9224 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 

1See 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). 

5CEA 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. 

7Section 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. 

8CEA 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. 

9CEA 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.’’ 

11To 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). 

12Core 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). 

13 17 CFR 37.205; see Section II, infra. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 37 

RIN 3038–AE25 

Swap Execution Facilities 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

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, NMarkowitz@cftc.gov; 

Jonathan Lave, Associate Director, (202) 

418–5983, Division of Market Oversight; 

Eliezer Mishory, Special Counsel, (202) 

418–5609, EMishory@cftc.gov, Division 

of Data; or Michael Penick, Senior 

Economist, (202) 418–5279, mpenick@

cftc.gov, Office of the Chief Economist, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1151 21st Street NW, Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background and Introduction 

A. Statutory and Regulatory History 

B. Summary of Final Rules 

II. Audit Trail Requirements Related to PostExecution 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. § 37.1301—General Requirements 

C. § 37.1302—Types of Financial Resources 

D. § 37.1303—Liquidity of Financial 

Resources 

E. § 37.1304—Computation of Costs To 

Meet Financial Resources Requirement 

F. § 37.1305—Valuation of Financial 

Resources 

G. § 37.1306—Reporting to the Commission 

H. § 37.1307—Delegation of Authority 

IV. Chief Compliance Officer Requirements 

A. Background and Overview of Proposed 

Rules 

B. § 37.1501(a)—Definitions 

C. § 37.1501(b)—Qualifications of Chief 

Compliance Officer 

D. § 37.1501(c)—Duties of Chief 

Compliance Officer 

E. § 37.1501(d)—Preparation of Annual 

Compliance Report 

F. § 37.1501(e)—Submission of Annual 

Compliance Report and Related Matters 

G. § 37.1501(f)—Recordkeeping 

H. § 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

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

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 

§ 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) 


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14See 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. 

15See, e.g., CFTC Staff Letter No. 17–54, Re: NoAction 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: NoAction 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’’). 

16Swap Execution Facilities and Trade Execution 

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

17Under § 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 § 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. 

18See, 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). 

19See, 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). 

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). 

23CFTC 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 applicationprogramming interface or secure file transfer 

protocol site, is currently not in place.’’ 

24 Id.; CFTC Staff Letter No. 17–54. 

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 capitalintensive 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

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

Accordingly, the Final Rules 

implement certain operationallyfocused 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 § 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

During the SEF registration process 

starting fall 2013 through spring 2016, 

numerous SEFs indicated that postexecution 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 postexecution 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

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 


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25 83 FR at 62005. 

26 Id. 

27 Id. 

28Refinitiv 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.’’). 

29Refinitiv Letter at 11; 2019 WMBAA Letter at 

12. 

30 2019 WMBAA Letter at 12. 

31 Id. at 12–13. 

32 17 CFR 39.20(a)(2). 

33 17 CFR 1.35(b)(5). 

34See 17 CFR 1.31(d), 1.35(b)(5). 

35 7 U.S.C. 7b–3(f)(13). 

36 Id. 

37 17 CFR 37.1301 through 37.1307. 

38When the Commission adopted § 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. 

39See, 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. 

41CFTC Staff Letter No. 17–25; CFTC Staff Letter 

No. 15–26. 

42 83 FR at 62025–62030. 

43 Id. at 62025. 

44 In addition to finalizing the proposed 

amendments to § 37.1301(a) and (c), the 

Commission also proposed amendments to 

§ 37.1301(b), which requires a SEF also operating as 

a DCO to comply with the financial resource 

requirements for DCOs under § 39.11. Specifically, 

the Commission proposed to amend § 37.1301(b) to 

permit a SEF that also operates as a DCO to file a 

single financial report under § 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. 

45 17 CFR 37.1301(a). 

§ 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

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

C. Final Rules 

The Commission has determined, 

based on representations from SEFs, 

that SEFs are unable to obtain postexecution allocation information and is 

adopting the amendments to § 37.205(a) 

and (b)(2) as proposed. Moreover, the 

Commission is able to obtain postexecution 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 § 1.35 

managers of accounts eligible for postexecution 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. 

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 §§ 37.1301 through 37.1307 to 

specify (i) the eligible types of financial 

resources that may be counted toward 

compliance (§ 37.1302); (ii) the 

computation of projected operating 

costs (§ 37.1303); (iii) asset valuation 

requirements (§ 37.1304); (iv) a liquidity 

requirement for required financial 

resources equal to six months of a SEF’s 

operating costs (§ 37.1305); and (v) 

reporting obligations (§ 37.1306).37

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

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

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. § 37.1301—General Requirements 44

Existing § 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 

§ 37.1301(c) specifies that a SEF’s 

financial resources shall be considered 

sufficient if their value is ‘‘at least equal 


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46 17 CFR 37.1301(c). 

47See 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. 

49 83 FR at 62025–62026. 

50The Proposed Rules consolidated existing 

§ 37.1301(a) and (c) into a single amended 

§ 37.1301(a). 

51This 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. 

53 Id. 

54 Id. 

55 Id. 

56The Commission also proposed an amendment 

to refer to ‘‘projected operating costs’’ instead of 

‘‘operating costs’’ to conform to existing § 37.1303, 

17 CFR 37.1303, and § 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.’’ 

57Refinitiv Letter at 13; 2019 WMBAA Letter at 

21. 

58 Id. 

59 2019 WMBAA Letter at 21. 

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 § 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. 

