[Federal Register Volume 86, Number 27 (Thursday, February 11, 2021)]
[Rules and Regulations]
[Pages 9224-9252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28944]



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Vol. 86

Thursday,

No. 27

February 11, 2021

Part III





 Commodity Futures Trading Commission





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17 CFR Part 37





Swap Execution Facilities; Final Rule

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

[[Page 9224]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 37

RIN 3038-AE25


Swap Execution Facilities

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting final rules (``Final Rules'') addressing 
operational issues facing swap execution facilities (``SEF'') and their 
market participants in connection with the Commission's regulatory 
requirements for a SEF's audit trail data, financial resources, and 
chief compliance officer (``CCO'').

DATES: This rule is effective May 12, 2021.

FOR FURTHER INFORMATION CONTACT: Nancy Markowitz, Deputy Director, 
(202) 418-5453, <a href="/cdn-cgi/l/email-protection#e2acaf8390898d958b9698a281849681cc858d94"><span class="__cf_email__" data-cfemail="eda3a08c9f86829a849997ad8e8b998ec38a829b">[email protected]</span></a>; Jonathan Lave, Associate Director, 
(202) 418-5983, Division of Market Oversight; Eliezer Mishory, Special 
Counsel, (202) 418-5609, <a href="/cdn-cgi/l/email-protection#d7929abea4bfb8a5ae97b4b1a3b4f9b0b8a1"><span class="__cf_email__" data-cfemail="a4e1e9cdd7cccbd6dde4c7c2d0c78ac3cbd2">[email protected]</span></a>, Division of Data; or 
Michael Penick, Senior Economist, (202) 418-5279, <a href="/cdn-cgi/l/email-protection#d1bca1b4bfb8b2ba91b2b7a5b2ffb6bea7"><span class="__cf_email__" data-cfemail="84e9f4e1eaede7efc4e7e2f0e7aae3ebf2">[email protected]</span></a>, 
Office of the Chief Economist, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1151 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background and Introduction
    A. Statutory and Regulatory History
    B. Summary of Final Rules
II. Audit Trail Requirements Related to Post-Execution Allocation 
Information
    A. Background and Proposed Rules
    B. Summary of Comments
    C. Final Rules
III. Financial Resources Requirements
    A. Background and Overview of Proposed Rules
    B. Sec.  37.1301--General Requirements
    C. Sec.  37.1302--Types of Financial Resources
    D. Sec.  37.1303--Liquidity of Financial Resources
    E. Sec.  37.1304--Computation of Costs To Meet Financial 
Resources Requirement
    F. Sec.  37.1305--Valuation of Financial Resources
    G. Sec.  37.1306--Reporting to the Commission
    H. Sec.  37.1307--Delegation of Authority
IV. Chief Compliance Officer Requirements
    A. Background and Overview of Proposed Rules
    B. Sec.  37.1501(a)--Definitions
    C. Sec.  37.1501(b)--Qualifications of Chief Compliance Officer
    D. Sec.  37.1501(c)--Duties of Chief Compliance Officer
    E. Sec.  37.1501(d)--Preparation of Annual Compliance Report
    F. Sec.  37.1501(e)--Submission of Annual Compliance Report and 
Related Matters
    G. Sec.  37.1501(f)--Recordkeeping
    H. Sec.  37.1501(g)--Delegation of Authority
V. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    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 (``Dodd-Frank Act'') \1\ amended the Commodity Exchange 
Act (``CEA'' or ``Act'') \2\ to establish a comprehensive new swaps 
regulatory framework that includes the registration and oversight of 
SEFs.\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.\4\ CEA section 5h(a)(1) requires an entity to register as a 
SEF prior to operating a facility for the trading or processing of 
swaps.\5\ CEA section 5h(f) requires registered SEFs to comply with 
fifteen core principles.\6\ Further, CEA section 2(h)(8) provides that 
swap transactions subject to the clearing requirement in CEA section 
2(h)(1)(A) \7\ must be executed on a designated contract market 
(``DCM''), SEF, or a SEF that is exempt from registration pursuant to 
CEA section 5h(g),\8\ unless (i) no DCM or SEF \9\ ``makes the swap 
available to trade'' or (ii) the transaction is subject to a clearing 
requirement exception pursuant to CEA section 2(h)(7).\10\
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, title 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.
    \2\ 7 U.S.C. 1 et seq.
    \3\ 7 U.S.C. 7b-3 (adding CEA section 5h to establish a 
registration requirement and regulatory regime for SEFs).
    \4\ 7 U.S.C. 1a(50).
    \5\ CEA section 5h(a)(1) states that no person may operate a 
facility for the trading or processing of swaps unless the facility 
is registered as a SEF or as a DCM under section 5h. 7 U.S.C. 7b-
3(a)(1).
    \6\ 7 U.S.C. 7b-3(f). From herein, the term ``SEFs'' refers to 
registered SEFs, unless otherwise indicated.
    \7\ Section 723(a)(3) of the Dodd-Frank Act added a 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 CEA or a derivatives clearing organization that is exempt 
from registration under the CEA 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, 
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 determination process under part 50, which 
also specifies the swaps currently subject to the requirement. 17 
CFR part 50.
    \8\ 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, this reference is corrected in the 
discussion herein.
    \9\ CEA section 2(h)(8)(A)(i)-(ii) provides, with respect to 
transactions involving swaps subject to the clearing requirement 
that 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 
section 5h or a swap execution facility that is exempt from 
registration under section 5h(g) of the CEA. 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).
    \10\ 7 U.S.C. 2(h)(8). This is referred to as the ``trade 
execution requirement.''
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    Pursuant to its discretionary rulemaking authority in CEA sections 
5h(f)(1) and 8a(5), the Commission identified the relevant areas in 
which the statutory SEF framework would benefit from additional rules 
or regulations.\11\ Accordingly, in 2013, the Commission adopted part 
37 of its regulations to implement a regulatory framework for SEFs and 
for the trading and execution of swaps on such facilities (``2013 SEF 
Rules'').\12\
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    \11\ To implement the SEF core principles, Core Principle 1 
provides that the Commission may, in its discretion, determine by 
rule or regulation the manner in which SEFs comply with the core 
principles. 7 U.S.C. 7b-3(f)(1)(B).
    \12\ Core 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).
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    Subsequently, a number of SEFs and their market participants 
requested relief from certain part 37 requirements they found in 
practice to be operationally unworkable or unnecessarily burdensome. A 
number of SEFs indicated that some of those requirements are 
impractical or unachievable due to technology limitations, or are 
incompatible with existing market practices. For example, as discussed 
further below, a number of SEFs stated that the requirement to include 
post-execution allocation information in audit trail data under Sec.  
37.205 is operationally difficult and impractical to implement.\13\ 
Even where SEFs were able to comply with certain requirements, they 
asserted that (i) the compliance costs are high, and (ii)

[[Page 9225]]

compliance is unnecessary to satisfy their self-regulatory obligations 
and the statutory SEF core principles. For instance, SEFs noted that 
the financial resources requirements imposed by Core Principle 13 
regulations are capital-intensive and broader than the specific costs 
of compliance with SEF regulatory obligations.\14\ In response to 
concerns regarding the financial resources requirement and other 
requirements operationally difficult and impractical to implement, 
Commission staff issued a combination of no-action relief and guidance 
in the months and years following the adoption of part 37.\15\
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    \13\ 17 CFR 37.205; see Section II, infra.
    \14\ See Comment Letter from Wholesale Markets Brokers' 
Association, Americas (``WMBAA''), Swap Execution Facility 
Regulations, Made Available to Trade Determinations, and Swap 
Trading Requirements at 5 (Mar. 11, 2016), http://www.wmbaa.com/wp-content/uploads/2016/06/WMBAA_Letter_to_CFTC_031116.pdf.
    \15\ See, e.g., CFTC Staff Letter No. 17-54, Re: No-Action 
Relief for Swap Execution Facilities from Certain Audit Trail 
Requirements in Commission Regulation 37.205 Related to Post-
Execution Allocation Information at 2 (Oct. 31, 2017) (``CFTC Staff 
Letter No. 17-54''); CFTC Staff Letter No. 15-26, Division of Market 
Oversight Guidance on Calculating Projected Operating Costs by Swap 
Execution Facilities (Apr. 23, 2015) (``CFTC Staff Letter No. 15-
26''); and CFTC Staff Letter No. 17-25, Division of Market Oversight 
Guidance on Calculating Projected Operating Costs By Designated 
Contract Markets and Swap Execution Facilities (Apr. 28, 2017) 
(``CFTC Staff Letter No. 17-25''); CFTC Staff Letter No. 17-61, Re: 
No-Action Relief for Swap Execution Facilities from Compliance with 
the Timing Requirements of Commission Regulation 37.1501(f)(2) 
Relating to Chief Compliance Officer Annual Compliance Reports and 
Commission Regulation 37.1306(d) Relating to Fourth Quarter 
Financial Reports at 2-3 (Nov. 20, 2017) (``CFTC Staff Letter No. 
17-61'').
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    In November 2018, the Commission issued a notice of proposed 
rulemaking under CEA sections 5h(f)(1) and 8a(5), seeking to address 
these issues by codifying relevant staff no-action relief or otherwise 
resolving the concerns of SEFs and market participants.\16\ The 
proposed rules (``Proposed Rules'') also set forth structural reforms 
to the SEF regime beyond these operational fixes. In particular, the 
Proposed Rules would have removed existing limitations on swap 
execution methods,\17\ while expanding both the categories of swaps 
that must be executed on a SEF, and the types of entities that must 
register as SEFs. Commenters to the Proposed Rules uniformly favored 
adopting certain of the narrower operational proposals.\18\ By 
contrast, the Proposed Rules' broader market reforms elicited a number 
of comments expressing hesitation regarding the expansive scope of the 
proposed changes and recommending the Commission instead focus on more 
targeted improvements to the existing swap trading regulatory 
regime.\19\
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    \16\ Swap Execution Facilities and Trade Execution Requirement, 
83 FR 61946 (Nov. 30, 2018).
    \17\ Under Sec.  37.9(a), any transaction involving a swap 
subject to the trade execution requirement in section 2(h)(8) of the 
Act (``Required Transactions'') must be executed in accordance with 
(i) an Order Book as defined in Sec.  37.3(a)(3); or (ii) a request 
for quote (``RFQ'') to no fewer than three market participants in 
conjunction with an Order Book. 17 CFR 37.9(a). Transactions not 
subject to the trade execution requirement (``Permitted 
Transactions'') may trade via any execution method.
    \18\ See, e.g., Comment Letter from Bloomberg at A-6 (Mar. 15, 
2019) (expressing support for proposed changes to financial 
resources liquidity requirement) (``Bloomberg Letter''); Comment 
Letter from Refinitiv at 11, 13-14 (Mar. 13, 2019) (``Refinitiv 
Letter'') (expressing support for proposed changes to financial 
resources and audit trail requirements); Comment Letter from WMBAA 
(Mar. 15, 2019) (``2019 WMBAA Letter'') (expressing support for 
proposed changes to financial resources, audit trail, and CCO 
requirements).
    \19\ See, 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 Rules 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) (same); 
Comment Letter from Wellington Management Company LLP at 1 (Mar. 15, 
2019). See also Comment Letter from Futures Industry Association at 
7-9 (Mar. 15, 2019) (stating 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).
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    Accordingly, the Final Rules implement certain operationally-
focused proposals that received limited and generally positive feedback 
from commenters--namely, targeted changes to requirements for a SEF's 
audit trail data, financial resources, CCO governance, and timing of 
CCO reports.

B. Summary of Final Rules

    In summary, the Final Rules make the following changes to the SEF 
regulatory regime:
    (1) Audit trail data. The Final Rules eliminate the requirement of 
a SEF to capture and retain post-execution allocation information in 
its audit trail data.
    (2) Financial resources. The Final Rules apply the existing Core 
Principle 13 financial resources requirements to SEF operations in a 
less burdensome manner, including through amendments to the existing 
six-month liquidity requirement and the addition of new acceptable 
practices providing further guidelines to SEFs for making a reasonable 
calculation of their projected operating costs.
    (3) CCO. The Final Rules streamline requirements for the CCO 
position, allow SEF management to exercise greater discretion in CCO 
oversight, and simplify the preparation and submission of the required 
annual compliance report (``ACR'').

II. Audit Trail Requirements Related to Post-Execution Allocation 
Information

A. Background and Proposed Rules

    Existing Sec.  37.205(a) requires a SEF to capture and retain all 
audit trail data necessary to detect, investigate, and prevent customer 
and market abuses.\20\ This audit trail data must permit a SEF to track 
a customer order from the time of receipt through fill, allocation, or 
other disposition.\21\ Commission regulation 37.205(b)(2)(iv) requires 
a SEF's audit trail program to include an electronic transaction 
history database that identifies, among other things, each account to 
which order fills are allocated.\22\
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    \20\ 17 CFR 37.205(a). Such audit trail data must be sufficient 
to reconstruct all indications of interest, RFQs, orders, and 
trades.
    \21\ Id.
    \22\ 17 CFR 37.205(b)(2)(iv).
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    During the SEF registration process starting fall 2013 through 
spring 2016, numerous SEFs indicated that post-execution allocations 
are made away from SEFs and typically occur between the clearing firm 
or the customer and the derivatives clearing organization (``DCO'') or 
at the middleware provider.\23\ Those SEFs represented they typically 
do not have access to post-execution allocation information and are 
unable to obtain this data from third parties, such as DCOs and swap 
data repositories, due to confidentiality concerns. Based on these 
representations, Commission staff issued no-action relief from this 
requirement.\24\
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    \23\ CFTC Staff Letter No. 15-68, Re: No-Action Relief for Swap 
Execution Facilities from Certain Audit Trail Requirements in 
Commission Regulation 37.205 Related to Post-Execution Allocation 
Information (Dec. 22, 2015) at 2. As stated therein, ``[e]ven if 
SEFs could obtain the information from DCOs, swap data repositories, 
or middleware providers, or alternatively, from the counterparties 
to the swap, the infrastructure necessary to securely transmit the 
post-execution allocation information, such as an application-
programming interface or secure file transfer protocol site, is 
currently not in place.''
    \24\ Id.; CFTC Staff Letter No. 17-54.
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    Recognizing the practical difficulties SEFs face in obtaining 
information regarding allocations occurring away from the SEF after a 
trade has been executed, the Commission proposed to eliminate the 
requirements in

[[Page 9226]]

Sec.  37.205(a) and (b)(2) that a SEF capture post-execution allocation 
information in its audit trail.\25\ Instead, the Proposed Rules only 
require a SEF to capture and retain in its audit trail information 
through the execution of a trade on the SEF.\26\ The Commission noted 
that this change would be consistent with current swap market 
practices.\27\
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    \25\ 83 FR at 62005.
    \26\ Id.
    \27\ Id.
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B. Summary of Comments

    Commenters support the proposal to eliminate the requirement to 
capture and retain post-execution allocation information.\28\ According 
to Refinitiv and WMBAA, SEFs remain unable to obtain post-execution 
allocation information.\29\ WMBAA believes ``SEFs cannot and should not 
be responsible for collecting trade allocation information when the 
allocations occur away from the SEF'' and the proposed changes ``more 
accurately reflect the capabilities of SEFs to capture audit trail 
data.'' \30\ In WMBAA's view, the proposed changes to SEF audit trail 
requirements ``will [not] lead to degradation of the ability to 
reconstruct a trade and the environment in which it is traded.'' \31\
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    \28\ Refinitiv Letter at 11 (``Refinitiv SEF supports the 
elimination of the requirement to be able to track an order through 
fill, allocation or other disposition, because SEFs generally do not 
have access to most post-execution information.''); 2019 WMBAA 
Letter at 12-13 (``The WMBAA supports the Commission's proposal 
regarding audit trail requirements.'').
    \29\ Refinitiv Letter at 11; 2019 WMBAA Letter at 12.
    \30\ 2019 WMBAA Letter at 12.
    \31\ Id. at 12-13.
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C. Final Rules

    The Commission has determined, based on representations from SEFs, 
that SEFs are unable to obtain post-execution allocation information 
and is adopting the amendments to Sec.  37.205(a) and (b)(2) as 
proposed. Moreover, the Commission is able to obtain post-execution 
allocation information from other registered entities and market 
participants, and is not aware that SEFs' reliance on the relief from 
collecting and retaining post-execution allocation has raised any 
regulatory concerns.
    As commenters noted, post-execution allocation generally takes 
place between the clearing firm or the customer and the DCO, or at the 
middleware provider. DCOs are required to maintain records of all 
information necessary to record allocation of bunched orders for 
cleared swaps.\32\ In addition, under Sec.  1.35 managers of accounts 
eligible for post-execution allocation must maintain records sufficient 
to permit the reconstruction of the handling of the order from the time 
of placement by the account manager to the allocation to individual 
accounts, and introducing brokers, futures commission merchants, and 
SEF members must similarly maintain records of each order subject to 
post-execution allocation and the accounts to which the orders are 
allocated.\33\ These required records must be made available to the 
Commission upon request.\34\ Accordingly, the Commission expects that 
it will continue to have access to post-execution allocation 
information from these registered entities and market participants even 
after SEFs are no longer required to capture this information.
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    \32\ 17 CFR 39.20(a)(2).
    \33\ 17 CFR 1.35(b)(5).
    \34\ See 17 CFR 1.31(d), 1.35(b)(5).
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III. Financial Resources Requirements

A. Background and Overview of Proposed Rules

    Core Principle 13 requires a SEF to have adequate financial, 
operational, and managerial resources to discharge each of its 
responsibilities.\35\ To achieve financial resource adequacy, a SEF 
must maintain financial resources sufficient to cover its operating 
costs for a period of at least one year, calculated on a rolling 
basis.\36\ The Commission implemented Core Principle 13 by adopting 
Sec. Sec.  37.1301 through 37.1307 to specify (i) the eligible types of 
financial resources that may be counted toward compliance (Sec.  
37.1302); (ii) the computation of projected operating costs (Sec.  
37.1303); (iii) asset valuation requirements (Sec.  37.1304); (iv) a 
liquidity requirement for required financial resources equal to six 
months of a SEF's operating costs (Sec.  37.1305); and (v) reporting 
obligations (Sec.  37.1306).\37\
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    \35\ 7 U.S.C. 7b-3(f)(13).
    \36\ Id.
    \37\ 17 CFR 37.1301 through 37.1307.
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    These regulations are intended to ensure that a SEF has financial 
strength sufficient to discharge its responsibilities, maintain market 
continuity, and withstand unpredictable market events.\38\ Since the 
adoption of part 37 in 2013, the Commission received feedback from 
several SEFs noting the existing requirements impose impractical and 
unnecessary financial and operating burdens.\39\ Among other things, 
SEFs contended the amount of financial resources a SEF is required to 
maintain has proven to be unnecessary and shackles resources that 
otherwise could be used towards operational growth and further 
innovation.\40\ To address some of these concerns, Commission staff 
issued two guidance documents regarding the calculation of operating 
costs.\41\
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    \38\ When the Commission adopted Sec.  37.1301(a), it recognized 
that a SEF's financial strength is vital to ensure that the SEF can 
discharge its core principle responsibilities. SEF Core Principles 
Final Rule at 33538-33539.
    \39\ See, e.g., WMBAA, Re: Project KISS at 5 (Sept. 29, 2017) 
(``2017 WMBAA Letter'') https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61415&SearchText=.
    \40\ Id. at 5.
    \41\ CFTC Staff Letter No. 17-25; CFTC Staff Letter No. 15-26.
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    Based on the Commission's experience with overseeing the financial 
resources requirements, feedback previously received from SEFs, and the 
Commission staff's experience with administering guidance on operating 
costs, the Proposed Rules set forth several amendments to the Core 
Principle 13 regulations, including the addition of acceptable 
practices to Core Principle 13 in Appendix B to part 37.\42\ The intent 
of the proposed amendments was to achieve a better balance between 
ensuring SEF financial stability and promoting SEF growth and 
innovation and reducing unnecessary costs.\43\
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    \42\ 83 FR at 62025-62030.
    \43\ Id. at 62025.
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    As discussed in greater detail below, the Proposed Rules included: 
(i) Clarification of the scope of operating costs that a SEF must cover 
with adequate financial resources; (ii) acceptable practices for 
calculating projected operating costs; (iii) amendments to the existing 
six-month liquidity requirement for financial resources held by a SEF; 
and (iv) streamlined and flexible requirements with respect to 
financial reports filed with the Commission.

