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December 18, 2018
Page S

seller.

Upfront Fee Payment; The upfront fee is a portion of the
payments, expressed in percentage points of the notional,
which is present valued and paid at the inception of the
Contract by the protection buyer to the protection seller.

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Please see above regarding the calculation of the cash settlement price.

(iii) The cash-settlement calculation should involve computational procedures that eliminate or
reduce the impact of potentially unrepresentative data.

(iv) The cash settlement price should be an accurate and reliable indicator of prices in the
underlying cash market. The cash settlement price also should be acceptable to commercial users of
the commodity contract. The registered entity should fully document that the settlement price is
accurate, reliable, highly regarded by industry/market agents, and fully reflects the economic and
commercial conditions of the relevant designated contract market.

Please see above regarding the availability, reliability and widespread acceptance of the method used to
generate the cash settlement price.

(v) To the extent possible, the cash settlement price should be based on cash price series that are
publicly available and available on a timely basis for purposes of calculating the cash settlement
price at the expiration of a commodity contract. A designated contract market should make the
final cash settlement price and any other supporting information that is appropriate for release to
the public, available to the public when cash settlement is accomplished by the derivatives clearing
organization. If the cash settlement price is based on cash prices that are obtained from non-public
sources (e.g., cash market surveys conducted by the designated contract market or by third parties
on behalf of the designated contract market), a designated contract market should make ayailable
to the public as soon as possible after a contract month’s expiration the final cash settlement price
as well as any other supporting information that is appropriate or feasible to make available to the
public,

Information on the reference index is available on ihsmarkit.com.
(4) Contract terms and conditions requirements for futures contracts settled by cash settlement.

(i) An acceptable specification of the terms and conditions of a cash-settled commodity contract will
also set forth the trading months, last trading day, contract size, minimum price change (tick size)
and daily price limits, if any.

The terms and conditions of the Contracts include the essential economic terms of the Contracts. The
counterparties will begin calculating accrued obligations from the effective date to the maturity date
(ie., “last trading day”) of each contract — dates which are set by the counterparties. The minimum size
is determined by the counterparties, as is customary for contracts of this type.

(A) Commodity Characteristics: The terms and conditions of a commodity contract should describe
the commodity underlying the contract.

The terms and conditions of the Contracts note that the Contracts are based on an index of 40 liquid
Japanese entities with investment grade credit ratings that trade in the CDS market.

(B) Contract Size and Trading Unit: An acceptable specification of the trading unit would be a
contract size that is consistent with customary transactions in the cash market. A designated
contract market may opt to set the contract size smaller than that of standard cash market
transactions.

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well-established and transparent rules! that specify, among other things: (i) the selection of index
constituents; (ii) the selection of the constituents’ reference obligations; (iii) the removal/addition of
entities to the index; and (iv) the replacement of the reference obligation associated with a reference
entity.

Selection of Reference Entities

IHS Markit Ltd. constructs the list of reference entities in accordance with methodologies outlined in the
Markit Rules. The reference index is composed of forty (40) liquid Japanese entities with investment
grade credit ratings that trade in the CDS market. Each constituent entity in the index is equally weighted
or approximately equally weighted.’

THS Markit Ltd’s process for generating the list of reference entities has several other well-defined,
thoroughly-documented steps, including: (a) determining the universe of entities incorporated in Japan
with the required credit ratings and required recent liquidity; (b) determining the 40 most liquid of such
entities based on the “6 Month Analysis Top 1,000 Single Names” report published by DTCC (if that
does not yield the required 40 entities, supplemented by a poll of market participants); (c) selecting
reference obligations for the reference entities obtained from Markit Group’s Reference Entity Database
with input from Markit iTraxx® Japan Index market participants; and (d) publishing the final index on the
business day immediately preceding the roll date.*

Reference Index is Not Readily Susceptible to Manipulation

The Markit iTraxx® Japan Index is not readily susceptible to manipulation. First, as noted above, it is a
broad index ~ comprised of 40 liquid investment grade Japanese entities. Second it is balanced — all 40
constituents have equal, or approximately equal weightings.’ Third, as noted above, the index is highly
liquid since Markit forms a Liquidity List based on the average weekly trading activity as measured in
DTCC’s “6 Month Analysis Top 1,000 Single Names” report. And finally, as noted above, the
management and calculation of the index is transparent and rules-based. Markit clearly outlines, in its
rulebook, among other things, how entities are selected, how entities are weighted, and the procedures
surrounding the Roll Dates, These clearly defined, well-accepted procedures, make it difficult for
individuals or entities to change index practices for purposes of manipulation.