63This approach is consistent with the discretion 

granted to SEFs in the statutory core principles 

Continued 

to’’ the SEF’s operating costs for a oneyear period, calculated on a rolling 

basis.46

Certain SEFs expressed concerns that 

existing § 37.1301(a), when read in 

conjunction with existing § 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

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 

§ 37.1301(c), and instead amend 

§ 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

The Commission also proposed to 

amend § 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

Under proposed § 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

The Commission also proposed 

several technical changes in order to 

align proposed § 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 

§ 37.1303. 

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

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 winddown.62

3. Final Rule 

The Commission is adopting the 

amendments to § 37.1301(a) and 

eliminating § 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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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). 

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). 

65 17 CFR 37.1302. 

66 Id. 

67 17 CFR 37.1305. 

68 Id. 

69The 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. 

71See 2017 WMBAA Letter at 5 (arguing a shorter 

liquidity requirement would allow for a SEF to 

allocate capital for innovation). 

72For 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. 

73 83 FR at 62027. 

74SEF Core Principles Final Rule at 33540. 

75 83 FR at 62027. 

76 Id. 

77 Id. 

78 Id. 

79Refinitiv Letter at 13; Bloomberg Letter at A– 

6. 

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

C. § 37.1302—Types of Financial 

Resources 

Existing § 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

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 § 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 § 37.1302 as proposed. 

This change will conform to the adopted 

amendments to § 37.1306 described 

further below. 

D. § 37.1303—Liquidity of Financial 

Resources 

Existing § 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

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 betterpositioned to determine the amount of 

liquid financial resources required to 

continue its operations and to conduct 

an orderly winddown. 

In light of this experience, the 

Commission proposed to renumber 

§ 37.1305 as § 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 threemonth 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

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 winddown 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

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 


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80Refinitiv Letter at 13. 

81Bloomberg Letter at A–6. 

82 2019 WMBAA Letter at 21. 

83 Id. 

84 Id. 

85The 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. 

86 17 CFR 37.1303. 

87 Id. 

88 83 FR 62028. 

89The 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. 

90See CFTC Staff Letter No. 17–25. 

91For 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. 

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

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

3. Final Rules 

The Commission is adopting 

§ 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 § 37.1303, amended as 

§ 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. § 37.1304—Computation of Costs To 

Meet Financial Resources 

Requirement 85

Existing § 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

1. Proposed Rules and Acceptable 

Practices 

The Commission proposed to 

renumber § 37.1303 as § 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 § 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 § 37.1303. 

First, the Commission proposed to add 

a reference to amended § 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 twelvemonth requirement, given that proposed 

§ 37.1301(a) establishes that the 

financial resource requirement applies 

on a one-year, rolling basis. 

The Commission also proposed to 

include acceptable practices to Core 

Principle 13 in Appendix B associated 

with proposed § 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 § 37.1301. 

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 

§ 37.1301 because these expenses are 

not necessary for a SEF to comply with 

the SEF core principles or Commission 

regulations. 

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 


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92The 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. 

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. 

94See Refinitiv Letter at 13–14. 

95As 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. 

96 17 CFR 37.1304. 

97SEF Core Principles Final Rule at 33539. 

98A ‘‘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. 

99 17 CFR 37.1306. 

100 17 CFR 37.1306(a)(1). 

101 17 CFR 37.1306(a)(2). 

102 Id. 

103 83 FR 62029. 

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 § 37.1306, 

discussed further below.92

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

3. Final Rules and Acceptable Practices 

The Commission is adopting 

§ 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 § 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 § 37.1304.95

These acceptable practices are 

consistent with the Final Rules’ 

amendments to § 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. 

F. § 37.1305—Valuation of Financial 

Resources 

Existing § 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 

§ 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

1. Proposed Rules 

The Commission proposed to 

renumber existing § 37.1304 as 

§ 37.1305 and amend the provision to 

add a reference to the liquidity 

requirement under amended § 37.1303. 

This would clarify that compliance with 

amended § 37.1303 requires a SEF to 

utilize the current market value of the 

applicable financial resources as 

computed pursuant to § 37.1304. 

2. Summary of Comments 

The Commission did not receive any 

comments on this amendment. 

3. Final Rules 

The Commission is adopting 

§ 37.1305 as proposed, confirming that 

compliance with the liquidity 

requirement under amended § 37.1303 

requires a SEF to utilize the current 

market value of the applicable financial 

resources. 

G. § 37.1306—Reporting to the 

Commission 

1. § 37.1306(a) 

Existing § 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 § 37.1301, and 

(ii) the value of each financial resource 

available to meet those requirements as 

calculated under § 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

i. Proposed Rules 

The Commission proposed several 

amendments to § 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

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 


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104 Id. 

105 Id. 

106WMBAA Letter at 23. 

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 § 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. 

109 Id. at 22–23. 

110 Id. at 22. 

111Existing § 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. 

112WMBAA Letter at 22. 

113The Commission is finalizing the amendments 

to § 37.1306(a)(1) as proposed. 

114See Section III.D., supra. 115Existing § 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 § 37.1306(b) adding the word ‘‘applicable’’ before 

‘‘fiscal quarter’’ in the existing rule text. The 

Commission is finalizing this amendment as 

proposed. 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). 

120The Commission proposed to consolidate 

§ 37.1306(c)(1) through (3) into § 37.1306(c)(1) 

through (2) and adopt the proposed requirements as 

described. 