B. Sec.  37.1301--General Requirements 44
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    \44\ In addition to finalizing the proposed amendments to Sec.  
37.1301(a) and (c), the Commission also proposed amendments to Sec.  
37.1301(b), which requires a SEF also operating as a DCO to comply 
with the financial resource requirements for DCOs under Sec.  39.11. 
Specifically, the Commission proposed to amend Sec.  37.1301(b) to 
permit a SEF that also operates as a DCO to file a single financial 
report under Sec.  39.11 that covers both the SEF and DCO. The 
Commission is continuing to consider this proposed change and, 
therefore, is not finalizing it as part of the Final Rules.
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    Existing Sec.  37.1301(a) requires a SEF to maintain financial 
resources sufficient to enable it to perform its functions in 
compliance with the SEF core principles set forth in section 5h of the 
Act (emphasis added).\45\ Existing Sec.  37.1301(c) specifies that a 
SEF's financial resources shall be considered sufficient if their value 
is ``at least equal

[[Page 9227]]

to'' the SEF's operating costs for a one-year period, calculated on a 
rolling basis.\46\
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    \45\ 17 CFR 37.1301(a).
    \46\ 17 CFR 37.1301(c).
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    Certain SEFs expressed concerns that existing Sec.  37.1301(a), 
when read in conjunction with existing Sec.  37.1301(c), requires that 
SEFs include operational costs in the financial resources calculation, 
even if those costs relate to functions that are not germane to 
discharging SEF core principle responsibilities.\47\ According to those 
SEFs, the requirement that SEFs maintain capital to cover such costs 
unnecessarily prevents SEFs from allocating that capital to operational 
growth and innovation.\48\
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    \47\ See 2017 WMBAA Letter at 6 (stating the financial resource 
requirements should focus on fixed costs required for compliance, 
rather than variable costs and staff-related costs that are not 
essential).
    \48\ Id.
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1. Proposed Rules
    In the notice of proposed rulemaking, the Commission acknowledged 
some SEF operational costs may not be necessary to comply with a SEF 
core principle or Commission regulation and, therefore, should not be 
included when calculating the adequacy of the SEF's financial 
resources.\49\ For example, a SEF may incur costs related to product 
research, business development, and advertising. Incurring costs to 
engage in these activities is unrelated to compliance with a SEF core 
principle or Commission regulation. Accordingly, the Commission 
proposed to eliminate Sec.  37.1301(c), and instead amend Sec.  
37.1301(a) to require a SEF to maintain adequate financial resources to 
cover the operating costs of activities needed to ``comply'' with the 
SEF core principles, rather than ``perform its functions in compliance 
with'' the core principles.\50\
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    \49\ 83 FR at 62025-62026.
    \50\ The Proposed Rules consolidated existing Sec.  37.1301(a) 
and (c) into a single amended Sec.  37.1301(a).
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    The Commission also proposed to amend Sec.  37.1301(a) to require a 
SEF to maintain financial resources adequate to comply with 
``applicable Commission regulations.'' This amendment was intended to 
clarify that a SEF's obligation to maintain adequate financial 
resources extends to those resources necessary to comply with any 
additional regulatory requirements the Commission has promulgated.\51\ 
The Commission noted SEFs already are complying with this clarification 
in practice.\52\
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    \51\ This requirement is currently in effect, and the proposed 
rules simply clarified the requirement without substantively 
expanding it. Under Core Principle 1, a SEF must comply with any 
rule or regulation promulgated by the Commission pursuant to section 
8a(5) of the Act. 17 CFR 37.100. For a SEF to discharge its 
responsibilities pursuant to Core Principle 13, which include 
complying with the SEF core principles, it is required to ensure 
that its financial resources are adequate to comply with those rules 
or regulations.
    \52\ 83 FR 62026.
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    Under proposed Sec.  37.1301(a), a SEF need not maintain financial 
resources to cover the costs of activities (e.g., product research, 
business development, or advertising) unrelated to compliance with a 
core principle or Commission regulation. The Commission stated the 
proposed rule offers a better and more balanced regulatory approach to 
implementing Core Principle 13 requirements, noting that under the 
proposed rule, SEFs would be able to allocate capital to other areas, 
thereby furthering the goals of promoting SEF growth and 
innovation.\53\ Thus, the Commission concluded, the proposed rule would 
achieve a better balance between ensuring that a SEF is financially 
stable and providing the SEF discretion to allocate its limited 
resources towards growth and innovation.\54\ Further, in proposing this 
rule, the Commission aimed to remove a potential barrier for new SEF 
entrants that might be deterred by the relatively higher capital costs 
required under existing regulations.\55\
---------------------------------------------------------------------------

    \53\ Id.
    \54\ Id.
    \55\ Id.
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    The Commission also proposed several technical changes in order to 
align proposed Sec.  37.1301(a) with Core Principle 13's requirements. 
Core Principle 13's requirements are ongoing, prompting the Commission 
to propose requiring a SEF to maintain adequate financial resources on 
an ``ongoing basis.'' The Commission also proposed to replace the word 
``sufficient'' with ``adequate'' while adopting additional language to 
specify a SEF's financial resources are ``adequate'' if their value 
``exceeds,'' rather than is ``at least equal to,'' one year's worth of 
operating costs,\56\ calculated on a rolling basis pursuant to the 
requirements for calculating such costs under proposed Sec.  37.1303.
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    \56\ The Commission also proposed an amendment to refer to 
``projected operating costs'' instead of ``operating costs'' to 
conform to existing Sec.  37.1303, 17 CFR 37.1303, and Sec.  
37.1307, 17 CFR 37.1307, both of which refer to ``projected 
operating costs.'' During informal discussions, Commission staff and 
SEFs generally have referred to SEFs' ``projected operating costs.''
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2. Summary of Comments
    Refinitiv and WMBAA support the proposed changes to the general 
financial resource requirements.\57\ They believe financial resources 
for certain SEF personnel and activities are not necessary for 
compliance with the SEF core principles or Commission regulations and 
the costs associated with these personnel and activities could be 
appropriately excluded in calculating projected operating costs.\58\ 
WMBAA also believes the amendments will encourage SEF innovation and 
lower barriers to entry for new entities seeking to operate as 
SEFs.\59\
---------------------------------------------------------------------------

    \57\ Refinitiv Letter at 13; 2019 WMBAA Letter at 21.
    \58\ Id.
    \59\ 2019 WMBAA Letter at 21.
---------------------------------------------------------------------------

    WMBAA requested the Commission allow a SEF to use a credit facility 
to meet the general financial resources requirement.\60\ In addition, 
WMBAA stated the statutory requirement a SEF maintain adequate 
financial resources to cover one year of operating costs is unnecessary 
and burdensome.\61\ According to WMBAA, this amount of resources is not 
needed for a SEF to wind down its operations. Unlike futures contracts 
that are proprietary to, and traded exclusively on, a particular 
exchange, swaps of a particular type can and do trade on multiple SEFs, 
making it relatively easy to transfer trading to another SEF in the 
event of a wind-down.\62\
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    \60\ Id. In the preamble to the 2013 SEF Core Principles Final 
Rule, the Commission stated a SEF is allowed to include a credit 
facility to comply with the six-month liquid resources requirement 
(where its liquid assets on hand are insufficient) under Sec.  
37.1305, 17 CFR 37.1305, but otherwise is not allowed to include 
such a facility to demonstrate compliance with the one-year general 
requirement. 2013 SEF Core Principles Final Rule at 33540.
    \61\ 2019 WMBAA Letter at 21.
    \62\ Id.
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3. Final Rule
    The Commission is adopting the amendments to Sec.  37.1301(a) and 
eliminating Sec.  37.1301(c) as proposed. The Commission believes it is 
unnecessary to require a SEF to maintain financial resources for 
activities beyond those required to comply with a SEF core principle or 
Commission regulation. Limiting the financial resources requirement to 
the costs of activities necessary to comply with the SEF core 
principles and Commission regulations is expected to reduce barriers to 
growth, innovation, and entry. The Commission believes this approach 
strikes an appropriate balance between ensuring a SEF's financial 
stability and allowing the SEF discretion in allocating resources.\63\
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    \63\ This approach is consistent with the discretion granted to 
SEFs in the statutory core principles framework and other aspects of 
the Commission's financial resource requirements for SEFs. See 7 
U.S.C. 7b-3(f)(1)(B) (granting a SEF reasonable discretion in 
establishing the manner in which it complies with the SEF core 
principles, unless the Commission provides otherwise by rule); 17 
CFR 37.1303 (granting a SEF reasonable discretion in calculating its 
projected operating costs for purposes of 17 CFR 37.1301).

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[[Page 9228]]

    The Commission views WMBAA's request to permit the use of a credit 
facility to meet the general financial resources requirement as a 
substantive amendment to its regulations that is beyond the scope of 
the Proposed Rules. As a result, the Commission is not addressing the 
request in the Final Rules. However, the Commission may take the 
request into consideration for future rulemakings.
    The Final Rules do not address WMBAA's comment that it is 
unnecessary and burdensome for a SEF to maintain financial resources 
covering a full year's operating costs, as this is a requirement set 
forth in the Act.\64\
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    \64\ 7 U.S.C. 7b-3(f)(13)(B) (providing that the financial 
resources of a swap execution facility shall be considered to be 
adequate if the value of the financial resources exceeds the total 
amount that would enable the swap execution facility to cover the 
operating costs of the swap execution facility for a 1-year period, 
as calculated on a rolling basis).
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C. Sec.  37.1302--Types of Financial Resources

    Existing Sec.  37.1302 sets forth the types of financial resources 
available to a SEF to satisfy the general financial resources 
requirement.\65\ These resources include the SEF's own capital, meaning 
its assets minus liabilities calculated in accordance with U.S. 
generally accepted accounting principles (``U.S. GAAP''), and any other 
financial resources deemed acceptable by the Commission.\66\
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    \65\ 17 CFR 37.1302.
    \66\ Id.
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1. Proposed Rules
    The Commission proposed to amend the current regulation to refer to 
generally accepted accounting principles ``in the United States'' in 
order to conform to the proposed amendments to Sec.  37.1306 described 
further below.
2. Summary of Comments
    The Commission received no comments on the proposed changes.
3. Final Rules
    The Commission is adopting the amendment to Sec.  37.1302 as 
proposed. This change will conform to the adopted amendments to Sec.  
37.1306 described further below.

D. Sec.  37.1303--Liquidity of Financial Resources

    Existing Sec.  37.1305 requires a SEF to maintain unencumbered, 
liquid financial assets, i.e., cash and/or highly liquid securities, 
equal to at least six months of a SEF's operating costs.\67\ If any 
portion of a SEF's financial resources is not sufficiently liquid, a 
SEF is permitted to take into account a committed line of credit or 
similar facility to meet this requirement.\68\ In adopting this rule in 
2013, the Commission explained that the liquidity requirement is 
intended to ensure that a SEF could continue to operate and wind down 
its operations in an orderly fashion, if necessary.\69\ The Commission 
also determined that a six-month period would be an accurate assessment 
of how long it would take for a SEF to wind down in an orderly manner, 
absent support for alternative time frames.\70\
---------------------------------------------------------------------------

    \67\ 17 CFR 37.1305.
    \68\ Id.
    \69\ The Commission stated that the purpose of the liquidity 
requirement is so that all SEFs have liquid financial assets to 
allow them to continue to operate and to wind down in an orderly 
fashion and that the Commission viewed a six-month period as 
appropriate for a wind-down period. SEF Core Principles Final Rule 
at 33540.
    \70\ Id.
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1. Proposed Rules
    Since the adoption of part 37, many SEFs have maintained that a 
six-month minimum liquidity requirement is more than is necessary and 
some of their liquid assets could be better applied toward growth of 
the SEFs.\71\ Consistent with that feedback, the Commission observed 
that the wind-downs and ownership changes of several registered trading 
platforms, including SEFs and DCMs, were completed within much shorter 
time frames.\72\ Based on this experience, the Commission acknowledged 
the existing six-month requirement is not necessary in all 
circumstances and a SEF may be better-positioned to determine the 
amount of liquid financial resources required to continue its 
operations and to conduct an orderly winddown.
---------------------------------------------------------------------------

    \71\ See 2017 WMBAA Letter at 5 (arguing a shorter liquidity 
requirement would allow for a SEF to allocate capital for 
innovation).
    \72\ For example, the Commission noted that the DCM Green 
Exchange LLC had its designation vacated and ceased operations. 
Similarly, the DCM Kansas City Board of Trade was acquired by CME 
Group Inc. and had its designation vacated; it ultimately ceased 
operations. In each case, the Commission observed a relatively 
expeditious process.
---------------------------------------------------------------------------

    In light of this experience, the Commission proposed to renumber 
Sec.  37.1305 as Sec.  37.1303 and amend the minimum liquid assets 
requirement to equal the greater of (i) three months of projected 
operating costs, calculated on a rolling basis; or (ii) the projected 
costs needed to wind down the swap execution facility's operations.\73\ 
While recognizing that it rejected a three-month requirement in the SEF 
Core Principles Final Rule absent support for a shorter time frame,\74\ 
the Commission stated it had since come to believe, based on its 
experience and the feedback discussed above, that the potentially 
shorter proposed time frame would be sufficient to fulfill the goal of 
ensuring a SEF can continue to operate and, if necessary, wind down its 
SEF operations in an orderly fashion.\75\
---------------------------------------------------------------------------

    \73\ 83 FR at 62027.
    \74\ SEF Core Principles Final Rule at 33540.
    \75\ 83 FR at 62027.
---------------------------------------------------------------------------

    The Commission further noted that under the proposed change, SEFs 
would be able to use the resources previously allocated to the liquid 
asset requirement to invest in other areas of SEF operations.\76\ 
Accordingly, compared to the existing static six-month requirement, the 
Commission stated a liquid resources requirement of the ``greater of'' 
either (i) three months of projected operating costs or (ii) projected 
wind-down costs better ensures an orderly wind down for SEFs and a more 
efficient allocation of resources for SEFs estimating a wind-down 
period less than six months.\77\ The Commission further stated 
requiring SEFs to maintain the greater of three months of projected 
operating costs or the SEF's projected costs for an orderly wind down 
of its business better protects against the risk of failure in the 
unlikely event that a SEF requires a wind-down period of longer than 
six months.\78\
---------------------------------------------------------------------------

    \76\ Id.
    \77\ Id.
    \78\ Id.
---------------------------------------------------------------------------

    The Commission also proposed an amendment to clarify that a SEF can 
overcome any deficiency in satisfying this requirement by obtaining a 
committed line of credit or similar facility in an amount at least 
equal to the deficiency.
2. Summary of Comments
    Refinitiv and Bloomberg support the proposed rule and believe the 
proposed three-month minimum liquid asset requirement better reflects a 
SEF's liquidity needs for day-to-day operations and, if necessary, for 
winding down operations.\79\ Refinitiv supports focusing the liquid 
financial resources requirement on the cost of unwinding the SEF in an 
orderly

[[Page 9229]]

manner.\80\ Bloomberg believes a SEF's wind-down period will generally 
be no more than three months and that the revised liquidity requirement 
``will release capital that can be deployed by a SEF to promote 
innovation, while also promoting stability by ensuring that a SEF 
retains sufficient capital on reserve.'' \81\
---------------------------------------------------------------------------

    \79\ Refinitiv Letter at 13; Bloomberg Letter at A-6.
    \80\ Refinitiv Letter at 13.
    \81\ Bloomberg Letter at A-6.
---------------------------------------------------------------------------

    WMBAA requested the Commission allow SEFs to count all commissions 
receivable, aged less than three months, towards their liquid financial 
resources calculation.\82\ WMBAA believes permitting the use of liquid 
receivables would not impair a SEF's ability to perform its core 
functions, but would enable a SEF to avoid locking up cash 
unnecessarily. According to WMBAA, payment of these commissions 
typically occurs within one to two months, and thus would be available 
to cover operating costs or a wind-down.\83\ WMBAA also urged the 
Commission to allow revolving subordinated debt as a liquid asset in 
the financial resource requirement.\84\
---------------------------------------------------------------------------

    \82\ 2019 WMBAA Letter at 21.
    \83\ Id.
    \84\ Id.
---------------------------------------------------------------------------

3. Final Rules
    The Commission is adopting Sec.  37.1303 as proposed. Requiring a 
SEF to maintain liquid financial resources equal to the greater of 
three months of projected operating costs or its projected wind-down 
costs will ensure that SEFs have sufficient resources for day-to-day 
operations as well as winding down operations if needed, while freeing 
capital for innovation and expansion in the SEF's business where 
appropriate.
    The Commission notes that under existing Sec.  37.1303, amended as 
Sec.  37.1304, the Commission may review the methodologies used in the 
calculation of a SEF's projected costs needed to wind down the swap 
execution facility's operations and may require changes as appropriate. 
Some examples a SEF may use to support its conclusion include: The 
tenor of the contracts listed on the facility, the listing of the SEF's 
contracts on other facilities, the ability of participants to close out 
positions and trade on a different SEF and, in the event the SEF's 
swaps are cleared, the ability of participants to clear swaps at the 
same DCO as they currently utilized if they had to trade on a different 
facility.
    Finally, WMBAA's requests to include additional types of resources 
as liquid assets are beyond the scope of this rulemaking. The 
Commission may consider including additional types of liquid assets in 
a future rulemaking.

E. Sec.  37.1304--Computation of Costs To Meet Financial Resources 
Requirement <SUP>85</SUP>
---------------------------------------------------------------------------

    \85\ The Commission is renaming this section, previously titled 
``Computation of Projected Operating Costs to Meet Financial 
Resource Requirement,'' to reflect the requirement to calculate 
wind-down costs as well as operating costs.
---------------------------------------------------------------------------

    Existing Sec.  37.1303 requires a SEF to make a reasonable 
calculation of its projected operating costs, each fiscal quarter over 
a twelve-month period, to determine the amount of financial resources 
needed to comply with the financial resource requirement.\86\ The rule 
further provides a SEF reasonable discretion to determine the 
methodology to compute its projected operating costs, although the 
Commission may review the SEF's methodology and require the SEF to make 
changes as appropriate.\87\
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    \86\ 17 CFR 37.1303.
    \87\ Id.
---------------------------------------------------------------------------

1. Proposed Rules and Acceptable Practices
    The Commission proposed to renumber Sec.  37.1303 as Sec.  37.1304 
and amend the rule to add the requirement that a SEF make a reasonable 
calculation of projected wind-down costs, providing discretion in 
adopting the methodology for calculating such costs. The Commission 
stated the proposed amendment is consistent with the reasonable 
discretion already provided for calculating projected operating costs 
and corresponds to proposed Sec.  37.1303, which incorporates the 
calculation of a SEF's wind-down costs into the liquidity 
determination.\88\ The Commission proposed two additional amendments to 
Sec.  37.1303. First, the Commission proposed to add a reference to 
amended Sec.  37.1303 to require that a SEF calculate projected 
operating costs to determine how to comply with the liquidity 
requirement. Second, the Commission proposed to eliminate the reference 
to the twelve-month requirement, given that proposed Sec.  37.1301(a) 
establishes that the financial resource requirement applies on a one-
year, rolling basis.
---------------------------------------------------------------------------

    \88\ 83 FR 62028.
---------------------------------------------------------------------------

    The Commission also proposed to include acceptable practices to 
Core Principle 13 in Appendix B associated with proposed Sec.  37.1304. 
The proposed acceptable practices expound upon the reasonable 
discretion that SEFs have for computing projected operating costs in 
determining their financial resource requirements, consistent with 
existing guidance provided by Commission staff.\89\ Among other things, 
these acceptable practices further explain which operating costs are 
not necessary to comply with the SEF core principles and the 
Commission's regulations and therefore need not be considered in a 
SEF's financial resources calculation under revised Sec.  37.1301.
---------------------------------------------------------------------------

    \89\ The proposed acceptable practices to Core Principle 13 in 
Appendix B are based, in part, upon existing Division of Market 
Oversight (``DMO'') staff guidance. See CFTC Staff Letter No. 15-26 
and CFTC Staff Letter No. 17-25.
---------------------------------------------------------------------------

    Specifically, the proposed acceptable practices state that 
calculations of projected operating costs, i.e., those that are 
necessary for a SEF to comply with the SEF core principles and 
applicable Commission regulations, should be based on the SEF's current 
business model and anticipated business volume. The proposed acceptable 
practices specify that a SEF may exclude certain expenses in making a 
``reasonable'' calculation of projected operating costs. These include, 
among others, the following expenses: Marketing and development costs; 
variable commissions paid to SEF trading specialists, the payment of 
which is contingent on whether the SEF collects associated revenue from 
transactions on its systems or platforms; \90\ and costs for SEF 
personnel who are not necessary to enable a SEF to comply with the core 
principles and Commission regulations.\91\ Further, a SEF may exclude 
any non-cash costs, including depreciation and amortization. The 
exclusion of these expenses is consistent with the financial resource 
and liquidity requirements in proposed Sec.  37.1301 because these 
expenses are not necessary for a SEF to comply with the SEF core 
principles or Commission regulations.
---------------------------------------------------------------------------

    \90\ See CFTC Staff Letter No. 17-25.
    \91\ For example, if a SEF requires a certain number of SEF 
trading specialists to operate a voice-based or voice-assisted 
trading system or platform, but hires additional personnel to 
enhance its operations to benefit market participants, then the SEF 
would only need to include the minimum number of trading specialists 
required to operate the trading system or platform based on its 
current business volume and take into account any projected increase 
or decrease in business volume in its projected operating cost 
calculations.
---------------------------------------------------------------------------

    In addition, the proposed acceptable practices specify that a SEF 
in calculating projected operating costs may prorate, but not exclude, 
certain expenses. The Commission recognizes some costs may be only 
partially attributable to a SEF's compliance with the SEF core 
principles and regulatory requirements. Therefore, only those 
attributed costs need to be included in a SEF's projected operating 
costs. Accordingly, a SEF may prorate

[[Page 9230]]

expenses shared with affiliates, e.g., the costs of administrative 
staff or seconded employees the SEF shares with affiliates. Further, a 
SEF may also prorate expenses that are attributable, in part, to 
operational aspects of the SEF business that are not required to comply 
with the SEF core principles, e.g., costs of a SEF's office space, to 
the extent that it is also used to house marketing personnel. In 
prorating any such expense, however, a SEF must document and justify 
those prorated expenses pursuant to proposed requirements under 
proposed Sec.  37.1306, discussed further below.\92\
---------------------------------------------------------------------------

    \92\ The proposed acceptable practices also allowed a SEF 
offering more than one bona fide execution method to include the 
costs of only one of those methods in calculating projected 
operating costs, with the goal of mitigating disincentives for SEFs 
to offer a multiplicity of execution methods. This proposed change 
was intended to be consistent with the Proposed Rule's removal of 
existing limitations on execution methods for Required Transactions. 
Because the Final Rules are not implementing the Proposed Rule's 
expansion of permissible execution methods for Required 
Transactions, the Commission is not finalizing this proposed 
acceptable practice at this time.
---------------------------------------------------------------------------

2. Summary of Comments
    WMBAA supports the proposed acceptable practices.\93\ Refinitiv 
concurs with the Commission's understanding that many SEF expenses are 
shared with affiliates or are partly attributable to activities not 
necessary for compliance with the SEF core principles and Commission 
regulations and supports allowing SEFs to prorate such expenses.\94\
---------------------------------------------------------------------------

    \93\ 2019 WMBAA Letter at 22. WMBAA requested that the 
Commission clarify the meaning of ``bona fide'' execution method for 
purposes of calculating operating costs of SEF execution methods. As 
noted above, the Commission at this time is not finalizing the 
proposed acceptable practice regarding treatment of operating costs 
for multiple execution methods.
    \94\ See Refinitiv Letter at 13-14.
---------------------------------------------------------------------------

3. Final Rules and Acceptable Practices
    The Commission is adopting Sec.  37.1304 and the acceptable 
practices as proposed. The requirement to calculate wind-down costs 
corresponds to the amendments the Commission is adopting in amended 
Sec.  37.1303 discussed above, which incorporate the calculation of a 
SEF's wind-down costs into the liquidity requirement. The reasonable 
discretion provided for calculation of wind-down costs is already 
provided to SEFs for their calculations of projected operating costs.
    The Commission believes the acceptable practices added to Appendix 
B to part 37 will assist SEFs in complying with amended Sec.  
37.1304.\95\ These acceptable practices are consistent with the Final 
Rules' amendments to Sec.  37.1301, which focus a SEF's financial 
resource requirement on covering the costs of compliance with SEF 
statutory and regulatory obligations, rather than the costs of all 
operations of a SEF or operations of its affiliates.
---------------------------------------------------------------------------

    \95\ As noted, the Commission at this time is not finalizing the 
proposed acceptable practice allowing a SEF offering multiple bona 
fide execution methods to count the costs of only one execution 
method toward its projected operating costs, for the reasons stated 
above. See note 92, supra.
---------------------------------------------------------------------------

F. Sec.  37.1305--Valuation of Financial Resources

    Existing Sec.  37.1304--``Valuation of financial resources''--
requires a SEF, at least once each fiscal quarter, to compute the 
current market value of each financial resource used to meet its 
financial resources requirement under Sec.  37.1301.\96\ The 
requirement is designed to address the need to update valuations when 
there may have been material fluctuations in market value that could 
affect a SEF's ability to satisfy its financial resource 
requirement.\97\ When valuing a financial resource, the SEF must reduce 
the value, as appropriate, to reflect any market or credit risk 
specific to that particular resource, i.e., apply a haircut.\98\
---------------------------------------------------------------------------

    \96\ 17 CFR 37.1304.
    \97\ SEF Core Principles Final Rule at 33539.
    \98\ A ``haircut'' is a deduction taken from the value of an 
asset to reserve for potential future adverse price movement in such 
asset. Id. at 33539 n.772.
---------------------------------------------------------------------------

1. Proposed Rules
    The Commission proposed to renumber existing Sec.  37.1304 as Sec.  
37.1305 and amend the provision to add a reference to the liquidity 
requirement under amended Sec.  37.1303. This would clarify that 
compliance with amended Sec.  37.1303 requires a SEF to utilize the 
current market value of the applicable financial resources as computed 
pursuant to Sec.  37.1304.
2. Summary of Comments
    The Commission did not receive any comments on this amendment.
3. Final Rules
    The Commission is adopting Sec.  37.1305 as proposed, confirming 
that compliance with the liquidity requirement under amended Sec.  
37.1303 requires a SEF to utilize the current market value of the 
applicable financial resources.

