```

[Federal Register Volume 78, Number 107 (Tuesday, June 4, 2013)]
[Rules and Regulations]
[Pages 33475-33604]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12242]

[[Page 33475]]

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

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

[[Page 33476]]

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

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. Sec.  37.1--Scope
    2. Sec.  37.2--Applicable Provisions
    3. Sec.  37.3--Requirements for Registration
    4. Sec.  37.4--Procedures for Listing Products and Implementing 
Rules
    5. Sec.  37.5--Information Relating to Swap Execution Facility 
Compliance
    6. Sec.  37.6--Enforceability
    7. Sec.  37.7--Prohibited Use of Data Collected for Regulatory 
Purposes
    8. Sec.  37.8--Boards of Trade Operating Both a Designated 
Contract Market and a Swap Execution Facility
    9. Sec.  37.9--Permitted Execution Methods
    10. Sec.  37.10--Swaps Made Available for Trading
    11. Sec.  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) Sec.  37.200--Core Principle 2--Compliance With Rules
    (b) Sec.  37.201--Operation of Swap Execution Facility and 
Compliance With Rules
    (c) Sec.  37.202--Access Requirements
    (d) Sec.  37.203--Rule Enforcement Program
    (e) Sec.  37.204--Regulatory Services Provided by a Third Party
    (f) Sec.  37.205--Audit Trail
    (g) Sec.  37.206--Disciplinary Procedures and Sanctions
    (h) Sec.  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) Sec.  37.401--General Requirements
    (b) Sec.  37.402--Additional Requirements for Physical-Delivery 
Swaps
    (c) Sec.  37.403--Additional Requirements for Cash-Settled Swaps
    (d) Sec.  37.404--Ability To Obtain Information
    (e) Sec.  37.405--Risk Controls for Trading
    (f) Sec.  37.406--Trade Reconstruction
    (g) Sec.  37.407--Additional Rules Required
    5. Subpart F--Core Principle 5 (Ability To Obtain Information)
    (a) Sec.  37.501--Establish and Enforce Rules
    (b) Sec.  37.502--Collection of Information
    (c) Sec.  37.503--Provide Information to the Commission
    (d) Sec.  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) Sec.  37.701--Mandatory Clearing
    (b) Sec.  37.702--General Financial Integrity
    (c) Sec.  37.703--Monitoring for Financial Soundness
    8. Subpart I--Core Principle 8 (Emergency Authority)
    (a) Sec.  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) Sec.  37.1301--General Requirements
    (b) Sec.  37.1302--Types of Financial Resources
    (c) Sec.  37.1303--Computation of Financial Resource Requirement
    (d) Sec.  37.1304--Valuation of Financial Resources
    (e) Sec.  37.1305--Liquidity of Financial Resources
    (f) Sec.  37.1306--Reporting Requirements
    14. Subpart O--Core Principle 14 (System Safeguards)
    (a) Sec.  37.1401--Requirements
    15. Subpart P--Core Principle 15 (Designation of Chief 
Compliance Officer)
    (a) Sec.  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 Dodd-Frank 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,

[[Page 33477]]

2010, President Obama signed the Dodd-Frank Act,\3\ which tasked the 
Commission with overseeing a large portion of the U.S. swaps market.
---------------------------------------------------------------------------

    \1\ See Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (2000).
    \2\ 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 299, 352, 363-364, 386, 621 n. 56 
(2011), available at http://fcic-static.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).
---------------------------------------------------------------------------

    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 pre-trade 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.
---------------------------------------------------------------------------

    \4\ Pursuant 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.
    \6\ See Financial Stability Board, Implementing OTC Derivatives 
Market Reforms, at 41 (Oct. 25, 2010), available at http://www.financialstabilityboard.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.
---------------------------------------------------------------------------

    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 Dodd-Frank 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\
---------------------------------------------------------------------------

    \7\ See 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.
    \8\ CEA section 5h(a)(1), as enacted by section 733 of the Dodd-
Frank Act; 7 U.S.C. 7b-3(a)(1).
    \9\ CEA section 1a(50), as amended by section 721 of the Dodd-
Frank Act; 7 U.S.C. 1a(50).
    \10\ CEA section 2(h)(8), as amended by section 723 of the Dodd-
Frank Act; 7 U.S.C. 2(h)(8).
    \11\ CEA section 5h, as enacted by section 733 of the Dodd-Frank 
Act; 7 U.S.C. 7b-3.
---------------------------------------------------------------------------

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

    \12\ CEA section 5h(f)(1); 7 U.S.C. 7b-3(f)(1).
    \13\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR 1214 (proposed Jan. 7, 2011).
---------------------------------------------------------------------------

    The SEF NPRM provided, among other requirements, the following:
    (1) Procedures for temporary and full SEF registration.\14\
---------------------------------------------------------------------------

    \14\ Id. at 1238.
---------------------------------------------------------------------------

    (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 Dodd-Frank 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 non-
executable 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\
---------------------------------------------------------------------------

    \15\ Id. at 1241.
    \16\ CEA section 1a(50); 7 U.S.C. 1a(50).
    \17\ CEA section 5h(f); 7 U.S.C. 7b-3(f).
    \18\ The 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).
    \19\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1241.
    \20\ Id.
    \21\ Id.
    \22\ By ``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 Sec.  37.9(a)(1)(ii)--Request for Quote 
System in the preamble for further details.
    \23\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1220.
---------------------------------------------------------------------------

    (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

[[Page 33478]]

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

    \24\ Id. at 1241.
    \25\ Id.
    \26\ Id.
---------------------------------------------------------------------------

    (4) Regulations, guidance, and acceptable practices to implement 
the 15 core principles specified in section 5h(f) of the Act.\27\
---------------------------------------------------------------------------

    \27\ Id. at 1241-1253, 1256-1258.
---------------------------------------------------------------------------

    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 Dodd-Frank 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.
---------------------------------------------------------------------------

    \28\ Reopening 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 Dodd-Frank 
Wall Street Reform and Consumer Protection Act, 76 FR 23221 (Apr. 
26, 2011).
    \29\ The 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.
    \30\ A 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.
    \31\ Meeting summaries are available through the Commission's 
Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=955.
---------------------------------------------------------------------------

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 Dodd-Frank 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\
---------------------------------------------------------------------------

    \32\ Registration and Regulation of Security-Based Swap 
Execution Facilities, 76 FR 10948 (proposed Feb. 28, 2011).
    \33\ 15 U.S.C. 8302(a)(1).
    \34\ Tradeweb 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).
---------------------------------------------------------------------------

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

    \35\ Registration and Regulation of Security-Based Swap 
Execution Facilities, 76 FR at 10950.
---------------------------------------------------------------------------

    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 narrow-based 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 non-substantive changes to the proposed rule 
text intended to clarify certain provisions, standardize terminology

[[Page 33479]]

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 Sec.  37.9, which has been 
moved to the registration section under final Sec.  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 Sec. Sec.  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\
---------------------------------------------------------------------------

    \36\ Subparts B through P begin with a regulation containing the 
language of the core principle in the Act.
---------------------------------------------------------------------------

1. Sec.  37.1--Scope
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \37\ The Commission has removed the phrase ``has been 
registered'' from proposed Sec.  37.1 because a SEF that has been 
registered is the same as a SEF that is registered.
---------------------------------------------------------------------------

2. Sec.  37.2--Applicable Provisions
    Proposed Sec.  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 Dodd-Frank Act.
(a) Commission Determination
    Although it received no comments on this section, the Commission is 
revising proposed Sec.  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 Sec.  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 Sec.  37.2 when new 
regulations with which SEFs must comply are codified.
---------------------------------------------------------------------------

    \38\ Adaptation 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.
    \39\ The term ``contract market'' used in Sec.  1.60 of the 
Commission's regulations should be interpreted to include a SEF for 
purposes of applying the requirements of Sec.  1.60 to a SEF. 17 CFR 
1.60.
    \40\ The 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.
---------------------------------------------------------------------------

3. Sec.  37.3--Requirements for Registration \41\
---------------------------------------------------------------------------

    \41\ The 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 Sec.  37.3 to provide clarity.
---------------------------------------------------------------------------

    Proposed Sec.  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\
---------------------------------------------------------------------------

    \42\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1219.
    \43\ Id.
    \44\ Id.
    \45\ CEA 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).
    \46\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1219.
---------------------------------------------------------------------------

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

    \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 Sec.  37.10--Swaps 
Made Available for Trading in the preamble for further details 
regarding this process.
    \48\ Id. at 1222.
---------------------------------------------------------------------------

(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

[[Page 33480]]

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

    \49\ CEA 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).
    \50\ UBS Comment Letter at 1 (May 18, 2012). The Commission 
notes that UBS submitted 2 comment letters on May 18, 2012.
    \51\ Barclays Comment Letter at 2 (Jun. 3, 2011).
    \52\ Bloomberg Comment Letter at 3 (Mar. 8, 2011).
---------------------------------------------------------------------------

(i) One-to-Many Systems or Platforms
    AFR opined that single dealer or one-to-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-to-one'' pricing model of 
existing dealer systems is inconsistent with the SEF definition.\54\
---------------------------------------------------------------------------

    \53\ AFR 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).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \55\ Nodal 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).
    \56\ Nodal Comment Letter at 3 (Mar. 8, 2011).
    \57\ Id.
    \58\ Id. at 2.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \59\ UBS 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).
    \60\ Meeting with UBS dated Mar. 27, 2012. See also UBS Comment 
Letter at 1 (Nov. 2, 2011).
    \61\ Meeting with UBS dated Mar. 27, 2012.
---------------------------------------------------------------------------

(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 mark-to-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\
---------------------------------------------------------------------------

    \62\ Meeting 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).
    \63\ TriOptima 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.
---------------------------------------------------------------------------

    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

[[Page 33481]]

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

    \71\ Meeting with ICAP dated Aug. 29, 2012; ICAP Comment Letter 
at 1, 4 (Jul. 7, 2011).
    \72\ Meeting 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.
    \76\ Id.
    \77\ Id.
    \78\ Id.
    \79\ ICAP Comment Letter at 2 (Jan. 16, 2013); ICAP Comment 
Letter at 4 (Jul. 7, 2011).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \80\ MarkitSERV Comment Letter at 6 (Mar. 8, 2011).
    \81\ MarkitSERV Comment Letter at 1-2 (Jun. 3, 2011).
    \82\ Id. at 3-4.
    \83\ Id. at 5.
---------------------------------------------------------------------------

(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 Sec.  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\
---------------------------------------------------------------------------

    \84\ CEA 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).
    \85\ See 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).
    \86\ CEA 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.
    \87\ The Commission is adding this new provision to Sec.  
37.3(a)(1). As a result, proposed Sec.  37.3(a) is adopted as Sec.  
37.3(b), proposed Sec.  37.3(b) is adopted as Sec.  37.3(c), 
proposed Sec.  37.3(c) is adopted as Sec.  37.3(d), proposed Sec.  
37.3(d) is adopted as Sec.  37.3(e), proposed Sec.  37.3(e) is 
adopted as Sec.  37.3(f), and proposed Sec.  37.3(f) is adopted as 
Sec.  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.
---------------------------------------------------------------------------

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

    \88\ The 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 Sec.  37.9(a)(1)(iv)--Required Transactions and 
Sec.  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)).
    \89\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1222.
---------------------------------------------------------------------------

    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

[[Page 33482]]

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

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

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

    \91\ The Commission notes that entities seeking guidance 
concerning their SEF registration obligations may request such 
further guidance from the Division of Market Oversight (``DMO'').
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \92\ Transactions 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).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \93\ The 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 Sec.  37.202(a)--Impartial 
Access by Members and Market Participants in the preamble.
    \94\ For 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 Sec.  37.202(a)--Impartial Access by Members and Market 
Participants in the preamble.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \95\ Confirmation, 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.
---------------------------------------------------------------------------

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

    \97\ 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 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).
---------------------------------------------------------------------------

    The Commission understands from commenters that certain entities 
provide

[[Page 33483]]

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

    \98\ The 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-service-into-us-financials.aspx.
---------------------------------------------------------------------------

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

    \99\ CEA section 5h(e); 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

    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) Sec.  37.9(b)(2)--Minimum Trading Functionality (Final Sec.  
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 
Sec.  37.9(b)(2) to final Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \100\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1219.
---------------------------------------------------------------------------

(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

[[Page 33484]]

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

    \101\ Reuters 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.
    \102\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1259.
    \103\ Id.
    \104\ Id.
    \105\ Reuters 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).
    \106\ Better Markets Comment Letter at 6-7 (Mar. 8, 2011).
    \107\ Id.
---------------------------------------------------------------------------

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

    \108\ Nodal 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).
    \109\ Nodal 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).
    \110\ Tradeweb Comment Letter at 6 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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 Sec.  
37.9(b)(2), which now requires a SEF to provide an Order Book as 
defined in final Sec.  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 Sec.  37.3(a)(3), is consistent with the SEF 
definition and promotes the goals provided in section 733 of the Dodd-
Frank 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\
---------------------------------------------------------------------------

    \111\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1219.
    \112\ The Commission is renumbering proposed Sec.  37.9(b)(2) to 
Sec.  37.3(a)(2).
    \113\ CEA 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 pre-trade price transparency in the 
swaps market''). 7 U.S.C. 7b-3(e).
    \114\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1219.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \115\ See discussion below under Sec.  37.9(a)(1)(ii)--Request 
for Quote System in the preamble.
    \116\ See discussion below under Sec.  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.
    \117\ See discussion below under Sec.  37.9(b)(1) and (b)(4)--
Execution Methods for Required Transactions in the preamble.
    \118\ See Sec.  37.9(c)(2).
    \119\ CEA section 1a(50); 7 U.S.C. 1a(50).
---------------------------------------------------------------------------

    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 
Sec.  37.3(a)(3) (e.g., central limit order books facilitating only 
anonymous trading).
(c) Sec.  37.9(a)(1)(i)--Order Book (Final Sec.  37.3(a)(3))
    The Commission is also moving proposed Sec.  37.9(a)(1)(i) to final 
Sec.  37.3(a)(3) given the relocation of, and changes to, the minimum 
trading functionality section as discussed above. Proposed Sec.  
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

[[Page 33485]]

other trading system or platform as may be determined by the 
Commission.
---------------------------------------------------------------------------

    \120\ The 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.
    \121\ The 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 non-
discretionary automated trade matching and execution algorithm.'' 
CEA section 1a(51)(A); 7 U.S.C. 1a(51)(A).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \122\ Better Markets Comment Letter at 7 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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, price-size-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 Sec.  37.9(a)(1)(i)(D) because, as discussed in Sec.  37.9 
below, a SEF may petition the Commission under Sec.  13.2 to amend 
Sec.  37.9(a)(2) to include additional execution methods for Required 
Transactions.\124\
---------------------------------------------------------------------------

    \123\ The Commission is renumbering proposed Sec.  37.9(a)(1)(i) 
to Sec.  37.3(a)(3). The Commission is revising the definition in 
proposed Sec.  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 Sec. Sec.  37.9(b)(1) and (b)(4)--
Execution Methods for Required Transactions in the preamble for 
further details.
    \124\ See discussion below under Sec.  37.9(b)(1) and (b)(4)--
Execution Methods for Required Transactions in the preamble.
---------------------------------------------------------------------------

(d) Sec.  37.3(a)--Application Procedures \125\
---------------------------------------------------------------------------

    \125\ The Commission is renaming the title of this section from 
``Application Procedures'' to ``Procedures for Full Registration'' 
to provide greater clarity.
---------------------------------------------------------------------------

    Proposed Sec.  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.
---------------------------------------------------------------------------

    \126\ Proposed 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.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \127\ See Registration and Regulation of Security-Based 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).
    \128\ MarketAxess Comment Letter at 20-21 (Mar. 8, 2011).
    \129\ WMBAA Comment Letter at 14 (Mar. 8, 2011).
---------------------------------------------------------------------------

    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 Sec.  37.3(a)(6) to require amendments to Form 
SEF after the Commission approves an application.\131\
---------------------------------------------------------------------------

    \130\ Tradeweb Comment Letter at 13 (Mar. 8, 2011).
    \131\ MarketAxess Comment Letter at 29 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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.
---------------------------------------------------------------------------

    \132\ The Commission is renumbering proposed Sec.  37.3(a) to 
Sec.  37.3(b) and making several non-substantive revisions to this 
provision and Form SEF for clarity. The Commission is also moving 
proposed Sec.  37.3(a)(7) regarding delegated authority to the 
Director of DMO to Sec.  37.3(h).
    \133\ CEA section 5h(g); 7 U.S.C. 7b-3(g).
---------------------------------------------------------------------------

    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 
Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \134\ The 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.
    \135\ The Commission is renumbering proposed Sec.  37.3(a)(6) to 
Sec.  37.3(b)(3).
    \136\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1238.
---------------------------------------------------------------------------

    The Commission is adding final Sec.  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

[[Page 33486]]

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

    \137\ CEA 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 Sec.  37.3(b)(1)(i), the Commission will notify 
the applicant, pursuant to Sec.  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.
---------------------------------------------------------------------------

    Finally, the Commission is clarifying the standard upon which the 
Commission will grant or deny registration. Proposed Sec.  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 Sec.  
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 Sec.  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) Sec.  37.3(b)--Temporary Grandfather Relief From Registration \138\
---------------------------------------------------------------------------

    \138\ The Commission is renaming the title of this section from 
``Temporary Grandfather Relief from Registration'' to ``Temporary 
Registration'' to provide greater clarity.
---------------------------------------------------------------------------

    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \139\ MarketAxess Comment Letter at 16 (Mar. 8, 2011).
---------------------------------------------------------------------------

    With respect to the substance of this provision, some commenters 
expressed concern that the existing trading activity requirement in 
proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \140\ MarketAxess Comment Letter at 16-17 (Mar. 8, 2011); MFA 
Comment Letter at 4-5 (Mar. 8, 2011).
    \141\ MarketAxess Comment Letter at 16-17 (Mar. 8, 2011).
    \142\ MarketAxess 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).
    \143\ Bloomberg Comment Letter at 5 (Jun. 3, 2011).
    \144\ MarketAxess Comment Letter at 17-19 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \145\ Phoenix Comment Letter at 2 (Mar. 7, 2011).
    \146\ MarketAxess Comment Letter at 20 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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

[[Page 33487]]

temporary relief from registration as a SEF.\148\
---------------------------------------------------------------------------

    \147\ CME Comment Letter at 11 (Mar. 8, 2011).
    \148\ NYSE Liffe Comment Letter at 3-4 (Sep. 2, 2011).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \149\ AIMA 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).
    \150\ Nodal Comment Letter at 4 (Jun. 3, 2011); Nodal Comment 
Letter at 4 (Mar. 8, 2011).
    \151\ MarketAxess Comment Letter at 19 (Mar. 8, 2011); NFA 
Comment Letter at 2-3 (Mar. 8, 2011).
    \152\ SDMA Comment Letter at 12 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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 Sec.  37.3(b) as final 
Sec.  37.3(c) subject to a number of modifications.\153\
---------------------------------------------------------------------------

    \153\ The Commission is renumbering proposed Sec.  37.3(b) to 
Sec.  37.3(c) and making several non-substantive revisions for 
clarity.
---------------------------------------------------------------------------

    The Commission further agrees with MarketAxess and other commenters 
that the trading activity requirement as proposed in Sec.  
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 Sec.  
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 Sec.  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\
---------------------------------------------------------------------------

    \154\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1216.
---------------------------------------------------------------------------

    The Commission is revising the temporary registration provisions to 
clarify in final Sec.  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 Sec.  37.3(c)(5).\156\
---------------------------------------------------------------------------

    \155\ The applicant must comply with all of the requirements in 
final Sec.  37.3(b)(1)(i) and must submit a temporary registration 
notice to the Commission to qualify for temporary registration. See 
Final Sec.  37.3(c)(1) of the Commission's regulations.
    \156\ The 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).
---------------------------------------------------------------------------

    Pursuant to final Sec.  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.
---------------------------------------------------------------------------

    \157\ See discussion below regarding swap dealer and major swap 
participant provisional registration rules.
    \158\ The 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 Sec.  
37.3(h) of the Commission's regulations.
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 33488]]

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

    \159\ This provision is contained in final Sec.  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.
---------------------------------------------------------------------------

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

    \160\ Registration of Swap Dealers and Major Swap Participants, 
77 FR 2613 (Jan. 19, 2012).
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \161\ This provision is contained in final Sec.  37.3(c)(5) of 
the Commission's regulations.
---------------------------------------------------------------------------

    The Commission is also revising final Sec.  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 Sec.  37.3(b)(6) by the time of the 
termination of the temporary registration provision. In addition, final 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 
Sec.  37.3(b) in final Sec.  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.
---------------------------------------------------------------------------

    \162\ This provision is contained in final Sec.  37.3(c)(6) of 
the Commission's regulations.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \163\ See Heckler v. Chaney, 470 U.S. 821 (1985).
    \164\ This 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 Sec.  37.3(c)(1).
---------------------------------------------------------------------------

    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

[[Page 33489]]

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

    \165\ Section 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).
    \166\ Section 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).
---------------------------------------------------------------------------

(f) Sec.  37.3(c)--Reinstatement of Dormant Registration
    Proposed Sec.  37.3(c) provided procedures for a dormant SEF to 
reinstate its registration. The Commission received no comments on this 
section and is adopting Sec.  37.3(c) as proposed.\167\
---------------------------------------------------------------------------

    \167\ The Commission is renumbering proposed Sec.  37.3(c) to 
Sec.  37.3(d) and making several non-substantive revisions for 
clarity.