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

The Commission also proposed 

revisions to § 37.1306(a)(1) to add 

appropriate references to amended 

§ 37.1303 and amended § 37.1305. In 

addition to specifying the amount of 

financial resources necessary to comply 

with § 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 § 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

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

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 § 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

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

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

2. § 37.1306(c) 115

Existing § 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 

§ 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, § 37.1306(c)(3) requires 

SEFs to provide copies of certain 

agreements that evidence or otherwise 

support its conclusions.119

i. Proposed Rules 

Based on the proposed amendments 

to the Core Principle 13 regulations 

described above, the Commission 

proposed conforming amendments to 

§ 37.1306(c) that would require a SEF to 

specify the methodology used to 

compute its financial resources and 

liquidity requirements. Proposed 

§ 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 § 37.1303. Proposed 

§ 37.1306(c)(2)(i) through (iv) 120

requires the SEF, at a minimum, to (i) 

list all of its expenses, without 


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121The Commission also proposed to eliminate 

the language in existing § 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 

§ 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 § 37.1306(c)(2) provides minimum 

requirements. 

122See CFTC Staff Letter No. 17–25 at 4. 

123 83 FR 62030. 

124 Id. 

125 Id. 

126 17 CFR 37.1306(d). 

127CFTC 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. 

129 83 FR 62030. 

130 Id. 

131For 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. 

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. 

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

The Commission further stated 

proposed § 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

ii. Summary of Comments 

The Commission did not receive any 

comments on the proposed amendments 

to § 37.1306(c). 

iii. Final Rules 

The Commission is adopting the 

amendments to § 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. § 37.1306(d) 

Existing § 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

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 § 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

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 fourthquarter 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. § 37.1306(e) 

i. Proposed Rules 

The Commission proposed to add a 

new § 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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133 17 CFR 37.1307(a). 

134 7 U.S.C. 7b–3(f)(15). The Commission codified 

Core Principle 15 under § 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. 

138 7 U.S.C. 7b–3(f)(15)(B)(i). 

139 7 U.S.C. 7b–3(f)(15)(B)(iii). 

140Section 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. 

142SEF Core Principles Final Rule at 33544. 

143 83 FR 62023. 

144 2019 WMBAA Letter at 23. 

145 17 CFR 37.1501(b). 

146 17 CFR 37.1501(c). 

147The Commission proposed to eliminate this 

requirement under existing § 37.1501(b)(1), which 

the Commission proposed to retitle ‘‘Authority of 

chief compliance officer’’ from ‘‘Chief compliance 

officer required.’’ 

148The Commission proposed to eliminate this 

requirement under existing § 37.1501(c)(2) because 

it is duplicative of statutory Core Principle 15. 

149These requirements include a mandatory 

quarterly meeting with the ROC under existing 

Continued 

ii. Summary of Comments 

The Commission did not receive any 

comments on proposed § 37.1306(e). 

iii. Final Rules 

The Commission is adopting 

§ 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. § 37.1307—Delegation of Authority 

Existing § 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

1. Proposed Rules 

The Commission proposed to amend 

§ 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 

§ 37.1304 and the methodology that 

SEFs use to determine their wind-down 

costs under amended § 37.1305. Further, 

the Commission would delegate the 

ability to request and receive the 

additional documentation related to 

calculation methodologies required 

under § 37.1306(c) and receive required 

notifications of noncompliance under 

§ 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 § 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 

§ 37.1501 to implement these 

requirements.137

The Proposed Rules set forth several 

amendments to § 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. § 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 § 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

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. 

2. Summary of Comments 

WMBAA supports the proposed 

amendments to add a definition of 

senior officer.144

3. Final Rules 

The Commission is adopting 

§ 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. § 37.1501(b)—Chief Compliance 

Officer 

Existing §§ 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

1. Proposed Rules 

The Commission proposed to amend, 

clarify, or eliminate various existing 

requirements under § 37.1501(b) and (c) 

and consolidate the remaining 

provisions into § 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 ROCrelated requirements from part 37.149


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§ 37.1501(c)(1)(iii), and the requirement that the 

CCO provide self-regulatory program information to 

the ROC under existing § 37.1501 (c)(1)(iv). 150The Commission proposed the amendment 

under proposed § 37.1501(b)(1)(i). 151The Commission proposed to renumber 

existing § 37.1501(c)(1)(iii) to § 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.’’ 152The Commission proposed to renumber 

existing § 37.1501(c)(1)(iv) to § 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. 153The Commission proposed to eliminate this 

requirement under existing § 37.1501(c)(3). In 

addition to the changes discussed herein, the 

Commission proposed to renumber existing 

§ 37.1501(c)(1)(ii) to § 37.1501(b)(4) and title the 

paragraph ‘‘Compensation of the chief compliance 

officer.’’ 

154The Commission proposed to consolidate and 

amend the requirements under existing 

§ 37.1501(c)(1)(i) in part, which addresses the 

appointment of a CCO by the board or senior 

officer, with existing § 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. 

155The Commission notes that notification to the 

Commission of the appointment and removal of a 

CCO is currently required under existing 

§ 37.1501(c)(1)(i) and existing § 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 § 37.1501(b)(3)(i). 

156 83 FR 62033. 

157 Id. 

158The Commission proposed to renumber the 

requirements under existing § 37.1501(b)(2)— 

‘‘Qualifications of chief compliance officer’’—to 

proposed § 37.1501(b)(2)(i) and (ii). The 

Commission also proposed to retitle existing 

§ 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 § 37.1501(b) and (c), the 

Commission proposed to renumber this 

requirement to § 37.1501(b)(4). 

159 83 FR 62033. 

160 2019 WMBAA Letter at 24. 

161The Commission is renumbering existing 

§ 37.1501(d) to § 37.1501(c). 

162 17 CFR 37.1501(d)(1). 

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. 

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 § 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

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 

§ 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

Based on the proposed consolidation 

of existing § 37.1501(b) and (c), the 

Commission also proposed several 

technical amendments to the remaining 

provisions under proposed § 37.1501(b), 

including the renumbering of certain 

existing provisions.158

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. 