G. Sec.  37.1306--Reporting to the Commission

1. Sec.  37.1306(a)
    Existing Sec.  37.1306 establishes a SEF's financial reporting 
requirements.\99\ Commission regulation 37.1306(a)(1) provides that at 
the end of each fiscal quarter or upon Commission request, a SEF must 
report to the Commission (i) the amount of financial resources 
necessary to meet the financial resources requirement of Sec.  37.1301, 
and (ii) the value of each financial resource available to meet those 
requirements as calculated under Sec.  37.1304.\100\ Commission 
regulation 37.1306(a)(2) additionally requires a SEF to provide the 
Commission each fiscal quarter with a financial statement, including a 
balance sheet, income statement, and statement of the cash flows of the 
SEF or its parent company.\101\ In lieu of submitting its own financial 
statements, a SEF may submit the financial statements of its parent 
company.\102\
---------------------------------------------------------------------------

    \99\ 17 CFR 37.1306.
    \100\ 17 CFR 37.1306(a)(1).
    \101\ 17 CFR 37.1306(a)(2).
    \102\ Id.
---------------------------------------------------------------------------

i. Proposed Rules
    The Commission proposed several amendments to Sec.  37.1306(a). 
First, the Commission proposed to require a SEF to prepare its 
financial statements in accordance with U.S. GAAP. For a SEF that is 
not domiciled in the U.S., and is not otherwise required to prepare its 
financial statements in accordance with U.S. GAAP, the Proposed Rules 
allowed the SEF to prepare its statements in accordance with either the 
International Financial Reporting Standards issued by the International 
Accounting Standards Board, or such comparable international standard 
as the Commission may accept in its discretion. The Commission noted 
the quality and transparency of SEF financial reports submitted under 
the current reporting requirement have varied and stated the U.S. GAAP-
based requirement would promote consistency and better ensure a minimum 
reporting standard across financial submissions.\103\
---------------------------------------------------------------------------

    \103\ 83 FR 62029.
---------------------------------------------------------------------------

    The Commission also proposed to require a SEF to provide its own 
financial statements, rather than allow a SEF the option of submitting 
the statements of its parent company. The Commission noted it may lack 
jurisdiction over a SEF's parent company or its affiliates, and in such 
instances, the Commission could not consider the parent company's 
financial resources in determining whether the

[[Page 9231]]

SEF alone possesses adequate financial resources.\104\ The Commission 
stated a separate SEF financial statement would more clearly 
demonstrate evidence of the SEF's compliance with Core Principle 
13.\105\
---------------------------------------------------------------------------

    \104\ Id.
    \105\ Id.
---------------------------------------------------------------------------

    The Commission also proposed revisions to Sec.  37.1306(a)(1) to 
add appropriate references to amended Sec.  37.1303 and amended Sec.  
37.1305. In addition to specifying the amount of financial resources 
necessary to comply with Sec.  37.1301, a SEF's quarterly report would 
have to include the amount of financial resources necessary to comply 
with the liquidity requirement in amended Sec.  37.1303. Further, the 
amounts specified in the report would have to be based on the current 
market value of each financial resource and computed as reasonable 
calculations of the SEF's projected operating costs and wind-down 
costs.
    The Proposed Rules also posed several questions to commenters on 
reporting requirements for SEFs. These included whether a SEF's 
financial reports should be required to be audited and whether 
financial reporting should be required on a semiannual rather than a 
quarterly basis.
ii. Summary of Comments
    WMBAA supports requiring a SEF's financial statements be prepared 
in accordance with U.S. GAAP or its equivalent for non-U.S. SEFs, 
concurring with the Commission's view that such a requirement would 
promote comparability across SEFs.\106\
---------------------------------------------------------------------------

    \106\ WMBAA Letter at 23.
---------------------------------------------------------------------------

    WMBAA objects to requiring a SEF's financial reports be audited, 
contending audited reports would not improve oversight. WMBAA reasoned 
that an auditing firm would not provide a complete assessment because 
it likely would be unable or unwilling to opine on certain unique 
aspects of a SEF's financial resources calculations, including 
projection of costs based on historical or estimated costs.\107\ 
Further, WMBAA argued the costs associated with an audited report are 
high and would pose a barrier to entry for new SEFs.\108\
---------------------------------------------------------------------------

    \107\ Id. at 22. WMBAA also stated that an auditing firm would 
be unlikely to opine on whether an execution method is ``bona fide'' 
for purposes of the proposed acceptable practices related to Sec.  
37.1303. As noted above, the meaning of ``bon fide'' is not relevant 
since the Commission is not finalizing the proposed acceptable 
practice regarding the calculation of costs of different execution 
methods.
    \108\ Id.
---------------------------------------------------------------------------

    WMBAA also believes the current reporting requirement--quarterly 
financial reports--is sufficient to ensure capital adequacy, but that a 
semi-annual and annual report would also be adequate to achieve the 
goal of Commission oversight.\109\ According to WMBAA, if the 
Commission adopts less frequent financial reporting, a SEF should be 
required to maintain all related documents and support for further 
inspection.\110\ However, WMBAA asserted a SEF should not be required 
to maintain, in between each report, the supplemental documents 
required under existing Sec.  37.1306(c).\111\ Rather, WMBAA contends a 
SEF should be able to maintain a balance sheet with financial resources 
and liquidity calculations based on the most recent filing.\112\
---------------------------------------------------------------------------

    \109\ Id. at 22-23.
    \110\ Id. at 22.
    \111\ Existing Sec.  37.1306(c) requires a SEF to provide the 
Commission with supplemental documentation to its quarterly reports, 
including documentation used to calculate its financial 
requirements; documentation showing the basis for financial resource 
valuations and liquidity requirements; and copies of relevant 
agreements supporting the SEF's calculations.
    \112\ WMBAA Letter at 22.
---------------------------------------------------------------------------

    The Commission did not receive any comments on its proposal to 
require SEFs to submit their own financial statements rather than those 
of their parent entities.
iii. Final Rules
    The Commission is adopting the proposal requiring financial 
statements submitted as part of a SEF's quarterly financial reports to 
conform to U.S. GAAP or comparable foreign standards. As supported by 
commenters' feedback, the Commission continues to believe conforming 
financial statements to U.S. GAAP or comparable foreign standards will 
enhance the quality and transparency of SEFs' financial reporting and 
facilitate assessments of SEFs' financial conditions.
    The Commission is adopting, as proposed, the requirement for a SEF 
to provide its own financial statements (including balance sheet), 
rather than the financial statements of its parent. This change will 
provide the Commission with a more accurate picture of the SEFs' assets 
to ensure a SEF has adequate financial resources.\113\
---------------------------------------------------------------------------

    \113\ The Commission is finalizing the amendments to Sec.  
37.1306(a)(1) as proposed.
---------------------------------------------------------------------------

    The Commission will not adopt the requirement that financial 
statements be audited. As noted by commenters, the Commission has the 
ability to request additional information from a SEF if warranted, and 
the Commission does not believe the benefits of a blanket auditing 
requirement would justify the costs to SEF operators at this time.
    Finally, the Commission will retain the existing quarterly 
reporting requirement for SEFs, rather than moving to a semiannual 
reporting requirement. Quarterly reports are necessary for the 
Commission to remain current with the SEF's financial condition in a 
manner that semiannual reports would not. Timely financial information 
will be particularly important to the Commission as it monitors the 
transition to a relatively less stringent liquidity requirement for 
SEFs' financial resources under the Final Rules.\114\
---------------------------------------------------------------------------

    \114\ See Section III.D., supra.
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2. Sec.  37.1306(c) \115\
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    \115\ Existing Sec.  37.1306(b), 17 CFR 37.1306(b), requires a 
SEF to make its financial resource calculations on the last business 
day of its fiscal quarter. The Commission proposed an amendment to 
Sec.  37.1306(b) adding the word ``applicable'' before ``fiscal 
quarter'' in the existing rule text. The Commission is finalizing 
this amendment as proposed.
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    Existing Sec.  37.1306(c) sets forth documentation requirements for 
a SEF's financial reporting obligations.\116\ Commission regulation 
37.1306(c)(1) requires a SEF to provide the Commission with sufficient 
documentation explaining the methodology used to calculate its 
financial resource requirements under Sec.  37.1301.\117\ Commission 
regulation 37.1306(c)(2) requires a SEF to provide sufficient 
documentation explaining the basis for its valuation and liquidity 
determinations.\118\ To provide such documentation, Sec.  37.1306(c)(3) 
requires SEFs to provide copies of certain agreements that evidence or 
otherwise support its conclusions.\119\
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    \116\ 17 CFR 37.1306(c).
    \117\ 17 CFR 37.1306(c)(1).
    \118\ 17 CFR 37.1306(c)(2).
    \119\ 17 CFR 37.1306(c)(3).
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i. Proposed Rules
    Based on the proposed amendments to the Core Principle 13 
regulations described above, the Commission proposed conforming 
amendments to Sec.  37.1306(c) that would require a SEF to specify the 
methodology used to compute its financial resources and liquidity 
requirements. Proposed Sec.  37.1306(c)(1) requires documentation to be 
sufficient to enable the Commission to determine whether the SEF has 
made reasonable calculations of projected operating and wind-down costs 
under Sec.  37.1303. Proposed Sec.  37.1306(c)(2)(i) through (iv) \120\ 
requires the SEF, at a minimum, to (i) list all of its expenses, 
without

[[Page 9232]]

exclusion; (ii) identify all of those expenses the SEF excluded or 
prorated in its projected operating cost calculations and explain the 
basis for excluding or prorating any expenses; (iii) include 
documentation related to any committed line of credit or similar 
facility used to meet the liquidity requirement; \121\ and (iv) 
identify estimates of all of the costs and the projected amount of time 
required for any wind down of operations, including the basis for those 
estimates.
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    \120\ The Commission proposed to consolidate Sec.  37.1306(c)(1) 
through (3) into Sec.  37.1306(c)(1) through (2) and adopt the 
proposed requirements as described.
    \121\ The Commission also proposed to eliminate the language in 
existing Sec.  37.1306(c)(3) regarding copies of insurance coverage 
or other arrangements evidencing or otherwise supporting the SEF's 
conclusions. The Commission noted that proposed Sec.  37.1306(c) 
requires a SEF to provide sufficient documentation explaining the 
methodology used to compute its financial resource requirements. 
Therefore, if insurance coverage or other arrangements are necessary 
to explain a SEF's methodology, then the SEF must submit such 
documentation. The Commission noted, however, that such 
documentation may not be required in all cases; proposed Sec.  
37.1306(c)(2) provides minimum requirements.
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    The proposed requirement would create regulatory certainty by 
codifying the no-action relief, permitting SEFs to maintain their 
existing practices and avoid legal exposure arising out of a SEF's 
inability to comply with regulations.\122\ The proposed requirements 
would ensure that a SEF can establish that it has sufficient financial 
resources, particularly in light of the discretion provided to SEFs to 
compute projected operating costs and wind-down costs. The Commission 
noted its belief that maintaining the general obligation for each SEF 
to identify all of its expenses in its financial report, including 
those corresponding to activities not needed for compliance or 
otherwise are excluded or prorated from projected operating costs, is 
appropriate on an ongoing basis.\123\
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    \122\ See CFTC Staff Letter No. 17-25 at 4.
    \123\ 83 FR 62030.
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    The Commission further stated proposed Sec.  37.1306(c)(2)(i) 
through (iv) would address the current lack of adequate documentation 
or insufficient identification of excluded or prorated expenses by some 
SEFs in submitting their projected operating costs based on Commission 
staff guidance.\124\ The Commission predicted that adding greater 
specificity to the existing requirement would mitigate the time and 
resources required to determine a SEF's compliance with the financial 
resources requirements.\125\
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    \124\ Id.
    \125\ Id.
---------------------------------------------------------------------------

ii. Summary of Comments
    The Commission did not receive any comments on the proposed 
amendments to Sec.  37.1306(c).
iii. Final Rules
    The Commission is adopting the amendments to Sec.  37.1306(c) as 
proposed. The enhanced specificity in documentation requirements will 
save time and effort for both Commission and SEF personnel by reducing 
the need for multiple iterations of communications and submissions in 
order to assess a SEF's compliance with the financial resources 
requirements. The requirement to provide documentation of projected 
wind-down costs corresponds to the incorporation under the revised 
rules of wind-down costs into a SEF's liquidity requirement and the 
requirement to compute such costs in addition to operating costs.
3. Sec.  37.1306(d)
    Existing Sec.  37.1306(d) requires a SEF to file its financial 
report no later than 40 calendar days after the end of each of the 
SEF's first three fiscal quarters, and no later than 60 calendar days 
after the end of the SEF's fourth fiscal quarter, or at such later time 
as the Commission may permit.\126\ Multiple SEFs noted difficulties in 
meeting the 60-day deadline for the fourth-quarter report, explaining: 
``[a]t year end, finance departments are required to prepare annual and 
quarterly reports for all entities within a particular group. This 
requires information gathering from numerous sources, preparation of a 
consolidated audit, complying with various statutory reporting 
requirements, as well as budgeting and forecasting for the pending 
year.'' \127\ Noting the difficulties SEFs face in meeting their 
obligation to submit an annual compliance report concurrently with the 
fourth-quarter financial report, Commission staff provided no-action 
relief allowing 30 additional days for submission of a SEF's fourth-
quarter financial report and its annual compliance report.\128\
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    \126\ 17 CFR 37.1306(d).
    \127\ CFTC Staff Letter No. 17-61 (Nov. 20, 2017) (quoting no-
action relief request letter from 360 Trading Networks, Inc.; Cboe 
SEF, LLC (f/d/b/a Bats Hotspot SEF, LLC); Chicago Mercantile 
Exchange, Inc.; GTX SEF, LLC; LatAm SEF, LLC; LedgerX LLC; Tradition 
SEF, Inc.; and trueEX LLC).
    \128\ Id.
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i. Proposed Rules
    The Commission proposed to extend the due date for SEFs' fourth-
quarter report from 60 to 90 days following the end of the quarter. The 
revised due date would conform to the proposed revisions to the due 
date for the SEF annual compliance report under proposed Sec.  
37.1501(e)(2), discussed below. The Commission recognized that 
preparing multiple year-end reports for concurrent submission, 
including a fourth-quarter financial report and an annual compliance 
report, imposes resource constraints on SEFs.\129\ The Commission 
stated such potential constraints justify an additional 30 days to 
prepare and concurrently file the SEF's fourth-quarter financial report 
along with its annual compliance report.\130\
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    \129\ 83 FR 62030.
    \130\ Id.
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ii. Summary of Comments
    The Commission did not receive any comments on the proposed 
extension of the deadline for submission of the fourth-quarter 
financial report.
iii. Final Rules
    The extended deadline for fourth-quarter financial reports is being 
adopted as proposed. The Commission continues to believe the resource 
constraints facing SEFs at year-end justify an additional 30 days to 
prepare the fourth-quarter financial report. The Commission has not 
experienced difficulties in monitoring SEFs' financial condition as a 
result of the 30-day extension currently available under Commission 
staff no-action relief.
4. Sec.  37.1306(e)
i. Proposed Rules
    The Commission proposed to add a new Sec.  37.1306(e) requiring 
each SEF to provide notice to the Commission of its noncompliance with 
the financial resource requirements no later than 48 hours after the 
SEF knows or reasonably should know of its noncompliance.\131\ The 
Commission noted that in some instances, the Commission has not been 
informed of a SEF's noncompliance with the financial resource 
requirements until the filing of a quarterly financial report. Prompt 
notification of noncompliance is necessary for the Commission to 
conduct proper market oversight and ensure market stability on an 
ongoing basis.\132\ The proposed requirement would ensure the necessary 
prompt notification.
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    \131\ For example, if a SEF knows or reasonably should know that 
its assets will no longer cover its projected operating costs for 
the next twelve months, as calculated on a rolling basis, the SEF 
would be required to notify the Commission within 48 hours.
    \132\ 83 FR 62030.

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[[Page 9233]]

ii. Summary of Comments
    The Commission did not receive any comments on proposed Sec.  
37.1306(e).
iii. Final Rules
    The Commission is adopting Sec.  37.1306(e) as proposed. The 
Commission continues to believe prompt notification of noncompliance is 
necessary for it to perform its oversight functions and ensure market 
stability.

H. Sec.  37.1307--Delegation of Authority

    Existing Sec.  37.1307(a) delegates authority to the Director of 
DMO, or other staff as the Director may designate, to perform certain 
functions that are reserved to the Commission under the Core Principle 
13 regulations, including reviewing the methodology used to compute 
projected operating costs.\133\
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    \133\ 17 CFR 37.1307(a).
---------------------------------------------------------------------------

1. Proposed Rules
    The Commission proposed to amend Sec.  37.1307(a)(2) to 
additionally delegate the authority to review and make changes to the 
methodology used by a SEF to determine the market value of its 
financial resources under amended Sec.  37.1304 and the methodology 
that SEFs use to determine their wind-down costs under amended Sec.  
37.1305. Further, the Commission would delegate the ability to request 
and receive the additional documentation related to calculation 
methodologies required under Sec.  37.1306(c) and receive required 
notifications of noncompliance under Sec.  37.1306(e). The proposed 
amendments also include several additional technical amendments based 
on the proposed amendments to Core Principle 13 regulations, as 
described above.
2. Summary of Comments
    The Commission did not receive any comments on the proposed 
delegations of authority.
3. Final Rules
    The Commission is adopting the additional provisions for delegation 
of authority as proposed. These delegation provisions will facilitate 
prompt and efficient determinations of the adequacy of SEF financial 
resources, consistent with the existing delegation authority under 
Sec.  37.1307(a).

IV. Chief Compliance Officer Requirements

A. Background and Overview of Proposed Rules

    Statutory Core Principle 15 requires each SEF to designate a CCO 
and sets forth its corresponding duties.\134\ Among other 
responsibilities, the CCO is required to ensure that the SEF complies 
with the CEA and applicable rules and regulations, and is required to 
establish and administer required policies and procedures.\135\ Core 
Principle 15 also requires the CCO to prepare and file an ACR to the 
Commission.\136\ The Commission promulgated requirements under Sec.  
37.1501 to implement these requirements.\137\
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    \134\ 7 U.S.C. 7b-3(f)(15). The Commission codified Core 
Principle 15 under Sec.  37.1500. 17 CFR 37.1500.
    \135\ 7 U.S.C. 7b-3(f)(15)(B)(iv) through (v).
    \136\ 7 U.S.C. 7b-3(f)(15)(D).
    \137\ 17 CFR 37.1501.
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    The Proposed Rules set forth several amendments to Sec.  37.1501 
based on the Commission's experience since the part 37 implementation. 
These amendments streamline CCO requirements, allow SEF management to 
exercise discretion in CCO oversight, and simplify the preparation and 
submission of the ACR.

B. Sec.  37.1501(a)--Definitions

    Core Principle 15 requires the CCO to report directly to the SEF's 
``board [of directors]'' or ``senior officer'' \138\ and consult either 
to resolve conflicts of interest.\139\ Existing Sec.  37.1501(a) 
defines ``board of directors'' \140\ but does not define ``senior 
officer.'' \141\ In the SEF Core Principles Final Rule, the Commission 
stated it would not adopt a definition of ``senior officer,'' but noted 
the statutory term would only include the most senior executive officer 
of the legal entity registered as a SEF.\142\
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    \138\ 7 U.S.C. 7b-3(f)(15)(B)(i).
    \139\ 7 U.S.C. 7b-3(f)(15)(B)(iii).
    \140\ Section 37.1501(a) defines ``board of directors'' as the 
board of directors of a SEF, or for those SEFs whose organizational 
structure does not include a board of directors, a body performing a 
function similar to a board of directors. 17 CFR 37.1501(a).
    \141\ 17 CFR 37.1501(a). The CEA likewise does not define the 
term ``senior officer'' in this context.
    \142\ SEF Core Principles Final Rule at 33544.
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1. Proposed Rules
    The Commission proposed to relabel paragraph (a) as 
``Definitions,'' and define ``senior officer'' as the chief executive 
officer or other equivalent officer of the SEF. The Commission stated 
defining ``senior officer'' would clarify the permissible reporting 
lines for the CCO and provide specificity to the Commission's proposed 
amendments to the Core Principle 15 regulations, as described 
below.\143\ The Commission also proposed additional, technical changes.
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    \143\ 83 FR 62023.
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2. Summary of Comments
    WMBAA supports the proposed amendments to add a definition of 
senior officer.\144\
---------------------------------------------------------------------------

    \144\ 2019 WMBAA Letter at 23.
---------------------------------------------------------------------------

3. Final Rules
    The Commission is adopting Sec.  37.1501(a) as proposed. The 
Commission continues to believe the definition of senior officer will 
clarify a CCO's permissible reporting lines consistent with Core 
Principle 15.

