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[Federal Register Volume 76, Number 5 (Friday, January 7, 2011)]
[Proposed Rules]
[Pages 1214-1259]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32358]

[[Page 1213]]

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Part II

Commodity Futures Trading Commission

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17 CFR Part 37

Core Principles and Other Requirements for Swap Execution Facilities; 
Proposed Rule

Federal Register / Vol. 76 , No. 5 / Friday, January 7, 2011 / 
Proposed Rules

[[Page 1214]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 37

RIN Number 3038-AD18

Core Principles and Other Requirements for Swap Execution 
Facilities

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing new rules, and guidance and acceptable practices 
to implement the new statutory provisions enacted by Title VII of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed 
rules, guidance, and acceptable practices, which apply to the 
registration and operation of a new type of regulated entity named a 
swap execution facility, implement the new statutory framework that, 
among other things, adds a new Section 5h to the Commodity Exchange Act 
(``CEA'') concerning the registration and operation of swap execution 
facilities, and new Section 2(h)(8) to the CEA concerning the listing, 
trading and execution of swaps on swap execution facilities. The 
Commission requests comment on all aspects of the proposed rules, 
guidance and acceptable practices.

DATES: Comments must be received on or before March 8, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD18, 
by any of the following methods:
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act (``FOIA''),\1\ a petition for confidential treatment of 
the exempt information may be submitted according to the established 
procedures in Sec.  145.9.\2\
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    \1\ 5 U.S.C. 552.
    \2\ 17 CFR 145.9.
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    The Commission reserves the right, but shall have no obligation, to 
review, prescreen filter, redact, refuse, or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
FOIA.

FOR FURTHER INFORMATION CONTACT: Riva Spear Adriance, Associate 
Director, 202-418-5494, radriance@cftc.gov, or Mauricio Melara, 
Attorney-Advisor, 202-418-5719, mmelara@cftc.gov, Division of Market 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Overview
    B. The Dodd-Frank Act
II. The Proposed Regulations, Guidance and Acceptable Practices
    A. Adoption of New Regulations, Guidance and Acceptable 
Practices
    B. Proposed General Regulations Under Part 37
    C. Proposed Regulations, Guidance and Acceptable Practices for 
Compliance With the Core Principles
III. Effective Date and Transition Period
IV. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Analysis
V. Text of the Proposed Regulations, Guidance and Acceptable 
Practices

I. Background

A. Overview

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\ 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. The legislation was enacted to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (1) Providing for the registration and 
comprehensive regulation of swap dealers and major swap participants; 
(2) imposing clearing and trade execution requirements on standardized 
derivatives products; (3) creating robust recordkeeping and real-time 
reporting regimes; and (4) enhancing the Commission's rulemaking and 
enforcement authorities with respect to, among others, all registered 
entities and intermediaries subject to the Commission's oversight.
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    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-
Frank Act may be accessed at http://www.cftc.gov./LawRegulation/
OTCDERIVATIVES/index.htm.
    \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.
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    The Dodd-Frank Act creates a new type of regulated marketplace: 
``Swap execution facilities'' (``SEFs''),\6\ for which the Dodd-Frank 
Act establishes a comprehensive regulatory framework, including by: 
Section 733 (adding new Section 5h to the CEA to provide a regulatory 
framework of Commission oversight), Section 723(a)(3) (adding new 
Section 2(h)(8) to the CEA, to require, among other things, that swaps 
subject to the clearing requirement of Section 2(h)(1) of the CEA be 
executed either on a designated contract market (``DCM'') or on a SEF, 
unless no DCM or SEF made the swap ``available for trading''),\7\ and 
Section 733 of the Dodd-Frank Act (adding Section 5h(a)(1), requiring 
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).
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    \6\ This new 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. The definition of swap execution 
facility is added in Section 721 of the Dodd-Frank Act, amending 
Section 1a of the CEA. 7 U.S.C. 1a(50).
    \7\ See Section 723 of the Dodd-Frank Act.
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    In enacting the Dodd-Frank Act, Congress directed that rules and 
regulations required by the provisions of Title VII be promulgated by 
the later of either 360 days of its enactment or, to the extent that a 
rulemaking is required by Dodd-Frank, not less than 60 days after the 
publication of that final rule.\8\ Consistent with Congress' directive, 
this release proposes amendments to Part 37 of the Commission's 
regulations to

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implement Sections 723(a)(3) and 733 of the Dodd-Frank Act.\9\
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    \8\ See Section 754 of the Dodd-Frank Act.
    \9\ See Section 754 of the Dodd-Frank Act. Please also note that 
Section 734 of the Dodd-Frank Act deletes the provision of the CEA 
that provided for Derivatives Transaction Execution Facilities 
(``DTEFs''), which previously were regulated under Part 37, 
replacing those provisions with regulations establishing the 
regulatory requirements for SEFs.
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B. The Dodd-Frank Act

    Section 723(a)(3) of the Dodd-Frank Act amends Section 2(h) of the 
CEA, providing that, with respect to transactions involving a swap 
subject to the clearing requirement of paragraph 2(h)(1), 
counterparties must execute the transaction on a DCM or a SEF.\10\ This 
``exchange trading'' requirement does not apply if no DCM or SEF 
``makes the swap available to trade'' or if the exceptions to the 
clearing requirement apply.\11\
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    \10\ See Section 2(h)(8) of the CEA, as enacted by Section 
723(a)(3) of the Dodd-Frank Act. The Dodd-Frank Act also eliminates 
the swaps exemption under former Section 2(g) of the CEA, supporting 
the requirement that trading and processing of cleared swaps must 
occur on a DCM or a SEF as well as expanding the types of products 
that can be listed and traded on a DCM to include swaps. The 
Commission is proposing provisions for the trading of swaps on a DCM 
in a separate rulemaking. See also Notice of Proposed Rulemaking 
Relating to Core Principles and Other Requirements for Designated 
Contract Markets approved for publication by the Commission at an 
open meeting on Dec. 1, 2010 and expected to be published shortly in 
the Federal Register (to be codified at 17 CFR part 38) (the ``DCM 
NPRM''). This Notice is available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister120110b.pdf (last 
visited on Dec. 8, 2010).
    \11\ See Section 2(h)(8)(B) of the CEA, as enacted by Section 
723(a)(3) of the Dodd-Frank Act. Newly amended Section 2(h)(7) of 
the CEA provides for exceptions to the clearing requirement when one 
of the counterparties to a swap (i) is not a financial entity, (ii) 
is using the swap to hedge or mitigate commercial risk, and (iii) 
notifies the Commission how it meets its financial obligations 
associated with entering into a non-cleared swap.
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    Section 733 of the Dodd-Frank Act adopts new Section 5h of the CEA, 
providing that: (i) 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; (ii) 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; and (iii) the Commission 
has the authority to prescribe rules governing the regulation of SEFs.
    The proposed regulations, guidance and acceptable practices will 
implement the regulatory obligations that each SEF must meet in order 
to comply with Section 5h of the CEA both initially upon registration 
and on an ongoing basis. The Commission requests comments on all 
aspects of its proposal.

II. The Proposed Regulations, Guidance and Acceptable Practices

A. Adoption of New Regulations, Guidance and Acceptable Practices

    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 DCMs and SEFs comply with the core 
principles. In consideration of the novel nature of SEFs and also based 
on 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, the Commission is proposing a combination of 
regulations, guidance and acceptable practices for the oversight and 
regulation of SEFs.

B. Proposed General Regulations Under Part 37

    The Commission is proposing to organize Part 37 to include new 
subparts A through P. Proposed Subpart A would include general Sec.  
37.1 through 37.11.\12\ While in this rulemaking, the Commission is 
proposing Sec. Sec.  37.1 through 37.11, it notes that Sec.  37.19, 
addressing conflicts of interest, was proposed in a separate 
rulemaking.\13\ Subparts B through P would establish relevant 
regulations applicable to each of the 15 core principles.\14\
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    \12\ These sections apply both to applicants for registration 
and registered SEFs, clarify which provisions are applicable to 
trading on SEFs, provide for SEF registration processes (including 
processes for the vacation, reinstatement, and transfer of a SEF 
registration), and provide general requirements regarding: (i) The 
listing and trading of swaps; (ii) the responsibility, upon request 
of the Commission, to respond to requests for information and 
demonstrations of compliance with core principles, and to provide 
information and certifications upon transfers of equity interest; 
(iii) the enforceability of a SEF's swap transactions under certain 
conditions, (iv) limitations on the use of data collected for 
regulatory purposes, (v) the need for a board of trade that operates 
a trading facility that has been designated as a DCM by the 
Commission and also intends to operate a SEF to separately register 
the entity that will operate as a SEF, (vi) the appropriate 
execution of swaps based on the type of transaction and order 
interaction, and (vii) the periodic assessment of the method by 
which swaps are made available for trading.
    \13\ 75 FR 63732 (October 18, 2010).
    \14\ Each subpart begins with a regulation containing the 
language of the core principle.
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1. Subpart A--General Provisions
a. Scope--Proposed Sec.  37.1
    Proposed Sec.  37.1 provides that Part 37 will apply to entities 
that are registered SEFs or that are submitting an application for SEF 
registration under Section 5h of the CEA, and clarifies that Part 37 
does not restrict the eligibility of SEFs to operate under the 
provisions of Parts 38 or 49 of this Chapter.
b. Applicable Provisions--Proposed Sec.  37.2
    Proposed Sec.  37.2 lists those Commission regulations that are 
applicable to SEFs, and provides that SEFs must comply with, in 
addition to the requirements in Part 37, the proposed Part 43 
requirements regarding the real time reporting of swaps and the 
determination of appropriate block size for swaps, the proposed Part 45 
requirements for data elements, recordkeeping and reporting of swap 
information to swap data repositories (``SDRs''), the proposed Part 46 
requirements for business continuity and disaster recovery, the 
proposed Part 49 requirements regarding SDRs, and the proposed Part 151 
position limits requirements.\15\
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    \15\ The Commission notes that because some of the proposed 
rulemakings are either ongoing or forthcoming, this proposed list of 
applicable sections under proposed Sec.  37.2 may be subject to 
further revisions pending the final rules for each respective 
rulemaking.
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c. Requirements for Registration--Proposed Sec.  37.3
i. Application Procedures--Proposed Sec.  37.3(a)
    Proposed Sec.  37.3 sets forth the application and approval 
procedures for registration of new SEFs. The provision would require 
that all SEF applications, reinstatements of registrations, requests 
for transfer of registrations, requests for withdrawal of application 
for registration, and vacation of registrations must be filed 
electronically with the Secretary of the Commission, in the form and 
manner as provided by the Commission.\16\
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    \16\ This amendment also would ensure consistency with the 
process used for filing rule and product submissions under Parts 38, 
39 and 40 of the Commission's regulations. See 17 CFR Parts 38, 39 
and 40.
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    To assist prospective applicants, the Commission proposes to 
include an application form under Appendix A to Part 37 (``Form SEF''); 
the proposed form would also be used for any updates or amendments for 
registration that are not required to be submitted under Part 40 of 
this Chapter.\17\ Each applicant will be required to provide the 
Commission with documents and descriptions pertaining to its: (i) 
Business

[[Page 1216]]

organization, (ii) financial resources, (iii) compliance program and 
(iv) technological capabilities.
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    \17\ The Commission also is requiring tailored application forms 
for the designation of DCMs and the registration of Designated 
Clearing Organizations and Swap Data Repositories.
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    Other than the specific requirements necessitated by the core 
principles, the majority of information required under the Form SEF 
consists of information that Commission staff has historically found 
necessary considering DCM applications. The Commission expects that 
similar information will be necessary to assess applications for SEF 
registration. Proposed Sec.  37.3(a)(1) requires that, at a minimum, 
all applicants must complete the application form and provide the 
necessary information and documentation in order to initiate the SEF 
registration review process. The determination when a submission is 
complete will be at the sole discretion of the Commission. The 
Commission will review Form SEF and, at the conclusion of its review, 
by order either: (i) Grant registration; (ii) deny the application for 
registration; or (iii) grant registration subject to Commission-
established conditions.
    SEF applicants will be required to provide various documents 
describing the applicant's legal and financial status. SEF applicants 
must also submit copies of any applicable rules and regulations (as 
defined in Sec.  40.1),\18\ disclose any affiliates and a brief 
description of the nature of the affiliation, and submit copies of any 
agreements between the SEF and third parties that would assist the 
applicant in complying with its duties under the CEA.
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    \18\ See 75 FR. 67282, 67292 (November 2, 2010).
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    Applicants will be required to demonstrate operational capability 
through documentation, including technical manuals and third party 
service provider agreements. Proposed Sec.  37.3 also requires that 
each applicant request and obtain from the Commission a unique, 
extensible, alphanumeric code for the purpose of identifying the SEF 
pursuant to the swap recordkeeping and reporting requirements under 
proposed Part 45.\19\
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    \19\ This requirement stems from the Commission's authority, 
under Section 728 of the Dodd-Frank Act, to establish standards and 
requirements related to reporting and recordkeeping for swaps. In 
particular, the Commission is required to adopt consistent data 
element standards for ``registered entities,'' which include SEFs. 
Proposed Part 45 will set forth the recordkeeping and reporting 
requirements of each SEF with respect to swap transactions on or 
through its facility. Proposed Sec.  37.3 codifies the obligation of 
SEFs to comply with the provisions of proposed Part 45. See 75 FR 
76574 (December 8, 2010).
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ii. Procedures for Temporary Grandfather Relief--Proposed Sec.  37.3(b)
    Section 754 of the Dodd-Frank Act provides that: ``[u]nless 
otherwise provided in this title, the provisions of this subtitle 
[Subtitle A--Regulation of Over-the-Counter Swaps Markets] shall take 
effect on the later of 360 days after the date of enactment of this 
subtitle [i.e., July 15, 2011], or, to the extent a provision of this 
subtitle requires a rulemaking, not less than 60 days after publication 
of the final rule or regulation implementing such provision of this 
subtitle.''
    The Commission anticipates that, upon the effective date of this 
Part 37, it may receive a large number \20\ of applications for SEF 
registration from entities that currently provide a marketplace for the 
listing and trading of swaps. The Commission notes that it would be 
difficult to carry out and complete an appropriate and comprehensive 
review of all such applications during the period between publication 
of the final rulemaking and the effective date of this Part 37. Any 
consequent delay in the processing of these SEF applications could 
adversely impact SEF applicants, undermine the efficient implementation 
of the Dodd-Frank Act, create legal uncertainty for market participants 
and adversely affect the swaps market.
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    \20\ The Commission notes that although the public estimate 
regarding the expected number of applications ranges from 30 to 40, 
certain market participants have noted that the number of SEFs could 
exceed 100.
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    Therefore, proposed Sec.  37.3(b) permits the Commission, upon the 
request of an applicant, to grant temporary grandfather relief to 
qualifying entities that, due to their operations, will be required to 
register as a SEF in order to continue operating as of the effective 
date of the regulations. The proposed temporary grandfather relief 
would be optional and would enable a qualifying entity to operate 
without SEF registration on a short-term basis during the pendency of 
the application review process on the condition that it otherwise 
operate in conformance with all SEF requirements under the Dodd-Frank 
Act. This approach is intended to avoid undue market disruption as well 
as to ensure continuity of the business operations of an existing 
entity that, at the time that Part 37 becomes effective,\21\ is 
providing a marketplace for the trading of swaps. The temporary relief 
would also allow the Commission to implement registration requirements 
of the Dodd-Frank Act for SEFs while providing the Commission 
sufficient time to fully review the application of a SEF. Each SEF that 
qualifies for temporary relief would be subject to Section 5h of the 
CEA and related regulations during the period in which the Commission 
is reviewing the SEF's application of registration.
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    \21\ See Section 754 of the Dodd-Frank Act.
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    The Commission notes that it previously issued orders providing 
grandfather relief to exempt commercial markets (``ECMs'') and exempt 
boards of trade (``EBOTs''), allowing them to continue to operate as 
EBOTs and ECMs after the effective date of the Dodd-Frank Act (July 15, 
2011) (``ECM and EBOT grandfather relief orders'').\22\ The relief 
under proposed Sec.  37.3(b) would be consistent with the ECM and EBOT 
grandfather relief orders. In addition, the Commission notes that the 
grandfather relief under proposed Sec.  37.3(b) would also be available 
for entities that are currently operating pursuant to another exemption 
or exclusion provided under the CEA (prior to its amendment by the 
Dodd-Frank Act) as of the effective date of this Part 37.\23\
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    \22\ See Orders Regarding the Treatment of Petitions Seeking 
Grandfather Relief for Exempt Commercial Markets and Exempt Boards 
of Trade (``ECM and EBOT grandfather relief''). 75 FR 56513 
(September 10, 2010). The Commission's Orders set forth various 
conditions for such grandfather relief, including the filing of a 
relief petition and a SEF or DCM application with the Commission.
    \23\ See CEA Sections 2(d), 2(e), 2(g) and 2(h)(1)-(2).
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    As a condition for receiving temporary grandfather relief, the 
applicant must: (1) File a complete application, as required under 
proposed Sec.  37.3(a),\24\ on the proposed application form, Form SEF, 
under Appendix A to Part 37; (2) notify the Commission, at the time of 
its submission of the application, of its interest in operating under 
the temporary relief; (3) 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 the request; and (4) provide a certification that the 
applicant believes that its operation on a temporary basis will meet 
the requirements of Part 37 of the CEA, as adopted by the Commission. 
Since the purpose of the temporary relief is to provide an appropriate 
process to ensure continuity of the business operations during the 
pendency of the review of an application, the temporary grandfather 
relief would expire on the earlier of: (i) The date that the Commission 
grants or denies registration of the SEF, or (ii) the

[[Page 1217]]

date that the Commission rescinds the temporary relief. Additionally, 
the temporary relief would not be a permanent provision of Part 37. 
Proposed Sec.  37.3(b) provides for a ``sunset'' provision so that 
temporary grandfather relief would terminate 365 days from the 
effective date of proposed Sec.  37.3(b).
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    \24\ As noted above, the determination of when a submission on 
Form SEF is complete is at the sole discretion of the Commission.
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iii. Procedures for Transfer of Registration--Proposed Sec.  37.3(d)
    The Commission is proposing Sec.  37.3(d) to formalize the 
procedures that a SEF must follow when requesting the transfer of its 
registration, in anticipation of a corporate event (e.g., a merger, 
corporate reorganization, or change in corporate domicile) which 
results in the transfer of all or substantially all of the SEF's assets 
to another legal entity. Under proposed Sec.  37.3(d), the SEF would 
submit to the Commission a request for transfer no later than three 
months prior to the anticipated corporate change, with a limited 
exception.\25\
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    \25\ The proposed rule would require that where a SEF does not 
know or could not have reasonably known three months prior to the 
anticipated change, it shall be required to file the request as soon 
as it knows of the change.
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    Proposed Sec.  37.3(d) also would require, as a condition of 
approval, that the SEF submit a representation that it is in compliance 
with the CEA, including the SEF core principles, and the Commission's 
regulations. In addition, the SEF would have to submit various 
representations by the transferee regarding its duties and obligations.
    Proposed Sec.  37.3(d) also provides that the Commission will 
review any requests for transfer of registration as soon as 
practicable, and such request will be approved or denied pursuant to a 
Commission order.
d. Procedures for Listing Products and Implementing Rules--Proposed 
Sec.  37.4
    Proposed Sec.  37.4 conforms to the proposed changes to existing 
Sec. Sec.  40.3 (Voluntary submission of new products for Commission 
review and approval) and 40.5(b) (Voluntary submission of rules for 
Commission review and approval),\26\ in the Commission's separate rule 
proposal pertaining to ``Provisions Common to Registered Entities.'' 
\27\
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    \26\ Proposed Sec.  40.3 is amended to require additional 
information to be provided by registered entities that submit new 
products for the Commission's review and approval. Proposed Sec.  
40.5(b) codifies a new standard for the review of new rules or rule 
amendments as established under the Dodd-Frank Act.
    \27\ 75 FR 67282 (November 2, 2010).
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e. Information Relating to Swap Execution Facility Compliance--Proposed 
Sec.  37.5
    Under proposed Sec.  37.5(a), upon request by the Commission, a SEF 
must file with the Commission certain information related to its 
business as a SEF, in the form and manner as specified by the 
Commission. Under proposed Sec.  37.5(b), the Commission may demand 
that a SEF file a written demonstration regarding its compliance with 
any specified core principles. The information requested under proposed 
Sec.  37.5(a) and (b) provides for information requests to entities 
regarding compliance with the conditions for registration made for any 
oversight purpose.\28\
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    \28\ In this regard, for example, the Commission may request 
SEFs to provide information relating to their operations or their 
practices in connection with its general oversight responsibilities 
under the CEA, in connection with the Commission's formulation of 
statements of acceptable practice, or in connection with a 
particular SEF's compliance with particular core principles or other 
conditions of its registration.
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    The Commission believes that on occasion, SEFs will enter into 
equity interest transfers that result in a change in ownership. In 
those situations, Commission staff must determine whether the change in 
ownership will impact adversely the operations of the SEF or the SEF's 
ability to comply with the core principles and the Commission's 
regulations. The Commission is proposing Sec.  37.5 to ensure that SEFs 
remain mindful of their self-regulatory responsibilities when 
negotiating the terms of significant equity interest transfers, and to 
improve the Commission staff's ability to undertake a timely and 
effective due diligence review of the impact, if any, of such 
transfers.
    Proposed Sec.  37.5(c) would require SEFs to file with the 
Commission a notice of the equity interest transfer of ten percent or 
more, with certain documents providing information on the transfer, no 
later than the business day \29\ following the date on which the SEF 
enters into a firm obligation to transfer the equity interest.\30\ The 
proposed regulation requires that the SEF keep the Commission apprised 
of the projected date that the transaction resulting in the equity 
interest transfer will be consummated, and must provide to the 
Commission any new agreements or modifications to the original 
agreement(s) filed pursuant to proposed Sec.  37.5(c). The SEF must 
notify the Commission of the consummation of the transaction on the day 
on which it occurs. The proposed regulation will enable staff to 
consider whether any conditions contained in an equity transfer 
agreement(s) are inconsistent with the self-regulatory responsibilities 
of a SEF or with any of the core principles.
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    \29\ ``Business day'' is defined in Commission Sec.  40.1.
    \30\ The Commission is proposing a 10 percent threshold because 
it believes that a change in ownership of such magnitude may have an 
impact on the operations of the swap execution facility. The 
Commission believes that such impact may be present even if the 
change in ownership does not constitute a change in control. For 
example, if one entity holds a minority 10 percent equity share in 
the SEF, it may have a more significant voice in the operation of 
the SEF than five entities each with a minority 2 percent equity 
share. Given the potential impact that a change in ownership might 
have on the operations of a SEF, the Commission believes that it is 
appropriate to require such SEF to certify after such change that it 
continues to comply with all obligations under the CEA and 
Commission regulations.
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    The Commission believes when there is a 10% or greater change in 
ownership, the SEF itself is the more appropriate entity to provide a 
certification of its continued compliance with all regulatory 
obligations. Accordingly, proposed Sec.  37.5(c)(3) would require that 
if there is a change in ownership,\31\ the SEF must 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 CEA and the provisions of Part 37 of the Commission's 
regulations.
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    \31\ The Commission's regulations consistently identify a 
financial or ownership interest of ten percent or more as material 
and indicative of the ability to influence the activities of an 
entity or trading in an account. See, e.g., Core Principle 5, 
Acceptable Practices, and Core Principle 14, Application Guidance, 
in Appendix B to Part 38 of the Commission's regulations. 17 CFR 
part 38, Appendix B.
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Request for Comment:

    The Commission notes that there are differences in the proposed 
notification requirements for changes in the ownership of SEFs, 
derivative clearing organizations (``DCOs''), DCMs, and SDRs.\32\ The 
Commission requests comment on the proposed notification requirements 
under 37.5(c) and, more specifically, the extent to which there should 
be uniformity or differentiation in procedures applied to different 
types of registrants.
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    \32\ See, supra note 10, DCM NPRM; also the Notice of Proposed 
Rulemaking Relating to Swap Data Repositories, approved for 
publication by the Commission at an open meeting on November 19, 
2010 and expected to be published shortly in the Federal Register 
(to be codified at 17 CFR part 49). This Notice is available at 
http://www.cftc.gov/stellent/groups/public/@otherif/documents/ifdocs/federalregister112210d.pdf (last visited on Dec. 8, 2010); 
and other appropriate future rulemakings.