3. Summary of Comments 

WMBAA supports the proposed 

amendments to § 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

4. Final Rules and Acceptable Practice 

The Commission is adopting the 

amendments to § 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. § 37.1501(c)—Duties of Chief 

Compliance Officer 161

Existing § 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 


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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 § 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). 

171Existing paragraph § 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 

§ 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 § 37.1501(c)(5). 

172The Commission proposed to renumber 

existing § 37.1501(d)(2), which addresses the CCO’s 

duty to resolve conflicts of interest, to 

§ 37.1501(c)(2) and amend the requirement as 

described. 

173The Commission also proposed to eliminate ‘‘a 

body performing a function similar to the board of 

directors’’ under proposed § 37.1501(c)(2) (existing 

§ 37.1501(d)(2)), as this phrase is already included 

in the definition of ‘‘board of directors’’ under 

§ 37.1501(a). 

174These provisions are currently set forth under 

existing § 37.1501(d)(2)(i) through (iii). The 

Commission also proposed additional, technical 

changes to existing § 37.1501(d), (d)(1), d(7) and 

d(8), to renumber them as § 37.1501(c), (c)(1), (c)(6) 

and (c)(7), respectively and to renumber existing 

paragraph § 37.1501(c)(9) as § 37.1501(c)(8). 

175 84 FR 62034. 

176 Id. 

177 2019 WMBAA Letter at 25. 

178The list will be re-designated as 

§ 37.1501(c)(2)(i) through (iv). 

179The Commission is renumbering existing 

§ 37.1501(e) to § 37.1501(d). 

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). 

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 selfregulatory program; 169 and (ix) 

supervise the effectiveness and 

sufficiency of any regulatory services 

provided to the SEF in accordance with 

§ 37.204.170

1. Proposed Rules 

The Commission proposed to 

consolidate certain existing provisions 

of § 37.1501(d) (to be renumbered as 

§ 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. 

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

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

2. Summary of Comments 

WMBAA supports the proposed 

changes to the CCO’s duties.177

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 § 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. 

E. § 37.1501(d)—Preparation of Annual 

Compliance Report 179

Existing § 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 selfassessment 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

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 


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187Among 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. 

188See 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). 

189The Commission proposed to eliminate these 

requirements in the introductory language of 

existing § 1501(e)(2) and § 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 § 37.1501(e)(2)(ii), 

which requires a SEF to provide in the ACR a selfassessment as to the effectiveness of its policies and 

procedures, with existing § 37.1501(e)(1), and 

renumber the consolidated requirement to 

§ 37.1501(d)(1). Further, the Commission proposed 

to consolidate and amend existing 

§ 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 § 37.1501(e)(3) and renumber the 

consolidated requirement to § 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. 

191The Commission proposed to eliminate these 

requirements under existing § 37.1501(e)(4). 

192The Commission proposed to renumber the 

remaining requirements under existing 

§ 37.1501(e)(4) to § 37.1501(d)(3) and adopt 

technical amendments. 

193The Commission proposed to renumber this 

requirement under existing § 37.1501(e)(5) to 

§ 37.1501(d)(4) and adopt the amendments as 

described above and additional, technical changes. 

194 83 FR 62035. 

195See Section IV.D., supra. The Commission 

proposed to eliminate these enumerated 

mechanisms from the ACR requirements under 

existing paragraph (e)(5). 

196The Commission proposed to renumber 

existing § 37.1501(e)(6) to § 37.1501(d)(5) and 

amend the requirement as described. 

197 83 FR 62035. 

198 2019 WMBAA Letter at 25–26; Refinitiv Letter 

at 14. 

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. 

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 § 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. 

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

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

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. 

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 


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199The Commission is renumbering existing 

§ 37.1501(f) to § 37.1501(e). 

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). 

206The Commission proposed to renumber 

existing § 37.1501(f)(2) to § 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. 

208The Commission proposed to renumber 

existing § 37.1501(f)(4) to § 37.1501(e)(4) and amend 

the provision as described. The Commission also 

proposed to add a title—‘‘Request for extension.’’ 

209The Commission proposed to eliminate this 

requirement under existing paragraph (f)(1). 

210Existing § 37.1501(g) sets forth recordkeeping 

requirements for SEFs related to the CCO’s duties. 

As discussed below, the Commission is amending 

those requirements. 

211The Commission proposed to renumber 

existing § 37.1501(f)(3) to § 37.1501(e)(3) and add a 

title—‘‘Amendments to annual compliance report.’’ 

The Commission proposed to adopt this 

requirement under § 37.1501(e)(3)(i). Under 

proposed § 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 § 37.1501(f) to § 37.1501(e) and change the 

title to ‘‘Submission of annual compliance report 

and related matters.’’ The Commission also 

proposed to renumber existing § 37.1501(f)(1) to 

§ 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.’’ 

212 2019 WMBAA Letter at 27. 

213A 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. 

214The Commission is renumbering existing 

paragraph (g) to paragraph (f). 

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). 

220 17 CFR 37.1501(f); 17 CFR 37.1000 and 

37.1001. 

review of an ACR and assessment of a 

SEF’s compliance. 

F. § 37.1501(e)—Submission of Annual 

Compliance Report and Related 

Matters 199

Existing § 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

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 fourthquarter 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 

§ 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

2. Summary of Comments 

WMBAA supports the proposed 

amendments to the ACR submission 

requirements.212

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. 

