This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents.

Rules and Regulations Federal Register

8993 

Vol. 86, No. 27 

Thursday, February 11, 2021 

1 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, tit. VII, 124 

Stat. 1376 (2010) (codified as amended in various 

sections of 7 U.S.C.), https://www.cftc.gov/sites/ 

default/files/idc/groups/public/@lrfederalregister/ 

documents/file/2013-12242a.pdf (‘‘Dodd-Frank 

Act’’). 

2 7 U.S.C. 1 et seq. 

3 7 U.S.C. 2(h)(8), 7b–3. As amended, CEA section 

1a(50) defines a SEF as a trading system or platform 

that allows multiple participants to execute or trade 

swaps with multiple participants through any 

means of interstate commerce.’’ 7 U.S.C. 1a(50). 

CEA section 5h(a)(1) requires an entity to register 

as a SEF or a DCM prior to operating a facility for 

the trading or processing of swaps. 7 U.S.C. 7b– 

3(a)(1). CEA section 5h(f) requires registered SEFs 

to comply with fifteen core principles. 7 U.S.C. 7b– 

3(f). 

4Section 723(a)(3) of the Dodd-Frank Act added 

a new CEA section 2(h) to establish the clearing 

requirement for swaps. 7 U.S.C. 2(h). CEA section 

2(h)(1)(A) provides that it is unlawful for any 

person to engage in a swap unless that person 

submits such swap for clearing to a derivatives 

clearing organization that is registered under the 

Act or a derivatives clearing organization that is 

exempt from registration under the Act if the swap 

is required to be cleared. 7 U.S.C. 2(h)(1)(A). CEA 

section 2(h)(2) specifies the process for the 

Commission to review and determine whether a 

swap, or a group, category, type or class of swap 

should be subject to the clearing requirement. 7 

U.S.C. 2(h)(2). The Commission further 

implemented the clearing requirement 

determination process under regulation 39.5 and 

part 50. Part 50 specifies the interest rate and credit 

default swaps that are currently subject to the 

Commission’s clearing requirement. 17 CFR part 50. 

5The Commission notes that CEA section 

2(h)(8)(A)(ii) contains a typographical error that 

specifies CEA section 5h(f), rather than CEA section 

5h(g), as the provision that allows the Commission 

to exempt a SEF from registration. Where 

appropriate, the Commission corrects this reference 

in the discussion herein. 

6CEA sections 2(h)(8)(A)(i)–(ii) provide that with 

respect to transactions involving swaps subject to 

the clearing requirement, counterparties shall 

execute the transaction on a board of trade 

designated as a contract market under section 5; or 

execute the transaction on a swap execution facility 

registered under 5h or a swap execution facility that 

is exempt from registration under section 5h(g) of 

the Act. Given this reference in CEA section 

2(h)(8)(A)(ii), the Commission accordingly 

interprets ‘‘swap execution facility’’ in CEA section 

2(h)(8)(B) to include a swap execution facility that 

is exempt from registration pursuant to CEA section 

5h(g). 

7This regulation codifies the statutory exception 

to the swap clearing requirement set forth in 7 

U.S.C. 2(h)(7)(A). See infra notes 19–20 and 

accompanying text. Recently, the Commission 

renumbered Commission regulation 50.50(d) as a 

new numbered section and heading, namely, 

Commission regulation 50.53. A stand-alone 

exemption from the clearing requirement for certain 

banks, savings associations, farm credit system 

institutions, and credit unions separated this 

exemption from the non-financial entities’ 

exception provided for under CEA section 2(h)(7) 

and codified in regulation 50.50(a)–(c). See Swap 

Clearing Requirement Exemptions, 85 FR 76428 

(Nov. 30, 2020). 

8Core Principles and Other Requirements for 

Swap Execution Facilities, 78 FR 33476 (Jun. 4, 

2013) (‘‘SEF Core Principles Final Rule’’); Process 

for a Designated Contract Market or Swap Execution 

Facility to Make a Swap Available to Trade, Swap 

Transaction Compliance and Implementation 

Schedule, and Trade Execution Requirement Under 

the Commodity Exchange Act, 78 FR 33606 (Jun. 4, 

2013) (‘‘MAT Final Rule’’). 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 36 

RIN 3038–AE25 

Exemptions From Swap Trade 

Execution Requirement 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting a final rule (‘‘Final 

Rule’’) that establishes two exemptions 

from the statutory requirement to 

execute certain types of swaps on a 

swap execution facility (‘‘SEF’’) or a 

designated contract market (‘‘DCM’’) 

(this requirement, the ‘‘trade execution 

requirement’’). 

DATES: The Final Rule is effective on 

March 15, 2021. 

FOR FURTHER INFORMATION CONTACT: 

Roger Smith, Associate Chief Counsel, 

Division of Market Oversight, (202) 418– 

5344, rsmith@cftc.gov, Commodity 

Futures Trading Commission, 525 West 

Monroe Street, Suite 1100, Chicago, IL 

60661; or Michael Penick, Senior 

Economist, (202) 418–5279, mpenick@

cftc.gov, Office of the Chief Economist, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1151 21st Street NW, Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background and Introduction 

A. Statutory and Regulatory History 

B. Summary of the Final Rule 

II. Part 36—Trade Execution Exemptions 

Linked to Swap Clearing Requirement 

Exceptions and Exemptions 

A. Background and Proposed Rule 

B. Trade Execution Requirement 

Exemption for Swaps Eligible for a 

Clearing Requirement Exception or 

Exemption Under Part 50 

1. Summary of Comments 

2. Final Rule: CEA Section 4(c) Authority 

and Standards 

C. Trade Execution Exemption for Swaps 

Between Eligible Affiliate Counterparties 

1. Proposed Rule 

2. Summary of Comments 

3. Final Rule: CEA Section 4(c) Authority 

and Standard 

III. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost-Benefit Considerations 

1. Introduction 

D. Antitrust Considerations 

I. Background and Introduction 

A. Statutory and Regulatory History 

Title VII of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act 1 amended the Commodity 

Exchange Act (‘‘CEA’’ or ‘‘Act’’) 2 to 

establish a comprehensive new swaps 

regulatory framework that addresses, 

inter alia, the trading of swaps and the 

registration and oversight of SEFs.3 CEA 

section 2(h)(8) provides that swap 

transactions that are subject to the swap 

clearing requirement under CEA section 

2(h)(1)(A) 4 must be executed on a DCM, 

a registered SEF, or a SEF that is exempt 

from registration pursuant to CEA 

section 5h(g) (‘‘Exempt SEF’’),5 unless 

(i) no DCM or SEF 6 ‘‘makes the swap 

available to trade’’ or (ii) the related 

transaction is subject to the exception 

from the swap clearing requirement 

under CEA section 2(h)(7). The swap 

clearing requirement exception under 

CEA section 2(h)(7) applies to nonfinancial entities that are using swaps to 

hedge or mitigate commercial risk and 

notify the Commission how they 

generally meet their financial 

obligations related to uncleared swaps, 

and has been implemented under 

Commission regulation 50.50.7

In 2013, pursuant to its discretionary 

rulemaking authority in CEA sections 

5h(f)(1) and 8a(5), the Commission 

issued an initial set of rules 

implementing this statutory framework 

for swap trading and the registration 

and oversight of SEFs (‘‘2013 SEF 

Rules’’).8

In November 2018, the Commission 

issued a proposed rule (‘‘Proposed 


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9Swap Execution Facilities and Trade Execution 

Requirement, 83 FR 61946 (Nov. 30, 2018). 

10Under the CFTC’s current regulations, swaps 

subject to the trade execution requirement must be 

executed via a central limit order book (‘‘Order 

Book’’) or a request for quote to no fewer than three 

unaffiliated market participants in conjunction with 

an Order Book (‘‘RFQ’’). 17 CFR 37.9(a). 

11 83 FR at 62036–62040. The Proposed Rule also 

included a trade execution exemption for swap 

components of package transactions that includes 

both a swap that is otherwise subject to the trade 

execution requirement and a new bond issuance 

(‘‘New Issuance Bonds package transactions’’). The 

Commission in a separate proposal, that sought to 

codify the majority of relief currently provided to 

package transactions, also proposed an exemption 

from the trade execution requirement for swap 

components of New Issuance Bond package 

transactions. See Swap Execution Facility 

Requirements and Real-Time Reporting 

Requirements, 85 FR 9407 (Feb. 19, 2020). On 

November 18, 2020, the Commission adopted that 

exemption in a separate rulemaking, as § 36.1(a) of 

its regulations. See Swap Execution Facility 

Requirements, 85 FR 82313 (Dec. 18, 2020). 

12See Comment Letter from Japanese Bankers 

Association at 4 (Mar. 13, 2019) (‘‘JBA Letter’’); 

Comment Letter from Citadel and Citadel Securities 

at 40–41 (Mar. 15, 2019) (‘‘Citadel Letter’’). As 

discussed below, Citadel recommended certain 

limitations on the applicability of these exemptions. 

While the Commission received numerous 

comments on the Proposed Rule, only the JBA 

Letter and Citadel Letter commented directly on the 

two proposed exemptions addressed in these Final 

Rules. 

13See, e.g., Comment Letter from the Alternative 

Investment Management Association at 1–2 (Feb. 

25, 2019) (urging the CFTC ‘‘to approach any 

change to swap execution facilities and trade 

execution in a phased and targeted manner, rather 

than adopt a wholesale package of changes in a 

single rulemaking’’); Comment Letter from Managed 

Funds Association at 2–3 (Mar. 15, 2019) 

(expressing concern with the breadth of the 

Proposed Rule and recommending targeted rather 

than comprehensive changes to the swap trading 

framework); Comment Letter from IATP at 3–4 

(Mar. 15, 2019) (same); Comment Letter from 

Securities Industry and Financial Markets 

Association at 1 (Mar. 15, 2019) (‘‘SIFMA Letter’’) 

(same); Comment Letter from SIFMA Asset 

Management Group at 1 (Mar. 15, 2019) (same); 

Comment Letter from Tradeweb Markets LLC at 1– 

2 (Mar. 14, 2019) (‘‘Tradeweb Letter’’) (same); 

Comment Letter from Wellington Management 

Company LLP at 1 (Mar. 15, 2019) (same); see also 

Comment Letter from Futures Industry Association 

at 7–9 (Mar. 15, 2019) (‘‘FIA Letter’’) (stating that 

proposed market reforms ‘‘would present tall 

operational challenges and impose substantial costs 

on all market participants’’); Comment Letter from 

Commodity Markets Council at 2 (Mar. 15, 2019) 

(same). 