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[[Page 1218]]

f. Enforceability of Executed Swaps--Proposed Sec.  37.6
    Proposed Sec.  37.6 is intended to provide legal certainty to 
market participants transacting in swaps. Under Sec.  37.6(a), a 
transaction entered into on or pursuant to the rules of a registered 
SEF will not be void, voidable, subject to rescission or otherwise 
invalidated or rendered unenforceable as a result of: (1) A violation 
by the registered SEF of the provisions of Section 5h of the CEA or 
Part 37; or (2) any Commission proceeding to alter or supplement a 
rule, term or condition under Section 8a(7) of the CEA, to declare an 
emergency under Section 8a(9) of the CEA, or any other proceeding the 
effect of which is to alter, supplement, or require a registered SEF to 
adopt a specific term or condition, trading rule or procedure, or to 
take or refrain from taking a specific action.
    In other rules proposed by the Commission, 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.\33\ 
Proposed Sec.  37.6(b) provides that a confirmation must be in writing 
(whether electronic or otherwise) and must legally supersede any 
previous agreement (electronically or otherwise). For swaps executed on 
a SEF, the SEF will provide the counterparties with a definitive 
written record of the terms of their agreement, which will serve as a 
confirmation of the swap. The proposed regulation on swap confirmations 
would require that parties have full written agreement on all terms of 
a swap at the same time as execution.
---------------------------------------------------------------------------

    \33\ See 75 FR 76140 (December 7, 2010); and 75 FR 76574 
(December 8, 2010).
---------------------------------------------------------------------------

g. Prohibited Use of Data Collected for Regulatory Purposes--Proposed 
Sec.  37.7
    In fulfilling their regulatory and compliance obligations, the 
Commission expects that SEFs will often require market participants to 
provide proprietary data or personal information. Proposed Sec.  37.7 
prohibits a SEF from using information generated by market participants 
for purposes of meeting regulatory and compliance obligations for 
marketing products or for other commercial purposes.\34\ The Commission 
notes that nothing in this regulation prohibits a SEF from sharing such 
information with another SEF or DCM offering swaps for trading for 
regulatory purposes.
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    \34\ The Commission notes that, in the recent notice of proposed 
rulemaking for Business Affiliate Marketing and Disposal of Consumer 
Information Rules, it proposed rules prohibiting futures commission 
merchants (``FCMs'') (and other intermediaries) from using certain 
consumer information received from an affiliate to make a 
solicitation for marketing purposes. In addition, rules were 
proposed requiring FCMs to develop a written disposal program to the 
extent that such FCMs possess consumer information. The underlying 
policy for these rules is to protect the privacy of customer 
information. Similarly, Proposed Sec.  37.7 is intended to protect 
market participants' information provided to a SEF for regulatory 
purposes from its use to advance the commercial interests of the 
SEF.
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h. Boards of Trade Operating Both a Designated Contract Market and a 
Swap Execution Facility--Proposed Sec.  37.8
    Proposed Sec.  37.8 implements CEA Section 5h(c) by requiring that 
a board of trade that operates a trading facility that has been 
designated as a DCM by the Commission and also intends to operate an 
entity for the execution or trading of swaps: (1) Must separately 
register such entity as a SEF under Part 37; and (2) may use the same 
electronic trade execution system for executing swaps that it uses for 
its DCM operations, provided that, the entity clearly identifies to 
market participants whether the execution or trading of a swaps is 
taking place on the DCM or the SEF.\35\
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    \35\ Section 5h(c) of the CEA provides:
    IDENTIFICATION OF FACILITY USED TO TRADE SWAPS BY CONTRACT 
MARKETS.--A board of trade that operates a contract market shall, to 
the extent that the board of trade also operates a swap execution 
facility and uses the same electronic trade execution system for 
listing and executing trades of swaps on or through the contract 
market and the swap execution facility, identify whether the 
electronic trading of such swaps is taking place on or through the 
contract market or the swap execution facility.
---------------------------------------------------------------------------

i. Permitted Execution Methods--Sec.  37.9
    This rule proposal will provide market participants with the choice 
of a number of means to access the market and execute trades therein. 
This flexibility would allow market participants to use requests for 
quotes, indications of interest, or executable quotes to consummate a 
trade. It would allow SEFs to use a variety of different trading 
systems or platforms as long as market participants have the ability to 
access the market and execute trades as discussed below.
i. SEF Definition
    The term `swap execution facility' means 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.\36\
---------------------------------------------------------------------------

    \36\ CEA Section 1a(50).
---------------------------------------------------------------------------

    Market participants currently use a number of different methods for 
transacting swaps, including: brokers who facilitate trades over the 
telephone (commonly referred to as ``voice brokers''); hybrid voice and 
electronic trading systems; fully electronic inter-dealer brokerage 
systems; single-dealer trading platforms; various versions of ``request 
for quote'' platforms (including platforms that allow more than one 
customer to submit requests for quotes to, and receive responses from, 
multiple dealers); and order books. The Commission does not believe 
that all of these methods comply with the statutory definition of a 
SEF, especially the ``multiple participant to multiple participant'' 
requirement thereunder. Specifically, as discussed below, the 
Commission notes that entities offering the following services do not 
comply with the statutory definition of a SEF: one-to-one voice 
services for the execution or trading of swaps (other than for the 
execution of block trades),\37\ single-dealer platforms, and services 
that solely provide for the processing of swaps.
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    \37\ As proposed, a block trade is a swap of a large notional or 
principal amount that is transacted off-exchange, pursuant to the 
rules of a SEF or DCM, and that is greater than the minimum block 
trade size set by the SEF or DCM. As proposed, a SEF or DCM must set 
the minimum block size for a particular swap contract at an amount 
greater than the appropriate minimum block size for the appropriate 
category of swap instrument in which such swap contract is 
categorized. See 75 FR 76140 (December 7, 2010).
---------------------------------------------------------------------------

    The SEF definition requires at a minimum the existence of a 
``trading system or platform.'' The Commission notes that the terms 
``trading system'' and ``platform'' are not defined under the Dodd-
Frank Act or anywhere in the CEA. Based on the SEF definition under the 
Dodd-Frank Act, the Commission interprets trading system and platform 
to include, but not be limited to, the term ``trading facility'' as 
defined in CEA Section 1a(51).\38\ In addition, as discussed in detail 
below, the Commission believes that any other method that allows 
multiple market participants to have the ability to execute or trade 
swaps by accepting

[[Page 1219]]

bids and offers made by other multiple participants in the facility or 
system, through any means of interstate commerce, may qualify as an 
acceptable trade execution method for an entity that wishes to register 
as a SEF.
---------------------------------------------------------------------------

    \38\ See CEA Section 1a(51). In this context, a trading facility 
requires ``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.''
---------------------------------------------------------------------------

    In order for an entity to meet the definition of a SEF 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'' and such participants must be provided 
impartial access to the market. The Commission believes that an 
acceptable SEF platform or system must provide at least a basic 
functionality to allow market participants the ability to make 
executable bids or offers and indicative quotes, and to display them to 
multiple parties, including all other parties participating in the SEF, 
if the market participants wish to do so. As set forth in proposed 
Sec.  37.9(b) and discussed below, the Commission proposes that a SEF 
also must provide market participants with the ability to make a bid, 
make an offer, hit a bid, or lift an offer, and may provide the ability 
to request a bid and request an offer. Accordingly, market participants 
would not have to receive a ``request for quote'' \39\ from another 
market participant in order to make a bid or offer or to execute a 
trade with other market participants. In addition to this basic 
functionality whereby market participants would have the ability to 
access all other market participants, a SEF could also provide a 
multiple-to-multiple request for quote trading system for those market 
participants that do not wish to display their bids, offers, or 
requests to all other market participants. A SEF's chosen approach(es) 
would be described in its registration application, to be evaluated by 
the Commission during the application process. Once operational, the 
Commission would be able to empirically evaluate the SEF's treatment of 
executable bids and offers as compared to responses to requests for 
quotes to ensure ongoing compliance with the definition of a SEF, the 
SEF registration requirements, and the core principles.
---------------------------------------------------------------------------

    \39\ See infra, Section II.C.2.i.v for further discussion of 
``request for quote'' systems.
---------------------------------------------------------------------------

ii. One-to-One Voice and Single-Dealer Platforms
    The Commission notes that one-to-one voice services and single-
dealer platforms do not satisfy the statutory requirement under CEA 
Section 1a(50) that ``multiple participants have the ability to execute 
or trade swaps by accepting bids and offers made by multiple 
participants in the facility or system''. The nature of these types of 
trading systems or platforms, where transactions are negotiated or 
consummated via a one-to-one or one-to-many basis, do not provide the 
ability for participants to conduct multiple-to-multiple execution or 
trading. The Commission also notes that CEA Sections 5h(f)(2)(A)(ii) 
and (2)(B)(i) require that SEFs provide market participants with 
impartial access to their markets, and that SEFs must adopt rules with 
respect to any limitations they place on access. Entities operating 
either one-to-one voice services or single-dealer platforms, by 
definition, limit the provision of liquidity to single dealers or 
liquidity providers, thus excluding other participants from filling 
those roles, in non-compliance with the impartial market access 
requirements applicable to SEFs under the CEA.
iii. Processing of Swaps
    In regard to entities that offer, with respect to swaps 
transactions, processing services exclusively, the Commission notes 
that Section 5h(a)(1) of the CEA states ``[n]o person may operate a 
facility for the trading or processing of swaps, unless the facility is 
registered as a [SEF] or as a [DCM] under this section.'' In addition, 
Section 5h(b) states that a registered SEF may ``(A) make available for 
trading any swap, and (B) facilitate trade processing of any swap.'' 
Although these provisions could be read to require the registration of 
entities that engage in trade processing (but not trade execution) as 
SEFs, the Commission believes that entities that operate exclusively as 
swap processors do not meet the SEF definition (and should not be 
required to register as SEFs) because: (1) They do not provide (as 
required by the definition) the ability to ``execute or trade'' a swap; 
and (2) the definition does not include the term ``process.''
iv. Trading Systems or Platforms
    When determining what types of trading systems qualify to register 
as a SEF, the Commission takes into account, in addition to 
consideration of the SEF definition as discussed above, the core 
principles applicable to SEFs \40\ as well as the goals provided in 
Section 733 of the Dodd-Frank Act: (1) Bringing greater pre-trade price 
transparency to swap transactions; and (2) bringing more swaps trading 
onto regulated trading systems or platforms.\41\ Therefore, the 
Commission interprets the SEF registration requirements to necessitate 
that the trading system or platform: (a) Provide multiple participants 
with the ability to make bids and offers to other multiple participants 
or to accept bids or offers made by other multiple participants; (b) 
promote pre-trade price transparency; (c) ensure that the trading of 
swaps on the trading system or platform is in accordance with the SEF 
core principles, the registration requirements and the Commission's 
regulations; and (d) provide all market participants with impartial 
access to the SEF's market.
---------------------------------------------------------------------------

    \40\ See e.g., Sections 5h(f)(2)(A)(ii) and (2)(B)(i) (Core 
Principle 2, requiring the provision of impartial access). See also 
infra, Section II.C.2.a. (discussing the provision of impartial 
access under to Core Principle 2).
    \41\ See CEA Section 5h(e) (Stating twin goals regarding the 
promotion of ``the trading of swaps on swap execution facilities'' 
and ``pre-trade price transparency in the swaps market'').
---------------------------------------------------------------------------

    The Commission believes that, to register as a SEF or to maintain 
registration, an applicant or SEF must provide market participants with 
the ability to make executable quotes on either side of a swap 
transaction and to take the opposite side of a trade from participants 
who seek to enter into transactions on such contract. The ``multiple 
participant to multiple participant'' requirement, when read in 
conjunction with the impartial access requirement (i.e., the Core 
Principle 2 requirement that the SEF must ``provide market participants 
with impartial access to the market'') requires that each SEF provide 
any market participant with the ability to make any bid or offer 
transparent to all other market participants of the SEF. In addition, 
the ``ability to execute or trade'' statutory provision means that the 
SEF must provide market participants with the ability to post both firm 
and indicative quotes on a centralized screen such that they can be 
executed or traded against by other multiple market participants. Under 
the proposal, it is a market participant's prerogative to make a bid or 
offer available to all other market participants in the trading system 
or platform without an invitation to join an auction process. Willing 
counterparties should have the ability to execute swap trades by 
accepting such bids or offers. The Commission believes there could be a 
number of ways for a SEF to provide this functionality, including but 
not limited to having an order book.
    Additionally, SEFs must make indicative quote functionalities 
available, such that market participants could provide non-executable 
quotes or indicative quotes through the SEF that are visible and 
accessible to all other market participants. Such functionalities could 
include electronic,

[[Page 1220]]

streaming indicative quotes, or other methods for providing market 
participants with indicative quotes. Indicative quotes provide 
additional information about pricing and help inform market 
participants as they consider hedging and investment strategies, as 
well as when considering whether and how to execute a trade (either 
through a request for quote or through an existing executable quote). 
The Commission believes that indicative quotes are consistent with the 
statute's goal of achieving pre-trade price transparency.
    The Commission believes that SEFs can utilize various trading 
systems and platforms that provide market participants with the ability 
to post executable bids or offers for display to multiple potential 
counterparties. A trading system or platform that provides this minimum 
multiple-to-multiple functionality, as described above, also may 
include other functionalities that provide multiple participants with 
the ability to access multiple market participants, but not necessarily 
the entire market if the participant so chooses. These may include 
certain request for quote systems, as described below, or other systems 
that meet the SEF definition and comply with the core principles.\42\ 
Hence, although at times a market participant 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, market 
participants that desire to access the entire market must be provided 
with the ability to do so as well.
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    \42\ As previously noted, one-to-one voice systems and single-
dealer platforms do not satisfy the listed factors.
---------------------------------------------------------------------------

v. Execution Methods
    Proposed Sec.  37.9 will allow market participants to have the 
choice of a number of means to access and execute within a SEF's 
marketplace. There would not be any requirements for pre-trade 
transparency for: (1) Blocks; (2) trades subject to the end user 
exceptions; or (3) contracts which are not ``made available for 
trading.'' Thus the requirements for pre-trade transparency (e.g., 
posting both firm and indicative quotes on a centralized electronic 
screen accessible to all market participants) \43\ for trades executed 
on a SEF would only relate in the context of transactions in swaps 
which are: (1) Subject to the mandatory clearing requirement; (2) 
``made available for trading'' on a SEF; and (3) too small to be a 
block trade under part 45. For these three types of transactions, SEFs 
could permit their market participants to trade via requests for 
quotes, indications of interest, or executable quotes.
---------------------------------------------------------------------------

    \43\ See also, proposed Sec.  37.205(b)(1).
---------------------------------------------------------------------------

    As stated in the preceding section, Section 5h(e) of the CEA sets 
forth Congress' goals with respect to SEFs: The promotion of ``the 
trading of swaps on swap execution facilities'' and ``pre-trade price 
transparency in the swaps market.'' \44\ The Commission believes that 
these goals can be achieved for swap transactions that are subject to 
the CEA execution requirements, are made available for trading, and are 
not block trades by providing for the execution of such swap 
transactions on trading systems or platforms that give market 
participants the option to post both firm and indicative quotes or 
accept bids and offers that are transparent to the entire market.\45\
---------------------------------------------------------------------------

    \44\ See CEA Section 5h(e).
    \45\ While currently such systems are often used by traders in 
order to account for counterparty risk, it is important to note that 
there is no counterparty risk for swaps that are cleared.
---------------------------------------------------------------------------

    Under proposed Sec.  37.9, applicants and registered SEFs must 
offer trading services to facilitate the ability of market participants 
to make executable bids or offers and to display them to multiple 
parties. Transactions may be executed by providing market participants 
with a number of execution methods from which to choose, including: (1) 
``Request for quote'' systems that provide market participants the 
ability to interact with multiple participants but less than the entire 
market, as described below; (2) systems that allow market participants 
to display executable bids and offers on a centralized, electronic 
screen to the entire market; or (3) other systems that comply with the 
core principles.
    Additionally, under the proposal, SEFs must provide a general 
timing requirement applicable to traders such as brokers who have the 
ability to execute against a customer's trade or are entering a trade 
for two customers on opposite sides of the transaction. Under the 
proposal, a broker would have to provide a minimum pause before 
entering the second side (whether for its own account or for a second 
customer), thus ``showing'' other market participants the terms of a 
request for quote from its customer, and providing other market 
participants the opportunity to join in the trade. The Commission 
proposes to require a minimum pause of 15 seconds between entry of two 
potentially matching customer-broker swap orders or two potentially 
matching customer-customer swap orders on SEFs.
(A) Request for Quote Systems
    As proposed by the Commission, the steps taken by market 
participants in order to complete a transaction using an acceptable 
request for quote system are similar to the steps taken in the 
marketplace today (i.e., a market participant transmits a request to 
counterparties for bids or offers and chooses to transact with one of 
the respondents to the request). However, to ensure that multiple 
participants have the ability to reach multiple counterparties, the 
Commission proposes to require SEFs to provide that market participants 
transmit a request for quote to at least five potential counterparties 
in the trading system or platform. The Commission notes that, under the 
proposal, acceptable request for quote systems offered by SEFs could be 
designed such that requests for quotes are visible to all market 
participants with access to the trading system or platform, but should 
permit requesters the option of making a request for quote visible to 
the entire market. Additionally, the proposal provides that an 
acceptable request for quote system may allow for a transaction to be 
consummated if the original request to five potential counterparties 
receives fewer than five responses.\46\
---------------------------------------------------------------------------

    \46\ The proposal also provides that request for quote systems 
include trading systems or platforms in which multiple market 
participants view real-time electronic streaming quotes, both firm 
and indicative, from multiple potential counterparties on a 
centralized electronic screen, and have the ability to accept a firm 
streaming quote and complete the transaction or based on an 
indicative streaming quote, issue a request for quote to no less 
than five market participants and upon receipt of a responsive 
quote, have the option to complete the transaction. See proposed 
Sec.  37.9(a)(1)(v).
---------------------------------------------------------------------------

    Under the proposal, SEFs that utilize request for quote systems 
must also furnish liquidity providers with the ability to post both 
executable bids or offers and indicative quotes. The terms of any such 
``resting'' executable bids or offers would be displayed to the 
requester along with any other specific bids or offers included in the 
responses to its request for quote. Upon receipt of the responses and 
the appropriate resting bids or offers, the original requester would 
have the option to execute the transaction. The Commission believes 
that SEFs that utilize request for quote systems must ensure that any 
competitive resting bids or offers be taken into account and 
communicated to the requester along with any bids or offers included 
with responses to requests for quotes. While the Commission does not 
believe it appropriate to prescribe a method of integration as part of 
this rulemaking,

[[Page 1221]]

the Commission would expect each SEF to describe its chosen integration 
mechanism as part of its application.
    The Commission believes its proposed approach to the use of request 
for quote systems by SEFs is consistent with the statute and promotes: 
(a) The ability of multiple participants to make bids and offers to 
other multiple participants or to accept bids or offers made by other 
multiple participants; (b) pre-trade price transparency; (c) the 
trading of swaps on a regulated trading system or platform in 
accordance with the registration requirements and the Commission's 
regulations; and (d) the ability for all market participants to receive 
impartial access to all other market participants. The Commission 
further believes that this feature would help encourage price 
competition within the market.
(B) ``By Any Means of Interstate Commerce''
    For block trades, swaps not subject to clearing, and bespoke or 
illiquid swaps, the Commission interprets the statute's language ``by 
any means of interstate commerce'' to allow execution methods that may 
include voice. This method of execution is consistent with the use of 
voice in the futures markets for executing block trades, where in light 
of the size of the trades, pre-trade transparency is not required. It 
is also possible that a SEF might choose to offer to facilitate 
bilateral trading for those transactions not bound by the CEA's 
execution requirements and, therefore, the use of voice may be 
acceptable. The Commission notes that with respect to these types of 
transactions, market participants may have an interest in choosing 
their counterparty in light of the credit risk involved. Voice 
transactions must be entered into some form of electronic affirmation 
system immediately upon execution.
    With regard to swaps available for trading that are not blocks, 
trading systems or platforms facilitating the execution of such swaps 
via voice exclusively are not multiple participant to multiple 
participant and do not provide for pre-trade transparency. While not 
acceptable as the sole method of execution of swaps required to be 
traded on a SEF or DCM, the Commission believes voice would be 
appropriate for a market participant to communicate a message to an 
employee of the SEF, whether requests for quotes, indications of 
interest, or firm quotes. For instance, voice-based communications in 
the proposed SEF context may occur in certain circumstances, such as 
when an agent: (1) Assists in executing a trade for a client, 
immediately entering the terms of the trade into the SEF's electronic 
system; or (2) enters a bid, offer or request for quote immediately 
into a SEF's electronic multiple-to-multiple trading system or 
platform. In all cases, the employee of the SEF must promptly provide 
transparency and comply with audit trail requirements, including by the 
immediately entering into the trading system or platform any orders or 
requests for quote that are immediately executable, or, if not, 
immediately creating an electronic record with the order or request for 
quote entered into the trading system or platform as soon as 
practicable. The core principles and these rules would fully apply to 
such communications including but not limited to the transparency, 
audit trail, impartial access and standards for requests for quotes.

Request for Comment:

    The Commission seeks public comment regarding the trading systems 
or platforms described in this section. In addition, the Commission 
asks the public to respond to the specific questions below.
     Does the proposal appropriately implement the statutory 
directive that a SEF provide multiple participants with the ability to 
execute or trade swaps by accepting bids and offers made by multiple 
participants in the facility or system? If not, how should the 
Commission best carry out the intent of Congress in the registration 
and oversight of SEFs?
     The Commission interprets the ``multiple participant to 
multiple participant'' requirement (in conjunction with the impartial 
access requirement) as requiring that the facility provide the ability 
for any market participant to make any bid or offer transparent to the 
entire market, if the market participant chooses to do so. Should the 
Commission be explicit as to the means or methods which can be used to 
fulfill this functionality? If so, in addition to an order book, what 
other means or models should be included in the final regulations?
     In 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.
     Should the Commission determine that other models of 
execution satisfy the statutory ``multiple participant to multiple 
participant'' requirement as well as the pre-trade price transparency 
and open access policy objectives under the Dodd-Frank Act?
     Does the proposal properly implement the provision in the 
SEF definition regarding having the ability to execute or trade swaps 
``through any means of interstate commerce''?
     In general, does the proposal properly implement the CEA's 
goal to promote both the trading of swaps on SEFs and pre-trade price 
transparency? Should there be other characteristics the Commission 
should consider? If so, what are they?
     What level of pre-trade transparency should be required to 
promote price discovery, competition and the trading of swaps on SEFs? 
Should the Commission consider requiring a request for quote method 
that provides for transparency in the request for quote process in 
addition to the posting of any resting bids/offers on its trading 
system or platform? Should all orders and quotes be displayed to all 
participants or should alternative engagement rules apply on a pre-
trade basis?
     Should SEFs be required to communicate executable bids/
offers to issuers of requests for quotes? Also, should any such 
executable bids/offers be provided any priority during the request for 
quote process? Should market participants have an obligation to 
consider and/or execute against an executable bid/offer if it is 
competitive?
     Should SEFs be required to make responses to requests for 
quotes transparent to all market participants? If so, when should this 
information be provided to the market? Prior to execution? At the time 
of execution? Subsequent to execution?
     Would the SEF provisions in the Dodd-Frank Act support a 
requirement that swaps that meet a certain level of trading activity be 
limited to trading through order books? If so, what level of trading 
activity would be the appropriate level at which to mandate trading 
exclusively on an order book? Should any such analysis be done on a 
product or asset-class basis?
     Should swap processors be subject to the registration 
requirements for SEFs?
j. Swaps Made Available for Trading--Proposed Sec.  37.10
    The Dodd-Frank Act requires that transactions involving swaps 
subject to

[[Page 1222]]

the clearing requirement be executed on a SEF or DCM.\47\ This trade 
execution requirement will not apply if (i) the Commission has not made 
a determination regarding the clearing requirement with respect to the 
swap,\48\ (ii) an eligible counterparty availed itself of an exception 
to the clearing requirement and does not wish to transact the swap on a 
SEF or DCM, or (iii) no DCM or SEF ``makes the swap available to 
trade.'' \49\
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    \47\ CEA Section 2(h)(8).
    \48\ CEA Section 2(h)(1).
    \49\ CEA Section 2(h)(8).
---------------------------------------------------------------------------

    The Commission proposes to require SEFs to make periodic 
assessments to determine whether a swap has been made available for 
trading. To that end, proposed Sec.  37.10 requires each SEF to 
annually conduct an assessment and provide a report to the Commission 
regarding the determination that the swaps it offers are made available 
for trading thereunder. With respect to the determination that swaps 
are made available to trade, the SEF may consider frequency of 
transactions and open interest, and any additional factors requested by 
the Commission.

Request for Comment:

    The Commission seeks general public comment regarding the meaning 
of ``made available for trading.'' In addition, the Commission asks the 
public to respond to the specific questions below.
     In addition to the frequency of transactions and open 
interest, should the Commission request that SEFs consider the number 
of market participants trading a particular swap? If so, should a 
minimum number of participants be required, for example, should the 
swap be traded by more than two participants? More than three?
     Should the Commission request that SEFs consider any other 
factors or processes to make the determination that swaps are made 
available for trading?
k. Identification of Non-Cleared Swaps or Swaps Not Made Available To 
Trade--Proposed Sec.  37.11
    The Commission acknowledges that certain market participants may 
desire to avail themselves of the benefits of trading on SEFs (e.g., 
automated confirmation of trades, straight-through processing) with 
respect to trades that are not otherwise required to be executed on a 
SEF or DCM. In particular, market participants might want to effect 
swap transactions on SEFs or DCMs regarding swaps that have not been 
determined to come under the clearing mandate of Section 2(h) of the 
CEA, transactions that are excepted from the clearing requirements as 
provided under Section 2(h)(7) of the CEA, and transactions regarding 
swaps determined to not be available for trading pursuant to Commission 
Sec.  37.10. Proposed Sec.  37.11 requires that if a SEF determines to 
provide for trading of swaps that are excepted from the clearing 
requirements, the SEF must clearly identify to market participants that 
the particular swap is to be transacted pursuant to one of the 
applicable exemptions from execution and clearing.

