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Vol. 78 Tuesday,

No. 107 June 4, 2013

Part II

Commodity Futures Trading Commission

17 CFR Part 37Core Principles and Other Requirements for Swap Execution Facilities;

Final Rule

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

1See Commodity Futures Modernization Act of 2000, Public Law 106–554, 114 Stat. 2763 (2000).

2See The Financial Crisis Inquiry Commission,The Financial Crisis Inquiry Report: Final Report of

COMMODITY FUTURES TRADINGCOMMISSION

17 CFR Part 37

RIN 3038–AD18

Core Principles and OtherRequirements for Swap ExecutionFacilities

AGENCY: Commodity Futures TradingCommission.ACTION: Final rule.

SUMMARY: The Commodity FuturesTrading Commission (‘‘Commission’’ or‘‘CFTC’’) is adopting new rules,guidance, and acceptable practices toimplement certain statutory provisionsenacted by Title VII of the Dodd-FrankWall Street Reform and ConsumerProtection Act (‘‘Dodd-Frank Act’’). Thefinal rules, guidance, and acceptablepractices, which apply to theregistration and operation of a new type

of regulated entity named a swapexecution facility (‘‘SEF’’), implementthe Dodd-Frank Act’s new statutoryframework that, among otherrequirements, adds a new section 5h tothe Commodity Exchange Act (‘‘CEA’’ or‘‘Act’’) concerning the registration andoperation of SEFs, and adds a newsection 2(h)(8) to the CEA concerningthe execution of swaps on SEFs.DATES: The rules will become effectiveAugust 5, 2013, with the exception of regulation 37.3(b)(5) (17 CFR 37.3(b)(5)),which shall become effective August 5,2015.

Compliance date: October 2, 2013,except that: (a) From August 5, 2013until October 2, 2014 marketparticipants may comply with theminimum market participantrequirement in regulation 37.9(a)(3) (17CFR 37.9(a)(3)) by transmitting a requestfor a quote to no less than two marketparticipants; and (b) each affected entityshall comply with the warning letterrequirement in regulation 37.206(f) (17CFR 37.206(f)) no later than August 5,2014.FOR FURTHER INFORMATION CONTACT:Amir Zaidi, Special Counsel, 202–418–

6770, [email protected] , Alexis Hall-Bugg,Special Counsel, 202–418–6711,[email protected] , or David VanWagner, Chief Counsel, 202–418–5481,[email protected] , Division of Market Oversight; Michael Penick,Senior Economist, 202–418–5279,[email protected] , or Sayee Srinivasan,Research Analyst, 202–418–5309,[email protected] , Office of the Chief Economist, Commodity Futures TradingCommission, Three Lafayette Centre,1155 21st Street NW., Washington, DC20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. BackgroundA. Swaps and Title VII of the Dodd-Frank

ActB. SEF Notice of Proposed Rulemaking

II. Part 37 of the Commission’s Regulations—Final Rules

A. Adoption of Regulations, Guidance, and

Acceptable PracticesB. General Regulations (Subpart A)1. §37.1—Scope2. § 37.2—Applicable Provisions3. § 37.3—Requirements for Registration4. § 37.4—Procedures for Listing Products

and Implementing Rules5. § 37.5—Information Relating to Swap

Execution Facility Compliance6. §37.6—Enforceability7. § 37.7—Prohibited Use of Data Collected

for Regulatory Purposes8. § 37.8—Boards of Trade Operating Both

a Designated Contract Market and aSwap Execution Facility

9. § 37.9—Permitted Execution Methods10. § 37.10—Swaps Made Available for

Trading11. § 37.11—Identification of Non-ClearedSwaps or Swaps Not Made Available ToTrade

C. Regulations, Guidance, and AcceptablePractices for Compliance With the CorePrinciples

1. Subpart B—Core Principle 1(Compliance With Core Principles)

2. Subpart C—Core Principle 2(Compliance With Rules)

(a) § 37.200—Core Principle 2—Compliance With Rules

(b) § 37.201—Operation of Swap ExecutionFacility and Compliance With Rules

(c) § 37.202—Access Requirements(d) § 37.203—Rule Enforcement Program

(e) § 37.204—Regulatory Services Provided by a Third Party(f) § 37.205—Audit Trail(g) § 37.206—Disciplinary Procedures and

Sanctions(h) § 37.207—Swaps Subject to Mandatory

Clearing3. Subpart D—Core Principle 3 (Swaps Not

Readily Susceptible to Manipulation)4. Subpart E—Core Principle 4 (Monitoring

of Trading and Trade Processing)(a) § 37.401—General Requirements(b) § 37.402—Additional Requirements for

Physical-Delivery Swaps(c) § 37.403—Additional Requirements for

Cash-Settled Swaps(d) §37.404—Ability To Obtain

Information

(e) § 37.405—Risk Controls for Trading(f) § 37.406—Trade Reconstruction(g) § 37.407—Additional Rules Required5. Subpart F—Core Principle 5 (Ability To

Obtain Information)(a) § 37.501—Establish and Enforce Rules(b) § 37.502—Collection of Information(c) § 37.503—Provide Information to the

Commission(d) § 37.504—Information-Sharing

Agreements6. Subpart G—Core Principle 6 (Position

Limits or Accountability)7. Subpart H—Core Principle 7 (Financial

Integrity of Transactions)

(a) § 37.701—Mandatory Clearing(b) § 37.702—General Financial Integrity(c) § 37.703—Monitoring for Financial

Soundness8. Subpart I—Core Principle 8 (Emergency

Authority)(a) § 37.801—Additional Sources for

Compliance9. Subpart J—Core Principle 9 (Timely

Publication of Trading Information)

10. Subpart K—Core Principle 10(Recordkeeping and Reporting)

11. Subpart L—Core Principle 11 (AntitrustConsiderations)

12. Subpart M—Core Principle 12(Conflicts of Interest)

13. Subpart N—Core Principle 13(Financial Resources)

(a) § 37.1301—General Requirements(b) § 37.1302—Types of Financial

Resources(c) § 37.1303—Computation of Financial

Resource Requirement(d) § 37.1304—Valuation of Financial

Resources(e) § 37.1305—Liquidity of Financial

Resources

(f) § 37.1306—Reporting Requirements14. Subpart O—Core Principle 14 (SystemSafeguards)

(a) § 37.1401—Requirements15. Subpart P—Core Principle 15

(Designation of Chief ComplianceOfficer)

(a) § 37.1501—Chief Compliance OfficerIII. Related Matters

A. Regulatory Flexibility ActB. Paperwork Reduction ActC. Cost Benefit Considerations1. Introduction2. SEF Market Structure3. Registration4. Recordkeeping and Reporting5. Compliance

6. Monitoring and Surveillance7. Financial Resources8. Emergency Operations and System

SafeguardsIV. List of CommentersV. Text of Final Regulations, Guidance, and

Acceptable Practices

I. Background

A. Swaps and Title VII of the Dodd-Frank Act

Historically, swaps have traded inover-the-counter (‘‘OTC’’) markets,rather than on regulated exchangesgiven their exemption from regulation.1 The OTC swaps market is less

transparent than exchange-tradedfutures and securities markets. This lackof transparency was a major contributorto the 2008 financial crisis becauseregulators and market participantslacked visibility to identify and assessthe implications of swaps marketexposures and counterpartyrelationships.2 As a result, on July 21,


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33477Federal Register / Vol. 78, No. 107/ Tuesday, June 4, 2013 / Rules and Regulations

the National Commission on the Causes of theFinancial and Economic Crisis in the United States(Official Government Edition), at 299, 352, 363–364,386, 621 n. 56 (2011), available at http://fcic-static.law.stanford.edu/cdn _media/fcic-reports/ fcic _ final _report _ full.pdf. The Commission hasacknowledged, however, that the benefits of enhanced market transparency are not boundless,particularly in swap markets with limited liquidity.See Procedures to Establish Appropriate MinimumBlock Sizes for Large Notional Off-Facility Swapsand Block Trades, 77 FR 15460, 15466 (proposedMar. 15, 2012). In implementing these regulations,the Commission has taken into account the benefitsand concerns related to market transparency.

3Dodd-Frank Wall Street Reform and ConsumerProtection Act, Public Law 111–203, 124 Stat. 1376(2010).

4Pursuant to section 701 of the Dodd-Frank Act,Title VII may be cited as the ‘ ‘Wall StreetTransparency and Accountability Act of 2010.’’

57 U.S.C. 1 et seq.6See Financial Stability Board, Implementing

OTC Derivatives Market Reforms, at 41 (Oct. 25,2010), available at http://www.financialstability board.org/publications/r _101025.pdf; TechnicalCommittee of the International Organization of Securities Commissions, Transparency of Structured Finance Products Final Report, at 17, 21(Jul. 2010), available at http://www.iosco.org/ library/pubdocs/pdf/IOSCOPD326.pdf.

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

of the Dodd-Frank Act; 7 U.S.C. 7b–3. Thisregulatory framework includes: (i) Registration,operation, and compliance requirements for SEFsand (ii) fifteen core principles. Applicants andregistered SEFs are required to comply with thecore principles as a condition of obtaining andmaintaining their registration as a SEF.

8CEA section 5h(a)(1), as enacted by section 733of the Dodd-Frank Act; 7 U.S.C. 7b–3(a)(1).

9CEA section 1a(50), as amended by section 721of the Dodd-Frank Act; 7 U.S.C. 1a(50).

10CEA section 2(h)(8), as amended by section 723of the Dodd-Frank Act; 7 U.S.C. 2(h)(8).

11CEA section 5h, as enacted by section 733 of the Dodd-Frank Act; 7 U.S.C. 7b–3.

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

13Core Principles and Other Requirements forSwap Execution Facilities, 76 FR 1214 (proposed Jan. 7, 2011).

14 Id. at 1238.15 Id. at 1241.16CEA section 1a(50); 7 U.S.C. 1a(50).17CEA section 5h(f); 7 U.S.C. 7b–3(f).18The goals of section 733 of the Dodd-Frank Act

are to promote the trading of swaps on SEFs andto promote pre-trade price transparency in theswaps market. CEA section 5h(e); 7 U.S.C. 7b–3(e).

19Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1241.

20 Id.21 Id.22By ‘‘in conjunction with the SEF’s minimum

trading functionality,’’ the Commission means thatthe SEF NPRM required a SEF to offer the minimumtrading functionality, and if that SEF also offered anRFQ System, it was required to communicate any bids or offers resting on the minimum tradingfunctionality to the RFQ requester along with theresponsive quotes. See the discussion belowregarding ‘‘Taken Into Account andCommunicated’’ Language in the RFQ SystemDefinition under §37.9(a)(1)(ii)—Request for QuoteSystem in the preamble for further details.


2010, President Obama signed theDodd-Frank Act,3 which tasked theCommission with overseeing a largeportion of the U.S. swaps market.

Title VII of the Dodd-Frank Act 4 amended the CEA 5 to establish acomprehensive new regulatoryframework for swaps and security-basedswaps (‘‘SB-swaps’’). A key goal of the

Dodd-Frank Act is to bring greater pre-trade and post-trade transparency to theswaps market. Pre-trade transparencywith respect to the swaps market refersto making information about a swapavailable to the market, including bid(offers to buy) and offer (offers to sell)prices, quantity available at thoseprices, and other relevant information

before the execution of a transaction.Such transparency lowers costs forinvestors, consumers, and businesses;lowers the risks of the swaps market tothe economy; and enhances marketintegrity to protect market participants

and the public. The Dodd-Frank Actalso ensures that a broader universe of market participants receive pricing andvolume information by providing suchinformation upon the completion of every swap transaction (i.e., post-tradetransparency).6 By requiring the tradingof swaps on SEFs and designatedcontract markets (‘‘DCMs’’), all marketparticipants will benefit from viewingthe prices of available bids and offersand from having access to transparentand competitive trading systems orplatforms.

In addition to facilitating greatertransparency and trading of swaps onSEFs, Title VII of the Dodd-Frank Actestablishes a comprehensive regulatory

framework, including registration,operation, and compliance requirementsfor SEFs.7 For example, section 733 of the Dodd-Frank Act sets forth a broadregistration provision that requires anyperson who operates a facility for thetrading of swaps to register as a SEF oras a DCM.8 In addition, section 721 of the Dodd-Frank Act amended the CEA

to define SEF as a trading platformwhere multiple participants have theability to execute swaps by accepting

bids and offers made by multipleparticipants in the platform.9 Furthermore, section 723 of the Dodd-Frank Act set forth a trade executionrequirement, which states that swaptransactions subject to the clearingrequirement must be executed on aDCM or SEF, unless no DCM or SEFmakes the swap available to trade or forswap transactions subject to the clearingexception under CEA section 2(h)(7).10 Section 733 of the Dodd-Frank Act

provided that to be registered andmaintain registration, a SEF mustcomply with fifteen enumerated coreprinciples and any requirement that theCommission may impose by rule orregulation.11

B. SEF Notice of Proposed Rulemaking

The Dodd-Frank Act amended theCEA to provide that, under new section5h, the Commission may in itsdiscretion determine by rule orregulation the manner in which SEFscomply with the core principles.12 Inconsideration of both the novel nature

of SEFs and its experience in overseeingDCMs’ compliance with core principles,the Commission carefully assessedwhich SEF core principles would

benefit from regulations, providing legalcertainty and clarity to the marketplace,and which core principles would

benefit from guidance or acceptablepractices, where flexibility is moreappropriate. Based on that evaluation,on January 7, 2011, the Commissionproposed a combination of regulations,guidance, and acceptable practices for

the registration, oversight, andregulation of SEFs (‘‘SEF NPRM’’).13

The SEF NPRM provided, amongother requirements, the following:

(1) Procedures for temporary and fullSEF registration.14

(2) A minimum trading functionalityrequirement that all SEFs must offer,15 which took into account the SEF

definition,16 the core principlesapplicable to SEFs,17 and the goalsprovided in section 733 of the Dodd-Frank Act.18 The minimum tradingfunctionality required a SEF to providea centralized electronic trading screenupon which any market participant canpost both executable and non-executable bids and offers that aretransparent to all other marketparticipants of the SEF.19 For a traderwho has the ability to execute against itscustomer’s order or to execute twocustomers’ orders against each other, theSEF NPRM also required the trader be

subject to a 15 second time delay between the entry of those two orders.20 In addition, the proposal allowed aRequest for Quote (‘‘RFQ’’) System 21 that operates in conjunction with theSEF’s minimum trading functionality.22 Finally, the SEF NPRM stated that a SEFmay offer other functionalities inconjunction with the minimum tradingfunctionality, as long as thosefunctionalities meet the SEF definitionand comply with the core principles.23

(3) The classification of swaptransactions into two categories:Required Transactions (i.e., transactionssubject to the trade execution mandateunder section 2(h)(8) of the CEA and not

block trades) and PermittedTransactions (i.e., transactions not


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24 Id. at 1241.25 Id.26 Id.27 Id. at 1241–1253, 1256–1258.28Reopening and Extension of Comment Periods

for Rulemakings Implementing the Dodd-Frank

Wall Street Reform and Consumer Protection Act,76 FR 25274 (May 4, 2011). The Commissionextended the applicable comment periods toprovide the public an additional opportunity tocomment on the proposed new regulatoryframework. The Commission also opened anadditional comment period, which ended on June10, 2011, to provide the public an opportunity tocomment on the Commission’s phasedimplementation of the Act, as amended, includingits implementation of section 733 of Dodd-FrankAct. Joint Public Roundtable on Issues Related tothe Schedule for Implementing Final Rules forSwaps and Security-Based Swaps Under the Dodd-Frank Wall Street Reform and Consumer ProtectionAct, 76 FR 23221 (Apr. 26, 2011).

29The Commission also held two roundtablestouching on issues related to the SEF NPRM: (1)‘‘Available to Trade’’ Provision for Swap Execution

Facilities and Designated Contract Markets; and (2)Proposed Regulations Implementing Core Principle9 for Designated Contract Markets. Transcripts areavailable through the Commission’s Web site athttp://www.cftc.gov/PressRoom/Events/2012Events/ index.htm.

30A list of the full names and abbreviations of commenters to the SEF NPRM is included insection IV at the end of this release. TheCommission notes that many commenterssubmitted more than one comment letter.Additionally, all comment letters that pertain to theSEF NPRM, including those from the additionalcomment periods related to implementation of thefinal Dodd-Frank rules, are contained in the SEFrulemaking comment file and are available throughthe Commission’s Web site at http://

comments.cftc.gov/PublicComments/ CommentList.aspx?id=955.

31Meeting summaries are available through theCommission’s Web site at http://comments.cftc.gov/ PublicComments/CommentList.aspx?id=955.

32Registration and Regulation of Security-BasedSwap Execution Facilities, 76 FR 10948 (proposedFeb. 28, 2011).

3315 U.S.C. 8302(a)(1).34Tradeweb Comment Letter at 3–4 (Jun. 3, 2011);

Reuters Comment Letter 3–4 (Mar. 8, 2011); FSRComment Letter at 10–11 (Mar. 8, 2011); WMBAAComment Letter at 10–11 (Mar. 8, 2011).

35Registration and Regulation of Security-BasedSwap Execution Facilities, 76 FR at 10950.

subject to the clearing and tradeexecution mandates, illiquid or bespokeswaps, or block trades).24 Under the SEFNPRM, Required Transactions wererequired to be executed on theminimum trading functionality, anOrder Book meeting the minimumtrading functionality, or an RFQ System(in conjunction with the minimum

trading functionality).25 The SEF NPRMalso allowed a SEF to provide additionalmethods of execution for PermittedTransactions, including Voice-BasedSystems.26

(4) Regulations, guidance, andacceptable practices to implement the15 core principles specified in section5h(f) of the Act.27

The initial comment period for theSEF NPRM ended on March 8, 2011.Subsequently, the Commissionreopened the comment period until June3, 2011, as part of its global extensionof comment periods for various

rulemakings implementing the Dodd-Frank Act.28 After the second commentperiod ended, the Commissioncontinued to accept and consider latecomments, which it did until April 30,2013.29 The Commission receivedapproximately 107 comment letters onthe SEF NPRM from members of thepublic.30 The Chairman and

Commissioners, as well as theCommission staff, participated innumerous meetings with representativesof single dealer platforms, interdealer

brokers, DCMs, trade associations, OTCmarket participants, potential SEFapplicants, and other interestedparties.31 In addition, the Commissionconsulted with the Securities and

Exchange Commission (‘‘SEC’’) andinternational regulators on numerousoccasions.

II. Part 37 of the Commission’sRegulations—Final Rules

A. Adoption of Regulations, Guidance,and Acceptable Practices

In this final rulemaking, theCommission is adopting many of theproposed regulations that each SEFmust meet in order to comply withsection 5h of the CEA, both initiallyupon registration and on an ongoing

basis, and related guidance, and

acceptable practices. As a result of thewritten comments received anddialogue and meetings with the public,the Commission has revised oreliminated a number of regulations thatwere proposed in the SEF NPRM, andin a number of instances, has codifiedguidance and/or acceptable practices inlieu of the proposed regulations. Indetermining the scope and content of the final SEF regulations, theCommission has carefully consideredthe costs and benefits for each rule withparticular attention to the publiccomments. Additionally, the

Commission has taken into account theconcerns raised by commentersregarding the potential effects of specificrules on SEFs offering different swapcontracts and trading systems orplatforms and the importance of thestatutory differences between SEFs andDCMs. The Commission addresses theseissues below in its discussion of specificrule provisions.

The Commission also notes that theSEC has proposed rules related tosecurity-based SEFs (‘‘SB–SEFs’’) asrequired under section 763 of the Dodd-Frank Act (‘‘SB–SEF NPRM’’).32 Section712(a) of the Dodd-Frank Act states that

before commencing any rulemakingregarding swap execution facilities, theCommission ‘‘shall consult andcoordinate to the extent possible withthe Securities and ExchangeCommission and the prudential

regulators for the purposes of assuringregulatory consistency andcomparability . . . .’’ 33 TheCommission has also received severalcomments stating that the Commissionand the SEC should harmonize theirrules as much as possible.34

The Commission has coordinatedwith the SEC to harmonize the SEF and

SB–SEF requirements to the extentpossible and has taken intoconsideration the comments for greaterharmonization between the SEF andSB–SEF regulations. However, theremay be appropriate differences in theapproach that each agency may takeregarding the regulation of SEFs andSB–SEFs. Cognizant of the differentproducts and markets regulated by theSEC and the Commission, the SECrecognized in its SB–SEF NPRM thatthere may be differences in theapproach that each agency may takeregarding the regulation of SEFs and

SB–SEFs.35

Similarly, the Commission is mindfulthat swaps may also trade on DCMs.Thus, in addition to its efforts tocoordinate its approach with the SB–SEF regulations, the Commission alsoseeks, where possible, to harmonize thefinal SEF regulations with the DCMregulations in order to minimizeregulatory differences between SEFs andDCMs in those instances whereCongress enacted similar core principlesfor the two types of registered entities.In addition, some differences in theagencies’ regulatory oversight regimesmay be attributed to the fact that, unlike

the SEC that is only responsible foroverseeing trading in SB-swaps, such assingle-name securities and narrow-

based security indexes, the Commissionis charged with the oversight of swapstrading over a broad range of assetcategories. Consequently, theCommission has taken into account thevaried characteristics of thoseunderlying commodities in formulatingthe regulatory responsibilities of SEFs.

In the preamble sections below, theCommission responds to the substantivecomments submitted in response to theSEF NPRM. The Commission reviewed

and considered all comments inadopting this final rulemaking. Further,the final regulations include a numberof technical revisions and non-substantive changes to the proposedrule text intended to clarify certainprovisions, standardize terminology


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36Subparts B through P begin with a regulationcontaining the language of the core principle in theAct.

37The Commission has removed the phrase ‘ ‘has been registered’’ from proposed §37.1 because aSEF that has been registered is the same as a SEFthat is registered.

38Adaptation of Regulations to IncorporateSwaps, 77 FR 66288 (Nov. 2, 2012). TheCommission may promulgate a second phase of conforming changes to its regulations once morerules relating to swaps are finalized.

39The term ‘‘contract market’’ used in §1.60 of the Commission’s regulations should be interpretedto include a SEF for purposes of applying therequirements of §1.60 to a SEF. 17 CFR 1.60.

40The term ‘‘exchange’’ used in part 9 of theCommission’s regulations should be interpreted toinclude a SEF for purposes of applying therequirements of part 9 to a SEF. 17 CFR part 9.

41The Commission is renaming the title of thissection from ‘‘Requirements for Registration’’ to‘‘Requirements and Procedures for Registration’’ toprovide greater clarity. The Commission is alsorestructuring the order of §37.3 to provide clarity.


43 Id.

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

may operate a facility for the trading or processingof swaps unless the facility is registered as a swapexecution facility or designated contractmarket. . . .’’ 7 U.S.C. 7b–3(a)(1).


47 Id. at 1221–22. CEA sections 2(h)(7) and2(h)(8); 7 U.S.C. 2(h)(7) and 2(h)(8). See discussion below under §37.10—Swaps Made Available forTrading in the preamble for further detailsregarding this process.

48 Id. at 1222.49CEA section 5h(a)(1) states that ‘‘[n]o person

may operate a facility for the trading or processingof swaps unless the facility is registered as a swapexecution facility or designated contractmarket. . . .’’ 7 U.S.C. 7b–3(a)(1). UBS CommentLetter at 1–2 (May 18, 2012); UBS Comment Letterat 2–3 (Nov. 2, 2011); Barclays Comment Letter at2 (Jun. 3, 2011); Deutsche Comment Letter at 6(Mar. 8, 2011); Bloomberg Comment Letter at 3(Mar. 8, 2011); State Street Comment Letter at 3(Mar. 8, 2011); CME Comment Letter at 8 (Mar. 8,2011).

50UBS Comment Letter at 1 (May 18, 2012). TheCommission notes that UBS submitted 2 commentletters on May 18, 2012.

within this part 37, conformterminology to that used in other partsof the Commission’s regulations, andmore precisely state regulatorystandards and requirements. Forexample, a minimum tradingfunctionality requirement was inproposed §37.9, which has been movedto the registration section under final

§ 37.3 to clarify that this functionality isrequired in order to register as a SEF.The final regulations will becomeeffective 60 days after their publicationin the Federal Register.

B. General Regulations (Subpart A)

The regulations in this finalrulemaking are codified in subparts Athrough P under part 37 of theCommission’s regulations. The generalregulations consisting of §§37.1 through37.9 are codified in subpart A, and theregulations applicable to each of the 15core principles are codified in subparts

B through P, respectively.36

1. § 37.1—Scope

Proposed §37.1 provided that part 37applies to entities that are registeredSEFs, have been registered SEFs, or areapplying to become registered SEFs. Theproposed rule also stated that part 37does not restrict the eligibility of SEFsto operate under the provisions of parts38 or 49 of this chapter.

(a) Commission Determination

The Commission received nocomments on this section and isadopting the provision as proposed.37

2. §37.2—Applicable Provisions

Proposed §37.2 listed theCommission regulations that, inaddition to part 37, will be applicable toSEFs, including regulations that have

been codified and are proposed to becodified upon the Commission’sfinalization of the rulemakingsimplemented pursuant to the Dodd-Frank Act.

(a) Commission Determination

Although it received no comments onthis section, the Commission is revising

proposed §37.2 to generally state thatSEFs shall comply with, in addition topart 37, all applicable Commissionregulations, and to only cite thosespecific provisions whose applicabilityto SEFs may not be apparent. TheCommission notes that a separate

rulemaking adopted conformingchanges to existing regulations to clarifythe pre-Dodd Frank provisionsapplicable to SEFs.38 There are,however, certain existing regulationsthat will apply to SEFs that the separaterulemaking did not address.Accordingly, for clarity purposes, theCommission is specifically stating that

§1.60 39 and part 9 40 of its regulationswill apply to SEFs. These revisions willeliminate the need for the Commissionto continually update §37.2 when newregulations with which SEFs mustcomply are codified.

3. §37.3—Requirements forRegistration 41

Proposed §37.3 established, amongother procedures, applicationprocedures for temporary and fullregistration of new SEFs, andprocedures for the transfer of aregistration. To assist prospective SEF

applicants, the SEF NPRM includedunder appendix A to part 37 anapplication form titled Form SEF. FormSEF included information that anapplicant would be required to provideto the Commission in order for theCommission to make a determinationregarding the applicant’s request for SEFregistration.

With respect to which entities mustregister as a SEF, the SEF NPRM statedthat in order for an entity to meet theSEF definition and satisfy the SEFregistration requirements, multipleparties must have the ability to executeor trade swaps by accepting bids andoffers made by multiple participants.42 In this regard, the SEF NPRM stated thatone-to-one voice services and singledealer platforms do not satisfy the SEFdefinition because multiple participantsdo not have the ability to execute ortrade swaps with multipleparticipants.43 In addition, the SEFNPRM stated that entities that operateexclusively as swap processors do not

meet the SEF definition and should not be required to register.44 Although theSEF NPRM stated that the registrationprovision in CEA section 5h(a)(1) could

be read to require the registration of entities that solely engage in tradeprocessing,45 it stated that such entitiesdo not meet the SEF definition andshould not be required to register as

SEFs because: (1) They do not providethe ability to execute or trade a swap asrequired by the SEF definition; and (2)the SEF definition does not include theterm ‘‘process.’’ 46

The SEF NPRM also noted that CEAsection 2(h)(8) requires that transactionsinvolving swaps subject to the clearingrequirement be executed on a DCM orSEF, unless no DCM or SEF makes suchswaps available to trade or such swapsqualify for the clearing exception underCEA section 2(h)(7).47 In this regard, theSEF NPRM stated that marketparticipants may desire to avail

themselves of the benefits of trading onSEFs for swaps that are not subject tothe CEA section 2(h)(8) trade executionrequirement, but it also acknowledgedthat such swaps are not required to beexecuted on a SEF or DCM.48

(a) Requirements for Registration

(1) Summary of Comments

Several commenters asserted that theproposed rule is ambiguous as to whomust register as a SEF as required underCEA section 5h(a)(1) and requestedclarification.49 For example, UBS statedthat the Commission should clarify that

‘‘the SEF registration requirement in[CEA section 5h(a)(1)] only applies toplatforms that meet the SEFdefinition.’’50 In addition, Barclays


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51Barclays Comment Letter at 2 (Jun. 3, 2011).52Bloomberg Comment Letter at 3 (Mar. 8, 2011).53AFR Comment Letter at 3–4 (Mar. 8, 2011). JP

Morgan also commented that it agrees with theCommission that a single dealer platform cannotqualify as a SEF because it fails to satisfy the‘‘multiple to multiple’’ language in the SEFdefinition. JP Morgan Comment Letter at 3 (Mar. 8,2011).

54 IECA Comment Letter at 3 (May 24, 2011).55Nodal Comment Letter at 2–3 (Jun. 3, 2011);

Nodal Comment Letter at 2–3 (Mar. 8, 2011). Nodalalso expressed support for blind auction platformsin its comment letter to the Second Amendment to July 14, 2011 Order for Swap Regulation Notice of Proposed Amendment, 77 FR 28819 (proposed May16, 2012).

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

57 Id.58 Id. at 2.59UBS Comment Letter at 1 (May 18, 2012);

Meeting with UBS dated Mar. 27, 2012; Meeting

with Bloomberg dated Jan. 18, 2012. See also UBSComment Letter at 1 (Nov. 2, 2011).

60Meeting with UBS dated Mar. 27, 2012. Seealso UBS Comment Letter at 1 (Nov. 2, 2011).

61Meeting with UBS dated Mar. 27, 2012.62Meeting with ICAP and TriOptima dated Sep.

6, 2012; Meeting with ICAP dated Aug. 29, 2012;Meeting with ICE dated Jul. 25, 2012; WMBAAComment Letter at 3 (Jul. 18, 2011); ICAP CommentLetter at 2 (Jul. 7, 2011); TriOptima Comment Letterat 1 (Mar. 8, 2011).

63TriOptima Comment Letter at 2, 4 (Mar. 8,2011).

64 Id. at 2. The service does not place anyconstraints on the number of positions or risktolerances of prospective participants. Id.

65 Id. at 3.66 Id.67 Id.68 Id.69 Id.70 Id.71Meeting with ICAP dated Aug. 29, 2012; ICAP

Comment Letter at 1, 4 (Jul. 7, 2011).72Meeting with ICAP dated Aug. 29, 2012; ICAP

Comment Letter at 4 (Jul. 7, 2011).73 Id.74 Id. The service does not place any constraints

on the number of positions or risk tolerances of prospective participants. Id.

75 Id.

commented that the language of CEAsection 5h(a)(1) should not be read

broadly to require SEF registration forany platform or system that executes orprocesses swaps to the extent it isdeemed to be a ‘‘facility’’ withoutconsidering whether such swaps are orare not subject to the CEA section2(h)(8) trade execution mandate.51

Similarly, Bloomberg noted the broadlanguage under the CEA section 5h(a)(1)registration requirement, and stated thatif Congress intended that all swaps betraded on a SEF or DCM, then the tradeexecution mandate under CEA section2(h)(8) would be unnecessary.52 TheCommission also received commentsand specific requests for a Commissiondetermination as to whether certain

business models or services mustregister as a SEF, including one-to-manyplatforms, blind auction platforms,aggregation services or portals, portfoliocompression services, risk mitigation

services, and swap processing services.(i) One-to-Many Systems or Platforms

AFR opined that single dealer or one-to-many platforms do not meet the SEFdefinition in CEA section 1a(50), whichrefers to a system in which multipleparties have the ability to execute ortrade swaps by accepting bids or offersfrom multiple participants.53 Similarly,IECA stated that SEFs should operate ina way that publicly reveals marketprices, and that preserving the ‘‘one-to-one’’ pricing model of existing dealersystems is inconsistent with the SEFdefinition.54

(ii) Blind Auction Systems or Platforms

Nodal commented that a blindauction platform should be able toregister as a SEF.55 Nodal contendedthat its blind auction platform meets theSEF definition because multipleparticipants have the ability to executeswap transactions by accepting bids andoffers made by multiple participantsalbeit without the pre-trade posting of

bids or offers.56 Nodal explained that itsplatform allows participants to submit

firm bids and offers without thedisclosure of the terms of those bids andoffers to other participants, and that theauction algorithmically processes the

bids and offers to match participantsefficiently.57 Nodal further explainedthat auction volume is awarded toparticipants at the same price and at aprice equal to or better than the

participants’ auction order.58 (iii) Aggregation Services or Portals

UBS and Bloomberg requestedclarification whether aggregator servicesare required to register as SEFs.59 UBSstated that an aggregator service willprovide customers with the ability toaccess the best available liquidity andpricing on multiple SEFs through theaggregator’s screen so that customerswill not have to connect to each SEFindividually.60 UBS stated that anaggregator service should not berequired to register as a SEF because thetransaction is executed on the relevantSEF’s platform.61

(iv) Services Facilitating PortfolioCompression and Risk MitigationTransactions

Several commenters soughtclarification that portfolio compressionand risk mitigation services are notrequired to register as SEFs.62 According to TriOptima, its portfoliocompression service provides a nettingmechanism that reduces the outstandingtrade count and outstanding grossnotional value of swaps in participants’portfolios by terminating or modifying

existing trades.63

Specifically,TriOptima stated that prospectiveparticipants may sign up for ascheduled compression cycle and theparticipants must provide detailed dataabout their respective portfolios and risktolerances.64 Other than to update mark-to-market values shortly before thecompression cycle is run, prospectiveparticipants have no further input intothe compression process, which is

entirely controlled by the compressionalgorithm.65 On a specified date,TriOptima runs the compression cycle,which produces a set of proposedtransactions for each participant.66 Theproposed transactions, if effected,would terminate or modify participants’existing trades in order to reduce theoutstanding trade count and outstanding

gross notional value of swaps in theparticipants’ portfolios.67 Eachparticipant receives only details of theproposed compression transactions towhich it is a party, but all of thecompression transactions must beaccepted in order for the particularcompression cycle to occur.68 If a singleparticipant declines to agree to theproposed compression transactions,then the entire compression cycle failsand the pre-compression swaptransactions remain in effect.69 TriOptima contended that such servicesdo not perform the role of a trade

execution venue so they should not beregulated as a SEF.70 ICAP stated that its bulk risk

mitigation service assists marketparticipants in managing their riskexposures by identifying offsetting riskrequirements and executing newoffsetting trades among thoseparticipants.71 Specifically, ICAP statedthat its risk mitigation service sets thecurve and price for all trades based ona survey of market making entities, suchas banks, or other entities that arewilling to provide quotes, as well asprice quotes on DCMs.72 All prospective

participants in a particular riskmitigation run are first shown the curveand prices for transactions along thecurve.73 Subsequently, the prospectiveparticipants provide ICAP with dataabout any of their positions of theirchoosing and their acceptable risktolerances.74 ICAP then runs aproprietary algorithm, which produces aset of proposed transactions for eachparticipant.75 The proposedtransactions, if effected, would result innew trades for the participants thatenable them to manage their exposuresto market, credit, or other sources of


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76 Id.77 Id.78 Id.79 ICAP Comment Letter at 2 (Jan. 16, 2013); ICAP

Comment Letter at 4 (Jul. 7, 2011).80MarkitSERV Comment Letter at 6 (Mar. 8,

2011).81MarkitSERV Comment Letter at 1–2 (Jun. 3,

2011).82 Id. at 3–4.83 Id. at 5.

84CEA section 5h(a)(1) states that ‘‘[n]o personmay operate a facility for the trading or processingof swaps unless the facility is registered as a swapexecution facility or as a designated contractmarket. . . .’’ 7 U.S.C. 7b–3(a)(1).

85See Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1219(explaining that entities that operate exclusively asswap processors do not meet the SEF definition andshould not be required to register as a SEF despitethe broad language in the CEA section 5h(a)(1)registration provision).

86CEA section 1a(50); 7 U.S.C. 1a(50). TheCommission notes that the Secretary of the Treasuryissued a written determination pursuant to CEAsections 1a(47)(E) and 1b that foreign exchangeswaps and foreign exchange forwards should not beregulated as swaps under the CEA, and thereforeshould be exempted from the definition of the term‘‘swap’’ under the CEA. See Determination of Foreign Exchange Swaps and Foreign ExchangeForwards Under the Commodity Exchange Act, 77FR 69694 (Nov. 20, 2012). Accordingly, if a facilityoffers a trading system or platform solely for theexecution or trading of foreign exchange swaps or

foreign exchange forwards, then the facility wouldnot be required to register as a SEF.87The Commission is adding this new provision

to §37.3(a)(1). As a result, proposed § 37.3(a) isadopted as §37.3(b), proposed § 37.3(b) is adoptedas §37.3(c), proposed § 37.3(c) is adopted as§ 37.3(d), proposed § 37.3(d) is adopted as § 37.3(e),proposed §37.3(e) is adopted as §37.3(f), andproposed §37.3(f) is adopted as § 37.3(g). The SEFNPRM stated that certain entities such as one-to-onevoice services and single-dealer platforms do notprovide the ability for participants to conductmultiple-to-multiple execution or trading becausethey limit the provision of liquidity to a singleliquidity provider. Core Principles and OtherRequirements for Swap Execution Facilities, 76 FRat 1219.

88The Commission notes that it is not tying theregistration requirement in CEA section 5h(a)(1) tothe trade execution requirement in CEA section2(h)(8), such that only facilities trading swapssubject to the trade execution requirement would berequired to register as a SEF. Therefore, a facilitywould be required to register as a SEF if it operatesin a manner that meets the SEF definition eventhough it only executes or trades swaps that are notsubject to the trade execution mandate. TheCommission also notes that transactions involvingswaps on SEFs that are subject to the tradeexecution mandate are considered to be ‘‘RequiredTransactions’’ under part 37 of the Commission’sregulations, whereas ‘‘Permitted Transactions’’ aretransactions not involving swaps that are subject tothe trade execution mandate. As discussed further below, the regulatory obligations which pertain toPermitted Transactions differ from, and aresomewhat less rigorous than, those for RequiredTransactions. See discussion below regardingPermitted Transactions under §37.9(a)(1)(iv)—Required Transactions and §37.9(a)(1)(v)—Permitted Transactions in the preamble. See alsoProcess for a Designated Contract Market or SwapExecution Facility To Make a Swap Available ToTrade, 76 FR 77728 (proposed Dec. 14, 2011)(discussing the process by which a swap isdetermined to be subject to the trade executionrequirement in CEA section 2(h)(8)).


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

risk.76 All transactions must be acceptedin order for a particular risk mitigationrun to occur.77 If a single participantdeclines to agree to the proposed riskmitigation transactions, then the entirerisk mitigation run fails and the existingswap transactions remain in effect.78 While its bulk risk mitigation servicesresult in market participants entering

into new trades, ICAP commented thatsuch services do not meet the SEFdefinition because they do not permitparticipants to trade in real-time,negotiate price, or initiate directionaltrades.79

(v) Swap Processing Services

In its first comment letter,MarkitSERV agreed with the SEF NPRMthat entities operating exclusively asswap processors should not have toregister as SEFs because they onlyprovide post-execution services thatfacilitate clearing and settlement, not

services relating to the execution of swaps.80 However, in a subsequentcomment letter, after the SEC’sproposed rule that would require certainproviders of post-trade services toregister with the SEC as clearingagencies, MarkitSERV recommendedthat the Commission regulate entitiesthat perform the confirmation andprocessing of swaps.81 WhileMarkitSERV acknowledged that theSEC’s authority under the Securities andExchange Act of 1934 to regulate swapprocessors as a clearing agency has noparallel in the CEA, MarkitSERVrecommended that the Commissionregister such entities to avoidunnecessarily inconsistentregulations.82 MarkitSERVrecommended that the Commissionrequire swap processors to register as asub-category of SEFs because CEAsection 5h(a)(1) references theprocessing of swaps.83

(2) Commission Determination

In response to commenters’ requestsfor clarification regarding theregistration requirement, theCommission is clarifying how itinterprets the broad registration

provision in section 5h(a)(1) of the Actin coordination with the specificrequirements for a SEF’s structure found

in section 1a(50) of the Act and thetrade execution requirement in section2(h)(8) of the Act. As noted in the SEFNPRM, the Commission views the CEAsection 5h(a)(1) registrationrequirement 84 as applying only tofacilities that meet the SEF definition inCEA section 1a(50).85 Section 1a(50) of the Act defines a SEF as ‘‘a trading

system or platform in which multipleparticipants have the ability to executeor trade swaps by accepting bids andoffers made by multiple participants inthe facility or system, through anymeans of interstate commerce, includingany trading facility, that—(A) Facilitatesthe execution of swaps betweenpersons; and (B) is not a designatedcontract market.’’ 86 Accordingly, theCommission is revising proposed §37.3to clarify the scope of the registrationrequirement, which states that ‘‘[a]nyperson operating a facility that offers atrading system or platform in which

more than one market participant hasthe ability to execute or trade swapswith more than one other marketparticipant on the system or platformshall register the facility as a swapexecution facility under this part 37 oras a designated contract market underpart 38 of this chapter.’’ 87

The Commission also clarifies thatswap transactions that are not subject to

the CEA section 2(h)(8) trade executionrequirement may be executed on eithera registered SEF (i.e., a facility thatmeets the SEF definition) or analternative entity that is not required toregister as a SEF (e.g., see one-to-manysystem or platform discussion below).88 This clarification is consistent with theCommission’s acknowledgement in the

SEF NPRM that swap transactions thatare not subject to the CEA section2(h)(8) trade execution requirementwould not have to be executed on aregistered SEF.89

The Commission believes that itsinterpretation of the registrationprovision in CEA section 5h(a)(1) isconsistent with the statute and helpsfurther the goals provided in CEAsection 5h, which are to promote thetrading of swaps on SEFs and topromote pre-trade price transparency inthe swaps market. Although theregistration provision is written in broad

language and could be read to requirethe registration of any facility for thetrading or processing of swaps, theCommission notes that other statutoryprovisions appear to narrow theregistration requirement. For example,the CEA section 2(h)(8) trade executionrequirement and CEA section 5h(d)(2),which states that ‘‘[f]or all swaps thatare not required to be executed througha swap execution facility . . . suchtrades may be executed through anyother available means of interstatecommerce[,]’’ 90 when read together,contemplate alternative entities that arenot required to register as SEFs and may

execute those swaps that are not


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91The Commission notes that entities seekingguidance concerning their SEF registrationobligations may request such further guidance fromthe Division of Market Oversight (‘‘DMO’’).

92Transactions in swaps that are subject to theclearing requirement in CEA section 2(h)(1) and‘‘made available to trade’’ would be subject to thetrade execution requirement. See CEA sections2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8). Seealso Process for a Designated Contract Market orSwap Execution Facility To Make a Swap Available

To Trade, 76 FR 77728 (proposed Dec. 14, 2011)(discussing the process by which a swap isdetermined to be subject to the trade executionrequirement in CEA section 2(h)(8)). The tradeexecution requirement provides an exception to therequirement for swap transactions subject to theclearing exception under CEA section 2(h)(7).

93The Commission notes that footnote 423 belowclassifies aggregator platforms as a type of independent software vendor (‘‘ISV’’). Therefore,other types of ISVs would not have to register asa SEF if they only provide their users with theability to access multiple SEFs, but do not providefor execution or trading of swaps. See discussion below regarding ISVs under §37.202(a)—ImpartialAccess by Members and Market Participants in thepreamble.

94For example, some aggregation services mayprovide their users with a portal to multiple SEFsand also execute swap transactions between their

multiple users. These services would have toregister as a SEF under section 5h(a)(1) of the Act.The Commission notes that if other types of ISVsprovide a system or platform whereby more thanone participant has the ability to execute or tradeswaps with more than one other participant on thesystem or platform, then they would also have toregister as a SEF under section 5h(a)(1) of the Act.See discussion below regarding ISVs under§ 37.202(a)—Impartial Access by Members andMarket Participants in the preamble.

95Confirmation, Portfolio Reconciliation,Portfolio Compression, and Swap TradingRelationship Documentation Requirements forSwap Dealers and Major Swap Participants, 77 FR55904, 55932 (Sep. 11, 2012).

96 Id. at 55960.97The Commission notes, however, that

transactions in swaps that are subject to the tradeexecution mandate, under CEA section 2(h)(8),must be executed on a DCM or SEF and,accordingly, may not be executed on a portfoliocompression service (unless no DCM or SEF makesthe swap available to trade or the swap transactionis excepted or exempted from clearing under CEAsection 2(h)(7) or as otherwise provided by theCommission).

required to be executed on a SEF (i.e.,those swaps that are not subject to theCEA section 2(h)(8) trade executionrequirement). The Commission isinterpreting the CEA section 5h(a)(1)registration provision in a manner thatis consistent with the SEF definition inCEA section 1a(50), the trade executionrequirement in CEA section 2(h)(8), and

CEA section 5h(d)(2), as discussedabove.

The following discussion is notintended to comprehensively coverwhich entities are required to register asa SEF. Whether a particular entity fallswithin the scope of CEA section 5h(a)(1)depends on all of the relevant facts andcircumstances of the entity’s operations.The Commission is mindful that anyrule attempting to capture all of thepossible configurations of facilities thatprovide for the execution or trading of swaps may be or become over-inclusiveor under-inclusive in light of

technological changes and the everevolving swaps market.91 However, inresponse to commenters’ requests, theCommission is providing examples of how it would interpret the CEA section5h(a)(1) registration requirement withrespect to certain categories of betterunderstood facilities.

(i) One-to-Many Systems or Platforms

The Commission continues to believethat a one-to-many system or platformon which the sponsoring entity is thecounterparty to all swap contractsexecuted through the system or platformwould not meet the SEF definition in

section 1a(50) of the Act and, therefore,would not be required to register as aSEF under section 5h(a)(1) of the Act. Inthe Commission’s view, such a systemor platform does not meet the SEFdefinition because it limits theprovision of liquidity to a singleliquidity provider (i.e., the sponsoringentity). Accordingly, marketparticipants do not have the ability toconduct multiple-to-multiple executionor trading on such a trading system orplatform. The Commission notes,however, that transactions in swaps thatare subject to the trade execution

mandate, under CEA section 2(h)(8),must be executed on a DCM or SEF and,accordingly, may not be executed on aone-to-many system or platform.92

(ii) Blind Auction Systems or Platforms

The Commission understands fromcommenters that a blind auction systemor platform, as described above, allowsmarket participants to submit firm bidsand offers without disclosure of theterms of those bids and offers to otherparticipants. Such bids and offers arematched through a pre-determinedalgorithm. The Commission believesthat an entity that provides such a blindauction system or platform would meetthe SEF definition in CEA section 1a(50)

because more than one marketparticipant has the ability to execute ortrade swaps with more than one othermarket participant on the system orplatform. Accordingly, an entity thatprovides such a blind auction system orplatform would have to register as a SEFunder section 5h(a)(1) of the Act.

(iii) Aggregation Services or Portals

The Commission understands that

certain entities may seek to providetheir users with the ability to accessmultiple SEFs and the marketparticipants thereon, but do not providefor execution on their aggregationservices as execution occurs on one of those individual SEFs. The Commission

believes that an entity that providessuch an aggregation service would notmeet the SEF definition in CEA section1a(50) because it is only providing aportal through which its users mayaccess multiple SEFs and swaps are notexecuted or traded through the service.Accordingly, an entity that providessuch an aggregation service or portalwould not have to register as a SEFunder section 5h(a)(1) of the Act.93 However, the Commission notes that tothe extent that an aggregation service orportal itself provides a trading system orplatform whereby more than one marketparticipant has the ability to execute ortrade swaps with more than one othermarket participant on the system orplatform, the aggregation service would

be required to register as a SEF.94

(iv) Services Facilitating PortfolioCompression and Risk MitigationTransactions

The Commission notes that portfoliocompression services provide a nettingmechanism that reduces the outstandingtrade count and outstanding grossnotional value of swaps in two or moreswap counterparties’ portfolios.95 Toachieve this result, a portfoliocompression service, for example, maywholly terminate or change the notionalvalue of some or all of the swapssubmitted by the counterparties forinclusion in the portfolio compressionexercise and, depending on themethodology employed, replace theterminated swaps with other swapswhose combined notional value (orsome other measure of risk) is less thanthe combined notional value (or someother measure of risk) of the terminatedswaps in the compression exercise.96 The swap counterparties’ risk profiles

are not materially changed as a result of the portfolio compression exercise.

The Commission does not believe thata portfolio compression service, asdescribed above, provides for theexecution or trading of swaptransactions between counterparties

because the compression service isproviding a netting mechanism wherebythe outstanding trade count andoutstanding gross notional value of swaps in two or more swapcounterparties’ portfolios are reduced.Therefore, an entity providing such aportfolio compression service would not

meet the SEF definition in section1a(50) of the Act and would not have toregister as a SEF under section 5h(a)(1)of the Act.97

The Commission understands fromcommenters that certain entities provide


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98The Commission also notes that ICAP’s Websites for its Reset and ReMatch risk mitigationservices support the notion that these services areexecuting trades between counterparties. ICAP’sReset Web site states that ‘‘[t]he new RESETmatching engine allows for unilateral matchingwith hedging. No longer is it necessary to have anoffsetting position for each trade to be executed.’’See http://www.reset.net/aboutus.php. A pressarticle regarding ReMatch states that ‘‘ReMatchaddresses the problem of minimal or no exitliquidity . . . [by] enabling market participants toexit positions that they may otherwise have beenunable to.’’ See http://www.icap.com/news-events/ in-the-news/news/2011/rematch-expands-service-into-us-financials.aspx. 99CEA section 5h(e); 7 U.S.C. 7b–3(e).


101Reuters Comment Letter at 3–4 (Dec. 12, 2011);Rosen et al. Comment Letter at 8–9 (Apr. 5, 2011);WMBAA Comment Letter at 4, 9 (Mar. 8, 2011);

ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 2011);FXall Comment Letter at 4–5 (Mar. 8, 2011).Commissioner Sommers’ dissent to the SEF NPRM.See Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1259.


103 Id.104 Id.105Reuters Comment Letter at 3–4 (Dec. 12, 2011);

Rosen et al. Comment Letter at 8 (Apr. 5, 2011);ISDA/SIFMA Comment Letter at 5–6 (Mar. 8, 2011);CME Comment Letter at 7–8 (Mar. 8, 2011); FXallComment Letter at 4–5 (Mar. 8, 2011); BarclaysComment Letter at 5 (Mar. 8, 2011); MarketAxessComment Letter at 32–33 (Mar. 8, 2011); WMBAAComment Letter at 8 (Mar. 8, 2011).

risk mitigation services, as describedabove, that operate to assist marketparticipants in managing theirexposures to market, credit, and othersources of risk. These risk mitigationservices may redistribute or mitigatemarket participants’ risks, but they donot provide a netting mechanism. Toredistribute or mitigate risk, a risk

mitigation service, for example, mayallow market participants to identifyelements of risk in their respectiveportfolios and to submit informationabout these risks to the service. The riskmitigation service may set the prices forall points along the maturity or creditcurve for all trades and the service’sproprietary algorithm produces a set of proposed transactions for eachparticipant. If all participants accept theproposed transactions, then the newtrades are executed.

In the Commission’s view, such anentity would meet the SEF definition in

CEA section 1a(50) because more thanone market participant has the ability toexecute swaps with more than one othermarket participant on the system orplatform.98 In response to ICAP’scomment that such services do not meetthe SEF definition because they do notpermit participants to trade in real-time,negotiate price, or initiate directionaltrades, the Commission notes that theSEF definition does not require any of these stated characteristics. As notedabove, the outcome of a successful riskmitigation run is the execution of newtrades between multiple participants atprices accepted by those multiple

participants.Additionally, the Commission notes

that there are alternative avenues tomanaging the same risks that riskmitigation services manage, including

bringing the risk mitigating orders to theopen market. For instance, a marketparticipant could assess the various riskelements in its portfolio usingappropriate tools, and then decide on aset of trades to mitigate these risks. Themarket participant could choose toexecute these trades through a riskmitigation service, a SEF, or a DCM. Infact, in the DCM context, market

participants execute such risk mitigatingtrades on the DCM and not through aseparate non-DCM service. As such, riskmitigation services are providing analternative avenue to execute certainswap transactions betweencounterparties.

Furthermore, the Commission believes that the confluence of trading

interests from a diverse range of motivations (e.g., risk mitigating andrisk taking trades) brings depth to themarketplace and helps to build liquidmarkets. If the Commission did notrequire these risk mitigation services toregister as SEFs, then marketparticipants would be able to executecertain swap transactions away from theSEF, which would hurt liquidity andalso the trading of swaps on SEFs. Thiswould contradict one of the goals insection 5h of the Act, which is topromote the trading of swaps on SEFs.99

For the reasons mentioned above, the

Commission believes that an entity thatprovides such a risk mitigation servicewould have to register as a SEF undersection 5h(a)(1) of the Act. However, theCommission notes that such entitiesmay not have to register as a SEF if theyonly provide the analytical services thatproduce the proposed risk mitigationtransactions and the execution of thosetransactions occurs elsewhere and, inparticular, the execution of thosetransactions that are subject to the tradeexecution mandate occurs on a SEF.

(v) Swap Processing Services

As noted in the SEF NPRM, entities

that solely engage in trade processingwould not meet the SEF definition inCEA section 1a(50) because they do notprovide the ability to execute or trade aswap as required by the definition.Accordingly, swap processing serviceswould not have to register as a SEFunder CEA section 5h(a)(1). Consistentwith this distinction, the Commissiondeclines to create a sub-category of SEFsfor processing services that would besubject to some limited subset of SEFcore principles as requested byMarkitSERV.

Finally, the Commission notes that

platforms seeking guidance concerningthe SEF registration obligations and itsapplication to their particularoperations may request informalguidance from the Division of MarketOversight (‘‘DMO’’).

(b) §37.9(b)(2)—Minimum TradingFunctionality (Final §37.3(a)(2))

To further clarify what functionalitiesa SEF must provide if it is required toregister as a SEF, as opposed to what

functionalities trigger the registrationrequirement, the Commission is movingproposed §37.9(b)(2) to final§ 37.3(a)(2). As discussed in the SEFNPRM, an entity that must register as aSEF under CEA section 5h(a)(1) mustensure that its operations comply withthe minimum trading functionalityrequirement.100 The minimum trading

functionality requirement in proposed§ 37.9(b)(2) provided that an applicantseeking registration as a SEF must, at aminimum, offer trading services tofacilitate Required Transactions byproviding market participants with theability to post both firm and indicativequotes on a centralized electronic screenaccessible to all market participantswho have access to the SEF.


Several commenters stated that theminimum trading functionality issimilar to an order book, which is notrequired by the SEF definition.101 Inthis regard, Commissioner Sommersoffered a dissent to the SEF NPRM,which was published as Appendix 3 tothat notice.102 Commissioner Sommers’dissent asserted that the minimumtrading functionality requirement is notmandated by the Dodd-Frank Act.103 Inaddition, Commissioner Sommers’dissent argued for a broaderinterpretation of the terms ‘‘tradingsystem’’ and ‘‘platform,’’ which areincluded in the statutory SEF definitionso that SEFs can offer a broader modelfor executing swaps.104 Manycommenters also stated that the SEF

definition only requires that the facilityprovide multiple participants with the‘‘ability’’ to execute or trade swaps byaccepting bids and offers made by‘‘multiple participants’’ and, thus, thedefinition does not require making bidsor offers transparent to the entire market

but rather to multiple participants.105 Better Markets commented that theCommission’s minimum trading


http://www.reset.net/aboutus.php

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106Better Markets Comment Letter at 6–7 (Mar. 8,2011).

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

ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011);SIFMA AMG Comment Letter at 9 (Mar. 8, 2011);ICE Comment Letter at 3 (Mar. 8, 2011); TradewebComment Letter at 6 (Mar. 8, 2011).

109Nodal Comment Letter at 3–4 (Mar. 8, 2011);ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011);SIFMA AMG Comment Letter at 9 (Mar. 8, 2011);ICE Comment Letter at 3 (Mar. 8, 2011).

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

Swap Execution Facilities, 76 FR at 1219.112The Commission is renumbering proposed

§ 37.9(b)(2) to § 37.3(a)(2).

113CEA section 1a(50); 7 U.S.C. 1a(50). In section5h(e) of the Act, Congress provided a ‘‘rule of construction’’ to guide the Commission’sinterpretation of certain SEF provisions (stating thatthe goals of section 5h of the Act are to ‘‘promotethe trading of swaps on [SEFs] and to promote pre-trade price transparency in the swaps market’’). 7U.S.C. 7b–3(e).


115See discussion below under §37.9(a)(1)(ii)—Request for Quote System in the preamble.

116See discussion below under §37.9(b)(1) and(b)(4)—Execution Methods for RequiredTransactions in the preamble. Section 13.2 willallow the Commission to consider if a broadermodel for executing on SEFs, consistent with thesuggestion in Commissioner Sommers’ dissent,would be appropriate on a case-by-case basis, inconformance with the CEA and the Commission’sregulations. Core Principles and OtherRequirements for Swap Execution Facilities, 76 FRat 1259.

117See discussion below under §37.9(b)(1) and(b)(4)—Execution Methods for RequiredTransactions in the preamble.

118See § 37.9(c)(2).

119CEA section 1a(50); 7 U.S.C. 1a(50).120The term ‘‘electronic trading facility’’ means

‘‘a trading facility that—(A) operates by means of an electronic or telecommunications network; and(B) maintains an automated audit trail of bids,offers, and the matching of orders or the executionof transactions on the facility.’’ CEA section 1a(16);7 U.S.C. 1a(16). The Commission notes that, under

section 1a(16) of the Act, the term ‘‘electronictrading facility’’ incorporates the definition of ‘‘trading facility’’ as that term is defined undersection 1a(51) of the Act.

121The term ‘‘trading facility’’ means ‘‘a personor group of persons that constitutes, maintains, orprovides a physical or electronic facility or systemin which multiple participants have the ability toexecute or trade agreements, contracts, ortransactions—(i) by accepting bids or offers made by other participants that are open to multipleparticipants in the facility or system; or ( ii) throughthe interaction of multiple bids or multiple offerswithin a system with a pre-determined non-discretionary automated trade matching andexecution algorithm.’’ CEA section 1a(51)(A);7 U.S.C. 1a(51)(A).

functionality requirement is an overly broad interpretation of the SEFdefinition because it allows a SEF to bealmost any type of system orplatform.106 Therefore, it recommendedthat the Commission narrowly interpretthe multiple participant to multipleparticipant requirement so that thescope of acceptable execution methods

has rational boundaries.107 Several commenters expressed

concern about the requirement to postindicative quotes.108 Nodal and othercommenters expressed concern thatindicative quotes could be used formanipulative purposes.109 Tradewebcommented that, under the proposal,SEFs operating an anonymous order

book system would be required to offerindicative quotes due to the minimumtrading functionality requirement,which would not be suitable foranonymous order book marketplaces.110


The Commission reiterates its view inthe SEF NPRM that an entity that mustregister as a SEF under CEA section5h(a)(1) must ensure that its operationscomply with the minimum tradingfunctionality requirement.111 TheCommission reaffirms that an acceptableSEF system or platform must provide atleast a minimum functionality to allowmarket participants the ability to makeexecutable bids and offers, and todisplay them to all other marketparticipants on the SEF. TheCommission is adopting a revisedversion of proposed § 37.9(b)(2), which

now requires a SEF to provide an OrderBook as defined in final § 37.3(a)(3) (i.e.,an electronic trading facility, a tradingfacility, or a trading system or platformin which all market participants havethe ability to enter multiple bids andoffers, observe or receive bids andoffers, and transact on such bids andoffers) because, as noted by severalcommenters, the proposed minimumtrading functionality description issimilar to the proposed definition of anOrder Book.112 In response tocomments, like the one provided by

Commissioner Sommers, that an order book is not required by the SEFdefinition, the Commission believes thatan Order Book, as defined in final§ 37.3(a)(3), is consistent with the SEFdefinition and promotes the goalsprovided in section 733 of the Dodd-Frank Act.113 This interpretation is alsoconsistent with the SEF NPRM, as the

Commission noted that it took intoaccount these requirements whenproposing the minimum tradingfunctionality requirement.114

The Commission notes, however, thatthe final regulations provide SEFs withadditional flexibility in the executionmethods for Required Transactions byallowing SEFs to offer an RFQ Systemin conjunction with an Order Book, asdescribed below, to permit marketparticipants to access multiple marketparticipants, but not necessarily theentire market.115 The Commission alsonotes that a SEF may petition the

Commission under § 13.2 of theCommission’s regulations to amend itsregulations to include additionalexecution methods for RequiredTransactions.116 The final regulationsfurther allow a SEF to utilize ‘‘anymeans of interstate commerce’’ inproviding the execution methods in§ 37.9(a)(2)(i)(A) or (B) (i.e., an OrderBook or an RFQ System that operates inconjunction with an Order Book, asdescribed below).117 The Commissionalso notes that a SEF may provide anymethod of execution for PermittedTransactions.118 By allowing SEFs to

offer additional methods of execution,and permitting flexible means forexecuting swaps through these methodsof execution, as discussed below, theCommission is effectuating theCongressional direction to allow

multiple participants to execute swaps by accepting bids and offers made bymultiple participants through anymeans of interstate commerce.119 TheCommission notes that a DCM mustoperate as a trading facility and inconjunction with that trading facility isalso permitted to utilize additionalexecution methods; however, those

additional execution methods arelimited by the requirements set forth inDCM Core Principle 9, for which thereis no identical core principle for SEFs.

Finally, given the changes to theminimum trading functionalityrequirement, the Commission notes thatSEFs are not required to offer indicativequote functionality. The Commissionagrees with commenters that indicativequotes would not be appropriate forcertain trading systems or platformscomplying with the Order Bookdefinition in final § 37.3(a)(3) (e.g.,central limit order books facilitating

only anonymous trading).

(c) §37.9(a)(1)(i)—Order Book (Final§ 37.3(a)(3))

The Commission is also movingproposed §37.9(a)(1)(i) to final§ 37.3(a)(3) given the relocation of, andchanges to, the minimum tradingfunctionality section as discussedabove. Proposed § 37.9(a)(1)(i) definedthe term ‘‘Order Book’’ to mean: (A) Anelectronic trading facility, as that term isdefined in section 1a(16) of the Act; 120 (B) a trading facility, as that term isdefined in section 1a(51) of the Act; 121 (C) a trading system or platform inwhich all market participants in thetrading system or platform can entermultiple bids and offers, observe bidsand offers entered by other marketparticipants, and choose to transact onsuch bids and offers; or (D) any such


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

123The Commission is renumbering proposed§ 37.9(a)(1)(i) to §37.3(a)(3). The Commission isrevising the definition in proposed §37.9(a)(1)(i)(C) by replacing the word ‘‘can’’ with the phrase ‘‘havethe ability to’’ and deleting the words ‘‘choose to.’ ’The Commission is also adding the words ‘‘orreceive’’ after the word ‘‘observe’’ so that thedefinition is technology neutral. See ‘‘Through AnyMeans of Interstate Commerce’’ Language in theSEF Definition discussion below under §§ 37.9(b)(1)and (b)(4)—Execution Methods for RequiredTransactions in the preamble for further details.

124See discussion below under § 37.9(b)(1) and(b)(4)—Execution Methods for RequiredTransactions in the preamble.

125The Commission is renaming the title of thissection from ‘‘Application Procedures’’ to‘‘Procedures for Full Registration’’ to providegreater clarity.

126Proposed Form SEF, as set forth in proposedappendix A to part 37, was to be used for initialor temporary registration as a SEF as well as for anyamendments to an applicant’s status otherwise notrequired to be submitted under part 40 of theCommission’s regulations.

127See Registration and Regulation of Security-Based Swap Execution Facilities, 76 FR 10948(proposed Feb. 28, 2011). Tradeweb CommentLetter at 3–4 (Jun. 3, 2011); MarketAxess CommentLetter at 20–21 (Mar. 8, 2011); WMBAA Comment

Letter at 14 (Mar. 8, 2011); FSR Comment Letter at10–11 (Mar. 8, 2011); Reuters Comment Letter at 3–4 (Mar. 8, 2011).

128MarketAxess Comment Letter at 20–21 (Mar.8, 2011).

129WMBAA Comment Letter at 14 (Mar. 8, 2011).130Tradeweb Comment Letter at 13 (Mar. 8,

2011).131MarketAxess Comment Letter at 29 (Mar. 8,

2011).132The Commission is renumbering proposed

§ 37.3(a) to §37.3(b) and making several non-substantive revisions to this provision and FormSEF for clarity. The Commission is also movingproposed §37.3(a)(7) regarding delegated authorityto the Director of DMO to §37.3(h).

133CEA section 5h(g); 7 U.S.C. 7b–3(g).134The Commission notes that subsequent

modifications to a SEF’s modes of execution or anyadditional SEF modes of execution wouldconstitute rules; therefore, the SEF must submitsuch rules to the Commission for review pursuantto the procedures under part 40 of theCommission’s regulations.

135The Commission is renumbering proposed§ 37.3(a)(6) to § 37.3(b)(3).


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


Better Markets commented that thedefinition of an ‘‘order book’’ shouldspecify that SEF systems must operatepursuant to a best price, first-in-timetrade matching algorithm.122


The Commission is adopting the ruleas proposed, subject to the modificationdescribed below.123 The Commissionnotes that the Dodd-Frank Act does notmandate that the Commission specify orrequire a particular trade-matchingalgorithm for modes of executionprovided by SEFs. Therefore, a SEF hasthe discretion to use a matchingalgorithm such as a price-time, price-size-time, or pro-rata allocation,provided, however, that such matchingalgorithm is published in the SEF’srulebook and submitted to theCommission for review and approval aspart of the registration application. TheCommission is eliminating proposed§ 37.9(a)(1)(i)(D) because, as discussedin § 37.9 below, a SEF may petition theCommission under § 13.2 to amend§ 37.9(a)(2) to include additionalexecution methods for RequiredTransactions.124

(d) § 37.3(a)—ApplicationProcedures 125

Proposed §37.3(a) set forth theapplication and approval procedures forthe registration of new SEFs. The

proposed rule required a SEF applicantto apply to the Commission byelectronically filing the proposed FormSEF.126 The proposed rule also providedthat the Commission would eitherapprove or deny the application or, if

deemed appropriate, register theapplicant as a SEF subject to conditions.


The Commission received severalcomments encouraging theharmonization of the registrationprocedures for SEFs with the SEC’sregistration procedures for SB–SEFs.127

In this regard, MarketAxessrecommended that the Commissionallow an SEC-registered SB–SEF tonotice register with the Commission.128 WMBAA recommended that theCommission and the SEC adopt acommon application form, which wouldprovide for a smoother, timeliertransition to the new regulatoryregime.129

Tradeweb requested that theCommission confirm that SEFapplicants do not need to file separateapplications for each mode of executionthat it will offer to participants,

provided that the application clearlyidentifies the different features of theseparate marketplaces and that eachfeature is in compliance with therules.130 Additionally, MarketAxessrequested clarification that theCommission does not intend proposed§ 37.3(a)(6) to require amendments toForm SEF after the Commissionapproves an application.131


The Commission is adopting §37.3(a)and Form SEF as proposed, subject tocertain modifications discussed

below.132 The Commission notes thatthere is no CEA provision whichprovides for SEF notice registration forSB–SEFs. The Commission does note,however, that section 5h(g) of the Actprovides that the Commission ‘‘mayexempt’’ a SEF from registration if thefacility is subject to comparable,comprehensive supervision andregulation by the SEC, a prudentialregulator, or the appropriate

governmental authorities in the homecountry of the facility.133 TheCommission observes that the SEC andother regulators have not implementedcomparable, comprehensive supervisionand regulation to the Commission’s SEFregulatory scheme at this time. TheCommission also observes that, it mustcomprehensively review and

understand a SEF’s proposed tradingmodels and operations, which willfacilitate trading for a more diverseuniverse of financial instruments andunderlying commodities than SB–SEFs.Therefore, at this time, the Commissionis not allowing for exempt SEFs.

In response to Tradeweb’s commentabout separate applications, theCommission clarifies that a SEFapplicant does not need to file separateapplications for each mode of executionthat it will offer to market participants,

but its application, as noted in ExhibitQ to Form SEF, must describe eachmode of execution offered.134 Additionally, in response toMarketAxess’s comment aboutamendments to Form SEF after theCommission registers a SEF, theCommission is revising proposed§ 37.3(a)(6)135 and Form SEF to clarifythat an amended Form SEF is requiredfor a SEF applicant amending a pendingapplication for registration or for a SEFrequesting an amendment to its order of registration. Otherwise, once registered,a SEF must file any amendments toForm SEF as a submission under part 40of the Commission’s regulations or as

specified by the Commission (e.g., byfiling quarterly financial resourcesreports pursuant to § 37.1306 or byfiling an amended Form SEF). As statedin the SEF NPRM, the Commissionclarifies that if any informationcontained in Form SEF is or becomesinaccurate for any reason, even after aSEF is registered, the SEF mustpromptly make the appropriatecorrections with the Commission.136

The Commission is adding final§ 37.3(b)(5) to the rule text that requiresthe Commission to review anapplication for registration as a SEFpursuant to the 180-day timeframe andprocedures specified in CEA section


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137CEA section 6(a); 7 U.S.C. 8(a). TheCommission notes that under CEA section 6(a), if the Commission notifies an applicant that its

application is materially incomplete and specifiesthe deficiencies in the application, the running of the 180-day period is stayed from the time of suchnotification. The Commission also notes that if anapplicant does not provide a complete Form SEF asprovided for under §37.3(b)(1)(i), the Commissionwill notify the applicant, pursuant to §37.3(b)(4),that its application will not be deemed to have beensubmitted for purposes of the Commission’s review.By ‘‘complete’’ Form SEF, the Commission meansthat the SEF applicant provides appropriatelyresponsive answers to each of the informational andexhibit items set forth in Form SEF. TheCommission notes that if the application is notdeemed to have been submitted for purposes of theCommission’s review, then the 180-day reviewperiod (when effective) will not have commenced.

138The Commission is renaming the title of thissection from ‘‘Temporary Grandfather Relief fromRegistration’’ to ‘‘Temporary Registration’’ toprovide greater clarity.

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

140MarketAxess Comment Letter at 16–17 (Mar.8, 2011); MFA Comment Letter at 4–5 (Mar. 8,2011).

141

MarketAxess Comment Letter at 16–17 (Mar.8, 2011).

142MarketAxess Comment Letter at 4 (Jun. 3,2011); Bloomberg Comment Letter at 5 (Jun. 3,2011); State Street Comment Letter at 6–7 (Mar. 8,2011); WMBAA Comment Letter at 14–15 (Mar. 8,2011); Tradeweb Comment Letter at 13 (Mar. 8,2011); MarketAxess Comment Letter at 17–19 (Mar.8, 2011).

143Bloomberg Comment Letter at 5 (Jun. 3, 2011).144MarketAxess Comment Letter at 17–19 (Mar.

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

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

6(a).137 This section will be effective forSEF applicants who submit theirapplications for registration as a SEF onor after two years from the effective dateof part 37. The Commission is adoptingthis provision so that SEF applicants aretreated comparably to DCM applicantswho currently are subject to the 180-dayCommission review period under CEA

section 6(a). Although Congress did notimpose a 180-day review period forSEFs, the Commission believes thatharmonization of the review periods forDCM and SEF applicants is appropriategiven the fact that both are registeredentities for the trading of swaps. TheCommission also believes that thisrequirement will provide greatercertainty for SEF applicants regardingthe time period for the Commission’sreview of their applications.

Finally, the Commission is clarifyingthe standard upon which theCommission will grant or deny

registration. Proposed § 37.3(a)(1) statedthat ‘‘[t]he Commission shall approve ordeny the application or, if deemedappropriate, register the applicant as aswap execution facility subject toconditions.’’ In addition, proposed§ 37.3(a)(2) stated that ‘‘[t]he applicationmust include information sufficient todemonstrate compliance with the coreprinciples specified in Section 5h of theAct.’’ Consistent with these provisions,the Commission is clarifying in final§ 37.3(b)(6) that: (i) The Commissionwill issue an order granting registrationupon a Commission determination, inits own discretion, that the applicant

has demonstrated compliance with theAct and the Commission’s regulationsapplicable to swap execution facilities;(ii) if deemed appropriate, theCommission may issue an ordergranting registration subject toconditions; and (iii) the Commissionmay issue an order denying registrationupon a Commission determination, inits own discretion, that the applicanthas not demonstrated compliance withthe Act and the Commission’s

regulations applicable to swapexecution facilities.

(e) §37.3(b)—Temporary GrandfatherRelief From Registration 138

Proposed §37.3(b) provided that anapplicant for SEF registration mayrequest that the Commission grant theapplicant temporary grandfather relief

from the registration requirement. Thetemporary relief would allow theapplicant to continue operating duringthe pending application review process.Under the proposed rule, to receivetemporary relief, the applicant wasrequired to provide the followinginformation to the Commission: (1) Anapplication for SEF registrationsubmitted in compliance with proposed§ 37.3(a); (2) a notification of its interestin operating under the temporary relief;(3) transaction data substantiating thatswaps have been traded and continue to

be traded on the applicant’s trading

system or platform at the time of itsapplication submission; and (4) acertification that the applicant believesthat it will meet the requirements of part37 of the Commission’s regulationswhen it operates under temporary relief.

Under proposed § 37.3(b)(2), anapplicant’s grant of temporary relief would expire on the earlier of: (1) Thedate that the Commission grants ordenies SEF registration; or (2) the datethat the Commission rescinds thetemporary relief. Proposed §37.3(b)(3)contained a sunset date for thetemporary relief provision of 365 days

following the effective date of the finalSEF regulations. Finally, theCommission proposed that the SEFrules, which include the requirementsfor temporary relief, would be effective90 days after their publication in theFederal Register.


(i) Comments on TemporaryGrandfather Relief

MarketAxess commented that thephrase ‘‘temporary grandfather relief’’ isambiguous and recommended that theCommission rename ‘‘temporary

grandfather relief’’ to ‘‘temporaryregistration.’’ 139

With respect to the substance of thisprovision, some commenters expressedconcern that the existing trading activityrequirement in proposed §37.3(b)(1)(ii)would prevent new entities from

qualifying for temporary relief.140 In thisregard, MarketAxess recommended thatthe Commission revise proposed§ 37.3(b)(1)(ii) to permit SEF applicants,as an alternative to providingtransaction data, to provide materialssubstantiating that the applicant’ssystem is operational and thereforecould facilitate trading in listed swaps

upon receiving temporary registrationfrom the Commission.141

Further, several commentersrecommended alternative certificationstandards under proposed§ 37.3(b)(1)(iii).142 Bloomberg, forexample, recommended that SEFs berequired to certify only that they haveimplemented rules ‘‘reasonablydesigned to ensure’’ compliance withpart 37.143 Similarly, MarketAxessrecommended a more flexiblecertification requirement becausecompliance with certain core principleswill need to await the build-out

functionality of third-party regulatoryservice providers.144 In addition, Phoenix commented that

to avoid any market disruptions, theCommission should permit SEFapplicants to operate under temporaryrelief while awaiting a Commissiondetermination to either grant or denythe temporary relief request.145 MarketAxess also noted that theCommission should not ‘‘tie its ownhands’’ by imposing a fixed one-yearpost-effective time period for reviewingSEF applications.146

(ii) Comments on DCM Eligibility

CME commented that if a DCM haslisted cleared swaps prior to theadoption of the final rules, then there isno reason to exclude them fromapplying for temporary relief.147 NYSELiffe recommended that temporary relief remain available to DCMs either as longas it is available to SEF applicants or onan ongoing basis so that a DCM requiredunder DCM Core Principle 9 to delist afutures contract at any point in thefuture would be allowed to seek


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148NYSE Liffe Comment Letter at 3–4 (Sep. 2,2011).

149AIMA Comment Letter at 3 (Jun. 10, 2011);Nodal Comment Letter at 3–5 (Jun. 3, 2011);WMBAA Comment Letter at 4–5 (Jun. 3, 2011);CME Comment Letter at 6 (Jun. 3, 2011);MarketAxess Comment Letter at 19 (Mar. 8, 2011);NFA Comment Letter at 2–3 (Mar. 8, 2011);WMBAA Comment Letter at 12–13 (Mar. 8, 2011);ICAP Comment Letter at 6 (Mar. 8, 2011); NodalComment Letter at 4–5 (Mar. 8, 2011).

150Nodal Comment Letter at 4 (Jun. 3, 2011);Nodal Comment Letter at 4 (Mar. 8, 2011).

151MarketAxess Comment Letter at 19 (Mar. 8,2011); NFA Comment Letter at 2–3 (Mar. 8, 2011).

152SDMA Comment Letter at 12 (Mar. 8, 2011).153The Commission is renumbering proposed

§ 37.3(b) to §37.3(c) and making several non-substantive revisions for clarity.


155The applicant must comply with all of therequirements in final §37.3(b)(1)(i) and mustsubmit a temporary registration notice to theCommission to qualify for temporary registration.See Final §37.3(c)(1) of the Commission’sregulations.

156The Commission notes that certain entitiesmay continue to operate under current exemptionswhile their SEF applications are pending, as longas the entities submit a complete application (i.e.,the SEF applicant provides substantive answers toeach of the informational and exhibit items set forthin Form SEF) and temporary registration notice before the effective date of the final SEF regulations.See CFTC No-Action Letter 12–48 (Dec. 11, 2012).

157See discussion below regarding swap dealerand major swap participant provisional registrationrules.

158The Commission is delegating to the Directorof DMO, upon consultation with the GeneralCounsel, the authority to issue a notice granting ordenying temporary registration. See Final §37.3(h)of the Commission’s regulations.

159This provision is contained in final §37.3(c)(2)of the Commission’s regulations. This rule alsostates that in no case may an applicant beginoperating as a temporarily registered SEF until theeffective date of the SEF regulations.

temporary relief from registration as aSEF.148

(iii) Comments on 90-Day Effective Dateof Regulations

Some commenters recommended alonger time period for the effective dateof the final regulations to provideapplicants with additional time to

implement the large number of changesrequired.149 Nodal commented that theshort effective date will disadvantagesmaller exchanges because itssupporting external parties will likelyprioritize compliance obligations inorder to be responsive to the largestexchanges first.150 MarketAxess andNFA recommended that theCommission provide SEF applicants 180days after adoption of the final rules tocomply with the final SEF regulations inlight of forthcoming operationalchallenges.151 However, SDMAsupported the 90-day effective date andurged the Commission to be vigilant inpreventing further delays thatundermine the realization of the goals of the Dodd-Frank Act.152


(i) Temporary Grandfather Relief

The Commission agrees withMarketAxess that ‘‘temporaryregistration’’ is more accurate than‘‘temporary grandfather relief’’ and isaccordingly making such change.Additionally, based on the comments,the Commission is adopting proposed§ 37.3(b) as final §37.3(c) subject to anumber of modifications.153

The Commission further agrees withMarketAxess and other commenters thatthe trading activity requirement asproposed in § 37.3(b)(1)(ii) may limittemporary registration to incumbentplatforms. Therefore, the Commission iseliminating the trading activityrequirement and will permit all SEFapplicants to apply for temporaryregistration if they meet therequirements under final §37.3(c)(1).The Commission views the revised

temporary registration provision aspromoting competition between SEFs byproviding fair opportunities for newentities to establish trading operationsin competition with incumbents.

The Commission is deleting thecertification requirement underproposed §37.3(b)(1)(iii) because it isunnecessary. The Commission notes, as

stated in the SEF NPRM, that once aSEF applicant is granted temporaryregistration it must comply with allprovisions of the Act and theCommission’s regulations that areapplicable to SEFs.154

The Commission is revising thetemporary registration provisions toclarify in final §37.3(c)(1) that a SEFapplicant may apply for temporaryregistration if it submits a completeForm SEF and a temporary registrationnotice.155 The Commission is alsorevising the temporary registrationprovisions to require a SEF applicantthat is already operating a swaps-tradingplatform, in reliance upon either anexemption granted by the Commissionor some form of no-action relief granted

by the Commission staff, to include inthe temporary registration notice acertification that it is operating pursuantto such exemption or no-action relief.The Commission also clarifies that aSEF applicant may submit suchtemporary registration application afterthe final SEF regulations are publishedin the Federal Register until thetermination of the temporaryregistration provision pursuant to final§ 37.3(c)(5).156

Pursuant to final §37.3(c)(1), theCommission notes that it will grant aSEF applicant temporary registrationupon a Commission determination thatthe applicant has provided a completeForm SEF as part of its registrationapplication and submitted a notificationrequesting that the Commission granttemporary registration. If an applicanthas not met these requirements, theCommission may deny its request fortemporary registration. By ‘‘complete’’Form SEF, the Commission means thatthe SEF applicant provides

appropriately responsive answers toeach of the informational and exhibititems set forth in Form SEF. TheCommission notes that it will review aSEF applicant’s Form SEF to ensure thatit is complete, and will not conduct anysubstantive review of the form beforegranting or denying temporaryregistration. The Commission notes that

this temporary registration process issimilar to the notice registration processfollowed by the Commission in thecontext of other types of registrations.157 The Commission will review SEFapplicants’ submissions on a rolling

basis and the Commission will issuenotices either granting or denyingtemporary registration.158 TheCommission believes that providing aclear and streamlined path to temporaryregistration will minimize the potentialfor regulatory arbitrage, ensure a levelplaying field, and promote competitionamong SEFs.

The Commission stresses that a grantof temporary registration does not meanthat the Commission has determinedthat a SEF applicant is fully compliantwith the Act and Commissionregulations, nor does it guarantee that aSEF applicant will eventually begranted full SEF registration. Aftergranting a SEF applicant temporaryregistration, the Commission willreview the applicant’s application toassess whether the applicant is fullycompliant with the requirements of theAct and the Commission’s regulationsapplicable to SEFs. During suchassessment, the Commission may

request from the SEF applicantadditional information in order to makea determination whether to issue a finalorder of registration.

The Commission is also revising thetemporary registration provisions toclarify in final § 37.3(c)(2) that anapplicant cannot operate as a SEF undertemporary registration until theapplicant receives a notice from theCommission or the Commission staff granting temporary registration.159 Inresponse to Phoenix’s comment about aSEF operating while its temporaryregistration is pending, the Commission

does not believe that a SEF applicantshould be allowed to operate as a SEF


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

161This provision is contained in final §37.3(c)(5)of the Commission’s regulations.

162This provision is contained in final §37.3(c)(6)of the Commission’s regulations.

163See Heckler v. Chaney, 470 U.S. 821 (1985).164This scenario is not limited to a prospective

SEF that is already operating a swaps-tradingplatform in reliance on a Commission staff relief letter. As noted above, all SEF applicants may applyfor temporary registration if they meet therequirements under final § 37.3(c)(1).

under temporary registration before theCommission has had a chance to reviewthe application to ensure that it iscomplete. The Commission’s review isespecially merited given theCommission’s decision to permittemporary registration of entities thathave not previously traded swaps.

The Commission believes that

permitting entities to operate astemporarily registered SEFs,notwithstanding the lack of asubstantive review of the SEF’sapplication by the Commission, is not anovel concept and has been followed bythe Commission in other contexts whereit is important to allow entities toquickly reach the market, before anextensive Commission review. Forinstance, under the Commission’s swapdealer and major swap participantregistration rules, provisionalregistration is granted upon the filing of an application and documentation

demonstrating compliance or the abilityto comply with the CEA section 4srequirements in effect on such date—and not after review and approval of thedocumentation by the National FuturesAssociation (‘‘NFA’’), as theCommission’s delegee.160 On and afterthe date on which NFA confirms thatthe applicant has demonstrated itsinitial compliance with the applicablerequirements, the provisionalregistration of the applicant ceases andthe applicant becomes registered as anSD or an MSP, as the case may be.

The Commission envisions the SEF

temporary registration process asoperating in a similar fashion, with theCommission reviewing each applicationfor completeness alone before grantingtemporary registration. Subsequently,and concurrent with the temporarilyregistered SEF’s early operations, theCommission would conduct acomprehensive review of theapplication for compliance with allapplicable SEF requirements.

The Commission is revising proposed§ 37.3(b)(2) regarding the expiration of temporary registration to remove theability of the Commission to rescind

temporary registration. The Commissionnotes that the SEF NPRM did notprovide a standard for the Commissionto rescind temporary registration.Instead, in final §37.3(c)(3), theCommission may rely on its ability todeny full registration, which will alsocause temporary registration to expire.Therefore, the Commission believes thatthe ability to rescind temporaryregistration is unnecessary.

The Commission is extending the 365-day sunset provision for temporaryregistration to two years from theeffective date of these regulations infinal § 37.3(c)(5).161 Given that theprojected number of temporary SEFregistrations may exceed 20 and theresource constraints faced by theCommission, the Commission may not

be able to complete its registrationreviews, enable SEFs to remedy anyidentified deficiencies, and ultimatelygrant or deny full registration for all of the SEF applicants within the proposed365-day period. Extending thetemporary registration provision willprovide the Commission with adequatetime to review the SEF registrationapplications while ensuring that SEFscan continue their operations undertemporary registration, withoutinterruption, until the Commissiondecides on their application for fullregistration.

The Commission is also revising final§ 37.3(c)(5) to state that the temporaryregistration provision will not terminatefor an applicant who applies fortemporary registration before thetermination of the temporaryregistration provision and has not beengranted or denied registration under§ 37.3(b)(6) by the time of thetermination of the temporaryregistration provision. In addition, final§ 37.3(c)(5) states that such an applicantmay operate as a SEF under temporaryregistration upon receipt of a noticefrom the Commission grantingtemporary registration until the

Commission grants or denies fullregistration pursuant to §37.3(b)(6). Onthe termination date of the temporaryregistration provision, the Commissionwill review such applicant’s applicationpursuant to the 180-day Commissionreview period and procedures in§ 37.3(b)(5). These revisions will ensurethat a temporarily registered SEF whodoes not have a full registration in place

by the time the temporary registrationprovision terminates will not have tostop operating on such termination date.

(ii) DCM Eligibility

The Commission is withdrawingproposed §37.3(b)(1)(ii) regarding theexisting trading activity requirement soan operational DCM that seeks to createa new SEF would be able to qualify fortemporary SEF registration. Inconsideration of NYSE Liffe’s commentthat temporary SEF registration for anexisting DCM should not be subject tothe sunset provision, the Commission isrevising proposed §37.3(b) in final

§ 37.3(c)(6) to allow for such anexemption.162 The Commission notesthat a DCM is subject to a higherregulatory standard than a SEF such thata non-dormant DCM who seeks to createa new SEF in order to transfer one ormore of its contracts should be able tomeet many of the SEF requirements.Therefore, the Commission believes

that, on an ongoing basis, an operationalDCM that also seeks to register as a SEFin order to transfer one or more of itscontracts (whether the transfer of thecontract is motivated by DCM CorePrinciple 9 or another reason) mayrequest SEF temporary registration.

(iii) 90-Day Effective Date of Regulations

The Commission is shortening theproposed 90-day effective date to 60days subsequent to publication in theFederal Register. In consideration of thecomments received and the availabilityof the Commission staff resources, the

Commission has determined to use itsdiscretion to establish alternative datesfor the commencement of itsenforcement of regulatory provisionsand is setting a general compliance dateof 120 days subsequent to FederalRegister publication.163 With this use of an effective date and compliance date,a prospective SEF that is alreadyoperating a swaps-trading platform inreliance on a Commission staff relief letter (e.g., CFTC No-Action Letter 12–48) could submit a SEF application andreceive temporary registration beforepart 37’s effective date so that it might

begin operating as a SEF upon thateffective date.164 Alternatively, if such aprospective SEF took additional time toprepare its SEF application, it wouldhave the option of forestalling thesubmission of its application until afterthe effective date, so long as itsubmitted its SEF application by thecompliance date.

The Commission believes that thiscombination of a 60-day effective dateand a 120-day compliance datesubsequent to Federal Registerpublication for prospective SEFapplicants establishes a transitionperiod that appropriately balances the

Commission’s need to provideregulatory certainty to potentialapplicants through issuance of final SEFregulations and the Commission’sstatutory directives to both promote fair


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165Section 3(b) of the Act lists the promotion of ‘‘fair competition among boards of trade, othermarkets, and market participants’’ as a purpose of the Act. 7 U.S.C. 5(b).

166Section 5h(e) of the Act lists the promotion of ‘‘the trading of swaps on swap executive facilities’’as one goal of the Act. 7 U.S.C. 7b–3(e).

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

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

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

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

171CEA section 15(b) requires the Commission totake into consideration the public interest to beprotected by the antitrust laws and endeavor to takethe least anticompetitive means of achieving theobjectives of the Act, as well as the policies andpurposes of the Act. 7 U.S.C. 19(b).

172WMBAA Comment Letter at 15–16 (Mar. 8,2011).

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

CME also provided its comments to the rulemakingtitled Provisions Common to Registered Entities, 76FR 44776 (Jul. 27, 2011). In addition, rather thanrepeat its comments that pertain to both the DCMand SEF NPRMs, CME incorporated its entire DCMrulemaking comment letter dated Feb. 22, 2011 asExhibit A to its SEF comment letter dated Mar. 8,2011. The Commission notes these comments byreferencing the Feb. 22, 2011 date of CME’s DCMcomment letter. The Commission is also changingCME’s reference to ‘‘DCM’’ to ‘‘SEF’’ for thesecomments.

175MarketAxess Comment Letter at 19 (Mar. 8,2011). Tradeweb similarly commented that a SEFapplicant should be able to introduce new productswhile it is operating under temporary relief.Tradeweb Comment Letter at 13 (Mar. 8, 2011).

17617 CFR part 40.177CEA section 5c(c); 7 U.S.C. 7a–2(c).178See Provisions Common to Registered Entities,

76 FR 44776 (Jul. 27, 2011).179See generally Core Principles and Other

Requirements for Swap Execution Facilities, 76 FRat 1217 (explaining the proposed ten percentthreshold).

competition between swaps tradingvenues 165 and promote the trading of swaps on SEFs.166 The new transitionperiod ensures swaps market continuity,preserves competition between swapstrading venues, and facilitates theorderly restructuring of the swapsmarket in compliance with the Act andregulations thereunder. TheCommission believes that the 60-dayeffective date and the 120-daycompliance date approach will provideprospective SEF applicants withsufficient time to comply with the finalregulations and, if they choose, toprepare an application for temporaryregistration.

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

Proposed § 37.3(c) providedprocedures for a dormant SEF toreinstate its registration. TheCommission received no comments onthis section and is adopting §37.3(c) asproposed.167

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

Proposed §37.3(d) providedprocedures that a SEF must follow whenseeking to transfer its registration fromits current legal entity to a new legalentity as a result of a corporate event.The Commission received no commentson this section and is adopting §37.3(d)as proposed.168

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

Application for Registration

Proposed §37.3(e) provided that aSEF applicant may withdraw itsapplication for registration. TheCommission received no comments onthis section and is adopting §37.3(e) asproposed.169

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

Proposed §37.3(f) provided that a SEFmay vacate its registration. TheCommission received no comments on

this section and is adopting §37.3(f) asproposed.170

4. §37.4—Procedures for ListingProducts and Implementing Rules

Proposed §37.4 detailed the approvaland self-certification procedures underpart 40 of the Commission’s regulationsthat SEF applicants and SEFs must

follow to submit its products and rulesto the Commission. Proposed §37.4 alsoprovided that a SEF may request thatthe Commission consider, under theprovisions of section 15(b) of the Act,171 any of the SEF’s rules or policies.

(a) Summary of Comments

WMBAA commented that SEFsshould not be required to seekCommission approval for their productsand rules.172 WMBAA recommendedthat SEFs be allowed to submit to theCommission a simple self-certificationthat they complied with the applicable

requirements.173

CME stated that theproposed procedures for listingproducts would increase the burdensassociated with new productsubmissions and rule changes andwould create new and costly

bureaucratic inefficiencies, competitivedisadvantages in the global marketplace,and impediments to innovation.174 MarketAxess recommended that theCommission revise proposed § 37.4 toclarify that temporarily registered SEFsmay list swaps through theCommission’s approval or self-certification procedures.175

(b) Commission DeterminationThe Commission is adopting

proposed §37.4 subject to certain

modifications. The Commission isremoving many of the details from theproposed rule, which are alreadycontained in part 40 of theCommission’s regulations, and isinstead referring SEFs to part 40.176 TheCommission is also removing the CEAsection 15(b) consideration provision

because, when reviewing any SEF rule,

the Commission is already required totake into consideration the provisionsunder section 15(b) of the Act.

In response to WMBAA’s commentsthat SEFs should not be required to seekCommission approval of their productsand rules, the Commission notes that aSEF is a registered entity under the Actand pursuant to section 5c(c) of the Act,registered entities must submit productterms and conditions and rules to theCommission for approval or under self-certification procedures.177 In addition,the Commission notes that CME’scomments were addressed in the part 40

rulemaking and are outside the scope of this rulemaking.178 The Commissionalso clarifies that temporarily registeredSEFs may list swaps or submit rulesthrough the Commission’s approval orself-certification procedures under part40 of this chapter, and that the timelinesunder those procedures shall apply.

5. §37.5—Information Relating to SwapExecution Facility Compliance

Proposed §37.5(a) required a SEF tofile with the Commission informationrelated to its business as a SEF asspecified in the Commission’s request.Proposed §37.5(b) required a SEF to file

with the Commission a writtendemonstration of compliance with thecore principles. Proposed § 37.5(d)delegated the Commission’s authority toseek information as set forth in §37.5(b)to the Director of DMO or such otheremployee as the Director may designate.

Proposed §37.5(c) required a SEF tofile with the Commission a notice of thetransfer of ten percent or more of itsequity no later than the business dayfollowing the date on which the SEFenters into a firm obligation to transferthe equity interest.179 The proposed rulealso required that the notification

include any relevant agreement and arepresentation from the SEF that itmeets all of the requirements of section5h of the Act and Commissionregulations adopted thereunder.Additionally, the proposed rule


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180CME Comment Letter at 13 (Feb. 22, 2011).181 Id.182MarketAxess Comment Letter at 29 (Mar. 8,

2011).183Better Markets Comment Letter at 21–22 (Mar.

8, 2011).184The Commission is removing the reference to

‘‘information relating to data entry and tradedetails’’ in proposed §37.5(a) because it isunnecessary. The rule text is broad enough to

encompass such information as it states that, uponthe Commission’s request, a SEF shall file with theCommission information related to its business asa SEF.

185The Commission interprets ‘‘firm obligation’’to mean when a SEF enters into a letter of intentor any other document that demonstrates a SEF’sfirm intent to transfer its equity interest asdescribed in § 37.5(c).

required the SEF to notify theCommission of the consummation of thetransaction on the day on which itoccurs. Furthermore, the proposed rulerequired that, upon the transfer of theequity interest, the SEF certify, no laterthan two business days following thedate on which the change in ownershipoccurs, that the SEF meets all of the

requirements of section 5h of the Actand Commission regulations adoptedthereunder.


The Commission did not receive anycomments on proposed § 37.5(a), (b), or(d). The Commission did, however,receive comments on the equity interesttransfer provisions in proposed§ 37.5(c).

CME commented that the submissionsrequired to be simultaneously filed withthe initial notification of an equityinterest transfer do not lend themselves

to preparation within the 24-hour timeframe proposed in the rules.180 CMEfurther commented that therepresentation of compliance with therequirements of CEA section 5h and theCommission’s regulations adoptedthereunder would be more appropriateif required upon consummation of theequity interest transfer, rather than withthe initial notification.181

MarketAxess commented that publiccompanies should not have to file anotice of an equity interest transfer

because the ownership structure of apublic company does not implicate thecontrol and influence concerns raised

by the Commission in its proposal, andshareholders are already obligatedunder the SEC’s regulations to reportthreshold acquisitions of equityinterests within ten days of such anacquisition.182

Lastly, Better Markets recognized theimportant implications of transferringcontrol in a regulated marketplace andit recommended that the Commissionlower the transfer threshold forreporting to five percent as similarlyrequired by the SEC for public equitytransfers.183

(b) Commission DeterminationThe Commission is adopting §37.5(a),

(b), and (d) as proposed subject tocertain non-substantive clarifications.184

The Commission is adopting proposed§ 37.5(c) with certain revisionsdiscussed below.

The Commission is revising §37.5(c)to provide that a SEF must submit to theCommission a notification of eachtransaction involving the transfer of fiftypercent or more of the equity interest inthe SEF, and that such notification must

be provided at the earliest possible time, but in no event later than the open of the business day that is ten businessdays following the date in which theSEF enters into a firm obligation 185 totransfer the equity interest. However, inall cases, the Commission notes that aSEF must provide the Commission staff with sufficient time, prior toconsummating the equity interesttransfer, to review and consider theimplications of the change inownership, including whether thechange in ownership will adverselyimpact the operations of the SEF or the

SEF’s ability to comply with the coreprinciples and the Commission’sregulations thereunder.

The Commission acknowledgesCME’s concern regarding the one

business day time period for filing thesupporting documents with the equityinterest transfer notification. Thus, inaddition to extending the time period toup to ten business days for a SEF to filenotification with the Commission, theCommission is revising the rule toeliminate the requirement that specificdocuments be provided with thenotification. Rather, the Commission isrevising the rule text to clarify that uponreceiving a notification of the equityinterest transfer, the Commission mayrequest appropriate documentationpursuant to its authority under §37.5 of the Commission’s regulations. Forexample, such documentation mayinclude, but is not limited to: (i)Relevant agreement(s), including anypreliminary agreements (not includingdraft documents); (ii) associated changesto relevant corporate documents; (iii) achart outlining any new ownership orcorporate or organizational structure, if available; and (iv) a brief description of the purpose and any impact of the

equity interest transfer.The Commission is deleting the

requirement for a SEF to provide arepresentation of compliance withsection 5h of the Act and the

Commission regulations thereunderwith the equity interest transfernotification, as requested by CME. TheCommission agrees with CME that thisrequirement is more appropriate uponconsummation of the equity interesttransfer, rather than with the initialnotification. Therefore, the Commissionis maintaining the certification

requirement upon consummation of theequity interest transfer as proposed inthe SEF NPRM.

With respect to the other comments,the Commission believes that the noticerequirements should not be limited toprivately-held companies as theCommission’s objective is to ensure thatequity transfers do not negativelyimpact the operations of registeredentities. The Commission must overseeand ensure the continued compliance of all SEFs with the core principles andthe Commission’s regulations. In orderto fulfill its oversight obligations, and to

ensure that SEFs maintain compliancewith their self-regulatory obligations,the Commission must receive a notice of an equity interest transfer. TheCommission acknowledges thesuggestion by Better Markets to lowerthe equity interest transfer threshold tofive percent; however, the Commission

believes that the revisions to § 37.5(c)will still allow the Commission to fulfillits oversight obligations, while reducingthe costs for SEFs to comply with theequity interest transfer requirements.

Finally, the Commission is revisingthe rule to remind SEFs that if anyaspect of an equity interest transfer

requires the SEF to file a rule as definedin part 40 of the Commissionregulations, then the SEF must complywith the rule submission requirementsof section 5c(c) of the CEA and part 40of this chapter, and all other applicableCommission regulations.

6. § 37.6—Enforceability

Section 37.6 is intended to providemarket participants who execute swaptransactions on or pursuant to the rulesof a SEF with legal certainty withrespect to such transactions. In thatregard, proposed § 37.6(a) established

that any transaction entered into, on, orpursuant to the rules of a SEF cannot bevoided, rescinded, or heldunenforceable as a result of: (1) The SEFviolating any provision of section 5h of the CEA or part 37; (2) any Commissionproceeding to alter or supplement arule, term, or condition under section8a(7) of the CEA or to declare anemergency under section 8a(9) of theCEA; or (3) any other proceeding theeffect of which is to alter or supplementa specific term or condition or tradingrule or procedure, or require a registered


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186The Commission proposed §37.6(b) to

facilitate the process contemplated by theconfirmation definition. A swap ‘‘confirmation’’ isdefined as the consummation (electronically orotherwise) of legally binding documentation(electronic or otherwise) that memorializes theagreement of the counterparties to all of the termsof a swap. A confirmation must be in writing(whether electronic or otherwise) and must legallysupersede any previous agreement (electronically orotherwise). 17 CFR 45.1; Swap Data Recordkeepingand Reporting Requirements, 77 FR 2136, 2197 (Jan.13, 2012).

187MarketAxess Comment Letter at 28–29 (Mar.8, 2011). Proposed §45.3 required that for alltransactions executed on a SEF, regardless of whether the swap was cleared, the SEF would beresponsible for reporting to a swap data repositoryonly the primary economic terms of the transactionin its possession at the time of execution, and that

reporting of confirmation data consisting of allterms of the transaction would be the responsibilityof either the derivatives clearing organization (if cleared) or one of the counterparties (if uncleared).Swap Data Recordkeeping and ReportingRequirements, 75 FR 76574, 76580–81 (proposedDec. 8, 2010). As adopted by the Commission,however, §45.3 requires a SEF to report both theprimary economic terms data as well as allconfirmation data consisting of all transaction termsfor each swap executed on or pursuant to the rulesof the SEF as soon as technologically practicableafter execution of the swap. 17 CFR 45.3; Swap DataRecordkeeping and Reporting Requirements, 77 FR2136, 2199 (Jan. 13, 2012).


189MarkitSERV Comment Letter at 4–5 (Mar. 8,2011).

