Post-Trade Name Give-Up on Swap Execution Facilities, 44693-44708 [2020-14343]
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Federal Register / Vol. 85, No. 143 / Friday, July 24, 2020 / Rules and Regulations
FOR FURTHER INFORMATION CONTACT:
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Background
On February 25, 2020, the FAA
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After that rule was published, the FAA
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Correction
In the final rule, FR Doc. 2020–12170,
published on June 30, 2020, at 85 FR
39069, make the following correction:
1. On page 39069 in the heading of
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282B’’ to read ‘‘121–384’’.
Issued under authority provided by 49
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206 of Public Law 111–216, 124 Stat.
2348 (49 U.S.C. 44701 note) in
Washington, DC, on July 9, 2020.
Brandon Roberts,
Executive Director, Office of Rulemaking.
[FR Doc. 2020–15229 Filed 7–23–20; 8:45 am]
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COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 37
RIN Number 3038–AE79
Post-Trade Name Give-Up on Swap
Execution Facilities
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:
The Commodity Futures
Trading Commission (CFTC or
Commission) is issuing a final rule to
prohibit post-trade name give-up for
swaps executed, pre-arranged, or prenegotiated anonymously on or pursuant
to the rules of a swap execution facility
(SEF) and intended to be cleared. The
final rule provides an exception for
package transactions that include a
component transaction that is not a
swap intended to be cleared, including
but not limited to U.S. Treasury swap
spreads.
SUMMARY:
The effective date for this final
rule is September 22, 2020. The
compliance date for swaps subject to the
trade execution requirement under
section 2(h)(8) of the Commodity
Exchange Act (CEA or Act) is November
1, 2020. The compliance date for swaps
not subject to the trade execution
requirement under section 2(h)(8) of the
CEA is July 5, 2021.
FOR FURTHER INFORMATION CONTACT:
Alexandros Stamoulis, Special Counsel,
(646) 746–9792, astamoulis@cftc.gov,
Division of Market Oversight,
Commodity Futures Trading
Commission, 140 Broadway, 19th Floor,
New York, NY 10005; 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;
Israel Goodman, Special Counsel, (202)
418–6715, igoodman@cftc.gov, Division
of Market Oversight; or Vincent
McGonagle, Principal Deputy Director,
(202) 418–5387, vmcgonagle@cftc.gov,
Division of Enforcement, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1151 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
DATES:
I. Background
A. November 2018 Request for Comment
On November 30, 2018, the
Commission published in the Federal
Register a request for comment
regarding the practice of post-trade
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44693
name give-up on SEFs (2018 RFC).1 As
described in the 2018 RFC, some SEFs
facilitate post-trade name give-up by
directly or indirectly disclosing the
identities of swap counterparties to one
another after a trade is matched
anonymously. The 2018 RFC noted that
a SEF may effectuate such disclosure
through its own trade protocols or
through a third-party service provider
utilized to process and route
transactions to a derivatives clearing
organization (DCO) for clearing. In the
2018 RFC, the Commission questioned
the necessity of the practice with
respect to cleared swaps anonymously
executed on a SEF. The Commission
also summarized some of the general
views on post-trade name give-up of
various industry participants and
requested public comments on the
merits of the practice and whether the
Commission should prohibit it.
The Commission received 13
comment letters in response to the 2018
RFC. Most commenters opposed the
practice of post-trade name give-up for
anonymously-executed swaps submitted
to clearing, and requested that the
Commission adopt a regulatory
prohibition. The Securities Industry and
Financial Markets Association (SIFMA)
expressed support for the practice and
concern about the effects of a
prohibition. The views raised in those
comment letters were considered and
discussed by the Commission in a
proposed rule on post-trade name giveup issued in December 2019.
B. December 2019 Proposed Rule
After considering the comments
received in response to the 2018 RFC,
on December 31, 2019, the Commission
published in the Federal Register a
proposed rule to prohibit post-trade
name give-up for anonymouslyexecuted and intended-to-be-cleared
swaps (Proposal).2 The Proposal
prohibits a SEF from directly or
indirectly, including through a thirdparty service provider, disclosing the
identity of a counterparty to a swap
executed anonymously and intended to
be cleared. The Proposal also requires
SEFs to establish and enforce rules
prohibiting any person from effectuating
such a disclosure.
In the Proposal, the Commission
reasoned that a prohibition on posttrade name give-up may (1) advance the
statutory objectives of promoting swaps
1 Post-Trade Name Give-up on Swap Execution
Facilities, 83 FR 61571 (Nov. 30, 2018). ‘‘Post-trade
name give-up’’ refers to the practice of disclosing
the identity of each swap counterparty to the other
after a trade has been matched anonymously.
2 Post-Trade Name Give-up on Swap Execution
Facilities, 84 FR 72262 (Dec. 31, 2019).
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trading on SEFs and fair competition
among market participants; (2) further
the objectives underlying the
prohibition against swap data
repositories (SDRs) disclosing the
identity of a counterparty to a swap that
is anonymously executed and cleared in
accordance with the Commission’s
straight-through processing (STP)
requirements; and (3) promote impartial
access on SEFs.3
The Commission requested comments
on all aspects of the Proposal, and also
solicited comments through targeted
questions relating to whether and how
the proposed rule, if adopted, (1) would
advance the statutory and regulatory
goals described above; (2) might impact
aspects of market quality and liquidity;
and (3) should be tailored. Overall, the
Commission received comment letters
on the Proposal from 20 different
respondents: 13 public interest and
industry groups; two global banks with
affiliated swap dealers; two global
market makers; a global asset manager;
a SEF operator; and a third-party
provider of derivatives trade processing
services.4 Additionally, Commission
staff participated in several ex parte
meetings concerning the proposal.5 The
Commission also consulted with the
U.S. Securities and Exchange
Commission and foreign regulators on
the proposed rule.
II. Final Rule
After considering the public
comments on the Proposal, the
Commission is adopting the proposed
regulations, with certain modifications
and clarifications discussed below.
Specifically, the Commission is
amending its part 37 regulations to
3 See
Proposal at 72265–72267.
letters were submitted by the
following entities: Alternative Investment
Management Association (AIMA) (Feb. 17, 2020);
American Bankers Association (ABA) (Mar. 2,
2020); Americans for Financial Reform Education
Fund (AFR) (Mar. 2, 2020); Bank Policy Institute
(BPI) (Mar. 10, 2020); Better Markets, Inc. (Better
Markets) (Mar. 2, 2020); Citadel and Citadel
Securities (Citadel) (Letter 1: Mar. 2, 2020, and
Letter 2: Apr. 21, 2020); Citibank, N.A. (Citi) (Mar.
2, 2020); Coalition for Derivatives End-Users (Mar.
2, 2020); CTC Trading Group, LLC (CTC) (Mar. 10,
2020); FIA Principal Traders Group (FIA PTG) (Mar.
2, 2020); Financial Services Forum (FSF) (Mar. 2,
2020); Healthy Markets Association (HMA) (Mar. 9,
2020); IHS Markit (Mar. 2, 2020); Investment
Company Institute (ICI) (Mar. 2, 2020); JPMorgan
Chase & Co. (JPMorgan) (Mar. 2, 2020); Managed
Funds Association (MFA) (Mar. 2, 2020); SIFMA,
on behalf of a majority of SIFMA’s swap dealer
members who have expressed a view (Mar. 2, 2020);
SIFMA’s Asset Management Group (SIFMA AMG)
(Mar. 2, 2020); ICAP Global Derivatives Limited and
tpSEF, Inc. (TP ICAP); and Vanguard (Mar. 2, 2020).
5 See Comments for Proposed Rule 84 FR 72262,
available at https://comments.cftc.gov/
PublicComments/CommentList.aspx?id=3066 (last
retrieved June 23, 2020).
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prohibit post-trade name give-up for
swaps anonymously executed, prearranged, or pre-negotiated on or
pursuant to the rules of a SEF and
intended to be cleared. New § 37.9(d)
prohibits a SEF from directly or
indirectly disclosing the identity of a
counterparty to any such swap, and
requires a SEF to establish and enforce
rules that prohibit any person from
doing so.6 The final rule, however,
contains an exception for package
transactions that include a component
transaction that is not a swap intended
to be cleared.
A. Statutory Authorities
CEA section 8a(5) authorizes the
Commission to make and promulgate
such rules and regulations as, in the
judgment of the Commission, are
reasonably necessary to effectuate any of
the provisions or to accomplish any of
the purposes of the CEA.7 The
Commission believes that prohibiting
the practice of post-trade name give-up
for intended-to-be-cleared swaps is
reasonably necessary to promote trading
of swaps on SEFs and fair competition
among market participants. The
Commission also believes that posttrade name give-up for intended-to-becleared swaps is inconsistent with the
requirement that SEFs provide market
participants with impartial access to
trading on SEFs, as well as the
objectives underlying the prohibition
against SDRs disclosing the identities of
counterparties to swaps anonymously
executed on a SEF and cleared in
accordance with STP requirements.
1. Promoting Trading on SEFs and Pretrade Price Transparency (CEA Section
5h(e))
CEA section 5h(e) establishes the
statutory goal of the SEF regulatory
regime to promote swaps trading on
SEFs and promote pre-trade price
transparency in the swaps market.8 In
the Proposal, the Commission stated
that despite available liquidity for
cleared products on certain SEF
platforms, the range and number of
active participants may be limited due
to market participants’ concerns about
information leakage and anticompetitive
behavior made possible by post-trade
name give-up.9 The Commission also
6 The Commission notes that this rule does not
prohibit a SEF from disclosing the identities of all
of the participants on the SEF to all other
participants. However, such disclosure in specific
cases may be prohibited under other provisions of
the CEA and Commission regulations. In addition,
the Commission may consider this issue in a future
rulemaking.
7 7 U.S.C. 12(a)(5).
8 7 U.S.C. 7b–3(e).
9 Proposal at 72265–72266.
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stated that fully-anonymous trading
(i.e., without post-trade name give-up)
would likely encourage more
participants to trade on those
platforms.10 The Proposal requested
public comments on how a prohibition
on post-trade name give-up would
impact trading and pre-trade price
transparency on affected SEFs.
Several commenters on the Proposal
stated that prohibiting post-trade name
give-up would remove a significant
barrier to increased participation on
certain SEF platforms,11 and that
prohibiting the practice would lead to
an increase in the number of
participants trading on affected SEFs.12
MFA, for example, stated that its
members are ‘‘eager’’ to participate on
affected SEFs and ‘‘to have the ability to
transact cleared swaps anonymously;
similar to how they currently trade in
other asset classes (e.g., equities,
futures, foreign exchange, and
Treasuries, among others).’’ 13
JPMorgan, on the other hand, opined
that ‘‘the more likely outcome of
banning [post-trade name give-up] will
be to reduce overall trading on SEFs, as
dealers pull back from trading . . . .’’ 14
Other commenters similarly argued that
incumbent swap dealers may exit the
market or reduce their trading.15 ICI and
MFA, however, characterized this
outcome as ‘‘unlikely.’’ 16 MFA stated
that competitive market forces would
ensure that ‘‘in the unlikely event an
individual dealer reduced its offering,
other dealers would quickly step into its
place.’’ 17 Asserting its experience as a
‘‘top liquidity provider’’ in SEF markets,
Citadel stated that it does not expect a
prohibition on post-trade name give-up
to affect its liquidity provision on pretrade disclosed platforms or its use of
pre-trade anonymous trading
protocols.18 Citadel further asserted that
‘‘other swap dealers share our view, as
UBS has supported the prohibition and
SIFMA indicated that the views among
swap dealers ‘are not uniform.’ ’’ 19
10 Id.
at 72266.
SIFMA AMG Letter, at 2; ICI Letter, at 3;
MFA Letter, at 6 (‘‘While MFA speaks only on
behalf of our members, we have heard broadly and
uniformly from them that the practice of Name
Give-Up is the most significant obstacle to their
participation on IDB SEFs.’’); Citadel Letter 1, at 3–
4 (‘‘Name give-up is the most significant remaining
such barrier preventing buy-side firms from trading
on certain SEFs . . . .’’).
12 See AFR Letter, at 3; CTC Letter, at 1–2; FIA
PTG Letter, at 2; MFA Letter, at 6.
13 MFA Letter, at 6.
14 JPMorgan Letter, at 10.
15 See ABA Letter, at 2; BPI Letter, at 1; FSF
Letter, at 7–8; SIFMA Letter, at 4.
16 ICI Letter, at 5; MFA Letter, at 4.
17 MFA Letter, at 4.
18 Citadel Letter 1, at 6.
19 Citadel Letter 1, at 7.
11 See
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Commenters in favor of the Proposal
also pointed to their experience in other
asset classes where post-trade name
give-up is not practiced, asserting that
such markets demonstrate that the
purported negative liquidity impacts
raised by some incumbent swap dealers
are unwarranted.20 Commenters
opposed to the Proposal, however,
asserted that the quality of liquidity in
certain fully-anonymous markets has
degraded, even as new types of market
participants have entered the
marketplace.21
Commenters also asserted that
prohibiting post-trade name give-up
would improve price transparency.22
Citadel noted that pre-trade anonymous
execution methods, such as anonymous
order books, will continue to function
on a pre-trade basis as they do today,
providing the same level of price
transparency to market participants.23
Citadel and MFA opined, however, that
eliminating post-trade name give-up
should be expected to increase pre-trade
transparency, as more market
participants are able to participate in
these trading protocols.24 MFA stated
that post-trade name give-up has limited
investor access to affected SEFs, thereby
reducing pre-trade transparency
regarding available bids and offers,
limiting investor choice of trading
protocols, and creating information
asymmetries between market
participants.25 MFA asserted that
eliminating post-trade name give-up
would facilitate investors selectively
accessing additional liquidity pools and
trading protocols, thereby improving
price discovery and pre-trade
transparency while reducing
information asymmetries.26
The Commission believes that
prohibiting post-trade name give-up is
reasonably necessary to facilitate and
promote trading on SEFs. The practice
of post-trade name give-up has
reportedly deterred a significant
segment of market participants from
making markets on or otherwise
participating on affected SEFs. Such
market participants have ascribed their
lack of participation to several potential
harms resulting from post-trade name
give-up, a principal concern being the
risk of information leakage allowing
counterparties to glean a SEF
participant’s trading positions and
strategies.27 The Commission has heard
repeatedly and consistently from market
participants eager to trade fullyanonymously on SEFs.28 The
Commission expects that many of these
market participants will choose to
participate on affected SEFs once the
practice is prohibited, leading to
increased trading. Furthermore, the
Commission believes that prohibiting
post-trade name give-up will promote
pre-trade price transparency in the
swaps market by encouraging a greater
number, and a more diverse set, of
market participants to anonymously
post bids and offers on affected SEFs.
With respect to claims made by some
commenters that incumbent swap
dealers may pull back from trading on
SEFs if post-trade name give-up is
prohibited, the Commission does not
believe that this prospect justifies
maintaining the practice. In the
Commission’s view, there is not
convincing evidence, such as research
or data, supporting the proposition that
participation and trading on SEFs will
decrease as a result of prohibiting posttrade name give-up. Rather, the
Commission believes that fullyanonymous trading has facilitated
liquidity and diverse participation in
markets for instruments such as futures,
equities, and U.S. Treasury securities,
and academic literature suggests that
markets with pre- and post-trade
anonymity generally feature greater
liquidity than those without.29 The
20 See Citadel Letter 1, at 7; Citadel Letter 2, at
7, FIA PTG Letter, at 1–2, MFA Letter, at 4.
21 For example, FSF and JPMorgan assert that
dealer-provided liquidity in some markets has
increasingly been replaced by high-frequency
trading firms that tend to retract liquidity sooner
than other types of market participants during
periods of high volatility. FSF Letter, at 9; JPMorgan
Letter, at 6 and 9. See also Citi Letter, at 4 note 7
(‘‘[D]egradations in liquidity have occurred in other
markets that have transitioned to fully anonymous
trading.’’). By contrast, Citadel asserts that it is
‘‘bank dealers’’ that have withdrawn from SEFs and
U.S. Treasury markets during certain periods of
market volatility. Citadel Letter 2, at 12.
22 Citadel Letter 1, at 4–5; Citadel Letter 2, at 5;
MFA Letter, at 4; SIFMA AMG Letter, at 2;
Vanguard Letter, at 1.
23 Citadel Letter 1, at 4–5.
24 Id. at 5; Citadel Letter 2, at 5; MFA Letter, at
4.
25 MFA Letter, at 4.
26 Id.
27 See CFTC Market Risk Advisory Committee
Meeting, Panel Discussion: Market’s Response to
the Introduction of SEF’s, 133 et seq. (Apr. 2, 2015)
(MRAC Meeting Transcript) at 142–144; Proposal at
72264; AIMA Letter, at 1; Citadel Letter 1, at 1, 3
and 10; ICI Letter, at 3; MFA Letter, at 3 and 7;
SIFMA AMG Letter, at 1 and 2; Vanguard Letter, at
2.
28 See, e.g., supra notes 12–13 and accompanying
text; Proposal at 72264, notes 31–32 and
accompanying text; MRAC Meeting Transcript at
140.
29 See, e.g., S. Freiderich & R. Payne, Trading
Anonymity and Order Anticipation, 21 Journal of
Financial Markets 1–24 (2014) (finding that posttrade anonymity improved market liquidity,
particularly for small stocks and stocks with
concentrated trading, which may be more analogous
to swaps); T.G. Meling, Anonymous Trading in
Equities (2019 working paper) (also finding that
post-trade anonymity improved market liquidity);
P.J. Dennis & P. Sandas, Does Trading
Anonymously Enhance Liquidity? Journal of
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44695
Commission believes that increased
anonymity is reasonably likely to
similarly enhance trading on SEFs.30
The Commission intends to study the
state of the swaps market in order to
observe any changes to trading on SEFs
following the implementation of this
final rule.31
Moreover, the Commission finds the
reasoning behind claims that incumbent
swap dealers may reduce their trading if
post-trade name give-up is prohibited to
be at odds with the statutory
requirements discussed in the following
two sections: To promote fair
competition among market participants
and impartial access to the market. The
reason proffered for a potential pullback
in trading by incumbent swap dealers is
that post-trade name give-up is
important to ensure that swap dealers
can hedge the risk of their client-facing
trades.32 In this regard, some market
participants argue that participation of
buy-side clients and speculators on pretrade anonymous SEFs (and without the
ability to identify them through posttrade name give-up) will harm the
ability of dealers to hedge reliably.33
These arguments can be understood to
imply that greater participation and
competition from certain types of
market participants (such as buy-side
clients and speculators) on affected pretrade anonymous SEFs will harm
overall market quality and welfare. The
Commission finds this proposition to be
at odds with the statutory requirements
to promote fair competition among
Financial and Quantitative Analysis 1–25 (2019)
(same); A. Hachmeister & D. Schierek, Dancing in
the Dark: Post-Trade Anonymity, Liquidity, and
Informed Trading, 34 Review of Quantitative
Finance and Accounting 145–177 (2010) (same); J.
Linnainmaa & G. Saar, Lack of Anonymity and the
Inference from Order Flow, 25 Review of Financial
Studies 1,414–1,456 (2012) (same). See also
Treasury Market Practices Group, White Paper on
Clearing and Settlement in the Secondary Market
for U.S. Treasury Securities (Jul. 11, 2019) (stating
that the emergence of new types of market
participants in the U.S. Treasury securities market
has ‘‘likely improved overall liquidity through
enhanced order flow and competition’’).
30 See, e.g., T. Lee & C. Wang, Why Trade Overthe-Counter? When Investors Want Price
Discrimination, at 26–27 (2019 working paper)
(predicting that eliminating name give-up in swaps
markets would decrease spreads on SEFs and
increase total market participant welfare).
31 In this respect, the Commission will endeavor
to conduct a preliminary study on the state of the
swaps markets by July 2021, and a further study by
July 2023.
32 See ABA Letter, at 2; BPI Letter, at 1; Citi
Letter, at 4; FSF Letter, at 3–6; JPMorgan Letter, at
4–5; SIFMA Letter, at 4–5; TP ICAP Letter, at 5.
Commenters supporting the Proposal, however,
asserted that the proposition that post-trade name
give-up is necessary for dealer risk management is
spurious. See, Better Markets Letter, at 8; Citadel
Letter 1, at 2; Vanguard Letter, at 2.
33 See FSF Letter, at 4–6; Citi Letter, at 3; infra
notes 53–57 and accompanying text.
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market participants and impartial access
on SEFs. The Commission believes that
maintaining post-trade anonymity,
where it is reasonable to do so, will
better align with the statutory
framework discussed below and level
the playing field for market participants
of all types and sizes to trade and
compete on affected SEFs without
exposing sensitive swap transaction
information.
2. Promoting Fair Competition Among
Market Participants (CEA Section 3(b))
CEA Section 3(b) specifies that a
purpose of the CEA is to promote fair
competition among market
participants.34 In the Proposal, the
Commission noted commenters’ stated
concerns about information leakage and
anticompetitive behavior made possible
by post-trade name give-up. The
Commission reasoned that greater
participation on SEFs resulting from a
prohibition on post-trade name give-up
would advance the goal of promoting
competition on SEFs.35 The
Commission stated that the proposed
rule may also advance the CEA’s goal of
fostering fair competition among market
participations by reducing opportunities
for information leakage associated with
post-trade name give-up.36
In response to the Proposal, several
commenters emphasized the view that
post-trade name give-up is an
anticompetitive practice and/or permits
swap dealers to engage in certain
anticompetitive behavior,37 and some
commenters opined that prohibiting the
practice may lead to greater competition
among dealers and liquidity
providers.38 Conversely, JPMorgan
asserted that post-trade name give-up
34 7
U.S.C. 5(b).
at 72266.
36 Id.
37 See AFR Letter, at 2–3; Better Markets Letter,
at 11–12 (‘‘[T]he gleaning of trading interest and
trade information and the apparent consequences of
the practice of Post-Trade Name Give-Up—to
permit dealers to exit order books with non-dealer
participation and trade with informational
advantages—conflict with the CEA’s overarching
statutory objectives to ‘promote . . . fair
competition among boards of trade, other markets
and market participants’ . . . .’’); Citadel Letter 1,
at 1; Citadel Letter 2, at 5 and 10; HMA Letter, at
2; MFA Letter, at 3; SIFMA AMG Letter, at 1.
38 See CTC Letter, at 1–2 (‘‘[W]e would expect
abolishing name give-up to increase liquidity
provision on SEFs given increased participation
from buy-side firms, which should in turn drive
enhanced participation from liquidity providers.’’);
ICI Letter, at 5 (‘‘[P]rohibiting post-trade name giveup could encourage competition among dealers to
the extent post-trade name give-up today gives a
few dominant dealers in the market leverage over
buy-side participants and other dealers.’’); MFA
Letter, at 4 (‘‘[N]ew liquidity providers may be able
to enter the market more easily, which will
diversify sources of liquidity and increase
competition.’’).
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‘‘promotes competition and attracts SEF
trading by providing market participants
multiple protocols from which to
choose depending on their business
models and preferences.’’ 39 By
‘‘limiting the methods through which
SEFs can operate and compete with
each other,’’ JPMorgan argued, banning
post-trade name give-up ‘‘would clearly
reduce innovation and reduce
competition ‘among . . . markets,’ thus
in fact contravening Section 3(b)’s
mandate.’’ 40
The Commission is not persuaded by
comments that prohibiting post-trade
name give-up would itself impair
competition or innovation. Post-trade
name give-up is an ancillary post-trade
protocol, and not a method of execution.
The prohibition of post-trade name giveup, as proposed and adopted by the
Commission, applies to all SEFs and all
pre-trade anonymous execution
methods. It does not proscribe SEFs
from offering any existing execution
method, nor does it prevent SEFs from
developing new execution methods.
Moreover, the Commission is concerned
by other commenters’ assertions that
post-trade name give-up enables
anticompetitive behavior. Regardless of
the prevalence or magnitude of such
behavior, the Commission believes that
prohibiting post-trade name give-up will
reduce the opportunity for such
behavior to occur, and is therefore
reasonably necessary to promote fair
competition among market participants
on pre-trade anonymous SEF markets
for cleared swaps. The Commission
believes that prohibiting post-trade
name give-up will address concerns
about information leakage and
discriminatory behavior that market
participants claim have dissuaded them
from accessing pre-trade anonymous
liquidity pools to date, thereby
removing barriers to greater
participation and competition.
3. Providing Market Participants With
Impartial Access to the Market (CEA
Section 5h(f)(2)(B) and CFTC Regulation
37.202)
CEA section 5h(f)(2)(B) requires a SEF
to establish and enforce trading, trade
processing, and participation rules that
provide market participants with
‘‘impartial access’’ to the market.41 The
Commission implemented this statutory
requirement by adopting CFTC
Letter, at 10.
at 11. See also FSF Letter, at 10 (‘‘Contrary
to what is argued in the [Proposal] and by
commenters, banning name give-up would itself
impair competition (certainly, innovation and
competition among markets) . . . .’’).
41 7 U.S.C. 7b–3(f)(2)(B).
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40 Id.
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regulation 37.202,42 which requires a
SEF to provide market participants with
impartial access to its market(s),
including, among other things, criteria
governing such access that are
‘‘impartial, transparent and applied in a
fair and non-discriminatory manner.’’ 43
In this context, ‘‘impartial’’ means fair,
unbiased, and unprejudiced.44 The
impartial access requirement allows
participants to compete on a level
playing field, and additional liquidity
providers to participate on SEFs.45
In the Proposal, the Commission
stated that post-trade name give-up may
result in a ‘‘discriminatory effect’’
against certain market participants, and
that the Commission preliminarily
believed post-trade name give-up
undermines the policy goals of the
impartial access requirement, namely,
to: (1) Ensure that market participants
can compete on a level playing field;
and (2) allow additional liquidity
providers to participate on SEFs.46 The
Commission also stated its preliminary
assessment that promoting a fullyanonymous trading environment
without post-trade name give-up would
better fulfill the goals of the impartial
access requirement.47 The Proposal
asked for public comments on whether
post-trade name give-up undermines the
stated goals of impartial access.
Several commenters stated that posttrade name give-up creates an uneven or
unfair playing field by conferring
benefits to select market participants
(large incumbent swap dealers) and
permitting such market participants to
engage in discriminatory trading
practices.48 AFR stated that post-trade
42 17
CFR 37.202.
CFR 37.202(a).
44 See Core Principles and Other Requirements for
SEFs, 78 FR 33476, 33508 (June 4, 2013).
