Swap Execution Facilities and Trade Execution Requirement — CFTC — US

1 17 CFR 145.9.
COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 9, 36, 37, 38, 39, and 43 RIN 3038–AE25 Swap Execution Facilities and Trade Execution Requirement AGENCY: Commodity Futures Trading Commission. ACTION: Proposed rule. SUMMARY: The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is proposing amendments to regulations relating to the trade execution requirement under the Commodity Exchange Act (‘‘CEA’’ or ‘‘Act’’) and amendments to existing regulations relating to swap execution facilities (‘‘SEFs’’) and designated contract markets (‘‘DCMs’’). Among other amendments, the proposed rules apply the SEF registration requirement to certain swaps broking entities and aggregators of single-dealer platforms; broaden the scope of the trade execution requirement to include all swaps subject to the clearing requirement under the Act that a SEF or a DCM lists for trading; allow SEFs to offer flexible execution methods for all swaps that they list for trading; amend straightthrough processing requirements; and amend the block trade definition. The proposed rules, which also include nonsubstantive amendments and various conforming changes to other Commission regulations, reflect the Commission’s enhanced knowledge and experience with swaps trading characteristics and would further the Dodd-Frank Act’s statutory goals for SEFs, i.e., promote more SEF trading and pre-trade price transparency in the swaps market. Further, the proposed rules are intended to strengthen the existing swaps regulatory framework by reducing unnecessary complexity, costs, and other burdens that impede SEF development, innovation, and growth. DATES: Comments must be received on or before February 13, 2019. ADDRESSES: You may submit comments, identified by ‘‘Swap Execution Facilities and Trade Execution Requirement’’ and RIN 3038–AE25, by any of the following methods:

CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit Comments’’ link for this rulemaking and follow the instructions on the Public Comment Form.
Mail: Send to Christopher
Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the
same instructions as for Mail, above. Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in English, or if not, be accompanied by an English translation. Comments will be posted as received to https:// comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (‘‘FOIA’’), a petition for confidential treatment of the exempt information may be submitted according to the procedures established under § 145.9 of the Commission’s regulations.1 The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all submissions from https://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the FOIA. FOR FURTHER INFORMATION CONTACT:
Nhan Nguyen, Special Counsel, (202) 418–5932, nnguyen@cftc.gov; Roger Smith, Special Counsel, (202) 418–5344, rsmith@cftc.gov; or David Van Wagner, Chief Counsel, (202) 418–5481, dvanwagner@cftc.gov, Division of Market Oversight; Michael Penick, Senior Economist, (202) 418–5279, mpenick@cftc.gov, Office of the Chief Economist, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background and Introduction
A. Statutory Background: The Dodd-Frank Act B. Regulatory History: The Part 37 Rules
1. Challenges of Existing Regulatory
Approach a. Lack of MAT Determinations b. Swaps Market Characteristics
c. Operational Complexities and Costs
C. Proposed Approach
D. Summary of Proposed Revisions E. Consultation With Other U.S. Financial Regulators
II. Part 9—Rules Relating To Review of
Exchange Disciplinary, Access Denial or Other Adverse Actions
III. Part 36—Trade Execution Requirement
IV. Part 37—Subpart A: General Provisions
A. § 37.1—Scope
B. § 37.2—Applicable Provisions and Definitions
1. § 37.2(a)—Applicable Provisions
2. § 37.2(b)—Definition of ‘‘Market
Participant’’ a. Applicability of § 37.404(b) to Market Participants b. SEF Jurisdiction Over Clients of Market Participants
C. § 37.3—Requirements and Procedures
for Registration
1. § 37.3(a)—Requirements for Registration
a. Footnote 88 b. Single-Dealer Aggregator Platforms
c. Swaps Broking Entities, Including
Interdealer Brokers
(1) Structure and Operations of Swaps Broking Entities, Including Interdealer Brokers (2) SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers d. Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps Trading Facilities (1) Proposed Delay of SEF Registration Requirement (2) Proposed Conditions for Delay of SEF Registration Requirement
2. § 37.3(a)(2) Through (3)—Minimum
Trading Functionality and Order Book Definition
3. § 37.3(b)—Procedures for Registration
a. Elimination of Temporary Registration b. § 37.3(b)(1)—Application for Registration (1) Form SEF Exhibits—Business Organization (2) Form SEF Exhibits—Financial Information (3) Form SEF Exhibits—Compliance (4) Form SEF Exhibits—Operational Capability (5) Other Form SEF Amendments (6) Request for Legal Entity Identifier
c. § 37.2(b)(2)—Request for Confidential
Treatment d. § 37.3(b)(3)—Amendment of Application for Registration e. § 37.3(b)(4)—Effect of Incomplete Application f. § 37.3(b)(5)—Commission Review Period g. § 37.3(b)(6)—Commission Determination
4. § 37.3(c)—Amendment to an Order of
Registration
5. § 37.3(d)—Reinstatement of Dormant
Registration
6. § 37.3(e)—Request for Transfer of
Registration
7. § 37.3(f)—Request for Withdrawal of
Application for Registration
8. § 37.3(g)—Request for Vacation of
Registration
9. § 37.3(h)—Delegation of Authority
D. § 37.4—Procedures for Implementing Rules E. § 37.5—Provision of Information Relating to a Swap Execution Facility

1. § 37.5(a)—Request for Information
2. § 37.5(b)—Demonstration of Compliance
3. § 37.5(c)—Equity Interest Transfer
4. § 37.5(d)—Delegation of Authority
F. § 37.6—Enforceability
1. § 37.6(a)—Enforceability of Transactions
2. § 37.6(b)—Swap Documentation
a. § 37.6(b)(1)—Legally Binding Documentation b. § 37.6(b)(2)—Requirements for Swap Documentation G. § 37.7—Prohibited Use of Data Collected for Regulatory Purposes H. § 37.8—Boards of Trade Operating Both a Designated Contract Market and a Swap Execution Facility
I. § 37.9—Methods of Execution for
Required and Permitted Transactions; § 37.10—Process for a Swap Execution Facility To Make a Swap Available to Trade; § 37.12—Trade Execution Compliance Schedule; § 38.11—Trade Execution Compliance Schedule; § 38.12—Process for a Designated Contract Market To Make a Swap Available to Trade
1. Trade Execution Requirement and MAT
Process
2. Execution Method Requirements
3. Implementation of Existing
Requirements
4. Proposed Approach
a. § 36.1(a)—Trade Execution Requirement b. Elimination of Required Execution Methods
V. Part 37—Subpart B: Core Principle 1
(Compliance With Core Principles)
VI. Part 37 Regulations Related to SEF
Execution Methods—Subpart C: Core Principle 2 (Compliance With Rules) A. § 37.201—Requirements for Swap Execution Facility Execution Methods
1. § 37.201(a)—Required Swap Execution
Facility Rules a. § 37.201(a)(1)—Trading and Execution Protocols and Procedures b. § 37.201(a)(2)—Discretion
c. § 37.201(a)(3)—Market Pricing
Information
2. § 37.203(a)—Pre-Arranged Trading
Prohibition; § 37.9(b)—Time Delay Requirement a. § 37.201(b)—Pre-Execution Communications (1) Exception for Swaps Not Subject to the Trade Execution Requirement (2) § 37.201(b)(1)—Exception for Package Transactions
3. § 37.201(c)—SEF Trading Specialists
a. § 37.201(c)(1)—Definition of ‘‘SEF Trading Specialist’’ b. § 37.201(c)(2)—Fitness
c. § 37.201(c)(3)—Proficiency
Requirements d. § 37.201(c)(4)—Ethics Training (1) Guidance to Core Principle 2 in
Appendix B—Ethics Training
e. § 37.201(c)(5)—Standards of Conduct f. § 37.201(c)(6)—Duty To Supervise g. § 37.201(c)(7)—Additional Sources for Compliance
VII. Additional Part 37 Regulations—Subpart
C: Core Principle 2 (Compliance With Rules) A. § 37.202—Access Requirements
1. § 37.202(a)—Impartial Access to
Markets, Market Services, and Execution Methods a. § 37.202(a)(1)—Impartial Access Criteria (1) Application of Impartial Access Requirement (i) Eligibility and Onboarding Criteria (ii) Access to Execution Methods (iii) Use of Discretion b. § 37.202(a)(2)—Fees
2. § 37.202(b)—Limitations on Access
3. § 37.202(c)—Eligibility
4. § 37.202(d)—Jurisdiction
B. § 37.203—Rule Enforcement Program
1. § 37.203(a)—Abusive Trading Practices
Prohibited
2. § 37.203(b)—Authority To Collect
Information
3. § 37.203(c)—Compliance Staff and
Resources
4. § 37.203(d)—Automated Trade
Surveillance System
5. § 37.203(e)—Error Trade Policy
a. Error Trades—Swaps Submitted for Clearing b. Current SEF Error Trade Policies
c. § 37.203(e)—Error Trade Policy
6. § 37.203(f)—Investigations
7. § 37.203(g)—Additional Sources for
Compliance
C. § 37.204—Regulatory Services Provided
by a Third Party
1. § 37.204(a)—Use of Regulatory Service
Provider Permitted
2. § 37.204(b)—Duty To Supervise
Regulatory Service Provider
3. § 37.204(c)—Delegation of Authority
D. § 37.205—Audit Trail
1. § 37.205(a)—Audit Trail Required
2. § 37.205(b)—Elements of an Acceptable
Audit Trail Program a. § 37.205(b)(1)—Original Source Documents; § 37.205(b)(2)—Transaction History Database; § 37.205(b)(3)— Electronic Analysis Capability
3. § 37.205(c)—Audit Trail Reconstruction
E. § 37.206—Disciplinary Procedures and Sanctions
1. § 37.206(a)—Enforcement Staff
2. § 37.206(b)—Disciplinary Program
3. § 37.206(c)—Hearings
4. § 37.206(d)—Decisions
5. § 37.206(e)—Disciplinary Sanctions
6. § 37.206(f)—Warning Letters
7. § 37.206(g)—Additional Sources for
Compliance
F. Part 9—Rules Relating To Review of Exchange Disciplinary, Access Denial or Other Adverse Actions
VIII. Part 37—Subpart D: Core Principle 3
(Swaps Not Readily Susceptible to Manipulation) A. § 37.301—General Requirements
1. Appendix C—Demonstration of
Compliance That a Swap Contract Is Not Readily Susceptible to Manipulation
IX. Part 37—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—Regulatory Service Provider; § 37.408—Additional Sources for Compliance
X. Part 37—Subpart F: Core Principle 5
(Ability To Obtain Information) A. § 37.501—Establish and Enforce Rules B. § 37.502—Provide Information to the Commission
C. § 37.503—Information-Sharing
D. § 37.504—Prohibited Use of Data Collected for Regulatory Purposes
XI. Part 37—Subpart G: Core Principle 6
(Position Limits or Accountability) A. § 37.601—Additional Sources for Compliance; Guidance to Core Principle 6 in Appendix B
XII. Part 37—Subpart H: Core Principle 7
(Financial Integrity of Transactions); § 39.12—Participant and Product Eligibility A. § 37.701—Required Clearing B. § 37.702—General Financial Integrity
1. § 37.702(a)—Minimum Financial
Standards
2. § 37.702(b) and § 39.12(b)(7)—Time
Frame for Clearing a. ‘‘Prompt and Efficient’’ Standard and AQATP Standard b. Proposed Approach to Straight-Through Processing (1) § 37.702(b)(1) and § 39.12(b)(7)(i)(A)— ‘‘Prompt, Efficient, and Accurate’’ Standard (2) § 39.12(b)(7)(ii)—AQATP Standard for Registered DCOs (3) § 37.702(b)(2) Through (3)—PreExecution Credit Screening
3. Applicability of § 37.702(b) to SEFs That
Do Not Facilitate Clearing
C. § 37.703—Monitoring for Financial
Soundness
XIII. Part 37—Subpart I: Core Principle 8
(Emergency Authority)
A. § 37.801—Additional Sources for Compliance
XIV. Part 37—Subpart J: Core Principle 9
(Timely Publication of Trading Information)
XV. Part 37—Subpart K: Core Principle 10
(Recordkeeping and Reporting)
XVI. Part 37—Subpart L: Core Principle 11
(Antitrust Considerations)
XVII. Part 37—Subpart M: Core Principle 12
(Conflicts of Interest)
XVIII. Part 37—Subpart N: Core Principle 13
(Financial Resources)
A. § 37.1301—General Requirements
1. § 37.1301(a)
2. § 37.1301(b)
3. § 37.1301(c)
B. § 37.1302—Types of Financial Resources
C. § 37.1303—Liquidity of Financial
Resources
D. § 37.1304—Computation of Costs To Meet Financial Resources Requirement
1. Acceptable Practices to Core Principle
13 in Appendix B
E. § 37.1305—Valuation of Financial Resources F. § 37.1306—Reporting to the Commission
1. § 37.1306(a)
2. § 37.1306(b)
3. § 37.1306(c)
4. § 37.1306(d)
5. § 37.1306(e)