C. Proposed Regulations, Guidance and Acceptable Practices for 
Compliance With the Core Principles

    As noted above, this rulemaking establishes the relevant 
regulations, guidance and acceptable practices applicable to the 15 
core principles. As proposed, the regulations applicable to the 15 core 
principles are set out in separate subparts to Part 37, Subparts B 
through P, 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.
1. Subpart B--Core Principle 1 (Compliance With Core Principles)
    Under Core Principle 1, compliance with the core principles, and 
any other rule or regulation that the Commission may impose under 
Section 8a(5) of the CEA, is a condition of obtaining and maintaining 
registration as a SEF.\50\ The Commission proposes to codify the 
statutory text of Core Principle 1 in proposed Sec.  37.100. SEFs will 
have reasonable discretion in establishing the manner in which they 
comply with the core principles.
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    \50\ CEA Section 5h(f)(1)(A).
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2. Subpart C--Core Principle 2 (Compliance With Rules)
a. Background
    Core Principle 2 requires a SEF to establish and enforce compliance 
with its rules,\51\ including by: (1) Establishing various rules to 
deter abuses; and (2) having the capacity to detect, investigate, and 
enforce such rules.\52\ Similarly, under Core Principle 2, a SEF must 
establish and enforce rules to provide any eligible contract 
participant (``ECP'') and any independent software vendor (``ISV'') 
\53\ with impartial access to the market and to capture information 
that the SEF may use in establishing whether rule violations have 
occurred.\54\ Additionally, SEF Core Principle 2 requires a SEF to 
establish rules governing the operations of the trading platform and 
provide rules relating to the mandatory clearing requirement under 
Section 2(h)(8).\55\The Commission proposes to implement these 
requirements through Sec. Sec.  37.200-37.207.
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    \51\ CEA Section 5h(f)(2)(A).
    \52\ CEA Section 5h(f)(2)(C) requires SEFs to establish rules 
specifying trading procedures to be used in entering and executing 
orders traded or posted on the trading platform, including block 
trades. The sentence annotated by this footnote also captures 2(B).
    \53\ The Commission notes that examples of independent software 
vendors include: Smart order routers, trading software companies 
that develop front-end trading applications, and aggregators of 
transaction data. 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. Aggregators of transaction data provide 
access to news, analytics and execution services. 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.
    \54\ CEA Section 5h(f)(2)(B).
    \55\ CEA Section 2(h)(8) requires counterparties transacting in 
swaps that are subject to the clearing requirement of Section 2(h) 
to execute the transaction on a DCM or a SEF, unless no DCM or SEF 
``makes the swap available to trade'' or the swap transaction is 
subject to the clearing exception under Section 2(h)(7). The 
sentence annotated by this footnote captures both 2(C) and 2(D).
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    Although SEFs are a new type of regulated exchange, the Commission 
notes that the statutory text for SEF Core Principle 2 is largely a 
compilation of established regulatory principles applicable to DCMs. As 
a result, proposed Sec. Sec.  37.200-37.207, implementing SEF Core 
Principle 2, set forth requirements for establishing and enforcing 
rules, providing access, conducting trade practice surveillance, and 
implementing audit trail requirements and disciplinary rules, that are 
analogous to those found in the proposed regulations for DCM Core 
Principles 2, 10, and 13. In addition, proposed Sec. Sec.  37.200-
37.207 also address elements of Core Principle 2 that are not 
implicated by these DCM core principles.
b. Operation of a Swap Execution Facility and Compliance With Rules--
Proposed Sec.  37.201
    Proposed Sec.  37.201 addresses the requirement to establish and 
enforce rules. More specifically, the core principle requires that a 
SEF establish and enforce compliance with its rules.\56\A SEF is also 
required to

[[Page 1223]]

establish rules governing the operation of the trading platform.\57\
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    \56\ CEA Section 5h(f)(2)(A)(i).
    \57\ CEA Section 5h(f)(2)(C).
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    Proposed Sec.  37.201 addresses these elements by requiring SEFs to 
establish rules governing the members' and market participants' use of 
their markets, including rules specifying trading procedures for 
entering and executing orders traded or posted on the trading platform, 
including block trades. Proposed Sec.  37.201(b) further requires SEFs 
to establish and impartially enforce compliance with the rules of the 
SEF, including, but not limited to: (1) The terms and conditions of any 
swaps traded or processed on or through the SEF; (2) access rules for 
the SEF; (3) trade practice rules; (4) audit trail requirements; (5) 
disciplinary rules; and (6) mandatory trading requirements.
c. Access Requirements--Proposed Sec.  37.202
    Proposed Sec.  37.202 addresses Core Principle 2's requirement that 
SEFs provide any ECP and any ISV with impartial access to the market, 
and that they adopt rules with respect to any limitations they place on 
access.\58\ In that regard, proposed Sec.  37.202(a) requires a SEF to 
provide any ECP and any ISV with impartial access to its market(s) and 
market services (including any indicative quote screens or any similar 
pricing data displays), which includes establishing criteria that are 
impartial, transparent, and applied in a fair and nondiscriminatory 
manner and levying equal fees for participants receiving comparable 
access to, or services from, the SEF. The purpose of the proposed 
impartial access requirements is to prevent a SEF's owners or operators 
from using discriminatory access requirements as a competitive tool 
against certain participants. Access to a SEF should be determined, for 
example, on the SEF's impartial evaluation of an applicant's 
disciplinary history and financial and operational soundness against 
objective, pre-established criteria. Any participant should be able to 
demonstrate financial soundness either by showing that it is a clearing 
member of a DCO that clears products traded on that SEF or by showing 
that it has clearing arrangements in place with such a clearing member.
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    \58\ CEA Section 5h(f)(2)(A)(ii) and (2)(B)(i).
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    Proposed Sec.  37.202(b) requires that, prior to granting a 
participant access to its markets, a SEF must require each member or 
market participant to consent to its jurisdiction.\59\ Finally, 
proposed Sec.  37.202(c) requires a SEF to establish and impartially 
enforce its rules governing any decision to deny, suspend, or 
permanently bar participants' access to the SEF, including when such 
decisions are part of a disciplinary or emergency action taken by the 
SEF.
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    \59\ Consent may be obtained in the form of a written agreement 
at the time that a member or market participant is granted access to 
the SEF.
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Request for Comment:

    The Commission solicits specific public comments regarding the 
sufficiency of proposed Sec.  37.202.
     In particular, the Commission is interested to know 
whether additional regulations are necessary to ensure that a SEF can 
assert jurisdiction over any person or entity executing swaps on the 
SEF, either for their own account or on behalf of another's account.
     The Commission also requests public comments on proposed 
Sec. Sec.  37.202(a) and 37.202(c), which are intended to ensure that 
similarly situated persons and entities receive equal access to a SEF's 
trading platform and services, and that similar access and services be 
charged a similar fee.
     In addition, the Commission wants to know whether the 
proposed regulations seeking to prohibit a SEF from abusing its 
authority to deny or suspend access via disciplinary or emergency 
procedures are sufficient to prohibit discrimination by a SEF against 
competitors or for inappropriate business reasons.
d. Rule Enforcement Program--Proposed Sec.  37.203
    Proposed Sec.  37.203 addresses SEF Core Principle 2's requirement 
that SEFs establish and enforce trading and trade processing rules that 
will deter abuses and have the capacity to investigate and enforce 
those rules.\60\
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    \60\ CEA Section 5h(f)(2)(B).
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    Proposed regulation 37.203(a) addresses abusive trading practices 
by requiring SEFs to prohibit specific practices in connection with 
intermediated and non-intermediated trading activities,\61\ as well as 
any other manipulative or disruptive trading practices prohibited by 
the CEA or by the Commission pursuant to Commission regulation.
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    \61\ The prohibited practices include: trading ahead of customer 
orders, trading against customer orders, accommodation trading, and 
improper cross-trading. Specific trading practice violations that 
must be prohibited by all SEFs include: Front-running, wash trading, 
pre-arranged trading, fraudulent trading, money passes, and any 
other trading practices that the SEF deems to be abusive. These 
practices are a compilation of abusive trading practices that DCMs 
already prohibit, and include trading practices that Congress 
expressly prohibited in Section 747 of the Dodd-Frank Act. Section 
747 of the Dodd-Frank Act amends section 4c(a) of the CEA by adding 
three disruptive practices, which 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 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).
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    Subsection (b) of the proposed regulation requires that a SEF have 
arrangements and resources for effective rule enforcement, including 
the authority to collect information and examine books and records of 
members and market participants. The Commission believes that SEFs must 
have appropriate resources to enforce all of its rules, including the 
ability to perform effective trade practice surveillance. Furthermore, 
a SEF must have the authority to examine books and records for all 
market participants. 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.
    Next, subsection (c) of proposed Sec.  37.203 requires that a SEF 
maintain sufficient compliance resources to conduct effective and 
timely audit trail reviews, trade practice surveillance, market 
surveillance, and real-time monitoring. A SEF must also monitor its 
staff size annually to ensure that it is appropriate to effectively 
perform those functions. A SEF's staff size also must be sufficient to 
address unusual or unanticipated market or trading events while 
continuing to effectively conduct routine self-regulatory duties. 
Proposed Sec.  37.203 reflects the Commission's belief that sufficient 
compliance staff are essential to the effectiveness of a SEF's self-
regulatory program.
    While requiring sufficient staff, proposed Sec.  37.203(c) does not 
require that staff size be determined based on a specific formula. 
Rather, it permits the individual SEF to determine what size staff it 
needs to effectively perform its self-regulatory responsibilities.\62\
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    \62\ In making this determination, the proposed regulation 
requires that a SEF take into account specific facts and 
circumstances (e.g., volume of trading, the number of swaps listed, 
number of traders, etc.), as well as any other factors suggesting 
the need for increased resources. A factor that may suggest the need 
for increased compliance resources is a prolonged surge in trading 
volume or a prolonged period of price volatility.
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    Proposed Sec.  37.203(d) requires SEFs to maintain an automated 
trade surveillance system capable of detecting

[[Page 1224]]

and investigating potential trade practice violations. At a minimum, a 
SEF's systems must be capable of generating alerts on at least a trade 
date plus one day (T+1) basis to help staff focus on potential 
violations and anomalies found in trade data.\63\ They must also 
provide compliance staff the ability to sort, query and analyze 
voluminous amounts of data. In order to detect and prosecute the 
abusive trading practices enumerated in proposed Sec.  37.203(a), a 
SEF's automated surveillance system must maintain all trade and order 
data, including order modifications and cancellations. In addition, a 
SEF's automated trade surveillance system must provide users with the 
ability to compute retain, and compare trading statistics; compute 
profit and loss; and reconstruct the sequence of trading activity. The 
proposed regulation reflects the Commission's belief that a SEF must 
have automated surveillance systems that are equivalent to those of a 
DCM in order to fulfill its trade practice surveillance requirements.
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    \63\ These systems typically differ from those systems used for 
real-time market monitoring. The requirements for real-time market 
monitoring can be found in proposed Commission Sec.  37.203(e).
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    Subsection (e) of proposed Sec.  37.203 requires SEFs to conduct 
real-time market monitoring of all trading activity on its trading 
platform, in order to ensure orderly trading and to identify and 
correct any market or system anomalies. The Commission's proposed 
regulation requires that any price adjustments or trade cancellations 
be transparent to the market and subject to clear and fair publicly 
available standards.
    Next, proposed Sec.  37.203(f) requires SEFs to establish 
procedures for conducting investigations and the requirements for an 
investigation report. Subsection (f)(1) requires that a SEF have 
procedures to conduct investigations of possible rule violations and 
subsection (f)(2) requires that an investigation be completed within a 
timely manner (generally defined as 12 months after an investigation is 
opened, absent mitigating circumstances).\64\
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    \64\ Mitigating circumstances may 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.
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    Subsections (f)(3) and (f)(4) of proposed Sec.  37.203 set forth 
what must be included in an investigation report. Subsection (f)(3) 
requires that when compliance staff believes there is a reasonable 
basis for finding a violation, the investigation report must include 
the potential wrongdoer's disciplinary history. Similarly, subsection 
(f)(4) requires that an investigation report include the potential 
wrongdoer's disciplinary history when compliance staff recommends that 
a warning letter be issued. The Commission believes that prior 
disciplinary history is critical information that a disciplinary 
committee should consider when either issuing a warning letter or 
assessing an appropriate penalty as part of any settlement decision or 
hearing.\65\
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    \65\ As noted below in the discussion of proposed Sec.  
37.206(n), a SEF's disciplinary committee should review a member's 
complete disciplinary history when determining appropriate sanctions 
and impose meaningful sanctions on members who repeatedly violate 
the same or similar rules to discourage recidivist activity.
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    Subsection (f)(5) of proposed Sec.  37.203 provides that a SEF may 
authorize its compliance staff to issue a warning letter or to 
recommend that a disciplinary committee issue a warning letter. 
However, the proposed regulation prohibits SEFs from issuing more than 
one warning letter, in lieu of stronger disciplinary action, for the 
same violation during a rolling 12-month period.\66\
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    \66\ For purposes of this regulation, the Commission does not 
consider a ``reminder letter'' or such other similar letter to be 
any different than a warning letter. 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, whether for the same or similar violations is ever 
appropriate. A policy of issuing repeated warning letters to members 
and market participants who violate the same or similar rules, 
rather than issuing meaningful sanctions, reduces the effectiveness 
of a SEF's rule enforcement program.
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    Finally, proposed Sec.  37.203(g) requires a SEF to adopt and 
enforce any additional rules that it believes are necessary to comply 
with the requirements of proposed Sec.  37.203.

Request for Comment:

    The Commission requests public comment on proposed Sec.  37.203.
     In particular, the Commission requests public comment on 
the abusive trading practices enumerated in subsection 37.203(a). These 
practices are identical to the abusive trading practices prohibited in 
DCM trading.
     The Commission also solicits comments regarding the types 
of abusive trading practices that should be prohibited on a SEF's 
trading platform, particularly whether SEFs and DCMs are likely to face 
similar types of trading abuses by market participants, whether 
additional or different trading practices should be prohibited on a 
SEF, and whether SEFs should be required to have the same types of 
trade practice surveillance and real-time market monitoring programs as 
DCMs.
     Finally, the Commission requests comments on whether the 
investigatory reports prepared by DCM compliance staff as a prelude to 
formal disciplinary proceedings, and included in these proposed 
regulations, are needed within SEFs.
e. Regulatory Services Provided by a Third Party--Proposed Sec.  37.204
    Proposed Sec.  37.204 permits a SEF to utilize the services of a 
registered futures association or another registered entity for 
assistance in performing certain self-regulatory functions.\67\ 
However, SEFs remain responsible for the execution of these functions 
and for compliance with their associated core principles. In this 
regard, the Commission notes that the Dodd-Frank Act does not confer on 
SEFs the same right to delegate certain core principle compliance 
functions as that conferred to DCMs, pursuant to Section 5c(b) of the 
CEA.
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    \67\ Self-regulatory functions include, for example, trade 
practice surveillance; market surveillance; real-time market 
monitoring; investigations of possible rule violations; and 
disciplinary actions.
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    The proposed regulation requires that any SEF that contracts with a 
third-party regulatory service provider ensure that the provider has 
sufficient capacity and resources to render timely and effective 
regulatory services. The SEF must also oversee the quality of 
regulatory services provided on its behalf, and must retain exclusive 
authority with respect to all substantive decisions made by its 
regulatory service provider.\68\ The proposed regulation also specifies 
that any instances where a SEF's actions differ from those recommended 
by its regulatory provider must be documented and explained in writing.
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    \68\ Such decisions include, but are not limited to, those 
involving the cancellation of trades, the issuance of disciplinary 
charges against members or market participants, denials of access to 
the trading platform, and any decision to open an investigation into 
a possible rule violation.
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Request for Comment:

    The Commission requests public comment on proposed Sec.  37.204.
     In particular, the Commission requests comments on the 
supervisory and decision-making relationship that should exist between 
a SEF and a third-party regulatory service provider.
     The Commission also seeks public comment on the types of 
information that SEFs and their regulatory service providers should be 
required to share with other SEFs and regulatory service providers, in 
order to conduct effective surveillance of fungible swap products 
trading on multiple SEFs.

[[Page 1225]]

     Finally, because SEFs are not permitted to delegate core 
principle compliance functions, as are DCMs, are there any additional 
conditions that the Commission should impose on SEFs' use of third-
party regulatory service providers?
f. Audit Trail Requirements--Proposed Sec.  37.205
    Proposed Sec.  37.205 addresses SEF Core Principle 2's requirements 
that a SEF be able to capture information that may be used to determine 
whether rule violations have occurred.\69\ Proposed Sec.  37.205 
requirements are akin to the DCM regulations addressing audit trail 
requirements.\70\
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    \69\ CEA Section 5h(f)(2)(B)(ii).
    \70\ For further explanation of the elements of an effective 
audit trail, see supra note 10, DCM NPRM.
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    Proposed Sec.  37.205 requires that a SEF establish an audit trail, 
and sets forth the elements of an effective audit trail and the 
requirements for effective audit trail enforcement.\71\ The Commission 
believes that these requirements will help to ensure that SEFs can 
appropriately monitor and investigate any potential customer and market 
abuse. Additionally, the audit trail data captured by SEFs must be 
sufficient to reconstruct all transactions promptly, and to provide 
evidence of any rule violations that may have occurred.
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    \71\ Subsection (a) of the proposed regulation establishes the 
overarching requirements for SEFs' audit trail programs, while 
Subsection (b) prescribes the four elements of an acceptable audit 
trail program and Subsection (c) prescribes the elements of an 
effective audit trail enforcement program.
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    Subsection (b)(1) of the proposed regulation requires that a SEF's 
audit trail include original source documents, defined to include 
unalterable, sequentially-identified records on which trade execution 
information is originally recorded, whether manually or electronically. 
It also requires that customer order records demonstrate the terms of 
the order, the unique account identifier that relates to the account 
owner, and the time of the order entry. Subsection (b)(2) of the 
proposed regulation requires that a SEF's audit trail program include a 
transaction history database to facilitate rapid access and analysis of 
all original source documents. Subsection (b)(2) also specifies the 
trade information that must be included in a transaction history 
database.\72\ Subsection (b)(3) of the proposed regulation requires 
that a SEF's audit trail program have electronic analysis capability 
for all data in its transaction history database and enable the SEF to 
reconstruct trades in order to identify possible rule violations. 
Subsection (b)(4) requires that a SEF's audit trail program 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. Safe storage capability also requires a 
SEF to protect its audit trail data from unauthorized alteration, 
accidental erasure or other loss.
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    \72\ For example, mandatory information includes a history of 
all orders and trades; all data input in the trade matching system 
for purposes of clearing; the categories of participant for which 
each trade is executed (i.e., the customer type indicator or ``CTI'' 
codes); timing and sequencing data sufficient to reconstruct 
trading; and identification of each account to which fills are 
allocated.
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    Subsection (c) of proposed Sec.  37.205 is organized in two parts. 
First, subsection (c)(1) requires that a SEF develop an effective audit 
trail enforcement program, which must, at a minimum, review all members 
and market participants annually to verify their compliance with all 
applicable audit trail requirements. Subsection (c)(1) also sets forth 
minimum review criteria for an electronic trading audit trail that must 
be carried out by each SEF. Finally, subsection (c)(2) requires that 
SEFs develop programs to ensure effective enforcement of their audit 
trail and recordkeeping requirements, including a requirement that SEFs 
levy meaningful sanctions when deficiencies are found. Sanctions may 
not include more than one warning letter or other non-financial 
penalty, in lieu of stronger disciplinary action, for the same 
violation within a rolling twelve-month period.

Request for Comment:

    The Commission seeks public comment on the proposed audit trail and 
audit trail enforcement requirements for SEFs.
     The Commission seeks specific public comment on whether 
such requirements should be similar for both SEFs and DCMs.
     Should SEFs be subject to additional requirements beyond 
the proposed regulations? Are there elements of the proposed 
regulations that are inappropriate for SEFs?
     For example, is the CTI code system used by DCMs to denote 
different types of futures participants also necessary for swap 
transactions on SEFs?
     What specific data points should a SEF's audit trail 
enforcement program seek to verify?
g. Disciplinary Procedures and Sanctions--Proposed Sec.  37.206
    Proposed Sec.  37.206 addresses SEF Core Principle 2's requirement 
that SEFs establish and enforce participation rules to deter abuse, and 
have the capacity to investigate and enforce such abuses.\73\ 
Subsection (a) of the proposed regulation requires that a SEF establish 
and maintain sufficient enforcement staff and resources to effectively 
and promptly prosecute possible rule violations within the jurisdiction 
of the SEF. Subsection (a) also provides that a SEF's enforcement staff 
may not include members of the SEF or persons whose interests conflict 
with their enforcement duties. Moreover, a member of the enforcement 
staff may not operate under the direction or control of any person or 
persons with trading privileges at the SEF. These provisions seek to 
ensure the independence of enforcement staff, and help promote 
disciplinary procedures that are free of potential conflicts of 
interest.
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    \73\ See CEA Section 5h(f)(2)(B). In general, the proposed 
regulations addressing disciplinary procedures for SEFs parallel the 
disciplinary procedure regulations for DCMs. The proposed 
regulations pursuant to DCM Core Principle 13 are also similar to 
the text of the disciplinary procedures in part 8, which the 
Commission found to be the model for many DCMs' disciplinary 
programs. 17 CFR 8.01 et seq. DCMs were exempt from Part 8 pursuant 
to Sec.  38.2; however, the predecessor DCM Core Principle 13 
offered the disciplinary procedures in Part 8 as an example of 
appropriate disciplinary procedures.
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    Subsection (b) requires SEFs to establish one or more Review Panels 
and one or more Hearing Panels (together, ``disciplinary panels''). 
Neither panel may include members of the SEF's compliance staff or any 
person involved in adjudicating any other stage of the same 
proceeding.\74\ The proposed regulation provides 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, while a separate Hearing Panel must be 
responsible for adjudicating the matter and issuing sanctions.\75\
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    \74\ Disciplinary panels must also adhere to the composition 
requirement of Sec.  40.9(c)(3)(ii), as proposed, which provides 
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.'' See 75 FR 63752 
(October 18, 2010).
    \75\ The Commission notes that, while proposed Sec.  37.206(b) 
requires SEFs to empanel distinct bodies to issue charges and to 
adjudicate charges in a particular matter, SEFs may determine for 
themselves whether their Review and Hearing Panels are separate 
standing panels or ad hoc bodies whose members are chosen from a 
larger ``disciplinary committee'' to serve in one capacity or the 
other for a particular disciplinary matter. The purposes of separate 
Review and Hearing Panels is to help ensure adjudication of 
disciplinary matters by separating a decision to issue charges from 
a hearing on the merits of a matter.

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[[Page 1226]]

    Subsection (c) of the proposed regulation requires a Review Panel 
to promptly review an investigation report received pursuant to 
proposed Sec.  37.203(f)(3), and to take action within 30 days of 
receipt. The Commission believes that prompt disciplinary action 
provides the best opportunity for witnesses to recall conversations, 
facts, and other information relevant to the matter, and transmits a 
clear signal to the market and to market participants that violations 
of exchange rules will not be tolerated. Subsection (c) also specifies 
the range of actions which a Review Panel may take upon receiving a 
completed investigation report. Subsection (d) describes the minimally 
acceptable contents of any notice of charges (``notice'') issued by a 
Review Panel. The notice 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; and prescribe the period within 
which a hearing may be requested. Further, the notice must advise the 
respondent charged that he or she is entitled, upon request, to a 
hearing on the charges.\76\ Subsection (e), in turn, specifies a 
respondent's right to be represented by any counsel or representative 
of his choosing upon receiving a notice of charges and in all 
succeeding stages of the disciplinary process. Subsection (f) requires 
that a respondent must be given a reasonable period of time to file an 
answer to a charges.\77\ Subsection (g) provides that, if a respondent 
admits or fails to deny any of the alleged violations a Hearing Panel 
may find that the violations admitted or not denied have been 
committed.\78\ Subsection (h) requires that in every instance where a 
respondent has requested a hearing on a charge that he or she denies, 
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).
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    \76\ The proposed regulations permit a SEF to adopt rules 
providing that the failure to request a hearing within the time 
prescribed in the notice, except for good cause, must be deemed a 
waiver of the right to a hearing and that the failure to answer or 
deny expressly a charge must be deemed to be an admission of such 
charge.
    \77\ Subsection (f) also permits a SEF, through its rules, to 
require 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.
    \78\ In addition, if a SEF adopts a rule concerning the 
admission or failure to deny charges pursuant to Proposed Sec.  
37.206(f), then Subsections (g)(1) through (g)(3) of the proposed 
regulation provide that: (1) The Hearing Panel must impose a 
sanction for each violation found to have been committed; (2) the 
SEF must promptly notify the respondent in writing of any sanction 
to be imposed and advise the respondent that they may request a 
hearing on such sanction within the period of time stated in the 
notice; and (3) the rules of the SEF may provide that if the 
respondent fails to request a hearing within the period of time 
stated in the notice, then the respondent will be deemed to have 
accepted the sanction.
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    Subsection (i) provides the procedures a SEF must follow when it 
settles a disciplinary case. The provision states that the rules of a 
SEF may permit a respondent to submit a written offer of settlement 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 the offer unless the respondent agrees. 
Subsection (i) requires a disciplinary panel that accepts a settlement 
offer to 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. 
Significantly, proposed Sec.  37.206(i)(3) also provides that if an 
offer of settlement is accepted without the agreement of a SEF's 
enforcement staff, the decision must carefully explain the panel's 
acceptance of the settlement.\79\
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    \79\ Subsection (i) allows 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.
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    Subsection (j) requires a SEF to adopt rules that provide certain 
minimum requirements for any hearing conducted pursuant to a notice of 
charges. In general, Subsections (j)(1)(i) through (j)(1)(vi) require 
that the SEF: (1) Provide a fair hearing; (2) permit respondents to 
examine evidence relied on by enforcement staff in presenting the 
notice of charges; (3) require enforcement and compliance staffs to be 
parties to the hearing and enforcement staff to present their case on 
those charges and sanctions that are the subject of the hearing; (4) 
permit respondents to appear personally at the hearing, to cross-
examine and call witnesses and to present evidence; (5) require that 
persons within its jurisdiction who are called as witnesses participate 
in the hearing and produce evidence; and (6) transcribe and retain a 
copy of the hearing. Additionally, subsection (j)(2) specifies 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.
    Subsection (k) details the procedures that a Hearing Panel must 
follow in rendering disciplinary decisions. The provision requires that 
all decisions include: (1) A notice of charges or a summary of the 
charges; (2) an 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 in the investigation report; (4) a statement 
of findings and conclusions with respect to each charge, and a careful 
explanation of the evidentiary and other bases for such findings and 
conclusions with respect to each charge; (5) an indication of each 
specific rule which the respondent was found to have violated; and (6) 
a declaration of any penalty imposed against the respondent, including 
the basis for such sanctions and the effective date of such sanctions.
    Subsection Proposed Sec.  37.206(l) provides the procedures that a 
SEF must follow in the event that the SEF's rules authorize an appeal 
of adverse decisions in all or in certain classes of cases.\80\ 
Notably, the proposed Sec.  requires a SEF that permits appeals by 
disciplinary respondents to also permit appeals by its enforcement 
staff. This provision reflects the Commission's belief that SEF 
enforcement staff must have the discretion to appeal disciplinary panel 
decisions that, for example, do not adequately sanction a respondent's 
violative conduct. Subsection (m) requires that each SEF establish 
rules setting forth when a decision rendered under this subsection C 
will become the final decision of the SEF.
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    \80\ For SEFs that permit appeals, the language in subsections 
(l)(1) through (l)(4) of proposed Sec.  37.206 generally require the 
SEF to: (1) Establish an appellate panel that is authorized to hear 
appeals; (2) ensure that the appellate panel composition is 
consistent with Sec.  40.9(c)(3)(iii) 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) except for good cause 
shown, the appeal or review must be conducted solely on the record 
before the Hearing Panel, the written exceptions field by the 
parties, and the oral or written arguments of the parties; and (4) 
promptly following the appeal or review proceeding, the board of 
appeals must issue a written decision and provide a copy to the 
respondent. The Commission notes that a respondent has certain 
rights of appeal to the Commission under Part 9 of the Commission's 
regulations.
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    Subsection (n) requires that every disciplinary sanction imposed by 
a SEF must be commensurate with the

[[Page 1227]]

violations committed and must be clearly sufficient to deter recidivism 
or similar violations by other market participants. Additionally, the 
proposed regulation requires that, in the event of demonstrated 
customer harm, any disciplinary sanction must include full customer 
restitution. In evaluating appropriate sanctions, the proposed 
regulation requires the SEF to take into account a respondent's 
disciplinary history.\81\
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    \81\ Proposed Sec.  37.203(f)(3) also requires that a copy of a 
member or market participant's disciplinary history be included in 
the compliance staff's investigation report.
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    Subsection (o) permits a SEF to adopt a summary fine schedule for 
violations of rules relating to timely submission of accurate records 
required for clearing or verifying each day's transactions. The 
proposed regulation makes clear that a SEF should issue no more than 
one warning letter in a rolling 12-month period for the same violation 
before sanctions are imposed. Additionally, the proposed regulation 
specifies that a summary fine schedule must provide for progressively 
larger fines for recurring violations. The Commission believes that 
these provisions will serve to discourage recidivist behavior.
    Finally, subsection (p) provides that a SEF may impose an immediate 
sanction upon a reasonable belief that such action is necessary to 
protect the best interest of the marketplace. The proposed regulation 
also provides that any emergency action taken by the SEF must be 
performed in accordance with certain procedural safeguards.