45 Id.
46 Proposal at 72267.
47 Id.
48 See AFR Letter, at 3 (‘‘Post-trade name give-up
exposes liquidity providers to several risks,
including the risk of retaliation from large
competitors and the risk of revealing information
relevant to trading strategies to competitors. Smaller
liquidity providers and new entrants would tend to
be more vulnerable to these dangers.’’); Better
Markets Letter, at 9; Citadel Letter 1, at 3–4 and 6
(‘‘[S]wap dealers are able to use name give-up as a
post-trade check to ensure that they are only
transacting with other swap dealer counterparties
on [interdealer broker] SEFs, thereby maintaining
dealer-only liquidity pools in direct contradiction
of statutory impartial access requirements.’’);
Citadel Letter 2, at 10 (‘‘[W]e note the experience
of Citadel Securities entering the swaps market as
a new liquidity provider, where we witnessed how
certain other swap dealers can use name give-up for
purposes that are inconsistent with the
Commission’s impartial access requirements.
Immediately following our entry as a new liquidity
provider, this included certain incumbent swap
dealers asking [interdealer broker] SEFs to cancel
executed trades upon learning through name give43 17
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name give-up thereby ‘‘undermines
impartial access and reduces the
number of competitive liquidity
providers on SEFs.’’ 49 Commenters also
asserted that prohibiting post-trade
name give-up would lead to additional,
more diversified sources of liquidity on
SEFs.50 JPMorgan, on the other hand,
opined that although eliminating posttrade name give-up ‘‘might draw certain
market participants to trade on . . .
SEFs that are fully anonymous, it may
drive others (e.g., dealers) away.
Therefore, it is not clear that prohibiting
[post-trade name give-up] would further
the goal of impartial access . . . .’’ 51
JPMorgan also argued that the concept
of ‘‘discriminatory effect’’ is
‘‘amorphous’’ and could be used to
justify other market interventions
simply because certain market
participants prefer it.52
For commenters opposed to a
prohibition on post-trade name give-up,
the crux of their opposition is the notion
that prohibiting the practice may
impose ‘‘adverse selection’’ risk on
incumbent swap dealers.53 FSF
explained that ‘‘dealers prefer to match
with the natural other side of a trade
(e.g., another dealer generally seeking to
maintain a risk-neutral position)’’ as
opposed to other market participants,
such as speculators, who may impose
adverse selection costs.54 According to
FSF, swap dealers use post-trade name
give-up to ascertain ‘‘what types of
market participants are generally
trading’’ on pre-trade anonymous SEFs,
and ‘‘maximize the chances of trading
with the natural other side and thus
up that their counterparty was Citadel Securities.’’);
SIFMA AMG Letter, at 2.
49 AFR Letter, at 3.
50 CTC Letter, at 1–2; FIA PTG Letter, at 2; AFR
Letter, at 3; MFA Letter, at 4; Better Markets Letter,
at 5.
51 JPMorgan Letter, at 12.
52 Id. See also FSF Letter, at 11. But cf. Better
Markets Letter, at 10 (‘‘[I]mpartial access would
essentially become a fiction if certain classes of SEF
participants could be targeted with trading
practices, like Post-Trade Name Give-Up, that not
only impose, but are meant to impose, disparate
economic costs and trading limitations on
competitors . . . .’’).
53 See ABA Letter, at 2; BPI Letter, at 1; FSF
Letter, at 4–5; SIFMA Letter, at 3. FSF explained
adverse selection in this context as follows.
‘‘[I]nstead of facing a speculator on the other side
of a trade, who is more likely to trade in the same
direction on other venues or trade in one direction
in a small size on one venue in order to push the
price in a certain direction so that it can trade in
the opposite direction on a different venue at a
better price, dealers prefer to match with the natural
other side of a trade (e.g., another dealer generally
seeking to maintain a risk-neutral position). Such
‘‘naturals’’ are more likely to be hedging all their
residual accumulated risk, rather than trading in a
manner that would move the price in an
unfavorable direction.’’ FSF Letter, at 5.
54 FSF Letter, at 4–5.
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manage adverse selection costs.’’ 55 Citi
similarly commented that ‘‘[i]f new
participants will be enticed to join
[dealer-to-dealer] SEFs, some
presumably may be participants that
quote speculatively and intermittently,
thereby diluting the reliable and
consistent nature of quoting and trading
that is the hallmark of [dealer-to-dealer]
SEFs.’’ 56 In a related argument, FSF
asserted that post-trade name give-up
makes request-for-quote (RFQ) pricing
‘‘more tailored and efficient’’ by
allowing dealers to ensure their RFQ
clients are not trading on dealer-todealer order books, or if they are,
quoting them wider spreads via RFQ to
accommodate a greater anticipated risk
of hedging the balance sheet capacity
allocated to such clients.57
After considering all comments, the
Commission believes that post-trade
name give-up undermines the policy
goals of the impartial access
requirement, and that prohibiting the
practice is reasonably necessary to
effectuate the purposes of section
5h(f)(2)(B) of the Act. The Commission
finds that the practice of post-trade
name give-up effectively discriminates
against certain market participants and
has deterred participants from joining or
trading in a meaningful way on SEFs
that employ the practice. The use of
post-trade name give-up to discriminate
between certain types of market
participants in order to maximize
trading with one type of market
participant and avoid trading with
another—or to dissuade certain types of
market participants from trading on a
SEF—undermines the policy goals of
the impartial access requirement to
ensure that market participants can
compete on a level playing field and to
allow additional liquidity providers to
participate on SEFs. Further, in
implementing § 37.202(a), the
Commission rejected the notion that a
SEF could limit access to its trading
systems to certain types of market
55 Id.
Letter, at 3.
FSF Letter, at 5 (‘‘Name give-up allows a
dealer, over time (not just at the point of execution),
to more accurately assess its risk of providing
balance sheet capacity to a particular client and
determine how it should quote to the client in order
to achieve the same desired return on capital for
trading with that client as with another, e.g., by
quoting a tighter price to [an RFQ requester that
does not trade in the dealer-to-dealer order book
SEFs] than [an RFQ requester the dealer has seen
trade frequently in order book SEFs].’’). FSF
explained that the price that a dealer gives a client
over RFQ depends on the costs of hedging the
client-facing trade, and the dealer’s available
liquidity for hedging depends in turn on whether
the client will also be accessing that liquidity. Id.
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57 See
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44697
participants such as swap dealers.58
However, the practice of post-trade
name give-up purportedly to avoid
adverse selection risk, in the
Commission’s view, leads to a similar
result, and therefore conflicts with the
purposes of the impartial access
requirement imposed by CEA section
5h(f)(2)(B). Finally, the comment that a
potential ‘‘discriminatory effect’’ could
be used to justify market intervention
simply because certain market
participants prefer it misses the point.
The Commission’s view here is based
not upon the mere preference of certain
market participants, but rather upon the
entirety of facts and circumstances
presented, the discriminatory manner in
which post-trade name give-up is
applied, and the realized effect of posttrade name give-up as a disincentive to
access and participation by certain types
of market participants and not others.
4. Information Privacy and Prohibition
Against Post-Trade Name Give-up at an
SDR (CEA Section 21(c)(6) and CFTC
Regulation 49.17(f)(2))
CEA section 21(c)(6) requires an SDR
to maintain the privacy of any and all
swap transaction information that it
receives from a swap dealer,
counterparty, or any other registered
entity.59 In implementing this statutory
provision, the Commission promulgated
regulation 49.17(f) to address the scope
of access a market participant may have
to swap data maintained by an SDR. For
swaps executed anonymously on a SEF
and cleared in accordance with the
Commission’s STP requirements,
§ 49.17(f)(2) prohibits an SDR from
providing a counterparty to a swap with
access to the identity of the other
counterparty or its clearing member.60
In adopting this provision, the
Commission explained that this swap
transaction information is subject to the
statutory privacy protections because, in
the Commission’s view, swap
counterparties would not otherwise
know one another’s identity if the swap
were submitted to clearing via STP.61 In
the Proposal, the Commission stated
that post-trade name give-up undercuts
the intent of § 49.17(f)(2) and the
congressional objectives of CEA section
21(c)(6). Therefore, the Commission
reasoned, prohibiting post-trade name
give-up would help to advance the
objectives underlying the statutory
58 See Core Principles and Other Requirements for
Swap Execution Facilities, 78 FR 33476, 33507–
33508 (June 4, 2013).
59 7 U.S.C. 24a(c)(6).
60 17 CFR 49.17(f)(2).
61 Swap Data Repositories—Access to SDR Data
by Market Participants, 79 FR 16673–16674 (Mar.
26, 2014).
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privacy protections in CEA section
21(c)(6) and the Commission’s
regulations thereunder.62
Several commenters agreed with the
Commission’s assessment in the
Proposal that post-trade name give-up
undercuts the intent of CEA section
21(c)(6) and § 49.17(f)(2).63 FSF, on the
other hand, asserted that name give-up
is not comparable to an SDR disclosing
counterparty information since, in FSF’s
view, market participants choose to
have their names disclosed by trading
on a SEF that practices post-trade name
give-up.64 FSF also asserted that ‘‘[i]f
Congress wanted to extend the privacy
requirement to SEFs, it certainly would
have done so.’’ 65
After considering commenters’
arguments, the Commission continues
to believe that post-trade name give-up
undermines the objectives underlying
CEA section 21(c)(6) and § 49.17(f)(2)
thereunder. In response to commenters
who noted CEA section 21(c)(6)
addresses SDRs and not SEFs, the
Commission does not believe this
reflects a Congressional intent to permit
post-trade name give-up on SEFs. As the
Commission noted in the Proposal, the
Congressional intent to protect the
privacy of trading information,
including trader identities, is evident in
other statutory provisions.66 While
some market participants willingly
participate on SEF platforms practicing
post-trade name give-up, others are
reportedly deterred from doing so due to
concerns over the privacy of their swap
transaction information.67 The
Commission believes that prohibiting
post-trade name give-up is consistent
with Congressional intent and will
further the objectives underlying CEA
section 21(c)(6) and statutory provisions
similarly aimed at protecting private
information of market participants.
B. Application of the Rule
1. Scope of Swaps Covered
In the Proposal, the Commission
stated its preliminary belief that, with
respect to operational, credit and
settlement, and legal issues in
62 Proposal
at 72266.
Better Markets Letter, at 11; Citadel Letter
1, at 4; FIA PTG Letter, at 2–3; ICI Letter, at 4.
64 See FSF Letter, at 10–11.
65 FSF Letter, at 11. See also SIFMA Letter, at 5;
TP ICAP Letter, at 6.
66 Proposal at 72266, note 62. CEA Section 8(a),
for example, prohibits the Commission from
publication of data and information that would
disclose the business transactions or market
positions of any person and trade secrets or names
of customers. 7 U.S.C. 12(a).
67 See, e.g., Proposal at 72263–72264 (discussing
market participants’ concerns over ‘‘information
leakage’’ that could expose a counterparty’s trading
positions, strategies and/or objectives).
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particular, post-trade name give-up is
generally unnecessary where a swap is
executed on a SEF and submitted to a
DCO for clearing.68 Accordingly, the
Commission proposed in § 37.9(d) to
prohibit disclosing the identity of a
counterparty to a swap executed
anonymously and ‘‘intended to be
cleared.’’ The Commission specifically
requested public comments on whether
any operational, credit and settlement,
legal, or similar issues exist that would
still require post-trade name give-up for
an intended-to-be-cleared swap. The
Commission also requested public
comments on whether it should narrow
the scope of the proposed prohibition
on post-trade name give-up to swaps
required to be cleared under section
2(h)(1) of the Act or swaps subject to the
trade execution requirement under
section 2(h)(8) of the Act.
The Commission received a number
of comments opposing limiting the
scope of the prohibition.69 MFA
opposed narrowing the scope of the
prohibition to swaps required to be
cleared or subject to the trade execution
requirements, asserting that doing so
‘‘would mute the overall effectiveness of
the Proposed Rule . . . .’’ 70 Similarly,
Citadel asserted that the rationale for
prohibiting post-trade name give-up
applies equally to all swaps intended to
be cleared, not just swaps subject to the
clearing requirement or trade execution
requirement and, therefore, ‘‘there is no
rational basis for drawing such a
distinction.’’ 71 Citadel and FIA PTG,
however, requested that the
Commission clarify that ‘‘intended to be
cleared’’ be interpreted to mean swaps
that are intended to be submitted for
clearing contemporaneously with
execution, and not include swaps that
begin as uncleared transactions and are
later submitted to clearing.72 TP ICAP,
on the other hand, asserted that any
prohibition on post-trade name give-up
should be limited to, at most, swaps
68 Proposal at 72267. The Commission also noted
that STP requirements for transactions subject to
clearing obviate the need for counterparty name
disclosure. Id.
69 See AFR Letter, at 3; Citadel Letter 1, at 4; FIA
PTG Letter, at 2; ICI Letter,
at 5; MFA Letter, at 5–6.
70 MFA Letter, at 5.
71 Citadel Letter 1, at 4 (asserting that name giveup has no justification where: (1) the Commission’s
STP requirements ensure that a swap is quickly
submitted to, and accepted or rejected by, a DCO
(and is considered void ab initio if rejected); and (2)
the two trading counterparties do not have credit,
operational, or legal exposure to each other at any
stage).
72 See FIA PTG Letter, at 2; Citadel Letter 1, at
4; Citadel Letter 2, at 16. Citadel noted that ‘‘SEFs
may offer pre-trade anonymous trading protocols
for swaps that begin as uncleared and then are
‘backloaded’ into clearing by the trading
counterparties at a later time.’’ Id.
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subject to the clearing requirement.73 TP
ICAP reasoned that a SEF may not know
whether parties to a voluntarily-cleared
swap will in fact submit the swap to a
DCO, as the parties may do so
themselves post-execution.74 TP ICAP
stated that ‘‘it would be difficult, if not
impossible, to impose a restriction on
[post-trade name give-up] postexecution when it is not known whether
the transaction will be submitted for
clearing.’’ 75
The Commission declines to narrow
the prohibition as requested by TP ICAP
and is adopting § 37.9(d), as proposed,
to include swaps that are intended to be
cleared. The Commission continues to
believe that there is no need for posttrade name give-up if a swap is executed
on a SEF and submitted to a DCO for
clearing pursuant to STP requirements.
Narrowing the prohibition to apply only
to swaps required be cleared under
section 2(h)(1) of the Act would unduly
narrow its scope and hamper the
statutory and regulatory objectives
underlying the prohibition. Whether or
not a swap is intended to be cleared is
a material term that affects trade pricing
and trade processing workflows, and it
is something a SEF should be able to
determine at the time of execution.76
However, to the extent a SEF’s current
systems do not indicate whether a swap
is intended to be cleared, the
Commission notes that the SEF must
make necessary adjustments to its
systems and processes to ensure that it
can determine whether a swap is
intended to be cleared before permitting
post-trade name give-up.77 The
Commission recognizes that some SEFs
may need time to make such
adjustments, and the Commission is
73 TP
ICAP Letter, at 2.
74 Id.
75 Id. TP ICAP also asserted that the Proposal
‘‘does not accommodate the necessity of Name
Give-Up in transactions that are executed and
cleared across time zones.’’ Id. TP ICAP stated that
in such circumstances, transactions executed in one
time zone may remain bilateral transactions until
the relevant clearing house opens in another time
zone, and post-trade name give-up would be
necessary for the parties to manage counterparty
credit risk until the trade can be submitted to the
clearing house.
76 Furthermore, the Commission notes that a
SEF’s knowledge of whether or not a swap is
intended to be cleared is relevant to real-time
reporting and STP requirements. See 17 CFR 43.3(b)
and Appendix A to Part 43; 17 CFR 39.12(b)(7).
77 As discussed in the following section below,
the prohibition on post-trade name give-up applies
equally to swaps that are pre-arranged or prenegotiated by a broker on an anonymous basis.
Therefore, a SEF must also ensure that its rules,
systems, and processes require and enable brokers
to engage in such pre-arrangement or prenegotiation without compromising counterparty
anonymity, and to reliably determine whether a
swap is intended to be cleared prior to engaging in
name give-up.
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therefore providing a later compliance
date for voluntarily-cleared swaps, as
further described below. Finally, in
response to the comments from Citadel
and FIA PTG, the Commission clarifies
that ‘‘intended to be cleared’’ should be
interpreted to mean swaps that are
intended to be submitted for clearing
contemporaneously with execution.
Accordingly, if a swap begins as an
uncleared transaction and then is
voluntarily submitted for clearing by the
counterparties at a later time, the swap
would not be considered ‘‘intended to
be cleared,’’ and therefore would not be
subject to the prohibition on post-trade
name give-up.78
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2. Trades Pre-arranged or Pre-negotiated
by a Broker
A number of commenters
recommended the Commission clarify
that the prohibition on post-trade name
give-up applies to a swap that is prearranged or pre-negotiated by a broker
on an anonymous basis and thereafter
submitted for execution on a SEF.79
Commenters stated that doing so would
help ensure that market participants
cannot evade the prohibition on posttrade name give-up.80 For example,
Citadel stated that voice brokers,
operating either within a SEF or through
an affiliated introducing broker, may
seek to evade a prohibition on posttrade name give-up by pre-negotiating or
pre-arranging trades anonymously and
then disclosing counterparty identities
prior to formally executing the
transaction on the SEF.81
To address this concern, the
Commission is revising proposed
78 This includes swaps that are ‘‘backloaded’’ into
clearing as described by Citadel. See supra note 72.
The Commission notes that its STP regulations
apply to all swaps cleared through a DCO,
including voluntarily-cleared swaps. Those
requirements are designed to (1) ensure that swaps
are processed and accepted or rejected promptly
from clearing, and (2) require swap dealers, SEFs
and DCOs to coordinate with one another to ensure
they have the capacity to accept or reject trades as
quickly as technologically practicable if fully
automated systems were used. 17 CFR 23.610,
37.702(b), 39.12(b)(7).
79 See AIMA Letter, at 2; Citadel Letter 1, at 11;
Citadel Letter 2, at 17–18; FIA PTG Letter, at 2;
MFA Letter, at 7. In a related comment, TP ICAP
noted that the Commission should consider
additional exceptions or guidance ‘‘where a swap
is arranged off-SEF (e.g., by an Introducing Broker)
[and] submitted for execution and clearing through
a SEF to a [DCO]’’ where a prohibition on name
give-up ‘‘would . . . be incongruous because the
counterparties will already know one another’s
identity at the point of execution.’’ TP ICAP Letter,
at 7.
80 Citadel Letter 1, at 11; Citadel Letter 2, at 17–
18; CTC Letter, at 2; FIA PTG Letter, at 2; MFA
Letter, at 7. The Commission notes that the ban on
post-trade name give-up is subject to the
Commission’s broad anti-evasion requirements.
81 Citadel Letter 1, at 2; Citadel Letter 2, at 17–
18.
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§ 37.9(d)(3) to state that the phrase
‘‘executed anonymously’’ for purposes
of §§ 37.9(d)(1) and (2) includes a swap
that is pre-arranged or pre-negotiated
anonymously, including by a
participant of the SEF. In addition, the
Commission is deleting the original text
of proposed § 37.9(d)(3), which the
Commission believes is superfluous.82
3. Package Transactions
In the Proposal, the Commission
recognized that a limited exception to
the post-trade name give-up prohibition
may be necessary for cleared swaps that
are components of package transactions
that include uncleared swap
components.83 Uncleared swap
components create bilateral credit,
operational, and/or legal exposures that
the counterparties must manage on an
ongoing basis. Therefore, the
Commission requested public comments
on the necessity and scope of an
exception to the post-trade name giveup prohibition for package transactions.
The Commission also requested
comments on whether an exception
should be provided for package
transactions involving any non-swap
instrument, including U.S. Treasury
securities.
Commenters agreed that a prohibition
on post-trade name give-up should not
apply to components of a package
transaction that are uncleared swaps or
non-swap instruments. Commenters
differed on whether the Commission
should provide an explicit exception in
the regulation. FIA PTG, MFA and
Citadel argued that while uncleared and
non-swap components of package
transactions should not be subject to a
prohibition on post-trade name give-up,
an explicit exclusion in the regulation is
not necessary.84 These commenters
reasoned that, by its very terms, the
proposed prohibition applies to swaps
intended to be cleared; thus, where a
package transaction contains a cleared
swap component and another uncleared
swap or a non-swap component, the
prohibition would not apply to the
uncleared swap or non-swap component
of the transaction.85 In contrast,
82 As proposed, § 37.9(d)(3) read as follows: The
provisions in paragraphs (d)(1) and (d)(2) of this
section shall not apply with respect to any method
of execution whereby the identity of a counterparty
is disclosed prior to execution of the swap. The
Commission notes that the removal of this language
from the final regulation is not intended to be a
substantive revision or change the intended
meaning or effect of the final rule. Notwithstanding
this revision, the final rule does not apply to
execution methods that are not pre-trade
anonymous, such as name-disclosed RFQ.
83 Proposal at 72267.
84 See FIA PTG Letter, at 2; MFA Letter, at 5–6;
Citadel Letter, at 9; Citadel Letter 2, at 17.
85 Citadel and FIA PTG also stated that each
component of a package already faces distinct post-
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44699
JPMorgan and FSF stated that the
Commission should provide an
exception to the post-trade name giveup prohibition for package transactions
that include an uncleared swap or
security component.86
The Commission agrees with
commenters that the post-trade name
give-up prohibition should not apply to
an uncleared swap or non-swap
component of a package transaction.
Uncleared swap and non-swap
components of package transactions
may create bilateral credit, operational,
and/or legal exposures that require the
counterparties to know each other’s
identities. For uncleared components of
a package transaction, post-trade name
give-up enables market participants to
perform credit checks on counterparties
prior to finalizing the transaction. The
practice also allows counterparties to
manage credit exposure and payment
obligations arising from the bilateral
nature of such uncleared transactions.
In the case of U.S. Treasury securities,
post-trade name give-up may still be
necessary to accommodate trading
mechanisms and infrastructures
currently used for U.S. Treasury swap
spreads that do not allow for
anonymous clearing and settlement of
the Treasury component of such
transactions.87 Therefore, the
Commission believes that a limited
exception to the prohibition is
appropriate at this time for package
transactions that include a component
that is an uncleared swap or a nonswap.88 The Commission will continue
trade operational workflows, so this treatment
would be consistent with current market practice.
FIA PTG Letter, at 2; Citadel Letter 1, at 9; Citadel
Letter 2, at 17.
86 See FSF Letter, at 6 and 15; JPMorgan Letter,
at 6 and 19. Similarly, SIFMA stated that any
prohibition on post-trade name give-up should
exempt package transactions that involve a nonswap component. Without such an exemption,
SIFMA argued, SEFs will be required to change the
operational flow of both the swap component and
the non-swap/security component of the package
transaction. SIFMA Letter, at 6. SIFMA raised
concern that ‘‘the changes necessary for this
infrastructure have not been considered in the cost/
benefit analysis, and have not been analyzed
enough to consider unintended consequences.’’ Id.
87 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 laws and
regulations.
88 TP ICAP commented that the Commission
should also consider an exception or additional
guidance in cases where ‘‘a swap is a component
of a package transaction involving another
component that is not cleared at the same DCO.’’
TP ICAP Letter, at 7. The Commission believes that
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to monitor the operational development
of these markets, and encourages SEFs
and market participants to address
existing operational limitations so that
any need for post-trade name give-up
may be further diminished.
Accordingly, the Commission is
revising proposed § 37.9(d) by adding
§ 37.9(d)(4), which provides a limited
exception to the post-trade name giveup prohibition for a swap that is
intended to be cleared, when it is a
component of a package transaction that
includes a component transaction that is
not an intended-to-be-cleared swap. The
post-trade name give-up prohibition, as
adopted in this release, prohibits SEFs
from directly or indirectly disclosing the
identity of a counterparty to a swap that
is anonymously executed, pre-arranged
or pre-negotiated on or pursuant to the
rules of a SEF and intended to be
cleared. Because the components of a
package transaction are priced or quoted
together as one economic transaction,
the disclosure of the identity of a
counterparty to any component of a
package transaction effectively discloses
the counterparty identity for all
components of that package transaction.
As such, if a SEF were to disclose the
identity of a counterparty to the
uncleared swap or non-swap component
of a package transaction, the SEF would
also be indirectly disclosing the identity
of the counterparty to the intended-tobe-cleared swap component of the
package transaction; and such indirect
disclosure is otherwise prohibited under
the regulation. Therefore, the
Commission believes that a limited
exception to the post-trade name giveup prohibition for package transactions
with uncleared swap and non-swap
components is necessary to provide
clarity and regulatory certainty to SEFs
and market participants.
The exception will apply, for
example, to U.S. Treasury swap spreads
involving an intended-to-be-cleared
swap and a U.S. Treasury security.
However, the Commission emphasizes
that the exception is limited in scope.
Many package transactions are traded
anonymously and involve only
intended-to-be-cleared swaps, and the
prohibition on post-trade name give-up
will apply to these transactions in full.89
The Commission notes that this
exception is intended to accommodate
trading and settlement workflows for
certain package transactions as they
exist today. It is not an invitation to
such an exception or guidance is not necessary at
this time, and further submits that an explanation
as to what the issue or underlying problem could
be in such cases has not been provided.
89 For example, ‘‘curve’’ and ‘‘butterfly’’ trades
involving only intended-to-be-cleared swaps.
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structure package transactions to allow
post-trade name give-up or to evade the
prohibition on post-trade name give-up
that the Commission is adopting in this
final rule. In that regard, the final rule
adopted herein is subject to the
Commission’s broad anti-evasion
requirements.
The Commission emphasizes that this
exception does not limit, prohibit, or
otherwise restrain SEFs or market
participants from developing and
utilizing trading functionalities,
operational workflows, or
infrastructures for package trades that
are fully anonymous, and do not utilize
post-trade name give-up. The
Commission encourages SEFs and
market participants to continue to work
to eliminate the technological and/or
operational need for post-trade name
give-up. The Commission will continue
to monitor whether the exception in
§ 37.9(d)(4) can be refined as trading
functionalities, operational workflows,
and/or infrastructure continue to
develop in the future.
4. Workups
In the Proposal, the Commission
requested public comments on how, if
at all, a prohibition on post-trade name
give-up would affect trading protocols
such as auctions, portfolio compression,
and/or workup sessions. JPMorgan and
FSF asserted that post-trade name giveup is an integral part of workup
protocols, and the Proposal will impair
workup protocols and adversely affect
dealers’ ability to hedge.90 These
commenters asserted that a dealer’s
willingness to offer greater size through
a workup may depend on (1) who its
counterparty is, in particular whether
the counterparty is likely to be able to
execute on the full size the dealer is
willing to offer, 91 and (2), as FSF stated,
whether the counterparty might impose
adverse selection costs on the dealer
upon knowing its trading interests.92
FSF suggested that if the Commission
proceeds with a prohibition on posttrade name give-up, it should exclude
from the prohibition any SEF that
obtains a material portion of its trading
volume, over a specified period, through
workups.93
In contrast, Citadel and MFA asserted
that post-trade name give-up is not
necessary for workup sessions. Citadel
asserted that if a trading protocol is pretrade anonymous, there is no need to
disclose the trading counterparties in
order to engage in a work-up session
PO 00000
90 See
FSF Letter, at 2; JPMorgan Letter, at 7.
