[Federal Register Volume 85, Number 244 (Friday, December 18, 2020)]
[Rules and Regulations]
[Pages 82313-82332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26555]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 36 and 37

RIN 3038-AE94


Swap Execution Facility Requirements

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting final rules to amend certain parts of its 
regulations relating to the execution of package transactions on swap 
execution facilities (``SEFs'') and the resolution of error trades on 
SEFs. These matters are currently the subject of relief in certain no-
action letters from Commission staff.

DATES: The rules will become effective February 16, 2021.

FOR FURTHER INFORMATION CONTACT: Roger Smith, Associate Chief Counsel, 
(202) 418-5344, <a href="/cdn-cgi/l/email-protection#1361607e7a677b53707567703d747c65"><span class="__cf_email__" data-cfemail="a4d6d7c9cdd0cce4c7c2d0c78ac3cbd2">[email protected]</span></a>, Division of Market Oversight, 
Commodity Futures Trading Commission, 525 West Monroe Street, Suite 
1100, Chicago, Illinois 60661, or Michael Penick, Senior Economist, 
(202) 418-5279, <a href="/cdn-cgi/l/email-protection#3d504d5853545e567d5e5b495e135a524b"><span class="__cf_email__" data-cfemail="a8c5d8cdc6c1cbc3e8cbcedccb86cfc7de">[email protected]</span></a>, Office of the Chief Economist, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st 
Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Part 37 of the Commission's Regulations
    B. Summary of Proposed Changes to Parts 36 and 37
    C. Consultation With Other U.S. Financial Regulators
II. Final Rules
    A. Addition of Sec.  37.9(d) and Amendment of Sec.  37.9(a) for 
the Execution of Certain Package Transactions
    1. Proposed Rules
    2. Public Comment
    3. Commission Determination
    B. Addition of Sec.  37.3(a)(4)
    1. Proposed Rule
    2. Public Comment
    3. Commission Determination
    C. Exemption of New Issuance Bond Package Transactions From the 
Trade Execution Requirement--Addition of Sec.  36.1
    1. Proposed Exemption
    2. Public Comment
    3. Commission Determination and Discussion of CEA Section 4(c) 
Authority
    D. Error Trades: Execution of Trades To Correct Operational and 
Clerical Errors on Swap Execution Facilities--Addition of Sec.  
37.9(e)
    1. Proposed Rules
    2. Public Comment
    3. Commission Determination
III. Effective Date
IV. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

A. Part 37 of the Commission's Regulations

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') amended the Commodity Exchange Act (``CEA'' or 
``Act'') by adding section 5h, which establishes registration 
requirements and core principles for swap execution facilities 
(``SEFs'').\1\ The Commission implemented CEA section 5h by adopting 
regulations that establish various trading requirements for swaps 
traded on SEFs \2\ and articulating, where appropriate, guidance and 
acceptable practices. In particular, the Commission promulgated part 37 
of its regulations to implement section 5h of the CEA and set forth the 
registration and operational requirements for SEFs.\3\ Among those are 
requirements in part 37 specifying minimum trading functionality that a 
SEF must offer to participants for all listed swaps, i.e., an ``order 
book,'' as defined in Sec.  37.3 (``Order Book''); \4\ specifying the 
types of systems or platforms that a SEF must offer for swaps trading, 
including swaps subject to the trade execution requirement under CEA 
section 2(h)(8); \5\ and setting forth other relevant regulations 
applicable to the fifteen core principles with which a SEF must comply 
to obtain and maintain registration with the Commission.
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    \1\ 7 U.S.C. 7b-3.
    \2\ The Dodd-Frank Act also added to the CEA certain provisions 
related to the trading of swaps on designated contract markets 
(``DCMs''). Given that almost all platform trading of swaps in the 
U.S. occurs on SEFs, the Commission is not at this time amending any 
regulatory requirements pertaining to DCMs within part 38 of the 
Commission's regulations.
    \3\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476 (June 4, 2013) (hereinafter ``SEF Core 
Principles Final Rule'').
    \4\ 17 CFR 37.3(a)(2). An Order Book is defined as (i) an 
``electronic trading facility,'' as that term is defined in CEA 
section 1a(16); (ii) a ``trading facility,'' as that term is defined 
in CEA section 1a(51); or (iii) a trading system or platform in 
which all market participants have the ability to enter multiple 
bids and offers, observe or receive bids and offers entered by other 
market participants, and transact on such bids and offers. See 17 
CFR 37.3(a)(3).
    \5\ CEA section 2(h)(8) requires that transactions involving 
swaps subject to the CEA section 2(h)(1) clearing requirement be 
executed on or pursuant to the rules of a DCM or SEF, or a SEF that 
is exempt from registration, unless no DCM or SEF makes such swaps 
available to trade (``MAT'') or such swaps qualify for the clearing 
exception under CEA section 2(h)(7) (the ``trade execution 
requirement''). See 7 U.S.C. 2(h)(8).
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    Commission regulation 37.9 prescribes the methods of execution that 
a SEF must offer to market participants to execute swap transactions on 
the SEF. In particular, Sec.  37.9(a) defines ``Required Transactions'' 
as swaps subject to the trade execution requirement. Section 37.9(a) 
also requires a SEF to offer, as required methods of execution, either 
(i) an Order Book or (ii) a request-for-quote

[[Page 82314]]

system that sends a request-for-quote to no less than three 
unaffiliated market participants and operates in conjunction with an 
Order Book (``RFQ System'') for the execution of these transactions.\6\ 
Swaps that are not subject to the trade execution requirement are 
defined as ``Permitted Transactions,'' for which a SEF may offer any 
execution method and for which market participants may voluntarily 
trade on a SEF.\7\ The Commission's regulations specify additional 
requirements that correspond to the use of an Order Book or RFQ System 
to execute Required Transactions.\8\
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    \6\ 17 CFR 37.9(a). With the exception of block trades, as 
defined in Sec.  43.2 of the Commission's regulations, Required 
Transactions must be executed on a SEF's Order Book or RFQ System. 
See 17 CFR 37.9(a)(2)(i).
    \7\ 17 CFR 37.9(c).
    \8\ For example, under Sec.  37.9(b), the Commission implemented 
a fifteen-second time-delay requirement for Required Transactions 
that are pre-arranged or pre-negotiated by a broker and submitted as 
cross trades for execution through the SEF's Order Book. This 
requirement allows a broker or dealer to execute a Required 
Transaction by trading against a customer's order, or executing two 
customers' orders against each other, through pre-negotiation or 
pre-arrangement, provided that one side of the transaction is 
exposed to the Order Book for fifteen seconds before the other side 
of the transaction is submitted for execution. See 17 CFR 37.9(b).
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B. Summary of Proposed Changes to Parts 36 and 37

    During the implementation of part 37, market participants and SEFs 
identified certain operational and compliance burdens related to 
various requirements. To mitigate these burdens, Commission staff 
issued to SEFs and market participants time-limited no-action relief 
from certain provisions of the CEA and the Commission's regulations.\9\ 
Based on this implementation experience, on February 19, 2020, the 
Commission released a proposal \10\ (the ``Proposal'') to amend the SEF 
regulatory framework to address the following issues, which had been 
identified in staff no-action letters. In particular, within the 
Proposal:\11\
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    \9\ As defined in Sec.  140.99(a)(2) of the Commission's 
regulations, a no-action letter is a written statement issued by a 
Division stating that it will not recommend enforcement action to 
the Commission for failure to comply with a specific provision of 
the Act or a Commission rule, regulation, or order. A no-action 
letter represents only the issuing Division's position and binds 
only that Division. 17 CFR 140.99(a)(2).
    \10\ See Swap Execution Facility Requirements and Real-Time 
Reporting Requirements, 85 FR 9407 (Feb. 19, 2020). The relief in 
many instances also applies to DCMs. See supra note 2.
    \11\ In addition to what is specified below, in the Proposal, 
the Commission proposed to amend the definition of ``block trade'' 
in Sec.  43.2 to enable SEFs to offer non-Order Book methods of 
execution for market participants to execute swap block trades on 
the SEF. The proposed amendment would codify CFTC No-Action Letter 
No. 17-60 (``NAL No. 17-60'') while also allowing block trades for 
swaps that are not intended to be cleared (``ITBC'') to be executed 
on SEF via non-Order Book methods of execution. On September 17, 
2020, the Commission adopted final rules amending certain 
regulations setting forth the real-time public swap reporting and 
dissemination requirements. Within those final rules, the Commission 
adopted, with minor technical changes, the Proposal's proposed 
amendment to the definition of ``block trade'' in Sec.  43.2. Real-
Time Public Reporting Requirements, 85 FR 75422 (Nov. 25, 2020) 
(``2020 Part 43 Final Rules'').
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    <bullet> The Commission proposed to amend part 37 to allow the swap 
components of certain categories of ``package transactions'' \12\ to be 
executed on-SEF through flexible means of execution pursuant to Sec.  
37.9(c)(2), rather than through the required methods of execution under 
Sec.  37.9(a) for ``Required Transactions.'' In addition, the 
Commission proposed to amend part 36 to include an exemption from the 
trade execution requirement for swap transactions that are executed as 
a component of a package transaction that also includes a component 
that is a new issuance bond (``New Issuance Bond package 
transactions''). CFTC No-Action Letter No. 20-31 (``NAL No. 20-
31''),\13\ which extended and replaced NAL 17-55, currently provides 
no-action relief for the swap components of certain categories of 
package transactions from the required methods of execution, and in 
some instances, from the trade execution requirement.
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    \12\ As used herein a package transaction consists of two or 
more component transactions executed between two or more 
counterparties where: (i) At least one component transaction is a 
Required Transaction; (ii) execution of each component transaction 
is contingent upon the execution of all other component 
transactions; and (iii) the component transactions are priced or 
quoted together as one economic transaction with simultaneous or 
near-simultaneous execution of all components.
    \13\ NAL No. 20-31, Re: Extension of No-Action Relief from 
Sections 2(h)(8) and 5(d)(9) of the Commodity Exchange Act and from 
Commission Regulations 37.3(a)(2) and 37.9 for Swaps Executed as 
Part of Certain Package Transactions (Oct. 9, 2020). NAL No. 20-31 
extended no-action relief and related conditions previously granted 
by Commission staff. See CFTC Letter No. 14-12, No-Action Relief 
from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and 
from Commission Regulation Sec.  37.9 for Swaps Executed as Part of 
a Package Transaction (Feb. 10, 2014) (``NAL No. 14-12''); CFTC 
Letter No. 14-62, No-Action Relief from the Commodity Exchange Act 
Sections 2(h)(8) and 5(d)(9) and from Commission Regulation Sec.  
37.9 for Swaps Executed as Part of Certain Package Transactions and 
No-Action Relief for Swap Execution Facilities from Compliance with 
Certain Requirements of Commission Regulations Sec.  37.9(a)(2), 
Sec.  37.203(a) and Sec.  38.152 for Package Transactions (May 1, 
2014) (``NAL No. 14-62''); CFTC Letter No. 14-121, Extension of No-
Action Relief for Swap Execution Facilities and Designated Contract 
Markets from Compliance with Certain Requirements of Commission 
Regulations Sec.  37.9(a)(2), Sec.  37.203(a) and Sec.  38.152 for 
Package Transactions (Sept. 30, 2014) (``NAL No. 14-121''); CFTC 
Letter No. 14-137, Extension of No-Action Relief from the Commodity 
Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission 
Regulation Sec.  37.9 and Additional No-Action Relief for Swap 
Execution Facilities from Commission Regulation Sec.  37.3(a)(2) for 
Swaps Executed as Part of Certain Package Transactions (Nov. 10, 
2014) (``NAL No. 14-137''); CFTC Letter No. 15-55, Extension of No-
Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 
5(d)(9) and from Commission Regulation Sec.  37.9 and No-Action 
Relief for Swap Execution Facilities from Commission Regulation 
Sec.  37.3(a)(2) for Swaps Executed as Part of Certain Package 
Transactions (Oct. 15, 2015) (``NAL No. 15-55''); CFTC Letter No. 
16-76, Re: Extension of No-Action Relief from the Commodity Exchange 
Act Sections 2(h)(8) and 5(d)(9) and from Commission Regulation 
Sec.  37.9 and No-Action Relief for Swap Execution Facilities from 
Commission Regulation Sec.  37.3(a)(2) for Swaps Executed as Part of 
Certain Package Transactions (Nov. 1, 2016) (``NAL No. 16-76''); 
CFTC Letter No. 17-55, Re: Extension of No-Action Relief from 
Sections 2(h)(8) and 5(d)(9) of the Commodity Exchange Act and from 
Commission Regulations 37.3(a)(2) and 37.9 for Swaps Executed as 
Part of Certain Package Transactions (Oct. 31, 2017) (``NAL No. 17-
55''). NAL No. 20-31 also provides relief for package transactions 
where at least one individual swap component is subject to the trade 
execution requirement and all other components are futures contracts 
(``MAT/Futures package transactions''). The Commission did not 
propose any regulations related to the MAT/Futures package 
transactions in the Proposal. As such, the Commission continues to 
evaluate MAT/Futures package transactions and their regulatory 
treatment.
    Further, NAL No. 20-31 also applies to package transactions 
occurring on a DCM. See supra note 2.
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    <bullet> The Commission proposed to amend part 37 to establish a 
principles-based approach for SEF error trade policies that 
incorporated relief from the required methods of execution under Sec.  
37.9(a) for Required Transactions for trades intended to resolve error 
trades. The amendment would enable SEFs to permit market participants 
to execute swaps transactions to correct operational or clerical errors 
using execution methods other than those required under Sec.  37.9(a) 
for Required Transactions. The Proposal did not seek to codify the 
specific conditions contained in CFTC No-Action Letter No. 17-27 (``NAL 
No. 17-27'').\14\ Rather, the Proposal intended to capture the intent 
of NAL No. 17-27 to permit market participants to correct error trades 
in Required Transactions through non-required methods of execution 
while providing flexibility for SEFs to determine the most suitable 
error trade

[[Page 82315]]

rules for their markets and participants.\15\
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    \14\ The Proposal also did not propose to codify the 
supplemental conditions to NAL No. 17-27 contained in CFTC No-Action 
Letter No. 20-01, Re: Supplemental No-Action Relief for Swap 
Execution Facilities and Designated Contract Markets in Connection 
with Swaps with Operational or Clerical Errors Executed on a Swap 
Execution Facility or Designated Contract Market (Jan. 8, 2020) 
(``NAL No. 20-01''), conditions that allow market participants to 
correct error trades that have been accepted for clearing with an ex 
post facto review by the SEF. As discussed below, nothing in this 
adopting release would prohibit SEFs from incorporating such 
conditions within their error trade rules.
    \15\ NAL No. 17-27, Re: No-Action Relief for Swap Execution 
Facilities and Designated Contract Markets in Connection with Swaps 
with Operational or Clerical Errors Executed on a Swap Execution 
Facility or Designated Contract Market (May 30, 2017). NAL No. 17-27 
extended no-action relief and related conditions previously granted 
by Commission staff. See CFTC Letter No. 16-58, Re: No-Action Relief 
for Swap Execution Facilities and Designated Contract Markets in 
Connection with Swaps with Operational or Clerical Errors Executed 
on a Swap Execution Facility or Designated Contract Market (June 10, 
2016) (``NAL No. 16-58''); CFTC Letter No. 15-24, Re: No-Action 
Relief for Swap Execution Facilities and Designated Contract Markets 
in Connection with Swaps with Operational or Clerical Errors 
Executed on a Swap Execution Facility or Designated Contract Market 
(Apr. 22, 2015) (``NAL No. 15-24''); and CFTC Letter No. 13-66, 
Time-Limited No-Action Relief for Swap Execution Facilities from 
Compliance with Certain Requirements of Commission Regulation 
37.9(a)(2) and 37.203(a) (Oct. 25, 2013) (initial relief provided by 
Commission staff with respect to error trades that are rejected from 
clearing)(``NAL No. 13-66''). NAL No. 17-27 also applies to swap 
transactions occurring on a DCM. See supra note 2. In addition, DMO 
released NAL No. 20-01, which supplements the conditions in NAL No. 
17-27 to allow market participants, sua sponte, to correct error 
trades that have been accepted to clearing with an ex post facto 
review by the SEF. NAL No. 20-01, Re: Supplemental No-Action Relief 
for Swap Execution Facilities and Designated Contract Markets in 
Connection with Swaps with Operational or Clerical Errors Executed 
on a Swap Execution Facility or Designated Contract Market (Jan. 8, 
2020).
    Further, NAL 17-27 and NAL 20-01 also apply to operational or 
clerical errors occurring on a DCM. See supra note 2.
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    The Commission received six comment letters regarding the 
Proposal.\16\ After considering the comments, the Commission is 
adopting the rules as proposed. The Commission believes the rules 
adopted herein will decrease execution risks, improve efficiency, 
decrease transaction costs, promote operational efficiency, and lead to 
a more effective regulatory framework for SEFs.
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    \16\ The following entities submitted comment letters: Citadel; 
The Futures Industry Association (``FIA''); IHS Markit (``Markit''); 
International Energy Credit Association (``IECA''); International 
Swaps and Derivatives Association, Inc. (``ISDA''); and ICAP Global 
Derivatives Limited (``IGDL'') and tpSEF, Inc. (``tpSEF'') 
(collectively the ``TP ICAP SEFs''). In addition, the Commission 
received five letters from Better Markets; Carnegie Mellon; Chris 
Barnard; Foreign Exchange Professionals Association (``FXPA''); and 
Massachusetts Institute of Technology (``MIT'') that commented 
exclusively on proposals that were addressed in the 2020 Part 43 
Final Rules. As such, they are not addressed further in this 
rulemaking. See 2020 Part 43 Final Rules.
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C. Consultation With Other U.S. Financial Regulators