G. § 37.1501(f)—Recordkeeping 214

Existing § 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 

§ 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 

§ 37.1501(g)(2) requires the SEF to 

maintain these records in accordance 

with § 1.31 and part 45 of the 

Commission’s regulations.219

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 

§ 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 §§ 37.1000 and 

37.1001.220

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. 


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221The Commission is renumbering existing 

§ 37.1501(h) to § 37.1501(g). 

222 17 CFR 37.1501(h). 

223See 5 U.S.C. 601 et seq. 

224See Policy Statement and Establishment of 

‘‘Small Entities’’ for purposes of the Regulatory 

Flexibility Act, 47 FR 18618 (Apr. 30, 1982). 

225Core Principles and Other Requirements for 

Swap Execution Facilities, 78 FR 33476, 33548 

(June 4, 2013). 

226 44 U.S.C. 3501 et seq. 

227This 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 § 38.12) or OMB 

control number 3038–0099, which covers the 

information collections related to the ‘‘available to 

trade’’ determination (MAT determination) process 

under §§ 37.10 and 38.12. 

H. § 37.1501(g)—Delegation of 

Authority 221

Existing § 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. 

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. 

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’’). 

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

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 § 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 § 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 

§ 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 § 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 

§ 37.205(a) and (b) will not 

substantively or materially affect a SEF’s 

total information collection burden 

hours. With respect to § 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 noncompliance 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 §§ 37.1301 

through 37.1307 to specify: (i) The 

eligible types of financial resources that 

may be counted toward compliance 

(§ 37.1302); (ii) the computation of 

projected operating costs (§ 37.1303); 

(iii) valuation requirements (§ 37.1304); 

(iv) a liquidity requirement for those 

financial resources that is equal to six 

months of a SEF’s operating costs 

(§ 37.1305); and (v) reporting obligations 

(§ 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 

§ 37.1304; (iii) amend the existing sixmonth liquidity requirement for 

financial resources held by a SEF; and 

(iv) streamline requirements with 

respect to financial reports filed with 


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228 7 U.S.C. 19(a). 

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 §§ 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 § 37.1301(b) will 

decrease the annual recurring 

information collection burden hours by 

five burden hours; the amendment to 

§ 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 § 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 § 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 § 37.1501 to implement these 

requirements. 

The Commission proposed several 

amendments to § 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 

§ 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 

§ 37.1501(d)(2). 

With respect to the ACR, existing 

§ 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 § 37.1501(d) will 

reduce annual recurring information 

collection burden hours by 

approximately 10 burden hours per SEF. 

The amendment to § 37.1501(d)(3) will 

reduce annual recurring information 

collection burden hours by 

approximately five burden hours per 

SEF. The amendment to § 37.1501(d)(4) 

will reduce annual recurring 

information collection burden hours per 

SEF by three burden hours. The 

amendment to § 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. 

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 


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229CFTC Staff Letter No. 17–54 (post-execution 

allocation data); CFTC Staff Letter No. 17–61 

(timing of the ACR submission). 

230Section 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. 

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). 

234 83 FR at 62005. 

235 Id. 

236 Id. 

237CFTC 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. 

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. 

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

3. Audit Trail 

i. Overview 

Existing § 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 

§ 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

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 

§ 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

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 postexecution 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 noaction 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. 

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 postexecution 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 


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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 9241 

239Refinitiv 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. 

241 37 CFR 37.1301. 

242Existing § 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 § 37.1301. 

Because the liquidity requirement in existing 

§ 37.1305 is based upon a SEF’s financial 

requirement under § 37.1301, the SEF’s application 

of its reasonable discretion also implicitly 

determines its liquidity obligation under amended 

§ 37.1303. The Commission is adopting additional, 

technical changes to § 37.1302. The Commission is 

renumbering § 37.1304 to § 37.1305 and is not 

adopting substantive changes to the provision. 

243The 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. 

244For 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 

§ 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 § 37.1301(a). However, in 

order to conform with amended § 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. 

246For 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). 

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 

§ 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 § 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

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 sixmonth 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 § 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 § 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. 

Pursuant to existing § 37.1303, a SEF 

has reasonable discretion to determine 

its financial obligations under 

§ 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 § 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 §§ 37.1301 and 

37.1303, as amended. 

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 § 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. 

Amended § 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 


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247The Commission notes that the current 

liquidity requirement in existing § 37.1305, as well 

as amended § 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 § 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. 

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 § 37.1303. 

Amended § 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 § 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 

§ 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 § 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 

§ 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 § 37.1301(a). 

With respect to § 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 § 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 

§ 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 

§ 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 § 37.1303 only requires most 

SEFs to maintain three months of 

projected operating costs. As a result, 

amended § 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 winddown costs are greater. For certain SEFs 

with wind-down costs that exceed six 

months of operating costs, amended 

§ 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. 

Amended § 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 §§ 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 § 37.1306(e) benefits market 

integrity by ensuring that the 

Commission is aware of any noncompliance 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 § 37.1306(a), increasing the 

Commission’s ability to promptly 

respond. 

iii. Costs 

Amended § 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 § 37.1301(a). 

The acceptable practices provide 

guidance on the costs that a SEF may 

exclude when determining its 

obligations under amended § 37.1301(a). 

As a result, amended § 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 § 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 

§ 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 § 37.1303 since it is more 

difficult for a SEF to timely liquidate its 

illiquid assets to cover its operating 


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248See § 37.1306(c). 

249See Core Principles Final Rule at 33580. 

250As 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. 

costs, especially during periods of 

market instability. Accordingly, the 

Commission believes a SEF’s liquid 

financial assets, which the Commission 

addresses in amended § 37.1303 below, 

is more important for sustaining a SEF’s 

financial health and continuing 

operations. 