Letter, at 4; JPMorgan Letter, at 7.
92 FSF Letter, at 4.
93 FSF Letter, at 15.
91 FSF
Frm 00016
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and, therefore, ‘‘work-up sessions on
[interdealer broker] SEFs will function
just as they do today in order to
facilitate trading in size.’’ 94 Citadel also
stated that claims to the contrary ‘‘are
easily disproven by looking at the U.S.
Treasury market, where work-ups are
commonly employed on interdealer
platforms even though name give-up is
not used.’’ 95 MFA further argued that
prohibiting post-trade name give-up
would benefit trading protocols such as
auctions, portfolio compression, and/or
workup sessions by increasing buy-side
access and participation.96
The Commission agrees that posttrade name give-up is not necessary for
workup sessions. The reasons given by
commenters for why they view posttrade name give-up as an important
aspect of workup sessions are
essentially the same reasons espoused
for the purported benefits of post-trade
name give-up generally, i.e., ensuring
reliable hedging and avoiding adverse
selection for incumbent swap dealers.97
The Commission does not find that
workup sessions present a particular
need for post-trade name give-up that is
distinct from pre-trade anonymous
order books. Accordingly, the
Commission does not believe it is
necessary or appropriate to include an
exception for workups.
5. Error Trades
Commenters also addressed the
potential impact of a prohibition on
post-trade name give-up on error trade
corrections. TP ICAP asserted that a
prohibition would prevent an efficient
means for correcting trade errors,
specifically, in cases ‘‘[w]here a party to
a swap identifies an error that requires
coordination with its counterparty.’’ 98
TP ICAP therefore identified error trade
correction among issues ‘‘that require
the Commission to consider exceptions
and additional guidance.’’ 99 Similarly,
FSF stated that post-trade name give-up
94 Citadel Letter 1, at 6. Citadel added that,
similarly, a pre-trade anonymous auction or
compression exercise should not require post-trade
name give-up for intended-to-be-cleared swaps. Id.
95 Citadel Letter 2, at 11. Citadel further stated
that ‘‘there is nothing unique about transactions
executed via work-up compared to other
anonymously-executed cleared swaps that would
require the disclosure of counterparty identities
post-trade. In the fully anonymous U.S. Treasury
market, work-ups account for a significant
percentage of overall trading activity.’’ Id. (citing to
M.J. Fleming, E. Schaumburg & R. Yang, The
Evolution of Workups in the U.S. Treasury
Securities Market, Liberty Street Economics Blog
(Aug. 20, 2015)).
96 MFA Letter, at 6.
97 See supra notes 32, 33, 53, 54, 55 and
accompanying text.
98 TP ICAP Letter, at 7.
99 Id.
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‘‘will remain necessary for
counterparties to correct operational or
clerical errors resulting in a trade being
rejected.’’ 100 Citadel disagreed with
these commenters, stating that ‘‘[i]n the
event of an operational or clerical error,
the SEF can facilitate the correction of
the error without disclosing a
counterparty’s identity . . . .’’ 101
The Commission does not believe that
post-trade name give-up is necessary or
appropriate to resolve error trades for
pre-trade anonymous and intended-tobe-cleared swaps. A SEF can
intermediate communications if
necessary, and otherwise facilitate error
trade corrections, without disclosing
counterparty identities.102 Accordingly,
the Commission declines to adopt an
exception to the prohibition on posttrade name give-up for error trade
corrections. Therefore, any SEF offering
trading in swaps subject to the
prohibition must ensure its rules and
procedures for error trades allow for
error trade remediation without
disclosure of the identities of
counterparties to one another.
C. Compliance Dates
The Commission recognizes the final
rule adopted herein may require SEFs to
modify, in varying degrees, their rules
and operations with respect to trading
and trade processing systems, error
trades, and compliance programs.103
The Commission also recognizes that
the modifications required—and the
time necessary to implement them—
may vary for different swap products.
The Commission anticipates that
compliance with the final rule will be
simpler to implement for required
transactions due to the fact that the
methods of execution for such
transactions are limited.104 Permitted
transactions may require more time to
establish compliance, given that a SEF
may offer any method of execution for
such transactions.105 Furthermore, for
swaps that are not subject to mandatory
clearing, a SEF may need to make
100 FSF
Letter, at 15.
Letter 1, at 10. See also Citadel Letter
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101 Citadel
2, at 17.
102 The Commission’s view on this issue is
consistent with its stated view in the Proposal. See
Proposal at 72267, note 78.
103 This includes establishing rules to prohibit
post-trade name give-up, as required under
§ 37.9(d)(2).
104 17 CFR 37.9(a) defines ‘‘required transaction’’
as a transaction involving a swap that is subject to
the trade execution requirement in section 2(h)(8)
of the Act, and provides that required transactions
shall be executed on a SEF through an order book
or RFQ to no less than three market participants.
105 17 CFR 37.9(c) (defining ‘‘permitted
transaction’’ as any transaction not involving a
swap that is subject to the trade execution
requirement in section 2(h)(8) of the Act).
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additional adjustments to its systems
and processes to ensure that it can
determine whether a swap is intended
to be cleared, and therefore subject to
the prohibition on post-trade name giveup.
Accordingly, the Commission is
adopting a phased compliance schedule.
Specifically, for swaps subject to the
trade execution requirement under CEA
section 2(h)(8), SEFs must commence
compliance with the requirements of
§ 37.9(d) no later than November 1,
2020. For swaps not subject to the trade
execution requirement under CEA
section 2(h)(8), SEFs must commence
compliance with the requirements of
§ 37.9(d) no later than July 5, 2021.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 106 requires Federal agencies to
consider whether the rules they propose
will have a significant economic impact
on a substantial number of small entities
and, if so, to provide an analysis
regarding the economic impact on those
entities. The final rule adopted by the
Commission will directly affect SEFs.
The Commission has previously
determined that SEFs are not ‘‘small
entities’’ for the purpose of the RFA.107
Therefore, the Chairman, on behalf of
the Commission, hereby certifies,
pursuant to 5 U.S.C. 605(b), that the rule
adopted herein will not have a
significant economic impact on a
substantial number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act
(PRA) 108 imposes certain requirements
on Federal agencies, including the
Commission, in connection with their
conducting or sponsoring any collection
of information, as defined by the PRA.
The Commission may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
Office of Management and Budget
(OMB) control number. The
Commission has previously received a
control number from OMB that includes
the collection of information associated
with part 37 of the Commission’s
regulations. The title for this collection
of information is ‘‘Core Principles and
Other Requirements for Swap Execution
Facilities, OMB control number 3038–
U.S.C. 601 et seq.
Core Principles and Other Requirements
for Swap Execution Facilities, 78 FR 33476, 33548
(June 4, 2013).
108 44 U.S.C. 3501 et seq.
PO 00000
106 5
107 See
Frm 00017
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44701
0074.’’ 109 Collection 3038–0074 is
currently in force with its control
number having been provided by OMB.
However, the rule adopted herein does
not impose any new recordkeeping or
information collection requirements,
and therefore contains no requirements
subject to the PRA.
C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
CEA.110 Section 15(a) further specifies
that 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.
The Commission is adopting
amendments to part 37 of the
Commission’s regulations to prohibit
post-trade name give-up for swaps
anonymously executed, pre-arranged, or
pre-negotiated on or pursuant to the
rules of a SEF and intended to be
cleared. Section 37.9(d) of the
Commission’s regulations adopted
herein prohibits a SEF from directly or
indirectly, including through a thirdparty service provider, disclosing the
identity of a counterparty to any such
swap. The regulation also requires SEFs
to establish and enforce rules that
prohibit any person from effectuating
such a disclosure.
The baseline for this consideration of
costs and benefits with respect to the
rule adopted herein is the status quo,
which includes the existing practice of
post-trade name give-up for cleared
swaps on some SEFs, and the current
regulatory requirements that do not
explicitly prohibit post-trade name giveup for cleared swaps anonymously
executed, pre-arranged, or prenegotiated on or pursuant to the rules of
a SEF. The prohibition does not apply
to uncleared swaps or SEF trading
systems and platforms that are not pretrade anonymous; and the final rule
includes an exception for package
transactions that include components
that are not intended-to-be-cleared
109 See OMB Control No. 3038–0074, available at
https://www.reginfo.gov/public/do/
PRAOMBHistory?ombControlNumber=3038-0074
(last retrieved June 23, 2020).
110 7 U.S.C. 19(a).
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swaps. Much of the swaps trading on
SEFs today occurs on disclosed trading
systems and platforms that display the
identities of potential counterparties to
one another before execution occurs.
Such is the case, for example, with
many RFQ systems offered by SEFs.
The Commission notes that this
consideration of costs and benefits is
based on the understanding that the
swaps market functions internationally,
with many transactions involving U.S.
firms taking place across international
boundaries, with some Commission
registrants being organized outside of
the United States, with leading industry
members typically conducting
operations both within and outside the
United States, and with industry
members commonly following
substantially similar business practices
wherever located. Where the
Commission does not specifically refer
to matters of location, the below
discussion of costs and benefits refers to
the effects of the final 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).111
The Commission has endeavored to
assess the expected costs and benefits of
the final rulemaking in quantitative
terms, where possible. In situations
where the Commission is unable to
quantify the costs and benefits, the
Commission identifies and considers
the costs and benefits of the adopted
rule in qualitative terms. The lack of
data and information to estimate those
costs is attributable in part to the nature
of the final rule and uncertainty about
the potential responses of market
participants to the implementation of
the final rule. The Commission
recognizes that potential indirect costs
and benefits of the prohibition on posttrade name give-up adopted herein—
i.e., those relating to effects on trading
behavior, liquidity, and competition—
may be impossible to accurately predict
or quantify prior to implementation of
the rule.
The final rule differs from the
proposed rule in several ways. Section
37.9(d)(3) of the final rule states that for
purposes of the rule, the term ‘‘executed
111 7 U.S.C. 2(i). 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. 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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anonymously’’ shall include a swap that
is pre-arranged or pre-negotiated
anonymously, including by a
participant of the SEF. The proposed
rule does not include this provision,
which is intended to clarify that the
prohibition on name disclosure also
applies in cases where a broker prenegotiates or pre-arranges a trade
anonymously. The final rule also
includes an exception for package
transactions that include a component
transaction that is not an intended-tobe-cleared swap, and a staggered
compliance schedule depending on
whether a swap is subject to the trade
execution requirement.
1. Costs
The Commission recognizes that the
final rule adopted herein may require
SEFs to modify their rules and
operations in varying degrees,
including, potentially, with respect to
trading and trade processing systems,
error trades, and compliance programs;
and that these modifications are likely
to impose costs. For example,
§ 37.9(d)(2) requires SEFs to establish
and enforce rules to prohibit any person
from directly or indirectly, including
through a third-party service provider,
disclosing the identity of a counterparty
to a swap that is executed anonymously
and intended to be cleared. Complying
with § 37.9(d)(2) will require a SEF to
file such rules with the Commission in
accordance with part 40 of the
Commission’s regulations. The
Commission estimates that filing such
rules may take up to 50 hours, which is
unlikely to be a major cost burden on
SEFs. The Commission also recognizes
that the modifications required—and
the time necessary to implement them—
may vary for different swap products.
The Commission believes that these
costs will be relatively small as
compared to a SEF’s overall operating
costs. In the Proposal, the Commission
stated a preliminary assessment that the
direct costs in implementing and
complying with the proposed rule
would not be material, and that the
costs of adjusting affected SEF protocols
in order to comply would be
negligible.112 The Commission
requested that SEFs provide estimates of
any direct costs they would incur.113
The Commission received no such
comments. The Commission anticipates
that compliance with the final rule will
be simpler and less costly to implement
for swaps that are subject to the clearing
requirement. The Commission
recognizes that a SEF may incur
PO 00000
112 Proposal
at 72269.
113 Id.
Frm 00018
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additional costs with respect to swaps
that are not subject to mandatory
clearing, insofar as its systems and
processes must be adjusted to ensure
that it is determined whether a swap is
intended to be cleared prior to
permitting post-trade name give-up to
occur. The Commission is adopting a
phased compliance schedule based on
whether a swap is subject to the trade
execution requirement. The extended
compliance period for swaps not subject
to the trade execution requirement will
delay the benefits associated with the
rule for certain swaps, but should also
mitigate the costs to SEFs associated
with compliance with the rule.
The Commission anticipates the
direct cost of complying with § 37.9(d)
for market participants to be at or near
zero and has received no comments to
the contrary. With respect to potential
indirect costs of the proposed rule,
commenters opposing the Proposal
argued that it will harm liquidity by
causing incumbent swap dealers to exit
the market or reduce their trading and
the liquidity they provide.114 Several
proponents of the Proposal disputed
these assertions. ICI and MFA
characterized this outcome as
‘‘unlikely.’’ 115 MFA stated that
competitive market forces would ensure
that ‘‘in the unlikely event an individual
dealer reduced its offering, other dealers
would quickly step into its place.’’ 116
Asserting its experience as a ‘‘top
liquidity provider’’ in SEF markets,
Citadel stated that it does not expect a
prohibition on post-trade name give-up
to affect its liquidity provision on RFQ
platforms or its use of pre-trade
anonymous trading protocols.117 Citadel
further asserted that ‘‘other swap dealers
share our view, as UBS has supported
the prohibition and SIFMA indicated
that the views among swap dealers ‘are
not uniform.’ ’’ 118 Commenters also
pointed to their experience in other
asset classes where post-trade name
give-up is not practiced, asserting that
such markets demonstrate that the
purported negative liquidity impacts
raised by incumbent swap dealers are
unwarranted.119
The Commission believes that
incumbent swap dealers will continue
to provide liquidity on the affected SEFs
as long as it is in their business interest
to do so and notes that the apparent
desire of other entities to provide
114 See ABA Letter, at 2; BPI Letter, at 1; FSF
Letter, at 7–8; SIFMA Letter, at 4.
115 ICI Letter, at 5; MFA Letter, at 4.
116 MFA Letter, at 4.
117 Citadel Letter 1, at 6.
118 Citadel Letter 1, at 7.
119 See Citadel Letter 1, at 7; Citadel Letter 2, at
7, FIA PTG Letter, at 1–2, MFA Letter, at 4.
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liquidity once post-trade name give-up
is prohibited suggests that overall
liquidity is not likely to decline.
A number of commenters asserted
that without post-trade name give-up on
dealer-to-dealer SEFs, pricing and
liquidity offered by dealers to clients via
RFQ or over-the-counter (OTC) may
suffer.120 Some of these commenters
stated that post-trade name give-up
helps dealers predict their hedging costs
and tailor their pricing on RFQ SEFs.121
They argued that prohibiting the
practice would likely result in inferior
pricing for clients on RFQ SEFs.122
Similarly, commenters asserted that
post-trade name give-up enables dealers
to hedge the risk they accumulate by
providing liquidity to clients off-SEF.123
FSF argued that if dealers widen
spreads as a result of a prohibition on
post-trade name give-up, commercial
end users may be disproportionately
harmed because they rely more
exclusively on dealer pricing and
generally do not trade in cleared swaps
on SEFs.124 The Coalition for
Derivatives End-Users (Coalition) stated
that they ‘‘have heard from bank swap
dealers that the Proposed Rule would
result in less liquidity and worse pricing
on SEFs, which in turn may increase
costs for derivatives end users hedging
transactions in the non-cleared OTC
derivatives markets.’’ 125 The Coalition
also stated that they ‘‘have heard from
other market participants that, under the
Proposed Rule, liquidity would increase
and result in better pricing on SEFs,
which in turn may drive down costs for
derivatives end-users in the non-cleared
OTC derivatives markets.’’ 126 The
Coalition further stated that it ‘‘lacks the
empirical data and institutional
knowledge to reach a firm conclusion as
to the effects of the Proposed Rule on
the ability of end-users to access
efficient and economical markets to
hedge their commercial risks.’’ 127
SIFMA AMG and Citadel each
generally disagreed with the notion that
client pricing will be harmed by a
prohibition on post-trade name giveup.128 Citadel asserted that, ‘‘if
anything, pricing should become more
competitive, as buy-side firms gain
120 See ABA Letter, at 2; Citi Letter, at 3–4; FSF
Letter, at 2 and 5–6; JPMorgan Letter, at 5–6.
121 See JPMorgan Letter, at 5–6; FSF Letter, at 2;
Citi Letter, at 3.
122 See Citi Letter, at 3–4; FSF Letter, at 5–6.
123 ABA Letter, at 3; FSF Letter, at 2 and 5; Citi
Letter, at 3–4.
124 See FSF Letter, at 2 and 7.
125 Coalition Letter, at 1.
126 Id.
127 Id. at 2.
128 See Citadel Letter 1, at 7; Citadel Letter 2, at
11; SIFMA AMG Letter, at 2.
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access to additional sources of liquidity
and will have more pre-trade price
information on which to transact’’; 129
and that ‘‘increasing competition should
lower transaction costs, thereby
facilitating dealer hedging.’’ 130
The Commission continues to believe
that prohibiting post-trade name give-up
is likely to increase competition on
affected SEFs, which in turn should
lead to lower overall transaction
costs.131 The Commission is basing its
belief on several studies described in
the benefits section below, finding that
post-trade anonymity tends to reduce
trading costs and lead to better price
quotes and lower realized spreads.132
Nevertheless, the Commission
acknowledges that it is theoretically
possible that the prohibition on posttrade name give-up could lead to
increased trading costs associated with
some OTC swaps, even if, as the
Commission anticipates, it leads to
improved liquidity and lower
transaction costs for swaps traded on
SEFs. One study reviewed by the
Commission, as discussed below,
describes a theoretical scenario, where
post-trade anonymity in swaps and
bond markets could lead to an increase
in OTC spreads and a simultaneous
decrease in spreads on exchanges that
ultimately improves overall welfare of
market participants.133
2. Benefits
The Commission believes that
implementing the rule may reduce
information asymmetries and improve
liquidity, particularly on affected SEFs,
and may reduce transaction costs and
bid-ask spreads. The practice of posttrade name give-up and the prospect of
information leakage have reportedly
deterred a significant segment of market
participants from making markets on or
otherwise participating on affected
SEFs. The Commission expects that
many of these market participants will
choose to participate on these SEFs once
the practice is prohibited, leading to
increased liquidity. Increased liquidity
may benefit market participants by
making it easier to execute transactions,
especially larger transactions, quickly
and without undue price impact.
Letter 1, at 7.
Letter 2, at 11.
131 See Proposal at 72269.
132 The Commission does note that reductions in
transaction costs may lead to a reduction in profits
for incumbent liquidity providers and thus, these
lower costs may be perceived as a cost for those
liquidity providers, even as it is perceived as a
benefit for other market participants.
133 T. Lee & C. Wang, Why Trade Over-theCounter? When Investors Want Price Discrimination
(2019 working paper).
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130 Citadel
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In order to evaluate the expected
benefits of implementing the rule, the
Commission reviewed several empirical
studies examining prior experiences
with changes in post-trade anonymity.
As detailed in the Proposal, the studies
covered the experiences in U.S.
securities markets and a wide range of
foreign financial markets and, on
balance, support the premise that posttrade anonymity promotes trading
liquidity. Commenters in favor of the
prohibition of name give-up cited other
studies that further support the benefits
of fully-anonymous trading.
Commenters not in favor of prohibiting
post-trade name give-up did not provide
data, evidence, or studies regarding the
impact of post-trade anonymity.
Specifically, as discussed in more
detail in the Proposal, the Commission
reviewed six event studies focusing on
post-trade anonymity in various equity
exchanges around the world, most of
which document an improvement in
liquidity. The Commission
acknowledges that none of these studies
examine a change in post-trade
anonymity for a swaps market, but the
studies do provide real-world evidence
on the effects on liquidity in a range of
markets when the rules for post-trade
anonymity are changed. Hence, they
provide the most instructive empirical
evidence available regarding a proposed
change in such rules. Four of these
studies, which focus on European
equity markets, provide evidence of a
liquidity improvement associated with
post-trade anonymity,134 which could
be attributed to a reduction of
information leakage.135 A study on the
2003 introduction of post-trade
anonymity on the NASDAQ platform
found no evidence that best quotes were
improved,136 while a study on the South
Korea Exchange found that reducing
post-trade anonymity led to lower
realized spreads.137 The Commission
134 S. Freiderich & R. Payne, Trading Anonymity
and Order Anticipation, 21 Journal of Financial
Markets 1–24 (2014); T.G. Meling, Anonymous
Trading in Equities (2019 working paper); P.J.
Dennis & P. Sandas, Does Trading Anonymously
Enhance Liquidity?, Journal of Financial and
Quantitative Analysis 1–25 (2019); A. Hachmeister
& D. Schierek, Dancing in the Dark: Post-Trade
Anonymity, Liquidity, and Informed Trading, 34
Review of Quantitative Finance and Accounting
145–177 (2010).
135 S. Freiderich & R. Payne, Trading Anonymity
and Order Anticipation, 21 Journal of Financial
Markets 1–24 (2014); J. Linnainmaa & G. Saar, Lack
of Anonymity and the Inference from Order Flow,
25 Review of Financial Studies 1,414–1,456 (2012).
136 K. Benhami, Liquidity providers’ valuation of
anonymity: The NASDAQ Market Makers evidence
(2006 working paper).
137 T.P. Pham, et al., Intra-day Revelation of
Counterparty Identity in the World’s Best-Lit Market
(2016 working paper).
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believes that on balance the empirical
evidence presented in these academic
studies supports the benefits of
anonymous trading.
As discussed in more detail in the
Proposal, the Commission also reviewed
several theoretical studies. The studies
present models with various levels of
post-trade disclosure in different
settings, and the results offer insight
into the trade-offs associated with
changes in post-trade anonymity,
notwithstanding the fact that the studies
did not directly examine the case of
bilateral disclosure of counterparty
identities immediately after each trade.
The Commission found that the results
of these theoretical studies were mixed.
One study, for example, focused on the
post-trade public disclosure of the
trades of insiders in equity markets, and
the authors concluded that public
disclosure of insider trades accelerates
the price discovery process.138
Therefore, the results suggest that posttrade anonymity might strengthen
asymmetric information problems in the
market and lead to subsequently
reduced liquidity by exacerbating the
market maker’s adverse selection
problem. Another study concluded that
public disclosure can reduce the
informational efficiency of prices and
reduce market liquidity, because
informed traders reduce trading in order
to preserve their informational
advantage.139
The Commission also examined one
theoretical study that explicitly
addresses the practice of post-trade
name give-up. The study, considered in
more detail in the Proposal, modeled
the investor choice between OTC
markets and electronic order books.140
The authors supported that the OTC
market can detect and attract
uninformed traders (i.e., hedgers who
are demanding liquidity but do not
possess market moving information) by
offering them lower spreads, which
results in an increase in spreads for
informed traders (i.e., traders who
demand liquidity in order to profit from
the trade) in an electronic order book, as
well as a decrease in average spreads
and an increase in total volume. The
authors concluded that a prohibition on
post-trade name give-up would likely
lead to an increase in overall welfare.
They reasoned that, in the absence of
post-trade name give-up, informed
traders will continue to trade via RFQ
in order to minimize exposure of their
trading intentions, and that spreads in
this venue will stay high to reflect this
situation. On the other hand,
uninformed traders will migrate to the
order book and trade more, because
spreads will decline due to the
increased activity. They predicted that
overall welfare would increase because
the aggregate benefits of increased
electronic trading at low spreads would
more than offset the aggregate costs to
informed traders who remain concerned
about information leakage. The study is
consistent with the Commission’s
recognition of the trade-offs in
prohibiting post-trade name give-up.
Citadel cited two additional studies
that the Commission did not consider in
the Proposal, but which it has now
reviewed.141 These studies examined
the effect of various levels of
intermediation (i.e., access to multiple
market makers) on liquidity in OTC
markets and may be closer to the setting
of the swaps market. One study
provided an empirical evaluation of the
implications of the OTC market
structure for non-financial firms in the
foreign exchange derivatives market.142
The authors documented extensive
discriminatory pricing by dealers, who
appeared to favor sophisticated
customers, defined as those customers
transacting high volume with multiple
counterparties. However, clients trading
on RFQ platforms, where they can
request quotes from multiple dealers
simultaneously, appeared to receive
competitive pricing irrespective of the
level of their sophistication which leads
the authors to conclude that
discriminatory pricing could be
potentially eliminated with the use of a
centralized order book. Finally, the
authors argued that the lack of
centralized dissemination of transaction
prices provides dealers with an
information advantage compared to
clients, which enables them to extract
information rents.143 The Commission
recognizes the empirical fact that
trading costs appear to differ across
different venues and for different
traders, as this study emphasizes.
Nonetheless, the Commission finds that
the design of the study precludes strong
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141 See
138 S.
Huddart, J.S., Hughes & C.B. Levine, Public
Disclosure and Dissimulation of Insider Trades,
Econometrica, Vol. 69, No. 3 (May 2001), 665–681.
139 A.M. Buffa, Insider Trade Disclosure, Market
Efficiency, and Liquidity (2014 working paper).
140 T. Lee & C. Wang, Why Trade Over-theCounter? When Investors Want Price Discrimination
(2019 working paper).
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Citadel Letter 2, at 16.
Hau, P. Hoffmann, S. Langfield, & Y.
Timmer, Discriminatory pricing of over-the-counter
derivatives (2017 working paper). We note that,
while the paper focuses on the foreign exchange
derivatives market, its conclusions regarding the
impact of multi-dealer RFQ platforms are generally
applicable across markets.
143 Id.
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causal statements regarding the causes
and effects of the observed variation.
The second study, which provides a
theoretical model of a generic OTC
market, concluded that sophisticated
investors, who have access to multiple
market makers or other investors, face
lower transaction costs.144 The authors
theorized that the availability of other
trading counterparties (i.e., more
competition) forces market makers to
provide better pricing. The Commission
agrees with the broad conclusion that
more active, competitive markets are
welfare enhancing.