    In adopting these rules, the Commission has consulted with the 
Securities and Exchange Commission, pursuant to section 712(a)(1) of 
the Dodd-Frank Act.\17\
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    \17\ Dodd-Frank Act, Public Law 111-203, title VII, sec. 
712(a)(1), 124 Stat. 1376 (2010).
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II. Final Rules

A. Addition of Sec.  37.9(d) and Amendment of Sec.  37.9(a) for the 
Execution of Certain Package Transactions

1. Proposed Rules
    Package transactions generally involve the execution of multiple 
component transactions together that market participants consider to 
represent one economic transaction.\18\ The types of transactions that 
constitute a package transaction are wide-ranging and diverse. In 
particular, there are package transactions that consist solely of swaps 
subject to the trade execution requirement; those that include a mix of 
swaps subject to the trade execution requirement and swaps that are 
not; those made up of swaps and non-swaps; and those comprised of both 
swaps that are and swaps that are not exclusively subject to the 
Commission's jurisdiction.\19\ These components range from being very 
liquid and standardized to being illiquid and bespoke.\20\ The variety 
of package transactions derives, in part, from the fact that the 
different types of package transactions are fit for distinct purposes. 
The Commission understands that certain package transactions are 
utilized as tools within market participants' portfolio management and 
hedging programs, while other types of package transactions are used to 
allow market participants to express views of the market--for example, 
by allowing participants to trade the spread between certain products 
or different maturities in the same product.
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    \18\ See supra note 12. The Commission notes that there are 
transactions that otherwise meet the package transaction definition 
but do not involve a swap subject to the trade execution 
requirement. While these transactions may colloquially be referred 
to as package transactions, the Commission notes that such 
transactions are not the subject of these final rules.
    \19\ See infra note 29 for a more precise description of various 
package transactions.
    To the extent that counterparties may be facilitating package 
transactions that involve a ``security,'' as defined in section 
2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the 
Securities Exchange Act of 1934, or any component agreement, 
contract, or transaction over which the Commission does not have 
exclusive jurisdiction, the Commission does not opine on whether 
such activity complies with other applicable law and regulations.
    \20\ Some non-swap components may be subject to different 
regulatory requirements than the swap components in the package 
transactions.
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    Given the diverse characteristics of the component transactions 
that may be involved, the Commission understands that package 
transactions often pose unique pricing and execution characteristics. 
The Commission understands that the negotiation or arrangement of each 
of these components generally occurs concurrently or on a singular 
basis; in particular, negotiations for the pricing of such package 
transactions may be based primarily on the components that are not 
subject to the trade execution requirement. Further, given the 
individual liquidity and trading characteristics of each component, 
certain package transactions will have to trade through methods of 
execution that are suitable for an illiquid and bespoke component, 
which in many cases are not the required methods of execution.\21\
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    \21\ For example, while a swap that is subject to the trade 
execution requirement is suitable to be executed through the 
required methods of execution as an outright transaction, when that 
same swap is bundled together with an illiquid and bespoke component 
in a package transaction, the package transaction takes on the 
liquidity and trading profile of the illiquid and bespoke component.
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    Notwithstanding the complexity of their pricing and execution, the 
Commission is aware of the benefits of such package transactions. By 
executing multiple components together as part of a package 
transaction, market participants can improve transaction pricing and 
cost, increase execution efficiency, and decrease execution risk beyond 
what would have been possible if the market participant had executed 
each component individually, i.e., ``legged'' or ``legging'' into the 
transaction.\22\
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    \22\ For example, a market participant seeking to execute two 
component transactions independent of one another, instead of 
executing the two components together in a package transaction, 
would be forced to pay the bid/offer spread on each leg, which in 
many cases is more costly and less efficient than paying the single 
bid/offer spread for a package transaction composed of the same two 
components.
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    During the implementation of the trade execution requirement for 
certain interest rate swaps and credit default swaps, SEFs and market 
participants informed the Commission that requiring swaps that are 
otherwise Required Transactions--but are components of a package 
transaction \23\--to be executed through the required methods of 
execution \24\ under Sec.  37.9 was in many cases impracticable and 
increased execution risks and operational challenges. Market 
participants and

[[Page 82316]]

SEFs informed the staff and the Commission that these risks and 
challenges generally reflect (i) an initial lack of market 
infrastructure available to trade and clear certain package 
transactions; \25\ and (ii) the complex, bespoke, and idiosyncratic 
nature of several categories of package transactions that precluded 
them from being suitable for execution through required methods of 
execution.\26\
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    \23\ See supra note 12. Consistent with the definition of 
package transaction under Sec.  37.9(d) the Commission notes that, 
unless otherwise stated, the term ``swap component(s)'' as used 
herein refers to a swap component that is subject to the trade 
execution requirement under CEA section 2h(8), and therefore a 
Required Transaction.
    \24\ As noted above, pursuant to Sec.  37.9(a), SEFs must 
provide as the required methods of execution for Required 
Transactions either an Order Book or an RFQ System.
    \25\ See, e.g., NAL No. 14-12 at 2-3 n.10 (describing the 
inability of a derivatives clearing organization (``DCO'') to 
simultaneously screen and accept all components of a package 
transaction for clearing).
    \26\ See, e.g., CFTC Public Roundtable: Trade Execution 
Requirements and Package Transactions, 72, 84-85 (Feb. 12, 2014), 
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/transcript021214.pdf (commenting on 
the challenges of applying required methods of execution to package 
transactions with complex component swaps).
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    Since the Division of Market Oversight's (DMO's) issuance of this 
no-action relief, the Commission has gained considerable knowledge and 
experience with the dynamics of the trading of package transactions, 
particularly with respect to the existing no-action relief from the 
required methods of execution. Based on this knowledge and experience, 
the Commission believed that certain aspects of the current 
requirements for the required methods of execution under Sec.  37.9 
should be enhanced to better account for the complex nature of the 
relevant package transactions.
    As a result, in the Proposal the Commission proposed to add Sec.  
37.9(d) and amend Sec.  37.9(a)(2) to permit the swap components of 
certain package transactions to be executed via flexible methods of 
execution pursuant to Sec.  37.9(c)(2). The Commission proposed to 
define a ``package transaction'' as a transaction consisting of two or 
more component transactions executed between two or more counterparties 
where: (i) At least one component transaction is a Required 
Transaction; (ii) execution of each component transaction is contingent 
upon the execution of all other component transactions; and (iii) the 
component transactions are priced or quoted together as one economic 
transaction with simultaneous or near-simultaneous execution of all 
components.\27\ Based on this proposed definition and consistent with 
existing no-action relief, the Commission proposed to allow the 
Required Transaction swap component of the following three categories 
of package transactions to be executed via flexible means of execution 
pursuant to Sec.  37.9(c)(2):
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    \27\ The Commission notes that there are transactions which 
otherwise meet the package transaction definition but do not involve 
a swap that is subject to the trade execution requirement. While 
these transactions may colloquially be referred to as package 
transactions, the Commission notes that such transactions are not 
the subject of these final rules. See supra note 12.
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    (1) A package transaction where at least one of the components is a 
swap exclusively within the Commission's jurisdiction that is not 
subject to the clearing requirement (``MAT/Non-MAT Uncleared'');
    (2) A package transaction where at least one of the components is 
not a swap (excluding certain package transaction categories as 
discussed below) (``MAT/Non-Swap Instrument''); \28\ and
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    \28\ Under Sec.  37.9(d)(3), consistent with the no-action 
relief, this category specifically excludes package transactions in 
which all non-swap components are U.S. Treasury securities (``U.S. 
Dollar Spreadover package transactions''); MAT/Futures package 
transactions; package transactions in which all other non-swap 
components are agency mortgage-backed securities (``MAT/Agency MBS 
package transactions''); and New Issuance Bond package transactions. 
See also Section II.A.7--Exemption of New Issuance Bond Package 
Transactions from the Trade Execution Requirement--Addition of Sec.  
36.1.
    To the extent that counterparties may be facilitating package 
transactions that involve a ``security,'' as defined in section 
2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the 
Securities Exchange Act of 1934, or any component agreement, 
contract, or transaction over which the Commission does not have 
exclusive jurisdiction, the Commission does not opine on whether 
such activity complies with other applicable law and regulations.
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    (3) A package transaction where at least one of the components is a 
swap for which the CFTC does not have exclusive jurisdiction, e.g., a 
mixed swap (``MAT/Non-Exclusive CFTC Swap'').\29\
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    \29\ The Commission notes that the swap components of different 
categories of package transactions have been subject to time-limited 
no-action relief provided by Commission staff from the trade 
execution requirement and required methods of execution. These 
categories of package transactions include those where: (i) Each of 
the components is a swap subject to the trade execution requirement 
(``MAT/MAT package transactions''); (ii) at least one of the 
components is subject to the trade execution requirement and each of 
the other components is subject to the clearing requirement (``MAT/
Non-MAT (Cleared)''); (iii) U.S. Dollar Spreadover package 
transactions; (iv) MAT/Agency MBS package transactions; (v) New 
Issuance Bond package transactions; (vi) MAT/Futures package 
transactions; (vii) MAT/Non-MAT (Uncleared); (viii) excluding 
aforementioned categories, MAT/Non-Swap Instruments; and (ix) MAT/
Non-Exclusive CFTC Swap. See NAL No. 14-12; NAL No. 14-62; NAL No. 
14-121; NAL No. 14-137; NAL No. 15-55; NAL No. 16-76; NAL No. 17-55; 
and NAL No. 20-31.
    Subsequently, the swap components of the following categories of 
package transactions were no longer provided relief: MAT/MAT package 
transactions, MAT/Non-MAT (Cleared) package transactions, U.S. 
Dollar Spreadover package transactions, and MAT/Agency MBS package 
transactions. As a result, the swap components of these package 
transactions must be executed through the required methods of 
execution under Sec.  37.9(a).
    Currently, the swap components of the following categories of 
package transactions receive no-action relief from the required 
methods of execution under Sec.  37.9 pursuant to NAL No. 20-31: (i) 
MAT/Non-MAT (Uncleared) package transactions; (ii) MAT/Non-Swap 
Instruments package transactions (subject to the exclusions 
previously discussed); and (iii) MAT/Non-Exclusive CFTC Swap package 
transactions. The addition of Sec.  37.9(d) is consistent with the 
relief from the required methods of execution under NAL No. 20-31. 
Within section II, the term ``relevant package transactions,'' 
unless context requires otherwise, refers to these three categories 
of package transactions.
    In addition to the relief from the required methods of execution 
in Sec.  37.9(a), NAL No. 20-31 also provides relief from the trade 
execution for the swap components of MAT/Futures package 
transactions and New Issuance Bond Package transactions. As 
discussed above, the Commission is still evaluating MAT/Futures 
package transactions. See supra note 13.
    Further, as discussed in more detail below, the Commission is 
exempting the swap components of New Issuance Bond package 
transactions from the trade execution requirement. This is 
consistent with the relief currently provided to New Issuance Bond 
package transactions under NAL No. 20-31. To the extent that 
counterparties may be facilitating package transactions that involve 
a ``security,'' as defined in section 2(a)(1) of the Securities Act 
of 1933 or section 3(a)(10) of the Securities Exchange Act of 1934, 
or any component agreement, contract, or transaction over which the 
Commission does not have exclusive jurisdiction, the Commission does 
not opine on whether such activity complies with other applicable 
law and regulations.
---------------------------------------------------------------------------

2. Public Comment
    Citadel, IHS Markit, IECA, ISDA, and the TP ICAP SEFs generally 
support the proposed addition of Sec.  37.9(d) and amendment of Sec.  
37.9(a)(2) to permit the swap components of certain package 
transactions to be executed via flexible methods of execution pursuant 
to Sec.  37.9(c)(2).\30\
---------------------------------------------------------------------------

    \30\ Citadel at 1-2; IHS Markit at 8; IECA at 1-4; ISDA at 1; 
and TP ICAP SEFs at 1-3.
---------------------------------------------------------------------------

    In particular, ISDA commends the Commission for codifying no-action 
relief, such as the package transaction relief, as it will ``will 
reduce operational and compliance uncertainty, enhance efficiency, and 
improve regulatory oversight.'' \31\
---------------------------------------------------------------------------

    \31\ ISDA at 1.
---------------------------------------------------------------------------

    Citadel notes that the transition of package transactions from no-
action relief to SEF trading has: (i) ``improved pricing and liquidity 
as SEFs offer access to more competitive and transparent trading with a 
greater number of liquidity providers;'' (ii) ``enhanced market 
stability and integrity given the monitoring and surveillance 
capabilities of SEFs;'' and (iii) ``reduced operational risk through 
the pre-trade credit check and straight-through-processing requirements 
that are applicable to SEF trades.'' \32\ Citadel believes that such 
benefits would be threatened if the scope of package transactions 
eligible for flexible execution methods were expanded,

[[Page 82317]]

such as altering block treatment for package transactions that have 
successfully transitioned onto SEFs.\33\ However, Citadel supports 
codifying the remaining no-action relief for the ``small number of 
categories'' of package transactions as proposed in the Proposal.\34\
---------------------------------------------------------------------------

    \32\ Citadel at 1-2.
    \33\ Id. at 2.
    \34\ Id.
---------------------------------------------------------------------------

    The TP ICAP SEFs believe that the proposed rules for package 
transactions strike ``an appropriate balance between the 'utility of 
package transactions against the policy goals of the trade execution 
requirement'[.]'' \35\ The TP ICAP SEFs support the increased 
flexibility for execution methods for swap components of the relevant 
package transactions ``to be executed on-SEF through flexible means of 
execution pursuant to proposed Rule 37.9(c)(2), rather than through the 
required methods of execution under Commission Rule 37.9. . . .'' \36\ 
The TP ICAP SEFs support allowing SEF trades to be executed through any 
means of interstate commerce.\37\ As such, the TP ICAP SEFs believe 
that Proposal for package transactions brought the SEF ``regime closer 
to the flexible framework envisioned by Congress in 2010, and will 
assist in the liquidity formation and trade execution of package 
transactions, further promoting the trading of swaps on SEFs.'' \38\
---------------------------------------------------------------------------

    \35\ TP ICAP SEFs at 2.
    \36\ Id.
    \37\ Id. at 3.
    \38\ Id.
---------------------------------------------------------------------------

    Similarly, IECA supports flexible methods of execution for package 
transactions.\39\ IECA believes that allowing flexible methods of 
execution for package transactions ``will encourage SEFs to develop new 
and innovative trade execution methods'' for package transactions and 
the development of new and innovative execution methods may result in 
commercial end-users and their hedging affiliates executing more 
transactions on SEFs.\40\
---------------------------------------------------------------------------

    \39\ IECA at 4.
    \40\ Id.
---------------------------------------------------------------------------

    The Commission received two comments regarding MAT/Future package 
transactions. Citadel recommends that the Commission work to bring MAT/
Futures package transactions onto SEFs to bring ``greater price 
transparency to market participants.'' \41\ However, ISDA recommends 
that MAT/Futures package transactions be exempted from the Trade 
Execution Requirement.\42\
---------------------------------------------------------------------------

    \41\ Citadel at 2.
    \42\ ISDA at 1-2.
---------------------------------------------------------------------------

    The Commission received one comment, from IECA, requesting that the 
Commission clarify that Sec.  37.203(a)'s prohibition of pre-arranged 
trading does not apply to package transactions.\43\
---------------------------------------------------------------------------

