is meant within
the proposed definition when it states
that ‘‘[t]he component transactions are
priced or quoted together as one
economic transaction’’? If not, please
explain how the Commission should
clarify this provision.
(25) Is it clear what is meant within
the proposed definition when it states
The Commission notes that SEFs have
adopted policies to identify and resolve
error trades as part of the rules and
procedures that govern their respective
trading and trade processing operations.
Errors in SEF transactions, as observed
by the Commission, may be operational
or clerical in nature and attributable to
either the SEF, the counterparties to the
transaction, the counterparties’
intermediaries, or the clearing members
involved. Clerical errors, in particular,
may occur in the process of entering
trade details into a SEF’s trading system
and may relate to the swap’s terms and
conditions, such as price, size, or
direction, as well as counterparty or
clearing member identities. The
adoption of error trade policies by SEFs
reflects the importance of addressing
errors to ensure that counterparties are
able to execute swap transactions as
intended on a SEF, which promotes a
fair and orderly trading market for SEF
market participants.58
Under the current SEF regulatory
framework, however, resolving error
trades for swaps subject to the
Commission’s required methods of
execution and straight-through
processing requirements has occurred
pursuant to no-action relief provided by
Commission staff on an ongoing basis.
Since 2013, the Division of Clearing and
Risk (‘‘DCR’’) and DMO (together, the
‘‘Divisions’’) have issued time-limited
no-action relief to allow counterparties
to correct swap ‘‘error trades’’—
transactions containing an ‘‘operational
56 Clearing Exemption for Swaps Between Certain
Affiliated Entities, 78 FR 21750, 21754 (Apr. 11,
2013).
57 Id.
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B. Error Trades: Execution of Trades To
Correct Operational and Clerical Errors
on Swap Execution Facilities
1. Background
58 The Commission notes that the guidance to
Core Principle 4 in Appendix B cites ‘‘clear errortrade and order-cancellation’’ policies as a type of
trading risk control that could be part of an
acceptable program for preventing market
disruptions. 17 CFR part 37 app. B (guidance to
Core Principle 4—paragraph (a)(5)—‘‘Risk controls
for trading’’).
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or clerical error’’ 59—involving swaps
designated as Required Transactions,
which are subject both to the clearing
requirement and the trade execution
requirement.60 This relief, as described
further below, has facilitated corrections
where the error trade has either been (i)
rejected by a DCO from clearing due to
the error; or (ii) accepted for clearing,
and therefore requires correction
through an offsetting trade. Pursuant to
the relief, SEFs may provide
counterparties with a bilateral,
‘‘corrective’’ execution process for
Required Transactions that does not
satisfy the required methods of
execution under § 37.9(a)(2) for swaps
subject to the trade execution
requirement.
For error trades rejected from clearing
by a DCO, the no-action relief has
provided operational flexibility from the
required methods of execution that
otherwise apply in conjunction with the
Commission’s ‘‘straight-through
processing’’ requirements for swaps
submitted to a DCO for clearing.61 To
promote the ‘‘near[-]instantaneous
acceptance or rejection of each trade [for
clearing],’’ 62 the Divisions issued a
2013 staff guidance expressing the view
59 The Divisions previously defined ‘‘operational
or clerical error’’ as any type of error other than a
rejection from clearing due to credit reasons. See
NAL No. 17–27 at 1 n.2.
60 See NAL No. 13–66. In April 2015, staff issued
additional no-action relief, which not only
reinstated the previous time-limited no-action relief
from NAL No. 13–66 for SEFs from the
requirements of § 37.9(a)(2) and § 37.203(a) for error
trades rejected from clearing, but also provided
relief for error trades accepted for clearing in NAL
No. 15–24. Commission staff subsequently extended
the relief provided in NAL No. 15–24 in June 2016
with NAL No. 16–58. This relief was most recently
extended in May 2017 by NAL No. 17–27 and
would expire on the effective date of any applicable
changes in the Commission’s regulations.
Commission staff in DMO recently issued NAL No.
20–01, which supplements NAL No. 17–27 to allow
market participants, sua sponte, to correct error
trades that have been accepted for clearing. In
instances where market participants correct an error
trade sua sponte, NAL No. 20–01 requires an ex
post facto review by the SEF of the error trade,
offsetting trade, and correcting trade on a T+1 basis.
Such review must consider whether a transaction
cancellation or price adjustment will adversely
impact market integrity, facilitate market
manipulation or other illegitimate activity, or
otherwise violate the CEA, Commission regulations,
or the SEF’s rules.
61 The Commission’s ‘‘straight-through
processing’’ requirements address the process of
routing transactions from execution through
clearing. See Customer Clearing Documentation,
Timing of Acceptance for Clearing, and Clearing
Member Risk Management, 77 FR 21278, 21283
(Apr. 9, 2012) (‘‘Timing of Acceptance for Clearing
Final Rule’’). 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.’’ Id. at 21285.
62 Staff Guidance on Swaps Straight-Through
Processing at 2 (Sept. 26, 2013)(‘‘2013 Staff STP
Guidance’’).
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that SEFs should have rules stating that
trades that are rejected from clearing are
‘‘void ab initio.’’ 63 Accordingly,
executed swaps that a DCO rejects from
clearing would be deemed void,
including swaps that are rejected due to
an operational or clerical error by the
SEF or the counterparties. Where the
counterparties still seek to execute the
transaction as intended, void ab initio
compels the counterparties to execute a
new transaction between one another
with the corrected terms. Where the
counterparties seek to execute a
correcting swap that is a Required
Transaction, the no-action relief allows
SEFs to accept bilaterally-arranged
swaps from the counterparties for
execution and submission for clearing,
rather than requiring them to execute
the correcting swap through an Order
Book or RFQ System.
For error trades accepted for clearing
by a DCO in spite of an operational or
clerical error in the swap, the no-action
relief has provided similar operational
flexibility from the prescribed execution
methods under § 37.9(a)(2).64
Accordingly, the relief allows SEFs to
accept a bilaterally arranged swap from
the counterparties for execution and
submission for clearing that (i)
economically offsets the initial error
trade that was accepted from clearing;
and (ii) corrects the initial error trade
with corrected terms as originally
intended by the counterparties.
The Divisions also attached certain
conditions to this no-action relief that,
among other things, specified timing
requirements for submitting these
transactions to a SEF for execution and
to a DCO for clearing. For transactions
correcting error trades that a DCO has
rejected from clearing, the Divisions
specified that the counterparties must
execute the transaction on a SEF, and
the SEF must submit the transaction for
clearing, as quickly as technologically
practicable after receipt of notice of the
rejection by the DCO to the clearing
members, but no later than one hour
63 2013 Staff STP Guidance at 5. The 2013 Staff
STP Guidance also addresses other elements of
‘‘straight-through processing’’ for swap transactions,
including void ab initio. See 2018 SEF Proposal at
61999–62002, 62019–62024. The Commission notes
that it proposed to address certain provisions from
the 2013 Staff STP Guidance in the 2018 SEF
Proposal, including a clarification that mandatory
application of void ab initio would be limited to
swap transactions that are rejected from clearing for
credit-related reasons; for rejections arising from
clerical or operational errors, the proposed
clarifications would allow a SEF to adopt other
corrective approaches that may not involve
execution of a offsetting trade or a correcting trade.
Id. at 62000–62001. As noted above, this proposal
is independent of the 2018 SEF Proposal.
64 See NAL No. 17–27 at 5.
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from the notice.65 For offsetting and
correcting transactions to error trades
that a DCO has accepted for clearing, the
Divisions specified that such execution
and submission to clearing of those
transactions must occur no later than
three days after the error trade was
executed.66
2. Proposed § 37.9(e)
The Commission proposes to amend
the SEF regulatory framework by adding
subsection (e) to § 37.9 to establish a
flexible SEF error trade policy standard
that would, among other things,
incorporate the intent of the existing noaction relief in NAL No. 17–27 for
resolving errors in Required
Transactions. Proposed § 37.9(e)(2)(i)
would specify that a SEF must maintain
rules and procedures that are fair,
transparent, consistent, and allow for
timely resolution of an ‘‘error trade,’’ as
defined under proposed
§ 37.9(e)(1)(ii).67 This proposed
standard would apply to any error trade
that occurs on a SEF, regardless of
whether the swap is submitted for
clearing or not. The Commission
believes that the proposed standard is a
flexible approach that also clarifies the
key principles that any SEF’s error trade
policy should address.
Further, under proposed § 37.9(e)(2)(i)
SEFs must have error trade rules and
procedures that require market
participants to provide prompt notice to
the SEF of an error trade and, as
65 Id.
at 6.
In addition, for error trades that are
accepted for clearing, DMO issued NAL No. 20–01,
which supplements NAL No. 17–27 to allow market
participants, sua sponte, to correct error trades that
have been accepted for clearing with an ex post
facto review by the SEF. For error trades accepted
for clearing and corrected under the relief in NAL
No. 20–01, DMO specified that such error trades
would need to be corrected no later than 24 hours
after the error trade was executed. See NAL No. 20–
01 at 4.
67 As proposed, an ‘‘error trade’’ would be defined
as any trade executed on or subject to the rules of
a swap execution facility that contains an
operational or clerical error. With respect to
‘‘package transactions,’’ as defined under proposed
§ 37.9(d)(1), the Commission deems the submission
of the component transactions in a sequence that
causes a rejection from clearing of an individual
component to constitute an operational error that
could be resolved through a correcting trade under
proposed § 37.9(e)(2)(i)(A). Market participants had
previously informed the Commission that an
individual component transaction may be rejected
from clearing if prematurely submitted because the
risk of that component, in isolation, could cause a
trader to exceed its credit limit. Under a different
submission sequence of component transactions to
the DCO, however, the net risk of all of those
transactions may not have exceeded the credit limit,
thereby avoiding the rejection. The Commission
emphasizes, however, the use of a corrective trade
may only apply to the rejected component and
otherwise would not apply to the other legs of the
package transaction that have been accepted for
clearing.
66 Id.
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applicable, the corresponding correcting
trade and offsetting trade.68 This notice
need not be separate from the error trade
correction process.
The Commission believes that such a
requirement is important to facilitate
SEFs’ fulfillment of their self-regulatory
obligations. In particular, the
Commission believes that providing a
SEF prompt notice that an error trade
has occurred on its trading system(s) or
platform(s) will further enable it to
facilitate direct supervision of it markets
in order to determine whether a rule
violation has occurred as required under
§ 37.203(b) as well as enhance its ability
to carry out real-time market monitoring
of all trading activity on its system(s) or
platform(s) to identify disorderly trading
and any market or system anomalies
pursuant to § 37.203(e).69
Proposed § 37.9(e) would also require
a SEF to adopt rules to resolve error
trades that involve swaps submitted for
clearing. For an error trade rejected from
clearing and therefore deemed void ab
initio, proposed § 37.9(e)(2)(i)(A) would
require a SEF to permit the
counterparties to subsequently execute a
correcting trade, as defined in proposed
§ 37.9(e)(1)(i), through any method of
execution offered by the SEF. For an
error trade that has been accepted for
clearing, proposed § 37.9(e)(2)(i)(B)
would require a SEF to permit the
counterparties to subsequently execute
both an offsetting trade, as defined in
proposed § 37.9(e)(1)(iii), and a
correcting trade through any method of
execution offered by the SEF.70
68 To the extent a SEF implements error trade
rules and procedures that allow market participants
to correct error trades sua sponte with an ex post
facto review by the SEF, that the SEF must require
that market participants notify it of the subsequent
correcting and offsetting trades. Conversely, a SEF
that adopts error trades rules and procedures in
which the SEF is responsible for correcting the error
trade, that SEF would not be required to have
market participants notify it of the subsequent
correcting and offsetting trades. Regardless of the
type of error trade rules and procedures a SEF
adopts, it is required to adopt rules and procedures
which require its market participants to provide
prompt notice to it of an error trade that has
occurred on its trading system(s) or platform(s).
69 See 17 CFR 37.203(b); 17 CFR 37.203(e).
70 NAL No. 17–27 also provided relief from
§ 37.203(a), which prohibits pre-arranged trading,
for offsetting trades and correcting trades. The
Commission, however, does not view a regulatory
amendment corresponding to that relief as
necessary. The existing prohibition already
provides an exception to that prohibition by
allowing a SEF to adopt trading practices that are
certified or approved by the Commission pursuant
to part 40 of the Commission’s regulations. See 17
CFR 37.203(a). Accordingly, the Commission
anticipates that a SEF would implement proposed
§ 37.9(e) by self-certifying or adopting rules subject
to Commission review under part 40 that specify
the manner in which counterparties may execute
offsetting and correcting trades.
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Consistent with the existing no-action
relief, this approach would continue to
provide flexibility in the execution
methods that a SEF may offer to
counterparties to execute offsetting and
correcting trades that involve swaps that
are Required Transactions.71 Based on
its experience with the existing noaction relief, the Commission believes
that this flexibility would continue to
promote SEF operational efficiency by
allowing SEFs to offer error trade
protocols that are tailored to their
markets and to allow identification and
resolution of operational and clerical
errors in a timely manner. Without such
flexibility, market participants with an
error in Required Transactions would
otherwise be prohibited from
determining how to resolve the error
between themselves by entering into an
offsetting trade or a new trade with the
correct terms due to the execution
method requirements under § 37.9(a)(2),
which require that all Required
Transactions be traded via either an
Order Book or RFQ System.
The Commission also believes that the
proposed approach would further the
SEF statutory goals of promoting trading
on SEFs and pre-trade price
transparency in the swaps market.72 The
proposed rules provide flexibility to
depart from required execution methods
that are otherwise intended to advance
those statutory goals; allowing
counterparties to correctly and
efficiently execute swaps with the
intended terms and conditions,
however, enhances market integrity on
SEFs, which promotes SEF
participation. Additionally, the
proposed rules would also help to
ensure that trade data, which market
participants rely upon to inform their
swaps trading decisions, accurately
reflects prevailing market pricing at any
given time.
The Commission notes that the
existing no-action relief is currently
subject to several conditions applicable
to SEFs and counterparties—for
example, SEFs must affirmatively
determine, or determine after an ex post
facto review, that an error trade has
occurred.73 Except as incorporated in
the proposed rules herein, the
Commission intends for the proposed
approach to otherwise provide SEFs
with the flexibility to address such
aspects of its error trade policy in a
71 The Commission notes that swaps that are
Permitted Transactions, including those that are
submitted to a DCO for clearing, may already be
executed through any method of execution offered
by a SEF pursuant to § 37.9(c)(2).
72 See 7 U.S.C. 7b–3(e).
73 See NAL No. 17–27 at 5–7 and NAL No. 20–
01 at 4–5.
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manner that is best suited to its trading
and trade processing operations.74
The proposed rules, however, would
also adopt some limitations that are
similar to the existing no-action relief,
including specified timeframes for
executing and submitting these trades
for clearing. For correcting trades
associated with an error trade that has
been rejected from clearing, proposed
§ 37.9(e)(2)(i)(A) would require the SEF
to submit the correcting trade for
clearing to the registered DCO or exempt
DCO as soon as technologically
practicable, but no later than one hour
after notice of the rejection to the
relevant clearing members. For an
offsetting trade and a correcting trade
associated with an error trade that
already has been accepted for clearing,
proposed § 37.9(e)(2)(i)(B) would
require the SEF to submit both types of
trades to the registered DCO or exempt
DCO as soon as technologically
practicable, but no later than three days
after the registered DCO or exempt DCO
accepted the error trade for clearing.75
74 Under the proposal’s principles-based
approach, the Commission notes that a SEF would
not be prohibited from incorporating the conditions
contained within NAL No. 17–27, or implementing
rules that allow market participants, sua sponte, to
correct error trades that have been accepted for
clearing with an ex post facto review by the SEF
of the error trade, offsetting trade, and correcting
trade on a T+1 basis as is contemplated by NAL No.
20–01. Further, this proposal would not preclude
SEFs from deploying error trade rules and
procedures which consider whether a transaction
cancellation or price adjustment will adversely
impact market integrity, facilitate market
manipulation or other illegitimate activity, or
otherwise violate the CEA, Commission regulations,
or the SEF’s rules. However, regardless of the error
trade rules and procedures that a SEF may adopt,
the Commission notes that pursuant to this
proposal such rules must be fair, transparent, and
consistent. For example, in a scenario where a SEF
is unsure as to how to address an error, the SEF may
have rules which make it clear that the SEF will
seek guidance and consent from both counterparties
to the error trade before correcting the error trade.
The Commission believes that such rule would be
fair as it considers the positions of both
counterparties and is transparent as it makes clear
what the SEF will do in a specific scenario.
75 The Commission notes that the supplemental
conditions contained in NAL No. 20–01 require
error trades that have been accepted to clearing to
be corrected as soon as technologically practicable
but no later than 24 hours after the error trade was
executed. See NAL No. 20–01 at 4. However, as
noted above, the Commission intends for this
proposal to provide a SEF with the flexibility to
address such aspects of its error trade policy in a
manner that is best suited to its trading and trade
processing operations. As such, SEFs may continue
to have error trade rules and procedures that are
contemplated in both NAL No. 17–27 and NAL No.
20–01 for error trades that have been accepted for
clearing. Therefore, the Commission is proposing
that an error trade that has already been accepted
for clearing would be required to be corrected as
soon as technologically practicable, but no later
than three days after the registered DCO or exempt
DCO accepted the error trade for clearing, as this
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addition to these proposed timeframes,
proposed § 37.9(e)(2)(ii) would prohibit
counterparties from executing a second
correcting trade to fix an error trade if
the initial correcting trade is rejected
from clearing.
The Commission believes that these
proposed limitations are consistent with
the goal of promoting straight-through
processing. The proposed timing
requirements, in particular, are intended
to provide a SEF and the counterparties
to an error trade with an appropriate
amount of time to identify and resolve
error trades, while also minimizing
delays to achieving prompt and efficient
clearing of transactions. Similarly,
limiting the number of instances in
which counterparties may attempt to
correct an error trade would also help to
facilitate prompt and efficient clearing
by incentivizing the counterparties to
accurately execute their correcting trade
as quickly as possible. The Commission,
however, seeks additional public
comment regarding this proposed
limitation, as well as the
appropriateness of the proposed
timeframes.
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3. Request for Comment
The Commission requests comment
on all aspects of proposed § 37.9(e). As
noted above, the 2018 SEF Proposal also
discussed this topic. Comments made
on the 2018 SEF Proposal that are
relevant to this rulemaking must be
resubmitted to be considered. The
Commission also invites comments
specifically on the following:
(27) The Commission notes that
§ 37.203(e) already specifies that a SEF
may resolve errors by adjusting trade
prices or canceling trades to mitigate
‘‘market disrupting events;’’ such action
by a SEF must be ‘‘transparent to the
market and subject to standards that are
clear, fair, and publicly available.’’
Should the Commission adopt a single
rule for all error trades under proposed
§ 37.9(e) that is similar to this standard,
or is the proposed standard, i.e., ‘‘fair,
transparent, consistent, [and] allow for
timely resolution’’ more appropriate? If
the Commission should maintain
separate standards, please explain why.
(28) Is the proposed timeframe
adequate for the submission of a
is the longest timeframe for correcting such error
trades as contemplated in both NAL No. 17–27 and
NAL No. 20–01. Nonetheless, the Commission is
seeking comment on whether three days is an
appropriate timeframe for error trades that have
been accepted for clearing to be corrected. Further,
despite the proposed outer limit of three days for
correcting error trades that have been accepted for
clearing, the Commission notes that SEFs and
market participants are expected to correct such
error trades as soon as technologically practicable
as is proposed under § 37.9(e)(2)(i)(B).
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correcting trade to resolve an error trade
rejected from clearing for non-credit
reasons? If not, please provide an
alternative timeframe and explain why
such an alternative would be more
appropriate.
(29) Is the proposed timeframe
adequate for submitting an offsetting
trade and correcting trade to resolve an
error trade accepted for clearing? If not,
please provide an alternative timeframe
and explain why such an alternative
would be more appropriate.
(30) Under proposed § 37.9(e)(2)(i),
SEFs must have rules which require
market participants to provide prompt
notice to the SEF that an error trade has
occurred. Is it clear what is meant by
‘‘prompt notice’’ in § 37.9(e)(2)(i)? If not,
please explain how the Commission
should clarify this provision.
(31) Should the Commission require
that notification to a SEF of an error
trade occur within a specified
timeframe? If so, what is the appropriate
time frame for that notification to occur?
(32) If a SEF adopts error trade rules
and procedures that allow market
participants to sua sponte correct an
error trade with an ex post facto review
by the SEF, should the Commission
allow the SEF to have rules permitting
market participants to withhold notice
of the error trade until the market
participant notifies the SEF of the
correcting trade and, as applicable, the
offsetting trade?
(33) Should the Commission require
SEFs to affirmatively determine, or
determine after an ex post facto review,
that an error trade has occurred? Why or
why not?
(34) If a SEF should affirmatively
determine that an error trade had
occurred, what is the appropriate time
frame for that declaration to occur?
(35) If a SEF should determine that an
error trade has occurred after an ex post
facto review, what is the appropriate
time frame for that review and
determination to occur?
(36) If a SEF should affirmatively
determine that an error trade had
occurred, should the SEF’s review
consider whether a transaction
cancellation or price adjustment will
adversely impact market integrity,
facilitate market manipulation or other
illegitimate activity, or otherwise violate
the CEA, Commission regulations, or the
SEF’s rules?
(37) If a SEF should determine that an
error trade has occurred after an ex post
facto review, should the SEF’s review
consider whether a transaction
cancellation or price adjustment will
adversely impact market integrity,
facilitate market manipulation or other
illegitimate activity, or otherwise violate
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the CEA, Commission regulations, or the
SEF’s rules?
(38) Does § 37.9(e) sufficiently address
potential situations in which a
component of a package transaction is
rejected from clearing by the relevant
registered DCO or exempt DCO because
of the sequencing of the components of
the package transaction submitted for
clearing at the registered DCO or exempt
DCO? With respect to proposed
§ 37.9(e), are there any other issues that
should be addressed regarding package
transactions?
(39) Should the same error trade
policy also be available to correct any
errors contained in a correcting trade or
an offsetting trade, or should the
number of corrections be limited? If an
initial correcting trade or offsetting trade
that is executed to correct an error trade
contains an operational or clerical error,
should the counterparties be allowed to
submit another correcting trade or
offsetting trade?
(40) Should the Commission require
SEFs to notify its market when it
receives notice from a market
participant that an error trade has
occurred?
(41) Should the Commission prescribe
different error trade rules and
procedures depending on the status (i.e.,
Required Transactions or Permitted
Transactions) of the original swap
transaction? Please explain why or why
not.
(42) Are there any conditions in NAL
No. 17–27 or supplemental NAL No.
20–01 not contained within this
proposal that the Commission should
require SEFs to adopt in their error trade
rules and procedures? If so, please
explain in detail why such conditions
are necessary and appropriate to be
required in SEF error trade rules and
procedures.
C. Real-Time Public Reporting: Block
Trade Definition
1. Existing § 43.2
Section 43.2 defines a swap ‘‘block
trade’’ as a publicly reportable swap
transaction that (i) involves a swap that
is listed on a SEF or DCM; (ii) occurs
away from the SEF’s or DCM’s trading
system or platform and is executed
pursuant to the SEF’s or DCM’s rules
and procedures; (iii) has a notional or
principal amount at or above the
appropriate minimum block trade size
applicable to such swap; and (iv) is
reported subject to the rules or
procedures of the SEF or DCM and the
rules set forth under part 43, including
the appropriate time delay requirements
set forth under § 43.5.76 In specifying
76 17
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these elements, the Commission
considered the treatment of block trades
in various swap and non-swap
markets.77 In particular, the
Commission looked to the futures
markets, where futures block trades are
permissible, privately-negotiated
transactions that equal or exceed a
DCM’s specified minimum quantity of
futures or options contracts and is
executed away from the DCM’s
centralized market but pursuant to its
rules.78 Accordingly, the Commission’s
regulatory definition of a ‘‘block trade’’
for swaps closely tracks this futures
market concept of a block trade.
Similar to futures block trades, the
Commission requires that swap block
trades ‘‘occur away’’ from a SEF’s or a
DCM’s trading system or platform, but
pursuant to the SEF’s or a DCM’s rules
and procedures.79 The Commission
clarified the ‘‘block trade’’ definition by
stating that ‘‘[a]ny swap that is executed
on a SEF or a DCM’s trading system or
platform, regardless of whether it is for
a size at or above the appropriate
minimum block size for such swap, is
not a block trade under this definition.
. . .’’ 80 Accordingly, to receive the
fifteen-minute public reporting delay
that block trades are entitled to under
§ 43.5(d), the swap transaction not only
must have a notional amount at or above
the appropriate minimum block size,
but must also ‘‘occur away’’ from the
SEF’s or the DCM’s trading system or
platform.81
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2. Proposed Amendment to § 43.2
During the part 37 implementation
process, SEFs and market participants
informed the Commission that for swap
transactions that are intended to be
cleared, requiring that such swaps
‘‘occur away’’ from a SEF’s trading
system or platform creates an issue with
carrying out pre-execution credit
screening.82 These market participants
77 Real-Time Public Reporting of Swap
Transaction Data, 75 FR 76140, 76159 (proposed
Dec. 7, 2010) (discussion of block trades with
respect to futures).
78 Id.
79 17 CFR 43.2.
80 Procedures To Establish Appropriate Minimum
Block Sizes for Large Notional Off-Facility Swaps
and Block Trades, 78 FR 32866, 32904 n.425 (May
31, 2013).
81 CEA section 2(a)(13) requires the Commission
to establish rules that govern the real-time reporting
of swap transaction and pricing data to the public,
but also directs the Commission, among other
things, to prescribe rules that specify the
appropriate reporting time delay for block trades,
including the criteria for determining what
constitutes a block trade. 7 U.S.C. 2(a)(13).
82 For the avoidance of doubt, the Commission
believes that if the parties purport to execute a
block trade away from the SEF without first
obtaining a credit check, an FCM clearing member
that clears such trade and does not have knowledge
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noted that, in many cases, clearing
FCMs are unable to conduct preexecution credit screening for such
block trades because they are unaware
that a block trade has occurred away
from a SEF until after it has been
executed and reported to the SEF.83
Accordingly, SEFs were unable to
facilitate pre-execution credit checks for
block trades.
DMO acknowledged this operational
challenge and accordingly has granted
ongoing no-action relief from the
requirement that swap block trades
‘‘occur away’’ from a SEF.84 Based on
Commission staff no-action relief
provided in NAL No. 17–60, a SEF may
allow market participants to execute
swap block trades that are ITBC 85 on a
SEF’s non-Order Book trading system or
platform.86 As a result, FCMs and SEFs
have been able to comply with their
respective pre-execution credit
screening obligations.
The Commission proposes to revise
the ‘‘block trade’’ definition under
§ 43.2 in order to allow market
participants to utilize a SEF’s non-Order
Book trading system or platform while
still allowing swap block trades to
‘‘occur away’’ from a SEF.87 The
proposed revision to the ‘‘block trade’’
definition not only allows swap block
trades that are ITBC to be executed on
a SEF’s non-Order Book trading system
or platform—as is currently provided for
in NAL No. 17–60—but the proposed
definition would also permit swap block
trades that are not ITBC to be executed
on SEF.88 The Commission believes that
having a single set of block trade rules
for both ITBC and non-ITBC swap block
trades will help to reduce operational
complexity for both SEFs and market
participants. Further, the Commission
of such purported execution is not in violation of
the pre-execution credit check requirement under
Commission regulation 1.73. NAL No. 17–60 n.9.
The Commission understands that currently no
mechanism exists to enable a pre-execution credit
check where blocks are executed away from a SEF;
however, this proposal does not preclude
participants from developing and using such a
mechanism in the future.
83 NAL No. 17–60 at 2.
84 NAL No. 17–60; NAL No. 16–74; NAL No. 15–
60; NAL No. 14–118.
85 As used herein, swaps that are ITBC are swaps
(i) of a type accepted for clearing by a DCO, and
(ii) intended to be submitted for clearing
contemporaneously with execution. NAL No. 17–60
n.2.
86 NAL No. 17–60 at 2–3.
87 The Commission notes that it has proposed to
address the issue of block trades on SEFs in the
2018 SEF Proposal. As noted above, this proposal
is independent of the 2018 SEF Proposal.
88 The Commission notes that in the 2018 SEF
Proposal, it proposed for all SEF swap block trades
to be executed on the SEF. The Commission
continues to evaluate this proposal. See supra note
15.
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9419
believes that permitting execution of
block trades on a SEF’s non-Order Book
trading systems or platforms furthers the
statutory SEF goal of promoting the
trading of swaps on SEFs.89 Moreover,
for swap block trades that are ITBC and
executed on a SEF’s non-Order Book
trading system or platform, the
Commission believes that the proposed
revised definition would (i) allow FCMs
to conduct pre-execution credit
screenings in accordance with § 1.73;
and (ii) allow SEFs to facilitate those
screenings in accordance with the
Commission’s proposed requirement
under § 37.702(b).90
Further, the Commission notes that
this revised block trade definition is
consistent with the provisions of the
Dodd-Frank Act. CEA section 2(a)(13),
as amended by the Dodd-Frank Act,
directs the Commission to prescribe
criteria for determining what constitutes
a block trade and to establish
appropriate post-trade reporting time
delays. The provision, however, does
not set forth any pre-trade requirements,
such as a requirement that the
transaction be executed away from a
SEF. In addition, the Commission
believes that allowing participants to
use a SEF’s non-Order Book
functionalities to execute swap block
trades is consistent with the
Commission’s regulatory approach to
mitigate risks of information leakage
(i.e., a ‘‘winner’s curse’’) as market
participants can use the functionality of
the SEF to execute a block trade in a
manner that will not disclose the order
to the entire market.91 SEFs currently
provide various modes of execution to
enable market participants to execute a
block trade on the SEF without
providing disclosure of the block trade
to the market or to multiple market
participants.92
Finally, the Commission believes that
permitting swap block trades to be
executed on a SEF’s non-Order Book
trading platforms while also allowing
them to ‘‘occur away’’ from a SEF
provides SEFs increased flexibility. In
particular, SEFs will be able to provide
execution methods for swap block
89 See
7 U.S.C. 7b–3(e).
Commission notes that proposed
§ 37.702(b) applies to SEFs that list (i) swaps that
are subject to the clearing requirement; and/or (ii)
swaps that are not subject to the clearing
requirement, but for which the SEF facilitates
processing and routing to a DCO for clearing.