G. § 37.1307—Delegation of Authority
XIX. Part 37—Subpart O: Core Principle 14
(System Safeguards)
A. § 37.1401(c)
B. § 37.1401(g)—Program of Risk Analysis and Oversight Technology Questionnaire
C. § 37.1401(j)
XX. Part 37—Subpart P: Core Principle 15
(Designation of Chief Compliance Officer) A. § 37.1501—Chief Compliance Officer
1. § 37.1501(a)—Definitions
2. § 37.1501(b)—Chief Compliance Officer
a. Acceptable Practices to Core Principle 15 in Appendix B
3. § 37.1501(c)—Duties of Chief
Compliance Officer
4. § 37.1501(d)—Preparation of Annual
Compliance Report
5. § 37.1501(e)—Submission of Annual
Compliance Report and Related Matters
6. § 37.1501(f)—Recordkeeping
7. § 37.1501(g)—Delegation of Authority
XXI. Part 36—Trade Execution Requirement
A. § 36.1—Trade Execution Requirement
1. § 36.1(a)—Trade Execution Requirement
2. § 36.1(b)—Exemption for Certain Swaps
Listed Only by Exempt SEFs a. Discussion of CEA Section 4(c) Enumerated Factors
3. § 36.1(c)—Exemption for Swap
Transactions Excepted or Exempted From the Clearing Requirement Under
Part 50
a. Discussion of CEA Section 4(c) Enumerated Factors
4. § 36.1(d)—Exemption for Swaps
Executed With Bond Issuance a. Discussion of CEA Section 4(c) Enumerated Factors
5. § 36.1(e)—Exemption for Swaps
Executed Between Affiliates That Elect To Clear a. Discussion of CEA Section 4(c) Enumerated Factors B. § 36.2—Registry of Registered Entities Listing Swaps Subject to the Trade Execution Requirement; Appendix A to
Part 36—Form TER
C. § 36.3—Trade Execution Requirement
Compliance Schedule
1. § 36.3(c)(1)—Category 1 Entities
2. § 36.3(c)(2)—Category 2 Entities
3. § 36.3(c)(3)—Other Counterparties
4. § 36.3(e)—Future Compliance Schedules
XXII. Part 43—§ 43.2—Definition of ‘‘Block
Trade’’
A. § 43.2—Definition—Block Trade; § 37.203(a)—Elimination of Block Trade Exception to Pre-Arranged Trading
XXIII. Related Matters
A. Regulatory Flexibility Act B. Paperwork Reduction Act
1. Information Provided by Reporting
Entities/Persons a. § 37.3(a)—Requirements for Registration b. § 37.3(b)—Procedures for Registration
c. § 37.3(c)—Amendment to an Order of
Registration d. § 37.5(c)—Provision of Information Relating to a Swap Execution Facility e. § 37.6(b)(1)—Legally Binding Documentation f. § 37.203(d)—Automated Trade Surveillance System g. § 37.203(e)—Error Trade Policy h. § 37.205(a)—Audit Trail Required
i. § 37.205(b)—Elements of an Acceptable
Audit Trail Program j. § 37.205(c)—Audit Trail Reconstruction k. §§ 37.206(b)–(d)—Disciplinary Program
l. § 37.401—General Requirements for
Monitoring of Trading and Trade Processing m. § 37.1301(b)—General Requirements for Financial Resources n. § 37.1306—Financial Reporting to the Commission o. § 37.1401(g)—Program of Risk Analysis and Oversight Technology Questionnaire p. § 37.1501(d)—Preparation of Annual Compliance Report q. Part 36—Trade Execution Requirement
2. Information Collection Comments
C. Cost-Benefit Considerations
1. Introduction
2. Baseline
3. SEF Registration
a. Overview
(1) Application of SEF Registration Requirement (2) SEF Registration Process and Related Forms b. Benefits (1) Application of SEF Registration Requirement (2) SEF Registration Process and Related Forms
c. Costs
(1) Application of SEF Registration Requirement (2) SEF Registration Process and Related Forms d. Section 15(a) Factors (1) Protection of Market Participants and the Public (2) Efficiency, Competitiveness, and Financial Integrity of Markets (3) Price Discovery (4) Sound Risk Management Practices (5) Other Public Interest Considerations
4. Market Structure and Trade Execution
a. Overview
(1) Elimination of Minimum Trading Functionality and Execution Method Requirements (2) Trade Execution Requirement and Elimination of MAT Process (3) Pre-Execution Communications and Block Trades (4) Impartial Access b. Benefits (1) Elimination of Minimum Trading Functionality and Execution Method Requirements (2) Trade Execution Requirement and Elimination of MAT Process (3) Pre-Execution Communications and Block Trades (4) Impartial Access
c. Costs
(1) Elimination of Minimum Trading Functionality and Execution Method Requirements (2) Trade Execution Requirement and Elimination of MAT Process (3) Pre-Execution Communications and Block Trades (4) Impartial Access d. Section 15(a) Factors (1) Protection of Market Participants and the Public (2) Efficiency, Competitiveness, and Financial Integrity of Markets (3) Price Discovery (4) Sound Risk Management Practices (5) Other Public Interest Considerations
5. Compliance and SRO Responsibilities
a. Overview
(1) SEF Trading Specialists (2) Rule Compliance and Enforcement (i) Definition of ‘‘Market Participant’’ (ii) Audit Trail and Surveillance Program (iii) Compliance and Disciplinary Programs (iv) Regulatory Service Provider (3) Error Trade Policy (4) Chief Compliance Officer (5) Recordkeeping, Reporting, and Information-Sharing (i) Equity Interest Transfer (ii) Confirmation and Trade Evidence Record (iii) Information-Sharing (6) System Safeguards b. Benefits (1) SEF Trading Specialists (2) Rule Compliance and Enforcement (i) Definition of ‘‘Market Participant’’ (ii) Audit Trail and Surveillance Program (iii) Compliance and Disciplinary Programs (iv) Regulatory Service Provider (3) Error Trade Policy (4) Chief Compliance Officer (5) Recordkeeping, Reporting, and Information-Sharing (i) Equity Interest Transfer (ii) Confirmation and Trade Evidence Record (iii) Information-Sharing (6) System Safeguards
c. Costs
(1) SEF Trading Specialists (2) Rule Compliance and Enforcement (i) Definition of ‘‘Market Participant’’ (ii) Audit Trail and Surveillance Program (iii) Compliance and Disciplinary Programs (iv) Regulatory Service Provider (3) Error Trade Policy (4) Chief Compliance Officer (5) Recordkeeping, Reporting, and Information-Sharing (i) Equity Interest Transfer (ii) Confirmation and Trade Evidence Record (iii) Information-Sharing (6) System Safeguards d. Section 15(a) Factors (1) Protection of Market Participants and the Public (2) Efficiency, Competitiveness, and Financial Integrity of Markets (3) Price Discovery (4) Sound Risk Management Practices (5) Other Public Interest Considerations
6. Design and Monitoring of Swaps
a. Overview
(1) Swaps Not Readily Susceptible to Manipulation (2) Monitoring of Trading and Trade Processing b. Benefits (1) Swaps Not Readily Susceptible to Manipulation (2) Monitoring of Trading and Trade Processing
c. Costs
(1) Swaps Not Readily Susceptible to Manipulation

2See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, tit. VII, 124 Stat. 1376 (2010) (codified as amended in various sections of 7 U.S.C.), available at https:// www.cftc.gov/sites/default/files/idc/groups/public/ @lrfederalregister/documents/file/2013-12242a.pdf. 3 7 U.S.C. 1 et seq. 4 7 U.S.C. 7b–3 (adding a new CEA section 5h to establish a registration requirement and regulatory regime for SEFs). 5As amended by the Dodd-Frank Act, CEA
section 1a(50) specifically defines a ‘‘swap
execution facility’’ as a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that facilitates the execution of swaps between persons; and is not a designated contract market. 7 U.S.C. 1a(50). 6CEA section 5h(a)(1) states that no person may operate a facility for the trading or processing of swaps unless the facility is registered as a SEF or as a DCM under section 5h. 7 U.S.C. 7b–3(a)(1). 7 7 U.S.C. 7b–3(f). 8Section 723(a)(3) of the Dodd-Frank Act added a new CEA section 2(h) to establish the clearing requirement for swaps. 7 U.S.C. 2(h). CEA section 2(h)(1)(A) provides that it is unlawful for any person to engage in a swap unless that person submits such swap for clearing to a derivatives clearing organization that is registered under the Act or a derivatives clearing organization that is exempt from registration under this Act if the swap is required to be cleared. 7 U.S.C. 2(h)(1)(A). CEA
section 2(h)(2) specifies the process for the
Commission to review and determine whether a swap, group, category, type or class of swap should be subject to the clearing requirement. 7 U.S.C. 2(h)(2). The Commission further implemented the clearing determination process under part 50, which also specifies the swaps that are currently subject to the requirement. 17 CFR part 50. 9The Commission notes that CEA section 2(h)(8)(A)(ii) contains a typographical error that specifies CEA section 5h(f), rather than CEA section 5h(g), as the provision that allows the Commission to exempt a SEF from registration. Where appropriate, the Commission corrects this reference in the discussion herein. 10CEA sections 2(h)(8)(A)(i)–(ii) provide that with respect to transactions involving swaps subject to the clearing requirement, counterparties shall execute the transaction on a board of trade designated as a contract market under section 5; or execute the transaction on a swap execution facility registered under 5h or a swap execution facility that is exempt from registration under section 5h(g) of the Act. Given this reference in CEA section 2(h)(8)(A)(ii), the Commission accordingly interprets ‘‘swap execution facility’’ in CEA section 2(h)(8)(B) to include a swap execution facility that is exempt from registration pursuant to CEA section 5h(g). 11To implement the SEF core principles, Core Principle 1 provides that the Commission may, in its discretion, determine by rule or regulation the manner in which SEFs comply with the core principles. 7 U.S.C. 7b–3(f)(1)(B). 12The Commission notes that, unless otherwise stated, the terms ‘‘trades,’’ ‘‘transactions,’’ and ‘‘swaps’’ are used interchangeably in the discussion herein. 13Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476 (Jun. 4,
2013) (‘‘SEF Core Principles Final Rule’’); Process
for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation
Schedule, and Trade Execution Requirement Under
the Commodity Exchange Act, 78 FR 33606 (Jun. 4,
2013) (‘‘MAT Final Rule’’).
14 17 CFR 37.3(a)(2). An Order Book is defined as (i) an ‘‘electronic trading facility,’’ as that term is defined in CEA section 1a(16); (ii) a ‘‘trading facility,’’ as that term is defined in CEA section 1a(51); or (iii) a trading system or platform in which all market participants have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers. 17 CFR 37.3(a)(3). 15 17 CFR 37.10. Given that swaps subject to the trade execution requirement may also be executed on a DCM, the Commission adopted the same process for a registered DCM to make a swap ‘‘available to trade’’ in part 38. 17 CFR 38.12. Accordingly, discussion in this notice with respect to the application of the trade execution requirement or the MAT process to SEFs should be interpreted to also apply to DCMs. 16 17 CFR 37.9(a). With the exception of block trades, as defined under § 43.2, Required Transactions must be executed on a SEF’s Order Book or RFQ System. 17 CFR 37.9(a)(2)(i). 17 17 CFR 37.9(c). 18See infra notes 85 (15-second time delay for the entry of pre-arranged or pre-negotiated transactions Continued (2) Monitoring of Trading and Trade Processing d. Section 15(a) Factors (1) Protection of Market Participants and the Public (2) Efficiency, Competitiveness, and Financial Integrity of Markets (3) Price Discovery (4) Sound Risk Management Practices (5) Other Public Interest Considerations
7. Financial Integrity of Transactions
a. Overview b. Benefits
c. Costs
d. Section 15(a) Factors (1) Protection of Market Participants and the Public (2) Efficiency, Competitiveness, and Financial Integrity of Markets (3) Price Discovery (4) Sound Risk Management Practices (5) Other Public Interest Considerations
8. Financial Resources
a. Overview b. Benefits
c. Costs
d. Section 15(a) Factors (1) Protection of Market Participants and the Public (2) Efficiency, Competitiveness, and Financial Integrity of Markets (3) Price Discovery (4) Sound Risk Management Practices (5) Other Public Interest Considerations D. Antitrust Considerations
I. Background and Introduction
A. Statutory Background: The DoddFrank Act Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’) 2 amended the Commodity Exchange Act (‘‘CEA’’ or ‘‘Act’’) 3 to establish a comprehensive new swaps regulatory framework that includes the registration and the oversight of swap execution facilities (‘‘SEFs’’).4 As amended, CEA section 1a(50) defines a SEF as a trading system or platform that allows multiple participants to execute or trade swaps with multiple participants through any means of interstate commerce.5 CEA
section 5h(a)(1) establishes the SEF
registration requirement, which requires an entity to register as a SEF prior to operating a facility for the trading or processing of swaps.6 CEA section 5h(f) requires registered SEFs to comply with fifteen core principles.7 Further, the trade execution requirement in CEA
section 2(h)(8) provides that swap
transactions that are subject to the clearing requirement in CEA section 2(h)(1)(A) 8 must be executed on a DCM, SEF, or a SEF that is exempt from registration pursuant to CEA section 5h(g) (‘‘Exempt SEF’’),9 unless no DCM or SEF 10 ‘‘makes the swap available to trade’’ or the related transaction is subject to a clearing requirement exception pursuant to CEA section 2(h)(7). B. Regulatory History: The Part 37 Rules Pursuant to its discretionary rulemaking authority in CEA sections 5h(f)(1) and 8a(5), the Commission identified the relevant areas in which the statutory SEF framework would benefit from additional rules or regulations.11 Accordingly, the Commission adopted the part 37 rules to implement a regulatory framework for SEFs and for the trading and execution of swaps 12 on such facilities.13 Among other provisions, subpart A to part 37 applies the SEF registration requirement to facilities that meet the statutory SEF definition; specifies a minimum trading functionality that a SEF must offer to participants for all listed swaps, i.e., an ‘‘Order Book’’; 14 and specifies the process for a SEF to make a swap ‘‘available to trade’’ (‘‘MAT’’), i.e., required to be executed on a SEF or DCM pursuant to the trade execution requirement.15 Subpart A also defines swaps subject to the trade execution requirement as ‘‘Required Transactions’’ and requires a SEF to offer either (i) an Order Book or (ii) a request-for-quote system that sends a request-for-quote to no less than three unaffiliated market participants and operates in conjunction with an Order Book (‘‘RFQ System’’) for the execution of these transactions.16 Swaps that are not subject to the trade execution requirement are defined as ‘‘Permitted Transactions,’’ for which a SEF may offer any execution method and for which market participants may voluntarily trade on a SEF.17 The Commission’s regulations specify additional requirements that correspond to the use of an Order Book or RFQ System to execute Required Transactions.18 Subparts B through O

to an Order Book) and 242 (additional requirements for RFQ Systems) and accompanying discussion. 19 17 CFR part 37 app. B. 20 7 U.S.C. 7b–3(e) (specifying the rule of construction for CEA section 5h). 21 17 CFR 37.3(a)(2) (minimum trading functionality requirement); 17 CFR 37.9(a)(2)(i)(A) (Required Transactions requirement). 22SEF Core Principles Final Rule at 33564–65. 23 17 CFR 37.9(a)(3). 24SEF Core Principles Final Rule at 33497, 33499. 25MAT Final Rule at 33609 (noting that a MAT determination may focus on whether a swap is sufficiently liquid to be subject to the trade execution requirement). 26SEF Core Principles Final Rule at 33501. 27 Id. at 33496. 28 Id. at 33501. 29 Id. at 33484. 30 Id. at 33477. 31For example, the RFQ System requirement for Required Transactions on SEFs is less restrictive than the RFQ-to-all approach that is used by some DCMs. The Commission decided that the former approach was more appropriate for SEFs due to the less standardized nature of the swaps market. SEF Core Principles Final Rule at 33497 n.270. 32 Id. at 33478, 33553 (noting the similarities between the statutory requirements for SEFs and DCMs). 33For a list of MAT determinations that have been submitted to the Commission, see CFTC, Industry Oversight, Industry Filings, Swaps Made Available to Trade Determination, https:// sirt.cftc.gov/sirt/sirt.aspx?Topic=%20Swaps MadeAvailableToTradeDetermination. For a current list of swaps that have been made ‘‘available to trade’’ and are subject to the trade execution requirement, see CFTC, Industry Oversight, Industry Filings, Swaps Made Available to Trade, https://www.cftc.gov/sites/default/files/idc/groups/ public/@otherif/documents/file/swapsmade availablechart.pdf. For a list of swaps subject to the clearing requirement, see 17 CFR 50.4; see also CFTC, Industry Oversight, Industry Filings, Swaps Subject to Clearing Requirement, https:// www.cftc.gov/sites/default/files/idc/groups/public/ @otherif/documents/ifdocs/clearing requirementcharts9-16.pdf. 34See, e.g., Bloomberg SEF, Submission No. 2013–R–9, Bloomberg SEF LLC—Made Available to Trade (‘‘MAT’’) Submission of Certain Credit Default Swaps (‘‘CDS’’) and Interest Rate Swaps (‘‘IRS’’) pursuant to [CFTC] Regulation 40.6 at 3 (Dec. 5, 2013) (stating that its MAT determination consists of only the most standardized and liquid swaps, which represent a majority of market traded volume), https://www.cftc.gov/sites/default/files/ stellent/groups/public/@otherif/documents/ifdocs/ bsefmatdetermltr120513.pdf; ‘‘TW SEF,TW SEF LLC—Clarification and Amendment to SelfCertification for Swaps to be Made Available to Trade’’ at 8 (Nov. 29, 2013) (stating that its MAT determinations with respect to IRS represent the ‘‘standard benchmarks, which are the most standard, liquid, and transparent of the IRS market, and trade with market-accepted, standard, plain vanilla dates), https://www.cftc.gov/sites/default/ files/stellent/groups/public/@otherif/documents/
ifdocs/twsefamendmatltr112913.pdf. 35 In 2016, the Commission expanded the clearing requirement for IRS in the four classes (fixed-tofloating swaps, basis swaps, forward rate agreements, overnight index swaps) to additional currencies. CFTC, Press Releases, Release No. 7457– 16, CFTC Expands Interest Rate Swap Clearing Requirement, https://www.cftc.gov/PressRoom/ set forth regulations that further implement each of the fifteen SEF core principles in CEA section 5h(f).
Appendix B provides further guidance
and acceptable practices associated with the SEF core principles.19 These rules reflect a more limited and prescriptive regulatory approach to implementing the statutory provisions and promoting the statutory goals of
section 5h of the Act, i.e., promoting the
trading of swaps on SEFs and promoting pre-trade price transparency in the swaps market.20 In particular, the Commission focused on achieving pretrade price transparency by mandating a minimum trading functionality requirement for all swaps listed on a SEF and two specific, limited execution methods for Required Transactions. The Commission adopted the Order Book requirement both as a minimum trading functionality for SEF registration and as an execution method for Required Transactions.21 To provide some execution flexibility for Required Transactions,22 the Commission also allowed SEFs to offer an RFQ System, as described above.23 To further the goal of pre-trade price transparency with respect to trading via an RFQ System, however, the Commission required that an RFQ must be submitted to three unaffiliated market participants and that a requester receive applicable firm bids and offers from the Order Book in addition to any RFQ responses.24 Recognizing that only certain swaps are well-suited to be traded and executed through an Order Book or RFQ System, the Commission interpreted the trade execution requirement in CEA section 2(h)(8), in particular the phrase ‘‘makes the swap available to trade,’’ to have a scope of application that is consistent with the use of these methods. Accordingly, the Commission interpreted the phrase, which the Act does not otherwise define, to implement a voluntary MAT process for determining the swaps that must be executed on a SEF; this process primarily focuses on whether a swap has ‘‘sufficient trading liquidity’’ to be executed via an Order Book or RFQ System.25 The Commission noted that the prescribed trading methods, such as the Order Book, are consistent with the SEF definition in CEA section 1a(50) of the Act as they allow multiple market participants to post bids or offers and accept bids and offers that are transparent to multiple market participants.26 The Commission stated that the RFQ System is consistent with the SEF definition because it requires market participants to be able to access multiple market participants, but not necessarily the entire market.27 Further, in response to commenters’ feedback that the Commission’s approach is inconsistent with the Act, the Commission stated that the limited execution methods for Required Transactions are consistent with the phrase ‘‘through any means of interstate commerce’’ in the SEF definition because a SEF ‘‘may for purposes of execution and communication use ‘any means of interstate commerce,’ including, but not limited to, the mail, internet, email, and telephone, provided that the chosen execution method satisfies the requirements . . . for Order Books or . . . for [RFQ Systems].’’ 28 The Commission also noted that a SEF may provide any method of execution for Permitted Transactions as further justification for its approach under the Act.29 In adopting a regulatory framework that would effectuate the statutory SEF provisions and goals, the Commission
relied in part upon its experience with the futures market, including DCM oversight and DCM core principles implementation.30 While the Commission did provide flexibility for certain swap requirements relative to the DCM rules,31 the Commission sought, where possible, to harmonize SEF regulations with DCM regulations based on the similarities in the statutory core principles between SEFs and DCMs, and the ability of both types of entities to offer swaps for trading and execution.32