Amended § 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 § 37.1303 should not increase 

the liquidity requirement for most SEFs. 

Amended § 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 §§ 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 

§ 37.1306(a) will impose greater costs on 

a SEF. Specifically, amended 

§ 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. GAAPcompliant financial reports. 

The Commission does not believe 

amended § 37.1306(c) will increase 

costs. Under existing § 37.1306(c), a SEF 

must provide sufficient documentation 

explaining the methodology it used to 

compute its financial resources 

requirements; accordingly, amended 

§ 37.1306(c) is merely clarifying the type 

of information that is already 

required.248 Similarly, the Commission 

does not believe amended § 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 noncompliance, rather than informing the 

Commission through a SEF’s quarterly 

financial submission, amended 

§ 37.1306(e) could impose a de minimis 

cost to prepare a notice from a noncompliant SEF. 

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 § 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 winddown 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. 

Moreover, under amended 

§ 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. GAAPcompliant quarterly financial 

submissions under amended 

§ 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 § 37.1301(a) and § 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 § 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 § 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 § 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 


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251 2019 WMBAA Letter at 21. 

252 Id. 

253 Id. 

254Commenters 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. 

255As discussed below, the Commission proposes 

to define senior officer to mean the chief executive 

officer or other equivalent officer of the SEF. 

256This requirement is in amended § 37.1501(b). 

257This requirement is in amended 

§ 37.1501(b)(6). 

258This requirement is in amended 

§ 37.1501(c)(5). 

259This requirement is in amended 

§ 37.1501(c)(2). 

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 § 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 § 37.1306(c) requires a SEF to 

explain the basis of its determination for 

its estimate of its wind-down costs and 

timing. Amended § 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 noncompliance. 

(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. 

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. 

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. 

First, the Proposed Rule included 

amendments to § 37.1301(b), which 

requires a SEF that also operates as a 

DCO to also comply with the financial 

resource requirements for DCOs under 

§ 39.11. Specifically, the Commission 

proposed to amend § 37.1301(b) to 

permit SEFs that also operate as DCOs 

to file a single financial report under 

§ 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 

§ 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 

§ 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 

§ 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 § 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 

§ 37.1501(b)(3)(i). 

Second, the Commission is 

consolidating and amending existing 

§ 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 

§ 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. 


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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 9245 

260This requirement is in amended § 37.1501(d). 261This requirement is in amended 

§ 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. 262This requirement is in amended 

§ 37.1501(d)(4). 263This requirement is in amended 

§ 37.1501(d)(5). 264This requirement is in amended 

§ 37.1501(d)(1). 265This requirement is in amended 

§ 37.1501(d)(2). 266This requirement is in amended 

§ 37.1501(e)(2). 

267This requirement is in amended 

§ 37.1501(e)(4). 

268This requirement is in amended 

§ 37.1501(e)(3). 

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. 

Third, the Commission is making 

certain amendments to the ACR 

regulations in existing § 37.1501(e) 260 in 

order to remove duplicative or 

unnecessary information requirements 

and streamline existing requirements. 

The Commission is removing existing 

§ 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 

§ 37.1501(e)(4).261 The Commission is 

amending existing § 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 § 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 § 37.1501(e)(1) 264 with the 

CCO’s required assessment of the 

effectiveness of these policies and 

procedures under existing 

§ 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 

§ 37.1501(e)(3) and existing 

§ 37.1501(e)(2)(iii),265 respectively. 

The Commission is finalizing several 

amendments to simplify the ACR 

submission procedures. The 

Commission is amending existing 

§ 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 § 37.1501(f)(4).267 The 

Commission is amending existing 

§ 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. 

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 § 37.1501(c)(1)(iii), which 

requires a quarterly meeting with the 

ROC and existing § 37.1501(c)(1)(iv), 

which requires the CCO to provide selfregulatory 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 § 37.1501(b) and 

(c) into final § 37.1501(b). The 

Commission is eliminating existing 

§ 37.1501(b)(1), which requires a SEF to 

designate a CCO and existing 

§ 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 § 37.1500. 

The Commission is eliminating the 

requirement under existing 

§ 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 

§ 37.1501(f), which is existing 

§ 37.1501(g). 

The Commission is finalizing an 

amendment to § 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 nonexclusive 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. 

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 § 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 § 37.1501(e)(2)(i) and certain 

specific content set forth under 

§ 37.1501(e)(4) should reduce the 

amount of time that a CCO and his or 

her staff spend preparing the ACR. 

Amended § 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 § 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-ofyear 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. 


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9246 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 

271See § 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. 

272 2019 WMBAA Letter at 23. 

273 Id. at 25. 

274 Id. at 26. 

275 Id. at 27. 

276Refinitiv Letter at 14. 

iii. Costs 

The amendments to § 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 § 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. 

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 § 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 noncompliance 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. 

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 

§ 37.1500(d)(2) does not create 


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

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. 

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 

■ 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. 

■ 2. Amend § 37.205 by revising 

paragraph (a) and removing paragraph 

(b)(2)(iv), the revision to read as follows: 

§ 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. 

* * * * * 

■ 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. 

§ 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. 

§ 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 § 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 § 39.11 of this chapter. 

§ 37.1302 Types of financial resources. 

Financial resources available to 

satisfy the requirements of § 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. 

§ 37.1303 Liquidity of financial resources. 

The financial resources allocated by 

the swap execution facility to meet the 

ongoing requirements of § 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 § 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. 

§ 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 §§ 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. 

§ 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 §§ 37.1301 and 

37.1303. Reductions in value to reflect 

market and credit risk (‘‘haircuts’’) shall 

be applied as appropriate. 