    \43\ IECA at 5. Further, IECA requested clarification that 
uncleared bilateral swaps that are permitted transactions, in 
particular such swaps that include a counterparty that has elected 
the end-user or affiliate exceptions under CEA section 2(h)(7), 
``are exempt from the prohibition against pre-arranged trading.'' 
See IECA at 7. The Commission did not propose any changes to the 
pre-arranged trading prohibition in Sec.  37.203(a) in the Proposal. 
Accordingly, Sec.  37.203(a) continues to apply, as applicable, to 
such transactions.
---------------------------------------------------------------------------

    ISDA requested that the Commission reevaluate the process for 
determining the scope of the trade execution (``MAT Process'') 
requirement in order to permit SEFs and market participants ``to modify 
the scope of contracts subject to the trade execution requirement, 
which is particularly important during times of increased market 
stress.'' \44\
---------------------------------------------------------------------------

    \44\ ISDA at 2.
---------------------------------------------------------------------------

    Finally, the TP ICAP SEFs requested that the Commission adopt other 
Commission staff no-action letters not included in the Proposal.\45\
---------------------------------------------------------------------------

    \45\ TP ICAP SEFs at 4-5.
---------------------------------------------------------------------------

3. Commission Determination
    The Commission is adopting the addition of Sec.  37.9(d) and 
amendment of Sec.  37.9(a)(2) to permit the swap components of certain 
package transactions to be executed via flexible methods of execution 
pursuant to Sec.  37.9(c)(2) as proposed and as was supported by 
commenters.\46\ While, as noted above and commented on by Citadel, the 
swap components of several types of package transactions have been 
successfully transitioned to SEFs and are executed via the required 
methods of execution, the Commission believes, and agrees with IHS 
Markit, that the types of package transactions covered by this final 
rulemaking are not suitable to be traded through the required methods 
of execution due to their specific characteristics.\47\ In particular, 
the Commission recognizes that these package transactions contain 
components that are illiquid and bespoke, such as swaptions, or contain 
components that are subject to regulatory requirements other than or in 
addition to the CEA and the Commission's regulations issued 
thereunder.\48\
---------------------------------------------------------------------------

    \46\ Citadel at 1-2; IHS Markit at 8; IECA at 1-4; ISDA at 1; 
and TP ICAP SEFs at 1-3. The Commission is also re-designating 
existing Sec.  37.9(d) to Sec.  37.9(f) in order to keep the rules 
setting forth permissible execution methods in Sec.  37.9 grouped 
together. In conjunction with re-designating existing Sec.  37.9(d) 
to Sec.  37.9(f), the Commission is making ministerial edits to 
correct internal cross references in re-designated Sec.  37.9(f).
    \47\ See IHS Markit at 8.
    \48\ The Commission will continue to evaluate these categories 
of package transactions for new developments in execution methods on 
SEFs and may in the future revise the categories of package 
transactions in which the swap component is eligible to be executed 
through flexible means of execution.
---------------------------------------------------------------------------

    The Commission believes that if market participants are unable to 
utilize flexible methods of execution for the swap components of these 
package transactions, they would potentially be forced to break the 
package transaction into its individual components, otherwise known as 
``legging'' into the transaction. The Commission understands from 
market participants that legging into a package transaction is 
inefficient and increases transaction costs and execution risks. Given 
that components of package transactions are each priced or quoted 
together as part of one economic transaction, the Commission recognizes 
the impracticality of breaking the package transaction into individual 
legs or components in order to trade the swap components via the 
required methods of execution under Sec.  37.9(a).
    Based on its experience with the existing no-action relief and 
supported by commenters, the Commission believes that the addition of 
Sec.  37.9(d) and amendment of Sec.  37.9(a) will allow market 
participants to choose the most suitable execution method for their 
package transactions, which will decrease execution risks, improve 
efficiency, and decrease transaction costs because market participants 
will no longer be forced to leg into transactions.\49\ Given the 
inherent complexity of the relevant package transactions, the 
Commission believes that this final rule ensures that market 
participants are able to trade these package transactions in the most 
effective, efficient, transparent, and economical manner. As a result 
of this final rulemaking, SEFs will be able to offer, and market 
participants would be able to utilize, methods of execution that best 
suit the characteristics of the relevant package transaction being 
traded. The Commission believes this will help preserve the benefits 
and purpose of executing such package transactions.
---------------------------------------------------------------------------

    \49\ See ISDA at 1, TP ICAP SEFs 2-3, and IECA 4.
---------------------------------------------------------------------------

    In addition to causing inefficient execution and increasing risks 
and cost, forcing the swap components of the relevant package 
transactions through required methods of execution may also limit the 
commercial utility of such transactions or entirely frustrate the 
purposes of entering in such package transactions in the first place. 
For example, the Commission understands that in some of the relevant 
package

[[Page 82318]]

transactions, (i) the swap component serves as the hedging instrument 
to other instruments in the package transaction, or (ii) the package 
transaction as a whole may be utilized as part of a market 
participant's portfolio management program. If the swap component of 
such package transactions were impractical or unable to be executed due 
to the required methods of execution, market participants would be 
prevented from entering or effectively entering into the package 
transaction, nullifying the package transaction's purpose and benefits 
as a hedging and portfolio management tool. Based on its experience 
with the existing no-action relief, the Commission believes that these 
final rules will allow market participants to utilize flexible methods 
of execution for the swap component of the relevant package 
transaction, thereby ensuring that market participants are able to 
continue to utilize these effective hedging tools.
    Further, the Commission agrees with the TP ICAP SEFs that these 
final rules will advance the SEF statutory goal of promoting trading on 
SEFs.\50\ These final rules provide relief from execution method 
requirements that are generally intended to help promote trading on 
SEFs.\51\ However, the swap components of the relevant package 
transactions are not suitable for trading via such required methods of 
execution, as discussed above. Accordingly, the Commission believes 
that in this case flexibility with respect to execution methods will 
better promote trading of such component swaps on SEFs, consistent with 
the statutory SEF goals. In addition, the Commission agrees with IECA 
that flexible methods of execution for the swap components of the 
package transactions in these final rules may encourage SEFs to develop 
new and innovative methods of executions.\52\
---------------------------------------------------------------------------

    \50\ See TP ICAP SEFs at 3. See also 7 U.S.C. 7b-3(e).
    \51\ Further, while the final rules also provide flexibility 
from the required methods of execution that are otherwise intended 
to help promote pre-trade transparency on SEFs, the Commission notes 
that permitting market participants to use flexible methods of 
execution is consistent with how package transactions are treated 
within other jurisdictions. For example, in the European Union 
(``EU''), certain package transactions (including package 
transactions for which the Commission currently requires the swap 
component to be executed through the required methods of execution, 
such as U.S. Dollar Spreadover package transactions) are eligible to 
be waived from the EU's transparency regime. The Commission believes 
that these final rules strike an appropriate balance between 
promoting pre-trade transparency and ensuring that U.S. markets and 
their participants are not unnecessarily burdened. See Regulation 
(EU) 2016/1033 of the European Parliament and of the Council of 23 
June 2016 amending Regulation (EU) No 600/2014 on markets in 
financial instruments, Regulation (EU) No 596/2014 on market abuse 
and Regulation (EU) No 909/2014 on improving securities settlement 
in the European Union and on central securities depositories, 
Commission Delegated Regulation (EU) 2017/2194 of 14 August 2017 
supplementing Regulation (EU) No 600/2014 of the European Parliament 
and of the Council on markets in financial instruments with regard 
to package orders, and Commission Delegated Regulation (EU) 2017/583 
of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the 
European Parliament and of the Council on markets in financial 
instruments with regard to regulatory technical standards on 
transparency requirements for trading venues and investment firms in 
respect of bonds, structured finance products, emission allowances 
and derivatives. The Commission further believes that in this 
regard, these final rules further the establishment of consistent 
international standards with respect to the regulation of swaps as 
directed by Congress in the Dodd-Frank Act. See Section 752(a) of 
the Dodd-Frank Act, supra.
    \52\ See IECA at 4.
---------------------------------------------------------------------------

    The Commission agrees with Citadel that the transition of the swap 
components of package transactions from no-action relief to SEF trading 
has: (i) Improved pricing and liquidity as SEFs offer access to more 
competitive and transparent trading with a greater number of liquidity 
providers; (ii) enhanced market stability and integrity given the 
monitoring and surveillance capabilities of SEFs; and (iii) reduced 
operational risk through the pre-trade credit check and straight-
through-processing requirements that are applicable to SEF trades.\53\ 
Therefore, the Commission agrees with Citadel that the swap components 
of package transactions not currently subject to existing no-action 
relief should continue to be subject to the required methods of 
executions under Sec.  37.9(a).\54\
---------------------------------------------------------------------------

    \53\ See Citadel at 1-2.
    \54\ See id. In response to Citadel's comment that the scope of 
package transactions eligible to be executed through flexible 
methods of execution should not be expanded, such as altering the 
treatment of block package transactions, the Commission notes that 
it did not propose any changes related to the treatment of block 
package transactions. Therefore, the Commission is taking no action 
related to the treatment of block package transactions in these 
final rules.
---------------------------------------------------------------------------

    In response to Citadel and ISDA's comments regarding MAT/Futures, 
as noted above, the Commission notes that it did not propose any 
regulations related to MAT/Futures package transactions and is 
continuing to evaluate the regulatory treatment of MAT/Futures package 
transactions. Therefore, the Commission declines to adopt any 
regulations related to MAT/Futures package transactions in this 
release.\55\ IECA asked the Commission to clarify that package 
transactions are not subject to the pre-arranged trading ban in Sec.  
37.203(a).\56\ The Commission did not propose to change any 
requirements related to pre-arranged trading in the Proposal. However, 
the Commission makes clear that the requirements in Sec.  37.203(a) 
apply to the swap components of package transactions. While not 
suitable for swap components of package transactions that have 
successfully transitioned onto SEF,\57\ the Commission does note that 
for swap components of package transactions subject to this final 
rule--MAT/Non-MAT Uncleared, MAT/Non-Swap Instrument, and MAT/Non-
Exclusive CFTC Swap--the existing pre-arranged trading prohibition 
already provides an exception by allowing a SEF to adopt trading 
practices that are certified or approved by the Commission pursuant to 
part 40 of the Commission's regulations.\58\ Accordingly, the 
Commission anticipates that a SEF would implement final Sec.  37.9(d) 
by self-certifying or adopting rules subject to Commission review under 
part 40 that specify the manner in which counterparties may execute the 
swap components of MAT/Non-MAT Uncleared, MAT/Non-Swap Instrument, and 
MAT/Non-Exclusive CFTC Swap package transactions.
---------------------------------------------------------------------------

    \55\ The Commission notes the MAT/Futures package transactions 
continue to fall within the bounds of current Commission staff 
relief provided in NAL No. 20-31 for MAT/Futures package 
transactions.
    \56\ See IECA at 5.
    \57\ However, such swap components of package transactions may 
still be executed subject to the requirements of Sec.  37.9(b)(1). 
17 CFR 37.9(b)(1).
    \58\ See 17 CFR 37.203(a).
---------------------------------------------------------------------------

    The Commission acknowledges ISDA's comment regarding amending the 
MAT Process to allow modification of the swaps that are subject to the 
trade execution requirement, especially during times of market 
stress.\59\ However, the Commission did not propose any amendments to 
the MAT Process in the Proposal. Further, the Commission believes that 
such a substantive change should be subject to notice and comment 
rulemaking. Therefore, the Commission declines to adopt ISDA's 
suggested amendment to the MAT process at this time.
---------------------------------------------------------------------------

    \59\ ISDA at 1-2.
---------------------------------------------------------------------------

    Further, the Commission acknowledges the TP ICAP SEFs' request that 
the Commission evaluate adopting additional no-action relief that was 
not proposed to be codified in the Proposal.\60\ The Commission will 
evaluate whether there is additional no-action relief that is currently 
outstanding that should be codified but declines to codify at this time 
without further notice and comment any no-action relief that was not 
proposed to be codified in the Proposal.
---------------------------------------------------------------------------

    \60\ See TP ICAP SEFs at 4-5.

---------------------------------------------------------------------------

[[Page 82319]]

    Therefore, for the reasons stated above, the Commission is adopting 
the addition of Sec.  37.9(d) and amendment of Sec.  37.9(a)(2) to 
permit the swap components of certain package transactions to be 
executed via flexible methods of execution pursuant to Sec.  37.9(c)(2) 
as proposed.\61\
---------------------------------------------------------------------------

    \61\ The Commission notes that upon the effective date of these 
rules, the addition of Sec.  37.9(d) and amendment of Sec.  
37.9(a)(2), as well as the adoption of Sec.  37.3(a)(4) as discussed 
below, will negate the need for the relief provided in NAL No. 20-31 
for MAT/Non-MAT Uncleared, MAT/Non-Swap Instrument, and MAT/Non-
Exclusive CFTC Swap package transactions.
---------------------------------------------------------------------------

B. Addition of Sec.  37.3(a)(4)

1. Proposed Rule
    In the Proposal, the Commission proposed to add Sec.  37.3(a)(4) to 
allow SEFs not to offer an Order Book for the swap components of the 
following package transactions: (i) MAT/Non-MAT Uncleared package 
transactions; (ii) MAT/Non-Swap Instrument package transactions; and 
(iii) MAT/Non-Exclusive CFTC Swap package transactions.\62\
---------------------------------------------------------------------------

    \62\ However, the Proposal did not alter any requirement 
applicable to such swap components to the extent they are executed 
in transactions that were not package transactions covered by the 
Proposal. The text of proposed Sec.  37.3(a)(4) made clear that 
Sec.  37.3(a)(2) of the Commission's regulations would continue to 
apply to such swap components and SEFs would be required to offer 
Order Books for these Required Transactions as outright 
transactions.
---------------------------------------------------------------------------

    An Order Book is one of the two required methods of execution under 
Sec.  37.9(a). The Commission designated an Order Book as the ``minimum 
trading functionality'' each SEF must maintain and offer for each swap 
that it lists for trading. An Order Book is defined under Sec.  
37.3(a)(3) as (i) an electronic trading facility; \63\ (ii) a trading 
facility; \64\ or (iii) a trading system or platform in which all 
market participants in the trading system or platform have the ability 
to enter multiple bids and offers, observe or receive bids and offers 
entered by other market participants, and transact on such bids and 
offers.\65\
---------------------------------------------------------------------------

    \63\ CEA section 1a(16) defines ``electronic trading facility'' 
as a trading facility that (i) operates by means of an electronic or 
telecommunications network; and (ii) maintains an automated audit 
trail of bids, offers, and the matching of orders or the execution 
of transactions on the facility. 7 U.S.C. 1a(16).
    \64\ CEA section 1a(51) defines ``trading facility'' as ``a 
person or group of persons that constitutes, maintains, or provides 
a physical or electronic facility or system in which multiple 
participants have the ability to execute or trade agreements, 
contracts, or transactions (i) by accepting bids or offers made by 
other participants that are open to multiple participants in the 
facility or system; or (ii) through the interaction of multiple bids 
or multiple offers within a system with a pre-determined non-
discretionary automated trade matching and execution algorithm.'' 7 
U.S.C. 1a(51)(A).
    \65\ 17 CFR 37.3(a)(3).
---------------------------------------------------------------------------

    Generally speaking, it may be complex to apply the existing Order 
Book requirement in Sec.  37.3(a)(2) to the swap components of the 
package transactions covered by this proposed amendment. In some 
situations, Sec.  37.3(a)(2) may require that a SEF maintain separate 
Order Books for the same type of swap: One Order Book for when the swap 
is executed as a single transaction (referred to as an ``outright 
transaction''), and a separate Order Book for when the swap is executed 
as part of a package transaction. In fact, multiple Order Books could 
be required for the same type of swap if it were included as part of 
multiple types of package transactions. The Commission understands 
that, in part because of the availability of relief under the staff 
letters described above, SEFs have put in place relatively few Order 
Books for swaps to be executed as part of the package transactions 
covered by the Proposal, and any such Order Books in place are not 
actively used.
2. Public Comment
    Citadel, IECA, ISDA, and the TP ICAP SEFs generally support the 
codification of existing relief for package transactions which includes 
relief from having to provide an Order Book for (i) MAT/Non-MAT 
Uncleared package transactions; (ii) MAT/Non-Swap Instrument package 
transactions; and (iii) MAT/Non-Exclusive CFTC Swap package 
transactions.\66\
---------------------------------------------------------------------------

    \66\ See Citadel at 1-2; IHS Markit at 8; IECA at 2-4; ISDA at 
1; and TP ICAP SEFs at 1-3. The TP ICAP SEFs based part of their 
support on the idea that Permitted Transactions ``[do] not require 
an Order Book under the Commission's regulations.'' TP ICAP SEFs at 
3. Out of an abundance of caution, the Commission notes that while 
Permitted Transactions are not required to be executed through Order 
Books or RFQ Systems, as part of the Sec.  37.9(a)'s required 
methods of execution, SEF's are still required to provide Order 
Books for permitted transactions as part of the minimum trading 
functionality requirements in Sec.  37.3(a)(2).
---------------------------------------------------------------------------