14 In addition, the Proposed Rule addressed a 

number of SEF operational challenges arising from 

incongruities between the 2013 SEF Rules and 

existing technology and market practice. Proposed 

solutions to these operational challenges also 

received broad support from commenters. The 

Commission finalized certain of these proposals in 

a parallel rulemaking. 

15See infra note 23. 

16For example, the Commission recently codified 

staff no-action relief related to block trades, error 

trades, and package transactions. See Real-Time 

Public Reporting Requirements, 85 FR 75422 (Nov. 

25, 2020) (codifying stat no-action relief related to 

block trades). The adopting release codifying staff 

no-action relief related to package transactions and 

error trades is available on the Commission’s 

website at https://www.cftc.gov/media/5276/ 

votingdraft111820b/download. 

17CFTC Letter No. 17–67, Re: Extension of NoAction Relief from Commodity Exchange Act 

Section 2(h)(8) for Swaps Executed Between Certain 

Affiliated Entities that Are Not Exempt from 

Clearing Under Commission Regulation 50.52 (Dec. 

14, 2017) (‘‘NAL No. 17–67’’); CFTC Letter No. 16– 

80, Re: Extension of No-Action Relief from 

Commodity Exchange Act Section 2(h)(8) for Swaps 

Executed Between Certain Affiliated Entities that 

Are Not Exempt from Clearing Under Commission 

Regulation 50.52 (Nov. 28, 2016); CFTC Letter No. 

15–62, Re: Extension of No-Action Relief from 

Commodity Exchange Act Section 2(h)(8) for Swaps 

Executed Between Certain Affiliated Entities that 

Are Not Exempt from Clearing Under Commission 

Regulation 50.52 (Nov. 17, 2015); CFTC Letter No. 

14–136, Re: Extension of No-Action Relief from 

Commodity Exchange Act Section 2(h)(8) for Swaps 

Executed Between Certain Affiliated Entities that 

Are Not Exempt from Clearing Under Commission 

Regulation 50.52 (Nov. 7, 2014); CFTC Letter No. 

14–26, Time-Limited No-Action Relief from the 

Commodity Exchange Act Section 2(h)(8) for Swaps 

Executed Between Certain Affiliated Entities Not 

Electing Commission Regulation § 50.52 (Mar. 6, 

2014). 

18 7 U.S.C. 2(h)(8)(B). 

19 7 U.S.C. 2(h)(7). 

20 17 CFR 50.50. Among other things, § 50.50 

establishes when a swap transaction is considered 

to hedge or mitigate commercial risk; specifies how 

to satisfy the reporting requirement; and exempts 

small financial institutions from the definition of 

‘‘financial entity.’’ 17 CFR 50.50. 

Rule’’), again under CEA sections 

5h(f)(1) and 8a(5), that set forth 

comprehensive structural reforms to the 

SEF regulatory regime.9 For example, 

the Proposed Rule would have removed 

existing limitations on swap execution 

methods on SEFs,10 while expanding 

the categories of swaps that are subject 

to the trade execution requirement as 

well as the types of entities that must 

register as SEFs. In addition to these 

broad reforms, the Proposed Rule also 

contained, among other things, more 

targeted regulatory proposals to codify 

exemptions from the trade execution 

requirement, including two such 

exemptions linked to exceptions to, or 

exemptions from, the swap clearing 

requirement.11

Commenters provided limited and 

generally positive feedback regarding 

these two proposed exemptions from 

the trade execution requirement.12 By 

contrast, the Proposed Rule’s broader 

market reforms elicited a number of 

public comments expressing concerns 

with the expansive scope of the changes 

and recommending that the Commission 

focus on more targeted improvements to 

the swap trading regulatory regime.13 In 

light of available resources and current 

priorities, the Commission agrees that it 

is appropriate to proceed with 

incremental improvements rather than a 

wholesale reform package at this time.14

Accordingly, this Final Rule addresses 

only the two proposed exemptions from 

the trade execution requirement linked 

to the swap clearing requirement’s 

exemptions and exceptions under part 

50, such as the end-user exception 

under Commission regulation 50.50, the 

exemption for co-operatives under 

Commission regulation 50.51, and the 

inter-affiliate exemption under 

Commission regulation 50.52.15

Additional targeted improvements to 

the swap trading regulatory framework 

have been and will continue to be made 

via discrete rulemakings.16

B. Summary of the Final Rule

The Final Rule establishes two

exemptions from the trade execution 

requirement for swaps, both of which 

are linked to the Commission’s 

exemptions from, and exceptions to, the 

swap clearing requirement. The first 

such trade execution requirement 

exemption applies to a swap that 

qualifies for, and meets the associated 

requirements of, any exception or 

exemption under part 50 of the 

Commission’s regulations. The second 

codifies relief provided under CFTC 

Letter No. 17–67, and prior staff 

letters,17 and applies to a swap that is 

entered into by eligible affiliate 

counterparties and cleared, regardless of 

the affiliates’ ability to claim the interaffiliate clearing exemption under 

§ 50.52 of the Commission’s regulations.

II. Part 36—Trade Execution

Exemptions Linked to Swap Clearing

Requirement Exceptions and

Exemptions

A. Background and Proposed Rule

CEA section 2(h)(8) specifies that

swap transactions that are excepted 

from the clearing requirement pursuant 

to CEA section 2(h)(7) are not subject to 

the trade execution requirement.18 CEA 

section 2(h)(7)(C)(i), which is codified 

in Commission regulation 50.50, is 

known as the ‘‘end-user exception’’ and 

provides an exception from the swap 

clearing requirement if one of the 

counterparties to the transaction (i) is 

not a financial entity; (ii) is using the 

swap to hedge or mitigate commercial 

risk; and (iii) notifies the Commission as 

to how it generally meets its financial 

obligations associated with entering into 

uncleared swaps.19 The Commission 

adopted requirements under § 50.50 to 

implement this exception.20 CEA 

section 2(h)(7)(C)(ii) provided the 

Commission with the authority to 

consider whether to exempt from the 

definition of ‘‘financial entity’’ small 

banks, savings associations, farm credit 

system institutions and credit unions. 

The Commission exercised this 

authority at the same time it 


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21On May 12, 2020, the Commission proposed a 

non-substantive change to § 50.50(d). The 

Commission proposed to move the exception from 

the clearing requirement for small banks, loan 

associations, farm credit system institutions, and 

credit unions under § 50.50(d) to a stand-alone 

regulation, namely § 50.53. Swap Clearing 

Requirement Exemptions, 85 FR 27955, 27962–63 

(May 12, 2020). The Commission adopted this 

proposal on November 2, 2020. See Swap Clearing 

Requirement Exemptions, 85 FR 76428 (Nov. 30, 

2020). Those regulations are now codified in 

Commission regulation 50.53. 

22 17 CFR 50.51. The exemption permits a 

qualifying exempt cooperative to elect not to clear 

swaps that are executed in connection with 

originating a loan or loans for the members of the 

cooperative, or hedging or mitigating commercial 

risk related to member loans or arising from swaps 

related to originating loans for members. 17 CFR 

50.51(b)(1)–(2). 

23 17 CFR 50.52. Counterparties have ‘‘eligible 

affiliate counterparty’’ status if: (i) One 

counterparty, directly or indirectly, holds a majority 

ownership interest in the other counterparty, and 

the counterparty that holds the majority interest in 

the other counterparty reports its financial 

statements on a consolidated basis under Generally 

Accepted Accounting Principles or International 

Financial Reporting Standards, and such 

consolidated financial statements include the 

financial results of the majority-owned 

counterparty; or (ii) a third party, directly or 

indirectly, holds a majority ownership interest in 

both counterparties, and the third party reports its 

financial statements on a consolidated basis under 

Generally Accepted Accounting Principles or 

International Financial Reporting Standards, and 

such consolidated financial statements include the 

financial results of both of the swap counterparties. 

17 CFR 50.52(a)(1)(i)–(ii). To elect the exemption, 

such counterparties must also meet additional 

conditions, including documentation requirements; 

centralized risk management requirements; 

reporting requirements; and a requirement to clear 

outward-facing swaps that are of a type identified 

in the Commission’s clearing requirement (subject 

to applicable exceptions, exemptions, and 

alternative compliance frameworks). 17 CFR 

50.52(b)–(c). 

24E.g., Swap Clearing Requirement Exemptions, 

85 FR 27955 (May 12, 2020) (proposing to exempt 

from the clearing requirement swaps entered into 

by central banks, sovereign entities, international 

financial institutions (‘‘IFIs), bank holding 

companies, savings and loan holding companies, 

and community development financial 

institutions); Amendments to the Clearing 

Exemption for Swaps Entered into by Certain Bank 

Holding Companies, Savings and Loan Holding 

Companies, and Community Development 

Financial Institutions, 83 FR 44001 (Aug. 29, 2018). 

As noted above, the Commission adopted the May 

12, 2020 proposal on November 2, 2020. Swap 

Clearing Requirement Exemptions, 85 FR 76428 

(Nov. 30, 2020). See also Proposed Rule at 62038 

(discussing the proposed exemption from the 

clearing requirement for swaps entered by eligible 

bank holding companies, savings and loan holding 

companies, and community development financial 

institutions). 

25Proposed Rule at 62038. 

26 JBA Letter at 4. 

27Citadel Letter at 40–41. 