(3) For swaps that are settled by physical delivery or by cash settlement refer to the guidance in
Appendix C to Part 38 of this chapter—Demonstration of Compliance that a Contract is not
Readily Susceptible to Manipulation, section b(2) and section c(4), respectively.

Please see below.

Appendix C to Part 38 - Demonstration of Compliance That a Contract Is Not Readily Susceptible
to Manipulation

See Markit iTraxx® Japan Index Rules (March 2017), available at
hitps:/Avww.markit.com/NewsInformation/NewsAnnouncementsPile?CMSID=95d0664766cb4¢1 SadbOd2e93ab4 79¢e (“Markit
Rules”).

7 Id at.

* Id, at 4-7,

“Id ata.

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EXHIBIT C

EXPLANATION AND ANALYSIS OF THE CONTRACTS’ COMPLIANCE WITH
APPLICABLE CORE PRINCIPLES AND COMMISSION REGULATIONS

As required by Commodity Futures Trading Commission (“Commission”) Regulation 40.2(a), the
following analysis, in narrative form, demonstrates that CDS Index Contracts — iTraxx Japan (the
“Contracts”) are consistent with the requirements of the Commodity Exchange Act, as amended (the
“Act”), and the Commission regulations and guidance thereunder (in particular, Appendix B to Part 37
and Appendix C to Part 38).

Appendix B to Part 37

CORE PRINCIPLE 3 OF SECTION 511 OF THE ACT—SWaPS NOT READILY SUSCEPTIBLE TO
MANIPULATION; CORE PRINCIPLE 4 OF SECTION 5H OF THE ACT—MONITORING OF TRADING AND
TRADE PROCESSING

The swap execution facility shall permit trading only in swaps that are not readily susceptible to
manipulation.

(a) Guidance.

(1) In general, a swap contract is an agreement to exchange a series of cash flows over a period of
time based on some reference price, which could be a single price, such as an absolute level or a
differential, or a price index calculated based on multiple observations. Moreover, such a reference
price may be reported by the swap execution facility itself or by an independent third party. When
listing a swap for trading, a swap execution facility shall ensure a swap’s compliance with Core
Principle 3, paying special attention to the reference price used to determine the cash flow
exchanges. Specifically, Core Principle 3 requires that the reference price used by a swap not be
readily susceptible to manipulation. As a result, when identifying a reference price, a swap
execution facility should either: Calculate its own reference price using suitable and well-
established acceptable methods or carefully select a reliable third-party index.

(2) The importance of the reference price’s suitability for a given swap is similar to that of the final
settlement price for a cash-settled futures contract. If the final settlement price is manipulated, then
the futures contract does not serve its intended price discovery and risk management functions.
Similarly, inappropriate reference prices cause the cash flows between the buyer and seller to differ
from the proper amounts, thus benefitting one party and disadvantaging the other. Thus, careful
consideration should be given to the potential for manipulation or distortion of the reference price.

Reference Index: Markit iTraxx® Japan Index
The reference index used to determine the exchange of cash flows for the Contracts is IHS Markit Ltd’s

“Markit iTraxx® Japan Index.” This index is currently composed of forty (40) liquid Japanese entities
with investment grade credit ratings that trade in the CDS market. The index is based on comprehensive,

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contract for risk management and price discovery would be significantly impaired if the cash
settlement price is not a reliable or robust indicator of the value of the underlying commodity or
instrument. Accordingly, careful consideration should be given to the potential for manipulation or
distortion of the cash settlement price, as well as the reliability of that price as an indicator of cash
market values. Appropriate consideration also should be given to the commercial acceptability,
public availability, and timeliness of the price series that is used to calculate the cash settlement
price. Documentation demonstrating that the settlement price index is a reliable indicator of
market values and conditions and is commonly used as a reference index by industry/market agents
should be provided. Such documentation may take on various forms, including carefully
documented interview results with knowledgeable agents.