C. Sec.  37.1501(b)--Chief Compliance Officer

    Existing Sec. Sec.  37.1501(b)-(c) set forth certain baseline 
requirements for the SEF CCO position. Commission regulation 
37.1501(b)--``Designation and qualifications of chief compliance 
officer''-- requires a SEF to designate an individual to serve as the 
CCO; requires the CCO to have the authority and resources to help 
fulfill the SEF's statutory and regulatory duties, including 
supervisory authority over compliance staff; and establishes minimum 
qualifications for the designated CCO.\145\ Commission regulation 
37.1501(c)--``Appointment, supervision, and removal of chief compliance 
officer''--establishes the respective authorities of the SEF board of 
directors and senior officer to designate, supervise, and remove a CCO; 
and requires the CCO to meet with the SEF's board of directors and 
regulatory oversight committee (``ROC'') on an annual and quarterly 
basis, respectively, and provide them with information as 
requested.\146\
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    \145\ 17 CFR 37.1501(b).
    \146\ 17 CFR 37.1501(c).
---------------------------------------------------------------------------

1. Proposed Rules
    The Commission proposed to amend, clarify, or eliminate various 
existing requirements under Sec.  37.1501(b) and (c) and consolidate 
the remaining provisions into Sec.  37.1501(b). The Commission proposed 
to eliminate rules that are duplicative of Core Principle 15, including 
requirements that a SEF designate a CCO \147\ and the CCO report 
directly to the board of directors or the senior officer.\148\ The 
Commission also proposed to eliminate the existing ROC-related 
requirements from part 37.\149\

[[Page 9234]]

Core Principle 15 does not require a SEF to establish a ROC and the 
Commission has not finalized a rule that establishes requirements for a 
ROC.
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    \147\ The Commission proposed to eliminate this requirement 
under existing Sec.  37.1501(b)(1), which the Commission proposed to 
retitle ``Authority of chief compliance officer'' from ``Chief 
compliance officer required.''
    \148\ The Commission proposed to eliminate this requirement 
under existing Sec.  37.1501(c)(2) because it is duplicative of 
statutory Core Principle 15.
    \149\ These requirements include a mandatory quarterly meeting 
with the ROC under existing Sec.  37.1501(c)(1)(iii), and the 
requirement that the CCO provide self-regulatory program information 
to the ROC under existing Sec.  37.1501 (c)(1)(iv).
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    Consistent with Core Principle 15, which requires a CCO to report 
to the SEF's board of directors or senior officer, the Commission 
proposed amendments under Sec.  37.1501(b) to allow a SEF's senior 
officer to have the same oversight responsibilities over the CCO as the 
board of directors. First, the Commission proposed to allow a CCO to 
consult with the board of directors or senior officer of the SEF as the 
CCO develops the SEF's policies and procedures.\150\ Second, the 
Commission proposed to allow a CCO to meet with the senior officer of 
the SEF on an annual basis, in lieu of an annual meeting with the board 
of directors.\151\ Third, the Commission proposed to allow a CCO to 
provide self-regulatory program information to the SEF's senior 
officer, in addition to the board of directors.\152\
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    \150\ The Commission proposed the amendment under proposed Sec.  
37.1501(b)(1)(i).
    \151\ The Commission proposed to renumber existing Sec.  
37.1501(c)(1)(iii) to Sec.  37.1501(b)(5), based on the proposed 
consolidation of existing paragraphs (b) and (c), amend the 
requirement as described, and title the paragraph ``Annual meeting 
with the chief compliance officer.''
    \152\ The Commission proposed to renumber existing Sec.  
37.1501(c)(1)(iv) to Sec.  37.1501(b)(6), based on the proposed 
consolidation of existing paragraphs (b) and (c), amend the 
requirement as described, title the paragraph ``Information 
requested of the chief compliance officer,'' and make additional, 
technical changes.
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    The Commission further proposed to eliminate the limitations on 
authority to remove a CCO, which currently restricts CCO removal 
authority to a majority of the board, or in the absence of a board, a 
senior officer.\153\ Instead, the Commission proposed a simplified 
requirement under proposed Sec.  37.1501(b) to establish that (i) the 
board or the senior officer may appoint or remove a CCO; \154\ and (ii) 
the SEF must notify the Commission within two business days of the 
appointment or removal (on an interim or permanent basis) of a 
CCO.\155\ Based on its experience, the Commission recognized that in 
many instances, the senior officer may be better positioned than the 
board of directors to provide day-to-day oversight of the SEF and the 
CCO, as well as to determine whether to remove a CCO.\156\ Therefore, 
consistent with Core Principle 15, the Commission believes a SEF's 
senior officer should have equivalent CCO oversight authority as the 
SEF's board of directors. This proposed amendment is consistent with 
Core Principle 15, which does not mandate a voting percentage to 
approve or remove a CCO. The Commission also believes these proposed 
amendments would allow a SEF to more appropriately designate, appoint, 
supervise, and remove a CCO based on the SEF's particular corporate 
structure, size, and complexity, and also continue to ensure a level of 
independence for a CCO consistent with Core Principle 15.\157\
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    \153\ The Commission proposed to eliminate this requirement 
under existing Sec.  37.1501(c)(3). In addition to the changes 
discussed herein, the Commission proposed to renumber existing Sec.  
37.1501(c)(1)(ii) to Sec.  37.1501(b)(4) and title the paragraph 
``Compensation of the chief compliance officer.''
    \154\ The Commission proposed to consolidate and amend the 
requirements under existing Sec.  37.1501(c)(1)(i) in part, which 
addresses the appointment of a CCO by the board or senior officer, 
with existing Sec.  37.1501(c)(3)(i), which currently addresses the 
removal of a CCO. Based on the proposed consolidation of existing 
paragraphs (b) and (c), the Commission proposed to renumber this 
consolidated provision to paragraph (b)(3), retitle the consolidated 
provision to ``Appointment and removal of chief compliance 
officer,'' and make additional, technical changes.
    \155\ The Commission notes that notification to the Commission 
of the appointment and removal of a CCO is currently required under 
existing Sec.  37.1501(c)(1)(i) and existing Sec.  
37.1501(c)(3)(ii), respectively. Based on the proposed consolidation 
of existing paragraphs (b) and (c), the Commission proposed to 
consolidate and amend these notification requirements, and renumber 
the consolidated requirement to Sec.  37.1501(b)(3)(i).
    \156\ 83 FR 62033.
    \157\ Id.
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    Based on the proposed consolidation of existing Sec.  37.1501(b) 
and (c), the Commission also proposed several technical amendments to 
the remaining provisions under proposed Sec.  37.1501(b), including the 
renumbering of certain existing provisions.\158\
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    \158\ The Commission proposed to renumber the requirements under 
existing Sec.  37.1501(b)(2)--``Qualifications of chief compliance 
officer''--to proposed Sec.  37.1501(b)(2)(i) and (ii). The 
Commission also proposed to retitle existing Sec.  
37.1501(c)(1)(ii), which specifies that the board or the senior 
officer must approve the CCO's compensation, to ``Compensation of 
the chief compliance officer.'' Based on the proposed consolidation 
of existing Sec.  37.1501(b) and (c), the Commission proposed to 
renumber this requirement to Sec.  37.1501(b)(4).
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2. Proposed Acceptable Practice
    The Commission proposed to adopt a new acceptable practice to Core 
Principle 15 in Appendix B providing, in determining whether the 
background and skills of a potential CCO are appropriate for fulfilling 
the responsibilities of the role of the CCO, a SEF has the discretion 
to base its determination on the totality of the qualifications of the 
potential CCO, including, but not limited to, compliance experience, 
related career experience, training, and any other relevant factors 
related to the position. The Commission stated a non-exclusive list 
provides the clarity that SEFs sought regarding a CCO's requisite 
qualifications, and also provides a board of directors and senior 
officer reasonable flexibility in appointing a CCO.\159\ The proposed 
acceptable practice also states a SEF should be especially vigilant 
regarding potential conflicts of interest when appointing a CCO.
---------------------------------------------------------------------------

    \159\ 83 FR 62033.
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3. Summary of Comments
    WMBAA supports the proposed amendments to Sec.  37.1501(b) and (c). 
According to WMBAA, the Commission's revised rules should eliminate 
duplicative or unnecessary requirements, streamline existing 
provisions, and thereby allow SEFs to meet their statutory and 
regulatory obligations in a more effective and less burdensome 
manner.\160\
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    \160\ 2019 WMBAA Letter at 24.
---------------------------------------------------------------------------

4. Final Rules and Acceptable Practice
    The Commission is adopting the amendments to Sec.  37.1501(b) and 
(c) as proposed. These changes will mitigate potential confusion by 
removing requirements that are duplicative of provisions in Core 
Principle 15 and references to governance structures, such as the ROC, 
that are not required by statute or regulation. The Commission believes 
the amendments granting the SEF's senior officer additional oversight 
authority over the CCO better reflects the reality that the senior 
officer is often better-positioned than the board of directors to 
facilitate a CCO's effectiveness on a day-to-day basis, while still 
maintaining the CCO's independence to an appropriate degree.
    Further, the acceptable practice on qualifications of a CCO will 
provide SEFs with additional clarity on appropriate considerations in 
selecting a CCO, without limiting permissible considerations to the 
enumerated list. As stated in the acceptable practice, the Commission 
continues to stress the importance of considering potential conflicts 
of interest in appointing a CCO.

D. Sec.  37.1501(c)--Duties of Chief Compliance Officer 161
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    \161\ The Commission is renumbering existing Sec.  37.1501(d) to 
Sec.  37.1501(c).
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    Existing Sec.  37.1501(d)--``Duties of chief compliance officer''-- 
requires a CCO, at a minimum, to: (i) Oversee and review the SEF's 
compliance with the Act and Commission regulations; \162\ (ii) resolve 
any conflicts of interest that may

[[Page 9235]]

arise, including in certain enumerated circumstances; \163\ (iii) 
establish and administer written policies and procedures reasonably 
designed to prevent violations of the Act and Commission regulations; 
\164\ (iv) take reasonable steps to ensure compliance with the Act and 
Commission regulations; \165\ (v) establish procedures for the 
remediation of noncompliance issues identified by the CCO through 
certain specified protocols; \166\ (vi) establish and follow 
appropriate procedures for the handling, management response, 
remediation, retesting, and closing of noncompliance issues; \167\ 
(vii) establish and administer a compliance manual and a written code 
of ethics; \168\ (viii) supervise a SEF's self-regulatory program; 
\169\ and (ix) supervise the effectiveness and sufficiency of any 
regulatory services provided to the SEF in accordance with Sec.  
37.204.\170\
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    \162\ 17 CFR 37.1501(d)(1).
    \163\ 17 CFR 37.1501(d)(2). A CCO is specifically required to 
address conflicts between (i) business considerations and compliance 
requirements; (ii) business considerations and the requirement that 
the SEF provide fair, open, and impartial access under Sec.  37.202; 
and (iii) a SEF's management and board members. 17 CFR 
37.1501(d)(2)(i) through (iii).
    \164\ 17 CFR 37.1501(d)(3).
    \165\ 17 CFR 37.1501(d)(4).
    \166\ 17 CFR 37.1501(d)(5).
    \167\ 17 CFR 37.1501(d)(6).
    \168\ 17 CFR 37.1501(d)(7).
    \169\ 17 CFR 37.1501(d)(8).
    \170\ 17 CFR 37.1501(d)(9).
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1. Proposed Rules
    The Commission proposed to consolidate certain existing provisions 
of Sec.  37.1501(d) (to be renumbered as Sec.  37.1501(c)), specify a 
CCO may identify noncompliance matters through ``any means'' in 
addition to the currently prescribed means, and clarify that the 
procedures followed to address noncompliance issues must be 
``reasonably designed'' by the CCO to handle, respond, remediate, 
retest, and resolve noncompliance issues identified by the CCO.\171\ 
The Proposed Rules acknowledged that a CCO may not be able to design 
procedures that detect all possible noncompliance issues and noted that 
a CCO may utilize a variety of resources to identify noncompliance 
issues beyond a limited set of means.
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    \171\ Existing paragraph Sec.  37.1501(d)(5) requires a CCO to 
establish procedures for remediation of noncompliance issues 
identified through a compliance office review, look-back, internal 
or external audit finding, self-reported error, or validated 
complaint. Existing paragraph Sec.  37.1501(d)(6) requires a CCO to 
establish and follow appropriate procedures for the handling, 
management response, remediation, retesting, and closing of 
noncompliance issues. The Commission proposed to consolidate and 
amend these requirements, and renumber the consolidated requirement 
to paragraph Sec.  37.1501(c)(5).
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    The Commission also proposed to amend the CCO's duty to resolve 
conflicts of interest.\172\ First, the CCO would be required to take 
``reasonable steps'' to resolve ``material'' conflicts of interest that 
may arise.\173\ This proposed amendment reflects the Commission's view 
that the current requirement is overly broad and impractical because a 
CCO cannot be reasonably expected to successfully resolve every 
potential conflict of interest that may arise. The Commission further 
proposed to eliminate the existing enumerated conflicts of interest to 
avoid any inference that they are an exhaustive list of conflicts that 
a CCO must address.\174\
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    \172\ The Commission proposed to renumber existing Sec.  
37.1501(d)(2), which addresses the CCO's duty to resolve conflicts 
of interest, to Sec.  37.1501(c)(2) and amend the requirement as 
described.
    \173\ The Commission also proposed to eliminate ``a body 
performing a function similar to the board of directors'' under 
proposed Sec.  37.1501(c)(2) (existing Sec.  37.1501(d)(2)), as this 
phrase is already included in the definition of ``board of 
directors'' under Sec.  37.1501(a).
    \174\ These provisions are currently set forth under existing 
Sec.  37.1501(d)(2)(i) through (iii). The Commission also proposed 
additional, technical changes to existing Sec.  37.1501(d), (d)(1), 
d(7) and d(8), to renumber them as Sec.  37.1501(c), (c)(1), (c)(6) 
and (c)(7), respectively and to renumber existing paragraph Sec.  
37.1501(c)(9) as Sec.  37.1501(c)(8).
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    The Commission stated these proposed amendments would not weaken 
the CCO's statutory duty to address conflicts of interest, but rather 
reflect the CCO's practical ability to detect and resolve 
conflicts.\175\ Moreover, the proposed amendments reflected the 
Commission's belief that a CCO should have discretion to determine the 
conflicts that are material to the SEF's ability to comply with the Act 
and the Commission's regulations.\176\
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    \175\ 84 FR 62034.
    \176\ Id.
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2. Summary of Comments
    WMBAA supports the proposed changes to the CCO's duties.\177\
---------------------------------------------------------------------------

    \177\ 2019 WMBAA Letter at 25.
---------------------------------------------------------------------------

3. Final Rules
    The amendments are being finalized as proposed, with one exception. 
The Commission notes the list of potential conflicts that a CCO should 
resolve under existing Sec.  37.1500(d)(2) does not create an inference 
that they are an exhaustive list of conflicts that a CCO must address 
but, instead, provides useful examples, and the list will not be 
eliminated as proposed.\178\ The Commission continues to believe the 
amendments do not weaken the CCO's duties to identify and address 
conflicts of interest. Rather, the amendments reflect the practical 
reality that, in the Commission's experience, a CCO cannot be 
reasonably expected to successfully detect and resolve every potential 
conflict of interest that may arise.
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    \178\ The list will be re-designated as Sec.  37.1501(c)(2)(i) 
through (iv).
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E. Sec.  37.1501(d)--Preparation of Annual Compliance Report 
<SUP>179</SUP>
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    \179\ The Commission is renumbering existing Sec.  37.1501(e) to 
Sec.  37.1501(d).
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    Existing Sec.  37.1501(e)--``Preparation of annual compliance 
report''--requires the CCO to annually prepare and sign an ACR that, at 
a minimum, (i) describes the SEF's written policies and procedures, 
including the code of ethics and conflicts of interest policies; \180\ 
(ii) reviews the SEF's compliance with the Act and Commission 
regulations in conjunction with the SEF's policies and procedures; 
\181\ (iii) provides a self-assessment of the effectiveness of the 
SEF's policies and procedures, including areas of improvement and 
related recommendations for the SEF's compliance program or resources; 
\182\ (iv) lists material changes to the policies and procedures; \183\ 
(v) describes the SEF's financial, managerial, and operational 
resources, including compliance program staffing and resources, a 
catalogue of investigations and disciplinary actions, and a review of 
the disciplinary committee's performance; \184\ (vi) describes any 
material compliance matters identified through certain enumerated 
mechanisms (e.g., compliance office review or lookback), and explains 
how they were resolved; \185\ and (vii) certifies that, to the best of 
the CCO's knowledge and reasonable belief and under penalty of law, the 
ACR report is accurate and complete.\186\
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    \180\ 17 CFR 37.1501(e)(1).
    \181\ 17 CFR 37.1501(e)(2)(i).
    \182\ 17 CFR 37.1501(e)(2)(ii) through (iii).
    \183\ 17 CFR 37.1501(e)(3).
    \184\ 17 CFR 37.1501(e)(4).
    \185\ 17 CFR 37.1501(e)(5).
    \186\ 17 CFR 37.1501(e)(6).
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    After part 37 was implemented, the Commission gained experience and 
received feedback on the ACR requirements. The Commission determined 
that some of the required ACR content provides it with minimal 
meaningful insight into a SEF's compliance program. For example, some 
of the content is duplicative of information obtained by the Commission 
from other reporting channels, such as the system-related information 
that a SEF must file pursuant to Core Principle 14 and rule 
certifications filed pursuant to part 40 of

[[Page 9236]]

the Commission's regulations.\187\ Various SEF CCOs also have provided 
feedback that certain ACR content requires substantial time to prepare 
and includes some information that does not change frequently.\188\ 
SEFs requested that the Commission simplify those requirements and 
provide additional time to file the reports. To this end, the 
Commission notes many SEFs have not provided sufficient assessments 
whether their respective policies and procedures (e.g., rulebooks, 
compliance manuals, conflict of interest policies, codes of ethics, 
governance documentation, and third-party service agreements) comply 
with the Act and Commission regulations.
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    \187\ Among other information required to be submitted to the 
Commission pursuant to part 40, a SEF is required to provide the 
Commission with amendments to its rulebook and compliance manual.
    \188\ See CFTC Staff Letter No. 17-61 (citing testimonials from 
SEFs that the preparation of an ACR requires an extensive 
information-gathering process, including review and documentation of 
information gathered on an entity-wide basis).
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1. Proposed Rules
    Based upon its experience in reviewing ACRs, the Commission 
proposed certain amendments to eliminate duplicative or unnecessary 
information requirements and streamline existing requirements, thereby 
reducing unnecessary regulatory burdens and compliance costs associated 
with certain aspects of ACRs. The Commission also proposed certain 
amendments to enhance the usefulness of ACRs by enabling the Commission 
to better assess the effectiveness of a SEF's compliance and self-
regulatory programs.
    Under the proposed approach, a SEF would no longer need to include 
in its ACR either a review of all the Commission regulations applicable 
to a SEF or an identification of the written policies and procedures 
designed to ensure compliance with the Act and Commission 
regulations.\189\ Instead, under proposed Sec.  1501(d)(1), a SEF would 
be required to include in the ACR a description and self-assessment of 
the effectiveness of the SEF's written policies and procedures to 
``reasonably ensure'' compliance with the Act and applicable Commission 
regulations. The Commission stated its belief that this approach is 
more closely aligned with the corresponding provisions of Core 
Principle 15 and would still allow the Commission to properly assess 
the SEF's compliance and self-regulatory programs.\190\ Similarly, the 
Commission also proposed to eliminate a required discussion of the 
SEF's compliance staffing and structure; a catalogue of investigations 
and disciplinary actions taken over the last year; and a review of 
disciplinary committee and panel performance.\191\ A SEF would continue 
to be required to describe in its ACR the SEF's financial, managerial, 
and operational resources set aside for compliance.\192\ By refining 
the scope of information a SEF would be required to include in its ACR, 
the Commission intended to allow SEFs to devote their resources to 
providing more detailed--and ultimately better-quality--information 
that will better facilitate assessments of compliance.
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    \189\ The Commission proposed to eliminate these requirements in 
the introductory language of existing Sec.  1501(e)(2) and Sec.  
1501(e)(2)(i).
    \190\ 83 FR 62035. As proposed, a SEF would continue to be 
required to describe the SEF's written policies and procedures, 
consistent with Core Principle 15. In addition to the required 
description, the Commission proposed to consolidate and amend 
existing Sec.  37.1501(e)(2)(ii), which requires a SEF to provide in 
the ACR a self-assessment as to the effectiveness of its policies 
and procedures, with existing Sec.  37.1501(e)(1), and renumber the 
consolidated requirement to Sec.  37.1501(d)(1). Further, the 
Commission proposed to consolidate and amend existing Sec.  
37.1501(e)(2)(iii), which requires an ACR to discuss areas for 
improvement and recommend potential or prospective changes or 
improvements to a SEF's compliance program and resources, with 
existing Sec.  37.1501(e)(3) and renumber the consolidated 
requirement to Sec.  37.1501(d)(2). The Commission expects the CCO 
will provide more nuanced and in-depth discussions through these 
consolidated provisions, rather than merely providing generalized 
responses.
    \191\ The Commission proposed to eliminate these requirements 
under existing Sec.  37.1501(e)(4).
    \192\ The Commission proposed to renumber the remaining 
requirements under existing Sec.  37.1501(e)(4) to Sec.  
37.1501(d)(3) and adopt technical amendments.
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    To enhance the Commission's ability to assess a SEF's written 
policies and procedures regarding compliance matters, the Commission 
also proposed to require a SEF to discuss only material noncompliance 
matters and explain the corresponding actions taken to resolve such 
matters.\193\ The Commission stated requiring SEFs to focus on 
describing material noncompliance matters, rather than describing all 
compliance matters in similar depth, would streamline this requirement 
and provide more useful information to the Commission.\194\ Further, 
the Commission proposed to eliminate the enumerated mechanisms for 
identifying noncompliance issues, conforming to the ability of a CCO to 
establish procedures to identify noncompliance issues through ``any 
means,'' as described above.\195\
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    \193\ The Commission proposed to renumber this requirement under 
existing Sec.  37.1501(e)(5) to Sec.  37.1501(d)(4) and adopt the 
amendments as described above and additional, technical changes.
    \194\ 83 FR 62035.
    \195\ See Section IV.D., supra. The Commission proposed to 
eliminate these enumerated mechanisms from the ACR requirements 
under existing paragraph (e)(5).
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    Consistent with these proposed amendments, the Commission also 
proposed to limit a SEF CCO's certification of an ACR's accuracy and 
completeness to ``all material respects'' of the report.\196\ The 
Commission recognized CCOs have been hesitant to certify that an entire 
ACR is accurate and complete under the penalty of the law, without 
regard to whether a potential inaccuracy or omission would be a 
material error or not. The Commission believed the proposed change 
would appropriately address SEF CCOs' concerns regarding potential 
liability while ensuring the material accuracy of an ACR submitted to 
the Commission.\197\
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    \196\ The Commission proposed to renumber existing Sec.  
37.1501(e)(6) to Sec.  37.1501(d)(5) and amend the requirement as 
described.
    \197\ 83 FR 62035.
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2. Summary of Comments
    Refinitiv and WMBAA support the proposed amendments to the 
preparation of the ACR.\198\ Refinitiv believes the ACR is unduly 
burdensome to prepare in its current form in comparison to the 
regulatory benefits of much of the information required to be provided; 
and the proposed amendments would more closely harmonize a SEF's ACR 
requirements with ACR requirements for a swap dealers or futures 
commission merchants. Refinitiv supports the proposal to eliminate the 
requirement to include a chart identifying a specific policy or 
procedure reasonably designed to ensure compliance with each individual 
regulation and paragraph of a regulation. In Refinitiv's view, the 
proposed requirements regarding CCO reports would ensure a proper 
compliance review on an annual basis without the unnecessary costs 
incurred in connection with producing such a chart.
---------------------------------------------------------------------------

    \198\ 2019 WMBAA Letter at 25-26; Refinitiv Letter at 14.
---------------------------------------------------------------------------

3. Final Rules
    The Commission is adopting the amended requirements for preparation 
of an ACR as proposed. The streamlined content requirements will allow 
SEF CCOs to focus on providing complete and accurate information on the 
compliance matters that are most critical to the Commission's oversight 
of SEFs, and allow the Commission to conduct a more efficient and 
effective

[[Page 9237]]

review of an ACR and assessment of a SEF's compliance.