28See Comment Letter from Blackrock at 2 (Mar. 

15, 2019) (‘‘Blackrock Letter’’); Comment Letter 

from International Swaps and Derivatives 

Association, Inc. at 11 (Mar. 15, 2019) (‘‘ISDA 

Letter’’); SIFMA Letter at 14; Comment Letter from 

the Global Foreign Exchange Division of the Global 

Financial Markets Association at 5 (Mar. 15, 2019) 

(‘‘GFXD Letter’’). 

29See ISDA Letter at 11, Appendix at 5; SIFMA 

Letter at 13–14; GFXD Letter at 5–6; Tradeweb 

Letter at 6; FIA Letter at 15, Comment Letter from 

Vanguard at 2 (Mar. 15, 2019). 

30Comment Letter from Mercaris at 1–2 (Mar. 4, 

2019) (‘‘Mercaris Letter’’). 

promulgated the end-user exception 

final rule.21

In contrast to swaps that are eligible 

for the end-user exception, the 

Commission’s regulations do not 

specifically exempt from the trade 

execution requirement swaps that are 

not subject to the swap clearing 

requirement based on other statutory 

authority provisions. Pursuant to its 

exemptive authority under CEA section 

4(c), the Commission promulgated 

additional exemptions from the clearing 

requirement for swaps between certain 

types of entities. Commission regulation 

50.51 allows an ‘‘exempt cooperative’’ 

to elect a clearing exemption for swaps 

entered into in connection with loans to 

the cooperative’s members.22

Commission regulation 50.52 provides a 

clearing exemption for swaps between 

eligible affiliate counterparties.23

At the time of the drafting of the 

Proposed Rule, the Commission was in 

the process of considering a proposal to 

codify certain exemptions from the 

clearing requirement.24 The Proposed 

Rule applied the Commission’s section 

4(c) exemptive authority to create an 

explicit exemption from the trade 

execution requirement for any future 

exceptions to, or exemptions from, the 

clearing requirement under part 50.25

Proposed § 36.1(c) established an 

exemption to the trade execution 

requirement for swap transactions for 

which an exception or exemption has 

been elected pursuant to part 50. The 

Proposed Rule also indicated that the 

trade execution requirement would not 

apply to swap transactions for which a 

future exemption has been adopted by 

the Commission under part 50. 

Proposed § 36.1(e) established a 

separate exemption from the trade 

execution requirement that may be 

elected by eligible affiliate 

counterparties to a swap submitted for 

clearing, notwithstanding the eligible 

affiliate counterparties’ option to elect a 

clearing exemption pursuant to § 50.52. 

Eligible affiliate counterparties may rely 

on this exemption from the trade 

execution requirement regardless of 

their decision not to elect the interaffiliate clearing exemption and instead 

clear the swap. 

The Commission has determined that 

these two exemptions are consistent 

with the objectives of CEA section 4(c). 

The following sections address the 

exemptions in turn. 

B. Trade Execution Requirement 

Exemption for Swaps Eligible for a 

Clearing Requirement Exception or 

Exemption Under Part 50 

1. Summary of Comments 

The Commission received several 

comments on the proposed regulations 

to codify exemptions to the trade 

execution requirement for swaps that 

are not subject to the clearing 

requirement under part 50. JBA 

expressed support for the proposed 

exemption.26 Citadel also expressed 

support for the exemption for swap 

transactions that are currently subject to 

a clearing exception or exemption. 

However, Citadel stated that the 

Commission should not preemptively 

grant a trade execution requirement 

exemption for swaps falling under 

future clearing exceptions or 

exemptions, but rather should consider 

additional future trade execution 

requirement exemptions on a case-bycase basis.27 In addition, Citadel 

recommended that participants be 

required to actually elect the clearing 

exemption in order to be eligible for the 

corresponding exemption from the trade 

execution requirement. 

In addition to the proposed 

exemptions for swaps not subject to the 

clearing requirement, Blackrock, ISDA, 

SIFMA, and GFXD requested an 

exemption from the trade execution 

requirement that would apply in 

instances where a SEF outage or system 

disruption or limited hours of operation 

prevent participants from complying 

with the requirement.28 Some 

commenters also requested additional 

exemptions from the trade execution 

requirement for block trades and 

package transactions, such as package 

transactions that include a futures 

component.29 Mercaris separately 

requested exemptions from the trade 

execution requirement for swaps that 

are based on new agricultural assets or 

have a notional value not exceeding $5 

billion, on the grounds that the 

Proposed Rule would have an adverse 

impact on small swaps broking entities 

due to its expansion of the types of 

swaps that are subject to the trade 

execution requirement (to include all 

swaps that are required to be cleared) as 

well as the types of entities that are 

required to register as SEFs (to include 

trading platforms operated by swaps 

broking entities).30

2. Final Rule: CEA Section 4(c) 

Authority and Standards 

For the purposes of promoting 

responsible economic or financial 


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8996 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 

31 7 U.S.C. 6(c)(1). CEA section 4(c)(1) is intended 

to allow the Commission to ‘‘provid[e] certainty and 

stability to existing and emerging markets so that 

financial innovation and market development can 

proceed in an effective and competitive manner.’’ 

House Conf. Report No. 102–978, 102d Cong. 2d 

Sess. at 81 (Oct. 2, 1992), reprinted in 1992 

U.S.C.C.A.N. 3179, 3213. 

32 7 U.S.C. 6(c)(3). CEA section 4(c)(3) includes a 

number of specified categories of persons within 

‘‘appropriate persons’’ that are deemed as 

appropriate to enter into swaps exempted pursuant 

to CEA section 4(c). This includes persons the 

Commission determines to be appropriate in light 

of their financial profile or other qualifications, or 

the applicability of appropriate regulatory 

protections. As noted below, for purposes of the 

Final Rule’s section 4(c) exemptions, the 

Commission has determined that eligible contract 

participants as defined in CEA section 1a are 

‘‘appropriate persons.’’ 

33 7 U.S.C. 6(c)(2). Notwithstanding the adoption 

of exemptions from the Act, the Commission 

emphasizes that their use is subject to the 

Commission’s anti-fraud and anti-manipulation 

enforcement authority. In this connection, 

§ 50.10(a) prohibits any person from knowingly or 

recklessly evading or participating in, or 

facilitating, an evasion of CEA section 2(h) or any 

Commission rule or regulation adopted thereunder. 

17 CFR 50.10(a). Further, § 50.10(c) prohibits any 

person from abusing any exemption or exception to 

CEA section 2(h), including any associated 

exemption or exception provided by rule, 

regulation, or order. 17 CFR 50.10(c). 

34The Commission recently adopted a final rule 

which adopted an exemption from the trade 

execution requirement under § 36.1(a) of the 

Commission’s regulations to establish an exemption 

to the trade execution requirement for swap 

transactions that are components of a ‘‘New 

Issuance Bond’’ package transaction. See supra note 

11. 

35For avoidance of doubt, the Commission makes 

clear that swap transactions that qualify for a swap 

clearing requirement exception or exemption under 

subparts C and D of part 50, and for which the 

associated requirements are met, are eligible for the 

exemption from the trade execution requirement 

under renumbered § 36.1(b). 

36 In addition, the Commission notes that 

Mercaris grounded its exemption requests on a 

concern that the Proposed Rule’s expansion of the 

trade execution and SEF registration requirements 

would adversely affect small swaps broking entities. 

Because the Final Rule would not enact either of 

the changes that Mercaris cited as likely to 

adversely affect small swaps broking entities, the 

Commission assumes that Mercaris’ exemption 

requests are inapplicable to the Final Rule. 

37See supra note 24. 

innovation and fair competition,31 CEA 

section 4(c) provides the Commission 

with the authority to exempt any 

agreement, contract, or transaction from 

any CEA provision, subject to specified 

factors. Specifically, the Commission 

must first determine that (i) the 

requirement should not be applied to 

the agreement, contract, or transaction 

for which the exemption is sought; (ii) 

the exemption would be consistent with 

the public interest and the purposes of 

[the Act]; (iii) the agreement, contract, 

or transaction at issue will be entered 

into solely between appropriate 

persons; 32 and (iv) the agreement, 

contract, or transaction at issue will not 

have a material adverse effect on the 

ability of the Commission or exchange 

to discharge its regulatory or selfregulatory duties under the Act.33

For the reasons stated below, the 

Commission believes that the trade 

execution requirement should not be 

applied to a swap transaction that is 

eligible for a clearing requirement 

exception or exemption under part 50, 

and that the exemption from the trade 

execution requirement is in the public 

interest and consistent with the CEA in 

such circumstances. 

The Commission has determined to 

finalize the exemption largely as 

proposed, renumbered as § 36.1(b).34 As 

modified in this adopting release for 

additional clarity and consistency, 

§ 36.1(b) will apply to any swap 

transaction that qualifies for the 

exception under section 2(h)(7) of the 

Act or an exception or exemption under 

part 50 of this chapter, and for which 

the associated requirements are met.35

As discussed below, applying the trade 

execution requirement to swaps that are 

eligible for an exception to or exemption 

from the clearing requirement, or are 

otherwise not subject to the clearing 

requirement, is not consistent with 

section 2(h)(8) of the CEA and would 

impose additional burdens on market 

participants that would be required to 

incur the costs and burdens of SEF or 

DCM onboarding and execution. For 

example, a counterparty that determines 

not to clear a swap pursuant to a part 

50 exemption, but otherwise remains 

subject to the trade execution 

requirement, may be limited in where it 

may trade or execute that swap and 

subsequently incur costs and 

operational burdens related to SEF or 

DCM onboarding and trading. Therefore, 

the Commission believes swaps that are 

excepted or exempted from the clearing 

requirement should also be exempted 

from the trade execution requirement. 

