Vol. 78 Tuesday, 

No. 107 June 4, 2013 

Part II 

Commodity Futures Trading Commission 

17 CFR Part 37 

Core Principles and Other Requirements for Swap Execution Facilities; 

Final Rule 

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33476 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

1See Commodity Futures Modernization Act of 

2000, Public Law 106–554, 114 Stat. 2763 (2000). 

2See The Financial Crisis Inquiry Commission, 

The Financial Crisis Inquiry Report: Final Report of 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 37 

RIN 3038–AD18 

Core Principles and Other 

Requirements for Swap Execution 

Facilities 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting new rules, 

guidance, and acceptable practices to 

implement certain statutory provisions 

enacted by Title VII of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’). The 

final rules, guidance, and acceptable 

practices, which apply to the 

registration and operation of a new type 

of regulated entity named a swap 

execution facility (‘‘SEF’’), implement 

the Dodd-Frank Act’s new statutory 

framework that, among other 

requirements, adds a new section 5h to 

the Commodity Exchange Act (‘‘CEA’’ or 

‘‘Act’’) concerning the registration and 

operation of SEFs, and adds a new 

section 2(h)(8) to the CEA concerning 

the execution of swaps on SEFs. 

DATES: The rules will become effective 

August 5, 2013, with the exception of 

regulation 37.3(b)(5) (17 CFR 37.3(b)(5)), 

which shall become effective August 5, 

2015. 

Compliance date: October 2, 2013, 

except that: (a) From August 5, 2013 

until October 2, 2014 market 

participants may comply with the 

minimum market participant 

requirement in regulation 37.9(a)(3) (17 

CFR 37.9(a)(3)) by transmitting a request 

for a quote to no less than two market 

participants; and (b) each affected entity 

shall comply with the warning letter 

requirement in regulation 37.206(f) (17 

CFR 37.206(f)) no later than August 5, 

2014. 

FOR FURTHER INFORMATION CONTACT: 

Amir Zaidi, Special Counsel, 202–418– 

6770, azaidi@cftc.gov, Alexis Hall-Bugg, 

Special Counsel, 202–418–6711, 

ahallbugg@cftc.gov, or David Van 

Wagner, Chief Counsel, 202–418–5481, 

dvanwagner@cftc.gov, Division of 

Market Oversight; Michael Penick, 

Senior Economist, 202–418–5279, 

mpenick@cftc.gov, or Sayee Srinivasan, 

Research Analyst, 202–418–5309, 

ssrinivasan@cftc.gov, Office of the Chief 

Economist, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Swaps and Title VII of the Dodd-Frank 

Act 

B. SEF Notice of Proposed Rulemaking 

II. Part 37 of the Commission’s Regulations— 

Final Rules 

A. Adoption of Regulations, Guidance, and 

Acceptable Practices 

B. General Regulations (Subpart A) 

1. § 37.1—Scope 

2. § 37.2—Applicable Provisions 

3. § 37.3—Requirements for Registration 

4. § 37.4—Procedures for Listing Products 

and Implementing Rules 

5. § 37.5—Information Relating to Swap 

Execution Facility Compliance 

6. § 37.6—Enforceability 

7. § 37.7—Prohibited Use of Data Collected 

for Regulatory Purposes 

8. § 37.8—Boards of Trade Operating Both 

a Designated Contract Market and a 

Swap Execution Facility 

9. § 37.9—Permitted Execution Methods 

10. § 37.10—Swaps Made Available for 

Trading 

11. § 37.11—Identification of Non-Cleared 

Swaps or Swaps Not Made Available To 

Trade 

C. Regulations, Guidance, and Acceptable 

Practices for Compliance With the Core 

Principles 

1. Subpart B—Core Principle 1 

(Compliance With Core Principles) 

2. Subpart C—Core Principle 2 

(Compliance With Rules) 

(a) § 37.200—Core Principle 2— 

Compliance With Rules 

(b) § 37.201—Operation of Swap Execution 

Facility and Compliance With Rules 

(c) § 37.202—Access Requirements 

(d) § 37.203—Rule Enforcement Program 

(e) § 37.204—Regulatory Services Provided 

by a Third Party 

(f) § 37.205—Audit Trail 

(g) § 37.206—Disciplinary Procedures and 

Sanctions 

(h) § 37.207—Swaps Subject to Mandatory 

Clearing 

3. Subpart D—Core Principle 3 (Swaps Not 

Readily Susceptible to Manipulation) 

4. Subpart E—Core Principle 4 (Monitoring 

of Trading and Trade Processing) 

(a) § 37.401—General Requirements 

(b) § 37.402—Additional Requirements for 

Physical-Delivery Swaps 

(c) § 37.403—Additional Requirements for 

Cash-Settled Swaps 

(d) § 37.404—Ability To Obtain 

Information 

(e) § 37.405—Risk Controls for Trading 

(f) § 37.406—Trade Reconstruction 

(g) § 37.407—Additional Rules Required 

5. Subpart F—Core Principle 5 (Ability To 

Obtain Information) 

(a) § 37.501—Establish and Enforce Rules 

(b) § 37.502—Collection of Information 

(c) § 37.503—Provide Information to the 

Commission 

(d) § 37.504—Information-Sharing 

Agreements 

6. Subpart G—Core Principle 6 (Position 

Limits or Accountability) 

7. Subpart H—Core Principle 7 (Financial 

Integrity of Transactions) 

(a) § 37.701—Mandatory Clearing 

(b) § 37.702—General Financial Integrity 

(c) § 37.703—Monitoring for Financial 

Soundness 

8. Subpart I—Core Principle 8 (Emergency 

Authority) 

(a) § 37.801—Additional Sources for 

Compliance 

9. Subpart J—Core Principle 9 (Timely 

Publication of Trading Information) 

10. Subpart K—Core Principle 10 

(Recordkeeping and Reporting) 

11. Subpart L—Core Principle 11 (Antitrust 

Considerations) 

12. Subpart M—Core Principle 12 

(Conflicts of Interest) 

13. Subpart N—Core Principle 13 

(Financial Resources) 

(a) § 37.1301—General Requirements 

(b) § 37.1302—Types of Financial 

Resources 

(c) § 37.1303—Computation of Financial 

Resource Requirement 

(d) § 37.1304—Valuation of Financial 

Resources 

(e) § 37.1305—Liquidity of Financial 

Resources 

(f) § 37.1306—Reporting Requirements 

14. Subpart O—Core Principle 14 (System 

Safeguards) 

(a) § 37.1401—Requirements 

15. Subpart P—Core Principle 15 

(Designation of Chief Compliance 

Officer) 

(a) § 37.1501—Chief Compliance Officer 

III. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost Benefit Considerations 

1. Introduction 

2. SEF Market Structure 

3. Registration 

4. Recordkeeping and Reporting 

5. Compliance 

6. Monitoring and Surveillance 

7. Financial Resources 

8. Emergency Operations and System 

Safeguards 

IV. List of Commenters 

V. Text of Final Regulations, Guidance, and 

Acceptable Practices 

I. Background 

A. Swaps and Title VII of the DoddFrank Act 

Historically, swaps have traded in 

over-the-counter (‘‘OTC’’) markets, 

rather than on regulated exchanges 

given their exemption from regulation.1

The OTC swaps market is less 

transparent than exchange-traded 

futures and securities markets. This lack 

of transparency was a major contributor 

to the 2008 financial crisis because 

regulators and market participants 

lacked visibility to identify and assess 

the implications of swaps market 

exposures and counterparty 

relationships.2 As a result, on July 21, 

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the National Commission on the Causes of the 

Financial and Economic Crisis in the United States 

(Official Government Edition), at 299, 352, 363–364, 

386, 621 n. 56 (2011), available at http://fcicstatic.law.stanford.edu/cdn_media/fcic-reports/ 

fcic_final_report_full.pdf. The Commission has 

acknowledged, however, that the benefits of 

enhanced market transparency are not boundless, 

particularly in swap markets with limited liquidity. 

See Procedures to Establish Appropriate Minimum 

Block Sizes for Large Notional Off-Facility Swaps 

and Block Trades, 77 FR 15460, 15466 (proposed 

Mar. 15, 2012). In implementing these regulations, 

the Commission has taken into account the benefits 

and concerns related to market transparency. 

3 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, 124 Stat. 1376 

(2010). 

4Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

5 7 U.S.C. 1 et seq. 

6See Financial Stability Board, Implementing 

OTC Derivatives Market Reforms, at 41 (Oct. 25, 

2010), available at http://www.financialstability

board.org/publications/r_101025.pdf; Technical 

Committee of the International Organization of 

Securities Commissions, Transparency of 

Structured Finance Products Final Report, at 17, 21 

(Jul. 2010), available at http://www.iosco.org/

library/pubdocs/pdf/IOSCOPD326.pdf. 

7See CEA section 5h, as enacted by section 733 

of the Dodd-Frank Act; 7 U.S.C. 7b–3. This 

regulatory framework includes: (i) Registration, 

operation, and compliance requirements for SEFs 

and (ii) fifteen core principles. Applicants and 

registered SEFs are required to comply with the 

core principles as a condition of obtaining and 

maintaining their registration as a SEF. 

8CEA section 5h(a)(1), as enacted by section 733 

of the Dodd-Frank Act; 7 U.S.C. 7b–3(a)(1). 

9CEA section 1a(50), as amended by section 721 

of the Dodd-Frank Act; 7 U.S.C. 1a(50). 

10CEA section 2(h)(8), as amended by section 723 

of the Dodd-Frank Act; 7 U.S.C. 2(h)(8). 

11CEA section 5h, as enacted by section 733 of 

the Dodd-Frank Act; 7 U.S.C. 7b–3. 

12CEA section 5h(f)(1); 7 U.S.C. 7b–3(f)(1). 

13Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR 1214 (proposed 

Jan. 7, 2011). 

14 Id. at 1238. 

15 Id. at 1241. 

16CEA section 1a(50); 7 U.S.C. 1a(50). 

17CEA section 5h(f); 7 U.S.C. 7b–3(f). 

18The goals of section 733 of the Dodd-Frank Act 

are to promote the trading of swaps on SEFs and 

to promote pre-trade price transparency in the 

swaps market. CEA section 5h(e); 7 U.S.C. 7b–3(e). 

19Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1241. 

20 Id. 

21 Id. 

22By ‘‘in conjunction with the SEF’s minimum 

trading functionality,’’ the Commission means that 

the SEF NPRM required a SEF to offer the minimum 

trading functionality, and if that SEF also offered an 

RFQ System, it was required to communicate any 

bids or offers resting on the minimum trading 

functionality to the RFQ requester along with the 

responsive quotes. See the discussion below 

regarding ‘‘Taken Into Account and 

Communicated’’ Language in the RFQ System 

Definition under § 37.9(a)(1)(ii)—Request for Quote 

System in the preamble for further details. 

23Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1220. 

2010, President Obama signed the 

Dodd-Frank Act,3 which tasked the 

Commission with overseeing a large 

portion of the U.S. swaps market. 

Title VII of the Dodd-Frank Act 4

amended the CEA 5 to establish a 

comprehensive new regulatory 

framework for swaps and security-based 

swaps (‘‘SB-swaps’’). A key goal of the 

Dodd-Frank Act is to bring greater pretrade and post-trade transparency to the 

swaps market. Pre-trade transparency 

with respect to the swaps market refers 

to making information about a swap 

available to the market, including bid 

(offers to buy) and offer (offers to sell) 

prices, quantity available at those 

prices, and other relevant information 

before the execution of a transaction. 

Such transparency lowers costs for 

investors, consumers, and businesses; 

lowers the risks of the swaps market to 

the economy; and enhances market 

integrity to protect market participants 

and the public. The Dodd-Frank Act 

also ensures that a broader universe of 

market participants receive pricing and 

volume information by providing such 

information upon the completion of 

every swap transaction (i.e., post-trade 

transparency).6 By requiring the trading 

of swaps on SEFs and designated 

contract markets (‘‘DCMs’’), all market 

participants will benefit from viewing 

the prices of available bids and offers 

and from having access to transparent 

and competitive trading systems or 

platforms. 

In addition to facilitating greater 

transparency and trading of swaps on 

SEFs, Title VII of the Dodd-Frank Act 

establishes a comprehensive regulatory 

framework, including registration, 

operation, and compliance requirements 

for SEFs.7 For example, section 733 of 

the Dodd-Frank Act sets forth a broad 

registration provision that requires any 

person who operates a facility for the 

trading of swaps to register as a SEF or 

as a DCM.8 In addition, section 721 of 

the Dodd-Frank Act amended the CEA 

to define SEF as a trading platform 

where multiple participants have the 

ability to execute swaps by accepting 

bids and offers made by multiple 

participants in the platform.9

Furthermore, section 723 of the DoddFrank Act set forth a trade execution 

requirement, which states that swap 

transactions subject to the clearing 

requirement must be executed on a 

DCM or SEF, unless no DCM or SEF 

makes the swap available to trade or for 

swap transactions subject to the clearing 

exception under CEA section 2(h)(7).10

Section 733 of the Dodd-Frank Act 

provided that to be registered and 

maintain registration, a SEF must 

comply with fifteen enumerated core 

principles and any requirement that the 

Commission may impose by rule or 

regulation.11

B. SEF Notice of Proposed Rulemaking 

The Dodd-Frank Act amended the 

CEA to provide that, under new section 

5h, the Commission may in its 

discretion determine by rule or 

regulation the manner in which SEFs 

comply with the core principles.12 In 

consideration of both the novel nature 

of SEFs and its experience in overseeing 

DCMs’ compliance with core principles, 

the Commission carefully assessed 

which SEF core principles would 

benefit from regulations, providing legal 

certainty and clarity to the marketplace, 

and which core principles would 

benefit from guidance or acceptable 

practices, where flexibility is more 

appropriate. Based on that evaluation, 

on January 7, 2011, the Commission 

proposed a combination of regulations, 

guidance, and acceptable practices for 

the registration, oversight, and 

regulation of SEFs (‘‘SEF NPRM’’).13

The SEF NPRM provided, among 

other requirements, the following: 

(1) Procedures for temporary and full 

SEF registration.14

(2) A minimum trading functionality 

requirement that all SEFs must offer,15

which took into account the SEF 

definition,16 the core principles 

applicable to SEFs,17 and the goals 

provided in section 733 of the DoddFrank Act.18 The minimum trading 

functionality required a SEF to provide 

a centralized electronic trading screen 

upon which any market participant can 

post both executable and nonexecutable bids and offers that are 

transparent to all other market 

participants of the SEF.19 For a trader 

who has the ability to execute against its 

customer’s order or to execute two 

customers’ orders against each other, the 

SEF NPRM also required the trader be 

subject to a 15 second time delay 

between the entry of those two orders.20

In addition, the proposal allowed a 

Request for Quote (‘‘RFQ’’) System 21

that operates in conjunction with the 

SEF’s minimum trading functionality.22

Finally, the SEF NPRM stated that a SEF 

may offer other functionalities in 

conjunction with the minimum trading 

functionality, as long as those 

functionalities meet the SEF definition 

and comply with the core principles.23

(3) The classification of swap 

transactions into two categories: 

Required Transactions (i.e., transactions 

subject to the trade execution mandate 

under section 2(h)(8) of the CEA and not 

block trades) and Permitted 

Transactions (i.e., transactions not 

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24 Id. at 1241. 

25 Id. 

26 Id. 

27 Id. at 1241–1253, 1256–1258. 

28Reopening and Extension of Comment Periods 

for Rulemakings Implementing the Dodd-Frank 

Wall Street Reform and Consumer Protection Act, 

76 FR 25274 (May 4, 2011). The Commission 

extended the applicable comment periods to 

provide the public an additional opportunity to 

comment on the proposed new regulatory 

framework. The Commission also opened an 

additional comment period, which ended on June 

10, 2011, to provide the public an opportunity to 

comment on the Commission’s phased 

implementation of the Act, as amended, including 

its implementation of section 733 of Dodd-Frank 

Act. Joint Public Roundtable on Issues Related to 

the Schedule for Implementing Final Rules for 

Swaps and Security-Based Swaps Under the DoddFrank Wall Street Reform and Consumer Protection 

Act, 76 FR 23221 (Apr. 26, 2011). 

29The Commission also held two roundtables 

touching on issues related to the SEF NPRM: (1) 

‘‘Available to Trade’’ Provision for Swap Execution 

Facilities and Designated Contract Markets; and (2) 

Proposed Regulations Implementing Core Principle 

9 for Designated Contract Markets. Transcripts are 

available through the Commission’s Web site at 

http://www.cftc.gov/PressRoom/Events/2012Events/ 

index.htm. 

30A list of the full names and abbreviations of 

commenters to the SEF NPRM is included in 

section IV at the end of this release. The 

Commission notes that many commenters 

submitted more than one comment letter. 

Additionally, all comment letters that pertain to the 

SEF NPRM, including those from the additional 

comment periods related to implementation of the 

final Dodd-Frank rules, are contained in the SEF 

rulemaking comment file and are available through 

the Commission’s Web site at http:// 

comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=955. 31Meeting summaries are available through the 

Commission’s Web site at http://comments.cftc.gov/ 

PublicComments/CommentList.aspx?id=955. 32Registration and Regulation of Security-Based 

Swap Execution Facilities, 76 FR 10948 (proposed 

Feb. 28, 2011). 

33 15 U.S.C. 8302(a)(1). 

34Tradeweb Comment Letter at 3–4 (Jun. 3, 2011); 

Reuters Comment Letter 3–4 (Mar. 8, 2011); FSR 

Comment Letter at 10–11 (Mar. 8, 2011); WMBAA 

Comment Letter at 10–11 (Mar. 8, 2011). 

35Registration and Regulation of Security-Based 

Swap Execution Facilities, 76 FR at 10950. 

subject to the clearing and trade 

execution mandates, illiquid or bespoke 

swaps, or block trades).24 Under the SEF 

NPRM, Required Transactions were 

required to be executed on the 

minimum trading functionality, an 

Order Book meeting the minimum 

trading functionality, or an RFQ System 

(in conjunction with the minimum 

trading functionality).25 The SEF NPRM 

also allowed a SEF to provide additional 

methods of execution for Permitted 

Transactions, including Voice-Based 

Systems.26

(4) Regulations, guidance, and 

acceptable practices to implement the 

15 core principles specified in section 

5h(f) of the Act.27

The initial comment period for the 

SEF NPRM ended on March 8, 2011. 

Subsequently, the Commission 

reopened the comment period until June 

3, 2011, as part of its global extension 

of comment periods for various 

rulemakings implementing the DoddFrank Act.28 After the second comment 

period ended, the Commission 

continued to accept and consider late 

comments, which it did until April 30, 

2013.29 The Commission received 

approximately 107 comment letters on 

the SEF NPRM from members of the 

public.30 The Chairman and 

Commissioners, as well as the 

Commission staff, participated in 

numerous meetings with representatives 

of single dealer platforms, interdealer 

brokers, DCMs, trade associations, OTC 

market participants, potential SEF 

applicants, and other interested 

parties.31 In addition, the Commission 

consulted with the Securities and 

Exchange Commission (‘‘SEC’’) and 

international regulators on numerous 

occasions. 

II. Part 37 of the Commission’s 

Regulations—Final Rules 

A. Adoption of Regulations, Guidance, 

and Acceptable Practices 

In this final rulemaking, the 

Commission is adopting many of the 

proposed regulations that each SEF 

must meet in order to comply with 

section 5h of the CEA, both initially 

upon registration and on an ongoing 

basis, and related guidance, and 

acceptable practices. As a result of the 

written comments received and 

dialogue and meetings with the public, 

the Commission has revised or 

eliminated a number of regulations that 

were proposed in the SEF NPRM, and 

in a number of instances, has codified 

guidance and/or acceptable practices in 

lieu of the proposed regulations. In 

determining the scope and content of 

the final SEF regulations, the 

Commission has carefully considered 

the costs and benefits for each rule with 

particular attention to the public 

comments. Additionally, the 

Commission has taken into account the 

concerns raised by commenters 

regarding the potential effects of specific 

rules on SEFs offering different swap 

contracts and trading systems or 

platforms and the importance of the 

statutory differences between SEFs and 

DCMs. The Commission addresses these 

issues below in its discussion of specific 

rule provisions. 

The Commission also notes that the 

SEC has proposed rules related to 

security-based SEFs (‘‘SB–SEFs’’) as 

required under section 763 of the DoddFrank Act (‘‘SB–SEF NPRM’’).32 Section 

712(a) of the Dodd-Frank Act states that 

before commencing any rulemaking 

regarding swap execution facilities, the 

Commission ‘‘shall consult and 

coordinate to the extent possible with 

the Securities and Exchange 

Commission and the prudential 

regulators for the purposes of assuring 

regulatory consistency and 

comparability . . . .’’ 33 The 

Commission has also received several 

comments stating that the Commission 

and the SEC should harmonize their 

rules as much as possible.34

The Commission has coordinated 

with the SEC to harmonize the SEF and 

SB–SEF requirements to the extent 

possible and has taken into 

consideration the comments for greater 

harmonization between the SEF and 

SB–SEF regulations. However, there 

may be appropriate differences in the 

approach that each agency may take 

regarding the regulation of SEFs and 

SB–SEFs. Cognizant of the different 

products and markets regulated by the 

SEC and the Commission, the SEC 

recognized in its SB–SEF NPRM that 

there may be differences in the 

approach that each agency may take 

regarding the regulation of SEFs and 

SB–SEFs.35

Similarly, the Commission is mindful 

that swaps may also trade on DCMs. 

Thus, in addition to its efforts to 

coordinate its approach with the SB– 

SEF regulations, the Commission also 

seeks, where possible, to harmonize the 

final SEF regulations with the DCM 

regulations in order to minimize 

regulatory differences between SEFs and 

DCMs in those instances where 

Congress enacted similar core principles 

for the two types of registered entities. 

In addition, some differences in the 

agencies’ regulatory oversight regimes 

may be attributed to the fact that, unlike 

the SEC that is only responsible for 

overseeing trading in SB-swaps, such as 

single-name securities and narrowbased security indexes, the Commission 

is charged with the oversight of swaps 

trading over a broad range of asset 

categories. Consequently, the 

Commission has taken into account the 

varied characteristics of those 

underlying commodities in formulating 

the regulatory responsibilities of SEFs. 

In the preamble sections below, the 

Commission responds to the substantive 

comments submitted in response to the 

SEF NPRM. The Commission reviewed 

and considered all comments in 

adopting this final rulemaking. Further, 

the final regulations include a number 

of technical revisions and nonsubstantive changes to the proposed 

rule text intended to clarify certain 

provisions, standardize terminology 

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36Subparts B through P begin with a regulation 

containing the language of the core principle in the 

Act. 

37The Commission has removed the phrase ‘‘has 

been registered’’ from proposed § 37.1 because a 

SEF that has been registered is the same as a SEF 

that is registered. 

38Adaptation of Regulations to Incorporate 

Swaps, 77 FR 66288 (Nov. 2, 2012). The 

Commission may promulgate a second phase of 

conforming changes to its regulations once more 

rules relating to swaps are finalized. 

39The term ‘‘contract market’’ used in § 1.60 of 

the Commission’s regulations should be interpreted 

to include a SEF for purposes of applying the 

requirements of § 1.60 to a SEF. 17 CFR 1.60. 

40The term ‘‘exchange’’ used in part 9 of the 

Commission’s regulations should be interpreted to 

include a SEF for purposes of applying the 

requirements of part 9 to a SEF. 17 CFR part 9. 

41The Commission is renaming the title of this 

section from ‘‘Requirements for Registration’’ to 

‘‘Requirements and Procedures for Registration’’ to 

provide greater clarity. The Commission is also 

restructuring the order of § 37.3 to provide clarity. 

42Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1219. 

43 Id. 

44 Id. 

45CEA section 5h(a)(1) states that ‘‘[n]o person 

may operate a facility for the trading or processing 

of swaps unless the facility is registered as a swap 

execution facility or designated contract 

market. . . .’’ 7 U.S.C. 7b–3(a)(1). 

46Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1219. 

47 Id. at 1221–22. CEA sections 2(h)(7) and 

2(h)(8); 7 U.S.C. 2(h)(7) and 2(h)(8). See discussion 

below under § 37.10—Swaps Made Available for 

Trading in the preamble for further details 

regarding this process. 

48 Id. at 1222. 

49CEA section 5h(a)(1) states that ‘‘[n]o person 

may operate a facility for the trading or processing 

of swaps unless the facility is registered as a swap 

execution facility or designated contract 

market. . . .’’ 7 U.S.C. 7b–3(a)(1). UBS Comment 

Letter at 1–2 (May 18, 2012); UBS Comment Letter 

at 2–3 (Nov. 2, 2011); Barclays Comment Letter at 

2 (Jun. 3, 2011); Deutsche Comment Letter at 6 

(Mar. 8, 2011); Bloomberg Comment Letter at 3 

(Mar. 8, 2011); State Street Comment Letter at 3 

(Mar. 8, 2011); CME Comment Letter at 8 (Mar. 8, 

2011). 

50UBS Comment Letter at 1 (May 18, 2012). The 

Commission notes that UBS submitted 2 comment 

letters on May 18, 2012. 

within this part 37, conform 

terminology to that used in other parts 

of the Commission’s regulations, and 

more precisely state regulatory 

standards and requirements. For 

example, a minimum trading 

functionality requirement was in 

proposed § 37.9, which has been moved 

to the registration section under final 

§ 37.3 to clarify that this functionality is 

required in order to register as a SEF. 

The final regulations will become 

effective 60 days after their publication 

in the Federal Register. 

B. General Regulations (Subpart A) 

The regulations in this final 

rulemaking are codified in subparts A 

through P under part 37 of the 

Commission’s regulations. The general 

regulations consisting of §§ 37.1 through 

37.9 are codified in subpart A, and the 

regulations applicable to each of the 15 

core principles are codified in subparts 

B through P, respectively.36

1. § 37.1—Scope 

Proposed § 37.1 provided that part 37 

applies to entities that are registered 

SEFs, have been registered SEFs, or are 

applying to become registered SEFs. The 

proposed rule also stated that part 37 

does not restrict the eligibility of SEFs 

to operate under the provisions of parts 

38 or 49 of this chapter. 

(a) Commission Determination 

The Commission received no 

comments on this section and is 

adopting the provision as proposed.37

2. § 37.2—Applicable Provisions 

Proposed § 37.2 listed the 

Commission regulations that, in 

addition to part 37, will be applicable to 

SEFs, including regulations that have 

been codified and are proposed to be 

codified upon the Commission’s 

finalization of the rulemakings 

implemented pursuant to the DoddFrank Act. 

(a) Commission Determination 

Although it received no comments on 

this section, the Commission is revising 

proposed § 37.2 to generally state that 

SEFs shall comply with, in addition to 

part 37, all applicable Commission 

regulations, and to only cite those 

specific provisions whose applicability 

to SEFs may not be apparent. The 

Commission notes that a separate 

rulemaking adopted conforming 

changes to existing regulations to clarify 

the pre-Dodd Frank provisions 

applicable to SEFs.38 There are, 

however, certain existing regulations 

that will apply to SEFs that the separate 

rulemaking did not address. 

Accordingly, for clarity purposes, the 

Commission is specifically stating that 

§ 1.60 39 and part 9 40 of its regulations 

will apply to SEFs. These revisions will 

eliminate the need for the Commission 

to continually update § 37.2 when new 

regulations with which SEFs must 

comply are codified. 

3. § 37.3—Requirements for 

Registration 41

Proposed § 37.3 established, among 

other procedures, application 

procedures for temporary and full 

registration of new SEFs, and 

procedures for the transfer of a 

registration. To assist prospective SEF 

applicants, the SEF NPRM included 

under appendix A to part 37 an 

application form titled Form SEF. Form 

SEF included information that an 

applicant would be required to provide 

to the Commission in order for the 

Commission to make a determination 

regarding the applicant’s request for SEF 

registration. 

With respect to which entities must 

register as a SEF, the SEF NPRM stated 

that in order for an entity to meet the 

SEF definition and satisfy the SEF 

registration requirements, multiple 

parties must have the ability to execute 

or trade swaps by accepting bids and 

offers made by multiple participants.42

In this regard, the SEF NPRM stated that 

one-to-one voice services and single 

dealer platforms do not satisfy the SEF 

definition because multiple participants 

do not have the ability to execute or 

trade swaps with multiple 

participants.43 In addition, the SEF 

NPRM stated that entities that operate 

exclusively as swap processors do not 

meet the SEF definition and should not 

be required to register.44 Although the 

SEF NPRM stated that the registration 

provision in CEA section 5h(a)(1) could 

be read to require the registration of 

entities that solely engage in trade 

processing,45 it stated that such entities 

do not meet the SEF definition and 

should not be required to register as 

SEFs because: (1) They do not provide 

the ability to execute or trade a swap as 

required by the SEF definition; and (2) 

the SEF definition does not include the 

term ‘‘process.’’ 46

The SEF NPRM also noted that CEA 

section 2(h)(8) requires that transactions 

involving swaps subject to the clearing 

requirement be executed on a DCM or 

SEF, unless no DCM or SEF makes such 

swaps available to trade or such swaps 

qualify for the clearing exception under 

CEA section 2(h)(7).47 In this regard, the 

SEF NPRM stated that market 

participants may desire to avail 

themselves of the benefits of trading on 

SEFs for swaps that are not subject to 

the CEA section 2(h)(8) trade execution 

requirement, but it also acknowledged 

that such swaps are not required to be 

executed on a SEF or DCM.48

(a) Requirements for Registration 

(1) Summary of Comments 

Several commenters asserted that the 

proposed rule is ambiguous as to who 

must register as a SEF as required under 

CEA section 5h(a)(1) and requested 

clarification.49 For example, UBS stated 

that the Commission should clarify that 

‘‘the SEF registration requirement in 

[CEA section 5h(a)(1)] only applies to 

platforms that meet the SEF 

definition.’’ 50 In addition, Barclays 

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51Barclays Comment Letter at 2 (Jun. 3, 2011). 

52Bloomberg Comment Letter at 3 (Mar. 8, 2011). 

53AFR Comment Letter at 3–4 (Mar. 8, 2011). JP 

Morgan also commented that it agrees with the 

Commission that a single dealer platform cannot 

qualify as a SEF because it fails to satisfy the 

‘‘multiple to multiple’’ language in the SEF 

definition. JP Morgan Comment Letter at 3 (Mar. 8, 

2011). 

54 IECA Comment Letter at 3 (May 24, 2011). 

55Nodal Comment Letter at 2–3 (Jun. 3, 2011); 

Nodal Comment Letter at 2–3 (Mar. 8, 2011). Nodal 

also expressed support for blind auction platforms 

in its comment letter to the Second Amendment to 

July 14, 2011 Order for Swap Regulation Notice of 

Proposed Amendment, 77 FR 28819 (proposed May 

16, 2012). 

56Nodal Comment Letter at 3 (Mar. 8, 2011). 

57 Id. 

58 Id. at 2. 

59UBS Comment Letter at 1 (May 18, 2012); 

Meeting with UBS dated Mar. 27, 2012; Meeting 

with Bloomberg dated Jan. 18, 2012. See also UBS 

Comment Letter at 1 (Nov. 2, 2011). 

60Meeting with UBS dated Mar. 27, 2012. See 

also UBS Comment Letter at 1 (Nov. 2, 2011). 

61Meeting with UBS dated Mar. 27, 2012. 

62Meeting with ICAP and TriOptima dated Sep. 

6, 2012; Meeting with ICAP dated Aug. 29, 2012; 

Meeting with ICE dated Jul. 25, 2012; WMBAA 

Comment Letter at 3 (Jul. 18, 2011); ICAP Comment 

Letter at 2 (Jul. 7, 2011); TriOptima Comment Letter 

at 1 (Mar. 8, 2011). 

63TriOptima Comment Letter at 2, 4 (Mar. 8, 

2011). 

64 Id. at 2. The service does not place any 

constraints on the number of positions or risk 

tolerances of prospective participants. Id. 

65 Id. at 3. 

66 Id. 

67 Id. 

68 Id. 

69 Id. 

70 Id. 

71Meeting with ICAP dated Aug. 29, 2012; ICAP 

Comment Letter at 1, 4 (Jul. 7, 2011). 

72Meeting with ICAP dated Aug. 29, 2012; ICAP 

Comment Letter at 4 (Jul. 7, 2011). 

73 Id. 

74 Id. The service does not place any constraints 

on the number of positions or risk tolerances of 

prospective participants. Id. 

75 Id. 

commented that the language of CEA 

section 5h(a)(1) should not be read 

broadly to require SEF registration for 

any platform or system that executes or 

processes swaps to the extent it is 

deemed to be a ‘‘facility’’ without 

considering whether such swaps are or 

are not subject to the CEA section 

2(h)(8) trade execution mandate.51

Similarly, Bloomberg noted the broad 

language under the CEA section 5h(a)(1) 

registration requirement, and stated that 

if Congress intended that all swaps be 

traded on a SEF or DCM, then the trade 

execution mandate under CEA section 

2(h)(8) would be unnecessary.52 The 

Commission also received comments 

and specific requests for a Commission 

determination as to whether certain 

business models or services must 

register as a SEF, including one-to-many 

platforms, blind auction platforms, 

aggregation services or portals, portfolio 

compression services, risk mitigation 

services, and swap processing services. 

(i) One-to-Many Systems or Platforms 

AFR opined that single dealer or oneto-many platforms do not meet the SEF 

definition in CEA section 1a(50), which 

refers to a system in which multiple 

parties have the ability to execute or 

trade swaps by accepting bids or offers 

from multiple participants.53 Similarly, 

IECA stated that SEFs should operate in 

a way that publicly reveals market 

prices, and that preserving the ‘‘one-toone’’ pricing model of existing dealer 

systems is inconsistent with the SEF 

definition.54

(ii) Blind Auction Systems or Platforms 

Nodal commented that a blind 

auction platform should be able to 

register as a SEF.55 Nodal contended 

that its blind auction platform meets the 

SEF definition because multiple 

participants have the ability to execute 

swap transactions by accepting bids and 

offers made by multiple participants 

albeit without the pre-trade posting of 

bids or offers.56 Nodal explained that its 

platform allows participants to submit 

firm bids and offers without the 

disclosure of the terms of those bids and 

offers to other participants, and that the 

auction algorithmically processes the 

bids and offers to match participants 

efficiently.57 Nodal further explained 

that auction volume is awarded to 

participants at the same price and at a 

price equal to or better than the 

participants’ auction order.58

(iii) Aggregation Services or Portals 

UBS and Bloomberg requested 

clarification whether aggregator services 

are required to register as SEFs.59 UBS 

stated that an aggregator service will 

provide customers with the ability to 

access the best available liquidity and 

pricing on multiple SEFs through the 

aggregator’s screen so that customers 

will not have to connect to each SEF 

individually.60 UBS stated that an 

aggregator service should not be 

required to register as a SEF because the 

transaction is executed on the relevant 

SEF’s platform.61

(iv) Services Facilitating Portfolio 

Compression and Risk Mitigation 

Transactions 

Several commenters sought 

clarification that portfolio compression 

and risk mitigation services are not 

required to register as SEFs.62

According to TriOptima, its portfolio 

compression service provides a netting 

mechanism that reduces the outstanding 

trade count and outstanding gross 

notional value of swaps in participants’ 

portfolios by terminating or modifying 

existing trades.63 Specifically, 

TriOptima stated that prospective 

participants may sign up for a 

scheduled compression cycle and the 

participants must provide detailed data 

about their respective portfolios and risk 

tolerances.64 Other than to update markto-market values shortly before the 

compression cycle is run, prospective 

participants have no further input into 

the compression process, which is 

entirely controlled by the compression 

algorithm.65 On a specified date, 

TriOptima runs the compression cycle, 

which produces a set of proposed 

transactions for each participant.66 The 

proposed transactions, if effected, 

would terminate or modify participants’ 

existing trades in order to reduce the 

outstanding trade count and outstanding 

gross notional value of swaps in the 

participants’ portfolios.67 Each 

participant receives only details of the 

proposed compression transactions to 

which it is a party, but all of the 

compression transactions must be 

accepted in order for the particular 

compression cycle to occur.68 If a single 

participant declines to agree to the 

proposed compression transactions, 

then the entire compression cycle fails 

and the pre-compression swap 

transactions remain in effect.69

TriOptima contended that such services 

do not perform the role of a trade 

execution venue so they should not be 

regulated as a SEF.70

ICAP stated that its bulk risk 

mitigation service assists market 

participants in managing their risk 

exposures by identifying offsetting risk 

requirements and executing new 

offsetting trades among those 

participants.71 Specifically, ICAP stated 

that its risk mitigation service sets the 

curve and price for all trades based on 

a survey of market making entities, such 

as banks, or other entities that are 

willing to provide quotes, as well as 

price quotes on DCMs.72 All prospective 

participants in a particular risk 

mitigation run are first shown the curve 

and prices for transactions along the 

curve.73 Subsequently, the prospective 

participants provide ICAP with data 

about any of their positions of their 

choosing and their acceptable risk 

tolerances.74 ICAP then runs a 

proprietary algorithm, which produces a 

set of proposed transactions for each 

participant.75 The proposed 

transactions, if effected, would result in 

new trades for the participants that 

enable them to manage their exposures 

to market, credit, or other sources of 

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76 Id. 

77 Id. 

78 Id. 

79 ICAP Comment Letter at 2 (Jan. 16, 2013); ICAP 

Comment Letter at 4 (Jul. 7, 2011). 

80MarkitSERV Comment Letter at 6 (Mar. 8, 

2011). 

81MarkitSERV Comment Letter at 1–2 (Jun. 3, 

2011). 

82 Id. at 3–4. 

83 Id. at 5. 

84CEA section 5h(a)(1) states that ‘‘[n]o person 

may operate a facility for the trading or processing 

of swaps unless the facility is registered as a swap 

execution facility or as a designated contract 

market. . . .’’ 7 U.S.C. 7b–3(a)(1). 

85See Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1219 

(explaining that entities that operate exclusively as 

swap processors do not meet the SEF definition and 

should not be required to register as a SEF despite 

the broad language in the CEA section 5h(a)(1) 

registration provision). 

86CEA section 1a(50); 7 U.S.C. 1a(50). The 

Commission notes that the Secretary of the Treasury 

issued a written determination pursuant to CEA 

sections 1a(47)(E) and 1b that foreign exchange 

swaps and foreign exchange forwards should not be 

regulated as swaps under the CEA, and therefore 

should be exempted from the definition of the term 

‘‘swap’’ under the CEA. See Determination of 

Foreign Exchange Swaps and Foreign Exchange 

Forwards Under the Commodity Exchange Act, 77 

FR 69694 (Nov. 20, 2012). Accordingly, if a facility 

offers a trading system or platform solely for the 

execution or trading of foreign exchange swaps or 

foreign exchange forwards, then the facility would 

not be required to register as a SEF. 

87The Commission is adding this new provision 

to § 37.3(a)(1). As a result, proposed § 37.3(a) is 

adopted as § 37.3(b), proposed § 37.3(b) is adopted 

as § 37.3(c), proposed § 37.3(c) is adopted as 

§ 37.3(d), proposed § 37.3(d) is adopted as § 37.3(e), 

proposed § 37.3(e) is adopted as § 37.3(f), and 

proposed § 37.3(f) is adopted as § 37.3(g). The SEF 

NPRM stated that certain entities such as one-to-one 

voice services and single-dealer platforms do not 

provide the ability for participants to conduct 

multiple-to-multiple execution or trading because 

they limit the provision of liquidity to a single 

liquidity provider. Core Principles and Other 

Requirements for Swap Execution Facilities, 76 FR 

at 1219. 

88The Commission notes that it is not tying the 

registration requirement in CEA section 5h(a)(1) to 

the trade execution requirement in CEA section 

2(h)(8), such that only facilities trading swaps 

subject to the trade execution requirement would be 

required to register as a SEF. Therefore, a facility 

would be required to register as a SEF if it operates 

in a manner that meets the SEF definition even 

though it only executes or trades swaps that are not 

subject to the trade execution mandate. The 

Commission also notes that transactions involving 

swaps on SEFs that are subject to the trade 

execution mandate are considered to be ‘‘Required 

Transactions’’ under part 37 of the Commission’s 

regulations, whereas ‘‘Permitted Transactions’’ are 

transactions not involving swaps that are subject to 

the trade execution mandate. As discussed further 

below, the regulatory obligations which pertain to 

Permitted Transactions differ from, and are 

somewhat less rigorous than, those for Required 

Transactions. See discussion below regarding 

Permitted Transactions under § 37.9(a)(1)(iv)— 

Required Transactions and § 37.9(a)(1)(v)— 

Permitted Transactions in the preamble. See also 

Process for a Designated Contract Market or Swap 

Execution Facility To Make a Swap Available To 

Trade, 76 FR 77728 (proposed Dec. 14, 2011) 

(discussing the process by which a swap is 

determined to be subject to the trade execution 

requirement in CEA section 2(h)(8)). 

89Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1222. 

90CEA section 5h(d)(2); 7 U.S.C. 7b–3(d)(2). 

risk.76 All transactions must be accepted 

in order for a particular risk mitigation 

run to occur.77 If a single participant 

declines to agree to the proposed risk 

mitigation transactions, then the entire 

risk mitigation run fails and the existing 

swap transactions remain in effect.78

While its bulk risk mitigation services 

result in market participants entering 

into new trades, ICAP commented that 

such services do not meet the SEF 

definition because they do not permit 

participants to trade in real-time, 

negotiate price, or initiate directional 

trades.79

(v) Swap Processing Services 

In its first comment letter, 

MarkitSERV agreed with the SEF NPRM 

that entities operating exclusively as 

swap processors should not have to 

register as SEFs because they only 

provide post-execution services that 

facilitate clearing and settlement, not 

services relating to the execution of 

swaps.80 However, in a subsequent 

comment letter, after the SEC’s 

proposed rule that would require certain 

providers of post-trade services to 

register with the SEC as clearing 

agencies, MarkitSERV recommended 

that the Commission regulate entities 

that perform the confirmation and 

processing of swaps.81 While 

MarkitSERV acknowledged that the 

SEC’s authority under the Securities and 

Exchange Act of 1934 to regulate swap 

processors as a clearing agency has no 

parallel in the CEA, MarkitSERV 

recommended that the Commission 

register such entities to avoid 

unnecessarily inconsistent 

regulations.82 MarkitSERV 

recommended that the Commission 

require swap processors to register as a 

sub-category of SEFs because CEA 

section 5h(a)(1) references the 

processing of swaps.83

(2) Commission Determination 

In response to commenters’ requests 

for clarification regarding the 

registration requirement, the 

Commission is clarifying how it 

interprets the broad registration 

provision in section 5h(a)(1) of the Act 

in coordination with the specific 

requirements for a SEF’s structure found 

in section 1a(50) of the Act and the 

trade execution requirement in section 

2(h)(8) of the Act. As noted in the SEF 

NPRM, the Commission views the CEA 

section 5h(a)(1) registration 

requirement 84 as applying only to 

facilities that meet the SEF definition in 

CEA section 1a(50).85 Section 1a(50) of 

the Act defines a SEF as ‘‘a trading 

system or platform in which multiple 

participants have the ability to execute 

or trade swaps by accepting bids and 

offers made by multiple participants in 

the facility or system, through any 

means of interstate commerce, including 

any trading facility, that—(A) Facilitates 

the execution of swaps between 

persons; and (B) is not a designated 

contract market.’’ 86 Accordingly, the 

Commission is revising proposed § 37.3 

to clarify the scope of the registration 

requirement, which states that ‘‘[a]ny 

person operating a facility that offers a 

trading system or platform in which 

more than one market participant has 

the ability to execute or trade swaps 

with more than one other market 

participant on the system or platform 

shall register the facility as a swap 

execution facility under this part 37 or 

as a designated contract market under 

part 38 of this chapter.’’ 87

The Commission also clarifies that 

swap transactions that are not subject to 

the CEA section 2(h)(8) trade execution 

requirement may be executed on either 

a registered SEF (i.e., a facility that 

meets the SEF definition) or an 

alternative entity that is not required to 

register as a SEF (e.g., see one-to-many 

system or platform discussion below).88

This clarification is consistent with the 

Commission’s acknowledgement in the 

SEF NPRM that swap transactions that 

are not subject to the CEA section 

2(h)(8) trade execution requirement 

would not have to be executed on a 

registered SEF.89

The Commission believes that its 

interpretation of the registration 

provision in CEA section 5h(a)(1) is 

consistent with the statute and helps 

further the goals provided in CEA 

section 5h, which are to promote the 

trading of swaps on SEFs and to 

promote pre-trade price transparency in 

the swaps market. Although the 

registration provision is written in broad 

language and could be read to require 

the registration of any facility for the 

trading or processing of swaps, the 

Commission notes that other statutory 

provisions appear to narrow the 

registration requirement. For example, 

the CEA section 2(h)(8) trade execution 

requirement and CEA section 5h(d)(2), 

which states that ‘‘[f]or all swaps that 

are not required to be executed through 

a swap execution facility . . . such 

trades may be executed through any 

other available means of interstate 

commerce[,]’’ 90 when read together, 

contemplate alternative entities that are 

not required to register as SEFs and may 

execute those swaps that are not 

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91The Commission notes that entities seeking 

guidance concerning their SEF registration 

obligations may request such further guidance from 

the Division of Market Oversight (‘‘DMO’’). 

92Transactions in swaps that are subject to the 

clearing requirement in CEA section 2(h)(1) and 

‘‘made available to trade’’ would be subject to the 

trade execution requirement. See CEA sections 

2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8). See 

also Process for a Designated Contract Market or 

Swap Execution Facility To Make a Swap Available 

To Trade, 76 FR 77728 (proposed Dec. 14, 2011) 

(discussing the process by which a swap is 

determined to be subject to the trade execution 

requirement in CEA section 2(h)(8)). The trade 

execution requirement provides an exception to the 

requirement for swap transactions subject to the 

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

93The Commission notes that footnote 423 below 

classifies aggregator platforms as a type of 

independent software vendor (‘‘ISV’’). Therefore, 

other types of ISVs would not have to register as 

a SEF if they only provide their users with the 

ability to access multiple SEFs, but do not provide 

for execution or trading of swaps. See discussion 

below regarding ISVs under § 37.202(a)—Impartial 

Access by Members and Market Participants in the 

preamble. 

94For example, some aggregation services may 

provide their users with a portal to multiple SEFs 

and also execute swap transactions between their 

multiple users. These services would have to 

register as a SEF under section 5h(a)(1) of the Act. 

The Commission notes that if other types of ISVs 

provide a system or platform whereby more than 

one participant has the ability to execute or trade 

swaps with more than one other participant on the 

system or platform, then they would also have to 

register as a SEF under section 5h(a)(1) of the Act. 

See discussion below regarding ISVs under 

§ 37.202(a)—Impartial Access by Members and 

Market Participants in the preamble. 

95Confirmation, Portfolio Reconciliation, 

Portfolio Compression, and Swap Trading 

Relationship Documentation Requirements for 

Swap Dealers and Major Swap Participants, 77 FR 

55904, 55932 (Sep. 11, 2012). 

96 Id. at 55960. 

97The Commission notes, however, that 

transactions in swaps that are subject to the trade 

execution mandate, under CEA section 2(h)(8), 

must be executed on a DCM or SEF and, 

accordingly, may not be executed on a portfolio 

compression service (unless no DCM or SEF makes 

the swap available to trade or the swap transaction 

is excepted or exempted from clearing under CEA 

section 2(h)(7) or as otherwise provided by the 

Commission). 

required to be executed on a SEF (i.e., 

those swaps that are not subject to the 

CEA section 2(h)(8) trade execution 

requirement). The Commission is 

interpreting the CEA section 5h(a)(1) 

registration provision in a manner that 

is consistent with the SEF definition in 

CEA section 1a(50), the trade execution 

requirement in CEA section 2(h)(8), and 

CEA section 5h(d)(2), as discussed 

above. 

The following discussion is not 

intended to comprehensively cover 

which entities are required to register as 

a SEF. Whether a particular entity falls 

within the scope of CEA section 5h(a)(1) 

depends on all of the relevant facts and 

circumstances of the entity’s operations. 

The Commission is mindful that any 

rule attempting to capture all of the 

possible configurations of facilities that 

provide for the execution or trading of 

swaps may be or become over-inclusive 

or under-inclusive in light of 

technological changes and the ever 

evolving swaps market.91 However, in 

response to commenters’ requests, the 

Commission is providing examples of 

how it would interpret the CEA section 

5h(a)(1) registration requirement with 

respect to certain categories of better 

understood facilities. 

(i) One-to-Many Systems or Platforms 

The Commission continues to believe 

that a one-to-many system or platform 

on which the sponsoring entity is the 

counterparty to all swap contracts 

executed through the system or platform 

would not meet the SEF definition in 

section 1a(50) of the Act and, therefore, 

would not be required to register as a 

SEF under section 5h(a)(1) of the Act. In 

the Commission’s view, such a system 

or platform does not meet the SEF 

definition because it limits the 

provision of liquidity to a single 

liquidity provider (i.e., the sponsoring 

entity). Accordingly, market 

participants do not have the ability to 

conduct multiple-to-multiple execution 

or trading on such a trading system or 

platform. The Commission notes, 

however, that transactions in swaps that 

are subject to the trade execution 

mandate, under CEA section 2(h)(8), 

must be executed on a DCM or SEF and, 

accordingly, may not be executed on a 

one-to-many system or platform.92

(ii) Blind Auction Systems or Platforms 

The Commission understands from 

commenters that a blind auction system 

or platform, as described above, allows 

market participants to submit firm bids 

and offers without disclosure of the 

terms of those bids and offers to other 

participants. Such bids and offers are 

matched through a pre-determined 

algorithm. The Commission believes 

that an entity that provides such a blind 

auction system or platform would meet 

the SEF definition in CEA section 1a(50) 

because more than one market 

participant has the ability to execute or 

trade swaps with more than one other 

market participant on the system or 

platform. Accordingly, an entity that 

provides such a blind auction system or 

platform would have to register as a SEF 

under section 5h(a)(1) of the Act. 

(iii) Aggregation Services or Portals 

The Commission understands that 

certain entities may seek to provide 

their users with the ability to access 

multiple SEFs and the market 

participants thereon, but do not provide 

for execution on their aggregation 

services as execution occurs on one of 

those individual SEFs. The Commission 

believes that an entity that provides 

such an aggregation service would not 

meet the SEF definition in CEA section 

1a(50) because it is only providing a 

portal through which its users may 

access multiple SEFs and swaps are not 

executed or traded through the service. 

Accordingly, an entity that provides 

such an aggregation service or portal 

would not have to register as a SEF 

under section 5h(a)(1) of the Act.93

However, the Commission notes that to 

the extent that an aggregation service or 

portal itself provides a trading system or 

platform whereby more than one market 

participant has the ability to execute or 

trade swaps with more than one other 

market participant on the system or 

platform, the aggregation service would 

be required to register as a SEF.94

(iv) Services Facilitating Portfolio 

Compression and Risk Mitigation 

Transactions 

The Commission notes that portfolio 

compression services provide a netting 

mechanism that reduces the outstanding 

trade count and outstanding gross 

notional value of swaps in two or more 

swap counterparties’ portfolios.95 To 

achieve this result, a portfolio 

compression service, for example, may 

wholly terminate or change the notional 

value of some or all of the swaps 

submitted by the counterparties for 

inclusion in the portfolio compression 

exercise and, depending on the 

methodology employed, replace the 

terminated swaps with other swaps 

whose combined notional value (or 

some other measure of risk) is less than 

the combined notional value (or some 

other measure of risk) of the terminated 

swaps in the compression exercise.96

The swap counterparties’ risk profiles 

are not materially changed as a result of 

the portfolio compression exercise. 

The Commission does not believe that 

a portfolio compression service, as 

described above, provides for the 

execution or trading of swap 

transactions between counterparties 

because the compression service is 

providing a netting mechanism whereby 

the outstanding trade count and 

outstanding gross notional value of 

swaps in two or more swap 

counterparties’ portfolios are reduced. 

Therefore, an entity providing such a 

portfolio compression service would not 

meet the SEF definition in section 

1a(50) of the Act and would not have to 

register as a SEF under section 5h(a)(1) 

of the Act.97

The Commission understands from 

commenters that certain entities provide 

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98The Commission also notes that ICAP’s Web 

sites for its Reset and ReMatch risk mitigation 

services support the notion that these services are 

executing trades between counterparties. ICAP’s 

Reset Web site states that ‘‘[t]he new RESET 

matching engine allows for unilateral matching 

with hedging. No longer is it necessary to have an 

offsetting position for each trade to be executed.’’ 

See http://www.reset.net/aboutus.php. A press 

article regarding ReMatch states that ‘‘ReMatch 

addresses the problem of minimal or no exit 

liquidity . . . [by] enabling market participants to 

exit positions that they may otherwise have been 

unable to.’’ See http://www.icap.com/news-events/ 

in-the-news/news/2011/rematch-expands-serviceinto-us-financials.aspx. 99CEA section 5h(e); 7 U.S.C. 7b–3(e). 

100Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1219. 101Reuters Comment Letter at 3–4 (Dec. 12, 2011); 

Rosen et al. Comment Letter at 8–9 (Apr. 5, 2011); 

WMBAA Comment Letter at 4, 9 (Mar. 8, 2011); 

ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 2011); 

FXall Comment Letter at 4–5 (Mar. 8, 2011). 

Commissioner Sommers’ dissent to the SEF NPRM. 

See Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1259. 102Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1259. 103 Id. 104 Id. 105Reuters Comment Letter at 3–4 (Dec. 12, 2011); 

Rosen et al. Comment Letter at 8 (Apr. 5, 2011); 

ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 2011); 

CME Comment Letter at 7–8 (Mar. 8, 2011); FXall 

Comment Letter at 4–5 (Mar. 8, 2011); Barclays 

Comment Letter at 5 (Mar. 8, 2011); MarketAxess 

Comment Letter at 32–33 (Mar. 8, 2011); WMBAA 

Comment Letter at 8 (Mar. 8, 2011). 

risk mitigation services, as described 

above, that operate to assist market 

participants in managing their 

exposures to market, credit, and other 

sources of risk. These risk mitigation 

services may redistribute or mitigate 

market participants’ risks, but they do 

not provide a netting mechanism. To 

redistribute or mitigate risk, a risk 

mitigation service, for example, may 

allow market participants to identify 

elements of risk in their respective 

portfolios and to submit information 

about these risks to the service. The risk 

mitigation service may set the prices for 

all points along the maturity or credit 

curve for all trades and the service’s 

proprietary algorithm produces a set of 

proposed transactions for each 

participant. If all participants accept the 

proposed transactions, then the new 

trades are executed. 

In the Commission’s view, such an 

entity would meet the SEF definition in 

CEA section 1a(50) because more than 

one market participant has the ability to 

execute swaps with more than one other 

market participant on the system or 

platform.98 In response to ICAP’s 

comment that such services do not meet 

the SEF definition because they do not 

permit participants to trade in real-time, 

negotiate price, or initiate directional 

trades, the Commission notes that the 

SEF definition does not require any of 

these stated characteristics. As noted 

above, the outcome of a successful risk 

mitigation run is the execution of new 

trades between multiple participants at 

prices accepted by those multiple 

participants. 

Additionally, the Commission notes 

that there are alternative avenues to 

managing the same risks that risk 

mitigation services manage, including 

bringing the risk mitigating orders to the 

open market. For instance, a market 

participant could assess the various risk 

elements in its portfolio using 

appropriate tools, and then decide on a 

set of trades to mitigate these risks. The 

market participant could choose to 

execute these trades through a risk 

mitigation service, a SEF, or a DCM. In 

fact, in the DCM context, market 

participants execute such risk mitigating 

trades on the DCM and not through a 

separate non-DCM service. As such, risk 

mitigation services are providing an 

alternative avenue to execute certain 

swap transactions between 

counterparties. 

Furthermore, the Commission 

believes that the confluence of trading 

interests from a diverse range of 

motivations (e.g., risk mitigating and 

risk taking trades) brings depth to the 

marketplace and helps to build liquid 

markets. If the Commission did not 

require these risk mitigation services to 

register as SEFs, then market 

participants would be able to execute 

certain swap transactions away from the 

SEF, which would hurt liquidity and 

also the trading of swaps on SEFs. This 

would contradict one of the goals in 

section 5h of the Act, which is to 

promote the trading of swaps on SEFs.99

For the reasons mentioned above, the 

Commission believes that an entity that 

provides such a risk mitigation service 

would have to register as a SEF under 

section 5h(a)(1) of the Act. However, the 

Commission notes that such entities 

may not have to register as a SEF if they 

only provide the analytical services that 

produce the proposed risk mitigation 

transactions and the execution of those 

transactions occurs elsewhere and, in 

particular, the execution of those 

transactions that are subject to the trade 

execution mandate occurs on a SEF. 

(v) Swap Processing Services 

As noted in the SEF NPRM, entities 

that solely engage in trade processing 

would not meet the SEF definition in 

CEA section 1a(50) because they do not 

provide the ability to execute or trade a 

swap as required by the definition. 

Accordingly, swap processing services 

would not have to register as a SEF 

under CEA section 5h(a)(1). Consistent 

with this distinction, the Commission 

declines to create a sub-category of SEFs 

for processing services that would be 

subject to some limited subset of SEF 

core principles as requested by 

MarkitSERV. 

Finally, the Commission notes that 

platforms seeking guidance concerning 

the SEF registration obligations and its 

application to their particular 

operations may request informal 

guidance from the Division of Market 

Oversight (‘‘DMO’’). 

(b) § 37.9(b)(2)—Minimum Trading 

Functionality (Final § 37.3(a)(2)) 

To further clarify what functionalities 

a SEF must provide if it is required to 

register as a SEF, as opposed to what 

functionalities trigger the registration 

requirement, the Commission is moving 

proposed § 37.9(b)(2) to final 

§ 37.3(a)(2). As discussed in the SEF 

NPRM, an entity that must register as a 

SEF under CEA section 5h(a)(1) must 

ensure that its operations comply with 

the minimum trading functionality 

requirement.100 The minimum trading 

functionality requirement in proposed 

§ 37.9(b)(2) provided that an applicant 

seeking registration as a SEF must, at a 

minimum, offer trading services to 

facilitate Required Transactions by 

providing market participants with the 

ability to post both firm and indicative 

quotes on a centralized electronic screen 

accessible to all market participants 

who have access to the SEF. 

(1) Summary of Comments 

Several commenters stated that the 

minimum trading functionality is 

similar to an order book, which is not 

required by the SEF definition.101 In 

this regard, Commissioner Sommers 

offered a dissent to the SEF NPRM, 

which was published as Appendix 3 to 

that notice.102 Commissioner Sommers’ 

dissent asserted that the minimum 

trading functionality requirement is not 

mandated by the Dodd-Frank Act.103 In 

addition, Commissioner Sommers’ 

dissent argued for a broader 

interpretation of the terms ‘‘trading 

system’’ and ‘‘platform,’’ which are 

included in the statutory SEF definition 

so that SEFs can offer a broader model 

for executing swaps.104 Many 

commenters also stated that the SEF 

definition only requires that the facility 

provide multiple participants with the 

‘‘ability’’ to execute or trade swaps by 

accepting bids and offers made by 

‘‘multiple participants’’ and, thus, the 

definition does not require making bids 

or offers transparent to the entire market 

but rather to multiple participants.105

Better Markets commented that the 

Commission’s minimum trading 

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106Better Markets Comment Letter at 6–7 (Mar. 8, 

2011). 107 Id. 108Nodal Comment Letter at 3–4 (Mar. 8, 2011); 

ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 9 (Mar. 8, 2011); 

ICE Comment Letter at 3 (Mar. 8, 2011); Tradeweb 

Comment Letter at 6 (Mar. 8, 2011). 109Nodal Comment Letter at 3–4 (Mar. 8, 2011); 

ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 9 (Mar. 8, 2011); 

ICE Comment Letter at 3 (Mar. 8, 2011). 110Tradeweb Comment Letter at 6 (Mar. 8, 2011). 111Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1219. 112The Commission is renumbering proposed 

§ 37.9(b)(2) to § 37.3(a)(2). 

113CEA section 1a(50); 7 U.S.C. 1a(50). In section 

5h(e) of the Act, Congress provided a ‘‘rule of 

construction’’ to guide the Commission’s 

interpretation of certain SEF provisions (stating that 

the goals of section 5h of the Act are to ‘‘promote 

the trading of swaps on [SEFs] and to promote pretrade price transparency in the swaps market’’). 7 

U.S.C. 7b–3(e). 

114Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1219. 

115See discussion below under § 37.9(a)(1)(ii)— 

Request for Quote System in the preamble. 

116See discussion below under § 37.9(b)(1) and 

(b)(4)—Execution Methods for Required 

Transactions in the preamble. Section 13.2 will 

allow the Commission to consider if a broader 

model for executing on SEFs, consistent with the 

suggestion in Commissioner Sommers’ dissent, 

would be appropriate on a case-by-case basis, in 

conformance with the CEA and the Commission’s 

regulations. Core Principles and Other 

Requirements for Swap Execution Facilities, 76 FR 

at 1259. 

117See discussion below under § 37.9(b)(1) and 

(b)(4)—Execution Methods for Required 

Transactions in the preamble. 

118See § 37.9(c)(2). 

119CEA section 1a(50); 7 U.S.C. 1a(50). 

120The term ‘‘electronic trading facility’’ means 

‘‘a trading facility that—(A) operates by means of 

an electronic or telecommunications network; and 

(B) maintains an automated audit trail of bids, 

offers, and the matching of orders or the execution 

of transactions on the facility.’’ CEA section 1a(16); 

7 U.S.C. 1a(16). The Commission notes that, under 

section 1a(16) of the Act, the term ‘‘electronic 

trading facility’’ incorporates the definition of 

‘‘trading facility’’ as that term is defined under 

section 1a(51) of the Act. 

121The term ‘‘trading facility’’ means ‘‘a person 

or group of persons that constitutes, maintains, or 

provides a physical or electronic facility or system 

in which multiple participants have the ability to 

execute or trade agreements, contracts, or 

transactions—(i) by accepting bids or offers made 

by other participants that are open to multiple 

participants in the facility or system; or (ii) through 

the interaction of multiple bids or multiple offers 

within a system with a pre-determined nondiscretionary automated trade matching and 

execution algorithm.’’ CEA section 1a(51)(A); 

7 U.S.C. 1a(51)(A). 

functionality requirement is an overly 

broad interpretation of the SEF 

definition because it allows a SEF to be 

almost any type of system or 

platform.106 Therefore, it recommended 

that the Commission narrowly interpret 

the multiple participant to multiple 

participant requirement so that the 

scope of acceptable execution methods 

has rational boundaries.107

Several commenters expressed 

concern about the requirement to post 

indicative quotes.108 Nodal and other 

commenters expressed concern that 

indicative quotes could be used for 

manipulative purposes.109 Tradeweb 

commented that, under the proposal, 

SEFs operating an anonymous order 

book system would be required to offer 

indicative quotes due to the minimum 

trading functionality requirement, 

which would not be suitable for 

anonymous order book marketplaces.110

(2) Commission Determination 

The Commission reiterates its view in 

the SEF NPRM that an entity that must 

register as a SEF under CEA section 

5h(a)(1) must ensure that its operations 

comply with the minimum trading 

functionality requirement.111 The 

Commission reaffirms that an acceptable 

SEF system or platform must provide at 

least a minimum functionality to allow 

market participants the ability to make 

executable bids and offers, and to 

display them to all other market 

participants on the SEF. The 

Commission is adopting a revised 

version of proposed § 37.9(b)(2), which 

now requires a SEF to provide an Order 

Book as defined in final § 37.3(a)(3) (i.e., 

an electronic trading facility, a trading 

facility, or a trading system or platform 

in which all market participants have 

the ability to enter multiple bids and 

offers, observe or receive bids and 

offers, and transact on such bids and 

offers) because, as noted by several 

commenters, the proposed minimum 

trading functionality description is 

similar to the proposed definition of an 

Order Book.112 In response to 

comments, like the one provided by 

Commissioner Sommers, that an order 

book is not required by the SEF 

definition, the Commission believes that 

an Order Book, as defined in final 

§ 37.3(a)(3), is consistent with the SEF 

definition and promotes the goals 

provided in section 733 of the DoddFrank Act.113 This interpretation is also 

consistent with the SEF NPRM, as the 

Commission noted that it took into 

account these requirements when 

proposing the minimum trading 

functionality requirement.114

The Commission notes, however, that 

the final regulations provide SEFs with 

additional flexibility in the execution 

methods for Required Transactions by 

allowing SEFs to offer an RFQ System 

in conjunction with an Order Book, as 

described below, to permit market 

participants to access multiple market 

participants, but not necessarily the 

entire market.115 The Commission also 

notes that a SEF may petition the 

Commission under § 13.2 of the 

Commission’s regulations to amend its 

regulations to include additional 

execution methods for Required 

Transactions.116 The final regulations 

further allow a SEF to utilize ‘‘any 

means of interstate commerce’’ in 

providing the execution methods in 

§ 37.9(a)(2)(i)(A) or (B) (i.e., an Order 

Book or an RFQ System that operates in 

conjunction with an Order Book, as 

described below).117 The Commission 

also notes that a SEF may provide any 

method of execution for Permitted 

Transactions.118 By allowing SEFs to 

offer additional methods of execution, 

and permitting flexible means for 

executing swaps through these methods 

of execution, as discussed below, the 

Commission is effectuating the 

Congressional direction to allow 

multiple participants to execute swaps 

by accepting bids and offers made by 

multiple participants through any 

means of interstate commerce.119 The 

Commission notes that a DCM must 

operate as a trading facility and in 

conjunction with that trading facility is 

also permitted to utilize additional 

execution methods; however, those 

additional execution methods are 

limited by the requirements set forth in 

DCM Core Principle 9, for which there 

is no identical core principle for SEFs. 

Finally, given the changes to the 

minimum trading functionality 

requirement, the Commission notes that 

SEFs are not required to offer indicative 

quote functionality. The Commission 

agrees with commenters that indicative 

quotes would not be appropriate for 

certain trading systems or platforms 

complying with the Order Book 

definition in final § 37.3(a)(3) (e.g., 

central limit order books facilitating 

only anonymous trading). 

(c) § 37.9(a)(1)(i)—Order Book (Final 

§ 37.3(a)(3)) 

The Commission is also moving 

proposed § 37.9(a)(1)(i) to final 

§ 37.3(a)(3) given the relocation of, and 

changes to, the minimum trading 

functionality section as discussed 

above. Proposed § 37.9(a)(1)(i) defined 

the term ‘‘Order Book’’ to mean: (A) An 

electronic trading facility, as that term is 

defined in section 1a(16) of the Act; 120

(B) a trading facility, as that term is 

defined in section 1a(51) of the Act; 121

(C) a trading system or platform in 

which all market participants in the 

trading system or platform can enter 

multiple bids and offers, observe bids 

and offers entered by other market 

participants, and choose to transact on 

such bids and offers; or (D) any such 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33485 

122Better Markets Comment Letter at 7 (Mar. 8, 

2011). 

123The Commission is renumbering proposed 

§ 37.9(a)(1)(i) to § 37.3(a)(3). The Commission is 

revising the definition in proposed § 37.9(a)(1)(i)(C) 

by replacing the word ‘‘can’’ with the phrase ‘‘have 

the ability to’’ and deleting the words ‘‘choose to.’’ 

The Commission is also adding the words ‘‘or 

receive’’ after the word ‘‘observe’’ so that the 

definition is technology neutral. See ‘‘Through Any 

Means of Interstate Commerce’’ Language in the 

SEF Definition discussion below under §§ 37.9(b)(1) 

and (b)(4)—Execution Methods for Required 

Transactions in the preamble for further details. 

124See discussion below under § 37.9(b)(1) and 

(b)(4)—Execution Methods for Required 

Transactions in the preamble. 

125The Commission is renaming the title of this 

section from ‘‘Application Procedures’’ to 

‘‘Procedures for Full Registration’’ to provide 

greater clarity. 

126Proposed Form SEF, as set forth in proposed 

appendix A to part 37, was to be used for initial 

or temporary registration as a SEF as well as for any 

amendments to an applicant’s status otherwise not 

required to be submitted under part 40 of the 

Commission’s regulations. 

127See Registration and Regulation of SecurityBased Swap Execution Facilities, 76 FR 10948 

(proposed Feb. 28, 2011). Tradeweb Comment 

Letter at 3–4 (Jun. 3, 2011); MarketAxess Comment 

Letter at 20–21 (Mar. 8, 2011); WMBAA Comment 

Letter at 14 (Mar. 8, 2011); FSR Comment Letter at 

10–11 (Mar. 8, 2011); Reuters Comment Letter at 3– 

4 (Mar. 8, 2011). 

128MarketAxess Comment Letter at 20–21 (Mar. 

8, 2011). 

129WMBAA Comment Letter at 14 (Mar. 8, 2011). 

130Tradeweb Comment Letter at 13 (Mar. 8, 

2011). 

131MarketAxess Comment Letter at 29 (Mar. 8, 

2011). 

132The Commission is renumbering proposed 

§ 37.3(a) to § 37.3(b) and making several nonsubstantive revisions to this provision and Form 

SEF for clarity. The Commission is also moving 

proposed § 37.3(a)(7) regarding delegated authority 

to the Director of DMO to § 37.3(h). 

133CEA section 5h(g); 7 U.S.C. 7b–3(g). 

134The Commission notes that subsequent 

modifications to a SEF’s modes of execution or any 

additional SEF modes of execution would 

constitute rules; therefore, the SEF must submit 

such rules to the Commission for review pursuant 

to the procedures under part 40 of the 

Commission’s regulations. 

135The Commission is renumbering proposed 

§ 37.3(a)(6) to § 37.3(b)(3). 

136Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1238. 

other trading system or platform as may 

be determined by the Commission. 

(1) Summary of Comments 

Better Markets commented that the 

definition of an ‘‘order book’’ should 

specify that SEF systems must operate 

pursuant to a best price, first-in-time 

trade matching algorithm.122

(2) Commission Determination 

The Commission is adopting the rule 

as proposed, subject to the modification 

described below.123 The Commission 

notes that the Dodd-Frank Act does not 

mandate that the Commission specify or 

require a particular trade-matching 

algorithm for modes of execution 

provided by SEFs. Therefore, a SEF has 

the discretion to use a matching 

algorithm such as a price-time, pricesize-time, or pro-rata allocation, 

provided, however, that such matching 

algorithm is published in the SEF’s 

rulebook and submitted to the 

Commission for review and approval as 

part of the registration application. The 

Commission is eliminating proposed 

§ 37.9(a)(1)(i)(D) because, as discussed 

in § 37.9 below, a SEF may petition the 

Commission under § 13.2 to amend 

§ 37.9(a)(2) to include additional 

execution methods for Required 

Transactions.124

(d) § 37.3(a)—Application 

Procedures 125

Proposed § 37.3(a) set forth the 

application and approval procedures for 

the registration of new SEFs. The 

proposed rule required a SEF applicant 

to apply to the Commission by 

electronically filing the proposed Form 

SEF.126 The proposed rule also provided 

that the Commission would either 

approve or deny the application or, if 

deemed appropriate, register the 

applicant as a SEF subject to conditions. 

(1) Summary of Comments 

The Commission received several 

comments encouraging the 

harmonization of the registration 

procedures for SEFs with the SEC’s 

registration procedures for SB–SEFs.127

In this regard, MarketAxess 

recommended that the Commission 

allow an SEC-registered SB–SEF to 

notice register with the Commission.128

WMBAA recommended that the 

Commission and the SEC adopt a 

common application form, which would 

provide for a smoother, timelier 

transition to the new regulatory 

regime.129

Tradeweb requested that the 

Commission confirm that SEF 

applicants do not need to file separate 

applications for each mode of execution 

that it will offer to participants, 

provided that the application clearly 

identifies the different features of the 

separate marketplaces and that each 

feature is in compliance with the 

rules.130 Additionally, MarketAxess 

requested clarification that the 

Commission does not intend proposed 

§ 37.3(a)(6) to require amendments to 

Form SEF after the Commission 

approves an application.131

(2) Commission Determination 

The Commission is adopting § 37.3(a) 

and Form SEF as proposed, subject to 

certain modifications discussed 

below.132 The Commission notes that 

there is no CEA provision which 

provides for SEF notice registration for 

SB–SEFs. The Commission does note, 

however, that section 5h(g) of the Act 

provides that the Commission ‘‘may 

exempt’’ a SEF from registration if the 

facility is subject to comparable, 

comprehensive supervision and 

regulation by the SEC, a prudential 

regulator, or the appropriate 

governmental authorities in the home 

country of the facility.133 The 

Commission observes that the SEC and 

other regulators have not implemented 

comparable, comprehensive supervision 

and regulation to the Commission’s SEF 

regulatory scheme at this time. The 

Commission also observes that, it must 

comprehensively review and 

understand a SEF’s proposed trading 

models and operations, which will 

facilitate trading for a more diverse 

universe of financial instruments and 

underlying commodities than SB–SEFs. 

Therefore, at this time, the Commission 

is not allowing for exempt SEFs. 

In response to Tradeweb’s comment 

about separate applications, the 

Commission clarifies that a SEF 

applicant does not need to file separate 

applications for each mode of execution 

that it will offer to market participants, 

but its application, as noted in Exhibit 

Q to Form SEF, must describe each 

mode of execution offered.134

Additionally, in response to 

MarketAxess’s comment about 

amendments to Form SEF after the 

Commission registers a SEF, the 

Commission is revising proposed 

§ 37.3(a)(6) 135 and Form SEF to clarify 

that an amended Form SEF is required 

for a SEF applicant amending a pending 

application for registration or for a SEF 

requesting an amendment to its order of 

registration. Otherwise, once registered, 

a SEF must file any amendments to 

Form SEF as a submission under part 40 

of the Commission’s regulations or as 

specified by the Commission (e.g., by 

filing quarterly financial resources 

reports pursuant to § 37.1306 or by 

filing an amended Form SEF). As stated 

in the SEF NPRM, the Commission 

clarifies that if any information 

contained in Form SEF is or becomes 

inaccurate for any reason, even after a 

SEF is registered, the SEF must 

promptly make the appropriate 

corrections with the Commission.136

The Commission is adding final 

§ 37.3(b)(5) to the rule text that requires 

the Commission to review an 

application for registration as a SEF 

pursuant to the 180-day timeframe and 

procedures specified in CEA section 

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33486 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

137CEA section 6(a); 7 U.S.C. 8(a). The 

Commission notes that under CEA section 6(a), if 

the Commission notifies an applicant that its 

application is materially incomplete and specifies 

the deficiencies in the application, the running of 

the 180-day period is stayed from the time of such 

notification. The Commission also notes that if an 

applicant does not provide a complete Form SEF as 

provided for under § 37.3(b)(1)(i), the Commission 

will notify the applicant, pursuant to § 37.3(b)(4), 

that its application will not be deemed to have been 

submitted for purposes of the Commission’s review. 

By ‘‘complete’’ Form SEF, the Commission means 

that the SEF applicant provides appropriately 

responsive answers to each of the informational and 

exhibit items set forth in Form SEF. The 

Commission notes that if the application is not 

deemed to have been submitted for purposes of the 

Commission’s review, then the 180-day review 

period (when effective) will not have commenced. 

138The Commission is renaming the title of this 

section from ‘‘Temporary Grandfather Relief from 

Registration’’ to ‘‘Temporary Registration’’ to 

provide greater clarity. 

139MarketAxess Comment Letter at 16 (Mar. 8, 

2011). 

140MarketAxess Comment Letter at 16–17 (Mar. 

8, 2011); MFA Comment Letter at 4–5 (Mar. 8, 

2011). 

141MarketAxess Comment Letter at 16–17 (Mar. 

8, 2011). 

142MarketAxess Comment Letter at 4 (Jun. 3, 

2011); Bloomberg Comment Letter at 5 (Jun. 3, 

2011); State Street Comment Letter at 6–7 (Mar. 8, 

2011); WMBAA Comment Letter at 14–15 (Mar. 8, 

2011); Tradeweb Comment Letter at 13 (Mar. 8, 

2011); MarketAxess Comment Letter at 17–19 (Mar. 

8, 2011). 

143Bloomberg Comment Letter at 5 (Jun. 3, 2011). 

144MarketAxess Comment Letter at 17–19 (Mar. 

8, 2011). 

145Phoenix Comment Letter at 2 (Mar. 7, 2011). 

146MarketAxess Comment Letter at 20 (Mar. 8, 

2011). 

147CME Comment Letter at 11 (Mar. 8, 2011). 

6(a).137 This section will be effective for 

SEF applicants who submit their 

applications for registration as a SEF on 

or after two years from the effective date 

of part 37. The Commission is adopting 

this provision so that SEF applicants are 

treated comparably to DCM applicants 

who currently are subject to the 180-day 

Commission review period under CEA 

section 6(a). Although Congress did not 

impose a 180-day review period for 

SEFs, the Commission believes that 

harmonization of the review periods for 

DCM and SEF applicants is appropriate 

given the fact that both are registered 

entities for the trading of swaps. The 

Commission also believes that this 

requirement will provide greater 

certainty for SEF applicants regarding 

the time period for the Commission’s 

review of their applications. 

Finally, the Commission is clarifying 

the standard upon which the 

Commission will grant or deny 

registration. Proposed § 37.3(a)(1) stated 

that ‘‘[t]he Commission shall approve or 

deny the application or, if deemed 

appropriate, register the applicant as a 

swap execution facility subject to 

conditions.’’ In addition, proposed 

§ 37.3(a)(2) stated that ‘‘[t]he application 

must include information sufficient to 

demonstrate compliance with the core 

principles specified in Section 5h of the 

Act.’’ Consistent with these provisions, 

the Commission is clarifying in final 

§ 37.3(b)(6) that: (i) The Commission 

will issue an order granting registration 

upon a Commission determination, in 

its own discretion, that the applicant 

has demonstrated compliance with the 

Act and the Commission’s regulations 

applicable to swap execution facilities; 

(ii) if deemed appropriate, the 

Commission may issue an order 

granting registration subject to 

conditions; and (iii) the Commission 

may issue an order denying registration 

upon a Commission determination, in 

its own discretion, that the applicant 

has not demonstrated compliance with 

the Act and the Commission’s 

regulations applicable to swap 

execution facilities. 

(e) § 37.3(b)—Temporary Grandfather 

Relief From Registration 138

Proposed § 37.3(b) provided that an 

applicant for SEF registration may 

request that the Commission grant the 

applicant temporary grandfather relief 

from the registration requirement. The 

temporary relief would allow the 

applicant to continue operating during 

the pending application review process. 

Under the proposed rule, to receive 

temporary relief, the applicant was 

required to provide the following 

information to the Commission: (1) An 

application for SEF registration 

submitted in compliance with proposed 

§ 37.3(a); (2) a notification of its interest 

in operating under the temporary relief; 

(3) transaction data substantiating that 

swaps have been traded and continue to 

be traded on the applicant’s trading 

system or platform at the time of its 

application submission; and (4) a 

certification that the applicant believes 

that it will meet the requirements of part 

37 of the Commission’s regulations 

when it operates under temporary relief. 

Under proposed § 37.3(b)(2), an 

applicant’s grant of temporary relief 

would expire on the earlier of: (1) The 

date that the Commission grants or 

denies SEF registration; or (2) the date 

that the Commission rescinds the 

temporary relief. Proposed § 37.3(b)(3) 

contained a sunset date for the 

temporary relief provision of 365 days 

following the effective date of the final 

SEF regulations. Finally, the 

Commission proposed that the SEF 

rules, which include the requirements 

for temporary relief, would be effective 

90 days after their publication in the 

Federal Register. 

(1) Summary of Comments 

(i) Comments on Temporary 

Grandfather Relief 

MarketAxess commented that the 

phrase ‘‘temporary grandfather relief’’ is 

ambiguous and recommended that the 

Commission rename ‘‘temporary 

grandfather relief’’ to ‘‘temporary 

registration.’’ 139

With respect to the substance of this 

provision, some commenters expressed 

concern that the existing trading activity 

requirement in proposed § 37.3(b)(1)(ii) 

would prevent new entities from 

qualifying for temporary relief.140 In this 

regard, MarketAxess recommended that 

the Commission revise proposed 

§ 37.3(b)(1)(ii) to permit SEF applicants, 

as an alternative to providing 

transaction data, to provide materials 

substantiating that the applicant’s 

system is operational and therefore 

could facilitate trading in listed swaps 

upon receiving temporary registration 

from the Commission.141

Further, several commenters 

recommended alternative certification 

standards under proposed 

§ 37.3(b)(1)(iii).142 Bloomberg, for 

example, recommended that SEFs be 

required to certify only that they have 

implemented rules ‘‘reasonably 

designed to ensure’’ compliance with 

part 37.143 Similarly, MarketAxess 

recommended a more flexible 

certification requirement because 

compliance with certain core principles 

will need to await the build-out 

functionality of third-party regulatory 

service providers.144

In addition, Phoenix commented that 

to avoid any market disruptions, the 

Commission should permit SEF 

applicants to operate under temporary 

relief while awaiting a Commission 

determination to either grant or deny 

the temporary relief request.145

MarketAxess also noted that the 

Commission should not ‘‘tie its own 

hands’’ by imposing a fixed one-year 

post-effective time period for reviewing 

SEF applications.146

(ii) Comments on DCM Eligibility 

CME commented that if a DCM has 

listed cleared swaps prior to the 

adoption of the final rules, then there is 

no reason to exclude them from 

applying for temporary relief.147 NYSE 

Liffe recommended that temporary relief 

remain available to DCMs either as long 

as it is available to SEF applicants or on 

an ongoing basis so that a DCM required 

under DCM Core Principle 9 to delist a 

futures contract at any point in the 

future would be allowed to seek 

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148NYSE Liffe Comment Letter at 3–4 (Sep. 2, 

2011). 

149AIMA Comment Letter at 3 (Jun. 10, 2011); 

Nodal Comment Letter at 3–5 (Jun. 3, 2011); 

WMBAA Comment Letter at 4–5 (Jun. 3, 2011); 

CME Comment Letter at 6 (Jun. 3, 2011); 

MarketAxess Comment Letter at 19 (Mar. 8, 2011); 

NFA Comment Letter at 2–3 (Mar. 8, 2011); 

WMBAA Comment Letter at 12–13 (Mar. 8, 2011); 

ICAP Comment Letter at 6 (Mar. 8, 2011); Nodal 

Comment Letter at 4–5 (Mar. 8, 2011). 

150Nodal Comment Letter at 4 (Jun. 3, 2011); 

Nodal Comment Letter at 4 (Mar. 8, 2011). 

151MarketAxess Comment Letter at 19 (Mar. 8, 

2011); NFA Comment Letter at 2–3 (Mar. 8, 2011). 

152SDMA Comment Letter at 12 (Mar. 8, 2011). 

153The Commission is renumbering proposed 

§ 37.3(b) to § 37.3(c) and making several nonsubstantive revisions for clarity. 

154Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1216. 

155The applicant must comply with all of the 

requirements in final § 37.3(b)(1)(i) and must 

submit a temporary registration notice to the 

Commission to qualify for temporary registration. 

See Final § 37.3(c)(1) of the Commission’s 

regulations. 

156The Commission notes that certain entities 

may continue to operate under current exemptions 

while their SEF applications are pending, as long 

as the entities submit a complete application (i.e., 

the SEF applicant provides substantive answers to 

each of the informational and exhibit items set forth 

in Form SEF) and temporary registration notice 

before the effective date of the final SEF regulations. 

See CFTC No-Action Letter 12–48 (Dec. 11, 2012). 

157See discussion below regarding swap dealer 

and major swap participant provisional registration 

rules. 

158The Commission is delegating to the Director 

of DMO, upon consultation with the General 

Counsel, the authority to issue a notice granting or 

denying temporary registration. See Final § 37.3(h) 

of the Commission’s regulations. 

159This provision is contained in final § 37.3(c)(2) 

of the Commission’s regulations. This rule also 

states that in no case may an applicant begin 

operating as a temporarily registered SEF until the 

effective date of the SEF regulations. 

temporary relief from registration as a 

SEF.148

(iii) Comments on 90-Day Effective Date 

of Regulations 

Some commenters recommended a 

longer time period for the effective date 

of the final regulations to provide 

applicants with additional time to 

implement the large number of changes 

required.149 Nodal commented that the 

short effective date will disadvantage 

smaller exchanges because its 

supporting external parties will likely 

prioritize compliance obligations in 

order to be responsive to the largest 

exchanges first.150 MarketAxess and 

NFA recommended that the 

Commission provide SEF applicants 180 

days after adoption of the final rules to 

comply with the final SEF regulations in 

light of forthcoming operational 

challenges.151 However, SDMA 

supported the 90-day effective date and 

urged the Commission to be vigilant in 

preventing further delays that 

undermine the realization of the goals of 

the Dodd-Frank Act.152

(2) Commission Determination 

(i) Temporary Grandfather Relief 

The Commission agrees with 

MarketAxess that ‘‘temporary 

registration’’ is more accurate than 

‘‘temporary grandfather relief’’ and is 

accordingly making such change. 

Additionally, based on the comments, 

the Commission is adopting proposed 

§ 37.3(b) as final § 37.3(c) subject to a 

number of modifications.153

The Commission further agrees with 

MarketAxess and other commenters that 

the trading activity requirement as 

proposed in § 37.3(b)(1)(ii) may limit 

temporary registration to incumbent 

platforms. Therefore, the Commission is 

eliminating the trading activity 

requirement and will permit all SEF 

applicants to apply for temporary 

registration if they meet the 

requirements under final § 37.3(c)(1). 

The Commission views the revised 

temporary registration provision as 

promoting competition between SEFs by 

providing fair opportunities for new 

entities to establish trading operations 

in competition with incumbents. 

The Commission is deleting the 

certification requirement under 

proposed § 37.3(b)(1)(iii) because it is 

unnecessary. The Commission notes, as 

stated in the SEF NPRM, that once a 

SEF applicant is granted temporary 

registration it must comply with all 

provisions of the Act and the 

Commission’s regulations that are 

applicable to SEFs.154

The Commission is revising the 

temporary registration provisions to 

clarify in final § 37.3(c)(1) that a SEF 

applicant may apply for temporary 

registration if it submits a complete 

Form SEF and a temporary registration 

notice.155 The Commission is also 

revising the temporary registration 

provisions to require a SEF applicant 

that is already operating a swaps-trading 

platform, in reliance upon either an 

exemption granted by the Commission 

or some form of no-action relief granted 

by the Commission staff, to include in 

the temporary registration notice a 

certification that it is operating pursuant 

to such exemption or no-action relief. 

The Commission also clarifies that a 

SEF applicant may submit such 

temporary registration application after 

the final SEF regulations are published 

in the Federal Register until the 

termination of the temporary 

registration provision pursuant to final 

§ 37.3(c)(5).156

Pursuant to final § 37.3(c)(1), the 

Commission notes that it will grant a 

SEF applicant temporary registration 

upon a Commission determination that 

the applicant has provided a complete 

Form SEF as part of its registration 

application and submitted a notification 

requesting that the Commission grant 

temporary registration. If an applicant 

has not met these requirements, the 

Commission may deny its request for 

temporary registration. By ‘‘complete’’ 

Form SEF, the Commission means that 

the SEF applicant provides 

appropriately responsive answers to 

each of the informational and exhibit 

items set forth in Form SEF. The 

Commission notes that it will review a 

SEF applicant’s Form SEF to ensure that 

it is complete, and will not conduct any 

substantive review of the form before 

granting or denying temporary 

registration. The Commission notes that 

this temporary registration process is 

similar to the notice registration process 

followed by the Commission in the 

context of other types of registrations.157

The Commission will review SEF 

applicants’ submissions on a rolling 

basis and the Commission will issue 

notices either granting or denying 

temporary registration.158 The 

Commission believes that providing a 

clear and streamlined path to temporary 

registration will minimize the potential 

for regulatory arbitrage, ensure a level 

playing field, and promote competition 

among SEFs. 

The Commission stresses that a grant 

of temporary registration does not mean 

that the Commission has determined 

that a SEF applicant is fully compliant 

with the Act and Commission 

regulations, nor does it guarantee that a 

SEF applicant will eventually be 

granted full SEF registration. After 

granting a SEF applicant temporary 

registration, the Commission will 

review the applicant’s application to 

assess whether the applicant is fully 

compliant with the requirements of the 

Act and the Commission’s regulations 

applicable to SEFs. During such 

assessment, the Commission may 

request from the SEF applicant 

additional information in order to make 

a determination whether to issue a final 

order of registration. 

The Commission is also revising the 

temporary registration provisions to 

clarify in final § 37.3(c)(2) that an 

applicant cannot operate as a SEF under 

temporary registration until the 

applicant receives a notice from the 

Commission or the Commission staff 

granting temporary registration.159 In 

response to Phoenix’s comment about a 

SEF operating while its temporary 

registration is pending, the Commission 

does not believe that a SEF applicant 

should be allowed to operate as a SEF 

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33488 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

160Registration of Swap Dealers and Major Swap 

Participants, 77 FR 2613 (Jan. 19, 2012). 

161This provision is contained in final § 37.3(c)(5) 

of the Commission’s regulations. 

162This provision is contained in final § 37.3(c)(6) 

of the Commission’s regulations. 

163See Heckler v. Chaney, 470 U.S. 821 (1985). 

164This scenario is not limited to a prospective 

SEF that is already operating a swaps-trading 

platform in reliance on a Commission staff relief 

letter. As noted above, all SEF applicants may apply 

for temporary registration if they meet the 

requirements under final § 37.3(c)(1). 

under temporary registration before the 

Commission has had a chance to review 

the application to ensure that it is 

complete. The Commission’s review is 

especially merited given the 

Commission’s decision to permit 

temporary registration of entities that 

have not previously traded swaps. 

The Commission believes that 

permitting entities to operate as 

temporarily registered SEFs, 

notwithstanding the lack of a 

substantive review of the SEF’s 

application by the Commission, is not a 

novel concept and has been followed by 

the Commission in other contexts where 

it is important to allow entities to 

quickly reach the market, before an 

extensive Commission review. For 

instance, under the Commission’s swap 

dealer and major swap participant 

registration rules, provisional 

registration is granted upon the filing of 

an application and documentation 

demonstrating compliance or the ability 

to comply with the CEA section 4s 

requirements in effect on such date— 

and not after review and approval of the 

documentation by the National Futures 

Association (‘‘NFA’’), as the 

Commission’s delegee.160 On and after 

the date on which NFA confirms that 

the applicant has demonstrated its 

initial compliance with the applicable 

requirements, the provisional 

registration of the applicant ceases and 

the applicant becomes registered as an 

SD or an MSP, as the case may be. 

The Commission envisions the SEF 

temporary registration process as 

operating in a similar fashion, with the 

Commission reviewing each application 

for completeness alone before granting 

temporary registration. Subsequently, 

and concurrent with the temporarily 

registered SEF’s early operations, the 

Commission would conduct a 

comprehensive review of the 

application for compliance with all 

applicable SEF requirements. 

The Commission is revising proposed 

§ 37.3(b)(2) regarding the expiration of 

temporary registration to remove the 

ability of the Commission to rescind 

temporary registration. The Commission 

notes that the SEF NPRM did not 

provide a standard for the Commission 

to rescind temporary registration. 

Instead, in final § 37.3(c)(3), the 

Commission may rely on its ability to 

deny full registration, which will also 

cause temporary registration to expire. 

Therefore, the Commission believes that 

the ability to rescind temporary 

registration is unnecessary. 

The Commission is extending the 365- 

day sunset provision for temporary 

registration to two years from the 

effective date of these regulations in 

final § 37.3(c)(5).161 Given that the 

projected number of temporary SEF 

registrations may exceed 20 and the 

resource constraints faced by the 

Commission, the Commission may not 

be able to complete its registration 

reviews, enable SEFs to remedy any 

identified deficiencies, and ultimately 

grant or deny full registration for all of 

the SEF applicants within the proposed 

365-day period. Extending the 

temporary registration provision will 

provide the Commission with adequate 

time to review the SEF registration 

applications while ensuring that SEFs 

can continue their operations under 

temporary registration, without 

interruption, until the Commission 

decides on their application for full 

registration. 

The Commission is also revising final 

§ 37.3(c)(5) to state that the temporary 

registration provision will not terminate 

for an applicant who applies for 

temporary registration before the 

termination of the temporary 

registration provision and has not been 

granted or denied registration under 

§ 37.3(b)(6) by the time of the 

termination of the temporary 

registration provision. In addition, final 

§ 37.3(c)(5) states that such an applicant 

may operate as a SEF under temporary 

registration upon receipt of a notice 

from the Commission granting 

temporary registration until the 

Commission grants or denies full 

registration pursuant to § 37.3(b)(6). On 

the termination date of the temporary 

registration provision, the Commission 

will review such applicant’s application 

pursuant to the 180-day Commission 

review period and procedures in 

§ 37.3(b)(5). These revisions will ensure 

that a temporarily registered SEF who 

does not have a full registration in place 

by the time the temporary registration 

provision terminates will not have to 

stop operating on such termination date. 

(ii) DCM Eligibility 

The Commission is withdrawing 

proposed § 37.3(b)(1)(ii) regarding the 

existing trading activity requirement so 

an operational DCM that seeks to create 

a new SEF would be able to qualify for 

temporary SEF registration. In 

consideration of NYSE Liffe’s comment 

that temporary SEF registration for an 

existing DCM should not be subject to 

the sunset provision, the Commission is 

revising proposed § 37.3(b) in final 

§ 37.3(c)(6) to allow for such an 

exemption.162 The Commission notes 

that a DCM is subject to a higher 

regulatory standard than a SEF such that 

a non-dormant DCM who seeks to create 

a new SEF in order to transfer one or 

more of its contracts should be able to 

meet many of the SEF requirements. 

Therefore, the Commission believes 

that, on an ongoing basis, an operational 

DCM that also seeks to register as a SEF 

in order to transfer one or more of its 

contracts (whether the transfer of the 

contract is motivated by DCM Core 

Principle 9 or another reason) may 

request SEF temporary registration. 

(iii) 90-Day Effective Date of Regulations 

The Commission is shortening the 

proposed 90-day effective date to 60 

days subsequent to publication in the 

Federal Register. In consideration of the 

comments received and the availability 

of the Commission staff resources, the 

Commission has determined to use its 

discretion to establish alternative dates 

for the commencement of its 

enforcement of regulatory provisions 

and is setting a general compliance date 

of 120 days subsequent to Federal 

Register publication.163 With this use of 

an effective date and compliance date, 

a prospective SEF that is already 

operating a swaps-trading platform in 

reliance on a Commission staff relief 

letter (e.g., CFTC No-Action Letter 12– 

48) could submit a SEF application and 

receive temporary registration before 

part 37’s effective date so that it might 

begin operating as a SEF upon that 

effective date.164 Alternatively, if such a 

prospective SEF took additional time to 

prepare its SEF application, it would 

have the option of forestalling the 

submission of its application until after 

the effective date, so long as it 

submitted its SEF application by the 

compliance date. 

The Commission believes that this 

combination of a 60-day effective date 

and a 120-day compliance date 

subsequent to Federal Register 

publication for prospective SEF 

applicants establishes a transition 

period that appropriately balances the 

Commission’s need to provide 

regulatory certainty to potential 

applicants through issuance of final SEF 

regulations and the Commission’s 

statutory directives to both promote fair 

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165Section 3(b) of the Act lists the promotion of 

‘‘fair competition among boards of trade, other 

markets, and market participants’’ as a purpose of 

the Act. 7 U.S.C. 5(b). 

166Section 5h(e) of the Act lists the promotion of 

‘‘the trading of swaps on swap executive facilities’’ 

as one goal of the Act. 7 U.S.C. 7b–3(e). 

167The Commission is renumbering proposed 

§ 37.3(c) to § 37.3(d) and making several nonsubstantive revisions for clarity. 

168The Commission is renumbering proposed 

§ 37.3(d) to § 37.3(e) and making several nonsubstantive revisions for clarity. 

169The Commission is renumbering proposed 

§ 37.3(e) to § 37.3(f) and making several nonsubstantive revisions for clarity. 

170The Commission is renumbering proposed 

§ 37.3(f) to § 37.3(g) and making several nonsubstantive revisions for clarity. 

171CEA section 15(b) requires the Commission to 

take into consideration the public interest to be 

protected by the antitrust laws and endeavor to take 

the least anticompetitive means of achieving the 

objectives of the Act, as well as the policies and 

purposes of the Act. 7 U.S.C. 19(b). 

172WMBAA Comment Letter at 15–16 (Mar. 8, 

2011). 

173 Id. 

174CME Comment Letter at 10, 13 (Feb. 22, 2011). 

CME also provided its comments to the rulemaking 

titled Provisions Common to Registered Entities, 76 

FR 44776 (Jul. 27, 2011). In addition, rather than 

repeat its comments that pertain to both the DCM 

and SEF NPRMs, CME incorporated its entire DCM 

rulemaking comment letter dated Feb. 22, 2011 as 

Exhibit A to its SEF comment letter dated Mar. 8, 

2011. The Commission notes these comments by 

referencing the Feb. 22, 2011 date of CME’s DCM 

comment letter. The Commission is also changing 

CME’s reference to ‘‘DCM’’ to ‘‘SEF’’ for these 

comments. 

175MarketAxess Comment Letter at 19 (Mar. 8, 

2011). Tradeweb similarly commented that a SEF 

applicant should be able to introduce new products 

while it is operating under temporary relief. 

Tradeweb Comment Letter at 13 (Mar. 8, 2011). 

176 17 CFR part 40. 

177CEA section 5c(c); 7 U.S.C. 7a–2(c). 

178See Provisions Common to Registered Entities, 

76 FR 44776 (Jul. 27, 2011). 

179See generally Core Principles and Other 

Requirements for Swap Execution Facilities, 76 FR 

at 1217 (explaining the proposed ten percent 

threshold). 

competition between swaps trading 

venues 165 and promote the trading of 

swaps on SEFs.166 The new transition 

period ensures swaps market continuity, 

preserves competition between swaps 

trading venues, and facilitates the 

orderly restructuring of the swaps 

market in compliance with the Act and 

regulations thereunder. The 

Commission believes that the 60-day 

effective date and the 120-day 

compliance date approach will provide 

prospective SEF applicants with 

sufficient time to comply with the final 

regulations and, if they choose, to 

prepare an application for temporary 

registration. 

(f) § 37.3(c)—Reinstatement of Dormant 

Registration 

Proposed § 37.3(c) provided 

procedures for a dormant SEF to 

reinstate its registration. The 

Commission received no comments on 

this section and is adopting § 37.3(c) as 

proposed.167

(g) § 37.3(d)—Request for Transfer of 

Registration 

Proposed § 37.3(d) provided 

procedures that a SEF must follow when 

seeking to transfer its registration from 

its current legal entity to a new legal 

entity as a result of a corporate event. 

The Commission received no comments 

on this section and is adopting § 37.3(d) 

as proposed.168

(h) § 37.3(e)—Request for Withdrawal of 

Application for Registration 

Proposed § 37.3(e) provided that a 

SEF applicant may withdraw its 

application for registration. The 

Commission received no comments on 

this section and is adopting § 37.3(e) as 

proposed.169

(i) § 37.3(f)—Request for Vacation of 

Registration 

Proposed § 37.3(f) provided that a SEF 

may vacate its registration. The 

Commission received no comments on 

this section and is adopting § 37.3(f) as 

proposed.170

4. § 37.4—Procedures for Listing 

Products and Implementing Rules 

Proposed § 37.4 detailed the approval 

and self-certification procedures under 

part 40 of the Commission’s regulations 

that SEF applicants and SEFs must 

follow to submit its products and rules 

to the Commission. Proposed § 37.4 also 

provided that a SEF may request that 

the Commission consider, under the 

provisions of section 15(b) of the Act,171

any of the SEF’s rules or policies. 

(a) Summary of Comments 

WMBAA commented that SEFs 

should not be required to seek 

Commission approval for their products 

and rules.172 WMBAA recommended 

that SEFs be allowed to submit to the 

Commission a simple self-certification 

that they complied with the applicable 

requirements.173 CME stated that the 

proposed procedures for listing 

products would increase the burdens 

associated with new product 

submissions and rule changes and 

would create new and costly 

bureaucratic inefficiencies, competitive 

disadvantages in the global marketplace, 

and impediments to innovation.174

MarketAxess recommended that the 

Commission revise proposed § 37.4 to 

clarify that temporarily registered SEFs 

may list swaps through the 

Commission’s approval or selfcertification procedures.175

(b) Commission Determination 

The Commission is adopting 

proposed § 37.4 subject to certain 

modifications. The Commission is 

removing many of the details from the 

proposed rule, which are already 

contained in part 40 of the 

Commission’s regulations, and is 

instead referring SEFs to part 40.176 The 

Commission is also removing the CEA 

section 15(b) consideration provision 

because, when reviewing any SEF rule, 

the Commission is already required to 

take into consideration the provisions 

under section 15(b) of the Act. 

In response to WMBAA’s comments 

that SEFs should not be required to seek 

Commission approval of their products 

and rules, the Commission notes that a 

SEF is a registered entity under the Act 

and pursuant to section 5c(c) of the Act, 

registered entities must submit product 

terms and conditions and rules to the 

Commission for approval or under selfcertification procedures.177 In addition, 

the Commission notes that CME’s 

comments were addressed in the part 40 

rulemaking and are outside the scope of 

this rulemaking.178 The Commission 

also clarifies that temporarily registered 

SEFs may list swaps or submit rules 

through the Commission’s approval or 

self-certification procedures under part 

40 of this chapter, and that the timelines 

under those procedures shall apply. 

5. § 37.5—Information Relating to Swap 

Execution Facility Compliance 

Proposed § 37.5(a) required a SEF to 

file with the Commission information 

related to its business as a SEF as 

specified in the Commission’s request. 

Proposed § 37.5(b) required a SEF to file 

with the Commission a written 

demonstration of compliance with the 

core principles. Proposed § 37.5(d) 

delegated the Commission’s authority to 

seek information as set forth in § 37.5(b) 

to the Director of DMO or such other 

employee as the Director may designate. 

Proposed § 37.5(c) required a SEF to 

file with the Commission a notice of the 

transfer of ten percent or more of its 

equity no later than the business day 

following the date on which the SEF 

enters into a firm obligation to transfer 

the equity interest.179 The proposed rule 

also required that the notification 

include any relevant agreement and a 

representation from the SEF that it 

meets all of the requirements of section 

5h of the Act and Commission 

regulations adopted thereunder. 

Additionally, the proposed rule 

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33490 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

180CME Comment Letter at 13 (Feb. 22, 2011). 

181 Id. 

182MarketAxess Comment Letter at 29 (Mar. 8, 

2011). 

183Better Markets Comment Letter at 21–22 (Mar. 

8, 2011). 

184The Commission is removing the reference to 

‘‘information relating to data entry and trade 

details’’ in proposed § 37.5(a) because it is 

unnecessary. The rule text is broad enough to 

encompass such information as it states that, upon 

the Commission’s request, a SEF shall file with the 

Commission information related to its business as 

a SEF. 

185The Commission interprets ‘‘firm obligation’’ 

to mean when a SEF enters into a letter of intent 

or any other document that demonstrates a SEF’s 

firm intent to transfer its equity interest as 

described in § 37.5(c). 

required the SEF to notify the 

Commission of the consummation of the 

transaction on the day on which it 

occurs. Furthermore, the proposed rule 

required that, upon the transfer of the 

equity interest, the SEF certify, no later 

than two business days following the 

date on which the change in ownership 

occurs, that the SEF meets all of the 

requirements of section 5h of the Act 

and Commission regulations adopted 

thereunder. 

(a) Summary of Comments 

The Commission did not receive any 

comments on proposed § 37.5(a), (b), or 

(d). The Commission did, however, 

receive comments on the equity interest 

transfer provisions in proposed 

§ 37.5(c). 

CME commented that the submissions 

required to be simultaneously filed with 

the initial notification of an equity 

interest transfer do not lend themselves 

to preparation within the 24-hour time 

frame proposed in the rules.180 CME 

further commented that the 

representation of compliance with the 

requirements of CEA section 5h and the 

Commission’s regulations adopted 

thereunder would be more appropriate 

if required upon consummation of the 

equity interest transfer, rather than with 

the initial notification.181

MarketAxess commented that public 

companies should not have to file a 

notice of an equity interest transfer 

because the ownership structure of a 

public company does not implicate the 

control and influence concerns raised 

by the Commission in its proposal, and 

shareholders are already obligated 

under the SEC’s regulations to report 

threshold acquisitions of equity 

interests within ten days of such an 

acquisition.182

Lastly, Better Markets recognized the 

important implications of transferring 

control in a regulated marketplace and 

it recommended that the Commission 

lower the transfer threshold for 

reporting to five percent as similarly 

required by the SEC for public equity 

transfers.183

(b) Commission Determination 

The Commission is adopting § 37.5(a), 

(b), and (d) as proposed subject to 

certain non-substantive clarifications.184

The Commission is adopting proposed 

§ 37.5(c) with certain revisions 

discussed below. 

The Commission is revising § 37.5(c) 

to provide that a SEF must submit to the 

Commission a notification of each 

transaction involving the transfer of fifty 

percent or more of the equity interest in 

the SEF, and that such notification must 

be provided at the earliest possible time, 

but in no event later than the open of 

the business day that is ten business 

days following the date in which the 

SEF enters into a firm obligation 185 to 

transfer the equity interest. However, in 

all cases, the Commission notes that a 

SEF must provide the Commission staff 

with sufficient time, prior to 

consummating the equity interest 

transfer, to review and consider the 

implications of the change in 

ownership, including whether the 

change in ownership will adversely 

impact the operations of the SEF or the 

SEF’s ability to comply with the core 

principles and the Commission’s 

regulations thereunder. 

The Commission acknowledges 

CME’s concern regarding the one 

business day time period for filing the 

supporting documents with the equity 

interest transfer notification. Thus, in 

addition to extending the time period to 

up to ten business days for a SEF to file 

notification with the Commission, the 

Commission is revising the rule to 

eliminate the requirement that specific 

documents be provided with the 

notification. Rather, the Commission is 

revising the rule text to clarify that upon 

receiving a notification of the equity 

interest transfer, the Commission may 

request appropriate documentation 

pursuant to its authority under § 37.5 of 

the Commission’s regulations. For 

example, such documentation may 

include, but is not limited to: (i) 

Relevant agreement(s), including any 

preliminary agreements (not including 

draft documents); (ii) associated changes 

to relevant corporate documents; (iii) a 

chart outlining any new ownership or 

corporate or organizational structure, if 

available; and (iv) a brief description of 

the purpose and any impact of the 

equity interest transfer. 

The Commission is deleting the 

requirement for a SEF to provide a 

representation of compliance with 

section 5h of the Act and the 

Commission regulations thereunder 

with the equity interest transfer 

notification, as requested by CME. The 

Commission agrees with CME that this 

requirement is more appropriate upon 

consummation of the equity interest 

transfer, rather than with the initial 

notification. Therefore, the Commission 

is maintaining the certification 

requirement upon consummation of the 

equity interest transfer as proposed in 

the SEF NPRM. 

With respect to the other comments, 

the Commission believes that the notice 

requirements should not be limited to 

privately-held companies as the 

Commission’s objective is to ensure that 

equity transfers do not negatively 

impact the operations of registered 

entities. The Commission must oversee 

and ensure the continued compliance of 

all SEFs with the core principles and 

the Commission’s regulations. In order 

to fulfill its oversight obligations, and to 

ensure that SEFs maintain compliance 

with their self-regulatory obligations, 

the Commission must receive a notice of 

an equity interest transfer. The 

Commission acknowledges the 

suggestion by Better Markets to lower 

the equity interest transfer threshold to 

five percent; however, the Commission 

believes that the revisions to § 37.5(c) 

will still allow the Commission to fulfill 

its oversight obligations, while reducing 

the costs for SEFs to comply with the 

equity interest transfer requirements. 

Finally, the Commission is revising 

the rule to remind SEFs that if any 

aspect of an equity interest transfer 

requires the SEF to file a rule as defined 

in part 40 of the Commission 

regulations, then the SEF must comply 

with the rule submission requirements 

of section 5c(c) of the CEA and part 40 

of this chapter, and all other applicable 

Commission regulations. 

6. § 37.6—Enforceability 

Section 37.6 is intended to provide 

market participants who execute swap 

transactions on or pursuant to the rules 

of a SEF with legal certainty with 

respect to such transactions. In that 

regard, proposed § 37.6(a) established 

that any transaction entered into, on, or 

pursuant to the rules of a SEF cannot be 

voided, rescinded, or held 

unenforceable as a result of: (1) The SEF 

violating any provision of section 5h of 

the CEA or part 37; (2) any Commission 

proceeding to alter or supplement a 

rule, term, or condition under section 

8a(7) of the CEA or to declare an 

emergency under section 8a(9) of the 

CEA; or (3) any other proceeding the 

effect of which is to alter or supplement 

a specific term or condition or trading 

rule or procedure, or require a registered 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33491 

186The Commission proposed § 37.6(b) to 

facilitate the process contemplated by the 

confirmation definition. A swap ‘‘confirmation’’ is 

defined as the consummation (electronically or 

otherwise) of legally binding documentation 

(electronic or otherwise) that memorializes the 

agreement of the counterparties to all of the terms 

of a swap. A confirmation must be in writing 

(whether electronic or otherwise) and must legally 

supersede any previous agreement (electronically or 

otherwise). 17 CFR 45.1; Swap Data Recordkeeping 

and Reporting Requirements, 77 FR 2136, 2197 (Jan. 

13, 2012). 

187MarketAxess Comment Letter at 28–29 (Mar. 

8, 2011). Proposed § 45.3 required that for all 

transactions executed on a SEF, regardless of 

whether the swap was cleared, the SEF would be 

responsible for reporting to a swap data repository 

only the primary economic terms of the transaction 

in its possession at the time of execution, and that 

reporting of confirmation data consisting of all 

terms of the transaction would be the responsibility 

of either the derivatives clearing organization (if 

cleared) or one of the counterparties (if uncleared). 

Swap Data Recordkeeping and Reporting 

Requirements, 75 FR 76574, 76580–81 (proposed 

Dec. 8, 2010). As adopted by the Commission, 

however, § 45.3 requires a SEF to report both the 

primary economic terms data as well as all 

confirmation data consisting of all transaction terms 

for each swap executed on or pursuant to the rules 

of the SEF as soon as technologically practicable 

after execution of the swap. 17 CFR 45.3; Swap Data 

Recordkeeping and Reporting Requirements, 77 FR 

2136, 2199 (Jan. 13, 2012). 

188MarketAxess Comment Letter at 29 (Mar. 8, 

2011). 

189MarkitSERV Comment Letter at 4–5 (Mar. 8, 

2011). 