§ 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 

§§ 37.1301 and 37.1303, computed in 

accordance with the requirements of 

§ 37.1304, and the market value of each 

available financial resource, computed 

in accordance with the requirements of 

§ 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. 


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(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 §§ 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 § 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 §§ 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 § 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 

§ 37.1301 or 37.1303. 

§ 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 § 37.1302 may 

be used to satisfy the requirements of 

§ 37.1301; 

(2) Review and make changes to the 

methodology used to compute projected 

operating costs and wind-down costs 

under § 37.1304 and the valuation of 

financial resources under § 37.1305; 

(3) Request reports, in addition to 

those required in § 37.1306, or 

additional documentation or 

information under § 37.1306(a), (c), and 

(e); and 

(4) Grant an extension of time to file 

fiscal quarter reports under § 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. 

■ 4. Revise § 37.1501 to read as follows: 

§ 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 § 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; 


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(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 § 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 § 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 §§ 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. 

■ 5. Amend Appendix B to Part 37 by: 

■ a. Under the heading ‘‘Core Principle 

13 of Section 5h of the Act—Financial 

Resources,’’ adding paragraph (b); and 

■ 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; 


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9250 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 

1Swap Execution Facilities and Trade Execution 

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

‘‘SEF Proposal’’). 

2Swap Execution Facility Requirements (Nov. 18, 

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

PressReleases/8313-20. 

3Statement of Concurrence of Commissioner 

Rostin Behnam Regarding Swap Execution 

Facilities and Trade Execution Requirement, 

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

SpeechesTestimony/behnamstatement110518a. 

4 Id. 

5 Id. 

(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 § 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 § 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. 

Back in November 2018, I expressed 

concern that finalization of the SEF Proposal 

would reduce transparency, increase 

limitations on access to SEFs, and add 

significant costs for market participants.3 I 

also noted that, while the existing SEF 

framework could benefit from targeted 

changes, particularly the codification of 

existing no-action relief, the SEF framework 

has in many ways been a success. I pointed 

out that the Commission’s work to promote 

swaps trading on SEFs has resulted in 

increased liquidity, while adding pre-trade 

price transparency and competition. 

Nonetheless, I voted to put the SEF Proposal 

out for public comment, anticipating that the 

notice and comment process would guide the 

Commission in identifying a narrower set of 

changes that would improve the current SEF 

framework and better align it with the 

statutory mandate and the underling policy 

objectives shaped after the 2008 financial 

crisis.4 More than two years and many 

comment letters later, that is exactly what 

has happened. The Commission has been 

precise and targeted in its finalization of 

specific provisions from the SEF Proposal 

that provide needed clarity to market 

participants and promote consistency, 

competitiveness, and appropriate operational 

flexibility consistent with the core principles. 

In addition to expressing substantive 

concerns about the overbreadth of the SEF 

Proposal, I also voiced concerns that we were 

rushing by having a comparatively short 75- 

day comment period.5 In the end, the 

comment period was rightly extended, and 

the Commission has taken the time necessary 

to carefully evaluate the appropriateness of 

the SEF Proposal in consideration of its 

regulatory and oversight responsibilities and 

the comments received. I think that the 

consideration of the SEF Proposal is an 

example of how the process is supposed to 

work. When we move too quickly toward the 

finish line and without due consideration of 

the surrounding environment, we risk 

making a mistake that will impact our 

markets and market participants. 

Finally, I would like to address the 

Commission’s separate vote to withdraw the 

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 


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6Rostin Behnam, Commissioner, CFTC, 

Dissenting Statement of Commissioner Rostin 

Behnam Regarding Electronic Trading Risk 

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

PressRoom/SpeechesTestimony/ 

behnamstatement062520b. 

1Swap Execution Facilities and Trade Execution 

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

2 Dissenting Statement of Commissioner Dan M. 

Berkovitz Regarding Proposed Rulemaking on Swap 

Execution Facilities and Trade Execution 

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

www.cftc.gov/PressRoom/SpeechesTestimony/ 

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

working in a bipartisan fashion.6 In the case 

of today’s withdrawal, the Commission has 

voted on all appropriate aspects of the SEF 

Proposal through three rules finalized during 

the past month. The Commission has voted 

unanimously on all of these rules, including 

today’s decision to withdraw the remainder 

from further consideration. While normally a 

single proposal results in a single final rule, 

in this instance, multiple final rules have 

been finalized emanating from the SEF 

Proposal. This could lead to confusion 

regarding the Commission’s intentions 

regarding the many unadopted provisions of 

the SEF Proposal. Under such circumstances, 

I think it is appropriate to provide market 

participants with clarity regarding the SEF 

Proposal. Accordingly, I will support today’s 

withdrawal of the SEF Proposal. But rather 

than viewing it as a withdrawal of the SEF 

Proposal, I see it as an affirmation of the 

success of the existing SEF framework and 

the careful process to markedly improve the 

SEF framework in a measured and thoughtful 

way. 

Appendix 3—Statement of 

Commissioner Dan M. Berkovitz 

I support the Commission’s decision to 

withdraw its 2018 proposal to overhaul the 

regulation of swap execution facilities 

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

instead with targeted adjustments to our SEF 

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

approved today will make minor changes to 

SEF requirements while retaining the 

progress we have made in moving 

standardized swaps onto electronic trading 

platforms, which has enhanced the stability, 

transparency, and competitiveness of our 

swaps markets.2

When the Commission issued the 2018 SEF 

NPRM, I proposed that we enhance the 

existing swaps trading system instead of 

dismantling it. For example, I urged the 

Commission to clarify the floor trader 

exception to the swap dealer registration 

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

pleased that the Commission already has 

acted favorably on both of those matters. 