Challenges of Existing Regulatory
Approach
The Commission’s existing regulatory approach has transitioned some degree of swaps trading and market participants to SEFs, but has also created several challenges for swaps trading on SEFs, as described below. a. Lack of MAT Determinations The voluntary, SEF-driven MAT determination process has resulted in a limited set of products that are required to be executed on SEFs. Since 2014, SEFs have submitted a limited number of swaps, relative to the scope of swaps subject to the clearing requirement, as ‘‘available to trade’’ to the Commission.33 The swaps that SEFs have submitted—‘‘on-the-run’’ index credit default swaps (‘‘CDS’’) and fixedto-floating interest rate swaps (‘‘IRS’’) in benchmark tenors—are generally the most standardized and liquid swaps contracts.34 Beyond this initial set of MAT determinations, the Commission has not received any filings for additional swaps despite the subsequent expansion of the clearing requirement.35

PressReleases/pr7457-16 (Sept. 28, 2016). See also Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps, 81 FR 71202 (Oct. 14, 2016) (‘‘Second Clearing Determination Final Rule’’). 36See CFTC Public Roundtable: The Made Available to Trade Process, 151–152, 192–193 (July 15, 2015), https://www.cftc.gov/idc/groups/public/ %40newsroom/documents/file/transcript071515 .pdf (‘‘2015 MAT Roundtable’’) (discussing the prescriptive nature of the required methods of execution and noting the relationship to the MAT determination process). 37 7 U.S.C. 2(e); 7 U.S.C. 1a(18). 38See infra Section IV.F.—§ 37.6—Enforceability (discussion of SEF confirmation requirements);
Section VII.D.—§ 37.205—Audit Trail (discussion of
SEF audit trail requirements).
39See Letter from Wholesale Markets Brokers’ Association, Americas (‘‘WMBAA’’), Swap Execution Facility Regulations, Made Available to Trade Determinations, and Swap Trading Requirements at 5 (Mar. 11, 2016) (‘‘2016 WMBAA Letter’’); see also CFTC Letter No. 17–25, Division of Market Oversight Guidance on Calculating Projected Operating Costs By Designated Contract Markets and Swap Execution Facilities (Apr. 28,
2017) (‘‘CFTC Letter No. 17–25’’).
40The Commission believes that most of these swaps broking entities are currently registered with the Commission as introducing brokers (‘‘IBs’’). See infra note 340 and accompanying discussion. 41The Commission notes that these swaps broking entities and their affiliated SEFs primarily operate as part the ‘‘dealer-to-dealer’’ segment of the swaps market, which primarily facilitates swaps trading between swap dealers. See infra Section VII.A.1.a.(1)(i).—Eligibility and Onboarding Criteria (discussion of impartial access requirements). The lack of additional determinations is partly attributable to market participants’ concerns over the Commission’s required methods of execution for Required Transactions.36 Based on those concerns, SEFs have not pursued making additional swaps subject to the trade execution requirement. This lack of additional submissions has effectively limited the number of swaps that must be executed on SEFs which has limited the amount of trading and liquidity formation occurring on SEFs. b. Swaps Market Characteristics Over the course of the part 37 implementation process, the Commission has gained greater familiarity with the swaps markets, in particular the nature of the products and how market participants trade and execute those products. Based on what it has learned, the Commission believes that the existing regulatory framework has contributed to the limited amount of swaps that are subject to the trade execution requirement, and therefore, the limited scope of swaps trading that occurs on SEFs. Swaps consist of many highly variable terms and conditions beyond price and size that can be negotiated and tailored to suit a market participant’s specific and unique needs. While some swaps are relatively standardized, others are customized and consist of innumerable permutations, making them generally less standardized and more bespoke than futures contracts. Given the ability to customize swaps to address specific and often large risks that cannot be offset through more standardized instruments, the swaps market is generally comprised of a relatively concentrated number of sophisticated market participants in contrast to the futures market. In this regard, the Commission notes that CEA section 2(e) limits swaps trading on SEFs to ‘‘eligible contract participants’’ (‘‘ECPs’’), as defined by CEA section 1a(18).37 These swaps market characteristics contribute to varying liquidity profiles for swaps that range from relatively illiquid to episodic to relatively liquid. Historically, these particular characteristics have contributed to the use of a variety of execution methods— electronic, voice-based, or a hybrid of both (‘‘voice-assisted’’)—by market participants. Utilizing one execution method or another depends on considerations such as the type of swap, transaction size, complexity, the swap’s liquidity at a given time, the number of potential liquidity providers, and the associated desire to minimize potential information
leakage and front-running risks. For swaps with standard tenors that are relatively liquid, market participants may utilize a method of trading and execution, such as an electronic order book platform, that disseminates trading interests to all other market participants on the platform. Trading and execution in less standardized products, however, generally occur on systems or platforms that are more discreet in disseminating trading interests, such as auction platforms. The Commission’s existing approach to required execution methods, as described above, creates a tension with swaps market characteristics that necessitate flexible execution methods. This tension has otherwise hindered the expansion of the trade execution requirement.
c. Operational Complexities and Costs
The Commission has learned that its approach to other part 37 rules may have imposed certain burdens on SEFs, including operating complexities and costs that have impeded development, innovation, and growth in the swaps market. SEFs have indicated that they are unable to comply with some of these requirements because they are impractical or unachievable due to technology limitations or incompatible with existing market practices. For example, as discussed further below, SEFs have informed the Commission that the confirmation requirement for uncleared swaps under § 37.6(b) and the electronic analysis capability requirements with respect to audit trail data for voice orders under § 37.205 have been operationally difficult and impractical to implement.38 Even where SEFs have been able to comply with some of the requirements, they have asserted that the compliance costs are high and compliance is unnecessary in helping them satisfy their self-regulatory obligations and the SEF core principles. For example, SEFs have noted the high costs of the financial resources requirements imposed by the Core Principle 13 regulations.39 SEFs and market participants have attributed the limited development, innovation, and growth of SEFs to these ongoing burdens. As a result of these burdens, the Commission believes that a significant amount of swaps liquidity formation activity occurs away from registered SEFs in a manner similar to the preDodd-Frank Act swaps trading environment. These examples include (i) entities that aggregate single-dealer platforms to allow market participants to obtain indicative or firm pricing and execute swaps with multiple singledealer liquidity providers away from SEFs; and (ii) swaps broking entities, including interdealer brokers 40 that facilitate swaps trading between multiple market participants through non-registered voice or electronic platforms. While some of these interdealer brokers are affiliated with registered SEFs, the Commission understands that they have nevertheless maintained a bifurcated operating structure under which a SEF primarily executes and processes orders that have already been negotiated or arranged on an affiliated broker platform, in effect limiting a SEF’s role to a swaps transaction booking and processing engine.41 By operating in this manner, the Commission believes that many entities have been able to avoid the burdens arising from SEF registration and compliance under part 37. When necessary or appropriate to mitigate these burdens in the course of implementing part 37, Commission staff has issued various guidance and timelimited no-action relief to SEFs and market participants. The no-action relief has afforded additional time for compliance with certain part 37 regulations and related procedures or has provided an opportunity to

42See infra notes 223 (no-action relief from existing § 37.6(b) confirmation requirements for uncleared swap transactions executed on a SEF), 433 (no-action relief from existing § 37.9 and § 37.203(a) with respect to the correction of error trades on SEFs), 474 (no-action relief from existing § 37.205(a) with respect to capturing of trade allocation information in a SEF transaction history database), 822 (no-action relief from existing § 37.1501(f) with respect to SEF annual compliance report filing requirements), 898 (no-action relief from certain ‘‘block trade’’ definitional requirements under existing § 43.2) and accompanying discussion. 43See infra note 355. determine whether a longer-term regulatory solution—such as those proposed in this notice—is warranted.42 Where compliance could not be achieved or impractical compliance burdens arose from the existing part 37 rules, SEFs may have been impeded from pursuing beneficial market initiatives, such as developing new trading systems and protocols to attract greater swaps liquidity. The Commission believes that it is appropriate to address these issues as
part of the changes to the existing
regulations proposed in this notice.
C. Proposed Approach
Given the challenges described above and the Commission’s enhanced knowledge and experience from implementing part 37, the Commission is proposing to strengthen its swaps trading regulatory framework, while still effectuating the statutory SEF provisions and better promoting the statutory SEF goals. The Commission’s proposed approach also more appropriately accounts for swaps market characteristics and should reduce certain complexities and costs that have contributed to a significant amount of swaps liquidity formation occurring away from SEFs; limited the scope of swaps that are subject to the trade execution requirement; and impeded SEF development, innovation, and growth. In this regard, the Commission proposes a simple but comprehensive approach that provides SEFs with flexibility, where appropriate, to calibrate their trading and compliance functions based on their respective trading operations and markets. The Commission believes that this proposed approach will attract greater liquidity formation on SEFs. First, the Commission aims to effectuate the SEF registration requirement to ensure that multiple-tomultiple trading of swaps occurs on a SEF by requiring that swaps broking entities and certain single-dealer aggregator platforms register as SEFs (emphasis added). In particular, consistent with the statutory SEF provisions and goals, this proposed rulemaking would apply the SEF registration requirement in CEA section 5h(a)(1) and § 37.3(a) to swaps broking entities, including interdealer brokers, that are currently registered with the Commission as IBs, and their personnel currently facilitating swaps trading away from SEFs. Based on its experience and observation of market developments since the adoption of part 37, the Commission has witnessed the various ways in which swaps broking entities, including interdealer brokers, have structured themselves to facilitate swaps trading, and therefore liquidity formation, outside of the existing SEF regulatory framework. Second, the Commission aims to facilitate increased trading and liquidity on SEFs by proposing a revised interpretation of the trade execution requirement that is consistent with CEA
section 2(h)(8). The Commission’s
proposed interpretation would apply the trade execution requirement to all swaps that are both subject to the clearing requirement under section 2(h)(1) of the Act and listed for trading on a SEF. As a result of this approach, the Commission would also withdraw the existing voluntary MAT process. The proposed expansion of the trade execution requirement is expected to capture a greater number of swaps with different liquidity profiles, thereby reinforcing the need to establish a more flexible regulatory approach to swaps trading and execution that would help foster customer choice, promote competition between and innovation by SEFs, and better account for fundamental swaps market characteristics. Accordingly, the Commission also proposes to allow a SEF to offer any method of execution for all swaps trading and execution, rather than only an Order Book or RFQ System. Rather than dictating certain execution methods for Required Transactions, the Commission’s proposed flexible approach would enable SEFs to provide, and ultimately allow market participants to choose, execution methods that are appropriate for the liquidity and other characteristics of particular swaps. The Commission’s approach should also promote pre-trade price transparency in the swaps market by allowing execution methods that maximize participation and concentrate liquidity during times of episodic liquidity. The Commission believes that providing flexibility in execution methods will allow the swaps market to continue to naturally evolve and allow SEFs to innovate and provide more efficient, transparent, and costeffective means of trading and execution. The Commission also proposes to eliminate the minimum trading functionality requirement, which should reduce the costs incurred by SEFs to operate and maintain order books that have not attracted significant volumes. In lieu of specific execution method requirements, the Commission is proposing general disclosure-based trading and execution rules that would apply to any execution method offered by a SEF. In conjunction with allowing SEFs to offer more flexible execution methods, the Commission is proposing new rules for certain SEF personnel—‘‘SEF trading specialists’’—that constitute part of a SEF’s trading system or platform. The proposed rules require SEFs to adopt minimum proficiency testing and ethics training requirements to ensure that their trading specialists possess and maintain an adequate level of technical knowledge and understand their ethical responsibilities in customer trading or execution and fostering liquidity formation. The proposed rules would also require SEFs to adopt trading conduct standards and a duty of supervision. With the ability to offer more flexible execution methods for all swaps, in particular those that involve discretion by trading specialists in handling trading or execution, the Commission believes that these proposed requirements are necessary to enhance professionalism in the swaps
market and to promote market integrity and fairness. Further, the proposed requirements would mandate requisite levels of knowledge and competence that are commensurate to other similar requirements established for personnel in major trading markets, such as futures and equities.43 The Commission is also proposing a series of amendments to additional part 37 regulations that implement the SEF core principles. These proposed amendments would allow a SEF to better tailor its compliance and regulatory oversight programs to its trading operations and markets. The Commission believes that these proposed revisions are critical to the ability of SEFs to offer the diverse types of execution methods that would be available to them under this proposal. Further, the proposed rules would streamline and refine some of the existing prescriptive requirements applicable to SEFs to better reflect technological capabilities and existing market practices in the swaps market. The proposed rules would also seek to reduce unnecessary compliance costs while still maintaining robust

44Core Principle 1 states that, unless otherwise determined by the Commission by rule or regulation, a SEF shall have reasonable discretion in establishing the manner in which it complies with the SEF core principles.’’ 7 U.S.C. 7b– 3(f)(1)(B). 45 Dodd-Frank Act, Public Law 111–203, tit. VII, § 712(a)(1), 124 Stat. 1376 (2010). 46See infra Section IV.I.4.a.—§ 36.1(a)—Trade Execution Requirement. compliance programs and consistency with the SEF core principles. The ability to tailor compliance and oversight programs is consistent with the ‘‘reasonable discretion’’ that Core Principle 1 provides SEFs to comply with the core principles and mitigates compliance challenges that SEFs have encountered in implementing part 37.44 With respect to existing staff guidance and staff no-action relief, the Commission would adopt or codify such guidance or relief where appropriate. Providing a simple, but more comprehensive regulatory approach would help mitigate barriers for market participants to trade and execute further on SEFs, which would in turn better promote the statutory SEF goals. Finally, the proposed rules include non-substantive amendments and various conforming changes to relevant provisions in the Commission’s regulations. The Commission believes that the proposed revisions to the part 37 framework are consistent with the statutory SEF provisions and should serve to advance swaps trading on SEFs. The proposed rules are designed to more appropriately account for swaps market characteristics, especially with respect to the use of a wider array of different execution methods to trade and execute a broad scope of swaps with varying liquidity characteristics. Accordingly, the proposed rules are expected to better promote the development, innovation, and growth of the swaps market, with the intent of attracting liquidity formation onto SEFs. D. Summary of Proposed Revisions As a general overview of the major changes described in this notice, the Commission is proposing:

Registration: A proposed interpretation
to apply the statutory SEF registration requirement and the definition of ‘‘swap execution facility’’ in CEA sections 5h(a)(1) and 1a(50), respectively, to certain swaps broking entities, including interdealer brokers, as well as aggregators of singledealer platforms. The proposed rules also include revisions to simplify the registration process by streamlining Form SEF.
Trade Execution Requirement: A revised
interpretation of the trade execution requirement in CEA section 2(h)(8) and new rules based upon that interpretation that (i) broaden the scope of the trade execution requirement; (ii) create a compliance
schedule for the expanded requirement; and
(iii) provide exemptions from the requirement for certain types of swap transactions pursuant to CEA section 4(c). Further, the Commission is proposing to require each SEF to submit a Form TER that specifies those swaps that it lists for trading that are subject to the clearing requirement.
Execution Methods: New general,
disclosure-based trading and execution rules under Core Principle 2 that apply to any execution method offered by a SEF. These proposed rules would replace the § 37.3(a)(2) minimum trading functionality requirement and the execution methods prescribed under § 37.9 for Required Transactions, thereby allowing a SEF to offer flexible methods of execution for swaps subject to the trade execution requirement. Further, the Commission is also proposing to limit the scope of trading-related communications that SEF participants may conduct away from a SEF’s trading system or platform.
Proficiency: In conjunction with
allowing SEFs to offer more flexible methods of execution for swaps subject to the trade execution requirement, the Commission is also proposing new rules under Core Principle 2 for SEF trading specialists. The proposed rules would benefit SEF participants by strengthening market integrity and fairness through requirements for SEFs to establish proficiency testing and ethics training, trading conduct standards, and a duty of supervision.
Swap Documentation: Amendments to
the existing § 37.6(b) confirmation requirement that would allow a SEF to provide a ‘‘trade evidence’’ record for an uncleared swap that serves as evidence of a legally binding swap transaction, but may be supplemented by counterparties with additional terms based on previously negotiated underlying agreements.
Impartial Access: Modifications to the
existing impartial access rules under § 37.202 that would allow a SEF to structure participation criteria and trading practices in a manner that aligns with the current swaps market structure.
Self-Regulatory Oversight: Amendments
to §§ 37.203–206 under Core Principle 2 that provide a SEF with the ability to, among other things, (i) tailor its rule enforcement program and disciplinary procedures and sanctions to the characteristics of its trading operations and market; (ii) develop an audit trail surveillance system that is appropriate to the types of available execution methods it offers; and (iii) choose other additional types of regulatory service providers to assist with fulfilling its oversight duties.
Product Guidance: Additional guidance,
pursuant to Core Principle 3, for a SEF to demonstrate that the swaps that it lists for trading are not readily susceptible to manipulation.
Straight-Through Processing:
Amendments and clarifications to the SEF straight-through processing requirements that better reflect existing swaps market practices.
Financial Resources: Amendments to
apply the existing Core Principle 13 financial resource requirements in a more practical manner to SEF operations. The proposed rule changes include amendments to the existing six-month liquidity requirement and the addition of new acceptable practices that provide further guidelines to SEFs for making a reasonable calculation of their projected operating costs.
Chief Compliance Officer: Amendments
to Core Principle 15 regulations that streamline existing requirements for the chief compliance officer (‘‘CCO’’) position; allow SEF management to exercise discretion in CCO oversight; and simplify the preparation and submission of the required annual compliance report. E. Consultation With Other U.S. Financial Regulators In developing these rules, the Commission has consulted with the Securities and Exchange Commission, pursuant to section 712(a)(1) of the Dodd-Frank Act.45
II. Part 9—Rules Relating To Review of
Exchange Disciplinary, Access Denial or Other Adverse Actions The Commission is proposing nonsubstantive amendments to part 9 of the Commission’s regulations that conform to proposed amendments to § 37.206— Disciplinary procedures and sanctions. Accordingly, the Commission discusses those proposed amendments to part 9 in
Section VII.F. of this notice in
conjunction with its discussion of the proposed amendments to § 37.206.
III. Part 36—Trade Execution
Requirement
The Commission is proposing new rules under part 36 of the Commission’s regulations to implement a proposed revised interpretation of the trade execution requirement in CEA section 2(h)(8), which would broaden the scope of the requirement to include additional swaps. The Commission discusses the proposed implementing rules in Section IV.I.4.a. of this notice in conjunction with its discussion of (i) the proposed adoption of flexible means of execution and elimination of the minimum trading functionality under § 37.3(a)(2); (ii) the prescribed execution methods under § 37.9; and (iii) the MAT process (and corresponding trade execution compliance schedule) under § 37.10, § 37.12, and §§ 38.11–12.46 Further, the Commission discusses the proposed Form TER submission, the proposed compliance schedule for the expanded requirement, and proposed exemptions from the requirement in Section XXI. of this notice.

47The Commission proposes to retitle § 37.2 to ‘‘Applicable provisions and definitions’’ from ‘‘Applicable provisions’’ based on the proposed addition of § 37.2(b) described below. 48Section 1.60 sets forth requirements for futures commission merchants (‘‘FCMs’’) and DCMs to submit documents requested by the Commission that have been filed in any material legal proceeding in which the FCM or DCM is a party. 17 CFR 1.60. For a description of the Commission’s
part 9 regulations, see infra Section VII.F.—Part 9—
Rules Relating to Review of Exchange Disciplinary, Access Denial or Other Adverse Actions. 49Technical Amendments to Rules on Registration and Review of Exchange Disciplinary, Access Denial, or Other Adverse Actions, 83 FR 1538 (Jan. 12, 2018). The Commission notes that it is also proposing additional amendments to part 9 in this notice that conform to the proposed amendments to the Core Principle 2 regulations discussed herein. The Commission also proposes to renumber this provision to subsection (a) based on the proposed addition of § 37.2(b) described below. 50SEF Core Principles Final Rule at 33506. See also Division of Market Oversight Guidance on Swap Execution Facility Jurisdiction (Feb. 10, 2014) (‘‘2014 Staff Jurisdiction Guidance’’). 51 17 CFR 37.206. 52The Commission notes that ‘‘direct access’’ also refers to participants who may onboard and utilize a SEF’s own front-end application to trade swaps on the SEF’s systems or platforms. 53The Commission notes that some SEFs refer to such persons as ‘‘customers’’ of a SEF trading participant. 54Although a person who directs an intermediary to trade on its behalf does not interact with other market participants in the same manner, the Commission believes that such a person could engage in abusive trading activity by using more than one intermediary to place orders that result in an abusive trading practice. For example, a person seeking to achieve a wash result could structure a transaction or a series of transactions through separate intermediaries, which may give the appearance of bona fide purchases and sales, but where the trades have been entered into without the intent to take a bona fide market position. While persons do not typically access a SEF in this manner, the Commission is mindful that the part 37 rules do not preclude this access method and notes that some SEFs currently facilitate agency-based trading. Accordingly, the Commission believes that a SEF must continue to have jurisdiction and disciplinary authority over these persons in order to effectively investigate misconduct and prosecute rule violations that occur on the SEF.
IV. Part 37—Subpart A: General
Provisions
A. § 37.1—Scope
Section 37.1 currently clarifies that
part 37 applies to every SEF that is
registered or is applying to become registered as a SEF with the Commission. Section 37.1 also clarifies that part 37’s applicability does not affect the eligibility of a registered SEF or a SEF applicant to operate as either a DCM under part 38 of the Commission regulations or a swap data repository (‘‘SDR’’) under part 49 of the Commission’s regulations. The Commission proposes a nonsubstantive amendment to § 37.1. The Commission has not identified any provisions in part 37 that would preclude a registered SEF from being eligible to operate as a DCM or an SDR; accordingly, the clarifying language may create unnecessary ambiguity. Therefore, the Commission proposes a non-substantive amendment to eliminate the existing language to avoid any potential confusion. B. § 37.2—Applicable Provisions and Definitions 47

§ 37.2(a)—Applicable Provisions
Section 37.2 states that a SEF must
comply with part 37 and all other applicable Commission regulations, including any related definitions and cross-referenced sections. Section 37.2 also identifies certain specific pre-DoddFrank Act provisions whose applicability to SEFs may otherwise not be apparent—in particular, § 1.60 and
part 9 of the Commission’s
regulations.48 The Commission proposes to adopt a non-substantive amendment to eliminate the reference to
part 9; the Commission notes that it has
since adopted amendments to part 9 to conform to the relevant part 37 regulations.49
§ 37.2(b)—Definition of ‘‘Market
Participant’’
The Commission proposes a new provision under § 37.2(b) to define ‘‘market participant,’’ as the term is currently used in part 37, to clarify a SEF’s jurisdiction over the various participants that may be involved in trading or executing swaps on its facility. In the preamble to the SEF Core Principles Final Rule, the Commission specified that a ‘‘market participant’’ includes any ‘‘person that directly or indirectly effects transactions on the SEF. [The definition] includes persons with trading privileges on the SEF and persons whose trades are intermediated.’’ 50 This term applies to several part 37 rules and triggers certain obligations under the Core Principle 2 regulations, which set forth a SEF’s selfregulatory responsibilities. For example, § 37.206 requires a SEF to establish participation rules that broadly impose a SEF’s disciplinary authority across different categories of participants, including market participants.51 In practice, SEFs have created various participation categories, including ‘‘direct access,’’ ‘‘direct market access,’’ and ‘‘sponsored access’’ to describe how persons connect to their trading systems or platforms. For example, the Commission understands that ‘‘direct access’’ generally refers to participants who have been granted trading privileges by a SEF and utilize their own proprietary means, e.g., trading credentials and/or front-end interface, to participate directly on the SEF.52 In contrast, ‘‘direct market access’’ or ‘‘sponsored access’’ generally describe arrangements in which a person uses a SEF participant’s means, including trading credentials and/or front-end systems, to participate directly on the SEF. For example, many SEFs allow persons to access their systems or platforms by using the credentials and/ or front-end functionality provided by a SEF participant, such as a futures commission merchant (‘‘FCM’’) serving as a clearing member on the SEF or an IB.53 Finally, some persons may participate on a SEF via an agency execution model by directing an intermediary, e.g., an FCM or an IB, to submit orders or request quotes on their behalf. Notwithstanding these categories, SEFs have generally relied on the existing description of ‘‘market participant’’ in the SEF Core Principles Final Rule preamble to establish jurisdiction over all of these participants that access the SEF and trade swaps on a direct or indirect basis. Given this established reliance and the continued use of this term under the proposed rules, the Commission seeks to codify the definition of ‘‘market participant’’ in
part 37. The Commission proposes to
define ‘‘market participant’’ as any person who accesses a SEF (i) through direct access provided by a SEF; (ii) through access or functionality provided by a third-party; or (iii) through directing an intermediary that accesses a SEF on behalf of such person to trade on its behalf. As a threshold matter, the Commission notes that since these persons are currently considered ‘‘market participants,’’ they are already subject to a SEF’s jurisdiction. The Commission believes that persons accessing a SEF through the various means described above interact with other market participants on the SEF and have the ability to engage in abusive trading practices. Therefore, they should continue to be subject to a SEF’s jurisdiction, including disciplinary procedures and recordkeeping obligations.54 a. Applicability of § 37.404(b) to Market Participants The Commission notes in particular that this proposed definition of ‘‘market participant’’ would apply to the recordkeeping requirements under § 37.404(b). Section 37.404(b) requires a SEF to adopt rules that require its market participants to keep records of their trading, including records of their activity in any index or instrument used as a reference price, the underlying

55 17 CFR 37.404(b).
56The Commission notes that the proposed ‘‘market participant’’ definition, or the discussion herein, does not alter any person’s obligations under § 1.35. 17 CFR 1.35. 57The Commission notes that in the SEF Core Principles Final Rule, one commenter expressed concern that the vague use of the term ‘‘market participant’’ could potentially subject dealers’ customers, and thus asset managers and their clients, to onerous requirements. SEF Core Principles Final Rule at 33506. commodity, and related derivatives markets.55 Participants who trade on a SEF via direct access and participants who use the access or functionality of another participant to trade on a SEF have primary access to these types of records of their own trading. Further, the Commission believes persons who direct an intermediary to trade on their behalf are best situated to maintain the records required by § 37.404(b). The Commission understands that such intermediaries would likely only have access to records of swaps activity occurring on the SEF, not necessarily activity by their customers in the index or instruments used as a reference price, the underlying commodity, and related derivatives markets. Consequently, the Commission believes that as ‘‘market participants’’ under the proposed definition, they should be subject to the recordkeeping requirements under § 37.404(b).56 b. SEF Jurisdiction Over Clients of Market Participants The proposed ‘‘market participant’’ definition would not capture clients of asset managers who, as market participants of a SEF, trade on a SEF on their clients’ behalf.57 The Commission recognizes that based on general industry practice, these clients have given their respective asset managers broad discretion to execute transactions in various financial products in different markets, including swaps. When asset managers trade on a client’s behalf based on that discretion, such trading typically occurs without specific knowledge by the client as to whether such transactions are occurring on a SEF or the identity of the SEFs involved. While the clients themselves ultimately are the named counterparties to any transactions executed on their behalf, the asset managers are the participants accessing the SEF, and as such, are subject to the ‘‘market participant’’ definition and the obligations thereunder, including the SEF’s jurisdiction. The Commission notes that asset managers—not their clients— access the SEF and sign onboarding documentation subjecting them to the SEF’s jurisdiction. Since clients of asset managers would not be captured under the proposed market participant definition, a SEF would not be required to subject these clients to jurisdiction under proposed § 37.202(d). Given that these clients give broad trading discretion to their asset managers, the Commission believes that requiring an asset manager who accesses and conducts actual trading on a SEF to submit to the SEF’s jurisdiction is sufficient. This approach ensures that SEFs have the
ability to take disciplinary action against the individual or entity—the asset manager—that could actually engage in potentially abusive trading practices on the SEF. The Commission notes that this logic would apply in other circumstances where a client gives broad trading discretion to another person to trade and execute swap transactions on the client’s behalf. Therefore, these situations would not fall within the third prong of the ‘‘market participant’’ definition as described above because the client is not ‘‘directing’’ the intermediary to trade on its behalf. With respect to recordkeeping, the Commission understands that asset managers typically maintain records of swap transactions on SEFs to which their clients are named counterparties. Although asset managers would likely not have complete records of their clients’ trading activity in the index or instruments used as a reference price, the underlying commodity, and related derivatives markets under § 37.404(b), the Commission does not believe that SEFs would need these client records for regulatory purposes to the extent that the client is not directing the asset manager to trade on its behalf, but rather allowing the asset manager to exercise discretion in trading swaps. Therefore, the potential risks of manipulation, price distortion, and disruptions of the delivery or cash settlement process, which a SEF is required to prevent through trade monitoring under Core Principle 4, may be less attributable to such clients. To the extent that such risks may exist, however, the Commission believes it is sufficient for SEFs to have access to records that relate to the asset manager, who is conducting the actual swaps trading activity. Request for Comment The Commission requests comment on all aspects of proposed § 37.2(b). The Commission is particularly interested in the impact of the scope of the proposed ‘‘market participant’’ definition on various constituencies and, therefore, requests comment on the following questions:
(1) Is the Commission’s proposed definition of ‘‘market participant’’ clear and complete? Please comment on any aspect of the definition that you believe is not clear or adequately addressed. (2) Should the proposed definition of ‘‘market participant’’ distinguish between clients that give up complete trading discretion to an asset manager or another SEF participant and clients that do not so give up discretion or only give up partial discretion? If so, on what basis should the definition establish such a distinction? (3) Do customers currently access a SEF through an intermediary, e.g., an FCM or IB, and direct that intermediary to trade on their behalf through an agency-based approach? If this is not common, could this method of accessing a SEF become more common in the future? If so, under what circumstances would this occur? Is the third prong of the proposed ‘‘market participant’’ definition appropriate, which would include a person who directs an intermediary that accesses a SEF to trade on its behalf? If not, then why? (4) Are there any other methods that are either currently being used or could be used to access a SEF? Are there any other examples of how a person could access a SEF through access or functionality provided by a third party? What type of abusive trading practices, if any, could a customer attempt to conduct if the customer directs its trading through an intermediary such as an FCM or an IB? Please provide examples. (5) What type of abusive trading practices, if any, could a client of an asset manager conduct if the client gives up complete trading discretion to the asset manager? Please provide examples. If the client allows an asset manager to exercise discretion in trading swaps, what are the risks of manipulation, price distortion, and disruptions of the delivery or cash settlement process that may be attributable to the client? (6) Does a SEF’s ability to monitor trading to prevent such risks require it to have access to client trading records that include activity in the index or instrument used as a reference price, the underlying commodity, and related derivatives markets? Are there any trading records that are currently created and maintained by clients of asset managers that would not also be retained by the asset managers? If so, please describe such records. Should SEFs receive such records for regulatory purposes?