190 Id. MarkitSERV also expressed concern that 

the SEF NPRM is conflating the concepts of 

confirmation and affirmation with the audit trail 

requirements in proposed § 37.205. For example, 

MarkitSERV sought clarification regarding the SEF 

NPRM’s statement that ‘‘[v]oice transactions must 

be entered into some form of electronic affirmation 

system immediately upon execution.’’ Core 

Principles and Other Requirements for Swap 

Execution Facilities, 76 FR at 1221. Given the audit 

trail requirement in proposed § 37.205(b)(1), which 

states that SEFs that ‘‘permit intermediation must 

require that all orders or requests for quotes 

received by phone that are executable be 

immediately entered into the trading system or 

platform[,]’’ MarkitSERV recommended that the 

Commission use the term ‘‘electronic processing 

system’’ instead of ‘‘electronic affirmation system’’ 

because audit trail records and affirmation are 

different concepts. Id. at 1244. MarkitSERV 

Comment Letter at 4, 6 (Mar. 8, 2011). ABC/CIEBA 

also sought clarification as to whether SEFs must 

enter Permitted Transactions into an affirmation 

system, and if so, ABC/CIEBA noted that the SEF 

NPRM is inconsistent with other rules. ABC/CIEBA 

Comment Letter at 7–8 (Mar. 8, 2011). The 

Commission notes that the final SEF rules do not 

require the use of an ‘‘electronic affirmation 

system.’’ The Commission also clarifies that 

confirmation and the creation of an audit trail in 

§ 37.205 are two separate and distinct requirements. 

In addition, the Commission notes that § 37.205(b) 

merely establishes the requirement that SEFs must 

capture audit trail data for regulatory purposes and 

does not address affirmation, confirmation, or the 

public reporting or dissemination of such data. 

191Energy Working Group Comment Letter at 5 

(Mar. 8, 2011). 

192 Id. 

193The Commission is making certain nonsubstantive revisions to § 37.6(a) for clarity. 

194Part 45 requires a SEF to report all 

confirmation data and all primary economic terms 

data as defined in part 23 and § 45.1 of the 

Commission’s regulations for each swap executed 

on or pursuant to the rules of the SEF as soon as 

technologically practicable after execution of the 

swap. 17 CFR 45.3; Swap Data Recordkeeping and 

Reporting Requirements, 77 FR 2136, 2199 (Jan. 13, 

2012). Part 45 defines confirmation data as ‘‘all of 

the terms of a swap matched and agreed upon by 

the counterparties in confirming the swap.’’ Id. at 

2197. 

195The Commission notes that swap trading 

relationship documentation is not required for 

swaps cleared by a derivatives clearing 

organization. See § 23.504(a)(1) of the Commission’s 

regulations. The Commission also notes that the 

commenters’ concerns are most relevant to those 

transactions that are truly bespoke, not subject to 

the clearing mandate, and not voluntarily cleared. 

There is no reason why a SEF’s written 

confirmation terms cannot incorporate by reference 

the privately negotiated terms of a freestanding 

master agreement for these types of transactions, 

provided that the master agreement is submitted to 

the SEF ahead of execution and the counterparties 

ensure that nothing in the confirmation terms 

contradict the standardized terms intended to be 

incorporated from the master agreement. See also 

Real-Time Public Reporting of Swap Transaction 

Data, 77 FR 1182, 1193 (Jan. 9, 2012) (discussing 

confirmation and incorporating documents by 

reference). 

SEF to adopt a specific term or 

condition, trading rule or procedure, or 

to take or refrain from taking a specific 

action. Proposed § 37.6(b) required that 

all transactions executed on or pursuant 

to the rules of a SEF include written 

documentation memorializing all terms 

of the swap transaction, the legal effect 

of which is to supersede any previous 

agreement between the counterparties. 

The proposed rule also required that the 

confirmation of all terms of the 

transaction take place at the same time 

as execution.186

(a) Summary of Comments 

Three commenters addressed the 

practicality of a SEF confirming all 

terms of a transaction at the same time 

as execution. MarketAxess 

recommended that a SEF be responsible 

for confirming only the swap creation 

data in its possession at the time of 

execution, consistent with the 

Commission’s approach in its proposed 

part 45 regulations.187 MarketAxess also 

requested that the Commission clarify 

that SEFs are only responsible for 

producing a confirmation for swaps 

entered into on, and not just pursuant 

to the rules of, a SEF.188

MarkitSERV stated that when 

counterparties choose to execute a swap 

on a SEF that is not subject to the 

clearing mandate and not submitted for 

clearing to a clearinghouse, the parties 

will require a long-term credit 

relationship to be in place, often 

memorialized in an ISDA Master 

Agreement.189 MarkitSERV further 

stated that the confirmation terms 

provided by a SEF may not be able to 

accommodate the specificity of such a 

master agreement, thus making the 

SEF’s confirmation inadequate for 

purposes of complying with the 

Commission’s regulations.190

Similarly, the Energy Working Group 

expressed concern over the provision’s 

requirement that the SEF’s confirmation 

supersede any previous agreement 

between the transacting parties, noting 

that this language appears to prevent a 

master agreement from operating 

between counterparties transacting on a 

SEF.191 The Energy Working Group also 

stated that confirmation cannot take 

place at the same time as execution 

because they are two distinct steps in 

the swap transaction process.192

(b) Commission Determination 

The Commission is adopting § 37.6(a) 

as proposed.193 The Commission is also 

adopting § 37.6(b) as proposed subject to 

the two revisions discussed below. 

Although the comments received 

regarding proposed § 37.6(b) did not cite 

ambiguity in the SEF NPRM regarding a 

SEF’s affirmative duty to provide 

confirmation documentation to 

counterparties, the Commission has 

determined to revise § 37.6(b) to state 

explicitly that a ‘‘swap execution 

facility shall provide each counterparty’’ 

with written documentation of all terms 

of the transaction to serve as 

confirmation of such transaction. In 

response to MarketAxess’s comments, 

the Commission notes that § 37.6(b) is 

consistent with the requirement in final 

part 45 of the Commission’s regulations 

that a SEF report confirmation data 

consisting of all terms of a transaction 

to a swap data repository (‘‘SDR’’) for 

each swap executed on or pursuant to 

the rules of the SEF.194

With regard to the specific comments 

received about the role of master 

agreements in the written confirmation 

provided by a SEF, the Commission has 

determined that counterparties choosing 

to execute a transaction not submitted 

for clearing on or pursuant to the rules 

of a SEF must have all terms, including 

possible long-term credit support 

arrangements, agreed to no later than 

execution, such that the SEF can 

provide a written confirmation inclusive 

of those terms at the time of execution 

and report complete, non-duplicative, 

and non-contradictory data to an SDR as 

soon as technologically practicable after 

execution.195 This requirement, as 

mentioned above, is necessary to 

provide market participants who 

execute swap transactions on or 

pursuant to the rules of a SEF with legal 

certainty with respect to such 

transactions, and to promote the 

Commission’s policy goal of achieving 

‘‘straight-through processing’’ of swap 

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33492 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

196The OTC Derivatives Supervisors’ Group, a 

collaboration of market participant leadership 

headed by the Federal Reserve Bank of New York, 

recognized the potential of electronic trading to 

facilitate the objectives of straight-through 

processing in the wake of the 2008 financial crisis. 

See Confirmation, Portfolio Reconciliation, and 

Portfolio Compression Requirements for Swap 

Dealers and Major Swap Participants, 75 FR 81519, 

81521–22 (proposed Dec. 28, 2010) (noting that 

‘‘[t]imely and accurate confirmation of transactions 

is critical for all downstream operational and risk 

management processes, including the correct 

calculation of cash flows and discharge of 

settlement obligations as well as accurate 

measurement of counterparty credit exposures.’’). 

197See CEA section 5h(e); 7 U.S.C. 7b–3(e) 

(stating that the goal of this section is to promote 

pre-trade price transparency in the swaps market). 

While straight-through processing may not be as 

relevant to credit risk associated with transactions 

executed on or pursuant to the rules of a SEF but 

not submitted for clearing, the data and real-time 

reporting requirements already finalized by the 

Commission mandate reporting by the SEF of all 

swap transaction terms ‘‘as soon as technologically 

practicable’’ in order to effectuate the statutory 

mandate of post-trade price transparency. See 17 

CFR 43.3(b)(1) (real-time reporting); 17 CFR 

45.3(a)(1) (swap data recordkeeping and reporting 

requirements). This allowance of a slight timing 

delay, however, is meant to account for ‘‘the 

prevalence, implementation and use of technology 

by comparable market participants,’’ and not postexecution confirmation of other terms such as credit 

agreements for uncleared swaps. See, e.g., 17 CFR 

43.2; Real-Time Public Reporting of Swap 

Transaction Data, 77 FR 1182, 1191 (Jan. 9, 2012) 

(discussing the definition of ‘‘as soon as 

technologically practicable’’). 

198See 17 CFR 1.35; Customer Clearing 

Documentation, Timing of Acceptance for Clearing, 

and Clearing Member Risk Management, 77 FR 

21278, 21286–287, 306 (Apr. 9, 2012); 

Confirmation, Portfolio Reconciliation, Portfolio 

Compression, and Swap Trading Relationship 

Documentation Requirements for Swap Dealers and 

Major Swap Participants, 77 FR 55904, 55923 (Sep. 

11, 2012) for further details. 

199Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1218 n. 34. 

200MarketAxess Comment Letter at 31 (Mar. 8, 

2011); FSR Comment Letter at 9 (Mar. 8, 2011); ICE 

Comment Letter at 5–6 (Mar. 8, 2011); CME 

Comment Letter at 14 (Feb. 22, 2011). 

201CME Comment Letter at 14 (Feb. 22, 2011). 

202MarketAxess Comment Letter at 31 (Mar. 8, 

2011); FSR Comment Letter at 9 (Mar. 8, 2011). 

203CME Comment Letter at 14 (Feb. 22, 2011); 

MarketAxess Comment Letter at 31 (Mar. 8, 2011). 

204FSR Comment Letter at 9 (Mar. 8, 2011). 

205SIFMA AMG Comment Letter at 15–16 (Mar. 

8, 2011). 

206Freddie Mac Comment Letter at 5 (Mar. 8, 

2011). 207WMBAA Comment Letter at 17 (Mar. 8, 2011). 

transactions in order to facilitate orderly 

markets, whether bilateral or facility 

traded.196 Furthermore, the Commission 

believes that credit-support 

arrangements for uncleared transactions 

can impact the ultimate price of a swap, 

and thus should be agreed to no later 

than the time of trade execution in order 

to promote the statutory goal of pretrade price transparency.197

Finally, in response to the Energy 

Working Group’s comment that 

confirmation cannot take place at the 

same time as execution, the Commission 

is revising § 37.6(b) to state that ‘‘. . . 

specific customer identifiers for 

accounts included in bunched orders 

involving swaps need not be included 

in confirmations provided by a swap 

execution facility if the applicable 

requirements of § 1.35(b)(5) of this 

chapter are met.’’ The Commission 

acknowledges that for bunched orders 

the post-execution allocation of trades is 

required for confirmation. The above 

revisions to § 37.6 are consistent with 

Commission regulation 1.35(b)(5) and 

provide sufficient time for the postexecution allocation of bunched orders, 

but allow SEFs to meet the requirement 

that confirmation takes place at the 

same time as execution.198

7. § 37.7—Prohibited Use of Data 

Collected for Regulatory Purposes 

Proposed § 37.7 prohibited a SEF from 

using for commercial purposes 

proprietary data or personal information 

that it obtains from or on behalf of any 

person for regulatory purposes. The 

purpose of this provision was to protect 

customer privacy and prevent a SEF 

from using such information to advance 

its commercial interests.199

(a) Summary of Comments 

Several commenters recommended 

that the Commission adopt a more 

flexible approach toward the use of data 

collected for regulatory purposes.200

CME, for example, stated that a SEF 

should be allowed to use information 

that is provided for both regulatory and 

non-regulatory purposes for commercial 

purposes, as long as transparent rules or 

policies are in place.201 Some 

commenters believed that commercial 

use should be allowed, provided that 

market participants’ identities are 

protected 202 or prior consent is 

obtained.203 For example, FSR believed 

that commercial use should be allowed 

for aggregate data as long as the sources 

of the information are not revealed.204

However, SIFMA AMG stated that, 

given the broad authority under the 

proposed rules for SEFs to acquire 

information, the term ‘‘proprietary data’’ 

is too narrow to adequately protect 

market participants from improper 

disclosure.205 Freddie Mac requested 

that the Commission strengthen the 

proposed rule to additionally prohibit 

any SEF from asserting ownership rights 

over the trading information of any 

transacting party.206

Finally, WMBAA requested that the 

Commission clarify the meaning of 

‘‘proprietary data or personal 

information,’’ and recommended 

limiting the rule to information obtained 

outside the ordinary course of trade 

execution and related to market 

surveillance activities.207

(b) Commission Determination 

The Commission is adopting § 37.7 as 

proposed, subject to certain 

modifications. In response to the 

commenters, the Commission is 

modifying the proposed rule to allow 

SEFs to use proprietary data or personal 

information for business or marketing 

purposes if the person from whom it 

collects or receives such information 

clearly consents to the use of its 

information in such manner. The 

Commission is also revising the 

proposed rule to prohibit a SEF from 

conditioning access to its facility based 

upon such consent. The Commission 

believes that the consent requirement 

will protect persons by allowing them to 

first weigh the benefits and 

consequences of allowing a SEF to make 

commercial use of their information. In 

response to CME’s comment about 

information provided for both 

regulatory and non-regulatory purposes, 

the Commission notes that a SEF may 

use information that it receives for both 

regulatory and non-regulatory purposes 

for business or marketing purposes if 

the source of the information clearly 

consents to the use in such a manner. 

In response to comments about the 

definition of ‘‘proprietary data and 

personal information,’’ the Commission 

declines to adopt a further definition 

and is maintaining a flexible approach. 

However, the Commission notes that 

some examples of proprietary data and 

personal information would include 

information that separately discloses 

business transactions, market positions, 

or trade secrets. The Commission 

recommends that SEFs define these 

terms in their rulebooks, which will be 

subject to Commission review during 

the SEF registration process. 

8. § 37.8—Boards of Trade Operating 

Both a Designated Contract Market and 

a Swap Execution Facility 

Proposed § 37.8(a) required that a 

board of trade that operates a DCM and 

also intends to operate a SEF must 

separately register the SEF under part 

37, and on an ongoing basis, comply 

with the core principles under section 

5h of the Act and the part 37 regulations 

issued thereunder. Proposed § 37.8(b) 

implemented CEA section 5h(c) by 

requiring a board of trade that operates 

both a DCM and SEF and uses the same 

electronic trade execution system for 

executing and trading swaps on both 

registered entities to clearly identify to 

market participants for each swap 

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208CEA section 5h(c); 7 U.S.C. 7b–3(c). 

209CME Comment Letter at 14 (Feb. 22, 2011). 

210 Id. 

211The Commission notes that only eligible 

contract participants may execute a swap on a SEF 

so a board of trade that operates both a DCM and 

a SEF must ensure that its SEF does not allow for 

non-eligible contract participant trading on the SEF. 

See CEA section 2(e); 7 U.S.C. 2(e). 

212The Commission notes that it is not replacing 

the term ‘‘board of trade’’ in § 37.8(b) with the term 

‘‘entity’’ as in § 37.8(a) because in § 37.8(b) only a 

board of trade would be able to use the same 

electronic trade execution system for executing and 

trading swaps on the DCM and on the SEF (i.e., a 

trading facility). The Commission also notes that 

§ 37.8(b) implements CEA section 5h(c), which uses 

the term ‘‘board of trade.’’ 

213The Commission is renaming the title of this 

section from ‘‘Permitted Execution Methods’’ to 

‘‘Methods of Execution for Required and Permitted 

Transactions’’ to provide greater clarity. 

214By ‘‘in conjunction with the SEF’s minimum 

trading functionality,’’ the Commission means that 

the SEF NPRM required a SEF to offer the minimum 

trading functionality, and if that SEF also offered an 

RFQ System, it was required to communicate any 

bids or offers resting on the minimum trading 

functionality to the RFQ requester along with the 

responsive quotes. See the discussion below 

regarding ‘‘Taken Into Account and 

Communicated’’ Language in the RFQ System 

Definition under § 37.9(a)(1)(ii)—Request for Quote 

System in the preamble for further details. 

215Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1220. 

216Additionally, WMBAA commented that the 

distinction between Required Transactions and 

Permitted Transactions is not required or 

authorized by the CEA. WMBAA Comment Letter 

at 6–7 (Mar. 8, 2011). In this regard, the 

Commission notes that the CEA sets out specific 

trading requirements for swaps that are subject to 

the trade execution mandate. See CEA sections 

2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8). To 

meet these statutory requirements, final § 37.9(a)(1) 

defines these swaps as Required Transactions and 

provides specific methods of execution for such 

swaps. To distinguish these swaps from other 

swaps that are not subject to the trade execution 

mandate, the Commission defines such swaps in 

final § 37.9(c)(1) as Permitted Transactions and 

allows these swaps to be voluntarily traded on a 

SEF by using any method of execution. See 

discussion below regarding execution methods for 

Required and Permitted Transactions under 

§ 37.9(b)(1) and (b)(4)—Execution Methods for 

Required Transactions and § 37.9(c)—Execution 

Methods for Permitted Transactions in the 

preamble. 

217MarketAxess Comment Letter at 32 (Mar. 8, 

2011). Similarly, ISDA/SIFMA and the Energy 

Working Group requested clarity regarding the 

definition of Permitted Transactions. ISDA/SIFMA 

Comment Letter at 7 (Mar. 8, 2011); Energy Working 

Group Comment Letter at 4 (Mar. 8, 2011). 

218Freddie Mac Comment Letter at 3 (Mar. 8, 

2011). Similarly, MFA recommended that the 

Commission expand the definition of Permitted 

Transactions to include other transactions, such as 

exchanges for physical, exchanges for swaps, and 

linked or packaged transactions. MFA Comment 

Letter at 8 (Mar. 8, 2011). The Commission 

interprets MFA’s comment to be a request that the 

Commission create through rulemaking an 

Continued 

whether the execution or trading of such 

swaps is taking place on the DCM or the 

SEF.208

(a) Summary of Comments 

CME stated that the rules of a DCM 

and SEF would clearly identify, as 

necessary, the trade platform upon 

which a swap was being executed, 

rendering the requirements of proposed 

§ 37.8 unnecessary.209 CME requested 

that the Commission clarify whether 

proposed § 37.8 created additional 

substantive obligations on the part of 

DCMs and SEFs given that market 

participants often interface with 

electronic platforms via proprietary or 

third-party front end systems not under 

the control of DCMs or SEFs.210

(b) Commission Determination 

The Commission is adopting § 37.8(a) 

as proposed, subject to one revision. 

Proposed § 37.8(a) only addressed the 

SEF registration and compliance of a 

board of trade that already operates a 

DCM and intends to operate a SEF. To 

address all situations regarding DCM 

and SEF registration and compliance, 

the Commission is revising § 37.8(a) to 

apply to ‘‘[a]n entity that intends to 

operate both a [DCM] and a [SEF].’’ The 

rule requires the entity to separately 

register the DCM and SEF pursuant to 

part 38 and part 37 of the Commission’s 

regulations, respectively, and to comply 

with the applicable core principles and 

regulations. 

As to CME’s comments regarding 

§ 37.8(b), the Commission clarifies that 

it would not be sufficient for a board of 

trade that operates both a DCM and a 

SEF to simply have rules that identify 

whether a transaction is being executed 

on the DCM or the SEF. The 

Commission notes that section 5h(c) of 

the Act clearly requires a board of trade 

that operates both a DCM and a SEF to 

identify to market participants whether 

each swap is being executed on the 

DCM or the SEF.211 Accordingly, a 

consolidated DCM/SEF trading screen 

must identify whether the execution is 

occurring on the DCM or the SEF, 

irrespective of how proprietary or thirdparty front end systems eventually 

present that data to market 

participants.212

9. § 37.9—Permitted Execution 

Methods 213

As mentioned above, the SEF NPRM 

required a SEF to offer a minimum 

trading functionality (i.e., a centralized 

electronic trading screen upon which 

any market participant can post both 

firm and indicative bids and offers that 

are transparent to all other market 

participants of the SEF). The SEF NPRM 

provided that Required Transactions 

(i.e., transactions subject to the trade 

execution mandate under section 2(h)(8) 

of the CEA and not block trades) must 

be executed through the SEF’s 

minimum trading functionality, Order 

Book meeting the minimum trading 

functionality, or RFQ System that 

operates in conjunction with the SEF’s 

minimum trading functionality.214 The 

SEF NPRM made it clear that for 

Required Transactions, pre-trade 

transparency must be met.215 The SEF 

NPRM also allowed a SEF to provide 

additional execution methods for 

Permitted Transactions (i.e., 

transactions not subject to the clearing 

and trade execution mandates, illiquid 

or bespoke swaps, and block trades), 

including Voice-Based System. 

The Commission is restructuring the 

order of the rule text in § 37.9 and this 

corresponding preamble discussion to 

provide clarity. Despite the order of 

other preamble sections, which 

generally follows the order of the SEF 

NPRM, the Commission’s preamble 

discussion of § 37.9 generally follows 

the order of the restructured rule text. 

Additionally, as discussed above in the 

registration section, the Commission is 

moving the minimum trading 

functionality and Order Book sections 

from proposed § 37.9 to final § 37.3. 

(a) § 37.9(a)(1)(iv)—Required 

Transactions and § 37.9(a)(1)(v)— 

Permitted Transactions 

Proposed § 37.9(a)(1)(iv) defined 

Required Transactions as transactions 

that are subject to the execution 

requirements under the Act and are 

made available for trading pursuant to 

§ 37.10, and are not block trades. 

Proposed § 37.9(a)(1)(v) defined 

Permitted Transactions as transactions 

that meet any of the following 

requirements: (A) Are block trades; (B) 

are not swaps subject to the Act’s 

clearing and execution requirements; or 

(C) are illiquid or bespoke swaps. 

(1) Summary of Comments 

Several commenters recommended 

revisions to the definition of Permitted 

Transactions.216 To ensure that there are 

no gaps between the definitions of 

Required Transactions and Permitted 

Transactions, MarketAxess 

recommended that the proposed 

definition of Permitted Transactions in 

§ 37.9(a)(1)(v) be revised to include all 

transactions that are not Required 

Transactions as defined in proposed 

§ 37.9(a)(1)(iv).217 Freddie Mac 

recommended that the Commission 

revise the proposed definition of 

Permitted Transactions to incorporate 

hedging transactions by any end-user 

(i.e., non-dealer) counterparty.218

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exception to the CEA section 2(h)(8) trade execution 

requirement similar to the centralized market 

trading exception established by DCM Core 

Principle 9 for certain exchange of futures for 

related positions. See CEA section 5(d)(9); 7 U.S.C. 

7(d)(9); see also Regulation of Noncompetitive 

Transactions Executed on or Subject to the Rules of 

a Contract Market, 63 FR 3708 (Jan. 26, 1998). The 

Commission notes that while DCM Core Principle 

9 does permit certain exceptions to the centralized 

market trading requirements, such exceptions are 

all premised on there being some ‘‘bona fide 

business purpose’’ for the exception. MFA does not 

offer a specific bona fide business purpose for any 

of its three suggested off-exchange exceptions, nor 

is the Commission aware of any. In addition, MFA 

does not explain why an exchange of swaps for 

swaps transaction, where each leg of the transaction 

can presumably be executed on a SEF, needs to be 

executed off-exchange. The Commission observes 

that should swaps based on physical commodities 

become subject to the trade execution mandate, 

there might be some bona fide business purpose for 

executing exchanges of swaps for physicals 

transactions. However, the market participants who 

are most likely to engage in such transactions are 

also likely to be eligible for the end-user exception 

in CEA section 2(h)(7). As an initial matter, the 

Commission observes that swaps based on physical 

commodities may be subject to the trade execution 

requirement if the Commission determines that they 

are subject to the clearing requirement under CEA 

section 2(h)(1) and part 50 of the Commission’s 

regulations. Should the circumstances arise where 

the Commission is determining whether physical 

commodity swaps should become subject to the 

clearing requirement and there are parties who seek 

to engage in exchanges of swaps for physicals 

transactions that are not eligible for the end-user 

exception, the Commission could at that time 

entertain requests to permit a trade execution 

requirement exception for swaps that are 

components of such exchanges of swaps for 

physicals transactions. However, for the above 

reason, the Commission believes that a broad 

exception for such off-exchange transactions in the 

absence of bona fide business purposes could 

undermine the trade execution requirement by 

allowing market participants to execute swaps 

subject to the trade execution requirement 

bilaterally rather than on a SEF or DCM. 

219Coalition Comment Letter at 8 (Mar. 8, 2011). 

220 ISDA/SIFMA Comment Letter at 10 (Mar. 8, 

2011); Tradeweb Comment Letter at 5 (Mar. 8, 

2011); GFI Comment Letter at 4 (Mar. 8, 2011). 

221 ISDA/SIFMA Comment Letter at 10 (Mar. 8, 

2011). 

222Tradeweb Comment Letter at 5 (Mar. 8, 2011). 

223 GFI Comment Letter at 4 (Mar. 8, 2011). 

224The Commission is renumbering proposed 

§ 37.9(a)(1)(iv) to § 37.9(a)(1). Several commenters 

requested clarification from the Commission 

whether inter-affiliate trades would be subject to 

the CEA section 2(h)(8) trade execution 

requirement. JP Morgan Comment Letter at 5 (Jun. 

3, 2011); Rosen et al. Comment Letter at 20–21 (Apr. 

5, 2011); Coalition Comment Letter at 5 (Mar. 8, 

2011); ISDA/SIFMA Comment Letter at 11 (Mar. 8, 

2011). See Clearing Exemption for Swaps Between 

Certain Affiliated Entities, 77 FR 50425 (proposed 

Aug. 21, 2012) for further details. 

225The Commission is renumbering proposed 

§ 37.9(a)(1)(v) to § 37.9(c)(1). 

226See CEA section 2(h)(8) trade execution 

requirement discussion above under § 37.3— 

Requirements for Registration; see also discussion 

below under § 37.9(c)—Execution Methods for 

Permitted Transactions. 

227Section 43.2 of the Commission’s regulations 

states that ‘‘block trade’’ means a publicly 

reportable swap transaction that: (1) Involves a 

swap that is listed on a registered SEF or DCM; (2) 

Occurs away from the registered SEF’s or DCM’s 

trading system or platform and is executed pursuant 

to the registered SEF’s or DCM’s rules and 

procedures; (3) Has a notional or principal amount 

at or above the appropriate minimum block size 

applicable to such swap; and (4) Is reported subject 

to the rules and procedures of the registered SEF 

or DCM and the rules described in this part, 

including the appropriate time delay requirements 

set forth in § 43.5 of this part. 17 CFR 43.2. 

228 Id. 

229The Commission notes that the execution 

methods for Required Transactions in final 

§ 37.9(a)(2) excludes block trades. 

230Rosen et al. Comment Letter at 10 (Apr. 5, 

2011); Goldman Comment Letter at 2 (Mar. 8, 2011); 

ISDA/SIFMA Comment Letter at 2 (Mar. 8, 2011); 

FXall Comment Letter at 7–8 (Mar 8, 2011); SIFMA 

AMG Comment Letter at 4–5 (Mar. 8, 2011). 

Additionally, the Coalition commented 

that the Commission should define 

illiquid or bespoke transactions to 

include typical end-user trades.219

Several commenters also commented 

on the reference to block trades in the 

definition of Permitted Transactions.220

ISDA/SIFMA commented that the 

definition of block trade in part 43 of 

the Commission’s regulations should 

apply to blocks executed on a SEF.221

Tradeweb sought confirmation that 

block size trades in swaps that are 

required to be cleared and made 

available to trade would not be subject 

to the minimum trading requirements 

for Required Transactions, but would be 

required to be reported to and processed 

through a SEF in a manner prescribed 

by the SEF.222 Similarly, GFI requested 

the Commission to confirm that block 

transactions must be effected on a SEF, 

but may be subject to special rules.223

(2) Commission Determination 

To ensure that there is consistency in 

the definitions, and in response to 

MarketAxess’s comment, the 

Commission is: (1) Revising the 

definition of Required Transaction to 

mean any transaction involving a swap 

that is subject to the trade execution 

requirement in section 2(h)(8) of the 

Act 224; and (2) revising the definition of 

Permitted Transaction to mean any 

transaction not involving a swap that is 

subject to the trade execution 

requirement in section 2(h)(8) of the 

Act.225 The Commission is not revising 

the definition of Permitted Transaction 

to explicitly include ‘‘hedging 

transactions involving end-users’’ or 

‘‘typical end-user’’ transactions because 

the Commission’s revisions to the 

definition of Permitted Transaction are 

consistent with the CEA section 2(h)(8) 

trade execution requirement.226

With respect to the treatment of block 

transactions, the Commission notes that 

the definition of block trade in part 43 

of the Commission’s regulations applies 

to such transactions involving swaps 

that are listed on a SEF.227 The 

Commission also notes that the 

definition of block trade states, in part, 

that block trades occur away from the 

registered SEF’s or DCM’s trading 

system or platform and is executed 

pursuant to the registered SEF’s or 

DCM’s rules and procedures.228 As 

such, block trades are not subject to the 

execution methods for Required 

Transactions and Permitted 

Transactions in final § 37.9(a)(2) and 

§ 37.9(c)(2), respectively.229

(b) § 37.9(a)(1)(ii)—Request for Quote 

System 

Proposed § 37.9(a)(1)(ii)(A) defined an 

RFQ System as a trading system or 

platform in which a market participant 

must transmit a request for quote to buy 

or sell a specific instrument to no less 

than five market participants in the 

trading system or platform, to which all 

such market participants may respond. 

Under the proposed rule, any bids or 

offers resting on the trading system or 

platform pertaining to the same 

instrument must be taken into account 

and communicated to the requester 

along with the responsive quotes. 

In addition, proposed 

§ 37.9(a)(1)(ii)(B) defined an RFQ 

System as a trading system or platform 

in which multiple market participants 

can both: (1) View real-time electronic 

streaming quotes, both firm and 

indicative, from multiple potential 

counterparties on a centralized 

electronic screen; and (2) have the 

option to complete a transaction by: (i) 

Accepting a firm streaming quote, or (ii) 

transmitting a request for quote to no 

less than five market participants, based 

upon an indicative streaming quote, 

taking into account any resting bids or 

offers that have been communicated to 

the requester along with any responsive 

quotes. Finally, proposed 

§ 37.9(a)(1)(ii)(C) provided that an RFQ 

System means any such other trading 

system or platform as may be 

determined by the Commission. 

(1) Summary of Comments 

(i) Comments on RFQ System Definition 

and Transmission to Five Market 

Participants 

In general, some commenters stated 

that the Commission’s definition of an 

RFQ System imposes rigid requirements 

that are not supported by the SEF 

definition.230 Other commenters stated 

that the defined RFQ System preserves 

‘‘the single-dealer status quo,’’ threatens 

to diminish the transparency and 

efficiency of the regulated swaps 

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231 IECA Comment Letter at 3 (May 24, 2011); 

Mallers et al. Comment Letter at 3–5 (Mar. 21, 

2011); AFR Comment Letter at 4, 5 (Mar. 8, 2011). 

The Mallers et al. comment letter represents the 

view of a number of high frequency trading firms: 

Allston Trading, LLC, Atlantic Trading USA LLC, 

Bluefin Trading LLC, Chopper Trading LLC, DRW 

Holdings, LLC, Eagle Seven, LLC, Endeavor 

Trading, LLC, GETCO, Hard Eight Futures, LLC, 

HTG Capital Partners, IMC Financial Markets, 

Infinium Capital Management LLC, Kottke 

Associates, LLC, Liger Investments Limited, 

Marquette Partners, LP, Nico Holdings LLC, Optiver 

US LLC, Quantlab Financial, LLC, RGM Advisors, 

LLC, Traditum Group LLC, WH Trading, and XR 

Trading LLC. 

232Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1221. The 

Commission asked, ‘‘[i]n light of the ‘multiple 

participant to multiple participant’ requirement, the 

Commission has proposed that requests for quotes 

be requested of at least five possible respondents. 

Is this the appropriate minimum number of 

respondents that the Commission should require to 

potentially interact with a request for quote? If not, 

what is an appropriate minimum number? Some 

pre-proposal commenters have suggested that 

market participants should transmit a request for 

quote to ‘more than one’ market participant. The 

Commission is interested in receiving public 

comment on this matter.’’ Id. 

233 Id. 

234Representative Garrett et al. Comment Letter at 

1 (Apr. 5, 2013); Eaton Vance Comment Letter at 2 

(Feb. 17, 2012); Reuters Comment Letter at 6 (Dec. 

12, 2011); Tradeweb Comment Letter at 5 (Jun. 3, 

2011); Traccr Limited Comment Letter at 2 (Jun. 3, 

2011); FHLB Comment Letter at 12–13 (Jun. 3, 

2011); AII Comment Letter at 5 (Jun. 2, 2011); Rosen 

et al. Comment Letter at 11 (Apr. 5, 2011); JP 

Morgan Comment Letter at 2–3 (Mar. 8, 2011); 

Bloomberg Comment Letter at 2–3 (Mar. 8, 2011); 

FXall Comment Letter at 8–9 (Mar. 8, 2011); Reuters 

Comment Letter at 3 (Mar. 8, 2011); BlackRock 

Comment Letter at 3–4 (Mar. 8, 2011); Tradeweb 

Comment Letter at 7 (Mar. 8, 2011); FSR Comment 

Letter at 3 (Mar. 8, 2011); MFA Comment Letter at 

6 (Mar. 8, 2011); MetLife Comment Letter at 2–3 

(Mar. 8, 2011); SIFMA AMG Comment Letter at 5– 

7 (Mar. 8, 2011); Deutsche Comment Letter at 3–4 

(Mar. 8, 2011); MarketAxess Comment Letter at 31 

(Mar. 8, 2011); Barclays Comment Letter at 5–6 

(Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3 

(Mar. 8, 2011); ABC/CIEBA Comment Letter at 6 

(Mar. 8, 2011); Global FX Comment Letter at 3 (Mar. 

8, 2011); TruMarx Comment Letter at 6 (Mar. 8, 

2011); Coalition Comment Letter at 5–7 (Mar. 8, 

2011); WMBAA Comment Letter at 6 (Mar. 8, 2011); 

CME Comment Letter at 8 (Mar. 8, 2011); Morgan 

Stanley Comment Letter at 2–3 (Mar. 2, 2011); 

CanDeal Comment Letter at 2–3 (Feb. 25, 2011). The 

Commission notes that some commenters in 

addressing this provision used the term ‘‘liquidity 

providers’’ to refer to the minimum number of 

‘‘market participants’’ that must receive RFQs. See, 

e.g., Tradeweb Comment Letter at 5 (Jun. 3, 2011); 

AII Comment Letter at 5 (Jun. 2, 2011); Bloomberg 

Comment Letter at 2 (Mar. 8, 2011); FXall Comment 

Letter at 9 (Mar. 8, 2011); FSR Comment Letter at 

3 (Mar. 8, 2011). The Commission clarifies that the 

proposed five market participant requirement did 

not imply any requirement that the requested 

market participants operate in any particular 

manner, such as one that regularly provides 

liquidity or makes markets in the particular swap. 

235Eaton Vance Comment Letter at 2 (Feb. 17, 

2012); JP Morgan Comment Letter at 2–3 (Mar. 8, 

2011); BlackRock Comment Letter at 4 (Mar. 8, 

2011); MetLife Comment Letter at 3 (Mar. 8, 2011); 

Global FX Comment Letter at 3 (Mar. 8, 2011); 

Morgan Stanley Comment Letter at 2 (Mar. 2, 2011); 

CanDeal Comment Letter at 2–3 (Feb. 25, 2011). 

236Tradeweb Comment Letter at 5 (Jun. 3, 2011); 

Traccr Limited Comment Letter at 2 (Jun. 3, 2011); 

FHLB Comment Letter at 12 (Jun. 3, 2011); JP 

Morgan Comment Letter at 2–3 (Mar. 8, 2011); 

BlackRock Comment Letter at 3 (Mar. 8, 2011); 

Tradeweb Comment Letter at 7 (Mar. 8, 2011); 

MetLife Comment Letter at 3 (Mar. 8, 2011); 

CanDeal Comment Letter at 2–3 (Feb. 25, 2011). 

237Tradeweb Comment Letter at 5 (Jun. 3, 2011); 

MetLife Comment Letter at 3 (Mar. 8, 2011). 

238BlackRock Comment Letter at 4 (Mar. 8, 2011). 

239FHLB Comment Letter at 12 (Jun. 3, 2011); AII 

Comment Letter at 5 (Jun. 2, 2011); Bloomberg 

Comment Letter at 2–3 (Mar. 8, 2011); FXall 

Comment Letter at 8–9 (Mar. 8, 2011); BlackRock 

Comment Letter at 3–4 (Mar. 8, 2011); MetLife 

Comment Letter at 3 (Mar. 8, 2011); SIFMA AMG 

Comment Letter at 5–6 (Mar. 8, 2011); Barclays 

Comment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMA 

Comment Letter at 3 (Mar. 8, 2011); ABC/CIEBA 

Comment Letter at 6 (Mar. 8, 2011); Global FX 

Comment Letter at 3 (Mar. 8, 2011); Coalition 

Comment Letter at 5–6 (Mar. 8, 2011); Morgan 

Stanley Comment Letter at 2 (Mar. 2, 2011). 

240FHLB Comment Letter at 12 (Jun. 3, 2011); AII 

Comment Letter at 5 (Jun. 2, 2011); Bloomberg 

Comment Letter at 2–3 (Mar. 8, 2011); FXall 

Comment Letter at 8–9 (Mar. 8, 2011); MetLife 

Comment Letter at 3 (Mar. 8, 2011); SIFMA AMG 

Comment Letter at 5–6 (Mar. 8, 2011); Barclays 

Comment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMA 

Comment Letter at 3 (Mar. 8, 2011); Global FX 

Comment Letter at 3 (Mar. 8, 2011); Coalition 

Comment Letter at 5–6 (Mar. 8, 2011); Morgan 

Stanley Comment Letter at 2 (Mar. 2, 2011). 

241FHLB Comment Letter at 12 (Jun. 3, 2011); AII 

Comment Letter at 5 (Jun. 2, 2011); Bloomberg 

Comment Letter at 2–3 (Mar. 8, 2011); FXall 

Comment Letter at 8–9 (Mar. 8, 2011); BlackRock 

Comment Letter at 3–4 (Mar. 8, 2011); MetLife 

Comment Letter at 3 (Mar. 8, 2011); SIFMA AMG 

Comment Letter at 5–6 (Mar. 8, 2011); Barclays 

Comment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMA 

Comment Letter at 3 (Mar. 8, 2011); ABC/CIEBA 

Comment Letter at 6 (Mar. 8, 2011); Global FX 

Comment Letter at 3 (Mar. 8, 2011); Coalition 

Comment Letter at 5–6 (Mar. 8, 2011); Morgan 

Stanley Comment Letter at 2 (Mar. 2, 2011). 

242Registration and Regulation of Security-Based 

Swap Execution Facilities, 76 FR 10948 (proposed 

Feb. 28, 2011). 

243Reuters Comment Letter at 6 (Dec. 12, 2011); 

Traccr Limited Comment Letter at 2 (Jun. 3, 2011); 

AII Comment Letter at 5 (Jun. 2, 2011); Rosen et al. 

Comment Letter at 11 (Apr. 5, 2011); JP Morgan 

Comment Letter at 5 (Mar. 8, 2011); Reuters 

Comment Letter at 3 (Mar. 8, 2011); Tradeweb 

Comment Letter at 7 (Mar. 8, 2011); FSR Comment 

Letter at 3 (Mar. 8, 2011); MetLife Comment Letter 

at 3 (Mar. 8, 2011); SIFMA AMG Comment Letter 

at 5 (Mar. 8, 2011); Deutsche Comment Letter at 4 

(Mar. 8, 2011); MarketAxess Comment Letter at 31 

(Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3 

(Mar. 8, 2011); Global FX Comment Letter at 3 (Mar. 

8, 2011); Goldman Comment Letter at 2 (Mar. 8, 

2011); TruMarx Comment Letter at 6 (Mar. 8, 2011). 

244Morgan Stanley Comment Letter at 2 (Mar. 2, 

2011). 

245MetLife Comment Letter at 3 (Mar. 8, 2011). 

246Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1259. 

247 IECA Comment Letter at 3 (May 24, 2011); 

Mallers et al. Comment Letter at 4–5 (Mar. 21, 

2011); Better Markets Comment Letter at 9 (Mar. 8, 

2011); AFR Comment Letter at 4–5 (Mar. 8, 2011). 

market, and is inconsistent with the 

Dodd-Frank Act.231

As noted above, § 37.9(a)(1)(ii) of the 

SEF NPRM contained a requirement that 

a market participant transmit an RFQ to 

no less than five market participants. In 

the SEF NPRM, the Commission 

specifically asked for public comment 

on whether five is the appropriate 

minimum number of respondents that 

the Commission should require to 

potentially interact with a request for 

quote.232 The Commission also asked 

for public comment on the appropriate 

minimum number, if not five.233 The 

Commission received the following 

comments regarding the five market 

participant requirement and has 

responded to those comments below. 

Several commenters objected to the 

requirement in proposed § 37.9(a)(1)(ii) 

that a market participant transmit an 

RFQ to no less than five market 

participants.234 The commenters raised 

various concerns with this requirement, 

including the potential for increased 

trading costs,235 decreased liquidity,236

decreased transparency,237 and breaking 

trades into smaller sizes.238 Several 

commenters specifically noted that the 

five market participant requirement may 

result in increased spreads for 

participants because non-executing 

market participants in the RFQ could 

‘‘front run’’ the transaction in 

anticipation of the executing market 

participant’s forthcoming and offsetting 

transactions.239 Many of these 

commenters additionally noted that 

these risks would be most pronounced 

in illiquid swaps or large-sized trades 

(i.e., transactions approaching the block 

trade threshold).240 As a result, many of 

the commenters noted that it will be 

difficult and costly to enter into hedging 

transactions.241

In this regard, some commenters 

noted that the SEC’s SB–SEF 

proposal 242 permitted RFQs to be 

transmitted to one or more SEF 

participant(s).243 Morgan Stanley 

commented that, given the impact of 

signaling transactions to multiple 

market participants, as trade size grows, 

participants may receive better 

execution if their RFQs are transmitted 

to fewer than five participants.244

Similarly, MetLife commented that 

participants should have the flexibility 

to determine the appropriate number of 

respondents for a particular trade, 

which could vary based on the size and 

liquidity of the trade.245 Additionally, 

Commissioner Sommers’ dissent 

suggested an alternative approach to 

RFQ Systems that would permit a 

market participant to transmit an RFQ to 

‘‘more than one’’ potential 

counterparty.246

Other commenters, however, stated 

that an RFQ should be transmitted to all 

participants on the SEF.247 Mallers et al. 

stated that participants would not be 

disadvantaged by disclosing an RFQ to 

the entire market for transactions below 

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33496 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

248Mallers et al. Comment Letter at 4 (Mar. 21, 

2011). 

249 Id. 

250SDMA Comment Letter at 3 (Mar. 8, 2011). See 

also Better Markets Comment Letter at 2 (Apr. 12, 

2013) and Allston et al. Comment Letter at 1 (Feb. 

28, 2013). 

251SDMA Comment Letter at 5 (Feb. 28, 2013); 

SDMA Comment Letter at 3 (Mar. 8, 2011). 

252Tradeweb Comment Letter at 5 (Jun. 3, 2011); 

JP Morgan Comment Letter at 5–6 (Mar. 8, 2011); 

FXall Comment Letter at 9–10 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 9 (Mar. 8, 2011); 

Barclays Comment Letter at 7 (Mar. 8, 2011); 

Tradeweb Comment Letter at 6 (Mar. 8, 2011). 

253FXall Comment Letter at 9 (Mar. 8, 2011); 

Barclays Comment Letter at 7 (Mar. 8, 2011). 

254 ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 

2011); FXall Comment Letter at 4 (Mar. 8, 2011); 

MarketAxess Comment Letter at 33 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 4 (Mar. 8, 2011). 

255 JP Morgan Comment Letter at 5 (Mar. 8, 2011). 

256Reuters Comment Letter at 1 (Jun. 13, 2012); 

Rosen et al. Comment Letter at 12–14 (Apr. 5, 2011); 

JP Morgan Comment Letter at 5–6 (Mar. 8, 2011); 

FXall Comment Letter at 9–10 (Mar. 8, 2011); 

Tradeweb Comment Letter at 8 (Mar. 8, 2011); FSR 

Comment Letter at 5 (Mar. 8, 2011); MetLife 

Comment Letter at 3 (Mar. 8, 2011); SIFMA AMG 

Comment Letter at 9 (Mar. 8, 2011); MarketAxess 

Comment Letter at 32 (Mar. 8, 2011); Barclays 

Comment Letter at 7 (Mar. 8, 2011); ABC/CIEBA 

Comment Letter at 6–7 (Mar. 8, 2011); ISDA/SIFMA 

Comment Letter at 3–4; Evolution Comment Letter 

at 5–6 (Mar. 8, 2011). 

257 JP Morgan Comment Letter at 5–6 (Mar. 8, 

2011); FSR Comment Letter at 5 (Mar. 8, 2011); 

MetLife Comment Letter at 3 (Mar. 8, 2011); SIFMA 

AMG Comment Letter at 9 (Mar. 8, 2011); 

MarketAxess Comment Letter at 32 (Mar. 8, 2011); 

ABC/CIEBA Comment Letter at 6–7 (Mar. 8, 2011); 

ISDA/SIFMA Comment Letter at 3–4 (Mar. 8, 2011); 

Evolution Comment Letter at 5–6 (Mar. 8, 2011). 

258 ISDA/SIFMA Comment Letter at 3–4 (Mar. 8, 

2011); SIFMA AMG Comment Letter at 9 (Mar. 8, 

2011). 

259FXall Comment Letter at 9–10 (Mar. 8, 2011); 

ISDA/SIFMA Comment Letter at 3–4 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 9 (Mar. 8, 2011). 

FSR also commented that the provider of the resting 

bid should not be provided with information about 

the identity of the RFQ requester. FSR Comment 

Letter at 5 (Mar. 8, 2011). 

260AFR Comment Letter at 3 (Feb. 27, 2013); AFR 

Comment Letter at 5 (Mar. 8, 2011); Better Markets 

Comment Letter at 8 (Mar. 8, 2011). 

261AFR Comment Letter at 5 (Mar. 8, 2011). 

262Rosen et al. Comment Letter at 14 (Apr. 5, 

2011); MarketAxess Comment Letter at 32 (Mar. 8, 

2011); Barclays Comment Letter at 10 (Mar. 8, 

2011); Tradeweb Comment Letter at 7–8 (Mar. 8, 

2011); State Street Comment Letter at 4 (Mar. 8, 

2011); Deutsche Comment Letter at 4 (Mar. 8, 2011). 

263Tradeweb Comment Letter at 7 (Mar. 8, 2011); 

State Street Comment Letter at 4 (Mar. 8, 2011); 

Deutsche Comment Letter at 4 (Mar. 8, 2011). 

264FSR Comment Letter at 3 (Mar. 8, 2011). 

265Tradeweb Comment Letter at 8 (Mar. 8, 2011). 

266FSR Comment Letter at 3 (Mar. 8, 2011). 

267State Street Comment Letter at 4 (Mar. 8, 

2011). 

268The Commission is renumbering proposed 

§ 37.9(a)(1)(ii) to § 37.9(a)(3). 

269Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1220–21. 

the block trade threshold, which would 

not move the market.248 In their view, 

the five market participant requirement 

would allow a participant to conduct 

semi-private deals with a few favored 

participants to the exclusion of other 

market participants, which would 

ultimately decrease liquidity and create 

a substantial barrier to entry to the 

swaps market.249 On the other hand, 

SDMA supported the five market 

participant requirement.250 In its view, 

this requirement promotes price 

discovery and liquidity, whereas the 

single market participant model 

facilitates abusive trading practices, 

such as pre-arranged trading and 

‘‘painting the screen’’ (i.e., posting of 

non-competitive quotes to confuse the 

market).251

(ii) Comments on ‘‘Taken Into Account 

and Communicated’’ Language in the 

RFQ System Definition 

Some commenters recommended that 

the Commission delete the requirement 

that resting orders be ‘‘taken into 

account and communicated’’ to the RFQ 

requester.252 FXall and Barclays stated 

that this requirement is not necessary 

because the RFQ requester already has 

the ability to view the resting orders on 

the SEF’s minimum trading 

functionality or Order Book.253 Several 

commenters stated that this requirement 

is mandating that SEFs offer RFQ 

systems in conjunction with the SEF’s 

minimum trading functionality, which 

is not required.254 Similarly, JP Morgan 

stated that the resting order 

functionality is not mandated by the 

statute.255

Several commenters requested 

clarification regarding the interaction 

between resting bids and offers and the 

RFQ system.256 Some commenters 

thought that the ‘‘taken into account and 

communicated’’ language should mean 

that a SEF must only communicate to 

the RFQ requester the resting bids and 

offers, and that the RFQ requester has 

sole discretion to either respond to, or 

ignore, these resting bids and offers.257

ISDA/SIFMA and SIFMA AMG 

requested clarification that the resting 

bids and offers do not include indicative 

prices.258 Several commenters also 

stated that SEFs should not be required 

to inform the providers of resting bids 

and offers of the RFQs; otherwise, the 

RFQ system would be subject to market 

abuse by opportunistic third parties 

seeking market information, and the 

requirement would open up RFQs 

beyond the minimum number of 

participants.259

(iii) Comments on RFQ Disclosure 

Issues 

AFR and Better Markets stated that 

SEFs should be required to disclose 

RFQ responses to all market 

participants.260 For example, AFR 

commented that responses to RFQs 

should be made transparent to all 

market participants prior to trade 

execution, which would serve the 

statutory goal of pre-trade price 

transparency and would increase price 

competition.261 Several commenters 

objected to the recommendation by AFR 

and Better Markets.262 Some of these 

commenters noted that such a 

requirement could raise the same 

information leakage concerns as with 

the five market participant 

requirement.263

FSR commented that market 

participants receiving the RFQ should 

have relevant information about the 

identity of the RFQ requester.264

However, Tradeweb commented that the 

Commission should not impose a 

specific requirement that the identity of 

the RFQ requester be disclosed or 

anonymous.265 FSR also stated that 

SEFs should not be required to publish 

RFQs until after the trade has been 

completed, and then only as part of 

aggregated disclosures.266 Finally, State 

Street requested that the Commission 

clarify that an RFQ System is not 

required to provide functionality to 

make RFQs visible to the entire market, 

although it may voluntarily choose to do 

so.267

(2) Commission Determination 

Based on the comments, the 

Commission is adopting proposed 

§ 37.9(a)(1)(ii) as final § 37.9(a)(3), 

subject to a number of modifications 

discussed below.268

(i) RFQ System Definition and 

Transmission to Five Market 

Participants 

The Commission is adopting the 

definition of RFQ System in proposed 

§ 37.9(a)(1)(ii)(A), subject to certain 

modifications described below. As 

explained in the SEF NPRM, the 

Commission believes that an RFQ 

System, as defined in § 37.9, operating 

in conjunction with a SEF’s minimum 

trading functionality (i.e., Order Book) 

is consistent with the SEF definition 

and promotes the goals provided in 

section 733 of the Dodd-Frank Act, 

which are to: (1) Promote the trading of 

swaps on SEFs and (2) promote pretrade price transparency in the swaps 

market.269 The Commission notes that 

the RFQ System definition requires 

SEFs to provide market participants the 

ability to access multiple market 

participants, but not necessarily the 

entire market, in conformance with the 

SEF definition. 

The Commission agrees with SDMA 

that the proposed five market 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33497 

270The Commission notes that a SEF market 

participant may send an RFQ to the entire market. 

See id. at 1220 and discussion below. The 

Commission also notes that there are generally two 

distinct differences between the requirements 

finalized in this release and the RFQ-type 

functionality offered by DCMs. First, RFQ 

functionality used by DCMs disseminates RFQs to 

all market participants. Second, the responses to the 

RFQs take the form of executable bids or offers that 

are entered into the DCM’s order book or other 

centralized market, such that orders from any 

market participant, not just the one submitting the 

RFQ, can be matched against such responsive bids 

or offers. Although the Commission considered a 

minimum RFQ-to-all requirement similar to the 

current practice in DCMs, given that swaps tend to 

be less standardized than futures, the Commission 

believes that rules pertaining to the execution 

methods for SEFs should provide appropriate 

flexibility for market participants trading swaps. 

The Commission notes that the less restrictive 

minimum market participant requirement 

established by part 37 reflects the more flexible 

statutory provisions for SEFs as compared to DCMs. 

271The Commission clarifies that the three market 

participant requirement does not imply any 

requirement that the requested market participants 

operate in any particular manner, such as a 

requirement that such participants be dedicated 

liquidity providers or market makers in the 

particular swap. The RFQ requester may send the 

RFQ to any three market participants on the RFQ 

system, subject to the affiliate prohibition discussed 

below. See supra footnote 234 for further details. 

272The Commission notes that ‘‘affiliate’’ means: 

(i) One party, directly or indirectly, holds a majority 

ownership interest in the other party, and the party 

that holds the majority interest in the other party 

reports its financial statements on a consolidated 

basis under Generally Accepted Accounting 

Principles or International Financial Reporting 

Standards, and such consolidated financial 

statements include the financial results of the 

majority-owned party; or (ii) a third party, directly 

or indirectly, holds a majority ownership interest in 

both parties, and the third party reports its financial 

statements on a consolidated basis under Generally 

Accepted Accounting Principles or International 

Financial Reporting Standards, and such 

consolidated financial statements include the 

financial results of both of the parties. A party or 

third party directly or indirectly holds a majority 

ownership interest if it directly or indirectly holds 

a majority of the equity securities of an entity, or 

the right to receive upon dissolution, or the 

contribution of, a majority of the capital of a 

partnership. See Commission regulation 50.52. 

273Tradeweb Comment Letter at 7 (Mar. 8, 2011). 

274The Commission understands that such 

provisions are in place to accommodate various 

operational and other reasons that could cause a 

market participant to not comply with the quoting 

obligations. 

participant requirement would promote 

pre-trade price transparency, as the RFQ 

requester would be required to solicit 

executable orders, on a pre-trade basis, 

from a larger group of potential 

responders.270 A broader group of 

potential responders, in turn, 

encourages price competition between 

the potential responders to the RFQ and 

may provide a more reliable assessment 

of market value than SEF functionality 

that would permit a market participant 

to rely on a quote from a single RFQ 

requestee. The Commission nevertheless 

recognizes commenters’ concerns about 

the proposed five market participant 

requirement, such as the potential for 

increased trading costs and information 

leakage to the non-executing market 

participants in the RFQ. To address 

these concerns, while still complying 

with the multiple-to-multiple 

requirement in the statutory SEF 

definition and promoting the goals of 

pre-trade price transparency and trading 

of swaps on SEFs provided in section 

733 of the Dodd-Frank Act, the 

Commission is requiring that a market 

participant transmit an RFQ to no less 

than two market participants during a 

phase-in compliance period and, 

subsequent to that period, to no less 

than three market participants.271 The 

Commission believes, as noted above, 

that sending an RFQ to a greater number 

of market participants increases the 

potential for price competition among 

responders and provides a more reliable 

assessment of market value. The 

Commission also believes that the three 

market participant requirement, with 

the two market participant phase-in 

period, appropriately balances the 

benefits of pre-trade price transparency 

and the information leakage concerns 

raised by commenters. The revision 

from five to three minimum market 

participants will also provide market 

participants with greater flexibility in 

sending RFQs for Required 

Transactions, while still complying with 

the statutory SEF definition and 

promoting pre-trade price transparency. 

The Commission has also determined 

to clarify that the market participants 

required for inclusion in an RFQ in all 

cases may not be affiliated with or 

controlled by the RFQ requester and 

may not be affiliated with or controlled 

by each other, and is revising final 

§ 37.9(a)(3) to clarify this point.272 For 

an RFQ requester to send an RFQ to 

another entity who is affiliated with or 

controlled by the RFQ requester is 

inconsistent with the purpose of 

requiring that RFQs be sent to more than 

one market participant, as explained 

both in the SEF NPRM and this release. 

The Commission notes that if an RFQ is 

transmitted to one non-affiliate and two 

affiliates of the requester or if an RFQ 

is transmitted to three requestees who 

are affiliates of each other, then the 

policy objective of promoting the goal of 

pre-trade price transparency and 

complying with the multiple-tomultiple requirement in the SEF 

definition could be undermined. The 

Commission is also concerned that such 

an outcome could disincentivize entities 

from responding to an RFQ, which 

would reduce price competition and 

liquidity. 

The Commission believes, moreover, 

that the three market participant 

requirement is consistent with current 

market practice where, in certain 

markets, many market participants 

already choose to send an RFQ to 

multiple market participants. Tradeweb, 

for example, noted that in its experience 

in the U.S. Treasuries market, market 

participants on average send an RFQ to 

three market participants.273 In 

addition, the Commission understands 

that many pension and other managed 

funds with fiduciary obligations 

routinely obtain quotes from at least 

three market participants in certain 

securities markets. The Commission 

believes that the three market 

participant requirement, with the two 

market participant transition period, 

supports a common industry practice of 

querying multiple market participants, 

while still complying with the statutory 

SEF definition and promoting the goals 

provided in section 733 of the DoddFrank Act. 

Furthermore, the Commission 

believes that the three minimum market 

participant requirement heightens the 

probability that multiple participants 

will respond to an RFQ and, thus, will 

facilitate the pricing improvements 

attendant to competition among RFQ 

responders. The Commission is aware of 

numerous legal, business, and 

technological issues that could prevent 

a market participant from responding to 

a specific RFQ. The Commission notes, 

for example, that DCM market maker 

programs often require participants to 

quote two-sided markets for 75 to 85 

percent of the trading day.274 Therefore, 

a participant in the market maker 

program may not provide quotes for a 

portion of the trading day. While there 

is no guarantee that even a minimum 

market participant requirement will 

ensure that multiple responses are 

available for all RFQs, it increases the 

probability that the goal of pre-trade 

price transparency is achieved and that 

a competitive market exists for all 

market participants. 

Finally, the Commission believes that 

setting the minimum RFQ requirement 

at a uniform number for all Required 

Transactions in all asset classes 

provides regulatory and market 

efficiencies and is appropriate for the 

SEF market structure at this particular 

time. SEFs and market participants will 

benefit from a clear and uniform 

standard that would not require them to 

be subject to different minimum RFQ 

requirements, and to monitor 

compliance with such requirements, for 

every swap or class of swaps subject to 

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275The Commission notes that the affiliate 

prohibition in § 37.9(a)(3) applies during the 

interim RFQ-to-2 period. 

276Registration and Regulation of Security-Based 

Swap Execution Facilities, 76 FR at 10953–54, 

10971–74. 

277 Id. 

278To the extent such risks potentially exist for 

Required Transactions, the reduction of the 

minimum market participant requirement from the 

proposed five will help mitigate this risk. 279Clearing Requirement Determination Under 

Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 

2012); Process for a Designated Contract Market or 

Swap Execution Facility To Make a Swap Available 

To Trade, 76 FR 77728 (proposed Dec. 14, 2011). 

280Clearing Requirement Determination Under 

Section 2(h) of the CEA, 77 FR 74284. The 

Commission notes that these swaps already went 

through a Commission determination process that 

included a five factor review, including a liquidity 

review. Id. ISDA, in its letter requesting interpretive 

relief regarding the obligation to provide a pre-trade 

mid-market mark, recognized that many of the 

swaps that the Commission has determined are 

required to be cleared under CEA section 2(h)(1) are 

‘‘highly-liquid, exhibit narrow bid-ask spreads and 

are widely quoted by SD/MSPs in the marketplace 

. . . ’’ ISDA Comment Letter at 2 (Nov. 30, 2012). 

281The Commission recognizes that not all swap 

dealers will be active in all Required Transactions. 

The Commission also notes that of the 77 currently 

registered swap dealers, 35 swap dealers are not 

affiliated with any other swap dealers. 

282See definition of block trade in § 43.2 of the 

Commission’s regulations. 

283Similarly, as noted below, SEFs are not 

required to display responses to an RFQ to anyone 

but the RFQ requester. 

284The Commission is also deleting the catch-all 

RFQ definition in proposed § 37.9(a)(1)(ii)(C) as it 

is unnecessary. As discussed below, a SEF may 

petition the Commission under § 13.2 to amend 

§ 37.9(a)(2) to include additional execution methods 

for Required Transactions. See discussion below 

under § 37.9(b)(1) and (b)(4)—Execution Methods 

for Required Transactions in the preamble. 

the CEA section 2(h)(8) trade execution 

requirement. 

For the reasons discussed above, at 

this time, the Commission believes that 

the three market participant 

requirement implements the multipleto-multiple requirement in the statutory 

SEF definition and will create an 

appropriate level of pre-trade price 

transparency for Required Transactions 

(i.e., transactions involving swaps that 

are subject to the trade execution 

mandate of section 2(h)(8) of the CEA) 

for market participants initiating RFQs. 

However, the Commission is also aware 

of the fact that a phased implementation 

of this requirement will assist market 

participants and prospective SEFs to 

make an efficient transition from the 

swap industry’s current market 

structure to the more transparent 

execution framework set forth in these 

final rules. Therefore, to provide market 

participants, SEFs, and the swaps 

industry with time to adapt to the new 

SEF regime, the Commission is phasingin the three market participant 

requirement. From the effective date of 

the final SEF regulations until one year 

from the compliance date of these final 

regulations, a market participant 

transmitting an RFQ for Required 

Transactions under § 37.9(a)(2) must 

still comply with the RFQ definition in 

§ 37.9(a)(3), but may transmit the quote 

to no less than two market 

participants.275

Some comments expressed support 

for the SEC’s SB–SEF proposal, which 

allows for one-to-one RFQs. If the 

Commission eliminated the multiple 

market participant requirement and 

instead permitted RFQ requesters to 

send RFQs to a single market 

participant, then the multipleparticipant-to-multiple-participant 

requirement in the SEF definition and 

the pre-trade price transparency goal 

would be undermined. In this regard, 

the Commission notes that while the 

SEC’s SB–SEF proposal allows for oneto-one RFQs, it proposed to fulfill the 

multiple to multiple requirement by 

mandating full order interaction or best 

execution for RFQs.276 Under the SEC’s 

SB–SEF proposal, an RFQ requester 

must execute against the best priced 

orders of any size within and across a 

SEF’s modes of execution, a 

requirement that the Commission is not 

recommending at this time.277

The Commission notes that some 

commenters expressed concerns about 

the risks with respect to information 

leakage for illiquid swaps or large-size 

trades, and the potential risk of a 

winner’s curse for the market 

participant whose quote is accepted by 

the RFQ requester. According to the 

commenters, the other market 

participants in the RFQ will be aware of 

the RFQ, and some or all of those 

participants will attempt to front-run 

the trades by the winning responder to 

hedge or layoff the risk from the RFQ 

transaction.278

With respect to commenters’ concerns 

about the potential winner’s curse for 

illiquid swaps, the Commission clarifies 

that the minimum market participant 

requirement only applies to RFQ 

Systems for Required Transactions (i.e., 

transactions involving swaps that are 

subject to the trade execution mandate 

of section 2(h)(8) of the CEA); such 

swaps generally should be more liquid 

than swaps that are not subject to the 

trade execution mandate because they 

are subject to the clearing mandate of 

section 2(h)(1) of the CEA and are made 

available to trade.279 In this regard, the 

Commission notes that the interest rate 

swaps and credit default swaps that the 

Commission has determined are 

required to be cleared under CEA 

section 2(h)(1) (and are likely to be 

subject to the trade execution mandate 

of CEA section 2(h)(8)) are some of the 

most liquid swaps.280 The Commission 

also notes that 77 swap dealers have 

registered with the Commission and 

nearly all of them make markets in such 

swaps.281 Further, SEFs may offer RFQ 

systems without the three market 

participant requirement for Permitted 

Transactions (i.e., transactions not 

involving swaps that are subject to the 

trade execution mandate of section 

2(h)(8) of the CEA). 

With respect to commenters’ concerns 

about the potential winner’s curse for 

large-sized trades, the Commission 

notes that block trades would not be 

subject to the execution methods for 

Required Transactions, including the 

three market participant requirement.282

Therefore, excluding block trades from 

the execution methods for Required 

Transactions will address the potential 

risk of a winner’s curse for such trades. 

The Commission also clarifies that SEFs 

are not required to display a requester’s 

RFQ to market participants not 

participating in the RFQ.283

The Commission believes, in response 

to commenters’ concerns about 

increased trading costs, that an 

increased number of participants 

receiving and responding to RFQs will 

tighten the bid-ask spreads, and result 

in lower transaction costs for market 

participants. The Commission notes that 

the relationship between spreads and 

the industry practice for the minimum 

number of RFQ recipients will vary 

across swaps and over time. Further, the 

Commission believes that as SEFs 

compete to grow their swaps trading 

volumes and deliver improved liquidity 

and lower transaction costs for their 

customers, the final rules in this release 

will provide them with the flexibility to 

experiment with different minimum 

numbers of recipients that is higher than 

the minimum articulated in this 

regulation. The final RFQ requirement 

will provide some protection to RFQ 

requesters that at least a minimum 

number of market participants will 

receive their RFQs, and thus increase 

the likelihood of receiving multiple, 

competitive quotes. 

Finally, the Commission is deleting 

the additional definition of RFQ System 

in proposed § 37.9(a)(1)(ii)(B) because it 

is unnecessary.284 A SEF that chooses to 

offer an RFQ System to facilitate 

Required Transactions is required to 

offer the RFQ System in conjunction 

with the SEF’s Order Book, which 

would encompass the requirements in 

proposed § 37.9(a)(1)(ii)(B)(1) and 

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285See discussion below under § 37.9(b)(1) and 

(b)(4)—Execution Methods for Required 

Transactions in the preamble. As noted above in the 

registration section, a SEF is not required to offer 

indicative quotes. 

286 Id. 

287The Commission is renumbering proposed 

§ 37.9(a)(1)(ii)(A) to § 37.9(a)(3). The Commission 

notes that after the RFQ responses and resting bids 

or offers on the Order Book are communicated to 

the RFQ requester, the RFQ requester may make a 

counter request or order as long as it is submitted 

to 3 market participants, whether it be to the same 

3 market participants as the original RFQ request, 

3 different market participants, or some 

combination of both. 

288Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1220 (stating 

that market participants may desire to interact with 

a limited number of market participants (i.e., fewer 

than the entire market) and are permitted to do so 

under the proposal). 

289 Id. 

290 Id. 

291 Id. at 1219–20. 

292 Id. 

293 Id. at 1220. 

(2)(i).285 Additionally, a market 

participant is already required to send 

an RFQ to three market participants, 

which would also be the case if it is 

based upon an indicative quote as stated 

in proposed § 37.9(a)(1)(ii)(B)(2)(ii).286

(ii) ‘‘Taken Into Account and 

Communicated’’ Language in the RFQ 

System Definition 

To address commenters’ concern that 

the SEF NPRM was ambiguous with 

respect to the communication 

requirement, the Commission is 

modifying the definition of RFQ System 

in proposed § 37.9(a)(1)(ii)(A) to state 

that a SEF must provide the RFQ 

requester: (1) With any firm resting bid 

or offer in the same instrument from any 

of the SEF’s Order Books at the same 

time as the first responsive bid or offer 

is received by the RFQ requester and (2) 

with the ability to execute against such 

firm resting bids or offers along with the 

responsive orders.287 For example, a 

market participant transmits an RFQ to 

three market participants to buy a US $1 

million notional 10-year fixed-tofloating US$ LIBOR interest rate swap. 

Any firm offer resting on the SEF’s 

Order Book for a 10-year fixed-tofloating US$ LIBOR interest rate swap 

must be transmitted to the RFQ 

requester at the same time that the first 

responsive offer is received by the RFQ 

requester. The SEF must provide the 

RFQ requester with the ability to lift the 

firm offers and execute against any of 

the responsive orders. The final rule 

requires that SEFs communicate any 

resting bid or offer pertaining to the 

same instrument back to the RFQ 

requester, while the requester retains 

the discretion to decide whether to 

execute against the resting bids or offers 

or responsive orders. 

Similar to the three market participant 

requirement, the Commission believes 

that the communication requirement 

promotes pre-trade price transparency 

and the trading of swaps on SEFs, as the 

RFQ requester will have the ability to 

access competitive quotes and quote 

providers will be able to have their 

quotes viewed by the RFQ requester. 

The Commission also clarifies that the 

resting bids and offers being 

communicated are not required to 

include indicative prices, to the extent 

that indicative prices are facilitated by 

the Order Book, and that SEFs are not 

required to inform the providers of the 

resting bids and offers on the Order 

Book of the RFQs. 

(iii) RFQ Disclosure Issues 

The Commission is clarifying that 

SEFs are not required to disclose 

responses to RFQs to all market 

participants. While the Commission 

understands that the RFQ functionality 

offered by some DCMs disseminates 

responses to RFQs to all market 

participants, it also notes that the less 

restrictive disclosure requirement for 

SEFs reflects the more flexible statutory 

provisions for SEFs as compared to 

DCMs. As noted in the SEF NPRM, a 

market participant may access fewer 

market participants than the entire 

market in certain situations.288 In 

response to FSR’s and Tradeweb’s 

comments about the identity of the RFQ 

requester, the Commission clarifies that 

it is not imposing a specific requirement 

that the identity of the RFQ requester be 

disclosed or anonymous. The 

Commission is also not providing a 

specific requirement regarding the 

publishing of the ‘‘request’’ for a quote 

and notes that SEFs must comply with 

all reporting obligations as required in 

the Act and Commission’s regulations. 

Finally, as noted in the SEF NPRM, 

acceptable RFQ Systems must permit 

RFQ requesters the option to make an 

RFQ visible to the entire market.289

(iv) Other RFQ Issues 

As noted in the SEF NPRM, an 

acceptable RFQ System may allow for a 

transaction to be consummated if the 

original request to five potential 

counterparties receives fewer than five 

responses.290 Although the Commission 

received no comment letters on this 

issue, some commenters in meetings 

asked the Commission to clarify the 

amount of time required to elapse before 

the RFQ requester can execute against 

the responsive quotes since fewer than 

five responses may be received. As 

such, the Commission is modifying the 

RFQ System definition in final 

§ 37.9(a)(3) to state that a SEF must 

ensure that its trading protocols provide 

each of its market participants with 

equal priority in receiving requests for 

quotes and in transmitting and 

displaying for execution responsive 

orders. The SEF does not need to 

establish a minimum latency or specific 

period of time for the transmission of 

responsive orders, provided that the 

SEF’s rulebook and prohibition on 

transmission and display priorities are 

appropriately designed to prevent 

market participants from seeking to 

avoid the three market participant 

requirement. A SEF’s RFQ System and 

rulebook must account for this 

prohibition. 

(c) § 37.9(a)(1)(iii)—Voice-Based System 

Proposed § 37.9(a)(1)(iii) defined 

Voice-Based System as a trading system 

or platform in which a market 

participant executes or trades a 

Permitted Transaction using a 

telephonic line or other voice-based 

service. 

(1) Commission Determination 

The Commission did not receive any 

comments on the definition of VoiceBased System. However, the 

Commission is deleting the definition of 

Voice-Based System in proposed 

§ 37.9(a)(1)(iii) given its decision below 

to allow SEFs to provide any execution 

method for Permitted Transactions. 

(d) §§ 37.9(b)(1) and (b)(4)—Execution 

Methods for Required Transactions 

Proposed § 37.9(b)(1) stated that 

Required Transactions may be executed 

on an Order Book or an RFQ System. As 

noted in the SEF NPRM, a SEF must 

offer the minimum trading functionality 

in proposed § 37.9(b)(2) (i.e., a 

centralized electronic screen with the 

ability to post both firm and indicative 

quotes visible to all market 

participants).291 Therefore, the SEF 

NPRM provided that Required 

Transactions must be executed through 

the SEF’s minimum trading 

functionality, Order Book that meets the 

minimum trading functionality, or RFQ 

System that operates in conjunction 

with the minimum trading 

functionality.292 The SEF NPRM made it 

clear that for Required Transactions, 

pre-trade transparency must be met.293

Additionally, proposed § 37.9(b)(4) 

stated that the Commission may, in its 

discretion, require a SEF to offer a 

different trading method for a particular 

swap. 

For Required Transactions, the SEF 

NPRM did not provide for a specific 

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294 Id. at 1221. 

295 Id. 

296 Id. 

297 Id. at 1220. 

298 Id. 

299 Id. 

300Mallers et al. Comment Letter at 3 (Mar. 21, 

2011); Better Markets Comment Letter at 5–6 (Mar. 

8, 2011); AFR Comment Letter at 4 (Mar. 8, 2011). 

Similarly, SDMA supports the sole use of order 

books for certain products. SDMA Comment Letter 

at 2 (Apr. 30, 2013). 

301Mallers et al. Comment Letter at 3 (Mar. 21, 

2011). 302Tradeweb Comment Letter at 4 (Jun. 3, 2011); 

SDMA Comment Letter at 2 (Mar. 8, 2011); 

Deutsche Comment Letter at 3 (Mar. 8, 2011); MFA 

Comment Letter at 5–6 (Mar. 8, 2011); MetLife 

Comment Letter at 2 (Mar. 8, 2011); Barclays 

Comment Letter at 4 (Mar. 8, 2011); Bloomberg 

Comment Letter at 2 (Mar. 8, 2011); BlackRock 

Comment Letter at 4–5 (Mar. 8, 2011). 303SDMA Comment Letter at 2 (Mar. 8, 2011). 

304Nodal Comment Letter at 3 (Mar. 8, 2011). 

305 Id. at 2–3; Nodal Comment Letter at 3 (Jun. 3, 

2011). 

306See discussion above under § 37.3— 

Requirements for Registration in the preamble for 

a description of Nodal’s blind auction. 

307Nodal Comment Letter at 2 (Mar. 8, 2011). 

308Representative Scott Garrett Comment Letter 

at 1 (Feb. 27, 2013); WMBAA Comment Letter at 2– 

3 (Jul. 18, 2011); WMBAA Comment Letter at 6–8 

(Jun. 3, 2011); Rosen et al. Comment Letter at 15 

(Apr. 5, 2011); JP Morgan Comment Letter at 6 (Mar. 

8, 2011); WMBAA Comment Letter at 4–6 (Mar. 8, 

2011); ICAP Comment Letter at 3, 4–5 (Mar. 8, 

2011); ISDA/SIFMA Comment Letter at 4–5 (Mar. 8, 

2011); CME Comment Letter at 7–8 (Mar. 8, 2011). 

309 JP Morgan Comment Letter at 6 (Mar. 8, 2011). 

310WMBAA Comment Letter at 2 (Jul. 18, 2011). 

311WMBAA Comment Letter at 5 (Mar. 8, 2011). 

312Meetings with ICAP dated Mar. 21, 2012, Mar. 

9, 2012, Feb. 16, 2012, Feb. 14, 2012; Meetings with 

GFI dated Mar. 14, 2012, Feb. 16, 2012; Meeting 

with WMBAA dated Feb. 16, 2012; ICAP Comment 

Letter at 4 (Mar. 8, 2011). 

313Meetings with GFI dated Mar. 14, 2012, Feb. 

16, 2012. 

314 Id. 

315 Id. 

316Rosen et al. Comment Letter at 10 (Apr. 5, 

2011); Barclays Comment Letter at 11 (Mar. 8, 

2011); ISDA/SFMA Comment Letter at 5 (Mar. 8, 

2011); Tradeweb Comment Letter at 6 (Mar. 8, 

2011); MarketAxess Comment Letter at 33 (Mar. 8, 

2011). 

317MarketAxess Comment Letter at 33 (Mar. 8, 

2011). 

318 Id. 

319Tradeweb Comment Letter at 6 (Mar. 8, 2011). 

execution method incorporating voice. 

The proposal stated that trading systems 

or platforms facilitating the execution of 

Required Transactions via voice 

exclusively are not multiple participant 

to multiple participant and do not 

provide for pre-trade price 

transparency.294 However, the SEF 

NPRM noted that, while not acceptable 

as the sole method of execution for 

Required Transactions, voice would be 

appropriate under certain circumstances 

such as for a market participant to 

communicate an order to a SEF’s 

employee or for a SEF’s employee to 

assist a market participant in executing 

a trade.295 The SEF NPRM stated that 

the core principles and the 

Commission’s regulations would fully 

apply to such communications, 

including, but not limited to, 

transparency, audit trail, impartial 

access, and standards for RFQs.296

Although the SEF NPRM did not 

provide for a specific execution method 

incorporating voice for Required 

Transactions, it did contemplate the 

possibility of certain functionalities that 

operate in conjunction with the SEF’s 

minimum trading functionality.297 In 

this regard, the SEF NPRM stated that, 

in addition to the SEF’s minimum 

trading functionality, a SEF may offer 

other functionalities that provide 

multiple participants with the ability to 

access multiple participants, but not 

necessarily the entire market, if the 

market participant so chooses.298 The 

SEF NPRM noted that certain defined 

RFQ Systems or other systems that meet 

the SEF definition and comply with the 

core principles applicable to SEFs may 

qualify.299

(1) Summary of Comments 

(i) Comments on Execution Methods for 

Required Transactions 

Some commenters supported the use 

of order books for Required 

Transactions.300 For example, Mallers et 

al. contended that a central order book 

market structure for all Required 

Transactions provides the most accurate 

valuation of the market, reduces 

systemic risks, and results in better 

prices.301 Other commenters supported 

the use of order book structures and 

RFQ models for Required 

Transactions.302 SDMA, for example, 

stated that all cleared swaps should be 

executed through a central limit order 

book or an RFQ System.303

Nodal recommended that the 

Commission explicitly include blind 

auctions as an acceptable method of 

execution for Required Transactions.304

Nodal commented 305 that pre-trade 

transparency for Required Transactions 

should not apply to blind auctions.306

Nodal articulated its view that the twin 

goals of pre-trade transparency and 

promoting on-exchange trading of swaps 

on SEFs should be balanced against 

each other, instead of being read in 

conjunction with one another.307

(ii) Comments on ‘‘Through Any Means 

of Interstate Commerce’’ Language in 

the SEF Definition 

Given the phrase ‘‘through any means 

of interstate commerce’’ in the CEA 

section 1a(50) SEF definition, many 

commenters supported the use of 

multiple methods of execution, such as 

voice, for Required Transactions on a 

SEF.308 JP Morgan, for example, stated 

that the SEF NPRM assumes that SEFs 

will always be electronic platforms, 

which it contended, appears to directly 

contradict the phrase ‘‘through any 

means of interstate commerce’’ in the 

SEF definition.309 According to 

WMBAA, the phrase ‘‘through any 

means of interstate commerce’’ in the 

SEF definition supports multiple 

methods of execution for Required 

Transactions on a SEF, including a 

combination of voice and electronic 

systems.310 In this regard, WMBAA 

stated that the Commission should 

allow any execution method for 

Required Transactions as long as it 

meets the multiple participant to 

multiple participant requirement in the 

SEF definition and the other statutory 

requirements for SEFs.311

Furthermore, some members of the 

industry requested that the Commission 

clarify in the final rules whether ‘‘workup’’ sessions would be considered an 

acceptable method of execution for 

Required Transactions.312 GFI explained 

one example of a work-up session 

where, after a trade is executed on an 

order book, one of the counterparties to 

the trade may wish to buy or sell 

additional quantities of the same 

instrument at the previously executed 

price.313 In this case, the parties initiate 

a work-up session to execute such 

additional quantity.314 After the initial 

counterparty exercises its right of first 

refusal, other market participants may 

also join in the trade at the previously 

executed price.315

(iii) Comments on Liquidity-Based 

Execution Mandates 

Several commenters stated that the 

Dodd-Frank Act does not require certain 

methods of trading, such as an order 

book, based upon the amount of trading 

activity in a particular instrument.316

MarketAxess contended that nothing in 

the Dodd-Frank Act supports the 

requirement in proposed § 37.9(b)(4) 

that methods of execution on a SEF 

should be based upon characteristics of 

a particular swap.317 MarketAxess 

stated that such a requirement would 

create uncertainty regarding a SEF’s 

operational structure 318 and, according 

to Tradeweb, would likely decrease the 

trading activity and liquidity of those 

swaps subject to the requirement.319 On 

the other hand, AFR contended that 

mandatorily cleared swaps meeting a 

certain level of trading activity should 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33501 

320AFR Comment Letter at 5–6 (Mar. 8, 2011). 

321The Commission is renumbering proposed 

§ 37.9(b)(1) to § 37.9(a)(2). 

322See 17 CFR 13.2 for further details. This will 

allow the Commission to consider if a broader 

model for executing on SEFs, consistent with the 

suggestion in Commissioner Sommers’ dissent, 

would be appropriate on a case-by-case basis, in 

conformance with the CEA and the Commission’s 

regulations. Core Principles and Other 

Requirements for Swap Execution Facilities, 76 FR 

at 1259. 

323See proposed § 37.9(a)(1)(i)(D) and 

§ 37.9(a)(1)(ii)(C). 

324CEA section 5h(e); 7 U.S.C. 7b–3(e) (emphasis 

added). 

325Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1220. 

326The Commission notes below that pre-trade 

transparency can help promote the trading of swaps 

on SEFs. See the Introduction section of the Cost 

Benefit Considerations section for further details. 

327The Commission further notes that this 

determination does not accept Nodal’s assertion 

that ‘‘this type of blind auction trading platform is 

permissible on DCMs.’’ See Nodal Comment Letter 

at 3 (Mar. 8, 2011). 

328The Commission interprets the phrase 

‘‘through any means of interstate commerce’’ in 

CEA § 1a(50) to allow a SEF to utilize a variety of 

means of execution or communication, including, 

but not limited to, telephones, internet 

communications, and electronic transmissions. 

Overstreet v. North Shore Corp., 318 U.S. 125, 129– 

30 (1943) (in general, ‘‘instrument’’ of interstate 

commerce is to be interpreted broadly); United 

States v. Barlow, 568 F.3d 215, 220 (5th Cir. 2009) 

(‘‘It is beyond debate that internet and email are 

facilities or means of interstate commerce.’’); United 

States v. Weathers, 169 F.3d 336, 341 (6th Cir. 

2000) (‘‘It is generally well established that 

telephones, even when used intrastate, constitute 

instrumentalities of interstate commerce.’’); SEC v. 

Solucorp Indus., 274 F.Supp.2d 379, 419 (S.D.N.Y. 

2003) (defendants ‘‘used the means and 

instrumentalities of interstate commerce, including, 

among other things, the mails and wires, including 

the Internet, news wires and telephone lines’’ to 

commit securities fraud). While the Commission’s 

interpretation of ‘‘any means of interstate 

commerce’’ allows a SEF to utilize a wide variety 

of execution or communication means, all SEFs, 

regardless of the execution or communication 

means they employ, must comply with all of the 

substantive SEF requirements, including, but not 

limited to, requirements that pertain to execution. 

For example, a SEF using the telephone to execute 

Required Transactions must satisfy the execution 

requirements set forth in § 37.9(a)(2)(i)(A) or (B). 

only be traded through order book 

systems.320

(2) Commission Determination 

(i) Execution Methods for Required 

Transactions 

The Commission is revising proposed 

§ 37.9(b)(1) as final § 37.9(a)(2) to clarify 

that each Required Transaction that is 

not a block trade as defined in § 43.2 of 

the Commission’s regulations shall be 

executed on a SEF in accordance with 

one of the following methods of 

execution: (1) An Order Book as defined 

in § 37.3(a)(3) or (2) an RFQ System, as 

defined in § 37.9(a)(3), that operates in 

conjunction with an Order Book.321 As 

explained in this final rulemaking, the 

Commission believes that these 

execution methods are consistent with 

the SEF definition and promote the 

goals provided in section 733 of the 

Dodd-Frank Act. The Commission 

notes, however, that a SEF may petition 

the Commission under § 13.2 of the 

Commission’s regulations to amend 

§ 37.9(a)(2) to include additional 

execution methods.322 This ability of 

SEFs to petition the Commission 

replaces similar provisions in the SEF 

NPRM that were included in the Order 

Book and RFQ System definitions and 

provides SEFs with additional 

flexibility as existing execution methods 

evolve or new methods are 

developed.323

In keeping with the statutory 

instruction that the Dodd-Frank Act goal 

of SEFs is to both ‘‘promote the trading 

of swaps on swap execution facilities 

and to promote pre-trade price 

transparency in the swaps market’’ 324

(emphasis added), the Commission is 

reaffirming its view articulated in the 

SEF NPRM that these goals can be 

achieved for Required Transactions by 

providing for the execution of such 

transactions on trading systems or 

platforms that allow market participants 

to post bids and offers or accept bids 

and offers that are transparent to the 

entire market.325 Promoting trading on a 

SEF should not result in eliminating the 

need to provide some degree of pretrade transparency. Therefore, even 

when recognizing the importance of 

promoting the trading of swaps on SEFs, 

some degree of pre-trade transparency 

must be met for Required 

Transactions.326 As a result, the 

Commission is declining to accept 

Nodal’s recommendation to explicitly 

include blind auctions as an acceptable 

method of execution for Required 

Transactions under this rulemaking.327

(ii) ‘‘Through Any Means of Interstate 

Commerce’’ Language in the SEF 

Definition 

In consideration of the comments 

regarding possible limitations on how 

the Commission interprets the phrase 

‘‘through any means of interstate 

commerce’’ in the SEF definition, the 

Commission is revising the final rule 

text to clarify that in providing either 

one of the execution methods for 

Required Transactions in 

§ 37.9(a)(2)(i)(A) or (B) of this final 

rulemaking (i.e., Order Book or RFQ 

System that operates in conjunction 

with an Order Book), a SEF may for 

purposes of execution and 

communication use ‘‘any means of 

interstate commerce,’’ including, but not 

limited to, the mail, internet, email, and 

telephone, provided that the chosen 

execution method satisfies the 

requirements provided in § 37.3(a)(3) for 

Order Books or in § 37.9(a)(3) for 

Request for Quote Systems.328 With this 

use of the phrase ‘‘any means of 

interstate commerce,’’ the Commission 

is not limiting the means of execution 

or communication that a SEF may 

utilize in implementing the required 

execution methods for Required 

Transactions in § 37.9(a)(2)(i)(A) or (B), 

provided that the chosen execution 

method satisfies the requirements 

provided in § 37.3(a)(3) for Order Books 

or in § 37.9(a)(3) for Request for Quote 

Systems. In this regard, the Commission 

notes that as the swaps market evolves, 

SEFs may develop new means of 

execution or communication for use in 

implementing the required execution 

methods. Although the Commission 

notes that its regulations are technology 

neutral given the ‘‘any means of 

interstate commerce’’ language, it also 

emphasizes that, regardless of the means 

of interstate commerce utilized, a SEF 

must comply with the Act and the 

Commission’s regulations, including the 

§ 37.9 execution method, impartial 

access, audit trail, and surveillance 

requirements. Furthermore, all 

transactions on the SEF must comply 

with the SEF’s rules. 

For example, to meet the RFQ System 

definition for Required Transactions, a 

SEF must satisfy all of the following 

functions, and in doing so, all or some 

of these functions may be performed 

over the telephone: (1) Receiving a 

request from a market participant to 

execute a trade, (2) submitting that 

request to at least 3 market participants 

in accordance with the RFQ System 

definition, (3) communicating the RFQ 

responses and resting bids or offers on 

the Order Book to the RFQ requester, 

and (4) executing the transaction. The 

Commission notes that regardless of the 

means of interstate commerce utilized, 

including the telephone, the SEF must 

submit the transaction into its system or 

platform so that the SEF is able to 

comply with the Act and the 

Commission’s regulations, including 

audit trail, clearing, and reporting 

requirements. Given the different means 

of interstate commerce that a SEF may 

utilize for purposes of communication 

and execution in implementing the 

execution methods for Required 

Transactions in § 37.9(a)(2)(i)(A) or (B), 

the Commission notes that it must 

evaluate each system or platform to 

determine whether it meets the 

requirements of § 37.9(a)(2). 

The Commission, in order to provide 

further clarity regarding the means of 

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33502 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

329See final § 37.9(a)(3) and the preamble for 

details regarding the communication of the resting 

bids or offers on the Order Book to the RFQ 

requester. 

330The Commission notes that a work-up 

transaction does not qualify as a block trade even 

if an individual market participant’s transactions as 

part of the work-up transaction has a notional or 

principal amount at or above the appropriate 

minimum block size applicable to such swap. The 

Commission believes that the concepts of work-up 

transactions and block trades are mutually 

exclusive. Block trades are executed pursuant to a 

SEF’s rules, but negotiated and executed off of the 

SEF’s trading platform. A work-up transaction is 

conducted on a SEF’s trading platform. See block 

trade definition in § 43.2 of the Commission’s 

regulations; see also Rules Prohibiting the 

Aggregation of Orders To Satisfy Minimum Block 

Sizes or Cap Size Requirements, and Establishing 

Eligibility Requirements for Parties to Block Trades, 

77 FR 38229 (proposed Jun. 27, 2012). Accordingly, 

each individual transaction that is part of the workup transaction must be reported as it occurs 

pursuant to the SEF’s reporting obligations. 

331These resting bids or offers would be included 

at the work-up session price. The Commission notes 

that ‘‘equal to or better than the work-up session 

price’’ means any resting bids that are equal to or 

greater than the work-up price or any resting offers 

that are equal to or less than the work-up price. 

332 Id. 

333Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1220. 

334Mallers et al. Comment Letter at 5 (Mar. 21, 

2011); SDMA Comment Letter at 4 (Mar. 8, 2011). 

interstate commerce that a SEF may 

utilize in order to satisfy the execution 

methods for Required Transactions in 

§ 37.9(a)(2), is providing the following 

example, which the Commission 

intends to be instructive, though not 

comprehensive. The Commission 

emphasizes that the following example 

should not be construed as bright-line 

rules: 

• RFQ System example—a market 

participant calls an employee of the SEF 

with a request for a quote to buy or sell 

a swap subject to the trade execution 

requirement in CEA section 2(h)(8). The 

SEF employee disseminates the request 

for a quote to no less than three market 

participants on the SEF (directly or 

through other SEF employees or both) 

by telephone, email, instant messaging, 

squawk box, some other means of 

communication, or some combination 

thereof. Based on the responses of these 

market participants, the SEF employee 

communicates the responsive bids or 

offers and the resting bids or offers on 

the SEF’s Order Book 329 to the RFQ 

requester by one of the above referenced 

means of communication. The RFQ 

requester communicates acceptance of 

one of the bids or offers to the SEF 

employee by one of the above 

referenced means of communication. 

The SEF employee informs those two 

market participants by one of the above 

referenced means of communication 

that the swap transaction is executed. 

The SEF employee enters the 

transaction into the SEF’s system or 

platform so that the SEF is able to 

comply with the Act and the 

Commission’s regulations, including 

audit trail, clearing, and reporting 

requirements. The Commission views 

this example as demonstrating 

acceptable uses of different means of 

interstate commerce while meeting the 

RFQ System method of execution in 

§ 37.9(a)(2). 

In response to commenters, the 

Commission will generally allow workup sessions if such trading protocols are 

utilized after a transaction is executed 

on the SEF’s Order Book or RFQ 

System.330 The Commission, in order to 

provide further clarity regarding workup sessions, is providing the following 

two examples, which the Commission 

intends to be instructive, though not 

comprehensive. The Commission notes 

that the following examples are two 

types of work-up session that may be 

acceptable: 

• After two counterparties execute a 

transaction on a SEF’s Order Book, the 

SEF may establish a short time period 

for a work-up session. The SEF must 

open up the work-up session to all 

market participants so that they may 

trade an additional quantity of the same 

instrument at the same price previously 

executed by the initial counterparties. In 

addition, any resting bids or offers on 

the SEF’s Order Book equal to or better 

than the work-up session price must be 

included in the work-up session.331 The 

SEF may provide the initial 

counterparties execution priority in the 

work-up session. 

• After two counterparties execute a 

transaction on a SEF’s RFQ System, the 

SEF may establish a short time period 

for a work-up session. The SEF must 

open up the work-up session to all 

market participants so that they may 

trade an additional quantity of the same 

instrument at the same price previously 

executed by the initial counterparties. In 

addition, any resting bids or offers on 

the SEF’s Order Book equal to or better 

than the work-up session price must be 

included in the work-up session.332 The 

SEF may provide the initial 

counterparties execution priority in the 

work-up session. 

The SEF must have rules governing 

the operation of any work-up 

mechanism, including the length of the 

session, any priorities accorded the 

counterparties to the transaction that 

triggered the work-up session, and the 

handling of any orders submitted during 

the session that are not executed. A SEF 

must also have systems or procedures in 

place to ensure that a work-up session 

is accessible by, and work-up session 

information (e.g., the work-up session’s 

trade price and ongoing volume) is 

available to, all market participants. The 

Commission believes that, if properly 

conducted, work-up sessions may 

enhance price discovery and foster 

liquidity. 

The Commission believes that a workup session would be a trading protocol 

and, thus, constitute a rule under § 40.1 

of the Commission’s regulations. Any 

such rule or amendment thereto must be 

codified and included in a SEF’s 

rulebook in accordance with the rule 

review or approval procedures of part 

40 of the Commission’s regulations or 

during the SEF application process. 

Additionally, all transactions executed 

through a work-up session must comply 

with the SEF’s rules. The Commission 

staff will provide informal guidance to 

SEF applicants on whether such workup sessions are in compliance with the 

Act and the Commission’s regulations. 

(iii) Liquidity-Based Execution 

Mandates 

The Commission is deleting proposed 

§ 37.9(b)(4). Given the incipience of the 

regulated swaps market, at this time, the 

Commission is not imposing a 

requirement for specific methods of 

execution for Required Transactions 

based upon the amount of trading 

activity in such transactions. 

(e) § 37.9(b)(3)—Time Delay 

Requirement 

Proposed § 37.9(b)(3) stated that SEFs 

must require that traders who have the 

ability to execute against a customer’s 

order or to execute two customers 

against each other be subject to a 15- 

second timing delay between the entry 

of the two orders, such that one side of 

the potential transaction is disclosed 

and made available to other market 

participants before the second side of 

the potential transaction (whether for 

the trader’s own account or for a second 

customer) is submitted for execution. 

The SEF NPRM stated that this 

requirement will provide other market 

participants the opportunity to join in 

the trade.333

(1) Summary of Comments 

SDMA and Mallers et al. supported 

the proposed 15-second delay 

requirement as necessary to increase 

price transparency and market 

integrity.334 Mallers et al. stated that the 

15-second rule provides a meaningful 

opportunity for other SEF participants 

to execute against the individual sides 

of the cross transaction, and that such 

crossing delays have been successfully 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33503 

335Mallers et al. Comment Letter at 5 (Mar. 21, 

2011). 

336WMBAA Comment Letter at 3 (Jul. 18, 2011); 

FHLB Comment Letter at 13 (Jun. 3, 2011); WMBAA 

Comment Letter at 9 (Jun. 3, 2011); Rosen et al. 

Comment Letter at 15–16 (Apr. 5, 2011); BlackRock 

Comment Letter at 6 (Mar. 8, 2011); Global FX 

Comment Letter at 3–4 (Mar. 8, 2011); JP Morgan 

Comment Letter at 7 (Mar. 8, 2011); Evolution 

Comment Letter at 6 (Mar. 8, 2011); WMBAA 

Comment Letter at 7 (Mar. 8, 2011); SIFMA AMG 

Comment Letter at 7 (Mar. 8, 2011); TruMarx 

Comment Letter at 7 (Mar. 8, 2011); Deutsche 

Comment Letter at 5 (Mar. 8, 2011); FCC Comment 

Letter at 2 (Mar. 8, 2011); Phoenix Comment Letter 

at 2–3 (Mar. 7, 2011). 

337WMBAA Comment Letter at 3 (Jul. 18, 2011); 

WMBAA Comment Letter at 9 (Jun. 3, 2011); 

WMBAA Comment Letter at 7 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 8 (Mar. 8, 2011); 

Deutsche Comment Letter at 5 (Mar. 8, 2011); MFA 

Comment Letter at 8 (Mar. 8, 2011). 

338FHLB Comment Letter at 13 (Jun. 3, 2011); 

BlackRock Comment Letter at 6 (Mar. 8, 2011); 

WMBAA Comment Letter at 7–8 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 7 (Mar. 8, 2011); 

FCC Comment Letter at 2 (Mar. 8, 2011). 

339Freddie Mac Comment Letter at 3 (Mar. 8, 

2011). 

340WMBAA Comment Letter at 9 (Jun. 3, 2011); 

BlackRock Comment Letter at 6 (Mar. 8, 2011); MFA 

Comment Letter at 9 (Mar. 8, 2011); Phoenix 

Comment Letter at 3 (Mar. 7, 2011). 

341ABC/CIEBA Comment Letter at 9 (Mar. 8, 

2011). 

342 Id. at 10. 

343Reuters Comment Letter at 5 (Dec. 12, 2011); 

Goldman Comment Letter at 3 (Mar. 8, 2011); ISDA/ 

SIFMA Comment Letter at 6 (Mar. 8, 2011); FXall 

Comment Letter at 10 (Mar. 8, 2011); MFA 

Comment Letter at 8–9 (Mar. 8, 2011). 

344 Goldman Comment Letter at 3 (Mar. 8, 2011). 

345FXall Comment Letter at 10 (Mar. 8, 2011). 

346Reuters Comment Letter at 5 (Dec. 12, 2011); 

Rosen et al. Comment Letter at 15–16 (Apr. 5, 2011); 

Goldman Comment Letter at 3 (Mar. 8, 2011); 

Global FX Comment Letter at 3–4 (Mar. 8, 2011); 

ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); 

Barclays Comment Letter at 9 (Mar. 8, 2011); FSR 

Comment Letter at 7 (Mar. 8, 2011). 

347SIFMA AMG Comment Letter at 7 (Mar. 8, 

2011). 

348Better Markets Comment Letter at 9 (Mar. 8, 

2011). 

349WMBAA Comment Letter at 7 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 8 (Mar. 8, 2011); 

FSR Comment Letter at 6–7 (Mar. 8, 2011). 

350WMBAA Comment Letter at 7 (Mar. 8, 2011). 

351SIFMA AMG Comment Letter at 8 (Mar. 8, 

2011). 

352The Commission is renumbering proposed 

§ 37.9(b)(3) to § 37.9(b)(1). 

353The Commission clarifies that the exposure of 

‘‘orders’’ subject to the 15 second time delay into 

the Order Book in final § 37.9(b)(1) means exposure 

of the price, size, and other terms of the orders. 354The Commission also notes that the time delay 

requirement is similar to certain timing delays for 

cross trades applicable to futures transactions 

executed on DCMs where one side of a potential 

transaction (i.e., price, size, and other terms) is 

exposed to the market for a certain period of time 

before the second side of the potential transaction 

is submitted for execution. See, e.g., NYMEX rule 

533, which provides for a 5-second delay for futures 

and a 15-second delay for options, available at 

http://www.cmegroup.com/rulebook/NYMEX/1/ 

5.pdf. 

355See, e.g., CME Rule 539.C Pre-Execution 

Communications Regarding Globex Trades, 

available at http://www.cmegroup.com/rulebook/ 

CME/I/5/39.html (setting forth rules regarding preexecution communications in the DCM context). 

implemented in the futures markets.335

However, several commenters objected 

to the 15-second delay requirement.336

Some commenters stated that there is no 

statutory authority for the timing delay 

requirement.337 Commenters also stated 

that the timing delay will increase 

prices and expose traders to market 

risk.338 Freddie Mac, for example, stated 

that liquidity providers may increase 

prices to account for anticipated market 

movements.339 Some commenters also 

noted that the timing delay requirement 

may lead to unwillingness on the part 

of dealers to provide liquidity because 

they will not know whether they will 

ultimately serve as their customers’ 

principal counterparty or merely as 

their executing agent.340

ABC/CIEBA commented that the 

proposed rule is unclear as to what 

limitations, if any, apply to preexecution communications.341 ABC/ 

CIEBA recommended that the 

Commission revise the proposed rule to 

permit pre-execution communications 

between counterparties as long as 

parties comply with the requirement to 

execute the trade on the SEF.342

Several commenters recommended 

that the Commission provide flexibility 

with respect to the time period of the 

timing delay.343 Goldman recommended 

that the Commission, in consultation 

with market participants and SEFs, set 

the delay at 1–3 seconds depending on 

the complexity of the product.344 FXall 

stated that each SEF should be able to 

decide upon the appropriate delay, 

taking into account the particular 

characteristics of that market.345

Several commenters requested 

clarification that the 15-second delay 

requirement only applies to SEFs that 

operate an Order Book and not an RFQ 

System.346 In this regard, SIFMA AMG 

commented that the timing delay should 

not apply to an RFQ System because 

firm quotes transmitted in response to 

an RFQ would already be exposed to the 

market.347 However, Better Markets 

contended that the requirement should 

apply to responsive orders in RFQ 

systems.348

Finally, some commenters requested 

that the Commission clarify the term 

‘‘trader’’ in the proposed rule.349

WMBAA stated that it is not clear 

whether the term ‘‘trader’’ refers to a 

counterparty, broker, or another 

entity.350 SIFMA AMG noted that the 

timing delay should not apply to asset 

managers executing trades on behalf of 

their clients.351

(2) Commission Determination 

The Commission is adopting the time 

delay requirement for Required 

Transactions in proposed § 37.9(b)(3) as 

final § 37.9(b)(1), subject to the 

modifications described below.352 The 

Commission clarifies that the purpose of 

the time delay requirement is to ensure 

a minimum level of pre-trade price 

transparency for Required Transactions 

on a SEF’s Order Book by allowing other 

market participants the opportunity to 

join or participate in a trade where a 

broker or dealer engages in some form 

of pre-arrangement or pre-negotiation of 

a transaction and then attempts, through 

the SEF’s Order Book, to either 

internalize the order by executing 

opposite a customer or cross two 

customer orders.353 In addition to 

ensuring a minimum level of pre-trade 

price transparency, the Commission 

believes that the time delay requirement 

will incentivize competition between 

market participants.354 The Commission 

is revising proposed § 37.9(b)(3) to 

clarify the purpose of the time delay 

requirement as described above. 

In response to ABC/CEIBA’s comment 

about any limitations on pre-execution 

communications, the Commission notes 

that a SEF that allows pre-execution 

communications must adopt rules 

regarding such communications that 

have been certified to or approved by 

the Commission.355 The Commission 

also notes that orders that result from 

pre-execution communications would 

be subject to the time delay requirement 

in the final rule text. The Commission 

notes that pre-execution 

communications are communications 

between market participants for the 

purpose of discerning interest in the 

execution of a transaction prior to the 

exposure of the market participants’ 

orders (i.e., price, size, and other terms) 

to the market. Any communication that 

involves discussion of the size, side of 

market, or price of an order, or a 

potentially forthcoming order, 

constitutes a pre-execution 

communication. 

The Commission acknowledges 

commenters’ concerns that the time 

delay requirement should take into 

account a product’s characteristics. 

Therefore, the Commission believes that 

the 15-second time delay requirement 

should serve as a default time delay. 

The Commission is revising the rule to 

allow SEFs to adjust the time period of 

the delay, based upon liquidity or other 

product-specific considerations as 

stated in final § 37.9(b)(2). The 

Commission notes that such 

adjustments and accompanying 

justifications, as well as any 

establishment of a 15-second time delay 

requirement at a SEF, must be submitted 

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33504 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

356For example, a futures commission merchant 

or other market participant acting in the role of a 

broker who has the ability to execute against its 

customer’s order or to execute two of its customers’ 

orders against each other would be subject to the 

time delay requirement. 

357The SEF NPRM stated that pre-trade price 

transparency is not required for Permitted 

Transactions. Core Principles and Other 

Requirements for Swap Execution Facilities, 76 FR 

at 1220. 

358SIFMA AMG Comment Letter at 10 (Mar. 8, 

2011). 

359 Id. 

360Rosen et al. Comment Letter at 19–20 (Apr. 5, 

2011); Deutsche Comment Letter at 6 (Mar. 8, 2011); 

FSR Comment Letter at 8 (Mar. 8, 2011); Global FX 

Comment Letter at 3 (Mar. 8, 2011); Barclays 

Comment Letter at 10 (Mar. 8, 2011); ABC/CIEBA 

Comment Letter at 7 (Mar. 8, 2011). 

361The Commission is renumbering proposed 

§ 37.9(c)(1) to § 37.9(c)(2). 

362This section does not apply to those entities 

that do not have to register as a SEF. As noted above 

in the registration section, swap transactions that 

are not subject to the CEA section 2(h)(8) trade 

execution requirement would not have to be 

executed on a registered SEF. 

363CEA sections 2(h)(7) and 2(h)(8); 7 U.S.C. 

2(h)(7) and 2(h)(8). 

364Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1241. 

365Core Principles and Other Requirements for 

Designated Contract Markets, 75 FR 80572 

(proposed Dec. 22, 2010). 

for the Commission’s review pursuant to 

the procedures described in part 40 of 

the Commission’s regulations. 

The Commission is clarifying that the 

15-second time delay requirement is not 

applicable to trades that are executed 

through an RFQ System. As noted 

above, the purpose of the time delay 

requirement is to ensure a minimum 

level of pre-trade price transparency for 

Required Transactions on a SEF’s Order 

Book. The Commission notes that an 

RFQ System already provides pre-trade 

price transparency to the RFQ requester 

and that a dealer attempting to cross or 

internalize trades through an RFQ 

System would be subject to such pretrade price transparency. As such, the 

Commission is revising the rule text to 

clarify that the 15-second time delay 

requirement only applies to a SEF’s 

Order Book. 

Finally, the Commission is replacing 

the term ‘‘traders’’ in proposed 

§ 37.9(b)(3) with the phrase ‘‘brokers or 

dealers.’’ The Commission intended the 

provision to apply only to brokers or 

dealers attempting to internalize or 

cross trades through a SEF’s Order Book 

and acknowledges that the proposal was 

unclear with respect to the meaning of 

the term ‘‘traders.’’ 356 In response to 

SIFMA AMG’s concern, the Commission 

does not have sufficient information at 

this time to make a determination 

whether asset managers executing trades 

on behalf of their clients would be 

subject to the time delay requirement. 

The Commission staff will work with 

SEFs to determine if the time delay 

requirement applies to asset managers 

or other market participants. 

(f) § 37.9(c)—Execution Methods for 

Permitted Transactions 

Proposed § 37.9(c)(1) provided that 

Permitted Transactions may be executed 

by an Order Book, RFQ System, a VoiceBased System, or any such other system 

for trading as may be permitted by the 

Commission. In addition, proposed 

§ 37.9(c)(2) stated that a registered SEF 

may submit a request to the Commission 

to offer trading services to facilitate 

Permitted Transactions, and that when 

doing so, the SEF must certify its 

compliance with § 37.11 (Identification 

of non-cleared swaps or swaps not made 

available to trade). As noted in the SEF 

NPRM, market participants would not 

be required to utilize the minimum 

trading functionality in § 37.9(b) to 

execute Permitted Transactions.357

(1) Summary of Comments 

SIFMA AMG stated that the 

Commission should not limit the 

execution modalities available to market 

participants who execute Permitted 

Transactions on a SEF.358 SIFMA AMG 

also stated that no statutory basis exists 

for regulatory execution requirements 

for Permitted Transactions.359

Additionally, several commenters stated 

that the Commission should not 

prescribe execution methods for swaps 

executed off a SEF.360

(2) Commission Determination 

The Commission is revising proposed 

§ 37.9(c)(1) to state that a SEF may offer 

any method of execution for each 

Permitted Transaction.361 The 

Commission agrees that it should not 

limit the execution methods that are 

available to market participants or 

require market participants to utilize 

certain execution methods for Permitted 

Transactions, which are not required to 

be executed on a SEF. The Commission 

clarifies, however, that, in accordance 

with the minimum trading functionality 

requirement in final § 37.3(a)(2), a SEF 

must offer an Order Book for Permitted 

Transactions. The Commission further 

clarifies that a market participant has 

the option to utilize the Order Book or 

any other method of execution that a 

SEF provides for Permitted 

Transactions. Additionally, the 

Commission clarifies that this section 

only applies to Permitted Transactions 

listed or traded on a SEF, and that this 

section does not apply to transactions 

not listed or traded on a SEF.362 Finally, 

the Commission is deleting proposed 

§ 37.9(c)(2) given the deletion to 

proposed § 37.11 as described below. 

(g) Future Review 

Consistent with the Commission’s 

practice of reviewing and monitoring its 

regulatory programs, the Commission 

directs the Commission staff to conduct 

a general review of SEFs’ experience 

with the execution methods prescribed 

in Commission regulations 37.3(a)(2) 

(minimum trading functionality), 

37.3(a)(3) (Order Book), and 37.9 

(execution methods for Required and 

Permitted Transactions and time delay 

requirement for Required Transactions). 

If appropriate, the review should 

include any Commission staff 

recommendations regarding possible 

modifications to Commission 

regulations 37.3(a)(2), 37.3(a)(3), or 37.9 

that are consistent with the Act (e.g., a 

recommendation to modify the 

minimum number of RFQ requestees 

required by the RFQ definition, 

including whether a trading protocol in 

which the minimum number of RFQ 

requestees differed by swap class or 

another category would be appropriate). 

The Commission staff’s review should 

be completed within four years of the 

effective date of these final SEF 

regulations, within which time the 

Commission believes that staff will have 

gained sufficient experience and will 

have three years’ worth of data with 

respect to the execution methods. 

10. § 37.10—Swaps Made Available for 

Trading 

The Dodd-Frank Act added section 

2(h)(8) of the CEA to require that 

transactions involving swaps subject to 

the clearing requirement must be 

executed either on a DCM or SEF, 

unless no DCM or SEF makes the swap 

‘‘available to trade’’ or the related 

transaction is subject to the clearing 

exception under section 2(h)(7) (i.e., the 

end-user exception).363 In the SEF 

NPRM, the Commission proposed to 

require SEFs to conduct annual 

assessments and to submit reports to the 

Commission regarding whether it has 

made a swap available to trade.364 In the 

DCM notice of proposed rulemaking 

(‘‘NPRM’’),365 the Commission did not 

establish any obligation for DCMs under 

section 2(h)(8) of the Act. After 

reviewing the SEF NPRM comments 

regarding the proposed available to 

trade process, and in light of the fact 

that the DCM NPRM did not establish 

any obligation for DCMs under section 

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366Process for a Designated Contract Market or 

Swap Execution Facility To Make a Swap Available 

To Trade, 76 FR 77728 (proposed Dec. 14, 2011). 

367MarketAxess Comment Letter at 33–34 (Mar. 

8, 2011). 

368 Id. at 34. 

369CEA section 5h(f)(1)(A); 7 U.S.C. 7b–3(f)(1)(A). 

370CEA section 5h(f)(1)(B); 7 U.S.C. 7b–3(f)(1)(B). 

371CEA section 5h(f)(2)(A); 7 U.S.C. 7b–3(f)(2)(A). 

372CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). 

This section also requires a SEF to provide market 

participants with impartial access to the market and 

to capture information that may be used in 

establishing whether rule violations have occurred. 

373CEA section 5h(f)(2)(C); 7 U.S.C. 7b–3(f)(2)(C). 

374CEA section 5h(f)(2)(D); 7 U.S.C. 7b–3(f)(2)(D). 

375FXall Comment Letter at 3–4, 11 (Mar. 8, 

2011); State Street Comment Letter at 5–6 (Mar. 8, 

2011); ICE Comment Letter at 2 (Mar. 8, 2011); 

WMBAA Comment Letter at 18 (Mar. 8, 2011). 