In response to Citadel’s comment that 

swaps subject to future exemptions from 

the clearing requirement should not 

automatically be eligible for an 

exemption from the trade execution 

requirement, the Commission notes that 

Congress expressly chose to link the 

statutory exemption from the trade 

execution requirement under CEA 

section 2(h)(8) to the 2(h)(7) exemption 

from the clearing requirement. 

Therefore, as explained elsewhere, the 

Commission considers it appropriate to 

follow this statutory intent with respect 

to the trade execution requirement and 

recognize that any swaps eligible for an 

exemption from the clearing 

requirement should qualify for an 

exemption from the trade execution 

requirement. The Commission notes 

that, consistent with the statutory 

restrictions on the use of its CEA section 

4(c) authority, it has been judicious in 

issuing clearing exceptions and 

exemptions, and will continue to be so 

particularly in light of this linking of 

clearing exceptions and exemptions 

with the trade execution exemption. 

Additionally, while the Final Rule 

automatically makes swaps that are 

eligible for future exemptions from, and 

exceptions to, the clearing requirement 

eligible for this exemption from the 

trade execution requirement, nothing in 

the Final Rule limits a future 

Commission’s ability to issue new 

clearing exemptions or exceptions but 

still require compliance with CEA 

section 2(h)(8) by amending this 

exemption. Given the limited nature of 

these part 50 exceptions and 

exemptions, the Commission does not 

believe that this approach with regard to 

the trade execution requirement will 

diminish swaps market transparency or 

liquidity in a manner likely to implicate 

systemic risk concerns. 

Commenters’ requests for additional 

exemptions from the trade execution 

requirement are outside the scope of the 

current rulemaking. However, the 

Commission will take these requests 

under advisement for future 

rulemakings.36

In its comments, Citadel also 

recommended that participants be 

required to elect the clearing exemption 

in order to be eligible for this exemption 

from the trade execution requirement. 

The Commission notes that as proposed, 

renumbered § 36.1(b) required that the 

appropriate swap clearing requirement 

exception or exemption be elected in 

order to be eligible for this exemption. 

However, since the Proposed Rule, the 

Commission has adopted exemptions 

from the swap clearing requirement 

under part 50 that do not to need be 

elected, but rather apply by virtue of the 

status of a counterparty to the 

transaction.37 In particular, the swap 

clearing requirement exemptions for 

swaps entered into by central banks, 

sovereign entities, and IFIs apply by 

virtue of a counterparty’s status as such 

an entity. 

Therefore, the Commission is 

amending § 36.1(b) to state that section 

2(h)(8) of the Act does not apply to a 

swap transaction that qualifies for an 

exception under section 2(h)(7) of the 

Act or one or more of the exceptions or 

exemptions under part 50 of chapter I of 

title 17, and for which the associated 

requirements are met. This amendment 

will still require, as recommended by 

Citadel, that, where applicable, the 


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38 7 U.S.C. 2(e) (providing that it shall be 

unlawful for any person, other than an eligible 

contract participant, to enter into a swap unless the 

swap is entered into on, or subject to the rules of, 

a board of trade designated as a contract market). 

39See supra note 23 (describing requirements for 

meeting ‘‘eligible affiliate counterparty’’ status). 

40MAT Final Rule, 78 FR 33606, 33606 n. 1 (June 

4, 2013). 

41See supra note 17. 42See NAL No. 17–67 at 2. 43Clearing Exemption for Swaps Between Certain 

Affiliated Entities, 78 FR 21750, 21753–54 (Apr. 11, 

2013). 

44NAL No. 17–67 at 2. 

45 JBA Letter at 4. 

46Citadel Letter at 41. 

47 7 U.S.C. 7b–3(e) (emphasis added). 

relevant swap clearing requirement 

exception or exemption be elected in 

order to be eligible for this exemption. 

In addition, the amendment also 

reflects, as discussed above, that there 

are certain swap clearing requirement 

exemptions that are not required to be 

elected. However, the Commission notes 

that consistent with Citadel’s comment, 

this amendment would still require that 

all associated requirements of the 

relevant swap clearing requirement 

exception or exemption be met in order 

to be eligible for this exemption. 

Under § 36.1(b), swap transactions 

would still be entered into solely 

between eligible contract participants 

(‘‘ECPs’’),38 whom the Commission 

believes, for purposes of this Final Rule, 

to be appropriate persons. The scope of 

this exemption is limited and applies to 

transactions that are already excepted or 

exempted from the swap clearing 

requirement. Further, transactions 

subject to this exemption are still 

subject to the Commission’s reporting 

requirements under parts 43 and 45. 

Therefore, the Commission will still be 

able to conduct oversight and 

surveillance of the transactions covered 

by the exemption. For these reasons, the 

Commission believes that the exemption 

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 responsibilities under 

the CEA and the Commission’s 

regulations. 

C. Trade Execution Exemption for 

Swaps Between Eligible Affiliate 

Counterparties 

1. Proposed Rule 

The Proposed Rule proposed to create 

a new § 36.1(e) to establish an 

exemption from the trade execution 

requirement for swaps between certain 

affiliates that are submitted for clearing. 

Counterparties are eligible to elect the 

exemption if they meet the conditions 

set forth under § 50.52(a) for ‘‘eligible 

affiliate counterparty’’ status.39

The Commission has previously 

stated that transactions subject to the 

inter-affiliate exemption from the swap 

clearing requirement are exempt from 

the trade execution requirement.40 In 

accordance with time-limited no-action 

relief granted by Commission staff, 

counterparties that meet the ‘‘eligible 

affiliate counterparty’’ definition under 

§ 50.52(a), but do not claim the interaffiliate clearing requirement exemption 

may execute swaps away from a SEF or 

DCM that are otherwise subject to the 

trade execution requirement.41 CFTC 

staff has granted relief to address the 

difficulty cited by market participants in 

executing inter-affiliate swap 

transactions through the required 

methods of execution prescribed for 

swaps subject to the trade execution 

requirement under § 37.9, i.e., Order 

Book and RFQ, and subpart J of part 38 

of the Commission’s regulations. In 

particular, executing these transactions 

via competitive means of execution 

would be difficult because inter-affiliate 

swaps generally are not intended to be 

executed on an arm’s-length basis or 

based on fully competitive pricing.42

Rather, such swaps are used to manage 

risk among and between affiliates and 

are subject to internal accounting 

processes. 

In the 2013 rulemaking adopting the 

inter-affiliate exemption from the 

clearing requirement, commenters 

explained that corporate groups often 

use a single affiliate to face the swap 

market on behalf of multiple affiliates 

within the group, which permits the 

corporate group to net affiliates’ trades. 

This netting effectively reduces the 

overall risk of the corporate group and 

the number of open swap positions with 

external market participants, which in 

turn reduces operational, market, 

counterparty credit, and settlement 

risk.43 Market participants have asserted 

that requiring these swap transactions to 

be executed through a SEF or DCM 

would impose unnecessary costs and 

inefficiencies without any of the related 

benefits associated with competitive 

means of execution.44 Accordingly, the 

Commission sought through the 

Proposed Rule to provide permanent 

relief from the trade execution 

requirement for eligible affiliate 

counterparties. 

2. Summary of Comments 

JBA expressed support for the 

proposed exemption on the grounds that 

inter-affiliate transactions ‘‘do not 

necessarily seek competitive pricing, 

but are generally based on intra-group 

risk management and trading 

strategies.’’ 45 Citadel generally 

supported the proposed exemption but 

recommended that participants be 

required to actually elect the clearing 

exemption in order to be eligible for the 

corresponding exemption from the trade 

execution requirement.46

3. Final Rule: CEA Section 4(c) 

Authority and Standard 

The Commission believes that 

exempting an inter-affiliate swap from 

the trade execution requirement is 

consistent with the objectives of CEA 

section 4(c) regardless of whether or not 

it has been submitted for clearing. For 

the reasons discussed below, the 

Commission has determined to finalize 

this exemption as proposed, 

renumbered as § 36.1(c). 

As noted above, these transactions are 

not intended to be arm’s-length, marketfacing, or competitively executed under 

any circumstance, irrespective of the 

type of swap involved. Therefore, these 

transactions would not contribute to the 

price discovery process if executed on a 

SEF or a DCM. The statutory purposes 

of the swaps trading regulatory regime 

are ‘‘to promote the trading of swaps on 

swap execution facilities and to 

promote pre-trade price transparency in 

the swaps market.’’ 47 The Commission 

does not believe that these dual 

purposes are served by requiring on-SEF 

trading of swaps that will not contribute 

to the price discovery process. The 

Commission therefore agrees with 

commenters that subjecting these types 

of transactions to the trade execution 

requirement confers little if any benefit 

to the overall swaps market. 

The Commission recognizes the 

efficiency benefits associated with 

entering into inter-affiliate swaps via 

internal processes and acknowledges 

that applying the trade execution 

requirement to such transactions could 

inhibit affiliated counterparties from 

efficiently executing these types of 

transactions for risk management, 

operational, and accounting purposes. 

The Commission therefore believes this 

trade execution requirement exemption 

would promote economic and financial 

innovation by allowing affiliated 

counterparties to efficiently utilize the 

risk management approach that best 

suits their specific needs, including 

with respect to decisions regarding 

whether to clear inter-affiliate swaps, 

without being unduly influenced by 

whether that choice would require them 

to execute swaps on a SEF or DCM. 

In response to Citadel’s comment, the 

Commission has determined not to 

require affiliate counterparties to elect 

the inter-affiliate exemption under 

§ 50.52 in order to claim the 


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48As noted above, the Commission previously 

determined that swaps for which the counterparties 

claim the inter-affiliate clearing exemption are not 

subject to the trade execution requirement. Supra 

note 37 and accompanying text. 

49See Leaders’ Statement at the Pittsburgh 

Summit (Sept. 24–25, 2009), available at https://

www.treasury.gov/resource-center/international/g7- 

g20/Documents/pittsburgh_summit_leaders_

statement_250909.pdf (stating that standardized 

derivatives should be centrally cleared and should 

be traded on exchanges or electronic trading 

platforms where appropriate). 