58The Commission proposes to renumber paragraph (a)(1) to subsection (a) based on the proposed elimination of the minimum trading functionality requirement under § 37.3(a)(2) and the Order Book definition under § 37.3(a)(3) described below. 59CEA section 5h(a)(1) states that no person may operate a facility for the trading or processing of swaps unless the facility is registered as a swap execution facility or as a designated contract market. 7 U.S.C. 7b–3(a)(1). 60SEF Core Principles Final Rule at 33481. The statutory SEF definition in CEA section 1a(50) provides that a SEF is a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that facilitates the execution of swaps between persons; and is not a designated contract market. 7 U.S.C. 1a(50). 61 17 CFR 37.3(a)(1). In addition to SEFs, existing § 37.3(a)(1) also references registration as a DCM. While the trading of swaps may occur through either a SEF or a DCM, CEA section 2(e) limits the trading of swaps on SEFs to ECPs. Both ECPs and non-ECPs may trade swaps through a DCM. 7 U.S.C. 2(e). 62SEF Core Principles Final Rule at 33481. 63The Commission notes that the preamble to the SEF Core Principles Final Rule addresses the applicability of the SEF registration requirement in CEA section 5h(a)(1) to several types of entities that facilitate swaps activity. SEF Core Principles Final Rule at 33479–84. The Commission maintains its approach to these types of entities with respect to the registration requirement, except as discussed herein. See infra Section IV.C.1.b.—Single-Dealer Aggregator Platforms (addressing the SEF registration requirement with respect to singledealer aggregator platforms). 64 7 U.S.C. 5h(a)(1). 65 7 U.S.C. 1a(50). 66SEF Core Principles Final Rule at 33481 n.88. 67 Id. 68 Id. at 33479–80. 69 Id. at 33481–82. 70SEF Core Principles Final Rule at 33481–83. 71See id. 72 7 U.S.C. 1a(50).
C. § 37.3—Requirements and Procedures
for Registration

§ 37.3(a)—Requirements for
Registration 58
CEA section 5h(a)(1) establishes the SEF registration requirement and specifies that no person may operate a facility for the trading or processing of swaps unless the facility is registered as a SEF or as a DCM.59 In adopting the SEF Core Principles Final Rule, the Commission affirmed its view under existing § 37.3(a)(1) that the broad registration requirement in CEA section 5h(a)(1) applies only to facilities that meet the SEF definition in CEA section 1a(50).60 In furtherance of CEA section 5h(a)(1), existing § 37.3(a)(1) states that any person operating a facility that offers a trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform shall register the facility as a SEF or as a DCM.61 The Commission believed that this interpretation of the statutory SEF registration requirement would help further the statutory SEF goals of promoting swaps trading on SEFs and promoting pre-trade price transparency in the swaps market.62 As discussed further below, the Commission is proposing to apply the SEF registration requirement to several types of entities. The Commission does not intend for the discussion in this notice to exhaustively address which entities must register as a SEF. Rather, a determination of whether an entity must register as a SEF pursuant to CEA
section 5h(a)(1) would depend on an
evaluation of the operations of the entity, in particular whether it meets the SEF definition under CEA section 1a(50).63 a. Footnote 88 As noted above, the Commission has stated that the SEF registration requirement in CEA section 5h(a)(1) 64 only applies to facilities that meet the statutory SEF definition in CEA section 1a(50).65 In footnote 88 of the preamble to the SEF Core Principles Final Rule, the Commission specifically stated that the SEF registration requirement is not limited by the trade execution requirement in CEA section 2(h)(8), ‘‘such that only facilities trading swaps subject to the trade execution requirement would be required to register as a SEF.66 Therefore, a facility is required to register as a SEF if it operates in a manner that meets the statutory SEF definition even though it only executes or trades swaps that are not subject to the trade execution [requirement].’’ 67 The Commission adopted this approach despite several comments to the proposed part 37 regulations, stating that registration as a SEF should only be required if an entity both met the SEF definition and offered swaps subject to the trade execution requirement.68 The Commission stated that its approach to this issue is consistent with the statutory SEF registration requirement, the statutory SEF definition, and the trade execution requirement; the Commission also held that its approach promotes the statutory SEF goals.69 The Commission proposes to codify this existing approach to the SEF registration requirement by amending § 37.3(a)(1) to state that a person operating a facility that meets the statutory SEF definition must register as a SEF without regard to whether the swaps that it lists for trading are subject to the trade execution requirement. This proposed amendment is intended to clarify that the trade execution requirement is not a determinant of whether an entity must register as a SEF by codifying the requirement that an entity must register as a SEF if it permits trading or execution of any swap, including swaps that are not subject to the trade execution requirement, in a manner consistent with the statutory SEF definition, i.e., trading or execution on a ‘‘multiple-to-multiple’’ basis among market participants. Request for Comment The Commission requests comment on all aspects of the proposed amendment to § 37.3(a). b. Single-Dealer Aggregator Platforms In the preamble to the SEF Core Principles Final Rule, the Commission evaluated the application of the statutory SEF registration requirement to various swaps market entities, including ‘‘aggregation services or portals’’ (‘‘SEF Aggregator Portals’’) and ‘‘one-to-many systems or platforms’’ (‘‘Single-Dealer Platforms’’).70 The Commission generally determined that SEF Aggregator Portals and SingleDealer Platforms do not meet the statutory SEF definition and therefore are not required to register as SEFs.71 As the Commission has gained greater knowledge and experience with the swaps market,
however, it has become aware of a different type of a trading system or platform that implicates the SEF registration requirement—trading systems or platforms that aggregate Single-Dealer Platforms (‘‘Single-Dealer Aggregator Platforms’’). Specifically, a Single-Dealer Aggregator Platform typically operates a trading system or platform that aggregates multiple SingleDealer Platforms and, thus, enables multiple dealer participants to provide executable bids and offers, often via two-way quotes, to multiple non-dealer participants on the system or platform. Those non-dealer participants are thus able to view, execute, or trade swaps posted to the Single-Dealer Aggregator Platform’s system or platform from multiple dealer participants. These types of systems or platforms, however, have not registered their operations as SEFs. The Commission believes that the type of trading system or platform provided by Single-Dealer Aggregator Platforms should be subject to the SEF registration requirement because it meets the SEF definition in CEA section 1a(50) by allowing multiple participants to trade swaps by accepting bids and offers made by multiple participants in the facility or system.72

73SEF Core Principles Final Rule at 33482. 74 Id. 75See id. 76Although the Commission maintains that a SEF Aggregator Portal is generally not required to register as a SEF, such a system or platform may be subject to the Act and Commission regulations as an IB, as defined in CEA section 1a(31), given that its activity may constitute soliciting or accepting orders to be routed to SEFs. 7 U.S.C. 1a(31). 77As noted in the preamble to the SEF Core Principles Final Rule, the Commission received comments characterizing the SEF registration requirement as ambiguous and requesting that the Commission provide clarification with respect to certain entities. SEF Core Principles Final Rule at 33479–81. In response, the Commission provided examples of how the SEF registration requirement would or would not apply to ‘‘certain categories of better understood facilities.’’ Id. at 33482–84. These categories included (i) one-to-many systems or platforms; (ii) blind auction systems or platforms; (iii) aggregation services or portals; (iv) services facilitating portfolio compression and risk mitigation transactions; and (v) swap processing services. The Commission, however, emphasized that these examples do not ‘‘comprehensively’’ address all entities that are subject to SEF registration and urged participants to seek clarification from the Commission as to how the registration requirement applied to their particular operations. Id. at 33482. 78 ‘‘Interdealer broker,’’ as used in this notice, refers to an interdealer broker entity or operation in the aggregate and not to a particular individual, i.e., an associated person, who works as a broker within the entity or operation. The Commission, however, considers such individuals to constitute part of the interdealer broker’s trading system or platform. See infra Section VI.A.1.—§ 37.201(a)—Required Swap Execution Facility Rules (specifying proposed rules for SEF execution methods that apply to activities of SEF trading specialists who facilitate swaps trading or execution by, among other things, conducting broking-like functions). 79Pursuant to CEA section 5h(g), the Commission may exempt a facility from SEF registration upon a finding that it is subject to ‘‘comparable, comprehensive supervision and regulation’’ under the rules and regulations of the facility’s home country. 7 U.S.C. 7b–3(g). See infra Section IV.C.1.d.—Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps Trading Facilities. While a Single-Dealer Aggregator Platform has elements that resemble a Single-Dealer Platform, which is a type of entity that does not trigger the SEF registration requirement,73 the Commission believes that both types of platforms are distinguishable from one another. In the preamble to the SEF Core Principles Final Rule, the Commission characterized Single-Dealer Platforms as systems or platforms in which a single dealer serves as a single liquidity provider by exclusively providing all bids and offers against
which its customers, i.e., participants, trade or execute swaps.74 Accordingly, the dealer serves as the counterparty to all swaps executed on its trading system or platform.75 Unlike the ‘‘one-to-many’’ nature of a Single-Dealer Platform, however, a Single-Dealer Aggregator Platform comports with the SEF definition in CEA section 1a(50) by providing a trading system or platform where multiple dealers send or stream bids and offers to multiple participants, thereby subjecting them to SEF registration. The Commission also believes that Single-Dealer Aggregator Platforms are distinguishable from SEF Aggregator Portals. SEF Aggregator Portals are services or portals that enable market participants to access multiple SEFs, each of which provides a trading system or platform that facilitates the trading or execution of swaps between multiple participants. In the preamble to the SEF Core Principles Final Rule, the Commission stated that a SEF Aggregator Portal does not meet the statutory SEF definition because it merely provides a portal through which its users may access multiple SEFs, rather than providing a venue for the trading or execution of swaps.76 A SEF Aggregator Portal does not provide a trading system or platform where multiple participants have the ability to execute or trade swaps with multiple participants within its facility; rather, the multiple-to-multiple participant execution or trading occurs on the SEF and not the SEF Aggregator Portal. A Single-Dealer Aggregator Platform, in contrast, acts as more than a mere portal because it provides a system or platform for multiple-to-multiple participant swaps trading or execution, thereby subjecting it to the SEF registration requirement. Request for Comment The Commission requests comment on all aspects of the proposed application of the SEF registration requirement to Single-Dealer Aggregator Platforms. The Commission may consider alternatives to the proposed application of the registration requirement to Single-Dealer Aggregator Platforms and requests comment on the following questions:
(7) Is the Commission’s position that Single-Dealer Aggregator Platforms meet the SEF definition appropriate? Please explain. (8) Should the Commission apply the SEF registration requirement to any other type of entity or activity? If so, please describe the type of entity and/ or activity at issue. (9) What factors, if any, would prevent a Single-Dealer Aggregator Platform from complying with the SEF registration requirement? (10) Is the Commission’s existing position that SEF Aggregator Portals and Single-Dealer Platforms do not satisfy the statutory SEF definition appropriate? Please explain.
c. Swaps Broking Entities, Including
Interdealer Brokers
In the preamble to SEF Core Principles Final Rule, the Commission specified whether the SEF registration requirement would apply to several specific types of entities,77 but did not address whether the requirement would apply to swaps broking entities, i.e., interdealer brokers, most of whom are registered with the Commission as IBs and traditionally facilitate swaps trading in the over-the-counter (‘‘OTC’’) markets.78 As discussed below, the Commission believes that the activities of these entities—firms operating trading systems or platforms that facilitate swaps trading primarily between swap dealers—trigger the SEF registration requirement because they allow multiple participants to trade swaps with multiple participants in a manner consistent with the language of CEA sections 5h(a)(1) and 1a(50) (emphasis added). In light of existing market practices, the Commission believes that it is necessary to apply the SEF registration requirement to ensure that the multiple-to-multiple ‘‘trading’’ that occurs on such trading systems or platforms is subject to the Act and Commission’s regulations as regulated SEFs. This application is consistent with Congressional intent, as evidenced by the statutory SEF registration requirement and SEF definition, and is further consistent with the statutory SEF goals. The Commission understands that the proposed interpretation may require certain non-domestic operations—in particular, foreign swaps broking entities, such as foreign interdealer broker operations—to seek SEF registration or an exemption from SEF registration pursuant to CEA section 5h(g), provided that they fall within the Commission’s jurisdiction.79 Given the potentially complex issues that may arise for these entities from the Commission’s proposed application of the SEF registration requirement, the Commission proposes below to delay the compliance date of the requirement with respect to such entities and their operations. This proposed delay would allow the Commission to further develop its cross-border regulatory regime, including the achievement of additional comparability determinations with foreign regulators regarding their respective regulatory frameworks for swap trading venues located within their respective jurisdictions, i.e., foreign multilateral swaps trading

80The Commission notes that potential courses of action for such entities may include seeking SEF or DCM registration; reorganizing into an existing affiliated SEF; working with the appropriate regulator within their home country to seek an exemption from registration pursuant to CEA
section 5h(g); or adjusting their activity to avoid the
Commission’s jurisdiction.
81For a description of a ‘‘trade work-up’’ session, see infra note 269. 82As discussed below, persons operating within these SEFs that facilitate swaps trading are commonly referred to as ‘‘trading specialists’’ or ‘‘execution specialists.’’ See infra Section VI.A.3.— § 37.201(c)—SEF Trading Specialists. 83 In becoming participants on a SEF, interdealer brokers typically meet the SEF’s access criteria prior to onboarding, which provides them with trading privileges on the SEF. As SEF participants, they are subject to the SEF’s jurisdiction, including all applicable disciplinary rules, similar to any other SEF participant. Where the SEF offers its participants the ability to submit pre-arranged or pre-negotiated transactions for execution, an interdealer broker SEF participant will route transactions it has arranged between its customers or clients, who are also SEF participants, for execution on the SEF. 84 17 CFR 37.9(b). 85SEF Core Principles Final Rule at 33503. See infra note 322 and accompanying discussion (describing the policy reason for the § 37.9(b) time delay requirement). 86See infra Section VI.A.2.a.—§ 37.201(b)—PreExecution Communications (discussion of how preexecution communications between market participants constitute ‘‘trading’’). 87For further discussion of this execution method, see infra Section VI.A.2.—§ 37.203(a)—PreArranged Trading Prohibition; § 37.9—Time Delay Requirement. 88The Commission has also observed that other swaps broking entities that are not affiliated with a SEF similarly negotiate or arrange transactions facilities, which would include foreign swaps broking entities as described below. Such a determination would allow such operations to seek an exemption from SEF registration. A delay would also provide time to foreign swaps broking entities to determine an appropriate course of action for their respective operations.80 (1) Structure and Operations of Swaps Broking Entities, Including Interdealer Brokers Since adopting part 37, the Commission has developed a deeper understanding of the swaps market and has observed how swaps broking entities, including interdealer brokers, have structured themselves in relation to the current SEF regulatory framework. Interdealer broker trading systems or platforms facilitate swaps trading between multiple customers by negotiating or arranging swaps through voice-based or voice-assisted systems that combine voice functionalities with electronic systems such as order books. Swap dealers currently use these trading systems or platforms for several purposes, including obtaining market color or maintaining pre-trade anonymity in the course of trading. Specifically, an interdealer broker typically ‘‘works’’ customer orders by issuing RFQs-to-all among other customers and negotiating or arranging any resultant bids or offers. Once the interdealer broker arranges a reciprocating bid and reciprocating offer, it sets a price for a specific swap transaction for a particular
product, which in many cases enables a subsequent ‘‘trade work-up’’ session.81 Finally, the interdealer broker will either facilitate the execution of the transaction(s) if the broker is part of a SEF’s trading system or platform 82 or will otherwise route the pre-arranged transaction(s) to a SEF for execution if the broker is not a part of the registered SEF. The Commission notes that interdealer brokers have adopted varying approaches to structuring themselves in relation to the SEF regulatory framework. Some interdealer brokers have registered components of their trading systems or platforms as SEFs. Other interdealer brokers have operated very similar trading systems or platforms outside of the structure of a SEF, often through registered IB entities, and have interacted with a SEF solely as participants of the SEF.83 As SEF participants, they submit transactions, which have already been arranged on those trading systems or platforms, to the SEF for execution. Notably, many interdealer brokers have maintained the latter approach by operating both a SEF platform and a non-SEF trading system or platform simultaneously, using the latter to facilitate the interaction of bids and offers and bringing the resulting arranged swaps to the SEF for execution. This bifurcated approach has existed despite the close similarities among interdealer broker trading systems or platforms, whether they are registered or not as SEFs—they offer trading systems or platforms that facilitate the trading of swaps between multiple participants. This approach, however, has been justified by the execution of the swap on a SEF; as noted, the interdealer brokers that conduct activity on non-SEF platforms ultimately route the prearranged transactions to a SEF where they are executed. This approach seems premised on the view that because the execution occurs on a registered SEF, the facilitating interdealer broker does not need to register as a SEF, notwithstanding its role in negotiating or arranging the transaction(s). To facilitate trading in Required Transactions outside the SEF, these interdealer broker trading systems or platforms typically operate outside of SEFs pursuant to the time delay requirement for Required Transactions under § 37.9(b).84 Under § 37.9(b), the Commission implemented a fifteensecond time-delay requirement for Required Transactions that are prearranged or pre-negotiated by a broker and submitted as cross trades for execution through the SEF’s Order Book. This requirement allows a broker or dealer to execute a Required Transaction by trading against a customer’s order or executing two customers’ orders against each other through pre-negotiation or prearrangement, provided that one side of the transaction is exposed to the Order Book for fifteen seconds before the other side of the transaction is submitted for execution. The time delay is intended to provide other market participants with an opportunity to execute against the first order.85 In
practice, however, the time delay requirement has enabled interdealer brokers to facilitate ‘‘trading’’ of swaps i.e., the negotiating or arranging of swaps transactions outside the SEF, through the interdealer brokers’ multiple-to-multiple trading systems or platforms. Negotiating or arranging consists of facilitating the interaction of bids and offers.86 Once the transaction is pre-negotiated or prearranged through the interdealer broker’s multiple-to-multiple trading system or platform, the interdealer broker routes the pre-arranged transaction to the SEF, where one side of the transaction is exposed for fifteen seconds on the Order Book prior to the entry of the other side for execution. For swaps that are not subject to the trade execution requirement, i.e., Permitted Transactions, SEFs have allowed their market participants to conduct trading via pre-execution communications away from their respective facilities and then submit the resulting transaction, with the price, terms, and conditions already agreed upon between the participants, to the SEF’s trade capture functionality for execution.87 The Commission notes that several SEFs affiliated with interdealer brokers offer this type of functionality based in part on the execution flexibility allowed under § 37.9(c)(2) for Permitted Transactions, i.e., a SEF may offer any method of execution for such swaps. Accordingly, interdealer brokers submit Permitted Transactions that have been negotiated or arranged through their trading systems or platforms to an affiliated SEF without being subject to any corresponding order exposure (e.g., a fifteen-second time-delay).88 Coupled