376FXall Comment Letter at 3–4, 11 (Mar. 8, 

2011); State Street Comment Letter at 5–6 (Mar. 8, 

2011). 

377 Id. 

378 ICE Comment Letter at 2 (Mar. 8, 2011). 

379Reuters Comment Letter at 4 (Mar. 8, 2011); 

FXall Comment Letter at 3–4, 11 (Mar. 8, 2011); ICE 

Comment Letter at 2 (Mar. 8, 2011); State Street 

Comment Letter at 5–6 (Mar. 8, 2011). 

380WMBAA Comment Letter at 18 (Mar. 8, 2011); 

FXall Comment Letter at 11 (Mar. 8, 2011); 

MarketAxess Comment Letter at 34 (Mar. 8, 2011); 

SIFMA AMG Comment Letter at 14–15 (Mar. 8, 

2011). 

2(h)(8) of the CEA, the Commission 

determined to separately issue a further 

notice of proposed rulemaking to 

establish a process for a DCM or SEF to 

make a swap available to trade under 

section 2(h)(8) of the Act.366 The 

Commission may implement the 

available to trade provision in a separate 

rulemaking. 

11. § 37.11—Identification of NonCleared Swaps or Swaps Not Made 

Available to Trade 

Proposed § 37.11 required a SEF that 

chooses to offer swaps: (1) Not subject 

to the clearing mandate under section 

2(h) of the Act, (2) that are subject to the 

end-user exception from the clearing 

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

Act, or (3) that have not been made 

available to trade pursuant to § 37.10 of 

the Commission’s regulations to clearly 

identify to market participants that the 

particular swap is to be executed 

bilaterally between the parties pursuant 

to one of the applicable exemptions 

from execution and clearing. 

(a) Summary of Comments 

MarketAxess expressed concern that 

proposed § 37.11 could be read to 

require that all transactions described in 

the provision must only be executed 

bilaterally, and not on a SEF.367 To 

address this concern, MarketAxess 

requested the Commission clarify that 

§ 37.11 requires a SEF choosing to 

facilitate Permitted Transactions to 

identify to market participants why the 

particular swap is a Permitted 

Transaction (i.e., falls under one of the 

three categories described in the 

provision).368

(b) Commission Determination 

The Commission believes that 

proposed § 37.11 is unnecessary and 

therefore is deleting it in its entirety. 

Market participants should have 

sufficient notice of the swaps subject to 

the clearing and trade execution 

requirements. Therefore, in conjunction 

with the definitions contained in part 37 

as adopted, market participants will 

know which swaps are Required 

Transactions and which swaps are 

Permitted Transactions, and thus the 

execution methods deemed acceptable 

for each. 

C. Regulations, Guidance, and 

Acceptable Practices for Compliance 

With the Core Principles 

As noted above, this final part 37 

rulemaking establishes the relevant 

regulations, guidance, and acceptable 

practices applicable to the 15 core 

principles that SEFs are required to 

comply with initially and on a 

continuing basis as part of the 

conditions of registration. The 

regulations applicable to the 15 core 

principles are set out in separate 

subparts B through P to part 37, which 

includes a codification within each 

subpart of the statutory language of the 

respective core principle. The guidance 

and acceptable practices are set out in 

appendix B to part 37. 

1. Subpart B—Core Principle 1 

(Compliance With Core Principles) 

Core Principle 1 requires a SEF to 

comply with the core principles set 

forth in CEA section 5h(f) and any 

requirement that the Commission may 

impose by rule or regulation pursuant to 

CEA section 8a(5) as a condition of 

obtaining and maintaining registration 

as a SEF.369 Additionally, Core 

Principle 1 provides a SEF with 

reasonable discretion in establishing the 

manner in which it complies with the 

core principles unless the Commission 

determines otherwise by rule or 

regulation.370 In the SEF NPRM, the 

Commission proposed to codify the 

statutory text of Core Principle 1 in 

proposed § 37.100, and adopts that rule 

as proposed. 

2. Subpart C—Core Principle 2 

(Compliance With Rules) 

(a) § 37.200—Core Principle 2— 

Compliance With Rules 

Core Principle 2 requires a SEF to 

establish and enforce compliance with 

its rules, including the terms and 

conditions of the swaps traded or 

processed on or through the SEF and 

any limitations on access to the SEF.371

It also requires a SEF to establish and 

enforce trading, trade processing, and 

participation rules that will deter abuses 

and have the capacity to detect, 

investigate, and enforce those rules.372

A SEF must also establish rules 

governing the operation of the facility, 

including rules specifying trading 

procedures to be used in entering and 

executing orders traded or posted on the 

facility, including block trades.373

Finally, Core Principle 2 requires a SEF 

to provide by its rules that when a swap 

dealer or major swap participant enters 

into or facilitates a swap that is subject 

to the mandatory clearing requirement 

of section 2(h) of the Act, the swap 

dealer or major swap participant is 

responsible for complying with the 

mandatory trading requirement under 

section 2(h)(8) of the Act.374 In the SEF 

NPRM, the Commission proposed to 

codify the statutory text of Core 

Principle 2 in proposed § 37.200, and 

adopts that rule as proposed. 

(1) Summary of Comments 

Some commenters expressed general 

concerns regarding the proposed rules 

under Core Principle 2.375 FXall and 

State Street believed that the proposed 

rules under Core Principle 2 would 

require a SEF to act as a de facto selfregulatory organization (‘‘SRO’’) and 

impose burdens that would impede the 

growth of the swaps market.376 These 

commenters also noted that the 

proposed requirements were too similar 

to the regulations applicable to DCMs, 

which would place SEFs at a 

disadvantage compared to DCMs given 

that SEFs will operate in a competitive 

environment while DCMs operate in a 

monopolistic environment.377 ICE urged 

the Commission to limit its prescriptive 

rulemaking to issues that it believes 

require specific, binding rules.378 In this 

regard, several commenters 

recommended that the Commission 

adopt greater flexibility in 

implementing Core Principle 2.379

Some commenters recommended 

limiting the scope of the proposed rules 

under Core Principle 2.380 Specifically, 

WMBAA argued that SEFs may not be 

able to satisfy all of the requirements of 

the proposed rules given that SEFs 

cannot be held responsible for what 

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381WMBAA Comment Letter at 18 (Mar. 8, 2011). 

382FXall Comment Letter at 11 (Mar. 8, 2011). 

383SIFMA AMG Comment Letter at 14–15 (Mar. 

8, 2011). 

384 Id. 

385See Adaptation of Regulations to Incorporate 

Swaps, 77 FR 66288 (Nov. 2, 2012). Section 1.3(ee) 

states that a self-regulatory organization ‘‘means a 

contract market (as defined in § 1.3(h)), a swap 

execution facility (as defined in § 1.3(rrrr)), or a 

registered futures association under section 17 of 

the Act.’’ Id. at 66318. 

386CEA section 1a(34) defines ‘‘member’’ as ‘‘an 

individual, association, partnership, corporation, or 

trust—(A) owning or holding membership in, or 

admitted to membership representation on, the 

registered entity . . . or (B) having trading 

privileges on the registered entity. . . .’’ 7 U.S.C. 

1a(34). 

387The Commission notes that § 37.201(a) 

codifies CEA section 5h(f)(2)(C). 7 U.S.C. 7b– 

3(f)(2)(C). 

388The Commission notes that § 37.201(b) 

codifies certain sections of CEA section 5h(f)(2). 7 

U.S.C. 7b–3(f)(2). 

389MarketAxess Comment Letter at 34 (Mar. 8, 

2011). 

390The Commission notes that under 

§ 37.1501(d), a duty of the Chief Compliance Officer 

is to establish and administer written policies and 

procedures reasonably designed to prevent 

violations of the Act and the rules of the 

Commission. 

391The Commission notes that under 

§ 37.1501(d), a duty of the Chief Compliance Officer 

is to take reasonable steps to ensure compliance 

with the Act and the rules of the Commission, and 

to establish and administer a compliance manual 

designed to promote compliance with applicable 

laws, rules, and regulations. 

392See WMBAA Comment Letter at 2 (Feb. 15, 

2013) (explaining that employees of a SEF provide 

services such as disseminating bids and offers, 

helping to understand market conditions, and 

executing transactions between counterparties). 

393Commission regulation 1.59(d). 

happens on a competitor’s platform.381

Similarly, FXall believed that SEFs 

would not have the requisite market 

data to conduct meaningful compliance 

oversight.382 SIFMA AMG believed that 

the Commission’s vague use of the terms 

‘‘members,’’ ‘‘market participants,’’ and 

‘‘participants’’ could potentially subject 

dealers’ customers, and thus asset 

managers and their clients, to ‘‘onerous’’ 

requirements of multiple SEFs.383

Therefore, SIFMA AMG requested 

clarification that a SEF’s rules would 

only regulate entities that actually 

execute transactions on the SEF.384

(2) Commission Determination 

In response to comments by FXall and 

State Street about treating SEFs as SROs, 

the Commission notes that like DCMs, it 

views SEFs as SROs and amended the 

Commission’s regulations to include 

them as SROs.385 Treating a SEF as an 

SRO is consistent with a SEF’s selfregulatory obligations pursuant to CEA 

section 5h(f). Therefore, where 

appropriate, the Commission is 

adopting surveillance, audit trail, 

investigation, enforcement, and other 

requirements for SEFs. 

In response to commenters’ concerns 

that the proposed requirements were 

similar to the regulations applicable to 

DCMs, the Commission believes that 

adopting similar requirements for both 

types of entities is warranted given the 

similar statutory self-regulatory 

obligations for both types of entities. 

Given that both DCMs and SEFs, 

regardless of whether they are new or 

existing entities, are required to fulfill 

similar self-regulatory functions, the 

Commission does not believe that this 

approach will adversely affect 

competition between DCMs and SEFs. 

In response to commenters’ requests 

for less prescriptive rules and greater 

flexibility in applying the rules, the 

Commission is moving various 

provisions of the proposed rules to 

guidance and eliminating other 

provisions, as discussed below. The 

provisions that are adopted as final 

rules reflect the Commission’s opinion 

of what is required, at a minimum, for 

any SEF to comply with the core 

principles. SEFs may take any 

additional steps necessary, beyond the 

requirements of the rules, to satisfy 

statutory obligations. 

In response to WMBAA’s and FXall’s 

comments regarding certain limitations 

faced by SEFs in terms of oversight, the 

Commission recognizes the limitations 

faced by SEFs with respect to position 

monitoring, cross-market surveillance, 

and rule enforcement and addresses 

them in the context of comments 

received below. In response to SIFMA 

AMG’s comment about the ambiguous 

use of terms, the Commission clarifies 

that ‘‘market participant’’ when used 

with respect to a SEF means a person 

that directly or indirectly effects 

transactions on the SEF. This includes 

persons with trading privileges on the 

SEF and persons whose trades are 

intermediated. The Commission also 

clarifies that ‘‘member’’ has the meaning 

set forth in CEA section 1a(34).386

(b) § 37.201—Operation of Swap 

Execution Facility and Compliance 

With Rules 

Proposed § 37.201(a) required a SEF 

to establish rules governing the 

operation of the SEF, including rules 

specifying trading procedures for 

entering and executing orders traded or 

posted on the SEF, including block 

trades.387 Proposed § 37.201(b) further 

required a SEF to establish and 

impartially enforce compliance with its 

rules, including, but not limited to: (1) 

The terms and conditions of any swaps 

traded or processed on or through the 

SEF; (2) access to the SEF; (3) trade 

practice rules; (4) audit trail 

requirements; (5) disciplinary rules; and 

(6) mandatory clearing requirements.388

(1) Summary of Comments 

MarketAxess recommended that the 

Commission withdraw proposed 

§ 37.201(b)(6), which required a SEF to 

adopt and enforce mandatory clearing 

requirements, on the basis that clearing 

of a swap occurs outside of a SEF’s main 

responsibility to facilitate the 

transaction.389

(2) Commission Determination 

The Commission is adopting § 37.201 

as proposed, subject to two 

modifications. To address the comment 

by MarketAxess, the Commission notes 

that proposed § 37.201(b)(6) contained a 

drafting error, and therefore is replacing 

the term ‘‘mandatory clearing’’ with 

‘‘mandatory trading.’’ The Commission 

also notes that the citation to ‘‘part 45’’ 

in proposed § 37.201(a) should instead 

cite to ‘‘part 43.’’ Therefore, the 

Commission is modifying the final rule 

to include these technical changes. 

Additionally, the Commission notes 

that a SEF must establish and enforce 

rules for its employees. These rules 

must be reasonably designed to prevent 

violations of the Act and the rules of the 

Commission.390 Towards that end, the 

Commission also notes that a SEF must 

have systems in place reasonably 

designed to ensure that its employees 

are operating in accordance with the 

SEF’s rules.391 For example, a SEF that 

is utilizing an RFQ System in 

conjunction with an Order Book for 

Required Transactions must establish 

rules specifying order handling 

procedures for its employees who 

receive and execute orders over the 

telephone, email, instant messaging, 

squawk box, some other method of 

communication, or some combination 

thereof so that the employees may 

comply with the RFQ System 

requirements as specified in final 

§ 37.9(a)(3).392

Furthermore, the Commission notes 

that a SEF’s employees have certain 

obligations under the Commission’s 

existing regulations. For example, under 

§ 1.59, a SEF’s employees are prohibited 

from disclosing for any purpose 

inconsistent with the performance of its 

official duties any material, non-public 

information obtained through special 

access related to the performance of its 

duties.393

Finally, the Commission notes that 

under § 1.2 of the Commission’s 

regulations, a SEF is liable for the acts, 

omissions, or failures of its employees 

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394Commission regulation 1.2. 395CEA section 5h(f)(2)(A)(ii) and (2)(B)(i); 7 

U.S.C. 7b–3(f)(2)(A)(ii) and (2)(B)(i). 396The Commission is renaming the title of this 

section from ‘‘Impartial Access by Members and 

Market Participants’’ to ‘‘Impartial Access to 

Markets and Market Services’’ to provide greater 

clarity. 397Reuters Comment Letter at 5 (Mar. 8, 2011); 

Goldman Comment Letter at 4 (Mar. 8, 2011); 

Tradeweb Comment Letter at 10 (Mar. 8, 2011). 398 ISDA/SIFMA Comment Letter at 11 (Mar. 8, 

2011). 399 JP Morgan Comment Letter at 11 (Mar. 8, 

2011). 400 Id. 

401 Id. 

402Rosen et al. Comment Letter at 17 (Apr. 5, 

2011). 

403MarketAxess Comment Letter at 23–24 (Mar. 

8, 2011). 

404Tradeweb Comment Letter at 10 (Mar. 8, 

2011). 

405Mallers et al. Comment Letter at 2–3 (Mar. 21, 

2011). 

406 Id. at 3. 

407SDMA Comment Letter at 4–5 (Mar. 8, 2011). 

408UBS Comment Letter II at 1 (May 18, 2012). 

UBS submitted two comment letters on May 18, 

2012. The Commission is referencing UBS’s 

comment letter regarding impartial access as ‘‘UBS 

Comment Letter II.’’ 

409MarketAxess Comment Letter at 24 (Mar. 8, 

2011); WMBAA Comment Letter at 19 (Mar. 8, 

2011). 

410MarketAxess Comment Letter at 25 (Mar. 8, 

2011). 

411WMBAA Comment Letter at 19 (Mar. 8, 2011). 

412See Core Principles and Other Requirements 

for Swap Execution Facilities, 76 FR at 1222 n. 53 

(providing examples of ISVs). 

413Meeting with Bloomberg dated Jan. 18, 2012. 

414 Id. 

415MarketAxess Comment Letter at 25 (Mar. 8, 

2011). 

416 Id. 

417Better Markets Comment Letter at 11–12 (Mar. 

8, 2011). 

418MarketAxess Comment Letter at 25 (Mar. 8, 

2011). 

acting within the scope of their 

employment.394

(c) § 37.202—Access Requirements 

Proposed § 37.202 addressed Core 

Principle 2’s requirements that SEFs 

provide market participants with 

impartial access to the market and that 

SEFs adopt and enforce rules with 

respect to any limitations placed on 

access to the SEF.395

(1) § 37.202(a)—Impartial Access by 

Members and Market Participants 396

Proposed § 37.202(a) required that a 

SEF provide any eligible contract 

participant (‘‘ECP’’) and any 

independent software vendor (‘‘ISV’’) 

with impartial access to its market(s) 

and market services (including any 

indicative quote screens or any similar 

pricing data displays), providing: (1) 

Access criteria that are impartial, 

transparent, and applied in a fair and 

nondiscriminatory manner; (2) a process 

for confirming ECP status prior to being 

granted access to the SEF; and (3) 

comparable fees for participants 

receiving comparable access to, or 

services from, the SEF. 

(i) Summary of Comments 

Several commenters sought 

clarification that SEFs would be 

permitted to use their own reasonable 

discretion to determine individual 

access criteria, provided that the criteria 

are impartial, transparent, and applied 

in a fair and non-discriminatory 

manner.397 In this regard, ISDA/SIFMA 

commented that a SEF should be able to 

limit access to its trading systems or 

platforms to certain types of market 

participants in order to maintain the 

financial integrity and operational safety 

of the trading platform.398 JP Morgan 

also stated that a SEF should be able to 

limit access to certain types of market 

participants such as swap dealers.399 JP 

Morgan commented, however, that the 

SEF NPRM’s preamble language about 

financial and operational soundness is 

problematic because it would not allow 

SEFs to limit access to certain types of 

market participants.400 This could 

disrupt business models such as that of 

inter-dealer brokers whose model is 

intimately tied to the idea of serving as 

an intermediary to wholesale liquidity 

providers.401 Similarly, Rosen et al. 

recommended that SEFs should be able 

to use selective access criteria such as 

objective minimum capital or credit 

requirements or limits on participation 

to objective classes of sophisticated 

market participants.402 MarketAxess 

commented that the meaning of the term 

‘‘impartial’’ is unclear and 

recommended that the Commission 

revise proposed § 37.202(a)(1) as 

follows: ‘‘Criteria that are transparent 

and objective and are applied in a fair 

and nondiscriminatory manner[.]’’ 403

Tradeweb noted that, because it offers 

multiple marketplaces, its access criteria 

may reasonably differ for each mode of 

execution and within one mode of 

execution given that each market will 

offer different services and may have 

different types of participants.404

Mallers et al. supported the impartial 

access requirement and its purpose of 

preventing a SEF’s owners or operators 

from using discriminatory access 

requirements as a competitive tool 

against certain participants.405 Mallers 

et al. stated that impartial access is a 

prerequisite to having an open market in 

which ECPs can compete on a level 

playing field, and that the participation 

of additional liquidity providers will 

improve the pricing and efficiency of 

the market and reduce systemic risk.406

SDMA also supported the impartial 

access requirement and stated that the 

ability to obtain intellectual property 

licenses and the amount of royalties for 

intellectual property licenses should be 

fair and not used to create 

anticompetitive advantages for a 

particular SEF or group of market 

participants.407 UBS requested that the 

Commission clarify in the final 

rulemaking that SEFs may not exclude 

or discriminate against participants 

providing agency services solely as a 

result of engaging in these activities.408

MarketAxess and WMBAA stated that 

a SEF should be able to restrict access 

to ISVs because the Dodd-Frank Act 

does not require SEFs to provide ISVs 

with impartial access.409 MarketAxess 

further commented that the Commission 

must permit a SEF to restrict access to 

an ISV who would use such direct 

access to provide a competitive 

advantage to another SEF or DCM.410

Similarly, WMBAA stated that SEFs 

could qualify as ISVs in order to seek 

access to competitors’ trading systems 

or platforms, which would defeat the 

existing structure of competitive sources 

of liquidity.411 Bloomberg commented 

that the SEF NPRM’s characterization of 

ISV is too broad; 412 therefore, an ISV 

may be able to replicate the services of 

a SEF without having to register as a 

SEF.413 Bloomberg also requested that 

the Commission clarify that a user of an 

ISV service must be a participant of a 

SEF in order to access the SEF’s data 

and/or to execute swap transactions on 

that SEF.414

Under proposed § 37.202(a)(2), 

MarketAxess recommended that SEFs 

be permitted to rely on a written or 

electronically signed representation by a 

participant seeking access to the SEF 

regarding its status as an ECP.415

MarketAxess stated that SEFs may then 

adopt rules to require that the 

participant notify the SEF immediately 

of any change to its status after the 

participant makes the representation.416

Better Markets commented that 

proposed § 37.202(a)(3) should make 

clear that any form of preferential access 

to a SEF through fee arrangements 

should not be allowed because it would 

defeat the goal of impartial access.417

However, MarketAxess stated that SEFs 

should be able to provide their market 

participants with volume discounts and 

other pricing arrangements as long as 

such discounts and arrangements are 

based upon objective criteria that are 

applied uniformly.418

(ii) Commission Determination 

The Commission is adopting 

§ 37.202(a) as proposed, subject to the 

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419The Commission is also making certain nonsubstantive clarifications to the rule. 

420CEA sections 5h(f)(2)(A)(ii) and (2)(B)(i); 7 

U.S.C. 7b–3(f)(2)(A)(ii) and (2)(B)(i). 

421 In this regard, the Commission is clarifying in 

response to UBS’s comment that a SEF may not 

exclude or discriminate against a market participant 

providing agency services subject to any limitation 

on such services contained in this final rulemaking. 

422CEA section 5h(f)(2)(B)(i); 7 U.S.C. 

7b–3(f)(2)(B)(i). WMBAA also commented that ISVs 

should comply with a SEF’s rules, the SEF core 

principles, and the oversight or supervision by the 

SEF in the same manner as a market participant. 

WMBAA Comment Letter at 19 (Mar. 8, 2011). The 

Commission disagrees with WMBAA’s comment 

because ISVs provide market participants with 

greater options to access SEFs and ISVs are not 

executing swaps on a SEF as are market 

participants. Therefore, the Commission believes 

that ISVs should not be subject to the same 

requirements as market participants. 

423The Commission notes that examples of 

independent software vendors include: smart order 

routers, trading software companies that develop 

front-end trading applications, and aggregator 

platforms. Smart order routing generally involves 

scanning of the market for the best-displayed price 

and then routing orders to that market for 

execution. Software that serves as a front-end 

trading application is typically used by traders to 

input orders, monitor quotations, and view a record 

of the transactions completed during a trading 

session. As noted above in the registration section, 

aggregator platforms generally provide a portal to 

market participants so that they can access multiple 

SEFs, but do not provide for execution as execution 

remains on SEFs. Aggregator platforms may also 

provide access to news and analytics. The 

Commission believes that transparency and trading 

efficiency would be enhanced as a result of 

innovations in this field for market services. For 

instance, certain providers of market services with 

access to multiple trading systems or platforms 

could provide consolidated transaction data from 

such trading systems or platforms to market 

participants. 

424See Aggregation Services or Portals discussion 

above under § 37.3—Requirements for Registration 

in the preamble. The Commission notes that 

footnote 423 above classifies aggregator platforms as 

a type of ISV so the discussion in this section 

regarding ISVs also applies to aggregator platforms. 

425The Commission notes, however, that the user 

of an ISV may not need to have been granted access 

to the SEF if the ISV is only providing a composite 

quote or top level quote for multiple SEFs. 

426The Commission is replacing the term 

‘‘participant’’ in proposed § 37.202(a)(2) with the 

term ‘‘eligible contract participant’’ in final 

§ 37.202(a)(2) because the term ‘‘participant’’ was 

not defined in the SEF NPRM and the revised term 

more clearly communicates the persons to whom 

this rule applies. In this regard, the Commission 

notes that, prior to granting a person access to its 

facility, a SEF must obtain confirmation from the 

person of its ECP status. 

427For example, the Commission notes that a 

customer of a futures commission merchant must be 

an ECP and a customer of a broker must be an ECP. 

modifications discussed below.419 The 

Commission does not believe that the 

statute allows a SEF to adopt rules that 

limit access as requested by ISDA/ 

SIFMA, JP Morgan, and Rosen et al. The 

statutory language of Core Principle 2 

requires that SEFs establish and enforce 

participation rules, including means to 

provide market participants with 

impartial access to the market, and that 

SEFs adopt and enforce rules with 

respect to any limitations they place on 

access (emphasis added).420 As stated in 

the SEF NPRM, the Commission 

reiterates that the purpose of the 

impartial access requirements is to 

prevent a SEF’s owners or operators 

from using discriminatory access 

requirements as a competitive tool 

against certain ECPs or ISVs. The 

Commission also agrees with Mallers et 

al. who stated that the impartial access 

requirement allows ECPs to compete on 

a level playing field, and that the 

participation of additional liquidity 

providers will improve the pricing and 

efficiency of the market and reduce 

systemic risk. As such, the Commission 

believes that access to a SEF should be 

determined, for example, based on a 

SEF’s impartial evaluation of an 

applicant’s disciplinary history and 

financial and operational soundness 

against objective, pre-established 

criteria. As one example of such criteria, 

any ECP should be able to demonstrate 

financial soundness either by showing 

that it is a clearing member of a 

derivatives clearing organization 

(‘‘DCO’’) that clears products traded on 

that SEF or by showing that it has 

clearing arrangements in place with 

such a clearing member. 

In this regard, the Commission 

believes that the impartial access 

requirement of Core Principle 2 does not 

allow a SEF to limit access to its trading 

systems or platforms to certain types of 

ECPs or ISVs as requested by some 

commenters.421 The Commission notes 

that the rule states ‘‘impartial’’ criteria 

and not ‘‘selective’’ criteria as 

recommended by some commenters. 

The Commission is using the term 

‘‘impartial’’ as intended in the statute. 

‘‘Impartial’’ should be interpreted in the 

ordinary sense of the word: fair, 

unbiased, and unprejudiced. Subject to 

these requirements, a SEF may use its 

own reasonable discretion to determine 

its access criteria, provided that the 

criteria are impartial, transparent and 

applied in a fair and non-discriminatory 

manner, and are not anti-competitive. 

In response to Tradeweb’s comment 

about different access criteria for 

different markets, the Commission notes 

that a SEF may establish different access 

criteria for each of its markets. Core 

Principle 2 does not specify whether 

impartial access criteria must be the 

same for all of a SEF’s markets or may 

differ for each market. Therefore, the 

Commission believes that it is within its 

discretion to allow a SEF to establish 

different access criteria for each of its 

markets. However, the Commission 

reiterates that the access criteria must be 

impartial and must not be used as a 

competitive tool against certain ECPs or 

ISVs. The Commission also reiterates 

that each similarly situated group of 

ECPs and ISVs must be treated 

similarly. 

In response to MarketAxess’s and 

WMBAA’s comments regarding ISVs, 

the Commission notes that Congress 

required SEFs to establish participation 

rules, including means to provide 

market participants with impartial 

access to the market.422 The 

Commission believes that ISVs 423

provide market participants with 

additional opportunities to access SEFs 

and that, similar to ECPs, SEFs should 

apply impartial criteria in a fair and 

non-discriminatory manner when 

deciding whether or not to grant an ISV 

access. In response to MarketAxess’s 

and WMBAA’s comments regarding 

ISVs providing a competitive advantage 

to other SEFs, the Commission notes 

that SEFs may set rules for ISVs so they 

do not misuse data, for example, by 

providing the data to another SEF for 

purely competitive reasons to the 

exclusion of market participants. The 

Commission also notes that SEFs may 

charge fees to ISVs based on the access 

or services they receive from the SEF. 

In response to Bloomberg’s comments, 

the Commission agrees that ISVs should 

not be able to replicate the services of 

a SEF without having to register as a 

SEF. The Commission notes that an ISV 

that merely provides a service to SEFs 

will not, merely because it provides 

such a service, be deemed to be a SEF 

as defined in CEA section 1a(50). 

However, pursuant to the registration 

requirements in final § 37.3(a), if an ISV 

offers a trading system or platform in 

which more than one market participant 

has the ability to execute or trade swaps 

with more than one other market 

participant on that system or platform, 

then the ISV has to register as a SEF.424

The Commission also notes that the user 

of an ISV must have been granted access 

by a SEF in order to access that SEF’s 

data and/or to execute a swap 

transaction on that SEF through the 

ISV.425

The Commission notes that under 

§ 37.202(a)(2), a SEF that is determining 

whether to grant an ECP access to its 

facilities may rely on a signed 

representation of its ECP status.426 By 

not prescribing a process, the 

Commission is providing SEFs with 

flexibility and discretion on how to 

meet this requirement. The Commission 

also notes that for SEFs that permit 

intermediation, customers of ECPs must 

also be ECPs.427 In this regard, a SEF 

must obtain a signed representation 

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428The Commission is replacing the term 

‘‘participant’’ in proposed § 37.202(a)(3) with the 

terms ‘‘eligible contract participants’’ and 

‘‘independent software vendors’’ in final 

§ 37.202(a)(3) because the term ‘‘participant’’ was 

not defined in the SEF NPRM and the revised terms 

more clearly communicates the persons to whom 

this rule applies. 

429CME Comment Letter at 17 (Feb. 22, 2011). 

430 Id. at 16. 

431 Id. 

432 Id. 

433 Id. 

434Bloomberg Comment Letter at 6 (Mar. 8, 2011). 

435 Id. 

436WMBAA Comment Letter at 19 (Mar. 8, 2011). 

437 Id. 

438CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). 

439The Commission is making certain nonsubstantive clarifications to the rule. 

440For the avoidance of doubt, the Commission 

notes that this rule applies to the SEF’s members 

and market participants. 

441CEA section 5h(f)(2)(A)(ii); 7 U.S.C. 

7b–3(f)(2)(A)(ii). 

442The Commission notes that § 37.203 codifies 

CEA section 5h(f)(2)(B). 7 U.S.C. 7b–3(f)(2)(B). 

from an intermediary that its customers 

are ECPs. 

To address comments submitted in 

connection with proposed § 37.202(a)(3) 

regarding fees, the Commission clarifies 

that § 37.202(a)(3) neither sets nor limits 

the fees that SEFs may charge. A SEF 

may establish different categories of 

ECPs or ISVs seeking access to, or 

services from, the SEF, but may not 

discriminate with respect to fees within 

a particular category.428 The 

Commission notes that § 37.202(a)(3) is 

not designed to be a rigid requirement 

that fails to take into account legitimate 

business justifications for offering 

different fees to different categories of 

entities seeking access to the SEF. For 

example, a SEF may consider the 

services it receives from members such 

as market making services when it 

determines its fee structure. 

(2) § 37.202(b)—Jurisdiction 

Proposed § 37.202(b) required that 

prior to granting any ECP access to its 

facilities, a SEF must require that the 

ECP consents to its jurisdiction. 

(i) Summary of Comments 

CME recommended that the 

Commission withdraw the proposed 

rule.429 CME contended that requiring 

clearing firms to obtain every customer’s 

consent to the regulatory jurisdiction of 

each SEF would be costly.430 Moreover, 

CME commented that even if such 

consent were obtained, the proposed 

rule would be entirely ineffective in 

achieving the Commission’s desired 

outcome.431 CME explained that if a 

non-member, who had consented to the 

SEF’s jurisdiction under the proposed 

rule, committed a rule violation and 

subsequently elected not to cooperate in 

the investigation or disciplinary 

process, the SEF’s only recourse would 

be to deny the non-member access and, 

if appropriate, refer the matter to the 

Commission.432 CME further explained 

that a SEF’s enforcement options, and 

the regulatory outcomes, do not change 

based on whether or not there is a 

record of the non-member consenting to 

jurisdiction, but rather depend on 

whether the non-member chooses to 

participate in the SEF’s investigative 

and disciplinary processes.433

Similarly, Bloomberg requested that 

the Commission clarify that proposed 

§ 37.202(b) would only apply to a SEF’s 

members and not customers of members 

whose orders are executed on a SEF.434

Bloomberg stated that, rather than 

subject all market participants to a SEF’s 

jurisdiction, it would be sufficient and 

more practical for each SEF member to 

provide to the SEF specific information 

about its customers.435 WMBAA noted 

that a SEF may only exercise 

jurisdiction over a market participant 

with respect to its own rules and that 

the SEF’s ultimate sanction would be to 

ban a market participant from its trading 

system or platform.436 WMBAA also 

stated that prohibiting a market 

participant from trading on one 

particular SEF has little utility because 

a market participant could continue to 

execute swaps on other SEFs.437

(ii) Commission Determination 

The Commission is adopting 

§ 37.202(b) as proposed. While 

acknowledging the comments described 

above, the Commission believes that 

§ 37.202(b) codifies jurisdictional 

requirements necessary to effectuate the 

statutory mandate of Core Principle 2 

that a SEF shall have the capacity to 

detect, investigate, and enforce rules of 

the SEF.438 In the Commission’s view, 

jurisdiction must be established by a 

SEF prior to granting eligible contract 

participants access to its markets in 

order to effectively investigate and 

sanction persons that violate SEF rules. 

In particular, a SEF should not be in the 

position of asking market participants to 

voluntarily submit to its jurisdiction 

and cooperate in investigatory 

proceedings after a potential rule 

violation has been found. Similarly, 

market participants should have 

advanced notice that their trading 

practices are subject to the rules of a 

SEF, including rules that require 

cooperating in investigatory and 

disciplinary processes. 

For the avoidance of doubt, the 

Commission clarifies that the scope of 

§ 37.202(b) is not limited to members. 

To the contrary, all members and market 

participants of a SEF, as defined above 

under § 37.200, are within the scope of 

§ 37.202(b). 

In response to CME’s and WMBAA’s 

comments, the Commission notes that a 

SEF’s ultimate recourse against a market 

participant is to deny such market 

participant access to the SEF and, if 

appropriate, refer the market participant 

to the Commission. The Commission 

has the authority to issue broader 

sanctions for market participants who 

commit SEF rule violations that also 

violate the CEA and Commission 

regulations. Therefore, the Commission 

expects that a SEF would not only 

sanction market participants as 

appropriate, but also refer matters to the 

Commission for additional action when 

necessary. The Commission does not 

agree that this action absolves SEFs 

from their responsibility to establish 

jurisdiction over members and market 

participants. 

(3) § 37.202(c)—Limitations on Access 

Proposed § 37.202(c) required a SEF 

to establish and impartially enforce 

rules governing any decision to allow, 

deny, suspend, or permanently bar 

participants’ access to the SEF, 

including when such decisions are 

made as part of a disciplinary or 

emergency action taken by the SEF. 

(i) Commission Determination 

Although no comments were received 

on § 37.202(c), the Commission is 

adopting the proposed rule subject to 

one modification.439 The Commission is 

replacing the term ‘‘participant’’ with 

‘‘eligible contract participant’’ because 

the term ‘‘participant’’ was not defined 

in the SEF NPRM and the revised term 

more clearly communicates the persons 

to whom this rule applies.440 The 

Commission notes that § 37.202(c) 

implements Core Principle 2’s 

requirement regarding limitations on 

access to the SEF.441

(d) § 37.203—Rule Enforcement Program 

Proposed § 37.203 required a SEF to 

establish and enforce trading, trade 

processing, and participation rules that 

will deter abuses and have the capacity 

to detect, investigate, and enforce those 

rules.442

(1) § 37.203(a)—Abusive Trading 

Practices Prohibited 

Proposed § 37.203(a) required a SEF 

to prohibit certain abusive trading 

practices, including front-running, wash 

trading, pre-arranged trading, fraudulent 

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443Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1223 n.61. 

Section 747 of the Dodd-Frank Act amended CEA 

section 4c(a) to make it unlawful for any person to 

engage in any trading, practice, or conduct on or 

subject to the rules of a registered entity that—(A) 

violates bids or offers; (B) demonstrates intentional 

or reckless disregard for the orderly execution of 

transactions during the closing period; or (C) is, is 

of the character of, or is commonly known to the 

trade as, spoofing (bidding or offering with the 

intent to cancel the bid or offer before execution). 

See Antidisruptive Practices Authority, 76 FR 

14943 (proposed Mar. 18, 2011) for proposed 

interpretive guidance on these three new statutory 

provisions of CEA section 4c(a)(5). 

444ABC/CIEBA Comment Letter at 9 (Mar. 8, 

2011); CME Comment Letter at 17–18 (Feb. 22, 

2011). 

445CME Comment Letter at 17 (Feb. 22, 2011). 

446 Id. at 17–18. 

447WMBAA Comment Letter at 20 (Mar. 8, 2011). 

448 Id. 

449Better Markets Comment Letter at 13–17 (Mar. 

8, 2011). 

450Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1223. 

451Core Principles and Other Requirements for 

Designated Contract Markets, 77 FR 36612, 36626 

(Jun. 19, 2012). 

452See Final § 37.203(a) in the Commission’s 

regulations. 

453CEA section 5h(f)(2); 7 U.S.C. 7b–3(f)(2). 

454Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1223. 

trading, money passes, and any other 

trading practices that the SEF deems to 

be abusive. The proposed rule further 

obligated a SEF to ‘‘prohibit any other 

manipulative or disruptive trading 

practices prohibited by the Act or by the 

Commission pursuant to Commission 

regulations.’’ SEFs permitting 

intermediation were required to prohibit 

additional trading practices, such as 

trading ahead of customer orders, 

trading against customer orders, 

accommodation trading, and improper 

cross trading. As explained in the SEF 

NPRM, prohibited trading practices 

include those proscribed by section 747 

of the Dodd-Frank Act.443

(i) Summary of Comments 

CME and ABC/CIEBA commented 

that the proposed rule is problematic 

because it enumerated prohibited trade 

practices without specifically defining 

them.444 CME stated that SEFs should 

have reasonable discretion to establish 

rules appropriate to their markets that 

are consistent with the CEA and that 

satisfy the core principles.445 CME 

questioned, in particular, how to 

interpret the proposed prohibition on 

pre-arranged trading with respect to 

rules that allow for block trading, 

exchange for related position 

transactions, and pre-execution 

communications subject to specified 

conditions.446

WMBAA contended that the 

enumerated abusive trading practices 

appear more commonly in markets with 

retail participants, and therefore are 

more likely to occur on a DCM rather 

than a SEF.447 Accordingly, WMBAA 

recommended that the Commission 

include in the final rule abusive trading 

practices that are more likely to occur 

on a SEF.448 Finally, Better Markets 

recommended that the Commission 

expand its list of prohibited trade 

practices to ban certain high-frequency 

trading practices, including exploiting a 

large quantity or block trade, price 

spraying (which it views as a form of 

front-running), rebate harvesting, and 

layering the market (which it analogizes 

to spoofing).449

(ii) Commission Determination 

The Commission is adopting 

proposed § 37.203(a), subject to one 

modification described below. In 

response to CME’s and ABC/CIEBA’s 

comments regarding the perceived 

vagueness of the enumerated trading 

practices, the Commission notes that the 

enumerated abusive trading practices 

reflect the trading practices that are 

typically accepted as prohibited 

conduct by regulators and derivatives 

exchanges in the industry. In the SEF 

NPRM, the Commission stated that the 

proposed prohibited trading practices 

are a compilation of abusive trading 

practices that DCMs already prohibit.450

The Commission also noted in the final 

DCM rulemaking that the prohibited 

trading practices are typically already 

prohibited in DCM rulebooks.451

Although the Commission believes, as 

noted by CME, that a SEF should have 

reasonable discretion to establish rules 

for its markets, the Commission 

believes, at a minimum, that a SEF must 

prohibit the abusive trading practices 

identified in the rule. 

In response to CME’s comment about 

how to interpret the prohibition on prearranged trading with respect to rules 

that allow for block trading and other 

types of trading, the Commission is 

amending proposed § 37.203(a) to 

clarify that a SEF must prohibit prearranged trading, except for block trades 

permitted under part 43 of the 

Commission’s regulations or other types 

of transactions certified to or approved 

by the Commission pursuant to the 

procedures under part 40 of the 

Commission’s regulations. This change 

clarifies that these types of transactions 

will not be subject to the prohibition on 

pre-arranged trading. The Commission 

also clarifies, as discussed above under 

the time delay requirement, that the 

prohibition on pre-arranged trading 

does not limit pre-execution 

communications between market 

participants, subject to the rules of the 

SEF. Accordingly, SEFs that permit preexecution communications must 

establish and enforce rules relating to 

such communications. 

In response to WMBAA’s comment 

that the enumerated abusive trading 

practices are more suited to DCMs 

rather than SEFs, the Commission 

believes that similar prohibitions are 

necessary to promote consistent 

protection for all market participants 

across the swaps market. Therefore, the 

Commission believes that the 

enumerated abusive trading practices 

should be prohibited by DCMs and 

SEFs. The Commission notes that 

requiring SEFs to proscribe trading 

practices which are prohibited by the 

Act and Commission regulations does 

not create any additional obligations 

beyond the existing statutory and 

regulatory requirements applicable to all 

SEFs. 

The Commission agrees with 

WMBAA and Better Markets that other 

abusive trading practices may exist. In 

this regard, § 37.203(a) provides a nonexhaustive, non-exclusive list. The 

regulations adopted in this final release 

provide a SEF with reasonable 

discretion to establish rules that 

prohibit additional abusive trading 

practices. Additionally, not only must a 

SEF prohibit any other trading practices 

that a SEF deems abusive,452 it must 

also establish and enforce rules that will 

deter abuses under statutory Core 

Principle 2.453 Therefore, if a SEF 

identifies additional abusive trading 

practices that are likely to occur on its 

trading systems and platforms, then the 

SEF is required, by statute and 

Commission regulation, to prohibit such 

abusive trading practices. The 

Commission anticipates that as SEFs 

gain experience with exchange-listed 

swaps, it may periodically revisit the 

list of prohibited abusive trading 

practices under § 37.203(a). 

(2) § 37.203(b)—Capacity to Detect and 

Investigate Rule Violations 

Proposed § 37.203(b) required a SEF 

to have arrangements and resources for 

effective rule enforcement, which 

included a SEF’s authority to collect 

information and examine books and 

records of SEF members and market 

participants. As discussed in the 

preamble to the SEF NPRM, the 

Commission believes that a SEF can best 

administer its compliance and rule 

enforcement obligations by having the 

ability to reach the books and records of 

all market participants.454 Proposed 

§ 37.203(b) also required a SEF’s 

arrangements and resources to facilitate 

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455FXall Comment Letter at 11–12 (Mar. 8, 2011); 

CME Comment Letter at 18 (Feb. 22, 2011). 456CME Comment Letter at 18 (Feb. 22, 2011). 457 Id. 458FXall Comment Letter at 11–12 (Mar. 8, 2011). 459 Id. 

460WMBAA Comment Letter at 21 (Mar. 8, 2011); 

MarketAxess Comment Letter at 35 (Mar. 8, 2011). 

461WMBAA Comment Letter at 21 (Mar. 8, 2011). 

462 Id. 

463MarketAxess Comment Letter at 35 (Mar. 8, 

2011). 

464 Id. 

465 Id. 

466The Commission is making certain nonsubstantive clarifications to proposed § 37.203(c)(1). 

The Commission is also renumbering proposed 

§ 37.203(c)(1) to § 37.203(c). 

the direct supervision of the market and 

the analysis of data collected to 

determine whether a rule violation has 

occurred. 

(i) Summary of Comments 

FXall and CME requested that the 

Commission clarify the provision in 

proposed § 37.203(b) that requires a SEF 

to have the authority to examine the 

books and records of its members and 

market participants.455 Specifically, 

CME expressed concern that the 

proposed rule would subject nonregistered market participants to 

recordkeeping requirements that 

currently apply only to member, 

registrants, and direct access clients of 

its platform, which it does not believe 

would be effective.456 CME also 

commented that the proposed rule does 

not detail which books, records, and 

information a SEF must be able to 

obtain from its non-member market 

participants.457 FXall expressed concern 

that the requirement for a SEF to have 

the authority to examine the books and 

records of its members and market 

participants could be interpreted to 

require a SEF to conduct a full 

regulatory examination program.458

FXall, therefore, recommended that the 

Commission clarify that this 

requirement only applies as may be 

necessary for a SEF to investigate a 

specific potential rule violation that the 

SEF has detected in the ordinary course 

of its trade practice surveillance routine 

or has otherwise been brought to its 

attention.459

(ii) Commission Determination 

The Commission is adopting 

§ 37.203(b) as proposed, subject to the 

following modification. To address 

CME’s concerns about the scope of 

proposed § 37.203(b), the Commission is 

replacing the term ‘‘market participant’’ 

with ‘‘persons under investigation.’’ The 

Commission recognizes that using the 

term ‘‘market participant’’ could 

significantly increase the regulatory 

responsibilities for SEFs. Thus, the 

Commission clarifies that § 37.203(b) 

places upon a SEF an affirmative 

obligation to have the authority to 

examine books and records from its 

members and from any persons under 

investigation for effective enforcement 

of its rules. The Commission also notes 

that the books and records collected by 

the SEF should encompass all 

information and documents that are 

necessary to detect and prosecute rule 

violations. In response to FXall’s 

comment, the Commission clarifies that 

the requirement for a SEF to have the 

authority to examine books and records 

does not require a SEF to conduct a full 

regulatory examination program. 

However, the Commission notes that in 

addition to the SEF’s obligations 

pursuant to § 37.203(b), the audit trail 

requirements in § 37.205(c)(2) require a 

SEF to establish a program for effective 

enforcement of its audit trail and 

recordkeeping requirements, which 

would require the examination of books 

and records. 

(3) § 37.203(c)—Compliance Staff and 

Resources 

Proposed § 37.203(c)(1) provided that 

a SEF must establish and maintain 

sufficient compliance staff and 

resources to conduct a number of 

enumerated tasks, such as audit trail 

reviews, trade practice surveillance, 

market surveillance, and real-time 

monitoring. Proposed § 37.203(c)(2) 

required a SEF to continually monitor 

the size and workload of its compliance 

staff and, on at least an annual basis, 

formally evaluate the need to increase 

its compliance staff and resources. The 

proposed rule also set forth certain 

factors that a SEF should consider in 

determining the appropriate level of 

compliance staff and resources. 

(i) Summary of Comments 

Two commenters sought clarification 

regarding a SEF’s compliance 

resources.460 WMBAA requested that 

the Commission clarify whether the 

resources and staff of a compliance 

department may be shared with 

affiliates or between multiple SEFs, and 

if so, how these shared resources would 

be considered in meeting the 

requirements for sufficient compliance 

staff and resources.461 WMBAA also 

requested clarification as to whether a 

SEF could consider its third party 

service provider’s resources and staff for 

purposes of evaluating the adequacy of 

its compliance staff and resources.462

MarketAxess believed that the process 

by which a SEF must conduct a formal 

evaluation of its compliance resources 

was unclear.463 MarketAxess also noted 

that while the findings of such an 

evaluation could result in the need to 

increase a SEF’s compliance staff and 

resources, it could also result in a 

decrease.464 Accordingly, MarketAxess 

suggested that the Commission remove 

the term ‘‘formally’’ and clarify that the 

evaluation of compliance resources 

could result in either an increase or 

decrease in compliance staff and 

resources.465

(ii) Commission Determination 

The Commission is adopting 

§ 37.203(c) as proposed, subject to one 

modification discussed below.466 The 

Commission agrees in part with 

WMBAA’s recommendation that some 

SEF compliance staff can be shared 

among affiliated entities under the 

appropriate circumstances. However, 

such arrangements would require prior 

review by the Commission staff and 

appropriate legal documentation 

between the affiliated entities with 

respect to any shared staff (e.g., 

secondment or regulatory services 

agreements that define responsibilities; 

establish decision-trees for matters of 

regulatory consequence; and provide for 

exclusive authority and responsibility 

by each SEF with respect to matters on 

its markets). The Commission also 

emphasizes that any sharing of 

compliance staff does not diminish each 

SEF’s obligation to maintain sufficient 

staff to meet its own regulatory needs. 

The Commission believes that 

compliance resources may not be shared 

between non-affiliated SEFs given 

potential conflict issues. However, the 

Commission recognizes that a SEF may 

provide regulatory services to a nonaffiliated SEF pursuant to a regulatory 

services agreement. 

The Commission believes that a SEF 

may take into consideration the staff 

and resources of its regulatory service 

provider when evaluating the 

sufficiency of its own compliance staff. 

Regardless of whether a SEF utilizes a 

regulatory service provider or shares its 

compliance staff with an affiliate, the 

Commission emphasizes that the SEF 

must maintain sufficient internal 

compliance staff to oversee the quality 

and effectiveness of the regulatory 

services provided and to make certain 

regulatory decisions, as required by 

§ 37.204. 

Finally, the Commission is deleting 

proposed § 37.203(c)(2), which required 

that a SEF monitor the size and 

workload of its compliance staff on a 

continuous basis and, on at least an 

annual basis, formally evaluate the need 

to increase its compliance resources and 

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467CME Comment Letter at 19–20 (Feb. 22, 2011); 

WMBAA Comment Letter at 21 (Mar. 8, 2011). 

468CME Comment Letter at 19–20 (Feb. 22, 2011). 

469 Id. at 20. 

470WMBAA Comment Letter at 21 (Mar. 8, 2011). 

471Better Markets Comment Letter at 18 (Mar. 8, 

2011). 

472CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). 

473See discussion below regarding highfrequency trading under § 37.401—General 

Requirements in the preamble. 

staff. The Commission believes that the 

obligation that a SEF monitor the 

adequacy of its compliance staff and 

resources are implicit in proposed 

§ 37.203(c)(1). The final rule provides 

greater flexibility to SEFs in 

determining their approach to 

monitoring their compliance resources. 

(4) § 37.203(d)—Automated Trade 

Surveillance System 

Proposed § 37.203(d) required a SEF 

to maintain an automated trade 

surveillance system capable of detecting 

and investigating potential trade 

practice violations. The proposed rule 

also required that an acceptable 

automated trade surveillance system 

must have the capability to generate 

alerts on a trade date plus one day (T+1) 

basis to assist staff in detecting potential 

violations. The automated trade 

surveillance system, among other 

requirements, must maintain all trade 

and order data, including order 

modifications and cancellations, and 

must have the capability to compute, 

retain, and compare trading statistics; 

compute trade gains and losses; and 

reconstruct the sequence of trading 

activity. 

(i) Summary of Comments 

CME and WMBAA expressed concern 

about the capabilities required of an 

automated trade surveillance system 

under the proposed rule.467 Specifically, 

CME stated that it has been unable to 

design an automated surveillance 

system that automates the actual 

investigation of potential trade practice 

violations.468 CME also challenged the 

use of what it deemed as ‘‘broad and 

ambiguous’’ terms to describe the 

required capabilities of such a system, 

and recommended that the Commission 

consider applying a more flexible, core 

principles-based approach to 

implementing the requirement.469

WMBAA argued that it would be 

impossible to create an automated trade 

surveillance system with the 

capabilities described in the proposed 

rule without knowledge of a 

participant’s complete trading activity, 

including trading activity that takes 

place on other SEFs.470

Better Markets recommended that 

data recorded by an automated trade 

surveillance system be time-stamped at 

intervals consistent with the capabilities 

of high-frequency traders that will 

transact on SEFs.471

(ii) Commission Determination 

The Commission is adopting 

proposed § 37.203(d), subject to two 

modifications discussed below. First, 

the Commission is moving the 

requirement that an automated trade 

surveillance system maintain all data 

reflecting the details of each order 

entered into the trading system to final 

§ 37.205(b). The Commission believes 

that § 37.205(b) is a more logical place 

in the Commission’s rules to address 

this aspect of a SEF’s automated 

surveillance system because it also 

specifies the requirements for a SEF’s 

audit trail program, including a history 

of all orders and trades. 

Second, the Commission is deleting 

the word ‘‘investigating’’ from proposed 

§ 37.203(d) to remove any confusion, as 

noted by CME. The Commission notes, 

in response to CME’s comment, that the 

final rules do not require a SEF’s 

automated trade surveillance system to 

conduct the actual investigations. The 

Commission believes that the actual 

investigation would be carried out by a 

SEF’s compliance staff with the 

assistance of automated surveillance 

tools. 

In response to CME’s comment 

pertaining to the breadth of the rule, the 

Commission believes that effective 

surveillance of trading markets requires 

that a SEF maintain an automated trade 

surveillance system capable of detecting 

trade practice violations to assist 

compliance staff in analyzing large data 

sets and investigating patterns of 

conduct that may go otherwise 

unnoticed. The Commission also 

believes that the analytical tools 

enumerated in the rule are a necessary 

component of an effective trade 

surveillance system. This rule, as 

modified, therefore fulfills the statutory 

requirement of Core Principle 2 by 

assisting the SEF in detecting, 

investigating, and enforcing trading 

rules that will deter abuses.472

The Commission acknowledges the 

inter-SEF surveillance limitations 

expressed by WMBAA. The 

Commission notes that the purpose of 

§ 37.203(d) is to ensure that a SEF’s 

compliance staff has the necessary tools 

to detect, analyze, and investigate 

potential trade practice violations on the 

SEF’s trading systems or platforms; it 

does not obligate a SEF to establish a 

cross-market trade practice surveillance 

program. 

Although the Commission 

acknowledges the merits of the 

recommendation by Better Markets to 

include time stamps at intervals 

consistent with the capabilities of highfrequency traders, the Commission does 

not believe that it is necessary to modify 

§ 37.203(d) to address this concern. As 

discussed in § 37.401 below, there are 

efforts underway both within and 

outside of the Commission to define and 

develop approaches for better 

monitoring of high-frequency and 

algorithmic trading.473 However, while 

the rule does not specify the granularity 

of time-stamped data, a SEF’s automated 

trade surveillance system should have 

the ability to readily determine the 

sequence in which orders are entered. 

This reflects the Commission’s belief 

that an automated trade surveillance 

system should time-stamp data with the 

granularity necessary to conduct 

effective surveillance of all trade-related 

activity, including high-frequency 

trading, while leaving the details of the 

system to the SEF. 

The Commission notes that the 

accurate time-stamping of data is 

particularly important for SEFs that use 

an RFQ System, including an RFQ 

System with a voice component. For 

such SEFs, the accurate time-stamping 

of both their Order Book and RFQ 

System activity is critical for ensuring 

both that the SEF itself has a robust 

surveillance system and that the 

Commission is able to monitor the SEF’s 

adherence to part 37’s Order Book-RFQ 

System integration requirements. 

(5) § 37.203(e)—Real-Time Market 

Monitoring 

Proposed § 37.203(e) required a SEF 

to conduct real-time market monitoring 

of all trading activity on its electronic 

trading platform to ensure orderly 

trading and to identify market or system 

anomalies. The proposed rule further 

required a SEF to have the authority to 

adjust prices and cancel trades when 

needed to mitigate ‘‘market disrupting 

events’’ caused by platform 

malfunctions or errors in orders 

submitted by market participants. In 

addition, proposed § 37.203(e) required 

that any trade price adjustments or trade 

cancellations be transparent to the 

market and subject to standards that are 

clear, fair, and publicly available. 

(i) Summary of Comments 

CME stated that the proposed 

standards would be difficult for any SEF 

to reasonably meet because they require 

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474CME Comment Letter at 21 (Feb. 22, 2011). 

475 Id. at 20–21. 

476WMBAA Comment Letter at 21 (Mar. 8, 2011). 

477SIFMA AMG Comment Letter at 14 (Mar. 8, 

2011); ISDA/SIFMA Comment Letter at 13 (Mar. 8, 

2011). 

478SIFMA AMG Comment Letter at 14 (Mar. 8, 

2011). 

479 Id. 

480 ISDA/SIFMA Comment Letter at 13 (Mar. 8, 

2011). 

481Better Markets Comment Letter at 18 (Mar. 8, 

2011). 

482CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). 

483Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1224. 

484 Id. at 1223–24. 

485 Id. at 1224. 

486See discussion below regarding highfrequency trading under § 37.401—General 

Requirements in the preamble. 

monitoring of all trading activity on a 

platform to ensure orderly trading.474

CME also reiterated its belief that the 

proposed rules are overly prescriptive 

and recommended that the Commission 

provide application guidance instead of 

a rule.475 WMBAA requested 

clarification that a SEF’s obligation to 

conduct real-time market monitoring 

does not include the requirement to 

conduct automated trade surveillance 

under § 37.203(d).476

Two commenters opined on the 

requirement for a SEF to modify or 

cancel a swap transaction.477 SIFMA 

AMG argued that a SEF should not be 

able to modify or cancel a swap 

transaction under any circumstances 

without the express consent of the 

counterparties.478 SIFMA AMG also 

stated that if counterparties consent to 

an adjustment, then clearing entities, 

executing brokers, DCMs, and 

middleware platforms should also make 

the appropriate adjustment.479 ISDA/ 

SIFMA recommended that the 

Commission adopt a uniform standard 

for ‘‘market disrupting events.’’ 480

Better Markets stated that a SEF’s 

obligation to conduct real-time market 

monitoring should include monitoring 

orders and cancellations that are timestamped at intervals consistent with the 

capabilities of high-frequency traders to 

identify abusive high frequency trading 

strategies.481

(ii) Commission Determination 

The Commission is adopting 

proposed § 37.203(e), subject to one 

modification. The Commission agrees 

with CME that real-time market 

monitoring cannot ‘‘ensure’’ orderly 

trading at all times, but the Commission 

believes that such monitoring must 

identify disorderly trading when it 

occurs. Accordingly, the Commission is 

modifying proposed § 37.203(e) to 

require a SEF to conduct real-time 

market monitoring ‘‘to identify 

disorderly trading,’’ instead of ‘‘to 

ensure orderly trading.’’ 

In response to CME’s comment that 

the rule is overly prescriptive, the 

Commission believes that § 37.203(e) 

grants a SEF the flexibility to determine 

the best way to conduct real-time 

market monitoring so that it can 

effectively monitor its markets. The 

Commission also believes that the rule 

correctly mandates that a SEF conduct 

real-time market monitoring of all 

trading activity that occurs on its system 

or platform in order to detect disorderly 

trading and market or system anomalies, 

and take appropriate regulatory action. 

The Commission believes that this rule 

fulfills the statutory requirement of Core 

Principle 2, which requires a SEF to 

have the capacity to detect, investigate, 

and enforce trading rules that will deter 

abuses.482

In response to WMBAA’s comment, 

the Commission clarifies that a SEF’s 

obligation to conduct real-time market 

monitoring does not encompass the 

automated trade surveillance 

requirement in § 37.203(d). The 

Commission notes that while real-time 

market monitoring and trade practice 

surveillance are both self-regulatory 

functions assigned to all SEFs, these 

functions are generally independent and 

serve different purposes. As discussed 

in the SEF NPRM, market monitoring is 

conducted on a real-time basis so that a 

SEF can take mitigating action against 

any market or system anomalies on its 

trading system or platform.483 Trade 

practice surveillance, on the other hand, 

involves reconstructing and analyzing 

order, trade, and other data postexecution to identify potential 

violations and anomalies found in trade 

data.484 Further, as noted in the SEF 

NPRM, the automated trade surveillance 

system typically differs from the system 

used to conduct real-time market 

monitoring.485

The Commission disagrees with 

SIFMA AMG’s comment that a SEF 

should not be able to modify or cancel 

a swap transaction under any 

circumstances without the express 

consent of the counterparties. The 

Commission believes that a SEF should 

have the authority to modify or cancel 

a swap transaction without the consent 

of the counterparties under certain 

limited circumstances. For example, a 

SEF should be able to cancel a trade 

when such trade was executed due to a 

technological error on the part of the 

SEF. Further, the Commission believes 

that the rule’s requirement that any 

modifications or cancellations by the 

SEF be transparent to the market and 

subject to standards that are clear, fair, 

and publicly available will provide 

protection to counterparties. The 

Commission also acknowledges the 

validity of SIFMA AMG’s concern that 

any adjustment to a swap transaction 

should also be reflected by entities 

involved in the clearing and processing 

of the swap. However, since imposing 

such a requirement on entities involved 

in the clearing and processing of swaps 

is outside the scope of this SEF 

rulemaking, the Commission declines to 

address this issue in these final rules. 

The Commission also rejects ISDA/ 

SIFMA’s recommendation to define the 

term ‘‘market disrupting events,’’ as it 

does not believe that a rule definition 

could reasonably capture the universe of 

potentially market disrupting events. 

The Commission notes that industry 

definitions for terms such as ‘‘market 

disrupting events’’ generally only 

establish a process or framework for 

counterparties and other third parties to 

determine whether such an event has 

occurred and can be subject to 

challenge, resulting in delayed 

determinations with limited utility for 

effective trade monitoring. Although the 

Commission believes that coordination 

among SEFs regarding market 

disrupting events may be appropriate, 

and encourages SEFs to do so, the 

Commission is not defining ‘‘market 

disrupting events’’ at this time. The 

Commission may provide examples at a 

later time once it gains further 

knowledge regarding the types of market 

disrupting events that are likely to occur 

on a SEF. 

In response to the comment by Better 

Markets about high-frequency trading, 

the Commission declines to modify 

proposed § 37.203(e) to include 

concepts related specifically to highfrequency trading at this time.486 The 

Commission believes that a SEF’s realtime market monitoring system should 

be structured to conduct effective 

market monitoring for all order and 

trade types, including, but not limited 

to, high frequency trading. 

(6) § 37.203(f)—Investigations and 

Investigation Reports 

Proposed § 37.203(f) required a SEF to 

establish procedures for conducting 

investigations, provided timelines for 

completing such investigations, detailed 

the requirements of an investigation 

report, and provided for warning letters. 

(i) § 37.203(f)(1)—Procedures 

Proposed § 37.203(f)(1) required a SEF 

to have procedures that require its 

compliance staff to conduct 

investigations of possible rule 

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33514 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

487CME Comment Letter at 21 (Feb. 22, 2011). 

488 Id. 

489 Id. 

490MarketAxess Comment Letter at 35 (Mar. 8, 

2011). 

491 Id. at 35–36. 

492CME Comment Letter at 21 (Feb. 22, 2011). 

493 Id. at 21–22. 

494 ICE Comment Letter at 7 (Mar. 8, 2011); CME 

Comment Letter at 22, 35 (Feb. 22, 2011). 495CME Comment Letter at 35 (Feb. 22, 2011). 496 ICE Comment Letter at 7 (Mar. 8, 2011). 

497CME Comment Letter at 22 (Feb. 22, 2011). 

498 Id. 

499MarketAxess Comment Letter at 36 (Mar. 8, 

2011). 

violations. The proposed rule required 

that an investigation be commenced 

upon the Commission staff’s request or 

upon discovery of information by the 

SEF indicating a possible basis for 

finding that a violation has occurred or 

will occur. 

(A) Summary of Comments 

CME argued that the proposed rule 

diminishes a SEF’s discretion to 

determine the matters that warrant a 

formal investigation because at the time 

of discovery or upon receipt of 

information, and before any review has 

occurred, there will always be ‘‘a 

possible basis’’ that a violation has 

occurred or will occur.487 CME agreed 

that formal written referrals from the 

Commission, law enforcement 

authorities, other regulatory agencies, or 

other SROs should result in a formal 

investigation in every instance.488

However, CME contended that a SEF 

should have reasonable discretion to 

determine how it responds to 

complaints, leads, and other types of 

referrals, including the discretion to 

follow-up with a less formal inquiry in 

certain situations.489

MarketAxess expressed concern that 

the proposed rule is not clear as to 

whether a SEF can contract its 

investigations to its regulatory service 

provider.490 MarketAxess recommended 

that the Commission modify the 

proposed rule by replacing ‘‘compliance 

staff’’ with ‘‘swap execution facility’’ to 

clarify that a regulatory service provider 

that is responsible for a SEF’s rule 

enforcement program can conduct 

investigations on behalf of the SEF.491

(B) Commission Determination 

The Commission is adopting 

§ 37.203(f)(1) as proposed, subject to 

certain modifications described below. 

The Commission confirms that in 

certain circumstances a SEF should 

have reasonable discretion regarding 

whether or not to open an investigation, 

as noted by CME. Accordingly, the 

Commission is amending proposed 

§ 37.203(f)(1) to provide that an 

investigation must be commenced by 

the SEF upon the receipt of a request 

from Commission staff or upon the 

discovery or receipt of information that 

indicates a ‘‘reasonable basis’’ for 

finding that a violation may have 

occurred or will occur. 

In response to MarketAxess’s 

comment that the proposed rule is 

unclear, the Commission confirms that 

a SEF may contract with a regulatory 

service provider, as provided for under 

§ 37.204, whose staff may perform the 

functions assigned to a SEF’s 

compliance staff under this rule. In this 

regard, the Commission also notes that 

the SEF must maintain sufficient 

internal compliance staff to oversee the 

quality and effectiveness of the 

regulatory services provided on its 

behalf, and to make certain regulatory 

decisions, as required by § 37.204. 

(ii) § 37.203(f)(2)—Timeliness 

Under proposed § 37.203(f)(2), the 

Commission required that investigations 

be completed in a timely manner, 

defined as 12 months after an 

investigation is opened, absent 

enumerated mitigating circumstances. 

(A) Summary of Comments 

CME generally supported the 

proposed rule, but recommended that 

the list of possible mitigating 

circumstances also include the domicile 

of the subjects and cooperative 

enforcement matters since the SEF may 

not have independent control over the 

pace of the investigation.492 CME also 

requested that the Commission clarify 

that the twelve month period for 

completing an investigation referenced 

in proposed § 37.203(f)(2) is separate 

from the time period necessary to 

prosecute an investigation.493

(B) Commission Determination 

The Commission is adopting 

§ 37.203(f)(2) as proposed. The 

Commission believes that a 12-month 

period to complete an investigation is 

appropriate and timely. Although the 

Commission agrees with CME that 

additional mitigating factors could 

justifiably contribute to a delay in 

completing an investigation within a 12- 

month period, the Commission notes 

that the factors included in the 

proposed rule were not intended to be 

an exhaustive list of mitigating 

circumstances. In the Commission’s 

view, the factors listed in the proposed 

rule represent some of the more 

common examples that could delay 

completion of an investigation within 

the 12-month period. The Commission 

also confirms that § 37.203(f)(2) only 

applies to the investigation phase of a 

matter, and is separate from the time 

period necessary to prosecute an 

investigation. 

(iii) § 37.203(f)(3)—Investigation Reports 

When a Reasonable Basis Exists for 

Finding a Violation 

Proposed § 37.203(f)(3) required a 

SEF’s compliance staff to submit an 

investigation report for disciplinary 

action any time staff determined that a 

reasonable basis existed for finding a 

rule violation. The proposed rule also 

enumerated the items that must be 

included in the investigation report, 

including the market participant’s 

disciplinary history. 

(A) Summary of Comments 

CME and ICE commented on the 

requirement that a respondent’s 

disciplinary history be included in the 

investigation report that is submitted to 

a Review Panel.494 CME asserted that a 

respondent’s disciplinary history would 

only be relevant if a prior offense is an 

element of proof for the potential rule 

violation under review.495 ICE 

commented that only substantive 

violations in the respondent’s history 

would be relevant to the Review Panel’s 

deliberations.496

CME commented that rule violations 

can range from very minor to egregious 

and not every rule violation merits 

formal disciplinary action.497 CME 

argued that warning letters are sufficient 

to address minor rule violations, rather 

than the issuance of a formal 

investigatory report.498

MarketAxess stated that the proposed 

rule does not specify to whom the 

investigation reports must be submitted, 

and recommended that the reports be 

submitted to the SEF’s Chief 

Compliance Officer, consistent with 

Core Principle 15.499

(B) Commission Determination 

The Commission is adopting 

§ 37.203(f)(3) as proposed, subject to one 

modification. The Commission agrees 

with CME and ICE that a respondent’s 

disciplinary history is not always 

relevant to the determination of whether 

the respondent has committed a further 

violation of a SEF’s rules. Accordingly, 

the Commission is removing this 

requirement from the final rule. The 

Commission notes, however, that all 

disciplinary sanctions, including 

sanctions imposed pursuant to an 

accepted settlement offer, must take into 

account the respondent’s disciplinary 

history. 

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500The Commission notes that a SEF’s issuance 

of a warning letter for the violation of a SEF rule 

neither precludes the Commission from taking an 

enforcement action against the recipient of the 

warning letter based upon the same underlying 

conduct, nor does it provide a defense against any 

such Commission enforcement action. 

501CME Comment Letter at 21 (Feb. 22, 2011). 

502 Id. 

503Similar to § 37.203(f)(3), the Commission notes 

that a SEF’s compliance staff should submit all 

completed investigation reports to the member or 

members of the SEF’s compliance department 

responsible for reviewing such reports and 

determining the next steps to take. 

504 ICE Comment Letter at 7 (Mar. 8, 2011); CME 

Comment Letter at 22 (Feb. 22, 2011). 

505CME Comment Letter at 22 (Feb. 22, 2011). 

506 Id. 

507 ICE Comment Letter at 7 (Mar. 8, 2011). 

508MarketAxess Comment Letter at 36 (Mar. 8, 

2011). 

509For purposes of this rule, the Commission 

does not consider a ‘‘reminder letter’’ or such other 

similar letter to be any different than a warning 

letter. 

510Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1224. 

511 Id. 

The Commission confirms, as 

recommended by CME, that ‘‘minor 

transgressions’’ can be addressed by a 

SEF’s compliance staff with the 

issuance of warning letters as discussed 

below in § 37.203(f)(5). However, as 

further discussed below in 

§ 37.203(f)(5), no more than one warning 

letter may be issued to the same person 

or entity found to have committed the 

same rule violation more than once 

within a rolling 12-month period.500

Finally, the Commission clarifies that 

a SEF’s compliance staff should submit 

all completed investigation reports to 

the member or members of the SEF’s 

compliance department responsible for 

reviewing such reports and determining 

the next steps in the process, such as 

whether to refer the matter to the SEF’s 

disciplinary panel or authorized 

compliance staff under § 37.206(c). 

(iv) § 37.203(f)(4)—Investigation Reports 

When No Reasonable Basis Exists for 

Finding a Violation 

Proposed § 37.203(f)(4) required 

compliance staff to prepare an 

investigation report upon concluding an 

investigation and determining that no 

reasonable basis exists for finding a rule 

violation. If the investigation report 

recommended that a disciplinary panel 

should issue a warning letter, then the 

investigation report must also include a 

copy of the warning letter and the 

market participant’s disciplinary 

history, including copies of warning 

letters. 

(A) Summary of Comments 

CME noted that its Market Regulation 

Department currently has the authority 

to administratively close a case and 

issue a warning letter without 

disciplinary committee approval.501

Accordingly, CME recommended that 

the Commission amend the proposed 

rule to reflect that a SEF will also have 

such authority.502

(B) Commission Determination 

The Commission is adopting 

§ 37.203(f)(4) as proposed, subject to one 

modification.503 The Commission is 

eliminating the provision that discussed 

the concept of warning letters because 

the Commission does not believe that a 

SEF would need to limit the number of 

warning letters that can be issued when 

a rule violation has not been found. The 

Commission notes, however, that this 

modification does not impact the 

limitation on the number of warning 

letters that may be issued by a 

disciplinary panel or by compliance 

staff to the same person or entity for the 

same violation committed more than 

once in a rolling 12-month period when 

a rule violation has been found. The 

Commission clarifies, in response to 

CME’s comment, that a SEF may 

authorize its compliance staff to close a 

case administratively and issue a 

warning letter without disciplinary 

panel approval when a reasonable basis 

does not exist for finding a rule 

violation. 

(v) § 37.203(f)(5)—Warning Letters 

Proposed § 37.203(f)(5) provided that 

a SEF may authorize its compliance staff 

to issue a warning letter or to 

recommend that a disciplinary 

committee issue a warning letter. The 

proposed rule also prohibited a SEF 

from issuing more than one warning 

letter to the same person or entity for 

the same potential violation during a 

rolling 12-month period. 

(A) Summary of Comments 

Some commenters opposed the 

proposed limitation on the number of 

warning letters issued during a rolling 

12-month period.504 CME contended 

that the rule does not consider 

important factors that are relevant to a 

SEF when evaluating potential 

sanctions in a disciplinary matter.505

CME believed that the SEF should have 

discretion to determine the appropriate 

actions in all cases based on the 

‘‘totality of the circumstances.’’ 506 ICE 

stated that this limitation would 

discourage self-reporting of violations 

because of the lack of discretion in a 

resulting penalty assessment.507

MarketAxess requested that the 

Commission adopt a more uniform 

approach with respect to warning 

letters, permitting them to be issued as 

a sanction or an indication of a finding 

of a violation in all SEF contexts.508

(B) Commission Determination 

The Commission is adopting 

proposed § 37.203(f)(5), subject to 

certain modifications, including 

converting a portion of the rule to 

guidance in appendix B to part 37. 

The Commission is maintaining in the 

final rule the limitation on the number 

of warning letters issued. The 

Commission acknowledges the 

comments from CME and ICE 

concerning the issuance of warning 

letters, but believes that to ensure that 

warning letters serve as effective 

deterrents and to preserve the value of 

disciplinary sanctions, no more than 

one warning letter may be issued to the 

same person or entity found to have 

committed the same rule violation more 

than once within a rolling 12-month 

period.509 As discussed in the SEF 

NPRM, while a warning letter may be 

appropriate for a first-time violation, the 

Commission does not believe that more 

than one warning letter in a rolling 12- 

month period for the same violation is 

ever appropriate.510 Further, a policy of 

issuing repeated warning letters, rather 

than issuing meaningful sanctions, to 

market participants who repeatedly 

violate the same rules reduces the 

effectiveness of a SEF’s rule 

enforcement program.511

However, in response to commenters’ 

concerns, the Commission is narrowing 

the application of this rule to warning 

letters that contain an affirmative 

finding that a rule violation has 

occurred. Therefore, the Commission is 

removing the provision in the proposed 

rule that a warning letter issued in 

accordance with this section is not a 

penalty or an indication that a finding 

of a violation has been made. To remain 

consistent with the modifications to 

proposed § 37.203(f)(3) and (f)(4), the 

Commission is also deleting the 

proposed requirement that investigation 

reports required by paragraphs (f)(3) and 

(f)(4) of this section must include a copy 

of the warning letter issued by 

compliance staff. 

As noted above, the Commission 

agrees with CME’s comment that minor 

transgressions can be addressed by a 

SEF’s compliance staff issuing a 

warning letter. Accordingly, in order to 

provide a SEF with flexibility in this 

regard, the Commission is moving this 

provision of the rule to the guidance in 

appendix B to part 37. The text of the 

guidance provides that the rules of a 

SEF may authorize its compliance staff 

to issue a warning letter to a person or 

entity under investigation or to 

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512The Commission is renaming the title of this 

section from ‘‘Use of Third-Party Provider 

Permitted’’ to ‘‘Use of Regulatory Service Provider 

Permitted’’ to provide greater clarity. 

513MarketAxess Comment Letter at 14–15 (Mar. 

8, 2011); Reuters Comment Letter at 5 (Mar. 8, 

2011); Bloomberg Comment Letter at 4–5 (Mar. 8, 

2011); NFA Comment Letter at 1 (Mar. 8, 2011). 

514MarketAxess Comment Letter at 15 (Mar. 8, 

2011). 

515 Id. 

516Parity Energy Comment Letter at 5 (Mar. 25, 

2011); WMBAA Comment Letter at 22 (Mar. 8, 

2011); FXall Comment Letter at 12 (Mar. 8, 2011). 

517WMBAA Comment Letter at 22 (Mar. 8, 2011). 

518MarketAxess Comment Letter at 15 (Mar. 8, 

2011); Tradeweb Comment Letter at 10 (Mar. 8, 

2011). 

519Tradeweb Comment Letter at 10 (Mar. 8, 

2011). 

520See, e.g., discussion under § 37.203(d)— 

Automated Trade Surveillance System and Core 

Principle 6—Position Limits or Accountability in 

the preamble. 

521The Commission notes that other core 

principles, such as Core Principle 4, and the 

Commission’s regulations thereunder may require 

SEFs to conduct certain cross-market monitoring. 

522The Commission is renaming the title of this 

section from ‘‘Duty to Supervise Third Party’’ to 

‘‘Duty to Supervise Regulatory Service Provider’’ to 

provide greater clarity. 

recommend that a disciplinary panel 

take such action. 

(7) § 37.203(g)—Additional Rules 

Required 

Proposed § 37.203(g) required a SEF 

to adopt and enforce any additional 

rules that it believes are necessary to 

comply with the requirements of 

§ 37.203. 

(i) Commission Determination 

The Commission did not receive any 

comments on proposed § 37.203(g); 

however, the Commission is moving 

this rule to the guidance in appendix B 

to part 37. The Commission believes 

that this requirement is already implicit 

in Core Principle 2 and need not be 

addressed separately as a final rule. 

Additionally, moving proposed 

§ 37.203(g) to guidance provides SEFs 

with added flexibility in adopting 

additional rules that it believes are 

necessary to comply with the rules 

related to Core Principle 2. Consistent 

with this determination, the 

Commission is replacing proposed 

§ 37.203(g) with final § 37.203(g) (titled 

‘‘Additional sources for compliance’’) 

that simply permits SEFs to rely upon 

the guidance in appendix B to part 37 

to demonstrate to the Commission 

compliance with § 37.203. 

(e) § 37.204—Regulatory Services 

Provided by a Third Party 

(1) § 37.204(a)—Use of Third-Party 

Provider Permitted 512

Proposed § 37.204(a) allowed a SEF to 

contract with a registered futures 

association or another registered entity 

to assist in complying with the SEF core 

principles, as approved by the 

Commission. The proposed rule also 

stated that a SEF that elects to use the 

services of a regulatory service provider 

must ensure that such provider has the 

capacity and resources to provide timely 

and effective regulatory services. The 

proposed rule further stated that a SEF 

will at all times remain responsible for 

the performance of any regulatory 

services received, for compliance with 

the SEF’s obligations under the Act and 

Commission regulations, and for the 

regulatory service provider’s 

performance on its behalf. 

(i) Summary of Comments 

Commenters generally supported the 

Commission’s proposal to allow third 

parties to provide regulatory services.513

However, MarketAxess argued that the 

Commission should permit an entity 

that is not a registered futures 

association or another registered entity 

with the Commission to perform 

regulatory services on behalf of a SEF, 

such as the Financial Industry 

Regulatory Authority (‘‘FINRA’’).514 In 

the alternative, MarketAxess 

recommended that the Commission 

should permit SEFs, if desired, to form 

a joint venture to create a special 

regulatory service provider for SEFs that 

would not be a registered entity.515

Similarly, several commenters 

supported a centralized, common 

regulatory organization (‘‘CRO’’) that 

would facilitate compliance with SEF 

core principles.516 In this regard, 

WMBAA stated that a CRO would 

establish a uniform SEF standard of 

conduct, streamline the Commission’s 

evaluation of each SEF registration 

application, and conduct effective 

surveillance of fungible swap products 

trading on multiple SEFs.517

MarketAxess and Tradeweb requested 

clarification on how the Commission 

will assess and approve regulatory 

service providers.518 In this regard, 

Tradeweb commented that SEFs should 

have flexibility in contracting with third 

party service providers, so long as the 

SEF uses reasonable diligence and acts 

in a manner consistent with market 

practice.519

(ii) Commission Determination 

The Commission is adopting 

§ 37.204(a) as proposed, subject to two 

modifications. In response to 

MarketAxess’s comment about nonregistered entities performing regulatory 

services, the Commission is revising the 

proposed rule to allow FINRA to assist 

SEFs in complying with the core 

principles. The Commission notes that 

FINRA has provided similar regulatory 

services for the securities industry for 

many years and may serve as a selfregulatory organization for SB–SEFs. 

Therefore, the Commission believes that 

allowing FINRA to serve as a regulatory 

service provider for SEFs is appropriate 

because FINRA is likely to have the 

qualifications, capacity, and resources 

to provide timely and effective 

regulatory services for SEFs. 

The Commission recognizes the 

concerns that WMBAA and others have 

with respect to SEFs conducting marketwide surveillance activities. As 

discussed elsewhere in this final 

rulemaking,520 an individual SEF may 

have limited ability to monitor trading 

activities across markets since 

individual swaps may be listed on 

multiple SEFs (as well as any DCMs 

listing swaps). The Commission clarifies 

that a SEF (or a regulatory service 

provider on a SEF’s behalf), under Core 

Principle 2 and the Commission’s 

regulations thereunder, is only 

responsible for surveillance and rule 

enforcement of the SEF’s systems and 

platforms, and Core Principle 2 does not 

impose a cross-market surveillance 

requirement on a SEF.521 Therefore, the 

final rules do not require the use of a 

single industry-wide CRO to assist SEFs 

with cross-market surveillance. While 

not requiring it, the final rules also do 

not prohibit the use of a single industrywide CRO. 

In response to MarketAxess’s and 

Tradeweb’s comments regarding the 

Commission’s assessment and approval 

of regulatory service providers, the 

Commission notes that it will assess and 

approve the use of such service 

providers during the full registration 

process. The Commission also notes that 

Exhibit N to Form SEF requests 

executed or executable copies of any 

agreements with regulatory service 

providers. 

Finally, the Commission is modifying 

§ 37.204(a) to make clear that a SEF may 

use the services of a regulatory service 

provider for the provision of services to 

assist the SEF in complying with ‘‘the 

Act and Commission regulations 

thereunder’’ rather than simply the SEF 

core principles as stated in proposed 

§ 37.204(a). The modification aligns the 

rule text with what the Commission has 

always intended to be the range of a 

SEF’s self-regulatory obligations. 

(2) § 37.204(b)—Duty To Supervise 

Third Party 522

Proposed § 37.204(b) required that a 

SEF maintain sufficient compliance staff 

to supervise any services performed by 

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523NFA Comment Letter at 2 (Mar. 8, 2011); CME 

Comment Letter at 18–19 (Feb. 22, 2011). 

524NFA Comment Letter at 2 (Mar. 8, 2011). 

525CME Comment Letter at 19 (Feb. 22, 2011). 

526 Id. at 18–19. 

527 Id. at 19. 

528The Commission is making certain nonsubstantive clarifications to § 37.204(b). 

529CME Comment Letter at 19 (Feb. 22, 2011). 

530 Id. 

531CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b– 

3(f)(2)(B)(ii). 

532WMBAA Comment Letter at 22–23 (Mar. 8, 

2011). 

a regulatory service provider. The 

proposed rule also required that the SEF 

hold regular meetings with its 

regulatory service provider to discuss 

current work and other matters of 

regulatory concern, as well as conduct 

periodic reviews of the adequacy and 

effectiveness of services provided on its 

behalf. In addition, proposed § 37.204(b) 

required a SEF to carefully document 

the reviews and make them available to 

the Commission upon request. 

(i) Summary of Comments 

Two commenters recommended that 

the Commission adopt a more flexible 

rule with respect to a SEF’s duty to 

supervise its regulatory service 

provider.523 In this regard, NFA 

recommended that the Commission 

provide flexibility to a SEF and its 

regulatory service provider to mutually 

determine the necessary process for a 

SEF to supervise its regulatory service 

provider.524 CME recommended that the 

Commission move the rule to guidance 

or acceptable practices.525 In particular, 

CME pointed to the requirements that a 

SEF conduct periodic reviews of the 

services provided and hold regular 

meetings with the regulatory service 

provider to discuss ongoing 

investigations, trading patterns, market 

participants, and any other matters of 

regulatory concern.526 CME stated that 

‘‘[w]hile it may well be that it is 

constructive for the [SEF] to hold 

regular meetings with its service 

provider and ‘discuss market 

participants,’ the core principle should 

stand on its own and the [SEF] should 

have the flexibility to determine how 

best to demonstrate compliance with the 

core principle.’’ 527

(ii) Commission Determination 

The Commission is adopting 

§ 37.204(b) as proposed.528 The 

Commission acknowledges the 

commenters’ desire for a flexible 

approach, but notes that a SEF that 

elects to use a regulatory service 

provider remains responsible for the 

regulatory services received and for 

compliance with the Act and 

Commission regulations. The SEF 

therefore must properly supervise the 

quality and effectiveness of the 

regulatory services provided on its 

behalf. The Commission believes that 

proper supervision will require that a 

SEF have complete and timely 

knowledge of relevant work performed 

by the SEF’s regulatory service provider 

on its behalf. The Commission also 

believes that this knowledge can only be 

acquired through periodic reviews and 

regular meetings required under 

§ 37.204(b). 

(3) § 37.204(c)—Regulatory Decisions 

Required From the SEF 

Proposed § 37.204(c) required a SEF 

that utilizes a regulatory service 

provider to retain exclusive authority 

over all substantive decisions made by 

its regulatory service provider, 

including the cancellation of trades, 

issuance of disciplinary charges, denials 

of access to the trading platform for 

disciplinary reasons, and any decision 

to open an investigation into a possible 

rule violation. Further, the proposed 

rule required a SEF to document any 

instance where its actions differed from 

those recommended by its regulatory 

service provider. 

(i) Summary of Comments 

CME objected to the idea that all 

decisions concerning the cancellation of 

trades remain in the exclusive authority 

of the SEF.529 CME contended that a 

SEF may be better served by granting 

such authority to a regulatory service 

provider because such decisions require 

prompt decision-making.530

(ii) Commission Determination 

The Commission is adopting 

§ 37.204(c) as proposed, subject to two 

modifications. First, the Commission is 

removing the requirement that a 

decision to open an investigation reside 

exclusively with the SEF. The final rule 

grants a SEF the latitude to determine 

whether investigations will be opened 

by the SEF, by its regulatory service 

provider, or some combination of the 

two. The Commission believes that 

opening investigations is an 

administrative task and does not 

necessarily imply the threat of formal 

disciplinary action or sanctions against 

a market participant. Second, the 

Commission is amending the rule to 

clarify that when a SEF documents 

instances when its actions differ from 

those recommended by its regulatory 

service provider, the SEF must include 

the reasons for the course of action 

recommended by the regulatory service 

provider and the reasons why the SEF 

chose a different course of action. 

The Commission disagrees with 

CME’s comment concerning the 

‘‘cancellation of trades’’ and believes 

that a SEF must retain exclusive 

authority in this regard. Cancelling 

trades is an important exercise of a 

SEF’s authority over its markets and 

market participants. Cancelled trades 

may have meaningful economic 

consequences to the swap 

counterparties involved in the 

transaction, and may be the subject of 

contention between the counterparties if 

they do not both agree to the 

cancellation. The Commission 

emphasizes that permanent, 

consequential decisions must remain 

with the SEF. 

(f) § 37.205—Audit Trail 

Proposed § 37.205 implements Core 

Principle 2’s requirement that SEFs 

capture information that may be used in 

establishing whether rule violations 

have occurred.531 Accordingly, 

proposed § 37.205 required a SEF to 

establish procedures to capture and 

retain information that may be used in 

establishing whether rule violations 

have occurred. The proposed rule, along 

with its subparts, established the 

requirements of an acceptable audit trail 

program and the enforcement of such 

program. 

(1) § 37.205(a)—Audit Trail Required 

Proposed § 37.205(a) required a SEF 

to capture and retain all audit trail data 

so that the SEF has the ability to detect, 

investigate, and prevent customer and 

market abuses. The proposed rule also 

provided that the audit trail data must 

be sufficient to reconstruct all 

transactions within a reasonable period 

of time and to provide evidence of any 

rule violations that may have occurred. 

Proposed § 37.205(a) further provided 

that the audit trail must permit the SEF 

to track a customer order from the time 

of receipt through fill, allocation, or 

other disposition, and must include 

both order and trade data. 

(i) Summary of Comments 

WMBAA requested that the 

Commission establish a common format 

for audit trail data to ensure consistency 

among all SEFs and to make the 

information easier for the Commission 

to use and review when investigating 

customer and market abuses.532

(ii) Commission Determination 

The Commission is adopting 

§ 37.205(a) as proposed, subject to the 

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33518 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

533The Commission is making certain nonsubstantive clarifications to § 37.205(a). 

534CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b– 

3(f)(2)(B)(ii). 535WMBAA Comment Letter at 23 (Mar. 8, 2011). 

536 Id. 

537Better Markets Comment Letter at 18 (Mar. 8, 

2011). 

538CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b– 

3(f)(2)(B)(ii). 

modifications described below.533 The 

Commission believes that the 

requirement that SEFs capture and 

retain all audit trial data is essential to 

ensuring that SEFs can capture 

information to establish whether rule 

violations have occurred, as required by 

Core Principle 2.534 Additionally, the 

creation and retention of a 

comprehensive audit trail will enable 

SEFs to properly reconstruct any and all 

market and trading events and to 

conduct a thorough forensic review of 

all market information. The Commission 

believes that the ability to reconstruct 

markets in such a manner is a 

fundamental element of a SEF’s 

surveillance and rule enforcement 

programs. Consistent with these 

principles, the Commission is 

modifying § 37.205(a) to clarify that the 

audit trail data must be sufficient to 

reconstruct trades and sufficient to 

reconstruct indications of interest, 

requests for quotes, and orders within a 

reasonable period of time. 

Both the proposed and final rules in 

§ 37.205(a) require that a SEF ‘‘capture 

and retain all audit trail data necessary 

to detect, investigate, and prevent 

customer and market abuses’’ (emphasis 

added). The Commission notes that 

information required to detect abuses 

may in some cases include all 

communications between market 

participants and a SEF’s trading system 

or platform. The Commission also notes 

that a SEF’s obligation to capture in its 

audit trail all data necessary to detect, 

investigate, and prevent customer and 

market abuses is not altered by the 

nature of the trading system or platform 

that a SEF may choose to utilize, 

including a system or platform that, for 

example, utilizes the telephone. For 

example, an acceptable audit trail for a 

SEF with a telephone component 

should include communications 

between the SEF’s employees and their 

customers, as well as any 

communications between employees as 

they work customer indications of 

interest, requests for quotes, orders, and 

trades. An acceptable audit trail must 

capture the totality of communications 

(including, but not limited to, 

telephone, instant messaging, email, 

written records, and electronic 

communications within a trading 

system or platform) that could be 

necessary to detect, investigate, and 

prevent customer and market abuses, as 

required by both proposed and final 

§ 37.205(a). 

The Commission believes that 

WMBAA’s suggestion to establish a 

common format for audit trail data may 

provide some value for SEFs that wish 

to coordinate and establish such a 

standard. However, the intent of the 

final rules is to require that a SEF 

establish and maintain an effective audit 

trail program, not to dictate the method 

or form for maintaining such 

information. Importantly, the rule, by 

not being prescriptive, provides SEFs 

with flexibility to determine the manner 

and the technology necessary and 

appropriate to meet the requirements. 

The Commission notes, nevertheless, 

that staff from the Commission’s Office 

of Data and Technology will coordinate 

with SEFs to establish standards for the 

submission of audit trail data to the 

Commission. 

(2) § 37.205(b)—Elements of an 

Acceptable Audit Trail Program 

Proposed § 37.205(b)(1) required a 

SEF’s audit trail to include original 

source documents, on which trade 

execution information was originally 

recorded, as well as records for 

customer orders, whether or not they 

were filled. The proposed rule also 

required that a SEF that permits 

intermediation must require all 

executable orders or RFQs received over 

the telephone to be immediately entered 

into the trading system or platform. 

Proposed § 37.205(b)(2) required that a 

SEF’s audit trail program include a 

transaction history database and 

specified the trade information required 

to be included in the database. Proposed 

§ 37.205(b)(3) required the audit trail 

program to also have electronic analysis 

capability for the transaction history 

database. Proposed § 37.205(b)(4) 

required the audit trail program to 

include the ability to safely store all 

audit trail data and to retain it in 

accordance with the recordkeeping 

requirements of SEF Core Principle 10 

and its associated regulations. 

(i) Summary of Comments 

WMBAA commented that the 

requirement for records to be retained 

for customer orders should not apply to 

indications of interest because it would 

extend beyond the Commission’s 

statutory authority and the audit trail 

requirements currently in place in other 

financial markets, and would be 

unnecessarily costly and 

burdensome.535 WMBAA also 

commented that the audit trail 

requirements must permit the retention 

of relevant information through various 

modes because SEFs may operate trade 

execution platforms ‘‘through any 

means of interstate commerce.’’ 536

Better Markets commented that audit 

trail records, such as records of 

customers’ orders and their disposition, 

must be time-stamped at intervals that 

are consistent with the capabilities of 

high-frequency traders that use SEFs.537

(ii) Commission Determination 

The Commission is adopting 

proposed § 37.205(b), subject to the 

modifications discussed below. The 

Commission is clarifying that ‘‘time of 

trade execution’’ must be included in 

the data points of an acceptable audit 

trail, and is noting this clarification in 

final § 37.205(b)(1). The Commission is 

also revising proposed § 37.205(b)(2) to 

specify that a transaction history 

database must include a history of ‘‘all 

indications of interest, requests for 

quotes, orders, and trades entered into 

a [SEF’s] trading system or platform, 

including all order modifications and 

cancellations.’’ Further, the Commission 

is revising proposed § 37.205(b)(3) to 

specifically state that a SEF’s electronic 

analysis capability must provide it with 

the ‘‘ability to reconstruct indications of 

interest, requests for quotes, orders, and 

trades, and identify possible trading 

violations.’’ The revisions to 

§ 37.205(b)(2) and (b)(3), subject to the 

additions of the indications of interest 

and requests for quotes language, reflect 

regulatory requirements previously 

proposed as part of § 37.203(d), but, as 

noted above, the Commission is moving 

these requirements to final § 37.205(b). 

Additionally, the Commission is 

revising proposed § 37.205(b)(2) by 

replacing the customer type indicators 

listed in the proposed rule with the term 

‘‘customer type indicator code.’’ 

In response to WMBAA’s comment 

regarding indications of interest, the 

Commission believes that retaining 

information about indications of interest 

provides another important detail of an 

audit trail, just as information of filled, 

unfilled, or cancelled orders provides 

important information for the SEF. This 

information enables a SEF to fulfill its 

statutory duty under Core Principle 2, 

which requires a SEF to capture 

information that may be used in 

establishing whether rule violations 

have occurred.538 Absent this 

information, SEFs would be limited in 

their ability to monitor their markets 

and to detect, investigate, and prevent 

customer and market abuses and trading 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33519 

539See discussion above regarding Minimum 

Trading Functionality under § 37.3—Requirements 

for Registration in the preamble. 

540The Commission notes, as stated above under 

§ 37.203(d)—Automated Trade Surveillance System 

in the preamble, that the accurate time stamping of 

data is particularly important for SEFs that use an 

RFQ System, including an RFQ System with a voice 

component. For such SEFs, the accurate time 

stamping of both their Order Book and RFQ System 

activity is critical for ensuring both that the SEF 

itself has a robust audit trail system and that the 

Commission is able to monitor the SEF’s adherence 

to part 37’s Order Book-RFQ System integration 

requirements. 

rule violations. However, as discussed 

above, the Commission has removed the 

requirement for SEFs to offer indicative 

quote functionality, which should 

reduce the costs of complying with the 

audit trail requirements.539

In response to WMBAA’s comment 

about the flexibility of audit trail 

requirements to accommodate various 

methods of execution, the Commission 

notes that proposed § 37.205(b) did not 

discriminate based on the method of 

execution. Given the Commission’s 

clarification that a SEF may utilize any 

means of interstate commerce in 

providing the execution methods in 

§ 37.9(a)(2)(i)(A) or (B), the Commission 

emphasizes that no matter how an 

indication of interest, request for quote, 

or order is communicated or a trade is 

executed, an audit trail that satisfies the 

requirements set forth in § 37.205 must 

be created. 

The Commission is also making 

certain conforming changes to 

§ 37.205(b)(1) to harmonize its 

provisions with the Commission’s 

determination that a SEF may utilize 

any means of interstate commerce in 

providing the execution methods in 

§ 37.9(a)(2)(i)(A) or (B). First, the 

Commission is adding ‘‘indications of 

interest’’ to the items that must be 

immediately captured in the audit trail 

pursuant to § 37.205(b)(1). Second, 

while proposed § 37.205(b)(1) required 

that all executable orders or requests for 

quotes ‘‘be immediately entered into the 

trading system or platform,’’ 

§ 37.205(b)(1) as adopted requires that 

such information be immediately 

‘‘captured in the audit trail.’’ This 

approach more accurately reflects the 

intent of § 37.205, whose purpose is to 

ensure an adequate audit trail, rather 

than to address the operation of a SEF’s 

trading system or platform. 

Accordingly, the final rules in 

§ 37.205(b)(1) include conforming 

changes that remove the reference in 

proposed § 37.205(b)(1) to orders or 

requests for quotes ‘‘that are 

executable,’’ and also remove the 

qualification that a SEF’s obligation to 

capture information in the audit trail is 

dependent on whether the SEF permits 

intermediation. Finally, the final rules 

remove the additional audit trail 

requirement in proposed § 37.205(b)(1) 

for orders and requests for quotes that 

cannot be immediately entered into the 

trading system or platform. These 

clarifications are consistent with the 

Commission’s intention in § 37.205(a) 

that a SEF’s audit trail ‘‘capture and 

retain all audit trail data necessary to 

detect, investigate, and prevent 

customer and market abuses.’’ It is the 

Commission’s intent throughout 

§ 37.205 to ensure that all SEFs’ audit 

trails are equally comprehensive and 

effective regardless of the means of 

interstate commerce that a SEF may 

provide to meet the execution methods 

in § 37.9(a)(2)(i)(A) or (B). 

Although § 37.205 sets forth a unified 

set of audit trail requirements for all 

methods of execution, the Commission 

notes that a SEF, for example, that 

utilizes the telephone as a means of 

interstate commerce in providing the 

execution methods in § 37.9(a)(2)(i)(A) 

or (B) may comply with the audit trail 

requirements by utilizing different 

technologies than a SEF that does not 

utilize the telephone. For example, the 

Commission believes that a SEF that 

utilizes the telephone may comply with 

the audit trail requirements in 

§ 37.205(a) for oral communications by 

recording all such communications that 

relate to swap transactions, and all 

communications that may subsequently 

result in swap transactions. Such 

recordings must allow for 

reconstruction of communications 

between the SEF and its customers; 

reconstruction of internal and external 

communications involving SEF 

employees who are ascertaining or 

providing indications of interest, 

requests for quotes, or orders; 

reconstruction of executed transactions; 

provide evidence of any rule violations; 

track a customer’s order; and capture 

order and trade data as required under 

§ 37.205(a). 

The Commission also believes that a 

SEF that utilizes the telephone may 

comply with the original source 

document requirement in § 37.205(b)(1) 

for oral communications by retaining 

each recording’s original media. By 

storing the recordings in a digital 

database and supplementing it with 

additional data as necessary, the 

Commission believes that a SEF that 

utilizes the telephone may comply with 

the transaction history database 

requirement in § 37.205(b)(2) for oral 

communications. Additionally, the 

Commission believes that a SEF that 

utilizes the telephone may comply with 

the electronic analysis capability in 

§ 37.205(b)(3) for oral communications 

by ensuring that its digital database of 

recordings is capable of being searched 

and analyzed. The Commission notes, 

however, that § 37.205(b) does not 

establish an affirmative requirement to 

create recordings of oral 

communications if the audit trail 

requirements are met through other 

methods. The discussion above 

regarding the applicability of audit trail 

requirements to SEFs that utilize the 

telephone in providing the execution 

methods in § 37.9(a)(2) applies equally 

to SEFs that use non-telephonic means 

of communication (e.g., instant 

messaging or email). In all cases, the 

operative requirement is to capture in 

the audit trail and the transaction 

history database the totality of 

communications that could be necessary 

to detect, investigate, and prevent 

customer and market abuses. 

The Commission acknowledges the 

comment by Better Markets regarding 

time-stamping audit trail records at 

intervals that are consistent with the 

capabilities of high-frequency traders. 

While the audit trail rules do not specify 

the granularity of time-stamped data, 

the Commission believes that the audit 

trail rules adopted herein, particularly 

the requirements that a SEF retain and 

maintain all data necessary to permit it 

to reconstruct trading, will help to 

ensure that audit trail records are timestamped with the granularity necessary 

to reconstruct trades and investigate 

possible trading violations, including 

for high-frequency trading.540

(3) § 37.205(c)—Enforcement of Audit 

Trail Requirements 

Proposed § 37.205(c)(1) required that 

a SEF conduct reviews, at least 

annually, of its members and market 

participants to verify their compliance 

with the SEF’s audit trail and 

recordkeeping requirements. Proposed 

§ 37.205(c)(1) also set forth minimum 

review criteria. Proposed § 37.205(c)(2) 

required that a SEF develop a program 

for effective enforcement of its audit 

trail and recordkeeping requirements, 

including a requirement that a SEF levy 

meaningful sanctions when deficiencies 

are found. Proposed § 37.205(c)(2) also 

stated that sanctions may not include 

more than one warning letter for the 

same violation within a rolling twelvemonth period. 

(i) Summary of Comments 

Some commenters stated that annual 

audits are unnecessary and unduly 

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33520 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

541Tradeweb Comment Letter at 6 (Jun. 3, 2011); 

MarketAxess Comment Letter at 22 (Mar. 8, 2011); 

CME Comment Letter at 33 (Feb. 22, 2011). 

542CME Comment Letter at 33 (Feb. 22, 2011). 

543MarketAxess Comment Letter at 22 (Mar. 8, 

2011). 

544Tradeweb Comment Letter at 6 (Jun. 3, 2011). 

545See, e.g., discussion above under 

§ 37.203(f)(5)—Warning Letters in the preamble. 

546Core Principles and Other Requirements for 

Designated Contract Markets, 77 FR at 36704. 

547CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). 

548MarketAxess Comment Letter at 23 (Mar. 8, 

2011); ABC/CIEBA Comment Letter at 11 (Mar. 8, 

2011); FXall Comment Letter at 12 (Mar. 8, 2011); 

ICAP Comment Letter at 5–6 (Mar. 8, 2011); State 

Street Comment Letter at 5 (Mar. 8, 2011). 

549FXall Comment Letter at 12 (Mar. 8, 2011). 550MarketAxess Comment Letter at 23 (Mar. 8, 

2011), WMBAA Comment Letter at 24 (Mar. 8, 

2011); FXall Comment Letter at 12 (Mar. 8, 2011). 551FXall Comment Letter at 12 (Mar. 8, 2011); 

ICAP Comment Letter at 6 (Mar. 8, 2011); Reuters 

Comment Letter at 4 (Mar. 8, 2011); WMBAA 

Comment Letter at 23 (Mar. 8, 2011); State Street 

Comment Letter at 5 (Mar. 8, 2011). 552Tradeweb Comment Letter at 10 (Mar. 8, 

2011). Parity Energy also commented that the 

proposed disciplinary rules will impose 

unnecessary costs and create unnecessary 

duplication and the possibility of conflicting rules. 

Parity Energy Comment Letter at 4 (Mar. 25, 2011). 

553CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B). 

554The Commission is also revising § 37.206 to 

include the term ‘‘member’’ in addition to the term 

‘‘market participant’’ in order to provide greater 

detail and clarity. The Commission notes, as 

described above in § 37.200, that the term ‘‘market 

participant’’ encompasses SEF ‘‘members.’’ 

burdensome.541 CME commented that 

annual audits of all SEF market 

participants would be costly and 

unproductive, and should instead apply 

at the clearing firm level.542

MarketAxess recommended that the 

Commission require a single entity or 

self-regulatory organization, such as 

FINRA or NFA, to conduct the audit of 

each SEF market participant.543

Tradeweb commented that the proposed 

annual audit review requirement is not 

required of DCMs and, as such, should 

not be required of SEFs.544

(ii) Commission Determination 

The Commission is adopting 

§ 37.205(c) as proposed, subject to 

certain modifications as discussed 

below. The Commission disagrees with 

commenters who assert that the annual 

audit review requirement is 

unnecessary, unduly burdensome, 

costly, and unproductive. Through its 

experience with DCMs and DCOs, the 

Commission has learned that samplingbased reviews of audit trail and 

recordkeeping requirements are 

inadequate to ensure compliance with 

audit trail rules. The Commission 

believes that the requirements under 

§ 37.205(c) are necessary to ensure that 

SEFs have accurate and consistent 

access to all data needed to reconstruct 

all transactions in their markets and to 

provide evidence of customer and 

market abuses. Absent reliable audit 

trail data, a SEF’s ability to detect or 

investigate customer or market abuses 

may be severely diminished. 

However, in response to commenters’ 

concerns that the rule is burdensome, 

the Commission is narrowing the scope 

of the proposed rule by removing the 

reference to ‘‘market participants’’ and 

instead stating that the annual audit 

review requirement only applies to 

members and those persons and firms 

that are subject to the SEF’s 

recordkeeping rules. As a result of this 

revision, the Commission declines to 

adopt CME’s recommendation to require 

annual audit trail reviews only at the 

clearing firm level. 

The Commission is maintaining 

proposed § 37.205(c)(2) as a rule to 

ensure that SEFs impose meaningful 

sanctions for violations of audit trail 

and recordkeeping rules. However, the 

Commission is revising the rule to 

clarify that the limit on warning letters 

only applies where a SEF’s compliance 

staff finds an actual rule violation, 

rather than just the suspicion of a 

violation. This change is consistent with 

the revisions in other sections 

discussing warning letters.545

In response to MarketAxess’s 

recommendation that a single entity 

conduct the audit of each SEF market 

participant, the Commission believes 

that a SEF can monitor market 

participants on its own platform 

without relying upon a single crossmarket self-regulatory organization. 

However, a SEF may use a regulatory 

service provider pursuant to § 37.204 to 

assist it in complying with the 

requirements under § 37.205(c). 

In response to Tradeweb’s comment 

that the annual audit review 

requirement is not required of DCMs, 

the Commission notes that it adopted a 

similar requirement for DCMs under 

§ 38.553 of the Commission’s 

regulations, to apply to all members and 

persons and firms subject to the DCM’s 

recordkeeping rules.546 The 

Commission believes that similar 

requirements are appropriate because, 

as noted above, SEFs, like DCMs, must 

have accurate and consistent access to 

all data needed to reconstruct all 

transactions in their markets, including 

indications of interest, requests for 

quotes, orders, and trades, and to detect, 

investigate, and prevent customer and 

market abuses. 

(g) § 37.206—Disciplinary Procedures 

and Sanctions 

(1) § 37.206—Disciplinary Procedures 

and Sanctions 

Proposed § 37.206 addressed SEF 

Core Principle 2’s requirement that SEFs 

establish and enforce trading, trade 

processing, and participation rules to 

deter abuse, and have the capacity to 

investigate and enforce such abuses.547

Proposed § 37.206 provided that SEFs 

must establish trading, trade processing, 

and participation rules that will deter 

abuses and have the capacity to enforce 

such rules through prompt and effective 

disciplinary action. 

(i) Summary of Comments 

Some commenters generally stated 

that the proposed disciplinary 

procedures go beyond the statute and 

intent of Congress.548 In this regard, 

FXall stated that, unlike DCMs, retail 

customers will not be participants on 

SEFs; therefore, the same level of 

protection afforded to DCM participants 

is not required for SEFs.549 Some 

commenters recommended that the 

proposed disciplinary procedures 

should be streamlined through the use 

of a staff summary fine program.550

Some commenters also requested that 

SEFs be granted greater flexibility to 

establish their own disciplinary 

procedures.551 Tradeweb stated that the 

proposed disciplinary procedures 

would impose significant costs on SEFs 

and should be contracted to a central, 

third-party self-regulatory 

organization.552

(ii) Commission Determination 

The Commission’s evaluation of 

public comments with respect to 

proposed § 37.206 is based on its 

understanding that a SEF’s obligation to 

establish adequate disciplinary rules is 

implicit in the statutory language of 

Core Principle 2, which requires, in 

part, that a SEF establish and enforce 

trading, trade processing, and 

participation rules to deter abuse and 

have the capacity to investigate and 

enforce such rules.553 The Commission 

also takes note of public comments 

requesting greater flexibility in the 

application of SEF disciplinary rules. 

Accordingly, consistent with both its 

statutory mandate and its evaluation of 

the public comments received, the 

Commission is adopting elements of 

§ 37.206 as proposed, while also moving 

to guidance or eliminating other parts of 

the proposed rules.554

The Commission believes that the 

specific disciplinary rules retained in 

the final rules are those that are 

essential to the promotion of market 

integrity by ensuring that SEF markets 

are free of fraud or abuse, and also 

helping to provide basic procedural 

fairness for SEF disciplinary 

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555Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1225 n. 73. 

556The Commission also believes that guidance is 

more appropriate for the SEF disciplinary 

procedures because the SEF core principles do not 

have a parallel to DCM Core Principle 13, which 

specifically discusses disciplinary procedures. 

557See Adaptation of Regulations to Incorporate 

Swaps, 77 FR 66288 (Nov. 2, 2012). Section 1.3(ee) 

states that a self-regulatory organization ‘‘means a 

contract market (as defined in § 1.3(h)), a swap 

execution facility (as defined in § 1.3(rrrr)), or a 

registered futures association under section 17 of 

the Act.’’ Id. at 66318. 

558Section 40.9(c)(3)(ii), as proposed, in the 

separate release titled Requirements for Derivatives 

Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities Regarding 

the Mitigation of Conflicts of Interest, provided that 

‘‘Each Disciplinary Panel shall include at least one 

person who would not be disqualified from serving 

as a Public Director by § 1.3(ccc)(1)(i)–(vi) and (2) 

of this chapter (a ‘‘Public Participant’’). Such Public 

Participant shall chair each Disciplinary Panel. In 

addition, any registered entity specified in 

paragraph (c)(3)(i) of this section shall adopt rules 

that would, at a minimum: (A) Further preclude any 

group or class of participants from dominating or 

exercising disproportionate influence on a 

Disciplinary Panel and (B) Prohibit any member of 

a Disciplinary Panel from participating in 

deliberations or voting on any matter in which the 

member has a financial interest.’’ 75 FR 63732, 

63752 (proposed Oct. 18, 2010). 

559MetLife Comment Letter at 6 (Mar. 8, 2011). 

560CME Comment Letter at 35 (Feb. 22, 2011). 

respondents. While the SEF NPRM 

noted that the SEF disciplinary 

procedures parallel those for DCMs,555

the Commission has determined that the 

level of protection offered by the 

proposed rules was more appropriate for 

markets that include retail participants, 

in contrast to SEFs, whose participants 

are limited to ECPs.556 Consequently, 

the Commission is moving to guidance 

numerous procedural protections set 

forth in the proposed rules that are more 

tailored to retail participants, including 

the requirements relating to the issuance 

of a notice of charges, and a 

respondent’s right to representation, 

right to answer charges, and right to 

request a hearing. 

The remaining final rules provide an 

essential framework that the 

Commission believes adequately 

ensures the effectiveness of a SEF’s 

disciplinary program. Accordingly, the 

Commission is maintaining the 

proposed disciplinary rules that 

represent the most critical components 

of a disciplinary program, including the 

requirements that a SEF: (1) Establish 

disciplinary panels that meet certain 

composition requirements; (2) levy 

meaningful disciplinary sanctions to 

deter recidivism; and (3) issue no more 

than one warning letter per rolling 12- 

month period for the same violation by 

the same respondent. The Commission 

believes that with these modifications, 

§ 37.206 strikes the appropriate balance 

between providing the flexibility 

requested by the commenters and 

ensuring that SEFs comply with their 

statutory obligation under Core 

Principle 2. 

Some commenters recommended that 

the proposed disciplinary procedures 

should be streamlined through the use 

of a summary fine program. The 

Commission believes that, while 

summary fines may be appropriate for 

some disciplinary matters, such as 

recordkeeping violations, many 

disciplinary matters are dynamic and 

require the balancing of multiple unique 

facts and circumstances, which cannot 

be addressed through a summary fine 

program. Therefore, the Commission 

declines to adopt a summary fine 

program in lieu of disciplinary 

procedures. 