Request for Comment:

    The Commission seeks public comment on proposed Sec.  37.206.
     In particular, comments should address whether SEFs should 
be subject to the detailed disciplinary procedures proposed herein. The 
proposed disciplinary procedures emphasize procedural safeguards for 
respondents, including a clear separation between SEF personnel 
recommending the issuance of charges, review panels determining whether 
charges should be issued, and hearing panels adjudicating cases on the 
merits. Are these disciplinary procedures sufficient for SEFs? Or, 
should SEFs instead utilize a more streamlined disciplinary process 
that features, for example, a robust staff summary fine program rather 
than formal disciplinary hearings.
     Finally, given the significant financial resources of the 
ECPs conducting swap transactions on SEFs, should Commission 
regulations provide more detailed guidelines on the appropriate size of 
any financial penalties levied by SEFs for violative conduct? Should 
any such guidelines take cognizance of the financial resources of 
potential respondents?
h. Swaps Subject to Mandatory Clearing--Proposed Sec.  37.207
    Proposed Sec.  37.207 mandates that SEFs provide rules that require 
swap dealers or major swap participants, who trade a swap subject to 
the mandatory clearing requirement under Section 2(h)(1), to execute 
the transaction on either a DCM or a SEF. However, swap dealers or 
major swap participants are not required to execute such transactions 
if no DCM or SEF makes the swap available to trade.
3. Subpart D--Core Principle 3 (Swaps Not Readily Susceptible to 
Manipulation)
    Under Core Principle 3, Congress required that SEFs offer for 
trading swaps that are not readily susceptible to manipulation. The 
Commission notes that the statutory language of Core Principle 3 is 
substantively identical to the counterpart core principle under Section 
5(d)(3) of the CEA as applicable to DCMs. Historically, DCMs complied 
with the requirements of Section 5(d)(3) by using as guidance the 
provisions of Guideline No. 1, contained in Appendix A to Part 40. In a 
separate release, the Commission proposes certain revisions to the 
former Guideline No. 1, including: (i) Amending the provisions to 
include swap transactions, (ii) re-titling the guidance as 
``Demonstration of compliance that a contract is not readily 
susceptible to manipulation,'' and (iii) re-designating the guidance to 
be included under Appendix C to Part 38.\82\
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    \82\ See, supra note 10, DCM NPRM.
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    Accordingly, proposed Sec.  37.301 requires that, applicants and 
SEFs must provide to the Commission the information required under 
Appendix C to Part 38 for purposes of demonstrating to the Commission 
that their swap contracts are not readily susceptible to manipulation.
    Under Appendix B to Part 37, the guidance for compliance with Core 
Principle 3 focuses on the selection and construction of the price 
index on which the swaps' cash flows are based. If obtained from a 
private third-party, the company should be independent and reputable. 
Moreover, the third party should use a sound, well-documented 
methodology that protects the index from manipulation. If the SEF 
itself determines the price index, then it should take precautions to 
safeguard against attempts to artificially influence the index. In this 
regard, if the price index is based on a survey of cash market sources, 
then the SEF should maintain a list of such entities which all should 
be reputable sources with knowledge of the cash market. In addition, 
the sample of sources polled should be representative of the cash 
market, and the poll should be conducted at a time when trading in the 
cash market is active. The cash-settlement survey should include a 
minimum of four independent entities if such sources do not take 
positions in the commodity (e.g., if the survey list is comprised 
exclusively of brokers) or at least eight independent entities if such 
sources trade for their own accounts (e.g., if the survey list is 
comprised of dealers or commercial users).
4. Subpart E--Core Principle 4 (Monitoring of Trading and Trade 
Processing)
    Under Core Principle 4, Congress required that SEFs must take an 
active role in preventing manipulation, price distortion and 
disruptions of the delivery or cash settlement process. Accordingly, 
the proposed regulations under Subpart E of Part 37 clarify the related 
responsibilities for applicants and SEFs to monitor trading activities 
and prevent market disruptions.
a. General Requirements--Proposed Sec.  37.401
    Proposed Sec.  37.401 requires that applicants and SEFs must 
collect, monitor and evaluate data to detect and prevent manipulative 
activity. Proposed Sec.  37.401 also requires that applicants and SEFs 
have the ability to conduct real-time monitoring of trading and 
comprehensive and accurate trade reconstructions.
    As noted above in its discussion of the need for automated tools in 
connection with Core Principle 2 requirements, the Commission believes 
that it would be difficult, if not impossible, to monitor for market 
disruptions in markets with high transaction volume and a large number 
of trades unless the SEF has installed automated trading alerts to 
detect many types of potential violations of exchange or Commission 
rules. Accordingly, the Commission proposes in Sec.  37.401 to require 
that, where the SEF cannot reasonably demonstrate that its manual 
processes are effective in detecting and preventing abuses, the SEF 
must implement automated trading alerts to detect potential problems.

[[Page 1228]]

Request for Comment:

    The Commission seeks public comment on whether in any rule the 
Commission may adopt in this matter, SEFs should be required to monitor 
the extent of high frequency trading, and whether automated trading 
systems should include the ability to detect and flag high frequency 
trading anomalies.
b. Additional Requirements for Physical-Delivery Swaps--Proposed Sec.  
37.402
    For physical delivery swaps, proposed Sec.  37.402 requires that 
SEFs monitor each swap's terms and conditions as well as take 
meaningful corrective action to allow market participants to continue 
to use the market to make sound hedging decisions and for price 
discovery.
c. Additional Requirements for Cash-Settled Swaps--Proposed Sec.  
37.403
    Over the past several years, there has been a growth in markets 
that are linked, for example, where the settlement price of one market 
is linked to the prices established in another market. As a result, 
traders may have incentives to disrupt or manipulate prices in the 
reference market in order to influence the prices in the linked market. 
The Commission believes that in such situations SEFs must monitor 
trading in the market to which its swap is linked. Accordingly, 
proposed Sec.  37.403 requires that, where a swap is settled by 
reference to the price of an instrument traded in another venue the SEF 
must 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.
d. Ability To Obtain Information--Proposed Sec.  37.404
    To ensure that SEFs have the ability to properly assess the 
potential for price manipulation, price distortions, and the disruption 
of the delivery or cash-settlement process, proposed Sec.  37.404 
provides that SEFs require that traders in their market keep and make 
available records of their activity in underlying commodities and 
related derivatives markets and swaps.
e. Risk Controls for Trading--Proposed Sec.  37.405
    Proposed Sec.  37.405 requires that a SEF have effective risk 
controls to reduce the potential risk of market disruptions and ensure 
orderly market conditions. In the current futures markets, DCMs have 
implemented a variety of risk controls to avoid market disruptions 
through restrictions on order entry, including daily price limits, 
price/quantity bands, and trading pauses. In order to prevent market 
disruptions due to sudden volatile price movements, proposed Sec.  
37.405 requires SEFs to have in place effective risk controls, 
including but not limited to pauses and/or halts to trading in the 
event of extraordinary price movements that may result in distorted 
prices or trigger market disruptions. Such risk controls can, among 
other things, allow time for 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. Moreover, where a swap is linked to, or a 
substitute for, other swaps on the SEF or other trading venues, 
including where a swap is based on the level of an equity index, risk 
controls should be coordinated with those on the similar markets or 
trading venues, to the extent possible.
    The desirability of coordination of various risk controls, for 
example, ``circuit breakers'' in equities and their various derivatives 
including futures and options, recently has been the subject of 
discussions by regulators and the industry. The Commission believes 
that pauses and halts are effective risk management tools and must be 
implemented by SEFs to facilitate orderly markets. These basic risk 
controls also have proven to be effective and necessary in preventing 
market disruptions. The Commission recognizes 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. Such 
controls may include price collars or bands,\83\ maximum order size 
limits,\84\ stop loss order protections,\85\ kill buttons,\86\ and 
others.
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    \83\ Price bands would prevent clearly erroneous orders from 
entering the trading system, including ``fat finger'' errors, by 
automatically rejecting orders priced outside of a range of 
reasonability.
    \84\ Maximum order size limitations would prevent entry into the 
trading system of an order that exceeds a maximum quantity 
established by the SEF.
    \85\ Stop loss orders would be triggered if the market declines 
to a level pre-selected by the person entering the order. This 
mechanism would provide that when the market declines to the 
trader's pre-selected stop level for such an order, the order would 
become a limit order executable only down to a price within the 
range of reasonability permitted by the system, instead of becoming 
a market order.
    \86\ Kill buttons would give clearinghouses associated with a 
SEF the ability to delete open orders and quotes and reject entry of 
new orders or quotes in instances where a trader breaches its 
obligations with the clearinghouse. See FIA Market Access Risk 
Management Recommendations, p. 10 (April 2010).
---------------------------------------------------------------------------

Request for Comment:

    The Commission is considering mandating in this rulemaking risk 
controls that are appropriate and/or necessary. Accordingly, the 
Commission invites comments on the appropriateness of these and other 
controls that could supplement trading halts or pauses. The Commission 
also invites comments on the following additional questions:
     Which risk controls should be mandated and how?
     What types of pauses and halts are necessary and 
appropriate for particular market conditions?
     What other risk controls are appropriate or necessary to 
reduce the risk of market disruptions?
f. Trade Reconstruction--Proposed Sec.  37.406
    Under Core Principle 4, Congress required that SEFs have the 
ability to comprehensively and accurately reconstruct all trading on 
its facility. Proposed Sec.  37.406 sets forth this requirement, 
including the requirement that audit-trail data and reconstructions be 
made available to the Commission upon request.
g. Additional Rules Required--Proposed Sec.  37.407
    Proposed Sec.  37.407 requires SEFs to adopt and enforce any 
additional rules that it believes are necessary to comply with the 
requirements of Subpart E.
5. Subpart F--Core Principle 5 (Ability To Obtain Information)
    The proposed regulations under Subpart F require an applicant and a 
SEF to have the ability and authority, necessary Core Principle 5, to 
obtain necessary information to perform its obligations.
6. Subpart G--Core Principle 6 (Position Limits or Accountability)
    Under Core Principle 6, Congress required that SEFs adopt for each 
swap, as is necessary and appropriate, position limits or position 
accountability. In addition, Congress required that, for any contract 
that is subject to a Federal position limit under CEA Section 4a(a), 
the SEF shall set its position limits at a level no higher than the 
position limitation established by the Commission in its Part 151 
regulations. Proposed Sec.  37.601 requires that each SEF must comply 
with the requirements of Part 151 in order to be in compliance with 
Core Principle 6.

[[Page 1229]]

7. Subpart H--Core Principle 7 (Financial Integrity of Transactions)
    Proposed Sec.  37.700 sets out the financial integrity requirements 
for transactions on a SEF, as required under Core Principle 7. Under 
such core principle, a SEF must establish and enforce rules to ensure 
the financial integrity of swaps entered on or through the facilities 
of the SEF, including the clearing and settlement of the swaps. The 
requirements of proposed Sec.  37.700 depend, in part, on whether the 
swap is cleared.\87\
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    \87\ The Commission interprets the mandatory clearing 
requirement in Section 723(a)(3) of the Dodd-Frank Act to mean that 
a DCO must clear a swap for any DCM or SEF that requests such 
clearing services, so long as the DCO offers the swap. In addition, 
a DCO that is clearing particular swaps must also clear the same 
swaps when listed on DCMs or SEFs, whether affiliated or 
unaffiliated, on a nondiscriminatory basis.
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    Under proposed Sec.  37.702(a), a SEF must ensure that all its 
members meet the definition of ``eligible contract participant'' under 
CEA Section 1(a)(18). Under proposed Sec.  37.702(b), for swaps cleared 
by a DCO, a SEF must ensure that it has the capacity to route 
transactions to the DCO. With respect to swaps that are not required to 
be cleared, a SEF must impose additional requirements to ensure the 
financial integrity of the transaction,\88\ including requiring the 
transacting member to have entered into a credit arrangement for the 
transaction, demonstrate an ability to exchange collateral, and have 
appropriate credit filters in place. The Commission believes that these 
additional requirements are necessary in light of the fact that 
uncleared swaps will not have the risk management protections of a DCO.
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    \88\ Separately, if the SEF determines to allow swap 
transactions that are not cleared, the SEF must have provisions to 
determine that the swap meets the exemption to the clearing 
requirement provided under section 2(h)(7) of the CEA, as amended by 
the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Commission requests comment on whether these standards are 
appropriate financial integrity safeguards for SEFs. Specifically, the 
Commission solicits comment regarding how SEF members would demonstrate 
sufficient credit documentation and ability to exchange collateral.

Request for Comment:

    The Commission seeks public comment on the proposed rule, and 
specifically on the following questions:
     Whether SEFs should provide additional controls to permit 
FCMs to manage their risks? If so, what specific direct access controls 
and procedures should SEFs implement?
     Should such controls be mandatory?
8. Subpart I--Core Principle 8 (Emergency Authority)
    Under Core Principle 8, a SEF must provide for emergency 
situations. Based upon its experience with DCMs, and in recognition of 
the fact that individual SEFs may have different approaches to handling 
emergency action, proposed Sec.  37.801 refers to the guidance in 
Appendix B to Part 37 to demonstrate compliance with Core Principle 8.
    The guidance reflects the Commission's belief that there should be 
an increased emphasis on cross-market coordination of emergency actions 
and SEFs should have alternate lines of communication and approval 
procedures in order to address emergencies in real time.
    The Commission's experience has demonstrated that there are some 
specific requirements that at a minimum should be followed and these 
requirements are incorporated under the proposed guidance. 
Specifically, the SEF should have procedures and guidelines for 
decision-making and implementation of emergency intervention in the 
market. The SEF should have the authority to perform various actions, 
including without limitation: Liquidating or transferring open 
positions in the market,\89\ suspending or curtailing trading in any 
swap, and taking such market actions as the Commission may direct. In 
addition, the guidance notes that SEFs must 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.
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    \89\ In situations where a swap is traded on more than one 
platform, emergency action to liquidate or transfer open interest 
must be directed, or agreed to, by the Commission or Commission 
staff.
---------------------------------------------------------------------------

9. Subpart J--Core Principle 9 (Timely Publication of Trading 
Information)
    Under Core Principle 9, Congress required that SEFs make available 
to the public timely information on price, trading volume, and other 
trading data on swaps to the extent prescribed by the Commission. 
Congress also required a SEF to have the capability of electronically 
capturing trade information for those transactions that occur on the 
trading system or platform. These matters are addressed in separate 
releases.\90\ Proposed Sec.  37.901 requires that SEFs comply with the 
real-time swap reporting and swap reporting and recordkeeping 
requirements being separately proposed by the Commission.
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    \90\ See, supra note 10, DCM NPRM; 75 FR 76140 (December 7, 
2010); and 75 FR 76574 (December 8, 2010).
---------------------------------------------------------------------------

Request for Comment:

    In order to address all relevant considerations with respect to the 
reporting requirements of Core Principle 9, the Commission seeks 
general comments and asks the public to respond to the specific 
questions below.
     For interest rate swaps, because the term life on an 
interest rate swap can be one of a large number of possible periods 
along a yield curve, what would be an appropriate manner to display 
prices?
     Would prices for interest rate swaps be meaningful or 
misleading and why?
     If the prices are misleading, what useful information 
should be displayed at the end of the trading day?
     Please identify any other swap products that have similar 
price reporting issues and address how the prices for that product 
should be reported to provide a summary of the trading for that day.
10. Subpart K--Core Principle 10 (Recordkeeping and Reporting)
    Core Principle 10 establishes a three-part recordkeeping and 
reporting requirement applicable to all SEFs, which the Commission 
proposes to implement through proposed Sec. Sec.  37.1001-37.1003.\91\
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    \91\ CEA Section 5h(f)(10)(A) requires all SEFs to: Maintain 
records of all activities relating to the business of each SEF, 
including a complete audit trail, for a period of at least five 
years; report to the Commission, in a form and manner acceptable to 
the Commission, such information as the Commission determines to be 
necessary or appropriate; and keep records relating to swaps defined 
in CEA Section 1a(47)(A)(v) open to inspection and examination by 
the Securities and Exchange Commission. CEA Section 5h(f)(10)(B) 
requires the Commission to ``adopt data collection and reporting 
requirements for swap execution facilities that are comparable to 
corresponding requirements for derivatives clearing organizations 
and swap data repositories.'' The Commission's data standards are 
included in proposed rules in Part 45 of the Commission's 
regulations.
---------------------------------------------------------------------------

    Proposed Sec.  37.1001 largely codifies the statutory language of 
Core Principle 10. In addition, it clarifies that investigatory and 
disciplinary files are included in the records that a SEF must 
maintain, and requires that a SEF comply with the recordkeeping 
requirements of Sec.  1.31.\92\
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    \92\ The Commission notes that it has always considered audit 
trails and investigatory and disciplinary files as a part of the 
records which a DCM is required to maintain and which the Commission 
is permitted to request and to examine. In this respect, the 
proposed regulation merely codifies existing Commission practice.
---------------------------------------------------------------------------

    By incorporating Sec.  1.31, proposed Sec.  37.1001 effectively 
requires that SEF books and records be readily accessible for the first 
2 years of the minimum 5-

[[Page 1230]]

year statutory period and be open to inspection by any representatives 
of the Commission or the United States Department of Justice.\93\ The 
SEF, at its own expense, must promptly provide either a copy or the 
original books or records upon request.
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    \93\ Proposed Sec.  37.1001 also effectively incorporates Sec.  
1.31(b)'s description of the permissible methods of storing books 
and records. Consequently, a SEF may store its books and records as 
prescribed by Sec.  1.31(b)(1)(ii). Among other criteria, Sec.  
1.31(b)(1)(ii) defines electronic storage media as ``any digital 
storage medium or system that preserves the records exclusively in a 
non-rewritable, non-erasable format [and] verifies automatically the 
quality and accuracy of the storage media recording process * * *.'' 
SEFs must, at all times, have the facilities to immediately produce 
and be prepared to present legible hard-copy images of such records. 
Additionally, SEF's must keep only Commission-required records on 
the media, store a duplicate of the record at a separate location, 
and organize and maintain an accurate index of all information 
maintained on both the original and duplicate storage media. SEFs 
that use electronic storage media are also required to develop and 
maintain an audit system to track the initial entry of original or 
duplicate records and any subsequent changes made thereafter. 
Proposed Sec.  37.1001 also incorporates Sec. Sec.  1.31(c) and 
1.31(d), which expand upon the requirements established by proposed 
Sec.  37.1001. Section 1.31(c) requires that record-keepers who 
employ an electronic storage system certify with Commission that the 
system meets the requirements of an electronic storage media as 
defined in Sec.  1.31(b)(1)(ii). Section 1.31(d) states that trading 
cards, documents on which trade information is originally recorded 
in writing, certain written orders, and paper copies of certain 
electronically filed forms and reports with original signatures must 
be retained in hard-copy for the requisite time period. Finally, 
proposed Sec.  37.1001 also requires that SEFs comply with the 
recordkeeping requirements applicable to swaps in proposed Part 45.
---------------------------------------------------------------------------

    The statutory regime for SEFs established by the Dodd-Frank Act 
envisions ongoing Commission oversight of SEFs and their trading 
activity. Such oversight will resemble, in concept, the oversight 
already conducted by the Commission with respect to DCMs. Accordingly, 
proposed Sec.  37.1002 requires that SEFs report to the Commission any 
information necessary or appropriate for the Commission to perform its 
oversight duties. The proposed regulation does not articulate specific 
information that must be provided to the Commission; instead, it 
establishes the general requirement that SEFs must provide any relevant 
data requested by the Commission in a form and manner acceptable to the 
Commission.\94\
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    \94\ The Commission anticipates that the records it will 
routinely request will include, for example, daily trading records, 
board of directors' meeting minutes, investigatory and disciplinary 
files, information regarding resources allocated to compliance 
functions, and other records used in the Commission's trade practice 
surveillance program and rule enforcement review program.
---------------------------------------------------------------------------

    Proposed Sec.  37.1003 codifies Core Principle 10's statutory 
requirement that a SEF keep any records relating to security-based swap 
agreements defined in Section 1a(47)(A)(v) of the CEA open to 
inspection and examination by the Securities and Exchange Commission 
(``SEC'').\95\
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    \95\ CEA Section 5h(f)(10)(A)(iii).
---------------------------------------------------------------------------

11. Subpart L--Core Principle 11 (Antitrust Considerations)
    Core Principle 11 governs the antitrust obligations of SEFs.\96\ 
This SEF core principle is substantially similar to DCM Core Principle 
19.\97\ The Commission believes that the existing guidance applicable 
to DCM Core Principle 19 remains appropriate. Accordingly, the 
Commission proposes to codify the statutory text of Core Principle 11 
into proposed Sec.  37.1100. Additionally, proposed Sec.  37.1101 
refers applicants and SEFs to the guidance in Appendix B to Part 37 for 
purposes of demonstrating compliance with proposed Sec.  37.1100.
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    \96\ Part 38 contains guidance governing compliance with former 
Core Principle 18. 17 CFR part 38, App. B.
    \97\ Prior to the Dodd-Frank Act, the DCM core principle on 
antitrust considerations was numbered as DCM Core Principle 18.
---------------------------------------------------------------------------

12. Subpart M--Core Principle 12 (Conflicts of Interest)
    Core Principle 12 governs conflicts of interest. Like Core 
Principle 11, Core Principle 12 is substantially similar to both the 
DCM and the DCO conflicts of interest core principles, as amended by 
the Dodd-Frank Act.\98\ As a result, the Commission proposes to handle 
Core Principle 12 consistent with its handling of those DCM and DCO 
core principles. This release proposes to codify the statutory text of 
the core principle in proposed Sec.  37.1200. The applicable 
regulations implementing this core principle 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.'' \99\
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    \98\ DCM Core Principle 16 and DCO Core Principle P, both as 
amended by the Dodd-Frank Act.
    \99\ 75 FR 63732 (October 18, 2010).
---------------------------------------------------------------------------

13. Subpart N--Core Principle 13 (Financial Resources)
    Core Principle 13 requires that a SEF have adequate financial 
resources to discharge its responsibilities. In particular, SEFs must 
maintain financial resources sufficient to cover operating costs for a 
period of at least one year, calculated on a rolling basis.
a. General Rule
    Under proposed Sec.  37.1301(b), SEFs that also operate as DCOs are 
also subject to the financial resource requirements for DCOs in 
proposed Sec.  39.11. Proposed Sec.  37.1301(c) would require that SEFs 
maintain sufficient financial resources to cover operating costs for at 
least one year, calculated on a rolling basis--i.e., at all times. The 
one year period is required under the CEA. The Commission believes that 
a one-year timeframe would allow a SEF's business to wind down in an 
orderly fashion and should generally enhance the financial integrity of 
the markets.\100\
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    \100\ Some foreign regulatory authorities already have similar 
requirements for the equivalent entities they regulate. For example, 
the UK Financial Services Authority's (``FSA'') recognition 
requirements for UK recognized investment exchanges and UK 
recognized clearing houses (collectively, ``UK recognized bodies'') 
include the maintenance of financial resources sufficient to ensure 
that the UK recognized body would be able to complete an orderly 
closure or transfer of its business without being prevented from 
doing so by insolvency or lack of available funds. Section 2.3.7 of 
the FSA Recognition Requirements calls for a UK recognized body to 
have at all times liquid financial assets amounting to at least six 
months' operating costs and net capital of at least that amount.
---------------------------------------------------------------------------

    The one-year period also is consistent with established accounting 
standards, under which an entity's ability to continue as a going 
concern comes into question if there is evidence that the entity may be 
unable to continue to meet its obligations in the next 12 months 
without substantial disposition of assets outside the ordinary course 
of business, restructuring of debt, externally forced revisions of its 
operations, or similar actions.\101\
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    \101\ See American Institute of Certified Public Accountants 
Auditing Standards Board Statement of Auditing Standards No. 59, The 
Auditor's Consideration of an Entity's Ability to Continue as a 
Going Concern, as amended.
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b. Types of Financial Resources
    Under proposed Sec.  37.1302, financial resources available to SEFs 
to satisfy the applicable financial requirements would include the 
SEF's own capital (assets in excess of liabilities) and any other 
financial resource deemed acceptable by the Commission. A SEF would be 
able to request an informal interpretation from CFTC staff on whether 
or not a particular financial resource would be acceptable.