---------------------------------------------------------------------------

(g) Sec.  37.3(d)--Request for Transfer of Registration
    Proposed Sec.  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 Sec.  37.3(d) as 
proposed.\168\
---------------------------------------------------------------------------

    \168\ The Commission is renumbering proposed Sec.  37.3(d) to 
Sec.  37.3(e) and making several non-substantive revisions for 
clarity.
---------------------------------------------------------------------------

(h) Sec.  37.3(e)--Request for Withdrawal of Application for 
Registration
    Proposed Sec.  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 Sec.  37.3(e) as proposed.\169\
---------------------------------------------------------------------------

    \169\ The Commission is renumbering proposed Sec.  37.3(e) to 
Sec.  37.3(f) and making several non-substantive revisions for 
clarity.
---------------------------------------------------------------------------

(i) Sec.  37.3(f)--Request for Vacation of Registration
    Proposed Sec.  37.3(f) provided that a SEF may vacate its 
registration. The Commission received no comments on this section and 
is adopting Sec.  37.3(f) as proposed.\170\
---------------------------------------------------------------------------

    \170\ The Commission is renumbering proposed Sec.  37.3(f) to 
Sec.  37.3(g) and making several non-substantive revisions for 
clarity.
---------------------------------------------------------------------------

4. Sec.  37.4--Procedures for Listing Products and Implementing Rules
    Proposed Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \171\ CEA section 15(b) requires the Commission to take into 
consideration the public interest to be protected by the antitrust 
laws and endeavor to take the least anticompetitive means of 
achieving the objectives of the Act, as well as the policies and 
purposes of the Act. 7 U.S.C. 19(b).
---------------------------------------------------------------------------

(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 Sec.  37.4 to clarify that temporarily registered SEFs may 
list swaps through the Commission's approval or self-certification 
procedures.\175\
---------------------------------------------------------------------------

    \172\ WMBAA Comment Letter at 15-16 (Mar. 8, 2011).
    \173\ Id.
    \174\ CME 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.
    \175\ MarketAxess 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).
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission is adopting proposed Sec.  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.
---------------------------------------------------------------------------

    \176\ 17 CFR part 40.
---------------------------------------------------------------------------

    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 self-
certification 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.
---------------------------------------------------------------------------

    \177\ CEA section 5c(c); 7 U.S.C. 7a-2(c).
    \178\ See Provisions Common to Registered Entities, 76 FR 44776 
(Jul. 27, 2011).
---------------------------------------------------------------------------

5. Sec.  37.5--Information Relating to Swap Execution Facility 
Compliance
    Proposed Sec.  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 Sec.  37.5(b) required a SEF to file 
with the Commission a written demonstration of compliance with the core 
principles. Proposed Sec.  37.5(d) delegated the Commission's authority 
to seek information as set forth in Sec.  37.5(b) to the Director of 
DMO or such other employee as the Director may designate.
    Proposed Sec.  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

[[Page 33490]]

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

    \179\ See generally Core Principles and Other Requirements for 
Swap Execution Facilities, 76 FR at 1217 (explaining the proposed 
ten percent threshold).
---------------------------------------------------------------------------

(a) Summary of Comments
    The Commission did not receive any comments on proposed Sec.  
37.5(a), (b), or (d). The Commission did, however, receive comments on 
the equity interest transfer provisions in proposed Sec.  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\
---------------------------------------------------------------------------

    \180\ CME Comment Letter at 13 (Feb. 22, 2011).
    \181\ Id.
---------------------------------------------------------------------------

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

    \182\ MarketAxess Comment Letter at 29 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \183\ Better Markets Comment Letter at 21-22 (Mar. 8, 2011).
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission is adopting Sec.  37.5(a), (b), and (d) as proposed 
subject to certain non-substantive clarifications.\184\ The Commission 
is adopting proposed Sec.  37.5(c) with certain revisions discussed 
below.
---------------------------------------------------------------------------

    \184\ The Commission is removing the reference to ``information 
relating to data entry and trade details'' in proposed Sec.  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.
---------------------------------------------------------------------------

    The Commission is revising Sec.  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.
---------------------------------------------------------------------------

    \185\ The 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 Sec.  37.5(c).
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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. Sec.  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 
Sec.  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

[[Page 33491]]

SEF to adopt a specific term or condition, trading rule or procedure, 
or to take or refrain from taking a specific action. Proposed Sec.  
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\
---------------------------------------------------------------------------

    \186\ The Commission proposed Sec.  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).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \187\ MarketAxess Comment Letter at 28-29 (Mar. 8, 2011). 
Proposed Sec.  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, Sec.  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).
    \188\ MarketAxess Comment Letter at 29 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \189\ MarkitSERV 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 Sec.  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 Sec.  
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 Sec.  37.205 are two separate and distinct 
requirements. In addition, the Commission notes that Sec.  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.
---------------------------------------------------------------------------

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

    \191\ Energy Working Group Comment Letter at 5 (Mar. 8, 2011).
    \192\ Id.
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission is adopting Sec.  37.6(a) as proposed.\193\ The 
Commission is also adopting Sec.  37.6(b) as proposed subject to the 
two revisions discussed below. Although the comments received regarding 
proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \193\ The Commission is making certain non-substantive revisions 
to Sec.  37.6(a) for clarity.
    \194\ Part 45 requires a SEF to report all confirmation data and 
all primary economic terms data as defined in part 23 and Sec.  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.
---------------------------------------------------------------------------

    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

[[Page 33492]]

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 
pre-trade price transparency.\197\
---------------------------------------------------------------------------

    \195\ The Commission notes that swap trading relationship 
documentation is not required for swaps cleared by a derivatives 
clearing organization. See Sec.  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).
    \196\ The 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.'').
    \197\ See 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 post-execution 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'').
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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 Sec.  37.6 are consistent with 
Commission regulation 1.35(b)(5) and provide sufficient time for the 
post-execution allocation of bunched orders, but allow SEFs to meet the 
requirement that confirmation takes place at the same time as 
execution.\198\
---------------------------------------------------------------------------

    \198\ See 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.
---------------------------------------------------------------------------

7. Sec.  37.7--Prohibited Use of Data Collected for Regulatory Purposes
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \199\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1218 n. 34.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \200\ MarketAxess 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).
    \201\ CME Comment Letter at 14 (Feb. 22, 2011).
    \202\ MarketAxess Comment Letter at 31 (Mar. 8, 2011); FSR 
Comment Letter at 9 (Mar. 8, 2011).
    \203\ CME Comment Letter at 14 (Feb. 22, 2011); MarketAxess 
Comment Letter at 31 (Mar. 8, 2011).
    \204\ FSR Comment Letter at 9 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \205\ SIFMA AMG Comment Letter at 15-16 (Mar. 8, 2011).
    \206\ Freddie Mac Comment Letter at 5 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

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

(b) Commission Determination
    The Commission is adopting Sec.  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. Sec.  37.8--Boards of Trade Operating Both a Designated Contract 
Market and a Swap Execution Facility
    Proposed Sec.  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 Sec.  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

[[Page 33493]]

whether the execution or trading of such swaps is taking place on the 
DCM or the SEF.\208\
---------------------------------------------------------------------------

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

(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 Sec.  37.8 unnecessary.\209\ CME 
requested that the Commission clarify whether proposed Sec.  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\
---------------------------------------------------------------------------

    \209\ CME Comment Letter at 14 (Feb. 22, 2011).
    \210\ Id.
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission is adopting Sec.  37.8(a) as proposed, subject to 
one revision. Proposed Sec.  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 
Sec.  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 Sec.  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 third-party front end systems 
eventually present that data to market participants.\212\
---------------------------------------------------------------------------

    \211\ The 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).
    \212\ The Commission notes that it is not replacing the term 
``board of trade'' in Sec.  37.8(b) with the term ``entity'' as in 
Sec.  37.8(a) because in Sec.  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 Sec.  37.8(b) 
implements CEA section 5h(c), which uses the term ``board of 
trade.''
---------------------------------------------------------------------------

9. Sec.  37.9--Permitted Execution Methods \213\
---------------------------------------------------------------------------

    \213\ The 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.
---------------------------------------------------------------------------

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

    \214\ By ``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 Sec.  37.9(a)(1)(ii)--Request for Quote 
System in the preamble for further details.
    \215\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1220.
---------------------------------------------------------------------------

    The Commission is restructuring the order of the rule text in Sec.  
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 
Sec.  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 Sec.  37.9 to final Sec.  37.3.
(a) Sec.  37.9(a)(1)(iv)--Required Transactions and Sec.  
37.9(a)(1)(v)--Permitted Transactions
    Proposed Sec.  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 Sec.  37.10, and are 
not block trades. Proposed Sec.  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 Sec.  37.9(a)(1)(v) be revised to include all 
transactions that are not Required Transactions as defined in proposed 
Sec.  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\

[[Page 33494]]

Additionally, the Coalition commented that the Commission should define 
illiquid or bespoke transactions to include typical end-user 
trades.\219\
---------------------------------------------------------------------------

    \216\ Additionally, 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 
Sec.  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 
Sec.  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 Sec.  37.9(b)(1) and (b)(4)--Execution 
Methods for Required Transactions and Sec.  37.9(c)--Execution 
Methods for Permitted Transactions in the preamble.
    \217\ MarketAxess 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).
    \218\ Freddie 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 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.
    \219\ Coalition Comment Letter at 8 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \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).
    \222\ Tradeweb Comment Letter at 5 (Mar. 8, 2011).
    \223\ GFI Comment Letter at 4 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \224\ The Commission is renumbering proposed Sec.  
37.9(a)(1)(iv) to Sec.  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.
    \225\ The Commission is renumbering proposed Sec.  37.9(a)(1)(v) 
to Sec.  37.9(c)(1).
    \226\ See CEA section 2(h)(8) trade execution requirement 
discussion above under Sec.  37.3--Requirements for Registration; 
see also discussion below under Sec.  37.9(c)--Execution Methods for 
Permitted Transactions.
---------------------------------------------------------------------------

    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 Sec.  
37.9(a)(2) and Sec.  37.9(c)(2), respectively.\229\
---------------------------------------------------------------------------

    \227\ Section 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 Sec.  
43.5 of this part. 17 CFR 43.2.
    \228\ Id.
    \229\ The Commission notes that the execution methods for 
Required Transactions in final Sec.  37.9(a)(2) excludes block 
trades.
---------------------------------------------------------------------------

(b) Sec.  37.9(a)(1)(ii)--Request for Quote System
    Proposed Sec.  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 Sec.  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 Sec.  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

[[Page 33495]]

market, and is inconsistent with the Dodd-Frank Act.\231\
---------------------------------------------------------------------------

    \230\ Rosen 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).
    \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.
---------------------------------------------------------------------------

    As noted above, Sec.  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.
---------------------------------------------------------------------------

    \232\ Core 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.
---------------------------------------------------------------------------

    Several commenters objected to the requirement in proposed Sec.  
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\
---------------------------------------------------------------------------

    \234\ Representative 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.
    \235\ Eaton 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).
    \236\ Tradeweb 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).
    \237\ Tradeweb Comment Letter at 5 (Jun. 3, 2011); MetLife 
Comment Letter at 3 (Mar. 8, 2011).
    \238\ BlackRock Comment Letter at 4 (Mar. 8, 2011).
    \239\ FHLB 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).
    \240\ FHLB 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).
    \241\ FHLB 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).
---------------------------------------------------------------------------

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

    \242\ Registration and Regulation of Security-Based Swap 
Execution Facilities, 76 FR 10948 (proposed Feb. 28, 2011).
    \243\ Reuters 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).
    \244\ Morgan Stanley Comment Letter at 2 (Mar. 2, 2011).
    \245\ MetLife Comment Letter at 3 (Mar. 8, 2011).
    \246\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1259.
---------------------------------------------------------------------------

    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

[[Page 33496]]

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

    \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).
    \248\ Mallers et al. Comment Letter at 4 (Mar. 21, 2011).
    \249\ Id.
    \250\ SDMA 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).
    \251\ SDMA Comment Letter at 5 (Feb. 28, 2013); SDMA Comment 
Letter at 3 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \252\ Tradeweb 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).
    \253\ FXall 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).
---------------------------------------------------------------------------

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

    \256\ Reuters 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).
    \259\ FXall 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).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \260\ AFR Comment Letter at 3 (Feb. 27, 2013); AFR Comment 
Letter at 5 (Mar. 8, 2011); Better Markets Comment Letter at 8 (Mar. 
8, 2011).
    \261\ AFR Comment Letter at 5 (Mar. 8, 2011).
    \262\ Rosen 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).
    \263\ Tradeweb Comment Letter at 7 (Mar. 8, 2011); State Street 
Comment Letter at 4 (Mar. 8, 2011); Deutsche Comment Letter at 4 
(Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \264\ FSR Comment Letter at 3 (Mar. 8, 2011).
    \265\ Tradeweb Comment Letter at 8 (Mar. 8, 2011).
    \266\ FSR Comment Letter at 3 (Mar. 8, 2011).
    \267\ State Street Comment Letter at 4 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    Based on the comments, the Commission is adopting proposed Sec.  
37.9(a)(1)(ii) as final Sec.  37.9(a)(3), subject to a number of 
modifications discussed below.\268\
---------------------------------------------------------------------------

    \268\ The Commission is renumbering proposed Sec.  
37.9(a)(1)(ii) to Sec.  37.9(a)(3).
---------------------------------------------------------------------------

(i) RFQ System Definition and Transmission to Five Market Participants
    The Commission is adopting the definition of RFQ System in proposed 
Sec.  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 Sec.  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 pre-trade 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.
---------------------------------------------------------------------------

    \269\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1220-21.
---------------------------------------------------------------------------

    The Commission agrees with SDMA that the proposed five market

[[Page 33497]]

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

    \270\ The 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.
    \271\ The 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.
---------------------------------------------------------------------------

    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 
Sec.  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-to-multiple 
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.
---------------------------------------------------------------------------

    \272\ The 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.
---------------------------------------------------------------------------

    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 Dodd-Frank Act.
---------------------------------------------------------------------------

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

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

    \274\ The 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.
---------------------------------------------------------------------------

    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

[[Page 33498]]

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 
multiple-to-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 
phasing-in 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 Sec.  37.9(a)(2) must still comply 
with the RFQ definition in Sec.  37.9(a)(3), but may transmit the quote 
to no less than two market participants.\275\
---------------------------------------------------------------------------

    \275\ The Commission notes that the affiliate prohibition in 
Sec.  37.9(a)(3) applies during the interim RFQ-to-2 period.
---------------------------------------------------------------------------

    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 
multiple-participant-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 one-to-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\
---------------------------------------------------------------------------

    \276\ Registration and Regulation of Security-Based Swap 
Execution Facilities, 76 FR at 10953-54, 10971-74.
    \277\ Id.
---------------------------------------------------------------------------

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

    \278\ To 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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \279\ Clearing 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).
    \280\ Clearing 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).
    \281\ The 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.
---------------------------------------------------------------------------

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

    \282\ See definition of block trade in Sec.  43.2 of the 
Commission's regulations.
    \283\ Similarly, as noted below, SEFs are not required to 
display responses to an RFQ to anyone but the RFQ requester.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  37.9(a)(1)(ii)(B)(1) and

[[Page 33499]]

(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 Sec.  
37.9(a)(1)(ii)(B)(2)(ii).\286\
---------------------------------------------------------------------------

    \284\ The Commission is also deleting the catch-all RFQ 
definition in proposed Sec.  37.9(a)(1)(ii)(C) as it is unnecessary. 
As discussed below, a SEF may petition the Commission under Sec.  
13.2 to amend Sec.  37.9(a)(2) to include additional execution 
methods for Required Transactions. See discussion below under Sec.  
37.9(b)(1) and (b)(4)--Execution Methods for Required Transactions 
in the preamble.
    \285\ See discussion below under Sec.  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.
---------------------------------------------------------------------------

(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 Sec.  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 $1 million notional 10-year fixed-to-floating 
US$ LIBOR interest rate swap. Any firm offer resting on the SEF's Order 
Book for a 10-year fixed-to-floating 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.
---------------------------------------------------------------------------

    \287\ The Commission is renumbering proposed Sec.  
37.9(a)(1)(ii)(A) to Sec.  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.
---------------------------------------------------------------------------

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

    \288\ Core 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.
---------------------------------------------------------------------------

(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 Sec.  
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.
---------------------------------------------------------------------------

    \290\ Id.
---------------------------------------------------------------------------

(c) Sec.  37.9(a)(1)(iii)--Voice-Based System
    Proposed Sec.  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 
Voice-Based System. However, the Commission is deleting the definition 
of Voice-Based System in proposed Sec.  37.9(a)(1)(iii) given its 
decision below to allow SEFs to provide any execution method for 
Permitted Transactions.
(d) Sec. Sec.  37.9(b)(1) and (b)(4)--Execution Methods for Required 
Transactions
    Proposed Sec.  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 Sec.  
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 Sec.  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.
---------------------------------------------------------------------------

    \291\ Id. at 1219-20.
    \292\ Id.
    \293\ Id. at 1220.
---------------------------------------------------------------------------

    For Required Transactions, the SEF NPRM did not provide for a 
specific

[[Page 33500]]

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

    \294\ Id. at 1221.
    \295\ Id.
    \296\ Id.
---------------------------------------------------------------------------

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

    \297\ Id. at 1220.
    \298\ Id.
    \299\ Id.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \300\ Mallers 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).
    \301\ Mallers et al. Comment Letter at 3 (Mar. 21, 2011).
    \302\ Tradeweb 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).
    \303\ SDMA Comment Letter at 2 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \304\ Nodal Comment Letter at 3 (Mar. 8, 2011).
    \305\ Id. at 2-3; Nodal Comment Letter at 3 (Jun. 3, 2011).
    \306\ See discussion above under Sec.  37.3--Requirements for 
Registration in the preamble for a description of Nodal's blind 
auction.
    \307\ Nodal Comment Letter at 2 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \308\ Representative 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).
    \310\ WMBAA Comment Letter at 2 (Jul. 18, 2011).
    \311\ WMBAA Comment Letter at 5 (Mar. 8, 2011).
---------------------------------------------------------------------------

    Furthermore, some members of the industry requested that the 
Commission clarify in the final rules whether ``work-up'' 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\
---------------------------------------------------------------------------

    \312\ Meetings 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).
    \313\ Meetings with GFI dated Mar. 14, 2012, Feb. 16, 2012.
    \314\ Id.
    \315\ Id.
---------------------------------------------------------------------------

(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 Sec.  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

[[Page 33501]]

only be traded through order book systems.\320\
---------------------------------------------------------------------------

    \316\ Rosen 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).
    \317\ MarketAxess Comment Letter at 33 (Mar. 8, 2011).
    \318\ Id.
    \319\ Tradeweb Comment Letter at 6 (Mar. 8, 2011).
    \320\ AFR Comment Letter at 5-6 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
(i) Execution Methods for Required Transactions
    The Commission is revising proposed Sec.  37.9(b)(1) as final Sec.  
37.9(a)(2) to clarify that each Required Transaction that is not a 
block trade as defined in Sec.  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 Sec.  37.3(a)(3) 
or (2) an RFQ System, as defined in Sec.  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 Sec.  13.2 of the Commission's 
regulations to amend Sec.  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\
---------------------------------------------------------------------------

    \321\ The Commission is renumbering proposed Sec.  37.9(b)(1) to 
Sec.  37.9(a)(2).
    \322\ See 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.
    \323\ See proposed Sec.  37.9(a)(1)(i)(D) and Sec.  
37.9(a)(1)(ii)(C).
---------------------------------------------------------------------------

    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 
pre-trade 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\
---------------------------------------------------------------------------

    \324\ CEA section 5h(e); 7 U.S.C. 7b-3(e) (emphasis added).
    \325\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1220.
    \326\ The 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.
    \327\ The 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).
---------------------------------------------------------------------------

(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 Sec.  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 Sec.  37.3(a)(3) for Order Books or in Sec.  
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 Sec.  37.9(a)(2)(i)(A) or (B), provided that the chosen 
execution method satisfies the requirements provided in Sec.  
37.3(a)(3) for Order Books or in Sec.  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 
Sec.  37.9 execution method, impartial access, audit trail, and 
surveillance requirements. Furthermore, all transactions on the SEF 
must comply with the SEF's rules.
---------------------------------------------------------------------------

    \328\ The Commission interprets the phrase ``through any means 
of interstate commerce'' in CEA Sec.  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 Sec.  37.9(a)(2)(i)(A) or (B).
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  37.9(a)(2).
    The Commission, in order to provide further clarity regarding the 
means of

[[Page 33502]]

interstate commerce that a SEF may utilize in order to satisfy the 
execution methods for Required Transactions in Sec.  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 Sec.  37.9(a)(2).
---------------------------------------------------------------------------

    \329\ See final Sec.  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.
---------------------------------------------------------------------------

    In response to commenters, the Commission will generally allow 
work-up 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 work-up 
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:
---------------------------------------------------------------------------

    \330\ The 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 Sec.  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 work-up transaction must be reported as it occurs pursuant to 
the SEF's reporting obligations.
---------------------------------------------------------------------------

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

    \331\ These 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.
---------------------------------------------------------------------------

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

    \332\ Id.
---------------------------------------------------------------------------

    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 work-up session would be a trading 
protocol and, thus, constitute a rule under Sec.  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 work-up sessions are in compliance with the 
Act and the Commission's regulations.
(iii) Liquidity-Based Execution Mandates
    The Commission is deleting proposed Sec.  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) Sec.  37.9(b)(3)--Time Delay Requirement
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \333\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1220.
---------------------------------------------------------------------------

(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

[[Page 33503]]

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

    \334\ Mallers et al. Comment Letter at 5 (Mar. 21, 2011); SDMA 
Comment Letter at 4 (Mar. 8, 2011).