In response to Tradeweb’s comment 

about contracting out certain aspects of 

a SEF’s disciplinary functions to a 

central third-party, the Commission 

notes that it views SEFs as SROs,557

with all the attendant self-regulatory 

responsibilities to establish and enforce 

rules necessary to promote market 

integrity and the protection of market 

participants. Such responsibilities 

include the adherence to, and 

maintenance of, disciplinary 

procedures. The Commission notes that 

a SEF may utilize the services of a thirdparty regulatory service provider for 

assistance in performing its selfregulatory functions, as provided for in 

§ 37.204. 

(2) § 37.206(a)—Enforcement Staff 

Proposed § 37.206(a) required that a 

SEF establish and maintain sufficient 

enforcement staff and resources to 

effectively and promptly prosecute 

possible rule violations within the SEF’s 

jurisdiction. Proposed § 37.206(a) also 

required a SEF to monitor the size and 

workload of its enforcement staff 

annually. In addition, proposed 

§ 37.206(a) included provisions to 

ensure the independence of the 

enforcement staff and to help promote 

disciplinary procedures that are free of 

potential conflicts of interest. 

(i) Commission Determination 

In response to the general comments 

requesting greater flexibility regarding 

disciplinary procedures, the 

Commission is moving all of the 

requirements of proposed § 37.206(a) to 

guidance, except for the critical 

requirement that a SEF maintain 

sufficient enforcement staff and 

resources. The Commission believes 

that sufficient enforcement staff and 

resources are essential to the effective 

performance of a SEF’s disciplinary 

program and are necessary to comply 

with Core Principle 2. Without a 

sufficient enforcement staff and 

resources, a SEF would be unable to 

promptly investigate and adjudicate 

potential rule violations and deter 

future violations. To maintain 

consistency with the revisions to 

proposed § 37.203(c)(2), the 

Commission is deleting from the rule 

the reference that a SEF monitor the size 

and workload of its enforcement staff 

annually to provide greater flexibility to 

SEFs in determining their approach to 

monitoring their enforcement resources. 

Nonetheless, the Commission believes 

that a SEF’s obligation to monitor its 

enforcement staff and resources is 

implicit in the requirement to maintain 

adequate enforcement staff and 

resources. 

(3) § 37.206(b)—Disciplinary Panels 

Proposed § 37.206(b)(1) required a 

SEF to establish one or more Review 

Panels and one or more Hearing Panels. 

The composition of both panels was 

required to meet the composition 

requirements of proposed 

§ 40.9(c)(3)(ii) 558 and could not include 

any members of the SEF’s compliance 

staff or any person involved in 

adjudicating any other stage of the same 

proceeding. Proposed § 37.206(b)(2) 

provided that a Review Panel must be 

responsible for determining whether a 

reasonable basis exists for finding a 

violation of SEF rules and for 

authorizing the issuance of a notice of 

charges. If a notice of charges is issued, 

proposed § 37.206(b)(3) provided that a 

Hearing Panel must be responsible for 

adjudicating the matter and issuing 

sanctions. 

(i) Summary of Comments 

MetLife supported the proposed rule 

and agreed that SEFs should maintain a 

clear separation between disciplinary 

bodies that recommend the issuance of 

charges and those responsible for 

adjudicating matters.559 CME stated that 

the Commission should not require a 

prescriptive approach to disciplinary 

panels, as SEFs may develop structures 

that clearly satisfy the objective of the 

core principle, but that may not 

precisely comply with the rule text.560

CME illustrated two practices it 

believed may be precluded by the text 

of proposed § 37.206(b): (1) CME’s 

Market Regulation staff determines 

whether certain non-egregious rule 

violations merit referral to a Review 

Panel and they issue warning letters on 

an administrative basis; and (2) CME’s 

hearing panel adjudicates a disciplinary 

case prior to the issuance of charges 

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33522 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

561 Id. 

562The Commission notes that it is replacing 

specific panel names (i.e., Review Panel and 

Hearing Panel) with a generic reference to the 

‘‘disciplinary panel’’ throughout part 37. 

563CME Comment Letter at 35 (Feb. 22, 2011). 

564 Id. While the Commission largely agrees with 

CME’s comment, the Commission directs interested 

parties to § 37.203(f) for a further discussion of the 

required components of investigation reports. 

565As mentioned above, the Commission is 

moving paragraph (3) of proposed § 37.206(c) to the 

text of proposed § 37.206(d) that will now be 

included as guidance. 

566CME Comment Letter at 35 (Feb. 22, 2011). 

pursuant to a supported settlement 

agreement.561

(ii) Commission Determination 

The Commission is adopting 

§ 37.206(b) as proposed, subject to 

certain modifications described below. 

The Commission considered 

commenters’ views and believes that the 

proposed rule can be modified to 

provide additional flexibility without 

diminishing its purpose. Accordingly, 

final § 37.206(b) will require SEFs to 

have one or more disciplinary panels, 

without imposing a specific requirement 

for SEFs to maintain a Review Panel and 

a Hearing Panel.562 However, even 

under this single-panel approach, 

individuals who determine to issue 

charges in a particular disciplinary 

matter may not also adjudicate the 

matter. Therefore, final § 37.206(b) 

permits flexibility in the structure of 

SEFs’ disciplinary bodies, but not in the 

basic prohibition, supported by MetLife, 

against vesting the same individuals 

with the authority to both issue and 

adjudicate charges in the same matter. 

The modifications reflected in final 

§ 37.206(b), together with the revisions 

made to the text of proposed § 37.206(d) 

that will now be included as guidance, 

as discussed below, provide additional 

flexibility by permitting SEFs to rely on 

their authorized compliance staff, rather 

than on a disciplinary panel, to issue 

disciplinary charges. However, the 

Commission notes that the adjudication 

of charges must still be performed by a 

disciplinary panel. 

Finally, the Commission is adopting 

the composition and conflicts 

requirements for disciplinary panels 

with one modification, by replacing the 

reference to § 40.9(c)(3)(ii) with a 

reference to the more general ‘‘part 40 

of this chapter’’ to accommodate any reenumeration that may occur with 

respect to proposed § 40.9(c)(3)(ii). 

(4) § 37.206(c)—Review of Investigation 

Report 

Proposed § 37.206(c) required a 

Review Panel to promptly review an 

investigation report received pursuant 

to proposed § 37.203(f)(3), and to take 

one of the following actions within 30 

days of receipt: (1) Promptly direct 

compliance staff to conduct further 

investigation if the Review Panel 

determined that additional investigation 

or evidence was needed, (2) direct that 

no further action be taken if the Review 

Panel determined that no reasonable 

basis existed for finding a violation or 

that prosecution was unwarranted, or 

(3) direct that the person or entity 

alleged to have committed a violation be 

served with a notice of charges if the 

Review Panel determined that a 

reasonable basis existed for finding a 

violation and adjudication was 

warranted. 

(i) Summary of Comments 

CME agreed that an investigation 

report should include the subject’s 

disciplinary history; however, CME 

disagreed with the requirement in 

proposed § 37.203(f) that the 

disciplinary history be included in the 

version of the investigation report sent 

to the Review Panel.563 CME believed 

that the disciplinary history should not 

be considered by the Review Panel at all 

when determining whether to issue 

formal charges, arguing that a 

participant’s disciplinary history is not 

relevant to the consideration of whether 

it committed a further violation of SEF 

rules.564

(ii) Commission Determination 

In response to the general comments 

requesting greater flexibility, the 

Commission is eliminating all of 

proposed § 37.206(c) except for 

paragraph (3) of the proposed rule. In 

addition, the Commission is adding 

language to paragraph (3) to provide 

SEFs with the flexibility to allow 

authorized compliance staff to review 

an investigation report and determine 

whether a notice of charges should be 

issued in a particular matter. The 

Commission is also revising the text of 

paragraph (3) to follow the single-panel 

approach provided for in § 37.206(b). 

Proposed § 37.206(c)(3), with the 

revisions described above, is being 

incorporated into proposed § 37.206(d). 

As described below, all of proposed 

§ 37.206(d) is being moved to the 

guidance in appendix B to part 37. 

(5) § 37.206(d)—Notice of Charges 

Proposed § 37.206(d) described the 

minimally acceptable contents of a 

notice of charges issued by a Review 

Panel. Specifically, proposed 

§ 37.206(d) provided that a notice of 

charges must adequately state the acts, 

conduct, or practices in which the 

respondent is alleged to have engaged; 

state the rule(s) alleged to have been 

violated; advise the respondent that he 

is entitled, upon request, to a hearing on 

the charges; and prescribe the period 

within which a hearing may be 

requested. Paragraphs (1) and (2) of the 

proposed rule permitted a SEF to adopt 

rules providing that: (1) The failure to 

request a hearing within the time 

prescribed in the notice, except for good 

cause, may be deemed a waiver of the 

right to a hearing; and (2) the failure to 

answer or expressly deny a charge may 

be deemed to be an admission of such 

charge. 

(i) Commission Determination 

Although no comments were received 

on proposed § 37.206(d), the 

Commission believes that it can provide 

SEFs with additional flexibility by 

moving the entire rule to the guidance 

in appendix B to part 37.565 Moreover, 

since paragraphs (1) and (2) of proposed 

§ 37.206(d) allowed, but did not require, 

a SEF to issue rules regarding failures to 

request a hearing and expressly answer 

or deny a charge, the Commission 

believes that the language in these 

paragraphs is better suited as guidance 

rather than a rule. 

(6) § 37.206(e)—Right to Representation 

Proposed § 37.206(e) provided for a 

respondent’s right, upon receiving a 

notice of charges, to be represented by 

legal counsel or any other representative 

of its choosing in all succeeding stages 

of the disciplinary process. 

(i) Summary of Comments 

CME commented that this rule should 

be limited to avoid conflicts of interest 

in representation and, accordingly, 

requested that the rule be revised to 

clarify that a respondent may not be 

represented by: (1) A member of the 

SEF’s disciplinary committees; (2) a 

member of the SEF’s Board of Directors; 

(3) an employee of the SEF; or (4) a 

person substantially related to the 

underlying investigation, such as a 

material witness or other respondent.566

(ii) Commission Determination 

The Commission is moving proposed 

§ 37.206(e) in its entirety to the 

guidance in appendix B to part 37, 

subject to the following modification. 

The Commission is amending the 

language to incorporate CME’s 

recommendation. The guidance states 

that upon being served with a notice of 

charges, a respondent should have the 

right to be represented by legal counsel 

or any other representative of its 

choosing in all succeeding stages of the 

disciplinary process, except by any 

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567These aspects were that: (1) The answer must 

be in writing and include a statement that the 

respondent admits, denies, or does not have and is 

unable to obtain sufficient information to admit or 

deny each allegation; (2) failure to file an answer 

on a timely basis shall be deemed an admission of 

all allegations in the notice of charges; and (3) 

failure in an answer to deny expressly a charge 

shall be deemed to be an admission of such charge. 

568The Commission notes that the text that will 

now be included as guidance is being modified to 

reflect the single-panel approach adopted in 

§ 37.206(b), replacing specific panel names with a 

generic reference to the ‘‘disciplinary panel.’’ 569The Commission is revising the proposed rule 

to reflect the single-panel approach adopted in 

§ 37.206(b), replacing specific panel names with a 

generic reference to the ‘‘disciplinary panel.’’ The 

Commission is also removing the references to 

proposed §§ 37.206(g) and (j) given that the 

Commission is moving proposed § 37.206(g) to 

guidance, and either eliminating or moving certain 

provisions of proposed § 37.206(j) to guidance. 

570The Commission notes that the text that will 

now be included as guidance is being modified to 

reflect the single-panel approach adopted in 

§ 37.206(b), replacing specific panel names with a 

generic reference to the ‘‘disciplinary panel.’’ 

member of the SEF’s board of directors 

or disciplinary panel, any employee of 

the SEF, or any person substantially 

related to the underlying investigations, 

such as a material witness or 

respondent. The Commission believes 

that this revision appropriately 

addresses the conflicts of interest noted 

by CME. 

(7) § 37.206(f)—Answer to Charges 

Proposed § 37.206(f) required that a 

respondent be given a reasonable period 

of time to file an answer to a notice of 

charges. The proposed rule also 

provided that the rules of a SEF may 

prescribe certain aspects of the answer, 

which were enumerated in paragraphs 

(1) through (3).567

(i) Commission Determination 

Although no comments were received 

on proposed § 37.206(f), the 

Commission is moving the entire rule to 

the guidance in appendix B to part 37, 

with certain modifications, in order to 

provide SEFs with greater flexibility to 

adopt their own disciplinary 

procedures. The Commission is also 

condensing the guidance by replacing 

paragraphs (1) through (3) with language 

making clear that any rules adopted by 

a SEF governing the requirements and 

timeliness of a respondent’s answer to a 

notice of charges should be ‘‘fair, 

equitable, and publicly available.’’ 

(8) § 37.206(g)—Admission or Failure 

To Deny Charges 

Proposed § 37.206(g) provided that a 

SEF may adopt rules whereby a 

respondent who admits or fails to deny 

any of the charges alleged in the notice 

of charges may be found by the Hearing 

Panel to have committed the violations 

charged. If a SEF adopted such rules, 

paragraphs (1) through (3) of the 

proposed rule provided that: (1) The 

Hearing Panel must impose a sanction 

for each violation found to have been 

committed; (2) the Hearing Panel must 

promptly notify the respondent in 

writing of any sanction to be imposed 

and advise the respondent that it may 

request a hearing on such sanction 

within a specified period of time; and 

(3) the rules of the SEF may provide that 

if the respondent fails to request a 

hearing within the period of time 

specified in the notice, then the 

respondent will be deemed to have 

accepted the sanction. 

(i) Commission Determination 

Although the Commission did not 

receive comments on proposed 

§ 37.206(g), the Commission is moving 

the entire rule, with certain 

modifications, to the guidance in 

appendix B to part 37.568 Given that 

proposed § 37.206(g) allowed, but did 

not require, a SEF to issue rules 

regarding a respondent’s admission or 

failure to deny charges, the Commission 

believes that the proposed rule is better 

suited as guidance rather than a rule. 

The Commission also believes that 

adopting the proposed rule as guidance, 

rather than a rule, will provide SEFs 

greater flexibility in administering their 

obligations, consistent with the general 

comments seeking the same. 

Furthermore, the Commission is 

modifying the text of proposed 

§ 37.206(g)(2) that will now be included 

as guidance to clarify that a respondent 

may request a hearing ‘‘within the 

period of time, which should be stated 

in the notice.’’ 

(9) § 37.206(h)—Denial of Charges and 

Right to Hearing 

Proposed § 37.206(h) required that in 

every instance where a respondent has 

requested a hearing on a charge that is 

denied, or on a sanction set by the 

Hearing Panel pursuant to proposed 

§ 37.206(g), the respondent must be 

given the opportunity for a hearing in 

accordance with the requirements of 

proposed § 37.206(j). Proposed 

§ 37.206(h) also gave SEFs the option to 

adopt rules that provided, except for 

good cause, the hearing must be 

concerned only with those charges 

denied and/or sanctions set by the 

Hearing Panel under proposed 

§ 37.206(g) for which a hearing has been 

requested. 

(i) Commission Determination 

The Commission received no 

comments on proposed § 37.206(h), but 

is moving the entire rule, with certain 

modifications, to the guidance in 

appendix B to part 37.569 In order to 

provide SEFs with further flexibility, 

even within the guidance, the 

Commission is also removing the 

proposed rule’s reference to a SEF’s 

ability to limit hearings to only those 

charges denied and/or sanctions set by 

the Hearing Panel under proposed 

§ 37.206(g) for which a hearing has been 

requested. 

(10) § 37.206(i)—Settlement Offers 

Proposed § 37.206(i) provided the 

procedures that a SEF must follow if it 

permits the use of settlements to resolve 

disciplinary cases. Paragraph (1) of the 

proposed rule stated that the rules of a 

SEF may permit a respondent to submit 

a written offer of settlement any time 

after the investigation report is 

completed. The proposed rule also 

permitted the disciplinary panel 

presiding over the matter to accept the 

offer of settlement, but prohibited the 

panel from altering the terms of the offer 

unless the respondent agreed. In 

addition, paragraph (2) of the proposed 

rule provided that the rules of the SEF 

may allow a disciplinary panel to 

permit the respondent to accept a 

sanction without admitting or denying 

the rule violations upon which the 

sanction is based. 

Paragraph (3) of the proposed rule 

stated that a disciplinary panel 

accepting a settlement offer must issue 

a written decision specifying the rule 

violations it has reason to believe were 

committed, and any sanction imposed, 

including any order of restitution where 

customer harm has been demonstrated. 

Paragraph (3) also provided that if an 

offer of settlement is accepted without 

the agreement of a SEF’s enforcement 

staff, then the decision must adequately 

support the Hearing Panel’s acceptance 

of the settlement. Finally, paragraph (4) 

of the proposed rule allowed a 

respondent to withdraw his or her offer 

of settlement at any time before final 

acceptance by a disciplinary panel. If an 

offer is withdrawn after submission, or 

is rejected by a disciplinary panel, the 

respondent must not be deemed to have 

made any admissions by reason of the 

offer of settlement and must not be 

otherwise prejudiced by having 

submitted the offer of settlement. 

(i) Commission Determination 

Although the Commission received no 

comments on proposed § 37.206(i), the 

Commission is moving the entire rule, 

with certain modifications, to the 

guidance in appendix B to part 37.570

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33524 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

571CME Comment Letter at 36 (Feb. 22, 2011). 

572The Commission is renumbering proposed 

§ 37.206(j) to § 37.206(c). The Commission is also 

revising the proposed rule to reflect the single-panel 

approach adopted in § 37.206(b), replacing specific 

panel names with a generic reference to the 

‘‘disciplinary panel.’’ The Commission is also 

revising the reference to § 37.206(l) in proposed 

§ 37.206(j)(1)(vi) given that it is moving proposed 

§ 37.206(l) to guidance. 

573The Commission is renumbering proposed 

§ 37.206(k) to § 37.206(d). The Commission is also 

revising the reference to § 37.206(j) in proposed 

§ 37.206(k) given that the Commission has either 

eliminated or moved to guidance many of the 

provisions of proposed § 37.206(j). The Commission 

is also revising the proposed rule to reflect the 

single-panel approach adopted in § 37.206(b), 

replacing specific panel names with a generic 

reference to the ‘‘disciplinary panel.’’ 

574The Commission notes that the reference to 

§ 40.9(c)(iv) in the proposed rule was a technical 

error. Instead, proposed § 37.206(l) should have 

referenced the composition requirements of an 

appellate panel outlined in proposed 

§ 40.9(c)(3)(iii). However, to accommodate any reenumeration that may occur with respect to 

proposed § 40.9(c)(3)(iii), the Commission is 

replacing the mistaken reference to § 40.9(c)(iv) 

with a more general reference to part 40 in the 

guidance text. See Requirements for Derivatives 

Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities Regarding 

the Mitigation of Conflicts of Interest, 75 FR 63732, 

63752 (proposed Oct. 18, 2010). The Commission is 

also revising the reference to § 37.206(k) in 

proposed § 37.206(l)(4) to § 37.206(d) given the 

renumbering in § 37.206. Finally, the Commission 

is revising the proposed rule to reflect the singlepanel approach adopted in § 37.206(b), replacing 

specific panel names with a generic reference to the 

‘‘disciplinary panel.’’ 

The Commission believes that adopting 

the proposed rule as guidance, rather 

than a rule, will provide SEFs greater 

flexibility in administering their 

obligations, consistent with the general 

comments seeking the same. 

Furthermore, the Commission is 

revising the guidance text to make it 

consistent with its modifications to the 

customer restitution provisions adopted 

below with respect to proposed 

§ 37.206(n). 

(11) § 37.206(j)—Hearings 

Proposed § 37.206(j) required a SEF to 

adopt rules that provide certain 

minimum procedural safeguards for any 

hearing conducted pursuant to a notice 

of charges. In general, proposed 

§§ 37.206(j)(1)(i) through (j)(1)(vii) 

required the following: (i) A fair 

hearing; (ii) authority for a respondent 

to examine evidence relied on by 

enforcement staff in presenting the 

charges; (iii) the SEF’s enforcement and 

compliance staffs to be parties to the 

hearing and the enforcement staff to 

present its case on the charges and 

sanctions; (iv) the respondent to be 

entitled to appear personally at the 

hearing, to cross-examine and call 

witnesses, and to present evidence; (v) 

the SEF to require persons within its 

jurisdiction who are called as witnesses 

to participate in the hearing and 

produce evidence; (vi) a copy of the 

hearing be made and be a part of the 

record of the proceeding if the 

respondent requested the hearing; and 

(vii) the rules of the SEF may provide 

that the cost of transcribing the record 

be borne by the respondent in certain 

circumstances. Additionally, proposed 

§ 37.206(j)(2) specified that the rules of 

the SEF may provide that a sanction be 

summarily imposed upon any person 

within its jurisdiction whose actions 

impede the progress of a hearing. 

(i) Summary of Comments 

CME recommended that proposed 

§ 37.206(j)(1)(ii) be revised so that a 

respondent may not access protected 

attorney work product, attorney-client 

communications, and investigative work 

product (e.g., investigation and 

exception reports).571

(ii) Commission Determination 

The Commission is partially adopting 

proposed § 37.206(j), and is either 

eliminating or moving to guidance the 

remaining portion of the rule. The 

Commission is maintaining as a rule the 

provisions requiring the following: (1) 

Hearings must be fair; and (2) if a 

respondent requested a hearing, a copy 

of the hearing be made and be a part of 

the record of the proceeding.572 The 

Commission is eliminating proposed 

§ 37.206(j)(1)(vii), a discretionary rule 

that in certain cases allowed for the cost 

of transcribing the record of the hearing 

to be borne by the respondent. The 

Commission is moving the remainder of 

proposed § 37.206(j) to the guidance in 

appendix B to part 37. The Commission 

believes that these revisions are 

appropriate given commenters’ requests 

for greater flexibility to establish their 

own disciplinary procedures. 

The Commission agrees with CME’s 

comment that a SEF should be 

permitted to withhold certain 

documents from a respondent in certain 

circumstances. Therefore, the 

Commission is revising the text of 

proposed § 37.206(j)(1)(ii), which will 

now be included in guidance, to provide 

that a SEF may withhold documents 

that: (i) Are privileged or constitute 

attorney work product; (ii) were 

prepared by an employee of the SEF but 

will not be offered in evidence in the 

disciplinary proceedings; (iii) may 

disclose a technique or guideline used 

in examinations, investigations, or 

enforcement proceedings; or (iv) 

disclose the identity of a confidential 

source. 

(12) § 37.206(k)—Decisions 

Proposed § 37.206(k) required a 

Hearing Panel, promptly following a 

hearing conducted in accordance with 

proposed § 37.206(j), to render a written 

decision based upon the weight of the 

evidence and to provide a copy to the 

respondent. Paragraphs (1) through (6) 

detailed the items to be included in the 

decision. 

(i) Commission Determination 

The Commission received no 

comments on proposed § 37.206(k) and 

is adopting the rule as proposed with 

certain non-substantive clarifications.573

(13) § 37.206(l)—Right to Appeal 

Proposed § 37.206(l) provided the 

procedures that a SEF must follow in 

the event that the SEF’s rules permit an 

appeal. For SEFs that permit appeals, 

the language in paragraphs (1) through 

(4) of proposed § 37.206(l) generally 

required the SEF to: (1) Establish an 

appellate panel; (2) ensure that the 

appellate panel composition is 

consistent with § 40.9(c)(iv) and not 

include any members of the SEF’s 

compliance staff or any person involved 

in adjudicating any other stage of the 

same proceeding; (3) conduct the appeal 

solely on the record before the Hearing 

Panel, except for good cause shown; and 

(4) issue a written decision of the board 

of appeals and provide a copy to the 

respondent. 

(i) Commission Determination 

Although the Commission received no 

comments on proposed § 37.206(l), the 

Commission is moving the entire rule to 

the guidance in appendix B to part 

37.574 Given that proposed § 37.206(l) 

allowed, but did not require, a SEF to 

issue rules regarding a respondent’s 

right to appeal, the Commission believes 

that the proposed rule is better suited as 

guidance rather than a rule. The 

Commission also believes that adopting 

the proposed rule as guidance, rather 

than a rule, will provide SEFs greater 

flexibility in administering their 

obligations, consistent with the general 

comments seeking the same. 

(14) § 37.206(m)—Final Decisions 

Proposed § 37.206(m) required that 

each SEF establish rules setting forth 

when a decision rendered under 

§ 37.206 will become the final decision 

of the SEF. 

(i) Commission Determination 

Although the Commission received no 

comments on proposed § 37.206(m), the 

Commission is moving the entire rule to 

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575WMBAA Comment Letter at 23 (Mar. 8, 2011). 

576 Id. 

577 Id. at 24. 

578The Commission is renumbering proposed 

§ 37.206(n) to § 37.206(e). 

579The Commission notes that commenters to the 

DCM rulemaking requested this change and, after 

considering the comments, the Commission 

believes that this revision should also be applicable 

to SEFs. Core Principles and Other Requirements 

for Designated Contract Markets, 77 FR at 36654– 

55. 

580Section 37.2 states that a SEF shall comply 

with part 9 of the Commission’s regulations. 

581NFA’s Background Affiliation Status 

Information Center database is available at http:// 

www.nfa.futures.org/basicnet/. 

582CME Comment Letter at 36 (Feb. 22, 2011). 583MarketAxess Comment Letter at 36 (Mar. 8, 

2011). 584The Commission is renumbering proposed 

§ 37.206(o) to § 37.206(f). The Commission is also 

retitling this section as ‘‘Warning letters.’’ 585For purposes of this rule, the Commission 

does not consider a ‘‘reminder letter’’ or such other 

similar letter to be any different than a warning 

letter. 586See Core Principles and Other Requirements 

for Swap Execution Facilities, 76 FR at 1224. 

the guidance in appendix B to part 37. 

The Commission believes that adopting 

the proposed rule as guidance rather 

than a rule provides a SEF with 

additional flexibility to establish 

disciplinary procedures to meet its 

obligations pursuant to Core Principle 2. 

(15) § 37.206(n)—Disciplinary Sanctions 

Proposed § 37.206(n) required that 

disciplinary sanctions imposed by a SEF 

must be commensurate with the 

violations committed and must be 

clearly sufficient to deter recidivism or 

similar violations by other market 

participants. In addition, the proposed 

rule required that a SEF take into 

account a respondent’s disciplinary 

history when evaluating appropriate 

sanctions. The proposed rule further 

required that in the event of 

demonstrated customer harm, any 

disciplinary sanction must include full 

customer restitution. 

(i) Summary of Comments 

WMBAA recommended that any 

limitation of a market participant’s 

access to a SEF imposed in response to 

a rule violation should be recognized 

and enforced consistently among all 

SEFs.575 WMBAA also recommended 

that any disciplinary sanction imposed 

by a SEF should be published and made 

available to market participants.576 Such 

requirements, WMBAA argued, are 

necessary in order to prevent market 

participants from gaming the system 

and maintaining access to markets after 

violations.577

(ii) Commission Determination 

The Commission is adopting 

proposed § 37.206(n), subject to certain 

modifications.578 The Commission is 

revising proposed § 37.206(n) to clarify 

that a respondent’s disciplinary history 

should be taken into account in all 

sanction determinations, including 

sanctions imposed pursuant to an 

accepted settlement offer. Furthermore, 

the Commission is revising proposed 

§ 37.206(n) so that it does not require 

customer restitution if the amount of 

restitution or the recipient cannot be 

reasonably determined.579

The Commission acknowledges 

WMBAA’s comment that disciplinary 

sanctions may not be recognized and 

enforced consistently across SEFs. 

However, each SEF is a distinct entity 

with its own rulebook and set of 

disciplinary procedures. Therefore, each 

SEF must determine the sanctions that 

are appropriate for its own market and 

thus the same conduct may result in 

different sanctions at different SEFs. 

The Commission does not believe that 

such sanction variation supports the 

mandatory recognition of sanctions 

across SEFs. However, if a SEF believes 

that it is important to recognize and 

enforce sanctions against market 

participants imposed by other SEFs or 

DCMs, then the SEF may implement 

appropriate rules. 

The Commission agrees with 

WMBAA that any disciplinary sanction 

imposed by a SEF should be published 

and made available to market 

participants. Commission Regulation 

9.11(a) requires that ‘‘[w]henever an 

exchange decision pursuant to which a 

disciplinary action or access denial 

action is to be imposed has become 

final, the exchange must, within thirty 

days thereafter, provide written notice 

of such action to . . . the 

Commission . . . .’’ 580 The 

Commission has issued guidance that an 

exchange may comply with § 9.11(a) by 

transmitting or delivering the notice to 

NFA to be included in NFA’s 

Background Affiliation Status 

Information Center database, which is 

available to the public online.581 The 

Commission also notes that a SEF may 

adopt rules regarding the publishing of 

disciplinary sanctions imposed by the 

SEF. 

(16) § 37.206(o)—Summary Fines for 

Violations of Rules Regarding Timely 

Submission of Records 

Proposed § 37.206(o) permitted a SEF 

to adopt a summary fine schedule for 

violations of rules relating to the timely 

submission of accurate records required 

for clearing or verifying each day’s 

transactions. Under the proposed rule, a 

SEF may permit its compliance staff to 

summarily impose minor sanctions 

against persons within the SEF’s 

jurisdiction for violating such rules. The 

proposed rule made clear that a SEF’s 

summary fine schedule must not permit 

more than one warning letter in a rolling 

12-month period for the same violation 

before sanctions are imposed and must 

provide for progressively larger fines for 

recurring violations. 

(i) Summary of Comments 

CME objected to the restriction of one 

warning letter per rolling 12-month 

period.582 MarketAxess also requested 

that the Commission adopt a uniform 

approach with respect to warning 

letters, either permitting warning letters 

as a sanction or an indication of a 

finding of a violation in all SEF 

contexts.583

(ii) Commission Determination 

The Commission is partially adopting 

proposed § 37.206(o) and is converting 

the remaining portion of the rule to 

guidance in appendix B to part 37.584

The Commission is maintaining as a 

rule the provision in the proposed rule 

that prohibits a SEF from issuing more 

than one warning letter per rolling 12- 

month period for the same violation. As 

discussed above, the Commission 

believes that in order to ensure that 

warning letters serve as effective 

deterrents, and to preserve the value of 

disciplinary sanctions, no more than 

one warning letter may be issued to the 

same person or entity found to have 

committed the same rule violation 

within a rolling 12-month period.585

While a warning letter may be 

appropriate for a first-time violation, the 

Commission does not believe that more 

than one warning letter in a rolling 12- 

month period for the same violation is 

ever appropriate.586

However, in response to 

MarketAxess’s comment, the 

Commission is narrowing the 

application of this rule to warning 

letters that contain an affirmative 

finding that a rule violation has 

occurred. Additionally, in order to 

provide flexibility, the compliance date 

of this rule will be one year from the 

effective date of the final SEF rules so 

that persons and entities may adapt to 

the new SEF regime. The Commission is 

converting the remainder of proposed 

§ 37.206(o) to guidance in appendix B to 

part 37 because the proposed rule 

allowed, but did not require, a SEF to 

adopt a summary fine schedule. 

(17) § 37.206(p)—Emergency 

Disciplinary Actions 

Proposed § 37.206(p) provided that a 

SEF may impose a sanction, including 

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33526 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

587The Commission notes that, pursuant to § 9.11 

and § 37.2, SEFs must provide the Commission with 

notice of any disciplinary actions that they take, 

including emergency disciplinary actions. 

588The Commission is also revising the reference 

to § 37.206(j) in proposed § 37.206(p)(ii) given that 

the Commission has either eliminated or moved to 

guidance many of the provisions of proposed 

§ 37.206(j). 

589The Commission notes that this paragraph’s 

numbering is due to the renumbering of § 37.206. 

590FXall Comment Letter at 11 (Mar. 8, 2011). 

591MarketAxess Comment Letter at 34 (Mar. 8, 

2011). 

592 Id. 

593WMBAA Comment Letter at 24 (Mar. 8, 2011). 

594CEA section 5h(f)(2)(D); 7 U.S.C. 7b–3(f)(2)(D). 

595CEA section 5h(f)(3); 7 U.S.C. 7b–3(f)(3). 

596The Commission notes that in Argus’s joint 

DCM and SEF rulemaking comment letter dated 

Feb. 22, 2011, it commented on Core Principle 3 

and specifically, the Commission’s guidance in 

appendix C to part 38—Demonstration of 

Compliance That a Contract is Not Readily 

Susceptible to Manipulation. The Commission has 

addressed Argus’s comments in the DCM final 

rulemaking, Core Principles and Other 

Requirements for Designated Contract Markets, 77 

FR at 36633–34. The Commission also notes that in 

CME’s SEF rulemaking comment letter dated Mar. 

8, 2011 and DCM rulemaking comment letter dated 

Feb. 22, 2011, it commented on the Commission’s 

guidance in appendix C to part 38. The Commission 

has also addressed CME’s comments in the DCM 

final rulemaking, Core Principles and Other 

Requirements for Designated Contract Markets, 77 

FR at 36632–34. 

597Reuters Comment Letter at 5 (Mar. 8, 2011). 

598 GFI Comment Letter at 4–5 (Mar. 8, 2011). 

599 Id. at 5. 

600CEA section 5h(f)(3); 7 U.S.C. 7b–3(f)(3). 

a suspension, or take other summary 

action against a person or entity subject 

to its jurisdiction upon a reasonable 

belief that such immediate action is 

necessary to protect the best interest of 

the marketplace. The proposed rule also 

provided that any emergency action 

taken by the SEF must be in accordance 

with certain procedural safeguards as 

enumerated in the proposed rule.587

(i) Commission Determination 

Although the Commission received no 

comments on proposed § 37.206(p), the 

Commission is moving the entire rule to 

the guidance in appendix B to part 37 

because it is a discretionary rule.588 The 

Commission also believes that adopting 

the proposed rule as guidance, rather 

than a rule, will provide SEFs greater 

flexibility in administering their 

obligations, consistent with the general 

comments seeking the same. 

The Commission is also codifying 

new § 37.206(g) 589 (titled ‘‘Additional 

sources for compliance’’) that permits 

SEFs to refer to the guidance and/or 

acceptable practices in appendix B to 

part 37 to demonstrate to the 

Commission compliance with the 

requirements of § 37.206. 

(h) § 37.207—Swaps Subject to 

Mandatory Clearing 

Proposed § 37.207 required that a SEF 

provide rules that when a swap dealer 

or major swap participant enters into or 

facilitates a swap transaction subject to 

the mandatory clearing requirement 

under section 2(h) of the Act, the swap 

dealer or major swap participant shall 

be responsible for complying with the 

mandatory trading requirement under 

section 2(h)(8) of the Act. 

(1) Summary of Comments 

FXall stated that proposed § 37.207 

could be read to require a SEF to be 

responsible for policing the conduct of 

swap dealers and major swap 

participants generally, and not only 

with respect to their trading on such 

SEF.590 In this regard, MarketAxess 

stated that a SEF’s obligation to require 

swap dealers and major swap 

participants to comply with the 

mandatory trading requirement should 

only extend to swaps that are executed 

pursuant to its own rules.591

MarketAxess also noted that proposed 

§ 37.207 is identical to proposed 

§ 37.200(d) and therefore is 

unnecessary.592 WMBAA commented 

that there is no statutory basis to impose 

the requirement in proposed 

§ 37.207.593

(2) Commission Determination 

The Commission agrees with 

MarketAxess that proposed § 37.207 is 

identical to § 37.200(d) and is therefore 

eliminating proposed § 37.207. In 

response to WMBAA’s comment, the 

Commission notes that § 37.200(d) 

recites the statutory text of Core 

Principle 2 and thus provides the 

statutory basis for codification of the 

statutory text as a regulation.594 To 

address FXall’s and MarketAxess’s 

concerns, the Commission clarifies that 

a SEF’s rules pursuant to § 37.200(d) 

need only apply to swaps executed on 

or pursuant to the rules of that SEF. 

3. Subpart D—Core Principle 3 (Swaps 

Not Readily Susceptible to 

Manipulation) 

Core Principle 3 requires that a SEF 

permit trading only in swaps that are 

not readily susceptible to 

manipulation.595 In the SEF NPRM, the 

Commission proposed to codify the 

statutory text of Core Principle 3 in 

proposed § 37.300, and adopts that rule 

as proposed. 

To demonstrate to the Commission 

compliance with Core Principle 3, 

proposed § 37.301 required a SEF to 

submit new swap contracts in advance 

to the Commission pursuant to part 40 

of the Commission’s regulations, and 

provide to the Commission the 

information required under appendix C 

to part 38. The Commission also 

proposed guidance for compliance with 

Core Principle 3 under appendix B to 

part 37, which noted the importance of 

the reference price for a swap contract. 

The guidance also stated that Core 

Principle 3 requires that the reference 

price used by a swap not be readily 

susceptible to manipulation. 

(a) Summary of Comments 596

Reuters generally supported Core 

Principle 3, and the requirement that 

SEFs should have in place appropriate 

systems and controls to identify and 

manage situations where the market or 

individual swap contract may be 

susceptible to manipulation or fraud.597

GFI commented that once the 

Commission has declared a swap 

subject to mandatory clearing, a SEF 

should not be required to ensure that 

the contract is not readily susceptible to 

manipulation since such activity would 

be redundant.598 According to GFI, the 

Commission would not make a swap 

subject to mandatory clearing unless it 

believed that the swap is not subject to 

manipulation.599

(b) Commission Determination 

The Commission is adopting § 37.301 

as proposed, subject to certain 

modifications for clarity. The 

Commission is deleting from the rule 

the references to prior approval or selfcertification for new product 

submissions under part 40 of the 

Commission’s regulations because those 

details are covered under § 37.4 and part 

40. The Commission is also adding to 

the rule a reference to the guidance and/ 

or acceptable practices in appendix B to 

part 37. This reference was 

inadvertently omitted from the SEF 

NPRM. 

In response to GFI’s comments, the 

Commission notes that section 5h of the 

Act requires that a SEF permit trading 

only in swaps that are not readily 

susceptible to manipulation.600 The 

Commission notes that this is a separate 

and distinct requirement for a SEF to 

comply with, as opposed to the 

Commission determination as to 

whether a swap is subject to mandatory 

clearing. The Commission does not have 

the authority under CEA section 4(c)(1) 

to exempt SEFs from complying with 

the core principles. 

The Commission notes that the 

requirement that a SEF permit trading in 

swaps that are not readily susceptible to 

manipulation requires a SEF to be 

responsible for the terms and conditions 

of the swap contracts which trade on its 

facility. To meet this requirement, the 

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601CEA section 5h(f)(4); 7 U.S.C. 7b–3(f)(4). 

602 Id. 

603Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1227. 

604Bloomberg Comment Letter 3–4 (Jun. 3, 2011); 

Parity Energy Comment Letter at 4 (Mar. 25, 2011); 

Tradeweb Comment Letter at 11 (Mar. 8, 2011); 

MarketAxess Comment Letter at 22 (Mar. 8, 2011); 

WMBAA Comment Letter at 25 (Mar. 8, 2011). 

605Tradeweb Comment Letter at 11 (Mar. 8, 

2011). 

606WMBAA Comment Letter at 25 (Mar. 8, 2011). 

607 Id. 

608CME Comment Letter at 24 (Feb. 22, 2011). 

609 ICE Comment Letter at 4 (Mar. 8, 2011). 

610 ICE Comment Letter at 4 (Mar. 8, 2011); CME 

Comment Letter at 24 (Feb. 22, 2011). 

611 ICE Comment Letter at 4 (Mar. 8, 2011). 

612CME Comment Letter at 24 (Feb. 22, 2011). 

613 Id. at 25. 

614 Id. 

615 Id. 

616 Id. 

guidance includes items that a SEF 

should consider in developing swap 

contract terms and conditions for both 

physical delivery and cash-settled 

contracts. The Commission recognizes 

that a SEF may permit trading in a wide 

range of swaps, some standardized and 

others customized and complex. The 

Commission staff is available to consult 

with SEFs should questions arise 

regarding the information that SEFs 

should submit to the Commission to 

satisfy the requirements of Core 

Principle 3, especially for the SEF’s 

more customized and complex swap 

contracts. The Commission will take 

into account these considerations when 

determining whether a SEF satisfies the 

requirements of Core Principle 3. 

4. Subpart E—Core Principle 4 

(Monitoring of Trading and Trade 

Processing) 

Under Core Principle 4, a SEF must 

establish and enforce rules or terms and 

conditions defining, or specifications 

detailing trading procedures to be used 

in entering and executing orders traded 

on or through the facilities of the SEF 

and procedures for trade processing of 

swaps on or through the facilities of the 

SEF.601 Core Principle 4 also requires a 

SEF to monitor trading in swaps to 

prevent manipulation, price distortion, 

and disruptions of the delivery or cash 

settlement process through surveillance, 

compliance, and disciplinary practices 

and procedures, including methods for 

conducting real-time monitoring of 

trading and comprehensive and accurate 

trade reconstructions.602 In the SEF 

NPRM, the Commission proposed to 

codify the statutory text of Core 

Principle 4 in proposed § 37.400, and 

adopts that rule as proposed. 

As discussed above under Core 

Principle 3, the Commission recognizes 

that a SEF may permit trading in a wide 

range of swaps, some standardized and 

others customized and complex. The 

Commission staff is available to consult 

with SEFs should questions arise 

regarding how to satisfy the 

requirements of Core Principle 4, 

especially for the SEF’s more 

customized and complex swap 

contracts. The Commission will take 

into account these considerations when 

determining whether a SEF satisfies the 

requirements of Core Principle 4. 

(a) § 37.401—General Requirements 

Proposed § 37.401(a) required a SEF 

to collect and evaluate data on 

individual traders’ market activity on an 

ongoing basis in order to detect and 

prevent manipulation, price distortions 

and, where possible, disruptions of the 

delivery or cash-settlement process. 

Proposed § 37.401(b) required a SEF to 

monitor and evaluate general market 

data in order to detect and prevent 

manipulative activity that would result 

in the failure of the market price to 

reflect the normal forces of supply and 

demand. Proposed § 37.401(c) required 

a SEF to have the capacity to conduct 

real-time monitoring of trading and 

comprehensive and accurate trade 

reconstruction. Further, the proposed 

rule required that intraday trade 

monitoring must include the capacity to 

detect abnormal price movements, 

unusual trading volumes, impairments 

to market liquidity, and position-limit 

violations. Finally, proposed § 37.401(d) 

required a SEF to have either manual 

processes or automated alerts that are 

effective in detecting and preventing 

trading abuses. The Commission noted 

in the SEF NPRM preamble that it 

would be difficult, if not impossible, for 

a SEF to monitor for market disruptions 

in markets with high transaction volume 

and a large number of trades unless the 

SEF installed automated trading 

alerts.603

(1) Summary of Comments 

Several commenters sought 

clarification that proposed § 37.401 

limits a SEF’s oversight of market 

participant activity to its own SEF.604

Tradeweb, for example, commented that 

a SEF cannot ensure that a marketplace 

other than its own has not been 

manipulated to affect the SEF’s swaps 

because the SEF will not have enough 

information about the other 

marketplaces.605

WMBAA requested that the 

Commission clarify what it means by 

‘‘individual traders’’ and ‘‘market 

activity’’ in proposed § 37.401(a).606

WMBAA also sought clarification 

regarding what constitutes ‘‘general 

market data’’ in proposed § 37.401(b).607

CME commented that the 

Commission’s requirements for realtime monitoring in proposed § 37.401(c) 

are overly broad, and stated that 

requiring real-time monitoring 

capabilities across every instrument for 

vague terms such as ‘‘abnormal price 

movements,’’ ‘‘unusual trading 

volumes,’’ and ‘‘impairments to market 

liquidity’’ does not provide a SEF with 

sufficient clarity with respect to what 

specific capabilities satisfy the 

standard.608 Similarly, ICE requested 

that the Commission delete the phrase 

‘‘impairments to market liquidity’’ from 

the rule, arguing that the wording is 

vague and has no foundation in the core 

principle.609

ICE and CME also expressed concern 

regarding the real-time monitoring of 

position limits.610 ICE stated that realtime monitoring of position limits may 

be flawed given that option deltas 

change throughout the day, the 

destination of allocated and give-up 

transactions are not immediately 

known, and off-exchange transactions 

may not be reported in real-time.611

CME stated that effective real-time 

monitoring of position limits is 

challenging given that the identical 

contract will frequently trade in 

multiple competitive venues.612

In response to the Commission’s 

questions in the SEF NPRM regarding 

high frequency trading, CME raised 

concerns over the absence of a 

definition for high frequency trading, 

which CME claimed can include many 

different trading strategies.613 CME 

questioned whether the Commission 

had unique concerns about high 

frequency traders, and further remarked 

that the Commission has not articulated 

what purpose would be served by 

singling out high frequency trading for 

special monitoring.614 CME stated, 

however, that it has the capability to 

monitor the messaging frequency of 

participants in their markets and can 

quickly and easily identify which 

participants generate high messaging 

traffic.615 With respect to the ability of 

automated trading systems to detect and 

flag high frequency trading anomalies, 

CME commented that it is unclear what 

specific types of anomalies would be 

uniquely of concern in the context of a 

high frequency trader as opposed to any 

other type of trader.616 CME noted that 

its systems were designed to identify 

anomalies or transaction patterns that 

violate their rules or might otherwise be 

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33528 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

617 Id. 

618The Commission is moving proposed 

§ 37.401(d) to the guidance in appendix B to part 

37 and moving the ‘‘trade reconstruction’’ language 

in proposed § 37.401(c) to final § 37.401(d). 

619CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 

620Refer to the guidance under Core Principle 4 

in appendix B to part 37 for examples of methods 

for monitoring market activity beyond a SEF’s own 

market. 

621See discussion below under § 37.403— 

Additional Requirements for Cash-Settled Swaps 

and § 37.404—Ability To Obtain Information in the 

preamble. 

622See, e.g., ‘‘Recommendations on Pre-Trade 

Practices for Trading Firms, Clearing Firms and 

Exchanges involved in Direct Market Access,’’ PreTrade Functionality Subcommittee of the CFTC’s 

Technology Advisory Committee (Mar. 1, 2011) 

(‘‘TAC Subcommittee Recommendations’’), 

available at http://www.cftc.gov/ucm/groups/ 

public/@swaps/documents/dfsubmission/ 

tacpresentation030111_ptfs2.pdf. The Commission 

notes that the subcommittee report was submitted 

to the TAC and made available for public comment, 

but no final action has been taken by the full 

committee. 

623See UK Government Office for Science, 

Foresight Project, The Future of Computer Trading 

in Financial Markets (working paper), available at 

http://www.bis.gov.uk/foresight/our-work/projects/ 

current-projects/computer-trading/working-paper. 

624CME Comment Letter at 25 (Feb. 22, 2011). 

625Parity Energy Comment Letter at 4 (Mar. 25, 

2011). 

indicative of some other risk to the 

orderly functioning of the markets.617

(2) Commission Determination 

The Commission is adopting § 37.401 

as proposed, subject to certain 

modifications, including converting 

portions of the rule to guidance in 

appendix B to part 37.618

To address commenters’ concerns 

whether § 37.401 requires a SEF to 

monitor market activity beyond its own 

market, the Commission notes that the 

Act requires a SEF to monitor trading in 

swaps to prevent manipulation, price 

distortion, and disruptions of the 

delivery or cash settlement process.619

Given this statutory requirement, there 

are certain instances where a SEF must 

monitor market activity beyond its own 

market.620 As noted below, a SEF must 

assess whether trading in a third-party 

index or instrument used as a reference 

price or the underlying commodity for 

its listed swaps is being used to affect 

prices on its market.621 The 

Commission, however, provides 

flexibility to SEFs by not prescribing in 

the regulations the specific methods for 

monitoring. To provide additional 

flexibility, in instances where a SEF can 

demonstrate to the Commission that 

trading activity off the SEF’s facility is 

not relevant to threats of manipulation, 

distortion, or disruption for trading 

conducted on its own facility, then the 

SEF may limit monitoring to trading 

activity on its own facility. 

In response to WMBAA’s concerns 

regarding the clarification of certain 

terms in § 37.401(a), the Commission is 

revising the rule text to change the term 

‘‘individual traders’’ to ‘‘market 

participants’’ as ‘‘individual traders’’ 

was meant to apply to a SEF’s market 

participants. The Commission also 

clarifies that ‘‘market activity’’ means its 

market participants’ ‘‘trading’’ activity. 

In § 37.401(b), ‘‘general market data’’ 

means that a SEF shall monitor and 

evaluate general market conditions 

related to its swaps. For example, a SEF 

must monitor the pricing of the 

underlying commodity or a third-party 

index or instrument used as a reference 

price for its swaps as compared to the 

prices on its markets. 

The Commission is also revising the 

rule to clarify that: (a) Real-time 

monitoring is to detect and, when 

necessary, resolve abnormalities; and (b) 

reconstructing trading activity is to 

detect instances or threats of 

manipulation, price distortion, and 

disruptions. 

In the guidance, the Commission is 

clarifying that monitoring of trading 

activity in listed swaps should be 

designed to prevent manipulation, price 

distortion, and disruptions. The 

Commission believes that SEFs should 

have rules in place that allow it to 

intervene to prevent or reduce market 

disruptions given such requirement in 

Core Principle 4. The Commission also 

notes that once a threatened or actual 

disruption is detected, the SEF should 

take steps to prevent the disruption or 

reduce its severity. 

In the guidance, the Commission is 

also clarifying what activities should be 

included in real-time monitoring as 

compared to what activities may be 

done on a T+1 basis. The Commission 

believes that monitoring of price 

movements and trading volumes in 

order to detect, and when necessary, 

resolve abnormalities should be 

accomplished in real time in order to 

achieve, as much as possible, the 

statute’s emphasis on preventive 

actions. It is acceptable, however, to 

have a program that detects instances or 

threats of manipulation, price 

distortion, and disruptions on at least a 

T+1 basis, incorporating any additional 

data that is available on such T+1 basis, 

including trade reconstruction data. The 

Commission notes that it dropped the 

requirements for a SEF to monitor for 

‘‘impairments to market liquidity’’ and 

‘‘position limit violations’’ given 

commenters’ concerns about the 

difficulty of such monitoring. 

The Commission is moving to 

guidance the requirement to have 

automated alerts in proposed 

§ 37.401(d). The Commission believes 

that automated trading alerts, preferably 

in real time, are the most effective 

means of detecting market anomalies. 

However, a SEF may demonstrate that 

its manual processes are effective. 

As for the Commission’s inquiry in 

the SEF NPRM about requiring 

additional monitoring of high frequency 

trading, the Commission believes that a 

SEF should be capable of monitoring all 

types of trading that may occur on its 

facility, including trading that may be 

characterized as ‘‘high frequency.’’ The 

Commission has decided not to 

implement, at this time, further rules 

pertaining to the monitoring of high 

frequency trading. The Commission is 

encouraged that there are efforts 

underway both within and outside of 

the Commission, to define and develop 

approaches for better monitoring of 

high-frequency and algorithmic trading. 

This is particularly evident from recent 

work done at the request of the 

Commission’s Technology Advisory 

Committee (‘‘TAC’’).622 Further, the 

United Kingdom government’s Foresight 

Project also commissioned a recently 

released report on the future of 

computer trading in financial markets, 

which aims to assess the risks and 

benefits of automated buying and 

selling.623 These efforts may assist the 

Commission’s further development of a 

regulatory framework for high frequency 

trading activities. 

(b) § 37.402—Additional Requirements 

for Physical-Delivery Swaps 

Proposed § 37.402 required, for 

physical-delivery swaps, that a SEF 

monitor each swap’s terms and 

conditions, monitor the adequacy of 

deliverable supplies, assess whether 

supplies are available to those making 

physical delivery and saleable by those 

taking delivery, and monitor the 

ownership of deliverable supplies. 

Proposed § 37.402 also required that a 

SEF address any conditions that are 

causing price distortions or market 

disruptions. 

(1) Summary of Comments 

CME commented that proposed 

§ 37.402 should be an acceptable 

practice instead of a prescriptive rule.624

Parity Energy commented that in a 

market where numerous SEFs permit 

trading in identical swaps, requiring 

each SEF to monitor the adequacy, size, 

and ownership of deliverable supply as 

well as the delivery locations and 

commodity characteristics is 

duplicative, unmanageable, and creates 

the risk of conflicting conclusions.625

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626The Commission is renumbering proposed 

§ 37.402(a)(1) and (a)(2) to § 37.402(a) and (b), 

respectively. The Commission is deleting or moving 

to guidance proposed § 37.402(a)(3), (a)(4), and (b). 

627Proposed § 37.402(a)(2) is now final 

§ 37.402(b). 

628Argus Comment Letter at 6 (Feb. 22, 2011). 

629 Id. 

630 Id. at 7. 

631Parity Energy Comment Letter at 5 (Mar. 25, 

2011); ICE Comment Letter at 4–5 (Mar. 8, 2011); 

Nodal Comment Letter at 5 (Mar. 8, 2011); CME 

Comment Letter at 11 (Mar. 8, 2011). 

632 ICE Comment Letter at 4–5 (Mar. 8, 2011). 

633CME Comment Letter at 11 (Mar. 8, 2011). 

634 Id. 

635 Id. 

636Nodal Comment Letter at 5 (Mar. 8, 2011). 

637The Commission is renumbering proposed 

§ 37.403(a)(1) and (a)(2) to § 37.403(a), (b), and (c). 

The Commission is moving proposed § 37.403(b) to 

§ 37.404(a). 

638CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 

639Final § 37.403(a) was proposed § 37.403(a)(1). 

640Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1228. 

641The Commission is renumbering proposed 

§ 37.403(a)(2) to § 37.403(b). 

(2) Commission Determination 

The Commission is adopting § 37.402 

as proposed, subject to certain 

modifications, including converting 

portions of the rule to guidance in 

appendix B to part 37.626 In response to 

comments and to provide SEFs with 

greater flexibility, the Commission is 

revising the requirement in proposed 

§ 37.402(a)(2) 627 so that SEFs only have 

to monitor the ‘‘availability’’ of the 

commodity supply instead of 

monitoring whether the supply is 

‘‘adequate.’’ The Commission is also 

removing from proposed § 37.402 the 

requirements that SEFs monitor specific 

details of the supply, marketing, and 

ownership of the commodity to be 

physically delivered. Instead, appendix 

B to part 37 lists guidance for 

monitoring conditions that may cause a 

physical-delivery swap to become 

susceptible to price manipulation or 

distortion, including monitoring the 

general availability of the commodity 

specified by the swap, the commodity’s 

general characteristics, the delivery 

locations, and, if available, information 

on the size and ownership of deliverable 

supplies. Moving these specific details 

to guidance will provide SEFs with 

additional flexibility in meeting their 

monitoring obligations associated with 

physical-delivery swaps. 

(c) § 37.403—Additional Requirements 

for Cash-Settled Swaps 

Proposed § 37.403(a) required, for 

cash-settled swaps, that a SEF monitor: 

(a) The availability and pricing of the 

commodity making up the index to 

which the swap is settled and; (b) the 

continued appropriateness of the 

methodology for deriving the index for 

SEFs that compute their own indices. 

Where a swap is settled by reference to 

the price of an instrument traded in 

another venue, proposed § 37.403(b) 

required that the SEF either have an 

information sharing agreement with the 

other venue or be able to independently 

determine that positions or trading in 

the reference instrument are not being 

manipulated to affect positions or 

trading in its swap. 

(1) Summary of Comments 

Argus expressed concern regarding 

the requirement in proposed 

§ 37.403(a)(1) for a SEF to monitor the 

availability and pricing of the 

commodity making up the index to 

which the swap will be settled, 

particularly where an index price is 

published based upon transactions that 

are executed off the SEF.628 Argus noted 

that if a SEF is required to perform this 

monitoring function, a SEF may choose 

not to list the swap and market 

participants would not have a hedging 

instrument.629 Argus also commented 

that the cost to monitor transactions that 

are executed off of the SEF could be 

prohibitive.630

Several commenters expressed 

concern about the requirement in 

proposed § 37.403(b) that a SEF have an 

information sharing agreement with, or 

monitor positions or trading in, another 

venue when a swap listed on the SEF is 

settled by reference to the price of an 

instrument traded on another venue.631

ICE stated that the proposal places an 

undue burden on SEFs to monitor 

positions held at other trading venues, 

and that this requirement would be 

more efficiently facilitated by a central 

regulatory body such as the 

Commission.632

Similarly, CME stated that the 

Commission is uniquely situated to add 

regulatory value to the industry by 

reviewing for potential cross-venue rule 

violations because the Commission is 

the central repository for position 

information delivered to it on a daily 

basis in a common format across all 

venues.633 CME asserted that the SEF 

NPRM’s proposed alternative of 

requiring SEFs and their customers to 

report information that the Commission 

already receives or will be receiving is 

an onerous burden.634 CME further 

asserted that the SEF NPRM’s other 

proposed alternative, that the SEF enter 

into an information-sharing agreement 

with the other venue, will result in 

additional costs to both entities and that 

it may not be practical or prudent for a 

SEF to enter into such an agreement 

with the other venue.635

Finally, Nodal stated that a SEF that 

is a party to an industry agreement such 

as the International Information Sharing 

Memorandum of Understanding and 

Agreement should satisfy the 

information sharing requirement in the 

proposed rule by virtue of such 

agreement.636

(2) Commission Determination 

The Commission is adopting § 37.403 

as proposed, subject to certain 

modifications, including converting 

portions of the rule to guidance in 

appendix B to part 37.637 The Act 

requires SEFs to monitor trading in 

swaps to prevent disruptions of the cash 

settlement process.638 However, in 

response to Argus’s comment about the 

costs of proposed § 37.403(a)(1), the 

Commission has removed from the rule 

the requirement that a SEF monitor the 

availability and pricing of the 

commodity making up the index to 

which the swap will be settled. Section 

37.403(a) 639 now requires that a SEF 

monitor the pricing of the reference 

price used to determine cash flows or 

settlement. The Commission believes 

that SEFs must monitor the pricing of 

the reference price in order to comply 

with Core Principle 4’s requirement to 

prevent manipulation, price distortion, 

and disruptions of the cash settlement 

process. As noted in the SEF NPRM, 

market participants may have incentives 

to disrupt or manipulate reference 

prices for cash-settled swaps.640

Although no comments were received 

on proposed § 37.403(a)(2),641 the 

Commission is revising the rule so that 

the requirement for monitoring the 

continued appropriateness of the 

methodology for deriving the reference 

price only applies when the reference 

price is formulated and computed by 

the SEF. In order to reduce the burden 

on SEFs, the Commission is clarifying in 

new § 37.403(c) that when the reference 

price relies on a third-party index or 

instrument, including an index or 

instrument traded on another venue, the 

SEF must only monitor the ‘‘continued 

appropriateness’’ of the index or 

instrument as opposed to specifically 

monitoring the ‘‘continued 

appropriateness of the methodology’’ for 

deriving the index. To provide SEFs 

with greater flexibility, the Commission 

is moving the other requirements for 

monitoring in proposed § 37.403(a)(2) to 

the guidance in appendix B to part 37. 

Specifically, the guidance notes that if 

a SEF computes its own reference price, 

it should promptly amend any 

methodologies or impose new 

methodologies as necessary to resolve 

threats of disruption or distortions. For 

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33530 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

642CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 

643CME Comment Letter at 26 (Feb. 22, 2011). 

644WMBAA Comment Letter at 26 (Mar. 8, 2011). 

645The Commission is changing the phrase 

‘‘traders in its swaps’’ to ‘‘its market participants’’ 

to provide clarity. 

646The Commission notes that this requirement is 

now in § 37.404(a). 

647The Commission notes that this requirement is 

now in § 37.404(b). 

648CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 

649See, e.g., comments below under Core 

Principle 6—Position Limits or Accountability in 

the preamble. 

650Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1228. 

651 Id. 

reference prices that rely upon a thirdparty index or instrument, the 

Commission notes in the guidance that 

the SEF should conduct due diligence to 

ensure that the reference price is not 

susceptible to manipulation. 

With respect to commenters’ concerns 

about the requirement in proposed 

§ 37.403(b) for a SEF to have an 

information-sharing agreement with, or 

monitor positions or trading in, another 

venue when a swap listed on the SEF is 

settled by reference to the price of an 

instrument traded on another venue, the 

Commission notes that the Act requires 

SEFs to monitor trading in swaps to 

prevent disruptions of the cash 

settlement process.642 Given this 

statutory requirement, the Commission 

believes that a SEF must have access to 

sufficient information to determine 

whether trading in the instrument or 

index used as a reference price for its 

listed swaps is being used to affect 

prices on its market. The Commission is 

adopting this general requirement, but is 

moving it to § 37.404 where it more 

logically belongs. 

Although, as CME noted, the 

Commission does obtain certain 

position information in the large-trader 

reporting systems for swaps, the 

Commission may not routinely obtain 

such position information, including 

where a SEF’s swap settles to the price 

of a non-U.S. index or instrument. 

However, in response to ICE’s and 

CME’s concerns and to reduce the 

burden on SEFs, the Commission is 

removing from the rule text the 

requirement for SEFs to assess 

‘‘positions’’ and is moving it to the 

guidance in appendix B to part 37. The 

Commission is also moving to the 

guidance the specific methods for a SEF 

to obtain information to assess whether 

trading in the reference market is being 

used to affect prices on its market. The 

guidance also allows SEFs to limit such 

information gathering to market 

participants that conduct substantial 

trading on its facility. 

(d) § 37.404—Ability To Obtain 

Information 

Proposed § 37.404(a) provided that a 

SEF must have rules that require traders 

in its swaps to keep and make available 

records of their activity in underlying 

commodities and related derivatives 

markets and swaps. Proposed 

§ 37.404(b) required that a SEF with 

customers trading through 

intermediaries have a large-trader 

reporting system or other means to 

obtain position information. 

(1) Summary of Comments 

CME commented that the Commission 

should specify in acceptable practices 

the types of records that traders are 

required to keep under proposed 

§ 37.404(a).643 WMBAA commented 

that the requirement for a SEF to force 

traders to maintain trading and financial 

records is not required under the 

CEA.644

(2) Commission Determination 

The Commission is adopting § 37.404 

as proposed, subject to certain 

modifications, including providing 

guidance in appendix B to part 37.645 As 

noted above in the discussion of 

§ 37.403, the Commission is moving to 

§ 37.404 the requirement for a SEF to 

assess whether trading in swaps listed 

on its market, in the index or instrument 

used as a reference price, or in the 

underlying commodity for its swaps is 

being used to affect prices in its 

market.646

With respect to CME’s and WMBAA’s 

comments on proposed § 37.404(a),647

the Commission disagrees that this rule 

is unnecessary or that the requirements 

should instead be codified as acceptable 

practices. Core Principle 4 requires a 

SEF to monitor trading in swaps to 

prevent manipulation, price distortion, 

and disruptions.648 In its experience 

regulating the futures market, the 

Commission has found market 

participants’ records to be an invaluable 

tool in its surveillance efforts, and 

believes that a SEF should have direct 

access to such information in order to 

discharge its obligations under the SEF 

core principles, including Core 

Principle 4. However, the Commission 

notes that in the guidance for this rule, 

a SEF may limit the application of this 

requirement to those market 

participants who conduct substantial 

trading activity on its facility, which is 

consistent with the Commission’s 

similar requirements that large traders 

keep records for futures trading under 

§ 18.05 and for swaps trading under 

§ 20.6 of the Commission’s regulations. 

The Commission also notes that the 

requirement for market participants to 

keep such records is sound commercial 

practice, and that market participants 

are likely already maintaining such 

trading records. In response to CME’s 

comment, the Commission notes that 

the nature of records covered varies 

with the type of market and a market 

participant’s involvement, but would 

generally include purchases, sales, 

ownership, production, processing, and 

use of swaps, the underlying 

commodity, and other derivatives that 

have some relationship to, or effect on, 

the market participant’s trading in the 

listed swap. 

The Commission is also deleting the 

requirements under proposed 

§ 37.404(b) and replacing it, in the 

guidance, with a more general 

requirement for a SEF to demonstrate 

that it can obtain position and trading 

information directly from market 

participants or, if not available from 

them, through information-sharing 

agreements. Moreover, the guidance for 

this rule allows a SEF to limit the 

acquisition of such information to those 

market participants who conduct 

substantial trading on its facility. The 

Commission is making this change in 

response to commenters’ concerns, as 

noted in other sections, about obtaining 

position information because a SEF will 

not have the capability to monitor 

trading activities conducted on other 

trading venues.649

(e) § 37.405—Risk Controls for Trading 

Proposed § 37.405 required that a SEF 

have risk controls to reduce the 

potential risk of market disruptions, 

including, but not limited to, market 

restrictions that pause or halt trading in 

market conditions prescribed by the 

SEF. Additionally, the rule provided 

that where a SEF’s swap is linked to, or 

a substitute for, other swaps on the SEF 

or on other trading venues, including 

where a swap is based on the level of 

an equity index, such risk controls must 

be coordinated with those on the similar 

markets or trading venues, to the extent 

possible. 

The preamble of the SEF NPRM 

recognized that pauses and halts are 

only one category of risk controls, and 

that additional controls may be 

necessary to further reduce the potential 

for market disruptions.650 The SEF 

NPRM preamble specifically listed 

several risk controls that the 

Commission believed may be 

appropriate, including price collars or 

bands, maximum order size limits, stop 

loss order protections, kill buttons, and 

any others that may be suggested by 

commenters.651

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652 ICE Comment Letter at 5 (Mar. 8, 2011); 

Tradeweb Comment Letter at 11 (Mar. 8, 2011); 

CME Comment Letter at 27 (Feb. 22, 2011). 

653CME Comment Letter at 27 (Feb. 22, 2011). 

654 ICE Comment Letter at 5 (Mar. 8, 2011). 

655 Id. 

656SDMA Comment Letter at 5 (Mar. 8, 2011). 

657 Id. at 6. 

658 Id. See TAC Subcommittee Recommendations 

(Mar. 1, 2011). The report recommended several 

pre-trade risk controls for implementation at the 

exchange level, which were largely consistent with 

the pre-trade controls listed in the preamble to the 

SEF NPRM. 

659CME Comment Letter at 26 (Feb. 22, 2011). 

660 Id. 

661 Id. 

662Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1228. 

663TAC Subcommittee Recommendations (Mar. 

1, 2011). 

664The preamble to the SEF NPRM specifically 

mentioned daily price limits, order size limits, 

trading pauses, stop logic functionality, among 

others. Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1228. 

665TAC Subcommittee Recommendations at 4–5 

(Mar. 1, 2011). The TAC discussed this report’s 

findings at its meeting on March 1, 2011. See 

Transcript of Third Meeting of Technology 

Advisory Committee (Mar. 1, 2011) available at 

http://www.cftc.gov/ucm/groups/public/ 

@newsroom/documents/file/ 

tac_030111_transcript.pdf. 

666TAC Subcommittee Recommendations at 4 

(Mar. 1, 2011). 

667CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 

668CME Comment Letter at 27 (Feb. 22, 2011). 

(1) Summary of Comments 

Several commenters asserted that a 

SEF should have some discretion to 

determine the specific risk controls that 

are implemented within its markets.652

CME commented that the marketplace 

would benefit from some 

standardization of the types of pre-trade 

risk controls employed by SEFs and 

other trading venues, and expressed 

support for an acceptable practices 

framework that includes pre-trade 

quantity limits, price banding, and 

messaging throttles, but argued that the 

specific parameters of such controls 

should be determined by each SEF.653

ICE recommended that the Commission 

take a flexible approach to risk controls 

so as not to hinder innovation in 

developing new mechanisms to prevent 

market disruptions.654 ICE did, 

however, recommend that the 

Commission expressly require a SEF to 

have pre-trade risk controls or checks, 

which are especially important in thinly 

traded markets where RFQs are more 

common.655

SDMA supported the requirement in 

proposed § 37.405, but noted that the 

rule should include pre-trade and posttrade risk control requirements that are 

uniform across the market.656 SDMA 

noted that a uniform approach would 

create a much needed single regulatory 

approach to risk management across the 

derivatives market, enhance market 

integrity, and decrease systemic risk.657

SDMA agreed with the best practices for 

pre-trade and post-trade risk controls as 

noted in the Pre-Trade Functionality 

Subcommittee of the CFTC TAC’s 

Recommendations on Pre-Trade 

Practices for Trading Firms, Clearing 

Firms and Exchanges involved in Direct 

Market Access.658

Finally, CME objected to the 

requirement to coordinate risk 

controls.659 CME stated that a SEF 

should retain the flexibility to 

determine and implement risk controls 

that it believes are necessary to protect 

the integrity of its markets.660 CME 

recommended that the Commission 

work constructively with registered 

entities to facilitate coordination.661

(2) Commission Determination 

The Commission is adopting 

proposed § 37.405, subject to certain 

modifications, including converting a 

portion of the rule to the guidance in 

appendix B to part 37. As stated in the 

SEF NPRM, the Commission believes 

that pauses and halts are effective risk 

management tools that must be 

implemented by a SEF to facilitate 

orderly markets.662 Automated risk 

control mechanisms, including pauses 

and halts, have proven to be effective 

and necessary in preventing market 

disruptions in the futures market and, 

therefore, will remain as part of the rule. 

As noted by SDMA, the Pre-Trade 

Functionality Subcommittee of the TAC 

issued a report that recommended the 

implementation of several trade risk 

controls at the exchange level.663 The 

controls recommended in the 

Subcommittee report were consistent, in 

large part, with the trade controls 

referenced in the preamble to the SEF 

NPRM, and which are being adopted in 

the guidance in appendix B to part 

37.664 The TAC accepted the 

Subcommittee report, which specifically 

recommended that exchanges 

implement pre-trade limits on order 

size, price collars around the current 

price, intraday position limits (of a type 

that represent financial risk to the 

clearing member), message throttles, 

and clear error-trade and ordercancellation policies.665 The 

Subcommittee report also noted that 

‘‘[s]ome measure of standardization of 

pre-trade risk controls at the exchange 

level is the cheapest, most effective and 

most robust path to addressing the 

Commission’s concern [for preserving 

market integrity].’’ 666

The Commission believes that the 

implementation of specific types of 

other risk controls is generally desirable, 

but also recognizes that such risk 

controls should be adapted to the 

unique characteristics of the markets to 

which they apply. A SEF implementing 

any such additional risk controls should 

consider the balance between avoiding 

a market disruption while not impeding 

a market’s price discovery function. 

Controls that unduly restrict a market’s 

ability to respond to legitimate market 

events will interfere with price 

discovery. Accordingly, consistent with 

many of the comments on this subject, 

the Commission is enumerating specific 

types of risk controls, in addition to 

pauses and halts, that a SEF may 

implement in the guidance rather than 

in the rule, in order to provide a SEF 

with greater discretion to select among 

the enumerated risk controls, or to 

create new risk controls that meet the 

unique characteristics of its markets. A 

SEF will also have discretion in 

determining the parameters for the 

selected controls. 

Additionally, in response to CME’s 

concern about the requirement to 

coordinate risk controls, the 

Commission is moving this language 

from proposed § 37.405 to the guidance. 

Specifically, a SEF with a swap that is 

fungible with, linked to, or a substitute 

for other swaps on the SEF or on other 

trading venues, should, to the extent 

practicable, coordinate its risk controls 

with any similar controls placed on 

those other swaps. The guidance also 

states that if a SEF’s swap is based on 

the level of an equity index, such risk 

controls should, to the extent 

practicable, be coordinated with any 

similar controls placed on national 

security exchanges. 

(f) § 37.406—Trade Reconstruction 

Under Core Principle 4, Congress 

required that a SEF have the ability to 

comprehensively and accurately 

reconstruct all trading on its facility.667

Proposed § 37.406 set forth this 

requirement, including the requirement 

that audit-trail data and reconstructions 

be made available to the Commission in 

a form, manner, and time as determined 

by the Commission. 

(1) Summary of Comments 

CME commented that audit trail data 

is extremely detailed and voluminous 

and that SEFs should be given adequate 

time to prepare the trading data before 

it is supplied to the Commission.668 In 

this regard, CME recommended that the 

wording ‘‘in a form, manner, and time 

as determined by the Commission’’ be 

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669 Id. 

670CEA section 5h(f)(5); 7 U.S.C. 7b–3(f)(5). 

671CEA section 5h(f)(5)(A); 7 U.S.C. 7b–3(f)(5)(A). 

672WMBAA Comment Letter at 26 (Mar. 8, 2011). 

673 Id. 

674 Id. 

675MarketAxess Comment Letter at 37 (Mar. 8, 

2011). 

676The Commission is changing the terms 

‘‘participants’’ and ‘‘traders’’ to ‘‘market 

participants’’ to provide clarity. 

677CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B). 

678CEA section 5h(f)(5)(B); 7 U.S.C. 7b–3(f)(5)(B). 

replaced with ‘‘such reasonable time as 

determined by the Commission.’’ 669

(2) Commission Determination 

The Commission is revising the rule 

so that a SEF shall be required to make 

audit trail data and reconstructions 

available to the Commission ‘‘in a form, 

manner, and time that is acceptable to 

the Commission.’’ The Commission 

notes that it will work with SEFs to 

provide them with adequate time to 

supply such information to the 

Commission. 

(g) § 37.407—Additional Rules Required 

Proposed § 37.407 required a SEF to 

adopt and enforce any additional rules 

that it believes are necessary to comply 

with the requirements of subpart E of 

part 37. 

(1) Commission Determination 

Although the Commission did not 

receive any comments on the proposed 

rule, the Commission is revising the rule 

to state that applicants and SEFs may 

refer to the guidance and/or acceptable 

practices in appendix B to part 37 to 

demonstrate to the Commission 

compliance with the requirements of 

section 37.400. The Commission is also 

moving proposed § 37.407 to new 

§ 37.408, titled ‘‘Additional sources for 

compliance.’’ 

In new § 37.407, titled ‘‘Regulatory 

service provider,’’ the Commission is 

clarifying that a SEF can comply with 

the regulations in subpart E through a 

dedicated regulatory department or by 

contracting with a regulatory service 

provider pursuant to § 37.204. 

5. Subpart F—Core Principle 5 (Ability 

To Obtain Information) 

Core Principle 5 requires a SEF to: (a) 

Establish and enforce rules that will 

allow the facility to obtain any 

necessary information to perform any of 

the functions described in section 5h of 

the Act, (b) provide the information to 

the Commission on request, and (c) have 

the capacity to carry out international 

information-sharing agreements as the 

Commission may require.670 In the SEF 

NPRM, the Commission proposed to 

codify the statutory text of Core 

Principle 5 in proposed § 37.500, and 

adopts that rule as proposed. 

(a) § 37.501—Establish and Enforce 

Rules 

Proposed § 37.501 required a SEF to 

establish and enforce rules that will 

allow the SEF to have the ability and 

authority to obtain sufficient 

information to allow it to fully perform 

its operational, risk management, 

governance, and regulatory functions 

and any requirements under part 37, 

including the capacity to carry out 

international information-sharing 

agreements as the Commission may 

require. 

(1) Commission Determination 

The Commission received no 

comments on proposed § 37.501 and is 

adopting the rule as proposed. The 

Commission believes that § 37.501 

appropriately implements the 

requirement in Core Principle 5 for a 

SEF to establish and enforce rules that 

will allow the SEF to obtain any 

necessary information to perform any of 

its functions described in section 5h of 

the Act.671

(b) § 37.502—Collection of Information 

Proposed § 37.502 required a SEF to 

have rules that allow it to collect 

information on a routine basis, allow for 

the collection of non-routine data from 

its participants, and allow for its 

examination of books and records kept 

by the traders on its facility. 

(1) Summary of Comments 

WMBAA commented that aside from 

participants who contractually agree to 

provide information, a SEF does not 

possess the legal authority to obtain 

such information.672 Additionally, 

WMBAA stated that the burden to 

collect information should be placed 

upon counterparties.673 In the 

alternative, WMBAA stated that the 

Commission should require a SEF and 

its participants to enter into third party 

service provider agreements for the 

collection of the required 

information.674 MarketAxess 

commented that it is not clear what is 

meant by ‘‘non-routine data’’ in 

proposed § 37.502 and that the rule 

should make clear that a SEF is only 

required to collect and maintain 

participant information that is directly 

related to such participants’ activity 

conducted pursuant to the SEF’s 

rules.675

(2) Commission Determination 

The Commission is adopting § 37.502 

as proposed.676 In response to 

WMBAA’s and MarketAxess’s 

comments, the Commission notes that 

Core Principle 5 requires a SEF to 

establish and enforce rules that will 

allow it to obtain any necessary 

information to perform any of its 

functions described in section 5h of the 

Act. The Act and the Commission’s 

regulations provide a SEF with the legal 

authority to collect such information. As 

mentioned in § 37.204 above, a SEF may 

contract with a regulatory service 

provider to perform regulatory services 

on behalf of a SEF. Thus, a SEF may 

enter into a third party regulatory 

service provider agreement for the 

collection of information under 

§ 37.502. Additionally, as mentioned in 

§ 37.404 above, the Act requires SEFs to 

monitor trading in swaps to prevent 

manipulation, price distortion, and 

disruptions through surveillance, 

compliance, and disciplinary practices 

and procedures.677 The Commission 

believes that market participant records 

are a valuable tool in conducting an 

effective surveillance program; thus, a 

SEF should have direct access to such 

information in order to discharge its 

obligations under the core principles. 

The Commission notes that market 

participants are likely maintaining 

trading records as part of sound 

business practices so requiring SEFs to 

have rules that allow them to access 

such information should not present a 

burden. To address MarketAxess’s 

comment about ‘‘non-routine data,’’ the 

Commission clarifies that ‘‘non-routine 

data’’ means the collection of data on an 

ad-hoc basis, such as data that may be 

collected during an investigation. 

(c) § 37.503—Provide Information to the 

Commission 

Proposed § 37.503 required a SEF to 

provide information in its possession to 

the Commission upon request, in a form 

and manner that the Commission 

approves. 

(1) Commission Determination 

The Commission received no 

comments on proposed § 37.503 and is 

adopting the rule as proposed. The 

Commission believes that § 37.503 

appropriately implements the 

requirement in Core Principle 5 for a 

SEF to provide information to the 

Commission on request.678

(d) § 37.504—Information-Sharing 

Agreements 

Proposed § 37.504 required a SEF to 

share information with other regulatory 

organizations, data repositories, and 

reporting services as required by the 

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679WMBAA Comment Letter at 27 (Mar. 8, 2011). 

680 Id. 

681CEA section 5h(f)(6); 7 U.S.C. 7b–3(f)(6). 

682 Id. 

683Bloomberg Comment Letter at 3–4 (Jun. 3, 

2011); Alice Comment Letter at 5 (May 31, 2011); 

Rosen et al. Comment Letter at 22 (Apr. 5, 2011); 

WMBAA Comment Letter at 27 (Mar. 8, 2011); 

Tradeweb Comment Letter at 11 (Mar. 8, 2011); 

Reuters Comment Letter at 6 (Mar. 8, 2011); 

Phoenix Comment Letter at 3 (Mar. 7, 2011). 

684WMBAA Comment Letter at 2 (Apr. 11, 2013); 

Bloomberg Comment Letter at 3–4 (Jun. 3, 2011); 

Rosen et al. Comment Letter at 22 (Apr. 5, 2011); 

WMBAA Comment Letter at 27 (Mar. 8, 2011); 

Tradeweb Comment Letter at 11 (Mar. 8, 2011); 

Phoenix Comment Letter at 3 (Mar. 7, 2011). 

685Phoenix Comment Letter at 3–4 (Mar. 7, 2011). 

686WMBAA Comment Letter at 27 (Mar. 8, 2011). 

687Reuters Comment Letter at 6 (Mar. 8, 2011); 

Phoenix Comment Letter at 4 (Mar. 7, 2011). 

688Alice Comment Letter at 5 (May 31, 2011). 

689Phoenix Comment Letter at 4 (Mar. 7, 2011). 

690Tradeweb Comment Letter at 11 (Mar. 8, 

2011). 

691See Position Limits for Derivatives, 76 FR 

4752 (proposed Jan. 26, 2011). 

692Part 150 of the Commission’s regulations 

contains the current position limits regime. 

Commission or as otherwise necessary 

and appropriate to fulfill its selfregulatory and reporting 

responsibilities. The proposed rule also 

stated that appropriate informationsharing agreements can be established 

with such entities or the Commission 

can act in conjunction with the SEF to 

carry out such information sharing. 

(1) Summary of Comments 

WMBAA commented that the 

proposed rule could be interpreted to 

require a SEF to share information with 

its competitors, unless the information 

is disseminated by a neutral third party 

pursuant to a services agreement.679

WMBAA also requested clarification 

regarding the circumstances in which 

the Commission would determine to 

carry out information sharing itself, as 

opposed to a SEF entering into 

information-sharing agreements with 

the relevant entity.680

(2) Commission Determination 

The Commission is adopting § 37.504 

as proposed, subject to one 

modification. The Commission is 

revising the rule to change the term 

‘‘reporting services’’ to ‘‘third party data 

reporting services.’’ The Commission 

clarifies that the term ‘‘reporting 

services’’ was meant to refer to 

independent third parties that would 

provide trading data on a public basis 

and was not meant to include 

competitor SEFs. To address WMBAA’s 

comment about information sharing, the 

Commission clarifies that a SEF may 

work with the Commission to fulfill its 

information sharing requirements in the 

absence of agreements with SDRs, 

regulatory bodies, or third party data 

reporting services. Given that each SEF 

is unique, a particular SEF would need 

to contact the Commission to discuss 

how the information sharing 

requirements could be fulfilled. 

6. Subpart G—Core Principle 6 (Position 

Limits or Accountability) 

Core Principle 6 requires that a SEF 

adopt for each swap, as is necessary and 

appropriate, position limits or position 

accountability to reduce the potential 

threat of market manipulation or 

congestion.681 In addition, Core 

Principle 6 requires that for any contract 

that is subject to a federal position limit 

under CEA section 4a(a), the SEF set its 

position limits at a level no higher than 

the position limitation established by 

the Commission and monitor positions 

established on or through the SEF for 

compliance with the limit set by the 

Commission and the limit, if any, set by 

the SEF.682 In the SEF NPRM, the 

Commission proposed to codify the 

statutory text of Core Principle 6 in 

proposed § 37.600, and adopts that rule 

as proposed. Proposed § 37.601 repeated 

the requirements in § 37.600 and 

required that SEFs establish position 

limits in accordance with the 

requirements set forth in part 151 of the 

Commission’s regulations. 

(a) Summary of Comments 

Several commenters stated that SEFs 

will have difficulty enforcing position 

limitations.683 Many of these 

commenters noted that SEFs will lack 

knowledge of a market participant’s 

activity on other venues, and that will 

prevent a SEF from being able to 

calculate the true position of a market 

participant.684 In this regard, Phoenix 

stated that market participants will be 

allowed to trade on multiple SEFs so 

any one SEF’s information concerning a 

market participant’s position will be 

virtually meaningless, as the market 

participant may sell a large position on 

one SEF and simultaneously buy the 

same amount of the instrument on 

another SEF.685 WMBAA recommended 

that a common regulatory organization 

or third party regulatory service 

provider monitor position limits 

because they will have the capability to 

ensure coordinated oversight of the 

trading activity on multiple SEFs and 

the ability to implement disciplinary 

action if needed.686 Reuters and 

Phoenix recommended that the 

Commission or its designee monitor 

position limits.687 Alice recommended 

that, for cleared swaps, DCOs maintain 

position limits, and when a swap is 

cleared by multiple DCOs, one DCO 

would be the primary for a given 

participant and the other DCOs would 

report positions to that DCO.688

Despite the concerns raised by other 

commenters, Phoenix noted that, if 

required, a SEF can monitor position 

limits of market participants based upon 

the trading activity that takes place only 

on the SEF’s platform.689 Tradeweb also 

requested confirmation from the 

Commission that a SEF must only 

monitor its market participants’ position 

limits or positions in particular 

instruments with respect to positions 

entered into on its own platforms.690

(b) Commission Determination 

In response to commenters concerns 

about monitoring position limits, the 

Commission is removing the 

requirements in § 37.601. Instead, final 

§ 37.601 states that until such time that 

compliance is required under part 151 

of this chapter,691 a SEF may refer to the 

guidance and/or acceptable practices in 

appendix B to part 37 to demonstrate to 

the Commission compliance with the 

requirements of § 37.600. 

The guidance provides a SEF with 

reasonable discretion to comply with 

§ 37.600, including considering part 150 

of the Commission’s regulations.692 The 

guidance also states that for Required 

Transactions as defined in § 37.9, a SEF 

may demonstrate compliance with 

§ 37.600 by setting and enforcing 

position limitations or position 

accountability levels only with respect 

to trading on the SEF’s own market. For 

example, a SEF could satisfy the 

position accountability requirement by 

setting up a compliance program that 

continuously monitors the trading 

activity of its market participants and 

has procedures in place for remedying 

any violations of position levels. For 

Permitted Transactions as defined in 

§ 37.9, a SEF may demonstrate 

compliance with § 37.600 by setting and 

enforcing position accountability levels 

or sending the Commission a list of 

Permitted Transactions traded on the 

SEF. Therefore, a SEF is not required to 

monitor its market participants’ activity 

on other venues with respect to 

monitoring position limits. 

In response to comments that a 

common regulatory organization or the 

Commission should monitor position 

limits, the Commission notes that Core 

Principle 6 places the responsibility on 

a SEF to adopt and monitor position 

limits. The Dodd-Frank Act does not 

mandate that a common regulatory 

organization or the Commission monitor 

position limits. The Dodd-Frank Act 

also does not provide the Commission 

with the authority to exempt a SEF from 

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33534 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

693CEA section 5h(f)(7); 7 U.S.C. 7b–3(f)(7). 

694The Commission is renaming the title of this 

section from ‘‘Mandatory Clearing’’ to ‘‘Required 

Clearing’’ to be consistent with terminology used in 

the CEA and the Commission’s regulations. 

695 ISDA/SIFMA Comment Letter at 13 (Mar. 8, 

2011). 

696 Id. 

697MarketAxess Comment Letter at 38 (Mar. 8, 

2011). 

698CEA section 5b(h); 7 U.S.C. 7a–1(h). 

699 Id. 

700The Commission will address any necessary 

revisions to part 37 at such time as it determines 

to exercise its discretionary authority to exempt 

DCOs from certain DCO registration requirements. 

For example, if exempt DCOs are limited to clearing 

for only certain types of market participants, then 

the Commission will take action to ensure that SEF 

market participants have impartial access to swap 

clearing through registered DCOs. 

certain core principles. Therefore, the 

Commission is providing a SEF with 

flexibility to adopt and monitor position 

limits as described above. 

7. Subpart H—Core Principle 7 

(Financial Integrity of Transactions) 

Core Principle 7 requires a SEF to 

establish and enforce rules and 

procedures for ensuring the financial 

integrity of swaps entered on or through 

the facilities of the SEF, including the 

clearance and settlement of the swaps 

pursuant to section 2(h)(1) of the Act.693

In the SEF NPRM, the Commission 

proposed to codify the statutory text of 

Core Principle 7 in proposed § 37.700, 

and adopts that rule as proposed. 

(a) § 37.701—Mandatory Clearing 694

Proposed § 37.701 required 

transactions executed on or through a 

SEF to be cleared through a Commission 

registered DCO unless the transaction is 

excepted from clearing under section 

2(h)(7) of the Act or the swap is not 

subject to the clearing requirement 

under section 2(h)(1) of the Act. 

(1) Summary of Comments 

ISDA/SIFMA commented that section 

2(h)(1) of the CEA provides that swaps 

subject to the clearing requirement must 

be submitted for clearing to a registered 

DCO or a DCO that is exempt from 

registration; however, proposed § 37.701 

requires that transactions executed 

through a SEF be cleared only through 

a Commission-registered DCO.695 ISDA/ 

SIFMA recommended that the rule be 

amended to permit the use of exempt 

DCOs.696 MarketAxess recommended 

that proposed § 37.701 be revised to 

permit a SEF to rely on a representation 

from an end-user that it qualifies for the 

section 2(h)(7) exemption.697

(2) Commission Determination 

The Commission is adopting § 37.701 

as proposed, subject to certain revisions. 

The Commission is modifying § 37.701 

to state that ‘‘[t]ransactions executed on 

or through the swap execution facility 

that are required to be cleared under 

section 2(h)(1)(A) of the Act or are 

voluntarily cleared by the 

counterparties shall be cleared through 

a Commission-registered derivatives 

clearing organization, or a derivatives 

clearing organization that the 

Commission has determined is exempt 

from registration.’’ The Commission is 

deleting proposed § 37.701(a), which 

referred to the end-user exception under 

CEA section 2(h)(7) because, as 

modified, the final rule text clarifies that 

any swaps that are required to be 

cleared or that are voluntarily cleared 

must be cleared through a registered 

DCO, or a DCO that the Commission has 

determined is exempt from registration. 

The Commission notes that swaps that 

are subject to the clearing requirement 

must be submitted for clearing, except 

where the swap may be eligible for an 

exception or exemption from the 

clearing requirement pursuant to either 

the exception provided under section 

2(h)(7) of the Act and § 50.50 of the 

Commission’s regulations, or an 

exemption provided under part 50 of 

the Commission’s regulations. The rule 

also provides that counterparties that 

elect to clear a swap that is not required 

to be cleared may do so voluntarily 

through a Commission-registered DCO, 

or a DCO that the Commission has 

determined is exempt from registration. 

In response to ISDA/SIFMA’s 

recommendation that the rule be 

amended to permit the use of exempt 

DCOs, the Commission is mindful that 

CEA section 2(h)(1) provides that swaps 

subject to the clearing requirement must 

be submitted for clearing to a registered 

DCO or a DCO that is exempt from 

registration under the Act. The 

Commission further notes that under 

CEA section 5b(h), the Commission has 

discretionary authority to exempt DCOs, 

conditionally or unconditionally, from 

the applicable DCO registration 

requirements.698 Specifically, section 

5b(h) of the Act provides that ‘‘[t]he 

Commission may exempt, conditionally 

or unconditionally, a derivatives 

clearing organization from registration 

under this section for the clearing of 

swaps if the Commission determines 

that the [DCO] is subject to comparable, 

comprehensive supervision and 

regulation by the Securities and 

Exchange Commission or the 

appropriate government authorities in 

the home country of the 

organization.’’ 699 Thus, the Commission 

has discretion to exempt from 

registration DCOs that, at a minimum, 

are subject to comparable and 

comprehensive supervision by another 

regulator. 

The Commission notes that it has not 

yet exercised its discretionary authority 

to exempt DCOs from registration. 

Notwithstanding that there are no 

exempt DCOs at this time, the 

Commission has determined to revise 

the rule text as suggested by ISDA/ 

SIFMA. If the Commission determines 

to exercise its authority to exempt DCOs 

from applicable registration 

requirements, the Commission would 

likely address, among other things, the 

conditions and limitations applicable to 

clearing swaps for customers subject to 

section 4d(f) of the Act.700

Until such time as the Commission 

determines to exercise its authority to 

exempt DCOs from the applicable 

registration requirement, SEFs must 

route all swaps through registered 

DCOs, which are the appropriate 

entities to perform the clearing 

functions under CEA section 2(h)(1) at 

this time. Registered DCOs are subject to 

the CEA, the Commission’s regulations, 

and its regulatory programs. Among 

other things, registered DCOs are 

supervised for compliance with the 

Commission’s regulations, and 

subjected to ongoing risk surveillance 

and regular examinations. 

In consideration of MarketAxess’s 

comment that a SEF should be able to 

rely on a representation from an enduser that it qualifies for the CEA section 

2(h)(7) exception, the Commission 

clarifies that a SEF is not obligated to 

make any determinations with respect 

to applicability of the exceptions to the 

clearing requirement. 

(b) § 37.702—General Financial Integrity 

Proposed § 37.702(a) required a SEF 

to provide for the financial integrity of 

its transactions by establishing 

minimum financial standards for its 

members. At a minimum, a SEF would 

have to ensure that its members meet 

the definition of ‘‘eligible contract 

participant’’ under CEA section 1(a)(18). 

Proposed § 37.702(b) required a SEF, for 

transactions cleared by a DCO, to have 

the capacity to route transactions to the 

DCO in a manner acceptable to the DCO 

for purposes of ongoing risk 

management. In proposed § 37.702(c), 

for transactions that are not cleared by 

a DCO, a SEF must require members to 

demonstrate that they: (1) Have entered 

into credit arrangement documentation 

for the transaction, (2) have the ability 

to exchange collateral, and (3) meet any 

credit filters that the SEF may adopt. 

Proposed § 37.702(d) required a SEF to 

implement any additional safeguards 

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701Bloomberg Comment Letter at 5 (Mar. 8, 2011). 

702 Id. 

703Reuters Comment Letter at 6 (Mar. 8, 2011). 

704MarketAxess Comment Letter at 35 (Mar. 8, 

2011). 

705 Id. 

706Energy Working Group Comment Letter at 5 

(Mar. 8, 2011). 

707MarketAxess Comment Letter at 37 (Mar. 8, 

2011). 

708Reuters Comment Letter at 6 (Mar. 8, 2011). 

709 ISDA/SIFMA Comment Letter at 13 (Mar. 8, 

2011). 

710ABC/CEIBA Comment Letter at 11 (Mar. 8, 

2011). 

711 Goldman Comment Letter at 5 (Mar. 8, 2011). 

712 Id. 

713 Id. 

714The Commission notes that under 

§ 37.202(a)(2), a SEF that permits intermediation 

must also obtain signed representations from 

intermediaries that their customers are ECPs. 

715Customer Clearing Documentation, Timing of 

Acceptance for Clearing, and Clearing Member Risk 

Management, 77 FR 21278 (Apr. 9, 2012). 

716Requirements for Processing, Clearing, and 

Transfer of Customer Positions, 76 FR 13101, 

13109–10 (proposed Mar. 10, 2011). 

717Customer Clearing Documentation, Timing of 

Acceptance for Clearing, and Clearing Member Risk 

Management, 77 FR at 21309. 

718 Id. 

719 Id. 

720ABC/CEIBA Comment Letter at 11 (Mar. 8, 

2011). 

that may be required by Commission 

regulations. 

(1) Summary of Comments 

Bloomberg commented, with respect 

to proposed § 37.702(a), that a SEF 

should be able to determine a market 

participant’s ability to meet any 

minimum financial standards by virtue 

of confirming that the participant has 

access to a DCO either as a member or 

through an intermediary.701 According 

to Bloomberg, it is not necessary to set 

separate, duplicative financial 

requirements at the SEF level that are 

redundant to the exhaustive financial 

requirements that will be associated 

with access to a DCO.702

With respect to proposed § 37.702(b), 

Reuters agreed that SEFs should assure 

the secure and prompt routing to a DCO 

for swap transactions subject to the 

clearing requirement.703 MarketAxess 

commented that SEFs should be able to 

send a trade to the DCO via an 

affirmation hub.704 Use of affirmation 

hubs, according to MarketAxess, would 

allow SEFs to enjoy lower costs and is 

preferred by its clients.705

The Commission received several 

comments with regard to proposed 

§ 37.702(c). The Energy Working Group 

noted that proposed § 37.702(c) should 

be narrower in scope and that a SEF 

should be able to fulfill its obligation by 

ensuring that the counterparties have 

entered into bilateral credit support 

arrangements.706 MarketAxess wrote 

that a SEF is not in a position to 

determine whether members’ credit 

filters or exchanges of collateral are 

sufficient.707 Reuters noted that the 

existence of credit and/or collateral 

arrangements should be primarily a 

matter between the counterparties.708

ISDA/SIFMA commented that the 

Commission should not create new 

collateral requirements for end-users 

transacting through a SEF.709 ABC/ 

CIEBA commented that proposed 

§ 37.702(c) would impose costly 

burdens on SEFs.710

Goldman noted that there are 

circumstances where a swap that is 

subject to the clearing requirement may 

not be accepted for clearing for credit or 

other reasons.711 In such cases and 

depending on the SEF’s rules under 

Core Principle 7, parties that execute 

through the SEF either would face one 

another in an uncleared, bilateral 

transaction or would potentially owe 

amounts arising from the trade not being 

accepted for clearing.712 Therefore, 

Goldman recommended that parties 

should be able to learn the identities of 

their counterparty when transacting in 

cleared and uncleared swaps.713

(2) Commission Determination 

The Commission has considered the 

comments received and is adopting 

§ 37.702(a) as proposed. In response to 

Bloomberg’s comment about setting 

financial requirements at the SEF level, 

the Commission disagrees that a SEF 

should be able to determine a member’s 

ability to meet any minimum financial 

standards by virtue of confirming that 

the member has access to a DCO. The 

Commission notes that a DCO only 

screens clearing members, and not 

customers, according to financial 

standards. Therefore, unless a SEF 

member is also a clearing member, the 

SEF will not be able to determine the 

member’s ability to meet any minimum 

financial standards by virtue of 

confirming that the member has access 

to a DCO. The Commission also notes 

that there is no affirmative obligation for 

a DCO to ensure that its members, 

customers, or counterparties are ECPs. 

Therefore, a SEF must ensure that its 

members qualify as ECPs and may rely 

on representations from its members to 

fulfill this requirement.714

Last year, the Commission adopted 

rules regarding the processing of cleared 

trades.715 In that rulemaking, the 

Commission proposed a new 

§ 37.702(b) 716 and adopted a revised 

§ 37.702(b) 717 regarding cleared swaps 

traded through a SEF. That final rule 

required a SEF to provide for the 

financial integrity of its transactions that 

are cleared by a DCO: (a) By ensuring 

that it has the capacity to route 

transactions to the DCO in a manner 

acceptable to the DCO for purposes of 

clearing; and (b) by coordinating with 

each DCO to which it submits 

transactions for clearing, in the 

development of rules and procedures to 

facilitate prompt and efficient 

transaction processing in accordance 

with the requirements of § 39.12(b)(7) of 

the Commission’s regulations.718

In response to MarketAxess’s 

comment about affirmation hubs, the 

Commission notes that § 37.702(b), as 

adopted in April 2012, requires a SEF to 

route a swap to a DCO in a manner 

acceptable to the DCO.719 If the DCO 

views the use of an affirmation hub as 

an acceptable means for routing the 

swap, the routing otherwise complies 

with § 37.702(b), and the trade is 

processed in accordance with the 

standards set forth in §§ 1.74, 39.12, 

23.506, and 23.610 of the Commission’s 

regulations, then the use of an 

affirmation hub for routing a swap to a 

DCO for clearing would be permissible. 

In consideration of the comments 

with respect to uncleared swaps, the 

Commission is eliminating proposed 

§ 37.702(c). The Commission agrees 

with commenters that requiring SEFs to 

monitor the credit and collateral 

arrangements of parties transacting 

uncleared swaps goes beyond the scope 

of what should be expected of a SEF. To 

address Goldman’s comments 

requesting that the Commission 

mandate that a SEF’s rules require 

identification of the counterparties prior 

to a swap transaction, the Commission 

believes that a SEF should retain 

discretion in this regard. Finally, the 

Commission is deleting proposed 

§ 37.702(d) as it is unnecessary because 

a SEF must already implement 

safeguards as required by Commission 

regulations. 

(c) § 37.703—Monitoring for Financial 

Soundness 

Proposed § 37.703 required a SEF to 

monitor its members’ compliance with 

the SEF’s minimum financial standards 

and routinely receive and promptly 

review financial and related information 

from its members. 

(1) Summary of Comments 

ABC/CIEBA commented that this 

requirement would create significant 

barriers to entry, stifle competition, and 

lead to higher transaction costs.720 FXall 

commented that like DCMs, SEFs 

should be permitted to delegate their 

financial surveillance functions to the 

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33536 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

721FXall Comment Letter at 13 (Mar. 8, 2011). 722 Id. 723CEA section 5h(f)(8); 7 U.S.C. 7b–3(f)(8). 724The Commission notes that Commission 

regulation 40.6(a)(6)(i) provides that any SEF rule 

that establishes general standards or guidelines for 

taking emergency actions must be submitted to the 

Commission pursuant to regulation 40.6(a). 

Relatedly, Commission regulation 40.6(a)(6)(ii) 

provides particular emergency actions shall be filed 

with the Commission ‘‘prior to [its] 

implementation, or, if not practicable, . . . at the 

earlier possible time after implementation, but in no 

event more than twenty-four hours after 

implementation.’’ 

725Bloomberg Comment Letter at 4 (Jun. 3, 2011); 

Bloomberg Comment Letter at 5–6 (Mar. 8, 2011); 

WMBAA Comment Letter at 28 (Mar. 8, 2011); 

Reuters Comment Letter at 7 (Mar.8, 2011). 

726Bloomberg Comment Letter at 4 (Jun. 3, 2011); 

Bloomberg Comment Letter at 5–6 (Mar. 8, 2011). 

727WMBAA Comment Letter at 28 (Mar. 8, 2011). 

728Reuters Comment Letter at 7 (Mar. 8, 2011). 

729CME Comment Letter at 28 (Feb. 22, 2011). 

730 ISDA/SIFMA Comment Letter at 13 (Mar. 8, 

2011). 

731CEA section 5h(f)(8); 7 U.S.C. 7b–3(f)(8). 

732CEA section 5h(f)(9); 7 U.S.C. 7b–3(f)(9). 

733 Id. 

Joint Audit Committee to the extent that 

its members are registered with NFA.721

For non-NFA members, FXall 

recommended that SEFs be permitted to 

delegate financial surveillance 

obligations to the members’ primary 

financial regulator or otherwise 

outsource such duties to a third party 

service provider.722

(2) Commission Determination 

The Commission agrees with the 

commenters that burdensome financial 

surveillance obligations may lead to 

higher transaction costs. Therefore, in 

consideration of the comments, the 

Commission is revising § 37.703 to state 

that a SEF must monitor its members to 

ensure that they continue to qualify as 

ECPs. With regard to the comment 

requesting delegation of the proposed 

§ 37.703 responsibilities to the Joint 

Audit Committee, the Commission notes 

that final § 37.703, as revised, obviates 

the need for any such delegation. Under 

final § 37.703, a SEF need only ensure 

that its members remain ECPs and may 

rely on representations from its 

members. 

8. Subpart I—Core Principle 8 

(Emergency Authority) 

Core Principle 8 requires a SEF to 

adopt rules to provide for the exercise 

of emergency authority, in consultation 

or cooperation with the Commission, as 

is necessary and appropriate, including 

the authority to liquidate or transfer 

open positions in any swap or to 

suspend or curtail trading in a swap.723

In the SEF NPRM, the Commission 

proposed to codify the statutory text of 

Core Principle 8 in proposed § 37.800, 

and adopts that rule as proposed.724

(a) § 37.801—Additional Sources for 

Compliance 

Proposed § 37.801 referred applicants 

and SEFs to the guidance and/or 

acceptable practices in appendix B to 

part 37 to demonstrate compliance with 

Core Principle 8. The guidance reflected 

the Commission’s belief that the need 

for emergency action may also arise 

from related markets traded on other 

platforms and that there should be an 

increased emphasis on cross-market 

coordination of emergency actions. In 

that regard, the proposed guidance 

provided that, in consultation and 

cooperation with the Commission, a 

SEF should have the authority to 

intervene as necessary to maintain 

markets with fair and orderly trading 

and to prevent or address manipulation 

or disruptive trading practices, whether 

the need for intervention arises 

exclusively from the SEF’s market or as 

part of a coordinated, cross-market 

intervention. The proposed guidance 

also provided that in situations where a 

swap is traded on more than one 

platform, emergency action to liquidate 

or transfer open interest must be as 

directed, or agreed to, by the 

Commission or the Commission’s staff. 

The proposed guidance also clarified 

that the SEF should have rules that 

allow it to take market actions as may 

be directed by the Commission. 

In addition to providing for rules, 

procedures, and guidelines for 

emergency intervention, the guidance 

noted that SEFs should provide prompt 

notification and explanation to the 

Commission of the exercise of 

emergency authority, and that 

information on all regulatory actions 

carried out pursuant to a SEF’s 

emergency authority should be included 

in a timely submission of a certified 

rule. 

(1) Summary of Comments 

Several commenters expressed 

concern about a SEFs ability to liquidate 

or transfer open positions.725 Bloomberg 

stated that, because a SEF will not hold 

a participant’s swap positions, the 

Commission should only require that a 

SEF adopt rules requiring it to 

coordinate with a DCO to facilitate the 

liquidation or transfer of positions 

during an emergency.726 Similarly, 

WMBAA noted that a SEF will not 

maintain counterparty positions and 

thus it may not possess the ability to 

liquidate or transfer those positions.727

Reuters stated that liquidating open 

positions does not fall within a trading 

platform’s traditional role in the 

market.728

CME stated that SEFs must have the 

flexibility and independence necessary 

to address market emergencies.729

Alternatively, ISDA/SIFMA commented 

that the Core Principle 8 rules should 

adopt uniform standards and that those 

standards must consider the interaction 

between SEFs, DCMs, clearing 

organizations, swap data repositories, 

and other market-wide institutions.730

(2) Commission Determination 

The Commission is adopting § 37.801 

as proposed, with certain modifications 

to the guidance in appendix B to part 

37. The Commission acknowledges 

commenters concerns regarding a SEF’s 

ability to liquidate or transfer open 

positions; however, the statute requires 

a SEF to have the authority to liquidate 

or transfer open positions.731 The 

Commission expects that SEFs would 

establish such authority over open 

positions through their rules and/or 

participant agreements and that the 

exercise of any such authority would, 

consistent with the statute, be done in 

coordination with the Commission and 

relevant DCOs. 

The Commission is making slight 

revisions to the guidance to clarify that 

SEFs retain the authority to 

independently respond to emergencies 

in an effective and timely manner 

consistent with the nature of the 

emergency, as long as all such actions 

taken by the SEF are made in good faith 

to protect the integrity of the markets. 

The Commission believes that market 

emergencies can vary with the type of 

market and any number of unusual 

circumstances so SEFs need flexibility 

to carry out emergency actions. The 

Commission believes that the guidance 

strikes a reasonable balance between the 

need for flexibility and the need for 

standards in the case of coordinated 

cross-market intervention. 

9. Subpart J—Core Principle 9 (Timely 

Publication of Trading Information) 

Core Principle 9 requires a SEF to 

make public timely information on 

price, trading volume, and other trading 

data on swaps to the extent prescribed 

by the Commission.732 It also requires a 

SEF to have the capacity to 

electronically capture and transmit 

trade information for those transactions 

that occur on its facility.733 In the SEF 

NPRM, the Commission proposed to 

codify the statutory text of Core 

Principle 9 in proposed § 37.900. 

Proposed § 37.901 required that, for 

swaps traded on or through a SEF, the 

SEF report specified swap data as 

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734 17 CFR part 43; Real-Time Reporting of Swap 

Transaction Data, 77 FR 1182 (Jan. 9, 2012). 

735 17 CFR part 45; Swap Data Recordkeeping and 

Reporting Requirements, 77 FR 2136 (Jan. 13, 2012). 

736The Commission proposed certain revisions to 

§ 16.01 in the DCM NPRM. See Core Principles and 

Other Requirements for Designated Contract 

Markets, 75 FR 80572 (proposed Dec. 22, 2010) for 

further details. 

737Eris Comment Letter at 5 (Mar. 8, 2011). 

738 Id. 

739MarketAxess Comment Letter at 39 (Mar. 8, 

2011). 

740The Commission notes that § 16.00 is 

applicable to a SEF only to the extent that such SEF 

has clearing members and lists options on physicals 

for trading. Section 16.01 is applicable to a SEF for 

all swaps and options traded thereon. Section 16.02 

is applicable to a SEF only to the extent that such 

SEF lists options for trading. 

741Core Principles and Other Requirements for 

Designated Contract Markets, 77 FR 36612, 36642 

(Jun. 19, 2012). 

742CEA section 5h(f)(10); 7 U.S.C. 7b–3(f)(10). 

743MarketAxess Comment Letter at 39 (Mar. 8, 

2011). 

744CME Comment Letter at 38 (Feb. 22, 2011). 

745See Registration and Regulation of SecurityBased Swap Execution Facilities, 76 FR at 10982, 

11063 (Proposed Rule 818(b) requires SB–SEFs to 

keep books and records ‘‘for a period of not less 

than five years, the first two years in an easily 

accessible place). Rule 17a–1(b) (240.17a–1(b) 

requires national securities exchanges, among 

others, to keep books and records for a period of 

not less than five years, the first two years in an 

easily accessible place, subject to a destruction and 

disposition provisions, which allows exchanges to 

destroy physical documents pursuant to an effective 

and approved plan regarding such destruction and 

transferring/indexing of such documents onto some 

recording medium.). 17 CFR 240.17a–1(b). 

746CEA section 5h(f)(11); 7 U.S.C. 7b–3(f)(11). 

747NGSA Comment Letter at 2 (Jun. 8, 2012). 

DTCC also raised this concern in its comment letter. 

DTCC Comment Letter at 3 (Jun. 10, 2011). 

provided under part 43 734 and part 

45 735 of the Commission’s regulations 

and meet the requirements of part 16 of 

the Commission’s regulations. Proposed 

§ 37.902 required a SEF to have the 

capacity to electronically capture trade 

information with respect to transactions 

executed on the facility. 

(a) Summary of Comments 

In response to the Commission’s 

questions in the SEF NPRM about endof-day price reporting for interest rate 

swaps and the Commission’s proposed 

revisions to § 16.01,736 Eris stated the 

following: (1) It is reasonable to require 

a market to report publicly each trade 

(including instrument, price, and 

volume) intra-day, as soon as the trade 

occurs; (2) daily open interest should be 

published publicly in a summary 

fashion and should be grouped in 

maturity buckets based on the 

remaining tenor of each instrument; (3) 

as to end-of-day pricing, a clearing 

house will settle contracts based upon a 

market-driven curve, and the 

methodology, as well as the inputs and 

components, of the curve should be 

made transparent to the full trading 

community; and (4) the clearing house 

should publish the specific settlement 

value applied to each cleared swap in 

the daily mark-to-market process.737

Eris also stated that SEFs and DCMs 

should be held to the same reporting 

standard in this respect.738

MarketAxess commented that 

proposed § 37.900(b) and § 37.902 are 

duplicative and that proposed § 37.902 

should be withdrawn.739

(b) Commission Determination 

The Commission is adopting § 37.900 

and § 37.901 as proposed. The 

Commission acknowledges 

MarketAxess’s comment that § 37.902 is 

duplicative to § 37.900(b) and thus is 

withdrawing § 37.902. In response to 

Eris’s comment about the same 

reporting standards for SEFs and DCMs 

that list swaps, the Commission notes 

that a SEF, similar to a DCM, must meet 

the same requirements under part 16 of 

the Commission’s regulations for swaps 

reporting.740 The Commission also notes 

that it codified § 16.01 in the final DCM 

rulemaking, and in that rulemaking, the 

Commission states that it considered the 

proposed reporting standard put forth 

by Eris, but the Commission believes 

that the more detailed reporting 

obligations under § 16.01 are warranted 

at this time in light of the novelty of 

swaps trading on regulated 

exchanges.741

10. Subpart K—Core Principle 10 

(Recordkeeping and Reporting) 

Core Principle 10 establishes 

recordkeeping and reporting 

requirements for SEFs.742 In the SEF 

NPRM, the Commission proposed to 

codify the statutory text of Core 

Principle 10 in proposed § 37.1000, and 

adopts that rule as proposed. 