The Contracts are not readily susceptible to manipulation for a number of reasons, First, the underlying
market for the Contracts have considerable depth and liquidity, making manipulation very difficult to
achieve. Second, the reference index is composed of highly liquid entities; as noted, in order to form the
index, Markit constructs a ranked Liquidity List based on the average weekly trading activity as measured
in DTCC’s “6 Month Analysis Top 1,000 Single Names” report. Third, the management and calculation
of the reference price is based on clear and comprehensive rules. Fourth, as noted above, the method for
calculating the cash settlement price — involving upfront fee payments, fixed quarterly cash payments, and
(in the case ofa credit event) a contingent payment — is widely used and generally accepted by market
participants. Finally, tpSEF Inc. (“tpSEF”) working with its regulatory services provider, the National
Futures Association, has a robust market surveillance program that is effectively able to surveil this
market, detect uncommon activity, and investigate any such activity for signs of manipulation (note that
the foregoing also demonstrates compliance with Core Principle 4).

(3) Where an independent, private-sector third party calculates the cash settlement price series, a
designated contract market should consider the need for a licensing agreement that will ensure the
designated contract market’s rights to the use of the price series to settle the listed contract.

(i) Where an independent, private-sector third party calculates the cash settlement price series, the
designated contract market should verify that the third party utilizes business practices that
minimize the opportunity or incentive to manipulate the cash-settlement price series. Such
safeguards may include lock-downs, prohibitions against derivatives trading by employees, or
public dissemination of the names of sources and the price quotes they provide, Because a cash-
settled contract may create an incentive to manipulate or artificially influence the underlying
market from which the cash-settlement price is derived or to exert undue influence on the cash-
settlement computation in order to profit on a futures position in that commodity, a designated
contract market should, whenever practicable, enter into an information-sharing agreement with
the third-party provider which would enable the designated contract market to better detect and
prevent manipulative behavior,

Please see above regarding the calculation of the cash settlement price.

(ii) Where a designated contract market itself generates the cash settlement price series, the
designated contract market should establish calculation procedures that safeguard against potential
attempts to artificially influence the price. For example, if the cash settlement price is derived by
the designated contract market based on a survey of cash market sources, the designated contract
market 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.

ACTIVE 238007431


© tullett prebon

tpSEF Inc.
101 Hudson Street
Jersey City

NJ. 07302-3908
USA

tel +1201557 5000

fax +1201557 5995
December 18, 2018

web www.tullettprebon.com

By CFTC Portal

Mr. Christopher J. Kirkpatrick

Office of the Secretariat

Commodity Futures Trading Commission
Three Lafayette Centre

1155 21st Street, N.W.

Washington, D.C. 20581

Re: (pSEF Inc. ~ Regulation 40.2 Certification of CDS Index Contracts ~ iTraxx Japan
(tpSEF Submission #18-33P)

Dear Mr. Kirkpatrick:

tpSEF Inc. (“tpSEF”) hereby notifies the Commodity Futures Trading Commission (the “Commission”)
of its intent to list CDS Index Contracts ~ iTraxx Japan (the “Contracts”) on tpSEF’s swap execution
facility. tpSEF intends to list the Contracts on December 20, 2018.

Pursuant to Commission Regulation 40.2, this submission includes:
i. The intended listing date - December 20, 2018;
ii. A certification by tpSEF that: (a) the Contracts comply with the Commodity Exchange
Act, as amended, and the Commission regulations thereunder; and (b) concurrent with
this submission, tpSEF posted on its website: (i) a notice of pending certification of the

Contracts, and (ii) a copy of this submission, attached as Exhibit A;

iii. |The terms and conditions of the Contracts, attached as Exhibit B; and

iv. An explanation and analysis of the Contracts’ compliance with applicable core principles
and Commission regulations, attached as Exhibit C.

tpSEF will be separately updating Appendix B to its Rulebook (tpSEF Inc. Swap Specifications) to reflect
this listing.

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Moreover, a contract should not be listed past the date for which the designated contract market
has access to use a proprietary price index for cash settlement.

If there is no credit event, the protection buyer will pay the protection seller fixed quarterly cash
payments.

(A) Speculative Limits: Specific rules and policies for speculative position limits are set forth in part
150 and/or part 151, as applicable, of the Commission’s regulations.

tpSEF will comply with Parts 150 and 151 of the Commission’s regulations. Currently, there are no
speculative limits applicable to the Contracts under Parts 150 and 151 of the Commission’s regulations.

(I) Reportable Levels: Refer to § 15.03 of the Commission’s regulations.
tpSEF will adhere to the applicable reporting levels set forth in § 15.03 of the Commission’s regulations.
(J) Trading Hours: Should be set by the designated contract market to delineate each trading day.