Several commenters addressed the
Commission’s review of academic
studies in the Proposal. FSF, SIFMA,
JPMorgan and TP ICAP each asserted
that the studies on equity markets cited
in the Proposal’s Cost-Benefit
Considerations (CBC) are not relevant
because equity markets are not
comparable to the swaps market.145 JP
Morgan stated that ‘‘swap markets have
many fewer participants, of which
institutional participants constitute a far
larger proportion, much lower trading
frequency, far greater variation in
tradeable products, and much larger
typical trade sizes.’’ 146 The Coalition
requested a quantitative analysis of the
costs and benefits for commercial end
users.147 BPI, FSF, Citi and JPMorgan
further asserted that the CBC is not
sufficient and that further study is
necessary.148
Better Markets, Citadel and AFR each
commented that the Proposal, including
the consideration of costs and benefits
therein, provides a sufficient basis with
which to move forward with a final
rule.149 Citadel also argued that the
Proposal is consistent with the
Commission’s previous decision in
implementing part 37 not to limit SEF
144 D. Duffie, N. Ga
ˆ rleanu, & L.G. Pedersen,
Valuation in Over-the-Counter Markets, Review of
Financial Studies, Vol. 20, No. 5 (2007).
145 See FSF Letter, at 9; SIFMA Letter, at 3;
JPMorgan Letter, at 9; TP ICAP Letter, at 5.
146 JPMorgan Letter, at 9. See also FSF Letter, at
9 (‘‘The swap markets have many fewer
participants, much lower trading volume, far greater
variation in tradable products, and much larger
typical trade sizes.’’).
147 Coalition Letter, at 2. The Commission notes
that it is not possible to conduct a quantitative
analysis of the costs and benefits to commercial end
users of a prohibition on post-trade name give-up
prior to finalizing the rule, because there is no data
on the effects until after the rule is implemented.
148 See BPI Letter, at 2; FSF Letter, at 12; Citi
Letter, at 3; JPMorgan Letter, at 13–14. See also
ABA Letter, at 2 (‘‘[W]e see no relevant data cited
in the Proposed Rule to support the contention that
the prohibition would attract sufficient additional
non-dealer market participants to CLOB SEFs to
outweigh these negative consequences.’’).
149 See AFR Letter, at 1; Better Markets Letter, at
5; Citadel Letter 1, at 11; Citadel Letter 2, at 14–
15.
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access to just swap dealers, and
therefore the Commission can rely on its
cost-benefit considerations for that
rulemaking to support a prohibition on
post-trade name give-up.150 Citadel
further argued that claims by some
commenters that commercial end-users
transacting swaps off-SEF might be
negatively affected by the Proposal
conflicts with academic research.151
The Commission notes that
commenters who support prohibiting
post-trade name give-up generally
considered the academic studies
discussed in the Proposal to be
informative, while commenters who
oppose the prohibition assert that the
studies are not informative because
swaps markets are different than equity
markets. The Commission acknowledges
that there are differences between the
equity markets in most of these
empirical studies and the U.S. swaps
markets. Further, the Commission
understands that the equity markets
examined do not generally mirror the
exact dealer-centric swaps markets
under consideration. Nonetheless, the
wide range of markets, time periods,
and experiences considered in the
empirical studies leads the Commission
to conclude that the value of
anonymous trading is well-established.
Moreover, to the extent that liquidity
provision in swaps markets is more
concentrated than in the most active
and liquid equity markets, the empirical
studies that provide evidence on smaller
equity markets, or on the less liquid
stocks in a given market, might be most
informative.
Some of the equity markets studied
may be deeper and more liquid than the
U.S. swaps market. However, several of
the markets studied are equity markets
that are smaller than the U.S. equity
market (e.g., Finland, Norway, and
Sweden), and therefore potentially more
comparable to the swaps markets in the
U.S. For example, one of the early
empirical studies on the
implementation of post-trade anonymity
on the London Stock Exchange in 2001
finds that liquidity improvements were
more pronounced for small stocks and
stocks with higher trading
concentration, which were potentially
subject to larger information
asymmetries. The Commission notes
that, with respect to the smaller
universe of liquidity providers, markets
for smaller stocks could be more
Letter 2, at 14.
Letter 2, at 15. Citadel cited two
academic studies that it asserted ‘‘suggests that
commercial end-users may not be best-served by
maintaining the current status quo.’’ Id. These
studies show that access to multiple market makers
reduces trading costs.
analogous to swaps markets than
markets for larger and more liquid
stocks with a broader array of market
participants.
Commenters who objected to the
application of the studies did not
provide evidence to support the
argument that the differences between
the anonymous order books in swaps
and equity markets would prevent the
liquidity improvement associated with
greater post-trade anonymity, as
suggested by the empirical studies in
equity markets. Accordingly, the
Commission agrees with those
commenters who stated that the studies
are instructive for U.S. swap markets,
since they share the use of pre-trade
anonymous order books and these
studies appear to be of markets that are
more analogous to swap markets than
any other empirical study the
Commission or commenters have
identified.152
The Commission believes that
prohibiting post-trade name give-up is
reasonably likely to improve liquidity
on SEFs, particularly on affected pretrade anonymous markets, as additional
market participants choose to
participate on these markets once posttrade name give-up is prohibited. The
Commission has not found convincing
evidence that a prohibition on posttrade name give-up will have net
liquidity-reducing effects. Rather, the
Commission notes that the evidence
from the studies, as discussed above,
suggests that markets with pre- and
post-trade anonymity generally feature
greater liquidity than those without.
Moreover the Commission is concerned
that the status quo may facilitate
information asymmetries and hinder
access and participation on affected
SEFs for many market participants. The
Commission believes that the rule as
adopted may benefit market participants
by reducing these information
asymmetries and will increase
participation on these SEF platforms.
3. Consideration of Alternatives
TP ICAP suggested the alternative that
any prohibition on post-trade name
give-up should be limited to, at most,
swaps subject to the clearing
requirement rather than all swaps that
are intended to be cleared, because a
SEF may not know whether the parties
to a voluntarily-cleared swap will
submit the swap to a DCO, as the parties
may do so themselves post-execution.
150 Citadel
151 Citadel
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152 Citi did suggest that the Commission study the
effects of post-trade anonymity on the emerging
market bond market. Citi Letter, at 4. The
Commission does not have jurisdiction over
emerging market bonds and does not have access
to the relevant data.
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The Commission has determined not to
adopt this alternative. The Commission
notes that whether a swap is intended
to be cleared is a material term that
affects trade pricing and trade
processing workflows, and it is
something that SEF should be able to
determine at the time of execution,
including for voluntarily-cleared swaps.
Thus, the Commission believes that the
final rule, which applies the prohibition
to voluntarily-cleared swaps, will
enable a larger scope of swaps to receive
the benefits associated with the
regulation, including, potentially,
greater participation and improved
liquidity. However, to ensure that SEFs
are provided with adequate time to
make any necessary changes to their
systems, the Commission is providing a
phased compliance schedule, as
discussed above.
A number of commenters suggested
that before implementing a full posttrade name give-up prohibition, the
Commission should implement a timelimited pilot program that would
prohibit post-trade name give-up for
some, but not all, products.153 These
commenters asserted that a pilot
program would allow the Commission
to assess the impact of a post-trade
name give-up prohibition before
requiring market-wide changes. The
Commission has determined not to
adopt this alternative. A temporary pilot
program may provide market
participants with different incentives
than a permanent rule and thus may not
be indicative of the efficacy of a
permanent rule. As Citadel noted, ‘‘a
short-term pilot would be easily
susceptible to manipulation. Given their
commercial interests in maintaining the
status quo and privileged position as
liquidity providers, the incumbent
dealer banks could temporarily provide
worse pricing for instruments covered
by the name give-up prohibition in
order to dictate the pilot results.’’ 154
The Commission agrees that a pilot
program could create an incentive to
engage in such conduct, but a
permanent prohibition will not.
FSF and JP Morgan suggested the
alternative approach whereby the
Commission would require every order
book SEF that offers post-trade name
give-up to design a method that would
permit its participants to opt out of posttrade name give-up, which could be
through a parallel, fully-anonymous
order book, or by allowing participants
to opt-out of post-trade name give-up on
153 See Citi Letter, at 5; JPMorgan Letter, at 14;
FSF Letter, at 14.
154 Citadel Letter 2, at 16.
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an order-by-order basis.155 In the view
of FSF, this approach would provide
freedom for market participants to
transact in the manner in which they
wish to, while providing the option of
fully-anonymous trading to buy-side
clients concerned with undesirable
information leakage.156 The
Commission has determined not to
adopt this alternative. The Commission
believes that post-trade name give-up is
likely to persist wherever it is
permitted, and that this alternative
would provide little or no benefit while
still imposing costs on SEFs that are at
least as high as those of a full
prohibition (as SEFs would need to
change their systems to allow opting
out). The Commission agrees with
Citadel’s statement that one ‘‘would
expect incumbent dealer banks not to
agree to opt-out of name give-up,
meaning that very little would change
on [interdealer broker] SEFs.’’ 157
FSF suggested an alternative whereby
the Commission would exclude from
the prohibition on post-trade name giveup any SEF that obtains a material
portion of its trading volume, over a
specified period, through workups.
JPMorgan and FSF asserted that posttrade name give-up is an integral part of
workup protocols, and the prohibition
will impair workup protocols and
adversely affect dealers’ ability to hedge
via adverse selection. In contrast,
Citadel and MFA assert that post-trade
name give-up is not necessary for
workup sessions. Citadel asserted that if
a trading protocol is pre-trade
anonymous, there is no need to disclose
the trading counterparties in order to
engage in a workup session and,
therefore, workup sessions will function
just as they do today. Citadel also stated
that claims to the contrary ‘‘are easily
disproven by looking at the U.S.
Treasury market, where work-ups are
commonly employed on interdealer
platforms even though name give-up is
not used.’’ 158 MFA further argued that
prohibiting post-trade name give-up
would benefit trading protocols such as
auctions, portfolio compression, and/or
workup sessions by increasing buy-side
access and participation.
The Commission has determined not
to adopt this alternative. The
Commission agrees with those
comments asserting that post-trade
name give-up is not necessary for
workup sessions and that post-trade
anonymity will not make workup
sessions more difficult or costly and
155 FSF
Letter, at 14, JPMorgan Letter, at 15.
156 FSF Letter, at 14.
157 See Citadel Letter 2, at 16.
158 Citadel Letter 2, at 11.
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may provide the benefits associated
with increased participation. The
reasons given by JPMorgan and FSF
relating to why they view post-trade
name give-up to be an important aspect
of workup sessions are essentially the
same reasons espoused for the
purported benefits of post-trade name
give-up generally, i.e., avoiding adverse
selection and ensuring reliable hedging
for incumbent swap dealers.
Some commenters proposed an
alternative of not applying the
prohibition on post-trade name give-up
to error trade corrections. Commenters
asserted that post-trade name give-up
remains necessary for counterparties to
correct operational or clerical errors
resulting in a trade being rejected for
clearing. Citadel disagreed with these
commenters, noting that SEFs can
facilitate the correction of errors without
disclosing the identities of
counterparties. The Commission has
determined not to adopt this alternative.
A SEF can intermediate
communications, if necessary, and
otherwise facilitate error trade
corrections without disclosing
counterparty identities. The
Commission acknowledges that some
SEFs may incur additional costs
associated with ensuring that their rules
and procedures for error trades allow for
error trade remediation without
disclosure of the identities of
counterparties to one another. The
Commission notes that designated
contract markets resolve error trades
without engaging in name give-up, and
SEFs already intermediate the
resolution of error trades to varying
degrees. The Commission believes that
the additional costs some SEFs may
incur to employ anonymous error trade
remediation are relatively modest.
4. Section 15(a) Factors
a. Protection of Market Participants and
the Public
The final rule is intended to protect
market participants and the public by
advancing the statutory goals of: (1)
Promoting swaps trading and pre-trade
price transparency on SEFs; (2) fostering
fair competition among market
participants; (3) providing market
participants with impartial access to
SEFs; and (4) maintaining the privacy of
swap transaction information.
b. Efficiency, Competitiveness, and
Financial Integrity of the Markets
The final rule is intended to enhance
competitiveness in the swap markets by
removing an effective barrier to
participation on SEFs for many market
participants who are concerned with the
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prospect of information leakage. The
Commission expects participation on
SEFs to increase as a result, leading to
greater competition.
c. Price Discovery
The Commission believes that by
increasing participation and
competition on SEFs, the final rule will
decrease information asymmetries
between market participants, allowing
market participants to attain broader
knowledge of pricing across more SEFs,
thereby enhancing SEF trading as a
mechanism for price discovery.
d. Sound Risk Management Practices
Similarly, increased participation and
competition on SEFs and decreased
information asymmetry among market
participants is likely to enhance SEF
trading as a mechanism for risk
management.
e. Other Public Interest Considerations
Post-trade name give-up is
inconsistent with provisions intended to
protect the privacy of a swap
counterparty’s trading information.
Prohibiting post-trade name give-up will
help to effectuate the statutory privacy
protections under CEA section 21(c)(6)
that apply to this information.
Moreover, the Commission believes that
the prohibition is reasonably likely to
lead to enhanced liquidity and lower
transaction costs.
D. Antitrust Considerations
Section 15(b) of the CEA requires the
Commission to take into consideration
the public interest to be protected by the
antitrust laws and endeavor to take the
least anticompetitive means of
achieving the purposes of the CEA, in
issuing any order or adopting any
Commission rule or regulation.159 The
Commission believes that the public
interest to be protected by the antitrust
laws is generally to protect competition.
In the Proposal, the Commission
requested comments on whether: (1)
The proposed rulemaking implicates
any other specific public interest to be
protected by the antitrust laws; (2) the
proposed rulemaking is anticompetitive,
and if it is, what are anticompetitive
effects; and (3) there are less
anticompetitive means of achieving the
relevant purposes of the CEA that would
otherwise be served by adopting the
proposed rules.
The Commission does not anticipate
that the amendments to part 37 that it
is adopting today will result in
anticompetitive behavior, but instead,
believes that the amendments will
159 7
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promote greater competition on, and
among, SEFs. In the proposal, the
Commission encouraged comments
from the public on any aspect of the
rulemaking that may have the potential
to be inconsistent with the antitrust
laws or be anticompetitive in nature.
The Commission received two
comments asserting that the proposed
rule may be anticompetitive. JPMorgan
commented that prohibiting post-trade
name give-up ‘‘would itself impair
competition and pose an unreasonable
restraint on trade by forcing dealers to
trade fully anonymously in order to
access a [central-limit order-book], even
though dealers prefer [post-trade name
give-up] . . . .’’ 160 FSF similarly
commented that ‘‘banning name give-up
would itself impair competition
(certainly, innovation and competition
among markets) and unnecessarily push
dealers to trade fully anonymously in
order to access an Order Book SEF,
despite their bona fide preference for
name give-up.’’ 161 As stated above, the
Commission disagrees with comments
that prohibiting post-trade name give-up
would impair competition. Post-trade
name give-up is an ancillary post-trade
protocol, and not a method of execution.
It does not proscribe SEFs from offering
any existing execution method, nor does
it prevent SEFs from developing new
execution methods. Moreover, the
Commission is concerned by other
commenters’ assertions that post-trade
name give-up enables anticompetitive
behavior,162 and the Commission
believes that prohibiting post-trade
name give-up will reduce the
opportunity for such behavior to occur,
and is therefore reasonably necessary to
promote fair competition among market
participants. The Commission has
considered the rulemaking and related
comments to determine whether it is
anticompetitive and continues to
believe that these amendments to part
37 will not result in anticompetitive
behavior.
List of Subjects in 17 CFR Part 37
Swaps, Swap execution facilities.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission amends 17 CFR
part 37 as follows:
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PART 37—SWAP EXECUTION
FACILITIES
1. The authority citation for part 37
continues to read as follows:
■
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a–
2, 7b–3, and 12a, as amended by Titles VII
and VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L.
111–203, 124 Stat. 1376.
Appendices to Post-Trade Name GiveUp on Swap Execution Facilities—
Commission Voting Summary,
Chairman’s Statement, and
Commissioners’ Statements
2. In § 37.9, add paragraph (d) to read
as follows:
Appendix 1—Commission Voting
Summary
■
§ 37.9 Methods of execution for required
and permitted transactions.
*
*
*
*
*
(d) Counterparty anonymity. (1)
Except as otherwise required under the
Act or the Commission’s regulations, a
swap execution facility shall not
directly or indirectly, including through
a third-party service provider, disclose
the identity of a counterparty to a swap
that is executed anonymously and
intended to be cleared.
(2) A swap execution facility shall
establish and enforce rules that prohibit
any person from directly or indirectly,
including through a third-party service
provider, disclosing the identity of a
counterparty to a swap that is executed
anonymously and intended to be
cleared.
(3) For purposes of paragraphs (d)(1)
and (2) of this section, ‘‘executed
anonymously’’ shall include a swap that
is pre-arranged or pre-negotiated
anonymously, including by a
participant of the swap execution
facility.
(4) For a package transaction that
includes a component transaction that is
not a swap intended to be cleared,
disclosing the identity of a counterparty
shall not violate paragraph (d)(1) or (2)
of this section. For purposes of this
paragraph, a ‘‘package transaction’’
consists of two or more component
transactions executed between two or
more counterparties where:
(i) Execution of each component
transaction is contingent upon the
execution of all other component
transactions; and
(ii) The component transactions are
priced or quoted together as one
economic transaction with simultaneous
or near-simultaneous execution of all
components.
Issued in Washington, DC, on June 29,
2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
160 JPMorgan
Letter, at 10.
Letter, at 10.
162 See supra note 37 and accompanying text.
161 FSF
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On this matter, Chairman Tarbert and
Commissioners Quintenz, Behnam, Stump,
and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2—Joint Supporting
Statement of Chairman Heath P.
Tarbert, Commissioner Rostin Behnam,
and Commissioner Dan M. Berkovitz
As we have previously stated,1 it is a
fundamental principle of exchange-style
trading systems that the buyer and seller of
a given financial instrument have no reason
to know—and do not know—one another’s
identity.2 This levels the playing field for
counterparties of all sizes and types by
allowing traders to enter and exit the market
without exposing their trading positions and
strategies.3 As a result, markets with pre- and
post-trade anonymity are generally not only
fairer, but also feature greater liquidity, a
more diverse set of market participants, and
greater competition.4
1 Joint Statement of Chairman Heath Tarbert,
Commissioner Rostin Behnam, and Commissioner
Dan Berkovitz in Support of Proposed Rule
Restricting Post-Trade Name Give-Up (Dec. 18,
2019).
2 See, e.g., Peter A. McKay, CME and CBOT to
Close Loophole, Wall St. J. (Apr. 15, 2006) (‘‘When
stocks are traded on public exchanges, investors
generally don’t know who they are buying from or
selling to. On futures exchanges, most investors
expect the same thing when trading
electronically.’’).
3 See, e.g., Peter Madigan, CFTC to Test Role of
Anonymity in SEF Order Book Flop, Risk (Nov. 21,
2014) (noting arguments that anonymity creates a
more egalitarian market); Managed Funds
Association (‘‘MFA’’), Position Paper: Why
Eliminating Post-Trade Name Disclosure Will
Improve the Swaps Market 8 (Mar. 31, 2015)
(arguing that ‘‘markets should remain anonymous to
create a level playing field for all participants’’);
CFTC Market Risk Advisory Committee, Panel
Discussion: Market’s Response to the Introduction
of SEFs 139 (Apr. 2, 2015) (‘‘MRAC Meeting
Transcript’’) (noting buy-side reticence to use SEF
order books with name give-up because of potential
uncontrolled information leakage). This can prevent
price discrimination based on the identity of the
counterparty.
4 See, e.g., MRAC Meeting Transcript, supra note
3, at 154 (explaining that anonymous order books
have facilitated liquidity and diverse participation
in markets for other instruments, such as equities
and futures); S. Freiderich & R. Payne, Trading
Anonymity and Order Anticipation, 21 Journal of
Financial Markets 1–24 (2014) (finding that posttrade anonymity improved market liquidity,
particularly for small stocks and stocks with
concentrated trading, which may be more analogous
to swaps); Treasury Market Practices Group, White
Paper on Clearing and Settlement in the Secondary
Market for U.S. Treasury Securities (Jul. 11, 2019)
(stating that emergence of new types of market
participants in the fully anonymous U.S. Treasury
securities market has ‘‘likely improved overall
liquidity through enhanced order flow and
competition’’).
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Federal Register / Vol. 85, No. 143 / Friday, July 24, 2020 / Rules and Regulations
In the swaps market, a number of swap
execution facilities (‘‘SEFs’’) provide for posttrade disclosure of the name of the
counterparty, a practice that is known as
‘‘name give-up.’’ This protocol is a vestige of
the pre-Dodd-Frank era, when few swaps
were centrally cleared and market
participants needed to know their
counterparty’s identity to manage the
associated credit risk. Given the advent of
central clearing, many have appropriately
questioned the continuing need for post-trade
name give-up for cleared swaps. Others have
gone further, criticizing the practice as
anticompetitive, an obstacle to broad and
diverse participation on SEFs, and
potentially inconsistent with numerous
provisions of the Commodity Exchange Act
(‘‘CEA’’) and Commission regulations.
In 2019, after considering responses to a
request for comment on the issue,5 the
Commission issued a proposed rule
(‘‘Proposal’’) to restrict name give-up such
that trades that are executed anonymously
on-SEF and cleared would remain
anonymous after execution.6 Public
comments on the Proposal reflected a variety
of differing viewpoints and interests. The
agency carefully considered all comments in
crafting the final rule we voted to approve
today.
We believe the final rule reflects a
balanced approach, is workable, and will
improve overall market vibrancy. The rule
prohibits name give-up for swaps that are
executed anonymously and intended to be
cleared. However, it does not apply to swaps
that are not intended to be executed
anonymously, such as trades done via a
name-disclosed request for quote. The rule
also includes a limited exception for package
transactions 7 with at least one component
that is an uncleared swap or a non-swap
instrument. This exception reflects current
technological and operational realities that
require counterparty disclosure for the nonswap or non-cleared swap component of
such trades.8 In addition, the rule includes a
phased implementation schedule to allow
SEFs and market participants time to adjust
to the changes.
We believe the rule’s fundamental
objective—protecting trading anonymity
jbell on DSKJLSW7X2PROD with RULES
5 CFTC
Request for Comment on Post-Trade Name
Give-Up on Swap Execution Facilities, 83 FR
61,571 (Nov. 30, 2018).
6 Post-Trade Name Give-Up on Swap Execution
Facilities, 84 FR 72262 (Dec. 31, 2019).
7 The rule defines a ‘‘package transaction’’ as
‘‘consist[ing] of two or more component
transactions executed between two or more
counterparties where: (i) Execution of each
component transaction is contingent upon the
execution of all other component transactions; and
(ii) the component transactions are priced or quoted
together as one economic transaction with
simultaneous or near-simultaneous execution of all
components.’’
8 As noted in the preamble to the final rule, we
urge SEFs and their participants to work towards
an infrastructure that ultimately does support
anonymous post-trade processing for packages
including certain cleared non-swap components
(e.g., U.S. Treasuries). The preamble to the final
rule also notes the Commission’s intention to
monitor market developments and evaluate the
continued need for the package transaction
exception in the future.
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where it is possible to do so—is key to two
statutory goals for the SEF regime: (1)
Promoting swaps trading on SEFs 9 and (2)
promoting fair competition among market
participants, including through impartial
access to a SEF’s trading platform.10 Indeed,
we hope the rule will help attract a diverse
set of additional market participants who
have been deterred from trading on these
platforms by the practice of post-trade name
give-up, but remain interested in bringing
liquidity and competition to SEFs.
The issue of name give-up can be a bit of
a lightning rod, sometimes inciting
passionate disagreements between
stakeholders. We and CFTC staff stand ready
to work with market participants and market
operators to resolve any new issues that may
arise as the rule is implemented. We hope
that all parties to this debate can
constructively move forward together toward
the goals of sound derivatives regulation and
robust financial markets.
Appendix 3—Supporting Statement of
Commissioner Brian Quintenz
I will vote in favor of today’s final rule to
prohibit post-trade name give-up practices
for swaps executed, pre-arranged, or prenegotiated anonymously on or pursuant to
the rules of a swap execution facility (SEF)
and intended-to-be-cleared (Final Rule).
As I have noted previously, I have
concerns about the government banning an
established trading practice that has evolved
from natural market forces to support swaps
liquidity provision. Client swap activity is
inherently dealer and relationship-sourced.
That is why the name-disclosed Request for
Quote (RFQ) model has been highly favored
over the anonymous Central Limit Order
Book (CLOB) model in the client market.
Although the Final Rule predicts that the ban
on name give-up will result in increased
participation and competition in the dealerto-dealer market, I remain concerned that
banning post-trade name give-up will
negatively impact dealers’ ability to hedge
efficiently on existing inter-dealer platforms,
which will ultimately lead to a degradation
in the pricing and liquidity provision of
swaps trading on dealer-to-client platforms. I
am also doubtful that new entrants into the
wholesale market will use the advantages of
that participation to add any meaningful
liquidity in the client market, making it even
less certain that the benefits of enhanced
competition hoped for in this Final Rule will
be passed through to end-users.
Despite my concerns, I am supporting the
Final Rule because it adopts an important
exception from the prohibition, as well as an
incremental approach that will give the
Commission and market participants time to
transition into compliance, observe the
9 CEA section 5h(e), 7 U.S.C. 7b–3(e). In this
regard, the CFTC intends to complete a preliminary
study of the state of swaps markets one year after
the initial phase of the rule takes effect, and to
follow up with further study after the rule has been
in effect for three years.
10 CEA section 3(b), 7 U.S.C. 5(b) (listing fair
competition among market participants as a goal of
the CEA); CEA section 5h(f)(2)(B)(i) (requiring a SEF
to establish and enforce rules to provide
participants impartial access to the market).
PO 00000
Frm 00024
Fmt 4700
Sfmt 4700
impact of the Final Rule, and make
adjustments in the future, if necessary.
For example, the Final Rule includes a
significant exception for package transactions
that include a component transaction that is
not a swap intended-to-be-cleared. The
exception would include U.S. Treasury swap
spread package trades involving an intendedto-be-cleared swap and a U.S. Treasury
security component. These package
transactions are rarely traded on dealer-toclient platforms, but make up a significant
portion of volume on dealer-to-dealer
platforms. Recognizing this important
difference between markets is a small but
necessary accommodation to ensure package
trades can continue to be efficiently executed
in light of this mandated change to market
trading protocols.
The Final Rule also adopts staggered
compliance deadlines, with the most liquid
swaps coming into compliance first, and less
liquid swaps becoming subject to the ban in
July 2021. In the interim, the Commission
plans to conduct a preliminary study of the
Final Rule’s impact on SEF trading by July
2021, with a further study to be conducted
by July 2023. These studies will allow the
Commission to assess if the ban on post-trade
name give-up is, in fact, increasing
competition and liquidity on SEFs, as the ban
is intended to do. If a more fulsome analysis
reveals that the ban has not yielded its
expected benefits, or may not be appropriate
for certain products given their liquidity
profile, I expect further adjustments will be
made to maintain a well-functioning swaps
market.
Lastly, I would like to thank staff of the
Division of Market Oversight for working
with my staff to incorporate many of my
comments into the Final Rule.