    \335\ Mallers et al. Comment Letter at 5 (Mar. 21, 2011).
    \336\ WMBAA 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).
    \337\ WMBAA 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).
    \338\ FHLB 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).
    \339\ Freddie Mac Comment Letter at 3 (Mar. 8, 2011).
    \340\ WMBAA 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).
---------------------------------------------------------------------------

    ABC/CIEBA commented that the proposed rule is unclear as to what 
limitations, if any, apply to pre-execution 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\
---------------------------------------------------------------------------

    \341\ ABC/CIEBA Comment Letter at 9 (Mar. 8, 2011).
    \342\ Id. at 10.
---------------------------------------------------------------------------

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

    \343\ Reuters 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).
    \345\ FXall Comment Letter at 10 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \346\ Reuters 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).
    \347\ SIFMA AMG Comment Letter at 7 (Mar. 8, 2011).
    \348\ Better Markets Comment Letter at 9 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \349\ WMBAA 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).
    \350\ WMBAA Comment Letter at 7 (Mar. 8, 2011).
    \351\ SIFMA AMG Comment Letter at 8 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting the time delay requirement for Required 
Transactions in proposed Sec.  37.9(b)(3) as final Sec.  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 Sec.  37.9(b)(3) 
to clarify the purpose of the time delay requirement as described 
above.
---------------------------------------------------------------------------

    \352\ The Commission is renumbering proposed Sec.  37.9(b)(3) to 
Sec.  37.9(b)(1).
    \353\ The Commission clarifies that the exposure of ``orders'' 
subject to the 15 second time delay into the Order Book in final 
Sec.  37.9(b)(1) means exposure of the price, size, and other terms 
of the orders.
    \354\ The 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.
---------------------------------------------------------------------------

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

    \355\ See, 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 pre-
execution communications in the DCM context).
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 33504]]

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 pre-trade 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 Sec.  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.
---------------------------------------------------------------------------

    \356\ For 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.
---------------------------------------------------------------------------

(f) Sec.  37.9(c)--Execution Methods for Permitted Transactions
    Proposed Sec.  37.9(c)(1) provided that Permitted Transactions may 
be executed by an Order Book, RFQ System, a Voice-Based System, or any 
such other system for trading as may be permitted by the Commission. In 
addition, proposed Sec.  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 Sec.  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 Sec.  37.9(b) to execute Permitted 
Transactions.\357\
---------------------------------------------------------------------------

    \357\ The 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.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \358\ SIFMA AMG Comment Letter at 10 (Mar. 8, 2011).
    \359\ Id.
    \360\ Rosen 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).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is revising proposed Sec.  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 Sec.  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 Sec.  
37.9(c)(2) given the deletion to proposed Sec.  37.11 as described 
below.
---------------------------------------------------------------------------

    \361\ The Commission is renumbering proposed Sec.  37.9(c)(1) to 
Sec.  37.9(c)(2).
    \362\ This 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.
---------------------------------------------------------------------------

(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. Sec.  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

[[Page 33505]]

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

    \363\ CEA sections 2(h)(7) and 2(h)(8); 7 U.S.C. 2(h)(7) and 
2(h)(8).
    \364\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1241.
    \365\ Core Principles and Other Requirements for Designated 
Contract Markets, 75 FR 80572 (proposed Dec. 22, 2010).
    \366\ Process for a Designated Contract Market or Swap Execution 
Facility To Make a Swap Available To Trade, 76 FR 77728 (proposed 
Dec. 14, 2011).
---------------------------------------------------------------------------

11. Sec.  37.11--Identification of Non-Cleared Swaps or Swaps Not Made 
Available to Trade
    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \367\ MarketAxess Comment Letter at 33-34 (Mar. 8, 2011).
    \368\ Id. at 34.
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission believes that proposed Sec.  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 Sec.  37.100, and adopts 
that rule as proposed.
---------------------------------------------------------------------------

    \369\ CEA section 5h(f)(1)(A); 7 U.S.C. 7b-3(f)(1)(A).
    \370\ CEA section 5h(f)(1)(B); 7 U.S.C. 7b-3(f)(1)(B).
---------------------------------------------------------------------------

2. Subpart C--Core Principle 2 (Compliance With Rules)
(a) Sec.  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 Sec.  37.200, and adopts that rule as 
proposed.
---------------------------------------------------------------------------

    \371\ CEA section 5h(f)(2)(A); 7 U.S.C. 7b-3(f)(2)(A).
    \372\ CEA 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.
    \373\ CEA section 5h(f)(2)(C); 7 U.S.C. 7b-3(f)(2)(C).
    \374\ CEA section 5h(f)(2)(D); 7 U.S.C. 7b-3(f)(2)(D).
---------------------------------------------------------------------------

(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 self-regulatory 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\
---------------------------------------------------------------------------

    \375\ FXall 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).
    \376\ FXall 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).
    \379\ Reuters 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).
---------------------------------------------------------------------------

    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

[[Page 33506]]

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

    \380\ WMBAA 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).
    \381\ WMBAA Comment Letter at 18 (Mar. 8, 2011).
    \382\ FXall Comment Letter at 11 (Mar. 8, 2011).
    \383\ SIFMA AMG Comment Letter at 14-15 (Mar. 8, 2011).
    \384\ Id.
---------------------------------------------------------------------------

(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 self-
regulatory obligations pursuant to CEA section 5h(f). Therefore, where 
appropriate, the Commission is adopting surveillance, audit trail, 
investigation, enforcement, and other requirements for SEFs.
---------------------------------------------------------------------------

    \385\ See 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 Sec.  1.3(h)), 
a swap execution facility (as defined in Sec.  1.3(rrrr)), or a 
registered futures association under section 17 of the Act.'' Id. at 
66318.
---------------------------------------------------------------------------

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

    \386\ CEA 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).
---------------------------------------------------------------------------

(b) Sec.  37.201--Operation of Swap Execution Facility and Compliance 
With Rules
    Proposed Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \387\ The Commission notes that Sec.  37.201(a) codifies CEA 
section 5h(f)(2)(C). 7 U.S.C. 7b-3(f)(2)(C).
    \388\ The Commission notes that Sec.  37.201(b) codifies certain 
sections of CEA section 5h(f)(2). 7 U.S.C. 7b-3(f)(2).
---------------------------------------------------------------------------

(1) Summary of Comments
    MarketAxess recommended that the Commission withdraw proposed Sec.  
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\
---------------------------------------------------------------------------

    \389\ MarketAxess Comment Letter at 34 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  37.201 as proposed, subject to two 
modifications. To address the comment by MarketAxess, the Commission 
notes that proposed Sec.  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 Sec.  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 Sec.  37.9(a)(3).\392\
---------------------------------------------------------------------------

    \390\ The Commission notes that under Sec.  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.
    \391\ The Commission notes that under Sec.  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.
    \392\ See 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).
---------------------------------------------------------------------------

    Furthermore, the Commission notes that a SEF's employees have 
certain obligations under the Commission's existing regulations. For 
example, under Sec.  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\
---------------------------------------------------------------------------

    \393\ Commission regulation 1.59(d).
---------------------------------------------------------------------------

    Finally, the Commission notes that under Sec.  1.2 of the 
Commission's regulations, a SEF is liable for the acts, omissions, or 
failures of its employees

[[Page 33507]]

acting within the scope of their employment.\394\
---------------------------------------------------------------------------

    \394\ Commission regulation 1.2.
---------------------------------------------------------------------------

(c) Sec.  37.202--Access Requirements
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \395\ CEA section 5h(f)(2)(A)(ii) and (2)(B)(i); 7 U.S.C. 7b-
3(f)(2)(A)(ii) and (2)(B)(i).
---------------------------------------------------------------------------

(1) Sec.  37.202(a)--Impartial Access by Members and Market 
Participants \396\
---------------------------------------------------------------------------

    \396\ The 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.
---------------------------------------------------------------------------

    Proposed Sec.  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 Sec.  
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\
---------------------------------------------------------------------------

    \397\ Reuters 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.
    \402\ Rosen et al. Comment Letter at 17 (Apr. 5, 2011).
    \403\ MarketAxess Comment Letter at 23-24 (Mar. 8, 2011).
    \404\ Tradeweb Comment Letter at 10 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \405\ Mallers et al. Comment Letter at 2-3 (Mar. 21, 2011).
    \406\ Id. at 3.
    \407\ SDMA Comment Letter at 4-5 (Mar. 8, 2011).
    \408\ UBS 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.''
---------------------------------------------------------------------------

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

    \409\ MarketAxess Comment Letter at 24 (Mar. 8, 2011); WMBAA 
Comment Letter at 19 (Mar. 8, 2011).
    \410\ MarketAxess Comment Letter at 25 (Mar. 8, 2011).
    \411\ WMBAA Comment Letter at 19 (Mar. 8, 2011).
    \412\ See Core Principles and Other Requirements for Swap 
Execution Facilities, 76 FR at 1222 n. 53 (providing examples of 
ISVs).
    \413\ Meeting with Bloomberg dated Jan. 18, 2012.
    \414\ Id.
---------------------------------------------------------------------------

    Under proposed Sec.  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\
---------------------------------------------------------------------------

    \415\ MarketAxess Comment Letter at 25 (Mar. 8, 2011).
    \416\ Id.
---------------------------------------------------------------------------

    Better Markets commented that proposed Sec.  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\
---------------------------------------------------------------------------

    \417\ Better Markets Comment Letter at 11-12 (Mar. 8, 2011).
    \418\ MarketAxess Comment Letter at 25 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  37.202(a) as proposed, subject to 
the

[[Page 33508]]

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

    \419\ The Commission is also making certain non-substantive 
clarifications to the rule.
    \420\ CEA sections 5h(f)(2)(A)(ii) and (2)(B)(i); 7 U.S.C. 7b-
3(f)(2)(A)(ii) and (2)(B)(i).
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

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

    \422\ CEA 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.
    \423\ The 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.
---------------------------------------------------------------------------

    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 Sec.  
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\
---------------------------------------------------------------------------

    \424\ See Aggregation Services or Portals discussion above under 
Sec.  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.
    \425\ The 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.
---------------------------------------------------------------------------

    The Commission notes that under Sec.  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

[[Page 33509]]

from an intermediary that its customers are ECPs.
---------------------------------------------------------------------------

    \426\ The Commission is replacing the term ``participant'' in 
proposed Sec.  37.202(a)(2) with the term ``eligible contract 
participant'' in final Sec.  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.
    \427\ For 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.
---------------------------------------------------------------------------

    To address comments submitted in connection with proposed Sec.  
37.202(a)(3) regarding fees, the Commission clarifies that Sec.  
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 Sec.  
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.
---------------------------------------------------------------------------

    \428\ The Commission is replacing the term ``participant'' in 
proposed Sec.  37.202(a)(3) with the terms ``eligible contract 
participants'' and ``independent software vendors'' in final Sec.  
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.
---------------------------------------------------------------------------

(2) Sec.  37.202(b)--Jurisdiction
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \429\ CME Comment Letter at 17 (Feb. 22, 2011).
    \430\ Id. at 16.
    \431\ Id.
    \432\ Id.
    \433\ Id.
---------------------------------------------------------------------------

    Similarly, Bloomberg requested that the Commission clarify that 
proposed Sec.  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\
---------------------------------------------------------------------------

    \434\ Bloomberg Comment Letter at 6 (Mar. 8, 2011).
    \435\ Id.
    \436\ WMBAA Comment Letter at 19 (Mar. 8, 2011).
    \437\ Id.
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  37.202(b) as proposed. While 
acknowledging the comments described above, the Commission believes 
that Sec.  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.
---------------------------------------------------------------------------

    \438\ CEA section 5h(f)(2)(B); 7 U.S.C. 7b-3(f)(2)(B).
---------------------------------------------------------------------------

    For the avoidance of doubt, the Commission clarifies that the scope 
of Sec.  37.202(b) is not limited to members. To the contrary, all 
members and market participants of a SEF, as defined above under Sec.  
37.200, are within the scope of Sec.  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) Sec.  37.202(c)--Limitations on Access
    Proposed Sec.  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 Sec.  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 Sec.  37.202(c) implements Core Principle 2's requirement 
regarding limitations on access to the SEF.\441\
---------------------------------------------------------------------------

    \439\ The Commission is making certain non-substantive 
clarifications to the rule.
    \440\ For the avoidance of doubt, the Commission notes that this 
rule applies to the SEF's members and market participants.
    \441\ CEA section 5h(f)(2)(A)(ii); 7 U.S.C. 7b-3(f)(2)(A)(ii).
---------------------------------------------------------------------------

(d) Sec.  37.203--Rule Enforcement Program
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \442\ The Commission notes that Sec.  37.203 codifies CEA 
section 5h(f)(2)(B). 7 U.S.C. 7b-3(f)(2)(B).
---------------------------------------------------------------------------

(1) Sec.  37.203(a)--Abusive Trading Practices Prohibited
    Proposed Sec.  37.203(a) required a SEF to prohibit certain abusive 
trading practices, including front-running, wash trading, pre-arranged 
trading, fraudulent

[[Page 33510]]

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

    \443\ Core 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).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \444\ ABC/CIEBA Comment Letter at 9 (Mar. 8, 2011); CME Comment 
Letter at 17-18 (Feb. 22, 2011).
    \445\ CME Comment Letter at 17 (Feb. 22, 2011).
    \446\ Id. at 17-18.
---------------------------------------------------------------------------

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

    \447\ WMBAA Comment Letter at 20 (Mar. 8, 2011).
    \448\ Id.
    \449\ Better Markets Comment Letter at 13-17 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting proposed Sec.  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.
---------------------------------------------------------------------------

    \450\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1223.
    \451\ Core Principles and Other Requirements for Designated 
Contract Markets, 77 FR 36612, 36626 (Jun. 19, 2012).
---------------------------------------------------------------------------

    In response to CME's comment about how to interpret the prohibition 
on pre-arranged trading with respect to rules that allow for block 
trading and other types of trading, the Commission is amending proposed 
Sec.  37.203(a) to clarify that a SEF must prohibit pre-arranged 
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 pre-execution 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, Sec.  37.203(a) 
provides a non-exhaustive, 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 Sec.  37.203(a).
---------------------------------------------------------------------------

    \452\ See Final Sec.  37.203(a) in the Commission's regulations.
    \453\ CEA section 5h(f)(2); 7 U.S.C. 7b-3(f)(2).
---------------------------------------------------------------------------

(2) Sec.  37.203(b)--Capacity to Detect and Investigate Rule Violations
    Proposed Sec.  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 
Sec.  37.203(b) also required a SEF's arrangements and resources to 
facilitate

[[Page 33511]]

the direct supervision of the market and the analysis of data collected 
to determine whether a rule violation has occurred.
---------------------------------------------------------------------------

    \454\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1223.
---------------------------------------------------------------------------

(i) Summary of Comments
    FXall and CME requested that the Commission clarify the provision 
in proposed Sec.  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 non-registered 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\
---------------------------------------------------------------------------

    \455\ FXall Comment Letter at 11-12 (Mar. 8, 2011); CME Comment 
Letter at 18 (Feb. 22, 2011).
    \456\ CME Comment Letter at 18 (Feb. 22, 2011).
    \457\ Id.
    \458\ FXall Comment Letter at 11-12 (Mar. 8, 2011).
    \459\ Id.
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  37.203(b) as proposed, subject to 
the following modification. To address CME's concerns about the scope 
of proposed Sec.  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 Sec.  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 Sec.  37.203(b), the audit trail 
requirements in Sec.  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) Sec.  37.203(c)--Compliance Staff and Resources
    Proposed Sec.  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 
Sec.  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\
---------------------------------------------------------------------------

    \460\ WMBAA Comment Letter at 21 (Mar. 8, 2011); MarketAxess 
Comment Letter at 35 (Mar. 8, 2011).
    \461\ WMBAA Comment Letter at 21 (Mar. 8, 2011).
    \462\ Id.
    \463\ MarketAxess Comment Letter at 35 (Mar. 8, 2011).
    \464\ Id.
    \465\ Id.
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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 
non-affiliated SEF pursuant to a regulatory services agreement.
---------------------------------------------------------------------------

    \466\ The Commission is making certain non-substantive 
clarifications to proposed Sec.  37.203(c)(1). The Commission is 
also renumbering proposed Sec.  37.203(c)(1) to Sec.  37.203(c).
---------------------------------------------------------------------------

    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 Sec.  37.204.
    Finally, the Commission is deleting proposed Sec.  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

[[Page 33512]]

staff. The Commission believes that the obligation that a SEF monitor 
the adequacy of its compliance staff and resources are implicit in 
proposed Sec.  37.203(c)(1). The final rule provides greater 
flexibility to SEFs in determining their approach to monitoring their 
compliance resources.
(4) Sec.  37.203(d)--Automated Trade Surveillance System
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \467\ CME Comment Letter at 19-20 (Feb. 22, 2011); WMBAA Comment 
Letter at 21 (Mar. 8, 2011).
    \468\ CME Comment Letter at 19-20 (Feb. 22, 2011).
    \469\ Id. at 20.
    \470\ WMBAA Comment Letter at 21 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \471\ Better Markets Comment Letter at 18 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting proposed Sec.  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 Sec.  37.205(b). The Commission believes that Sec.  
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 Sec.  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\
---------------------------------------------------------------------------

    \472\ CEA section 5h(f)(2)(B); 7 U.S.C. 7b-3(f)(2)(B).
---------------------------------------------------------------------------

    The Commission acknowledges the inter-SEF surveillance limitations 
expressed by WMBAA. The Commission notes that the purpose of Sec.  
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 high-frequency traders, the 
Commission does not believe that it is necessary to modify Sec.  
37.203(d) to address this concern. As discussed in Sec.  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.
---------------------------------------------------------------------------

    \473\ See discussion below regarding high-frequency trading 
under Sec.  37.401--General Requirements in the preamble.
---------------------------------------------------------------------------

    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) Sec.  37.203(e)--Real-Time Market Monitoring
    Proposed Sec.  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 Sec.  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

[[Page 33513]]

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 Sec.  37.203(d).\476\
---------------------------------------------------------------------------

    \474\ CME Comment Letter at 21 (Feb. 22, 2011).
    \475\ Id. at 20-21.
    \476\ WMBAA Comment Letter at 21 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \477\ SIFMA AMG Comment Letter at 14 (Mar. 8, 2011); ISDA/SIFMA 
Comment Letter at 13 (Mar. 8, 2011).
    \478\ SIFMA AMG Comment Letter at 14 (Mar. 8, 2011).
    \479\ Id.
    \480\ ISDA/SIFMA Comment Letter at 13 (Mar. 8, 2011).
---------------------------------------------------------------------------

    Better Markets stated that a SEF's obligation to conduct real-time 
market monitoring should include monitoring orders and cancellations 
that are time-stamped at intervals consistent with the capabilities of 
high-frequency traders to identify abusive high frequency trading 
strategies.\481\
---------------------------------------------------------------------------

    \481\ Better Markets Comment Letter at 18 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \482\ CEA section 5h(f)(2)(B); 7 U.S.C. 7b-3(f)(2)(B).
---------------------------------------------------------------------------

    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 Sec.  
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 post-execution 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\
---------------------------------------------------------------------------

    \483\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1224.
    \484\ Id. at 1223-24.
    \485\ Id. at 1224.
---------------------------------------------------------------------------

    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 Sec.  37.203(e) to 
include concepts related specifically to high-frequency trading at this 
time.\486\ The Commission believes that a SEF's real-time 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.
---------------------------------------------------------------------------

    \486\ See discussion below regarding high-frequency trading 
under Sec.  37.401--General Requirements in the preamble.
---------------------------------------------------------------------------

(6) Sec.  37.203(f)--Investigations and Investigation Reports
    Proposed Sec.  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) Sec.  37.203(f)(1)--Procedures
    Proposed Sec.  37.203(f)(1) required a SEF to have procedures that 
require its compliance staff to conduct investigations of possible rule

[[Page 33514]]

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

    \487\ CME Comment Letter at 21 (Feb. 22, 2011).
    \488\ Id.
    \489\ Id.
---------------------------------------------------------------------------

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

    \490\ MarketAxess Comment Letter at 35 (Mar. 8, 2011).
    \491\ Id. at 35-36.
---------------------------------------------------------------------------

(B) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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 Sec.  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 Sec.  
37.204.
(ii) Sec.  37.203(f)(2)--Timeliness
    Under proposed Sec.  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 Sec.  
37.203(f)(2) is separate from the time period necessary to prosecute an 
investigation.\493\
---------------------------------------------------------------------------

    \492\ CME Comment Letter at 21 (Feb. 22, 2011).
    \493\ Id. at 21-22.
---------------------------------------------------------------------------

(B) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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) Sec.  37.203(f)(3)--Investigation Reports When a Reasonable Basis 
Exists for Finding a Violation
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \494\ ICE Comment Letter at 7 (Mar. 8, 2011); CME Comment Letter 
at 22, 35 (Feb. 22, 2011).
    \495\ CME Comment Letter at 35 (Feb. 22, 2011).
    \496\ ICE Comment Letter at 7 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \497\ CME Comment Letter at 22 (Feb. 22, 2011).
    \498\ Id.
---------------------------------------------------------------------------

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

    \499\ MarketAxess Comment Letter at 36 (Mar. 8, 2011).
---------------------------------------------------------------------------

(B) Commission Determination
    The Commission is adopting Sec.  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.

[[Page 33515]]

    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 Sec.  37.203(f)(5). 
However, as further discussed below in Sec.  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\
---------------------------------------------------------------------------

    \500\ The 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.
---------------------------------------------------------------------------

    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 Sec.  37.206(c).