The Contracts are traded twenty-three hours a day from Sunday to Friday Eastern Time. The Contracts
are not traded between 5:30 p.m. and 6:30 p.m, Eastern Time.

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The size of the Contracts, which is determined by the counterparties to each Contract, are
consistent with customary transactions in the market.

(C) Cash Settlement Procedure: The cash settlement price should be reliable, acceptable, publicly
available, and reported in a timely manner as described in paragraphs (c)(3)(iv) and (c)(3)(v) of this
appendix C,

The cash settlement procedure and an explanation of how it is reliable, acceptable, publicly available, and
reported in a timely manner is included above.

(D) Pricing Basis and Minimum Price Fluctuation (Minimum Tick): The minimum price increment
(tick) should be set a level that is equal to, or less than, the minimum pri crement commonly
observed in cash market transactions for the underlying commodity. Specifying a futures’
minimum tick that is greater than the minimum price increment in the cash market can undermine
the risk management utility of the futures contract by preventing hedgers from efficiently
establishing and liquidating futures positions that are used to hedge anticipated cash market
transactions or cash market positions.

As determined by the counterparties.

(E) Maximum Price Fluctuation Limits: Designated contract markets may adopt price limits to: (1)
Reduce or constrain price movements in a trading day that may not be reflective of true market
conditions but might be caused by traders overreacting to news; (2) Allow additional time for the
collection of margins in times of large price movements; and (3) Provide a “cooling-off” period for
futures market participants to respond to bona fide changes in market supply and demand
fundamentals that would lead to large cash and futures price changes. If price-limit pro
adopted, the limits should be set at levels that are not overly restrictive in relation to price
movements in the cash market for the commodity underlying the futures contract. For broad-based
stock index futures contracts, rules should be adopted that coordinate with New York Stock
Exchange (“NYSE”) declared Circuit Breaker Trading Halts (or other market coordinated Circuit
Breaker mechanism) and would recommence trading in the futures contract only after trading in
the majority of the stocks underlying the index has recommenced.

ions are

As determined by the counterparties.

(F) Last Trading Day: Specification of the last trading day for expiring contracts should be
established such that it occurs before publication of the underlying third-party price index or
determination of the final settlement price. If the designated contract market chooses to allow
trading to occur through the determination of the final settlement price, then the designated
contract market should show that futures trading would not distort the final settlement price
calculation.

The last trading day is the maturity date of each contract, which is set by the counterparties,

(G) Trading Months: Trading months should be established based on the risk management needs of
commercial entities as well as the availability of price and other data needed to calculate the cash
settlement price in the specified months. Specification of the last trading day should take into
consideration whether the volume of transactions underlying the cash settlement price would be
unduly limited by occurrence of holidays or traditional holiday periods in the cash market.

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(c) Futures Contracts Settled by Cash Settlement. (1) Cash settlement is a method of settling certain
futures or option contracts whereby, at contract expiration, the contract is settled by cash payment
in lieu of physical delivery of the commodity or instrument underlying the contract, An acceptable
specification of the cash settlement price for commodity futures and option contracts would include
rules that fully describe the essential economic characteristics of the underlying commodity (e.g.,
grade, quality, weight, class, growth, issuer, maturity, source, rating, description of the underlying
index and index’s calculation methodology, etc.), as well as how the final settlement price is
calculated. In addition, the rules should clearly specify the trading months and hours of trading, the
last trading day, contract size, minimum price change (tick size) and any limitations on price
movements (e.g., price limits or trading halts).

Essential Economic Characteristics of the Contract Terms
The terms and conditions of the Contracts are listed in Exhibit B.

Some terms of the Contracts are fixed (e.g., currency and fixed rate), while other terms are flexible and
determined by the counterparties (¢.g., effective date, maturity date and the notional amount). This
combination of standard and flexible terms allows the contract to have a basic consistent form, while
allowing counterparties to tailor some aspects of the Contracts to their economic needs. This structure
follows industry convention; the terms of the Contracts match the terms of credit default swaps that are
commonly offered in the market.

Calculation of Cash Settlement Price
As described in Exhibit B, the cash settlement process for the Contracts includes the following payments:

¢ Fixed Quarterly Cash Payments: These payments are reflected in basis points and paid by the
protection buyer to the protection seller.