Request for Comment:

    The Commission invites commenters to recommend particular financial 
resources for inclusion in the final regulation.
c. Computation of Financial Resource Requirement
    Proposed Sec.  37.1303 would require that a SEF, at the end of each 
fiscal quarter, make a reasonable calculation of the financial 
resources it needs to meet the requirements of proposed

[[Page 1231]]

Sec.  37.1301. In the first instance, the SEF would have reasonable 
discretion in determining how to make this calculation, the Commission 
may require changes as appropriate.
d. Valuation of Financial Resources
    Proposed Sec.  37.1304 would require that SEFs, no less frequently 
than quarterly, calculate the current market value of each financial 
resource used to meet their obligations under these proposed 
regulations. Additionally, SEFs would have to perform the valuation at 
other times as appropriate. This provision 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. When valuing a 
financial resource, a SEF would be required to reduce the value, as 
appropriate, to reflect any market or credit risk specific to that 
particular resource, i.e., apply a haircut.\102\
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    \102\ The Commission would permit each SEF to exercise its 
discretion in determining the applicable haircuts. However, such 
haircuts are subject to Commission review and must be acceptable to 
the Commission.
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e. Liquidity of Financial Resources
    Proposed Sec.  37.1305 would require that SEFs maintain 
unencumbered liquid financial assets, such as cash or highly liquid 
securities, equal to at least six months' operating costs. The 
Commission believes that having six months' worth of unencumbered 
liquid financial assets would give 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. If a SEF does not have 
six months' worth of unencumbered liquid financial assets, it would be 
allowed to use a committed line of credit or similar facility to 
satisfy this requirement.
    The Commission notes that a committed line of credit or similar 
facility is not listed in proposed Sec.  37.1302 as a financial 
resource available to a SEF to satisfy the requirements of proposed 
Sec.  37.1301. A SEF may only use such resources to meet the liquidity 
requirements of proposed Sec.  37.1305.
f. Reporting Requirements
    Under proposed Sec.  37.1306, at the end of each fiscal quarter, or 
at any time upon Commission request, SEFs would be required to report 
to the Commission: (i) The amount of financial resources necessary to 
meet the requirements set forth in the regulation; and (ii) the value 
of each financial resource available to meet those requirements. A SEF 
would also have to provide the Commission with a financial statement, 
including the balance sheet, income statement, and statement of cash 
flows, of the SEF or of its parent company, as appropriate.
14. Subpart O--Core Principle 14 (System Safeguards)
    Core Principle 14 requires that SEFs: (1) Establish and maintain a 
program of risk 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 (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. Proposed Sec.  37.1401 would 
establish system safeguards requirements for all SEFs, pursuant to Core 
Principle 14.
    The proposed rule would require 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.
    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 the trading of swaps. 
Sophisticated computer systems will be crucial to a SEF's ability to 
meet its obligations and responsibilities. SEF 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.
15. Subpart P--Core Principle 15 (Designation of Chief Compliance 
Officer)
    Section 5h(f)(15) of the CEA, as added by Section 733 of the Dodd-
Frank Act, creates an internal regulatory framework for all SEFs, with 
the position of chief compliance officer (``CCO'') serving as a focal 
point for compliance with the CEA and applicable Commission 
regulations. The four-part structure of Section 5h(f)(15) requires, 
first, that every SEF designate an individual to serve as CCO. Second, 
it enumerates specific duties for CCOs and establishes their 
responsibilities within a SEF. Third, it requires CCOs to design the 
procedures establishing the handling, management response, remediation, 
retesting, and closing of noncompliance issues. Fourth, it outlines the 
requirements of a mandatory annual report from SEFs to the Commission, 
which must be prepared and signed by a SEF's CCO. The Commission 
proposes to implement Section 5h(f)(15) of the CEA through proposed 
Sec.  37.1501, which further develops the already robust CCO 
requirements enacted by the Dodd-Frank Act. Section 5h(f)(15) of the 
CEA and proposed Sec.  37.1501 are summarized below.
    The first provision of Section 5h(f)(15)-5h(f)(15)(A)--provides 
only for the self-explanatory requirement that each SEF designate an 
individual to serve as its CCO. The second provision of Section 
5h(f)(15) offers a detailed description of a CCO's role within a SEF. 
Specifically, Section 5h(f)(15)(B) includes six enumerated duties 
incumbent upon all CCOs, and thereby outlines the internal regulatory 
structure of a SEF as contemplated by the Dodd-Frank Act. The 
enumerated duties of CCOs include: (1) Reporting directly to the SEF's 
board of directors or to its senior officer; (2) reviewing an SEF's 
compliance with the requirements and core principles described in 
Section 5h; (3) resolving any conflicts of interest that may arise, in 
consultation with the board of directors or the senior officer of the 
SEF; (4) establishing and administering any policy or procedure that is 
required to be established by a SEF pursuant to Section 5h; (5) 
ensuring compliance with the CEA, including rules prescribed by the 
Commission pursuant to Section 5h; and (6) establishing procedures for 
the remediation of noncompliance issues identified by the CCO. The 
third provision of Section 5h(f)(15) provides that the CCO in 
establishing and following appropriate procedures shall design such 
procedures for the handling, management response, remediation, 
retesting, and closing of noncompliance issues.
    Finally, the fourth provision of Section 5h(f)(15)-5h(f)(15)(D)--
requires CCOs to prepare and sign annual compliance reports on behalf 
of their

[[Page 1232]]

SEFs. The annual compliance reports must describe a SEF's compliance 
with the CEA and Commission regulations. They must also describe the 
policies and procedures of the SEF, including the code of ethics and 
conflict of interest policies. In addition, the annual compliance 
reports must include ``a certification that, under penalty of law, the 
report is accurate and complete.'' The annual compliance report must be 
furnished to the Commission as it may prescribe.
    Proposed subpart P develops each of these statutory provisions in 
greater detail and grants CCOs the regulatory authority necessary to 
fulfill responsibilities in each regard.
a. Definition of Board of Directors--Proposed Sec.  37.1501(a)
    Proposed Sec.  37.1501(a) defines ``board of directors'' as ``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.'' The proposed definition reflects the various forms of 
business associations which a SEF could conceivably take, including 
forms which do not include a corporate board of directors. It also 
reflects the flexibility in Section 733 of the Dodd-Frank Act, which 
refers, for example, to ``a body performing a function similar to a 
board'' in discussing the duties of a CCO pursuant to Section 
5h(f)(15)(B)(iii) of the CEA.

Request for Comment:

    The Commission requests comment on the following:
     Should the Commission develop additional rules around the 
types of bodies which may perform board-like functions at a SEF, 
depending on their business form?
     Should the proposed definition of board of directors 
appropriately address issues related to parent companies, subsidiaries, 
affiliates, and SEFs located in foreign jurisdictions? Does the 
proposed rule allow for sufficient flexibility with regard to a SEF's 
business structure?
b. Designation and Qualifications of Chief Compliance Officer--Proposed 
Sec.  37.1501(b)
    Proposed Sec.  37.1501(b)(1) requires a SEF to establish the 
position of CCO, designate an individual to serve in that capacity and 
provide that individual with the authority and resources to develop and 
enforce policies and procedures necessary to fulfill the duties set 
forth for CCOs in the Dodd-Frank Act and Commission regulations. In 
addition, proposed Sec.  37.1501(b)(1) provides that CCOs must have 
supervisory authority over all staff acting in furtherance of the CCO's 
statutory and regulatory obligations. In short, proposed Sec.  
37.1501(b)(1) establishes CCOs as the focal point of a SEF's regulatory 
compliance functions.
    Proposed Sec.  37.1501(b)(2) details minimum competency standards 
for CCOs. It requires that CCOs have the background and skills 
necessary to fulfill the responsibilities of the position, and 
prohibits anyone who would be disqualified from registration under 
Sections 8a(2) or 8a(3) of the CEA from serving as a CCO. Although the 
CCO would not be required to register with the Commission, as the 
primary individual with responsibility for ensuring a SEF's legal 
compliance, the Commission believes that CCOs should meet the same 
standard as those individuals who are required to register, as set 
forth in the list of statutory disqualifications under Sections 8a(2) 
and (3) of the CEA. These standards largely consist of a high degree of 
responsibility and requirements relating to integrity and honesty in 
financial and business dealings. Section 37.1501(b)(2) also requires 
that a CCO not serve as general counsel of a SEF. This prohibition 
reflects the Commission's belief that granting these dual roles to a 
single individual is incompatible with effective regulation and self-
regulation.\103\
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    \103\ As conceived by the Commission, SEF CCOs have overall 
responsibility for SEFs' compliance programs. CCOs must be neutral 
fact-finders, and must be able to act in the interest of effective 
compliance regardless of the persons, entities, or conduct that may 
be the subject of investigation. In contrast, an entity's general 
counsel serves as the legal counsel and defender of a company and 
seeks to avoid or negate related legal risks. A second basis for the 
separation of the general counsel and CCO roles is the Commission's 
determination that an individual acting as CCO should not be in a 
position to assert attorney-client privilege against the Commission. 
If a SEF's CCO were also its general counsel, much of the 
information about its compliance program could potentially be 
protected from third-party review, including the Commission's, under 
the shroud of attorney-client privilege. While there may be 
circumstances where the attorney-client privilege could be asserted 
by a SEF, the Commission believes that such circumstances do not 
include the areas of responsibility assigned to CCOs by the CEA or 
Commission regulations.
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Request for Comment:

    The Commission is seeking comment on whether additional limitations 
should be placed on persons who may be designated as a CCO.
     The Commission requests comment on whether the provisions 
of proposed Sec.  37.1501(b) are sufficient to ensure that a CCO has 
the authority and resources necessary to fulfill his or her statutory 
and regulatory obligations.
     The Commission also requests comment regarding the 
qualifications that should be required of a CCO, and whether the 
requirements expressed in proposed Sec.  37.1501(b) are sufficient.
     Should there be additional restrictions placed on who is 
qualified to be designated as a CCO? The Commission requests comment on 
whether restricting a CCO from serving as the General Counsel or other 
attorney within the legal department of a SEF would sufficiently 
address conflict of interest concerns?
c. Appointment, Supervision, and Removal of Chief Compliance Officer--
Proposed Sec.  37.1501(c)
    Taken together, proposed Sec. Sec.  37.1501(c)(1), 37.1501(c)(2), 
and 37.1501(c)(3) provide the supervisory regime applicable to CCOs. 
Proposed Sec.  37.1501(c) requires that a CCO be appointed by a 
majority of the SEF's board of directors or senior officer, and that a 
majority of the board or senior officer be responsible for approving 
the CCO's compensation. A SEF must notify the Commission within two 
business days of appointing a new CCO. The proposed regulation also 
requires the CCO to meet at least annually with the board of directors 
to discuss the effectiveness of the CCO's administration of the 
compliance policies adopted by the registrant. The meeting or meetings 
would create an opportunity for a CCO and the directors to speak freely 
about any sensitive issues of concern to any of them, including any 
reservations about the cooperativeness or compliance practices of the 
registrant's management. The Commission's governance proposals require 
that each SEF's board of directors include a board-level regulatory 
oversight committee (``ROC'') consisting exclusively of public 
directors.\104\ The Commission believes

[[Page 1233]]

that ROCs will help to mitigate potential conflicts of interest within 
a SEF by introducing an independent perspective to board 
deliberations.\105\ The Commission also believes that both CCOs and 
ROCs will be strengthened in their regulatory work and independence 
through close cooperation and coordination. Although a CCO is not 
required to report to his or her ROC, proposed Sec.  37.1501(c)(1) 
provides that a CCO must meet with the ROC quarterly to discuss matters 
of mutual concern and share information. These meetings will create an 
opportunity for a CCO and the ROC to speak freely about potentially 
sensitive issues, including any reservations by the CCO regarding the 
SEF's management. They will also facilitate the ROC's oversight 
responsibilities, and allow the CCO to seek assistance and 
institutional support from the ROC as necessary.
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    \104\ Proposed Sec.  37.1501(a) defines board of directors for 
purposes of subpart P as follows: ``the board of directors or board 
of governors of a swap execution facility, or equivalent governing 
body of a swap execution facility or of an entity operating a swap 
execution facility.'' The proposed definition reflects the various 
forms of business associations which a SEF could take, including 
forms which do not include a corporate board of directors. With 
respect to boards of directors and ROCs, the Commission notes that 
in a separately proposed series of regulations governing conflicts 
of interest within SEFs, DCMs, and DCOs, the Commission proposes a 
number of governance measures that impact the proposed regulations 
for CCOs. First, proposed Sec.  40.9(b)(1)(i) requires a SEF's board 
of directors to be composed of at least 35%, but no less than two, 
public directors. Second, proposed Sec.  40.9(b)(2) prohibits a SEF 
from ``permit[ing] itself to be operated by any entity'' that does 
not adhere to the board composition requirements of 40.9(b)(1)(i). 
Third, proposed Sec.  37.19(b)(3) requires a SEF to have a board-
level ROC consisting exclusively of public directors.
    \105\ See proposed Sec.  37.19(b)(1) for a description of a 
ROC's role in overseeing the performance of a CCO and effectiveness, 
efficiency, and independence of a SEF's regulatory and self-
regulatory programs.
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    Finally, proposed Sec.  37.1501(c)(1) also provides that the senior 
officer of a SEF may assume responsibility for appointing the CCO and 
approving his or her compensation.
    Proposed Sec.  37.1501(c)(2) addresses routine oversight of a SEF's 
CCO. It allows a SEF with a board of directors to grant oversight 
authority to either its board or to its senior officer. The proposed 
regulation is modeled on the terms of Section 5h(f)(15)(B)(i) of the 
CEA, which requires a CCO to ``report directly to the board or to the 
senior officer of the facility.''

Request for Comment:

    The Commission requests comment regarding the appropriate reporting 
relationship for the CCO of a SEF that has both a senior officer and a 
board of directors.
     In such cases, should a CCO report to the SEF's board 
rather than to its senior officer?
     What potential conflicts of interest might arise if a CCO 
reports to the senior officer rather than to the board, and how might 
those conflicts be mitigated?
     In addition, the Commission requests comment regarding 
whether ``senior officer'' of a SEF should be a defined term, and if 
so, how the term should be defined.
d. Removal of CCO--Proposed Sec.  37.1501(c)(3)
    Proposed Sec.  37.1501(c)(3) requires approval of a majority of an 
SDR's board of directors to remove a CCO. The Commission believes that 
these removal provisions will help insulate CCOs and their decision-
making from day-to-day commercial pressures that they may otherwise 
experience. If a SEF does not have a board, the proposed regulation 
provides that the CCO may be removed by its senior officer. Proposed 
Sec.  37.1501(c)(3) also requires an SDR to notify the Commission in 
writing within two business days of the removal or voluntary departure 
of its CCO by providing a statement describing the circumstances 
surrounding his or her departure.\106\ The Commission believes that 
this provision will help protect CCOs from undue influence or 
retaliatory termination by the board or the senior officer of the SEF.
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    \106\ Upon the departure of a CCO, proposed Sec.  37.1501(c)(3) 
requires a SEF to appoint an interim CCO immediately and a permanent 
replacement as soon as practicable.
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    Proposed Sec. Sec.  37.1501(c)(1) and 37.1501(c)(3) seek to provide 
a SEF's CCO with a measure of independence from management in the 
performance of his or her duties, and to ensure that such duties are 
executed in the most effective and impartial manner possible.

Request for Comment:

    The Commission requests comment on any additional measures that 
should be required to adequately protect CCOs from undue influence in 
the performance of their duties. The Commission is particularly 
interested in how it might offer such protection to a CCO who reports 
to his or her senior officer, either at the SEF's choosing or because 
the SEF does not have a board of directors. In addition, the Commission 
also requests comment on whether the provision that would require a 
majority of a board of directors to remove the CCO is sufficiently 
specific.
e. Duties of the Chief Compliance Officer--Proposed Sec.  37.1501(d)
    Proposed Sec.  37.1501(d) details the duties of a CCO, as well as 
his or her authority within a SEF. The proposed regulation codifies and 
expands upon the CCO duties already set forth in Section 5h(f)(15)(B) 
of the CEA. These duties include overseeing and reviewing compliance 
with the CEA and Commission regulations, as well as resolving, in 
consultation with the board of directors or the senior officer, any 
conflicts of interest that may arise. The proposed regulation also 
lists a number of potential conflicts that may confront a CCO. The list 
of conflicts of interest indicates the types of conflicts that the 
Commission believes a SEF's CCOs should be aware of, but it is not 
exhaustive.
    Proposed Sec.  37.1501(d) also requires that the CCO establish and 
administer a written code of ethics and policies and procedures 
designed to prevent violations of the CEA and Commission regulations. 
Section 37.1501(d) also requires that a CCO establish and administer 
written policies and procedures, including a ``compliance manual,'' 
designed to prevent violations of the CEA and Commission 
regulations.\107\
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    \107\ By ``compliance manual,'' the Commission means a detailed 
internal handbook explaining to SEF staff the resources and 
procedures that they are to use in monitoring trading, conducting 
investigations, documenting their work, and making findings and 
recommendations to supervisory staff regarding trading in any swap 
or other conduct by SEF members and market participants that is 
subject to SEF rules. The Commission believes that such written 
documentation will serve as a useful guide for the SEF's management 
and staff. It will also help the Commission evaluate the SEF's 
compliance and adherence to its own internal standards.
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    The Commission believes that such written documentation will serve 
as a useful guide for the SEF's management and staff, as well as for 
swap participants who will be trading on the SEF. It will also help the 
Commission to evaluate the SEF's compliance and adherence to its own 
internal standards. Finally, proposed Sec.  37.1501(d) requires that a 
CCO establish and follow procedures for the remediation and closing of 
any noncompliance issues that are identified. To assist the CCO in 
meeting this responsibility, proposed Sec.  37.1501(b)(1), summarized 
above, grants a CCO oversight authority over all compliance functions 
and staff acting in furtherance of those compliance functions. The 
CCO's authority would also extend to any activities performed by the 
SEF to verify that other entities are in compliance with applicable 
laws and regulations, such as the verification of the timeliness of 
reporting certain swap data, pursuant to proposed Sec.  37.901. The 
Commission recognizes that the staff that assists a CCO may not be 
dedicated to the CCO full-time; however, the proposed regulation would 
ensure that a CCO has authority over any staff and resources while they 
are acting in furtherance of compliance functions.
    Section 37.1501(d), for example, reflects the statutory text of the 
Dodd-Frank Act by requiring that a CCO review and ensure a SEF's 
compliance

[[Page 1234]]

with the CEA and Commission regulations. It also reflects a CCO's 
responsibilities with respect to the regulation of members and market 
participants utilizing a SEF's trading platform. In this regard, 
Section 37.1501(d)(8) requires that a CCO supervise a SEF'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; and audits, 
examinations, and other regulatory responsibilities with respect to 
members and market participants. Similarly, Section 37.1501(d)(9) 
requires that a CCO supervise the effectiveness and sufficiency of any 
regulatory services provided to the SEF by a registered futures 
association or other registered entity in accordance with Sec.  
37.204.\108\
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    \108\ See proposed Sec.  37.204 (governing a SEF's use of third-
party regulatory service providers and its duty to supervise such 
providers and any services received).
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Request for Comment:

    The Commission requests comment regarding proposed Sec.  
37.1501(d). Comments should address any additional CCO duties which the 
Commission should include in the proposed regulation. In addition, they 
should specifically address a CCO's role in managing conflicts of 
interest within a SEF, the types of conflicts which commenters believe 
might arise within a SEF, and how and by whom those conflicts should be 
resolved.
f. Preparation and Submission of Annual Compliance Report--Proposed 
Sec. Sec.  37.1501(e) and 37.1501(f)
    Section 5h(f)(15)(D) of the CEA requires a CCO to prepare an annual 
compliance report. As discussed above, the Commission believes that 
this annual compliance report should give the Commission a complete and 
accurate picture of a SEF's compliance program. Proposed Sec.  
37.1501(e) details the information that must be included in the annual 
compliance report. The report must include: (i) A description of the 
SEF's written policies and procedures, code of ethics and conflicts of 
interest policies; (ii) a detailed review of the SEF compliance with 
Section 5h of the CEA, including an assessment by the CCO of the 
effectiveness of the SEF's policies and procedures in ensuring 
compliance with Section 5h of the CEA and a discussion of areas for 
improvement; (iii) a description of any material changes to the 
policies and procedures that were made to these since the last annual 
compliance report; (iv) a description of the financial, managerial, 
operational, and staffing resources set aside for the SEF's compliance 
program, including a description of the SEF's compliance program, 
describing resources set aside for the SEF's self-regulatory 
responsibilities. An annual compliance report must also provide: a 
detailed description and review of the SEF's self-regulatory program, 
which includes a description of staff associated with self-regulation, 
a catalogue of investigations and disciplinary actions taken, and a 
review of the performance of disciplinary committees and panels; (v) a 
description of any material compliance matters, including instances of 
noncompliance, that were identified in the year prior to the filing of 
the report; and (vi) any objections to the annual compliance report by 
the board or senior officer of the SEF. In addition to the above 
information, proposed Sec.  37.1501(e) also requires the annual report 
to include a certification by the CCO that, under penalty of law, the 
compliance report is accurate and complete.
    Proposed Sec.  37.1501(f)(1) sets forth the procedures for the 
review of the annual compliance report by the board of directors of the 
SEF or senior officer, prior to submission to the Commission. While the 
board or senior officer has a chance to review the annual compliance 
report before submission, the report is not subject to their approval. 
Proposed Sec.  37.1501(f)(1) explicitly prohibits the board or senior 
officer from forcing the CCO to make any material changes to the 
report. The purpose of this review is to permit the members of the 
board or the senior officer to provide the Commission with any 
objections they might have to the report. The Commission believes that 
the prohibition against the board and senior officer making changes to 
the annual compliance report will allow the CCO to make a complete and 
accurate assessment of the SEF's compliance program.
    Proposed Sec.  37.1501(f)(2) describes the process for submission 
of the report to the Commission. The proposed regulation requires that 
the annual compliance report be electronically provided to the 
Commission not more than 60 days after the end of the calendar year. If 
a CCO determines that an annual compliance report filed with the 
Commission has a material error or if material non-compliance is 
identified after filing, proposed Sec.  37.1501(f)(3) would require a 
SEF to promptly file an amended report. This amended report must also 
include the certification by the CCO as to the accuracy and 
completeness made in the initial submission of the report. If a CCO is 
unable to file an annual compliance report within 60 days of the end of 
the calendar year, proposed Sec.  37.1501(f)(4) would permit a CCO to 
request the Commission to grant an extension of time to file its 
compliance report based on substantial undue hardship. Extensions for 
the filing deadline would be granted at the discretion of the 
Commission. Additionally, to protect the trade secrets of the SEF and 
the security of the data held by the SEF, the proposed regulation 
requires that annual compliance reports filed pursuant to Sec.  37.1501 
be treated as exempt from mandatory public disclosure for purposes of 
FOIA and the Sunshine Act and parts 145 and 147 of Commission 
regulations.

Request for Comment:

    The Commission requests comment on its proposed regulations 
regarding the preparation and submission of a SEF's annual compliance 
report.
     Should the annual compliance report contain additional 
content beyond what is proposed in Sec.  37.1501(e)? Are additional 
provisions necessary to ensure that a SEF's board of directors cannot 
adversely influence the content of an annual compliance report as 
drafted by the CCO?
     In the alternative, are additional provisions necessary to 
ensure that individual directors or other SEF employees have an 
adequate opportunity to register any concerns or objections they might 
have to the contents of an annual compliance report?
    The Commission also requests comment relating to insulating a SEF's 
CCO from undue influence or coercion.
     Should the Commission adopt a regulation that prohibits an 
officer, director or employee of the SEF or related person to coerce, 
manipulate, mislead, or fraudulently influence the CCO in performing 
his or her duties?
     Is it necessary to adopt regulations to address potential 
conflicts between and among a SEF's compliance, commercial, and 
ownership interests?
     If so, what should such regulations entail, and what 
specific conflicts of interest should they address?
g. Recordkeeping--Proposed Sec.  37.1501(g)
    Proposed Sec.  37.1501(g) details SEFs' recordkeeping requirements 
for records relating to a CCO's areas of responsibility. This proposed 
regulation requires a SEF to maintain: (i) A copy of its written 
policies and procedures,

[[Page 1235]]

including its code of ethics and conflicts of interest policies; (ii) 
copies of all materials created in furtherance of the chief compliance 
officer's self-regulatory duties, including records of any 
investigations or disciplinary actions taken by the SEF; (iii) copies 
of all materials, including written reports provided to the board of 
directors in connection with review of the annual report, as well as 
the board minutes or other similar written records, that record the 
submission of the annual compliance report to an SEF's board of 
directors or its senior officer; and (iv) any other records relevant to 
an SEF's annual report. The records required to be maintained pursuant 
to this section are designed to provide Commission staff with a basis 
to determine whether a SEF has complied with the CEA and applicable 
Commission regulations. The Commission also wants to preserve its 
ability to reconstruct why certain information was included or excluded 
in an annual report, in the event that such reconstruction becomes 
necessary under a future audit or investigation.
    The SEF would be required to maintain these records in accordance 
with Sec.  1.31 of the Commission's regulations. Following Sec.  1.31, 
all records must be kept for a period of five years.

Request for Comment:

    The Commission requests comment regarding whether the requirements 
of proposed Sec.  37.1501(g) are sufficient to create a complete and 
easily auditable record of a board of directors' or senior officer's 
review of an annual compliance report to ensure that the report, as 
drafted by the CCO, was not altered.