91 SEF Core Principles Final Rule, 78 FR 33498,
33562, and 33563.
92 For example, the Commission has observed that
some SEFs offer a ‘‘RFQ-to-one’’ functionality that
allows counterparties to bilaterally negotiate a block
trade between two potential counterparties, without
requiring disclosure of the potential trade to other
market participants on a pre-trade basis.
90 The
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trades that are most suitable, efficient,
and cost-effective for the product being
traded, the SEF’s market, and its market
participants.
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3. Request for Comment
The Commission requests comment
on all aspects of the proposed revision
to the definition of ‘‘block trade’’ in
§ 43.2. The 2018 SEF Proposal also
proposed revisions to this definition.
Comments made on the 2018 SEF
Proposal that are relevant to this
rulemaking must be resubmitted to be
considered. The Commission also
invites comments specifically on the
following:
(43) Is the Commission’s proposed
revision to the definition of ‘‘block
trade’’ appropriate? If not, how should
the Commission amend the proposed
definition?
(44) Should the Commission continue
to permit market participants to execute
ITBC swap block trades away from but
pursuant to the rules of a SEF? Please
explain why or why not.
(45) Should the Commission continue
to permit market participants to execute
non-ITBC swap block trades away from
but pursuant to the rules of a SEF?
Please explain why or why not.
(46) Should the Commission prohibit
swap block trades that are subject to the
trade execution requirement from
‘‘occurring away’’ from a SEF but
pursuant to its rules?
(47) Should the Commission further
limit or prohibit the execution of swap
block trades through an RFQ system, as
defined in § 37.9(a)(3)? For example,
should the Commission limit the
number of market participants that may
receive a RFQ for a swap block trade
that is intended to be executed on the
SEF? Please explain why or why not.
(48) Should the Commission allow
swap block trades to be executed
through an Order Book, as defined in
§ 37.3(a)(3)? Please explain why or why
not.
III. Effective Date and Transition Period
The Commission proposes that the
effective date for the proposed
regulations be 60 days after publication
of final regulations in the Federal
Register. The Commission preliminarily
believes that such an effective date
would allow SEFs and market
participants sufficient time to adapt to
the amended and additional rules in an
efficient and orderly manner.
Request for Comment
The Commission requests comment
on whether the proposed effective date
is appropriate and, if not, the
Commission further requests comment
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on possible alternative effective dates
and the basis for any such alternative
dates.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) 93 requires Federal agencies, in
promulgating regulations, to consider
the impact of those regulations on small
businesses. The regulations adopted
herein will affect SEFs and their market
participants. The Commission has
previously established certain
definitions of ‘‘small entities’’ to be used
by the Commission in evaluating the
impact of its regulations on small
entities in accordance with the RFA.94
The Commission previously concluded
that SEFs are not small entities for the
purpose of the RFA.95 The Commission
has also previously stated its belief in
the context of relevant rulemakings that
SEFs’ market participants, which are all
required to be eligible contract
participants (‘‘ECPs’’) 96 as defined in
section 1a(18) of the CEA,97 are not
small entities for purposes of the RFA.98
Therefore, the Chairman, on behalf of
the Commission, hereby preliminarily
certifies, pursuant to 5 U.S.C. 605(b),
that the regulations will not have a
significant economic impact on a
substantial number of small entities.
The Commission invites the public to
comment on whether SEFs and SEF
market participants covered by these
proposed rules should be considered
small entities for the purpose of the
RFA.
B. Paperwork Reduction Act
The Paperwork Reduction Act of
1995, 44 U.S.C. 3501 et seq. (‘‘PRA’’)
imposes certain requirements on
Federal agencies (including the
Commission) in connection with
conducting or sponsoring any
‘‘collection of information,’’ 99 as
defined by the PRA. Among its
purposes, the PRA is intended to
minimize the paperwork burden to the
private sector, to ensure that any
collection of information by a
government agency is put to the greatest
93 5
U.S.C. 601 et seq.
FR 18618—18621 (Apr. 30, 1982).
95 SEF Core Principles Final Rule, 78 FR 33476,
33548 (June 4, 2013) (citing 47 FR 18618, 18621
(Apr. 30, 1982) (discussing DCMs); 66 FR 42256,
42268 (Aug. 10, 2001) (discussing DTFs, ECMs, and
EBOTs); and 66 FR 45604, 45609 (Aug. 29, 2001)
(discussing registered DCOs)).
96 17 CFR 37.703.
97 7 U.S.C. 1(a)(18).
98 66 FR 20740, 20743 (Apr. 25, 2001) (stating that
ECPs by the nature of their definition in the CEA
should not be considered small entities).
99 See 44 U.S.C. 3502(3)(A).
94 47
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possible uses, and to minimize
duplicative information collections
across the government.100
The PRA applies to all information,
regardless of form or format, whenever
the government is obtaining, causing to
be obtained, or soliciting information,
and includes required disclosure to
third parties or the public, of facts or
opinions, when the information
collection calls for answers to identical
questions posed to, or identical
reporting or recordkeeping requirements
imposed on, ten or more persons.101 The
PRA requirements have been
determined to include not only
mandatory, but also voluntary
information collections, and include
both written and oral
communications.102 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.
This proposed rulemaking contains
collections of information for which the
Commission has previously received
control numbers from OMB. The titles
for these collections of information are
‘‘Real-Time Public Reporting and Block
Trades, OMB control number 3038–
0070’’ and ‘‘Core Principles and Other
Requirements for Swap Execution
Facilities, OMB control number 3038–
0074.’’ This proposed rulemaking would
not impose any new information
collection requirements from any
persons or entities that require approval
of OMB under the PRA.
C. Cost-Benefit Considerations
Section 15(a) of the CEA 103 requires
the Commission to consider the costs
and benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders. 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.
100 See
44 U.S.C. 3501.
44 U.S.C. 3502(3).
102 See 5 CFR 1320.3(c)(1).
103 7 U.S.C. 19(a).
101 See
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1. Background
The Commission is proposing to
amend certain rules in parts 36, 37, and
43 of its regulations relating to the
execution of certain package
transactions on SEFs; the resolution of
error trades on SEFs; and the execution
of block trades on SEFs.
The baseline against which the
Commission considers the costs and
benefits of these proposed rules is the
statutory and regulatory requirements of
the CEA and Commission regulations
now in effect, in particular CEA section
5h and certain rules in parts 37 and 43
of the Commission’s regulations. The
Commission, however, notes that as a
practical matter SEFs and market
participants have adopted some current
practices based upon no-action relief
provided by Commission staff that is
time-limited in nature.104 As such, to
the extent that SEFs and market
participants have relied on relevant staff
no-action letters, the actual costs and
benefits of the proposed rules as
realized in the market may not be as
significant.
In some instances, it is not reasonably
feasible to quantify the costs and
benefits to SEFs and certain market
participants with respect to certain
factors, for example, market integrity.
Notwithstanding these types of
limitations, however, the Commission
otherwise identifies and considers the
costs and benefits of these rules in
qualitative terms.
The following consideration of costs
and benefits is organized according to
the rules and rule amendments
proposed in this release. For each rule,
the Commission summarizes the
proposed amendments and identifies
and discusses the costs and benefits
attributable to such rule. The
Commission, where applicable, then
considers the costs and benefits of the
proposed rules in light of the five public
interest considerations set out in section
15(a) of the CEA.
The Commission notes that this
consideration of costs and benefits is
104 In its discussion of alternatives, the
Commission believes it is also relevant to consider
the costs and benefits of the proposed regulations
in comparison to circumstances in which such noaction relief has expired and is no longer available.
The Commission further notes that in connection
with NAL No. 16–58 and its extension NAL No. 17–
27 (relief related to clerical or operational error
trade resolution), market participants specifically
requested that the Commission undertake
rulemakings to establish a permanent solution for
addressing these clerical and operational errors,
rather than merely extending the previous NAL
relief. See NAL No. 16–58 and NAL No. 17–27. In
contrast, previous requests for no-action relief from
market participants for the NALs which preceded
NAL No.16–58 and NAL No. 17–27 were merely for
temporary relief.
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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 discussion of
costs and benefits below refers to the
effects of the proposed rules on all
swaps activity subject to the proposed
and amended regulations, whether by
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).105
2. Package Transactions
The Commission proposes to add
§ 37.9(d) and amend § 37.9(a)(2) to
permit the swap components of certain
package transactions to be executed via
flexible methods of execution pursuant
to § 37.9(c)(2). The Commission
proposes to define a ‘‘package
transaction’’ for the purpose of the
proposed rule as a transaction
consisting of two or more component
transactions executed between two or
more counterparties where (i) at least
one component transaction is subject to
the trade execution requirement in
section 2(h)(8) of the Act; (ii) execution
of each component transaction is
contingent upon the execution of all
other component transactions; and (iii)
the component transactions are priced
or quoted together as one economic
transaction with simultaneous or nearsimultaneous execution of all
components. Based on this proposed
definition and consistent with existing
no-action relief, the Commission
proposes to allow the swap component
of the following three categories of
package transactions to be executed via
flexible means of execution pursuant to
§ 37.9(c)(2): (1) MAT/Non-MAT
Uncleared package transactions; (2)
MAT/Non-Swap Instrument package
105 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.
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9421
transactions; 106 and (3) MAT/NonExclusive CFTC Swap package
transactions.
In addition, the Commission is
proposing to exempt the swap
components of these three types of
package transactions from the
requirement in § 37.3 that the SEF offer
an Order Book for every swap listed for
trading on the SEF, while continuing to
require that SEFs offer an Order Book
for outright transactions in every swap
listed for trading on the SEF. Finally,
the Commission is proposing to use its
exemptive authority pursuant to CEA
section 4(c) to exempt swap transactions
that are executed as a component of a
package transaction that includes a
component that is a new issuance bond
from the trade execution requirement
under section 2(h)(8) of the Act.
Benefits: The proposed rule would
allow market participants to choose the
most suitable execution method for each
package transaction and will allow SEFs
to continue to offer flexible execution
methods for these package transactions
rather than only offer the required
methods of execution for swaps subject
to the trade execution requirement. The
Commission expects this would reduce
execution risks, improve efficiency, and
decrease transaction costs as market
participants would be able to avoid
legging into transactions, that is,
entering into each part of the package
separately. The Commission notes that
these benefits are currently available to
market participants through existing noaction relief. The Commission further
believes that the proposed rule would
provide the liquidity and transparency
benefits of increased trading of
component swaps on SEFs, as without
the proposed flexibility market
participants would be unable or
unwilling to trade such swap
components through SEFs’ required
methods of execution.107
106 Under proposed § 37.9(d)(3), consistent with
the no-action relief, this category specifically
excludes U.S. Dollar Spreadover package
transactions; MAT/Futures package transactions,
MAT/Agency MBS package transactions; and New
Issuance Bond package transactions.
107 Further, while the proposed rules also provide
flexibility from the required methods of execution
that are otherwise intended to help promote pretrade transparency on SEFs, the Commission notes
that permitting market participants to use flexible
methods of execution is consistent with how
package transactions are treated within other
jurisdictions. For example, in the European Union
(‘‘EU’’) certain package transactions (including
package transactions for which the Commission
currently requires the swap component to be
executed through the required methods of
execution, such as U.S. Dollar Spreadover package
transactions) are eligible to be waived from the EU’s
transparency regime. The Commission believes that
this proposal strikes an appropriate balance
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The Commission believes that not
requiring SEFs to offer an Order Book
for the swap components of the three
types of relevant package transactions
would benefit SEFs by helping them to
reduce operating costs, as they would
no longer be required to operate and
maintain an Order Book for trading
those swaps that are components of
those package transactions. However,
SEFs would need to retain the
availability of Order Books for those
swaps executed as outright transactions.
Further, as discussed above, given the
illiquid and bespoke nature of various
components within the relevant package
transactions, the Commission
acknowledges that the Order Book is not
the ideal method of execution for many
such transactions. Therefore, the
Commission anticipates that if SEFs are
not required to provide an Order Book
for relevant package transactions that
are not suitable for Order Book trading,
SEFs will be able to more effectively
employ their resources, and no longer
face the prospect of being required to
provide Order Books that will not be
utilized given the complex, illiquid, and
bespoke nature of various components
of the relevant package transactions.
The Commission believes that the
proposal to exempt swap transactions
that are executed as a component of a
package transaction that includes a
component that is a new issuance bond
from the trade execution requirement
will ensure that market participants
such as bond underwriters and issuers
can continue to execute these packages
(where the new-issuance bond is hedged
by an interest rate swap with tenor and
payment terms that typically match the
terms of the bond issuance) off-SEF. As
discussed above, this proposed
exemption may facilitate new bond
issuances, which may benefit capital
formation by helping market
participants to raise capital and fund
origination loans for businesses and
homeowners. Moreover, in light of the
involvement of the bond issuer and the
underwriter in arranging and executing
a package transaction in conjunction
with a new issuance bond and the
unique negotiation and fit-for-purpose
nature of these package transactions, the
Commission understands that it remains
difficult or impossible to trade these
package transactions on a SEF. SEFs
between promoting pre-trade transparency and
ensuring that U.S. markets and their participants
are not unnecessarily burdened. See Regulation
(EU) 2016/1033 of the European Parliament and of
the Council of 23 June 2016 amending Regulation
(EU) No 600/2014 on markets in financial
instruments, Regulation (EU) No 596/2014 on
market abuse and Regulation (EU) No 909/2014 on
improving securities settlement in the European
Union and on central securities depositories.
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have not been able to design an
execution method suitable for this
particular type of package, rendering it
impracticable to execute these packages
on-SEF. While the swap components of
many swap/new-issuance bond
packages executed today are not
currently subject to the trade execution
requirement,108 the proposed rule
would ensure that those transactions
would remain exempt in the event the
trade execution requirement is
expanded to include more types of
swaps.
Costs: The proposed amendments to
allow flexible execution methods for
certain package transactions and the
proposed exemption for package
transactions that include a new issuance
bond should not impose costs on market
participants since they only provide
flexibility to market participants and do
not require them to change their current
trade practices. Moreover, to the extent
that market participants are relying on
existing no-action relief, they could
continue to implement existing industry
practice. The Commission believes that
current SEF rules typically allow
participants to utilize flexible execution
methods pursuant to the existing noaction relief, but to the extent that SEFs
need to modify their rules to incorporate
the proposed amendments, they may
incur modest costs.
As noted, not requiring SEFs to offer
an Order Book for the swap components
of the relevant package transactions may
enable SEFs to reduce operating costs.
Since any existing Order Books for swap
components of the relevant package
transactions are not actively used and
are not practicable for market
participants to use, removing these
Order Books (and not requiring SEFs to
create such Order Books) should not
impose significant costs on market
participants.
Section 15(a) Factors
a. Protection of Market Participants and
the Public
The Commission believes that the
proposed amendments and exemption
will protect market participants from
the risks associated with legging into the
relevant packages by enabling market
participants to enter into package
transactions using appropriate
execution methods. Permitting SEFs to
eliminate the Order Book for use when
swaps are components of package
transactions should not impact
108 For example, the swap component may be a
forwarding-starting swap whose start date
corresponds to the issuance date of the bond.
Forward starting swaps are not currently subject to
the trade execution requirement.
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protection of market participants. While
protecting market participants also
benefits the public, the Commission has
not identified any further effect of the
proposal on protection of the public.
b. Efficiency, Competitiveness, and
Financial Integrity of the Markets
The proposed amendments would
enhance efficiency by enabling market
participants to continue to execute the
relevant packages in a single transaction
with an appropriate execution method,
rather than via the inefficient process of
legging into the package one component
at a time. The proposed amendments
would also enhance financial integrity
by enabling market participants to
continue to avoid the execution risk
associated with potential adverse price
movements while attempting to leg a
transaction. The Commission has not
identified any likely effects of the
proposed amendments on competition
in the swap markets. The Commission
expects that, since there are few, if any,
active Order Books for swaps as
components of the relevant package
transactions, SEFs will not use proposed
§ 37.3(a)(4) to remove active Order
Books that are providing competitive
markets.
c. Price Discovery
Package transactions are typically
executed at a single price for the entire
package, rather than at the prices of the
individual components. The proposed
amendments would continue to allow
the relevant package transactions to be
executed using the execution methods
that are designed to facilitate price
discovery in these packages. For
packages that include new issuance
bonds, the proposed exemption will
permit price discovery to occur at the
appropriate venue. The Commission
believes that the proposed § 37.3(a)(4),
which would exempt swaps that are
part of the relevant package transactions
from the Order Book requirement,
would not materially inhibit price
discovery since the Commission
anticipates that SEFs would retain
Order Books where price discovery is
occurring and that currently price
discovery is not occurring in Order
Books for swap components of the
package transactions addressed within
this proposal.
d. Sound Risk Management Practices
The Commission believes that the
proposal will continue to promote
sound risk management by facilitating
the execution of package transactions as
market participants consider package
transactions to often be useful and
appropriate instruments for
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management and transfer of risk and to
avoid the execution risks associated
with legging of transactions.
e. Other Public Interest Considerations
The proposed exemption from the
trade execution requirement for the
swap components of packages involving
new issuance bonds may help promote
capital formation by facilitating the
issuance of bonds to raise capital. The
Commission has not identified any
other effect of the proposed rules and
proposed exemption regarding package
transactions on other public interest
considerations.
Request for Comment
The Commission requests comment
on the costs and benefits of all aspects
of the proposed amendments related to
certain package transactions, including
the discussion of the section 15(a)
factors. Comments made on the 2018
SEF Proposal that are relevant to this
rulemaking should be resubmitted to be
considered. The Commission requests
comment on the alternatives discussed
above as well as any other alternatives
that commenters believe present a
superior cost-benefit profile to the
proposed amendments. Commenters are
requested to provide data and any other
information or statistics to support their
position. In particular, to the extent
commenters believe that the costs or
benefits of any aspect of the proposed
rules are reasonably quantifiable, the
Commission requests that they provide
data and any other information or
statistics to assist the Commission in
quantification.
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3. Error Trades
The Commission proposes to add
subsection (e) to § 37.9 to establish a
flexible SEF error trade policy standard
that would, among other things,
incorporate the intent of the existing noaction relief in NAL No. 17–27 for
resolving errors in Required
Transactions. Proposed § 37.9(e)(2)(i)
would specify that a SEF must maintain
rules and procedures that are ‘‘fair,
transparent, consistent’’ and ‘‘allow for
timely resolution’’ of an ‘‘error trade,’’
as defined under proposed
§ 37.9(e)(1)(ii). This proposed standard
would apply to any error trade that
occurs on a SEF, regardless of whether
or not the swap is submitted for
clearing. Further, under proposed
§ 37.9(e)(2)(i), SEFs must have error
trade rules and procedures that require
that market participants provide prompt
notice to the SEF of an error trade and,
as applicable, correcting and offsetting
trades.
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Proposed § 37.9(e) would also require
a SEF to adopt rules to resolve error
trades that involve swaps submitted for
clearing. For an error trade rejected from
clearing and therefore deemed void ab
initio, proposed § 37.9(e)(2)(i)(A) would
require a SEF to permit the
counterparties to subsequently execute a
correcting trade, as defined in proposed
§ 37.9(e)(1)(i), through any method of
execution offered by the SEF. For an
error trade that has been accepted for
clearing, proposed § 37.9(e)(2)(i)(B)
would require a SEF to permit the
counterparties to subsequently execute
both an offsetting trade, as defined in
proposed § 37.9(e)(1)(iii), and a
correcting trade through any method of
execution offered by the SEF.
The proposed rule includes some
limitations that are similar to the
existing no-action relief, including
specified timeframes for executing and
submitting these trades for clearing. For
correcting trades associated with an
error trade that has been rejected from
clearing, proposed § 37.9(e)(2)(i)(A)
would require the SEF to submit the
correcting trade for clearing to the
registered DCO or exempt DCO as soon
as technologically practicable, but no
later than one hour after notice of the
rejection to the relevant clearing
members. For an offsetting trade and a
correcting trade associated with an error
trade that already has been accepted for
clearing, proposed § 37.9(e)(2)(i)(B)
would require the SEF to submit both
types of trades to the registered DCO or
exempt DCO as soon as technologically
practicable, but no later than three days
after the registered DCO or exempt DCO
accepted the error trade for clearing. In
addition to these proposed timeframes,
proposed § 37.9(e)(2)(ii) would prohibit
counterparties from executing a second
correcting trade to fix an error trade if
the initial correcting trade is rejected
from clearing.
However, the proposed rule does not
include certain additional conditions
applicable to SEFs and counterparties
that are contained in the no-action relief
under NAL No. 17–27 or NAL No. 20–
01. For example, the no-action relief in
NAL No. 17–27 requires that a SEF must
make an affirmative finding that an
alleged error trade has occurred and
must have rules setting forth the
procedures for making such a finding.
Benefits: Absent an adoption of these
proposed rules, both SEFs and market
participants would need to comply with
the existing Commission regulations,
notwithstanding the significant
procedural and logistical difficulties of
doing so. In particular, market
participants would have to resolve error
trades in Required Transactions using
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9423
the Order Book or RFQ System, which
would likely make it impossible to
recreate the trade as originally intended.
These difficulties could dissuade SEFs
from being actively involved in the error
trade resolution process and market
participants from executing swaps on a
SEF. The Commission believes that the
proposal would avoid these potential
difficulties.
The Commission preliminarily
believes that, given that the proposed
amendments are largely consistent with
current industry practice, SEFs and
market participants may likely have
already realized much of the benefit of
proposed § 37.9(e). The Commission
preliminarily believes, however, that the
proposed rules additionally would
provide a tangible benefit to market
participants on a longer-term basis by
allowing market participants to
continue utilizing policies and protocols
which the Commission understands
most SEFs adopted in reliance upon the
relief provided in existing no-action
letters to resolve error trades.
The proposed rule does not require
that a SEF affirmatively determine that
an error trade has occurred, either
before resolution or via an ex post facto
review. The Commission preliminarily
believes that such a requirement, which
is in the existing no-action relief, would
impose unnecessary costs on SEFs and
market participants, and potentially
impair the efficiency of the error trade
resolution process. To the extent that
SEFs and market participants are
currently availing themselves of current
no-action relief, they may realize
reduced costs under the proposed rule.
The proposed requirement under
§ 37.9(e)(2)(i) that market participants
provide prompt notice to a SEF of an
error trade and, as applicable, the
corresponding correcting trade and
offsetting trade would benefit SEFs in
carrying out their self-regulatory
obligations. In particular, the
Commission believes that providing
SEFs prompt notice that an error trade
has occurred on their trading system(s)
or platform(s) would enhance their
ability to carry real-time market
monitoring of all trading activity on
their system(s) or platform(s) to identify
disorderly trading and any market or
system anomalies or violations of SEF
rules.
The Commission also believes that the
proposed amendments will facilitate the
goal of promoting consistency in the
swaps market with respect to how errors
are evaluated and resolved. First, the
proposed amendments would require all
SEFs to adopt such policies. To the
extent SEFs have not yet implemented
such policies, the proposed
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amendments will benefit market
participants who will now be able to
correct error trades and avoid related
economic losses. Further, market
participants can obtain the benefit of
executing a swap transaction that
corrects an error trade with the terms
originally intended.
Finally, some SEFs have already
implemented robust error trade
resolution policies pursuant to existing
no-action relief, while other SEFs have
not implemented robust error trade
policies. This inconsistency among
SEFs otherwise causes a ‘‘race to the
bottom’’ for SEFs’ compliance and
market oversight, as certain market
participants may prefer SEFs with less
stringent error trade policies. As a
result, SEFs that have implemented
robust error trade policies—and the
swaps market in general—will benefit
by eliminating this potential ‘‘race to the
bottom,’’ and the Commission will
underscore the importance of SEF
market oversight by adopting such
requirements in Commission
regulations.109
Costs: Similar to the conditions
established by Commission staff in timelimited no-action relief, the proposed
amendments would require SEFs to
establish rules implementing various
policies and procedures for resolving
error trades. Under the proposal, SEFs
would have to submit new rules to the
Commission pursuant to part 40 of the
Commission’s regulations. However, the
Commission understands that pursuant
to the existing no-action relief, most
SEFs currently have rules that otherwise
would comply with the proposed
regulations. SEFs may choose to adjust
their rules in light of the absence in the
proposed rules of the requirement in the
no-action relief that SEFs affirmatively
determine that an error trade has
occurred.110 To the extent that SEFs
must draft and submit new rules to the
Commission, the Commission estimates
that the costs will be modest.
The Commission preliminarily
believes that the proposed amendments
would not impose significant additional
costs on market participants and
intermediaries, because resolving error
trades is inherently costly regardless of
109 The Commission notes that a robust error
trade resolution policy is also consistent with an
effective compliance and oversight program because
the ability to resolve error trades (i) helps protect
market integrity by unwinding certain error trades
that otherwise would have an adverse effect on the
market and (ii) promotes legal certainty by ensuring
that market participants obtain the economic
position in the transaction that they intended.
110 In light of the flexibility of the proposed rule,
SEFs can continue to require such an affirmative
declaration if the determine that such requirement
provides benefits to market participants or the SEF.
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regulations imposed by the
Commission, and market participants
and intermediaries are currently subject
to SEF policies and procedures. The
proposed requirement that market
participants provide prompt notice to a
SEF of an error trade and, as applicable,
the correcting trade and offsetting trade
would impose modest costs on market
participants, but, in practice, market
participants have likely needed to report
error trades to SEFs in order to facilitate
SEF determinations that an error trade
has occurred pursuant to NAL No. 17–
27, and would have had to report the
correcting trade and offsetting trade in
order to facilitate the SEF’s ex post facto
review pursuant to NAL No. 20–01. Not
requiring that a SEF find that an error
trade has occurred either before it has
been resolved or via an ex post facto
review should impose only minor costs
on market participants associated with
changes in procedures to no longer
request that a SEF make such a
determination.
The Commission notes that NAL No.
17–27 and NAL No. 20–01 apply to both
SEFs and DCMs, but the proposed rule
would apply only to SEFs. Therefore,
the Commission believes that the
proposed rule would impose no costs on
DCMs, and notes that no DCM is
currently availing itself of the no-action
relief.
Section 15(a) Factors
a. Protection of Market Participants and
the Public
The proposed addition of § 37.9(e)
regarding error trades will protect
market participants and the public by
providing SEFs with greater authority
under Commission regulations to
resolve error trades. Further, by
providing SEFs with the authority to
permit counterparties to execute
correcting trades and offsetting trades,
the proposed amendments would
protect market stability and
transparency by preventing potential
losses to market participants in
connection with error trades and
reducing instances in which market
participants rely on inaccurate pricing
information to inform their trading
decisions. The proposed addition of
§ 37.9(e) would also promote greater
transparency of the error trade
resolution process to SEFs’ market
participants as SEFs would be required
to establish policies and procedures for
reviewing and determining how to
resolve alleged error trades. The
proposed requirement under
§ 37.9(e)(2)(i) that market participants
provide prompt notice to a SEF of an
error trade and, as applicable, the
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correcting trade and offsetting trade
would promote protection of market
participants and the public by
enhancing a SEF’s ability to carry out its
market oversight and monitoring
responsibilities. The Commission
believes that the absence of a
requirement in the proposed rule that
SEFs must affirmatively determine, or
determine after an ex post facto review,
that an error trade has occurred (which
are conditions in the existing no-action
relief under NAL No. 17–27 and NAL
No. 20–01) would not materially impact
the protection of market participants
and the public.
b. Efficiency, Competitiveness, and
Financial Integrity of the Markets
The proposed addition of § 37.9(e)
may improve the efficiency and
financial integrity of markets by
enabling counterparties to correct
operational or clerical errors in a swap
transaction. In particular, the proposed
rules would help promote greater
trading accuracy in the market by
allowing counterparties to ultimately
carry out transactions as originally
intended, and would avoid unexpected
trading losses caused by error trades.
The proposed requirement under
§ 37.9(e)(2)(i) that market participants
provide prompt notice to a SEF of an
error trade and, as applicable, the
correcting trade and offsetting trade
would enhance a SEF’s ability to carry
out its market oversight and monitoring
responsibilities which helps promote
the financial integrity of its markets.
The Commission believes that the
absence of the no-action provision that
SEFs must affirmatively determine that
an error trade has occurred could
enhance the efficiency of the error trade
resolution process and would not
materially impact the competitiveness
or financial integrity of the swap market
on SEFs.