190 Id. MarkitSERV also expressed concern thatthe SEF NPRM is conflating the concepts of confirmation and affirmation with the audit trailrequirements in proposed §37.205. For example,MarkitSERV sought clarification regarding the SEF

NPRM’s statement that ‘‘[v]oice transactions must be entered into some form of electronic affirmationsystem immediately upon execution.’’ CorePrinciples and Other Requirements for SwapExecution Facilities, 76 FR at 1221. Given the audittrail requirement in proposed §37.205(b)(1), whichstates that SEFs that ‘‘permit intermediation mustrequire that all orders or requests for quotesreceived by phone that are executable beimmediately entered into the trading system orplatform[,]’’ MarkitSERV recommended that theCommission use the term ‘‘electronic processingsystem’’ instead of ‘‘electronic affirmation system’’ because audit trail records and affirmation aredifferent concepts. Id. at 1244. MarkitSERVComment Letter at 4, 6 (Mar. 8, 2011). ABC/CIEBAalso sought clarification as to whether SEFs mustenter Permitted Transactions into an affirmationsystem, and if so, ABC/CIEBA noted that the SEFNPRM is inconsistent with other rules. ABC/CIEBAComment Letter at 7–8 (Mar. 8, 2011). TheCommission notes that the final SEF rules do notrequire the use of an ‘‘electronic affirmationsystem.’’ The Commission also clarifies thatconfirmation and the creation of an audit trail in§ 37.205 are two separate and distinct requirements.In addition, the Commission notes that §37.205(b)merely establishes the requirement that SEFs mustcapture audit trail data for regulatory purposes anddoes not address affirmation, confirmation, or thepublic reporting or dissemination of such data.

191Energy Working Group Comment Letter at 5(Mar. 8, 2011).

192 Id.193The Commission is making certain non-

substantive revisions to §37.6(a) for clarity.

194Part 45 requires a SEF to report allconfirmation data and all primary economic termsdata as defined in part 23 and §45.1 of theCommission’s regulations for each swap executedon or pursuant to the rules of the SEF as soon astechnologically practicable after execution of theswap. 17 CFR 45.3; Swap Data Recordkeeping andReporting Requirements, 77 FR 2136, 2199 (Jan. 13,2012). Part 45 defines confirmation data as ‘‘all of the terms of a swap matched and agreed upon bythe counterparties in confirming the swap.’’ Id. at2197.

195The Commission notes that swap tradingrelationship documentation is not required forswaps cleared by a derivatives clearingorganization. See § 23.504(a)(1) of the Commission’s

regulations. The Commission also notes that thecommenters’ concerns are most relevant to thosetransactions that are truly bespoke, not subject tothe clearing mandate, and not voluntarily cleared.There is no reason why a SEF’s writtenconfirmation terms cannot incorporate by referencethe privately negotiated terms of a freestandingmaster agreement for these types of transactions,provided that the master agreement is submitted tothe SEF ahead of execution and the counterpartiesensure that nothing in the confirmation termscontradict the standardized terms intended to beincorporated from the master agreement. See alsoReal-Time Public Reporting of Swap TransactionData, 77 FR 1182, 1193 (Jan. 9, 2012) (discussingconfirmation and incorporating documents byreference).

SEF to adopt a specific term orcondition, trading rule or procedure, orto take or refrain from taking a specificaction. Proposed §37.6(b) required thatall transactions executed on or pursuantto the rules of a SEF include writtendocumentation memorializing all termsof the swap transaction, the legal effectof which is to supersede any previous

agreement between the counterparties.The proposed rule also required that theconfirmation of all terms of thetransaction take place at the same timeas execution.186


Three commenters addressed thepracticality of a SEF confirming allterms of a transaction at the same timeas execution. MarketAxessrecommended that a SEF be responsiblefor confirming only the swap creationdata in its possession at the time of execution, consistent with theCommission’s approach in its proposedpart 45 regulations.187 MarketAxess alsorequested that the Commission clarifythat SEFs are only responsible forproducing a confirmation for swapsentered into on, and not just pursuantto the rules of, a SEF.188

MarkitSERV stated that whencounterparties choose to execute a swapon a SEF that is not subject to theclearing mandate and not submitted forclearing to a clearinghouse, the partieswill require a long-term creditrelationship to be in place, often

memorialized in an ISDA MasterAgreement.189 MarkitSERV furtherstated that the confirmation termsprovided by a SEF may not be able toaccommodate the specificity of such amaster agreement, thus making theSEF’s confirmation inadequate forpurposes of complying with theCommission’s regulations.190

Similarly, the Energy Working Groupexpressed concern over the provision’srequirement that the SEF’s confirmationsupersede any previous agreement

between the transacting parties, notingthat this language appears to prevent amaster agreement from operating

between counterparties transacting on aSEF.191 The Energy Working Group alsostated that confirmation cannot takeplace at the same time as execution

because they are two distinct steps inthe swap transaction process.192

(b) Commission Determination

The Commission is adopting §37.6(a)as proposed.193 The Commission is alsoadopting § 37.6(b) as proposed subject tothe two revisions discussed below.Although the comments receivedregarding proposed §37.6(b) did not citeambiguity in the SEF NPRM regarding aSEF’s affirmative duty to provideconfirmation documentation to

counterparties, the Commission hasdetermined to revise §37.6(b) to stateexplicitly that a ‘‘swap executionfacility shall provide each counterparty’’with written documentation of all termsof the transaction to serve asconfirmation of such transaction. Inresponse to MarketAxess’s comments,the Commission notes that § 37.6(b) is

consistent with the requirement in finalpart 45 of the Commission’s regulationsthat a SEF report confirmation dataconsisting of all terms of a transactionto a swap data repository (‘‘SDR’’) foreach swap executed on or pursuant tothe rules of the SEF.194

With regard to the specific commentsreceived about the role of masteragreements in the written confirmationprovided by a SEF, the Commission hasdetermined that counterparties choosingto execute a transaction not submittedfor clearing on or pursuant to the rulesof a SEF must have all terms, including

possible long-term credit supportarrangements, agreed to no later thanexecution, such that the SEF canprovide a written confirmation inclusiveof those terms at the time of executionand report complete, non-duplicative,and non-contradictory data to an SDR assoon as technologically practicable afterexecution.195 This requirement, asmentioned above, is necessary toprovide market participants whoexecute swap transactions on orpursuant to the rules of a SEF with legalcertainty with respect to suchtransactions, and to promote theCommission’s policy goal of achieving

‘‘straight-through processing’’ of swap


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196The OTC Derivatives Supervisors’ Group, acollaboration of market participant leadershipheaded by the Federal Reserve Bank of New York,recognized the potential of electronic trading tofacilitate the objectives of straight-throughprocessing in the wake of the 2008 financial crisis.See Confirmation, Portfolio Reconciliation, andPortfolio Compression Requirements for Swap

Dealers and Major Swap Participants, 75 FR 81519,81521–22 (proposed Dec. 28, 2010) (noting that‘‘[t]imely and accurate confirmation of transactionsis critical for all downstream operational and riskmanagement processes, including the correctcalculation of cash flows and discharge of settlement obligations as well as accuratemeasurement of counterparty credit exposures.’’).

197See CEA section 5h(e); 7 U.S.C. 7b–3(e)(stating that the goal of this section is to promotepre-trade price transparency in the swaps market).While straight-through processing may not be asrelevant to credit risk associated with transactionsexecuted on or pursuant to the rules of a SEF butnot submitted for clearing, the data and real-timereporting requirements already finalized by theCommission mandate reporting by the SEF of allswap transaction terms ‘‘as soon as technologicallypracticable’’ in order to effectuate the statutory

mandate of post-trade price transparency. See 17CFR 43.3(b)(1) (real-time reporting); 17 CFR45.3(a)(1) (swap data recordkeeping and reportingrequirements). This allowance of a slight timingdelay, however, is meant to account for ‘‘theprevalence, implementation and use of technology by comparable market participants,’’ and not post-execution confirmation of other terms such as creditagreements for uncleared swaps. See, e.g., 17 CFR43.2; Real-Time Public Reporting of SwapTransaction Data, 77 FR 1182, 1191 (Jan. 9, 2012)(discussing the definition of ‘‘as soon astechnologically practicable’’).

198See 17 CFR 1.35; Customer ClearingDocumentation, Timing of Acceptance for Clearing,and Clearing Member Risk Management, 77 FR21278, 21286–287, 306 (Apr. 9, 2012);

Confirmation, Portfolio Reconciliation, PortfolioCompression, and Swap Trading RelationshipDocumentation Requirements for Swap Dealers andMajor Swap Participants, 77 FR 55904, 55923 (Sep.11, 2012) for further details.

199

Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1218 n. 34.200MarketAxess Comment Letter at 31 (Mar. 8,

2011); FSR Comment Letter at 9 (Mar. 8, 2011); ICEComment Letter at 5–6 (Mar. 8, 2011); CMEComment Letter at 14 (Feb. 22, 2011).

201CME Comment Letter at 14 (Feb. 22, 2011).202MarketAxess Comment Letter at 31 (Mar. 8,

2011); FSR Comment Letter at 9 (Mar. 8, 2011).203CME Comment Letter at 14 (Feb. 22, 2011);

MarketAxess Comment Letter at 31 (Mar. 8, 2011).204FSR Comment Letter at 9 (Mar. 8, 2011).205SIFMA AMG Comment Letter at 15–16 (Mar.

8, 2011).206Freddie Mac Comment Letter at 5 (Mar. 8,

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

transactions in order to facilitate orderlymarkets, whether bilateral or facilitytraded.196 Furthermore, the Commission

believes that credit-supportarrangements for uncleared transactionscan impact the ultimate price of a swap,and thus should be agreed to no laterthan the time of trade execution in orderto promote the statutory goal of pre-

trade price transparency.197 Finally, in response to the Energy

Working Group’s comment thatconfirmation cannot take place at thesame time as execution, the Commissionis revising § 37.6(b) to state that ‘‘. . .specific customer identifiers foraccounts included in bunched ordersinvolving swaps need not be includedin confirmations provided by a swapexecution facility if the applicablerequirements of §1.35(b)(5) of thischapter are met.’’ The Commissionacknowledges that for bunched ordersthe post-execution allocation of trades is

required for confirmation. The aboverevisions to §37.6 are consistent withCommission regulation 1.35(b)(5) andprovide sufficient time for the post-execution allocation of bunched orders,

but allow SEFs to meet the requirementthat confirmation takes place at thesame time as execution.198

7. §37.7—Prohibited Use of DataCollected for Regulatory Purposes

Proposed §37.7 prohibited a SEF fromusing for commercial purposesproprietary data or personal informationthat it obtains from or on behalf of anyperson for regulatory purposes. Thepurpose of this provision was to protect

customer privacy and prevent a SEFfrom using such information to advanceits commercial interests.199


Several commenters recommendedthat the Commission adopt a moreflexible approach toward the use of datacollected for regulatory purposes.200 CME, for example, stated that a SEFshould be allowed to use informationthat is provided for both regulatory andnon-regulatory purposes for commercialpurposes, as long as transparent rules orpolicies are in place.201 Somecommenters believed that commercial

use should be allowed, provided thatmarket participants’ identities areprotected 202 or prior consent isobtained.203 For example, FSR believedthat commercial use should be allowedfor aggregate data as long as the sourcesof the information are not revealed.204

However, SIFMA AMG stated that,given the broad authority under theproposed rules for SEFs to acquireinformation, the term ‘‘proprietary data’’is too narrow to adequately protectmarket participants from improperdisclosure.205 Freddie Mac requestedthat the Commission strengthen the

proposed rule to additionally prohibitany SEF from asserting ownership rightsover the trading information of anytransacting party.206

Finally, WMBAA requested that theCommission clarify the meaning of ‘‘proprietary data or personalinformation,’’ and recommendedlimiting the rule to information obtainedoutside the ordinary course of trade

execution and related to marketsurveillance activities.207


The Commission is adopting § 37.7 asproposed, subject to certainmodifications. In response to thecommenters, the Commission ismodifying the proposed rule to allow

SEFs to use proprietary data or personalinformation for business or marketingpurposes if the person from whom itcollects or receives such informationclearly consents to the use of itsinformation in such manner. TheCommission is also revising theproposed rule to prohibit a SEF fromconditioning access to its facility basedupon such consent. The Commission

believes that the consent requirementwill protect persons by allowing them tofirst weigh the benefits andconsequences of allowing a SEF to makecommercial use of their information. Inresponse to CME’s comment aboutinformation provided for bothregulatory and non-regulatory purposes,the Commission notes that a SEF mayuse information that it receives for bothregulatory and non-regulatory purposesfor business or marketing purposes if the source of the information clearlyconsents to the use in such a manner.

In response to comments about thedefinition of ‘‘proprietary data andpersonal information,’’ the Commissiondeclines to adopt a further definitionand is maintaining a flexible approach.However, the Commission notes thatsome examples of proprietary data and

personal information would includeinformation that separately discloses

business transactions, market positions,or trade secrets. The Commissionrecommends that SEFs define theseterms in their rulebooks, which will besubject to Commission review duringthe SEF registration process.

8. §37.8—Boards of Trade OperatingBoth a Designated Contract Market anda Swap Execution Facility

Proposed §37.8(a) required that a board of trade that operates a DCM andalso intends to operate a SEF must

separately register the SEF under part37, and on an ongoing basis, complywith the core principles under section5h of the Act and the part 37 regulationsissued thereunder. Proposed §37.8(b)implemented CEA section 5h(c) byrequiring a board of trade that operates

both a DCM and SEF and uses the sameelectronic trade execution system forexecuting and trading swaps on bothregistered entities to clearly identify tomarket participants for each swap


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208CEA section 5h(c); 7 U.S.C. 7b–3(c).209CME Comment Letter at 14 (Feb. 22, 2011).210 Id.211The Commission notes that only eligible

contract participants may execute a swap on a SEFso a board of trade that operates both a DCM anda SEF must ensure that its SEF does not allow fornon-eligible contract participant trading on the SEF.See CEA section 2(e); 7 U.S.C. 2(e).

212The Commission notes that it is not replacingthe term ‘‘board of trade’’ in § 37.8(b) with the term‘‘entity’’ as in §37.8(a) because in §37.8(b) only a

board of trade would be able to use the sameelectronic trade execution system for executing andtrading swaps on the DCM and on the SEF (i.e., atrading facility). The Commission also notes that§ 37.8(b) implements CEA section 5h(c), which usesthe term ‘‘board of trade.’’

213The Commission is renaming the title of thissection from ‘‘Permitted Execution Methods’’ to

‘‘Methods of Execution for Required and PermittedTransactions’’ to provide greater clarity.

214By ‘‘in conjunction with the SEF’s minimumtrading functionality,’’ the Commission means thatthe SEF NPRM required a SEF to offer the minimumtrading functionality, and if that SEF also offered anRFQ System, it was required to communicate any bids or offers resting on the minimum tradingfunctionality to the RFQ requester along with theresponsive quotes. See the discussion belowregarding ‘‘Taken Into Account andCommunicated’’ Language in the RFQ SystemDefinition under §37.9(a)(1)(ii)—Request for QuoteSystem in the preamble for further details.


216Additionally, WMBAA commented that thedistinction between Required Transactions andPermitted Transactions is not required orauthorized by the CEA. WMBAA Comment Letter

at 6–7 (Mar. 8, 2011). In this regard, theCommission notes that the CEA sets out specifictrading requirements for swaps that are subject tothe trade execution mandate. See CEA sections2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8). Tomeet these statutory requirements, final §37.9(a)(1)defines these swaps as Required Transactions andprovides specific methods of execution for suchswaps. To distinguish these swaps from otherswaps that are not subject to the trade executionmandate, the Commission defines such swaps infinal § 37.9(c)(1) as Permitted Transactions andallows these swaps to be voluntarily traded on aSEF by using any method of execution. Seediscussion below regarding execution methods forRequired and Permitted Transactions under§ 37.9(b)(1) and (b)(4)—Execution Methods forRequired Transactions and §37.9(c)—ExecutionMethods for Permitted Transactions in thepreamble.

217MarketAxess Comment Letter at 32 (Mar. 8,2011). Similarly, ISDA/SIFMA and the EnergyWorking Group requested clarity regarding thedefinition of Permitted Transactions. ISDA/SIFMAComment Letter at 7 (Mar. 8, 2011); Energy WorkingGroup Comment Letter at 4 (Mar. 8, 2011).

218Freddie Mac Comment Letter at 3 (Mar. 8,2011). Similarly, MFA recommended that theCommission expand the definition of PermittedTransactions to include other transactions, such asexchanges for physical, exchanges for swaps, andlinked or packaged transactions. MFA CommentLetter at 8 (Mar. 8, 2011). The Commissioninterprets MFA’s comment to be a request that theCommission create through rulemaking an

Continued

whether the execution or trading of suchswaps is taking place on the DCM or theSEF.208


CME stated that the rules of a DCMand SEF would clearly identify, asnecessary, the trade platform uponwhich a swap was being executed,

rendering the requirements of proposed§ 37.8 unnecessary.209 CME requestedthat the Commission clarify whetherproposed §37.8 created additionalsubstantive obligations on the part of DCMs and SEFs given that marketparticipants often interface withelectronic platforms via proprietary orthird-party front end systems not underthe control of DCMs or SEFs.210


The Commission is adopting §37.8(a)as proposed, subject to one revision.Proposed §37.8(a) only addressed theSEF registration and compliance of a

board of trade that already operates aDCM and intends to operate a SEF. Toaddress all situations regarding DCMand SEF registration and compliance,the Commission is revising § 37.8(a) toapply to ‘‘[a]n entity that intends tooperate both a [DCM] and a [SEF].’’ Therule requires the entity to separatelyregister the DCM and SEF pursuant topart 38 and part 37 of the Commission’sregulations, respectively, and to complywith the applicable core principles andregulations.

As to CME’s comments regarding§ 37.8(b), the Commission clarifies that

it would not be sufficient for a board of trade that operates both a DCM and aSEF to simply have rules that identifywhether a transaction is being executedon the DCM or the SEF. TheCommission notes that section 5h(c) of the Act clearly requires a board of tradethat operates both a DCM and a SEF toidentify to market participants whethereach swap is being executed on theDCM or the SEF.211 Accordingly, aconsolidated DCM/SEF trading screenmust identify whether the execution isoccurring on the DCM or the SEF,irrespective of how proprietary or third-party front end systems eventuallypresent that data to marketparticipants.212

9. §37.9—Permitted ExecutionMethods 213

As mentioned above, the SEF NPRMrequired a SEF to offer a minimumtrading functionality (i.e., a centralizedelectronic trading screen upon whichany market participant can post bothfirm and indicative bids and offers that

are transparent to all other marketparticipants of the SEF). The SEF NPRMprovided that Required Transactions(i.e., transactions subject to the tradeexecution mandate under section 2(h)(8)of the CEA and not block trades) must

be executed through the SEF’sminimum trading functionality, OrderBook meeting the minimum tradingfunctionality, or RFQ System thatoperates in conjunction with the SEF’sminimum trading functionality.214 TheSEF NPRM made it clear that forRequired Transactions, pre-tradetransparency must be met.215 The SEFNPRM also allowed a SEF to provideadditional execution methods forPermitted Transactions (i.e.,transactions not subject to the clearingand trade execution mandates, illiquidor bespoke swaps, and block trades),including Voice-Based System.

The Commission is restructuring theorder of the rule text in § 37.9 and thiscorresponding preamble discussion toprovide clarity. Despite the order of other preamble sections, whichgenerally follows the order of the SEFNPRM, the Commission’s preamble

discussion of §37.9 generally followsthe order of the restructured rule text.Additionally, as discussed above in theregistration section, the Commission ismoving the minimum tradingfunctionality and Order Book sectionsfrom proposed §37.9 to final § 37.3.

(a) § 37.9(a)(1)(iv)—RequiredTransactions and §37.9(a)(1)(v)—Permitted Transactions

Proposed § 37.9(a)(1)(iv) definedRequired Transactions as transactionsthat are subject to the executionrequirements under the Act and aremade available for trading pursuant to§ 37.10, and are not block trades.Proposed § 37.9(a)(1)(v) definedPermitted Transactions as transactionsthat meet any of the followingrequirements: (A) Are block trades; (B)are not swaps subject to the Act’sclearing and execution requirements; or(C) are illiquid or bespoke swaps.


Several commenters recommendedrevisions to the definition of PermittedTransactions.216 To ensure that there areno gaps between the definitions of Required Transactions and PermittedTransactions, MarketAxess

recommended that the proposeddefinition of Permitted Transactions in§ 37.9(a)(1)(v) be revised to include alltransactions that are not RequiredTransactions as defined in proposed§ 37.9(a)(1)(iv).217 Freddie Macrecommended that the Commissionrevise the proposed definition of Permitted Transactions to incorporatehedging transactions by any end-user(i.e., non-dealer) counterparty.218


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exception to the CEA section 2(h)(8) trade executionrequirement similar to the centralized markettrading exception established by DCM Core

Principle 9 for certain exchange of futures forrelated positions. See CEA section 5(d)(9); 7 U.S.C.7(d)(9); see also Regulation of NoncompetitiveTransactions Executed on or Subject to the Rules of a Contract Market, 63 FR 3708 (Jan. 26, 1998). TheCommission notes that while DCM Core Principle9 does permit certain exceptions to the centralizedmarket trading requirements, such exceptions areall premised on there being some ‘‘bona fide business purpose’’ for the exception. MFA does notoffer a specific bona fide business purpose for anyof its three suggested off-exchange exceptions, noris the Commission aware of any. In addition, MFAdoes not explain why an exchange of swaps forswaps transaction, where each leg of the transactioncan presumably be executed on a SEF, needs to beexecuted off-exchange. The Commission observesthat should swaps based on physical commodities become subject to the trade execution mandate,

there might be some bona fide business purpose forexecuting exchanges of swaps for physicalstransactions. However, the market participants whoare most likely to engage in such transactions arealso likely to be eligible for the end-user exceptionin CEA section 2(h)(7). As an initial matter, theCommission observes that swaps based on physicalcommodities may be subject to the trade executionrequirement if the Commission determines that theyare subject to the clearing requirement under CEAsection 2(h)(1) and part 50 of the Commission’sregulations. Should the circumstances arise wherethe Commission is determining whether physicalcommodity swaps should become subject to theclearing requirement and there are parties who seekto engage in exchanges of swaps for physicalstransactions that are not eligible for the end-userexception, the Commission could at that timeentertain requests to permit a trade executionrequirement exception for swaps that arecomponents of such exchanges of swaps forphysicals transactions. However, for the abovereason, the Commission believes that a broadexception for such off-exchange transactions in theabsence of bona fide business purposes couldundermine the trade execution requirement byallowing market participants to execute swapssubject to the trade execution requirement bilaterally rather than on a SEF or DCM.

219Coalition Comment Letter at 8 (Mar. 8, 2011).220 ISDA/SIFMA Comment Letter at 10 (Mar. 8,

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

221 ISDA/SIFMA Comment Letter at 10 (Mar. 8,2011).

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

223GFI Comment Letter at 4 (Mar. 8, 2011).224The Commission is renumbering proposed

§ 37.9(a)(1)(iv) to § 37.9(a)(1). Several commentersrequested clarification from the Commissionwhether inter-affiliate trades would be subject tothe CEA section 2(h)(8) trade executionrequirement. JP Morgan Comment Letter at 5 (Jun.3, 2011); Rosen et al. Comment Letter at 20–21 (Apr.5, 2011); Coalition Comment Letter at 5 (Mar. 8,2011); ISDA/SIFMA Comment Letter at 11 (Mar. 8,2011). See Clearing Exemption for Swaps BetweenCertain Affiliated Entities, 77 FR 50425 (proposedAug. 21, 2012) for further details.

225The Commission is renumbering proposed§ 37.9(a)(1)(v) to § 37.9(c)(1).

226See CEA section 2(h)(8) trade executionrequirement discussion above under §37.3—Requirements for Registration; see also discussion below under §37.9(c)—Execution Methods forPermitted Transactions.

227Section 43.2 of the Commission’s regulationsstates that ‘‘block trade’’ means a publiclyreportable swap transaction that: (1) Involves aswap that is listed on a registered SEF or DCM; (2)Occurs away from the registered SEF’s or DCM’strading system or platform and is executed pursuantto the registered SEF’s or DCM’s rules andprocedures; (3) Has a notional or principal amountat or above the appropriate minimum block sizeapplicable to such swap; and (4) Is reported subjectto the rules and procedures of the registered SEFor DCM and the rules described in this part,including the appropriate time delay requirementsset forth in § 43.5 of this part. 17 CFR 43.2.

228 Id.

229The Commission notes that the executionmethods for Required Transactions in final§ 37.9(a)(2) excludes block trades.

230Rosen et al. Comment Letter at 10 (Apr. 5,2011); Goldman Comment Letter at 2 (Mar. 8, 2011);ISDA/SIFMA Comment Letter at 2 (Mar. 8, 2011);FXall Comment Letter at 7–8 (Mar 8, 2011); SIFMAAMG Comment Letter at 4–5 (Mar. 8, 2011).

Additionally, the Coalition commentedthat the Commission should defineilliquid or bespoke transactions toinclude typical end-user trades.219

Several commenters also commentedon the reference to block trades in thedefinition of Permitted Transactions.220 ISDA/SIFMA commented that thedefinition of block trade in part 43 of

the Commission’s regulations shouldapply to blocks executed on a SEF.221 Tradeweb sought confirmation that

block size trades in swaps that arerequired to be cleared and madeavailable to trade would not be subjectto the minimum trading requirementsfor Required Transactions, but would berequired to be reported to and processedthrough a SEF in a manner prescribed

by the SEF.222 Similarly, GFI requestedthe Commission to confirm that block

transactions must be effected on a SEF, but may be subject to special rules.223


To ensure that there is consistency inthe definitions, and in response toMarketAxess’s comment, theCommission is: (1) Revising thedefinition of Required Transaction to

mean any transaction involving a swapthat is subject to the trade executionrequirement in section 2(h)(8) of theAct 224; and (2) revising the definition of Permitted Transaction to mean anytransaction not involving a swap that issubject to the trade executionrequirement in section 2(h)(8) of theAct.225 The Commission is not revisingthe definition of Permitted Transactionto explicitly include ‘‘hedgingtransactions involving end-users’’ or‘‘typical end-user’’ transactions becausethe Commission’s revisions to thedefinition of Permitted Transaction areconsistent with the CEA section 2(h)(8)trade execution requirement.226

With respect to the treatment of blocktransactions, the Commission notes thatthe definition of block trade in part 43of the Commission’s regulations appliesto such transactions involving swapsthat are listed on a SEF.227 TheCommission also notes that thedefinition of block trade states, in part,that block trades occur away from theregistered SEF’s or DCM’s tradingsystem or platform and is executedpursuant to the registered SEF’s orDCM’s rules and procedures.228 As

such, block trades are not subject to theexecution methods for RequiredTransactions and PermittedTransactions in final §37.9(a)(2) and§ 37.9(c)(2), respectively.229

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

Proposed §37.9(a)(1)(ii)(A) defined anRFQ System as a trading system orplatform in which a market participantmust transmit a request for quote to buyor sell a specific instrument to no lessthan five market participants in thetrading system or platform, to which allsuch market participants may respond.Under the proposed rule, any bids oroffers resting on the trading system orplatform pertaining to the sameinstrument must be taken into accountand communicated to the requesteralong with the responsive quotes.

In addition, proposed

§ 37.9(a)(1)(ii)(B) defined an RFQ System as a trading system or platformin which multiple market participantscan both: (1) View real-time electronicstreaming quotes, both firm andindicative, from multiple potentialcounterparties on a centralizedelectronic screen; and (2) have theoption to complete a transaction by: (i)Accepting a firm streaming quote, or (ii)transmitting a request for quote to noless than five market participants, basedupon an indicative streaming quote,taking into account any resting bids oroffers that have been communicated to

the requester along with any responsivequotes. Finally, proposed§ 37.9(a)(1)(ii)(C) provided that an RFQ System means any such other tradingsystem or platform as may bedetermined by the Commission.


(i) Comments on RFQ System Definitionand Transmission to Five MarketParticipants

In general, some commenters statedthat the Commission’s definition of anRFQ System imposes rigid requirements

that are not supported by the SEFdefinition.230 Other commenters statedthat the defined RFQ System preserves‘‘the single-dealer status quo,’’ threatensto diminish the transparency andefficiency of the regulated swaps


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231 IECA Comment Letter at 3 (May 24, 2011);Mallers et al. Comment Letter at 3–5 (Mar. 21,2011); AFR Comment Letter at 4, 5 (Mar. 8, 2011).The Mallers et al. comment letter represents theview of a number of high frequency trading firms:Allston Trading, LLC, Atlantic Trading USA LLC,Bluefin Trading LLC, Chopper Trading LLC, DRWHoldings, LLC, Eagle Seven, LLC, EndeavorTrading, LLC, GETCO, Hard Eight Futures, LLC,HTG Capital Partners, IMC Financial Markets,Infinium Capital Management LLC, KottkeAssociates, LLC, Liger Investments Limited,Marquette Partners, LP, Nico Holdings LLC, OptiverUS LLC, Quantlab Financial, LLC, RGM Advisors,LLC, Traditum Group LLC, WH Trading, and XRTrading LLC.

232Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1221. The

Commission asked, ‘‘[i]n light of the ‘multipleparticipant to multiple participant’ requirement, theCommission 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 topotentially interact with a request for quote? If not,what is an appropriate minimum number? Somepre-proposal commenters have suggested thatmarket participants should transmit a request forquote to ‘more than one’ market participant. TheCommission is interested in receiving publiccomment on this matter.’’ Id.

233 Id.234Representative Garrett et al. Comment Letter at

1 (Apr. 5, 2013); Eaton Vance Comment Letter at 2(Feb. 17, 2012); Reuters Comment Letter at 6 (Dec.12, 2011); Tradeweb Comment Letter at 5 (Jun. 3,2011); Traccr Limited Comment Letter at 2 (Jun. 3,

2011); FHLB Comment Letter at 12–13 (Jun. 3,2011); AII Comment Letter at 5 (Jun. 2, 2011); Rosenet al. Comment Letter at 11 (Apr. 5, 2011); JPMorgan Comment Letter at 2–3 (Mar. 8, 2011);Bloomberg Comment Letter at 2–3 (Mar. 8, 2011);FXall Comment Letter at 8–9 (Mar. 8, 2011); ReutersComment Letter at 3 (Mar. 8, 2011); BlackRockComment Letter at 3–4 (Mar. 8, 2011); TradewebComment Letter at 7 (Mar. 8, 2011); FSR CommentLetter at 3 (Mar. 8, 2011); MFA Comment Letter at6 (Mar. 8, 2011); MetLife Comment Letter at 2–3(Mar. 8, 2011); SIFMA AMG Comment Letter at 5–7 (Mar. 8, 2011); Deutsche Comment Letter at 3–4(Mar. 8, 2011); MarketAxess Comment Letter at 31(Mar. 8, 2011); Barclays Comment Letter at 5–6(Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3(Mar. 8, 2011); ABC/CIEBA Comment Letter at 6

(Mar. 8, 2011); Global FX Comment Letter at 3 (Mar.8, 2011); TruMarx Comment Letter at 6 (Mar. 8,2011); Coalition Comment Letter at 5–7 (Mar. 8,2011); WMBAA Comment Letter at 6 (Mar. 8, 2011);CME Comment Letter at 8 (Mar. 8, 2011); Morgan

Stanley Comment Letter at 2–3 (Mar. 2, 2011);CanDeal Comment Letter at 2–3 (Feb. 25, 2011). TheCommission notes that some commenters inaddressing this provision used the term ‘‘liquidityproviders’’ to refer to the minimum number of ‘‘market participants’’ that must receive RFQs. See,e.g., Tradeweb Comment Letter at 5 (Jun. 3, 2011);AII Comment Letter at 5 (Jun. 2, 2011); BloombergComment Letter at 2 (Mar. 8, 2011); FXall CommentLetter at 9 (Mar. 8, 2011); FSR Comment Letter at3 (Mar. 8, 2011). The Commission clarifies that theproposed five market participant requirement didnot imply any requirement that the requestedmarket participants operate in any particularmanner, such as one that regularly providesliquidity or makes markets in the particular swap.

235Eaton Vance Comment Letter at 2 (Feb. 17,2012); JP Morgan Comment Letter at 2–3 (Mar. 8,2011); BlackRock Comment Letter at 4 (Mar. 8,2011); MetLife Comment Letter at 3 (Mar. 8, 2011);Global FX Comment Letter at 3 (Mar. 8, 2011);Morgan Stanley Comment Letter at 2 (Mar. 2, 2011);CanDeal Comment Letter at 2–3 (Feb. 25, 2011).

236Tradeweb Comment Letter at 5 (Jun. 3, 2011);Traccr Limited Comment Letter at 2 (Jun. 3, 2011);FHLB Comment Letter at 12 (Jun. 3, 2011); JPMorgan Comment Letter at 2–3 (Mar. 8, 2011);BlackRock Comment Letter at 3 (Mar. 8, 2011);Tradeweb Comment Letter at 7 (Mar. 8, 2011);MetLife Comment Letter at 3 (Mar. 8, 2011);CanDeal Comment Letter at 2–3 (Feb. 25, 2011).

237Tradeweb Comment Letter at 5 (Jun. 3, 2011);MetLife Comment Letter at 3 (Mar. 8, 2011).

238BlackRock Comment Letter at 4 (Mar. 8, 2011).239FHLB Comment Letter at 12 (Jun. 3, 2011); AII

Comment Letter at 5 (Jun. 2, 2011); BloombergComment Letter at 2–3 (Mar. 8, 2011); FXallComment Letter at 8–9 (Mar. 8, 2011); BlackRock

Comment Letter at 3–4 (Mar. 8, 2011); MetLifeComment Letter at 3 (Mar. 8, 2011); SIFMA AMGComment Letter at 5–6 (Mar. 8, 2011); BarclaysComment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMAComment Letter at 3 (Mar. 8, 2011); ABC/CIEBAComment Letter at 6 (Mar. 8, 2011); Global FXComment Letter at 3 (Mar. 8, 2011); CoalitionComment Letter at 5–6 (Mar. 8, 2011); MorganStanley Comment Letter at 2 (Mar. 2, 2011).

240FHLB Comment Letter at 12 (Jun. 3, 2011); AIIComment Letter at 5 (Jun. 2, 2011); BloombergComment Letter at 2–3 (Mar. 8, 2011); FXallComment Letter at 8–9 (Mar. 8, 2011); MetLifeComment Letter at 3 (Mar. 8, 2011); SIFMA AMGComment Letter at 5–6 (Mar. 8, 2011); BarclaysComment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMAComment Letter at 3 (Mar. 8, 2011); Global FX

Comment Letter at 3 (Mar. 8, 2011); CoalitionComment Letter at 5–6 (Mar. 8, 2011); MorganStanley Comment Letter at 2 (Mar. 2, 2011).

241FHLB Comment Letter at 12 (Jun. 3, 2011); AIIComment Letter at 5 (Jun. 2, 2011); BloombergComment Letter at 2–3 (Mar. 8, 2011); FXallComment Letter at 8–9 (Mar. 8, 2011); BlackRockComment Letter at 3–4 (Mar. 8, 2011); MetLife

Comment Letter at 3 (Mar. 8, 2011); SIFMA AMGComment Letter at 5–6 (Mar. 8, 2011); BarclaysComment Letter at 5–6 (Mar. 8, 2011); ISDA/SIFMAComment Letter at 3 (Mar. 8, 2011); ABC/CIEBAComment Letter at 6 (Mar. 8, 2011); Global FXComment Letter at 3 (Mar. 8, 2011); CoalitionComment Letter at 5–6 (Mar. 8, 2011); MorganStanley Comment Letter at 2 (Mar. 2, 2011).

242Registration and Regulation of Security-BasedSwap Execution Facilities, 76 FR 10948 (proposedFeb. 28, 2011).

243Reuters Comment Letter at 6 (Dec. 12, 2011);Traccr Limited Comment Letter at 2 (Jun. 3, 2011);AII Comment Letter at 5 (Jun. 2, 2011); Rosen et al.Comment Letter at 11 (Apr. 5, 2011); JP MorganComment Letter at 5 (Mar. 8, 2011); ReutersComment Letter at 3 (Mar. 8, 2011); TradewebComment Letter at 7 (Mar. 8, 2011); FSR CommentLetter at 3 (Mar. 8, 2011); MetLife Comment Letter

at 3 (Mar. 8, 2011); SIFMA AMG Comment Letterat 5 (Mar. 8, 2011); Deutsche Comment Letter at 4(Mar. 8, 2011); MarketAxess Comment Letter at 31(Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3(Mar. 8, 2011); Global FX Comment Letter at 3 (Mar.8, 2011); Goldman Comment Letter at 2 (Mar. 8,2011); TruMarx Comment Letter at 6 (Mar. 8, 2011).

244Morgan Stanley Comment Letter at 2 (Mar. 2,2011).

245MetLife Comment Letter at 3 (Mar. 8, 2011).246Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1259.247 IECA Comment Letter at 3 (May 24, 2011);

Mallers et al. Comment Letter at 4–5 (Mar. 21,2011); Better Markets Comment Letter at 9 (Mar. 8,2011); AFR Comment Letter at 4–5 (Mar. 8, 2011).

market, and is inconsistent with theDodd-Frank Act.231

As noted above, §37.9(a)(1)(ii) of theSEF NPRM contained a requirement thata market participant transmit an RFQ tono less than five market participants. Inthe SEF NPRM, the Commissionspecifically asked for public commenton whether five is the appropriate

minimum number of respondents thatthe Commission should require topotentially interact with a request forquote.232 The Commission also askedfor public comment on the appropriateminimum number, if not five.233 TheCommission received the followingcomments regarding the five marketparticipant requirement and hasresponded to those comments below.

Several commenters objected to therequirement in proposed §37.9(a)(1)(ii)that a market participant transmit anRFQ to no less than five marketparticipants.234 The commenters raised

various concerns with this requirement,including the potential for increasedtrading costs,235 decreased liquidity,236 decreased transparency,237 and breakingtrades into smaller sizes.238 Severalcommenters specifically noted that thefive market participant requirement mayresult in increased spreads forparticipants because non-executing

market participants in the RFQ could‘‘front run’’ the transaction inanticipation of the executing marketparticipant’s forthcoming and offsettingtransactions.239 Many of thesecommenters additionally noted thatthese risks would be most pronouncedin illiquid swaps or large-sized trades(i.e., transactions approaching the blocktrade threshold).240 As a result, many of

the commenters noted that it will bedifficult and costly to enter into hedgingtransactions.241

In this regard, some commentersnoted that the SEC’s SB–SEFproposal 242 permitted RFQs to betransmitted to one or more SEFparticipant(s).243 Morgan Stanleycommented that, given the impact of

signaling transactions to multiplemarket participants, as trade size grows,participants may receive betterexecution if their RFQs are transmittedto fewer than five participants.244 Similarly, MetLife commented thatparticipants should have the flexibilityto determine the appropriate number of respondents for a particular trade,which could vary based on the size andliquidity of the trade.245 Additionally,Commissioner Sommers’ dissentsuggested an alternative approach toRFQ Systems that would permit amarket participant to transmit an RFQ to

‘‘more than one’’ potentialcounterparty.246 Other commenters, however, stated

that an RFQ should be transmitted to allparticipants on the SEF.247 Mallers et al.stated that participants would not bedisadvantaged by disclosing an RFQ tothe entire market for transactions below


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248Mallers et al. Comment Letter at 4 (Mar. 21,2011).

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

also Better Markets Comment Letter at 2 (Apr. 12,2013) and Allston et al. Comment Letter at 1 (Feb.28, 2013).

251SDMA Comment Letter at 5 (Feb. 28, 2013);SDMA Comment Letter at 3 (Mar. 8, 2011).

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

JP Morgan Comment Letter at 5–6 (Mar. 8, 2011);FXall Comment Letter at 9–10 (Mar. 8, 2011);SIFMA AMG Comment Letter at 9 (Mar. 8, 2011);Barclays Comment Letter at 7 (Mar. 8, 2011);Tradeweb Comment Letter at 6 (Mar. 8, 2011).

253FXall Comment Letter at 9 (Mar. 8, 2011);Barclays Comment Letter at 7 (Mar. 8, 2011).

254 ISDA/SIFMA Comment Letter at 5–6 (Mar. 8,2011); FXall Comment Letter at 4 (Mar. 8, 2011);MarketAxess Comment Letter at 33 (Mar. 8, 2011);SIFMA AMG Comment Letter at 4 (Mar. 8, 2011).

255 JP Morgan Comment Letter at 5 (Mar. 8, 2011).256Reuters Comment Letter at 1 (Jun. 13, 2012);

Rosen et al. Comment Letter at 12–14 (Apr. 5, 2011); JP Morgan Comment Letter at 5–6 (Mar. 8, 2011);FXall Comment Letter at 9–10 (Mar. 8, 2011);

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

Comment Letter at 3 (Mar. 8, 2011); SIFMA AMGComment Letter at 9 (Mar. 8, 2011); MarketAxessComment Letter at 32 (Mar. 8, 2011); BarclaysComment Letter at 7 (Mar. 8, 2011); ABC/CIEBAComment Letter at 6–7 (Mar. 8, 2011); ISDA/SIFMAComment Letter at 3–4; Evolution Comment Letterat 5–6 (Mar. 8, 2011).

257 JP Morgan Comment Letter at 5–6 (Mar. 8,2011); FSR Comment Letter at 5 (Mar. 8, 2011);MetLife Comment Letter at 3 (Mar. 8, 2011); SIFMAAMG Comment Letter at 9 (Mar. 8, 2011);MarketAxess Comment Letter at 32 (Mar. 8, 2011);ABC/CIEBA Comment Letter at 6–7 (Mar. 8, 2011);ISDA/SIFMA Comment Letter at 3–4 (Mar. 8, 2011);Evolution Comment Letter at 5–6 (Mar. 8, 2011).

258 ISDA/SIFMA Comment Letter at 3–4 (Mar. 8,2011); SIFMA AMG Comment Letter at 9 (Mar. 8,2011).

259FXall Comment Letter at 9–10 (Mar. 8, 2011);ISDA/SIFMA Comment Letter at 3–4 (Mar. 8, 2011);SIFMA AMG Comment Letter at 9 (Mar. 8, 2011).FSR also commented that the provider of the resting bid should not be provided with information aboutthe identity of the RFQ requester. FSR CommentLetter at 5 (Mar. 8, 2011).

260AFR Comment Letter at 3 (Feb. 27, 2013); AFRComment Letter at 5 (Mar. 8, 2011); Better MarketsComment Letter at 8 (Mar. 8, 2011).

261AFR Comment Letter at 5 (Mar. 8, 2011).262Rosen et al. Comment Letter at 14 (Apr. 5,

2011); MarketAxess Comment Letter at 32 (Mar. 8,2011); Barclays Comment Letter at 10 (Mar. 8,2011); Tradeweb Comment Letter at 7–8 (Mar. 8,2011); State Street Comment Letter at 4 (Mar. 8,2011); Deutsche Comment Letter at 4 (Mar. 8, 2011).

263Tradeweb Comment Letter at 7 (Mar. 8, 2011);State Street Comment Letter at 4 (Mar. 8, 2011);Deutsche Comment Letter at 4 (Mar. 8, 2011).

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


§ 37.9(a)(1)(ii) to § 37.9(a)(3).269Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1220–21.

the block trade threshold, which wouldnot move the market.248 In their view,the five market participant requirementwould allow a participant to conductsemi-private deals with a few favoredparticipants to the exclusion of othermarket participants, which wouldultimately decrease liquidity and createa substantial barrier to entry to the

swaps market.249 On the other hand,SDMA supported the five marketparticipant requirement.250 In its view,this requirement promotes pricediscovery and liquidity, whereas thesingle market participant modelfacilitates abusive trading practices,such as pre-arranged trading and‘‘painting the screen’’ (i.e., posting of non-competitive quotes to confuse themarket).251

(ii) Comments on ‘‘Taken Into Accountand Communicated’’ Language in theRFQ System Definition

Some commenters recommended thatthe Commission delete the requirementthat resting orders be ‘‘taken intoaccount and communicated’’ to the RFQ requester.252 FXall and Barclays statedthat this requirement is not necessary

because the RFQ requester already hasthe ability to view the resting orders onthe SEF’s minimum tradingfunctionality or Order Book.253 Severalcommenters stated that this requirementis mandating that SEFs offer RFQ systems in conjunction with the SEF’sminimum trading functionality, whichis not required.254 Similarly, JP Morganstated that the resting order

functionality is not mandated by thestatute.255

Several commenters requestedclarification regarding the interaction

between resting bids and offers and theRFQ system.256 Some commenters

thought that the ‘‘taken into account andcommunicated’’ language should meanthat a SEF must only communicate tothe RFQ requester the resting bids andoffers, and that the RFQ requester hassole discretion to either respond to, orignore, these resting bids and offers.257 ISDA/SIFMA and SIFMA AMGrequested clarification that the resting

bids and offers do not include indicativeprices.258 Several commenters alsostated that SEFs should not be requiredto inform the providers of resting bidsand offers of the RFQs; otherwise, theRFQ system would be subject to marketabuse by opportunistic third partiesseeking market information, and therequirement would open up RFQs

beyond the minimum number of participants.259

(iii) Comments on RFQ DisclosureIssues

AFR and Better Markets stated that

SEFs should be required to discloseRFQ responses to all marketparticipants.260 For example, AFRcommented that responses to RFQsshould be made transparent to allmarket participants prior to tradeexecution, which would serve thestatutory goal of pre-trade pricetransparency and would increase pricecompetition.261 Several commentersobjected to the recommendation by AFRand Better Markets.262 Some of thesecommenters noted that such a

requirement could raise the sameinformation leakage concerns as withthe five market participantrequirement.263

FSR commented that marketparticipants receiving the RFQ shouldhave relevant information about theidentity of the RFQ requester.264 However, Tradeweb commented that the

Commission should not impose aspecific requirement that the identity of the RFQ requester be disclosed oranonymous.265 FSR also stated thatSEFs should not be required to publishRFQs until after the trade has beencompleted, and then only as part of aggregated disclosures.266 Finally, StateStreet requested that the Commissionclarify that an RFQ System is notrequired to provide functionality tomake RFQs visible to the entire market,although it may voluntarily choose to doso.267


Based on the comments, theCommission is adopting proposed§ 37.9(a)(1)(ii) as final § 37.9(a)(3),subject to a number of modificationsdiscussed below.268

(i) RFQ System Definition andTransmission to Five MarketParticipants

The Commission is adopting thedefinition of RFQ System in proposed§ 37.9(a)(1)(ii)(A), subject to certainmodifications described below. Asexplained in the SEF NPRM, theCommission believes that an RFQ

System, as defined in § 37.9, operatingin conjunction with a SEF’s minimumtrading functionality (i.e., Order Book)is consistent with the SEF definitionand promotes the goals provided insection 733 of the Dodd-Frank Act,which are to: (1) Promote the trading of swaps on SEFs and (2) promote pre-trade price transparency in the swapsmarket.269 The Commission notes thatthe RFQ System definition requiresSEFs to provide market participants theability to access multiple marketparticipants, but not necessarily theentire market, in conformance with theSEF definition.

The Commission agrees with SDMAthat the proposed five market


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270The Commission notes that a SEF marketparticipant may send an RFQ to the entire market.See id. at 1220 and discussion below. TheCommission also notes that there are generally twodistinct differences between the requirementsfinalized in this release and the RFQ-typefunctionality offered by DCMs. First, RFQ functionality used by DCMs disseminates RFQs toall market participants. Second, the responses to theRFQs take the form of executable bids or offers thatare entered into the DCM’s order book or othercentralized market, such that orders from anymarket participant, not just the one submitting theRFQ, can be matched against such responsive bidsor offers. Although the Commission considered aminimum RFQ-to-all requirement similar to thecurrent practice in DCMs, given that swaps tend to be less standardized than futures, the Commission

believes that rules pertaining to the executionmethods for SEFs should provide appropriateflexibility for market participants trading swaps.The Commission notes that the less restrictiveminimum market participant requirementestablished by part 37 reflects the more flexiblestatutory provisions for SEFs as compared to DCMs.

271The Commission clarifies that the three marketparticipant requirement does not imply anyrequirement that the requested market participantsoperate in any particular manner, such as arequirement that such participants be dedicatedliquidity providers or market makers in theparticular swap. The RFQ requester may send theRFQ to any three market participants on the RFQ system, subject to the affiliate prohibition discussed below. See supra footnote 234 for further details.

272The Commission notes that ‘‘affiliate’’ means:(i) One party, directly or indirectly, holds a majorityownership interest in the other party, and the partythat holds the majority interest in the other partyreports its financial statements on a consolidated basis under Generally Accepted Accounting

Principles or International Financial ReportingStandards, and such consolidated financialstatements include the financial results of themajority-owned party; or (ii) a third party, directlyor indirectly, holds a majority ownership interest in both parties, and the third party reports its financialstatements on a consolidated basis under GenerallyAccepted Accounting Principles or InternationalFinancial Reporting Standards, and suchconsolidated financial statements include thefinancial results of both of the parties. A party orthird party directly or indirectly holds a majorityownership interest if it directly or indirectly holdsa majority of the equity securities of an entity, orthe right to receive upon dissolution, or thecontribution of, a majority of the capital of apartnership. See Commission regulation 50.52.

273Tradeweb Comment Letter at 7 (Mar. 8, 2011).274The Commission understands that such

provisions are in place to accommodate variousoperational and other reasons that could cause amarket participant to not comply with the quotingobligations.

participant requirement would promotepre-trade price transparency, as the RFQ requester would be required to solicitexecutable orders, on a pre-trade basis,from a larger group of potentialresponders.270 A broader group of potential responders, in turn,encourages price competition betweenthe potential responders to the RFQ and

may provide a more reliable assessmentof market value than SEF functionalitythat would permit a market participantto rely on a quote from a single RFQ requestee. The Commission neverthelessrecognizes commenters’ concerns aboutthe proposed five market participantrequirement, such as the potential forincreased trading costs and informationleakage to the non-executing marketparticipants in the RFQ. To addressthese concerns, while still complyingwith the multiple-to-multiplerequirement in the statutory SEFdefinition and promoting the goals of

pre-trade price transparency and tradingof swaps on SEFs provided in section733 of the Dodd-Frank Act, theCommission is requiring that a marketparticipant transmit an RFQ to no lessthan two market participants during aphase-in compliance period and,subsequent to that period, to no lessthan three market participants.271 TheCommission believes, as noted above,that sending an RFQ to a greater numberof market participants increases thepotential for price competition amongresponders and provides a more reliableassessment of market value. The

Commission also believes that the threemarket participant requirement, withthe two market participant phase-inperiod, appropriately balances the

benefits of pre-trade price transparencyand the information leakage concernsraised by commenters. The revisionfrom five to three minimum marketparticipants will also provide market

participants with greater flexibility insending RFQs for RequiredTransactions, while still complying withthe statutory SEF definition andpromoting pre-trade price transparency.

The Commission has also determinedto clarify that the market participantsrequired for inclusion in an RFQ in allcases may not be affiliated with orcontrolled by the RFQ requester andmay not be affiliated with or controlled

by each other, and is revising final§ 37.9(a)(3) to clarify this point.272 Foran RFQ requester to send an RFQ toanother entity who is affiliated with or

controlled by the RFQ requester isinconsistent with the purpose of requiring that RFQs be sent to more thanone market participant, as explained

both in the SEF NPRM and this release.The Commission notes that if an RFQ istransmitted to one non-affiliate and twoaffiliates of the requester or if an RFQ is transmitted to three requestees whoare affiliates of each other, then thepolicy objective of promoting the goal of pre-trade price transparency andcomplying with the multiple-to-multiple requirement in the SEFdefinition could be undermined. TheCommission is also concerned that suchan outcome could disincentivize entitiesfrom responding to an RFQ, whichwould reduce price competition andliquidity.

The Commission believes, moreover,that the three market participantrequirement is consistent with currentmarket practice where, in certainmarkets, many market participants

already choose to send an RFQ tomultiple market participants. Tradeweb,for example, noted that in its experiencein the U.S. Treasuries market, marketparticipants on average send an RFQ tothree market participants.273 Inaddition, the Commission understandsthat many pension and other managedfunds with fiduciary obligations

routinely obtain quotes from at leastthree market participants in certainsecurities markets. The Commission

believes that the three marketparticipant requirement, with the twomarket participant transition period,supports a common industry practice of querying multiple market participants,while still complying with the statutorySEF definition and promoting the goalsprovided in section 733 of the Dodd-Frank Act.

Furthermore, the Commission believes that the three minimum marketparticipant requirement heightens the

probability that multiple participantswill respond to an RFQ and, thus, willfacilitate the pricing improvementsattendant to competition among RFQ responders. The Commission is aware of numerous legal, business, andtechnological issues that could preventa market participant from responding toa specific RFQ. The Commission notes,for example, that DCM market makerprograms often require participants toquote two-sided markets for 75 to 85percent of the trading day.274 Therefore,a participant in the market makerprogram may not provide quotes for a

portion of the trading day. While thereis no guarantee that even a minimummarket participant requirement willensure that multiple responses areavailable for all RFQs, it increases theprobability that the goal of pre-tradeprice transparency is achieved and thata competitive market exists for allmarket participants.

Finally, the Commission believes thatsetting the minimum RFQ requirementat a uniform number for all RequiredTransactions in all asset classesprovides regulatory and marketefficiencies and is appropriate for theSEF market structure at this particulartime. SEFs and market participants will

benefit from a clear and uniformstandard that would not require them to

be subject to different minimum RFQ requirements, and to monitorcompliance with such requirements, forevery swap or class of swaps subject to


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275The Commission notes that the affiliateprohibition in §37.9(a)(3) applies during theinterim RFQ-to-2 period.

276Registration and Regulation of Security-BasedSwap Execution Facilities, 76 FR at 10953–54,10971–74.

277 Id.

278To the extent such risks potentially exist forRequired Transactions, the reduction of theminimum market participant requirement from theproposed five will help mitigate this risk.

279Clearing Requirement Determination UnderSection 2(h) of the CEA, 77 FR 74284 (Dec. 13,2012); Process for a Designated Contract Market orSwap Execution Facility To Make a Swap AvailableTo Trade, 76 FR 77728 (proposed Dec. 14, 2011).

280Clearing Requirement Determination Under

Section 2(h) of the CEA, 77 FR 74284. TheCommission notes that these swaps already wentthrough a Commission determination process thatincluded a five factor review, including a liquidityreview. Id. ISDA, in its letter requesting interpretiverelief regarding the obligation to provide a pre-trademid-market mark, recognized that many of theswaps that the Commission has determined arerequired to be cleared under CEA section 2(h)(1) are‘‘highly-liquid, exhibit narrow bid-ask spreads andare widely quoted by SD/MSPs in the marketplace. . . ’’ ISDA Comment Letter at 2 (Nov. 30, 2012).

281The Commission recognizes that not all swapdealers will be active in all Required Transactions.The Commission also notes that of the 77 currentlyregistered swap dealers, 35 swap dealers are notaffiliated with any other swap dealers.

282See definition of block trade in §43.2 of theCommission’s regulations.

283Similarly, as noted below, SEFs are notrequired to display responses to an RFQ to anyone but the RFQ requester.

284The Commission is also deleting the catch-allRFQ definition in proposed §37.9(a)(1)(ii)(C) as itis unnecessary. As discussed below, a SEF maypetition the Commission under §13.2 to amend§ 37.9(a)(2) to include additional execution methodsfor Required Transactions. See discussion belowunder §37.9(b)(1) and (b)(4)—Execution Methodsfor Required Transactions in the preamble.

the CEA section 2(h)(8) trade executionrequirement.

For the reasons discussed above, atthis time, the Commission believes thatthe three market participantrequirement implements the multiple-to-multiple requirement in the statutorySEF definition and will create anappropriate level of pre-trade price

transparency for Required Transactions(i.e., transactions involving swaps thatare subject to the trade executionmandate of section 2(h)(8) of the CEA)for market participants initiating RFQs.However, the Commission is also awareof the fact that a phased implementationof this requirement will assist marketparticipants and prospective SEFs tomake an efficient transition from theswap industry’s current marketstructure to the more transparentexecution framework set forth in thesefinal rules. Therefore, to provide marketparticipants, SEFs, and the swaps

industry with time to adapt to the newSEF regime, the Commission is phasing-in the three market participantrequirement. From the effective date of the final SEF regulations until one yearfrom the compliance date of these finalregulations, a market participanttransmitting an RFQ for RequiredTransactions under § 37.9(a)(2) muststill comply with the RFQ definition in§ 37.9(a)(3), but may transmit the quoteto no less than two marketparticipants.275

Some comments expressed supportfor the SEC’s SB–SEF proposal, which

allows for one-to-one RFQs. If theCommission eliminated the multiplemarket participant requirement andinstead permitted RFQ requesters tosend RFQs to a single marketparticipant, then the multiple-participant-to-multiple-participantrequirement in the SEF definition andthe pre-trade price transparency goalwould be undermined. In this regard,the Commission notes that while theSEC’s SB–SEF proposal allows for one-to-one RFQs, it proposed to fulfill themultiple to multiple requirement bymandating full order interaction or bestexecution for RFQs.276 Under the SEC’sSB–SEF proposal, an RFQ requestermust execute against the best pricedorders of any size within and across aSEF’s modes of execution, arequirement that the Commission is notrecommending at this time.277

The Commission notes that somecommenters expressed concerns aboutthe risks with respect to informationleakage for illiquid swaps or large-sizetrades, and the potential risk of awinner’s curse for the marketparticipant whose quote is accepted bythe RFQ requester. According to thecommenters, the other market

participants in the RFQ will be aware of the RFQ, and some or all of thoseparticipants will attempt to front-runthe trades by the winning responder tohedge or layoff the risk from the RFQ transaction.278

With respect to commenters’ concernsabout the potential winner’s curse forilliquid swaps, the Commission clarifiesthat the minimum market participantrequirement only applies to RFQ Systems for Required Transactions (i.e.,transactions involving swaps that aresubject to the trade execution mandateof section 2(h)(8) of the CEA); such

swaps generally should be more liquidthan swaps that are not subject to thetrade execution mandate because theyare subject to the clearing mandate of section 2(h)(1) of the CEA and are madeavailable to trade.279 In this regard, theCommission notes that the interest rateswaps and credit default swaps that theCommission has determined arerequired to be cleared under CEAsection 2(h)(1) (and are likely to besubject to the trade execution mandateof CEA section 2(h)(8)) are some of themost liquid swaps.280 The Commissionalso notes that 77 swap dealers haveregistered with the Commission and

nearly all of them make markets in suchswaps.281 Further, SEFs may offer RFQ systems without the three marketparticipant requirement for PermittedTransactions (i.e., transactions notinvolving swaps that are subject to the

trade execution mandate of section2(h)(8) of the CEA).

With respect to commenters’ concernsabout the potential winner’s curse forlarge-sized trades, the Commissionnotes that block trades would not besubject to the execution methods forRequired Transactions, including the

three market participant requirement.282

Therefore, excluding block trades fromthe execution methods for RequiredTransactions will address the potentialrisk of a winner’s curse for such trades.The Commission also clarifies that SEFsare not required to display a requester’sRFQ to market participants notparticipating in the RFQ.283

The Commission believes, in responseto commenters’ concerns aboutincreased trading costs, that anincreased number of participantsreceiving and responding to RFQs willtighten the bid-ask spreads, and result

in lower transaction costs for marketparticipants. The Commission notes thatthe relationship between spreads andthe industry practice for the minimumnumber of RFQ recipients will varyacross swaps and over time. Further, theCommission believes that as SEFscompete to grow their swaps tradingvolumes and deliver improved liquidityand lower transaction costs for theircustomers, the final rules in this releasewill provide them with the flexibility toexperiment with different minimumnumbers of recipients that is higher thanthe minimum articulated in this

regulation. The final RFQ requirementwill provide some protection to RFQ requesters that at least a minimumnumber of market participants willreceive their RFQs, and thus increasethe likelihood of receiving multiple,competitive quotes.

Finally, the Commission is deletingthe additional definition of RFQ Systemin proposed § 37.9(a)(1)(ii)(B) because itis unnecessary.284 A SEF that chooses tooffer an RFQ System to facilitateRequired Transactions is required tooffer the RFQ System in conjunctionwith the SEF’s Order Book, which

would encompass the requirements inproposed § 37.9(a)(1)(ii)(B)(1) and


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285See discussion below under § 37.9(b)(1) and(b)(4)—Execution Methods for RequiredTransactions in the preamble. As noted above in theregistration section, a SEF is not required to offerindicative quotes.

286 Id.287The Commission is renumbering proposed

§ 37.9(a)(1)(ii)(A) to §37.9(a)(3). The Commissionnotes that after the RFQ responses and resting bidsor offers on the Order Book are communicated tothe RFQ requester, the RFQ requester may make acounter request or order as long as it is submittedto 3 market participants, whether it be to the same3 market participants as the original RFQ request,3 different market participants, or somecombination of both.

288Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1220 (statingthat market participants may desire to interact witha limited number of market participants (i.e., fewerthan the entire market) and are permitted to do sounder the proposal).

289 Id.290 Id.

291 Id. at 1219–20.292 Id.293 Id. at 1220.

(2)(i).285 Additionally, a marketparticipant is already required to sendan RFQ to three market participants,which would also be the case if it is

based upon an indicative quote as statedin proposed §37.9(a)(1)(ii)(B)(2)(ii).286

(ii) ‘‘Taken Into Account andCommunicated’’ Language in the RFQ

System DefinitionTo address commenters’ concern that

the SEF NPRM was ambiguous withrespect to the communicationrequirement, the Commission ismodifying the definition of RFQ Systemin proposed § 37.9(a)(1)(ii)(A) to statethat a SEF must provide the RFQ requester: (1) With any firm resting bidor offer in the same instrument from anyof the SEF’s Order Books at the sametime as the first responsive bid or offeris received by the RFQ requester and (2)with the ability to execute against suchfirm resting bids or offers along with theresponsive orders.287 For example, amarket participant transmits an RFQ tothree market participants to buy a US $1million notional 10-year fixed-to-floating US$ LIBOR interest rate swap.Any firm offer resting on the SEF’sOrder Book for a 10-year fixed-to-floating US$ LIBOR interest rate swapmust be transmitted to the RFQ requester at the same time that the firstresponsive offer is received by the RFQ requester. The SEF must provide theRFQ requester with the ability to lift thefirm offers and execute against any of the responsive orders. The final rulerequires that SEFs communicate any

resting bid or offer pertaining to thesame instrument back to the RFQ requester, while the requester retainsthe discretion to decide whether toexecute against the resting bids or offersor responsive orders.

Similar to the three market participantrequirement, the Commission believesthat the communication requirementpromotes pre-trade price transparencyand the trading of swaps on SEFs, as theRFQ requester will have the ability toaccess competitive quotes and quoteproviders will be able to have theirquotes viewed by the RFQ requester.

The Commission also clarifies that theresting bids and offers beingcommunicated are not required toinclude indicative prices, to the extentthat indicative prices are facilitated bythe Order Book, and that SEFs are notrequired to inform the providers of theresting bids and offers on the OrderBook of the RFQs.

(iii) RFQ Disclosure Issues

The Commission is clarifying thatSEFs are not required to discloseresponses to RFQs to all marketparticipants. While the Commissionunderstands that the RFQ functionalityoffered by some DCMs disseminatesresponses to RFQs to all marketparticipants, it also notes that the lessrestrictive disclosure requirement forSEFs reflects the more flexible statutoryprovisions for SEFs as compared toDCMs. As noted in the SEF NPRM, amarket participant may access fewer

market participants than the entiremarket in certain situations.288 Inresponse to FSR’s and Tradeweb’scomments about the identity of the RFQ requester, the Commission clarifies thatit is not imposing a specific requirementthat the identity of the RFQ requester bedisclosed or anonymous. TheCommission is also not providing aspecific requirement regarding thepublishing of the ‘‘request’’ for a quoteand notes that SEFs must comply withall reporting obligations as required inthe Act and Commission’s regulations.Finally, as noted in the SEF NPRM,acceptable RFQ Systems must permit

RFQ requesters the option to make anRFQ visible to the entire market.289

(iv) Other RFQ Issues

As noted in the SEF NPRM, anacceptable RFQ System may allow for atransaction to be consummated if theoriginal request to five potentialcounterparties receives fewer than fiveresponses.290 Although the Commissionreceived no comment letters on thisissue, some commenters in meetingsasked the Commission to clarify theamount of time required to elapse beforethe RFQ requester can execute against

the responsive quotes since fewer thanfive responses may be received. Assuch, the Commission is modifying theRFQ System definition in final§ 37.9(a)(3) to state that a SEF mustensure that its trading protocols provide

each of its market participants withequal priority in receiving requests forquotes and in transmitting anddisplaying for execution responsiveorders. The SEF does not need toestablish a minimum latency or specificperiod of time for the transmission of responsive orders, provided that theSEF’s rulebook and prohibition on

transmission and display priorities areappropriately designed to preventmarket participants from seeking toavoid the three market participantrequirement. A SEF’s RFQ System andrulebook must account for thisprohibition.

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

Proposed § 37.9(a)(1)(iii) definedVoice-Based System as a trading systemor platform in which a marketparticipant executes or trades aPermitted Transaction using atelephonic line or other voice-based

service.(1) Commission Determination

The Commission did not receive anycomments on the definition of Voice-Based System. However, theCommission is deleting the definition of Voice-Based System in proposed§ 37.9(a)(1)(iii) given its decision belowto allow SEFs to provide any executionmethod for Permitted Transactions.

(d) §§37.9(b)(1) and (b)(4)—ExecutionMethods for Required Transactions

Proposed §37.9(b)(1) stated thatRequired Transactions may be executed

on an Order Book or an RFQ System. Asnoted in the SEF NPRM, a SEF mustoffer the minimum trading functionalityin proposed § 37.9(b)(2) (i.e., acentralized electronic screen with theability to post both firm and indicativequotes visible to all marketparticipants).291 Therefore, the SEFNPRM provided that RequiredTransactions must be executed throughthe SEF’s minimum tradingfunctionality, Order Book that meets theminimum trading functionality, or RFQ System that operates in conjunctionwith the minimum trading

functionality.292

The SEF NPRM made itclear that for Required Transactions,pre-trade transparency must be met.293 Additionally, proposed §37.9(b)(4)stated that the Commission may, in itsdiscretion, require a SEF to offer adifferent trading method for a particularswap.

For Required Transactions, the SEFNPRM did not provide for a specific


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294 Id. at 1221.295 Id.296 Id.297 Id. at 1220.298 Id.299 Id.300Mallers et al. Comment Letter at 3 (Mar. 21,

2011); Better Markets Comment Letter at 5–6 (Mar.8, 2011); AFR Comment Letter at 4 (Mar. 8, 2011).Similarly, SDMA supports the sole use of order books for certain products. SDMA Comment Letterat 2 (Apr. 30, 2013).


302Tradeweb Comment Letter at 4 (Jun. 3, 2011);SDMA Comment Letter at 2 (Mar. 8, 2011);Deutsche Comment Letter at 3 (Mar. 8, 2011); MFAComment Letter at 5–6 (Mar. 8, 2011); MetLifeComment Letter at 2 (Mar. 8, 2011); BarclaysComment Letter at 4 (Mar. 8, 2011); BloombergComment Letter at 2 (Mar. 8, 2011); BlackRockComment Letter at 4–5 (Mar. 8, 2011).

303SDMA Comment Letter at 2 (Mar. 8, 2011).304Nodal Comment Letter at 3 (Mar. 8, 2011).305 Id. at 2–3; Nodal Comment Letter at 3 (Jun. 3,

2011).306See discussion above under §37.3—

Requirements for Registration in the preamble fora description of Nodal’s blind auction.

307Nodal Comment Letter at 2 (Mar. 8, 2011).308Representative Scott Garrett Comment Letter

at 1 (Feb. 27, 2013); WMBAA Comment Letter at 2–3 (Jul. 18, 2011); WMBAA Comment Letter at 6–8(Jun. 3, 2011); Rosen et al. Comment Letter at 15(Apr. 5, 2011); JP Morgan Comment Letter at 6 (Mar.8, 2011); WMBAA Comment Letter at 4–6 (Mar. 8,2011); ICAP Comment Letter at 3, 4–5 (Mar. 8,2011); ISDA/SIFMA Comment Letter at 4–5 (Mar. 8,2011); CME Comment Letter at 7–8 (Mar. 8, 2011).

309 JP Morgan Comment Letter at 6 (Mar. 8, 2011).310WMBAA Comment Letter at 2 (Jul. 18, 2011).

311WMBAA Comment Letter at 5 (Mar. 8, 2011).312Meetings with ICAP dated Mar. 21, 2012, Mar.

9, 2012, Feb. 16, 2012, Feb. 14, 2012; Meetings withGFI dated Mar. 14, 2012, Feb. 16, 2012; Meeting

with WMBAA dated Feb. 16, 2012; ICAP CommentLetter at 4 (Mar. 8, 2011).313Meetings with GFI dated Mar. 14, 2012, Feb.

16, 2012.314 Id.315 Id.316Rosen et al. Comment Letter at 10 (Apr. 5,

2011); Barclays Comment Letter at 11 (Mar. 8,2011); ISDA/SFMA Comment Letter at 5 (Mar. 8,2011); Tradeweb Comment Letter at 6 (Mar. 8,2011); MarketAxess Comment Letter at 33 (Mar. 8,2011).


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

execution method incorporating voice.The proposal stated that trading systemsor platforms facilitating the execution of Required Transactions via voiceexclusively are not multiple participantto multiple participant and do notprovide for pre-trade pricetransparency.294 However, the SEFNPRM noted that, while not acceptableas the sole method of execution forRequired Transactions, voice would beappropriate under certain circumstancessuch as for a market participant tocommunicate an order to a SEF’semployee or for a SEF’s employee toassist a market participant in executinga trade.295 The SEF NPRM stated thatthe core principles and theCommission’s regulations would fullyapply to such communications,including, but not limited to,transparency, audit trail, impartialaccess, and standards for RFQs.296

Although the SEF NPRM did notprovide for a specific execution methodincorporating voice for RequiredTransactions, it did contemplate thepossibility of certain functionalities thatoperate in conjunction with the SEF’sminimum trading functionality.297 Inthis regard, the SEF NPRM stated that,in addition to the SEF’s minimumtrading functionality, a SEF may offerother functionalities that providemultiple participants with the ability toaccess multiple participants, but notnecessarily the entire market, if themarket participant so chooses.298 TheSEF NPRM noted that certain definedRFQ Systems or other systems that meetthe SEF definition and comply with thecore principles applicable to SEFs mayqualify.299


(i) Comments on Execution Methods forRequired Transactions

Some commenters supported the useof order books for RequiredTransactions.300 For example, Mallers etal. contended that a central order bookmarket structure for all RequiredTransactions provides the most accurate

valuation of the market, reducessystemic risks, and results in better

prices.301 Other commenters supportedthe use of order book structures andRFQ models for RequiredTransactions.302 SDMA, for example,stated that all cleared swaps should beexecuted through a central limit order

book or an RFQ System.303 Nodal recommended that the

Commission explicitly include blind

auctions as an acceptable method of execution for Required Transactions.304 Nodal commented 305 that pre-tradetransparency for Required Transactionsshould not apply to blind auctions.306 Nodal articulated its view that the twingoals of pre-trade transparency andpromoting on-exchange trading of swapson SEFs should be balanced againsteach other, instead of being read inconjunction with one another.307

(ii) Comments on ‘‘Through Any Meansof Interstate Commerce’’ Language inthe SEF Definition

Given the phrase ‘‘through any meansof interstate commerce’’ in the CEAsection 1a(50) SEF definition, manycommenters supported the use of multiple methods of execution, such asvoice, for Required Transactions on aSEF.308 JP Morgan, for example, statedthat the SEF NPRM assumes that SEFswill always be electronic platforms,which it contended, appears to directlycontradict the phrase ‘‘through anymeans of interstate commerce’’ in theSEF definition.309 According toWMBAA, the phrase ‘‘through anymeans of interstate commerce’’ in theSEF definition supports multiple

methods of execution for RequiredTransactions on a SEF, including acombination of voice and electronicsystems.310 In this regard, WMBAA

stated that the Commission shouldallow any execution method forRequired Transactions as long as itmeets the multiple participant tomultiple participant requirement in theSEF definition and the other statutoryrequirements for SEFs.311

Furthermore, some members of the

industry requested that the Commissionclarify in the final rules whether ‘‘work-up’’ sessions would be considered anacceptable method of execution forRequired Transactions.312 GFI explainedone example of a work-up sessionwhere, after a trade is executed on anorder book, one of the counterparties tothe trade may wish to buy or selladditional quantities of the sameinstrument at the previously executedprice.313 In this case, the parties initiatea work-up session to execute suchadditional quantity.314 After the initialcounterparty exercises its right of firstrefusal, other market participants mayalso join in the trade at the previouslyexecuted price.315

(iii) Comments on Liquidity-BasedExecution Mandates

Several commenters stated that theDodd-Frank Act does not require certainmethods of trading, such as an order

book, based upon the amount of tradingactivity in a particular instrument.316 MarketAxess contended that nothing inthe Dodd-Frank Act supports therequirement in proposed §37.9(b)(4)that methods of execution on a SEF

should be based upon characteristics of a particular swap.317 MarketAxessstated that such a requirement wouldcreate uncertainty regarding a SEF’soperational structure 318 and, accordingto Tradeweb, would likely decrease thetrading activity and liquidity of thoseswaps subject to the requirement.319 Onthe other hand, AFR contended thatmandatorily cleared swaps meeting acertain level of trading activity should


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320AFR Comment Letter at 5–6 (Mar. 8, 2011).321The Commission is renumbering proposed

§ 37.9(b)(1) to § 37.9(a)(2).322See 17 CFR 13.2 for further details. This will

allow the Commission to consider if a broadermodel for executing on SEFs, consistent with thesuggestion in Commissioner Sommers’ dissent,would be appropriate on a case-by-case basis, inconformance with the CEA and the Commission’sregulations. Core Principles and OtherRequirements for Swap Execution Facilities, 76 FRat 1259.

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

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


326The Commission notes below that pre-tradetransparency can help promote the trading of swapson SEFs. See the Introduction section of the CostBenefit Considerations section for further details.

327The Commission further notes that thisdetermination does not accept Nodal’s assertionthat ‘‘this type of blind auction trading platform ispermissible on DCMs.’’ See Nodal Comment Letterat 3 (Mar. 8, 2011).

328The Commission interprets the phrase‘‘through any means of interstate commerce’’ inCEA § 1a(50) to allow a SEF to utilize a variety of means of execution or communication, including, but not limited to, telephones, internetcommunications, and electronic transmissions.Overstreet v. North Shore Corp., 318 U.S. 125, 129–30 (1943) (in general, ‘‘instrument’’ of interstatecommerce is to be interpreted broadly); United

States v. Barlow, 568 F.3d 215, 220 (5th Cir. 2009)(‘‘It is beyond debate that internet and email arefacilities or means of interstate commerce.’’); United States v. Weathers, 169 F.3d 336, 341 (6th Cir.2000) (‘‘It is generally well established thattelephones, even when used intrastate, constituteinstrumentalities of interstate commerce.’’); SEC v.Solucorp Indus., 274 F.Supp.2d 379, 419 (S.D.N.Y.2003) (defendants ‘‘used the means andinstrumentalities of interstate commerce, including,among other things, the mails and wires, includingthe Internet, news wires and telephone lines’’ tocommit securities fraud). While the Commission’sinterpretation of ‘‘any means of interstatecommerce’’ allows a SEF to utilize a wide varietyof execution or communication means, all SEFs,regardless of the execution or communication

means they employ, must comply with all of thesubstantive SEF requirements, including, but notlimited to, requirements that pertain to execution.For example, a SEF using the telephone to executeRequired Transactions must satisfy the executionrequirements set forth in § 37.9(a)(2)(i)(A) or (B).

only be traded through order booksystems.320


(i) Execution Methods for RequiredTransactions

The Commission is revising proposed§ 37.9(b)(1) as final § 37.9(a)(2) to clarifythat each Required Transaction that isnot a block trade as defined in §43.2 of the Commission’s regulations shall beexecuted on a SEF in accordance withone of the following methods of execution: (1) An Order Book as definedin § 37.3(a)(3) or (2) an RFQ System, asdefined in §37.9(a)(3), that operates inconjunction with an Order Book.321 Asexplained in this final rulemaking, theCommission believes that theseexecution methods are consistent withthe SEF definition and promote thegoals provided in section 733 of theDodd-Frank Act. The Commissionnotes, however, that a SEF may petition

the Commission under § 13.2 of theCommission’s regulations to amend§ 37.9(a)(2) to include additionalexecution methods.322 This ability of SEFs to petition the Commissionreplaces similar provisions in the SEFNPRM that were included in the OrderBook and RFQ System definitions andprovides SEFs with additionalflexibility as existing execution methodsevolve or new methods aredeveloped.323

In keeping with the statutoryinstruction that the Dodd-Frank Act goalof SEFs is to both ‘‘promote the trading

of swaps on swap execution facilitiesand to promote pre-trade pricetransparency in the swaps market’’ 324 (emphasis added), the Commission isreaffirming its view articulated in theSEF NPRM that these goals can beachieved for Required Transactions byproviding for the execution of suchtransactions on trading systems orplatforms that allow market participantsto post bids and offers or accept bidsand offers that are transparent to theentire market.325 Promoting trading on a

SEF should not result in eliminating theneed to provide some degree of pre-trade transparency. Therefore, evenwhen recognizing the importance of promoting the trading of swaps on SEFs,some degree of pre-trade transparencymust be met for RequiredTransactions.326 As a result, theCommission is declining to accept

Nodal’s recommendation to explicitlyinclude blind auctions as an acceptablemethod of execution for RequiredTransactions under this rulemaking.327

(ii) ‘‘Through Any Means of InterstateCommerce’’ Language in the SEFDefinition

In consideration of the commentsregarding possible limitations on howthe Commission interprets the phrase‘‘through any means of interstatecommerce’’ in the SEF definition, theCommission is revising the final ruletext to clarify that in providing either

one of the execution methods forRequired Transactions in§ 37.9(a)(2)(i)(A) or (B) of this finalrulemaking (i.e., Order Book or RFQ System that operates in conjunctionwith an Order Book), a SEF may forpurposes of execution andcommunication use ‘‘any means of interstate commerce,’’ including, but notlimited to, the mail, internet, email, andtelephone, provided that the chosenexecution method satisfies therequirements provided in §37.3(a)(3) forOrder Books or in §37.9(a)(3) forRequest for Quote Systems.328 With this

use of the phrase ‘‘any means of interstate commerce,’’ the Commissionis not limiting the means of executionor communication that a SEF mayutilize in implementing the requiredexecution methods for RequiredTransactions in § 37.9(a)(2)(i)(A) or (B),provided that the chosen executionmethod satisfies the requirements

provided in §37.3(a)(3) for Order Booksor in §37.9(a)(3) for Request for QuoteSystems. In this regard, the Commissionnotes that as the swaps market evolves,SEFs may develop new means of execution or communication for use inimplementing the required executionmethods. Although the Commissionnotes that its regulations are technologyneutral given the ‘‘any means of interstate commerce’’ language, it alsoemphasizes that, regardless of the meansof interstate commerce utilized, a SEFmust comply with the Act and theCommission’s regulations, including the

§ 37.9 execution method, impartialaccess, audit trail, and surveillancerequirements. Furthermore, alltransactions on the SEF must complywith the SEF’s rules.

For example, to meet the RFQ Systemdefinition for Required Transactions, aSEF must satisfy all of the followingfunctions, and in doing so, all or someof these functions may be performedover the telephone: (1) Receiving arequest from a market participant toexecute a trade, (2) submitting thatrequest to at least 3 market participantsin accordance with the RFQ Systemdefinition, (3) communicating the RFQ

responses and resting bids or offers onthe Order Book to the RFQ requester,and (4) executing the transaction. TheCommission notes that regardless of themeans of interstate commerce utilized,including the telephone, the SEF mustsubmit the transaction into its system orplatform so that the SEF is able tocomply with the Act and theCommission’s regulations, includingaudit trail, clearing, and reportingrequirements. Given the different meansof interstate commerce that a SEF mayutilize for purposes of communicationand execution in implementing the

execution methods for RequiredTransactions in § 37.9(a)(2)(i)(A) or (B),the Commission notes that it mustevaluate each system or platform todetermine whether it meets therequirements of §37.9(a)(2).

The Commission, in order to providefurther clarity regarding the means of


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329See final §37.9(a)(3) and the preamble fordetails regarding the communication of the resting bids or offers on the Order Book to the RFQ requester.

330The Commission notes that a work-uptransaction does not qualify as a block trade evenif an individual market participant’s transactions aspart of the work-up transaction has a notional orprincipal amount at or above the appropriateminimum block size applicable to such swap. TheCommission believes that the concepts of work-uptransactions and block trades are mutuallyexclusive. Block trades are executed pursuant to aSEF’s rules, but negotiated and executed off of theSEF’s trading platform. A work-up transaction is

conducted on a SEF’s trading platform. See blocktrade definition in §43.2 of the Commission’sregulations; see also Rules Prohibiting theAggregation of Orders To Satisfy Minimum BlockSizes or Cap Size Requirements, and EstablishingEligibility Requirements for Parties to Block Trades,77 FR 38229 (proposed Jun. 27, 2012). Accordingly,each individual transaction that is part of the work-up transaction must be reported as it occurspursuant to the SEF’s reporting obligations.

331These resting bids or offers would be includedat the work-up session price. The Commission notesthat ‘‘equal to or better than the work-up sessionprice’’ means any resting bids that are equal to orgreater than the work-up price or any resting offersthat are equal to or less than the work-up price.

332 Id.


334Mallers et al. Comment Letter at 5 (Mar. 21,2011); SDMA Comment Letter at 4 (Mar. 8, 2011).

interstate commerce that a SEF mayutilize in order to satisfy the executionmethods for Required Transactions in§ 37.9(a)(2), is providing the followingexample, which the Commissionintends to be instructive, though notcomprehensive. The Commissionemphasizes that the following exampleshould not be construed as bright-line

rules:• RFQ System example—a market

participant calls an employee of the SEFwith a request for a quote to buy or sella swap subject to the trade executionrequirement in CEA section 2(h)(8). TheSEF employee disseminates the requestfor a quote to no less than three marketparticipants on the SEF (directly orthrough other SEF employees or both)

by telephone, email, instant messaging,squawk box, some other means of communication, or some combinationthereof. Based on the responses of thesemarket participants, the SEF employee

communicates the responsive bids oroffers and the resting bids or offers onthe SEF’s Order Book 329 to the RFQ requester by one of the above referencedmeans of communication. The RFQ requester communicates acceptance of one of the bids or offers to the SEFemployee by one of the abovereferenced means of communication.The SEF employee informs those twomarket participants by one of the abovereferenced means of communicationthat the swap transaction is executed.The SEF employee enters thetransaction into the SEF’s system or

platform so that the SEF is able tocomply with the Act and theCommission’s regulations, includingaudit trail, clearing, and reportingrequirements. The Commission viewsthis example as demonstratingacceptable uses of different means of interstate commerce while meeting theRFQ System method of execution in§ 37.9(a)(2).

In response to commenters, theCommission will generally allow work-up sessions if such trading protocols areutilized after a transaction is executedon the SEF’s Order Book or RFQ System.330 The Commission, in order to

provide further clarity regarding work-up sessions, is providing the followingtwo examples, which the Commissionintends to be instructive, though notcomprehensive. The Commission notesthat the following examples are twotypes of work-up session that may beacceptable:

• After two counterparties execute a

transaction on a SEF’s Order Book, theSEF may establish a short time periodfor a work-up session. The SEF mustopen up the work-up session to allmarket participants so that they maytrade an additional quantity of the sameinstrument at the same price previouslyexecuted by the initial counterparties. Inaddition, any resting bids or offers onthe SEF’s Order Book equal to or betterthan the work-up session price must beincluded in the work-up session.331 TheSEF may provide the initialcounterparties execution priority in thework-up session.

• After two counterparties execute atransaction on a SEF’s RFQ System, theSEF may establish a short time periodfor a work-up session. The SEF mustopen up the work-up session to allmarket participants so that they maytrade an additional quantity of the sameinstrument at the same price previouslyexecuted by the initial counterparties. Inaddition, any resting bids or offers onthe SEF’s Order Book equal to or betterthan the work-up session price must beincluded in the work-up session.332 TheSEF may provide the initialcounterparties execution priority in thework-up session.

The SEF must have rules governingthe operation of any work-upmechanism, including the length of thesession, any priorities accorded thecounterparties to the transaction thattriggered the work-up session, and thehandling of any orders submitted duringthe session that are not executed. A SEFmust also have systems or procedures inplace to ensure that a work-up sessionis accessible by, and work-up sessioninformation (e.g., the work-up session’strade price and ongoing volume) isavailable to, all market participants. The

Commission believes that, if properlyconducted, work-up sessions mayenhance price discovery and fosterliquidity.

The Commission believes that a work-up session would be a trading protocoland, thus, constitute a rule under §40.1of the Commission’s regulations. Anysuch rule or amendment thereto must be

codified and included in a SEF’srulebook in accordance with the rulereview or approval procedures of part40 of the Commission’s regulations orduring the SEF application process.Additionally, all transactions executedthrough a work-up session must complywith the SEF’s rules. The Commissionstaff will provide informal guidance toSEF applicants on whether such work-up sessions are in compliance with theAct and the Commission’s regulations.

(iii) Liquidity-Based ExecutionMandates

The Commission is deleting proposed§ 37.9(b)(4). Given the incipience of theregulated swaps market, at this time, theCommission is not imposing arequirement for specific methods of execution for Required Transactions

based upon the amount of tradingactivity in such transactions.

(e) §37.9(b)(3)—Time DelayRequirement

Proposed §37.9(b)(3) stated that SEFsmust require that traders who have theability to execute against a customer’sorder or to execute two customersagainst each other be subject to a 15-second timing delay between the entryof the two orders, such that one side of the potential transaction is disclosedand made available to other marketparticipants before the second side of the potential transaction (whether forthe trader’s own account or for a secondcustomer) is submitted for execution.The SEF NPRM stated that thisrequirement will provide other marketparticipants the opportunity to join inthe trade.333


SDMA and Mallers et al. supported

the proposed 15-second delayrequirement as necessary to increaseprice transparency and marketintegrity.334 Mallers et al. stated that the15-second rule provides a meaningfulopportunity for other SEF participantsto execute against the individual sidesof the cross transaction, and that suchcrossing delays have been successfully


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336WMBAA Comment Letter at 3 (Jul. 18, 2011);FHLB Comment Letter at 13 (Jun. 3, 2011); WMBAAComment Letter at 9 (Jun. 3, 2011); Rosen et al.Comment Letter at 15–16 (Apr. 5, 2011); BlackRock

Comment Letter at 6 (Mar. 8, 2011); Global FXComment Letter at 3–4 (Mar. 8, 2011); JP MorganComment Letter at 7 (Mar. 8, 2011); EvolutionComment Letter at 6 (Mar. 8, 2011); WMBAAComment Letter at 7 (Mar. 8, 2011); SIFMA AMGComment Letter at 7 (Mar. 8, 2011); TruMarxComment Letter at 7 (Mar. 8, 2011); DeutscheComment Letter at 5 (Mar. 8, 2011); FCC CommentLetter at 2 (Mar. 8, 2011); Phoenix Comment Letterat 2–3 (Mar. 7, 2011).

337WMBAA Comment Letter at 3 (Jul. 18, 2011);WMBAA Comment Letter at 9 (Jun. 3, 2011);WMBAA Comment Letter at 7 (Mar. 8, 2011);SIFMA AMG Comment Letter at 8 (Mar. 8, 2011);Deutsche Comment Letter at 5 (Mar. 8, 2011); MFAComment Letter at 8 (Mar. 8, 2011).

338FHLB Comment Letter at 13 (Jun. 3, 2011);BlackRock Comment Letter at 6 (Mar. 8, 2011);WMBAA Comment Letter at 7–8 (Mar. 8, 2011);

SIFMA AMG Comment Letter at 7 (Mar. 8, 2011);FCC Comment Letter at 2 (Mar. 8, 2011).

339Freddie Mac Comment Letter at 3 (Mar. 8,2011).

340WMBAA Comment Letter at 9 (Jun. 3, 2011);BlackRock Comment Letter at 6 (Mar. 8, 2011); MFAComment Letter at 9 (Mar. 8, 2011); PhoenixComment Letter at 3 (Mar. 7, 2011).

341ABC/CIEBA Comment Letter at 9 (Mar. 8,2011).

342 Id. at 10.343Reuters Comment Letter at 5 (Dec. 12, 2011);

Goldman Comment Letter at 3 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); FXallComment Letter at 10 (Mar. 8, 2011); MFAComment Letter at 8–9 (Mar. 8, 2011).

344Goldman Comment Letter at 3 (Mar. 8, 2011).345FXall Comment Letter at 10 (Mar. 8, 2011).346Reuters Comment Letter at 5 (Dec. 12, 2011);

Rosen et al. Comment Letter at 15–16 (Apr. 5, 2011);Goldman Comment Letter at 3 (Mar. 8, 2011);

Global FX Comment Letter at 3–4 (Mar. 8, 2011);ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011);Barclays Comment Letter at 9 (Mar. 8, 2011); FSRComment Letter at 7 (Mar. 8, 2011).

347SIFMA AMG Comment Letter at 7 (Mar. 8,2011).


349WMBAA Comment Letter at 7 (Mar. 8, 2011);SIFMA AMG Comment Letter at 8 (Mar. 8, 2011);FSR Comment Letter at 6–7 (Mar. 8, 2011).

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


§ 37.9(b)(3) to § 37.9(b)(1).

353The Commission clarifies that the exposure of ‘‘orders’’ subject to the 15 second time delay intothe Order Book in final §37.9(b)(1) means exposureof the price, size, and other terms of the orders.

354

The Commission also notes that the time delayrequirement is similar to certain timing delays forcross trades applicable to futures transactionsexecuted on DCMs where one side of a potentialtransaction (i.e., price, size, and other terms) isexposed to the market for a certain period of time before the second side of the potential transactionis submitted for execution. See, e.g., NYMEX rule533, which provides for a 5-second delay for futuresand a 15-second delay for options, available at http://www.cmegroup.com/rulebook/NYMEX/1/ 5.pdf.

355See, e.g., CME Rule 539.C Pre-ExecutionCommunications Regarding Globex Trades,available at http://www.cmegroup.com/rulebook/ CME/I/5/39.html (setting forth rules regarding pre-execution communications in the DCM context).

implemented in the futures markets.335 However, several commenters objectedto the 15-second delay requirement.336 Some commenters stated that there is nostatutory authority for the timing delayrequirement.337 Commenters also statedthat the timing delay will increaseprices and expose traders to marketrisk.338 Freddie Mac, for example, stated

that liquidity providers may increaseprices to account for anticipated marketmovements.339 Some commenters alsonoted that the timing delay requirementmay lead to unwillingness on the partof dealers to provide liquidity becausethey will not know whether they willultimately serve as their customers’principal counterparty or merely astheir executing agent.340

ABC/CIEBA commented that theproposed rule is unclear as to whatlimitations, if any, apply to pre-execution communications.341 ABC/CIEBA recommended that the

Commission revise the proposed rule topermit pre-execution communications between counterparties as long asparties comply with the requirement toexecute the trade on the SEF.342

Several commenters recommendedthat the Commission provide flexibilitywith respect to the time period of thetiming delay.343 Goldman recommendedthat the Commission, in consultation

with market participants and SEFs, setthe delay at 1–3 seconds depending onthe complexity of the product.344 FXallstated that each SEF should be able todecide upon the appropriate delay,taking into account the particularcharacteristics of that market.345

Several commenters requestedclarification that the 15-second delay

requirement only applies to SEFs thatoperate an Order Book and not an RFQ System.346 In this regard, SIFMA AMGcommented that the timing delay shouldnot apply to an RFQ System becausefirm quotes transmitted in response toan RFQ would already be exposed to themarket.347 However, Better Marketscontended that the requirement shouldapply to responsive orders in RFQ systems.348

Finally, some commenters requestedthat the Commission clarify the term‘‘trader’’ in the proposed rule.349 WMBAA stated that it is not clear

whether the term ‘‘trader’’ refers to acounterparty, broker, or anotherentity.350 SIFMA AMG noted that thetiming delay should not apply to assetmanagers executing trades on behalf of their clients.351


The Commission is adopting the timedelay requirement for RequiredTransactions in proposed § 37.9(b)(3) asfinal § 37.9(b)(1), subject to themodifications described below.352 TheCommission clarifies that the purpose of the time delay requirement is to ensurea minimum level of pre-trade price

transparency for Required Transactionson a SEF’s Order Book by allowing othermarket participants the opportunity tojoin or participate in a trade where a

broker or dealer engages in some formof pre-arrangement or pre-negotiation of a transaction and then attempts, throughthe SEF’s Order Book, to eitherinternalize the order by executingopposite a customer or cross two

customer orders.353 In addition toensuring a minimum level of pre-tradeprice transparency, the Commission

believes that the time delay requirementwill incentivize competition betweenmarket participants.354 The Commissionis revising proposed § 37.9(b)(3) toclarify the purpose of the time delayrequirement as described above.

In response to ABC/CEIBA’s commentabout any limitations on pre-executioncommunications, the Commission notesthat a SEF that allows pre-executioncommunications must adopt rulesregarding such communications thathave been certified to or approved bythe Commission.355 The Commissionalso notes that orders that result frompre-execution communications would

be subject to the time delay requirementin the final rule text. The Commissionnotes that pre-executioncommunications are communications

between market participants for the

purpose of discerning interest in theexecution of a transaction prior to theexposure of the market participants’orders (i.e., price, size, and other terms)to the market. Any communication thatinvolves discussion of the size, side of market, or price of an order, or apotentially forthcoming order,constitutes a pre-executioncommunication.

The Commission acknowledgescommenters’ concerns that the timedelay requirement should take intoaccount a product’s characteristics.Therefore, the Commission believes thatthe 15-second time delay requirement

should serve as a default time delay.The Commission is revising the rule toallow SEFs to adjust the time period of the delay, based upon liquidity or otherproduct-specific considerations asstated in final § 37.9(b)(2). TheCommission notes that suchadjustments and accompanyingjustifications, as well as anyestablishment of a 15-second time delayrequirement at a SEF, must be submitted


http://www.cmegroup.com/rulebook/NYMEX/1/5.pdf


http://www.cmegroup.com/rulebook/CME/I/5/39.html






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356For example, a futures commission merchantor other market participant acting in the role of a broker who has the ability to execute against itscustomer’s order or to execute two of its customers’orders against each other would be subject to thetime delay requirement.

357The SEF NPRM stated that pre-trade pricetransparency is not required for PermittedTransactions. Core Principles and OtherRequirements for Swap Execution Facilities, 76 FRat 1220.

358SIFMA AMG Comment Letter at 10 (Mar. 8,

2011).359 Id.360Rosen et al. Comment Letter at 19–20 (Apr. 5,

2011); Deutsche Comment Letter at 6 (Mar. 8, 2011);FSR Comment Letter at 8 (Mar. 8, 2011); Global FXComment Letter at 3 (Mar. 8, 2011); BarclaysComment Letter at 10 (Mar. 8, 2011); ABC/CIEBAComment Letter at 7 (Mar. 8, 2011).

361The Commission is renumbering proposed§ 37.9(c)(1) to § 37.9(c)(2).

362This section does not apply to those entitiesthat do not have to register as a SEF. As noted abovein the registration section, swap transactions thatare not subject to the CEA section 2(h)(8) t radeexecution requirement would not have to beexecuted on a registered SEF.

363CEA sections 2(h)(7) and 2(h)(8); 7 U.S.C.2(h)(7) and 2(h)(8).


365Core Principles and Other Requirements forDesignated Contract Markets, 75 FR 80572(proposed Dec. 22, 2010).

for the Commission’s review pursuant tothe procedures described in part 40 of the Commission’s regulations.

The Commission is clarifying that the15-second time delay requirement is notapplicable to trades that are executedthrough an RFQ System. As notedabove, the purpose of the time delay

requirement is to ensure a minimumlevel of pre-trade price transparency forRequired Transactions on a SEF’s OrderBook. The Commission notes that anRFQ System already provides pre-tradeprice transparency to the RFQ requesterand that a dealer attempting to cross orinternalize trades through an RFQ System would be subject to such pre-trade price transparency. As such, theCommission is revising the rule text toclarify that the 15-second time delayrequirement only applies to a SEF’sOrder Book.

Finally, the Commission is replacing

the term ‘‘traders’’ in proposed§ 37.9(b)(3) with the phrase ‘‘brokers ordealers.’’ The Commission intended theprovision to apply only to brokers ordealers attempting to internalize orcross trades through a SEF’s Order Bookand acknowledges that the proposal wasunclear with respect to the meaning of the term ‘‘traders.’’ 356 In response toSIFMA AMG’s concern, the Commissiondoes not have sufficient information atthis time to make a determinationwhether asset managers executing tradeson behalf of their clients would besubject to the time delay requirement.The Commission staff will work withSEFs to determine if the time delayrequirement applies to asset managersor other market participants.

(f) §37.9(c)—Execution Methods forPermitted Transactions

Proposed §37.9(c)(1) provided thatPermitted Transactions may be executed

by an Order Book, RFQ System, a Voice-Based System, or any such other systemfor trading as may be permitted by theCommission. In addition, proposed§ 37.9(c)(2) stated that a registered SEFmay submit a request to the Commissionto offer trading services to facilitatePermitted Transactions, and that whendoing so, the SEF must certify itscompliance with § 37.11 (Identificationof non-cleared swaps or swaps not madeavailable to trade). As noted in the SEFNPRM, market participants would not

be required to utilize the minimum

trading functionality in § 37.9(b) toexecute Permitted Transactions.357


SIFMA AMG stated that theCommission should not limit theexecution modalities available to marketparticipants who execute Permitted

Transactions on a SEF.358

SIFMA AMGalso stated that no statutory basis existsfor regulatory execution requirementsfor Permitted Transactions.359 Additionally, several commenters statedthat the Commission should notprescribe execution methods for swapsexecuted off a SEF.360


The Commission is revising proposed§ 37.9(c)(1) to state that a SEF may offerany method of execution for eachPermitted Transaction.361 TheCommission agrees that it should not

limit the execution methods that areavailable to market participants orrequire market participants to utilizecertain execution methods for PermittedTransactions, which are not required to

be executed on a SEF. The Commissionclarifies, however, that, in accordancewith the minimum trading functionalityrequirement in final §37.3(a)(2), a SEFmust offer an Order Book for PermittedTransactions. The Commission furtherclarifies that a market participant hasthe option to utilize the Order Book orany other method of execution that aSEF provides for Permitted

Transactions. Additionally, theCommission clarifies that this sectiononly applies to Permitted Transactionslisted or traded on a SEF, and that thissection does not apply to transactionsnot listed or traded on a SEF.362 Finally,the Commission is deleting proposed§ 37.9(c)(2) given the deletion toproposed §37.11 as described below.

(g) Future Review

Consistent with the Commission’spractice of reviewing and monitoring itsregulatory programs, the Commissiondirects the Commission staff to conducta general review of SEFs’ experiencewith the execution methods prescribedin Commission regulations 37.3(a)(2)

(minimum trading functionality),37.3(a)(3) (Order Book), and 37.9(execution methods for Required andPermitted Transactions and time delayrequirement for Required Transactions).If appropriate, the review shouldinclude any Commission staff recommendations regarding possiblemodifications to Commissionregulations 37.3(a)(2), 37.3(a)(3), or 37.9that are consistent with the Act (e.g., arecommendation to modify theminimum number of RFQ requesteesrequired by the RFQ definition,including whether a trading protocol inwhich the minimum number of RFQ

requestees differed by swap class oranother category would be appropriate).The Commission staff’s review should

be completed within four years of theeffective date of these final SEFregulations, within which time theCommission believes that staff will havegained sufficient experience and willhave three years’ worth of data withrespect to the execution methods.

10. §37.10—Swaps Made Available forTrading

The Dodd-Frank Act added section2(h)(8) of the CEA to require that

transactions involving swaps subject tothe clearing requirement must beexecuted either on a DCM or SEF,unless no DCM or SEF makes the swap‘‘available to trade’’ or the relatedtransaction is subject to the clearingexception under section 2(h)(7) (i.e., theend-user exception).363 In the SEFNPRM, the Commission proposed torequire SEFs to conduct annualassessments and to submit reports to theCommission regarding whether it hasmade a swap available to trade.364 In theDCM notice of proposed rulemaking(‘‘NPRM’’),365 the Commission did not

establish any obligation for DCMs undersection 2(h)(8) of the Act. Afterreviewing the SEF NPRM commentsregarding the proposed available totrade process, and in light of the factthat the DCM NPRM did not establishany obligation for DCMs under section


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366Process for a Designated Contract Market orSwap Execution Facility To Make a Swap AvailableTo Trade, 76 FR 77728 (proposed Dec. 14, 2011).

367MarketAxess Comment Letter at 33–34 (Mar.8, 2011).

368 Id. at 34.

369CEA section 5h(f)(1)(A); 7 U.S.C. 7b–3(f)(1)(A).370CEA section 5h(f)(1)(B); 7 U.S.C. 7b–3(f)(1)(B).371CEA section 5h(f)(2)(A); 7 U.S.C. 7b–3(f)(2)(A).372CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B).

This section also requires a SEF to provide marketparticipants with impartial access to the market andto capture information that may be used inestablishing whether rule violations have occurred.

373CEA section 5h(f)(2)(C); 7 U.S.C. 7b–3(f)(2)(C).374CEA section 5h(f)(2)(D); 7 U.S.C. 7b–3(f)(2)(D).375FXall Comment Letter at 3–4, 11 (Mar. 8,

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

2011); ICE Comment Letter at 2 (Mar. 8, 2011);WMBAA Comment Letter at 18 (Mar. 8, 2011).