away from a registered SEF and subsequently submit those transactions to a registered SEF for execution. These types of transactions, however, are less common and constitute a smaller portion of the overall volume of relevant transactions discussed herein. 89Although the Commission’s description of swaps broking entities above focuses on the dealerto-dealer market, the Commission clarifies that any person operating a system or platform for multipleto-multiple participant swaps trading as described herein must register as a SEF consistent with CEA
section 5h(a)(1) and § 37.3(a) (emphasis added).
90The Commission notes that this view is consistent with the proposed amendment to § 37.3(a) to clarify that a person operating a facility that meets the statutory SEF definition must register as a SEF without regard to whether the swaps that it lists for trading are subject to the trade execution requirement. See supra Section IV.C.1.a.—Footnote
88. As part of the proposed elimination of the
prescriptive execution methods under § 37.9 for Required Transactions, the Commission is proposing to eliminate the time delay requirement under § 37.9(b). See infra Section VI.A.2.— § 37.203(a)—Pre-Arranged Trading Prohibition; § 37.9(b)—Time Delay Requirement. Based on this proposed elimination and the adoption of a flexible approach to SEF execution methods, the Commission notes that rules permitting the prearrangement or pre-negotiation of a swap transaction subject to a time delay requirement would no longer be needed or allowed. 91 In addition to negotiation or arrangement that occurs through a swaps broking entity, the Commission believes that negotiation or arrangement that occurs directly between participants should also occur within a SEF. The Commission is proposing to require SEFs to have rules that prohibit market participants from engaging in pre-execution communications, i.e., negotiation or arrangement of swaps, away from a SEF’s trading system or platform, subject to certain exceptions. See infra Section VI.A.2.a.— § 37.201(b)—Pre-Execution Communications. 92 7 U.S.C. 7b–3(e). 93 7 U.S.C. 6f(a). Part 3 sets forth the registration and regulatory requirements for IBs, among other registered entities. 17 CFR part 3. Among those requirements, IBs are required to register with the National Futures Association (‘‘NFA’’) and therefore are also subject to the NFA rules and regulations. 17 CFR 3.2. The Commission further notes that § 155.4 sets forth trading standards for IBs. 17 CFR
155.4. For a description of additional IB-related
Commission requirements, see infra note 341. 94The Commission emphasizes that an interdealer broker that solely solicits or accepts individual or single bids or offers and introduces them to an exchange, such as a SEF, would not be required to register as a SEF because it would not be facilitating the ‘‘trading,’’ i.e., negotiating or arranging of swaps between multiple market participants consistent with the SEF registration requirement. Such brokers would be able to continue to engage in such solicitation or acceptance in conformance with the IB definition. 7 U.S.C. 1a(31). 95 17 CFR 1.3 (definition of ‘‘self-regulatory organization’’). 96 7 U.S.C. 7b–3(f)(2)(B). 97 Given that the interdealer brokers are participants of the SEFs to which they submit negotiated or arranged transactions for execution, the Commission notes that SEFs still have jurisdiction over that activity and could investigate Continued with the ability to submit Required Transactions in accordance with the time delay requirement, these arrangements essentially enable the operation of multiple-to-multiple trading systems or platforms for a broad range of swaps outside of the SEF regulatory framework. (2) SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers Based on the statutory SEF registration requirement and SEF definition, the associated SEF goals, the Commission’s experience and knowledge from implementing part 37, and its evaluation of trading practices that have developed under the current SEF regulatory framework with respect to swaps broking entities that include interdealer brokers, the Commission proposes that a trading system or platform operated by such an entity must register as a SEF pursuant to CEA
section 5h(a)(1) and § 37.3(a).89 The
Commission believes that such trading systems or platforms conform to the statutory SEF definition because they allow multiple participants to trade swaps by accepting bids and offers made by multiple participants in that facility or system (emphasis added). As described above, these trading systems or platforms facilitate the negotiation or arrangement of swap transactions through the interaction of bids and offers. The Commission believes that this ‘‘trading’’ activity should occur within a SEF, regardless of whether the product is subject to the trade execution requirement.90 Accordingly, entities operating these types of trading systems or platforms should be subject to the SEF registration requirement.91 In addition to the statutory basis for this application, the Commission’s proposed approach would advance the Dodd-Frank goals of promoting swaps trading on SEFs and pre-trade price transparency.92 The Commission believes that the operation of multipleto-multiple swaps trading systems or platforms by swaps broking entities, including interdealer brokers outside of SEFs has frustrated these statutory goals and moved liquidity formation away from SEFs. To promote both trading on SEFs and pre-trade price transparency, the Commission believes that the activities associated with swaps trading should occur on SEFs consistent with the SEF registration requirement. Allowing such activities to occur away from a SEF and submitting any resulting transactions to a SEF for execution effectively makes the SEF a tradebooking or post-trade processing engine, which is inconsistent with the statutory language and goals of the CEA related to SEFs. The Commission also believes that requiring these types of swaps broking entities to register as SEFs would help to consistently apply the SEF regulatory framework over a segment of swaps trading activity that is very similar to registered SEF activity. Interdealer brokers currently operate trading systems or platforms outside of the SEF regulatory framework, yet act as participants on SEFs, resulting in multiple-to-multiple trading that is opaque not only to the SEF where the negotiated or arranged trade is eventually routed to for execution, but also to the Commission and the general marketplace. Although many interdealer brokers are registered as IBs pursuant to CEA section 4f and are subject to the Commission’s rules and regulations,93 the Commission believes that these requirements are neither intended nor sufficient for the regulation and oversight of such interdealer brokers’ multiple-to-multiple trading activity. The Commission believes that Congress would not have created SEFs and added the word ‘‘trading’’ in the statutory SEF registration requirement and SEF definition if it intended that an IB framework would be sufficient for swaps ‘‘trading.’’ Given that these interdealer brokers operate trading systems or platforms outside of the SEF regulatory framework that are very similar to the activity that
occurs on trading systems or platforms that are located within interdealer brokers’ registered affiliated SEFs,94 the Commission believes such activity would be more appropriately subject to a SEF-specific regulatory framework. This approach would achieve the policy goal of applying more consistent regulatory treatment to very similar swaps market activity. Requiring interdealer brokers to either register as SEFs or carry out their multiple-to-multiple trading activities within a SEF would also enhance market integrity and monitoring because such activities would become subject to the SEF core principles and regulations, as well as direct regulatory oversight of a SEF in its capacity as a self-regulatory organization (‘‘SRO’’).95 For example, Core Principle 2 requires SEFs to establish and enforce trading, trade processing, and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules, including means to capture information that may be used in establishing whether rule violations have occurred.96 These requirements enable SEFs to more comprehensively monitor for, among other things, potential abusive trading practices such as fraud and manipulation.97 The

suspected prohibited activity and issue sanctions where appropriate, pursuant to the SEF’s selfregulatory obligations. 98See, e.g., Enforcement Order re: Socie´te´ Ge´ne´rale S.A. Attempted Manipulation and False Reporting of LIBOR and Euribor, CFTC Docket No. 18–14 (June 4, 2018); see also Enforcement Order re: JP Morgan Chase Bank, N.A. Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark, CFTC Docket No. 18–15 (June 18, 2018). 99As discussed below, the Commission is proposing § 37.201(b) to prohibit the use of preexecution communications by market participants away from a SEF’s trading system or platform. See infra Section VI.A.2.a.—§ 37.201(b)—Pre-Execution Communications. The Commission notes that to the extent swaps broking entities, including interdealer brokers, engage in such communications in the course of negotiating or arranging transactions and submitting them to a SEF for execution, the prohibition—if adopted via a final rule—would not apply during the six-month period. 100The Commission anticipates that the effective date of any final rule would be established ninety days from the publication of the rule in the Federal Register. The Commission believes that the proposed ninety-day period would provide swaps broking entities, including interdealer brokers seeking to avail themselves of the six-month compliance date delay with a sufficient opportunity to compile and submit this information to the Commission. 101 7 U.S.C. 2(e). See supra note 61. Commission notes that establishing SEF monitoring and surveillance requirements over activity in the interdealer broker market is especially beneficial based on the role of interdealer brokers in the manipulation of ISDAFIX, a benchmark for swap rates and spreads for IRS; and the London Interbank Offered Rate (‘‘LIBOR’’), an average benchmark for short-term interest rates used to determine floating rates for IRS.98 Accordingly, the Commission proposes that swaps broking entities, including interdealer brokers, that offer a trading system or platform in which more than one market participant has the ability to trade any swap with more than one other market participant on the system or platform, shall register as a SEF or seek an exemption from registration pursuant to CEA section 5h(g) (emphasis added). Where an entity operates both a registered SEF and an affiliated swaps broking entity—such as an interdealer broker—that negotiates or arranges trades via a non-SEF trading system or platform and participates on the affiliated SEF as a market participant, the swaps broking entity could also comply with the SEF registration requirement by integrating its non-SEF trading system or platform into its affiliated SEF. The Commission believes that this proposed application of the SEF registration provision in CEA
section 5h(a)(1), which the Commission
continues to interpret in conjunction with the SEF definition in CEA section 1a(50), is consistent with the statute and helps further the statutory SEF goals provided in CEA section 5h. The Commission proposes to delay the application of the SEF registration requirement with respect to swaps broking entities, including interdealer brokers, for a period of six months, subject to certain conditions and starting from the compliance date of any final rule adopted from this proposed rulemaking. Swaps broking entities, including interdealer brokers, that meet the conditions set forth below would be able to continue to maintain their current practice of facilitating the negotiating or arranging of swaps transactions between multiple participants and routing those swaps transactions to SEFs for execution.99 Without the six-month delay period, the Commission believes that applying the SEF registration requirement to these entities would disrupt their operations and further fragment swaps liquidity. As applied to swaps broking entities, including interdealer brokers—most of whom are registered with the Commission as IBs—the Commission proposes that the six-month delay from the SEF registration requirement would be subject to the following conditions:
(i) All swap transactions that are traded on a swaps broking entity, including an interdealer broker, must be routed for execution to a SEF; and (ii) The swaps broking entity, including an interdealer broker, must provide electronically the following information with respect to itself to the Secretary of the Commission at submissions@cftc.gov and the Commission’s Division of Market Oversight (‘‘Division’’ or ‘‘DMO’’) at DMOSubmissions@cftc.gov: (i) Entity name as it appears in the entity’s charter; (ii) name and address of the entity’s ultimate parent company; (iii) any names under which the entity does business; (iv) address of principal executive office; (v) a contact person’s name, address, phone number, and email address; (vi) asset classes and swap products for which the entity facilitates trading; and (vii) any registrations, authorizations, or licenses held.100 Upon a DMO determination that a swaps broking entity’s notice is complete, the Commission proposes to post these notices on the Commission’s website under the ‘‘Industry Filings’’
page. This proposed approach would
effectively maintain the status quo for these swaps broking entities for the proposed six-month delay period. The Commission notes that the proposed six-month delay for swaps broking entities, including interdealer brokers, does not affect any other requirements under the CEA or the Commission’s regulations. In particular, this delayed compliance date would not affect the application of CEA section 2(e) and its requirement that only ECPs be permitted to trade swaps on SEFs.101 As part of this proposed transition period, swaps broking entities, including interdealer brokers, would be able to route their transactions to a SEF for execution. Furthermore, during this period, counterparties subject to the trade execution requirement would be able to satisfy that requirement by trading via a swaps broking entity, including an interdealer broker, that routes the transactions to a SEF for execution. Request for Comment The Commission requests comment on all aspects of the proposed application of the SEF registration requirement to swaps broking entities. The Commission may consider alternatives to the proposed application of the requirement and requests comment on the following questions:
(11) Is the Commission’s view that swap broking entities, including interdealer brokers, meet the SEF definition appropriate? Please explain why or why not. Is it clear what activity falls within the SEF registration requirement and SEF definition, including the meaning of ‘‘trading’’? If not, please explain. (12) Should the Commission apply the SEF registration requirement to any other type of entity or activity? (13) What factors, if any, would prevent a swaps broking entity, including an interdealer broker, from complying with the SEF registration requirement or from seeking an exemption from registration pursuant to CEA section 5h(g)? (14) Is the proposed six-month delay period sufficient to allow swaps broking entities, including interdealer brokers, time to seek registration or alter their operations in compliance with the SEF registration requirements? Why or why not? (15) Should the Commission allow swaps broking entities, including interdealer brokers, to route swap transactions to exempt SEFs during this six-month delay period? Why or why not? d. Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps Trading Facilities As discussed above, the Commission has observed that swaps broking