F. Sec.  37.1501(e)--Submission of Annual Compliance Report and Related 
Matters <SUP>199</SUP>
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    \199\ The Commission is renumbering existing Sec.  37.1501(f) to 
Sec.  37.1501(e).
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    Existing Sec.  37.1501(f)(1) requires a CCO to provide the ACR to 
the board or, in the absence of a board, the senior officer for 
review.\200\ The board of directors and senior officer may not require 
the CCO to change the ACR.\201\ The SEF's board minutes, or a similar 
written record, must reflect the submission of the ACR to the board of 
directors or senior officer and any subsequent discussion of the 
report.\202\ Additionally, the SEF must concurrently file the ACR and 
the fourth-quarter financial statements with the Commission within 60 
calendar days of the end of the SEF's fiscal year end.\203\ The CCO 
must certify and promptly file an amended ACR with the Commission upon 
the discovery of any material error or omission in the report.\204\ A 
SEF may request an extension of the ACR filing deadline based on 
substantial, undue hardship in filing the ACR on time.\205\
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    \200\ 17 CFR 37.1501(f)(1).
    \201\ Id.
    \202\ Id.
    \203\ 17 CFR 37.1501(f)(2).
    \204\ 17 CFR 37.1501(f)(3).
    \205\ 17 CFR 37.1501(f)(4).
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1. Proposed Rules
    The Commission proposed several amendments to the ACR submission 
procedures. First, the Commission proposed to provide SEFs with an 
additional 30 days to file the ACR with the Commission, but no later 
than 90 calendar days after a SEF's fiscal year end.\206\ The 
Commission recognized that in addition to the ACR, SEFs have other 
reporting obligations, such as the fourth-quarter financial report 
required to be submitted under Core Principle 13 and other year-end 
reports; and SEFs have indicated that these multiple reporting 
obligations present resource constraints on SEFs and their CCOs.\207\ 
In addition to an extended deadline, the Commission proposed to replace 
the ``substantial and undue hardship'' standard required for filing ACR 
extensions with a ``reasonable and valid'' standard.\208\ Further, the 
Commission proposed to eliminate the requirement that each SEF must 
document the submission of the ACR to the SEF's board of directors or 
senior officer in board minutes or some other similar written 
record,\209\ noting that the Core Principle 15 recordkeeping 
requirement under proposed Sec.  37.1501(f), discussed below, would 
incorporate this requirement.\210\ The Commission also proposed to 
require the CCO to submit an amended ACR to the SEF's board of 
directors--or, in the absence of a board of directors, the senior 
officer of the SEF--for review prior to submitting the amended ACR to 
the Commission; this approach is the same as the requirements that 
exist for submitting an initial ACR.\211\
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    \206\ The Commission proposed to renumber existing Sec.  
37.1501(f)(2) to Sec.  37.1501(e)(2), amend the requirement as 
described, and adopt additional, technical amendments to the 
existing language. The Commission also proposed to add a title to 
this paragraph--``Submission of annual compliance report to the 
Commission.''
    \207\ 83 FR 62036.
    \208\ The Commission proposed to renumber existing Sec.  
37.1501(f)(4) to Sec.  37.1501(e)(4) and amend the provision as 
described. The Commission also proposed to add a title--``Request 
for extension.''
    \209\ The Commission proposed to eliminate this requirement 
under existing paragraph (f)(1).
    \210\ Existing Sec.  37.1501(g) sets forth recordkeeping 
requirements for SEFs related to the CCO's duties. As discussed 
below, the Commission is amending those requirements.
    \211\ The Commission proposed to renumber existing Sec.  
37.1501(f)(3) to Sec.  37.1501(e)(3) and add a title--``Amendments 
to annual compliance report.'' The Commission proposed to adopt this 
requirement under Sec.  37.1501(e)(3)(i). Under proposed Sec.  
37.1501(e)(3)(ii), an amended ACR would be subject to the amended 
certification requirement, i.e., a CCO must certify that the ACR is 
accurate and complete in all material respects. The Commission also 
proposed to renumber existing Sec.  37.1501(f) to Sec.  37.1501(e) 
and change the title to ``Submission of annual compliance report and 
related matters.'' The Commission also proposed to renumber existing 
Sec.  37.1501(f)(1) to Sec.  37.1501(e)(1), adopt additional, 
technical amendments to the existing language, and add a title--
``Furnishing the annual compliance report prior to submission to the 
Commission.''
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2. Summary of Comments
    WMBAA supports the proposed amendments to the ACR submission 
requirements.\212\
---------------------------------------------------------------------------

    \212\ 2019 WMBAA Letter at 27.
---------------------------------------------------------------------------

3. Final Rules
    The amendments to the ACR submission requirements are being 
finalized as proposed. Given other relevant end-of-year reporting 
requirements, including the SEF's required fourth-quarter financial 
report (as well as any reporting required of the SEF's affiliates under 
other regulatory regimes), the Commission continues to believe a 30-day 
extension of the submission timeline and a less stringent ``reasonable 
and valid'' standard for further extensions will facilitate more 
accurate and useful reporting to the Commission.\213\ The additional 
requirements for board of directors or senior officer review of an 
amended ACR will likewise foster increased accuracy and precision in 
regulatory reporting.
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    \213\ A SEF requesting an extension must identify the 
circumstances creating a reasonable and valid need for the 
extension. The Commission--and, when exercising the delegated 
authority discussed below, the Director of the Division of Market 
Oversight--reserves the discretion to determine that the rationale 
proffered by the SEF is not objectively reasonable and valid.
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G. Sec.  37.1501(f)--Recordkeeping <SUP>214</SUP>
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    \214\ The Commission is renumbering existing paragraph (g) to 
paragraph (f).
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    Existing Sec.  37.1501(g)(1) requires a SEF to maintain a copy of 
written policies and procedures adopted in furtherance of compliance 
with the Act and the Commission's regulations; \215\ copies of all 
materials created in furtherance of the CCO's duties under existing 
Sec.  37.1501(d)(8) and (9); \216\ copies of all materials in 
connection with the review and submission of the ACR; \217\ and any 
records relevant to the ACR.\218\ Existing Sec.  37.1501(g)(2) requires 
the SEF to maintain these records in accordance with Sec.  1.31 and 
part 45 of the Commission's regulations.\219\
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    \215\ 17 CFR 37.1501(g)(1)(i).
    \216\ 17 CFR 37.1501(g)(1)(ii).
    \217\ 17 CFR 37.1501(g)(1)(iii).
    \218\ 17 CFR 37.1501(g)(1)(iv).
    \219\ 17 CFR 37.1501(g)(2).
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1. Proposed Rules
    The Commission proposed to streamline the recordkeeping 
requirements that pertain to the CCO's duties and the preparation and 
submission of the ACR. Specifically, the Commission proposed to revise 
Sec.  37.1501(f) to require a SEF to keep all records demonstrating 
compliance with the duties of the CCO and the preparation and 
submission of the ACR consistent with the recordkeeping requirements 
under Sec. Sec.  37.1000 and 37.1001.\220\
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    \220\ 17 CFR 37.1501(f); 17 CFR 37.1000 and 37.1001.
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2. Summary of Comments
    The Commission did not receive any comments on the proposed 
amendments to the CCO's recordkeeping requirements.
3. Final Rules
    The Commission is adopting the recordkeeping requirements as 
proposed. The Commission believes the simplified requirements will 
better ensure access to relevant compliance information.

[[Page 9238]]

H. Sec.  37.1501(g)--Delegation of Authority <SUP>221</SUP>
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    \221\ The Commission is renumbering existing Sec.  37.1501(h) to 
Sec.  37.1501(g).
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    Existing Sec.  37.1501(h)--``Delegation of authority''--delegates 
the authority to grant or deny a SEF's request for an extension of time 
to file its ACR to the Director of DMO.\222\ In addition to renumbering 
this provision based on the amendments described above, the Commission 
proposed to adopt additional, technical amendments that conform to the 
proposed amendments to the Core Principle 15 regulations discussed 
above. The Commission received no comments on the proposal and is 
adopting the amendments as proposed.
---------------------------------------------------------------------------

    \222\ 17 CFR 37.1501(h).
---------------------------------------------------------------------------

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires federal agencies, 
in promulgating rules, to consider the impact of those rules on small 
entities.\223\ The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on small entities in accordance with 
the RFA.\224\ The changes to part 37 adopted herein would have a direct 
effect on the operations of SEFs. The Commission has previously 
certified that SEFs \225\ are not small entities for purpose of the 
RFA. Accordingly, the Commission does not believe the Final Rules will 
have a significant economic impact on a substantial number of small 
entities. Therefore, the Chairman, on behalf of the Commission, 
pursuant to 5 U.S.C. 605(b), hereby certifies that the Final Rules will 
not have a significant economic impact on a substantial number of small 
entities.
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    \223\ See 5 U.S.C. 601 et seq.
    \224\ See Policy Statement and Establishment of ``Small 
Entities'' for purposes of the Regulatory Flexibility Act, 47 FR 
18618 (Apr. 30, 1982).
    \225\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476, 33548 (June 4, 2013).
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B. Paperwork Reduction Act

1. Background
    The Paperwork Reduction Act of 1995 (``PRA'') \226\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring a collection of 
information as defined by the PRA. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number issued 
by the Office of Management and Budget (``OMB'').
---------------------------------------------------------------------------

    \226\ 44 U.S.C. 3501 et seq.
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    The rule amendments adopted herein will result in the revision of a 
collection of information for which the Commission has previously 
received a control number from OMB: OMB Control Number 3038-0074, Core 
Principles and Other Requirements for Swap Execution Facilities. The 
responses to this collection of information are mandatory.
    The Commission did not receive any comments regarding its PRA 
burden analysis in the preamble to the notice of proposed rulemaking. 
The Commission is revising information collection number 3038-0074 to 
reflect the adoption of amendments to part 37 of its regulations, as 
discussed below, but does not believe the regulations as adopted impose 
any other new collections of information that require approval of OMB 
under the PRA.
2. New Information Collection Requirements and Related Burden Estimates 
\227\
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    \227\ This discussion does not include information collection 
requirements that are included under other Commission regulations 
and related OMB control numbers. Specifically, the discussion does 
not include OMB control number 3038-0052, which covers, among other 
things, information collections arising in part 38 (other than the 
information collections related to Sec.  38.12) or OMB control 
number 3038-0099, which covers the information collections related 
to the ``available to trade'' determination (MAT determination) 
process under Sec. Sec.  37.10 and 38.12.
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    Currently, there are approximately 19 SEFs registered with the 
Commission that may be impacted by this rulemaking and, in particular, 
the collection of information contained herein and discussed below.
i. Audit Trail Requirements Related to Post-Execution Allocation 
Information
    Existing Sec.  37.205(a) requires a SEF to capture and retain all 
audit trail data necessary to detect, investigate, and prevent customer 
and market abuses. Existing Sec.  37.205(b)(2)(iv) requires a SEF's 
audit trail program to include an electronic transaction history 
database that identifies, among other things, each account to which 
order fills are allocated. The Commission proposed to eliminate the 
requirements in Sec.  37.205(a) and (b)(2)(iv) that a SEF capture post-
execution allocation information in its audit trail. Instead, the 
Commission proposed to require that SEFs capture in their audit trail 
information only through execution on the SEF. The Commission is 
adopting the amendments as proposed.
    As noted in the Proposed Rules, to the extent that the Commission 
is providing SEFs with greater discretion in fulfilling their 
information collection obligations with respect to audit trail 
requirements under Sec.  37.205, the Commission estimates and assumes 
SEFs will continue to fulfill their information collection burdens in a 
manner similar to the status quo. Accordingly, amended Sec.  37.205(a) 
and (b) will not substantively or materially affect a SEF's total 
information collection burden hours. With respect to Sec.  37.205(a), 
the Commission's proposal to eliminate such information collections 
will not result in a net change to a SEF's aggregate burden hours 
because the 2016 Part 37 PRA Renewal already considered such relief and 
non-compliance with such requirements in its revised estimate.
ii. Financial Resources Requirements
    Core Principle 13 requires a SEF to have adequate financial, 
operational, and managerial resources to discharge its 
responsibilities. To achieve financial resource adequacy, a SEF must 
maintain financial resources sufficient to cover its operating costs 
for a period of at least one year, calculated on a rolling basis. The 
Commission implemented Core Principle 13 by adopting Sec. Sec.  37.1301 
through 37.1307 to specify: (i) The eligible types of financial 
resources that may be counted toward compliance (Sec.  37.1302); (ii) 
the computation of projected operating costs (Sec.  37.1303); (iii) 
valuation requirements (Sec.  37.1304); (iv) a liquidity requirement 
for those financial resources that is equal to six months of a SEF's 
operating costs (Sec.  37.1305); and (v) reporting obligations (Sec.  
37.1306). These regulations are intended to ensure that a SEF has 
financial strength sufficient to discharge its responsibilities, 
maintain market continuity, and withstand unpredictable market events.
    The Commission proposed several amendments to the Core Principle 13 
regulations to achieve a better balance between ensuring SEF financial 
stability, promoting SEF growth and innovation, and reducing 
unnecessary costs. The proposed rules: (i) Clarify the scope of 
operating costs that a SEF must cover with adequate financial 
resources; (ii) set forth acceptable practices, based on existing 
Commission staff guidance, that address the discretion that a SEF has 
when calculating projected operating costs pursuant to proposed Sec.  
37.1304; (iii) amend the existing six-month liquidity requirement for 
financial resources held by a SEF; and (iv) streamline requirements 
with respect to financial reports filed with

[[Page 9239]]

the Commission. The Commission also proposed amendments to clarify 
certain existing requirements, including the renumbering of several 
provisions to present the requirements in a more cohesive manner.
    The Commission is adopting the amendments to Sec. Sec.  37.1301 
through 37.1307 as proposed. With respect to two questions posed in the 
notice of proposed rulemaking, the Commission will not adopt the 
requirement that financial statements be audited, and the Commission 
will retain the existing quarterly reporting requirement for SEFs, 
rather than moving to a semiannual reporting requirement.
    As stated in the notice of proposed rulemaking, the Commission 
estimates the amendment to Sec.  37.1301(b) will decrease the annual 
recurring information collection burden hours by five burden hours; the 
amendment to Sec.  37.1306 will increase the annual recurring 
information collection burden hours by 10 burden hours and not impose 
an initial, non-recurring burden; and the amendment to Sec.  37.1306(c) 
will impose an initial, non-recurring information collection of 20 
burden hours and five annual recurring information collection burden 
hours after the initial year to update the information. Other than as 
discussed above, the Commission believes the amendment to Sec.  
37.1306(c) will not impose new information collection burdens on SEFs 
or substantively or materially modify existing burdens.
iii. Chief Compliance Officer Requirements
    Statutory Core Principle 15 requires each SEF to designate a CCO 
and sets forth its corresponding duties. Among other responsibilities, 
the CCO is required to ensure the SEF complies with the CEA and 
applicable rules and regulations, and to establish and administer 
required policies and procedures. Core Principle 15 also requires the 
CCO to prepare and file an ACR to the Commission. The Commission 
promulgated requirements under Sec.  37.1501 to implement these 
requirements.
    The Commission proposed several amendments to Sec.  37.1501 based 
on the Commission's experience since the part 37 implementation. These 
amendments streamline CCO requirements; allow SEF management to 
exercise discretion in CCO oversight; and simplify the preparation and 
submission of the ACR. Specifically, the proposed changes: (i) Add the 
definition of ``senior officer;'' (ii) eliminate the existing ROC-
related requirements; (iii) allow the SEF's senior officer to have the 
same oversight responsibilities over the CCO as the board; (iv) 
eliminate the limitations on authority to remove the CCO, which 
currently restricts that removal authority to a majority of the board, 
or in the absence of a board, the senior officer; (v) add a new 
acceptable practice to Core Principle 15 in Appendix B associated with 
Sec.  37.1501(b)(2)(i), which requires the CCO to have the background 
and skills appropriate to the position and states that a SEF should be 
especially vigilant regarding potential conflicts of interest when 
appointing the CCO; (vi) adopt several amendments to clarify and 
streamline the CCO's duties, including refining the scope of the CCO's 
duty to taking only ``reasonable steps'' to resolve ``material'' 
conflicts of interest that may arise; and (vii) make other amendments, 
including elimination of duplicative rules and renumbering and 
consolidation of existing provisions. The amendments are being 
finalized as proposed, with one exception. The Commission is not 
eliminating the list of potential conflicts that the CCO should resolve 
under existing Sec.  37.1501(d)(2).
    With respect to the ACR, existing Sec.  37.1501(e) requires the CCO 
to prepare and sign annually an ACR that, at a minimum: (i) Describes 
the SEF's written policies and procedures; (ii) reviews the SEF's 
compliance with the Act and Commission regulations; (iii) provides a 
self-assessment of the effectiveness of the SEF's policies and 
procedures; (iv) lists material changes to the policies and procedures; 
(v) describes the SEF's financial, managerial, and operational 
resources; (vi) describes any material compliance matters identified 
through certain enumerated mechanisms and explains how they were 
resolved; and (vii) certifies that, to the best of the CCO's knowledge 
and reasonable belief and under penalty of law, the ACR is accurate and 
complete.
    The Commission proposed several amendments to simplify the ACR 
submission procedures including: Providing SEFs with an additional 30 
days to file the ACR with the Commission, but no later than 90 calendar 
days after a SEF's fiscal year end, and requiring the CCO to submit an 
amended ACR to the SEF's board or, in the absence of a board, the 
senior officer of the SEF, for review prior to submitting the amended 
ACR to the Commission. The proposed rules also would streamline the 
recordkeeping requirements that pertain to the CCO's duties and the 
preparation and submission of the ACR. The amendments to the ACR 
preparation, submission and recordkeeping requirements are being 
adopted and finalized as proposed.
    As stated in the notice of proposed rulemaking, the Commission 
estimates the amendment to Sec.  37.1501(d) will reduce annual 
recurring information collection burden hours by approximately 10 
burden hours per SEF. The amendment to Sec.  37.1501(d)(3) will reduce 
annual recurring information collection burden hours by approximately 
five burden hours per SEF. The amendment to Sec.  37.1501(d)(4) will 
reduce annual recurring information collection burden hours per SEF by 
three burden hours. The amendment to Sec.  37.1501(d)(5) will reduce 
annual recurring information collection burden hours per SEF/CCO by 10 
burden hours.