376FXall Comment Letter at 3–4, 11 (Mar. 8,2011); State Street Comment Letter at 5–6 (Mar. 8,2011).

377 Id.378 ICE Comment Letter at 2 (Mar. 8, 2011).379Reuters Comment Letter at 4 (Mar. 8, 2011);

FXall Comment Letter at 3–4, 11 (Mar. 8, 2011); ICEComment Letter at 2 (Mar. 8, 2011); State StreetComment Letter at 5–6 (Mar. 8, 2011).

380WMBAA Comment Letter at 18 (Mar. 8, 2011);FXall Comment Letter at 11 (Mar. 8, 2011);MarketAxess Comment Letter at 34 (Mar. 8, 2011);SIFMA AMG Comment Letter at 14–15 (Mar. 8,2011).

2(h)(8) of the CEA, the Commissiondetermined to separately issue a furthernotice of proposed rulemaking toestablish a process for a DCM or SEF tomake a swap available to trade undersection 2(h)(8) of the Act.366 TheCommission may implement theavailable to trade provision in a separaterulemaking.

11. §37.11—Identification of Non-Cleared Swaps or Swaps Not MadeAvailable to Trade

Proposed §37.11 required a SEF thatchooses to offer swaps: (1) Not subjectto the clearing mandate under section2(h) of the Act, (2) that are subject to theend-user exception from the clearingmandate under section 2(h)(7) of theAct, or (3) that have not been madeavailable to trade pursuant to § 37.10 of the Commission’s regulations to clearlyidentify to market participants that the

particular swap is to be executed bilaterally between the parties pursuantto one of the applicable exemptionsfrom execution and clearing.


MarketAxess expressed concern thatproposed §37.11 could be read torequire that all transactions described inthe provision must only be executed

bilaterally, and not on a SEF.367 Toaddress this concern, MarketAxessrequested the Commission clarify that§ 37.11 requires a SEF choosing tofacilitate Permitted Transactions toidentify to market participants why theparticular swap is a PermittedTransaction (i.e., falls under one of thethree categories described in theprovision).368


The Commission believes thatproposed §37.11 is unnecessary andtherefore is deleting it in its entirety.Market participants should havesufficient notice of the swaps subject tothe clearing and trade executionrequirements. Therefore, in conjunction

with the definitions contained in part 37as adopted, market participants willknow which swaps are RequiredTransactions and which swaps arePermitted Transactions, and thus theexecution methods deemed acceptablefor each.

C. Regulations, Guidance, and Acceptable Practices for ComplianceWith the Core Principles

As noted above, this final part 37rulemaking establishes the relevantregulations, guidance, and acceptablepractices applicable to the 15 coreprinciples that SEFs are required tocomply with initially and on acontinuing basis as part of theconditions of registration. Theregulations applicable to the 15 coreprinciples are set out in separatesubparts B through P to part 37, whichincludes a codification within eachsubpart of the statutory language of therespective core principle. The guidanceand acceptable practices are set out inappendix B to part 37.

1. Subpart B—Core Principle 1(Compliance With Core Principles)

Core Principle 1 requires a SEF tocomply with the core principles set

forth in CEA section 5h(f) and anyrequirement that the Commission mayimpose by rule or regulation pursuant toCEA section 8a(5) as a condition of obtaining and maintaining registrationas a SEF.369 Additionally, CorePrinciple 1 provides a SEF withreasonable discretion in establishing themanner in which it complies with thecore principles unless the Commissiondetermines otherwise by rule orregulation.370 In the SEF NPRM, theCommission proposed to codify thestatutory text of Core Principle 1 inproposed §37.100, and adopts that rule

as proposed.2. Subpart C—Core Principle 2(Compliance With Rules)

(a) §37.200—Core Principle 2—Compliance With Rules

Core Principle 2 requires a SEF toestablish and enforce compliance withits rules, including the terms andconditions of the swaps traded orprocessed on or through the SEF andany limitations on access to the SEF.371 It also requires a SEF to establish andenforce trading, trade processing, andparticipation rules that will deter abuses

and have the capacity to detect,investigate, and enforce those rules.372 A SEF must also establish rulesgoverning the operation of the facility,including rules specifying tradingprocedures to be used in entering and

executing orders traded or posted on thefacility, including block trades.373 Finally, Core Principle 2 requires a SEFto provide by its rules that when a swapdealer or major swap participant entersinto or facilitates a swap that is subjectto the mandatory clearing requirementof section 2(h) of the Act, the swapdealer or major swap participant isresponsible for complying with themandatory trading requirement undersection 2(h)(8) of the Act.374 In the SEFNPRM, the Commission proposed tocodify the statutory text of CorePrinciple 2 in proposed § 37.200, andadopts that rule as proposed.


Some commenters expressed generalconcerns regarding the proposed rulesunder Core Principle 2.375 FXall andState Street believed that the proposedrules under Core Principle 2 would

require a SEF to act as a de facto self-regulatory organization (‘‘SRO’’) andimpose burdens that would impede thegrowth of the swaps market.376 Thesecommenters also noted that theproposed requirements were too similarto the regulations applicable to DCMs,which would place SEFs at adisadvantage compared to DCMs giventhat SEFs will operate in a competitiveenvironment while DCMs operate in amonopolistic environment.377 ICE urgedthe Commission to limit its prescriptiverulemaking to issues that it believesrequire specific, binding rules.378 In thisregard, several commentersrecommended that the Commissionadopt greater flexibility inimplementing Core Principle 2.379

Some commenters recommendedlimiting the scope of the proposed rulesunder Core Principle 2.380 Specifically,WMBAA argued that SEFs may not beable to satisfy all of the requirements of the proposed rules given that SEFscannot be held responsible for what


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381WMBAA Comment Letter at 18 (Mar. 8, 2011).382FXall Comment Letter at 11 (Mar. 8, 2011).383SIFMA AMG Comment Letter at 14–15 (Mar.

8, 2011).384 Id.385See Adaptation of Regulations to Incorporate

Swaps, 77 FR 66288 (Nov. 2, 2012). Section 1.3(ee)states that a self-regulatory organization ‘‘means acontract market (as defined in §1.3(h)), a swapexecution facility (as defined in §1.3(rrrr)), or aregistered futures association under section 17 of the Act.’’ Id. at 66318.

386CEA section 1a(34) defines ‘‘member’’ as ‘‘anindividual, association, partnership, corporation, ortrust—(A) owning or holding membership in, oradmitted to membership representation on, theregistered entity . . . or (B) having tradingprivileges on the registered entity. . . .’’ 7 U.S.C.1a(34).

387The Commission notes that §37.201(a)codifies CEA section 5h(f)(2)(C). 7 U.S.C. 7b–3(f)(2)(C).

388The Commission notes that §37.201(b)codifies certain sections of CEA section 5h(f)(2). 7U.S.C. 7b–3(f)(2).


390The Commission notes that under§ 37.1501(d), a duty of the Chief Compliance Officeris to establish and administer written policies andprocedures reasonably designed to preventviolations of the Act and the rules of theCommission.

391The Commission notes that under§ 37.1501(d), a duty of the Chief Compliance Officeris to take reasonable steps to ensure compliancewith the Act and the rules of the Commission, andto establish and administer a compliance manualdesigned to promote compliance with applicablelaws, rules, and regulations.

392See WMBAA Comment Letter at 2 (Feb. 15,2013) (explaining that employees of a SEF provideservices such as disseminating bids and offers,helping to understand market conditions, andexecuting transactions between counterparties).

393Commission regulation 1.59(d).

happens on a competitor’s platform.381 Similarly, FXall believed that SEFswould not have the requisite marketdata to conduct meaningful complianceoversight.382 SIFMA AMG believed thatthe Commission’s vague use of the terms‘‘members,’’ ‘‘market participants,’’ and‘‘participants’’ could potentially subjectdealers’ customers, and thus asset

managers and their clients, to ‘‘onerous’’requirements of multiple SEFs.383 Therefore, SIFMA AMG requestedclarification that a SEF’s rules wouldonly regulate entities that actuallyexecute transactions on the SEF.384


In response to comments by FXall andState Street about treating SEFs as SROs,the Commission notes that like DCMs, itviews SEFs as SROs and amended theCommission’s regulations to includethem as SROs.385 Treating a SEF as anSRO is consistent with a SEF’s self-regulatory obligations pursuant to CEAsection 5h(f). Therefore, whereappropriate, the Commission isadopting surveillance, audit trail,investigation, enforcement, and otherrequirements for SEFs.

In response to commenters’ concernsthat the proposed requirements weresimilar to the regulations applicable toDCMs, the Commission believes thatadopting similar requirements for bothtypes of entities is warranted given thesimilar statutory self-regulatoryobligations for both types of entities.Given that both DCMs and SEFs,regardless of whether they are new or

existing entities, are required to fulfillsimilar self-regulatory functions, theCommission does not believe that thisapproach will adversely affectcompetition between DCMs and SEFs.

In response to commenters’ requestsfor less prescriptive rules and greaterflexibility in applying the rules, theCommission is moving variousprovisions of the proposed rules toguidance and eliminating otherprovisions, as discussed below. Theprovisions that are adopted as finalrules reflect the Commission’s opinionof what is required, at a minimum, forany SEF to comply with the coreprinciples. SEFs may take anyadditional steps necessary, beyond the

requirements of the rules, to satisfystatutory obligations.

In response to WMBAA’s and FXall’scomments regarding certain limitationsfaced by SEFs in terms of oversight, theCommission recognizes the limitationsfaced by SEFs with respect to positionmonitoring, cross-market surveillance,and rule enforcement and addresses

them in the context of commentsreceived below. In response to SIFMAAMG’s comment about the ambiguoususe of terms, the Commission clarifiesthat ‘‘market participant’’ when usedwith respect to a SEF means a personthat directly or indirectly effectstransactions on the SEF. This includespersons with trading privileges on theSEF and persons whose trades areintermediated. The Commission alsoclarifies that ‘‘member’’ has the meaningset forth in CEA section 1a(34).386

(b) § 37.201—Operation of SwapExecution Facility and Compliance

With RulesProposed §37.201(a) required a SEF

to establish rules governing theoperation of the SEF, including rulesspecifying trading procedures forentering and executing orders traded orposted on the SEF, including blocktrades.387 Proposed §37.201(b) furtherrequired a SEF to establish andimpartially enforce compliance with itsrules, including, but not limited to: (1)The terms and conditions of any swapstraded or processed on or through theSEF; (2) access to the SEF; (3) tradepractice rules; (4) audit trail

requirements; (5) disciplinary rules; and(6) mandatory clearing requirements.388


MarketAxess recommended that theCommission withdraw proposed§ 37.201(b)(6), which required a SEF toadopt and enforce mandatory clearingrequirements, on the basis that clearingof a swap occurs outside of a SEF’s mainresponsibility to facilitate thetransaction.389


The Commission is adopting § 37.201as proposed, subject to two

modifications. To address the comment by MarketAxess, the Commission notesthat proposed §37.201(b)(6) contained adrafting error, and therefore is replacingthe term ‘‘mandatory clearing’’ with‘‘mandatory trading.’’ The Commissionalso notes that the citation to ‘‘part 45’’in proposed §37.201(a) should insteadcite to ‘‘part 43.’’ Therefore, the

Commission is modifying the final ruleto include these technical changes.

Additionally, the Commission notesthat a SEF must establish and enforcerules for its employees. These rulesmust be reasonably designed to preventviolations of the Act and the rules of theCommission.390 Towards that end, theCommission also notes that a SEF musthave systems in place reasonablydesigned to ensure that its employeesare operating in accordance with theSEF’s rules.391 For example, a SEF thatis utilizing an RFQ System inconjunction with an Order Book forRequired Transactions must establishrules specifying order handlingprocedures for its employees whoreceive and execute orders over thetelephone, email, instant messaging,squawk box, some other method of communication, or some combinationthereof so that the employees maycomply with the RFQ Systemrequirements as specified in final§ 37.9(a)(3).392

Furthermore, the Commission notesthat a SEF’s employees have certainobligations under the Commission’s

existing regulations. For example, under§ 1.59, a SEF’s employees are prohibitedfrom disclosing for any purposeinconsistent with the performance of itsofficial duties any material, non-publicinformation obtained through specialaccess related to the performance of itsduties.393

Finally, the Commission notes thatunder §1.2 of the Commission’sregulations, a SEF is liable for the acts,omissions, or failures of its employees


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394Commission regulation 1.2.395CEA section 5h(f)(2)(A)(ii) and (2)(B)(i); 7

U.S.C. 7b–3(f)(2)(A)(ii) and (2)(B)(i).396The Commission is renaming the title of this

section from ‘‘Impartial Access by Members andMarket Participants’’ to ‘‘Impartial Access toMarkets and Market Services’’ to provide greaterclarity.

397Reuters Comment Letter at 5 (Mar. 8, 2011);Goldman Comment Letter at 4 (Mar. 8, 2011);Tradeweb Comment Letter at 10 (Mar. 8, 2011).


399 JP Morgan Comment Letter at 11 (Mar. 8,2011).

400 Id.

401

Id.402Rosen et al. Comment Letter at 17 (Apr. 5,

2011).403MarketAxess Comment Letter at 23–24 (Mar.

8, 2011).404Tradeweb Comment Letter at 10 (Mar. 8,

2011).405Mallers et al. Comment Letter at 2–3 (Mar. 21,

2011).406 Id. at 3.407SDMA Comment Letter at 4–5 (Mar. 8, 2011).408UBS Comment Letter II at 1 (May 18, 2012).

UBS submitted two comment letters on May 18,2012. The Commission is referencing UBS’scomment letter regarding impartial access as ‘‘UBSComment Letter II.’’

409MarketAxess Comment Letter at 24 (Mar. 8,2011); WMBAA Comment Letter at 19 (Mar. 8,

2011).410MarketAxess Comment Letter at 25 (Mar. 8,2011).

411WMBAA Comment Letter at 19 (Mar. 8, 2011).412See Core Principles and Other Requirements

for Swap Execution Facilities, 76 FR at 1222 n. 53(providing examples of ISVs).

413Meeting with Bloomberg dated Jan. 18, 2012.414 Id.415MarketAxess Comment Letter at 25 (Mar. 8,

2011).416 Id.417Better Markets Comment Letter at 11–12 (Mar.

8, 2011).418MarketAxess Comment Letter at 25 (Mar. 8,

2011).

acting within the scope of theiremployment.394

(c) §37.202—Access Requirements

Proposed §37.202 addressed CorePrinciple 2’s requirements that SEFsprovide market participants withimpartial access to the market and thatSEFs adopt and enforce rules with

respect to any limitations placed onaccess to the SEF.395

(1) §37.202(a)—Impartial Access byMembers and Market Participants 396

Proposed §37.202(a) required that aSEF provide any eligible contractparticipant (‘‘ECP’’) and anyindependent software vendor (‘‘ISV’’)with impartial access to its market(s)and market services (including anyindicative quote screens or any similarpricing data displays), providing: (1)Access criteria that are impartial,transparent, and applied in a fair andnondiscriminatory manner; (2) a processfor confirming ECP status prior to beinggranted access to the SEF; and (3)comparable fees for participantsreceiving comparable access to, orservices from, the SEF.

(i) Summary of Comments

Several commenters soughtclarification that SEFs would bepermitted to use their own reasonablediscretion to determine individualaccess criteria, provided that the criteriaare impartial, transparent, and appliedin a fair and non-discriminatorymanner.397 In this regard, ISDA/SIFMA

commented that a SEF should be able tolimit access to its trading systems orplatforms to certain types of marketparticipants in order to maintain thefinancial integrity and operational safetyof the trading platform.398 JP Morganalso stated that a SEF should be able tolimit access to certain types of marketparticipants such as swap dealers.399 JPMorgan commented, however, that theSEF NPRM’s preamble language aboutfinancial and operational soundness isproblematic because it would not allowSEFs to limit access to certain types of market participants.400 This could

disrupt business models such as that of inter-dealer brokers whose model isintimately tied to the idea of serving asan intermediary to wholesale liquidityproviders.401 Similarly, Rosen et al.recommended that SEFs should be ableto use selective access criteria such asobjective minimum capital or creditrequirements or limits on participation

to objective classes of sophisticatedmarket participants.402 MarketAxesscommented that the meaning of the term‘‘impartial’’ is unclear andrecommended that the Commissionrevise proposed § 37.202(a)(1) asfollows: ‘‘Criteria that are transparentand objective and are applied in a fairand nondiscriminatory manner[.]’’ 403 Tradeweb noted that, because it offersmultiple marketplaces, its access criteriamay reasonably differ for each mode of execution and within one mode of execution given that each market willoffer different services and may have

different types of participants.404

Mallers et al. supported the impartialaccess requirement and its purpose of preventing a SEF’s owners or operatorsfrom using discriminatory accessrequirements as a competitive toolagainst certain participants.405 Mallerset al. stated that impartial access is aprerequisite to having an open market inwhich ECPs can compete on a levelplaying field, and that the participationof additional liquidity providers willimprove the pricing and efficiency of the market and reduce systemic risk.406 SDMA also supported the impartialaccess requirement and stated that the

ability to obtain intellectual propertylicenses and the amount of royalties forintellectual property licenses should befair and not used to createanticompetitive advantages for aparticular SEF or group of marketparticipants.407 UBS requested that theCommission clarify in the finalrulemaking that SEFs may not excludeor discriminate against participantsproviding agency services solely as aresult of engaging in these activities.408

MarketAxess and WMBAA stated thata SEF should be able to restrict access

to ISVs because the Dodd-Frank Actdoes not require SEFs to provide ISVswith impartial access.409 MarketAxessfurther commented that the Commissionmust permit a SEF to restrict access toan ISV who would use such directaccess to provide a competitiveadvantage to another SEF or DCM.410 Similarly, WMBAA stated that SEFs

could qualify as ISVs in order to seekaccess to competitors’ trading systemsor platforms, which would defeat theexisting structure of competitive sourcesof liquidity.411 Bloomberg commentedthat the SEF NPRM’s characterization of ISV is too broad; 412 therefore, an ISVmay be able to replicate the services of a SEF without having to register as aSEF.413 Bloomberg also requested thatthe Commission clarify that a user of anISV service must be a participant of aSEF in order to access the SEF’s dataand/or to execute swap transactions onthat SEF.414

Under proposed §37.202(a)(2),MarketAxess recommended that SEFs be permitted to rely on a written orelectronically signed representation by aparticipant seeking access to the SEFregarding its status as an ECP.415 MarketAxess stated that SEFs may thenadopt rules to require that theparticipant notify the SEF immediatelyof any change to its status after theparticipant makes the representation.416

Better Markets commented thatproposed §37.202(a)(3) should makeclear that any form of preferential accessto a SEF through fee arrangementsshould not be allowed because it woulddefeat the goal of impartial access.417 However, MarketAxess stated that SEFsshould be able to provide their marketparticipants with volume discounts andother pricing arrangements as long assuch discounts and arrangements are

based upon objective criteria that areapplied uniformly.418

(ii) Commission Determination

The Commission is adopting§ 37.202(a) as proposed, subject to the


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419The Commission is also making certain non-substantive clarifications to the rule.

420CEA sections 5h(f)(2)(A)(ii) and (2)(B)(i); 7U.S.C. 7b–3(f)(2)(A)(ii) and (2)(B)(i).

421 In this regard, the Commission is clarifying inresponse to UBS’s comment that a SEF may notexclude or discriminate against a market participantproviding agency services subject to any limitationon such services contained in this final rulemaking.

422CEA section 5h(f)(2)(B)(i); 7 U.S.C.7b–3(f)(2)(B)(i). WMBAA also commented that ISVs

should comply with a SEF’s rules, the SEF coreprinciples, and the oversight or supervision by theSEF in the same manner as a market participant.WMBAA Comment Letter at 19 (Mar. 8, 2011). TheCommission disagrees with WMBAA’s comment because ISVs provide market participants withgreater options to access SEFs and ISVs are notexecuting swaps on a SEF as are marketparticipants. Therefore, the Commission believesthat ISVs should not be subject to the samerequirements as market participants.

423The Commission notes that examples of independent software vendors include: smart orderrouters, trading software companies that developfront-end trading applications, and aggregatorplatforms. Smart order routing generally involvesscanning of the market for the best-displayed priceand then routing orders to that market forexecution. Software that serves as a front-end

trading application is typically used by traders toinput orders, monitor quotations, and view a recordof the transactions completed during a tradingsession. As noted above in the registration section,aggregator platforms generally provide a portal tomarket participants so that they can access multipleSEFs, but do not provide for execution as executionremains on SEFs. Aggregator platforms may alsoprovide access to news and analytics. TheCommission believes that transparency and tradingefficiency would be enhanced as a result of innovations in this field for market services. Forinstance, certain providers of market services withaccess to multiple trading systems or platformscould provide consolidated transaction data fromsuch trading systems or platforms to marketparticipants.

424See Aggregation Services or Portals discussionabove under §37.3—Requirements for Registrationin the preamble. The Commission notes thatfootnote 423 above classifies aggregator platforms asa type of ISV so the discussion in this sectionregarding ISVs also applies to aggregator platforms.

425The Commission notes, however, that the userof an ISV may not need to have been granted accessto the SEF if the ISV is only providing a compositequote or top level quote for multiple SEFs.

426The Commission is replacing the term‘‘participant’’ in proposed §37.202(a)(2) with theterm ‘‘eligible contract participant’’ in final§ 37.202(a)(2) because the term ‘‘participant’’ wasnot defined in the SEF NPRM and the revised termmore clearly communicates the persons to whomthis rule applies. In this regard, the Commissionnotes that, prior to granting a person access to itsfacility, a SEF must obtain confirmation from theperson of its ECP status.

427For example, the Commission notes that acustomer of a futures commission merchant must bean ECP and a customer of a broker must be an ECP.

modifications discussed below.419 TheCommission does not believe that thestatute allows a SEF to adopt rules thatlimit access as requested by ISDA/SIFMA, JP Morgan, and Rosen et al. Thestatutory language of Core Principle 2requires that SEFs establish and enforceparticipation rules, including means toprovide market participants with

impartial access to the market, and thatSEFs adopt and enforce rules withrespect to any limitations they place onaccess (emphasis added).420 As stated inthe SEF NPRM, the Commissionreiterates that the purpose of theimpartial access requirements is toprevent a SEF’s owners or operatorsfrom using discriminatory accessrequirements as a competitive toolagainst certain ECPs or ISVs. TheCommission also agrees with Mallers etal. who stated that the impartial accessrequirement allows ECPs to compete ona level playing field, and that the

participation of additional liquidityproviders will improve the pricing andefficiency of the market and reducesystemic risk. As such, the Commission

believes that access to a SEF should bedetermined, for example, based on aSEF’s impartial evaluation of anapplicant’s disciplinary history andfinancial and operational soundnessagainst objective, pre-establishedcriteria. As one example of such criteria,any ECP should be able to demonstratefinancial soundness either by showingthat it is a clearing member of aderivatives clearing organization(‘‘DCO’’) that clears products traded onthat SEF or by showing that it hasclearing arrangements in place withsuch a clearing member.

In this regard, the Commission believes that the impartial accessrequirement of Core Principle 2 does notallow a SEF to limit access to its tradingsystems or platforms to certain types of ECPs or ISVs as requested by somecommenters.421 The Commission notesthat the rule states ‘‘impartial’’ criteriaand not ‘‘selective’’ criteria asrecommended by some commenters.The Commission is using the term‘‘impartial’’ as intended in the statute.

‘‘Impartial’’ should be interpreted in theordinary sense of the word: fair,unbiased, and unprejudiced. Subject tothese requirements, a SEF may use itsown reasonable discretion to determine

its access criteria, provided that thecriteria are impartial, transparent andapplied in a fair and non-discriminatorymanner, and are not anti-competitive.

In response to Tradeweb’s commentabout different access criteria fordifferent markets, the Commission notesthat a SEF may establish different accesscriteria for each of its markets. Core

Principle 2 does not specify whetherimpartial access criteria must be thesame for all of a SEF’s markets or maydiffer for each market. Therefore, theCommission believes that it is within itsdiscretion to allow a SEF to establishdifferent access criteria for each of itsmarkets. However, the Commissionreiterates that the access criteria must beimpartial and must not be used as acompetitive tool against certain ECPs orISVs. The Commission also reiteratesthat each similarly situated group of ECPs and ISVs must be treatedsimilarly.

In response to MarketAxess’s andWMBAA’s comments regarding ISVs,the Commission notes that Congressrequired SEFs to establish participationrules, including means to providemarket participants with impartialaccess to the market.422 TheCommission believes that ISVs 423 provide market participants withadditional opportunities to access SEFsand that, similar to ECPs, SEFs shouldapply impartial criteria in a fair andnon-discriminatory manner when

deciding whether or not to grant an ISVaccess. In response to MarketAxess’sand WMBAA’s comments regardingISVs providing a competitive advantageto other SEFs, the Commission notesthat SEFs may set rules for ISVs so theydo not misuse data, for example, byproviding the data to another SEF forpurely competitive reasons to the

exclusion of market participants. TheCommission also notes that SEFs maycharge fees to ISVs based on the accessor services they receive from the SEF.

In response to Bloomberg’s comments,the Commission agrees that ISVs shouldnot be able to replicate the services of a SEF without having to register as aSEF. The Commission notes that an ISVthat merely provides a service to SEFswill not, merely because it providessuch a service, be deemed to be a SEFas defined in CEA section 1a(50).However, pursuant to the registrationrequirements in final §37.3(a), if an ISV

offers a trading system or platform inwhich more than one market participanthas the ability to execute or trade swapswith more than one other marketparticipant on that system or platform,then the ISV has to register as a SEF.424 The Commission also notes that the userof an ISV must have been granted access

by a SEF in order to access that SEF’sdata and/or to execute a swaptransaction on that SEF through theISV.425

The Commission notes that under§ 37.202(a)(2), a SEF that is determiningwhether to grant an ECP access to itsfacilities may rely on a signed

representation of its ECP status.426 Bynot prescribing a process, theCommission is providing SEFs withflexibility and discretion on how tomeet this requirement. The Commissionalso notes that for SEFs that permitintermediation, customers of ECPs mustalso be ECPs.427 In this regard, a SEFmust obtain a signed representation


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428The Commission is replacing the term‘‘participant’’ in proposed §37.202(a)(3) with theterms ‘‘eligible contract participants’’ and‘‘independent software vendors’’ in final§ 37.202(a)(3) because the term ‘‘participant’’ wasnot defined in the SEF NPRM and the revised termsmore clearly communicates the persons to whomthis rule applies.

429CME Comment Letter at 17 (Feb. 22, 2011).430 Id. at 16.431 Id.432 Id.

433 Id.434Bloomberg Comment Letter at 6 (Mar. 8, 2011).435 Id.436WMBAA Comment Letter at 19 (Mar. 8, 2011).437 Id.438CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B).

439The Commission is making certain non-substantive clarifications to the rule.

440For the avoidance of doubt, the Commissionnotes that this rule applies to the SEF’s membersand market participants.

441CEA section 5h(f)(2)(A)(ii); 7 U.S.C.7b–3(f)(2)(A)(ii).

442The Commission notes that §37.203 codifiesCEA section 5h(f)(2)(B). 7 U.S.C. 7b–3(f)(2)(B).

from an intermediary that its customersare ECPs.

To address comments submitted inconnection with proposed §37.202(a)(3)regarding fees, the Commission clarifiesthat § 37.202(a)(3) neither sets nor limitsthe fees that SEFs may charge. A SEFmay establish different categories of ECPs or ISVs seeking access to, orservices from, the SEF, but may notdiscriminate with respect to fees withina particular category.428 TheCommission notes that §37.202(a)(3) isnot designed to be a rigid requirementthat fails to take into account legitimate

business justifications for offeringdifferent fees to different categories of entities seeking access to the SEF. Forexample, a SEF may consider theservices it receives from members suchas market making services when itdetermines its fee structure.

(2) § 37.202(b)—Jurisdiction

Proposed §37.202(b) required thatprior to granting any ECP access to itsfacilities, a SEF must require that theECP consents to its jurisdiction.


CME recommended that theCommission withdraw the proposedrule.429 CME contended that requiringclearing firms to obtain every customer’sconsent to the regulatory jurisdiction of each SEF would be costly.430 Moreover,CME commented that even if suchconsent were obtained, the proposedrule would be entirely ineffective inachieving the Commission’s desiredoutcome.431 CME explained that if anon-member, who had consented to theSEF’s jurisdiction under the proposedrule, committed a rule violation andsubsequently elected not to cooperate inthe investigation or disciplinaryprocess, the SEF’s only recourse would

be to deny the non-member access and,if appropriate, refer the matter to theCommission.432 CME further explainedthat a SEF’s enforcement options, andthe regulatory outcomes, do not change

based on whether or not there is arecord of the non-member consenting to

jurisdiction, but rather depend onwhether the non-member chooses to

participate in the SEF’s investigativeand disciplinary processes.433

Similarly, Bloomberg requested thatthe Commission clarify that proposed§ 37.202(b) would only apply to a SEF’smembers and not customers of memberswhose orders are executed on a SEF.434 Bloomberg stated that, rather thansubject all market participants to a SEF’s

jurisdiction, it would be sufficient andmore practical for each SEF member toprovide to the SEF specific informationabout its customers.435 WMBAA notedthat a SEF may only exercisejurisdiction over a market participantwith respect to its own rules and thatthe SEF’s ultimate sanction would be to

ban a market participant from its tradingsystem or platform.436 WMBAA alsostated that prohibiting a marketparticipant from trading on oneparticular SEF has little utility becausea market participant could continue toexecute swaps on other SEFs.437


The Commission is adopting§ 37.202(b) as proposed. Whileacknowledging the comments describedabove, the Commission believes that§ 37.202(b) codifies jurisdictionalrequirements necessary to effectuate thestatutory mandate of Core Principle 2that a SEF shall have the capacity todetect, investigate, and enforce rules of the SEF.438 In the Commission’s view,jurisdiction must be established by aSEF prior to granting eligible contractparticipants access to its markets inorder to effectively investigate andsanction persons that violate SEF rules.In particular, a SEF should not be in theposition of asking market participants tovoluntarily submit to its jurisdictionand cooperate in investigatoryproceedings after a potential ruleviolation has been found. Similarly,market participants should haveadvanced notice that their tradingpractices are subject to the rules of aSEF, including rules that requirecooperating in investigatory anddisciplinary processes.

For the avoidance of doubt, theCommission clarifies that the scope of

§ 37.202(b) is not limited to members.To the contrary, all members and marketparticipants of a SEF, as defined aboveunder §37.200, are within the scope of § 37.202(b).

In response to CME’s and WMBAA’scomments, the Commission notes that a

SEF’s ultimate recourse against a marketparticipant is to deny such marketparticipant access to the SEF and, if appropriate, refer the market participantto the Commission. The Commissionhas the authority to issue broadersanctions for market participants whocommit SEF rule violations that alsoviolate the CEA and Commission

regulations. Therefore, the Commissionexpects that a SEF would not onlysanction market participants asappropriate, but also refer matters to theCommission for additional action whennecessary. The Commission does notagree that this action absolves SEFsfrom their responsibility to establishjurisdiction over members and marketparticipants.

(3) §37.202(c)—Limitations on Access

Proposed §37.202(c) required a SEFto establish and impartially enforcerules governing any decision to allow,

deny, suspend, or permanently barparticipants’ access to the SEF,including when such decisions aremade as part of a disciplinary oremergency action taken by the SEF.

(i) Commission Determination

Although no comments were receivedon §37.202(c), the Commission isadopting the proposed rule subject toone modification.439 The Commission isreplacing the term ‘‘participant’’ with‘‘eligible contract participant’’ becausethe term ‘‘participant’’ was not definedin the SEF NPRM and the revised termmore clearly communicates the personsto whom this rule applies.440 TheCommission notes that §37.202(c)implements Core Principle 2’srequirement regarding limitations onaccess to the SEF.441

(d) §37.203—Rule Enforcement Program

Proposed §37.203 required a SEF toestablish and enforce trading, tradeprocessing, and participation rules thatwill deter abuses and have the capacityto detect, investigate, and enforce thoserules.442

(1) §37.203(a)—Abusive Trading

Practices ProhibitedProposed §37.203(a) required a SEF

to prohibit certain abusive tradingpractices, including front-running, washtrading, pre-arranged trading, fraudulent


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443Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1223 n.61.Section 747 of the Dodd-Frank Act amended CEAsection 4c(a) to make it unlawful for any person toengage in any trading, practice, or conduct on orsubject 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, isof the character of, or is commonly known to thetrade as, spoofing (bidding or offering with theintent to cancel the bid or offer before execution).See Antidisruptive Practices Authority, 76 FR14943 (proposed Mar. 18, 2011) for proposedinterpretive guidance on these three new statutoryprovisions of CEA section 4c(a)(5).

444ABC/CIEBA Comment Letter at 9 (Mar. 8,2011); CME Comment Letter at 17–18 (Feb. 22,2011).

445CME Comment Letter at 17 (Feb. 22, 2011).446 Id. at 17–18.447WMBAA Comment Letter at 20 (Mar. 8, 2011).448 Id.

449Better Markets Comment Letter at 13–17 (Mar.8, 2011).


451Core Principles and Other Requirements forDesignated Contract Markets, 77 FR 36612, 36626(Jun. 19, 2012).

452See Final §37.203(a) in the Commission’sregulations.

453CEA section 5h(f)(2); 7 U.S.C. 7b–3(f)(2).454Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1223.

trading, money passes, and any othertrading practices that the SEF deems to

be abusive. The proposed rule furtherobligated a SEF to ‘‘prohibit any othermanipulative or disruptive tradingpractices prohibited by the Act or by theCommission pursuant to Commissionregulations.’’ SEFs permittingintermediation were required to prohibit

additional trading practices, such astrading ahead of customer orders,trading against customer orders,accommodation trading, and impropercross trading. As explained in the SEFNPRM, prohibited trading practicesinclude those proscribed by section 747of the Dodd-Frank Act.443


CME and ABC/CIEBA commentedthat the proposed rule is problematic

because it enumerated prohibited tradepractices without specifically definingthem.444 CME stated that SEFs shouldhave reasonable discretion to establishrules appropriate to their markets thatare consistent with the CEA and thatsatisfy the core principles.445 CMEquestioned, in particular, how tointerpret the proposed prohibition onpre-arranged trading with respect torules that allow for block trading,exchange for related positiontransactions, and pre-executioncommunications subject to specifiedconditions.446

WMBAA contended that theenumerated abusive trading practicesappear more commonly in markets withretail participants, and therefore are

more likely to occur on a DCM ratherthan a SEF.447 Accordingly, WMBAArecommended that the Commissioninclude in the final rule abusive tradingpractices that are more likely to occuron a SEF.448 Finally, Better Marketsrecommended that the Commissionexpand its list of prohibited tradepractices to ban certain high-frequency

trading practices, including exploiting alarge quantity or block trade, pricespraying (which it views as a form of front-running), rebate harvesting, andlayering the market (which it analogizesto spoofing).449


The Commission is adopting

proposed §37.203(a), subject to onemodification described below. Inresponse to CME’s and ABC/CIEBA’scomments regarding the perceivedvagueness of the enumerated tradingpractices, the Commission notes that theenumerated abusive trading practicesreflect the trading practices that aretypically accepted as prohibitedconduct by regulators and derivativesexchanges in the industry. In the SEFNPRM, the Commission stated that theproposed prohibited trading practicesare a compilation of abusive tradingpractices that DCMs already prohibit.450 The Commission also noted in the finalDCM rulemaking that the prohibitedtrading practices are typically alreadyprohibited in DCM rulebooks.451 Although the Commission believes, asnoted by CME, that a SEF should havereasonable discretion to establish rulesfor its markets, the Commission

believes, at a minimum, that a SEF mustprohibit the abusive trading practicesidentified in the rule.

In response to CME’s comment abouthow to interpret the prohibition on pre-arranged trading with respect to rulesthat allow for block trading and othertypes of trading, the Commission is

amending proposed § 37.203(a) toclarify that a SEF must prohibit pre-arranged trading, except for block tradespermitted under part 43 of theCommission’s regulations or other typesof transactions certified to or approved

by the Commission pursuant to theprocedures under part 40 of theCommission’s regulations. This changeclarifies that these types of transactionswill not be subject to the prohibition onpre-arranged trading. The Commissionalso clarifies, as discussed above underthe time delay requirement, that theprohibition on pre-arranged trading

does not limit pre-executioncommunications between marketparticipants, subject to the rules of theSEF. Accordingly, SEFs that permit pre-execution communications mustestablish and enforce rules relating tosuch communications.

In response to WMBAA’s commentthat the enumerated abusive tradingpractices are more suited to DCMsrather than SEFs, the Commission

believes that similar prohibitions arenecessary to promote consistentprotection for all market participantsacross the swaps market. Therefore, theCommission believes that the

enumerated abusive trading practicesshould be prohibited by DCMs andSEFs. The Commission notes thatrequiring SEFs to proscribe tradingpractices which are prohibited by theAct and Commission regulations doesnot create any additional obligations

beyond the existing statutory andregulatory requirements applicable to allSEFs.

The Commission agrees withWMBAA and Better Markets that otherabusive trading practices may exist. Inthis regard, §37.203(a) provides a non-exhaustive, non-exclusive list. The

regulations adopted in this final releaseprovide a SEF with reasonablediscretion to establish rules thatprohibit additional abusive tradingpractices. Additionally, not only must aSEF prohibit any other trading practicesthat a SEF deems abusive,452 it mustalso establish and enforce rules that willdeter abuses under statutory CorePrinciple 2.453 Therefore, if a SEFidentifies additional abusive tradingpractices that are likely to occur on itstrading systems and platforms, then theSEF is required, by statute andCommission regulation, to prohibit such

abusive trading practices. TheCommission anticipates that as SEFsgain experience with exchange-listedswaps, it may periodically revisit thelist of prohibited abusive tradingpractices under §37.203(a).

(2) §37.203(b)—Capacity to Detect andInvestigate Rule Violations

Proposed §37.203(b) required a SEFto have arrangements and resources foreffective rule enforcement, whichincluded a SEF’s authority to collectinformation and examine books andrecords of SEF members and marketparticipants. As discussed in the

preamble to the SEF NPRM, theCommission believes that a SEF can bestadminister its compliance and ruleenforcement obligations by having theability to reach the books and records of all market participants.454 Proposed§ 37.203(b) also required a SEF’sarrangements and resources to facilitate


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455FXall Comment Letter at 11–12 (Mar. 8, 2011);CME Comment Letter at 18 (Feb. 22, 2011).

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

460WMBAA Comment Letter at 21 (Mar. 8, 2011);MarketAxess Comment Letter at 35 (Mar. 8, 2011).

461WMBAA Comment Letter at 21 (Mar. 8, 2011).462 Id.463MarketAxess Comment Letter at 35 (Mar. 8,

2011).

464 Id.465 Id.466The Commission is making certain non-

substantive clarifications to proposed §37.203(c)(1).The Commission is also renumbering proposed§ 37.203(c)(1) to § 37.203(c).

the direct supervision of the market andthe analysis of data collected todetermine whether a rule violation hasoccurred.


FXall and CME requested that theCommission clarify the provision inproposed §37.203(b) that requires a SEF

to have the authority to examine the books and records of its members andmarket participants.455 Specifically,CME expressed concern that theproposed rule would subject non-registered market participants torecordkeeping requirements thatcurrently apply only to member,registrants, and direct access clients of its platform, which it does not believewould be effective.456 CME alsocommented that the proposed rule doesnot detail which books, records, andinformation a SEF must be able toobtain from its non-member marketparticipants.457 FXall expressed concernthat the requirement for a SEF to havethe authority to examine the books andrecords of its members and marketparticipants could be interpreted torequire a SEF to conduct a fullregulatory examination program.458 FXall, therefore, recommended that theCommission clarify that thisrequirement only applies as may benecessary for a SEF to investigate aspecific potential rule violation that theSEF has detected in the ordinary courseof its trade practice surveillance routineor has otherwise been brought to itsattention.459


The Commission is adopting§ 37.203(b) as proposed, subject to thefollowing modification. To addressCME’s concerns about the scope of proposed §37.203(b), the Commission isreplacing the term ‘‘market participant’’with ‘‘persons under investigation.’’ TheCommission recognizes that using theterm ‘‘market participant’’ couldsignificantly increase the regulatoryresponsibilities for SEFs. Thus, theCommission clarifies that §37.203(b)places upon a SEF an affirmativeobligation to have the authority toexamine books and records from itsmembers and from any persons underinvestigation for effective enforcementof its rules. The Commission also notesthat the books and records collected bythe SEF should encompass allinformation and documents that are

necessary to detect and prosecute ruleviolations. In response to FXall’scomment, the Commission clarifies thatthe requirement for a SEF to have theauthority to examine books and recordsdoes not require a SEF to conduct a fullregulatory examination program.However, the Commission notes that inaddition to the SEF’s obligations

pursuant to §37.203(b), the audit trailrequirements in §37.205(c)(2) require aSEF to establish a program for effectiveenforcement of its audit trail andrecordkeeping requirements, whichwould require the examination of booksand records.

(3) §37.203(c)—Compliance Staff andResources

Proposed §37.203(c)(1) provided thata SEF must establish and maintainsufficient compliance staff andresources to conduct a number of enumerated tasks, such as audit trail

reviews, trade practice surveillance,market surveillance, and real-timemonitoring. Proposed §37.203(c)(2)required a SEF to continually monitorthe size and workload of its compliancestaff and, on at least an annual basis,formally evaluate the need to increaseits compliance staff and resources. Theproposed rule also set forth certainfactors that a SEF should consider indetermining the appropriate level of compliance staff and resources.


Two commenters sought clarificationregarding a SEF’s complianceresources.460 WMBAA requested thatthe Commission clarify whether theresources and staff of a compliancedepartment may be shared withaffiliates or between multiple SEFs, andif so, how these shared resources would

be considered in meeting therequirements for sufficient compliancestaff and resources.461 WMBAA alsorequested clarification as to whether aSEF could consider its third partyservice provider’s resources and staff forpurposes of evaluating the adequacy of its compliance staff and resources.462 MarketAxess believed that the process

by which a SEF must conduct a formalevaluation of its compliance resourceswas unclear.463 MarketAxess also notedthat while the findings of such anevaluation could result in the need toincrease a SEF’s compliance staff andresources, it could also result in a

decrease.464 Accordingly, MarketAxesssuggested that the Commission removethe term ‘‘formally’’ and clarify that theevaluation of compliance resourcescould result in either an increase ordecrease in compliance staff andresources.465


The Commission is adopting§ 37.203(c) as proposed, subject to onemodification discussed below.466 TheCommission agrees in part withWMBAA’s recommendation that someSEF compliance staff can be sharedamong affiliated entities under theappropriate circumstances. However,such arrangements would require priorreview by the Commission staff andappropriate legal documentation

between the affiliated entities withrespect to any shared staff (e.g.,secondment or regulatory servicesagreements that define responsibilities;establish decision-trees for matters of regulatory consequence; and provide forexclusive authority and responsibility

by each SEF with respect to matters onits markets). The Commission alsoemphasizes that any sharing of compliance staff does not diminish eachSEF’s obligation to maintain sufficientstaff to meet its own regulatory needs.The Commission believes thatcompliance resources may not be shared

between non-affiliated SEFs givenpotential conflict issues. However, theCommission recognizes that a SEF mayprovide regulatory services to a non-affiliated SEF pursuant to a regulatory

services agreement.The Commission believes that a SEF

may take into consideration the staff and resources of its regulatory serviceprovider when evaluating thesufficiency of its own compliance staff.Regardless of whether a SEF utilizes aregulatory service provider or shares itscompliance staff with an affiliate, theCommission emphasizes that the SEFmust maintain sufficient internalcompliance staff to oversee the qualityand effectiveness of the regulatoryservices provided and to make certainregulatory decisions, as required by

§ 37.204.Finally, the Commission is deletingproposed §37.203(c)(2), which requiredthat a SEF monitor the size andworkload of its compliance staff on acontinuous basis and, on at least anannual basis, formally evaluate the needto increase its compliance resources and


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467CME Comment Letter at 19–20 (Feb. 22, 2011);WMBAA Comment Letter at 21 (Mar. 8, 2011).

468CME Comment Letter at 19–20 (Feb. 22, 2011).469 Id. at 20.470WMBAA Comment Letter at 21 (Mar. 8, 2011).


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

473See discussion below regarding high-frequency trading under §37.401—GeneralRequirements in the preamble.

staff. The Commission believes that theobligation that a SEF monitor theadequacy of its compliance staff andresources are implicit in proposed§ 37.203(c)(1). The final rule providesgreater flexibility to SEFs indetermining their approach tomonitoring their compliance resources.

(4) §37.203(d)—Automated TradeSurveillance System

Proposed §37.203(d) required a SEFto maintain an automated tradesurveillance system capable of detectingand investigating potential tradepractice violations. The proposed rulealso required that an acceptableautomated trade surveillance systemmust have the capability to generatealerts on a trade date plus one day (T+1)

basis to assist staff in detecting potentialviolations. The automated tradesurveillance system, among other

requirements, must maintain all tradeand order data, including ordermodifications and cancellations, andmust have the capability to compute,retain, and compare trading statistics;compute trade gains and losses; andreconstruct the sequence of tradingactivity.


CME and WMBAA expressed concernabout the capabilities required of anautomated trade surveillance systemunder the proposed rule.467 Specifically,CME stated that it has been unable to

design an automated surveillancesystem that automates the actualinvestigation of potential trade practiceviolations.468 CME also challenged theuse of what it deemed as ‘‘broad andambiguous’’ terms to describe therequired capabilities of such a system,and recommended that the Commissionconsider applying a more flexible, coreprinciples-based approach toimplementing the requirement.469 WMBAA argued that it would beimpossible to create an automated tradesurveillance system with thecapabilities described in the proposed

rule without knowledge of aparticipant’s complete trading activity,including trading activity that takesplace on other SEFs.470

Better Markets recommended thatdata recorded by an automated tradesurveillance system be time-stamped atintervals consistent with the capabilities

of high-frequency traders that willtransact on SEFs.471


The Commission is adoptingproposed §37.203(d), subject to twomodifications discussed below. First,the Commission is moving therequirement that an automated trade

surveillance system maintain all datareflecting the details of each orderentered into the trading system to final§ 37.205(b). The Commission believesthat § 37.205(b) is a more logical placein the Commission’s rules to addressthis aspect of a SEF’s automatedsurveillance system because it alsospecifies the requirements for a SEF’saudit trail program, including a historyof all orders and trades.

Second, the Commission is deletingthe word ‘‘investigating’’ from proposed§ 37.203(d) to remove any confusion, asnoted by CME. The Commission notes,

in response to CME’s comment, that thefinal rules do not require a SEF’sautomated trade surveillance system toconduct the actual investigations. TheCommission believes that the actualinvestigation would be carried out by aSEF’s compliance staff with theassistance of automated surveillancetools.

In response to CME’s commentpertaining to the breadth of the rule, theCommission believes that effectivesurveillance of trading markets requiresthat a SEF maintain an automated tradesurveillance system capable of detectingtrade practice violations to assist

compliance staff in analyzing large datasets and investigating patterns of conduct that may go otherwiseunnoticed. The Commission also

believes that the analytical toolsenumerated in the rule are a necessarycomponent of an effective tradesurveillance system. This rule, asmodified, therefore fulfills the statutoryrequirement of Core Principle 2 byassisting the SEF in detecting,investigating, and enforcing tradingrules that will deter abuses.472

The Commission acknowledges theinter-SEF surveillance limitations

expressed by WMBAA. TheCommission notes that the purpose of § 37.203(d) is to ensure that a SEF’scompliance staff has the necessary toolsto detect, analyze, and investigatepotential trade practice violations on theSEF’s trading systems or platforms; itdoes not obligate a SEF to establish across-market trade practice surveillanceprogram.

Although the Commissionacknowledges the merits of therecommendation by Better Markets toinclude time stamps at intervalsconsistent with the capabilities of high-frequency traders, the Commission doesnot believe that it is necessary to modify§ 37.203(d) to address this concern. Asdiscussed in §37.401 below, there are

efforts underway both within andoutside of the Commission to define anddevelop approaches for bettermonitoring of high-frequency andalgorithmic trading.473 However, whilethe rule does not specify the granularityof time-stamped data, a SEF’s automatedtrade surveillance system should havethe ability to readily determine thesequence in which orders are entered.This reflects the Commission’s belief that an automated trade surveillancesystem should time-stamp data with thegranularity necessary to conducteffective surveillance of all trade-related

activity, including high-frequencytrading, while leaving the details of thesystem to the SEF.

The Commission notes that theaccurate time-stamping of data isparticularly important for SEFs that usean RFQ System, including an RFQ System with a voice component. Forsuch SEFs, the accurate time-stampingof both their Order Book and RFQ System activity is critical for ensuring

both that the SEF itself has a robustsurveillance system and that theCommission is able to monitor the SEF’sadherence to part 37’s Order Book-RFQ

System integration requirements.(5) §37.203(e)—Real-Time MarketMonitoring

Proposed §37.203(e) required a SEFto conduct real-time market monitoringof all trading activity on its electronictrading platform to ensure orderlytrading and to identify market or systemanomalies. The proposed rule furtherrequired a SEF to have the authority toadjust prices and cancel trades whenneeded to mitigate ‘‘market disruptingevents’’ caused by platformmalfunctions or errors in orderssubmitted by market participants. In

addition, proposed §37.203(e) requiredthat any trade price adjustments or tradecancellations be transparent to themarket and subject to standards that areclear, fair, and publicly available.


CME stated that the proposedstandards would be difficult for any SEFto reasonably meet because they require


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474CME Comment Letter at 21 (Feb. 22, 2011).475 Id. at 20–21.476WMBAA Comment Letter at 21 (Mar. 8, 2011).477SIFMA AMG Comment Letter at 14 (Mar. 8,

2011); ISDA/SIFMA Comment Letter at 13 (Mar. 8,2011).

478SIFMA AMG Comment Letter at 14 (Mar. 8,2011).

479 Id.480 ISDA/SIFMA Comment Letter at 13 (Mar. 8,

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

2011).

482CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B).483Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1224.484 Id. at 1223–24.485 Id. at 1224.

486See discussion below regarding high-frequency trading under §37.401—GeneralRequirements in the preamble.

monitoring of all trading activity on aplatform to ensure orderly trading.474 CME also reiterated its belief that theproposed rules are overly prescriptiveand recommended that the Commissionprovide application guidance instead of a rule.475 WMBAA requestedclarification that a SEF’s obligation toconduct real-time market monitoring

does not include the requirement toconduct automated trade surveillanceunder § 37.203(d).476

Two commenters opined on therequirement for a SEF to modify orcancel a swap transaction.477 SIFMAAMG argued that a SEF should not beable to modify or cancel a swaptransaction under any circumstanceswithout the express consent of thecounterparties.478 SIFMA AMG alsostated that if counterparties consent toan adjustment, then clearing entities,executing brokers, DCMs, andmiddleware platforms should also make

the appropriate adjustment.479

ISDA/SIFMA recommended that theCommission adopt a uniform standardfor ‘‘market disrupting events.’’ 480

Better Markets stated that a SEF’sobligation to conduct real-time marketmonitoring should include monitoringorders and cancellations that are time-stamped at intervals consistent with thecapabilities of high-frequency traders toidentify abusive high frequency tradingstrategies.481


The Commission is adoptingproposed §37.203(e), subject to one

modification. The Commission agreeswith CME that real-time marketmonitoring cannot ‘‘ensure’’ orderlytrading at all times, but the Commission

believes that such monitoring mustidentify disorderly trading when itoccurs. Accordingly, the Commission ismodifying proposed § 37.203(e) torequire a SEF to conduct real-timemarket monitoring ‘‘to identifydisorderly trading,’’ instead of ‘‘toensure orderly trading.’’

In response to CME’s comment thatthe rule is overly prescriptive, theCommission believes that §37.203(e)grants a SEF the flexibility to determinethe best way to conduct real-time

market monitoring so that it caneffectively monitor its markets. TheCommission also believes that the rulecorrectly mandates that a SEF conductreal-time market monitoring of alltrading activity that occurs on its systemor platform in order to detect disorderlytrading and market or system anomalies,and take appropriate regulatory action.

The Commission believes that this rulefulfills the statutory requirement of CorePrinciple 2, which requires a SEF tohave the capacity to detect, investigate,and enforce trading rules that will deterabuses.482

In response to WMBAA’s comment,the Commission clarifies that a SEF’sobligation to conduct real-time marketmonitoring does not encompass theautomated trade surveillancerequirement in §37.203(d). TheCommission notes that while real-timemarket monitoring and trade practicesurveillance are both self-regulatory

functions assigned to all SEFs, thesefunctions are generally independent andserve different purposes. As discussedin the SEF NPRM, market monitoring isconducted on a real-time basis so that aSEF can take mitigating action againstany market or system anomalies on itstrading system or platform.483 Tradepractice surveillance, on the other hand,involves reconstructing and analyzingorder, trade, and other data post-execution to identify potentialviolations and anomalies found in tradedata.484 Further, as noted in the SEFNPRM, the automated trade surveillancesystem typically differs from the systemused to conduct real-time marketmonitoring.485

The Commission disagrees withSIFMA AMG’s comment that a SEFshould not be able to modify or cancela swap transaction under anycircumstances without the expressconsent of the counterparties. TheCommission believes that a SEF shouldhave the authority to modify or cancela swap transaction without the consentof the counterparties under certainlimited circumstances. For example, aSEF should be able to cancel a tradewhen such trade was executed due to a

technological error on the part of theSEF. Further, the Commission believesthat the rule’s requirement that anymodifications or cancellations by theSEF be transparent to the market andsubject to standards that are clear, fair,and publicly available will provideprotection to counterparties. The

Commission also acknowledges thevalidity of SIFMA AMG’s concern thatany adjustment to a swap transactionshould also be reflected by entitiesinvolved in the clearing and processingof the swap. However, since imposingsuch a requirement on entities involvedin the clearing and processing of swapsis outside the scope of this SEF

rulemaking, the Commission declines toaddress this issue in these final rules.

The Commission also rejects ISDA/SIFMA’s recommendation to define theterm ‘‘market disrupting events,’’ as itdoes not believe that a rule definitioncould reasonably capture the universe of potentially market disrupting events.The Commission notes that industrydefinitions for terms such as ‘‘marketdisrupting events’’ generally onlyestablish a process or framework forcounterparties and other third parties todetermine whether such an event hasoccurred and can be subject to

challenge, resulting in delayeddeterminations with limited utility foreffective trade monitoring. Although theCommission believes that coordinationamong SEFs regarding marketdisrupting events may be appropriate,and encourages SEFs to do so, theCommission is not defining ‘‘marketdisrupting events’’ at this time. TheCommission may provide examples at alater time once it gains furtherknowledge regarding the types of marketdisrupting events that are likely to occuron a SEF.

In response to the comment by Better

Markets about high-frequency trading,the Commission declines to modifyproposed §37.203(e) to includeconcepts related specifically to high-frequency trading at this time.486 TheCommission believes that a SEF’s real-time market monitoring system should

be structured to conduct effectivemarket monitoring for all order andtrade types, including, but not limitedto, high frequency trading.

(6) §37.203(f)—Investigations andInvestigation Reports

Proposed §37.203(f) required a SEF toestablish procedures for conducting

investigations, provided timelines forcompleting such investigations, detailedthe requirements of an investigationreport, and provided for warning letters.

(i) § 37.203(f)(1)—Procedures

Proposed §37.203(f)(1) required a SEFto have procedures that require itscompliance staff to conductinvestigations of possible rule


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487CME Comment Letter at 21 (Feb. 22, 2011).488 Id.489 Id.490MarketAxess Comment Letter at 35 (Mar. 8,

2011).491 Id. at 35–36.

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

494 ICE Comment Letter at 7 (Mar. 8, 2011); CMEComment Letter at 22, 35 (Feb. 22, 2011).

495CME Comment Letter at 35 (Feb. 22, 2011).496 ICE Comment Letter at 7 (Mar. 8, 2011).497CME Comment Letter at 22 (Feb. 22, 2011).498 Id.499MarketAxess Comment Letter at 36 (Mar. 8,

2011).

violations. The proposed rule requiredthat an investigation be commencedupon the Commission staff’s request orupon discovery of information by theSEF indicating a possible basis forfinding that a violation has occurred orwill occur.

(A) Summary of Comments

CME argued that the proposed rulediminishes a SEF’s discretion todetermine the matters that warrant aformal investigation because at the timeof discovery or upon receipt of information, and before any review hasoccurred, there will always be ‘‘apossible basis’’ that a violation hasoccurred or will occur.487 CME agreedthat formal written referrals from theCommission, law enforcementauthorities, other regulatory agencies, orother SROs should result in a formalinvestigation in every instance.488 However, CME contended that a SEFshould have reasonable discretion todetermine how it responds tocomplaints, leads, and other types of referrals, including the discretion tofollow-up with a less formal inquiry incertain situations.489

MarketAxess expressed concern thatthe proposed rule is not clear as towhether a SEF can contract itsinvestigations to its regulatory serviceprovider.490 MarketAxess recommendedthat the Commission modify theproposed rule by replacing ‘‘compliancestaff’’ with ‘‘swap execution facility’’ toclarify that a regulatory service providerthat is responsible for a SEF’s rule

enforcement program can conductinvestigations on behalf of the SEF.491

(B) Commission Determination

The Commission is adopting§ 37.203(f)(1) as proposed, subject tocertain modifications described below.The Commission confirms that incertain circumstances a SEF shouldhave reasonable discretion regardingwhether or not to open an investigation,as noted by CME. Accordingly, theCommission is amending proposed§ 37.203(f)(1) to provide that aninvestigation must be commenced bythe SEF upon the receipt of a requestfrom Commission staff or upon thediscovery or receipt of information thatindicates a ‘‘reasonable basis’’ forfinding that a violation may haveoccurred or will occur.

In response to MarketAxess’scomment that the proposed rule is

unclear, the Commission confirms thata SEF may contract with a regulatoryservice provider, as provided for under§ 37.204, whose staff may perform thefunctions assigned to a SEF’scompliance staff under this rule. In thisregard, the Commission also notes thatthe SEF must maintain sufficientinternal compliance staff to oversee thequality and effectiveness of theregulatory services provided on its

behalf, and to make certain regulatorydecisions, as required by § 37.204.

(ii) § 37.203(f)(2)—Timeliness

Under proposed § 37.203(f)(2), theCommission required that investigations

be completed in a timely manner,defined as 12 months after aninvestigation is opened, absentenumerated mitigating circumstances.


CME generally supported theproposed rule, but recommended thatthe list of possible mitigatingcircumstances also include the domicileof the subjects and cooperativeenforcement matters since the SEF maynot have independent control over thepace of the investigation.492 CME alsorequested that the Commission clarifythat the twelve month period forcompleting an investigation referencedin proposed §37.203(f)(2) is separatefrom the time period necessary toprosecute an investigation.493

(B) Commission DeterminationThe Commission is adopting

§ 37.203(f)(2) as proposed. TheCommission believes that a 12-monthperiod to complete an investigation isappropriate and timely. Although theCommission agrees with CME thatadditional mitigating factors couldjustifiably contribute to a delay incompleting an investigation within a 12-month period, the Commission notesthat the factors included in theproposed rule were not intended to bean exhaustive list of mitigatingcircumstances. In the Commission’sview, the factors listed in the proposedrule represent some of the morecommon examples that could delaycompletion of an investigation withinthe 12-month period. The Commissionalso confirms that § 37.203(f)(2) onlyapplies to the investigation phase of amatter, and is separate from the timeperiod necessary to prosecute aninvestigation.

(iii) §37.203(f)(3)—Investigation ReportsWhen a Reasonable Basis Exists forFinding a Violation

Proposed §37.203(f)(3) required aSEF’s compliance staff to submit aninvestigation report for disciplinaryaction any time staff determined that areasonable basis existed for finding arule violation. The proposed rule alsoenumerated the items that must beincluded in the investigation report,including the market participant’sdisciplinary history.


CME and ICE commented on therequirement that a respondent’sdisciplinary history be included in theinvestigation report that is submitted toa Review Panel.494 CME asserted that arespondent’s disciplinary history wouldonly be relevant if a prior offense is anelement of proof for the potential ruleviolation under review.495 ICE

commented that only substantiveviolations in the respondent’s historywould be relevant to the Review Panel’sdeliberations.496

CME commented that rule violationscan range from very minor to egregiousand not every rule violation meritsformal disciplinary action.497 CMEargued that warning letters are sufficientto address minor rule violations, ratherthan the issuance of a formalinvestigatory report.498

MarketAxess stated that the proposedrule does not specify to whom theinvestigation reports must be submitted,and recommended that the reports be

submitted to the SEF’s Chief Compliance Officer, consistent withCore Principle 15.499


The Commission is adopting§ 37.203(f)(3) as proposed, subject to onemodification. The Commission agreeswith CME and ICE that a respondent’sdisciplinary history is not alwaysrelevant to the determination of whetherthe respondent has committed a furtherviolation of a SEF’s rules. Accordingly,the Commission is removing thisrequirement from the final rule. The

Commission notes, however, that alldisciplinary sanctions, includingsanctions imposed pursuant to anaccepted settlement offer, must take intoaccount the respondent’s disciplinaryhistory.


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500The Commission notes that a SEF’s issuanceof a warning letter for the violation of a SEF ruleneither precludes the Commission from taking anenforcement action against the recipient of thewarning letter based upon the same underlyingconduct, nor does it provide a defense against anysuch Commission enforcement action.

501CME Comment Letter at 21 (Feb. 22, 2011).502 Id.503Similar to §37.203(f)(3), the Commission notes

that a SEF’s compliance staff should submit allcompleted investigation reports to the member ormembers of the SEF’s compliance departmentresponsible for reviewing such reports anddetermining the next steps to take.

504 ICE Comment Letter at 7 (Mar. 8, 2011); CMEComment Letter at 22 (Feb. 22, 2011).

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

2011).

509For purposes of this rule, the Commissiondoes not consider a ‘‘reminder letter’’ or such othersimilar letter to be any different than a warningletter.


511 Id.

The Commission confirms, asrecommended by CME, that ‘‘minortransgressions’’ can be addressed by aSEF’s compliance staff with theissuance of warning letters as discussed

below in §37.203(f)(5). However, asfurther discussed below in§ 37.203(f)(5), no more than one warningletter may be issued to the same person

or entity found to have committed thesame rule violation more than oncewithin a rolling 12-month period.500

Finally, the Commission clarifies thata SEF’s compliance staff should submitall completed investigation reports tothe member or members of the SEF’scompliance department responsible forreviewing such reports and determiningthe next steps in the process, such aswhether to refer the matter to the SEF’sdisciplinary panel or authorizedcompliance staff under §37.206(c).

(iv) §37.203(f)(4)—Investigation ReportsWhen No Reasonable Basis Exists for

Finding a ViolationProposed § 37.203(f)(4) required

compliance staff to prepare aninvestigation report upon concluding aninvestigation and determining that noreasonable basis exists for finding a ruleviolation. If the investigation reportrecommended that a disciplinary panelshould issue a warning letter, then theinvestigation report must also include acopy of the warning letter and themarket participant’s disciplinaryhistory, including copies of warningletters.


CME noted that its Market RegulationDepartment currently has the authorityto administratively close a case andissue a warning letter withoutdisciplinary committee approval.501 Accordingly, CME recommended thatthe Commission amend the proposedrule to reflect that a SEF will also havesuch authority.502


The Commission is adopting§ 37.203(f)(4) as proposed, subject to onemodification.503 The Commission iseliminating the provision that discussed

the concept of warning letters becausethe Commission does not believe that aSEF would need to limit the number of warning letters that can be issued whena rule violation has not been found. TheCommission notes, however, that thismodification does not impact thelimitation on the number of warningletters that may be issued by a

disciplinary panel or by compliancestaff to the same person or entity for thesame violation committed more thanonce in a rolling 12-month period whena rule violation has been found. TheCommission clarifies, in response toCME’s comment, that a SEF mayauthorize its compliance staff to close acase administratively and issue awarning letter without disciplinarypanel approval when a reasonable basisdoes not exist for finding a ruleviolation.

(v) §37.203(f)(5)—Warning Letters

Proposed §37.203(f)(5) provided thata SEF may authorize its compliance staff to issue a warning letter or torecommend that a disciplinarycommittee issue a warning letter. Theproposed rule also prohibited a SEFfrom issuing more than one warningletter to the same person or entity forthe same potential violation during arolling 12-month period.


Some commenters opposed theproposed limitation on the number of warning letters issued during a rolling12-month period.504 CME contended

that the rule does not considerimportant factors that are relevant to aSEF when evaluating potentialsanctions in a disciplinary matter.505 CME believed that the SEF should havediscretion to determine the appropriateactions in all cases based on the‘‘totality of the circumstances.’’ 506 ICEstated that this limitation woulddiscourage self-reporting of violations

because of the lack of discretion in aresulting penalty assessment.507 MarketAxess requested that theCommission adopt a more uniformapproach with respect to warning

letters, permitting them to be issued asa sanction or an indication of a findingof a violation in all SEF contexts.508


The Commission is adoptingproposed §37.203(f)(5), subject to

certain modifications, includingconverting a portion of the rule toguidance in appendix B to part 37.

The Commission is maintaining in thefinal rule the limitation on the numberof warning letters issued. TheCommission acknowledges thecomments from CME and ICEconcerning the issuance of warning

letters, but believes that to ensure thatwarning letters serve as effectivedeterrents and to preserve the value of disciplinary sanctions, no more thanone warning letter may be issued to thesame person or entity found to havecommitted the same rule violation morethan once within a rolling 12-monthperiod.509 As discussed in the SEFNPRM, while a warning letter may beappropriate for a first-time violation, theCommission does not believe that morethan one warning letter in a rolling 12-month period for the same violation isever appropriate.510 Further, a policy of

issuing repeated warning letters, ratherthan issuing meaningful sanctions, tomarket participants who repeatedlyviolate the same rules reduces theeffectiveness of a SEF’s ruleenforcement program.511

However, in response to commenters’concerns, the Commission is narrowingthe application of this rule to warningletters that contain an affirmativefinding that a rule violation hasoccurred. Therefore, the Commission isremoving the provision in the proposedrule that a warning letter issued inaccordance with this section is not apenalty or an indication that a finding

of a violation has been made. To remainconsistent with the modifications toproposed §37.203(f)(3) and (f)(4), theCommission is also deleting theproposed requirement that investigationreports required by paragraphs (f)(3) and(f)(4) of this section must include a copyof the warning letter issued bycompliance staff.

As noted above, the Commissionagrees with CME’s comment that minortransgressions can be addressed by aSEF’s compliance staff issuing awarning letter. Accordingly, in order toprovide a SEF with flexibility in this

regard, the Commission is moving thisprovision of the rule to the guidance inappendix B to part 37. The text of theguidance provides that the rules of aSEF may authorize its compliance staff to issue a warning letter to a person orentity under investigation or to


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512The Commission is renaming the title of thissection from ‘‘Use of Third-Party ProviderPermitted’’ to ‘‘Use of Regulatory Service ProviderPermitted’’ to provide greater clarity.

513MarketAxess Comment Letter at 14–15 (Mar.8, 2011); Reuters Comment Letter at 5 (Mar. 8,

2011); Bloomberg Comment Letter at 4–5 (Mar. 8,2011); NFA Comment Letter at 1 (Mar. 8, 2011).


515 Id.516Parity Energy Comment Letter at 5 (Mar. 25,

2011); WMBAA Comment Letter at 22 (Mar. 8,2011); FXall Comment Letter at 12 (Mar. 8, 2011).

517WMBAA Comment Letter at 22 (Mar. 8, 2011).518MarketAxess Comment Letter at 15 (Mar. 8,

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

519Tradeweb Comment Letter at 10 (Mar. 8,2011).

520See, e.g., discussion under § 37.203(d)—Automated Trade Surveillance System and CorePrinciple 6—Position Limits or Accountability inthe preamble.

521The Commission notes that other coreprinciples, such as Core Principle 4, and theCommission’s regulations thereunder may requireSEFs to conduct certain cross-market monitoring.

522The Commission is renaming the title of thissection from ‘‘Duty to Supervise Third Party’’ to‘‘Duty to Supervise Regulatory Service Provider’’ toprovide greater clarity.

recommend that a disciplinary paneltake such action.

(7) §37.203(g)—Additional RulesRequired

Proposed §37.203(g) required a SEFto adopt and enforce any additionalrules that it believes are necessary tocomply with the requirements of

§ 37.203.(i) Commission Determination

The Commission did not receive anycomments on proposed §37.203(g);however, the Commission is movingthis rule to the guidance in appendix Bto part 37. The Commission believesthat this requirement is already implicitin Core Principle 2 and need not beaddressed separately as a final rule.Additionally, moving proposed§ 37.203(g) to guidance provides SEFswith added flexibility in adoptingadditional rules that it believes arenecessary to comply with the rulesrelated to Core Principle 2. Consistentwith this determination, theCommission is replacing proposed§ 37.203(g) with final §37.203(g) (titled‘‘Additional sources for compliance’’)that simply permits SEFs to rely uponthe guidance in appendix B to part 37to demonstrate to the Commissioncompliance with § 37.203.

(e) §37.204—Regulatory ServicesProvided by a Third Party

(1) §37.204(a)—Use of Third-PartyProvider Permitted 512

Proposed §37.204(a) allowed a SEF to

contract with a registered futuresassociation or another registered entityto assist in complying with the SEF coreprinciples, as approved by theCommission. The proposed rule alsostated that a SEF that elects to use theservices of a regulatory service providermust ensure that such provider has thecapacity and resources to provide timelyand effective regulatory services. Theproposed rule further stated that a SEFwill at all times remain responsible forthe performance of any regulatoryservices received, for compliance withthe SEF’s obligations under the Act and

Commission regulations, and for theregulatory service provider’sperformance on its behalf.


Commenters generally supported theCommission’s proposal to allow thirdparties to provide regulatory services.513

However, MarketAxess argued that theCommission should permit an entitythat is not a registered futuresassociation or another registered entitywith the Commission to performregulatory services on behalf of a SEF,such as the Financial IndustryRegulatory Authority (‘‘FINRA’’).514 Inthe alternative, MarketAxess

recommended that the Commissionshould permit SEFs, if desired, to forma joint venture to create a specialregulatory service provider for SEFs thatwould not be a registered entity.515 Similarly, several commenterssupported a centralized, commonregulatory organization (‘‘CRO’’) thatwould facilitate compliance with SEFcore principles.516 In this regard,WMBAA stated that a CRO wouldestablish a uniform SEF standard of conduct, streamline the Commission’sevaluation of each SEF registrationapplication, and conduct effective

surveillance of fungible swap productstrading on multiple SEFs.517 MarketAxess and Tradeweb requested

clarification on how the Commissionwill assess and approve regulatoryservice providers.518 In this regard,Tradeweb commented that SEFs shouldhave flexibility in contracting with thirdparty service providers, so long as theSEF uses reasonable diligence and actsin a manner consistent with marketpractice.519


The Commission is adopting§ 37.204(a) as proposed, subject to two

modifications. In response toMarketAxess’s comment about non-registered entities performing regulatoryservices, the Commission is revising theproposed rule to allow FINRA to assistSEFs in complying with the coreprinciples. The Commission notes thatFINRA has provided similar regulatoryservices for the securities industry formany years and may serve as a self-regulatory organization for SB–SEFs.Therefore, the Commission believes thatallowing FINRA to serve as a regulatoryservice provider for SEFs is appropriate

because FINRA is likely to have the

qualifications, capacity, and resources

to provide timely and effectiveregulatory services for SEFs.

The Commission recognizes theconcerns that WMBAA and others havewith respect to SEFs conducting market-wide surveillance activities. Asdiscussed elsewhere in this finalrulemaking,520 an individual SEF mayhave limited ability to monitor trading

activities across markets sinceindividual swaps may be listed onmultiple SEFs (as well as any DCMslisting swaps). The Commission clarifiesthat a SEF (or a regulatory serviceprovider on a SEF’s behalf), under CorePrinciple 2 and the Commission’sregulations thereunder, is onlyresponsible for surveillance and ruleenforcement of the SEF’s systems andplatforms, and Core Principle 2 does notimpose a cross-market surveillancerequirement on a SEF.521 Therefore, thefinal rules do not require the use of asingle industry-wide CRO to assist SEFs

with cross-market surveillance. Whilenot requiring it, the final rules also donot prohibit the use of a single industry-wide CRO.

In response to MarketAxess’s andTradeweb’s comments regarding theCommission’s assessment and approvalof regulatory service providers, theCommission notes that it will assess andapprove the use of such serviceproviders during the full registrationprocess. The Commission also notes thatExhibit N to Form SEF requestsexecuted or executable copies of anyagreements with regulatory serviceproviders.

Finally, the Commission is modifying§ 37.204(a) to make clear that a SEF mayuse the services of a regulatory serviceprovider for the provision of services toassist the SEF in complying with ‘‘theAct and Commission regulationsthereunder’’ rather than simply the SEFcore principles as stated in proposed§ 37.204(a). The modification aligns therule text with what the Commission hasalways intended to be the range of aSEF’s self-regulatory obligations.

(2) §37.204(b)—Duty To SuperviseThird Party 522

Proposed §37.204(b) required that aSEF maintain sufficient compliance staff to supervise any services performed by


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523NFA Comment Letter at 2 (Mar. 8, 2011); CMEComment Letter at 18–19 (Feb. 22, 2011).

524NFA Comment Letter at 2 (Mar. 8, 2011).525CME Comment Letter at 19 (Feb. 22, 2011).526 Id. at 18–19.527 Id. at 19.528The Commission is making certain non-

substantive clarifications to §37.204(b).

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

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

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

a regulatory service provider. Theproposed rule also required that the SEFhold regular meetings with itsregulatory service provider to discusscurrent work and other matters of regulatory concern, as well as conductperiodic reviews of the adequacy andeffectiveness of services provided on its

behalf. In addition, proposed §37.204(b)

required a SEF to carefully documentthe reviews and make them available tothe Commission upon request.


Two commenters recommended thatthe Commission adopt a more flexiblerule with respect to a SEF’s duty tosupervise its regulatory serviceprovider.523 In this regard, NFArecommended that the Commissionprovide flexibility to a SEF and itsregulatory service provider to mutuallydetermine the necessary process for aSEF to supervise its regulatory serviceprovider.524 CME recommended that theCommission move the rule to guidanceor acceptable practices.525 In particular,CME pointed to the requirements that aSEF conduct periodic reviews of theservices provided and hold regularmeetings with the regulatory serviceprovider to discuss ongoinginvestigations, trading patterns, marketparticipants, and any other matters of regulatory concern.526 CME stated that‘‘[w]hile it may well be that it isconstructive for the [SEF] to holdregular meetings with its serviceprovider and ‘discuss marketparticipants,’ the core principle should

stand on its own and the [SEF] shouldhave the flexibility to determine how

best to demonstrate compliance with thecore principle.’’ 527


The Commission is adopting§ 37.204(b) as proposed.528 TheCommission acknowledges thecommenters’ desire for a flexibleapproach, but notes that a SEF thatelects to use a regulatory serviceprovider remains responsible for theregulatory services received and forcompliance with the Act andCommission regulations. The SEFtherefore must properly supervise thequality and effectiveness of theregulatory services provided on its

behalf. The Commission believes thatproper supervision will require that a

SEF have complete and timelyknowledge of relevant work performed

by the SEF’s regulatory service provideron its behalf. The Commission also

believes that this knowledge can only beacquired through periodic reviews andregular meetings required under§ 37.204(b).

(3) §37.204(c)—Regulatory DecisionsRequired From the SEF

Proposed §37.204(c) required a SEFthat utilizes a regulatory serviceprovider to retain exclusive authorityover all substantive decisions made byits regulatory service provider,including the cancellation of trades,issuance of disciplinary charges, denialsof access to the trading platform fordisciplinary reasons, and any decisionto open an investigation into a possiblerule violation. Further, the proposedrule required a SEF to document anyinstance where its actions differed from

those recommended by its regulatoryservice provider.


CME objected to the idea that alldecisions concerning the cancellation of trades remain in the exclusive authorityof the SEF.529 CME contended that aSEF may be better served by grantingsuch authority to a regulatory serviceprovider because such decisions requireprompt decision-making.530


The Commission is adopting§ 37.204(c) as proposed, subject to two

modifications. First, the Commission isremoving the requirement that adecision to open an investigation resideexclusively with the SEF. The final rulegrants a SEF the latitude to determinewhether investigations will be opened

by the SEF, by its regulatory serviceprovider, or some combination of thetwo. The Commission believes thatopening investigations is anadministrative task and does notnecessarily imply the threat of formaldisciplinary action or sanctions againsta market participant. Second, theCommission is amending the rule to

clarify that when a SEF documentsinstances when its actions differ fromthose recommended by its regulatoryservice provider, the SEF must includethe reasons for the course of actionrecommended by the regulatory serviceprovider and the reasons why the SEFchose a different course of action.

The Commission disagrees withCME’s comment concerning the‘‘cancellation of trades’’ and believes

that a SEF must retain exclusiveauthority in this regard. Cancellingtrades is an important exercise of aSEF’s authority over its markets andmarket participants. Cancelled tradesmay have meaningful economicconsequences to the swapcounterparties involved in thetransaction, and may be the subject of

contention between the counterparties if they do not both agree to thecancellation. The Commissionemphasizes that permanent,consequential decisions must remainwith the SEF.

(f) §37.205—Audit Trail

Proposed §37.205 implements CorePrinciple 2’s requirement that SEFscapture information that may be used inestablishing whether rule violationshave occurred.531 Accordingly,proposed §37.205 required a SEF toestablish procedures to capture andretain information that may be used inestablishing whether rule violationshave occurred. The proposed rule, alongwith its subparts, established therequirements of an acceptable audit trailprogram and the enforcement of suchprogram.

(1) §37.205(a)—Audit Trail Required

Proposed §37.205(a) required a SEFto capture and retain all audit trail dataso that the SEF has the ability to detect,investigate, and prevent customer andmarket abuses. The proposed rule also

provided that the audit trail data must be sufficient to reconstruct alltransactions within a reasonable periodof time and to provide evidence of anyrule violations that may have occurred.Proposed §37.205(a) further providedthat the audit trail must permit the SEFto track a customer order from the timeof receipt through fill, allocation, orother disposition, and must include

both order and trade data.


WMBAA requested that theCommission establish a common format

for audit trail data to ensure consistencyamong all SEFs and to make theinformation easier for the Commissionto use and review when investigatingcustomer and market abuses.532


The Commission is adopting§ 37.205(a) as proposed, subject to the


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533The Commission is making certain non-substantive clarifications to §37.205(a).

534CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b–3(f)(2)(B)(ii). 535WMBAA Comment Letter at 23 (Mar. 8, 2011).

536 Id.537Better Markets Comment Letter at 18 (Mar. 8,

2011).538CEA section 5h(f)(2)(B)(ii); 7 U.S.C. 7b–

3(f)(2)(B)(ii).

modifications described below.533 TheCommission believes that therequirement that SEFs capture andretain all audit trial data is essential toensuring that SEFs can captureinformation to establish whether ruleviolations have occurred, as required byCore Principle 2.534 Additionally, thecreation and retention of a

comprehensive audit trail will enableSEFs to properly reconstruct any and allmarket and trading events and toconduct a thorough forensic review of all market information. The Commission

believes that the ability to reconstructmarkets in such a manner is afundamental element of a SEF’ssurveillance and rule enforcementprograms. Consistent with theseprinciples, the Commission ismodifying §37.205(a) to clarify that theaudit trail data must be sufficient toreconstruct trades and sufficient toreconstruct indications of interest,

requests for quotes, and orders within areasonable period of time.Both the proposed and final rules in

§ 37.205(a) require that a SEF ‘‘captureand retain all audit trail data necessaryto detect, investigate, and preventcustomer and market abuses’’ (emphasisadded). The Commission notes thatinformation required to detect abusesmay in some cases include allcommunications between marketparticipants and a SEF’s trading systemor platform. The Commission also notesthat a SEF’s obligation to capture in itsaudit trail all data necessary to detect,investigate, and prevent customer andmarket abuses is not altered by thenature of the trading system or platformthat a SEF may choose to utilize,including a system or platform that, forexample, utilizes the telephone. Forexample, an acceptable audit trail for aSEF with a telephone componentshould include communications

between the SEF’s employees and theircustomers, as well as anycommunications between employees asthey work customer indications of interest, requests for quotes, orders, andtrades. An acceptable audit trail mustcapture the totality of communications

(including, but not limited to,telephone, instant messaging, email,written records, and electroniccommunications within a tradingsystem or platform) that could benecessary to detect, investigate, andprevent customer and market abuses, asrequired by both proposed and final§ 37.205(a).

The Commission believes thatWMBAA’s suggestion to establish acommon format for audit trail data mayprovide some value for SEFs that wishto coordinate and establish such astandard. However, the intent of thefinal rules is to require that a SEFestablish and maintain an effective audittrail program, not to dictate the method

or form for maintaining suchinformation. Importantly, the rule, bynot being prescriptive, provides SEFswith flexibility to determine the mannerand the technology necessary andappropriate to meet the requirements.The Commission notes, nevertheless,that staff from the Commission’s Officeof Data and Technology will coordinatewith SEFs to establish standards for thesubmission of audit trail data to theCommission.

(2) §37.205(b)—Elements of anAcceptable Audit Trail Program

Proposed §37.205(b)(1) required aSEF’s audit trail to include originalsource documents, on which tradeexecution information was originallyrecorded, as well as records forcustomer orders, whether or not theywere filled. The proposed rule alsorequired that a SEF that permitsintermediation must require allexecutable orders or RFQs received overthe telephone to be immediately enteredinto the trading system or platform.Proposed §37.205(b)(2) required that aSEF’s audit trail program include atransaction history database andspecified the trade information required

to be included in the database. Proposed§ 37.205(b)(3) required the audit trailprogram to also have electronic analysiscapability for the transaction historydatabase. Proposed § 37.205(b)(4)required the audit trail program toinclude the ability to safely store allaudit trail data and to retain it inaccordance with the recordkeepingrequirements of SEF Core Principle 10and its associated regulations.


WMBAA commented that therequirement for records to be retained

for customer orders should not apply toindications of interest because it wouldextend beyond the Commission’sstatutory authority and the audit trailrequirements currently in place in otherfinancial markets, and would beunnecessarily costly and

burdensome.535 WMBAA alsocommented that the audit trailrequirements must permit the retentionof relevant information through variousmodes because SEFs may operate trade

execution platforms ‘‘through anymeans of interstate commerce.’’ 536 Better Markets commented that audittrail records, such as records of customers’ orders and their disposition,must be time-stamped at intervals thatare consistent with the capabilities of high-frequency traders that use SEFs.537

(ii) Commission DeterminationThe Commission is adopting

proposed §37.205(b), subject to themodifications discussed below. TheCommission is clarifying that ‘‘time of trade execution’’ must be included inthe data points of an acceptable audittrail, and is noting this clarification infinal §37.205(b)(1). The Commission isalso revising proposed § 37.205(b)(2) tospecify that a transaction historydatabase must include a history of ‘‘allindications of interest, requests forquotes, orders, and trades entered intoa [SEF’s] trading system or platform,

including all order modifications andcancellations.’’ Further, the Commissionis revising proposed § 37.205(b)(3) tospecifically state that a SEF’s electronicanalysis capability must provide it withthe ‘‘ability to reconstruct indications of interest, requests for quotes, orders, andtrades, and identify possible tradingviolations.’’ The revisions to§ 37.205(b)(2) and (b)(3), subject to theadditions of the indications of interestand requests for quotes language, reflectregulatory requirements previouslyproposed as part of § 37.203(d), but, asnoted above, the Commission is movingthese requirements to final §37.205(b).Additionally, the Commission isrevising proposed § 37.205(b)(2) byreplacing the customer type indicatorslisted in the proposed rule with the term‘‘customer type indicator code.’’

In response to WMBAA’s commentregarding indications of interest, theCommission believes that retaininginformation about indications of interestprovides another important detail of anaudit trail, just as information of filled,unfilled, or cancelled orders providesimportant information for the SEF. Thisinformation enables a SEF to fulfill itsstatutory duty under Core Principle 2,

which requires a SEF to captureinformation that may be used inestablishing whether rule violationshave occurred.538 Absent thisinformation, SEFs would be limited intheir ability to monitor their marketsand to detect, investigate, and preventcustomer and market abuses and trading


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539See discussion above regarding MinimumTrading Functionality under §37.3—Requirementsfor Registration in the preamble.

540The Commission notes, as stated above under§ 37.203(d)—Automated Trade Surveillance Systemin the preamble, that the accurate time stamping of data is particularly important for SEFs that use anRFQ System, including an RFQ System with a voicecomponent. For such SEFs, the accurate timestamping of both their Order Book and RFQ Systemactivity is critical for ensuring both that the SEFitself has a robust audit trail system and that theCommission is able to monitor the SEF’s adherenceto part 37’s Order Book-RFQ System integrationrequirements.

rule violations. However, as discussedabove, the Commission has removed therequirement for SEFs to offer indicativequote functionality, which shouldreduce the costs of complying with theaudit trail requirements.539

In response to WMBAA’s commentabout the flexibility of audit trailrequirements to accommodate various

methods of execution, the Commissionnotes that proposed § 37.205(b) did notdiscriminate based on the method of execution. Given the Commission’sclarification that a SEF may utilize anymeans of interstate commerce inproviding the execution methods in§ 37.9(a)(2)(i)(A) or (B), the Commissionemphasizes that no matter how anindication of interest, request for quote,or order is communicated or a trade isexecuted, an audit trail that satisfies therequirements set forth in § 37.205 must

be created.The Commission is also making

certain conforming changes to§ 37.205(b)(1) to harmonize itsprovisions with the Commission’sdetermination that a SEF may utilizeany means of interstate commerce inproviding the execution methods in§ 37.9(a)(2)(i)(A) or (B). First, theCommission is adding ‘‘indications of interest’’ to the items that must beimmediately captured in the audit trailpursuant to § 37.205(b)(1). Second,while proposed § 37.205(b)(1) requiredthat all executable orders or requests forquotes ‘‘be immediately entered into thetrading system or platform,’’§ 37.205(b)(1) as adopted requires thatsuch information be immediately‘‘captured in the audit trail.’’ Thisapproach more accurately reflects theintent of § 37.205, whose purpose is toensure an adequate audit trail, ratherthan to address the operation of a SEF’strading system or platform.

Accordingly, the final rules in§ 37.205(b)(1) include conformingchanges that remove the reference inproposed §37.205(b)(1) to orders orrequests for quotes ‘‘that areexecutable,’’ and also remove thequalification that a SEF’s obligation tocapture information in the audit trail is

dependent on whether the SEF permitsintermediation. Finally, the final rulesremove the additional audit trailrequirement in proposed §37.205(b)(1)for orders and requests for quotes thatcannot be immediately entered into thetrading system or platform. Theseclarifications are consistent with theCommission’s intention in §37.205(a)that a SEF’s audit trail ‘‘capture and

retain all audit trail data necessary todetect, investigate, and preventcustomer and market abuses.’’ It is theCommission’s intent throughout§ 37.205 to ensure that all SEFs’ audittrails are equally comprehensive andeffective regardless of the means of interstate commerce that a SEF mayprovide to meet the execution methods

in §37.9(a)(2)(i)(A) or (B).Although §37.205 sets forth a unified

set of audit trail requirements for allmethods of execution, the Commissionnotes that a SEF, for example, thatutilizes the telephone as a means of interstate commerce in providing theexecution methods in §37.9(a)(2)(i)(A)or (B) may comply with the audit trailrequirements by utilizing differenttechnologies than a SEF that does notutilize the telephone. For example, theCommission believes that a SEF thatutilizes the telephone may comply withthe audit trail requirements in

§ 37.205(a) for oral communications byrecording all such communications thatrelate to swap transactions, and allcommunications that may subsequentlyresult in swap transactions. Suchrecordings must allow forreconstruction of communications

between the SEF and its customers;reconstruction of internal and externalcommunications involving SEFemployees who are ascertaining orproviding indications of interest,requests for quotes, or orders;reconstruction of executed transactions;provide evidence of any rule violations;track a customer’s order; and capture

order and trade data as required under§ 37.205(a).

The Commission also believes that aSEF that utilizes the telephone maycomply with the original sourcedocument requirement in § 37.205(b)(1)for oral communications by retainingeach recording’s original media. Bystoring the recordings in a digitaldatabase and supplementing it withadditional data as necessary, theCommission believes that a SEF thatutilizes the telephone may comply withthe transaction history databaserequirement in §37.205(b)(2) for oral

communications. Additionally, theCommission believes that a SEF thatutilizes the telephone may comply withthe electronic analysis capability in§ 37.205(b)(3) for oral communications

by ensuring that its digital database of recordings is capable of being searchedand analyzed. The Commission notes,however, that §37.205(b) does notestablish an affirmative requirement tocreate recordings of oralcommunications if the audit trailrequirements are met through othermethods. The discussion above

regarding the applicability of audit trailrequirements to SEFs that utilize thetelephone in providing the executionmethods in § 37.9(a)(2) applies equallyto SEFs that use non-telephonic meansof communication (e.g., instantmessaging or email). In all cases, theoperative requirement is to capture inthe audit trail and the transactionhistory database the totality of communications that could be necessaryto detect, investigate, and preventcustomer and market abuses.

The Commission acknowledges thecomment by Better Markets regardingtime-stamping audit trail records atintervals that are consistent with thecapabilities of high-frequency traders.While the audit trail rules do not specifythe granularity of time-stamped data,the Commission believes that the audittrail rules adopted herein, particularlythe requirements that a SEF retain and

maintain all data necessary to permit itto reconstruct trading, will help toensure that audit trail records are time-stamped with the granularity necessaryto reconstruct trades and investigatepossible trading violations, includingfor high-frequency trading.540

(3) §37.205(c)—Enforcement of AuditTrail Requirements

Proposed §37.205(c)(1) required thata SEF conduct reviews, at leastannually, of its members and marketparticipants to verify their compliancewith the SEF’s audit trail and

recordkeeping requirements. Proposed§ 37.205(c)(1) also set forth minimumreview criteria. Proposed §37.205(c)(2)required that a SEF develop a programfor effective enforcement of its audittrail and recordkeeping requirements,including a requirement that a SEF levymeaningful sanctions when deficienciesare found. Proposed § 37.205(c)(2) alsostated that sanctions may not includemore than one warning letter for thesame violation within a rolling twelve-month period.


Some commenters stated that annualaudits are unnecessary and unduly


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


2011).544Tradeweb Comment Letter at 6 (Jun. 3, 2011).

545See, e.g., discussion above under§ 37.203(f)(5)—Warning Letters in the preamble.

546Core Principles and Other Requirements forDesignated Contract Markets, 77 FR at 36704.

547CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B).548MarketAxess Comment Letter at 23 (Mar. 8,

2011); ABC/CIEBA Comment Letter at 11 (Mar. 8,2011); FXall Comment Letter at 12 (Mar. 8, 2011);ICAP Comment Letter at 5–6 (Mar. 8, 2011); StateStreet Comment Letter at 5 (Mar. 8, 2011).

549FXall Comment Letter at 12 (Mar. 8, 2011).550MarketAxess Comment Letter at 23 (Mar. 8,

2011), WMBAA Comment Letter at 24 (Mar. 8,2011); FXall Comment Letter at 12 (Mar. 8, 2011).

551FXall Comment Letter at 12 (Mar. 8, 2011);

ICAP Comment Letter at 6 (Mar. 8, 2011); ReutersComment Letter at 4 (Mar. 8, 2011); WMBAAComment Letter at 23 (Mar. 8, 2011); State StreetComment Letter at 5 (Mar. 8, 2011).

552Tradeweb Comment Letter at 10 (Mar. 8,2011). Parity Energy also commented that theproposed disciplinary rules will imposeunnecessary costs and create unnecessaryduplication and the possibility of conflicting rules.Parity Energy Comment Letter at 4 (Mar. 25, 2011).

553CEA section 5h(f)(2)(B); 7 U.S.C. 7b–3(f)(2)(B).554The Commission is also revising §37.206 to

include the term ‘‘member’’ in addition to the term‘‘market participant’’ in order to provide greaterdetail and clarity. The Commission notes, asdescribed above in §37.200, that the term ‘‘marketparticipant’’ encompasses SEF ‘‘members.’’

burdensome.541 CME commented thatannual audits of all SEF marketparticipants would be costly andunproductive, and should instead applyat the clearing firm level.542 MarketAxess recommended that theCommission require a single entity orself-regulatory organization, such asFINRA or NFA, to conduct the audit of

each SEF market participant.543 Tradeweb commented that the proposedannual audit review requirement is notrequired of DCMs and, as such, shouldnot be required of SEFs.544


The Commission is adopting§ 37.205(c) as proposed, subject tocertain modifications as discussed

below. The Commission disagrees withcommenters who assert that the annualaudit review requirement isunnecessary, unduly burdensome,costly, and unproductive. Through itsexperience with DCMs and DCOs, theCommission has learned that sampling-

based reviews of audit trail andrecordkeeping requirements areinadequate to ensure compliance withaudit trail rules. The Commission

believes that the requirements under§ 37.205(c) are necessary to ensure thatSEFs have accurate and consistentaccess to all data needed to reconstructall transactions in their markets and toprovide evidence of customer andmarket abuses. Absent reliable audittrail data, a SEF’s ability to detect orinvestigate customer or market abusesmay be severely diminished.

However, in response to commenters’concerns that the rule is burdensome,the Commission is narrowing the scopeof the proposed rule by removing thereference to ‘‘market participants’’ andinstead stating that the annual auditreview requirement only applies tomembers and those persons and firmsthat are subject to the SEF’srecordkeeping rules. As a result of thisrevision, the Commission declines toadopt CME’s recommendation to requireannual audit trail reviews only at theclearing firm level.

The Commission is maintainingproposed §37.205(c)(2) as a rule toensure that SEFs impose meaningfulsanctions for violations of audit trailand recordkeeping rules. However, theCommission is revising the rule toclarify that the limit on warning lettersonly applies where a SEF’s compliance

staff finds an actual rule violation,rather than just the suspicion of aviolation. This change is consistent withthe revisions in other sectionsdiscussing warning letters.545

In response to MarketAxess’srecommendation that a single entityconduct the audit of each SEF marketparticipant, the Commission believes

that a SEF can monitor marketparticipants on its own platformwithout relying upon a single cross-market self-regulatory organization.However, a SEF may use a regulatoryservice provider pursuant to § 37.204 toassist it in complying with therequirements under §37.205(c).

In response to Tradeweb’s commentthat the annual audit reviewrequirement is not required of DCMs,the Commission notes that it adopted asimilar requirement for DCMs under§ 38.553 of the Commission’sregulations, to apply to all members and

persons and firms subject to the DCM’srecordkeeping rules.546 TheCommission believes that similarrequirements are appropriate because,as noted above, SEFs, like DCMs, musthave accurate and consistent access toall data needed to reconstruct alltransactions in their markets, includingindications of interest, requests forquotes, orders, and trades, and to detect,investigate, and prevent customer andmarket abuses.

(g) §37.206—Disciplinary Proceduresand Sanctions

(1) §37.206—Disciplinary Procedures

and SanctionsProposed §37.206 addressed SEF

Core Principle 2’s requirement that SEFsestablish and enforce trading, tradeprocessing, and participation rules todeter abuse, and have the capacity toinvestigate and enforce such abuses.547 Proposed §37.206 provided that SEFsmust establish trading, trade processing,and participation rules that will deterabuses and have the capacity to enforcesuch rules through prompt and effectivedisciplinary action.


Some commenters generally statedthat the proposed disciplinaryprocedures go beyond the statute andintent of Congress.548 In this regard,

FXall stated that, unlike DCMs, retailcustomers will not be participants onSEFs; therefore, the same level of protection afforded to DCM participantsis not required for SEFs.549 Somecommenters recommended that theproposed disciplinary proceduresshould be streamlined through the useof a staff summary fine program.550

Some commenters also requested thatSEFs be granted greater flexibility toestablish their own disciplinaryprocedures.551 Tradeweb stated that theproposed disciplinary procedureswould impose significant costs on SEFsand should be contracted to a central,third-party self-regulatoryorganization.552


The Commission’s evaluation of public comments with respect toproposed §37.206 is based on itsunderstanding that a SEF’s obligation toestablish adequate disciplinary rules isimplicit in the statutory language of Core Principle 2, which requires, inpart, that a SEF establish and enforcetrading, trade processing, andparticipation rules to deter abuse andhave the capacity to investigate andenforce such rules.553 The Commissionalso takes note of public commentsrequesting greater flexibility in theapplication of SEF disciplinary rules.Accordingly, consistent with both itsstatutory mandate and its evaluation of the public comments received, theCommission is adopting elements of § 37.206 as proposed, while also moving

to guidance or eliminating other parts of the proposed rules.554

The Commission believes that thespecific disciplinary rules retained inthe final rules are those that areessential to the promotion of marketintegrity by ensuring that SEF marketsare free of fraud or abuse, and alsohelping to provide basic proceduralfairness for SEF disciplinary


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555Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1225 n. 73.

556The Commission also believes that guidance ismore appropriate for the SEF disciplinaryprocedures because the SEF core principles do nothave a parallel to DCM Core Principle 13, whichspecifically discusses disciplinary procedures.

557See Adaptation of Regulations to IncorporateSwaps, 77 FR 66288 (Nov. 2, 2012). Section 1.3(ee)states that a self-regulatory organization ‘‘means acontract market (as defined in §1.3(h)), a swapexecution facility (as defined in §1.3(rrrr)), or aregistered futures association under section 17 of the Act.’’ Id. at 66318.

558Section 40.9(c)(3)(ii), as proposed, in theseparate release titled Requirements for DerivativesClearing Organizations, Designated ContractMarkets, and Swap Execution Facilities Regardingthe Mitigation of Conflicts of Interest, provided that‘‘Each Disciplinary Panel shall include at least oneperson who would not be disqualified from servingas a Public Director by §1.3(ccc)(1)(i)–(vi) and (2)of this chapter (a ‘‘Public Participant’’). Such PublicParticipant shall chair each Disciplinary Panel. Inaddition, any registered entity specified inparagraph (c)(3)(i) of this section shall adopt rulesthat would, at a minimum: (A) Further preclude anygroup or class of participants from dominating orexercising disproportionate influence on aDisciplinary Panel and (B) Prohibit any member of a Disciplinary Panel from participating indeliberations or voting on any matter in which themember has a financial interest.’’ 75 FR 63732,63752 (proposed Oct. 18, 2010).

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

respondents. While the SEF NPRMnoted that the SEF disciplinaryprocedures parallel those for DCMs,555 the Commission has determined that thelevel of protection offered by theproposed rules was more appropriate formarkets that include retail participants,in contrast to SEFs, whose participantsare limited to ECPs.556 Consequently,

the Commission is moving to guidancenumerous procedural protections setforth in the proposed rules that are moretailored to retail participants, includingthe requirements relating to the issuanceof a notice of charges, and arespondent’s right to representation,right to answer charges, and right torequest a hearing.

The remaining final rules provide anessential framework that theCommission believes adequatelyensures the effectiveness of a SEF’sdisciplinary program. Accordingly, theCommission is maintaining the

proposed disciplinary rules thatrepresent the most critical componentsof a disciplinary program, including therequirements that a SEF: (1) Establishdisciplinary panels that meet certaincomposition requirements; (2) levymeaningful disciplinary sanctions todeter recidivism; and (3) issue no morethan one warning letter per rolling 12-month period for the same violation bythe same respondent. The Commission

believes that with these modifications,§ 37.206 strikes the appropriate balance

between providing the flexibilityrequested by the commenters andensuring that SEFs comply with their

statutory obligation under CorePrinciple 2.

Some commenters recommended thatthe proposed disciplinary proceduresshould be streamlined through the useof a summary fine program. TheCommission believes that, whilesummary fines may be appropriate forsome disciplinary matters, such asrecordkeeping violations, manydisciplinary matters are dynamic andrequire the balancing of multiple uniquefacts and circumstances, which cannot

be addressed through a summary fineprogram. Therefore, the Commission

declines to adopt a summary fineprogram in lieu of disciplinaryprocedures.

In response to Tradeweb’s commentabout contracting out certain aspects of a SEF’s disciplinary functions to acentral third-party, the Commission

notes that it views SEFs as SROs,557 with all the attendant self-regulatoryresponsibilities to establish and enforcerules necessary to promote marketintegrity and the protection of marketparticipants. Such responsibilitiesinclude the adherence to, andmaintenance of, disciplinaryprocedures. The Commission notes that

a SEF may utilize the services of a third-party regulatory service provider forassistance in performing its self-regulatory functions, as provided for in§ 37.204.

(2) §37.206(a)—Enforcement Staff

Proposed §37.206(a) required that aSEF establish and maintain sufficientenforcement staff and resources toeffectively and promptly prosecutepossible rule violations within the SEF’sjurisdiction. Proposed §37.206(a) alsorequired a SEF to monitor the size andworkload of its enforcement staff

annually. In addition, proposed§ 37.206(a) included provisions toensure the independence of theenforcement staff and to help promotedisciplinary procedures that are free of potential conflicts of interest.