50 5 U.S.C. 601 et seq. 

51 47 FR 18618–18621 (Apr. 30, 1982). 

52SEF 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 

derivatives clearing organizations (‘‘DCOs’’))). 

53 17 CFR 37.703. 

54 7 U.S.C. 1(a)(18). 

55 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). 

56Mercaris Letter at 1–2. 

57 44 U.S.C. 3501 et seq. 

58For purposes of this PRA discussion, the terms 

‘‘information collection’’ and ‘‘collection of 

information’’ have the same meaning, and this 

section will use the terms interchangeably. 

59 44 U.S.C. 3501. 

60 44 U.S.C. 3502. 

61 5 CFR 1320.3(c)(1). 

62 7 U.S.C. 19(a). 

concomitant trade execution 

exemption.48 Promoting central clearing 

of standardized swaps is a key objective 

of the G–20 commitments set out at the 

2009 Pittsburgh Summit, as 

implemented by Section 2(h) of the 

CEA.49 A rule requiring counterparties 

to elect not to clear a swap in order to 

claim a trade execution requirement 

exemption would frustrate this purpose. 

Moreover, the Commission finds this 

exemption appropriate for 

counterparties that meet the definition 

of ‘‘eligible affiliate counterparty’’ but 

decide to clear the swap perhaps 

because they recognize a benefit from 

clearing or they do not want to satisfy 

the other conditions of § 50.52 that are 

required to elect that exemption from 

the clearing requirement. 

As explained previously, the 

Commission recognizes the benefits of 

inter-affiliate swap transactions, 

including their contributions to efficient 

risk management within corporate 

groups. Given that inter-affiliate trades 

are not executed on a competitive basis 

and therefore do not contribute to 

meaningful price discovery, the 

Commission does not believe that 

subjecting such transactions to the trade 

execution requirement would provide 

any benefit to the swaps markets that 

would justify the costs and burdens of 

such a requirement, which may 

discourage corporate groups from using 

these transactions as part of an effective 

risk-management strategy. 

For these reasons, the exemption from 

the trade execution requirement for 

affiliated counterparties is appropriate 

and consistent with the public interest 

and purposes of the CEA. This 

exemption is limited to transactions 

between eligible affiliate counterparties. 

The transactions subject to this 

exemption are still required to be 

reported under the Commission’s 

regulatory reporting requirements under 

part 45. Therefore, the Commission will 

still be able to conduct oversight and 

surveillance of the transactions covered 

by the exemption. For these reasons, the 

Commission does not believe that it 

would have a materially adverse effect 

on the ability of the Commission or any 

SEF or DCM to discharge its regulatory 

or self-regulatory duties under the CEA. 

Finally, under the exemption, swap 

transactions would still be entered into 

solely between ECPs, whom the 

Commission believes, for purposes of 

this Final Rule, to be appropriate 

persons. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 50 requires Federal agencies, in 

promulgating regulations, to consider 

the impact of those regulations on small 

businesses. The regulations adopted 

herein will affect SEFs, DCMs, and 

ECPs. 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.51 The 

Commission previously concluded that 

SEFs and DCMs are not small entities 

for the purpose of the RFA.52 The 

Commission has also previously stated 

its belief that ECPs 53 as defined in 

section 1a(18) of the CEA,54 are not 

small entities for purposes of the RFA.55

As noted above, one commenter, 

Mercaris, stated that the Proposed Rule 

would have an adverse impact on small 

swaps broking entities due to its 

expansion of the types of swaps that are 

subject to the trade execution 

requirement (to include all swaps that 

are required to be cleared) as well as the 

types of entities that are required to 

register as SEFs (to include trading 

platforms operated by swaps broking 

entities). Mercaris accordingly requested 

exemptions from the trade execution 

requirement for swaps that are based on 

new agricultural assets or have a 

notional value not exceeding $5 billion, 

and stated that a failure to provide such 

exemptions would violate the RFA.56

Because the Final Rule would not adopt 

either of the changes that Mercaris cited 

as having an adverse impact on small 

swaps broking entities, Mercaris’s 

exemption requests and statements 

regarding the RFA are inapplicable to 

the Final Rule. 

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. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 57 imposes certain 

requirements on Federal agencies 

(including the Commission) in 

connection with conducting or 

sponsoring any ‘‘collection of 

information,’’ 58 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.59

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.60 The 

PRA requirements have been 

determined to include not only 

mandatory, but also voluntary 

information collections, and include 

both written and oral 

communications.61

The Final Rule establishes two 

exemptions from the trade execution 

requirement. The Final Rule will not 

create any new, or revise any existing, 

collections of information under the 

PRA. Therefore, no information 

collection request has been submitted to 

the Office of Management and Budget 

for review. 

C. Cost-Benefit Considerations 

1. Introduction 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders.62 Section 

15(a) further specifies that the costs and 


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63See NAL No. 17–67. 

64Section 2(i)(1) applies the swaps provisions of 

both the Dodd-Frank Act and Commission 

regulations promulgated under those provisions to 

activities outside the United States that ‘‘have a 

direct and significant connection with activities in, 

or effect on, commerce of the United States[.]’’ 7 

U.S.C. 2(i). Section 2(i)(2) makes them applicable to 

activities outside the United States that contravene 

Commission rules promulgated to prevent evasion 

of the Dodd-Frank Act. 

65 7 U.S.C. 2(h)(8)(B). 

66 17 CFR 50.50. Among other things, § 50.50 

establishes when a swap is being used to hedge or 

mitigate commercial risk and specifies how to 

satisfy the reporting requirement to elect such an 

exception from the clearing requirement. 17 CFR 

50.50. 

67This includes the exemption for qualifying 

banks, savings associations, farm credit system 

institutions, and credit unions in Commission 

regulation 50.53. 

68See supra note 23 (describing requirements for 

meeting ‘‘eligible affiliate counterparty’’ status). 

69See Swap Clearing Requirement Exemptions, 

85 FR 76428 (Nov. 30, 2020). 

benefits shall be evaluated in light of the 

following 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. 

2. Background 

The Commission is amending § 36.1 

to codify two exemptions from the trade 

execution requirement for swaps. As 

noted, the trade execution requirement 

applies to any swap that is subject to the 

swap clearing requirement and has been 

‘‘made available to trade’’ by a SEF or 

DCM pursuant to § 37.10 or § 38.12. The 

first trade execution requirement 

exemption applies to a swap transaction 

that qualifies for an exception to, or 

exemption from, the clearing 

requirement under part 50 of the 

Commission’s regulations, and for 

which the associated requirements are 

met. The second applies to a swap that 

is entered into by eligible affiliate 

counterparties and cleared, regardless of 

the affiliates’ decision not to claim the 

inter-affiliate clearing exemption under 

§ 50.52 of the Commission’s regulations 

and instead clear the swap. 

The baseline against which the 

Commission considers the costs and 

benefits of this Final Rule is the 

statutory and regulatory requirements of 

the CEA and Commission regulations 

now in effect, in particular CEA section 

2(h)(8) and certain rules in part 37 of the 

Commission’s regulations. The 

Commission, however, notes that as a 

practical matter certain market 

participants, such as eligible affiliates 

and non-financial end-users, have 

adopted trade execution practices 

consistent with this Final Rule based 

upon statutory provisions or no-action 

relief provided by Commission staff that 

is time-limited in nature.63 As such, to 

the extent that market participants have 

relied on statutory provisions to provide 

an exception from the trade execution 

requirement or relevant staff no-action 

relief, the actual costs and benefits of 

the Final Rule may not be as significant. 

In some instances, it is not reasonably 

feasible to quantify the costs and 

benefits with respect to certain factors, 

for example, price discovery or 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 Proposed Rule. 

The following consideration of costs 

and benefits is organized according to 

the rules and rule amendments adopted 

in this release. For each rule, the 

Commission summarizes the 

amendments and identifies and 

discusses the costs and benefits 

attributable to such rule. The 

Commission, where applicable, then 

considers the costs and benefits of the 

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 Rule on all swaps 

activity subject to the new and amended 

regulations, whether by virtue of the 

activity’s physical location in the 

United States or by virtue of the 

activity’s connection with activities in, 

or effect on, U.S. commerce under CEA 

section 2(i).64

CEA section 2(h)(8) specifies that 

swap transactions that are excepted 

from the clearing requirement pursuant 

to CEA section 2(h)(7) (described in 

more detail above) are not subject to the 

trade execution requirement.65 The 

Commission adopted requirements 

under § 50.50 to implement the end-user 

exception under CEA section 2(h)(7).66

The Commission is adopting § 36.1(b) 

to expressly exempt from the trade 

execution requirement swaps that are 

exempt from the clearing requirement 

pursuant to part 50 of the Commission’s 

regulations. Part 50 exempts from the 

clearing requirement swaps that have at 

least one counterparty that is a certain 

type of entity, including ‘‘exempt 

cooperatives’’, entities that qualify for 

the statutory end-user exception,67 and 

eligible affiliate counterparties.68 In 

addition, the Commission recently 

adopted amendments to part 50 

codifying additional clearing 

exemptions for swaps entered into with 

certain central banks, sovereign entities, 

IFIs, bank holding companies, savings 

and loan holding companies, and 

community development financial 

institutions.69

3. Benefits and Costs 

The Final Rule exempts from the 

trade execution requirement swap 

transactions between eligible affiliate 

counterparties that elect to clear such 

transactions, notwithstanding their 

ability to elect the clearing exemption 

under § 50.52. Under the current rules, 

inter-affiliate transactions are only 

exempt from the trade execution 

requirement if the eligible affiliate 

counterparties elect not to clear the 

transaction. However, eligible affiliate 

counterparties that elect to clear their 

inter-affiliate transactions are not 

exempted from the trade execution 

requirement despite these transactions 

also not being intended to be price 

forming or arm’s length and therefore 

may not be suitable for trading on SEFs 

or DCMs. 