Absent these proposed rules,
counterparties would be required in
certain circumstances to correct or reexecute swap transactions in a less
efficient and effective manner on a SEF,
such as through the required methods of
execution under § 37.9(a). The proposed
rules, which also require SEFs to adopt
certain policies and procedures for
addressing error trades, should further
promote efficiency in the resolution
process by providing market
participants that transact on multiple
SEFs with a more consistent approach
across different platforms for correcting
error trades.
c. Price Discovery
The proposed addition of § 37.9(e)
regarding error trades would enable
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SEFs to correct error trades containing
a clerical or operational error while
maintaining the price discovery benefits
associated with the pre-trade
transparency requirements of § 37.9. In
particular, the proposed rules would
help promote price discovery by
allowing counterparties, whose original
trade has been cancelled upon rejection
from clearing due to a clerical or
operational error, to re-execute the trade
with the terms as originally intended.
For error trades that have been accepted
by a registered DCO or exempt DCO for
clearing, the proposed rules promote
greater accuracy in the price discovery
process by allowing the counterparties
to correct the error trade by executing an
offsetting swap transaction and a
subsequent swap transaction with the
terms as originally intended.
d. Sound Risk Management Practices
The proposed addition of § 37.9(e)
regarding error trades may promote
sound risk management practices by
providing SEFs with greater authority
under Commission regulations to
facilitate error trade resolution. The
proposed rules will help to mitigate
potential losses to market participants
arising out of trade cancellations, where
the error trade is rejected from clearing,
or arising from maintaining the position
of an unintended error trade.
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e. Other Public Interest Considerations
The Commission has not identified
any effect of proposed § 37.9(e) on other
public interest considerations.
Request for Comment
The Commission invites public
comment on all aspects of its cost
benefit considerations related to the
proposed amendments regarding SEFs’
error trade policies, including the
discussion of the section 15(a) factors.
Comments made on the 2018 SEF
Proposal that are relevant to this
rulemaking should be resubmitted to be
considered. Commenters are requested
to provide data and any other
information or statistics to support their
position. In particular, to the extent
commenters believe that the costs or
benefits of any aspect of the proposed
rules are reasonably quantifiable, the
Commission requests that they provide
data and any other information or
statistics to assist the Commission in
quantification.
The Commission requests comment
on the impact of the proposed rule on
market participants who may need to
adjust their error trade rules and
policies to comply with SEFs’ error
trade rules implemented to comply with
proposed § 37.9(e). The Commission
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also requests comment on any
alternatives that commenters believe
present a superior cost-benefit profile to
the proposed amendments.
4. Block Trades
The Commission proposes
amendments to the definition of block
trade, set forth in § 43.2, to allow SEFs
to permit market participants to execute
swap block trades using a SEF’s trading
system or platform, with the exception
of the Order Book.111 Market
participants could continue to execute a
block trade away from the SEF’s trading
system or platform, but pursuant to the
SEF’s rules.112 This rule is similar to
existing relief set out in NAL No. 17–60,
but the proposed rule would apply to
uncleared swaps as well ITBC swaps,
while the existing no-action relief only
applies to ITBC swaps.
Benefits: The Commission believes
that permitting swap block trades to be
executed on SEFs pursuant to
Commission regulation would provide
tangible benefits to market participants
by allowing them to further utilize a
SEF’s trading systems and platforms
with the exception of the Order Book.
To the extent that a SEF provides the
most operationally- and cost-efficient
method of executing swap block trades,
the proposed amendment would help
market participants to continue
realizing such benefits. Additionally,
allowing market participants to execute
swap block trades on a SEF helps to
facilitate the pre-execution screening of
transactions against risk-based limits in
an efficient manner through SEF-based
mechanisms. The Commission also
recognizes that many SEFs and market
participants have already expended
resources to implement technological
and operational changes needed to avail
themselves of the no-action relief under
NAL No. 17–60. The proposed
amendments would preclude the need
to expend additional resources to negate
111 The Commission notes that a swap transaction
with a notional size above the appropriate
minimum block trade size could still be executed
on an Order Book, but would not qualify as a block
trade, and therefore, would not receive a time delay
from public dissemination requirements set forth in
§ 43.5(d).
112 The Commission notes that § 43.6(g)(1)—
required notification of block trade election—would
still apply to block trade transactions executed on
the SEF via the SEF’s non-Order Book trading
systems and platforms. For example, pursuant to
§ 43.6(g)(1)(i), SEFs would need to implement a
mechanism by which the counterparties notify the
SEF of the counterparties’ intention to have an onSEF executed block trade treated as a block trade
for reporting purposes. Additionally, pursuant to
§ 43.6(i)(2), a person transacting a cleared swap
block trade on behalf of a customer would still need
to receive prior written instruction or consent from
the customer to transact the trade as a cleared swap
block trade on the SEF. See 17 CFR 43.6(i)(2).
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those changes. Further, incorporating
the current no-action relief in the
Commission’s regulations would
promote the statutory goal in CEA
section 5h(e) of promoting swaps
trading on SEFs. Finally, the proposed
amendment would permit SEFs to
extend the benefits of executed swap
block trades on-SEF to uncleared swaps
as well as ITBC swaps.
Costs: The Commission notes that the
majority of SEFs have implemented the
existing no-action relief. To the extent
that SEFs have implemented such relief,
they may incur modest costs in
adjusting their rulebooks to, for
example, include uncleared swaps in
their block trading provisions. Any SEF
that has not implemented the existing
no-action relief but wishes to implement
block trading rules consistent with the
proposed amendment will incur
somewhat higher, but still modest costs.
Section 15(a) Factors
a. Protection of Market Participants and
the Public
The proposed amendment to the
definition of a swap block trade in
§ 43.2, which would allow for both ITBC
and non-ITBC swap block trades to be
executed on a SEF’s non-Order Book
trading system or platform will provide
more options to market participants for
executing swap block trades without
impeding the protection of market
participants and the public provided
under existing Commission regulations.
b. Efficiency, Competitiveness, and
Financial Integrity of the Markets
The proposed amendment to the
definition of block trade under § 43.2 to
allow cleared and uncleared swap block
trades to be executed on a SEF’s nonOrder Book trading system or platform
may improve the efficiency and
financial integrity of the swaps markets.
The proposed amendments would
provide market participants with the
ability to execute block trades either on
a SEF or away from, but pursuant to the
rules of, a SEF. From an efficiency
perspective, such choice should allow
participants to choose the most
operationally efficient and cost-efficient
method of executing block trades. With
respect to the financial integrity of the
swaps market, this proposed
amendment would also facilitate the use
of pre-trade credit screening
functionalities or protocols offered by
the SEF to fulfill its obligations under
SEF Core Principle 7—Financial
Integrity of Transactions.113
113 17
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c. Price Discovery
The Commission is not aware of
significant effects on the price discovery
process of the proposed amendment to
the definition of block trade under
§ 43.2 to allow block trades to be
executed on a SEF’s non-Order Book
trading system or platform. The
Commission notes that block trades are
currently not subject to the execution
methods for required transactions under
§ 37.9, which are intended to promote
pre-trade price transparency pursuant to
section 5h of the CEA.114 Based on the
previous recognition that market
participants are likely to execute largesized trades, i.e., block trades, in a
manner that would mitigate pre-trade
information leakage concerns, the
Commission does not anticipate that the
proposed amendment would diminish
the price discovery process for block
trades executed on a SEF.
d. Sound Risk Management Practices
The proposed amendment to allow
block trades to occur on the SEF (but
not on the SEF’s order book) may
promote sound risk management
practices by providing more options for
the execution of block trades. In this
regard, the Commission notes that block
trading can facilitate risk management
by providing a means for commercial
firms to transact large orders without
the need for significant price
concessions and resulting price
uncertainty for parties to the transaction
that would occur if transacted on the
centralized market.
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e. Other Public Interest Considerations
The proposed amendments should
help promote SEF trading and pre-trade
price transparency, i.e., the statutory
goals set forth under section 5h(f)(2) of
the CEA with respect to SEFs.115
Request for Comment
The Commission requests comment
on the costs and benefits of all aspects
of the proposed amendments to permit
block trades to be executed on a SEF,
including the discussion of the section
15(a) factors. Comments made on the
2018 SEF Proposal that are relevant to
this rulemaking should be resubmitted
to be considered. The Commission
requests comment on the alternatives
discussed above as well as any other
alternatives that commenters believe
114 The Commission stated its belief in the part
37 final rule release that an order book, as defined
in § 37.3(a)(3), and the RFQ System, as defined in
§ 37.9(a)(3), are intended to promote the goals
articulated in section 733 of the Dodd-Frank Act,
which include promoting pre-trade price
transparency. 78 FR 33484, 33497.
115 7 U.S.C. 7b–3(e).
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present a superior cost-benefit profile to
the proposed amendments. Commenters
are requested to provide data and any
other information or statistics to support
their position. In particular, to the
extent commenters believe that the costs
or benefits of any aspect of the proposed
rules are reasonably quantifiable, the
Commission requests that they provide
data and any other information or
statistics to assist the Commission in
quantification.
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 objectives of the CEA, in
issuing any order or adopting any
Commission rule or regulation. The
Commission does not anticipate that the
proposed amendments to parts 36, 37,
and 43 would promote or result in anticompetitive consequences or behavior.
However, the Commission encourages
comments from the public with respect
to any aspect of the proposal that maybe
perceived as potentially inconsistent
with the antitrust laws or anticompetitive in nature.
§ 36.1 Exemptions to trade execution
requirement.
(a) A swap transaction that is
executed as a component of a package
transaction that also includes a
component transaction that is the
issuance of a bond in a primary market
is exempt from the trade execution
requirement in section 2(h)(8) of the
Act.
(1) For purposes of paragraph (a) of
this section, a package transaction
consists of two or more component
transactions executed between two or
more counterparties where:
(i) At least one component transaction
is subject to the trade execution
requirement in section 2(h)(8) of the
Act;
(ii) Execution of each component
transaction is contingent upon the
execution of all other component
transactions; and
(iii) The component transactions are
priced or quoted together as one
economic transaction with simultaneous
or near-simultaneous execution of all
components.
(2) [Reserved]
(b) [Reserved]
PART 37—SWAP EXECUTION
FACILITIES
2. The authority citation for part 37
continues to read as follows:
List of Subjects
■
17 CFR Part 36
Package transactions, Trade execution
requirement.
17 CFR Part 37
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.
3. In § 37.3, add paragraph (a)(4) to
read as follows:
Block trades, Error trades, Package
transactions, Required methods of
execution, Swap execution facilities,
Swaps, Trade execution requirement.
■
17 CFR Part 43
(a) * * *
(4) A swap execution facility is not
required to provide an order book under
this section for transactions defined in
§ 37.9(d)(2), (3), and (4), except that a
swap execution facility must provide an
order book under this section for
Required Transactions that are
components of transactions defined in
§ 37.9(d)(2), (3), and (4) when such
Required Transactions are not executed
as components of transactions defined
in § 37.9(d)(2), (3), and (4).
*
*
*
*
*
■ 4. In § 37.9, revise paragraph (a)(2)(i)
introductory text and add paragraphs (d)
and (e) to read as follows:
Block trades, Large notional offfacility swaps, Real-time public
reporting, Reporting and recordkeeping
requirements.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission proposes to amend
17 CFR chapter I as follows:
■
1. Revise part 36 to read as follows:
PART 36—TRADE EXECUTION
REQUIREMENT
Sec.
36.1
Exemptions to trade execution
requirement.
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a–
2, 7b–3, 2a2, and 21, 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 (2010).
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§ 37.3 Requirements and procedures for
registration.
§ 37.9 Methods of execution for required
and permitted transactions.
(a) * * *
(2) * * *
(i) Each Required Transaction that is
not a block trade as defined in § 43.2 of
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this chapter shall be executed on a swap
execution facility in accordance with
one of the following methods of
execution except as provided in
paragraph (d) or (e) of this section:
*
*
*
*
*
(d) Exceptions to required methods of
execution for package transactions. (1)
For purposes of this paragraph, a
package transaction consists of two or
more component transactions executed
between two or more counterparties
where:
(i) At least one component transaction
is a Required Transaction;
(ii) Execution of each component
transaction is contingent upon the
execution of all other component
transactions; and
(iii) The component transactions are
priced or quoted together as one
economic transaction with simultaneous
or near-simultaneous execution of all
components.
(2) A Required Transaction that is
executed as a component of a package
transaction that includes a component
swap that is subject exclusively to the
Commission’s jurisdiction, but is not
subject to the clearing requirement
under section 2(h)(1)(A) of the Act, may
be executed on a swap execution facility
in accordance with paragraph (c)(2) of
this section as if it were a Permitted
Transaction;
(3) A Required Transaction that is
executed as a component of a package
transaction that includes a component
that is not a swap, as defined under
section 1a(47) of the Act, may be
executed on a swap execution facility in
accordance with paragraph (c)(2) of this
section as if it were a Permitted
Transaction. This provision shall not
apply to:
(i) A Required Transaction that is
executed as a component of a package
transaction in which all other non-swap
components are U.S. Treasury
securities;
(ii) A Required Transaction that is
executed as a component of a package
transaction in which all other non-swap
components are contracts for the
purchase or sale of a commodity for
future delivery;
(iii) A Required Transaction that is
executed as a component of a package
transaction in which all other non-swap
components are agency mortgagebacked securities; and
(iv) A Required Transaction that is
executed as a component of a package
transaction that includes a component
transaction that is the issuance of a
bond in a primary market.
(4) A Required Transaction that is
executed as a component of a package
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transaction that includes a component
swap that is not exclusively subject to
the Commission’s jurisdiction may be
executed on a swap execution facility in
accordance with paragraph (c)(2) of this
section as if it were a Permitted
Transaction.
(e) Resolution of operational and
clerical error trades. (1) As used in this
paragraph:
(i) Correcting trade means a trade
executed and submitted for clearing to
a registered derivatives clearing
organization, or a derivatives clearing
organization that the Commission has
determined is exempt from registration,
with the same terms and conditions as
an error trade other than any corrections
to any operational or clerical error and
the time of execution.
(ii) Error trade means any trade
executed on or subject to the rules of a
swap execution facility that contains an
operational or clerical error.
(iii) Offsetting trade means a trade
executed and submitted for clearing to
a registered derivatives clearing
organization, or a derivatives clearing
organization that the Commission has
determined is exempt from registration,
with terms and conditions that
economically reverse an error trade that
was accepted for clearing.
(2) Execution of correcting trades and
offsetting trades. (i) A swap execution
facility shall maintain rules and
procedures that facilitate the resolution
of error trades. Such rules shall be fair,
transparent, and consistent; allow for
timely resolution; require market
participants to provide prompt notice of
an error trade—and, as applicable,
offsetting and correcting trades—to the
swap execution facility; and permit
market participants to:
(A) Execute a correcting trade, in
accordance with paragraph (c)(2) of this
section, regardless of whether it is a
Required or Permitted Transaction, for
an error trade that has been rejected
from clearing as soon as technologically
practicable, but no later than one hour
after a registered derivatives clearing
organization, or a derivatives clearing
organization that the Commission has
determined is exempt from registration,
provides notice of the rejection; or
(B) Execute an offsetting trade and a
correcting trade, in accordance with
paragraph (c)(2) of this section,
regardless of whether it is a Required or
Permitted Transaction, for an error trade
that was accepted for clearing as soon as
technologically practicable, but no later
than three days after the error trade was
accepted for clearing at a derivatives
clearing organization or a derivatives
clearing organization that the
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9427
Commission has determined is exempt
from registration.
(ii) If a correcting trade is rejected
from clearing, then a swap execution
facility shall not allow the
counterparties to execute another
correcting trade.
PART 43—REAL-TIME PUBLIC
REPORTING
5. The authority citation for part 43
continues to read as follows:
■
Authority: 7 U.S.C. 2(a), 12a(5) and 24a, as
amended by Pub. L. 111–203, 124 Stat. 1376
(2010).
■
6. Revise § 43.2 to read as follows:
§ 43.2
Definitions.
As used in this part:
Act means the Commodity Exchange
Act, as amended, 7 U.S.C. 1 et seq.
Affirmation means the process by
which parties to a swap verify (orally,
in writing, electronically or otherwise)
that they agree on the primary economic
terms of a swap (but not necessarily all
terms of the swap). Affirmation may
constitute ‘‘execution’’ of the swap or
may provide evidence of execution of
the swap, but does not constitute
confirmation (or confirmation by
affirmation) of the swap.
Appropriate minimum block size
means the minimum notional or
principal amount for a category of
swaps that qualifies a swap within such
category as a block trade or large
notional off-facility swap.
As soon as technologically practicable
means as soon as possible, taking into
consideration the prevalence,
implementation and use of technology
by comparable market participants.
Asset class means a broad category of
commodities including, without
limitation, any ‘‘excluded commodity’’
as defined in section 1a(19) of the Act,
with common characteristics underlying
a swap. The asset classes include
interest rate, foreign exchange, credit,
equity, other commodity and such other
asset classes as may be determined by
the Commission.
Block trade means a publicly
reportable swap transaction that:
(1) Involves a swap that is listed on
a registered swap execution facility or
designated contract market;
(2) Is executed on a trading system or
platform of a registered swap execution
facility that is not an order book as
defined in § 37.3(a)(3) of this chapter, or
occurs away from a registered swap
execution facility’s or designated
contract market’s trading system or
platform and is executed pursuant to the
registered swap execution facility’s or
designated contract market’s rules and
procedures;
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(3) Has a notional or principal amount
at or above the appropriate minimum
block size applicable to such swap; and
(4) Is reported subject to the rules and
procedures of the registered swap
execution facility or designated contract
market and the rules described in this
part, including the appropriate time
delay requirements set forth in § 43.5.
Business day means the twenty-four
hour day, on all days except Saturdays,
Sundays and legal holidays, in the
location of the reporting party or
registered entity reporting data for the
swap.
Business hours means the consecutive
hours of one or more consecutive
business days.
Cap size means, for each swap
category, the maximum notional or
principal amount of a publicly
reportable swap transaction that is
publicly disseminated.
Confirmation means the
consummation (electronic or otherwise)
of legally binding documentation
(electronic or otherwise) that
memorializes the agreement of the
parties to all terms of a swap. A
confirmation shall be in writing
(electronic or otherwise) and shall
legally supersede any previous
agreement (electronic or otherwise)
relating to the swap.
Confirmation by affirmation means
the process by which one party to a
swap acknowledges its assent to the
complete swap terms submitted by the
other party to the swap. If the parties to
a swap are using a confirmation service
vendor, complete swap terms may be
submitted electronically by a party to
such vendor’s platform and the other
party may affirm such terms on such
platform.
Economically related means a direct
or indirect reference to the same
commodity at the same delivery
location or locations, or with the same
or a substantially similar cash market
price series.
Embedded option means any right,
but not an obligation, provided to one
party of a swap by the other party to the
swap that provides the party holding the
option with the ability to change any
one or more of the economic terms of
the swap as those terms previously were
established at confirmation (or were in
effect on the start date).
Executed means the completion of the
execution process.
Execution means an agreement by the
parties (whether orally, in writing,
electronically, or otherwise) to the terms
of a swap that legally binds the parties
to such swap terms under applicable
law. Execution occurs simultaneous
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with or immediately following the
affirmation of the swap.
Futures-related swap means a swap
(as defined in section 1a(47) of the Act
and as further defined by the
Commission in implementing
regulations) that is economically related
to a futures contract.
Large notional off-facility swap means
an off-facility swap that has a notional
or principal amount at or above the
appropriate minimum block size
applicable to such publicly reportable
swap transaction and is not a block
trade as defined in this section.
Major currencies means the
currencies, and the cross-rates between
the currencies, of Australia, Canada,
Denmark, New Zealand, Norway, South
Africa, South Korea, Sweden, and
Switzerland.
Non-major currencies means all other
currencies that are not super-major
currencies or major currencies.
Novation means the process by which
a party to a swap transfers all of its
rights, liabilities, duties and obligations
under the swap to a new legal party
other than the counterparty to the swap.
The transferee accepts all of the
transferor’s rights, liabilities, duties and
obligations under the swap. A novation
is valid as long as the transferor and the
remaining party to the swap are given
notice, and the transferor, transferee and
remaining party to the swap consent to
the transfer.
Off-facility swap means any publicly
reportable swap transaction that is not
executed on or pursuant to the rules of
a registered swap execution facility or
designated contract market.
Other commodity means any
commodity that is not categorized in the
other asset classes as may be determined
by the Commission.
Physical commodity swap means a
swap in the other commodity asset class
that is based on a tangible commodity.
Public dissemination and publicly
disseminate means to publish and make
available swap transaction and pricing
data in a non-discriminatory manner,
through the internet or other electronic
data feed that is widely published and
in machine-readable electronic format.
Publicly reportable swap transaction
means:
(1) Unless otherwise provided in this
part—
(i) Any executed swap that is an
arm’s-length transaction between two
parties that results in a corresponding
change in the market risk position
between the two parties; or
(ii) Any termination, assignment,
novation, exchange, transfer,
amendment, conveyance, or
extinguishing of rights or obligations of
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a swap that changes the pricing of the
swap.
(2) Examples of executed swaps that
do not fall within the definition of
publicly reportable swap may include:
(i) Internal swaps between onehundred percent owned subsidiaries of
the same parent entity; and
(ii) Portfolio compression exercises.
(3) These examples represent swaps
that are not at arm’s length and thus are
not publicly reportable swap
transactions, notwithstanding that they
do result in a corresponding change in
the market risk position between two
parties.
Real-time public reporting means the
reporting of data relating to a swap
transaction, including price and
volume, as soon as technologically
practicable after the time at which the
swap transaction has been executed.
Reference price means a floating price
series (including derivatives contract
prices and cash market prices or price
indices) used by the parties to a swap
or swaption to determine payments
made, exchanged or accrued under the
terms of a swap contract.
Remaining party means a party to a
swap that consents to a transferor’s
transfer by novation of all of the
transferor’s rights, liabilities, duties and
obligations under such swap to a
transferee.
Reporting party means the party to a
swap with the duty to report a publicly
reportable swap transaction in
accordance with this part and section
2(a)(13)(F) of the Act.
Super-major currencies means the
currencies of the European Monetary
Union, Japan, the United Kingdom, and
United States.
Swaps with composite reference
prices means swaps based on reference
prices that are composed of more than
one reference price from more than one
swap category.
Transferee means a party to a swap
that accepts, by way of novation, all of
a transferor’s rights, liabilities, duties
and obligations under such swap with
respect to a remaining party.
Transferor means a party to a swap
that transfers, by way of novation, all of
its rights, liabilities, duties and
obligations under such swap, with
respect to a remaining party, to a
transferee.
Trimmed data set means a data set
that has had extraordinarily large
notional transactions removed by
transforming the data into a logarithm
with a base of 10, computing the mean,
and excluding transactions that are
beyond four standard deviations above
the mean.
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Unique product identifier means a
unique identification of a particular
level of the taxonomy of the product in
an asset class or sub-asset class in
question, as further described in
§ 43.4(f) and appendix A to this part.
Such unique product identifier may
combine the information from one or
more of the data fields described in
appendix A.
Widely published means to publish
and make available through electronic
means in a manner that is freely
available and readily accessible to the
public.
Issued in Washington, DC, on February 6,
2020, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
NOTE: The following appendices will not
appear in the Code of Federal Regulations.
Appendices To Swap Execution Facility
Requirements and Real-Time Reporting
Requirements—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.
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Appendix 2—Statement of Support of
Commissioner Brian D. Quintenz
I support today’s proposal that seeks to
resolve through rulemaking three issues
currently addressed in staff no-action letters.
I believe this proposal is an important first
step to provide market participants with
much needed regulatory certainty while also
promoting swap execution facility (SEF)
participation, though regulatory certainty
over additional current market practices is
necessary as well.
Staff initially granted these requests for
relief in 2013 and 2014, as SEFs were first
coming into compliance with the
Commission’s then-new SEF regulatory
framework. With the benefit of six-plus years
of implementation experience, and multiple
extensions of each of these no-action letters,
it is long overdue for the Commission to
codify and clarify its policy on each of these
important issues.
First, the proposal would amend part 37
regulations to permit the swap components
of certain categories of package transactions
to be executed on-SEF through flexible
means of execution, rather than via the
required methods of execution under Rule
37.9.1 In addition, the proposal would also
include an exemption from the trade
execution requirement for swap transactions
that are executed as a component of a new
issuance bond package transaction. These
1 These amendments address the relief currently
provided by CFTC No-Action Letter 17–55 (Oct. 31,
2017).
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amendments recognize the need to provide
flexible means of execution for swaps that are
negotiated and executed concurrently with
other components of a larger, integrated
transaction.
Second, the proposal adopts a principlesbased approach regarding SEF policies to
correct operational or clerical errors.2 The
proposal directs SEFs to adopt fair,
transparent, and consistent policies and
procedures that allow for the timely
resolution of error trades. SEFs would be
permitted to allow market participants to
execute offsetting or correcting trades
through any method of execution offered by
the SEF. I believe these amendments will
facilitate the prompt identification and
correction of error trades, thereby minimizing
market participants’ exposure to market,
credit, and operational risks.
Thirdly, the proposal recognizes the
difficulties associated with performing a pretrade execution credit check on block trades
occurring away from a SEF’s trading system
or platforms.3 Accordingly, it would permit
block trades to be executed on a trading
system of the SEF that is not an order book,
thereby allowing FCMs to conduct preexecution credit screenings. The proposal
also continues to allow block trades to be
executed away from the SEF.
This proposal should in no way preclude
the Commission from considering additional
SEF no-action letters and policy issues
through rulemaking. For example, codifying
the current no-action letter providing relief
from the trade execution requirement for
inter-affiliate swaps, or providing greater
clarity about permissible methods of
execution and minimum SEF trading
functionality are prime examples. In order to
truly foster and promote market liquidity,
transparency, innovation, and competition in
the SEF marketplace, I believe these
outstanding issues should be addressed. I
will support today’s proposal but remain
hopeful that these and other important areas
can be addressed through rulemaking in the
near future.
Appendix 3—Statement of Concurrence
of Commissioner Rostin Behnam
I respectfully concur in the Commission’s
proposal to amend certain swap execution
facility (SEF) requirements and real-time
reporting requirements. A little more than a
year ago, the Commission issued a proposal
that would have constituted a complete
overhaul of the existing regulatory framework
for SEFs.1 As I stated in my concurrence to
the 2018 SEF proposal, I do not believe that
such an overhaul is necessary.2 However,
2 These amendments address the relief currently
provided by CFTC No-Action Letters 17–27 (May
30, 2017) and 20–01 (Jan. 8, 2020).
3 These amendments address the relief currently
provided by CFTC No-Action Letter 17–60 (Nov. 14,
2017).
1 Swap Execution Facilities and Trade Execution
Requirement, 83 FR 61946 (proposed Nov. 30,
2018).
2 Rostin Behnam, Statement of Concurrence of
Commissioner Rostin Behnam Regarding Swap
Execution Facilities and Trade Execution
Requirement (Nov. 5, 2018), https://www.cftc.gov/
PressRoom/SpeechesTestimony/
behnamstatement110518a.
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9429
despite my opposition to the overhaul, I
supported issuing the SEF proposal for
public comment because it contained several
policy changes which separately warranted
further consideration. Market participants
have spent a great deal of resources to build
systems and businesses that comply with our
existing SEF rules. Fundamental changes
amounting to an overhaul of the entire
system should only be done in circumstances
where there is a regulatory concern that
necessitates action.3 Accordingly, in the past
I have suggested we should focus on targeted
reforms, such as codifying existing no-action
relief for SEFs.4 I warned that we should not
allow issues with the broader vision of the
2018 SEF proposal to distract us from making
targeted changes.5
Today, the Commission proposes to limit
changes to our existing SEF rules,
specifically focusing on the codification of
long-standing no-action relief regarding
package transactions, error trades, and block
trades. While I support today’s proposal, I do
have some concerns where I think we deviate
from the path of targeted codification. The
provisions in today’s proposal regarding
package transactions and block trades
basically mirror the existing no-action relief.6
However, the proposal regarding error trades
does not.7
DMO currently provides no-action relief
from the required methods of execution
under § 37.9 for trades intended to resolve
error trades.8 The existing relief provides a
number of conditions, including a
requirement that a SEF determine (either
prior to execution or within 24 hours after)
that an error has occurred. Among other
things, the no-action relief requires that a
SEF have error trade rules that account for
whether a transaction cancellation or price
adjustment will adversely impact market
integrity or facilitate market manipulation or
other illegitimate activity.9 None of these
3 Rostin Behnam, Sowing the Seeds of Success in
2020, Remarks of CFTC Commissioner Rostin
Behnam at the 2019 ISDA Annual General Meeting,
Grand Hyatt Hong Kong, Hong Kong (Apr. 9, 2019),
https://www.cftc.gov/PressRoom/
SpeechesTestimony/opabehnam13.
4 Id.
5 Id.
6 See CFTC No-Action Letter No. 17–55, Re:
Extension of No-Action Relief from Sections 2(h)(8)
and 5(d)(9) of the Commodity Exchange Act and
from Commission Regulations 37.3(a)(2) and 37.9
for Swaps Executed as Part of Certain Package
Transactions (Oct. 31, 2017); CFTC No-Action
Letter No. 17–60, Re: Extension of No-Action Relief
for Swap Execution Facilities from Certain ‘‘Block
Trade’’ Requirements in Commission Regulation
43.2 (Nov. 14, 2017).
7 See CFTC No-Action Letter No. 17–27, Re: NoAction 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); CFTC No-Action
Letter No. 20–01 (‘‘NAL No. 20–01’’), Re:
Supplemental 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 (Jan. 8,
2020).
8 NAL 17–27.
9 Id.
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Federal Register / Vol. 85, No. 33 / Wednesday, February 19, 2020 / Proposed Rules
conditions appear in the error trade rules
proposed today, and under the proposal SEFs
will no longer have any obligation to
determine whether a trade is an error trade—
the determination can instead be left entirely
to the parties to the trade. I look forward to
comments regarding whether this
‘‘principles-based’’ approach goes too far and
fails to give market participants sufficient
clarity regarding error trades.