In response to the general commentsrequesting greater flexibility regardingdisciplinary procedures, theCommission is moving all of therequirements of proposed §37.206(a) toguidance, except for the criticalrequirement that a SEF maintainsufficient enforcement staff and

resources. The Commission believesthat sufficient enforcement staff andresources are essential to the effectiveperformance of a SEF’s disciplinaryprogram and are necessary to complywith Core Principle 2. Without asufficient enforcement staff andresources, a SEF would be unable topromptly investigate and adjudicatepotential rule violations and deterfuture violations. To maintainconsistency with the revisions toproposed § 37.203(c)(2), theCommission is deleting from the rulethe reference that a SEF monitor the size

and workload of its enforcement staff annually to provide greater flexibility toSEFs in determining their approach tomonitoring their enforcement resources.Nonetheless, the Commission believesthat a SEF’s obligation to monitor itsenforcement staff and resources is

implicit in the requirement to maintainadequate enforcement staff andresources.

(3) §37.206(b)—Disciplinary Panels

Proposed §37.206(b)(1) required aSEF to establish one or more ReviewPanels and one or more Hearing Panels.The composition of both panels was

required to meet the compositionrequirements of proposed§ 40.9(c)(3)(ii) 558 and could not includeany members of the SEF’s compliancestaff or any person involved inadjudicating any other stage of the sameproceeding. Proposed §37.206(b)(2)provided that a Review Panel must beresponsible for determining whether areasonable basis exists for finding aviolation of SEF rules and forauthorizing the issuance of a notice of charges. If a notice of charges is issued,proposed §37.206(b)(3) provided that aHearing Panel must be responsible foradjudicating the matter and issuingsanctions.


MetLife supported the proposed ruleand agreed that SEFs should maintain aclear separation between disciplinary

bodies that recommend the issuance of charges and those responsible foradjudicating matters.559 CME stated thatthe Commission should not require aprescriptive approach to disciplinarypanels, as SEFs may develop structuresthat clearly satisfy the objective of thecore principle, but that may notprecisely comply with the rule text.560

CME illustrated two practices it believed may be precluded by the textof proposed §37.206(b): (1) CME’sMarket Regulation staff determineswhether certain non-egregious ruleviolations merit referral to a ReviewPanel and they issue warning letters onan administrative basis; and (2) CME’shearing panel adjudicates a disciplinarycase prior to the issuance of charges


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561 Id.562The Commission notes that it is replacing

specific panel names (i.e., Review Panel andHearing Panel) with a generic reference to the‘‘disciplinary panel’’ throughout part 37.

563CME Comment Letter at 35 (Feb. 22, 2011).564 Id. While the Commission largely agrees with

CME’s comment, the Commission directs interestedparties to § 37.203(f) for a further discussion of therequired components of investigation reports.

565As mentioned above, the Commission ismoving paragraph (3) of proposed §37.206(c) to thetext of proposed §37.206(d) that will now beincluded as guidance.

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

pursuant to a supported settlementagreement.561


The Commission is adopting§ 37.206(b) as proposed, subject tocertain modifications described below.The Commission consideredcommenters’ views and believes that the

proposed rule can be modified toprovide additional flexibility withoutdiminishing its purpose. Accordingly,final § 37.206(b) will require SEFs tohave one or more disciplinary panels,without imposing a specific requirementfor SEFs to maintain a Review Panel anda Hearing Panel.562 However, evenunder this single-panel approach,individuals who determine to issuecharges in a particular disciplinarymatter may not also adjudicate thematter. Therefore, final §37.206(b)permits flexibility in the structure of SEFs’ disciplinary bodies, but not in the

basic prohibition, supported by MetLife,against vesting the same individualswith the authority to both issue andadjudicate charges in the same matter.

The modifications reflected in final§ 37.206(b), together with the revisionsmade to the text of proposed §37.206(d)that will now be included as guidance,as discussed below, provide additionalflexibility by permitting SEFs to rely ontheir authorized compliance staff, ratherthan on a disciplinary panel, to issuedisciplinary charges. However, theCommission notes that the adjudicationof charges must still be performed by adisciplinary panel.

Finally, the Commission is adoptingthe composition and conflictsrequirements for disciplinary panelswith one modification, by replacing thereference to §40.9(c)(3)(ii) with areference to the more general ‘‘part 40of this chapter’’ to accommodate any re-enumeration that may occur withrespect to proposed §40.9(c)(3)(ii).

(4) §37.206(c)—Review of InvestigationReport

Proposed §37.206(c) required aReview Panel to promptly review aninvestigation report received pursuantto proposed §37.203(f)(3), and to takeone of the following actions within 30days of receipt: (1) Promptly directcompliance staff to conduct furtherinvestigation if the Review Paneldetermined that additional investigationor evidence was needed, (2) direct thatno further action be taken if the ReviewPanel determined that no reasonable

basis existed for finding a violation orthat prosecution was unwarranted, or(3) direct that the person or entityalleged to have committed a violation beserved with a notice of charges if theReview Panel determined that areasonable basis existed for finding aviolation and adjudication waswarranted.


CME agreed that an investigationreport should include the subject’sdisciplinary history; however, CMEdisagreed with the requirement inproposed §37.203(f) that thedisciplinary history be included in theversion of the investigation report sentto the Review Panel.563 CME believedthat the disciplinary history should not

be considered by the Review Panel at allwhen determining whether to issueformal charges, arguing that aparticipant’s disciplinary history is notrelevant to the consideration of whetherit committed a further violation of SEFrules.564


In response to the general commentsrequesting greater flexibility, theCommission is eliminating all of proposed §37.206(c) except forparagraph (3) of the proposed rule. Inaddition, the Commission is addinglanguage to paragraph (3) to provideSEFs with the flexibility to allowauthorized compliance staff to reviewan investigation report and determinewhether a notice of charges should be

issued in a particular matter. TheCommission is also revising the text of paragraph (3) to follow the single-panelapproach provided for in § 37.206(b).Proposed §37.206(c)(3), with therevisions described above, is beingincorporated into proposed §37.206(d).As described below, all of proposed§ 37.206(d) is being moved to theguidance in appendix B to part 37.

(5) §37.206(d)—Notice of Charges

Proposed §37.206(d) described theminimally acceptable contents of anotice of charges issued by a ReviewPanel. Specifically, proposed

§ 37.206(d) provided that a notice of charges must adequately state the acts,conduct, or practices in which therespondent is alleged to have engaged;state the rule(s) alleged to have beenviolated; advise the respondent that heis entitled, upon request, to a hearing onthe charges; and prescribe the period

within which a hearing may berequested. Paragraphs (1) and (2) of theproposed rule permitted a SEF to adoptrules providing that: (1) The failure torequest a hearing within the timeprescribed in the notice, except for goodcause, may be deemed a waiver of theright to a hearing; and (2) the failure toanswer or expressly deny a charge may

be deemed to be an admission of suchcharge.


Although no comments were receivedon proposed § 37.206(d), theCommission believes that it can provideSEFs with additional flexibility bymoving the entire rule to the guidancein appendix B to part 37.565 Moreover,since paragraphs (1) and (2) of proposed§ 37.206(d) allowed, but did not require,a SEF to issue rules regarding failures torequest a hearing and expressly answeror deny a charge, the Commission

believes that the language in theseparagraphs is better suited as guidancerather than a rule.

(6) §37.206(e)—Right to Representation

Proposed §37.206(e) provided for arespondent’s right, upon receiving anotice of charges, to be represented bylegal counsel or any other representativeof its choosing in all succeeding stagesof the disciplinary process.


CME commented that this rule should be limited to avoid conflicts of interestin representation and, accordingly,

requested that the rule be revised toclarify that a respondent may not berepresented by: (1) A member of theSEF’s disciplinary committees; (2) amember of the SEF’s Board of Directors;(3) an employee of the SEF; or (4) aperson substantially related to theunderlying investigation, such as amaterial witness or other respondent.566


The Commission is moving proposed§ 37.206(e) in its entirety to theguidance in appendix B to part 37,subject to the following modification.The Commission is amending the

language to incorporate CME’srecommendation. The guidance statesthat upon being served with a notice of charges, a respondent should have theright to be represented by legal counselor any other representative of itschoosing in all succeeding stages of thedisciplinary process, except by any


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567These aspects were that: (1) The answer must be in writing and include a statement that therespondent admits, denies, or does not have and isunable to obtain sufficient information to admit ordeny each allegation; (2) failure to file an answeron 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 chargeshall be deemed to be an admission of such charge.

568The Commission notes that the text that willnow be included as guidance is being modified toreflect the single-panel approach adopted in§ 37.206(b), replacing specific panel names with ageneric reference to the ‘‘disciplinary panel.’’

569The Commission is revising the proposed ruleto reflect the single-panel approach adopted in§ 37.206(b), replacing specific panel names with ageneric reference to the ‘‘disciplinary panel.’’ TheCommission is also removing the references toproposed §§37.206(g) and (j) given that theCommission is moving proposed §37.206(g) toguidance, and either eliminating or moving certainprovisions of proposed §37.206(j) to guidance.

570The Commission notes that the text that willnow be included as guidance is being modified toreflect the single-panel approach adopted in§ 37.206(b), replacing specific panel names with ageneric reference to the ‘‘disciplinary panel.’’

member of the SEF’s board of directorsor disciplinary panel, any employee of the SEF, or any person substantiallyrelated to the underlying investigations,such as a material witness orrespondent. The Commission believesthat this revision appropriatelyaddresses the conflicts of interest noted

by CME.

(7) §37.206(f)—Answer to Charges

Proposed §37.206(f) required that arespondent be given a reasonable periodof time to file an answer to a notice of charges. The proposed rule alsoprovided that the rules of a SEF mayprescribe certain aspects of the answer,which were enumerated in paragraphs(1) through (3).567


Although no comments were receivedon proposed § 37.206(f), theCommission is moving the entire rule to

the guidance in appendix B to part 37,with certain modifications, in order toprovide SEFs with greater flexibility toadopt their own disciplinaryprocedures. The Commission is alsocondensing the guidance by replacingparagraphs (1) through (3) with languagemaking clear that any rules adopted bya SEF governing the requirements andtimeliness of a respondent’s answer to anotice of charges should be ‘‘fair,equitable, and publicly available.’’

(8) §37.206(g)—Admission or FailureTo Deny Charges

Proposed §37.206(g) provided that aSEF may adopt rules whereby arespondent who admits or fails to denyany of the charges alleged in the noticeof charges may be found by the HearingPanel to have committed the violationscharged. If a SEF adopted such rules,paragraphs (1) through (3) of theproposed rule provided that: (1) TheHearing Panel must impose a sanctionfor each violation found to have beencommitted; (2) the Hearing Panel mustpromptly notify the respondent inwriting of any sanction to be imposedand advise the respondent that it mayrequest a hearing on such sanction

within a specified period of time; and(3) the rules of the SEF may provide thatif the respondent fails to request ahearing within the period of timespecified in the notice, then the

respondent will be deemed to haveaccepted the sanction.


Although the Commission did notreceive comments on proposed§ 37.206(g), the Commission is movingthe entire rule, with certainmodifications, to the guidance in

appendix B to part 37.568

Given thatproposed §37.206(g) allowed, but didnot require, a SEF to issue rulesregarding a respondent’s admission orfailure to deny charges, the Commission

believes that the proposed rule is bettersuited as guidance rather than a rule.The Commission also believes thatadopting the proposed rule as guidance,rather than a rule, will provide SEFsgreater flexibility in administering theirobligations, consistent with the generalcomments seeking the same.Furthermore, the Commission ismodifying the text of proposed§ 37.206(g)(2) that will now be includedas guidance to clarify that a respondentmay request a hearing ‘‘within theperiod of time, which should be statedin the notice.’’

(9) § 37.206(h)—Denial of Charges andRight to Hearing

Proposed §37.206(h) required that inevery instance where a respondent hasrequested a hearing on a charge that isdenied, or on a sanction set by theHearing Panel pursuant to proposed§ 37.206(g), the respondent must begiven the opportunity for a hearing inaccordance with the requirements of

proposed §37.206(j). Proposed§ 37.206(h) also gave SEFs the option toadopt rules that provided, except forgood cause, the hearing must beconcerned only with those chargesdenied and/or sanctions set by theHearing Panel under proposed§ 37.206(g) for which a hearing has beenrequested.


The Commission received nocomments on proposed § 37.206(h), butis moving the entire rule, with certainmodifications, to the guidance inappendix B to part 37.569 In order to

provide SEFs with further flexibility,

even within the guidance, theCommission is also removing theproposed rule’s reference to a SEF’sability to limit hearings to only thosecharges denied and/or sanctions set bythe Hearing Panel under proposed§ 37.206(g) for which a hearing has beenrequested.

(10) §37.206(i)—Settlement OffersProposed §37.206(i) provided the

procedures that a SEF must follow if itpermits the use of settlements to resolvedisciplinary cases. Paragraph (1) of theproposed rule stated that the rules of aSEF may permit a respondent to submita written offer of settlement any timeafter the investigation report iscompleted. The proposed rule alsopermitted the disciplinary panelpresiding over the matter to accept theoffer of settlement, but prohibited thepanel from altering the terms of the offerunless the respondent agreed. In

addition, paragraph (2) of the proposedrule provided that the rules of the SEFmay allow a disciplinary panel topermit the respondent to accept asanction without admitting or denyingthe rule violations upon which thesanction is based.

Paragraph (3) of the proposed rulestated that a disciplinary panelaccepting a settlement offer must issuea written decision specifying the ruleviolations it has reason to believe werecommitted, and any sanction imposed,including any order of restitution wherecustomer harm has been demonstrated.

Paragraph (3) also provided that if anoffer of settlement is accepted withoutthe agreement of a SEF’s enforcementstaff, then the decision must adequatelysupport the Hearing Panel’s acceptanceof the settlement. Finally, paragraph (4)of the proposed rule allowed arespondent to withdraw his or her offerof settlement at any time before finalacceptance by a disciplinary panel. If anoffer is withdrawn after submission, oris rejected by a disciplinary panel, therespondent must not be deemed to havemade any admissions by reason of theoffer of settlement and must not beotherwise prejudiced by havingsubmitted the offer of settlement.


Although the Commission received nocomments on proposed § 37.206(i), theCommission is moving the entire rule,with certain modifications, to theguidance in appendix B to part 37.570


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572The Commission is renumbering proposed§ 37.206(j) to §37.206(c). The Commission is also

revising the proposed rule to reflect the single-panelapproach adopted in §37.206(b), replacing specificpanel names with a generic reference to the‘‘disciplinary panel.’’ The Commission is alsorevising the reference to §37.206(l) in proposed§ 37.206(j)(1)(vi) given that it is moving proposed§ 37.206(l) to guidance.

573The Commission is renumbering proposed§ 37.206(k) to §37.206(d). The Commission is alsorevising the reference to §37.206(j) in proposed§ 37.206(k) given that the Commission has eithereliminated or moved to guidance many of theprovisions of proposed §37.206(j). The Commissionis also revising the proposed rule to reflect thesingle-panel approach adopted in §37.206(b),replacing specific panel names with a genericreference to the ‘‘disciplinary panel.’’

574The Commission notes that the reference to§ 40.9(c)(iv) in the proposed rule was a technicalerror. Instead, proposed §37.206(l) should havereferenced the composition requirements of anappellate panel outlined in proposed

§ 40.9(c)(3)(iii). However, to accommodate any re-enumeration that may occur with respect toproposed §40.9(c)(3)(iii), the Commission isreplacing the mistaken reference to §40.9(c)(iv)with a more general reference to part 40 in theguidance text. See Requirements for DerivativesClearing Organizations, Designated ContractMarkets, and Swap Execution Facilities Regardingthe Mitigation of Conflicts of Interest, 75 FR 63732,63752 (proposed Oct. 18, 2010). The Commission isalso revising the reference to §37.206(k) inproposed §37.206(l)(4) to §37.206(d) given therenumbering in §37.206. Finally, the Commissionis revising the proposed rule to reflect the single-panel approach adopted in §37.206(b), replacingspecific panel names with a generic reference to the‘‘disciplinary panel.’’

The Commission believes that adoptingthe proposed rule as guidance, ratherthan a rule, will provide SEFs greaterflexibility in administering theirobligations, consistent with the generalcomments seeking the same.Furthermore, the Commission isrevising the guidance text to make itconsistent with its modifications to the

customer restitution provisions adopted below with respect to proposed§ 37.206(n).

(11) § 37.206(j)—Hearings

Proposed §37.206(j) required a SEF toadopt rules that provide certainminimum procedural safeguards for anyhearing conducted pursuant to a noticeof charges. In general, proposed§§ 37.206(j)(1)(i) through (j)(1)(vii)required the following: (i) A fairhearing; (ii) authority for a respondentto examine evidence relied on byenforcement staff in presenting the

charges; (iii) the SEF’s enforcement andcompliance staffs to be parties to thehearing and the enforcement staff topresent its case on the charges andsanctions; (iv) the respondent to beentitled to appear personally at thehearing, to cross-examine and callwitnesses, and to present evidence; (v)the SEF to require persons within itsjurisdiction who are called as witnessesto participate in the hearing andproduce evidence; (vi) a copy of thehearing be made and be a part of therecord of the proceeding if therespondent requested the hearing; and(vii) the rules of the SEF may provide

that the cost of transcribing the record be borne by the respondent in certaincircumstances. Additionally, proposed§ 37.206(j)(2) specified that the rules of the SEF may provide that a sanction besummarily imposed upon any personwithin its jurisdiction whose actionsimpede the progress of a hearing.


CME recommended that proposed§ 37.206(j)(1)(ii) be revised so that arespondent may not access protectedattorney work product, attorney-clientcommunications, and investigative work

product (e.g., investigation andexception reports).571


The Commission is partially adoptingproposed §37.206(j), and is eithereliminating or moving to guidance theremaining portion of the rule. TheCommission is maintaining as a rule theprovisions requiring the following: (1)Hearings must be fair; and (2) if arespondent requested a hearing, a copy

of the hearing be made and be a part of the record of the proceeding.572 TheCommission is eliminating proposed§ 37.206(j)(1)(vii), a discretionary rulethat in certain cases allowed for the costof transcribing the record of the hearingto be borne by the respondent. TheCommission is moving the remainder of proposed §37.206(j) to the guidance inappendix B to part 37. The Commission

believes that these revisions areappropriate given commenters’ requestsfor greater flexibility to establish theirown disciplinary procedures.

The Commission agrees with CME’scomment that a SEF should bepermitted to withhold certaindocuments from a respondent in certaincircumstances. Therefore, theCommission is revising the text of proposed §37.206(j)(1)(ii), which willnow be included in guidance, to providethat a SEF may withhold documents

that: (i) Are privileged or constituteattorney work product; (ii) wereprepared by an employee of the SEF butwill not be offered in evidence in thedisciplinary proceedings; (iii) maydisclose a technique or guideline usedin examinations, investigations, orenforcement proceedings; or (iv)disclose the identity of a confidentialsource.

(12) § 37.206(k)—Decisions

Proposed §37.206(k) required aHearing Panel, promptly following ahearing conducted in accordance with

proposed §37.206(j), to render a writtendecision based upon the weight of theevidence and to provide a copy to therespondent. Paragraphs (1) through (6)detailed the items to be included in thedecision.


The Commission received nocomments on proposed § 37.206(k) andis adopting the rule as proposed withcertain non-substantive clarifications.573

(13) §37.206(l)—Right to Appeal

Proposed §37.206(l) provided theprocedures that a SEF must follow inthe event that the SEF’s rules permit anappeal. For SEFs that permit appeals,the language in paragraphs (1) through(4) of proposed §37.206(l) generallyrequired the SEF to: (1) Establish anappellate panel; (2) ensure that theappellate panel composition isconsistent with §40.9(c)(iv) and notinclude any members of the SEF’scompliance staff or any person involvedin adjudicating any other stage of thesame proceeding; (3) conduct the appealsolely on the record before the HearingPanel, except for good cause shown; and(4) issue a written decision of the boardof appeals and provide a copy to therespondent.


Although the Commission received nocomments on proposed § 37.206(l), the

Commission is moving the entire rule tothe guidance in appendix B to part37.574 Given that proposed §37.206(l)allowed, but did not require, a SEF toissue rules regarding a respondent’sright to appeal, the Commission believesthat the proposed rule is better suited asguidance rather than a rule. TheCommission also believes that adoptingthe proposed rule as guidance, ratherthan a rule, will provide SEFs greaterflexibility in administering theirobligations, consistent with the generalcomments seeking the same.

(14) §37.206(m)—Final Decisions

Proposed §37.206(m) required thateach SEF establish rules setting forthwhen a decision rendered under§ 37.206 will become the final decisionof the SEF.


Although the Commission received nocomments on proposed § 37.206(m), theCommission is moving the entire rule to


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575WMBAA Comment Letter at 23 (Mar. 8, 2011).576 Id.577 Id. at 24.578The Commission is renumbering proposed

§ 37.206(n) to § 37.206(e).579The Commission notes that commenters to the

DCM rulemaking requested this change and, afterconsidering the comments, the Commission believes that this revision should also be applicableto SEFs. Core Principles and Other Requirementsfor Designated Contract Markets, 77 FR at 36654–55.

580Section 37.2 states that a SEF shall complywith part 9 of the Commission’s regulations.

581NFA’s Background Affiliation StatusInformation Center database is available at http:// www.nfa.futures.org/basicnet/ .



§ 37.206(o) to §37.206(f). The Commission is alsoretitling this section as ‘‘Warning letters.’’

585For purposes of this rule, the Commissiondoes not consider a ‘‘reminder letter’’ or such othersimilar letter to be any different than a warningletter.

586See Core Principles and Other Requirementsfor Swap Execution Facilities, 76 FR at 1224.

the guidance in appendix B to part 37.The Commission believes that adoptingthe proposed rule as guidance ratherthan a rule provides a SEF withadditional flexibility to establishdisciplinary procedures to meet itsobligations pursuant to Core Principle 2.

(15) §37.206(n)—Disciplinary Sanctions

Proposed §37.206(n) required thatdisciplinary sanctions imposed by a SEFmust be commensurate with theviolations committed and must beclearly sufficient to deter recidivism orsimilar violations by other marketparticipants. In addition, the proposedrule required that a SEF take intoaccount a respondent’s disciplinaryhistory when evaluating appropriatesanctions. The proposed rule furtherrequired that in the event of demonstrated customer harm, anydisciplinary sanction must include fullcustomer restitution.

(i) Summary of CommentsWMBAA recommended that any

limitation of a market participant’saccess to a SEF imposed in response toa rule violation should be recognizedand enforced consistently among allSEFs.575 WMBAA also recommendedthat any disciplinary sanction imposed

by a SEF should be published and madeavailable to market participants.576 Suchrequirements, WMBAA argued, arenecessary in order to prevent marketparticipants from gaming the systemand maintaining access to markets afterviolations.577


The Commission is adoptingproposed §37.206(n), subject to certainmodifications.578 The Commission isrevising proposed §37.206(n) to clarifythat a respondent’s disciplinary historyshould be taken into account in allsanction determinations, includingsanctions imposed pursuant to anaccepted settlement offer. Furthermore,the Commission is revising proposed§ 37.206(n) so that it does not requirecustomer restitution if the amount of restitution or the recipient cannot bereasonably determined.579

The Commission acknowledgesWMBAA’s comment that disciplinary

sanctions may not be recognized andenforced consistently across SEFs.However, each SEF is a distinct entitywith its own rulebook and set of disciplinary procedures. Therefore, eachSEF must determine the sanctions thatare appropriate for its own market andthus the same conduct may result indifferent sanctions at different SEFs.

The Commission does not believe thatsuch sanction variation supports themandatory recognition of sanctionsacross SEFs. However, if a SEF believesthat it is important to recognize andenforce sanctions against marketparticipants imposed by other SEFs orDCMs, then the SEF may implementappropriate rules.

The Commission agrees withWMBAA that any disciplinary sanctionimposed by a SEF should be publishedand made available to marketparticipants. Commission Regulation9.11(a) requires that ‘‘[w]henever an

exchange decision pursuant to which adisciplinary action or access denialaction is to be imposed has becomefinal, the exchange must, within thirtydays thereafter, provide written noticeof such action to . . . theCommission . . . .’’ 580 TheCommission has issued guidance that anexchange may comply with §9.11(a) bytransmitting or delivering the notice toNFA to be included in NFA’sBackground Affiliation StatusInformation Center database, which isavailable to the public online.581 TheCommission also notes that a SEF may

adopt rules regarding the publishing of disciplinary sanctions imposed by theSEF.

(16) §37.206(o)—Summary Fines forViolations of Rules Regarding TimelySubmission of Records

Proposed §37.206(o) permitted a SEFto adopt a summary fine schedule forviolations of rules relating to the timelysubmission of accurate records requiredfor clearing or verifying each day’stransactions. Under the proposed rule, aSEF may permit its compliance staff tosummarily impose minor sanctionsagainst persons within the SEF’s

jurisdiction for violating such rules. Theproposed rule made clear that a SEF’ssummary fine schedule must not permitmore than one warning letter in a rolling12-month period for the same violation

before sanctions are imposed and mustprovide for progressively larger fines forrecurring violations.


CME objected to the restriction of onewarning letter per rolling 12-monthperiod.582 MarketAxess also requestedthat the Commission adopt a uniformapproach with respect to warningletters, either permitting warning lettersas a sanction or an indication of afinding of a violation in all SEFcontexts.583


The Commission is partially adoptingproposed §37.206(o) and is convertingthe remaining portion of the rule toguidance in appendix B to part 37.584 The Commission is maintaining as arule the provision in the proposed rulethat prohibits a SEF from issuing morethan one warning letter per rolling 12-month period for the same violation. Asdiscussed above, the Commission

believes that in order to ensure thatwarning letters serve as effective

deterrents, and to preserve the value of disciplinary sanctions, no more thanone warning letter may be issued to thesame person or entity found to havecommitted the same rule violationwithin a rolling 12-month period.585 While a warning letter may beappropriate for a first-time violation, theCommission does not believe that morethan one warning letter in a rolling 12-month period for the same violation isever appropriate.586

However, in response toMarketAxess’s comment, theCommission is narrowing theapplication of this rule to warningletters that contain an affirmativefinding that a rule violation hasoccurred. Additionally, in order toprovide flexibility, the compliance dateof this rule will be one year from theeffective date of the final SEF rules sothat persons and entities may adapt tothe new SEF regime. The Commission isconverting the remainder of proposed§ 37.206(o) to guidance in appendix B topart 37 because the proposed ruleallowed, but did not require, a SEF toadopt a summary fine schedule.

(17) § 37.206(p)—EmergencyDisciplinary Actions

Proposed §37.206(p) provided that aSEF may impose a sanction, including


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587The Commission notes that, pursuant to §9.11and §37.2, SEFs must provide the Commission withnotice of any disciplinary actions that they take,including emergency disciplinary actions.

588The Commission is also revising the referenceto §37.206(j) in proposed §37.206(p)(ii) given thatthe Commission has either eliminated or moved toguidance many of the provisions of proposed§ 37.206(j).

589The Commission notes that this paragraph’snumbering is due to the renumbering of §37.206.

590FXall Comment Letter at 11 (Mar. 8, 2011).


592 Id.593WMBAA Comment Letter at 24 (Mar. 8, 2011).594CEA section 5h(f)(2)(D); 7 U.S.C. 7b–3(f)(2)(D).595CEA section 5h(f)(3); 7 U.S.C. 7b–3(f)(3).596The Commission notes that in Argus’s joint

DCM and SEF rulemaking comment letter datedFeb. 22, 2011, it commented on Core Principle 3and specifically, the Commission’s guidance inappendix C to part 38—Demonstration of Compliance That a Contract is Not Readily

Susceptible to Manipulation. The Commission hasaddressed Argus’s comments in the DCM finalrulemaking, Core Principles and OtherRequirements for Designated Contract Markets, 77FR at 36633–34. The Commission also notes that inCME’s SEF rulemaking comment letter dated Mar.8, 2011 and DCM rulemaking comment letter datedFeb. 22, 2011, it commented on the Commission’sguidance in appendix C to part 38. The Commissionhas also addressed CME’s comments in the DCMfinal rulemaking, Core Principles and OtherRequirements for Designated Contract Markets, 77FR at 36632–34.

597Reuters Comment Letter at 5 (Mar. 8, 2011).598GFI Comment Letter at 4–5 (Mar. 8, 2011).599 Id. at 5.600CEA section 5h(f)(3); 7 U.S.C. 7b–3(f)(3).

a suspension, or take other summaryaction against a person or entity subjectto its jurisdiction upon a reasonable

belief that such immediate action isnecessary to protect the best interest of the marketplace. The proposed rule alsoprovided that any emergency actiontaken by the SEF must be in accordancewith certain procedural safeguards as

enumerated in the proposed rule.587 (i) Commission Determination

Although the Commission received nocomments on proposed § 37.206(p), theCommission is moving the entire rule tothe guidance in appendix B to part 37

because it is a discretionary rule.588 TheCommission also believes that adoptingthe proposed rule as guidance, ratherthan a rule, will provide SEFs greaterflexibility in administering theirobligations, consistent with the generalcomments seeking the same.

The Commission is also codifyingnew § 37.206(g)589 (titled ‘‘Additionalsources for compliance’’) that permitsSEFs to refer to the guidance and/oracceptable practices in appendix B topart 37 to demonstrate to theCommission compliance with therequirements of § 37.206.

(h) §37.207—Swaps Subject toMandatory Clearing

Proposed §37.207 required that a SEFprovide rules that when a swap dealeror major swap participant enters into orfacilitates a swap transaction subject tothe mandatory clearing requirementunder section 2(h) of the Act, the swap

dealer or major swap participant shall be responsible for complying with themandatory trading requirement undersection 2(h)(8) of the Act.


FXall stated that proposed §37.207could be read to require a SEF to beresponsible for policing the conduct of swap dealers and major swapparticipants generally, and not onlywith respect to their trading on suchSEF.590 In this regard, MarketAxessstated that a SEF’s obligation to requireswap dealers and major swapparticipants to comply with themandatory trading requirement shouldonly extend to swaps that are executed

pursuant to its own rules.591 MarketAxess also noted that proposed§ 37.207 is identical to proposed§ 37.200(d) and therefore isunnecessary.592 WMBAA commentedthat there is no statutory basis to imposethe requirement in proposed§ 37.207.593

(2) Commission DeterminationThe Commission agrees with

MarketAxess that proposed § 37.207 isidentical to § 37.200(d) and is thereforeeliminating proposed § 37.207. Inresponse to WMBAA’s comment, theCommission notes that §37.200(d)recites the statutory text of CorePrinciple 2 and thus provides thestatutory basis for codification of thestatutory text as a regulation.594 Toaddress FXall’s and MarketAxess’sconcerns, the Commission clarifies thata SEF’s rules pursuant to §37.200(d)need only apply to swaps executed onor pursuant to the rules of that SEF.

3. Subpart D—Core Principle 3 (SwapsNot Readily Susceptible toManipulation)

Core Principle 3 requires that a SEFpermit trading only in swaps that arenot readily susceptible tomanipulation.595 In the SEF NPRM, theCommission proposed to codify thestatutory text of Core Principle 3 inproposed §37.300, and adopts that ruleas proposed.

To demonstrate to the Commissioncompliance with Core Principle 3,proposed §37.301 required a SEF to

submit new swap contracts in advanceto the Commission pursuant to part 40of the Commission’s regulations, andprovide to the Commission theinformation required under appendix Cto part 38. The Commission alsoproposed guidance for compliance withCore Principle 3 under appendix B topart 37, which noted the importance of the reference price for a swap contract.The guidance also stated that CorePrinciple 3 requires that the referenceprice used by a swap not be readilysusceptible to manipulation.

(a) Summary of Comments 596

Reuters generally supported CorePrinciple 3, and the requirement that

SEFs should have in place appropriatesystems and controls to identify andmanage situations where the market orindividual swap contract may besusceptible to manipulation or fraud.597 GFI commented that once theCommission has declared a swapsubject to mandatory clearing, a SEFshould not be required to ensure that

the contract is not readily susceptible tomanipulation since such activity would

be redundant.598 According to GFI, theCommission would not make a swapsubject to mandatory clearing unless it

believed that the swap is not subject tomanipulation.599


The Commission is adopting §37.301as proposed, subject to certainmodifications for clarity. TheCommission is deleting from the rulethe references to prior approval or self-certification for new productsubmissions under part 40 of theCommission’s regulations because thosedetails are covered under § 37.4 and part40. The Commission is also adding tothe rule a reference to the guidance and/or acceptable practices in appendix B topart 37. This reference wasinadvertently omitted from the SEFNPRM.

In response to GFI’s comments, theCommission notes that section 5h of theAct requires that a SEF permit tradingonly in swaps that are not readilysusceptible to manipulation.600 TheCommission notes that this is a separateand distinct requirement for a SEF to

comply with, as opposed to theCommission determination as towhether a swap is subject to mandatoryclearing. The Commission does not havethe authority under CEA section 4(c)(1)to exempt SEFs from complying withthe core principles.

The Commission notes that therequirement that a SEF permit trading inswaps that are not readily susceptible tomanipulation requires a SEF to beresponsible for the terms and conditionsof the swap contracts which trade on itsfacility. To meet this requirement, the


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


604Bloomberg Comment Letter 3–4 (Jun. 3, 2011);Parity Energy Comment Letter at 4 (Mar. 25, 2011);Tradeweb Comment Letter at 11 (Mar. 8, 2011);MarketAxess Comment Letter at 22 (Mar. 8, 2011);WMBAA Comment Letter at 25 (Mar. 8, 2011).

605Tradeweb Comment Letter at 11 (Mar. 8,2011).

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

608CME Comment Letter at 24 (Feb. 22, 2011).609 ICE Comment Letter at 4 (Mar. 8, 2011).610 ICE Comment Letter at 4 (Mar. 8, 2011); CME

Comment Letter at 24 (Feb. 22, 2011).611 ICE Comment Letter at 4 (Mar. 8, 2011).612CME Comment Letter at 24 (Feb. 22, 2011).613 Id. at 25.614 Id.615 Id.616 Id.

guidance includes items that a SEFshould consider in developing swapcontract terms and conditions for bothphysical delivery and cash-settledcontracts. The Commission recognizesthat a SEF may permit trading in a widerange of swaps, some standardized andothers customized and complex. TheCommission staff is available to consult

with SEFs should questions ariseregarding the information that SEFsshould submit to the Commission tosatisfy the requirements of CorePrinciple 3, especially for the SEF’smore customized and complex swapcontracts. The Commission will takeinto account these considerations whendetermining whether a SEF satisfies therequirements of Core Principle 3.

4. Subpart E—Core Principle 4(Monitoring of Trading and TradeProcessing)

Under Core Principle 4, a SEF mustestablish and enforce rules or terms andconditions defining, or specificationsdetailing trading procedures to be usedin entering and executing orders tradedon or through the facilities of the SEFand procedures for trade processing of swaps on or through the facilities of theSEF.601 Core Principle 4 also requires aSEF to monitor trading in swaps toprevent manipulation, price distortion,and disruptions of the delivery or cashsettlement process through surveillance,compliance, and disciplinary practicesand procedures, including methods forconducting real-time monitoring of trading and comprehensive and accurate

trade reconstructions.602 In the SEFNPRM, the Commission proposed tocodify the statutory text of CorePrinciple 4 in proposed § 37.400, andadopts that rule as proposed.

As discussed above under CorePrinciple 3, the Commission recognizesthat a SEF may permit trading in a widerange of swaps, some standardized andothers customized and complex. TheCommission staff is available to consultwith SEFs should questions ariseregarding how to satisfy therequirements of Core Principle 4,especially for the SEF’s more

customized and complex swapcontracts. The Commission will takeinto account these considerations whendetermining whether a SEF satisfies therequirements of Core Principle 4.

(a) §37.401—General Requirements

Proposed §37.401(a) required a SEFto collect and evaluate data onindividual traders’ market activity on anongoing basis in order to detect and

prevent manipulation, price distortionsand, where possible, disruptions of thedelivery or cash-settlement process.Proposed §37.401(b) required a SEF tomonitor and evaluate general marketdata in order to detect and preventmanipulative activity that would resultin the failure of the market price toreflect the normal forces of supply and

demand. Proposed § 37.401(c) requireda SEF to have the capacity to conductreal-time monitoring of trading andcomprehensive and accurate tradereconstruction. Further, the proposedrule required that intraday trademonitoring must include the capacity todetect abnormal price movements,unusual trading volumes, impairmentsto market liquidity, and position-limitviolations. Finally, proposed § 37.401(d)required a SEF to have either manualprocesses or automated alerts that areeffective in detecting and preventingtrading abuses. The Commission noted

in the SEF NPRM preamble that itwould be difficult, if not impossible, fora SEF to monitor for market disruptionsin markets with high transaction volumeand a large number of trades unless theSEF installed automated tradingalerts.603


Several commenters soughtclarification that proposed §37.401limits a SEF’s oversight of marketparticipant activity to its own SEF.604 Tradeweb, for example, commented thata SEF cannot ensure that a marketplaceother than its own has not beenmanipulated to affect the SEF’s swaps

because the SEF will not have enoughinformation about the othermarketplaces.605

WMBAA requested that theCommission clarify what it means by‘‘individual traders’’ and ‘‘marketactivity’’ in proposed §37.401(a).606 WMBAA also sought clarificationregarding what constitutes ‘‘generalmarket data’’ in proposed § 37.401(b).607

CME commented that theCommission’s requirements for real-time monitoring in proposed §37.401(c)are overly broad, and stated that

requiring real-time monitoringcapabilities across every instrument forvague terms such as ‘‘abnormal price

movements,’’ ‘‘unusual tradingvolumes,’’ and ‘‘impairments to marketliquidity’’ does not provide a SEF withsufficient clarity with respect to whatspecific capabilities satisfy thestandard.608 Similarly, ICE requestedthat the Commission delete the phrase‘‘impairments to market liquidity’’ fromthe rule, arguing that the wording isvague and has no foundation in the coreprinciple.609

ICE and CME also expressed concernregarding the real-time monitoring of position limits.610 ICE stated that real-time monitoring of position limits may

be flawed given that option deltaschange throughout the day, thedestination of allocated and give-uptransactions are not immediatelyknown, and off-exchange transactionsmay not be reported in real-time.611 CME stated that effective real-timemonitoring of position limits is

challenging given that the identicalcontract will frequently trade inmultiple competitive venues.612

In response to the Commission’squestions in the SEF NPRM regardinghigh frequency trading, CME raisedconcerns over the absence of adefinition for high frequency trading,which CME claimed can include manydifferent trading strategies.613 CMEquestioned whether the Commissionhad unique concerns about highfrequency traders, and further remarkedthat the Commission has not articulatedwhat purpose would be served bysingling out high frequency trading forspecial monitoring.614 CME stated,however, that it has the capability tomonitor the messaging frequency of participants in their markets and canquickly and easily identify whichparticipants generate high messagingtraffic.615 With respect to the ability of automated trading systems to detect andflag high frequency trading anomalies,CME commented that it is unclear whatspecific types of anomalies would beuniquely of concern in the context of ahigh frequency trader as opposed to anyother type of trader.616 CME noted thatits systems were designed to identifyanomalies or transaction patterns thatviolate their rules or might otherwise be


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617 Id.618The Commission is moving proposed

§ 37.401(d) to the guidance in appendix B to part37 and moving the ‘‘trade reconstruction’’ languagein proposed § 37.401(c) to final § 37.401(d).

619CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B).620Refer to the guidance under Core Principle 4

in appendix B to part 37 for examples of methodsfor monitoring market activity beyond a SEF’s ownmarket.

621See discussion below under § 37.403—Additional Requirements for Cash-Settled Swapsand §37.404—Ability To Obtain Information in thepreamble.

622See, e.g., ‘‘Recommendations on Pre-TradePractices for Trading Firms, Clearing Firms andExchanges involved in Direct Market Access,’’ Pre-Trade Functionality Subcommittee of the CFTC’sTechnology Advisory Committee (Mar. 1, 2011)(‘‘TAC Subcommittee Recommendations’’),available at http://www.cftc.gov/ucm/groups/ public/@swaps/documents/dfsubmission/ tacpresentation030111 _ ptfs2.pdf . The Commissionnotes that the subcommittee report was submittedto the TAC and made available for public comment, but no final action has been taken by the fullcommittee.

623See UK Government Office for Science,Foresight Project, The Future of Computer Tradingin Financial Markets (working paper), available at http://www.bis.gov.uk/foresight/our-work/projects/ current-projects/computer-trading/working-paper .

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

2011).

indicative of some other risk to theorderly functioning of the markets.617


The Commission is adopting §37.401as proposed, subject to certainmodifications, including convertingportions of the rule to guidance inappendix B to part 37.618

To address commenters’ concernswhether §37.401 requires a SEF tomonitor market activity beyond its ownmarket, the Commission notes that theAct requires a SEF to monitor trading inswaps to prevent manipulation, pricedistortion, and disruptions of thedelivery or cash settlement process.619 Given this statutory requirement, thereare certain instances where a SEF mustmonitor market activity beyond its ownmarket.620 As noted below, a SEF mustassess whether trading in a third-partyindex or instrument used as a referenceprice or the underlying commodity for

its listed swaps is being used to affectprices on its market.621 TheCommission, however, providesflexibility to SEFs by not prescribing inthe regulations the specific methods formonitoring. To provide additionalflexibility, in instances where a SEF candemonstrate to the Commission thattrading activity off the SEF’s facility isnot relevant to threats of manipulation,distortion, or disruption for tradingconducted on its own facility, then theSEF may limit monitoring to tradingactivity on its own facility.

In response to WMBAA’s concerns

regarding the clarification of certainterms in §37.401(a), the Commission isrevising the rule text to change the term‘‘individual traders’’ to ‘‘marketparticipants’’ as ‘‘individual traders’’was meant to apply to a SEF’s marketparticipants. The Commission alsoclarifies that ‘‘market activity’’ means itsmarket participants’ ‘‘trading’’ activity.In §37.401(b), ‘‘general market data’’means that a SEF shall monitor andevaluate general market conditionsrelated to its swaps. For example, a SEFmust monitor the pricing of theunderlying commodity or a third-party

index or instrument used as a reference

price for its swaps as compared to theprices on its markets.

The Commission is also revising therule to clarify that: (a) Real-timemonitoring is to detect and, whennecessary, resolve abnormalities; and (b)reconstructing trading activity is todetect instances or threats of manipulation, price distortion, and

disruptions.In the guidance, the Commission is

clarifying that monitoring of tradingactivity in listed swaps should bedesigned to prevent manipulation, pricedistortion, and disruptions. TheCommission believes that SEFs shouldhave rules in place that allow it tointervene to prevent or reduce marketdisruptions given such requirement inCore Principle 4. The Commission alsonotes that once a threatened or actualdisruption is detected, the SEF shouldtake steps to prevent the disruption orreduce its severity.

In the guidance, the Commission isalso clarifying what activities should beincluded in real-time monitoring ascompared to what activities may bedone on a T+1 basis. The Commission

believes that monitoring of pricemovements and trading volumes inorder to detect, and when necessary,resolve abnormalities should beaccomplished in real time in order toachieve, as much as possible, thestatute’s emphasis on preventiveactions. It is acceptable, however, tohave a program that detects instances orthreats of manipulation, pricedistortion, and disruptions on at least a

T+1 basis, incorporating any additionaldata that is available on such T+1 basis,including trade reconstruction data. TheCommission notes that it dropped therequirements for a SEF to monitor for‘‘impairments to market liquidity’’ and‘‘position limit violations’’ givencommenters’ concerns about thedifficulty of such monitoring.

The Commission is moving toguidance the requirement to haveautomated alerts in proposed§ 37.401(d). The Commission believesthat automated trading alerts, preferablyin real time, are the most effective

means of detecting market anomalies.However, a SEF may demonstrate thatits manual processes are effective.

As for the Commission’s inquiry inthe SEF NPRM about requiringadditional monitoring of high frequencytrading, the Commission believes that aSEF should be capable of monitoring alltypes of trading that may occur on itsfacility, including trading that may becharacterized as ‘‘high frequency.’’ TheCommission has decided not toimplement, at this time, further rulespertaining to the monitoring of high

frequency trading. The Commission isencouraged that there are effortsunderway both within and outside of the Commission, to define and developapproaches for better monitoring of high-frequency and algorithmic trading.This is particularly evident from recentwork done at the request of theCommission’s Technology Advisory

Committee (‘‘TAC’’).622 Further, theUnited Kingdom government’s ForesightProject also commissioned a recentlyreleased report on the future of computer trading in financial markets,which aims to assess the risks and

benefits of automated buying andselling.623 These efforts may assist theCommission’s further development of aregulatory framework for high frequencytrading activities.

(b) §37.402—Additional Requirementsfor Physical-Delivery Swaps

Proposed §37.402 required, for

physical-delivery swaps, that a SEFmonitor each swap’s terms andconditions, monitor the adequacy of deliverable supplies, assess whethersupplies are available to those makingphysical delivery and saleable by thosetaking delivery, and monitor theownership of deliverable supplies.Proposed §37.402 also required that aSEF address any conditions that arecausing price distortions or marketdisruptions.


CME commented that proposed§ 37.402 should be an acceptablepractice instead of a prescriptive rule.624 Parity Energy commented that in amarket where numerous SEFs permittrading in identical swaps, requiringeach SEF to monitor the adequacy, size,and ownership of deliverable supply aswell as the delivery locations andcommodity characteristics isduplicative, unmanageable, and createsthe risk of conflicting conclusions.625


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626The Commission is renumbering proposed§ 37.402(a)(1) and (a)(2) to §37.402(a) and (b),respectively. The Commission is deleting or movingto guidance proposed §37.402(a)(3), (a)(4), and (b).

627Proposed §37.402(a)(2) is now final§ 37.402(b).

628Argus Comment Letter at 6 (Feb. 22, 2011).629 Id.630 Id. at 7.631Parity Energy Comment Letter at 5 (Mar. 25,

2011); ICE Comment Letter at 4–5 (Mar. 8, 2011);Nodal Comment Letter at 5 (Mar. 8, 2011); CMEComment Letter at 11 (Mar. 8, 2011).

632 ICE Comment Letter at 4–5 (Mar. 8, 2011).633CME Comment Letter at 11 (Mar. 8, 2011).634 Id.635 Id.636Nodal Comment Letter at 5 (Mar. 8, 2011).

637The Commission is renumbering proposed§ 37.403(a)(1) and (a)(2) to §37.403(a), (b), and (c).The Commission is moving proposed § 37.403(b) to§ 37.404(a).

638CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B).639Final §37.403(a) was proposed §37.403(a)(1).640Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1228.641The Commission is renumbering proposed

§ 37.403(a)(2) to § 37.403(b).


The Commission is adopting §37.402as proposed, subject to certainmodifications, including convertingportions of the rule to guidance inappendix B to part 37.626 In response tocomments and to provide SEFs withgreater flexibility, the Commission is

revising the requirement in proposed§ 37.402(a)(2) 627 so that SEFs only haveto monitor the ‘‘availability’’ of thecommodity supply instead of monitoring whether the supply is‘‘adequate.’’ The Commission is alsoremoving from proposed § 37.402 therequirements that SEFs monitor specificdetails of the supply, marketing, andownership of the commodity to bephysically delivered. Instead, appendixB to part 37 lists guidance formonitoring conditions that may cause aphysical-delivery swap to becomesusceptible to price manipulation ordistortion, including monitoring the

general availability of the commodityspecified by the swap, the commodity’sgeneral characteristics, the deliverylocations, and, if available, informationon the size and ownership of deliverablesupplies. Moving these specific detailsto guidance will provide SEFs withadditional flexibility in meeting theirmonitoring obligations associated withphysical-delivery swaps.

(c) §37.403—Additional Requirementsfor Cash-Settled Swaps

Proposed §37.403(a) required, forcash-settled swaps, that a SEF monitor:

(a) The availability and pricing of thecommodity making up the index towhich the swap is settled and; (b) thecontinued appropriateness of themethodology for deriving the index forSEFs that compute their own indices.Where a swap is settled by reference tothe price of an instrument traded inanother venue, proposed §37.403(b)required that the SEF either have aninformation sharing agreement with theother venue or be able to independentlydetermine that positions or trading inthe reference instrument are not beingmanipulated to affect positions or

trading in its swap.(1) Summary of Comments

Argus expressed concern regardingthe requirement in proposed§ 37.403(a)(1) for a SEF to monitor theavailability and pricing of thecommodity making up the index to

which the swap will be settled,particularly where an index price ispublished based upon transactions thatare executed off the SEF.628 Argus notedthat if a SEF is required to perform thismonitoring function, a SEF may choosenot to list the swap and marketparticipants would not have a hedginginstrument.629 Argus also commented

that the cost to monitor transactions thatare executed off of the SEF could beprohibitive.630

Several commenters expressedconcern about the requirement inproposed §37.403(b) that a SEF have aninformation sharing agreement with, ormonitor positions or trading in, anothervenue when a swap listed on the SEF issettled by reference to the price of aninstrument traded on another venue.631 ICE stated that the proposal places anundue burden on SEFs to monitorpositions held at other trading venues,and that this requirement would be

more efficiently facilitated by a centralregulatory body such as theCommission.632

Similarly, CME stated that theCommission is uniquely situated to addregulatory value to the industry byreviewing for potential cross-venue ruleviolations because the Commission isthe central repository for positioninformation delivered to it on a daily

basis in a common format across allvenues.633 CME asserted that the SEFNPRM’s proposed alternative of requiring SEFs and their customers toreport information that the Commissionalready receives or will be receiving isan onerous burden.634 CME furtherasserted that the SEF NPRM’s otherproposed alternative, that the SEF enterinto an information-sharing agreementwith the other venue, will result inadditional costs to both entities and thatit may not be practical or prudent for aSEF to enter into such an agreementwith the other venue.635

Finally, Nodal stated that a SEF thatis a party to an industry agreement suchas the International Information SharingMemorandum of Understanding andAgreement should satisfy theinformation sharing requirement in the

proposed rule by virtue of suchagreement.636


The Commission is adopting §37.403as proposed, subject to certainmodifications, including convertingportions of the rule to guidance inappendix B to part 37.637 The Actrequires SEFs to monitor trading inswaps to prevent disruptions of the cashsettlement process.638 However, inresponse to Argus’s comment about thecosts of proposed § 37.403(a)(1), theCommission has removed from the rulethe requirement that a SEF monitor theavailability and pricing of thecommodity making up the index towhich the swap will be settled. Section37.403(a) 639 now requires that a SEFmonitor the pricing of the referenceprice used to determine cash flows orsettlement. The Commission believesthat SEFs must monitor the pricing of the reference price in order to complywith Core Principle 4’s requirement toprevent manipulation, price distortion,

and disruptions of the cash settlementprocess. As noted in the SEF NPRM,market participants may have incentivesto disrupt or manipulate referenceprices for cash-settled swaps.640

Although no comments were receivedon proposed §37.403(a)(2),641 theCommission is revising the rule so thatthe requirement for monitoring thecontinued appropriateness of themethodology for deriving the referenceprice only applies when the referenceprice is formulated and computed bythe SEF. In order to reduce the burdenon SEFs, the Commission is clarifying innew §37.403(c) that when the referenceprice relies on a third-party index orinstrument, including an index orinstrument traded on another venue, theSEF must only monitor the ‘‘continuedappropriateness’’ of the index orinstrument as opposed to specificallymonitoring the ‘‘continuedappropriateness of the methodology’’ forderiving the index. To provide SEFswith greater flexibility, the Commissionis moving the other requirements formonitoring in proposed § 37.403(a)(2) tothe guidance in appendix B to part 37.Specifically, the guidance notes that if a SEF computes its own reference price,

it should promptly amend anymethodologies or impose newmethodologies as necessary to resolvethreats of disruption or distortions. For


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643CME Comment Letter at 26 (Feb. 22, 2011).644WMBAA Comment Letter at 26 (Mar. 8, 2011).645The Commission is changing the phrase

‘‘traders in its swaps’’ to ‘‘its market participants’’to provide clarity.

646The Commission notes that this requirement isnow in § 37.404(a).

647The Commission notes that this requirement isnow in § 37.404(b).


649See, e.g., comments below under CorePrinciple 6—Position Limits or Accountability inthe preamble.


651 Id.

reference prices that rely upon a third-party index or instrument, theCommission notes in the guidance thatthe SEF should conduct due diligence toensure that the reference price is notsusceptible to manipulation.

With respect to commenters’ concernsabout the requirement in proposed§ 37.403(b) for a SEF to have an

information-sharing agreement with, ormonitor positions or trading in, anothervenue when a swap listed on the SEF issettled by reference to the price of aninstrument traded on another venue, theCommission notes that the Act requiresSEFs to monitor trading in swaps toprevent disruptions of the cashsettlement process.642 Given thisstatutory requirement, the Commission

believes that a SEF must have access tosufficient information to determinewhether trading in the instrument orindex used as a reference price for itslisted swaps is being used to affect

prices on its market. The Commission isadopting this general requirement, but ismoving it to §37.404 where it morelogically belongs.

Although, as CME noted, theCommission does obtain certainposition information in the large-traderreporting systems for swaps, theCommission may not routinely obtainsuch position information, includingwhere a SEF’s swap settles to the priceof a non-U.S. index or instrument.However, in response to ICE’s andCME’s concerns and to reduce the

burden on SEFs, the Commission is

removing from the rule text therequirement for SEFs to assess‘‘positions’’ and is moving it to theguidance in appendix B to part 37. TheCommission is also moving to theguidance the specific methods for a SEFto obtain information to assess whethertrading in the reference market is beingused to affect prices on its market. Theguidance also allows SEFs to limit suchinformation gathering to marketparticipants that conduct substantialtrading on its facility.

(d) §37.404—Ability To ObtainInformation

Proposed §37.404(a) provided that aSEF must have rules that require tradersin its swaps to keep and make availablerecords of their activity in underlyingcommodities and related derivativesmarkets and swaps. Proposed§ 37.404(b) required that a SEF withcustomers trading throughintermediaries have a large-traderreporting system or other means toobtain position information.


CME commented that the Commissionshould specify in acceptable practicesthe types of records that traders arerequired to keep under proposed§ 37.404(a).643 WMBAA commentedthat the requirement for a SEF to forcetraders to maintain trading and financialrecords is not required under theCEA.644


The Commission is adopting § 37.404as proposed, subject to certainmodifications, including providingguidance in appendix B to part 37.645 Asnoted above in the discussion of § 37.403, the Commission is moving to§ 37.404 the requirement for a SEF toassess whether trading in swaps listedon its market, in the index or instrumentused as a reference price, or in theunderlying commodity for its swaps is

being used to affect prices in its

market.646

With respect to CME’s and WMBAA’scomments on proposed §37.404(a),647 the Commission disagrees that this ruleis unnecessary or that the requirementsshould instead be codified as acceptablepractices. Core Principle 4 requires aSEF to monitor trading in swaps toprevent manipulation, price distortion,and disruptions.648 In its experienceregulating the futures market, theCommission has found marketparticipants’ records to be an invaluabletool in its surveillance efforts, and

believes that a SEF should have directaccess to such information in order todischarge its obligations under the SEFcore principles, including CorePrinciple 4. However, the Commissionnotes that in the guidance for this rule,a SEF may limit the application of thisrequirement to those marketparticipants who conduct substantialtrading activity on its facility, which isconsistent with the Commission’ssimilar requirements that large traderskeep records for futures trading under§ 18.05 and for swaps trading under§ 20.6 of the Commission’s regulations.The Commission also notes that therequirement for market participants to

keep such records is sound commercialpractice, and that market participantsare likely already maintaining suchtrading records. In response to CME’s

comment, the Commission notes thatthe nature of records covered varieswith the type of market and a marketparticipant’s involvement, but wouldgenerally include purchases, sales,ownership, production, processing, anduse of swaps, the underlyingcommodity, and other derivatives thathave some relationship to, or effect on,

the market participant’s trading in thelisted swap.

The Commission is also deleting therequirements under proposed§ 37.404(b) and replacing it, in theguidance, with a more generalrequirement for a SEF to demonstratethat it can obtain position and tradinginformation directly from marketparticipants or, if not available fromthem, through information-sharingagreements. Moreover, the guidance forthis rule allows a SEF to limit theacquisition of such information to thosemarket participants who conduct

substantial trading on its facility. TheCommission is making this change inresponse to commenters’ concerns, asnoted in other sections, about obtainingposition information because a SEF willnot have the capability to monitortrading activities conducted on othertrading venues.649

(e) §37.405—Risk Controls for Trading

Proposed §37.405 required that a SEFhave risk controls to reduce thepotential risk of market disruptions,including, but not limited to, marketrestrictions that pause or halt trading inmarket conditions prescribed by the

SEF. Additionally, the rule providedthat where a SEF’s swap is linked to, ora substitute for, other swaps on the SEFor on other trading venues, includingwhere a swap is based on the level of an equity index, such risk controls must

be coordinated with those on the similarmarkets or trading venues, to the extentpossible.

The preamble of the SEF NPRMrecognized that pauses and halts areonly one category of risk controls, andthat additional controls may benecessary to further reduce the potentialfor market disruptions.650 The SEFNPRM preamble specifically listedseveral risk controls that theCommission believed may beappropriate, including price collars or

bands, maximum order size limits, stoploss order protections, kill buttons, andany others that may be suggested bycommenters.651


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652

ICE Comment Letter at 5 (Mar. 8, 2011);Tradeweb Comment Letter at 11 (Mar. 8, 2011);CME Comment Letter at 27 (Feb. 22, 2011).

653CME Comment Letter at 27 (Feb. 22, 2011).654 ICE Comment Letter at 5 (Mar. 8, 2011).655 Id.656SDMA Comment Letter at 5 (Mar. 8, 2011).657 Id. at 6.658 Id. See TAC Subcommittee Recommendations

(Mar. 1, 2011). The report recommended severalpre-trade risk controls for implementation at theexchange level, which were largely consistent withthe pre-trade controls listed in the preamble to theSEF NPRM.

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

661 Id.662Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1228.663TAC Subcommittee Recommendations (Mar.

1, 2011).664The preamble to the SEF NPRM specifically

mentioned daily price limits, order size limits,trading pauses, stop logic functionality, amongothers. Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1228.

665TAC Subcommittee Recommendations at 4–5(Mar. 1, 2011). The TAC discussed this report’sfindings at its meeting on March 1, 2011. SeeTranscript of Third Meeting of TechnologyAdvisory Committee (Mar. 1, 2011) available at http://www.cftc.gov/ucm/groups/public/ @newsroom/documents/file/ tac _030111 _transcript.pdf.

666TAC Subcommittee Recommendations at 4(Mar. 1, 2011).

667CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B).668CME Comment Letter at 27 (Feb. 22, 2011).


Several commenters asserted that aSEF should have some discretion todetermine the specific risk controls thatare implemented within its markets.652 CME commented that the marketplacewould benefit from somestandardization of the types of pre-trade

risk controls employed by SEFs andother trading venues, and expressedsupport for an acceptable practicesframework that includes pre-tradequantity limits, price banding, andmessaging throttles, but argued that thespecific parameters of such controlsshould be determined by each SEF.653 ICE recommended that the Commissiontake a flexible approach to risk controlsso as not to hinder innovation indeveloping new mechanisms to preventmarket disruptions.654 ICE did,however, recommend that theCommission expressly require a SEF tohave pre-trade risk controls or checks,

which are especially important in thinlytraded markets where RFQs are morecommon.655

SDMA supported the requirement inproposed §37.405, but noted that therule should include pre-trade and post-trade risk control requirements that areuniform across the market.656 SDMAnoted that a uniform approach wouldcreate a much needed single regulatoryapproach to risk management across thederivatives market, enhance marketintegrity, and decrease systemic risk.657 SDMA agreed with the best practices forpre-trade and post-trade risk controls as

noted in the Pre-Trade FunctionalitySubcommittee of the CFTC TAC’sRecommendations on Pre-TradePractices for Trading Firms, ClearingFirms and Exchanges involved in DirectMarket Access.658

Finally, CME objected to therequirement to coordinate riskcontrols.659 CME stated that a SEFshould retain the flexibility todetermine and implement risk controlsthat it believes are necessary to protectthe integrity of its markets.660 CMErecommended that the Commission

work constructively with registeredentities to facilitate coordination.661


The Commission is adoptingproposed §37.405, subject to certainmodifications, including converting aportion of the rule to the guidance inappendix B to part 37. As stated in the

SEF NPRM, the Commission believesthat pauses and halts are effective riskmanagement tools that must beimplemented by a SEF to facilitateorderly markets.662 Automated riskcontrol mechanisms, including pausesand halts, have proven to be effectiveand necessary in preventing marketdisruptions in the futures market and,therefore, will remain as part of the rule.

As noted by SDMA, the Pre-TradeFunctionality Subcommittee of the TACissued a report that recommended theimplementation of several trade riskcontrols at the exchange level.663 Thecontrols recommended in theSubcommittee report were consistent, inlarge part, with the trade controlsreferenced in the preamble to the SEFNPRM, and which are being adopted inthe guidance in appendix B to part37.664 The TAC accepted theSubcommittee report, which specificallyrecommended that exchangesimplement pre-trade limits on ordersize, price collars around the currentprice, intraday position limits (of a typethat represent financial risk to theclearing member), message throttles,and clear error-trade and order-cancellation policies.665 The

Subcommittee report also noted that‘‘[s]ome measure of standardization of pre-trade risk controls at the exchangelevel is the cheapest, most effective andmost robust path to addressing theCommission’s concern [for preservingmarket integrity].’’ 666

The Commission believes that theimplementation of specific types of other risk controls is generally desirable,

but also recognizes that such risk

controls should be adapted to theunique characteristics of the markets towhich they apply. A SEF implementingany such additional risk controls shouldconsider the balance between avoidinga market disruption while not impedinga market’s price discovery function.Controls that unduly restrict a market’sability to respond to legitimate market

events will interfere with pricediscovery. Accordingly, consistent withmany of the comments on this subject,the Commission is enumerating specifictypes of risk controls, in addition topauses and halts, that a SEF mayimplement in the guidance rather thanin the rule, in order to provide a SEFwith greater discretion to select amongthe enumerated risk controls, or tocreate new risk controls that meet theunique characteristics of its markets. ASEF will also have discretion indetermining the parameters for theselected controls.

Additionally, in response to CME’sconcern about the requirement tocoordinate risk controls, theCommission is moving this languagefrom proposed §37.405 to the guidance.Specifically, a SEF with a swap that isfungible with, linked to, or a substitutefor other swaps on the SEF or on othertrading venues, should, to the extentpracticable, coordinate its risk controlswith any similar controls placed onthose other swaps. The guidance alsostates that if a SEF’s swap is based onthe level of an equity index, such riskcontrols should, to the extent

practicable, be coordinated with anysimilar controls placed on nationalsecurity exchanges.

(f) §37.406—Trade Reconstruction

Under Core Principle 4, Congressrequired that a SEF have the ability tocomprehensively and accuratelyreconstruct all trading on its facility.667 Proposed §37.406 set forth thisrequirement, including the requirementthat audit-trail data and reconstructions

be made available to the Commission ina form, manner, and time as determined

by the Commission.


CME commented that audit trail datais extremely detailed and voluminousand that SEFs should be given adequatetime to prepare the trading data beforeit is supplied to the Commission.668 Inthis regard, CME recommended that thewording ‘‘in a form, manner, and timeas determined by the Commission’’ be


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669 Id.670CEA section 5h(f)(5); 7 U.S.C. 7b–3(f)(5).

671CEA section 5h(f)(5)(A); 7 U.S.C. 7b–3(f)(5)(A).672WMBAA Comment Letter at 26 (Mar. 8, 2011).673 Id.674 Id.675MarketAxess Comment Letter at 37 (Mar. 8,

2011).676The Commission is changing the terms

‘‘participants’’ and ‘‘traders’’ to ‘‘marketparticipants’’ to provide clarity.

677CEA section 5h(f)(4)(B); 7 U.S.C. 7b–3(f)(4)(B).678CEA section 5h(f)(5)(B); 7 U.S.C. 7b–3(f)(5)(B).

replaced with ‘‘such reasonable time asdetermined by the Commission.’’ 669


The Commission is revising the ruleso that a SEF shall be required to makeaudit trail data and reconstructionsavailable to the Commission ‘‘in a form,manner, and time that is acceptable to

the Commission.’’ The Commissionnotes that it will work with SEFs toprovide them with adequate time tosupply such information to theCommission.

(g) § 37.407—Additional Rules Required

Proposed §37.407 required a SEF toadopt and enforce any additional rulesthat it believes are necessary to complywith the requirements of subpart E of part 37.


Although the Commission did notreceive any comments on the proposedrule, the Commission is revising the ruleto state that applicants and SEFs mayrefer to the guidance and/or acceptablepractices in appendix B to part 37 todemonstrate to the Commissioncompliance with the requirements of section 37.400. The Commission is alsomoving proposed §37.407 to new§ 37.408, titled ‘‘Additional sources forcompliance.’’

In new §37.407, titled ‘‘Regulatoryservice provider,’’ the Commission isclarifying that a SEF can comply withthe regulations in subpart E through adedicated regulatory department or by

contracting with a regulatory serviceprovider pursuant to §37.204.

5. Subpart F—Core Principle 5 (AbilityTo Obtain Information)

Core Principle 5 requires a SEF to: (a)Establish and enforce rules that willallow the facility to obtain anynecessary information to perform any of the functions described in section 5h of the Act, (b) provide the information tothe Commission on request, and (c) havethe capacity to carry out internationalinformation-sharing agreements as theCommission may require.670 In the SEF

NPRM, the Commission proposed tocodify the statutory text of CorePrinciple 5 in proposed § 37.500, andadopts that rule as proposed.

(a) § 37.501—Establish and EnforceRules

Proposed §37.501 required a SEF toestablish and enforce rules that willallow the SEF to have the ability andauthority to obtain sufficient

information to allow it to fully performits operational, risk management,governance, and regulatory functionsand any requirements under part 37,including the capacity to carry outinternational information-sharingagreements as the Commission mayrequire.

(1) Commission DeterminationThe Commission received no

comments on proposed § 37.501 and isadopting the rule as proposed. TheCommission believes that §37.501appropriately implements therequirement in Core Principle 5 for aSEF to establish and enforce rules thatwill allow the SEF to obtain anynecessary information to perform any of its functions described in section 5h of the Act.671

(b) §37.502—Collection of Information

Proposed §37.502 required a SEF to

have rules that allow it to collectinformation on a routine basis, allow forthe collection of non-routine data fromits participants, and allow for itsexamination of books and records kept

by the traders on its facility.


WMBAA commented that aside fromparticipants who contractually agree toprovide information, a SEF does notpossess the legal authority to obtainsuch information.672 Additionally,WMBAA stated that the burden tocollect information should be placedupon counterparties.673 In the

alternative, WMBAA stated that theCommission should require a SEF andits participants to enter into third partyservice provider agreements for thecollection of the requiredinformation.674 MarketAxesscommented that it is not clear what ismeant by ‘‘non-routine data’’ inproposed §37.502 and that the ruleshould make clear that a SEF is onlyrequired to collect and maintainparticipant information that is directlyrelated to such participants’ activityconducted pursuant to the SEF’srules.675


The Commission is adopting § 37.502as proposed.676 In response toWMBAA’s and MarketAxess’s

comments, the Commission notes thatCore Principle 5 requires a SEF toestablish and enforce rules that willallow it to obtain any necessaryinformation to perform any of itsfunctions described in section 5h of theAct. The Act and the Commission’sregulations provide a SEF with the legalauthority to collect such information. As

mentioned in §37.204 above, a SEF maycontract with a regulatory serviceprovider to perform regulatory serviceson behalf of a SEF. Thus, a SEF mayenter into a third party regulatoryservice provider agreement for thecollection of information under§ 37.502. Additionally, as mentioned in§ 37.404 above, the Act requires SEFs tomonitor trading in swaps to preventmanipulation, price distortion, anddisruptions through surveillance,compliance, and disciplinary practicesand procedures.677 The Commission

believes that market participant records

are a valuable tool in conducting aneffective surveillance program; thus, aSEF should have direct access to suchinformation in order to discharge itsobligations under the core principles.The Commission notes that marketparticipants are likely maintainingtrading records as part of sound

business practices so requiring SEFs tohave rules that allow them to accesssuch information should not present a

burden. To address MarketAxess’scomment about ‘‘non-routine data,’’ theCommission clarifies that ‘‘non-routinedata’’ means the collection of data on an

ad-hoc basis, such as data that may becollected during an investigation.

(c) § 37.503—Provide Information to theCommission

Proposed §37.503 required a SEF toprovide information in its possession tothe Commission upon request, in a formand manner that the Commissionapproves.


The Commission received nocomments on proposed § 37.503 and isadopting the rule as proposed. TheCommission believes that §37.503

appropriately implements therequirement in Core Principle 5 for aSEF to provide information to theCommission on request.678

(d) § 37.504—Information-SharingAgreements

Proposed §37.504 required a SEF toshare information with other regulatoryorganizations, data repositories, andreporting services as required by the


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679WMBAA Comment Letter at 27 (Mar. 8, 2011).680 Id.681CEA section 5h(f)(6); 7 U.S.C. 7b–3(f)(6).

682 Id.683Bloomberg Comment Letter at 3–4 (Jun. 3,

2011); Alice Comment Letter at 5 (May 31, 2011);

Rosen et al. Comment Letter at 22 (Apr. 5, 2011);WMBAA Comment Letter at 27 (Mar. 8, 2011);Tradeweb Comment Letter at 11 (Mar. 8, 2011);Reuters Comment Letter at 6 (Mar. 8, 2011);Phoenix Comment Letter at 3 (Mar. 7, 2011).

684WMBAA Comment Letter at 2 (Apr. 11, 2013);Bloomberg Comment Letter at 3–4 (Jun. 3, 2011);Rosen et al. Comment Letter at 22 (Apr. 5, 2011);WMBAA Comment Letter at 27 (Mar. 8, 2011);Tradeweb Comment Letter at 11 (Mar. 8, 2011);Phoenix Comment Letter at 3 (Mar. 7, 2011).

685Phoenix Comment Letter at 3–4 (Mar. 7, 2011).686WMBAA Comment Letter at 27 (Mar. 8, 2011).687Reuters Comment Letter at 6 (Mar. 8, 2011);

Phoenix Comment Letter at 4 (Mar. 7, 2011).688Alice Comment Letter at 5 (May 31, 2011).

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

2011).691See Position Limits for Derivatives, 76 FR

4752 (proposed Jan. 26, 2011).692Part 150 of the Commission’s regulations

contains the current position limits regime.

Commission or as otherwise necessaryand appropriate to fulfill its self-regulatory and reportingresponsibilities. The proposed rule alsostated that appropriate information-sharing agreements can be establishedwith such entities or the Commissioncan act in conjunction with the SEF tocarry out such information sharing.


WMBAA commented that theproposed rule could be interpreted torequire a SEF to share information withits competitors, unless the informationis disseminated by a neutral third partypursuant to a services agreement.679 WMBAA also requested clarificationregarding the circumstances in whichthe Commission would determine tocarry out information sharing itself, asopposed to a SEF entering intoinformation-sharing agreements withthe relevant entity.680

(2) Commission DeterminationThe Commission is adopting §37.504

as proposed, subject to onemodification. The Commission isrevising the rule to change the term‘‘reporting services’’ to ‘‘third party datareporting services.’’ The Commissionclarifies that the term ‘‘reportingservices’’ was meant to refer toindependent third parties that wouldprovide trading data on a public basisand was not meant to includecompetitor SEFs. To address WMBAA’scomment about information sharing, theCommission clarifies that a SEF may

work with the Commission to fulfill itsinformation sharing requirements in theabsence of agreements with SDRs,regulatory bodies, or third party datareporting services. Given that each SEFis unique, a particular SEF would needto contact the Commission to discusshow the information sharingrequirements could be fulfilled.

6. Subpart G—Core Principle 6 (PositionLimits or Accountability)

Core Principle 6 requires that a SEFadopt for each swap, as is necessary andappropriate, position limits or position

accountability to reduce the potentialthreat of market manipulation orcongestion.681 In addition, CorePrinciple 6 requires that for any contractthat is subject to a federal position limitunder CEA section 4a(a), the SEF set itsposition limits at a level no higher thanthe position limitation established bythe Commission and monitor positionsestablished on or through the SEF for

compliance with the limit set by theCommission and the limit, if any, set bythe SEF.682 In the SEF NPRM, theCommission proposed to codify thestatutory text of Core Principle 6 inproposed §37.600, and adopts that ruleas proposed. Proposed §37.601 repeatedthe requirements in § 37.600 andrequired that SEFs establish position

limits in accordance with therequirements set forth in part 151 of theCommission’s regulations.


Several commenters stated that SEFswill have difficulty enforcing positionlimitations.683 Many of thesecommenters noted that SEFs will lackknowledge of a market participant’sactivity on other venues, and that willprevent a SEF from being able tocalculate the true position of a marketparticipant.684 In this regard, Phoenixstated that market participants will beallowed to trade on multiple SEFs soany one SEF’s information concerning amarket participant’s position will bevirtually meaningless, as the marketparticipant may sell a large position onone SEF and simultaneously buy thesame amount of the instrument onanother SEF.685 WMBAA recommendedthat a common regulatory organizationor third party regulatory serviceprovider monitor position limits

because they will have the capability toensure coordinated oversight of thetrading activity on multiple SEFs andthe ability to implement disciplinaryaction if needed.686 Reuters and

Phoenix recommended that theCommission or its designee monitorposition limits.687 Alice recommendedthat, for cleared swaps, DCOs maintainposition limits, and when a swap iscleared by multiple DCOs, one DCOwould be the primary for a givenparticipant and the other DCOs wouldreport positions to that DCO.688

Despite the concerns raised by othercommenters, Phoenix noted that, if required, a SEF can monitor position

limits of market participants based uponthe trading activity that takes place onlyon the SEF’s platform.689 Tradeweb alsorequested confirmation from theCommission that a SEF must onlymonitor its market participants’ positionlimits or positions in particularinstruments with respect to positionsentered into on its own platforms.690


In response to commenters concernsabout monitoring position limits, theCommission is removing therequirements in §37.601. Instead, final§ 37.601 states that until such time thatcompliance is required under part 151of this chapter,691 a SEF may refer to theguidance and/or acceptable practices inappendix B to part 37 to demonstrate tothe Commission compliance with therequirements of §37.600.

The guidance provides a SEF withreasonable discretion to comply with§ 37.600, including considering part 150of the Commission’s regulations.692 Theguidance also states that for RequiredTransactions as defined in § 37.9, a SEFmay demonstrate compliance with§ 37.600 by setting and enforcingposition limitations or positionaccountability levels only with respectto trading on the SEF’s own market. Forexample, a SEF could satisfy theposition accountability requirement bysetting up a compliance program thatcontinuously monitors the tradingactivity of its market participants andhas procedures in place for remedyingany violations of position levels. For

Permitted Transactions as defined in§ 37.9, a SEF may demonstratecompliance with §37.600 by setting andenforcing position accountability levelsor sending the Commission a list of Permitted Transactions traded on theSEF. Therefore, a SEF is not required tomonitor its market participants’ activityon other venues with respect tomonitoring position limits.

In response to comments that acommon regulatory organization or theCommission should monitor positionlimits, the Commission notes that CorePrinciple 6 places the responsibility ona SEF to adopt and monitor positionlimits. The Dodd-Frank Act does notmandate that a common regulatoryorganization or the Commission monitorposition limits. The Dodd-Frank Actalso does not provide the Commissionwith the authority to exempt a SEF from


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693CEA section 5h(f)(7); 7 U.S.C. 7b–3(f)(7).694The Commission is renaming the title of this

section from ‘‘Mandatory Clearing’’ to ‘‘RequiredClearing’’ to be consistent with terminology used inthe CEA and the Commission’s regulations.


696 Id.697MarketAxess Comment Letter at 38 (Mar. 8,

2011).

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

700The Commission will address any necessaryrevisions to part 37 at such time as i t determinesto exercise its discretionary authority to exemptDCOs from certain DCO registration requirements.For example, if exempt DCOs are limited to clearingfor only certain types of market participants, thenthe Commission will take action to ensure that SEFmarket participants have impartial access to swapclearing through registered DCOs.

certain core principles. Therefore, theCommission is providing a SEF withflexibility to adopt and monitor positionlimits as described above.

7. Subpart H—Core Principle 7(Financial Integrity of Transactions)

Core Principle 7 requires a SEF toestablish and enforce rules and

procedures for ensuring the financialintegrity of swaps entered on or throughthe facilities of the SEF, including theclearance and settlement of the swapspursuant to section 2(h)(1) of the Act.693 In the SEF NPRM, the Commissionproposed to codify the statutory text of Core Principle 7 in proposed §37.700,and adopts that rule as proposed.

(a) §37.701—Mandatory Clearing 694

Proposed § 37.701 requiredtransactions executed on or through aSEF to be cleared through a Commissionregistered DCO unless the transaction isexcepted from clearing under section2(h)(7) of the Act or the swap is notsubject to the clearing requirementunder section 2(h)(1) of the Act.


ISDA/SIFMA commented that section2(h)(1) of the CEA provides that swapssubject to the clearing requirement must

be submitted for clearing to a registeredDCO or a DCO that is exempt fromregistration; however, proposed §37.701requires that transactions executedthrough a SEF be cleared only througha Commission-registered DCO.695 ISDA/SIFMA recommended that the rule be

amended to permit the use of exemptDCOs.696 MarketAxess recommendedthat proposed §37.701 be revised topermit a SEF to rely on a representationfrom an end-user that it qualifies for thesection 2(h)(7) exemption.697


The Commission is adopting §37.701as proposed, subject to certain revisions.The Commission is modifying §37.701to state that ‘‘[t]ransactions executed onor through the swap execution facilitythat are required to be cleared undersection 2(h)(1)(A) of the Act or arevoluntarily cleared by the

counterparties shall be cleared througha Commission-registered derivativesclearing organization, or a derivativesclearing organization that the

Commission has determined is exemptfrom registration.’’ The Commission isdeleting proposed § 37.701(a), whichreferred to the end-user exception underCEA section 2(h)(7) because, asmodified, the final rule text clarifies thatany swaps that are required to becleared or that are voluntarily clearedmust be cleared through a registered

DCO, or a DCO that the Commission hasdetermined is exempt from registration.The Commission notes that swaps thatare subject to the clearing requirementmust be submitted for clearing, exceptwhere the swap may be eligible for anexception or exemption from theclearing requirement pursuant to eitherthe exception provided under section2(h)(7) of the Act and §50.50 of theCommission’s regulations, or anexemption provided under part 50 of the Commission’s regulations. The rulealso provides that counterparties thatelect to clear a swap that is not required

to be cleared may do so voluntarilythrough a Commission-registered DCO,or a DCO that the Commission hasdetermined is exempt from registration.

In response to ISDA/SIFMA’srecommendation that the rule beamended to permit the use of exemptDCOs, the Commission is mindful thatCEA section 2(h)(1) provides that swapssubject to the clearing requirement must

be submitted for clearing to a registeredDCO or a DCO that is exempt fromregistration under the Act. TheCommission further notes that underCEA section 5b(h), the Commission hasdiscretionary authority to exempt DCOs,

conditionally or unconditionally, fromthe applicable DCO registrationrequirements.698 Specifically, section5b(h) of the Act provides that ‘‘[t]heCommission may exempt, conditionallyor unconditionally, a derivativesclearing organization from registrationunder this section for the clearing of swaps if the Commission determinesthat the [DCO] is subject to comparable,comprehensive supervision andregulation by the Securities andExchange Commission or theappropriate government authorities inthe home country of the

organization.’’699

Thus, the Commissionhas discretion to exempt fromregistration DCOs that, at a minimum,are subject to comparable andcomprehensive supervision by anotherregulator.

The Commission notes that it has notyet exercised its discretionary authorityto exempt DCOs from registration.Notwithstanding that there are noexempt DCOs at this time, the

Commission has determined to revisethe rule text as suggested by ISDA/SIFMA. If the Commission determinesto exercise its authority to exempt DCOsfrom applicable registrationrequirements, the Commission wouldlikely address, among other things, theconditions and limitations applicable toclearing swaps for customers subject to

section 4d(f) of the Act.700 Until such time as the Commission

determines to exercise its authority toexempt DCOs from the applicableregistration requirement, SEFs mustroute all swaps through registeredDCOs, which are the appropriateentities to perform the clearingfunctions under CEA section 2(h)(1) atthis time. Registered DCOs are subject tothe CEA, the Commission’s regulations,and its regulatory programs. Amongother things, registered DCOs aresupervised for compliance with theCommission’s regulations, and

subjected to ongoing risk surveillanceand regular examinations.In consideration of MarketAxess’s

comment that a SEF should be able torely on a representation from an end-user that it qualifies for the CEA section2(h)(7) exception, the Commissionclarifies that a SEF is not obligated tomake any determinations with respectto applicability of the exceptions to theclearing requirement.

(b) §37.702—General Financial Integrity

Proposed §37.702(a) required a SEFto provide for the financial integrity of its transactions by establishingminimum financial standards for itsmembers. At a minimum, a SEF wouldhave to ensure that its members meetthe definition of ‘‘eligible contractparticipant’’ under CEA section 1(a)(18).Proposed §37.702(b) required a SEF, fortransactions cleared by a DCO, to havethe capacity to route transactions to theDCO in a manner acceptable to the DCOfor purposes of ongoing riskmanagement. In proposed §37.702(c),for transactions that are not cleared bya DCO, a SEF must require members todemonstrate that they: (1) Have enteredinto credit arrangement documentation

for the transaction, (2) have the abilityto exchange collateral, and (3) meet anycredit filters that the SEF may adopt.Proposed §37.702(d) required a SEF toimplement any additional safeguards


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701Bloomberg Comment Letter at 5 (Mar. 8, 2011).702 Id.703Reuters Comment Letter at 6 (Mar. 8, 2011).704MarketAxess Comment Letter at 35 (Mar. 8,

2011).705 Id.706Energy Working Group Comment Letter at 5

(Mar. 8, 2011).707MarketAxess Comment Letter at 37 (Mar. 8,

2011).708Reuters Comment Letter at 6 (Mar. 8, 2011).709 ISDA/SIFMA Comment Letter at 13 (Mar. 8,

2011).710ABC/CEIBA Comment Letter at 11 (Mar. 8,

2011).

711

Goldman Comment Letter at 5 (Mar. 8, 2011).712 Id.713 Id.714The Commission notes that under

§ 37.202(a)(2), a SEF that permits intermediationmust also obtain signed representations fromintermediaries that their customers are ECPs.

715Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member RiskManagement, 77 FR 21278 (Apr. 9, 2012).

716Requirements for Processing, Clearing, andTransfer of Customer Positions, 76 FR 13101,13109–10 (proposed Mar. 10, 2011).

717Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member RiskManagement, 77 FR at 21309.

718 Id.719 Id.720ABC/CEIBA Comment Letter at 11 (Mar. 8,

2011).

that may be required by Commissionregulations.


Bloomberg commented, with respectto proposed §37.702(a), that a SEFshould be able to determine a marketparticipant’s ability to meet anyminimum financial standards by virtue

of confirming that the participant hasaccess to a DCO either as a member orthrough an intermediary.701 Accordingto Bloomberg, it is not necessary to setseparate, duplicative financialrequirements at the SEF level that areredundant to the exhaustive financialrequirements that will be associatedwith access to a DCO.702

With respect to proposed § 37.702(b),Reuters agreed that SEFs should assurethe secure and prompt routing to a DCOfor swap transactions subject to theclearing requirement.703 MarketAxesscommented that SEFs should be able tosend a trade to the DCO via anaffirmation hub.704 Use of affirmationhubs, according to MarketAxess, wouldallow SEFs to enjoy lower costs and ispreferred by its clients.705

The Commission received severalcomments with regard to proposed§ 37.702(c). The Energy Working Groupnoted that proposed § 37.702(c) should

be narrower in scope and that a SEFshould be able to fulfill its obligation byensuring that the counterparties haveentered into bilateral credit supportarrangements.706 MarketAxess wrotethat a SEF is not in a position todetermine whether members’ credit

filters or exchanges of collateral aresufficient.707 Reuters noted that theexistence of credit and/or collateralarrangements should be primarily amatter between the counterparties.708 ISDA/SIFMA commented that theCommission should not create newcollateral requirements for end-userstransacting through a SEF.709 ABC/CIEBA commented that proposed§ 37.702(c) would impose costly

burdens on SEFs.710 Goldman noted that there are

circumstances where a swap that issubject to the clearing requirement may

not be accepted for clearing for credit orother reasons.711 In such cases anddepending on the SEF’s rules underCore Principle 7, parties that executethrough the SEF either would face oneanother in an uncleared, bilateraltransaction or would potentially oweamounts arising from the trade not beingaccepted for clearing.712 Therefore,

Goldman recommended that partiesshould be able to learn the identities of their counterparty when transacting incleared and uncleared swaps.713


The Commission has considered thecomments received and is adopting§ 37.702(a) as proposed. In response toBloomberg’s comment about settingfinancial requirements at the SEF level,the Commission disagrees that a SEFshould be able to determine a member’sability to meet any minimum financialstandards by virtue of confirming that

the member has access to a DCO. TheCommission notes that a DCO onlyscreens clearing members, and notcustomers, according to financialstandards. Therefore, unless a SEFmember is also a clearing member, theSEF will not be able to determine themember’s ability to meet any minimumfinancial standards by virtue of confirming that the member has accessto a DCO. The Commission also notesthat there is no affirmative obligation fora DCO to ensure that its members,customers, or counterparties are ECPs.Therefore, a SEF must ensure that itsmembers qualify as ECPs and may relyon representations from its members tofulfill this requirement.714

Last year, the Commission adoptedrules regarding the processing of clearedtrades.715 In that rulemaking, theCommission proposed a new§ 37.702(b)716 and adopted a revised§ 37.702(b)717 regarding cleared swapstraded through a SEF. That final rulerequired a SEF to provide for thefinancial integrity of its transactions thatare cleared by a DCO: (a) By ensuringthat it has the capacity to routetransactions to the DCO in a manner

acceptable to the DCO for purposes of clearing; and (b) by coordinating witheach DCO to which it submitstransactions for clearing, in thedevelopment of rules and procedures tofacilitate prompt and efficienttransaction processing in accordancewith the requirements of § 39.12(b)(7) of the Commission’s regulations.718

In response to MarketAxess’scomment about affirmation hubs, theCommission notes that §37.702(b), asadopted in April 2012, requires a SEF toroute a swap to a DCO in a manneracceptable to the DCO.719 If the DCOviews the use of an affirmation hub asan acceptable means for routing theswap, the routing otherwise complieswith §37.702(b), and the trade isprocessed in accordance with thestandards set forth in §§ 1.74, 39.12,23.506, and 23.610 of the Commission’sregulations, then the use of anaffirmation hub for routing a swap to a

DCO for clearing would be permissible.In consideration of the commentswith respect to uncleared swaps, theCommission is eliminating proposed§ 37.702(c). The Commission agreeswith commenters that requiring SEFs tomonitor the credit and collateralarrangements of parties transactinguncleared swaps goes beyond the scopeof what should be expected of a SEF. Toaddress Goldman’s commentsrequesting that the Commissionmandate that a SEF’s rules requireidentification of the counterparties priorto a swap transaction, the Commission

believes that a SEF should retaindiscretion in this regard. Finally, theCommission is deleting proposed§ 37.702(d) as it is unnecessary becausea SEF must already implementsafeguards as required by Commissionregulations.

(c) §37.703—Monitoring for FinancialSoundness

Proposed §37.703 required a SEF tomonitor its members’ compliance withthe SEF’s minimum financial standardsand routinely receive and promptlyreview financial and related informationfrom its members.


ABC/CIEBA commented that thisrequirement would create significant

barriers to entry, stifle competition, andlead to higher transaction costs.720 FXallcommented that like DCMs, SEFsshould be permitted to delegate theirfinancial surveillance functions to the


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721FXall Comment Letter at 13 (Mar. 8, 2011).722 Id.723CEA section 5h(f)(8); 7 U.S.C. 7b–3(f)(8).724The Commission notes that Commission

regulation 40.6(a)(6)(i) provides that any SEF rulethat establishes general standards or guidelines fortaking emergency actions must be submitted to theCommission pursuant to regulation 40.6(a).Relatedly, Commission regulation 40.6(a)(6)(ii)provides particular emergency actions shall be filedwith the Commission ‘‘prior to [its]implementation, or, if not practicable, . . . at theearlier possible time after implementation, but in noevent more than twenty-four hours afterimplementation.’’

725Bloomberg Comment Letter at 4 (Jun. 3, 2011);Bloomberg Comment Letter at 5–6 (Mar. 8, 2011);WMBAA Comment Letter at 28 (Mar. 8, 2011);Reuters Comment Letter at 7 (Mar.8, 2011).

726Bloomberg Comment Letter at 4 (Jun. 3, 2011);Bloomberg Comment Letter at 5–6 (Mar. 8, 2011).

727WMBAA Comment Letter at 28 (Mar. 8, 2011).728Reuters Comment Letter at 7 (Mar. 8, 2011).729CME Comment Letter at 28 (Feb. 22, 2011).


731CEA section 5h(f)(8); 7 U.S.C. 7b–3(f)(8).732CEA section 5h(f)(9); 7 U.S.C. 7b–3(f)(9).733 Id.

Joint Audit Committee to the extent thatits members are registered with NFA.721 For non-NFA members, FXallrecommended that SEFs be permitted todelegate financial surveillanceobligations to the members’ primaryfinancial regulator or otherwiseoutsource such duties to a third partyservice provider.722


The Commission agrees with thecommenters that burdensome financialsurveillance obligations may lead tohigher transaction costs. Therefore, inconsideration of the comments, theCommission is revising §37.703 to statethat a SEF must monitor its members toensure that they continue to qualify asECPs. With regard to the commentrequesting delegation of the proposed§ 37.703 responsibilities to the JointAudit Committee, the Commission notesthat final §37.703, as revised, obviatesthe need for any such delegation. Underfinal § 37.703, a SEF need only ensurethat its members remain ECPs and mayrely on representations from itsmembers.

8. Subpart I—Core Principle 8(Emergency Authority)

Core Principle 8 requires a SEF toadopt rules to provide for the exerciseof emergency authority, in consultationor cooperation with the Commission, asis necessary and appropriate, includingthe authority to liquidate or transferopen positions in any swap or tosuspend or curtail trading in a swap.723

In the SEF NPRM, the Commissionproposed to codify the statutory text of Core Principle 8 in proposed §37.800,and adopts that rule as proposed.724

(a) § 37.801—Additional Sources forCompliance

Proposed §37.801 referred applicantsand SEFs to the guidance and/oracceptable practices in appendix B topart 37 to demonstrate compliance withCore Principle 8. The guidance reflectedthe Commission’s belief that the needfor emergency action may also arisefrom related markets traded on otherplatforms and that there should be an

increased emphasis on cross-marketcoordination of emergency actions. Inthat regard, the proposed guidanceprovided that, in consultation andcooperation with the Commission, aSEF should have the authority tointervene as necessary to maintainmarkets with fair and orderly tradingand to prevent or address manipulation

or disruptive trading practices, whetherthe need for intervention arisesexclusively from the SEF’s market or aspart of a coordinated, cross-marketintervention. The proposed guidancealso provided that in situations where aswap is traded on more than oneplatform, emergency action to liquidateor transfer open interest must be asdirected, or agreed to, by theCommission or the Commission’s staff.The proposed guidance also clarifiedthat the SEF should have rules thatallow it to take market actions as may

be directed by the Commission.

In addition to providing for rules,procedures, and guidelines foremergency intervention, the guidancenoted that SEFs should provide promptnotification and explanation to theCommission of the exercise of emergency authority, and thatinformation on all regulatory actionscarried out pursuant to a SEF’semergency authority should be includedin a timely submission of a certifiedrule.


Several commenters expressedconcern about a SEFs ability to liquidate

or transfer open positions.725 Bloombergstated that, because a SEF will not holda participant’s swap positions, theCommission should only require that aSEF adopt rules requiring it tocoordinate with a DCO to facilitate theliquidation or transfer of positionsduring an emergency.726 Similarly,WMBAA noted that a SEF will notmaintain counterparty positions andthus it may not possess the ability toliquidate or transfer those positions.727 Reuters stated that liquidating openpositions does not fall within a tradingplatform’s traditional role in the

market.728

CME stated that SEFs must have theflexibility and independence necessaryto address market emergencies.729 Alternatively, ISDA/SIFMA commented

that the Core Principle 8 rules shouldadopt uniform standards and that thosestandards must consider the interaction

between SEFs, DCMs, clearingorganizations, swap data repositories,and other market-wide institutions.730


The Commission is adopting §37.801as proposed, with certain modificationsto the guidance in appendix B to part37. The Commission acknowledgescommenters concerns regarding a SEF’sability to liquidate or transfer openpositions; however, the statute requiresa SEF to have the authority to liquidateor transfer open positions.731 TheCommission expects that SEFs wouldestablish such authority over openpositions through their rules and/orparticipant agreements and that theexercise of any such authority would,consistent with the statute, be done incoordination with the Commission and

relevant DCOs.The Commission is making slight

revisions to the guidance to clarify thatSEFs retain the authority toindependently respond to emergenciesin an effective and timely mannerconsistent with the nature of theemergency, as long as all such actionstaken by the SEF are made in good faithto protect the integrity of the markets.The Commission believes that marketemergencies can vary with the type of market and any number of unusualcircumstances so SEFs need flexibilityto carry out emergency actions. The

Commission believes that the guidancestrikes a reasonable balance between theneed for flexibility and the need forstandards in the case of coordinatedcross-market intervention.

9. Subpart J—Core Principle 9 (TimelyPublication of Trading Information)

Core Principle 9 requires a SEF tomake public timely information onprice, trading volume, and other tradingdata on swaps to the extent prescribed

by the Commission.732 It also requires aSEF to have the capacity toelectronically capture and transmit

trade information for those transactionsthat occur on its facility.733 In the SEFNPRM, the Commission proposed tocodify the statutory text of CorePrinciple 9 in proposed § 37.900.Proposed §37.901 required that, forswaps traded on or through a SEF, theSEF report specified swap data as


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73417 CFR part 43; Real-Time Reporting of SwapTransaction Data, 77 FR 1182 (Jan. 9, 2012).

73517 CFR part 45; Swap Data Recordkeeping andReporting Requirements, 77 FR 2136 (Jan. 13, 2012).

736The Commission proposed certain revisions to§ 16.01 in the DCM NPRM. See Core Principles andOther Requirements for Designated ContractMarkets, 75 FR 80572 (proposed Dec. 22, 2010) forfurther details.

737Eris Comment Letter at 5 (Mar. 8, 2011).738 Id.739MarketAxess Comment Letter at 39 (Mar. 8,

2011).

740The Commission notes that §16.00 isapplicable to a SEF only to the extent that such SEFhas clearing members and lists options on physicalsfor trading. Section 16.01 is applicable to a SEF forall swaps and options traded thereon. Section 16.02is applicable to a SEF only to the extent that suchSEF lists options for trading.

741Core Principles and Other Requirements forDesignated Contract Markets, 77 FR 36612, 36642(Jun. 19, 2012).

742CEA section 5h(f)(10); 7 U.S.C. 7b–3(f)(10).743MarketAxess Comment Letter at 39 (Mar. 8,

2011).744CME Comment Letter at 38 (Feb. 22, 2011).

745See Registration and Regulation of Security-Based Swap Execution Facilities, 76 FR at 10982,11063 (Proposed Rule 818(b) requires SB–SEFs tokeep books and records ‘‘for a period of not lessthan five years, the first two years in an easilyaccessible place). Rule 17a–1(b) (240.17a–1(b)requires national securities exchanges, amongothers, to keep books and records for a period of not less than five years, the first two years in aneasily accessible place, subject to a destruction anddisposition provisions, which allows exchanges todestroy physical documents pursuant to an effectiveand approved plan regarding such destruction andtransferring/indexing of such documents onto somerecording medium.). 17 CFR 240.17a–1(b).

746CEA section 5h(f)(11); 7 U.S.C. 7b–3(f)(11).747NGSA Comment Letter at 2 (Jun. 8, 2012).

DTCC also raised this concern in its comment letter.DTCC Comment Letter at 3 (Jun. 10, 2011).

provided under part 43 734 and part45 735 of the Commission’s regulationsand meet the requirements of part 16 of the Commission’s regulations. Proposed§ 37.902 required a SEF to have thecapacity to electronically capture tradeinformation with respect to transactionsexecuted on the facility.

(a) Summary of CommentsIn response to the Commission’s

questions in the SEF NPRM about end-of-day price reporting for interest rateswaps and the Commission’s proposedrevisions to § 16.01,736 Eris stated thefollowing: (1) It is reasonable to requirea market to report publicly each trade(including instrument, price, andvolume) intra-day, as soon as the tradeoccurs; (2) daily open interest should bepublished publicly in a summaryfashion and should be grouped inmaturity buckets based on theremaining tenor of each instrument; (3)

as to end-of-day pricing, a clearinghouse will settle contracts based upon amarket-driven curve, and themethodology, as well as the inputs andcomponents, of the curve should bemade transparent to the full tradingcommunity; and (4) the clearing houseshould publish the specific settlementvalue applied to each cleared swap inthe daily mark-to-market process.737 Eris also stated that SEFs and DCMsshould be held to the same reportingstandard in this respect.738

MarketAxess commented thatproposed § 37.900(b) and § 37.902 areduplicative and that proposed § 37.902should be withdrawn.739


The Commission is adopting §37.900and §37.901 as proposed. TheCommission acknowledgesMarketAxess’s comment that § 37.902 isduplicative to §37.900(b) and thus iswithdrawing §37.902. In response toEris’s comment about the samereporting standards for SEFs and DCMsthat list swaps, the Commission notesthat a SEF, similar to a DCM, must meetthe same requirements under part 16 of the Commission’s regulations for swaps

reporting.740 The Commission also notesthat it codified §16.01 in the final DCMrulemaking, and in that rulemaking, theCommission states that it considered theproposed reporting standard put forth

by Eris, but the Commission believesthat the more detailed reportingobligations under §16.01 are warrantedat this time in light of the novelty of

swaps trading on regulatedexchanges.741

10. Subpart K—Core Principle 10(Recordkeeping and Reporting)

Core Principle 10 establishesrecordkeeping and reportingrequirements for SEFs.742 In the SEFNPRM, the Commission proposed tocodify the statutory text of CorePrinciple 10 in proposed § 37.1000, andadopts that rule as proposed.

Proposed §37.1001 required a SEF tomaintain records of all businessactivities, including a complete audit

trail, investigatory files, anddisciplinary files, in a form and manneracceptable to the Commission for atleast five years in accordance with therequirements of section 1.31 and part 45of this chapter. Proposed § 37.1002required a SEF to report to theCommission such information that theCommission determines to be necessaryor appropriate for it to perform itsduties. Proposed §37.1003 required aSEF to keep records relating to swapsdefined in section 1a(47)(A)(v) of theCEA open to inspection andexamination by the SEC.

(a) Summary of CommentsMarketAxess stated that a SEF should

be permitted to use a regulatory serviceprovider with respect to itsrecordkeeping and reportingrequirements.743 CME commented thatproposed §37.1003 does not provideany guidance as to what records willneed to be retained and for how longthey must be retained.744


The Commission is adopting§ 37.1001 as proposed. The Commissionis also withdrawing proposed §37.1002

and §37.1003 because they are

repetitive of paragraphs (a)(2) and (a)(3)of § 37.1000. In response toMarketAxess’s comment, theCommission notes that a SEF mayutilize the services of a regulatoryservice provider pursuant to §37.204 toassist the SEF in complying with itsresponsibilities under Core Principle 10.In response to CME’s comment, the

Commission notes that in accordancewith Core Principle 10 and §1.31 of theCommission’s regulations, a SEF shouldretain ‘‘any’’ records relevant to swapsdefined in section 1a(47)(A)(v) of theAct and that the SEF should leave suchrecords open to inspection andexamination for a period of five years.The Commission staff also consultedwith representatives from the SEC, whoconfirmed that the SEC’s relevantrecordkeeping requirements typicallyextend for a period of five years.745

11. Subpart L—Core Principle 11(Antitrust Considerations)

Core Principle 11 governs theantitrust obligations of SEFs.746 In theSEF NPRM, the Commission proposedto codify the statutory text of CorePrinciple 11 in proposed §37.1100, andadopts that rule as proposed.Additionally, proposed §37.1101referred applicants and SEFs to theguidance in appendix B to part 37 forpurposes of demonstrating compliancewith proposed §37.1100.


NGSA commented that if SEFs areallowed to select the SDR to which SEF-

executed swaps are reported, there is athreat of anticompetitive tying of swapdata reporting services from a particularSDR to the SEF’s services, which mayharm competition among SDRs.747 Accordingly, NGSA recommended thatthe Commission amend the proposedrules to explicitly prohibit a SEF fromtying the swap data reporting services of a particular SDR to the swap executionservices provided by such SEF and fromentering into an exclusive agreement


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748NGSA Comment Letter at 5 (Jun. 8, 2012).749CEA section 5h(f)(12); 7 U.S.C. 7b–3(f)(12).750Requirements for Derivatives Clearing

Organizations, Designated Contract Markets, andSwap Execution Facilities Regarding the Mitigationof Conflicts of Interest, 75 FR 63732 (proposed Oct.18, 2010).

751CEA section 5h(f)(13); 7 U.S.C. 7b–3(f)(13).

752 Id.753

See Derivatives Clearing Organization GeneralProvisions and Core Principles, 76 FR 69334 (Nov.8, 2011). Commission regulation §39.11 establishesrequirements that a DCO will have to meet in orderto comply with DCO Core Principle B (FinancialResources), as amended by the Dodd-Frank Act.Amended Core Principle B requires a DCO topossess financial resources that, at a minimum,exceed the total amount that would enable the DCOto meet its financial obligations to its clearingmembers notwithstanding a default by the clearingmember creating the largest financial exposure forthe DCO in extreme but plausible conditions; andenable the DCO to cover its operating costs for aperiod of one year, as calculated on a rolling basis.