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.\228\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following five broad areas of market and public concern: (i) 
Protection of market participants and the public; (ii) efficiency, 
competitiveness, and financial integrity of futures markets; (iii) 
price discovery; (iv) sound risk management practices; and (v) other 
public interest considerations.
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    \228\ 7 U.S.C. 19(a).
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2. Background
    The Commission is finalizing several of the Proposed Rules. First, 
the Final Rules eliminate the requirement that a SEF capture post-
execution allocation information in its audit trail data. Second, 
regarding financial resources, the Final Rules finalize amendments to 
the existing six-month liquidity requirement and add new acceptable 
practices that provide further guidance to SEFs for making a reasonable 
calculation of their projected operating costs. Finally, the Final 
Rules streamline requirements for the CCO position; allow SEF 
management to exercise discretion in CCO oversight; and simplify the 
preparation and submission of the required ACR.
    The baseline against which the Commission considers the costs and 
benefits of the Final Rules is the statutory and regulatory 
requirements of the CEA and Commission regulations now in effect, in 
particular CEA section

[[Page 9240]]

2(h)(8) and certain rules in part 37 of the Commission's regulations. 
The Commission, however, notes that as a practical matter, SEFs have 
adopted some current practices included in the Final Rules based upon 
no-action relief and guidance provided by Commission staff that is 
time-limited in nature.\229\ As such, to the extent that SEFs and 
market participants have relied on relevant Commission staff no-action 
relief or Commission staff guidance, the actual costs and benefits of 
the Final Rules may not be as significant.
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    \229\ CFTC Staff Letter No. 17-54 (post-execution allocation 
data); CFTC Staff Letter No. 17-61 (timing of the ACR submission).
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    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 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 these rules.
    The following consideration of costs and benefits is organized 
according to the rules and rule amendments finalized in this 
rulemaking. For each rule, the Commission summarizes the Final Rules, 
and identifies and discusses the costs and benefits attributable to 
each rule. The Commission, where applicable, then considers the costs 
and benefits of the Final Rules in light of the five public interest 
considerations set out in section 15(a) of the CEA.
    The Commission notes that this consideration of costs and benefits 
is based on the understanding that the swaps market functions 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries, with some Commission registrants 
being organized outside of the U.S., with leading industry members 
typically conducting operations both within and outside the U.S., and 
with industry members commonly following substantially similar business 
practices wherever located. Where the Commission does not specifically 
refer to matters of location, the discussion of costs and benefits 
below refers to the effects of the Final Rules on all swaps activity 
subject to the final new and amended regulations, whether by virtue of 
the activity's physical location in the U.S. or by virtue of the 
activity's connection with activities in, or effect on, U.S. commerce 
under CEA section 2(i).\230\
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    \230\ Section 2(i)(1) applies the swaps provisions of both the 
Dodd-Frank Act and Commission regulations promulgated under those 
provisions to activities outside the United States that have a 
direct and significant connection with activities in, or effect on, 
commerce of the United States. 7 U.S.C. 2(i). Section 2(i)(2) makes 
them applicable to activities outside the United States that 
contravene Commission rules promulgated to prevent evasion of the 
Dodd-Frank Act.
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3. Audit Trail
i. Overview
    Existing Sec.  37.205(a) requires a SEF to capture and retain all 
audit trail data necessary to detect, investigate and prevent customer 
and market abuses.\231\ This audit trail data must permit a SEF to 
track a customer order from the time of receipt through fill, 
allocation, or other disposition.\232\ Existing Sec.  37.205(b)(2)(iv) 
requires a SEF's audit trail program to include an electronic 
transaction history database that identifies, among other things, each 
account to which order fills are allocated.\233\
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    \231\ 17 CFR 37.205(a). Such audit trail data must be sufficient 
to reconstruct all indications of interest, RFQs, orders, and 
trades.
    \232\ Id.
    \233\ 17 CFR 37.205(b)(2)(iv).
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    Recognizing the practical difficulties that SEFs face in obtaining 
information regarding allocations that occur away from the SEF after a 
trade has been executed, the Commission is eliminating the requirements 
in Sec.  37.205(a) and (b)(2)(iv) that a SEF capture post-execution 
allocation information in its audit trail.\234\ Instead, the Final 
Rules require a SEF to capture in its audit trail information only 
through execution on the SEF.\235\ The Commission has noted that this 
change would be consistent with current swap market practice.\236\
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    \234\ 83 FR at 62005.
    \235\ Id.
    \236\ Id.
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ii. Benefits
    Post-execution allocations are made away from SEFs and typically 
occur between the clearing firm or the customer and the DCO, or at the 
middleware provider.\237\ In general, SEFs do not have access to post-
execution allocation information and are unable to obtain such data 
from third parties, such as DCOs and swap data repositories, due to 
confidentiality concerns. Commission staff has issued no-action relief 
from this requirement.\238\ This rulemaking creates regulatory 
certainty by codifying the no-action relief, which will permit SEFs to 
maintain their existing practice and avoid any legal exposure due to a 
SEF's inability to comply with regulations.
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    \237\ CFTC Staff Letter No. 17-54. SEFs have noted that even if 
they could obtain the information from DCOs, swap data repositories, 
or middleware providers, or alternatively, from the counterparties 
to the swap, the infrastructure necessary to securely transmit the 
post-execution allocation information, such as an application-
programming interface or secure file transfer protocol site, is 
currently not in place.
    \238\ Id.
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iii. Costs
    The changes to the existing audit trail requirements may reduce the 
scope of information captured in a SEF's audit trail, but the 
Commission believes that these changes are not likely to affect 
materially the protection of market participants and the public. The 
Commission notes that post-execution allocation information has 
generally not been captured because SEFs have operated under no-action 
relief, which was provided by Commission staff due to the general 
inability of SEFs to access this information. Thus, although the 
elimination of the requirement to capture and retain post-execution 
allocation information is a regulatory change, it should not have a 
material effect on the status quo.
iv. Section 15(a) Factors
(1) Protection of Market Participants and the Public
    The Commission believes the revised audit trail requirements 
provide a nearly identical level of protection to market participants 
and the public as provided under the existing rules. As noted above, 
SEFs generally do not capture post-execution allocation information in 
their audit trail because SEFs have operated under no-action relief, 
which was provided by Commission staff due to the general inability of 
SEFs to access this information. Moreover, the Commission is able to 
obtain post-execution allocation information from other registered 
entities and is not aware that SEFs' reliance on the relief from 
collecting post-execution allocation information has raised any 
regulatory concerns. Thus, elimination of the requirement that SEFs 
capture and retain post-execution allocation information should not 
have a material effect on the level of protection for market 
participants and the public relative to the status quo, although it is 
a regulatory change.
(2) Efficiency, Competitiveness, and Financial Integrity of the Markets
    The Commission believes that there will be no substantive change to 
the efficiency, competitiveness, and financial integrity of markets 
because

[[Page 9241]]

SEFs will continue to capture information through execution in the 
audit trail and the Commission has the ability to obtain post-execution 
allocation information from other registrants. Further, the amendments 
to Sec.  37.205 will not change the current status quo in the markets.
(3) Price Discovery
    The Commission believes these rules will have no effect on price 
discovery because they affect only how SEFs track and audit trades and 
do not change what information is disclosed to market participants. 
Further, the amendments to Sec.  37.205 will not change the current 
status quo in the markets.
(4) Sound Risk Management Practices
    The Commission believes these rules will have no material effect on 
sound risk management practices because they do not change the status 
quo and the Commission is not aware that SEFs' reliance on the no-
action relief from collecting post-execution allocation information has 
raised any regulatory concerns.
(5) Other Public Interest Considerations
    The Commission has not identified any effects that these rules will 
have on public interest considerations other than those enumerated 
above, nor did any commenter suggest one.
v. Consideration of Alternatives and Comments
    Commenters support the proposal to eliminate the requirement to 
capture and retain post-execution allocation information because SEFs 
remain unable to obtain the information.\239\ Further, in WMBAA's view, 
the proposal ``will [not] lead to degradation of the ability to 
reconstruct a trade and the environment in which it is traded.'' \240\
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    \239\ Refinitiv Letter at 11 (``Refinitiv SEF supports the 
elimination of the requirement to be able to track an order through 
fill, allocation or other disposition, because SEFs generally do not 
have access to most post-execution information.''); 2019 WMBAA 
Letter at 12-13 (``The WMBAA supports the Commission's proposal 
regarding audit trail requirements.'').
    \240\ 2019 WMBAA Letter at 12-13.
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4. Financial Resources
i. Overview
    The Final Rules improve on the existing rules to apply the existing 
Core Principle 13 financial resources requirements to SEF operations in 
a more practical manner, including through amendments to the existing 
six-month liquidity requirement and the addition of new acceptable 
practices that provide further guidance to SEFs for making a reasonable 
calculation of their projected operating costs.
    Amended Sec.  37.1301 requires a SEF to maintain financial 
resources in an amount adequate to cover only those projected operating 
costs necessary to enable the SEF to comply with its core principle 
obligations under section 5h of the Act and any applicable Commission 
regulation for a one-year period, calculated on a rolling basis.\241\ 
In contrast, existing Sec.  37.1301 requires a SEF to maintain 
sufficient financial resources to cover all of its operations for a 
one-year period, calculated on a rolling basis, regardless of whether 
such operating costs are necessary for the SEF to comply with its core 
principle or other applicable Commission regulations.
---------------------------------------------------------------------------

    \241\ 37 CFR 37.1301.
---------------------------------------------------------------------------

    Pursuant to existing Sec.  37.1303, a SEF has reasonable discretion 
to determine its financial obligations under Sec.  37.1301.\242\ The 
Commission is adopting acceptable practices in Appendix B to Part 37 
that offer guidance on the costs that a SEF may exclude in its 
reasonable discretion when determining its projected operating costs 
under Sec.  37.1301(a). The acceptable practices are based upon 
financial resources guidance that was provided to the public by 
Commission staff and discuss the scope of a SEF's reasonable discretion 
for determining its obligations under Sec. Sec.  37.1301 and 37.1303, 
as amended.
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    \242\ Existing Sec.  37.1303 provides a SEF has reasonable 
discretion in determining the methodology used to compute its 
projected operating costs in order to determine the amount needed to 
meet its requirements under Sec.  37.1301. Because the liquidity 
requirement in existing Sec.  37.1305 is based upon a SEF's 
financial requirement under Sec.  37.1301, the SEF's application of 
its reasonable discretion also implicitly determines its liquidity 
obligation under amended Sec.  37.1303. The Commission is adopting 
additional, technical changes to Sec.  37.1302. The Commission is 
renumbering Sec.  37.1304 to Sec.  37.1305 and is not adopting 
substantive changes to the provision.
---------------------------------------------------------------------------

    Specifically, the financial resources guidance provides that a SEF 
may reasonably exclude from its projected operating costs certain 
expenses, including: (i) Costs attributable solely to sales, marketing, 
business development, or recruitment; \243\ (ii) compensation and 
related taxes and benefits for SEF employees whose functions are not 
necessary to meet the SEF's regulatory responsibilities; \244\ (iii) 
costs for acquiring and defending patents and trademarks for SEF 
products and related intellectual property; (iv) magazine, newspaper, 
and online periodical subscription fees; (v) tax preparation and audit 
fees; (vi) to the extent not covered by item (ii) above, the variable 
commissions that a voice-based SEF may pay to its employee-brokers, 
calculated as a percentage of transaction revenue generated by the 
voice-based SEF; and (vii) any non-cash costs, including depreciation 
and amortization. The Commission similarly is incorporating this list 
with certain conforming changes into the acceptable practices as costs 
that the Commission believes may be reasonable for a SEF to exclude 
from its projected operating cost calculations.\245\ Further, based on 
the financial resources guidance, the acceptable practices clarify that 
in order to determine its obligations under amended Sec.  37.1301(a), a 
SEF may prorate, but not exclude, certain expenses in calculating 
projected operating costs.\246\ In prorating these expenses, however, a 
SEF needs to document, identify, and justify its decision to prorate 
such expenses.
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    \243\ The costs listed in this item (i) also include costs for 
travel, entertainment, events and conferences to the extent that 
such costs are not necessary to meet the SEF's regulatory 
responsibilities.
    \244\ For example, if a SEF requires a certain number of voice 
brokers to run its voice/hybrid platform but hires additional voice 
brokers to provide enhanced customer service, the SEF will need to 
include only the minimum number of voice brokers to run its voice/
hybrid platform based on its current business volume, and taking 
into account any projected increase or decrease in business volume, 
in its projected operating cost calculations.
    \245\ In order to conform to the change to Sec.  37.1301(a), the 
Commission is slightly altering the wording of item (ii) to provide 
that a SEF may exclude the costs of a SEF's employees that are not 
necessary ``to comply with the core principles set forth in section 
5h of the Act and any applicable Commission regulations[.]'' 
(emphasis added). Similarly, the financial resources guidance 
provides that a reasonable calculation of projected operating 
expenses must include all expenses necessary for a SEF ``to 
discharge its responsibilities as a . . . SEF in compliance with the 
CEA, the Commission's regulations, and the . . . SEF's rulebooks,'' 
which is consistent with existing Sec.  37.1301(a). However, in 
order to conform with amended Sec.  37.1301(a), the acceptable 
practices instead provide that a SEF must include all expenses 
necessary for the SEF ``to comply'' with the core principles and any 
applicable Commission regulations.
    \246\ For example, a SEF will be permitted to prorate expenses 
that are shared with affiliates, e.g., the costs of administrative 
staff or seconded employees that a SEF shares with affiliates. 
Further, a SEF is also permitted to prorate expenses that are 
attributable in part to activities that are not required to comply 
with the SEF core principles, e.g., costs of a SEF's office space to 
the extent it also houses personnel whose costs may be excludable 
under items (i) or (ii).
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    Amended Sec.  37.1303 requires a SEF to maintain liquid assets in 
an amount equal to the greater of (i) three months of projected 
operating costs necessary to enable the SEF to comply with its core 
principle obligations and applicable Commission regulations, or (ii) 
the SEF's projected wind-down costs. In contrast, under existing rules, 
a SEF

[[Page 9242]]

must maintain sufficient liquid assets to cover six months of projected 
operating costs. As discussed above, the Commission is adopting 
acceptable practices to provide further guidance on the costs that a 
SEF, based on its reasonable discretion, may exclude from its projected 
operating costs when determining its financial obligations under 
amended Sec.  37.1303.
    Amended Sec.  37.1306(a) requires a SEF's quarterly financial 
submissions to conform to U.S. GAAP, or in the case of a non-U.S. 
domiciled SEF that is not otherwise required to prepare U.S. GAAP-
compliant statements, to prepare its statements in accordance with 
either the International Financial Reporting Standards issued by the 
International Accounting Standards Board, or a comparable international 
standard that the Commission may accept in its discretion. Amended 
Sec.  37.1306(c) provides that a SEF's quarterly financial statements 
must explicitly: (i) Identify all the SEF's expenses without any 
exclusions; (ii) identify all expenses and corresponding amounts that 
the SEF excluded or prorated when it determined its projected operating 
costs; (iii) explain why the SEF excluded or prorated any expenses; and 
(iv) identify and explain all costs necessary to wind down the SEF's 
operations. Amended Sec.  37.1306(d) extends the deadline for a SEF's 
fourth-quarter financial statement from 60 to 90 days after the end of 
such fiscal quarter to conform to the extended deadline for a SEF's 
annual compliance report. Amended Sec.  37.1306(e) is a new rule that 
requires a SEF to provide notice no later than 48 hours after it knows 
or reasonably should know it no longer meets its financial resources 
obligations.
ii. Benefits
    The Commission expects amended Sec.  37.1301(a) to reduce the total 
financial assets that most SEFs must maintain because a SEF will only 
be required to maintain sufficient resources to cover its operations 
necessary to comply with its core principle obligations and applicable 
Commission regulations, rather than all of its operating costs as is 
required by existing Sec.  37.1301(a). With respect to Sec.  
37.1301(a), the acceptable practices provide further guidance regarding 
the scope of a SEF's reasonable discretion when determining the SEF's 
financial requirements under amended Sec.  37.1301(a) to exclude 
certain expenses from its projected operating cost calculations, 
thereby reducing the amount of total financial assets that a SEF must 
maintain under amended Sec.  37.1301(a). To the extent that the 
acceptable practices generally adopt the Commission staff's existing 
financial resources guidance, SEFs may already have realized the 
benefits associated with reduced financial resources requirements.
    The liquidity requirement in amended Sec.  37.1303 significantly 
reduces the amount of liquid financial assets that must be maintained 
by most SEFs. Currently, a SEF must maintain liquid financial assets 
equal to six months of projected operating costs, while amended Sec.  
37.1303 only requires most SEFs to maintain three months of projected 
operating costs. As a result, amended Sec.  37.1303 is expected to 
reduce the liquidity requirement for most SEFs by 50 percent.\247\ In 
addition, a SEF currently must maintain liquid assets equal to six 
months of operating costs even if the SEF's actual wind-down costs are 
greater. For certain SEFs with wind-down costs that exceed six months 
of operating costs, amended Sec.  37.1303 augments market integrity for 
such SEFs by requiring them to maintain additional liquid assets to 
cover their wind-down costs, even if the SEF's wind-down would exceed 
six months, but in no event would a SEF be permitted to maintain less 
than three months of operating costs.
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    \247\ The Commission notes that the current liquidity 
requirement in existing Sec.  37.1305, as well as amended Sec.  
37.1303, permits a SEF to acquire a ``committed line of credit'' to 
satisfy the liquidity requirement. However, the Commission notes 
that most SEFs satisfy this requirement through maintaining liquid 
assets rather than obtaining a line of credit. Accordingly, as a 
practical matter, the Commission expects amended Sec.  37.1303 to 
reduce the amount of liquid assets that a SEF must maintain. 
Moreover, the Commission notes that there would be additional 
associated costs if a SEF were to obtain a committed line of credit.
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    Amended Sec.  37.1304 provides that a SEF must make a reasonable 
calculation of projected wind-down costs, but has reasonable discretion 
in adopting the methodology for calculating such costs. The finalized 
acceptable practices expound upon the reasonable discretion that a SEF 
has for computing its projected operating costs to exclude certain 
expenses from its projected three months of operating cost 
calculations.
    The Commission believes the Final Rules provide SEFs with greater 
flexibility in terms of establishing their financial resources. This, 
in turn, may lead to greater efficiencies in terms of financing and 
capital allocation and investment. However, the Commission 
acknowledges, as discussed below, this flexibility may increase the 
level of financial risk at the SEF.
    Amended Sec. Sec.  37.1306(a) and (c) will increase transparency 
and augment the Commission's oversight by requiring SEFs to provide 
standardized, U.S. GAAP-compliant financial submissions that explicitly 
identify any cost a SEF has excluded or prorated in determining its 
projected operating costs. In its experience conducting ongoing SEF 
oversight, Commission staff has devoted additional effort to obtain 
appropriate clarity and sufficient documentation from SEFs. Therefore, 
the Commission believes that establishing the minimum documentation 
that a SEF must provide will mitigate the time and resources required 
both by Commission staff in conducting its oversight and by SEFs in 
responding to Commission staff's requests for additional information. 
Final Sec.  37.1306(e) benefits market integrity by ensuring that the 
Commission is aware of any non-compliance 48 hours after a SEF knows or 
reasonably should know that it fails to satisfy its financial resources 
obligations rather than when the SEF submits its quarterly financial 
statement under Sec.  37.1306(a), increasing the Commission's ability 
to promptly respond.
iii. Costs
    Amended Sec.  37.1301(a) reduces the amount of financial resources 
a SEF must maintain to an amount that will enable the SEF to comply 
with its core principle obligations and applicable Commission 
regulations for a one-year period, calculated on a rolling basis, 
rather than in an amount necessary to cover all of the SEF's operations 
as required under existing Sec.  37.1301(a). The acceptable practices 
provide guidance on the costs that a SEF may exclude when determining 
its obligations under amended Sec.  37.1301(a). As a result, amended 
Sec.  37.1301(a) as supplemented by the acceptable practices likely 
will induce SEFs to reduce the current level of total financial 
resources that they maintain under Sec.  37.1301. In turn, this could 
decrease market participants' confidence and could harm a SEF's 
stability during adverse market conditions because the SEF may not have 
adequate financial resources to cover its costs. However, the 
Commission believes the potential harm to a SEF's financial stability 
and to the market is minimal because amended Sec.  37.1301(a) addresses 
only the amount of a SEF's total financial assets, which includes 
illiquid assets, rather than focusing only on a SEF's liquid assets. 
The Commission notes that illiquid assets are less important compared 
to the amount of liquid financial assets that a SEF must maintain under 
amended Sec.  37.1303 since it is more difficult for a SEF to timely 
liquidate its illiquid assets to cover its operating

[[Page 9243]]

costs, especially during periods of market instability. Accordingly, 
the Commission believes a SEF's liquid financial assets, which the 
Commission addresses in amended Sec.  37.1303 below, is more important 
for sustaining a SEF's financial health and continuing operations.
    Amended Sec.  37.1303 may require some SEFs to maintain additional 
liquid financial assets, compared to the current liquidity requirement, 
where a SEF's wind-down costs exceed six months of operating costs. 
However, as explained above in the discussion of benefits, the 
Commission believes most SEFs do not have wind-down costs that exceed 
six months of operating costs. Accordingly, amended Sec.  37.1303 
should not increase the liquidity requirement for most SEFs.
    Amended Sec.  37.1304 requires a SEF to incur an additional 
marginal cost to calculate its wind-down costs, in addition to its 
projected operating costs as currently required, in order to determine 
its financial resources obligations under Sec. Sec.  37.1301 and 
37.1303. The Commission estimates this change will impose an initial, 
minimal, one-time cost for each SEF related to determining the length 
of time and associated costs associated with an orderly wind down.
    The Commission anticipates amended Sec.  37.1306(a) will impose 
greater costs on a SEF. Specifically, amended Sec.  37.1306(a) requires 
a SEF to submit U.S. GAAP-compliant quarterly reports. Because U.S. 
GAAP-compliant financial statements generally require additional effort 
compared to financial statements that are not U.S. GAAP-compliant, the 
Commission estimates the proposed change will increase annual costs for 
each SEF required to create U.S. GAAP-compliant financial reports.
    The Commission does not believe amended Sec.  37.1306(c) will 
increase costs. Under existing Sec.  37.1306(c), a SEF must provide 
sufficient documentation explaining the methodology it used to compute 
its financial resources requirements; accordingly, amended Sec.  
37.1306(c) is merely clarifying the type of information that is already 
required.\248\ Similarly, the Commission does not believe amended Sec.  
37.1306(e) will materially increase costs since a SEF currently is 
required to maintain continuous compliance with its financial resources 
obligations. By requiring a SEF to notify the Commission within 48 
hours of non-compliance, rather than informing the Commission through a 
SEF's quarterly financial submission, amended Sec.  37.1306(e) could 
impose a de minimis cost to prepare a notice from a non-compliant SEF.
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    \248\ See Sec.  37.1306(c).
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iv. Section 15(a) Factors
(1) Protection of Market Participants and the Public
    The Commission previously noted that the financial resources 
requirements protect market participants and the public by establishing 
uniform standards and a system of Commission oversight that ensures 
trading occurs on a financially stable facility, which in turn, 
mitigates the risk of market disruptions, financial losses, and system 
problems that could arise from a SEF's failure to maintain adequate 
financial resources.\249\ In the event that a SEF must wind down its 
operations, amended Sec.  37.1303 explicitly requires a SEF to maintain 
sufficient liquid financial resources to conduct an orderly wind down 
of its operations, or three months of operating costs if greater than 
the SEF's wind-down costs.\250\ The Commission believes the amended SEF 
financial requirements are better calibrated to the inherent risks of a 
SEF, and should result in greater efficiencies, but should not diminish 
the financial integrity of the SEF.
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    \249\ See Core Principles Final Rule at 33580.
    \250\ As the Commission previously noted, a SEF with sufficient 
amounts of liquid financial resources would be better positioned to 
close out trading in a manner not disruptive to market participants 
or to members of the public who rely on SEF prices. See Core 
Principles Final Rule at 33580.
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    Moreover, under amended Sec.  37.1306(e), a SEF is required to 
provide notice no later than 48 hours after it knows or reasonably 
should know that it no longer satisfies its financial resources 
obligations, ensuring that the Commission can take prompt action to 
protect market participants and the public. In contrast, the Commission 
currently is notified of non-compliance in a SEF's quarterly financial 
statements. Lastly, a SEF is required to submit U.S. GAAP-compliant 
quarterly financial submissions under amended Sec.  37.1306(c) that 
explicitly identify the costs a SEF has excluded or prorated in 
determining its projected operating costs. As a result, the Commission 
will more easily be able to compare SEFs' financial health and take 
proactive steps to protect market participants and the public if the 
Commission identifies a SEF with weak financial health or the 
development of negative financial trends among SEFs that could endanger 
market participants or the public.
(2) Efficiency, Competitiveness, and Financial Integrity of the Markets
    Amended Sec.  37.1301(a) and Sec.  37.1303, as further supplemented 
through the acceptable practices, together should benefit market 
efficiency by reducing capital costs since SEFs are no longer required 
to maintain an excessive amount of financial resources. Accordingly, a 
SEF should be able to more efficiently allocate its financial 
resources, which in turn should encourage market growth and innovation. 
For example, as noted above, in the case of amended Sec.  37.1303, the 
Commission expects most SEFs will need to hold approximately 50 percent 
less liquid financial assets as reserve capital to cover operating 
costs. The existing financial resources requirements can pose a burden 
to a SEF that wishes to innovate, because they will impose higher 
capital requirements if the SEF wishes to offer new or experimental 
technology, execution methods, or related products and services. This 
is especially so if such business lines, products, or services are not 
expected to be immediately profitable or would have low margins.
    The existing regulations may also discourage a SEF from offering 
more capital intensive activities, such as execution methods that 
involve human brokers compared to fully electronic trading that is less 
capital intensive. Accordingly, the Commission believes the amended 
financial resources requirements will be more neutral with respect to a 
SEF's chosen technology and business model, and therefore should 
encourage a greater variety of execution methods and related services 
and products in the market place.
    Reducing capital costs may promote the entry of new entrants into 
the market by reducing start-up costs and initial capital requirements, 
thereby further encouraging competition and innovation. The increase in 
competition and innovation would depend on the extent to which 
potential new entrants respond to this encouragement.
    Amended Sec.  37.1306(e) should improve the financial integrity of 
markets by requiring a SEF to notify the Commission within 48 hours 
after it knows or reasonably should know that it no longer satisfies 
its financial resources obligations, ensuring that the Commission can 
take prompt action to protect market integrity. Lastly, amended Sec.  
37.1306(c) improves SEF financial submissions by requiring U.S. GAAP-
compliant statements as well as clarifying that a SEF must explicitly 
identify any costs that it has excluded