3. Commission Determination
    The Commission agrees with commenters and is adopting Sec.  
37.3(a)(4) as proposed to allow SEFs not to offer an Order Book for the 
swap components of the following package transactions: (i) MAT/Non-MAT 
Uncleared package transactions; (ii) MAT/Non-Swap Instrument package 
transactions; and (iii) MAT/Non-Exclusive CFTC Swap package 
transactions.\67\ As noted above,\68\ executing Required Transaction 
swap components of certain package transactions through the required 
methods of execution is operationally complex, and in many instances, 
impracticable. Given that the Commission continues to believe that it 
is infeasible or inefficient to facilitate swap components of these 
package transactions through the required methods of execution, which 
includes an Order Book under Sec.  37.3(a), it logically follows that 
requiring SEFs to offer an Order Book for the swap components of 
package transactions would be superfluous.
---------------------------------------------------------------------------

    \67\ However, these final rules do not alter any requirement 
applicable to such swap components to the extent they are executed 
in transactions that are not package transactions covered by this 
amendment. The text of Sec.  37.3(a)(4) makes clear that Sec.  
37.3(a)(2) of the Commission's regulations continues to apply to 
such swap components and SEFs would be required to offer Order Books 
for these Required Transactions as outright transactions.
    \68\ See section II.A.--Addition of Sec.  37.9(d) and Amendment 
of Sec.  37.9(a) for the Execution of Certain Package Transactions.
---------------------------------------------------------------------------

    Finally, the Commission believes that not requiring SEFs to offer 
an Order Book for the swap components of the relevant package 
transactions would help reduce operating costs for SEFs, as they would 
no longer be required to operate and maintain order book systems that 
are not suitable for trading the swap components of the relevant 
package transactions. Instead of employing resources to build (or 
attempt to build) and support an unused or underutilized Order Book for 
the swap components of certain package transactions, the final rules 
will instead provide a SEF with the flexibility to determine how to 
allocate its resources, particularly as it relates to developing 
methods of execution that are better suited to trading the relevant 
package transactions.\69\
---------------------------------------------------------------------------

    \69\ The Commission notes that nothing in these final rules 
would preclude a SEF from offering an Order Book if it is able to 
develop an Order Book solution that is effective in trading the swap 
component of the relevant package transactions.
---------------------------------------------------------------------------

    Therefore, for the reasons stated above, the Commission is adopting 
Sec.  37.3(a)(4) as proposed to allow SEFs not to offer an Order Book 
for the swap components of the following package transactions: (i) MAT/
Non-MAT Uncleared package transactions; (ii) MAT/Non-Swap Instrument 
package transactions; and (iii) MAT/Non-Exclusive CFTC Swap package 
transactions.\70\
---------------------------------------------------------------------------

    \70\ See supra note 61.
---------------------------------------------------------------------------

C. Exemption of New Issuance Bond Package Transactions From the Trade 
Execution Requirement--Addition of Sec.  36.1

1. Proposed Exemption
    In the Proposal, the Commission proposed new rules under part 36 of 
the Commission's regulations to establish an exemption to the trade 
execution

[[Page 82320]]

requirement for swap transactions that are components of a ``New 
Issuance Bond'' package transaction. The Commission believes that 
exempting these types of transactions from the trade execution 
requirement is authorized by, and would be consistent with the 
objectives of, CEA section 4(c).\71\ The Proposal was consistent with 
the time-limited no-action relief provided by Commission staff for this 
category of package transactions.\72\
---------------------------------------------------------------------------

    \71\ 7 U.S.C. 6(c).
    \72\ See supra note 29 (describing the no-action relief from the 
trade execution requirement provided by Commission staff for 
categories of package transactions).
---------------------------------------------------------------------------

    New Issuance Bond package transactions include at least one 
individual swap component that is subject to the trade execution 
requirement and at least one individual component that is a bond issued 
and sold in the primary market.\73\ An underwriter (on behalf of an 
issuer) arranges the issuance of a bond packaged with a fixed-to-
floating interest rate swap (``IRS'') that features the issuer as a 
counterparty. The terms of the IRS, which include tenor and payment 
terms, typically match the terms of the bond issuance. By issuing a 
bond with a fixed-to-floating IRS, issuers are able to effectively turn 
fixed-rate liabilities into variable-rate liabilities, or vice 
versa.\74\ To match the terms between these two components and 
facilitate the bond issuance in an efficient and cost-effective manner, 
the IRS component is customized and negotiated in a manner that closely 
corresponds to the bond issuance process.
---------------------------------------------------------------------------

    \73\ The Commission understands that a bond issued and sold in 
the primary market that may constitute part of a package transaction 
is a ``security,'' as defined in section 2(a)(1) of the Securities 
Act of 1933 or section 3(a)(10) of the Securities Exchange Act of 
1934. To the extent that counterparties may be facilitating package 
transactions that involve a security, or any component agreement, 
contract, or transaction over which the Commission does not have 
exclusive jurisdiction, the Commission does not opine on whether 
such activity complies with other applicable law and regulations.
    \74\ For example, a bond issuer seeks to pay variable rates on 
its bonds, but prospective investors may seek a fixed rate of 
return. By arranging a New Issuance Bond package transaction, the 
bond issuer can issue a fixed-rate bond and simultaneously enter 
into an offsetting IRS. The IRS enables the issuer to receive a 
fixed rate that matches the fixed rate on its bond to be issued, 
while paying the variable rate that it originally sought. 
Ultimately, this arrangement may allow the bond issuer to issue the 
fixed-rate bond at a lower cost.
---------------------------------------------------------------------------

    Given the process under which the swap is negotiated,\75\ this type 
of package transaction has not been conducive to execution on a SEF 
trading system or platform. The Commission notes that the no-action 
relief that has been provided by Commission staff for these swaps 
components reflects the ongoing lack of an available execution method 
on an appropriate trading venue.\76\ Based on the integral role of the 
bond issuance in facilitating the component swap execution, the 
Commission believes that the IRS component is not suitable for 
execution on a SEF, even if a SEF were able to offer flexible means of 
execution, as the Commission proposed for swap components of other 
package transactions in the Proposal.\77\
---------------------------------------------------------------------------

    \75\ The Commission notes that these types of package 
transactions differ from other package transactions that involve the 
purchase or sale of a security in the secondary market, given that 
they involve the issuance of a new security.
    \76\ See NAL No. 20-31 at 2-3.
    \77\ See Section II.A.2.
---------------------------------------------------------------------------

    Therefore, consistent with current no-action relief provided by 
Commission staff, the Commission proposed to exempt swap components of 
a New Issuance Bond package transaction from the trade execution 
requirement within new Sec.  36.1. The proposed exemption would 
establish that a ``package transaction'' consists of two or more 
component transactions executed between two or more counterparties, 
where (i) at least one component transaction is subject to the trade 
execution requirement in section 2(h)(8) of the Act; (ii) execution of 
each component transaction is contingent upon the execution of all 
other component transactions; and (iii) the component transactions are 
priced or quoted together as one economic transaction with simultaneous 
or near-simultaneous execution of all components.\78\
---------------------------------------------------------------------------

    \78\ The Commission notes that this definition is consistent 
with the definition for package transaction in Sec.  37.9(d)(1).
---------------------------------------------------------------------------

2. Public Comment
    Citadel, IECA, ISDA, and the TP ICAP SEFs generally support the 
codification of existing relief for package transactions which includes 
relief from the trade execution requirement for the swap components of 
New Issuance Bond package transactions.\79\
---------------------------------------------------------------------------

    \79\ See Citadel at 1-2; IHS Markit at 8; IECA at 2-4; ISDA at 
1; and TP ICAP SEFs at 1-3.
---------------------------------------------------------------------------

    In addition, as noted above, ISDA recommends that MAT/Futures 
package transactions be exempted from the Trade Execution 
Requirement.\80\
---------------------------------------------------------------------------

    \80\ ISDA at 1-2.
---------------------------------------------------------------------------

3. Commission Determination and Discussion of CEA Section 4(c) 
Authority
    Section 4(c) of the CEA grants the Commission the authority to 
exempt any transaction or class of transactions, including swaps, from 
certain provisions of the CEA, including the Commission's trade 
execution requirement, in order to ``promote responsible economic or 
financial innovation and fair competition.'' \81\ Section 4(c)(2) of 
the CEA further provides that the Commission may not grant exemptive 
relief unless it determines that: (i) The exemption is appropriate for 
the transaction and consistent with the public interest; (ii) the 
exemption is consistent with the purposes of the CEA; (iii) the 
transaction will be entered into solely between ``appropriate 
persons;'' and (iv) the exemption will not have a material adverse 
effect on the ability of the Commission or any contract market to 
discharge its regulatory or self-regulatory responsibilities under the 
CEA. In enacting section 4(c), Congress noted that the purpose of the 
provision is to give the Commission a means of providing certainty and 
stability to existing and emerging markets so that financial innovation 
and market development can proceed in an effective and competitive 
manner.\82\
---------------------------------------------------------------------------

    \81\ 7 U.S.C. 6(c); see also 7 U.S.C. 2(d).
    \82\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
---------------------------------------------------------------------------

    The Commission believes that exempting swap components of New 
Issuance Bond package transactions from the trade execution requirement 
is consistent with the objectives of CEA section 4(c).\83\ The 
Commission recognizes the inherent challenges in trading or executing 
these swap components on a SEF or DCM and, therefore, recognizes the 
benefits of continuing to allow market participants to maintain 
established market practices with respect to this type of package 
transaction.
---------------------------------------------------------------------------

    \83\ The Commission notes that this exemption would not apply to 
swap components of package transactions that include sovereign debt, 
such as U.S. Treasury bonds, notes, and bills.
---------------------------------------------------------------------------

    The Commission recognizes the importance of new bond issuances in 
helping market participants to raise capital and fund origination loans 
for businesses and homeowners. The Commission recognizes that allowing 
the swap components of New Issuance Bond package transactions to be 
executed away from a SEF or DCM--consistent with current market 
practice--is integral to facilitating the bond issuance. Further, the 
Commission

[[Page 82321]]

recognizes that the exemption is limited in nature, i.e., the swap 
transaction remains subject to all other applicable Commission rules 
and regulations.
    Therefore, the Commission believes that the exemption from the 
trade execution requirement for swap components of New Issuance Bond 
package transactions is appropriate and would be consistent with the 
public interest and purposes of the CEA.
    The Commission further believes that the regulation would not have 
a material adverse effect on the ability of the Commission or any SEF 
or DCM to discharge its regulatory or self-regulatory duties under the 
CEA. The Commission notes that the exemption is limited in scope and 
the swap components subject to this exemption are still required to be 
reported to a swap data repository pursuant to parts 43 and 45 of the 
Commission's regulations. Further, the Commission retains its special 
call, anti-fraud, and anti-evasion authorities, which will enable it to 
adequately discharge its regulatory responsibilities under the CEA.
    The Commission notes that under the exemption, swap transactions 
would still be entered into solely between eligible contract 
participants (``ECPs''), whom the Commission determines, for purposes 
of this exemption, to be appropriate persons within the scope of 
section 4(c)(3)(K) of the CEA.\84\ This determination is consistent 
with, and rests on the same reasoning of, previous Commission 
determinations that ECPs are appropriate persons.\85\ As the Commission 
has noted, the elements of the ECP definition (as set forth in section 
1a(18)(A) of the CEA and Commission regulation 1.3) generally are more 
restrictive than the comparable elements of the enumerated 
``appropriate person'' definition.\86\ Given that only ECPs are 
permitted to enter into swaps off of a DCM, there is no risk that a 
non-ECP or a person who does not satisfy the requirements for an 
``appropriate person'' could enter into a New Issuance Bond package 
transaction using this exemption. Therefore, the Commission believes 
that the class of persons eligible to rely on the exemption for New 
Bond Issuance package transactions will be limited to ``appropriate 
persons'' within the scope of section 4(c)(3) of the CEA.
---------------------------------------------------------------------------

    \84\ 7 U.S.C. 6(c)(3)(K).
    \85\ See, e.g., Clearing Exemption for Swaps Between Certain 
Affiliated Entities, 78 FR 21750, 21754 (Apr. 11, 2013).
    \86\ Id.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission is finalizing the 
exemption from the trade execution requirement for New Issuance Bond 
package transactions with the addition of new Sec.  36.1.\87\ In 
response to ISDA's comment regarding MAT/Futures, as noted above, the 
Commission notes that it did not propose any regulations related to 
MAT/Futures package transactions and is continuing to evaluate the 
regulatory treatment of MAT/Futures package transactions. As such, the 
Commission declines to adopt any regulations related to MAT/Futures 
package transactions in this release.
---------------------------------------------------------------------------

    \87\ The Commission notes that upon the effective date of these 
rules, exemption from the trade execution requirement for swap 
components of New Issuance Bond package transactions will negate the 
need for the relief provided in NAL No. 20-31 for New Issuance Bond 
package transactions.
---------------------------------------------------------------------------

D. Error Trades: Execution of Trades To Correct Operational and 
Clerical Errors on Swap Execution Facilities--Addition of Sec.  37.9(e)

1. Proposed Rules
    In the Proposal, the Commission proposed to amend the SEF 
regulatory framework by adding subsection (e) to Sec.  37.9 to 
establish a flexible SEF error trade policy standard that would, among 
other things, incorporate the intent of the existing no-action relief 
in NAL No. 17-27 and NAL No. 20-01 for resolving errors in Required 
Transactions. Proposed Sec.  37.9(e)(2)(i) requires that a SEF must 
maintain rules and procedures that are fair, transparent, consistent, 
and allow for timely resolution of an ``error trade,'' as defined under 
proposed Sec.  37.9(e)(1)(ii).\88\ The error trade rules in the 
Proposal would apply to any error trade that occurs on a SEF, 
regardless of whether the swap is submitted for clearing or not.
---------------------------------------------------------------------------

    \88\ As proposed, an ``error trade'' would be defined as any 
trade executed on or subject to the rules of a swap execution 
facility that contains an operational or clerical error.
---------------------------------------------------------------------------

    Further, proposed Sec.  37.9(e)(2)(i) would require SEFs to have 
error trade rules and procedures that require market participants to 
provide prompt notice to the SEF of an error trade and, as applicable, 
the corresponding correcting trade and offsetting trade. The Proposal 
made clear that this notice need not be separate from the error trade 
correction process.
    In the Proposal, for correcting trades associated with an error 
trade that has been rejected from clearing, proposed Sec.  
37.9(e)(2)(i)(A) would require the SEF to submit the correcting trade 
for clearing to the registered DCO or exempt DCO as soon as 
technologically practicable, but no later than one hour after notice of 
the rejection to the relevant clearing members. For an offsetting trade 
and a correcting trade associated with an error trade that already has 
been accepted for clearing, proposed Sec.  37.9(e)(2)(i)(B) would 
require the SEF to submit both types of trades to the registered DCO or 
exempt DCO as soon as technologically practicable, but no later than 
three days after the registered DCO or exempt DCO accepted the error 
trade for clearing. In addition to these proposed timeframes, proposed 
Sec.  37.9(e)(2)(ii) would prohibit counterparties from executing a 
second correcting trade to fix an error trade if the initial correcting 
trade is rejected from clearing.
2. Public Comment
    Citadel, IHS Markit, IECA, ISDA, and the TP ICAP SEFs generally 
supported the Proposal to establish a flexible SEF error trade policy 
standard in Sec.  37.9(e).\89\
---------------------------------------------------------------------------

    \89\ Citadel at 1-2; IHS Markit at 8; IECA at 2; ISDA at 1; and 
TP ICAP SEFs at 1-4.
---------------------------------------------------------------------------

    In particular, ISDA commended the Commission for codifying no-
action relief, such as the relief granted for error trades, as it 
``will reduce operational and compliance uncertainty, enhance 
efficiency, and improve regulatory oversight.'' \90\
---------------------------------------------------------------------------

    \90\ ISDA at 1.
---------------------------------------------------------------------------

    Citadel stated that it supports ``the Proposal's formal 
codification of the remaining no-action relief that allows . . . the 
efficient resolution of error trades on SEFs.'' \91\ In particular, 
Citadel supports the codification of the existing error trade no-action 
relief ``which enables SEFs and market participants to efficiently 
correct transactions that have an operational or clerical error. This 
includes permitting SEFs to allow members to quickly correct an error 
trade on their own, with an ex post facto review performed by the 
SEF.'' \92\ Further, Citadel believes it is important that ``error 
trade cancellations and corrected trades be properly reported pursuant 
to Parts 43 and 45'' and recommends that the Commission address the 
reporting of error trades in the final rules.\93\
---------------------------------------------------------------------------