Therefore, the Final Rule treats 

cleared and uncleared inter-affiliate 

swap transactions the same with respect 

to the trade execution requirement. The 

Commission believes that this approach 

will be beneficial because inter-affiliate 

swap transactions do not change the 

ultimate ownership and control of swap 

positions (or result in netting), and 

permitting them to be executed 

internally (provided that they qualify for 

the clearing exemption under existing 

§ 50.52) may reduce costs relative to 

requiring that they be executed on a SEF 

or a DCM. Finally, the Commission 

believes that this exemption may help 

ensure that eligible affiliate 

counterparties are not discouraged from 

clearing their inter-affiliate swap 

transactions in order not to have to trade 

them on SEFs or DCMs subject to the 

trade execution requirement, which may 


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70The Commission notes that the Division of 

Market Oversight previously provided no-action 

relief that mirrors this Final Rule so these benefits 

may have already been realized. See NAL No. 17– 

67. 

71Total volume in fixed-to-floating IRS that week 

was about $1.37 trillion notional. 

72Specifically, the Commission found using DCO 

data that during calendar year 2018, 16 IFIs entered 

an estimated notional amount of $220 billion in 

uncleared interest rate swaps pursuant to existing 

no-action relief. During the same time period, 

eligible bank holding companies and other eligible 

financial institutions entered an estimated notional 

amount of $235 million in uncleared interest rate 

swaps pursuant to existing no-action relief. See 

Swap Clearing Requirement Exemptions, 85 FR 

76428, 76435 (Nov. 30, 2020). 

have systemic risk benefits.70 Market 

participants are currently realizing these 

benefits pursuant to no-action relief and 

as discussed below, inter-affiliate 

volume in cleared swaps executed offexchange appears to be a significant 

proportion of the overall swap volume 

that would be subject to the trade 

execution requirement in fixed-tofloating interest rate swaps (‘‘IRS’’). 

In an effort to estimate the scope of 

the Final Rule, Commission staff 

reviewed swap transaction data for 

fixed-to-floating IRS for the week ending 

September 18, 2020. Staff found that 

approximately $496 billion notional 

amount was traded in fixed-to-floating 

IRS subject to the trade execution 

requirement (‘‘TER IRS’’) during that 

week.71 A significant proportion of this 

volume (approximately $176 billion 

notional or 35% of the total) was in 

swap transactions between eligible 

affiliate counterparties. Of these interaffiliate trades, approximately $96 

billion notional was uncleared and 

approximately $80 billion notional was 

cleared. About $3 billion in swap 

transactions between eligible affiliate 

counterparties was cleared and executed 

on-SEF while the remaining $77 billion 

in cleared inter-affiliate transactions in 

TER IRS was cleared and traded offexchange pursuant to no-action relief. 

The Final Rule also exempts swap 

transactions that are excepted or 

exempted from the clearing requirement 

under part 50 from the trade execution 

requirement. The Commission believes 

that swap transactions which are 

excepted or exempted from the clearing 

requirement also benefit from 

exemption from the trade execution 

requirement, and that the same 

reasoning that supports the clearing 

exemptions supports an explicit 

exemption from the trade execution 

requirement. The Commission also 

believes that exempting these 

transactions from the trade execution 

requirement is consistent with CEA 

section 2(h)(8) and adoption of the Final 

Rule may reduce transaction costs and 

may permit some entities to avoid 

incurring the costs associated with 

onboarding on a SEF or DCM. 

The Commission’s staff analysis 

identified relatively little volume in 

TER IRS that was marked as being 

executed by end-users, $760 million 

notional of which $10 million was 

traded on-SEF and the rest traded offexchange. However, it is unclear 

whether the data captures all the TER 

IRS trades executed by entities that are 

trading TER IRS off-exchange pursuant 

to the no-action relief. In a separate 

analysis for the recently adopted 

amendments to part 50, adopting 

additional clearing exemptions, the 

Commission found that that final rule 

exempted only a small fraction of IRS 

transactions from the clearing 

requirement.72 Since only a fraction of 

IRS transactions are subject to the trade 

execution requirement, the Commission 

believes that the scope of swaps subject 

to this Final Rule is significantly smaller 

than the scope of swaps subject to the 

recent amendments to part 50. 

The Commission notes that some 

swap transactions that are subject to the 

trade execution requirement involving 

entities that are eligible for existing 

exemptions (or existing no-action relief) 

are nevertheless executed on SEFs (as 

permitted transactions without 

restrictions on execution method) and 

all market participants will continue to 

have the option to execute on SEFs if 

they determine that they obtain benefits 

from trading on a SEF voluntarily. 

The Commission believes that the 

exemptions for certain swaps from the 

trade execution requirement will not 

impose new costs on market 

participants or on SEFs and DCMs and, 

since they are limited in scope and in 

some instances involve affiliates and 

thus are not arm’s-length transactions, 

will not significantly detract from price 

discovery or protection of market 

participants and the public. 

4. Section 15(a) Factors 

a. Protection of Market Participants and 

the Public 

The Commission anticipates that the 

exemptions for certain swaps from the 

trade execution requirement should not 

materially affect the protection of 

market participants and the public. The 

exemptions finalized today are intended 

to establish that a limited set of swap 

transactions which are otherwise subject 

to the trade execution requirement may 

occur off-exchange (or on-SEF as 

permitted transactions). These 

transactions include inter-affiliate swap 

transactions and other swap 

transactions that are exempt under part 

50 from the clearing requirement. 

b. Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

The Commission anticipates that the 

exemptions from the trade execution 

requirement, as discussed above, will 

maintain the current efficiency of those 

trades and thus maintain the financial 

integrity of the counterparties consistent 

with statutory intent. The Commission 

believes that the exemptions under part 

50 are appropriately tailored and thus, 

should not materially affect the 

competitiveness of the swap markets. 

The Commission does not believe that 

there would be a benefit to competition 

in the swap markets if inter-affiliate 

trades were required to trade on a SEF 

or on a DCM since these trades merely 

transfer positions between different 

entities within the same corporate 

group. 

c. Price Discovery 

While, as a general matter, the 

Commission believes that price 

discovery in swaps subject to the trade 

execution requirement should occur on 

SEFs or DCMs, the Commission 

nevertheless believes that the 

exemptions from the trade execution 

requirement should not materially 

impact price discovery in the U.S. 

swaps markets. Most of the transactions 

eligible for the exemptions, such as 

inter-affiliate trades, are not price 

forming, while others involve end-users 

and similar entities. 

d. Sound Risk Management Practices 

The Commission anticipates that the 

exemptions from the trade execution 

requirement should not significantly 

impair the furtherance of sound risk 

management practices because firms 

using the exemptions should continue 

to be able to move swap positions 

between affiliates, and to take advantage 

of the statutory end-user exception from 

the clearing requirement as well as the 

exemptions from the clearing 

requirement set forth in part 50. The 

Commission observes that eligible 

market participants have been engaging 

in swaps activity consistent with this 

Final Rule pursuant to statutory 

provisions or CFTC staff no-action relief 

and the practice has not been found to 

impair risk management practices. 

e. Other Public Interest Considerations 

The Commission has not identified 

any effects of the rules and the trade 

execution requirement exemption on 

other public interest considerations. 


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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 9001 

73As 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. 

74 7 U.S.C. 19(b). 

1Swap Execution Facilities and Trade Execution 

Requirement, 83 FR 61946 (Nov. 30, 2018) (the 

‘‘SEF Proposal’’). 

2Swap Execution Facility Requirements (Nov. 18, 

2020), https://www.cftc.gov/PressRoom/ 

PressReleases/8313-20. 

3Statement of Concurrence of Commissioner 

Rostin Behnam Regarding Swap Execution 

Facilities and Trade Execution Requirement, 

https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/behnamstatement110518a. 

4 Id. 

5 Id. 

5. Consideration of Alternatives 

Commenters were generally 

supportive of the Proposed Rule and 

section 4(c) exemptions and 

recommended only one viable 

alternative.73 Specifically, Citadel stated 

that the Commission should not 

preemptively grant a trade execution 

exemption for swaps falling under 

future clearing exemptions, but rather 

should consider additional future 

exemptions from the trade execution 

requirement on a case-by-case basis. The 

Commission is finalizing the rule 

automatically granting such exemptions, 

and as a consequence will consider the 

costs and benefits in future rulemakings 

of both any proposed clearing 

exemption and the associated 

exemption from the trade execution 

requirement. Interested persons will 

have the opportunity to comment on the 

appropriateness of both exemptions. 

D. Antitrust Considerations 

CEA section 15(b) requires the 

Commission to take into consideration 

the public interest to be protected by the 

antitrust laws and endeavor to take the 

least anticompetitive means of 

achieving the purposes of the Act, in 

issuing any order or adopting any 

Commission rule or regulation 

(including any exemption under section 

4(c) or 4c(b)), or in requiring or 

approving any bylaw, rule, or regulation 

of a contract market or registered futures 

association established pursuant to 

section 17 of the Act.74

The Commission believes that the 

public interest to be protected by the 

antitrust laws is generally to protect 

competition. The Commission requested 

and did not receive comments on 

whether the Proposed Rule implicates 

any other specific public interest to be 

protected by the antitrust laws. The 

Commission has considered the Final 

Rule to determine whether it is 

anticompetitive and has identified no 

significant anticompetitive effects. 

Although the Final Rule exempts certain 

swaps from the requirement to trade 

competitively on a SEF or DCM, as 

noted above, these exemptions are 

narrowly circumscribed in scope, and 

the Commission has determined the 

exemptions to be in the public interest. 

The Commission also notes that the 

inter-affiliate transactions exempted 

under new § 36.1(b) would not be 

executed on a competitive, arm’s-length 

basis even if they were required to occur 

on a SEF or DCM. 

List of Subjects in 17 CFR Part 36 

Trade execution requirement. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission amends 17 CFR 

part 36 as follows: 

PART 36—TRADE EXECUTION 

REQUIREMENT 

■ 1. The authority citation for part 36 

continues to read as follows: 

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). 