I support targeted, thoughtful reform of our
SEF regulations, and I particularly applaud
staff’s efforts to provide market participants
with greater legal certainty through the
codification of our existing no-action relief.
I look forward to the comments.
Appendix 4—Statement of
Commissioner Dan M. Berkovitz
khammond on DSKJM1Z7X2PROD with PROPOSALS
I am voting in favor of today’s proposed
rule that would amend certain Commission
rules in parts 36, 37, and 43 relating to
package transactions, block trades, and error
transactions on swap execution facilities
(‘‘SEFs’’) (‘‘Proposal’’). Today’s amendments
largely codify longstanding no-action letters
for limited categories of swaps transactions
regarding the required methods of execution.
Generally, I support the codification of noaction letters where, based on experience,
doing so is consistent with our statutory
mandate, protects customers, provides
market participants with a greater level of
certainty, and promotes market integrity.
Package Transactions
This Proposal would amend part 37 to
allow the swap components of certain
package transactions—including those that
are illiquid and bespoke and therefore not
suitable for trading on-SEF—to be executed
on-SEF but through flexible methods of
execution. In addition, the Proposal amends
part 36 to exempt from the trade execution
requirement a swap in a package transaction
involving a bond sold in the primary market
(‘‘new issuance bond transaction’’), which
also is not conducive to trading on-SEF.
Beginning in 2014, the Commission issued
a series of no-action letters specifying
permissible methods of execution for certain
package transactions, which have enabled
market participants and the agency to apply
the trading mandate to these transactions in
a phased manner. As the market
infrastructure for the trading and clearing of
swaps has improved, the trading mandate has
been applied to the packages involving more
liquid and standardized swap components.1
The remaining package transactions that
would be covered by today’s Proposal
represent a small percentage of swaps trading
on the most active SEFs.
I encourage the industry to continue to
develop systems that allow for increased
execution of package trade swap components
on-SEF. I also appreciate the Staff’s
commitment, if this rule is finalized, to
continue to evaluate the categories of package
transactions subject to the rule and revise the
rule as necessary in the future to reflect
developments in trading methodologies.
17:08 Feb 18, 2020
Jkt 250001
The Proposal also would amend part 37 to
enable SEFs to permit market participants to
use flexible methods of execution to correct
error trades, and would require a SEF to
establish error trade policies that largely
track the conditions set forth in prior noaction letters. Notably, the Proposal would
require market participants to provide
prompt notice of an error trade to the SEF,
enabling the SEF to fulfill its self-regulatory
obligations. It would not alter the
requirement that SEFs must adopt rules
declaring that trades rejected from clearing
are deemed void ab initio. The Proposal also
includes the requirement under CFTC NoAction Letter No. 17–27 that after submitting
one error trade, market participants will not
be able to submit a second new trade with
the original terms. These conditions facilitate
a SEF’s direct supervision of its markets,
protect against abuse, and promote fair
competition.
Block Trades
The Proposal would revise the definition of
‘‘block trade’’ in Commission Regulation 43.2
to permit SEFs to offer non-Order Book
methods of execution for market participants
to execute swap block trades on-SEF. Like
package transactions, block trades
encompassed within the Proposal are a small
percentage of the number of swaps traded. A
significant benefit of this Proposal is that it
would facilitate pre-trade credit checks by
SEFs for block trades, in accordance with the
SEF core principles.
It is my preliminary view that this Proposal
would provide certainty to market
participants and increase trading efficiencies,
while not compromising the Congressional
goal of moving standardized OTC derivative
contracts to exchanges or electronic trading
platforms. I look forward to public comments
on the anticipated effects of these
amendments, and I thank the staff of the
Division of Market Oversight for their work
on this Proposal.
[FR Doc. 2020–02721 Filed 2–18–20; 8:45 am]
BILLING CODE 6351–01–P
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Frm 00032
Forest Service
36 CFR Part 242
Error Trades
1 For example, U.S. Dollar Spreadover package
transactions account for nearly seventy percent of
interest rate swaps trading in the inter-dealer swap
market. No-action letters for these package
transactions have expired and market participants
now actively trade the swap component of these
packages through required methods of trading. See
Proposed Rule, Sect. II.A.1 and n.33.
VerDate Sep<11>2014
DEPARTMENT OF AGRICULTURE
Fmt 4702
Sfmt 4702
DEPARTMENT OF THE INTERIOR
Fish and Wildlife Service
50 CFR Part 100
[Docket No. FWS–R7–SM–2019–0092;
FXFR13350700640–201–FF07J00000]
RIN 1018–BE36
Subsistence Management Regulations
for Public Lands in Alaska—2021–22
and 2022–23 Subsistence Taking of
Fish and Shellfish Regulations
Forest Service, Agriculture;
Fish and Wildlife Service, Interior.
ACTION: Proposed rule.
AGENCY:
This proposed rule would
establish regulations for fish and
shellfish seasons, harvest limits,
methods, and means related to taking of
fish and shellfish for subsistence uses
during the 2021–2022 and 2022–2023
regulatory years. The Federal
Subsistence Board (Board) is on a
schedule of completing the process of
revising subsistence taking of fish and
shellfish regulations in odd-numbered
years and subsistence taking of wildlife
regulations in even-numbered years;
public proposal and review processes
take place during the preceding year.
The Board also addresses customary and
traditional use determinations during
the applicable cycle. When final, the
resulting rulemaking will replace the
existing subsistence fish and shellfish
taking regulations. This proposed rule
could also amend the general
regulations on subsistence taking of fish
and wildlife.
DATES:
Public meetings: The Federal
Subsistence Regional Advisory Councils
will hold public meetings to receive
comments and make proposals to
change this proposed rule March 2
through March 26, 2020, and will hold
another round of public meetings to
discuss and receive comments on the
proposals, and make recommendations
on the proposals to the Federal
Subsistence Board, on several dates
between August 18 and November 3,
2020. The Board will discuss and
evaluate proposed regulatory changes
during a public meeting in Anchorage,
AK, in January 2021. See
SUPPLEMENTARY INFORMATION for specific
information on dates and locations of
the public meetings.
SUMMARY:
E:\FR\FM\19FEP1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 33 (Wednesday, February 19, 2020)]
[Proposed Rules]
[Pages 9407-9430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02721]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 36, 37, and 43
RIN 3038-AE94
Swap Execution Facility Requirements and Real-Time Reporting
Requirements
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') proposes to amend certain parts of its regulations relating
to the execution of package transactions on swap execution facilities
(``SEFs''); the execution of block trades on SEFs; and the resolution
of error trades on SEFs. These matters are currently the subject of
relief in certain no-action letters from Commission staff.
DATES: Comments must be received on or before April 20, 2020.
ADDRESSES: You may submit comments, identified by RIN 3038-AE94, by any
of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods.
Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an
[[Page 9408]]
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 (``FOIA''),\1\ a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in the Commission's regulations, 17 CFR 145.9.
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\1\ 5 U.S.C. 552.
---------------------------------------------------------------------------
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 the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
FOIA.
FOR FURTHER INFORMATION CONTACT: Roger Smith, Special Counsel, (202)
418-5344, [email protected], Division of Market Oversight, Commodity
Futures Trading Commission, 525 West Monroe Street, Suite 1100,
Chicago, Illinois 60661, or Michael Penick, Senior Economist, (202)
418-5279, [email protected], Office of the Chief Economist, Commodity
Futures Trading Commission, Three Lafayette Centre, 1151 21st Street
NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Parts 37 and 43 of the Commission's Regulations
B. Summary of Proposed Changes to Parts 36, 37, and 43
C. Consultation With Other U.S. Financial Regulators
II. The Proposed Regulations
A. Execution of Package Transactions
1. Background
2. Proposed Addition of Sec. 37.9(d) and Amendment of Sec.
37.9(a)(2)
3. Request for Comment
4. Existing Sec. 37.3(a)
5. Proposed Addition of Sec. 37.3(a)(4)
6. Request for Comment
7. Exemption of New Issuance Bond Package Transaction From the
Trade Execution Requirement
8. Discussion of CEA Section 4(c) Enumerated Factors
9. Request for Comment
B. Error Trades: Execution of Trades To Correct Operational and
Clerical Errors on Swap Execution Facilities
1. Background
2. Proposed Sec. 37.9(e)
3. Request for Comment
C. Real-Time Public Reporting: Block Trade Definition
1. Existing Sec. 43.2
2. Proposed Amendment to Sec. 43.2
3. Request for Comment
III. Effective Date and Transition Period
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Parts 37 and 43 of the Commission's Regulations
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') amended the Commodity Exchange Act (``CEA'' or
``Act'') by adding section 5h, which establishes registration
requirements and core principles for swap execution facilities
(``SEFs'').\2\ The Commission implemented section 5h by adopting
regulations that establish various trading requirements for swaps
traded on SEFs \3\ and articulating, where appropriate, guidance and
acceptable practices. In particular, the Commission promulgated part 37
of its regulations to implement section 5h of the CEA and set forth the
registration and operational requirements for SEFs.\4\ Among those are
requirements in part 37 specifying minimum trading functionality that a
SEF must offer to participants for all listed swaps, i.e., an ``order
book,'' as defined in Sec. 37.3 (``Order Book''); \5\ specifying the
types of systems or platforms that a SEF must offer for swaps trading,
including swaps subject to the trade execution requirement under CEA
section 2(h)(8); \6\ and setting forth other relevant regulations
applicable to the fifteen core principles with which a SEF must comply
to obtain and maintain registration with the Commission.
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\2\ 7 U.S.C. 7b-3.
\3\ The Dodd-Frank Act also added to the CEA certain provisions
related to the trading of swaps on designated contract markets
(``DCMs''). Given that almost all platform trading of swaps in the
U.S. occurs on SEFs, the Commission is not at this time proposing to
amend any regulatory requirements pertaining to DCMs within part 38
of the Commission's regulations.
\4\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476 (June 4, 2013) (hereinafter ``SEF Core
Principles Final Rule'').
\5\ 17 CFR 37.3(a)(2). An Order Book is defined as (i) an
``electronic trading facility,'' as that term is defined in CEA
section 1a(16); (ii) a ``trading facility,'' as that term is defined
in CEA section 1a(51); or (iii) a trading system or platform in
which all market participants have the ability to enter multiple
bids and offers, observe or receive bids and offers entered by other
market participants, and transact on such bids and offers. See 17
CFR 37.3(a)(3).
\6\ CEA section 2(h)(8) requires that transactions involving
swaps subject to the CEA section 2(h)(1) clearing requirement be
executed on or pursuant to the rules of a DCM or SEF, or a SEF that
is exempt from registration, unless no DCM or SEF makes such swaps
available to trade (``MAT'') or such swaps qualify for the clearing
exception under CEA section 2(h)(7) (the ``trade execution
requirement''). See 7 U.S.C. 2(h)(8).
---------------------------------------------------------------------------
Commission regulation 37.9 prescribes the methods of execution that
a SEF must offer to market participants to execute swap transactions on
the SEF. In particular, Sec. 37.9 defines ``Required Transactions'' as
swaps subject to the trade execution requirement. Section 37.9 also
requires a SEF to offer, as required methods of execution, either (i)
an Order Book or (ii) a request-for-quote system that sends a request-
for-quote to no less than three unaffiliated market participants and
operates in conjunction with an Order Book (``RFQ System'') for the
execution of these transactions.\7\ Swaps that are not subject to the
trade execution requirement are defined as ``Permitted Transactions,''
for which a SEF may offer any execution method and for which market
participants may voluntarily trade on a SEF.\8\ The Commission's
regulations specify additional requirements that correspond to the use
of an Order Book or RFQ System to execute Required Transactions.\9\
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\7\ 17 CFR 37.9(a). With the exception of block trades, as
defined in Sec. 43.2 of the Commission's regulations, Required
Transactions must be executed on a SEF's Order Book or RFQ System.
See 17 CFR 37.9(a)(2)(i).
\8\ 17 CFR 37.9(c).
\9\ For example, under Sec. 37.9(b), the Commission implemented
a fifteen-second time-delay requirement for Required Transactions
that are pre-arranged or pre-negotiated by a broker and submitted as
cross trades for execution through the SEF's Order Book. This
requirement allows a broker or dealer to execute a Required
Transaction by trading against a customer's order, or executing two
customers' orders against each other, through pre-negotiation or
pre-arrangement, provided that one side of the transaction is
exposed to the Order Book for fifteen seconds before the other side
of the transaction is submitted for execution. See 17 CFR 37.9(b).
---------------------------------------------------------------------------
Pursuant to section 727 of the Dodd-Frank Act, the Commission also
established a regulatory framework for the real-time public reporting
of swap transaction and pricing data, including swap block trades
within CEA section 2(a)(13).\10\ Part 43 of the Commission's
regulations implements section 727 of the Dodd-Frank Act by, among
other things, defining the requisite criteria for when a publicly
reportable swap transaction will be classified as a block trade,
including the requirement that
[[Page 9409]]
the swap transaction ``occur[] away'' from a SEF's trading system or
platform, but pursuant to the SEF's rules and procedures.\11\ Part 43
also sets forth the procedures for calculating appropriate minimum
block sizes for each swap asset class \12\ and specifying the public
reporting delays available for such trades.\13\
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\10\ 7 U.S.C. 2(a)(13).
\11\ 17 CFR 43.2.
\12\ 17 CFR 43.6.
\13\ 17 CFR 43.5(d).
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B. Summary of Proposed Changes to Parts 36, 37, and 43
During the implementation of parts 37 and 43, market participants
and SEFs identified certain operational and compliance burdens related
to various requirements. To mitigate these burdens, Commission staff
issued to SEFs and market participants time-limited no-action relief
from certain provisions of the CEA and the Commission's
regulations.\14\ Based on this implementation experience, the
Commission believes it may be appropriate to amend the current SEF
regulatory framework to address the following issues, which have been
identified in staff no-action letters: \15\
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\14\ As defined in Sec. 140.99(a)(2) of the Commission's
regulations, a no-action letter is a written statement issued by a
Division stating that it will not recommend enforcement action to
the Commission for failure to comply with a specific provision of
the Act or a Commission rule, regulation, or order. A no-action
letter represents only the issuing Division's position and binds
only that Division. 17 CFR 140.99(a)(2).
\15\ In November 2018, the Commission issued a comprehensive
proposal to amend the SEF regulatory framework. See generally Swap
Execution Facilities and Trade Execution Requirement, 83 FR 61946
(Nov. 30, 2018) (``2018 SEF Proposal''). Among other things, the
2018 SEF Proposal addresses existing relief under various no-action
letters as part of the proposal's holistic approach to amending the
SEF regulatory framework. Given the complex, expansive, and
comprehensive nature of the 2018 SEF Proposal, however, the
Commission continues to evaluate it. Therefore, the Commission is
proposing rules herein independent of that proposal. To be clear,
this rule proposal does not supersede the 2018 SEF Proposal in any
way.
Further, while the proposals and rationales contained herein
are, in some cases, identical or similar to the proposals and
rationales used in the 2018 SEF Proposal, the Commission believes
the context surrounding these two proposals distinguishes them in
application and scope. While the Commission received comments on the
2018 SEF Proposal, the Commission believes that it is important for
the public to be able to provide comments focused on the facts and
circumstances of the proposal at hand. Therefore, comments made on
the 2018 SEF Proposal relevant to this rulemaking should be
resubmitted as comments to this rule proposal in order to be
considered.
---------------------------------------------------------------------------
The Commission proposes to amend part 37 to allow the swap
components of certain categories of ``package transactions'' \16\ to be
executed on-SEF through flexible means of execution pursuant to Sec.
37.9(c)(2), rather than through the required methods of execution under
Sec. 37.9 for ``Required Transactions.'' In addition, the Commission
is proposing to amend part 36 to include an exemption from the trade
execution requirement for swap transactions that are executed as a
component of a package transaction that also includes a component that
is a new issuance bond (``New Issuance Bond package transactions'').
CFTC No-Action Letter No. 17-55 (``NAL No. 17-55'') \17\ currently
provides no-action relief for the swap components of certain categories
of package transactions from the required methods of execution, and in
some instances, from the trade execution requirement.
---------------------------------------------------------------------------
\16\ As used herein a package transaction consists of two or
more component transactions executed between two or more
counterparties where: (i) At least one component transaction is a
Required Transaction; (ii) execution of each component transaction
is contingent upon the execution of all other component
transactions; and (iii) the component transactions are priced or
quoted together as one economic transaction with simultaneous or
near-simultaneous execution of all components.
\17\ NAL No. 17-55, Re: Extension of No-Action Relief from
Sections 2(h)(8) and 5(d)(9) of the Commodity Exchange Act and from
Commission Regulations 37.3(a)(2) and 37.9 for Swaps Executed as
Part of Certain Package Transactions (Oct. 31, 2017). NAL No. 17-55
extended no-action relief and related conditions previously granted
by Commission staff. See CFTC Letter No. 14-12, No-Action Relief
from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and
from Commission Regulation Sec. 37.9 for Swaps Executed as Part of
a Package Transaction (Feb. 10, 2014) (``NAL No. 14-12''); CFTC
Letter No. 14-62, No-Action Relief from the Commodity Exchange Act
Sections 2(h)(8) and 5(d)(9) and from Commission Regulation Sec.
37.9 for Swaps Executed as Part of Certain Package Transactions and
No-Action Relief for Swap Execution Facilities from Compliance with
Certain Requirements of Commission Regulations Sec. 37.9(a)(2),
Sec. 37.203(a) and Sec. 38.152 for Package Transactions (May 1,
2014) (``NAL No. 14-62''); CFTC Letter No. 14-121, Extension of No-
Action Relief for Swap Execution Facilities and Designated Contract
Markets from Compliance with Certain Requirements of Commission
Regulations Sec. 37.9(a)(2), Sec. 37.203(a) and Sec. 38.152 for
Package Transactions (Sept. 30, 2014) (``NAL No. 14-121''); CFTC
Letter No. 14-137, Extension of No-Action Relief from the Commodity
Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission
Regulation Sec. 37.9 and Additional No-Action Relief for Swap
Execution Facilities from Commission Regulation Sec. 37.3(a)(2) for
Swaps Executed as Part of Certain Package Transactions (Nov. 10,
2014) (``NAL No. 14-137''); CFTC Letter No. 15-55, Extension of No-
Action Relief from the Commodity Exchange Act Sections 2(h)(8) and
5(d)(9) and from Commission Regulation Sec. 37.9 and No-Action
Relief for Swap Execution Facilities from Commission Regulation
Sec. 37.3(a)(2) for Swaps Executed as Part of Certain Package
Transactions (Oct. 15, 2015) (``NAL No. 15-55''); and CFTC Letter
No. 16-76, Re: Extension of No-Action Relief from the Commodity
Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission
Regulation Sec. 37.9 and No-Action Relief for Swap Execution
Facilities from Commission Regulation Sec. 37.3(a)(2) for Swaps
Executed as Part of Certain Package Transactions (Nov. 1, 2016)
(``NAL No. 16-76''). NAL No. 17-55 also provided relief for package
transactions where at least one individual swap component is subject
to the trade execution requirement and all other components are
futures contracts (``MAT/Futures package transactions''). The
Commission continues to evaluate MAT/Futures package transactions
and their regulatory treatment. Therefore, this rulemaking does not
encompass MAT/Futures package transactions.
Further, NAL No. 17-55 also applies to package transactions
occurring on a DCM. See supra note 3.
---------------------------------------------------------------------------
The Commission proposes to amend part 37 to establish a
principles-based approach for SEF error trade policies that
incorporates relief from the required methods of execution under Sec.
37.9 for Required Transactions for trades intended to resolve error
trades.\18\ The amendment would enable SEFs to permit market
participants to execute swaps transactions to correct operational or
clerical errors using execution methods other than those required under
Sec. 37.9 for Required Transactions. This proposal does not seek to
codify the specific conditions contained in CFTC No-Action Letter No.
17-27 (``NAL No. 17-27'').\19\ Rather, this proposal is intended to
capture the intent of NAL No. 17-27 to permit market participants to
correct error trades in Required Transactions through non-required
methods of execution while ensuring flexibility for SEFs to determine
the most suitable error trade rules for their markets and
participants.\20\
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\18\ The Commission notes that in addition to relief from the
required methods of execution, staff has also provided relief from
Sec. 37.203(a) of the Commission's regulations, which prohibits
``pre-arranged trading,'' for offsetting trades and correcting
trades. See NAL 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). As discussed
further below, the Commission does not, however, view a regulatory
amendment corresponding to that relief as necessary. See infra note
70.
\19\ This proposal also does not codify the supplemental
conditions to NAL No. 17-27 contained in CFTC No-Action Letter No.
20-01, Re: Supplemental 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 (Jan. 8, 2020) (``NAL No. 20-
01''), conditions that allow market participants to correct error
trades that have been accepted for clearing with an ex post facto
review by the SEF. As discussed below, nothing in this proposal
would prohibit SEFs from incorporating such conditions within their
error trade rules. See infra note 74.
\20\ NAL 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). NAL No. 17-27
extended no-action relief and related conditions previously granted
by Commission staff. See CFTC Letter No. 16-58, 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 (June 10,
2016) (``NAL No. 16-58''); CFTC Letter 15-24, 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 (Apr. 22,
2015) (``NAL No. 15-24''); and CFTC Letter No. 13-66, Time-Limited
No-Action Relief for Swap Execution Facilities from Compliance with
Certain Requirements of Commission Regulation 37.9(a)(2) and
37.203(a) (Oct. 25, 2013) (initial relief provided by Commission
staff with respect to error trades that are rejected from
clearing)(``NAL No. 13-66''). NAL No. 17-27 also applies to swap
transactions occurring on a DCM. See supra note 3. In addition, DMO
recently released NAL No. 20-01, which supplements the conditions in
NAL No. 17-27 to allow market participants, sua sponte, to correct
error trades that have been accepted to clearing with an ex post
facto review by the SEF.
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[[Page 9410]]
The Commission proposes to amend the definition of ``block
trade'' in Sec. 43.2, which requires the execution of block trades
pursuant to the rules of a SEF to ``occur[] away'' from the SEF, i.e.,
to be executed outside of any of the SEF's trading systems or
platforms. The amendment would enable SEFs to offer non-Order Book
methods of execution for market participants to execute swap block
trades on the SEF. The proposal codifies CFTC No-Action Letter No. 17-
60 (``NAL No. 17-60'') while also allowing block trades for swaps that
are not intended to be cleared (``ITBC'') to be executed on SEF via
non-Order Book methods of execution.\21\
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\21\ NAL No. 17-60, Re: Extension of No-Action Relief for Swap
Execution Facilities from Certain ``Block Trade'' Requirements in
Commission Regulation 43.2 (Nov. 14, 2017). NAL No. 17-60 extended
no-action relief and related conditions previously granted by
Commission staff. See CFTC Letter No. 16-74, Re: Extension of No-
Action Relief for Swap Execution Facilities from Certain ``Block
Trade'' Requirements in Commission Regulation 43.2 (Oct. 7, 2016)
(``NAL No. 16-74''); CFTC Letter No. 15-60, Re: Extension of No-
Action Relief for Swap Execution Facilities from Certain ``Block
Trade'' Requirements in Commission Regulation 43.2 (Nov. 2, 2015)
(``NAL No. 15-60''); and CFTC Letter No. 14-118, No-Action Relief
for Swap Execution Facilities from Certain ``Block Trade''
Requirements in Commission Regulation 43.2 (Sept. 19, 2015) (``NAL
No. 14-118''). NAL No. 17-60 only provides relief for swap block
trades that are ITBC.
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The Commission believes that the above-described amendments would
continue to effectuate the statutory SEF provisions and better promote
the statutory SEF goals, as discussed below.
C. Consultation With Other U.S. Financial Regulators
In developing these rules, the Commission has consulted with the
Securities and Exchange Commission, pursuant to section 712(a)(1) of
the Dodd-Frank Act.\22\
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\22\ Dodd-Frank Act, Public Law 111-203, title VII, sec.
712(a)(1), 124 Stat. 1376 (2010).
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II. The Proposed Regulations
A. Execution of Package Transactions
1. Background
Package transactions generally involve the execution of multiple
component transactions together that market participants consider to
represent one economic transaction.\23\ The types of transactions that
constitute a package transaction are wide-ranging and diverse. In
particular, there are package transactions that consist solely of swaps
subject to the trade execution requirement; those that include a mix of
swaps subject to the trade execution requirement and swaps that are
not; those made up of swaps and non-swaps; and those comprised of both
swaps that are and swaps that are not exclusively subject to the
Commission's jurisdiction.\24\ These components range from being very
liquid and standardized to being illiquid and bespoke.\25\ The variety
of package transactions derives, in part, from the fact that the
different types of package transactions are fit for distinct purposes.
The Commission understands that certain package transactions are
utilized as tools within market participants' portfolio management and
hedging programs, while other types of package transactions are used to
allow market participants to express views of the market--for example,
by allowing participants to trade the spread between certain products
or different maturities in the same product.
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\23\ See supra note 16. The Commission notes that there are
transactions that otherwise meet the package transaction definition
but do not involve a swap subject to the trade execution
requirement. While these transactions may colloquially be referred
to as package transactions, the Commission notes that such
transactions are not the subject of this proposal.
\24\ See infra note 36 for a more precise description of various
package transactions.
To the extent that counterparties may be facilitating package
transactions that involve a ``security,'' as defined in section
2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the
Securities Exchange Act of 1934, or any component agreement,
contract, or transaction over which the Commission does not have
exclusive jurisdiction, the Commission does not opine on whether
such activity complies with other applicable law and regulations.
\25\ Some non-swap components may be subject to different
regulatory requirements than the swap components in the package
transactions.
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Given the diverse characteristics of the component transactions
that may be involved, the Commission understands that package
transactions often pose unique pricing and execution characteristics.
The Commission understands that the negotiation or arrangement of each
of these components generally occurs concurrently or on a singular
basis; in particular, negotiations for the pricing of such package
transactions may be based primarily on the components that are not
subject to the trade execution requirement. Further, given the
individual liquidity and trading characteristics of each component,
certain package transactions will have to trade through methods of
execution that are suitable for an illiquid and bespoke component,
which in many cases are not the required methods of execution.\26\
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\26\ For example, while a swap that is subject to the trade
execution requirement is suitable to be executed through the
required methods of execution as an outright transaction, when that
same swap is bundled together with an illiquid and bespoke component
in a package transaction, the package transaction takes on the
liquidity and trading profile of the illiquid and bespoke component.
---------------------------------------------------------------------------
Notwithstanding the complexity of their pricing and execution, the
Commission is aware of their benefits of such package transactions. By
executing multiple components together as part of a package
transaction, market participants can improve transaction pricing and
cost, increase execution efficiency, and decrease execution risk beyond
what would have been possible if the market participant had executed
each component individually, i.e., ``legged'' or ``legging'' into the
transaction.\27\
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\27\ For example, a market participant seeking to execute two
component transactions independent of one another, instead of
executing the two components together in a package transaction,
would be forced to pay the bid/offer spread on each leg, which in
many cases is more costly and less efficient than paying the single
bid/offer spread for a package transaction composed of the same two
components.
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During the implementation of the trade execution requirement for
certain interest rate swaps and credit default swaps, SEFs and market
participants informed the Commission that requiring swaps that are
otherwise Required Transactions--but are components of a package
transaction \28\--to be executed through the required methods of
execution \29\ under Sec. 37.9 was in many cases impracticable and
increased execution risks and operational challenges. Market
participants and SEFs informed the Commission that these risks and
challenges generally
[[Page 9411]]
reflect (i) an initial lack of market infrastructure available to trade
and clear certain package transactions; \30\ and (ii) the complex,
bespoke, and idiosyncratic nature of several categories of package
transactions that precluded them from being suitable for execution
through required methods of execution.\31\
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\28\ See supra note 16. Consistent with the proposed definition
of package transaction under Sec. 37.9(d) the Commission notes
that, unless otherwise stated, the term ``swap component(s)'' as
used herein refers to a swap component that is subject to the trade
execution requirement under CEA section 2h(8), and therefore a
Required Transaction.
\29\ As noted above, pursuant to Sec. 37.9, SEFs must provide
as the required methods of execution for Required Transactions
either an Order Book or an RFQ System.
\30\ See, e.g., NAL No. 14-12 at 2-3 n.10 (describing the
inability of a DCO to simultaneously screen and accept all
components of a package transaction for clearing).
\31\ See, e.g., CFTC Public Roundtable: Trade Execution
Requirements and Package Transactions, 72, 84-85 (Feb. 12, 2014),
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/transcript021214.pdf (commenting on
the challenges of applying required methods of execution to package
transactions with complex component swaps).
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In response to concerns from market participants, Commission staff
in the Division of Market Oversight (``DMO'') provided a series of
time-limited no-action relief in order to allow the swap components of
certain package transactions to be executed through flexible methods of
execution on a SEF, and in some cases completely away from a SEF. Over
time, the initial dearth of available market infrastructure to trade
and clear certain package transactions has diminished, especially for
package transactions composed of liquid and standardized components. As
a result, Commission staff has allowed the relief for certain package
transactions to expire as the capabilities and functionalities of
market participants and SEFs have progressed to the point of permitting
the swap component of various package transactions to be executed
through the required methods of execution.\32\ The Commission notes
that the expiration of relief has been successful for many types of
package transactions given (i) market participants now actively trade
the swap component of several types of package transactions through the
required methods of execution, and (ii) the trading of such package
transactions constitutes a significant portion of swaps trading.\33\
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\32\ See infra note 36 for an overview and description of the
evolution of the relief for package transactions.