754Parity Energy Comment Letter at 6 (Mar. 25,2011).

755Phoenix Comment Letter at 4 (Mar. 7, 2011).756TruMarx Comment Letter at 7 (Mar. 8, 2011).757 Id.758SDMA Comment Letter at 12 (Mar. 8, 2011).759 Id.760The Commission is making a technical change

due to the fact that the cross reference in§ 37.1301(b) should include ‘‘of this chapter’’ at theend of the reference in order to comply with federalregulatory guidelines. Accordingly, the Commissionis revising § 37.1301(b) to read: ‘‘An entity thatoperates as both a swap execution facility and aderivatives clearing organization shall also complywith the financial resources requirements of section39.11 of this chapter.’’ The Commission is alsoremoving the phrase ‘‘or applicant for designationas such’’ from §37.1301(c) because it isunnecessary. Section 37.3 and Form SEF readtogether make clear that an applicant must complywith the financial resources requirement.

761CEA section 5h(f)(13)(A); 7 U.S.C. 7b–3(f)(13)(A).


with any SDR to report all swaps tosuch SDR.748


The Commission is adopting§ 37.1101 and the correspondingguidance in appendix B to part 37 asproposed and declines to revise theproposed rules as NGSA recommends.

The Commission notes that under CorePrinciple 11, SEFs may not adopt anyrule or take any action that results inany unreasonable restraint of trade orimpose any material anticompetitive

burden on trading or clearing. TheCommission believes that Core Principle11 adequately addresses NGSA’sconcern. The Commission also notesthat it has not limited a SEF’s choice of DCOs. The Commission believes thatSDRs and DCOs should be able tocompete for a SEF’s business subject tothe anticompetitive considerationsunder Core Principle 11. Additionally,

the Commission notes that multipleSEFs are likely to trade the same swapcontracts so market participants will beable to choose the appropriate SEF totrade swaps based on SDR and otherconsiderations.

12. Subpart M—Core Principle 12(Conflicts of Interest)

Core Principle 12 governs conflicts of interest.749 In the SEF NPRM, theCommission proposed to codify thestatutory text of Core Principle 12 inproposed §37.1200, and adopts that ruleas proposed. As noted in the SEFNPRM, the substantive regulations

implementing Core Principle 12 wereproposed in a separate release titled‘‘Requirements for Derivatives ClearingOrganizations, Designated ContractMarkets, and Swap Execution FacilitiesRegarding the Mitigation of Conflicts of Interest.’’ 750 Until such time as theCommission may adopt the substantiverules implementing Core Principle 12,SEFs have reasonable discretion tocomply with this core principle asstated in §37.100.

13. Subpart N—Core Principle 13(Financial Resources)

Core Principle 13 requires a SEF tohave adequate financial, operational,and managerial resources to dischargeeach of its responsibilities.751 Inparticular, Core Principle 13 states thata SEF’s financial resources are

considered to be adequate if the valueof such resources exceeds the totalamount that would enable the SEF tocover its operating costs for a period of at least one year, calculated on a rolling

basis.752 In the SEF NPRM, theCommission proposed to codify thestatutory text of Core Principle 13 inproposed §37.1300, and adopts that rule

as proposed.(a) §37.1301—General Requirements

Proposed §37.1301 set forth thefinancial resources requirements forSEFs in order to implement CorePrinciple 13. Proposed §37.1301(a)required a SEF to maintain financialresources sufficient to enable it toperform its functions in compliancewith the SEF core principles. Proposed§ 37.1301(b) required an entity operatingas both a SEF and a DCO to comply with

both the SEF financial resourcesrequirements and the DCO financial

resources requirements in §39.11.753

Proposed §37.1301(c) stated thatfinancial resources would be consideredsufficient if their value is at least equalto a total amount that would enable theSEF, or applicant for designation assuch, to cover its operating costs for aperiod of at least one year, calculated ona rolling basis.


Several commenters raised concernsabout the financial resourcesrequirement to cover one year of operating costs. Parity Energyrecommended that the Commission

interpret ‘‘operating costs of a swapexecution facility for a 1-year period’’ to

be the cost to the SEF of an orderlywind-down of operations, where theSEF is one of many execution avenuesfor standardized, cleared swaps and itsfailure would have minimal impact onmarket risk or stability.754 Phoenixrecommended that because a SEF doesnot take or hold positions in any of theproducts traded on it, an orderly wind-down of a SEF should take six monthsso SEFs should be required to maintain

financial resources to cover six monthsof its operating costs.755 Similarly,TruMarx contended that SEFs shouldnot have such stringent financialresources standards because a SEF is atrading platform and, therefore, will notcarry on its books the risks of positionsand trades executed on it.756 Rather,TruMarx stated that risk will be borne

by the principals entering into thetransactions, their clearing brokers, andclearing houses.757

Alternatively, SDMA noted that itwould be disruptive to the market if aSEF went into bankruptcy.758 Therefore,it contended that 12 months of workingcapital is the absolute minimum amountof financial resources that SEFs shouldhave, and recommend that theCommission require that SEFs have 18months of working capital.759


The Commission is adopting§ 37.1301 as proposed.760 To address theconcerns about the financial resourcesrequirement, the Commission notes thatCore Principle 13 requires each SEF tomaintain adequate financial resources todischarge its responsibilities.761 In orderto fulfill this responsibility, the coreprinciple states that the financialresources of a SEF shall be consideredto be adequate if the value of thefinancial resources exceeds the totalamount that would enable the SEF tocover its operating costs for a period of one year, calculated on a rolling

basis.762 In response to comments that Core

Principle 13 should be interpreted tomean the cost to wind-down a SEF’soperations, the Commission notes thatsuch an interpretation would requireSEFs to have significantly less financialresources. The Commission believesthat a SEF’s financial strength is vital toensure that the SEF can discharge its


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

768The Commission is renaming the title of thissection from ‘‘Computation of Financial ResourceRequirement’’ to ‘‘Computation of ProjectedOperating Costs to Meet Financial ResourceRequirement’’ to provide greater clarity.


770The Commission is revising the language of § 37.1303 for clarity.

771Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1231.772A ‘‘haircut’’ is a deduction taken from the

value of an asset to reserve for potential futureadverse price movements in such asset.

773Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1231 n. 102.


775MarketAxess noted that §37.1304 contains atypographical error as it mistakenly cross-referencesproposed §37.701, which relates to the mandatoryclearing requirement, instead of proposed§ 37.1301. The Commission has made this technicalchange in the final rule. Additionally, theCommission is revising the language of §37.1304for clarity.

core principle responsibilities inaccordance with the CEA and that thosecosts are greater than the cost to wind-down operations. Based on itsexperience regulating DCMs and DCOs,the Commission has learned thatfinancial strength is vital to marketcontinuity and the ability of an entity towithstand unpredictable market events,

and believes that one year of operatingexpenses on a rolling basis isappropriate. For these reasons, theCommission also disagrees withTruMarx’s argument that SEFs shouldnot have such stringent financialresources standards because they willnot hold the risks of positions andtrades.

(b) §37.1302—Types of FinancialResources

Proposed §37.1302 set forth the typeof financial resources available to satisfythe requirements of proposed § 37.1301.

The proposed rule stated that financialresources may include: (a) The SEF’sown capital; and (b) Any other financialresource deemed acceptable by theCommission. The Commission invitedcomment regarding particular financialresources to be included in the finalregulation.763


Several commenters recommendedthat the Commission include specificexamples of financial resources thatmight satisfy the requirement. Phoenixrecommended that the Commissioninclude in final §37.1302 the followingfinancial resources: assets of a parentcompany that wholly owns the SEF,and, subject to §37.1304 (Valuation of financial resources), the SEF’s accountsreceivable from SEF members.764 Phoenix contended that as long as theparent company has committed toguarantee the financial resourceobligations of the SEF, those assetsshould be available to the SEF, and thatamounts owed to a SEF by its customersare easily obtainable by a SEF.765 CME

believed that Congress intended theterm ‘‘financial resources’’ to be

construed broadly and include anythingof value at the SEF’s disposal, includingoperating revenues.766 Reutersrecommended that assets of affiliatedentities within a corporate group should

be acceptable types of financialresources.767


The Commission is revising proposed§ 37.1302(a) to state that a SEF’s owncapital means its assets minus itsliabilities calculated in accordance withU.S. Generally Accepted AccountingPrinciples (‘‘GAAP’’). The Commission

believes that if a particular financialresource is an asset under GAAP, thenit is appropriate for inclusion in thecalculation for this rule. If a particularfinancial resource is not an asset underGAAP, but based upon the facts andcircumstances a SEF believes that theparticular financial resource should beacceptable, the Commission staff willwork with the SEF to determinewhether such resource is acceptable. Inthis regard, the Commission is clarifyingthat the language in final §37.1302(b) isintended to provide flexibility to bothSEFs and the Commission indetermining other acceptable types of financial resources on a case-by-case

basis.Finally, the Commission notes that it

may not have jurisdiction over a SEF’sparent company or its affiliates;therefore, the Commission cannotconsider the parent company’s oraffiliates’ financial resources indetermining whether the SEF possessesadequate financial resources.

(c) § 37.1303—Computation of FinancialResource Requirement 768

Proposed §37.1303 required a SEF,each fiscal quarter, to make a reasonablecalculation of its projected operatingcosts over a twelve-month period todetermine the amount needed to meetthe requirements of proposed § 37.1301.Proposed §37.1303 provided SEFs withreasonable discretion to determine themethodology used to compute suchprojected operating costs. The proposedrule authorized the Commission toreview the methodology and requirechanges as appropriate.


MarketAxess noted that the proposedregulations do not prescribe specificmethodologies for computing projectedoperating costs and recommended that

the Commission provide a safe harborfor specific methodologies.769


The Commission is adopting§ 37.1303 as proposed because itprovides flexibility to both SEFs and the

Commission regarding the calculation of projected operating costs.770 Thisflexibility would be limited if theCommission prescribed specificmethodologies for computing projectedoperating costs in the rule text. Inresponse to MarketAxess’s comment,the Commission notes that SEFs maywork with the Commission staff to

create an appropriate methodology forcomputing such operating costs.

(d) §37.1304—Valuation of FinancialResources

Proposed §37.1304 required a SEF,not less than quarterly, to compute thecurrent market value of each financialresource used to meet its obligationsunder proposed § 37.1301. Theproposed rule required SEFs to performthe valuation at other times asappropriate. As stated in the SEFNPRM, the rule is designed to addressthe need to update valuations in

circumstances where there may have been material fluctuations in marketvalue that could impact a SEF’s abilityto meet its obligations under proposed§ 37.1301.771 The proposed rulerequired that, when valuing a financialresource, the SEF reduce the value, asappropriate, to reflect any market orcredit risk specific to that particularresource (i.e., apply a haircut).772 TheSEF NPRM stated that the Commissionwould permit SEFs to exercisediscretion to determine applicablehaircuts, which would be subject toCommission review and acceptance.773


MarketAxess commented thatproposed §37.1304 did not prescribespecific methodologies for valuingfinancial resources and recommendedthat the Commission provide a safeharbor for specific methodologies.774


The Commission is adopting§ 37.1304 as proposed.775 As with


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777 Id.778 Id.779CME Comment Letter at 37 (Feb. 22, 2011).780Phoenix Comment Letter at 4 (Mar. 7, 2011).

781Parity Energy Comment Letter at 6 (Mar. 25,2011).

782SDMA Comment Letter at 12 (Mar. 8, 2011).783The Commission is renaming the title of this

section from ‘‘Reporting Requirements’’ to‘‘Reporting to the Commission’’ to provide greaterclarity.

784This filing deadline is consistent with thedeadline imposed on FCMs for the filing of monthlyfinancial reports. See 17 CFR 1.10(b) for furtherdetails.

785CME Comment Letter at 38 (Feb. 22, 2011).786 Id.787 Id.788MarketAxess Comment Letter at 40 (Mar. 8,

2011).789CME Comment Letter at 38 (Feb. 22, 2011).

§ 37.1303, § 37.1304 provides flexibilityto both SEFs and the Commissionregarding the valuation of financialresources. This flexibility would belimited if the Commission prescribedspecific methodologies for valuingfinancial resources in the rule text. Inresponse to MarketAxess’s comment,the Commission notes that SEFs may

work with the Commission staff tocreate an appropriate methodology forvaluing such financial resources.

(e) § 37.1305—Liquidity of FinancialResources

Proposed §37.1305 required a SEF’sfinancial resources to includeunencumbered, liquid financial assets(i.e., cash and/or highly liquidsecurities) equal to at least six months’operating costs. As noted in the SEFNPRM, the Commission believes thatthe requirement to have six months’worth of unencumbered, liquidfinancial assets would provide a SEFtime to liquidate the remaining financialassets it would need to continueoperating for the last six months of therequired one-year period.776 Theproposed rule stated that if any portionof such financial resources is notsufficiently liquid, the SEF may takeinto account a committed line of creditor similar facility to satisfy thisrequirement. As stated in the SEFNPRM, a SEF may only use a committedline of credit or similar facility to meetthe liquidity requirements set forth in§ 37.1305.777 Accordingly, the SEFNPRM stated that a committed line of

credit or similar facility is not availableto a SEF to satisfy the financialresources requirements of §37.1301.778


Several commenters recommendedalternate liquidity requirements to thesix months of operating costs. CMEcommented that the liquiditymeasurement is only relevant in thecontext of winding-down operations,and claimed that a three-month period,rather than a six-month period, is amore accurate assessment of how long itwould take for a SEF to wind down.779 Similarly, Phoenix recommended that aSEF be required to maintain liquidassets equal to three months of operating expenses.780 Parity Energycommented that the Commission shouldtailor financial requirements to a SEF’ssize and market impact andrecommended limiting the six month

liquid asset requirement to only thoseSEFs whose failure could impact marketstability.781 SDMA, however,recommended that the Commissionrequire SEFs to have at least 12 monthsof unencumbered capital.782



§ 37.1305 as proposed. The Commissionviews a six month period as appropriatefor a wind down period and notes thatcommenters did not provide anysupport for alternative time frames. Inresponse to Parity Energy’s comment,the Commission notes that the purposeof the liquidity requirement is so that allSEFs have liquid financial assets toallow them to continue to operate andto wind down in an orderly fashion.Therefore, the Commission is notlimiting the liquidity requirement toonly those SEFs whose failure couldimpact market stability. In this regard,the Commission notes that the statutoryfinancial resources requirements applyto all SEFs and are necessary to ensurecore principle compliance. The statutedoes not distinguish SEFs’ financialresources based on their market impact.

The Commission also notes that it isusing the term ‘‘unencumbered’’ in§ 37.1305 in the normal commercialsense to refer to assets that are notsubject to a security interest or otheradverse claims. By ‘‘committed line of credit or similar facility,’’ theCommission means a committed,irrevocable contractual obligation toprovide funds on demand with

preconditions limited to the executionof appropriate agreements. For example,a facility with a material adversefinancial condition restriction wouldnot be acceptable. The purpose of thisrequirement is for a SEF to have noimpediments to accessing its line of credit at the time it needs liquidity.Further, SEFs are encouraged toperiodically check their line of creditarrangements to confirm that nooperational difficulties are present.

(f) § 37.1306—ReportingRequirements 783

Proposed §37.1306(a)(1) requiredthat, at the end of each fiscal quarter, orat any time upon Commission request,a SEF report to the Commission: (i) Theamount of financial resources necessaryto meet the requirements of §37.1301;and (ii) the value of each financial

resource available to meet thoserequirements. Proposed §37.1306(a)(2)required a SEF to provide theCommission with a financial statement,including balance sheet, incomestatement, and statement of cash flowsof the SEF or of its parent company.Proposed §37.1306(b) requiredcalculations to be made on the last

business day of the SEF’s fiscal quarter.Proposed §37.1306(c) required a SEF

to provide the Commission withsufficient documentation explaining themethodology it used to calculate itsfinancial requirements and the basis forits valuation and liquiditydeterminations. The proposed rule alsorequired the SEF to provide copies of any agreements establishing oramending a credit facility, insurancecoverage, or any similar arrangementthat evidences or otherwise supports itsconclusions.

Finally, proposed §37.1306(d)

required SEFs to file the report no laterthan 17 business days 784 from the endof its fiscal quarter but allowed SEFs torequest an extension of time from theCommission.


CME wrote that it would not befeasible for SEFs to comply with theproposed filing deadline of 17 businessdays from the end of a SEF’s fiscalquarter.785 CME recommended areporting deadline of 40 calendar daysafter the end of each fiscal quarter and60 calendar days after the end of thefiscal year, which it noted is consistentwith the SEC’s reportingrequirements.786 CME also soughtclarification that consolidated financialstatements covering multiple registeredentities satisfy the reportingrequirements.787

MarketAxess stated that the proposedreporting requirements are unnecessaryand burdensome, and recommendedthat the Commission allow a seniorofficer of the SEF to represent to theCommission that the SEF satisfies thefinancial resources requirements.788

Two commenters discusseddisclosure of the reports. CME

recommended that the Commissionclarify that filings made in compliancewith the proposed financial resourcesregulations are confidential.789


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790SIMFA AMG Comment Letter at 13 (Mar. 8,2011).

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

79217 CFR 145.9.793CEA section 5h(f)(14); 7 U.S.C. 7b–3(f)(14).

However, SIFMA AMG commented thatSEFs should submit to the Commissionand make available for public commentevidence demonstrating sufficientresources.790


The Commission is adopting§ 37.1306 as proposed, subject to certainamendments to the filing deadlines.791 The Commission agrees with CME thatthe proposed 17 business day filingdeadline may be burdensome. In thefinal rule, the Commission is extendingthe 17 business day proposed filingdeadline to 40 calendar days for thefiscal quarter reports and to 60 calendardays for the fiscal year-end report,which will also harmonize the filingdeadlines with the SEC’s requirementsfor its Form 10–Q and Form 10–K. TheCommission also clarifies thatconsolidated financial statements mustdisclose all relevant and appropriate

figures such that a determination of thesufficiency of financial resources of aSEF can be made without additionalrequests for information from the entity.In such case, consolidated financialstatements would comply with thereporting requirements.

In response to MarketAxess’scomment that the reportingrequirements are unnecessary and

burdensome, the Commission believesthat prudent financial managementrequires SEFs to prepare and reviewfinancial reports on a regular basis andexpects that SEFs would regularly

review their finances. In this regard, theCommission notes that because of theimportance of this requirement, a mererepresentation by a senior officer isinsufficient for verification that the SEFmeets its financial obligations. Thequarterly reporting required by§ 37.1306 will adequately provide theCommission with assurance that a SEFsatisfies its financial resourcesrequirements. The Commission notesthat DCMs and DCOs have similarfinancial resources reporting obligationsand does not believe that SEFs should

be treated differently. The Commission

also believes that much of theinformation required by the reportsshould be readily available to asophisticated organization, which theCommission expects would regularlyaccount for its financial resources. Assuch, the Commission notes that thecost of submitting these reports to theCommission would be de minimis.

The Commission further clarifies thatit does not intend to make financialresources reports public. However,where such information is, in fact,confidential, the Commissionencourages SEFs to submit a writtenrequest for confidential treatment of such filings under the Freedom of Information Act (‘‘FOIA’’), pursuant to

the procedures established in section145.9 of the Commission’sregulations.792 The determination of whether to disclose or exempt suchinformation in the context of a FOIAproceeding would be governed by theprovisions of part 145 and any otherrelevant provision.

Finally, the Commission is addingnew §37.1307 titled ‘‘Delegation of Authority’’ to the final SEF rules todelegate authority to the Director of DMO to perform certain functions thatare reserved to the Commission undersubpart N.

14. Subpart O—Core Principle 14(System Safeguards)

Core Principle 14 pertains to theestablishment of system safeguards andrequires SEFs to: (1) Establish andmaintain a program of risk analysis andoversight to identify and minimizesources of operational risk through thedevelopment of appropriate controlsand procedures and the development of automated systems that are reliable,secure, and have adequate scalablecapacity; (2) establish and maintainemergency procedures, backupfacilities, and a plan for disaster

recovery that allow for the timelyrecovery and resumption of operationsand the fulfillment of theresponsibilities and obligations of theSEF; and (3) periodically conduct teststo verify that backup resources aresufficient to ensure continued orderprocessing and trade matching, pricereporting, market surveillance, andmaintenance of a comprehensive andaccurate audit trail.793 In the SEFNPRM, the Commission proposed tocodify the statutory text of CorePrinciple 14 in proposed § 37.1400, andadopts that rule as proposed.

(a) § 37.1401—Requirements

Proposed §37.1401(a) required a SEFto: Establish and maintain a program of risk analysis and oversight; establishand maintain emergency procedures,

backup facilities, and a plan for disasterrecovery; and periodically conduct teststo verify that backup resources aresufficient. Proposed §37.1401(b)required that a SEF’s program of risk

analysis and oversight address sixcategories of risk analysis and oversight,including: Information security;

business continuity-disaster recovery(‘‘BC–DR’’) planning and resources;capacity and performance planning;systems operations; systemsdevelopment and quality assurance; andphysical security and environmental

controls. Proposed §37.1401(c)suggested that a SEF follow generallyaccepted standards and best practiceswhen addressing the categories of riskanalysis and oversight.

Proposed §37.1401(d) and (e) alsorequired each SEF to maintain a BC–DRplan, BC–DR resources, emergencyprocedures, and backup facilitiessufficient to enable timely recovery andresumption of its operations andongoing fulfillment of itsresponsibilities and obligations as a SEFfollowing any disruption, either throughsufficient infrastructure and personnel

resources of its own or throughsufficient contractual arrangements withother SEFs or disaster recovery serviceproviders. If the Commissiondetermines that a SEF is a criticalfinancial market, then that SEF would

be subject to more stringentrequirements, set forth in § 40.9 of theCommission’s regulations.

The proposed rule also required eachSEF to notify the Commission staff of various system security-related events,including prompt notice of all electronictrading halts and systems malfunctions(proposed §37.1401(f)(1)), cyber-security incidents (proposed

§ 37.1401(f)(2)), and any activation of the SEF’s BC–DR plan (proposed§ 37.1401(f)(3)). In addition, theproposed rule required each SEF toprovide the Commission staff withtimely advance notice of all plannedchanges to automated systems that mayimpact the reliability, security, oradequate scalable capacity of suchsystems (proposed § 37.1401(g)(1)) andplanned changes to programs of riskanalysis and oversight (proposed§ 37.1401(g)(2)).

The proposed rule also required eachSEF to provide relevant documents to

the Commission (proposed §37.1401(h))and to conduct regular, periodic,objective testing and review of itsautomated systems (proposed§ 37.1401(i)). Moreover, proposed§ 37.1401(j) required each SEF, to theextent practicable, to coordinate its BC–DR plan with those of the marketparticipants upon whom it depends toprovide liquidity, to initiate coordinatedtesting of such plans, and to ensure thatits BC–DR plan takes into account theBC–DR plans of relevanttelecommunications, power, water, and


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794CME Comment Letter at 36 (Feb. 22, 2011).795 Id.796 Id. at 37.797 Id.798 Id.799MarketAxess Comment Letter at 40 (Mar. 8,

2011); WMBAA Comment Letter at 28 (Mar. 8,2011).


801 Id.

802As a result of these changes, proposed section(b) is adopted as section (a), proposed section (d)is adopted as section (b), proposed section (e) isadopted as section (c), proposed section (f) isadopted as section (d), proposed section (g) isadopted as section (e), proposed section (h) isadopted as section (f), proposed section (i) isadopted as section (g), and proposed section (k) isadopted as section (h).

803Business Continuity and Disaster Recovery, 75FR 42633 (proposed Jul. 22, 2010). The Commissionnotes that this rulemaking is not yet final.

804 Id. at 42639.805 Id. at 42638–39.806CEA section 5h(f)(15); 7 U.S.C. 7b–3(f)(15).807 Id.808 Id.809 Id.

other essential service providers.Finally, proposed § 37.1401(k) statedthat part 46 of the Commission’sregulations governs the obligations of entities determined to be criticalfinancial markets, with respect tomaintenance and geographical dispersalof disaster recovery resources.

(1) Summary of CommentsCME objected to what it considers to

be an overly broad requirement inproposed §37.1401(f)(1) to notify theCommission staff promptly of allelectronic trading halts and systemsmalfunctions.794 CME stated that therequired reporting should be limitedonly to material system failures.795 CMEalso objected to proposed§ 37.1401(g)(1), stating that therequirement that SEFs provide theCommission with timely advance noticeof all planned changes to automatedsystems that may impact the reliability,

security, or adequate scalable capacityof such systems is overly burdensome,and not cost effective.796 Additionally,CME stated that the proposed§ 37.1401(g)(2) requirement that SEFsprovide timely advance notice of allplanned changes to their program of riskanalysis and oversight is too broad andgenerally unnecessary.797 Finally, CMEnoted that it does not control, orgenerally have access to, the details of the disaster recovery plans of its majorvendors.798

MarketAxess and WMBAA soughtclarification of the criteria used to

determine which SEFs are ‘‘criticalfinancial markets,’’ as referenced inproposed § 37.1401(d).799


As noted in the SEF NPRM,automated systems play a central andcritical role in today’s electronicfinancial market environment, and theoversight of core principle compliance

by SEFs with respect to automatedsystems is an essential part of effectiveoversight of swaps market.800 Advancedcomputer systems are fundamental to aSEF’s ability to meet its obligations and

responsibilities under the coreprinciples.801 Accordingly, theCommission is adopting §37.1401 as

proposed, subject to the modificationsdescribed below.

Although the Commission did notreceive related comments, theCommission is eliminating proposed§ 37.1401(a) because this paragraph isrepetitious of proposed rule § 37.1400.The Commission is also moving thefollowing portions of proposed

§ 37.1401 to the guidance in appendix Bto part 37 because the rules as proposedprovided SEFs with a degree of discretion: (1) Proposed §37.1401(c)suggesting that a SEF follow generallyaccepted standards and best practices inaddressing the categories of its riskanalysis and oversight program; (2) theportion of proposed §37.1401(i)suggesting that a SEF’s testing of itsautomated systems and BC–DRcapabilities be conducted by qualified,independent professionals; and (3)proposed §37.1401(j) suggesting that aSEF coordinate its BC–DR plan with

those of others.802

Given that theseproposed provisions provided SEFswith a degree of discretion, theCommission believes that they are bettersuited as guidance rather than rules, andas guidance, SEFs will have greaterflexibility in administering theirobligations.

In response to CME’s comments, theCommission is revising proposed§ 37.1401(f)(1) to provide that SEFs onlyneed to promptly notify the Commissionstaff of all material system malfunctions.With respect to planned changes toautomated systems or programs of riskanalysis and oversight, the Commissionis revising proposed §37.1401(g) torequire timely advance notification of all material changes to automatedsystems and to programs of risk analysisand oversight. The Commission believesthat these revisions are appropriate

because the scope of the proposed rulesmay have been too broad as CME noted.The Commission notes that proposed§ 37.1401(j) does not require SEFs tocontrol or have access to the details of the disaster recovery plans of its majorvendors. Rather, the requirement in theproposed rule, which is being adoptedas guidance, suggests coordination to

the extent possible.In response to comments from

WMBAA and MarketAxess, theCommission is revising proposed§ 37.1401(d) to include a reference to

appendix E to part 40 of theCommission’s regulations, whichdescribes the Commission’s criteria fordetermining whether a SEF is a criticalfinancial market.803 Appendix E to part40 describes the evaluation andnotification process for SEFs oncedesignated as a critical financialmarket.804

With respect to the references to§ 40.9 regarding critical financialmarkets in proposed § 37.1401(d) and37.1401(k), the Commission notes that§ 40.9, which was proposed in aseparate rulemaking,805 is not yet final.However, SEFs deemed critical financialmarkets will be subject to therequirements set forth in § 40.9 upon itseffective date. The Commission furthernotes that the reference to part 46 inproposed §37.1401(k) was a technicalerror. Instead, the proposed rule shouldhave referenced part 40. Accordingly,the Commission is replacing the

mistaken reference to part 46 with areference to part 40.

15. Subpart P—Core Principle 15(Designation of Chief ComplianceOfficer)

Core Principle 15 establishes theposition and duties of chief complianceofficer (‘‘CCO’’).806 Core Principle 15also requires the CCO to designprocedures to establish the handling,management response, remediation,retesting, and closing of noncomplianceissues.807 The statute also requires aCCO to prepare and sign an annualcompliance report that is filed with the

Commission.808 In addition, CorePrinciple 15 requires the CCO to includein the report a certification that, underpenalty of law, the report is accurateand complete.809 In the SEF NPRM, theCommission proposed to codify thestatutory text of Core Principle 15 inproposed §37.1500, and adopts that ruleas proposed.

(a) §37.1501—Chief Compliance Officer

Proposed §37.1501 implemented thestatutory provisions of Core Principle 15and granted CCOs the authoritynecessary to fulfill their responsibilities.

(1) §37.1501(a)—Definition of Board of Directors

Proposed §37.1501(a) defined ‘‘boardof directors’’ as the board of directors of


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810See Core Principles and Other Requirementsfor Swap Execution Facilities, 76 FR at 1232(discussing the reasons for this requirement).

811 Id.812WMBAA Comment Letter II at 2–6 (Mar. 8,

2011); FXall Comment Letter at 14–15 (Mar. 8,2011); CME Comment Letter at 5–6 (Feb. 7, 2011).WMBAA submitted two comment letters to the SEFrulemaking comment file on Mar. 8, 2011. Thesecond comment letter referred to herein as‘‘WMBAA Comment Letter II’’ only pertains to theSEF NPRM’s proposed CCO provisions.Additionally, rather than repeat its commentsregarding the CCO provisions that pertain to boththe DCO and SEF NPRMs, CME incorporated itsentire DCO rulemaking comment letter regardingCCOs dated Feb. 7, 2011 as Exhibit B to its SEFcomment letter dated Mar. 8, 2011. TheCommission notes these comments by referencing

the Feb. 7, 2011 date of CME’s DCO comment letterregarding CCOs. The Commission is also changingCME’s reference to ‘‘DCO’’ to ‘‘SEF’’ for thesecomments.

813WMBAA Comment Letter II at 2–6 (Mar. 8,2011); FXall Comment Letter at 14–15 (Mar. 8,2011); CME Comment Letter at 5–6 (Feb. 7, 2011).

814WMBAA Comment Letter II at 6 (Mar. 8,2011); FXall Comment Letter at 14–15 (Mar. 8,2011); CME Comment Letter at 6 (Feb. 7, 2011).

815

WMBAA Comment Letter II at 6–7 (Mar. 8,2011); MarketAxess Comment Letter at 27 (Mar. 8,2011); ICE Comment Letter at 6–7 (Mar. 8, 2011);CME Comment Letter at 3 (Feb. 7, 2011).

816WMBAA Comment Letter II at 6 (Mar. 8,2011).

817CME Comment Letter at 3 (Feb. 7, 2011).818MarketAxess Comment Letter at 27 n. 31 (Mar.

8, 2011).819Parity Energy Comment Letter at 6 (Mar. 25,

2011).820Tradeweb Comment Letter at 12 (Mar. 8,

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


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

823Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1232, n. 103.

a swap execution facility or for thoseswap execution facilities whoseorganizational structure does notinclude a board of directors, a bodyperforming a function similar to a boardof directors.


The Commission received no

comments on §37.1501(a) and isadopting the rule as proposed.

(2) §37.1501(b)—Designation andQualifications of Chief ComplianceOfficer

Proposed §37.1501(b)(1) required aSEF to establish a CCO position and todesignate an individual to serve in thatcapacity. Proposed §37.1501(b)(1)(i)required that a SEF provide its CCOwith the authority and resources todevelop and enforce policies andprocedures necessary to fulfill itsstatutory and regulatory duties. In

addition, proposed §37.1501(b)(1)(ii)provided that CCOs must havesupervisory authority over all staff acting in furtherance of the CCO’sstatutory, regulatory, and self-regulatoryobligations.

Proposed §37.1501(b)(2) required thata CCO have the appropriate backgroundand skills to fulfill the responsibilitiesof the position. Proposed§ 37.1501(b)(2)(i) prohibited anyonewho would be disqualified fromregistration under CEA sections 8a(2) or8a(3) from serving as a CCO.810 Proposed §37.1501(b)(2)(ii) prohibited aCCO from being a member of the SEF’slegal department or its generalcounsel.811


Some commenters stated that bymandating that the CCO have theauthority and resources to ‘‘enforce’’ aSEF’s policies and procedures, theproposed rules change the traditionalrole of a CCO and give the CCOauthority that should be reserved forsenior management.812 These

commenters stated that the traditionaland proper role of a CCO is to advisemanagement on compliance issues andthat management has the authority toenforce compliance policies andprocedures.813 The commentersrecommended that the Commissionrevise the proposed rules to give effectto the well-established and critical

distinction between a CCO andmanagement.814

Some commenters stated that theproposed rules should not prohibit aCCO from serving as the SEF’s generalcounsel or as a member of the SEF’slegal department.815 WMBAA noted thatit is not uncommon for a company’sCCO to be its general counsel.816 Similarly, CME noted that many CCOshave certain other job responsibilities,most typically in related ‘‘control areas’’such as the Legal Department or InternalAudit.817 Additionally, MarketAxessstated that this prohibition could

prevent a smaller SEF from structuringits internal management in the mostefficient manner.818 Parity Energyrecommended that this requirementonly apply to SEFs that could have asubstantial impact on market risk andstability if they were to fail.819 However,Tradeweb and Better Markets expressedsupport for a dedicated CCO positionindependent of a SEF’s legaldepartment.820 Better Markets alsocommented that in situations wherethere are a number of affiliatedorganizations, a single senior CCOshould have overall responsibility foreach affiliated and controlled entity,

even if the individual entities haveCCOs.821


The Commission is adopting§ 37.1501(b) as proposed, subject to two

modifications described below. Ingeneral, the Commission disagrees withthe commenters who believe that aCCO’s function is solely to monitor andadvise on compliance issues. Thesecommenters do not provide anystatutory support for this view and theirposition appears to conflict with thestatutory responsibilities of a CCO as set

forth in the Act. In particular, CEAsection 5h(f)(15)(B) requires a CCO to‘‘resolve any conflicts of interest thatmay arise’’ and to ‘‘ensure compliancewith this Act.’’ 822 These duties suggestthat a CCO is intended to be more thanjust an advisor, and must have theappropriate authority to enforce policiesand procedures related to his or herareas of responsibility. The Commission

believes that such authority isparticularly important for a SEF CCO,given the CCO’s responsibility inoverseeing a SEF’s self-regulatoryprograms.

However, to clarify the CCO’ssupervisory authority, the Commissionis amending proposed §37.1501(b)(1)(ii)to state that ‘‘[t]he chief complianceofficer shall have supervisory authorityover all staff acting at the direction of the chief compliance officer’’ (emphasisadded). This modification providesgreater clarity as to the SEF staff thatmust be under the managerial oversightof a CCO by emphasizing that such staff includes persons necessary for SEFs tofulfill their self-regulatory obligations,including compliance staff (e.g., tradepractice and market surveillance staff and enforcement staff). The Commissionnotes that other SEF staff are notcaptured by the requirements of § 37.1501(b)(1).

The Commission is withdrawingproposed §37.1501(b)(2)(ii), whichprohibits the CCO from serving as aSEF’s general counsel or as a member of its legal department. In the SEF NPRM,the Commission noted that there ispotentially a conflict of interest presentif a CCO serves as a SEF’s generalcounsel or as a member of its legaldepartment.823 However, theCommission has determined that thepotential costs of hiring additional staff

to satisfy the requirement in proposed§ 37.1501(b)(2)(ii) may impose anexcessive burden on SEFs, particularlysmaller SEFs.

Although the Commission iseliminating proposed §37.1501(b)(2)(ii)from the final SEF rules, theCommission notes that a conflict of interest may compromise a CCO’s


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824See Requirements for Derivatives ClearingOrganizations, Designated Contract Markets, andSwap Execution Facilities Regarding the Mitigationof Conflicts of Interest, 75 FR 63732, 63747–48(proposed Oct. 18, 2010). Proposed §37.19(b)describes the role of the ROC. The Commissionnotes that this rule is not yet final.

825FXall Comment Letter at 14 (Mar. 8, 2011);Tradeweb Comment Letter at 12 n.8 (Mar. 8, 2011);CME Comment Letter at 2–3 (Feb. 7, 2011).

826FXall Comment Letter at 14 (Mar. 8, 2011).827CME Comment Letter at 2–3 (Feb. 7, 2011).828Tradeweb Comment Letter at 6 (Jun. 3, 2011);

MarketAxess Comment Letter at 26 (Mar. 8, 2011);WMBAA Comment Letter II at 7 (Mar. 8, 2011);Tradeweb Comment Letter at 12 (Mar. 8, 2011).

829WMBAA Comment Letter II at 7 (Mar. 8,2011).



832AFR Comment Letter at 6 (Mar. 8, 2011);Better Markets Comment Letter at 19–20 (Mar. 8,2011).

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

8, 2011).836The Commission is making certain non-

substantive revisions to §37.1501(c) for clarity.

ability to effectively fulfill his or herresponsibilities as a CCO, and that suchconflicts may be more likely to arisewhen a CCO is also employed as theSEF’s general counsel or within its legaldepartment. Therefore, the Commissionexpects that as soon as any conflict of interest becomes apparent, a SEF willimmediately implement contingency

measures. For example, a SEF mayreassign the conflicted matter to analternate employee who does not reportto the CCO and who does not possessa conflict of interest. The Commission

believes that a SEF’s RegulatoryOversight Committee (‘‘ROC’’)824 should regularly monitor for potentialconflicts of interest in its oversight of the CCO, and should be particularlyinvolved in the oversight of any matterin which a CCO was recused.

The Commission disagrees with therecommendation by Better Markets torequire a single senior CCO to have

responsibility over multiple affiliatedregistered entities, some of which would be required by the CEA and Commissionregulations to have their own CCOs.Such a situation might causeunnecessary confusion and dilute CCOaccountability at the individual entitylevel. Additionally, the Commission

believes that the proposed rule issufficient to manage instances wherethere are a number of affiliatedorganizations within a corporate family.In these instances, each SEF would berequired to appoint its own CCO.

(3) § 37.1501(c)—Appointment,

Supervision, and Removal of Chief Compliance Officer

Proposed §37.1501(c)(1) required thata CCO’s appointment and compensation

be approved by a majority of the SEF’s board of directors or its senior officer.Proposed §37.1501(c)(1) also required aCCO to meet with the SEF’s board of directors at least annually and the ROCat least quarterly, and to provide anyinformation requested regarding theSEF’s regulatory program. In addition,proposed §37.1501(c)(1) required a SEFto notify the Commission of theappointment of a new CCO within two

business days of such appointment.Proposed §37.1501(c)(2) required a CCOto report directly to the board of directors or to the senior officer of theSEF, at the SEF’s discretion. Proposed§ 37.1501(c)(3) required approval of amajority of a SEF’s board of directors to

remove a CCO. If a SEF does not havea board of directors, the proposed ruleprovided that the CCO may be removed

by its senior officer. Proposed§ 37.1501(c)(3) also required a SEF tonotify the Commission of, and explainthe reasons for, the departure of theCCO within two business days. Inaddition, proposed §37.1501(c)(3)

required a SEF to immediately appointan interim CCO, to appoint a permanentCCO as soon as reasonably practicable,and to notify the Commission withintwo business days of appointing anynew interim or permanent CCO.


Some commenters requested that theCommission define the term ‘‘seniorofficer’’ and providedrecommendations.825 FXallrecommended that the Commissiondefine the term ‘‘senior officer’’ toinclude the SEF’s president, chief executive officer, chief legal officer, orother officer with ultimate supervisoryauthority for the SEF entity.826 CMErecommended that the term ‘‘seniorofficer’’ be defined to include the seniorofficer of a division that is engaged inSEF activities rather than the seniorofficer of a larger corporation.827

Commenters also requested that theCommission grant a SEF greaterflexibility in determining how a CCO isappointed, compensated, supervised,and removed.828 In this regard, WMBAAstated that a CCO should be permittedto satisfy the statutory requirement of reporting to the board of directors or a

senior officer by reporting to a ROC.829

MarketAxess commented that theproposed requirements for a majority of the board of directors to approve theappointment, compensation, andremoval of the CCO go beyond thestatutory mandate and would effectivelyplace the CCO at the same level as theSEF’s senior officer.830 CME argued thateach SEF should be given the flexibilityto take additional steps beyond thoserequired in the proposed rule, based onthe SEF’s particular corporate structure,size, and complexity, to ensure anappropriate level of independence for

its CCO.831

AFR and Better Marketsrecommended, however, that the rulesfor CCO’s appointment, compensation,supervision, and removal bestrengthened.832 AFR recommendedthat CCOs be responsible only to a SEF’sROC.833 It argued that CCOindependence may only be ensured byvesting oversight of the position

exclusively in public directors.834 Similarly, Better Markets recommendedthat decisions relating to a CCO’sdesignation, compensation, andtermination should be the soleresponsibility of the independentmembers of the board of directors.835


The Commission is adopting§ 37.1501(c) as proposed, subject toseveral modifications described

below.836 In response to commenters’requests to define the term ‘‘seniorofficer,’’ the Commission believes, basedon the statutory language that requiresa CCO to report directly to the ‘‘boardor to the senior officer,’’ that ‘‘seniorofficer’’ would only include the mostsenior executive officer of the legalentity that is registered as a SEF.

In response to the commenters’requests for greater flexibility, theCommission believes that proposed§ 37.1501(c) generally strikes theappropriate balance between flexibilityand ensuring that a SEF’s CCO isinsulated from day-to-day commercialpressures. The proposed rules provide adegree of flexibility by allowing a SEF’s

board of directors or senior officer to

appoint, set the compensation of, andsupervise the CCO. The proposed rulesalso protect the CCO from undueinfluence by requiring that the board of directors or the senior officer (if the SEFdoes not have a board of directors) beresponsible for removing the CCO andthat the CCO meet with the board of directors at least annually and with theROC at least quarterly. In response toCME’s comment about additionalflexibility beyond the rules, theCommission notes that §37.1501(c) setsforth minimum standards so a SEF mayimplement additional measures if it

deems doing so necessary to insulate theCCO from undue influence. TheCommission encourages SEFs to reviewand enact conflict mitigation proceduresas appropriate for their specific


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837Better Markets Comment Letter at 20 (Mar. 8,2011); CME Comment Letter at 6 (Feb. 7, 2011).

838Better Markets Comment Letter at 19, 20 (Mar.8, 2011).

839CME Comment Letter at 6 (Feb. 7, 2011).840 Id.841Tradeweb Comment Letter at 6–7 (Jun. 3,

2011); WMBAA Comment Letter II at 5–6 (Mar. 8,2011); MarketAxess Comment Letter at 26 (Mar. 8,2011); Tradeweb Comment Letter at 12 (Mar. 8,2011); CME Comment Letter at 4 (Feb. 7, 2011).

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

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

2011).846The Commission notes that the preamble to

the SEF NPRM already clarified this point. Toprovide additional clarity, the Commission isclarifying this point in the final rule by adding theword ‘‘including’’ before the list of enumeratedconflicts of interest. See Core Principles and OtherRequirements for Swap Execution Facilities, 76 FRat 1233.

corporate and/or organizationalstructure.

However, the Commission is revisingproposed §37.1501(c) in six respects.First, the Commission is modifyingproposed §37.1501(c)(1) to more clearlystate that the CCO is obligated to meetwith the board of directors at leastannually and with the ROC at least

quarterly, even if the CCO wasappointed by, or is supervised by, thesenior officer of the facility. Second, toclarify a CCO’s duty to provideinformation to a SEF’s board of directorsor ROC, the Commission is modifyingproposed §37.1501(c)(1) to state that‘‘[t]he chief compliance officer shallprovide any information regarding theswap execution facility’s self-regulatoryprogram that is requested by the boardof directors or the regulatory oversightcommittee’’ (emphasis added). Third,the Commission is eliminating therequirement in proposed §37.1501(c)(1)

that a CCO’s appointment andcompensation require the approval of amajority of a SEF’s board of directors.The Commission believes that board of director approval is a sufficientrequirement for appointment, and that aSEF should have appropriate discretionto determine the voting percentagenecessary to appoint a CCO ordetermine salary. Fourth, theCommission is eliminating therequirement in proposed §37.1501(c)(3)that a SEF explain the reason for thedeparture of a CCO within two businessdays. The Commission believes that thespecific reason for the departure may be

unnecessary in most instances.However, the Commission will have theopportunity to investigate the reason forthe departure if it so desires because aSEF must notify the Commission of aCCO’s departure within two businessdays. Fifth, the Commission iseliminating the requirement in proposed§ 37.1501(c)(3) that a SEF immediatelyappoint an interim CCO, and appoint anew permanent CCO as soon asreasonably practicable, upon theremoval of a CCO. The Commission

believes that the requirement to appointa new CCO is implicit in § 37.1501(b)(1),

which requires that a SEF designate anindividual to serve as CCO. Finally, theCommission is eliminating therequirement in proposed §37.1501(c)(3)that a SEF notify the Commissionwithin two business days of appointinga new CCO because this requirement isalready included in §37.1501(c)(1).

(4) §37.1501(d)—Duties of Chief Compliance Officer

Proposed §37.1501(d) generally listedthe following CCO duties: (1)Overseeing and reviewing compliance

with section 5h of the CEA and relatedCommission regulations; (2) inconsultation with the board of directorsor the senior officer, resolving anyconflicts of interest that may arise; (3)establishing and administering writtenpolicies and procedures reasonablydesigned to prevent violations of theCEA and Commission regulations; (4)

ensuring compliance with the CEA andCommission regulations relating toagreements, contracts, or transactions,and with Commission regulationsissued under section 5h of the CEA; (5)establishing procedures for theremediation of noncompliance issuesidentified by the CCO; (6) establishingand following appropriate proceduresfor noncompliance issues; (7)establishing a compliance manual andadministering a code of ethics; (8)supervising a SEF’s self-regulatoryprogram; and (9) supervising theeffectiveness and sufficiency of any

regulatory services provided to the SEF.(i) Summary of Comments

Better Markets and CME commentedon proposed § 37.1501(d)(2) regardingconflicts of interest.837 Better Marketsrecommended that the Commissionrevise proposed § 37.1501(d)(2) torequire a CCO to consult with both theindependent members of the board of directors and the senior officer whenresolving conflicts of interest, which areparticularly contentious.838 CMErequested that the Commission reviseproposed §37.1501(d)(2) to require a

CCO to establish policies andprocedures reasonably designed toresolve any conflicts of interest that mayarise.839 Although CME conceded thatthe language in proposed § 37.1501(d)(2)mirrors the language in the Act, it

believes that Congress did not intend forthe CCO to resolve conflicts in theexecutive or managerial sense.840

Several commenters argued thatproposed §37.1501(d)(4), requiring aCCO to ‘‘ensure’’ compliance with theAct and Commission regulations, is animpracticable standard.841 Instead,many of these commenters

recommended alternative language,which generally stated that the CCO putin place policies and procedures that

reasonably ensure compliance with theAct and Commission regulations.842

CME also took issue with therequirement in proposed§ 37.1501(d)(6), which requires a CCO to‘‘follow’’ appropriate procedures for thehandling, management response,remediation, retesting, and closing of noncompliance issues.843 CME

requested that the Commissioneliminate this requirement, which it

believes is a function of seniormanagement.844 Additionally, WMBAArecommended that the Commissiondelete proposed § 37.1501(d)(8) and(d)(9), regarding the supervision of aSEF’s self-regulatory program and anyregulatory service provider, becausethese functions should be theresponsibility of management.845


The Commission is adopting§ 37.1501(d) as proposed, subject to

certain modifications described below.The Commission is revising proposed§ 37.1501(d)(2) to clarify that the list of enumerated conflicts of interest is notexhaustive.846 The Commission is notadopting the recommendation by BetterMarkets to require the CCO to consultwith both the independent members of the board of directors and the seniorofficer when resolving conflicts of interest. Considering the statutoryprovisions of CEA section 5h, theCommission believes that it isunnecessary to require the CCO to do so.However, the Commission notes that§ 37.1501(d)(2) sets forth minimumstandards so a SEF may institute higherstandards, such as requiring its CCO toconsult with both the independentmembers of the board of directors andthe senior officer when resolvingconflicts of interest. The Commissionalso declines to adopt CME’srecommendation regarding conflicts of interest. As CME acknowledged, theCommission is following the statutorylanguage in its implementation of § 37.1501(d)(2).

In response to commenters’ concernsabout the requirement to ‘‘ensure’’compliance in proposed §37.1501(d)(4),


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847See, e.g., Swap Data Repositories: RegistrationStandards, Duties and Core Principles, 76 FR 54538,54584 (Sept. 1, 2011) (stating that the duties of anSDR’s CCO include ‘‘[t]aking reasonable steps toensure compliance with the Act and Commissionregulations . . .’’); Derivatives ClearingOrganization General Provisions and CorePrinciples, 76 FR 69334, 69434 (Nov. 8, 2011)(stating that the duties of a DCO’s CCO include‘‘[t]aking reasonable steps to ensure compliancewith the Act and Commission regulations . . .’’).

848The Commission is renaming the title of thissection from ‘‘Annual Compliance Report Prepared

by Chief Compliance Officer’’ to ‘‘Preparation of Annual Compliance Report.’’

849FXall Comment Letter at 16–17 (Mar. 8, 2011);CME Comment Letter at 7–8 (Feb. 7, 2011).

850FXall Comment Letter at 16 (Mar. 8, 2011).851See id. for details regarding FXall’s proposed

alternatives.852FXall Comment Letter at 17 (Mar. 8, 2011);

CME Comment Letter at 7 (Feb. 7, 2011).

853CME Comment Letter at 7–8 (Feb. 7, 2011).854MarketAxess Comment Letter at 26 (Mar. 8,

2011).855MarketAxess Comment Letter at 26 (Mar. 8,

2011); FSR Comment Letter at 10 (Mar. 8, 2011).856 Id.857FXall Comment Letter at 15 (Mar. 8, 2011);

CME Comment Letter at 8 (Feb. 7, 2011).858 In this regard, the Commission disagrees with

CME’s recommendation regarding proposed§ 37.1501(e)(5).

the Commission is modifying the rule tostate that the CCO shall take ‘‘reasonablesteps to ensure compliance with the Actand the rules of the Commission.’’ TheCommission understands that a singleindividual cannot guarantee compliancewith the CEA and Commissionregulations. The Commission believesthat this modification is responsive to

commenters’ concerns and is consistentwith the final rules for other registeredentities.847 The Commission is alsoremoving the reference to ‘‘agreements,contracts, or transactions’’ in proposed§ 37.1501(d)(4) to more closely followthe language in the Act. In making thismodification, the Commission does notintend to modify any substantiveobligations of the CCO with regard toagreements, contracts, or transactions tothe extent that these documentsimplicate the Act or Commissionregulations under the Act.

In order to clarify differences between

the SEF NPRM’s preamble and rule textregarding proposed § 37.1501(d)(7), theCommission is revising the rule to statethat the CCO’s duties include‘‘[e]stablishing and administering acompliance manual designed topromote compliance with the applicablelaws, rules, and regulations . . .’’(emphasis added). The Commission alsodisagrees with CME and WMBAA thatthe requirements in proposed§ 37.1501(d)(6), (d)(8), and (d)(9) arefunctions of management. Theseprovisions, as discussed above, requirea CCO to establish and followappropriate procedures regarding

noncompliance issues, supervise theSEF’s self-regulatory program, andsupervise the effectiveness andsufficiency of any regulatory serviceprovider. As noted above, theCommission disagrees with thecommenters who believe that a CCO’sfunction is solely to monitor and adviseon compliance issues. Finally, theCommission is revising proposed§ 37.1501(d)(9) to remove the referencesto ‘‘registered futures association’’ and‘‘other registered entity’’ and, instead,adding a reference to ‘‘regulatory serviceprovider’’ given the inclusion of FINRA

as a regulatory service provider under§ 37.204.

(5) §37.1501(e)—Annual ComplianceReport Prepared by Chief ComplianceOfficer 848

Proposed § 37.1501(e) generallyenumerated the following informationthat must be included in the annualcompliance report: (1) A description of the SEF’s written policies andprocedures, including the code of ethicsand conflicts of interest policies; (2) adetailed review of the SEF’s compliancewith CEA section 5h and Commissionregulations, which, among otherrequirements, identifies the policies andprocedures that ensure compliance withthe core principles; (3) a list of anymaterial changes to the compliancepolicies and procedures since the lastannual compliance report; (4) adescription of staffing and resources setaside for the SEF’s compliance program;(5) a description of any materialcompliance matters, including instancesof noncompliance; (6) any objections to

the annual compliance report by thosepersons who have oversightresponsibility for the CCO; and (7) acertification by the CCO that, to the bestof his or her knowledge and reasonable

belief, and under penalty of law, theannual compliance report is accurateand complete.


FXall and CME asserted that theinformation required to be included inthe annual compliance report is toodetailed.849 FXall, for example,commented that the requirements forthe annual compliance report go beyondthose set forth in the Dodd-Frank Actand that producing the report willconsume considerable resources.850 FXall proposed alternativerequirements, which it believes would

be more in-line with the requirements inthe Dodd-Frank Act.851

With respect to the requirement inproposed §37.1501(e)(2)(i) to identifypolicies and procedures that ‘‘ensure’’compliance with the core principles,FXall and CME stated that policies andprocedures cannot ‘‘ensure’’ or guarantycompliance, but can only be reasonablydesigned to result in compliance.852

CME also recommended that therequirement in proposed §37.1501(e)(5)to describe any material compliancematters be revised to require the reportto identify ‘‘any material non-

compliance issues that were notproperly addressed.’’ 853 MarketAxessrecommended that the Commissionremove proposed §37.1501(e)(6)

because in its opinion other personsshould be able to correct the CCO’sannual report.854

MarketAxess and FSR expressed theirconcern that the CCO’s certification of

the annual compliance report inproposed §37.1501(e)(7) may imposestrict liability on a CCO where thereport contains even a minor andinsignificant error.855 Thesecommenters recommended adding amateriality qualifier to thecertification.856 Additionally, both FXalland CME recommended that the SEF’ssenior officer, not the CCO, certify theaccuracy of the annual compliancereport.857



§ 37.1501(e) as proposed, subject tocertain modifications described below.The Commission disagrees with thecomments from FXall and CMEregarding the complexity and the

burden of the annual compliance report.The annual compliance report is meantto provide the Commission with adetailed account of a SEF’s compliancewith the CEA and Commissionregulations, as well as a detailedaccount of a SEF’s self-regulatoryprogram. The Commission believes thatthe level of detail the proposed rulesrequire, including the requirement thatthe annual report include a descriptionof all noncompliance issues identified,is necessary to ensure that theCommission can determine theeffectiveness of a SEF’s compliance andself-regulatory programs.858

However, in response to comments,the Commission is revising proposed§ 37.1501(e)(2)(i) to require that theannual compliance report identify ‘‘thepolicies and procedures that aredesigned to ensure compliance witheach subsection and core principle,including each duty specified in section5h(f)(15)(B) of the Act . . .’’ (emphasisadded). The Commission is also

removing proposed §37.1501(e)(6),which requires the annual compliancereport to include any objections by


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859As a result of this deletion, the Commissionis adopting proposed §37.1501(e)(7) as§ 37.1501(e)(6).

860 If a SEF does not have a board of directors,then the senior officer of the SEF may append hisor her own comments if desired.

861CEA section 5h(f)(15)(D); 7 U.S.C. 7b–3(f)15)(D).

862The Commission is renaming the title of thissection from ‘‘Submission of Annual ComplianceReport by Chief Compliance Officer to theCommission’’ to ‘‘Submission of AnnualCompliance Report.’’

8635 U.S.C. 552.8645 U.S.C. 552b(b).865FXall Comment Letter at 17–18 (Mar. 8, 2011);

WMBAA Comment Letter II at 7 (Mar. 8, 2011);MarketAxess Comment Letter at 26 (Mar. 8, 2011).

866 Id.867Better Markets Comment Letter at 20 (Mar. 8,

2011).868 Id.869CME Comment Letter at 9 (Feb. 7, 2011).

870CEA section 5h(f)(15)(D)(ii); 7 U.S.C. 7b–3(f)(15)(D)(ii).

87117 CFR 145.9.

those persons who oversee the CCO.859 The Commission believes that the boardof directors 860 may append its owncomments if desired, but the statutorytext and the Commission’simplementing regulations do not requireit.

The Commission disagrees with thecomments from MarketAxess and FSR

regarding the inclusion of a materialityqualifier to the certificationrequirement. The Commission believesthat the current certification sufficientlyprotects the CCO from being heldstrictly liable for any minor inaccuracies

because it includes a ‘‘knowledge’’ and‘‘reasonable belief’’ qualifier. TheCommission also disagrees with CME’sand FXall’s comments to have the SEF’sCEO, instead of the CCO, certify theaccuracy of the annual compliancereport. While the CEA does notexplicitly require that the CCO certifythe report, it does require that the CCO

‘‘annually prepare and sign’’ the report,and that the report ‘‘include acertification that, under penalty of law,the compliance report is accurate andcomplete.’’ 861 The Commission believesthat these two requirements readtogether provide sufficient basis for theCCO to certify that the report is accurateand complete. However, theCommission is modifying §37.1501(e)to explicitly state that the CCO ‘‘sign’’the annual compliance report in order tofollow the statutory text more closely.

(6) § 37.1501(f)—Submission of AnnualCompliance Report by Chief

Compliance Officer to theCommission 862

Proposed §37.1501(f)(1) required,among other items, that the CCOprovide the annual compliance report tothe board of directors or the seniorofficer for review, prior to submission tothe Commission. The proposed rule alsostated that the board of directors or thesenior officer may not require the CCOto make any changes to the report.Proposed §37.1501(f)(2) required thatthe annual compliance report beelectronically provided to theCommission not more than 60 days after

the end of the SEF’s fiscal year.Proposed §37.1501(f)(3) required the

CCO to promptly file an amendment toan annual compliance report upondiscovery of any material error oromission. Proposed §37.1501(f)(4)allowed a SEF to request an extensionof time to file its compliance report

based on substantial, undue hardship.Finally, proposed § 37.1501(f)(5) statedthat annual compliance reports will be

treated as exempt from mandatorypublic disclosure for purposes of FOIA 863 and the Sunshine Act 864 andparts 145 and 147 of the Commission’sregulations.


Some commenters stated thatproposed §37.1501(f)(1) should bemodified to allow the board of directorsor the senior officer to make changes tothe annual compliance report.865 Thesecommenters generally argued that theCCO should be accountable tomanagement and, by not permitting the

board of directors or the senior officerto revise the report, the proposed ruleundermines the authority of the board of directors.866 Better Marketsrecommended that the CCO should berequired to present his or her finalizedreport to the board of directors andexecutive management prior to itssubmission.867 Better Markets furtherrecommended that the independentdirectors and/or the Audit Committee,as well as the entire board of directors,review and approve the report or detailwhere and why it disagrees with anyprovision before submission to theCommission.868

With respect to proposed§ 37.1501(f)(5), CME recommended thatthe Commission expressly state thatannual compliance reports areconfidential documents that are notsubject to public disclosure by listingsuch reports as a specifically exemptitem in Commission regulation 145.5.869


The Commission is adopting§ 37.1501(f) as proposed, subject to twomodifications described below. TheCommission has determined not toadopt the commenters’ recommendation

to allow the board of directors or thesenior officer to make changes to theannual compliance report. TheCommission believes that allowing the

board of directors or the senior officerto make changes to the report wouldprevent the CCO from making acomplete and accurate assessment of aSEF’s compliance program. TheCommission has determined not toadopt the recommendation by BetterMarkets that the board of directorsapprove the annual compliance report

or detail any disagreement. TheCommission believes that requiring the

board of directors to approve the reportincreases the risk that the CCO would besubject to undue influence by the boardor by management. The Commissionnotes that the board of directors mayinclude its own opinion of the annualcompliance report if it disagrees withthe CCO’s assessment. The Commission

believes that the rule strikes theappropriate balance between ensuringthat the board of directors cannotadversely influence the content of theannual compliance report and granting

the board the opportunity to express itsopinion of the report to theCommission.

The Commission is revising proposed§ 37.1501(f)(2) to clarify that a SEF shallsubmit its annual compliance report tothe Commission concurrently with theSEF’s filing of its fourth fiscal quarterfinancial report pursuant to § 37.1306.The Commission is making thistechnical correction because CEAsection 5h(f)(15)(D)(ii) sets forth such arequirement, which was inadvertentlyomitted from the proposed rules.870

Additionally, the Commission iswithdrawing proposed §37.1501(f)(5).The Commission acknowledges CME’sconcern regarding the public release of annual compliance reports and clarifiesthat the Commission does not intend tomake annual compliance reports public.However, where such information is, infact, confidential, the Commissionencourages SEFs to submit a writtenrequest for confidential treatment of such filings under FOIA, pursuant to theprocedures established in section 145.9of the Commission’s regulations.871 Thedetermination of whether to disclose orexempt such information in the contextof a FOIA proceeding would be

governed by the provisions of part 145and any other relevant provision.

(7) § 37.1501(g)—Recordkeeping

Proposed § 37.1501(g)(1) generallystated that a SEF must maintain thefollowing records: (i) A copy of writtenpolicies and procedures adopted infurtherance of compliance with the Actand Commission regulations; (ii) copies


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873 Id.874The Commission is making certain non-

substantive clarifications to §37.1501(g). Inaddition, the Commission is revising the citation toparagraphs ‘‘(d)(6) and (d)(7)’’ in proposed§ 37.1501(g)(1)(ii) to cite to paragraphs ‘‘(d)(8) and(d)(9).’’ The Commission notes that this was adrafting error.


8765 U.S.C. 601 et seq.

877See 47 FR 18618–21 (Apr. 30, 1982).878See 47 FR 18618, 18619 (Apr. 30, 1982)

discussing DCMs; 66 FR 42256, 42268 (Aug. 10,2001) discussing DTEFs, ECMs, and EBOTs; and 66FR 45604, 45609 (Aug. 29, 2001) discussing DCOs.

879Dodd Frank Wall Street Reform and ConsumerProtection Act, Public Law 111–203, 124 Stat. 1376(2010).


88144 U.S.C. 3501 et seq.


8837 U.S.C. 12(a)(1).8845 U.S.C. 552a.885Core Principles and Other Requirements for

Swap Execution Facilities, 76 FR at 1236.886 Id.

of all materials created in furtherance of the CCO’s duties listed in paragraphs(d)(6) and (d)(7) of proposed §37.1501;(iii) copies of all materials in connectionwith the review and submission of theannual compliance report; and (iv) anyrecords relevant to a SEF’s annualreport. Proposed §37.1501(g)(2)required a SEF to maintain these records

in accordance with §1.31 and part 45 of the Commission’s regulations.


MarketAxess commented that thefinal rule should provide an exceptionfor legally privileged materials.872 MarketAxess argued that it isunreasonable for the Commission totake the position that a CCO should not

be able to receive privileged advice fromcounsel in an effort to comply withthese new, complex, and uncertainrules.873


The Commission is adopting§ 37.1501(g) as proposed.874 TheCommission does not believe that§ 37.1501(g) changes existingCommission policies regarding theassertion of attorney-client privilege byregistrants. As stated in the SEF NPRM,the Commission designed §37.1501(g)to ensure that the Commission staff would be able to obtain the necessaryinformation to determine whether a SEFhas complied with the CEA andapplicable regulations.875 TheCommission believes that proposed§ 37.1501(g) properly accomplishes this

goal.Finally, the Commission is addingnew §37.1501(h) titled ‘‘Delegation of authority’’ to the final SEF rules todelegate authority to the Director of DMO to grant or deny a swap executionfacility’s request for an extension of time to file its annual compliance reportunder paragraph (f)(4) of §37.1501.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act(‘‘RFA’’)876 requires federal agencies, inpromulgating regulations, to consider

the impact of those regulations on smallentities. The regulations adopted herein

will affect SEFs. The Commission haspreviously established certaindefinitions of ‘‘small entities’’ to be used

by the Commission in evaluating theimpact of its regulations on smallentities in accordance with the RFA.877 In addition, the Commission haspreviously determined that DCMs,derivatives transaction execution

facilities (‘‘DTEFs’’), exempt commercialmarkets (‘‘ECMs’’), exempt boards of trade (‘‘EBOTs’’), and DCOs are notsmall entities for the purpose of theRFA.878

While SEFs are new entities to beregulated by the Commission pursuantto the Dodd-Frank Act,879 in the SEFNPRM the Commission proposed thatSEFs should not be considered as smallentities for the purpose of the RFA foressentially the same reasons that DCMsand DCOs have previously beendetermined not to be small entities.880 The Commission received no comments

on the impact of the rules containedherein on small entities. Therefore, theChairman, on behalf of the Commission,hereby certifies, pursuant to 5 U.S.C.605(b), that the regulations will not havea significant economic impact on asubstantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act(‘‘PRA’’)881 imposes certainrequirements on federal agencies inconnection with their conducting orsponsoring any collection of information as defined by the PRA. Anagency may not conduct or sponsor, anda person is not required to respond to,a collection of information unless itdisplays a currently valid controlnumber issued by the Office of Management and Budget (‘‘OMB’’). Thisfinal rulemaking contains newcollection of information requirementswithin the meaning of the PRA.Accordingly, in connection with theSEF NPRM, the Commission submittedan information collection request, titled‘‘Core Principles and OtherRequirements for Swap ExecutionFacilities,’’ to OMB for its review andapproval in accordance with 44 U.S.C.

3507(d) and 5 CFR 1320.11.Additionally, pursuant to 44 U.S.C.3506(c)(2)(B), the Commission, in the

SEF NPRM, requested comments fromthe public on the proposed informationcollection requirements in order to,among other items, evaluate thenecessity of the proposed collections of information and minimize the burden of the information collection requirementson respondents.882

On April 28, 2011, OMB assigned

control number 3038–0074 to thiscollection of information, but withheldfinal approval pending theCommission’s resubmission of theinformation collection, which includesa description of the comments receivedon the collection and the Commission’sresponses thereto. The Commission hasrevised some of its proposed estimatesof the number of mandatory responsesin order to clarify the Commission’soriginal intent; otherwise, the proposed

burden hour estimates are beingadopted as discussed herein. TheCommission has submitted the revised

information collection request to OMBfor its review, which will be madeavailable by OMB at http:// www.reginfo.gov/public/do/PRAMain.

As noted in the SEF NPRM, theCommission will protect proprietaryinformation according to the Freedom of Information Act and 17 CFR part 145,‘‘Commission Records andInformation.’’ In addition, section8(a)(1) of the CEA strictly prohibits theCommission, unless specificallyauthorized by the CEA, from makingpublic ‘‘data and information thatwould separately disclose the businesstransactions or market positions of any

person and trade secrets or names of customers.’’883 The Commission is alsorequired to protect certain informationcontained in a government system of records according to the Privacy Act of 1974.884

1. Proposed Collection of Information

In the SEF NPRM, the Commissionestimated that each SEF respondentwould have an average annual reporting

burden of 308 hours.885 In deriving thisestimate, the Commission compared thereporting requirements for other entitiesthat fall under the Commission’sregulatory oversight, such as an ExemptCommercial Market with a significantprice discovery contract (‘‘SPDC ECM’’),a DTEF, and a DCM.886 Specifically, theCommission estimated that a SEF willhave more reporting requirements thana SPDC ECM and a DTEF, but fewer


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887 Id. SPDC ECMs were subject to 9 coreprinciples, DTEFs were subject to 9 core principles,and DCMs are subject to 23 core principles. SEFs

will be subject to 15 core principles. Id. at 1236 n.124.

888 Id. at 1236.889After passage of the Commodity Futures

Modernization Act of 2000 and a switch to the coreprinciples framework for DCMs, the Commissionestimated that the recordkeeping and reportingobligations imposed by part 38 would total 300 burden hours per DCM. See A New RegulatoryFramework for Trading Facilities, Intermediariesand Clearing Organizations, 66 FR 42256, 42268(Aug. 10, 2001); 66 FR 14262, 14268 (proposed Mar.9, 2001). In 2007, the Commission amended theacceptable practices in part 38 for minimizingconflicts of interest, estimating that theamendments would increase the informationcollection and reporting burden by an additional 70hours per DCM. See Conflicts of Interest in Self-Regulation and Self-Regulatory Organizations

(‘‘SROs’’), 72 FR 6936, 6957 (Feb. 14, 2007); 71 FR38740, 38748 (proposed Jul. 7, 2006). Most recently,the Commission adopted revisions to part 38 toimplement the Dodd-Frank Act, estimating that therevisions would increase the information collectionand reporting burden by an additional 70 hours perDCM. See Core Principles and Other Requirementsfor Designated Contract Markets, 77 FR 36612,36662 (Jun. 19, 2012). The average for purposes of the initial burden hour estimate for SEFs averages both initial estimates for DCMs with the other mostrecent estimates.

890A New Regulatory Framework for TradingFacilities, Intermediaries and ClearingOrganizations, 66 FR at 42268; 66 FR at 14268.

891Significant Price Discovery Contracts onExempt Commercial Markets, 74 FR 12178, 12187(Mar. 23, 2009); 73 FR 75888, 75902 (proposed Dec.12, 2008).

892Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1236. Forhourly reporting requirements, an average of 35SEFs was used for calculation purposes. Id. at 1236n. 125.

893 Id. at 1236.894 In arriving at a wage rate for the hourly costs

imposed, the Commission consulted theManagement and Professional Earnings in theSecurities Industry Report, published in 2010 bythe Securities Industry and Financial MarketsAssociation (SIFMA Report). The wage rate is acomposite (blended) wage rate arrived at byaveraging the mean annual salaries of an Assistant/Associate General Counsel, an AssistantCompliance Director, a Senior Programmer, and a

Senior Treasury/Cash Management Manager aspublished in the SIFMA Report and dividing thatfigure by 2,000 annual work hours to arrive at thehourly rate of $52.


896 Id.897308 average hours per respondent × 35

respondents = 10,780 total hours/year. Id.898WMBAA Comment Letter at 14 (Mar. 8, 2011).899MarketAxess Comment Letter at 20–21 (Mar.

8, 2011).

900CME Comment Letter at 10, 13 (Feb. 22, 2011).901 Id. at 10.902Provisions Common to Registered Entities, 76

FR 44776, 44789 (Jul. 27, 2011). The Commissionalso notes that the annual burden hour estimate forDCMs that was used to calculate the annual burdenhour estimate for SEFs in this part 37 rulemakingdid not include the recordkeeping and reportinghours accounted for in the part 40 rulemaking’sinformation collection estimate. Therefore, there isno double counting of hours for product and rulesubmissions. Furthermore, the Commission notesthat, similar to the DCM rulemaking, many of thecollection burdens associated with this part 37

Continued

reporting requirements than a DCM (asmost recently calculated).887 TheCommission employed an average of itsmost recent hourly burdens for DCMs,DTEFs, and SPDC ECMs.888 Thosehourly burdens provided in the SEFNPRM are noted below:Current estimate of DCM’s annual

burden: 440 hours per DCM 889 Initial estimate of DTEF’s annual

burden: 200 hours per DTEF 890 Initial estimate of SPDC ECM’s annual

burden: 233 hours per ECM 891 In the SEF NPRM, the Commission

estimated that 30 to 40 SEFs willregister with the Commission as a resultof the Dodd-Frank Act.892 Therefore, theCommission estimated the annualaggregate hour burden for allrespondents to be 10,780 hours.893 Based on an hourly rate of $52,894 the

Commission estimated that respondentsmay expend up to $16,016 annually tocomply with the proposedregulations.895 This would result in anaggregate cost across all SEFrespondents of $560,560 per annum (35respondents × $16,016).896 The SEFNPRM also provided the followingsummary of estimates:

Estimated number of respondents: 35Annual responses by each respondent: 1Total annual responses: 35Quarterly responses by each respondent:

4Total quarterly responses: 140Estimated average hours per response:

308Aggregate annual reporting hours

burden: 10,780 897 2. Summary of Comments andCommission Response

While no commenter directlyaddressed the proposed aggregate

burden hour estimate, the Commissiondid receive comments related to thecosts of various recordkeeping andreporting requirements in the proposedrules.

(a) §37.3—Requirements andProcedures for Registration

WMBAA commented that theCommission could reduce the regulatory

burden of the registration procedures byreconciling its Form SEF with the SEC’sregistration form such that a potentialSEF will have to fill out only oneform.898 Similarly, MarketAxess stated

that it is costly and inefficient for a SEFthat is required to be registered by boththe Commission and SEC to go throughtwo full registration processes, and thatthe Commission instead should permit‘‘notice’’ or ‘‘passport’’ registration of anSB–SEF already registered with theSEC.899 While the Commissionacknowledges notice registration undersection 5h(g) of the Act, it notes that theregistration requirements for SEFs maydiffer from the registration requirementsfor SB–SEFs and thus the Commissionmust conduct an independent review of a SEF applicant’s registrationapplication to ensure that the potentialSEF’s proposed trading models andoperations comply with the

Commission’s requirements. Given suchdiffering requirements, the Commissionalso notes that Form SEF may differfrom the SEC’s registration form.

With respect to temporaryregistration, the Commission haseliminated the requirement from theSEF NPRM that an applicant providetransaction data that substantiates that

the execution or trading of swaps hasoccurred and continues to occur on theapplicant’s trading system or platform atthe time the applicant submits itstemporary registration request. TheCommission has also eliminated thecertification requirement that anapplicant believes that when it operatesunder temporary registration it willmeet the requirements of part 37 of theCommission’s regulations. Instead, theCommission has revised the temporaryregistration provisions to require a SEFapplicant that is already operating aswaps-trading platform, in reliance

upon either an exemption granted bythe Commission or some form of no-action relief granted by the Commissionstaff, to include in the temporaryregistration notice a certification that itis operating pursuant to such exemptionor no-action relief. The Commission

believes that these revisions will notmaterially affect the proposed part 37information collection estimate.

(b) §37.4—Procedures for ListingProducts and Implementing Rules

CME commented that the proposedproduct and rule certification processsubstantially increased thedocumentation burden, which in turnwould increase the cost and amount of time it takes to list new products andimplement new rules, with nocorresponding benefit to the public.900 While CME cited the 8,300 additionalaggregate hours that product and rulesubmissions were estimated to imposeon all registered entities,901 theCommission notes that this figure wasalready accounted for in theCommission’s information collectionestimate in the part 40 rulemaking titled‘‘Provisions Common to RegisteredEntities.’’902 Therefore, the burden


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rulemaking are covered by other existing or pendingcollections of information. Therefore, only those burdens that are not covered elsewhere areincluded in this collection of information.

903CME Comment Letter at 13 (Feb. 22, 2011).904 Id.905 Id. at 16.

906 Id. at 22.907WMBAA Comment Letter at 23 (Mar. 8, 2011).908 Id. at 26.

909FXall Comment Letter at 3 (Mar. 8, 2011).910MarketAxess Comment Letter at 40 (Mar. 8,

2011).911CME Comment Letter at 36–37 (Feb 22, 2011).

associated with that informationcollection is not duplicated here.

(c) § 37.5(c)—Equity Interest Transfers

CME commented that the ‘‘level of immediacy’’ contemplated by the 24-hour timeframe for submittingagreements with the notification to theCommission of an equity interest

transfer in proposed § 37.5(c) may beunrealistic.903 CME further commentedthat the representation of compliancewith the requirements of CEA section 5hand the Commission’s regulationsadopted thereunder would be moreappropriate if required uponconsummation of the equity interesttransfer, rather than with the initialnotification.904 In this final rulemaking,the Commission has revised proposed§ 37.5(c) to remove references to specificdocuments that must be provided withthe equity transfer notification, andinstead provided that the Commissionmay request supporting documentation.The Commission has also revised theproposed rule to increase the thresholdof when a SEF must file an equityinterest transfer notification with theCommission from ten percent to fiftypercent and has extended the timeperiod for a SEF to file the notificationto up to ten business days from one

business day under the proposed rule.In addition, the Commission has deletedthe requirement for a SEF to provide arepresentation of compliance withsection 5h of the Act and theCommission regulations thereunderwith the equity interest transfer

notification, as requested by CME. TheCommission notes that these revisionsshould slightly reduce the burden of theinformation collection requirements forthose respondents who are notrequested to provide supportingdocumentation.

(d) § 37.202(b)—Jurisdiction

CME stated that it would be costly fora SEF to obtain every customer’sconsent to its regulatory jurisdiction asrequired by proposed §37.202(b).905 Asnoted in the preamble, the Commission

believes that jurisdiction must beestablished by a SEF prior to grantingmembers and market participants accessto its markets in order to effectuate thestatutory mandate of Core Principle 2that a SEF shall have the capacity todetect, investigate, and enforce rules of the SEF. The Commission notes that any

information collection costs associatedwith this rule is covered by theCommission’s information collectionestimate.

(e) §37.203(f)—Investigations andInvestigation Reports

CME stated that minor transgressionscould be handled effectively through the

issuance of a warning letter rather thana formal investigatory report.906 Asexplained in the preamble, theCommission clarifies that warningletters may be issued for minortransgressions; however, no more thanone warning letter may be issued to thesame person or entity found to havecommitted the same rule violation morethan once within a rolling 12-monthperiod. The Commission also clarifiesthat the limit on the number of warningletters is not applicable when a ruleviolation has not been found. TheCommission believes that these

clarifications will not materially affectthe proposed part 37 informationcollection estimate.

(f) §37.205—Audit Trail

WMBAA commented that theproposed audit trail requirement in§ 37.205(b) to retain records of customerorders should not apply to indicativequotes because it would be burdensomeand costly.907 As discussed in thepreamble, the Commission believes thatthis requirement is necessary so that aSEF has a complete picture of all tradingactivity in order to carry out its statutorymandate to monitor its markets to detect

abusive trading practices and tradingrule violations. The Commissionaccounted for this recordkeepingrequirement in the proposed burdenhour estimate; therefore, the estimateremains unaffected.

(g) §37.404—Ability to ObtainInformation

WMBAA commented that therequirement for SEFs to mandate thattraders maintain trading and financialrecords is not required under the Act.908 The Commission notes that marketparticipants’ trading records are an

invaluable tool in its surveillance effortsand believes that a SEF should havedirect access to such information inorder to discharge its obligations underthe SEF core principles. However, asnoted in the preamble, the Commissionstates in the guidance that SEFs maylimit the application of this requirementto those market participants whoconduct substantial trading on their

facility. The Commission notes that therequirement for market participants tokeep such records is sound commercialpractice, and that market participantsare likely already maintaining suchtrading records; therefore, theCommission believes that the revisionabove will not materially affect theproposed part 37 information collection

estimate.

(h) §37.703—Monitoring for FinancialSoundness

FXall commented that SEFs would be burdened by the ‘‘onerous financialsurveillance obligations’’ of proposed§ 37.703, which include the routinereview of members’ financial records.909 The Commission agrees that

burdensome financial surveillanceobligations may lead to highertransaction costs; therefore, as discussedin the preamble, the Commission hasrevised the proposed rule to state that

SEFs must monitor their marketparticipants to ensure that they continueto qualify as ECPs. The Commission

believes that this revision will notmaterially affect the proposed part 37information collection estimate and isthus maintaining the estimate.

(i) §37.1306—Financial ResourcesReporting to the Commission

MarketAxess commented that thefinancial resources reportingrequirements are unnecessary and

burdensome and recommended that theCommission allow a senior officer of theSEF to represent to the Commission thatit satisfies the financial resourcesrequirements.910 The Commissiondisagrees with MarketAxess and, asdiscussed in the preamble, believes thatmuch of the information required by thereports should be readily available to aSEF in the ordinary course of business.The Commission’s proposed burdenhour estimate includes this reportingrequirement.

(j) §37.1401—System SafeguardsRequirements

CME commented that therequirements to notify the Commission

staff of all system security-related eventsand all planned changes to automatedsystems that may impact the reliability,security, or scalability of the systems areoverly burdensome.911 As noted in thepreamble, the Commission has revisedthe rule to only require notification of material system malfunctions andmaterial planned system changes. While


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912FXall Comment Letter at 16 (Mar. 8, 2011).

913Under § 37.1501, the SEF’s CCO is required tosubmit to the Commission annually a compliancereport.

914Under § 37.1306, a SEF is required to submitto the Commission each fiscal quarter a report of its financial resources available to meet thefinancial resources requirements of Core Principle13.

9151 quarterly response × 4 quarters per year ×

35 respondents.916308 average burden hours per respondent/5

responses total per year (1 annual response and 4quarterly responses) = 61.6 average hours perresponse.

9175 responses total per year × 61.6 average hoursper response × 35 respondents.

918See supra footnote 894 for a discussion of thewage rate. The Commission has revised the wagerate to $54 per hour based on data from the 2011SIFMA Report.

919While the Commission recognizes that someestimates cited in the following cost-benefitconsideration section suggest that reporting and

recordkeeping requirements may result in a muchhigher aggregate cost to SEFs and marketparticipants, it notes that all of the estimatesprovided therein account for more than purerecordkeeping and reporting costs subject to thePRA. Therefore, the Commission has not consideredthose estimates for purposes of reaching its final burden hour estimate and aggregate cost projection.

920CEA section 15(a); 7 U.S.C. 19(a). A morecomplete explanation of this statutory requirementis provided below. See infra section 1(b) of this CostBenefit Considerations section. Swaps, futures, andoptions are collectively referred to as derivatives—contracts used by market participants to hedgeagainst the risk of a future change in prices, suchas commodity prices, interest rates, and exchangerates.

these revisions should decrease theregulatory burden imposed by the rule,the Commission believes that, given theinfrequent nature of the informationcollection requirement as originallyproposed, the effect of the revisionsshould be de minimis and therefore notaffect the proposed burden hourestimate.

(k) §37.1501(e)—Preparation of AnnualCompliance Report

FXall commented that the informationrequired by the proposed regulations to

be included in the annual compliancereport is too detailed and will be toocostly to compile.912 The Commission isnot persuaded by FXall’s comment, andnotes that the annual compliance reportis meant to be the primary tool by whichthe Commission can evaluate theeffectiveness of a SEF’s compliance andself-regulatory programs, thus requiringa high level of detail. The Commission’sproposed burden hour estimate includesthe annual compliance reportrequirement.

3. Final Burden Estimate

The final regulations require eachrespondent to file information with theCommission. For instance, SEFapplicants must file registrationapplications with the Commissionpursuant to §37.3. SEFs must record,report, and disclose information relatedto prices, trading volume, and othertrading data for swaps pursuant to CorePrinciples 9 and 10 (‘‘TimelyPublication of Trading Information’’ and

‘‘Recordkeeping and Reporting’’). Ingeneral, the collections of informationare required to demonstrate a SEF’soperational capability and are a tool bywhich both the SEF and theCommission can evaluate theeffectiveness of a SEF’s self-regulatoryprograms.

The mandatory informationcollections are contained in several of the general provisions being adopted insubpart A, as well as in certainregulations implementing CorePrinciples 2, 3, 4, 5, 7, 8, 9, 10, 13, 14,and 15. Generally, the information

collections covered in this final part 37rulemaking are not covered in otherexisting collections or collections thatare being established in connection withother Dodd-Frank rulemakings, andpertain to the following generalcategories of recordkeeping andreporting: registration; submissionsrelated to material changes in the SEF’soperations or business structure;compliance; financial resources reports,and an annual report by the CCO related

to the SEF’s performance of its self-regulatory responsibilities.

As discussed above, the methodologyused to formulate the proposed estimatewas an average of other registeredentities. Due to the relatively lowmagnitude of changes made to themandatory information collectionprovisions in this final part 37

rulemaking, the Commission hasdetermined not to alter its proposedestimate of 308 hours per SEFrespondent. By definition, averages aremeant to serve as only a reference point;the Commission understands that due to

both discretionary and mandatoryrequirements, some SEFs may go abovethe final estimate of 308 hours tocomplete mandatory informationcollection requirements, while othersmay stay below. The Commission is,however, adjusting the proposedestimate of annual and quarterlyresponses to clarify the Commission’s

original intent. In this regard, theCommission is adding an estimatedaverage hours per response number

below, which is based on 5 responsesper year (1 annual response and 4quarterly responses) per respondent.Estimated number of respondents: 35Annual responses by each respondent:

1 913 Total annual responses: 35Quarterly responses by each respondent:

1 914 Total quarterly responses: 140 915 Estimated average hours per response:

62 916 Aggregate annual reporting hours

burden: 10,780Therefore, the Commission estimates

that based on 35 registered SEFs, thisfinal part 37 rulemaking will result in10,780 information collection hoursacross all respondents.917

4. Aggregate Information Burden

The Commission concludes that newinformation collection 3038–0074 willresult in each SEF respondentexpending, on average, $16,632annually based on an hourly wage rateof $54 to comply with the recordkeeping

and reporting requirements of this finalpart 37 rulemaking.918 In aggregate, thiswill result in a cost to all SEFrespondents of $582,120 per annum

based on 35 expected respondents. Thisaggregate cost estimate has beenadjusted from the estimate in the SEFNPRM to account for updated wage ratedata.919

C. Cost Benefit Considerations

1. Introduction

Section 15(a) of the CommodityExchange Act (‘‘CEA’’ or ‘‘Act’’)mandates that the Commodity FuturesTrading Commission (‘‘Commission’’ or‘‘CFTC’’) consider the costs and benefitsof the regulations that it is adopting inthis rulemaking to implement thestatutory requirements for theregistration and operation of swapexecution facilities (‘‘SEFs’’), a new typeof regulated marketplace for the tradingand execution of financial derivative

contracts known as swaps.920

Inconsidering the costs and benefits of thefinal SEF regulations, the Commissionhas grouped the same into the followingcategories—SEF Market Structure,Registration, Recordkeeping andReporting, Compliance, Monitoring andSurveillance, Financial Resources andIntegrity, and Emergency Operationsand System Safeguards.

Several preliminary matters, however,provide background for theCommission’s consideration of the costsand benefits of the rules adopted in thisrelease. Discussed in this Introductionsection, these preliminary matters are:(a) The circumstances and events thatform the backdrop for the statutoryrequirements that this rulemakingimplements; (b) the Commission’sstatutory mandate to consider costs and

benefits and its methodology for doingso; and (c) the estimated aggregate costsof forming and operating a SEF.


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921See Dodd-Frank Act section 721(a)(21), adding CEA section 1a(47). 7 U.S.C. 1a(47).

922CEA section 1a(47)(A)(ii); 7 U.S.C.1a(47)(A)(ii).

923CEA section 1a(47)(A)(i) & (iv); 7 U.S.C.1a(47)(A)(i) & (iv). Futures are not within thedefinition of swap and remain separately subject torequirements of the CEA. See CEA section1a(47)(B)(i); 7 U.S.C. 1a(47)(B)(i).

924CEA section 1a(47)(A)(i) & (iii); 7 U.S.C.1a(47)(A)(i) & (iii).

925CEA section 1a(47)(A)(ii); 7 U.S.C.1a(47)(A)(ii).

926See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based SwapAgreement’’; Mixed Swaps; Security-Based SwapAgreement Recordkeeping, 77 FR 48208 (Aug. 13,2012).

927The Commission notes that privatelynegotiated swap transactions betweencounterparties is only one method to execute ortrade a swap transaction in the OTC market.Counterparties in the OTC market may execute or

trade swap transactions through many tradingmethods such as order books, RFQ systems, orsystems that incorporate electronic and voicecomponents.

928Absent a centralized trading mechanism suchas a limit order book, buyers and sellers ‘‘negotiatedterms privately, often in ignorance of pricescurrently available from other potentialcounterparties and with limited knowledge of trades recently negotiated elsewhere in the market.OTC markets are thus said to be relatively opaque;investors are somewhat in the dark about the mostattractive available terms and conditions and aboutwhom to contact for attractive terms.’’ DarrellDuffie, Dark Markets: Asset Pricing and InformationTransmission in Over-the-Counter Markets 1(Princeton University Press) (2012).

929Asymmetric information exists when oneparty to a transaction has more or better informationthan the other. In the context of the swaps market,as dealers are always on one side of a large fractionof trades, it is highly likely that they will have better information on prevailing market conditionsand valuations compared to their non-dealercounterparties. See Michael Fleming, John Jackson,Ada Li, Asani Sarkar & Patricia Zobel, ‘‘An Analysisof OTC Interest Rate Derivatives Transactions:Implications for Public Reporting,’’ Federal Reserve

Bank of New York Staff Reports, No. 557, at 6 n.14 (Mar. 2012), available at http:// www.newyorkfed.org/research/staff _reports/ sr557.pdf. Major derivatives dealer activityaccounts for 89% of the total interest rate swapactivity in notional terms. Id.

930CEA section 1a(18); 7 U.S.C. 1a(18).931Under the CFMA, prior to the adoption of

Title VII of the Dodd-Frank Act, swaps based onexempt commodities—including energy andmetals—could be traded among eligible contractparticipants without CFTC regulation, but certainCEA provisions against fraud and manipulationcontinued to apply to these markets. No statutoryexclusions were provided for swaps on agriculturalcommodities by the CFMA, although they could betraded under certain regulatory exemptionsprovided by the CFTC prior to its enactment. Swaps based on securities were subject to certain SEC

enforcement authorities, but the SEC wasprohibited from prophylactic regulation of suchswaps. See Commodity Futures Modernization Actof 2000, Pub. L. 106–554, 114 Stat. 2763 (2000). TheFinancial Crisis Inquiry Commission majority foundthat the CFMA ‘‘effectively shielded OTCderivatives from virtually all regulation oroversight,’’ and ‘‘OTC derivatives markets boomed’’in the law’s wake, increasing ‘‘more thansevenfold’’ after the CFMA was enacted. See TheFinancial Crisis Inquiry Commission, The FinancialCrisis Inquiry Report: Final Report of the NationalCommission on the Causes of the Financial andEconomic Crisis in the United States (OfficialGovernment Edition), at 48, 364 (2011) (hereinafterthe ‘‘FCIC Report’’), available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.

932Legislative history indicates that in enactingthe Dodd-Frank Act, Congress recognized that OTC

market opacity, combined with the availability of superior price information primarily to dealers,limited the ability of swaps customers ‘‘to shop forthe best price or rate.’’ See Mark Jickling & KathleenAnn Ruane, ‘‘The Dodd-Frank Wall Street Reformand Consumer Protection Act: Title VII,Derivatives,’’ Cong. Research Serv., R41398, at 7(Aug. 30, 2010). See also S. Rep. No. 111–176, at30 (2010) (‘‘Information on [OTC derivativecontract] prices and quantities is opaque. . . . Thiscan lead to inefficient pricing and risk assessmentfor derivatives users and leave regulators ill-informed about risks building up throughout thefinancial system’’). Ben Bernanke, Chairman of theBoard of Governors of the Federal Reserve System,stated, ‘‘[a]t times [during the crisis], the complexityand diversity of derivatives instruments also posed

(a) Background

An appreciation of certain background elements is helpful tounderstand the costs and benefits of thisrulemaking. These are: (i) The definitionof the derivative financial transactions(i.e., swaps) that will be executed onSEFs; (ii) the execution and regulation

of swaps prior to the Dodd-Frank Act;(iii) the 2008 financial crisis and therole of the over-the-counter (‘‘OTC’’)swaps market; (iv) the new regulatoryregime to reform the swaps market inTitle VII of the Dodd-Frank Act; and,more specifically, (v) the role andpurpose of SEFs within the Title VIIregulatory regime. Each of these

background elements is discussed below.

(1) The Definition of a Swap

Congress defined the term ‘‘swap’’ inthe Dodd-Frank Act.921 The statutory

definition of the term ‘‘swap’’ includes,in part, any agreement, contract, ortransaction ‘‘that provides for anypurchase, sale, payment, or delivery(other than a dividend on an equitysecurity) that is dependent on theoccurrence, nonoccurrence, or theextent of the occurrence of an event orcontingency associated with a potentialfinancial, economic, or commercialconsequence.’’922 The statutorydefinition, among other things,generally includes options (other thanoptions on futures) as well astransactions that now or in the future

are commonly known to the trade asswaps.923 The definition also articulatesa broad range of underlying interestsupon which a swap may be based: ‘‘1 ormore interest or other rates, currencies,commodities, securities, instruments of indebtedness, indices, quantitativemeasures, or other financial oreconomic interests or property of anykind . . .’’ 924 or ‘‘the occurrence,nonoccurrence, or the extent of theoccurrence of any event or contingencyassociated with a potential financial,economic, or commercialconsequence.’’925 In a joint rulemakingwith the Securities and ExchangeCommission (‘‘SEC’’), the Commission

also adopted rules further defining theterm ‘‘swap.’’ 926

(2) The Execution and Regulation of Swaps Prior to the Dodd-Frank Act

Unlike futures contracts which areregulated by the Commission and arelisted for trading on exchanges calleddesignated contract markets (‘‘DCMs’’),

swap transactions (excluding someexchange-traded options encompassed

by the post-Dodd-Frank Act definition)evolved off-exchange—largely toprovide customized solutions for uniquerisk management needs that exchange-traded products addressed lesseffectively—lending themselves to theoften used label of ‘‘OTC derivatives.’’Accordingly, many swap transactionsprior to the Dodd-Frank Act werenegotiated privately OTC betweencounterparties.927 In these situations,only the counterparties knew that theswap transaction was taking place, andregulators and other market participantslacked access to pricing informationduring the negotiation phase (pre-trade)and after the agreement wasconsummated (post-trade). Whilecentralized exchanges permit multiplemarket participants to compare, assess,accept, or reject bids (offers to buy) andasks (offers to sell), the privatelynegotiated OTC market provided little,if any, pre- or post-tradetransparency.928

In a typical privately negotiated OTCswap transaction, a customer for a swapis likely to obtain a private quote from,and bilaterally negotiate contract terms

with, one of a small number of market-making dealers. These dealers, oftenlarge financial institutions, may standready to take either a long position (if they want to buy) or a short position (if they want to sell), profiting from

spreads (the difference between the bidand the offer price) and fees. Relative totheir non-dealer (usually ‘‘buy-side’’)counterparties, these dealers enjoyasymmetric information advantages.929 The Commodity Futures ModernizationAct of 2000 (‘‘CFMA’’)—which largelyexcluded swaps transacted between‘‘eligible contract participants’’ 930 from

regulation under the CEA—reinforcedthis outcome.931 Swaps remainedlargely insulated from regulation priorto the enactment of the Dodd-FrankAct.932


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problems. Financial firms sometimes found it quitedifficult to fully assess their own net derivativesexposures or to communicate to counterparties andregulators the nature and extent of those exposures.The associated uncertainties helped fuel losses of confidence that contributed importantly to theliquidity problems I mentioned earlier. The recentlegislation addresses these issues by requiring thatderivatives contracts be traded on exchanges or

other regulated trading facilities when possible andthat they be centrally cleared.’’ ‘‘Too Big To Fail:Expectations and Impact of ExtraordinaryGovernment Intervention and the Role of SystemicRisk in the Financial Crisis: Hearing Before theFinancial Crisis Inquiry Commission,’’ 11 (Sep. 2,2010) (statement of Ben Bernanke, Chairman, Boardof Governors of the Federal Reserve System),available at http://fcic-static.law.stanford.edu/ cdn _media/fcic-testimony/2010-0902-Bernanke.pdf.

933The Bank for International Settlements,Quarterly Review, at A 131 (Sep. 2012), availableat http://www.bis.org/statistics/otcder/dt1920a.pdf.

934The Bank for International Settlements, 79thAnnual Report, at 23 (2009), available at http:// www.bis.org/publ/arpdf/ar2009e2.pdf, for a broaderdiscussion of the development of the crisis.

935S. Rep. No. 111–176, at 30 (2010).936See Darrell Duffie, Ada Li & Theo Lubke,

‘‘Policy Perspectives on OTC Derivatives MarketInfrastructure,’’ Federal Reserve Bank of New YorkStaff Reports, No. 424, at 1 (Mar. 2010), availableat http://www.newyorkfed.org/research/ staff _reports/sr424.pdf.

937See Section 733 of the Dodd-Frank Act, whichadopted CEA section 5h regarding registration,operation, and compliance requirements for SEFs.7 U.S.C. 7b–3. See also Section 723(a)(3) of theDodd-Frank Act, which amended CEA section 2(h)to add CEA section 2(h)(8) setting forth a tradeexecution requirement. 7 U.S.C. 2(h)(8). Similarly,the Dodd-Frank Act authorized the SEC to regulatesecurity-based swaps. See Section 763 of the Dodd-Frank Act, which amended the Securities andExchange Act of 1934 to add section 3D of theExchange Act, among other provisions.

938See FCIC Report at xxiv (listing uncontrolledleverage; lack of transparency, capital and collateralrequirements; speculation; interconnection amongfirms; and concentrations of risk in the market ascontributing factors).

939S. Rep. No. 111–176, at 92 (2010).940See academic research discussed below.941S. Rep. No. 111–176, at 34 (2010).942 Id. at 33–34 (quoting former CFTC Chair

Brooksley Born, the report states ‘‘ ‘[w]hile centralclearing would mitigate counterparty risk, centralclearing alone is not enough. . . . [e]xchangetrading is also essential in order to provide pricediscovery, transparency, and meaningful regulatoryoversight of trading and intermediaries.’ ’’).

943 Id. at 34 (quoting Stanford UniversityProfessor Darrel Duffie, ‘‘ ‘[t]he relative opaquenessof the OTC market implies that bid/ask spreads arein many cases not being set as competitively as theywould be on exchanges. . . . [t]his entails a loss inmarket efficiency.’ ’’).

From these beginnings, theunregulated swaps market has expandedexponentially over the last thirty years.According to the Bank for InternationalSettlements (‘‘BIS’’), the global OTCderivatives market measures at over$647 trillion in notional size.933

(3) The 2008 Financial Crisis and the

Role of the OTC Swaps MarketIn the fall of 2008, the United States

experienced a financial crisis that led tomillions of Americans losing their jobs,millions of families losing their homes,and thousands of small businessesclosing their doors. The BIScharacterized 2008 as a year thatescalated for ‘‘what many had hopedwould be merely . . . manageablemarket turmoil [to] a full-fledged globalcrisis.’’ 934 Faced with what policymakers at the time perceived as a gravethreat that without immediate andunprecedented government action U.S.and global credit markets would freeze,the federal government mounted anextraordinary intervention at great costto the American taxpayer to buttress thestability of the U.S. financial system.

While there were multiple causes of the financial crisis, unregulated swapsplayed an important role. Swapscontributed significantly to theinterconnectedness between banks,investment banks, hedge funds, andother financial entities. As the swapsmarket grew, additional participationadded risk to the already highly-leveraged and interconnected market.Accordingly, swaps concentrated and

heightened risks in the financial systemand to the public.

The crisis elevated concern amongregulators that the opaque structure of the OTC swaps market and theconsequent lack of information aboutswap prices and quantities would

hinder efficient pricing, and that thelack of information about outstandingpositions and exposures could ‘‘leaveregulators ill-informed about the risks

building up in the financial system. . . .Lack of transparency in the massiveOTC market intensified systemic fearsduring the crisis about interrelatedderivatives exposures from counterparty

risk.’’ 935 As regulators did not have aclear view into how OTC derivativeswere being used, they also feared that‘‘the complexity and limitedtransparency of the market reinforcedthe potential for excessive risk-taking. . . .’’ 936

(4) The New Regulatory Regime ToReform the Swaps Market in Title VII of the Dodd-Frank Act

On July 21, 2010, President Obamasigned the Dodd-Frank Act into law.Title VII of the Dodd-Frank Actestablished a comprehensive newregulatory framework for swaps andcharged the Commission and the SECwith oversight of the more than $300trillion domestic swaps market.937 Thelegislation was enacted, among otherreasons, to promote market integritywithin the financial system, reduce risk,and increase transparency, including by:(i) Providing for the registration andcomprehensive regulation of swapdealers and major swap participants; (ii)imposing clearing and trade executionrequirements on swaps; (iii) creating arigorous recordkeeping and real-timereporting regime; and (iv) enhancing the

rulemaking and enforcement authorityof the Commission with respect to,among others, all registered entities,including SEFs. These various elementswork in concert to provide theCommission with a comprehensive viewof the entire swaps market, furtheringthe Commission’s ability to monitor themarket. Consistent with the view thatthe vulnerability of the OTC derivativesmarket during the financial crisis wasnot attributable to a single weakness,

but a combination of several,938 Title VIIdoes not provide for a single-dimensional fix. Rather, it weavestogether a multidimensional regulatoryconstruct designed to ‘‘mitigate costsand risks to taxpayers and the financialsystem.’’939

(5) The Role and Purpose of SEFs

Within the Title VII Regulatory RegimeOne of the most important goals of the

Dodd-Frank Act is to bring transparencyto the opaque OTC swaps market. It isgenerally accepted that when marketsare open and transparent, prices aremore competitive and markets are moreefficient.940 The legislative history of the Dodd-Frank Act indicates thatCongress viewed exchange trading as amechanism to ‘‘provide pre- and post-trade transparency for end users, marketparticipants, and regulators.’’ 941 Assuch, exchange trading was intended as‘‘a price transparency mechanism’’ that

complements Title VII’s separate centralclearing requirement to mitigatecounterparty risk.942 Additionally,legislative history reveals aCongressional expectation that, overtime, exchange trading of swaps wouldreduce transaction costs, enhancemarket efficiency, and counter theability of dealers to extract economicrents from higher bid/ask spreads at theexpense of other market participants.943

Consistent with this purpose, theDodd-Frank Act amended the CEA tocreate SEFs, a new type of regulatedmarketplace, and promotes swap tradingand execution on them. The statutoryrequirements for SEFs are similar to therequirements for the existingCommission-regulated futures market,which incorporates pre-trade and post-trade transparency aspects not presentin the OTC swaps market. SEFs willallow buyers and sellers to meet in anopen, centralized marketplace, whereprices are publicly available. Asstatutorily defined, a SEF is ‘‘a trading


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944CEA section 1a(50), as amended by section721 of the Dodd-Frank Act. 7 U.S.C. 1a(50).‘‘Trading facility’’ is also a statutorily defined term.See CEA section 1a(51); 7 U.S.C. 1a(51).