    \91\ Citadel at 1.
    \92\ Id. at 2.
    \93\ Id. at 3.
---------------------------------------------------------------------------

    The TP ICAP SEFs support the Proposal as it would ``establish a 
principles-based approach for SEF error trade policies that 
incorporates relief from the required methods of execution under 
proposed Rule 37.9 for Required Transactions for trades intended to 
resolve error trades.'' \94\ The TP ICAP SEFs believe the principles-
based approach provides ``flexibility for SEFs

[[Page 82322]]

to determine the most suitable error trade rules for their markets and 
participants.'' \95\ Further, the TP ICAPs SEFs believe that the 
Proposal's approach in providing flexibility that is consistent with 
the SEF core principles ``is an appropriate approach to implementing 
the related statutory provision with the regulatory certainty of a 
Commission rule, while preserving discretion for SEFs to formulate the 
specific approach most appropriate for their customers.'' \96\
---------------------------------------------------------------------------

    \94\ TP ICAP SEFs at 3.
    \95\ Id.
    \96\ Id. at 3-4.
---------------------------------------------------------------------------

    In addition, on the basis that SEF participants are sophisticated 
institutions, the TP ICAP SEFs support the proposed requirements in 
Sec.  37.9(e)(2)(i) ``that SEFs must have error trade rules and 
procedures that require market participants to provide prompt notice to 
the SEF of an error trade and, as applicable, the corresponding 
correcting trade and offsetting trade.'' \97\
---------------------------------------------------------------------------

    \97\ Id. at 4.
---------------------------------------------------------------------------

    While IHS Markit commends the Commission for codifying the error-
trade no-action relief in the Proposal, IHS Markit recommended that, 
especially during periods of market stress, the ``appropriate timeline 
for submitting correcting trades [should] be five (5) business days.'' 
\98\
---------------------------------------------------------------------------

    \98\ IHS Markit at 8.
---------------------------------------------------------------------------

    IECA supports flexible methods of execution for error trades.\99\ 
IECA believes that allowing flexible methods of execution for error 
trades ``will encourage SEFs to develop new and innovative trade 
execution methods'' for error trades and the development of new and 
innovative execution methods may result in commercial end-users and 
their hedging affiliates to execute more transactions on SEF.\100\ 
Further, IECA requested that the Commission clarify that Sec.  
37.203(a)'s prohibition of pre-arranged trading does not apply to error 
trades.\101\
---------------------------------------------------------------------------

    \99\ IECA at 4.
    \100\ Id.
    \101\ Id. at 5.
---------------------------------------------------------------------------

3. Commission Determination
    The Commission has determined to adopt Sec.  37.9(e) as proposed. 
Final Sec.  37.9(e)(2)(i) requires that a SEF must maintain rules and 
procedures that are fair, transparent, consistent, and allow for timely 
resolution of an ``error trade,'' as defined under Sec.  
37.9(e)(1)(ii).\102\ The error trade rules in Sec.  37.9(e) would apply 
to any error trade that occurs on a SEF, regardless of whether the swap 
is submitted for clearing or not.
---------------------------------------------------------------------------

    \102\ As adopted, an ``error trade'' would be defined as any 
trade executed on or subject to the rules of a SEF that contains an 
operational or clerical error. With respect to ``package 
transactions,'' as defined under final Sec.  37.9(d)(1), the 
Commission deems the submission of the component transactions in a 
sequence that causes a rejection from clearing of an individual 
component to constitute an operational error that could be resolved 
through a correcting trade under final Sec.  37.9(e)(2)(i)(A). 
Market participants had previously informed the Commission that an 
individual component transaction may be rejected from clearing if 
prematurely submitted because the risk of that component, in 
isolation, could cause a trader to exceed its credit limit. Under a 
different submission sequence of component transactions to the DCO, 
however, the net risk of all of those transactions may not have 
exceeded the credit limit, thereby avoiding the rejection. The 
Commission emphasizes, however, the use of a corrective trade may 
only apply to the rejected component and otherwise would not apply 
to the other legs of the package transaction that have been accepted 
for clearing.
---------------------------------------------------------------------------

    As adopted, final Sec.  37.9(e) would require a SEF to adopt rules 
to resolve error trades that involve swaps submitted for clearing. For 
an error trade rejected from clearing and therefore deemed void ab 
initio, final Sec.  37.9(e)(2)(i)(A) would require a SEF to permit the 
counterparties to subsequently execute a correcting trade, as defined 
in Sec.  37.9(e)(1)(i), through any method of execution offered by the 
SEF. For an error trade that has been accepted for clearing, Sec.  
37.9(e)(2)(i)(B) would require a SEF to permit the counterparties to 
subsequently execute both an offsetting trade, as defined in Sec.  
37.9(e)(1)(iii), and a correcting trade through any method of execution 
offered by the SEF. The Commission intends for its principles-based 
approach to provide SEFs with the flexibility to implement its error 
trade policy in a manner that is best suited to its trading and trade 
processing operations.
    Under the principles-based approach adopted in this release, the 
Commission notes that a SEF would not be prohibited from incorporating 
the conditions contained within NAL No. 17-27, or implementing rules 
that allow market participants, sua sponte, to correct error trades 
that have been accepted for clearing with an ex post facto review by 
the SEF of the error trade, offsetting trade, and correcting trade on a 
T+1 basis as is contemplated by NAL No. 20-01. Further, these final 
rules would not preclude SEFs from deploying error trade rules and 
procedures which consider whether a transaction cancellation or price 
adjustment will adversely impact market integrity, facilitate market 
manipulation or other illegitimate activity, or otherwise violate the 
CEA, Commission regulations, or the SEF's rules. However, regardless of 
the error trade rules and procedures that a SEF may adopt, the 
Commission notes that pursuant to this adopting release such rules must 
be fair, transparent, and consistent.\103\
---------------------------------------------------------------------------

    \103\ The Commission further reiterates that any SEF offering 
trading in swaps subject to the post-trade name give up prohibition 
under existing Sec.  37.9(d) (re-designated to Sec.  37.9(f) in this 
final rulemaking. See supra note 46) must ensure its rules and 
procedures for error trades allow for error trade remediation 
without disclosure of the identities of counterparties to one 
another. See Post-Trade Name Give-Up on Swap Execution Facilities, 
85 FR 44693, 44701 (July 24, 2020).
---------------------------------------------------------------------------

    Further, these final rules provide flexibility in the execution 
methods that a SEF may offer to counterparties to execute offsetting 
and correcting trades that involve swaps that are Required 
Transactions.\104\ The Commission agrees with commenters that this 
flexibility would promote SEF operational efficiency by allowing SEFs 
to offer error trade protocols that are tailored to their markets and 
to allow identification and resolution of operational and clerical 
errors in a timely manner.\105\ Without such flexibility, market 
participants with an error in Required Transactions would otherwise be 
prohibited from determining to resolve the error between themselves by 
entering into an offsetting trade or a new trade with the correct terms 
due to the execution method requirements under Sec.  37.9(a)(2), which 
require that all Required Transactions be traded via either an Order 
Book or RFQ System.
---------------------------------------------------------------------------

    \104\ The Commission notes that swaps that are Permitted 
Transactions, including those that are submitted to a DCO for 
clearing, may already be executed through any method of execution 
offered by a SEF pursuant to Sec.  37.9(c)(2).
    \105\ See Citadel at 1-3, IECA at 4, ISDA at 1, and TP ICAP SEFs 
at 3-4.
---------------------------------------------------------------------------

    The Commission also believes that the final error trade rules 
further the SEF statutory goals of promoting trading on SEFs and pre-
trade price transparency in the swaps market.\106\ These final rules 
provide flexibility to depart from required execution methods that are 
otherwise intended to advance those statutory goals; allowing 
counterparties to correctly and efficiently execute swaps with the 
intended terms and conditions, however, enhances market integrity on 
SEFs, which promotes SEF participation. Additionally, the Commission 
believes these final rules would also help to ensure that trade data, 
which market participants rely upon to inform their swaps trading 
decisions, accurately reflects prevailing market pricing at any given 
time.
---------------------------------------------------------------------------

    \106\ See 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

    The Commission agrees with Citadel that properly reporting error 
trade cancellations and correcting trades pursuant to parts 43 and 45 
is

[[Page 82323]]

important.\107\ The Commission notes that the reporting requirements 
for error trade cancellations, correcting trades, and offsetting trades 
will depend upon the error trade rules that SEFs adopt under this 
principles-based approach. However, regardless of the error trade rules 
that are adopted by a SEF, the Commission wants to make clear that SEFs 
and market participants are responsible for ensuring that they comply 
with their respective reporting requirements in parts 43 and 45 of the 
Commission's regulations.
---------------------------------------------------------------------------

    \107\ Id. at 3.
---------------------------------------------------------------------------

    The final rules adopted in Sec.  37.9(e)(2)(i) specify timeframes 
for executing and submitting correcting and offsetting trades for 
clearing. In particular, as noted above, for correcting trades 
associated with an error trade that has been rejected from clearing, 
Sec.  37.9(e)(2)(i)(A) would require the SEF to submit the correcting 
trade for clearing to the registered DCO or exempt DCO as soon as 
technologically practicable, but no later than one hour after notice of 
the rejection to the relevant clearing members. For an offsetting trade 
and a correcting trade associated with an error trade that already has 
been accepted for clearing, final Sec.  37.9(e)(2)(i)(B) requires the 
SEF to submit both types of trades to the registered DCO or exempt DCO 
as soon as technologically practicable, but no later than three days 
after the registered DCO or exempt DCO accepted the error trade for 
clearing.
    IHS Markit recommended that correcting trades have up to five days 
to be submitted to clearing.\108\ IHS Markit thought a five-day 
submission period was particularly important during times of market 
stress.\109\ The Commission notes that IHS Markit does not provide or 
offer any support or background on why a five-day submission period is 
more appropriate then the timeframes proposed by the Commission in the 
Proposal. The Commission believes that the timeframes adopted in this 
release are consistent with the goal of promoting straight-through 
processing. The timing requirements are intended to provide a SEF and 
the counterparties to an error trade with an appropriate amount of time 
to identify and resolve error trades, while also minimizing delays to 
achieving prompt and efficient clearing of transactions. Therefore, the 
Commission declines to adopt IHS Markit's recommendation that 
correcting trades have up to five days to be submitted to clearing.
---------------------------------------------------------------------------

    \108\ See IHS Markit at 8.
    \109\ See id.
---------------------------------------------------------------------------

    Further, final Sec.  37.9(e)(2)(i) would require SEFs to have error 
trade rules and procedures that require market participants to provide 
prompt notice to the SEF of an error trade and, as applicable, the 
corresponding correcting trade and offsetting trade.\110\ Such notice 
need not be separate from the error trade correction process.
---------------------------------------------------------------------------

    \110\ To the extent a SEF implements error trade rules and 
procedures that allow market participants to correct error trades 
sua sponte with an ex post facto review by the SEF, that SEF must 
require that market participants notify it of the subsequent 
correcting and offsetting trades. Conversely, a SEF that adopts 
error trade rules and procedures in which the SEF is responsible for 
correcting the error trade, that SEF would not be required to have 
market participants notify it of the subsequent correcting and 
offsetting trades. Regardless of the type of error trade rules and 
procedures a SEF adopts, it is required to adopt rules and 
procedures which require its market participants to provide prompt 
notice to it of an error trade that has occurred on its trading 
system(s) or platform(s).
---------------------------------------------------------------------------

    The Commission agrees with the TP ICAP SEFs that SEFs should have 
error trade rules and procedures that require market participants to 
provide prompt notice to the SEF of an error trade and, as applicable, 
the corresponding correcting trade and offsetting trade. The Commission 
believes that such a requirement is important to facilitate SEFs' 
fulfillment of their self-regulatory obligations. In particular, the 
Commission believes that providing a SEF prompt notice that an error 
trade has occurred on its trading system(s) or platform(s) will further 
enable it to facilitate direct supervision of its markets in order to 
determine whether a rule violation has occurred as required under Sec.  
37.203(b), as well as enhance its ability to carry out real-time market 
monitoring of all trading activity on its system(s) or platform(s) to 
identify disorderly trading and any market or system anomalies pursuant 
to Sec.  37.203(e).\111\
---------------------------------------------------------------------------

    \111\ See 17 CFR 37.203(b); 17 CFR 37.203(e).
---------------------------------------------------------------------------

    Final Sec.  37.9(e)(2)(ii) would prohibit counterparties from 
executing a second correcting trade to fix an error trade if the 
initial correcting trade is rejected from clearing. The Commission 
believes that limiting the number of instances in which counterparties 
may attempt to correct an error trade will help to facilitate prompt 
and efficient clearing by incentivizing the counterparties to 
accurately execute their correcting trade as quickly as possible.
    IECA requests that the Commission clarify that application of the 
pre-arranged trading prohibition under Commission regulation 
37.203(a).\112\ The Commission notes that the existing prohibition 
already provides an exception to that prohibition by allowing a SEF to 
adopt trading practices that are certified or approved by the 
Commission pursuant to part 40 of the Commission's regulations.\113\ 
Accordingly, the Commission anticipates that a SEF would implement 
final Sec.  37.9(e) by self-certifying or adopting rules subject to 
Commission review under part 40 that specify the manner in which 
counterparties may execute offsetting and correcting trades.
---------------------------------------------------------------------------

    \112\ See IECA at 5.
    \113\ See 17 CFR 37.203(a).
---------------------------------------------------------------------------

    Therefore, for the reasons stated above, the Commission is adopting 
Sec.  37.9(e) as proposed.\114\
---------------------------------------------------------------------------

    \114\ The Commission notes that upon the effective date of these 
rules, the adoption of Sec.  37.9(e) will negate the need for the 
relief provided in NAL No. 17-27 and NAL No. 20-01.
---------------------------------------------------------------------------

III. Effective Date

    The Commission proposed an effective date for the Proposal to be 60 
days after publication of final regulations in the Federal Register. 
The Commission received no comments regarding the effective date. 
Therefore, the Commission is adopting an effective date for these rules 
for 60 days after publication of final regulations in the Federal 
Register. The Commission believes that such an effective date allows 
SEFs and market participants sufficient time to adapt to the amended 
and additional rules in an efficient and orderly manner.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \115\ requires Federal 
agencies, in promulgating regulations, to consider the impact of those 
regulations on small businesses. The regulations adopted herein will 
affect SEFs and their market participants. The Commission has 
previously established certain definitions of ``small entities'' to be 
used by the Commission in evaluating the impact of its regulations on 
small entities in accordance with the RFA.\116\ The Commission 
previously concluded that SEFs are not small entities for the purpose 
of the RFA.\117\ The Commission has also previously stated its belief 
in the context of relevant rulemakings that SEFs' market participants, 
which are all required to be ECPs \118\ as defined in

[[Page 82324]]

section 1a(18) of the CEA,\119\ are not small entities for purposes of 
the RFA.\120\ The Commission received no comment on whether SEFs and 
SEF market participants covered by these final rules should be 
considered small entities for the purpose of the RFA. Therefore, the 
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 
U.S.C. 605(b), that the regulations will not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \115\ 5 U.S.C. 601 et seq.
    \116\ 47 FR 18618-18621 (Apr. 30, 1982).
    \117\ SEF Core Principles Final Rule, 78 FR 33476, 33548 (June 
4, 2013) (citing 47 FR 18618, 18621 (Apr. 30, 1982) (discussing 
DCMs); 66 FR 42256, 42268 (Aug. 10, 2001) (discussing derivatives 
transaction execution facilities, exempt commercial markets, and 
exempt boards of trade); and 66 FR 45604, 45609 (Aug. 29, 2001) 
(discussing registered DCOs)).
    \118\ 17 CFR 37.703.
    \119\ 7 U.S.C. 1(a)(18).
    \120\ 66 FR 20740, 20743 (Apr. 25, 2001) (stating that ECPs by 
the nature of their definition in the CEA should not be considered 
small entities).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq. 
(``PRA'') imposes certain requirements on Federal agencies (including 
the Commission) in connection with conducting or sponsoring any 
``collection of information,'' \121\ as defined by the PRA. Among its 
purposes, the PRA is intended to minimize the paperwork burden to the 
private sector, to ensure that any collection of information by a 
government agency is put to the greatest possible use, and to minimize 
duplicative information collections across the government.\122\
---------------------------------------------------------------------------

    \121\ See 44 U.S.C. 3502(3)(A).
    \122\ See 44 U.S.C. 3501.
---------------------------------------------------------------------------

    The PRA applies to all information, regardless of form or format, 
whenever the government is obtaining, causing to be obtained, or 
soliciting information, and includes required disclosure to third 
parties or the public, of facts or opinions, when the information 
collection calls for answers to identical questions posed to, or 
identical reporting or recordkeeping requirements imposed on, ten or 
more persons.\123\ The PRA requirements have been determined to include 
not only mandatory, but also voluntary information collections, and 
include both written and oral communications.\124\ 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.
---------------------------------------------------------------------------

    \123\ See 44 U.S.C. 3502(3).
    \124\ See 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------

    This final rulemaking contains collections of information for which 
the Commission has previously received control numbers from OMB. The 
titles for these collections of information are ``Core Principles and 
Other Requirements for Swap Execution Facilities, OMB control number 
3038-0074'' and ``Part 40, Provisions Common to Registered Entities, 
OMB control number 3038-0093.'' This final rulemaking would not impose 
any new information collection requirements from any persons or 
entities that require approval of OMB under the PRA.