Proposed § 37.1001 required a SEF to 

maintain records of all business 

activities, including a complete audit 

trail, investigatory files, and 

disciplinary files, in a form and manner 

acceptable to the Commission for at 

least five years in accordance with the 

requirements of section 1.31 and part 45 

of this chapter. Proposed § 37.1002 

required a SEF to report to the 

Commission such information that the 

Commission determines to be necessary 

or appropriate for it to perform its 

duties. Proposed § 37.1003 required a 

SEF to keep records relating to swaps 

defined in section 1a(47)(A)(v) of the 

CEA open to inspection and 

examination by the SEC. 

(a) Summary of Comments 

MarketAxess stated that a SEF should 

be permitted to use a regulatory service 

provider with respect to its 

recordkeeping and reporting 

requirements.743 CME commented that 

proposed § 37.1003 does not provide 

any guidance as to what records will 

need to be retained and for how long 

they must be retained.744

(b) Commission Determination 

The Commission is adopting 

§ 37.1001 as proposed. The Commission 

is also withdrawing proposed § 37.1002 

and § 37.1003 because they are 

repetitive of paragraphs (a)(2) and (a)(3) 

of § 37.1000. In response to 

MarketAxess’s comment, the 

Commission notes that a SEF may 

utilize the services of a regulatory 

service provider pursuant to § 37.204 to 

assist the SEF in complying with its 

responsibilities under Core Principle 10. 

In response to CME’s comment, the 

Commission notes that in accordance 

with Core Principle 10 and § 1.31 of the 

Commission’s regulations, a SEF should 

retain ‘‘any’’ records relevant to swaps 

defined in section 1a(47)(A)(v) of the 

Act and that the SEF should leave such 

records open to inspection and 

examination for a period of five years. 

The Commission staff also consulted 

with representatives from the SEC, who 

confirmed that the SEC’s relevant 

recordkeeping requirements typically 

extend for a period of five years.745

11. Subpart L—Core Principle 11 

(Antitrust Considerations) 

Core Principle 11 governs the 

antitrust obligations of SEFs.746 In the 

SEF NPRM, the Commission proposed 

to codify the statutory text of Core 

Principle 11 in proposed § 37.1100, and 

adopts that rule as proposed. 

Additionally, proposed § 37.1101 

referred applicants and SEFs to the 

guidance in appendix B to part 37 for 

purposes of demonstrating compliance 

with proposed § 37.1100. 

(a) Summary of Comments 

NGSA commented that if SEFs are 

allowed to select the SDR to which SEFexecuted swaps are reported, there is a 

threat of anticompetitive tying of swap 

data reporting services from a particular 

SDR to the SEF’s services, which may 

harm competition among SDRs.747

Accordingly, NGSA recommended that 

the Commission amend the proposed 

rules to explicitly prohibit a SEF from 

tying the swap data reporting services of 

a particular SDR to the swap execution 

services provided by such SEF and from 

entering into an exclusive agreement 

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748NGSA Comment Letter at 5 (Jun. 8, 2012). 

749CEA section 5h(f)(12); 7 U.S.C. 7b–3(f)(12). 

750Requirements for Derivatives Clearing 

Organizations, Designated Contract Markets, and 

Swap Execution Facilities Regarding the Mitigation 

of Conflicts of Interest, 75 FR 63732 (proposed Oct. 

18, 2010). 

751CEA section 5h(f)(13); 7 U.S.C. 7b–3(f)(13). 

752 Id. 

753See Derivatives Clearing Organization General 

Provisions and Core Principles, 76 FR 69334 (Nov. 

8, 2011). Commission regulation § 39.11 establishes 

requirements that a DCO will have to meet in order 

to comply with DCO Core Principle B (Financial 

Resources), as amended by the Dodd-Frank Act. 

Amended Core Principle B requires a DCO to 

possess financial resources that, at a minimum, 

exceed the total amount that would enable the DCO 

to meet its financial obligations to its clearing 

members notwithstanding a default by the clearing 

member creating the largest financial exposure for 

the DCO in extreme but plausible conditions; and 

enable the DCO to cover its operating costs for a 

period of one year, as calculated on a rolling basis. 

754Parity Energy Comment Letter at 6 (Mar. 25, 

2011). 

755Phoenix Comment Letter at 4 (Mar. 7, 2011). 

756TruMarx Comment Letter at 7 (Mar. 8, 2011). 

757 Id. 

758SDMA Comment Letter at 12 (Mar. 8, 2011). 

759 Id. 

760The Commission is making a technical change 

due to the fact that the cross reference in 

§ 37.1301(b) should include ‘‘of this chapter’’ at the 

end of the reference in order to comply with federal 

regulatory guidelines. Accordingly, the Commission 

is revising § 37.1301(b) to read: ‘‘An entity that 

operates as both a swap execution facility and a 

derivatives clearing organization shall also comply 

with the financial resources requirements of section 

39.11 of this chapter.’’ The Commission is also 

removing the phrase ‘‘or applicant for designation 

as such’’ from § 37.1301(c) because it is 

unnecessary. Section 37.3 and Form SEF read 

together make clear that an applicant must comply 

with the financial resources requirement. 

761CEA section 5h(f)(13)(A); 7 U.S.C. 7b– 

3(f)(13)(A). 

762CEA section 5h(f)(13)(B); 7 U.S.C. 7b– 

3(f)(13)(B). 

with any SDR to report all swaps to 

such SDR.748

(b) Commission Determination 

The Commission is adopting 

§ 37.1101 and the corresponding 

guidance in appendix B to part 37 as 

proposed and declines to revise the 

proposed rules as NGSA recommends. 

The Commission notes that under Core 

Principle 11, SEFs may not adopt any 

rule or take any action that results in 

any unreasonable restraint of trade or 

impose any material anticompetitive 

burden on trading or clearing. The 

Commission believes that Core Principle 

11 adequately addresses NGSA’s 

concern. The Commission also notes 

that it has not limited a SEF’s choice of 

DCOs. The Commission believes that 

SDRs and DCOs should be able to 

compete for a SEF’s business subject to 

the anticompetitive considerations 

under Core Principle 11. Additionally, 

the Commission notes that multiple 

SEFs are likely to trade the same swap 

contracts so market participants will be 

able to choose the appropriate SEF to 

trade swaps based on SDR and other 

considerations. 

12. Subpart M—Core Principle 12 

(Conflicts of Interest) 

Core Principle 12 governs conflicts of 

interest.749 In the SEF NPRM, the 

Commission proposed to codify the 

statutory text of Core Principle 12 in 

proposed § 37.1200, and adopts that rule 

as proposed. As noted in the SEF 

NPRM, the substantive regulations 

implementing Core Principle 12 were 

proposed in a separate release titled 

‘‘Requirements for Derivatives Clearing 

Organizations, Designated Contract 

Markets, and Swap Execution Facilities 

Regarding the Mitigation of Conflicts of 

Interest.’’ 750 Until such time as the 

Commission may adopt the substantive 

rules implementing Core Principle 12, 

SEFs have reasonable discretion to 

comply with this core principle as 

stated in § 37.100. 

13. Subpart N—Core Principle 13 

(Financial Resources) 

Core Principle 13 requires a SEF to 

have adequate financial, operational, 

and managerial resources to discharge 

each of its responsibilities.751 In 

particular, Core Principle 13 states that 

a SEF’s financial resources are 

considered to be adequate if the value 

of such resources exceeds the total 

amount that would enable the SEF to 

cover its operating costs for a period of 

at least one year, calculated on a rolling 

basis.752 In the SEF NPRM, the 

Commission proposed to codify the 

statutory text of Core Principle 13 in 

proposed § 37.1300, and adopts that rule 

as proposed. 

(a) § 37.1301—General Requirements 

Proposed § 37.1301 set forth the 

financial resources requirements for 

SEFs in order to implement Core 

Principle 13. Proposed § 37.1301(a) 

required a SEF to maintain financial 

resources sufficient to enable it to 

perform its functions in compliance 

with the SEF core principles. Proposed 

§ 37.1301(b) required an entity operating 

as both a SEF and a DCO to comply with 

both the SEF financial resources 

requirements and the DCO financial 

resources requirements in § 39.11.753

Proposed § 37.1301(c) stated that 

financial resources would be considered 

sufficient if their value is at least equal 

to a total amount that would enable the 

SEF, or applicant for designation as 

such, to cover its operating costs for a 

period of at least one year, calculated on 

a rolling basis. 

(1) Summary of Comments 

Several commenters raised concerns 

about the financial resources 

requirement to cover one year of 

operating costs. Parity Energy 

recommended that the Commission 

interpret ‘‘operating costs of a swap 

execution facility for a 1-year period’’ to 

be the cost to the SEF of an orderly 

wind-down of operations, where the 

SEF is one of many execution avenues 

for standardized, cleared swaps and its 

failure would have minimal impact on 

market risk or stability.754 Phoenix 

recommended that because a SEF does 

not take or hold positions in any of the 

products traded on it, an orderly winddown of a SEF should take six months 

so SEFs should be required to maintain 

financial resources to cover six months 

of its operating costs.755 Similarly, 

TruMarx contended that SEFs should 

not have such stringent financial 

resources standards because a SEF is a 

trading platform and, therefore, will not 

carry on its books the risks of positions 

and trades executed on it.756 Rather, 

TruMarx stated that risk will be borne 

by the principals entering into the 

transactions, their clearing brokers, and 

clearing houses.757

Alternatively, SDMA noted that it 

would be disruptive to the market if a 

SEF went into bankruptcy.758 Therefore, 

it contended that 12 months of working 

capital is the absolute minimum amount 

of financial resources that SEFs should 

have, and recommend that the 

Commission require that SEFs have 18 

months of working capital.759

(2) Commission Determination 

The Commission is adopting 

§ 37.1301 as proposed.760 To address the 

concerns about the financial resources 

requirement, the Commission notes that 

Core Principle 13 requires each SEF to 

maintain adequate financial resources to 

discharge its responsibilities.761 In order 

to fulfill this responsibility, the core 

principle states that the financial 

resources of a SEF shall be considered 

to be adequate if the value of the 

financial resources exceeds the total 

amount that would enable the SEF to 

cover its operating costs for a period of 

one year, calculated on a rolling 

basis.762

In response to comments that Core 

Principle 13 should be interpreted to 

mean the cost to wind-down a SEF’s 

operations, the Commission notes that 

such an interpretation would require 

SEFs to have significantly less financial 

resources. The Commission believes 

that a SEF’s financial strength is vital to 

ensure that the SEF can discharge its 

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763Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1230. 

764Phoenix Comment Letter at 5 (Mar. 7, 2011). 

765 Id. 

766CME Comment Letter at 37 (Feb. 22, 2011). 

767Reuters Comment Letter at 8 (Mar. 8, 2011). 

768The Commission is renaming the title of this 

section from ‘‘Computation of Financial Resource 

Requirement’’ to ‘‘Computation of Projected 

Operating Costs to Meet Financial Resource 

Requirement’’ to provide greater clarity. 

769MarketAxess Comment Letter at 39 (Mar. 8, 

2011). 

770The Commission is revising the language of 

§ 37.1303 for clarity. 

771Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1231. 

772A ‘‘haircut’’ is a deduction taken from the 

value of an asset to reserve for potential future 

adverse price movements in such asset. 

773Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1231 n. 102. 

774MarketAxess Comment Letter at 39 (Mar. 8, 

2011). 

775MarketAxess noted that § 37.1304 contains a 

typographical error as it mistakenly cross-references 

proposed § 37.701, which relates to the mandatory 

clearing requirement, instead of proposed 

§ 37.1301. The Commission has made this technical 

change in the final rule. Additionally, the 

Commission is revising the language of § 37.1304 

for clarity. 

core principle responsibilities in 

accordance with the CEA and that those 

costs are greater than the cost to winddown operations. Based on its 

experience regulating DCMs and DCOs, 

the Commission has learned that 

financial strength is vital to market 

continuity and the ability of an entity to 

withstand unpredictable market events, 

and believes that one year of operating 

expenses on a rolling basis is 

appropriate. For these reasons, the 

Commission also disagrees with 

TruMarx’s argument that SEFs should 

not have such stringent financial 

resources standards because they will 

not hold the risks of positions and 

trades. 

(b) § 37.1302—Types of Financial 

Resources 

Proposed § 37.1302 set forth the type 

of financial resources available to satisfy 

the requirements of proposed § 37.1301. 

The proposed rule stated that financial 

resources may include: (a) The SEF’s 

own capital; and (b) Any other financial 

resource deemed acceptable by the 

Commission. The Commission invited 

comment regarding particular financial 

resources to be included in the final 

regulation.763

(1) Summary of Comments 

Several commenters recommended 

that the Commission include specific 

examples of financial resources that 

might satisfy the requirement. Phoenix 

recommended that the Commission 

include in final § 37.1302 the following 

financial resources: assets of a parent 

company that wholly owns the SEF, 

and, subject to § 37.1304 (Valuation of 

financial resources), the SEF’s accounts 

receivable from SEF members.764

Phoenix contended that as long as the 

parent company has committed to 

guarantee the financial resource 

obligations of the SEF, those assets 

should be available to the SEF, and that 

amounts owed to a SEF by its customers 

are easily obtainable by a SEF.765 CME 

believed that Congress intended the 

term ‘‘financial resources’’ to be 

construed broadly and include anything 

of value at the SEF’s disposal, including 

operating revenues.766 Reuters 

recommended that assets of affiliated 

entities within a corporate group should 

be acceptable types of financial 

resources.767

(2) Commission Determination 

The Commission is revising proposed 

§ 37.1302(a) to state that a SEF’s own 

capital means its assets minus its 

liabilities calculated in accordance with 

U.S. Generally Accepted Accounting 

Principles (‘‘GAAP’’). The Commission 

believes that if a particular financial 

resource is an asset under GAAP, then 

it is appropriate for inclusion in the 

calculation for this rule. If a particular 

financial resource is not an asset under 

GAAP, but based upon the facts and 

circumstances a SEF believes that the 

particular financial resource should be 

acceptable, the Commission staff will 

work with the SEF to determine 

whether such resource is acceptable. In 

this regard, the Commission is clarifying 

that the language in final § 37.1302(b) is 

intended to provide flexibility to both 

SEFs and the Commission in 

determining other acceptable types of 

financial resources on a case-by-case 

basis. 

Finally, the Commission notes that it 

may not have jurisdiction over a SEF’s 

parent company or its affiliates; 

therefore, the Commission cannot 

consider the parent company’s or 

affiliates’ financial resources in 

determining whether the SEF possesses 

adequate financial resources. 

(c) § 37.1303—Computation of Financial 

Resource Requirement 768

Proposed § 37.1303 required a SEF, 

each fiscal quarter, to make a reasonable 

calculation of its projected operating 

costs over a twelve-month period to 

determine the amount needed to meet 

the requirements of proposed § 37.1301. 

Proposed § 37.1303 provided SEFs with 

reasonable discretion to determine the 

methodology used to compute such 

projected operating costs. The proposed 

rule authorized the Commission to 

review the methodology and require 

changes as appropriate. 

(1) Summary of Comments 

MarketAxess noted that the proposed 

regulations do not prescribe specific 

methodologies for computing projected 

operating costs and recommended that 

the Commission provide a safe harbor 

for specific methodologies.769

(2) Commission Determination 

The Commission is adopting 

§ 37.1303 as proposed because it 

provides flexibility to both SEFs and the 

Commission regarding the calculation of 

projected operating costs.770 This 

flexibility would be limited if the 

Commission prescribed specific 

methodologies for computing projected 

operating costs in the rule text. In 

response to MarketAxess’s comment, 

the Commission notes that SEFs may 

work with the Commission staff to 

create an appropriate methodology for 

computing such operating costs. 

(d) § 37.1304—Valuation of Financial 

Resources 

Proposed § 37.1304 required a SEF, 

not less than quarterly, to compute the 

current market value of each financial 

resource used to meet its obligations 

under proposed § 37.1301. The 

proposed rule required SEFs to perform 

the valuation at other times as 

appropriate. As stated in the SEF 

NPRM, the rule is designed to address 

the need to update valuations in 

circumstances where there may have 

been material fluctuations in market 

value that could impact a SEF’s ability 

to meet its obligations under proposed 

§ 37.1301.771 The proposed rule 

required that, when valuing a financial 

resource, the SEF reduce the value, as 

appropriate, to reflect any market or 

credit risk specific to that particular 

resource (i.e., apply a haircut).772 The 

SEF NPRM stated that the Commission 

would permit SEFs to exercise 

discretion to determine applicable 

haircuts, which would be subject to 

Commission review and acceptance.773

(1) Summary of Comments 

MarketAxess commented that 

proposed § 37.1304 did not prescribe 

specific methodologies for valuing 

financial resources and recommended 

that the Commission provide a safe 

harbor for specific methodologies.774

(2) Commission Determination 

The Commission is adopting 

§ 37.1304 as proposed.775 As with 

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33540 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

776Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1231. 777 Id. 778 Id. 779CME Comment Letter at 37 (Feb. 22, 2011). 780Phoenix Comment Letter at 4 (Mar. 7, 2011). 

781Parity Energy Comment Letter at 6 (Mar. 25, 

2011). 

782SDMA Comment Letter at 12 (Mar. 8, 2011). 

783The Commission is renaming the title of this 

section from ‘‘Reporting Requirements’’ to 

‘‘Reporting to the Commission’’ to provide greater 

clarity. 

784This filing deadline is consistent with the 

deadline imposed on FCMs for the filing of monthly 

financial reports. See 17 CFR 1.10(b) for further 

details. 

785CME Comment Letter at 38 (Feb. 22, 2011). 

786 Id. 

787 Id. 

788MarketAxess Comment Letter at 40 (Mar. 8, 

2011). 

789CME Comment Letter at 38 (Feb. 22, 2011). 

§ 37.1303, § 37.1304 provides flexibility 

to both SEFs and the Commission 

regarding the valuation of financial 

resources. This flexibility would be 

limited if the Commission prescribed 

specific methodologies for valuing 

financial resources in the rule text. In 

response to MarketAxess’s comment, 

the Commission notes that SEFs may 

work with the Commission staff to 

create an appropriate methodology for 

valuing such financial resources. 

(e) § 37.1305—Liquidity of Financial 

Resources 

Proposed § 37.1305 required a SEF’s 

financial resources to include 

unencumbered, liquid financial assets 

(i.e., cash and/or highly liquid 

securities) equal to at least six months’ 

operating costs. As noted in the SEF 

NPRM, the Commission believes that 

the requirement to have six months’ 

worth of unencumbered, liquid 

financial assets would provide a SEF 

time to liquidate the remaining financial 

assets it would need to continue 

operating for the last six months of the 

required one-year period.776 The 

proposed rule stated that if any portion 

of such financial resources is not 

sufficiently liquid, the SEF may take 

into account a committed line of credit 

or similar facility to satisfy this 

requirement. As stated in the SEF 

NPRM, a SEF may only use a committed 

line of credit or similar facility to meet 

the liquidity requirements set forth in 

§ 37.1305.777 Accordingly, the SEF 

NPRM stated that a committed line of 

credit or similar facility is not available 

to a SEF to satisfy the financial 

resources requirements of § 37.1301.778

(1) Summary of Comments 

Several commenters recommended 

alternate liquidity requirements to the 

six months of operating costs. CME 

commented that the liquidity 

measurement is only relevant in the 

context of winding-down operations, 

and claimed that a three-month period, 

rather than a six-month period, is a 

more accurate assessment of how long it 

would take for a SEF to wind down.779

Similarly, Phoenix recommended that a 

SEF be required to maintain liquid 

assets equal to three months of 

operating expenses.780 Parity Energy 

commented that the Commission should 

tailor financial requirements to a SEF’s 

size and market impact and 

recommended limiting the six month 

liquid asset requirement to only those 

SEFs whose failure could impact market 

stability.781 SDMA, however, 

recommended that the Commission 

require SEFs to have at least 12 months 

of unencumbered capital.782

(2) Commission Determination 

The Commission is adopting 

§ 37.1305 as proposed. The Commission 

views a six month period as appropriate 

for a wind down period and notes that 

commenters did not provide any 

support for alternative time frames. In 

response to Parity Energy’s comment, 

the Commission notes 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. 

Therefore, the Commission is not 

limiting the liquidity requirement to 

only those SEFs whose failure could 

impact market stability. In this regard, 

the Commission notes that the statutory 

financial resources requirements apply 

to all SEFs and are necessary to ensure 

core principle compliance. The statute 

does not distinguish SEFs’ financial 

resources based on their market impact. 

The Commission also notes that it is 

using the term ‘‘unencumbered’’ in 

§ 37.1305 in the normal commercial 

sense to refer to assets that are not 

subject to a security interest or other 

adverse claims. By ‘‘committed line of 

credit or similar facility,’’ the 

Commission means a committed, 

irrevocable contractual obligation to 

provide funds on demand with 

preconditions limited to the execution 

of appropriate agreements. For example, 

a facility with a material adverse 

financial condition restriction would 

not be acceptable. The purpose of this 

requirement is for a SEF to have no 

impediments to accessing its line of 

credit at the time it needs liquidity. 

Further, SEFs are encouraged to 

periodically check their line of credit 

arrangements to confirm that no 

operational difficulties are present. 

(f) § 37.1306—Reporting 

Requirements 783

Proposed § 37.1306(a)(1) required 

that, at the end of each fiscal quarter, or 

at any time upon Commission request, 

a SEF report to the Commission: (i) The 

amount of financial resources necessary 

to meet the requirements of § 37.1301; 

and (ii) the value of each financial 

resource available to meet those 

requirements. Proposed § 37.1306(a)(2) 

required a SEF to provide the 

Commission with a financial statement, 

including balance sheet, income 

statement, and statement of cash flows 

of the SEF or of its parent company. 

Proposed § 37.1306(b) required 

calculations to be made on the last 

business day of the SEF’s fiscal quarter. 

Proposed § 37.1306(c) required a SEF 

to provide the Commission with 

sufficient documentation explaining the 

methodology it used to calculate its 

financial requirements and the basis for 

its valuation and liquidity 

determinations. The proposed rule also 

required the SEF to provide copies of 

any agreements establishing or 

amending a credit facility, insurance 

coverage, or any similar arrangement 

that evidences or otherwise supports its 

conclusions. 

Finally, proposed § 37.1306(d) 

required SEFs to file the report no later 

than 17 business days 784 from the end 

of its fiscal quarter but allowed SEFs to 

request an extension of time from the 

Commission. 

(1) Summary of Comments 

CME wrote that it would not be 

feasible for SEFs to comply with the 

proposed filing deadline of 17 business 

days from the end of a SEF’s fiscal 

quarter.785 CME recommended a 

reporting deadline of 40 calendar days 

after the end of each fiscal quarter and 

60 calendar days after the end of the 

fiscal year, which it noted is consistent 

with the SEC’s reporting 

requirements.786 CME also sought 

clarification that consolidated financial 

statements covering multiple registered 

entities satisfy the reporting 

requirements.787

MarketAxess stated that the proposed 

reporting requirements are unnecessary 

and burdensome, and recommended 

that the Commission allow a senior 

officer of the SEF to represent to the 

Commission that the SEF satisfies the 

financial resources requirements.788

Two commenters discussed 

disclosure of the reports. CME 

recommended that the Commission 

clarify that filings made in compliance 

with the proposed financial resources 

regulations are confidential.789

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790SIMFA AMG Comment Letter at 13 (Mar. 8, 

2011). 

791The Commission is also making certain nonsubstantive clarifications to § 37.1306. 

792 17 CFR 145.9. 

793CEA section 5h(f)(14); 7 U.S.C. 7b–3(f)(14). 

However, SIFMA AMG commented that 

SEFs should submit to the Commission 

and make available for public comment 

evidence demonstrating sufficient 

resources.790

(2) Commission Determination 

The Commission is adopting 

§ 37.1306 as proposed, subject to certain 

amendments to the filing deadlines.791

The Commission agrees with CME that 

the proposed 17 business day filing 

deadline may be burdensome. In the 

final rule, the Commission is extending 

the 17 business day proposed filing 

deadline to 40 calendar days for the 

fiscal quarter reports and to 60 calendar 

days for the fiscal year-end report, 

which will also harmonize the filing 

deadlines with the SEC’s requirements 

for its Form 10–Q and Form 10–K. The 

Commission also clarifies that 

consolidated financial statements must 

disclose all relevant and appropriate 

figures such that a determination of the 

sufficiency of financial resources of a 

SEF can be made without additional 

requests for information from the entity. 

In such case, consolidated financial 

statements would comply with the 

reporting requirements. 

In response to MarketAxess’s 

comment that the reporting 

requirements are unnecessary and 

burdensome, the Commission believes 

that prudent financial management 

requires SEFs to prepare and review 

financial reports on a regular basis and 

expects that SEFs would regularly 

review their finances. In this regard, the 

Commission notes that because of the 

importance of this requirement, a mere 

representation by a senior officer is 

insufficient for verification that the SEF 

meets its financial obligations. The 

quarterly reporting required by 

§ 37.1306 will adequately provide the 

Commission with assurance that a SEF 

satisfies its financial resources 

requirements. The Commission notes 

that DCMs and DCOs have similar 

financial resources reporting obligations 

and does not believe that SEFs should 

be treated differently. The Commission 

also believes that much of the 

information required by the reports 

should be readily available to a 

sophisticated organization, which the 

Commission expects would regularly 

account for its financial resources. As 

such, the Commission notes that the 

cost of submitting these reports to the 

Commission would be de minimis. 

The Commission further clarifies that 

it does not intend to make financial 

resources reports public. However, 

where such information is, in fact, 

confidential, the Commission 

encourages SEFs to submit a written 

request for confidential treatment of 

such filings under the Freedom of 

Information Act (‘‘FOIA’’), pursuant to 

the procedures established in section 

145.9 of the Commission’s 

regulations.792 The determination of 

whether to disclose or exempt such 

information in the context of a FOIA 

proceeding would be governed by the 

provisions of part 145 and any other 

relevant provision. 

Finally, the Commission is adding 

new § 37.1307 titled ‘‘Delegation of 

Authority’’ to the final SEF rules to 

delegate authority to the Director of 

DMO to perform certain functions that 

are reserved to the Commission under 

subpart N. 

14. Subpart O—Core Principle 14 

(System Safeguards) 

Core Principle 14 pertains to the 

establishment of system safeguards and 

requires SEFs to: (1) Establish and 

maintain a program of risk analysis and 

oversight to identify and minimize 

sources of operational risk through the 

development of appropriate controls 

and procedures and the development of 

automated systems that are reliable, 

secure, and have adequate scalable 

capacity; (2) establish and maintain 

emergency procedures, backup 

facilities, and a plan for disaster 

recovery that allow for the timely 

recovery and resumption of operations 

and the fulfillment of the 

responsibilities and obligations of the 

SEF; and (3) periodically conduct tests 

to verify that backup resources are 

sufficient to ensure continued order 

processing and trade matching, price 

reporting, market surveillance, and 

maintenance of a comprehensive and 

accurate audit trail.793 In the SEF 

NPRM, the Commission proposed to 

codify the statutory text of Core 

Principle 14 in proposed § 37.1400, and 

adopts that rule as proposed. 

(a) § 37.1401—Requirements 

Proposed § 37.1401(a) required a SEF 

to: Establish and maintain a program of 

risk analysis and oversight; establish 

and maintain emergency procedures, 

backup facilities, and a plan for disaster 

recovery; and periodically conduct tests 

to verify that backup resources are 

sufficient. Proposed § 37.1401(b) 

required that a SEF’s program of risk 

analysis and oversight address six 

categories of risk analysis and oversight, 

including: Information security; 

business continuity-disaster recovery 

(‘‘BC–DR’’) planning and resources; 

capacity and performance planning; 

systems operations; systems 

development and quality assurance; and 

physical security and environmental 

controls. Proposed § 37.1401(c) 

suggested that a SEF follow generally 

accepted standards and best practices 

when addressing the categories of risk 

analysis and oversight. 

Proposed § 37.1401(d) and (e) also 

required each SEF to maintain a BC–DR 

plan, BC–DR resources, emergency 

procedures, and backup facilities 

sufficient to enable timely recovery and 

resumption of its operations and 

ongoing fulfillment of its 

responsibilities and obligations as a SEF 

following any disruption, either through 

sufficient infrastructure and personnel 

resources of its own or through 

sufficient contractual arrangements with 

other SEFs or disaster recovery service 

providers. If the Commission 

determines that a SEF is a critical 

financial market, then that SEF would 

be subject to more stringent 

requirements, set forth in § 40.9 of the 

Commission’s regulations. 

The proposed rule also required each 

SEF to notify the Commission staff of 

various system security-related events, 

including prompt notice of all electronic 

trading halts and systems malfunctions 

(proposed § 37.1401(f)(1)), cybersecurity incidents (proposed 

§ 37.1401(f)(2)), and any activation of 

the SEF’s BC–DR plan (proposed 

§ 37.1401(f)(3)). In addition, the 

proposed rule required each SEF to 

provide the Commission staff with 

timely advance notice of all planned 

changes to automated systems that may 

impact the reliability, security, or 

adequate scalable capacity of such 

systems (proposed § 37.1401(g)(1)) and 

planned changes to programs of risk 

analysis and oversight (proposed 

§ 37.1401(g)(2)). 

The proposed rule also required each 

SEF to provide relevant documents to 

the Commission (proposed § 37.1401(h)) 

and to conduct regular, periodic, 

objective testing and review of its 

automated systems (proposed 

§ 37.1401(i)). Moreover, proposed 

§ 37.1401(j) required each SEF, to the 

extent practicable, to coordinate its BC– 

DR plan with those of the market 

participants upon whom it depends to 

provide liquidity, to initiate coordinated 

testing of such plans, and to ensure that 

its BC–DR plan takes into account the 

BC–DR plans of relevant 

telecommunications, power, water, and 

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33542 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

794CME Comment Letter at 36 (Feb. 22, 2011). 

795 Id. 

796 Id. at 37. 

797 Id. 

798 Id. 

799MarketAxess Comment Letter at 40 (Mar. 8, 

2011); WMBAA Comment Letter at 28 (Mar. 8, 

2011). 

800Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1231. 

801 Id. 

802As a result of these changes, proposed section 

(b) is adopted as section (a), proposed section (d) 

is adopted as section (b), proposed section (e) is 

adopted as section (c), proposed section (f) is 

adopted as section (d), proposed section (g) is 

adopted as section (e), proposed section (h) is 

adopted as section (f), proposed section (i) is 

adopted as section (g), and proposed section (k) is 

adopted as section (h). 

803Business Continuity and Disaster Recovery, 75 

FR 42633 (proposed Jul. 22, 2010). The Commission 

notes that this rulemaking is not yet final. 

804 Id. at 42639. 

805 Id. at 42638–39. 

806CEA section 5h(f)(15); 7 U.S.C. 7b–3(f)(15). 

807 Id. 

808 Id. 

809 Id. 

other essential service providers. 

Finally, proposed § 37.1401(k) stated 

that part 46 of the Commission’s 

regulations governs the obligations of 

entities determined to be critical 

financial markets, with respect to 

maintenance and geographical dispersal 

of disaster recovery resources. 

(1) Summary of Comments 

CME objected to what it considers to 

be an overly broad requirement in 

proposed § 37.1401(f)(1) to notify the 

Commission staff promptly of all 

electronic trading halts and systems 

malfunctions.794 CME stated that the 

required reporting should be limited 

only to material system failures.795 CME 

also objected to proposed 

§ 37.1401(g)(1), stating that the 

requirement that SEFs provide the 

Commission with timely advance notice 

of all planned changes to automated 

systems that may impact the reliability, 

security, or adequate scalable capacity 

of such systems is overly burdensome, 

and not cost effective.796 Additionally, 

CME stated that the proposed 

§ 37.1401(g)(2) requirement that SEFs 

provide timely advance notice of all 

planned changes to their program of risk 

analysis and oversight is too broad and 

generally unnecessary.797 Finally, CME 

noted that it does not control, or 

generally have access to, the details of 

the disaster recovery plans of its major 

vendors.798

MarketAxess and WMBAA sought 

clarification of the criteria used to 

determine which SEFs are ‘‘critical 

financial markets,’’ as referenced in 

proposed § 37.1401(d).799

(2) Commission Determination 

As noted in the SEF NPRM, 

automated systems play a central and 

critical role in today’s electronic 

financial market environment, and the 

oversight of core principle compliance 

by SEFs with respect to automated 

systems is an essential part of effective 

oversight of swaps market.800 Advanced 

computer systems are fundamental to a 

SEF’s ability to meet its obligations and 

responsibilities under the core 

principles.801 Accordingly, the 

Commission is adopting § 37.1401 as 

proposed, subject to the modifications 

described below. 

Although the Commission did not 

receive related comments, the 

Commission is eliminating proposed 

§ 37.1401(a) because this paragraph is 

repetitious of proposed rule § 37.1400. 

The Commission is also moving the 

following portions of proposed 

§ 37.1401 to the guidance in appendix B 

to part 37 because the rules as proposed 

provided SEFs with a degree of 

discretion: (1) Proposed § 37.1401(c) 

suggesting that a SEF follow generally 

accepted standards and best practices in 

addressing the categories of its risk 

analysis and oversight program; (2) the 

portion of proposed § 37.1401(i) 

suggesting that a SEF’s testing of its 

automated systems and BC–DR 

capabilities be conducted by qualified, 

independent professionals; and (3) 

proposed § 37.1401(j) suggesting that a 

SEF coordinate its BC–DR plan with 

those of others.802 Given that these 

proposed provisions provided SEFs 

with a degree of discretion, the 

Commission believes that they are better 

suited as guidance rather than rules, and 

as guidance, SEFs will have greater 

flexibility in administering their 

obligations. 

In response to CME’s comments, the 

Commission is revising proposed 

§ 37.1401(f)(1) to provide that SEFs only 

need to promptly notify the Commission 

staff of all material system malfunctions. 

With respect to planned changes to 

automated systems or programs of risk 

analysis and oversight, the Commission 

is revising proposed § 37.1401(g) to 

require timely advance notification of 

all material changes to automated 

systems and to programs of risk analysis 

and oversight. The Commission believes 

that these revisions are appropriate 

because the scope of the proposed rules 

may have been too broad as CME noted. 

The Commission notes that proposed 

§ 37.1401(j) does not require SEFs to 

control or have access to the details of 

the disaster recovery plans of its major 

vendors. Rather, the requirement in the 

proposed rule, which is being adopted 

as guidance, suggests coordination to 

the extent possible. 

In response to comments from 

WMBAA and MarketAxess, the 

Commission is revising proposed 

§ 37.1401(d) to include a reference to 

appendix E to part 40 of the 

Commission’s regulations, which 

describes the Commission’s criteria for 

determining whether a SEF is a critical 

financial market.803 Appendix E to part 

40 describes the evaluation and 

notification process for SEFs once 

designated as a critical financial 

market.804

With respect to the references to 

§ 40.9 regarding critical financial 

markets in proposed § 37.1401(d) and 

37.1401(k), the Commission notes that 

§ 40.9, which was proposed in a 

separate rulemaking,805 is not yet final. 

However, SEFs deemed critical financial 

markets will be subject to the 

requirements set forth in § 40.9 upon its 

effective date. The Commission further 

notes that the reference to part 46 in 

proposed § 37.1401(k) was a technical 

error. Instead, the proposed rule should 

have referenced part 40. Accordingly, 

the Commission is replacing the 

mistaken reference to part 46 with a 

reference to part 40. 

15. Subpart P—Core Principle 15 

(Designation of Chief Compliance 

Officer) 

Core Principle 15 establishes the 

position and duties of chief compliance 

officer (‘‘CCO’’).806 Core Principle 15 

also requires the CCO to design 

procedures to establish the handling, 

management response, remediation, 

retesting, and closing of noncompliance 

issues.807 The statute also requires a 

CCO to prepare and sign an annual 

compliance report that is filed with the 

Commission.808 In addition, Core 

Principle 15 requires the CCO to include 

in the report a certification that, under 

penalty of law, the report is accurate 

and complete.809 In the SEF NPRM, the 

Commission proposed to codify the 

statutory text of Core Principle 15 in 

proposed § 37.1500, and adopts that rule 

as proposed. 

(a) § 37.1501—Chief Compliance Officer 

Proposed § 37.1501 implemented the 

statutory provisions of Core Principle 15 

and granted CCOs the authority 

necessary to fulfill their responsibilities. 

(1) § 37.1501(a)—Definition of Board of 

Directors 

Proposed § 37.1501(a) defined ‘‘board 

of directors’’ as the board of directors of 

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810See Core Principles and Other Requirements 

for Swap Execution Facilities, 76 FR at 1232 

(discussing the reasons for this requirement). 

811 Id. 

812WMBAA Comment Letter II at 2–6 (Mar. 8, 

2011); FXall Comment Letter at 14–15 (Mar. 8, 

2011); CME Comment Letter at 5–6 (Feb. 7, 2011). 

WMBAA submitted two comment letters to the SEF 

rulemaking comment file on Mar. 8, 2011. The 

second comment letter referred to herein as 

‘‘WMBAA Comment Letter II’’ only pertains to the 

SEF NPRM’s proposed CCO provisions. 

Additionally, rather than repeat its comments 

regarding the CCO provisions that pertain to both 

the DCO and SEF NPRMs, CME incorporated its 

entire DCO rulemaking comment letter regarding 

CCOs dated Feb. 7, 2011 as Exhibit B to its SEF 

comment letter dated Mar. 8, 2011. The 

Commission notes these comments by referencing 

the Feb. 7, 2011 date of CME’s DCO comment letter 

regarding CCOs. The Commission is also changing 

CME’s reference to ‘‘DCO’’ to ‘‘SEF’’ for these 

comments. 

813WMBAA Comment Letter II at 2–6 (Mar. 8, 

2011); FXall Comment Letter at 14–15 (Mar. 8, 

2011); CME Comment Letter at 5–6 (Feb. 7, 2011). 

814WMBAA Comment Letter II at 6 (Mar. 8, 

2011); FXall Comment Letter at 14–15 (Mar. 8, 

2011); CME Comment Letter at 6 (Feb. 7, 2011). 

815WMBAA Comment Letter II at 6–7 (Mar. 8, 

2011); MarketAxess Comment Letter at 27 (Mar. 8, 

2011); ICE Comment Letter at 6–7 (Mar. 8, 2011); 

CME Comment Letter at 3 (Feb. 7, 2011). 

816WMBAA Comment Letter II at 6 (Mar. 8, 

2011). 

817CME Comment Letter at 3 (Feb. 7, 2011). 

818MarketAxess Comment Letter at 27 n. 31 (Mar. 

8, 2011). 

819Parity Energy Comment Letter at 6 (Mar. 25, 

2011). 

820Tradeweb Comment Letter at 12 (Mar. 8, 

2011); Better Markets Comment Letter at 19 (Mar. 

8, 2011). 

821Better Markets Comment Letter at 19 (Mar. 8, 

2011). 

822CEA sections 5h(f)(15)(B)(iii) and (v); 7 U.S.C. 

7b–3(f)(15)(B)(iii) and (v). 

823Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1232, n. 103. 

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. 

(i) Commission Determination 

The Commission received no 

comments on § 37.1501(a) and is 

adopting the rule as proposed. 

(2) § 37.1501(b)—Designation and 

Qualifications of Chief Compliance 

Officer 

Proposed § 37.1501(b)(1) required a 

SEF to establish a CCO position and to 

designate an individual to serve in that 

capacity. Proposed § 37.1501(b)(1)(i) 

required that a SEF provide its CCO 

with the authority and resources to 

develop and enforce policies and 

procedures necessary to fulfill its 

statutory and regulatory duties. In 

addition, proposed § 37.1501(b)(1)(ii) 

provided that CCOs must have 

supervisory authority over all staff 

acting in furtherance of the CCO’s 

statutory, regulatory, and self-regulatory 

obligations. 

Proposed § 37.1501(b)(2) required that 

a CCO have the appropriate background 

and skills to fulfill the responsibilities 

of the position. Proposed 

§ 37.1501(b)(2)(i) prohibited anyone 

who would be disqualified from 

registration under CEA sections 8a(2) or 

8a(3) from serving as a CCO.810

Proposed § 37.1501(b)(2)(ii) prohibited a 

CCO from being a member of the SEF’s 

legal department or its general 

counsel.811

(i) Summary of Comments 

Some commenters stated that by 

mandating that the CCO have the 

authority and resources to ‘‘enforce’’ a 

SEF’s policies and procedures, the 

proposed rules change the traditional 

role of a CCO and give the CCO 

authority that should be reserved for 

senior management.812 These 

commenters stated that the traditional 

and proper role of a CCO is to advise 

management on compliance issues and 

that management has the authority to 

enforce compliance policies and 

procedures.813 The commenters 

recommended that the Commission 

revise the proposed rules to give effect 

to the well-established and critical 

distinction between a CCO and 

management.814

Some commenters stated that the 

proposed rules should not prohibit a 

CCO from serving as the SEF’s general 

counsel or as a member of the SEF’s 

legal department.815 WMBAA noted that 

it is not uncommon for a company’s 

CCO to be its general counsel.816

Similarly, CME noted that many CCOs 

have certain other job responsibilities, 

most typically in related ‘‘control areas’’ 

such as the Legal Department or Internal 

Audit.817 Additionally, MarketAxess 

stated that this prohibition could 

prevent a smaller SEF from structuring 

its internal management in the most 

efficient manner.818 Parity Energy 

recommended that this requirement 

only apply to SEFs that could have a 

substantial impact on market risk and 

stability if they were to fail.819 However, 

Tradeweb and Better Markets expressed 

support for a dedicated CCO position 

independent of a SEF’s legal 

department.820 Better Markets also 

commented that in situations where 

there are a number of affiliated 

organizations, a single senior CCO 

should have overall responsibility for 

each affiliated and controlled entity, 

even if the individual entities have 

CCOs.821

(ii) Commission Determination 

The Commission is adopting 

§ 37.1501(b) as proposed, subject to two 

modifications described below. In 

general, the Commission disagrees with 

the commenters who believe that a 

CCO’s function is solely to monitor and 

advise on compliance issues. These 

commenters do not provide any 

statutory support for this view and their 

position appears to conflict with the 

statutory responsibilities of a CCO as set 

forth in the Act. In particular, CEA 

section 5h(f)(15)(B) requires a CCO to 

‘‘resolve any conflicts of interest that 

may arise’’ and to ‘‘ensure compliance 

with this Act.’’ 822 These duties suggest 

that a CCO is intended to be more than 

just an advisor, and must have the 

appropriate authority to enforce policies 

and procedures related to his or her 

areas of responsibility. The Commission 

believes that such authority is 

particularly important for a SEF CCO, 

given the CCO’s responsibility in 

overseeing a SEF’s self-regulatory 

programs. 

However, to clarify the CCO’s 

supervisory authority, the Commission 

is amending proposed § 37.1501(b)(1)(ii) 

to state that ‘‘[t]he chief compliance 

officer shall have supervisory authority 

over all staff acting at the direction of 

the chief compliance officer’’ (emphasis 

added). This modification provides 

greater clarity as to the SEF staff that 

must be under the managerial oversight 

of a CCO by emphasizing that such staff 

includes persons necessary for SEFs to 

fulfill their self-regulatory obligations, 

including compliance staff (e.g., trade 

practice and market surveillance staff 

and enforcement staff). The Commission 

notes that other SEF staff are not 

captured by the requirements of 

§ 37.1501(b)(1). 

The Commission is withdrawing 

proposed § 37.1501(b)(2)(ii), which 

prohibits the CCO from serving as a 

SEF’s general counsel or as a member of 

its legal department. In the SEF NPRM, 

the Commission noted that there is 

potentially a conflict of interest present 

if a CCO serves as a SEF’s general 

counsel or as a member of its legal 

department.823 However, the 

Commission has determined that the 

potential costs of hiring additional staff 

to satisfy the requirement in proposed 

§ 37.1501(b)(2)(ii) may impose an 

excessive burden on SEFs, particularly 

smaller SEFs. 

Although the Commission is 

eliminating proposed § 37.1501(b)(2)(ii) 

from the final SEF rules, the 

Commission notes that a conflict of 

interest may compromise a CCO’s 

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33544 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

824See Requirements for Derivatives Clearing 

Organizations, Designated Contract Markets, and 

Swap Execution Facilities Regarding the Mitigation 

of Conflicts of Interest, 75 FR 63732, 63747–48 

(proposed Oct. 18, 2010). Proposed § 37.19(b) 

describes the role of the ROC. The Commission 

notes that this rule is not yet final. 

825FXall Comment Letter at 14 (Mar. 8, 2011); 

Tradeweb Comment Letter at 12 n.8 (Mar. 8, 2011); 

CME Comment Letter at 2–3 (Feb. 7, 2011). 

826FXall Comment Letter at 14 (Mar. 8, 2011). 

827CME Comment Letter at 2–3 (Feb. 7, 2011). 

828Tradeweb Comment Letter at 6 (Jun. 3, 2011); 

MarketAxess Comment Letter at 26 (Mar. 8, 2011); 

WMBAA Comment Letter II at 7 (Mar. 8, 2011); 

Tradeweb Comment Letter at 12 (Mar. 8, 2011). 

829WMBAA Comment Letter II at 7 (Mar. 8, 

2011). 

830MarketAxess Comment Letter at 26 (Mar. 8, 

2011). 

831CME Comment Letter at 9 (Feb. 7, 2011). 

832AFR Comment Letter at 6 (Mar. 8, 2011); 

Better Markets Comment Letter at 19–20 (Mar. 8, 

2011). 

833AFR Comment Letter at 6 (Mar. 8, 2011). 

834 Id. 

835Better Markets Comment Letter at 19–20 (Mar. 

8, 2011). 

836The Commission is making certain nonsubstantive revisions to § 37.1501(c) for clarity. 

ability to effectively fulfill his or her 

responsibilities as a CCO, and that such 

conflicts may be more likely to arise 

when a CCO is also employed as the 

SEF’s general counsel or within its legal 

department. Therefore, the Commission 

expects that as soon as any conflict of 

interest becomes apparent, a SEF will 

immediately implement contingency 

measures. For example, a SEF may 

reassign the conflicted matter to an 

alternate employee who does not report 

to the CCO and who does not possess 

a conflict of interest. The Commission 

believes that a SEF’s Regulatory 

Oversight Committee (‘‘ROC’’) 824

should regularly monitor for potential 

conflicts of interest in its oversight of 

the CCO, and should be particularly 

involved in the oversight of any matter 

in which a CCO was recused. 

The Commission disagrees with the 

recommendation by Better Markets to 

require a single senior CCO to have 

responsibility over multiple affiliated 

registered entities, some of which would 

be required by the CEA and Commission 

regulations to have their own CCOs. 

Such a situation might cause 

unnecessary confusion and dilute CCO 

accountability at the individual entity 

level. Additionally, the Commission 

believes that the proposed rule is 

sufficient to manage instances where 

there are a number of affiliated 

organizations within a corporate family. 

In these instances, each SEF would be 

required to appoint its own CCO. 

(3) § 37.1501(c)—Appointment, 

Supervision, and Removal of Chief 

Compliance Officer 

Proposed § 37.1501(c)(1) required that 

a CCO’s appointment and compensation 

be approved by a majority of the SEF’s 

board of directors or its senior officer. 

Proposed § 37.1501(c)(1) also required a 

CCO to meet with the SEF’s board of 

directors at least annually and the ROC 

at least quarterly, and to provide any 

information requested regarding the 

SEF’s regulatory program. In addition, 

proposed § 37.1501(c)(1) required a SEF 

to notify the Commission of the 

appointment of a new CCO within two 

business days of such appointment. 

Proposed § 37.1501(c)(2) required a CCO 

to report directly to the board of 

directors or to the senior officer of the 

SEF, at the SEF’s discretion. Proposed 

§ 37.1501(c)(3) required approval of a 

majority of a SEF’s board of directors to 

remove a CCO. If a SEF does not have 

a board of directors, the proposed rule 

provided that the CCO may be removed 

by its senior officer. Proposed 

§ 37.1501(c)(3) also required a SEF to 

notify the Commission of, and explain 

the reasons for, the departure of the 

CCO within two business days. In 

addition, proposed § 37.1501(c)(3) 

required a SEF to immediately appoint 

an interim CCO, to appoint a permanent 

CCO as soon as reasonably practicable, 

and to notify the Commission within 

two business days of appointing any 

new interim or permanent CCO. 

(i) Summary of Comments 

Some commenters requested that the 

Commission define the term ‘‘senior 

officer’’ and provided 

recommendations.825 FXall 

recommended that the Commission 

define the term ‘‘senior officer’’ to 

include the SEF’s president, chief 

executive officer, chief legal officer, or 

other officer with ultimate supervisory 

authority for the SEF entity.826 CME 

recommended that the term ‘‘senior 

officer’’ be defined to include the senior 

officer of a division that is engaged in 

SEF activities rather than the senior 

officer of a larger corporation.827

Commenters also requested that the 

Commission grant a SEF greater 

flexibility in determining how a CCO is 

appointed, compensated, supervised, 

and removed.828 In this regard, WMBAA 

stated that a CCO should be permitted 

to satisfy the statutory requirement of 

reporting to the board of directors or a 

senior officer by reporting to a ROC.829

MarketAxess commented that the 

proposed requirements for a majority of 

the board of directors to approve the 

appointment, compensation, and 

removal of the CCO go beyond the 

statutory mandate and would effectively 

place the CCO at the same level as the 

SEF’s senior officer.830 CME argued that 

each SEF should be given the flexibility 

to take additional steps beyond those 

required in the proposed rule, based on 

the SEF’s particular corporate structure, 

size, and complexity, to ensure an 

appropriate level of independence for 

its CCO.831

AFR and Better Markets 

recommended, however, that the rules 

for CCO’s appointment, compensation, 

supervision, and removal be 

strengthened.832 AFR recommended 

that CCOs be responsible only to a SEF’s 

ROC.833 It argued that CCO 

independence may only be ensured by 

vesting oversight of the position 

exclusively in public directors.834

Similarly, Better Markets recommended 

that decisions relating to a CCO’s 

designation, compensation, and 

termination should be the sole 

responsibility of the independent 

members of the board of directors.835

(ii) Commission Determination 

The Commission is adopting 

§ 37.1501(c) as proposed, subject to 

several modifications described 

below.836 In response to commenters’ 

requests to define the term ‘‘senior 

officer,’’ the Commission believes, based 

on the statutory language that requires 

a CCO to report directly to the ‘‘board 

or to the senior officer,’’ that ‘‘senior 

officer’’ would only include the most 

senior executive officer of the legal 

entity that is registered as a SEF. 

In response to the commenters’ 

requests for greater flexibility, the 

Commission believes that proposed 

§ 37.1501(c) generally strikes the 

appropriate balance between flexibility 

and ensuring that a SEF’s CCO is 

insulated from day-to-day commercial 

pressures. The proposed rules provide a 

degree of flexibility by allowing a SEF’s 

board of directors or senior officer to 

appoint, set the compensation of, and 

supervise the CCO. The proposed rules 

also protect the CCO from undue 

influence by requiring that the board of 

directors or the senior officer (if the SEF 

does not have a board of directors) be 

responsible for removing the CCO and 

that the CCO meet with the board of 

directors at least annually and with the 

ROC at least quarterly. In response to 

CME’s comment about additional 

flexibility beyond the rules, the 

Commission notes that § 37.1501(c) sets 

forth minimum standards so a SEF may 

implement additional measures if it 

deems doing so necessary to insulate the 

CCO from undue influence. The 

Commission encourages SEFs to review 

and enact conflict mitigation procedures 

as appropriate for their specific 

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837Better Markets Comment Letter at 20 (Mar. 8, 

2011); CME Comment Letter at 6 (Feb. 7, 2011). 

838Better Markets Comment Letter at 19, 20 (Mar. 

8, 2011). 

839CME Comment Letter at 6 (Feb. 7, 2011). 

840 Id. 

841Tradeweb Comment Letter at 6–7 (Jun. 3, 

2011); WMBAA Comment Letter II at 5–6 (Mar. 8, 

2011); MarketAxess Comment Letter at 26 (Mar. 8, 

2011); Tradeweb Comment Letter at 12 (Mar. 8, 

2011); CME Comment Letter at 4 (Feb. 7, 2011). 

842Tradeweb Comment Letter at 6–7 (Jun. 3, 

2011); Tradeweb Comment Letter at 12 (Mar. 8, 

2011); CME Comment Letter at 4 (Feb. 7, 2011). 

843CME Comment Letter at 6 (Feb. 7, 2011). 

844 Id. 

845WMBAA Comment Letter II at 6 (Mar. 8, 

2011). 

846The Commission notes that the preamble to 

the SEF NPRM already clarified this point. To 

provide additional clarity, the Commission is 

clarifying this point in the final rule by adding the 

word ‘‘including’’ before the list of enumerated 

conflicts of interest. See Core Principles and Other 

Requirements for Swap Execution Facilities, 76 FR 

at 1233. 

corporate and/or organizational 

structure. 

However, the Commission is revising 

proposed § 37.1501(c) in six respects. 

First, the Commission is modifying 

proposed § 37.1501(c)(1) to more clearly 

state that the CCO is obligated to meet 

with the board of directors at least 

annually and with the ROC at least 

quarterly, even if the CCO was 

appointed by, or is supervised by, the 

senior officer of the facility. Second, to 

clarify a CCO’s duty to provide 

information to a SEF’s board of directors 

or ROC, the Commission is modifying 

proposed § 37.1501(c)(1) to state that 

‘‘[t]he chief compliance officer shall 

provide any information regarding the 

swap execution facility’s self-regulatory 

program that is requested by the board 

of directors or the regulatory oversight 

committee’’ (emphasis added). Third, 

the Commission is eliminating the 

requirement in proposed § 37.1501(c)(1) 

that a CCO’s appointment and 

compensation require the approval of a 

majority of a SEF’s board of directors. 

The Commission believes that board of 

director approval is a sufficient 

requirement for appointment, and that a 

SEF should have appropriate discretion 

to determine the voting percentage 

necessary to appoint a CCO or 

determine salary. Fourth, the 

Commission is eliminating the 

requirement in proposed § 37.1501(c)(3) 

that a SEF explain the reason for the 

departure of a CCO within two business 

days. The Commission believes that the 

specific reason for the departure may be 

unnecessary in most instances. 

However, the Commission will have the 

opportunity to investigate the reason for 

the departure if it so desires because a 

SEF must notify the Commission of a 

CCO’s departure within two business 

days. Fifth, the Commission is 

eliminating the requirement in proposed 

§ 37.1501(c)(3) that a SEF immediately 

appoint an interim CCO, and appoint a 

new permanent CCO as soon as 

reasonably practicable, upon the 

removal of a CCO. The Commission 

believes that the requirement to appoint 

a new CCO is implicit in § 37.1501(b)(1), 

which requires that a SEF designate an 

individual to serve as CCO. Finally, the 

Commission is eliminating the 

requirement in proposed § 37.1501(c)(3) 

that a SEF notify the Commission 

within two business days of appointing 

a new CCO because this requirement is 

already included in § 37.1501(c)(1). 

(4) § 37.1501(d)—Duties of Chief 

Compliance Officer 

Proposed § 37.1501(d) generally listed 

the following CCO duties: (1) 

Overseeing and reviewing compliance 

with section 5h of the CEA and related 

Commission regulations; (2) in 

consultation with the board of directors 

or the senior officer, resolving any 

conflicts of interest that may arise; (3) 

establishing and administering written 

policies and procedures reasonably 

designed to prevent violations of the 

CEA and Commission regulations; (4) 

ensuring compliance with the CEA and 

Commission regulations relating to 

agreements, contracts, or transactions, 

and with Commission regulations 

issued under section 5h of the CEA; (5) 

establishing procedures for the 

remediation of noncompliance issues 

identified by the CCO; (6) establishing 

and following appropriate procedures 

for noncompliance issues; (7) 

establishing a compliance manual and 

administering a code of ethics; (8) 

supervising a SEF’s self-regulatory 

program; and (9) supervising the 

effectiveness and sufficiency of any 

regulatory services provided to the SEF. 

(i) Summary of Comments 

Better Markets and CME commented 

on proposed § 37.1501(d)(2) regarding 

conflicts of interest.837 Better Markets 

recommended that the Commission 

revise proposed § 37.1501(d)(2) to 

require a CCO to consult with both the 

independent members of the board of 

directors and the senior officer when 

resolving conflicts of interest, which are 

particularly contentious.838 CME 

requested that the Commission revise 

proposed § 37.1501(d)(2) to require a 

CCO to establish policies and 

procedures reasonably designed to 

resolve any conflicts of interest that may 

arise.839 Although CME conceded that 

the language in proposed § 37.1501(d)(2) 

mirrors the language in the Act, it 

believes that Congress did not intend for 

the CCO to resolve conflicts in the 

executive or managerial sense.840

Several commenters argued that 

proposed § 37.1501(d)(4), requiring a 

CCO to ‘‘ensure’’ compliance with the 

Act and Commission regulations, is an 

impracticable standard.841 Instead, 

many of these commenters 

recommended alternative language, 

which generally stated that the CCO put 

in place policies and procedures that 

reasonably ensure compliance with the 

Act and Commission regulations.842

CME also took issue with the 

requirement in proposed 

§ 37.1501(d)(6), which requires a CCO to 

‘‘follow’’ appropriate procedures for the 

handling, management response, 

remediation, retesting, and closing of 

noncompliance issues.843 CME 

requested that the Commission 

eliminate this requirement, which it 

believes is a function of senior 

management.844 Additionally, WMBAA 

recommended that the Commission 

delete proposed § 37.1501(d)(8) and 

(d)(9), regarding the supervision of a 

SEF’s self-regulatory program and any 

regulatory service provider, because 

these functions should be the 

responsibility of management.845

(ii) Commission Determination 

The Commission is adopting 

§ 37.1501(d) as proposed, subject to 

certain modifications described below. 

The Commission is revising proposed 

§ 37.1501(d)(2) to clarify that the list of 

enumerated conflicts of interest is not 

exhaustive.846 The Commission is not 

adopting the recommendation by Better 

Markets to require the CCO to consult 

with both the independent members of 

the board of directors and the senior 

officer when resolving conflicts of 

interest. Considering the statutory 

provisions of CEA section 5h, the 

Commission believes that it is 

unnecessary to require the CCO to do so. 

However, the Commission notes that 

§ 37.1501(d)(2) sets forth minimum 

standards so a SEF may institute higher 

standards, such as requiring its CCO to 

consult with both the independent 

members of the board of directors and 

the senior officer when resolving 

conflicts of interest. The Commission 

also declines to adopt CME’s 

recommendation regarding conflicts of 

interest. As CME acknowledged, the 

Commission is following the statutory 

language in its implementation of 

§ 37.1501(d)(2). 

In response to commenters’ concerns 

about the requirement to ‘‘ensure’’ 

compliance in proposed § 37.1501(d)(4), 

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847See, e.g., Swap Data Repositories: Registration 

Standards, Duties and Core Principles, 76 FR 54538, 

54584 (Sept. 1, 2011) (stating that the duties of an 

SDR’s CCO include ‘‘[t]aking reasonable steps to 

ensure compliance with the Act and Commission 

regulations . . .’’); Derivatives Clearing 

Organization General Provisions and Core 

Principles, 76 FR 69334, 69434 (Nov. 8, 2011) 

(stating that the duties of a DCO’s CCO include 

‘‘[t]aking reasonable steps to ensure compliance 

with the Act and Commission regulations . . .’’). 

848The Commission is renaming the title of this 

section from ‘‘Annual Compliance Report Prepared 

by Chief Compliance Officer’’ to ‘‘Preparation of 

Annual Compliance Report.’’ 

849FXall Comment Letter at 16–17 (Mar. 8, 2011); 

CME Comment Letter at 7–8 (Feb. 7, 2011). 

850FXall Comment Letter at 16 (Mar. 8, 2011). 

851See id. for details regarding FXall’s proposed 

alternatives. 

852FXall Comment Letter at 17 (Mar. 8, 2011); 

CME Comment Letter at 7 (Feb. 7, 2011). 

853CME Comment Letter at 7–8 (Feb. 7, 2011). 

854MarketAxess Comment Letter at 26 (Mar. 8, 

2011). 

855MarketAxess Comment Letter at 26 (Mar. 8, 

2011); FSR Comment Letter at 10 (Mar. 8, 2011). 

856 Id. 

857FXall Comment Letter at 15 (Mar. 8, 2011); 

CME Comment Letter at 8 (Feb. 7, 2011). 

858 In this regard, the Commission disagrees with 

CME’s recommendation regarding proposed 

§ 37.1501(e)(5). 

the Commission is modifying the rule to 

state that the CCO shall take ‘‘reasonable 

steps to ensure compliance with the Act 

and the rules of the Commission.’’ The 

Commission understands that a single 

individual cannot guarantee compliance 

with the CEA and Commission 

regulations. The Commission believes 

that this modification is responsive to 

commenters’ concerns and is consistent 

with the final rules for other registered 

entities.847 The Commission is also 

removing the reference to ‘‘agreements, 

contracts, or transactions’’ in proposed 

§ 37.1501(d)(4) to more closely follow 

the language in the Act. In making this 

modification, the Commission does not 

intend to modify any substantive 

obligations of the CCO with regard to 

agreements, contracts, or transactions to 

the extent that these documents 

implicate the Act or Commission 

regulations under the Act. 

In order to clarify differences between 

the SEF NPRM’s preamble and rule text 

regarding proposed § 37.1501(d)(7), the 

Commission is revising the rule to state 

that the CCO’s duties include 

‘‘[e]stablishing and administering a 

compliance manual designed to 

promote compliance with the applicable 

laws, rules, and regulations . . .’’ 

(emphasis added). The Commission also 

disagrees with CME and WMBAA that 

the requirements in proposed 

§ 37.1501(d)(6), (d)(8), and (d)(9) are 

functions of management. These 

provisions, as discussed above, require 

a CCO to establish and follow 

appropriate procedures regarding 

noncompliance issues, supervise the 

SEF’s self-regulatory program, and 

supervise the effectiveness and 

sufficiency of any regulatory service 

provider. As noted above, the 

Commission disagrees with the 

commenters who believe that a CCO’s 

function is solely to monitor and advise 

on compliance issues. Finally, the 

Commission is revising proposed 

§ 37.1501(d)(9) to remove the references 

to ‘‘registered futures association’’ and 

‘‘other registered entity’’ and, instead, 

adding a reference to ‘‘regulatory service 

provider’’ given the inclusion of FINRA 

as a regulatory service provider under 

§ 37.204. 

(5) § 37.1501(e)—Annual Compliance 

Report Prepared by Chief Compliance 

Officer 848

Proposed § 37.1501(e) generally 

enumerated the following information 

that must be included in the annual 

compliance report: (1) A description of 

the SEF’s written policies and 

procedures, including the code of ethics 

and conflicts of interest policies; (2) a 

detailed review of the SEF’s compliance 

with CEA section 5h and Commission 

regulations, which, among other 

requirements, identifies the policies and 

procedures that ensure compliance with 

the core principles; (3) a list of any 

material changes to the compliance 

policies and procedures since the last 

annual compliance report; (4) a 

description of staffing and resources set 

aside for the SEF’s compliance program; 

(5) a description of any material 

compliance matters, including instances 

of noncompliance; (6) any objections to 

the annual compliance report by those 

persons who have oversight 

responsibility for the CCO; and (7) a 

certification by the CCO 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. 

(i) Summary of Comments 

FXall and CME asserted that the 

information required to be included in 

the annual compliance report is too 

detailed.849 FXall, for example, 

commented that the requirements for 

the annual compliance report go beyond 

those set forth in the Dodd-Frank Act 

and that producing the report will 

consume considerable resources.850

FXall proposed alternative 

requirements, which it believes would 

be more in-line with the requirements in 

the Dodd-Frank Act.851

With respect to the requirement in 

proposed § 37.1501(e)(2)(i) to identify 

policies and procedures that ‘‘ensure’’ 

compliance with the core principles, 

FXall and CME stated that policies and 

procedures cannot ‘‘ensure’’ or guaranty 

compliance, but can only be reasonably 

designed to result in compliance.852

CME also recommended that the 

requirement in proposed § 37.1501(e)(5) 

to describe any material compliance 

matters be revised to require the report 

to identify ‘‘any material noncompliance issues that were not 

properly addressed.’’ 853 MarketAxess 

recommended that the Commission 

remove proposed § 37.1501(e)(6) 

because in its opinion other persons 

should be able to correct the CCO’s 

annual report.854

MarketAxess and FSR expressed their 

concern that the CCO’s certification of 

the annual compliance report in 

proposed § 37.1501(e)(7) may impose 

strict liability on a CCO where the 

report contains even a minor and 

insignificant error.855 These 

commenters recommended adding a 

materiality qualifier to the 

certification.856 Additionally, both FXall 

and CME recommended that the SEF’s 

senior officer, not the CCO, certify the 

accuracy of the annual compliance 

report.857

(ii) Commission Determination 

The Commission is adopting 

§ 37.1501(e) as proposed, subject to 

certain modifications described below. 

The Commission disagrees with the 

comments from FXall and CME 

regarding the complexity and the 

burden of the annual compliance report. 

The annual compliance report is meant 

to provide the Commission with a 

detailed account of a SEF’s compliance 

with the CEA and Commission 

regulations, as well as a detailed 

account of a SEF’s self-regulatory 

program. The Commission believes that 

the level of detail the proposed rules 

require, including the requirement that 

the annual report include a description 

of all noncompliance issues identified, 

is necessary to ensure that the 

Commission can determine the 

effectiveness of a SEF’s compliance and 

self-regulatory programs.858

However, in response to comments, 

the Commission is revising proposed 

§ 37.1501(e)(2)(i) to require that the 

annual compliance report identify ‘‘the 

policies and procedures that are 

designed to ensure compliance with 

each subsection and core principle, 

including each duty specified in section 

5h(f)(15)(B) of the Act . . .’’ (emphasis 

added). The Commission is also 

removing proposed § 37.1501(e)(6), 

which requires the annual compliance 

report to include any objections by 

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859As a result of this deletion, the Commission 

is adopting proposed § 37.1501(e)(7) as 

§ 37.1501(e)(6). 

860 If a SEF does not have a board of directors, 

then the senior officer of the SEF may append his 

or her own comments if desired. 

861CEA section 5h(f)(15)(D); 7 U.S.C. 7b– 

3(f)15)(D). 

862The Commission is renaming the title of this 

section from ‘‘Submission of Annual Compliance 

Report by Chief Compliance Officer to the 

Commission’’ to ‘‘Submission of Annual 

Compliance Report.’’ 

863 5 U.S.C. 552. 

864 5 U.S.C. 552b(b). 

865FXall Comment Letter at 17–18 (Mar. 8, 2011); 

WMBAA Comment Letter II at 7 (Mar. 8, 2011); 

MarketAxess Comment Letter at 26 (Mar. 8, 2011). 

866 Id. 

867Better Markets Comment Letter at 20 (Mar. 8, 

2011). 

868 Id. 

869CME Comment Letter at 9 (Feb. 7, 2011). 

870CEA section 5h(f)(15)(D)(ii); 7 U.S.C. 7b– 

3(f)(15)(D)(ii). 

871 17 CFR 145.9. 

those persons who oversee the CCO.859

The Commission believes that the board 

of directors 860 may append its own 

comments if desired, but the statutory 

text and the Commission’s 

implementing regulations do not require 

it. 

The Commission disagrees with the 

comments from MarketAxess and FSR 

regarding the inclusion of a materiality 

qualifier to the certification 

requirement. The Commission believes 

that the current certification sufficiently 

protects the CCO from being held 

strictly liable for any minor inaccuracies 

because it includes a ‘‘knowledge’’ and 

‘‘reasonable belief’’ qualifier. The 

Commission also disagrees with CME’s 

and FXall’s comments to have the SEF’s 

CEO, instead of the CCO, certify the 

accuracy of the annual compliance 

report. While the CEA does not 

explicitly require that the CCO certify 

the report, it does require that the CCO 

‘‘annually prepare and sign’’ the report, 

and that the report ‘‘include a 

certification that, under penalty of law, 

the compliance report is accurate and 

complete.’’ 861 The Commission believes 

that these two requirements read 

together provide sufficient basis for the 

CCO to certify that the report is accurate 

and complete. However, the 

Commission is modifying § 37.1501(e) 

to explicitly state that the CCO ‘‘sign’’ 

the annual compliance report in order to 

follow the statutory text more closely. 

(6) § 37.1501(f)—Submission of Annual 

Compliance Report by Chief 

Compliance Officer to the 

Commission 862

Proposed § 37.1501(f)(1) required, 

among other items, that the CCO 

provide the annual compliance report to 

the board of directors or the senior 

officer for review, prior to submission to 

the Commission. The proposed rule also 

stated that the board of directors or the 

senior officer may not require the CCO 

to make any changes to the report. 

Proposed § 37.1501(f)(2) required that 

the annual compliance report be 

electronically provided to the 

Commission not more than 60 days after 

the end of the SEF’s fiscal year. 

Proposed § 37.1501(f)(3) required the 

CCO to promptly file an amendment to 

an annual compliance report upon 

discovery of any material error or 

omission. Proposed § 37.1501(f)(4) 

allowed a SEF to request an extension 

of time to file its compliance report 

based on substantial, undue hardship. 

Finally, proposed § 37.1501(f)(5) stated 

that annual compliance reports will be 

treated as exempt from mandatory 

public disclosure for purposes of 

FOIA 863 and the Sunshine Act 864 and 

parts 145 and 147 of the Commission’s 

regulations. 

(i) Summary of Comments 

Some commenters stated that 

proposed § 37.1501(f)(1) should be 

modified to allow the board of directors 

or the senior officer to make changes to 

the annual compliance report.865 These 

commenters generally argued that the 

CCO should be accountable to 

management and, by not permitting the 

board of directors or the senior officer 

to revise the report, the proposed rule 

undermines the authority of the board of 

directors.866 Better Markets 

recommended that the CCO should be 

required to present his or her finalized 

report to the board of directors and 

executive management prior to its 

submission.867 Better Markets further 

recommended that the independent 

directors and/or the Audit Committee, 

as well as the entire board of directors, 

review and approve the report or detail 

where and why it disagrees with any 

provision before submission to the 

Commission.868

With respect to proposed 

§ 37.1501(f)(5), CME recommended that 

the Commission expressly state that 

annual compliance reports are 

confidential documents that are not 

subject to public disclosure by listing 

such reports as a specifically exempt 

item in Commission regulation 145.5.869

(ii) Commission Determination 

The Commission is adopting 

§ 37.1501(f) as proposed, subject to two 

modifications described below. The 

Commission has determined not to 

adopt the commenters’ recommendation 

to allow the board of directors or the 

senior officer to make changes to the 

annual compliance report. The 

Commission believes that allowing the 

board of directors or the senior officer 

to make changes to the report would 

prevent the CCO from making a 

complete and accurate assessment of a 

SEF’s compliance program. The 

Commission has determined not to 

adopt the recommendation by Better 

Markets that the board of directors 

approve the annual compliance report 

or detail any disagreement. The 

Commission believes that requiring the 

board of directors to approve the report 

increases the risk that the CCO would be 

subject to undue influence by the board 

or by management. The Commission 

notes that the board of directors may 

include its own opinion of the annual 

compliance report if it disagrees with 

the CCO’s assessment. The Commission 

believes that the rule strikes the 

appropriate balance between ensuring 

that the board of directors cannot 

adversely influence the content of the 

annual compliance report and granting 

the board the opportunity to express its 

opinion of the report to the 

Commission. 

The Commission is revising proposed 

§ 37.1501(f)(2) to clarify that a SEF shall 

submit its annual compliance report to 

the Commission concurrently with the 

SEF’s filing of its fourth fiscal quarter 

financial report pursuant to § 37.1306. 

The Commission is making this 

technical correction because CEA 

section 5h(f)(15)(D)(ii) sets forth such a 

requirement, which was inadvertently 

omitted from the proposed rules.870

Additionally, the Commission is 

withdrawing proposed § 37.1501(f)(5). 

The Commission acknowledges CME’s 

concern regarding the public release of 

annual compliance reports and clarifies 

that the Commission does not intend to 

make annual compliance reports public. 

However, where such information is, in 

fact, confidential, the Commission 

encourages SEFs to submit a written 

request for confidential treatment of 

such filings under FOIA, pursuant to the 

procedures established in section 145.9 

of the Commission’s regulations.871 The 

determination of whether to disclose or 

exempt such information in the context 

of a FOIA proceeding would be 

governed by the provisions of part 145 

and any other relevant provision. 

(7) § 37.1501(g)—Recordkeeping 

Proposed § 37.1501(g)(1) generally 

stated that a SEF must maintain the 

following records: (i) A copy of written 

policies and procedures adopted in 

furtherance of compliance with the Act 

and Commission regulations; (ii) copies 

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33548 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

872MarketAxess Comment Letter at 27 (Mar. 8, 

2011). 

873 Id. 

874The Commission is making certain nonsubstantive clarifications to § 37.1501(g). In 

addition, the Commission is revising the citation to 

paragraphs ‘‘(d)(6) and (d)(7)’’ in proposed 

§ 37.1501(g)(1)(ii) to cite to paragraphs ‘‘(d)(8) and 

(d)(9).’’ The Commission notes that this was a 

drafting error. 

875Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1235. 

876 5 U.S.C. 601 et seq. 

877See 47 FR 18618–21 (Apr. 30, 1982). 

878See 47 FR 18618, 18619 (Apr. 30, 1982) 

discussing DCMs; 66 FR 42256, 42268 (Aug. 10, 

2001) discussing DTEFs, ECMs, and EBOTs; and 66 

FR 45604, 45609 (Aug. 29, 2001) discussing DCOs. 

879 Dodd Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, 124 Stat. 1376 

(2010). 

880Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1235. 

881 44 U.S.C. 3501 et seq. 

882Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1236. 

883 7 U.S.C. 12(a)(1). 

884 5 U.S.C. 552a. 

885Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1236. 

886 Id. 

of all materials created in furtherance of 

the CCO’s duties listed in paragraphs 

(d)(6) and (d)(7) of proposed § 37.1501; 

(iii) copies of all materials in connection 

with the review and submission of the 

annual compliance report; and (iv) any 

records relevant to a SEF’s annual 

report. Proposed § 37.1501(g)(2) 

required a SEF to maintain these records 

in accordance with § 1.31 and part 45 of 

the Commission’s regulations. 

(i) Summary of Comments 

MarketAxess commented that the 

final rule should provide an exception 

for legally privileged materials.872

MarketAxess argued that it is 

unreasonable for the Commission to 

take the position that a CCO should not 

be able to receive privileged advice from 

counsel in an effort to comply with 

these new, complex, and uncertain 

rules.873

(ii) Commission Determination 

The Commission is adopting 

§ 37.1501(g) as proposed.874 The 

Commission does not believe that 

§ 37.1501(g) changes existing 

Commission policies regarding the 

assertion of attorney-client privilege by 

registrants. As stated in the SEF NPRM, 

the Commission designed § 37.1501(g) 

to ensure that the Commission staff 

would be able to obtain the necessary 

information to determine whether a SEF 

has complied with the CEA and 

applicable regulations.875 The 

Commission believes that proposed 

§ 37.1501(g) properly accomplishes this 

goal. 

Finally, the Commission is adding 

new § 37.1501(h) titled ‘‘Delegation of 

authority’’ to the final SEF rules to 

delegate authority to the Director of 

DMO to grant or deny a swap execution 

facility’s request for an extension of 

time to file its annual compliance report 

under paragraph (f)(4) of § 37.1501. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 876 requires federal agencies, in 

promulgating regulations, to consider 

the impact of those regulations on small 

entities. The regulations adopted herein 

will affect SEFs. The Commission has 

previously established certain 

definitions of ‘‘small entities’’ to be used 

by the Commission in evaluating the 

impact of its regulations on small 

entities in accordance with the RFA.877

In addition, the Commission has 

previously determined that DCMs, 

derivatives transaction execution 

facilities (‘‘DTEFs’’), exempt commercial 

markets (‘‘ECMs’’), exempt boards of 

trade (‘‘EBOTs’’), and DCOs are not 

small entities for the purpose of the 

RFA.878

While SEFs are new entities to be 

regulated by the Commission pursuant 

to the Dodd-Frank Act,879 in the SEF 

NPRM the Commission proposed that 

SEFs should not be considered as small 

entities for the purpose of the RFA for 

essentially the same reasons that DCMs 

and DCOs have previously been 

determined not to be small entities.880

The Commission received no comments 

on the impact of the rules contained 

herein on small entities. Therefore, the 

Chairman, on behalf of the Commission, 

hereby certifies, pursuant to 5 U.S.C. 

605(b), that the regulations will not have 

a significant economic impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(‘‘PRA’’) 881 imposes certain 

requirements on federal agencies in 

connection with their conducting or 

sponsoring any 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’’). This 

final rulemaking contains new 

collection of information requirements 

within the meaning of the PRA. 

Accordingly, in connection with the 

SEF NPRM, the Commission submitted 

an information collection request, titled 

‘‘Core Principles and Other 

Requirements for Swap Execution 

Facilities,’’ to OMB for its review and 

approval in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. 

Additionally, pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission, in the 

SEF NPRM, requested comments from 

the public on the proposed information 

collection requirements in order to, 

among other items, evaluate the 

necessity of the proposed collections of 

information and minimize the burden of 

the information collection requirements 

on respondents.882

On April 28, 2011, OMB assigned 

control number 3038–0074 to this 

collection of information, but withheld 

final approval pending the 

Commission’s resubmission of the 

information collection, which includes 

a description of the comments received 

on the collection and the Commission’s 

responses thereto. The Commission has 

revised some of its proposed estimates 

of the number of mandatory responses 

in order to clarify the Commission’s 

original intent; otherwise, the proposed 

burden hour estimates are being 

adopted as discussed herein. The 

Commission has submitted the revised 

information collection request to OMB 

for its review, which will be made 

available by OMB at http:// 

www.reginfo.gov/public/do/PRAMain. 

As noted in the SEF NPRM, the 

Commission will protect proprietary 

information according to the Freedom of 

Information Act and 17 CFR part 145, 

‘‘Commission Records and 

Information.’’ In addition, section 

8(a)(1) of the CEA strictly prohibits the 

Commission, unless specifically 

authorized by the CEA, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ 883 The Commission is also 

required to protect certain information 

contained in a government system of 

records according to the Privacy Act of 

1974.884

1. Proposed Collection of Information 

In the SEF NPRM, the Commission 

estimated that each SEF respondent 

would have an average annual reporting 

burden of 308 hours.885 In deriving this 

estimate, the Commission compared the 

reporting requirements for other entities 

that fall under the Commission’s 

regulatory oversight, such as an Exempt 

Commercial Market with a significant 

price discovery contract (‘‘SPDC ECM’’), 

a DTEF, and a DCM.886 Specifically, the 

Commission estimated that a SEF will 

have more reporting requirements than 

a SPDC ECM and a DTEF, but fewer 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33549 

887 Id. SPDC ECMs were subject to 9 core 

principles, DTEFs were subject to 9 core principles, 

and DCMs are subject to 23 core principles. SEFs 

will be subject to 15 core principles. Id. at 1236 n. 

124. 

888 Id. at 1236. 

889After passage of the Commodity Futures 

Modernization Act of 2000 and a switch to the core 

principles framework for DCMs, the Commission 

estimated that the recordkeeping and reporting 

obligations imposed by part 38 would total 300 

burden hours per DCM. See A New Regulatory 

Framework for Trading Facilities, Intermediaries 

and Clearing Organizations, 66 FR 42256, 42268 

(Aug. 10, 2001); 66 FR 14262, 14268 (proposed Mar. 

9, 2001). In 2007, the Commission amended the 

acceptable practices in part 38 for minimizing 

conflicts of interest, estimating that the 

amendments would increase the information 

collection and reporting burden by an additional 70 

hours per DCM. See Conflicts of Interest in SelfRegulation and Self-Regulatory Organizations 

(‘‘SROs’’), 72 FR 6936, 6957 (Feb. 14, 2007); 71 FR 

38740, 38748 (proposed Jul. 7, 2006). Most recently, 

the Commission adopted revisions to part 38 to 

implement the Dodd-Frank Act, estimating that the 

revisions would increase the information collection 

and reporting burden by an additional 70 hours per 

DCM. See Core Principles and Other Requirements 

for Designated Contract Markets, 77 FR 36612, 

36662 (Jun. 19, 2012). The average for purposes of 

the initial burden hour estimate for SEFs averages 

both initial estimates for DCMs with the other most 

recent estimates. 

890A New Regulatory Framework for Trading 

Facilities, Intermediaries and Clearing 

Organizations, 66 FR at 42268; 66 FR at 14268. 

891Significant Price Discovery Contracts on 

Exempt Commercial Markets, 74 FR 12178, 12187 

(Mar. 23, 2009); 73 FR 75888, 75902 (proposed Dec. 

12, 2008). 

892Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1236. For 

hourly reporting requirements, an average of 35 

SEFs was used for calculation purposes. Id. at 1236 

n. 125. 

893 Id. at 1236. 

894 In arriving at a wage rate for the hourly costs 

imposed, the Commission consulted the 

Management and Professional Earnings in the 

Securities Industry Report, published in 2010 by 

the Securities Industry and Financial Markets 

Association (SIFMA Report). The wage rate is a 

composite (blended) wage rate arrived at by 

averaging the mean annual salaries of an Assistant/ 

Associate General Counsel, an Assistant 

Compliance Director, a Senior Programmer, and a 

Senior Treasury/Cash Management Manager as 

published in the SIFMA Report and dividing that 

figure by 2,000 annual work hours to arrive at the 

hourly rate of $52. 

895Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR at 1236. 

896 Id. 

897 308 average hours per respondent × 35 

respondents = 10,780 total hours/year. Id. 

898WMBAA Comment Letter at 14 (Mar. 8, 2011). 

899MarketAxess Comment Letter at 20–21 (Mar. 

8, 2011). 

900CME Comment Letter at 10, 13 (Feb. 22, 2011). 

901 Id. at 10. 

902Provisions Common to Registered Entities, 76 

FR 44776, 44789 (Jul. 27, 2011). The Commission 

also notes that the annual burden hour estimate for 

DCMs that was used to calculate the annual burden 

hour estimate for SEFs in this part 37 rulemaking 

did not include the recordkeeping and reporting 

hours accounted for in the part 40 rulemaking’s 

information collection estimate. Therefore, there is 

no double counting of hours for product and rule 

submissions. Furthermore, the Commission notes 

that, similar to the DCM rulemaking, many of the 

collection burdens associated with this part 37 

Continued 

reporting requirements than a DCM (as 

most recently calculated).887 The 

Commission employed an average of its 

most recent hourly burdens for DCMs, 

DTEFs, and SPDC ECMs.888 Those 

hourly burdens provided in the SEF 

NPRM are noted below: 

Current estimate of DCM’s annual 

burden: 440 hours per DCM 889

Initial estimate of DTEF’s annual 

burden: 200 hours per DTEF 890

Initial estimate of SPDC ECM’s annual 

burden: 233 hours per ECM 891

In the SEF NPRM, the Commission 

estimated that 30 to 40 SEFs will 

register with the Commission as a result 

of the Dodd-Frank Act.892 Therefore, the 

Commission estimated the annual 

aggregate hour burden for all 

respondents to be 10,780 hours.893

Based on an hourly rate of $52,894 the 

Commission estimated that respondents 

may expend up to $16,016 annually to 

comply with the proposed 

regulations.895 This would result in an 

aggregate cost across all SEF 

respondents of $560,560 per annum (35 

respondents × $16,016).896 The SEF 

NPRM also provided the following 

summary of estimates: 

Estimated number of respondents: 35 

Annual responses by each respondent: 1 

Total annual responses: 35 

Quarterly responses by each respondent: 

4 

Total quarterly responses: 140 

Estimated average hours per response: 

308 

Aggregate annual reporting hours 

burden: 10,780 897

2. Summary of Comments and 

Commission Response 

While no commenter directly 

addressed the proposed aggregate 

burden hour estimate, the Commission 

did receive comments related to the 

costs of various recordkeeping and 

reporting requirements in the proposed 

rules. 

(a) § 37.3—Requirements and 

Procedures for Registration 

WMBAA commented that the 

Commission could reduce the regulatory 

burden of the registration procedures by 

reconciling its Form SEF with the SEC’s 

registration form such that a potential 

SEF will have to fill out only one 

form.898 Similarly, MarketAxess stated 

that it is costly and inefficient for a SEF 

that is required to be registered by both 

the Commission and SEC to go through 

two full registration processes, and that 

the Commission instead should permit 

‘‘notice’’ or ‘‘passport’’ registration of an 

SB–SEF already registered with the 

SEC.899 While the Commission 

acknowledges notice registration under 

section 5h(g) of the Act, it notes that the 

registration requirements for SEFs may 

differ from the registration requirements 

for SB–SEFs and thus the Commission 

must conduct an independent review of 

a SEF applicant’s registration 

application to ensure that the potential 

SEF’s proposed trading models and 

operations comply with the 

Commission’s requirements. Given such 

differing requirements, the Commission 

also notes that Form SEF may differ 

from the SEC’s registration form. 

With respect to temporary 

registration, the Commission has 

eliminated the requirement from the 

SEF NPRM that an applicant provide 

transaction data that substantiates that 

the execution or trading of swaps has 

occurred and continues to occur on the 

applicant’s trading system or platform at 

the time the applicant submits its 

temporary registration request. The 

Commission has also eliminated the 

certification requirement that an 

applicant believes that when it operates 

under temporary registration it will 

meet the requirements of part 37 of the 

Commission’s regulations. Instead, the 

Commission has revised the temporary 

registration provisions to require a SEF 

applicant that is already operating a 

swaps-trading platform, in reliance 

upon either an exemption granted by 

the Commission or some form of noaction relief granted by the Commission 

staff, to include in the temporary 

registration notice a certification that it 

is operating pursuant to such exemption 

or no-action relief. The Commission 

believes that these revisions will not 

materially affect the proposed part 37 

information collection estimate. 

(b) § 37.4—Procedures for Listing 

Products and Implementing Rules 

CME commented that the proposed 

product and rule certification process 

substantially increased the 

documentation burden, which in turn 

would increase the cost and amount of 

time it takes to list new products and 

implement new rules, with no 

corresponding benefit to the public.900

While CME cited the 8,300 additional 

aggregate hours that product and rule 

submissions were estimated to impose 

on all registered entities,901 the 

Commission notes that this figure was 

already accounted for in the 

Commission’s information collection 

estimate in the part 40 rulemaking titled 

‘‘Provisions Common to Registered 

Entities.’’ 902 Therefore, the burden 

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33550 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

rulemaking are covered by other existing or pending 

collections of information. Therefore, only those 

burdens that are not covered elsewhere are 

included in this collection of information. 

903CME Comment Letter at 13 (Feb. 22, 2011). 

904 Id. 

905 Id. at 16. 

906 Id. at 22. 

907WMBAA Comment Letter at 23 (Mar. 8, 2011). 

908 Id. at 26. 

909FXall Comment Letter at 3 (Mar. 8, 2011). 

910MarketAxess Comment Letter at 40 (Mar. 8, 

2011). 

911CME Comment Letter at 36–37 (Feb 22, 2011). 

associated with that information 

collection is not duplicated here. 

(c) § 37.5(c)—Equity Interest Transfers 

CME commented that the ‘‘level of 

immediacy’’ contemplated by the 24- 

hour timeframe for submitting 

agreements with the notification to the 

Commission of an equity interest 

transfer in proposed § 37.5(c) may be 

unrealistic.903 CME further commented 

that the representation of compliance 

with the requirements of CEA section 5h 

and the Commission’s regulations 

adopted thereunder would be more 

appropriate if required upon 

consummation of the equity interest 

transfer, rather than with the initial 

notification.904 In this final rulemaking, 

the Commission has revised proposed 

§ 37.5(c) to remove references to specific 

documents that must be provided with 

the equity transfer notification, and 

instead provided that the Commission 

may request supporting documentation. 

The Commission has also revised the 

proposed rule to increase the threshold 

of when a SEF must file an equity 

interest transfer notification with the 

Commission from ten percent to fifty 

percent and has extended the time 

period for a SEF to file the notification 

to up to ten business days from one 

business day under the proposed rule. 

In addition, the Commission has deleted 

the requirement for a SEF to provide a 

representation of compliance with 

section 5h of the Act and the 

Commission regulations thereunder 

with the equity interest transfer 

notification, as requested by CME. The 

Commission notes that these revisions 

should slightly reduce the burden of the 

information collection requirements for 

those respondents who are not 

requested to provide supporting 

documentation. 

(d) § 37.202(b)—Jurisdiction 

CME stated that it would be costly for 

a SEF to obtain every customer’s 

consent to its regulatory jurisdiction as 

required by proposed § 37.202(b).905 As 

noted in the preamble, the Commission 

believes that jurisdiction must be 

established by a SEF prior to granting 

members and market participants access 

to its markets in order to effectuate the 

statutory mandate of Core Principle 2 

that a SEF shall have the capacity to 

detect, investigate, and enforce rules of 

the SEF. The Commission notes that any 

information collection costs associated 

with this rule is covered by the 

Commission’s information collection 

estimate. 

(e) § 37.203(f)—Investigations and 

Investigation Reports 

CME stated that minor transgressions 

could be handled effectively through the 

issuance of a warning letter rather than 

a formal investigatory report.906 As 

explained in the preamble, the 

Commission clarifies that warning 

letters may be issued for minor 

transgressions; however, no more than 

one warning letter may be issued to the 

same person or entity found to have 

committed the same rule violation more 

than once within a rolling 12-month 

period. The Commission also clarifies 

that the limit on the number of warning 

letters is not applicable when a rule 

violation has not been found. The 

Commission believes that these 

clarifications will not materially affect 

the proposed part 37 information 

collection estimate. 

(f) § 37.205—Audit Trail 

WMBAA commented that the 

proposed audit trail requirement in 

§ 37.205(b) to retain records of customer 

orders should not apply to indicative 

quotes because it would be burdensome 

and costly.907 As discussed in the 

preamble, the Commission believes that 

this requirement is necessary so that a 

SEF has a complete picture of all trading 

activity in order to carry out its statutory 

mandate to monitor its markets to detect 

abusive trading practices and trading 

rule violations. The Commission 

accounted for this recordkeeping 

requirement in the proposed burden 

hour estimate; therefore, the estimate 

remains unaffected. 

(g) § 37.404—Ability to Obtain 

Information 

WMBAA commented that the 

requirement for SEFs to mandate that 

traders maintain trading and financial 

records is not required under the Act.908

The Commission notes that market 

participants’ trading records are an 

invaluable tool in its surveillance efforts 

and believes that a SEF should have 

direct access to such information in 

order to discharge its obligations under 

the SEF core principles. However, as 

noted in the preamble, the Commission 

states in the guidance that SEFs may 

limit the application of this requirement 

to those market participants who 

conduct substantial trading on their 

facility. The Commission notes that the 

requirement for market participants to 

keep such records is sound commercial 

practice, and that market participants 

are likely already maintaining such 

trading records; therefore, the 

Commission believes that the revision 

above will not materially affect the 

proposed part 37 information collection 

estimate. 

(h) § 37.703—Monitoring for Financial 

Soundness 

FXall commented that SEFs would be 

burdened by the ‘‘onerous financial 

surveillance obligations’’ of proposed 

§ 37.703, which include the routine 

review of members’ financial records.909

The Commission agrees that 

burdensome financial surveillance 

obligations may lead to higher 

transaction costs; therefore, as discussed 

in the preamble, the Commission has 

revised the proposed rule to state that 

SEFs must monitor their market 

participants to ensure that they continue 

to qualify as ECPs. The Commission 

believes that this revision will not 

materially affect the proposed part 37 

information collection estimate and is 

thus maintaining the estimate. 

(i) § 37.1306—Financial Resources 

Reporting to the Commission 

MarketAxess commented that the 

financial resources reporting 

requirements are unnecessary and 

burdensome and recommended that the 

Commission allow a senior officer of the 

SEF to represent to the Commission that 

it satisfies the financial resources 

requirements.910 The Commission 

disagrees with MarketAxess and, as 

discussed in the preamble, believes that 

much of the information required by the 

reports should be readily available to a 

SEF in the ordinary course of business. 

The Commission’s proposed burden 

hour estimate includes this reporting 

requirement. 

(j) § 37.1401—System Safeguards 

Requirements 

CME commented that the 

requirements to notify the Commission 

staff of all system security-related events 

and all planned changes to automated 

systems that may impact the reliability, 

security, or scalability of the systems are 

overly burdensome.911 As noted in the 

preamble, the Commission has revised 

the rule to only require notification of 

material system malfunctions and 

material planned system changes. While 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33551 

912FXall Comment Letter at 16 (Mar. 8, 2011). 

913Under § 37.1501, the SEF’s CCO is required to 

submit to the Commission annually a compliance 

report. 

914Under § 37.1306, a SEF is required to submit 

to the Commission each fiscal quarter a report of 

its financial resources available to meet the 

financial resources requirements of Core Principle 

13. 

915 1 quarterly response × 4 quarters per year × 

35 respondents. 

916 308 average burden hours per respondent/5 

responses total per year (1 annual response and 4 

quarterly responses) = 61.6 average hours per 

response. 

917 5 responses total per year × 61.6 average hours 

per response × 35 respondents. 

918See supra footnote 894 for a discussion of the 

wage rate. The Commission has revised the wage 

rate to $54 per hour based on data from the 2011 

SIFMA Report. 

919While the Commission recognizes that some 

estimates cited in the following cost-benefit 

consideration section suggest that reporting and 

recordkeeping requirements may result in a much 

higher aggregate cost to SEFs and market 

participants, it notes that all of the estimates 

provided therein account for more than pure 

recordkeeping and reporting costs subject to the 

PRA. Therefore, the Commission has not considered 

those estimates for purposes of reaching its final 

burden hour estimate and aggregate cost projection. 

920CEA section 15(a); 7 U.S.C. 19(a). A more 

complete explanation of this statutory requirement 

is provided below. See infra section 1(b) of this Cost 

Benefit Considerations section. Swaps, futures, and 

options are collectively referred to as derivatives— 

contracts used by market participants to hedge 

against the risk of a future change in prices, such 

as commodity prices, interest rates, and exchange 

rates. 

these revisions should decrease the 

regulatory burden imposed by the rule, 

the Commission believes that, given the 

infrequent nature of the information 

collection requirement as originally 

proposed, the effect of the revisions 

should be de minimis and therefore not 

affect the proposed burden hour 

estimate. 

(k) § 37.1501(e)—Preparation of Annual 

Compliance Report 

FXall commented that the information 

required by the proposed regulations to 

be included in the annual compliance 

report is too detailed and will be too 

costly to compile.912 The Commission is 

not persuaded by FXall’s comment, and 

notes that the annual compliance report 

is meant to be the primary tool by which 

the Commission can evaluate the 

effectiveness of a SEF’s compliance and 

self-regulatory programs, thus requiring 

a high level of detail. The Commission’s 

proposed burden hour estimate includes 

the annual compliance report 

requirement. 

3. Final Burden Estimate 

The final regulations require each 

respondent to file information with the 

Commission. For instance, SEF 

applicants must file registration 

applications with the Commission 

pursuant to § 37.3. SEFs must record, 

report, and disclose information related 

to prices, trading volume, and other 

trading data for swaps pursuant to Core 

Principles 9 and 10 (‘‘Timely 

Publication of Trading Information’’ and 

‘‘Recordkeeping and Reporting’’). In 

general, the collections of information 

are required to demonstrate a SEF’s 

operational capability and are a tool by 

which both the SEF and the 

Commission can evaluate the 

effectiveness of a SEF’s self-regulatory 

programs. 

The mandatory information 

collections are contained in several of 

the general provisions being adopted in 

subpart A, as well as in certain 

regulations implementing Core 

Principles 2, 3, 4, 5, 7, 8, 9, 10, 13, 14, 

and 15. Generally, the information 

collections covered in this final part 37 

rulemaking are not covered in other 

existing collections or collections that 

are being established in connection with 

other Dodd-Frank rulemakings, and 

pertain to the following general 

categories of recordkeeping and 

reporting: registration; submissions 

related to material changes in the SEF’s 

operations or business structure; 

compliance; financial resources reports, 

and an annual report by the CCO related 

to the SEF’s performance of its selfregulatory responsibilities. 

As discussed above, the methodology 

used to formulate the proposed estimate 

was an average of other registered 

entities. Due to the relatively low 

magnitude of changes made to the 

mandatory information collection 

provisions in this final part 37 

rulemaking, the Commission has 

determined not to alter its proposed 

estimate of 308 hours per SEF 

respondent. By definition, averages are 

meant to serve as only a reference point; 

the Commission understands that due to 

both discretionary and mandatory 

requirements, some SEFs may go above 

the final estimate of 308 hours to 

complete mandatory information 

collection requirements, while others 

may stay below. The Commission is, 

however, adjusting the proposed 

estimate of annual and quarterly 

responses to clarify the Commission’s 

original intent. In this regard, the 

Commission is adding an estimated 

average hours per response number 

below, which is based on 5 responses 

per year (1 annual response and 4 

quarterly responses) per respondent. 

Estimated number of respondents: 35 

Annual responses by each respondent: 

1 913

Total annual responses: 35 

Quarterly responses by each respondent: 

1 914

Total quarterly responses: 140 915

Estimated average hours per response: 

62 916

Aggregate annual reporting hours 

burden: 10,780 

Therefore, the Commission estimates 

that based on 35 registered SEFs, this 

final part 37 rulemaking will result in 

10,780 information collection hours 

across all respondents.917

4. Aggregate Information Burden 

The Commission concludes that new 

information collection 3038–0074 will 

result in each SEF respondent 

expending, on average, $16,632 

annually based on an hourly wage rate 

of $54 to comply with the recordkeeping 

and reporting requirements of this final 

part 37 rulemaking.918 In aggregate, this 

will result in a cost to all SEF 

respondents of $582,120 per annum 

based on 35 expected respondents. This 

aggregate cost estimate has been 

adjusted from the estimate in the SEF 

NPRM to account for updated wage rate 

data.919

C. Cost Benefit Considerations 

1. Introduction 

Section 15(a) of the Commodity 

Exchange Act (‘‘CEA’’ or ‘‘Act’’) 

mandates that the Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) consider the costs and benefits 

of the regulations that it is adopting in 

this rulemaking to implement the 

statutory requirements for the 

registration and operation of swap 

execution facilities (‘‘SEFs’’), a new type 

of regulated marketplace for the trading 

and execution of financial derivative 

contracts known as swaps.920 In 

considering the costs and benefits of the 

final SEF regulations, the Commission 

has grouped the same into the following 

categories—SEF Market Structure, 

Registration, Recordkeeping and 

Reporting, Compliance, Monitoring and 

Surveillance, Financial Resources and 

Integrity, and Emergency Operations 

and System Safeguards. 

Several preliminary matters, however, 

provide background for the 

Commission’s consideration of the costs 

and benefits of the rules adopted in this 

release. Discussed in this Introduction 

section, these preliminary matters are: 

(a) The circumstances and events that 

form the backdrop for the statutory 

requirements that this rulemaking 

implements; (b) the Commission’s 

statutory mandate to consider costs and 

benefits and its methodology for doing 

so; and (c) the estimated aggregate costs 

of forming and operating a SEF. 

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921See Dodd-Frank Act section 721(a)(21), adding 

CEA section 1a(47). 7 U.S.C. 1a(47). 

922CEA section 1a(47)(A)(ii); 7 U.S.C. 

1a(47)(A)(ii). 

923CEA section 1a(47)(A)(i) & (iv); 7 U.S.C. 

1a(47)(A)(i) & (iv). Futures are not within the 

definition of swap and remain separately subject to 

requirements of the CEA. See CEA section 

1a(47)(B)(i); 7 U.S.C. 1a(47)(B)(i). 

924CEA section 1a(47)(A)(i) & (iii); 7 U.S.C. 

1a(47)(A)(i) & (iii). 

925CEA section 1a(47)(A)(ii); 7 U.S.C. 

1a(47)(A)(ii). 

926See Further Definition of ‘‘Swap,’’ ‘‘SecurityBased Swap,’’ and ‘‘Security-Based Swap 

Agreement’’; Mixed Swaps; Security-Based Swap 

Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 

2012). 

927The Commission notes that privately 

negotiated swap transactions between 

counterparties is only one method to execute or 

trade a swap transaction in the OTC market. 

Counterparties in the OTC market may execute or 

trade swap transactions through many trading 

methods such as order books, RFQ systems, or 

systems that incorporate electronic and voice 

components. 

928Absent a centralized trading mechanism such 

as a limit order book, buyers and sellers ‘‘negotiated 

terms privately, often in ignorance of prices 

currently available from other potential 

counterparties and with limited knowledge of 

trades recently negotiated elsewhere in the market. 

OTC markets are thus said to be relatively opaque; 

investors are somewhat in the dark about the most 

attractive available terms and conditions and about 

whom to contact for attractive terms.’’ Darrell 

Duffie, Dark Markets: Asset Pricing and Information 

Transmission in Over-the-Counter Markets 1 

(Princeton University Press) (2012). 

929Asymmetric information exists when one 

party to a transaction has more or better information 

than the other. In the context of the swaps market, 

as dealers are always on one side of a large fraction 

of trades, it is highly likely that they will have 

better information on prevailing market conditions 

and valuations compared to their non-dealer 

counterparties. See Michael Fleming, John Jackson, 

Ada Li, Asani Sarkar & Patricia Zobel, ‘‘An Analysis 

of OTC Interest Rate Derivatives Transactions: 

Implications for Public Reporting,’’ Federal Reserve 

Bank of New York Staff Reports, No. 557, at 6 n. 

14 (Mar. 2012), available at http:// 

www.newyorkfed.org/research/staff_reports/ 

sr557.pdf. Major derivatives dealer activity 

accounts for 89% of the total interest rate swap 

activity in notional terms. Id. 

930CEA section 1a(18); 7 U.S.C. 1a(18). 

931Under the CFMA, prior to the adoption of 

Title VII of the Dodd-Frank Act, swaps based on 

exempt commodities—including energy and 

metals—could be traded among eligible contract 

participants without CFTC regulation, but certain 

CEA provisions against fraud and manipulation 

continued to apply to these markets. No statutory 

exclusions were provided for swaps on agricultural 

commodities by the CFMA, although they could be 

traded under certain regulatory exemptions 

provided by the CFTC prior to its enactment. Swaps 

based on securities were subject to certain SEC 

enforcement authorities, but the SEC was 

prohibited from prophylactic regulation of such 

swaps. See Commodity Futures Modernization Act 

of 2000, Pub. L. 106–554, 114 Stat. 2763 (2000). The 

Financial Crisis Inquiry Commission majority found 

that the CFMA ‘‘effectively shielded OTC 

derivatives from virtually all regulation or 

oversight,’’ and ‘‘OTC derivatives markets boomed’’ 

in the law’s wake, increasing ‘‘more than 

sevenfold’’ after the CFMA was enacted. See The 

Financial Crisis Inquiry Commission, The Financial 

Crisis Inquiry Report: Final Report of the National 

Commission on the Causes of the Financial and 

Economic Crisis in the United States (Official 

Government Edition), at 48, 364 (2011) (hereinafter 

the ‘‘FCIC Report’’), available at http://www.gpo.

gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf. 

932Legislative history indicates that in enacting 

the Dodd-Frank Act, Congress recognized that OTC 

market opacity, combined with the availability of 

superior price information primarily to dealers, 

limited the ability of swaps customers ‘‘to shop for 

the best price or rate.’’ See Mark Jickling & Kathleen 

Ann Ruane, ‘‘The Dodd-Frank Wall Street Reform 

and Consumer Protection Act: Title VII, 

Derivatives,’’ Cong. Research Serv., R41398, at 7 

(Aug. 30, 2010). See also S. Rep. No. 111–176, at 

30 (2010) (‘‘Information on [OTC derivative 

contract] prices and quantities is opaque. . . . This 

can lead to inefficient pricing and risk assessment 

for derivatives users and leave regulators illinformed about risks building up throughout the 

financial system’’). Ben Bernanke, Chairman of the 

Board of Governors of the Federal Reserve System, 

stated, ‘‘[a]t times [during the crisis], the complexity 

and diversity of derivatives instruments also posed 

(a) Background 

An appreciation of certain 

background elements is helpful to 

understand the costs and benefits of this 

rulemaking. These are: (i) The definition 

of the derivative financial transactions 

(i.e., swaps) that will be executed on 

SEFs; (ii) the execution and regulation 

of swaps prior to the Dodd-Frank Act; 

(iii) the 2008 financial crisis and the 

role of the over-the-counter (‘‘OTC’’) 

swaps market; (iv) the new regulatory 

regime to reform the swaps market in 

Title VII of the Dodd-Frank Act; and, 

more specifically, (v) the role and 

purpose of SEFs within the Title VII 

regulatory regime. Each of these 

background elements is discussed 

below. 

(1) The Definition of a Swap 

Congress defined the term ‘‘swap’’ in 

the Dodd-Frank Act.921 The statutory 

definition of the term ‘‘swap’’ includes, 

in part, any agreement, contract, or 

transaction ‘‘that provides for any 

purchase, sale, payment, or delivery 

(other than a dividend on an equity 

security) that is dependent on the 

occurrence, nonoccurrence, or the 

extent of the occurrence of an event or 

contingency associated with a potential 

financial, economic, or commercial 

consequence.’’ 922 The statutory 

definition, among other things, 

generally includes options (other than 

options on futures) as well as 

transactions that now or in the future 

are commonly known to the trade as 

swaps.923 The definition also articulates 

a broad range of underlying interests 

upon which a swap may be based: ‘‘1 or 

more interest or other rates, currencies, 

commodities, securities, instruments of 

indebtedness, indices, quantitative 

measures, or other financial or 

economic interests or property of any 

kind . . .’’ 924 or ‘‘the occurrence, 

nonoccurrence, or the extent of the 

occurrence of any event or contingency 

associated with a potential financial, 

economic, or commercial 

consequence.’’ 925 In a joint rulemaking 

with the Securities and Exchange 

Commission (‘‘SEC’’), the Commission 

also adopted rules further defining the 

term ‘‘swap.’’ 926

(2) The Execution and Regulation of 

Swaps Prior to the Dodd-Frank Act 

Unlike futures contracts which are 

regulated by the Commission and are 

listed for trading on exchanges called 

designated contract markets (‘‘DCMs’’), 

swap transactions (excluding some 

exchange-traded options encompassed 

by the post-Dodd-Frank Act definition) 

evolved off-exchange—largely to 

provide customized solutions for unique 

risk management needs that exchangetraded products addressed less 

effectively—lending themselves to the 

often used label of ‘‘OTC derivatives.’’ 

Accordingly, many swap transactions 

prior to the Dodd-Frank Act were 

negotiated privately OTC between 

counterparties.927 In these situations, 

only the counterparties knew that the 

swap transaction was taking place, and 

regulators and other market participants 

lacked access to pricing information 

during the negotiation phase (pre-trade) 

and after the agreement was 

consummated (post-trade). While 

centralized exchanges permit multiple 

market participants to compare, assess, 

accept, or reject bids (offers to buy) and 

asks (offers to sell), the privately 

negotiated OTC market provided little, 

if any, pre- or post-trade 

transparency.928

In a typical privately negotiated OTC 

swap transaction, a customer for a swap 

is likely to obtain a private quote from, 

and bilaterally negotiate contract terms 

with, one of a small number of marketmaking dealers. These dealers, often 

large financial institutions, may stand 

ready to take either a long position (if 

they want to buy) or a short position (if 

they want to sell), profiting from 

spreads (the difference between the bid 

and the offer price) and fees. Relative to 

their non-dealer (usually ‘‘buy-side’’) 

counterparties, these dealers enjoy 

asymmetric information advantages.929

The Commodity Futures Modernization 

Act of 2000 (‘‘CFMA’’)—which largely 

excluded swaps transacted between 

‘‘eligible contract participants’’ 930 from 

regulation under the CEA—reinforced 

this outcome.931 Swaps remained 

largely insulated from regulation prior 

to the enactment of the Dodd-Frank 

Act.932

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problems. Financial firms sometimes found it quite 

difficult to fully assess their own net derivatives 

exposures or to communicate to counterparties and 

regulators the nature and extent of those exposures. 

The associated uncertainties helped fuel losses of 

confidence that contributed importantly to the 

liquidity problems I mentioned earlier. The recent 

legislation addresses these issues by requiring that 

derivatives contracts be traded on exchanges or 

other regulated trading facilities when possible and 

that they be centrally cleared.’’ ‘‘Too Big To Fail: 

Expectations and Impact of Extraordinary 

Government Intervention and the Role of Systemic 

Risk in the Financial Crisis: Hearing Before the 

Financial Crisis Inquiry Commission,’’ 11 (Sep. 2, 

2010) (statement of Ben Bernanke, Chairman, Board 

of Governors of the Federal Reserve System), 

available at http://fcic-static.law.stanford.edu/ 

cdn_media/fcic-testimony/2010-0902-Bernanke.pdf. 

933The Bank for International Settlements, 

Quarterly Review, at A 131 (Sep. 2012), available 

at http://www.bis.org/statistics/otcder/dt1920a.pdf. 

934The Bank for International Settlements, 79th 

Annual Report, at 23 (2009), available at http:// 

www.bis.org/publ/arpdf/ar2009e2.pdf, for a broader 

discussion of the development of the crisis. 

935S. Rep. No. 111–176, at 30 (2010). 

936See Darrell Duffie, Ada Li & Theo Lubke, 

‘‘Policy Perspectives on OTC Derivatives Market 

Infrastructure,’’ Federal Reserve Bank of New York 

Staff Reports, No. 424, at 1 (Mar. 2010), available 

at http://www.newyorkfed.org/research/ 

staff_reports/sr424.pdf. 

937See Section 733 of the Dodd-Frank Act, which 

adopted CEA section 5h regarding registration, 

operation, and compliance requirements for SEFs. 

7 U.S.C. 7b–3. See also Section 723(a)(3) of the 

Dodd-Frank Act, which amended CEA section 2(h) 

to add CEA section 2(h)(8) setting forth a trade 

execution requirement. 7 U.S.C. 2(h)(8). Similarly, 

the Dodd-Frank Act authorized the SEC to regulate 

security-based swaps. See Section 763 of the DoddFrank Act, which amended the Securities and 

Exchange Act of 1934 to add section 3D of the 

Exchange Act, among other provisions. 

938See FCIC Report at xxiv (listing uncontrolled 

leverage; lack of transparency, capital and collateral 

requirements; speculation; interconnection among 

firms; and concentrations of risk in the market as 

contributing factors). 

939S. Rep. No. 111–176, at 92 (2010). 

940See academic research discussed below. 

941S. Rep. No. 111–176, at 34 (2010). 

942 Id. at 33–34 (quoting former CFTC Chair 

Brooksley Born, the report states ‘‘ ‘[w]hile central 

clearing would mitigate counterparty risk, central 

clearing alone is not enough. . . . [e]xchange 

trading is also essential in order to provide price 

discovery, transparency, and meaningful regulatory 

oversight of trading and intermediaries.’ ’’). 

943 Id. at 34 (quoting Stanford University 

Professor Darrel Duffie, ‘‘ ‘[t]he relative opaqueness 

of the OTC market implies that bid/ask spreads are 

in many cases not being set as competitively as they 

would be on exchanges. . . . [t]his entails a loss in 

market efficiency.’ ’’). 