[[Page 9244]]

or prorated in determining its projected operating costs. These changes 
should improve the Commission's ability to conduct its oversight 
responsibilities to protect market integrity.
(3) Price Discovery
    The Commission has not identified any effects of these rules on 
price discovery.
(4) Sound Risk Management Practices
    By establishing specific standards with respect to how SEFs should 
assess and monitor the adequacy of their financial resources, the 
financial resources rules should promote sound risk management 
practices by SEFs. As noted above, amended Sec.  37.1303 requires a SEF 
to identify its wind-down costs and associated timing and ensure it has 
sufficient liquid assets to maintain an orderly wind down. Similarly, 
amended Sec.  37.1306(c) requires a SEF to explain the basis of its 
determination for its estimate of its wind-down costs and timing. 
Amended Sec.  37.1306(e) requires a SEF to notify the Commission no 
later than 48 hours after it knows or reasonably should know it no 
longer satisfies its financial resources obligations. As a result, SEFs 
will be required to ensure they maintain the necessary procedures to 
identify, and to notify the Commission of, any non-compliance.
(5) Other Public Interest Considerations
    The Commission has not identified any effects that these rules will 
have on public interest considerations other than those enumerated 
above, nor did any commenter suggest one.
v. Consideration of Alternatives and Comments
    The Proposed Rule included requests for comment regarding possible 
alternatives to the proposed reporting requirements for SEFs. These 
included whether to require that a SEF's financial reports be audited, 
and whether financial reporting should be required on a semiannual 
rather than a quarterly basis.
    WMBAA objected to the alternative of requiring that a SEF's 
financial reports be audited, contending, as discussed further above, 
that auditing reports would not improve oversight (i.e., would not 
provide benefits).\251\ WMBAA also argued the costs associated with an 
audited report are high and would pose a barrier to entry for new 
SEFs.\252\ The Commission has determined not to adopt a requirement 
that SEF financial reports be audited.
---------------------------------------------------------------------------

    \251\ 2019 WMBAA Letter at 21.
    \252\ Id.
---------------------------------------------------------------------------

    Regarding the frequency of reports, WMBAA stated the current 
reporting requirement of quarterly financial reports is sufficient for 
ensuring capital adequacy, but that a semi-annual or annual report 
would also be adequate if a SEF is required to maintain all related 
documents and support for further inspection.\253\ The Commission 
received no further comments comparing the costs and benefits of 
quarterly reporting to those of less frequent reporting. The Commission 
has determined to retain the existing quarterly reporting requirement 
for SEFs so that the Commission can remain abreast of a SEF's financial 
condition in a timely manner.
---------------------------------------------------------------------------

    \253\ Id.
---------------------------------------------------------------------------

    As noted above, commenters generally supported the proposed 
financial resources rules and offered no relevant alternatives other 
than those discussed above.\254\ Accordingly, the Commission is 
generally finalizing the financial resources rules as proposed. 
However, there are two proposed provisions that the Commission has 
determined not to include in the Final Rules.
---------------------------------------------------------------------------

    \254\ Commenters did suggest several possible rules that, as 
discussed above, are beyond the scope of this rulemaking. Should the 
Commission propose any of these alternatives in the future, it will 
consider their costs and benefits at that time.
---------------------------------------------------------------------------

    First, the Proposed Rule included amendments to Sec.  37.1301(b), 
which requires a SEF that also operates as a DCO to also comply with 
the financial resource requirements for DCOs under Sec.  39.11. 
Specifically, the Commission proposed to amend Sec.  37.1301(b) to 
permit SEFs that also operate as DCOs to file a single financial report 
under Sec.  39.11 that covers both the SEF and DCO. The Commission is 
not finalizing this proposed change as part of the Final Rules but is 
continuing to consider it.
    Second, the proposed acceptable practices included a provision that 
would have allowed a SEF offering more than one bona fide execution 
method to include the costs of only one of those methods in calculating 
projected operating costs, with the goal of mitigating the burden for 
SEFs wishing to offer multiple execution methods. This proposed change 
was intended to be consistent with the Proposed Rule's removal of 
existing limitations on execution methods for Required Transactions. 
The Final Rules are not implementing the Proposed Rule's expansion of 
permissible execution methods for Required Transactions, nor is it 
eliminating the minimum trading functionality requirement that a SEF 
maintain an Order Book as one of its execution methods. Accordingly, 
the Commission is not finalizing this particular proposed acceptable 
practice at this time.
5. Chief Compliance Officer
i. Overview
    The Commission is adopting several amendments to the CCO 
regulations. First, the Commission is allowing the senior officer \255\ 
of a SEF to have the same oversight responsibilities with respect to 
the CCO as the SEF's board of directors. Specifically, the Commission 
is (i) amending existing Sec.  37.1501(b)(1)(i) to allow a CCO to 
consult with either the board of directors or senior officer of the SEF 
as the CCO develops the SEF's policies and procedures; (ii) amending 
existing Sec.  37.1501(c)(1)(iii) \256\ to allow a CCO to meet with 
either the senior officer of the SEF or the board of directors on an 
annual basis; (iii) amending existing Sec.  37.1501(c)(1)(iv) \257\ to 
allow a CCO to provide self-regulatory program information to the SEF's 
senior officer or to the board of directors; and (iv) eliminating the 
restriction under existing Sec.  37.1501(c)(3) that removal of the CCO 
requires approval of a majority of the board of directors or the senior 
officer if the SEF does not have a board of directors, and instead 
permitting the board of directors or the senior officer to remove the 
CCO under Sec.  37.1501(b)(3)(i).
---------------------------------------------------------------------------

    \255\ As discussed below, the Commission proposes to define 
senior officer to mean the chief executive officer or other 
equivalent officer of the SEF.
    \256\ This requirement is in amended Sec.  37.1501(b).
    \257\ This requirement is in amended Sec.  37.1501(b)(6).
---------------------------------------------------------------------------

    Second, the Commission is consolidating and amending existing Sec.  
37.1501(d)(5) and (6) \258\ to allow a CCO to identify noncompliance 
matters through ``any means,'' in addition to the currently prescribed 
detection methods, and to clarify that the procedures followed to 
address noncompliance issues must be ``reasonably designed'' by the CCO 
to handle, respond, remediate, retest, and resolve noncompliance issues 
identified by the CCO. The Commission is also amending the CCO's duty 
to resolve conflicts of interest under existing Sec.  
37.1501(d)(2).\259\ The Commission is refining the scope of the CCO's 
duty to take ``reasonable steps'' to resolve ``material'' conflicts of 
interest that may arise.
---------------------------------------------------------------------------

    \258\ This requirement is in amended Sec.  37.1501(c)(5).
    \259\ This requirement is in amended Sec.  37.1501(c)(2).

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[[Page 9245]]

    Third, the Commission is making certain amendments to the ACR 
regulations in existing Sec.  37.1501(e) \260\ in order to remove 
duplicative or unnecessary information requirements and streamline 
existing requirements. The Commission is removing existing Sec.  
37.1501(e)(2)(i), which requires a SEF to include in the ACR a review 
of all of the Commission regulations applicable to the SEF and identify 
the written policies and procedures designed to ensure compliance with 
the Act and Commission regulations. The Commission is also eliminating 
certain specific content required under existing Sec.  
37.1501(e)(4).\261\ The Commission is amending existing Sec.  
37.1501(e)(5) \262\ to require a SEF to only discuss material 
noncompliance matters and explain the corresponding actions taken to 
resolve such matters, rather than describing all compliance matters. 
The Commission is amending existing Sec.  37.1501(e)(6) \263\ to limit 
a SEF CCO's certification of an ACR's accuracy and completeness to 
``all material respects'' of the report, rather than the entire report. 
The Commission is streamlining and reorganizing the remaining ACR 
content requirements, including consolidating the CCO's required 
description of the SEF's policies and procedures under existing Sec.  
37.1501(e)(1) \264\ with the CCO's required assessment of the 
effectiveness of these policies and procedures under existing Sec.  
37.1501(e)(2)(ii), and consolidating the CCO's required narrative of 
any material changes made during the prior year along with any 
recommended potential or prospective changes and areas of improvement 
to the compliance program as required under existing Sec.  
37.1501(e)(3) and existing Sec.  37.1501(e)(2)(iii),\265\ respectively.
---------------------------------------------------------------------------

    \260\ This requirement is in amended Sec.  37.1501(d).
    \261\ This requirement is in amended Sec.  37.1501(d)(3). The 
eliminated provisions currently require a discussion of the SEF's 
compliance staffing and structure, a catalogue of investigations and 
disciplinary actions taken over the last year, and a review of 
disciplinary committee and panel performance.
    \262\ This requirement is in amended Sec.  37.1501(d)(4).
    \263\ This requirement is in amended Sec.  37.1501(d)(5).
    \264\ This requirement is in amended Sec.  37.1501(d)(1).
    \265\ This requirement is in amended Sec.  37.1501(d)(2).
---------------------------------------------------------------------------

    The Commission is finalizing several amendments to simplify the ACR 
submission procedures. The Commission is amending existing Sec.  
37.1501(f)(2) \266\ to provide SEFs with an additional 30 days to file 
the ACR with the Commission. Additionally, the Commission is 
eliminating the ``substantial and undue hardship'' standard required 
for ACR extension requests and replacing it with a ``reasonable and 
valid'' standard set forth in existing Sec.  37.1501(f)(4).\267\ The 
Commission is amending existing Sec.  37.1501(f)(3) \268\ to require 
that the CCO submit an amended ACR to the SEF's board of directors or, 
in the absence of a board of directors, the senior officer of the SEF, 
for review prior to submitting the amended ACR to the Commission.
---------------------------------------------------------------------------

    \266\ This requirement is in amended Sec.  37.1501(e)(2).
    \267\ This requirement is in amended Sec.  37.1501(e)(4).
    \268\ This requirement is in amended Sec.  37.1501(e)(3).
---------------------------------------------------------------------------

    In addition to these substantive changes, the Commission is 
adopting a number of conforming, clarifying, and streamlining changes 
that would not impose new costs or result in new benefits and are not 
discussed below. The Commission is eliminating the CCO's obligations to 
the ROC, including existing Sec.  37.1501(c)(1)(iii), which requires a 
quarterly meeting with the ROC and existing Sec.  37.1501(c)(1)(iv), 
which requires the CCO to provide self-regulatory program information 
to the ROC. The Final Rule will not impact SEFs as there is no 
requirement that a SEF have a ROC.
    Additionally, the Commission is consolidating existing Sec.  
37.1501(b) and (c) into final Sec.  37.1501(b). The Commission is 
eliminating existing Sec.  37.1501(b)(1), which requires a SEF to 
designate a CCO and existing Sec.  37.1501(c)(2), which requires the 
CCO to report directly to the board of directors or the senior officer 
of the SEF, as these requirements are already contained under Sec.  
37.1500.
    The Commission is eliminating the requirement under existing Sec.  
37.1501(f)(1) that a SEF document the submission of the ACR to the 
SEF's board of directors or senior officer in the board minutes or some 
other similar written record. This requirement is already covered in 
the general recordkeeping requirements in amended Sec.  37.1501(f), 
which is existing Sec.  37.1501(g).
    The Commission is finalizing an amendment to Sec.  37.1501(a)(2) to 
define a ``senior officer'' as ``the chief executive officer or other 
equivalent officer of the swap execution facility.'' \269\ Finally, the 
Commission is adopting a new acceptable practice to Core Principle 15 
in Appendix B that provides a non-exclusive list of factors that a SEF 
may consider when evaluating an individual's qualifications to be a 
CCO.\270\ This acceptable practice will provide a safe harbor and not 
impose new obligations.
---------------------------------------------------------------------------

    \269\ In the SEF Core Principles Final Rule, the Commission did 
not adopt a definition of ``senior officer,'' but noted that the 
statutory term would only include the most senior executive officer 
of the legal entity registered as a SEF. See SEF Core Principles 
Final Rule at 33544.
    \270\ 17 CFR part 37 app. B.
---------------------------------------------------------------------------

ii. Benefits
    The amendments give the senior officer the same authority as the 
board of directors to oversee the CCO and provide SEFs with greater 
opportunity to structure the management and oversight of the CCO based 
on the SEF's particular corporate structure, size, and complexity. This 
could increase efficiency and reduce costs. Additionally, the quality 
of oversight of the CCO could improve if the senior officer is better 
positioned than the board of directors to provide day-to-day oversight 
of the CCO.
    The amendments permit a CCO to use any means to identify 
noncompliance issues and are less prescriptive than the existing rule, 
which could increase efficiency and reduce costs. The amendment to 
Sec.  37.1501(d) refines the scope of the required information in an 
ACR and should make the ACR process more efficient and reduce costs. 
The removal of Sec.  37.1501(e)(2)(i) and certain specific content set 
forth under Sec.  37.1501(e)(4) should reduce the amount of time that a 
CCO and his or her staff spend preparing the ACR.
    Amended Sec.  37.1501(d)(4), which requires SEFs to focus on 
describing material non-compliance matters, rather than describing all 
compliance matters, should streamline the ACR requirement and provide 
more useful information to the Commission. Additionally, the 
clarification under Sec.  37.1501(e)(3) that the CCO must submit an 
amended ACR to the SEF's board of directors or, in the absence of a 
board of directors, the senior officer of the SEF, should reduce the 
need for extensive follow-up discussions.
    Finally, the amendment allowing SEFs more time to submit their ACRs 
should reduce the time and resource burden on CCOs and SEFs' compliance 
departments. This additional time should allow SEFs to fully complete 
their ACRs and meet their other end-of-year reporting obligations such 
as the fourth-quarter financial report. However, the Commission 
understands that those SEFs that already may rely on Commission staff 
no-action relief for an extra 30 days to complete the ACR may have 
already availed themselves of the benefits associated with the extended 
reporting deadline.

[[Page 9246]]

iii. Costs
    The amendments to Sec.  37.1501(b) that authorize the senior 
officer to oversee the CCO could impair the independence of the CCO, 
and as a result, the CCO's oversight of the SEF. However, the 
Commission believes this concern is mitigated by the Commission's 
review of annual ACRs and its examination program.
    The amendments eliminate requirements that the CCO identify 
noncompliance matters using certain specified detection methods, design 
procedures that detect and resolve all possible noncompliance issues, 
and eliminate all potential conflicts of interest. These requirements 
are replaced by more flexible standards, which could potentially allow 
for some impairment of a CCO's oversight of the SEF's compliance in 
some circumstances. However, the Commission believes the resulting 
costs (in the form of potential adverse consequences) will not be 
material because the amendments require a CCO to focus on material 
aspects of the compliance program (e.g., material breaches and material 
conflicts of interest). The Commission believes placing the focus on 
material compliance issues, rather than all compliance issues, will not 
adversely impact SEF compliance.
    The amendments to Sec.  37.1501(e) that reduce the information 
required in an ACR could make it more difficult for the Commission to 
assess a SEF's compliance and self-regulatory programs. However, the 
Commission does not anticipate that these changes will materially 
impact the Commission's assessment, as the Commission already receives 
or has access to such information from other sources. For example, the 
Commission approves the SEF's compliance staffing and structure as part 
of the SEF's registration or rule submission, and annual updates 
provide minimal additional information, at best. In addition, SEFs 
report finalized disciplinary actions to the NFA,\271\ and the 
Commission is able to access this information through its oversight of 
the NFA.
---------------------------------------------------------------------------

    \271\ See Sec.  9.11 (which states that whenever an exchange 
decision pursuant to which a disciplinary action or access denial 
action is to be imposed has become final, the exchange must, within 
30 days thereafter, provide written notice of such action to the 
person against whom the action was taken and notice to the National 
Futures Association). 17 CFR 9.11.
---------------------------------------------------------------------------

    Finally, the amendment providing SEFs more time to submit their 
ACRs could delay the Commission recognizing and addressing a SEF 
compliance issue. However, the Commission anticipates that such risk is 
mitigated to the extent that SEFs submit ACRs on the timeline set forth 
in the Final Rules. The Commission's experience has not indicated that 
delayed reporting pursuant to Commission staff no-action relief has 
adversely impacted its ability to recognize and address compliance 
issues in a timely manner.
iv. Section 15(a) Factors
 (1) Protection of Market Participants and the Public
    The Commission believes the changes to the existing SEF CCO 
requirements are likely to better enable the Commission to protect 
market participants and the public. Specifically, the Commission should 
be better able to assess whether a SEF's policies and procedures 
adversely impact a SEF's operations or its ability to comply with the 
core principles or Commission's regulations, which are intended in part 
to protect market participants.
    The changes to the ACR requirements under amended Sec.  37.1501(d) 
should better enable the Commission to assess the effectiveness of a 
SEF's compliance and self-regulatory programs; this assessment is 
intended, in part, to protect market participants. The amendments will 
remove some of the duplicative and unnecessary content requirements and 
require the ACR to focus on describing material non-compliance matters. 
The Commission believes the new requirements will streamline the ACR 
and provide more useful information to the Commission. Removing these 
information requirements, e.g., requirements to review all Commission 
regulations applicable to a SEF and to identify the written policies 
and procedures enacted to foster compliance, will likely reduce the 
amount of information in an ACR. However, the Commission has 
determined, based on its experience with the existing requirements, 
that this information generally does not enhance the usefulness of the 
ACR.
(2) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission is promoting the efficiency and integrity of a SEF's 
market by allowing a more streamlined compliance approach that does not 
require the board of directors to assume primary oversight 
responsibility for the CCO. This streamlined approach should, in many 
circumstances, permit CCOs to more efficiently make changes to the 
regulatory program in response to potential trading violations, which 
should aid in protecting the financial integrity of the market. 
Furthermore, the focus of CCOs' duties on reasonably designed 
procedures to address noncompliance issues and material conflicts of 
interest should improve CCOs' effectiveness by specifying that this is 
the appropriate standard. This increased effectiveness should permit 
CCOs to better allocate resources to focus on detecting and deterring 
material rule violations, which otherwise may harm the market's 
efficiency, competitiveness, and integrity.
(3) Price Discovery
    The Commission believes the changes to the CCO requirements will 
not impede a CCO's ability to ensure compliance and are unlikely to 
have a substantial impact on price discovery.
(4) Sound Risk Management Practices
    The Commission believes the new CCO rules should promote sound risk 
management practices. The gains in this regard will depend on the 
quality and effective implementation of the policies and practices that 
SEFs currently have in place and the new policies and procedures that 
they will adopt due to the proposed amendments.
(5) Other Public Interest Considerations
    The Commission has not identified any effects that these rules will 
have on public interest considerations other than those enumerated 
above, nor did any commenter suggest one.
v. Consideration of Alternatives and Comments
    Commenters support the proposed changes. WMBAA supports the 
amendments to add a definition of senior officer,\272\ to amend the 
CCO's duties,\273\ to the preparation of the ACR,\274\ and to the ACR 
submission requirements.\275\ Refinitiv supports the amendments to the 
preparation of the ACR.\276\ The Commission did not receive any 
comments on the proposed amendments to the CCO's recordkeeping 
requirements.
---------------------------------------------------------------------------

    \272\ 2019 WMBAA Letter at 23.
    \273\ Id. at 25.
    \274\ Id. at 26.
    \275\ Id. at 27.
    \276\ Refinitiv Letter at 14.
---------------------------------------------------------------------------

    The Commission also proposed to eliminate the existing enumerated 
conflicts of interest to avoid any inference that they are an 
exhaustive list of conflicts that a CCO must address. The Commission 
has determined that the list of potential conflicts that a CCO should 
resolve under existing Sec.  37.1500(d)(2) does not create

[[Page 9247]]

confusion, but instead provides useful examples, and the list will not 
be eliminated as proposed.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\277\ In the notice of proposed rulemaking, the 
Commission requested comments on whether: (1) The proposed rulemaking 
implicates any other specific public interest to be protected by the 
antitrust laws; (2) the proposed rulemaking is anticompetitive; and (3) 
there are less anticompetitive means of achieving the relevant purposes 
of the CEA.
---------------------------------------------------------------------------

    \277\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission does not anticipate that the amendments to part 37 
that it is adopting in this rule will result in anticompetitive 
behavior. The Commission received no comments on the antitrust 
considerations of the proposed rules finalized herein.