(iv) Sec.  37.203(f)(4)--Investigation Reports When No Reasonable Basis 
Exists for Finding a Violation
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \501\ CME Comment Letter at 21 (Feb. 22, 2011).
    \502\ Id.
---------------------------------------------------------------------------

(B) Commission Determination
    The Commission is adopting Sec.  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.
---------------------------------------------------------------------------

    \503\ Similar to Sec.  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.
---------------------------------------------------------------------------

(v) Sec.  37.203(f)(5)--Warning Letters
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \504\ ICE Comment Letter at 7 (Mar. 8, 2011); CME Comment Letter 
at 22 (Feb. 22, 2011).
    \505\ CME Comment Letter at 22 (Feb. 22, 2011).
    \506\ Id.
    \507\ ICE Comment Letter at 7 (Mar. 8, 2011).
    \508\ MarketAxess Comment Letter at 36 (Mar. 8, 2011).
---------------------------------------------------------------------------

(B) Commission Determination
    The Commission is adopting proposed Sec.  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\
---------------------------------------------------------------------------

    \509\ For 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.
    \510\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1224.
    \511\ Id.
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 33516]]

recommend that a disciplinary panel take such action.
(7) Sec.  37.203(g)--Additional Rules Required
    Proposed Sec.  37.203(g) required a SEF to adopt and enforce any 
additional rules that it believes are necessary to comply with the 
requirements of Sec.  37.203.
(i) Commission Determination
    The Commission did not receive any comments on proposed Sec.  
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 Sec.  
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 Sec.  37.203(g) with final Sec.  
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 Sec.  37.203.
(e) Sec.  37.204--Regulatory Services Provided by a Third Party
(1) Sec.  37.204(a)--Use of Third-Party Provider Permitted \512\
---------------------------------------------------------------------------

    \512\ The 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.
---------------------------------------------------------------------------

    Proposed Sec.  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\
---------------------------------------------------------------------------

    \513\ MarketAxess 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).
    \514\ MarketAxess Comment Letter at 15 (Mar. 8, 2011).
    \515\ Id.
    \516\ Parity Energy Comment Letter at 5 (Mar. 25, 2011); WMBAA 
Comment Letter at 22 (Mar. 8, 2011); FXall Comment Letter at 12 
(Mar. 8, 2011).
    \517\ WMBAA Comment Letter at 22 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \518\ MarketAxess Comment Letter at 15 (Mar. 8, 2011); Tradeweb 
Comment Letter at 10 (Mar. 8, 2011).
    \519\ Tradeweb Comment Letter at 10 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  37.204(a) as proposed, subject to 
two modifications. In response to MarketAxess's comment about non-
registered 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 self-regulatory 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 market-wide 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 industry-wide CRO.
---------------------------------------------------------------------------

    \520\ See, e.g., discussion under Sec.  37.203(d)--Automated 
Trade Surveillance System and Core Principle 6--Position Limits or 
Accountability in the preamble.
    \521\ The 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.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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) Sec.  37.204(b)--Duty To Supervise Third Party \522\
---------------------------------------------------------------------------

    \522\ The 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.
---------------------------------------------------------------------------

    Proposed Sec.  37.204(b) required that a SEF maintain sufficient 
compliance staff to supervise any services performed by

[[Page 33517]]

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 Sec.  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\
---------------------------------------------------------------------------

    \523\ NFA Comment Letter at 2 (Mar. 8, 2011); CME Comment Letter 
at 18-19 (Feb. 22, 2011).
    \524\ NFA Comment Letter at 2 (Mar. 8, 2011).
    \525\ CME Comment Letter at 19 (Feb. 22, 2011).
    \526\ Id. at 18-19.
    \527\ Id. at 19.
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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 Sec.  37.204(b).
---------------------------------------------------------------------------

    \528\ The Commission is making certain non-substantive 
clarifications to Sec.  37.204(b).
---------------------------------------------------------------------------

(3) Sec.  37.204(c)--Regulatory Decisions Required From the SEF
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \529\ CME Comment Letter at 19 (Feb. 22, 2011).
    \530\ Id.
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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) Sec.  37.205--Audit Trail
    Proposed Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \531\ CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b-3(f)(2)(B)(ii).
---------------------------------------------------------------------------

(1) Sec.  37.205(a)--Audit Trail Required
    Proposed Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \532\ WMBAA Comment Letter at 22-23 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  37.205(a) as proposed, subject to 
the

[[Page 33518]]

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 Sec.  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.
---------------------------------------------------------------------------

    \533\ The Commission is making certain non-substantive 
clarifications to Sec.  37.205(a).
    \534\ CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b-3(f)(2)(B)(ii).
---------------------------------------------------------------------------

    Both the proposed and final rules in Sec.  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 Sec.  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) Sec.  37.205(b)--Elements of an Acceptable Audit Trail Program
    Proposed Sec.  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 Sec.  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 Sec.  37.205(b)(3) required the audit trail program 
to also have electronic analysis capability for the transaction history 
database. Proposed Sec.  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\
---------------------------------------------------------------------------

    \535\ WMBAA Comment Letter at 23 (Mar. 8, 2011).
    \536\ Id.
    \537\ Better Markets Comment Letter at 18 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting proposed Sec.  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 Sec.  
37.205(b)(1). The Commission is also revising proposed Sec.  
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 Sec.  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 Sec.  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 Sec.  37.203(d), but, as noted above, the Commission is moving these 
requirements to final Sec.  37.205(b). Additionally, the Commission is 
revising proposed Sec.  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

[[Page 33519]]

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

    \538\ CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b-3(f)(2)(B)(ii).
    \539\ See discussion above regarding Minimum Trading 
Functionality under Sec.  37.3--Requirements for Registration in the 
preamble.
---------------------------------------------------------------------------

    In response to WMBAA's comment about the flexibility of audit trail 
requirements to accommodate various methods of execution, the 
Commission notes that proposed Sec.  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 Sec.  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 Sec.  37.205 must be 
created.
    The Commission is also making certain conforming changes to Sec.  
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 Sec.  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 
Sec.  37.205(b)(1). Second, while proposed Sec.  37.205(b)(1) required 
that all executable orders or requests for quotes ``be immediately 
entered into the trading system or platform,'' Sec.  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 
Sec.  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 Sec.  37.205(b)(1) include 
conforming changes that remove the reference in proposed Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  37.9(a)(2)(i)(A) or (B).
    Although Sec.  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 Sec.  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 Sec.  
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 
Sec.  37.205(a).
    The Commission also believes that a SEF that utilizes the telephone 
may comply with the original source document requirement in Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 time-stamped with the granularity necessary to reconstruct 
trades and investigate possible trading violations, including for high-
frequency trading.\540\
---------------------------------------------------------------------------

    \540\ The Commission notes, as stated above under Sec.  
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.
---------------------------------------------------------------------------

(3) Sec.  37.205(c)--Enforcement of Audit Trail Requirements
    Proposed Sec.  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 Sec.  37.205(c)(1) also set forth minimum review criteria. 
Proposed Sec.  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 Sec.  37.205(c)(2) also 
stated that sanctions may not include more than one warning letter for 
the same violation within a rolling twelve-month period.
(i) Summary of Comments
    Some commenters stated that annual audits are unnecessary and 
unduly

[[Page 33520]]

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

    \541\ Tradeweb Comment Letter at 6 (Jun. 3, 2011); MarketAxess 
Comment Letter at 22 (Mar. 8, 2011); CME Comment Letter at 33 (Feb. 
22, 2011).
    \542\ CME Comment Letter at 33 (Feb. 22, 2011).
    \543\ MarketAxess Comment Letter at 22 (Mar. 8, 2011).
    \544\ Tradeweb Comment Letter at 6 (Jun. 3, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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 
sampling-based reviews of audit trail and recordkeeping requirements 
are inadequate to ensure compliance with audit trail rules. The 
Commission believes that the requirements under Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \545\ See, e.g., discussion above under Sec.  37.203(f)(5)--
Warning Letters in the preamble.
---------------------------------------------------------------------------

    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 cross-market self-regulatory 
organization. However, a SEF may use a regulatory service provider 
pursuant to Sec.  37.204 to assist it in complying with the 
requirements under Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \546\ Core Principles and Other Requirements for Designated 
Contract Markets, 77 FR at 36704.
---------------------------------------------------------------------------

(g) Sec.  37.206--Disciplinary Procedures and Sanctions
(1) Sec.  37.206--Disciplinary Procedures and Sanctions
    Proposed Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \547\ CEA section 5h(f)(2)(B); 7 U.S.C. 7b-3(f)(2)(B).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \548\ MarketAxess 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).
    \549\ FXall Comment Letter at 12 (Mar. 8, 2011).
    \550\ MarketAxess Comment Letter at 23 (Mar. 8, 2011), WMBAA 
Comment Letter at 24 (Mar. 8, 2011); FXall Comment Letter at 12 
(Mar. 8, 2011).
    \551\ FXall 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).
    \552\ Tradeweb 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).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission's evaluation of public comments with respect to 
proposed Sec.  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 Sec.  37.206 as proposed, while also moving to guidance or 
eliminating other parts of the proposed rules.\554\
---------------------------------------------------------------------------

    \553\ CEA section 5h(f)(2)(B); 7 U.S.C. 7b-3(f)(2)(B).
    \554\ The Commission is also revising Sec.  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 Sec.  37.200, that the term ``market 
participant'' encompasses SEF ``members.''
---------------------------------------------------------------------------

    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

[[Page 33521]]

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

    \555\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1225 n. 73.
    \556\ The 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.
---------------------------------------------------------------------------

    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, Sec.  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 third-party regulatory service 
provider for assistance in performing its self-regulatory functions, as 
provided for in Sec.  37.204.
---------------------------------------------------------------------------

    \557\ See 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 Sec.  1.3(h)), 
a swap execution facility (as defined in Sec.  1.3(rrrr)), or a 
registered futures association under section 17 of the Act.'' Id. at 
66318.
---------------------------------------------------------------------------

(2) Sec.  37.206(a)--Enforcement Staff
    Proposed Sec.  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 Sec.  37.206(a) also required a SEF to monitor the size and 
workload of its enforcement staff annually. In addition, proposed Sec.  
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 Sec.  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 Sec.  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) Sec.  37.206(b)--Disciplinary Panels
    Proposed Sec.  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 
Sec.  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 Sec.  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 Sec.  37.206(b)(3) provided that a Hearing Panel must be 
responsible for adjudicating the matter and issuing sanctions.
---------------------------------------------------------------------------

    \558\ Section 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 Sec.  
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).
---------------------------------------------------------------------------

(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 Sec.  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

[[Page 33522]]

pursuant to a supported settlement agreement.\561\
---------------------------------------------------------------------------

    \559\ MetLife Comment Letter at 6 (Mar. 8, 2011).
    \560\ CME Comment Letter at 35 (Feb. 22, 2011).
    \561\ Id.
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \562\ The 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.
---------------------------------------------------------------------------

    The modifications reflected in final Sec.  37.206(b), together with 
the revisions made to the text of proposed Sec.  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 Sec.  40.9(c)(3)(ii) with a reference to the 
more general ``part 40 of this chapter'' to accommodate any re-
enumeration that may occur with respect to proposed Sec.  
40.9(c)(3)(ii).
(4) Sec.  37.206(c)--Review of Investigation Report
    Proposed Sec.  37.206(c) required a Review Panel to promptly review 
an investigation report received pursuant to proposed Sec.  
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 Sec.  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\
---------------------------------------------------------------------------

    \563\ CME Comment Letter at 35 (Feb. 22, 2011).
    \564\ Id. While the Commission largely agrees with CME's 
comment, the Commission directs interested parties to Sec.  
37.203(f) for a further discussion of the required components of 
investigation reports.
---------------------------------------------------------------------------

(ii) Commission Determination
    In response to the general comments requesting greater flexibility, 
the Commission is eliminating all of proposed Sec.  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 Sec.  
37.206(b). Proposed Sec.  37.206(c)(3), with the revisions described 
above, is being incorporated into proposed Sec.  37.206(d). As 
described below, all of proposed Sec.  37.206(d) is being moved to the 
guidance in appendix B to part 37.
(5) Sec.  37.206(d)--Notice of Charges
    Proposed Sec.  37.206(d) described the minimally acceptable 
contents of a notice of charges issued by a Review Panel. Specifically, 
proposed Sec.  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 Sec.  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 Sec.  
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.
---------------------------------------------------------------------------

    \565\ As mentioned above, the Commission is moving paragraph (3) 
of proposed Sec.  37.206(c) to the text of proposed Sec.  37.206(d) 
that will now be included as guidance.
---------------------------------------------------------------------------

(6) Sec.  37.206(e)--Right to Representation
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \566\ CME Comment Letter at 35 (Feb. 22, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is moving proposed Sec.  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

[[Page 33523]]

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) Sec.  37.206(f)--Answer to Charges
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \567\ These 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.
---------------------------------------------------------------------------

(i) Commission Determination
    Although no comments were received on proposed Sec.  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) Sec.  37.206(g)--Admission or Failure To Deny Charges
    Proposed Sec.  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 Sec.  
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 Sec.  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 Sec.  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.''
---------------------------------------------------------------------------

    \568\ The Commission notes that the text that will now be 
included as guidance is being modified to reflect the single-panel 
approach adopted in Sec.  37.206(b), replacing specific panel names 
with a generic reference to the ``disciplinary panel.''
---------------------------------------------------------------------------

(9) Sec.  37.206(h)--Denial of Charges and Right to Hearing
    Proposed Sec.  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 Sec.  37.206(g), 
the respondent must be given the opportunity for a hearing in 
accordance with the requirements of proposed Sec.  37.206(j). Proposed 
Sec.  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 
Sec.  37.206(g) for which a hearing has been requested.
(i) Commission Determination
    The Commission received no comments on proposed Sec.  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 Sec.  37.206(g) for which a hearing has 
been requested.
---------------------------------------------------------------------------

    \569\ The Commission is revising the proposed rule to reflect 
the single-panel approach adopted in Sec.  37.206(b), replacing 
specific panel names with a generic reference to the ``disciplinary 
panel.'' The Commission is also removing the references to proposed 
Sec. Sec.  37.206(g) and (j) given that the Commission is moving 
proposed Sec.  37.206(g) to guidance, and either eliminating or 
moving certain provisions of proposed Sec.  37.206(j) to guidance.
---------------------------------------------------------------------------

(10) Sec.  37.206(i)--Settlement Offers
    Proposed Sec.  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 Sec.  
37.206(i), the Commission is moving the entire rule, with certain 
modifications, to the guidance in appendix B to part 37.\570\

[[Page 33524]]

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 Sec.  
37.206(n).
---------------------------------------------------------------------------

    \570\ The Commission notes that the text that will now be 
included as guidance is being modified to reflect the single-panel 
approach adopted in Sec.  37.206(b), replacing specific panel names 
with a generic reference to the ``disciplinary panel.''
---------------------------------------------------------------------------

(11) Sec.  37.206(j)--Hearings
    Proposed Sec.  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 Sec. Sec.  
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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \571\ CME Comment Letter at 36 (Feb. 22, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is partially adopting proposed Sec.  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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \572\ The Commission is renumbering proposed Sec.  37.206(j) to 
Sec.  37.206(c). The Commission is also revising the proposed rule 
to reflect the single-panel approach adopted in Sec.  37.206(b), 
replacing specific panel names with a generic reference to the 
``disciplinary panel.'' The Commission is also revising the 
reference to Sec.  37.206(l) in proposed Sec.  37.206(j)(1)(vi) 
given that it is moving proposed Sec.  37.206(l) to guidance.
---------------------------------------------------------------------------

    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 Sec.  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) Sec.  37.206(k)--Decisions
    Proposed Sec.  37.206(k) required a Hearing Panel, promptly 
following a hearing conducted in accordance with proposed Sec.  
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 Sec.  37.206(k) and 
is adopting the rule as proposed with certain non-substantive 
clarifications.\573\
---------------------------------------------------------------------------

    \573\ The Commission is renumbering proposed Sec.  37.206(k) to 
Sec.  37.206(d). The Commission is also revising the reference to 
Sec.  37.206(j) in proposed Sec.  37.206(k) given that the 
Commission has either eliminated or moved to guidance many of the 
provisions of proposed Sec.  37.206(j). The Commission is also 
revising the proposed rule to reflect the single-panel approach 
adopted in Sec.  37.206(b), replacing specific panel names with a 
generic reference to the ``disciplinary panel.''
---------------------------------------------------------------------------

(13) Sec.  37.206(l)--Right to Appeal
    Proposed Sec.  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 Sec.  37.206(l) generally required the SEF to: (1) Establish 
an appellate panel; (2) ensure that the appellate panel composition is 
consistent with Sec.  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 Sec.  
37.206(l), the Commission is moving the entire rule to the guidance in 
appendix B to part 37.\574\ Given that proposed Sec.  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.
---------------------------------------------------------------------------

    \574\ The Commission notes that the reference to Sec.  
40.9(c)(iv) in the proposed rule was a technical error. Instead, 
proposed Sec.  37.206(l) should have referenced the composition 
requirements of an appellate panel outlined in proposed Sec.  
40.9(c)(3)(iii). However, to accommodate any re-enumeration that may 
occur with respect to proposed Sec.  40.9(c)(3)(iii), the Commission 
is replacing the mistaken reference to Sec.  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 Sec.  37.206(k) in 
proposed Sec.  37.206(l)(4) to Sec.  37.206(d) given the renumbering 
in Sec.  37.206. Finally, the Commission is revising the proposed 
rule to reflect the single-panel approach adopted in Sec.  
37.206(b), replacing specific panel names with a generic reference 
to the ``disciplinary panel.''
---------------------------------------------------------------------------

(14) Sec.  37.206(m)--Final Decisions
    Proposed Sec.  37.206(m) required that each SEF establish rules 
setting forth when a decision rendered under Sec.  37.206 will become 
the final decision of the SEF.
(i) Commission Determination
    Although the Commission received no comments on proposed Sec.  
37.206(m), the Commission is moving the entire rule to

[[Page 33525]]

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) Sec.  37.206(n)--Disciplinary Sanctions
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \575\ WMBAA Comment Letter at 23 (Mar. 8, 2011).
    \576\ Id.
    \577\ Id. at 24.
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting proposed Sec.  37.206(n), subject to 
certain modifications.\578\ The Commission is revising proposed Sec.  
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 Sec.  37.206(n) so that it does not 
require customer restitution if the amount of restitution or the 
recipient cannot be reasonably determined.\579\
---------------------------------------------------------------------------

    \578\ The Commission is renumbering proposed Sec.  37.206(n) to 
Sec.  37.206(e).
    \579\ The 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.
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \580\ Section 37.2 states that a SEF shall comply with part 9 of 
the Commission's regulations.
    \581\ NFA's Background Affiliation Status Information Center 
database is available at http://www.nfa.futures.org/basicnet/.
---------------------------------------------------------------------------

(16) Sec.  37.206(o)--Summary Fines for Violations of Rules Regarding 
Timely Submission of Records
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \582\ CME Comment Letter at 36 (Feb. 22, 2011).
    \583\ MarketAxess Comment Letter at 36 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is partially adopting proposed Sec.  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\
---------------------------------------------------------------------------

    \584\ The Commission is renumbering proposed Sec.  37.206(o) to 
Sec.  37.206(f). The Commission is also retitling this section as 
``Warning letters.''
    \585\ For 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.
    \586\ See Core Principles and Other Requirements for Swap 
Execution Facilities, 76 FR at 1224.
---------------------------------------------------------------------------

    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 Sec.  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) Sec.  37.206(p)--Emergency Disciplinary Actions
    Proposed Sec.  37.206(p) provided that a SEF may impose a sanction, 
including

[[Page 33526]]

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

    \587\ The Commission notes that, pursuant to Sec.  9.11 and 
Sec.  37.2, SEFs must provide the Commission with notice of any 
disciplinary actions that they take, including emergency 
disciplinary actions.
---------------------------------------------------------------------------

(i) Commission Determination
    Although the Commission received no comments on proposed Sec.  
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.
---------------------------------------------------------------------------

    \588\ The Commission is also revising the reference to Sec.  
37.206(j) in proposed Sec.  37.206(p)(ii) given that the Commission 
has either eliminated or moved to guidance many of the provisions of 
proposed Sec.  37.206(j).
---------------------------------------------------------------------------

    The Commission is also codifying new Sec.  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 Sec.  
37.206.
---------------------------------------------------------------------------

    \589\ The Commission notes that this paragraph's numbering is 
due to the renumbering of Sec.  37.206.
---------------------------------------------------------------------------

(h) Sec.  37.207--Swaps Subject to Mandatory Clearing
    Proposed Sec.  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 Sec.  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 Sec.  37.207 is identical to proposed Sec.  
37.200(d) and therefore is unnecessary.\592\ WMBAA commented that there 
is no statutory basis to impose the requirement in proposed Sec.  
37.207.\593\
---------------------------------------------------------------------------

    \590\ FXall Comment Letter at 11 (Mar. 8, 2011).
    \591\ MarketAxess Comment Letter at 34 (Mar. 8, 2011).
    \592\ Id.
    \593\ WMBAA Comment Letter at 24 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission agrees with MarketAxess that proposed Sec.  37.207 
is identical to Sec.  37.200(d) and is therefore eliminating proposed 
Sec.  37.207. In response to WMBAA's comment, the Commission notes that 
Sec.  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 Sec.  37.200(d) 
need only apply to swaps executed on or pursuant to the rules of that 
SEF.
---------------------------------------------------------------------------

    \594\ CEA section 5h(f)(2)(D); 7 U.S.C. 7b-3(f)(2)(D).
---------------------------------------------------------------------------

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 Sec.  37.300, and adopts that rule as proposed.
---------------------------------------------------------------------------

    \595\ CEA section 5h(f)(3); 7 U.S.C. 7b-3(f)(3).