From these beginnings, the 

unregulated swaps market has expanded 

exponentially over the last thirty years. 

According to the Bank for International 

Settlements (‘‘BIS’’), the global OTC 

derivatives market measures at over 

$647 trillion in notional size.933

(3) The 2008 Financial Crisis and the 

Role of the OTC Swaps Market 

In the fall of 2008, the United States 

experienced a financial crisis that led to 

millions of Americans losing their jobs, 

millions of families losing their homes, 

and thousands of small businesses 

closing their doors. The BIS 

characterized 2008 as a year that 

escalated for ‘‘what many had hoped 

would be merely . . . manageable 

market turmoil [to] a full-fledged global 

crisis.’’ 934 Faced with what policy 

makers at the time perceived as a grave 

threat that without immediate and 

unprecedented government action U.S. 

and global credit markets would freeze, 

the federal government mounted an 

extraordinary intervention at great cost 

to the American taxpayer to buttress the 

stability of the U.S. financial system. 

While there were multiple causes of 

the financial crisis, unregulated swaps 

played an important role. Swaps 

contributed significantly to the 

interconnectedness between banks, 

investment banks, hedge funds, and 

other financial entities. As the swaps 

market grew, additional participation 

added risk to the already highlyleveraged and interconnected market. 

Accordingly, swaps concentrated and 

heightened risks in the financial system 

and to the public. 

The crisis elevated concern among 

regulators that the opaque structure of 

the OTC swaps market and the 

consequent lack of information about 

swap prices and quantities would 

hinder efficient pricing, and that the 

lack of information about outstanding 

positions and exposures could ‘‘leave 

regulators ill-informed about the risks 

building up in the financial system. . . . 

Lack of transparency in the massive 

OTC market intensified systemic fears 

during the crisis about interrelated 

derivatives exposures from counterparty 

risk.’’ 935 As regulators did not have a 

clear view into how OTC derivatives 

were being used, they also feared that 

‘‘the complexity and limited 

transparency of the market reinforced 

the potential for excessive risktaking. . . .’’ 936

(4) The New Regulatory Regime To 

Reform the Swaps Market in Title VII of 

the Dodd-Frank Act 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act into law. 

Title VII of the Dodd-Frank Act 

established a comprehensive new 

regulatory framework for swaps and 

charged the Commission and the SEC 

with oversight of the more than $300 

trillion domestic swaps market.937 The 

legislation was enacted, among other 

reasons, to promote market integrity 

within the financial system, reduce risk, 

and increase transparency, including by: 

(i) Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; (ii) 

imposing clearing and trade execution 

requirements on swaps; (iii) creating a 

rigorous recordkeeping and real-time 

reporting regime; and (iv) enhancing the 

rulemaking and enforcement authority 

of the Commission with respect to, 

among others, all registered entities, 

including SEFs. These various elements 

work in concert to provide the 

Commission with a comprehensive view 

of the entire swaps market, furthering 

the Commission’s ability to monitor the 

market. Consistent with the view that 

the vulnerability of the OTC derivatives 

market during the financial crisis was 

not attributable to a single weakness, 

but a combination of several,938 Title VII 

does not provide for a singledimensional fix. Rather, it weaves 

together a multidimensional regulatory 

construct designed to ‘‘mitigate costs 

and risks to taxpayers and the financial 

system.’’ 939

(5) The Role and Purpose of SEFs 

Within the Title VII Regulatory Regime 

One of the most important goals of the 

Dodd-Frank Act is to bring transparency 

to the opaque OTC swaps market. It is 

generally accepted that when markets 

are open and transparent, prices are 

more competitive and markets are more 

efficient.940 The legislative history of 

the Dodd-Frank Act indicates that 

Congress viewed exchange trading as a 

mechanism to ‘‘provide pre- and posttrade transparency for end users, market 

participants, and regulators.’’ 941 As 

such, exchange trading was intended as 

‘‘a price transparency mechanism’’ that 

complements Title VII’s separate central 

clearing requirement to mitigate 

counterparty risk.942 Additionally, 

legislative history reveals a 

Congressional expectation that, over 

time, exchange trading of swaps would 

reduce transaction costs, enhance 

market efficiency, and counter the 

ability of dealers to extract economic 

rents from higher bid/ask spreads at the 

expense of other market participants.943

Consistent with this purpose, the 

Dodd-Frank Act amended the CEA to 

create SEFs, a new type of regulated 

marketplace, and promotes swap trading 

and execution on them. The statutory 

requirements for SEFs are similar to the 

requirements for the existing 

Commission-regulated futures market, 

which incorporates pre-trade and posttrade transparency aspects not present 

in the OTC swaps market. SEFs will 

allow buyers and sellers to meet in an 

open, centralized marketplace, where 

prices are publicly available. As 

statutorily defined, a SEF is ‘‘a trading 

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944CEA section 1a(50), as amended by section 

721 of the Dodd-Frank Act. 7 U.S.C. 1a(50). 

‘‘Trading facility’’ is also a statutorily defined term. 

See CEA section 1a(51); 7 U.S.C. 1a(51). 

945The Commission separately proposed rules to 

determine whether a swap is ‘‘made available to 

trade’’ for purposes of the trade execution 

requirement in CEA section 2(h)(8). Process for a 

Designated Contract Market or Swap Execution 

Facility To Make a Swap Available To Trade, 76 FR 

77728 (proposed Dec. 14, 2011). 

946The Commission separately proposed rules to 

determine minimum block trade sizes for swaps. 

Since the execution methods for Required 

Transactions excludes block trades, this rulemaking 

affects the scope of the trade execution mandate. 

See Procedures to Establish Appropriate Minimum 

Block Sizes for Large Notional Off-Facility Swaps 

and Block Trades, 77 FR 15460 (proposed Mar. 15, 

2012). 

947See Section 723(a)(3) of the Dodd-Frank Act, 

which amended the CEA to add section 2(h)(8). 7 

U.S.C. 2(h)(8). 

948See Section 723(a)(3) of the Dodd-Frank Act, 

which amended the CEA to add section 2(h)(1). 7 

U.S.C. 2(h)(1). 

949See Section 723(a)(3) of the Dodd-Frank Act, 

which amended the CEA to add section 2(h)(7). 7 

U.S.C. 2(h)(7). The Commission separately 

proposed rules to determine whether a swap is 

‘‘made available to trade’’ for purposes of the trade 

execution requirement in CEA section 2(h)(8). 

Process for a Designated Contract Market or Swap 

Execution Facility To Make a Swap Available To 

Trade, 76 FR 77728 (proposed Dec. 14, 2011). 

950CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1). 

951CEA section 5h(f); 7 U.S.C. 7b–3(f). 

952CEA section 5h(f)(1)(A); 7 U.S.C. 7b–3(f)(1)(A). 

Further, CEA section 5h(h) mandates that the 

Commission prescribe rules governing SEF 

regulation. 7 U.S.C. 7b–3(h). 

953While the SEF rules focus on measures to 

promote pre-trade price transparency and trade 

execution, they complement other Commission 

rules pertaining to real-time reporting (part 43 of 

the Commission’s regulations) and swap data 

recordkeeping and reporting (part 45 of the 

Commission’s regulations). The addition of the CEA 

section 5h rules for registration, operation, and 

compliance of SEFs to this mix results in a suite 

of rules covering all critical aspects of the trading 

process—pre-trade, trade, and post-trade. 

954Pre-trade transparency is defined as ‘‘the 

dissemination of current bid and ask quotations, 

depths, and information about limit orders away 

from the best prices. Post-trade transparency refers 

to the public and timely transmission of 

information on past trades, including execution 

time, volume and price.’’ See Ananth Madhavan, 

David Porter & Daniel Weaver, ‘‘Should securities 

markets be transparent?,’’ 8 Journal of Financial 

Markets 265, 268 (Aug. 2005). See also Larry Harris, 

Trading and Exchanges—Market Microstructure for 

Practitioners 102 (Oxford University Press) (2003) 

(hereinafter Harris, ‘‘Trading and Exchanges’’). 

955See section 733 of the Dodd-Frank Act, adding 

CEA section 5h. 7 U.S.C. 7b–3. Under section 5h, 

Congress provided an explicit rule of construction, 

stating that ‘‘[t]he goal of this section is to promote 

the trading of swaps on swap execution facilities 

and to promote pre-trade price transparency in the 

swaps market.’’ CEA section 5h(e); 7 U.S.C. 7b–3(e). 

956See, e.g., ISDA Research Staff & NERA 

Economic Consulting, Costs and Benefits of 

Mandatory Electronic Execution Requirements for 

Interest Rate Products, ISDA Discussion Papers 

Series, Number Two, at 1, 4 (Nov. 2011) (added to 

the public comment file for the SEF rulemaking on 

Nov. 10, 2011) (hereinafter ‘‘ISDA Discussion 

Paper’’); ISDA/SIFMA Comment Letter at 5–6 (Mar. 

8, 2011); MetLife Comment Letter at 2–3 (Mar. 8, 

2011). 

957The corporate bond markets are generally 

comparable to the OTC swap markets in terms of 

the large number of instruments traded, with 

potentially a large overlap of market participants. 

Additionally, any single issuer will have multiple 

bonds outstanding, with different maturity dates 

and coupons. Some potential SEF registrants will 

likely be firms operating trading platforms for 

corporate bonds. 

958For example, Larry Harris notes that market 

participants might be ‘‘ambivalent about 

transparency,’’ and explains that traders ‘‘favor 

transparency when it allows them to see more of 

what other traders are doing, but they oppose it 

when it requires that they reveal more of what they 

are doing. Generally, those who know the least 

about market conditions most favor transparency. 

Those who know the most oppose transparency 

because they do not want to give up their 

informational advantages.’’ The Commission also 

recognizes that there is a continuum of markets 

occupying ‘‘various points between high and low 

transparency.’’ See Harris, ‘‘Trading and 

Exchanges,’’ at 101. See also ISDA Research Notes, 

‘‘Transparency and over-the-counter derivatives: 

The role of transaction transparency,’’ No. 1, at 2– 

3 (2009), available at http://www2.isda.org/ 

attachment/MTY4NA==/ISDA-ResearchNotes1.pdf. 

system or platform in which multiple 

participants have the ability to execute 

or trade swaps by accepting bids and 

offers made by multiple participants in 

the facility or system, through any 

means of interstate commerce, including 

any trading facility, that (A) facilitates 

the execution of swaps between 

persons; and (B) is not a designated 

contract market.’’ 944

With this rulemaking, in conjunction 

with the separate made available to 

trade rulemaking 945 and the swaps 

block rulemaking,946 the Commission is 

implementing the Dodd-Frank Act’s 

trade execution mandate.947 Pursuant to 

this trade execution requirement, 

transactions involving swaps subject to 

the clearing requirement in CEA section 

2(h)(1) 948 must be executed on a SEF or 

a DCM, unless no SEF or DCM ‘‘makes 

the swap available to trade’’ or the 

related transaction is subject to the 

clearing exception under CEA section 

2(h)(7).949 Further, no facility may be 

operated for the trading or processing of 

swaps unless first registered as a SEF or 

DCM.950 SEFs are required to comply 

with 15 statutorily enumerated core 

principles,951 as well as any other 

requirements that the Commission 

prescribes by rule or regulation.952

Taken together, these statutory 

provisions provide the framework that 

transforms the swaps market from one 

in which prices for bilaterallynegotiated contracts are privately 

quoted—often by dealers with an 

informational advantage—to one in 

which bid/offer prices for swap 

contracts are accessible to multiple 

market participants to compare, assess, 

accept, or reject. By improving price 

transparency, the new provisions 

should reduce information asymmetry 

and, in turn, the informational 

advantage enjoyed by a small number of 

dealers to the detriment of other market 

participants.953 These provisions benefit 

the financial system as a whole by 

creating more efficient market places, 

where market participants will take into 

account the price at which recent 

transactions have occurred when 

determining at what price to display 

quotes or orders. 

As discussed, this rulemaking furthers 

Congress’ goal of promoting 

transparency in the swaps market.954

The goal of pre-trade transparency on 

SEFs is statutorily mandated in the 

Dodd-Frank Act.955 Notwithstanding the 

fact that Congress directed the 

Commission to construe the statute in 

light of this goal, some commenters 

have questioned the benefits of the 

Commission’s proposals in furtherance 

of that goal.956

In response to commenters who 

question the Congressionally-directed 

goal of pre-trade price transparency and 

the Commission’s implementation of 

that goal, the Commission notes that 

there is a body of research that tends to 

be generally supportive, albeit based on 

experience in other markets, as 

discussed below. Although this research 

was not critical to or relied upon by the 

Commission in its decision-making of 

how to best implement Congress’ goal of 

promoting pre-trade price transparency, 

it does provide a useful counterpoint to 

many of the general comments raised by 

commenters and therefore merits brief 

mention. 

While there are no studies on the 

effect of pre-trade transparency in the 

swaps market, empirical research on the 

likely effects of transparency on market 

participants exists in other markets, 

including the equity market, which has 

pre-trade transparency, and the 

corporate bond market, which has a 

similar market structure to the OTC 

swaps market and has post-trade 

transparency.957 While academics have 

a range of perspectives on market 

structure and transparency issues,958 the 

empirical research discussed below and 

throughout this document supports the 

general proposition that a lack of preand post-trade transparency, which are 

characteristics of any dark, opaque 

market, generally increases search and 

transaction costs, and negatively 

impacts price discovery. 

While some commenters contend that 

pre-trade price transparency 

requirements would increase costs for 

market participants, there is academic 

support for the general proposition that 

increased transparency will actually 

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959 Discussing the trade-off between higher costs 

to liquidity providers and the lower costs to 

institutional investors from greater post-trade 

transparency in the corporate bond markets, 

Bessembinder & Maxell conclude that while 

‘‘[T]raders employed by insurance companies and 

investment management firms bear costs associated 

with decreases in service provided by bond dealers 

. . . these higher costs are offset by lower trade 

execution costs that . . . benefit the investors who 

ultimately own the bonds transacted. . .’’ See 

Hendrik Bessembinder & William Maxwell, 

‘‘Markets: Transparency and the Corporate Bond 

Market,’’ 22 Journal of Economic Perspectives 217, 

232–33 (Spring 2008) (hereinafter Bessembinder & 

Maxwell, ‘‘Transparency’’). 

960Harris, ‘‘Trading and Exchanges,’’ at 101. 

961 It is instructive to note the view that 

transparency is ‘‘not an objective per se but rather 

a means for ensuring the proper functioning of the 

market.’’ See Marco Avellaneda & Rama Cont, 

‘‘Transparency in Credit Default Swap Markets,’’ 

Finance Concepts, at 3 (Jul. 2010), available at 

http://www.finance-concepts.com/images/fc/ 

CDSMarketTransparency.pdf. 

962Pagano & Ro ̈ell explain the regulatory policy 

support for pre-trade transparency as a means ‘‘to 

enable ordinary traders to check for themselves 

whether they have gotten a fair price.’’ Comparing 

the price formation in auction and dealer markets, 

they find that greater transparency generates lower 

trading costs for uninformed traders on average, 

although not necessarily for every trade size. See 

Marco Pagano & Ailsa Ro ̈ell, ‘‘Transparency and 

Liquidity: A Comparison of Auction and Dealer 

Markets with Informed Trading,’’ 51 Journal of 

Finance 579 (Jun. 1996). Research referenced later 

in the release has found that such competition can 

reduce revenues and increase costs and risks for 

liquidity providers, thus causing them to reduce 

their participation in the markets. 

963Many of the existing electronic trading 

platforms for bonds and for swaps display 

indicative quotes, but the Commission is not aware 

of research on the quality of these indicative quotes, 

and of their likely impact on price discovery and 

market quality in terms of transaction costs. 

964See Bessembinder & Maxwell, 

‘‘Transparency,’’ at 223 (explaining that in addition 

to the cost of conducting the search, market 

participants are exposed to the additional cost from 

the fact that a dealer’s quote is only good ‘‘as long 

as the breath is warm’’). Comparing execution cost 

in the equity and corporate bond markets, Edwards, 

Harris & Piwowar theorize that despite the fact that 

corporate bonds are less risky than equity (in the 

same company), differences in pre- and post-trade 

transparency between the two markets contribute to 

higher transaction costs in the bond markets. See 

Amy Edwards, Lawrence Harris & Michael 

Piwowar, ‘‘Corporate Bond Market Transactions 

Costs and Transparency,’’ 62 Journal of Finance 

1421, 1438 (Jun. 2007) (hereinafter Edwards et al., 

‘‘Transaction Costs and Transparency’’). 

965See ‘‘Markets with Search Frictions,’’ The 

Royal Swedish Academy of Sciences, at 1 (Oct. 11, 

2010), available at http://www.nobelprize.org/ 

nobel_prizes/economics/laureates/2010/advancedeconomicsciences2010.pdf. 

966 Id. at 5. 

967See Peter Diamond, ‘‘A Model of Price 

Adjustment,’’ 3 Journal of Economic Theory 156 

(Jun. 1971). 

968See Darrell Duffie, Nicolae Gaˆrleanu & Lasse 

Heje Pedersen, ‘‘Valuation in Over-the-Counter 

Markets,’’ 20 The Review of Financial Studies 1865, 

1888–89 (Nov. 2007) (hereinafter Duffie et al., 

‘‘Valuation in OTC Markets’’) for a series of 

examples of markets where search costs impact 

price discovery, adversely resulting in prices 

diverging from competitive market outcomes. 

969An oligopoly is a market form in which a 

market or industry is dominated by a small number 

of sellers (oligopolists)—dealers or market makers 

in the context of the OTC swaps markets. While the 

traditional research into oligopolistic behavior has 

focused on attempts by firms to collude, which 

could potentially result in non-competitive or 

monopoly pricing for the rest of the market, the 

search literature explains that the monopoly pricing 

is due to the presence of search costs. Indicative of 

the potential impact of such oligopolistic behavior 

by dealers in an environment with low pre-trade 

transparency, Hendershott & Madhavan reference 

research comparing transactions costs between 

equity and corporate and municipal bond markets. 

See Terrence Hendershott & Ananth Madhavan, 

‘‘Click or Call? Auction versus Search in the Overthe-Counter Market,’’ Working Paper, at 2 (Mar. 19, 

2012) (hereinafter Hendershott & Madhavan, ‘‘Click 

or Call’’). They explain that despite improvements 

in the post-trade transparency in both corporate and 

municipal bond markets, transaction costs are 

higher compared to equivalent-sized equity trades 

due to ‘‘the lack of pre-trade transparency that 

confers rents to dealers.’’ Id. 

970Empirical research evaluating the impact of 

transparency on market quality are typically in the 

context of natural experiments when there is a 

change in the set of trading rules in a particular 

market. Madhavan, Porter & Weaver examined the 

outcomes when the Toronto Stock Exchange 

increased transparency levels for stocks traded on 

the floor and on the screen, and found that it 

reduced the earnings of specialists (or liquidity 

providers); lower order flows from them in turn 

reduced market depth and caused the market to 

exhibit increased price volatility and higher 

transaction costs. See Ananth Madhavan, David 

Porter & Daniel Weaver, ‘‘Should securities markets 

be transparent?,’’ 8 Journal of Financial Markets 265 

(Aug. 2005). Eom, Ok & Park focus on the impact 

of changes in the display in the level of depth of 

the limit order book in the Korean equity market 

and find evidence of positive effects on market 

quality measured in terms of depth, volume and 

quoted spreads, but beyond a point, these effects 

taper-off, and can even become negative. See Kyong 

Shik Eom, Jinho Ok & Jong Ho Park, ‘‘Pre-trade 

transparency and market quality,’’ 10 Journal of 

Financial Markets 319 (Nov. 2007). In another 

paper, Boehmer, Saar & Yu present evidence that 

when the New York Stock Exchange took specific 

steps to display limit-order book information to 

traders off the exchange floor, ‘‘an increase in pretrade transparency affects investors’ trading 

strategies and can improve certain dimensions of 

market quality.’’ See Ekkehart Boehmer, Gideon 

Saar & Lei Yu, ‘‘Lifting the Veil: An Analysis of Pretrade Transparency at the NYSE,’’ 60 The Journal 

of Finance 783 (Apr. 2005). Additionally, in a paper 

highlighting the impact of pre-trade transparency 

on price discovery, and highlighting the risks of 

driving trading activity to competing markets, 

Hendershott & Jones found that when the Island 

electronic communications network stopped 

displaying its limit order book in certain exchangetraded funds (‘‘ETFs’’), ETF prices adjusted more 

Continued 

lower costs for market participants,959

‘‘help them predict future price changes, 

to predict when their orders will 

execute, and to evaluate their brokers’ 

performance,’’ 960 and will improve the 

quality of execution they receive from 

the marketplace.961 Greater 

transparency in general can increase 

market liquidity by reducing 

information asymmetry between 

informed and less informed market 

participants, and greater pre-trade 

transparency also helps improve price 

discovery by promoting competition 

among liquidity providers.962

Academic research supports the view 

that a lack of pre-trade transparency 

affects trading costs because it 

contributes to frictions in the search 

process, which in turn can translate into 

higher transaction costs and impact 

equilibrium prices and allocations. 

Given the lack of pre-trade transparency 

and the absence of centralized markets 

(i.e., exchanges) in the OTC swaps 

market, market participants will likely 

contact multiple dealers sequentially by 

phone or by some other electronic 

means of communication.963

Bessembinder and Maxwell explain that 

the take-it-or-leave-it aspect of the 

negotiation process in the bond markets 

(which is also present in the OTC swaps 

market) ‘‘limits one’s ability to obtain 

multiple quotations before committing 

to trade.’’ 964

More generally, this area of research, 

also called search and matching theory, 

‘‘offers a framework for studying 

frictions in real-world transactions and 

has led to new insights into the working 

of markets.’’ 965 This research shows 

that ‘‘even with very minor search costs 

and with a large number of sellers, a 

search and matching environment 

would deliver a rather large departure 

from the outcome under perfect 

competition (which would prevail if the 

search costs were zero).’’ 966 This 

‘‘Diamond paradox’’ 967 is of relevance 

to this rulemaking because given search 

costs, no matter how small, the presence 

of multiple dealers can result in trades 

being transacted at the single monopoly 

price.968 This highlights the importance 

of reducing the costs that exist when a 

market is dominated by a small number 

of dealers—in other words, an 

oligopoly.969

Academic research into the impact of 

pre-trade transparency on market 

quality in the context of the equity 

markets is an active area of research. As 

buy and sell interest at the best bid and 

offer price is widely available to all 

market participants in these markets, 

they are not necessarily analogous to the 

OTC swap markets, where such 

information is simply not available. 

Nevertheless, research in this area is 

notable because the equity markets have 

pre-trade transparency, and Congress 

has mandated pre-trade transparency on 

SEFs. Various research papers examine 

the impact of changes in relative levels 

of pre-trade transparency within a 

specific trading venue or exchange, and 

depending on the specific 

circumstances of each such event, 

market participants’ behavior can be 

influenced, which in turn can impact 

liquidity and costs.970

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slowly, and there was ‘‘substantial price discovery 

movement from ETFs to the futures market.’’ See 

Terrence Hendershott & Charles M. Jones, ‘‘Island 

Goes Dark: Transparency, Fragmentation, and 

Regulation,’’ 18 The Review of Financial Studies 

743 (Fall 2005). 

971The Trade Reporting and Compliance Engine 

(‘‘TRACE’’) is operated by the Financial Industry 

Regulatory Authority (‘‘FINRA’’), and facilitates the 

mandatory reporting of OTC secondary market 

transactions in eligible fixed income securities. All 

broker/dealers who are FINRA member firms have 

an obligation to report transactions in corporate 

bonds to TRACE under an SEC-approved set of 

rules. See http://www.finra.org/Industry/ 

Compliance/MarketTransparency/TRACE/for 

further details. 

972See Edwards et al., ‘‘Transaction Costs and 

Transparency,’’ at 1426. As with OTC swaps, given 

that there is no pre-trade transparency in the 

corporate bond markets, bid-ask spreads, a key 

determinant of transaction costs, have to be 

estimated using specialized econometric 

techniques. In this paper, they assume that there 

has been no change in the market structure (in 

terms of execution methods) before and after 

TRACE. 

973 In a related paper on the impact of higher 

transparency on liquidity, research examining the 

impact of higher post-trade transparency on the 

liquidity of the BBB-rated corporate bond market 

shows that ‘‘overall, adding transparency has either 

a neutral or a positive effect on liquidity.’’ Id. at 

1438. 

974Bessembinder & Maxwell point out that prior 

to the introduction of TRACE, ‘‘customers found it 

difficult to know whether their trade price reflected 

market conditions . . . . With transaction 

reporting, customers are able to assess the 

competitiveness of their own trade price by 

comparing it to recent and subsequent transactions 

in the same and similar issues.’’ Bessembinder & 

Maxwell, ‘‘Transparency,’’ at 226. 

975CEA section 15(a); 7 U.S.C. 19(a). 

976 Id. 

977See Core Principles and Other Requirements 

for Swap Execution Facilities, 76 FR 1214, 1237 

(proposed Jan. 7, 2011). 

978See, e.g., FXall Comment Letter at 2–4 (Mar. 

8, 2011); CME Comment Letter at 2 (Mar. 8, 2011). 

979See ISDA Discussion Paper (Nov. 2011). 

980The costs and benefits of Core Principle 12 are 

discussed in connection with a separate proposed 

rulemaking entitled Requirements for Derivatives 

Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities Regarding 

While the literature from the equity 

markets referenced above focuses on 

changes in relative levels of pre-trade 

transparency, research from the 

corporate bond markets also directly 

addresses the benefits from bringing 

post-trade transparency into dark 

markets. Edwards, Harris, and Piwowar 

examine trading costs in the corporate 

bond market using a record of every 

corporate bond trade reported on the 

TRACE 971 system between January 2003 

and January 2005.972 In their paper, they 

find evidence that post-trade 

transparency through TRACE has 

lowered transaction costs in the 

corporate bond market and that higher 

post-transparency has helped improve 

liquidity in this market.973 Summarizing 

findings from studies by other 

researchers on the impact of TRACE on 

market participants, Bessembinder and 

Maxwell confirm that it has helped 

provide a level playing field—in the 

context of information regarding current 

prices at which various corporate bonds 

are being traded.974

(b) The Statutory Mandate To Consider 

the Costs and Benefits of the 

Commission’s Action: Section 15(a) of 

the CEA 

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.975 CEA 

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: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations.976 The Commission 

considers below the costs and benefits 

resulting from its discretionary 

determinations with respect to the 

section 15(a) factors. 

To aid the Commission in its 

consideration of the costs and benefits 

resulting from its regulations, the 

Commission requested in the SEF 

NPRM that commenters provide data 

and supporting information which 

quantify or qualify the costs and 

benefits of the proposed rules.977 While 

a number of industry commenters 

expressed the general view that 

implementing and complying with the 

proposed rules would come at 

considerable cost and that the proposed 

rules would be burdensome,978 the 

Commission only received one 

comment quantifying the costs that may 

result from the proposed regulations.979

In meetings requested by potential SEF 

registrants during the comment period, 

the Commission staff invited those 

entities to provide specific data to 

support general assertions that the 

proposed regulations would be costly. 

Again, no such information was 

provided. In another effort to gather 

such data, the Commission staff 

initiated follow-up contacts with certain 

potential SEFs regarding their projected 

expenses in light of the Commission’s 

proposed regulations. The product of 

these conversations is reflected in the 

cost estimates included in this release. 

While certain costs are amenable to 

quantification, other costs are not easily 

monetized, such as the costs to the 

public of another financial crisis. The 

Commission’s final regulations are 

intended to mitigate that risk, and, 

therefore, serve an important if 

unquantifiable public benefit. While the 

benefits of effective regulation are 

difficult to value in dollar terms, the 

Commission believes that they are no 

less important to consider given the 

Commission’s mission to protect both 

market users and the public. 

Additionally, where appropriate, in 

response to the cost concerns of some 

commenters, the Commission, as 

discussed below, adopted costmitigating alternatives presented by 

commenters where doing so would still 

achieve the goals of the Dodd-Frank Act. 

The discussion of costs and benefits 

that follows begins with an 

informational discussion of the 

aggregate estimated costs of forming and 

operating a SEF. Although these costs 

are mostly attributable to Congress’ 

mandate that there be SEFs, they 

provide useful context for the costs and 

benefits attributable to the 

Commission’s action of implementing 

that mandate in this rulemaking. 

Relatedly, the Commission believes that 

many of the costs that arise from the 

application of the final rules are a 

consequence of the Congressional trade 

execution mandate of section 2(h)(8) of 

the CEA, as well as the Congressional 

goals to promote the trading of swaps on 

SEFs and to promote pre-trade price 

transparency in the swaps market in 

section 5h(e) of the CEA. For example, 

those market participants who are not 

eligible for the CEA section 2(h)(7) end 

user exception will no longer have the 

option to execute Required Transactions 

bilaterally even when they consider it 

more costly or less convenient to 

execute trades on a SEF (or a DCM). As 

described more fully below, the 

Commission has considered these costs 

in adopting these final rules, and has, 

where appropriate, attempted to 

mitigate the costs while observing the 

express direction of Congress in CEA 

sections 2(h)(8) and 5h(e). 

After the discussion of the aggregate 

costs of forming and operating a SEF, 

the Commission’s consideration of costs 

and benefits is organized into seven 

categories: (1) SEF Market Structure; (2) 

Registration; (3) Recordkeeping and 

Reporting; (4) Compliance; (5) 

Monitoring and Surveillance; (6) 

Financial Resources and Integrity; and 

(7) Emergency Operations and System 

Safeguards. For each category,980 the 

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the Mitigation of Conflicts of Interest, 75 FR 63732 

(proposed Oct. 18, 2010). 

981The Commission notes that a number of these 

regulations also refer to requirements that are 

contained in other rulemakings, some that have 

been finalized and others that have not. The costs 

and benefits of these regulations have been, or will 

be, discussed in those other rulemakings. 

982CEA section 15(a); 7 U.S.C. 19(a). 

983The Commission notes that these registrants 

will also incur costs to meet the statutory 

requirements. 

984 ISDA Discussion Paper at 30–31 (Nov. 2011). 

While the ISDA discussion paper is largely 

concerned with the costs and benefits resulting 

from the statute and regulations implemented by 

other rulemakings, relevant portions are discussed 

in this release. ISDA’s estimate includes the costs 

of: registering with the Commission; developing an 

electronic system capable of providing market 

participants with the ability to make bids and offers 

to multiple participants and capable of maintaining 

safe storage capacity; developing and maintaining 

electronic analysis, reporting, and monitoring 

software; developing new products; drafting 

contractual arrangements with SEF users and 

vendors; drafting market rules and policies; and 

developing emergency backup procedures and 

systems. 

985 Id. at 31–32. This estimate includes the cost 

of compensation and benefits for staff, leasing office 

space, maintaining and upgrading operational 

infrastructure and systems, maintaining sufficient 

financial resources to cover operating costs for at 

least one year, maintaining an independent board 

of governors, and maintaining emergency backup 

facilities. 

986 Id. at 31, 34. 

987 Id. at 29. 

988 Id. at 30. 

989 Id. at 31. 

990MarketAxess Comment Letter at 5 (Jun. 3, 

2011). 

991Registration and Regulation of Security-Based 

Swap Execution Facilities, 76 FR 10948, 11041 

(proposed Feb. 28, 2011). 

992 Id. 

993 Id. 

Commission summarizes the final 

regulations; describes and responds to 

comments discussing the costs and 

benefits; 981 assesses alternatives, 

including those raised by commenters; 

and considers the costs and benefits in 

light of the five factors set out in CEA 

section 15(a), which expressly requires 

the Commission to consider the costs 

and benefits of ‘‘the action of the 

Commission.’’ 982 In this regard, as with 

the aggregate costs of forming and 

operating a SEF attributable to Congress, 

where the Commission merely codifies 

a statutory requirement, the 

Commission believes that there is no act 

of discretion for consideration under 

CEA section 15(a). For example, for each 

core principle, the first section of the 

Commission’s regulations is a 

codification of the statutory language of 

the core principle as a rule and, 

accordingly, there is no Commission act 

of discretion and thus no costs and 

benefits for the Commission to consider 

under section 15(a). In other cases, such 

as Core Principle 1, the rule simply 

codifies the text of the core principle, 

and thus will not be discussed as it is 

outside the scope of section 15(a). 

The Commission expects that the 

costs and benefits will vary based on the 

specific circumstances of the individual 

entity seeking registration as a SEF. For 

example, some SEF-like execution 

platforms that currently operate in the 

OTC marketplace may generally already 

have the infrastructure to comply with 

the Commission’s regulations without 

the need for sizeable additional 

expenditures. For these potential SEF 

registrants, the regulations may occasion 

minimal incremental costs above their 

existing cost structure. In contrast, 

potential SEF registrants that are not 

currently operating in the OTC 

marketplace, registered as a DCM, or 

operating as an exempt board of trade 

will likely lack existing infrastructure 

and may incur costs, at times 

significant, in both physical and human 

capital to meet the requirements of the 

regulations.983 Accordingly, where 

appropriate and possible to account for 

these differences, the Commission has 

attempted to express costs and benefits 

as a range, sometimes one that is wide. 

Finally, in some instances, 

quantification of costs to certain market 

participants is not reasonably feasible 

because costs will depend on the size, 

structure, and product offering of a SEF, 

which are likely to have considerable 

variation, or because required 

information or data will not exist until 

after a SEF commences operation as a 

registrant. In other instances—for 

example with respect to protection of 

market participants and the public— 

suitable metrics to quantify costs and 

benefits simply do not exist. 

Notwithstanding the above-mentioned 

limitations, the Commission identifies 

and considers the costs and benefits of 

these rules in qualitative terms. 

(c) Estimated Aggregate Costs of 

Forming and Operating a SEF 

In its discussion paper, ISDA 

estimated the cost of establishing a new 

SEF to be $7.4 million,984 and estimated 

ongoing operating costs to be nearly $12 

million per year.985 ISDA based its cost 

estimates on a survey of groups which 

included a ‘‘small number of (large) 

Buy-Side firms and the 16 largest 

dealers.’’ 986 ISDA’s estimate is based on 

a trading architecture that includes an 

order matching engine, and a Request 

for Quote system or other means of 

interstate commerce that will allow 

members to show (and see) bids and 

offers.987 In addition, ISDA’s estimate 

includes costs associated with: systems 

to capture and retain data necessary to 

create an audit trail for at least 5 years; 

an electronic analysis capability and the 

ability to collect and evaluate market 

data on a daily basis; a real-time 

electronic monitoring system to detect 

and deter manipulation, distortion, and 

market disruption; reporting transaction 

information to the Commission and data 

repositories using unique product 

identifiers; a Chief Compliance Officer; 

and disaster recovery.988 ISDA also 

identified major operating costs to 

include the cost of compensation and 

benefits for staff, leasing office space, 

maintaining and upgrading operational 

infrastructure and systems, maintaining 

sufficient financial resources to cover 

operating costs for at least one year, 

maintaining an independent board of 

governors, and maintaining emergency 

backup facilities.989

In another comment letter, 

MarketAxess stated that the SEC’s cost 

estimates in its proposed rulemaking for 

security-based SEFs (‘‘SB–SEFs’’), were 

‘‘generally realistic and accurate 

estimates of the costs of establishing and 

operating a SB–SEF’’ and that these 

estimates would be ‘‘comparable to, and 

thus relevant for, calculation of costs for 

a SEF.’’ 990

The SEC estimated that the cost of 

forming an SB–SEF is approximately 

$15–20 million, including the first year 

of operation.991 These costs included a 

software and product development 

estimate of $6.5–10 million for the first 

year and ongoing technology and 

maintenance costs of $2–4 million.992

The SEC also estimated that it would 

cost approximately $50,000–$3 million 

for an operator of an existing platform 

to modify its platform to conform to the 

statute and the SEC’s proposed rules, 

depending on the enhancements that 

would be required by the final 

regulations.993

In the Commission staff’s follow-up 

conversations, potential SEFs stated that 

the costs associated with the SEF NPRM 

may differ from the SEC’s cost estimates 

in various areas. For example, one 

commenter estimated first-year software 

and product development costs of $4 

million rather than the $6.5–10 million 

estimated by the SEC. Another 

commenter stated that existing entities 

will be able to leverage existing 

technology at minimal cost, and that 

there is no real cost associated with the 

rulemaking from a technology 

perspective if an entity is not a startup. 

As stated above, ISDA’s estimates also 

differed from those of the SEC, 

including estimated initial software 

development costs of $1 million and 

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994 ISDA Discussion Paper at 32 (Nov. 2011). 

ISDA’s paper also contained a discussion of the 

costs likely to be faced by dealers and buy-side 

users of interest rate swaps that must be executed 

on regulated exchanges. Some of these costs result 

from statutory requirements that were not the 

product of Commission discretion, while other 

costs are likely to derive from regulations being 

implemented in other rulemakings. Other costs 

simply reflect the cost of doing business and are not 

directly imposed by Commission regulations. 

Accordingly, these costs are beyond the scope of 

this rulemaking and will not be discussed in this 

release. 

995Rule 37.204 permits SEFs to contract with a 

regulatory service provider for the provision of 

services to assist in compliance with the core 

principles, as approved by the Commission. 

996An Order Book means: (i) An electronic 

trading facility, as that term is defined in section 

1a(16) of the Act; (ii) a trading facility, as that term 

is defined in section 1a(51) of the Act; or (iii) a 

trading system or platform in which all market 

participants in the trading system or platform have 

the ability to enter multiple bids and offers, observe 

or receive bids and offers entered by other market 

participants, and transact on such bids and offers. 

See Final § 37.3(a)(3) of the Commission’s 

regulations. 

997CEA section 1a(50) defines a SEF as ‘‘a trading 

system or platform in which multiple participants 

have the ability to execute or trade swaps by 

accepting bids and offers made by multiple 

participants in the facility or system, through any 

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

In section 5h(e) of the Act, Congress provided a 

‘‘rule of construction’’ to guide the Commission’s 

interpretation of certain SEF provisions (stating that 

the goals of section 5h of the Act are to ‘‘promote 

the trading of swaps on [SEFs] and to promote pretrade price transparency in the swaps market’’). 7 

U.S.C. 7b–3(e). 

998See Minimum Trading Functionality 

discussion above under § 37.3—Requirements for 

Registration in the preamble. 

999Transactions that are subject to the trade 

execution requirement of CEA section 2(h)(8) are 

subject to the clearing requirement of CEA section 

2(h)(1) and are ‘‘available to trade’’ on a SEF or 

DCM. See Process for a Designated Contract Market 

or Swap Execution Facility To Make a Swap 

Available To Trade, 76 FR 77728 (proposed Dec. 14, 

2011). 

1000The SEF NPRM provided that Permitted 

Transactions may be executed by an Order Book, 

RFQ System, Voice-Based System, or any such 

other system for trading as may be permitted by the 

Commission. Core Principles and Other 

Requirements for Swap Execution Facilities, 76 FR 

at 1241. 

1001See RFQ System Definition and Transmission 

to Five Market Participants discussion above under 

§ 37.9(a)(1)(ii)—Request for Quote System in the 

preamble. 

initial product development costs of 

$1.25 million.994

In the Commission staff’s follow-up 

conversations, potential SEFs stated that 

total ongoing costs would range from 

$3.5 million to $5 million per year. 

These potential SEFs also told the 

Commission staff that it would cost 

them approximately $2 million to 

conform to the statute and the 

Commission’s proposed rules, including 

contracting with the National Futures 

Association (‘‘NFA’’) to perform 

regulatory services. 

While the Commission believes that 

the various cost estimates (including 

those for SB–SEFs and those reflecting 

costs imposed by statute) can be used as 

a rough guide to the costs that would be 

incurred to establish and operate a SEF, 

the Commission notes that the majority 

of these costs are necessary to establish 

and operate any platform for the trading 

of swaps, as a number of firms had 

already done prior to the enactment of 

the Dodd-Frank Act. The Commission 

believes that the additional costs of 

modifying a platform to comply with 

the Commission’s regulations to 

implement the statute represent a 

relatively modest proportion of these 

costs. 

(1) Regulatory Costs 

Pursuant to final § 37.204 adopted in 

this release, SEFs may utilize a 

regulatory service provider for 

assistance in performing certain selfregulatory functions, including, among 

others, trade practice surveillance, 

market surveillance, real-time market 

monitoring, investigations of possible 

rule violations, and disciplinary 

actions.995 The costs described in this 

cost benefit consideration section reflect 

the costs that a SEF is likely to face if 

it does not choose to utilize the services 

of a regulatory service provider. To the 

extent that utilizing a regulatory service 

provider is more cost-effective for a SEF 

than performing the functions 

independently, the quantitative and 

qualitative cost discussions in this 

release may overstate the costs of 

complying with the rules. Based on the 

Commission staff’s follow-up 

discussions with potential SEFs, it 

appears that most SEFs will be entering 

into agreements with regulatory service 

providers for the provision of these 

functions. In fact, the Commission 

understands that many potential SEFs 

have already entered into formal 

agreements with a regulatory service 

provider. The Commission notes that 

competition among regulatory service 

providers, including NFA and the 

Financial Industry Regulatory 

Authority, may result in additional cost 

savings for SEFs that choose to 

outsource compliance obligations. 

2. SEF Market Structure 

(a) Background 

(1) Minimum Trading Functionality 

(Order Book) 

Final § 37.3(a)(2) requires that each 

SEF provide its market participants with 

a minimum trading functionality 

referred to as an Order Book,996 which 

the Commission believes is consistent 

with the SEF definition and promotes 

the goals provided in section 733 of the 

Dodd-Frank Act.997 As noted in the 

preamble, the Commission is 

withdrawing the proposed requirement 

that SEFs offer indicative quote 

functionality because the Commission 

believes that, at this time, such a 

requirement is unnecessary.998

(2) Methods of Execution on a SEF 

Final § 37.9 governs the execution 

methods that are available on a SEF and 

classifies transactions executed on a 

SEF as either Required Transactions 

(i.e., any transaction involving a swap 

that is subject to the trade execution 

requirement in section 2(h)(8) of the 

Act 999) or Permitted Transactions (i.e., 

any transaction not involving a swap 

that is subject to the trade execution 

requirement in section 2(h)(8) of the 

Act). 

Pursuant to final § 37.9(a)(2), market 

participants may only execute Required 

Transactions using either the SEF’s 

Order Book or an RFQ System that will 

transmit a request for a quote to at least 

three market participants and that 

operates in conjunction with the Order 

Book. In contrast, while SEFs must offer 

an Order Book for Permitted 

Transactions, market participants may 

execute Permitted Transactions on a 

SEF using any method of execution.1000

(3) Request for Quote (‘‘RFQ’’) System 

for Required Transactions 

The RFQ System definition in final 

§ 37.9(a)(3) requires that each market 

participant transmit a request for a 

quote to at least three market 

participants, with each of these market 

participants being given the opportunity 

to respond. As described in greater 

detail in the preamble, permitting RFQ 

requesters to send RFQs to a single 

market participant would undermine 

the multiple participant to multiple 

participant requirement in the SEF 

definition and the goal of pre-trade price 

transparency.1001 The three market 

participant requirement will help the 

RFQ requester benefit from price 

competition among multiple RFQ 

responders and thus promotes price 

discovery. In addition, final § 37.9(a)(3) 

requires that any firm bid or offer 

pertaining to the same instrument 

resting on any of the SEF’s Order Books 

must be communicated to the RFQ 

requester at the same time the first 

responsive bid or offer is received by 

such requester. 

(4) Time Delay Requirement 

Final § 37.9(b)(1) sets forth a time 

delay requirement for a broker or dealer 

who has the ability to execute against its 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33559 

1002 ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 

2011). 

1003See Minimum Trading Functionality 

discussion above under § 37.3—Requirements for 

Registration in the preamble. 

1004 In section 5h(e) of the Act (as adopted by 

section 733 of the Dodd-Frank Act), Congress 

provided a ‘‘rule of construction’’ to guide the 

Commission’s interpretation of certain SEF 

provisions (stating that the goals of section 5h of the 

Act are to ‘‘promote the trading of swaps on [SEFs] 

and to promote pre-trade price transparency in the 

swaps market’’). 7 U.S.C. 7b–3(e). 

1005As described earlier, a work-up session refers 

to a practice wherein once a trade has been 

executed, one of the counterparties to the trade can 

express an interest in transacting additional volume 

at the same price. 

1006 ISDA Discussion Paper at 20–21 (Nov. 2011). 

1007 Id. at 1. 

1008 Id. at 4. 

1009 Id. 

1010 Id. 

1011 Id. 

1012 Id. at 24. 

1013 Id. at 4. 

customer’s order or to execute two of its 

customers’ orders against each other. 

These orders (i.e., price, size, and other 

terms) are subject to a 15-second time 

delay between the entry of the two 

orders, such that one side of the 

potential transaction is disclosed and 

made available to other market 

participants before the second side of 

the potential transaction is submitted 

for execution. This time delay 

requirement is similar to certain timing 

delays applicable to futures transactions 

executed on DCMs, which are also 

designed to promote pre-trade 

transparency by allowing other market 

participants the opportunity to 

participate in the transaction and thus 

prevent any two market participants 

from crossing a bilaterally (offexchange) negotiated trade. The 

Commission notes that the 15-second 

requirement is a default time delay; the 

final rule also permits SEFs to adjust 

this time delay requirement based upon 

a swap’s liquidity or other productspecific characteristics. 

(b) Costs 

(1) Costs to SEFs 

(i) Minimum Trading Functionality 

(Order Book) and Methods of Execution 

on a SEF 

In the Commission staff’s follow-up 

conversations with potential SEFs, one 

commenter noted that it would cost 

approximately $250,000 to upgrade its 

existing system to provide the required 

minimum trading functionality, while 

another stated that there is no real cost 

associated with the rulemaking from a 

technology perspective if an entity is 

already operating a trading platform, 

and that an existing platform could 

become compliant with the rule by 

leveraging existing technology at 

minimal cost. The Commission believes 

that these estimates are reasonable for 

existing platforms. Though the 

Commission is not requiring that 

systems be upgraded once they have 

achieved compliance with the rules, it 

expects that SEFs may have business 

incentives to incur ongoing 

programming costs to upgrade their 

systems. 

ISDA/SIFMA noted that the minimum 

trading functionality may limit 

competition by increasing costs to 

applicants that would otherwise prefer 

to offer solely RFQ functionality.1002 As 

discussed in the preamble to this 

release,1003 the Commission believes 

that the minimum trading functionality 

is consistent with the SEF definition 

and promotes the statutory goals of pretrade price transparency and trading on 

SEFs provided in section 733 of DoddFrank.1004 Nevertheless, the 

Commission has adopted cost-mitigating 

alternatives identified by commenters, 

including: (1) Deleting the requirement 

that indicative bids and offers must be 

posted on a SEF’s Order Book; (2) 

allowing work-up sessions 1005 where 

the original counterparties to a trade 

and other market participants can trade 

additional quantities of a swap at the 

previously executed price; and (3) 

allowing SEFs to use any means of 

interstate commerce in providing the 

execution methods for Required 

Transactions in § 37.9(a)(2)(i)(A) or (B) 

of this final rulemaking (i.e., Order Book 

or RFQ System that operates in 

conjunction with an Order Book). Not 

having to display indicative quotes will 

likely reduce the programming costs for 

SEFs, since they will not need to 

program that functionality into the 

platform. The Commission believes the 

requirement to communicate any firm 

bid or offer will marginally add to the 

programming costs for SEFs and is 

included in the $250,000 estimate 

provided above. As commenters have 

described, work-up sessions are part of 

current OTC market practice, and the 

Commission believes that this 

additional flexibility for market 

participants to execute transactions in 

the SEF context will promote the 

trading of swaps on SEFs consistent 

with CEA section 5h(e). 

(ii) Time Delay Requirement 

A SEF will incur some additional 

programming costs as a result of the 

requirement that a SEF must provide for 

a 15-second time delay in certain 

circumstances. The Commission did not 

receive any specific estimates of these 

programming costs and notes that the 

rule permits a SEF to adjust the 

minimum time delay requirement based 

upon a swap’s liquidity or other 

product-specific characteristics. For 

example, less liquid contracts may need 

a longer time delay than more liquid 

contracts. 

(2) Costs to Market Participants 

(i) General Costs 

In its discussion paper, ISDA 

described what it asserted would be the 

likely costs and benefits of what it 

labeled the ‘‘electronic execution 

mandate,’’ that is, mandating the 

execution of interest rate swaps on 

DCMs or on SEFs.1006 According to 

ISDA, ‘‘[t]he study indicates that the EE 

mandate [electronic execution 

mandate], in all likelihood, will bring 

little benefit to the market while adding 

significantly to the costs of using 

derivatives.’’1007 ISDA stated that the 

electronic execution mandate will result 

in higher bid/ask spreads and 

significant operational, technological, 

and compliance costs for those 

transacting in interest rate swaps.1008

ISDA further stated that these costs will 

be borne by end users and may force 

some participants to withdraw from the 

market with ‘‘virtually no effect on 

small end users.’’ 1009 ISDA stated that 

the electronic execution mandate is both 

unnecessary and counterproductive as 

electronic trading is already developing 

rapidly as users take advantage of the 

existing choice in execution venues.1010

According to ISDA, the electronic 

execution mandate will take away users’ 

choice, create inefficiencies, and 

discourage innovation.1011 ISDA stated 

that the electronic execution mandate 

will impose new costs because: 

SEFs themselves need to be established, 

licensed and operated. Buy-Side users will 

face significant technology and operational 

challenges as well as increased regulatory 

reporting requirements. Dealers will have to 

upgrade infrastructure to deal with 

automated trading and comply with 

increased regulatory reporting and recordkeeping. All participants will face increased 

reconciliations, oversight and reporting 

requirements as well. Finally, regulators will 

need additional staff to properly oversee the 

new markets.1012

According to ISDA, the aggregate 

market-wide ‘‘set up costs are estimated 

to exceed $750 million and annual costs 

may run to $250 million.’’1013

In terms of benefits, ISDA concluded 

that: 

Transparency and market access may 

improve marginally for small financial 

entities that use IRS [interest rate swaps] but 

any benefit they receive will be very modest 

relative to the added costs of execution. 

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1014 Id. at 36. 

1015 Id. at 20–21. 

1016 Id. at 2–4, 20–21. 

1017 Id. at 35. 

1018 Id. at 4. 

1019CEA section 2(h)(8); 7 U.S.C. 2(h)(8). 

1020CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1). 

1021CEA section 5h(e); 7 U.S.C. 7b–3(e). 

1022The ISDA comment ignores the liquidity risk 

inherent in the current bilateral interest rate swap 

market. It addresses the cost of entering into a new 

position, but not of unwinding it. If a buy-side firm 

wishes to unwind a swap in the OTC market, it will 

typically have to complete the unwind trade with 

the original counterparty or swap dealer. Given that 

the dealer is aware of the true trading interest of the 

buy-side firm, the quote might be one-sided 

favoring the dealer. Assuming sufficient liquidity, 

any anonymous trading platform will pose a lower 

unwind risk/cost to most non-dealer or buy-side 

firms. 

1023CEA section 5h(e); 7 U.S.C. 7b–3(e). 

1024 ISDA Discussion Paper at 2–4 (Nov. 2011). 

1025See Hendershott & Madhavan, ‘‘Click or 

Call,’’ at 2; Darrell Duffie, Nicolae Gaˆrleanu & Lasse 

Heje Pedersen, ‘‘Over-the-Counter Markets,’’ 73 

Econometrica 1815 (Nov. 2005) (hereinafter Duffie 

et al., ‘‘OTC Markets’’). 

1026See, e.g., Minimum Trading Functionality 

discussion above under § 37.3—Requirements for 

Registration in the preamble and ‘‘Through Any 

Means of Interstate Commerce’’ Language in the 

SEF Definition discussion above under § 37.9(b)(1) 

and (b)(4)—Execution Methods for Required 

Transactions in the preamble. 

1027See ‘‘Through Any Means of Interstate 

Commerce’’ Language in the SEF Definition 

discussion above under § 37.9(b)(1) and (b)(4)— 

Execution Methods for Required Transactions in the 

preamble. 

Indeed, the imposition of clearing and the 

higher fees that will result from the EE 

Mandate [electronic execution mandate] and 

other provisions of DFA [Dodd-Frank Act] 

may cause these and other participants to 

reduce their activity or even withdraw from 

the IRS market.1014

ISDA asserted that transaction costs 

for OTC trades in interest rate swaps are 

already low with levels of transparency 

that market participants consider 

sufficient, and that trading in a 

regulated market or on an exchange 

does not guarantee a more efficient 

market because traders often get better 

execution off-exchange.1015 ISDA 

further asserted that liquidity in OTC 

interest rate swaps is at least as good as 

liquidity in exchange-traded futures 

contracts, especially outside of the most 

liquid futures contract months, and that 

market participants predicted that bidask spreads in interest rate swaps would 

increase after the execution mandate 

takes effect.1016

ISDA also estimated that the market 

as a whole will need to absorb at least 

an additional $400 million in annual 

expenses as a result of the changes 

implemented in connection with the 

Dodd-Frank Act, and that assuming 

SEFs will execute 1,000 trades a day 

(comparable to what ISDA states is the 

current number of transactions in the 

OTC market), this will amount to 

execution costs of $1,280 per trade.1017

As a result, ISDA stated that dealer costs 

will be passed on to end users and will 

cause participants to withdraw from the 

market, discouraging innovation.1018

The Commission notes that a majority 

of the costs identified by ISDA result 

from statutory requirements that were 

not the product of Commission 

discretion. For example, the 

requirements that certain swaps must be 

executed on a SEF or DCM,1019 and 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,1020 are statutory requirements. 

Additionally, CEA section 5h(e) 

contains a rule of construction that 

states ‘‘[t]he goal of this section is to 

promote the trading of swaps on swap 

execution facilities and to promote pretrade price transparency in the swaps 

market.’’ 1021 The interest rate swaps 

discussed by ISDA are included in these 

statutory requirements. Moreover, 

notwithstanding ISDA’s use of the term 

‘‘electronic execution mandate,’’ this 

rulemaking does not require that market 

participants execute swaps in Required 

Transactions electronically, since SEFs 

will be allowed to use any means of 

interstate commerce in providing the 

execution methods for such transactions 

as described in § 37.9(a)(2)(ii). 

Nevertheless, the Commission addresses 

below many of ISDA’s comments 

regarding the statutory trading mandate 

for interest rate swaps. 

Further, while commenters did not 

submit any data to support or refute 

ISDA’s estimates, during follow-up calls 

with potential SEFs, one commenter 

stated that the U.S. credit default swap 

market experiences approximately 1,350 

trades per day. If interest rate swaps and 

other swaps are included, the total 

number of trades per day is likely to be 

a much higher figure. In turn, this 

would imply that the execution costs 

per trade are likely to be lower than 

ISDA’s estimate, which was based on 

only 1,000 trades per day. 

The Commission notes that while 

SEFs are expected to list for trading a 

wide variety of swaps, ISDA’s comment 

addresses only the costs and benefits 

applicable to the interest rate swap 

market. The interest rate swap market is 

one of the most liquid swap markets and 

is characterized by relatively tight bidask spreads, a high level of notional 

principal, and relatively high volume 

compared to other swap markets, 

including credit default swaps. Most 

other swap markets, especially many of 

the instruments like credit derivatives 

which contributed to the financial 

crisis, are less liquid than the interest 

rate swap market and thus will benefit 

more from the enhanced pre-trade and 

post-trade price transparency and 

centralized marketplaces that will be 

available on SEFs. 

While it may be true, as ISDA asserts, 

that some buy-side users contend that 

current levels of price transparency in 

the interest rate swap market are 

adequate, the Commission notes that an 

increase in pre-trade transparency 

benefits the public because it will allow 

all market participants (not just those 

with a strong business relationship with 

a particular swap dealer) 1022 to transact 

in the market on a level playing field, 

and will likely enhance price discovery 

in the swaps market. Moreover, as 

noted, section 5h(e) of the CEA states 

that a purpose of SEFs is to promote 

pre-trade transparency in the swaps 

market.1023

According to ISDA, market 

participants asserted that bid-ask 

spreads in interest rate swaps will 

widen after SEFs begin trading.1024 The 

Commission notes that such predictions 

are speculative and are not based on 

data, which does not yet exist because 

SEFs have yet to begin trading. 

Moreover, during the Commission staff’s 

follow-up conversations, other market 

participants (potential SEFs) shared 

information illustrating that after the 

financial crisis, participation by dealers 

or liquidity providers increased on their 

trading platforms. These sources stated 

that in some instances, new entrants 

now account for over a quarter of the 

total business transacted on such 

platforms. The Commission believes 

that, holding all else constant, increased 

participation and competition among 

liquidity providers should result in 

tighter spreads and greater depth, both 

key components of improved 

liquidity.1025

However, to promote the trading of 

swaps on SEFs, the Commission’s final 

rules, as mentioned above, further 

increase the flexibility regarding the 

trading platforms that a SEF may offer 

for Required Transactions (which the 

Commission expects will include many 

interest rate swap contracts).1026 In 

addition, as discussed above,1027 workup sessions will allow market 

participants to continue using certain 

existing market practices, which will 

help facilitate the transition of swap 

markets to SEFs. 

To support its comments on the 

potentially adverse impact of moving 

interest rate swaps to centralized 

execution platforms, ISDA provided 

data on bid-offer spreads from both 

interest rate swap markets and 

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1028 ISDA Discussion Paper at 12–20 (Nov. 2011). 

1029A strip of Eurodollar futures contracts is a 

position consisting of a sequence of contract 

months, for example, a position consisting of the 

March 2013, June 2013, September 2013, and 

December 2013 Eurodollar futures contracts. This 

position is economically equivalent to a one year 

interest rate swap with quarterly payment dates on 

the futures expiration dates. 

1030According to the CME Group Web site, 

during the first eight months of 2012, Eurodollar 

futures contracts had a total volume of 

approximately 2300 million contracts. During that 

same period, the combined volume of CME Group’s 

interest rate swap futures contracts was only about 

312,000 contracts, approximately 1/10 of one 

percent of the volume in Eurodollar futures 

contracts. See http://www.cmegroup.com/ 

wrappedpages/web_monthly_report/ 

Web_Volume_Report_CMEG.pdf, updated monthly 

and viewed in September 2012. 

1031See ISDA Discussion Paper at 35 (Nov. 2011). 

A recent paper by the New York Federal Reserve 

estimated 2,500 trades/day in the interest rate swap 

market. See Michael Fleming, John Jackson, Ada Li, 

Asani Sarkar, & Patricia Zobel, ‘‘An Analysis of 

OTC Interest Rate Derivatives Transactions: 

Implications for Public Reporting,’’ Federal Reserve 

Bank of New York Staff Reports, No. 557, at 2 (Mar. 

2012), available at http://www.newyorkfed.org/ 

research/staff_reports/sr557.pdf. 

1032See, e.g., George H. K. Wang & Aysegul Ates, 

‘‘When Size Matters: The Case of Equity Index 

Futures,’’ EFMA 2004 Basel Meetings Paper (Dec. 

2003); Samarth Shah & B. Wade Brorsen, 

‘‘Electronic vs. Open Outcry: Side-by-Side Trading 

of KCBT Wheat Futures,’’ 36 Journal of Agricultural 

and Resource Economics 48 (Apr. 2011). 

1033See RFQ System Definition and Transmission 

to Five Market Participants discussion above under 

§ 37.9(a)(1)(ii)—Request for Quote System in the 

preamble. 

1034MetLife Comment Letter at 2–3 (Mar. 8, 

2011). 

1035See RFQ System Definition and Transmission 

to Five Market Participants discussion above under 

§ 37.9(a)(1)(ii)—Request for Quote System in the 

preamble. 1036 Id. 1037 Id.; ISDA Discussion Paper at 2 (Nov. 2011). 

exchange-traded futures markets.1028

The Commission notes that interest rate 

swap dealers use exchange-traded 

interest rate futures, primarily the 

Eurodollar futures, to hedge the 

exposures that arise from their interest 

rate swap dealing activity. A dealer 

seeking to hedge an interest rate swap 

using Eurodollar futures will typically 

trade a strip of Eurodollar futures.1029 In 

its comparisons of typical bid-offer 

spreads in exchange-traded interest rate 

futures and in OTC interest rate swaps, 

ISDA provided spreads in the front 

month Treasury bond and Treasury note 

futures contracts and the relatively 

illiquid interest rate swap futures 

contracts, but not the highly liquid 

Eurodollar futures contract.1030 As 

noted, the Eurodollar futures contract is 

the primary vehicle used by interest rate 

swap dealers to hedge their residual 

interest rate exposure. Therefore, the 

Commission believes that Eurodollar 

futures bid-offer spreads are a more 

appropriate metric for comparison to 

interest rate swap bid-ask spreads than 

the interest rate swap futures contracts 

bid-ask spreads used by ISDA. Likewise, 

Eurodollar futures are more closely 

related to the OTC interest rate swap 

market and more useful for hedging 

interest rate swap positions than 

Treasury futures contracts. Thus, 

Eurodollar futures are also a better 

metric for comparison to interest rate 

swaps than Treasury futures. 

Underlying ISDA’s comment is an 

implicit assumption that moving swaps 

to electronic trading platforms will not 

result in any major changes to the 

number of transactions that occur. In 

computing its cost estimates, ISDA 

assumes that the number of trades on 

SEFs will be comparable to the number 

of trades that occur in the OTC market 

today. As noted above, ISDA states that, 

assuming SEFs will execute 1,000 trades 

a day, total execution costs will amount 

to $1,280 per trade.1031 However, 

transaction volume has increased 

dramatically in securities markets and 

DCM futures markets that have migrated 

to electronic trading platforms (such as 

order books) from open outcry and other 

non-electronic trading environments. 

This volume increase is due to a 

tendency for typical transaction sizes to 

be much smaller on electronic order 

book markets and also because order 

books attract participation from new 

and alternate sources of liquidity, 

including participants using automated 

trading strategies.1032 Transactions 

levels increased in the securities and 

futures markets when trading moved to 

electronic platforms, and the 

Commission believes that it is likely 

that the number of transactions in the 

swap markets will increase as swap 

trading migrates to SEFs and DCMs. The 

Commission is unaware of any 

comments or studies indicating that 

transaction sizes in the swap markets 

will remain unchanged when they move 

to electronic platforms. 

(ii) RFQ–5 Market Participant 

Requirement 

Several commenters stated that the 

five market participant requirement in 

proposed § 37.9(a)(1)(ii) is likely to 

increase costs, but commenters did not 

provide any data to support this 

assertion.1033 MetLife stated that 

disclosure of a large expected trade by 

RFQ to five swap dealers would likely 

result in a material widening of bid/ask 

spreads and increased hedging costs, as 

swap dealers will pass on to their 

customers the cost of protecting 

themselves against potential adverse 

price movements due to the required 

pre-trade transparency.1034 Some 

commenters specifically noted that 

these adverse price movements would 

be due to non-executing market 

participants receiving the RFQ frontrunning the transaction in anticipation 

of the executing market participant’s 

forthcoming and offsetting 

transactions.1035 Commenters 

additionally stated that the risks 

associated with the five market 

participant requirement would be most 

pronounced in illiquid swaps or largesized trades (i.e., transactions 

approaching the block trade 

threshold).1036 Some commenters also 

stated that the five market participant 

requirement would negatively impact 

liquidity.1037

While the Commission believes that 

the five market participant requirement 

promotes the statutory goal of pre-trade 

transparency because the RFQ requester 

will have access to quotes from a larger 

group of potential responders, the 

Commission is sensitive to commenters’ 

concerns about this requirement, such 

as the potential for increased trading 

costs and information leakage to the 

non-executing market participants in 

the RFQ. To address these concerns, 

while still complying with the statutory 

SEF definition and promoting the goals 

provided in section 733 of the DoddFrank, the Commission is revising final 

§ 37.9(a)(3) so that a market participant 

must transmit an RFQ to no less than 

three market participants. 

As noted in the preamble, the 

Commission believes that the three 

market participant requirement is 

consistent with current market practice 

where, in certain markets, many market 

participants already choose to send an 

RFQ to multiple market participants, 

while still complying with the statutory 

SEF definition and promoting the goal 

of pre-trade transparency. 

Additionally, the Commission 

believes that adopting a minimum 

market participant requirement of fewer 

than three (e.g., a minimum of two 

market participants) will expose market 

participants to a higher risk of not 

receiving multiple responses to their 

RFQs. The receipt of multiple responses 

increases the likelihood that the 

requestor will execute at the best 

possible price. The Commission has 

learned that business or technology 

reasons may prevent any given market 

participant from responding to a 

specific RFQ. For example, DCM market 

maker programs typically require 

participants to quote two-sided markets 

for 75 to 85 percent of the trading day. 

Therefore, if the Commission 

established a minimum market 

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1038See Hendershott & Madhavan, ‘‘Click or 

Call,’’ at 10–12. 

1039 Id. at 10. 

1040 Id. at 14. 

1041 Id. at 17. 

1042See, e.g., Edwards et al., ‘‘Transaction Costs 

and Transparency,’’ 1421–51. 

1043Hendershott & Madhavan, ‘‘Click or Call,’’ at 

1–4. 

1044 Id. at 15, 18, 28. 

1045 Id. A market participant sending an order to 

the market is likely to be concerned about others 

in the market being able to glean information 

through the order. In the context of a firm sending 

a large size trade, one substantially bigger than the 

typical trade size, there will always be concern that 

the size of the order will be interpreted as 

containing information, and elicit responses from 

other market participants. Firms will typically be 

interested in ensuring that the size of the order does 

not have an adverse impact on the order price, or 

the quotes from liquidity providers. Accordingly, 

while looking to execute such orders, firms will 

take steps to avoid leakage of the information of 

their trading interest beyond a very small group of 

potential counterparties. 

1046Mallers et al. Comment Letter at 3–5 (Mar. 21, 

2011). 

1047 Id. at 5. 

1048The Commission notes that a SEF market 

participant may send an RFQ to the entire market. 

Core Principles and Other Requirements for Swap 

Execution Facilities, 76 FR at 1220. Based on its 

experience with RFQ-to-all functionality offered by 

DCMs, the Commission notes that there are two 

distinct differences between these and the 

requirements finalized in this release. First, RFQs 

submitted to DCMs are disseminated to all market 

participants. Second, the responses to the RFQs 

take the form of executable bids or offers that are 

entered into the DCM’s order book or other 

centralized market, such that orders from any 

market participant, not just the one submitting the 

RFQ, can be matched against such responsive bids 

or offers. 

participant requirement of two, there 

could be instances where one market 

participant does not respond to the 

RFQ, leaving the RFQ requester with 

only a single response. While there is no 

guarantee that even a minimum of three 

market participants will ensure that 

multiple responses are available for all 

RFQs at all times, it increases the 

probability that the goal of pre-trade 

price transparency is achieved and that 

a competitive market is created for 

market participants. 

In response to the concerns raised by 

commenters about increased trading 

costs, the Commission also notes that 

research in the corporate bond market 

supports the view that RFQ systems in 

general increase search options for 

investors, and that the competition that 

ensues among market participants 

results in lower bid-ask spreads.1038

One paper by Hendershott and 

Madhavan provides evidence that by 

allowing a market participant to 

negotiate simultaneously with multiple 

participants, and thus not be 

constrained by the limitations of the 

sequential search process as discussed 

above, RFQ systems contribute to a 

statistically significant reduction in 

transaction costs for quote 

requesters.1039

Specifically, the authors compare 

transaction costs across two different 

market structures, one with an RFQ and 

one with a traditional OTC structure, 

and find that investors are more likely 

to use RFQ systems when their costs are 

high because increased RFQ 

participation reduces their transaction 

costs.1040 This is so because competition 

among dealers lowers costs.1041 While 

Hendershott and Madhavan’s estimates 

for transaction costs in the corporate 

bond market are consistent with those 

reported by others,1042 access to RFQ 

market data, plus their choice of 

econometric model, help them obtain 

deeper insights into the reasons for 

differences in costs across different 

types of bonds.1043 This research in the 

debt markets supports the final rules’ 

three market participant requirement 

because it demonstrates that unless 

multiple market participants receive the 

RFQ, the quote requester will not be 

able to generate a minimal level of 

competition sufficient to reduce the 

quoted bid-ask spread. 

As stated by commenters, in a market 

with high levels of pre-trade 

transparency, concerns about leakage of 

trading interest typically grow with 

trade size; a market participant posting 

a bid or offer in the order book, or 

sending a request for a quote to multiple 

dealers, will typically be concerned that 

information about their trading interest 

will adversely impact the market price. 

However, empirical research by 

Hendershott and Madhavan 

demonstrates that standard-sized (as 

opposed to large size) trades are more 

likely to be traded on an RFQ 

system.1044 For these trade sizes, market 

participants believe that the benefits 

from lowering search costs mitigate 

concerns about information leakage.1045

On the other hand, for larger trades (i.e., 

block trades), leakage concerns could 

dominate any expected savings in 

search costs from participating in the 

order book or RFQ system, and larger 

trades are more likely to be executed 

though a bilateral bargaining process. 

The Commission’s understanding of this 

potential trade-off between lower search 

costs and higher leakage risk is 

generally consistent with the results 

from Hendershott and Madhavan 

described above. These findings are 

relevant for the final rules’ exclusion of 

block-sized trades from the execution 

methods for Required Transactions. 

While some commenters stated that 

the five market participant requirement 

would result in excessive and costly 

disclosure, other commenters argued 

that the requirement would result in 

insufficient transparency, comparing the 

proposed requirement to the current 

status quo of private OTC markets, 

where large swap dealers can choose to 

only interact with one another.1046

According to Mallers et al., because the 

SEF NPRM would permit a market 

participant to interact with a limited 

number of market participants (i.e., less 

than the entire market), the proposal 

would allow ‘‘semi-private side deals’’ 

to take place, and that in light of the 

2008 financial crisis, the ‘‘costs and 

risks of permitting private RFQ markets 

[remained] high.’’ 1047

As noted above, the Commission 

agrees that a broader group of potential 

responders will encourage price 

competition and provide a fairer 

assessment of market value; however, 

the Commission is mindful of concerns 

that the five RFQ recipient model may 

impose additional costs, especially for 

illiquid and bespoke swaps. Following 

the practice for futures on DCMs, the 

Commission could have required that 

RFQs be disseminated to all market 

participants.1048 However, the 

Commission recognizes that swaps tend 

to be less standardized than futures; 

therefore, the rules pertaining to the 

execution methods for SEFs should 

provide the requisite flexibility to 

market participants trading swaps. As 

such, the Commission is implementing 

the minimum three market participant 

requirement. The Commission also 

believes that the three market 

participant requirement reflects the 

more flexible statutory provisions for 

SEFs as compared to DCMs. 

While commenters have not 

submitted any data on the potential 

impact of the proposed five market 

participant requirement from the 

potential information leakage and frontrunning risks, the Commission believes 

that the three market participant 

requirement adopted in this final release 

does not necessarily introduce a new 

source of risk for market participants as 

these risks to the extent that they exist 

are present in the current OTC market. 

The Commission also believes that the 

prices of bids and offers made in 

response to RFQs will reflect any 

subsequent hedging risks by the 

responders, and the potential winner’s 

curse to the extent one exists will, if at 

all, be realized only if the market 

participant does not price this risk fully 

into its quote. Nonetheless, the revision 

from five to three market participants 

should help to mitigate this potential 

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1049Clearing Requirement Determination Under 

Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 

2012); Process for a Designated Contract Market or 

Swap Execution Facility To Make a Swap Available 

To Trade, 76 FR 77728 (proposed Dec. 14, 2011). 

1050Clearing Requirement Determination Under 

Section 2(h) of the CEA, 77 FR 74284. The 

Commission notes that these swaps already went 

through a Commission determination process that 

included a five factor review, including a liquidity 

review. Id. ISDA, in its letter requesting interpretive 

relief regarding the obligation to provide a pre-trade 

mid-market mark, recognized that many of the 

swaps that the Commission has determined are 

required to be cleared under CEA section 2(h)(1) are 

‘‘highly-liquid, exhibit narrow bid-ask spreads and 

are widely quoted by SD/MSPs in the marketplace 

. . .’’ ISDA Comment Letter at 2 (Nov. 30, 2012). 

1051The Commission recognizes that not all swap 

dealers will be active in all Required Transactions. 

The Commission also notes that of the 77 swap 

dealers, 35 swap dealers are not affiliated with any 

of the 77 swap dealers. 

1052See definition of block trade in § 43.2 of the 

Commission’s regulations. 

1053As any trades emanating from an RFQ will be 

subject to real time reporting, if a non-affiliated 

respondent to an RFQ observes trades happening 

away from better or equal prices quoted by it, such 

respondents might be discouraged from responding 

to future RFQ requests, thus hurting market 

integrity. 

1054See Time Delay Requirement discussion 

above under § 37.9—Permitted Execution Methods 

in the preamble. 

1055FHLB Comment Letter at 13 (Jun. 13, 2011). 

1056 Dealer internalized or cross-trades are not 

open and competitive and may result in inferior 

execution for one of the parties compared to 

Continued 

risk, while still complying with the 

statutory SEF definition and promoting 

pre-trade price transparency and price 

competition. 

Furthermore, regarding comments 

concerns’ about the potential winner’s 

curse for illiquid swaps, the 

Commission notes that the three market 

participant requirement will only apply 

to transactions in swaps that are subject 

to the CEA section 2(h)(8) trade 

execution mandate (i.e., transactions in 

more liquid swaps, which are subject to 

the clearing mandate and made 

available to trade, and not to illiquid 

and bespoke swaps).1049 The 

Commission also notes that the interest 

rate swaps and credit default swaps that 

the Commission has determined are 

required to be cleared under CEA 

section 2(h)(1) (and are likely to be 

subject to the trade execution mandate 

of CEA section 2(h)(8)) are some of the 

most liquid swaps.1050 Additionally, 77 

swap dealers have registered with the 

Commission and nearly all of them 

make markets in such swaps.1051 SEFs 

may offer RFQ systems without the 

three market participant requirement for 

Permitted Transactions (i.e., 

transactions not involving swaps that 

are subject to the trade execution 

mandate of CEA section 2(h)(8)). In 

response to commenters’ concerns about 

the potential winner’s curse for largesized trades, the Commission notes that 

block-sized transactions would not be 

subject to the execution methods for 

Required Transactions, including the 

three market participant 

requirement.1052 Therefore, excluding 

block-sized transactions from the 

execution methods for Required 

Transactions will address the potential 

risk of a winner’s curse for large-sized 

trades. 

As noted in the preamble, the three 

market participants may not be affiliated 

with or controlled by the RFQ requester 

and may not be affiliated with or 

controlled by each other, and the 

Commission is revising final § 37.9(a)(3) 

to clarify this point. The Commission 

believes that for an RFQ requester to 

send an RFQ to another entity who is 

affiliated with or controlled by the RFQ 

requester would undermine the benefits 

of the requirement. 

The costs associated with the noaffiliate rule may include, for example, 

the costs that a SEF would incur to 

upgrade its systems to create filters that 

would prevent RFQs from being sent to 

affiliated parties, but these costs could 

be mitigated or eliminated by, for 

example, the SEF requiring market 

participants accepting RFQs to disclose 

their affiliations to potential RFQ 

requestors before a request is 

transmitted. Another possibility is for a 

SEF to monitor RFQs and cancel trades 

that it determines are made pursuant to 

RFQs between affiliated parties. Yet 

another possibility is for the SEF to 

include in its rules a requirement that 

market participants must not transmit 

RFQs to their affiliates or to market 

participants who are affiliated with each 

other. 

The primary benefit of this no-affiliate 

rule is to ensure that RFQs are sent to 

three unaffiliated parties who can be 

expected to provide truly independent 

quotes. If an RFQ requester were to 

transmit an RFQ to one non-affiliate and 

two affiliates or if an RFQ requester 

transmits an RFQ to three requestees 

who are affiliates of each other, then the 

goal of pre-trade price transparency 

would be undermined (since the quotes 

might be coordinated or otherwise not 

independent) and the RFQ could 

effectively turn into an RFQ-to-one, 

which is contrary to the statutory SEF 

definition. The Commission also notes 

that such an outcome could 

disincentivize entities from responding 

to an RFQ, which would reduce price 

competition and liquidity.1053

The Commission clarifies that SEFs 

are not required to: (1) Display RFQs to 

market participants not participating in 

the RFQ, (2) disclose RFQ responses to 

all market participants, or (3) disclose 

the identity of the RFQ requester. The 

Commission also clarifies that an 

acceptable RFQ System may allow for a 

transaction to be consummated if the 

original request to three potential 

counterparties receives fewer than three 

responses. Moreover, § 37.9(a)(2)(ii) 

clarifies that in providing either one of 

the execution methods for Required 

Transactions (i.e., an Order Book or an 

RFQ System that operates in 

conjunction with an Order Book), a 

swap execution facility may for 

purposes of execution and 

communication use any means of 

interstate commerce, including, but not 

limited to, the mail, internet, email, and 

telephone, provided that the chosen 

execution method satisfies the 

requirements provided in § 37.3(a)(3) for 

Order Books or in § 37.9(a)(3) for 

Request for Quote Systems. Finally, in 

order to provide market participants, 

SEFs, and the swaps industry generally 

with additional time to adapt to the new 

SEF regime, the Commission is phasingin the three market participant 

requirement so that from the effective 

date of the SEF rule until one year after 

the compliance date for the SEF rule, 

RFQ requesters may transmit RFQs to 

no less than two market participants 

(rather than three). These provisions 

will likely significantly mitigate the 

likelihood and magnitude of the 

potential costs noted by commenters. 

(iii) Time Delay Requirement 

Some commenters stated that the rule 

requiring a 15-second time delay before 

crossing a trade between two customers 

should be eliminated because it may 

impact liquidity or result in increased 

costs.1054 FHLB stated that this 

requirement would likely increase the 

bid-ask spread, because ‘‘by waiting for 

15 seconds before entering into an 

offsetting transaction, brokers will be 

exposed to risks associated with market 

fluctuations and will have to pass the 

costs of these risks along to its 

customer.’’ 1055 No commenter provided 

dollar estimates or data regarding these 

costs. 

The time delay requirement (which 

only applies to a SEF’s Order Book and 

not to its RFQ System) supports the 

Congressional goal of pre-trade 

transparency on SEFs by allowing other 

market participants the opportunity to 

participate in a trade where dealer 

internalization or a dealer crossing 

customers’ orders would otherwise 

reduce such pre-trade price 

transparency.1056 The Commission 

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33564 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

situations where the bid or offer is exposed to the 

market. Accordingly, DCM rules typically require 

that an order be exposed to an order book or trading 

pit before it can be crossed with another order. 

1057See, e.g., NYMEX rule 533, which provides 

for a 5-second delay for futures and a 15-second 

delay for options, available at http:// 

www.cmegroup.com/rulebook/NYMEX/1/5.pdf. 

1058CEA section 5h(e); 7 U.S.C. 7b–3(e). 

1059See Duffie et al., ‘‘OTC Markets,’’ at 1827 

(presenting results showing that bid-ask spreads are 

lower if investors can find each other more easily). 

1060See, e.g., Transparency of Structured Finance 

Products (Final Report), Technical Committee of the 

International Organization of Securities 

Commissions, at 17, 21 (Jul. 2010), available at 

http://www.iosco.org/library/pubdocs/pdf/ 

IOSCOPD326.pdf. 

believes that this requirement will 

minimize the possibility of dealer 

internalization and incentivize 

competition between market 

participants. Absent this requirement, 

market participants would be free to 

conduct pre-execution communications 

away from the centralized market and 

then ensure that the orders from such 

private negotiations are matched by 

coordinating their submission to the 

SEF. 

Further, the Commission notes that 

the costs outlined by commenters are 

speculative, since SEFs have not yet 

begun operation. Moreover, the time 

delay requirement is similar to certain 

timing delays adopted by DCMs, and the 

Commission is not aware of evidence 

that those DCM rules are imposing 

significant costs on participants in those 

markets.1057 Nevertheless, the 

Commission’s final rules recognize that 

a one-size-fits-all approach to the time 

delay requirement is not appropriate for 

all swap products and markets on a SEF. 

Accordingly, the Commission is revising 

the proposed rule to allow a SEF to 

adjust the duration of the time delay 

requirement based upon a swap’s 

liquidity or other product-specific 

characteristics. SEFs therefore will have 

the ability to reduce the costs described 

by the commenters, if they arise. 

(c) Benefits 

As a whole, the minimum trading 

functionality (i.e., Order Book) and 

permissible execution methods 

established by §§ 37.3 and 37.9 advance 

the Congressional goals of promoting 

pre-trade price transparency in the 

swaps market and promoting trading of 

swaps on SEFs.1058

(1) Promotion of Pre-Trade Price 

Transparency 

The order book requirement is 

designed to ensure a base level of pretrade transparency to all market 

participants by providing for live 

executable bids and offers in Required 

Transactions. This requirement gives all 

market participants (and potential 

market participants) access to the same 

key information that swap dealers have, 

including current information about the 

price of a particular swap, at the same 

time. An order book with executable 

bids and offers will ensure that prior to 

placing an order or executing a trade, a 

market participant will be able to view 

other bids and offers submitted to the 

SEF, including prices, quantities, and 

order book depth.1059 Access to such 

information allows market participants 

to make informed trading decisions 

involving variables such as price, size, 

and timing, and to better assess the 

quality of execution effected by their 

intermediaries. 

Intermediaries will know that their 

market participants have information to 

assess the quality of executions and can 

send their business elsewhere if they are 

not satisfied with their executions. 

Thus, intermediaries will have greater 

incentive to provide efficient execution 

to their customers at competitive prices. 

In addition, an order book is an 

efficient method of execution of 

transactions for swaps that are subject to 

the CEA section 2(h)(8) trade execution 

mandate because it provides prompt 

and fast executions of marketable orders 

at market prices, while providing for a 

variety of functionalities such as limit 

orders and stop-loss orders. The order 

book functionality for such transactions 

will introduce core levels of pre-trade 

transparency without hindering the 

ability of SEFs and market participants 

to deploy other market structures 

depending on the needs of the 

individual products and markets. 

As discussed above, the benefits of 

pre-trade (and post-trade) transparency 

generally flow from reducing 

information asymmetries.1060 In 

transparent markets, all market 

participants (and potential market 

participants) have timely access to the 

same public pricing information that 

insiders or professionals have, reducing 

potential negotiating advantages. Also, 

in a transparent market, market 

participants can better assess the quality 

of executions effected by their 

intermediaries by comparing execution 

prices against quotations and other 

transactions. A potential entrant can 

view current price quotations as well as 

prices of recent trades in an instrument, 

and can thereby assess whether it can 

offer a better price. Market transparency 

can thus provide incentives for new 

participants to enter the market, 

increasing competition, reducing 

concentration, and narrowing spreads. 

The 15-second time delay 

requirement is intended to limit dealer 

internalization of trades (cross trades) 

and to incentivize competition between 

market participants. This requirement 

will also promote pre-trade price 

transparency of swaps executed on SEFs 

by allowing other market participants 

the opportunity to participate in the 

trade. The Commission’s final rules also 

recognize that a one-size-fits-all 

approach to the time delay requirement 

is not appropriate for all swap products 

on a SEF. Therefore, the final rules 

provide SEFs with an appropriate level 

of discretion to adjust the minimum 

time delay requirement based upon a 

swap’s liquidity or other productspecific characteristics. Moreover, the 

Commission has clarified that the time 

delay requirement does not apply to the 

RFQ System. 

The Commission recognizes 

commenters’ concerns, as discussed in 

this section, that there may be certain 

circumstances in which pre-trade price 

transparency may reduce overall market 

liquidity. Therefore, the Commission 

has taken certain steps in the final 

regulations to mitigate such benefitreducing effects (such as excluding 

block trades, tying the time-delay 

requirement to a swap’s liquidity, 

clarifying the subset of swaps that are 

Required Transactions, and allowing 

SEFs to offer any method of execution 

for Permitted Transactions). 

(2) Promotion of Trading on SEFs 

While the statutory goal of pre-trade 

price transparency is reflected in the 

minimum trading functionality (i.e., 

Order Book) requirement, the 

regulations also provide a SEF with 

additional flexibility for offering the 

trading and execution of swaps by 

providing additional execution methods 

(e.g., RFQ Systems along with the 

discretion to offer any method of 

execution for Permitted Transactions). 

The Commission believes that these 

additional functionalities will provide 

flexibility in methods of execution that 

will promote the trading of swaps on 

SEFs, which in turn will promote price 

transparency. 

For example, execution methods and 

market structures in general can vary 

depending on the product—simple or 

complex, the state of development of the 

market—established or new, market 

participants—retail or institutional, and 

other related factors. The Commission 

anticipates that the order book method 

will typically work well for liquid 

Required Transactions (i.e., transactions 

involving swaps that are subject to the 

trade execution requirement under CEA 

section 2(h)(8)), but for less liquid 

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1061See Duffie et al., ‘‘OTC Markets,’’ at 1818–20. 

1062 Id. at 1815. 

1063 Id. at 1827. 

1064 Id. at 1817. 

1065 Id. 

1066 Id. at 1834–35. 

1067 Id.; see also Hendrik Bessembinder & Herbert 

M. Kaufman, ‘‘A Comparison of Trade Execution 

Costs for NYSE and NASDAQ-Listed Stocks,’’ 32 

The Journal of Financial and Quantitative Analysis 

287 (Sep. 1997). 

1068 Duffie et al., ‘‘OTC Markets,’’ at 1834–35. 

1069See, e.g., Rosen et al. Comment Letter at 11 

(Apr. 5, 2011). 

1070Mallers et al. Comment Letter at 4 (Mar. 21, 

2011); AFR Comment Letter at 4–5 (Mar. 8, 2011). 

1071Rosen et al. Comment Letter at 12–14 (Apr. 

5, 2011); JP Morgan Comment Letter at 5–6 (Mar. 

8, 2011); FXall Comment Letter at 9–10 (Mar. 8, 

2011); Tradeweb Comment Letter at 8 (Mar. 8, 

2011); FSR Comment Letter at 5 (Mar. 8, 2011); 

MetLife Comment Letter at 3 (Mar. 8, 2011); SIFMA 

AMG Comment Letter at 9 (Mar. 8, 2011); 

MarketAxess Comment Letter at 32 (Mar. 8, 2011); 

Barclays Comment Letter at 7 (Mar. 8, 2011); ABC/ 

CIEBA Comment Letter at 6–7 (Mar. 8, 2011); ISDA/ 

SIFMA Comment Letter at 3–4; Evolution Comment 

Letter at 5–6 (Mar. 8, 2011). 

1072MFA Comment Letter at 8 (Mar. 8, 2011). 

1073See RFQ System Definition and Transmission 

to Five Market Participants discussion above under 

§ 37.9(a)(1)(ii)—Request for Quote System in the 

preamble. Under the SEC’s interpretation of the 

SB–SEF definition, such an RFQ system would 

provide multiple participants with the ability, but 

not the obligation, to transact with multiple other 

participants. Registration and Regulation of 

Security-Based Swap Execution Facilities, 76 FR at 

10953. 

1074See, e.g., Rosen et al. Comment Letter at 11 

(Apr. 5, 2011). 

1075See, e.g., Mallers et al. Comment Letter at 

3–5 (Mar. 21, 2011). 

1076 Id. 

1077 Id. at 4. 

Required Transactions, RFQ systems are 

expected to help facilitate trading. RFQ 

systems are currently used by market 

participants in the OTC swap market, 

many in conjunction with order book 

functionality. By providing a SEF with 

the flexibility to offer alternate 

execution methods to its market 

participants, the Commission is 

leveraging best practices from current 

swap trading platforms. The additional 

flexibility offered for the trading and 

execution of Permitted Transactions 

will allow a SEF to offer new, 

innovative market structures to facilitate 

trading in these swaps that are not 

subject to the trade execution 

requirement under CEA section 2(h)(8), 

and thus may help to promote the 

trading of these swaps on SEFs. 

Additionally, the RFQ system 

communication requirement helps 

promote the trading of swaps on SEFs 

and enhances price competition and 

pre-trade price transparency by ensuring 

that RFQ requesters have access to 

competitive prices, and that competitive 

resting bids and offers left by market 

participants on the SEF will be 

transmitted to the RFQ requester for 

possible execution. 

(3) Facilitating Search 

The Duffie, Gaˆrleanu, and Pedersen 

(‘‘DGP’’) approach reflects the typical 

search process, which involves 

approaching intermediaries sequentially 

(similar to making phone calls to 

different dealers asking for quotes); 

strategic bargaining then ensues—prices 

negotiated reflect each investor’s or the 

dealer’s alternatives to trade.1061 DGP’s 

results show that both traded prices as 

well as transaction costs depend on 

investors’ search abilities, access to 

market makers, and investors’ 

bargaining powers.1062 DGP’s results 

show that bid-ask spreads are lower if 

investors can find each other more 

easily, through market structures 

designed to allow them to negotiate 

simultaneously, instead of sequentially, 

with multiple, competing liquidity 

providers.1063 Contrary to what 

commenters have stated, DGP reason 

that improvements in an investor’s 

ability to search for alternate 

counterparties forces dealers to improve 

on their quoted prices and spreads.1064

Further, they demonstrate that those 

with better access to market makers (or 

liquidity providers) receive tighter bidask spreads.1065

The final rules establishing a market 

structure for SEFs, including the 

provisions governing Order Books and 

RFQ Systems are designed to deliver 

improved search capabilities to 

investors and better access to market 

makers. These provisions will facilitate 

the shifting of trading to the centralized 

SEF market structure from the bilateral 

OTC market structure where investors 

may have limited ability to find one 

another. 

The importance of facilitating 

investors’ ability to find each other more 

easily is highlighted by evidence in the 

DGP paper of another dealer-centric 

market—the one prevailing at Nasdaq 

until the mid-1990s, where all trades 

had to be routed to a dealer.1066

Notwithstanding competition among the 

dealers, and the fact that there was both 

pre- and post-trade transparency in the 

equity markets, spreads at Nasdaq at 

that time were wider than at the New 

York Stock Exchange.1067 Though the 

latter had ‘‘a single specialist for each 

stock, floor brokers can find and trade 

among themselves, and outside brokers 

can find each other and trade ‘around’ 

the specialist with limit orders.’’ 1068

Along these lines, the final rules 

provide for an anonymous but 

transparent order book that will 

facilitate trading among market 

participants directly without having to 

route all trades through dealers. 

(d) Consideration of Alternatives 

Some commenters recommended that 

the Commission modify the proposed 

five market participant requirement 

from no less than five market 

participants to either ‘‘one or more’’ 1069

or to all market participants.1070 Other 

commenters recommended an 

alternative that would include some 

level of order interaction between the 

SEF’s order book functionality and RFQ 

systems, including the order interaction 

model proposed by the SEC for SB– 

SEFs.1071 MFA recommended that the 

Commission expand the definition of 

Permitted Transaction to include other 

transactions, such as exchanges of 

swaps for physicals, exchanges of swaps 

for swaps, and linked or packaged 

transactions.1072 Each of these 

alternatives is discussed below. 

(1) Modification to the Number of RFQ 

Requests 

Numerous commenters recommended 

that the Commission adopt the SEC’s 

proposed approach for SB–SEFs by 

allowing RFQs to be sent to one or more 

market participants (while not 

recommending that the Commission 

adopt the SEC’s proposed order 

interaction requirement), instead of 

requiring that RFQs be sent to at least 

five market participants.1073 The benefit 

of this approach, cited favorably by 

some commenters, would be to protect 

proprietary trading strategies and 

mitigate hedging costs.1074

Other commenters, however, stated 

that only requiring RFQs to be sent to 

one or more market participants would 

preserve the single-dealer status quo, 

would diminish the transparency and 

efficiency of the regulated swaps 

markets, and would be inconsistent 

with the goals of the Dodd-Frank 

Act.1075 These commenters supported 

another alternative under which an RFQ 

must be transmitted to all participants 

on the SEF.1076 In particular, one 

commenter stated that participants 

would not be disadvantaged by 

disclosing an RFQ to the entire market 

for transactions below the block trade 

threshold, which would not move the 

market.1077 In this commenter’s view, 

the proposed five market participant 

requirement would still allow a 

participant to conduct semi-private 

deals with a few favored participants to 

the exclusion of other market 

participants, which would ultimately 

decrease liquidity and create a 

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33566 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

1078 Id. 

1079 IECA Comment Letter at 3 (May 24, 2011). 

1080Under the SEC’s SB–SEF NPRM, an RFQ 

requester must execute against the best-priced 

orders of any size within and across an SB–SEF’s 

modes of execution. See Registration and 

Regulation of Security-Based Swap Execution 

Facilities, 76 FR at 10953–54, 10971–74. 

1081See, e.g., Tradeweb Comment Letter at 6 

(Mar. 8, 2011). 

1082See CEA section 5(d)(9); 7 U.S.C. 7(d)(9). The 

Commission notes that DCM Core Principle 9 does 

not explicitly permit DCMs to offer exchange of 

swaps for physicals or exchange of swaps for swaps. 

1083Bessembinder & Maxwell, ‘‘Transparency,’’ at 

226. Their conclusions in the context of post-trade 

transparency introduced by the TRACE system can 

be generalized to the improvement in pre-trade 

transparency introduced through the minimum 

trading functionality (i.e., Order Book) and the 

ability to negotiate simultaneously with multiple 

market participants through the RFQ system. 

substantial barrier to entry into the 

swaps market.1078

The Commission considered the costs 

and benefits of the above alternatives, 

but believes that neither alternative 

would satisfy the objectives of the 

Dodd-Frank Act. As noted by one 

commenter, only requiring that RFQs be 

sent to one market participant would 

preserve the status quo,1079 while 

requiring that RFQs be sent to the entire 

market may not be feasible for certain 

less liquid swaps. Nevertheless, in light 

of the comments, the Commission is 

reducing the required minimum number 

of recipients for RFQs in the final rule 

from five to three. The Commission 

expects that this will mitigate the 

concerns of commenters as discussed 

above, while continuing to satisfy the 

objectives of the Dodd-Frank Act. As 

discussed above in connection with the 

RFQ to three market participant 

requirement, the Commission views 

three RFQ recipients as appropriately 

balancing between ensuring liquidity in 

the swaps market and promoting pretrade price transparency. The 

Commission further notes that the three 

RFQ recipient model will provide a 

more reliable indicator of market value 

than a quote from a single RFQ 

responder. 

(2) Order Interaction 

Another alternative was to allow for 

one-to-one RFQs, but to mandate full 

order interaction.1080 However, 

according to commenters, an order 

interaction requirement across trading 

platforms would impose significant 

architectural and operational costs on 

SEFs.1081 In particular, potential SEFs 

were concerned that they would incur 

significant expenses by having to create 

the technological capabilities necessary 

to ensure that market participants 

execute against the best price. 

The Commission did not propose this 

type of order interaction and has 

declined to impose such a requirement 

herein. Accordingly, the final 

regulations respond to concerns 

regarding a transacting party’s ability to 

take into consideration factors other 

than price when choosing a 

counterparty or clearing entity, by, for 

example, offsetting an existing position 

cleared through the Derivatives Clearing 

Organization (‘‘DCO’’) through which 

the position was entered into, even 

though a slightly better price may exist 

for the same instrument at a different 

DCO. This flexibility will allow market 

participants to execute swap 

transactions in accordance with the 

unique execution requirements of each 

transaction. 

(3) Expand Definition of Permitted 

Transaction 

Another alternative is to expand the 

definition of Permitted Transaction to 

include other transactions, such as 

exchanges of swaps for physicals, 

exchanges of swaps for swaps, and 

linked or packaged transactions. The 

Commission interprets MFA’s comment 

suggesting this alternative to be a 

request that the Commission create 

through rulemaking an exception to the 

CEA section 2(h)(8) trade execution 

mandate similar to the centralized 

market trading exception established by 

DCM Core Principle 9 for certain 

exchange of futures for related positions 

(‘‘EFRPs’’).1082

The Commission has determined not 

to adopt this alternative, because a 

broad exception for the off-exchange 

transactions described by MFA could 

undermine the trade execution 

requirement by allowing market 

participants to execute swaps subject to 

the trade execution requirement 

bilaterally rather than on a SEF or DCM. 

The Commission notes that market 

participants with a bona fide business 

purpose for executing exchange of 

swaps for physicals in physical 

commodity swaps (should such swaps 

become subject to the trade execution 

mandate) are likely to be eligible for the 

end-user exception. The Commission is 

not currently aware of any bona fide 

business purpose for executing such 

transactions in financial swaps subject 

to the trade execution mandate. In light 

of the end-user exception, the 

Commission expects that the costs 

associated with the Commission’s 

determination will be minimal. The 

Commission is aware that the swaps 

market will evolve in ways that it does 

not currently anticipate and is open to 

revisiting this issue should a bona fide 

business purpose arise to execute swaps 

that are subject to the trade execution 

mandate in a manner recommended by 

the commenter. 

(e) Section 15(a) Factors 

(1) Protection of Market Participants and 

the Public 

The final regulations, specifically the 

provisions requiring a minimum trading 

functionality (i.e., Order Book) and the 

communication of any firm bid or offer 

along with responses to the RFQ, 

promote the protection of market 

participants and the public by 

promoting the statutory goals of 

increased pre-trade transparency and 

trading on SEFs. Taken together, these 

final rules should reduce the likelihood 

that market participants and SEFs 

execute swaps at non-market prices, 

thus protecting traders and members of 

the public that rely on the prices of 

swaps facilitated or executed on SEFs. 

The rules should benefit market 

participants by reducing the potential 

rents extracted by dealers from 

customers in opaque markets, ‘‘and 

more so from less informed 

customers.’’ 1083

The Commission mitigates the costs to 

market participants by minimizing the 

risk of information leakage to other 

market participants by clarifying that 

SEFs are not required to: (1) Display 

RFQs to market participants not 

participating in the RFQ, (2) disclose 

RFQ responses to all market 

participants, or (3) disclose the identity 

of the RFQ requester. 

As discussed above, the Commission 

anticipates that the requirements in 

§ 37.9 will result in better pricing and 

liquidity and increased participation on 

SEFs because market participants will 

be able to trade on flexible platforms 

without compromising on pre- and posttrade transparency. The final regulations 

also provide information and pricing 

benefits to market participants using an 

RFQ System because market 

participants seeking liquidity will have 

access to additional pricing information 

after disseminating an RFQ. The final 

regulations increase the likelihood that 

RFQ requesters will receive competing 

quotes from a larger group of 

responders. The Commission notes that 

competition between multiple quote 

providers should result in tighter bidoffer spreads for the RFQ requesters. 

The rules promoting trading on SEFs 

protect the public by encouraging 

trading on regulated SEFs rather than on 

unregulated OTC markets. Moreover, 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33567 

1084The Commission notes that CEA § 15(a)(2)(B) 

requires the Commission to consider the costs and 

benefits of its actions in light of ‘‘considerations of 

the efficiency, competitiveness, and financial 

integrity of futures markets.’’ The Commission is 

also considering the costs and benefits of these 

rules in light of considerations of the efficiency, 

competitiveness, and financial integrity of ‘‘swap 

markets.’’ 1085See ISDA Research Notes, ‘‘Transparency and 

over-the-counter derivatives: The role of transaction 

transparency,’’ No. 1, at 2–3 (2009), available at 

http://www2.isda.org/attachment/MTY4NA==/ 

ISDA-Research-Notes1.pdf. 1086See Hendershott & Madhavan, ‘‘Click or 

Call,’’ at 3 (stating that ‘‘[T]he evolution of bilateral, 

sequential trading into an auction type framework’’ 

(their definition of the RFQ system), ‘‘offers a path 

from an over-the-counter market to centralized, 

continuous trading’’). 

1087 Duffie et al., ‘‘OTC Markets,’’ at 1815. 

1088Haoxiang Zhu, ‘‘Finding a Good Price in 

Opaque Over-the-Counter Markets,’’ 25 The Review 

of Financial Studies 1255, 1264 (Apr. 2012). 

1089Marco Avellaneda & Rama Cont, 

‘‘Transparency in Credit Default Swap Markets,’’ 

Finance Concepts, at 3 (Jul. 2010), available at 

http://www.finance-concepts.com/images/fc/ 

CDSMarketTransparency.pdf. 

1090Haoxiang Zhu, ‘‘Finding a Good Price in 

Opaque Over-the-Counter Markets,’’ 25 The Review 

of Financial Studies 1255, 1257–58 (Apr. 2012). 

1091 Duffie et al., ‘‘Valuation in OTC Markets,’’ at 

1881. 

1092See Yakov Amihud, Haim Mendelson, & Beni 

Lauterbach, ‘‘Market microstructure and securities 

values: Evidence from the Tel Aviv Stock 

Exchange,’’ 45 Journal of Financial Economics 365, 

378–80 (Sep. 1997) (discussing liquidity 

externalities in trading). 

some market participants may be end 

users that provide goods and services to 

the public (e.g., airlines or electric 

utilities). To the extent that these end 

users obtain better pricing due to these 

rules and are able to pass those cost 

savings to their customers and 

shareholders, the public would gain 

additional benefits from the pre-trade 

transparency and promotion of trading 

on SEFs. 

(2) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 1084

The final regulations will improve the 

efficiency, competitiveness, and 

financial integrity of the swaps market 

by providing a SEF with the flexibility 

to offer several execution methods for 

Required Transactions to meet the needs 

of market participants, including RFQ 

Systems, as well as the flexibility to 

offer any execution method for 

Permitted Transactions. This flexibility 

reflects the fact that there is a 

continuum of markets occupying 

‘‘various points between high and low 

transparency’’ 1085 and will allow 

participants to efficiently execute trades 

using various methods of execution 

depending on the liquidity levels in 

particular products. For example, 

participants may execute more liquid 

products on an Order Book, while 

executing less liquid products using 

RFQ functionality. Final § 37.9, 

specifically the provisions related to 

RFQ Systems (including the minimum 

RFQ to three requirement) and the 15 

second time delay requirement for cross 

trades, should also facilitate an increase 

in the number of market participants 

that provide liquidity on SEFs by 

providing greater opportunities for those 

market participants, which will 

contribute to the competitiveness of the 

swaps market. 

Research by Hendershott and 

Madhavan supports the benefits of 

increased competition facilitated by 

RFQ systems.1086 By enabling market 

participants to meet each other directly 

(without being forced to go through an 

intermediary as is the case in the 

current OTC market structure), and by 

providing them a facility (via the RFQ 

system) to simultaneously negotiate 

with multiple market participants, the 

rules reduce the search costs inherent in 

the current OTC market structure as 

described by Duffie, Gaˆrleanu, and 

Pedersen,1087 and thus promote a more 

efficient and competitive market 

structure for the swaps markets. In 

another paper, Zhu addresses the 

requirement for a minimum of five 

quote providers as a means to ‘‘increase 

direct trading among ‘end-users’ and 

reduce the fraction of trading volume 

that is conducted through 

intermediaries.’’ 1088 Similarly, 

Avellaneda and Cont emphasize the 

importance of market transparency as 

‘‘not an objective per se but rather a 

means for ensuring the proper 

functioning of the market.’’ 1089

(3) Price Discovery 

The final rules provide for pre-trade 

transparency and promote trading on 

SEFs, both of which will enhance price 

discovery on a SEF. The minimum 

trading functionality will allow nondealer firms with access to the SEF to 

compete with dealers by also placing 

bids and offers on the SEF. The 15 

second time delay requirement will 

ensure a minimum level of pre-trade 

transparency by allowing other market 

participants the opportunity to 

participate in a privately negotiated 

trade before it is crossed. The broader 

participation and pre-trade transparency 

could increase market depth and 

improve price discovery. Research by 

Zhu shows that execution methods 

similar to the RFQ system can help 

improve the dispersion of quote 

information across a broader crosssection of market participants, the 

sensitivity of quoted prices to 

information, and the ability of the 

market to aggregate information 

distributed among multiple 

participants.1090 These conclusions 

support findings from research by 

Duffie, Gaˆrleanu, and Pedersen that 

‘‘[s]earch frictions affect not only the 

average levels of asset prices but also 

the asset market’s resilience to aggregate 

shocks[,]’’ both of which are critical 

elements of any efficient and effective 

price discovery process.1091

The differentiation in execution 

methods for Required and Permitted 

Transactions, and the ability to use ‘‘any 

means of interstate commerce’’ in 

providing the execution methods for 

Required Transactions as described in 

§ 37.9(a)(2)(ii), will allow a SEF to 

adjust its market structures for emerging 

and less liquid markets by using a 

variety of means of communication in 

providing the execution methods for 

Required Transactions and using any 

execution method the SEF deems 

appropriate for Permitted Transactions. 

This approach reflects the Commission’s 

belief that the price discovery process 

varies across markets and products. 

(4) Sound Risk Management Practices 

Centralized trading platforms have 

multiple checks and balances built into 

their systems designed to reduce 

operational risks (such as human error) 

inherent in order submission, matching, 

and confirmation. The Commission 

believes that adoption of centralized 

trading platforms for swaps trading on 

a SEF will contribute to a system-wide 

reduction in operational risks, and will 

help standardize risk management 

practices in the marketplace. This in 

turn will reduce overall transaction 

costs, and will, along with pre-trade 

transparency and the prospects for 

improved price discovery discussed 

earlier, encourage market participants to 

trade swaps on SEFs and thus aid in the 

development of the swaps market. As 

markets are interlinked, the growth of 

the swaps market will likely drive 

growth of the futures and other 

derivatives markets through the 

liquidity externality mechanism, which 

in turn will improve the ability of a 

broader range of market participants to 

measure, hedge, and transfer their risks 

through such contracts.1092

(5) Other Public Interest Considerations 

The Commission has not identified 

any effects that these rules will have on 

other public interest considerations 

other than those enumerated above. 

3. Registration 

(a) Background 

Section 5h(a)(1) of the Act provides 

that no person may operate a facility for 

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33568 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

1093CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1). 

1094CEA section 1a(50); 7 U.S.C. 1a(50). 

1095See Requirements for Registration discussion 

above under § 37.3—Requirements for Registration 

in the preamble for further details. 

1096Sections 37.3(d)–(g) provide procedures for 

other actions involving registration, including 

reinstating a dormant registration, requesting a 

transfer of registration, withdrawal of an 

application for registration, and vacation of 

registration. These procedures will further the 

ability of the Commission to efficiently monitor 

SEFs’ compliance with the core principles, and will 

result in minimal administrative costs for SEFs. 

1097 ISDA Discussion Paper at 32 (Nov. 2011). 

1098The Commission notes that the SEC 

estimated that the one-time registration burden to 

prepare and file Form SB–SEF will be 

approximately 100 hours for each new and existing 

entity. See Registration and Regulation of SecurityBased Swap Execution Facilities, 76 FR at 11024. 

The SEC based this estimate on its experience with 

the registration process for national securities 

exchanges, having last estimated the average time 

it should take to fill out the securities exchange 

registration form (Form 1) to be 47 hours. Id. The 

SEC adjusted this figure upwards to account for the 

greater resources that would be required initially in 

lieu of an established framework and familiarity of 

the industry in order to gather supporting 

documentation and complete Form SB–SEF. 

the trading or processing of swaps 

unless the facility is registered as a SEF 

or a DCM.1093 The SEF definition in 

CEA section 1a(50) defines a SEF as ‘‘a 

trading system or platform in which 

multiple participants have the ability to 

execute or trade swaps by accepting 

bids and offers made by multiple 

participants in the facility or system, 

through any means of interstate 

commerce, including any trading 

facility, that—(A) Facilitates the 

execution of swaps between persons; 

and (B) is not a designated contract 

market.’’ 1094 In accordance with these 

provisions, the Commission has 

clarified that a facility would be 

required to register as a SEF if it offers 

a trading system or platform in which 

more than one market participant has 

the ability to execute or trade swaps 

with more than one other market 

participant on the system or 

platform.1095 In response to comments, 

the Commission also provides examples 

of how it would interpret the 

registration requirement for certain 

entities. 

Section 37.3(a)(1) codifies this 

statutory registration requirement and 

§ 37.3(b) requires, among other things, 

that applicants requesting approval of 

registration as a SEF must file a 

complete Form SEF, which consists of 

general questions and a list of exhibits 

that will enable the Commission to 

determine whether the applicant 

complies with the core principles and 

the Commission’s regulations. Form SEF 

standardizes the information that an 

applicant must provide to the 

Commission and includes 

comprehensive instructions that will 

guide applicants through the 

process.1096 Section 37.3(b)(5) requires 

the Commission to review any 

application for registration as a SEF 

submitted two years or later after the 

effective date of part 37 pursuant to the 

180-day timeframe and procedures 

specified in CEA section 6(a). 

Under § 37.3(c), SEF applicants may 

submit a notice to the Commission 

requesting temporary registration, 

allowing them to operate during the 

pending application process once a 

notice granting temporary registration 

from the Commission has been received. 

The SEF NPRM required these 

applicants to submit transaction data 

substantiating that they are trading 

swaps. In response to comments, the 

Commission is eliminating this 

requirement from the final rule and is 

also extending the termination date of 

the proposed temporary registration 

provision by one year. In addition, the 

Commission is shortening the proposed 

effective date of the regulations from 90 

days to 60 days subsequent to 

publication in the Federal Register. In 

connection with this change, the 

Commission is also using its discretion 

to establish alternative dates for the 

commencement of its enforcement of 

regulatory provisions and is setting a 

general compliance date of 120 days 

subsequent to Federal Register 

publication. 

(b) Costs 

In its discussion paper, ISDA 

estimated the average cost of registration 

would be $333,000.1097 Based on the 

Commission staff’s follow-up 

discussions with commenters, the 

Commission estimates that the total cost 

of completing and filing a registration 

application with the Commission will 

be between $333,000 and $500,000. This 

range accounts for the time that will be 

expended to prepare and file Form 

SEF.1098

As noted above, based on the statute 

as interpreted by the Commission, a 

facility that meets the SEF definition 

would be required to register as a SEF 

and would incur the costs of 

registration. These facilities would also 

be required to meet the minimum 

trading functionality and other 

requirements of § 37.9. The costs and 

benefits of those requirements are 

discussed above. The 180-day review 

period for SEF applications submitted 

two years or later after the effective date 

of part 37 is not expected to impose 

significant costs on applicants who 

submit their applications sooner since 

they will be eligible for two years of 

temporary registration and will not need 

to await final Commission approval 

before commencing SEF operation. 

(c) Benefits 

As discussed above, based on the 

statute as interpreted by the 

Commission, a facility that meets the 

SEF definition would be required to 

register as a SEF. These facilities will, 

as registered SEFs, have the benefit of 

being able to offer Required 

Transactions for execution, while 

alternative entities that are not required 

to register as SEFs, including one-tomany systems or platforms, will only be 

able to offer Permitted Transactions for 

execution. This will ensure, consistent 

with the statute, a level playing field, 

that all Required Transactions are 

executed on registered SEFs. This will 

provide market participants in Required 

Transactions with the benefits 

associated with the minimum trading 

functionality, core principles, and other 

requirements set out in this release. 

Additionally, the Commission’s 

interpretation of the registration 

requirement through a set of examples 

helps to clarify which facilities must 

register as a SEF. The Commission 

believes that providing examples of how 

it would interpret the CEA section 

5h(a)(1) registration requirement will 

ensure that a consistent set of metrics is 

available to market participants while 

evaluating the applicability of the 

registration requirements. Providing 

specific examples will also mitigate the 

costs potential registrants may incur in 

seeking advice on issues pertaining to 

registration. 