\33\ For example, according to publicly available data from
ClarusFT, nearly seventy percent of U.S. Dollar interest rate swaps
trading in the inter-dealer swap market were carried out as part of
just a single type of package transaction: U.S. Dollar Spreadover
package transactions, as defined in note 35. See Chris Barnes, USD
Spreadovers and SEF Market Share, Clarus Financial Technology Blog
(August 14, 2018), available at https://www.clarusft.com/usd-spreadovers-and-sef-market-share/. Further, package transactions
involving spreads and butterflies of interest rate swaps make up a
material amount of trading in the swaps markets.
---------------------------------------------------------------------------
Despite the progress, however, Commission staff has continued to
provide relief for the swap components of certain package transactions
where relief is necessary for market participants to be able to
effectively execute the package transaction due to specific attributes
of such transactions.
2. Proposed Addition of Sec. 37.9(d) and Amendment of Sec. 37.9(a)(2)
In light of the complex nature of these package transactions, the
Commission recognizes that the required methods of execution under
Sec. 37.9 may inhibit market participants from tailoring the execution
of the swap component of the relevant package transactions. This may
force market participants to effect such transactions on a leg-by-leg
basis--leading to increased execution and operational risk--or prevent
them from engaging in the relevant package transactions altogether,
precluding effective hedging strategies and decreasing market
liquidity. Since DMO's issuance of this no-action relief, the
Commission has gained considerable knowledge and experience with the
dynamics of the trading of package transactions, particularly with
respect to the existing no-action relief from the required methods of
execution. Based on this knowledge and experience, the Commission
believes that certain aspects of the current requirements for the
required methods of execution under Sec. 37.9 should be enhanced to
better account for the complex nature of the relevant package
transactions.
Therefore, the Commission proposes to add Sec. 37.9(d) and amend
Sec. 37.9(a)(2) to permit the swap components of certain package
transactions to be executed via flexible methods of execution pursuant
to Sec. 37.9(c)(2). The Commission proposes to define a ``package
transaction'' as a transaction consisting of two or more component
transactions executed between two or more counterparties where: (i) At
least one component transaction is a Required Transaction; (ii)
execution of each component transaction is contingent upon the
execution of all other component transactions; and (iii) the component
transactions are priced or quoted together as one economic transaction
with simultaneous or near-simultaneous execution of all components.\34\
Based on this proposed definition and consistent with existing no-
action relief, the Commission proposes to allow the Required
Transaction swap component of the following three categories of package
transactions to be executed via flexible means of execution pursuant to
Sec. 37.9(c)(2):
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\34\ See proposed Sec. 37.9(d)(1). The Commission notes that
there are transactions which otherwise meet the package transaction
definition but do not involve a swap that is subject to the trade
execution requirement. While these transactions may colloquially be
referred to as package transactions, the Commission notes that such
transactions are not the subject of this proposal. See supra note
16.
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(1) A package transaction where at least one of the components is a
swap exclusively within the Commission's jurisdiction that is not
subject to the clearing requirement (``MAT/Non-MAT Uncleared'');
(2) A package transaction where at least one of the components is
not a swap (excluding certain package transaction categories as
discussed below) (``MAT/Non-Swap Instrument''); \35\ and
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\35\ Under proposed Sec. 37.9(d)(3), consistent with the no-
action relief, this category specifically excludes package
transactions in which all non-swap components are U.S. Treasury
securities (``U.S. Dollar Spreadover package transactions''); MAT/
Futures package transactions; package transactions in which all
other non-swap components are agency mortgage-backed securities
(``MAT/Agency MBS package transactions''); and New Issuance Bond
package transactions. See also Section II.A.7--Exemption of New
Issuance Bond Package Transactions from the Trade Execution
Requirement.
To the extent that counterparties may be facilitating package
transactions that involve a ``security,'' as defined in section
2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the
Securities Exchange Act of 1934, or any component agreement,
contract, or transaction over which the Commission does not have
exclusive jurisdiction, the Commission does not opine on whether
such activity complies with other applicable law and regulations.
---------------------------------------------------------------------------
(3) A package transaction where at least one of the components is a
swap for which the CFTC does not have exclusive jurisdiction, e.g., a
mixed swap (``MAT/Non-Exclusive CFTC Swap'').\36\
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\36\ The Commission notes that the swap components of different
categories of package transactions have been subject to time-limited
no-action relief provided by Commission staff from the trade
execution requirement and required methods of execution. These
categories of package transactions include those where: (i) Each of
the components is a swap subject to the trade execution requirement
(``MAT/MAT package transactions''); (ii) at least one of the
components is subject to the trade execution requirement and each of
the other components is subject to the clearing requirement (``MAT/
Non-MAT (Cleared)''); (iii) U.S. Dollar Spreadover package
transactions; (iv) MAT/Agency MBS package transactions; (v) New
Issuance Bond package transactions; (vi) MAT/Futures package
transactions; (vii) MAT/Non-MAT (Uncleared); (viii) excluding
aforementioned categories, MAT/Non-Swap Instruments; and (ix) MAT/
Non-Exclusive CFTC Swap. See NAL No. 14-12; NAL No. 14-62; NAL No.
14-121; NAL No. 14-137; NAL No. 15-55; NAL No. 16-76; and NAL No.
17-55.
Over time, the swap components of the following categories of
package transactions were no longer provided relief: MAT/MAT package
transactions, MAT/Non-MAT (Cleared) package transactions, U.S.
Dollar Spreadover package transactions, and MAT/Agency MBS package
transactions. As a result, the swap components of these package
transactions must be executed through the required methods of
execution under Sec. 37.9(a).
Currently, the swap components of the following categories of
package transactions receive no-action relief from the required
methods of execution under Sec. 37.9 under NAL No. 17-55: (i) MAT/
Non-MAT (Uncleared) package transactions; (ii) MAT/Non-Swap
Instruments package transactions (subject to the exclusions
previously discussed); and (iii) MAT/Non-Exclusive CFTC Swap package
transactions. The proposed addition of Sec. 37.9(d) is consistent
with the relief from the required methods of execution under NAL No.
17-55. Within this section, the term ``relevant package
transactions,'' unless context requires otherwise, refers to these
three categories of package transactions.
In addition to the relief from the required methods of execution
in Sec. 37.9, NAL No. 17-55 also provides relief from the trade
execution for the swap components of MAT/Futures package
transactions and New Issuance Bond Package transactions. As
discussed above, the Commission is still evaluating MAT/Futures
package transactions. See supra note 17.
Further, as discussed in more detail below, the Commission is
proposing to exempt the swap components of New Issuance Bond package
transactions from the trade execution requirement. This is
consistent with the relief currently provided to New Issuance Bond
package transactions under NAL No. 17-55. To the extent that
counterparties may be facilitating package transactions that involve
a ``security,'' as defined in section 2(a)(1) of the Securities Act
of 1933 or section 3(a)(10) of the Securities Exchange Act of 1934,
or any component agreement, contract, or transaction over which the
Commission does not have exclusive jurisdiction, the Commission does
not opine on whether such activity complies with other applicable
law and regulations.
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[[Page 9412]]
While, as noted above, the swap components of several types of
package transactions have been successfully transitioned to SEF and are
executed via the required methods of execution, the Commission believes
that the types of package transactions covered by this proposal may not
be suitable to be traded through the required methods of execution due
to their specific characteristics. In particular, the Commission
recognizes that these package transactions contain components that are
illiquid and bespoke, such as swaptions, or contain components that are
subject to regulatory requirements other than or in addition to the CEA
and the Commission's regulations issued thereunder.\37\
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\37\ The Commission will continue to evaluate these categories
of package transactions for new developments in execution methods on
SEFs and may in the future revise the categories of package
transactions in which the swap component is eligible to be executed
through flexible means of execution. For example, the Commission
notes that Tradeweb Markets Inc. recently released an electronic
trading method for package transactions involving swaps and bonds.
Such transactions--provided they are not U.S. Dollar Spreadover
package transactions--would fall under the MAT/Non-Swap Instruments
category of package transactions. Therefore, the Commission asks in
this proposal whether the proposed package transaction categories
are appropriate.
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The Commission believes that if market participants are unable to
utilize flexible methods of execution for the swap components of these
package transactions, they would potentially be forced to break the
package transaction into its individual components, otherwise known as
``legging'' into the transaction. The Commission understands from
market participants that legging into a package transaction is
inefficient and increases transaction costs and execution risks. Given
that components of package transactions are each priced or quoted
together as part of one economic transaction, the Commission recognizes
the impracticality of breaking the package transaction into individual
legs or components in order to trade the swap components via the
required methods of execution under Sec. 37.9.
Based on its experience with the existing no-action relief, the
Commission believes that the proposed addition of Sec. 37.9(d) and
amendment of Sec. 37.9(a) will allow market participants to choose the
most suitable execution method for their package transactions, which
will decrease execution risks, improve efficiency, and decrease
transaction costs because market participants will no longer be forced
to leg into transactions. Given the inherent complexity of the relevant
package transactions, the Commission believes that this proposal
ensures that market participants are able to trade these package
transactions in the most effective, efficient, transparent, and
economical manner. SEFs would be able to offer, and market participants
would be able to utilize, methods of execution that best suit the
characteristics of the relevant package transaction being traded. The
Commission believes this would preserve the benefits and purpose of
executing such package transactions.
In addition to causing inefficient execution and increasing risks
and cost, forcing the swap components of the relevant package
transactions through required methods of execution may also limit the
commercial utility of such transactions or entirely frustrate the
purposes of entering in such package transactions in the first place.
For example, the Commission understands that in some of the relevant
package transactions, (i) the swap component serves as the hedging
instrument to other instruments in the package transaction, or (ii) the
package transaction as a whole may be utilized as part of a market
participant's portfolio management program. If the swap component of
such package transactions were impractical or unable to be executed due
to the required methods of execution, market participants would be
prevented from entering or effectively entering into the package
transaction, nullifying the package transaction's purpose and benefits
as a hedging and portfolio management tool. Based on its experience
with the existing no-action relief, the Commission believes that this
proposal would allow market participants to utilize flexible methods of
execution for the swap component of the relevant package transaction,
thereby ensuring that market participants are able to continue to
utilize these effective hedging tools.
Finally, the Commission believes that its proposed approach would
advance the SEF statutory goal of promoting trading on SEFs.\38\ The
proposed rule provides relief from execution method requirements that
are generally intended to help promote trading on SEFs. However, the
relevant package transactions are not suitable for trading via such
required methods of execution, as discussed above. Accordingly, the
Commission believes that in this case flexibility with respect to
execution methods will better promote trading of such component swaps
on SEFs, consistent with the statutory SEF goals.
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\38\ See 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------
3. Request for Comment
The Commission requests comment on all aspects of proposed Sec.
37.9(d) and the proposed amendment of Sec. 37.9(a)(2). The Commission
also invites specific comments on the following:
(1) Is the proposed definition of ``package transaction'' in
proposed Sec. 37.9(d)(1) appropriate? Please explain why or why not.
(2) Is the proposed definition's condition that the ``execution of
each component transaction is contingent upon the execution of all
other component transactions'' clear in its meaning? If not, please
explain how the Commission should clarify this provision.
(3) Similarly, is the proposed definition's condition that ``[t]he
component transactions are priced or quoted together as one economic
transaction'' clear in its meaning? If not, please explain how the
Commission should clarify this provision.
(4) Is it clear what is meant within the proposed definition's
statement that execution of all component transactions is to be
``simultaneous or near-simultaneous''? If not, please explain how the
Commission should clarify this provision.
(5) Is the proposed addition of Sec. 37.9(d)(2) for MAT/Non-MAT
(Uncleared) package transactions
[[Page 9413]]
appropriate? Please explain why or why not.
(6) Is the proposed addition of Sec. 37.9(d)(3) for MAT/Non-Swap
package transactions appropriate? Please explain why or why not.
(7) Are the categories of package transactions that are excluded
from Sec. 37.9(d)(3) appropriate? Please explain why or why not.
(8) Are there additional package transactions that should be
excluded from Sec. 37.9(d)(3)?
(9) Is the proposed addition of Sec. 37.9(d)(4) for MAT/Non-
Exclusive CFTC Swap package transactions appropriate? Please explain
why or why not.
(10) Are there additional types or categories of package
transactions not covered in this proposal for which the Commission
should allow the swap component to be executed through the flexible
means of execution in Sec. 37.9(c)(2)? Please explain in detail why or
why not.
(11) Should the Commission allow swap components to be executed via
flexible methods of execution where a package transaction contains more
than four components or legs, regardless of the types of components?
(12) In addition to U.S. Dollar Spreadover package transactions,
are there additional package transactions with sovereign debt
components for which the Commission should exclude the swap component
from flexible methods of execution? Please explain why or why not.
(13) Should the Commission allow all swap components of a package
transaction to be executed via flexible means of execution where a
single swap component subject to the trade execution requirement is
above the applicable block size? Please explain why or why not.
(14) Should the Commission allow a package transaction composed of
a Credit Default Swap (``CDS'') index swap subject to the trade
execution requirement and a CDS index swap that is several series off-
the-run to be executed through flexible means of execution? Please
explain why or why not.
4. Existing Sec. 37.3(a)
An Order Book is one of the two required methods of execution under
Sec. 37.9(a). The Commission designated an Order Book as the ``minimum
trading functionality'' each SEF must maintain and offer for each swap
that it lists for trading. An Order Book is defined under Sec.
37.3(a)(3) as (i) an electronic trading facility; \39\ (ii) a trading
facility; \40\ or (iii) a trading system or platform in which all
market participants in the trading system or platform have the ability
to enter multiple bids and offers, observe or receive bids and offers
entered by other market participants, and transact on such bids and
offers.'' \41\
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\39\ CEA section 1a(16) defines ``electronic trading facility''
as a trading facility that (i) operates by means of an electronic or
telecommunications network; and (ii) maintains an automated audit
trail of bids, offers, and the matching of orders or the execution
of transactions on the facility. 7 U.S.C. 1a(16).
\40\ CEA section 1a(51) defines ``trading facility'' as a person
or group of persons that constitutes, maintains, or provides a
physical or electronic facility or system in which multiple
participants have the ability to execute or trade agreements,
contracts, or transactions by accepting bids or offers made by other
participants that are open to multiple participants in the facility
or system; or through the interaction of multiple bids or multiple
offers within a system with a pre-determined non-discretionary
automated trade matching and execution algorithm. 7 U.S.C.
1a(51)(A).
\41\ 17 CFR 37.3(a)(3).
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Generally speaking, it may be complex to apply the existing Order
Book requirement in Sec. 37.3(a)(2) to the swap components of the
package transactions covered by this proposed amendment. In some
situations, Sec. 37.3(a)(2) may require that a SEF maintain separate
Order Books for the same type of swap: One Order Book for when the swap
is executed as a single transaction (referred to as an ``outright
transaction''), and a separate Order Book for when the swap is executed
as part of a package transaction. In fact, multiple Order Books could
be required for the same type of swap if it were included as part of
multiple types of package transactions. The Commission understands
that, in part because of the availability of relief under the staff
letters described above, SEFs have put in place relatively few Order
Books for swaps to be executed as part of the package transactions
covered by this proposed amendment, and any such Order Books in place
are not actively used.
5. Proposed Addition of Sec. 37.3(a)(4)
The Commission proposes to add Sec. 37.3(a)(4), which would allow
SEFs not to offer an Order Book for the swap components of the package
transactions covered by this proposed amendment: (i) MAT/Non-MAT
Uncleared package transactions; (ii) MAT/Non-Swap Instrument package
transactions; and (iii) MAT/Non-Exclusive CFTC Swap package
transactions. However, this proposal would not alter any requirement
applicable to such swap components to the extent they are executed in
transactions that are not package transactions covered by this proposed
amendment. The text of proposed Sec. 37.3(a)(4) makes clear that Sec.
37.3(a)(2) of the Commission's regulations would continue to apply to
such swap components and SEFs would be required to offer Order Books
for these Required Transactions as outright transactions.
As noted above,\42\ executing Required Transaction swap components
of certain package transactions through the required methods of
execution is operationally complex, and in many instances,
impracticable. Given that the Commission has preliminarily determined
that it is infeasible or inefficient to facilitate swap components of
these package transactions through the required methods of execution,
which includes an Order Book under Sec. 37.3(a), it logically follows
that requiring SEFs to offer an Order Book for the swap components of
package transactions would be superfluous.
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\42\ See section II.A.1--Background and section II.A.2--Proposed
Addition of Sec. 37.9(d) and Amendment of Sec. 37.9(a)(2).
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Finally, the Commission believes that not requiring SEFs to offer
an Order Book for the swap components of the relevant package
transactions would help reduce operating costs for SEFs, as they would
no longer be required to operate and maintain order book systems that
are not suitable for trading the swap components of the relevant
package transactions. Instead of employing resources to build (or
attempt to build) and support an unused or underutilized Order Book for
the swap components of certain package transactions, the proposal would
instead provide a SEF with the flexibility to determine how to allocate
its resources, particularly as it relates to developing methods of
execution that are better suited to trading the relevant package
transactions.\43\
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\43\ The Commission notes that nothing in this proposal would
preclude a SEF from offering an Order Book if it is able to develop
an Order Book solution that is effective in trading the swap
component of certain package transactions.
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6. Request for Comment
The Commission requests comment on all aspects of proposed Sec.
37.3(a)(4). The Commission also invites comments specifically on the
following:
(15) Is the addition of Sec. 37.3(a)(4) appropriate?
(16) Should the Commission still require SEFs to offer an Order
Book for MAT/Non-MAT (Uncleared) package transactions as defined in
Sec. 37.9(d)(2)?
(17) Should the Commission still require SEFs to offer an Order
Book for
[[Page 9414]]
the swap components of MAT/Non-Swap package transactions as defined in
Sec. 37.9(d)(3)?
(18) Should the Commission still require SEFs to offer an Order
Book for MAT/Non-Exclusive CFTC Swap package transactions as defined in
Sec. 37.9(d)(4)?
(19) Are there additional types of package transactions that the
Commission should consider allowing SEFs to not offer Order Books for?
(20) Should the Commission allow SEFs not to offer an Order Book
for swaps that are not subject to the trade execution requirement but
are components of any package transaction? Would this lead to
additional types of package transactions being listed and traded on
SEFs?
7. Exemption of New Issuance Bond Package Transactions From the Trade
Execution Requirement
The Commission proposes to establish an exemption to the trade
execution requirement for swap transactions that are components of a
``New Issuance Bond'' package transaction.\44\ The Commission believes
that exempting these types of transactions from the trade execution
requirement is authorized by, and would be consistent with the
objectives of, CEA section 4(c).\45\ This proposed approach is
consistent with the time-limited no-action relief provided by
Commission staff for this category of package transactions.\46\
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\44\ The Commission notes that both this proposal and the 2018
SEF Proposal propose to exempt New Issuance Bond package
transactions from the trade execution requirement under section
2(h)(8) of the CEA. See 2018 SEF Proposal at 62039. However, while
these proposals and the supporting rationales are nearly identical,
these two proposals are dissimilar in practical effect and scope.
Under the 2018 SEF Proposal, the Commission proposed to apply the
trade execution requirement to all swaps that are subject to the
clearing requirement in section 2(h)(1) of the CEA and are listed on
a SEF or a DCM. The 2018 SEF Proposal thus would have significantly
expanded the scope of swaps that are subject to the trade execution
requirement, including materially expanding the requirement to
numerous forward starting interest rate swaps which are used as the
swap components for New Issuance Bond package transactions.
Contrastingly, this proposal would not alter the scope of swaps that
are currently subject to the trade execution requirement, the
majority of which are not swaps that are used as a component in New
Issuance Bond package transactions. This means that the proposal to
exempt New Issuance Bond package transaction under the 2018 SEF
Proposal would have a significantly broader impact on the market
than the proposed exemption within this proposal.
\45\ 7 U.S.C. 6(c).
\46\ See supra note 36 (describing the no-action relief from the
trade execution requirement provided by Commission staff for
categories of package transactions).
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New Issuance Bond package transactions include at least one
individual swap component that is subject to the trade execution
requirement and at least one individual component that is a bond \47\
issued and sold in the primary market.\48\ An underwriter (on behalf of
an issuer) arranges the issuance of a bond packaged with a fixed-to-
floating interest rate swap (``IRS'') that features the issuer as a
counterparty. The terms of the IRS, which include tenor and payment
terms, typically match the terms of the bond issuance. By issuing a
bond with a fixed-to-floating IRS, issuers are able to effectively turn
fixed-rate liabilities into variable-rate liabilities, or vice
versa.\49\ To match the terms between these two components and
facilitate the bond issuance in an efficient and cost-effective manner,
the IRS component is customized and negotiated in a manner that closely
corresponds to the bond issuance process.
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\47\ The Commission notes that this proposed exemption would not
apply to swap components of package transactions that include
sovereign debt, such as U.S. Treasury bonds, notes, and bills.
\48\ The Commission understands that a bond issued and sold in
the primary market that may constitute part of a package transaction
is a ``security,'' as defined in section 2(a)(1) of the Securities
Act of 1933 or section 3(a)(10) of the Securities Exchange Act of
1934. To the extent that counterparties may be facilitating package
transactions that involve a security, or any component agreement,
contract, or transaction over which the Commission does not have
exclusive jurisdiction, the Commission does not opine on whether
such activity complies with other applicable law and regulations.
\49\ For example, a bond issuer seeks to pay variable rates on
its bonds, but prospective investors may seek a fixed rate of
return. By arranging a New Issuance Bond package transaction, the
bond issuer can issue a fixed-rate bond and simultaneously enter
into an offsetting IRS. The IRS enables the issuer to receive a
fixed rate that matches the fixed rate on its bond to be issued,
while paying the variable rate that it originally sought.
Ultimately, this arrangement may allow the bond issuer to issue the
fixed-rate bond at a lower cost.
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Given the process under which the swap is negotiated,\50\ this type
of package transaction has not been conducive to execution on a SEF
trading system or platform. The Commission notes that the no-action
relief that has been provided by Commission staff for these swaps
components reflects the ongoing lack of an available execution method
on an appropriate trading venue.\51\ Based on the integral role of the
bond issuance in facilitating the component swap execution, the
Commission believes that the IRS component is not suitable for
execution on a SEF, even if a SEF were able to offer flexible means of
execution, as the Commission is proposing for swap components of other
package transactions within this proposal.\52\
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\50\ The Commission notes that these types of package
transactions differ from other package transactions that involve the
purchase or sale of a security in the secondary market, given that
they involve the issuance of a new security.
\51\ See NAL No. 17-55 at 2-3.
\52\ See Section II.A.2.
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Therefore, consistent with current no-action relief provided by
Commission staff, the Commission proposes to exempt swap components of
a New Issuance Bond package transaction from the trade execution
requirement. The proposed exemption would establish that a ``package
transaction'' consists of two or more component transactions executed
between two or more counterparties, where (i) at least one component
transaction is subject to the trade execution requirement in section
2(h)(8) of the Act; (ii) execution of each component transaction is
contingent upon the execution of all other component transactions; and
(iii) the component transactions are priced or quoted together as one
economic transaction with simultaneous or near-simultaneous execution
of all components.\53\ The Commission recognizes the inherent
challenges in trading or executing these swap components on a SEF or
DCM and, therefore, recognizes the benefits of continuing to allow
market participants to maintain established market practices with
respect to this type of package transaction.
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\53\ The Commission notes that this definition is consistent
with the proposed definition for package transaction in Sec.
37.9(d)(1).
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8. Discussion of CEA Section 4(c) Enumerated Factors
Section 4(c) of the CEA grants the Commission the authority to
exempt any transaction or class of transactions, including swaps, from
certain provisions of the CEA, including the Commission's clearing
requirement, in order to ``promote responsible economic or financial
innovation and fair competition.'' \54\ Section 4(c)(2) of the CEA
further provides that the Commission may not grant exemptive relief
unless it determines that: (i) The exemption is appropriate for the
transaction and consistent with the public interest; (ii) the exemption
is consistent with the purposes of the CEA; (iii) the transaction will
be entered into solely between ``appropriate persons;'' and (iv) the
exemption will not have a material adverse effect on the ability of the
Commission or any contract market to discharge its regulatory or self-
regulatory responsibilities under the CEA. In enacting section 4(c),
Congress noted
[[Page 9415]]
that the purpose of the provision is to give the Commission a means of
providing certainty and stability to existing and emerging markets so
that financial innovation and market development can proceed in an
effective and competitive manner.\55\
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\54\ 7 U.S.C 6(c).
\55\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
---------------------------------------------------------------------------
The Commission believes that exempting swap components of New
Issuance Bond package transactions from the trade execution requirement
would be consistent with the objectives of CEA section 4(c).
The Commission recognizes the importance of new bond issuances in
helping market participants to raise capital and fund origination loans
for businesses and homeowners. The Commission recognizes that allowing
the swap components of New Issuance Bond package transactions to be
executed away from a SEF or DCM--consistent with current market
practice--is integral to facilitating the bond issuance. Further, the
Commission recognizes that the proposed exemption is limited in nature,
i.e., the swap transaction remains subject to all other applicable
Commission rules and regulations.
Therefore, the Commission preliminarily believes that the proposed
exemption from the trade execution requirement for swap components of
New Issuance Bond package transactions is appropriate and would be
consistent with the public interest and purposes of the CEA.
The Commission further believes that the proposed regulation would
not have a material adverse effect on the ability of the Commission or
any SEF or DCM to discharge its regulatory or self-regulatory duties
under the CEA. The Commission notes that the exemption is limited in
scope and the swap components subject to this exemption are still
required to be reported to a swap data repository pursuant to parts 43
and 45 of the Commission's regulations. Further, the Commission retains
its special call, anti-fraud, and anti-evasion authorities, which will
enable it to adequately discharge its regulatory responsibilities under
the CEA.
The Commission notes that under the proposed exemption, swap
transactions would still be entered into solely between eligible
contract participants (``ECPs''), whom the Commission believes, for
purposes of this proposal, to be appropriate persons. Previously, the
Commission determined that ECPs are appropriate persons within the
scope of section 4(c)(3)(K) of the CEA.\56\ The Commission noted that
the elements of the ECP definition (as set forth in section 1a(18)(A)
of the CEA and Commission regulation 1.3) generally are more
restrictive than the comparable elements of the enumerated
``appropriate person'' definition.\57\ Given that only ECPs are
permitted to enter into swaps off of a DCM, there is no risk that a
non-ECP or a person who does not satisfy the requirements for an
``appropriate person'' could enter into a New Issuance Bond package
transaction using this proposed exemption. Therefore, the Commission
believes that the class of persons eligible to rely on the exemption
for New Bond Issuance package transactions will be limited to
``appropriate persons'' within the scope of section 4(c)(3) of the CEA.
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\56\ Clearing Exemption for Swaps Between Certain Affiliated
Entities, 78 FR 21750, 21754 (Apr. 11, 2013).
\57\ Id.
---------------------------------------------------------------------------
9. Request for Comment
The Commission requests comment on all aspects of the proposed
exemption of swap components of New Issuance Bond package transactions
from the trade execution requirement under proposed Sec. 36.1(a),
including whether the proposed exemptive relief is consistent with the
public interest and the other requirements of CEA section 4(c). As
noted above, the 2018 SEF Proposal contained a nearly identical
provision. Comments made on the 2018 SEF Proposal that are relevant to
this rulemaking must be resubmitted to be considered. The Commission
specifically requests comment on the following questions:
(21) Pursuant to its authority in CEA section 4(c), should the
Commission exempt the swap components of a New Issuance Bond package
transaction from the trade execution requirement?
(22) Is the proposed definition of ``package transaction'' in
proposed Sec. 36.1(a)(1) appropriate?
(23) Is it clear what is meant within the proposed definition when
it states that the ``execution of each component transaction is
contingent upon the execution of all other component transactions''? If
not, please explain how the Commission should clarify this provision.
(24) Is it clear what is meant within the proposed definition when
it states that ``[t]he component transactions are priced or quoted
together as one economic transaction''? If not, please explain how the
Commission should clarify this provision.
(25) Is it clear what is meant within the proposed definition when
it states that all component transactions are to be executed on a
``simultaneous or near-simultaneous'' basis? If not, please explain how
the Commission should clarify this provision.
(26) Are there additional swap components of different types or
categories of package transactions that should be exempt from the trade
execution requirement? If so, then please describe in detail why such
swap components of these types or categories of package transactions
should be exempt from the trade execution requirement.
B. Error Trades: Execution of Trades To Correct Operational and
Clerical Errors on Swap Execution Facilities
1. Background
The Commission notes that SEFs have adopted policies to identify
and resolve error trades as part of the rules and procedures that
govern their respective trading and trade processing operations. Errors
in SEF transactions, as observed by the Commission, may be operational
or clerical in nature and attributable to either the SEF, the
counterparties to the transaction, the counterparties' intermediaries,
or the clearing members involved. Clerical errors, in particular, may
occur in the process of entering trade details into a SEF's trading
system and may relate to the swap's terms and conditions, such as
price, size, or direction, as well as counterparty or clearing member
identities. The adoption of error trade policies by SEFs reflects the
importance of addressing errors to ensure that counterparties are able
to execute swap transactions as intended on a SEF, which promotes a
fair and orderly trading market for SEF market participants.\58\
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\58\ The Commission notes that the guidance to Core Principle 4
in Appendix B cites ``clear error-trade and order-cancellation''
policies as a type of trading risk control that could be part of an
acceptable program for preventing market disruptions. 17 CFR part 37
app. B (guidance to Core Principle 4--paragraph (a)(5)--``Risk
controls for trading'').