■ 2. In § 36.1, add paragraphs (b) and (c) 

to read as follows: 

§ 36.1 Exemptions to trade execution 

requirement. 

* * * * * 

(b) Section 2(h)(8) of the Act does not 

apply to a swap transaction that 

qualifies for the exception under section 

2(h)(7) of the Act or an exception or 

exemption under part 50 of this chapter, 

and for which the associated 

requirements are met. 

(c) Section 2(h)(8) of the Act does not 

apply to a swap transaction that is 

executed between counterparties that 

have eligible affiliate counterparty 

status pursuant to § 50.52(a) of this 

chapter even if the eligible affiliate 

counterparties clear the swap 

transaction. 

Issued in Washington, DC, on December 

23, 2020, by the Commission. 

Christopher Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Exemptions From Swap 

Trade Execution Requirement— 

Commission Voting Summary and 

Commissioners’ Statements 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Tarbert and 

Commissioners Quintenz, Behnam, Stump, 

and Berkovitz voted in the affirmative. No 

Commissioner voted in the negative. 

Appendix 2—Statement of Concurrence 

of Commissioner Rostin Behnam 

More than two years ago, in November 

2018, the Commission voted to propose a 

comprehensive overhaul of the existing 

framework for swap execution facilities 

(SEFs).1 Today, the Commission issues two 

rules finalizing aspects of the SEF Proposal 

and a withdrawal of the SEF Proposal’s 

unadopted provisions. This is the final step 

in a long road. Last month, the Commission 

finalized rules emanating from the SEF 

Proposal regarding codification of existing 

no-action letters regarding, among other 

things, package transactions.2 Today’s final 

rules and withdrawal complete the 

Commission’s consideration of the SEF 

Proposal. 

Back in November 2018, I expressed 

concern that finalization of the SEF Proposal 

would reduce transparency, increase 

limitations on access to SEFs, and add 

significant costs for market participants.3 I 

also noted that, while the existing SEF 

framework could benefit from targeted 

changes, particularly the codification of 

existing no-action relief, the SEF framework 

has in many ways been a success. I pointed 

out that the Commission’s work to promote 

swaps trading on SEFs has resulted in 

increased liquidity, while adding pre-trade 

price transparency and competition. 

Nonetheless, I voted to put the SEF Proposal 

out for public comment, anticipating that the 

notice and comment process would guide the 

Commission in identifying a narrower set of 

changes that would improve the current SEF 

framework and better align it with the 

statutory mandate and the underling policy 

objectives shaped after the 2008 financial 

crisis.4 More than two years and many 

comment letters later, that is exactly what 

has happened. The Commission has been 

precise and targeted in its finalization of 

specific provisions from the SEF Proposal 

that provide needed clarity to market 

participants and promote consistency, 

competitiveness, and appropriate operational 

flexibility consistent with the core principles. 

In addition to expressing substantive 

concerns about the overbreadth of the SEF 

Proposal, I also voiced concerns that we were 

rushing by having a comparatively short 75- 

day comment period.5 In the end, the 

comment period was rightly extended, and 

the Commission has taken the time necessary 

to carefully evaluate the appropriateness of 

the SEF Proposal in consideration of its 

regulatory and oversight responsibilities and 

the comments received. I think that the 

consideration of the SEF Proposal is an 

example of how the process is supposed to 

work. When we move too quickly toward the 

finish line and without due consideration of 

the surrounding environment, we risk 

making a mistake that will impact our 

markets and market participants. 

Finally, I would like to address the 

Commission’s separate vote to withdraw the 


khammond on DSKJM1Z7X2PROD with RULES
9002 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 

6Rostin Behnam, Commissioner, CFTC, 

Dissenting Statement of Commissioner Rostin 

Behnam Regarding Electronic Trading Risk 

Principles (June 25, 2020), https://www.cftc.gov/ 

PressRoom/SpeechesTestimony/ 

behnamstatement062520b. 

1Swap Execution Facilities and Trade Execution 

Requirement, 83 FR 61946 (Nov. 30, 2018). 

2 Dissenting Statement of Commissioner Dan M. 

Berkovitz Regarding Proposed Rulemaking on Swap 

Execution Facilities and Trade Execution 

Requirement (Nov, 5, 2018), available at https://

www.cftc.gov/PressRoom/SpeechesTestimony/ 

berkovitzstatement110518a. 3 17 CFR 37.205(a), b(2)(iv). 

unadopted provisions of the SEF Proposal. In 

the past, I have expressed concern with such 

withdrawals by an agency that has 

historically prided itself on collegiality and 

working in a bipartisan fashion.6 In the case 

of today’s withdrawal, the Commission has 

voted on all appropriate aspects of the SEF 

Proposal through three rules finalized during 

the past month. The Commission has voted 

unanimously on all of these rules, including 

today’s decision to withdraw the remainder 

from further consideration. While normally a 

single proposal results in a single final rule, 

in this instance, multiple final rules have 

been finalized emanating from the SEF 

Proposal. This could lead to confusion 

regarding the Commission’s intentions 

regarding the many unadopted provisions of 

the SEF Proposal. Under such circumstances, 

I think it is appropriate to provide market 

participants with clarity regarding the SEF 

Proposal. Accordingly, I will support today’s 

withdrawal of the SEF Proposal. But rather 

than viewing it as a withdrawal of the SEF 

Proposal, I see it as an affirmation of the 

success of the existing SEF framework and 

the careful process to markedly improve the 

SEF framework in a measured and thoughtful 

way. 

Appendix 3—Statement of 

Commissioner Dan M. Berkovitz 

I support the Commission’s decision to 

withdraw its 2018 proposal to overhaul the 

regulation of swap execution facilities 

(‘‘SEFs’’) 1 (‘‘2018 SEF NPRM’’) and proceed 

instead with targeted adjustments to our SEF 

rules (‘‘Final Rules’’). The two Final Rules 

approved today will make minor changes to 

SEF requirements while retaining the 

progress we have made in moving 

standardized swaps onto electronic trading 

platforms, which has enhanced the stability, 

transparency, and competitiveness of our 

swaps markets.2

When the Commission issued the 2018 SEF 

NPRM, I proposed that we enhance the 

existing swaps trading system instead of 

dismantling it. For example, I urged the 

Commission to clarify the floor trader 

exception to the swap dealer registration 

requirement and abolish the practice of posttrade name give-up for cleared swaps. I am 

pleased that the Commission already has 

acted favorably on both of those matters. 

Today’s rulemaking represents a further 

positive step in this targeted approach. 

Many commenters to the 2018 SEF NPRM 

supported this incremental approach, 

advocating discrete amendments rather than 

wholesale changes. Today, the Commission 

is adopting two Final Rules that codify 

tailored amendments that received general 

support from commenters. The first rule— 

Swap Execution Facilities—amends part 37 

to address certain operational challenges that 

SEFs face in complying with current 

requirements, some of which are currently 

the subject of no-action relief or other 

Commission guidance. The second rule— 

Exemptions from Swap Trade Execution 

Requirement—exempts two categories of 

swaps from the trade execution requirement, 

both of which are linked to exceptions to or 

exemptions from the swap clearing 

requirement. 

Swap Execution Facilities: Audit Trail Data, 

Financial Resources and Reporting, and 

Requirements for Chief Compliance Officers 

Commission regulations require a SEF to 

capture and retain all audit trail data 

necessary to detect, investigate, and prevent 

customer and market abuses, which currently 

includes identification of each account to 

which fills are ultimately allocated.3

Following the adoption of these regulations, 

SEFs represented that they are unable to 

capture post-execution allocation data 

because the allocations occur away from the 

SEF, prompting CFTC staff to issue no-action 

relief. Other parties, including DCOs and 

account managers, must capture and retain 

post-execution allocation information and 

produce it to the CFTC upon request, and 

SEFs are required to establish rules that 

allow them obtain this allocation information 

from market participants as necessary to 

fulfill their self-regulatory responsibilities. 

Given that staff is not aware of any regulatory 

gaps that have resulted from SEFs’ reliance 

on the no-action letter, codifying this 

alternative compliance framework is 

appropriate. 

This Swap Execution Facility final rule 

also will amend part 37 to tie a SEF’s 

financial resource requirements more closely 

to the cost of its operations, whether in 

complying with core principles and 

Commission regulations or winding down its 

operations. Based on its experience 

implementing the SEF regulatory regime, the 

Commission believes that these amended 

resource requirements—some of which 

simply reflect current practice—will be 

sufficient to ensure that a SEF is financially 

stable while avoiding the imposition of 

unnecessary costs. Additional amendments 

to part 37, including requirements that a SEF 

must prepare its financial statements in 

accordance with U.S. GAAP standards, 

identify costs that it has excluded in 

determining its projected operated costs, and 

notify the Commission within 48 hours if it 

is unable to comply with its financial 

resource requirements, will further enhance 

the Commission’s ability to exercise it 

oversight responsibilities. 

Finally, this rule makes limited changes to 

the Chief Compliance Officer (‘‘CCO’’) 

requirements. As a general matter, I agree 

that the Commission should clarify certain 

CCO duties and streamline CCO reporting 

requirements where information is 

duplicative or not useful to the Commission. 

Although the CCO requirements diverge 

somewhat from those for futures commission 

merchants and swap dealers, the role of SEFs 

is different and therefore, standardization is 

not always necessary or appropriate. I expect 

that the staff will continue to monitor the 

effects of all of the changes adopted today 

and inform the Commission if it believes 

further changes to our rules are needed. 

Exemptions From Swap Trade Execution 

Requirement 

Commodity Exchange Act (‘‘CEA’’) section 

2(h)(8) specifies that a swap that is excepted 

from the clearing requirement pursuant to 

CEA section 2(h)(7) is not subject to the 

requirement to trade the swap on a SEF. 

Accordingly, swaps that fall into the 

statutory swap clearing exceptions (e.g., 

commercial end-users and small banks) are 

also excepted from the trading mandate. 