Form SEF is designed to ensure that 

only applicants that comply with the 

Act and the Commission’s regulations 

are registered as SEFs. Form SEF is 

expected to minimize the amount of 

time the Commission staff will need to 

review applications and reduce the need 

for the Commission staff to request, and 

applicants to provide, supplementary 

information, which, in turn, benefits 

potential SEFs by reducing the time it 

takes to become fully registered. This 

standardized registration process will 

provide applicants with legal certainty 

regarding the type of information that is 

required and will ensure that no 

applicant is given a competitive 

advantage in the application process. 

Further, granting temporary 

registration for up to two years will 

improve market continuity by allowing 

the Commission ample time to review 

applications without jeopardizing an 

applicant’s ability to operate pending 

Commission review. By withdrawing 

the existing trading activity requirement 

in proposed § 37.3(b)(1)(ii), all SEF 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33569 

1099See Application Procedures discussion above 

under § 37.3—Requirements for Registration in the 

preamble. 

1100Tradeweb Comment Letter at 3–4 (Jun. 3, 

2011). 

1101For example, section 37.901 states that SEFs 

must report swap data as specified in parts 43 and 

45 and meet the requirements of part 16. This 

provision references other Commission regulations, 

the costs and benefits of which are discussed in 

connection with those rulemakings. 

1102The discretionary costs and benefits specific 

to the confirmation process are discussed in the 

part 23 rulemaking for new confirmation standards. 

applicants, not only those operating 

existing platforms, may apply for 

temporary registration. The withdrawal 

of the trading activity requirement 

should promote competition between 

SEFs by providing opportunities for 

new entities to establish trading 

operations that compete with existing 

platforms. The 180-day review period 

for SEF applications submitted two 

years or later after the effective date of 

part 37 will provide any later SEF 

applicants with the same review period 

as is applicable under the CEA to DCMs 

and will provide greater certainty for 

SEF applicants regarding the time 

period for the Commission’s review of 

their applications. 

(d) Consideration of Alternatives 

Several commenters stated that the 

Commission should harmonize its 

registration procedures with the SEC in 

order to avoid unnecessary cost and 

duplication for SEFs.1099 In particular, 

Tradeweb stated that SEF applicants 

should not have to file separate 

applications for each mode of execution, 

and that where a SEF is offering both 

swaps and security-based swaps, the 

SEF should only be required to file one 

application for both agencies.1100

The Commission recognizes that 

substantially similar registration forms 

and procedures could facilitate 

compliance and reduce regulatory costs 

for SEFs seeking dual registrations. The 

Commission notes, however, that it 

must comprehensively review and 

understand a SEF’s proposed trading 

models and operations, which will 

facilitate trading for a more diverse 

universe of financial instruments and 

underlying commodities than SB–SEFs. 

Accordingly, the Commission is not 

permitting notice registration to SECregistered SB–SEFs. Additionally, in 

response to comments raised, the 

Commission clarified in the preamble 

that a SEF applicant does not need to 

file separate applications for each mode 

of execution, but that its application 

must describe each mode of execution 

offered. This should allay concerns that 

multiple costly applications must be 

filed with the Commission. 

(e) Section 15(a) Factors 

(1) Protection of Market Participants and 

the Public 

The interpretation of the registration 

provision to apply to facilities that meet 

the SEF definition will ensure that 

market participants transacting any 

swap on these platforms, whether or not 

they are subject to the trade execution 

requirement, will benefit from the core 

principles and other requirements for 

SEFs (including the pre-trade 

transparency available on SEFs), 

especially those designed to protect 

market participants and the public. 

Furthermore, given the critical role that 

SEFs will play in the financial markets, 

it is essential that the Commission 

conduct a comprehensive and thorough 

review of all SEF applications for 

registration. Such a review is important 

for the protection of market participants 

and the public because it ensures that 

only qualified applicants who satisfy 

the statutory requirements and the 

Commission’s regulations thereunder 

can operate as SEFs. Form SEF will 

enable the Commission to efficiently 

and accurately determine whether an 

applicant meets such requirements. 

(2) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

The Commission’s interpretation of 

the registration provision to apply to 

facilities that meet the SEF definition, 

along with the minimum trading 

functionality requirement, will promote 

competition in the swaps market by 

providing a level playing field for 

entities that meet the SEF definition. 

The standardized registration 

procedures and Form SEF will create an 

efficient process that will reduce the 

resources associated with submitting 

and reviewing completed applications. 

The final rules promote market 

competition by not discriminating 

between new and existing platforms 

applying to register as SEFs. For 

example, the elimination of the 

proposed existing trading activity 

requirement for temporary registration 

will ensure that new entities wishing to 

qualify for temporary registration will 

not be placed at a competitive 

disadvantage to existing entities. The 

required information in Form SEF 

(Exhibits I–K—Financial Information 

and M and T—Compliance) will allow 

the Commission to evaluate each 

applicant’s ability to operate a 

financially-sound SEF and to 

appropriately manage the risks 

associated with its role in the financial 

markets. 

(3) Price Discovery 

The Commission has not identified 

any effects that these procedures will 

have on price discovery. 

(4) Sound Risk Management Practices 

The registration procedures will 

require SEF applicants to examine their 

proposed risk management program 

through a series of detailed exhibits and 

submissions. These risks include risks 

associated with the SEF applicant’s 

financial resources and operational and 

market risks associated with trading on 

the SEF platform. The submission of 

exhibits relating to risk management, 

including Exhibits I–K (Financial 

Information) and M, O, and T 

(Compliance), will provide data and 

information that will aid the 

Commission staff’s analysis and 

evaluation of an applicant’s ability to 

comply with the core principles. 

(5) Other Public Interest Considerations 

The Commission has not identified 

any effects that these procedures will 

have on other public interest 

considerations other than those 

enumerated above. 

4. Recordkeeping and Reporting 

(a) Background 

This release finalizes a series of 

provisions governing the recordkeeping 

and reporting responsibilities of SEFs 

and market participants.1101 Among 

other requirements, these rules require 

each SEF to: (1) Provide the 

Commission with information about its 

business as a SEF (§§ 37.5(a), 37.503), 

provide a written demonstration of 

compliance with any core principle 

(§ 37.5(b)), and provide notice of any 

transaction involving the transfer of at 

least fifty percent of the equity interest 

in the SEF (§ 37.5(c)); (2) provide each 

counterparty to a swap on the SEF with 

a written record of all of the terms of the 

transaction (§ 37.6(b)); 1102 and (3) 

maintain records of all business 

activities, including a complete audit 

trail, investigatory files, and 

disciplinary files, in a form and manner 

acceptable to the Commission for at 

least 5 years (§ 37.1001). 

A SEF must also: (1) Have the ability 

to obtain the information necessary to 

perform its self-regulatory 

responsibilities, including the authority 

to examine books and records 

(§§ 37.501, 37.502); (2) share 

information with other regulatory 

organizations, data repositories, and 

third-party data reporting services as 

required by the Commission (§ 37.504); 

(3) demonstrate that it has access to 

sufficient information to assess whether 

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33570 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

trading is being used to affect prices in 

its market (§ 37.404(a)); and (4) require 

market participants to keep records of 

their trading and make such records 

available to the SEF or the SEF’s 

regulatory service provider, and the 

Commission, upon request (§ 37.404(b)). 

The final rules also govern a SEF’s use 

of data and records obtained from 

market participants, and prohibit a SEF 

from using for business or marketing 

purposes proprietary or personal 

information that it collects from any 

person unless the person clearly 

consents to the use of its information in 

such a manner (§ 37.7). 

(b) Costs 

The costs associated with responding 

to requests for information or 

demonstrations of compliance under 

recordkeeping rules in § 37.5 will 

include the staff hours required to 

prepare exhibits, draft responses, and 

submit materials. These costs will vary 

among SEFs depending upon the nature 

and frequency of Commission inquiries. 

The Commission is reducing the 

reporting burden associated with final 

§ 37.5(c) (equity interest transfers) by 

raising the threshold of when a SEF 

must file a notification with the 

Commission from 10 percent to 50 

percent, by increasing the time frame for 

submitting such notification to 10 days 

rather than the next business day, and 

by eliminating the proposed 

requirement that SEFs must provide a 

series of documents and a 

representation along with the 

notification of an equity transfer 

interest. Under the final rules, the 

Commission, upon receiving a 

notification of an equity interest 

transfer, may request appropriate 

documentation of the transfer, but all 

the documentation should already be in 

the possession of the SEF. Accordingly, 

a SEF that enters into agreements that 

could result in equity interest transfers 

of 50 percent of more will incur onetime costs associated with preparing 

and submitting the required notification 

for each event. 

Further, final § 37.1001 (requirement 

to maintain business records including 

audit trail, investigatory, and 

disciplinary files) codifies the 

substantive requirements found in Core 

Principle 10. Accordingly, most, if not 

all, of the costs associated with this rule 

are attributable to statutory mandate. 

Commenters did not mention any 

specific costs with respect to this rule. 

In addition, §§ 37.501 and 37.503 

(establish and enforce rules and provide 

information to the Commission) codify 

requirements that appear in the statute 

and impose no additional costs on SEFs 

or market participants beyond those 

attributable to Congressional mandate. 

Final § 37.502 requires each SEF to 

have rules that allow it to collect 

information or examine books and 

records of participants, but imposes no 

affirmative obligations on SEFs to do so. 

Accordingly, the only direct costs 

associated with § 37.502 are the de 

minimis costs associated with writing 

such rules. 

Final § 37.504 (information sharing 

agreements) codifies and implements 

the Core Principle 5 requirement that a 

SEF have the capacity to carry out 

international information-sharing 

agreements as the Commission may 

require. Accordingly, SEFs will bear the 

cost of responding to Commission 

requests to share information with other 

regulatory organizations, data 

repositories, and third-party data 

reporting services. The cost of 

responding to Commission requests to 

share information will vary depending 

on the frequency and nature of the 

requests. To the extent that it is 

necessary for a SEF to enter into an 

information sharing agreement, the SEF 

may face additional costs such as 

negotiating such agreement. However, 

these costs are unlikely to be significant 

and will only be incurred should a SEF 

determine that it is necessary to enter 

into an information sharing agreement. 

A market participant’s cost to 

maintain records under § 37.404 (ability 

to obtain information) should be 

minimal if, as expected, it is part of its 

normal business practice. As a result, a 

market participant’s additional cost to 

provide records to the SEF, and the 

SEF’s cost to request and process the 

records, will be nominal if, based upon 

the Commission’s experience with 

DCMs, such requests are infrequent and 

targeted to specific and significant 

market situations. 

Additionally, the Commission has 

moved to guidance the requirement 

from proposed § 37.404(b) that a SEF 

require customers engaging in 

intermediated trades to use a 

comprehensive large-trader reporting 

system or be able to demonstrate that 

they can obtain position data from other 

sources. This change should mitigate 

costs by providing SEFs with greater 

flexibility to identify particular methods 

of compliance that suit their markets 

and business structures. 

The Commission is also amending 

§ 37.7 (use of proprietary or personal 

information) to allow SEFs to use 

certain information for business or 

marketing purposes if the person 

consents to the use of such information. 

The costs imposed by this provision are 

limited to the cost a SEF might incur in 

obtaining such person’s consent to use 

its information for the purposes 

described above. The Commission does 

not prescribe the method by which a 

SEF must obtain such consent, which 

provides flexibility to SEFs. 

(c) Benefits 

The Dodd-Frank Act created a robust 

recordkeeping regime in order to reduce 

risks associated with swaps trading, 

increase transparency, and promote 

market integrity. Taken as a whole, the 

recordkeeping and reporting regulations 

adopted in this release will provide a 

SEF and the Commission with access to 

information that will enhance a SEF’s 

ability to oversee its platforms and 

markets and enable the Commission to 

determine whether a SEF is operating in 

compliance with the statute and the 

Commission’s regulations. The 

information-sharing requirement in 

§ 37.504 will also provide cost-savings 

across market regulators by allowing the 

SEF to serve as the focal point for 

collecting certain data instead of each 

regulator duplicating efforts and 

collecting the information 

independently. 

The confirmation requirement in 

§ 37.6(b) will provide market 

participants with the certainty that 

transactions entered into on or pursuant 

to the rules of a SEF will be legally 

enforceable on all parties to the 

transaction. The requirement that a SEF 

provide each counterparty with a 

confirmation at the same time as 

execution will support the policy goal of 

straight-through processing to ensure 

that counterparties do not encounter 

gaps in their records as to their exposure 

level with other counterparties. This 

will also reduce the costs and risks 

involved in resolving disputes between 

counterparties to a trade; given 

dependency across trades, for example, 

if a participant has already unwound a 

position or taken a position via a trade 

under dispute or hedged it, any delays 

or uncertainties in the confirmation will 

result in higher costs from having to 

further unwind such linked trades. 

The prohibition on the use by a SEF 

of proprietary or personal information 

for business purposes without consent 

(§ 37.7) will ensure that information 

provided to a SEF for regulatory 

purposes will not be used to advance 

the commercial interests of the SEF. The 

rule does, however, afford market 

participants the flexibility to consent to 

a SEF’s use of their personal 

information for commercial purposes, if 

they so desire. 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33571 

1103State Street Comment Letter at 5 (Mar. 8, 

2011). 

1104CEA section 5h(f)(2)(B); 7 U.S.C. 

7b–3(f)(2)(B). 

1105 ISDA Discussion Paper at 28 (Nov. 2011). 

(d) Section 15(a) Factors 

(1) Protection of Market Participants and 

the Public 

The recordkeeping and reporting rules 

will protect market participants and the 

public by improving a SEF’s and the 

Commission’s ability to detect 

manipulative or disruptive activity. 

This, in turn, may deter SEFs and 

market participants from engaging in 

practices that may harm other market 

participants and harm the public by 

placing the larger economy at risk. 

Additionally, certification of continued 

compliance with the core principles 

will enable the Commission to ensure 

that performance of SEF functions is 

limited to only those entities that have 

adequately demonstrated an ability to 

comply with the Act and accompanying 

regulations. This will protect the public 

by promoting trading on regulated SEFs 

rather than OTC markets. While SEFs 

and the Commission may at times 

require access to market participants’ 

information for regulatory purposes, the 

rules also protect market participants by 

stipulating that information they 

provide to SEFs for regulatory purposes 

is not used inappropriately to advance 

the commercial interests of the SEF 

without their consent. 

(2) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

The recordkeeping and reporting rules 

promote financial integrity as they 

ensure that the Commission and SEFs 

will have access to information to 

ensure that trading is conducted 

pursuant to the regulatory requirements, 

and that SEFs have sufficient 

documentation to detect, enforce, and 

deter potential rule violations. 

(3) Price Discovery 

The Commission has not identified 

any effects that these rules will have on 

price discovery considerations. 

(4) Sound Risk Management Practices 

Requiring that SEFs maintain audit 

trail, investigatory files, disciplinary, 

and other records will provide the 

Commission with access to data that 

will allow it to assess whether market 

participants are manipulating or 

otherwise disrupting trading in the 

swaps market. The Commission and 

SEFs can then take action to mitigate 

these risks. 

(5) Other Public Interest Considerations 

The Commission has not identified 

any effects that these rules will have on 

other public interest considerations 

other than those enumerated above. 

5. Compliance 

(a) Rule Writing and Enforcement 

Under Core Principle 2, a SEF must 

implement a number of rule-writing and 

enforcement-related provisions. Among 

other requirements, a SEF must: (1) 

Establish a rulebook that addresses 

critical areas of market protection 

(§ 37.201), including rules prohibiting 

certain abusive trading practices 

(§ 37.203(a)), rules ensuring impartial 

access to the SEF’s trading system 

(§ 37.202), and rules governing internal 

disciplinary procedures (§ 37.206); and 

(2) have resources for effective rule 

enforcement, including sufficient 

compliance staff and resources 

(§ 37.203(c)), authority to collect 

information and examine books and 

records (§ 37.203(b)), and procedures for 

conducting investigations into possible 

rule violations (§ 37.203(f)). The 

Commission is also clarifying that a SEF 

must establish and enforce rules for its 

employees that are reasonably designed 

to prevent violations of the Act and the 

rules of the Commission. 

Additionally, § 37.204 provides SEFs 

with the option to choose to contract 

with a regulatory service provider for 

the provision of services to assist in 

complying with the CEA and 

Commission regulations, provided that 

the SEF supervise the regulatory service 

provider and retain exclusive authority 

with respect to all substantive decisions 

made by the regulatory service provider 

on the SEF’s behalf. 

(1) Costs 

The costs associated with the rulewriting and enforcement provisions 

outlined above will consist mostly of 

one-time administrative outlays such as 

wages paid to attorneys and other 

compliance personnel for time spent 

drafting, reviewing, implementing, and 

updating rules. While new entities 

seeking to become SEFs would need to 

develop a rulebook, existing entities that 

already have written rules would only 

incur the incremental expense of 

updating them. 

SEFs will also incur the initial and 

recurring costs associated with investing 

in the resources and staff necessary to 

provide effective rule enforcement. A 

SEF must have sufficient staff and 

resources, including resources to collect 

information and examine books and 

records, as well as automated systems to 

assist the compliance staff in carrying 

out the SEF’s self-regulatory 

responsibilities. One commenter stated 

that these requirements are overly 

burdensome, but did not provide any 

data in support.1103

The Commission believes that having 

a minimum level of resources in place 

for rule enforcement purposes is a 

critical element of a sufficient 

compliance program, and is necessary 

pursuant to the statutory mandate of 

Core Principle 2, which requires SEFs to 

have the capacity to detect, investigate, 

and enforce its rules.1104 SEFs may be 

able to reduce these costs by contracting 

with a regulatory service provider. In 

addition, the Commission reduced the 

costs of the final rules by eliminating 

the requirement in proposed 

§ 37.203(c)(2) that a SEF monitor the 

size and workload of its compliance 

staff on an ongoing basis and, on at least 

an annual basis, formally evaluate the 

need to increase its compliance 

resources and staff. The Commission 

believes that the final rulemaking 

provides greater flexibility to SEFs in 

determining their approach to 

monitoring their compliance resources. 

With respect to the use of a thirdparty regulatory service provider as 

permitted under § 37.204 (Regulatory 

services provided by a third party), two 

commenters in follow-up conversations 

indicated to the Commission staff that 

they each may contract (or have already 

contracted) with a regulatory service 

provider to perform various compliance 

functions at a cost of between $540,000 

and $720,000 per year. This estimate 

represents the total cost of contracting a 

SEF’s compliance functions to a 

regulatory service provider. 

Additionally, ISDA estimates an 

assessment on SEFs of $45,000 per year 

to contract with a regulatory service 

provider and $635,000 per year in dues 

for membership to the regulatory service 

provider.1105 Section 37.204 is intended 

to be a cost-saving provision that 

mitigates the burden placed on SEFs by 

the rule enforcement program and, as 

stated by one commenter, this rule may 

reduce a SEF’s overall costs by at least 

thirty percent. 

SEFs that choose to contract with a 

regulatory service provider will need to 

hire sufficient compliance staff to 

supervise the quality and effectiveness 

of the services provided by the 

regulatory service provider, including 

the cost of holding regular meetings 

with the regulatory service provider to 

review and assess the adequacy of the 

services provided. SEFs will also incur 

the cost of documenting any instances 

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33572 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

1106See, e.g., ‘‘NFA Signs Agreement with ICAP 

to provide Regulatory Services to ICAP’s Swap 

Execution Facility’’ (Mar. 20, 2012), available at 

http://www.nfa.futures.org/NFA-regulation/

regulationNewsRel.asp?ArticleID=3996. 

1107CME Comment Letter at 35 (Feb. 22, 2011). 

1108The Commission is renumbering proposed 

§ 37.206(o) to § 37.206(f). The Commission is also 

retitling this section as ‘‘Warning letters.’’ 

1109 Deleted provisions include proposed 

§ 37.203(c)(2) (ongoing monitoring of compliance 

staff and resources), the second sentence of 

proposed § 37.206(a) (annual review of enforcement 

staff), the majority of proposed § 37.206(c) (timely 

review of investigation reports), the last sentence of 

proposed § 37.206(h) (denial of charges and right to 

a hearing), and proposed § 37.206(j)(1)(vii) (cost of 

transcribing the record to be borne by the 

respondent). 

1110See second part of proposed § 37.206(a) 

(enforcement staff), proposed § 37.206(d) (notice of 

charges), proposed § 37.206(e) (right to 

representation), proposed § 37.206(f) (answer to 

charges), proposed § 37.206(g) (admission or failure 

to deny charges), proposed § 37.206(h) (denial of 

charges and right to hearing), proposed § 37.206(i) 

(settlement of offers), the majority of proposed 

§ 37.206(j) (hearings), proposed § 37.206(l) (right to 

appeal), proposed § 37.206(m) (final decisions), 

proposed § 37.206(o) (summary fines for violations 

of rules regarding timely submission of records), 

and proposed § 37.206(p) (emergency disciplinary 

actions). 

in which their decisions differ from 

those recommended by their regulatory 

service provider. 

(2) Benefits 

Establishing a rulebook and an 

effective rule enforcement program will 

ensure that SEFs have specific and 

transparent procedures for addressing 

critical areas of market protection, and 

that SEFs will have the resources 

needed to implement those procedures. 

In particular, the requirements that a 

SEF offer impartial access, provide a fair 

and competitive market free of abusive 

trading practices, have sufficient 

resources to oversee and monitor the 

market, promptly investigate rule 

violations, establish disciplinary 

procedures that will deter abuses, and 

provide respondents with adequate 

safeguards will foster greater confidence 

that SEFs will provide a fair and 

competitive market free of trading 

abuses. This confidence is likely to 

result in increased trading of swaps on 

SEFs, improving liquidity and resulting 

in more competitive quotes. 

According to conversations with 

commenters, SEFs that contract-out 

certain regulatory functions to a 

regulatory service provider are likely to 

realize significant cost savings from 

economies of scale—one commenter 

stated that contracting with a regulatory 

service provider would reduce a SEF’s 

overall costs by at least thirty percent. 

According to NFA’s Web site, it appears 

that many potential SEFs have already 

contracted with, or are in the process of 

contracting with, a regulatory service 

provider.1106 Additionally, the rule 

governing the use of regulatory service 

providers ensures that SEFs will have 

sufficient staff to adequately supervise 

their regulatory service providers. By 

requiring that SEFs oversee the services 

provided by the regulatory service 

provider, the rule will likely result in 

cost savings to the SEF, as the failure of 

a service provider to adequately fulfill 

its duties may result in costs to SEFs for 

not meeting compliance obligations. 

(3) Consideration of Alternatives 

As referenced above, one of a SEF’s 

rule-writing obligations is to develop 

rules governing internal disciplinary 

procedures, including rules governing 

disciplinary panels. CME stated that the 

Commission should not provide a 

prescriptive approach to disciplinary 

panels in proposed § 37.206(b) by 

requiring a ‘‘hearing panel’’ to be 

separate from a ‘‘review panel.’’ 1107 In 

response, the Commission removed the 

proposed requirement to establish 

separate hearing and review panels, 

instead allowing a SEF to establish one 

or more disciplinary panels, which will, 

among other things, issue notices of 

charges, conduct hearings, render 

written decisions, and impose 

disciplinary sanctions. The final rule 

will continue to achieve the goals of the 

proposed regulations by deterring 

violations of SEF rules, preventing 

recidivist behavior, and protecting 

respondents and customers harmed by 

violations of exchange rules. The 

procedures will achieve these goals 

while also providing SEFs with greater 

flexibility to structure their disciplinary 

bodies in a manner that best suits their 

business models and markets. The final 

rule is unlikely to impose additional 

personnel expenditures on SEFs, as the 

Commission anticipates that SEFs, like 

DCMs, will rely upon unpaid 

disciplinary panel members. The 

Commission anticipates that any actual 

costs associated with the disciplinary 

panel will be limited to de minimis 

administrative expenses for convening 

hearings over which the panel presides, 

such as postage, facility rentals, and 

printing. 

The Commission notes that it has 

provided additional flexibility to SEFs 

by delaying the effective date of 

proposed § 37.206(o) to 1 year from the 

effective date of the SEF rules.1108

Where a rule violation is found to have 

occurred, this provision limits the 

number of warning letters to one per 

rolling twelve month period for the 

same violation. The delay in the 

effective date of this provision is likely 

to mitigate costs for persons and entities 

so that they may adapt to the new SEF 

regime. 

As recommended by commenters, the 

Commission has also adopted costmitigating alternatives that will provide 

SEFs with additional flexibility and 

discretion to implement disciplinary 

and other enforcement programs in the 

manner they find most suited to their 

market. In particular, the Commission 

has: eliminated the requirement that an 

investigation report include the member 

or market participant’s disciplinary 

history at the SEF; removed the 

requirement that SEFs include a copy of 

a warning letter in an investigation 

report; amended the standard for 

commencing an investigation from a 

‘‘possible basis’’ to a ‘‘reasonable basis’’ 

that a violation may have occurred or 

will occur; and deleted several 

provisions.1109

The Commission has also moved part 

or all of several provisions to 

guidance.1110 By moving these 

provisions to guidance, entities will 

have the flexibility to tailor compliance 

programs to varying business models 

and trading platforms as well as 

unanticipated technological innovation 

or behavioral changes. While the 

Commission’s pairing of guidance and 

regulations provides for a broad and 

flexible regulatory framework, it also 

promotes uniformity of safe and sound 

operation such that market participants 

and the public receive comparable 

levels of protection irrespective of the 

particular SEF on which they transact. 

(4) Section 15(a) Factors (Rule Writing 

and Enforcement) 

(i) Protection of Market Participants and 

the Public 

Together, the rule-writing and 

enforcement provisions described above 

ensure that SEFs adopt and enforce 

operational rules that protect market 

participants and the public through 

orderly SEF-traded markets that are 

better protected from manipulative and 

disruptive conduct than pre-Dodd Frank 

OTC markets. 

Rules prohibiting abusive trade 

practices such as wash trades and frontrunning are intended to deter such 

disruptive practices, and will protect 

market participants transacting on the 

SEF, as well as the general public, who 

may rely on prices derived from the 

market and who may be customers or 

shareholders of market participants. 

The requirement that a SEF have the 

capacity to detect and investigate rule 

violations, including adequate 

compliance staff and resources to 

conduct automated trade surveillance 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33573 

1111There are no costs associated with 

§ 37.1501(a), which simply defines ‘‘board of 

directors.’’ 

1112 ICE Comment Letter at 6–7 (Mar. 8, 2011); 

WMBAA Comment Letter at 6–7 (Mar. 8, 2011); 

MarketAxess Comment Letter at 27 (Mar. 8, 2011); 

CME Comment Letter at 12–13 (Mar. 8, 2011). 

1113This estimate is derived from the 2010 

edition of SIFMA’s annual report on Management 

and Professional Earnings in the Securities Industry 

(hereinafter ‘‘SIFMA Report’’). This figure reflects 

the median total annual compensation (including 

base salary and bonus) for a CCO in the securities 

industry. The Commission notes that this estimate 

only includes the cost of hiring a CCO. Although 

not required by statute or rule, SEFs may also 

choose to hire additional staff at additional cost in 

order to support the CCO. 

1114Tradeweb Comment Letter at 12 (Mar. 8, 

2011); WMBAA Comment Letter II at 7 (Mar. 8, 

2011); MarketAxess Comment Letter at 26 (Mar. 8, 

2011). 

and real-time monitoring (or contract 

with a regulatory service provider that 

has the capacity to perform these 

functions on its behalf while 

maintaining ultimate responsibility), 

will improve a SEF’s ability to discover, 

sanction, and prevent violations and 

trading practices that could harm 

market participants and, indirectly, the 

public. 

SEF-initiated investigations are a 

chief tool in protecting market 

participants and the public because they 

provide the first opportunity to respond 

to rule violations. Rules allowing the 

SEF to obtain information and inspect 

books and records will not only deter 

potential abusive trading practices, but 

will also enable the SEF to detect any 

manipulative or fraudulent activity 

quickly and efficiently. Prompt and 

thorough investigations are essential to 

detecting and remedying violations and 

ensuring that the violations do not harm 

market participants, result in price 

distortions, or contribute to systemic 

risks that can harm the economy. 

In the event of demonstrated customer 

harm, restitution damages are generally 

required to make that customer whole 

again. Meaningful sanctions will serve 

as a general deterrent by discouraging 

others from engaging in violative 

conduct. 

Impartial access requirements protect 

market participants from discriminatory 

treatment by prohibiting similarly 

situated market participants from 

receiving different access terms and fee 

structures. 

The requirement that SEFs establish 

and enforce rules for its employees will 

protect market participants and the 

public by helping to ensure that 

employees operate in conformance with 

the Act and the rules of the 

Commission. 

(ii) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

The requirement that a SEF have the 

capacity to detect and mitigate rule and 

trade practice violations, including the 

ability to collect relevant information 

and examine books and records, and the 

requirement to establish and enforce 

rules for its employees will increase 

confidence in the financial integrity of 

the market by confirming to market 

participants that their orders and trades 

are handled pursuant to the posted rules 

of the SEF. 

In addition, impartial access 

requirements will eliminate a potential 

impediment to participation, resulting 

in a more competitive market. At a 

minimum, as required by section 2(e) of 

the Act, market participants must meet 

the definition of an ECP, which ensures 

that only those participants with a 

sufficient level of sophistication and 

financial resources are able to 

participate. Similarly, requiring a SEF to 

maintain minimum level of enforcement 

resources will promote financial 

integrity by ensuring that a SEF has 

sufficient resources to investigate 

wrongdoing and make aggrieved market 

participants whole again. Moreover, 

markets where wrongdoing is detected 

and deterred will operate more 

efficiently. 

(iii) Price Discovery 

Many of the same rule provisions 

previously discussed that serve to 

increase efficiency, liquidity, and 

competitiveness will, by extension, 

improve price discovery, because the 

combination of increases in liquidity 

and competition will help create a 

marketplace in which the forces of 

supply and demand reflect more 

accurate pricing. 

Timely investigations will increase 

the likelihood that manipulation is 

detected early-on and quickly remedied 

so that price discovery is not impaired. 

Additionally, a system of meaningful 

sanctions will deter disruptive and 

manipulative trade practices, providing 

a stable and competitive trading 

environment more likely to foster price 

discovery. 

(iv) Sound Risk Management Practices 

The requirement that SEF participants 

confirm to the SEF that they meet the 

definition of an ECP helps assure the 

market that participants in SEF-traded 

markets have the skill, knowledge, and/ 

or financial resources necessary to enter 

into financially-sound transactions and 

understand sound risk management 

practices. 

(v) Other Public Interest Considerations 

The Commission has not identified 

any effects that these rules will have on 

other public interest considerations 

other than those enumerated above. 

(b) Chief Compliance Officer 

Section 37.1501 implements Core 

Principle 15 and requires each SEF to 

designate an individual to serve as Chief 

Compliance Officer (‘‘CCO’’) and to 

provide its CCO with the authority and 

resources to develop and enforce such 

policies and procedures as are necessary 

for the CCO to fulfill its statutory and 

regulatory duties.1111 While the 

proposed rule prohibited the CCO from 

serving as a member of the SEF’s legal 

department or as the SEF’s general 

counsel, the Commission has eliminated 

this restriction from the final rule. 

The final rule also outlines the 

procedures for oversight authority over 

the CCO and for appointing and 

removing the CCO. The CCO must meet 

with the board of directors at least 

annually and the Regulatory Oversight 

Committee (‘‘ROC’’) at least quarterly. 

The CCO must also prepare an annual 

compliance report containing a detailed 

account of the SEF’s compliance with 

the CEA and Commission regulations, as 

well as a detailed account of the SEF’s 

self-regulatory program, and submit it to 

the SEF’s board of directors for review 

and to the Commission. SEFs must 

maintain records pertaining to, among 

other things, code of ethics and conflict 

of interest policies, copies of all 

materials created in furtherance of the 

CCO’s duties, and any records relevant 

to the SEF’s annual compliance report. 

(1) Costs 

Several commenters stated that the 

proposed requirement that the CCO may 

not be a member of the SEF’s legal 

department and may not serve as its 

general counsel is prescriptive and 

unnecessary.1112 In response to these 

comments, the Commission has 

eliminated the proposed prohibition on 

who may serve as CCO. Accordingly, a 

SEF may use its general counsel or a 

member of its legal department to serve 

as CCO. This change to the final rule 

should significantly reduce the expense 

imposed by the proposed rule, which 

would have necessitated the hiring of an 

individual specifically to serve as CCO 

at an estimated annual cost of 

$181,394.1113 The cost of assigning the 

role of CCO to an existing employee will 

be significantly less. 

Several commenters requested that 

the Commission grant SEFs more 

flexibility in determining how a CCO is 

appointed, compensated, supervised, 

and removed.1114 In response to these 

comments, the Commission has 

removed the requirement in proposed 

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33574 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

1115Tradeweb Comment Letter at 6–7 (Jun. 3, 

2011); WMBAA Comment Letter II at 5–6 (Mar. 8, 

2011); MarketAxess Comment Letter at 26 (Mar. 8, 

2011); Tradeweb Comment Letter at 12 (Mar. 8, 

2011); CME Comment Letter at 4 (Feb. 7, 2011). 

1116FXall Comment Letter at 16 (Mar. 8, 2011). 

1117 Id. at 17. 

1118CME Comment Letter at 7 (Feb. 7, 2011). 

1119See discussion above under § 37.1501(e)— 

Annual Compliance Report Prepared by Chief 

Compliance Officer in the preamble. 

§ 37.1501(c)(1) that a CCO’s 

appointment and compensation requires 

a majority vote of directors, as well as 

the requirements in proposed 

§ 37.1501(c)(3) that the SEF explain to 

the Commission the reason for the 

CCO’s removal upon departure and that 

the SEF immediately appoint an interim 

CCO and permanent CCO as soon as 

reasonably practicable thereafter. The 

Commission notes that these revisions 

will provide the board of directors or 

senior officer of the SEF with a degree 

of flexibility to appoint, compensate, 

and remove the CCO in the manner that 

the SEF deems most appropriate. 

Several commenters also stated that 

the proposed requirement that CCOs 

ensure ‘‘compliance with the Act and 

Commission regulations’’ is 

impracticable and overly burdensome, 

as one individual cannot ensure 

compliance of an entire 

organization.1115 In response, the 

Commission is modifying 

§ 37.1501(d)(4) to state that one of the 

CCO’s duties shall include ‘‘taking 

reasonable steps to ensure compliance 

with the Act and Commission 

regulations.’’ This modification should 

also reduce potential costs resulting 

from this rule without diminishing its 

benefits. 

(2) Benefits 

The rule ensures that each SEF has a 

central figure responsible for overseeing 

major areas of compliance with the CEA 

and Commission regulations. The 

annual compliance report will enable a 

SEF and the Commission to evaluate the 

effectiveness of the SEF’s self-regulatory 

programs and compliance with core 

principles, and to take remedial actions 

and make recommendations to improve 

the SEF’s self-regulatory programs in 

order to ensure that the SEF remains in 

compliance with the core principles. 

(3) Consideration of Alternatives 

With respect to the annual 

compliance report requirement in 

proposed § 37.1501(e), FXall stated that 

compiling the required information and 

preparing the report in a timely manner 

annually will consume considerable 

resources.1116 FXall proposed an 

alternative report that would request 

fewer pieces of information.1117

Similarly, CME stated that the 

Commission should specify key areas 

that should be discussed in the annual 

report, rather than requiring the report 

to describe in detail the registrant’s 

compliance with respect to each of the 

numerous components of the CEA and 

Commission regulations.1118

After weighing the comments and 

alternative proposals from FXall and 

CME, the Commission has determined 

to adopt the rules as proposed, subject 

to certain revisions detailed in the 

preamble.1119 The Commission declines 

to adopt commenters’ proposed 

alternatives because without the 

detailed information required by statute 

in the annual compliance report 

(including a self-assessment of policies 

and procedures designed to ensure 

compliance with each core principle, a 

discussion of areas for improvement, 

and a description of the SEF’s selfregulatory program’s staffing, structure, 

and cataloguing of disciplinary actions), 

the Commission would not have access 

to the information it needs to ensure 

that each SEF is in compliance with the 

CEA and Commission regulations. 

(4) Section 15(a) Factors (Chief 

Compliance Officer) 

(i) Protection of Market Participants and 

the Public 

The requirements that a CCO oversee 

the SEF’s compliance with the Act and 

Commission regulations and supervise 

the SEF’s self-regulatory program will 

ensure that the SEF monitors 

compliance with key provisions of the 

CEA designed to protect market 

participants and the public (including 

provisions governing trade practice and 

market surveillance, real-time market 

monitoring, and financial reporting). To 

the extent that the Commission’s 

regulations impose more specific or 

supplemental requirements when 

compared to those requirements 

explicitly imposed by section 5h(f)(15) 

of the CEA, those incremental costs are 

not likely to be significant. While it is 

possible that those incremental costs 

will be passed along to market 

participants, the size of those costs is 

likely to be negligible. 

The Commission believes the CCO 

rules will protect market participants 

and the public by promoting 

compliance with the core principles and 

Commission regulations through the 

designation and effective functioning of 

the CCO, and the establishment of a 

framework for preparation of a 

meaningful annual review of a SEF’s 

compliance program. The annual 

compliance report will allow the SEF 

and the Commission to periodically 

assess, and evaluate where necessary, 

the SEF’s ability to comply with the 

core principles. Upon review of the 

compliance report, the SEF and the 

Commission will be better able to 

determine whether the SEF has 

appropriate programs in place to protect 

market participants and the public from 

market abuses. 

Maintaining records as required under 

§ 37.1501 regarding a CCO’s efforts 

toward ensuring that the SEF complies 

with core principles provides a check 

against what is reported in the annual 

compliance report. Access to these 

records will assist the Commission in its 

determination of whether a SEF’s selfregulatory program complies with the 

core principles and the Commission’s 

regulations. If the Commission 

determines the self-regulatory program 

is not sufficient, the Commission will be 

able to use information required by the 

rule to take steps to remedy the 

shortcomings and to prevent disruptions 

that could harm market participants and 

the public. 

(ii) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

An effective CCO will implement 

measures that enhance the stability and 

efficiency of SEFs. Reliable and 

financially-sound SEFs are essential for 

the stability of the derivatives markets 

they serve. The CCO’s oversight of selfregulatory programs and the annual 

compliance report will provide both the 

SEF and the Commission with an 

opportunity to assess the effectiveness 

of the SEF’s self-regulatory programs 

and will help to detect and deter rule 

violations, increasing participation and 

competition in the markets. 

Likewise, compliance reports will 

allow the Commission to review the 

effectiveness of and order changes to 

self-regulatory programs, thus enabling 

the market to function more efficiently 

while promoting confidence and 

attracting competition. A board that 

makes proactive changes to a SEF’s selfregulatory programs based on the CCO’s 

compliance report will build confidence 

in the market and increase competition. 

(iii) Price Discovery 

The Commission has not identified 

any effects that this rule will have on 

price discovery. 

(iv) Sound Risk Management Policies 

The CCO rules and the required 

annual compliance report will enhance 

a SEF’s risk management policies by 

enhancing the standards for a SEF’s 

compliance program. This in turn will 

emphasize risk management compliance 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33575 

1120The Commission received no comments 

discussing the specific costs or benefits of § 37.406, 

which requires SEFs to make audit trail data 

available to the Commission and is an explicit 

requirement of the statute. 

1121The Commission notes, as described in the 

preamble, that a SEF that elects to use the services 

of a regulatory service provider must retain certain 

decision-making authority and cannot outsource 

this authority to the regulatory service provider. 

See, e.g., § 37.204(c)—Regulatory Decisions 

Required from the Swap Execution Facility in the 

preamble. 

1122For example, SEFs are required to comply 

with a unified set of audit trail requirements for all 

methods of execution. The Commission notes that 

a SEF, for example, that utilizes the telephone as 

a means of interstate commerce in providing the 

execution methods in § 37.9(a)(2)(i)(A) or (B) may 

comply with certain of the audit trail requirements 

by recording all such communications that relate to 

or result in swap transactions. Such recordings 

must allow for reconstruction of all relevant 

communications between the SEF and its customers 

or involving SEF employees. While it is common 

industry practice to make and retain electronic 

time-stamped recordings of conversations, SEFs 

may incur costs to upgrade their recording systems 

to ensure that they comply with all of the audit trail 

requirements. 

1123CME Comment Letter at 20 (Feb. 22, 2011). 

1124 Id. at 19–20. 

1125Tradeweb Comment Letter at 6 (Jun. 3, 2011); 

MarketAxess Comment Letter at 22 (Mar. 8, 2011). 

because of its significance to the overall 

purpose and functioning of the SEF. 

Compliance with the SEF core 

principles and related regulations 

encompasses, among other things, 

procedures for ensuring the financial 

integrity of swaps entered on or through 

the facilities of the SEF, including the 

clearance and settlement of swaps, 

determination of resource adequacy, 

and system safeguards to establish and 

maintain a program of risk analysis and 

oversight. It is the responsibility of the 

CCO to ensure that the SEF is compliant 

with the core principles and the 

regulations thereunder, and is otherwise 

engaged in appropriate risk management 

activities in accordance with the SEF’s 

own rules, policies, and procedures. 

(v) Other Public Interest Considerations 

The Commission has not identified 

any effects that these rules will have on 

other public interest considerations 

other than those enumerated above. 

6. Monitoring and Surveillance 

Core Principle 2 requires, among 

other things, that each SEF establish and 

enforce trading, trade processing, and 

participation rules that will deter 

abuses, and have the capacity to detect, 

investigate, and enforce those rules, 

including means to provide market 

participants with impartial access to the 

market and to capture information that 

may be used in establishing whether 

rule violations have occurred. 

Additionally, Core Principle 4, in part, 

requires each SEF to monitor trading in 

swaps to prevent manipulation and 

price distortion through surveillance, 

including methods of conducting realtime monitoring of trading and 

comprehensive and accurate trade 

reconstructions. 

(a) Monitoring of Trading 

The rules that implement Core 

Principles 2 and 4 will require a SEF to, 

among other things: (1) Maintain an 

automated trade surveillance system 

(§ 37.203(d)); (2) conduct real-time 

market monitoring of all trading activity 

on its platform and have the authority 

to cancel trades and adjust trade prices 

when necessary (§ 37.203(e)); (3) 

maintain an acceptable audit trail 

program that enables the SEF to identify 

entities that are routinely non-compliant 

and to levy meaningful sanctions 

(§ 37.205); 1120 (4) monitor trading in 

real-time and accurately reconstruct 

trading activity in order to detect 

manipulation, price distortions, and 

other disruptions (§ 37.401); (5) and 

establish risk control mechanisms 

(including pauses and halts) to prevent 

and reduce the potential risk of market 

disruptions (§ 37.405). 

(1) Costs 

As discussed above, potential SEFs 

are likely to outsource these obligations 

to a regulatory service provider at 

significantly less cost than performing 

them in-house.1121 Accordingly, the 

ongoing costs associated with these 

rules would already be included in the 

total annual cost of contracting with a 

regulatory service provider (plus the 

cost of overseeing the service provider’s 

compliance). 

Should a potential SEF that is a new 

entity choose to develop its own 

automated trade surveillance, real-time 

market monitoring, and audit trail 

systems, it is likely to incur the costs of 

developing and maintaining these 

systems, as well as the cost of hiring and 

maintaining adequate staff to administer 

them. The staff necessary to carry out a 

SEF’s obligations under these rules 

would likely include analysts, 

investigators, and systems and/or IT 

specialists. However, existing entities 

may already receive the requisite data, 

and may also have some infrastructure 

in place to perform automated trade 

surveillance and real-time market 

monitoring. Accordingly, the 

incremental cost for existing entities 

would be limited to investing in 

enhancements to existing electronic 

systems to ensure that data is captured 

in compliance with the rules and that 

the systems themselves comply with the 

rules.1122 The Commission notes that a 

SEF may use a unified monitoring 

system to jointly satisfy the 

requirements of § 37.401 (monitoring of 

trading and trade processing) and 

§ 37.205 (audit trail). 

Additionally, in response to 

comments that the standards set forth in 

the proposed requirements for real-time 

market monitoring are unreasonably 

high,1123 the Commission is modifying 

the final rule to require a SEF to 

conduct real-time market monitoring 

designed to ‘‘identify’’ disorderly 

trading, instead of to ‘‘ensure’’ orderly 

trading. The Commission believes that 

requiring SEFs to identify disorderly 

trading when it occurs, rather than to 

ensure orderly trading at all times, will 

likely mitigate the overall burden of the 

rule. Furthermore, in response to CME’s 

comment,1124 the Commission is 

deleting the word ‘‘investigating’’ from 

proposed § 37.203(d), thus clarifying 

that a SEF’s automated trade 

surveillance system will not be expected 

to conduct the actual investigation of 

potential trade practice violations. This 

deletion should further reduce costs for 

SEFs. 

Tradeweb and MarketAxess 

commented that annual audits for 

member and market participant 

compliance with the audit trail 

requirements pursuant to § 37.205(c)(1) 

are burdensome and unwarranted.1125

In the Commission staff’s follow-up 

conversation regarding costs, one 

commenter asserted that this 

requirement will cost SEFs at least 

$300,000 annually. 

To mitigate the costs associated with 

this provision, the Commission is 

modifying the language in final 

§ 37.205(c) so that it applies only to 

members and persons and firms subject 

to the SEF’s recordkeeping rules, rather 

than to members and ‘‘market 

participants.’’ With this change, the 

Commission limits the number of 

entities that a SEF must audit, which 

should reduce the cost noted above 

without any meaningful reduction in 

benefits because auditing those market 

participants subject to recordkeeping 

rules will ensure complete coverage of 

all activity pertinent to transactions on 

any given SEF. 

Finally, SEFs may also incur the onetime cost of programming risk controls 

such as pauses and halts, as well as ongoing costs to maintain and adjust such 

controls. For some SEFs, the costs of 

adding pause and halt functionality to 

swap contracts should be reduced since 

much of that technology is already 

commercially available and would not 

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33576 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

1126 In a separate Dodd-Frank rulemaking, DCMs 

are now required to have the same types of risk 

controls. See Core Principles and Other 

Requirements for Designated Contract Markets, 77 

FR 36612 (Jun. 19, 2012). 

1127See ‘‘Recommendations on Pre-Trade 

Practices for Trading Firms, Clearing Firms and 

Exchanges involved in Direct Market Access,’’ PreTrade Functionality Subcommittee of the CFTC 

Technology Advisory Committee (‘‘TAC 

Subcommittee Recommendations’’), at 4 (Mar. 1, 

2011), available at http://www.cftc.gov/ucm/ 

groups/public/@swaps/documents/dfsubmission/ 

tacpresentation030111_ptfs2.pdf. The Commission 

notes that the subcommittee report was submitted 

to the Technology Advisory Committee and made 

available for public comment, but no final action 

has been taken by the full committee. 

1128See TAC Subcommittee Recommendations at 

4 (Mar. 1, 2011). 

1129See, e.g., ICE Comment Letter at 5 (Mar. 8, 

2011); Tradeweb Comment Letter at 11 (Mar. 8, 

2011); CME Comment Letter at 27 (Feb. 22, 2011). 

1130CME Comment Letter at 26 (Feb. 22, 2011). 

1131The guidance provides that a SEF with a 

swap that is linked to, or a substitute for, other 

products, either on its market or on other trading 

venues, must, to the extent practicable, coordinate 

its risk controls with any similar controls placed on 

those other products. If a SEF’s swap is based on 

the level of an equity index, such risk controls 

must, to the extent practicable, be coordinated with 

any similar controls placed on national security 

exchanges. See guidance to Core Principle 4 in 

appendix B to part 37. 

house.1126 As noted in the Pre-Trade 

Functionality Subcommittee of the 

CFTC Technology Advisory Committee 

report, the costs would largely be borne 

by the exchanges and would center 

around intellectual property, as many 

exchanges develop, own, and manage 

their own technology.1127 However, the 

costs associated with implementing risk 

controls were not described in detail in 

the Pre-Trade Functionality 

Subcommittee report and will likely 

vary greatly from one SEF to another 

depending on the type of risk controls 

that will be implemented and the nature 

of the SEF’s trading platform. The 

Commission received no comments 

stating that risk controls cannot be 

implemented in a cost-effective manner 

using commercially available 

technology. As further noted in the PreTrade Functionality Subcommittee 

report, ‘‘[s]ome measure of 

standardization of pre-trade risk 

controls at the exchange level is the 

cheapest, most effective and most robust 

path to addressing the Commission’s 

concern [for preserving market 

integrity].’’ 1128

The Commission notes that while it is 

requiring pauses and halts in the rule, 

it is also enumerating in guidance other 

types of automated risk controls that 

may be implemented by SEFs in order 

to give SEFs greater discretion to select 

among the enumerated risk controls or 

to create new risk controls. The 

Commission believes that this 

combination of rules and guidance will 

facilitate orderly markets while 

maintaining a flexible environment that 

facilitates cost-effective innovation and 

development. 

(2) Benefits 

The automated trade surveillance 

system, real-time monitoring, audit-trail, 

and trade reconstruction requirements 

will promote orderly trading and will 

ensure that SEFs have the capability to 

promptly identify and correct market or 

system anomalies that could harm 

market participants and the public. 

These tools will improve SEF 

compliance staff’s ability to record, 

recover, sort, and query voluminous 

amounts of data in order to better detect 

potential rule violations and abusive 

trading practices that harm market 

participants and market integrity. By 

having the tools and data to identify 

these potential rule violations, a SEF 

can quickly respond, mitigating their 

effects and helping to prevent them 

from generating systemic risk or other 

severe problems. SEFs will also have the 

tools and information needed to 

prosecute rule violations supported by 

evidence from audit trail data and order 

and trade information. These tools will 

not only allow SEFs to more effectively 

respond to rule violations and trading 

abuses, but will also deter market 

participants from engaging in such 

conduct in the first place since market 

participants will be aware that rule 

violations are likely to be detected. 

While the provisions described above 

will increase the likelihood that SEFs 

will promptly identify market or system 

anomalies, SEFs must also have systems 

in place to respond to such anomalies 

after they occur. Risk controls such as 

automated trading pauses and halts can, 

among other things, allow time for 

market participants to analyze the 

market impact of new information that 

may have caused a sudden market 

move, allow new orders to come into a 

market that has moved dramatically, 

and allow traders to assess and secure 

their capital needs in the face of 

potential margin calls. Pauses and halts 

are intended to apply in the event of 

extraordinary price movements that may 

trigger or propagate systemic 

disruptions. Accordingly, a SEF’s ability 

to pause or halt trading in certain 

circumstances and, importantly, to restart trading through the appropriate reopening procedures, will allow SEFs to 

mitigate the propagation of shocks that 

are of a systemic nature. 

(3) Consideration of Alternatives 

While commenters requested 

additional flexibility to determine the 

risk controls that should be 

implemented within their market,1129

the Commission views pauses and halts 

as effective risk management tools that 

must be implemented to facilitate 

orderly markets. Moreover, in 

recognition that such risk controls 

should be adapted to the unique 

characteristics of the markets to which 

they apply, and that any controls should 

consider the balance between avoiding 

a market disruption while facilitating a 

market’s price discovery function, the 

Commission enumerated the other types 

of risk controls in guidance. 

Accordingly, a SEF will have discretion 

to select and create risk controls to meet 

the unique characteristics of its market 

and cost structure. 

Finally, in response to concerns about 

a lack of flexibility in the proposed 

requirement to coordinate risk controls 

among other markets or exchanges,1130

the Commission is moving the language 

in proposed § 37.405 to guidance.1131

The combination of rules and guidance 

pertaining to risk controls will ensure 

that, at a minimum, SEFs implement 

pauses and halts, while also granting 

SEFs the discretion to coordinate and 

adopt additional risk controls in a 

manner they find most cost effective 

and appropriate for their markets. 

(4) Section 15(a) Factors (Monitoring of 

Trading) 

(i) Protection of Market Participants and 

the Public 

These rules will help ensure fair and 

equitable markets that are protected 

from abusive trading practices or 

manipulative conditions, and will 

ensure that rule violations and market 

disruptions that could harm market 

participants and the public may be 

prevented or detected, reconstructed, 

investigated, and prosecuted. The 

absence of these regulations would 

result in an increased potential for 

violations to go undetected and for 

market disruptions to create distorted 

prices or systemic risks that could harm 

the economy and the public. These 

requirements will strengthen SEFs’ 

oversight of their trading platforms, 

increase the likelihood of early 

detection and prompt responses to rule 

violations and market disruptions, and 

result in stronger protection of market 

participants and the general public from 

rule violations, trading abuses, and 

other market disruptions that could 

harm market participants and, directly 

or indirectly, the public and the 

economy as a whole. 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33577 

1132SEFs must make this demonstration by 

providing the information set forth in appendix C 

to part 38. See Core Principles and Other 

Requirements for Designated Contract Markets, 77 

FR at 36722. 

1133Core Principle 6 requires that SEFs, for each 

contract and as necessary and appropriate, adopt 

position limitation or position accountability, and 

that, for any contract that is subject to a position 

limitation established by the Commission pursuant 

to CEA section 4a(a), SEFs must set the position 

limit at a level not higher than the position 

limitation established by the Commission. See 

Position Limits for Derivatives, 76 FR 4752 

(proposed Jan. 26, 2011). 

1134Proposed § 37.402(a)(2) is now final 

§ 37.402(b). 

(ii) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

These rules ensure that violations and 

market anomalies are detected and 

promptly addressed and do not generate 

systemic risk or other problems that 

could interfere with efficient and 

competitive markets. The requirements 

also help ensure that market prices are 

not distorted by prohibited activities. 

The rules strengthen market confidence 

and enable the market to operate more 

efficiently by deterring rule violations 

and by establishing conditions under 

which trading will be paused or halted, 

thereby promoting efficient pricing and 

competitive trading. 

(iii) Price Discovery 

Requiring SEFs to conduct effective 

monitoring and surveillance of their 

markets and to have the capacity to 

detect rule violations will help ensure 

that legitimate trades and fundamental 

supply and demand information are 

accurately reflected in market prices. 

The mitigation of rule violations, which 

detract from the price discovery process 

in SEF markets, will promote 

confidence in the prices market 

participants use to hedge risk and 

provide confidence in the price 

discovery process. 

(iv) Sound Risk Management Practices 

The rules are designed to allow SEFs 

to better deter, detect, and address 

operational risks posed by trading 

practices or trading activities. To the 

extent they deter overly risky actions by 

market participants, the rules will lower 

potential losses and costs to SEFs and 

market participants and promote sound 

risk management practices. 

(v) Other Public Interest Considerations 

The Commission has not identified 

any effects that these rules will have on 

other public interest considerations 

other than those enumerated above. 

(b) Monitoring of Contracts 

The Commission is adopting rules 

that will require a SEF to: (1) Submit 

new swap contracts to the Commission 

in advance of listing and trading and 

demonstrate that the contracts are not 

readily susceptible to manipulation 

(§ 37.301); 1132 (2) monitor physical 

delivery swaps’ terms and conditions 

and availability of the deliverable 

commodity (§ 37.402); (3) monitor the 

reference price of cash-settled swaps 

used to determine cash flow or 

settlement, the continued 

appropriateness of the methodology for 

the reference price for SEFs that derive 

that price, and the continued 

appropriateness of the third-party index 

or instrument for reference prices that 

rely on such index or instrument 

(§ 37.403); and (4) adopt position 

limitation or position accountability in 

accordance with Commission 

regulations (§ 37.601).1133

(1) Swaps Not Readily Susceptible to 

Manipulation 

(i) Costs 

Compliance with these regulations 

will impose costs equally on startups 

and entities with existing trading 

platforms seeking SEF registration 

because all SEFs must monitor their 

contracts in accordance with the rules 

on an ongoing basis. However, SEFs 

have incentives to review their contracts 

to ensure they are not susceptible to 

manipulation even in the absence of the 

core principle or these rules. For 

example, SEFs have a business need to 

develop products that provide market 

participants with reliable instruments 

that can be used for hedging and risk 

management. In order to do so, new and 

existing entities will need staff to 

research the underlying markets (at 

times using data from private sources) 

and to certify that the contract rules 

comply with Core Principle 3. SEFs 

likely will already have staff to ensure 

compliance with the applicable core 

principles and should plan on legal staff 

devoting approximately four hours per 

contract at a cost of approximately $400 

to review a swap’s compliance with 

Core Principle 3 as part of a sound 

business practice. The scale of these 

costs largely depends on how novel or 

complex a contract is, how many 

contracts the SEF plans to list at any 

given time, and whether listed swaps 

are similar to each other. 

The Commission notes that this 

guidance will likely reduce the time and 

costs that regulated markets will incur 

in providing the appropriate 

information and will likely reduce the 

amount of time it takes the Commission 

staff to analyze whether a new product 

or rule amendment is in compliance 

with the CEA. 

(ii) Benefits 

When SEFs list contracts that are not 

readily susceptible to manipulation, 

they contribute to the integrity and 

stability of the marketplace by giving 

traders confidence that the prices 

associated with swaps reflect the true 

supply of and demand for the 

underlying commodities or financial 

instruments. Section 37.301, which 

implements the Core Principle 3 

requirement that SEFs permit trading 

only in swaps that are not readily 

susceptible to manipulation, will 

promote an environment where swap 

prices are less likely to be subject to 

distortion and extreme volatility, 

allowing market participants to buy and 

sell physical and financial products at 

fair prices and to hedge price risk 

appropriately. 

The guidance outlined in appendix C 

to part 38 provides a reference for 

existing and new regulated markets for 

information that should be provided to 

the Commission for new products and 

rule amendments based on best 

practices developed over the past three 

decades by the Commission and other 

regulators. This guidance will likely 

reduce the time and costs that regulated 

markets will incur in providing the 

appropriate information and should 

mitigate the need for extensive followup discussions with the Commission. 

The guidance also reduces the amount 

of time it takes the Commission staff to 

analyze whether a new product or rule 

amendment is in compliance with the 

CEA. 

(2) Monitoring of Physical-Delivery 

Swaps 

(i) Costs 

While the Commission did not receive 

comments discussing the costs of this 

provision, the Commission is revising 

the requirement in proposed 

§ 37.402(a)(2) 1134 so that SEFs only 

have to monitor the availability of the 

commodity supply, instead of 

monitoring whether the supply is 

adequate. This reduced monitoring 

obligation should lower ongoing costs 

for SEFs since they will not have to 

make determinations regarding 

adequacy of deliverable supply as 

frequently as under the proposed rule, 

while achieving comparable benefit for 

market participants and the public. 

Costs will be further reduced by the 

Commission’s decision to remove from 

proposed § 37.402 the requirements that 

SEFs monitor specific details of the 

supply, marketing, and ownership of the 

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33578 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

1135Argus Comment Letter at 6–7 (Feb. 22, 2011). 

commodity to be physically delivered. 

Instead, final appendix B to part 37 lists 

guidance for monitoring conditions that 

may cause a physical-delivery swap to 

become susceptible to price 

manipulation or distortion. Listing these 

details in guidance will provide SEFs 

with flexibility in meeting their 

monitoring obligations associated with 

physical-delivery swaps, which will 

likely further mitigate any burden 

associated with compliance. The 

Commission notes that a SEF may 

contract with a regulatory service 

provider to perform these duties at 

potentially a lower cost. 

(ii) Benefits 

Section 37.402 requires that SEFs 

monitor physical-delivery swaps’ terms 

and conditions as they relate to the 

underlying commodity market and 

monitor the availability of the supply of 

the commodity specified by the delivery 

requirements of the swap. Such 

monitoring will allow SEFs to take 

appropriate steps to relieve the potential 

for market congestion or manipulation 

in situations where participants’ ability 

to make good on their delivery 

obligations is threatened due to supply 

shortages, disruptions or shortages of 

transportation, or disruptions due to 

weather or labor strikes. Any 

interference with the physical-delivery 

process will likely lead to disruptions in 

fair and orderly trading and 

participants’ ability to properly manage 

commercial risk. Moreover, close 

monitoring of physical-delivery 

contracts helps prevent the 

manipulation of prices, and the public 

benefits from prices that reflect actual 

market conditions. 

(3) Monitoring of Cash-Settled Swaps 

(i) Costs 

Argus commented that monitoring of 

trading in underlying price indexes will 

be costly, and that if SEFs are required 

to monitor the availability and pricing 

of the commodity that forms the basis of 

a price index (particularly where an 

index price is published based upon 

transactions that are executed off the 

DCM or SEF), the SEF may choose not 

to list the contract and thus traders will 

lose a hedging instrument.1135

In response to this comment, the 

Commission is amending the 

requirement in proposed § 37.403(a)(1) 

that a SEF monitor the availability and 

pricing of the commodity making up the 

index to which the swap will be settled, 

to only require the SEF to monitor the 

pricing. The Commission is also moving 

the other requirements for monitoring 

and obtaining information on traders’ 

activities in proposed § 37.403(a) and (b) 

to guidance. The combination of rules 

and guidance implementing Core 

Principle 4 will help ensure that the 

cash settlement process is not 

susceptible to manipulation by 

providing rules and guidance on how to 

meet the requirements of the core 

principle, while providing SEFs with 

the flexibility to adopt the most 

appropriate method of compliance in 

light of the nature of their contracts and 

market structure. 

As discussed above, the Commission 

notes that compliance with these 

provisions can likely be outsourced to a 

regulatory service provider at lower 

cost, and that on-going monitoring of 

pricing could be handled by the 

regulatory service provider. 

(ii) Benefits 

The § 37.403 requirement that a SEF 

monitor cash-settled swaps as they 

relate to the reference price, instrument, 

or index to which the swap is settled 

will reduce the potential for market 

disruptions or manipulations and 

ensure that they are discovered and 

promptly addressed. The interconnected 

nature of swap and underlying cash 

markets may create incentives for 

traders to disrupt or manipulate prices 

in the cash market in order to influence 

the prices in the swap market 

(potentially to benefit the trader’s 

position in the swap). Detecting and 

preventing this sort of manipulation 

requires information on traders’ 

activities in the cash-settled contract 

and in, or related to, the underlying 

instrument or index to which it is 

settled. This rule ensures that SEFs have 

the information and tools they need to 

accomplish their statutory duty to 

prevent manipulation and disruptions 

to the cash-settlement process. 

(4) Section 15(a) Factors (Monitoring of 

Contracts) 

(i) Protection of Market Participants and 

the Public 

The demonstration required by 

§ 37.301 and the monitoring 

requirements in §§ 37.402 and 37.403 

allow for a timely review by the 

Commission staff of the SEF’s 

supporting analysis and data to 

determine whether a contract is not 

readily susceptible to manipulation, and 

to ensure that SEFs are able to 

adequately collect information on 

market activity, including special 

considerations for physical-delivery 

contracts and cash-settled contracts. As 

a group, these rules protect market 

participants by helping to prevent price 

manipulation and protect the public by 

creating an environment that fosters 

prices that reflect actual market 

conditions. 

(ii) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

By providing guidance based on best 

practices regarding what a SEF should 

consider when developing a swap or 

amending the terms and conditions of 

an existing swap, the contracts listed by 

SEFs, as a whole, should be more 

reflective of the underlying cash market, 

thus providing for efficient hedging of 

commercial risk. Sections 37.402 and 

37.403 protect against disruptions and 

market manipulation, promote 

competition, and promote the efficiency 

and financial integrity of transactions in 

SEF markets because market mispricing 

that is due to disruptions or 

manipulation interferes with a market’s 

efficiency by limiting its ability to 

reflect the value of the underlying 

product. Markets that are prone to 

disruption or manipulation have a 

severe competitive disadvantage to 

those without such problems. These 

rules are designed to address and 

mitigate such problems for swap 

transactions. 

(iii) Price Discovery 

Manipulation or other market 

disruptions interfere with the price 

discovery process by artificially 

distorting prices and preventing those 

prices from properly reflecting the 

fundamental forces of supply and 

demand. These rules are designed to 

detect and, where possible, prevent 

such market mispricing, and to detect 

disconnects between swaps and their 

related market prices (e.g., between cash 

market prices and the prices of related 

futures and swaps). 

(iv) Sound Risk Management Practices 

By following the best practices 

outlined in the guidance in appendix C 

to part 38 and the requirements of 

§§ 37.402 and 37.403, a SEF should 

minimize the susceptibility of a swap to 

manipulation or price distortion at the 

time it is developing the contract’s 

terms and conditions. By performing 

this work early-on, a SEF should 

minimize risks to its clearing house and 

to market participants. Sound risk 

management practices rely upon 

execution of hedge strategies at market 

prices that are free of manipulation or 

other disruptions. These rules are 

designed to facilitate hedging at prices 

free of distortions that may be 

preventable by adequate controls. 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33579 

1136 ISDA Discussion Paper at 32 (Nov. 2011). The 

Commission notes that the components of this cost 

estimate are unclear. 

1137MarketAxess Comment Letter at 40 (Mar. 8, 

2011). 

1138Phoenix Comment Letter at 4–5 (Mar. 7, 

2011). 

1139CME Comment Letter at 37 (Feb. 22, 2011); 

Phoenix Comment Letter at 4–5 (Mar. 7, 2011). 

SDMA, however, recommended that the 

Commission require that SEFs have at least 12 

months of unencumbered capital. SDMA Comment 

Letter at 12 (Mar. 8, 2011). 

1140CME Comment Letter at 38 (Feb. 22, 2011). 

1141FXall Comment Letter at 13 (Mar. 8, 2011). 

1142ABC/CIEBA Comment Letter at 11 (Mar. 8, 

2011). 

(v) Other Public Interest Considerations 

The Commission has not identified 

any effects that these rules will have on 

other public interest considerations 

other than those enumerated above. 

7. Financial Resources and Integrity 

(a) Background 

Section 37.1301 codifies the Core 

Principle 13 requirement that a SEF 

must maintain sufficient financial 

resources to cover operating costs for at 

least one year, calculated on a rolling 

basis. The rules implementing Core 

Principle 13 also clarify the types of 

financial resources available to SEFs to 

satisfy the financial resources 

requirements (§ 37.1302) and require 

that each SEF, no less frequently than 

each fiscal quarter, calculate the 

financial resources it needs to meet the 

financial resource requirements, as well 

as the current market value of each 

financial resource (§§ 37.1303, 37.1304). 

The rules also require SEFs to maintain 

unencumbered liquid financial assets, 

such as cash or highly liquid securities, 

equal to at least six months’ operating 

costs, or a committed line of credit or 

similar facility (§ 37.1305), and to report 

certain information regarding their 

financial resources to the Commission 

quarterly or upon request (§ 37.1306). 

Sections 37.701, 37.702, and 37.703 

implement Core Principle 7 regarding 

the financial integrity of transactions. 

Section 37.701 requires transactions 

executed on or through a SEF that are 

mandatorily or voluntarily cleared to be 

cleared through a Commissionregistered DCO, or a DCO that the 

Commission has determined is exempt 

from registration. Section 37.702 

requires a SEF to establish minimum 

financial standards for its members, 

which at a minimum, requires that 

members qualify as ECPs. Section 

37.703 requires a SEF to monitor its 

members to ensure that they continue to 

qualify as ECPs. 

(b) Costs 

ISDA estimated that it would cost 

each SEF $1.4 million per year to 

comply with the financial resource 

requirement.1136 The Commission notes 

that the requirement that a SEF 

maintain sufficient financial resources 

to cover its operating expenses for one 

year appears in the statute itself, and 

that the Commission does not have the 

discretion to lower the financial 

resource requirement. Accordingly, 

§ 37.1301 imposes no additional costs 

on SEFs or market participants beyond 

those imposed by statute. 

With respect to the reporting 

requirements in § 37.1306, MarketAxess 

stated that the proposed requirements 

are unnecessary and burdensome.1137

The Commission expects that most, if 

not all, SEFs would calculate and 

prepare financial statements regularly. 

Accordingly, the Commission does not 

believe that requiring SEFs to meet the 

quarterly reporting requirements 

imposes a significant burden on SEFs. 

Extrapolation from the prepared 

financial statements should be relatively 

straightforward, but will require staff 

and technology resources to calculate, 

monitor, and report financial resources. 

In follow-up conversations with the 

Commission staff, one commenter 

indicated that the reporting 

requirements would costs SEFs about 

$100,000 per year. Given the staffing 

and operational differences among 

SEFs, this cost will vary, perhaps 

significantly. 

(c) Benefits 

The financial resources provisions 

ensure the financial stability of SEFs, 

which promotes the integrity of the 

markets and confidence of market 

participants trading on SEFs. The 

requirement that SEFs maintain six 

months’ worth of unencumbered liquid 

financial assets (i.e., cash and/or highly 

liquid securities) will also promote 

market integrity by ensuring that SEFs 

will have sufficient financial resources 

to continue to operate and wind-down 

in an orderly fashion, if necessary. In 

addition, the reporting requirements 

will ensure that the Commission can 

monitor the SEF’s compliance with Core 

Principle 13. 

Sections 37.702 and 37.703 promote 

financial integrity by requiring SEFs to 

establish minimum financial standards 

for its members and to ensure that they 

continue to qualify as ECPs. 

(d) Consideration of Alternatives 

Phoenix recommended only requiring 

SEFs to maintain financial resources 

necessary to operate for six months.1138

As described above, the statute 

mandates that a SEF maintain sufficient 

financial resources to cover its operating 

expenses for one year. Accordingly, the 

Commission does not have the 

discretion to consider alternative 

financial resource requirements. 

CME and Phoenix proposed an 

alternative liquidity requirement, 

arguing that a wind-down typically 

takes three months and that the 

proposed requirement of six months of 

liquid assets should be reduced 

accordingly.1139 The Commission 

believes that three months’ worth of 

liquid financial assets is an insufficient 

buffer to protect against events which 

may threaten a SEF’s viability, and 

believes that six months of liquid assets 

will provide enough time for a SEF to 

liquidate its other assets so that it may 

have adequate resources to operate for 

up to one year, as required by the 

statute. 

CME stated that it would not be 

feasible for SEFs to comply with the 

proposed 17-business-day filing 

deadline for submission of the financial 

resources report and recommended an 

alternative reporting deadline of 40 

calendar days after the end of each fiscal 

quarter and 60 calendar days after the 

end of each fiscal year.1140

The Commission is adopting the 

alternative recommended by CME and is 

extending the proposed 17-business-day 

filing deadline to 40 calendar days for 

the first three quarters. The 

Commission’s adoption of this 

alternative will mitigate the costs of 

preparing and submitting these reports 

as the new extended timeline will 

harmonize the Commission’s 

regulations with the SEC’s timelines for 

submission of Form 10–Q. Similarly, the 

Commission has extended the filing 

deadline to 60 days for the fourth 

quarter report to harmonize the 

Commission’s deadline with the SEC’s 

deadline for Form 10–K. 

With respect to proposed § 37.703, 

FXall stated that SEFs would be 

burdened by the ‘‘onerous financial 

surveillance obligations’’ and 

recommended that a SEF, like a DCM, 

be able to delegate its financial 

surveillance functions to the NFA Joint 

Audit Committee.1141 ABC/CIEBA 

stated that the rule would create 

significant barriers to entry, stifle 

competition, and lead to higher 

prices.1142 In response to these 

comments, the Commission has revised 

§ 37.703 to remove a SEF’s financial 

surveillance obligations and to only 

require that a SEF monitor its members 

to ensure that they continue to qualify 

as ECPs. This amendment obviates the 

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33580 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

1143 ISDA Discussion Paper at 32 (Nov. 2011). 

1144CME Comment Letter at 36–37 (Feb. 22, 

2011). 

1145The Commission is moving the following 

provisions to guidance: (1) Proposed § 37.1401(c) 

suggesting that a SEF follow generally accepted 

standards and best practices in addressing the 

categories of its risk analysis and oversight program; 

(2) the portion of proposed § 37.1401(d) discussing 

the SEFs obligation to resume the trading and 

clearing of swaps on the next business day 

following a disruption; (3) the portion of proposed 

§ 37.1401(i) suggesting that a SEF’s testing of its 

automated systems and business continuity-disaster 

recovery capabilities be conducted by qualified, 

independent professionals; (4) proposed 

§ 37.1401(j) discussing a SEF’s coordination of its 

business continuity-disaster recovery plan with 

those of others. 

need to delegate any financial 

surveillance functions and minimizes 

the costs imposed by the rule. As a SEF 

may rely on representations from its 

members that they continue to qualify 

as ECPs, the costs of the rule should be 

de minimis and administrative in 

nature. 

(e) Section 15(a) Factors 

(1) Protection of Market Participants and 

the Public 

The financial resources rules will 

protect market participants and the 

public by establishing uniform 

standards and a system of Commission 

oversight that ensures that trading 

occurs on a financially stable facility, 

which in turn, will mitigate the risk of 

market disruptions, financial losses, and 

systemic problems that could arise from 

a SEF’s failure to maintain adequate 

financial resources. These requirements 

will enable a SEF to fulfill its 

responsibilities of ensuring that trading 

occurs on a liquid, fair, and financially 

secure platform by maintaining 

appropriate minimum financial 

resources on hand and on an ongoing 

basis to sustain operations for a 

reasonable period of time. Additionally, 

in the event that a SEF does have to 

wind down its operations, SEFs that 

have sufficient amounts of liquid 

financial resources will 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 or who are 

customers or shareholders of market 

participants. 

(2) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

The financial resources rules promote 

the financial integrity of the markets by 

requiring SEFs to have adequate 

operating resources (i.e., operating 

resources sufficient to fund both current 

operations and ensure operations for a 

sufficient length of time in the future), 

and preventing those SEFs that lack 

these resources from expanding in ways 

that may ultimately harm the broader 

financial market (i.e., confining the 

operations of SEFs to levels their 

financial resources can support). 

Sections 37.702 and 37.703 will 

promote financial integrity by ensuring 

that SEFs establish minimum financial 

standards for their members and 

monitor those members to ensure that 

they continue to qualify as ECPs. 

(3) Price Discovery 

The Commission has not identified 

any effects that these rules will have on 

price discovery. 

(4) Sound Risk Management Practices 

By setting specific standards with 

respect to how SEFs should assess and 

monitor the adequacy of their financial 

resources, the financial resources rules 

promote sound risk management 

practices by SEFs and further the goal 

of minimizing systemic risk. 

Sections 37.702 and 37.703 will 

promote sound risk management 

practices by ensuring that SEF members 

have the financial resources necessary 

for proper management of the risk 

associated with their swap positions. 

These rules will also further the goal of 

minimizing systemic risk. 

(5) Other Public Interest Considerations 

The Commission has not identified 

any effects that these rules will have on 

other public interest considerations 

other than those enumerated above. 

8. Emergency Operations and System 

Safeguards 

(a) Background 

The Commission’s guidance for Core 

Principle 8 addresses procedures for 

handling emergency situations. 

Specifically, the guidance referenced in 

§ 37.801 provides that a SEF can comply 

with Core Principle 8 by having rules 

that allow it to intervene as necessary to 

maintain markets with fair and orderly 

trading and to prevent or address 

manipulation or disruptive trading 

practices by, among other things, 

imposing or modifying position limits, 

intraday market restrictions, or special 

margin requirements. 

Section 37.1401 codifies Core 

Principle 14 by requiring a SEF to 

establish and maintain a program of risk 

analysis and oversight to identify and 

minimize sources of operational risk 

(§ 37.1401(a)) and to maintain a 

business continuity-disaster recovery 

(‘‘BC DR’’) plan and resources, 

emergency procedures, and backup 

facilities sufficient to enable timely 

recovery and resumption of its 

operations (§ 37.1401(b)). Under 

§§ 37.1401(d)–(e), a SEF must notify the 

Commission promptly of certain 

significant systems malfunctions, 

including the activation of the SEF’s 

BC–DR plan, and must provide advance 

notice of any material planned changes 

to automated systems or risk analysis 

and oversight programs. 

(b) Costs 

ISDA estimated that SEFs will spend 

an average of $1,116,000 initially and 

$866,000 annually on disaster recovery 

procedures covered by the regulations 

implementing Core Principle 14.1143

The Commission recognizes that the 

costs of establishing and maintaining 

backup facilities could be substantial if 

the applicant does not already have 

these facilities in place to support 

another business area. The Commission 

also notes that the requirement that a 

SEF establish and maintain emergency 

procedures, backup facilities, and a plan 

for disaster recovery appears in the 

statute and is not the product of 

Commission discretion. 

CME commented that the requirement 

under proposed § 37.1401(g) that SEFs 

provide the Commission with timely 

advance notice of all planned changes to 

automated systems that may impact the 

reliability of such systems is 

burdensome and not cost-effective.1144

In response to this comment, the 

Commission is reducing the burden and 

cost associated with the proposed rule 

by requiring a SEF to promptly advise 

the Commission only of all ‘‘significant’’ 

system malfunctions, and to provide 

timely advance notification of only 

‘‘material’’ changes to automated 

systems or risk analysis and oversight 

programs (the proposed rule required 

notice of all system malfunctions and all 

changes to programs of risk analysis and 

oversight). 

While no comments addressed the 

subject directly, the Commission is also 

moving several proposed provisions to 

guidance.1145 The Commission believes 

that the combination of rules and 

guidance governing a SEF’s emergency 

operations will provide SEFs with 

sufficient flexibility to develop optimal 

emergency systems and procedures, 

while ensuring that SEFs will also take 

specific measures to maintain markets 

with fair and orderly trading. 

(c) Benefits 

The guidance in appendix B to Core 

Principle 8 governing emergency 

operations ensures that SEFs have 

flexible authority to take prompt, 

decisive action to restore orderly trading 

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1146CME Comment Letter at 28 (Feb. 22, 2011). 

1147See Statistical release: OTC derivatives 

statistics at end–December 2011, The Bank for 

International Settlements (May 2012), available at 

http://www.bis.org/publ/otc_hy1205.htm. 

1148For example, one swap may base its prices on 

the prices of one or more other swaps traded on 

other SEFs. 

and respond to market behavior that 

could cause significant financial losses 

and widespread systemic failures that 

could harm market participants and the 

public. 

In addition, the rules implementing 

Core Principle 14 reflect generally 

accepted standards and best practices 

with respect to the development, 

operation, reliability, security, and 

capacity of automated systems, which 

will reduce the frequency and severity 

of automated system security breaches 

or functional failures, thereby 

augmenting efforts to mitigate systemic 

risk and ensure market continuity in the 

event of system failures. Ensuring the 

resilience of the automated systems of a 

SEF and the ability of a SEF to recover 

and resume trading promptly in the 

event of a disruption of its operations 

will be crucial to the robust and 

transparent systemic risk management 

framework established by the DoddFrank Act. 

Based on the Commission’s 

experience, these requirements reflect 

best practices in the futures markets, 

where DCM compliance with generally 

accepted standards and best practices 

with respect to the development, 

operation, reliability, security, and 

capacity of automated systems can 

reduce the frequency and severity of 

automated system security breaches or 

functional failures, thereby augmenting 

efforts to mitigate systemic risk. These 

practices will be well-served in the 

swaps markets as well. 

Finally, notice to the Commission 

concerning systems malfunctions, 

security incidents, or any events leading 

to the activation of a SEF’s BC–DR plan 

will assist the Commission’s oversight 

and its ability to assess systemic risk 

levels and intervene when needed to 

protect market participants and the 

public. 

(d) Consideration of Alternatives 

CME stated that the regulations 

pursuant to Core Principle 8 should 

clarify that a SEF has flexibility and 

independence to address market 

emergencies.1146 As discussed in further 

detail in the preamble, the Commission 

did not issue rules for compliance with 

Core Principle 8. However, the 

Commission clarified its guidance to the 

core principle and is adopting this costmitigating alternative by revising the 

guidance to make clear that SEFs retain 

the authority to respond independently 

to emergencies in an effective and 

timely manner consistent with the 

nature of the emergency. Accordingly, a 

SEF will have flexibility to address 

market emergencies using the methods 

that it deems to be most appropriate, 

provided that its actions are taken in 

good faith and the Commission is 

notified of such actions in a certified 

rule submission. 

(e) Section 15(a) Factors 

(1) Protection of Market Participants and 

the Public 

The rules and guidance outlining 

emergency procedures pursuant to Core 

Principles 8 and 14 protect market 

participants and the public through both 

discretionary actions taken by a SEF’s 

management as well as through 

automated risk analysis systems that 

trigger specific responses. Because 

automated systems play a central and 

critical role in today’s electronic 

financial market environment, oversight 

of core principle compliance by SEFs 

with respect to automated systems is an 

essential part of effective oversight of 

both futures and swaps markets. 

Emergency rules and procedures 

provide SEFs with the authority and an 

established process by which to 

intervene in markets during times of 

crisis so that trading can continue in an 

orderly manner to the extent possible 

and so that potential harm to market 

participants and the public can be 

avoided. 

Timely reporting to the Commission 

of significant system malfunctions, 

material planned changes to automated 

systems, and material planned changes 

to programs of risk analysis and 

oversight is necessary for the 

Commission to fulfill its responsibility 

to oversee the swaps markets. Timely 

reporting will also augment the 

Commission’s efforts to monitor 

systemic risk (which protects the 

public), and ultimately further the 

protection of market participants and, 

indirectly, the public by ensuring that 

automated systems are available, 

reliable, secure, have adequate scalable 

capacity, and are effectively overseen. 

(2) Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

A SEF that has policies and 

procedures in place addressing its 

emergency authority will be better 

positioned to promptly intervene in 

markets to respond to or eliminate 

conditions that may deter participation 

and detract from overall market 

confidence, which could lead to 

diminished market efficiency, 

competitiveness, and perceptions of 

financial integrity. Sophisticated 

computer systems capable of 

automatically predicting operational 

risks will enhance the efficiency and 

financial integrity of the markets by 

ensuring that in emergency situations, 

trading remains uninterrupted and 

transactional data and positions are not 

lost. Active and periodic testing of 

emergency systems and procedures 

promotes confidence in the markets, 

encouraging liquidity and stability. 

Safeguarding the reliability, security, 

and capacity of a SEF’s computer 

systems is also essential to the 

mitigation of system risk for the 

financial system as a whole. The global 

OTC market is estimated to have in 

excess of $600 trillion in outstanding 

contracts.1147 The ability of SEFs to 

recover and resume trading promptly in 

the event of a disruption in their 

operations is important to the U.S. 

economy. Notice to the Commission 

concerning systems malfunctions, 

systems security incidents, or events 

leading to the activation of a SEF’s BC– 

DR plan will assist the Commission’s 

oversight and its ability to assess 

systemic risk levels. It would present 

unacceptable risks to the U.S. financial 

system if swaps markets that comprise 

critical components of the world 

financial system were to become 

unavailable for an extended period of 

time. 

(3) Price Discovery 

Any interruption in trading in a swap 

on a SEF can distort the price discovery 

process on other related swaps.1148 The 

Commission views the emergency 

operations rules adopted herein as 

likely to facilitate the price discovery 

process by mitigating the risk of 

operational market interruptions from 

disjoining the forces of supply and 

demand. The presence of emergency 

authority procedures signals to the 

market that a SEF is a financially sound 

place to trade, thus attracting greater 

liquidity which leads to more accurate 

price discovery. 

(4) Sound Risk Management Practices 

Participants who use SEF-traded 

swaps to manage commercial price risks 

should benefit from markets that behave 

in an orderly and controlled fashion in 

the face of emergency situations. If 

prices move in an uncontrolled fashion 

due to a market emergency, those who 

are managing risk may be forced to exit 

the market as a result of unwarranted 

margin calls or the deterioration of their 

capital. Those who want to enter the 

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33582 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

market to manage risk may be able to do 

so only at prices that do not reflect the 

actual supply and demand 

fundamentals, but have moved due to 

an uncontrolled emergency situation. 

Reliably functioning computer 

systems and networks are crucial to 

comprehensive risk management, and 

prompt notice to the Commission 

concerning systems malfunctions, 

systems security incidents, or any 

events leading to the activation of a 

SEF’s BC–DR plan will assist the 

Commission in its oversight role and 

bolster its ability to assess systemic risk 

levels. Adequate system safeguards and 

timely notice to the Commission 

regarding the status of those safeguards 

are crucial to mitigation of potential 

systemic risks. Should an emergency 

render a SEF temporarily inoperable, 

market participants will continue to be 

able to mitigate their risk through open 

positions transferred from the 

inoperable SEF to a functioning one 

with little to no gap in exposure. In the 

event of a longer period of down-time, 

market participants could establish 

functionally equivalent open positions 

to mimic the intended result of the 

swap. 

(5) Other Public Interest Considerations 

The Commission has not identified 

any effects that these rules will have on 

other public interest considerations 

other than those enumerated above. 

IV. List of Commenters 

1. Alice Corporation (‘‘Alice’’) 

2. Allston Holdings LLC, on behalf of certain 

trading firms (‘‘Allston et al.’’) 

3. Alternative Investment Management 

Association (‘‘AIMA’’) 

4. American Benefits Council/Committee on 

the Investment of Employee Benefit 

Assets (‘‘ABC/CIEBA’’) 

5. Americans for Financial Reform (‘‘AFR’’) 

6. Argus Media (‘‘Argus’’) 

7. Asset Management Group, Securities 

Industry and Financial Markets 

Association (‘‘SIFMA AMG’’) 

8. Association of Institutional Investors 

(‘‘AII’’) 

9. Better Markets 

10. Barclays 

11. BlackRock 

12. Bloomberg 

13. CanDeal.ca Inc. (‘‘CanDeal’’) 

14. CBOE Futures Exchange (‘‘CBOE’’) 

15. Chris Barnard 

16. CME Group (‘‘CME’’) 

17. Coalition for Derivatives End-Users 

(‘‘Coalition’’) 

18. Commissioner Jill Sommers 

(‘‘Commissioner Sommers’’) 

19. David Neal 

20. Depository Trust & Clearing Corporation 

(‘‘DTCC’’) 

21. Deutsche Bank (‘‘Deutsche’’) 

22. Eaton Vance Management (‘‘Eaton 

Vance’’) 

23. Edward Rosen, on behalf of certain 

dealers (‘‘Rosen et al.’’) 

24. Edward Rosen, on behalf of certain trade 

associations (‘‘Rosen et al. II’’) 

25. Eris Exchange (‘‘Eris’’) 

26. Evolution Markets (‘‘Evolution’’) 

27. Farm Credit Council (‘‘FCC’’) 

28. Federal Home Loan Banks (‘‘FHLB’’) 

29. Financial Services Roundtable (‘‘FSR’’) 

30. Freddie Mac 

31. FX Alliance (‘‘FXall’’) 

32. Geneva Energy Markets, LLC (‘‘Geneva’’) 

33. GFI Group (‘‘GFI’’) 

34. Global FX Division AFME, SIFMA and 

ASIFMA (‘‘Global FX’’) 

35. Goldman, Sachs & Co. (‘‘Goldman’’) 

36. ICAP 

37. Industrial Energy Consumers of America 

(‘‘IECA’’) 

38. Intercontinental Exchange (‘‘ICE’’) 

39. International Swaps and Derivatives 

Association (‘‘ISDA’’) 

40. Joanna Mallers, on behalf of certain 

trading firms (‘‘Mallers et al.’’) 

41. Joint CFTC–SEC Advisory Committee on 

Emerging Regulatory Issues 

42. JP Morgan 

43. LCH.Clearnet Group Limited (‘‘LCH’’) 

44. Managed Funds Association (‘‘MFA’’) 

45. MarketAxess Holdings (‘‘MarketAxess’’) 

46. Markit 

47. MarkitSERV 

48. MetLife 

49. Morgan Stanley 

50. National Futures Association (‘‘NFA’’) 

51. Natural Gas Supply Association 

(‘‘NGSA’’) 

52. Nodal Exchange (‘‘Nodal’’) 

53. NYSE Liffe U.S. (‘‘NYSE Liffe’’) 

54. Parity Energy 

55. Phoenix Partners Group (‘‘Phoenix’’) 

56. Representative Scott Garrett 

57. Representatives Scott Garrett, Gregory 

Meeks, Robert Hurt, and Gwen Moore 

(‘‘Representative Garrett et al.’’) 

58. State Street Corporation (‘‘State Street’’) 

59. Swap Execution Facilities Hearing 

Statements 

60. Swaps & Derivatives Market Association 

(‘‘SDMA’’) 

61. Thomson Reuters (‘‘Reuters’’) 

62. Traccr Limited 

63. Tradeweb Markets (‘‘Tradeweb’’) 

64. TriOptima 

65. TruMarx Data Partners (‘‘TruMarx’’) 

66. UBS Securities LLC (‘‘UBS’’) 

67. Wholesale Markets Brokers’ Association, 

Americas (‘‘WMBAA’’) 

68. Working Group of Commercial Energy 

Firms (‘‘Energy Working Group’’) 

List of Subjects in 17 CFR Part 37 

Registered entities, Registration 

application, Reporting and 

recordkeeping requirements, Swaps, 

Swap execution facilities. 

For the reasons discussed in the 

preamble, the Commission revises 17 

CFR part 37 to read as follows: 

PART 37—SWAP EXECUTION 

FACILITIES 

Subpart A—General Provisions 

Sec. 

37.1 Scope. 

37.2 Applicable provisions. 

37.3 Requirements and procedures for 

registration. 

37.4 Procedures for listing products and 

implementing rules. 

37.5 Information relating to swap execution 

facility compliance. 

37.6 Enforceability. 

37.7 Prohibited use of data collected for 

regulatory purposes. 

37.8 Boards of trade operating both a 

designated contract market and a swap 

execution facility. 

37.9 Methods of execution for required and 

permitted transactions. 

37.10 [Reserved] 

Subpart B—Compliance with Core 

Principles 

37.100 Core Principle 1—Compliance with 

core principles. 

Subpart C—Compliance with Rules 

37.200 Core Principle 2—Compliance with 

rules. 

37.201 Operation of swap execution facility 

and compliance with rules. 

37.202 Access requirements. 

37.203 Rule enforcement program. 

37.204 Regulatory services provided by a 

third party. 

37.205 Audit trail. 

37.206 Disciplinary procedures and 

sanctions. 

Subpart D—Swaps Not Readily Susceptible 

to Manipulation 

37.300 Core Principle 3—Swaps not readily 

susceptible to manipulation. 

37.301 General requirements. 

Subpart E—Monitoring of Trading and 

Trade Processing 

37.400 Core Principle 4—Monitoring of 

trading and trade processing. 

37.401 General requirements. 

37.402 Additional requirements for 

physical-delivery swaps. 

37.403 Additional requirements for cashsettled swaps. 

37.404 Ability to obtain information. 

37.405 Risk controls for trading. 

37.406 Trade reconstruction. 

37.407 Regulatory service provider. 

37.408 Additional sources for compliance. 

Subpart F—Ability to Obtain Information 

37.500 Core Principle 5—Ability to obtain 

information. 

37.501 Establish and enforce rules. 

37.502 Collection of information. 

37.503 Provide information to the 

Commission. 

37.504 Information-sharing agreements. 

Subpart G—Position Limits or 

Accountability 

37.600 Core Principle 6—Position limits or 

accountability. 

37.601 Additional sources for compliance. 

Subpart H—Financial Integrity of 

Transactions 

37.700 Core Principle 7—Financial integrity 

of transactions. 

37.701 Required clearing. 

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37.702 General financial integrity. 

37.703 Monitoring for financial soundness. 

Subpart I—Emergency Authority 

37.800 Core Principle 8—Emergency 

authority. 

37.801 Additional sources for compliance. 

Subpart J—Timely Publication of Trading 

Information 

37.900 Core Principle 9—Timely 

publication of trading information. 

37.901 General requirements. 

Subpart K—Recordkeeping and Reporting 

37.1000 Core Principle 10—Recordkeeping 

and reporting. 

37.1001 Recordkeeping. 

Subpart L—Antitrust Considerations 

37.1100 Core Principle 11—Antitrust 

considerations. 

37.1101 Additional sources for compliance. 

Subpart M—Conflicts of Interest 

37.1200 Core Principle 12—Conflicts of 

interest. 

Subpart N—Financial Resources 

37.1300 Core Principle 13—Financial 

resources. 

37.1301 General requirements. 

37.1302 Types of financial resources. 

37.1303 Computation of projected operating 

costs to meet financial resource 

requirement. 

37.1304 Valuation of financial resources. 

37.1305 Liquidity of financial resources. 

37.1306 Reporting to the Commission. 

37.1307 Delegation of authority. 

Subpart O—System Safeguards 

37.1400 Core Principle 14—System 

safeguards. 

37.1401 Requirements. 

Subpart P—Designation of Chief 

Compliance Officer 

37.1500 Core Principle 15—Designation of 

chief compliance officer. 

37.1501 Chief compliance officer. 

Appendix A to Part 37—Form SEF 

Appendix B to Part 37—Guidance on, and 

Acceptable Practices in, Compliance 

with Core Principles 

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. 

Subpart A—General Provisions 

§ 37.1 Scope. 

The provisions of this part shall apply 

to every swap execution facility that is 

registered or is applying to become 

registered as a swap execution facility 

under section 5h of the Commodity 

Exchange Act (‘‘the Act’’); provided, 

however, nothing in this provision 

affects the eligibility of swap execution 

facilities to operate under the provisions 

of parts 38 or 49 of this chapter. 

§ 37.2 Applicable provisions. 

A swap execution facility shall 

comply with the requirements of this 

part and all other applicable 

Commission regulations, including 

§ 1.60 and part 9 of this chapter, and 

including any related definitions and 

cross-referenced sections. 

§ 37.3 Requirements and procedures for 

registration. 

(a) Requirements for registration. (1) 

Any person operating a facility that 

offers a trading system or platform in 

which more than one market participant 

has the ability to execute or trade swaps 

with more than one other market 

participant on the system or platform 

shall register the facility as a swap 

execution facility under this part or as 

a designated contract market under part 

38 of this chapter. 

(2) Minimum trading functionality. A 

swap execution facility shall, at a 

minimum, offer an Order Book as 

defined in paragraph (a)(3) of this 

section. 

(3) Order book means: 

(i) An electronic trading facility, as 

that term is defined in section 1a(16) of 

the Act; 

(ii) A trading facility, as that term is 

defined in section 1a(51) of the Act; or 

(iii) A trading system or platform in 

which all market participants in the 

trading system or platform have the 

ability to enter multiple bids and offers, 

observe or receive bids and offers 

entered by other market participants, 

and transact on such bids and offers. 

(b) Procedures for full registration. (1) 

An applicant requesting registration as a 

swap execution facility shall: 

(i) File electronically a complete Form 

SEF as set forth in appendix A to this 

part, or any successor forms, and all 

information and documentation 

described in such forms with the 

Secretary of the Commission in the form 

and manner specified by the 

Commission; 

(ii) Provide to the Commission, upon 

the Commission’s request, any 

additional information and 

documentation necessary to review an 

application; and 

(iii) Request from the Commission a 

unique, extensible, alphanumeric code 

for the purpose of identifying the swap 

execution facility pursuant to part 45 of 

this chapter. 

(2) Request for confidential treatment. 

(i) An applicant requesting registration 

as a swap execution facility shall 

identify with particularity any 

information in the application that will 

be subject to a request for confidential 

treatment pursuant to § 145.9 of this 

chapter. 

(ii) Section 40.8 of this chapter sets 

forth those sections of the application 

that will be made publicly available, 

notwithstanding a request for 

confidential treatment pursuant to 

§ 145.9 of this chapter. 

(3) Amendment of application prior or 

subsequent to full registration. An 

applicant amending a pending 

application for registration as a swap 

execution facility or requesting an 

amendment to an order of registration 

shall file an amended application 

electronically with the Secretary of the 

Commission in the manner specified by 

the Commission. A swap execution 

facility shall file any amendment to an 

application subsequent to registration as 

a submission under part 40 of this 

chapter or as specified by the 

Commission. 

(4) Effect of incomplete application. If 

an application is incomplete pursuant to 

paragraph (b)(1) of this section, the 

Commission shall notify the applicant 

that its application will not be deemed 

to have been submitted for purposes of 

the Commission’s review. 

(5) Commission review period. For an 

applicant who submits its application 

for registration as a swap execution 

facility on or after August 5, 2015 the 

Commission shall review such 

application pursuant to the 180-day 

timeframe and procedures specified in 

section 6(a) of the Act. 

(6) Commission determination. (i) The 

Commission shall issue an order 

granting registration upon a 

Commission determination, in its own 

discretion, that the applicant has 

demonstrated compliance with the Act 

and the Commission’s regulations 

applicable to swap execution facilities. 

If deemed appropriate, the Commission 

may issue an order granting registration 

subject to conditions. 

(ii) The Commission may issue an 

order denying registration upon a 

Commission determination, in its own 

discretion, that the applicant has not 

demonstrated compliance with the Act 

and the Commission’s regulations 

applicable to swap execution facilities. 

(c) Temporary registration. An 

applicant seeking registration as a swap 

execution facility may request that the 

Commission grant the applicant 

temporary registration by complying 

with the requirements in paragraph 

(c)(1) of this section. 

(1) Requirements for temporary 

registration. The Commission shall grant 

a request for temporary registration 

upon a Commission determination that 

the applicant has: 

(i) Completed all of the requirements 

under paragraph (b)(1)(i) of this section; 

and 

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(ii) Submitted a notice to the 

Commission, concurrent with the filing 

of the application under paragraph 

(b)(1)(i) of this section, requesting that 

the Commission grant the applicant 

temporary registration. An applicant 

that is currently operating a swapstrading platform in reliance upon either 

an exemption granted by the 

Commission or some form of no-action 

relief granted by the Commission staff 

shall include in such notice a 

certification that the applicant is 

operating pursuant to such exemption 

or no-action relief. 

(iii) The Commission may deny a 

request for temporary registration upon 

a Commission determination that the 

applicant has not met the requirements 

under paragraphs (c)(1)(i) and (c)(1)(ii) 

of this section. 

(2) Operation pursuant to a grant of 

temporary registration. An applicant 

may operate as a swap execution facility 

under temporary registration upon 

receipt of a notice from the Commission 

granting such temporary registration, 

but in no case may begin operating as 

a temporarily registered swap execution 

facility before August 5, 2013. 

(3) Expiration of temporary 

registration. The temporary registration 

for a swap execution facility shall expire 

on the earlier of the date that: 

(i) The Commission grants or denies 

registration of the swap execution 

facility as provided under paragraph (b) 

of this section; 

(ii) The swap execution facility 

withdraws its application for 

registration pursuant to paragraph (f) of 

this section; or 

(iii) Temporary registration terminates 

pursuant to paragraph (c)(5) of this 

section. 

(4) Effect of temporary registration. A 

grant of temporary registration by the 

Commission does not affect the right of 

the Commission to grant or deny 

registration as provided under 

paragraph (b) of this section. 

(5) Termination of temporary 

registration. Paragraph (c) of this section 

shall terminate two years from the 

effective date of this regulation except 

as provided for under paragraph (c)(6) of 

this section and except for an applicant 

who requested that the Commission 

grant the applicant temporary 

registration by complying with the 

requirements in paragraph (c)(1) of this 

section before the termination of 

paragraph (c) of this section and has not 

been granted or denied registration 

under paragraph (b)(6) of this section by 

the time of the termination of paragraph 

(c) of this section. Such an applicant 

may operate as a swap execution facility 

under temporary registration upon 

receipt of a notice from the Commission 

granting such temporary registration 

until the Commission grants or denies 

registration pursuant to paragraph (b)(6) 

of this section. On the termination date 

of paragraph (c) of this section, the 

Commission shall review such 

applicant’s application pursuant to the 

time period and procedures in 

paragraph (b)(5) of this section. 

(6) Temporary registration for 

applicants that are operational 

designated contract markets. An 

applicant that is an operational 

designated contract market and is also 

seeking to register as a swap execution 

facility in order to transfer one or more 

of its contracts may request that the 

Commission grant the applicant 

temporary registration by complying 

with the requirements in paragraph 

(c)(1) of this section. The termination of 

temporary registration provision in 

paragraph (c)(5) of this section shall not 

apply to an applicant that is a nondormant designated contract market as 

described in this paragraph. 

(d) Reinstatement of dormant 

registration. A dormant swap execution 

facility as defined in section 40.1 of this 

chapter may reinstate its registration 

under the procedures of paragraph (b) of 

this section. The applicant may rely 

upon previously submitted materials if 

such materials accurately describe the 

dormant swap execution facility’s 

conditions at the time that it applies for 

reinstatement of its registration. 

(e) Request for transfer of registration. 

(1) A swap execution facility seeking to 

transfer its registration from its current 

legal entity to a new legal entity as a 

result of a corporate change shall file a 

request for approval to transfer such 

registration with the Secretary of the 

Commission in the form and manner 

specified by the Commission. 

(2) Timeline for filing a request for 

transfer of registration. A request for 

transfer of registration shall be filed no 

later than three months prior to the 

anticipated corporate change; or in the 

event that the swap execution facility 

could not have known of the anticipated 

change three months prior to the 

anticipated change, as soon as it knows 

of such change. 

(3) Required information. The request 

for transfer of registration shall include 

the following: 

(i) The underlying agreement that 

governs the corporate change; 

(ii) A description of the corporate 

change, including the reason for the 

change and its impact on the swap 

execution facility, including its 

governance and operations, and its 

impact on the rights and obligations of 

market participants; 

(iii) A discussion of the transferee’s 

ability to comply with the Act, 

including the core principles applicable 

to swap execution facilities, and the 

Commission’s regulations thereunder; 

(iv) The governing documents of the 

transferee, including, but not limited to, 

articles of incorporation and bylaws; 

(v) The transferee’s rules marked to 

show changes from the current rules of 

the swap execution facility; 

(vi) A representation by the transferee 

that it: 

(A) Will be the surviving entity and 

successor-in-interest to the transferor 

swap execution facility and will retain 

and assume, without limitation, all of 

the assets and liabilities of the 

transferor; 

(B) Will assume responsibility for 

complying with all applicable 

provisions of the Act and the 

Commission’s regulations promulgated 

thereunder, including this part and 

appendices thereto; 

(C) Will assume, maintain, and 

enforce all rules implementing and 

complying with the core principles 

applicable to swap execution facilities, 

including the adoption of the 

transferor’s rulebook, as amended in the 

request, and that any such amendments 

will be submitted to the Commission 

pursuant to section 5c(c) of the Act and 

part 40 of this chapter; 

(D) Will comply with all selfregulatory responsibilities except if 

otherwise indicated in the request, and 

will maintain and enforce all selfregulatory programs; and 

(E) Will notify market participants of 

all changes to the transferor’s rulebook 

prior to the transfer and will further 

notify market participants of the 

concurrent transfer of the registration to 

the transferee upon Commission 

approval and issuance of an order 

permitting this transfer. 

(vii) A representation by the 

transferee that upon the transfer: 

(A) It will assume responsibility for 

and maintain compliance with core 

principles for all swaps previously 

made available for trading through the 

transferor, whether by certification or 

approval; and 

(B) None of the proposed rule changes 

will affect the rights and obligations of 

any market participant. 

(4) Commission determination. Upon 

review of a request for transfer of 

registration, the Commission, as soon as 

practicable, shall issue an order either 

approving or denying the request. 

(f) Request for withdrawal of 

application for registration. An 

applicant for registration as a swap 

execution facility may withdraw its 

application submitted pursuant to 

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paragraph (b) of this section by filing a 

withdrawal request electronically with 

the Secretary of the Commission. 

Withdrawal of an application for 

registration shall not affect any action 

taken or to be taken by the Commission 

based upon actions, activities, or events 

occurring during the time that the 

application was pending with the 

Commission. 

(g) Request for vacation of 

registration. A swap execution facility 

may request that its registration be 

vacated under section 7 of the Act by 

filing a vacation request electronically 

with the Secretary of the Commission. 

Vacation of registration shall not affect 

any action taken or to be taken by the 

Commission based upon actions, 

activities, or events occurring during the 

time that the swap execution facility 

was registered by the Commission. 

(h) 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, upon consultation with the 

General Counsel or the General 

Counsel’s delegate, authority to notify 

an applicant seeking registration that its 

application is incomplete and that it 

will not be deemed to have been 

submitted for purposes of the 

Commission’s review, to notify an 

applicant seeking registration under 

section 6(a) of the Act that its 

application is materially incomplete and 

the running of the 180-day period is 

stayed, and to notify an applicant 

seeking temporary registration that its 

request is granted or denied. 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. 

§ 37.4 Procedures for listing products and 

implementing rules. 

(a) An applicant for registration as a 

swap execution facility may submit a 

swap’s terms and conditions prior to 

listing the product as part of its 

application for registration. 

(b) Any swap terms and conditions or 

rules submitted as part of a swap 

execution facility’s application for 

registration shall be considered for 

approval by the Commission at the time 

the Commission issues the swap 

execution facility’s order of registration. 

(c) After the Commission issues the 

order of registration, a swap execution 

facility shall submit a swap’s terms and 

conditions, including amendments to 

such terms and conditions, new rules, 

or rule amendments pursuant to the 

procedures under part 40 of this 

chapter. 

(d) Any swap terms and conditions or 

rules submitted as part of an application 

to reinstate the registration of a dormant 

swap execution facility, as defined in 

§ 40.1 of this chapter, shall be 

considered for approval by the 

Commission at the time the Commission 

approves the dormant swap execution 

facility’s reinstatement of registration. 

§ 37.5 Information relating to swap 

execution facility compliance. 

(a) Request for information. Upon the 

Commission’s request, a swap execution 

facility shall file with the Commission 

information related to its business as a 

swap execution facility in the form and 

manner and within the time period as 

the Commission specifies in its request. 

(b) Demonstration of compliance. 

Upon the Commission’s request, a swap 

execution facility shall file with the 

Commission a written demonstration, 

containing supporting data, information, 

and documents that it is in compliance 

with one or more core principles or with 

its other obligations under the Act or the 

Commission’s regulations as the 

Commission specifies in its request. The 

swap execution facility shall file such 

written demonstration in the form and 

manner and within the time period as 

the Commission specifies in its request. 

(c) Equity interest transfer—(1) Equity 

interest transfer notification. A swap 

execution facility shall file with the 

Commission a notification of each 

transaction that the swap execution 

facility enters into involving the transfer 

of fifty percent or more of the equity 

interest in the swap execution facility. 

The Commission may, upon receiving 

such notification, request supporting 

documentation of the transaction. 

(2) Timing of notification. The equity 

interest transfer notice described in 

paragraph (c)(1) of this section shall be 

filed electronically with the Secretary of 

the Commission at its Washington, DC 

headquarters at submissions@cftc.gov 

and the Division of Market Oversight at 

DMOSubmissions@cftc.gov, at the 

earliest possible time but in no event 

later than the open of business ten 

business days following the date upon 

which the swap execution facility enters 

into a firm obligation to transfer the 

equity interest. 

(3) Rule filing. Notwithstanding the 

foregoing, if any aspect of an equity 

interest transfer described in paragraph 

(c)(1) of this section requires a swap 

execution facility to file a rule as 

defined in part 40 of this chapter, then 

the swap execution facility shall comply 

with the requirements of section 5c(c) of 

the Act and part 40 of this chapter, and 

all other applicable Commission 

regulations. 

(4) Certification. Upon a transfer of an 

equity interest of fifty percent or more 

in a swap execution facility, the swap 

execution facility shall file 

electronically with the Secretary of the 

Commission at its Washington, DC 

headquarters at submissions@cftc.gov 

and the Division of Market Oversight at 

DMOSubmissions@cftc.gov, a 

certification that the swap execution 

facility meets all of the requirements of 

section 5h of the Act and the 

Commission regulations adopted 

thereunder, no later than two business 

days following the date on which the 

equity interest of fifty percent or more 

was acquired. 

(d) Delegation of authority. The 

Commission hereby delegates, until it 

orders otherwise, the authority set forth 

in this section 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 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. 

§ 37.6 Enforceability. 

(a) A transaction entered into on or 

pursuant to the rules of a swap 

execution facility shall not be void, 

voidable, subject to rescission, 

otherwise invalidated, or rendered 

unenforceable as a result of: 

(1) A violation by the swap execution 

facility of the provisions of section 5h 

of the Act or this part; 

(2) Any Commission proceeding to 

alter or supplement a rule, term, or 

condition under section 8a(7) of the Act 

or to declare an emergency under 

section 8a(9) of the Act; or 

(3) Any other proceeding the effect of 

which is to: 

(i) Alter or supplement a specific term 

or condition or trading rule or 

procedure; or 

(ii) Require a swap execution facility 

to adopt a specific term or condition, 

trading rule or procedure, or to take or 

refrain from taking a specific action. 

(b) A swap execution facility shall 

provide each counterparty to a 

transaction that is entered into on or 

pursuant to the rules of the swap 

execution facility with a written record 

of all of the terms of the transaction 

which shall legally supersede any 

previous agreement and serve as a 

confirmation of the transaction. The 

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confirmation of all terms of the 

transaction shall take place at the same 

time as execution; provided that specific 

customer identifiers for accounts 

included in bunched orders involving 

swaps need not be included in 

confirmations provided by a swap 

execution facility if the applicable 

requirements of § 1.35(b)(5) of this 

chapter are met. 

§ 37.7 Prohibited use of data collected for 

regulatory purposes. 

A swap execution facility shall not 

use for business or marketing purposes 

any proprietary data or personal 

information it collects or receives, from 

or on behalf of any person, for the 

purpose of fulfilling its regulatory 

obligations; provided, however, that a 

swap execution facility may use such 

data or information for business or 

marketing purposes if the person from 

whom it collects or receives such data 

or information clearly consents to the 

swap execution facility’s use of such 

data or information in such manner. A 

swap execution facility shall not 

condition access to its market(s) or 

market services on a person’s consent to 

the swap execution facility’s use of 

proprietary data or personal information 

for business or marketing purposes. A 

swap execution facility, where 

necessary for regulatory purposes, may 

share such data or information with one 

or more swap execution facilities or 

designated contract markets registered 

with the Commission. 

§ 37.8 Boards of trade operating both a 

designated contract market and a swap 

execution facility. 

(a) An entity that intends to operate 

both a designated contract market and a 

swap execution facility shall separately 

register the two entities pursuant to the 

designated contract market designation 

procedures set forth in part 38 of this 

chapter and the swap execution facility 

registration procedures set forth in this 

part. On an ongoing basis, the entity 

shall comply with the core principles 

for designated contract markets under 

section 5(d) of the Act and the 

regulations under part 38 of this chapter 

and the core principles for swap 

execution facilities under section 5h of 

the Act and the regulations under this 

part. 

(b) A board of trade, as defined in 

section 1a(6) of the Act, that operates 

both a designated contract market and a 

swap execution facility and that uses 

the same electronic trade execution 

system for executing and trading swaps 

on the designated contract market and 

on the swap execution facility shall 

clearly identify to market participants 

for each swap whether the execution or 

trading of such swaps is taking place on 

the designated contract market or on the 

swap execution facility. 

§ 37.9 Methods of execution for required 

and permitted transactions. 

(a) Execution methods for required 

transactions. (1) Required transaction 

means any transaction involving a swap 

that is subject to the trade execution 

requirement in section 2(h)(8) of the 

Act. 

(2) Execution methods. (i) Each 

Required Transaction that is not a block 

trade as defined in § 43.2 of this chapter 

shall be executed on a swap execution 

facility in accordance with one of the 

following methods of execution: 

(A) An Order Book as defined in 

§ 37.3(a)(3); or 

(B) A Request for Quote System, as 

defined in paragraph (a)(3) of this 

section, that operates in conjunction 

with an Order Book as defined in 

§ 37.3(a)(3). 