---------------------------------------------------------------------------

    To demonstrate to the Commission compliance with Core Principle 3, 
proposed Sec.  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\
---------------------------------------------------------------------------

    \596\ The 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.
---------------------------------------------------------------------------

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

    \597\ Reuters Comment Letter at 5 (Mar. 8, 2011).
    \598\ GFI Comment Letter at 4-5 (Mar. 8, 2011).
    \599\ Id. at 5.
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission is adopting Sec.  37.301 as proposed, subject to 
certain modifications for clarity. The Commission is deleting from the 
rule the references to prior approval or self-certification for new 
product submissions under part 40 of the Commission's regulations 
because those details are covered under Sec.  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.
---------------------------------------------------------------------------

    \600\ CEA section 5h(f)(3); 7 U.S.C. 7b-3(f)(3).
---------------------------------------------------------------------------

    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

[[Page 33527]]

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 Sec.  37.400, 
and adopts that rule as proposed.
---------------------------------------------------------------------------

    \601\ CEA section 5h(f)(4); 7 U.S.C. 7b-3(f)(4).
    \602\ Id.
---------------------------------------------------------------------------

    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) Sec.  37.401--General Requirements
    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \603\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1227.
---------------------------------------------------------------------------

(1) Summary of Comments
    Several commenters sought clarification that proposed Sec.  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\
---------------------------------------------------------------------------

    \604\ Bloomberg 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).
    \605\ Tradeweb Comment Letter at 11 (Mar. 8, 2011).
---------------------------------------------------------------------------

    WMBAA requested that the Commission clarify what it means by 
``individual traders'' and ``market activity'' in proposed Sec.  
37.401(a).\606\ WMBAA also sought clarification regarding what 
constitutes ``general market data'' in proposed Sec.  37.401(b).\607\
---------------------------------------------------------------------------

    \606\ WMBAA Comment Letter at 25 (Mar. 8, 2011).
    \607\ Id.
---------------------------------------------------------------------------

    CME commented that the Commission's requirements for real-time 
monitoring in proposed Sec.  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\
---------------------------------------------------------------------------

    \608\ CME Comment Letter at 24 (Feb. 22, 2011).
    \609\ ICE Comment Letter at 4 (Mar. 8, 2011).
---------------------------------------------------------------------------

    ICE and CME also expressed concern regarding the real-time 
monitoring of position limits.\610\ ICE stated that real-time 
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\
---------------------------------------------------------------------------

    \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).
    \612\ CME Comment Letter at 24 (Feb. 22, 2011).
---------------------------------------------------------------------------

    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

[[Page 33528]]

indicative of some other risk to the orderly functioning of the 
markets.\617\
---------------------------------------------------------------------------

    \613\ Id. at 25.
    \614\ Id.
    \615\ Id.
    \616\ Id.
    \617\ Id.
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  37.401 as proposed, subject to 
certain modifications, including converting portions of the rule to 
guidance in appendix B to part 37.\618\
---------------------------------------------------------------------------

    \618\ The Commission is moving proposed Sec.  37.401(d) to the 
guidance in appendix B to part 37 and moving the ``trade 
reconstruction'' language in proposed Sec.  37.401(c) to final Sec.  
37.401(d).
---------------------------------------------------------------------------

    To address commenters' concerns whether Sec.  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.
---------------------------------------------------------------------------

    \619\ CEA section 5h(f)(4)(B); 7 U.S.C. 7b-3(f)(4)(B).
    \620\ Refer 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.
    \621\ See discussion below under Sec.  37.403--Additional 
Requirements for Cash-Settled Swaps and Sec.  37.404--Ability To 
Obtain Information in the preamble.
---------------------------------------------------------------------------

    In response to WMBAA's concerns regarding the clarification of 
certain terms in Sec.  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 
Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \622\ See, e.g., ``Recommendations on Pre-Trade Practices for 
Trading Firms, Clearing Firms and Exchanges involved in Direct 
Market Access,'' Pre-Trade 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.
    \623\ See 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.
---------------------------------------------------------------------------

(b) Sec.  37.402--Additional Requirements for Physical-Delivery Swaps
    Proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \624\ CME Comment Letter at 25 (Feb. 22, 2011).
    \625\ Parity Energy Comment Letter at 4 (Mar. 25, 2011).

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

[[Page 33529]]

(2) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \626\ The Commission is renumbering proposed Sec.  37.402(a)(1) 
and (a)(2) to Sec.  37.402(a) and (b), respectively. The Commission 
is deleting or moving to guidance proposed Sec.  37.402(a)(3), 
(a)(4), and (b).
    \627\ Proposed Sec.  37.402(a)(2) is now final Sec.  37.402(b).
---------------------------------------------------------------------------

(c) Sec.  37.403--Additional Requirements for Cash-Settled Swaps
    Proposed Sec.  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 Sec.  
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 Sec.  
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\
---------------------------------------------------------------------------

    \628\ Argus Comment Letter at 6 (Feb. 22, 2011).
    \629\ Id.
    \630\ Id. at 7.
---------------------------------------------------------------------------

    Several commenters expressed concern about the requirement in 
proposed Sec.  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\
---------------------------------------------------------------------------

    \631\ Parity 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).
---------------------------------------------------------------------------

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

    \633\ CME Comment Letter at 11 (Mar. 8, 2011).
    \634\ Id.
    \635\ Id.
---------------------------------------------------------------------------

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

    \636\ Nodal Comment Letter at 5 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \637\ The Commission is renumbering proposed Sec.  37.403(a)(1) 
and (a)(2) to Sec.  37.403(a), (b), and (c). The Commission is 
moving proposed Sec.  37.403(b) to Sec.  37.404(a).
    \638\ CEA section 5h(f)(4)(B); 7 U.S.C. 7b-3(f)(4)(B).
    \639\ Final Sec.  37.403(a) was proposed Sec.  37.403(a)(1).
    \640\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1228.
---------------------------------------------------------------------------

    Although no comments were received on proposed Sec.  
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 Sec.  
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 Sec.  
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

[[Page 33530]]

reference prices that rely upon a third-party 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.
---------------------------------------------------------------------------

    \641\ The Commission is renumbering proposed Sec.  37.403(a)(2) 
to Sec.  37.403(b).
---------------------------------------------------------------------------

    With respect to commenters' concerns about the requirement in 
proposed Sec.  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 Sec.  37.404 where it more logically 
belongs.
---------------------------------------------------------------------------

    \642\ CEA section 5h(f)(4)(B); 7 U.S.C. 7b-3(f)(4)(B).
---------------------------------------------------------------------------

    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) Sec.  37.404--Ability To Obtain Information
    Proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \643\ CME Comment Letter at 26 (Feb. 22, 2011).
    \644\ WMBAA Comment Letter at 26 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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 Sec.  37.403, the 
Commission is moving to Sec.  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\
---------------------------------------------------------------------------

    \645\ The Commission is changing the phrase ``traders in its 
swaps'' to ``its market participants'' to provide clarity.
    \646\ The Commission notes that this requirement is now in Sec.  
37.404(a).
---------------------------------------------------------------------------

    With respect to CME's and WMBAA's comments on proposed Sec.  
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 Sec.  18.05 and for 
swaps trading under Sec.  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.
---------------------------------------------------------------------------

    \647\ The Commission notes that this requirement is now in Sec.  
37.404(b).
    \648\ CEA section 5h(f)(4)(B); 7 U.S.C. 7b-3(f)(4)(B).
---------------------------------------------------------------------------

    The Commission is also deleting the requirements under proposed 
Sec.  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\
---------------------------------------------------------------------------

    \649\ See, e.g., comments below under Core Principle 6--Position 
Limits or Accountability in the preamble.
---------------------------------------------------------------------------

(e) Sec.  37.405--Risk Controls for Trading
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \650\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1228.
    \651\ Id.

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

[[Page 33531]]

(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\
---------------------------------------------------------------------------

    \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).
    \653\ CME Comment Letter at 27 (Feb. 22, 2011).
    \654\ ICE Comment Letter at 5 (Mar. 8, 2011).
    \655\ Id.
---------------------------------------------------------------------------

    SDMA supported the requirement in proposed Sec.  37.405, but noted 
that the rule should include pre-trade and post-trade 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\
---------------------------------------------------------------------------

    \656\ SDMA 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.
---------------------------------------------------------------------------

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

    \659\ CME Comment Letter at 26 (Feb. 22, 2011).
    \660\ Id.
    \661\ Id.
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting proposed Sec.  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.
---------------------------------------------------------------------------

    \662\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1228.
---------------------------------------------------------------------------

    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 order-cancellation 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\
---------------------------------------------------------------------------

    \663\ TAC Subcommittee Recommendations (Mar. 1, 2011).
    \664\ The 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.
    \665\ TAC 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.
    \666\ TAC Subcommittee Recommendations at 4 (Mar. 1, 2011).
---------------------------------------------------------------------------

    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 Sec.  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) Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \667\ CEA section 5h(f)(4)(B); 7 U.S.C. 7b-3(f)(4)(B).
---------------------------------------------------------------------------

(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

[[Page 33532]]

replaced with ``such reasonable time as determined by the Commission.'' 
\669\
---------------------------------------------------------------------------

    \668\ CME Comment Letter at 27 (Feb. 22, 2011).
    \669\ Id.
---------------------------------------------------------------------------

(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) Sec.  37.407--Additional Rules Required
    Proposed Sec.  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 Sec.  37.407 to new Sec.  37.408, titled 
``Additional sources for compliance.''
    In new Sec.  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 Sec.  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 
Sec.  37.500, and adopts that rule as proposed.
---------------------------------------------------------------------------

    \670\ CEA section 5h(f)(5); 7 U.S.C. 7b-3(f)(5).
---------------------------------------------------------------------------

(a) Sec.  37.501--Establish and Enforce Rules
    Proposed Sec.  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 Sec.  37.501 and is 
adopting the rule as proposed. The Commission believes that Sec.  
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\
---------------------------------------------------------------------------

    \671\ CEA section 5h(f)(5)(A); 7 U.S.C. 7b-3(f)(5)(A).
---------------------------------------------------------------------------

(b) Sec.  37.502--Collection of Information
    Proposed Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \672\ WMBAA Comment Letter at 26 (Mar. 8, 2011).
    \673\ Id.
    \674\ Id.
    \675\ MarketAxess Comment Letter at 37 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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 Sec.  37.502. Additionally, as mentioned in Sec.  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.
---------------------------------------------------------------------------

    \676\ The Commission is changing the terms ``participants'' and 
``traders'' to ``market participants'' to provide clarity.
    \677\ CEA section 5h(f)(4)(B); 7 U.S.C. 7b-3(f)(4)(B).
---------------------------------------------------------------------------

(c) Sec.  37.503--Provide Information to the Commission
    Proposed Sec.  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 Sec.  37.503 and is 
adopting the rule as proposed. The Commission believes that Sec.  
37.503 appropriately implements the requirement in Core Principle 5 for 
a SEF to provide information to the Commission on request.\678\
---------------------------------------------------------------------------

    \678\ CEA section 5h(f)(5)(B); 7 U.S.C. 7b-3(f)(5)(B).
---------------------------------------------------------------------------

(d) Sec.  37.504--Information-Sharing Agreements
    Proposed Sec.  37.504 required a SEF to share information with 
other regulatory organizations, data repositories, and reporting 
services as required by the

[[Page 33533]]

Commission or as otherwise necessary and appropriate to fulfill its 
self-regulatory and reporting responsibilities. The proposed rule also 
stated that appropriate information-sharing 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\
---------------------------------------------------------------------------

    \679\ WMBAA Comment Letter at 27 (Mar. 8, 2011).
    \680\ Id.
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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 Sec.  37.600, and adopts that rule as proposed. 
Proposed Sec.  37.601 repeated the requirements in Sec.  37.600 and 
required that SEFs establish position limits in accordance with the 
requirements set forth in part 151 of the Commission's regulations.
---------------------------------------------------------------------------

    \681\ CEA section 5h(f)(6); 7 U.S.C. 7b-3(f)(6).
    \682\ Id.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \683\ Bloomberg 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).
    \684\ WMBAA 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).
    \685\ Phoenix Comment Letter at 3-4 (Mar. 7, 2011).
    \686\ WMBAA Comment Letter at 27 (Mar. 8, 2011).
    \687\ Reuters Comment Letter at 6 (Mar. 8, 2011); Phoenix 
Comment Letter at 4 (Mar. 7, 2011).
    \688\ Alice Comment Letter at 5 (May 31, 2011).
---------------------------------------------------------------------------

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

    \689\ Phoenix Comment Letter at 4 (Mar. 7, 2011).
    \690\ Tradeweb Comment Letter at 11 (Mar. 8, 2011).
---------------------------------------------------------------------------

(b) Commission Determination
    In response to commenters concerns about monitoring position 
limits, the Commission is removing the requirements in Sec.  37.601. 
Instead, final Sec.  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 Sec.  
37.600.
---------------------------------------------------------------------------

    \691\ See Position Limits for Derivatives, 76 FR 4752 (proposed 
Jan. 26, 2011).
---------------------------------------------------------------------------

    The guidance provides a SEF with reasonable discretion to comply 
with Sec.  37.600, including considering part 150 of the Commission's 
regulations.\692\ The guidance also states that for Required 
Transactions as defined in Sec.  37.9, a SEF may demonstrate compliance 
with Sec.  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 Sec.  37.9, a SEF may 
demonstrate compliance with Sec.  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.
---------------------------------------------------------------------------

    \692\ Part 150 of the Commission's regulations contains the 
current position limits regime.
---------------------------------------------------------------------------

    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

[[Page 33534]]

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 Sec.  37.700, and adopts that rule as 
proposed.
---------------------------------------------------------------------------

    \693\ CEA section 5h(f)(7); 7 U.S.C. 7b-3(f)(7).
---------------------------------------------------------------------------

(a) Sec.  37.701--Mandatory Clearing \694\
---------------------------------------------------------------------------

    \694\ The 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.
---------------------------------------------------------------------------

    Proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \695\ ISDA/SIFMA Comment Letter at 13 (Mar. 8, 2011).
    \696\ Id.
    \697\ MarketAxess Comment Letter at 38 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  37.701 as proposed, subject to 
certain revisions. The Commission is modifying Sec.  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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \698\ CEA section 5b(h); 7 U.S.C. 7a-1(h).
    \699\ Id.
---------------------------------------------------------------------------

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

    \700\ The 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.
---------------------------------------------------------------------------

    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 end-user 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) Sec.  37.702--General Financial Integrity
    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  37.702(d) required a SEF to implement any additional 
safeguards

[[Page 33535]]

that may be required by Commission regulations.
(1) Summary of Comments
    Bloomberg commented, with respect to proposed Sec.  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\
---------------------------------------------------------------------------

    \701\ Bloomberg Comment Letter at 5 (Mar. 8, 2011).
    \702\ Id.
---------------------------------------------------------------------------

    With respect to proposed Sec.  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\
---------------------------------------------------------------------------

    \703\ Reuters Comment Letter at 6 (Mar. 8, 2011).
    \704\ MarketAxess Comment Letter at 35 (Mar. 8, 2011).
    \705\ Id.
---------------------------------------------------------------------------

    The Commission received several comments with regard to proposed 
Sec.  37.702(c). The Energy Working Group noted that proposed Sec.  
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 Sec.  
37.702(c) would impose costly burdens on SEFs.\710\
---------------------------------------------------------------------------

    \706\ Energy Working Group Comment Letter at 5 (Mar. 8, 2011).
    \707\ MarketAxess Comment Letter at 37 (Mar. 8, 2011).
    \708\ Reuters Comment Letter at 6 (Mar. 8, 2011).
    \709\ ISDA/SIFMA Comment Letter at 13 (Mar. 8, 2011).
    \710\ ABC/CEIBA Comment Letter at 11 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \711\ Goldman Comment Letter at 5 (Mar. 8, 2011).
    \712\ Id.
    \713\ Id.
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission has considered the comments received and is adopting 
Sec.  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\
---------------------------------------------------------------------------

    \714\ The Commission notes that under Sec.  37.202(a)(2), a SEF 
that permits intermediation must also obtain signed representations 
from intermediaries that their customers are ECPs.
---------------------------------------------------------------------------

    Last year, the Commission adopted rules regarding the processing of 
cleared trades.\715\ In that rulemaking, the Commission proposed a new 
Sec.  37.702(b) \716\ and adopted a revised Sec.  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 Sec.  39.12(b)(7) of the Commission's 
regulations.\718\
---------------------------------------------------------------------------

    \715\ Customer Clearing Documentation, Timing of Acceptance for 
Clearing, and Clearing Member Risk Management, 77 FR 21278 (Apr. 9, 
2012).
    \716\ Requirements for Processing, Clearing, and Transfer of 
Customer Positions, 76 FR 13101, 13109-10 (proposed Mar. 10, 2011).
    \717\ Customer Clearing Documentation, Timing of Acceptance for 
Clearing, and Clearing Member Risk Management, 77 FR at 21309.
    \718\ Id.
---------------------------------------------------------------------------

    In response to MarketAxess's comment about affirmation hubs, the 
Commission notes that Sec.  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 Sec.  37.702(b), and the trade is processed in accordance with the 
standards set forth in Sec. Sec.  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.
---------------------------------------------------------------------------

    \719\ Id.
---------------------------------------------------------------------------

    In consideration of the comments with respect to uncleared swaps, 
the Commission is eliminating proposed Sec.  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 
Sec.  37.702(d) as it is unnecessary because a SEF must already 
implement safeguards as required by Commission regulations.
(c) Sec.  37.703--Monitoring for Financial Soundness
    Proposed Sec.  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

[[Page 33536]]

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

    \720\ ABC/CEIBA Comment Letter at 11 (Mar. 8, 2011).
    \721\ FXall Comment Letter at 13 (Mar. 8, 2011).
    \722\ Id.
---------------------------------------------------------------------------

(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 
Sec.  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 Sec.  37.703 responsibilities to 
the Joint Audit Committee, the Commission notes that final Sec.  
37.703, as revised, obviates the need for any such delegation. Under 
final Sec.  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 Sec.  37.800, and adopts that rule as proposed.\724\
---------------------------------------------------------------------------

    \723\ CEA section 5h(f)(8); 7 U.S.C. 7b-3(f)(8).
    \724\ The 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.''
---------------------------------------------------------------------------

(a) Sec.  37.801--Additional Sources for Compliance
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \725\ Bloomberg 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).
    \726\ Bloomberg Comment Letter at 4 (Jun. 3, 2011); Bloomberg 
Comment Letter at 5-6 (Mar. 8, 2011).
    \727\ WMBAA Comment Letter at 28 (Mar. 8, 2011).
    \728\ Reuters Comment Letter at 7 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \729\ CME Comment Letter at 28 (Feb. 22, 2011).
    \730\ ISDA/SIFMA Comment Letter at 13 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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.
---------------------------------------------------------------------------

    \731\ CEA section 5h(f)(8); 7 U.S.C. 7b-3(f)(8).
---------------------------------------------------------------------------

    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 Sec.  37.900. Proposed Sec.  37.901 required that, for 
swaps traded on or through a SEF, the SEF report specified swap data as

[[Page 33537]]

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 Sec.  37.902 required a SEF to have the capacity 
to electronically capture trade information with respect to 
transactions executed on the facility.
---------------------------------------------------------------------------

    \732\ CEA section 5h(f)(9); 7 U.S.C. 7b-3(f)(9).
    \733\ Id.
    \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).
---------------------------------------------------------------------------

(a) Summary of Comments
    In response to the Commission's questions in the SEF NPRM about 
end-of-day price reporting for interest rate swaps and the Commission's 
proposed revisions to Sec.  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\
---------------------------------------------------------------------------

    \736\ The Commission proposed certain revisions to Sec.  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.
    \737\ Eris Comment Letter at 5 (Mar. 8, 2011).
    \738\ Id.
---------------------------------------------------------------------------

    MarketAxess commented that proposed Sec.  37.900(b) and Sec.  
37.902 are duplicative and that proposed Sec.  37.902 should be 
withdrawn.\739\
---------------------------------------------------------------------------

    \739\ MarketAxess Comment Letter at 39 (Mar. 8, 2011).
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission is adopting Sec.  37.900 and Sec.  37.901 as 
proposed. The Commission acknowledges MarketAxess's comment that Sec.  
37.902 is duplicative to Sec.  37.900(b) and thus is withdrawing Sec.  
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 Sec.  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 
Sec.  16.01 are warranted at this time in light of the novelty of swaps 
trading on regulated exchanges.\741\
---------------------------------------------------------------------------

    \740\ The Commission notes that Sec.  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.
    \741\ Core Principles and Other Requirements for Designated 
Contract Markets, 77 FR 36612, 36642 (Jun. 19, 2012).
---------------------------------------------------------------------------

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 Sec.  
37.1000, and adopts that rule as proposed.
---------------------------------------------------------------------------

    \742\ CEA section 5h(f)(10); 7 U.S.C. 7b-3(f)(10).
---------------------------------------------------------------------------

    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \743\ MarketAxess Comment Letter at 39 (Mar. 8, 2011).
    \744\ CME Comment Letter at 38 (Feb. 22, 2011).
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission is adopting Sec.  37.1001 as proposed. The 
Commission is also withdrawing proposed Sec.  37.1002 and Sec.  37.1003 
because they are repetitive of paragraphs (a)(2) and (a)(3) of Sec.  
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 Sec.  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 
Sec.  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\
---------------------------------------------------------------------------

    \745\ See Registration and Regulation of Security-Based 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).
---------------------------------------------------------------------------

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 Sec.  37.1100, and adopts that rule as 
proposed. Additionally, proposed Sec.  37.1101 referred applicants and 
SEFs to the guidance in appendix B to part 37 for purposes of 
demonstrating compliance with proposed Sec.  37.1100.