[FR Doc. 2020–14343 Filed 7–23–20; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF HOMELAND
SECURITY
U.S. Customs and Border Protection
19 CFR Part 122
[CBP Dec. 20–10]
Technical Amendment to List of User
Fee Airports: Addition of Four Airports
U.S. Customs and Border
Protection; DHS.
ACTION: Final rule; technical
amendment.
AGENCY:
This document amends U.S.
Customs and Border Protection (CBP)
regulations by revising the list of user
fee airports to reflect the designation of
user fee status for four additional
airports: New York Stewart
International Airport in New Windsor,
New York; Lakeland Linder
International Airport in Lakeland,
Florida; Boca Raton Airport in Boca
Raton, Florida; and Ontario
SUMMARY:
E:\FR\FM\24JYR1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 143 (Friday, July 24, 2020)]
[Rules and Regulations]
[Pages 44693-44708]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14343]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 37
RIN Number 3038-AE79
Post-Trade Name Give-Up on Swap Execution Facilities
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission)
is issuing a final rule to prohibit post-trade name give-up for swaps
executed, pre-arranged, or pre-negotiated anonymously on or pursuant to
the rules of a swap execution facility (SEF) and intended to be
cleared. The final rule provides an exception for package transactions
that include a component transaction that is not a swap intended to be
cleared, including but not limited to U.S. Treasury swap spreads.
DATES: The effective date for this final rule is September 22, 2020.
The compliance date for swaps subject to the trade execution
requirement under section 2(h)(8) of the Commodity Exchange Act (CEA or
Act) is November 1, 2020. The compliance date for swaps not subject to
the trade execution requirement under section 2(h)(8) of the CEA is
July 5, 2021.
FOR FURTHER INFORMATION CONTACT: Alexandros Stamoulis, Special Counsel,
(646) 746-9792, [email protected], Division of Market Oversight,
Commodity Futures Trading Commission, 140 Broadway, 19th Floor, New
York, NY 10005; 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; Israel Goodman, Special Counsel, (202) 418-6715,
[email protected], Division of Market Oversight; or Vincent McGonagle,
Principal Deputy Director, (202) 418-5387, [email protected],
Division of Enforcement, Commodity Futures Trading Commission, Three
Lafayette Centre, 1151 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. November 2018 Request for Comment
On November 30, 2018, the Commission published in the Federal
Register a request for comment regarding the practice of post-trade
name give-up on SEFs (2018 RFC).\1\ As described in the 2018 RFC, some
SEFs facilitate post-trade name give-up by directly or indirectly
disclosing the identities of swap counterparties to one another after a
trade is matched anonymously. The 2018 RFC noted that a SEF may
effectuate such disclosure through its own trade protocols or through a
third-party service provider utilized to process and route transactions
to a derivatives clearing organization (DCO) for clearing. In the 2018
RFC, the Commission questioned the necessity of the practice with
respect to cleared swaps anonymously executed on a SEF. The Commission
also summarized some of the general views on post-trade name give-up of
various industry participants and requested public comments on the
merits of the practice and whether the Commission should prohibit it.
---------------------------------------------------------------------------
\1\ Post-Trade Name Give-up on Swap Execution Facilities, 83 FR
61571 (Nov. 30, 2018). ``Post-trade name give-up'' refers to the
practice of disclosing the identity of each swap counterparty to the
other after a trade has been matched anonymously.
---------------------------------------------------------------------------
The Commission received 13 comment letters in response to the 2018
RFC. Most commenters opposed the practice of post-trade name give-up
for anonymously-executed swaps submitted to clearing, and requested
that the Commission adopt a regulatory prohibition. The Securities
Industry and Financial Markets Association (SIFMA) expressed support
for the practice and concern about the effects of a prohibition. The
views raised in those comment letters were considered and discussed by
the Commission in a proposed rule on post-trade name give-up issued in
December 2019.
B. December 2019 Proposed Rule
After considering the comments received in response to the 2018
RFC, on December 31, 2019, the Commission published in the Federal
Register a proposed rule to prohibit post-trade name give-up for
anonymously-executed and intended-to-be-cleared swaps (Proposal).\2\
The Proposal prohibits a SEF from directly or indirectly, including
through a third-party service provider, disclosing the identity of a
counterparty to a swap executed anonymously and intended to be cleared.
The Proposal also requires SEFs to establish and enforce rules
prohibiting any person from effectuating such a disclosure.
---------------------------------------------------------------------------
\2\ Post-Trade Name Give-up on Swap Execution Facilities, 84 FR
72262 (Dec. 31, 2019).
---------------------------------------------------------------------------
In the Proposal, the Commission reasoned that a prohibition on
post-trade name give-up may (1) advance the statutory objectives of
promoting swaps
[[Page 44694]]
trading on SEFs and fair competition among market participants; (2)
further the objectives underlying the prohibition against swap data
repositories (SDRs) disclosing the identity of a counterparty to a swap
that is anonymously executed and cleared in accordance with the
Commission's straight-through processing (STP) requirements; and (3)
promote impartial access on SEFs.\3\
---------------------------------------------------------------------------
\3\ See Proposal at 72265-72267.
---------------------------------------------------------------------------
The Commission requested comments on all aspects of the Proposal,
and also solicited comments through targeted questions relating to
whether and how the proposed rule, if adopted, (1) would advance the
statutory and regulatory goals described above; (2) might impact
aspects of market quality and liquidity; and (3) should be tailored.
Overall, the Commission received comment letters on the Proposal from
20 different respondents: 13 public interest and industry groups; two
global banks with affiliated swap dealers; two global market makers; a
global asset manager; a SEF operator; and a third-party provider of
derivatives trade processing services.\4\ Additionally, Commission
staff participated in several ex parte meetings concerning the
proposal.\5\ The Commission also consulted with the U.S. Securities and
Exchange Commission and foreign regulators on the proposed rule.
---------------------------------------------------------------------------
\4\ Comment letters were submitted by the following entities:
Alternative Investment Management Association (AIMA) (Feb. 17,
2020); American Bankers Association (ABA) (Mar. 2, 2020); Americans
for Financial Reform Education Fund (AFR) (Mar. 2, 2020); Bank
Policy Institute (BPI) (Mar. 10, 2020); Better Markets, Inc. (Better
Markets) (Mar. 2, 2020); Citadel and Citadel Securities (Citadel)
(Letter 1: Mar. 2, 2020, and Letter 2: Apr. 21, 2020); Citibank,
N.A. (Citi) (Mar. 2, 2020); Coalition for Derivatives End-Users
(Mar. 2, 2020); CTC Trading Group, LLC (CTC) (Mar. 10, 2020); FIA
Principal Traders Group (FIA PTG) (Mar. 2, 2020); Financial Services
Forum (FSF) (Mar. 2, 2020); Healthy Markets Association (HMA) (Mar.
9, 2020); IHS Markit (Mar. 2, 2020); Investment Company Institute
(ICI) (Mar. 2, 2020); JPMorgan Chase & Co. (JPMorgan) (Mar. 2,
2020); Managed Funds Association (MFA) (Mar. 2, 2020); SIFMA, on
behalf of a majority of SIFMA's swap dealer members who have
expressed a view (Mar. 2, 2020); SIFMA's Asset Management Group
(SIFMA AMG) (Mar. 2, 2020); ICAP Global Derivatives Limited and
tpSEF, Inc. (TP ICAP); and Vanguard (Mar. 2, 2020).
\5\ See Comments for Proposed Rule 84 FR 72262, available at
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3066
(last retrieved June 23, 2020).
---------------------------------------------------------------------------
II. Final Rule
After considering the public comments on the Proposal, the
Commission is adopting the proposed regulations, with certain
modifications and clarifications discussed below. Specifically, the
Commission is amending its part 37 regulations to prohibit post-trade
name give-up for swaps anonymously executed, pre-arranged, or pre-
negotiated on or pursuant to the rules of a SEF and intended to be
cleared. New Sec. 37.9(d) prohibits a SEF from directly or indirectly
disclosing the identity of a counterparty to any such swap, and
requires a SEF to establish and enforce rules that prohibit any person
from doing so.\6\ The final rule, however, contains an exception for
package transactions that include a component transaction that is not a
swap intended to be cleared.
---------------------------------------------------------------------------
\6\ The Commission notes that this rule does not prohibit a SEF
from disclosing the identities of all of the participants on the SEF
to all other participants. However, such disclosure in specific
cases may be prohibited under other provisions of the CEA and
Commission regulations. In addition, the Commission may consider
this issue in a future rulemaking.
---------------------------------------------------------------------------
A. Statutory Authorities
CEA section 8a(5) authorizes the Commission to make and promulgate
such rules and regulations as, in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of the CEA.\7\ The Commission believes
that prohibiting the practice of post-trade name give-up for intended-
to-be-cleared swaps is reasonably necessary to promote trading of swaps
on SEFs and fair competition among market participants. The Commission
also believes that post-trade name give-up for intended-to-be-cleared
swaps is inconsistent with the requirement that SEFs provide market
participants with impartial access to trading on SEFs, as well as the
objectives underlying the prohibition against SDRs disclosing the
identities of counterparties to swaps anonymously executed on a SEF and
cleared in accordance with STP requirements.
---------------------------------------------------------------------------
\7\ 7 U.S.C. 12(a)(5).
---------------------------------------------------------------------------
1. Promoting Trading on SEFs and Pre-trade Price Transparency (CEA
Section 5h(e))
CEA section 5h(e) establishes the statutory goal of the SEF
regulatory regime to promote swaps trading on SEFs and promote pre-
trade price transparency in the swaps market.\8\ In the Proposal, the
Commission stated that despite available liquidity for cleared products
on certain SEF platforms, the range and number of active participants
may be limited due to market participants' concerns about information
leakage and anticompetitive behavior made possible by post-trade name
give-up.\9\ The Commission also stated that fully-anonymous trading
(i.e., without post-trade name give-up) would likely encourage more
participants to trade on those platforms.\10\ The Proposal requested
public comments on how a prohibition on post-trade name give-up would
impact trading and pre-trade price transparency on affected SEFs.
---------------------------------------------------------------------------
\8\ 7 U.S.C. 7b-3(e).
\9\ Proposal at 72265-72266.
\10\ Id. at 72266.
---------------------------------------------------------------------------
Several commenters on the Proposal stated that prohibiting post-
trade name give-up would remove a significant barrier to increased
participation on certain SEF platforms,\11\ and that prohibiting the
practice would lead to an increase in the number of participants
trading on affected SEFs.\12\ MFA, for example, stated that its members
are ``eager'' to participate on affected SEFs and ``to have the ability
to transact cleared swaps anonymously; similar to how they currently
trade in other asset classes (e.g., equities, futures, foreign
exchange, and Treasuries, among others).'' \13\ JPMorgan, on the other
hand, opined that ``the more likely outcome of banning [post-trade name
give-up] will be to reduce overall trading on SEFs, as dealers pull
back from trading . . . .'' \14\ Other commenters similarly argued that
incumbent swap dealers may exit the market or reduce their trading.\15\
ICI and MFA, however, characterized this outcome as ``unlikely.'' \16\
MFA stated that competitive market forces would ensure that ``in the
unlikely event an individual dealer reduced its offering, other dealers
would quickly step into its place.'' \17\ Asserting its experience as a
``top liquidity provider'' in SEF markets, Citadel stated that it does
not expect a prohibition on post-trade name give-up to affect its
liquidity provision on pre-trade disclosed platforms or its use of pre-
trade anonymous trading protocols.\18\ Citadel further asserted that
``other swap dealers share our view, as UBS has supported the
prohibition and SIFMA indicated that the views among swap dealers `are
not uniform.' '' \19\
[[Page 44695]]
Commenters in favor of the Proposal also pointed to their experience in
other asset classes where post-trade name give-up is not practiced,
asserting that such markets demonstrate that the purported negative
liquidity impacts raised by some incumbent swap dealers are
unwarranted.\20\ Commenters opposed to the Proposal, however, asserted
that the quality of liquidity in certain fully-anonymous markets has
degraded, even as new types of market participants have entered the
marketplace.\21\
---------------------------------------------------------------------------
\11\ See SIFMA AMG Letter, at 2; ICI Letter, at 3; MFA Letter,
at 6 (``While MFA speaks only on behalf of our members, we have
heard broadly and uniformly from them that the practice of Name
Give-Up is the most significant obstacle to their participation on
IDB SEFs.''); Citadel Letter 1, at 3-4 (``Name give-up is the most
significant remaining such barrier preventing buy-side firms from
trading on certain SEFs . . . .'').
\12\ See AFR Letter, at 3; CTC Letter, at 1-2; FIA PTG Letter,
at 2; MFA Letter, at 6.
\13\ MFA Letter, at 6.
\14\ JPMorgan Letter, at 10.
\15\ See ABA Letter, at 2; BPI Letter, at 1; FSF Letter, at 7-8;
SIFMA Letter, at 4.
\16\ ICI Letter, at 5; MFA Letter, at 4.
\17\ MFA Letter, at 4.
\18\ Citadel Letter 1, at 6.
\19\ Citadel Letter 1, at 7.
\20\ See Citadel Letter 1, at 7; Citadel Letter 2, at 7, FIA PTG
Letter, at 1-2, MFA Letter, at 4.
\21\ For example, FSF and JPMorgan assert that dealer-provided
liquidity in some markets has increasingly been replaced by high-
frequency trading firms that tend to retract liquidity sooner than
other types of market participants during periods of high
volatility. FSF Letter, at 9; JPMorgan Letter, at 6 and 9. See also
Citi Letter, at 4 note 7 (``[D]egradations in liquidity have
occurred in other markets that have transitioned to fully anonymous
trading.''). By contrast, Citadel asserts that it is ``bank
dealers'' that have withdrawn from SEFs and U.S. Treasury markets
during certain periods of market volatility. Citadel Letter 2, at
12.
---------------------------------------------------------------------------
Commenters also asserted that prohibiting post-trade name give-up
would improve price transparency.\22\ Citadel noted that pre-trade
anonymous execution methods, such as anonymous order books, will
continue to function on a pre-trade basis as they do today, providing
the same level of price transparency to market participants.\23\
Citadel and MFA opined, however, that eliminating post-trade name give-
up should be expected to increase pre-trade transparency, as more
market participants are able to participate in these trading
protocols.\24\ MFA stated that post-trade name give-up has limited
investor access to affected SEFs, thereby reducing pre-trade
transparency regarding available bids and offers, limiting investor
choice of trading protocols, and creating information asymmetries
between market participants.\25\ MFA asserted that eliminating post-
trade name give-up would facilitate investors selectively accessing
additional liquidity pools and trading protocols, thereby improving
price discovery and pre-trade transparency while reducing information
asymmetries.\26\
---------------------------------------------------------------------------
\22\ Citadel Letter 1, at 4-5; Citadel Letter 2, at 5; MFA
Letter, at 4; SIFMA AMG Letter, at 2; Vanguard Letter, at 1.
\23\ Citadel Letter 1, at 4-5.
\24\ Id. at 5; Citadel Letter 2, at 5; MFA Letter, at 4.
\25\ MFA Letter, at 4.
\26\ Id.
---------------------------------------------------------------------------
The Commission believes that prohibiting post-trade name give-up is
reasonably necessary to facilitate and promote trading on SEFs. The
practice of post-trade name give-up has reportedly deterred a
significant segment of market participants from making markets on or
otherwise participating on affected SEFs. Such market participants have
ascribed their lack of participation to several potential harms
resulting from post-trade name give-up, a principal concern being the
risk of information leakage allowing counterparties to glean a SEF
participant's trading positions and strategies.\27\ The Commission has
heard repeatedly and consistently from market participants eager to
trade fully-anonymously on SEFs.\28\ The Commission expects that many
of these market participants will choose to participate on affected
SEFs once the practice is prohibited, leading to increased trading.
Furthermore, the Commission believes that prohibiting post-trade name
give-up will promote pre-trade price transparency in the swaps market
by encouraging a greater number, and a more diverse set, of market
participants to anonymously post bids and offers on affected SEFs.
---------------------------------------------------------------------------
\27\ See CFTC Market Risk Advisory Committee Meeting, Panel
Discussion: Market's Response to the Introduction of SEF's, 133 et
seq. (Apr. 2, 2015) (MRAC Meeting Transcript) at 142-144; Proposal
at 72264; AIMA Letter, at 1; Citadel Letter 1, at 1, 3 and 10; ICI
Letter, at 3; MFA Letter, at 3 and 7; SIFMA AMG Letter, at 1 and 2;
Vanguard Letter, at 2.
\28\ See, e.g., supra notes 12-13 and accompanying text;
Proposal at 72264, notes 31-32 and accompanying text; MRAC Meeting
Transcript at 140.
---------------------------------------------------------------------------
With respect to claims made by some commenters that incumbent swap
dealers may pull back from trading on SEFs if post-trade name give-up
is prohibited, the Commission does not believe that this prospect
justifies maintaining the practice. In the Commission's view, there is
not convincing evidence, such as research or data, supporting the
proposition that participation and trading on SEFs will decrease as a
result of prohibiting post-trade name give-up. Rather, the Commission
believes that fully-anonymous trading has facilitated liquidity and
diverse participation in markets for instruments such as futures,
equities, and U.S. Treasury securities, and academic literature
suggests that markets with pre- and post-trade anonymity generally
feature greater liquidity than those without.\29\ The Commission
believes that increased anonymity is reasonably likely to similarly
enhance trading on SEFs.\30\ The Commission intends to study the state
of the swaps market in order to observe any changes to trading on SEFs
following the implementation of this final rule.\31\
---------------------------------------------------------------------------
\29\ See, e.g., S. Freiderich & R. Payne, Trading Anonymity and
Order Anticipation, 21 Journal of Financial Markets 1-24 (2014)
(finding that post-trade anonymity improved market liquidity,
particularly for small stocks and stocks with concentrated trading,
which may be more analogous to swaps); T.G. Meling, Anonymous
Trading in Equities (2019 working paper) (also finding that post-
trade anonymity improved market liquidity); P.J. Dennis & P. Sandas,
Does Trading Anonymously Enhance Liquidity? Journal of Financial and
Quantitative Analysis 1-25 (2019) (same); A. Hachmeister & D.
Schierek, Dancing in the Dark: Post-Trade Anonymity, Liquidity, and
Informed Trading, 34 Review of Quantitative Finance and Accounting
145-177 (2010) (same); J. Linnainmaa & G. Saar, Lack of Anonymity
and the Inference from Order Flow, 25 Review of Financial Studies
1,414-1,456 (2012) (same). See also Treasury Market Practices Group,
White Paper on Clearing and Settlement in the Secondary Market for
U.S. Treasury Securities (Jul. 11, 2019) (stating that the emergence
of new types of market participants in the U.S. Treasury securities
market has ``likely improved overall liquidity through enhanced
order flow and competition'').
\30\ See, e.g., T. Lee & C. Wang, Why Trade Over-the-Counter?
When Investors Want Price Discrimination, at 26-27 (2019 working
paper) (predicting that eliminating name give-up in swaps markets
would decrease spreads on SEFs and increase total market participant
welfare).
\31\ In this respect, the Commission will endeavor to conduct a
preliminary study on the state of the swaps markets by July 2021,
and a further study by July 2023.
---------------------------------------------------------------------------
Moreover, the Commission finds the reasoning behind claims that
incumbent swap dealers may reduce their trading if post-trade name
give-up is prohibited to be at odds with the statutory requirements
discussed in the following two sections: To promote fair competition
among market participants and impartial access to the market. The
reason proffered for a potential pullback in trading by incumbent swap
dealers is that post-trade name give-up is important to ensure that
swap dealers can hedge the risk of their client-facing trades.\32\ In
this regard, some market participants argue that participation of buy-
side clients and speculators on pre-trade anonymous SEFs (and without
the ability to identify them through post-trade name give-up) will harm
the ability of dealers to hedge reliably.\33\ These arguments can be
understood to imply that greater participation and competition from
certain types of market participants (such as buy-side clients and
speculators) on affected pre-trade anonymous SEFs will harm overall
market quality and welfare. The Commission finds this proposition to be
at odds with the statutory requirements to promote fair competition
among
[[Page 44696]]
market participants and impartial access on SEFs. The Commission
believes that maintaining post-trade anonymity, where it is reasonable
to do so, will better align with the statutory framework discussed
below and level the playing field for market participants of all types
and sizes to trade and compete on affected SEFs without exposing
sensitive swap transaction information.
---------------------------------------------------------------------------
\32\ See ABA Letter, at 2; BPI Letter, at 1; Citi Letter, at 4;
FSF Letter, at 3-6; JPMorgan Letter, at 4-5; SIFMA Letter, at 4-5;
TP ICAP Letter, at 5. Commenters supporting the Proposal, however,
asserted that the proposition that post-trade name give-up is
necessary for dealer risk management is spurious. See, Better
Markets Letter, at 8; Citadel Letter 1, at 2; Vanguard Letter, at 2.
\33\ See FSF Letter, at 4-6; Citi Letter, at 3; infra notes 53-
57 and accompanying text.
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2. Promoting Fair Competition Among Market Participants (CEA Section
3(b))
CEA Section 3(b) specifies that a purpose of the CEA is to promote
fair competition among market participants.\34\ In the Proposal, the
Commission noted commenters' stated concerns about information leakage
and anticompetitive behavior made possible by post-trade name give-up.
The Commission reasoned that greater participation on SEFs resulting
from a prohibition on post-trade name give-up would advance the goal of
promoting competition on SEFs.\35\ The Commission stated that the
proposed rule may also advance the CEA's goal of fostering fair
competition among market participations by reducing opportunities for
information leakage associated with post-trade name give-up.\36\
---------------------------------------------------------------------------
\34\ 7 U.S.C. 5(b).
\35\ Proposal at 72266.
\36\ Id.
---------------------------------------------------------------------------
In response to the Proposal, several commenters emphasized the view
that post-trade name give-up is an anticompetitive practice and/or
permits swap dealers to engage in certain anticompetitive behavior,\37\
and some commenters opined that prohibiting the practice may lead to
greater competition among dealers and liquidity providers.\38\
Conversely, JPMorgan asserted that post-trade name give-up ``promotes
competition and attracts SEF trading by providing market participants
multiple protocols from which to choose depending on their business
models and preferences.'' \39\ By ``limiting the methods through which
SEFs can operate and compete with each other,'' JPMorgan argued,
banning post-trade name give-up ``would clearly reduce innovation and
reduce competition `among . . . markets,' thus in fact contravening
Section 3(b)'s mandate.'' \40\
---------------------------------------------------------------------------
\37\ See AFR Letter, at 2-3; Better Markets Letter, at 11-12
(``[T]he gleaning of trading interest and trade information and the
apparent consequences of the practice of Post-Trade Name Give-Up--to
permit dealers to exit order books with non-dealer participation and
trade with informational advantages--conflict with the CEA's
overarching statutory objectives to `promote . . . fair competition
among boards of trade, other markets and market participants' . . .
.''); Citadel Letter 1, at 1; Citadel Letter 2, at 5 and 10; HMA
Letter, at 2; MFA Letter, at 3; SIFMA AMG Letter, at 1.
\38\ See CTC Letter, at 1-2 (``[W]e would expect abolishing name
give-up to increase liquidity provision on SEFs given increased
participation from buy-side firms, which should in turn drive
enhanced participation from liquidity providers.''); ICI Letter, at
5 (``[P]rohibiting post-trade name give-up could encourage
competition among dealers to the extent post-trade name give-up
today gives a few dominant dealers in the market leverage over buy-
side participants and other dealers.''); MFA Letter, at 4 (``[N]ew
liquidity providers may be able to enter the market more easily,
which will diversify sources of liquidity and increase
competition.'').
\39\ JPMorgan Letter, at 10.
\40\ Id. at 11. See also FSF Letter, at 10 (``Contrary to what
is argued in the [Proposal] and by commenters, banning name give-up
would itself impair competition (certainly, innovation and
competition among markets) . . . .'').
---------------------------------------------------------------------------
The Commission is not persuaded by comments that prohibiting post-
trade name give-up would itself impair competition or innovation. Post-
trade name give-up is an ancillary post-trade protocol, and not a
method of execution. The prohibition of post-trade name give-up, as
proposed and adopted by the Commission, applies to all SEFs and all
pre-trade anonymous execution methods. It does not proscribe SEFs from
offering any existing execution method, nor does it prevent SEFs from
developing new execution methods. Moreover, the Commission is concerned
by other commenters' assertions that post-trade name give-up enables
anticompetitive behavior. Regardless of the prevalence or magnitude of
such behavior, the Commission believes that prohibiting post-trade name
give-up will reduce the opportunity for such behavior to occur, and is
therefore reasonably necessary to promote fair competition among market
participants on pre-trade anonymous SEF markets for cleared swaps. The
Commission believes that prohibiting post-trade name give-up will
address concerns about information leakage and discriminatory behavior
that market participants claim have dissuaded them from accessing pre-
trade anonymous liquidity pools to date, thereby removing barriers to
greater participation and competition.
3. Providing Market Participants With Impartial Access to the Market
(CEA Section 5h(f)(2)(B) and CFTC Regulation 37.202)
CEA section 5h(f)(2)(B) requires a SEF to establish and enforce
trading, trade processing, and participation rules that provide market
participants with ``impartial access'' to the market.\41\ The
Commission implemented this statutory requirement by adopting CFTC
regulation 37.202,\42\ which requires a SEF to provide market
participants with impartial access to its market(s), including, among
other things, criteria governing such access that are ``impartial,
transparent and applied in a fair and non-discriminatory manner.'' \43\
In this context, ``impartial'' means fair, unbiased, and
unprejudiced.\44\ The impartial access requirement allows participants
to compete on a level playing field, and additional liquidity providers
to participate on SEFs.\45\
---------------------------------------------------------------------------
\41\ 7 U.S.C. 7b-3(f)(2)(B).
\42\ 17 CFR 37.202.
\43\ 17 CFR 37.202(a).
\44\ See Core Principles and Other Requirements for SEFs, 78 FR
33476, 33508 (June 4, 2013).
\45\ Id.
---------------------------------------------------------------------------
In the Proposal, the Commission stated that post-trade name give-up
may result in a ``discriminatory effect'' against certain market
participants, and that the Commission preliminarily believed post-trade
name give-up undermines the policy goals of the impartial access
requirement, namely, to: (1) Ensure that market participants can
compete on a level playing field; and (2) allow additional liquidity
providers to participate on SEFs.\46\ The Commission also stated its
preliminary assessment that promoting a fully-anonymous trading
environment without post-trade name give-up would better fulfill the
goals of the impartial access requirement.\47\ The Proposal asked for
public comments on whether post-trade name give-up undermines the
stated goals of impartial access.
---------------------------------------------------------------------------
\46\ Proposal at 72267.