III. Effective Date and Transition Period

    The statutory deadline for final regulations is July 15, 2011. 
Final regulations may become effective sixty (60) days after their 
publication in the Federal Register, but no earlier than July 15, 2011. 
The Commission is proposing that the effective date for the proposed 
regulations be 90 days after publication of final regulations in the 
Federal Register. The Commission believes that the effective date would 
be appropriate to allow potential SEFs and market participants time to 
adapt to the new regulatory regime for the trading of swaps in an 
efficient and orderly manner. In addition, the Commission believes that 
this would give any entities then operating a marketplace for the 
execution or trading of swaps adequate time to submit a SEF application 
and meet the conditions to receive relief under the grandfather 
provisions.

Request for Comment:

    The Commission requests comment on whether the proposed effective 
date is appropriate and, if not, the Commission further requests 
comment on possible alternative effective dates and the basis for any 
such alternative dates.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \109\ requires Federal 
agencies, in promulgating regulations, to consider the impact of those 
regulations on small businesses. 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.\110\ In its previous determinations, the 
Commission has concluded that DCMs, derivatives transaction execution 
facilities (``DTEFs''), ECMs, EBOTs and DCOs are not small entities for 
the purpose of the RFA.\111\
---------------------------------------------------------------------------

    \109\ 5 U.S.C. 601 et seq.
    \110\ 47 FR 18618-21 (Apr. 30, 1982).
    \111\ 47 FR 18618, 18619 (April 30, 1982) discussing contract 
markets; 66 FR 42256, 42268 (August 10, 2001) discussing derivatives 
transaction execution facilities, exempt commercial markets and 
exempt boards of trade; and 66 FR 45604, 45609 (August 29, 2001) 
discussing DCOs.
---------------------------------------------------------------------------

    While SEFs are new entities to be regulated by the Commission 
pursuant to the Dodd-Frank Act,\112\ in a recent rulemaking 
proposal,\113\ the Commission proposed that SEFs should not be 
considered as small entities for the purpose of the RFA. The Dodd-Frank 
Act defines a SEF to mean ``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.'' \114\ In its 
recent rulemaking, the Commission proposed that SEFs not be considered 
to be ``small entities'' for essentially the same reasons that DCMs and 
DCOs have previously been determined not to be small entities. These 
reasons include the fact that the Commission designates a DCM or 
registers a DCO only when it meets specific criteria including 
expenditure of sufficient resources to establish and maintain adequate 
self-regulatory programs. Likewise, the Commission will register an 
entity as a SEF only after it has met specific criteria including the 
expenditure of sufficient resources to establish and maintain an 
adequate self-regulatory program. In addition, once registered, a SEF 
will be required to comply with the additional requirements set forth 
in the final form of this proposed Part 37 rulemaking. In addition, the 
Commission proposes that SEFs should not be considered small entities 
based on, among other things, the central role SEFs will play in the 
national regulatory scheme overseeing the trading of swaps. Not only 
will SEFs play a vital role in the national economy, but they will be 
subject to Commission oversight with statutory duties to enforce the 
regulations adopted by their own governing bodies.
---------------------------------------------------------------------------

    \112\ Dodd Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (2010).
    \113\ 75 FR 63745-46 (October 18, 2010).
    \114\ See CEA Section 1a(50). The Commission anticipates 
proposing regulations that would further specify those entities that 
must register as a SEF. The Commission does not believe that such 
proposals would alter its determination that a SEF is not a ``small 
entity'' for purposes of the RFA.
---------------------------------------------------------------------------

    Accordingly, the Commission does not expect the regulations, as 
proposed herein, to have a significant economic impact on a substantial 
number of small entities. Therefore, the Chairman, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities. The Commission invites the public 
to comment on whether SEFs covered by these rules should be considered 
small entities for purposes of the RFA.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \115\ 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. This proposed rulemaking will result in new 
collection of information requirements within the meaning of the PRA. 
The Commission therefore is submitting this proposal to the Office of 
Management and Budget (OMB) for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The title for this collection of information 
is ``Part 37--Swap Execution Facilities'' (OMB control number 3038-
NEW). If adopted, responses to this collection of information would be 
mandatory. The Commission will protect proprietary

[[Page 1236]]

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.'' \116\ The Commission is also required to protect certain 
information contained in a government system of records according to 
the Privacy Act of 1974.\117\
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    \115\ 44 U.S.C. 3501 et seq.
    \116\ 7 U.S.C. 12(a)(1).
    \117\ 5 U.S.C. 552a.
---------------------------------------------------------------------------

1. Collection of Information--Regulations Relating to Part 37, Swap 
Execution Facilities
    The proposed regulations require each respondent to file 
information with the Commission. For instance, SEFs must file 
applications with the Commission for registration pursuant to Sec.  
37.3. SEFs must either request approval with, or certify to, the 
Commission rules and products, pursuant to Sec.  37.4. SEFs must 
disclose information related to prices, trading volume, and other 
trading data on swaps pursuant to Core Principle 9 (Timely Publication 
of Trading Information).
    Commission staff has previously estimated hourly burdens for DCMs 
and DTEFs pursuant to the Commodity Futures Modernization Act of 2000 
(``CFMA'').\118\ More recently, Commission staff estimated hourly 
burdens for ECMs with significant price discovery contracts 
(``SPDCs''). While the Commission has no way of knowing the exact 
hourly burden upon a registered entity prior to implementation of the 
regulations governing that registered entity, staff believes the 
estimated burden for a SEF would be within the range of previously 
estimated hours of burden for the above registered entities. Those 
hourly burdens are noted below:
---------------------------------------------------------------------------

    \118\ Appendix E of Public Law 106-554, 114 Stat. 2763 (2000).
---------------------------------------------------------------------------

    Initial estimate of DCM's annual burden \119\: 300 hours per DCM.
---------------------------------------------------------------------------

    \119\ 66 FR 38992 (June 22, 2000).
---------------------------------------------------------------------------

    Estimate of DCM's annual burden as of 2006 \120\: 370 hours per 
DCM.
---------------------------------------------------------------------------

    \120\ 71 FR 38748 (July 7, 2006).
---------------------------------------------------------------------------

    Current estimate of DCM's annual burden \121\: 440 hours per DCM.
---------------------------------------------------------------------------

    \121\ See, supra note 10, DCM NPRM.
---------------------------------------------------------------------------

    Initial estimate of DTEF's annual burden \122\: 200 hours per DTEF.
---------------------------------------------------------------------------

    \122\ 65 FR 38993 (June 22, 2000).
---------------------------------------------------------------------------

    Initial estimate of ECM's with SPDCs annual burden \123\: 233 hours 
per ECM.
---------------------------------------------------------------------------

    \123\ 73 FR 75901 (December 12, 2008).
---------------------------------------------------------------------------

    Based on the proposed regulations, Commission staff believes that a 
SEF will have more reporting responsibilities than an ECM with a SPDC 
and a DTEF, but fewer reporting hours than a DCM (as most recently 
calculated).\124\ Based on its experience with administering registered 
entities' submission requirements since implementation of the CFMA, 
Commission staff estimates an annual reporting burden for SEFs to be an 
average of the above noted estimates for DCMs, DTEFs and ECMs with 
SPDCs.
---------------------------------------------------------------------------

    \124\ ECMs with SPDCs are subject to 9 core principles, DTEFs 
are subject to 9 core principles, DCMs are currently subject to 18 
core principles, (but will be subject to 23 core principles upon 
finalization of the Part 38 regulations implementing the Dodd-Frank 
Act). SEFs will be subject to 15 core principles upon finalization 
of the regulations to implement the Dodd-Frank Act.
---------------------------------------------------------------------------

    Staff estimates that each respondent would, on average, have an 
annual burden of 308 hours of reporting time. Staff estimates that 30-
40 SEFs will register with the Commission as a result of the Dodd-Frank 
Act.\125\ Accordingly, the burden in terms of hours would in the 
aggregate be 308 hours annually per respondent and 10,780 hours 
annually for all respondents.
---------------------------------------------------------------------------

    \125\ For hourly reporting requirements, an average of 35 SEFs 
was used for calculation purposes.
---------------------------------------------------------------------------

    Commission staff estimates that respondents could expend up to 
$16,016 annually based on an hourly rate of $52 to comply with the 
proposed regulations. This would result in an aggregated cost of 
$560,560 per annum (35 respondents x $16,016).
    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 burden: 10,780.
2. Information Collection Comments
    Copies of the supporting statements for the collections of 
information from the Commission to OMB are available by visiting 
RegInfo.gov. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission will 
consider public comments on the proposed information requirements in 
order to:

    (1) Evaluate whether the proposed collections of information are 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    (2) Evaluate the accuracy of the estimated burden of the 
proposed information collection requirements, including the degree 
to which the methodology and the assumptions that the Commission 
employed were valid;
    (3) Enhance the quality, utility, and clarity of the information 
proposed to be collected; and
    (4) Minimize the burden of the proposed information collection 
requirements on DCOs, DCMs, and SEFs, including through the use of 
appropriate automated, electronic, mechanical, or other 
technological information collection techniques, e.g., permitting 
electronic submission of responses.

    Organizations and individuals desiring to submit comments on the 
proposed information collection requirements should contact the Office 
of Information and Regulatory Affairs, Office of Management and Budget 
by fax at (202) 395-6566 or by e-mail at OIRAsubmission@omb.eop.gov. 
Please provide the Commission with a copy of submitted comments so that 
they may be summarized and address in the final rulemaking. Refer to 
the ADDRESSES section of this notice of proposed rulemaking for comment 
submission instructions to the Commission.
    OMB is required to make a decision concerning the proposed 
information collection requirements between 30 and 60 days after 
publication of this Release in the Federal Register. Therefore, a 
comment to OMB is best assured of receiving full consideration if OMB 
receives it within 30 days of publication of this Release. Nothing in 
the foregoing affects the deadline enumerated above for public comment 
to the Commission on the proposed regulations.

C. Cost-Benefit Analysis

    Section 15(a) of the CEA \126\ requires that the Commission 
consider the costs and benefits of its actions before issuing a 
regulation under the CEA. By its terms, Section 15(a) does not require 
the Commission to quantify the costs and benefits of a new rule or 
determine whether the benefits of the rulemaking outweigh its costs; 
rather, Section 15(a) requires the Commission to ``consider'' the costs 
and benefits of its actions.
---------------------------------------------------------------------------

    \126\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Section 15(a) further specifies that costs and benefits shall be 
evaluated in light of 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. Accordingly, the Commission could, in its 
discretion, give greater weight to any one of the five considerations 
and could, in its discretion, determine that,

[[Page 1237]]

notwithstanding its costs, a particular rule was necessary or 
appropriate to protect the public interest or to effectuate any of the 
provisions or to accomplish any of the purposes of the CEA.
Summary of Proposed Requirements
    The proposed rulemaking would provide, pursuant to the Dodd-Frank 
Act, for the trading or processing of swaps on a registered SEF subject 
to 15 core principles. This rulemaking will implement, in Part 37 of 
the Commission's regulations, these provisions of the CEA. The proposal 
includes regulations as well as guidance and acceptable practices to 
implement these core principles. In general, the proposed regulations 
implementing core principles for SEFs are consistent with the existing 
or proposed regulations for similar or identical core principles 
applicable to DCMs.
Costs
    As highlighted by recent events in the global credit markets, 
transacting of swaps in unregulated, over-the-counter markets does not 
contribute to the goal of stability in the broader financial markets. 
The public would continue to be at risk to such financial instability 
if certain derivatives were allowed to trade over the counter rather 
than on regulated exchanges. SEFs that determine to register with the 
Commission in order to provide for the transacting of swaps will be 
subject to core principles for transacting of swaps. If swaps were 
allowed to continue to be transacted bilaterally, rather than on the 
regulated market of a SEF, price discovery and transparency in the 
swaps markets would continue to be inhibited. These procedures are 
mandatory pursuant to the Dodd-Frank Act and any additional costs 
associated with these procedures are required by the implementation of 
the Dodd-Frank Act.
Benefits
    The Commission believes that the benefits of the rulemaking are 
significant. The proposed regulations provide for the transacting of 
swaps on SEFs. SEFs will compete with DCMs that make certain swaps 
available for trading, while certain swaps will continue to transact 
bilaterally. This competition will benefit the marketplace. Providing 
market participants with the ability to trade certain swaps openly and 
competitively on a SEF complying with all of the SEF core principles as 
well as on DCMs complying with DCM core principles will provide market 
participants with additional choices and will enhance price 
transparency resulting in protection of market participants and the 
public. The proposed regulations will necessitate that SEFs that 
determine to make certain swaps available for trading will have to 
coordinate with DCOs in order to effect clearing and thus be subject to 
the DCO's risk management and margining procedures.

Request for Comment:

    The Commission invites public comment on its cost-benefit 
considerations. Commenters are also invited to submit any data or other 
information that they may have quantifying or qualifying the costs and 
benefits of the proposal with their comment letters.

V. Text of the Proposed Regulations, Guidance and Acceptable Practices

List of Subjects in 17 CFR Part 37

    Swaps, Swap execution facilities, Registration application, 
Registered entities, Reporting and recordkeeping requirements.

    In light of the foregoing, and pursuant to authority in the CEA, 
and, in particular, Sections 3, 5, 5c(c), 8a(5) and 21 of the CEA, the 
Commission hereby proposes to revise part 37 of Title 17 of the Code of 
Federal Regulations to read as follows:

PART 37--SWAP EXECUTION FACILITIES

Subpart A--General Provisions
Sec.
37.1 Scope.
37.2 Applicable provisions.
37.3 Requirements 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 Permitted execution methods.
37.10 Assessments regarding transactional tiers or platform and 
swaps made available for trading.
37.11 Identification of non-cleared swaps or swaps not made 
available to trade.
Subpart B--Compliance with Core Principles
Sec.
37.100 Core Principle 1--Compliance with core principles.
Subpart C--Compliance with Rules
Sec.
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 requirements.
37.206 Disciplinary procedures and sanctions.
37.207 Swaps subject to mandatory clearing.
Subpart D--Swaps Not Readily Susceptible to Manipulation
Sec.
37.300 Core Principle 3--Swaps not readily susceptible to 
manipulation.
37.301 General requirement.
Subpart E--Monitoring of Trading and Trade Processing
Sec.
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 Additional rules required.
Subpart F--Ability to Obtain Information
Sec.
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
Sec.
37.600 Core Principle 6--Position limits or accountability.
37.601 Position limits or accountability.
Subpart H--Financial Integrity of Transactions
Sec.
37.700 Core Principle 7--Financial integrity of transactions.
37.701 Mandatory clearing.
37.702 General financial integrity.
37.703 Monitoring for financial soundness.
Subpart I--Emergency Authority
Sec.
37.800 Core Principle 8--Emergency authority.
37.801 Additional sources for compliance.
Subpart J--Timely Publication of Trading Information
Sec.
37.900 Core Principle 9--Timely publication of trading information.
37.901 General requirement.
37.902 Capacity of swap execution facility.
Subpart K--Recordkeeping and Reporting
Sec.
37.1000 Core Principle 10--Recordkeeping and reporting.

[[Page 1238]]

37.1001 Recordkeeping required.
37.1002 Reporting to the commission required.
37.1003 Inspection and examination by the Securities and Exchange 
Commission.
Subpart L--Antitrust Considerations
Sec.
37.1100 Core Principle 11--Antitrust considerations.
37.1101 Additional sources for compliance.
Subpart M--Conflicts of Interest
Sec.
37.1200 Core Principle 12--Conflicts of interest.
Subpart N--Financial Resources
Sec.
37.1300 Core Principle 13--Financial resources.
37.1301 General requirements.
37.1302 Types of financial resources.
37.1303 Computation of financial resource requirement.
37.1304 Valuation of financial resources.
37.1305 Liquidity of financial resources.
37.1306 Reporting requirements.
Subpart O--System Safeguards
Sec.
37.1400 Core Principle 14--System safeguards.
37.1401 Requirements.
Subpart P--Designation of Chief Compliance Officer
Sec.
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 (2010).

Subpart A--General Provisions

Sec.  37.1  Scope.

    The provisions of this part 37 shall apply to every swap execution 
facility that is registered, has been registered or is applying to 
become registered as a swap execution facility under Section 5h of 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, the swap execution facility's operator 
and transactions traded on or through a swap execution facility under 
Section 5h of the Act shall comply with the requirements of this part 
37, and Sec. Sec.  1.3, 1.12(e), 1.31, 1.37(c)-(d), 1.52, 1.59(d), 
1.60, 1.63(c), 1.67, 33.10, part 9, parts 15 through 21, part 40, part 
41, part 43, part 45, part 46, part 49, part 151, and part 190 of this 
chapter, including any related definitions and cross-referenced 
sections.

Sec.  37.3  Requirements for registration.

    (a) Application procedures. (1) An applicant seeking registration 
as a swap execution facility must file electronically an application 
for registration with the Secretary of the Commission, in the form and 
manner as provided by the Commission. The Commission shall approve or 
deny the application or, if deemed appropriate, register the applicant 
as a swap execution facility subject to conditions.
    (2) The application must include information sufficient to 
demonstrate compliance with the core principles specified in Section 5h 
of the Act. The Application Form SEF consists of instructions, general 
questions and a list of Exhibits (documents, information and evidence) 
the Commission requires in order to be able to determine whether an 
applicant is able to comply with the core principles. An application 
will not be considered to be materially complete unless the applicant 
has submitted, at a minimum, the Exhibits as required in Application 
Form SEF. If the application is not materially complete, the Commission 
shall notify the applicant that the application will not be deemed to 
have been submitted for purposes of the Commission's review.
    (3) An applicant seeking registration must 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.
    (4) An applicant seeking registration must 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.
    (5) 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.
    (6) If any information contained in the application or any Exhibit 
is or becomes inaccurate for any reason, an amendment to the 
application or a submission filed under Part 40 of this Chapter must be 
filed promptly correcting such information.
    (7) 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 the applicant seeking registration that 
the application is materially incomplete and the review is stayed. 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.
    (b) Temporary Grandfather Relief from Registration. Concurrent with 
the completion of the application procedures under paragraph (a) of 
this section, an applicant may submit a notice requesting that the 
Commission grant the applicant temporary grandfather relief from the 
registration requirement, allowing it to continue operating during the 
pendency of the application process.
    (1) The Commission may grant such request for temporary grandfather 
relief from the registration requirement if the applicant has:
    (i) Satisfied all the requirements under paragraph (a) of this 
section,
    (ii) Provided 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 the request, and
    (iii) Provided a certification that the applicant believes that 
when it operates under temporary grandfather relief it will meet the 
requirements of this Part 37.
    (2) The temporary grandfather relief for a swap execution facility 
shall expire on the earlier of:
    (i) The date that the Commission grants or denies registration of 
the swap execution facility; or
    (ii) The date that the Commission rescinds the temporary 
grandfather relief provided to the swap execution facility.
    (3) The grant of temporary grandfather relief from the registration 
requirement by the Commission does not affect the right of the 
Commission to grant or deny permanent registration as provided under 
paragraph (a)(1) of this section. This paragraph shall terminate 365 
days from the effectiveness of this regulation.
    (c) Reinstatement of dormant registration. Before making any swaps 
available for trading, a dormant swap execution facility as defined in 
Sec.  40.1 of this Chapter must reinstate its registration under the 
procedures of paragraph (a) of this section; provided, however, that an 
application for reinstatement may rely upon previously submitted 
materials that still pertain to,

[[Page 1239]]

and accurately describe, current conditions.
    (d) Request for transfer of registration. (1) Request for transfer 
of registration. A swap execution facility that wants to request the 
transfer of its registration from its current legal entity to a new 
legal entity, as a result of a corporate reorganization or otherwise, 
must file a request with the Commission for approval to transfer the 
registration. Such request must 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.
    (2) Timing of submission. The request must be filed no later than 
three months prior to the anticipated corporate change; provided that 
the swap execution facility may file a request with the Commission 
later than three months prior to the anticipated change if the swap 
execution facility does not know and reasonably could not have known of 
the anticipated change three months prior to the anticipated change. In 
such event, the swap execution facility shall be required to 
immediately file the request with the Commission as soon as it knows of 
such change with an explanation as to the timing of the request.
    (3) Required information. The request shall include the following:
    (i) The underlying agreement that governs the corporate change;
    (ii) A narrative 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 corporation and successor-in-interest to 
the transferor swap execution facility and will retain and assume, 
without limitation, all 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 Part 37 and Appendices thereto;
    (C) Will assume, maintain and enforce all rules implementing and 
complying with these core principles, 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 the Commission's regulations; and
    (D) Will comply with all self-regulatory responsibilities except if 
otherwise indicated in the request, and will maintain and enforce all 
self-regulatory programs.
    (vii) A representation by the transferee that upon the transfer:
    (A) It will assume responsibility for and maintain compliance with 
product core principles for all swaps previously made available for 
trading through the transferor, whether by certification or approval; 
and
    (B) That none of the proposed rule changes will affect the rights 
and obligations of any participant.
    (viii) A representation by the transferee that market participants 
will be notified of all changes to the transferor's rulebook prior to 
the transfer and will be further notified of the concurrent transfer of 
the registration to the transferee upon Commission approval and 
issuance of an order permitting this transfer.
    (4) Commission determination. The Commission will review a request 
as soon as practicable and such request will be approved or denied 
pursuant to a Commission order and based on the Commission's 
determination as to the transferee's ability to continue to operate the 
swap execution facility in compliance with the Act and the Commission's 
regulations thereunder.
    (e) Request for withdrawal of application for registration. An 
applicant for registration may withdraw its application submitted 
pursuant to paragraph (a) of this section by filing such a request with 
the Commission at its Washington, DC headquarters. 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 for registration was 
pending with the Commission.
    (f) Request for vacation of registration. A swap execution facility 
may vacate its registration under Section 7 of the Act by filing 
electronically such a request with the Commission at its Washington, DC 
headquarters. 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.

Sec.  37.4  Procedures for Listing Products and Implementing Rules.

    (a) Request for Commission approval of rules and products. (1) An 
applicant for designation, or a swap execution facility, may request 
that the Commission approve under Section 5c(c) of the Act, any or all 
of its rules and contract terms and conditions, and subsequent 
amendments thereto, prior to their implementation or, notwithstanding 
the provisions of Section 5c(c)(2) of the Act, at anytime thereafter, 
under the procedures of Sec. Sec.  40.3 or 40.5 of this chapter, as 
applicable. A swap execution facility should label a swap in its rules 
as ``Listed for trading pursuant to Commission approval,'' if the swap 
and its terms or conditions have been submitted to the Commission for 
approval, and it may label as ``Approved by the Commission'' only those 
rules that have been so approved.
    (2) Notwithstanding the timeline under Sec. Sec.  40.3(b) and 
40.5(b) of this Chapter, the operating rules and terms and conditions 
of swaps submitted for Commission approval that have been submitted at 
the same time as an application for swap execution facility 
registration or an application under Sec.  37.3(c) to reinstate the 
registration of a dormant swap execution facility as defined in Sec.  
40.1 of this Chapter, or while one of the foregoing is pending, will be 
deemed approved by the Commission no earlier than when the swap 
execution facility is deemed to be registered or reinstated.
    (b) Self-certification of rules and products. Rules of a swap 
execution facility and subsequent amendments thereto, including both 
the operational rules and the terms or conditions of swaps listed for 
trading on the facility, not voluntarily submitted for prior Commission 
approval pursuant to paragraph (a) of this regulation, must be 
submitted to the Commission with a certification that the rule or rule 
amendment of the swap complies with the Act or rules thereunder 
pursuant to the procedures of Sec.  40.2 or Sec.  40.6 of this Chapter, 
as applicable.
    (c) Section 15 consideration. An applicant for registration, or a 
registered swap execution facility, may request that the Commission 
consider under the provisions of Section 15(b) of the Act any of the 
swap execution facility's rules or policies, including both the 
operational rules and the terms or conditions of swaps listed for 
trading.

[[Page 1240]]

Sec.  37.5  Information Relating to Swap Execution Facility Compliance.

    (a) Requests for information. Upon request by the Commission, a 
swap execution facility must file with the Commission such information 
related to its business as a swap execution facility, including 
information relating to data entry and trade details, in the form and 
manner and within the time as specified by the Commission in its 
request.
    (b) Demonstration of compliance. Upon request by the Commission, a 
swap execution facility must file with the Commission a written 
demonstration, containing such supporting data, information and 
documents, in the form and manner and within such time as the 
Commission may specify, that the swap execution facility is in 
compliance with one or more core principles as specified in the 
request, or that is requested by the Commission to satisfy its 
obligations under the Act.
    (c) Equity interest transfers. (1) Equity transfer notification. 
Upon entering into any agreement(s) that could result in an equity 
interest transfer of ten percent or more in the swap execution 
facility, the swap execution facility must file a notification of the 
equity interest transfer 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, no later than the business 
day, as defined in Sec.  40.1 of this Chapter, following the date on 
which the swap execution facility enters into a firm obligation to 
transfer the equity interest.
    (2) Required information. The notification must include and be 
accompanied by: Any relevant agreement(s), including any preliminary 
agreements; any associated changes to relevant corporate documents; a 
chart outlining any new ownership or corporate or organizational 
structure; a brief description of the purpose and any impact of the 
equity interest transfer; and a representation from the swap execution 
facility that it meets all of the requirements of Section 5h of the Act 
and Commission regulations adopted thereunder. The swap execution 
facility must keep the Commission apprised of the projected date that 
the transaction resulting in the equity interest transfer will be 
consummated, and must provide to the Commission any new agreements or 
modifications to the original agreement(s) filed pursuant to this 
section. The swap execution facility must notify the Commission of the 
consummation of the transaction on the day on which it occurs.
    (3) Certification. (i) Upon a transfer of an equity interest of ten 
percent or more in a swap execution facility, the swap execution 
facility must file 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 Commission regulations adopted thereunder, no later than 
two business days, as defined in Sec.  40.1 of this Chapter, following 
the date on which the equity interest of ten percent or more was 
acquired. Such certification must state whether changes to any aspects 
of the swap execution facility's operations were made as a result of 
such change in ownership, and include a description of any such 
change(s).
    (ii) The certification required under paragraph (c)(3) of this 
section may rely on and be supported by reference to an application for 
registration or prior filings made pursuant to a product or rule 
submission requirement, along with any necessary new filings, including 
new filings that provide any and all material updates of prior 
submissions.
    (d) Delegation of authority. The Commission hereby delegates, until 
it orders otherwise, the authority set forth in paragraph (b) of this 
regulation 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 
registered swap execution facility shall not be void, voidable, subject 
to rescission or otherwise invalidated or rendered unenforceable as a 
result of:
    (1) A violation by the registered swap execution facility of the 
provisions of Section 5h of the Act or this part 37; or
    (2) Any Commission proceeding to alter or supplement a rule, term 
or condition under Section 8a(7) of the Act, to declare an emergency 
under Section 8a(9) of the Act, or any other proceeding the effect of 
which is to alter, supplement, or require a registered 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 transaction entered into on or pursuant to the rules of a 
registered swap execution facility shall include written documentation 
that memorializes all of the terms of the transaction and legally 
supersedes any previous agreement. The confirmation of all terms of the 
transaction shall take place at the same time as execution.