¢ Upfront Fee Payment: This fee is a portion of the payments, which is expressed in percentage
points of the notional. The fee is present valued and paid at the inception of the Contract by the
protection buyer to the protection seller.

¢ Contingent Payment: Payments related to credit event settlement will be determined pursuant to
the 2014 ISDA Credit Derivatives Definitions as published by the International Swaps and
Derivatives Association, Inc.

This cash settlement method for credit default swaps is often used for credit default swaps and thus
widely accepted by market participants.

(2) Cash settled contracts may be susceptible to manipulation or price distortion, In evaluating the
susceptibility of a cash-settled contract to manipulation, a designated contract market should
consider the size and liquidity of the cash market that underlies the listed contract in a manner that
follows the determination of deliverable supply as noted above in (b)(1). In particular, situations
susceptible to manipulation include those in which the volume of cash market transactions and/or
the number of participants contacted in determining the cash-settlement price are very low. Cash-
settled contracts may create an incentive to manipulate or artificially influence the data from which
the cash-settlement price is derived or to exert undue influence on the cash-settlement price’s
computation in order to profit on a futures position in that commodity, The utility of a cash-settled

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Page 4
EXHIB!
Terms and Conditions
Summary: This covers uncleared credit default swaps on IHS

Markit Ltd’s “Markit iTraxx® Japan Index” (“CDS Index
Contracts — iTraxx Japan”). The terms under which CDS
Index Contracts - (Traxx Japan may be traded are shown
below.

Contract Overview:

An agreement to buy or sell protection on an index
composed of forty (40) Japanese entities with investment
grade credit ratings that trade in the CDS market as
published by IHS Markit Ltd. from time to time.

Index:

Markit iTraxx® Japan Index: Series 30 to current

Currency:

Quoting Convention and Minimum Increment:

JPY

~ TAs agreed by counterparties.

Minimum Size:

As agreed by counterparties.

Trading Conventions:

Buy = Buy Protection, the buyer of protection pays a
premium to the seller in case of a credit event occurring,

Sell = Sell Protection, the seller of protection receives
the premium payments from the protection buyer. The
Seller owns the credit risk of the instrument.

The indices are traded on spread.

Swap Conventions:

Fixed coupon payments are calculated at a spread of 100
bps and exchanged on a quarterly basis.

Swap Tenor: ~

As agreed by counterparties, subject to Applicable Law.

Effective Date:

The date (to be agreed by the counterparties) on which
parties begin calculating accrued obligations such as
fixed payments. Also known as the start date of the
swap.

Maturity Date:

The final date (to be agreed by the counterparties) on
which the obligations no longer accrue and the final
payment occurs.

Trade Types: The following swap types may be executed on tpSEF
Inc.:
* = Outrights
«Roll Trades
« Curve Trades
Settlement: Contingent Payment: Payments related to credit event

settlement will be determined pursuant to the 2014 ISDA
Credit Derivatives Definitions as published by the
International Swaps and Derivatives Association, Inc.

Fixed Quarterly Cash Payments: Reflected in basis

points and paid by the protection buyer to the protection

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EXHIBIT A

CERTIFICATIONS PURSUANT TO SECTION Se OF THE COMMODITY EXCHANGE ACT,
7 U.S.C. §7A-2 AND COMMODITY FUTURES TRADING COMMISSION REGULATION 40.2,
17 C.F.R. §40.2

tpSEF Inc. (“tpSEF”) hereby certifies that: (i) CDS Index Contracts — iTraxx Japan (the “Contracts”)
comply with the Commodity Exchange Act, 7 U.S.C. §1 ef seq. and Commodity Futures Trading
Commission (“Commission”) regulations thereunder; and (ii) concurrent with this submission, tpSEF
posted on its website: (a) a notice of pending certification of the Contracts with the Commission and (b) a
copy of this submission.

tpSEF Inc.

By:
Name: Brian D. Donnelly
Title: Chief Compliance Officer

Date: December 18, 2018

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Questions regarding this submission should be directed to Brian Donnelly, Chief Compliance Officer, at
(201) 984-6956 or by email at bddonnelly@tullettprebon.com.

Very truly yours,

tpSEF Inc.

By: —, 2
Name: Brian D. Donnelly

Title: Chief Compliance Officer

Date: December 18, 2018
Enclosures

ce: CFTC Division of Market Oversight (dmosubmissions@cftc.gov)
Nancy Markowitz, CFTC (nmarkowitz@cftc.gov)

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