C. Cost-Benefit Considerations

    Section 15(a) of the CEA \125\ requires the Commission to consider 
the costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
---------------------------------------------------------------------------

    \125\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

1. Background
    The Commission is amending certain rules in parts 36 and 37 of its 
regulations relating to the execution of the swap components of certain 
package transactions on SEFs and the resolution of error trades on 
SEFs.
    The baseline against which the Commission considers the costs and 
benefits of these final rules is the statutory and regulatory 
requirements of the CEA and Commission regulations now in effect, in 
particular CEA section 5h and certain rules in part 37 of the 
Commission's regulations. The Commission, however, notes that as a 
practical matter SEFs and market participants have adopted some current 
practices based upon no-action relief provided by Commission staff that 
is time-limited in nature.\126\ As such, to the extent that SEFs and 
market participants have relied on relevant staff no-action letters, 
the actual costs and benefits of the final rules as realized in the 
market may not be as significant.
---------------------------------------------------------------------------

    \126\ In its discussion of cost-benefit considerations, the 
Commission believes it is also relevant to consider the costs and 
benefits of the final regulations in comparison to circumstances in 
which such no-action relief has expired and is no longer available. 
The Commission further notes that in connection with NAL No. 16-58 
and its extension NAL No. 17-27 (relief related to clerical or 
operational error trade resolution), market participants 
specifically requested that the Commission undertake rulemakings to 
establish a permanent solution for addressing these clerical and 
operational errors, rather than merely extending the previous NAL 
relief. See NAL No. 16-58 and NAL No 17-27. In contrast, previous 
requests for no-action relief from market participants for the NALs 
which preceded NAL No.16-58 and NAL No. 17-27 were merely for 
temporary relief.
---------------------------------------------------------------------------

    In some instances, it is not reasonably feasible to quantify the 
costs and benefits to SEFs and certain market participants with respect 
to certain factors, for example, market integrity. Notwithstanding 
these types of limitations, however, the Commission otherwise 
identifies and considers the costs and benefits of these rules in 
qualitative terms. The Commission did not receive any comments from 
commenters which quantified or attempted to quantify the costs and 
benefits of the Proposal.
    The following consideration of costs and benefits is organized 
according to the rules and rule amendments proposed in this release. 
For each rule, the Commission summarizes the amendments, identifies and 
discusses the costs and benefits attributable to such rule, and 
identifies and discusses alternatives that the Commission considered. 
The Commission, where applicable, then considers the costs and benefits 
of the final rules in light of the five public interest considerations 
set out in section 15(a) of the CEA.
    The Commission notes that this consideration of costs and benefits 
is based on the understanding that the swaps market functions 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries, with some Commission registrants 
being organized outside of the United States, with leading industry 
members typically conducting operations both within and outside the 
United States, and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
discussion of costs and benefits below refers to the effects of the 
final rules on all swaps activity subject to the amended regulations, 
whether by virtue of the activity's physical location in the United 
States or by virtue of the activity's connection with activities in, or 
effect on, U.S. commerce under CEA section 2(i).\127\
---------------------------------------------------------------------------

    \127\ Section 2(i)(1) applies the swaps provisions of both the 
Dodd-Frank Act and Commission regulations promulgated under those 
provisions to activities outside the United States that have a 
direct and significant connection with activities in, or effect on, 
commerce of the United States. 7 U.S.C. 2(i)(1). 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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[[Page 82325]]

2. Package Transactions
    The Commission is adding Sec.  37.9(d) and amending Sec.  
37.9(a)(2) to permit the swap components of certain package 
transactions to be executed via flexible methods of execution pursuant 
to Sec.  37.9(c)(2). The final rules define a ``package transaction'' 
as a transaction consisting of two or more component transactions 
executed between two or more counterparties where (i) at least one 
component transaction is subject to the trade execution requirement in 
section 2(h)(8) of the Act; \128\ (ii) execution of each component 
transaction is contingent upon the execution of all other component 
transactions; and (iii) the component transactions are priced or quoted 
together as one economic transaction with simultaneous or near-
simultaneous execution of all components. Based on this definition and 
consistent with existing no-action relief, the final rule allows the 
swap component of the following three categories of package 
transactions to be executed via flexible means of execution pursuant to 
Sec.  37.9(c)(2): (1) MAT/Non-MAT Uncleared package transactions; (2) 
MAT/Non-Swap Instrument package transactions; \129\ and (3) MAT/Non-
Exclusive CFTC Swap package transactions.
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    \128\ Note prong (i) of the package transaction definition in 
Sec.  37.9(d)(1) states ``at least one component transaction is a 
Required Transaction'' which is substantively the same as prong (i) 
of the definition used above.
    \129\ Under final Sec.  37.9(d)(3), consistent with the no-
action relief, this category specifically excludes U.S. Dollar 
Spreadover package transactions; MAT/Futures package transactions, 
MAT/Agency MBS package transactions; and New Issuance Bond package 
transactions.
---------------------------------------------------------------------------

    In addition, the Commission is relieving the swap components of 
these three types of package transactions from the requirement in Sec.  
37.3 that the SEF offer an Order Book for every swap listed for trading 
on the SEF, while continuing to require that SEFs offer an Order Book 
for outright transactions in every swap listed for trading on the SEF. 
Finally, the Commission is using its exemptive authority pursuant to 
CEA section 4(c) to exempt swap transactions that are executed as a 
component of a package transaction that includes a component that is a 
new issuance bond from the trade execution requirement under section 
2(h)(8) of the Act.
    Benefits: The final rule will allow market participants to choose 
the most suitable execution method for each package transaction and 
will allow SEFs to continue to offer flexible execution methods for 
these package transactions rather than only offer the required methods 
of execution for swaps subject to the trade execution requirement. The 
Commission expects this will reduce execution risks, improve 
efficiency, and decrease transaction costs as market participants will 
be able to avoid legging into transactions, that is, entering into each 
part of the package separately. The Commission notes that these 
benefits are currently available to market participants through 
existing no-action relief. The Commission further believes that the 
final rule will provide the liquidity and transparency benefits of 
increased trading of component swaps on SEFs, as without this 
flexibility, market participants would be unable or unwilling to trade 
such swap components through SEFs' required methods of execution.\130\
---------------------------------------------------------------------------

    \130\ See supra note 51.
---------------------------------------------------------------------------

    The Commission believes that not requiring SEFs to offer an Order 
Book for the swap components of the three types of relevant package 
transactions will benefit SEFs by helping them to reduce operating 
costs, as they will no longer be required to operate and maintain an 
Order Book for trading those swaps that are components of those package 
transactions. However, SEFs will need to retain the availability of 
Order Books for those swaps executed as outright transactions.
    Further, as discussed above, given the illiquid and bespoke nature 
of various components within the relevant package transactions, the 
Commission acknowledges that the Order Book is not the ideal method of 
execution for many of such transactions. Therefore, the Commission 
anticipates that if SEFs are not required to provide an Order Book for 
the swap components of the relevant package transactions that are not 
suitable for Order Book trading, SEFs will be able to more effectively 
employ their resources, and no longer face the prospect of being 
required to provide Order Books that will not be utilized given the 
complex, illiquid, and bespoke nature of various components of the 
relevant package transactions.
    The Commission believes that exempting swap transactions that are 
executed as a component of a package transaction that includes a 
component that is a new issuance bond from the trade execution 
requirement will ensure that market participants such as bond 
underwriters and issuers can continue to execute these packages (where 
the new-issuance bond is hedged by an interest rate swap with tenor and 
payment terms that typically match the terms of the bond issuance) off-
SEF. As discussed above, this exemption may facilitate new bond 
issuances, which may benefit capital formation by helping market 
participants to raise capital and fund origination loans for businesses 
and homeowners. Moreover, in light of the involvement of the bond 
issuer and the underwriter in arranging and executing a package 
transaction in conjunction with a new issuance bond and the unique 
negotiation and fit-for-purpose nature of these package transactions, 
the Commission understands that it remains difficult or impossible to 
trade these package transactions on a SEF. SEFs have not been able to 
design an execution method suitable for this particular type of 
package, rendering it impracticable to execute these packages on-SEF. 
While the swap components of many swap/new-issuance bond packages 
executed today are not currently subject to the trade execution 
requirement,\131\ the final rule will ensure that those transactions 
would remain exempt in the event the trade execution requirement is 
expanded to include more types of swaps.
---------------------------------------------------------------------------

    \131\ For example, the swap component may be a forwarding-
starting swap whose start date corresponds to the issuance date of 
the bond. Forward starting swaps are not currently subject to the 
trade execution requirement.
---------------------------------------------------------------------------

    Costs: The amendments to allow flexible execution methods for 
certain package transactions and the exemption for package transactions 
that include a new issuance bond should not impose costs on market 
participants since they only provide flexibility to market participants 
and do not require them to change their current trade practices. 
Moreover, to the extent that market participants are relying on 
existing no-action relief, they can continue to implement existing 
industry practice. The Commission believes that current SEF rules 
typically allow participants to utilize flexible execution methods 
pursuant to the existing no-action relief, but to the extent that SEFs 
need to modify their rules to incorporate the amendments, they may 
incur modest costs.
    As noted, not requiring SEFs to offer an Order Book for the swap 
components of the relevant package transactions may enable SEFs to 
reduce operating costs. Since any existing Order Books for swap 
components of the relevant package transactions are not actively used 
and are not practicable for market participants to use, removing these 
Order Books (and not requiring SEFs to create such Order Books) should 
not impose significant costs on market participants.

[[Page 82326]]

Section 15(a) Factors
a. Protection of Market Participants and the Public
    The Commission believes that the amendments and exemption will 
protect market participants from the risks associated with legging into 
the relevant packages by enabling market participants to enter into 
package transactions using appropriate execution methods. Permitting 
SEFs to eliminate the Order Book for use when swaps are components of 
the relevant package transactions should not impact protection of 
market participants. While protecting market participants also benefits 
the public, the Commission has not identified any further effect of the 
final rules on protection of the public.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The amendments will enhance efficiency by enabling market 
participants to continue to execute the swap components of the relevant 
packages in a single transaction with an appropriate execution method, 
rather than via the inefficient process of legging into the package one 
component at a time. The amendments will also enhance financial 
integrity by enabling market participants to continue to avoid the 
execution risk associated with potential adverse price movements while 
attempting to leg into a transaction. The Commission has not identified 
any likely effects of the final rule amendments on competition in the 
swap markets. The Commission expects that, since there are few, if any, 
active Order Books for swaps as components of the relevant package 
transactions, SEFs will not use final Sec.  37.3(a)(4) to remove active 
Order Books that are providing competitive markets.
c. Price Discovery
    Package transactions are typically executed at a single price for 
the entire package, rather than at the prices of the individual 
components. The amendments will continue to allow the relevant package 
transactions to be executed using the execution methods that are 
designed to facilitate price discovery in these packages. For packages 
that include new issuance bonds, the exemption will permit price 
discovery to occur at the appropriate venue. The Commission believes 
that Sec.  37.3(a)(4), which exempts swaps that are part of the 
relevant package transactions from the Order Book requirement, will not 
materially inhibit price discovery since the Commission anticipates 
that SEFs would retain Order Books where price discovery is occurring 
and that currently price discovery is not occurring in Order Books for 
swap components of the package transactions addressed within this final 
rule.
d. Sound Risk Management Practices
    The Commission believes that the final rules will continue to 
promote sound risk management by facilitating the execution of package 
transactions as market participants consider package transactions to 
often be useful and appropriate instruments for management and transfer 
of risk and to avoid the execution risks associated with legging of 
transactions.
e. Other Public Interest Considerations
    The exemption from the trade execution requirement for the swap 
components of packages involving new issuance bonds may help promote 
capital formation by facilitating the issuance of bonds to raise 
capital. The Commission has not identified any other effect of the 
final rules and exemption regarding package transactions on other 
public interest considerations.
3. Error Trades
    The Commission is adding subsection (e) to Sec.  37.9 to establish 
a flexible SEF error trade policy standard that, among other things, 
incorporates the intent of the existing no-action relief in NAL No. 17-
27 for resolving errors in Required Transactions. Final Sec.  
37.9(e)(2)(i) specifies that a SEF must maintain rules and procedures 
that are ``fair, transparent, consistent'' and ``allow for timely 
resolution'' of an ``error trade,'' as defined under final Sec.  
37.9(e)(1)(ii). This standard applies to any error trade that occurs on 
a SEF, regardless of whether or not the swap is submitted for clearing. 
Further, under final Sec.  37.9(e)(2)(i), SEFs must have error trade 
rules and procedures that require that market participants provide 
prompt notice to the SEF of an error trade and, as applicable, 
correcting and offsetting trades.
    Final Sec.  37.9(e) also requires a SEF to adopt rules to resolve 
error trades that involve swaps submitted for clearing. For an error 
trade rejected from clearing and therefore deemed void ab initio, final 
Sec.  37.9(e)(2)(i)(A) requires a SEF to permit the counterparties to 
subsequently execute a correcting trade, as defined in Sec.  
37.9(e)(1)(i), through any method of execution offered by the SEF. For 
an error trade that has been accepted for clearing, final Sec.  
37.9(e)(2)(i)(B) requires a SEF to permit the counterparties to 
subsequently execute both an offsetting trade, as defined in final 
Sec.  37.9(e)(1)(iii), and a correcting trade through any method of 
execution offered by the SEF.
    The final rule includes some limitations that are similar to the 
existing no-action relief, including specified timeframes for executing 
and submitting these trades for clearing. For correcting trades 
associated with an error trade that has been rejected from clearing, 
final Sec.  37.9(e)(2)(i)(A) requires the SEF to submit the correcting 
trade for clearing to the registered DCO or exempt DCO as soon as 
technologically practicable, but no later than one hour after notice of 
the rejection to the relevant clearing members. For an offsetting trade 
and a correcting trade associated with an error trade that already has 
been accepted for clearing, final Sec.  37.9(e)(2)(i)(B) requires the 
SEF to submit both types of trades to the registered DCO or exempt DCO 
as soon as technologically practicable, but no later than three days 
after the registered DCO or exempt DCO accepted the error trade for 
clearing. In addition to these timeframes, final Sec.  37.9(e)(2)(ii) 
prohibits counterparties from executing a second correcting trade to 
fix an error trade if the initial correcting trade is rejected from 
clearing.
    However, the final rule does not include certain additional 
conditions applicable to SEFs and counterparties that are contained in 
the no-action relief under NAL No. 17-27 or NAL No. 20-01. For example, 
the no-action relief in NAL No. 17-27 requires that a SEF must make an 
affirmative finding that an alleged error trade has occurred and must 
have rules setting forth the procedures for making such a finding.
    Benefits: Absent the adoption of these rules, both SEFs and market 
participants would need to comply with the existing Commission 
regulations, notwithstanding the significant procedural and logistical 
difficulties of doing so. In particular, market participants would have 
to resolve error trades in Required Transactions using the Order Book 
or RFQ System, which would likely make it impossible to recreate the 
trade as originally intended. These difficulties could dissuade SEFs 
from being actively involved in the error trade resolution process and 
market participants from executing swaps on a SEF. The Commission 
believes that the final rule will avoid these potential difficulties.
    The Commission believes that, given that the amendments are largely 
consistent with current industry practice, SEFs and market participants 
may likely have already realized much of the benefit of final Sec.  
37.9(e). The Commission believes, however, that the