Today’s rulemaking represents a further 

positive step in this targeted approach. 

Many commenters to the 2018 SEF NPRM 

supported this incremental approach, 

advocating discrete amendments rather than 

wholesale changes. Today, the Commission 

is adopting two Final Rules that codify 

tailored amendments that received general 

support from commenters. The first rule— 

Swap Execution Facilities—amends part 37 

to address certain operational challenges that 

SEFs face in complying with current 

requirements, some of which are currently 

the subject of no-action relief or other 

Commission guidance. The second rule— 

Exemptions from Swap Trade Execution 

Requirement—exempts two categories of 

swaps from the trade execution requirement, 

both of which are linked to exceptions to or 

exemptions from the swap clearing 

requirement. 

Swap Execution Facilities: Audit Trail Data, 

Financial Resources and Reporting, and 

Requirements for Chief Compliance Officers 

Commission regulations require a SEF to 

capture and retain all audit trail data 

necessary to detect, investigate, and prevent 

customer and market abuses, which currently 

includes identification of each account to 

which fills are ultimately allocated.3

Following the adoption of these regulations, 

SEFs represented that they are unable to 

capture post-execution allocation data 

because the allocations occur away from the 

SEF, prompting CFTC staff to issue no-action 

relief. Other parties, including DCOs and 

account managers, must capture and retain 

post-execution allocation information and 

produce it to the CFTC upon request, and 

SEFs are required to establish rules that 

allow them obtain this allocation information 

from market participants as necessary to 

fulfill their self-regulatory responsibilities. 

Given that staff is not aware of any regulatory 

gaps that have resulted from SEFs’ reliance 

on the no-action letter, codifying this 

alternative compliance framework is 

appropriate. 

This Swap Execution Facility final rule 

also will amend part 37 to tie a SEF’s 

financial resource requirements more closely 

to the cost of its operations, whether in 

complying with core principles and 

Commission regulations or winding down its 

operations. Based on its experience 

implementing the SEF regulatory regime, the 

Commission believes that these amended 

resource requirements—some of which 

simply reflect current practice—will be 

sufficient to ensure that a SEF is financially 

stable while avoiding the imposition of 

unnecessary costs. Additional amendments 

to part 37, including requirements that a SEF 

must prepare its financial statements in 

accordance with U.S. GAAP standards, 

identify costs that it has excluded in 

determining its projected operated costs, and 

notify the Commission within 48 hours if it 

is unable to comply with its financial 

resource requirements, will further enhance 

the Commission’s ability to exercise it 

oversight responsibilities. 

Finally, this rule makes limited changes to 

the Chief Compliance Officer (‘‘CCO’’) 

requirements. As a general matter, I agree 

that the Commission should clarify certain 

CCO duties and streamline CCO reporting 

requirements where information is 

duplicative or not useful to the Commission. 

Although the CCO requirements diverge 

somewhat from those for futures commission 

merchants and swap dealers, the role of SEFs 

is different and therefore, standardization is 

not always necessary or appropriate. I expect 

that the staff will continue to monitor the 

effects of all of the changes adopted today 

and inform the Commission if it believes 

further changes to our rules are needed. 

Exemptions From Swap Trade Execution 

Requirement 

Commodity Exchange Act (‘‘CEA’’) section 

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

from the clearing requirement pursuant to 

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

requirement to trade the swap on a SEF. 

Accordingly, swaps that fall into the 

statutory swap clearing exceptions (e.g., 

commercial end-users and small banks) are 

also excepted from the trading mandate. 

However, the Commission has also exempted 

from mandatory clearing swaps entered into 

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

banks, and swaps between affiliates) using 

different exemptive authorities from section 

2(h)(7). 

The Exemptions from Swap Trade 

Execution Requirement final rule affirms the 

link between the clearing mandate and the 

trading mandate for swaps that are exempted 

from the clearing mandate under authorities 

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

additional clearing exemptions are typically 

provided by the Commission to limited types 

of market participants, such as cooperatives 

or central banks that use swaps for 

commercial hedging or have financial 

structures or purposes that greatly reduce the 

need for mandatory clearing and SEF trading. 

In addition, limited data provided in the 

release indicates that, at least up to this point 

in time, these exempted swaps represent a 

small percentage of the notional amount of 

swaps traded. 

This final rule also exempts inter-affiliate 

swaps from the trade execution requirement. 

These swaps are exempted from the clearing 

requirement primarily because the risks on 

both sides of the swap are, at least in some 

respects, held within the same corporate 

enterprise. As described in the final rule 

release, these swaps may not be traded at 

arms-length and serve primarily to move risk 

from one affiliate to another within the same 

enterprise. Neither market transparency nor 

price discovery would be enhanced by 

including these transactions within the trade 

execution mandate. For these reasons, I am 

approving the Exemptions from Swap Trade 

Execution Requirement final rule as a 

sensible exemption consistent with the 

relevant sections of the CEA. 

Conclusion 

These two Final Rules provide targeted 

changes to the SEF regulations based on 

experience from several years of 

implementing them. These limited changes, 

together with the withdrawal of the 

remainder of the 2018 SEF NPRM, effectively 

leave in place the basic framework of the SEF 

rules as originally adopted by the 

Commission. This framework has enhanced 

market transparency, improved competition, 

lowered transaction costs, and resulted in 

better swap prices for end users. While it 

may be appropriate to make other 

incremental changes going forward, it is 

important that we affirm the established 

regulatory program for SEFs to maintain 


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9252 Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations 

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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