945The Commission separately proposed rules todetermine whether a swap is ‘‘made available to

trade’’ for purposes of the trade executionrequirement in CEA section 2(h)(8). Process for aDesignated Contract Market or Swap ExecutionFacility To Make a Swap Available To Trade, 76 FR77728 (proposed Dec. 14, 2011).

946The Commission separately proposed rules todetermine minimum block trade sizes for swaps.Since the execution methods for RequiredTransactions excludes block trades, this rulemakingaffects the scope of the trade execution mandate.See Procedures to Establish Appropriate MinimumBlock Sizes for Large Notional Off-Facility Swapsand Block Trades, 77 FR 15460 (proposed Mar. 15,2012).

947See Section 723(a)(3) of the Dodd-Frank Act,which amended the CEA to add section 2(h)(8). 7U.S.C. 2(h)(8).

948See Section 723(a)(3) of the Dodd-Frank Act,which amended the CEA to add section 2(h)(1). 7

U.S.C. 2(h)(1).949See Section 723(a)(3) of the Dodd-Frank Act,

which amended the CEA to add section 2(h)(7). 7U.S.C. 2(h)(7). The Commission separatelyproposed rules to determine whether a swap is‘‘made available to trade’’ for purposes of the tradeexecution requirement in CEA section 2(h)(8).Process for a Designated Contract Market or SwapExecution Facility To Make a Swap Available ToTrade, 76 FR 77728 (proposed Dec. 14, 2011).

950CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1).951CEA section 5h(f); 7 U.S.C. 7b–3(f).952CEA section 5h(f)(1)(A); 7 U.S.C. 7b–3(f)(1)(A).

Further, CEA section 5h(h) mandates that theCommission prescribe rules governing SEFregulation. 7 U.S.C. 7b–3(h).

953While the SEF rules focus on measures topromote pre-trade price transparency and tradeexecution, they complement other Commissionrules pertaining to real-time reporting (part 43 of the Commission’s regulations) and swap datarecordkeeping and reporting (part 45 of theCommission’s regulations). The addition of the CEAsection 5h rules for registration, operation, andcompliance of SEFs to this mix results in a suiteof rules covering all critical aspects of the tradingprocess—pre-trade, trade, and post-trade.

954Pre-trade transparency is defined as ‘‘thedissemination of current bid and ask quotations,depths, and information about limit orders awayfrom the best prices. Post-trade transparency refersto the public and timely transmission of information on past trades, including executiontime, volume and price.’’ See Ananth Madhavan,David Porter & Daniel Weaver, ‘‘Should securitiesmarkets be transparent?,’’ 8 Journal of FinancialMarkets 265, 268 (Aug. 2005). See also Larry Harris,Trading and Exchanges—Market Microstructure forPractitioners 102 (Oxford University Press) (2003)(hereinafter Harris, ‘‘Trading and Exchanges’’).

955

See section 733 of the Dodd-Frank Act, addingCEA section 5h. 7 U.S.C. 7b–3. Under section 5h,Congress provided an explicit rule of construction,stating that ‘‘[t]he goal of this section is to promotethe trading of swaps on swap execution facilitiesand to promote pre-trade price transparency in theswaps market.’’ CEA section 5h(e); 7 U.S.C. 7b–3(e).

956See, e.g., ISDA Research Staff & NERAEconomic Consulting, Costs and Benefits of Mandatory Electronic Execution Requirements forInterest Rate Products, ISDA Discussion PapersSeries, Number Two, at 1, 4 (Nov. 2011) (added tothe public comment file for the SEF rulemaking onNov. 10, 2011) (hereinafter ‘‘ISDA DiscussionPaper’’); ISDA/SIFMA Comment Letter at 5–6 (Mar.8, 2011); MetLife Comment Letter at 2–3 (Mar. 8,2011).

957The corporate bond markets are generallycomparable to the OTC swap markets in terms of the large number of instruments traded, withpotentially a large overlap of market participants.Additionally, any single issuer will have multiple bonds outstanding, with different maturity datesand coupons. Some potential SEF registrants willlikely be firms operating trading platforms forcorporate bonds.

958For example, Larry Harris notes that marketparticipants might be ‘‘ambivalent abouttransparency,’’ and explains that traders ‘‘favor

transparency when it allows them to see more of what other traders are doing, but they oppose itwhen it requires that they reveal more of what theyare doing. Generally, those who know the leastabout market conditions most favor transparency.Those who know the most oppose transparency because they do not want to give up theirinformational advantages.’’ The Commission alsorecognizes that there is a continuum of marketsoccupying ‘‘various points between high and lowtransparency.’’ See Harris, ‘‘Trading andExchanges,’’ at 101. See also ISDA Research Notes,‘‘Transparency and over-the-counter derivatives:The role of transaction transparency,’’ No. 1, at 2–3 (2009), available at http://www2.isda.org/ attachment/MTY4NA==/ISDA-Research- Notes1.pdf.

system or platform in which multipleparticipants have the ability to executeor trade swaps by accepting bids andoffers made by multiple participants inthe facility or system, through anymeans of interstate commerce, includingany trading facility, that (A) facilitatesthe execution of swaps betweenpersons; and (B) is not a designated

contract market.’’ 944 With this rulemaking, in conjunction

with the separate made available totrade rulemaking 945 and the swaps

block rulemaking,946 the Commission isimplementing the Dodd-Frank Act’strade execution mandate.947 Pursuant tothis trade execution requirement,transactions involving swaps subject tothe clearing requirement in CEA section2(h)(1) 948 must be executed on a SEF ora DCM, unless no SEF or DCM ‘‘makesthe swap available to trade’’ or therelated transaction is subject to theclearing exception under CEA section

2(h)(7).949

Further, no facility may beoperated for the trading or processing of swaps unless first registered as a SEF orDCM.950 SEFs are required to complywith 15 statutorily enumerated coreprinciples,951 as well as any otherrequirements that the Commissionprescribes by rule or regulation.952

Taken together, these statutoryprovisions provide the framework that

transforms the swaps market from onein which prices for bilaterally-negotiated contracts are privatelyquoted—often by dealers with aninformational advantage—to one inwhich bid/offer prices for swapcontracts are accessible to multiplemarket participants to compare, assess,accept, or reject. By improving price

transparency, the new provisionsshould reduce information asymmetryand, in turn, the informationaladvantage enjoyed by a small number of dealers to the detriment of other marketparticipants.953 These provisions benefitthe financial system as a whole bycreating more efficient market places,where market participants will take intoaccount the price at which recenttransactions have occurred whendetermining at what price to displayquotes or orders.

As discussed, this rulemaking furthersCongress’ goal of promoting

transparency in the swaps market.954

The goal of pre-trade transparency onSEFs is statutorily mandated in theDodd-Frank Act.955 Notwithstanding thefact that Congress directed theCommission to construe the statute inlight of this goal, some commentershave questioned the benefits of theCommission’s proposals in furtheranceof that goal.956

In response to commenters whoquestion the Congressionally-directedgoal of pre-trade price transparency andthe Commission’s implementation of that goal, the Commission notes thatthere is a body of research that tends to

be generally supportive, albeit based onexperience in other markets, asdiscussed below. Although this research

was not critical to or relied upon by theCommission in its decision-making of how to best implement Congress’ goal of promoting pre-trade price transparency,it does provide a useful counterpoint tomany of the general comments raised bycommenters and therefore merits brief mention.

While there are no studies on theeffect of pre-trade transparency in theswaps market, empirical research on thelikely effects of transparency on marketparticipants exists in other markets,including the equity market, which haspre-trade transparency, and the

corporate bond market, which has asimilar market structure to the OTCswaps market and has post-tradetransparency.957 While academics havea range of perspectives on marketstructure and transparency issues,958 theempirical research discussed below andthroughout this document supports thegeneral proposition that a lack of pre-and post-trade transparency, which arecharacteristics of any dark, opaquemarket, generally increases search andtransaction costs, and negativelyimpacts price discovery.

While some commenters contend thatpre-trade price transparencyrequirements would increase costs formarket participants, there is academicsupport for the general proposition thatincreased transparency will actually


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959Discussing the trade-off between higher coststo liquidity providers and the lower costs toinstitutional investors from greater post-tradetransparency in the corporate bond markets,Bessembinder & Maxell conclude that while‘‘[T]raders employed by insurance companies andinvestment management firms bear costs associatedwith decreases in service provided by bond dealers. . . these higher costs are offset by lower tradeexecution costs that . . . benefit the investors whoultimately own the bonds transacted. . .’’ See

Hendrik Bessembinder & William Maxwell,‘‘Markets: Transparency and the Corporate BondMarket,’’ 22 Journal of Economic Perspectives 217,232–33 (Spring 2008) (hereinafter Bessembinder &Maxwell, ‘‘Transparency’’).

960Harris, ‘‘Trading and Exchanges,’’ at 101.961 It is instructive to note the view that

transparency is ‘‘not an objective per se but rathera means for ensuring the proper functioning of themarket.’’ See Marco Avellaneda & Rama Cont,‘‘Transparency in Credit Default Swap Markets,’’Finance Concepts, at 3 (Jul. 2010), available at http://www.finance-concepts.com/images/fc/ CDSMarketTransparency.pdf.

962Pagano & Roell explain the regulatory policysupport for pre-trade transparency as a means ‘‘toenable ordinary traders to check for themselveswhether they have gotten a fair price.’’ Comparingthe price formation in auction and dealer markets,

they find that greater transparency generates lowertrading costs for uninformed traders on average,although not necessarily for every trade size. SeeMarco Pagano & Ailsa Roell, ‘‘Transparency andLiquidity: A Comparison of Auction and DealerMarkets with Informed Trading,’’ 51 Journal of Finance 579 (Jun. 1996). Research referenced laterin the release has found that such competition canreduce revenues and increase costs and risks forliquidity providers, thus causing them to reducetheir participation in the markets.

963Many of the existing electronic tradingplatforms for bonds and for swaps displayindicative quotes, but the Commission is not awareof research on the quality of these indicative quotes,and of their likely impact on price discovery andmarket quality in terms of transaction costs.

964See Bessembinder & Maxwell,‘‘Transparency,’’ at 223 (explaining that in additionto the cost of conducting the search, marketparticipants are exposed to the additional cost fromthe fact that a dealer’s quote is only good ‘‘as longas the breath is warm’’). Comparing execution costin the equity and corporate bond markets, Edwards,Harris & Piwowar theorize that despite the fact thatcorporate bonds are less risky than equity (in thesame company), differences in pre- and post-tradetransparency between the two markets contribute tohigher transaction costs in the bond markets. See

Amy Edwards, Lawrence Harris & MichaelPiwowar, ‘‘Corporate Bond Market TransactionsCosts and Transparency,’’ 62 Journal of Finance1421, 1438 (Jun. 2007) (hereinafter Edwards et al.,‘‘Transaction Costs and Transparency’’).

965See ‘‘Markets with Search Frictions,’’ TheRoyal Swedish Academy of Sciences, at 1 (Oct. 11,2010), available at http://www.nobelprize.org/ nobel _ prizes/economics/laureates/2010/advanced-economicsciences2010.pdf.

966 Id. at 5.967See Peter Diamond, ‘‘A Model of Price

Adjustment,’’ 3 Journal of Economic Theory 156(Jun. 1971).

968See Darrell Duffie, Nicolae Garleanu & LasseHeje Pedersen, ‘‘Valuation in Over-the-CounterMarkets,’’ 20 The Review of Financial Studies 1865,1888–89 (Nov. 2007) (hereinafter Duffie et al.,

‘‘Valuation in OTC Markets’’) for a series of examples of markets where search costs impactprice discovery, adversely resulting in pricesdiverging from competitive market outcomes.

969An oligopoly is a market form in which amarket or industry is dominated by a small numberof sellers (oligopolists)—dealers or market makersin the context of the OTC swaps markets. While thetraditional research into oligopolistic behavior hasfocused on attempts by firms to collude, whichcould potentially result in non-competitive ormonopoly pricing for the rest of the market, thesearch literature explains that the monopoly pricingis due to the presence of search costs. Indicative of the potential impact of such oligopolistic behavior by dealers in an environment with low pre-tradetransparency, Hendershott & Madhavan reference

research comparing transactions costs betweenequity and corporate and municipal bond markets.See Terrence Hendershott & Ananth Madhavan,‘‘Click or Call? Auction versus Search in the Over-the-Counter Market,’’ Working Paper, at 2 (Mar. 19,2012) (hereinafter Hendershott & Madhavan, ‘‘Clickor Call’’). They explain that despite improvementsin the post-trade transparency in both corporate andmunicipal bond markets, transaction costs arehigher compared to equivalent-sized equity tradesdue to ‘‘the lack of pre-trade transparency thatconfers rents to dealers.’’ Id.

970Empirical research evaluating the impact of transparency on market quality are typically in thecontext of natural experiments when there is achange in the set of trading rules in a particularmarket. Madhavan, Porter & Weaver examined theoutcomes when the Toronto Stock Exchangeincreased transparency levels for stocks traded on

the floor and on the screen, and found that itreduced the earnings of specialists (or liquidityproviders); lower order flows from them in turnreduced market depth and caused the market toexhibit increased price volatility and highertransaction costs. See Ananth Madhavan, DavidPorter & Daniel Weaver, ‘‘Should securities markets be transparent?,’’ 8 Journal of Financial Markets 265(Aug. 2005). Eom, Ok & Park focus on the impactof changes in the display in the level of depth of the limit order book in the Korean equity marketand find evidence of positive effects on marketquality measured in terms of depth, volume andquoted spreads, but beyond a point, these effectstaper-off, and can even become negative. See KyongShik Eom, Jinho Ok & Jong Ho Park, ‘‘Pre-tradetransparency and market quality,’’ 10 Journal of Financial Markets 319 (Nov. 2007). In anotherpaper, Boehmer, Saar & Yu present evidence that

when the New York Stock Exchange took specificsteps to display limit-order book information totraders off the exchange floor, ‘‘an increase in pre-trade transparency affects investors’ tradingstrategies and can improve certain dimensions of market quality.’’ See Ekkehart Boehmer, GideonSaar & Lei Yu, ‘‘Lifting the Veil: An Analysis of Pre-trade Transparency at the NYSE,’’ 60 The Journalof Finance 783 (Apr. 2005). Additionally, in a paperhighlighting the impact of pre-trade transparencyon price discovery, and highlighting the risks of driving trading activity to competing markets,Hendershott & Jones found that when the Islandelectronic communications network stoppeddisplaying its limit order book in certain exchange-traded funds (‘‘ETFs’’), ETF prices adjusted more

Continued

lower costs for market participants,959 ‘‘help them predict future price changes,to predict when their orders willexecute, and to evaluate their brokers’performance,’’ 960 and will improve thequality of execution they receive fromthe marketplace.961 Greatertransparency in general can increasemarket liquidity by reducing

information asymmetry betweeninformed and less informed marketparticipants, and greater pre-tradetransparency also helps improve pricediscovery by promoting competitionamong liquidity providers.962

Academic research supports the viewthat a lack of pre-trade transparencyaffects trading costs because itcontributes to frictions in the searchprocess, which in turn can translate intohigher transaction costs and impactequilibrium prices and allocations.Given the lack of pre-trade transparencyand the absence of centralized markets

(i.e., exchanges) in the OTC swapsmarket, market participants will likelycontact multiple dealers sequentially byphone or by some other electronicmeans of communication.963 Bessembinder and Maxwell explain that

the take-it-or-leave-it aspect of thenegotiation process in the bond markets(which is also present in the OTC swapsmarket) ‘‘limits one’s ability to obtainmultiple quotations before committingto trade.’’ 964

More generally, this area of research,also called search and matching theory,‘‘offers a framework for studying

frictions in real-world transactions andhas led to new insights into the workingof markets.’’ 965 This research showsthat ‘‘even with very minor search costsand with a large number of sellers, asearch and matching environmentwould deliver a rather large departurefrom the outcome under perfectcompetition (which would prevail if thesearch costs were zero).’’ 966 This‘‘Diamond paradox’’ 967 is of relevanceto this rulemaking because given searchcosts, no matter how small, the presenceof multiple dealers can result in trades

being transacted at the single monopoly

price.968

This highlights the importanceof reducing the costs that exist when amarket is dominated by a small numberof dealers—in other words, anoligopoly.969

Academic research into the impact of pre-trade transparency on marketquality in the context of the equitymarkets is an active area of research. As

buy and sell interest at the best bid andoffer price is widely available to allmarket participants in these markets,they are not necessarily analogous to theOTC swap markets, where such

information is simply not available.Nevertheless, research in this area isnotable because the equity markets havepre-trade transparency, and Congresshas mandated pre-trade transparency onSEFs. Various research papers examinethe impact of changes in relative levelsof pre-trade transparency within aspecific trading venue or exchange, anddepending on the specificcircumstances of each such event,market participants’ behavior can beinfluenced, which in turn can impactliquidity and costs.970


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slowly, and there was ‘‘substantial price discoverymovement from ETFs to the futures market.’’ SeeTerrence Hendershott & Charles M. Jones, ‘‘IslandGoes Dark: Transparency, Fragmentation, andRegulation,’’ 18 The Review of Financial Studies743 (Fall 2005).

971The Trade Reporting and Compliance Engine(‘‘TRACE’’) is operated by the Financial IndustryRegulatory Authority (‘‘FINRA’’), and facilitates themandatory reporting of OTC secondary markettransactions in eligible fixed income securities. All

broker/dealers who are FINRA member firms havean obligation to report transactions in corporate bonds to TRACE under an SEC-approved set of rules. See http://www.finra.org/Industry/

Compliance/MarketTransparency/TRACE/for

further details.972See Edwards et al., ‘‘Transaction Costs and

Transparency,’’ at 1426. As with OTC swaps, giventhat there is no pre-trade transparency in thecorporate bond markets, bid-ask spreads, a keydeterminant of transaction costs, have to beestimated using specialized econometrictechniques. In this paper, they assume that therehas been no change in the market structure (interms of execution methods) before and afterTRACE.

973 In a related paper on the impact of higher

transparency on liquidity, research examining theimpact of higher post-trade transparency on theliquidity of the BBB-rated corporate bond marketshows that ‘‘overall, adding transparency has eithera neutral or a positive effect on liquidity.’’ Id. at1438.

974Bessembinder & Maxwell point out that priorto the introduction of TRACE, ‘‘customers found itdifficult to know whether their trade price reflectedmarket conditions . . . . With transactionreporting, customers are able to assess thecompetitiveness of their own trade price bycomparing it to recent and subsequent transactionsin the same and similar issues.’’ Bessembinder &Maxwell, ‘‘Transparency,’’ at 226.

975CEA section 15(a); 7 U.S.C. 19(a).976 Id.977See Core Principles and Other Requirements

for Swap Execution Facilities, 76 FR 1214, 1237(proposed Jan. 7, 2011).

978See, e.g., FXall Comment Letter at 2–4 (Mar.8, 2011); CME Comment Letter at 2 (Mar. 8, 2011).

979See ISDA Discussion Paper (Nov. 2011).

980The costs and benefits of Core Principle 12 arediscussed in connection with a separate proposedrulemaking entitled Requirements for DerivativesClearing Organizations, Designated ContractMarkets, and Swap Execution Facilities Regarding

While the literature from the equitymarkets referenced above focuses onchanges in relative levels of pre-tradetransparency, research from thecorporate bond markets also directlyaddresses the benefits from bringingpost-trade transparency into darkmarkets. Edwards, Harris, and Piwowarexamine trading costs in the corporate

bond market using a record of everycorporate bond trade reported on theTRACE971 system between January 2003and January 2005.972 In their paper, theyfind evidence that post-tradetransparency through TRACE haslowered transaction costs in thecorporate bond market and that higherpost-transparency has helped improveliquidity in this market.973 Summarizingfindings from studies by otherresearchers on the impact of TRACE onmarket participants, Bessembinder andMaxwell confirm that it has helped

provide a level playing field—in thecontext of information regarding currentprices at which various corporate bondsare being traded.974

(b) The Statutory Mandate To Considerthe Costs and Benefits of theCommission’s Action: Section 15(a) of the CEA

Section 15(a) of the CEA requires theCommission to consider the costs and

benefits of its actions beforepromulgating a regulation under theCEA or issuing certain orders.975 CEAsection 15(a) further specifies that thecosts and benefits shall be evaluated inlight of the following five broad areas of market and public concern: (1)Protection of market participants andthe public; (2) efficiency,competitiveness, and financial integrityof futures markets; (3) price discovery;(4) sound risk management practices;and (5) other public interestconsiderations.976 The Commissionconsiders below the costs and benefitsresulting from its discretionarydeterminations with respect to thesection 15(a) factors.

To aid the Commission in itsconsideration of the costs and benefitsresulting from its regulations, theCommission requested in the SEFNPRM that commenters provide dataand supporting information whichquantify or qualify the costs and

benefits of the proposed rules.977 Whilea number of industry commentersexpressed the general view thatimplementing and complying with theproposed rules would come atconsiderable cost and that the proposedrules would be burdensome,978 theCommission only received one

comment quantifying the costs that mayresult from the proposed regulations.979 In meetings requested by potential SEFregistrants during the comment period,the Commission staff invited thoseentities to provide specific data tosupport general assertions that theproposed regulations would be costly.Again, no such information wasprovided. In another effort to gathersuch data, the Commission staff initiated follow-up contacts with certainpotential SEFs regarding their projectedexpenses in light of the Commission’sproposed regulations. The product of

these conversations is reflected in thecost estimates included in this release.While certain costs are amenable to

quantification, other costs are not easilymonetized, such as the costs to thepublic of another financial crisis. The

Commission’s final regulations areintended to mitigate that risk, and,therefore, serve an important if unquantifiable public benefit. While the

benefits of effective regulation aredifficult to value in dollar terms, theCommission believes that they are noless important to consider given theCommission’s mission to protect both

market users and the public.Additionally, where appropriate, in

response to the cost concerns of somecommenters, the Commission, asdiscussed below, adopted cost-mitigating alternatives presented bycommenters where doing so would stillachieve the goals of the Dodd-Frank Act.

The discussion of costs and benefitsthat follows begins with aninformational discussion of theaggregate estimated costs of forming andoperating a SEF. Although these costsare mostly attributable to Congress’mandate that there be SEFs, they

provide useful context for the costs and benefits attributable to theCommission’s action of implementingthat mandate in this rulemaking.Relatedly, the Commission believes thatmany of the costs that arise from theapplication of the final rules are aconsequence of the Congressional tradeexecution mandate of section 2(h)(8) of the CEA, as well as the Congressionalgoals to promote the trading of swaps onSEFs and to promote pre-trade pricetransparency in the swaps market insection 5h(e) of the CEA. For example,those market participants who are not

eligible for the CEA section 2(h)(7) enduser exception will no longer have theoption to execute Required Transactions

bilaterally even when they consider itmore costly or less convenient toexecute trades on a SEF (or a DCM). Asdescribed more fully below, theCommission has considered these costsin adopting these final rules, and has,where appropriate, attempted tomitigate the costs while observing theexpress direction of Congress in CEAsections 2(h)(8) and 5h(e).

After the discussion of the aggregatecosts of forming and operating a SEF,the Commission’s consideration of costsand benefits is organized into sevencategories: (1) SEF Market Structure; (2)Registration; (3) Recordkeeping andReporting; (4) Compliance; (5)Monitoring and Surveillance; (6)Financial Resources and Integrity; and(7) Emergency Operations and SystemSafeguards. For each category,980 the


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the Mitigation of Conflicts of Interest, 75 FR 63732(proposed Oct. 18, 2010).

981The Commission notes that a number of theseregulations also refer to requirements that arecontained in other rulemakings, some that have been finalized and others that have not. The costsand benefits of these regulations have been, or will be, discussed in those other rulemakings.

982CEA section 15(a); 7 U.S.C. 19(a).983The Commission notes that these registrants

will also incur costs to meet the statutoryrequirements.

984 ISDA Discussion Paper at 30–31 (Nov. 2011).While the ISDA discussion paper is largelyconcerned with the costs and benefits resultingfrom the statute and regulations implemented byother rulemakings, relevant portions are discussedin this release. ISDA’s estimate includes the costsof: registering with the Commission; developing anelectronic system capable of providing marketparticipants with the ability to make bids and offersto multiple participants and capable of maintainingsafe storage capacity; developing and maintainingelectronic analysis, reporting, and monitoringsoftware; developing new products; draftingcontractual arrangements with SEF users andvendors; drafting market rules and policies; anddeveloping emergency backup procedures andsystems.

985 Id. at 31–32. This estimate includes the costof compensation and benefits for staff, leasing officespace, maintaining and upgrading operationalinfrastructure and systems, maintaining sufficientfinancial resources to cover operating costs for atleast one year, maintaining an independent boardof governors, and maintaining emergency backupfacilities.

986 Id. at 31, 34.987 Id. at 29.

988 Id. at 30.989 Id. at 31.990MarketAxess Comment Letter at 5 (Jun. 3,

2011).991Registration and Regulation of Security-Based

Swap Execution Facilities, 76 FR 10948, 11041(proposed Feb. 28, 2011).

992 Id.993 Id.

Commission summarizes the finalregulations; describes and responds tocomments discussing the costs and

benefits; 981 assesses alternatives,including those raised by commenters;and considers the costs and benefits inlight of the five factors set out in CEAsection 15(a), which expressly requiresthe Commission to consider the costs

and benefits of ‘‘the action of theCommission.’’982 In this regard, as withthe aggregate costs of forming andoperating a SEF attributable to Congress,where the Commission merely codifiesa statutory requirement, theCommission believes that there is no actof discretion for consideration underCEA section 15(a). For example, for eachcore principle, the first section of theCommission’s regulations is acodification of the statutory language of the core principle as a rule and,accordingly, there is no Commission actof discretion and thus no costs and

benefits for the Commission to considerunder section 15(a). In other cases, suchas Core Principle 1, the rule simplycodifies the text of the core principle,and thus will not be discussed as it isoutside the scope of section 15(a).

The Commission expects that thecosts and benefits will vary based on thespecific circumstances of the individualentity seeking registration as a SEF. Forexample, some SEF-like executionplatforms that currently operate in theOTC marketplace may generally alreadyhave the infrastructure to comply withthe Commission’s regulations without

the need for sizeable additionalexpenditures. For these potential SEFregistrants, the regulations may occasionminimal incremental costs above theirexisting cost structure. In contrast,potential SEF registrants that are notcurrently operating in the OTCmarketplace, registered as a DCM, oroperating as an exempt board of tradewill likely lack existing infrastructureand may incur costs, at timessignificant, in both physical and humancapital to meet the requirements of theregulations.983 Accordingly, whereappropriate and possible to account forthese differences, the Commission hasattempted to express costs and benefitsas a range, sometimes one that is wide.

Finally, in some instances,quantification of costs to certain marketparticipants is not reasonably feasible

because costs will depend on the size,structure, and product offering of a SEF,which are likely to have considerablevariation, or because requiredinformation or data will not exist untilafter a SEF commences operation as a

registrant. In other instances—forexample with respect to protection of market participants and the public—suitable metrics to quantify costs and

benefits simply do not exist.Notwithstanding the above-mentionedlimitations, the Commission identifiesand considers the costs and benefits of these rules in qualitative terms.

(c) Estimated Aggregate Costs of Forming and Operating a SEF

In its discussion paper, ISDAestimated the cost of establishing a newSEF to be $7.4 million,984 and estimatedongoing operating costs to be nearly $12million per year.985 ISDA based its costestimates on a survey of groups whichincluded a ‘‘small number of (large)Buy-Side firms and the 16 largestdealers.’’ 986 ISDA’s estimate is based ona trading architecture that includes anorder matching engine, and a Requestfor Quote system or other means of interstate commerce that will allowmembers to show (and see) bids andoffers.987 In addition, ISDA’s estimateincludes costs associated with: systemsto capture and retain data necessary tocreate an audit trail for at least 5 years;an electronic analysis capability and the

ability to collect and evaluate marketdata on a daily basis; a real-timeelectronic monitoring system to detectand deter manipulation, distortion, andmarket disruption; reporting transactioninformation to the Commission and data

repositories using unique productidentifiers; a Chief Compliance Officer;and disaster recovery.988 ISDA alsoidentified major operating costs toinclude the cost of compensation and

benefits for staff, leasing office space,maintaining and upgrading operationalinfrastructure and systems, maintainingsufficient financial resources to cover

operating costs for at least one year,maintaining an independent board of governors, and maintaining emergency

backup facilities.989

In another comment letter,MarketAxess stated that the SEC’s costestimates in its proposed rulemaking forsecurity-based SEFs (‘‘SB–SEFs’’), were‘‘generally realistic and accurateestimates of the costs of establishing andoperating a SB–SEF’’ and that theseestimates would be ‘‘comparable to, andthus relevant for, calculation of costs fora SEF.’’ 990

The SEC estimated that the cost of forming an SB–SEF is approximately$15–20 million, including the first yearof operation.991 These costs included asoftware and product developmentestimate of $6.5–10 million for the firstyear and ongoing technology andmaintenance costs of $2–4 million.992 The SEC also estimated that it wouldcost approximately $50,000–$3 millionfor an operator of an existing platformto modify its platform to conform to thestatute and the SEC’s proposed rules,depending on the enhancements thatwould be required by the finalregulations.993

In the Commission staff’s follow-upconversations, potential SEFs stated thatthe costs associated with the SEF NPRMmay differ from the SEC’s cost estimatesin various areas. For example, onecommenter estimated first-year softwareand product development costs of $4million rather than the $6.5–10 millionestimated by the SEC. Anothercommenter stated that existing entitieswill be able to leverage existingtechnology at minimal cost, and thatthere is no real cost associated with therulemaking from a technology

perspective if an entity is not a startup.As stated above, ISDA’s estimates alsodiffered from those of the SEC,including estimated initial softwaredevelopment costs of $1 million and


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994 ISDA Discussion Paper at 32 (Nov. 2011).

ISDA’s paper also contained a discussion of thecosts likely to be faced by dealers and buy-sideusers of interest rate swaps that must be executedon regulated exchanges. Some of these costs resultfrom statutory requirements that were not theproduct of Commission discretion, while othercosts are likely to derive from regulations beingimplemented in other rulemakings. Other costssimply reflect the cost of doing business and are notdirectly imposed by Commission regulations.Accordingly, these costs are beyond the scope of this rulemaking and will not be discussed in thisrelease.

995Rule 37.204 permits SEFs to contract with aregulatory service provider for the provision of services to assist in compliance with the coreprinciples, as approved by the Commission.

996An Order Book means: (i) An electronictrading facility, as that term is defined in section1a(16) of the Act; (ii) a trading facility, as that termis defined in section 1a(51) of the Act; or (iii) atrading system or platform in which all marketparticipants in the trading system or platform havethe ability to enter multiple bids and offers, observeor receive bids and offers entered by other marketparticipants, and transact on such bids and offers.See Final §37.3(a)(3) of the Commission’sregulations.

997CEA section 1a(50) defines a SEF as ‘‘a tradingsystem or platform in which multiple participantshave the ability to execute or trade swaps byaccepting bids and offers made by multipleparticipants in the facility or system, through anymeans of interstate commerce . . .’’ 7 U.S.C. 1a(50).In section 5h(e) of the Act, Congress provided a‘‘rule of construction’’ to guide the Commission’sinterpretation of certain SEF provisions (stating thatthe goals of section 5h of the Act are to ‘‘promotethe trading of swaps on [SEFs] and to promote pre-trade price transparency in the swaps market’’). 7U.S.C. 7b–3(e).

998See Minimum Trading Functionalitydiscussion above under §37.3—Requirements forRegistration in the preamble.

999Transactions that are subject to the tradeexecution requirement of CEA section 2(h)(8) aresubject to the clearing requirement of CEA section2(h)(1) and are ‘‘available to trade’’ on a SEF orDCM. See Process for a Designated Contract Marketor Swap Execution Facility To Make a SwapAvailable To Trade, 76 FR 77728 (proposed Dec. 14,2011).

1000The SEF NPRM provided that PermittedTransactions may be executed by an Order Book,RFQ System, Voice-Based System, or any suchother system for trading as may be permitted by theCommission. Core Principles and OtherRequirements for Swap Execution Facilities, 76 FRat 1241.

1001See RFQ System Definition and Transmissionto Five Market Participants discussion above under§ 37.9(a)(1)(ii)—Request for Quote System in thepreamble.

initial product development costs of $1.25 million.994

In the Commission staff’s follow-upconversations, potential SEFs stated thattotal ongoing costs would range from$3.5 million to $5 million per year.These potential SEFs also told theCommission staff that it would costthem approximately $2 million to

conform to the statute and theCommission’s proposed rules, includingcontracting with the National FuturesAssociation (‘‘NFA’’) to performregulatory services.

While the Commission believes thatthe various cost estimates (includingthose for SB–SEFs and those reflectingcosts imposed by statute) can be used asa rough guide to the costs that would beincurred to establish and operate a SEF,the Commission notes that the majorityof these costs are necessary to establishand operate any platform for the tradingof swaps, as a number of firms had

already done prior to the enactment of the Dodd-Frank Act. The Commission believes that the additional costs of modifying a platform to comply withthe Commission’s regulations toimplement the statute represent arelatively modest proportion of thesecosts.

(1) Regulatory Costs

Pursuant to final §37.204 adopted inthis release, SEFs may utilize aregulatory service provider forassistance in performing certain self-regulatory functions, including, amongothers, trade practice surveillance,

market surveillance, real-time marketmonitoring, investigations of possiblerule violations, and disciplinaryactions.995 The costs described in thiscost benefit consideration section reflectthe costs that a SEF is likely to face if it does not choose to utilize the servicesof a regulatory service provider. To theextent that utilizing a regulatory serviceprovider is more cost-effective for a SEFthan performing the functionsindependently, the quantitative andqualitative cost discussions in this

release may overstate the costs of complying with the rules. Based on theCommission staff’s follow-updiscussions with potential SEFs, itappears that most SEFs will be enteringinto agreements with regulatory serviceproviders for the provision of thesefunctions. In fact, the Commissionunderstands that many potential SEFs

have already entered into formalagreements with a regulatory serviceprovider. The Commission notes thatcompetition among regulatory serviceproviders, including NFA and theFinancial Industry RegulatoryAuthority, may result in additional costsavings for SEFs that choose tooutsource compliance obligations.

2. SEF Market Structure

(a) Background

(1) Minimum Trading Functionality(Order Book)

Final §37.3(a)(2) requires that eachSEF provide its market participants witha minimum trading functionalityreferred to as an Order Book,996 whichthe Commission believes is consistentwith the SEF definition and promotesthe goals provided in section 733 of theDodd-Frank Act.997 As noted in thepreamble, the Commission iswithdrawing the proposed requirementthat SEFs offer indicative quotefunctionality because the Commission

believes that, at this time, such arequirement is unnecessary.998

(2) Methods of Execution on a SEF

Final §37.9 governs the executionmethods that are available on a SEF andclassifies transactions executed on aSEF as either Required Transactions(i.e., any transaction involving a swapthat is subject to the trade execution

requirement in section 2(h)(8) of theAct 999) or Permitted Transactions (i.e.,any transaction not involving a swapthat is subject to the trade executionrequirement in section 2(h)(8) of theAct).

Pursuant to final §37.9(a)(2), marketparticipants may only execute RequiredTransactions using either the SEF’s

Order Book or an RFQ System that willtransmit a request for a quote to at leastthree market participants and thatoperates in conjunction with the OrderBook. In contrast, while SEFs must offeran Order Book for PermittedTransactions, market participants mayexecute Permitted Transactions on aSEF using any method of execution.1000

(3) Request for Quote (‘‘RFQ’’) Systemfor Required Transactions

The RFQ System definition in final§ 37.9(a)(3) requires that each marketparticipant transmit a request for a

quote to at least three marketparticipants, with each of these marketparticipants being given the opportunityto respond. As described in greaterdetail in the preamble, permitting RFQ requesters to send RFQs to a singlemarket participant would underminethe multiple participant to multipleparticipant requirement in the SEFdefinition and the goal of pre-trade pricetransparency.1001 The three marketparticipant requirement will help theRFQ requester benefit from pricecompetition among multiple RFQ responders and thus promotes pricediscovery. In addition, final § 37.9(a)(3)requires that any firm bid or offerpertaining to the same instrumentresting on any of the SEF’s Order Booksmust be communicated to the RFQ requester at the same time the firstresponsive bid or offer is received bysuch requester.

(4) Time Delay Requirement

Final § 37.9(b)(1) sets forth a timedelay requirement for a broker or dealerwho has the ability to execute against its


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1002 ISDA/SIFMA Comment Letter at 5–6 (Mar. 8,2011).

1003See Minimum Trading Functionalitydiscussion above under §37.3—Requirements forRegistration in the preamble.

1004 In section 5h(e) of the Act (as adopted bysection 733 of the Dodd-Frank Act), Congressprovided a ‘‘rule of construction’’ to guide theCommission’s interpretation of certain SEFprovisions (stating that the goals of section 5h of theAct are to ‘‘promote the trading of swaps on [SEFs]and to promote pre-trade price transparency in theswaps market’’). 7 U.S.C. 7b–3(e).

1005As described earlier, a work-up session refersto a practice wherein once a trade has beenexecuted, one of the counterparties to the trade canexpress an interest in transacting additional volumeat the same price.

1006 ISDA Discussion Paper at 20–21 (Nov. 2011).1007 Id. at 1.1008 Id. at 4.1009 Id.1010 Id.1011 Id.1012 Id. at 24.1013 Id. at 4.

customer’s order or to execute two of itscustomers’ orders against each other.These orders (i.e., price, size, and otherterms) are subject to a 15-second timedelay between the entry of the twoorders, such that one side of thepotential transaction is disclosed andmade available to other marketparticipants before the second side of

the potential transaction is submittedfor execution. This time delayrequirement is similar to certain timingdelays applicable to futures transactionsexecuted on DCMs, which are alsodesigned to promote pre-tradetransparency by allowing other marketparticipants the opportunity toparticipate in the transaction and thusprevent any two market participantsfrom crossing a bilaterally (off-exchange) negotiated trade. TheCommission notes that the 15-secondrequirement is a default time delay; thefinal rule also permits SEFs to adjust

this time delay requirement based upona swap’s liquidity or other product-specific characteristics.

(b) Costs

(1) Costs to SEFs

(i) Minimum Trading Functionality(Order Book) and Methods of Executionon a SEF

In the Commission staff’s follow-upconversations with potential SEFs, onecommenter noted that it would costapproximately $250,000 to upgrade itsexisting system to provide the requiredminimum trading functionality, while

another stated that there is no real costassociated with the rulemaking from atechnology perspective if an entity isalready operating a trading platform,and that an existing platform could

become compliant with the rule byleveraging existing technology atminimal cost. The Commission believesthat these estimates are reasonable forexisting platforms. Though theCommission is not requiring thatsystems be upgraded once they haveachieved compliance with the rules, itexpects that SEFs may have businessincentives to incur ongoingprogramming costs to upgrade theirsystems.

ISDA/SIFMA noted that the minimumtrading functionality may limitcompetition by increasing costs toapplicants that would otherwise preferto offer solely RFQ functionality.1002 Asdiscussed in the preamble to thisrelease,1003 the Commission believes

that the minimum trading functionalityis consistent with the SEF definitionand promotes the statutory goals of pre-trade price transparency and trading onSEFs provided in section 733 of Dodd-Frank.1004 Nevertheless, theCommission has adopted cost-mitigatingalternatives identified by commenters,including: (1) Deleting the requirement

that indicative bids and offers must beposted on a SEF’s Order Book; (2)allowing work-up sessions 1005 wherethe original counterparties to a tradeand other market participants can tradeadditional quantities of a swap at thepreviously executed price; and (3)allowing SEFs to use any means of interstate commerce in providing theexecution methods for RequiredTransactions in §37.9(a)(2)(i)(A) or (B)of this final rulemaking (i.e., Order Bookor RFQ System that operates inconjunction with an Order Book). Nothaving to display indicative quotes will

likely reduce the programming costs forSEFs, since they will not need toprogram that functionality into theplatform. The Commission believes therequirement to communicate any firm

bid or offer will marginally add to theprogramming costs for SEFs and isincluded in the $250,000 estimateprovided above. As commenters havedescribed, work-up sessions are part of current OTC market practice, and theCommission believes that thisadditional flexibility for marketparticipants to execute transactions inthe SEF context will promote thetrading of swaps on SEFs consistentwith CEA section 5h(e).

(ii) Time Delay Requirement

A SEF will incur some additionalprogramming costs as a result of therequirement that a SEF must provide fora 15-second time delay in certaincircumstances. The Commission did notreceive any specific estimates of theseprogramming costs and notes that therule permits a SEF to adjust theminimum time delay requirement basedupon a swap’s liquidity or otherproduct-specific characteristics. Forexample, less liquid contracts may need

a longer time delay than more liquidcontracts.

(2) Costs to Market Participants

(i) General Costs

In its discussion paper, ISDAdescribed what it asserted would be thelikely costs and benefits of what itlabeled the ‘‘electronic executionmandate,’’ that is, mandating theexecution of interest rate swaps on

DCMs or on SEFs.1006

According toISDA, ‘‘[t]he study indicates that the EEmandate [electronic executionmandate], in all likelihood, will bringlittle benefit to the market while addingsignificantly to the costs of usingderivatives.’’1007 ISDA stated that theelectronic execution mandate will resultin higher bid/ask spreads andsignificant operational, technological,and compliance costs for thosetransacting in interest rate swaps.1008 ISDA further stated that these costs will

be borne by end users and may forcesome participants to withdraw from the

market with ‘‘virtually no effect onsmall end users.’’ 1009 ISDA stated thatthe electronic execution mandate is bothunnecessary and counterproductive aselectronic trading is already developingrapidly as users take advantage of theexisting choice in execution venues.1010

According to ISDA, the electronicexecution mandate will take away users’choice, create inefficiencies, anddiscourage innovation.1011 ISDA statedthat the electronic execution mandatewill impose new costs because:

SEFs themselves need to be established,licensed and operated. Buy-Side users willface significant technology and operationalchallenges as well as increased regulatoryreporting requirements. Dealers will have toupgrade infrastructure to deal withautomated trading and comply withincreased regulatory reporting and record-keeping. All participants will face increasedreconciliations, oversight and reportingrequirements as well. Finally, regulators willneed additional staff to properly oversee thenew markets.1012

According to ISDA, the aggregatemarket-wide ‘‘set up costs are estimatedto exceed $750 million and annual costsmay run to $250 million.’’1013

In terms of benefits, ISDA concludedthat:

Transparency and market access mayimprove marginally for small financialentities that use IRS [interest rate swaps] butany benefit they receive will be very modestrelative to the added costs of execution.


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1014 Id. at 36.1015 Id. at 20–21.1016 Id. at 2–4, 20–21.1017 Id. at 35.1018 Id. at 4.1019CEA section 2(h)(8); 7 U.S.C. 2(h)(8).1020CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1).1021CEA section 5h(e); 7 U.S.C. 7b–3(e).

1022The ISDA comment ignores the liquidity riskinherent in the current bilateral interest rate swapmarket. It addresses the cost of entering into a newposition, but not of unwinding it. If a buy-side firmwishes to unwind a swap in the OTC market, i t willtypically have to complete the unwind trade withthe original counterparty or swap dealer. Given thatthe dealer is aware of the true trading interest of the buy-side firm, the quote might be one-sidedfavoring the dealer. Assuming sufficient liquidity,any anonymous trading platform will pose a lowerunwind risk/cost to most non-dealer or buy-sidefirms.

1023CEA section 5h(e); 7 U.S.C. 7b–3(e).1024 ISDA Discussion Paper at 2–4 (Nov. 2011).1025See Hendershott & Madhavan, ‘‘Click or

Call,’’ at 2; Darrell Duffie, Nicolae Garleanu & LasseHeje Pedersen, ‘‘Over-the-Counter Markets,’’ 73Econometrica 1815 (Nov. 2005) (hereinafter Duffieet al., ‘‘OTC Markets’’).

1026See, e.g., Minimum Trading Functionalitydiscussion above under §37.3—Requirements forRegistration in the preamble and ‘‘Through AnyMeans of Interstate Commerce’’ Language in theSEF Definition discussion above under §37.9(b)(1)and (b)(4)—Execution Methods for RequiredTransactions in the preamble.

1027See ‘‘Through Any Means of InterstateCommerce’’ Language in the SEF Definitiondiscussion above under §37.9(b)(1) and (b)(4)—Execution Methods for Required Transactions in thepreamble.

Indeed, the imposition of clearing and thehigher fees that will result from the EEMandate [electronic execution mandate] andother provisions of DFA [Dodd-Frank Act]may cause these and other participants toreduce their activity or even withdraw fromthe IRS market.1014

ISDA asserted that transaction costsfor OTC trades in interest rate swaps are

already low with levels of transparencythat market participants considersufficient, and that trading in aregulated market or on an exchangedoes not guarantee a more efficientmarket because traders often get betterexecution off-exchange.1015 ISDAfurther asserted that liquidity in OTCinterest rate swaps is at least as good asliquidity in exchange-traded futurescontracts, especially outside of the mostliquid futures contract months, and thatmarket participants predicted that bid-ask spreads in interest rate swaps wouldincrease after the execution mandatetakes effect.1016

ISDA also estimated that the marketas a whole will need to absorb at leastan additional $400 million in annualexpenses as a result of the changesimplemented in connection with theDodd-Frank Act, and that assumingSEFs will execute 1,000 trades a day(comparable to what ISDA states is thecurrent number of transactions in theOTC market), this will amount toexecution costs of $1,280 per trade.1017 As a result, ISDA stated that dealer costswill be passed on to end users and willcause participants to withdraw from themarket, discouraging innovation.1018

The Commission notes that a majorityof the costs identified by ISDA resultfrom statutory requirements that werenot the product of Commissiondiscretion. For example, therequirements that certain swaps must beexecuted on a SEF or DCM,1019 and thatno person may operate a facility for thetrading or processing of swaps unlessthe facility is registered as a SEF or asa DCM,1020 are statutory requirements.Additionally, CEA section 5h(e)contains a rule of construction thatstates ‘‘[t]he goal of this section is topromote the trading of swaps on swapexecution facilities and to promote pre-

trade price transparency in the swapsmarket.’’ 1021 The interest rate swapsdiscussed by ISDA are included in thesestatutory requirements. Moreover,notwithstanding ISDA’s use of the term

‘‘electronic execution mandate,’’ thisrulemaking does not require that marketparticipants execute swaps in RequiredTransactions electronically, since SEFswill be allowed to use any means of interstate commerce in providing theexecution methods for such transactionsas described in §37.9(a)(2)(ii).Nevertheless, the Commission addresses

below many of ISDA’s commentsregarding the statutory trading mandatefor interest rate swaps.

Further, while commenters did notsubmit any data to support or refuteISDA’s estimates, during follow-up callswith potential SEFs, one commenterstated that the U.S. credit default swapmarket experiences approximately 1,350trades per day. If interest rate swaps andother swaps are included, the totalnumber of trades per day is likely to bea much higher figure. In turn, thiswould imply that the execution costsper trade are likely to be lower than

ISDA’s estimate, which was based ononly 1,000 trades per day.The Commission notes that while

SEFs are expected to list for trading awide variety of swaps, ISDA’s commentaddresses only the costs and benefitsapplicable to the interest rate swapmarket. The interest rate swap market isone of the most liquid swap markets andis characterized by relatively tight bid-ask spreads, a high level of notionalprincipal, and relatively high volumecompared to other swap markets,including credit default swaps. Mostother swap markets, especially many of the instruments like credit derivativeswhich contributed to the financialcrisis, are less liquid than the interestrate swap market and thus will benefitmore from the enhanced pre-trade andpost-trade price transparency andcentralized marketplaces that will beavailable on SEFs.

While it may be true, as ISDA asserts,that some buy-side users contend thatcurrent levels of price transparency inthe interest rate swap market areadequate, the Commission notes that anincrease in pre-trade transparency

benefits the public because it will allowall market participants (not just those

with a strong business relationship witha particular swap dealer) 1022 to transact

in the market on a level playing field,and will likely enhance price discoveryin the swaps market. Moreover, asnoted, section 5h(e) of the CEA statesthat a purpose of SEFs is to promotepre-trade transparency in the swapsmarket.1023

According to ISDA, marketparticipants asserted that bid-ask

spreads in interest rate swaps willwiden after SEFs begin trading.1024 TheCommission notes that such predictionsare speculative and are not based ondata, which does not yet exist becauseSEFs have yet to begin trading.Moreover, during the Commission staff’sfollow-up conversations, other marketparticipants (potential SEFs) sharedinformation illustrating that after thefinancial crisis, participation by dealersor liquidity providers increased on theirtrading platforms. These sources statedthat in some instances, new entrantsnow account for over a quarter of the

total business transacted on suchplatforms. The Commission believesthat, holding all else constant, increasedparticipation and competition amongliquidity providers should result intighter spreads and greater depth, bothkey components of improvedliquidity.1025

However, to promote the trading of swaps on SEFs, the Commission’s finalrules, as mentioned above, furtherincrease the flexibility regarding thetrading platforms that a SEF may offerfor Required Transactions (which theCommission expects will include manyinterest rate swap contracts).1026 In

addition, as discussed above,1027 work-up sessions will allow marketparticipants to continue using certainexisting market practices, which willhelp facilitate the transition of swapmarkets to SEFs.

To support its comments on thepotentially adverse impact of movinginterest rate swaps to centralizedexecution platforms, ISDA provideddata on bid-offer spreads from bothinterest rate swap markets and


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1028 ISDA Discussion Paper at 12–20 (Nov. 2011).1029A strip of Eurodollar futures contracts is a

position consisting of a sequence of contractmonths, for example, a position consisting of the

March 2013, June 2013, September 2013, andDecember 2013 Eurodollar futures contracts. Thisposition is economically equivalent to a one yearinterest rate swap with quarterly payment dates onthe futures expiration dates.

1030According to the CME Group Web site,during the first eight months of 2012, Eurodollarfutures contracts had a total volume of approximately 2300 million contracts. During thatsame period, the combined volume of CME Group’sinterest rate swap futures contracts was only about312,000 contracts, approximately 1/10 of onepercent of the volume in Eurodollar futurescontracts. See http://www.cmegroup.com/ wrappedpages/web _monthly _report/ Web _Volume _Report _CMEG.pdf, updated monthlyand viewed in September 2012.

1031See ISDA Discussion Paper at 35 (Nov. 2011).A recent paper by the New York Federal Reserveestimated 2,500 trades/day in the interest rate swapmarket. See Michael Fleming, John Jackson, Ada Li,Asani Sarkar, & Patricia Zobel, ‘‘An Analysis of OTC Interest Rate Derivatives Transactions:Implications for Public Reporting,’’ Federal ReserveBank of New York Staff Reports, No. 557, at 2 (Mar.2012), available at http://www.newyorkfed.org/ research/staff _reports/sr557.pdf.

1032See, e.g., George H. K. Wang & Aysegul Ates,‘‘When Size Matters: The Case of Equity IndexFutures,’’ EFMA 2004 Basel Meetings Paper (Dec.2003); Samarth Shah & B. Wade Brorsen,‘‘Electronic vs. Open Outcry: Side-by-Side Tradingof KCBT Wheat Futures,’’ 36 Journal of Agriculturaland Resource Economics 48 (Apr. 2011).


1034MetLife Comment Letter at 2–3 (Mar. 8,2011).


1036 Id.1037 Id.; ISDA Discussion Paper at 2 (Nov. 2011).

exchange-traded futures markets.1028 The Commission notes that interest rateswap dealers use exchange-tradedinterest rate futures, primarily theEurodollar futures, to hedge theexposures that arise from their interestrate swap dealing activity. A dealerseeking to hedge an interest rate swapusing Eurodollar futures will typicallytrade a strip of Eurodollar futures.1029 Inits comparisons of typical bid-offerspreads in exchange-traded interest ratefutures and in OTC interest rate swaps,ISDA provided spreads in the frontmonth Treasury bond and Treasury notefutures contracts and the relativelyilliquid interest rate swap futurescontracts, but not the highly liquidEurodollar futures contract.1030 Asnoted, the Eurodollar futures contract isthe primary vehicle used by interest rateswap dealers to hedge their residualinterest rate exposure. Therefore, theCommission believes that Eurodollar

futures bid-offer spreads are a moreappropriate metric for comparison tointerest rate swap bid-ask spreads thanthe interest rate swap futures contracts

bid-ask spreads used by ISDA. Likewise,Eurodollar futures are more closelyrelated to the OTC interest rate swapmarket and more useful for hedginginterest rate swap positions thanTreasury futures contracts. Thus,Eurodollar futures are also a bettermetric for comparison to interest rateswaps than Treasury futures.

Underlying ISDA’s comment is animplicit assumption that moving swapsto electronic trading platforms will notresult in any major changes to thenumber of transactions that occur. Incomputing its cost estimates, ISDAassumes that the number of trades onSEFs will be comparable to the numberof trades that occur in the OTC markettoday. As noted above, ISDA states that,assuming SEFs will execute 1,000 tradesa day, total execution costs will amount

to $1,280 per trade.1031 However,transaction volume has increaseddramatically in securities markets andDCM futures markets that have migratedto electronic trading platforms (such asorder books) from open outcry and othernon-electronic trading environments.This volume increase is due to atendency for typical transaction sizes to

be much smaller on electronic order book markets and also because order books attract participation from newand alternate sources of liquidity,including participants using automatedtrading strategies.1032 Transactionslevels increased in the securities andfutures markets when trading moved toelectronic platforms, and theCommission believes that it is likelythat the number of transactions in theswap markets will increase as swaptrading migrates to SEFs and DCMs. TheCommission is unaware of anycomments or studies indicating that

transaction sizes in the swap marketswill remain unchanged when they moveto electronic platforms.

(ii) RFQ–5 Market ParticipantRequirement

Several commenters stated that thefive market participant requirement inproposed §37.9(a)(1)(ii) is likely toincrease costs, but commenters did notprovide any data to support thisassertion.1033 MetLife stated thatdisclosure of a large expected trade byRFQ to five swap dealers would likelyresult in a material widening of bid/askspreads and increased hedging costs, as

swap dealers will pass on to theircustomers the cost of protectingthemselves against potential adverseprice movements due to the requiredpre-trade transparency.1034 Somecommenters specifically noted thatthese adverse price movements would

be due to non-executing marketparticipants receiving the RFQ front-

running the transaction in anticipationof the executing market participant’sforthcoming and offsettingtransactions.1035 Commentersadditionally stated that the risksassociated with the five marketparticipant requirement would be mostpronounced in illiquid swaps or large-sized trades (i.e., transactions

approaching the block tradethreshold).1036 Some commenters alsostated that the five market participantrequirement would negatively impactliquidity.1037

While the Commission believes thatthe five market participant requirementpromotes the statutory goal of pre-tradetransparency because the RFQ requesterwill have access to quotes from a largergroup of potential responders, theCommission is sensitive to commenters’concerns about this requirement, suchas the potential for increased tradingcosts and information leakage to the

non-executing market participants inthe RFQ. To address these concerns,while still complying with the statutorySEF definition and promoting the goalsprovided in section 733 of the Dodd-Frank, the Commission is revising final§ 37.9(a)(3) so that a market participantmust transmit an RFQ to no less thanthree market participants.

As noted in the preamble, theCommission believes that the threemarket participant requirement isconsistent with current market practicewhere, in certain markets, many marketparticipants already choose to send anRFQ to multiple market participants,

while still complying with the statutorySEF definition and promoting the goalof pre-trade transparency.

Additionally, the Commission believes that adopting a minimummarket participant requirement of fewerthan three (e.g., a minimum of twomarket participants) will expose marketparticipants to a higher risk of notreceiving multiple responses to theirRFQs. The receipt of multiple responsesincreases the likelihood that therequestor will execute at the bestpossible price. The Commission haslearned that business or technology

reasons may prevent any given marketparticipant from responding to aspecific RFQ. For example, DCM marketmaker programs typically requireparticipants to quote two-sided marketsfor 75 to 85 percent of the trading day.Therefore, if the Commissionestablished a minimum market


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1038See Hendershott & Madhavan, ‘‘Click orCall,’’ at 10–12.

1039 Id. at 10.1040 Id. at 14.1041 Id. at 17.1042See, e.g., Edwards et al., ‘‘Transaction Costs

and Transparency,’’ 1421–51.1043Hendershott & Madhavan, ‘‘Click or Call,’’ at

1–4.

1044 Id. at 15, 18, 28.1045 Id. A market participant sending an order to

the market is likely to be concerned about othersin the market being able to glean informationthrough the order. In the context of a firm sendinga large size trade, one substantially bigger than thetypical trade size, there will always be concern thatthe size of the order will be interpreted ascontaining information, and elicit responses fromother market participants. Firms will typically beinterested in ensuring that the size of the order doesnot have an adverse impact on the order price, orthe quotes from liquidity providers. Accordingly,while looking to execute such orders, firms willtake steps to avoid leakage of the information of their trading interest beyond a very small group of potential counterparties.

1046Mallers et al. Comment Letter at 3–5 (Mar. 21,2011).

1047

Id. at 5.1048The Commission notes that a SEF marketparticipant may send an RFQ to the entire market.Core Principles and Other Requirements for SwapExecution Facilities, 76 FR at 1220. Based on itsexperience with RFQ-to-all functionality offered byDCMs, the Commission notes that there are twodistinct differences between these and therequirements finalized in this release. First, RFQssubmitted to DCMs are disseminated to all marketparticipants. Second, the responses to the RFQstake the form of executable bids or offers that areentered into the DCM’s order book or othercentralized market, such that orders from anymarket participant, not just the one submitting theRFQ, can be matched against such responsive bidsor offers.

participant requirement of two, therecould be instances where one marketparticipant does not respond to theRFQ, leaving the RFQ requester withonly a single response. While there is noguarantee that even a minimum of threemarket participants will ensure thatmultiple responses are available for allRFQs at all times, it increases the

probability that the goal of pre-tradeprice transparency is achieved and thata competitive market is created formarket participants.

In response to the concerns raised bycommenters about increased tradingcosts, the Commission also notes thatresearch in the corporate bond marketsupports the view that RFQ systems ingeneral increase search options forinvestors, and that the competition thatensues among market participantsresults in lower bid-ask spreads.1038 One paper by Hendershott andMadhavan provides evidence that byallowing a market participant tonegotiate simultaneously with multipleparticipants, and thus not beconstrained by the limitations of thesequential search process as discussedabove, RFQ systems contribute to astatistically significant reduction intransaction costs for quoterequesters.1039

Specifically, the authors comparetransaction costs across two differentmarket structures, one with an RFQ andone with a traditional OTC structure,and find that investors are more likely

to use RFQ systems when their costs arehigh because increased RFQ participation reduces their transactioncosts.1040 This is so because competitionamong dealers lowers costs.1041 WhileHendershott and Madhavan’s estimatesfor transaction costs in the corporate

bond market are consistent with thosereported by others,1042 access to RFQ market data, plus their choice of econometric model, help them obtaindeeper insights into the reasons fordifferences in costs across differenttypes of bonds.1043 This research in thedebt markets supports the final rules’three market participant requirement

because it demonstrates that unlessmultiple market participants receive theRFQ, the quote requester will not beable to generate a minimal level of

competition sufficient to reduce thequoted bid-ask spread.

As stated by commenters, in a marketwith high levels of pre-tradetransparency, concerns about leakage of trading interest typically grow withtrade size; a market participant postinga bid or offer in the order book, orsending a request for a quote to multiple

dealers, will typically be concerned thatinformation about their trading interestwill adversely impact the market price.However, empirical research byHendershott and Madhavandemonstrates that standard-sized (asopposed to large size) trades are morelikely to be traded on an RFQ system.1044 For these trade sizes, marketparticipants believe that the benefitsfrom lowering search costs mitigateconcerns about information leakage.1045 On the other hand, for larger trades (i.e.,

block trades), leakage concerns coulddominate any expected savings in

search costs from participating in theorder book or RFQ system, and largertrades are more likely to be executedthough a bilateral bargaining process.The Commission’s understanding of thispotential trade-off between lower searchcosts and higher leakage risk isgenerally consistent with the resultsfrom Hendershott and Madhavandescribed above. These findings arerelevant for the final rules’ exclusion of

block-sized trades from the executionmethods for Required Transactions.

While some commenters stated thatthe five market participant requirementwould result in excessive and costly

disclosure, other commenters arguedthat the requirement would result ininsufficient transparency, comparing theproposed requirement to the currentstatus quo of private OTC markets,where large swap dealers can choose toonly interact with one another.1046 According to Mallers et al., because theSEF NPRM would permit a marketparticipant to interact with a limitednumber of market participants (i.e., lessthan the entire market), the proposal

would allow ‘‘semi-private side deals’’to take place, and that in light of the2008 financial crisis, the ‘‘costs andrisks of permitting private RFQ markets[remained] high.’’ 1047

As noted above, the Commissionagrees that a broader group of potentialresponders will encourage pricecompetition and provide a fairer

assessment of market value; however,the Commission is mindful of concernsthat the five RFQ recipient model mayimpose additional costs, especially forilliquid and bespoke swaps. Followingthe practice for futures on DCMs, theCommission could have required thatRFQs be disseminated to all marketparticipants.1048 However, theCommission recognizes that swaps tendto be less standardized than futures;therefore, the rules pertaining to theexecution methods for SEFs shouldprovide the requisite flexibility tomarket participants trading swaps. As

such, the Commission is implementingthe minimum three market participantrequirement. The Commission also

believes that the three marketparticipant requirement reflects themore flexible statutory provisions forSEFs as compared to DCMs.

While commenters have notsubmitted any data on the potentialimpact of the proposed five marketparticipant requirement from thepotential information leakage and front-running risks, the Commission believesthat the three market participantrequirement adopted in this final releasedoes not necessarily introduce a new

source of risk for market participants asthese risks to the extent that they existare present in the current OTC market.The Commission also believes that theprices of bids and offers made inresponse to RFQs will reflect anysubsequent hedging risks by theresponders, and the potential winner’scurse to the extent one exists will, if atall, be realized only if the marketparticipant does not price this risk fullyinto its quote. Nonetheless, the revisionfrom five to three market participantsshould help to mitigate this potential


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1049Clearing Requirement Determination UnderSection 2(h) of the CEA, 77 FR 74284 (Dec. 13,2012); Process for a Designated Contract Market orSwap Execution Facility To Make a Swap AvailableTo Trade, 76 FR 77728 (proposed Dec. 14, 2011).

1050Clearing Requirement Determination UnderSection 2(h) of the CEA, 77 FR 74284. TheCommission notes that these swaps already wentthrough a Commission determination process thatincluded a five factor review, including a liquidityreview. Id. ISDA, in its letter requesting interpretiverelief regarding the obligation to provide a pre-trademid-market mark, recognized that many of theswaps that the Commission has determined arerequired to be cleared under CEA section 2(h)(1) are‘‘highly-liquid, exhibit narrow bid-ask spreads andare widely quoted by SD/MSPs in the marketplace. . .’’ ISDA Comment Letter at 2 (Nov. 30, 2012).

1051The Commission recognizes that not all swapdealers will be active in all Required Transactions.The Commission also notes that of the 77 swapdealers, 35 swap dealers are not affiliated with anyof the 77 swap dealers.

1052See definition of block trade in §43.2 of theCommission’s regulations.

1053As any trades emanating from an RFQ will besubject to real time reporting, if a non-affiliatedrespondent to an RFQ observes trades happeningaway from better or equal prices quoted by it, suchrespondents might be discouraged from respondingto future RFQ requests, thus hurting marketintegrity.

1054See Time Delay Requirement discussionabove under §37.9—Permitted Execution Methodsin the preamble.

1055FHLB Comment Letter at 13 (Jun. 13, 2011).1056Dealer internalized or cross-trades are not

open and competitive and may result in inferiorexecution for one of the parties compared to

Continued

risk, while still complying with thestatutory SEF definition and promotingpre-trade price transparency and pricecompetition.

Furthermore, regarding commentsconcerns’ about the potential winner’scurse for illiquid swaps, theCommission notes that the three market

participant requirement will only applyto transactions in swaps that are subjectto the CEA section 2(h)(8) tradeexecution mandate (i.e., transactions inmore liquid swaps, which are subject tothe clearing mandate and madeavailable to trade, and not to illiquidand bespoke swaps).1049 TheCommission also notes that the interestrate swaps and credit default swaps thatthe Commission has determined arerequired to be cleared under CEAsection 2(h)(1) (and are likely to besubject to the trade execution mandateof CEA section 2(h)(8)) are some of themost liquid swaps.1050 Additionally, 77swap dealers have registered with theCommission and nearly all of themmake markets in such swaps.1051 SEFsmay offer RFQ systems without thethree market participant requirement forPermitted Transactions (i.e.,transactions not involving swaps thatare subject to the trade executionmandate of CEA section 2(h)(8)). Inresponse to commenters’ concerns aboutthe potential winner’s curse for large-sized trades, the Commission notes that

block-sized transactions would not besubject to the execution methods forRequired Transactions, including the

three market participantrequirement.1052 Therefore, excluding

block-sized transactions from theexecution methods for RequiredTransactions will address the potentialrisk of a winner’s curse for large-sizedtrades.

As noted in the preamble, the threemarket participants may not be affiliatedwith or controlled by the RFQ requesterand may not be affiliated with orcontrolled by each other, and theCommission is revising final §37.9(a)(3)to clarify this point. The Commission

believes that for an RFQ requester tosend an RFQ to another entity who is

affiliated with or controlled by the RFQ requester would undermine the benefitsof the requirement.

The costs associated with the no-affiliate rule may include, for example,the costs that a SEF would incur toupgrade its systems to create filters thatwould prevent RFQs from being sent toaffiliated parties, but these costs could

be mitigated or eliminated by, forexample, the SEF requiring marketparticipants accepting RFQs to disclosetheir affiliations to potential RFQ requestors before a request istransmitted. Another possibility is for a

SEF to monitor RFQs and cancel tradesthat it determines are made pursuant toRFQs between affiliated parties. Yetanother possibility is for the SEF toinclude in its rules a requirement thatmarket participants must not transmitRFQs to their affiliates or to marketparticipants who are affiliated with eachother.

The primary benefit of this no-affiliaterule is to ensure that RFQs are sent tothree unaffiliated parties who can beexpected to provide truly independentquotes. If an RFQ requester were totransmit an RFQ to one non-affiliate andtwo affiliates or if an RFQ requester

transmits an RFQ to three requesteeswho are affiliates of each other, then thegoal of pre-trade price transparencywould be undermined (since the quotesmight be coordinated or otherwise notindependent) and the RFQ couldeffectively turn into an RFQ-to-one,which is contrary to the statutory SEFdefinition. The Commission also notesthat such an outcome coulddisincentivize entities from respondingto an RFQ, which would reduce pricecompetition and liquidity.1053

The Commission clarifies that SEFsare not required to: (1) Display RFQs to

market participants not participating inthe RFQ, (2) disclose RFQ responses toall market participants, or (3) disclosethe identity of the RFQ requester. TheCommission also clarifies that anacceptable RFQ System may allow for atransaction to be consummated if the

original request to three potentialcounterparties receives fewer than threeresponses. Moreover, §37.9(a)(2)(ii)clarifies that in providing either one of the execution methods for RequiredTransactions (i.e., an Order Book or anRFQ System that operates inconjunction with an Order Book), aswap execution facility may for

purposes of execution andcommunication use any means of interstate commerce, including, but notlimited to, the mail, internet, email, andtelephone, provided that the chosenexecution method satisfies therequirements provided in § 37.3(a)(3) forOrder Books or in § 37.9(a)(3) forRequest for Quote Systems. Finally, inorder to provide market participants,SEFs, and the swaps industry generallywith additional time to adapt to the newSEF regime, the Commission is phasing-in the three market participantrequirement so that from the effective

date of the SEF rule until one year afterthe compliance date for the SEF rule,RFQ requesters may transmit RFQs tono less than two market participants(rather than three). These provisionswill likely significantly mitigate thelikelihood and magnitude of thepotential costs noted by commenters.

(iii) Time Delay Requirement

Some commenters stated that the rulerequiring a 15-second time delay beforecrossing a trade between two customersshould be eliminated because it mayimpact liquidity or result in increasedcosts.1054 FHLB stated that this

requirement would likely increase the bid-ask spread, because ‘‘by waiting for15 seconds before entering into anoffsetting transaction, brokers will beexposed to risks associated with marketfluctuations and will have to pass thecosts of these risks along to itscustomer.’’1055 No commenter provideddollar estimates or data regarding thesecosts.

The time delay requirement (whichonly applies to a SEF’s Order Book andnot to its RFQ System) supports theCongressional goal of pre-tradetransparency on SEFs by allowing other

market participants the opportunity toparticipate in a trade where dealerinternalization or a dealer crossingcustomers’ orders would otherwisereduce such pre-trade pricetransparency.1056 The Commission


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situations where the bid or offer is exposed to themarket. Accordingly, DCM rules typically requirethat an order be exposed to an order book or tradingpit before it can be crossed with another order.

1057See, e.g., NYMEX rule 533, which providesfor a 5-second delay for futures and a 15-seconddelay for options, available at http:// www.cmegroup.com/rulebook/NYMEX/1/5.pdf.

1058CEA section 5h(e); 7 U.S.C. 7b–3(e).

1059See Duffie et al., ‘‘OTC Markets,’’ at 1827(presenting results showing that bid-ask spreads arelower if investors can find each other more easily).

1060See, e.g., Transparency of Structured FinanceProducts (Final Report), Technical Committee of theInternational Organization of SecuritiesCommissions, at 17, 21 (Jul. 2010), available at http://www.iosco.org/library/pubdocs/pdf/ IOSCOPD326.pdf.

believes that this requirement willminimize the possibility of dealerinternalization and incentivizecompetition between marketparticipants. Absent this requirement,market participants would be free toconduct pre-execution communicationsaway from the centralized market andthen ensure that the orders from such

private negotiations are matched bycoordinating their submission to theSEF.

Further, the Commission notes thatthe costs outlined by commenters arespeculative, since SEFs have not yet

begun operation. Moreover, the timedelay requirement is similar to certaintiming delays adopted by DCMs, and theCommission is not aware of evidencethat those DCM rules are imposingsignificant costs on participants in thosemarkets.1057 Nevertheless, theCommission’s final rules recognize thata one-size-fits-all approach to the time

delay requirement is not appropriate forall swap products and markets on a SEF.Accordingly, the Commission is revisingthe proposed rule to allow a SEF toadjust the duration of the time delayrequirement based upon a swap’sliquidity or other product-specificcharacteristics. SEFs therefore will havethe ability to reduce the costs described

by the commenters, if they arise.

(c) Benefits

As a whole, the minimum tradingfunctionality (i.e., Order Book) andpermissible execution methodsestablished by §§37.3 and 37.9 advancethe Congressional goals of promotingpre-trade price transparency in theswaps market and promoting trading of swaps on SEFs.1058

(1) Promotion of Pre-Trade PriceTransparency

The order book requirement isdesigned to ensure a base level of pre-trade transparency to all marketparticipants by providing for liveexecutable bids and offers in RequiredTransactions. This requirement gives allmarket participants (and potentialmarket participants) access to the same

key information that swap dealers have,including current information about theprice of a particular swap, at the sametime. An order book with executable

bids and offers will ensure that prior to

placing an order or executing a trade, amarket participant will be able to viewother bids and offers submitted to theSEF, including prices, quantities, andorder book depth.1059 Access to suchinformation allows market participantsto make informed trading decisionsinvolving variables such as price, size,and timing, and to better assess the

quality of execution effected by theirintermediaries.

Intermediaries will know that theirmarket participants have information toassess the quality of executions and cansend their business elsewhere if they arenot satisfied with their executions.Thus, intermediaries will have greaterincentive to provide efficient executionto their customers at competitive prices.

In addition, an order book is anefficient method of execution of transactions for swaps that are subject tothe CEA section 2(h)(8) trade executionmandate because it provides prompt

and fast executions of marketable ordersat market prices, while providing for avariety of functionalities such as limitorders and stop-loss orders. The order

book functionality for such transactionswill introduce core levels of pre-tradetransparency without hindering theability of SEFs and market participantsto deploy other market structuresdepending on the needs of theindividual products and markets.

As discussed above, the benefits of pre-trade (and post-trade) transparencygenerally flow from reducinginformation asymmetries.1060 In

transparent markets, all marketparticipants (and potential marketparticipants) have timely access to thesame public pricing information thatinsiders or professionals have, reducingpotential negotiating advantages. Also,in a transparent market, marketparticipants can better assess the qualityof executions effected by theirintermediaries by comparing executionprices against quotations and othertransactions. A potential entrant canview current price quotations as well asprices of recent trades in an instrument,and can thereby assess whether it can

offer a better price. Market transparencycan thus provide incentives for newparticipants to enter the market,increasing competition, reducingconcentration, and narrowing spreads.

The 15-second time delayrequirement is intended to limit dealerinternalization of trades (cross trades)and to incentivize competition betweenmarket participants. This requirementwill also promote pre-trade pricetransparency of swaps executed on SEFs

by allowing other market participantsthe opportunity to participate in the

trade. The Commission’s final rules alsorecognize that a one-size-fits-allapproach to the time delay requirementis not appropriate for all swap productson a SEF. Therefore, the final rulesprovide SEFs with an appropriate levelof discretion to adjust the minimumtime delay requirement based upon aswap’s liquidity or other product-specific characteristics. Moreover, theCommission has clarified that the timedelay requirement does not apply to theRFQ System.

The Commission recognizescommenters’ concerns, as discussed in

this section, that there may be certaincircumstances in which pre-trade pricetransparency may reduce overall marketliquidity. Therefore, the Commissionhas taken certain steps in the finalregulations to mitigate such benefit-reducing effects (such as excluding

block trades, tying the time-delayrequirement to a swap’s liquidity,clarifying the subset of swaps that areRequired Transactions, and allowingSEFs to offer any method of executionfor Permitted Transactions).

(2) Promotion of Trading on SEFs

While the statutory goal of pre-trade

price transparency is reflected in theminimum trading functionality (i.e.,Order Book) requirement, theregulations also provide a SEF withadditional flexibility for offering thetrading and execution of swaps byproviding additional execution methods(e.g., RFQ Systems along with thediscretion to offer any method of execution for Permitted Transactions).The Commission believes that theseadditional functionalities will provideflexibility in methods of execution thatwill promote the trading of swaps onSEFs, which in turn will promote price

transparency.For example, execution methods andmarket structures in general can varydepending on the product—simple orcomplex, the state of development of themarket—established or new, marketparticipants—retail or institutional, andother related factors. The Commissionanticipates that the order book methodwill typically work well for liquidRequired Transactions (i.e., transactionsinvolving swaps that are subject to thetrade execution requirement under CEAsection 2(h)(8)), but for less liquid










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1061See Duffie et al., ‘‘OTC Markets,’’ at 1818–20.1062 Id. at 1815.1063 Id. at 1827.1064 Id. at 1817.1065 Id.

1066 Id. at 1834–35.1067 Id.; see also Hendrik Bessembinder & Herbert

M. Kaufman, ‘‘A Comparison of Trade ExecutionCosts for NYSE and NASDAQ-Listed Stocks,’’ 32

The Journal of Financial and Quantitative Analysis287 (Sep. 1997).

1068Duffie et al., ‘‘OTC Markets,’’ at 1834–35.1069See, e.g., Rosen et al. Comment Letter at 11

(Apr. 5, 2011).1070Mallers et al. Comment Letter at 4 (Mar. 21,

2011); AFR Comment Letter at 4–5 (Mar. 8, 2011).1071Rosen et al. Comment Letter at 12–14 (Apr.

5, 2011); JP Morgan Comment Letter at 5–6 (Mar.8, 2011); FXall Comment Letter at 9–10 (Mar. 8,2011); Tradeweb Comment Letter at 8 (Mar. 8,2011); FSR Comment Letter at 5 (Mar. 8, 2011);MetLife Comment Letter at 3 (Mar. 8, 2011); SIFMAAMG Comment Letter at 9 (Mar. 8, 2011);MarketAxess Comment Letter at 32 (Mar. 8, 2011);Barclays Comment Letter at 7 (Mar. 8, 2011); ABC/

CIEBA Comment Letter at 6–7 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 3–4; Evolution CommentLetter at 5–6 (Mar. 8, 2011).

1072MFA Comment Letter at 8 (Mar. 8, 2011).1073See RFQ System Definition and Transmission

to Five Market Participants discussion above under§ 37.9(a)(1)(ii)—Request for Quote System in thepreamble. Under the SEC’s interpretation of theSB–SEF definition, such an RFQ system wouldprovide multiple participants with the ability, butnot the obligation, to transact with multiple otherparticipants. Registration and Regulation of Security-Based Swap Execution Facilities, 76 FR at10953.

1074See, e.g., Rosen et al. Comment Letter at 11(Apr. 5, 2011).

1075See, e.g., Mallers et al. Comment Letter at3–5 (Mar. 21, 2011).

1076 Id.1077 Id. at 4.

Required Transactions, RFQ systems areexpected to help facilitate trading. RFQ systems are currently used by marketparticipants in the OTC swap market,many in conjunction with order bookfunctionality. By providing a SEF withthe flexibility to offer alternateexecution methods to its marketparticipants, the Commission is

leveraging best practices from currentswap trading platforms. The additionalflexibility offered for the trading andexecution of Permitted Transactionswill allow a SEF to offer new,innovative market structures to facilitatetrading in these swaps that are notsubject to the trade executionrequirement under CEA section 2(h)(8),and thus may help to promote thetrading of these swaps on SEFs.

Additionally, the RFQ systemcommunication requirement helpspromote the trading of swaps on SEFsand enhances price competition and

pre-trade price transparency by ensuringthat RFQ requesters have access tocompetitive prices, and that competitiveresting bids and offers left by marketparticipants on the SEF will betransmitted to the RFQ requester forpossible execution.

(3) Facilitating Search

The Duffie, Garleanu, and Pedersen(‘‘DGP’’) approach reflects the typicalsearch process, which involvesapproaching intermediaries sequentially(similar to making phone calls todifferent dealers asking for quotes);strategic bargaining then ensues—prices

negotiated reflect each investor’s or thedealer’s alternatives to trade.1061 DGP’sresults show that both traded prices aswell as transaction costs depend oninvestors’ search abilities, access tomarket makers, and investors’

bargaining powers.1062 DGP’s resultsshow that bid-ask spreads are lower if investors can find each other moreeasily, through market structuresdesigned to allow them to negotiatesimultaneously, instead of sequentially,with multiple, competing liquidityproviders.1063 Contrary to whatcommenters have stated, DGP reason

that improvements in an investor’sability to search for alternatecounterparties forces dealers to improveon their quoted prices and spreads.1064 Further, they demonstrate that thosewith better access to market makers (orliquidity providers) receive tighter bid-ask spreads.1065

The final rules establishing a marketstructure for SEFs, including theprovisions governing Order Books andRFQ Systems are designed to deliverimproved search capabilities toinvestors and better access to marketmakers. These provisions will facilitatethe shifting of trading to the centralizedSEF market structure from the bilateral

OTC market structure where investorsmay have limited ability to find oneanother.

The importance of facilitatinginvestors’ ability to find each other moreeasily is highlighted by evidence in theDGP paper of another dealer-centricmarket—the one prevailing at Nasdaquntil the mid-1990s, where all tradeshad to be routed to a dealer.1066 Notwithstanding competition among thedealers, and the fact that there was bothpre- and post-trade transparency in theequity markets, spreads at Nasdaq atthat time were wider than at the New

York Stock Exchange.1067

Though thelatter had ‘‘a single specialist for eachstock, floor brokers can find and tradeamong themselves, and outside brokerscan find each other and trade ‘around’the specialist with limit orders.’’ 1068 Along these lines, the final rulesprovide for an anonymous buttransparent order book that willfacilitate trading among marketparticipants directly without having toroute all trades through dealers.

(d) Consideration of Alternatives

Some commenters recommended thatthe Commission modify the proposed

five market participant requirementfrom no less than five marketparticipants to either ‘‘one or more’’ 1069 or to all market participants.1070 Othercommenters recommended analternative that would include somelevel of order interaction between theSEF’s order book functionality and RFQ systems, including the order interactionmodel proposed by the SEC for SB–SEFs.1071 MFA recommended that the

Commission expand the definition of Permitted Transaction to include othertransactions, such as exchanges of swaps for physicals, exchanges of swapsfor swaps, and linked or packagedtransactions.1072 Each of thesealternatives is discussed below.

(1) Modification to the Number of RFQ

Requests

Numerous commenters recommendedthat the Commission adopt the SEC’sproposed approach for SB–SEFs byallowing RFQs to be sent to one or moremarket participants (while notrecommending that the Commissionadopt the SEC’s proposed orderinteraction requirement), instead of requiring that RFQs be sent to at leastfive market participants.1073 The benefitof this approach, cited favorably bysome commenters, would be to protectproprietary trading strategies and

mitigate hedging costs.1074

Other commenters, however, stated

that only requiring RFQs to be sent toone or more market participants wouldpreserve the single-dealer status quo,would diminish the transparency andefficiency of the regulated swapsmarkets, and would be inconsistentwith the goals of the Dodd-FrankAct.1075 These commenters supportedanother alternative under which an RFQ must be transmitted to all participantson the SEF.1076 In particular, onecommenter stated that participantswould not be disadvantaged by

disclosing an RFQ to the entire marketfor transactions below the block tradethreshold, which would not move themarket.1077 In this commenter’s view,the proposed five market participantrequirement would still allow aparticipant to conduct semi-privatedeals with a few favored participants tothe exclusion of other marketparticipants, which would ultimatelydecrease liquidity and create a


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1078 Id.1079 IECA Comment Letter at 3 (May 24, 2011).1080Under the SEC’s SB–SEF NPRM, an RFQ

requester must execute against the best-pricedorders of any size within and across an SB–SEF’smodes of execution. See Registration andRegulation of Security-Based Swap ExecutionFacilities, 76 FR at 10953–54, 10971–74.

1081See, e.g., Tradeweb Comment Letter at 6(Mar. 8, 2011).

1082See CEA section 5(d)(9); 7 U.S.C. 7(d)(9). TheCommission notes that DCM Core Principle 9 doesnot explicitly permit DCMs to offer exchange of swaps for physicals or exchange of swaps for swaps.

1083Bessembinder & Maxwell, ‘‘Transparency,’’ at226. Their conclusions in the context of post-tradetransparency introduced by the TRACE system can be generalized to the improvement in pre-tradetransparency introduced through the minimumtrading functionality (i.e., Order Book) and theability to negotiate simultaneously with multiplemarket participants through the RFQ system.

substantial barrier to entry into theswaps market.1078

The Commission considered the costsand benefits of the above alternatives,

but believes that neither alternativewould satisfy the objectives of theDodd-Frank Act. As noted by onecommenter, only requiring that RFQs besent to one market participant would

preserve the status quo,1079 whilerequiring that RFQs be sent to the entiremarket may not be feasible for certainless liquid swaps. Nevertheless, in lightof the comments, the Commission isreducing the required minimum numberof recipients for RFQs in the final rulefrom five to three. The Commissionexpects that this will mitigate theconcerns of commenters as discussedabove, while continuing to satisfy theobjectives of the Dodd-Frank Act. Asdiscussed above in connection with theRFQ to three market participantrequirement, the Commission views

three RFQ recipients as appropriately balancing between ensuring liquidity inthe swaps market and promoting pre-trade price transparency. TheCommission further notes that the threeRFQ recipient model will provide amore reliable indicator of market valuethan a quote from a single RFQ responder.

(2) Order Interaction

Another alternative was to allow forone-to-one RFQs, but to mandate fullorder interaction.1080 However,according to commenters, an orderinteraction requirement across tradingplatforms would impose significantarchitectural and operational costs onSEFs.1081 In particular, potential SEFswere concerned that they would incursignificant expenses by having to createthe technological capabilities necessaryto ensure that market participantsexecute against the best price.

The Commission did not propose thistype of order interaction and hasdeclined to impose such a requirementherein. Accordingly, the finalregulations respond to concernsregarding a transacting party’s ability totake into consideration factors other

than price when choosing acounterparty or clearing entity, by, forexample, offsetting an existing positioncleared through the Derivatives Clearing

Organization (‘‘DCO’’) through whichthe position was entered into, eventhough a slightly better price may existfor the same instrument at a differentDCO. This flexibility will allow marketparticipants to execute swaptransactions in accordance with theunique execution requirements of eachtransaction.

(3) Expand Definition of PermittedTransaction

Another alternative is to expand thedefinition of Permitted Transaction toinclude other transactions, such asexchanges of swaps for physicals,exchanges of swaps for swaps, andlinked or packaged transactions. TheCommission interprets MFA’s commentsuggesting this alternative to be arequest that the Commission createthrough rulemaking an exception to theCEA section 2(h)(8) trade execution

mandate similar to the centralizedmarket trading exception established byDCM Core Principle 9 for certainexchange of futures for related positions(‘‘EFRPs’’).1082

The Commission has determined notto adopt this alternative, because a

broad exception for the off-exchangetransactions described by MFA couldundermine the trade executionrequirement by allowing marketparticipants to execute swaps subject tothe trade execution requirement

bilaterally rather than on a SEF or DCM.

The Commission notes that marketparticipants with a bona fide businesspurpose for executing exchange of swaps for physicals in physicalcommodity swaps (should such swaps

become subject to the trade executionmandate) are likely to be eligible for theend-user exception. The Commission isnot currently aware of any bona fide

business purpose for executing suchtransactions in financial swaps subjectto the trade execution mandate. In lightof the end-user exception, theCommission expects that the costsassociated with the Commission’s

determination will be minimal. TheCommission is aware that the swapsmarket will evolve in ways that it doesnot currently anticipate and is open torevisiting this issue should a bona fide

business purpose arise to execute swapsthat are subject to the trade executionmandate in a manner recommended bythe commenter.

(e) Section 15(a) Factors

(1) Protection of Market Participants andthe Public

The final regulations, specifically theprovisions requiring a minimum tradingfunctionality (i.e., Order Book) and thecommunication of any firm bid or offeralong with responses to the RFQ,

promote the protection of marketparticipants and the public bypromoting the statutory goals of increased pre-trade transparency andtrading on SEFs. Taken together, thesefinal rules should reduce the likelihoodthat market participants and SEFsexecute swaps at non-market prices,thus protecting traders and members of the public that rely on the prices of swaps facilitated or executed on SEFs.The rules should benefit marketparticipants by reducing the potentialrents extracted by dealers fromcustomers in opaque markets, ‘‘and

more so from less informedcustomers.’’1083 The Commission mitigates the costs to

market participants by minimizing therisk of information leakage to othermarket participants by clarifying thatSEFs are not required to: (1) DisplayRFQs to market participants notparticipating in the RFQ, (2) discloseRFQ responses to all marketparticipants, or (3) disclose the identityof the RFQ requester.

As discussed above, the Commissionanticipates that the requirements in§ 37.9 will result in better pricing andliquidity and increased participation on

SEFs because market participants will be able to trade on flexible platformswithout compromising on pre- and post-trade transparency. The final regulationsalso provide information and pricing

benefits to market participants using anRFQ System because marketparticipants seeking liquidity will haveaccess to additional pricing informationafter disseminating an RFQ. The finalregulations increase the likelihood thatRFQ requesters will receive competingquotes from a larger group of responders. The Commission notes thatcompetition between multiple quote

providers should result in tighter bid-offer spreads for the RFQ requesters.

The rules promoting trading on SEFsprotect the public by encouragingtrading on regulated SEFs rather than onunregulated OTC markets. Moreover,


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1084The Commission notes that CEA §15(a)(2)(B)requires the Commission to consider the costs and benefits of its actions in light of ‘‘considerations of

the efficiency, competitiveness, and financialintegrity of futures markets.’’ The Commission isalso considering the costs and benefits of theserules in light of considerations of the efficiency,competitiveness, and financial integrity of ‘‘swapmarkets.’’

1085See ISDA Research Notes, ‘‘Transparency andover-the-counter derivatives: The role of transactiontransparency,’’ No. 1, at 2–3 (2009), available at http://www2.isda.org/attachment/MTY4NA==/ ISDA-Research-Notes1.pdf.

1086See Hendershott & Madhavan, ‘‘Click orCall,’’ at 3 (stating that ‘‘[T]he evolution of bilateral,sequential trading into an auction type framework’’(their definition of the RFQ system), ‘‘offers a pathfrom an over-the-counter market to centralized,continuous trading’’).

1087Duffie et al., ‘‘OTC Markets,’’ at 1815.1088Haoxiang Zhu, ‘‘Finding a Good Price in

Opaque Over-the-Counter Markets,’’ 25 The Reviewof Financial Studies 1255, 1264 (Apr. 2012).

1089Marco Avellaneda & Rama Cont,‘‘Transparency in Credit Default Swap Markets,’’Finance Concepts, at 3 (Jul. 2010), available at http://www.finance-concepts.com/images/fc/ CDSMarketTransparency.pdf.

1090Haoxiang Zhu, ‘‘Finding a Good Price inOpaque Over-the-Counter Markets,’’ 25 The Reviewof Financial Studies 1255, 1257–58 (Apr. 2012).

1091Duffie et al., ‘‘Valuation in OTC Markets,’’ at1881.

1092See Yakov Amihud, Haim Mendelson, & BeniLauterbach, ‘‘Market microstructure and securitiesvalues: Evidence from the Tel Aviv StockExchange,’’ 45 Journal of Financial Economics 365,378–80 (Sep. 1997) (discussing liquidityexternalities in trading).

some market participants may be endusers that provide goods and services tothe public (e.g., airlines or electricutilities). To the extent that these endusers obtain better pricing due to theserules and are able to pass those costsavings to their customers andshareholders, the public would gainadditional benefits from the pre-trade

transparency and promotion of tradingon SEFs.

(2) Efficiency, Competitiveness, andFinancial Integrity of the Markets 1084

The final regulations will improve theefficiency, competitiveness, andfinancial integrity of the swaps market

by providing a SEF with the flexibilityto offer several execution methods forRequired Transactions to meet the needsof market participants, including RFQ Systems, as well as the flexibility tooffer any execution method forPermitted Transactions. This flexibilityreflects the fact that there is acontinuum of markets occupying‘‘various points between high and lowtransparency’’1085 and will allowparticipants to efficiently execute tradesusing various methods of executiondepending on the liquidity levels inparticular products. For example,participants may execute more liquidproducts on an Order Book, whileexecuting less liquid products usingRFQ functionality. Final §37.9,specifically the provisions related toRFQ Systems (including the minimumRFQ to three requirement) and the 15second time delay requirement for cross

trades, should also facilitate an increasein the number of market participantsthat provide liquidity on SEFs byproviding greater opportunities for thosemarket participants, which willcontribute to the competitiveness of theswaps market.

Research by Hendershott andMadhavan supports the benefits of increased competition facilitated byRFQ systems.1086 By enabling marketparticipants to meet each other directly

(without being forced to go through anintermediary as is the case in thecurrent OTC market structure), and byproviding them a facility (via the RFQ system) to simultaneously negotiatewith multiple market participants, therules reduce the search costs inherent inthe current OTC market structure asdescribed by Duffie, Garleanu, and

Pedersen,1087 and thus promote a moreefficient and competitive marketstructure for the swaps markets. Inanother paper, Zhu addresses therequirement for a minimum of fivequote providers as a means to ‘‘increasedirect trading among ‘end-users’ andreduce the fraction of trading volumethat is conducted throughintermediaries.’’ 1088 Similarly,Avellaneda and Cont emphasize theimportance of market transparency as‘‘not an objective per se but rather ameans for ensuring the properfunctioning of the market.’’ 1089

(3) Price DiscoveryThe final rules provide for pre-trade

transparency and promote trading onSEFs, both of which will enhance pricediscovery on a SEF. The minimumtrading functionality will allow non-dealer firms with access to the SEF tocompete with dealers by also placing

bids and offers on the SEF. The 15second time delay requirement willensure a minimum level of pre-tradetransparency by allowing other marketparticipants the opportunity toparticipate in a privately negotiatedtrade before it is crossed. The broader

participation and pre-trade transparencycould increase market depth andimprove price discovery. Research byZhu shows that execution methodssimilar to the RFQ system can helpimprove the dispersion of quoteinformation across a broader cross-section of market participants, thesensitivity of quoted prices toinformation, and the ability of themarket to aggregate informationdistributed among multipleparticipants.1090 These conclusionssupport findings from research byDuffie, Garleanu, and Pedersen that

‘‘[s]earch frictions affect not only theaverage levels of asset prices but alsothe asset market’s resilience to aggregate

shocks[,]’’ both of which are criticalelements of any efficient and effectiveprice discovery process.1091

The differentiation in executionmethods for Required and PermittedTransactions, and the ability to use ‘‘anymeans of interstate commerce’’ inproviding the execution methods forRequired Transactions as described in

§ 37.9(a)(2)(ii), will allow a SEF toadjust its market structures for emergingand less liquid markets by using avariety of means of communication inproviding the execution methods forRequired Transactions and using anyexecution method the SEF deemsappropriate for Permitted Transactions.This approach reflects the Commission’s

belief that the price discovery processvaries across markets and products.

(4) Sound Risk Management Practices

Centralized trading platforms havemultiple checks and balances built intotheir systems designed to reduceoperational risks (such as human error)inherent in order submission, matching,and confirmation. The Commission

believes that adoption of centralizedtrading platforms for swaps trading ona SEF will contribute to a system-widereduction in operational risks, and willhelp standardize risk managementpractices in the marketplace. This inturn will reduce overall transactioncosts, and will, along with pre-tradetransparency and the prospects forimproved price discovery discussedearlier, encourage market participants totrade swaps on SEFs and thus aid in the

development of the swaps market. Asmarkets are interlinked, the growth of the swaps market will likely drivegrowth of the futures and otherderivatives markets through theliquidity externality mechanism, whichin turn will improve the ability of a

broader range of market participants tomeasure, hedge, and transfer their risksthrough such contracts.1092

(5) Other Public Interest Considerations

The Commission has not identifiedany effects that these rules will have onother public interest considerations

other than those enumerated above.3. Registration

(a) Background

Section 5h(a)(1) of the Act providesthat no person may operate a facility for










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1093CEA section 5h(a)(1); 7 U.S.C. 7b–3(a)(1).1094CEA section 1a(50); 7 U.S.C. 1a(50).1095See Requirements for Registration discussion

above under §37.3—Requirements for Registrationin the preamble for further details.

1096Sections 37.3(d)–(g) provide procedures forother actions involving registration, includingreinstating a dormant registration, requesting atransfer of registration, withdrawal of anapplication for registration, and vacation of registration. These procedures will further theability of the Commission to efficiently monitorSEFs’ compliance with the core principles, and willresult in minimal administrative costs for SEFs.

1097

ISDA Discussion Paper at 32 (Nov. 2011).1098The Commission notes that the SECestimated that the one-time registration burden toprepare and file Form SB–SEF will beapproximately 100 hours for each new and existingentity. See Registration and Regulation of Security-Based Swap Execution Facilities, 76 FR at 11024.The SEC based this estimate on its experience withthe registration process for national securitiesexchanges, having last estimated the average timeit should take to fill out the securities exchangeregistration form (Form 1) to be 47 hours. Id. TheSEC adjusted this figure upwards to account for thegreater resources that would be required initially inlieu of an established framework and familiarity of the industry in order to gather supportingdocumentation and complete Form SB–SEF.

the trading or processing of swapsunless the facility is registered as a SEFor a DCM.1093 The SEF definition inCEA section 1a(50) defines a SEF as ‘‘atrading system or platform in whichmultiple participants have the ability toexecute or trade swaps by accepting

bids and offers made by multipleparticipants in the facility or system,

through any means of interstatecommerce, including any tradingfacility, that—(A) Facilitates theexecution of swaps between persons;and (B) is not a designated contractmarket.’’ 1094 In accordance with theseprovisions, the Commission hasclarified that a facility would berequired to register as a SEF if it offersa trading system or platform in whichmore than one market participant hasthe ability to execute or trade swapswith more than one other marketparticipant on the system orplatform.1095 In response to comments,

the Commission also provides examplesof how it would interpret theregistration requirement for certainentities.

Section 37.3(a)(1) codifies thisstatutory registration requirement and§ 37.3(b) requires, among other things,that applicants requesting approval of registration as a SEF must file acomplete Form SEF, which consists of general questions and a list of exhibitsthat will enable the Commission todetermine whether the applicantcomplies with the core principles andthe Commission’s regulations. Form SEFstandardizes the information that an

applicant must provide to theCommission and includescomprehensive instructions that willguide applicants through theprocess.1096 Section 37.3(b)(5) requiresthe Commission to review anyapplication for registration as a SEFsubmitted two years or later after theeffective date of part 37 pursuant to the180-day timeframe and proceduresspecified in CEA section 6(a).

Under §37.3(c), SEF applicants maysubmit a notice to the Commissionrequesting temporary registration,allowing them to operate during the

pending application process once a

notice granting temporary registrationfrom the Commission has been received.The SEF NPRM required theseapplicants to submit transaction datasubstantiating that they are tradingswaps. In response to comments, theCommission is eliminating thisrequirement from the final rule and isalso extending the termination date of

the proposed temporary registrationprovision by one year. In addition, theCommission is shortening the proposedeffective date of the regulations from 90days to 60 days subsequent topublication in the Federal Register. Inconnection with this change, theCommission is also using its discretionto establish alternative dates for thecommencement of its enforcement of regulatory provisions and is setting ageneral compliance date of 120 dayssubsequent to Federal Registerpublication.

(b) Costs

In its discussion paper, ISDAestimated the average cost of registrationwould be $333,000.1097 Based on theCommission staff’s follow-updiscussions with commenters, theCommission estimates that the total costof completing and filing a registrationapplication with the Commission will

be between $333,000 and $500,000. Thisrange accounts for the time that will beexpended to prepare and file FormSEF.1098

As noted above, based on the statuteas interpreted by the Commission, afacility that meets the SEF definition

would be required to register as a SEFand would incur the costs of registration. These facilities would also

be required to meet the minimumtrading functionality and otherrequirements of §37.9. The costs and

benefits of those requirements arediscussed above. The 180-day reviewperiod for SEF applications submittedtwo years or later after the effective dateof part 37 is not expected to imposesignificant costs on applicants whosubmit their applications sooner sincethey will be eligible for two years of

temporary registration and will not needto await final Commission approval

before commencing SEF operation.

(c) Benefits

As discussed above, based on thestatute as interpreted by theCommission, a facility that meets theSEF definition would be required to

register as a SEF. These facilities will,as registered SEFs, have the benefit of

being able to offer RequiredTransactions for execution, whilealternative entities that are not requiredto register as SEFs, including one-to-many systems or platforms, will only beable to offer Permitted Transactions forexecution. This will ensure, consistentwith the statute, a level playing field,that all Required Transactions areexecuted on registered SEFs. This willprovide market participants in RequiredTransactions with the benefitsassociated with the minimum tradingfunctionality, core principles, and otherrequirements set out in this release.

Additionally, the Commission’sinterpretation of the registrationrequirement through a set of exampleshelps to clarify which facilities mustregister as a SEF. The Commission

believes that providing examples of howit would interpret the CEA section5h(a)(1) registration requirement willensure that a consistent set of metrics isavailable to market participants whileevaluating the applicability of theregistration requirements. Providingspecific examples will also mitigate thecosts potential registrants may incur in

seeking advice on issues pertaining toregistration.

Form SEF is designed to ensure thatonly applicants that comply with theAct and the Commission’s regulationsare registered as SEFs. Form SEF isexpected to minimize the amount of time the Commission staff will need toreview applications and reduce the needfor the Commission staff to request, andapplicants to provide, supplementaryinformation, which, in turn, benefitspotential SEFs by reducing the time ittakes to become fully registered. Thisstandardized registration process will

provide applicants with legal certaintyregarding the type of information that isrequired and will ensure that noapplicant is given a competitiveadvantage in the application process.

Further, granting temporaryregistration for up to two years willimprove market continuity by allowingthe Commission ample time to reviewapplications without jeopardizing anapplicant’s ability to operate pendingCommission review. By withdrawingthe existing trading activity requirementin proposed §37.3(b)(1)(ii), all SEF


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1099See Application Procedures discussion aboveunder §37.3—Requirements for Registration in thepreamble.

1100Tradeweb Comment Letter at 3–4 (Jun. 3,2011).

1101For example, section 37.901 states that SEFsmust report swap data as specified in parts 43 and45 and meet the requirements of part 16. Thisprovision references other Commission regulations,the costs and benefits of which are discussed inconnection with those rulemakings.

1102The discretionary costs and benefits specificto the confirmation process are discussed in thepart 23 rulemaking for new confirmation standards.

applicants, not only those operatingexisting platforms, may apply fortemporary registration. The withdrawalof the trading activity requirementshould promote competition betweenSEFs by providing opportunities fornew entities to establish tradingoperations that compete with existingplatforms. The 180-day review period

for SEF applications submitted twoyears or later after the effective date of part 37 will provide any later SEFapplicants with the same review periodas is applicable under the CEA to DCMsand will provide greater certainty forSEF applicants regarding the timeperiod for the Commission’s review of their applications.