List of Subjects in 17 CFR Part 37

    Swap execution facilities.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 37 as follows:

PART 37--SWAP EXECUTION FACILITIES

0
1. The authority citation for Part 37 continues to read as follows:

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


0
2. Amend Sec.  37.205 by revising paragraph (a) and removing paragraph 
(b)(2)(iv), the revision to read as follows:


Sec.  37.205   Audit trail.

    (a) Audit trail required. A swap execution facility shall capture 
and retain all audit trail data necessary to detect, investigate, and 
prevent customer and market abuses. Such data shall be sufficient to 
reconstruct all indications of interest, requests for quotes, orders, 
and trades within a reasonable period of time and to provide evidence 
of any violations of the rules of the swap execution facility. An 
acceptable audit trail shall also permit the swap execution facility to 
track a customer order from the time of receipt through execution on 
the swap execution facility.
* * * * *

0
3. Revise subpart N to read as follows:

Subpart N--Financial Resources

Sec.
37.1300 Core Principle 13--Financial resources.
37.1301 General requirements.
37.1302 Types of financial resources.
37.1303 Liquidity of financial resources.
37.1304 Computation of costs to meet financial resources 
requirement.
37.1305 Valuation of financial resources.
37.1306 Reporting to the Commission.
37.1307 Delegation of authority.


Sec.  37.1300  Core Principle 13--Financial resources.

    (a) In general. The swap execution facility shall have adequate 
financial, operational, and managerial resources to discharge each 
responsibility of the swap execution facility.
    (b) Determination of resource adequacy. The financial resources of 
a swap execution facility shall be considered to be adequate if the 
value of the financial resources exceeds the total amount that would 
enable the swap execution facility to cover the operating costs of the 
swap execution facility for a one-year period, as calculated on a 
rolling basis.


Sec.  37.1301  General requirements.

    (a) A swap execution facility shall maintain financial resources on 
an ongoing basis that are adequate to enable it to comply with the core 
principles set forth in section 5h of the Act and any applicable 
Commission regulations. Financial resources shall be considered 
adequate if their value exceeds the total amount that would enable the 
swap execution facility to cover its projected operating costs 
necessary for the swap execution facility to comply with section 5h of 
the Act and applicable Commission regulations for a one-year period, as 
calculated on a rolling basis pursuant to Sec.  37.1304.
    (b) An entity that operates as both a swap execution facility and a 
derivatives clearing organization shall also comply with the financial 
resource requirements of Sec.  39.11 of this chapter.


Sec.  37.1302  Types of financial resources.

    Financial resources available to satisfy the requirements of Sec.  
37.1301 may include:
    (a) The swap execution facility's own capital, meaning its assets 
minus its liabilities calculated in accordance with generally accepted 
accounting principles in the United States; and
    (b) Any other financial resource deemed acceptable by the 
Commission.


Sec.  37.1303  Liquidity of financial resources.

    The financial resources allocated by the swap execution facility to 
meet the ongoing requirements of Sec.  37.1301 shall include 
unencumbered, liquid financial assets (i.e., cash and/or highly liquid 
securities) equal to at least the greater of three months of projected 
operating costs, as calculated on a rolling basis, or the projected 
costs needed to wind down the swap execution facility's operations, in 
each case as determined under Sec.  37.1304. If a swap execution 
facility lacks sufficient unencumbered, liquid financial assets to 
satisfy its obligations under this section, the swap execution facility 
may satisfy this requirement by obtaining a committed line of credit or 
similar facility in an amount at least equal to such deficiency.


Sec.  37.1304   Computation of costs to meet financial resources 
requirement.

    A swap execution facility shall each fiscal quarter, make a 
reasonable calculation of its projected operating costs and wind-down 
costs in order to determine its applicable obligations under Sec. Sec.  
37.1301 and 37.1303. The swap execution facility shall have reasonable 
discretion in determining the methodologies used to compute such 
amounts. The Commission may review the methodologies and require 
changes as appropriate.


Sec.  37.1305  Valuation of financial resources.

    No less than each fiscal quarter, a swap execution facility shall 
compute the current market value of each financial resource used to 
meet its obligations under Sec. Sec.  37.1301 and 37.1303. Reductions 
in value to reflect market and credit risk (``haircuts'') shall be 
applied as appropriate.


Sec.  37.1306  Reporting to the Commission.

    (a) Each fiscal quarter, or at any time upon Commission request, a 
swap execution facility shall provide a report to the Commission that 
includes:
    (1) The amount of financial resources necessary to meet the 
requirements of Sec. Sec.  37.1301 and 37.1303, computed in accordance 
with the requirements of Sec.  37.1304, and the market value of each 
available financial resource, computed in accordance with the 
requirements of Sec.  37.1305; and
    (2) Financial statements, including the balance sheet, income 
statement, and statement of cash flows of the swap execution facility.
    (i) The financial statements shall be prepared in accordance with 
generally accepted accounting principles in the United States, prepared 
in English, and denominated in U.S. dollars.

[[Page 9248]]

    (ii) The financial statements of a swap execution facility that is 
not domiciled in the United States, and is not otherwise required to 
prepare financial statements in accordance with generally accepted 
accounting principles in the United States, may satisfy the requirement 
in paragraph (a)(2)(i) of this section if such financial statements are 
prepared in accordance with either International Financial Reporting 
Standards issued by the International Accounting Standards Board, or a 
comparable international standard as the Commission may otherwise 
accept in its discretion.
    (b) The calculations required by paragraph (a) of this section 
shall be made as of the last business day of the swap execution 
facility's applicable fiscal quarter.
    (c) With each report required under paragraph (a) of this section, 
the swap execution facility shall also provide the Commission with 
sufficient documentation explaining the methodology used to compute its 
financial requirements under Sec. Sec.  37.1301 and 37.1303. Such 
documentation shall:
    (1) Allow the Commission to reliably determine, without additional 
requests for information, that the swap execution facility has made 
reasonable calculations pursuant to Sec.  37.1304; and
    (2) Include, at a minimum:
    (i) A total list of all expenses, without any exclusion;
    (ii) All expenses and the corresponding amounts, if any, that the 
swap execution facility excluded or prorated when determining its 
operating costs, calculated on a rolling basis, required under 
Sec. Sec.  37.1301 and 37.1303, and the basis for any determination to 
exclude or prorate any such expenses;
    (iii) Documentation demonstrating the existence of any committed 
line of credit or similar facility relied upon for the purpose of 
meeting the requirements of Sec.  37.1303 (e.g., copies of agreements 
establishing or amending a credit facility or similar facility); and
    (iv) All costs that a swap execution facility would incur to wind 
down the swap execution facility's operations, the projected amount of 
time for any such wind-down period, and the basis of its determination 
for the estimation of its costs and timing.
    (d) The reports and supporting documentation required by this 
section shall be filed not later than 40 calendar days after the end of 
the swap execution facility's first three fiscal quarters, and not 
later than 90 calendar days after the end of the swap execution 
facility's fourth fiscal quarter, or at such later time as the 
Commission may permit, in its discretion, upon request by the swap 
execution facility.
    (e) A swap execution facility shall provide notice to the 
Commission no later than 48 hours after it knows or reasonably should 
know that it no longer meets its obligations under Sec.  37.1301 or 
37.1303.


Sec.  37.1307  Delegation of authority.

    (a) The Commission hereby delegates, until it orders otherwise, to 
the Director of the Division of Market Oversight or such other employee 
or employees as the Director may designate from time to time, authority 
to:
    (1) Determine whether a particular financial resource under Sec.  
37.1302 may be used to satisfy the requirements of Sec.  37.1301;
    (2) Review and make changes to the methodology used to compute 
projected operating costs and wind-down costs under Sec.  37.1304 and 
the valuation of financial resources under Sec.  37.1305;
    (3) Request reports, in addition to those required in Sec.  
37.1306, or additional documentation or information under Sec.  
37.1306(a), (c), and (e); and
    (4) Grant an extension of time to file fiscal quarter reports under 
Sec.  37.1306(d).
    (b) The Director may submit to the Commission for its consideration 
any matter that has been delegated in this section. Nothing in this 
section prohibits the Commission, at its election, from exercising the 
authority delegated in this section.

0
4. Revise Sec.  37.1501 to read as follows:


Sec.  37.1501  Chief compliance officer.

    (a) Definitions. For purposes of this part, the term--
    Board of directors means the board of directors of a swap execution 
facility, or for those swap execution facilities whose organizational 
structure does not include a board of directors, a body performing a 
function similar to a board of directors.
    Senior officer means the chief executive officer or other 
equivalent officer of the swap execution facility.
    (b) Chief compliance officer--(1) Authority of chief compliance 
officer. (i) The position of chief compliance officer shall carry with 
it the authority and resources to develop, in consultation with the 
board of directors or senior officer, the policies and procedures of 
the swap execution facility and enforce such policies and procedures to 
fulfill the duties set forth for chief compliance officers in the Act 
and Commission regulations.
    (ii) The chief compliance officer shall have supervisory authority 
over all staff acting at the direction of the chief compliance officer.
    (2) Qualifications of chief compliance officer. (i) The individual 
designated to serve as chief compliance officer shall have the 
background and skills appropriate for fulfilling the responsibilities 
of the position.
    (ii) No individual disqualified from registration pursuant to 
sections 8a(2) or 8a(3) of the Act may serve as a chief compliance 
officer.
    (3) Appointment and removal of chief compliance officer. (i) Only 
the board of directors or the senior officer may appoint or remove the 
chief compliance officer.
    (ii) The swap execution facility shall notify the Commission within 
two business days of the appointment or removal, whether interim or 
permanent, of a chief compliance officer.
    (4) Compensation of the chief compliance officer. The board of 
directors or the senior officer shall approve the compensation of the 
chief compliance officer.
    (5) Annual meeting with the chief compliance officer. The chief 
compliance officer shall meet with the board of directors or senior 
officer of the swap execution facility at least annually.
    (6) Information requested of the chief compliance officer. The 
chief compliance officer shall provide any information regarding the 
self-regulatory program of the swap execution facility as requested by 
the board of directors or the senior officer.
    (c) Duties of chief compliance officer. The duties of the chief 
compliance officer shall include, but are not limited to, the 
following:
    (1) Overseeing and reviewing compliance of the swap execution 
facility with section 5h of the Act and any related rules adopted by 
the Commission;
    (2) Taking reasonable steps, in consultation with the board of 
directors or the senior officer of the swap execution facility, to 
resolve any material conflicts of interest that may arise, including, 
but not limited to:
    (i) Conflicts between business considerations and compliance 
requirements;
    (ii) Conflicts between business considerations and the requirement 
that the swap execution facility provide fair, open, and impartial 
access as set forth in Sec.  37.202; and;
    (iii) Conflicts between a swap execution facility's management and 
members of the board of directors;
    (3) Establishing and administering written policies and procedures 
reasonably designed to prevent violations of the Act and the rules of 
the Commission;

[[Page 9249]]

    (4) Taking reasonable steps to ensure compliance with the Act and 
the rules of the Commission;
    (5) Establishing procedures reasonably designed to handle, respond, 
remediate, retest, and resolve noncompliance issues identified by the 
chief compliance officer through any means, including any compliance 
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
    (6) Establishing and administering a compliance manual designed to 
promote compliance with the applicable laws, rules, and regulations and 
a written code of ethics for the swap execution facility designed to 
prevent ethical violations and to promote honesty and ethical conduct 
by personnel of the swap execution facility;
    (7) Supervising the self-regulatory program of the swap execution 
facility with respect to trade practice surveillance; market 
surveillance; real time market monitoring; compliance with audit trail 
requirements; enforcement and disciplinary proceedings; audits, 
examinations, and other regulatory responsibilities (including taking 
reasonable steps to ensure compliance with, if applicable, financial 
integrity, financial reporting, sales practice, recordkeeping, and 
other requirements); and
    (8) Supervising the effectiveness and sufficiency of any regulatory 
services provided to the swap execution facility by a regulatory 
service provider in accordance with Sec.  37.204.
    (d) Preparation of annual compliance report. The chief compliance 
officer shall, not less than annually, prepare and sign an annual 
compliance report that covers the prior fiscal year. The report shall, 
at a minimum, contain:
    (1) A description and self-assessment of the effectiveness of the 
written policies and procedures of the swap execution facility, 
including the code of ethics and conflict of interest policies, to 
reasonably ensure compliance with the Act and applicable Commission 
regulations;
    (2) Any material changes made to compliance policies and procedures 
during the coverage period for the report and any areas of improvement 
or recommended changes to the compliance program;
    (3) A description of the financial, managerial, and operational 
resources set aside for compliance with the Act and applicable 
Commission regulations;
    (4) Any material non-compliance matters identified and an 
explanation of the corresponding action taken to resolve such non-
compliance matters; and
    (5) A certification by the chief compliance officer that, to the 
best of his or her knowledge and reasonable belief, and under penalty 
of law, the annual compliance report is accurate and complete in all 
material respects.
    (e) Submission of annual compliance report and related matters--(1) 
Furnishing the annual compliance report prior to submission to the 
Commission. Prior to submission to the Commission, the chief compliance 
officer shall provide the annual compliance report for review to the 
board of directors of the swap execution facility or, in the absence of 
a board of directors, to the senior officer of the swap execution 
facility. Members of the board of directors and the senior officer 
shall not require the chief compliance officer to make any changes to 
the report.
    (2) Submission of annual compliance report to the Commission. The 
annual compliance report shall be submitted electronically to the 
Commission not later than 90 calendar days after the end of the swap 
execution facility's fiscal year. The swap execution facility shall 
concurrently file the annual compliance report with the fourth-quarter 
financial report pursuant to Sec.  37.1306.
    (3) Amendments to annual compliance report. (i) Promptly upon 
discovery of any material error or omission made in a previously filed 
annual compliance report, the chief compliance officer shall file an 
amendment with the Commission to correct the material error or 
omission. The chief compliance officer shall submit the amended annual 
compliance report to the board of directors, or in the absence of a 
board of directors, to the senior officer of the swap execution 
facility, pursuant to paragraph (e)(1) of this section.
    (ii) An amendment shall contain the certification required under 
paragraph (d)(5) of this section.
    (4) Request for extension. A swap execution facility may request an 
extension of time to file its annual compliance report from the 
Commission. Reasonable and valid requests for extensions of the filing 
deadline may be granted at the discretion of the Commission.
    (f) Recordkeeping. The swap execution facility shall maintain all 
records demonstrating compliance with the duties of the chief 
compliance officer and the preparation and submission of annual 
compliance reports consistent with Sec. Sec.  37.1000 and 37.1001.
    (g) Delegation of authority. The Commission hereby delegates, until 
it orders otherwise, to the Director of the Division of Market 
Oversight or such other employee or employees as the Director may 
designate from time to time, the authority to grant or deny a request 
for an extension of time for a swap execution facility to file its 
annual compliance report under paragraph (e)(4) of this section. The 
Director may submit to the Commission for its consideration any matter 
that has been delegated in this paragraph. Nothing in this paragraph 
prohibits the Commission, at its election, from exercising the 
authority delegated in this paragraph.

0
5. Amend Appendix B to Part 37 by:
0
a. Under the heading ``Core Principle 13 of Section 5h of the Act--
Financial Resources,'' adding paragraph (b); and
0
b. Under the heading ``Core Principle 15 of Section 5h of the Act--
Designation of Chief Compliance Officer,'' adding paragraph (b).
    The additions read as follows:

Appendix B to Part 37--Guidance on, and Acceptable Practices in, 
Compliance With Core Principles

* * * * *

Core Principle 13 of Section 5h of the Act--Financial Resources

* * * * *
    (b) Acceptable Practices--(1) Reasonable calculation of 
projected operating costs. In connection with a swap execution 
facility calculating its projected operating costs, the Commission 
has determined that a reasonable calculation should include all 
expenses necessary for the swap execution facility to comply with 
the core principles set forth in section 5h of the Act and any 
applicable Commission regulations. This calculation should be based 
on the swap execution facility's current level of business and 
business model, and should take into account any projected 
modification to its business model (e.g., the addition or 
subtraction of business lines or operations or other changes), and 
any projected increase or decrease in its level of business over the 
next 12 months. The Commission believes, however, that it may be 
reasonable for a swap execution facility to exclude the following 
expenses (``excludable expenses'') from its projected operating cost 
calculations:
    (i) Costs attributable solely to sales, marketing, business 
development, product development, or recruitment and any related 
travel, entertainment, event, or conference costs;
    (ii) Compensation and related taxes and benefits for swap 
execution facility personnel who are not necessary to ensure that 
the swap execution facility is able to comply with the core 
principles set forth in section 5h of the Act and any applicable 
Commission regulations;
    (iii) Costs for acquiring and defending patents and trademarks 
for swap execution facility products and related intellectual 
property;
    (iv) Magazine, newspaper, and online periodical subscription 
fees;

[[Page 9250]]

    (v) Tax preparation and audit fees;
    (vi) To the extent not covered by paragraphs (b)(1)(ii) or (iii) 
of this Core Principle 13 of Section 5h of the Act--Financial 
Resources, the variable commissions that a voice-based swap 
execution facility may pay to its SEF trading specialists (as 
defined under Sec.  37.201(c)), calculated as a percentage of 
transaction revenue generated by the voice-based swap execution 
facility. Unlike fixed salaries or compensation, such variable 
commissions are not payable unless and until revenue is collected by 
the swap execution facility; and
    (vii) Any non-cash costs, including depreciation and 
amortization.
    (2) Prorated expenses. The Commission recognizes that, in the 
normal course of a swap execution facility's business, there may be 
an expense (e.g., typically related to overhead) that is only 
partially attributable to a swap execution facility's ability to 
comply with the core principles set forth in section 5h of the Act 
and any applicable Commission regulations; accordingly, such expense 
may need to be only partially attributed to the swap execution 
facility's projected operating costs. For example, if a swap 
execution facility's office rental space includes marketing 
personnel and compliance personnel, the swap execution facility may 
exclude the prorated office rental expense attributable to the 
marketing personnel. In order to prorate an expense, a swap 
execution facility should:
    (i) Maintain sufficient documentation that reasonably shows the 
extent to which an expense is partially attributable to an 
excludable expense;
    (ii) Identify any prorated expense in the financial reports that 
it submits to the Commission pursuant to Sec.  37.1306; and
    (iii) Sufficiently explain why it prorated any expense. Common 
allocation methodologies that can be used include actual use, 
headcount, or square footage. A swap execution facility may provide 
documentation, such as copies of service agreements, other legal 
documents, firm policies, audit statements, or allocation 
methodologies to support its determination to prorate an expense.
    (3) Expenses allocated among affiliates. The Commission 
recognizes that a swap execution facility may share certain expenses 
with affiliated entities, such as parent entities or other 
subsidiaries of the parent. For example, a swap execution facility 
may share employees (including employees on secondment from an 
affiliate) that perform similar tasks for the affiliated entities or 
may share office space with its affiliated entities. Accordingly, 
the Commission believes that it would be reasonable, for purposes of 
calculating its projected operating costs, for a swap execution 
facility to prorate any shared expense that the swap execution 
facility pays for, but only to the extent that such shared expense 
is actually attributable to the affiliate and for which the swap 
execution facility is reimbursed. Similarly, a reasonable 
calculation of a swap execution facility's projected operating costs 
must include the prorated amount of any expense paid for by an 
affiliated entity to the extent that the shared expense is 
attributable to the swap execution facility. In order to prorate a 
shared expense, the swap execution facility should:
    (i) Maintain sufficient documentation that reasonably shows the 
extent to which the shared expense is attributable to and paid for 
by the swap execution facility and/or affiliated entity;
    (ii) Identify any shared expense in the financial reports that 
it submits to the Commission; and
    (iii) Sufficiently explain why it prorated any shared expense. A 
swap execution facility may provide documentation, such as copies of 
service agreements, other legal documents, firm policies, audit 
statements, or allocation methodologies, that reasonably shows how 
expenses are attributable to, and paid for by, the swap execution 
facility and/or its affiliated entities to support its determination 
to prorate an expense.
* * * * *

Core Principle 15 of Section 5h of the Act--Designation of Chief 
Compliance Officer

* * * * *
    (b) Acceptable Practices--(1) Qualifications of chief compliance 
officer. In determining whether the background and skills of a 
potential chief compliance officer are appropriate for fulfilling 
the responsibilities of the role of the chief compliance officer, 
the swap execution facility has the discretion to base its 
determination on the totality of the qualifications of the potential 
chief compliance officer, including, but not limited to, compliance 
experience, related career experience, training, and any other 
relevant factors to the position. A swap execution facility should 
be especially vigilant regarding potential conflicts of interest 
when appointing a chief compliance officer.
    (2) [Reserved]

    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 Swap Execution Facilities--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.
---------------------------------------------------------------------------

    \1\ Swap Execution Facilities and Trade Execution Requirement, 
83 FR 61946 (Nov. 30, 2018) (the ``SEF Proposal'').
    \2\ Swap Execution Facility Requirements (Nov. 18, 2020), 
https://www.cftc.gov/PressRoom/PressReleases/8313-20.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \3\ Statement of Concurrence of Commissioner Rostin Behnam 
Regarding Swap Execution Facilities and Trade Execution Requirement, 
https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement110518a.
    \4\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \5\ Id.
---------------------------------------------------------------------------

    Finally, I would like to address the Commission's separate vote 
to withdraw the 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

[[Page 9251]]

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.
---------------------------------------------------------------------------

    \6\ Rostin Behnam, Commissioner, CFTC, Dissenting Statement of 
Commissioner Rostin Behnam Regarding Electronic Trading Risk 
Principles (June 25, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement062520b.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \1\ Swap 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.
---------------------------------------------------------------------------

    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 post-trade 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.
---------------------------------------------------------------------------

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

    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 may be appropriate to make other 
incremental changes going forward, it is important that we affirm 
the established regulatory program for SEFs to maintain

[[Page 9252]]

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. 2020-28944 Filed 2-10-21; 8:45 am]
BILLING CODE 6351-01-P


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