However, the Commission has also exempted 

from mandatory clearing swaps entered into 

by certain entities (e.g., cooperatives, central 

banks, and swaps between affiliates) using 

different exemptive authorities from section 

2(h)(7). 

The Exemptions from Swap Trade 

Execution Requirement final rule affirms the 

link between the clearing mandate and the 

trading mandate for swaps that are exempted 

from the clearing mandate under authorities 

other than CEA section 2(h)(7). The 

additional clearing exemptions are typically 

provided by the Commission to limited types 

of market participants, such as cooperatives 

or central banks that use swaps for 

commercial hedging or have financial 

structures or purposes that greatly reduce the 

need for mandatory clearing and SEF trading. 

In addition, limited data provided in the 

release indicates that, at least up to this point 

in time, these exempted swaps represent a 

small percentage of the notional amount of 

swaps traded. 

This final rule also exempts inter-affiliate 

swaps from the trade execution requirement. 

These swaps are exempted from the clearing 

requirement primarily because the risks on 

both sides of the swap are, at least in some 

respects, held within the same corporate 

enterprise. As described in the final rule 

release, these swaps may not be traded at 

arms-length and serve primarily to move risk 

from one affiliate to another within the same 

enterprise. Neither market transparency nor 

price discovery would be enhanced by 

including these transactions within the trade 

execution mandate. For these reasons, I am 

approving the Exemptions from Swap Trade 

Execution Requirement final rule as a 

sensible exemption consistent with the 

relevant sections of the CEA. 

Conclusion 

These two Final Rules provide targeted 

changes to the SEF regulations based on 

experience from several years of 

implementing them. These limited changes, 

together with the withdrawal of the 

remainder of the 2018 SEF NPRM, effectively 

leave in place the basic framework of the SEF 

rules as originally adopted by the 

Commission. This framework has enhanced 

market transparency, improved competition, 

lowered transaction costs, and resulted in 

better swap prices for end users. While it 


khammond on DSKJM1Z7X2PROD with RULES
Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 9003 

1Public Law 115–264, 132 Stat. 3676 (2018). 

2 84 FR 32274 (July 8, 2019). 

3 17 U.S.C. 115(d)(3)(C)(i)(V). 

4 Id. at 115(d)(3)(C)(i)(IV). 

5 Id. at 115(d)(5)(B); 84 FR 32274 (July 8, 2019); 

see also 17 U.S.C. 115(d)(3)(D)(i)(IV), (d)(5)(C). 

6 17 U.S.C. 115(d)(12)(C). 

7 Id. at 115(d)(3)(M)(i) (‘‘The mechanical licensing 

collective shall ensure that all material records . . . 

are preserved and maintained in a secure and 

reliable manner, with appropriate commercially 

reasonable safeguards against unauthorized access, 

copying, and disclosure, and subject to the 

confidentiality requirements prescribed by the 

Register of Copyrights under paragraph (12)(C) for 

a period of not less than 7 years after the date of 

creation or receipt, whichever occurs later.’’). 

8 Id. at 115(d)(3)(J)(i)(II)(bb). 

9 Id. at 115(d)(6)(B)(ii). 

10 Id. at 115(d)(11)(C)(iii). 

11 Id. at 115(d)(3)(L)(i)(II). 

12 Id. at 115(d)(4)(D)(i)(II). 

13H.R. Rep. No. 115–651, at 5–6 (2018); S. Rep. 

No. 115–339, at 5 (2018); Report and Section-bySection Analysis of H.R. 1551 by the Chairmen and 

Ranking Members of Senate and House Judiciary 

Committees, at 4 (2018), https://www.copyright.gov/ 

legislation/mma_conference_report.pdf (‘‘Conf. 

Rep.’’). 

14 17 U.S.C. 115(d)(12)(A). 

15H.R. Rep. No. 115–651, at 5–6, 14; S. Rep. No. 

115–339, at 5, 15; Conf. Rep. at 4, 12. The 

Conference Report further contemplates that the 

Office’s review will be important because the MLC 

must operate in a manner that can gain the trust of 

the entire music community, but can only be held 

liable under a standard of gross negligence when 

carrying out certain of the policies and procedures 

adopted by its board. Conf. Rep. at 4. 

16 17 U.S.C. 115(d)(3)(D)(ix)(I)(aa). 

17H.R. Rep. No. 115–651, at 5–6, 14; S. Rep. No. 

115–339, at 5, 15; Conf. Rep. at 4, 12. 

may be appropriate to make other 

incremental changes going forward, it is 

important that we affirm the established 

regulatory program for SEFs to maintain 

these benefits and facilitate further expansion 

of this framework. 

I thank the staff of the Division of Market 

Oversight for their work on these two rules 

and their helpful engagement with my office. 

[FR Doc. 2020–28943 Filed 2–10–21; 8:45 am] 

BILLING CODE 6351–01–P 

LIBRARY OF CONGRESS 

Copyright Office 

37 CFR Part 210 

[Docket No. 2020–7] 

Treatment of Confidential Information 

by the Mechanical Licensing Collective 

and the Digital Licensee Coordinator 

AGENCY: U.S. Copyright Office, Library 

of Congress. 

ACTION: Interim rule. 

SUMMARY: The U.S. Copyright Office is 

issuing an interim rule regarding the 

protection of confidential information 

by the mechanical licensing collective 

and the digital licensee coordinator 

under title I of the Orrin G. Hatch-Bob 

Goodlatte Music Modernization Act. 

After soliciting public comments 

through a notification of inquiry and a 

notice of proposed rulemaking, the 

Office is now issuing interim 

regulations identifying appropriate 

procedures to ensure that confidential, 

private, proprietary, or privileged 

information contained in the records of 

the mechanical licensing collective and 

the digital licensee coordinator is not 

improperly disclosed or used. 

DATES: Effective March 15, 2021. 

FOR FURTHER INFORMATION CONTACT: 

Regan A. Smith, General Counsel and 

Associate Register of Copyrights, by 

email at regans@copyright.gov or Anna 

B. Chauvet, Associate General Counsel, 

by email at achau@copyright.gov. Each 

can be contacted by telephone at (202) 

707–8350. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On October 11, 2018, the president 

signed into law the Orrin G. Hatch–Bob 

Goodlatte Music Modernization Act 

(‘‘MMA’’) which, among other things, 

substantially modifies the compulsory 

‘‘mechanical’’ license for making and 

distributing phonorecords of 

nondramatic musical works under 17 

U.S.C. 115.1 It does so by switching 

from a song-by-song licensing system to 

a blanket licensing regime administered 

by a mechanical licensing collective 

(‘‘MLC’’), which became available on 

January 1, 2021 (the ‘‘license availability 

date’’). In July 2019, the Copyright 

Office (the ‘‘Office’’) designated an 

entity to serve as the MLC, as required 

by the MMA.2 Among other things, the 

MLC is responsible for collecting and 

distributing royalties under the blanket 

license, engaging in efforts to identify 

musical works embodied in particular 

sound recordings and to identify and 

locate the copyright owners of such 

musical works, and administering a 

process by which copyright owners can 

claim ownership of musical works (or 

shares of such works).3 It also must 

‘‘maintain the musical works database 

and other information relevant to the 

administration of licensing activities 

under [section 115].’’ 4 The Office has 

also designated a digital licensee 

coordinator (‘‘DLC’’) to represent 

licensees in proceedings before the 

Copyright Royalty Judges (‘‘CRJs’’) and 

the Office, to serve as a non-voting 

member of the MLC, and to carry out 

other functions.5

A. Regulatory Authority Granted to the 

Office 

The MMA specifically directs the 

Office to ‘‘adopt regulations to provide 

for the appropriate procedures to ensure 

that confidential, private, proprietary, or 

privileged information contained in the 

records of the mechanical licensing 

collective and digital licensee 

coordinator is not improperly disclosed 

or used, including through any 

disclosure or use by the board of 

directors or personnel of either entity, 

and specifically including the 

unclaimed royalties oversight 

committee and the dispute resolution 

committee of the mechanical licensing 

collective.’’ 6 The MMA additionally 

makes several explicit references to the 

Office’s regulations governing the 

treatment of confidential and other 

sensitive information, including with 

respect to: (1) ‘‘all material records of 

the operations of the [MLC]’’; 7 (2) steps 

the MLC must take to ‘‘safeguard the 

confidentiality and security of usage, 

financial, and other sensitive data used 

to compute market shares’’ when 

distributing unclaimed accrued 

royalties; 8 (3) steps the MLC and DLC 

must take to ‘‘safeguard the 

confidentiality and security of financial 

and other sensitive data shared’’ by the 

MLC with the DLC about significant 

nonblanket licensees; 9 (4) voluntary 

licenses administered by the MLC; 10 (5) 

examination of the MLC’s ‘‘books, 

records, and data’’ pursuant to audits by 

copyright owners; 11 and (6) 

examination of digital music providers’ 

‘‘books, records, and data’’ pursuant to 

audits by the MLC.12

Beyond these specific directives, 

Congress invested the Office with 

‘‘broad regulatory authority’’ 13 to 

‘‘conduct such proceedings and adopt 

such regulations as may be necessary or 

appropriate to effectuate the provisions 

of [the MMA pertaining to the blanket 

license].’’ 14 The legislative history 

contemplates that the Office will 

‘‘thoroughly review[ ]’’ 15 policies and 

procedures established by the MLC and 

its three committees, which the MLC is 

statutorily bound to ensure are 

‘‘transparent and accountable,’’ 16 and 

promulgate regulations that ‘‘balance[ ] 

the need to protect the public’s interest 

with the need to let the new collective 

operate without over-regulation.’’ 17

Congress acknowledged that 

‘‘[a]lthough the legislation provides 

specific criteria for the collective to 

operate, it is to be expected that 

situations will arise that were not 

contemplated by the legislation,’’ and 

that ‘‘[t]he Office is expected to use its 

best judgement in determining the 


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