---------------------------------------------------------------------------

    \746\ CEA section 5h(f)(11); 7 U.S.C. 7b-3(f)(11).
---------------------------------------------------------------------------

(a) Summary of Comments
    NGSA commented that if SEFs are allowed to select the SDR to which 
SEF-executed 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

[[Page 33538]]

with any SDR to report all swaps to such SDR.\748\
---------------------------------------------------------------------------

    \747\ NGSA Comment Letter at 2 (Jun. 8, 2012). DTCC also raised 
this concern in its comment letter. DTCC Comment Letter at 3 (Jun. 
10, 2011).
    \748\ NGSA Comment Letter at 5 (Jun. 8, 2012).
---------------------------------------------------------------------------

(b) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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 Sec.  37.100.
---------------------------------------------------------------------------

    \749\ CEA section 5h(f)(12); 7 U.S.C. 7b-3(f)(12).
    \750\ Requirements 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).
---------------------------------------------------------------------------

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 Sec.  
37.1300, and adopts that rule as proposed.
---------------------------------------------------------------------------

    \751\ CEA section 5h(f)(13); 7 U.S.C. 7b-3(f)(13).
    \752\ Id.
---------------------------------------------------------------------------

(a) Sec.  37.1301--General Requirements
    Proposed Sec.  37.1301 set forth the financial resources 
requirements for SEFs in order to implement Core Principle 13. Proposed 
Sec.  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 Sec.  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 
Sec.  39.11.\753\ Proposed Sec.  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.
---------------------------------------------------------------------------

    \753\ See Derivatives Clearing Organization General Provisions 
and Core Principles, 76 FR 69334 (Nov. 8, 2011). Commission 
regulation Sec.  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.
---------------------------------------------------------------------------

(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 wind-down 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\
---------------------------------------------------------------------------

    \754\ Parity Energy Comment Letter at 6 (Mar. 25, 2011).
    \755\ Phoenix Comment Letter at 4 (Mar. 7, 2011).
    \756\ TruMarx Comment Letter at 7 (Mar. 8, 2011).
    \757\ Id.
---------------------------------------------------------------------------

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

    \758\ SDMA Comment Letter at 12 (Mar. 8, 2011).
    \759\ Id.
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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\
---------------------------------------------------------------------------

    \760\ The Commission is making a technical change due to the 
fact that the cross reference in Sec.  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 Sec.  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 Sec.  
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.
    \761\ CEA section 5h(f)(13)(A); 7 U.S.C. 7b-3(f)(13)(A).
    \762\ CEA section 5h(f)(13)(B); 7 U.S.C. 7b-3(f)(13)(B).
---------------------------------------------------------------------------

    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

[[Page 33539]]

core principle responsibilities in accordance with the CEA and that 
those costs are greater than the cost to wind-down 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) Sec.  37.1302--Types of Financial Resources
    Proposed Sec.  37.1302 set forth the type of financial resources 
available to satisfy the requirements of proposed Sec.  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\
---------------------------------------------------------------------------

    \763\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1230.
---------------------------------------------------------------------------

(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 Sec.  37.1302 
the following financial resources: assets of a parent company that 
wholly owns the SEF, and, subject to Sec.  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\
---------------------------------------------------------------------------

    \764\ Phoenix Comment Letter at 5 (Mar. 7, 2011).
    \765\ Id.
    \766\ CME Comment Letter at 37 (Feb. 22, 2011).
    \767\ Reuters Comment Letter at 8 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is revising proposed Sec.  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 Sec.  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) Sec.  37.1303--Computation of Financial Resource Requirement \768\
---------------------------------------------------------------------------

    \768\ The 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.
---------------------------------------------------------------------------

    Proposed Sec.  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 Sec.  37.1301. Proposed Sec.  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\
---------------------------------------------------------------------------

    \769\ MarketAxess Comment Letter at 39 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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.
---------------------------------------------------------------------------

    \770\ The Commission is revising the language of Sec.  37.1303 
for clarity.
---------------------------------------------------------------------------

(d) Sec.  37.1304--Valuation of Financial Resources
    Proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \771\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1231.
    \772\ A ``haircut'' is a deduction taken from the value of an 
asset to reserve for potential future adverse price movements in 
such asset.
    \773\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1231 n. 102.
---------------------------------------------------------------------------

(1) Summary of Comments
    MarketAxess commented that proposed Sec.  37.1304 did not prescribe 
specific methodologies for valuing financial resources and recommended 
that the Commission provide a safe harbor for specific 
methodologies.\774\
---------------------------------------------------------------------------

    \774\ MarketAxess Comment Letter at 39 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  37.1304 as proposed.\775\ As with

[[Page 33540]]

Sec.  37.1303, Sec.  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.
---------------------------------------------------------------------------

    \775\ MarketAxess noted that Sec.  37.1304 contains a 
typographical error as it mistakenly cross-references proposed Sec.  
37.701, which relates to the mandatory clearing requirement, instead 
of proposed Sec.  37.1301. The Commission has made this technical 
change in the final rule. Additionally, the Commission is revising 
the language of Sec.  37.1304 for clarity.
---------------------------------------------------------------------------

(e) Sec.  37.1305--Liquidity of Financial Resources
    Proposed Sec.  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 Sec.  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 Sec.  
37.1301.\778\
---------------------------------------------------------------------------

    \776\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1231.
    \777\ Id.
    \778\ Id.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \779\ CME Comment Letter at 37 (Feb. 22, 2011).
    \780\ Phoenix Comment Letter at 4 (Mar. 7, 2011).
    \781\ Parity Energy Comment Letter at 6 (Mar. 25, 2011).
    \782\ SDMA Comment Letter at 12 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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) Sec.  37.1306--Reporting Requirements \783\
---------------------------------------------------------------------------

    \783\ The Commission is renaming the title of this section from 
``Reporting Requirements'' to ``Reporting to the Commission'' to 
provide greater clarity.
---------------------------------------------------------------------------

    Proposed Sec.  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 Sec.  37.1301; and (ii) the value of each financial 
resource available to meet those requirements. Proposed Sec.  
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 Sec.  
37.1306(b) required calculations to be made on the last business day of 
the SEF's fiscal quarter.
    Proposed Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \784\ This 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.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \785\ CME Comment Letter at 38 (Feb. 22, 2011).
    \786\ Id.
    \787\ Id.
---------------------------------------------------------------------------

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

    \788\ MarketAxess Comment Letter at 40 (Mar. 8, 2011).
---------------------------------------------------------------------------

    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\

[[Page 33541]]

However, SIFMA AMG commented that SEFs should submit to the Commission 
and make available for public comment evidence demonstrating sufficient 
resources.\790\
---------------------------------------------------------------------------

    \789\ CME Comment Letter at 38 (Feb. 22, 2011).
    \790\ SIMFA AMG Comment Letter at 13 (Mar. 8, 2011).
---------------------------------------------------------------------------

(2) Commission Determination
    The Commission is adopting Sec.  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.
---------------------------------------------------------------------------

    \791\ The Commission is also making certain non-substantive 
clarifications to Sec.  37.1306.
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \792\ 17 CFR 145.9.
---------------------------------------------------------------------------

    Finally, the Commission is adding new Sec.  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 Sec.  37.1400, and adopts that rule as proposed.
---------------------------------------------------------------------------

    \793\ CEA section 5h(f)(14); 7 U.S.C. 7b-3(f)(14).
---------------------------------------------------------------------------

(a) Sec.  37.1401--Requirements
    Proposed Sec.  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 Sec.  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 Sec.  37.1401(c) suggested that a SEF 
follow generally accepted standards and best practices when addressing 
the categories of risk analysis and oversight.
    Proposed Sec.  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 Sec.  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 Sec.  37.1401(f)(1)), cyber-security incidents (proposed 
Sec.  37.1401(f)(2)), and any activation of the SEF's BC-DR plan 
(proposed Sec.  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 Sec.  37.1401(g)(1)) and planned changes to programs of risk 
analysis and oversight (proposed Sec.  37.1401(g)(2)).
    The proposed rule also required each SEF to provide relevant 
documents to the Commission (proposed Sec.  37.1401(h)) and to conduct 
regular, periodic, objective testing and review of its automated 
systems (proposed Sec.  37.1401(i)). Moreover, proposed Sec.  
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

[[Page 33542]]

other essential service providers. Finally, proposed Sec.  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 Sec.  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 Sec.  
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 
Sec.  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\
---------------------------------------------------------------------------

    \794\ CME Comment Letter at 36 (Feb. 22, 2011).
    \795\ Id.
    \796\ Id. at 37.
    \797\ Id.
    \798\ Id.
---------------------------------------------------------------------------

    MarketAxess and WMBAA sought clarification of the criteria used to 
determine which SEFs are ``critical financial markets,'' as referenced 
in proposed Sec.  37.1401(d).\799\
---------------------------------------------------------------------------

    \799\ MarketAxess Comment Letter at 40 (Mar. 8, 2011); WMBAA 
Comment Letter at 28 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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 Sec.  37.1401 
as proposed, subject to the modifications described below.
---------------------------------------------------------------------------

    \800\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1231.
    \801\ Id.
---------------------------------------------------------------------------

    Although the Commission did not receive related comments, the 
Commission is eliminating proposed Sec.  37.1401(a) because this 
paragraph is repetitious of proposed rule Sec.  37.1400. The Commission 
is also moving the following portions of proposed Sec.  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 Sec.  
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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \802\ As 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).
---------------------------------------------------------------------------

    In response to CME's comments, the Commission is revising proposed 
Sec.  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 Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \803\ Business 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.
---------------------------------------------------------------------------

    With respect to the references to Sec.  40.9 regarding critical 
financial markets in proposed Sec.  37.1401(d) and 37.1401(k), the 
Commission notes that Sec.  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 
Sec.  40.9 upon its effective date. The Commission further notes that 
the reference to part 46 in proposed Sec.  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.
---------------------------------------------------------------------------

    \805\ Id. at 42638-39.
---------------------------------------------------------------------------

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 Sec.  37.1500, and 
adopts that rule as proposed.
---------------------------------------------------------------------------

    \806\ CEA section 5h(f)(15); 7 U.S.C. 7b-3(f)(15).
    \807\ Id.
    \808\ Id.
    \809\ Id.
---------------------------------------------------------------------------

(a) Sec.  37.1501--Chief Compliance Officer
    Proposed Sec.  37.1501 implemented the statutory provisions of Core 
Principle 15 and granted CCOs the authority necessary to fulfill their 
responsibilities.
(1) Sec.  37.1501(a)--Definition of Board of Directors
    Proposed Sec.  37.1501(a) defined ``board of directors'' as the 
board of directors of

[[Page 33543]]

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 Sec.  37.1501(a) and is 
adopting the rule as proposed.
(2) Sec.  37.1501(b)--Designation and Qualifications of Chief 
Compliance Officer
    Proposed Sec.  37.1501(b)(1) required a SEF to establish a CCO 
position and to designate an individual to serve in that capacity. 
Proposed Sec.  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 Sec.  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 Sec.  37.1501(b)(2) required that a CCO have the 
appropriate background and skills to fulfill the responsibilities of 
the position. Proposed Sec.  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 Sec.  37.1501(b)(2)(ii) 
prohibited a CCO from being a member of the SEF's legal department or 
its general counsel.\811\
---------------------------------------------------------------------------

    \810\ See Core Principles and Other Requirements for Swap 
Execution Facilities, 76 FR at 1232 (discussing the reasons for this 
requirement).
    \811\ Id.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \812\ WMBAA 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.
    \813\ WMBAA 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).
    \814\ WMBAA 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).
---------------------------------------------------------------------------

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

    \815\ WMBAA 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).
    \816\ WMBAA Comment Letter II at 6 (Mar. 8, 2011).
    \817\ CME Comment Letter at 3 (Feb. 7, 2011).
    \818\ MarketAxess Comment Letter at 27 n. 31 (Mar. 8, 2011).
    \819\ Parity Energy Comment Letter at 6 (Mar. 25, 2011).
    \820\ Tradeweb Comment Letter at 12 (Mar. 8, 2011); Better 
Markets Comment Letter at 19 (Mar. 8, 2011).
    \821\ Better Markets Comment Letter at 19 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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.
---------------------------------------------------------------------------

    \822\ CEA sections 5h(f)(15)(B)(iii) and (v); 7 U.S.C. 7b-
3(f)(15)(B)(iii) and (v).
---------------------------------------------------------------------------

    However, to clarify the CCO's supervisory authority, the Commission 
is amending proposed Sec.  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 Sec.  37.1501(b)(1).
    The Commission is withdrawing proposed Sec.  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 Sec.  37.1501(b)(2)(ii) may impose an excessive burden on 
SEFs, particularly smaller SEFs.
---------------------------------------------------------------------------

    \823\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1232, n. 103.
---------------------------------------------------------------------------

    Although the Commission is eliminating proposed Sec.  
37.1501(b)(2)(ii) from the final SEF rules, the Commission notes that a 
conflict of interest may compromise a CCO's

[[Page 33544]]

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

    \824\ See 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 Sec.  37.19(b) describes the role 
of the ROC. The Commission notes that this rule is not yet final.
---------------------------------------------------------------------------

    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) Sec.  37.1501(c)--Appointment, Supervision, and Removal of Chief 
Compliance Officer
    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  
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\
---------------------------------------------------------------------------

    \825\ FXall 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).
    \826\ FXall Comment Letter at 14 (Mar. 8, 2011).
    \827\ CME Comment Letter at 2-3 (Feb. 7, 2011).
---------------------------------------------------------------------------

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

    \828\ Tradeweb 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).
    \829\ WMBAA Comment Letter II at 7 (Mar. 8, 2011).
    \830\ MarketAxess Comment Letter at 26 (Mar. 8, 2011).
    \831\ CME Comment Letter at 9 (Feb. 7, 2011).
---------------------------------------------------------------------------

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

    \832\ AFR Comment Letter at 6 (Mar. 8, 2011); Better Markets 
Comment Letter at 19-20 (Mar. 8, 2011).
    \833\ AFR Comment Letter at 6 (Mar. 8, 2011).
    \834\ Id.
    \835\ Better Markets Comment Letter at 19-20 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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.
---------------------------------------------------------------------------

    \836\ The Commission is making certain non-substantive revisions 
to Sec.  37.1501(c) for clarity.
---------------------------------------------------------------------------

    In response to the commenters' requests for greater flexibility, 
the Commission believes that proposed Sec.  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 Sec.  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

[[Page 33545]]

corporate and/or organizational structure.
    However, the Commission is revising proposed Sec.  37.1501(c) in 
six respects. First, the Commission is modifying proposed Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  37.1501(c)(1).
(4) Sec.  37.1501(d)--Duties of Chief Compliance Officer
    Proposed Sec.  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 Sec.  37.1501(d)(2) 
regarding conflicts of interest.\837\ Better Markets recommended that 
the Commission revise proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \837\ Better Markets Comment Letter at 20 (Mar. 8, 2011); CME 
Comment Letter at 6 (Feb. 7, 2011).
    \838\ Better Markets Comment Letter at 19, 20 (Mar. 8, 2011).
    \839\ CME Comment Letter at 6 (Feb. 7, 2011).
    \840\ Id.
---------------------------------------------------------------------------

    Several commenters argued that proposed Sec.  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\
---------------------------------------------------------------------------

    \841\ Tradeweb 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).
    \842\ Tradeweb Comment Letter at 6-7 (Jun. 3, 2011); Tradeweb 
Comment Letter at 12 (Mar. 8, 2011); CME Comment Letter at 4 (Feb. 
7, 2011).
---------------------------------------------------------------------------

    CME also took issue with the requirement in proposed Sec.  
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 Sec.  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\
---------------------------------------------------------------------------

    \843\ CME Comment Letter at 6 (Feb. 7, 2011).
    \844\ Id.
    \845\ WMBAA Comment Letter II at 6 (Mar. 8, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  37.1501(d) as proposed, subject to 
certain modifications described below. The Commission is revising 
proposed Sec.  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 Sec.  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 Sec.  37.1501(d)(2).
---------------------------------------------------------------------------

    \846\ The 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.
---------------------------------------------------------------------------

    In response to commenters' concerns about the requirement to 
``ensure'' compliance in proposed Sec.  37.1501(d)(4),

[[Page 33546]]

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 Sec.  
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.
---------------------------------------------------------------------------

    \847\ See, 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 . . .'').
---------------------------------------------------------------------------

    In order to clarify differences between the SEF NPRM's preamble and 
rule text regarding proposed Sec.  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 Sec.  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 Sec.  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 Sec.  
37.204.
---------------------------------------------------------------------------

    \848\ The Commission is renaming the title of this section from 
``Annual Compliance Report Prepared by Chief Compliance Officer'' to 
``Preparation of Annual Compliance Report.''
---------------------------------------------------------------------------

(5) Sec.  37.1501(e)--Annual Compliance Report Prepared by Chief 
Compliance Officer \848\
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \849\ FXall Comment Letter at 16-17 (Mar. 8, 2011); CME Comment 
Letter at 7-8 (Feb. 7, 2011).
    \850\ FXall Comment Letter at 16 (Mar. 8, 2011).
    \851\ See id. for details regarding FXall's proposed 
alternatives.
---------------------------------------------------------------------------

    With respect to the requirement in proposed Sec.  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 Sec.  37.1501(e)(5) to describe any material 
compliance matters be revised to require the report to identify ``any 
material non-compliance issues that were not properly addressed.'' 
\853\ MarketAxess recommended that the Commission remove proposed Sec.  
37.1501(e)(6) because in its opinion other persons should be able to 
correct the CCO's annual report.\854\
---------------------------------------------------------------------------

    \852\ FXall Comment Letter at 17 (Mar. 8, 2011); CME Comment 
Letter at 7 (Feb. 7, 2011).
    \853\ CME Comment Letter at 7-8 (Feb. 7, 2011).
    \854\ MarketAxess Comment Letter at 26 (Mar. 8, 2011).
---------------------------------------------------------------------------

    MarketAxess and FSR expressed their concern that the CCO's 
certification of the annual compliance report in proposed Sec.  
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\
---------------------------------------------------------------------------

    \855\ MarketAxess Comment Letter at 26 (Mar. 8, 2011); FSR 
Comment Letter at 10 (Mar. 8, 2011).
    \856\ Id.
    \857\ FXall Comment Letter at 15 (Mar. 8, 2011); CME Comment 
Letter at 8 (Feb. 7, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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\
---------------------------------------------------------------------------

    \858\ In this regard, the Commission disagrees with CME's 
recommendation regarding proposed Sec.  37.1501(e)(5).
---------------------------------------------------------------------------

    However, in response to comments, the Commission is revising 
proposed Sec.  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 Sec.  
37.1501(e)(6), which requires the annual compliance report to include 
any objections by

[[Page 33547]]

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

    \859\ As a result of this deletion, the Commission is adopting 
proposed Sec.  37.1501(e)(7) as Sec.  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.
---------------------------------------------------------------------------

    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 Sec.  37.1501(e) to explicitly 
state that the CCO ``sign'' the annual compliance report in order to 
follow the statutory text more closely.
---------------------------------------------------------------------------

    \861\ CEA section 5h(f)(15)(D); 7 U.S.C. 7b-3(f)15)(D).
---------------------------------------------------------------------------

(6) Sec.  37.1501(f)--Submission of Annual Compliance Report by Chief 
Compliance Officer to the Commission \862\
---------------------------------------------------------------------------

    \862\ The 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.''
---------------------------------------------------------------------------

    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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.
---------------------------------------------------------------------------

    \863\ 5 U.S.C. 552.
    \864\ 5 U.S.C. 552b(b).
---------------------------------------------------------------------------

(i) Summary of Comments
    Some commenters stated that proposed Sec.  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\
---------------------------------------------------------------------------

    \865\ FXall 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.
    \867\ Better Markets Comment Letter at 20 (Mar. 8, 2011).
    \868\ Id.
---------------------------------------------------------------------------

    With respect to proposed Sec.  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\
---------------------------------------------------------------------------

    \869\ CME Comment Letter at 9 (Feb. 7, 2011).
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \870\ CEA section 5h(f)(15)(D)(ii); 7 U.S.C. 7b-3(f)(15)(D)(ii).
---------------------------------------------------------------------------

    Additionally, the Commission is withdrawing proposed Sec.  
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.
---------------------------------------------------------------------------

    \871\ 17 CFR 145.9.
---------------------------------------------------------------------------

(7) Sec.  37.1501(g)--Recordkeeping
    Proposed Sec.  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

[[Page 33548]]

of all materials created in furtherance of the CCO's duties listed in 
paragraphs (d)(6) and (d)(7) of proposed Sec.  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 Sec.  37.1501(g)(2) required a SEF to maintain 
these records in accordance with Sec.  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\
---------------------------------------------------------------------------

    \872\ MarketAxess Comment Letter at 27 (Mar. 8, 2011).
    \873\ Id.
---------------------------------------------------------------------------

(ii) Commission Determination
    The Commission is adopting Sec.  37.1501(g) as proposed.\874\ The 
Commission does not believe that Sec.  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 Sec.  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 Sec.  37.1501(g) properly accomplishes this 
goal.
---------------------------------------------------------------------------

    \874\ The Commission is making certain non-substantive 
clarifications to Sec.  37.1501(g). In addition, the Commission is 
revising the citation to paragraphs ``(d)(6) and (d)(7)'' in 
proposed Sec.  37.1501(g)(1)(ii) to cite to paragraphs ``(d)(8) and 
(d)(9).'' The Commission notes that this was a drafting error.
    \875\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1235.
---------------------------------------------------------------------------

    Finally, the Commission is adding new Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \876\ 5 U.S.C. 601 et seq.