102Based on discussions with market participants, the Commission is aware of foreign swaps broking entities that are interdealer brokers located in numerous foreign jurisdictions, including Australia, Brazil, Canada, Chile, Colombia, Hong Kong, Japan, Mexico, Singapore, and South Korea, that participate on SEFs. The Commission is also aware that interdealer brokers domiciled in the European Union (‘‘EU’’) operate as investment firms that operate Multilateral Trading Facilities (‘‘MTFs’’) and Organized Trading Facilities (‘‘OTFs’’). The Commission notes that it has exempted certain MTFs and OTFs located in the EU from registration as SEFs pursuant to CEA section 5h(g). See infra note 109 (describing December 2017 exemptive order issued by the Commission to certain MTFs and OTFs based on comparability determination). 103See supra note 93 (general description of Commission requirements with respect to IBs). 104For purposes of this discussion, the term ‘‘U.S. person’’ identifies those persons who, under the Commission’s interpretation, could be expected to satisfy the jurisdictional nexus set forth in CEA
section 2(i) based on their swap activities, either on
an individual or aggregate basis. See Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations; Rule, 78 FR 45292, 45301 (Jul. 26, 2013) (‘‘2013 CrossBorder Guidance’’). 105 7 U.S.C. 2(i). 106 In November 2013, DMO issued guidance regarding the application of the SEF registration requirement to foreign multilateral swaps trading facilities. Division of Market Oversight Guidance on Application of Certain Commission Regulations to Swap Execution Facilities (Nov. 15, 2013). The guidance specified that a foreign multilateral swaps trading platform that provides U.S. persons or persons located in the United States (including personnel and agents of non-U.S. persons located in the United States) (‘‘U.S.-located persons’’) with the ability to trade or execute swaps on or pursuant to the rules of the platform, either directly or indirectly through an intermediary, would be expected to register as a SEF or DCM. Id. at 2. The guidance listed two non-exhaustive factors to determine whether a foreign platform met this registration requirement: (i) Whether a foreign multilateral swaps trading facility directly solicits or markets its services to U.S. persons or U.S.- located persons; or (ii) whether a significant portion of the market participants who a foreign multilateral swaps trading facility permits to effect transactions are U.S. persons or U.S.-located persons. Id. at 2 n.8. The guidance further specified DMO’s belief that U.S. persons and U.S.-located persons generally comprise those persons whose activities have the requisite ‘‘direct and significant’’ connection with activities in, or effect on, commerce of the United States within the meaning of CEA section 2(i). Id. at 2. The guidance also stated DMO’s view that a multilateral swaps trading facility’s provision of the ability to trade or execute swaps on or through the platform to U.S. persons or U.S.-located persons may create the requisite connection under CEA section 2(i) for purposes of the SEF/DCM registration requirement. Id. Subsequently, the Commission learned that many foreign multilateral swaps trading facilities prohibited U.S. persons and U.S-located persons from accessing their facilities due to the uncertainty that the guidance created with respect to SEF registration. The Commission understands that these prohibitions reflect concerns that U.S. persons and U.S.-located persons accessing their facilities would trigger the SEF registration requirement. As noted above, the Commission expects to address the application of CEA section 2(i) to foreign multilateral swaps trading facilities, including foreign swaps broking entities, in the future. 107The Commission discusses further below the potential implications for foreign multilateral swaps trading facilities offering swaps that are subject to the trade execution requirement to applicable counterparties. 108 7 U.S.C. 7b–3(g). 109Order Exempting MTFs and OTFs Authorized Within the EU from SEF
Registration Requirement (Dec. 8, 2017) (‘‘2017 MTF and OTF Exemptive Order’’). The order established this finding with respect to EU-wide legal requirements—including, in particular, requirements under the EU’s new Markets in Financial Instruments Regulation (‘‘MiFIR’’), the EU’s amended Markets in Financial Instruments Directive (‘‘MiFID II’’), and the EU’s Market Abuse Regulation—that establish regulatory frameworks for MTFs and OTFs. Pursuant to this finding, the Commission provided specific exemptions to several MTFs and OTFs. Id. at app. A. entities, including interdealer brokers, have utilized various business structures to operate in a bifurcated manner, i.e., a SEF and a non-SEF trading system or platform. One common structure consists of an entity that serves as a parent to a registered SEF entity and several affiliated broker entities that negotiate or arrange trades and participate exclusively on the affiliated SEF as market participants. While many of those broker entities are domestically domiciled, a significant number of them are also located in numerous foreign jurisdictions.102 Similar to domestic swaps broking entities, these foreign swaps broking entities are not currently registered as SEFs, but are typically registered with the Commission as IBs.103 These entities often serve as hubs for liquidity within their particular jurisdiction during nonU.S. trading hours—operating trading systems or platforms that facilitate the negotiating or arranging of transactions for multiple U.S. persons with local customers and the routing of those transactions to an affiliated SEF for execution.104 These foreign swaps broking entities’ trading systems or platforms are very similar to those operated by swaps broking entities within in the U.S., such that they provide more than one market participant with the ability to trade swaps with more than one other market participant (emphasis added). Therefore, the Commission proposes that these foreign swaps broking entities are ‘‘foreign multilateral swaps trading facilities,’’ which are foreign facilities that operate a trading system or platform where multiple participants have the ability to execute or trade swaps with multiple market participants. Consistent with the proposal regarding the SEF registration requirement above, such foreign multilateral swaps trading facilities, including foreign swaps broking entities, would be required to register as a SEF or seek an exemption from SEF registration if their activity falls within the jurisdictional reach of the Commission pursuant to CEA section 2(i). Pursuant to CEA section 2(i), activities outside of the U.S. are not subject to the swap provisions of the CEA, including any rules prescribed or regulations promulgated thereof, unless those activities either have a ‘‘direct and significant connection’’ with activities in, or effect on, commerce of the United States; or contravene any rule or regulation established to prevent evasion of a
Dodd-Frank Act-enacted provision of the CEA.105 The Commission expects that it will clarify the cross-border jurisdictional reach of the SEF registration requirement in the future for foreign multilateral swaps trading facilities, including foreign swaps broking entities, pursuant to CEA
section 2(i).106 To the extent that a
foreign multilateral swaps trading facility’s activities are determined to fall within the Commission’s jurisdictional reach, the facility would be required to register as a SEF or seek an exemption from SEF registration.107 Such facilities that do not wish to register as a SEF and prefer to comply with the regulatory requirements of their home country may seek an exemption from SEF registration pursuant to CEA section 5h(g) either directly or via the auspices of their home country regulator. Pursuant to CEA section 5h(g), the Commission may exempt facilities from SEF registration if the facility is subject to comparable, comprehensive supervision and regulation on a consolidated basis by the appropriate governmental authorities in the home country of the facility.108 Based on this provision, the Commission issued an order in December 2017 that exempts certain MTFs and OTFs authorized within the EU from the SEF registration requirement based on a finding that their respective regulatory frameworks satisfy the standard for granting an exemption from the SEF registration requirement pursuant to CEA section 5h(g).109 At this time, the Commission has neither adopted a formal regulatory framework for granting an exemption pursuant to this provision nor has it granted exemptive relief to facilities in other jurisdictions beyond the 2017 order to EU-based MTFs and OTFs. (1) Proposed Delay of SEF Registration Requirement Given that the Commission intends to address the cross-border jurisdictional reach of the Commission’s SEF registration requirement in the future, the Commission proposes to delay the compliance date of the registration

110 2017 MTF and OTF Exemptive Order. 111As discussed below, the Commission is proposing § 37.201(b) to prohibit the use of preexecution communications by market participants away from a SEF’s trading system or platform. See infra Section VI.A.2.a.—§ 37.201(b)—Pre-Execution Communications. The Commission notes that to the extent Eligible Foreign Swaps Broking Entities engage in such communications in the course of negotiating or arranging transactions and submitting them to a SEF for execution, the prohibition—if adopted via a final rule—would not apply during the two-year period. 112 7 U.S.C. 2(i). 113For a discussion of which counterparties must comply with the Category A Transaction-Level Requirements, including the trade execution requirement, see 2013 Cross-Border Guidance at 45350–59 app. D. 114See supra note 102 (listing the foreign jurisdictions where swaps broking entities operate). 115 Group of Twenty, ‘‘G–20 Leaders’ Statement:
The Pittsburgh Summit 7 (Sept. 24–25, 2009), https://www.treasury.gov/resource-center/ international/g7-g20/Documents/pittsburgh_ summit_leaders_statement_250909.pdf. requirement only with respect to foreign swaps broking entities, including foreign interdealer brokers, that currently facilitate trading, i.e., negotiation or arrangement, of swaps transactions for U.S. persons (‘‘Eligible Foreign Swaps Broking Entities’’) for a period of two years, subject to certain conditions and starting from the effective date of any final rule adopted from this notice. The proposed delay period would not apply to foreign swaps broking entities that do not currently facilitate trading, i.e., negotiation or arrangement, of swaps transactions for U.S. persons, given that their operations would not be materially affected by the proposed application of the SEF registration requirement to swaps broking entities. Further, the proposed delay period would not apply to foreign multilateral swaps trading facilities, as described above, that are not foreign swaps broking entities. Such facilities are not subject to the Commission’s proposed application of the SEF registration requirement, and therefore, are already required to register as a SEF pursuant to the SEF registration requirement or seek an exemption pursuant to CEA section 5h(g). Similarly, the Commission notes that MTFs and OTFs located in the EU may not rely on this delay and instead must seek an exemption from SEF registration pursuant to the terms of the Commission’s 2017 exemptive order.110 Eligible Foreign Swaps Broking Entities that meet the conditions set forth below would be able to continue to maintain the current practice of facilitating the negotiation or arrangement of swaps transactions between multiple participants and routing those swaps transactions to SEFs or Exempt SEFs for execution.111 Without the two-year period, the Commission believes that applying the SEF registration requirement to these entities would disrupt their operations and fragment swaps liquidity. During this period, the Commission anticipates that it will address what constitutes a ‘‘direct and significant connection with activities in, or effect on, commerce of the United States’’ for foreign multilateral swaps trading facilities, including foreign swaps broking entities, under CEA section 2(i).112 The proposed delay would also provide the Commission with time to develop any threshold standards for the application of CEA section 2(i) to the SEF registration requirement in CEA
section 5h(a)(1). While the Commission
has yet to determine standards in this area, the Commission notes that any such standard could include a de minimis component, whereby the activity of U.S. persons below some defined quantitative threshold on a particular foreign multilateral swaps trading facility would not trigger a need for SEF registration. The Commission notes that counterparties that are required to comply with the trade execution requirement may only satisfy the requirement by executing a swap on a SEF, a DCM, or an Exempt SEF.113 Accordingly, any foreign multilateral swaps trading facility that seeks to offer such swaps to such counterparties for trading must be registered as a SEF or DCM or obtain an exemption from SEF registration pursuant to CEA section 5h(g), regardless of whether that trading system or platform meets the standards (or any future standards the Commission may develop) for CEA
section 2(i), i.e., a ‘‘direct and significant
connection,’’ to trigger SEF registration. As noted above, the proposed delay would not apply to these foreign multilateral swaps trading facilities. Similarly, upon the expiration of the proposed two-year delay, any Eligible Foreign Swaps Broking Entity that seeks to offer such swaps to such counterparties for trading on its trading system or platform must be registered as a SEF or DCM or obtain an exemption from SEF registration pursuant to CEA
section 5h(g).
During this time, the Commission could formalize a regulatory framework for providing exemptions from the SEF registration requirement for foreign multilateral swaps trading facilities, including foreign swaps broking entities, that meet that CEA section 2(i) standard. The proposed two-year delay not only could provide the Commission with sufficient time to formalize this framework, which would require standards and processes for evaluating exemption requests, but also give Eligible Foreign Swaps Broking Entities more time to determine their best course of action, i.e., seek SEF registration with the Commission or obtain a CEA section 5h(g) exemption from registration. Accordingly, the proposed delay would further provide the Commission and regulators in foreign jurisdictions with additional time to evaluate such registration applications or requests for exemption received from Eligible Foreign Swaps Broking Entities. With respect to exemptions, the Commission anticipates that most foreign swaps broking entities and other foreign multilateral swaps trading facilities would seek to comply with the rules and regulations of their home countries, and thus, seek an exemption from SEF registration. The Commission further anticipates that the issuance of such exemptions may take some time based upon the large number of jurisdictions in which these operations are currently located.114 Thus, the Commission believes that it would be beneficial to provide more time for evaluation of exemption requests because exempting such comparablyregulated foreign entities from SEF registration, similar to other deference initiatives, should generally reduce market fragmentation, regulatory arbitrage, and duplicative or conflicting regulatory requirements, while increasing the potential for harmonized regulatory standards on a global level. Further, the Commission anticipates that any future determination process for granting exemptions from SEF registration would ensure that foreign and domestic multilateral swaps trading facilities, which operate in a similar fashion to one another, are all held to comparable regulatory standards. The Commission further believes that this proposal should create strong incentives for foreign jurisdictions to establish or bolster their own robust regulatory regimes for swaps trading. Such measures would also be consistent with the commitment made among the G–20 countries in 2009 ‘‘to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage.’’ 115 To the extent that foreign swaps broking entities and other foreign multilateral swaps trading facilities operate in foreign jurisdictions that currently do not have or are not expected to have

116For a current list of Exempt SEFs, see 2017 MTF and OTF Exemptive Order at app. A. 117The Commission anticipates that the effective date of any final rule would be established ninety days from the publication of the rule in the Federal Register. The Commission believes that a ninetyday effective date would provide Eligible Foreign Swaps Broking Entities seeking a two-year compliance date delay with sufficient opportunity to compile and submit the requisite information to the Commission. 118 7 U.S.C. 2(e). See supra note 61. 119 In connection with swap transactions executed on a SEF, the Commission notes that the
part 45 regulations continue to apply to
counterparties that are subject to such reporting requirements. 17 CFR part 45. 120Exempt SEFs may report transactions on behalf of counterparties as a service provider; the counterparties, however, retain ultimate responsibility for reporting. 121See 17 CFR 37.700–702. comparable and comprehensive supervision and regulation, such facilities would be subject to the proposed SEF registration requirement if their operations create a ‘‘direct and significant’’ connection to activities in, or effect on, commerce of the United States under CEA section 2(i). (2) Proposed Conditions for Delay of SEF Registration Requirement As applied to Eligible Foreign Swaps Broking Entities—most of whom are registered with the Commission as IBs— the Commission proposes that the twoyear delay from the SEF registration requirement be subject to the following conditions:
(i) All swap transactions involving U.S. persons that are traded on an Eligible Foreign Swaps Broking Entity must be routed for execution to a SEF or an Exempt SEF; 116 and (ii) The Eligible Foreign Swaps Broking Entities must provide the following information electronically to the Secretary of the Commission at submissions@cftc.gov and DMO at DMOSubmissions@cftc.gov: (i) Entity name as it appears in the entity’s charter; (ii) name and address of the entity’s ultimate parent company; (iii) any names under which the entity does business; (iv) address of principal executive office; (v) a contact person’s name, address, phone number, and email address; (vi) asset classes and swap products for which the entity facilitates trading; (vii) certification that the entity currently arranges or negotiates swap transactions for U.S. persons; (viii) the entity’s home country regulator or regulators; and (ix) any registrations, authorizations, or licenses held by the entity in its home country.117 Upon a DMO determination that an Eligible Foreign Swaps Broking Entity’s notice is complete, the Commission would post these notices on the Commission’s website under the ‘‘Industry Filings’’ page. This proposed approach would effectively maintain the status quo for these Eligible Foreign Swaps Broking Entities during the twoyear compliance date delay period. The Commission notes that the proposed two-year delay for Eligible Foreign Swaps Broking Entities does not affect any other requirements under the CEA or the Commission’s regulations. In particular, this delayed compliance date would not affect the application of CEA
section 2(e) and its limitation of SEF
and Exempt SEF trading to ECPs.118 As part of this proposed transition period, Eligible Foreign Swaps Broking Entities would be able to route their transactions to either a SEF or an Exempt SEF for execution. Furthermore, during this two-year delay, counterparties subject to the trade execution requirement would be able to satisfy that requirement by trading via an Eligible Foreign Swaps Broking Entity that routes the transactions to either a SEF or an Exempt SEF for execution. In light of these considerations, the Commission notes that the issue of whether an Eligible Foreign Swaps Broking Entity routes a transaction to a SEF or an Exempt SEF during the proposed two-year time delay period would have practical implications for the counterparties involved in the transaction with respect to complying with Commission reporting and clearing requirements. For swap transactions that are routed to a SEF for execution, the SEF would be responsible for compliance with (i) the real-time reporting requirements under part 43 of the Commission’s regulations and (ii) the regulatory reporting requirements under part 45 of the Commission’s regulations.119 Counterparties to a swap transaction that is routed to an Exempt SEF for execution would be responsible for the reporting requirements set forth in both part 43 and part 45, unless there is a substituted compliance determination by the Commission with respect to those requirements.120 Further, for swap transactions routed to a SEF that are intended to be cleared or subject to the clearing requirement, the SEF would be responsible for routing the swap transaction to a Commission-registered derivatives clearing organization (‘‘DCO’’) or a clearing organization that has been exempted from DCO registration by the Commission pursuant to CEA section 5b(h), i.e., Exempt DCO, for clearing.121 For swap transactions routed to an Exempt SEF for execution that are intended to be cleared or are subject to the clearing requirement, the Commission notes that the following clearing-related requirements would to apply to such swap transactions:
(i) When a swap transaction executed by a U.S. person on such an Exempt SEF is a ‘‘customer’’ position subject to CEA
section 4d, the transaction, if intended
to be cleared, must be cleared through a Commission-registered FCM at a Commission-registered DCO; (ii) When a swap transaction executed by a U.S. person on such an Exempt SEF is a ‘‘proprietary’’ position under Commission regulation 1.3(y), the transaction, if intended to be cleared, must be cleared either through a Commission-registered DCO or an Exempt DCO; and (iii) When a swap transaction is subject to the Commission’s clearing requirement, the transaction must be cleared either through a Commissionregistered DCO or an Exempt DCO, provided that consistent with (i) above, the transaction must be cleared through a Commission-registered FCM at a Commission-registered DCO and cannot be cleared through an Exempt DCO if the transaction is a ‘‘customer’’ position subject to CEA section 4d. Request for Comment The Commission requests comment on all aspects of its proposed approach to SEF registration for Eligible Foreign Swaps Broking Entities, in particular the proposed two-year delay in the compliance date of any final rule. The Commission may consider alternatives to the proposed two-year delay and requests comment on the following questions:
(16) Is the delay of two years for Eligible Foreign Swaps Broking Entities an adequate delay? If not, then how long of a delay should the Commission consider and why? (17) Are there additional considerations that the Commission should take into account in establishing this delay? (18) Are there additional conditions that the Commission should consider imposing on Eligible Foreign Swaps Broking Entities during this delay period?
2. §§ 37.3(a)(2)–(3)—Minimum Trading
Functionality and Order Book Definition In developing the regulatory framework for SEFs, the Commission adopted a ‘‘minimum trading functionality’’ requirement under § 37.3(a)(2) that requires a SEF to maintain and offer an Order Book for all