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Under the current SEF regulatory framework, however, resolving
error trades for swaps subject to the Commission's required methods of
execution and straight-through processing requirements has occurred
pursuant to no-action relief provided by Commission staff on an ongoing
basis. Since 2013, the Division of Clearing and Risk (``DCR'') and DMO
(together, the ``Divisions'') have issued time-limited no-action relief
to allow counterparties to correct swap ``error trades''--transactions
containing an ``operational
[[Page 9416]]
or clerical error'' \59\--involving swaps designated as Required
Transactions, which are subject both to the clearing requirement and
the trade execution requirement.\60\ This relief, as described further
below, has facilitated corrections where the error trade has either
been (i) rejected by a DCO from clearing due to the error; or (ii)
accepted for clearing, and therefore requires correction through an
offsetting trade. Pursuant to the relief, SEFs may provide
counterparties with a bilateral, ``corrective'' execution process for
Required Transactions that does not satisfy the required methods of
execution under Sec. 37.9(a)(2) for swaps subject to the trade
execution requirement.
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\59\ The Divisions previously defined ``operational or clerical
error'' as any type of error other than a rejection from clearing
due to credit reasons. See NAL No. 17-27 at 1 n.2.
\60\ See NAL No. 13-66. In April 2015, staff issued additional
no-action relief, which not only reinstated the previous time-
limited no-action relief from NAL No. 13-66 for SEFs from the
requirements of Sec. 37.9(a)(2) and Sec. 37.203(a) for error
trades rejected from clearing, but also provided relief for error
trades accepted for clearing in NAL No. 15-24. Commission staff
subsequently extended the relief provided in NAL No. 15-24 in June
2016 with NAL No. 16-58. This relief was most recently extended in
May 2017 by NAL No. 17-27 and would expire on the effective date of
any applicable changes in the Commission's regulations. Commission
staff in DMO recently issued NAL No. 20-01, which supplements NAL
No. 17-27 to allow market participants, sua sponte, to correct error
trades that have been accepted for clearing. In instances where
market participants correct an error trade sua sponte, NAL No. 20-01
requires an ex post facto review by the SEF of the error trade,
offsetting trade, and correcting trade on a T+1 basis. Such review
must consider whether a transaction cancellation or price adjustment
will adversely impact market integrity, facilitate market
manipulation or other illegitimate activity, or otherwise violate
the CEA, Commission regulations, or the SEF's rules.
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For error trades rejected from clearing by a DCO, the no-action
relief has provided operational flexibility from the required methods
of execution that otherwise apply in conjunction with the Commission's
``straight-through processing'' requirements for swaps submitted to a
DCO for clearing.\61\ To promote the ``near[-]instantaneous acceptance
or rejection of each trade [for clearing],'' \62\ the Divisions issued
a 2013 staff guidance expressing the view that SEFs should have rules
stating that trades that are rejected from clearing are ``void ab
initio.'' \63\ Accordingly, executed swaps that a DCO rejects from
clearing would be deemed void, including swaps that are rejected due to
an operational or clerical error by the SEF or the counterparties.
Where the counterparties still seek to execute the transaction as
intended, void ab initio compels the counterparties to execute a new
transaction between one another with the corrected terms. Where the
counterparties seek to execute a correcting swap that is a Required
Transaction, the no-action relief allows SEFs to accept bilaterally-
arranged swaps from the counterparties for execution and submission for
clearing, rather than requiring them to execute the correcting swap
through an Order Book or RFQ System.
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\61\ The Commission's ``straight-through processing''
requirements address the process of routing transactions from
execution through clearing. See Customer Clearing Documentation,
Timing of Acceptance for Clearing, and Clearing Member Risk
Management, 77 FR 21278, 21283 (Apr. 9, 2012) (``Timing of
Acceptance for Clearing Final Rule''). 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.'' Id. at 21285.
\62\ Staff Guidance on Swaps Straight-Through Processing at 2
(Sept. 26, 2013)(``2013 Staff STP Guidance'').
\63\ 2013 Staff STP Guidance at 5. The 2013 Staff STP Guidance
also addresses other elements of ``straight-through processing'' for
swap transactions, including void ab initio. See 2018 SEF Proposal
at 61999-62002, 62019-62024. The Commission notes that it proposed
to address certain provisions from the 2013 Staff STP Guidance in
the 2018 SEF Proposal, including a clarification that mandatory
application of void ab initio would be limited to swap transactions
that are rejected from clearing for credit-related reasons; for
rejections arising from clerical or operational errors, the proposed
clarifications would allow a SEF to adopt other corrective
approaches that may not involve execution of a offsetting trade or a
correcting trade. Id. at 62000-62001. As noted above, this proposal
is independent of the 2018 SEF Proposal.
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For error trades accepted for clearing by a DCO in spite of an
operational or clerical error in the swap, the no-action relief has
provided similar operational flexibility from the prescribed execution
methods under Sec. 37.9(a)(2).\64\ Accordingly, the relief allows SEFs
to accept a bilaterally arranged swap from the counterparties for
execution and submission for clearing that (i) economically offsets the
initial error trade that was accepted from clearing; and (ii) corrects
the initial error trade with corrected terms as originally intended by
the counterparties.
---------------------------------------------------------------------------
\64\ See NAL No. 17-27 at 5.
---------------------------------------------------------------------------
The Divisions also attached certain conditions to this no-action
relief that, among other things, specified timing requirements for
submitting these transactions to a SEF for execution and to a DCO for
clearing. For transactions correcting error trades that a DCO has
rejected from clearing, the Divisions specified that the counterparties
must execute the transaction on a SEF, and the SEF must submit the
transaction for clearing, as quickly as technologically practicable
after receipt of notice of the rejection by the DCO to the clearing
members, but no later than one hour from the notice.\65\ For offsetting
and correcting transactions to error trades that a DCO has accepted for
clearing, the Divisions specified that such execution and submission to
clearing of those transactions must occur no later than three days
after the error trade was executed.\66\
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\65\ Id. at 6.
\66\ Id. In addition, for error trades that are accepted for
clearing, DMO issued NAL No. 20-01, which supplements NAL No. 17-27
to allow market participants, sua sponte, to correct error trades
that have been accepted for clearing with an ex post facto review by
the SEF. For error trades accepted for clearing and corrected under
the relief in NAL No. 20-01, DMO specified that such error trades
would need to be corrected no later than 24 hours after the error
trade was executed. See NAL No. 20-01 at 4.
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2. Proposed Sec. 37.9(e)
The Commission proposes to amend the SEF regulatory framework by
adding subsection (e) to Sec. 37.9 to establish a flexible SEF error
trade policy standard that would, among other things, incorporate the
intent of the existing no-action relief in NAL No. 17-27 for resolving
errors in Required Transactions. Proposed Sec. 37.9(e)(2)(i) would
specify that a SEF must maintain rules and procedures that are fair,
transparent, consistent, and allow for timely resolution of an ``error
trade,'' as defined under proposed Sec. 37.9(e)(1)(ii).\67\ This
proposed standard would apply to any error trade that occurs on a SEF,
regardless of whether the swap is submitted for clearing or not. The
Commission believes that the proposed standard is a flexible approach
that also clarifies the key principles that any SEF's error trade
policy should address.
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\67\ As proposed, an ``error trade'' would be defined as any
trade executed on or subject to the rules of a swap execution
facility that contains an operational or clerical error. With
respect to ``package transactions,'' as defined under proposed Sec.
37.9(d)(1), the Commission deems the submission of the component
transactions in a sequence that causes a rejection from clearing of
an individual component to constitute an operational error that
could be resolved through a correcting trade under proposed Sec.
37.9(e)(2)(i)(A). Market participants had previously informed the
Commission that an individual component transaction may be rejected
from clearing if prematurely submitted because the risk of that
component, in isolation, could cause a trader to exceed its credit
limit. Under a different submission sequence of component
transactions to the DCO, however, the net risk of all of those
transactions may not have exceeded the credit limit, thereby
avoiding the rejection. The Commission emphasizes, however, the use
of a corrective trade may only apply to the rejected component and
otherwise would not apply to the other legs of the package
transaction that have been accepted for clearing.
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Further, under proposed Sec. 37.9(e)(2)(i) SEFs must have error
trade rules and procedures that require market participants to provide
prompt notice to the SEF of an error trade and, as
[[Page 9417]]
applicable, the corresponding correcting trade and offsetting
trade.\68\ This notice need not be separate from the error trade
correction process.
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\68\ To the extent a SEF implements error trade rules and
procedures that allow market participants to correct error trades
sua sponte with an ex post facto review by the SEF, that the SEF
must require that market participants notify it of the subsequent
correcting and offsetting trades. Conversely, a SEF that adopts
error trades rules and procedures in which the SEF is responsible
for correcting the error trade, that SEF would not be required to
have market participants notify it of the subsequent correcting and
offsetting trades. Regardless of the type of error trade rules and
procedures a SEF adopts, it is required to adopt rules and
procedures which require its market participants to provide prompt
notice to it of an error trade that has occurred on its trading
system(s) or platform(s).
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The Commission believes that such a requirement is important to
facilitate SEFs' fulfillment of their self-regulatory obligations. In
particular, the Commission believes that providing a SEF prompt notice
that an error trade has occurred on its trading system(s) or
platform(s) will further enable it to facilitate direct supervision of
it markets in order to determine whether a rule violation has occurred
as required under Sec. 37.203(b) as well as enhance its ability to
carry out real-time market monitoring of all trading activity on its
system(s) or platform(s) to identify disorderly trading and any market
or system anomalies pursuant to Sec. 37.203(e).\69\
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\69\ See 17 CFR 37.203(b); 17 CFR 37.203(e).
---------------------------------------------------------------------------
Proposed Sec. 37.9(e) would also require a SEF to adopt rules to
resolve error trades that involve swaps submitted for clearing. For an
error trade rejected from clearing and therefore deemed void ab initio,
proposed Sec. 37.9(e)(2)(i)(A) would require a SEF to permit the
counterparties to subsequently execute a correcting trade, as defined
in proposed Sec. 37.9(e)(1)(i), through any method of execution
offered by the SEF. For an error trade that has been accepted for
clearing, proposed Sec. 37.9(e)(2)(i)(B) would require a SEF to permit
the counterparties to subsequently execute both an offsetting trade, as
defined in proposed Sec. 37.9(e)(1)(iii), and a correcting trade
through any method of execution offered by the SEF.\70\
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\70\ NAL No. 17-27 also provided relief from Sec. 37.203(a),
which prohibits pre-arranged trading, for offsetting trades and
correcting trades. The Commission, however, does not view a
regulatory amendment corresponding to that relief as necessary. The
existing prohibition already provides an exception to that
prohibition by allowing a SEF to adopt trading practices that are
certified or approved by the Commission pursuant to part 40 of the
Commission's regulations. See 17 CFR 37.203(a). Accordingly, the
Commission anticipates that a SEF would implement proposed Sec.
37.9(e) by self-certifying or adopting rules subject to Commission
review under part 40 that specify the manner in which counterparties
may execute offsetting and correcting trades.
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Consistent with the existing no-action relief, this approach would
continue to provide flexibility in the execution methods that a SEF may
offer to counterparties to execute offsetting and correcting trades
that involve swaps that are Required Transactions.\71\ Based on its
experience with the existing no-action relief, the Commission believes
that this flexibility would continue to promote SEF operational
efficiency by allowing SEFs to offer error trade protocols that are
tailored to their markets and to allow identification and resolution of
operational and clerical errors in a timely manner. Without such
flexibility, market participants with an error in Required Transactions
would otherwise be prohibited from determining how to resolve the error
between themselves by entering into an offsetting trade or a new trade
with the correct terms due to the execution method requirements under
Sec. 37.9(a)(2), which require that all Required Transactions be
traded via either an Order Book or RFQ System.
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\71\ The Commission notes that swaps that are Permitted
Transactions, including those that are submitted to a DCO for
clearing, may already be executed through any method of execution
offered by a SEF pursuant to Sec. 37.9(c)(2).
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The Commission also believes that the proposed approach would
further the SEF statutory goals of promoting trading on SEFs and pre-
trade price transparency in the swaps market.\72\ The proposed rules
provide flexibility to depart from required execution methods that are
otherwise intended to advance those statutory goals; allowing
counterparties to correctly and efficiently execute swaps with the
intended terms and conditions, however, enhances market integrity on
SEFs, which promotes SEF participation. Additionally, the proposed
rules would also help to ensure that trade data, which market
participants rely upon to inform their swaps trading decisions,
accurately reflects prevailing market pricing at any given time.
---------------------------------------------------------------------------
\72\ See 7 U.S.C. 7b-3(e).
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The Commission notes that the existing no-action relief is
currently subject to several conditions applicable to SEFs and
counterparties--for example, SEFs must affirmatively determine, or
determine after an ex post facto review, that an error trade has
occurred.\73\ Except as incorporated in the proposed rules herein, the
Commission intends for the proposed approach to otherwise provide SEFs
with the flexibility to address such aspects of its error trade policy
in a manner that is best suited to its trading and trade processing
operations.\74\
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\73\ See NAL No. 17-27 at 5-7 and NAL No. 20-01 at 4-5.
\74\ Under the proposal's principles-based approach, the
Commission notes that a SEF would not be prohibited from
incorporating the conditions contained within NAL No. 17-27, or
implementing rules that allow market participants, sua sponte, to
correct error trades that have been accepted for clearing with an ex
post facto review by the SEF of the error trade, offsetting trade,
and correcting trade on a T+1 basis as is contemplated by NAL No.
20-01. Further, this proposal would not preclude SEFs from deploying
error trade rules and procedures which consider whether a
transaction cancellation or price adjustment will adversely impact
market integrity, facilitate market manipulation or other
illegitimate activity, or otherwise violate the CEA, Commission
regulations, or the SEF's rules. However, regardless of the error
trade rules and procedures that a SEF may adopt, the Commission
notes that pursuant to this proposal such rules must be fair,
transparent, and consistent. For example, in a scenario where a SEF
is unsure as to how to address an error, the SEF may have rules
which make it clear that the SEF will seek guidance and consent from
both counterparties to the error trade before correcting the error
trade. The Commission believes that such rule would be fair as it
considers the positions of both counterparties and is transparent as
it makes clear what the SEF will do in a specific scenario.
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The proposed rules, however, would also adopt some limitations that
are similar to the existing no-action relief, including specified
timeframes for executing and submitting these trades for clearing. For
correcting trades associated with an error trade that has been rejected
from clearing, proposed Sec. 37.9(e)(2)(i)(A) would require the SEF to
submit the correcting trade for clearing to the registered DCO or
exempt DCO as soon as technologically practicable, but no later than
one hour after notice of the rejection to the relevant clearing
members. For an offsetting trade and a correcting trade associated with
an error trade that already has been accepted for clearing, proposed
Sec. 37.9(e)(2)(i)(B) would require the SEF to submit both types of
trades to the registered DCO or exempt DCO as soon as technologically
practicable, but no later than three days after the registered DCO or
exempt DCO accepted the error trade for clearing.\75\
[[Page 9418]]
In addition to these proposed timeframes, proposed Sec. 37.9(e)(2)(ii)
would prohibit counterparties from executing a second correcting trade
to fix an error trade if the initial correcting trade is rejected from
clearing.
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\75\ The Commission notes that the supplemental conditions
contained in NAL No. 20-01 require error trades that have been
accepted to clearing to be corrected as soon as technologically
practicable but no later than 24 hours after the error trade was
executed. See NAL No. 20-01 at 4. However, as noted above, the
Commission intends for this proposal to provide a SEF with the
flexibility to address such aspects of its error trade policy in a
manner that is best suited to its trading and trade processing
operations. As such, SEFs may continue to have error trade rules and
procedures that are contemplated in both NAL No. 17-27 and NAL No.
20-01 for error trades that have been accepted for clearing.
Therefore, the Commission is proposing that an error trade that has
already been accepted for clearing would be required to be corrected
as soon as technologically practicable, but no later than three days
after the registered DCO or exempt DCO accepted the error trade for
clearing, as this is the longest timeframe for correcting such error
trades as contemplated in both NAL No. 17-27 and NAL No. 20-01.
Nonetheless, the Commission is seeking comment on whether three days
is an appropriate timeframe for error trades that have been accepted
for clearing to be corrected. Further, despite the proposed outer
limit of three days for correcting error trades that have been
accepted for clearing, the Commission notes that SEFs and market
participants are expected to correct such error trades as soon as
technologically practicable as is proposed under Sec.
37.9(e)(2)(i)(B).
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The Commission believes that these proposed limitations are
consistent with the goal of promoting straight-through processing. The
proposed timing requirements, in particular, are intended to provide a
SEF and the counterparties to an error trade with an appropriate amount
of time to identify and resolve error trades, while also minimizing
delays to achieving prompt and efficient clearing of transactions.
Similarly, limiting the number of instances in which counterparties may
attempt to correct an error trade would also help to facilitate prompt
and efficient clearing by incentivizing the counterparties to
accurately execute their correcting trade as quickly as possible. The
Commission, however, seeks additional public comment regarding this
proposed limitation, as well as the appropriateness of the proposed
timeframes.
3. Request for Comment
The Commission requests comment on all aspects of proposed Sec.
37.9(e). As noted above, the 2018 SEF Proposal also discussed this
topic. Comments made on the 2018 SEF Proposal that are relevant to this
rulemaking must be resubmitted to be considered. The Commission also
invites comments specifically on the following:
(27) The Commission notes that Sec. 37.203(e) already specifies
that a SEF may resolve errors by adjusting trade prices or canceling
trades to mitigate ``market disrupting events;'' such action by a SEF
must be ``transparent to the market and subject to standards that are
clear, fair, and publicly available.'' Should the Commission adopt a
single rule for all error trades under proposed Sec. 37.9(e) that is
similar to this standard, or is the proposed standard, i.e., ``fair,
transparent, consistent, [and] allow for timely resolution'' more
appropriate? If the Commission should maintain separate standards,
please explain why.
(28) Is the proposed timeframe adequate for the submission of a
correcting trade to resolve an error trade rejected from clearing for
non-credit reasons? If not, please provide an alternative timeframe and
explain why such an alternative would be more appropriate.
(29) Is the proposed timeframe adequate for submitting an
offsetting trade and correcting trade to resolve an error trade
accepted for clearing? If not, please provide an alternative timeframe
and explain why such an alternative would be more appropriate.
(30) Under proposed Sec. 37.9(e)(2)(i), SEFs must have rules which
require market participants to provide prompt notice to the SEF that an
error trade has occurred. Is it clear what is meant by ``prompt
notice'' in Sec. 37.9(e)(2)(i)? If not, please explain how the
Commission should clarify this provision.
(31) Should the Commission require that notification to a SEF of an
error trade occur within a specified timeframe? If so, what is the
appropriate time frame for that notification to occur?
(32) If a SEF adopts error trade rules and procedures that allow
market participants to sua sponte correct an error trade with an ex
post facto review by the SEF, should the Commission allow the SEF to
have rules permitting market participants to withhold notice of the
error trade until the market participant notifies the SEF of the
correcting trade and, as applicable, the offsetting trade?
(33) Should the Commission require SEFs to affirmatively determine,
or determine after an ex post facto review, that an error trade has
occurred? Why or why not?
(34) If a SEF should affirmatively determine that an error trade
had occurred, what is the appropriate time frame for that declaration
to occur?
(35) If a SEF should determine that an error trade has occurred
after an ex post facto review, what is the appropriate time frame for
that review and determination to occur?
(36) If a SEF should affirmatively determine that an error trade
had occurred, should the SEF's review consider whether a transaction
cancellation or price adjustment will adversely impact market
integrity, facilitate market manipulation or other illegitimate
activity, or otherwise violate the CEA, Commission regulations, or the
SEF's rules?
(37) If a SEF should determine that an error trade has occurred
after an ex post facto review, should the SEF's review consider whether
a transaction cancellation or price adjustment will adversely impact
market integrity, facilitate market manipulation or other illegitimate
activity, or otherwise violate the CEA, Commission regulations, or the
SEF's rules?
(38) Does Sec. 37.9(e) sufficiently address potential situations
in which a component of a package transaction is rejected from clearing
by the relevant registered DCO or exempt DCO because of the sequencing
of the components of the package transaction submitted for clearing at
the registered DCO or exempt DCO? With respect to proposed Sec.
37.9(e), are there any other issues that should be addressed regarding
package transactions?
(39) Should the same error trade policy also be available to
correct any errors contained in a correcting trade or an offsetting
trade, or should the number of corrections be limited? If an initial
correcting trade or offsetting trade that is executed to correct an
error trade contains an operational or clerical error, should the
counterparties be allowed to submit another correcting trade or
offsetting trade?
(40) Should the Commission require SEFs to notify its market when
it receives notice from a market participant that an error trade has
occurred?
(41) Should the Commission prescribe different error trade rules
and procedures depending on the status (i.e., Required Transactions or
Permitted Transactions) of the original swap transaction? Please
explain why or why not.
(42) Are there any conditions in NAL No. 17-27 or supplemental NAL
No. 20-01 not contained within this proposal that the Commission should
require SEFs to adopt in their error trade rules and procedures? If so,
please explain in detail why such conditions are necessary and
appropriate to be required in SEF error trade rules and procedures.
C. Real-Time Public Reporting: Block Trade Definition
1. Existing Sec. 43.2
Section 43.2 defines a swap ``block trade'' as a publicly
reportable swap transaction that (i) involves a swap that is listed on
a SEF or DCM; (ii) occurs away from the SEF's or DCM's trading system
or platform and is executed pursuant to the SEF's or DCM's rules and
procedures; (iii) has a notional or principal amount at or above the
appropriate minimum block trade size applicable to such swap; and (iv)
is reported subject to the rules or procedures of the SEF or DCM and
the rules set forth under part 43, including the appropriate time delay
requirements set forth under Sec. 43.5.\76\ In specifying
[[Page 9419]]
these elements, the Commission considered the treatment of block trades
in various swap and non-swap markets.\77\ In particular, the Commission
looked to the futures markets, where futures block trades are
permissible, privately-negotiated transactions that equal or exceed a
DCM's specified minimum quantity of futures or options contracts and is
executed away from the DCM's centralized market but pursuant to its
rules.\78\ Accordingly, the Commission's regulatory definition of a
``block trade'' for swaps closely tracks this futures market concept of
a block trade.
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\76\ 17 CFR 43.2.
\77\ Real-Time Public Reporting of Swap Transaction Data, 75 FR
76140, 76159 (proposed Dec. 7, 2010) (discussion of block trades
with respect to futures).
\78\ Id.
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Similar to futures block trades, the Commission requires that swap
block trades ``occur away'' from a SEF's or a DCM's trading system or
platform, but pursuant to the SEF's or a DCM's rules and
procedures.\79\ The Commission clarified the ``block trade'' definition
by stating that ``[a]ny swap that is executed on a SEF or a DCM's
trading system or platform, regardless of whether it is for a size at
or above the appropriate minimum block size for such swap, is not a
block trade under this definition. . . .'' \80\ Accordingly, to receive
the fifteen-minute public reporting delay that block trades are
entitled to under Sec. 43.5(d), the swap transaction not only must
have a notional amount at or above the appropriate minimum block size,
but must also ``occur away'' from the SEF's or the DCM's trading system
or platform.\81\
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\79\ 17 CFR 43.2.
\80\ Procedures To Establish Appropriate Minimum Block Sizes for
Large Notional Off-Facility Swaps and Block Trades, 78 FR 32866,
32904 n.425 (May 31, 2013).
\81\ CEA section 2(a)(13) requires the Commission to establish
rules that govern the real-time reporting of swap transaction and
pricing data to the public, but also directs the Commission, among
other things, to prescribe rules that specify the appropriate
reporting time delay for block trades, including the criteria for
determining what constitutes a block trade. 7 U.S.C. 2(a)(13).
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2. Proposed Amendment to Sec. 43.2
During the part 37 implementation process, SEFs and market
participants informed the Commission that for swap transactions that
are intended to be cleared, requiring that such swaps ``occur away''
from a SEF's trading system or platform creates an issue with carrying
out pre-execution credit screening.\82\ These market participants noted
that, in many cases, clearing FCMs are unable to conduct pre-execution
credit screening for such block trades because they are unaware that a
block trade has occurred away from a SEF until after it has been
executed and reported to the SEF.\83\ Accordingly, SEFs were unable to
facilitate pre-execution credit checks for block trades.
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\82\ For the avoidance of doubt, the Commission believes that if
the parties purport to execute a block trade away from the SEF
without first obtaining a credit check, an FCM clearing member that
clears such trade and does not have knowledge of such purported
execution is not in violation of the pre-execution credit check
requirement under Commission regulation 1.73. NAL No. 17-60 n.9. The
Commission understands that currently no mechanism exists to enable
a pre-execution credit check where blocks are executed away from a
SEF; however, this proposal does not preclude participants from
developing and using such a mechanism in the future.
\83\ NAL No. 17-60 at 2.
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DMO acknowledged this operational challenge and accordingly has
granted ongoing no-action relief from the requirement that swap block
trades ``occur away'' from a SEF.\84\ Based on Commission staff no-
action relief provided in NAL No. 17-60, a SEF may allow market
participants to execute swap block trades that are ITBC \85\ on a SEF's
non-Order Book trading system or platform.\86\ As a result, FCMs and
SEFs have been able to comply with their respective pre-execution
credit screening obligations.
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\84\ NAL No. 17-60; NAL No. 16-74; NAL No. 15-60; NAL No. 14-
118.
\85\ As used herein, swaps that are ITBC are swaps (i) of a type
accepted for clearing by a DCO, and (ii) intended to be submitted
for clearing contemporaneously with execution. NAL No. 17-60 n.2.
\86\ NAL No. 17-60 at 2-3.
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The Commission proposes to revise the ``block trade'' definition
under Sec. 43.2 in order to allow market participants to utilize a
SEF's non-Order Book trading system or platform while still allowing
swap block trades to ``occur away'' from a SEF.\87\ The proposed
revision to the ``block trade'' definition not only allows swap block
trades that are ITBC to be executed on a SEF's non-Order Book trading
system or platform--as is currently provided for in NAL No. 17-60--but
the proposed definition would also permit swap block trades that are
not ITBC to be executed on SEF.\88\ The Commission believes that having
a single set of block trade rules for both ITBC and non-ITBC swap block
trades will help to reduce operational complexity for both SEFs and
market participants. Further, the Commission believes that permitting
execution of block trades on a SEF's non-Order Book trading systems or
platforms furthers the statutory SEF goal of promoting the trading of
swaps on SEFs.\89\ Moreover, for swap block trades that are ITBC and
executed on a SEF's non-Order Book trading system or platform, the
Commission believes that the proposed revised definition would (i)
allow FCMs to conduct pre-execution credit screenings in accordance
with Sec. 1.73; and (ii) allow SEFs to facilitate those screenings in
accordance with the Commission's proposed requirement under Sec.
37.702(b).\90\
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\87\ The Commission notes that it has proposed to address the
issue of block trades on SEFs in the 2018 SEF Proposal. As noted
above, this proposal is independent of the 2018 SEF Proposal.
\88\ The Commission notes that in the 2018 SEF Proposal, it
proposed for all SEF swap block trades to be executed on the SEF.
The Commission continues to evaluate this proposal. See supra note
15.
\89\ See 7 U.S.C. 7b-3(e).
\90\ The Commission notes that proposed Sec. 37.702(b) applies
to SEFs that list (i) swaps that are subject to the clearing
requirement; and/or (ii) swaps that are not subject to the clearing
requirement, but for which the SEF facilitates processing and
routing to a DCO for clearing.
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Further, the Commission notes that this revised block trade
definition is consistent with the provisions of the Dodd-Frank Act. CEA
section 2(a)(13), as amended by the Dodd-Frank Act, directs the
Commission to prescribe criteria for determining what constitutes a
block trade and to establish appropriate post-trade reporting time
delays. The provision, however, does not set forth any pre-trade
requirements, such as a requirement that the transaction be executed
away from a SEF. In addition, the Commission believes that allowing
participants to use a SEF's non-Order Book functionalities to execute
swap block trades is consistent with the Commission's regulatory
approach to mitigate risks of information leakage (i.e., a ``winner's
curse'') as market participants can use the functionality of the SEF to
execute a block trade in a manner that will not disclose the order to
the entire market.\91\ SEFs currently provide various modes of
execution to enable market participants to execute a block trade on the
SEF without providing disclosure of the block trade to the market or to
multiple market participants.\92\
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\91\ SEF Core Principles Final Rule, 78 FR 33498, 33562, and
33563.
\92\ For example, the Commission has observed that some SEFs
offer a ``RFQ-to-one'' functionality that allows counterparties to
bilaterally negotiate a block trade between two potential
counterparties, without requiring disclosure of the potential trade
to other market participants on a pre-trade basis.
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Finally, the Commission believes that permitting swap block trades
to be executed on a SEF's non-Order Book trading platforms while also
allowing them to ``occur away'' from a SEF provides SEFs increased
flexibility. In particular, SEFs will be able to provide execution
methods for swap block
[[Page 9420]]
trades that are most suitable, efficient, and cost-effective for the
product being traded, the SEF's market, and its market participants.
3. Request for Comment
The Commission requests comment on all aspects of the proposed
revision to the definition of ``block trade'' in Sec. 43.2. The 2018
SEF Proposal also proposed revisions to this definition. Comments made
on the 2018 SEF Proposal that are relevant to this rulemaking must be
resubmitted to be considered. The Commission also invites comments
specifically on the following:
(43) Is the Commission's proposed revision to the definition of
``block trade'' appropriate? If not, how should the Commission amend
the proposed definition?
(44) Should the Commission continue to permit market participants
to execute ITBC swap block trades away from but pursuant to the rules
of a SEF? Please explain why or why not.