    \877\ See 47 FR 18618-21 (Apr. 30, 1982).
    \878\ See 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.
---------------------------------------------------------------------------

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

    \879\ Dodd Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \880\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1235.
---------------------------------------------------------------------------

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

    \881\ 44 U.S.C. 3501 et seq.
    \882\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1236.
---------------------------------------------------------------------------

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

    \883\ 7 U.S.C. 12(a)(1).
    \884\ 5 U.S.C. 552a.
---------------------------------------------------------------------------

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

[[Page 33549]]

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:
---------------------------------------------------------------------------

    \885\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1236.
    \886\ Id.
    \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.
---------------------------------------------------------------------------

Current estimate of DCM's annual burden: 440 hours per DCM 889
---------------------------------------------------------------------------

    \889\ After 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 Self-
Regulation 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.
---------------------------------------------------------------------------

Initial estimate of DTEF's annual burden: 200 hours per DTEF 890
---------------------------------------------------------------------------

    \890\ A New Regulatory Framework for Trading Facilities, 
Intermediaries and Clearing Organizations, 66 FR at 42268; 66 FR at 
14268.
---------------------------------------------------------------------------

Initial estimate of SPDC ECM's annual burden: 233 hours per ECM 891
---------------------------------------------------------------------------

    \891\ Significant Price Discovery Contracts on Exempt Commercial 
Markets, 74 FR 12178, 12187 (Mar. 23, 2009); 73 FR 75888, 75902 
(proposed Dec. 12, 2008).

    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 x $16,016).\896\ The SEF NPRM also 
provided the following summary of estimates:
---------------------------------------------------------------------------

    \892\ Core 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.
    \895\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR at 1236.
    \896\ Id.

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

    \897\ 308 average hours per respondent x 35 respondents = 10,780 
total hours/year. Id.
---------------------------------------------------------------------------

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) Sec.  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.
---------------------------------------------------------------------------

    \898\ WMBAA Comment Letter at 14 (Mar. 8, 2011).
    \899\ MarketAxess Comment Letter at 20-21 (Mar. 8, 2011).
---------------------------------------------------------------------------

    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 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 believes 
that these revisions will not materially affect the proposed part 37 
information collection estimate.
(b) Sec.  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

[[Page 33550]]

associated with that information collection is not duplicated here.
---------------------------------------------------------------------------

    \900\ CME Comment Letter at 10, 13 (Feb. 22, 2011).
    \901\ Id. at 10.
    \902\ Provisions 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 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.
---------------------------------------------------------------------------

(c) Sec.  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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \903\ CME Comment Letter at 13 (Feb. 22, 2011).
    \904\ Id.
---------------------------------------------------------------------------

(d) Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \905\ Id. at 16.
---------------------------------------------------------------------------

(e) Sec.  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.
---------------------------------------------------------------------------

    \906\ Id. at 22.
---------------------------------------------------------------------------

(f) Sec.  37.205--Audit Trail
    WMBAA commented that the proposed audit trail requirement in Sec.  
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.
---------------------------------------------------------------------------

    \907\ WMBAA Comment Letter at 23 (Mar. 8, 2011).
---------------------------------------------------------------------------

(g) Sec.  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.
---------------------------------------------------------------------------

    \908\ Id. at 26.
---------------------------------------------------------------------------

(h) Sec.  37.703--Monitoring for Financial Soundness
    FXall commented that SEFs would be burdened by the ``onerous 
financial surveillance obligations'' of proposed Sec.  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.
---------------------------------------------------------------------------

    \909\ FXall Comment Letter at 3 (Mar. 8, 2011).
---------------------------------------------------------------------------

(i) Sec.  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.
---------------------------------------------------------------------------

    \910\ MarketAxess Comment Letter at 40 (Mar. 8, 2011).
---------------------------------------------------------------------------

(j) Sec.  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

[[Page 33551]]

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

    \911\ CME Comment Letter at 36-37 (Feb 22, 2011).
---------------------------------------------------------------------------

(k) Sec.  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.
---------------------------------------------------------------------------

    \912\ FXall Comment Letter at 16 (Mar. 8, 2011).
---------------------------------------------------------------------------

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 Sec.  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 self-
regulatory 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\
---------------------------------------------------------------------------

    \913\ Under Sec.  37.1501, the SEF's CCO is required to submit 
to the Commission annually a compliance report.
---------------------------------------------------------------------------

Total annual responses: 35
Quarterly responses by each respondent: 1 \914\
---------------------------------------------------------------------------

    \914\ Under Sec.  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.
---------------------------------------------------------------------------

Total quarterly responses: 140 \915\
---------------------------------------------------------------------------

    \915\ 1 quarterly response x 4 quarters per year x 35 
respondents.
---------------------------------------------------------------------------

Estimated average hours per response: 62 \916\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    \917\ 5 responses total per year x 61.6 average hours per 
response x 35 respondents.
---------------------------------------------------------------------------

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

    \918\ See 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.
    \919\ While 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.
---------------------------------------------------------------------------

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

    \920\ CEA 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.
---------------------------------------------------------------------------

    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.

[[Page 33552]]

(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\
---------------------------------------------------------------------------

    \921\ See Dodd-Frank Act section 721(a)(21), adding CEA section 
1a(47). 7 U.S.C. 1a(47).
    \922\ CEA section 1a(47)(A)(ii); 7 U.S.C. 1a(47)(A)(ii).
    \923\ CEA 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).
    \924\ CEA section 1a(47)(A)(i) & (iii); 7 U.S.C. 1a(47)(A)(i) & 
(iii).
    \925\ CEA section 1a(47)(A)(ii); 7 U.S.C. 1a(47)(A)(ii).
    \926\ See Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 
2012).
---------------------------------------------------------------------------

(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 exchange-traded 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\
---------------------------------------------------------------------------

    \927\ The 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.
    \928\ Absent 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).
---------------------------------------------------------------------------

    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 market-making 
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\
---------------------------------------------------------------------------

    \929\ Asymmetric 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.
    \930\ CEA section 1a(18); 7 U.S.C. 1a(18).
    \931\ Under 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.
    \932\ Legislative 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 ill-informed 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 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.

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

[[Page 33553]]

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

    \933\ The Bank for International Settlements, Quarterly Review, 
at A 131 (Sep. 2012), available at http://www.bis.org/statistics/otcder/dt1920a.pdf.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \934\ The 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.
---------------------------------------------------------------------------

    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 highly-
leveraged 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 risk- 
taking. . . .'' \936\
---------------------------------------------------------------------------

    \935\ S. Rep. No. 111-176, at 30 (2010).
    \936\ See 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.
---------------------------------------------------------------------------

(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 single-dimensional fix. Rather, it weaves together a 
multidimensional regulatory construct designed to ``mitigate costs and 
risks to taxpayers and the financial system.'' \939\
---------------------------------------------------------------------------

    \937\ See 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 Dodd-Frank 
Act, which amended the Securities and Exchange Act of 1934 to add 
section 3D of the Exchange Act, among other provisions.
    \938\ See 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).
    \939\ S. Rep. No. 111-176, at 92 (2010).
---------------------------------------------------------------------------

(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 post-trade 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\
---------------------------------------------------------------------------

    \940\ See academic research discussed below.
    \941\ S. 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.' '').
---------------------------------------------------------------------------

    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 post-trade 
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

[[Page 33554]]

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

    \944\ CEA 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).
---------------------------------------------------------------------------

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

    \945\ 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).
    \946\ The 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).
    \947\ See 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).
    \948\ See 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).
    \949\ See 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).
    \950\ CEA section 5h(a)(1); 7 U.S.C. 7b-3(a)(1).
    \951\ CEA section 5h(f); 7 U.S.C. 7b-3(f).
    \952\ CEA 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).
---------------------------------------------------------------------------

    Taken together, these statutory provisions provide the framework 
that transforms the swaps market from one in which prices for 
bilaterally-negotiated 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.
---------------------------------------------------------------------------

    \953\ While 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.
---------------------------------------------------------------------------

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

    \954\ Pre-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'').
    \955\ See 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).
    \956\ See, 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).
---------------------------------------------------------------------------

    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 pre- and post-trade 
transparency, which are characteristics of any dark, opaque market, 
generally increases search and transaction costs, and negatively 
impacts price discovery.
---------------------------------------------------------------------------

    \957\ The 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.
    \958\ For 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-Research-Notes1.pdf.
---------------------------------------------------------------------------

    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

[[Page 33555]]

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

    \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'').
    \960\ Harris, ``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.
    \962\ Pagano & R[ouml]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 R[ouml]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.
---------------------------------------------------------------------------

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

    \963\ Many 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.
    \964\ See 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'').
---------------------------------------------------------------------------

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

    \965\ See ``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/advanced-economicsciences2010.pdf.
    \966\ Id. at 5.
    \967\ See Peter Diamond, ``A Model of Price Adjustment,'' 3 
Journal of Economic Theory 156 (Jun. 1971).
    \968\ See Darrell Duffie, Nicolae G[acirc]rleanu & 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.
    \969\ An 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 Over-the-
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.
---------------------------------------------------------------------------

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

    \970\ Empirical 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 pre-trade 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 Pre-trade 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 exchange-traded funds (``ETFs''), ETF prices 
adjusted more 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).

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

[[Page 33556]]

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

    \971\ The 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.
    \972\ See 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.
    \974\ Bessembinder & 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.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \975\ CEA section 15(a); 7 U.S.C. 19(a).
    \976\ Id.
---------------------------------------------------------------------------

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

    \977\ See Core Principles and Other Requirements for Swap 
Execution Facilities, 76 FR 1214, 1237 (proposed Jan. 7, 2011).
    \978\ See, e.g., FXall Comment Letter at 2-4 (Mar. 8, 2011); CME 
Comment Letter at 2 (Mar. 8, 2011).
    \979\ See ISDA Discussion Paper (Nov. 2011).
---------------------------------------------------------------------------

    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 cost-
mitigating 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

[[Page 33557]]

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).
---------------------------------------------------------------------------

    \980\ The 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 the 
Mitigation of Conflicts of Interest, 75 FR 63732 (proposed Oct. 18, 
2010).
    \981\ The 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.
    \982\ CEA section 15(a); 7 U.S.C. 19(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.
---------------------------------------------------------------------------

    \983\ The Commission notes that these registrants will also 
incur costs to meet the statutory requirements.
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

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

    \990\ MarketAxess Comment Letter at 5 (Jun. 3, 2011).
---------------------------------------------------------------------------

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

    \991\ Registration and Regulation of Security-Based Swap 
Execution Facilities, 76 FR 10948, 11041 (proposed Feb. 28, 2011).
    \992\ Id.
    \993\ Id.
---------------------------------------------------------------------------

    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

[[Page 33558]]

initial product development costs of $1.25 million.\994\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Sec.  37.204 adopted in this release, SEFs may 
utilize a regulatory service provider for assistance in performing 
certain self-regulatory 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.
---------------------------------------------------------------------------

    \995\ Rule 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.
---------------------------------------------------------------------------

2. SEF Market Structure
(a) Background
(1) Minimum Trading Functionality (Order Book)
    Final Sec.  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\
---------------------------------------------------------------------------

    \996\ An 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 
Sec.  37.3(a)(3) of the Commission's regulations.
    \997\ 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 . . .'' 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 pre-trade price transparency in the 
swaps market''). 7 U.S.C. 7b-3(e).
    \998\ See Minimum Trading Functionality discussion above under 
Sec.  37.3--Requirements for Registration in the preamble.
---------------------------------------------------------------------------

(2) Methods of Execution on a SEF
    Final Sec.  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).
---------------------------------------------------------------------------

    \999\ Transactions 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).
---------------------------------------------------------------------------

    Pursuant to final Sec.  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\
---------------------------------------------------------------------------

    \1000\ The 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.
---------------------------------------------------------------------------

(3) Request for Quote (``RFQ'') System for Required Transactions
    The RFQ System definition in final Sec.  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 
Sec.  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.
---------------------------------------------------------------------------

    \1001\ See RFQ System Definition and Transmission to Five Market 
Participants discussion above under Sec.  37.9(a)(1)(ii)--Request 
for Quote System in the preamble.
---------------------------------------------------------------------------

(4) Time Delay Requirement
    Final Sec.  37.9(b)(1) sets forth a time delay requirement for a 
broker or dealer who has the ability to execute against its

[[Page 33559]]

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 (off-exchange) 
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 
product-specific 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 pre-trade price transparency and 
trading on SEFs provided in section 733 of Dodd-Frank.\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 Sec.  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).
---------------------------------------------------------------------------

    \1002\ ISDA/SIFMA Comment Letter at 5-6 (Mar. 8, 2011).
    \1003\ See Minimum Trading Functionality discussion above under 
Sec.  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).
    \1005\ As 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.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \1006\ ISDA Discussion Paper at 20-21 (Nov. 2011).
    \1007\ Id. at 1.
    \1008\ Id. at 4.
    \1009\ Id.
    \1010\ Id.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \1011\ Id.

    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 record-
keeping. 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\
---------------------------------------------------------------------------

    \1012\ Id. at 24.

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

    \1013\ Id. at 4.
---------------------------------------------------------------------------

    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.

[[Page 33560]]

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

    \1014\ Id. at 36.

    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 bid-ask spreads in interest rate swaps 
would increase after the execution mandate takes effect.\1016\
---------------------------------------------------------------------------

    \1015\ Id. at 20-21.
    \1016\ Id. at 2-4, 20-21.
---------------------------------------------------------------------------

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

    \1017\ Id. at 35.
    \1018\ Id. at 4.
---------------------------------------------------------------------------

    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 pre-trade 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 Sec.  
37.9(a)(2)(ii). Nevertheless, the Commission addresses below many of 
ISDA's comments regarding the statutory trading mandate for interest 
rate swaps.
---------------------------------------------------------------------------

    \1019\ CEA section 2(h)(8); 7 U.S.C. 2(h)(8).
    \1020\ CEA section 5h(a)(1); 7 U.S.C. 7b-3(a)(1).
    \1021\ CEA section 5h(e); 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

    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 bid-ask 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\
---------------------------------------------------------------------------

    \1022\ The 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.
    \1023\ CEA section 5h(e); 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

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

    \1024\ ISDA Discussion Paper at 2-4 (Nov. 2011).
    \1025\ See Hendershott & Madhavan, ``Click or Call,'' at 2; 
Darrell Duffie, Nicolae G[acirc]rleanu & Lasse Heje Pedersen, 
``Over-the-Counter Markets,'' 73 Econometrica 1815 (Nov. 2005) 
(hereinafter Duffie et al., ``OTC Markets'').
---------------------------------------------------------------------------

    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\ 
work-up sessions will allow market participants to continue using 
certain existing market practices, which will help facilitate the 
transition of swap markets to SEFs.
---------------------------------------------------------------------------

    \1026\ See, e.g., Minimum Trading Functionality discussion above 
under Sec.  37.3--Requirements for Registration in the preamble and 
``Through Any Means of Interstate Commerce'' Language in the SEF 
Definition discussion above under Sec.  37.9(b)(1) and (b)(4)--
Execution Methods for Required Transactions in the preamble.
    \1027\ See ``Through Any Means of Interstate Commerce'' Language 
in the SEF Definition discussion above under Sec.  37.9(b)(1) and 
(b)(4)--Execution Methods for Required Transactions in the preamble.
---------------------------------------------------------------------------

    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

[[Page 33561]]

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

    \1028\ ISDA Discussion Paper at 12-20 (Nov. 2011).
    \1029\ A 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.
    \1030\ According 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.
---------------------------------------------------------------------------

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

    \1031\ See 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.
    \1032\ See, 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).
---------------------------------------------------------------------------

(ii) RFQ-5 Market Participant Requirement
    Several commenters stated that the five market participant 
requirement in proposed Sec.  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 front-running 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 large-sized 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\
---------------------------------------------------------------------------

    \1033\ See RFQ System Definition and Transmission to Five Market 
Participants discussion above under Sec.  37.9(a)(1)(ii)--Request 
for Quote System in the preamble.
    \1034\ MetLife Comment Letter at 2-3 (Mar. 8, 2011).
    \1035\ See RFQ System Definition and Transmission to Five Market 
Participants discussion above under Sec.  37.9(a)(1)(ii)--Request 
for Quote System in the preamble.
    \1036\ Id.
    \1037\ Id.; ISDA Discussion Paper at 2 (Nov. 2011).
---------------------------------------------------------------------------

    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 Dodd-Frank, the Commission is revising 
final Sec.  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

[[Page 33562]]

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

    \1038\ See Hendershott & Madhavan, ``Click or Call,'' at 10-12.
    \1039\ Id. at 10.
---------------------------------------------------------------------------

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

    \1040\ Id. at 14.
    \1041\ Id. at 17.
    \1042\ See, e.g., Edwards et al., ``Transaction Costs and 
Transparency,'' 1421-51.
    \1043\ Hendershott & Madhavan, ``Click or Call,'' at 1-4.
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

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

    \1046\ Mallers et al. Comment Letter at 3-5 (Mar. 21, 2011).
    \1047\ Id. at 5.
---------------------------------------------------------------------------

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

    \1048\ The 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.
---------------------------------------------------------------------------

    While commenters have not submitted any data on the potential 
impact of the proposed five market participant requirement from the 
potential information leakage and front-running 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

[[Page 33563]]

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 large-sized 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.
---------------------------------------------------------------------------

    \1049\ Clearing 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).
    \1050\ Clearing 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).
    \1051\ The 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.
    \1052\ See definition of block trade in Sec.  43.2 of the 
Commission's regulations.
---------------------------------------------------------------------------

    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 Sec.  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 no-affiliate 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\
---------------------------------------------------------------------------

    \1053\ As 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.
---------------------------------------------------------------------------

    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, Sec.  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 
Sec.  37.3(a)(3) for Order Books or in Sec.  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 phasing-in 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.
---------------------------------------------------------------------------

    \1054\ See Time Delay Requirement discussion above under Sec.  
37.9--Permitted Execution Methods in the preamble.
    \1055\ FHLB Comment Letter at 13 (Jun. 13, 2011).
---------------------------------------------------------------------------

    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

[[Page 33564]]

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

    \1056\ Dealer internalized or cross-trades are not open and 
competitive and may result in inferior execution for one of the 
parties compared to 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.
---------------------------------------------------------------------------

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

    \1057\ 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.
---------------------------------------------------------------------------

(c) Benefits
    As a whole, the minimum trading functionality (i.e., Order Book) 
and permissible execution methods established by Sec. Sec.  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\
---------------------------------------------------------------------------

    \1058\ CEA section 5h(e); 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

(1) Promotion of Pre-Trade Price Transparency
    The order book requirement is designed to ensure a base level of 
pre-trade 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.
---------------------------------------------------------------------------

    \1059\ See Duffie et al., ``OTC Markets,'' at 1827 (presenting 
results showing that bid-ask spreads are lower if investors can find 
each other more easily).
---------------------------------------------------------------------------

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

    \1060\ See, 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.
---------------------------------------------------------------------------

    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 product-specific 
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 benefit-reducing 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

[[Page 33565]]

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, G[acirc]rleanu, 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 
bid-ask spreads.\1065\
---------------------------------------------------------------------------

    \1061\ See Duffie et al., ``OTC Markets,'' at 1818-20.
    \1062\ Id. at 1815.
    \1063\ Id. at 1827.
    \1064\ Id. at 1817.
    \1065\ Id.
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \1069\ See, e.g., Rosen et al. Comment Letter at 11 (Apr. 5, 
2011).
    \1070\ Mallers et al. Comment Letter at 4 (Mar. 21, 2011); AFR 
Comment Letter at 4-5 (Mar. 8, 2011).
    \1071\ 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).
    \1072\ MFA Comment Letter at 8 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \1073\ See RFQ System Definition and Transmission to Five Market 
Participants discussion above under Sec.  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.
    \1074\ See, e.g., Rosen et al. Comment Letter at 11 (Apr. 5, 
2011).
---------------------------------------------------------------------------

    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

[[Page 33566]]

substantial barrier to entry into the swaps market.\1078\
---------------------------------------------------------------------------

    \1075\ See, e.g., Mallers et al. Comment Letter at 3-5 (Mar. 21, 
2011).
    \1076\ Id.
    \1077\ Id. at 4.
    \1078\ Id.
---------------------------------------------------------------------------

    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 pre-trade 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.
---------------------------------------------------------------------------

    \1079\ IECA Comment Letter at 3 (May 24, 2011).
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \1080\ Under 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.
    \1081\ See, e.g., Tradeweb Comment Letter at 6 (Mar. 8, 2011).
---------------------------------------------------------------------------

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

    \1082\ See 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.
---------------------------------------------------------------------------

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

    \1083\ Bessembinder & 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.
---------------------------------------------------------------------------

    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 Sec.  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 
post-trade 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 
bid-offer 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,

[[Page 33567]]

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

    \1084\ The Commission notes that CEA Sec.  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.''
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \1085\ See 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.
---------------------------------------------------------------------------

    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, G[acirc]rleanu, 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\
---------------------------------------------------------------------------

    \1086\ See 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.
    \1088\ Haoxiang Zhu, ``Finding a Good Price in Opaque Over-the-
Counter Markets,'' 25 The Review of Financial Studies 1255, 1264 
(Apr. 2012).
    \1089\ 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.
---------------------------------------------------------------------------

(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 non-dealer 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 
cross-section 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, G[acirc]rleanu, 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\
---------------------------------------------------------------------------

    \1090\ Haoxiang 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.