(ii) In providing either one of the 

execution methods set forth in 

paragraph (a)(2)(i)(A) or (B) of this 

section, a swap execution facility may 

for purposes of execution and 

communication use any means of 

interstate commerce, including, but not 

limited to, the mail, internet, email, and 

telephone, provided that the chosen 

execution method satisfies the 

requirements provided in § 37.3(a)(3) for 

Order Books or in paragraph (a)(3) of 

this section for Request for Quote 

Systems. 

(3) Request for quote system means a 

trading system or platform in which a 

market participant transmits a request 

for a quote to buy or sell a specific 

instrument to no less than three market 

participants in the trading system or 

platform, to which all such market 

participants may respond. The three 

market participants shall not be 

affiliates of or controlled by the 

requester and shall not be affiliates of or 

controlled by each other. A swap 

execution facility that offers a request 

for quote system in connection with 

Required Transactions shall provide the 

following functionality: 

(i) At the same time that the requester 

receives the first responsive bid or offer, 

the swap execution facility shall 

communicate to the requester any firm 

bid or offer pertaining to the same 

instrument resting on any of the swap 

execution facility’s Order Books, as 

defined in § 37.3(a)(3); 

(ii) The swap execution facility shall 

provide the requester with the ability to 

execute against such firm resting bids or 

offers along with any responsive orders; 

and 

(iii) The swap execution facility shall 

ensure that its trading protocols provide 

each of its market participants with 

equal priority in receiving requests for 

quotes and in transmitting and 

displaying for execution responsive 

orders. 

(b) Time delay requirement for 

required transactions on an order 

book—(1) Time delay requirement. A 

swap execution facility shall require 

that a broker or dealer who seeks to 

either execute against its customer’s 

order or execute two of its customers’ 

orders against each other through the 

swap execution facility’s Order Book, 

following some form of pre-arrangement 

or pre-negotiation of such orders, be 

subject to at least a 15 second time delay 

between the entry of those two orders 

into the Order Book, such that one side 

of the potential transaction is disclosed 

and made available to other market 

participants before the second side of 

the potential transaction, whether for 

the broker’s or dealer’s own account or 

for a second customer, is submitted for 

execution. 

(2) Adjustment of time delay 

requirement. A swap execution facility 

may adjust the time period of the 15 

second time delay requirement 

described in paragraph (b)(1) of this 

section, based upon a swap’s liquidity 

or other product-specific considerations; 

however, the time delay shall be set for 

a sufficient period of time so that an 

order is exposed to the market and other 

market participants have a meaningful 

opportunity to execute against such 

order. 

(c) Execution methods for permitted 

transactions. (1) Permitted transaction 

means any transaction not involving a 

swap that is subject to the trade 

execution requirement in section 2(h)(8) 

of the Act. 

(2) Execution methods. A swap 

execution facility may offer any method 

of execution for each Permitted 

Transaction. 

§ 37.10 [Reserved] 

Subpart B—Compliance With Core 

Principles 

§ 37.100 Core Principle 1—Compliance 

with core principles. 

(a) In general. To be registered, and 

maintain registration, as a swap 

execution facility, the swap execution 

facility shall comply with— 

(1) The core principles described in 

section 5h of the Act; and 

(2) Any requirement that the 

Commission may impose by rule or 

regulation pursuant to section 8a(5) of 

the Act. 

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(b) Reasonable discretion of a swap 

execution facility. Unless otherwise 

determined by the Commission by rule 

or regulation, a swap execution facility 

described in paragraph (a) of this 

section shall have reasonable discretion 

in establishing the manner in which the 

swap execution facility complies with 

the core principles described in section 

5h of the Act. 

Subpart C—Compliance With Rules 

§ 37.200 Core Principle 2—Compliance 

with rules. 

A swap execution facility shall: 

(a) Establish and enforce compliance 

with any rule of the swap execution 

facility, including the terms and 

conditions of the swaps traded or 

processed on or through the swap 

execution facility and any limitation on 

access to the swap execution facility; 

(b) Establish and enforce trading, 

trade processing, and participation rules 

that will deter abuses and have the 

capacity to detect, investigate, and 

enforce those rules, including means to 

provide market participants with 

impartial access to the market and to 

capture information that may be used in 

establishing whether rule violations 

have occurred; 

(c) Establish rules governing the 

operation of the facility, including rules 

specifying trading procedures to be used 

in entering and executing orders traded 

or posted on the facility, including 

block trades; and 

(d) Provide by its rules that when a 

swap dealer or major swap participant 

enters into or facilitates a swap that is 

subject to the mandatory clearing 

requirement of section 2(h) of the Act, 

the swap dealer or major swap 

participant shall be responsible for 

compliance with the mandatory trading 

requirement under section 2(h)(8) of the 

Act. 

§ 37.201 Operation of swap execution 

facility and compliance with rules. 

(a) A swap execution facility shall 

establish rules governing the operation 

of the swap execution facility, 

including, but not limited to, rules 

specifying trading procedures to be 

followed by members and market 

participants when entering and 

executing orders traded or posted on the 

swap execution facility, including block 

trades, as defined in part 43 of this 

chapter, if offered. 

(b) A swap execution facility shall 

establish and impartially enforce 

compliance with the rules of the swap 

execution facility, including, but not 

limited to— 

(1) The terms and conditions of any 

swaps traded or processed on or through 

the swap execution facility; 

(2) Access to the swap execution 

facility; 

(3) Trade practice rules; 

(4) Audit trail requirements; 

(5) Disciplinary rules; and 

(6) Mandatory trading requirements. 

§ 37.202 Access requirements. 

(a) Impartial access to markets and 

market services. A swap execution 

facility shall provide any eligible 

contract participant and any 

independent software vendor with 

impartial access to its market(s) and 

market services, including any 

indicative quote screens or any similar 

pricing data displays, provided that the 

facility has: 

(1) Criteria governing such access that 

are impartial, transparent, and applied 

in a fair and nondiscriminatory manner; 

(2) Procedures whereby eligible 

contract participants provide the swap 

execution facility with written or 

electronic confirmation of their status as 

eligible contract participants, as defined 

by the Act and Commission regulations, 

prior to obtaining access; and 

(3) Comparable fee structures for 

eligible contract participants and 

independent software vendors receiving 

comparable access to, or services from, 

the swap execution facility. 

(b) Jurisdiction. Prior to granting any 

eligible contract participant access to its 

facilities, a swap execution facility shall 

require that the eligible contract 

participant consent to its jurisdiction. 

(c) Limitations on access. A swap 

execution facility shall establish and 

impartially enforce rules governing any 

decision to allow, deny, suspend, or 

permanently bar eligible contract 

participants’ access to the swap 

execution facility, including when such 

decisions are made as part of a 

disciplinary or emergency action taken 

by the swap execution facility. 

§ 37.203 Rule enforcement program. 

A swap execution facility shall 

establish and enforce trading, trade 

processing, and participation rules that 

will deter abuses and it shall have the 

capacity to detect, investigate, and 

enforce those rules. 

(a) Abusive trading practices 

prohibited. A swap execution facility 

shall prohibit abusive trading practices 

on its markets by members and market 

participants. Swap execution facilities 

that permit intermediation shall 

prohibit customer-related abuses 

including, but not limited to, trading 

ahead of customer orders, trading 

against customer orders, 

accommodation trading, and improper 

cross trading. Specific trading practices 

that shall be prohibited include frontrunning, wash trading, pre-arranged 

trading (except for block trades 

permitted by part 43 of this chapter or 

other types of transactions certified to or 

approved by the Commission pursuant 

to the procedures under part 40 of this 

chapter), fraudulent trading, money 

passes, and any other trading practices 

that a swap execution facility deems to 

be abusive. A swap execution facility 

shall also prohibit any other 

manipulative or disruptive trading 

practices prohibited by the Act or by the 

Commission pursuant to Commission 

regulation. 

(b) Capacity to detect and investigate 

rule violations. A swap execution 

facility shall have arrangements and 

resources for effective enforcement of its 

rules. Such arrangements shall include 

the authority to collect information and 

documents on both a routine and nonroutine basis, including the authority to 

examine books and records kept by the 

swap execution facility’s members and 

by persons under investigation. A swap 

execution facility’s arrangements and 

resources shall also facilitate the direct 

supervision of the market and the 

analysis of data collected to determine 

whether a rule violation has occurred. 

(c) Compliance staff and resources. A 

swap execution facility shall establish 

and maintain sufficient compliance staff 

and resources to ensure that it can 

conduct effective audit trail reviews, 

trade practice surveillance, market 

surveillance, and real-time market 

monitoring. The swap execution 

facility’s compliance staff shall also be 

sufficient to address unusual market or 

trading events as they arise, and to 

conduct and complete investigations in 

a timely manner, as set forth in 

§ 37.203(f). 

(d) Automated trade surveillance 

system. A swap execution facility shall 

maintain an automated trade 

surveillance system capable of detecting 

potential trade practice violations. The 

automated trade surveillance system 

shall load and process daily orders and 

trades no later than 24 hours after the 

completion of the trading day. The 

automated trade surveillance system 

shall have the capability to detect and 

flag specific trade execution patterns 

and trade anomalies; compute, retain, 

and compare trading statistics; compute 

trade gains, losses, and swap-equivalent 

positions; reconstruct the sequence of 

market activity; perform market 

analyses; and support system users to 

perform in-depth analyses and ad hoc 

queries of trade-related data. 

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(e) Real-time market monitoring. A 

swap execution facility shall conduct 

real-time market monitoring of all 

trading activity on its system(s) or 

platform(s) to identify disorderly trading 

and any market or system anomalies. A 

swap execution facility shall have the 

authority to adjust trade prices or cancel 

trades when necessary to mitigate 

market disrupting events caused by 

malfunctions in its system(s) or 

platform(s) or errors in orders submitted 

by members and market participants. 

Any trade price adjustments or trade 

cancellations shall be transparent to the 

market and subject to standards that are 

clear, fair, and publicly available. 

(f) Investigations and investigation 

reports—(1) Procedures. A swap 

execution facility shall establish and 

maintain procedures that require its 

compliance staff to conduct 

investigations of possible rule 

violations. An investigation shall be 

commenced upon the receipt of a 

request from Commission staff or upon 

the discovery or receipt of information 

by the swap execution facility that 

indicates a reasonable basis for finding 

that a violation may have occurred or 

will occur. 

(2) Timeliness. Each compliance staff 

investigation shall be completed in a 

timely manner. Absent mitigating 

factors, a timely manner is no later than 

12 months after the date that an 

investigation is opened. Mitigating 

factors that may reasonably justify an 

investigation taking longer than 12 

months to complete include the 

complexity of the investigation, the 

number of firms or individuals involved 

as potential wrongdoers, the number of 

potential violations to be investigated, 

and the volume of documents and data 

to be examined and analyzed by 

compliance staff. 

(3) Investigation reports when a 

reasonable basis exists for finding a 

violation. Compliance staff shall submit 

a written investigation report for 

disciplinary action in every instance in 

which compliance staff determines from 

surveillance or from an investigation 

that a reasonable basis exists for finding 

a rule violation. The investigation report 

shall include the reason the 

investigation was initiated; a summary 

of the complaint, if any; the relevant 

facts; compliance staff’s analysis and 

conclusions; and a recommendation as 

to whether disciplinary action should be 

pursued. 

(4) Investigation reports when no 

reasonable basis exists for finding a 

violation. If after conducting an 

investigation, compliance staff 

determines that no reasonable basis 

exists for finding a rule violation, it 

shall prepare a written report including 

the reason the investigation was 

initiated; a summary of the complaint, 

if any; the relevant facts; and 

compliance staff’s analysis and 

conclusions. 

(5) Warning letters. No more than one 

warning letter may be issued to the 

same person or entity found to have 

committed the same rule violation 

within a rolling twelve month period. 

(g) Additional sources for compliance. 

A swap execution facility may refer to 

the guidance and/or acceptable 

practices in Appendix B of this part to 

demonstrate to the Commission 

compliance with the requirements of 

§ 37.203. 

§ 37.204 Regulatory services provided by 

a third party. 

(a) Use of regulatory service provider 

permitted. A swap execution facility 

may choose to contract with a registered 

futures association or another registered 

entity, as such terms are defined under 

the Act, or the Financial Industry 

Regulatory Authority (collectively, 

‘‘regulatory service providers’’), for the 

provision of services to assist in 

complying with the Act and 

Commission regulations thereunder, as 

approved by the Commission. Any swap 

execution facility that chooses to 

contract with a regulatory service 

provider shall ensure that such provider 

has the capacity and resources 

necessary to provide timely and 

effective regulatory services, including 

adequate staff and automated 

surveillance systems. A swap execution 

facility shall at all times remain 

responsible for the performance of any 

regulatory services received, for 

compliance with the swap execution 

facility’s obligations under the Act and 

Commission regulations, and for the 

regulatory service provider’s 

performance on its behalf. 

(b) Duty to supervise regulatory 

service provider. A swap execution 

facility that elects to use the service of 

a regulatory service provider shall retain 

sufficient compliance staff to supervise 

the quality and effectiveness of the 

regulatory services provided on its 

behalf. Compliance staff of the swap 

execution facility shall hold regular 

meetings with the regulatory service 

provider to discuss ongoing 

investigations, trading patterns, market 

participants, and any other matters of 

regulatory concern. A swap execution 

facility shall also conduct periodic 

reviews of the adequacy and 

effectiveness of services provided on its 

behalf. Such reviews shall be 

documented carefully and made 

available to the Commission upon 

request. 

(c) Regulatory decisions required from 

the swap execution facility. A swap 

execution facility that elects to use the 

service of a regulatory service provider 

shall retain exclusive authority in all 

substantive decisions made by its 

regulatory service provider, including, 

but not limited to, decisions involving 

the cancellation of trades, the issuance 

of disciplinary charges against members 

or market participants, and denials of 

access to the trading platform for 

disciplinary reasons. A swap execution 

facility shall document any instances 

where its actions differ from those 

recommended by its regulatory service 

provider, including the reasons for the 

course of action recommended by the 

regulatory service provider and the 

reasons why the swap execution facility 

chose a different course of action. 

§ 37.205 Audit trail. 

A swap execution facility shall 

establish procedures to capture and 

retain information that may be used in 

establishing whether rule violations 

have occurred. 

(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 fill, allocation, or other 

disposition, and shall include both 

order and trade data. 

(b) Elements of an acceptable audit 

trail program—(1) Original source 

documents. A swap execution facility’s 

audit trail shall include original source 

documents. Original source documents 

include unalterable, sequentiallyidentified records on which trade 

execution information is originally 

recorded, whether recorded manually or 

electronically. Records for customer 

orders (whether filled, unfilled, or 

cancelled, each of which shall be 

retained or electronically captured) 

shall reflect the terms of the order, an 

account identifier that relates back to 

the account(s) owner(s), the time of 

order entry, and the time of trade 

execution. Swap execution facilities 

shall require that all orders, indications 

of interest, and requests for quotes be 

immediately captured in the audit trail. 

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(2) Transaction history database. A 

swap execution facility’s audit trail 

program shall include an electronic 

transaction history database. An 

adequate transaction history database 

includes a history of all indications of 

interest, requests for quotes, orders, and 

trades entered into a swap execution 

facility’s trading system or platform, 

including all order modifications and 

cancellations. An adequate transaction 

history database also includes: 

(i) All data that are input into the 

trade entry or matching system for the 

transaction to match and clear; 

(ii) The customer type indicator code; 

(iii) Timing and sequencing data 

adequate to reconstruct trading; and 

(iv) Identification of each account to 

which fills are allocated. 

(3) Electronic analysis capability. A 

swap execution facility’s audit trail 

program shall include electronic 

analysis capability with respect to all 

audit trail data in the transaction history 

database. Such electronic analysis 

capability shall ensure that the swap 

execution facility has the ability to 

reconstruct indications of interest, 

requests for quotes, orders, and trades, 

and identify possible trading violations 

with respect to both customer and 

market abuse. 

(4) Safe storage capability. A swap 

execution facility’s audit trail program 

shall include the capability to safely 

store all audit trail data retained in its 

transaction history database. Such safe 

storage capability shall include the 

capability to store all data in the 

database in a manner that protects it 

from unauthorized alteration, as well as 

from accidental erasure or other loss. 

Data shall be retained in accordance 

with the recordkeeping requirements of 

Core Principle 10 for swap execution 

facilities and the associated regulations 

in subpart K of this part. 

(c) Enforcement of audit trail 

requirements—(1) Annual audit trail 

and recordkeeping reviews. A swap 

execution facility shall enforce its audit 

trail and recordkeeping requirements 

through at least annual reviews of all 

members and persons and firms subject 

to the swap execution facility’s 

recordkeeping rules to verify their 

compliance with the swap execution 

facility’s audit trail and recordkeeping 

requirements. Such reviews shall 

include, but are not limited to, reviews 

of randomly selected samples of frontend audit trail data for order routing 

systems; a review of the process by 

which user identifications are assigned 

and user identification records are 

maintained; a review of usage patterns 

associated with user identifications to 

monitor for violations of user 

identification rules; and reviews of 

account numbers and customer type 

indicator codes in trade records to test 

for accuracy and improper use. 

(2) Enforcement program required. A 

swap execution facility shall establish a 

program for effective enforcement of its 

audit trail and recordkeeping 

requirements. An effective program 

shall identify members and persons and 

firms subject to the swap execution 

facility’s recordkeeping rules that have 

failed to maintain high levels of 

compliance with such requirements, 

and impose meaningful sanctions when 

deficiencies are found. Sanctions shall 

be sufficient to deter recidivist behavior. 

No more than one warning letter shall 

be issued to the same person or entity 

found to have committed the same 

violation of audit trail or recordkeeping 

requirements within a rolling twelve 

month period. 

§ 37.206 Disciplinary procedures and 

sanctions. 

A swap execution facility shall 

establish trading, trade processing, and 

participation rules that will deter abuses 

and have the capacity to enforce such 

rules through prompt and effective 

disciplinary action, including 

suspension or expulsion of members or 

market participants that violate the rules 

of the swap execution facility. 

(a) Enforcement staff. A swap 

execution facility shall establish and 

maintain sufficient enforcement staff 

and resources to effectively and 

promptly prosecute possible rule 

violations within the disciplinary 

jurisdiction of the swap execution 

facility. 

(b) Disciplinary panels. A swap 

execution facility shall establish one or 

more disciplinary panels that are 

authorized to fulfill their obligations 

under the rules of this subpart. 

Disciplinary panels shall meet the 

composition requirements of part 40 of 

this chapter, and shall not include any 

members of the swap execution 

facility’s compliance staff or any person 

involved in adjudicating any other stage 

of the same proceeding. 

(c) Hearings. A swap execution 

facility shall adopt rules that provide for 

the following minimum requirements 

for any hearing: 

(1) The hearing shall be fair, shall be 

conducted before members of the 

disciplinary panel, and shall be 

promptly convened after reasonable 

notice to the respondent; and 

(2) If the respondent has requested a 

hearing, a copy of the hearing shall be 

made and shall become a part of the 

record of the proceeding. The record 

shall not be required to be transcribed 

unless: 

(i) The transcript is requested by 

Commission staff or the respondent; 

(ii) The decision is appealed pursuant 

to the rules of the swap execution 

facility; or 

(iii) The decision is reviewed by the 

Commission pursuant to section 8c of 

the Act or part 9 of this chapter. In all 

other instances, a summary record of a 

hearing is permitted. 

(d) Decisions. Promptly following a 

hearing conducted in accordance with 

the rules of the swap execution facility, 

the disciplinary panel shall render a 

written decision based upon the weight 

of the evidence contained in the record 

of the proceeding and shall provide a 

copy to the respondent. The decision 

shall include: 

(1) The notice of charges or a 

summary of the charges; 

(2) The answer, if any, or a summary 

of the answer; 

(3) A summary of the evidence 

produced at the hearing or, where 

appropriate, incorporation by reference 

of the investigation report; 

(4) A statement of findings and 

conclusions with respect to each charge, 

and a complete explanation of the 

evidentiary and other basis for such 

findings and conclusions with respect to 

each charge; 

(5) An indication of each specific rule 

that the respondent was found to have 

violated; and 

(6) A declaration of all sanctions 

imposed against the respondent, 

including the basis for such sanctions 

and the effective date of such sanctions. 

(e) Disciplinary sanctions. All 

disciplinary sanctions imposed by a 

swap execution facility or its 

disciplinary panels shall be 

commensurate with the violations 

committed and shall be clearly 

sufficient to deter recidivism or similar 

violations by other market participants. 

All disciplinary sanctions, including 

sanctions imposed pursuant to an 

accepted settlement offer, shall take into 

account the respondent’s disciplinary 

history. In the event of demonstrated 

customer harm, any disciplinary 

sanction shall also include full customer 

restitution, except where the amount of 

restitution or to whom it should be 

provided cannot be reasonably 

determined. 

(f) Warning letters. Where a rule 

violation is found to have occurred, no 

more than one warning letter may be 

issued per rolling twelve month period 

for the same violation. 

(g) Additional sources for compliance. 

A swap execution facility may refer to 

the guidance and/or acceptable 

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practices in Appendix B of this part to 

demonstrate to the Commission 

compliance with the requirements of 

§ 37.206. 

Subpart D—Swaps Not Readily 

Susceptible to Manipulation 

§ 37.300 Core Principle 3—Swaps not 

readily susceptible to manipulation. 

The swap execution facility shall 

permit trading only in swaps that are 

not readily susceptible to manipulation. 

§ 37.301 General requirements. 

To demonstrate to the Commission 

compliance with the requirements of 

§ 37.300, a swap execution facility shall, 

at the time it submits a new swap 

contract in advance to the Commission 

pursuant to part 40 of this chapter, 

provide the applicable information as 

set forth in Appendix C to part 38 of this 

chapter—Demonstration of Compliance 

That a Contract is not Readily 

Susceptible to Manipulation. A swap 

execution facility may also refer to the 

guidance and/or acceptable practices in 

Appendix B of this part. 

Subpart E—Monitoring of Trading and 

Trade Processing 

§ 37.400 Core Principle 4—Monitoring of 

trading and trade processing. 

The swap execution facility shall: 

(a) Establish and enforce rules or 

terms and conditions defining, or 

specifications detailing: 

(1) Trading procedures to be used in 

entering and executing orders traded on 

or through the facilities of the swap 

execution facility; and 

(2) Procedures for trade processing of 

swaps on or through the facilities of the 

swap execution facility; and 

(b) Monitor trading in swaps to 

prevent manipulation, price distortion, 

and disruptions of the delivery or cash 

settlement process through surveillance, 

compliance, and disciplinary practices 

and procedures, including methods for 

conducting real-time monitoring of 

trading and comprehensive and accurate 

trade reconstructions. 

§ 37.401 General requirements. 

A swap execution facility shall: 

(a) Collect and evaluate data on its 

market participants’ market activity on 

an ongoing basis in order to detect and 

prevent manipulation, price distortions, 

and, where possible, disruptions of the 

physical-delivery or cash-settlement 

process; 

(b) Monitor and evaluate general 

market data in order to detect and 

prevent manipulative activity that 

would result in the failure of the market 

price to reflect the normal forces of 

supply and demand; 

(c) Demonstrate an effective program 

for conducting real-time monitoring of 

trading for the purpose of detecting and 

resolving abnormalities; and 

(d) Demonstrate the ability to 

comprehensively and accurately 

reconstruct daily trading activity for the 

purpose of detecting instances or threats 

of manipulation, price distortion, and 

disruptions. 

§ 37.402 Additional requirements for 

physical-delivery swaps. 

For physical-delivery swaps, the swap 

execution facility shall demonstrate that 

it: 

(a) Monitors a swap’s terms and 

conditions as they relate to the 

underlying commodity market; and 

(b) Monitors the availability of the 

supply of the commodity specified by 

the delivery requirements of the swap. 

§ 37.403 Additional requirements for cashsettled swaps. 

(a) For cash-settled swaps, the swap 

execution facility shall demonstrate that 

it monitors the pricing of the reference 

price used to determine cash flows or 

settlement; 

(b) For cash-settled swaps listed on 

the swap execution facility where the 

reference price is formulated and 

computed by the swap execution 

facility, the swap execution facility shall 

demonstrate that it monitors the 

continued appropriateness of its 

methodology for deriving that price; and 

(c) For cash-settled swaps listed on 

the swap execution facility where the 

reference price relies on a third-party 

index or instrument, including an index 

or instrument traded on another venue, 

the swap execution facility shall 

demonstrate that it monitors the 

continued appropriateness of the index 

or instrument. 

§ 37.404 Ability to obtain information. 

(a) A swap execution facility shall 

demonstrate that it has access to 

sufficient information to assess whether 

trading in swaps listed on its market, in 

the index or instrument used as a 

reference price, or in the underlying 

commodity for its listed swaps is being 

used to affect prices on its market. 

(b) A swap execution facility shall 

have rules that require its market 

participants to keep records of their 

trading, including records of their 

activity in the index or instrument used 

as a reference price, the underlying 

commodity, and related derivatives 

markets, and make such records 

available, upon request, to the swap 

execution facility or, if applicable, to its 

regulatory service provider, and the 

Commission. 

§ 37.405 Risk controls for trading. 

The swap execution facility shall 

establish and maintain risk control 

mechanisms to prevent and reduce the 

potential risk of market disruptions, 

including, but not limited to, market 

restrictions that pause or halt trading 

under market conditions prescribed by 

the swap execution facility. 

§ 37.406 Trade reconstruction. 

The swap execution facility shall have 

the ability to comprehensively and 

accurately reconstruct all trading on its 

facility. All audit-trail data and 

reconstructions shall be made available 

to the Commission in a form, manner, 

and time that is acceptable to the 

Commission. 

§ 37.407 Regulatory service provider. 

A swap execution facility shall 

comply with the regulations in this 

subpart through a dedicated regulatory 

department or by contracting with a 

regulatory service provider pursuant to 

§ 37.204. 

§ 37.408 Additional sources for 

compliance. 

A swap execution facility may refer to 

the guidance and/or acceptable 

practices in Appendix B of this part to 

demonstrate to the Commission 

compliance with the requirements of 

§ 37.400. 

Subpart F—Ability to Obtain 

Information 

§ 37.500 Core Principle 5—Ability to obtain 

information. 

The swap execution facility shall: 

(a) Establish and enforce rules that 

will allow the facility to obtain any 

necessary information to perform any of 

the functions described in section 5h of 

the Act; 

(b) Provide the information to the 

Commission on request; and 

(c) Have the capacity to carry out such 

international information-sharing 

agreements as the Commission may 

require. 

§ 37.501 Establish and enforce rules. 

A swap execution facility shall 

establish and enforce rules that will 

allow the swap execution facility to 

have the ability and authority to obtain 

sufficient information to allow it to fully 

perform its operational, risk 

management, governance, and 

regulatory functions and any 

requirements under this part, including 

the capacity to carry out international 

information-sharing agreements as the 

Commission may require. 

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§ 37.502 Collection of information. 

A swap execution facility shall have 

rules that allow it to collect information 

on a routine basis, allow for the 

collection of non-routine data from its 

market participants, and allow for its 

examination of books and records kept 

by the market participants on its facility. 

§ 37.503 Provide information to the 

Commission. 

A swap execution facility shall 

provide information in its possession to 

the Commission upon request, in a form 

and manner that the Commission 

approves. 

§ 37.504 Information-sharing agreements. 

A swap execution facility shall share 

information with other regulatory 

organizations, data repositories, and 

third-party data reporting services as 

required by the Commission or as 

otherwise necessary and appropriate to 

fulfill its self-regulatory and reporting 

responsibilities. Appropriate 

information-sharing agreements can be 

established with such entities or the 

Commission can act in conjunction with 

the swap execution facility to carry out 

such information sharing. 

Subpart G—Position Limits or 

Accountability 

§ 37.600 Core Principle 6—Position limits 

or accountability. 

(a) In general. To reduce the potential 

threat of market manipulation or 

congestion, especially during trading in 

the delivery month, a swap execution 

facility that is a trading facility shall 

adopt for each of the contracts of the 

facility, as is necessary and appropriate, 

position limitations or position 

accountability for speculators. 

(b) Position limits. For any contract 

that is subject to a position limitation 

established by the Commission pursuant 

to section 4a(a) of the Act, the swap 

execution facility shall: 

(1) Set its position limitation at a level 

no higher than the Commission 

limitation; and 

(2) Monitor positions established on 

or through the swap execution facility 

for compliance with the limit set by the 

Commission and the limit, if any, set by 

the swap execution facility. 

§ 37.601 Additional sources for 

compliance. 

Until such time that compliance is 

required under part 151 of this chapter, 

a swap execution facility may refer to 

the guidance and/or acceptable 

practices in Appendix B of this part to 

demonstrate to the Commission 

compliance with the requirements of 

§ 37.600. 

Subpart H—Financial Integrity of 

Transactions 

§ 37.700 Core Principle 7—Financial 

integrity of transactions. 

The swap execution facility shall 

establish and enforce rules and 

procedures for ensuring the financial 

integrity of swaps entered on or through 

the facilities of the swap execution 

facility, including the clearance and 

settlement of the swaps pursuant to 

section 2(h)(1) of the Act. 

§ 37.701 Required clearing. 

Transactions executed on or through 

the swap execution facility that are 

required to be cleared under section 

2(h)(1)(A) of the Act or are voluntarily 

cleared by the counterparties shall be 

cleared through a Commissionregistered derivatives clearing 

organization, or a derivatives clearing 

organization that the Commission has 

determined is exempt from registration. 

§ 37.702 General financial integrity. 

A swap execution facility shall 

provide for the financial integrity of its 

transactions: 

(a) By establishing minimum financial 

standards for its members, which shall, 

at a minimum, require that members 

qualify as an eligible contract 

participant as defined in section 1a(18) 

of the Act; 

(b) [Reserved] 

§ 37.703 Monitoring for financial 

soundness. 

A swap execution facility shall 

monitor its members to ensure that they 

continue to qualify as eligible contract 

participants as defined in section 1a(18) 

of the Act. 

Subpart I—Emergency Authority 

§ 37.800 Core Principle 8—Emergency 

authority. 

The swap execution facility shall 

adopt rules to provide for the exercise 

of emergency authority, in consultation 

or cooperation with the Commission, as 

is necessary and appropriate, including 

the authority to liquidate or transfer 

open positions in any swap or to 

suspend or curtail trading in a swap. 

§ 37.801 Additional sources for 

compliance. 

A swap execution facility may refer to 

the guidance and/or acceptable 

practices in Appendix B of this part to 

demonstrate to the Commission 

compliance with the requirements of 

§ 37.800. 

Subpart J—Timely Publication of 

Trading Information 

§ 37.900 Core Principle 9—Timely 

publication of trading information. 

(a) In general. The swap execution 

facility shall make public timely 

information on price, trading volume, 

and other trading data on swaps to the 

extent prescribed by the Commission. 

(b) Capacity of swap execution 

facility. The swap execution facility 

shall be required to have the capacity to 

electronically capture and transmit 

trade information with respect to 

transactions executed on the facility. 

§ 37.901 General requirements. 

With respect to swaps traded on or 

through a swap execution facility, each 

swap execution facility shall: 

(a) Report specified swap data as 

provided under part 43 and part 45 of 

this chapter; and 

(b) Meet the requirements of part 16 

of this chapter. 

Subpart K—Recordkeeping and 

Reporting 

§ 37.1000 Core Principle 10— 

Recordkeeping and reporting. 

(a) In general. A swap execution 

facility shall: 

(1) Maintain records of all activities 

relating to the business of the facility, 

including a complete audit trail, in a 

form and manner acceptable to the 

Commission for a period of five years; 

(2) Report to the Commission, in a 

form and manner acceptable to the 

Commission, such information as the 

Commission determines to be necessary 

or appropriate for the Commission to 

perform the duties of the Commission 

under the Act; and 

(3) Keep any such records relating to 

swaps defined in section 1a(47)(A)(v) of 

the Act open to inspection and 

examination by the Securities and 

Exchange Commission. 

(b) Requirements. The Commission 

shall adopt data collection and reporting 

requirements for swap execution 

facilities that are comparable to 

corresponding requirements for 

derivatives clearing organizations and 

swap data repositories. 

§ 37.1001 Recordkeeping. 

A swap execution facility shall 

maintain records of all activities relating 

to the business of the facility, in a form 

and manner acceptable to the 

Commission, for a period of at least five 

years. A swap execution facility shall 

maintain such records, including a 

complete audit trail for all swaps 

executed on or subject to the rules of the 

swap execution facility, investigatory 

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files, and disciplinary files, in 

accordance with the requirements of 

§ 1.31 and part 45 of this chapter. 

Subpart L—Antitrust Considerations 

§ 37.1100 Core Principle 11—Antitrust 

considerations. 

Unless necessary or appropriate to 

achieve the purposes of the Act, the 

swap execution facility shall not: 

(a) Adopt any rules or take any 

actions that result in any unreasonable 

restraint of trade; or 

(b) Impose any material 

anticompetitive burden on trading or 

clearing. 

§ 37.1101 Additional sources for 

compliance. 

A swap execution facility may refer to 

the guidance and/or acceptable 

practices in Appendix B of this part to 

demonstrate to the Commission 

compliance with the requirements of 

§ 37.1100. 

Subpart M—Conflicts of Interest 

§ 37.1200 Core Principle 12—Conflicts of 

interest. 

The swap execution facility shall: 

(a) Establish and enforce rules to 

minimize conflicts of interest in its 

decision-making process; and 

(b) Establish a process for resolving 

the conflicts of interest. 

Subpart N—Financial Resources 

§ 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 sufficient 

to enable it to perform its functions in 

compliance with the core principles set 

forth in section 5h of the Act. 

(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. 

(c) Financial resources shall be 

considered sufficient if their value is at 

least equal to a total amount that would 

enable the swap execution facility to 

cover its operating costs for a period of 

at least one year, calculated on a rolling 

basis. 

§ 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 

U.S. generally accepted accounting 

principles; and 

(b) Any other financial resource 

deemed acceptable by the Commission. 

§ 37.1303 Computation of projected 

operating costs to meet financial resource 

requirement. 

A swap execution facility shall, each 

fiscal quarter, make a reasonable 

calculation of its projected operating 

costs over a twelve-month period in 

order to determine the amount needed 

to meet the requirements of § 37.1301. 

The swap execution facility shall have 

reasonable discretion in determining the 

methodology used to compute such 

projected operating costs. The 

Commission may review the 

methodology and require changes as 

appropriate. 

§ 37.1304 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. Reductions 

in value to reflect market and credit risk 

(‘‘haircuts’’) shall be applied as 

appropriate. 

§ 37.1305 Liquidity of financial resources. 

The financial resources allocated by 

the swap execution facility to meet the 

requirements of § 37.1301 shall include 

unencumbered, liquid financial assets 

(i.e., cash and/or highly liquid 

securities) equal to at least six months’ 

operating costs. If any portion of such 

financial resources is not sufficiently 

liquid, the swap execution facility may 

take into account a committed line of 

credit or similar facility for the purpose 

of meeting this requirement. 

§ 37.1306 Reporting to the Commission. 

(a) Each fiscal quarter, or at any time 

upon Commission request, a swap 

execution facility shall: 

(1) Report to the Commission: 

(i) The amount of financial resources 

necessary to meet the requirements of 

§ 37.1301; and 

(ii) The value of each financial 

resource available, computed in 

accordance with the requirements of 

§ 37.1304; 

(2) Provide the Commission with a 

financial statement, including the 

balance sheet, income statement, and 

statement of cash flows of the swap 

execution facility or of its parent 

company; 

(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 fiscal quarter. 

(c) The swap execution facility shall 

provide the Commission with: 

(1) Sufficient documentation 

explaining the methodology used to 

compute its financial requirements 

under § 37.1301; 

(2) Sufficient documentation 

explaining the basis for its 

determinations regarding the valuation 

and liquidity requirements set forth in 

§§ 37.1304 and 37.1305; and 

(3) Copies of any agreements 

establishing or amending a credit 

facility, insurance coverage, or other 

arrangement evidencing or otherwise 

supporting the swap execution facility’s 

conclusions. 

(d) The reports 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 60 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. 

§ 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 under § 37.1303; 

(3) Request reports, in addition to 

fiscal quarter reports, under 

§ 37.1306(a); 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. 

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Subpart O—System Safeguards 

§ 37.1400 Core Principle 14—System 

safeguards. 

The swap execution facility shall: 

(a) Establish and maintain a program 

of risk analysis and oversight to identify 

and minimize sources of operational 

risk, through the development of 

appropriate controls and procedures, 

and automated systems, that: 

(1) Are reliable and secure; and 

(2) Have adequate scalable capacity; 

(b) Establish and maintain emergency 

procedures, backup facilities, and a plan 

for disaster recovery that allow for: 

(1) The timely recovery and 

resumption of operations; and 

(2) The fulfillment of the 

responsibilities and obligations of the 

swap execution facility; and 

(c) Periodically conduct tests to verify 

that the backup resources of the swap 

execution facility are sufficient to 

ensure continued: 

(1) Order processing and trade 

matching; 

(2) Price reporting; 

(3) Market surveillance; and 

(4) Maintenance of a comprehensive 

and accurate audit trail. 

§ 37.1401 Requirements. 

(a) A swap execution facility’s 

program of risk analysis and oversight 

with respect to its operations and 

automated systems shall address each of 

the following categories of risk analysis 

and oversight: 

(1) Information security; 

(2) Business continuity-disaster 

recovery planning and resources; 

(3) Capacity and performance 

planning; 

(4) Systems operations; 

(5) Systems development and quality 

assurance; and 

(6) Physical security and 

environmental controls. 

(b) A swap execution facility shall 

maintain a business continuity-disaster 

recovery plan and resources, emergency 

procedures, and backup facilities 

sufficient to enable timely recovery and 

resumption of its operations and 

resumption of its ongoing fulfillment of 

its responsibilities and obligations as a 

swap execution facility following any 

disruption of its operations. Such 

responsibilities and obligations include, 

without limitation, order processing and 

trade matching; transmission of 

matched orders to a designated clearing 

organization for clearing, where 

appropriate; price reporting; market 

surveillance; and maintenance of a 

comprehensive audit trail. The swap 

execution facility’s business continuitydisaster recovery plan and resources 

generally should enable resumption of 

trading and clearing of swaps executed 

on the swap execution facility during 

the next business day following the 

disruption. Swap execution facilities 

determined by the Commission to be 

critical financial markets pursuant to 

Appendix E to part 40 of this chapter 

are subject to more stringent 

requirements in this regard, set forth in 

§ 40.9 of this chapter. 

(c) A swap execution facility that is 

not determined by the Commission to be 

a critical financial market satisfies the 

requirement to be able to resume its 

operations and resume its ongoing 

fulfillment of its responsibilities and 

obligations during the next business day 

following any disruption of its 

operations by maintaining either: 

(1) Infrastructure and personnel 

resources of its own that are sufficient 

to ensure timely recovery and 

resumption of its operations and 

resumption of its ongoing fulfillment of 

its responsibilities and obligations as a 

swap execution facility following any 

disruption of its operations; or 

(2) Contractual arrangements with 

other swap execution facilities or 

disaster recovery service providers, as 

appropriate, that are sufficient to ensure 

continued trading and clearing of swaps 

executed on the swap execution facility, 

and ongoing fulfillment of all of the 

swap execution facility’s 

responsibilities and obligations with 

respect to such swaps, in the event that 

a disruption renders the swap execution 

facility temporarily or permanently 

unable to satisfy this requirement on its 

own behalf. 

(d) A swap execution facility shall 

notify Commission staff promptly of all: 

(1) Electronic trading halts and 

material system malfunctions; 

(2) Cyber security incidents or 

targeted threats that actually or 

potentially jeopardize automated system 

operation, reliability, security, or 

capacity; and 

(3) Activations of the swap execution 

facility’s business continuity-disaster 

recovery plan. 

(e) A swap execution facility shall 

provide Commission staff timely 

advance notice of all material: 

(1) Planned changes to automated 

systems that may impact the reliability, 

security, or adequate scalable capacity 

of such systems; and 

(2) Planned changes to the swap 

execution facility’s program of risk 

analysis and oversight. 

(f) A swap execution facility shall 

provide to the Commission, upon 

request, current copies of its business 

continuity-disaster recovery plan and 

other emergency procedures, its 

assessments of its operational risks, and 

other documents requested by 

Commission staff for the purpose of 

maintaining a current profile of the 

swap execution facility’s automated 

systems. 

(g) A swap execution facility shall 

conduct regular, periodic, objective 

testing and review of its automated 

systems to ensure that they are reliable, 

secure, and have adequate scalable 

capacity. A swap execution facility shall 

also conduct regular, periodic testing 

and review of its business continuitydisaster recovery capabilities. Pursuant 

to Core Principle 10 under section 5h of 

the Act (Recordkeeping and Reporting) 

and §§ 37.1000 through 37.1001, the 

swap execution facility shall keep 

records of all such tests, and make all 

test results available to the Commission 

upon request. 

(h) Part 40 of this chapter governs the 

obligations of those registered entities 

that the Commission has determined to 

be critical financial markets, with 

respect to maintenance and geographic 

dispersal of disaster recovery resources 

sufficient to meet a same-day recovery 

time objective in the event of a widescale disruption. Section 40.9 

establishes the requirements for core 

principle compliance in that respect. 

Subpart P—Designation of Chief 

Compliance Officer 

§ 37.1500 Core Principle 15—Designation 

of chief compliance officer. 

(a) In general. Each swap execution 

facility shall designate an individual to 

serve as a chief compliance officer. 

(b) Duties. The chief compliance 

officer shall: 

(1) Report directly to the board or to 

the senior officer of the facility; 

(2) Review compliance with the core 

principles in this subsection; 

(3) In consultation with the board of 

the facility, a body performing a 

function similar to that of a board, or the 

senior officer of the facility, resolve any 

conflicts of interest that may arise; 

(4) Be responsible for establishing and 

administering the policies and 

procedures required to be established 

pursuant to this section; 

(5) Ensure compliance with the Act 

and the rules and regulations issued 

under the Act, including rules 

prescribed by the Commission pursuant 

to section 5h of the Act; and 

(6) Establish procedures for the 

remediation of noncompliance issues 

found during compliance office reviews, 

look backs, internal or external audit 

findings, self-reported errors, or through 

validated complaints. 

(c) Requirements for procedures. In 

establishing procedures under 

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paragraph (b)(6) of this section, the chief 

compliance officer shall design the 

procedures to establish the handling, 

management response, remediation, 

retesting, and closing of noncompliance 

issues. 

(d) Annual reports—(1) In general. In 

accordance with rules prescribed by the 

Commission, the chief compliance 

officer shall annually prepare and sign 

a report that contains a description of: 

(i) The compliance of the swap 

execution facility with the Act; and 

(ii) The policies and procedures, 

including the code of ethics and conflict 

of interest policies, of the swap 

execution facility. 

(2) Requirements. The chief 

compliance officer shall: 

(i) Submit each report described in 

paragraph (d)(1) of this section with the 

appropriate financial report of the swap 

execution facility that is required to be 

submitted to the Commission pursuant 

to section 5h of the Act; and 

(ii) Include in the report a 

certification that, under penalty of law, 

the report is accurate and complete. 

§ 37.1501 Chief compliance officer. 

(a) Definition of board of directors. 

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. 

(b) Designation and qualifications of 

chief compliance officer—(1) Chief 

compliance officer required. Each swap 

execution facility shall establish the 

position of chief compliance officer and 

designate an individual to serve in that 

capacity. 

(i) The position of chief compliance 

officer shall carry with it the authority 

and resources to develop and enforce 

policies and procedures necessary 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. The individual designated to 

serve as chief compliance officer shall 

have the background and skills 

appropriate for fulfilling the 

responsibilities of the position. No 

individual disqualified from registration 

pursuant to sections 8a(2) or 8a(3) of the 

Act may serve as a chief compliance 

officer. 

(c) Appointment, supervision, and 

removal of chief compliance office—(1) 

Appointment and compensation of chief 

compliance officer. (i) A swap execution 

facility’s chief compliance officer shall 

be appointed by its board of directors or 

senior officer. A swap execution facility 

shall notify the Commission within two 

business days of appointing any new 

chief compliance officer, whether 

interim or permanent. 

(ii) The board of directors or the 

senior officer shall approve the 

compensation of the chief compliance 

officer. 

(iii) The chief compliance officer shall 

meet with the board of directors at least 

annually and the regulatory oversight 

committee at least quarterly. 

(iv) The chief compliance officer shall 

provide any information regarding the 

swap execution facility’s self-regulatory 

program that is requested by the board 

of directors or the regulatory oversight 

committee. 

(2) Supervision of chief compliance 

officer. A swap execution facility’s chief 

compliance officer shall report directly 

to the board of directors or to the senior 

officer of the swap execution facility, at 

the swap execution facility’s discretion. 

(3) Removal of chief compliance 

officer. (i) Removal of a swap execution 

facility’s chief compliance officer shall 

require the approval of a majority of the 

swap execution facility’s board of 

directors. If the swap execution facility 

does not have a board of directors, then 

the chief compliance officer may be 

removed by the senior officer of the 

swap execution facility. 

(ii) The swap execution facility shall 

notify the Commission of such removal 

within two business days. 

(d) Duties of chief compliance officer. 

The chief compliance officer’s duties 

shall include, but are not limited to, the 

following: 

(1) Overseeing and reviewing the 

swap execution facility’s compliance 

with section 5h of the Act and any 

related rules adopted by the 

Commission; 

(2) In consultation with the board of 

directors, a body performing a function 

similar to the board of directors, or the 

senior officer of the swap execution 

facility, resolving any conflicts of 

interest that may arise, including: 

(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; 

(4) Taking reasonable steps to ensure 

compliance with the Act and the rules 

of the Commission; 

(5) Establishing procedures for the 

remediation of noncompliance issues 

identified by the chief compliance 

officer through a compliance office 

review, look-back, internal or external 

audit finding, self-reported error, or 

validated complaint; 

(6) Establishing and following 

appropriate procedures for the handling, 

management response, remediation, 

retesting, and closing of noncompliance 

issues; 

(7) Establishing and administering a 

compliance manual designed to 

promote compliance with the applicable 

laws, rules, and regulations and a 

written code of ethics designed to 

prevent ethical violations and to 

promote honesty and ethical conduct; 

(8) Supervising the swap execution 

facility’s self-regulatory program 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 with respect to members 

and market participants (including 

ensuring compliance with, if applicable, 

financial integrity, financial reporting, 

sales practice, recordkeeping, and other 

requirements); and 

(9) 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. 

(e) Preparation of annual compliance 

report. The chief compliance officer 

shall, not less than annually, prepare 

and sign an annual compliance report 

that, at a minimum, contains the 

following information covering the time 

period since the date on which the swap 

execution facility became registered 

with the Commission or since the end 

of the period covered by a previously 

filed annual compliance report, as 

applicable: 

(1) A description of the swap 

execution facility’s written policies and 

procedures, including the code of ethics 

and conflict of interest policies; 

(2) A review of applicable 

Commission regulations and each 

subsection and core principle of section 

5h of the Act, that, with respect to each: 

(i) Identifies the policies and 

procedures that are designed to ensure 

compliance with each subsection and 

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core principle, including each duty 

specified in section 5h(f)(15)(B) of the 

Act; 

(ii) Provides a self-assessment as to 

the effectiveness of these policies and 

procedures; and 

(iii) Discusses areas for improvement 

and recommends potential or 

prospective changes or improvements to 

its compliance program and resources; 

(3) A list of any material changes to 

compliance policies and procedures 

since the last annual compliance report; 

(4) A description of the financial, 

managerial, and operational resources 

set aside for compliance with respect to 

the Act and Commission regulations, 

including a description of the swap 

execution facility’s self-regulatory 

program’s staffing and structure, a 

catalogue of investigations and 

disciplinary actions taken since the last 

annual compliance report, and a review 

of the performance of disciplinary 

committees and panels; 

(5) A description of any material 

compliance matters, including 

noncompliance issues identified 

through a compliance office review, 

look-back, internal or external audit 

finding, self-reported error, or validated 

complaint, and an explanation of how 

they were resolved; and 

(6) 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. 

(f) Submission of annual compliance 

report. (1) Prior to submission to the 

Commission, the chief compliance 

officer shall provide the annual 

compliance report to the board of 

directors of the swap execution facility 

for its review. If the swap execution 

facility does not have a board of 

directors, then the annual compliance 

report shall be provided to the senior 

officer for his or her review. Members of 

the board of directors and the senior 

officer shall not require the chief 

compliance officer to make any changes 

to the report. Submission of the report 

to the board of directors or the senior 

officer, and any subsequent discussion 

of the report, shall be recorded in board 

minutes or a similar written record, as 

evidence of compliance with this 

requirement. 

(2) The annual compliance report 

shall be submitted electronically to the 

Commission not later than 60 calendar 

days after the end of the swap execution 

facility’s fiscal year, concurrently with 

the filing of the fourth fiscal quarter 

financial report pursuant to § 37.1306. 

(3) 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. An amendment shall 

contain the certification required under 

paragraph (e)(6) of this section. 

(4) A swap execution facility may 

request from the Commission an 

extension of time to file its annual 

compliance report based on substantial, 

undue hardship. Extensions of the filing 

deadline may be granted at the 

discretion of the Commission. 

(g) Recordkeeping. (1) The swap 

execution facility shall maintain: 

(i) A copy of the written policies and 

procedures, including the code of ethics 

and conflicts of interest policies 

adopted in furtherance of compliance 

with the Act and Commission 

regulations; 

(ii) Copies of all materials created in 

furtherance of the chief compliance 

officer’s duties listed in paragraphs 

(d)(8) and (d)(9) of this section, 

including records of any investigations 

or disciplinary actions taken by the 

swap execution facility; 

(iii) Copies of all materials, including 

written reports provided to the board of 

directors or senior officer in connection 

with the review of the annual 

compliance report under paragraph 

(f)(1) of this section and the board 

minutes or a similar written record that 

documents the review of the annual 

compliance report by the board of 

directors or senior officer; and 

(iv) Any records relevant to the swap 

execution facility’s annual compliance 

report, including, but not limited to, 

work papers and other documents that 

form the basis of the report, and 

memoranda, correspondence, other 

documents, and records that are 

(A) Created, sent, or received in 

connection with the annual compliance 

report and 

(B) Contain conclusions, opinions, 

analyses, or financial data related to the 

annual compliance report. 

(2) The swap execution facility shall 

maintain records in accordance with 

§ 1.31 and part 45 of this chapter. 

(h) 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, authority to grant or deny a swap 

execution facility’s request for an 

extension of time to file its annual 

compliance report under paragraph 

(f)(4) of this section. 

Appendix A to Part 37—Form SEF 

COMMODITY FUTURES TRADING 

COMMISSION 

FORM SEF 

SWAP EXECUTION FACILITY 

APPLICATION OR AMENDMENT TO 

APPLICATION FOR REGISTRATION 

Registration Instructions 

Intentional misstatements or omissions of 

material fact may constitute federal criminal 

violations (7 U.S.C. § 13 and 18 U.S.C. 

§ 1001) or grounds for disqualification from 

registration. 

DEFINITIONS 

Unless the context requires otherwise, all 

terms used in this Form SEF have the same 

meaning as in the Commodity Exchange Act, 

as amended (‘‘Act’’), and in the General Rules 

and Regulations of the Commodity Futures 

Trading Commission (‘‘Commission’’) 

thereunder. 

For the purposes of this Form SEF, the 

term ‘‘Applicant’’ shall include any applicant 

for registration as a swap execution facility, 

any applicant amending a pending 

application, or any registered swap execution 

facility that is applying for an amendment to 

its order of registration. 

GENERAL INSTRUCTIONS 

1. This Form SEF, which includes 

instructions, a Cover Sheet, and required 

Exhibits (together, ‘‘Form SEF’’), is to be filed 

with the Commission by all Applicants, 

pursuant to section 5h of the Act and the 

Commission’s regulations thereunder. 

Applicants may prepare their own Form SEF 

but must follow the format prescribed herein. 

Upon the filing of an application for 

registration or a registration amendment in 

accordance with the instructions provided 

herein, the Commission will publish notice 

of the filing and afford interested persons an 

opportunity to submit written data, views, 

and arguments concerning such application. 

No application for registration or registration 

amendment shall be effective unless the 

Commission, by order, grants such 

registration or amended registration. 

2. Individuals’ names, except the executing 

signature, shall be given in full (Last Name, 

First Name, Middle Name). 

3. Signatures on all copies of the Form SEF 

filed with the Commission can be executed 

electronically. If this Form SEF is filed by a 

corporation, it shall be signed in the name of 

the corporation by a principal officer duly 

authorized; if filed by a limited liability 

company, it shall be signed in the name of 

the limited liability company by a manager 

or member duly authorized to sign on the 

limited liability company’s behalf; if filed by 

a partnership, it shall be signed in the name 

of the partnership by a general partner duly 

authorized; if filed by an unincorporated 

organization or association which is not a 

partnership, it shall be signed in the name of 

such organization or association by the 

managing agent, i.e., a duly authorized 

person who directs or manages or who 

participates in the directing or managing of 

its affairs. 

4. If this Form SEF is being filed as an 

application for registration, all applicable 

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items must be answered in full. If any item 

is inapplicable, indicate by ‘‘none,’’ ‘‘not 

applicable,’’ or ‘‘N/A,’’ as appropriate. 

5. Under section 5h of the Act and the 

Commission’s regulations thereunder, the 

Commission is authorized to solicit the 

information required to be supplied by this 

Form SEF from any Applicant seeking 

registration as a swap execution facility and 

from any registered swap execution facility. 

Disclosure by the Applicant of the 

information specified on this Form SEF is 

mandatory prior to the start of the processing 

of an application for, or an amendment to, 

registration as a swap execution facility. The 

information provided in this Form SEF will 

be used for the principal purpose of 

determining whether the Commission should 

grant or deny registration to an Applicant. 

The Commission may determine that 

additional information is required from the 

Applicant in order to process its application. 

A Form SEF which is not prepared and 

executed in compliance with applicable 

requirements and instructions may be 

returned as not acceptable for filing. 

Acceptance of this Form SEF, however, shall 

not constitute a finding that the Form SEF 

has been filed as required or that the 

information submitted is true, current, or 

complete. 

6. Except in cases where confidential 

treatment is requested by the Applicant and 

granted by the Commission pursuant to the 

Freedom of Information Act and the rules of 

the Commission thereunder, information 

supplied on this Form SEF will be included 

routinely in the public files of the 

Commission and will be available for 

inspection by any interested person. 

APPLICATION AMENDMENTS 

1. An Applicant amending a pending 

application for registration as a swap 

execution facility or requesting an 

amendment to an order of registration shall 

file an amended Form SEF electronically 

with the Secretary of the Commission in the 

manner specified by the Commission. 

Otherwise, a swap execution facility shall file 

any amendment to this Form SEF as a 

submission under part 40 of the 

Commission’s regulations or as specified by 

the Commission. 

2. When filing this Form SEF for purposes 

of amending a pending application or 

requesting an amendment to an order of 

registration, Applicants must re-file the 

Cover Sheet, amended if necessary and 

including an executing signature, and attach 

thereto revised Exhibits or other materials 

marked to show changes, as applicable. The 

submission of an amendment represents that 

the remaining items and Exhibits that are not 

amended remain true, current, and complete 

as previously filed. 

WHERE TO FILE 

This Form SEF must be filed electronically 

with the Secretary of the Commission in the 

manner specified by the Commission. 

COMMODITY FUTURES TRADING 

COMMISSION 

FORM SEF 

SWAP EXECUTION FACILITY 

APPLICATION OR AMENDMENT TO 

APPLICATION FOR REGISTRATION 

Cover Sheet 

lllllllllllllllllllll

Exact name of Applicant as specified in 

charter 

lllllllllllllllllllll

Address of principal executive offices 

b If this is an APPLICATION for 

registration, complete in full and check here. 

b If this is an AMENDMENT to an 

application, or to an existing order of 

registration, list all items that are amended 

and check here. 

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

GENERAL INFORMATION 

1. Name under which the business of 

the swap execution facility is or will be 

conducted, if different than name 

specified above (include acronyms, if 

any): 

lllllllllllllllllllll

2. If name of swap execution facility 

is being amended, state previous swap 

execution facility name: 

lllllllllllllllllllll

3. Contact information, including 

mailing address if different than address 

specified above: 

lllllllllllllllllllll

Number and Street 

lllllllllllllllllllll

City State Country Zip Code 

lllllllllllllllllllll

Main Phone Number Fax 

lllllllllllllllllllll

Web site URL Email Address 

4. List of principal office(s) and 

address(es) where swap execution 

facility activities are/will be conducted: 

Office 

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

Address 

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

5. If the Applicant is a successor to a 

previously registered swap execution 

facility, please complete the following: 

a. Date of succession 

lllllllllllllllllllll

b. Full name and address of 

predecessor registrant 

lllllllllllllllllllll

Name 

lllllllllllllllllllll

Number and Street 

lllllllllllllllllllll

City State Country Zip Code 

lllllllllllllllllllll

Main Phone Number Web site 

URL 

BUSINESS ORGANIZATION 

6. Applicant is a: 

b Corporation 

b Partnership 

b Limited Liability Company 

b Other form of organization (specify) 

lllllllllllllllllllll

7. Date of incorporation or formation: 

lllllllllllllllllllll

8. State of incorporation or 

jurisdiction of organization: 

lllllllllllllllllllll

9. The Applicant agrees and consents 

that the notice of any proceeding before 

the Commission in connection with this 

application may be given by sending 

such notice by certified mail to the 

person named below at the address 

given. 

lllllllllllllllllllll

Print Name and Title 

lllllllllllllllllllll

Name of Applicant 

lllllllllllllllllllll

Number and Street 

lllllllllllllllllllll

City State Zip Code 

SIGNATURES 

10. The Applicant has duly caused 

this application or amendment to be 

signed on its behalf by the undersigned, 

hereunto duly authorized, this lll 

day of llllll, 20ll. The 

Applicant and the undersigned 

represent hereby that all information 

contained herein is true, current, and 

complete. It is understood that all 

required items and Exhibits are 

considered integral parts of this Form 

SEF and that the submission of any 

amendment represents that all 

unamended items and Exhibits remain 

true, current, and complete as 

previously filed. 

lllllllllllllllllllll

Name of Applicant 

lllllllllllllllllllll

Signature of Duly Authorized Person 

lllllllllllllllllllll

Print Name and Title of Signatory 

COMMODITY FUTURES TRADING 

COMMISSION 

FORM SEF 

SWAP EXECUTION FACILITY 

APPLICATION OR AMENDMENT TO 

APPLICATION FOR REGISTRATION 

Exhibits Instructions 

The following Exhibits must be filed 

with the Commission by each Applicant 

applying for registration as a swap 

execution facility, or by a registered 

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swap execution facility amending its 

registration, pursuant to section 5h of 

the Act and the Commission’s 

regulations thereunder. The Exhibits 

must be labeled according to the items 

specified in this Form SEF. 

The application must include a Table 

of Contents listing each Exhibit required 

by this Form SEF and indicating which, 

if any, Exhibits are inapplicable. For any 

Exhibit that is inapplicable, next to the 

Exhibit letter specify ‘‘none,’’ ‘‘not 

applicable,’’ or ‘‘N/A,’’ as appropriate. 

If the Applicant is a newly formed 

enterprise and does not have the 

financial statements required pursuant 

to Items 9 and 10 (Exhibits I and J) of 

this Form SEF, the Applicant should 

provide pro forma financial statements 

for the most recent six months or since 

inception, whichever is less. 

List of Exhibits 

EXHIBITS—BUSINESS 

ORGANIZATION 

1. Attach as Exhibit A, the name of 

any person who owns ten percent (10%) 

or more of the Applicant’s stock or who, 

either directly or indirectly, through 

agreement or otherwise, in any other 

manner, may control or direct the 

management or policies of the 

Applicant. 

Provide as part of Exhibit A the full 

name and address of each such person 

and attach a copy of the agreement or, 

if there is none written, describe the 

agreement or basis upon which such 

person exercises or may exercise such 

control or direction. 

2. Attach as Exhibit B, a list of the 

present officers, directors, governors 

(and, in the case of an Applicant that is 

not a corporation, the members of all 

standing committees, grouped by 

committee), or persons performing 

functions similar to any of the foregoing, 

of the swap execution facility or of any 

entity that performs the regulatory 

activities of the Applicant, indicating 

for each: 

a. Name 

b. Title 

c. Dates of commencement and termination 

of present term of office or position 

d. Length of time each present officer, 

director, or governor has held the same 

office or position 

e. Brief account of the business experience of 

each officer and director over the last five 

(5) years 

f. Any other business affiliations in the 

derivatives and securities industry 

g. For directors, list any committees on 

which they serve and any compensation 

received by virtue of their directorship 

h. A description of: 

(1) Any order of the Commission with 

respect to such person pursuant to section 5e 

of the Act; 

(2) Any conviction or injunction against 

such person within the past ten (10) years; 

(3) Any disciplinary action with respect to 

such person within the last five (5) years; 

(4) Any disqualification under sections 8b 

and 8d of the Act; 

(5) Any disciplinary action under section 

8c of the Act; and 

(6) Any violation pursuant to section 9 of 

the Act. 

3. Attach as Exhibit C, a narrative that sets 

forth the fitness standards for the Board of 

Directors and its composition including the 

number and percentage of public directors. 

4. Attach as Exhibit D, a narrative or 

graphic description of the organizational 

structure of the Applicant. Include a list of 

all affiliates of the Applicant and indicate the 

general nature of the affiliation. Note: If the 

swap execution facility activities of the 

Applicant are or will be conducted primarily 

by a division, subdivision, or other separate 

entity within the Applicant, corporation, or 

organization, describe the relationship of 

such entity within the overall organizational 

structure and attach as Exhibit D a 

description only as it applies to the division, 

subdivision, or separate entity, as applicable. 

Additionally, provide any relevant 

jurisdictional information, including any and 

all jurisdictions in which the Applicant or 

any affiliated entity are doing business, and 

registration status, including pending 

applications (e.g., country, regulator, 

registration category, date of registration). 

Provide the address for legal service of 

process for each jurisdiction, which cannot 

be a post office box. 

5. Attach as Exhibit E, a description of the 

personnel qualifications for each category of 

professional employees employed by the 

Applicant or the division, subdivision, or 

other separate entity within the Applicant as 

described in Item 4. 

6. Attach as Exhibit F, an analysis of 

staffing requirements necessary to carry out 

the operations of the Applicant as a swap 

execution facility and the name and 

qualifications of each key staff person. 

7. Attach as Exhibit G, a copy of the 

constitution, articles of incorporation, 

formation, or association with all 

amendments thereto, partnership or limited 

liability agreements, and existing by-laws, 

operating agreement, rules or instruments 

corresponding thereto, of the Applicant. 

Include any additional governance fitness 

information not included in Exhibit C. 

Provide a certificate of good standing dated 

within one week of the date of this Form 

SEF. 

8. Attach as Exhibit H, a brief description 

of any material pending legal proceeding(s), 

other than ordinary and routine litigation 

incidental to the business, to which the 

Applicant or any of its affiliates is a party or 

to which any of its or their property is the 

subject. Include the name of the court or 

agency where the proceeding(s) are pending, 

the date(s) instituted, the principal parties 

involved, a description of the factual basis 

alleged to underlie the proceeding(s), and the 

relief sought. Include similar information as 

to any proceeding(s) known to be 

contemplated by the governmental agencies. 

EXHIBITS—FINANCIAL INFORMATION 

9. Attach as Exhibit I: 

a. (i) Balance sheet, (ii) Statement of 

income and expenses, (iii) Statement of cash 

flows, and (iv) Statement of sources and 

application of revenues and all notes or 

schedules thereto, as of the most recent fiscal 

year of the Applicant, or of its parent 

company, if applicable. If a balance sheet and 

any statement(s) certified by an independent 

public accountant are available, that balance 

sheet and statement(s) should be submitted 

as Exhibit I. 

b. Provide a narrative of how the value of 

the financial resources of the Applicant is at 

least equal to a total amount that would 

enable the Applicant to cover its operating 

costs for a period of at least one year, 

calculated on a rolling basis, and whether 

such financial resources include 

unencumbered, liquid financial assets (i.e., 

cash and/or highly liquid securities) equal to 

at least six months’ operating costs. 

c. Attach copies of any agreements 

establishing or amending a credit facility, 

insurance coverage, or other arrangement 

evidencing or otherwise supporting the 

Applicant’s conclusions regarding the 

liquidity of its financial assets. 

d. Representations regarding sources and 

estimates for future ongoing operational 

resources. 

10. Attach as Exhibit J, a balance sheet and 

an income and expense statement for each 

affiliate of the swap execution facility that 

also engages in swap execution facility 

activities or that engages in designated 

contract market activities as of the end of the 

most recent fiscal year of each such affiliate. 

11. Attach as Exhibit K, the following: 

a. A complete list of all dues, fees, and 

other charges imposed, or to be imposed, by 

or on behalf of the Applicant for its swap 

execution facility services that are provided 

on an exclusive basis and identify the service 

or services provided for each such due, fee, 

or other charge. 

b. A description of the basis and methods 

used in determining the level and structure 

of the dues, fees, and other charges listed in 

paragraph (a) of this item. 

c. If the Applicant differentiates, or 

proposes to differentiate, among its 

customers or classes of customers in the 

amount of any dues, fees, or other charges 

imposed for the same or similar exclusive 

services, describe and indicate the amount of 

each differential. In addition, identify and 

describe any differences in the cost of 

providing such services and any other factors 

that account for such differentiations. 

EXHIBITS—COMPLIANCE 

12. Attach as Exhibit L, a narrative and any 

other form of documentation that may be 

provided under other Exhibits herein, that 

describes the manner in which the Applicant 

is able to comply with each core principle. 

Such documentation must include a 

regulatory compliance chart setting forth 

each core principle and providing citations to 

the Applicant’s relevant rules, policies, and 

procedures that address each core principle. 

To the extent that the application raises 

issues that are novel or for which compliance 

with a core principle is not self-evident, 

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include an explanation of how that item and 

the application satisfy the core principles. 

13. Attach as Exhibit M, a copy of the 

Applicant’s rules (as defined in § 40.1 of the 

Commission’s regulations) and any technical 

manuals, other guides, or instructions for 

users of, or participants in, the market, 

including minimum financial standards for 

members or market participants. Include 

rules citing applicable federal position limits 

and aggregation standards in part 151 of the 

Commission’s regulations and any facility set 

position limit rules. Include rules on 

publication of daily trading information with 

regards to the requirements of part 16 of the 

Commission’s regulations. The Applicant 

should include an explanation and any other 

form of documentation that the Applicant 

thinks will be helpful to its explanation, 

demonstrating how its rules, technical 

manuals, other guides, or instructions for 

users of, or participants in, the market, or 

minimum financial standards for members or 

market participants as provided in this 

Exhibit M help support the swap execution 

facility’s compliance with the core 

principles. 

14. Attach as Exhibit N, executed or 

executable copies of any agreements or 

contracts entered into or to be entered into 

by the Applicant, including third party 

regulatory service provider or member or 

user agreements that enable or empower the 

Applicant to comply with applicable core 

principles. Identify: (1) the services that will 

be provided; and (2) the core principles 

addressed by such agreement. 

15. Attach as Exhibit O, a copy of any 

compliance manual and any other documents 

that describe with specificity the manner in 

which the Applicant will conduct trade 

practice, market, and financial surveillance. 

16. Attach as Exhibit P, a description of the 

Applicant’s disciplinary and enforcement 

protocols, tools, and procedures and, if 

applicable, the arrangements for alternative 

dispute resolution. 

17. Attach as Exhibit Q, an explanation 

regarding the operation of the Applicant’s 

trading system(s) or platform(s) and the 

manner in which the system(s) or platform(s) 

satisfy any Commission rules, 

interpretations, or guidelines regarding a 

swap execution facility’s execution methods, 

including the minimum trading functionality 

requirement in § 37.3(a)(2) of the 

Commission’s regulations. This explanation 

should include, as applicable, the following: 

a. For trading systems or platforms that 

enable market participants to engage in 

transactions through an order book: 

(1) How the trading system or platform 

displays all orders and trades in an electronic 

or other form, and the timeliness in which 

the trading system or platform does so; 

(2) How all market participants have the 

ability to see and have the ability to transact 

on all bids and offers; and 

(3) An explanation of the trade matching 

algorithm, if applicable, and examples of 

how that algorithm works in various trading 

scenarios involving various types of orders. 

b. For trading systems or platforms that 

enable market participants to engage in 

transactions through a request for quote 

system: 

(1) How a market participant transmits a 

request for a quote to buy or sell a specific 

instrument to no less than three market 

participants in the trading system or 

platform, to which all such market 

participants may respond; 

(2) How resting bids or offers from the 

Applicant’s Order Book are communicated to 

the requester; and 

(3) How a requester may transact on resting 

bids or offers along with the responsive 

orders. 

c. How the timing delay described under 

§ 37.9 of the Commission’s regulations is 

incorporated into the trading system or 

platform. 

18. Attach as Exhibit R, a list of rules 

prohibiting specific trade practice violations. 

19. Attach as Exhibit S, a discussion of 

how trading data will be maintained by the 

swap execution facility. 

20. Attach as Exhibit T, a list of the name 

of the clearing organization(s) that will be 

clearing the Applicant’s trades, and a 

representation that clearing members of that 

organization will be guaranteeing such 

trades. 

21. Attach as Exhibit U, any information 

(described with particularity) included in the 

application that will be subject to a request 

for confidential treatment pursuant to § 145.9 

of the Commission’s regulations. 

EXHIBITS—OPERATIONAL CAPABILITY 

22. Attach as Exhibit V, information 

responsive to the Technology Questionnaire. 

This questionnaire focuses on information 

pertaining to the Applicant’s program of risk 

analysis and oversight. Main topic areas 

include: information security; business 

continuity-disaster recovery planning and 

resources; capacity and performance 

planning; systems operations; systems 

development and quality assurance; and 

physical security and environmental 

controls. The questionnaire will be provided 

to Applicants on the Commission’s Web site. 

Appendix B to Part 37—Guidance on, 

and Acceptable Practices in, 

Compliance with Core Principles 

1. This appendix provides guidance on 

complying with core principles, both initially 

and on an ongoing basis, to maintain 

registration under section 5h of the Act and 

this part 37. Where provided, guidance is set 

forth in paragraph (a) following the relevant 

heading and can be used to demonstrate to 

the Commission compliance with the 

selected requirements of a core principle of 

this part 37. The guidance for the core 

principle is illustrative only of the types of 

matters a swap execution facility may 

address, as applicable, and is not intended to 

be used as a mandatory checklist. Addressing 

the issues set forth in this appendix would 

help the Commission in its consideration of 

whether the swap execution facility is in 

compliance with the selected requirements of 

a core principle; provided however, that the 

guidance is not intended to diminish or 

replace, in any event, the obligations and 

requirements of applicants and swap 

execution facilities to comply with the 

regulations provided under this part 37. 

2. Where provided, acceptable practices 

meeting selected requirements of core 

principles are set forth in paragraph (b) 

following the guidance. Swap execution 

facilities that follow specific practices 

outlined in the acceptable practices for a core 

principle in this appendix will meet the 

selected requirements of the applicable core 

principle; provided however, that the 

acceptable practice is not intended to 

diminish or replace, in any event, the 

obligations and requirements of applicants 

and swap execution facilities to comply with 

the regulations provided under this part 37. 

The acceptable practices are for illustrative 

purposes only and do not state the exclusive 

means for satisfying a core principle. 

Core Principle 1 of Section 5h of the Act— 

Compliance With Core Principles 

(A) In general. To be registered, and 

maintain registration, as a swap execution 

facility, the swap execution facility shall 

comply with—the core principles described 

in section 5h of the Act; and any requirement 

that the Commission may impose by rule or 

regulation pursuant to section 8a(5) of the 

Act. 

(B) Reasonable discretion of swap 

execution facility. Unless otherwise 

determined by the Commission by rule or 

regulation, a swap execution facility 

described in paragraph (A) shall have 

reasonable discretion in establishing the 

manner in which the swap execution facility 

complies with the core principles described 

in section 5h of the Act. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Core Principle 2 of Section 5h of the Act— 

Compliance With Rules 

A swap execution facility shall: 

(A) Establish and enforce compliance with 

any rule of the swap execution facility, 

including the terms and conditions of the 

swaps traded or processed on or through the 

swap execution facility and any limitation on 

access to the swap execution facility; 

(B) Establish and enforce trading, trade 

processing, and participation rules that will 

deter abuses and have the capacity to detect, 

investigate, and enforce those rules, 

including means to provide market 

participants with impartial access to the 

market and to capture information that may 

be used in establishing whether rule 

violations have occurred; 

(C) Establish rules governing the operation 

of the facility, including rules specifying 

trading procedures to be used in entering and 

executing orders traded or posted on the 

facility, including block trades; and 

(D) Provide by its rules that when a swap 

dealer or major swap participant enters into 

or facilitates a swap that is subject to the 

mandatory clearing requirement of section 

2(h) of the Act, the swap dealer or major 

swap participant shall be responsible for 

compliance with the mandatory trading 

requirement under section 2(h)(8) of the Act. 

(a) Guidance. 

(1) Investigations and investigation 

reports—Warning letters. The rules of a swap 

execution facility may authorize its 

compliance staff to issue a warning letter to 

a person or entity under investigation or to 

recommend that a disciplinary panel take 

such an action. 

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(2) Additional rules required. A swap 

execution facility should adopt and enforce 

any additional rules that it believes are 

necessary to comply with the requirements of 

§ 37.203. 

(3) Enforcement staff. A swap execution 

facility’s enforcement staff should not 

include either members of the swap 

execution facility or persons whose interests 

conflict with their enforcement duties. A 

member of the enforcement staff should not 

operate under the direction or control of any 

person or persons with trading privileges at 

the swap execution facility. A swap 

execution facility’s enforcement staff may 

operate as part of the swap execution 

facility’s compliance department. 

(4) Notice of charges. If compliance staff 

authorized by a swap execution facility or a 

swap execution facility disciplinary panel 

determines, based upon reviewing an 

investigation report pursuant to 

§ 37.203(f)(3), that a reasonable basis exists 

for finding a violation and adjudication is 

warranted, it should direct that the person or 

entity alleged to have committed the 

violation be served with a notice of charges 

and should proceed in accordance with this 

guidance. A notice of charges should 

adequately state the acts, conduct, or 

practices in which the respondent is alleged 

to have engaged; state the rule, or rules, 

alleged to have been violated (or about to be 

violated); advise the respondent that it is 

entitled, upon request, to a hearing on the 

charges; and prescribe the period within 

which a hearing on the charges may be 

requested. If the rules of the swap execution 

facility so provide, a notice may also advise: 

(i) That failure to request a hearing within 

the period prescribed in the notice, except for 

good cause, may be deemed a waiver of the 

right to a hearing; and 

(ii) That failure to answer or to deny 

expressly a charge may be deemed to be an 

admission of such charge. 

(5) Right to representation. Upon being 

served with a notice of charges, a respondent 

should have the right to be represented by 

legal counsel or any other representative of 

its choosing in all succeeding stages of the 

disciplinary process, except by any member 

of the swap execution facility’s board of 

directors or disciplinary panel, any employee 

of the swap execution facility, or any person 

substantially related to the underlying 

investigations, such as a material witness or 

respondent. 

(6) Answer to charges. A respondent 

should be given a reasonable period of time 

to file an answer to a notice of charges. The 

rules of a swap execution facility governing 

the requirements and timeliness of a 

respondent’s answer to a notice of charges 

should be fair, equitable, and publicly 

available. 

(7) Admission or failure to deny charges. 

The rules of a swap execution facility may 

provide that if a respondent admits or fails 

to deny any of the charges, a disciplinary 

panel may find that the violations alleged in 

the notice of charges for which the 

respondent admitted or failed to deny any of 

the charges have been committed. If the swap 

execution facility’s rules so provide, then: 

(i) The disciplinary panel should impose a 

sanction for each violation found to have 

been committed; 

(ii) The disciplinary panel should 

promptly notify the respondent in writing of 

any sanction to be imposed pursuant to 

paragraph (7)(i) of this guidance and shall 

advise the respondent that it may request a 

hearing on such sanction within the period 

of time, which shall be stated in the notice; 

(iii) The rules of a swap execution facility 

may provide that if a respondent fails to 

request a hearing within the period of time 

stated in the notice, the respondent will be 

deemed to have accepted the sanction. 

(8) Denial of charges and right to hearing. 

In every instance where a respondent has 

requested a hearing on a charge that is 

denied, or on a sanction set by the 

disciplinary panel, the respondent should be 

given an opportunity for a hearing in 

accordance with the rules of the swap 

execution facility. 

(9) Settlement offers. (i) The rules of a 

swap execution facility may permit a 

respondent to submit a written offer of 

settlement at any time after an investigation 

report is completed. The disciplinary panel 

presiding over the matter may accept the 

offer of settlement, but may not alter the 

terms of a settlement offer unless the 

respondent agrees. 

(ii) The rules of a swap execution facility 

may provide that, in its discretion, a 

disciplinary panel may permit the 

respondent to accept a sanction without 

either admitting or denying the rule 

violations upon which the sanction is based. 

(iii) If an offer of settlement is accepted, the 

panel accepting the offer should issue a 

written decision specifying the rule 

violations it has reason to believe were 

committed, including the basis or reasons for 

the panel’s conclusions, and any sanction to 

be imposed, which should include full 

customer restitution where customer harm is 

demonstrated, except where the amount of 

restitution or to whom it should be provided 

cannot be reasonably determined. If an offer 

of settlement is accepted without the 

agreement of the enforcement staff, the 

decision should adequately support the 

disciplinary panel’s acceptance of the 

settlement. Where applicable, the decision 

should also include a statement that the 

respondent has accepted the sanctions 

imposed without either admitting or denying 

the rule violations. 

(iv) The respondent may withdraw his or 

her offer of settlement at any time before final 

acceptance by a disciplinary panel. If an offer 

is withdrawn after submission, or is rejected 

by a disciplinary panel, the respondent 

should not be deemed to have made any 

admissions by reason of the offer of 

settlement and should not be otherwise 

prejudiced by having submitted the offer of 

settlement. 

(10) Hearings. (i) The swap execution 

facility need not apply the formal rules of 

evidence for a hearing; nevertheless, the 

procedures for the hearing may not be so 

informal as to deny a fair hearing. No 

member of the disciplinary panel for the 

matter may have a financial, personal, or 

other direct interest in the matter under 

consideration. 

(ii) In advance of the hearing, the 

respondent should be entitled to examine all 

books, documents, or other evidence in the 

possession or under the control of the swap 

execution facility. The swap execution 

facility may withhold documents that: Are 

privileged or constitute attorney work 

product; were prepared by an employee of 

the swap execution facility but will not be 

offered in evidence in the disciplinary 

proceedings; may disclose a technique or 

guideline used in examinations, 

investigations, or enforcement proceedings; 

or disclose the identity of a confidential 

source. 

(iii) The swap execution facility’s 

enforcement and compliance staffs should be 

parties to the hearing, and the enforcement 

staff should present their case on those 

charges and sanctions that are the subject of 

the hearing. 

(iv) The respondent should be entitled to 

appear personally at the hearing, should be 

entitled to cross-examine any persons 

appearing as witnesses at the hearing, and 

should be entitled to call witnesses and to 

present such evidence as may be relevant to 

the charges. 

(v) The swap execution facility should 

require persons within its jurisdiction who 

are called as witnesses to participate in the 

hearing and produce evidence. The swap 

execution facility should make reasonable 

efforts to secure the presence of all other 

persons called as witnesses whose testimony 

would be relevant. 

(vi) The rules of a swap execution facility 

may provide that a sanction may be 

summarily imposed upon any person within 

its jurisdiction whose actions impede the 

progress of a hearing. 

(11) Right to appeal. The rules of a swap 

execution facility may permit the parties to 

a proceeding to appeal promptly an adverse 

decision of a disciplinary panel in all or in 

certain classes of cases. Such rules may 

require a party’s notice of appeal to be in 

writing and to specify the findings, 

conclusions, or sanctions to which objection 

are taken. If the rules of a swap execution 

facility permit appeals, then both the 

respondent and the enforcement staff should 

have the opportunity to appeal and the swap 

execution facility should provide for the 

following: 

(i) The swap execution facility should 

establish an appellate panel that should be 

authorized to hear appeals of respondents. In 

addition, the rules of a swap execution 

facility may provide that the appellate panel 

may, on its own initiative, order review of a 

decision by a disciplinary panel within a 

reasonable period of time after the decision 

has been rendered. 

(ii) The composition of the appellate panel 

should be consistent with part 40 of this 

chapter, and should not include any 

members of the swap execution facility’s 

compliance staff or any person involved in 

adjudicating any other stage of the same 

proceeding. The rules of a swap execution 

facility should provide for the appeal 

proceeding to be conducted before all of the 

members of the appellate panel or a panel 

thereof. 

(iii) Except for good cause shown, the 

appeal or review should be conducted solely 

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on the record before the disciplinary panel, 

the written exceptions filed by the parties, 

and the oral or written arguments of the 

parties. 

(iv) Promptly following the appeal or 

review proceeding, the appellate panel 

should issue a written decision and should 

provide a copy to the respondent. The 

decision issued by the appellate panel should 

adhere to all the requirements of § 37.206(d) 

to the extent that a different conclusion is 

reached from that issued by the disciplinary 

panel. 

(12) Final decisions. Each swap execution 

facility should establish rules setting forth 

when a decision rendered pursuant to its 

rules will become the final decision of such 

swap execution facility. 

(13) Summary fines for violations of rules 

regarding timely submission of records. A 

swap execution facility may adopt a 

summary fine schedule for violations of rules 

relating to the failure to timely submit 

accurate records required for clearing or 

verifying each day’s transactions. A swap 

execution facility may permit its compliance 

staff, or a designated panel of swap execution 

facility officials, to summarily impose minor 

sanctions against persons within the swap 

execution facility’s jurisdiction for violating 

such rules. A swap execution facility’s 

summary fine schedule may allow for 

warning letters to be issued for first-time 

violations or violators. If adopted, a summary 

fine schedule should provide for 

progressively larger fines for recurring 

violations. 

(14) Emergency disciplinary actions. (i) A 

swap execution facility may impose a 

sanction, including suspension, or take other 

summary action against a person or entity 

subject to its jurisdiction upon a reasonable 

belief that such immediate action is 

necessary to protect the best interest of the 

marketplace. 

(ii) Any emergency disciplinary action 

should be taken in accordance with a swap 

execution facility’s procedures that provide 

for the following: 

(A) If practicable, a respondent should be 

served with a notice before the action is 

taken, or otherwise at the earliest possible 

opportunity. The notice should state the 

action, briefly state the reasons for the action, 

and state the effective time and date, and the 

duration of the action. 

(B) The respondent should have the right 

to be represented by legal counsel or any 

other representative of its choosing in all 

proceedings subsequent to the emergency 

action taken. The respondent should be given 

the opportunity for a hearing as soon as 

reasonably practicable and the hearing 

should be conducted before the disciplinary 

panel pursuant to the rules of the swap 

execution facility. 

(C) Promptly following the hearing 

provided for in paragraph (14)(ii)(B) of this 

guidance, the swap execution facility should 

render a written decision based upon the 

weight of the evidence contained in the 

record of the proceeding and should provide 

a copy to the respondent. The decision 

should include a description of the summary 

action taken; the reasons for the summary 

action; a summary of the evidence produced 

at the hearing; a statement of findings and 

conclusions; a determination that the 

summary action should be affirmed, 

modified, or reversed; and a declaration of 

any action to be taken pursuant to the 

determination, and the effective date and 

duration of such action. 

(b) Acceptable Practices. [Reserved] 

Core Principle 3 of Section 5h of the Act— 

Swaps Not Readily Susceptible to 

Manipulation 

The swap execution facility shall permit 

trading only in swaps that are not readily 

susceptible to manipulation. 

(a) Guidance. 

(1) In general, a swap contract is an 

agreement to exchange a series of cash flows 

over a period of time based on some 

reference price, which could be a single 

price, such as an absolute level or a 

differential, or a price index calculated based 

on multiple observations. Moreover, such a 

reference price may be reported by the swap 

execution facility itself or by an independent 

third party. When listing a swap for trading, 

a swap execution facility shall ensure a 

swap’s compliance with Core Principle 3, 

paying special attention to the reference price 

used to determine the cash flow exchanges. 

Specifically, Core Principle 3 requires that 

the reference price used by a swap not be 

readily susceptible to manipulation. As a 

result, when identifying a reference price, a 

swap execution facility should either: 

Calculate its own reference price using 

suitable and well-established acceptable 

methods or carefully select a reliable thirdparty index. 

(2) The importance of the reference price’s 

suitability for a given swap is similar to that 

of the final settlement price for a cash-settled 

futures contract. If the final settlement price 

is manipulated, then the futures contract 

does not serve its intended price discovery 

and risk management functions. Similarly, 

inappropriate reference prices cause the cash 

flows between the buyer and seller to differ 

from the proper amounts, thus benefitting 

one party and disadvantaging the other. 

Thus, careful consideration should be given 

to the potential for manipulation or 

distortion of the reference price. 

(3) For swaps that are settled by physical 

delivery or by cash settlement refer to the 

guidance in appendix C to part 38 of this 

chapter—Demonstration of Compliance That 

a Contract is not Readily Susceptible to 

Manipulation, section b(2) and section c(5), 

respectively. 

(b) Acceptable Practices. [Reserved] 

Core Principle 4 of Section 5h of the Act— 

Monitoring of Trading and Trade Processing 

The swap execution facility shall: 

(A) Establish and enforce rules or terms 

and conditions defining, or specifications 

detailing: 

(1) Trading procedures to be used in 

entering and executing orders traded on or 

through the facilities of the swap execution 

facility; and 

(2) Procedures for trade processing of 

swaps on or through the facilities of the swap 

execution facility; and 

(B) Monitor trading in swaps to prevent 

manipulation, price distortion, and 

disruptions of the delivery or cash settlement 

process through surveillance, compliance, 

and disciplinary practices and procedures, 

including methods for conducting real-time 

monitoring of trading and comprehensive 

and accurate trade reconstructions. 

(a) Guidance. The monitoring of trading 

activity in listed swaps should be designed 

to prevent manipulation, price distortion, 

and disruptions of the physical-delivery and 

cash settlement processes. The swap 

execution facility should have rules in place 

that allow it to intervene to prevent or reduce 

such market disruptions. Once a threatened 

or actual disruption is detected, the swap 

execution facility should take steps to 

prevent the market disruption or reduce its 

severity. 

(1) General requirements. Real-time 

monitoring for market anomalies is the most 

effective, but the swap execution facility may 

also demonstrate that it has an acceptable 

program if some of the monitoring is 

accomplished on a T+1 basis. The monitoring 

of trading should use automated alerts to 

detect abnormal price movements and 

unusual trading volumes in real-time and 

instances or threats of manipulation, price 

distortion, and disruptions on at least a T+1 

basis. The T+1 detection and analysis should 

incorporate any additional data that becomes 

available on a T+1 basis, including the trade 

reconstruction data. In some cases, a swap 

execution facility may demonstrate that its 

manual processes are effective. The swap 

execution facility should continually monitor 

the appropriateness of its swaps’ terms and 

conditions, including the physical-delivery 

requirements or reference prices used to 

determine cash flows or settlement. The 

swap execution facility should act promptly 

to address the conditions that are causing 

price distortions or market disruptions, 

including, when appropriate, changes to 

contract terms. The swap execution facility 

should be mindful that changes to contract 

terms may affect whether a product is subject 

to the trade execution and clearing 

requirements of the Act. 

(2) Physical-delivery swaps. For physicaldelivery swaps, the swap execution facility 

should monitor for conditions that may cause 

the swap to become susceptible to price 

manipulation or distortion, including: The 

general availability of the commodity 

specified by the swap, the commodity’s 

characteristics, and the delivery locations; 

and if available, information related to the 

size and ownership of deliverable supplies. 

(3) Cash-settled swaps. For cash-settled 

swaps, the swap execution facility should 

monitor for pricing abnormalities in the 

index or instrument used to calculate the 

reference price. If the swap execution facility 

computes its own reference price used for 

cash flows or settlement, it should promptly 

amend any methodologies that result, or are 

likely to result, in manipulation, price 

distortions, or market disruptions, or impose 

new methodologies to resolve the threat of 

disruptions or distortions. If the swap 

execution facility relies upon a third-party 

index or instrument, including an index or 

instrument traded on another venue for the 

swap reference price, it should conduct due 

diligence to ensure that the reference price is 

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not susceptible to manipulation and that the 

terms and conditions of the swap continue to 

comply with § 37.300. 

(4) Ability to obtain information. The swap 

execution facility shall demonstrate that it 

has access to sufficient information to assess 

whether trading in swaps listed on its 

market, in the index or instrument used as 

a reference price, or the underlying 

commodity for its listed swaps is being used 

to affect prices on its market. The swap 

execution facility should demonstrate that it 

can obtain position and trading information 

directly from the market participants that 

conduct substantial trading on its facility or 

through an information sharing agreement 

with other venues or a third-party regulatory 

service provider. If the position and trading 

information is not available directly from the 

market participants in its markets, but is 

available through information sharing 

agreements with other trading venues or a 

third-party regulatory service provider, the 

swap execution facility should cooperate in 

such information sharing agreements. The 

swap execution facility may limit the 

application of the requirement for market 

participants to keep and provide records of 

their activity in the index or instrument used 

as a reference price, the underlying 

commodity, and related derivatives markets, 

to only those market participants that 

conduct substantial trading on its facility. 

(5) Risk controls for trading. An acceptable 

program for preventing market disruptions 

shall demonstrate appropriate trading risk 

controls, in addition to pauses and halts. Risk 

controls should be adapted to the unique 

characteristics of the trading platform and of 

the markets to which they apply and should 

be designed to avoid market disruptions 

without unduly interfering with that market’s 

price discovery function. The swap execution 

facility may choose from among controls that 

include: pre-trade limits on order size, price 

collars or bands around the current price, 

message throttles, daily price limits, and 

intraday position limits related to financial 

risk to the clearing member, or design other 

types of controls, as well as clear error-trade 

and order-cancellation policies. Within the 

specific array of controls that are selected, 

the swap execution facility should set the 

parameters for those controls, so that the 

specific parameters are reasonably likely to 

serve the purpose of preventing market 

disruptions and price distortions. If a swap 

is fungible with, linked to, or a substitute for 

other swaps on the swap execution facility or 

on other trading venues, such risk controls 

should, to the extent practicable, be 

coordinated with any similar controls placed 

on those other swaps. If a swap is based on 

the level of an equity index, such risk 

controls should, to the extent practicable, be 

coordinated with any similar controls placed 

on national security exchanges. 

(b) Acceptable practices. [Reserved] 

Core Principle 5 of Section 5h of the Act— 

Ability To Obtain Information 

The swap execution facility shall: 

(A) Establish and enforce rules that will 

allow the facility to obtain any necessary 

information to perform any of the functions 

described in section 5h of the Act; 

(B) Provide the information to the 

Commission on request; and 

(C) Have the capacity to carry out such 

international information-sharing agreements 

as the Commission may require. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Core Principle 6 of Section 5h of the Act— 

Position Limits or Accountability 

(A) In general. To reduce the potential 

threat of market manipulation or congestion, 

especially during trading in the delivery 

month, a swap execution facility that is a 

trading facility shall adopt for each of the 

contracts of the facility, as is necessary and 

appropriate, position limitations or position 

accountability for speculators. 

(B) Position limits. For any contract that is 

subject to a position limitation established by 

the Commission pursuant to section 4a(a) of 

the Act, the swap execution facility shall: 

(1) Set its position limitation at a level no 

higher than the Commission limitation; and 

(2) Monitor positions established on or 

through the swap execution facility for 

compliance with the limit set by the 

Commission and the limit, if any, set by the 

swap execution facility. 

(a) Guidance. Until such time that 

compliance is required under part 151 of this 

chapter, a swap execution facility should 

have reasonable discretion to comply with 

§ 37.600, including considering part 150 of 

this chapter. For Required Transactions as 

defined in § 37.9, a swap execution facility 

may demonstrate compliance with § 37.600 

by setting and enforcing position limitations 

or position accountability levels only with 

respect to trading on the swap execution 

facility’s own market. For Permitted 

Transactions as defined in § 37.9, a swap 

execution facility may demonstrate 

compliance with § 37.600 by setting and 

enforcing position accountability levels or 

sending the Commission a list of Permitted 

Transactions traded on the swap execution 

facility. 

(b) Acceptable Practices. [Reserved] 

Core Principle 7 of Section 5h of the Act— 

Financial Integrity of Transactions 

The swap execution facility shall establish 

and enforce rules and procedures for 

ensuring the financial integrity of swaps 

entered on or through the facilities of the 

swap execution facility, including the 

clearance and settlement of the swaps 

pursuant to section 2(h)(1) of the Act. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Core Principle 8 of Section 5h of the Act— 

Emergency Authority 

The swap execution facility shall adopt 

rules to provide for the exercise of emergency 

authority, in consultation or cooperation 

with the Commission, as is necessary and 

appropriate, including the authority to 

liquidate or transfer open positions in any 

swap or to suspend or curtail trading in a 

swap. 

(a) Guidance. 

(1) A swap execution facility should have 

rules that authorize it to take certain actions 

in the event of an emergency, as defined in 

§ 40.1(h) of this chapter. A swap execution 

facility should have the authority to 

intervene as necessary to maintain markets 

with fair and orderly trading and to prevent 

or address manipulation or disruptive trading 

practices, whether the need for intervention 

arises exclusively from the swap execution 

facility’s market or as part of a coordinated, 

cross-market intervention. A swap execution 

facility should have the flexibility and 

independence to address market emergencies 

in an effective and timely manner consistent 

with the nature of the emergency, as long as 

all such actions taken by the swap execution 

facility are made in good faith to protect the 

integrity of the markets. However, the swap 

execution facility should also have rules that 

allow it to take market actions as may be 

directed by the Commission. Additionally, in 

situations where a swap is traded on more 

than one platform, emergency action to 

liquidate or transfer open interest shall be as 

directed, or agreed to, by the Commission or 

the Commission’s staff. Swap execution 

facility rules should include procedures and 

guidelines for decision-making and 

implementation of emergency intervention 

that avoid conflicts of interest in accordance 

with the provisions of section 40.9 of this 

chapter, and include alternate lines of 

communication and approval procedures to 

address emergencies associated with real 

time events. To address perceived market 

threats, the swap execution facility should 

have rules that allow it to take emergency 

actions, including imposing or modifying 

position limits, imposing or modifying price 

limits, imposing or modifying intraday 

market restrictions, imposing special margin 

requirements, ordering the liquidation or 

transfer of open positions in any contract, 

ordering the fixing of a settlement price, 

extending or shortening the expiration date 

or the trading hours, suspending or curtailing 

trading in any contract, transferring customer 

contracts and the margin, or altering any 

contract’s settlement terms or conditions, or, 

if applicable, providing for the carrying out 

of such actions through its agreements with 

its third-party provider of clearing or 

regulatory services. 

(2) A swap execution facility should 

promptly notify the Commission of its 

exercise of emergency action, explaining its 

decision-making process, the reasons for 

using its emergency authority, and how 

conflicts of interest were minimized, 

including the extent to which the swap 

execution facility considered the effect of its 

emergency action on the underlying markets 

and on markets that are linked or referenced 

to the contracts traded on its facility, 

including similar markets on other trading 

venues. Information on all regulatory actions 

carried out pursuant to a swap execution 

facility’s emergency authority should be 

included in a timely submission of a certified 

rule pursuant to part 40 of this chapter. 

(b) Acceptable Practices. [Reserved] 

Core Principle 9 of Section 5h of the Act— 

Timely Publication of Trading Information 

(A) In general. The swap execution facility 

shall make public timely information on 

price, trading volume, and other trading data 

on swaps to the extent prescribed by the 

Commission. 

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33602 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

(B) Capacity of swap execution facility. 

The swap execution facility shall be required 

to have the capacity to electronically capture 

and transmit trade information with respect 

to transactions executed on the facility. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Core Principle 10 of Section 5h of the Act— 

Recordkeeping and Reporting 

(A) In general. A swap execution facility 

shall: 

(1) Maintain records of all activities 

relating to the business of the facility, 

including a complete audit trail, in a form 

and manner acceptable to the Commission 

for a period of five years; 

(2) Report to the Commission, in a form 

and manner acceptable to the Commission, 

such information as the Commission 

determines to be necessary or appropriate for 

the Commission to perform the duties of the 

Commission under the Act; and 

(3) Keep any such records relating to swaps 

defined in section 1a(47)(A)(v) of the Act 

open to inspection and examination by the 

Securities and Exchange Commission. 

(B) Requirements. The Commission shall 

adopt data collection and reporting 

requirements for swap execution facilities 

that are comparable to corresponding 

requirements for derivatives clearing 

organizations and swap data repositories. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Core Principle 11 of Section 5h of the Act— 

Antitrust Considerations 

Unless necessary or appropriate to achieve 

the purposes of the Act, the swap execution 

facility shall not: 

(A) Adopt any rules or take any actions 

that result in any unreasonable restraint of 

trade; or 

(B) Impose any material anticompetitive 

burden on trading or clearing. 

(a) Guidance. An entity seeking registration 

as a swap execution facility may request that 

the Commission consider under the 

provisions of section 15(b) of the Act, any of 

the entity’s rules, including trading protocols 

or policies, and including both operational 

rules and the terms or conditions of products 

listed for trading, at the time of registration 

or thereafter. The Commission intends to 

apply section 15(b) of the Act to its 

consideration of issues under this core 

principle in a manner consistent with that 

previously applied to contract markets. 

(b) Acceptable Practices. [Reserved] 

Core Principle 12 of Section 5h of the Act— 

Conflicts of Interest: 

The swap execution facility shall: 

(A) Establish and enforce rules to minimize 

conflicts of interest in its decision-making 

process; and 

(B) Establish a process for resolving the 

conflicts of interest. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Core Principle 13 of Section 5h of the Act— 

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. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Core Principle 14 of Section 5h of the Act— 

System Safeguards 

The swap execution facility shall: 

(A) Establish and maintain a program of 

risk analysis and oversight to identify and 

minimize sources of operational risk, through 

the development of appropriate controls and 

procedures, and automated systems, that: 

(1) Are reliable and secure; and 

(2) Have adequate scalable capacity; 

(B) Establish and maintain emergency 

procedures, backup facilities, and a plan for 

disaster recovery that allow for: 

(1) The timely recovery and resumption of 

operations; and 

(2) The fulfillment of the responsibilities 

and obligations of the swap execution 

facility; and 

(C) Periodically conduct tests to verify that 

the backup resources of the swap execution 

facility are sufficient to ensure continued: 

(1) Order processing and trade matching; 

(2) Price reporting; 

(3) Market surveillance; and 

(4) Maintenance of a comprehensive and 

accurate audit trail. 

(a) Guidance. 

(1) Risk analysis and oversight program. In 

addressing the categories of its risk analysis 

and oversight program, a swap execution 

facility should follow generally accepted 

standards and best practices with respect to 

the development, operation, reliability, 

security, and capacity of automated systems. 

(2) Testing. A swap execution facility’s 

testing of its automated systems and business 

continuity-disaster recovery capabilities 

should be conducted by qualified, 

independent professionals. Such qualified 

independent professionals may be 

independent contractors or employees of the 

swap execution facility, but should not be 

persons responsible for development or 

operation of the systems or capabilities being 

tested. 

(3) Coordination. To the extent practicable, 

a swap execution facility should: 

(i) Coordinate its business continuitydisaster recovery plan with those of the 

market participants it depends upon to 

provide liquidity, in a manner adequate to 

enable effective resumption of activity in its 

markets following a disruption causing 

activation of the swap execution facility’s 

business continuity-disaster recovery plan; 

(ii) Initiate and coordinate periodic, 

synchronized testing of its business 

continuity-disaster recovery plan with those 

of the market participants it depends upon to 

provide liquidity; and 

(iii) Ensure that its business continuitydisaster recovery plan takes into account 

such plans of its telecommunications, power, 

water, and other essential service providers. 

(b) Acceptable Practices. [Reserved] 

Core Principle 15 of Section 5h of the Act— 

Designation of Chief Compliance Officer 

(A) In general. Each swap execution 

facility shall designate an individual to serve 

as a chief compliance officer. 

(B) Duties. The chief compliance officer 

shall: 

(1) Report directly to the board or to the 

senior officer of the facility; 

(2) Review compliance with the core 

principles in this subsection; 

(3) In consultation with the board of the 

facility, a body performing a function similar 

to that of a board, or the senior officer of the 

facility, resolve any conflicts of interest that 

may arise; 

(4) Be responsible for establishing and 

administering the policies and procedures 

required to be established pursuant to this 

section; 

(5) Ensure compliance with the Act and the 

rules and regulations issued under the Act, 

including rules prescribed by the 

Commission pursuant to section 5h of the 

Act; and 

(6) Establish procedures for the 

remediation of noncompliance issues found 

during compliance office reviews, look backs, 

internal or external audit findings, selfreported errors, or through validated 

complaints. 

(C) Requirements for procedures. In 

establishing procedures under paragraph 

(B)(6) of this section, the chief compliance 

officer shall design the procedures to 

establish the handling, management 

response, remediation, retesting, and closing 

of noncompliance issues. 

(D) Annual reports. 

(1) In general. In accordance with rules 

prescribed by the Commission, the chief 

compliance officer shall annually prepare 

and sign a report that contains a description 

of: 

(i) The compliance of the swap execution 

facility with the Act; and 

(ii) The policies and procedures, including 

the code of ethics and conflict of interest 

policies, of the swap execution facility. 

(2) Requirements. The chief compliance 

officer shall: 

(i) Submit each report described in clause 

(1) with the appropriate financial report of 

the swap execution facility that is required to 

be submitted to the Commission pursuant to 

section 5h of the Act; and 

(ii) Include in the report a certification 

that, under penalty of law, the report is 

accurate and complete. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Issued in Washington, DC, on May 17, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Appendices to Core Principles and 

Other Requirements for Swap 

Execution Facilities 

NOTE: The following appendices will not 

appear in the Code of Federal Regulations. 

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Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 33603 

1CEA section 5h(e). 

2Commissioner Scott D. O’Malia Dissenting 

Statement, Process for a Designated Contract Market 

or Swap Execution Facility to Make a Swap 

Available to Trade under Section 2(h)(8) of the 

Commodity Exchange Act; Swap Transaction 

Compliance and Implementation Schedule; Trade 

Execution Requirement Under Section 2(h) of the 

Commodity Exchange Act (May 16, 2013). 

3A SEF is defined as a ‘‘trading system . . . in 

which multiple participants have the ability to . . . 

trade swaps by accepting bids and offers made by 

multiple participants in the . . . system, through 

any means of interstate commerce.’’ CEA section 

1(a)(50). 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton, O’Malia and Wetjen 

voted in the affirmative; Commissioner 

Sommers voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rulemaking on swap 

execution facilities (SEFs). This rule is key to 

fulfilling transparency reforms that Congress 

mandated in the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

Congress included a trade execution 

requirement in the law. This means that 

swaps subject to mandatory clearing and 

made available to trade would move to 

transparent trading platforms. Market 

participants would benefit from the price 

competition that comes from trading 

platforms where multiple participants have 

the ability to trade swaps by accepting bids 

and offers made by multiple participants. 

Congress also said that the market 

participants must have impartial access to 

these platforms. 

Farmers, ranchers, producers and 

commercial companies that want to hedge a 

risk by locking in a future price or rate would 

get the benefit of the competition and 

transparency that trading platforms, both 

SEFs and designated contract markets 

(DCMs), will provide. 

These transparent platforms will give 

everyone looking to compete in the 

marketplace the ability to see the prices of 

available bids and offers prior to making a 

decision on a transaction. By the end of this 

year, a significant portion of interest rate and 

credit derivative index swaps would be in 

full view to the marketplace before 

transactions occur. This is a significant shift 

toward market transparency from the status 

quo. 

Such common-sense transparency has 

existed in the securities and futures markets 

since the historic reforms of the 1930s. 

Transparency lowers costs for investors, 

businesses and consumers, as it shifts 

information from dealers to the broader 

public. It promotes competition and 

increases liquidity. 

As Congress made clear in the law, trading 

on SEFs and DCMs would be required only 

when financial institutions transact with 

financial institutions. End-users would 

benefit from access to the information on 

these platforms, but would not be required to 

use them. 

Further, companies would be able to 

continue relying on customized 

transactions—those not required to be 

cleared—to meet their particular needs, as 

well as to enter into large block trades. 

Consistent with Congress’ directive that 

multiple parties have the ability to trade with 

multiple parties on these transparent 

platforms, these reforms require that market 

participants trade through an order book, and 

provide the flexibility as well to seek 

requests for quotes. 

To be a registered SEF, the trading platform 

will be required to provide an order book to 

all its market participants. This is significant, 

as for the first time, the broad public will be 

able to gain access and compete in this 

market with the assurance that their bids or 

offers will be communicated to the rest of the 

market. This provision alone will 

significantly enhance transparency and 

competition in the market. 

SEFs also will have the flexibility to offer 

trading through requests for quotes. The rule 

provides that such requests would have to go 

out to a minimum of three unaffiliated 

market participants before a swap that is 

cleared, made available to trade and less than 

a block could be executed. There will be an 

initial phase-in period with a minimum of 

two participants to smooth the transition. 

As long as the minimum functionality is 

met, as detailed in the rule, and the SEF 

complies with these rules and the core 

principles, the SEF can conduct business 

through any means of interstate commerce, 

such as the Internet, telephone or even the 

mail. Thus, today’s rule is technology 

neutral. 

Under these transparency reforms coupled 

with the Commission’s rule on making swaps 

available for trading, the trade execution 

requirement will be phased in for market 

participants, giving them time to comply. 

These reforms benefited from extensive 

public comments. Moving forward, the CFTC 

will work with SEF applicants on 

implementation. 

Appendix 3—Concurring Statement of 

Commissioner Scott D. O’Malia 

Today, the Commission votes to establish 

a new trading venue, a Swap Execution 

Facility (SEF) that will allow market 

participants to access a more transparent 

market and offer innovative trading 

opportunities. Unlike the futures exchanges 

which are tied to a single clearinghouse, 

trades executed on SEFs can be cleared at 

different clearinghouses, which will provide 

a new competitive execution space. For these 

reasons, I have always had high hopes for 

SEFs. 

I am pleased that the final rule has been 

revised to soften many of the proposed rough 

edges and should allow for a smooth 

transition to this new trading environment. 

The final rule allows for a streamlined 

temporary registration process to ensure that 

SEF platforms are not disadvantaged by 

regulatory delays that could stifle 

competition or provide a first-mover 

advantage. However, instead of 

‘‘rubberstamping’’ SEFs’ applications, a 

better approach would have been to conduct 

a more substantive, but limited review of 

applications by coming up with a Checklist 

that contains specific requirements and that 

takes into account work already done by the 

National Futures Association in reviewing 

the SEFs’ systems and rulebooks. 

I am also cautiously optimistic about the 

Commission’s commitment to revisit the SEF 

rule and other Commission’s rules to address 

regulatory conflicts with foreign 

jurisdictions. Such regulatory disparities will 

discourage U.S. and foreign traders from 

doing business in the United States and 

prompt them to move their businesses to 

foreign jurisdictions with a less restrictive 

trading environment. I am pleased to have 

the commitment of Chairman Gensler who 

stated his intention to revisit the SEF rule if 

it proves to conflict with international 

regulatory requirements making U.S. 

platforms uncompetitive or disadvantaged as 

a result of this rulemaking. 

For SEFs to be successful, the Commission 

must be faithful to the express directives of 

Dodd-Frank and implement rules that are 

clear and promote efficient and fair trading. 

As I explain below, the Commission’s rules 

have fallen short of these objectives. 

The Rule’s Requirement To Send a Request 

for Quote to Three Market Participants Is 

Not Supported by Law 

Dodd-Frank seeks to ‘‘promote the trading 

on SEFs and to promote pre-trade price 

transparency in the swaps market.’’ 1 To 

advance these objectives, the rule must 

permit SEFs to offer flexible execution 

platforms that ensure pre-trade price 

transparency, but at the same time, allow 

participants (buy-side, sell-side, commercial 

firms) to execute various products with 

different levels of trading liquidity at the 

price acceptable to them. 

Thus, the success of a SEF is determined 

by whether it will be able to meet the 

liquidity needs of various market 

participants. Although the rules allow a 

Request for Quote (RFQ) to accommodate 

transactions in less liquid products to the 

extent that such products are determined to 

be made available to trade as provided in the 

Made Available to Trade rule,2 I am 

concerned that the requirement to broadcast 

a quote to at least three market participants 

is not supported by the statute and is not 

based on data analysis.3

One way for the Commission to assess 

trading liquidity on a SEF and make 

necessary adjustments to the RFQ 

requirement is to analyze transaction data 

that the Commission now receives from 

Swap Data Repositories (SDRs). Over time, as 

liquidity increases and the market feels more 

confident about SEFs, there will be a natural 

progression for market participants to migrate 

to more centralized execution platforms and 

the role of the RFQ may be significantly 

reduced. But again, the Commission should 

not come up with an unsubstantiated number 

and declare it to be the law. Instead, the 

Commission must make such determination 

based on an evaluation of the SDR 

transaction data. 

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33604 Federal Register / Vol. 78, No. 107 / Tuesday, June 4, 2013 / Rules and Regulations 

4CEA section 1(a) (50). 5Commission Regulation § 37.9. 

The Rule Should Have Provided Further 

Clarity Regarding Voice Execution. 

SEFs, by definition, may execute swaps 

‘‘through any means of interstate 

commerce.’’ 4 As I mentioned before, I 

strongly support the use of various methods 

of execution, including voice, to foster a 

competitive trading environment on a SEF. I 

am pleased that the final rule acknowledges 

the ‘‘any means of interstate commerce’’ 

clause and provides for a role of voice and 

other means of execution. However, I remain 

concerned that although the preamble to the 

rule provides an example of a voice-based 

method of execution, the rule text does not 

expressly allow for voice and other execution 

methods.5 A better approach would have 

been to add voice to the rule text as the third 

method of execution on a SEF. 

The Rule Should Have Provided Clarity 

Regarding Exchange of Swaps for Related 

Position Transactions 

For some unknown reason, the draft rule 

prohibited trades involving an Exchange of 

Swaps for Related Positions (ESRPs). Yet 

again, such ban would have caused the 

pendulum of the Commission’s regulations to 

continue its swing toward futures trading as 

the Commodity Exchange Act (CEA) 

expressly allows for bone fide Exchange of 

Futures for Related Positions transactions. 

The Commission sought to ban ESRPs 

transactions because they were not expressly 

allowed by the CEA. Just because these 

transactions are not mentioned in the statute, 

they don’t have to be banned by the 

Commission’s rules. 

I am glad that in the final rule, the 

Commission took a more reasonable 

approach and now has committed to 

entertaining requests from market 

participants to permit off-exchange trades 

where swaps are components of exchanges of 

swaps for physicals transactions. 

Conclusion 

For the reasons stated above, I reluctantly 

concur with the decision of the Commission 

to approve this final rule. 

[FR Doc. 2013–12242 Filed 6–3–13; 8:45 am] 

BILLING CODE 6351–01–P 

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