Several commenters stated that theCommission should harmonize itsregistration procedures with the SEC inorder to avoid unnecessary cost and

duplication for SEFs.1099

In particular,Tradeweb stated that SEF applicantsshould not have to file separateapplications for each mode of execution,and that where a SEF is offering bothswaps and security-based swaps, theSEF should only be required to file oneapplication for both agencies.1100

The Commission recognizes thatsubstantially similar registration formsand procedures could facilitatecompliance and reduce regulatory costsfor SEFs seeking dual registrations. TheCommission notes, however, that itmust comprehensively review andunderstand a SEF’s proposed tradingmodels and operations, which willfacilitate trading for a more diverseuniverse of financial instruments andunderlying commodities than SB–SEFs.Accordingly, the Commission is notpermitting notice registration to SEC-registered SB–SEFs. Additionally, inresponse to comments raised, theCommission clarified in the preamblethat a SEF applicant does not need tofile separate applications for each modeof execution, but that its applicationmust describe each mode of executionoffered. This should allay concerns thatmultiple costly applications must be

filed with the Commission.(e) Section 15(a) Factors


The interpretation of the registrationprovision to apply to facilities that meetthe SEF definition will ensure that

market participants transacting anyswap on these platforms, whether or notthey are subject to the trade executionrequirement, will benefit from the coreprinciples and other requirements forSEFs (including the pre-tradetransparency available on SEFs),especially those designed to protectmarket participants and the public.

Furthermore, given the critical role thatSEFs will play in the financial markets,it is essential that the Commissionconduct a comprehensive and thoroughreview of all SEF applications forregistration. Such a review is importantfor the protection of market participantsand the public because it ensures thatonly qualified applicants who satisfythe statutory requirements and theCommission’s regulations thereundercan operate as SEFs. Form SEF willenable the Commission to efficientlyand accurately determine whether anapplicant meets such requirements.

(2) Efficiency, Competitiveness, andFinancial Integrity of the Markets

The Commission’s interpretation of the registration provision to apply tofacilities that meet the SEF definition,along with the minimum tradingfunctionality requirement, will promotecompetition in the swaps market byproviding a level playing field forentities that meet the SEF definition.

The standardized registrationprocedures and Form SEF will create anefficient process that will reduce theresources associated with submittingand reviewing completed applications.

The final rules promote marketcompetition by not discriminating

between new and existing platformsapplying to register as SEFs. Forexample, the elimination of theproposed existing trading activityrequirement for temporary registrationwill ensure that new entities wishing toqualify for temporary registration willnot be placed at a competitivedisadvantage to existing entities. Therequired information in Form SEF(Exhibits I–K—Financial Informationand M and T—Compliance) will allowthe Commission to evaluate each

applicant’s ability to operate afinancially-sound SEF and toappropriately manage the risksassociated with its role in the financialmarkets.

(3) Price Discovery

The Commission has not identifiedany effects that these procedures willhave on price discovery.


The registration procedures willrequire SEF applicants to examine their

proposed risk management programthrough a series of detailed exhibits andsubmissions. These risks include risksassociated with the SEF applicant’sfinancial resources and operational andmarket risks associated with trading onthe SEF platform. The submission of exhibits relating to risk management,including Exhibits I–K (Financial

Information) and M, O, and T(Compliance), will provide data andinformation that will aid theCommission staff’s analysis andevaluation of an applicant’s ability tocomply with the core principles.


The Commission has not identifiedany effects that these procedures willhave on other public interestconsiderations other than thoseenumerated above.

4. Recordkeeping and Reporting

(a) Background

This release finalizes a series of provisions governing the recordkeepingand reporting responsibilities of SEFsand market participants.1101 Amongother requirements, these rules requireeach SEF to: (1) Provide theCommission with information about its

business as a SEF (§§37.5(a), 37.503),provide a written demonstration of compliance with any core principle(§ 37.5(b)), and provide notice of anytransaction involving the transfer of atleast fifty percent of the equity interestin the SEF (§37.5(c)); (2) provide eachcounterparty to a swap on the SEF witha written record of all of the terms of thetransaction (§ 37.6(b)); 1102 and (3)maintain records of all businessactivities, including a complete audittrail, investigatory files, anddisciplinary files, in a form and manneracceptable to the Commission for atleast 5 years (§37.1001).

A SEF must also: (1) Have the abilityto obtain the information necessary toperform its self-regulatoryresponsibilities, including the authorityto examine books and records(§§ 37.501, 37.502); (2) shareinformation with other regulatory

organizations, data repositories, andthird-party data reporting services asrequired by the Commission (§ 37.504);(3) demonstrate that it has access tosufficient information to assess whether


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trading is being used to affect prices inits market (§37.404(a)); and (4) requiremarket participants to keep records of their trading and make such recordsavailable to the SEF or the SEF’sregulatory service provider, and theCommission, upon request (§37.404(b)).

The final rules also govern a SEF’s useof data and records obtained from

market participants, and prohibit a SEFfrom using for business or marketingpurposes proprietary or personalinformation that it collects from anyperson unless the person clearlyconsents to the use of its information insuch a manner (§37.7).

(b) Costs

The costs associated with respondingto requests for information ordemonstrations of compliance underrecordkeeping rules in §37.5 willinclude the staff hours required toprepare exhibits, draft responses, andsubmit materials. These costs will varyamong SEFs depending upon the natureand frequency of Commission inquiries.

The Commission is reducing thereporting burden associated with final§ 37.5(c) (equity interest transfers) byraising the threshold of when a SEFmust file a notification with theCommission from 10 percent to 50percent, by increasing the time frame forsubmitting such notification to 10 daysrather than the next business day, and

by eliminating the proposedrequirement that SEFs must provide aseries of documents and arepresentation along with the

notification of an equity transferinterest. Under the final rules, theCommission, upon receiving anotification of an equity interesttransfer, may request appropriatedocumentation of the transfer, but allthe documentation should already be inthe possession of the SEF. Accordingly,a SEF that enters into agreements thatcould result in equity interest transfersof 50 percent of more will incur one-time costs associated with preparingand submitting the required notificationfor each event.

Further, final §37.1001 (requirement

to maintain business records includingaudit trail, investigatory, anddisciplinary files) codifies thesubstantive requirements found in CorePrinciple 10. Accordingly, most, if notall, of the costs associated with this ruleare attributable to statutory mandate.Commenters did not mention anyspecific costs with respect to this rule.In addition, §§37.501 and 37.503(establish and enforce rules and provideinformation to the Commission) codifyrequirements that appear in the statuteand impose no additional costs on SEFs

or market participants beyond thoseattributable to Congressional mandate.

Final §37.502 requires each SEF tohave rules that allow it to collectinformation or examine books andrecords of participants, but imposes noaffirmative obligations on SEFs to do so.Accordingly, the only direct costsassociated with §37.502 are the de

minimis costs associated with writingsuch rules.

Final §37.504 (information sharingagreements) codifies and implementsthe Core Principle 5 requirement that aSEF have the capacity to carry outinternational information-sharingagreements as the Commission mayrequire. Accordingly, SEFs will bear thecost of responding to Commissionrequests to share information with otherregulatory organizations, datarepositories, and third-party datareporting services. The cost of responding to Commission requests toshare information will vary dependingon the frequency and nature of therequests. To the extent that it isnecessary for a SEF to enter into aninformation sharing agreement, the SEFmay face additional costs such asnegotiating such agreement. However,these costs are unlikely to be significantand will only be incurred should a SEFdetermine that it is necessary to enterinto an information sharing agreement.

A market participant’s cost tomaintain records under §37.404 (abilityto obtain information) should beminimal if, as expected, it is part of itsnormal business practice. As a result, a

market participant’s additional cost toprovide records to the SEF, and theSEF’s cost to request and process therecords, will be nominal if, based uponthe Commission’s experience withDCMs, such requests are infrequent andtargeted to specific and significantmarket situations.

Additionally, the Commission hasmoved to guidance the requirementfrom proposed §37.404(b) that a SEFrequire customers engaging inintermediated trades to use acomprehensive large-trader reportingsystem or be able to demonstrate that

they can obtain position data from othersources. This change should mitigatecosts by providing SEFs with greaterflexibility to identify particular methodsof compliance that suit their marketsand business structures.

The Commission is also amending§ 37.7 (use of proprietary or personalinformation) to allow SEFs to usecertain information for business ormarketing purposes if the personconsents to the use of such information.The costs imposed by this provision arelimited to the cost a SEF might incur in

obtaining such person’s consent to useits information for the purposesdescribed above. The Commission doesnot prescribe the method by which aSEF must obtain such consent, whichprovides flexibility to SEFs.

(c) Benefits

The Dodd-Frank Act created a robustrecordkeeping regime in order to reducerisks associated with swaps trading,increase transparency, and promotemarket integrity. Taken as a whole, therecordkeeping and reporting regulationsadopted in this release will provide aSEF and the Commission with access toinformation that will enhance a SEF’sability to oversee its platforms andmarkets and enable the Commission todetermine whether a SEF is operating incompliance with the statute and theCommission’s regulations. Theinformation-sharing requirement in

§ 37.504 will also provide cost-savingsacross market regulators by allowing theSEF to serve as the focal point forcollecting certain data instead of eachregulator duplicating efforts andcollecting the informationindependently.

The confirmation requirement in§ 37.6(b) will provide marketparticipants with the certainty thattransactions entered into on or pursuantto the rules of a SEF will be legallyenforceable on all parties to thetransaction. The requirement that a SEFprovide each counterparty with a

confirmation at the same time asexecution will support the policy goal of straight-through processing to ensurethat counterparties do not encountergaps in their records as to their exposurelevel with other counterparties. Thiswill also reduce the costs and risksinvolved in resolving disputes betweencounterparties to a trade; givendependency across trades, for example,if a participant has already unwound aposition or taken a position via a tradeunder dispute or hedged it, any delaysor uncertainties in the confirmation willresult in higher costs from having to

further unwind such linked trades.The prohibition on the use by a SEF

of proprietary or personal informationfor business purposes without consent(§ 37.7) will ensure that informationprovided to a SEF for regulatorypurposes will not be used to advancethe commercial interests of the SEF. Therule does, however, afford marketparticipants the flexibility to consent toa SEF’s use of their personalinformation for commercial purposes, if they so desire.


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1103State Street Comment Letter at 5 (Mar. 8,2011).

1104CEA section 5h(f)(2)(B); 7 U.S.C.7b–3(f)(2)(B).

1105 ISDA Discussion Paper at 28 (Nov. 2011).

(d) Section 15(a) Factors


The recordkeeping and reporting ruleswill protect market participants and thepublic by improving a SEF’s and theCommission’s ability to detectmanipulative or disruptive activity.

This, in turn, may deter SEFs andmarket participants from engaging inpractices that may harm other marketparticipants and harm the public byplacing the larger economy at risk.Additionally, certification of continuedcompliance with the core principleswill enable the Commission to ensurethat performance of SEF functions islimited to only those entities that haveadequately demonstrated an ability tocomply with the Act and accompanyingregulations. This will protect the public

by promoting trading on regulated SEFsrather than OTC markets. While SEFs

and the Commission may at timesrequire access to market participants’information for regulatory purposes, therules also protect market participants bystipulating that information theyprovide to SEFs for regulatory purposesis not used inappropriately to advancethe commercial interests of the SEFwithout their consent.


The recordkeeping and reporting rulespromote financial integrity as theyensure that the Commission and SEFs

will have access to information toensure that trading is conductedpursuant to the regulatory requirements,and that SEFs have sufficientdocumentation to detect, enforce, anddeter potential rule violations.

(3) Price Discovery

The Commission has not identifiedany effects that these rules will have onprice discovery considerations.


Requiring that SEFs maintain audittrail, investigatory files, disciplinary,and other records will provide theCommission with access to data thatwill allow it to assess whether marketparticipants are manipulating orotherwise disrupting trading in theswaps market. The Commission andSEFs can then take action to mitigatethese risks.


The Commission has not identifiedany effects that these rules will have onother public interest considerationsother than those enumerated above.

5. Compliance

(a) Rule Writing and Enforcement

Under Core Principle 2, a SEF mustimplement a number of rule-writing andenforcement-related provisions. Amongother requirements, a SEF must: (1)Establish a rulebook that addressescritical areas of market protection(§ 37.201), including rules prohibitingcertain abusive trading practices(§ 37.203(a)), rules ensuring impartialaccess to the SEF’s trading system(§ 37.202), and rules governing internaldisciplinary procedures (§ 37.206); and(2) have resources for effective ruleenforcement, including sufficientcompliance staff and resources(§ 37.203(c)), authority to collectinformation and examine books andrecords (§37.203(b)), and procedures forconducting investigations into possiblerule violations (§ 37.203(f)). TheCommission is also clarifying that a SEFmust establish and enforce rules for itsemployees that are reasonably designedto prevent violations of the Act and therules of the Commission.

Additionally, §37.204 provides SEFswith the option to choose to contractwith a regulatory service provider forthe provision of services to assist incomplying with the CEA andCommission regulations, provided thatthe SEF supervise the regulatory serviceprovider and retain exclusive authoritywith respect to all substantive decisionsmade by the regulatory service provider

on the SEF’s behalf.(1) Costs

The costs associated with the rule-writing and enforcement provisionsoutlined above will consist mostly of one-time administrative outlays such aswages paid to attorneys and othercompliance personnel for time spentdrafting, reviewing, implementing, andupdating rules. While new entitiesseeking to become SEFs would need todevelop a rulebook, existing entities thatalready have written rules would onlyincur the incremental expense of

updating them.SEFs will also incur the initial and

recurring costs associated with investingin the resources and staff necessary toprovide effective rule enforcement. ASEF must have sufficient staff andresources, including resources to collectinformation and examine books andrecords, as well as automated systems toassist the compliance staff in carryingout the SEF’s self-regulatoryresponsibilities. One commenter statedthat these requirements are overly

burdensome, but did not provide anydata in support.1103

The Commission believes that havinga minimum level of resources in placefor rule enforcement purposes is acritical element of a sufficientcompliance program, and is necessarypursuant to the statutory mandate of Core Principle 2, which requires SEFs to

have the capacity to detect, investigate,and enforce its rules.1104 SEFs may beable to reduce these costs by contractingwith a regulatory service provider. Inaddition, the Commission reduced thecosts of the final rules by eliminatingthe requirement in proposed§ 37.203(c)(2) that a SEF monitor thesize and workload of its compliancestaff on an ongoing basis and, on at leastan annual basis, formally evaluate theneed to increase its complianceresources and staff. The Commission

believes that the final rulemakingprovides greater flexibility to SEFs in

determining their approach tomonitoring their compliance resources.With respect to the use of a third-

party regulatory service provider aspermitted under § 37.204 (Regulatoryservices provided by a third party), twocommenters in follow-up conversationsindicated to the Commission staff thatthey each may contract (or have alreadycontracted) with a regulatory serviceprovider to perform various compliancefunctions at a cost of between $540,000and $720,000 per year. This estimaterepresents the total cost of contracting aSEF’s compliance functions to aregulatory service provider.Additionally, ISDA estimates anassessment on SEFs of $45,000 per yearto contract with a regulatory serviceprovider and $635,000 per year in duesfor membership to the regulatory serviceprovider.1105 Section 37.204 is intendedto be a cost-saving provision thatmitigates the burden placed on SEFs bythe rule enforcement program and, asstated by one commenter, this rule mayreduce a SEF’s overall costs by at leastthirty percent.

SEFs that choose to contract with aregulatory service provider will need tohire sufficient compliance staff to

supervise the quality and effectivenessof the services provided by theregulatory service provider, includingthe cost of holding regular meetingswith the regulatory service provider toreview and assess the adequacy of theservices provided. SEFs will also incurthe cost of documenting any instances


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1106See, e.g., ‘‘NFA Signs Agreement with ICAPto provide Regulatory Services to ICAP’s SwapExecution Facility’’ (Mar. 20, 2012), available at http://www.nfa.futures.org/NFA-regulation/ regulationNewsRel.asp?ArticleID=3996.

1107CME Comment Letter at 35 (Feb. 22, 2011).1108The Commission is renumbering proposed

§ 37.206(o) to §37.206(f). The Commission is alsoretitling this section as ‘‘Warning letters.’’

1109Deleted provisions include proposed§ 37.203(c)(2) (ongoing monitoring of compliancestaff and resources), the second sentence of proposed §37.206(a) (annual review of enforcementstaff), the majority of proposed § 37.206(c) (timelyreview of investigation reports), the last sentence of proposed §37.206(h) (denial of charges and right to

a hearing), and proposed §37.206(j)(1)(vii) (cost of transcribing the record to be borne by therespondent).

1110See second part of proposed §37.206(a)(enforcement staff), proposed §37.206(d) (notice of charges), proposed §37.206(e) (right torepresentation), proposed § 37.206(f) (answer tocharges), proposed §37.206(g) (admission or failureto deny charges), proposed §37.206(h) (denial of charges and right to hearing), proposed §37.206(i)(settlement of offers), the majority of proposed§ 37.206(j) (hearings), proposed §37.206(l) (right toappeal), proposed §37.206(m) (final decisions),proposed §37.206(o) (summary fines for violationsof rules regarding timely submission of records),and proposed §37.206(p) (emergency disciplinaryactions).

in which their decisions differ fromthose recommended by their regulatoryservice provider.

(2) Benefits

Establishing a rulebook and aneffective rule enforcement program willensure that SEFs have specific andtransparent procedures for addressing

critical areas of market protection, andthat SEFs will have the resourcesneeded to implement those procedures.In particular, the requirements that aSEF offer impartial access, provide a fairand competitive market free of abusivetrading practices, have sufficientresources to oversee and monitor themarket, promptly investigate ruleviolations, establish disciplinaryprocedures that will deter abuses, andprovide respondents with adequatesafeguards will foster greater confidencethat SEFs will provide a fair andcompetitive market free of tradingabuses. This confidence is likely toresult in increased trading of swaps onSEFs, improving liquidity and resultingin more competitive quotes.

According to conversations withcommenters, SEFs that contract-outcertain regulatory functions to aregulatory service provider are likely torealize significant cost savings fromeconomies of scale—one commenterstated that contracting with a regulatoryservice provider would reduce a SEF’soverall costs by at least thirty percent.According to NFA’s Web site, it appearsthat many potential SEFs have alreadycontracted with, or are in the process of

contracting with, a regulatory serviceprovider.1106 Additionally, the rulegoverning the use of regulatory serviceproviders ensures that SEFs will havesufficient staff to adequately supervisetheir regulatory service providers. Byrequiring that SEFs oversee the servicesprovided by the regulatory serviceprovider, the rule will likely result incost savings to the SEF, as the failure of a service provider to adequately fulfillits duties may result in costs to SEFs fornot meeting compliance obligations.

(3) Consideration of Alternatives

As referenced above, one of a SEF’srule-writing obligations is to developrules governing internal disciplinaryprocedures, including rules governingdisciplinary panels. CME stated that theCommission should not provide aprescriptive approach to disciplinarypanels in proposed § 37.206(b) byrequiring a ‘‘hearing panel’’ to be

separate from a ‘‘review panel.’’ 1107 Inresponse, the Commission removed theproposed requirement to establishseparate hearing and review panels,instead allowing a SEF to establish oneor more disciplinary panels, which will,among other things, issue notices of charges, conduct hearings, renderwritten decisions, and impose

disciplinary sanctions. The final rulewill continue to achieve the goals of theproposed regulations by deterringviolations of SEF rules, preventingrecidivist behavior, and protectingrespondents and customers harmed byviolations of exchange rules. Theprocedures will achieve these goalswhile also providing SEFs with greaterflexibility to structure their disciplinary

bodies in a manner that best suits their business models and markets. The finalrule is unlikely to impose additionalpersonnel expenditures on SEFs, as theCommission anticipates that SEFs, like

DCMs, will rely upon unpaiddisciplinary panel members. TheCommission anticipates that any actualcosts associated with the disciplinarypanel will be limited to de minimisadministrative expenses for conveninghearings over which the panel presides,such as postage, facility rentals, andprinting.

The Commission notes that it hasprovided additional flexibility to SEFs

by delaying the effective date of proposed §37.206(o) to 1 year from theeffective date of the SEF rules.1108 Where a rule violation is found to haveoccurred, this provision limits thenumber of warning letters to one perrolling twelve month period for thesame violation. The delay in theeffective date of this provision is likelyto mitigate costs for persons and entitiesso that they may adapt to the new SEFregime.

As recommended by commenters, theCommission has also adopted cost-mitigating alternatives that will provideSEFs with additional flexibility anddiscretion to implement disciplinaryand other enforcement programs in themanner they find most suited to theirmarket. In particular, the Commission

has: eliminated the requirement that aninvestigation report include the memberor market participant’s disciplinaryhistory at the SEF; removed therequirement that SEFs include a copy of a warning letter in an investigationreport; amended the standard forcommencing an investigation from a‘‘possible basis’’ to a ‘‘reasonable basis’’

that a violation may have occurred orwill occur; and deleted severalprovisions.1109

The Commission has also moved partor all of several provisions toguidance.1110 By moving theseprovisions to guidance, entities willhave the flexibility to tailor complianceprograms to varying business models

and trading platforms as well asunanticipated technological innovationor behavioral changes. While theCommission’s pairing of guidance andregulations provides for a broad andflexible regulatory framework, it alsopromotes uniformity of safe and soundoperation such that market participantsand the public receive comparablelevels of protection irrespective of theparticular SEF on which they transact.

(4) Section 15(a) Factors (Rule Writingand Enforcement)

(i) Protection of Market Participants andthe Public

Together, the rule-writing andenforcement provisions described aboveensure that SEFs adopt and enforceoperational rules that protect marketparticipants and the public throughorderly SEF-traded markets that are

better protected from manipulative anddisruptive conduct than pre-Dodd FrankOTC markets.

Rules prohibiting abusive tradepractices such as wash trades and front-running are intended to deter suchdisruptive practices, and will protectmarket participants transacting on theSEF, as well as the general public, whomay rely on prices derived from themarket and who may be customers orshareholders of market participants.

The requirement that a SEF have thecapacity to detect and investigate ruleviolations, including adequatecompliance staff and resources toconduct automated trade surveillance


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1111There are no costs associated with§ 37.1501(a), which simply defines ‘‘board of directors.’’

1112 ICE Comment Letter at 6–7 (Mar. 8, 2011);WMBAA Comment Letter at 6–7 (Mar. 8, 2011);MarketAxess Comment Letter at 27 (Mar. 8, 2011);CME Comment Letter at 12–13 (Mar. 8, 2011).

1113This estimate is derived from the 2010edition of SIFMA’s annual report on Managementand Professional Earnings in the Securities Industry(hereinafter ‘‘SIFMA Report’’). This figure reflectsthe median total annual compensation (including base salary and bonus) for a CCO in the securitiesindustry. The Commission notes that this estimateonly includes the cost of hiring a CCO. Althoughnot required by statute or rule, SEFs may alsochoose to hire additional staff at additional cost inorder to support the CCO.

1114Tradeweb Comment Letter at 12 (Mar. 8,2011); WMBAA Comment Letter II at 7 (Mar. 8,2011); MarketAxess Comment Letter at 26 (Mar. 8,2011).

and real-time monitoring (or contractwith a regulatory service provider thathas the capacity to perform thesefunctions on its behalf whilemaintaining ultimate responsibility),will improve a SEF’s ability to discover,sanction, and prevent violations andtrading practices that could harmmarket participants and, indirectly, the

public.SEF-initiated investigations are a

chief tool in protecting marketparticipants and the public because theyprovide the first opportunity to respondto rule violations. Rules allowing theSEF to obtain information and inspect

books and records will not only deterpotential abusive trading practices, butwill also enable the SEF to detect anymanipulative or fraudulent activityquickly and efficiently. Prompt andthorough investigations are essential todetecting and remedying violations andensuring that the violations do not harm

market participants, result in pricedistortions, or contribute to systemicrisks that can harm the economy.

In the event of demonstrated customerharm, restitution damages are generallyrequired to make that customer wholeagain. Meaningful sanctions will serveas a general deterrent by discouragingothers from engaging in violativeconduct.

Impartial access requirements protectmarket participants from discriminatorytreatment by prohibiting similarlysituated market participants fromreceiving different access terms and feestructures.

The requirement that SEFs establishand enforce rules for its employees willprotect market participants and thepublic by helping to ensure thatemployees operate in conformance withthe Act and the rules of theCommission.

(ii) Efficiency, Competitiveness, andFinancial Integrity of the Markets

The requirement that a SEF have thecapacity to detect and mitigate rule andtrade practice violations, including theability to collect relevant informationand examine books and records, and the

requirement to establish and enforcerules for its employees will increaseconfidence in the financial integrity of the market by confirming to marketparticipants that their orders and tradesare handled pursuant to the posted rulesof the SEF.

In addition, impartial accessrequirements will eliminate a potentialimpediment to participation, resultingin a more competitive market. At aminimum, as required by section 2(e) of the Act, market participants must meetthe definition of an ECP, which ensures

that only those participants with asufficient level of sophistication andfinancial resources are able toparticipate. Similarly, requiring a SEF tomaintain minimum level of enforcementresources will promote financialintegrity by ensuring that a SEF hassufficient resources to investigatewrongdoing and make aggrieved market

participants whole again. Moreover,markets where wrongdoing is detectedand deterred will operate moreefficiently.

(iii) Price Discovery

Many of the same rule provisionspreviously discussed that serve toincrease efficiency, liquidity, andcompetitiveness will, by extension,improve price discovery, because thecombination of increases in liquidityand competition will help create amarketplace in which the forces of supply and demand reflect moreaccurate pricing.

Timely investigations will increasethe likelihood that manipulation isdetected early-on and quickly remediedso that price discovery is not impaired.Additionally, a system of meaningfulsanctions will deter disruptive andmanipulative trade practices, providinga stable and competitive tradingenvironment more likely to foster pricediscovery.

(iv) Sound Risk Management Practices

The requirement that SEF participantsconfirm to the SEF that they meet thedefinition of an ECP helps assure the

market that participants in SEF-tradedmarkets have the skill, knowledge, and/or financial resources necessary to enterinto financially-sound transactions andunderstand sound risk managementpractices.

(v) Other Public Interest Considerations


(b) Chief Compliance Officer

Section 37.1501 implements CorePrinciple 15 and requires each SEF to

designate an individual to serve as Chief Compliance Officer (‘‘CCO’’) and toprovide its CCO with the authority andresources to develop and enforce suchpolicies and procedures as are necessaryfor the CCO to fulfill its statutory andregulatory duties.1111 While theproposed rule prohibited the CCO fromserving as a member of the SEF’s legaldepartment or as the SEF’s general

counsel, the Commission has eliminatedthis restriction from the final rule.

The final rule also outlines theprocedures for oversight authority overthe CCO and for appointing andremoving the CCO. The CCO must meetwith the board of directors at leastannually and the Regulatory OversightCommittee (‘‘ROC’’) at least quarterly.

The CCO must also prepare an annualcompliance report containing a detailedaccount of the SEF’s compliance withthe CEA and Commission regulations, aswell as a detailed account of the SEF’sself-regulatory program, and submit it tothe SEF’s board of directors for reviewand to the Commission. SEFs mustmaintain records pertaining to, amongother things, code of ethics and conflictof interest policies, copies of allmaterials created in furtherance of theCCO’s duties, and any records relevantto the SEF’s annual compliance report.

(1) Costs

Several commenters stated that theproposed requirement that the CCO maynot be a member of the SEF’s legaldepartment and may not serve as itsgeneral counsel is prescriptive andunnecessary.1112 In response to thesecomments, the Commission haseliminated the proposed prohibition onwho may serve as CCO. Accordingly, aSEF may use its general counsel or amember of its legal department to serveas CCO. This change to the final ruleshould significantly reduce the expenseimposed by the proposed rule, whichwould have necessitated the hiring of anindividual specifically to serve as CCOat an estimated annual cost of $181,394.1113 The cost of assigning therole of CCO to an existing employee will

be significantly less.Several commenters requested that

the Commission grant SEFs moreflexibility in determining how a CCO isappointed, compensated, supervised,and removed.1114 In response to thesecomments, the Commission hasremoved the requirement in proposed


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1115Tradeweb Comment Letter at 6–7 (Jun. 3,2011); WMBAA Comment Letter II at 5–6 (Mar. 8,2011); MarketAxess Comment Letter at 26 (Mar. 8,2011); Tradeweb Comment Letter at 12 (Mar. 8,2011); CME Comment Letter at 4 (Feb. 7, 2011).

1116FXall Comment Letter at 16 (Mar. 8, 2011).1117 Id. at 17.

1118CME Comment Letter at 7 (Feb. 7, 2011).1119See discussion above under §37.1501(e)—

Annual Compliance Report Prepared by Chief Compliance Officer in the preamble.

§ 37.1501(c)(1) that a CCO’sappointment and compensation requiresa majority vote of directors, as well asthe requirements in proposed§ 37.1501(c)(3) that the SEF explain tothe Commission the reason for theCCO’s removal upon departure and thatthe SEF immediately appoint an interimCCO and permanent CCO as soon as

reasonably practicable thereafter. TheCommission notes that these revisionswill provide the board of directors orsenior officer of the SEF with a degreeof flexibility to appoint, compensate,and remove the CCO in the manner thatthe SEF deems most appropriate.

Several commenters also stated thatthe proposed requirement that CCOsensure ‘‘compliance with the Act andCommission regulations’’ isimpracticable and overly burdensome,as one individual cannot ensurecompliance of an entireorganization.1115 In response, the

Commission is modifying§ 37.1501(d)(4) to state that one of theCCO’s duties shall include ‘‘takingreasonable steps to ensure compliancewith the Act and Commissionregulations.’’ This modification shouldalso reduce potential costs resultingfrom this rule without diminishing its

benefits.

(2) Benefits

The rule ensures that each SEF has acentral figure responsible for overseeingmajor areas of compliance with the CEAand Commission regulations. Theannual compliance report will enable a

SEF and the Commission to evaluate theeffectiveness of the SEF’s self-regulatoryprograms and compliance with coreprinciples, and to take remedial actionsand make recommendations to improvethe SEF’s self-regulatory programs inorder to ensure that the SEF remains incompliance with the core principles.


With respect to the annualcompliance report requirement inproposed §37.1501(e), FXall stated thatcompiling the required information andpreparing the report in a timely manner

annually will consume considerableresources.1116 FXall proposed analternative report that would requestfewer pieces of information.1117 Similarly, CME stated that theCommission should specify key areasthat should be discussed in the annual

report, rather than requiring the reportto describe in detail the registrant’scompliance with respect to each of thenumerous components of the CEA andCommission regulations.1118

After weighing the comments andalternative proposals from FXall andCME, the Commission has determinedto adopt the rules as proposed, subject

to certain revisions detailed in thepreamble.1119 The Commission declinesto adopt commenters’ proposedalternatives because without thedetailed information required by statutein the annual compliance report(including a self-assessment of policiesand procedures designed to ensurecompliance with each core principle, adiscussion of areas for improvement,and a description of the SEF’s self-regulatory program’s staffing, structure,and cataloguing of disciplinary actions),the Commission would not have accessto the information it needs to ensure

that each SEF is in compliance with theCEA and Commission regulations.

(4) Section 15(a) Factors (Chief Compliance Officer)


The requirements that a CCO overseethe SEF’s compliance with the Act andCommission regulations and supervisethe SEF’s self-regulatory program willensure that the SEF monitorscompliance with key provisions of theCEA designed to protect marketparticipants and the public (includingprovisions governing trade practice andmarket surveillance, real-time marketmonitoring, and financial reporting). Tothe extent that the Commission’sregulations impose more specific orsupplemental requirements whencompared to those requirementsexplicitly imposed by section 5h(f)(15)of the CEA, those incremental costs arenot likely to be significant. While it ispossible that those incremental costswill be passed along to marketparticipants, the size of those costs islikely to be negligible.

The Commission believes the CCOrules will protect market participants

and the public by promotingcompliance with the core principles andCommission regulations through thedesignation and effective functioning of the CCO, and the establishment of aframework for preparation of ameaningful annual review of a SEF’scompliance program. The annualcompliance report will allow the SEF

and the Commission to periodicallyassess, and evaluate where necessary,the SEF’s ability to comply with thecore principles. Upon review of thecompliance report, the SEF and theCommission will be better able todetermine whether the SEF hasappropriate programs in place to protectmarket participants and the public from

market abuses.Maintaining records as required under

§ 37.1501 regarding a CCO’s effortstoward ensuring that the SEF complieswith core principles provides a checkagainst what is reported in the annualcompliance report. Access to theserecords will assist the Commission in itsdetermination of whether a SEF’s self-regulatory program complies with thecore principles and the Commission’sregulations. If the Commissiondetermines the self-regulatory programis not sufficient, the Commission will beable to use information required by the

rule to take steps to remedy theshortcomings and to prevent disruptionsthat could harm market participants andthe public.


An effective CCO will implementmeasures that enhance the stability andefficiency of SEFs. Reliable andfinancially-sound SEFs are essential forthe stability of the derivatives marketsthey serve. The CCO’s oversight of self-regulatory programs and the annualcompliance report will provide both theSEF and the Commission with an

opportunity to assess the effectivenessof the SEF’s self-regulatory programsand will help to detect and deter ruleviolations, increasing participation andcompetition in the markets.

Likewise, compliance reports willallow the Commission to review theeffectiveness of and order changes toself-regulatory programs, thus enablingthe market to function more efficientlywhile promoting confidence andattracting competition. A board thatmakes proactive changes to a SEF’s self-regulatory programs based on the CCO’scompliance report will build confidence

in the market and increase competition.(iii) Price Discovery

The Commission has not identifiedany effects that this rule will have onprice discovery.

(iv) Sound Risk Management Policies

The CCO rules and the requiredannual compliance report will enhancea SEF’s risk management policies byenhancing the standards for a SEF’scompliance program. This in turn willemphasize risk management compliance


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1120The Commission received no commentsdiscussing the specific costs or benefits of §37.406,which requires SEFs to make audit trail dataavailable to the Commission and is an explicitrequirement of the statute.

1121The Commission notes, as described in thepreamble, that a SEF that elects to use the servicesof a regulatory service provider must retain certaindecision-making authority and cannot outsourcethis authority to the regulatory service provider.See, e.g., § 37.204(c)—Regulatory DecisionsRequired from the Swap Execution Facility in thepreamble.

1122

For example, SEFs are required to complywith a unified set of audit trail requirements for allmethods of execution. The Commission notes thata SEF, for example, that utilizes the telephone asa means of interstate commerce in providing theexecution methods in § 37.9(a)(2)(i)(A) or (B) maycomply with certain of the audit trail requirements by recording all such communications that relate toor result in swap transactions. Such recordingsmust allow for reconstruction of all relevantcommunications between the SEF and its customersor involving SEF employees. While it is commonindustry practice to make and retain electronictime-stamped recordings of conversations, SEFsmay incur costs to upgrade their recording systemsto ensure that they comply with all of the audit trailrequirements.

1123CME Comment Letter at 20 (Feb. 22, 2011).1124 Id. at 19–20.1125Tradeweb Comment Letter at 6 (Jun. 3, 2011);

MarketAxess Comment Letter at 22 (Mar. 8, 2011).

because of its significance to the overallpurpose and functioning of the SEF.Compliance with the SEF coreprinciples and related regulationsencompasses, among other things,procedures for ensuring the financialintegrity of swaps entered on or throughthe facilities of the SEF, including theclearance and settlement of swaps,

determination of resource adequacy,and system safeguards to establish andmaintain a program of risk analysis andoversight. It is the responsibility of theCCO to ensure that the SEF is compliantwith the core principles and theregulations thereunder, and is otherwiseengaged in appropriate risk managementactivities in accordance with the SEF’sown rules, policies, and procedures.



6. Monitoring and Surveillance

Core Principle 2 requires, amongother things, that each SEF establish andenforce trading, trade processing, andparticipation rules that will deterabuses, and have the capacity to detect,investigate, and enforce those rules,including means to provide marketparticipants with impartial access to themarket and to capture information thatmay be used in establishing whetherrule violations have occurred.Additionally, Core Principle 4, in part,requires each SEF to monitor trading in

swaps to prevent manipulation andprice distortion through surveillance,including methods of conducting real-time monitoring of trading andcomprehensive and accurate tradereconstructions.

(a) Monitoring of Trading

The rules that implement CorePrinciples 2 and 4 will require a SEF to,among other things: (1) Maintain anautomated trade surveillance system(§ 37.203(d)); (2) conduct real-timemarket monitoring of all trading activityon its platform and have the authorityto cancel trades and adjust trade priceswhen necessary (§ 37.203(e)); (3)maintain an acceptable audit trailprogram that enables the SEF to identifyentities that are routinely non-compliantand to levy meaningful sanctions(§ 37.205); 1120 (4) monitor trading inreal-time and accurately reconstructtrading activity in order to detect

manipulation, price distortions, andother disruptions (§37.401); (5) andestablish risk control mechanisms(including pauses and halts) to preventand reduce the potential risk of marketdisruptions (§ 37.405).

(1) Costs

As discussed above, potential SEFs

are likely to outsource these obligationsto a regulatory service provider atsignificantly less cost than performingthem in-house.1121 Accordingly, theongoing costs associated with theserules would already be included in thetotal annual cost of contracting with aregulatory service provider (plus thecost of overseeing the service provider’scompliance).

Should a potential SEF that is a newentity choose to develop its ownautomated trade surveillance, real-timemarket monitoring, and audit trailsystems, it is likely to incur the costs of

developing and maintaining thesesystems, as well as the cost of hiring andmaintaining adequate staff to administerthem. The staff necessary to carry out aSEF’s obligations under these ruleswould likely include analysts,investigators, and systems and/or ITspecialists. However, existing entitiesmay already receive the requisite data,and may also have some infrastructurein place to perform automated tradesurveillance and real-time marketmonitoring. Accordingly, theincremental cost for existing entitieswould be limited to investing inenhancements to existing electronicsystems to ensure that data is capturedin compliance with the rules and thatthe systems themselves comply with therules.1122 The Commission notes that aSEF may use a unified monitoringsystem to jointly satisfy therequirements of §37.401 (monitoring of

trading and trade processing) and§ 37.205 (audit trail).

Additionally, in response tocomments that the standards set forth inthe proposed requirements for real-timemarket monitoring are unreasonablyhigh,1123 the Commission is modifyingthe final rule to require a SEF toconduct real-time market monitoring

designed to ‘‘identify’’ disorderlytrading, instead of to ‘‘ensure’’ orderlytrading. The Commission believes thatrequiring SEFs to identify disorderlytrading when it occurs, rather than toensure orderly trading at all times, willlikely mitigate the overall burden of therule. Furthermore, in response to CME’scomment,1124 the Commission isdeleting the word ‘‘investigating’’ fromproposed §37.203(d), thus clarifyingthat a SEF’s automated tradesurveillance system will not be expectedto conduct the actual investigation of potential trade practice violations. This

deletion should further reduce costs forSEFs.Tradeweb and MarketAxess

commented that annual audits formember and market participantcompliance with the audit trailrequirements pursuant to §37.205(c)(1)are burdensome and unwarranted.1125 In the Commission staff’s follow-upconversation regarding costs, onecommenter asserted that thisrequirement will cost SEFs at least$300,000 annually.

To mitigate the costs associated withthis provision, the Commission ismodifying the language in final§ 37.205(c) so that it applies only tomembers and persons and firms subjectto the SEF’s recordkeeping rules, ratherthan to members and ‘‘marketparticipants.’’ With this change, theCommission limits the number of entities that a SEF must audit, whichshould reduce the cost noted abovewithout any meaningful reduction in

benefits because auditing those marketparticipants subject to recordkeepingrules will ensure complete coverage of all activity pertinent to transactions onany given SEF.

Finally, SEFs may also incur the one-

time cost of programming risk controlssuch as pauses and halts, as well as on-going costs to maintain and adjust suchcontrols. For some SEFs, the costs of adding pause and halt functionality toswap contracts should be reduced sincemuch of that technology is alreadycommercially available and would notnecessarily have to be developed in-


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1126 In a separate Dodd-Frank rulemaking, DCMsare now required to have the same types of riskcontrols. See Core Principles and OtherRequirements for Designated Contract Markets, 77FR 36612 (Jun. 19, 2012).

1127See ‘‘Recommendations on Pre-TradePractices for Trading Firms, Clearing Firms andExchanges involved in Direct Market Access,’’ Pre-Trade Functionality Subcommittee of the CFTCTechnology Advisory Committee (‘‘TACSubcommittee Recommendations’’), at 4 (Mar. 1,2011), available at http://www.cftc.gov/ucm/ groups/public/@swaps/documents/dfsubmission/ tacpresentation030111 _ ptfs2.pdf . The Commissionnotes that the subcommittee report was submittedto the Technology Advisory Committee and madeavailable for public comment, but no final actionhas been taken by the full committee.

1128See TAC Subcommittee Recommendations at4 (Mar. 1, 2011).

1129See, e.g., ICE Comment Letter at 5 (Mar. 8,2011); Tradeweb Comment Letter at 11 (Mar. 8,2011); CME Comment Letter at 27 (Feb. 22, 2011).

1130CME Comment Letter at 26 (Feb. 22, 2011).1131The guidance provides that a SEF with a

swap that is linked to, or a substitute for, otherproducts, either on its market or on other tradingvenues, must, to the extent practicable, coordinateits risk controls with any similar controls placed onthose other products. If a SEF’s swap is based onthe level of an equity index, such risk controlsmust, to the extent practicable, be coordinated withany similar controls placed on national securityexchanges. See guidance to Core Principle 4 inappendix B to part 37.

house.1126 As noted in the Pre-TradeFunctionality Subcommittee of theCFTC Technology Advisory Committeereport, the costs would largely be borne

by the exchanges and would centeraround intellectual property, as manyexchanges develop, own, and managetheir own technology.1127 However, thecosts associated with implementing risk

controls were not described in detail inthe Pre-Trade FunctionalitySubcommittee report and will likelyvary greatly from one SEF to anotherdepending on the type of risk controlsthat will be implemented and the natureof the SEF’s trading platform. TheCommission received no commentsstating that risk controls cannot beimplemented in a cost-effective mannerusing commercially availabletechnology. As further noted in the Pre-Trade Functionality Subcommitteereport, ‘‘[s]ome measure of standardization of pre-trade risk

controls at the exchange level is thecheapest, most effective and most robustpath to addressing the Commission’sconcern [for preserving marketintegrity].’’ 1128

The Commission notes that while it isrequiring pauses and halts in the rule,it is also enumerating in guidance othertypes of automated risk controls thatmay be implemented by SEFs in orderto give SEFs greater discretion to selectamong the enumerated risk controls orto create new risk controls. TheCommission believes that thiscombination of rules and guidance will

facilitate orderly markets whilemaintaining a flexible environment thatfacilitates cost-effective innovation anddevelopment.

(2) Benefits

The automated trade surveillancesystem, real-time monitoring, audit-trail,and trade reconstruction requirementswill promote orderly trading and willensure that SEFs have the capability topromptly identify and correct market or

system anomalies that could harmmarket participants and the public.These tools will improve SEFcompliance staff’s ability to record,recover, sort, and query voluminousamounts of data in order to better detectpotential rule violations and abusivetrading practices that harm marketparticipants and market integrity. By

having the tools and data to identifythese potential rule violations, a SEFcan quickly respond, mitigating theireffects and helping to prevent themfrom generating systemic risk or othersevere problems. SEFs will also have thetools and information needed toprosecute rule violations supported byevidence from audit trail data and orderand trade information. These tools willnot only allow SEFs to more effectivelyrespond to rule violations and tradingabuses, but will also deter marketparticipants from engaging in suchconduct in the first place since market

participants will be aware that ruleviolations are likely to be detected.While the provisions described above

will increase the likelihood that SEFswill promptly identify market or systemanomalies, SEFs must also have systemsin place to respond to such anomaliesafter they occur. Risk controls such asautomated trading pauses and halts can,among other things, allow time formarket participants to analyze themarket impact of new information thatmay have caused a sudden marketmove, allow new orders to come into amarket that has moved dramatically,and allow traders to assess and securetheir capital needs in the face of potential margin calls. Pauses and haltsare intended to apply in the event of extraordinary price movements that maytrigger or propagate systemicdisruptions. Accordingly, a SEF’s abilityto pause or halt trading in certaincircumstances and, importantly, to re-start trading through the appropriate re-opening procedures, will allow SEFs tomitigate the propagation of shocks thatare of a systemic nature.


While commenters requested

additional flexibility to determine therisk controls that should beimplemented within their market,1129 the Commission views pauses and haltsas effective risk management tools thatmust be implemented to facilitateorderly markets. Moreover, inrecognition that such risk controlsshould be adapted to the uniquecharacteristics of the markets to which

they apply, and that any controls shouldconsider the balance between avoidinga market disruption while facilitating amarket’s price discovery function, theCommission enumerated the other typesof risk controls in guidance.Accordingly, a SEF will have discretionto select and create risk controls to meetthe unique characteristics of its market

and cost structure.Finally, in response to concerns about

a lack of flexibility in the proposedrequirement to coordinate risk controlsamong other markets or exchanges,1130 the Commission is moving the languagein proposed §37.405 to guidance.1131 The combination of rules and guidancepertaining to risk controls will ensurethat, at a minimum, SEFs implementpauses and halts, while also grantingSEFs the discretion to coordinate andadopt additional risk controls in amanner they find most cost effectiveand appropriate for their markets.

(4) Section 15(a) Factors (Monitoring of Trading)


These rules will help ensure fair andequitable markets that are protectedfrom abusive trading practices ormanipulative conditions, and willensure that rule violations and marketdisruptions that could harm marketparticipants and the public may beprevented or detected, reconstructed,investigated, and prosecuted. The

absence of these regulations wouldresult in an increased potential forviolations to go undetected and formarket disruptions to create distortedprices or systemic risks that could harmthe economy and the public. Theserequirements will strengthen SEFs’oversight of their trading platforms,increase the likelihood of earlydetection and prompt responses to ruleviolations and market disruptions, andresult in stronger protection of marketparticipants and the general public fromrule violations, trading abuses, andother market disruptions that could

harm market participants and, directlyor indirectly, the public and theeconomy as a whole.











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1132SEFs must make this demonstration byproviding the information set forth in appendix Cto part 38. See Core Principles and OtherRequirements for Designated Contract Markets, 77FR at 36722.

1133Core Principle 6 requires that SEFs, for eachcontract and as necessary and appropriate, adoptposition limitation or position accountability, andthat, for any contract that is subject to a positionlimitation established by the Commission pursuantto CEA section 4a(a), SEFs must set the positionlimit at a level not higher than the positionlimitation established by the Commission. SeePosition Limits for Derivatives, 76 FR 4752(proposed Jan. 26, 2011).

1134Proposed §37.402(a)(2) is now final§ 37.402(b).


These rules ensure that violations andmarket anomalies are detected andpromptly addressed and do not generatesystemic risk or other problems thatcould interfere with efficient andcompetitive markets. The requirementsalso help ensure that market prices arenot distorted by prohibited activities.The rules strengthen market confidenceand enable the market to operate moreefficiently by deterring rule violationsand by establishing conditions underwhich trading will be paused or halted,thereby promoting efficient pricing andcompetitive trading.


Requiring SEFs to conduct effectivemonitoring and surveillance of theirmarkets and to have the capacity todetect rule violations will help ensurethat legitimate trades and fundamental

supply and demand information areaccurately reflected in market prices.The mitigation of rule violations, whichdetract from the price discovery processin SEF markets, will promoteconfidence in the prices marketparticipants use to hedge risk andprovide confidence in the pricediscovery process.


The rules are designed to allow SEFsto better deter, detect, and addressoperational risks posed by tradingpractices or trading activities. To theextent they deter overly risky actions by

market participants, the rules will lowerpotential losses and costs to SEFs andmarket participants and promote soundrisk management practices.



(b) Monitoring of Contracts

The Commission is adopting rulesthat will require a SEF to: (1) Submitnew swap contracts to the Commissionin advance of listing and trading anddemonstrate that the contracts are notreadily susceptible to manipulation(§ 37.301); 1132 (2) monitor physicaldelivery swaps’ terms and conditionsand availability of the deliverablecommodity (§37.402); (3) monitor thereference price of cash-settled swapsused to determine cash flow or

settlement, the continuedappropriateness of the methodology forthe reference price for SEFs that derivethat price, and the continuedappropriateness of the third-party indexor instrument for reference prices thatrely on such index or instrument(§ 37.403); and (4) adopt positionlimitation or position accountability in

accordance with Commissionregulations (§ 37.601).1133

(1) Swaps Not Readily Susceptible toManipulation

(i) Costs

Compliance with these regulationswill impose costs equally on startupsand entities with existing tradingplatforms seeking SEF registration

because all SEFs must monitor theircontracts in accordance with the ruleson an ongoing basis. However, SEFshave incentives to review their contractsto ensure they are not susceptible tomanipulation even in the absence of thecore principle or these rules. Forexample, SEFs have a business need todevelop products that provide marketparticipants with reliable instrumentsthat can be used for hedging and riskmanagement. In order to do so, new andexisting entities will need staff toresearch the underlying markets (attimes using data from private sources)and to certify that the contract rulescomply with Core Principle 3. SEFslikely will already have staff to ensurecompliance with the applicable coreprinciples and should plan on legal staff

devoting approximately four hours percontract at a cost of approximately $400to review a swap’s compliance withCore Principle 3 as part of a sound

business practice. The scale of thesecosts largely depends on how novel orcomplex a contract is, how manycontracts the SEF plans to list at anygiven time, and whether listed swapsare similar to each other.

The Commission notes that thisguidance will likely reduce the time andcosts that regulated markets will incurin providing the appropriateinformation and will likely reduce the

amount of time it takes the Commissionstaff to analyze whether a new productor rule amendment is in compliancewith the CEA.

(ii) Benefits

When SEFs list contracts that are notreadily susceptible to manipulation,they contribute to the integrity andstability of the marketplace by givingtraders confidence that the pricesassociated with swaps reflect the truesupply of and demand for theunderlying commodities or financialinstruments. Section 37.301, whichimplements the Core Principle 3requirement that SEFs permit tradingonly in swaps that are not readilysusceptible to manipulation, willpromote an environment where swapprices are less likely to be subject todistortion and extreme volatility,allowing market participants to buy andsell physical and financial products atfair prices and to hedge price riskappropriately.

The guidance outlined in appendix Cto part 38 provides a reference forexisting and new regulated markets for

information that should be provided tothe Commission for new products andrule amendments based on bestpractices developed over the past threedecades by the Commission and otherregulators. This guidance will likelyreduce the time and costs that regulatedmarkets will incur in providing theappropriate information and shouldmitigate the need for extensive follow-up discussions with the Commission.The guidance also reduces the amountof time it takes the Commission staff toanalyze whether a new product or ruleamendment is in compliance with the

CEA.(2) Monitoring of Physical-DeliverySwaps

(i) Costs

While the Commission did not receivecomments discussing the costs of thisprovision, the Commission is revisingthe requirement in proposed§ 37.402(a)(2) 1134 so that SEFs onlyhave to monitor the availability of thecommodity supply, instead of monitoring whether the supply isadequate. This reduced monitoringobligation should lower ongoing costs

for SEFs since they will not have tomake determinations regardingadequacy of deliverable supply asfrequently as under the proposed rule,while achieving comparable benefit formarket participants and the public.Costs will be further reduced by theCommission’s decision to remove fromproposed §37.402 the requirements thatSEFs monitor specific details of thesupply, marketing, and ownership of the


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1135Argus Comment Letter at 6–7 (Feb. 22, 2011).

commodity to be physically delivered.Instead, final appendix B to part 37 listsguidance for monitoring conditions thatmay cause a physical-delivery swap to

become susceptible to pricemanipulation or distortion. Listing thesedetails in guidance will provide SEFswith flexibility in meeting theirmonitoring obligations associated with

physical-delivery swaps, which willlikely further mitigate any burdenassociated with compliance. TheCommission notes that a SEF maycontract with a regulatory serviceprovider to perform these duties atpotentially a lower cost.

(ii) Benefits

Section 37.402 requires that SEFsmonitor physical-delivery swaps’ termsand conditions as they relate to theunderlying commodity market andmonitor the availability of the supply of the commodity specified by the deliveryrequirements of the swap. Suchmonitoring will allow SEFs to takeappropriate steps to relieve the potentialfor market congestion or manipulationin situations where participants’ abilityto make good on their deliveryobligations is threatened due to supplyshortages, disruptions or shortages of transportation, or disruptions due toweather or labor strikes. Anyinterference with the physical-deliveryprocess will likely lead to disruptions infair and orderly trading andparticipants’ ability to properly managecommercial risk. Moreover, closemonitoring of physical-delivery

contracts helps prevent themanipulation of prices, and the public

benefits from prices that reflect actualmarket conditions.

(3) Monitoring of Cash-Settled Swaps

(i) Costs

Argus commented that monitoring of trading in underlying price indexes will

be costly, and that if SEFs are requiredto monitor the availability and pricingof the commodity that forms the basis of a price index (particularly where anindex price is published based upontransactions that are executed off the

DCM or SEF), the SEF may choose notto list the contract and thus traders willlose a hedging instrument.1135

In response to this comment, theCommission is amending therequirement in proposed §37.403(a)(1)that a SEF monitor the availability andpricing of the commodity making up theindex to which the swap will be settled,to only require the SEF to monitor thepricing. The Commission is also movingthe other requirements for monitoring

and obtaining information on traders’activities in proposed §37.403(a) and (b)to guidance. The combination of rulesand guidance implementing CorePrinciple 4 will help ensure that thecash settlement process is notsusceptible to manipulation byproviding rules and guidance on how tomeet the requirements of the core

principle, while providing SEFs withthe flexibility to adopt the mostappropriate method of compliance inlight of the nature of their contracts andmarket structure.

As discussed above, the Commissionnotes that compliance with theseprovisions can likely be outsourced to aregulatory service provider at lowercost, and that on-going monitoring of pricing could be handled by theregulatory service provider.

(ii) Benefits

The § 37.403 requirement that a SEF

monitor cash-settled swaps as theyrelate to the reference price, instrument,or index to which the swap is settledwill reduce the potential for marketdisruptions or manipulations andensure that they are discovered andpromptly addressed. The interconnectednature of swap and underlying cashmarkets may create incentives fortraders to disrupt or manipulate pricesin the cash market in order to influencethe prices in the swap market(potentially to benefit the trader’sposition in the swap). Detecting andpreventing this sort of manipulationrequires information on traders’activities in the cash-settled contractand in, or related to, the underlyinginstrument or index to which it issettled. This rule ensures that SEFs havethe information and tools they need toaccomplish their statutory duty toprevent manipulation and disruptionsto the cash-settlement process.

(4) Section 15(a) Factors (Monitoring of Contracts)


The demonstration required by

§ 37.301 and the monitoringrequirements in §§37.402 and 37.403allow for a timely review by theCommission staff of the SEF’ssupporting analysis and data todetermine whether a contract is notreadily susceptible to manipulation, andto ensure that SEFs are able toadequately collect information onmarket activity, including specialconsiderations for physical-deliverycontracts and cash-settled contracts. Asa group, these rules protect marketparticipants by helping to prevent price

manipulation and protect the public bycreating an environment that fostersprices that reflect actual marketconditions.


By providing guidance based on bestpractices regarding what a SEF shouldconsider when developing a swap oramending the terms and conditions of an existing swap, the contracts listed bySEFs, as a whole, should be morereflective of the underlying cash market,thus providing for efficient hedging of commercial risk. Sections 37.402 and37.403 protect against disruptions andmarket manipulation, promotecompetition, and promote the efficiencyand financial integrity of transactions inSEF markets because market mispricingthat is due to disruptions ormanipulation interferes with a market’sefficiency by limiting its ability toreflect the value of the underlyingproduct. Markets that are prone todisruption or manipulation have asevere competitive disadvantage tothose without such problems. Theserules are designed to address andmitigate such problems for swaptransactions.


Manipulation or other marketdisruptions interfere with the pricediscovery process by artificiallydistorting prices and preventing thoseprices from properly reflecting thefundamental forces of supply anddemand. These rules are designed todetect and, where possible, preventsuch market mispricing, and to detectdisconnects between swaps and theirrelated market prices (e.g., between cashmarket prices and the prices of relatedfutures and swaps).


By following the best practicesoutlined in the guidance in appendix Cto part 38 and the requirements of §§ 37.402 and 37.403, a SEF should

minimize the susceptibility of a swap tomanipulation or price distortion at thetime it is developing the contract’sterms and conditions. By performingthis work early-on, a SEF shouldminimize risks to its clearing house andto market participants. Sound riskmanagement practices rely uponexecution of hedge strategies at marketprices that are free of manipulation orother disruptions. These rules aredesigned to facilitate hedging at pricesfree of distortions that may bepreventable by adequate controls.


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1136 ISDA Discussion Paper at 32 (Nov. 2011). TheCommission notes that the components of this costestimate are unclear.


1138Phoenix Comment Letter at 4–5 (Mar. 7,2011).

1139CME Comment Letter at 37 (Feb. 22, 2011);Phoenix Comment Letter at 4–5 (Mar. 7, 2011).SDMA, however, recommended that theCommission require that SEFs have at least 12months of unencumbered capital. SDMA CommentLetter at 12 (Mar. 8, 2011).

1140CME Comment Letter at 38 (Feb. 22, 2011).1141FXall Comment Letter at 13 (Mar. 8, 2011).1142ABC/CIEBA Comment Letter at 11 (Mar. 8,

2011).



7. Financial Resources and Integrity

(a) Background

Section 37.1301 codifies the CorePrinciple 13 requirement that a SEFmust maintain sufficient financialresources to cover operating costs for atleast one year, calculated on a rolling

basis. The rules implementing CorePrinciple 13 also clarify the types of financial resources available to SEFs tosatisfy the financial resourcesrequirements (§37.1302) and requirethat each SEF, no less frequently thaneach fiscal quarter, calculate thefinancial resources it needs to meet thefinancial resource requirements, as wellas the current market value of each

financial resource (§§37.1303, 37.1304).The rules also require SEFs to maintainunencumbered liquid financial assets,such as cash or highly liquid securities,equal to at least six months’ operatingcosts, or a committed line of credit orsimilar facility (§ 37.1305), and to reportcertain information regarding theirfinancial resources to the Commissionquarterly or upon request (§ 37.1306).

Sections 37.701, 37.702, and 37.703implement Core Principle 7 regardingthe financial integrity of transactions.Section 37.701 requires transactionsexecuted on or through a SEF that aremandatorily or voluntarily cleared to becleared through a Commission-registered DCO, or a DCO that theCommission has determined is exemptfrom registration. Section 37.702requires a SEF to establish minimumfinancial standards for its members,which at a minimum, requires thatmembers qualify as ECPs. Section37.703 requires a SEF to monitor itsmembers to ensure that they continue toqualify as ECPs.

(b) Costs

ISDA estimated that it would costeach SEF $1.4 million per year to

comply with the financial resourcerequirement.1136 The Commission notesthat the requirement that a SEFmaintain sufficient financial resourcesto cover its operating expenses for oneyear appears in the statute itself, andthat the Commission does not have thediscretion to lower the financialresource requirement. Accordingly,§ 37.1301 imposes no additional costs

on SEFs or market participants beyondthose imposed by statute.

With respect to the reportingrequirements in §37.1306, MarketAxessstated that the proposed requirementsare unnecessary and burdensome.1137 The Commission expects that most, if not all, SEFs would calculate andprepare financial statements regularly.

Accordingly, the Commission does not believe that requiring SEFs to meet thequarterly reporting requirementsimposes a significant burden on SEFs.Extrapolation from the preparedfinancial statements should be relativelystraightforward, but will require staff and technology resources to calculate,monitor, and report financial resources.In follow-up conversations with theCommission staff, one commenterindicated that the reportingrequirements would costs SEFs about$100,000 per year. Given the staffingand operational differences among

SEFs, this cost will vary, perhapssignificantly.

(c) Benefits

The financial resources provisionsensure the financial stability of SEFs,which promotes the integrity of themarkets and confidence of marketparticipants trading on SEFs. Therequirement that SEFs maintain sixmonths’ worth of unencumbered liquidfinancial assets (i.e., cash and/or highlyliquid securities) will also promotemarket integrity by ensuring that SEFswill have sufficient financial resourcesto continue to operate and wind-downin an orderly fashion, if necessary. Inaddition, the reporting requirementswill ensure that the Commission canmonitor the SEF’s compliance with CorePrinciple 13.

Sections 37.702 and 37.703 promotefinancial integrity by requiring SEFs toestablish minimum financial standardsfor its members and to ensure that theycontinue to qualify as ECPs.


Phoenix recommended only requiringSEFs to maintain financial resourcesnecessary to operate for six months.1138

As described above, the statutemandates that a SEF maintain sufficientfinancial resources to cover its operatingexpenses for one year. Accordingly, theCommission does not have thediscretion to consider alternativefinancial resource requirements.

CME and Phoenix proposed analternative liquidity requirement,

arguing that a wind-down typicallytakes three months and that theproposed requirement of six months of liquid assets should be reducedaccordingly.1139 The Commission

believes that three months’ worth of liquid financial assets is an insufficient

buffer to protect against events whichmay threaten a SEF’s viability, and

believes that six months of liquid assetswill provide enough time for a SEF toliquidate its other assets so that it mayhave adequate resources to operate forup to one year, as required by thestatute.

CME stated that it would not befeasible for SEFs to comply with theproposed 17-business-day filingdeadline for submission of the financialresources report and recommended analternative reporting deadline of 40calendar days after the end of each fiscalquarter and 60 calendar days after theend of each fiscal year.1140

The Commission is adopting thealternative recommended by CME and isextending the proposed 17-business-dayfiling deadline to 40 calendar days forthe first three quarters. TheCommission’s adoption of thisalternative will mitigate the costs of preparing and submitting these reportsas the new extended timeline willharmonize the Commission’sregulations with the SEC’s timelines forsubmission of Form 10–Q. Similarly, theCommission has extended the filingdeadline to 60 days for the fourthquarter report to harmonize theCommission’s deadline with the SEC’sdeadline for Form 10–K.

With respect to proposed § 37.703,FXall stated that SEFs would be

burdened by the ‘‘onerous financialsurveillance obligations’’ andrecommended that a SEF, like a DCM,

be able to delegate its financialsurveillance functions to the NFA JointAudit Committee.1141 ABC/CIEBAstated that the rule would createsignificant barriers to entry, stiflecompetition, and lead to higherprices.1142 In response to thesecomments, the Commission has revised§ 37.703 to remove a SEF’s financial

surveillance obligations and to onlyrequire that a SEF monitor its membersto ensure that they continue to qualifyas ECPs. This amendment obviates the


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1143 ISDA Discussion Paper at 32 (Nov. 2011).1144CME Comment Letter at 36–37 (Feb. 22,

2011).1145The Commission is moving the followingprovisions to guidance: (1) Proposed §37.1401(c)suggesting that a SEF follow generally acceptedstandards and best practices in addressing thecategories of its risk analysis and oversight program;(2) the portion of proposed §37.1401(d) discussingthe SEFs obligation to resume the trading andclearing of swaps on the next business dayfollowing a disruption; (3) the portion of proposed§ 37.1401(i) suggesting that a SEF’s testing of itsautomated systems and business continuity-disasterrecovery capabilities be conducted by qualified,independent professionals; (4) proposed§ 37.1401(j) discussing a SEF’s coordination of its business continuity-disaster recovery plan withthose of others.

need to delegate any financialsurveillance functions and minimizesthe costs imposed by the rule. As a SEFmay rely on representations from itsmembers that they continue to qualifyas ECPs, the costs of the rule should bede minimis and administrative innature.

(e) Section 15(a) Factors(1) Protection of Market Participants andthe Public

The financial resources rules willprotect market participants and thepublic by establishing uniformstandards and a system of Commissionoversight that ensures that tradingoccurs on a financially stable facility,which in turn, will mitigate the risk of market disruptions, financial losses, andsystemic problems that could arise froma SEF’s failure to maintain adequatefinancial resources. These requirementswill enable a SEF to fulfill its

responsibilities of ensuring that tradingoccurs on a liquid, fair, and financiallysecure platform by maintainingappropriate minimum financialresources on hand and on an ongoing

basis to sustain operations for areasonable period of time. Additionally,in the event that a SEF does have towind down its operations, SEFs thathave sufficient amounts of liquidfinancial resources will be betterpositioned to close out trading in amanner not disruptive to marketparticipants or to members of the publicwho rely on SEF prices or who are

customers or shareholders of marketparticipants.


The financial resources rules promotethe financial integrity of the markets byrequiring SEFs to have adequateoperating resources (i.e., operatingresources sufficient to fund both currentoperations and ensure operations for asufficient length of time in the future),and preventing those SEFs that lackthese resources from expanding in waysthat may ultimately harm the broader

financial market (i.e., confining theoperations of SEFs to levels theirfinancial resources can support).

Sections 37.702 and 37.703 willpromote financial integrity by ensuringthat SEFs establish minimum financialstandards for their members andmonitor those members to ensure thatthey continue to qualify as ECPs.

(3) Price Discovery

The Commission has not identifiedany effects that these rules will have onprice discovery.


By setting specific standards withrespect to how SEFs should assess andmonitor the adequacy of their financialresources, the financial resources rulespromote sound risk managementpractices by SEFs and further the goalof minimizing systemic risk.

Sections 37.702 and 37.703 willpromote sound risk managementpractices by ensuring that SEF membershave the financial resources necessaryfor proper management of the riskassociated with their swap positions.These rules will also further the goal of minimizing systemic risk.



8. Emergency Operations and SystemSafeguards

(a) Background

The Commission’s guidance for CorePrinciple 8 addresses procedures forhandling emergency situations.Specifically, the guidance referenced in§ 37.801 provides that a SEF can complywith Core Principle 8 by having rulesthat allow it to intervene as necessary tomaintain markets with fair and orderlytrading and to prevent or addressmanipulation or disruptive tradingpractices by, among other things,imposing or modifying position limits,

intraday market restrictions, or specialmargin requirements.

Section 37.1401 codifies CorePrinciple 14 by requiring a SEF toestablish and maintain a program of riskanalysis and oversight to identify andminimize sources of operational risk(§ 37.1401(a)) and to maintain a

business continuity-disaster recovery(‘‘BC DR’’) plan and resources,emergency procedures, and backupfacilities sufficient to enable timelyrecovery and resumption of itsoperations (§37.1401(b)). Under§§ 37.1401(d)–(e), a SEF must notify the

Commission promptly of certainsignificant systems malfunctions,including the activation of the SEF’sBC–DR plan, and must provide advancenotice of any material planned changesto automated systems or risk analysisand oversight programs.

(b) Costs

ISDA estimated that SEFs will spendan average of $1,116,000 initially and$866,000 annually on disaster recoveryprocedures covered by the regulations

implementing Core Principle 14.1143 The Commission recognizes that thecosts of establishing and maintaining

backup facilities could be substantial if the applicant does not already havethese facilities in place to supportanother business area. The Commissionalso notes that the requirement that aSEF establish and maintain emergency

procedures, backup facilities, and a planfor disaster recovery appears in thestatute and is not the product of Commission discretion.

CME commented that the requirementunder proposed § 37.1401(g) that SEFsprovide the Commission with timelyadvance notice of all planned changes toautomated systems that may impact thereliability of such systems is

burdensome and not cost-effective.1144 In response to this comment, theCommission is reducing the burden andcost associated with the proposed rule

by requiring a SEF to promptly advise

the Commission only of all ‘‘significant’’system malfunctions, and to providetimely advance notification of only‘‘material’’ changes to automatedsystems or risk analysis and oversightprograms (the proposed rule requirednotice of all system malfunctions and allchanges to programs of risk analysis andoversight).

While no comments addressed thesubject directly, the Commission is alsomoving several proposed provisions toguidance.1145 The Commission believesthat the combination of rules andguidance governing a SEF’s emergencyoperations will provide SEFs withsufficient flexibility to develop optimalemergency systems and procedures,while ensuring that SEFs will also takespecific measures to maintain marketswith fair and orderly trading.

(c) Benefits

The guidance in appendix B to CorePrinciple 8 governing emergencyoperations ensures that SEFs haveflexible authority to take prompt,decisive action to restore orderly trading


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1147See Statistical release: OTC derivativesstatistics at end–December 2011, The Bank forInternational Settlements (May 2012), available at http://www.bis.org/publ/otc _hy1205.htm.

1148For example, one swap may base its prices onthe prices of one or more other swaps traded onother SEFs.

and respond to market behavior thatcould cause significant financial lossesand widespread systemic failures thatcould harm market participants and thepublic.

In addition, the rules implementingCore Principle 14 reflect generallyaccepted standards and best practiceswith respect to the development,

operation, reliability, security, andcapacity of automated systems, whichwill reduce the frequency and severityof automated system security breachesor functional failures, therebyaugmenting efforts to mitigate systemicrisk and ensure market continuity in theevent of system failures. Ensuring theresilience of the automated systems of aSEF and the ability of a SEF to recoverand resume trading promptly in theevent of a disruption of its operationswill be crucial to the robust andtransparent systemic risk managementframework established by the Dodd-

Frank Act.Based on the Commission’sexperience, these requirements reflect

best practices in the futures markets,where DCM compliance with generallyaccepted standards and best practiceswith respect to the development,operation, reliability, security, andcapacity of automated systems canreduce the frequency and severity of automated system security breaches orfunctional failures, thereby augmentingefforts to mitigate systemic risk. Thesepractices will be well-served in theswaps markets as well.

Finally, notice to the Commission

concerning systems malfunctions,security incidents, or any events leadingto the activation of a SEF’s BC–DR planwill assist the Commission’s oversightand its ability to assess systemic risklevels and intervene when needed toprotect market participants and thepublic.


CME stated that the regulationspursuant to Core Principle 8 shouldclarify that a SEF has flexibility andindependence to address marketemergencies.1146 As discussed in further

detail in the preamble, the Commissiondid not issue rules for compliance withCore Principle 8. However, theCommission clarified its guidance to thecore principle and is adopting this cost-mitigating alternative by revising theguidance to make clear that SEFs retainthe authority to respond independentlyto emergencies in an effective andtimely manner consistent with thenature of the emergency. Accordingly, aSEF will have flexibility to address

market emergencies using the methodsthat it deems to be most appropriate,provided that its actions are taken ingood faith and the Commission isnotified of such actions in a certifiedrule submission.

(e) Section 15(a) Factors

(1) Protection of Market Participants and

the PublicThe rules and guidance outlining

emergency procedures pursuant to CorePrinciples 8 and 14 protect marketparticipants and the public through bothdiscretionary actions taken by a SEF’smanagement as well as throughautomated risk analysis systems thattrigger specific responses. Becauseautomated systems play a central andcritical role in today’s electronicfinancial market environment, oversightof core principle compliance by SEFswith respect to automated systems is anessential part of effective oversight of

both futures and swaps markets.Emergency rules and procedures

provide SEFs with the authority and anestablished process by which tointervene in markets during times of crisis so that trading can continue in anorderly manner to the extent possibleand so that potential harm to marketparticipants and the public can beavoided.

Timely reporting to the Commissionof significant system malfunctions,material planned changes to automatedsystems, and material planned changesto programs of risk analysis and

oversight is necessary for theCommission to fulfill its responsibilityto oversee the swaps markets. Timelyreporting will also augment theCommission’s efforts to monitorsystemic risk (which protects thepublic), and ultimately further theprotection of market participants and,indirectly, the public by ensuring thatautomated systems are available,reliable, secure, have adequate scalablecapacity, and are effectively overseen.


A SEF that has policies andprocedures in place addressing itsemergency authority will be betterpositioned to promptly intervene inmarkets to respond to or eliminateconditions that may deter participationand detract from overall marketconfidence, which could lead todiminished market efficiency,competitiveness, and perceptions of financial integrity. Sophisticatedcomputer systems capable of automatically predicting operationalrisks will enhance the efficiency and

financial integrity of the markets byensuring that in emergency situations,trading remains uninterrupted andtransactional data and positions are notlost. Active and periodic testing of emergency systems and procedurespromotes confidence in the markets,encouraging liquidity and stability.

Safeguarding the reliability, security,

and capacity of a SEF’s computersystems is also essential to themitigation of system risk for thefinancial system as a whole. The globalOTC market is estimated to have inexcess of $600 trillion in outstandingcontracts.1147 The ability of SEFs torecover and resume trading promptly inthe event of a disruption in theiroperations is important to the U.S.economy. Notice to the Commissionconcerning systems malfunctions,systems security incidents, or eventsleading to the activation of a SEF’s BC–DR plan will assist the Commission’s

oversight and its ability to assesssystemic risk levels. It would presentunacceptable risks to the U.S. financialsystem if swaps markets that comprisecritical components of the worldfinancial system were to becomeunavailable for an extended period of time.

(3) Price Discovery

Any interruption in trading in a swapon a SEF can distort the price discoveryprocess on other related swaps.1148 TheCommission views the emergencyoperations rules adopted herein aslikely to facilitate the price discovery

process by mitigating the risk of operational market interruptions fromdisjoining the forces of supply anddemand. The presence of emergencyauthority procedures signals to themarket that a SEF is a financially soundplace to trade, thus attracting greaterliquidity which leads to more accurateprice discovery.


Participants who use SEF-tradedswaps to manage commercial price risksshould benefit from markets that behavein an orderly and controlled fashion in

the face of emergency situations. If prices move in an uncontrolled fashiondue to a market emergency, those whoare managing risk may be forced to exitthe market as a result of unwarrantedmargin calls or the deterioration of theircapital. Those who want to enter the


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market to manage risk may be able to doso only at prices that do not reflect theactual supply and demandfundamentals, but have moved due toan uncontrolled emergency situation.

Reliably functioning computersystems and networks are crucial tocomprehensive risk management, andprompt notice to the Commission

concerning systems malfunctions,systems security incidents, or anyevents leading to the activation of aSEF’s BC–DR plan will assist theCommission in its oversight role and

bolster its ability to assess systemic risklevels. Adequate system safeguards andtimely notice to the Commissionregarding the status of those safeguardsare crucial to mitigation of potentialsystemic risks. Should an emergencyrender a SEF temporarily inoperable,market participants will continue to beable to mitigate their risk through openpositions transferred from the

inoperable SEF to a functioning onewith little to no gap in exposure. In theevent of a longer period of down-time,market participants could establishfunctionally equivalent open positionsto mimic the intended result of theswap.



IV. List of Commenters

1. Alice Corporation (‘‘Alice’’)

2. Allston Holdings LLC, on behalf of certaintrading firms (‘‘Allston et al.’’)

3. Alternative Investment ManagementAssociation (‘‘AIMA’’)

4. American Benefits Council/Committee onthe Investment of Employee BenefitAssets (‘‘ABC/CIEBA’’)

5. Americans for Financial Reform (‘‘AFR’’)6. Argus Media (‘‘Argus’’)7. Asset Management Group, Securities

Industry and Financial MarketsAssociation (‘‘SIFMA AMG’’)

8. Association of Institutional Investors(‘‘AII’’)

9. Better Markets10. Barclays11. BlackRock

12. Bloomberg13. CanDeal.ca Inc. (‘‘CanDeal’’)14. CBOE Futures Exchange (‘‘CBOE’’)15. Chris Barnard16. CME Group (‘‘CME’’)17. Coalition for Derivatives End-Users

(‘‘Coalition’’)18. Commissioner Jill Sommers

(‘‘Commissioner Sommers’’)19. David Neal20. Depository Trust & Clearing Corporation

(‘‘DTCC’’)21. Deutsche Bank (‘‘Deutsche’’)22. Eaton Vance Management (‘‘Eaton

Vance’’)

23. Edward Rosen, on behalf of certaindealers (‘‘Rosen et al.’’)

24. Edward Rosen, on behalf of certain tradeassociations (‘‘Rosen et al. II’’)

25. Eris Exchange (‘‘Eris’’)26. Evolution Markets (‘‘Evolution’’)27. Farm Credit Council (‘‘FCC’’)28. Federal Home Loan Banks (‘‘FHLB’’)29. Financial Services Roundtable (‘‘FSR’’)30. Freddie Mac

31. FX Alliance (‘‘FXall’’)32. Geneva Energy Markets, LLC (‘‘Geneva’’)33. GFI Group (‘‘GFI’’)34. Global FX Division AFME, SIFMA and

ASIFMA (‘‘Global FX’’)35. Goldman, Sachs & Co. (‘‘Goldman’’)36. ICAP37. Industrial Energy Consumers of America

(‘‘IECA’’)38. Intercontinental Exchange (‘‘ICE’’)39. International Swaps and Derivatives

Association (‘‘ISDA’’)40. Joanna Mallers, on behalf of certain

trading firms (‘‘Mallers et al.’’)41. Joint CFTC–SEC Advisory Committee on

Emerging Regulatory Issues42. JP Morgan

43. LCH.Clearnet Group Limited (‘‘LCH’’)44. Managed Funds Association (‘‘MFA’’)45. MarketAxess Holdings (‘‘MarketAxess’’)46. Markit47. MarkitSERV48. MetLife49. Morgan Stanley50. National Futures Association (‘‘NFA’’)51. Natural Gas Supply Association

(‘‘NGSA’’)52. Nodal Exchange (‘‘Nodal’’)53. NYSE Liffe U.S. (‘‘NYSE Liffe’’)54. Parity Energy55. Phoenix Partners Group (‘‘Phoenix’’)56. Representative Scott Garrett57. Representatives Scott Garrett, Gregory

Meeks, Robert Hurt, and Gwen Moore

(‘‘Representative Garrett et al.’’)58. State Street Corporation (‘‘State Street’’)59. Swap Execution Facilities Hearing

Statements60. Swaps & Derivatives Market Association

(‘‘SDMA’’)61. Thomson Reuters (‘‘Reuters’’)62. Traccr Limited63. Tradeweb Markets (‘‘Tradeweb’’)64. TriOptima65. TruMarx Data Partners (‘‘TruMarx’’)66. UBS Securities LLC (‘‘UBS’’)67. Wholesale Markets Brokers’ Association,

Americas (‘‘WMBAA’’)68. Working Group of Commercial Energy

Firms (‘‘Energy Working Group’’)

List of Subjects in 17 CFR Part 37

Registered entities, Registrationapplication, Reporting andrecordkeeping requirements, Swaps,Swap execution facilities.

For the reasons discussed in thepreamble, the Commission revises 17CFR part 37 to read as follows:

PART 37—SWAP EXECUTIONFACILITIES

Subpart A—General Provisions

Sec.

37.1 Scope.37.2 Applicable provisions.37.3 Requirements and procedures for

registration.37.4 Procedures for listing products and

implementing rules.37.5 Information relating to swap execution

facility compliance.37.6 Enforceability.37.7 Prohibited use of data collected for

regulatory purposes.37.8 Boards of trade operating both a

designated contract market and a swapexecution facility.

37.9 Methods of execution for required andpermitted transactions.

37.10 [Reserved]

Subpart B—Compliance with CorePrinciples

37.100 Core Principle 1—Compliance withcore principles.

Subpart C—Compliance with Rules

37.200 Core Principle 2—Compliance withrules.

37.201 Operation of swap execution facility

and compliance with rules.37.202 Access requirements.37.203 Rule enforcement program.37.204 Regulatory services provided by a

third party.37.205 Audit trail.37.206 Disciplinary procedures and

sanctions.

Subpart D—Swaps Not Readily Susceptibleto Manipulation

37.300 Core Principle 3—Swaps not readilysusceptible to manipulation.

37.301 General requirements.

Subpart E—Monitoring of Trading andTrade Processing

37.400 Core Principle 4—Monitoring of trading and trade processing.

37.401 General requirements.37.402 Additional requirements for

physical-delivery swaps.37.403 Additional requirements for cash-

settled swaps.37.404 Ability to obtain information.37.405 Risk controls for trading.37.406 Trade reconstruction.37.407 Regulatory service provider.37.408 Additional sources for compliance.

Subpart F—Ability to Obtain Information

37.500 Core Principle 5—Ability to obtaininformation.

37.501 Establish and enforce rules.37.502 Collection of information.

37.503 Provide information to theCommission.

37.504 Information-sharing agreements.

Subpart G—Position Limits orAccountability

37.600 Core Principle 6—Position limits oraccountability.

37.601 Additional sources for compliance.

Subpart H—Financial Integrity ofTransactions

37.700 Core Principle 7—Financial integrityof transactions.

37.701 Required clearing.


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37.702 General financial integrity.37.703 Monitoring for financial soundness.

Subpart I—Emergency Authority

37.800 Core Principle 8—Emergencyauthority.


Subpart J—Timely Publication of TradingInformation

37.900 Core Principle 9—Timelypublication of trading information.

37.901 General requirements.

Subpart K—Recordkeeping and Reporting

37.1000 Core Principle 10—Recordkeepingand reporting.

37.1001 Recordkeeping.

Subpart L—Antitrust Considerations

37.1100 Core Principle 11—Antitrustconsiderations.


Subpart M—Conflicts of Interest

37.1200 Core Principle 12—Conflicts of interest.

Subpart N—Financial Resources

37.1300 Core Principle 13—Financialresources.

37.1301 General requirements.37.1302 Types of financial resources.37.1303 Computation of projected operating

costs to meet financial resourcerequirement.

37.1304 Valuation of financial resources.37.1305 Liquidity of financial resources.37.1306 Reporting to the Commission.37.1307 Delegation of authority.

Subpart O—System Safeguards

37.1400 Core Principle 14—Systemsafeguards.

37.1401 Requirements.Subpart P—Designation of ChiefCompliance Officer

37.1500 Core Principle 15—Designation of chief compliance officer.

37.1501 Chief compliance officer.Appendix A to Part 37—Form SEFAppendix B to Part 37—Guidance on, and

Acceptable Practices in, Compliancewith Core Principles

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a–2, 7b–3, and 12a, as amended by Titles VIIand VIII of the Dodd-Frank Wall StreetReform and Consumer Protection Act, Pub. L.111–203, 124 Stat. 1376.

Subpart A—General Provisions

§37.1 Scope.

The provisions of this part shall applyto every swap execution facility that isregistered or is applying to becomeregistered as a swap execution facilityunder section 5h of the CommodityExchange Act (‘‘the Act’’); provided,however, nothing in this provisionaffects the eligibility of swap executionfacilities to operate under the provisionsof parts 38 or 49 of this chapter.

§ 37.2 Applicable provisions.

A swap execution facility shallcomply with the requirements of thispart and all other applicableCommission regulations, including§ 1.60 and part 9 of this chapter, andincluding any related definitions andcross-referenced sections.

§ 37.3 Requirements and procedures forregistration.

(a) Requirements for registration. (1)Any person operating a facility thatoffers a trading system or platform inwhich more than one market participanthas the ability to execute or trade swapswith more than one other marketparticipant on the system or platformshall register the facility as a swapexecution facility under this part or asa designated contract market under part38 of this chapter.

(2) Minimum trading functionality. Aswap execution facility shall, at a

minimum, offer an Order Book asdefined in paragraph (a)(3) of thissection.

(3) Order book means:(i) An electronic trading facility, as

that term is defined in section 1a(16) of the Act;

(ii) A trading facility, as that term isdefined in section 1a(51) of the Act; or

(iii) A trading system or platform inwhich all market participants in thetrading system or platform have theability to enter multiple bids and offers,observe or receive bids and offersentered by other market participants,and transact on such bids and offers.

(b) Procedures for full registration. (1)An applicant requesting registration as aswap execution facility shall:

(i) File electronically a complete FormSEF as set forth in appendix A to thispart, or any successor forms, and allinformation and documentationdescribed in such forms with theSecretary of the Commission in the formand manner specified by theCommission;

(ii) Provide to the Commission, uponthe Commission’s request, anyadditional information anddocumentation necessary to review an

application; and(iii) Request from the Commission aunique, extensible, alphanumeric codefor the purpose of identifying the swapexecution facility pursuant to part 45 of this chapter.

(2) Request for confidential treatment.(i) An applicant requesting registrationas a swap execution facility shallidentify with particularity anyinformation in the application that will

be subject to a request for confidentialtreatment pursuant to §145.9 of thischapter.

(ii) Section 40.8 of this chapter setsforth those sections of the applicationthat will be made publicly available,notwithstanding a request forconfidential treatment pursuant to§ 145.9 of this chapter.

(3) Amendment of application prior or subsequent to full registration. Anapplicant amending a pending

application for registration as a swapexecution facility or requesting anamendment to an order of registrationshall file an amended applicationelectronically with the Secretary of theCommission in the manner specified bythe Commission. A swap executionfacility shall file any amendment to anapplication subsequent to registration asa submission under part 40 of thischapter or as specified by theCommission.

(4) Effect of incomplete application. If an application is incomplete pursuant toparagraph (b)(1) of this section, the

Commission shall notify the applicantthat its application will not be deemedto have been submitted for purposes of the Commission’s review.

(5) Commission review period. For anapplicant who submits its applicationfor registration as a swap executionfacility on or after August 5, 2015 theCommission shall review suchapplication pursuant to the 180-daytimeframe and procedures specified insection 6(a) of the Act.

(6) Commission determination. (i) TheCommission shall issue an ordergranting registration upon aCommission determination, in its own

discretion, that the applicant hasdemonstrated compliance with the Actand the Commission’s regulationsapplicable to swap execution facilities.If deemed appropriate, the Commissionmay issue an order granting registrationsubject to conditions.

(ii) The Commission may issue anorder denying registration upon aCommission determination, in its owndiscretion, that the applicant has notdemonstrated compliance with the Actand the Commission’s regulationsapplicable to swap execution facilities.

(c) Temporary registration. An

applicant seeking registration as a swapexecution facility may request that theCommission grant the applicanttemporary registration by complyingwith the requirements in paragraph(c)(1) of this section.

(1) Requirements for temporary registration. The Commission shall granta request for temporary registrationupon a Commission determination thatthe applicant has:

(i) Completed all of the requirementsunder paragraph (b)(1)(i) of this section;and


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(ii) Submitted a notice to theCommission, concurrent with the filingof the application under paragraph(b)(1)(i) of this section, requesting thatthe Commission grant the applicanttemporary registration. An applicantthat is currently operating a swaps-trading platform in reliance upon eitheran exemption granted by the

Commission or some form of no-actionrelief granted by the Commission staff shall include in such notice acertification that the applicant isoperating pursuant to such exemptionor no-action relief.

(iii) The Commission may deny arequest for temporary registration upona Commission determination that theapplicant has not met the requirementsunder paragraphs (c)(1)(i) and (c)(1)(ii)of this section.

(2) Operation pursuant to a grant of temporary registration. An applicantmay operate as a swap execution facility

under temporary registration uponreceipt of a notice from the Commissiongranting such temporary registration,

but in no case may begin operating asa temporarily registered swap executionfacility before August 5, 2013.

(3) Expiration of temporary registration. The temporary registrationfor a swap execution facility shall expireon the earlier of the date that:

(i) The Commission grants or deniesregistration of the swap executionfacility as provided under paragraph (b)of this section;

(ii) The swap execution facilitywithdraws its application for

registration pursuant to paragraph (f) of this section; or

(iii) Temporary registration terminatespursuant to paragraph (c)(5) of thissection.

(4) Effect of temporary registration. Agrant of temporary registration by theCommission does not affect the right of the Commission to grant or denyregistration as provided underparagraph (b) of this section.

(5) Termination of temporary registration. Paragraph (c) of this sectionshall terminate two years from theeffective date of this regulation except

as provided for under paragraph (c)(6) of this section and except for an applicantwho requested that the Commissiongrant the applicant temporaryregistration by complying with therequirements in paragraph (c)(1) of thissection before the termination of paragraph (c) of this section and has not

been granted or denied registrationunder paragraph (b)(6) of this section bythe time of the termination of paragraph(c) of this section. Such an applicantmay operate as a swap execution facilityunder temporary registration upon

receipt of a notice from the Commissiongranting such temporary registrationuntil the Commission grants or deniesregistration pursuant to paragraph (b)(6)of this section. On the termination dateof paragraph (c) of this section, theCommission shall review suchapplicant’s application pursuant to thetime period and procedures in

paragraph (b)(5) of this section.(6) Temporary registration for

applicants that are operational designated contract markets. Anapplicant that is an operationaldesignated contract market and is alsoseeking to register as a swap executionfacility in order to transfer one or moreof its contracts may request that theCommission grant the applicanttemporary registration by complyingwith the requirements in paragraph(c)(1) of this section. The termination of temporary registration provision inparagraph (c)(5) of this section shall not

apply to an applicant that is a non-dormant designated contract market asdescribed in this paragraph.

(d) Reinstatement of dormant registration. A dormant swap executionfacility as defined in section 40.1 of thischapter may reinstate its registrationunder the procedures of paragraph (b) of this section. The applicant may relyupon previously submitted materials if such materials accurately describe thedormant swap execution facility’sconditions at the time that it applies forreinstatement of its registration.

(e) Request for transfer of registration.(1) A swap execution facility seeking to

transfer its registration from its currentlegal entity to a new legal entity as aresult of a corporate change shall file arequest for approval to transfer suchregistration with the Secretary of theCommission in the form and mannerspecified by the Commission.

(2) Timeline for filing a request for transfer of registration. A request fortransfer of registration shall be filed nolater than three months prior to theanticipated corporate change; or in theevent that the swap execution facilitycould not have known of the anticipatedchange three months prior to the

anticipated change, as soon as it knowsof such change.(3) Required information. The request

for transfer of registration shall includethe following:

(i) The underlying agreement thatgoverns the corporate change;

(ii) A description of the corporatechange, including the reason for thechange and its impact on the swapexecution facility, including itsgovernance and operations, and itsimpact on the rights and obligations of market participants;

(iii) A discussion of the transferee’sability to comply with the Act,including the core principles applicableto swap execution facilities, and theCommission’s regulations thereunder;

(iv) The governing documents of thetransferee, 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 transfereethat it:

(A) Will be the surviving entity andsuccessor-in-interest to the transferorswap execution facility and will retainand assume, without limitation, all of the assets and liabilities of thetransferor;

(B) Will assume responsibility forcomplying with all applicableprovisions of the Act and theCommission’s regulations promulgatedthereunder, including this part and

appendices thereto;(C) Will assume, maintain, andenforce all rules implementing andcomplying with the core principlesapplicable to swap execution facilities,including the adoption of thetransferor’s rulebook, as amended in therequest, and that any such amendmentswill be submitted to the Commissionpursuant to section 5c(c) of the Act andpart 40 of this chapter;

(D) Will comply with all self-regulatory responsibilities except if otherwise indicated in the request, andwill maintain and enforce all self-regulatory programs; and

(E) Will notify market participants of all changes to the transferor’s rulebookprior to the transfer and will furthernotify market participants of theconcurrent transfer of the registration tothe transferee upon Commissionapproval and issuance of an orderpermitting this transfer.

(vii) A representation by thetransferee that upon the transfer:

(A) It will assume responsibility forand maintain compliance with coreprinciples for all swaps previouslymade available for trading through thetransferor, whether by certification or

approval; and(B) None of the proposed rule changeswill affect the rights and obligations of any market participant.

(4) Commission determination. Uponreview of a request for transfer of registration, the Commission, as soon aspracticable, shall issue an order eitherapproving or denying the request.

(f) Request for withdrawal of application for registration. Anapplicant for registration as a swapexecution facility may withdraw itsapplication submitted pursuant to


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paragraph (b) of this section by filing awithdrawal request electronically withthe Secretary of the Commission.Withdrawal of an application forregistration shall not affect any actiontaken or to be taken by the Commission

based upon actions, activities, or eventsoccurring during the time that theapplication was pending with the

Commission.(g) Request for vacation of

registration. A swap execution facilitymay request that its registration bevacated under section 7 of the Act byfiling a vacation request electronicallywith the Secretary of the Commission.Vacation of registration shall not affectany action taken or to be taken by theCommission based upon actions,activities, or events occurring during thetime that the swap execution facilitywas registered by the Commission.

(h) Delegation of authority. TheCommission hereby delegates, until it

orders otherwise, to the Director of theDivision of Market Oversight or suchother employee or employees as theDirector may designate from time totime, upon consultation with theGeneral Counsel or the GeneralCounsel’s delegate, authority to notifyan applicant seeking registration that itsapplication is incomplete and that itwill not be deemed to have beensubmitted for purposes of theCommission’s review, to notify anapplicant seeking registration undersection 6(a) of the Act that itsapplication is materially incomplete andthe running of the 180-day period isstayed, and to notify an applicantseeking temporary registration that itsrequest is granted or denied. TheDirector may submit to the Commissionfor its consideration any matter that has

been delegated in this paragraph.Nothing in this paragraph prohibits theCommission, at its election, fromexercising the authority delegated inthis paragraph.

§ 37.4 Procedures for listing products andimplementing rules.

(a) An applicant for registration as aswap execution facility may submit a

swap’s terms and conditions prior tolisting the product as part of itsapplication for registration.

(b) Any swap terms and conditions orrules submitted as part of a swapexecution facility’s application forregistration shall be considered forapproval by the Commission at the timethe Commission issues the swapexecution facility’s order of registration.

(c) After the Commission issues theorder of registration, a swap executionfacility shall submit a swap’s terms andconditions, including amendments to

such terms and conditions, new rules,or rule amendments pursuant to theprocedures under part 40 of thischapter.

(d) Any swap terms and conditions orrules submitted as part of an applicationto reinstate the registration of a dormantswap execution facility, as defined in§ 40.1 of this chapter, shall be

considered for approval by theCommission at the time the Commissionapproves the dormant swap executionfacility’s reinstatement of registration.

§ 37.5 Information relating to swapexecution facility compliance.

(a) Request for information. Upon theCommission’s request, a swap executionfacility shall file with the Commissioninformation related to its business as aswap execution facility in the form andmanner and within the time period asthe Commission specifies in its request.

(b) Demonstration of compliance.Upon the Commission’s request, a swapexecution facility shall file with theCommission a written demonstration,containing supporting data, information,and documents that it is in compliancewith one or more core principles or withits other obligations under the Act or theCommission’s regulations as theCommission specifies in its request. Theswap execution facility shall file suchwritten demonstration in the form andmanner and within the time period asthe Commission specifies in its request.

(c) Equity interest transfer— (1) Equity interest transfer notification. A swapexecution facility shall file with the

Commission a notification of eachtransaction that the swap executionfacility enters into involving the transferof fifty percent or more of the equityinterest in the swap execution facility.The Commission may, upon receivingsuch notification, request supportingdocumentation of the transaction.

(2) Timing of notification. The equityinterest transfer notice described inparagraph (c)(1) of this section shall befiled electronically with the Secretary of the Commission at its Washington, DCheadquarters at [email protected] and the Division of Market Oversight at

[email protected], at theearliest possible time but in no eventlater than the open of business ten

business days following the date uponwhich the swap execution facility entersinto a firm obligation to transfer theequity interest.

(3) Rule filing. Notwithstanding theforegoing, if any aspect of an equityinterest transfer described in paragraph(c)(1) of this section requires a swapexecution facility to file a rule asdefined in part 40 of this chapter, thenthe swap execution facility shall comply

with the requirements of section 5c(c) of the Act and part 40 of this chapter, andall other applicable Commissionregulations.

(4) Certification. Upon a transfer of anequity interest of fifty percent or morein a swap execution facility, the swapexecution facility shall fileelectronically with the Secretary of the

Commission at its Washington, DCheadquarters at [email protected] and the Division of Market Oversight [email protected], acertification that the swap executionfacility meets all of the requirements of section 5h of the Act and theCommission regulations adoptedthereunder, no later than two businessdays following the date on which theequity interest of fifty percent or morewas acquired.

(d) Delegation of authority. TheCommission hereby delegates, until itorders otherwise, the authority set forth

in this section to the Director of theDivision of Market Oversight or suchother employee or employees as theDirector may designate from time totime. The Director may submit to theCommission for its consideration anymatter that has been delegated in thisparagraph. Nothing in this paragraphprohibits the Commission, at itselection, from exercising the authoritydelegated in this paragraph.

§ 37.6 Enforceability.

(a) A transaction entered into on orpursuant to the rules of a swapexecution facility shall not be void,

voidable, subject to rescission,otherwise invalidated, or renderedunenforceable as a result of:

(1) A violation by the swap executionfacility of the provisions of section 5hof the Act or this part;

(2) Any Commission proceeding toalter or supplement a rule, term, orcondition under section 8a(7) of the Actor to declare an emergency undersection 8a(9) of the Act; or

(3) Any other proceeding the effect of which is to:

(i) Alter or supplement a specific termor condition or trading rule or

procedure; or(ii) Require a swap execution facilityto adopt a specific term or condition,trading rule or procedure, or to take orrefrain from taking a specific action.

(b) A swap execution facility shallprovide each counterparty to atransaction that is entered into on orpursuant to the rules of the swapexecution facility with a written recordof all of the terms of the transactionwhich shall legally supersede anyprevious agreement and serve as aconfirmation of the transaction. The










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confirmation of all terms of thetransaction shall take place at the sametime as execution; provided that specificcustomer identifiers for accountsincluded in bunched orders involvingswaps need not be included inconfirmations provided by a swapexecution facility if the applicablerequirements of §1.35(b)(5) of this

chapter are met.

§ 37.7 Prohibited use of data collected forregulatory purposes.

A swap execution facility shall notuse for business or marketing purposesany proprietary data or personalinformation it collects or receives, fromor on behalf of any person, for thepurpose of fulfilling its regulatoryobligations; provided, however, that aswap execution facility may use suchdata or information for business ormarketing purposes if the person fromwhom it collects or receives such data

or information clearly consents to theswap execution facility’s use of suchdata or information in such manner. Aswap execution facility shall notcondition access to its market(s) ormarket services on a person’s consent tothe swap execution facility’s use of proprietary data or personal informationfor business or marketing purposes. Aswap execution facility, wherenecessary for regulatory purposes, mayshare such data or information with oneor more swap execution facilities ordesignated contract markets registeredwith the Commission.

§ 37.8 Boards of trade operating both adesignated contract market and a swapexecution facility.

(a) An entity that intends to operate both a designated contract market and aswap execution facility shall separatelyregister the two entities pursuant to thedesignated contract market designationprocedures set forth in part 38 of thischapter and the swap execution facilityregistration procedures set forth in thispart. On an ongoing basis, the entityshall comply with the core principlesfor designated contract markets undersection 5(d) of the Act and the

regulations under part 38 of this chapterand the core principles for swapexecution facilities under section 5h of the Act and the regulations under thispart.

(b) A board of trade, as defined insection 1a(6) of the Act, that operates

both a designated contract market and aswap execution facility and that usesthe same electronic trade executionsystem for executing and trading swapson the designated contract market andon the swap execution facility shallclearly identify to market participants

for each swap whether the execution ortrading of such swaps is taking place onthe designated contract market or on theswap execution facility.

§ 37.9 Methods of execution for requiredand permitted transactions.

(a) Execution methods for required transactions. (1) Required transaction

means any transaction involving a swapthat is subject to the trade executionrequirement in section 2(h)(8) of theAct.

(2) Execution methods. (i) EachRequired Transaction that is not a blocktrade as defined in §43.2 of this chaptershall be executed on a swap executionfacility in accordance with one of thefollowing methods of execution:

(A) An Order Book as defined in§ 37.3(a)(3); or

(B) A Request for Quote System, asdefined in paragraph (a)(3) of thissection, that operates in conjunctionwith an Order Book as defined in§ 37.3(a)(3).

(ii) In providing either one of theexecution methods set forth inparagraph (a)(2)(i)(A) or (B) of thissection, a swap execution facility mayfor purposes of execution andcommunication use any means of interstate commerce, including, but notlimited to, the mail, internet, email, andtelephone, provided that the chosenexecution method satisfies therequirements provided in §37.3(a)(3) forOrder Books or in paragraph (a)(3) of this section for Request for QuoteSystems.

(3) Request for quote system means atrading system or platform in which amarket participant transmits a requestfor a quote to buy or sell a specificinstrument to no less than three marketparticipants in the trading system orplatform, to which all such marketparticipants may respond. The threemarket participants shall not beaffiliates of or controlled by therequester and shall not be affiliates of orcontrolled by each other. A swapexecution facility that offers a requestfor quote system in connection withRequired Transactions shall provide the

following functionality:(i) At the same time that the requesterreceives the first responsive bid or offer,the swap execution facility shallcommunicate to the requester any firm

bid or offer pertaining to the sameinstrument resting on any of the swapexecution facility’s Order Books, asdefined in § 37.3(a)(3);

(ii) The swap execution facility shallprovide the requester with the ability toexecute against such firm resting bids oroffers along with any responsive orders;and

(iii) The swap execution facility shallensure that its trading protocols provideeach of its market participants withequal priority in receiving requests forquotes and in transmitting anddisplaying for execution responsiveorders.

(b) Time delay requirement for required transactions on an order

book— (1) Time delay requirement. Aswap execution facility shall requirethat a broker or dealer who seeks toeither execute against its customer’sorder or execute two of its customers’orders against each other through theswap execution facility’s Order Book,following some form of pre-arrangementor pre-negotiation of such orders, besubject to at least a 15 second time delay

between the entry of those two ordersinto the Order Book, such that one sideof the potential transaction is disclosedand made available to other marketparticipants before the second side of

the potential transaction, whether forthe broker’s or dealer’s own account orfor a second customer, is submitted forexecution.