(45) Should the Commission continue to permit market participants
to execute non-ITBC swap block trades away from but pursuant to the
rules of a SEF? Please explain why or why not.
(46) Should the Commission prohibit swap block trades that are
subject to the trade execution requirement from ``occurring away'' from
a SEF but pursuant to its rules?
(47) Should the Commission further limit or prohibit the execution
of swap block trades through an RFQ system, as defined in Sec.
37.9(a)(3)? For example, should the Commission limit the number of
market participants that may receive a RFQ for a swap block trade that
is intended to be executed on the SEF? Please explain why or why not.
(48) Should the Commission allow swap block trades to be executed
through an Order Book, as defined in Sec. 37.3(a)(3)? Please explain
why or why not.
III. Effective Date and Transition Period
The Commission proposes that the effective date for the proposed
regulations be 60 days after publication of final regulations in the
Federal Register. The Commission preliminarily believes that such an
effective date would allow SEFs and market participants sufficient time
to adapt to the amended and additional rules in an efficient and
orderly manner.
Request for Comment
The Commission requests comment on whether the proposed effective
date is appropriate and, if not, the Commission further requests
comment on possible alternative effective dates and the basis for any
such alternative dates.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \93\ requires Federal
agencies, in promulgating regulations, to consider the impact of those
regulations on small businesses. The regulations adopted herein will
affect SEFs and their market participants. The Commission has
previously established certain definitions of ``small entities'' to be
used by the Commission in evaluating the impact of its regulations on
small entities in accordance with the RFA.\94\ The Commission
previously concluded that SEFs are not small entities for the purpose
of the RFA.\95\ The Commission has also previously stated its belief in
the context of relevant rulemakings that SEFs' market participants,
which are all required to be eligible contract participants (``ECPs'')
\96\ as defined in section 1a(18) of the CEA,\97\ are not small
entities for purposes of the RFA.\98\ Therefore, the Chairman, on
behalf of the Commission, hereby preliminarily certifies, pursuant to 5
U.S.C. 605(b), that the regulations will not have a significant
economic impact on a substantial number of small entities. The
Commission invites the public to comment on whether SEFs and SEF market
participants covered by these proposed rules should be considered small
entities for the purpose of the RFA.
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\93\ 5 U.S.C. 601 et seq.
\94\ 47 FR 18618--18621 (Apr. 30, 1982).
\95\ SEF Core Principles Final Rule, 78 FR 33476, 33548 (June 4,
2013) (citing 47 FR 18618, 18621 (Apr. 30, 1982) (discussing DCMs);
66 FR 42256, 42268 (Aug. 10, 2001) (discussing DTFs, ECMs, and
EBOTs); and 66 FR 45604, 45609 (Aug. 29, 2001) (discussing
registered DCOs)).
\96\ 17 CFR 37.703.
\97\ 7 U.S.C. 1(a)(18).
\98\ 66 FR 20740, 20743 (Apr. 25, 2001) (stating that ECPs by
the nature of their definition in the CEA should not be considered
small entities).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq.
(``PRA'') imposes certain requirements on Federal agencies (including
the Commission) in connection with conducting or sponsoring any
``collection of information,'' \99\ as defined by the PRA. Among its
purposes, the PRA is intended to minimize the paperwork burden to the
private sector, to ensure that any collection of information by a
government agency is put to the greatest possible uses, and to minimize
duplicative information collections across the government.\100\
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\99\ See 44 U.S.C. 3502(3)(A).
\100\ See 44 U.S.C. 3501.
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The PRA applies to all information, regardless of form or format,
whenever the government is obtaining, causing to be obtained, or
soliciting information, and includes required disclosure to third
parties or the public, of facts or opinions, when the information
collection calls for answers to identical questions posed to, or
identical reporting or recordkeeping requirements imposed on, ten or
more persons.\101\ The PRA requirements have been determined to include
not only mandatory, but also voluntary information collections, and
include both written and oral communications.\102\ The Commission may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid Office
of Management and Budget (``OMB'') control number.
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\101\ See 44 U.S.C. 3502(3).
\102\ See 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------
This proposed rulemaking contains collections of information for
which the Commission has previously received control numbers from OMB.
The titles for these collections of information are ``Real-Time Public
Reporting and Block Trades, OMB control number 3038-0070'' and ``Core
Principles and Other Requirements for Swap Execution Facilities, OMB
control number 3038-0074.'' This proposed rulemaking would not impose
any new information collection requirements from any persons or
entities that require approval of OMB under the PRA.
C. Cost-Benefit Considerations
Section 15(a) of the CEA \103\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. 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.
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\103\ 7 U.S.C. 19(a).
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[[Page 9421]]
1. Background
The Commission is proposing to amend certain rules in parts 36, 37,
and 43 of its regulations relating to the execution of certain package
transactions on SEFs; the resolution of error trades on SEFs; and the
execution of block trades on SEFs.
The baseline against which the Commission considers the costs and
benefits of these proposed rules is the statutory and regulatory
requirements of the CEA and Commission regulations now in effect, in
particular CEA section 5h and certain rules in parts 37 and 43 of the
Commission's regulations. The Commission, however, notes that as a
practical matter SEFs and market participants have adopted some current
practices based upon no-action relief provided by Commission staff that
is time-limited in nature.\104\ As such, to the extent that SEFs and
market participants have relied on relevant staff no-action letters,
the actual costs and benefits of the proposed rules as realized in the
market may not be as significant.
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\104\ In its discussion of alternatives, the Commission believes
it is also relevant to consider the costs and benefits of the
proposed regulations in comparison to circumstances in which such
no-action relief has expired and is no longer available. The
Commission further notes that in connection with NAL No. 16-58 and
its extension NAL No. 17-27 (relief related to clerical or
operational error trade resolution), market participants
specifically requested that the Commission undertake rulemakings to
establish a permanent solution for addressing these clerical and
operational errors, rather than merely extending the previous NAL
relief. See NAL No. 16-58 and NAL No. 17-27. In contrast, previous
requests for no-action relief from market participants for the NALs
which preceded NAL No.16-58 and NAL No. 17-27 were merely for
temporary relief.
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In some instances, it is not reasonably feasible to quantify the
costs and benefits to SEFs and certain market participants with respect
to certain factors, for example, market integrity. Notwithstanding
these types of limitations, however, the Commission otherwise
identifies and considers the costs and benefits of these rules in
qualitative terms.
The following consideration of costs and benefits is organized
according to the rules and rule amendments proposed in this release.
For each rule, the Commission summarizes the proposed amendments and
identifies and discusses the costs and benefits attributable to such
rule. The Commission, where applicable, then considers the costs and
benefits of the proposed rules in light of the five public interest
considerations set out in section 15(a) of the CEA.
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
discussion of costs and benefits below refers to the effects of the
proposed rules on all swaps activity subject to the proposed and
amended regulations, whether by 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).\105\
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\105\ 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.
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2. Package Transactions
The Commission proposes to add Sec. 37.9(d) and amend Sec.
37.9(a)(2) to permit the swap components of certain package
transactions to be executed via flexible methods of execution pursuant
to Sec. 37.9(c)(2). The Commission proposes to define a ``package
transaction'' for the purpose of the proposed rule as a transaction
consisting of two or more component transactions executed between two
or more counterparties where (i) at least one component transaction is
subject to the trade execution requirement in section 2(h)(8) of the
Act; (ii) execution of each component transaction is contingent upon
the execution of all other component transactions; and (iii) the
component transactions are priced or quoted together as one economic
transaction with simultaneous or near-simultaneous execution of all
components. Based on this proposed definition and consistent with
existing no-action relief, the Commission proposes to allow the swap
component of the following three categories of package transactions to
be executed via flexible means of execution pursuant to Sec.
37.9(c)(2): (1) MAT/Non-MAT Uncleared package transactions; (2) MAT/
Non-Swap Instrument package transactions; \106\ and (3) MAT/Non-
Exclusive CFTC Swap package transactions.
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\106\ Under proposed Sec. 37.9(d)(3), consistent with the no-
action relief, this category specifically excludes U.S. Dollar
Spreadover package transactions; MAT/Futures package transactions,
MAT/Agency MBS package transactions; and New Issuance Bond package
transactions.
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In addition, the Commission is proposing to exempt the swap
components of these three types of package transactions from the
requirement in Sec. 37.3 that the SEF offer an Order Book for every
swap listed for trading on the SEF, while continuing to require that
SEFs offer an Order Book for outright transactions in every swap listed
for trading on the SEF. Finally, the Commission is proposing to use its
exemptive authority pursuant to CEA section 4(c) to exempt swap
transactions that are executed as a component of a package transaction
that includes a component that is a new issuance bond from the trade
execution requirement under section 2(h)(8) of the Act.
Benefits: The proposed rule would allow market participants to
choose the most suitable execution method for each package transaction
and will allow SEFs to continue to offer flexible execution methods for
these package transactions rather than only offer the required methods
of execution for swaps subject to the trade execution requirement. The
Commission expects this would reduce execution risks, improve
efficiency, and decrease transaction costs as market participants would
be able to avoid legging into transactions, that is, entering into each
part of the package separately. The Commission notes that these
benefits are currently available to market participants through
existing no-action relief. The Commission further believes that the
proposed rule would provide the liquidity and transparency benefits of
increased trading of component swaps on SEFs, as without the proposed
flexibility market participants would be unable or unwilling to trade
such swap components through SEFs' required methods of execution.\107\
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\107\ Further, while the proposed rules also provide flexibility
from the required methods of execution that are otherwise intended
to help promote pre-trade transparency on SEFs, the Commission notes
that permitting market participants to use flexible methods of
execution is consistent with how package transactions are treated
within other jurisdictions. For example, in the European Union
(``EU'') certain package transactions (including package
transactions for which the Commission currently requires the swap
component to be executed through the required methods of execution,
such as U.S. Dollar Spreadover package transactions) are eligible to
be waived from the EU's transparency regime. The Commission believes
that this proposal strikes an appropriate balance between promoting
pre-trade transparency and ensuring that U.S. markets and their
participants are not unnecessarily burdened. See Regulation (EU)
2016/1033 of the European Parliament and of the Council of 23 June
2016 amending Regulation (EU) No 600/2014 on markets in financial
instruments, Regulation (EU) No 596/2014 on market abuse and
Regulation (EU) No 909/2014 on improving securities settlement in
the European Union and on central securities depositories.
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[[Page 9422]]
The Commission believes that not requiring SEFs to offer an Order
Book for the swap components of the three types of relevant package
transactions would benefit SEFs by helping them to reduce operating
costs, as they would no longer be required to operate and maintain an
Order Book for trading those swaps that are components of those package
transactions. However, SEFs would need to retain the availability of
Order Books for those swaps executed as outright transactions.
Further, as discussed above, given the illiquid and bespoke nature
of various components within the relevant package transactions, the
Commission acknowledges that the Order Book is not the ideal method of
execution for many such transactions. Therefore, the Commission
anticipates that if SEFs are not required to provide an Order Book for
relevant package transactions that are not suitable for Order Book
trading, SEFs will be able to more effectively employ their resources,
and no longer face the prospect of being required to provide Order
Books that will not be utilized given the complex, illiquid, and
bespoke nature of various components of the relevant package
transactions.
The Commission believes that the proposal to exempt swap
transactions that are executed as a component of a package transaction
that includes a component that is a new issuance bond from the trade
execution requirement will ensure that market participants such as bond
underwriters and issuers can continue to execute these packages (where
the new-issuance bond is hedged by an interest rate swap with tenor and
payment terms that typically match the terms of the bond issuance) off-
SEF. As discussed above, this proposed exemption may facilitate new
bond issuances, which may benefit capital formation by helping market
participants to raise capital and fund origination loans for businesses
and homeowners. Moreover, in light of the involvement of the bond
issuer and the underwriter in arranging and executing a package
transaction in conjunction with a new issuance bond and the unique
negotiation and fit-for-purpose nature of these package transactions,
the Commission understands that it remains difficult or impossible to
trade these package transactions on a SEF. SEFs have not been able to
design an execution method suitable for this particular type of
package, rendering it impracticable to execute these packages on-SEF.
While the swap components of many swap/new-issuance bond packages
executed today are not currently subject to the trade execution
requirement,\108\ the proposed rule would ensure that those
transactions would remain exempt in the event the trade execution
requirement is expanded to include more types of swaps.
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\108\ For example, the swap component may be a forwarding-
starting swap whose start date corresponds to the issuance date of
the bond. Forward starting swaps are not currently subject to the
trade execution requirement.
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Costs: The proposed amendments to allow flexible execution methods
for certain package transactions and the proposed exemption for package
transactions that include a new issuance bond should not impose costs
on market participants since they only provide flexibility to market
participants and do not require them to change their current trade
practices. Moreover, to the extent that market participants are relying
on existing no-action relief, they could continue to implement existing
industry practice. The Commission believes that current SEF rules
typically allow participants to utilize flexible execution methods
pursuant to the existing no-action relief, but to the extent that SEFs
need to modify their rules to incorporate the proposed amendments, they
may incur modest costs.
As noted, not requiring SEFs to offer an Order Book for the swap
components of the relevant package transactions may enable SEFs to
reduce operating costs. Since any existing Order Books for swap
components of the relevant package transactions are not actively used
and are not practicable for market participants to use, removing these
Order Books (and not requiring SEFs to create such Order Books) should
not impose significant costs on market participants.
Section 15(a) Factors
a. Protection of Market Participants and the Public
The Commission believes that the proposed amendments and exemption
will protect market participants from the risks associated with legging
into the relevant packages by enabling market participants to enter
into package transactions using appropriate execution methods.
Permitting SEFs to eliminate the Order Book for use when swaps are
components of package transactions should not impact protection of
market participants. While protecting market participants also benefits
the public, the Commission has not identified any further effect of the
proposal on protection of the public.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
The proposed amendments would enhance efficiency by enabling market
participants to continue to execute the relevant packages in a single
transaction with an appropriate execution method, rather than via the
inefficient process of legging into the package one component at a
time. The proposed amendments would also enhance financial integrity by
enabling market participants to continue to avoid the execution risk
associated with potential adverse price movements while attempting to
leg a transaction. The Commission has not identified any likely effects
of the proposed amendments on competition in the swap markets. The
Commission expects that, since there are few, if any, active Order
Books for swaps as components of the relevant package transactions,
SEFs will not use proposed Sec. 37.3(a)(4) to remove active Order
Books that are providing competitive markets.
c. Price Discovery
Package transactions are typically executed at a single price for
the entire package, rather than at the prices of the individual
components. The proposed amendments would continue to allow the
relevant package transactions to be executed using the execution
methods that are designed to facilitate price discovery in these
packages. For packages that include new issuance bonds, the proposed
exemption will permit price discovery to occur at the appropriate
venue. The Commission believes that the proposed Sec. 37.3(a)(4),
which would exempt swaps that are part of the relevant package
transactions from the Order Book requirement, would not materially
inhibit price discovery since the Commission anticipates that SEFs
would retain Order Books where price discovery is occurring and that
currently price discovery is not occurring in Order Books for swap
components of the package transactions addressed within this proposal.
d. Sound Risk Management Practices
The Commission believes that the proposal will continue to promote
sound risk management by facilitating the execution of package
transactions as market participants consider package transactions to
often be useful and appropriate instruments for
[[Page 9423]]
management and transfer of risk and to avoid the execution risks
associated with legging of transactions.
e. Other Public Interest Considerations
The proposed exemption from the trade execution requirement for the
swap components of packages involving new issuance bonds may help
promote capital formation by facilitating the issuance of bonds to
raise capital. The Commission has not identified any other effect of
the proposed rules and proposed exemption regarding package
transactions on other public interest considerations.
Request for Comment
The Commission requests comment on the costs and benefits of all
aspects of the proposed amendments related to certain package
transactions, including the discussion of the section 15(a) factors.
Comments made on the 2018 SEF Proposal that are relevant to this
rulemaking should be resubmitted to be considered. The Commission
requests comment on the alternatives discussed above as well as any
other alternatives that commenters believe present a superior cost-
benefit profile to the proposed amendments. Commenters are requested to
provide data and any other information or statistics to support their
position. In particular, to the extent commenters believe that the
costs or benefits of any aspect of the proposed rules are reasonably
quantifiable, the Commission requests that they provide data and any
other information or statistics to assist the Commission in
quantification.
3. Error Trades
The Commission proposes to add subsection (e) to Sec. 37.9 to
establish a flexible SEF error trade policy standard that would, among
other things, incorporate the intent of the existing no-action relief
in NAL No. 17-27 for resolving errors in Required Transactions.
Proposed Sec. 37.9(e)(2)(i) would specify that a SEF must maintain
rules and procedures that are ``fair, transparent, consistent'' and
``allow for timely resolution'' of an ``error trade,'' as defined under
proposed Sec. 37.9(e)(1)(ii). This proposed standard would apply to
any error trade that occurs on a SEF, regardless of whether or not the
swap is submitted for clearing. Further, under proposed Sec.
37.9(e)(2)(i), SEFs must have error trade rules and procedures that
require that market participants provide prompt notice to the SEF of an
error trade and, as applicable, correcting and offsetting trades.
Proposed Sec. 37.9(e) would also require a SEF to adopt rules to
resolve error trades that involve swaps submitted for clearing. For an
error trade rejected from clearing and therefore deemed void ab initio,
proposed Sec. 37.9(e)(2)(i)(A) would require a SEF to permit the
counterparties to subsequently execute a correcting trade, as defined
in proposed Sec. 37.9(e)(1)(i), through any method of execution
offered by the SEF. For an error trade that has been accepted for
clearing, proposed Sec. 37.9(e)(2)(i)(B) would require a SEF to permit
the counterparties to subsequently execute both an offsetting trade, as
defined in proposed Sec. 37.9(e)(1)(iii), and a correcting trade
through any method of execution offered by the SEF.
The proposed rule includes some limitations that are similar to the
existing no-action relief, including specified timeframes for executing
and submitting these trades for clearing. For correcting trades
associated with an error trade that has been rejected from clearing,
proposed Sec. 37.9(e)(2)(i)(A) would require the SEF to submit the
correcting trade for clearing to the registered DCO or exempt DCO as
soon as technologically practicable, but no later than one hour after
notice of the rejection to the relevant clearing members. For an
offsetting trade and a correcting trade associated with an error trade
that already has been accepted for clearing, proposed Sec.
37.9(e)(2)(i)(B) would require the SEF to submit both types of trades
to the registered DCO or exempt DCO as soon as technologically
practicable, but no later than three days after the registered DCO or
exempt DCO accepted the error trade for clearing. In addition to these
proposed timeframes, proposed Sec. 37.9(e)(2)(ii) would prohibit
counterparties from executing a second correcting trade to fix an error
trade if the initial correcting trade is rejected from clearing.
However, the proposed rule does not include certain additional
conditions applicable to SEFs and counterparties that are contained in
the no-action relief under NAL No. 17-27 or NAL No. 20-01. For example,
the no-action relief in NAL No. 17-27 requires that a SEF must make an
affirmative finding that an alleged error trade has occurred and must
have rules setting forth the procedures for making such a finding.
Benefits: Absent an adoption of these proposed rules, both SEFs and
market participants would need to comply with the existing Commission
regulations, notwithstanding the significant procedural and logistical
difficulties of doing so. In particular, market participants would have
to resolve error trades in Required Transactions using the Order Book
or RFQ System, which would likely make it impossible to recreate the
trade as originally intended. These difficulties could dissuade SEFs
from being actively involved in the error trade resolution process and
market participants from executing swaps on a SEF. The Commission
believes that the proposal would avoid these potential difficulties.
The Commission preliminarily believes that, given that the proposed
amendments are largely consistent with current industry practice, SEFs
and market participants may likely have already realized much of the
benefit of proposed Sec. 37.9(e). The Commission preliminarily
believes, however, that the proposed rules additionally would provide a
tangible benefit to market participants on a longer-term basis by
allowing market participants to continue utilizing policies and
protocols which the Commission understands most SEFs adopted in
reliance upon the relief provided in existing no-action letters to
resolve error trades.
The proposed rule does not require that a SEF affirmatively
determine that an error trade has occurred, either before resolution or
via an ex post facto review. The Commission preliminarily believes that
such a requirement, which is in the existing no-action relief, would
impose unnecessary costs on SEFs and market participants, and
potentially impair the efficiency of the error trade resolution
process. To the extent that SEFs and market participants are currently
availing themselves of current no-action relief, they may realize
reduced costs under the proposed rule.
The proposed requirement under Sec. 37.9(e)(2)(i) that market
participants provide prompt notice to a SEF of an error trade and, as
applicable, the corresponding correcting trade and offsetting trade
would benefit SEFs in carrying out their self-regulatory obligations.
In particular, the Commission believes that providing SEFs prompt
notice that an error trade has occurred on their trading system(s) or
platform(s) would enhance their ability to carry real-time market
monitoring of all trading activity on their system(s) or platform(s) to
identify disorderly trading and any market or system anomalies or
violations of SEF rules.
The Commission also believes that the proposed amendments will
facilitate the goal of promoting consistency in the swaps market with
respect to how errors are evaluated and resolved. First, the proposed
amendments would require all SEFs to adopt such policies. To the extent
SEFs have not yet implemented such policies, the proposed
[[Page 9424]]
amendments will benefit market participants who will now be able to
correct error trades and avoid related economic losses. Further, market
participants can obtain the benefit of executing a swap transaction
that corrects an error trade with the terms originally intended.
Finally, some SEFs have already implemented robust error trade
resolution policies pursuant to existing no-action relief, while other
SEFs have not implemented robust error trade policies. This
inconsistency among SEFs otherwise causes a ``race to the bottom'' for
SEFs' compliance and market oversight, as certain market participants
may prefer SEFs with less stringent error trade policies. As a result,
SEFs that have implemented robust error trade policies--and the swaps
market in general--will benefit by eliminating this potential ``race to
the bottom,'' and the Commission will underscore the importance of SEF
market oversight by adopting such requirements in Commission
regulations.\109\
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\109\ The Commission notes that a robust error trade resolution
policy is also consistent with an effective compliance and oversight
program because the ability to resolve error trades (i) helps
protect market integrity by unwinding certain error trades that
otherwise would have an adverse effect on the market and (ii)
promotes legal certainty by ensuring that market participants obtain
the economic position in the transaction that they intended.
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Costs: Similar to the conditions established by Commission staff in
time-limited no-action relief, the proposed amendments would require
SEFs to establish rules implementing various policies and procedures
for resolving error trades. Under the proposal, SEFs would have to
submit new rules to the Commission pursuant to part 40 of the
Commission's regulations. However, the Commission understands that
pursuant to the existing no-action relief, most SEFs currently have
rules that otherwise would comply with the proposed regulations. SEFs
may choose to adjust their rules in light of the absence in the
proposed rules of the requirement in the no-action relief that SEFs
affirmatively determine that an error trade has occurred.\110\ To the
extent that SEFs must draft and submit new rules to the Commission, the
Commission estimates that the costs will be modest.
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\110\ In light of the flexibility of the proposed rule, SEFs can
continue to require such an affirmative declaration if the determine
that such requirement provides benefits to market participants or
the SEF.
---------------------------------------------------------------------------
The Commission preliminarily believes that the proposed amendments
would not impose significant additional costs on market participants
and intermediaries, because resolving error trades is inherently costly
regardless of regulations imposed by the Commission, and market
participants and intermediaries are currently subject to SEF policies
and procedures. The proposed requirement that market participants
provide prompt notice to a SEF of an error trade and, as applicable,
the correcting trade and offsetting trade would impose modest costs on
market participants, but, in practice, market participants have likely
needed to report error trades to SEFs in order to facilitate SEF
determinations that an error trade has occurred pursuant to NAL No. 17-
27, and would have had to report the correcting trade and offsetting
trade in order to facilitate the SEF's ex post facto review pursuant to
NAL No. 20-01. Not requiring that a SEF find that an error trade has
occurred either before it has been resolved or via an ex post facto
review should impose only minor costs on market participants associated
with changes in procedures to no longer request that a SEF make such a
determination.
The Commission notes that NAL No. 17-27 and NAL No. 20-01 apply to
both SEFs and DCMs, but the proposed rule would apply only to SEFs.
Therefore, the Commission believes that the proposed rule would impose
no costs on DCMs, and notes that no DCM is currently availing itself of
the no-action relief.
Section 15(a) Factors
a. Protection of Market Participants and the Public
The proposed addition of Sec. 37.9(e) regarding error trades will
protect market participants and the public by providing SEFs with
greater authority under Commission regulations to resolve error trades.
Further, by providing SEFs with the authority to permit counterparties
to execute correcting trades and offsetting trades, the proposed
amendments would protect market stability and transparency by
preventing potential losses to market participants in connection with
error trades and reducing instances in which market participants rely
on inaccurate pricing information to inform their trading decisions.
The proposed addition of Sec. 37.9(e) would also promote greater
transparency of the error trade resolution process to SEFs' market
participants as SEFs would be required to establish policies and
procedures for reviewing and determining how to resolve alleged error
trades. The proposed requirement under Sec. 37.9(e)(2)(i) that market
participants provide prompt notice to a SEF of an error trade and, as
applicable, the correcting trade and offsetting trade would promote
protection of market participants and the public by enhancing a SEF's
ability to carry out its market oversight and monitoring
responsibilities. The Commission believes that the absence of a
requirement in the proposed rule that SEFs must affirmatively
determine, or determine after an ex post facto review, that an error
trade has occurred (which are conditions in the existing no-action
relief under NAL No. 17-27 and NAL No. 20-01) would not materially
impact the protection of market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
The proposed addition of Sec. 37.9(e) may improve the efficiency
and financial integrity of markets by enabling counterparties to
correct operational or clerical errors in a swap transaction. In
particular, the proposed rules would help promote greater trading
accuracy in the market by allowing counterparties to ultimately carry
out transactions as originally intended, and would avoid unexpected
trading losses caused by error trades. The proposed requirement under
Sec. 37.9(e)(2)(i) that market participants provide prompt notice to a
SEF of an error trade and, as applicable, the correcting trade and
offsetting trade would enhance a SEF's ability to carry out its market
oversight and monitoring responsibilities which helps promote the
financial integrity of its markets. The Commission believes that the
absence of the no-action provision that SEFs must affirmatively
determine that an error trade has occurred could enhance the efficiency
of the error trade resolution process and would not materially impact
the competitiveness or financial integrity of the swap market on SEFs.
Absent these proposed rules, counterparties would be required in
certain circumstances to correct or re-execute swap transactions in a
less efficient and effective manner on a SEF, such as through the
required methods of execution under Sec. 37.9(a). The proposed rules,
which also require SEFs to adopt certain policies and procedures for
addressing error trades, should further promote efficiency in the
resolution process by providing market participants that transact on
multiple SEFs with a more consistent approach across different
platforms for correcting error trades.
c. Price Discovery
The proposed addition of Sec. 37.9(e) regarding error trades would
enable
[[Page 9425]]
SEFs to correct error trades containing a clerical or operational error
while maintaining the price discovery benefits associated with the pre-
trade transparency requirements of Sec. 37.9. In particular, the
proposed rules would help promote price discovery by allowing
counterparties, whose original trade has been cancelled upon rejection
from clearing due to a clerical or operational error, to re-execute the
trade with the terms as originally intended. For error trades that have
been accepted by a registered DCO or exempt DCO for clearing, the
proposed rules promote greater accuracy in the price discovery process
by allowing the counterparties to correct the error trade by executing
an offsetting swap transaction and a subsequent swap transaction with
the terms as originally intended.
d. Sound Risk Management Practices
The proposed addition of Sec. 37.9(e) regarding error trades may
promote sound risk management practices by providing SEFs with greater
authority under Commission regulations to facilitate error trade
resolution. The proposed rules will help to mitigate potential losses
to market participants arising out of trade cancellations, where the
error trade is rejected from clearing, or arising from maintaining the
position of an unintended error trade.
e. Other Public Interest Considerations
The Commission has not identified any effect of proposed Sec.
37.9(e) on other public interest considerations.
Request for Comment
The Commission invites public comment on all aspects of its cost
benefit considerations related to the proposed amendments regarding
SEFs' error trade policies, including the discussion of the section
15(a) factors. Comments made on the 2018 SEF Proposal that are relevant
to this rulemaking should be resubmitted to be considered. Commenters
are requested to provide data and any other information or statistics
to support their position. In particular, to the extent commenters
believe that the costs or benefits of any aspect of the proposed rules
are reasonably quantifiable, the Commission requests that they provide
data and any other information or statistics to assist the Commission
in quantification.
The Commission requests comment on the impact of the proposed rule
on market participants who may need to adjust their error trade rules
and policies to comply with SEFs' error trade rules implemented to
comply with proposed Sec. 37.9(e). The Commission also requests
comment on any alternatives that commenters believe present a superior
cost-benefit profile to the proposed amendments.
4. Block Trades
The Commission proposes amendments to the definition of block
trade, set forth in Sec. 43.2, to allow SEFs to permit market
participants to execute swap block trades using a SEF's trading system
or platform, with the exception of the Order Book.\111\ Market
participants could continue to execute a block trade away from the
SEF's trading system or platform, but pursuant to the SEF's rules.\112\
This rule is similar to existing relief set out in NAL No. 17-60, but
the proposed rule would apply to uncleared swaps as well ITBC swaps,
while the existing no-action relief only applies to ITBC swaps.
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\111\ The Commission notes that a swap transaction with a
notional size above the appropriate minimum block trade size could
still be executed on an Order Book, but would not qualify as a block
trade, and therefore, would not receive a time delay from public
dissemination requirements set forth in Sec. 43.5(d).