[[Page 82327]]

final rules additionally will provide a tangible benefit to market 
participants on a longer-term basis by allowing market participants to 
continue utilizing policies and protocols which the Commission 
understands most SEFs adopted in reliance upon the relief provided in 
existing no-action letters to resolve error trades.
    The requirement under Sec.  37.9(e)(2)(i) that market participants 
provide prompt notice to a SEF of an error trade and, as applicable, 
the corresponding correcting trade and offsetting trade will benefit 
SEFs in carrying out their self-regulatory obligations. In particular, 
the Commission believes that providing SEFs prompt notice that an error 
trade has occurred on their trading system(s) or platform(s) will 
enhance their ability to carry out real-time market monitoring of all 
trading activity on their system(s) or platform(s) to identify 
disorderly trading and any market or system anomalies or violations of 
SEF rules.
    The Commission also believes that the amendments will facilitate 
the goal of promoting consistency in the swaps market with respect to 
how errors are evaluated and resolved. First, the amendments will 
require all SEFs to adopt such policies. To the extent SEFs have not 
yet implemented such policies, the amendments will benefit market 
participants who will now be able to correct error trades and avoid 
related economic losses. Further, market participants can obtain the 
benefit of executing a swap transaction that corrects an error trade 
with the terms originally intended.
    Finally, some SEFs have already implemented robust error trade 
resolution policies pursuant to existing no-action relief, while other 
SEFs have not implemented robust error trade policies. This 
inconsistency among SEFs could otherwise cause a ``race to the bottom'' 
for SEFs' compliance and market oversight, as certain market 
participants may prefer SEFs with less stringent error trade policies. 
As a result, SEFs that have implemented robust error trade policies--
and the swaps market in general--will benefit by eliminating this 
potential ``race to the bottom,'' and the Commission will underscore 
the importance of SEF market oversight by adopting such requirements in 
Commission regulations.\132\
---------------------------------------------------------------------------

    \132\ The Commission notes that a robust error trade resolution 
policy is also consistent with an effective compliance and oversight 
program because the ability to resolve error trades (i) helps 
protect market integrity by unwinding certain error trades that 
otherwise would have an adverse effect on the market and (ii) 
promotes legal certainty by ensuring that market participants obtain 
the economic position in the transaction that they intended.
---------------------------------------------------------------------------

    Costs: Similar to the conditions established by Commission staff in 
time-limited no-action relief, the amendments would require SEFs to 
establish rules implementing various policies and procedures for 
resolving error trades. Under the final rules, SEFs must submit new 
rules to the Commission pursuant to part 40 of the Commission's 
regulations. However, the Commission understands that pursuant to the 
existing no-action relief, most SEFs currently have rules that 
otherwise comply with the adopted regulations. SEFs may choose to 
adjust their rules in light of the absence in the final rules of the 
requirement in the no-action relief that SEFs affirmatively determine 
that an error trade has occurred.\133\ To the extent that SEFs must 
draft and submit new rules to the Commission, the Commission estimates 
that the costs will be modest.
---------------------------------------------------------------------------

    \133\ In light of the flexibility of the final rules, SEFs can 
continue to require such an affirmative declaration if they 
determine that such requirement provides benefits to market 
participants or the SEF.
---------------------------------------------------------------------------

    The Commission believes that the amendments will not impose 
significant additional costs on market participants and intermediaries, 
because resolving error trades is inherently costly regardless of 
regulations imposed by the Commission, and market participants and 
intermediaries are currently subject to SEF policies and procedures. 
The requirement that market participants provide prompt notice to a SEF 
of an error trade and, as applicable, the correcting trade and 
offsetting trade will impose modest costs on market participants. In 
practice, though, market participants have likely needed to report 
error trades to SEFs in order to facilitate SEF determinations that an 
error trade has occurred pursuant to NAL No. 17-27, and would have had 
to report the correcting trade and offsetting trade in order to 
facilitate the SEF's ex post facto review pursuant to NAL No. 20-01. 
Not requiring that a SEF find that an error trade has occurred either 
before it has been resolved or via an ex post facto review should 
impose only minor costs on market participants associated with changes 
in procedures to no longer request that a SEF make such a 
determination.
    The Commission notes that NAL No. 17-27 and NAL No. 20-01 apply to 
both SEFs and DCMs, but the final rule applies only to SEFs. Therefore, 
the Commission believes that the final rule will impose no costs on 
DCMs, and notes that no DCM is currently availing itself of the no-
action relief.
Section 15(a) Factors
a. Protection of Market Participants and the Public
    The addition of Sec.  37.9(e) regarding error trades will protect 
market participants and the public by providing SEFs with greater 
authority under Commission regulations to resolve error trades. 
Further, by providing SEFs with the authority to permit counterparties 
to execute correcting trades and offsetting trades, the final rule 
amendments will protect market stability and transparency by preventing 
potential losses to market participants in connection with error trades 
and reducing instances in which market participants rely on inaccurate 
pricing information to inform their trading decisions. The addition of 
Sec.  37.9(e) will also promote greater transparency of the error trade 
resolution process to SEFs' market participants as SEFs will be 
required to establish policies and procedures for reviewing and 
determining how to resolve alleged error trades. The adopted 
requirement under Sec.  37.9(e)(2)(i) that market participants provide 
prompt notice to a SEF of an error trade and, as applicable, the 
correcting trade and offsetting trade will promote protection of market 
participants and the public by enhancing a SEF's ability to carry out 
its market oversight and monitoring responsibilities. The Commission 
believes that the absence of a requirement in the final rule that SEFs 
must affirmatively determine, or determine after an ex post facto 
review, that an error trade has occurred (which are conditions in the 
existing no-action relief under NAL No. 17-27 and NAL No. 20-01) will 
not materially impact the protection of market participants and the 
public.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The addition of Sec.  37.9(e) may improve the efficiency and 
financial integrity of markets by enabling counterparties to correct 
operational or clerical errors in a swap transaction. In particular, 
the final rules will help promote greater trading accuracy in the 
market by allowing counterparties to ultimately carry out transactions 
as originally intended, and would avoid unexpected trading losses 
caused by error trades. The requirement under Sec.  37.9(e)(2)(i) that 
market participants provide prompt notice to a SEF of an error trade 
and, as applicable, the correcting trade and offsetting trade would 
enhance a SEF's ability to carry out its market oversight and 
monitoring responsibilities, which helps promote the financial 
integrity of

[[Page 82328]]

its markets. The Commission believes that the absence of the no-action 
provision that SEFs must affirmatively determine that an error trade 
has occurred could enhance the efficiency of the error trade resolution 
process and would not materially impact the competitiveness or 
financial integrity of the swap market on SEFs.
    Absent these final rules, counterparties would be required in 
certain circumstances to correct or re-execute swap transactions in a 
less efficient and effective manner on a SEF, such as through the 
required methods of execution under Sec.  37.9(a). The final rules, 
which also require SEFs to adopt certain policies and procedures for 
addressing error trades, should further promote efficiency in the 
resolution process by providing market participants that transact on 
multiple SEFs with a more consistent approach across different 
platforms for correcting error trades.
c. Price Discovery
    The addition of Sec.  37.9(e) regarding error trades will enable 
SEFs to correct error trades containing a clerical or operational error 
while maintaining the price discovery benefits associated with the pre-
trade transparency requirements of Sec.  37.9. In particular, the final 
rules will help promote price discovery by allowing counterparties, 
whose original trade has been cancelled upon rejection from clearing 
due to a clerical or operational error, to re-execute the trade with 
the terms as originally intended. For error trades that have been 
accepted by a registered DCO or exempt DCO for clearing, the final 
rules promote greater accuracy in the price discovery process by 
allowing the counterparties to correct the error trade by executing an 
offsetting swap transaction and a correcting swap transaction with the 
terms as originally intended.
d. Sound Risk Management Practices
    The addition of Sec.  37.9(e) regarding error trades may promote 
sound risk management practices by providing SEFs with greater 
authority under Commission regulations to facilitate error trade 
resolution. The final rules will help to mitigate potential losses to 
market participants arising out of trade cancellations, where the error 
trade is rejected from clearing, or arising from maintaining the 
position of an unintended error trade.
e. Other Public Interest Considerations
    The Commission has not identified any effect of Sec.  37.9(e) on 
other public interest considerations.
    Consideration of Alternatives. Commenters were generally supportive 
of the proposed rules and recommended only one viable alternative.\134\ 
IHS Markit recommended with respect to the error trade rules that, 
especially during periods of market stress, the ``appropriate timeline 
for submitting correcting trades [should] be five (5) business days.'' 
\135\ As discussed above, under final Sec.  37.9(e)(2)(i), a SEF must 
submit a correcting trade for clearing to the registered DCO or exempt 
DCO as soon as technologically practicable, but no later than one hour 
(if rejected for clearing) or three days (if accepted for clearing) 
after notice of the error trade. The Commission notes that the final 
rule is the same as the requirements of the no-action relief and that 
SEFs have successfully implemented error trade procedures consistent 
with the no-action relief and, thus, the final rule. SEFs have not 
indicated to the Commission that the deadlines are overly costly or 
burdensome. Moreover, during the recent period of market stress 
associated with the COVID-19 pandemic, no SEF requested relief from the 
error trade requirements. The Commission has therefore determined not 
to adopt the alternative recommended by IHS Markit.
---------------------------------------------------------------------------

    \134\ As discussed above, commenters did recommend several other 
potential Commission actions that are outside the scope of this 
rulemaking and are therefore not addressed in this consideration of 
costs and benefits. Further, commenters did not specifically comment 
on the Commission's consideration of costs and benefits in the 
Proposal. To the extent that comments addressed issues bearing on 
the Commission's consideration of costs and benefits, they are 
discussed above in section II; the cost-benefit considerations 
discussion incorporates previous discussion of comments relevant to 
costs and benefits by reference.
    \135\ IHS Markit at 8.
---------------------------------------------------------------------------

    The Commission considered adopting new rules identical to the no-
action relief but determined, based on SEFs' and the Commission's 
experience with the no-action relief, to adopt changes where 
appropriate relative to the no-action relief. In particular, the final 
rule does not contain the requirement that a SEF affirmatively 
determine that an error trade has occurred, either before resolution or 
via an ex post facto review. The Commission believes that such a 
requirement would impose unnecessary costs on SEFs and market 
participants, and potentially impair the efficiency of the error trade 
resolution process. To the extent that SEFs and market participants are 
currently availing themselves of current no-action relief, they 
therefore may realize reduced costs under the final rule.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
objectives of the CEA, in issuing any order or adopting any Commission 
rule or regulation. The Commission does not anticipate that the 
amendments to parts 36 and 37 will promote or result in anti-
competitive consequences or behavior.

List of Subjects

17 CFR Part 36

    Package transactions, Trade execution requirement.

17 CFR Part 37

    Error trades, Package transactions, Required methods of execution, 
Swap execution facilities, Swaps, Trade execution requirement.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR chapter I as follows:

0
1. Revise part 36 to read as follows:

PART 36--TRADE EXECUTION REQUIREMENT

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, and 7b-3, as 
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).


Sec.  36.1  Exemptions to trade execution requirement.

    (a) A swap transaction that is executed as a component of a package 
transaction that also includes a component transaction that is the 
issuance of a bond in a primary market is exempt from the trade 
execution requirement in section 2(h)(8) of the Act.
    (1) For purposes of paragraph (a) of this section, a package 
transaction consists of two or more component transactions executed 
between two or more counterparties where:
    (i) At least one component transaction is subject to the trade 
execution requirement in section 2(h)(8) of the Act;
    (ii) Execution of each component transaction is contingent upon the 
execution of all other component transactions; and
    (iii) The component transactions are priced or quoted together as 
one economic transaction with simultaneous or near-simultaneous 
execution of all components.
    (2) [Reserved]

[[Page 82329]]

    (b) [Reserved]

PART 37--SWAP EXECUTION FACILITIES

0
2. The authority citation for part 37 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a, as 
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.


0
3. In Sec.  37.3, add paragraph (a)(4) to read as follows:


Sec.  37.3  Requirements and procedures for registration.

    (a) * * *
    (4) A swap execution facility is not required to provide an order 
book under this section for transactions defined in Sec.  37.9(d)(2), 
(3), and (4), except that a swap execution facility must provide an 
order book under this section for Required Transactions that are 
components of transactions defined in Sec.  37.9(d)(2), (3), and (4) of 
this part when such Required Transactions are not executed as 
components of transactions defined in Sec.  37.9(d)(2), (3), and (4).
* * * * *

0
4. Amend Sec.  37.9 by:
0
a. Revising introductory text of paragraph (a)(2)(i);
0
b. Redesignating paragraph (d) as paragraph (f);
0
c. Adding new paragraphs (d) and (e); and
0
c. Revising newly redesignated paragraph (f).
    The additions and revisions read as follows:


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

    (a) * * *
    (2) * * *
    (i) Each Required Transaction that is not a block trade as defined 
in Sec.  43.2 of this chapter shall be executed on a swap execution 
facility in accordance with one of the following methods of execution 
except as provided in paragraph (d) or (e) of this section:
* * * * *
    (d) Exceptions to required methods of execution for package 
transactions. (1) For purposes of this paragraph, a package transaction 
consists of two or more component transactions executed between two or 
more counterparties where:
    (i) At least one component transaction is a Required Transaction;
    (ii) Execution of each component transaction is contingent upon the 
execution of all other component transactions; and
    (iii) The component transactions are priced or quoted together as 
one economic transaction with simultaneous or near-simultaneous 
execution of all components.
    (2) A Required Transaction that is executed as a component of a 
package transaction that includes a component swap that is subject 
exclusively to the Commission's jurisdiction, but is not subject to the 
clearing requirement under section 2(h)(1)(A) of the Act, may be 
executed on a swap execution facility in accordance with paragraph 
(c)(2) of this section as if it were a Permitted Transaction;
    (3) A Required Transaction that is executed as a component of a 
package transaction that includes a component that is not a swap, as 
defined under section 1a(47) of the Act, may be executed on a swap 
execution facility in accordance with paragraph (c)(2) of this section 
as if it were a Permitted Transaction. This provision shall not apply 
to:
    (i) A Required Transaction that is executed as a component of a 
package transaction in which all other non-swap components are U.S. 
Treasury securities;
    (ii) A Required Transaction that is executed as a component of a 
package transaction in which all other non-swap components are 
contracts for the purchase or sale of a commodity for future delivery;
    (iii) A Required Transaction that is executed as a component of a 
package transaction in which all other non-swap components are agency 
mortgage-backed securities; and
    (iv) A Required Transaction that is executed as a component of a 
package transaction that includes a component transaction that is the 
issuance of a bond in a primary market.
    (4) A Required Transaction that is executed as a component of a 
package transaction that includes a component swap that is not 
exclusively subject to the Commission's jurisdiction may be executed on 
a swap execution facility in accordance with paragraph (c)(2) of this 
section as if it were a Permitted Transaction.
    (e) Resolution of operational and clerical error trades. (1) As 
used in this paragraph:
    (i) Correcting trade means a trade executed and submitted for 
clearing to a registered derivatives clearing organization, or a 
derivatives clearing organization that the Commission has determined is 
exempt from registration, with the same terms and conditions as an 
error trade other than any corrections to any operational or clerical 
error and the time of execution.
    (ii) Error trade means any trade executed on or subject to the 
rules of a swap execution facility that contains an operational or 
clerical error.
    (iii) Offsetting trade means a trade executed and submitted for 
clearing to a registered derivatives clearing organization, or a 
derivatives clearing organization that the Commission has determined is 
exempt from registration, with terms and conditions that economically 
reverse an error trade that was accepted for clearing.
    (2) Execution of correcting trades and offsetting trades. (i) A 
swap execution facility shall maintain rules and procedures that 
facilitate the resolution of error trades. Such rules shall be fair, 
transparent, and consistent; allow for timely resolution; require 
market participants to provide prompt notice of an error trade--and, as 
applicable, offsetting and correcting trades--to the swap execution 
facility; and permit market participants to:
    (A) Execute a correcting trade, in accordance with paragraph (c)(2) 
of this section, regardless of whether it is a Required or Permitted 
Transaction, for an error trade that has been rejected from clearing as 
soon as technologically practicable, but no later than one hour after a 
registered derivatives clearing organization, or a derivatives clearing 
organization that the Commission has determined is exempt from 
registration, provides notice of the rejection; or
    (B) Execute an offsetting trade and a correcting trade, in 
accordance with paragraph (c)(2) of this section, regardless of whether 
it is a Required or Permitted Transaction, for an error trade that was 
accepted for clearing as soon as technologically practicable, but no 
later than three days after the error trade was accepted for clearing 
at a derivatives clearing organization or a derivatives clearing 
organization that the Commission has determined is exempt from 
registration.
    (ii) If a correcting trade is rejected from clearing, then a swap 
execution facility shall not allow the counterparties to execute 
another correcting trade.
    (f) 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