---------------------------------------------------------------------------

    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 Sec.  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\
---------------------------------------------------------------------------

    \1092\ See 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).
---------------------------------------------------------------------------

(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

[[Page 33568]]

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

    \1093\ CEA section 5h(a)(1); 7 U.S.C. 7b-3(a)(1).
    \1094\ CEA section 1a(50); 7 U.S.C. 1a(50).
    \1095\ See Requirements for Registration discussion above under 
Sec.  37.3--Requirements for Registration in the preamble for 
further details.
---------------------------------------------------------------------------

    Section 37.3(a)(1) codifies this statutory registration requirement 
and Sec.  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).
---------------------------------------------------------------------------

    \1096\ Sections 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.
---------------------------------------------------------------------------

    Under Sec.  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\
---------------------------------------------------------------------------

    \1097\ ISDA Discussion Paper at 32 (Nov. 2011).
    \1098\ The 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 Security-Based 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.
---------------------------------------------------------------------------

    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 Sec.  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-to-many 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 Sec.  37.3(b)(1)(ii), all SEF

[[Page 33569]]

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

    \1099\ See Application Procedures discussion above under Sec.  
37.3--Requirements for Registration in the preamble.
    \1100\ Tradeweb Comment Letter at 3-4 (Jun. 3, 2011).
---------------------------------------------------------------------------

    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 SEC-registered 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 (Sec. Sec.  37.5(a), 37.503), provide a written demonstration 
of compliance with any core principle (Sec.  37.5(b)), and provide 
notice of any transaction involving the transfer of at least fifty 
percent of the equity interest in the SEF (Sec.  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 (Sec.  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 (Sec.  37.1001).
---------------------------------------------------------------------------

    \1101\ For 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.
    \1102\ The discretionary costs and benefits specific to the 
confirmation process are discussed in the part 23 rulemaking for new 
confirmation standards.
---------------------------------------------------------------------------

    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 (Sec. Sec.  37.501, 37.502); 
(2) share information with other regulatory organizations, data 
repositories, and third-party data reporting services as required by 
the Commission (Sec.  37.504); (3) demonstrate that it has access to 
sufficient information to assess whether

[[Page 33570]]

trading is being used to affect prices in its market (Sec.  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 (Sec.  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 (Sec.  37.7).
(b) Costs
    The costs associated with responding to requests for information or 
demonstrations of compliance under recordkeeping rules in Sec.  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 Sec.  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 one-time 
costs associated with preparing and submitting the required 
notification for each event.
    Further, final Sec.  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, Sec. Sec.  
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 Sec.  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 Sec.  37.502 are the de minimis costs 
associated with writing such rules.
    Final Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 (Sec.  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.

[[Page 33571]]

(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 (Sec.  37.201), including rules prohibiting certain 
abusive trading practices (Sec.  37.203(a)), rules ensuring impartial 
access to the SEF's trading system (Sec.  37.202), and rules governing 
internal disciplinary procedures (Sec.  37.206); and (2) have resources 
for effective rule enforcement, including sufficient compliance staff 
and resources (Sec.  37.203(c)), authority to collect information and 
examine books and records (Sec.  37.203(b)), and procedures for 
conducting investigations into possible rule violations (Sec.  
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, Sec.  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 rule-writing 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\
---------------------------------------------------------------------------

    \1103\ State Street Comment Letter at 5 (Mar. 8, 2011).
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \1104\ CEA section 5h(f)(2)(B); 7 U.S.C. 7b-3(f)(2)(B).
---------------------------------------------------------------------------

    With respect to the use of a third-party regulatory service 
provider as permitted under Sec.  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.
---------------------------------------------------------------------------

    \1105\ ISDA Discussion Paper at 28 (Nov. 2011).
---------------------------------------------------------------------------

    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

[[Page 33572]]

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

    \1106\ See, 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.
---------------------------------------------------------------------------

(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 Sec.  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.
---------------------------------------------------------------------------

    \1107\ CME Comment Letter at 35 (Feb. 22, 2011).
---------------------------------------------------------------------------

    The Commission notes that it has provided additional flexibility to 
SEFs by delaying the effective date of proposed Sec.  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.
---------------------------------------------------------------------------

    \1108\ The Commission is renumbering proposed Sec.  37.206(o) to 
Sec.  37.206(f). The Commission is also retitling this section as 
``Warning letters.''
---------------------------------------------------------------------------

    As recommended by commenters, the Commission has also adopted cost-
mitigating 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\
---------------------------------------------------------------------------

    \1109\ Deleted provisions include proposed Sec.  37.203(c)(2) 
(ongoing monitoring of compliance staff and resources), the second 
sentence of proposed Sec.  37.206(a) (annual review of enforcement 
staff), the majority of proposed Sec.  37.206(c) (timely review of 
investigation reports), the last sentence of proposed Sec.  
37.206(h) (denial of charges and right to a hearing), and proposed 
Sec.  37.206(j)(1)(vii) (cost of transcribing the record to be borne 
by the respondent).
---------------------------------------------------------------------------

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

    \1110\ See second part of proposed Sec.  37.206(a) (enforcement 
staff), proposed Sec.  37.206(d) (notice of charges), proposed Sec.  
37.206(e) (right to representation), proposed Sec.  37.206(f) 
(answer to charges), proposed Sec.  37.206(g) (admission or failure 
to deny charges), proposed Sec.  37.206(h) (denial of charges and 
right to hearing), proposed Sec.  37.206(i) (settlement of offers), 
the majority of proposed Sec.  37.206(j) (hearings), proposed Sec.  
37.206(l) (right to appeal), proposed Sec.  37.206(m) (final 
decisions), proposed Sec.  37.206(o) (summary fines for violations 
of rules regarding timely submission of records), and proposed Sec.  
37.206(p) (emergency disciplinary actions).
---------------------------------------------------------------------------

(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 
front-running 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

[[Page 33573]]

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

    \1111\ There are no costs associated with Sec.  37.1501(a), 
which simply defines ``board of directors.''
---------------------------------------------------------------------------

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

    \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).
    \1113\ This 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.
---------------------------------------------------------------------------

    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

[[Page 33574]]

Sec.  37.1501(c)(1) that a CCO's appointment and compensation requires 
a majority vote of directors, as well as the requirements in proposed 
Sec.  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.
---------------------------------------------------------------------------

    \1114\ Tradeweb Comment Letter at 12 (Mar. 8, 2011); WMBAA 
Comment Letter II at 7 (Mar. 8, 2011); MarketAxess Comment Letter at 
26 (Mar. 8, 2011).
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \1115\ Tradeweb 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).
---------------------------------------------------------------------------

(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 Sec.  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\
---------------------------------------------------------------------------

    \1116\ FXall Comment Letter at 16 (Mar. 8, 2011).
    \1117\ Id. at 17.
    \1118\ CME Comment Letter at 7 (Feb. 7, 2011).
---------------------------------------------------------------------------

    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 
self-regulatory 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.
---------------------------------------------------------------------------

    \1119\ See discussion above under Sec.  37.1501(e)--Annual 
Compliance Report Prepared by Chief Compliance Officer in the 
preamble.
---------------------------------------------------------------------------

(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 Sec.  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 self-regulatory 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 self-regulatory 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 self-regulatory 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

[[Page 33575]]

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 real-
time 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 (Sec.  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 (Sec.  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 (Sec.  37.205); \1120\ (4) monitor trading in 
real-time and accurately reconstruct trading activity in order to 
detect manipulation, price distortions, and other disruptions (Sec.  
37.401); (5) and establish risk control mechanisms (including pauses 
and halts) to prevent and reduce the potential risk of market 
disruptions (Sec.  37.405).
---------------------------------------------------------------------------

    \1120\ The Commission received no comments discussing the 
specific costs or benefits of Sec.  37.406, which requires SEFs to 
make audit trail data available to the Commission and is an explicit 
requirement of the statute.
---------------------------------------------------------------------------

(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).
---------------------------------------------------------------------------

    \1121\ The 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., Sec.  37.204(c)--Regulatory Decisions Required from the Swap 
Execution Facility in the preamble.
---------------------------------------------------------------------------

    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 Sec.  
37.401 (monitoring of trading and trade processing) and Sec.  37.205 
(audit trail).
---------------------------------------------------------------------------

    \1122\ For 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 Sec.  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.
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \1123\ CME Comment Letter at 20 (Feb. 22, 2011).
    \1124\ Id. at 19-20.
---------------------------------------------------------------------------

    Tradeweb and MarketAxess commented that annual audits for member 
and market participant compliance with the audit trail requirements 
pursuant to Sec.  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.
---------------------------------------------------------------------------

    \1125\ Tradeweb Comment Letter at 6 (Jun. 3, 2011); MarketAxess 
Comment Letter at 22 (Mar. 8, 2011).
---------------------------------------------------------------------------

    To mitigate the costs associated with this provision, the 
Commission is modifying the language in final Sec.  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 one-time cost of programming risk 
controls such as pauses and halts, as well as on-going 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 
necessarily have to be developed in-

[[Page 33576]]

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 Pre-Trade 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\
---------------------------------------------------------------------------

    \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).
    \1127\ See ``Recommendations on Pre-Trade Practices for Trading 
Firms, Clearing Firms and Exchanges involved in Direct Market 
Access,'' Pre-Trade 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.
    \1128\ See TAC Subcommittee Recommendations at 4 (Mar. 1, 2011).
---------------------------------------------------------------------------

    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 re-start trading through the appropriate re-opening 
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.
---------------------------------------------------------------------------

    \1129\ See, 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).
---------------------------------------------------------------------------

    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 
Sec.  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.
---------------------------------------------------------------------------

    \1130\ CME Comment Letter at 26 (Feb. 22, 2011).
    \1131\ The 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.
---------------------------------------------------------------------------

(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.

[[Page 33577]]

(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 (Sec.  37.301); \1132\ (2) monitor physical delivery 
swaps' terms and conditions and availability of the deliverable 
commodity (Sec.  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 (Sec.  37.403); and (4) adopt position limitation or 
position accountability in accordance with Commission regulations 
(Sec.  37.601).\1133\
---------------------------------------------------------------------------

    \1132\ SEFs 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.
    \1133\ Core 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).
---------------------------------------------------------------------------

(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 
follow-up 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 Sec.  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 Sec.  37.402 the 
requirements that SEFs monitor specific details of the supply, 
marketing, and ownership of the

[[Page 33578]]

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

    \1134\ Proposed Sec.  37.402(a)(2) is now final Sec.  37.402(b).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \1135\ Argus Comment Letter at 6-7 (Feb. 22, 2011).
---------------------------------------------------------------------------

    In response to this comment, the Commission is amending the 
requirement in proposed Sec.  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 
Sec.  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 Sec.  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 Sec.  37.301 and the monitoring 
requirements in Sec. Sec.  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 Sec. Sec.  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.

[[Page 33579]]

(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 (Sec.  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 (Sec. Sec.  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 (Sec.  37.1305), and to report certain information 
regarding their financial resources to the Commission quarterly or upon 
request (Sec.  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 Commission-registered 
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, Sec.  37.1301 
imposes no additional costs on SEFs or market participants beyond those 
imposed by statute.
---------------------------------------------------------------------------

    \1136\ ISDA Discussion Paper at 32 (Nov. 2011). The Commission 
notes that the components of this cost estimate are unclear.
---------------------------------------------------------------------------

    With respect to the reporting requirements in Sec.  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.
---------------------------------------------------------------------------

    \1137\ MarketAxess Comment Letter at 40 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \1138\ Phoenix Comment Letter at 4-5 (Mar. 7, 2011).
---------------------------------------------------------------------------

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

    \1139\ CME 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).
---------------------------------------------------------------------------

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

    \1140\ CME Comment Letter at 38 (Feb. 22, 2011).
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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

[[Page 33580]]

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

    \1141\ FXall Comment Letter at 13 (Mar. 8, 2011).
    \1142\ ABC/CIEBA Comment Letter at 11 (Mar. 8, 2011).
---------------------------------------------------------------------------

(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 Sec.  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 (Sec.  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 
(Sec.  37.1401(b)). Under Sec. Sec.  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.
---------------------------------------------------------------------------

    \1143\ ISDA Discussion Paper at 32 (Nov. 2011).
---------------------------------------------------------------------------

    CME commented that the requirement under proposed Sec.  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).
---------------------------------------------------------------------------

    \1144\ CME Comment Letter at 36-37 (Feb. 22, 2011).
---------------------------------------------------------------------------

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

    \1145\ The Commission is moving the following provisions to 
guidance: (1) Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  37.1401(j) 
discussing a SEF's coordination of its business continuity-disaster 
recovery plan with those of others.
---------------------------------------------------------------------------

(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

[[Page 33581]]

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 Dodd-Frank 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 cost-mitigating 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.
---------------------------------------------------------------------------

    \1146\ CME Comment Letter at 28 (Feb. 22, 2011).
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \1147\ See 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.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \1148\ For example, one swap may base its prices on the prices 
of one or more other swaps traded on other SEFs.
---------------------------------------------------------------------------

(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

[[Page 33582]]

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 cash-settled 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.

[[Page 33583]]

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

Sec.  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.

Sec.  37.2  Applicable provisions.

    A swap execution facility shall comply with the requirements of 
this part and all other applicable Commission regulations, including 
Sec.  1.60 and part 9 of this chapter, and including any related 
definitions and cross-referenced sections.

Sec.  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 Sec.  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 Sec.  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

[[Page 33584]]

    (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 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 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 non-dormant 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 self-regulatory responsibilities except if 
otherwise indicated in the request, and will maintain and enforce all 
self-regulatory 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

[[Page 33585]]

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.

Sec.  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 Sec.  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.

Sec.  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.

Sec.  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

[[Page 33586]]

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 Sec.  1.35(b)(5) of this chapter are met.

Sec.  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.

Sec.  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.

Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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.

Sec.  37.10  [Reserved]

Subpart B--Compliance With Core Principles

Sec.  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.

[[Page 33587]]

    (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

Sec.  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.

Sec.  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.

Sec.  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.

Sec.  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 front-
running, 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 non-routine 
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 Sec.  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.

[[Page 33588]]

    (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 Sec.  37.203.

Sec.  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.

Sec.  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, sequentially-identified 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.

[[Page 33589]]

    (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 front-end 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.

Sec.  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

[[Page 33590]]

practices in Appendix B of this part to demonstrate to the Commission 
compliance with the requirements of Sec.  37.206.

Subpart D--Swaps Not Readily Susceptible to Manipulation

Sec.  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.

Sec.  37.301  General requirements.

    To demonstrate to the Commission compliance with the requirements 
of Sec.  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

Sec.  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.

Sec.  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.

Sec.  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.

Sec.  37.403  Additional requirements for cash-settled 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.

Sec.  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.

Sec.  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.

Sec.  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.

Sec.  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 Sec.  37.204.

Sec.  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 Sec.  37.400.

Subpart F--Ability to Obtain Information

Sec.  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.

Sec.  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.

[[Page 33591]]

Sec.  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.

Sec.  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.

Sec.  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

Sec.  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.

Sec.  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 Sec.  37.600.

Subpart H--Financial Integrity of Transactions

Sec.  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.

Sec.  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 Commission-registered derivatives clearing organization, or a 
derivatives clearing organization that the Commission has determined is 
exempt from registration.

Sec.  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]

Sec.  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

Sec.  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.

Sec.  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 Sec.  37.800.

Subpart J--Timely Publication of Trading Information

Sec.  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.

Sec.  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

Sec.  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.

Sec.  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

[[Page 33592]]

files, and disciplinary files, in accordance with the requirements of 
Sec.  1.31 and part 45 of this chapter.

Subpart L--Antitrust Considerations

Sec.  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.

Sec.  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 Sec.  37.1100.

Subpart M--Conflicts of Interest

Sec.  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

Sec.  37.1300  Core Principle 13--Financial resources.

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

Sec.  37.1301  General requirements.

    (a) A swap execution facility shall maintain financial resources 
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 Sec.  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.

Sec.  37.1302  Types of financial resources.

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

Sec.  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 Sec.  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.

Sec.  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 Sec.  37.1301. Reductions in value to 
reflect market and credit risk (``haircuts'') shall be applied as 
appropriate.

Sec.  37.1305  Liquidity of financial resources.

    The financial resources allocated by the swap execution facility to 
meet the requirements of Sec.  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.

Sec.  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 Sec.  37.1301; and
    (ii) The value of each financial resource available, computed in 
accordance with the requirements of Sec.  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 Sec.  37.1301;
    (2) Sufficient documentation explaining the basis for its 
determinations regarding the valuation and liquidity requirements set 
forth in Sec. Sec.  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.

Sec.  37.1307  Delegation of authority.

    (a) The Commission hereby delegates, until it orders otherwise, to 
the Director of the Division of Market Oversight or such other employee 
or employees as the Director may designate from time to time, authority 
to:
    (1) Determine whether a particular financial resource under Sec.  
37.1302 may be used to satisfy the requirements of Sec.  37.1301;
    (2) Review and make changes to the methodology used to compute 
projected operating costs under Sec.  37.1303;
    (3) Request reports, in addition to fiscal quarter reports, under 
Sec.  37.1306(a); and
    (4) Grant an extension of time to file fiscal quarter reports under 
Sec.  37.1306(d).
    (b) The Director may submit to the Commission for its consideration 
any matter that has been delegated in this section. Nothing in this 
section prohibits the Commission, at its election, from exercising the 
authority delegated in this section.

[[Page 33593]]

Subpart O--System Safeguards

Sec.  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.

Sec.  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 continuity-disaster 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 Sec.  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 continuity-disaster recovery capabilities. 
Pursuant to Core Principle 10 under section 5h of the Act 
(Recordkeeping and Reporting) and Sec. Sec.  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 wide-scale disruption. Section 40.9 
establishes the requirements for core principle compliance in that 
respect.

Subpart P--Designation of Chief Compliance Officer

Sec.  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

[[Page 33594]]

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.

Sec.  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 Sec.  37.202; and;
    (iii) Conflicts between a swap execution facility's management and 
members of the board of directors;
    (3) Establishing and administering written policies and procedures 
reasonably designed to prevent violations of the Act and the rules of 
the Commission;
    (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 Sec.  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

[[Page 33595]]

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 Sec.  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 Sec.  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. Sec.  13 and 18 
U.S.C. Sec.  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

[[Page 33596]]

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

-----------------------------------------------------------------------
Exact name of Applicant as specified in charter
-----------------------------------------------------------------------
Address of principal executive offices

    [square] If this is an APPLICATION for registration, complete in 
full and check here.
    [square] If this is an AMENDMENT to an application, or to an 
existing order of registration, list all items that are amended and 
check here.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------

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):
-----------------------------------------------------------------------
    2. If name of swap execution facility is being amended, state 
previous swap execution facility name:
-----------------------------------------------------------------------
    3. Contact information, including mailing address if different than 
address specified above:
-----------------------------------------------------------------------

Number and Street
-----------------------------------------------------------------------

City State Country Zip Code
-----------------------------------------------------------------------

Main Phone Number Fax
-----------------------------------------------------------------------

Web site URL Email Address

    4. List of principal office(s) and address(es) where swap execution 
facility activities are/will be conducted:

Office
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Address
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------

    5. If the Applicant is a successor to a previously registered swap 
execution facility, please complete the following:
    a. Date of succession
-----------------------------------------------------------------------
    b. Full name and address of predecessor registrant

-----------------------------------------------------------------------
Name
-----------------------------------------------------------------------
Number and Street
-----------------------------------------------------------------------
City State Country Zip Code
-----------------------------------------------------------------------

Main Phone Number Web site URL

BUSINESS ORGANIZATION

    6. Applicant is a:

[square] Corporation

[square] Partnership

[square] Limited Liability Company

[square] Other form of organization (specify)
-----------------------------------------------------------------------

    7. Date of incorporation or formation:
-----------------------------------------------------------------------
    8. State of incorporation or jurisdiction of organization:
-----------------------------------------------------------------------
    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.
-----------------------------------------------------------------------
Print Name and Title
-----------------------------------------------------------------------

Name of Applicant
-----------------------------------------------------------------------
Number and Street
-----------------------------------------------------------------------

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 ------ day of ------------, 20----. 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.

-----------------------------------------------------------------------
Name of Applicant
-----------------------------------------------------------------------
Signature of Duly Authorized Person
-----------------------------------------------------------------------
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

[[Page 33597]]

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,

[[Page 33598]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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.

[[Page 33599]]

    (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 Sec.  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 
Sec.  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

[[Page 33600]]

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 Sec.  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 third-party 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 physical-delivery 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

[[Page 33601]]

not susceptible to manipulation and that the terms and conditions of 
the swap continue to comply with Sec.  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 Sec.  37.600, including 
considering part 150 of this chapter. For Required Transactions as 
defined in Sec.  37.9, a swap execution facility may demonstrate 
compliance with Sec.  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 Sec.  37.9, a swap execution facility may 
demonstrate compliance with Sec.  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 Sec.  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.

[[Page 33602]]

    (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 continuity-disaster 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 continuity-disaster 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, self-reported 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.

[[Page 33603]]

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

    \1\ CEA section 5h(e).
---------------------------------------------------------------------------

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

    \2\ Commissioner 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).
    \3\ A 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).
---------------------------------------------------------------------------

    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.

[[Page 33604]]

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

    \4\ CEA section 1(a) (50).
    \5\ Commission Regulation Sec.  37.9.
---------------------------------------------------------------------------

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
```