(2) Adjustment of time delay requirement. A swap execution facilitymay adjust the time period of the 15second time delay requirementdescribed in paragraph (b)(1) of thissection, based upon a swap’s liquidityor other product-specific considerations;however, the time delay shall be set fora sufficient period of time so that anorder is exposed to the market and othermarket participants have a meaningful

opportunity to execute against suchorder.(c) Execution methods for permitted

transactions. (1) Permitted transactionmeans any transaction not involving aswap that is subject to the tradeexecution requirement in section 2(h)(8)of the Act.

(2) Execution methods. A swapexecution facility may offer any methodof execution for each PermittedTransaction.

§37.10 [Reserved]

Subpart B—Compliance With Core

Principles§ 37.100 Core Principle 1—Compliancewith core principles.

(a) In general. To be registered, andmaintain registration, as a swapexecution facility, the swap executionfacility shall comply with—

(1) The core principles described insection 5h of the Act; and

(2) Any requirement that theCommission may impose by rule orregulation pursuant to section 8a(5) of the Act.


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(b) Reasonable discretion of a swapexecution facility. Unless otherwisedetermined by the Commission by ruleor regulation, a swap execution facilitydescribed in paragraph (a) of thissection shall have reasonable discretionin establishing the manner in which theswap execution facility complies withthe core principles described in section

5h of the Act.

Subpart C—Compliance With Rules

§ 37.200 Core Principle 2—Compliancewith rules.

A swap execution facility shall:(a) Establish and enforce compliance

with any rule of the swap executionfacility, including the terms andconditions of the swaps traded orprocessed on or through the swapexecution facility and any limitation onaccess to the swap execution facility;

(b) Establish and enforce trading,

trade processing, and participation rulesthat will deter abuses and have thecapacity to detect, investigate, andenforce those rules, including means toprovide market participants withimpartial access to the market and tocapture information that may be used inestablishing whether rule violationshave occurred;

(c) Establish rules governing theoperation of the facility, including rulesspecifying trading procedures to be usedin entering and executing orders tradedor posted on the facility, including

block trades; and

(d) Provide by its rules that when aswap dealer or major swap participantenters into or facilitates a swap that issubject to the mandatory clearingrequirement of section 2(h) of the Act,the swap dealer or major swapparticipant shall be responsible forcompliance with the mandatory tradingrequirement under section 2(h)(8) of theAct.

§ 37.201 Operation of swap executionfacility and compliance with rules.

(a) A swap execution facility shallestablish rules governing the operationof the swap execution facility,including, but not limited to, rulesspecifying trading procedures to befollowed by members and marketparticipants when entering andexecuting orders traded or posted on theswap execution facility, including blocktrades, as defined in part 43 of thischapter, if offered.

(b) A swap execution facility shallestablish and impartially enforcecompliance with the rules of the swapexecution facility, including, but notlimited to—

(1) The terms and conditions of anyswaps traded or processed on or throughthe swap execution facility;

(2) Access to the swap executionfacility;

(3) Trade practice rules;(4) Audit trail requirements;(5) Disciplinary rules; and(6) Mandatory trading requirements.

§ 37.202 Access requirements.

(a) Impartial access to markets and market services. A swap executionfacility shall provide any eligiblecontract participant and anyindependent software vendor withimpartial access to its market(s) andmarket services, including anyindicative quote screens or any similarpricing data displays, provided that thefacility has:

(1) Criteria governing such access thatare impartial, transparent, and appliedin a fair and nondiscriminatory manner;

(2) Procedures whereby eligiblecontract participants provide the swapexecution facility with written orelectronic confirmation of their status aseligible contract participants, as defined

by the Act and Commission regulations,prior to obtaining access; and

(3) Comparable fee structures foreligible contract participants andindependent software vendors receivingcomparable access to, or services from,the swap execution facility.

(b) Jurisdiction. Prior to granting anyeligible contract participant access to itsfacilities, a swap execution facility shallrequire that the eligible contract

participant consent to its jurisdiction.(c) Limitations on access. A swap

execution facility shall establish andimpartially enforce rules governing anydecision to allow, deny, suspend, orpermanently bar eligible contractparticipants’ access to the swapexecution facility, including when suchdecisions are made as part of adisciplinary or emergency action taken

by the swap execution facility.

§ 37.203 Rule enforcement program.

A swap execution facility shallestablish and enforce trading, trade

processing, and participation rules thatwill deter abuses and it shall have thecapacity to detect, investigate, andenforce those rules.

(a) Abusive trading practices prohibited. A swap execution facilityshall prohibit abusive trading practiceson its markets by members and marketparticipants. Swap execution facilitiesthat permit intermediation shallprohibit customer-related abusesincluding, but not limited to, tradingahead of customer orders, tradingagainst customer orders,

accommodation trading, and impropercross trading. Specific trading practicesthat shall be prohibited include front-running, wash trading, pre-arrangedtrading (except for block tradespermitted by part 43 of this chapter orother types of transactions certified to orapproved by the Commission pursuantto the procedures under part 40 of this

chapter), fraudulent trading, moneypasses, and any other trading practicesthat a swap execution facility deems to

be abusive. A swap execution facilityshall also prohibit any othermanipulative or disruptive tradingpractices prohibited by the Act or by theCommission pursuant to Commissionregulation.

(b) Capacity to detect and investigaterule violations. A swap executionfacility shall have arrangements andresources for effective enforcement of itsrules. Such arrangements shall includethe authority to collect information and

documents on both a routine and non-routine basis, including the authority toexamine books and records kept by theswap execution facility’s members and

by persons under investigation. A swapexecution facility’s arrangements andresources shall also facilitate the directsupervision of the market and theanalysis of data collected to determinewhether a rule violation has occurred.

(c) Compliance staff and resources. Aswap execution facility shall establishand maintain sufficient compliance staff and resources to ensure that it canconduct effective audit trail reviews,

trade practice surveillance, marketsurveillance, and real-time marketmonitoring. The swap executionfacility’s compliance staff shall also besufficient to address unusual market ortrading events as they arise, and toconduct and complete investigations ina timely manner, as set forth in§ 37.203(f).

(d) Automated trade surveillancesystem. A swap execution facility shallmaintain an automated tradesurveillance system capable of detectingpotential trade practice violations. Theautomated trade surveillance system

shall load and process daily orders andtrades no later than 24 hours after thecompletion of the trading day. Theautomated trade surveillance systemshall have the capability to detect andflag specific trade execution patternsand trade anomalies; compute, retain,and compare trading statistics; computetrade gains, losses, and swap-equivalentpositions; reconstruct the sequence of market activity; perform marketanalyses; and support system users toperform in-depth analyses and ad hocqueries of trade-related data.


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(e) Real-time market monitoring. Aswap execution facility shall conductreal-time market monitoring of alltrading activity on its system(s) orplatform(s) to identify disorderly tradingand any market or system anomalies. Aswap execution facility shall have theauthority to adjust trade prices or canceltrades when necessary to mitigate

market disrupting events caused bymalfunctions in its system(s) orplatform(s) or errors in orders submitted

by members and market participants.Any trade price adjustments or tradecancellations shall be transparent to themarket and subject to standards that areclear, fair, and publicly available.

(f) Investigations and investigationreports— (1) Procedures. A swapexecution facility shall establish andmaintain procedures that require itscompliance staff to conductinvestigations of possible ruleviolations. An investigation shall be

commenced upon the receipt of arequest from Commission staff or uponthe discovery or receipt of information

by the swap execution facility thatindicates a reasonable basis for findingthat a violation may have occurred orwill occur.

(2) Timeliness. Each compliance staff investigation shall be completed in atimely manner. Absent mitigatingfactors, a timely manner is no later than12 months after the date that aninvestigation is opened. Mitigatingfactors that may reasonably justify aninvestigation taking longer than 12months to complete include the

complexity of the investigation, thenumber of firms or individuals involvedas potential wrongdoers, the number of potential violations to be investigated,and the volume of documents and datato be examined and analyzed bycompliance staff.

(3) Investigation reports when areasonable basis exists for finding aviolation. Compliance staff shall submita written investigation report fordisciplinary action in every instance inwhich compliance staff determines fromsurveillance or from an investigationthat a reasonable basis exists for finding

a rule violation. The investigation reportshall include the reason theinvestigation was initiated; a summaryof the complaint, if any; the relevantfacts; compliance staff’s analysis andconclusions; and a recommendation asto whether disciplinary action should bepursued.

(4) Investigation reports when noreasonable basis exists for finding aviolation. If after conducting aninvestigation, compliance staff determines that no reasonable basisexists for finding a rule violation, it

shall prepare a written report includingthe reason the investigation wasinitiated; a summary of the complaint,if any; the relevant facts; andcompliance staff’s analysis andconclusions.

(5) Warning letters. No more than onewarning letter may be issued to thesame person or entity found to havecommitted the same rule violationwithin a rolling twelve month period.

(g) Additional sources for compliance.A swap execution facility may refer tothe guidance and/or acceptablepractices in Appendix B of this part todemonstrate to the Commissioncompliance with the requirements of § 37.203.

§ 37.204 Regulatory services provided bya third party.

(a) Use of regulatory service provider permitted. A swap execution facilitymay choose to contract with a registered

futures association or another registeredentity, as such terms are defined underthe Act, or the Financial IndustryRegulatory Authority (collectively,‘‘regulatory service providers’’), for theprovision of services to assist incomplying with the Act andCommission regulations thereunder, asapproved by the Commission. Any swapexecution facility that chooses tocontract with a regulatory serviceprovider shall ensure that such providerhas the capacity and resourcesnecessary to provide timely andeffective regulatory services, including

adequate staff and automatedsurveillance systems. A swap executionfacility shall at all times remainresponsible for the performance of anyregulatory services received, forcompliance with the swap executionfacility’s obligations under the Act andCommission regulations, and for theregulatory service provider’sperformance on its behalf.

(b) Duty to supervise regulatory service provider. A swap executionfacility that elects to use the service of a regulatory service provider shall retainsufficient compliance staff to supervise

the quality and effectiveness of theregulatory services provided on its behalf. Compliance staff of the swapexecution facility shall hold regularmeetings with the regulatory serviceprovider to discuss ongoinginvestigations, trading patterns, marketparticipants, and any other matters of regulatory concern. A swap executionfacility shall also conduct periodicreviews of the adequacy andeffectiveness of services provided on its

behalf. Such reviews shall bedocumented carefully and made

available to the Commission uponrequest.

(c) Regulatory decisions required fromthe swap execution facility. A swapexecution facility that elects to use theservice of a regulatory service providershall retain exclusive authority in allsubstantive decisions made by itsregulatory service provider, including,

but not limited to, decisions involvingthe cancellation of trades, the issuanceof disciplinary charges against membersor market participants, and denials of access to the trading platform fordisciplinary reasons. A swap executionfacility shall document any instanceswhere its actions differ from thoserecommended by its regulatory serviceprovider, including the reasons for thecourse of action recommended by theregulatory service provider and thereasons why the swap execution facilitychose a different course of action.

§37.205 Audit trail.A swap execution facility shall

establish procedures to capture andretain information that may be used inestablishing whether rule violationshave occurred.

(a) Audit trail required. A swapexecution facility shall capture andretain all audit trail data necessary todetect, investigate, and preventcustomer and market abuses. Such datashall be sufficient to reconstruct allindications of interest, requests forquotes, orders, and trades within areasonable period of time and to provide

evidence of any violations of the rulesof the swap execution facility. Anacceptable audit trail shall also permitthe swap execution facility to track acustomer order from the time of receiptthrough fill, allocation, or otherdisposition, and shall include bothorder and trade data.

(b) Elements of an acceptable audit trail program— (1) Original sourcedocuments. A swap execution facility’saudit trail shall include original sourcedocuments. Original source documentsinclude unalterable, sequentially-identified records on which trade

execution information is originallyrecorded, whether recorded manually orelectronically. Records for customerorders (whether filled, unfilled, orcancelled, each of which shall beretained or electronically captured)shall reflect the terms of the order, anaccount identifier that relates back tothe account(s) owner(s), the time of order entry, and the time of tradeexecution. Swap execution facilitiesshall require that all orders, indicationsof interest, and requests for quotes beimmediately captured in the audit trail.


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(2) Transaction history database. Aswap execution facility’s audit trailprogram shall include an electronictransaction history database. Anadequate transaction history databaseincludes a history of all indications of interest, requests for quotes, orders, andtrades entered into a swap executionfacility’s trading system or platform,

including all order modifications andcancellations. An adequate transactionhistory database also includes:

(i) All data that are input into thetrade entry or matching system for thetransaction to match and clear;

(ii) The customer type indicator code;(iii) Timing and sequencing data

adequate to reconstruct trading; and(iv) Identification of each account to

which fills are allocated.(3) Electronic analysis capability. A

swap execution facility’s audit trailprogram shall include electronicanalysis capability with respect to allaudit trail data in the transaction historydatabase. Such electronic analysiscapability shall ensure that the swapexecution facility has the ability toreconstruct indications of interest,requests for quotes, orders, and trades,and identify possible trading violationswith respect to both customer andmarket abuse.

(4) Safe storage capability. A swapexecution facility’s audit trail programshall include the capability to safelystore all audit trail data retained in itstransaction history database. Such safestorage capability shall include thecapability to store all data in the

database in a manner that protects itfrom unauthorized alteration, as well asfrom accidental erasure or other loss.Data shall be retained in accordancewith the recordkeeping requirements of Core Principle 10 for swap executionfacilities and the associated regulationsin subpart K of this part.

(c) Enforcement of audit trail requirements—(1) Annual audit trail and recordkeeping reviews. A swapexecution facility shall enforce its audittrail and recordkeeping requirementsthrough at least annual reviews of allmembers and persons and firms subject

to the swap execution facility’srecordkeeping rules to verify theircompliance with the swap executionfacility’s audit trail and recordkeepingrequirements. Such reviews shallinclude, but are not limited to, reviewsof randomly selected samples of front-end audit trail data for order routingsystems; a review of the process bywhich user identifications are assignedand user identification records aremaintained; a review of usage patternsassociated with user identifications tomonitor for violations of user

identification rules; and reviews of account numbers and customer typeindicator codes in trade records to testfor accuracy and improper use.

(2) Enforcement program required. Aswap execution facility shall establish aprogram for effective enforcement of itsaudit trail and recordkeepingrequirements. An effective program

shall identify members and persons andfirms subject to the swap executionfacility’s recordkeeping rules that havefailed to maintain high levels of compliance with such requirements,and impose meaningful sanctions whendeficiencies are found. Sanctions shall

be sufficient to deter recidivist behavior.No more than one warning letter shall

be issued to the same person or entityfound to have committed the sameviolation of audit trail or recordkeepingrequirements within a rolling twelvemonth period.

§ 37.206 Disciplinary procedures andsanctions.

A swap execution facility shallestablish trading, trade processing, andparticipation rules that will deter abusesand have the capacity to enforce suchrules through prompt and effectivedisciplinary action, includingsuspension or expulsion of members ormarket participants that violate the rulesof the swap execution facility.

(a) Enforcement staff. A swapexecution facility shall establish andmaintain sufficient enforcement staff and resources to effectively and

promptly prosecute possible ruleviolations within the disciplinaryjurisdiction of the swap executionfacility.

(b) Disciplinary panels. A swapexecution facility shall establish one ormore disciplinary panels that areauthorized to fulfill their obligationsunder the rules of this subpart.Disciplinary panels shall meet thecomposition requirements of part 40 of this chapter, and shall not include anymembers of the swap executionfacility’s compliance staff or any personinvolved in adjudicating any other stageof the same proceeding.

(c) Hearings. A swap executionfacility shall adopt rules that provide forthe following minimum requirementsfor any hearing:

(1) The hearing shall be fair, shall beconducted before members of thedisciplinary panel, and shall bepromptly convened after reasonablenotice to the respondent; and

(2) If the respondent has requested ahearing, a copy of the hearing shall bemade and shall become a part of therecord of the proceeding. The record

shall not be required to be transcribedunless:

(i) The transcript is requested byCommission staff or the respondent;

(ii) The decision is appealed pursuantto the rules of the swap executionfacility; or

(iii) The decision is reviewed by theCommission pursuant to section 8c of

the Act or part 9 of this chapter. In allother instances, a summary record of ahearing is permitted.

(d) Decisions. Promptly following ahearing conducted in accordance withthe rules of the swap execution facility,the disciplinary panel shall render awritten decision based upon the weightof the evidence contained in the recordof the proceeding and shall provide acopy to the respondent. The decisionshall include:

(1) The notice of charges or asummary of the charges;

(2) The answer, if any, or a summaryof the answer;

(3) A summary of the evidenceproduced at the hearing or, whereappropriate, incorporation by referenceof the investigation report;

(4) A statement of findings andconclusions with respect to each charge,and a complete explanation of theevidentiary and other basis for suchfindings and conclusions with respect toeach charge;

(5) An indication of each specific rulethat the respondent was found to haveviolated; and

(6) A declaration of all sanctionsimposed against the respondent,

including the basis for such sanctionsand the effective date of such sanctions.

(e) Disciplinary sanctions. Alldisciplinary sanctions imposed by aswap execution facility or itsdisciplinary panels shall becommensurate with the violationscommitted and shall be clearlysufficient to deter recidivism or similarviolations by other market participants.All disciplinary sanctions, includingsanctions imposed pursuant to anaccepted settlement offer, shall take intoaccount the respondent’s disciplinaryhistory. In the event of demonstrated

customer harm, any disciplinarysanction shall also include full customerrestitution, except where the amount of restitution or to whom it should beprovided cannot be reasonablydetermined.

(f) Warning letters. Where a ruleviolation is found to have occurred, nomore than one warning letter may beissued per rolling twelve month periodfor the same violation.

(g) Additional sources for compliance.A swap execution facility may refer tothe guidance and/or acceptable


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practices in Appendix B of this part todemonstrate to the Commissioncompliance with the requirements of § 37.206.

Subpart D—Swaps Not ReadilySusceptible to Manipulation

§ 37.300 Core Principle 3—Swaps notreadily susceptible to manipulation.

The swap execution facility shallpermit trading only in swaps that arenot readily susceptible to manipulation.

§ 37.301 General requirements.

To demonstrate to the Commissioncompliance with the requirements of § 37.300, a swap execution facility shall,at the time it submits a new swapcontract in advance to the Commissionpursuant to part 40 of this chapter,provide the applicable information asset forth in Appendix C to part 38 of thischapter—Demonstration of ComplianceThat a Contract is not Readily

Susceptible to Manipulation. A swapexecution facility may also refer to theguidance and/or acceptable practices inAppendix B of this part.

Subpart E—Monitoring of Trading andTrade Processing

§ 37.400 Core Principle 4—Monitoring oftrading and trade processing.

The swap execution facility shall:(a) Establish and enforce rules or

terms and conditions defining, orspecifications detailing:

(1) Trading procedures to be used inentering and executing orders traded on

or through the facilities of the swapexecution facility; and(2) Procedures for trade processing of

swaps on or through the facilities of theswap execution facility; and

(b) Monitor trading in swaps toprevent manipulation, price distortion,and disruptions of the delivery or cashsettlement process through surveillance,compliance, and disciplinary practicesand procedures, including methods forconducting real-time monitoring of trading and comprehensive and accuratetrade reconstructions.


A swap execution facility shall:(a) Collect and evaluate data on itsmarket participants’ market activity onan ongoing basis in order to detect andprevent manipulation, price distortions,and, where possible, disruptions of thephysical-delivery or cash-settlementprocess;

(b) Monitor and evaluate generalmarket data in order to detect andprevent manipulative activity thatwould result in the failure of the marketprice to reflect the normal forces of supply and demand;

(c) Demonstrate an effective programfor conducting real-time monitoring of trading for the purpose of detecting andresolving abnormalities; and

(d) Demonstrate the ability tocomprehensively and accuratelyreconstruct daily trading activity for thepurpose of detecting instances or threatsof manipulation, price distortion, and

disruptions.

§ 37.402 Additional requirements forphysical-delivery swaps.

For physical-delivery swaps, the swapexecution facility shall demonstrate thatit:

(a) Monitors a swap’s terms andconditions as they relate to theunderlying commodity market; and

(b) Monitors the availability of thesupply of the commodity specified bythe delivery requirements of the swap.

§ 37.403 Additional requirements for cash-settled swaps.

(a) For cash-settled swaps, the swapexecution facility shall demonstrate thatit monitors the pricing of the referenceprice used to determine cash flows orsettlement;

(b) For cash-settled swaps listed onthe swap execution facility where thereference price is formulated andcomputed by the swap executionfacility, the swap execution facility shalldemonstrate that it monitors thecontinued appropriateness of itsmethodology for deriving that price; and

(c) For cash-settled swaps listed onthe swap execution facility where the

reference price relies on a third-partyindex or instrument, including an indexor instrument traded on another venue,the swap execution facility shalldemonstrate that it monitors thecontinued appropriateness of the indexor instrument.

§ 37.404 Ability to obtain information.

(a) A swap execution facility shalldemonstrate that it has access tosufficient information to assess whethertrading in swaps listed on its market, inthe index or instrument used as areference price, or in the underlying

commodity for its listed swaps is beingused to affect prices on its market.(b) A swap execution facility shall

have rules that require its marketparticipants to keep records of theirtrading, including records of theiractivity in the index or instrument usedas a reference price, the underlyingcommodity, and related derivativesmarkets, and make such recordsavailable, upon request, to the swapexecution facility or, if applicable, to itsregulatory service provider, and theCommission.

§ 37.405 Risk controls for trading.

The swap execution facility shallestablish and maintain risk controlmechanisms to prevent and reduce thepotential risk of market disruptions,including, but not limited to, marketrestrictions that pause or halt tradingunder market conditions prescribed bythe swap execution facility.

§ 37.406 Trade reconstruction.

The swap execution facility shall havethe ability to comprehensively andaccurately reconstruct all trading on itsfacility. All audit-trail data andreconstructions shall be made availableto the Commission in a form, manner,and time that is acceptable to theCommission.

§ 37.407 Regulatory service provider.

A swap execution facility shallcomply with the regulations in thissubpart through a dedicated regulatory

department or by contracting with aregulatory service provider pursuant to§ 37.204.

§ 37.408 Additional sources forcompliance.

A swap execution facility may refer tothe guidance and/or acceptablepractices in Appendix B of this part todemonstrate to the Commissioncompliance with the requirements of § 37.400.

Subpart F—Ability to ObtainInformation

§ 37.500 Core Principle 5—Ability to obtaininformation.

The swap execution facility shall:

(a) Establish and enforce rules thatwill allow the facility to obtain anynecessary information to perform any of the functions described in section 5h of the Act;

(b) Provide the information to theCommission on request; and

(c) Have the capacity to carry out suchinternational information-sharingagreements as the Commission mayrequire.

§ 37.501 Establish and enforce rules.

A swap execution facility shallestablish and enforce rules that willallow the swap execution facility tohave the ability and authority to obtainsufficient information to allow it to fullyperform its operational, riskmanagement, governance, andregulatory functions and anyrequirements under this part, includingthe capacity to carry out internationalinformation-sharing agreements as theCommission may require.


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§ 37.502 Collection of information.

A swap execution facility shall haverules that allow it to collect informationon a routine basis, allow for thecollection of non-routine data from itsmarket participants, and allow for itsexamination of books and records kept

by the market participants on its facility.

§ 37.503 Provide information to theCommission.

A swap execution facility shallprovide information in its possession tothe Commission upon request, in a formand manner that the Commissionapproves.

§ 37.504 Information-sharing agreements.

A swap execution facility shall shareinformation with other regulatoryorganizations, data repositories, andthird-party data reporting services asrequired by the Commission or asotherwise necessary and appropriate tofulfill its self-regulatory and reporting

responsibilities. Appropriateinformation-sharing agreements can beestablished with such entities or theCommission can act in conjunction withthe swap execution facility to carry outsuch information sharing.

Subpart G—Position Limits orAccountability

§ 37.600 Core Principle 6—Position limitsor accountability.

(a) In general. To reduce the potentialthreat of market manipulation orcongestion, especially during trading inthe delivery month, a swap executionfacility that is a trading facility shalladopt for each of the contracts of thefacility, as is necessary and appropriate,position limitations or positionaccountability for speculators.

(b) Position limits. For any contractthat is subject to a position limitationestablished by the Commission pursuantto section 4a(a) of the Act, the swapexecution facility shall:

(1) Set its position limitation at a levelno higher than the Commissionlimitation; and

(2) Monitor positions established onor through the swap execution facility

for compliance with the limit set by theCommission and the limit, if any, set bythe swap execution facility.


Until such time that compliance isrequired under part 151 of this chapter,a swap execution facility may refer tothe guidance and/or acceptablepractices in Appendix B of this part todemonstrate to the Commissioncompliance with the requirements of § 37.600.

Subpart H—Financial Integrity ofTransactions

§ 37.700 Core Principle 7—Financialintegrity of transactions.

The swap execution facility shallestablish and enforce rules andprocedures for ensuring the financialintegrity of swaps entered on or throughthe facilities of the swap executionfacility, including the clearance andsettlement of the swaps pursuant tosection 2(h)(1) of the Act.

§ 37.701 Required clearing.

Transactions executed on or throughthe swap execution facility that arerequired to be cleared under section2(h)(1)(A) of the Act or are voluntarilycleared by the counterparties shall becleared through a Commission-registered derivatives clearingorganization, or a derivatives clearingorganization that the Commission has

determined is exempt from registration.

§ 37.702 General financial integrity.

A swap execution facility shallprovide for the financial integrity of itstransactions:

(a) By establishing minimum financialstandards for its members, which shall,at a minimum, require that membersqualify as an eligible contractparticipant as defined in section 1a(18)of the Act;

(b) [Reserved]

§ 37.703 Monitoring for financialsoundness.

A swap execution facility shallmonitor its members to ensure that theycontinue to qualify as eligible contractparticipants as defined in section 1a(18)of the Act.

Subpart I—Emergency Authority

§ 37.800 Core Principle 8—Emergencyauthority.

The swap execution facility shalladopt rules to provide for the exerciseof emergency authority, in consultationor cooperation with the Commission, asis necessary and appropriate, includingthe authority to liquidate or transferopen positions in any swap or tosuspend or curtail trading in a swap.


A swap execution facility may refer tothe guidance and/or acceptablepractices in Appendix B of this part todemonstrate to the Commissioncompliance with the requirements of § 37.800.

Subpart J—Timely Publication ofTrading Information

§ 37.900 Core Principle 9—Timelypublication of trading information.

(a) In general. The swap executionfacility shall make public timelyinformation 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 facilityshall be required to have the capacity toelectronically capture and transmittrade information with respect totransactions executed on the facility.


With respect to swaps traded on orthrough a swap execution facility, eachswap execution facility shall:

(a) Report specified swap data asprovided under part 43 and part 45 of this chapter; and

(b) Meet the requirements of part 16

of this chapter.

Subpart K—Recordkeeping andReporting

§ 37.1000 Core Principle 10—Recordkeeping and reporting.

(a) In general. A swap executionfacility shall:

(1) Maintain records of all activitiesrelating to the business of the facility,including a complete audit trail, in aform and manner acceptable to theCommission for a period of five years;

(2) Report to the Commission, in aform and manner acceptable to the

Commission, such information as theCommission determines to be necessaryor appropriate for the Commission toperform the duties of the Commissionunder the Act; and

(3) Keep any such records relating toswaps defined in section 1a(47)(A)(v) of the Act open to inspection andexamination by the Securities andExchange Commission.

(b) Requirements. The Commissionshall adopt data collection and reportingrequirements for swap executionfacilities that are comparable tocorresponding requirements for

derivatives clearing organizations andswap data repositories.

§ 37.1001 Recordkeeping.

A swap execution facility shallmaintain records of all activities relatingto the business of the facility, in a formand manner acceptable to theCommission, for a period of at least fiveyears. A swap execution facility shallmaintain such records, including acomplete audit trail for all swapsexecuted on or subject to the rules of theswap execution facility, investigatory


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files, and disciplinary files, inaccordance with the requirements of § 1.31 and part 45 of this chapter.

Subpart L—Antitrust Considerations

§ 37.1100 Core Principle 11—Antitrustconsiderations.

Unless necessary or appropriate to

achieve the purposes of the Act, theswap execution facility shall not:(a) Adopt any rules or take any

actions that result in any unreasonablerestraint of trade; or

(b) Impose any materialanticompetitive burden on trading orclearing.


A swap execution facility may refer tothe guidance and/or acceptablepractices in Appendix B of this part todemonstrate to the Commissioncompliance with the requirements of

§ 37.1100.

Subpart M—Conflicts of Interest

§ 37.1200 Core Principle 12—Conflicts ofinterest.

The swap execution facility shall:(a) Establish and enforce rules to

minimize conflicts of interest in itsdecision-making process; and

(b) Establish a process for resolvingthe conflicts of interest.

Subpart N—Financial Resources

§ 37.1300 Core Principle 13—Financialresources.

(a) In general. The swap executionfacility shall have adequate financial,operational, and managerial resources todischarge each responsibility of theswap execution facility.

(b) Determination of resourceadequacy. The financial resources of aswap execution facility shall beconsidered to be adequate if the valueof the financial resources exceeds thetotal amount that would enable theswap execution facility to cover theoperating costs of the swap executionfacility for a one-year period, ascalculated on a rolling basis.


(a) A swap execution facility shallmaintain financial resources sufficientto enable it to perform its functions incompliance with the core principles setforth in section 5h of the Act.

(b) An entity that operates as both aswap execution facility and aderivatives clearing organization shallalso comply with the financial resourcerequirements of §39.11 of this chapter.

(c) Financial resources shall beconsidered sufficient if their value is at

least equal to a total amount that wouldenable the swap execution facility tocover its operating costs for a period of at least one year, calculated on a rolling

basis.

§ 37.1302 Types of financial resources.

Financial resources available tosatisfy the requirements of § 37.1301

may include:(a) The swap execution facility’s own

capital, meaning its assets minus itsliabilities calculated in accordance withU.S. generally accepted accountingprinciples; and

(b) Any other financial resourcedeemed acceptable by the Commission.

§ 37.1303 Computation of projectedoperating costs to meet financial resourcerequirement.

A swap execution facility shall, eachfiscal quarter, make a reasonablecalculation of its projected operatingcosts over a twelve-month period inorder to determine the amount neededto meet the requirements of §37.1301.The swap execution facility shall havereasonable discretion in determining themethodology used to compute suchprojected operating costs. TheCommission may review themethodology and require changes asappropriate.

§ 37.1304 Valuation of financial resources.

No less than each fiscal quarter, aswap execution facility shall computethe current market value of eachfinancial resource used to meet its

obligations under §37.1301. Reductionsin value to reflect market and credit risk(‘‘haircuts’’) shall be applied asappropriate.

§ 37.1305 Liquidity of financial resources.

The financial resources allocated bythe swap execution facility to meet therequirements of §37.1301 shall includeunencumbered, liquid financial assets(i.e., cash and/or highly liquidsecurities) equal to at least six months’operating costs. If any portion of suchfinancial resources is not sufficientlyliquid, the swap execution facility may

take into account a committed line of credit or similar facility for the purposeof meeting this requirement.

§ 37.1306 Reporting to the Commission.

(a) Each fiscal quarter, or at any timeupon Commission request, a swapexecution facility shall:

(1) Report to the Commission:(i) The amount of financial resources

necessary to meet the requirements of § 37.1301; and

(ii) The value of each financialresource available, computed in

accordance with the requirements of § 37.1304;

(2) Provide the Commission with afinancial statement, including the

balance sheet, income statement, andstatement of cash flows of the swapexecution facility or of its parentcompany;

(b) The calculations required byparagraph (a) of this section shall bemade as of the last business day of theswap execution facility’s fiscal quarter.

(c) The swap execution facility shallprovide the Commission with:

(1) Sufficient documentationexplaining the methodology used tocompute its financial requirementsunder §37.1301;

(2) Sufficient documentationexplaining the basis for itsdeterminations regarding the valuationand liquidity requirements set forth in§§ 37.1304 and 37.1305; and

(3) Copies of any agreementsestablishing or amending a creditfacility, insurance coverage, or otherarrangement evidencing or otherwisesupporting the swap execution facility’sconclusions.

(d) The reports required by thissection shall be filed not later than 40calendar days after the end of the swapexecution facility’s first three fiscalquarters, and not later than 60 calendardays after the end of the swap executionfacility’s fourth fiscal quarter, or at suchlater time as the Commission maypermit, in its discretion, upon request

by the swap execution facility.§ 37.1307 Delegation of authority.

(a) The Commission hereby delegates,until it orders otherwise, to the Directorof the Division of Market Oversight orsuch other employee or employees asthe Director may designate from time totime, authority to:

(1) Determine whether a particularfinancial resource under §37.1302 may

be used to satisfy the requirements of § 37.1301;

(2) Review and make changes to themethodology used to compute projected

operating costs under §37.1303;(3) Request reports, in addition to

fiscal quarter reports, under§ 37.1306(a); and

(4) Grant an extension of time to filefiscal quarter reports under § 37.1306(d).

(b) The Director may submit to theCommission for its consideration anymatter that has been delegated in thissection. Nothing in this sectionprohibits the Commission, at itselection, from exercising the authoritydelegated in this section.


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Subpart O—System Safeguards

§ 37.1400 Core Principle 14—Systemsafeguards.

The swap execution facility shall:(a) Establish and maintain a program

of risk analysis and oversight to identifyand minimize sources of operationalrisk, 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 planfor disaster recovery that allow for:

(1) The timely recovery andresumption of operations; and

(2) The fulfillment of theresponsibilities and obligations of theswap execution facility; and

(c) Periodically conduct tests to verifythat the backup resources of the swapexecution facility are sufficient to

ensure continued:(1) Order processing and tradematching;

(2) Price reporting;(3) Market surveillance; and(4) Maintenance of a comprehensive

and accurate audit trail.

§ 37.1401 Requirements.

(a) A swap execution facility’sprogram of risk analysis and oversightwith respect to its operations andautomated systems shall address each of the following categories of risk analysisand oversight:

(1) Information security;

(2) Business continuity-disasterrecovery planning and resources;

(3) Capacity and performanceplanning;

(4) Systems operations;(5) Systems development and quality

assurance; and(6) Physical security and

environmental controls.(b) A swap execution facility shall

maintain a business continuity-disasterrecovery plan and resources, emergencyprocedures, and backup facilitiessufficient to enable timely recovery andresumption of its operations and

resumption of its ongoing fulfillment of its responsibilities and obligations as aswap execution facility following anydisruption of its operations. Suchresponsibilities and obligations include,without limitation, order processing andtrade matching; transmission of matched orders to a designated clearingorganization for clearing, whereappropriate; price reporting; marketsurveillance; and maintenance of acomprehensive audit trail. The swapexecution facility’s business continuity-disaster recovery plan and resources

generally should enable resumption of trading and clearing of swaps executedon the swap execution facility duringthe next business day following thedisruption. Swap execution facilitiesdetermined by the Commission to becritical financial markets pursuant toAppendix E to part 40 of this chapterare subject to more stringent

requirements in this regard, set forth in§ 40.9 of this chapter.

(c) A swap execution facility that isnot determined by the Commission to bea critical financial market satisfies therequirement to be able to resume itsoperations and resume its ongoingfulfillment of its responsibilities andobligations during the next business dayfollowing any disruption of itsoperations by maintaining either:

(1) Infrastructure and personnelresources of its own that are sufficientto ensure timely recovery andresumption of its operations and

resumption of its ongoing fulfillment of its responsibilities and obligations as aswap execution facility following anydisruption of its operations; or

(2) Contractual arrangements withother swap execution facilities ordisaster recovery service providers, asappropriate, that are sufficient to ensurecontinued trading and clearing of swapsexecuted on the swap execution facility,and ongoing fulfillment of all of theswap execution facility’sresponsibilities and obligations withrespect to such swaps, in the event thata disruption renders the swap executionfacility temporarily or permanentlyunable to satisfy this requirement on itsown behalf.

(d) A swap execution facility shallnotify Commission staff promptly of all:

(1) Electronic trading halts andmaterial system malfunctions;

(2) Cyber security incidents ortargeted threats that actually orpotentially jeopardize automated systemoperation, reliability, security, orcapacity; and

(3) Activations of the swap executionfacility’s business continuity-disasterrecovery plan.

(e) A swap execution facility shall

provide Commission staff timelyadvance notice of all material:(1) Planned changes to automated

systems that may impact the reliability,security, or adequate scalable capacityof such systems; and

(2) Planned changes to the swapexecution facility’s program of riskanalysis and oversight.

(f) A swap execution facility shallprovide to the Commission, uponrequest, current copies of its businesscontinuity-disaster recovery plan andother emergency procedures, its

assessments of its operational risks, andother documents requested byCommission staff for the purpose of maintaining a current profile of theswap execution facility’s automatedsystems.

(g) A swap execution facility shallconduct regular, periodic, objectivetesting and review of its automated

systems to ensure that they are reliable,secure, and have adequate scalablecapacity. A swap execution facility shallalso conduct regular, periodic testingand review of its business continuity-disaster recovery capabilities. Pursuantto Core Principle 10 under section 5h of the Act (Recordkeeping and Reporting)and §§37.1000 through 37.1001, theswap execution facility shall keeprecords of all such tests, and make alltest results available to the Commissionupon request.

(h) Part 40 of this chapter governs theobligations of those registered entitiesthat the Commission has determined to

be critical financial markets, withrespect to maintenance and geographicdispersal of disaster recovery resourcessufficient to meet a same-day recoverytime objective in the event of a wide-scale disruption. Section 40.9establishes the requirements for coreprinciple compliance in that respect.

Subpart P—Designation of ChiefCompliance Officer

§ 37.1500 Core Principle 15—Designationof chief compliance officer.

(a) In general. Each swap executionfacility shall designate an individual toserve as a chief compliance officer.

(b) Duties. The chief complianceofficer shall:

(1) Report directly to the board or tothe senior officer of the facility;

(2) Review compliance with the coreprinciples in this subsection;

(3) In consultation with the board of the facility, a body performing afunction similar to that of a board, or thesenior officer of the facility, resolve anyconflicts of interest that may arise;

(4) Be responsible for establishing andadministering the policies andprocedures required to be established

pursuant to this section;(5) Ensure compliance with the Actand the rules and regulations issuedunder the Act, including rulesprescribed by the Commission pursuantto section 5h of the Act; and

(6) Establish procedures for theremediation of noncompliance issuesfound during compliance office reviews,look backs, internal or external auditfindings, self-reported errors, or throughvalidated complaints.

(c) Requirements for procedures. Inestablishing procedures under


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paragraph (b)(6) of this section, the chief compliance officer shall design theprocedures to establish the handling,management response, remediation,retesting, and closing of noncomplianceissues.

(d) Annual reports— (1) In general. Inaccordance with rules prescribed by theCommission, the chief compliance

officer shall annually prepare and signa report that contains a description of:

(i) The compliance of the swapexecution facility with the Act; and

(ii) The policies and procedures,including the code of ethics and conflictof interest policies, of the swapexecution facility.

(2) Requirements. The chief compliance officer shall:

(i) Submit each report described inparagraph (d)(1) of this section with theappropriate financial report of the swapexecution facility that is required to besubmitted to the Commission pursuant

to section 5h of the Act; and(ii) Include in the report acertification that, under penalty of law,the report is accurate and complete.

§ 37.1501 Chief compliance officer.

(a) Definition of board of directors.For purposes of this part, the term‘‘board of directors’’ means the board of directors of a swap execution facility, orfor those swap execution facilitieswhose organizational structure does notinclude a board of directors, a bodyperforming a function similar to a boardof directors.

(b) Designation and qualifications of

chief compliance officer— (1) Chief compliance officer required. Each swapexecution facility shall establish theposition of chief compliance officer anddesignate an individual to serve in thatcapacity.

(i) The position of chief complianceofficer shall carry with it the authorityand resources to develop and enforcepolicies and procedures necessary tofulfill the duties set forth for chief compliance officers in the Act andCommission regulations.

(ii) The chief compliance officer shallhave supervisory authority over all staff

acting at the direction of the chief compliance officer.(2) Qualifications of chief compliance

officer. The individual designated toserve as chief compliance officer shallhave the background and skillsappropriate for fulfilling theresponsibilities of the position. Noindividual disqualified from registrationpursuant to sections 8a(2) or 8a(3) of theAct may serve as a chief complianceofficer.

(c) Appointment, supervision, and removal of chief compliance office— (1)

Appointment and compensation of chief compliance officer. (i) A swap executionfacility’s chief compliance officer shall

be appointed by its board of directors orsenior officer. A swap execution facilityshall notify the Commission within two

business days of appointing any newchief compliance officer, whetherinterim or permanent.

(ii) The board of directors or thesenior officer shall approve thecompensation of the chief complianceofficer.

(iii) The chief compliance officer shallmeet with the board of directors at leastannually and the regulatory oversightcommittee at least quarterly.

(iv) The chief compliance officer shallprovide any information regarding theswap execution facility’s self-regulatoryprogram that is requested by the boardof directors or the regulatory oversightcommittee.

(2) Supervision of chief compliance

officer. A swap execution facility’s chief compliance officer shall report directlyto the board of directors or to the seniorofficer of the swap execution facility, atthe swap execution facility’s discretion.

(3) Removal of chief complianceofficer. (i) Removal of a swap executionfacility’s chief compliance officer shallrequire the approval of a majority of theswap execution facility’s board of directors. If the swap execution facilitydoes not have a board of directors, thenthe chief compliance officer may beremoved by the senior officer of theswap execution facility.

(ii) The swap execution facility shallnotify the Commission of such removalwithin two business days.

(d) Duties of chief compliance officer.The chief compliance officer’s dutiesshall include, but are not limited to, thefollowing:

(1) Overseeing and reviewing theswap execution facility’s compliancewith section 5h of the Act and anyrelated rules adopted by theCommission;

(2) In consultation with the board of directors, a body performing a functionsimilar to the board of directors, or thesenior officer of the swap executionfacility, resolving any conflicts of interest that may arise, including:

(i) Conflicts between businessconsiderations and compliancerequirements;

(ii) Conflicts between businessconsiderations and the requirement thatthe swap execution facility provide fair,open, and impartial access as set forthin § 37.202; and;

(iii) Conflicts between a swapexecution facility’s management andmembers of the board of directors;

(3) Establishing and administeringwritten policies and proceduresreasonably designed to preventviolations of the Act and the rules of theCommission;

(4) Taking reasonable steps to ensurecompliance with the Act and the rulesof the Commission;

(5) Establishing procedures for the

remediation of noncompliance issuesidentified by the chief complianceofficer through a compliance officereview, look-back, internal or externalaudit finding, self-reported error, orvalidated complaint;

(6) Establishing and followingappropriate procedures for the handling,management response, remediation,retesting, and closing of noncomplianceissues;

(7) Establishing and administering acompliance manual designed topromote compliance with the applicablelaws, rules, and regulations and a

written code of ethics designed toprevent ethical violations and topromote honesty and ethical conduct;

(8) Supervising the swap executionfacility’s self-regulatory program withrespect to trade practice surveillance;market surveillance; real-time marketmonitoring; compliance with audit trailrequirements; enforcement anddisciplinary proceedings; audits,examinations, and other regulatoryresponsibilities with respect to membersand market participants (includingensuring compliance with, if applicable,financial integrity, financial reporting,sales practice, recordkeeping, and other

requirements); and(9) Supervising the effectiveness and

sufficiency of any regulatory servicesprovided to the swap execution facility

by a regulatory service provider inaccordance with § 37.204.

(e) Preparation of annual compliancereport. The chief compliance officershall, not less than annually, prepareand sign an annual compliance reportthat, at a minimum, contains thefollowing information covering the timeperiod since the date on which the swapexecution facility became registeredwith the Commission or since the end

of the period covered by a previouslyfiled annual compliance report, asapplicable:

(1) A description of the swapexecution facility’s written policies andprocedures, including the code of ethicsand conflict of interest policies;

(2) A review of applicableCommission regulations and eachsubsection and core principle of section5h of the Act, that, with respect to each:

(i) Identifies the policies andprocedures that are designed to ensurecompliance with each subsection and


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core principle, including each dutyspecified in section 5h(f)(15)(B) of theAct;

(ii) Provides a self-assessment as tothe effectiveness of these policies andprocedures; and

(iii) Discusses areas for improvementand recommends potential orprospective changes or improvements to

its compliance program and resources;(3) A list of any material changes tocompliance policies and proceduressince the last annual compliance report;

(4) A description of the financial,managerial, and operational resourcesset aside for compliance with respect tothe Act and Commission regulations,including a description of the swapexecution facility’s self-regulatoryprogram’s staffing and structure, acatalogue of investigations anddisciplinary actions taken since the lastannual compliance report, and a reviewof the performance of disciplinarycommittees and panels;

(5) A description of any materialcompliance matters, includingnoncompliance issues identifiedthrough a compliance office review,look-back, internal or external auditfinding, self-reported error, or validatedcomplaint, and an explanation of howthey were resolved; and

(6) A certification by the chief compliance officer that, to the best of his or her knowledge and reasonable

belief, and under penalty of law, theannual compliance report is accurateand complete.

(f) Submission of annual compliance

report. (1) Prior to submission to theCommission, the chief complianceofficer shall provide the annualcompliance report to the board of directors of the swap execution facilityfor its review. If the swap executionfacility does not have a board of directors, then the annual compliancereport shall be provided to the seniorofficer for his or her review. Members of the board of directors and the seniorofficer shall not require the chief compliance officer to make any changesto the report. Submission of the reportto the board of directors or the senior

officer, and any subsequent discussionof the report, shall be recorded in boardminutes or a similar written record, asevidence of compliance with thisrequirement.

(2) The annual compliance reportshall be submitted electronically to theCommission not later than 60 calendardays after the end of the swap executionfacility’s fiscal year, concurrently withthe filing of the fourth fiscal quarterfinancial report pursuant to § 37.1306.

(3) Promptly upon discovery of anymaterial error or omission made in a

previously filed annual compliancereport, the chief compliance officer shallfile an amendment with theCommission to correct the material erroror omission. An amendment shallcontain the certification required underparagraph (e)(6) of this section.

(4) A swap execution facility mayrequest from the Commission anextension of time to file its annualcompliance report based on substantial,undue hardship. Extensions of the filingdeadline may be granted at thediscretion of the Commission.

(g) Recordkeeping. (1) The swapexecution facility shall maintain:

(i) A copy of the written policies andprocedures, including the code of ethicsand conflicts of interest policiesadopted in furtherance of compliancewith the Act and Commissionregulations;

(ii) Copies of all materials created in

furtherance of the chief complianceofficer’s duties listed in paragraphs(d)(8) and (d)(9) of this section,including records of any investigationsor disciplinary actions taken by theswap execution facility;

(iii) Copies of all materials, includingwritten reports provided to the board of directors or senior officer in connectionwith the review of the annualcompliance report under paragraph(f)(1) of this section and the boardminutes or a similar written record thatdocuments the review of the annualcompliance report by the board of

directors or senior officer; and(iv) Any records relevant to the swap

execution facility’s annual compliancereport, including, but not limited to,work papers and other documents thatform the basis of the report, andmemoranda, correspondence, otherdocuments, and records that are

(A) Created, sent, or received inconnection with the annual compliancereport and

(B) Contain conclusions, opinions,analyses, or financial data related to theannual compliance report.

(2) The swap execution facility shallmaintain records in accordance with§ 1.31 and part 45 of this chapter.

(h) Delegation of authority. TheCommission hereby delegates, until itorders otherwise, to the Director of theDivision of Market Oversight or suchother employee or employees as theDirector may designate from time totime, authority to grant or deny a swapexecution facility’s request for anextension of time to file its annualcompliance report under paragraph(f)(4) of this section.

Appendix A to Part 37—Form SEF


FORM SEF

SWAP EXECUTION FACILITYAPPLICATION OR AMENDMENT TOAPPLICATION FOR REGISTRATION

Registration Instructions

Intentional misstatements or omissions of material fact may constitute federal criminalviolations (7 U.S.C. § 13 and 18 U.S.C.§ 1001) or grounds for disqualification fromregistration.

DEFINITIONS

Unless the context requires otherwise, allterms used in this Form SEF have the samemeaning as in the Commodity Exchange Act,as amended (‘‘Act’’), and in the General Rulesand Regulations of the Commodity FuturesTrading Commission (‘‘Commission’’)thereunder.

For the purposes of this Form SEF, theterm ‘‘Applicant’’ shall include any applicantfor registration as a swap execution facility,

any applicant amending a pendingapplication, or any registered swap executionfacility that is applying for an amendment toits order of registration.

GENERAL INSTRUCTIONS

1. This Form SEF, which includesinstructions, a Cover Sheet, and requiredExhibits (together, ‘‘Form SEF’’), is to be filedwith the Commission by all Applicants,pursuant to section 5h of the Act and theCommission’s regulations thereunder.Applicants may prepare their own Form SEF

but must follow the format prescribed herein.Upon the filing of an application forregistration or a registration amendment inaccordance with the instructions provided

herein, the Commission will publish noticeof the filing and afford interested persons anopportunity to submit written data, views,and arguments concerning such application.No application for registration or registrationamendment shall be effective unless theCommission, by order, grants suchregistration or amended registration.

2. Individuals’ names, except the executingsignature, shall be given in full (Last Name,First Name, Middle Name).

3. Signatures on all copies of the Form SEFfiled with the Commission can be executedelectronically. If this Form SEF is filed by acorporation, it shall be signed in the name of the corporation by a principal officer dulyauthorized; if filed by a limited liabilitycompany, it shall be signed in the name of the limited liability company by a manageror member duly authorized to sign on thelimited liability company’s behalf; if filed bya partnership, it shall be signed in the nameof the partnership by a general partner dulyauthorized; if filed by an unincorporatedorganization or association which is not apartnership, it shall be signed in the name of such organization or association by themanaging agent, i.e., a duly authorizedperson who directs or manages or whoparticipates in the directing or managing of its affairs.

4. If this Form SEF is being filed as anapplication for registration, all applicable


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items must be answered in full. If any itemis inapplicable, indicate by ‘‘none,’’ ‘‘notapplicable,’’ or ‘‘N/A,’’ as appropriate.

5. Under section 5h of the Act and theCommission’s regulations thereunder, theCommission is authorized to solicit theinformation required to be supplied by thisForm SEF from any Applicant seekingregistration as a swap execution facility and

from any registered swap execution facility.Disclosure by the Applicant of theinformation specified on this Form SEF ismandatory prior to the start of the processingof an application for, or an amendment to,registration as a swap execution facility. Theinformation provided in this Form SEF will

be used for the principal purpose of determining whether the Commission shouldgrant or deny registration to an Applicant.The Commission may determine thatadditional information is required from theApplicant in order to process its application.A Form SEF which is not prepared andexecuted in compliance with applicablerequirements and instructions may be

returned as not acceptable for filing.Acceptance of this Form SEF, however, shallnot constitute a finding that the Form SEFhas been filed as required or that theinformation submitted is true, current, orcomplete.

6. Except in cases where confidentialtreatment is requested by the Applicant andgranted by the Commission pursuant to theFreedom of Information Act and the rules of the Commission thereunder, informationsupplied on this Form SEF will be includedroutinely in the public files of theCommission and will be available forinspection by any interested person.

APPLICATION AMENDMENTS1. An Applicant amending a pending

application for registration as a swapexecution facility or requesting anamendment to an order of registration shallfile an amended Form SEF electronicallywith the Secretary of the Commission in themanner specified by the Commission.Otherwise, a swap execution facility shall fileany amendment to this Form SEF as asubmission under part 40 of theCommission’s regulations or as specified bythe Commission.

2. When filing this Form SEF for purposesof amending a pending application orrequesting an amendment to an order of

registration, Applicants must re-file theCover Sheet, amended if necessary andincluding an executing signature, and attachthereto revised Exhibits or other materialsmarked to show changes, as applicable. Thesubmission of an amendment represents thatthe remaining items and Exhibits that are notamended remain true, current, and completeas previously filed.

WHERE TO FILE

This Form SEF must be filed electronicallywith the Secretary of the Commission in themanner specified by the Commission.


FORM SEF


Cover Sheet

lllllllllllllllllllll

Exact name of Applicant as specified incharter lllllllllllllllllllll

Address of principal executive offices

b If this is an APPLICATION forregistration, complete in full and check here.b If this is an AMENDMENT to an

application, or to an existing order of registration, list all items that are amendedand check here. lllllllllllllllllllll




GENERAL INFORMATION

1. Name under which the business of the swap execution facility is or will beconducted, if different than namespecified above (include acronyms, if any): lllllllllllllllllllll

2. If name of swap execution facilityis being amended, state previous swapexecution facility name: lllllllllllllllllllll

3. Contact information, includingmailing address if different than addressspecified above: lllllllllllllllllllll

Number and Street lllllllllllllllllllll

City State Country Zip Code lllllllllllllllllllll

Main Phone Number Fax lllllllllllllllllllll

Web site URL Email Address

4. List of principal office(s) andaddress(es) where swap executionfacility activities are/will be conducted:

Office lllllllllllllllllllll



Address lllllllllllllllllllll


lllllllllllllllllllll 5. If the Applicant is a successor to a

previously registered swap executionfacility, please complete the following:

a. Date of succession lllllllllllllllllllll

b. Full name and address of predecessor registrant lllllllllllllllllllll

Name lllllllllllllllllllll


City State Country Zip Code


Main Phone Number Web siteURL

BUSINESS ORGANIZATION

6. Applicant is a:

b Corporation

b Partnership

b Limited Liability Companyb Other form of organization (specify) lllllllllllllllllllll

7. Date of incorporation or formation: lllllllllllllllllllll

8. State of incorporation orjurisdiction of organization: lllllllllllllllllllll

9. The Applicant agrees and consentsthat the notice of any proceeding beforethe Commission in connection with thisapplication may be given by sendingsuch notice by certified mail to theperson named below at the addressgiven. lllllllllllllllllllll

Print Name and Title lllllllllllllllllllll

Name of Applicant lllllllllllllllllllll


City State Zip Code

SIGNATURES

10. The Applicant has duly causedthis application or amendment to besigned on its behalf by the undersigned,hereunto duly authorized, this lll day of llllll , 20 ll . TheApplicant and the undersigned

represent hereby that all informationcontained herein is true, current, andcomplete. It is understood that allrequired items and Exhibits areconsidered integral parts of this FormSEF and that the submission of anyamendment represents that allunamended items and Exhibits remaintrue, current, and complete aspreviously filed. lllllllllllllllllllll

Name of Applicant lllllllllllllllllllll

Signature of Duly Authorized Person lllllllllllllllllllll

Print Name and Title of Signatory


FORM SEF


Exhibits Instructions

The following Exhibits must be filedwith the Commission by each Applicantapplying for registration as a swapexecution facility, or by a registered


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swap execution facility amending itsregistration, pursuant to section 5h of the Act and the Commission’sregulations thereunder. The Exhibitsmust be labeled according to the itemsspecified in this Form SEF.

The application must include a Tableof Contents listing each Exhibit required

by this Form SEF and indicating which,

if any, Exhibits are inapplicable. For anyExhibit that is inapplicable, next to theExhibit letter specify ‘‘none,’’ ‘‘notapplicable,’’ or ‘‘N/A,’’ as appropriate.

If the Applicant is a newly formedenterprise and does not have thefinancial statements required pursuantto Items 9 and 10 (Exhibits I and J) of this Form SEF, the Applicant shouldprovide pro forma financial statementsfor the most recent six months or sinceinception, whichever is less.

List of Exhibits

EXHIBITS—BUSINESS

ORGANIZATION1. Attach as Exhibit A, the name of

any person who owns ten percent (10%)or more of the Applicant’s stock or who,either directly or indirectly, throughagreement or otherwise, in any othermanner, may control or direct themanagement or policies of theApplicant.

Provide as part of Exhibit A the fullname and address of each such personand attach a copy of the agreement or,if there is none written, describe theagreement or basis upon which suchperson exercises or may exercise such

control or direction.2. Attach as Exhibit B, a list of thepresent officers, directors, governors(and, in the case of an Applicant that isnot a corporation, the members of allstanding committees, grouped bycommittee), or persons performingfunctions similar to any of the foregoing,of the swap execution facility or of anyentity that performs the regulatoryactivities of the Applicant, indicatingfor each:a. Name

b. Titlec. 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 sameoffice 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 thederivatives and securities industry

g. For directors, list any committees onwhich they serve and any compensationreceived by virtue of their directorship

h. A description of:(1) Any order of the Commission with

respect to such person pursuant to section 5eof the Act;

(2) Any conviction or injunction againstsuch person within the past ten (10) years;

(3) Any disciplinary action with respect tosuch person within the last five (5) years;

(4) Any disqualification under sections 8band 8d of the Act;

(5) Any disciplinary action under section8c of the Act; and

(6) Any violation pursuant to section 9 of the Act.

3. Attach as Exhibit C, a narrative that setsforth the fitness standards for the Board of Directors and its composition including thenumber and percentage of public directors.

4. Attach as Exhibit D, a narrative orgraphic description of the organizationalstructure of the Applicant. Include a list of all affiliates of the Applicant and indicate thegeneral nature of the affiliation. Note: If theswap execution facility activities of theApplicant are or will be conducted primarily

by a division, subdivision, or other separateentity within the Applicant, corporation, ororganization, describe the relationship of such entity within the overall organizationalstructure and attach as Exhibit D adescription only as it applies to the division,subdivision, or separate entity, as applicable.Additionally, provide any relevantjurisdictional information, including any andall jurisdictions in which the Applicant orany affiliated entity are doing business, andregistration status, including pendingapplications (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 theApplicant or the division, subdivision, orother separate entity within the Applicant as

described in Item 4.6. Attach as Exhibit F, an analysis of staffing requirements necessary to carry outthe operations of the Applicant as a swapexecution facility and the name andqualifications of each key staff person.

7. Attach as Exhibit G, a copy of theconstitution, articles of incorporation,formation, or association with allamendments thereto, partnership or limitedliability agreements, and existing by-laws,operating agreement, rules or instrumentscorresponding thereto, of the Applicant.Include any additional governance fitnessinformation not included in Exhibit C.Provide a certificate of good standing datedwithin one week of the date of this Form

SEF.8. Attach as Exhibit H, a brief descriptionof any material pending legal proceeding(s),other than ordinary and routine litigationincidental to the business, to which theApplicant or any of its affiliates is a party orto which any of its or their property is thesubject. Include the name of the court oragency where the proceeding(s) are pending,the date(s) instituted, the principal partiesinvolved, a description of the factual basisalleged to underlie the proceeding(s), and therelief sought. Include similar information asto any proceeding(s) known to becontemplated 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 cashflows, and (iv) Statement of sources andapplication of revenues and all notes orschedules thereto, as of the most recent fiscalyear of the Applicant, or of its parentcompany, if applicable. If a balance sheet andany statement(s) certified by an independentpublic accountant are available, that balancesheet and statement(s) should be submittedas Exhibit I.

b. Provide a narrative of how the value of the financial resources of the Applicant is atleast equal to a total amount that wouldenable the Applicant to cover its operatingcosts for a period of at least one year,calculated on a rolling basis, and whethersuch financial resources includeunencumbered, liquid financial assets (i.e.,cash and/or highly liquid securities) equal toat least six months’ operating costs.

c. Attach copies of any agreementsestablishing or amending a credit facility,insurance coverage, or other arrangementevidencing or otherwise supporting the

Applicant’s conclusions regarding theliquidity of its financial assets.

d. Representations regarding sources andestimates for future ongoing operationalresources.

10. Attach as Exhibit J, a balance sheet andan income and expense statement for eachaffiliate of the swap execution facility thatalso engages in swap execution facilityactivities or that engages in designatedcontract market activities as of the end of themost recent fiscal year of each such affiliate.

11. Attach as Exhibit K, the following:a. A complete list of all dues, fees, and

other charges imposed, or to be imposed, byor on behalf of the Applicant for its swapexecution facility services that are provided

on an exclusive basis and identify the serviceor services provided for each such due, fee,or other charge.

b. A description of the basis and methodsused in determining the level and structureof the dues, fees, and other charges listed inparagraph (a) of this item.

c. If the Applicant differentiates, orproposes to differentiate, among itscustomers or classes of customers in theamount of any dues, fees, or other chargesimposed for the same or similar exclusiveservices, describe and indicate the amount of each differential. In addition, identify anddescribe any differences in the cost of providing such services and any other factorsthat account for such differentiations.

EXHIBITS—COMPLIANCE

12. Attach as Exhibit L, a narrative and anyother form of documentation that may beprovided under other Exhibits herein, thatdescribes the manner in which the Applicantis able to comply with each core principle.Such documentation must include aregulatory compliance chart setting fortheach core principle and providing citations tothe Applicant’s relevant rules, policies, andprocedures that address each core principle.To the extent that the application raisesissues that are novel or for which compliancewith a core principle is not self-evident,


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include an explanation of how that item andthe application satisfy the core principles.

13. Attach as Exhibit M, a copy of theApplicant’s rules (as defined in § 40.1 of theCommission’s regulations) and any technicalmanuals, other guides, or instructions forusers of, or participants in, the market,including minimum financial standards formembers or market participants. Includerules citing applicable federal position limits

and aggregation standards in part 151 of theCommission’s regulations and any facility setposition limit rules. Include rules onpublication of daily trading information withregards to the requirements of part 16 of theCommission’s regulations. The Applicantshould include an explanation and any otherform of documentation that the Applicantthinks will be helpful to its explanation,demonstrating how its rules, technicalmanuals, other guides, or instructions forusers of, or participants in, the market, orminimum financial standards for members ormarket participants as provided in thisExhibit M help support the swap executionfacility’s compliance with the coreprinciples.

14. Attach as Exhibit N, executed orexecutable copies of any agreements orcontracts entered into or to be entered into

by the Applicant, including third partyregulatory service provider or member oruser agreements that enable or empower theApplicant to comply with applicable coreprinciples. Identify: (1) the services that will

be provided; and (2) the core principlesaddressed by such agreement.

15. Attach as Exhibit O, a copy of anycompliance manual and any other documentsthat describe with specificity the manner inwhich the Applicant will conduct tradepractice, market, and financial surveillance.

16. Attach as Exhibit P, a description of theApplicant’s disciplinary and enforcement

protocols, tools, and procedures and, if applicable, the arrangements for alternativedispute resolution.

17. Attach as Exhibit Q, an explanationregarding the operation of the Applicant’strading system(s) or platform(s) and themanner in which the system(s) or platform(s)satisfy any Commission rules,interpretations, or guidelines regarding aswap execution facility’s execution methods,including the minimum trading functionalityrequirement in §37.3(a)(2) of theCommission’s regulations. This explanationshould include, as applicable, the following:

a. For trading systems or platforms thatenable market participants to engage intransactions through an order book:

(1) How the trading system or platformdisplays all orders and trades in an electronicor other form, and the timeliness in whichthe trading system or platform does so;

(2) How all market participants have theability to see and have the ability to transacton all bids and offers; and

(3) An explanation of the trade matchingalgorithm, if applicable, and examples of how that algorithm works in various tradingscenarios involving various types of orders.

b. For trading systems or platforms thatenable market participants to engage intransactions through a request for quotesystem:

(1) How a market participant transmits arequest for a quote to buy or sell a specificinstrument to no less than three marketparticipants in the trading system orplatform, to which all such marketparticipants may respond;

(2) How resting bids or offers from theApplicant’s Order Book are communicated tothe requester; and

(3) How a requester may transact on resting

bids or offers along with the responsiveorders.c. How the timing delay described under

§ 37.9 of the Commission’s regulations isincorporated into the trading system orplatform.

18. Attach as Exhibit R, a list of rulesprohibiting specific trade practice violations.

19. Attach as Exhibit S, a discussion of how trading data will be maintained by theswap execution facility.

20. Attach as Exhibit T, a list of the nameof the clearing organization(s) that will beclearing the Applicant’s trades, and arepresentation that clearing members of thatorganization will be guaranteeing suchtrades.

21. Attach as Exhibit U, any information(described with particularity) included in theapplication that will be subject to a requestfor confidential treatment pursuant to § 145.9of the Commission’s regulations.

EXHIBITS—OPERATIONAL CAPABILITY

22. Attach as Exhibit V, informationresponsive to the Technology Questionnaire.This questionnaire focuses on informationpertaining to the Applicant’s program of riskanalysis and oversight. Main topic areasinclude: information security; businesscontinuity-disaster recovery planning andresources; capacity and performanceplanning; systems operations; systemsdevelopment and quality assurance; andphysical security and environmental

controls. The questionnaire will be providedto Applicants on the Commission’s Web site.

Appendix B to Part 37—Guidance on,and Acceptable Practices in,Compliance with Core Principles

1. This appendix provides guidance oncomplying with core principles, both initiallyand on an ongoing basis, to maintainregistration under section 5h of the Act andthis part 37. Where provided, guidance is setforth in paragraph (a) following the relevantheading and can be used to demonstrate tothe Commission compliance with theselected requirements of a core principle of this part 37. The guidance for the coreprinciple is illustrative only of the types of

matters a swap execution facility mayaddress, as applicable, and is not intended to

be used as a mandatory checklist. Addressingthe issues set forth in this appendix wouldhelp the Commission in its consideration of whether the swap execution facility is incompliance with the selected requirements of a core principle; provided however, that theguidance is not intended to diminish orreplace, in any event, the obligations andrequirements of applicants and swapexecution facilities to comply with theregulations provided under this part 37.

2. Where provided, acceptable practicesmeeting selected requirements of core

principles are set forth in paragraph (b)following the guidance. Swap executionfacilities that follow specific practicesoutlined in the acceptable practices for a coreprinciple in this appendix will meet theselected requirements of the applicable coreprinciple; provided however, that theacceptable practice is not intended todiminish or replace, in any event, theobligations and requirements of applicants

and swap execution facilities to comply withthe regulations provided under this part 37.The acceptable practices are for illustrativepurposes only and do not state the exclusivemeans for satisfying a core principle.

Core Principle 1 of Section 5h of the Act—Compliance With Core Principles

(A) In general. To be registered, andmaintain registration, as a swap executionfacility, the swap execution facility shallcomply with—the core principles describedin section 5h of the Act; and any requirementthat the Commission may impose by rule orregulation pursuant to section 8a(5) of theAct.

(B) Reasonable discretion of swap

execution facility. Unless otherwisedetermined by the Commission by rule orregulation, a swap execution facilitydescribed in paragraph (A) shall havereasonable discretion in establishing themanner in which the swap execution facilitycomplies with the core principles describedin 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 theswaps traded or processed on or through theswap execution facility and any limitation onaccess to the swap execution facility;

(B) Establish and enforce trading, tradeprocessing, and participation rules that willdeter abuses and have the capacity to detect,investigate, and enforce those rules,including means to provide marketparticipants with impartial access to themarket and to capture information that may

be used in establishing whether ruleviolations have occurred;

(C) Establish rules governing the operationof the facility, including rules specifyingtrading procedures to be used in entering andexecuting orders traded or posted on thefacility, including block trades; and

(D) Provide by its rules that when a swap

dealer or major swap participant enters intoor facilitates a swap that is subject to themandatory clearing requirement of section2(h) of the Act, the swap dealer or majorswap participant shall be responsible forcompliance with the mandatory tradingrequirement under section 2(h)(8) of the Act.

(a) Guidance.(1) Investigations and investigation

reports—Warning letters. The rules of a swapexecution facility may authorize itscompliance staff to issue a warning letter toa person or entity under investigation or torecommend that a disciplinary panel takesuch an action.


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(2) Additional rules required. A swapexecution facility should adopt and enforceany additional rules that it believes arenecessary to comply with the requirements of § 37.203.

(3) Enforcement staff. A swap executionfacility’s enforcement staff should notinclude either members of the swapexecution facility or persons whose interestsconflict with their enforcement duties. A

member of the enforcement staff should notoperate under the direction or control of anyperson or persons with trading privileges atthe swap execution facility. A swapexecution facility’s enforcement staff mayoperate as part of the swap executionfacility’s compliance department.

(4) Notice of charges. If compliance staff authorized by a swap execution facility or aswap execution facility disciplinary paneldetermines, based upon reviewing aninvestigation report pursuant to§ 37.203(f)(3), that a reasonable basis existsfor finding a violation and adjudication iswarranted, it should direct that the person orentity alleged to have committed theviolation be served with a notice of chargesand should proceed in accordance with thisguidance. A notice of charges shouldadequately state the acts, conduct, orpractices in which the respondent is allegedto have engaged; state the rule, or rules,alleged to have been violated (or about to beviolated); advise the respondent that it isentitled, upon request, to a hearing on thecharges; and prescribe the period withinwhich a hearing on the charges may berequested. If the rules of the swap executionfacility so provide, a notice may also advise:

(i) That failure to request a hearing withinthe period prescribed in the notice, except forgood cause, may be deemed a waiver of theright to a hearing; and

(ii) That failure to answer or to denyexpressly a charge may be deemed to be anadmission of such charge.

(5) Right to representation. Upon beingserved with a notice of charges, a respondentshould have the right to be represented bylegal counsel or any other representative of its choosing in all succeeding stages of thedisciplinary process, except by any memberof the swap execution facility’s board of directors or disciplinary panel, any employeeof the swap execution facility, or any personsubstantially related to the underlyinginvestigations, such as a material witness orrespondent.

(6) Answer to charges. A respondentshould be given a reasonable period of time

to file an answer to a notice of charges. Therules of a swap execution facility governingthe requirements and timeliness of arespondent’s answer to a notice of chargesshould be fair, equitable, and publiclyavailable.

(7) Admission or failure to deny charges.The rules of a swap execution facility mayprovide that if a respondent admits or failsto deny any of the charges, a disciplinarypanel may find that the violations alleged inthe notice of charges for which therespondent admitted or failed to deny any of the charges have been committed. If the swapexecution facility’s rules so provide, then:

(i) The disciplinary panel should impose asanction for each violation found to have

been committed;(ii) The disciplinary panel should

promptly notify the respondent in writing of any sanction to be imposed pursuant toparagraph (7)(i) of this guidance and shalladvise the respondent that it may request ahearing on such sanction within the periodof time, which shall be stated in the notice;

(iii) The rules of a swap execution facilitymay provide that if a respondent fails torequest a hearing within the period of timestated in the notice, the respondent will bedeemed to have accepted the sanction.

(8) Denial of charges and right to hearing.In every instance where a respondent hasrequested a hearing on a charge that isdenied, or on a sanction set by thedisciplinary panel, the respondent should begiven an opportunity for a hearing inaccordance with the rules of the swapexecution facility.

(9) Settlement offers. (i) The rules of aswap execution facility may permit arespondent to submit a written offer of settlement at any time after an investigation

report is completed. The disciplinary panelpresiding over the matter may accept theoffer of settlement, but may not alter theterms of a settlement offer unless therespondent agrees.

(ii) The rules of a swap execution facilitymay provide that, in its discretion, adisciplinary panel may permit therespondent to accept a sanction withouteither admitting or denying the ruleviolations upon which the sanction is based.

(iii) If an offer of settlement is accepted, thepanel accepting the offer should issue awritten decision specifying the ruleviolations it has reason to believe werecommitted, including the basis or reasons forthe panel’s conclusions, and any sanction to

be imposed, which should include fullcustomer restitution where customer harm isdemonstrated, except where the amount of restitution or to whom it should be providedcannot be reasonably determined. If an offerof settlement is accepted without theagreement of the enforcement staff, thedecision should adequately support thedisciplinary panel’s acceptance of thesettlement. Where applicable, the decisionshould also include a statement that therespondent has accepted the sanctionsimposed without either admitting or denyingthe rule violations.

(iv) The respondent may withdraw his orher offer of settlement at any time before finalacceptance by a disciplinary panel. If an offeris withdrawn after submission, or is rejected

by a disciplinary panel, the respondentshould not be deemed to have made anyadmissions by reason of the offer of settlement and should not be otherwiseprejudiced by having submitted the offer of settlement.

(10) Hearings. (i) The swap executionfacility need not apply the formal rules of evidence for a hearing; nevertheless, theprocedures for the hearing may not be soinformal as to deny a fair hearing. Nomember of the disciplinary panel for thematter may have a financial, personal, orother direct interest in the matter underconsideration.

(ii) In advance of the hearing, therespondent should be entitled to examine all

books, documents, or other evidence in thepossession or under the control of the swapexecution facility. The swap executionfacility may withhold documents that: Areprivileged or constitute attorney workproduct; were prepared by an employee of the swap execution facility but will not beoffered in evidence in the disciplinary

proceedings; may disclose a technique orguideline used in examinations,investigations, or enforcement proceedings;or disclose the identity of a confidentialsource.

(iii) The swap execution facility’senforcement and compliance staffs should beparties to the hearing, and the enforcementstaff should present their case on thosecharges and sanctions that are the subject of the hearing.

(iv) The respondent should be entitled toappear personally at the hearing, should beentitled to cross-examine any personsappearing as witnesses at the hearing, andshould be entitled to call witnesses and topresent such evidence as may be relevant to

the charges.(v) The swap execution facility shouldrequire persons within its jurisdiction whoare called as witnesses to participate in thehearing and produce evidence. The swapexecution facility should make reasonableefforts to secure the presence of all otherpersons called as witnesses whose testimonywould be relevant.

(vi) The rules of a swap execution facilitymay provide that a sanction may besummarily imposed upon any person withinits jurisdiction whose actions impede theprogress of a hearing.

(11) Right to appeal. The rules of a swapexecution facility may permit the parties toa proceeding to appeal promptly an adversedecision of a disciplinary panel in all or incertain classes of cases. Such rules mayrequire a party’s notice of appeal to be inwriting and to specify the findings,conclusions, or sanctions to which objectionare taken. If the rules of a swap executionfacility permit appeals, then both therespondent and the enforcement staff shouldhave the opportunity to appeal and the swapexecution facility should provide for thefollowing:

(i) The swap execution facility shouldestablish an appellate panel that should beauthorized to hear appeals of respondents. Inaddition, the rules of a swap executionfacility may provide that the appellate panelmay, on its own initiative, order review of adecision by a disciplinary panel within a

reasonable period of time after the decisionhas been rendered.

(ii) The composition of the appellate panelshould be consistent with part 40 of thischapter, and should not include anymembers of the swap execution facility’scompliance staff or any person involved inadjudicating any other stage of the sameproceeding. The rules of a swap executionfacility should provide for the appealproceeding to be conducted before all of themembers of the appellate panel or a panelthereof.

(iii) Except for good cause shown, theappeal or review should be conducted solely


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on the record before the disciplinary panel,the written exceptions filed by the parties,and the oral or written arguments of theparties.

(iv) Promptly following the appeal orreview proceeding, the appellate panelshould issue a written decision and shouldprovide a copy to the respondent. Thedecision issued by the appellate panel shouldadhere to all the requirements of § 37.206(d)

to the extent that a different conclusion isreached from that issued by the disciplinarypanel.

(12) Final decisions. Each swap executionfacility should establish rules setting forthwhen a decision rendered pursuant to itsrules will become the final decision of suchswap execution facility.

(13) Summary fines for violations of rulesregarding timely submission of records. Aswap execution facility may adopt asummary fine schedule for violations of rulesrelating to the failure to timely submitaccurate records required for clearing orverifying each day’s transactions. A swapexecution facility may permit its compliancestaff, or a designated panel of swap execution

facility officials, to summarily impose minorsanctions against persons within the swapexecution facility’s jurisdiction for violatingsuch rules. A swap execution facility’ssummary fine schedule may allow forwarning letters to be issued for first-timeviolations or violators. If adopted, a summaryfine schedule should provide forprogressively larger fines for recurringviolations.

(14) Emergency disciplinary actions. (i) Aswap execution facility may impose asanction, including suspension, or take othersummary action against a person or entitysubject to its jurisdiction upon a reasonable

belief that such immediate action isnecessary to protect the best interest of the

marketplace.(ii) Any emergency disciplinary action

should be taken in accordance with a swapexecution facility’s procedures that providefor the following:

(A) If practicable, a respondent should beserved with a notice before the action istaken, or otherwise at the earliest possibleopportunity. The notice should state theaction, briefly state the reasons for the action,and state the effective time and date, and theduration of the action.

(B) The respondent should have the rightto be represented by legal counsel or anyother representative of its choosing in allproceedings subsequent to the emergencyaction taken. The respondent should be given

the opportunity for a hearing as soon asreasonably practicable and the hearingshould be conducted before the disciplinarypanel pursuant to the rules of the swapexecution facility.

(C) Promptly following the hearingprovided for in paragraph (14)(ii)(B) of thisguidance, the swap execution facility shouldrender a written decision based upon theweight of the evidence contained in therecord of the proceeding and should providea copy to the respondent. The decisionshould include a description of the summaryaction taken; the reasons for the summaryaction; a summary of the evidence produced

at the hearing; a statement of findings andconclusions; a determination that thesummary action should be affirmed,modified, or reversed; and a declaration of any action to be taken pursuant to thedetermination, and the effective date andduration of such action.

(b) Acceptable Practices. [Reserved]

Core Principle 3 of Section 5h of the Act—Swaps Not Readily Susceptible toManipulation

The swap execution facility shall permittrading only in swaps that are not readilysusceptible to manipulation.

(a) Guidance.(1) In general, a swap contract is an

agreement to exchange a series of cash flowsover a period of time based on somereference price, which could be a singleprice, such as an absolute level or adifferential, or a price index calculated basedon multiple observations. Moreover, such areference price may be reported by the swapexecution facility itself or by an independentthird 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 priceused to determine the cash flow exchanges.Specifically, Core Principle 3 requires thatthe reference price used by a swap not bereadily susceptible to manipulation. As aresult, when identifying a reference price, aswap execution facility should either:Calculate its own reference price usingsuitable and well-established acceptablemethods or carefully select a reliable third-party index.

(2) The importance of the reference price’ssuitability for a given swap is similar to thatof the final settlement price for a cash-settledfutures contract. If the final settlement priceis manipulated, then the futures contractdoes not serve its intended price discoveryand risk management functions. Similarly,inappropriate reference prices cause the cashflows between the buyer and seller to differfrom the proper amounts, thus benefittingone party and disadvantaging the other.Thus, careful consideration should be givento the potential for manipulation ordistortion of the reference price.

(3) For swaps that are settled by physicaldelivery or by cash settlement refer to theguidance in appendix C to part 38 of thischapter—Demonstration of Compliance Thata Contract is not Readily Susceptible toManipulation, section b(2) and section c(5),respectively.


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 specificationsdetailing:

(1) Trading procedures to be used inentering and executing orders traded on orthrough the facilities of the swap executionfacility; and

(2) Procedures for trade processing of swaps on or through the facilities of the swapexecution facility; and

(B) Monitor trading in swaps to preventmanipulation, price distortion, and

disruptions of the delivery or cash settlementprocess through surveillance, compliance,and disciplinary practices and procedures,including methods for conducting real-timemonitoring of trading and comprehensiveand accurate trade reconstructions.

(a) Guidance. The monitoring of tradingactivity in listed swaps should be designedto prevent manipulation, price distortion,and disruptions of the physical-delivery and

cash settlement processes. The swapexecution facility should have rules in placethat allow it to intervene to prevent or reducesuch market disruptions. Once a threatenedor actual disruption is detected, the swapexecution facility should take steps toprevent the market disruption or reduce itsseverity.

(1) General requirements. Real-timemonitoring for market anomalies is the mosteffective, but the swap execution facility mayalso demonstrate that it has an acceptableprogram if some of the monitoring isaccomplished on a T+1 basis. The monitoringof trading should use automated alerts todetect abnormal price movements andunusual trading volumes in real-time and

instances or threats of manipulation, pricedistortion, and disruptions on at least a T+1

basis. The T+1 detection and analysis shouldincorporate any additional data that becomesavailable on a T+1 basis, including the tradereconstruction data. In some cases, a swapexecution facility may demonstrate that itsmanual processes are effective. The swapexecution facility should continually monitorthe appropriateness of its swaps’ terms andconditions, including the physical-deliveryrequirements or reference prices used todetermine cash flows or settlement. Theswap execution facility should act promptlyto address the conditions that are causingprice distortions or market disruptions,including, when appropriate, changes to

contract terms. The swap execution facilityshould be mindful that changes to contractterms may affect whether a product is subjectto the trade execution and clearingrequirements of the Act.

(2) Physical-delivery swaps. For physical-delivery swaps, the swap execution facilityshould monitor for conditions that may causethe swap to become susceptible to pricemanipulation or distortion, including: Thegeneral availability of the commodityspecified by the swap, the commodity’scharacteristics, and the delivery locations;and if available, information related to thesize and ownership of deliverable supplies.

(3) Cash-settled swaps. For cash-settledswaps, the swap execution facility should

monitor for pricing abnormalities in theindex or instrument used to calculate thereference price. If the swap execution facilitycomputes its own reference price used forcash flows or settlement, it should promptlyamend any methodologies that result, or arelikely to result, in manipulation, pricedistortions, or market disruptions, or imposenew methodologies to resolve the threat of disruptions or distortions. If the swapexecution facility relies upon a third-partyindex or instrument, including an index orinstrument traded on another venue for theswap reference price, it should conduct duediligence to ensure that the reference price is


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not susceptible to manipulation and that theterms and conditions of the swap continue tocomply with § 37.300.

(4) Ability to obtain information. The swapexecution facility shall demonstrate that ithas access to sufficient information to assesswhether trading in swaps listed on itsmarket, in the index or instrument used asa reference price, or the underlyingcommodity for its listed swaps is being used

to affect prices on its market. The swapexecution facility should demonstrate that itcan obtain position and trading informationdirectly from the market participants thatconduct substantial trading on its facility orthrough an information sharing agreementwith other venues or a third-party regulatoryservice provider. If the position and tradinginformation is not available directly from themarket participants in its markets, but isavailable through information sharingagreements with other trading venues or athird-party regulatory service provider, theswap execution facility should cooperate insuch information sharing agreements. Theswap execution facility may limit theapplication of the requirement for market

participants to keep and provide records of their activity in the index or instrument usedas a reference price, the underlyingcommodity, and related derivatives markets,to only those market participants thatconduct substantial trading on its facility.

(5) Risk controls for trading. An acceptableprogram for preventing market disruptionsshall demonstrate appropriate trading riskcontrols, in addition to pauses and halts. Riskcontrols should be adapted to the uniquecharacteristics of the trading platform and of the markets to which they apply and should

be designed to avoid market disruptionswithout unduly interfering with that market’sprice discovery function. The swap executionfacility may choose from among controls that

include: pre-trade limits on order size, pricecollars or bands around the current price,message throttles, daily price limits, andintraday position limits related to financialrisk to the clearing member, or design othertypes of controls, as well as clear error-tradeand order-cancellation policies. Within thespecific array of controls that are selected,the swap execution facility should set theparameters for those controls, so that thespecific parameters are reasonably likely toserve the purpose of preventing marketdisruptions and price distortions. If a swapis fungible with, linked to, or a substitute forother swaps on the swap execution facility oron other trading venues, such risk controlsshould, to the extent practicable, be

coordinated with any similar controls placedon those other swaps. If a swap is based onthe level of an equity index, such riskcontrols should, to the extent practicable, becoordinated with any similar controls placedon national security exchanges.

(b) Acceptable practices. [Reserved]

Core Principle 5 of Section 5h of the Act—Ability To Obtain Information

The swap execution facility shall:(A) Establish and enforce rules that will

allow the facility to obtain any necessaryinformation to perform any of the functionsdescribed in section 5h of the Act;

(B) Provide the information to theCommission on request; and

(C) Have the capacity to carry out suchinternational information-sharing agreementsas the Commission may require.


Core Principle 6 of Section 5h of the Act—Position Limits or Accountability

(A) In general. To reduce the potentialthreat of market manipulation or congestion,especially during trading in the deliverymonth, a swap execution facility that is atrading facility shall adopt for each of thecontracts of the facility, as is necessary andappropriate, position limitations or positionaccountability for speculators.

(B) Position limits. For any contract that issubject to a position limitation established bythe Commission pursuant to section 4a(a) of the Act, the swap execution facility shall:

(1) Set its position limitation at a level nohigher than the Commission limitation; and

(2) Monitor positions established on orthrough the swap execution facility forcompliance with the limit set by the

Commission and the limit, if any, set by theswap execution facility.(a) Guidance. Until such time that

compliance is required under part 151 of thischapter, a swap execution facility shouldhave reasonable discretion to comply with§ 37.600, including considering part 150 of this chapter. For Required Transactions asdefined in §37.9, a swap execution facilitymay demonstrate compliance with § 37.600

by setting and enforcing position limitationsor position accountability levels only withrespect to trading on the swap executionfacility’s own market. For PermittedTransactions as defined in § 37.9, a swapexecution facility may demonstratecompliance with § 37.600 by setting andenforcing position accountability levels orsending the Commission a list of PermittedTransactions traded on the swap executionfacility.


Core Principle 7 of Section 5h of the Act—Financial Integrity of Transactions

The swap execution facility shall establishand enforce rules and procedures forensuring the financial integrity of swapsentered on or through the facilities of theswap execution facility, including theclearance and settlement of the swapspursuant to section 2(h)(1) of the Act.


Core Principle 8 of Section 5h of the Act—Emergency Authority

The swap execution facility shall adoptrules to provide for the exercise of emergencyauthority, in consultation or cooperationwith the Commission, as is necessary andappropriate, including the authority toliquidate or transfer open positions in anyswap or to suspend or curtail trading in aswap.

(a) Guidance.(1) A swap execution facility should have

rules that authorize it to take certain actionsin the event of an emergency, as defined in§ 40.1(h) of this chapter. A swap execution

facility should have the authority tointervene as necessary to maintain marketswith fair and orderly trading and to preventor address manipulation or disruptive tradingpractices, whether the need for interventionarises exclusively from the swap executionfacility’s market or as part of a coordinated,cross-market intervention. A swap executionfacility should have the flexibility andindependence to address market emergencies

in an effective and timely manner consistentwith the nature of the emergency, as long asall such actions taken by the swap executionfacility are made in good faith to protect theintegrity of the markets. However, the swapexecution facility should also have rules thatallow it to take market actions as may bedirected by the Commission. Additionally, insituations where a swap is traded on morethan one platform, emergency action toliquidate or transfer open interest shall be asdirected, or agreed to, by the Commission orthe Commission’s staff. Swap executionfacility rules should include procedures andguidelines for decision-making andimplementation of emergency interventionthat avoid conflicts of interest in accordance

with the provisions of section 40.9 of thischapter, and include alternate lines of communication and approval procedures toaddress emergencies associated with realtime events. To address perceived marketthreats, the swap execution facility shouldhave rules that allow it to take emergencyactions, including imposing or modifyingposition limits, imposing or modifying pricelimits, imposing or modifying intradaymarket restrictions, imposing special marginrequirements, ordering the liquidation ortransfer of open positions in any contract,ordering the fixing of a settlement price,extending or shortening the expiration dateor the trading hours, suspending or curtailingtrading in any contract, transferring customer

contracts and the margin, or altering anycontract’s settlement terms or conditions, or,if applicable, providing for the carrying outof such actions through its agreements withits third-party provider of clearing orregulatory services.

(2) A swap execution facility shouldpromptly notify the Commission of itsexercise of emergency action, explaining itsdecision-making process, the reasons forusing its emergency authority, and howconflicts of interest were minimized,including the extent to which the swapexecution facility considered the effect of itsemergency action on the underlying marketsand on markets that are linked or referencedto the contracts traded on its facility,

including similar markets on other tradingvenues. Information on all regulatory actionscarried out pursuant to a swap executionfacility’s emergency authority should beincluded in a timely submission of a certifiedrule pursuant to part 40 of this chapter.


Core Principle 9 of Section 5h of the Act—Timely Publication of Trading Information

(A) In general. The swap execution facilityshall make public timely information onprice, trading volume, and other trading dataon swaps to the extent prescribed by theCommission.


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(B) Capacity of swap execution facility.The swap execution facility shall be requiredto have the capacity to electronically captureand transmit trade information with respectto transactions executed on the facility.


Core Principle 10 of Section 5h of the Act—Recordkeeping and Reporting

(A) In general. A swap execution facilityshall:

(1) Maintain records of all activitiesrelating to the business of the facility,including a complete audit trail, in a formand manner acceptable to the Commissionfor a period of five years;

(2) Report to the Commission, in a formand manner acceptable to the Commission,such information as the Commissiondetermines to be necessary or appropriate forthe Commission to perform the duties of theCommission under the Act; and

(3) Keep any such records relating to swapsdefined in section 1a(47)(A)(v) of the Actopen to inspection and examination by theSecurities and Exchange Commission.

(B) Requirements. The Commission shalladopt data collection and reportingrequirements for swap execution facilitiesthat are comparable to correspondingrequirements for derivatives clearingorganizations and swap data repositories.


Core Principle 11 of Section 5h of the Act—Antitrust Considerations

Unless necessary or appropriate to achievethe purposes of the Act, the swap executionfacility shall not:

(A) Adopt any rules or take any actionsthat result in any unreasonable restraint of trade; or

(B) Impose any material anticompetitive burden on trading or clearing.

(a) Guidance. An entity seeking registrationas a swap execution facility may request thatthe Commission consider under theprovisions of section 15(b) of the Act, any of the entity’s rules, including trading protocolsor policies, and including both operationalrules and the terms or conditions of productslisted for trading, at the time of registrationor thereafter. The Commission intends toapply section 15(b) of the Act to itsconsideration of issues under this coreprinciple in a manner consistent with thatpreviously applied to contract markets.


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-makingprocess; and

(B) Establish a process for resolving theconflicts of interest.


Core Principle 13 of Section 5h of the Act—Financial Resources

(A) In general. The swap execution facilityshall have adequate financial, operational,

and managerial resources to discharge eachresponsibility of the swap execution facility.

(B) Determination of resource adequacy.The financial resources of a swap executionfacility shall be considered to be adequate if the value of the financial resources exceedsthe total amount that would enable the swapexecution facility to cover the operating costsof the swap execution facility for a one-yearperiod, as calculated on a rolling basis.


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 andminimize sources of operational risk, throughthe development of appropriate controls andprocedures, 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 fordisaster recovery that allow for:

(1) The timely recovery and resumption of operations; and

(2) The fulfillment of the responsibilitiesand obligations of the swap executionfacility; and

(C) Periodically conduct tests to verify thatthe backup resources of the swap executionfacility are sufficient to ensure continued:

(1) Order processing and trade matching;(2) Price reporting;(3) Market surveillance; and(4) Maintenance of a comprehensive and

accurate audit trail.(a) Guidance.(1) Risk analysis and oversight program. In

addressing the categories of its risk analysisand oversight program, a swap executionfacility should follow generally acceptedstandards and best practices with respect tothe development, operation, reliability,security, and capacity of automated systems.

(2) Testing. A swap execution facility’stesting of its automated systems and businesscontinuity-disaster recovery capabilitiesshould be conducted by qualified,independent professionals. Such qualifiedindependent professionals may beindependent contractors or employees of theswap execution facility, but should not bepersons responsible for development oroperation of the systems or capabilities beingtested.

(3) Coordination. To the extent practicable,a swap execution facility should:

(i) Coordinate its business continuity-disaster recovery plan with those of the

market participants it depends upon toprovide liquidity, in a manner adequate toenable effective resumption of activity in itsmarkets following a disruption causingactivation of the swap execution facility’s

business continuity-disaster recovery plan;(ii) Initiate and coordinate periodic,

synchronized testing of its businesscontinuity-disaster recovery plan with thoseof the market participants it depends upon toprovide liquidity; and

(iii) Ensure that its business continuity-disaster recovery plan takes into accountsuch plans of its telecommunications, power,water, and other essential service providers.


Core Principle 15 of Section 5h of the Act—Designation of Chief Compliance Officer

(A) In general. Each swap executionfacility shall designate an individual to serveas a chief compliance officer.

(B) Duties. The chief compliance officershall:

(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 similarto that of a board, or the senior officer of thefacility, resolve any conflicts of interest thatmay arise;

(4) Be responsible for establishing andadministering the policies and proceduresrequired to be established pursuant to thissection;

(5) Ensure compliance with the Act and therules and regulations issued under the Act,including rules prescribed by theCommission pursuant to section 5h of the

Act; and(6) Establish procedures for theremediation of noncompliance issues foundduring compliance office reviews, look backs,internal or external audit findings, self-reported errors, or through validatedcomplaints.

(C) Requirements for procedures. Inestablishing procedures under paragraph(B)(6) of this section, the chief complianceofficer shall design the procedures toestablish the handling, managementresponse, remediation, retesting, and closingof noncompliance issues.

(D) Annual reports.(1) In general. In accordance with rules

prescribed by the Commission, the chief

compliance officer shall annually prepareand sign a report that contains a descriptionof:

(i) The compliance of the swap executionfacility with the Act; and

(ii) The policies and procedures, includingthe code of ethics and conflict of interestpolicies, of the swap execution facility.

(2) Requirements. The chief complianceofficer 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 tosection 5h of the Act; and

(ii) Include in the report a certificationthat, under penalty of law, the report is

accurate and complete.(a) Guidance. [Reserved](b) Acceptable Practices. [Reserved]

Issued in Washington, DC, on May 17,2013, by the Commission.

Melissa D. Jurgens,

Secretary of the Commission.

Appendices to Core Principles andOther Requirements for SwapExecution Facilities

NOTE: The following appendices will notappear in the Code of Federal Regulations.


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1CEA section 5h(e).2Commissioner Scott D. O’Malia Dissenting

Statement, Process for a Designated Contract Marketor Swap Execution Facility to Make a SwapAvailable to Trade under Section 2(h)(8) of theCommodity Exchange Act; Swap TransactionCompliance and Implementation Schedule; TradeExecution Requirement Under Section 2(h) of theCommodity Exchange Act (May 16, 2013).

3A SEF is defined as a ‘‘trading system . . . inwhich multiple participants have the ability to . . .trade swaps by accepting bids and offers made bymultiple participants in the . . . system, throughany means of interstate commerce.’’ CEA section1(a)(50).

Appendix 1—Commission VotingSummary

On this matter, Chairman Gensler andCommissioners Chilton, O’Malia and Wetjenvoted in the affirmative; CommissionerSommers voted in the negative.

Appendix 2—Statement of ChairmanGary Gensler

I support the final rulemaking on swapexecution facilities (SEFs). This rule is key tofulfilling transparency reforms that Congressmandated in the Dodd-Frank Wall StreetReform and Consumer Protection Act.

Congress included a trade executionrequirement in the law. This means thatswaps subject to mandatory clearing andmade available to trade would move totransparent trading platforms. Marketparticipants would benefit from the pricecompetition that comes from tradingplatforms where multiple participants havethe ability to trade swaps by accepting bidsand offers made by multiple participants.Congress also said that the marketparticipants must have impartial access tothese platforms.

Farmers, ranchers, producers andcommercial companies that want to hedge arisk by locking in a future price or rate wouldget the benefit of the competition andtransparency that trading platforms, bothSEFs and designated contract markets(DCMs), will provide.

These transparent platforms will giveeveryone looking to compete in themarketplace the ability to see the prices of available bids and offers prior to making adecision on a transaction. By the end of thisyear, a significant portion of interest rate andcredit derivative index swaps would be infull view to the marketplace before

transactions occur. This is a significant shifttoward market transparency from the statusquo.

Such common-sense transparency hasexisted in the securities and futures marketssince the historic reforms of the 1930s.Transparency lowers costs for investors,

businesses and consumers, as it shiftsinformation from dealers to the broaderpublic. It promotes competition andincreases liquidity.

As Congress made clear in the law, tradingon SEFs and DCMs would be required onlywhen financial institutions transact withfinancial institutions. End-users would

benefit from access to the information onthese platforms, but would not be required to

use them.Further, companies would be able to

continue relying on customizedtransactions—those not required to becleared—to meet their particular needs, aswell as to enter into large block trades.

Consistent with Congress’ directive thatmultiple parties have the ability to trade withmultiple parties on these transparentplatforms, these reforms require that marketparticipants trade through an order book, andprovide the flexibility as well to seekrequests for quotes.

To be a registered SEF, the trading platformwill be required to provide an order book to

all its market participants. This is significant,as for the first time, the broad public will beable to gain access and compete in thismarket with the assurance that their bids oroffers will be communicated to the rest of themarket. This provision alone willsignificantly enhance transparency andcompetition in the market.

SEFs also will have the flexibility to offertrading through requests for quotes. The rule

provides that such requests would have to goout to a minimum of three unaffiliatedmarket participants before a swap that iscleared, made available to trade and less thana block could be executed. There will be aninitial phase-in period with a minimum of two participants to smooth the transition.

As long as the minimum functionality ismet, as detailed in the rule, and the SEFcomplies with these rules and the coreprinciples, the SEF can conduct businessthrough any means of interstate commerce,such as the Internet, telephone or even themail. Thus, today’s rule is technologyneutral.

Under these transparency reforms coupledwith the Commission’s rule on making swaps

available for trading, the trade executionrequirement will be phased in for marketparticipants, giving them time to comply.

These reforms benefited from extensivepublic comments. Moving forward, the CFTCwill work with SEF applicants onimplementation.

Appendix 3—Concurring Statement of Commissioner Scott D. O’Malia

Today, the Commission votes to establisha new trading venue, a Swap ExecutionFacility (SEF) that will allow marketparticipants to access a more transparentmarket and offer innovative tradingopportunities. Unlike the futures exchangeswhich are tied to a single clearinghouse,

trades executed on SEFs can be cleared atdifferent clearinghouses, which will providea new competitive execution space. For thesereasons, I have always had high hopes forSEFs.

I am pleased that the final rule has beenrevised to soften many of the proposed roughedges and should allow for a smoothtransition to this new trading environment.

The final rule allows for a streamlinedtemporary registration process to ensure thatSEF platforms are not disadvantaged byregulatory delays that could stiflecompetition or provide a first-moveradvantage. However, instead of ‘‘rubberstamping’’ SEFs’ applications, a

better approach would have been to conduct

a more substantive, but limited review of applications by coming up with a Checklistthat contains specific requirements and thattakes into account work already done by theNational Futures Association in reviewingthe SEFs’ systems and rulebooks.

I am also cautiously optimistic about theCommission’s commitment to revisit the SEFrule and other Commission’s rules to addressregulatory conflicts with foreignjurisdictions. Such regulatory disparities willdiscourage U.S. and foreign traders fromdoing business in the United States andprompt them to move their businesses toforeign jurisdictions with a less restrictive

trading environment. I am pleased to havethe commitment of Chairman Gensler whostated his intention to revisit the SEF rule if it proves to conflict with internationalregulatory requirements making U.S.platforms uncompetitive or disadvantaged asa result of this rulemaking.

For SEFs to be successful, the Commissionmust be faithful to the express directives of

Dodd-Frank and implement rules that areclear and promote efficient and fair trading.As I explain below, the Commission’s rules

have fallen short of these objectives.

The Rule’s Requirement To Send a Requestfor Quote to Three Market Participants IsNot Supported by Law

Dodd-Frank seeks to ‘‘promote the tradingon SEFs and to promote pre-trade pricetransparency in the swaps market.’’ 1 Toadvance these objectives, the rule mustpermit SEFs to offer flexible executionplatforms that ensure pre-trade pricetransparency, but at the same time, allowparticipants (buy-side, sell-side, commercialfirms) to execute various products with

different levels of trading liquidity at theprice acceptable to them.

Thus, the success of a SEF is determined by whether it will be able to meet theliquidity needs of various marketparticipants. Although the rules allow aRequest for Quote (RFQ) to accommodatetransactions in less liquid products to theextent that such products are determined to

be made available to trade as provided in theMade Available to Trade rule,2 I amconcerned that the requirement to broadcasta quote to at least three market participantsis not supported by the statute and is not

based on data analysis.3 One way for the Commission to assess

trading liquidity on a SEF and makenecessary adjustments to the RFQ requirement is to analyze transaction datathat the Commission now receives fromSwap Data Repositories (SDRs). Over time, asliquidity increases and the market feels moreconfident about SEFs, there will be a naturalprogression for market participants to migrateto more centralized execution platforms andthe role of the RFQ may be significantlyreduced. But again, the Commission shouldnot come up with an unsubstantiated numberand declare it to be the law. Instead, theCommission must make such determination

based on an evaluation of the SDRtransaction data.


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4CEA section 1(a) (50). 5Commission Regulation § 37.9.

The Rule Should Have Provided FurtherClarity Regarding Voice Execution.

SEFs, by definition, may execute swaps‘‘through any means of interstatecommerce.’’4 As I mentioned before, Istrongly support the use of various methodsof execution, including voice, to foster acompetitive trading environment on a SEF. Iam pleased that the final rule acknowledges

the ‘‘any means of interstate commerce’’clause and provides for a role of voice andother means of execution. However, I remainconcerned that although the preamble to therule provides an example of a voice-basedmethod of execution, the rule text does notexpressly allow for voice and other execution

methods.5 A better approach would have been to add voice to the rule text as the thirdmethod of execution on a SEF.

The Rule Should Have Provided ClarityRegarding Exchange of Swaps for RelatedPosition Transactions

For some unknown reason, the draft ruleprohibited trades involving an Exchange of Swaps for Related Positions (ESRPs). Yet

again, such ban would have caused thependulum of the Commission’s regulations tocontinue its swing toward futures trading asthe Commodity Exchange Act (CEA)expressly allows for bone fide Exchange of Futures for Related Positions transactions.

The Commission sought to ban ESRPstransactions because they were not expressly

allowed by the CEA. Just because thesetransactions are not mentioned in the statute,they don’t have to be banned by theCommission’s rules.

I am glad that in the final rule, theCommission took a more reasonableapproach and now has committed toentertaining requests from marketparticipants to permit off-exchange trades

where swaps are components of exchanges of swaps for physicals transactions.

Conclusion

For the reasons stated above, I reluctantlyconcur with the decision of the Commissionto approve this final rule.

[FR Doc. 2013–12242 Filed 6–3–13; 8:45 am]

BILLING CODE 6351–01–P

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2013-12242