Sec.  37.7  Prohibited use of data collected for regulatory purposes.

    A swap execution facility may 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, where necessary, may share such information with 
one or more swap execution facilities, or designated contract markets 
registered with the Commission, for regulatory purposes.

Sec.  37.8  Boards of trade operating both a designated contract market 
and a swap execution facility.

    (a) A board of trade that operates a designated contract market and 
intends to also operate a swap execution facility must separately 
register the swap execution facility, pursuant to the swap execution 
facility registration requirements set forth in this Part 37, and on an 
ongoing basis, comply with the core principles under Section 5h of the 
Act, and the regulations under this part 37.
    (b) A board of trade 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 that it uses for 
executing and trading swaps on the designated contract market must 
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  Permitted execution methods.

    (a) Definitions. (1) As used in this part 37:
    (i) Order Book means:
    (A) An electronic trading facility, as that term is defined in 
section 1a(16) of the Act;
    (B) A trading facility, as that term is defined in section 1a(51) 
of the Act;
    (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

[[Page 1241]]

    (D) Any such other trading system or platform as may be determined 
by the Commission.
    (ii) Request for Quote System means:
    (A) A trading system or platform in which a market participant must 
transmit a request for a 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. 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; or
    (B) 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; or
    (C) Any such other trading system or platform as may be determined 
by the Commission.
    (iii) Voice-Based System means 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.
    (iv) Required Transactions means transactions that are subject to 
the execution requirements under this Act and are made available for 
trading pursuant to Sec.  37.10, and are not block trades.
    (v) Permitted Transactions means transactions that meet any of 
these 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.
    (b) Required Transactions. (1) Required Transactions may be 
executed on an Order Book or a Request for Quote System.
    (2) An applicant seeking registration as a swap execution facility 
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 swap 
execution facility.
    (3) Swap execution facilities 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 those 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.
    (4) The Commission may, in its discretion, determine to require the 
swap execution facility to provide its participants a different trading 
method for a particular swap.
    (c) Permitted Transactions. (1) Permitted Transactions may be 
executed by an Order Book, Request for Quote System, a Voice-Based 
System, or any such other system for trading as may be permitted by the 
Commission.
    (2) A registered swap execution facility may submit a request to 
the Commission to offer trading services to facilitate Permitted 
Transactions. When submitting such request, the swap execution facility 
must certify its compliance with Sec.  37.11.

Sec.  37.10  Swaps made available for trading.

    (a) A swap execution facility must conduct an annual review (or at 
the Commission's request) of whether the swap execution facility has 
made a swap available for trading.
    (b) When conducting reviews and assessments regarding whether the 
swap execution facility has made a swap available for trading, a swap 
execution facility may consider:
    (1) The frequency of transactions in this or similar swaps;
    (2) The open interest in this or similar swaps; and
    (3) Any other factor requested by the Commission.
    (c)(1) If at least one swap execution facility has made the same or 
an economically equivalent swap available for trading, all swap 
execution facilities are required to treat the swap as made available 
for trading.
    (2) After conducting its review and assessment of whether a swap is 
made available for trading, the swap execution facility must provide 
electronically to the Commission a report of its assessment not more 
than 30 days after completion of the assessment.

Sec.  37.11  Identification of non-cleared swaps or swaps not made 
available to trade.

    (a) A swap execution facility may allow:
    (1) The execution and trading of swaps that have not been 
determined to be subject to the clearing mandate under Section 2(h) of 
the Act;
    (2) Transactions subject to an exception from the clearing mandate 
provided under Section 2(h)(7) of the Act; or
    (3) The execution and trading of swaps that have not been made 
available for trading pursuant to Sec.  37.10.
    (b) A swap execution facility that chooses to offer to facilitate 
bilateral trading for swaps detailed in paragraph (a) of this section 
must clearly identify to market participants that the particular swap 
is to be executed bilaterally between the parties pursuant to one of 
the applicable exemption from execution and clearing.

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) All 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.
    (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;

[[Page 1242]]

    (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), 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 must 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 45 of this chapter, if offered.
    (b) A swap execution facility must 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 clearing requirements.

Sec.  37.202  Access requirements.

    (a) Impartial access by members and market participants. 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), providing--
    (1) Criteria that are impartial, transparent, and applied in a fair 
and nondiscriminatory manner;
    (2) A process by which 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 being granted access to the swap execution 
facility; and
    (3) Comparable fees for participants receiving comparable access 
to, or services from, a swap execution facility.
    (b) Jurisdiction. Prior to granting any eligible contract 
participant access to its facilities, a swap execution facility must 
require that the eligible contract participant consents to its 
jurisdiction.
    (c) Limitations on access. A swap execution facility must establish 
and impartially enforce rules governing any decision to allow, deny, 
suspend, or permanently bar participants' access to the swap execution 
facility, including such decisions when 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 must establish and enforce trading, trade 
processing, and participation rules that will deter abuses and it must 
have the capacity to detect, investigate and enforce those rules.
    (a) Abusive Trading Practices Prohibited. A swap execution facility 
must prohibit abusive trading practices on its markets by members and 
market participants. Specific trading practices that must be prohibited 
by all swap execution facilities include front-running, wash trading, 
pre-arranged trading, fraudulent trading, money passes and any other 
trading practices that a swap execution facility deems to be abusive. 
In addition, a swap execution facility also must prohibit any other 
manipulative or disruptive trading practices prohibited by the Act or 
by the Commission pursuant to Commission regulation. Swap execution 
facilities that permit intermediation must prohibit customer-related 
abuses including, but not limited to, trading ahead of customer orders, 
trading against customer orders, accommodation trading, and improper 
cross trading.
    (b) Capacity to Detect and Investigate Rule Violations. A swap 
execution facility must have arrangements and resources for effective 
enforcement of its rules. Such arrangements must 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 market participants. A swap 
execution facility's arrangements and resources must 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. (1) Sufficient compliance 
staff. A swap execution facility must establish and maintain sufficient 
compliance department resources and staff 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 must 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).
    (2) Ongoing monitoring of compliance staff resources. A swap 
execution facility must 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 staff. In 
determining the appropriate level of compliance resources and staff, 
the swap execution facility should consider trading volume increases, 
the number of new products or swaps listed for trading, any new 
responsibilities assigned to compliance staff, the results of any 
internal review demonstrating that work is not completed in an 
effective or timely manner, the recommendation of any Commission rule 
enforcement review or evaluation of the swap execution facility and any 
other factors suggesting the need for increased resources and staff.
    (d) Automated Trade Surveillance System. A swap execution facility 
must maintain an automated trade surveillance system capable of 
detecting and investigating potential trade practice violations. Such 
system must maintain all data reflecting the details of each order 
entered into the trading system or platform, including all order 
modifications and cancellations, and maintain all data reflecting 
transactions executed on the swap execution facility. The automated 
system must load and process daily orders and trades no later than 24 
hours after the completion of the trading day. In addition, the 
automated trade surveillance system must 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 futures-equivalent positions; reconstruct the sequence of 
market activity; perform market analyses; and enable system users to 
perform in-depth analyses and ad hoc queries of trade-related data.
    (e) Real-time Market Monitoring. A swap execution facility must 
conduct real-time market monitoring of all trading activity on its 
electronic trading platform(s) to ensure orderly trading and identify 
any market or system anomalies. A swap execution facility must have the 
authority to adjust trade prices or cancel trades when necessary to 
mitigate market disrupting events caused by malfunctions in its 
electronic trading platform(s) or errors in orders submitted by members 
and market participants. Any trade price

[[Page 1243]]

adjustments or trade cancellations must 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 must establish and maintain procedures that 
require its compliance staff to conduct investigations of possible rule 
violations. An investigation must be commenced upon the receipt of a 
request from Commission staff or upon the discovery or receipt of 
information (such as data produced by automated surveillance systems) 
by the swap execution facility that, in the judgment of its compliance 
staff, indicates a possible basis for finding that a violation has 
occurred or will occur.
    (2) Timeliness. Each compliance staff investigation must 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 must 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 must 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. The report must also 
include the member or market participant's disciplinary history at the 
swap execution facility, including copies of warning letters.
    (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 
violation, it must prepare a written report including the reason the 
investigation was initiated; a summary of the complaint, if any; the 
relevant facts; compliance staff's analysis and conclusions; and if 
applicable, any recommendation that a disciplinary committee issue a 
warning letter in accordance with Sec.  37.203(f)(5). If compliance 
staff recommends that a warning letter be issued to a member or market 
participant pursuant to Sec.  37.203(f)(5), the investigation report 
must include a copy of the letter as well as the member or market 
participant's disciplinary history at the swap execution facility, 
including copies of warning letters.
    (5) Warning letters. In addition to the action required to be taken 
under Sec. Sec.  37.203(f)(3) and 37.203(f)(4), the rules of a swap 
execution facility may authorize compliance staff to issue a warning 
letter to a person or entity under investigation or to recommend that a 
disciplinary committee take such an action. 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. A copy of a warning letter issued 
by compliance staff must be included in the investigation report 
required by Sec. Sec.  37.203(f)(3) and 37.203(f)(4). No more than one 
warning letter for the same potential violation may be issued to the 
same person or entity during a rolling 12-month period.
    (g) Additional Rules Required. A swap execution facility must adopt 
and enforce any additional rules that it believes are necessary to 
comply with the requirements of Sec.  37.203.

Sec.  37.204  Regulatory services provided by a third party.

    (a) Use of third-party 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, 
(collectively, ``regulatory service provider''), for the provision of 
services to assist in complying with the core principles, as approved 
by the Commission. Any swap execution facility that chooses to contract 
with a regulatory service provider must ensure that its regulatory 
service 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 will 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 third party. A swap execution facility that 
elects to use the service of a regulatory service provider must 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 must 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 must also conduct periodic reviews 
of the adequacy and effectiveness of services provided on its behalf. 
Such reviews must 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 must 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, denials of access to the trading platform for 
disciplinary reasons, and any decision to open an investigation into a 
possible rule violation. A swap execution facility must document any 
instances where its actions differ from those recommended by its 
regulatory service provider.

Sec.  37.205  Audit trail.

    A swap execution facility must 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 must capture 
and retain all audit trail data necessary to detect, investigate and 
prevent customer and market abuses. Such data must be sufficient to 
reconstruct all transactions 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 must also permit the swap execution 
facility to track a customer order from the time of receipt through 
fill, allocation, or other disposition, and must 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 must 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) must reflect the terms of the order, a unique account 
identifier that relates

[[Page 1244]]

back to the account(s) owner(s) and the time of order entry. Swap 
execution facilities 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. If an order or 
request for quote cannot be immediately entered into the trading system 
or platform, an electronic record that includes the account identifier 
that relates to the account owner, time of receipt, and terms of the 
order or request for quote must immediately be created, and the order 
or request for quote must be entered into the trading system or 
platform as soon as practicable.
    (2) Transaction history database. A swap execution facility's audit 
trail program must include an electronic transaction history database. 
An adequate transaction history database includes a history of all 
orders and trades, and also includes:
    (i) All data that are input into the trade entry or matching system 
for the transaction to match and clear;
    (ii) The categories of participant for which each trade is 
executed, including whether the person executing a trade was executing 
it for his/her own account or an account for which he/she has 
discretion, his/her clearing member's house account, the account of 
another member or the account of any other customer;
    (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 must include electronic analysis capability with 
respect to all audit trail data in the transaction history database. An 
adequate electronic analysis capability must permit the sorting and 
presentation of data in the transaction history database so as to 
reconstruct trading 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 must include the capability to safely store all audit 
trail data retained in its transaction history database. Such safe 
storage capability must 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 must 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 37.
    (c) Enforcement of Audit Trail Requirements. (1) Annual audit trail 
and recordkeeping reviews. A swap execution facility must enforce its 
audit trail and recordkeeping requirements through at least annual 
reviews of all members and market participants to verify their 
compliance with the swap execution facility's audit trail and 
recordkeeping requirements. Such reviews must 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 must 
establish a program for effective enforcement of its audit trail and 
recordkeeping requirements. An effective program must identify members 
and market participants that have failed to maintain high levels of 
compliance with such requirements, and levy meaningful sanctions when 
deficiencies are found. Sanctions must be sufficient to deter 
recidivist behavior, and may not include more than one warning letter 
for the same violation within a rolling twelve month period.

Sec.  37.206  Disciplinary procedures and sanctions.

    A swap execution facility 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.
    (a) Enforcement staff. A swap execution facility must 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. A swap execution facility 
must also monitor the size and workload of its enforcement staff 
annually, and increase its enforcement resources and staff as 
appropriate. The enforcement staff may not include either members of 
the swap execution facility or persons whose interests conflict with 
their enforcement duties. A member of the enforcement staff may 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.
    (b) Disciplinary panels. (1) Disciplinary panels required. A swap 
execution facility must establish one or more Review Panels and one or 
more Hearing Panels (collectively, ``disciplinary panels'') that are 
authorized to fulfill their obligations under the rules of this 
Subpart. Disciplinary panels must meet the composition requirements of 
Sec.  40.9(c)(3)(ii), and must 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.
    (2) Review panels. A swap execution facility's Review Panel(s) must 
be responsible for determining whether a reasonable basis exists for 
finding a violation of swap execution facility rules, and for 
authorizing the issuance of notices of charges against persons alleged 
to have committed violations if the Review Panel believes that the 
matter should be adjudicated.
    (3) Hearing Panels. A swap execution facility's Hearing Panel(s) 
must be responsible for adjudicating disciplinary cases pursuant to a 
notice of charges authorized by a Review Panel, and must also be 
responsible for such other duties as are specified in this Subpart.
    (c) Review of investigation report. Promptly after receiving a 
completed investigation report pursuant to Sec.  37.203(f)(3), a Review 
Panel must promptly review the report and, within 30 days of such 
receipt, must take one of the following actions:
    (1) If the Review Panel determines that additional investigation or 
evidence is needed, it must promptly direct the compliance staff to 
conduct further investigation.
    (2) If the Review Panel determines that no reasonable basis exists 
for finding a violation or that prosecution is otherwise unwarranted, 
it may direct that no further action be taken. Such determination must 
be in writing, and must include a written statement setting forth the 
facts and analysis supporting the decision.
    (3) If the Review Panel determines that a reasonable basis exists 
for finding a violation and adjudication is warranted, it must direct 
that the person or entity alleged to have committed the violation be 
served with a notice of charges and must proceed in accordance with the 
rules of this section.
    (d) Notice of charges. A notice of charges must 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);

[[Page 1245]]

and prescribe the period within which a hearing on the charges may be 
requested. The notice must also advise the respondent charged that he 
is entitled, upon request, to a hearing on the charges; and if the 
rules of the swap execution facility so provide:
    (1) The 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
    (2) The failure to answer or to deny expressly a charge may be 
deemed to be an admission of such charge.
    (e) Right to representation. Upon being served with a notice of 
charges, a respondent must have the right to be represented by legal 
counsel or any other representative of its choosing in all succeeding 
stages of the disciplinary process.
    (f) Answer to charges. A respondent must be given a reasonable 
period of time to file an answer to a notice of charges. The rules of a 
swap execution facility may require 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. A statement of 
a lack of sufficient information shall have the effect of a denial of 
an allegation;
    (2) Failure to file an answer on a timely basis shall be deemed an 
admission of all allegations contained 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.
    (g) 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 Hearing 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:
    (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 pursuant to Sec.  37.206(g)(1) 
and advise the respondent that it may request a hearing on such 
sanction within a specified period of time;
    (3) The rules of a swap execution facility may provide that if a 
respondent fails to request a hearing within the period of time 
specified in the notice, the respondent will be deemed to have accepted 
the sanction.
    (h) 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 Hearing Panel pursuant to Section 37.206(g), the 
respondent must be given an opportunity for a hearing in accordance 
with the requirements of Sec.  37.206(j). The swap execution facility's 
rules may provide that, except for good cause, the hearing must be 
concerned only with those charges denied and/or sanctions set by the 
Hearing Panel under Sec.  37.206(g) for which a hearing has been 
requested.
    (i) Settlement offers. (1) The rules of a swap execution facility 
may permit a respondent to submit a written offer of settlement at any 
time after the 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.
    (2) 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.
    (3) If an offer of settlement is accepted, the panel accepting the 
offer must 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 must 
include full customer restitution where customer harm is demonstrated. 
If an offer of settlement is accepted without the agreement of the 
enforcement staff, the decision must adequately support the Hearing 
Panel's acceptance of the settlement. Where applicable, the decision 
must also include a statement that the respondent has accepted the 
sanctions imposed without either admitting or denying the rule 
violations.
    (4) The respondent may withdraw his or her offer of settlement at 
any time before final acceptance by a 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.
    (j) Hearings. (1) A swap execution facility must adopt rules that 
provide for the following minimum requirements for any hearing 
conducted pursuant to a notice of charges:
    (i) The hearing must be fair, must be conducted before members of 
the Hearing Panel, and must be promptly convened after reasonable 
notice to the respondent. The formal rules of evidence need not apply; 
nevertheless, the procedures for the hearing may not be so informal as 
to deny a fair hearing. No member of the Hearing 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 must be entitled to 
examine all books, documents, or other evidence in the possession or 
under the control of the swap execution facility that are to be relied 
upon by the enforcement staff in presenting the charges contained in 
the notice of charges or that are relevant to those charges.
    (iii) The swap execution facility's enforcement and compliance 
staffs must be parties to the hearing, and the enforcement staff must 
present their case on those charges and sanctions that are the subject 
of the hearing.
    (iv) The respondent must be entitled to appear personally at the 
hearing, must be entitled to cross-examine any persons appearing as 
witnesses at the hearing, and must be entitled to call witnesses and to 
present such evidence as may be relevant to the charges.
    (v) The swap execution facility must require that persons within 
its jurisdiction who are called as witnesses participate in the hearing 
and produce evidence. It must make reasonable efforts to secure the 
presence of all other persons called as witnesses whose testimony would 
be relevant.
    (vi) If the respondent has requested a hearing, a copy of the 
hearing must be made and must become a part of the record of the 
proceeding. The record must be one that is capable of being accurately 
transcribed; however, it need not be transcribed unless the transcript 
is requested by Commission staff or the respondent, the decision is 
appealed pursuant to Sec.  37.206(l), or 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.
    (vii) The rules of a swap execution facility may provide that the 
cost of transcribing the record of the hearing must be borne by a 
respondent who requests the transcript, appeals the decision pursuant 
to Sec.  37.206(l), or whose application for Commission review of the 
disciplinary action has been granted. In all other instances, the cost 
of transcribing the record must be borne by the swap execution 
facility.
    (2) 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.

[[Page 1246]]

    (k) Decisions. Promptly following a hearing conducted in accordance 
with Sec.  37.206(j), the Hearing Panel must render a written decision 
based upon the weight of the evidence contained in the record of the 
proceeding and must provide a copy to the respondent. The decision must 
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;
    (6) A declaration of all sanctions imposed against the respondent, 
including the basis for such sanctions and the effective date of such 
sanctions.
    (l) Right to appeal. The rules of a swap execution facility may 
permit the parties to a proceeding to appeal promptly an adverse 
decision of the Hearing 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 must have the 
opportunity to appeal and the swap execution facility must provide for 
the following:
    (1) The swap execution facility must establish an appellate panel 
that must 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 the 
Hearing Panel within a reasonable period of time after the decision has 
been rendered.
    (2) The composition of the appellate panel must be consistent with 
Sec.  40.9(c)(iv), and must 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 must provide for the appeal proceeding to be 
conducted before all of the members of the board of appeals or a panel 
thereof.
    (3) Except for good cause shown, the appeal or review must be 
conducted solely on the record before the Hearing Panel, the written 
exceptions filed by the parties, and the oral or written arguments of 
the parties.
    (4) Promptly following the appeal or review proceeding, the board 
of appeals must issue a written decision and must provide a copy to the 
respondent. The decision issued by the board of appeals must adhere to 
all the requirement of Sec.  37.206(k), to the extent that a different 
conclusion is reached from that issued by the Hearing Panel.
    (m) Final decisions. Each swap execution facility must establish 
rules setting forth when a decision rendered pursuant to this section 
will become the final decision of such swap execution facility.
    (n) Disciplinary sanctions. All disciplinary sanctions imposed by a 
swap execution facility or its disciplinary panels must be commensurate 
with the violations committed and must be clearly sufficient to deter 
recidivism or similar violations by other market participants. All 
disciplinary sanctions must take into account the respondent's 
disciplinary history. In the event of demonstrated customer harm, any 
disciplinary sanction must also include full customer restitution.
    (o) 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 timely submission 
of 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, provided 
that no more than one warning letter may be issued per rolling 12-month 
period for the same violation. If adopted, a summary fine schedule must 
provide for progressively larger fines for recurring violations.
    (p) Emergency disciplinary actions. (1) 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.
    (2) Any emergency disciplinary action must be taken in accordance 
with a swap execution facility's procedures that provide for the 
following:
    (i) If practicable, a respondent must be served with a notice 
before the action is taken, or otherwise at the earliest possible 
opportunity. The notice must state the action, briefly state the 
reasons for the action, and state the effective time and date, and the 
duration of the action.
    (ii) The respondent must 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 must be given 
the opportunity for a hearing as soon as reasonably practicable and the 
hearing must be conducted before the Hearing Panel pursuant to the 
requirements of Sec.  37.206(j).
    (iii) Promptly following the hearing provided for in this rule, the 
swap execution facility must render a written decision based upon the 
weight of the evidence contained in the record of the proceeding and 
must provide a copy to the respondent. The decision must 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.

Sec.  37.207  Swaps subject to mandatory clearing.

    A swap execution facility shall provide by its rules that when a 
swap dealer or major swap participant enters into or facilitates a swap 
transaction 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).

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 requirement.

    (a) To demonstrate to the Commission compliance with the 
requirements of Sec.  37.300, a swap execution facility must submit new 
swap contracts in advance to the Commission pursuant to part 40 of this 
chapter, either by:
    (1) Requesting prior approval from the Commission; or
    (2) Self-certification for new product submissions.

[[Page 1247]]

    (b) Furthermore, the swap execution facility must provide evidence 
that the swap complies with Core Principle 3 by providing the 
applicable information as set forth in appendix C to part 38--
Demonstration of Compliance that a contract is not readily susceptible 
to manipulation.

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 must:
    (a) 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;
    (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) Have the capacity to conduct real-time monitoring of trading 
and comprehensive and accurate trade reconstruction. The monitoring of 
intraday trading must include the capacity to detect abnormal price 
movements, unusual trading volumes, impairments to market liquidity, 
and position-limit violations; and
    (d) Have either manual processes or automated alerts that are 
effective in detecting and preventing trading abuses.

Sec.  37.402  Additional requirements for physical-delivery swaps.

    (a) For physical-delivery swaps, the swap execution facility must:
    (1) Monitor a swap's terms and conditions;
    (2) Monitor that the deliverable supply is adequate so that the 
swap will not be conducive to price manipulation or distortion;
    (3) Assess whether the deliverable commodity reasonably can be 
expected to be available to traders responsible for making the delivery 
and salable or usable by traders receiving delivery at its market value 
in normal cash marketing channels; and
    (4) When available, monitor data related to the size and ownership 
of deliverable supplies.
    (b) The swap execution facility must continually monitor the 
appropriateness of the swap's terms and conditions, including the 
delivery instrument, the delivery locations and location differentials, 
and the commodity characteristics and related differentials. The swap 
execution facility must act promptly to address the conditions that are 
causing price distortions or market disruptions, including, when 
appropriate, changes to contract terms.

Sec.  37.403  Additional requirements for cash-settled swaps.

    (a) For cash-settled swaps, the swap execution facility must 
monitor:
    (1) The availability and pricing of the commodity making up the 
index to which the swap will be settled; and
    (2) The continued appropriateness of the methodology for deriving 
the index. For those swap execution facilities that compute their own 
indices, they must promptly amend any methodologies that result, or are 
likely to result, in manipulation, price distortions, or market 
disruptions, or must impose new methodologies to resolve the threat of 
disruptions or distortions.
    (b) If a swap listed on a swap execution facility is settled by 
reference to the price of a swap traded in another venue, including a 
price or index derived from prices on another swap execution facility, 
the swap execution facility must have an information sharing agreement 
with the other venue or swap execution facility. In lieu of an 
information sharing agreement, the swap execution facility must have 
the capacity to assess whether positions or trading in the swap or 
commodity to which its swap is cash-settled are being manipulated in 
order to affect prices on its market.

Sec.  37.404  Ability to obtain information.

    (a) The swap execution facility must have rules that require 
traders in its swaps to keep records of their trading, including 
records of their activity in the underlying commodity and related 
derivatives markets and make such records available, upon request, to 
the swap execution facility and the Commission.
    (b) A swap execution facility with customers trading through 
intermediaries must either use a comprehensive large-trader reporting 
system (LTRS) or be able to demonstrate that it can obtain position 
data from other sources in order to conduct an effective surveillance 
program.

Sec.  37.405  Risk controls for trading.