\47\ Id.
---------------------------------------------------------------------------
Several commenters stated that post-trade name give-up creates an
uneven or unfair playing field by conferring benefits to select market
participants (large incumbent swap dealers) and permitting such market
participants to engage in discriminatory trading practices.\48\ AFR
stated that post-trade
[[Page 44697]]
name give-up thereby ``undermines impartial access and reduces the
number of competitive liquidity providers on SEFs.'' \49\ Commenters
also asserted that prohibiting post-trade name give-up would lead to
additional, more diversified sources of liquidity on SEFs.\50\
JPMorgan, on the other hand, opined that although eliminating post-
trade name give-up ``might draw certain market participants to trade on
. . . SEFs that are fully anonymous, it may drive others (e.g.,
dealers) away. Therefore, it is not clear that prohibiting [post-trade
name give-up] would further the goal of impartial access . . . .'' \51\
JPMorgan also argued that the concept of ``discriminatory effect'' is
``amorphous'' and could be used to justify other market interventions
simply because certain market participants prefer it.\52\
---------------------------------------------------------------------------
\48\ See AFR Letter, at 3 (``Post-trade name give-up exposes
liquidity providers to several risks, including the risk of
retaliation from large competitors and the risk of revealing
information relevant to trading strategies to competitors. Smaller
liquidity providers and new entrants would tend to be more
vulnerable to these dangers.''); Better Markets Letter, at 9;
Citadel Letter 1, at 3-4 and 6 (``[S]wap dealers are able to use
name give-up as a post-trade check to ensure that they are only
transacting with other swap dealer counterparties on [interdealer
broker] SEFs, thereby maintaining dealer-only liquidity pools in
direct contradiction of statutory impartial access requirements.'');
Citadel Letter 2, at 10 (``[W]e note the experience of Citadel
Securities entering the swaps market as a new liquidity provider,
where we witnessed how certain other swap dealers can use name give-
up for purposes that are inconsistent with the Commission's
impartial access requirements. Immediately following our entry as a
new liquidity provider, this included certain incumbent swap dealers
asking [interdealer broker] SEFs to cancel executed trades upon
learning through name give-up that their counterparty was Citadel
Securities.''); SIFMA AMG Letter, at 2.
\49\ AFR Letter, at 3.
\50\ CTC Letter, at 1-2; FIA PTG Letter, at 2; AFR Letter, at 3;
MFA Letter, at 4; Better Markets Letter, at 5.
\51\ JPMorgan Letter, at 12.
\52\ Id. See also FSF Letter, at 11. But cf. Better Markets
Letter, at 10 (``[I]mpartial access would essentially become a
fiction if certain classes of SEF participants could be targeted
with trading practices, like Post-Trade Name Give-Up, that not only
impose, but are meant to impose, disparate economic costs and
trading limitations on competitors . . . .'').
---------------------------------------------------------------------------
For commenters opposed to a prohibition on post-trade name give-up,
the crux of their opposition is the notion that prohibiting the
practice may impose ``adverse selection'' risk on incumbent swap
dealers.\53\ FSF explained that ``dealers prefer to match with the
natural other side of a trade (e.g., another dealer generally seeking
to maintain a risk-neutral position)'' as opposed to other market
participants, such as speculators, who may impose adverse selection
costs.\54\ According to FSF, swap dealers use post-trade name give-up
to ascertain ``what types of market participants are generally
trading'' on pre-trade anonymous SEFs, and ``maximize the chances of
trading with the natural other side and thus manage adverse selection
costs.'' \55\ Citi similarly commented that ``[i]f new participants
will be enticed to join [dealer-to-dealer] SEFs, some presumably may be
participants that quote speculatively and intermittently, thereby
diluting the reliable and consistent nature of quoting and trading that
is the hallmark of [dealer-to-dealer] SEFs.'' \56\ In a related
argument, FSF asserted that post-trade name give-up makes request-for-
quote (RFQ) pricing ``more tailored and efficient'' by allowing dealers
to ensure their RFQ clients are not trading on dealer-to-dealer order
books, or if they are, quoting them wider spreads via RFQ to
accommodate a greater anticipated risk of hedging the balance sheet
capacity allocated to such clients.\57\
---------------------------------------------------------------------------
\53\ See ABA Letter, at 2; BPI Letter, at 1; FSF Letter, at 4-5;
SIFMA Letter, at 3. FSF explained adverse selection in this context
as follows. ``[I]nstead of facing a speculator on the other side of
a trade, who is more likely to trade in the same direction on other
venues or trade in one direction in a small size on one venue in
order to push the price in a certain direction so that it can trade
in the opposite direction on a different venue at a better price,
dealers prefer to match with the natural other side of a trade
(e.g., another dealer generally seeking to maintain a risk-neutral
position). Such ``naturals'' are more likely to be hedging all their
residual accumulated risk, rather than trading in a manner that
would move the price in an unfavorable direction.'' FSF Letter, at
5.
\54\ FSF Letter, at 4-5.
\55\ Id.
\56\ Citi Letter, at 3.
\57\ See FSF Letter, at 5 (``Name give-up allows a dealer, over
time (not just at the point of execution), to more accurately assess
its risk of providing balance sheet capacity to a particular client
and determine how it should quote to the client in order to achieve
the same desired return on capital for trading with that client as
with another, e.g., by quoting a tighter price to [an RFQ requester
that does not trade in the dealer-to-dealer order book SEFs] than
[an RFQ requester the dealer has seen trade frequently in order book
SEFs].''). FSF explained that the price that a dealer gives a client
over RFQ depends on the costs of hedging the client-facing trade,
and the dealer's available liquidity for hedging depends in turn on
whether the client will also be accessing that liquidity. Id.
---------------------------------------------------------------------------
After considering all comments, the Commission believes that post-
trade name give-up undermines the policy goals of the impartial access
requirement, and that prohibiting the practice is reasonably necessary
to effectuate the purposes of section 5h(f)(2)(B) of the Act. The
Commission finds that the practice of post-trade name give-up
effectively discriminates against certain market participants and has
deterred participants from joining or trading in a meaningful way on
SEFs that employ the practice. The use of post-trade name give-up to
discriminate between certain types of market participants in order to
maximize trading with one type of market participant and avoid trading
with another--or to dissuade certain types of market participants from
trading on a SEF--undermines the policy goals of the impartial access
requirement to ensure that market participants can compete on a level
playing field and to allow additional liquidity providers to
participate on SEFs. Further, in implementing Sec. 37.202(a), the
Commission rejected the notion that a SEF could limit access to its
trading systems to certain types of market participants such as swap
dealers.\58\ However, the practice of post-trade name give-up
purportedly to avoid adverse selection risk, in the Commission's view,
leads to a similar result, and therefore conflicts with the purposes of
the impartial access requirement imposed by CEA section 5h(f)(2)(B).
Finally, the comment that a potential ``discriminatory effect'' could
be used to justify market intervention simply because certain market
participants prefer it misses the point. The Commission's view here is
based not upon the mere preference of certain market participants, but
rather upon the entirety of facts and circumstances presented, the
discriminatory manner in which post-trade name give-up is applied, and
the realized effect of post-trade name give-up as a disincentive to
access and participation by certain types of market participants and
not others.
---------------------------------------------------------------------------
\58\ See Core Principles and Other Requirements for Swap
Execution Facilities, 78 FR 33476, 33507-33508 (June 4, 2013).
---------------------------------------------------------------------------
4. Information Privacy and Prohibition Against Post-Trade Name Give-up
at an SDR (CEA Section 21(c)(6) and CFTC Regulation 49.17(f)(2))
CEA section 21(c)(6) requires an SDR to maintain the privacy of any
and all swap transaction information that it receives from a swap
dealer, counterparty, or any other registered entity.\59\ In
implementing this statutory provision, the Commission promulgated
regulation 49.17(f) to address the scope of access a market participant
may have to swap data maintained by an SDR. For swaps executed
anonymously on a SEF and cleared in accordance with the Commission's
STP requirements, Sec. 49.17(f)(2) prohibits an SDR from providing a
counterparty to a swap with access to the identity of the other
counterparty or its clearing member.\60\ In adopting this provision,
the Commission explained that this swap transaction information is
subject to the statutory privacy protections because, in the
Commission's view, swap counterparties would not otherwise know one
another's identity if the swap were submitted to clearing via STP.\61\
In the Proposal, the Commission stated that post-trade name give-up
undercuts the intent of Sec. 49.17(f)(2) and the congressional
objectives of CEA section 21(c)(6). Therefore, the Commission reasoned,
prohibiting post-trade name give-up would help to advance the
objectives underlying the statutory
[[Page 44698]]
privacy protections in CEA section 21(c)(6) and the Commission's
regulations thereunder.\62\
---------------------------------------------------------------------------
\59\ 7 U.S.C. 24a(c)(6).
\60\ 17 CFR 49.17(f)(2).
\61\ Swap Data Repositories--Access to SDR Data by Market
Participants, 79 FR 16673-16674 (Mar. 26, 2014).
\62\ Proposal at 72266.
---------------------------------------------------------------------------
Several commenters agreed with the Commission's assessment in the
Proposal that post-trade name give-up undercuts the intent of CEA
section 21(c)(6) and Sec. 49.17(f)(2).\63\ FSF, on the other hand,
asserted that name give-up is not comparable to an SDR disclosing
counterparty information since, in FSF's view, market participants
choose to have their names disclosed by trading on a SEF that practices
post-trade name give-up.\64\ FSF also asserted that ``[i]f Congress
wanted to extend the privacy requirement to SEFs, it certainly would
have done so.'' \65\
---------------------------------------------------------------------------
\63\ See Better Markets Letter, at 11; Citadel Letter 1, at 4;
FIA PTG Letter, at 2-3; ICI Letter, at 4.
\64\ See FSF Letter, at 10-11.
\65\ FSF Letter, at 11. See also SIFMA Letter, at 5; TP ICAP
Letter, at 6.
---------------------------------------------------------------------------
After considering commenters' arguments, the Commission continues
to believe that post-trade name give-up undermines the objectives
underlying CEA section 21(c)(6) and Sec. 49.17(f)(2) thereunder. In
response to commenters who noted CEA section 21(c)(6) addresses SDRs
and not SEFs, the Commission does not believe this reflects a
Congressional intent to permit post-trade name give-up on SEFs. As the
Commission noted in the Proposal, the Congressional intent to protect
the privacy of trading information, including trader identities, is
evident in other statutory provisions.\66\ While some market
participants willingly participate on SEF platforms practicing post-
trade name give-up, others are reportedly deterred from doing so due to
concerns over the privacy of their swap transaction information.\67\
The Commission believes that prohibiting post-trade name give-up is
consistent with Congressional intent and will further the objectives
underlying CEA section 21(c)(6) and statutory provisions similarly
aimed at protecting private information of market participants.
---------------------------------------------------------------------------
\66\ Proposal at 72266, note 62. CEA Section 8(a), for example,
prohibits the Commission from publication of data and information
that would disclose the business transactions or market positions of
any person and trade secrets or names of customers. 7 U.S.C. 12(a).
\67\ See, e.g., Proposal at 72263-72264 (discussing market
participants' concerns over ``information leakage'' that could
expose a counterparty's trading positions, strategies and/or
objectives).
---------------------------------------------------------------------------
B. Application of the Rule
1. Scope of Swaps Covered
In the Proposal, the Commission stated its preliminary belief that,
with respect to operational, credit and settlement, and legal issues in
particular, post-trade name give-up is generally unnecessary where a
swap is executed on a SEF and submitted to a DCO for clearing.\68\
Accordingly, the Commission proposed in Sec. 37.9(d) to prohibit
disclosing the identity of a counterparty to a swap executed
anonymously and ``intended to be cleared.'' The Commission specifically
requested public comments on whether any operational, credit and
settlement, legal, or similar issues exist that would still require
post-trade name give-up for an intended-to-be-cleared swap. The
Commission also requested public comments on whether it should narrow
the scope of the proposed prohibition on post-trade name give-up to
swaps required to be cleared under section 2(h)(1) of the Act or swaps
subject to the trade execution requirement under section 2(h)(8) of the
Act.
---------------------------------------------------------------------------
\68\ Proposal at 72267. The Commission also noted that STP
requirements for transactions subject to clearing obviate the need
for counterparty name disclosure. Id.
---------------------------------------------------------------------------
The Commission received a number of comments opposing limiting the
scope of the prohibition.\69\ MFA opposed narrowing the scope of the
prohibition to swaps required to be cleared or subject to the trade
execution requirements, asserting that doing so ``would mute the
overall effectiveness of the Proposed Rule . . . .'' \70\ Similarly,
Citadel asserted that the rationale for prohibiting post-trade name
give-up applies equally to all swaps intended to be cleared, not just
swaps subject to the clearing requirement or trade execution
requirement and, therefore, ``there is no rational basis for drawing
such a distinction.'' \71\ Citadel and FIA PTG, however, requested that
the Commission clarify that ``intended to be cleared'' be interpreted
to mean swaps that are intended to be submitted for clearing
contemporaneously with execution, and not include swaps that begin as
uncleared transactions and are later submitted to clearing.\72\ TP
ICAP, on the other hand, asserted that any prohibition on post-trade
name give-up should be limited to, at most, swaps subject to the
clearing requirement.\73\ TP ICAP reasoned that a SEF may not know
whether parties to a voluntarily-cleared swap will in fact submit the
swap to a DCO, as the parties may do so themselves post-execution.\74\
TP ICAP stated that ``it would be difficult, if not impossible, to
impose a restriction on [post-trade name give-up] post-execution when
it is not known whether the transaction will be submitted for
clearing.'' \75\
---------------------------------------------------------------------------
\69\ See AFR Letter, at 3; Citadel Letter 1, at 4; FIA PTG
Letter, at 2; ICI Letter, at 5; MFA Letter, at 5-6.
\70\ MFA Letter, at 5.
\71\ Citadel Letter 1, at 4 (asserting that name give-up has no
justification where: (1) the Commission's STP requirements ensure
that a swap is quickly submitted to, and accepted or rejected by, a
DCO (and is considered void ab initio if rejected); and (2) the two
trading counterparties do not have credit, operational, or legal
exposure to each other at any stage).
\72\ See FIA PTG Letter, at 2; Citadel Letter 1, at 4; Citadel
Letter 2, at 16. Citadel noted that ``SEFs may offer pre-trade
anonymous trading protocols for swaps that begin as uncleared and
then are `backloaded' into clearing by the trading counterparties at
a later time.'' Id.
\73\ TP ICAP Letter, at 2.
\74\ Id.
\75\ Id. TP ICAP also asserted that the Proposal ``does not
accommodate the necessity of Name Give-Up in transactions that are
executed and cleared across time zones.'' Id. TP ICAP stated that in
such circumstances, transactions executed in one time zone may
remain bilateral transactions until the relevant clearing house
opens in another time zone, and post-trade name give-up would be
necessary for the parties to manage counterparty credit risk until
the trade can be submitted to the clearing house.
---------------------------------------------------------------------------
The Commission declines to narrow the prohibition as requested by
TP ICAP and is adopting Sec. 37.9(d), as proposed, to include swaps
that are intended to be cleared. The Commission continues to believe
that there is no need for post-trade name give-up if a swap is executed
on a SEF and submitted to a DCO for clearing pursuant to STP
requirements. Narrowing the prohibition to apply only to swaps required
be cleared under section 2(h)(1) of the Act would unduly narrow its
scope and hamper the statutory and regulatory objectives underlying the
prohibition. Whether or not a swap is intended to be cleared is a
material term that affects trade pricing and trade processing
workflows, and it is something a SEF should be able to determine at the
time of execution.\76\ However, to the extent a SEF's current systems
do not indicate whether a swap is intended to be cleared, the
Commission notes that the SEF must make necessary adjustments to its
systems and processes to ensure that it can determine whether a swap is
intended to be cleared before permitting post-trade name give-up.\77\
The Commission recognizes that some SEFs may need time to make such
adjustments, and the Commission is
[[Page 44699]]
therefore providing a later compliance date for voluntarily-cleared
swaps, as further described below. Finally, in response to the comments
from Citadel and FIA PTG, the Commission clarifies that ``intended to
be cleared'' should be interpreted to mean swaps that are intended to
be submitted for clearing contemporaneously with execution.
Accordingly, if a swap begins as an uncleared transaction and then is
voluntarily submitted for clearing by the counterparties at a later
time, the swap would not be considered ``intended to be cleared,'' and
therefore would not be subject to the prohibition on post-trade name
give-up.\78\
---------------------------------------------------------------------------
\76\ Furthermore, the Commission notes that a SEF's knowledge of
whether or not a swap is intended to be cleared is relevant to real-
time reporting and STP requirements. See 17 CFR 43.3(b) and Appendix
A to Part 43; 17 CFR 39.12(b)(7).
\77\ As discussed in the following section below, the
prohibition on post-trade name give-up applies equally to swaps that
are pre-arranged or pre-negotiated by a broker on an anonymous
basis. Therefore, a SEF must also ensure that its rules, systems,
and processes require and enable brokers to engage in such pre-
arrangement or pre-negotiation without compromising counterparty
anonymity, and to reliably determine whether a swap is intended to
be cleared prior to engaging in name give-up.
\78\ This includes swaps that are ``backloaded'' into clearing
as described by Citadel. See supra note 72. The Commission notes
that its STP regulations apply to all swaps cleared through a DCO,
including voluntarily-cleared swaps. Those requirements are designed
to (1) ensure that swaps are processed and accepted or rejected
promptly from clearing, and (2) require swap dealers, SEFs and DCOs
to coordinate with one another to ensure they have the capacity to
accept or reject trades as quickly as technologically practicable if
fully automated systems were used. 17 CFR 23.610, 37.702(b),
39.12(b)(7).
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2. Trades Pre-arranged or Pre-negotiated by a Broker
A number of commenters recommended the Commission clarify that the
prohibition on post-trade name give-up applies to a swap that is pre-
arranged or pre-negotiated by a broker on an anonymous basis and
thereafter submitted for execution on a SEF.\79\ Commenters stated that
doing so would help ensure that market participants cannot evade the
prohibition on post-trade name give-up.\80\ For example, Citadel stated
that voice brokers, operating either within a SEF or through an
affiliated introducing broker, may seek to evade a prohibition on post-
trade name give-up by pre-negotiating or pre-arranging trades
anonymously and then disclosing counterparty identities prior to
formally executing the transaction on the SEF.\81\
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\79\ See AIMA Letter, at 2; Citadel Letter 1, at 11; Citadel
Letter 2, at 17-18; FIA PTG Letter, at 2; MFA Letter, at 7. In a
related comment, TP ICAP noted that the Commission should consider
additional exceptions or guidance ``where a swap is arranged off-SEF
(e.g., by an Introducing Broker) [and] submitted for execution and
clearing through a SEF to a [DCO]'' where a prohibition on name
give-up ``would . . . be incongruous because the counterparties will
already know one another's identity at the point of execution.'' TP
ICAP Letter, at 7.
\80\ Citadel Letter 1, at 11; Citadel Letter 2, at 17-18; CTC
Letter, at 2; FIA PTG Letter, at 2; MFA Letter, at 7. The Commission
notes that the ban on post-trade name give-up is subject to the
Commission's broad anti-evasion requirements.
\81\ Citadel Letter 1, at 2; Citadel Letter 2, at 17-18.
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To address this concern, the Commission is revising proposed Sec.
37.9(d)(3) to state that the phrase ``executed anonymously'' for
purposes of Sec. Sec. 37.9(d)(1) and (2) includes a swap that is pre-
arranged or pre-negotiated anonymously, including by a participant of
the SEF. In addition, the Commission is deleting the original text of
proposed Sec. 37.9(d)(3), which the Commission believes is
superfluous.\82\
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\82\ As proposed, Sec. 37.9(d)(3) read as follows: The
provisions in paragraphs (d)(1) and (d)(2) of this section shall not
apply with respect to any method of execution whereby the identity
of a counterparty is disclosed prior to execution of the swap. The
Commission notes that the removal of this language from the final
regulation is not intended to be a substantive revision or change
the intended meaning or effect of the final rule. Notwithstanding
this revision, the final rule does not apply to execution methods
that are not pre-trade anonymous, such as name-disclosed RFQ.
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3. Package Transactions
In the Proposal, the Commission recognized that a limited exception
to the post-trade name give-up prohibition may be necessary for cleared
swaps that are components of package transactions that include
uncleared swap components.\83\ Uncleared swap components create
bilateral credit, operational, and/or legal exposures that the
counterparties must manage on an ongoing basis. Therefore, the
Commission requested public comments on the necessity and scope of an
exception to the post-trade name give-up prohibition for package
transactions. The Commission also requested comments on whether an
exception should be provided for package transactions involving any
non-swap instrument, including U.S. Treasury securities.
---------------------------------------------------------------------------
\83\ Proposal at 72267.
---------------------------------------------------------------------------
Commenters agreed that a prohibition on post-trade name give-up
should not apply to components of a package transaction that are
uncleared swaps or non-swap instruments. Commenters differed on whether
the Commission should provide an explicit exception in the regulation.
FIA PTG, MFA and Citadel argued that while uncleared and non-swap
components of package transactions should not be subject to a
prohibition on post-trade name give-up, an explicit exclusion in the
regulation is not necessary.\84\ These commenters reasoned that, by its
very terms, the proposed prohibition applies to swaps intended to be
cleared; thus, where a package transaction contains a cleared swap
component and another uncleared swap or a non-swap component, the
prohibition would not apply to the uncleared swap or non-swap component
of the transaction.\85\ In contrast, JPMorgan and FSF stated that the
Commission should provide an exception to the post-trade name give-up
prohibition for package transactions that include an uncleared swap or
security component.\86\
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\84\ See FIA PTG Letter, at 2; MFA Letter, at 5-6; Citadel
Letter, at 9; Citadel Letter 2, at 17.
\85\ Citadel and FIA PTG also stated that each component of a
package already faces distinct post-trade operational workflows, so
this treatment would be consistent with current market practice. FIA
PTG Letter, at 2; Citadel Letter 1, at 9; Citadel Letter 2, at 17.
\86\ See FSF Letter, at 6 and 15; JPMorgan Letter, at 6 and 19.
Similarly, SIFMA stated that any prohibition on post-trade name
give-up should exempt package transactions that involve a non-swap
component. Without such an exemption, SIFMA argued, SEFs will be
required to change the operational flow of both the swap component
and the non-swap/security component of the package transaction.
SIFMA Letter, at 6. SIFMA raised concern that ``the changes
necessary for this infrastructure have not been considered in the
cost/benefit analysis, and have not been analyzed enough to consider
unintended consequences.'' Id.
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The Commission agrees with commenters that the post-trade name
give-up prohibition should not apply to an uncleared swap or non-swap
component of a package transaction. Uncleared swap and non-swap
components of package transactions may create bilateral credit,
operational, and/or legal exposures that require the counterparties to
know each other's identities. For uncleared components of a package
transaction, post-trade name give-up enables market participants to
perform credit checks on counterparties prior to finalizing the
transaction. The practice also allows counterparties to manage credit
exposure and payment obligations arising from the bilateral nature of
such uncleared transactions. In the case of U.S. Treasury securities,
post-trade name give-up may still be necessary to accommodate trading
mechanisms and infrastructures currently used for U.S. Treasury swap
spreads that do not allow for anonymous clearing and settlement of the
Treasury component of such transactions.\87\ Therefore, the Commission
believes that a limited exception to the prohibition is appropriate at
this time for package transactions that include a component that is an
uncleared swap or a non-swap.\88\ The Commission will continue
[[Page 44700]]
to monitor the operational development of these markets, and encourages
SEFs and market participants to address existing operational
limitations so that any need for post-trade name give-up may be further
diminished.
---------------------------------------------------------------------------
\87\ 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 laws and regulations.
\88\ TP ICAP commented that the Commission should also consider
an exception or additional guidance in cases where ``a swap is a
component of a package transaction involving another component that
is not cleared at the same DCO.'' TP ICAP Letter, at 7. The
Commission believes that such an exception or guidance is not
necessary at this time, and further submits that an explanation as
to what the issue or underlying problem could be in such cases has
not been provided.
---------------------------------------------------------------------------
Accordingly, the Commission is revising proposed Sec. 37.9(d) by
adding Sec. 37.9(d)(4), which provides a limited exception to the
post-trade name give-up prohibition for a swap that is intended to be
cleared, when it is a component of a package transaction that includes
a component transaction that is not an intended-to-be-cleared swap. The
post-trade name give-up prohibition, as adopted in this release,
prohibits SEFs from directly or indirectly disclosing the identity of a
counterparty to a swap that is anonymously executed, pre-arranged or
pre-negotiated on or pursuant to the rules of a SEF and intended to be
cleared. Because the components of a package transaction are priced or
quoted together as one economic transaction, the disclosure of the
identity of a counterparty to any component of a package transaction
effectively discloses the counterparty identity for all components of
that package transaction. As such, if a SEF were to disclose the
identity of a counterparty to the uncleared swap or non-swap component
of a package transaction, the SEF would also be indirectly disclosing
the identity of the counterparty to the intended-to-be-cleared swap
component of the package transaction; and such indirect disclosure is
otherwise prohibited under the regulation. Therefore, the Commission
believes that a limited exception to the post-trade name give-up
prohibition for package transactions with uncleared swap and non-swap
components is necessary to provide clarity and regulatory certainty to
SEFs and market participants.
The exception will apply, for example, to U.S. Treasury swap
spreads involving an intended-to-be-cleared swap and a U.S. Treasury
security. However, the Commission emphasizes that the exception is
limited in scope. Many package transactions are traded anonymously and
involve only intended-to-be-cleared swaps, and the prohibition on post-
trade name give-up will apply to these transactions in full.\89\ The
Commission notes that this exception is intended to accommodate trading
and settlement workflows for certain package transactions as they exist
today. It is not an invitation to structure package transactions to
allow post-trade name give-up or to evade the prohibition on post-trade
name give-up that the Commission is adopting in this final rule. In
that regard, the final rule adopted herein is subject to the
Commission's broad anti-evasion requirements.
---------------------------------------------------------------------------
\89\ For example, ``curve'' and ``butterfly'' trades involving
only intended-to-be-cleared swaps.
---------------------------------------------------------------------------
The Commission emphasizes that this exception does not limit,
prohibit, or otherwise restrain SEFs or market participants from
developing and utilizing trading functionalities, operational
workflows, or infrastructures for package trades that are fully
anonymous, and do not utilize post-trade name give-up. The Commission
encourages SEFs and market participants to continue to work to
eliminate the technological and/or operational need for post-trade name
give-up. The Commission will continue to monitor whether the exception
in Sec. 37.9(d)(4) can be refined as trading functionalities,
operational workflows, and/or infrastructure continue to develop in the
future.