\112\ The Commission notes that Sec. 43.6(g)(1)--required
notification of block trade election--would still apply to block
trade transactions executed on the SEF via the SEF's non-Order Book
trading systems and platforms. For example, pursuant to Sec.
43.6(g)(1)(i), SEFs would need to implement a mechanism by which the
counterparties notify the SEF of the counterparties' intention to
have an on-SEF executed block trade treated as a block trade for
reporting purposes. Additionally, pursuant to Sec. 43.6(i)(2), a
person transacting a cleared swap block trade on behalf of a
customer would still need to receive prior written instruction or
consent from the customer to transact the trade as a cleared swap
block trade on the SEF. See 17 CFR 43.6(i)(2).
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Benefits: The Commission believes that permitting swap block trades
to be executed on SEFs pursuant to Commission regulation would provide
tangible benefits to market participants by allowing them to further
utilize a SEF's trading systems and platforms with the exception of the
Order Book. To the extent that a SEF provides the most operationally-
and cost-efficient method of executing swap block trades, the proposed
amendment would help market participants to continue realizing such
benefits. Additionally, allowing market participants to execute swap
block trades on a SEF helps to facilitate the pre-execution screening
of transactions against risk-based limits in an efficient manner
through SEF-based mechanisms. The Commission also recognizes that many
SEFs and market participants have already expended resources to
implement technological and operational changes needed to avail
themselves of the no-action relief under NAL No. 17-60. The proposed
amendments would preclude the need to expend additional resources to
negate those changes. Further, incorporating the current no-action
relief in the Commission's regulations would promote the statutory goal
in CEA section 5h(e) of promoting swaps trading on SEFs. Finally, the
proposed amendment would permit SEFs to extend the benefits of executed
swap block trades on-SEF to uncleared swaps as well as ITBC swaps.
Costs: The Commission notes that the majority of SEFs have
implemented the existing no-action relief. To the extent that SEFs have
implemented such relief, they may incur modest costs in adjusting their
rulebooks to, for example, include uncleared swaps in their block
trading provisions. Any SEF that has not implemented the existing no-
action relief but wishes to implement block trading rules consistent
with the proposed amendment will incur somewhat higher, but still
modest costs.
Section 15(a) Factors
a. Protection of Market Participants and the Public
The proposed amendment to the definition of a swap block trade in
Sec. 43.2, which would allow for both ITBC and non-ITBC swap block
trades to be executed on a SEF's non-Order Book trading system or
platform will provide more options to market participants for executing
swap block trades without impeding the protection of market
participants and the public provided under existing Commission
regulations.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
The proposed amendment to the definition of block trade under Sec.
43.2 to allow cleared and uncleared swap block trades to be executed on
a SEF's non-Order Book trading system or platform may improve the
efficiency and financial integrity of the swaps markets. The proposed
amendments would provide market participants with the ability to
execute block trades either on a SEF or away from, but pursuant to the
rules of, a SEF. From an efficiency perspective, such choice should
allow participants to choose the most operationally efficient and cost-
efficient method of executing block trades. With respect to the
financial integrity of the swaps market, this proposed amendment would
also facilitate the use of pre-trade credit screening functionalities
or protocols offered by the SEF to fulfill its obligations under SEF
Core Principle 7--Financial Integrity of Transactions.\113\
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\113\ 17 CFR 37.700.
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[[Page 9426]]
c. Price Discovery
The Commission is not aware of significant effects on the price
discovery process of the proposed amendment to the definition of block
trade under Sec. 43.2 to allow block trades to be executed on a SEF's
non-Order Book trading system or platform. The Commission notes that
block trades are currently not subject to the execution methods for
required transactions under Sec. 37.9, which are intended to promote
pre-trade price transparency pursuant to section 5h of the CEA.\114\
Based on the previous recognition that market participants are likely
to execute large-sized trades, i.e., block trades, in a manner that
would mitigate pre-trade information leakage concerns, the Commission
does not anticipate that the proposed amendment would diminish the
price discovery process for block trades executed on a SEF.
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\114\ The Commission stated its belief in the part 37 final rule
release that an order book, as defined in Sec. 37.3(a)(3), and the
RFQ System, as defined in Sec. 37.9(a)(3), are intended to promote
the goals articulated in section 733 of the Dodd-Frank Act, which
include promoting pre-trade price transparency. 78 FR 33484, 33497.
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d. Sound Risk Management Practices
The proposed amendment to allow block trades to occur on the SEF
(but not on the SEF's order book) may promote sound risk management
practices by providing more options for the execution of block trades.
In this regard, the Commission notes that block trading can facilitate
risk management by providing a means for commercial firms to transact
large orders without the need for significant price concessions and
resulting price uncertainty for parties to the transaction that would
occur if transacted on the centralized market.
e. Other Public Interest Considerations
The proposed amendments should help promote SEF trading and pre-
trade price transparency, i.e., the statutory goals set forth under
section 5h(f)(2) of the CEA with respect to SEFs.\115\
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\115\ 7 U.S.C. 7b-3(e).
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Request for Comment
The Commission requests comment on the costs and benefits of all
aspects of the proposed amendments to permit block trades to be
executed on a SEF, including the discussion of the section 15(a)
factors. Comments made on the 2018 SEF Proposal that are relevant to
this rulemaking should be resubmitted to be considered. The Commission
requests comment on the alternatives discussed above as well as any
other alternatives that commenters believe present a superior cost-
benefit profile to the proposed amendments. Commenters are requested to
provide data and any other information or statistics to support their
position. In particular, to the extent commenters believe that the
costs or benefits of any aspect of the proposed rules are reasonably
quantifiable, the Commission requests that they provide data and any
other information or statistics to assist the Commission in
quantification.
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
objectives of the CEA, in issuing any order or adopting any Commission
rule or regulation. The Commission does not anticipate that the
proposed amendments to parts 36, 37, and 43 would promote or result in
anti-competitive consequences or behavior. However, the Commission
encourages comments from the public with respect to any aspect of the
proposal that maybe perceived as potentially inconsistent with the
antitrust laws or anti-competitive in nature.
List of Subjects
17 CFR Part 36
Package transactions, Trade execution requirement.
17 CFR Part 37
Block trades, Error trades, Package transactions, Required methods
of execution, Swap execution facilities, Swaps, Trade execution
requirement.
17 CFR Part 43
Block trades, Large notional off-facility swaps, Real-time public
reporting, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:
0
1. Revise part 36 to read as follows:
PART 36--TRADE EXECUTION REQUIREMENT
Sec.
36.1 Exemptions to trade execution requirement.
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, 2a2, and 21,
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
(2010).
Sec. 36.1 Exemptions to trade execution requirement.
(a) A swap transaction that is executed as a component of a package
transaction that also includes a component transaction that is the
issuance of a bond in a primary market is exempt from the trade
execution requirement in section 2(h)(8) of the Act.
(1) For purposes of paragraph (a) of this section, a package
transaction consists of two or more component transactions executed
between two or more counterparties where:
(i) At least one component transaction is subject to the trade
execution requirement in section 2(h)(8) of the Act;
(ii) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(iii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(2) [Reserved]
(b) [Reserved]
PART 37--SWAP EXECUTION FACILITIES
0
2. 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
3. In Sec. 37.3, add paragraph (a)(4) to read as follows:
Sec. 37.3 Requirements and procedures for registration.
(a) * * *
(4) A swap execution facility is not required to provide an order
book under this section for transactions defined in Sec. 37.9(d)(2),
(3), and (4), except that a swap execution facility must provide an
order book under this section for Required Transactions that are
components of transactions defined in Sec. 37.9(d)(2), (3), and (4)
when such Required Transactions are not executed as components of
transactions defined in Sec. 37.9(d)(2), (3), and (4).
* * * * *
0
4. In Sec. 37.9, revise paragraph (a)(2)(i) introductory text and add
paragraphs (d) and (e) to read as follows:
Sec. 37.9 Methods of execution for required and permitted
transactions.
(a) * * *
(2) * * *
(i) Each Required Transaction that is not a block trade as defined
in Sec. 43.2 of
[[Page 9427]]
this chapter shall be executed on a swap execution facility in
accordance with one of the following methods of execution except as
provided in paragraph (d) or (e) of this section:
* * * * *
(d) Exceptions to required methods of execution for package
transactions. (1) For purposes of this paragraph, a package transaction
consists of two or more component transactions executed between two or
more counterparties where:
(i) At least one component transaction is a Required Transaction;
(ii) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(iii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(2) A Required Transaction that is executed as a component of a
package transaction that includes a component swap that is subject
exclusively to the Commission's jurisdiction, but is not subject to the
clearing requirement under section 2(h)(1)(A) of the Act, may be
executed on a swap execution facility in accordance with paragraph
(c)(2) of this section as if it were a Permitted Transaction;
(3) A Required Transaction that is executed as a component of a
package transaction that includes a component that is not a swap, as
defined under section 1a(47) of the Act, may be executed on a swap
execution facility in accordance with paragraph (c)(2) of this section
as if it were a Permitted Transaction. This provision shall not apply
to:
(i) A Required Transaction that is executed as a component of a
package transaction in which all other non-swap components are U.S.
Treasury securities;
(ii) A Required Transaction that is executed as a component of a
package transaction in which all other non-swap components are
contracts for the purchase or sale of a commodity for future delivery;
(iii) A Required Transaction that is executed as a component of a
package transaction in which all other non-swap components are agency
mortgage-backed securities; and
(iv) A Required Transaction that is executed as a component of a
package transaction that includes a component transaction that is the
issuance of a bond in a primary market.
(4) A Required Transaction that is executed as a component of a
package transaction that includes a component swap that is not
exclusively subject to the Commission's jurisdiction may be executed on
a swap execution facility in accordance with paragraph (c)(2) of this
section as if it were a Permitted Transaction.
(e) Resolution of operational and clerical error trades. (1) As
used in this paragraph:
(i) Correcting trade means a trade executed and submitted for
clearing to a registered derivatives clearing organization, or a
derivatives clearing organization that the Commission has determined is
exempt from registration, with the same terms and conditions as an
error trade other than any corrections to any operational or clerical
error and the time of execution.
(ii) Error trade means any trade executed on or subject to the
rules of a swap execution facility that contains an operational or
clerical error.
(iii) Offsetting trade means a trade executed and submitted for
clearing to a registered derivatives clearing organization, or a
derivatives clearing organization that the Commission has determined is
exempt from registration, with terms and conditions that economically
reverse an error trade that was accepted for clearing.
(2) Execution of correcting trades and offsetting trades. (i) A
swap execution facility shall maintain rules and procedures that
facilitate the resolution of error trades. Such rules shall be fair,
transparent, and consistent; allow for timely resolution; require
market participants to provide prompt notice of an error trade--and, as
applicable, offsetting and correcting trades--to the swap execution
facility; and permit market participants to:
(A) Execute a correcting trade, in accordance with paragraph (c)(2)
of this section, regardless of whether it is a Required or Permitted
Transaction, for an error trade that has been rejected from clearing as
soon as technologically practicable, but no later than one hour after a
registered derivatives clearing organization, or a derivatives clearing
organization that the Commission has determined is exempt from
registration, provides notice of the rejection; or
(B) Execute an offsetting trade and a correcting trade, in
accordance with paragraph (c)(2) of this section, regardless of whether
it is a Required or Permitted Transaction, for an error trade that was
accepted for clearing as soon as technologically practicable, but no
later than three days after the error trade was accepted for clearing
at a derivatives clearing organization or a derivatives clearing
organization that the Commission has determined is exempt from
registration.
(ii) If a correcting trade is rejected from clearing, then a swap
execution facility shall not allow the counterparties to execute
another correcting trade.
PART 43--REAL-TIME PUBLIC REPORTING
0
5. The authority citation for part 43 continues to read as follows:
Authority: 7 U.S.C. 2(a), 12a(5) and 24a, as amended by Pub. L.
111-203, 124 Stat. 1376 (2010).
0
6. Revise Sec. 43.2 to read as follows:
Sec. 43.2 Definitions.
As used in this part:
Act means the Commodity Exchange Act, as amended, 7 U.S.C. 1 et
seq.
Affirmation means the process by which parties to a swap verify
(orally, in writing, electronically or otherwise) that they agree on
the primary economic terms of a swap (but not necessarily all terms of
the swap). Affirmation may constitute ``execution'' of the swap or may
provide evidence of execution of the swap, but does not constitute
confirmation (or confirmation by affirmation) of the swap.
Appropriate minimum block size means the minimum notional or
principal amount for a category of swaps that qualifies a swap within
such category as a block trade or large notional off-facility swap.
As soon as technologically practicable means as soon as possible,
taking into consideration the prevalence, implementation and use of
technology by comparable market participants.
Asset class means a broad category of commodities including,
without limitation, any ``excluded commodity'' as defined in section
1a(19) of the Act, with common characteristics underlying a swap. The
asset classes include interest rate, foreign exchange, credit, equity,
other commodity and such other asset classes as may be determined by
the Commission.
Block trade means a publicly reportable swap transaction that:
(1) Involves a swap that is listed on a registered swap execution
facility or designated contract market;
(2) Is executed on a trading system or platform of a registered
swap execution facility that is not an order book as defined in Sec.
37.3(a)(3) of this chapter, or occurs away from a registered swap
execution facility's or designated contract market's trading system or
platform and is executed pursuant to the registered swap execution
facility's or designated contract market's rules and procedures;
[[Page 9428]]
(3) Has a notional or principal amount at or above the appropriate
minimum block size applicable to such swap; and
(4) Is reported subject to the rules and procedures of the
registered swap execution facility or designated contract market and
the rules described in this part, including the appropriate time delay
requirements set forth in Sec. 43.5.
Business day means the twenty-four hour day, on all days except
Saturdays, Sundays and legal holidays, in the location of the reporting
party or registered entity reporting data for the swap.
Business hours means the consecutive hours of one or more
consecutive business days.
Cap size means, for each swap category, the maximum notional or
principal amount of a publicly reportable swap transaction that is
publicly disseminated.
Confirmation means the consummation (electronic or otherwise) of
legally binding documentation (electronic or otherwise) that
memorializes the agreement of the parties to all terms of a swap. A
confirmation shall be in writing (electronic or otherwise) and shall
legally supersede any previous agreement (electronic or otherwise)
relating to the swap.
Confirmation by affirmation means the process by which one party to
a swap acknowledges its assent to the complete swap terms submitted by
the other party to the swap. If the parties to a swap are using a
confirmation service vendor, complete swap terms may be submitted
electronically by a party to such vendor's platform and the other party
may affirm such terms on such platform.
Economically related means a direct or indirect reference to the
same commodity at the same delivery location or locations, or with the
same or a substantially similar cash market price series.
Embedded option means any right, but not an obligation, provided to
one party of a swap by the other party to the swap that provides the
party holding the option with the ability to change any one or more of
the economic terms of the swap as those terms previously were
established at confirmation (or were in effect on the start date).
Executed means the completion of the execution process.
Execution means an agreement by the parties (whether orally, in
writing, electronically, or otherwise) to the terms of a swap that
legally binds the parties to such swap terms under applicable law.
Execution occurs simultaneous with or immediately following the
affirmation of the swap.
Futures-related swap means a swap (as defined in section 1a(47) of
the Act and as further defined by the Commission in implementing
regulations) that is economically related to a futures contract.
Large notional off-facility swap means an off-facility swap that
has a notional or principal amount at or above the appropriate minimum
block size applicable to such publicly reportable swap transaction and
is not a block trade as defined in this section.
Major currencies means the currencies, and the cross-rates between
the currencies, of Australia, Canada, Denmark, New Zealand, Norway,
South Africa, South Korea, Sweden, and Switzerland.
Non-major currencies means all other currencies that are not super-
major currencies or major currencies.
Novation means the process by which a party to a swap transfers all
of its rights, liabilities, duties and obligations under the swap to a
new legal party other than the counterparty to the swap. The transferee
accepts all of the transferor's rights, liabilities, duties and
obligations under the swap. A novation is valid as long as the
transferor and the remaining party to the swap are given notice, and
the transferor, transferee and remaining party to the swap consent to
the transfer.
Off-facility swap means any publicly reportable swap transaction
that is not executed on or pursuant to the rules of a registered swap
execution facility or designated contract market.
Other commodity means any commodity that is not categorized in the
other asset classes as may be determined by the Commission.
Physical commodity swap means a swap in the other commodity asset
class that is based on a tangible commodity.
Public dissemination and publicly disseminate means to publish and
make available swap transaction and pricing data in a non-
discriminatory manner, through the internet or other electronic data
feed that is widely published and in machine-readable electronic
format.
Publicly reportable swap transaction means:
(1) Unless otherwise provided in this part--
(i) Any executed swap that is an arm's-length transaction between
two parties that results in a corresponding change in the market risk
position between the two parties; or
(ii) Any termination, assignment, novation, exchange, transfer,
amendment, conveyance, or extinguishing of rights or obligations of a
swap that changes the pricing of the swap.
(2) Examples of executed swaps that do not fall within the
definition of publicly reportable swap may include:
(i) Internal swaps between one-hundred percent owned subsidiaries
of the same parent entity; and
(ii) Portfolio compression exercises.
(3) These examples represent swaps that are not at arm's length and
thus are not publicly reportable swap transactions, notwithstanding
that they do result in a corresponding change in the market risk
position between two parties.
Real-time public reporting means the reporting of data relating to
a swap transaction, including price and volume, as soon as
technologically practicable after the time at which the swap
transaction has been executed.
Reference price means a floating price series (including
derivatives contract prices and cash market prices or price indices)
used by the parties to a swap or swaption to determine payments made,
exchanged or accrued under the terms of a swap contract.
Remaining party means a party to a swap that consents to a
transferor's transfer by novation of all of the transferor's rights,
liabilities, duties and obligations under such swap to a transferee.
Reporting party means the party to a swap with the duty to report a
publicly reportable swap transaction in accordance with this part and
section 2(a)(13)(F) of the Act.
Super-major currencies means the currencies of the European
Monetary Union, Japan, the United Kingdom, and United States.
Swaps with composite reference prices means swaps based on
reference prices that are composed of more than one reference price
from more than one swap category.
Transferee means a party to a swap that accepts, by way of
novation, all of a transferor's rights, liabilities, duties and
obligations under such swap with respect to a remaining party.
Transferor means a party to a swap that transfers, by way of
novation, all of its rights, liabilities, duties and obligations under
such swap, with respect to a remaining party, to a transferee.
Trimmed data set means a data set that has had extraordinarily
large notional transactions removed by transforming the data into a
logarithm with a base of 10, computing the mean, and excluding
transactions that are beyond four standard deviations above the mean.
[[Page 9429]]
Unique product identifier means a unique identification of a
particular level of the taxonomy of the product in an asset class or
sub-asset class in question, as further described in Sec. 43.4(f) and
appendix A to this part. Such unique product identifier may combine the
information from one or more of the data fields described in appendix
A.
Widely published means to publish and make available through
electronic means in a manner that is freely available and readily
accessible to the public.
Issued in Washington, DC, on February 6, 2020, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
NOTE: The following appendices will not appear in the Code of
Federal Regulations.
Appendices To Swap Execution Facility Requirements and Real-Time
Reporting Requirements--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--Statement of Support of Commissioner Brian D. Quintenz
I support today's proposal that seeks to resolve through
rulemaking three issues currently addressed in staff no-action
letters. I believe this proposal is an important first step to
provide market participants with much needed regulatory certainty
while also promoting swap execution facility (SEF) participation,
though regulatory certainty over additional current market practices
is necessary as well.
Staff initially granted these requests for relief in 2013 and
2014, as SEFs were first coming into compliance with the
Commission's then-new SEF regulatory framework. With the benefit of
six-plus years of implementation experience, and multiple extensions
of each of these no-action letters, it is long overdue for the
Commission to codify and clarify its policy on each of these
important issues.
First, the proposal would amend part 37 regulations to permit
the swap components of certain categories of package transactions to
be executed on-SEF through flexible means of execution, rather than
via the required methods of execution under Rule 37.9.\1\ In
addition, the proposal would also include an exemption from the
trade execution requirement for swap transactions that are executed
as a component of a new issuance bond package transaction. These
amendments recognize the need to provide flexible means of execution
for swaps that are negotiated and executed concurrently with other
components of a larger, integrated transaction.
---------------------------------------------------------------------------
\1\ These amendments address the relief currently provided by
CFTC No-Action Letter 17-55 (Oct. 31, 2017).
---------------------------------------------------------------------------
Second, the proposal adopts a principles-based approach
regarding SEF policies to correct operational or clerical errors.\2\
The proposal directs SEFs to adopt fair, transparent, and consistent
policies and procedures that allow for the timely resolution of
error trades. SEFs would be permitted to allow market participants
to execute offsetting or correcting trades through any method of
execution offered by the SEF. I believe these amendments will
facilitate the prompt identification and correction of error trades,
thereby minimizing market participants' exposure to market, credit,
and operational risks.
---------------------------------------------------------------------------
\2\ These amendments address the relief currently provided by
CFTC No-Action Letters 17-27 (May 30, 2017) and 20-01 (Jan. 8,
2020).
---------------------------------------------------------------------------
Thirdly, the proposal recognizes the difficulties associated
with performing a pre-trade execution credit check on block trades
occurring away from a SEF's trading system or platforms.\3\
Accordingly, it would permit block trades to be executed on a
trading system of the SEF that is not an order book, thereby
allowing FCMs to conduct pre-execution credit screenings. The
proposal also continues to allow block trades to be executed away
from the SEF.
---------------------------------------------------------------------------
\3\ These amendments address the relief currently provided by
CFTC No-Action Letter 17-60 (Nov. 14, 2017).
---------------------------------------------------------------------------
This proposal should in no way preclude the Commission from
considering additional SEF no-action letters and policy issues
through rulemaking. For example, codifying the current no-action
letter providing relief from the trade execution requirement for
inter-affiliate swaps, or providing greater clarity about
permissible methods of execution and minimum SEF trading
functionality are prime examples. In order to truly foster and
promote market liquidity, transparency, innovation, and competition
in the SEF marketplace, I believe these outstanding issues should be
addressed. I will support today's proposal but remain hopeful that
these and other important areas can be addressed through rulemaking
in the near future.
Appendix 3--Statement of Concurrence of Commissioner Rostin Behnam
I respectfully concur in the Commission's proposal to amend
certain swap execution facility (SEF) requirements and real-time
reporting requirements. A little more than a year ago, the
Commission issued a proposal that would have constituted a complete
overhaul of the existing regulatory framework for SEFs.\1\ As I
stated in my concurrence to the 2018 SEF proposal, I do not believe
that such an overhaul is necessary.\2\ However, despite my
opposition to the overhaul, I supported issuing the SEF proposal for
public comment because it contained several policy changes which
separately warranted further consideration. Market participants have
spent a great deal of resources to build systems and businesses that
comply with our existing SEF rules. Fundamental changes amounting to
an overhaul of the entire system should only be done in
circumstances where there is a regulatory concern that necessitates
action.\3\ Accordingly, in the past I have suggested we should focus
on targeted reforms, such as codifying existing no-action relief for
SEFs.\4\ I warned that we should not allow issues with the broader
vision of the 2018 SEF proposal to distract us from making targeted
changes.\5\
---------------------------------------------------------------------------
\1\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (proposed Nov. 30, 2018).
\2\ Rostin Behnam, Statement of Concurrence of Commissioner
Rostin Behnam Regarding Swap Execution Facilities and Trade
Execution Requirement (Nov. 5, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement110518a.
\3\ Rostin Behnam, Sowing the Seeds of Success in 2020, Remarks
of CFTC Commissioner Rostin Behnam at the 2019 ISDA Annual General
Meeting, Grand Hyatt Hong Kong, Hong Kong (Apr. 9, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam13.
\4\ Id.
\5\ Id.
---------------------------------------------------------------------------
Today, the Commission proposes to limit changes to our existing
SEF rules, specifically focusing on the codification of long-
standing no-action relief regarding package transactions, error
trades, and block trades. While I support today's proposal, I do
have some concerns where I think we deviate from the path of
targeted codification. The provisions in today's proposal regarding
package transactions and block trades basically mirror the existing
no-action relief.\6\ However, the proposal regarding error trades
does not.\7\
---------------------------------------------------------------------------
\6\ See CFTC No-Action Letter No. 17-55, Re: Extension of No-
Action Relief from Sections 2(h)(8) and 5(d)(9) of the Commodity
Exchange Act and from Commission Regulations 37.3(a)(2) and 37.9 for
Swaps Executed as Part of Certain Package Transactions (Oct. 31,
2017); CFTC No-Action Letter No. 17-60, Re: Extension of No-Action
Relief for Swap Execution Facilities from Certain ``Block Trade''
Requirements in Commission Regulation 43.2 (Nov. 14, 2017).
\7\ See CFTC No-Action 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); CFTC No-Action Letter No. 20-01 (``NAL No. 20-01''), Re:
Supplemental 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 (Jan. 8, 2020).
---------------------------------------------------------------------------
DMO currently provides no-action relief from the required
methods of execution under Sec. 37.9 for trades intended to resolve
error trades.\8\ The existing relief provides a number of
conditions, including a requirement that a SEF determine (either
prior to execution or within 24 hours after) that an error has
occurred. Among other things, the no-action relief requires that a
SEF have error trade rules that account for whether a transaction
cancellation or price adjustment will adversely impact market
integrity or facilitate market manipulation or other illegitimate
activity.\9\ None of these
[[Page 9430]]
conditions appear in the error trade rules proposed today, and under
the proposal SEFs will no longer have any obligation to determine
whether a trade is an error trade--the determination can instead be
left entirely to the parties to the trade. I look forward to
comments regarding whether this ``principles-based'' approach goes
too far and fails to give market participants sufficient clarity
regarding error trades.
---------------------------------------------------------------------------
\8\ NAL 17-27.
\9\ Id.
---------------------------------------------------------------------------
I support targeted, thoughtful reform of our SEF regulations,
and I particularly applaud staff's efforts to provide market
participants with greater legal certainty through the codification
of our existing no-action relief. I look forward to the comments.
Appendix 4--Statement of Commissioner Dan M. Berkovitz
I am voting in favor of today's proposed rule that would amend
certain Commission rules in parts 36, 37, and 43 relating to package
transactions, block trades, and error transactions on swap execution
facilities (``SEFs'') (``Proposal''). Today's amendments largely
codify longstanding no-action letters for limited categories of
swaps transactions regarding the required methods of execution.
Generally, I support the codification of no-action letters where,
based on experience, doing so is consistent with our statutory
mandate, protects customers, provides market participants with a
greater level of certainty, and promotes market integrity.
Package Transactions
This Proposal would amend part 37 to allow the swap components
of certain package transactions--including those that are illiquid
and bespoke and therefore not suitable for trading on-SEF--to be
executed on-SEF but through flexible methods of execution. In
addition, the Proposal amends part 36 to exempt from the trade
execution requirement a swap in a package transaction involving a
bond sold in the primary market (``new issuance bond transaction''),
which also is not conducive to trading on-SEF.
Beginning in 2014, the Commission issued a series of no-action
letters specifying permissible methods of execution for certain
package transactions, which have enabled market participants and the
agency to apply the trading mandate to these transactions in a
phased manner. As the market infrastructure for the trading and
clearing of swaps has improved, the trading mandate has been applied
to the packages involving more liquid and standardized swap
components.\1\ The remaining package transactions that would be
covered by today's Proposal represent a small percentage of swaps
trading on the most active SEFs.
---------------------------------------------------------------------------
\1\ For example, U.S. Dollar Spreadover package transactions
account for nearly seventy percent of interest rate swaps trading in
the inter-dealer swap market. No-action letters for these package
transactions have expired and market participants now actively trade
the swap component of these packages through required methods of
trading. See Proposed Rule, Sect. II.A.1 and n.33.
---------------------------------------------------------------------------
I encourage the industry to continue to develop systems that
allow for increased execution of package trade swap components on-
SEF. I also appreciate the Staff's commitment, if this rule is
finalized, to continue to evaluate the categories of package
transactions subject to the rule and revise the rule as necessary in
the future to reflect developments in trading methodologies.
Error Trades
The Proposal also would amend part 37 to enable SEFs to permit
market participants to use flexible methods of execution to correct
error trades, and would require a SEF to establish error trade
policies that largely track the conditions set forth in prior no-
action letters. Notably, the Proposal would require market
participants to provide prompt notice of an error trade to the SEF,
enabling the SEF to fulfill its self-regulatory obligations. It
would not alter the requirement that SEFs must adopt rules declaring
that trades rejected from clearing are deemed void ab initio. The
Proposal also includes the requirement under CFTC No-Action Letter
No. 17-27 that after submitting one error trade, market participants
will not be able to submit a second new trade with the original
terms. These conditions facilitate a SEF's direct supervision of its
markets, protect against abuse, and promote fair competition.
Block Trades
The Proposal would revise the definition of ``block trade'' in
Commission Regulation 43.2 to permit SEFs to offer non-Order Book
methods of execution for market participants to execute swap block
trades on-SEF. Like package transactions, block trades encompassed
within the Proposal are a small percentage of the number of swaps
traded. A significant benefit of this Proposal is that it would
facilitate pre-trade credit checks by SEFs for block trades, in
accordance with the SEF core principles.
It is my preliminary view that this Proposal would provide
certainty to market participants and increase trading efficiencies,
while not compromising the Congressional goal of moving standardized
OTC derivative contracts to exchanges or electronic trading
platforms. I look forward to public comments on the anticipated
effects of these amendments, and I thank the staff of the Division
of Market Oversight for their work on this Proposal.
[FR Doc. 2020-02721 Filed 2-18-20; 8:45 am]
BILLING CODE 6351-01-P