    The swap execution facility must establish and maintain risk 
control mechanisms 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 swap execution facility. 
If a swap is linked to, or a substitute for, other swaps on the swap 
execution facility or on other trading venues, such risk controls must, 
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 must, to the extent practicable, be 
coordinated with any similar controls placed on national security 
exchanges.

Sec.  37.406  Trade reconstruction.

    The swap execution facility must have the ability to 
comprehensively and accurately reconstruct all trading on its trading 
facility. All audit-trail data and reconstructions must be made 
available to the Commission in a form, manner, and time as determined 
by the Commission.

Sec.  37.407  Additional rules required.

    A swap execution facility must adopt and enforce any additional 
rules that it believes are necessary to comply with the requirements of 
subpart E of this part.

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 this section;
    (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 must 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

[[Page 1248]]

management, governance, and regulatory functions and any requirements 
under this part 37, including the capacity to carry out international 
information-sharing agreements as the Commission may require.

Sec.  37.502  Collection of information.

    A swap execution facility must 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.

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 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  Position limits or accountability.

    (a) 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 on the facility, as is necessary and appropriate, 
position limitations or position accountability for speculators.
    (b) For any contract that is subject to a position limitation 
established by the Commission pursuant to Section 4a(a), the swap 
execution facility shall:
    (1) Set its position limitation at a level no higher than the 
Commission limitation;
    (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.
    (c) The swap execution facility must establish the position limits 
in accordance with the requirements set forth in part 151.

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  Mandatory clearing.

    Transactions executed on or through the swap execution facility 
must be cleared through a Commission-registered derivatives clearing 
organization unless:
    (a) The transaction is exempted from clearing under Section 2(h)(7) 
of the Act; or
    (b) The Commission has not determined that the clearing requirement 
under Section 2(h)(1) is applicable.

Sec.  37.702  General financial integrity.

    A swap execution facility must 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) For transactions cleared by a derivatives clearing 
organization, by ensuring that the swap execution facility has the 
capacity to route transactions to the derivative clearing organization 
in a manner acceptable to the derivatives clearing organization for 
purposes of ongoing risk management;
    (c) For transactions not cleared by a derivatives clearing 
organization, by requiring 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 may be adopted by the swap 
execution facility; and
    (d) By implementing any additional safeguards as may be required by 
Commission regulations.

Sec.  37.703  Monitoring for financial soundness.

    A swap execution facility must monitor members' compliance with the 
swap execution facility's minimum financial standards and, therefore, 
must routinely receive and promptly review financial and related 
information from its members.

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.

    Applicants and swap execution facilities 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.  37.800.

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.

[[Page 1249]]

Sec.  37.901  General requirement.

    With respect to swaps traded on or through a swap execution 
facility, each swap execution facility must:
    (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.

Sec.  37.902  Capacity of swap execution facility.

    The swap execution facility must have the capacity to 
electronically capture trade information with respect to transactions 
executed on the facility.

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 5 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 required.

    A swap execution facility must 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 5 years. A swap 
execution facility must maintain such records, including a complete 
audit trail for all swaps executed on or subject to the rules of the 
swap execution facility, investigatory files, and disciplinary files, 
in accordance with the requirements of Sec.  1.31 and part 45 of this 
chapter.

Sec.  37.1002  Reporting to the commission required.

    A swap execution facility must 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 its duties under the Act.

Sec.  37.1003  Inspection and examination by the Securities and 
Exchange Commission.

    A swap execution facility must 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.

Subpart L--Antitrust Considerations

Sec.  37.1100  Core Principle 11--Antitrust considerations.

    Unless necessary or appropriate to achieve the purposes of this 
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.

    Applicants and swap execution facilities 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.  37.1100.

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 also shall comply with the financial 
resource requirements of Sec.  39.11.
    (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, or applicant for designation as such, 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; and
    (b) Any other financial resource deemed acceptable by the 
Commission.

Sec.  37.1303  Computation of financial resource requirement.

    A swap execution facility shall, on a quarterly basis, based upon 
its fiscal year, 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.

    At appropriate intervals, but not less than quarterly, a swap 
execution facility shall compute the current market value of each 
financial resource used to meet its obligations under Sec.  37.701. 
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 must 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 requirements.

    (a) Each fiscal quarter, or at any time upon Commission request, a 
swap execution facility shall:

[[Page 1250]]

    (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 this Sec.  37.1306 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 report required by this Sec.  37.1306 shall be filed not 
later than 17 business days after the end of the swap execution 
facility's fiscal quarter, or at such later time as the Commission may 
permit, in its discretion, upon request by the swap execution facility.

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) Each swap execution facility shall:
    (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 swap execution facility; and
    (3) Periodically conduct tests to verify that backup resources are 
sufficient to ensure continued order processing and trade matching, 
transmission of matched orders to a designated clearing organization 
for clearing, price reporting, market surveillance, and maintenance of 
a comprehensive and accurate audit trail.
    (b) A swap execution facility's program of risk analysis and 
oversight with respect to its operations and automated systems must 
address each of the following categories of risk analysis and 
oversight:
    (1) Information security;
    (2) Business continuity-disaster recovery (``BC-DR'') planning and 
resources;
    (3) Capacity and performance planning;
    (4) Systems operations;
    (5) Systems development and quality assurance; and
    (6) Physical security and environmental controls.
    (c) In addressing the categories of risk analysis and oversight 
required under paragraph (b) of this section, 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.
    (d) A swap execution facility must maintain a BC-DR plan and BC-DR 
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 BC-DR 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 are subject to more 
stringent requirements in this regard, set forth in Section 40.9 of the 
Commission's regulations.
    (e) 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 trading and clearing during the next business day 
following a disruption 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.
    (f) A swap execution facility must notify Commission staff promptly 
of all:
    (1) Electronic trading halts and systems malfunctions;
    (2) Cyber security incidents or targeted threats that actually or 
potentially jeopardize automated system operation, reliability, 
security, or capacity; and
    (3) Any activation of the swap execution facility's BC-DR plan.
    (g) A swap execution facility must give Commission staff timely 
advance notice of all:
    (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.

[[Page 1251]]

    (h) A swap execution facility must provide to the Commission upon 
request current copies of its BC-DR 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.
    (i) A swap execution facility must conduct regular, periodic, 
objective testing and review of its automated systems to ensure that 
they are reliable, secure, and have adequate scalable capacity. It must 
also conduct regular, periodic testing and review of its BC-DR 
capabilities. Both types of testing 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. Pursuant to Core Principle 10 
under Section 5h of the Act (Recordkeeping and Reporting), and 
Sec. Sec.  37.1000 through 37.1003, the swap execution facility must 
keep records of all such tests, and make all test results available to 
the Commission upon request.
    (j) To the extent practicable, a swap execution facility should:
    (1) Coordinate its BC-DR plan with those of the market participants 
upon whom it depends 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 BC-DR 
plan;
    (2) Initiate and coordinate periodic, synchronized testing of its 
BC-DR plan and the BC-DR plans of the market participants upon whom it 
depends to provide liquidity; and
    (3) Ensure that its BC-DR plan takes into account the BC-DR plans 
of its telecommunications, power, water, and other essential service 
providers.
    (k) Part 46 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 this section; 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 this section; 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 37, 
the term ``board of directors'' means the board of directors of a 
registered 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 registered 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 in furtherance of the chief compliance officer's 
statutory, regulatory, and self-regulatory obligations.
    (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.
    (i) No individual disqualified from registration pursuant to 
Sections 8a(2) or 8a(3) of the Act may serve as a chief compliance 
officer.
    (ii) The chief compliance officer may not be a member of the swap 
execution facility's legal department and may not serve as its general 
counsel.
    (c) Appointment, Supervision, and Removal of Chief Compliance 
Officer. (1) Appointment and Compensation of Chief Compliance Officer 
Determined by Board of Directors. A registered swap execution 
facility's chief compliance officer shall be appointed by its board of 
directors. The board of directors must also approve the compensation of 
the chief compliance officer and shall meet with the chief compliance 
officer at least annually. The chief compliance officer shall also meet 
with the regulatory oversight committee, as defined in Sec.  37.19(b), 
at least quarterly. The chief compliance officer shall provide any 
information regarding the swap execution facility's regulatory program 
that is requested by the board of directors or the regulatory oversight 
committee. The appointment of the chief compliance officer and approval 
of the chief compliance officer's compensation shall require the 
approval of a majority of the board of directors. The senior officer of 
the swap execution facility may fulfill these responsibilities. A swap 
execution facility shall notify

[[Page 1252]]

the Commission of the appointment of a new chief compliance officer 
within two business days of such appointment.
    (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 by Board of Directors. 
Removal of a registered 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. The swap 
execution facility shall notify the Commission and explain the reasons 
for the departure within two business days. The swap execution facility 
shall immediately appoint an interim chief compliance officer, and 
shall appoint a permanent chief compliance officer as soon as 
reasonably practicable. The swap execution facility shall notify the 
Commission within two business days of appointing any new chief 
compliance officer, whether interim or permanent.
    (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, or the senior officer of the swap 
execution facility, resolving any conflicts of interest that may arise:
    (i) Conflicts between business considerations and compliance 
requirements;
    (ii) Conflicts between business considerations and the requirement 
that the registered swap execution facility provide fair, open, and 
impartial access as set forth in Sec.  37.202 of this part; and;
    (iii) Conflicts between a registered swap execution facility's 
management and members of the board of directors;
    (3) Establishing and administering written policies and procedures 
reasonably designed to prevent violation of the Act and any rules 
adopted by the Commission;
    (4) Ensuring compliance with the Act and Commission regulations 
relating to agreements, contracts, or transactions, and with Commission 
regulations under Section 5h of the Act;
    (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 a compliance manual designed to promote compliance 
with the applicable laws, rules, and regulations and administering 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 registered 
futures association or other registered entity in accordance with Sec.  
37.204.
    (e) Annual Compliance Report Prepared by Chief Compliance Officer. 
The chief compliance officer shall, not less than annually, prepare 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 registered 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 ensure compliance 
with each subsection and the core principle, including each duty 
specified in Section 5h(f)(15)(B);
    (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 registered 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 explains how they were resolved;
    (6) Any objections to the annual compliance report by those persons 
who have oversight responsibility for the chief compliance officer; and
    (7) 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 by Chief Compliance 
Officer to the Commission.
    (1) Prior to submission of the annual compliance report to the 
Commission, the chief compliance officer shall provide the annual 
compliance report to the board of the registered swap execution 
facility for its review. If the swap execution facility does not have a 
board, then the annual compliance report shall be provided to the 
senior officer for their review. Members of the board and the senior 
officer may not require the chief compliance officer to make any 
changes to the report. Submission of the report to the board or the 
senior officer, and any subsequent discussion of the report, shall be 
recorded in board minutes or similar written record, as evidence of 
compliance with this requirement.
    (2) The annual compliance report shall be provided electronically 
to the Commission not more than 60 days after the end of the registered 
swap execution facility's fiscal year.
    (3) Promptly upon discovery of any material error or omission made 
in a previously filed compliance report, the chief compliance officer 
shall file an amendment with the Commission to

[[Page 1253]]

correct any material error or omission. An amendment shall contain the 
oath or certification required under paragraph (e)(7) of this section.
    (4) A registered swap execution facility may request the Commission 
for an extension of time to file its compliance report based on 
substantial, undue hardship. Extensions for the filing deadline may be 
granted at the discretion of the Commission.
    (5) Annual compliance reports filed pursuant to this section will 
be treated as exempt from mandatory public disclosure for purposes of 
the Freedom of Information Act and the Government in the Sunshine Act 
and parts 145 and 147 of this chapter, but will be available for 
official use by any official or employee of the United States and any 
State, by any self-regulatory organization of which the person filing 
the report is a member, and by any other person to whom the Commission 
believes disclosure is in the public interest.
    (g) Recordkeeping. (1) The registered swap execution facility must 
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)(6) and (d)(7) 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 similar written record of such review, 
that record the submission of the annual compliance report to the board 
of directors or senior officer; and
    (iv) Any records relevant to the registered 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 registered swap execution facility shall maintain records 
in accordance with Sec.  1.31 and part 45 of this chapter.

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 the 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.

GENERAL INSTRUCTIONS

    1. Form SEF and Exhibits thereto are to be filed with the 
Commission by applicants for registration as a swap execution facility, 
or by a swap execution facility amending such registration, 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 
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 shall be effective unless 
the Commission, by order, grants such registration.
    2. For the purposes of this Form, the term ``Applicant'' shall 
include any applicant for registration as a swap execution facility or 
any registered swap execution facility that is seeking an amendment to 
its order of registration.
    3. Individuals' names, except the executing signature in Item 11, 
shall be given in full (Last Name, First Name, Middle Name).
    4. Signatures on all copies of the Form SEF filed with the 
Commission can be executed electronically. If the Form SEF is filed by 
a limited liability company, it must be signed in the name of the 
limited liability company by a 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; if filed by a corporation, it 
shall be signed in the name of the corporation by a principal officer 
duly authorized.
    5. If Form SEF is being filed as an application for registration, 
all applicable items must be answered in full. If any item is not 
applicable, indicate by ``none,'' ``not applicable,'' or ``N/A'' as 
appropriate.
    6. For the purposes of this Form SEF, the term ``Applicant'' shall 
include any applicant for registration as a swap execution facility or 
any swap execution facility that is amending Form SEF.
    7. 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 of the information specified on this 
Form SEF is mandatory prior to the start of the processing of an 
application for registration as a swap execution facility. The 
information provided with 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 further may determine that 
other and additional information is required from the Applicant in 
order to process its application. 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. 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.

UPDATING INFORMATION ON THE FORM SEF

    1. Part 37 of the Commission's regulations requires that if any

[[Page 1254]]

information contained in this application, or any supplement or 
amendment thereto, is or becomes inaccurate for any reason, an 
amendment to Form SEF, or a submission under Part 40, in either case 
correcting such information must be filed promptly with the Commission.
    2. Swap execution facilities filing Form SEF as an amendment need 
file only the facing page, the signature page (Item 10), and any pages 
on which an answer is being amended, together with any exhibits that 
are being amended. The submission of an amendment represents that the 
remaining items and exhibits remain true, current and complete as 
previously filed.

WHERE TO FILE

    The Application Form SEF and appropriate exhibits must be filed 
electronically with the Secretary of the Commission in the form and 
manner as provided by the Commission.

COMMODITY FUTURES TRADING COMMISSION

FORM SEF

SWAP EXECUTION FACILITY

APPLICATION OR AMENDMENT TO APPLICATION FOR REGISTRATION

-----------------------------------------------------------------------
Exact name of Applicant as specified in charter
-----------------------------------------------------------------------
Address of principal executive offices

    [ballot] If this is an APPLICATION for registration, complete in 
full and check here
    [ballot] If this is an AMENDMENT to an application, or to an 
existing registration, list all items that are amended and check here
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
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GENERAL INFORMATION

    1. Name under which business of the swap execution facility will be 
conducted, if different than name specified on facing sheet:
-----------------------------------------------------------------------
    2. If name of swap execution facility is hereby amended, state 
previous swap execution facility name:
-----------------------------------------------------------------------
    3. Mailing address, if different than address specified on facing 
sheet:
-----------------------------------------------------------------------
Number and Street
-----------------------------------------------------------------------
City, State, Zip Code
    3(a). Additional contact information:
-----------------------------------------------------------------------
    Fax
-----------------------------------------------------------------------
    Phone
-----------------------------------------------------------------------
    Website
    4. List of principal office(s) and address(es) where swap execution 
facility activities are/will be conducted:
    Office
    Address
-----------------------------------------------------------------------
-----------------------------------------------------------------------

BUSINESS ORGANIZATION

    5. Applicant is a:
    [ballot] Corporation
    [ballot] Partnership
    [ballot] Limited Liability Company
    [ballot] Other form of organization (specify)
    6. If Applicant is a corporation:
    a. Date of incorporation:
-----------------------------------------------------------------------
    b. State of incorporation:
-----------------------------------------------------------------------
    7. If Applicant is a partnership:
    a. Date of filing of partnership articles:
-----------------------------------------------------------------------
    b. State in which filed:
-----------------------------------------------------------------------
    8. If Applicant is a limited liability company:
    a. Date of filing of Articles of Organization/Certificate of 
Formation:
-----------------------------------------------------------------------
    b. State in which filed:
-----------------------------------------------------------------------
    9. Applicant agrees and consents that the notice of any proceeding 
before the Commission in connection with its application for 
registration as a swap execution facility may be given by sending such 
notice by certified mail or confirmed telegram to the officer specified 
or person named below at the address given.
-----------------------------------------------------------------------
    Name of person (if Applicant is a corporation, limited liability 
company or partnership, title of officer)
-----------------------------------------------------------------------
    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
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    Manual signature of Member, General Partner, Managing Agent, or 
Principal Agent
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    Title

EXHIBITS INSTRUCTIONS

    The following exhibits must be filed with the Commission by 
Applicants seeking registration as a swap execution facility, or by a 
registered swap execution facility amending its registration, pursuant 
to Section 5h of the Act and the Commission's regulations thereunder. 
The exhibits should be labeled according to the items specified in this 
Form SEF. If any exhibit is not applicable, please specify the exhibit 
letter and indicate by ``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, the applicant should provide pro forma financial 
statements for the most recent six months or since inception, whichever 
is less.

EXHIBITS--BUSINESS ORGANIZATION

    1. Attach as Exhibit A, the name of any person(s) who own(s) 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 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

[[Page 1255]]

    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 or 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 you 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 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 the 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, and 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 statements certified by an independent 
public accountant are available, that balance sheet and statement 
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 as of the end of the most 
recent fiscal year of each such affiliate, and each affiliate of the 
swap execution facility that engages in designated contract market 
activities.
    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 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, so state 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 supporting documents that 
may be provided under other Exhibits herein, that describe the manner 
in which the Applicant is able to comply with each core principle. The 
Applicant should include an explanation, and any other forms of 
documentation the Applicant thinks will be helpful to its explanation, 
demonstrating how the swap execution facility will be able to comply 
with 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, 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

[[Page 1256]]

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 forms of documentation the Applicant thinks 
will be helpful to its explanation, demonstrating how the swap 
execution facility will be able to comply with each core principle and 
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 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 a 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 the 
arrangements for alternative dispute resolution.
    17. Attach as Exhibit Q, as applicable, an explanation regarding:
    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 provides all orders and 
trades in an electronic form, and the timeliness in which the trading 
system or platform does so;
    (2) How all market participants have the ability to immediately see 
and have the ability to transact on all bids and offers through the 
applicant's electronic automated trade-matching system or platform; and
    (3) The trade matching algorithm 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 on request for quote systems:
    (1) How a market participant transmits a request for a 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.
    (2) How resting bids or offers may be taken into account.
    c. For trading systems or platforms that enable market participants 
to engage in transactions via voice:
    (1) How the terms of voice-based transactions are entered into the 
electronic trading system or platform.
    d. How the timing delay described under Sec.  37.9 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 (link). The Technology 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.

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, under 
Sec. Sec.  37.3 and 37.5 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--(i) all core principles described in Section 5h of the Act; 
and (ii) 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

[[Page 1257]]

mandatory clearing requirement of Section 2(h), 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. [Reserved]
    (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 must 
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: (i) Calculate its own 
reference price using suitable and well-established acceptable 
methods or (ii) 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. If the final settlement price is manipulated, 
then the swap 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 guidance in Appendix C to Part 38--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. [Reserved]
    (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 this section;
    (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. [Reserved]
    (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. In consultation and cooperation with the 
Commission, 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. 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 17 CFR 40.11, 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. 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 swap execution facility should also have 
rules that allow it to take market actions as may be directed by the 
Commission. The Commission should be notified promptly of the swap 
execution facility's 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.
    (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,

[[Page 1258]]

including a complete audit trail, in a form and manner acceptable to 
the Commission for a period of 5 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 this 
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. [Reserved]
    (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 this section; 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), 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 this section; 
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]

    Dated: December 16, 2010.

    By the Commission.
David A. Stawick,
Secretary.

Appendices to Core Principles and Other Requirements for Swap Execution 
Facilities--Commission Voting Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Chilton 
and O'Malia voted in the affirmative; Commissioner Sommers voted in 
the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking to fulfill Congress's mandate 
to have rules and core principles requirements for swap execution 
facilities (SEFs). The proposed rule also fulfills Congress's 
mandate to promote transparency through the trading of swaps on 
SEFS.
    The proposed rule will provide for all market participants an 
ability to execute or trade with other market participants. It will 
afford market participants with the ability to make firm bids or 
offers to all other market participants. It also will allow them to 
make indications of interest--or what is often referred to as 
``indicative quotes''--to other participants. Furthermore, it will 
allow participants to request quotes from other market participants. 
These methods will provide hedgers, investors and Main Street 
businesses both the flexibility to execute and trade by a number of 
methods, but also the benefits of transparency and more market 
competition. I believe that transparency and competition in markets 
is consistent with Congress mandated in the definition of a swap 
execution facility, whereby all market participants can communicate 
with all market participants such that everybody gets the benefit of 
a competitive and transparent price discovery process.
    The proposal does allow participants, though, to do request for 
quotes, whereby they would reach out to a minimum number of other 
market participants for quotes. It also allows that, for block 
transactions, swap transactions involving non-financial end-users, 
swaps that are not ``made available for trading'' and bilateral 
transactions, market

[[Page 1259]]

participants can get the benefits of the swap execution facilities' 
greater transparency or, if they wish, would still be allowed to 
execute by voice or other means of trading.
    To fulfill Congress's mandate that, the rule requires SEFs to 
provide impartial access to market participants for trading on the 
platform or system.
    The proposed rule also would require SEFs to--on a yearly 
basis--state which contracts are deemed ``available for trading,'' 
based on factors including trading activity and open interest. The 
rule, if finalized, goes into effect in January 2012. This will give 
the markets time to adapt, allow SEFs to tell the market what 
contracts are available for trading.

Appendix 3--Statement of Commissioner Sommers

    I disagree with several aspects of the Swap Execution Facility 
(SEF) proposal the Commission is issuing today and seek public 
comment on alternative language for Section 37.9, Permitted 
Execution Methods.
    Dodd-Frank 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.'' As I have pointed out in my public 
speaking engagements over the past few months, the term ``trading 
facility'' is defined in the Commodity Exchange Act (Act), but the 
terms ``trading system'' and ``platform'' are not. By introducing 
these new, undefined terms into the Act, and by specifying that SEFs 
should facilitate the trading of swaps through any means of 
interstate commerce, I believe Congress intended a broad model for 
executing swaps on SEFs, both cleared, uncleared, liquid or bespoke. 
The goals identified by Dodd-Frank for registering SEFs are ``to 
promote the trading of swaps on swap execution facilities and to 
promote pre-trade price transparency in the swaps market.'' In my 
view, the best way to achieve these twin goals is to adopt a model 
that provides the maximum amount of flexibility as to the method of 
trading. Unfortunately, this proposal does not do that.
    Section 37.9, which governs the types of execution methods that 
SEFs may offer, is a key provision of this proposed regulation. 
While it permits alternative methods of execution, such as the 
trading facility model and the request for quote model, it also 
requires that to be registered as a SEF an applicant must, at a 
minimum, provide 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 swap 
execution facility.'' In my view this provision is not mandated by 
Dodd-Frank and may limit competition by shutting out applicants who 
wish to offer request for quote services without this functionality. 
I believe this interpretation of the statute, and other requirements 
within this section, are far too restrictive.
    As a result of my concerns, we worked throughout the past week 
to include alternative language for Section 37.9 in the proposal. I 
believe this alternative language complies with Dodd-Frank and would 
promote both pre-trade price transparency and the trading of swaps 
on SEFs. Including the alternative would have given the public an 
opportunity to comment, in accordance with the Administrative 
Procedure Act, on both the alternative language and the language 
contained in the proposed rule. I am deeply disappointed that 
despite a commitment to a transparent process in promulgating the 
Dodd-Frank rules, the alternative language is not in the proposal 
today and we are not giving the public the opportunity to comment on 
it. That alternative language is set forth below.

Sec.  37.9  Permitted Execution Methods.

    (a) Definitions.
    (1) As used in this Part 37:
    (i) Order Book System means:
    (A) An electronic trading facility, as that term is defined in 
section 1a(16) of the Act;
    (B) A trading facility, as that term is defined in section 1a(51) 
of the Act;
    (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 other trading system or platform as may be determined 
by the Commission.
    (ii) Request for Quote System means:
    (A) A trading system or platform in which a market participant 
transmits a request for a quote to buy or sell a specific instrument to 
all other market participants in the trading system or platform to 
which all market participants may respond;
    (B) A trading system or platform in which a market participant 
transmits a request for a quote to buy or sell a specific instrument to 
more than one potential counterparty. Upon receipt of responsive quotes 
from any of the potential counterparties, the original requester may 
accept a responsive quote and complete a transaction with any one of 
the responsive counterparties;
    (C) A trading system or platform in which multiple market 
participants can both (i) view real-time electronic streaming quotes, 
both firm or indicative, from multiple potential counterparties on a 
centralized screen; and (ii) have the option to complete a transaction 
by (A) accepting a firm streaming quote, or (B) transmitting a request 
for a quote to more than one market participant, 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; or
    (D) Any such other trading system or platform as may be determined 
by the Commission.
    (iii) Voice-Based System means:
    (A) A trading system or platform in which a market participant 
executes or trades a swap using a telephonic line or other voice-based 
service.
    (2) Swaps subject the clearing requirements under the Act that are 
made available for trading pursuant to Sec.  37.10 may be executed or 
traded on an Order Book System, a Request for Quote System, or any such 
other trading system or platform as may be determined by the 
Commission.
    (3) Swaps not subject to the clearing requirements under the Act 
may be executed or traded on an Order Book System, a Request for Quote 
System, a Voice-Based System, or any such other trading system or 
platform as may be determined by the Commission.
    (4) A swap execution facility can be an Order Book System, a 
Request for Quote System, or any such other trading system or platform 
as may be determined by the Commission, or any combination of the 
aforementioned systems.
[FR Doc. 2010-32358 Filed 1-6-11; 8:45 am]
BILLING CODE 6351-01-P
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