4. Workups
In the Proposal, the Commission requested public comments on how,
if at all, a prohibition on post-trade name give-up would affect
trading protocols such as auctions, portfolio compression, and/or
workup sessions. JPMorgan and FSF asserted that post-trade name give-up
is an integral part of workup protocols, and the Proposal will impair
workup protocols and adversely affect dealers' ability to hedge.\90\
These commenters asserted that a dealer's willingness to offer greater
size through a workup may depend on (1) who its counterparty is, in
particular whether the counterparty is likely to be able to execute on
the full size the dealer is willing to offer, \91\ and (2), as FSF
stated, whether the counterparty might impose adverse selection costs
on the dealer upon knowing its trading interests.\92\ FSF suggested
that if the Commission proceeds with a prohibition on post-trade name
give-up, it should exclude from the prohibition any SEF that obtains a
material portion of its trading volume, over a specified period,
through workups.\93\
---------------------------------------------------------------------------
\90\ See FSF Letter, at 2; JPMorgan Letter, at 7.
\91\ FSF Letter, at 4; JPMorgan Letter, at 7.
\92\ FSF Letter, at 4.
\93\ FSF Letter, at 15.
---------------------------------------------------------------------------
In contrast, Citadel and MFA asserted that post-trade name give-up
is not necessary for workup sessions. Citadel asserted that if a
trading protocol is pre-trade anonymous, there is no need to disclose
the trading counterparties in order to engage in a work-up session and,
therefore, ``work-up sessions on [interdealer broker] SEFs will
function just as they do today in order to facilitate trading in
size.'' \94\ Citadel also stated that claims to the contrary ``are
easily disproven by looking at the U.S. Treasury market, where work-ups
are commonly employed on interdealer platforms even though name give-up
is not used.'' \95\ MFA further argued that prohibiting post-trade name
give-up would benefit trading protocols such as auctions, portfolio
compression, and/or workup sessions by increasing buy-side access and
participation.\96\
---------------------------------------------------------------------------
\94\ Citadel Letter 1, at 6. Citadel added that, similarly, a
pre-trade anonymous auction or compression exercise should not
require post-trade name give-up for intended-to-be-cleared swaps.
Id.
\95\ Citadel Letter 2, at 11. Citadel further stated that
``there is nothing unique about transactions executed via work-up
compared to other anonymously-executed cleared swaps that would
require the disclosure of counterparty identities post-trade. In the
fully anonymous U.S. Treasury market, work-ups account for a
significant percentage of overall trading activity.'' Id. (citing to
M.J. Fleming, E. Schaumburg & R. Yang, The Evolution of Workups in
the U.S. Treasury Securities Market, Liberty Street Economics Blog
(Aug. 20, 2015)).
\96\ MFA Letter, at 6.
---------------------------------------------------------------------------
The Commission agrees that post-trade name give-up is not necessary
for workup sessions. The reasons given by commenters for why they view
post-trade name give-up as an important aspect of workup sessions are
essentially the same reasons espoused for the purported benefits of
post-trade name give-up generally, i.e., ensuring reliable hedging and
avoiding adverse selection for incumbent swap dealers.\97\ The
Commission does not find that workup sessions present a particular need
for post-trade name give-up that is distinct from pre-trade anonymous
order books. Accordingly, the Commission does not believe it is
necessary or appropriate to include an exception for workups.
---------------------------------------------------------------------------
\97\ See supra notes 32, 33, 53, 54, 55 and accompanying text.
---------------------------------------------------------------------------
5. Error Trades
Commenters also addressed the potential impact of a prohibition on
post-trade name give-up on error trade corrections. TP ICAP asserted
that a prohibition would prevent an efficient means for correcting
trade errors, specifically, in cases ``[w]here a party to a swap
identifies an error that requires coordination with its counterparty.''
\98\ TP ICAP therefore identified error trade correction among issues
``that require the Commission to consider exceptions and additional
guidance.'' \99\ Similarly, FSF stated that post-trade name give-up
[[Page 44701]]
``will remain necessary for counterparties to correct operational or
clerical errors resulting in a trade being rejected.'' \100\ Citadel
disagreed with these commenters, stating that ``[i]n the event of an
operational or clerical error, the SEF can facilitate the correction of
the error without disclosing a counterparty's identity . . . .'' \101\
---------------------------------------------------------------------------
\98\ TP ICAP Letter, at 7.
\99\ Id.
\100\ FSF Letter, at 15.
\101\ Citadel Letter 1, at 10. See also Citadel Letter 2, at 17.
---------------------------------------------------------------------------
The Commission does not believe that post-trade name give-up is
necessary or appropriate to resolve error trades for pre-trade
anonymous and intended-to-be-cleared swaps. A SEF can intermediate
communications if necessary, and otherwise facilitate error trade
corrections, without disclosing counterparty identities.\102\
Accordingly, the Commission declines to adopt an exception to the
prohibition on post-trade name give-up for error trade corrections.
Therefore, any SEF offering trading in swaps subject to the prohibition
must ensure its rules and procedures for error trades allow for error
trade remediation without disclosure of the identities of
counterparties to one another.
---------------------------------------------------------------------------
\102\ The Commission's view on this issue is consistent with its
stated view in the Proposal. See Proposal at 72267, note 78.
---------------------------------------------------------------------------
C. Compliance Dates
The Commission recognizes the final rule adopted herein may require
SEFs to modify, in varying degrees, their rules and operations with
respect to trading and trade processing systems, error trades, and
compliance programs.\103\ The Commission also recognizes that the
modifications required--and the time necessary to implement them--may
vary for different swap products. The Commission anticipates that
compliance with the final rule will be simpler to implement for
required transactions due to the fact that the methods of execution for
such transactions are limited.\104\ Permitted transactions may require
more time to establish compliance, given that a SEF may offer any
method of execution for such transactions.\105\ Furthermore, for swaps
that are not subject to mandatory clearing, a SEF may need to make
additional adjustments to its systems and processes to ensure that it
can determine whether a swap is intended to be cleared, and therefore
subject to the prohibition on post-trade name give-up.
---------------------------------------------------------------------------
\103\ This includes establishing rules to prohibit post-trade
name give-up, as required under Sec. 37.9(d)(2).
\104\ 17 CFR 37.9(a) defines ``required transaction'' as a
transaction involving a swap that is subject to the trade execution
requirement in section 2(h)(8) of the Act, and provides that
required transactions shall be executed on a SEF through an order
book or RFQ to no less than three market participants.
\105\ 17 CFR 37.9(c) (defining ``permitted transaction'' as any
transaction not involving a swap that is subject to the trade
execution requirement in section 2(h)(8) of the Act).
---------------------------------------------------------------------------
Accordingly, the Commission is adopting a phased compliance
schedule. Specifically, for swaps subject to the trade execution
requirement under CEA section 2(h)(8), SEFs must commence compliance
with the requirements of Sec. 37.9(d) no later than November 1, 2020.
For swaps not subject to the trade execution requirement under CEA
section 2(h)(8), SEFs must commence compliance with the requirements of
Sec. 37.9(d) no later than July 5, 2021.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \106\ requires Federal
agencies to consider whether the rules they propose will have a
significant economic impact on a substantial number of small entities
and, if so, to provide an analysis regarding the economic impact on
those entities. The final rule adopted by the Commission will directly
affect SEFs. The Commission has previously determined that SEFs are not
``small entities'' for the purpose of the RFA.\107\ Therefore, the
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5
U.S.C. 605(b), that the rule adopted herein will not have a significant
economic impact on a substantial number of small entities.
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\106\ 5 U.S.C. 601 et seq.
\107\ See Core Principles and Other Requirements for Swap
Execution Facilities, 78 FR 33476, 33548 (June 4, 2013).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \108\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget (OMB) control number. The Commission has previously received
a control number from OMB that includes the collection of information
associated with part 37 of the Commission's regulations. The title for
this collection of information is ``Core Principles and Other
Requirements for Swap Execution Facilities, OMB control number 3038-
0074.'' \109\ Collection 3038-0074 is currently in force with its
control number having been provided by OMB. However, the rule adopted
herein does not impose any new recordkeeping or information collection
requirements, and therefore contains no requirements subject to the
PRA.
---------------------------------------------------------------------------
\108\ 44 U.S.C. 3501 et seq.
\109\ See OMB Control No. 3038-0074, available at https://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0074
(last retrieved June 23, 2020).
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C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA.\110\ Section 15(a) further specifies that 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.
---------------------------------------------------------------------------
\110\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Commission is adopting amendments to part 37 of the
Commission's regulations to prohibit post-trade name give-up for swaps
anonymously executed, pre-arranged, or pre-negotiated on or pursuant to
the rules of a SEF and intended to be cleared. Section 37.9(d) of the
Commission's regulations adopted herein prohibits a SEF from directly
or indirectly, including through a third-party service provider,
disclosing the identity of a counterparty to any such swap. The
regulation also requires SEFs to establish and enforce rules that
prohibit any person from effectuating such a disclosure.
The baseline for this consideration of costs and benefits with
respect to the rule adopted herein is the status quo, which includes
the existing practice of post-trade name give-up for cleared swaps on
some SEFs, and the current regulatory requirements that do not
explicitly prohibit post-trade name give-up for cleared swaps
anonymously executed, pre-arranged, or pre-negotiated on or pursuant to
the rules of a SEF. The prohibition does not apply to uncleared swaps
or SEF trading systems and platforms that are not pre-trade anonymous;
and the final rule includes an exception for package transactions that
include components that are not intended-to-be-cleared
[[Page 44702]]
swaps. Much of the swaps trading on SEFs today occurs on disclosed
trading systems and platforms that display the identities of potential
counterparties to one another before execution occurs. Such is the
case, for example, with many RFQ systems offered by SEFs.
The Commission notes that this consideration of costs and benefits
is based on the understanding that the swaps market functions
internationally, with many transactions involving U.S. firms taking
place across international boundaries, with some Commission registrants
being organized outside of the United States, with leading industry
members typically conducting operations both within and outside the
United States, and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of the
final 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).\111\
---------------------------------------------------------------------------
\111\ 7 U.S.C. 2(i). 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. Section 2(i)(2)
makes them applicable to activities outside the United States that
contravene Commission rules promulgated to prevent evasion of Dodd-
Frank.
---------------------------------------------------------------------------
The Commission has endeavored to assess the expected costs and
benefits of the final rulemaking in quantitative terms, where possible.
In situations where the Commission is unable to quantify the costs and
benefits, the Commission identifies and considers the costs and
benefits of the adopted rule in qualitative terms. The lack of data and
information to estimate those costs is attributable in part to the
nature of the final rule and uncertainty about the potential responses
of market participants to the implementation of the final rule. The
Commission recognizes that potential indirect costs and benefits of the
prohibition on post-trade name give-up adopted herein--i.e., those
relating to effects on trading behavior, liquidity, and competition--
may be impossible to accurately predict or quantify prior to
implementation of the rule.
The final rule differs from the proposed rule in several ways.
Section 37.9(d)(3) of the final rule states that for purposes of the
rule, the term ``executed anonymously'' shall include a swap that is
pre-arranged or pre-negotiated anonymously, including by a participant
of the SEF. The proposed rule does not include this provision, which is
intended to clarify that the prohibition on name disclosure also
applies in cases where a broker pre-negotiates or pre-arranges a trade
anonymously. The final rule also includes an exception for package
transactions that include a component transaction that is not an
intended-to-be-cleared swap, and a staggered compliance schedule
depending on whether a swap is subject to the trade execution
requirement.
1. Costs
The Commission recognizes that the final rule adopted herein may
require SEFs to modify their rules and operations in varying degrees,
including, potentially, with respect to trading and trade processing
systems, error trades, and compliance programs; and that these
modifications are likely to impose costs. For example, Sec. 37.9(d)(2)
requires SEFs to establish and enforce rules to prohibit any person
from directly or indirectly, including through a third-party service
provider, disclosing the identity of a counterparty to a swap that is
executed anonymously and intended to be cleared. Complying with Sec.
37.9(d)(2) will require a SEF to file such rules with the Commission in
accordance with part 40 of the Commission's regulations. The Commission
estimates that filing such rules may take up to 50 hours, which is
unlikely to be a major cost burden on SEFs. The Commission also
recognizes that the modifications required--and the time necessary to
implement them--may vary for different swap products.
The Commission believes that these costs will be relatively small
as compared to a SEF's overall operating costs. In the Proposal, the
Commission stated a preliminary assessment that the direct costs in
implementing and complying with the proposed rule would not be
material, and that the costs of adjusting affected SEF protocols in
order to comply would be negligible.\112\ The Commission requested that
SEFs provide estimates of any direct costs they would incur.\113\ The
Commission received no such comments. The Commission anticipates that
compliance with the final rule will be simpler and less costly to
implement for swaps that are subject to the clearing requirement. The
Commission recognizes that a SEF may incur additional costs with
respect to swaps that are not subject to mandatory clearing, insofar as
its systems and processes must be adjusted to ensure that it is
determined whether a swap is intended to be cleared prior to permitting
post-trade name give-up to occur. The Commission is adopting a phased
compliance schedule based on whether a swap is subject to the trade
execution requirement. The extended compliance period for swaps not
subject to the trade execution requirement will delay the benefits
associated with the rule for certain swaps, but should also mitigate
the costs to SEFs associated with compliance with the rule.
---------------------------------------------------------------------------
\112\ Proposal at 72269.
\113\ Id.
---------------------------------------------------------------------------
The Commission anticipates the direct cost of complying with Sec.
37.9(d) for market participants to be at or near zero and has received
no comments to the contrary. With respect to potential indirect costs
of the proposed rule, commenters opposing the Proposal argued that it
will harm liquidity by causing incumbent swap dealers to exit the
market or reduce their trading and the liquidity they provide.\114\
Several proponents of the Proposal disputed these assertions. ICI and
MFA characterized this outcome as ``unlikely.'' \115\ MFA stated that
competitive market forces would ensure that ``in the unlikely event an
individual dealer reduced its offering, other dealers would quickly
step into its place.'' \116\ Asserting its experience as a ``top
liquidity provider'' in SEF markets, Citadel stated that it does not
expect a prohibition on post-trade name give-up to affect its liquidity
provision on RFQ platforms or its use of pre-trade anonymous trading
protocols.\117\ Citadel further asserted that ``other swap dealers
share our view, as UBS has supported the prohibition and SIFMA
indicated that the views among swap dealers `are not uniform.' '' \118\
Commenters also pointed to their experience in other asset classes
where post-trade name give-up is not practiced, asserting that such
markets demonstrate that the purported negative liquidity impacts
raised by incumbent swap dealers are unwarranted.\119\
---------------------------------------------------------------------------
\114\ See ABA Letter, at 2; BPI Letter, at 1; FSF Letter, at 7-
8; SIFMA Letter, at 4.
\115\ ICI Letter, at 5; MFA Letter, at 4.
\116\ MFA Letter, at 4.
\117\ Citadel Letter 1, at 6.
\118\ Citadel Letter 1, at 7.
\119\ See Citadel Letter 1, at 7; Citadel Letter 2, at 7, FIA
PTG Letter, at 1-2, MFA Letter, at 4.
---------------------------------------------------------------------------
The Commission believes that incumbent swap dealers will continue
to provide liquidity on the affected SEFs as long as it is in their
business interest to do so and notes that the apparent desire of other
entities to provide
[[Page 44703]]
liquidity once post-trade name give-up is prohibited suggests that
overall liquidity is not likely to decline.
A number of commenters asserted that without post-trade name give-
up on dealer-to-dealer SEFs, pricing and liquidity offered by dealers
to clients via RFQ or over-the-counter (OTC) may suffer.\120\ Some of
these commenters stated that post-trade name give-up helps dealers
predict their hedging costs and tailor their pricing on RFQ SEFs.\121\
They argued that prohibiting the practice would likely result in
inferior pricing for clients on RFQ SEFs.\122\ Similarly, commenters
asserted that post-trade name give-up enables dealers to hedge the risk
they accumulate by providing liquidity to clients off-SEF.\123\ FSF
argued that if dealers widen spreads as a result of a prohibition on
post-trade name give-up, commercial end users may be disproportionately
harmed because they rely more exclusively on dealer pricing and
generally do not trade in cleared swaps on SEFs.\124\ The Coalition for
Derivatives End-Users (Coalition) stated that they ``have heard from
bank swap dealers that the Proposed Rule would result in less liquidity
and worse pricing on SEFs, which in turn may increase costs for
derivatives end users hedging transactions in the non-cleared OTC
derivatives markets.'' \125\ The Coalition also stated that they ``have
heard from other market participants that, under the Proposed Rule,
liquidity would increase and result in better pricing on SEFs, which in
turn may drive down costs for derivatives end-users in the non-cleared
OTC derivatives markets.'' \126\ The Coalition further stated that it
``lacks the empirical data and institutional knowledge to reach a firm
conclusion as to the effects of the Proposed Rule on the ability of
end-users to access efficient and economical markets to hedge their
commercial risks.'' \127\
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\120\ See ABA Letter, at 2; Citi Letter, at 3-4; FSF Letter, at
2 and 5-6; JPMorgan Letter, at 5-6.
\121\ See JPMorgan Letter, at 5-6; FSF Letter, at 2; Citi
Letter, at 3.
\122\ See Citi Letter, at 3-4; FSF Letter, at 5-6.
\123\ ABA Letter, at 3; FSF Letter, at 2 and 5; Citi Letter, at
3-4.
\124\ See FSF Letter, at 2 and 7.
\125\ Coalition Letter, at 1.
\126\ Id.
\127\ Id. at 2.
---------------------------------------------------------------------------
SIFMA AMG and Citadel each generally disagreed with the notion that
client pricing will be harmed by a prohibition on post-trade name give-
up.\128\ Citadel asserted that, ``if anything, pricing should become
more competitive, as buy-side firms gain access to additional sources
of liquidity and will have more pre-trade price information on which to
transact''; \129\ and that ``increasing competition should lower
transaction costs, thereby facilitating dealer hedging.'' \130\
---------------------------------------------------------------------------
\128\ See Citadel Letter 1, at 7; Citadel Letter 2, at 11; SIFMA
AMG Letter, at 2.
\129\ Citadel Letter 1, at 7.
\130\ Citadel Letter 2, at 11.
---------------------------------------------------------------------------
The Commission continues to believe that prohibiting post-trade
name give-up is likely to increase competition on affected SEFs, which
in turn should lead to lower overall transaction costs.\131\ The
Commission is basing its belief on several studies described in the
benefits section below, finding that post-trade anonymity tends to
reduce trading costs and lead to better price quotes and lower realized
spreads.\132\ Nevertheless, the Commission acknowledges that it is
theoretically possible that the prohibition on post-trade name give-up
could lead to increased trading costs associated with some OTC swaps,
even if, as the Commission anticipates, it leads to improved liquidity
and lower transaction costs for swaps traded on SEFs. One study
reviewed by the Commission, as discussed below, describes a theoretical
scenario, where post-trade anonymity in swaps and bond markets could
lead to an increase in OTC spreads and a simultaneous decrease in
spreads on exchanges that ultimately improves overall welfare of market
participants.\133\
---------------------------------------------------------------------------
\131\ See Proposal at 72269.
\132\ The Commission does note that reductions in transaction
costs may lead to a reduction in profits for incumbent liquidity
providers and thus, these lower costs may be perceived as a cost for
those liquidity providers, even as it is perceived as a benefit for
other market participants.
\133\ T. Lee & C. Wang, Why Trade Over-the-Counter? When
Investors Want Price Discrimination (2019 working paper).
---------------------------------------------------------------------------
2. Benefits
The Commission believes that implementing the rule may reduce
information asymmetries and improve liquidity, particularly on affected
SEFs, and may reduce transaction costs and bid-ask spreads. The
practice of post-trade name give-up and the prospect of information
leakage have reportedly deterred a significant segment of market
participants from making markets on or otherwise participating on
affected SEFs. The Commission expects that many of these market
participants will choose to participate on these SEFs once the practice
is prohibited, leading to increased liquidity. Increased liquidity may
benefit market participants by making it easier to execute
transactions, especially larger transactions, quickly and without undue
price impact.
In order to evaluate the expected benefits of implementing the
rule, the Commission reviewed several empirical studies examining prior
experiences with changes in post-trade anonymity. As detailed in the
Proposal, the studies covered the experiences in U.S. securities
markets and a wide range of foreign financial markets and, on balance,
support the premise that post-trade anonymity promotes trading
liquidity. Commenters in favor of the prohibition of name give-up cited
other studies that further support the benefits of fully-anonymous
trading. Commenters not in favor of prohibiting post-trade name give-up
did not provide data, evidence, or studies regarding the impact of
post-trade anonymity.
Specifically, as discussed in more detail in the Proposal, the
Commission reviewed six event studies focusing on post-trade anonymity
in various equity exchanges around the world, most of which document an
improvement in liquidity. The Commission acknowledges that none of
these studies examine a change in post-trade anonymity for a swaps
market, but the studies do provide real-world evidence on the effects
on liquidity in a range of markets when the rules for post-trade
anonymity are changed. Hence, they provide the most instructive
empirical evidence available regarding a proposed change in such rules.
Four of these studies, which focus on European equity markets, provide
evidence of a liquidity improvement associated with post-trade
anonymity,\134\ which could be attributed to a reduction of information
leakage.\135\ A study on the 2003 introduction of post-trade anonymity
on the NASDAQ platform found no evidence that best quotes were
improved,\136\ while a study on the South Korea Exchange found that
reducing post-trade anonymity led to lower realized spreads.\137\ The
Commission
[[Page 44704]]
believes that on balance the empirical evidence presented in these
academic studies supports the benefits of anonymous trading.
---------------------------------------------------------------------------
\134\ S. Freiderich & R. Payne, Trading Anonymity and Order
Anticipation, 21 Journal of Financial Markets 1-24 (2014); T.G.
Meling, Anonymous Trading in Equities (2019 working paper); P.J.
Dennis & P. Sandas, Does Trading Anonymously Enhance Liquidity?,
Journal of Financial and Quantitative Analysis 1-25 (2019); A.
Hachmeister & D. Schierek, Dancing in the Dark: Post-Trade
Anonymity, Liquidity, and Informed Trading, 34 Review of
Quantitative Finance and Accounting 145-177 (2010).
\135\ S. Freiderich & R. Payne, Trading Anonymity and Order
Anticipation, 21 Journal of Financial Markets 1-24 (2014); J.
Linnainmaa & G. Saar, Lack of Anonymity and the Inference from Order
Flow, 25 Review of Financial Studies 1,414-1,456 (2012).
\136\ K. Benhami, Liquidity providers' valuation of anonymity:
The NASDAQ Market Makers evidence (2006 working paper).
\137\ T.P. Pham, et al., Intra-day Revelation of Counterparty
Identity in the World's Best-Lit Market (2016 working paper).
---------------------------------------------------------------------------
As discussed in more detail in the Proposal, the Commission also
reviewed several theoretical studies. The studies present models with
various levels of post-trade disclosure in different settings, and the
results offer insight into the trade-offs associated with changes in
post-trade anonymity, notwithstanding the fact that the studies did not
directly examine the case of bilateral disclosure of counterparty
identities immediately after each trade. The Commission found that the
results of these theoretical studies were mixed. One study, for
example, focused on the post-trade public disclosure of the trades of
insiders in equity markets, and the authors concluded that public
disclosure of insider trades accelerates the price discovery
process.\138\ Therefore, the results suggest that post-trade anonymity
might strengthen asymmetric information problems in the market and lead
to subsequently reduced liquidity by exacerbating the market maker's
adverse selection problem. Another study concluded that public
disclosure can reduce the informational efficiency of prices and reduce
market liquidity, because informed traders reduce trading in order to
preserve their informational advantage.\139\
---------------------------------------------------------------------------
\138\ S. Huddart, J.S., Hughes & C.B. Levine, Public Disclosure
and Dissimulation of Insider Trades, Econometrica, Vol. 69, No. 3
(May 2001), 665-681.
\139\ A.M. Buffa, Insider Trade Disclosure, Market Efficiency,
and Liquidity (2014 working paper).
---------------------------------------------------------------------------
The Commission also examined one theoretical study that explicitly
addresses the practice of post-trade name give-up. The study,
considered in more detail in the Proposal, modeled the investor choice
between OTC markets and electronic order books.\140\ The authors
supported that the OTC market can detect and attract uninformed traders
(i.e., hedgers who are demanding liquidity but do not possess market
moving information) by offering them lower spreads, which results in an
increase in spreads for informed traders (i.e., traders who demand
liquidity in order to profit from the trade) in an electronic order
book, as well as a decrease in average spreads and an increase in total
volume. The authors concluded that a prohibition on post-trade name
give-up would likely lead to an increase in overall welfare. They
reasoned that, in the absence of post-trade name give-up, informed
traders will continue to trade via RFQ in order to minimize exposure of
their trading intentions, and that spreads in this venue will stay high
to reflect this situation. On the other hand, uninformed traders will
migrate to the order book and trade more, because spreads will decline
due to the increased activity. They predicted that overall welfare
would increase because the aggregate benefits of increased electronic
trading at low spreads would more than offset the aggregate costs to
informed traders who remain concerned about information leakage. The
study is consistent with the Commission's recognition of the trade-offs
in prohibiting post-trade name give-up.
---------------------------------------------------------------------------
\140\ T. Lee & C. Wang, Why Trade Over-the-Counter? When
Investors Want Price Discrimination (2019 working paper).
---------------------------------------------------------------------------
Citadel cited two additional studies that the Commission did not
consider in the Proposal, but which it has now reviewed.\141\ These
studies examined the effect of various levels of intermediation (i.e.,
access to multiple market makers) on liquidity in OTC markets and may
be closer to the setting of the swaps market. One study provided an
empirical evaluation of the implications of the OTC market structure
for non-financial firms in the foreign exchange derivatives
market.\142\ The authors documented extensive discriminatory pricing by
dealers, who appeared to favor sophisticated customers, defined as
those customers transacting high volume with multiple counterparties.
However, clients trading on RFQ platforms, where they can request
quotes from multiple dealers simultaneously, appeared to receive
competitive pricing irrespective of the level of their sophistication
which leads the authors to conclude that discriminatory pricing could
be potentially eliminated with the use of a centralized order book.
Finally, the authors argued that the lack of centralized dissemination
of transaction prices provides dealers with an information advantage
compared to clients, which enables them to extract information
rents.\143\ The Commission recognizes the empirical fact that trading
costs appear to differ across different venues and for different
traders, as this study emphasizes. Nonetheless, the Commission finds
that the design of the study precludes strong causal statements
regarding the causes and effects of the observed variation.
---------------------------------------------------------------------------
\141\ See Citadel Letter 2, at 16.
\142\ H. Hau, P. Hoffmann, S. Langfield, & Y. Timmer,
Discriminatory pricing of over-the-counter derivatives (2017 working
paper). We note that, while the paper focuses on the foreign
exchange derivatives market, its conclusions regarding the impact of
multi-dealer RFQ platforms are generally applicable across markets.