[[Page 82330]]

counterparty to a swap that is executed anonymously and intended to be 
cleared.
    (3) For purposes of paragraphs (f)(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 (f)(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 November 27, 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 Swap Execution Facility Requirements--Voting Summary and 
Chairman's and Commissioners' Statements

Appendix 1--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--Supporting Statement of Chairman Heath P. Tarbert

    I am pleased to support today's final rule amending Part 36 and 
Part 37 of the CFTC's regulations relating to swaps. These 
amendments codify staff no-action letters in two areas: (1) Package 
transactions and (2) error trades.
    Before the 2008 financial crisis, swaps were executed 
bilaterally ``over the counter,'' rather than on a centralized 
exchange. When crafting the Dodd-Frank Act in 2010, Congress faced a 
key decision: Should it require swaps to trade like futures, via a 
centralized exchange order book visible to the entire market of 
potential buyers and sellers? Or should it retain the old bilateral, 
off-exchange trading practices?
    This was a difficult decision. After all, the crisis highlighted 
the need for more effective price discovery in our swaps markets.\1\ 
For more than a century, centralized exchanges have supported price 
discovery in futures products by providing a liquid, transparent 
market for buyers (longs) and sellers (shorts) to come together and 
transact. On the other hand, swaps are not futures. Many swaps 
products are executed only episodically through the negotiation of 
bespoke terms. In the 1990s and 2000s, this was done primarily 
through brokers and dealers providing quotes to one another on the 
telephone or over email. Hence, anonymous electronic trading via a 
central limit order book (CLOB) has not been viable for much of the 
swaps market.\2\ Even relatively standardized swaps are not 
typically as liquid as futures contracts and historically did not 
trade via the CLOB as futures do.
---------------------------------------------------------------------------

    \1\ See Committee on Capital Markets Regulation, The Global 
Financial Crisis: A Plan for Regulatory Reform 55 (May 2009) (With 
the real-time availability of both pre-trade quotes and post-trade 
contract prices, an exchange would thus provide an important source 
of price discovery that would complement the OTC market and enhance 
its liquidity.); Federal Reserve Bank of Chicago, Derivatives 
Overview in Understanding Derivatives: Markets and Infrastructure 9-
11 (2013) (OTC markets also exhibit low levels of transparency 
compared with futures markets . . . . Further, OTC markets provide 
limited price discovery; indeed, OTC trading relies heavily on price 
information generated by exchange-traded markets.).
    \2\ E.g., J. Christopher Giancarlo, Commissioner, CFTC, Pro-
Reform Reconsideration of the CFTC Swaps Trading Rules: Return to 
Dodd-Frank (2015). CLOBs are the modern computerized exchanges that 
have replaced the open-outcry trading pits of yesteryear.
---------------------------------------------------------------------------

The Creation of SEFs

    Ultimately, Congress sought a golden mean that would balance 
these competing concerns. The Dodd-Frank Act gave birth to the 
concept of swap execution facilities (SEFs). SEFs are platforms on 
which certain standardized swaps are required to trade.\3\ They 
resemble centralized exchanges, but have more flexibility in 
execution methods to accommodate the unique trading characteristics 
of swaps. In this regard, Congress took an evolutionary rather than 
a revolutionary approach, recognizing that mandating too much change 
too quickly could diminish rather than foster liquidity.
---------------------------------------------------------------------------

    \3\ Specifically, swaps that are required to be centrally 
cleared must be traded on-SEF unless no SEF makes that swap 
available to trade. Commodity Exchange Act (CEA) section 2(h)(8), 7 
U.S.C. 2(h)(8). The swaps that are required to be cleared are 
generally the most standardized and liquid classes of swaps.
---------------------------------------------------------------------------

    In implementing this portion of the Dodd-Frank Act, the CFTC 
required swaps that must be executed on a SEF (on-SEF) to trade via 
the CLOB or a request for quote to at least three SEF participants 
(Required Execution Methods or Required Methods).\4\ By contrast, 
swaps voluntarily traded on-SEF may be executed by any method the 
parties choose.\5\
---------------------------------------------------------------------------

    \4\ 17 CFR 37.9(a).
    \5\ Id. section 37.9(c).
---------------------------------------------------------------------------

    The SEF regulatory regime has generally worked well.\6\ But 
rarely is statutory implementation perfect on the first attempt. 
Some requirements are suitable for the swaps market as a whole but 
are not a good fit for particular types of transactions. CFTC staff 
has addressed such issues through a series of no-action letters, 
many of which have been in place for over six years. With the 
benefit of this experience, now is the time to begin codifying these 
no-action letters, with tweaks and refinements where needed.
---------------------------------------------------------------------------

    \6\ See, e.g., Lynn Riggs, et al., CFTC, Swap Trading after 
Dodd-Frank: Evidence from Index CDS, at 6, 52 (Aug. 17, 2019) 
(finding that SEF-traded index credit default swap markets are 
working relatively well following the Dodd-Frank swap trading 
reforms, though there is always room for improvement); Evangelos 
Benos, Richard Payne & Michalis Vasios, Centralized Trading, 
Transparency, and Interest Rate Swap Market Liquidity: Evidence from 
the Implementation of the Dodd-Frank Act, Bank of England Staff 
Working Paper No. 580, at 31 (May 2018) (finding liquidity 
improvement for swaps subject to the SEF trading mandate).
---------------------------------------------------------------------------

    Through today's action, we continue to strive for the golden 
mean that strikes the optimal balance between the features of the 
old bilateral swaps world and those of the anonymous, exchange-
traded futures model. In short, we aim to facilitate a natural 
progression toward more standardized and liquid products with 
tighter spreads. At the same time, we recognize that certain 
products that benefit the market do not lend themselves to the 
Required Execution Methods.

Package Transactions

    A ``package transaction'' typically involves multiple component 
financial instruments, to be executed simultaneously (or nearly so), 
with each component transaction contingent on the others. Pricing 
for certain components of the package is often based on the prices 
of other components. Some components may hedge other components. 
Executing these instruments in package form can improve execution 
pricing and efficiency, reduce execution costs, and mitigate 
execution risk, as compared with executing each instrument 
separately (known as ``legging'' into the transaction).
    In layman's terms, a package transaction is conceptually similar 
to booking a flight and hotel for an overnight trip. Each booking's 
utility is contingent on the other--making concurrent booking 
desirable--and there are often opportunities to improve cost and 
efficiency by bundling the bookings through a travel broker. As a 
practical matter, the derivatives market is no different.
    The final rule approved by the Commission today address package 
transactions that include both (1) one or more swaps that are 
required to trade on-SEF pursuant to the Required Execution Methods, 
and (2) one or more instruments that are not. The Required Execution 
Methods are suitable for swaps required to trade on-SEF, when such 
swaps are executed as standalone transactions. But when these swaps 
are executed as part of a package, they often take on the trading 
characteristics of the less-liquid instruments in the package, 
thereby making it unfeasible to execute these swaps via the Required 
Methods.
    This is a part of the market that is itself evolving.\7\ 
However, several types of package

[[Page 82331]]

transactions would include swaps that must trade via the Required 
Methods under CFTC rules, but currently cannot do so as part of a 
package. And it is not clear that they will be able to do so in the 
foreseeable future. Accordingly, today's final rule codifies the no-
action relief allowing swap components of those packages to trade 
through any execution method, provided that the trade occurs on-
SEF.\8\ I support this approach because it recognizes the progress 
made toward centralized exchange-type trading for swaps without 
forcing the market too far ahead of its natural evolutionary 
process. In addition, we must work to ensure our rules reflect 
actual market practice and functioning.
---------------------------------------------------------------------------

    \7\ CFTC staff has allowed the relief for certain package 
transactions to expire as swaps markets and market infrastructure 
have progressed such that the swap component of these package 
transactions can be executed through the required methods of 
execution. See, e.g., CFTC No Action Letter (NAL) No. 14-12; NAL No. 
14-62; NAL No. 14-121; NAL No. 14-137; NAL No. 15-55; NAL No. 16-76; 
NAL No. 17-55.
    \8\ The final rules would also allow any swap that is part of a 
package that also includes a new bond issuance to trade off-SEF.
---------------------------------------------------------------------------

Error Trades

    The CFTC, in accordance with the Commodity Exchange Act, has 
long taken a principles-based regulatory approach to the futures 
markets.\9\ In granting the CFTC jurisdiction over swaps, the Dodd-
Frank Act did not repudiate this principles-based tradition, but 
instead reinforced it. Section 733 of the Act sets forth core 
principles for SEFs and expressly affords SEFs ``reasonable 
discretion'' in determining how to comply.\10\
---------------------------------------------------------------------------

    \9\ E.g., Remarks of CFTC Chairman Heath P. Tarbert at the 2019 
Annual Robert Glauber Lecture at Harvard University's Institute of 
Politics (Oct. 24, 2019).
    \10\ CEA section 5b(f), 7 U.S.C. 7b-3(f) (setting forth core 
principles for SEFs and providing that a SEF ``shall have reasonable 
discretion in establishing the manner in which [it] complies with 
the core principles'').
---------------------------------------------------------------------------

    In this spirit, the amendments set out a principles-based 
approach to addressing error trades. They give SEFs the flexibility 
to determine the most suitable error trade rules for their markets 
and participants. At the same time, as I have said repeatedly, 
principles-based regulation is not a euphemism for ``deregulation'' 
or a ``light-touch'' approach.\11\ Accordingly, under our amendments 
a SEF must require its participants to inform it of error trades and 
correcting trades, so the SEF can maintain orderly markets and guard 
against false error claims.\12\
---------------------------------------------------------------------------

    \11\ Tarbert, supra note 10; Heath P. Tarbert, Fintech 
Regulation Needs More Principles, Not More Rules, Fortune (Nov. 19, 
2019), https://fortune.com/2019/11/19/bitcoin-blockchain-fintech-regulation-ctfc/.
    \12\ The final rules reiterate that any SEF offering trading in 
swaps subject to the post-trade name give-up 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. See Post-Trade Name Give-Up on Swap Execution 
Facilities, 85 FR 44693, 44701 (July 24, 2020).
---------------------------------------------------------------------------

Conclusion

    Today's action is in keeping with my recent directive on the use 
of staff letters and guidance, in which I noted that they should 
supplement rulemakings, rather than themselves function as 
rules.\13\ CFTC staff has provided important relief over the last 
six years, but we cannot rely on staff no-action relief to bridge 
the gaps forever. I expect these amendments will provide certainty 
and clarity to SEFs and their participants, thereby advancing our 
strategic objective of enhancing the regulatory experience for 
market participants at home and abroad.
---------------------------------------------------------------------------

    \13\ See Directive of Chairman Heath P. Tarbert on the Use of 
Staff Letters and Guidance (Oct. 27, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbetstatement102720.
---------------------------------------------------------------------------

    Furthermore, I remain open to dialogue on further fine-tuning of 
our SEF rules, consistent with Congress's mandate as well as the 
CFTC's priorities and resources. I therefore will support finalizing 
additional rules in the near term that have the backing of a broad-
based consensus of market participants and stakeholders. Swaps 
markets will benefit most from evolution, not revolution.

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I support today's final rule that codifies through rulemaking 
two issues concerning swap execution facilities (SEFs) currently 
addressed in staff no-action letters. I am pleased that this final 
rule will provide market participants with much needed regulatory 
certainty in the areas of ``package transactions'' (a series of 
related transactions sometimes including non-swap components) and 
the correction of erroneous trades. With the benefit of six-plus 
years of implementation experience, and multiple extensions of each 
of these no-action letters, it is long overdue for the Commission to 
codify and clarify its policy on each of these important issues.
    With regard to package transactions, the amendments recognize 
the need to provide flexible means of execution for swaps that are 
negotiated and executed concurrently with other components of a 
larger, integrated transaction. This flexibility has proved workable 
since 2014.\1\ In codifying current permissible practices with 
regard to the resolution of erroneous trades,\2\ the final rule 
similarly permits SEFs to allow market participants to execute 
offsetting or correcting trades through any method of execution 
offered by the SEF. These amendments will facilitate the prompt 
identification and correction of error trades, thereby minimizing 
market participants' exposure to market, credit, and operational 
risks.
---------------------------------------------------------------------------

    \1\ These amendments address the relief currently provided by 
CFTC No-Action Letter 17-55 (Oct. 31, 2017).
    \2\ These amendments address the relief currently provided by 
CFTC No-Action Letters 17-27 (May 30, 2017) and 20-01 (Jan. 8, 
2020).
---------------------------------------------------------------------------

    I have long disagreed with the overly restrictive mandate on 
permissible SEF methods of execution. While Dodd Frank's amendments 
to the Commodity Exchange Act define a SEF as a trading system 
facilitating multiple-to-multiple trading activity ``through any 
means of interstate commerce,'' \3\ the CFTC saw fit to only allow 
for two methods (RFQ and CLOB) to be used in connection with a swap 
subject to the trade execution requirement (``Required 
Transactions'').\4\ By dictating how Required Transactions are 
executed, the current regime forecloses any number of alternatives 
that could create liquidity on SEFs and better address the highly 
variable, bespoke nature of many swaps. I believe the Commission 
should follow the law and further expand the allowed methods of 
execution for Required Transactions to any form that is truly 
multiple-to-multiple, which would allow SEFs to experiment with new 
means of execution tailored to the bespoke liquidity of a wide 
variety of critical risk management products. Similarly, in the area 
of block trades, I recently expressed concern when the Commission 
raised the block size threshold, thereby reducing the population of 
swaps that can be negotiated through alternative means.\5\
---------------------------------------------------------------------------

    \3\ Definition of SEF in sec. 1a(50) of the Commodity Exchange 
Act.
    \4\ Reg. 37.9(a).
    \5\ Supporting Statement of Commissioner Brian Quintenz 
Regarding Final Rules Amending the Real-Time Reporting Requirements, 
available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement091720b
---------------------------------------------------------------------------

    Lastly, I hope the Commission promptly finalizes additional 
provisions of the SEF ruleset that the Commission has proposed 
revising. These areas include making more practical the SEF 
financial resources requirement and codifying an exemption from the 
trade execution requirement for swaps between affiliated 
counterparties. Resolving these issues through final rules will 
promote the liquidity and transparency of SEFs.

Appendix 4--Statement of Commissioner Dan M. Berkovitz

    I support today's final rule to amend parts 36 and 37 of the 
Commission's regulations relating to the execution of package 
transactions and correction of error trades on swap execution 
facilities (``SEFs''). The final rule will further, in a flexible 
and cost-effective manner, the Congressional goal of promoting the 
trading of swaps on SEFs.
    Beginning in 2014, the Commission issued a series of no-action 
letters specifying permissible methods of execution for certain 
package transactions, which enabled the agency to phase-in the 
application of the trade execution mandate for these transactions. 
As market infrastructure has evolved, the Commission has allowed 
portions of the relief for some package transactions to expire, 
leaving a narrow set of these transactions that still may be 
implemented through flexible methods of execution. Based on 
experience, the Commission has determined that flexible methods of 
execution are currently more appropriate for packages in which at 
least one of the components is (1) a swap not subject to the 
clearing requirement; (2) not a swap; or (3) a swap for which the 
CFTC does not have exclusive jurisdiction. Requiring that the swap 
components of these transactions be traded through the required

[[Page 82332]]

methods of execution (i.e., Order Book or Request-for-Quote to a 
minimum of 3 counterparties) could force market participants to 
break up the package into their individual components, which would 
increase transaction costs and risks, and thereby defeat the 
economic purpose and efficiency of the package transaction. 
Commenters supported the rule as proposed. It is therefore 
appropriate for the Commission to codify that flexible methods of 
execution may be used for the swap components of this limited set of 
package transactions.
    The final rule also exempts from the trade execution requirement 
swap transactions that are components of ``new issuance bond'' 
package transactions, and amends part 37 to provide flexibility in 
the execution methods a SEF may offer counterparties to correct 
clerical or operational errors. While providing additional 
flexibility for resolving error trades, the rule limits the number 
of instances in which such errors may be corrected, and preserves 
important protections to guard against abuse. Notably, the 
Commission requires market participants to provide prompt notice to 
a SEF of an error trade, enabling the SEF to conduct real-time 
market monitoring and fulfill other self-regulatory obligations. In 
addition, the rule makes clear that a SEF must maintain rules and 
procedures that are fair, transparent, incentivize timely resolution 
of an error trade, and allow for such resolution without disclosing 
the identity of counterparties to one another where the swaps 
trading is subject to the post-trade name give up prohibition.
    Given the tailored nature of these amendments and the 
appropriate safeguards, I support this final rule. I thank the staff 
of the Division of Market Oversight for their work on this rule and 
their helpful engagement with my office.

[FR Doc. 2020-26555 Filed 12-17-20; 8:45 am]
BILLING CODE 6351-01-P


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