\143\ Id.
---------------------------------------------------------------------------
The second study, which provides a theoretical model of a generic
OTC market, concluded that sophisticated investors, who have access to
multiple market makers or other investors, face lower transaction
costs.\144\ The authors theorized that the availability of other
trading counterparties (i.e., more competition) forces market makers to
provide better pricing. The Commission agrees with the broad conclusion
that more active, competitive markets are welfare enhancing.
---------------------------------------------------------------------------
\144\ D. Duffie, N. G[acirc]rleanu, & L.G. Pedersen, Valuation
in Over-the-Counter Markets, Review of Financial Studies, Vol. 20,
No. 5 (2007).
---------------------------------------------------------------------------
Several commenters addressed the Commission's review of academic
studies in the Proposal. FSF, SIFMA, JPMorgan and TP ICAP each asserted
that the studies on equity markets cited in the Proposal's Cost-Benefit
Considerations (CBC) are not relevant because equity markets are not
comparable to the swaps market.\145\ JP Morgan stated that ``swap
markets have many fewer participants, of which institutional
participants constitute a far larger proportion, much lower trading
frequency, far greater variation in tradeable products, and much larger
typical trade sizes.'' \146\ The Coalition requested a quantitative
analysis of the costs and benefits for commercial end users.\147\ BPI,
FSF, Citi and JPMorgan further asserted that the CBC is not sufficient
and that further study is necessary.\148\
---------------------------------------------------------------------------
\145\ See FSF Letter, at 9; SIFMA Letter, at 3; JPMorgan Letter,
at 9; TP ICAP Letter, at 5.
\146\ JPMorgan Letter, at 9. See also FSF Letter, at 9 (``The
swap markets have many fewer participants, much lower trading
volume, far greater variation in tradable products, and much larger
typical trade sizes.'').
\147\ Coalition Letter, at 2. The Commission notes that it is
not possible to conduct a quantitative analysis of the costs and
benefits to commercial end users of a prohibition on post-trade name
give-up prior to finalizing the rule, because there is no data on
the effects until after the rule is implemented.
\148\ See BPI Letter, at 2; FSF Letter, at 12; Citi Letter, at
3; JPMorgan Letter, at 13-14. See also ABA Letter, at 2 (``[W]e see
no relevant data cited in the Proposed Rule to support the
contention that the prohibition would attract sufficient additional
non-dealer market participants to CLOB SEFs to outweigh these
negative consequences.'').
---------------------------------------------------------------------------
Better Markets, Citadel and AFR each commented that the Proposal,
including the consideration of costs and benefits therein, provides a
sufficient basis with which to move forward with a final rule.\149\
Citadel also argued that the Proposal is consistent with the
Commission's previous decision in implementing part 37 not to limit SEF
[[Page 44705]]
access to just swap dealers, and therefore the Commission can rely on
its cost-benefit considerations for that rulemaking to support a
prohibition on post-trade name give-up.\150\ Citadel further argued
that claims by some commenters that commercial end-users transacting
swaps off-SEF might be negatively affected by the Proposal conflicts
with academic research.\151\
---------------------------------------------------------------------------
\149\ See AFR Letter, at 1; Better Markets Letter, at 5; Citadel
Letter 1, at 11; Citadel Letter 2, at 14-15.
\150\ Citadel Letter 2, at 14.
\151\ Citadel Letter 2, at 15. Citadel cited two academic
studies that it asserted ``suggests that commercial end-users may
not be best-served by maintaining the current status quo.'' Id.
These studies show that access to multiple market makers reduces
trading costs.
---------------------------------------------------------------------------
The Commission notes that commenters who support prohibiting post-
trade name give-up generally considered the academic studies discussed
in the Proposal to be informative, while commenters who oppose the
prohibition assert that the studies are not informative because swaps
markets are different than equity markets. The Commission acknowledges
that there are differences between the equity markets in most of these
empirical studies and the U.S. swaps markets. Further, the Commission
understands that the equity markets examined do not generally mirror
the exact dealer-centric swaps markets under consideration.
Nonetheless, the wide range of markets, time periods, and experiences
considered in the empirical studies leads the Commission to conclude
that the value of anonymous trading is well-established. Moreover, to
the extent that liquidity provision in swaps markets is more
concentrated than in the most active and liquid equity markets, the
empirical studies that provide evidence on smaller equity markets, or
on the less liquid stocks in a given market, might be most informative.
Some of the equity markets studied may be deeper and more liquid
than the U.S. swaps market. However, several of the markets studied are
equity markets that are smaller than the U.S. equity market (e.g.,
Finland, Norway, and Sweden), and therefore potentially more comparable
to the swaps markets in the U.S. For example, one of the early
empirical studies on the implementation of post-trade anonymity on the
London Stock Exchange in 2001 finds that liquidity improvements were
more pronounced for small stocks and stocks with higher trading
concentration, which were potentially subject to larger information
asymmetries. The Commission notes that, with respect to the smaller
universe of liquidity providers, markets for smaller stocks could be
more analogous to swaps markets than markets for larger and more liquid
stocks with a broader array of market participants.
Commenters who objected to the application of the studies did not
provide evidence to support the argument that the differences between
the anonymous order books in swaps and equity markets would prevent the
liquidity improvement associated with greater post-trade anonymity, as
suggested by the empirical studies in equity markets. Accordingly, the
Commission agrees with those commenters who stated that the studies are
instructive for U.S. swap markets, since they share the use of pre-
trade anonymous order books and these studies appear to be of markets
that are more analogous to swap markets than any other empirical study
the Commission or commenters have identified.\152\
---------------------------------------------------------------------------
\152\ Citi did suggest that the Commission study the effects of
post-trade anonymity on the emerging market bond market. Citi
Letter, at 4. The Commission does not have jurisdiction over
emerging market bonds and does not have access to the relevant data.
---------------------------------------------------------------------------
The Commission believes that prohibiting post-trade name give-up is
reasonably likely to improve liquidity on SEFs, particularly on
affected pre-trade anonymous markets, as additional market participants
choose to participate on these markets once post-trade name give-up is
prohibited. The Commission has not found convincing evidence that a
prohibition on post-trade name give-up will have net liquidity-reducing
effects. Rather, the Commission notes that the evidence from the
studies, as discussed above, suggests that markets with pre- and post-
trade anonymity generally feature greater liquidity than those without.
Moreover the Commission is concerned that the status quo may facilitate
information asymmetries and hinder access and participation on affected
SEFs for many market participants. The Commission believes that the
rule as adopted may benefit market participants by reducing these
information asymmetries and will increase participation on these SEF
platforms.
3. Consideration of Alternatives
TP ICAP suggested the alternative that any prohibition on post-
trade name give-up should be limited to, at most, swaps subject to the
clearing requirement rather than all swaps that are intended to be
cleared, because a SEF may not know whether the parties to a
voluntarily-cleared swap will submit the swap to a DCO, as the parties
may do so themselves post-execution. The Commission has determined not
to adopt this alternative. The Commission notes that whether a swap is
intended to be cleared is a material term that affects trade pricing
and trade processing workflows, and it is something that SEF should be
able to determine at the time of execution, including for voluntarily-
cleared swaps. Thus, the Commission believes that the final rule, which
applies the prohibition to voluntarily-cleared swaps, will enable a
larger scope of swaps to receive the benefits associated with the
regulation, including, potentially, greater participation and improved
liquidity. However, to ensure that SEFs are provided with adequate time
to make any necessary changes to their systems, the Commission is
providing a phased compliance schedule, as discussed above.
A number of commenters suggested that before implementing a full
post-trade name give-up prohibition, the Commission should implement a
time-limited pilot program that would prohibit post-trade name give-up
for some, but not all, products.\153\ These commenters asserted that a
pilot program would allow the Commission to assess the impact of a
post-trade name give-up prohibition before requiring market-wide
changes. The Commission has determined not to adopt this alternative. A
temporary pilot program may provide market participants with different
incentives than a permanent rule and thus may not be indicative of the
efficacy of a permanent rule. As Citadel noted, ``a short-term pilot
would be easily susceptible to manipulation. Given their commercial
interests in maintaining the status quo and privileged position as
liquidity providers, the incumbent dealer banks could temporarily
provide worse pricing for instruments covered by the name give-up
prohibition in order to dictate the pilot results.'' \154\ The
Commission agrees that a pilot program could create an incentive to
engage in such conduct, but a permanent prohibition will not.
---------------------------------------------------------------------------
\153\ See Citi Letter, at 5; JPMorgan Letter, at 14; FSF Letter,
at 14.
\154\ Citadel Letter 2, at 16.
---------------------------------------------------------------------------
FSF and JP Morgan suggested the alternative approach whereby the
Commission would require every order book SEF that offers post-trade
name give-up to design a method that would permit its participants to
opt out of post-trade name give-up, which could be through a parallel,
fully-anonymous order book, or by allowing participants to opt-out of
post-trade name give-up on
[[Page 44706]]
an order-by-order basis.\155\ In the view of FSF, this approach would
provide freedom for market participants to transact in the manner in
which they wish to, while providing the option of fully-anonymous
trading to buy-side clients concerned with undesirable information
leakage.\156\ The Commission has determined not to adopt this
alternative. The Commission believes that post-trade name give-up is
likely to persist wherever it is permitted, and that this alternative
would provide little or no benefit while still imposing costs on SEFs
that are at least as high as those of a full prohibition (as SEFs would
need to change their systems to allow opting out). The Commission
agrees with Citadel's statement that one ``would expect incumbent
dealer banks not to agree to opt-out of name give-up, meaning that very
little would change on [interdealer broker] SEFs.'' \157\
---------------------------------------------------------------------------
\155\ FSF Letter, at 14, JPMorgan Letter, at 15.
\156\ FSF Letter, at 14.
\157\ See Citadel Letter 2, at 16.
---------------------------------------------------------------------------
FSF suggested an alternative whereby the Commission would exclude
from the prohibition on post-trade name give-up any SEF that obtains a
material portion of its trading volume, over a specified period,
through workups. JPMorgan and FSF asserted that post-trade name give-up
is an integral part of workup protocols, and the prohibition will
impair workup protocols and adversely affect dealers' ability to hedge
via adverse selection. In contrast, Citadel and MFA assert that post-
trade name give-up is not necessary for workup sessions. Citadel
asserted that if a trading protocol is pre-trade anonymous, there is no
need to disclose the trading counterparties in order to engage in a
workup session and, therefore, workup sessions will function just as
they do today. Citadel also stated that claims to the contrary ``are
easily disproven by looking at the U.S. Treasury market, where work-ups
are commonly employed on interdealer platforms even though name give-up
is not used.'' \158\ MFA further argued that prohibiting post-trade
name give-up would benefit trading protocols such as auctions,
portfolio compression, and/or workup sessions by increasing buy-side
access and participation.
---------------------------------------------------------------------------
\158\ Citadel Letter 2, at 11.
---------------------------------------------------------------------------
The Commission has determined not to adopt this alternative. The
Commission agrees with those comments asserting that post-trade name
give-up is not necessary for workup sessions and that post-trade
anonymity will not make workup sessions more difficult or costly and
may provide the benefits associated with increased participation. The
reasons given by JPMorgan and FSF relating to why they view post-trade
name give-up to be an important aspect of workup sessions are
essentially the same reasons espoused for the purported benefits of
post-trade name give-up generally, i.e., avoiding adverse selection and
ensuring reliable hedging for incumbent swap dealers.
Some commenters proposed an alternative of not applying the
prohibition on post-trade name give-up to error trade corrections.
Commenters asserted that post-trade name give-up remains necessary for
counterparties to correct operational or clerical errors resulting in a
trade being rejected for clearing. Citadel disagreed with these
commenters, noting that SEFs can facilitate the correction of errors
without disclosing the identities of counterparties. The Commission has
determined not to adopt this alternative. A SEF can intermediate
communications, if necessary, and otherwise facilitate error trade
corrections without disclosing counterparty identities. The Commission
acknowledges that some SEFs may incur additional costs associated with
ensuring that their rules and procedures for error trades allow for
error trade remediation without disclosure of the identities of
counterparties to one another. The Commission notes that designated
contract markets resolve error trades without engaging in name give-up,
and SEFs already intermediate the resolution of error trades to varying
degrees. The Commission believes that the additional costs some SEFs
may incur to employ anonymous error trade remediation are relatively
modest.
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
The final rule is intended to protect market participants and the
public by advancing the statutory goals of: (1) Promoting swaps trading
and pre-trade price transparency on SEFs; (2) fostering fair
competition among market participants; (3) providing market
participants with impartial access to SEFs; and (4) maintaining the
privacy of swap transaction information.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
The final rule is intended to enhance competitiveness in the swap
markets by removing an effective barrier to participation on SEFs for
many market participants who are concerned with the prospect of
information leakage. The Commission expects participation on SEFs to
increase as a result, leading to greater competition.
c. Price Discovery
The Commission believes that by increasing participation and
competition on SEFs, the final rule will decrease information
asymmetries between market participants, allowing market participants
to attain broader knowledge of pricing across more SEFs, thereby
enhancing SEF trading as a mechanism for price discovery.
d. Sound Risk Management Practices
Similarly, increased participation and competition on SEFs and
decreased information asymmetry among market participants is likely to
enhance SEF trading as a mechanism for risk management.
e. Other Public Interest Considerations
Post-trade name give-up is inconsistent with provisions intended to
protect the privacy of a swap counterparty's trading information.
Prohibiting post-trade name give-up will help to effectuate the
statutory privacy protections under CEA section 21(c)(6) that apply to
this information. Moreover, the Commission believes that the
prohibition is reasonably likely to lead to enhanced liquidity and
lower transaction costs.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\159\ The Commission believes that the public
interest to be protected by the antitrust laws is generally to protect
competition. In the Proposal, the Commission requested comments on
whether: (1) The proposed rulemaking implicates any other specific
public interest to be protected by the antitrust laws; (2) the proposed
rulemaking is anticompetitive, and if it is, what are anticompetitive
effects; and (3) there are less anticompetitive means of achieving the
relevant purposes of the CEA that would otherwise be served by adopting
the proposed rules.
---------------------------------------------------------------------------
\159\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission does not anticipate that the amendments to part 37
that it is adopting today will result in anticompetitive behavior, but
instead, believes that the amendments will
[[Page 44707]]
promote greater competition on, and among, SEFs. In the proposal, the
Commission encouraged comments from the public on any aspect of the
rulemaking that may have the potential to be inconsistent with the
antitrust laws or be anticompetitive in nature. The Commission received
two comments asserting that the proposed rule may be anticompetitive.
JPMorgan commented that prohibiting post-trade name give-up ``would
itself impair competition and pose an unreasonable restraint on trade
by forcing dealers to trade fully anonymously in order to access a
[central-limit order-book], even though dealers prefer [post-trade name
give-up] . . . .'' \160\ FSF similarly commented that ``banning name
give-up would itself impair competition (certainly, innovation and
competition among markets) and unnecessarily push dealers to trade
fully anonymously in order to access an Order Book SEF, despite their
bona fide preference for name give-up.'' \161\ As stated above, the
Commission disagrees with comments that prohibiting post-trade name
give-up would impair competition. Post-trade name give-up is an
ancillary post-trade protocol, and not a method of execution. It does
not proscribe SEFs from offering any existing execution method, nor
does it prevent SEFs from developing new execution methods. Moreover,
the Commission is concerned by other commenters' assertions that post-
trade name give-up enables anticompetitive behavior,\162\ and the
Commission believes that prohibiting post-trade name give-up will
reduce the opportunity for such behavior to occur, and is therefore
reasonably necessary to promote fair competition among market
participants. The Commission has considered the rulemaking and related
comments to determine whether it is anticompetitive and continues to
believe that these amendments to part 37 will not result in
anticompetitive behavior.
---------------------------------------------------------------------------
\160\ JPMorgan Letter, at 10.
\161\ FSF Letter, at 10.
\162\ See supra note 37 and accompanying text.
---------------------------------------------------------------------------
List of Subjects in 17 CFR Part 37
Swaps, Swap execution facilities.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 37 as follows:
PART 37--SWAP EXECUTION FACILITIES
0
1. The authority citation for part 37 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a, as
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.
0
2. In Sec. 37.9, add paragraph (d) to read as follows:
Sec. 37.9 Methods of execution for required and permitted
transactions.
* * * * *
(d) Counterparty anonymity. (1) Except as otherwise required under
the Act or the Commission's regulations, a swap execution facility
shall not directly or indirectly, including through a third-party
service provider, disclose the identity of a counterparty to a swap
that is executed anonymously and intended to be cleared.
(2) A swap execution facility shall establish and enforce rules
that prohibit any person from directly or indirectly, including through
a third-party service provider, disclosing the identity of a
counterparty to a swap that is executed anonymously and intended to be
cleared.
(3) For purposes of paragraphs (d)(1) and (2) of this section,
``executed anonymously'' shall include a swap that is pre-arranged or
pre-negotiated anonymously, including by a participant of the swap
execution facility.
(4) For a package transaction that includes a component transaction
that is not a swap intended to be cleared, disclosing the identity of a
counterparty shall not violate paragraph (d)(1) or (2) of this section.
For purposes of this paragraph, a ``package transaction'' consists of
two or more component transactions executed between two or more
counterparties where:
(i) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(ii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
Issued in Washington, DC, on June 29, 2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Post-Trade Name Give-Up on Swap Execution Facilities--
Commission Voting Summary, Chairman's Statement, and Commissioners'
Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Joint Supporting Statement of Chairman Heath P. Tarbert,
Commissioner Rostin Behnam, and Commissioner Dan M. Berkovitz
As we have previously stated,\1\ it is a fundamental principle
of exchange-style trading systems that the buyer and seller of a
given financial instrument have no reason to know--and do not know--
one another's identity.\2\ This levels the playing field for
counterparties of all sizes and types by allowing traders to enter
and exit the market without exposing their trading positions and
strategies.\3\ As a result, markets with pre- and post-trade
anonymity are generally not only fairer, but also feature greater
liquidity, a more diverse set of market participants, and greater
competition.\4\
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\1\ Joint Statement of Chairman Heath Tarbert, Commissioner
Rostin Behnam, and Commissioner Dan Berkovitz in Support of Proposed
Rule Restricting Post-Trade Name Give-Up (Dec. 18, 2019).
\2\ See, e.g., Peter A. McKay, CME and CBOT to Close Loophole,
Wall St. J. (Apr. 15, 2006) (``When stocks are traded on public
exchanges, investors generally don't know who they are buying from
or selling to. On futures exchanges, most investors expect the same
thing when trading electronically.'').
\3\ See, e.g., Peter Madigan, CFTC to Test Role of Anonymity in
SEF Order Book Flop, Risk (Nov. 21, 2014) (noting arguments that
anonymity creates a more egalitarian market); Managed Funds
Association (``MFA''), Position Paper: Why Eliminating Post-Trade
Name Disclosure Will Improve the Swaps Market 8 (Mar. 31, 2015)
(arguing that ``markets should remain anonymous to create a level
playing field for all participants''); CFTC Market Risk Advisory
Committee, Panel Discussion: Market's Response to the Introduction
of SEFs 139 (Apr. 2, 2015) (``MRAC Meeting Transcript'') (noting
buy-side reticence to use SEF order books with name give-up because
of potential uncontrolled information leakage). This can prevent
price discrimination based on the identity of the counterparty.
\4\ See, e.g., MRAC Meeting Transcript, supra note 3, at 154
(explaining that anonymous order books have facilitated liquidity
and diverse participation in markets for other instruments, such as
equities and futures); S. Freiderich & R. Payne, Trading Anonymity
and Order Anticipation, 21 Journal of Financial Markets 1-24 (2014)
(finding that post-trade anonymity improved market liquidity,
particularly for small stocks and stocks with concentrated trading,
which may be more analogous to swaps); Treasury Market Practices
Group, White Paper on Clearing and Settlement in the Secondary
Market for U.S. Treasury Securities (Jul. 11, 2019) (stating that
emergence of new types of market participants in the fully anonymous
U.S. Treasury securities market has ``likely improved overall
liquidity through enhanced order flow and competition'').
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[[Page 44708]]
In the swaps market, a number of swap execution facilities
(``SEFs'') provide for post-trade disclosure of the name of the
counterparty, a practice that is known as ``name give-up.'' This
protocol is a vestige of the pre-Dodd-Frank era, when few swaps were
centrally cleared and market participants needed to know their
counterparty's identity to manage the associated credit risk. Given
the advent of central clearing, many have appropriately questioned
the continuing need for post-trade name give-up for cleared swaps.
Others have gone further, criticizing the practice as
anticompetitive, an obstacle to broad and diverse participation on
SEFs, and potentially inconsistent with numerous provisions of the
Commodity Exchange Act (``CEA'') and Commission regulations.
In 2019, after considering responses to a request for comment on
the issue,\5\ the Commission issued a proposed rule (``Proposal'')
to restrict name give-up such that trades that are executed
anonymously on-SEF and cleared would remain anonymous after
execution.\6\ Public comments on the Proposal reflected a variety of
differing viewpoints and interests. The agency carefully considered
all comments in crafting the final rule we voted to approve today.
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\5\ CFTC Request for Comment on Post-Trade Name Give-Up on Swap
Execution Facilities, 83 FR 61,571 (Nov. 30, 2018).
\6\ Post-Trade Name Give-Up on Swap Execution Facilities, 84 FR
72262 (Dec. 31, 2019).
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We believe the final rule reflects a balanced approach, is
workable, and will improve overall market vibrancy. The rule
prohibits name give-up for swaps that are executed anonymously and
intended to be cleared. However, it does not apply to swaps that are
not intended to be executed anonymously, such as trades done via a
name-disclosed request for quote. The rule also includes a limited
exception for package transactions \7\ with at least one component
that is an uncleared swap or a non-swap instrument. This exception
reflects current technological and operational realities that
require counterparty disclosure for the non-swap or non-cleared swap
component of such trades.\8\ In addition, the rule includes a phased
implementation schedule to allow SEFs and market participants time
to adjust to the changes.
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\7\ The rule defines a ``package transaction'' as ``consist[ing]
of two or more component transactions executed between two or more
counterparties where: (i) Execution of each component transaction is
contingent upon the execution of all other component transactions;
and (ii) the component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.''
\8\ As noted in the preamble to the final rule, we urge SEFs and
their participants to work towards an infrastructure that ultimately
does support anonymous post-trade processing for packages including
certain cleared non-swap components (e.g., U.S. Treasuries). The
preamble to the final rule also notes the Commission's intention to
monitor market developments and evaluate the continued need for the
package transaction exception in the future.
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We believe the rule's fundamental objective--protecting trading
anonymity where it is possible to do so--is key to two statutory
goals for the SEF regime: (1) Promoting swaps trading on SEFs \9\
and (2) promoting fair competition among market participants,
including through impartial access to a SEF's trading platform.\10\
Indeed, we hope the rule will help attract a diverse set of
additional market participants who have been deterred from trading
on these platforms by the practice of post-trade name give-up, but
remain interested in bringing liquidity and competition to SEFs.
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\9\ CEA section 5h(e), 7 U.S.C. 7b-3(e). In this regard, the
CFTC intends to complete a preliminary study of the state of swaps
markets one year after the initial phase of the rule takes effect,
and to follow up with further study after the rule has been in
effect for three years.
\10\ CEA section 3(b), 7 U.S.C. 5(b) (listing fair competition
among market participants as a goal of the CEA); CEA section
5h(f)(2)(B)(i) (requiring a SEF to establish and enforce rules to
provide participants impartial access to the market).
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The issue of name give-up can be a bit of a lightning rod,
sometimes inciting passionate disagreements between stakeholders. We
and CFTC staff stand ready to work with market participants and
market operators to resolve any new issues that may arise as the
rule is implemented. We hope that all parties to this debate can
constructively move forward together toward the goals of sound
derivatives regulation and robust financial markets.
Appendix 3--Supporting Statement of Commissioner Brian Quintenz
I will vote in favor of today's final rule to prohibit post-
trade name give-up practices for swaps executed, pre-arranged, or
pre-negotiated anonymously on or pursuant to the rules of a swap
execution facility (SEF) and intended-to-be-cleared (Final Rule).
As I have noted previously, I have concerns about the government
banning an established trading practice that has evolved from
natural market forces to support swaps liquidity provision. Client
swap activity is inherently dealer and relationship-sourced. That is
why the name-disclosed Request for Quote (RFQ) model has been highly
favored over the anonymous Central Limit Order Book (CLOB) model in
the client market. Although the Final Rule predicts that the ban on
name give-up will result in increased participation and competition
in the dealer-to-dealer market, I remain concerned that banning
post-trade name give-up will negatively impact dealers' ability to
hedge efficiently on existing inter-dealer platforms, which will
ultimately lead to a degradation in the pricing and liquidity
provision of swaps trading on dealer-to-client platforms. I am also
doubtful that new entrants into the wholesale market will use the
advantages of that participation to add any meaningful liquidity in
the client market, making it even less certain that the benefits of
enhanced competition hoped for in this Final Rule will be passed
through to end-users.
Despite my concerns, I am supporting the Final Rule because it
adopts an important exception from the prohibition, as well as an
incremental approach that will give the Commission and market
participants time to transition into compliance, observe the impact
of the Final Rule, and make adjustments in the future, if necessary.
For example, the Final Rule includes a significant exception for
package transactions that include a component transaction that is
not a swap intended-to-be-cleared. The exception would include U.S.
Treasury swap spread package trades involving an intended-to-be-
cleared swap and a U.S. Treasury security component. These package
transactions are rarely traded on dealer-to-client platforms, but
make up a significant portion of volume on dealer-to-dealer
platforms. Recognizing this important difference between markets is
a small but necessary accommodation to ensure package trades can
continue to be efficiently executed in light of this mandated change
to market trading protocols.
The Final Rule also adopts staggered compliance deadlines, with
the most liquid swaps coming into compliance first, and less liquid
swaps becoming subject to the ban in July 2021. In the interim, the
Commission plans to conduct a preliminary study of the Final Rule's
impact on SEF trading by July 2021, with a further study to be
conducted by July 2023. These studies will allow the Commission to
assess if the ban on post-trade name give-up is, in fact, increasing
competition and liquidity on SEFs, as the ban is intended to do. If
a more fulsome analysis reveals that the ban has not yielded its
expected benefits, or may not be appropriate for certain products
given their liquidity profile, I expect further adjustments will be
made to maintain a well-functioning swaps market.
Lastly, I would like to thank staff of the Division of Market
Oversight for working with my staff to incorporate many of my
comments into the Final Rule.
[FR Doc. 2020-14343 Filed 7-23-20; 8:45 am]
BILLING CODE 6351-01-P