122 17 CFR 37.3(a)(2).
123CEA section 1a(16) defines ‘‘electronic trading facility’’ as a trading facility that (i) operates by means of an electronic or telecommunications network; and (ii) maintains an automated audit trail of bids, offers, and the matching of orders or the execution of transactions on the facility. 7 U.S.C. 1a(16). 124CEA section 1a(51) defines ‘‘trading facility’’ as a person or group of persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions by accepting bids or offers made by other participants that are open to multiple participants in the facility or system; or through the interaction of multiple bids or multiple offers within a system with a pre-determined nondiscretionary automated trade matching and execution algorithm. 7 U.S.C. 1a(51)(A). 125 17 CFR 37.3(a)(3). 126SEF Core Principles Final Rule at 33564–65. In the preamble to the SEF Core Principles Final Rule, the Commission stated its anticipation that an Order Book would typically work well for liquid Required Transactions, i.e., transactions involving swaps that are subject to the trade execution requirement. For less liquid Required Transactions, however, it anticipated that RFQ systems would help facilitate trading.’’ Id. 127SEF Core Principles Final Rule at 33564. 128 J. Christopher Giancarlo and Bruce Tuckman, Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps 49–50 (Apr. 26, 2018), available at https://www.cftc.gov/sites/default/files/ 2018-05/oce_chairman_swapregversion2white paper_042618.pdf. 129 In addition to reasons stated above, the Commission acknowledges that the lack of swaps trading on SEF Order Books may also be attributed to other factors, such as concerns over ‘‘name giveup’’ practices and the current lack of certain trading features, such as the ability to calculate volumeweighted average pricing. 130 In their study of the index CDS market, Pierre Collin-Dufresne, Benjamin Junge, and Anders B. Trolle state that ‘‘[p]roponents of bringing all market participants onto one limit order book typically argue that it would (i) increase quote competition among dealers and (ii) allow clients to occasionally supply liquidity via limit orders thereby lowering overall transaction costs (although at the cost of execution risk). However, a limit order book arguably works best when trading is continuous and it is not necessarily optimal when trading is more episodic as is the case for index CDSs. For instance, Barclay, Hendershott, and Kotz (2006) document a precipitous drop in electronic trading (via limit order books) when Treasuries go off-the-run and trading volumes decline.’’ Pierre Collin-Dufresne, Benjamin Junge, & Anders B. Trolle, Market Structure and Transaction Costs of Index CDSs 6 n.10 (Swiss Fin. Inst. Res. Paper No. 18–40, 2017) (‘‘2017 Collin-Dufresne Research
Paper’’), citing Michael J. Barclay, Terrence Hendershott, & Kenneth Kotz, Automation Versus Intermediation: Evidence from Treasuries Going Off the Run, 61 J. Fin. 2395, 2395–2414 (2006). 131The Commission understands that these costs include regularly occurring software updates to electronic order book systems and other ongoing technology-related maintenance. 132See infra Section IV.I.4.b.—Elimination of Required Execution Methods. 133 7 U.S.C. 7b–3(e). 134The Commission emphasizes that while the SEF definition in CEA section 1a(50) would serve as the baseline requirement for the type of trading systems or platforms that a SEF must maintain, it also provides the basic criterion to determine which types of trading systems or platforms are subject to the SEF registration requirement. 135 7 U.S.C. 1a(50). of the swaps that it lists for trading.122 An Order Book is defined under § 37.3(a)(3) as (i) an electronic trading facility; 123 (ii) a trading facility; 124 or (iii) a trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers.125 In the preamble to the SEF Core Principles Final Rule, the Commission acknowledged that the Order Book functionality does not have the requisite flexibility to serve as the ideal method of execution for a variety of swaps, in particular those that feature lower levels of liquidity.126 The Commission nevertheless believed that an Order Book could establish a base level of pretrade price transparency to all market participants and, therefore, required that each SEF offer an Order Book for all swaps that it lists for trading, including both swaps subject to the trade execution requirement and swaps not subject to the trade execution requirement.127 The Commission has observed that market participants have rarely used Order Books to trade swaps on SEFs despite their availability for all swaps listed by SEFs. Depending on the product involved, for example, order book trading typically ranges between ‘‘less than [one percent] to less than [three percent] of total CDS transactions’’ on SEFs, while order book trading constitutes between ‘‘less than [one percent] to approximately [twenty percent] of total IRS transactions. . . .’’ 128 The Commission believes that this low level of swaps trading on Order Books is attributable 129 to an Order Book’s inability to support the broad and diverse range of products traded in the swaps market that trade episodically, rather than on a continuous basis.130 Given the broad array of liquid and illiquid swaps listed on SEFs, mandating that a SEF offer an Order Book for all of these products has imposed significant operational and financial costs and burdens, particularly from a technological standpoint, with little benefit to most market participants who choose not to utilize them.131 Therefore,
based in part on its experience, the Commission proposes to eliminate the minimum trading functionality requirement and the regulatory Order Book definition. The Commission believes that eliminating the minimum trading functionality would help reduce operating costs for SEFs, as they would no longer be required to operate and maintain order book systems that are poorly suited for trading in less liquid swaps, and therefore, do not attract significant trading activity. Instead of employing resources to build and support a seldom-utilized trading system or platform, the proposed elimination provides a SEF with the flexibility to determine how to allocate its resources, particularly as it relates to developing methods of execution that are better suited to trading the products that it lists. As discussed below, other execution methods may be better suited to maximizing participation and concentrating liquidity formation on SEFs in episodically liquid swaps markets.132 Therefore, removing this requirement may spur development and innovation in execution methods. The Commission also believes that eliminating this requirement may encourage SEFs to list new and different types of swaps, given that they would no longer have to incur the costs of operating and supporting Order Books. The Commission notes, however, that a SEF would be free to continue to offer an order book if it so chooses. The Commission adopted the minimum trading functionality requirement based in part on the goal of promoting pre-trade price transparency,133 but acknowledges that the CEA does not explicitly prescribe the Order Book as a SEF minimum trading functionality. Accordingly, with the elimination of this requirement under § 37.3(a)(2), the only trading functionality obligation that a SEF must comply with on an ongoing basis is based upon the CEA section 1a(50) definition of SEF.134 Therefore, the SEF must operate a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce.135 To meet the SEF definition, a trading system or platform must provide multiple participants with the ability to accept bids and offers from other multiple participants within the facility or system. As long as multiple participants have the ability to accept bids and offers from other multiple participants within the facility or system, the facility or system will meet the SEF definition, regardless of how the multiple participants choose to interact with one another. Based on this more straightforward approach, the Commission expects that determining whether a particular system or platform

136Based on the Commission’s proposed elimination of the Order Book as a minimum trading functionality requirement, the Commission clarifies one particular issue regarding the scope of the CEA section 1a(50) SEF definition. In the preamble to the SEF Core Principles Final Rule, the Commission expressed doubt as to whether an RFQto-one system met the multiple participant aspect of the SEF definition. SEF Core Principles Final Rule at 33498, 33561, and 33563. This view, articulated in the context of the Commission’s discussion of RFQ Systems as a required method of execution, would suggest that an ‘‘RFQ-to-one’’ trading system or platform may, on its face, not meet the SEF definition. The Commission notes, however, that this view does not appropriately give meaning to the ‘ability’ factor of the SEF definition. Therefore, the Commission seeks to clarify the application of the ‘ability’ factor as it applies to RFQ-to-one transactions. The Commission believes that an entity that permits its market participants to use its RFQ-to-one functionality to issue concurrent or serial RFQs to multiple, different recipients would fit within the SEF definition, as it provides participants the ‘‘ability’’ to accept bids and offers from multiple participants within the trading system or platform. 137Based on the elimination of the temporary registration requirements, the Commission proposes to retitle § 37.3(b) to ‘‘Procedures for registration’’ from ‘‘Procedures for full registration.’’ The Commission also proposes to add a title to § 37.3(b)(1)—‘‘Application for registration.’’ 138SEF Core Principles Final Rule at 33487. 139The Commission notes that the part 37 regulations became effective on August 5, 2013. Accordingly, the temporary registration provisions expired on August 5, 2015, subject to certain exceptions. 140 17 CFR 37.3(b)(5). 141 17 CFR 37.3(b)(1)(i). 142The exhibits that comprise Form SEF concern the applicant’s business organization (Exhibits A– H); financial information (Exhibits I–K); compliance (Exhibits L–U); and operational capability (Exhibit V). 17 CFR part 37 app. A. 143 17 CFR 37.3(b)(3); 17 CFR part 37 app. A. 144 17 CFR 37.3(b)(1)(iii). 145The Commission is not proposing any substantive changes to Exhibit A, which requires an applicant to specify persons who own ten percent or more of the applicant’s stock or otherwise may control or direct the applicant’s management or policies; and Exhibit B, which requires an applicant to provide a list of present officers, directors and governors, or their equivalents. The Commission is proposing non-substantive amendments to Exhibit A to reorganize the existing requirements to paragraphs (a)–(b) and to revise the existing language accordingly. 146Existing Exhibit C requires a narrative that describes the composition and fitness standards for the applicant’s board of directors. Existing Exhibit G requires a copy of the applicant’s constitution, articles of incorporation, articles of formation, or
articles of association with all amendments thereto; partnership or limited liability agreements; existing by-laws, operating agreement, rules or instruments corresponding thereto; any governance fitness information not included in existing Exhibit C; and a certificate of good standing. As proposed, the existing Exhibit G requirements would be redesignated as paragraphs (a) and (c) of a consolidated new Exhibit C; existing Exhibit C would be re-designated as paragraph (b) within new Exhibit C. 147Existing Exhibit E requires a description of such employees employed by the applicant or a division, subdivision, or other separate entity within the applicant. Existing Exhibit F requires the analysis of staffing requirements that are necessary to operate the applicant as a SEF, including the staff names and qualifications. meets the SEF definition would generally be self-evident. Nevertheless, the Commission will continue to work with entities that seek interpretive guidance on the parameters of that definition.136
3. § 37.3(b)—Procedures for
Registration 137 a. Elimination of Temporary Registration To implement the SEF regulatory framework, the Commission established a temporary SEF registration regime to help minimize disruptions to incumbent platforms that had been operating prior to the adoption of part 37 and to allow new entities to compete with those incumbent platforms.138 Section 37.3(c) sets forth the process for SEF applicants to apply for temporary SEF registration prior to the Commission’s review of an application for full SEF registration. The temporary registration process, however, has expired pursuant to a twoyear sunset provision established under § 37.3(c)(5).139 Since the expiration of this process, the Commission has reviewed SEF applications pursuant to a 180-day Commission review period.140 Based on the expiration of the temporary registration regime, the Commission proposes to eliminate the provisions under existing § 37.3(c) and adopt various conforming changes to other provisions in proposed § 37.3(b) and proposed § 37.3(h), as discussed below. b. § 37.3(b)(1)—Application for Registration To request registration as a SEF, § 37.3(b)(1)(i) requires an applicant to electronically file a complete Form SEF, as set forth in Appendix A to part 37, with the Commission.141 The Commission uses Form SEF, which is comprised of a series of different exhibits that require an applicant to provide details of its operations, to determine whether the applicant demonstrates compliance with the Act and applicable Commission’s regulations.142 Applicants must also use Form SEF to amend a pending application or to seek an amended registration order.143 As part of the SEF registration process, an applicant must also request from the Commission a unique, extensible, alphanumeric identifier code for the purpose of identifying the SEF in connection with swap reporting requirements pursuant to part 45 of the Commission’s regulations.144 Based on its experience with the SEF registration process, the Commission believes that some of the information requested under Form SEF has proven to be unnecessary to determine an applicant’s compliance with the Act and applicable Commission regulations. The Commission also recognizes that some of the exhibit requirements are unclear in the amount of information required to be provided, thereby causing inconsistency across applications in the information received to evaluate compliance. The proposed changes to the part 37 framework, as discussed further herein, would also necessitate certain Form SEF revisions. Therefore, the Commission is proposing several amendments to Form SEF that would consolidate or eliminate several of the existing exhibits and also request some additional information. Further, the Commission is proposing several amendments to the Form SEF instructions. The Commission intends for these proposed changes to establish a clearer and more streamlined application process that would still provide the Commission with sufficient and
appropriate information to determine compliance with the Act and Commission regulations. (1) Form SEF Exhibits—Business Organization The Commission proposes several amendments to the ‘‘Business Organization’’ exhibits—existing Exhibits A through H—of Form SEF.145 First, the Commission proposes to consolidate certain existing exhibits, in particular (i) existing Exhibit G, which requires an applicant to submit various governance documents, into existing Exhibit C, which requires information regarding the applicant’s board of directors; 146 and (ii) existing Exhibit F, which requires an analysis of the applicant’s staffing, into existing Exhibit E, which requires a description of the personnel qualifications for each category of the applicant’s professional employees.147 Under the consolidated new Exhibit E, the Commission proposes to require more specific detail about the applicant’s personnel structure, including personnel seconded to the applicant. As proposed, Exhibit E would require information about the reporting lines among the applicant’s personnel; estimates of the number of non-management and non-supervisory employees; and a description of the duties, background, skills, and other qualifications for each officer, manager/ supervisor, and any other category of non-management and non-supervisory employees. The Commission believes that amending Exhibit E to provide

148Based on the proposed consolidation of existing Exhibit F and existing Exhibit G, existing Exhibit H would be re-designated as a new Exhibit F with no additional substantive changes. This exhibit requires a brief description of any material pending legal proceeding(s), other than ordinary and routine litigation incidental to the business, to which the applicant or any of its affiliates is a party or to which any of its or their property is the subject. 149The Commission also proposes to re-designate existing Exhibit I as a new Exhibit G based on the proposed changes described above. 150The financial information currently required under paragraph (a) includes an applicant’s balance sheet; income and expense statement; cash flow statement; and statement of sources and application revenues and all notes or schedules thereto. 151See infra Section XVIII.—Part 37—Subpart N:
Core Principle 13 (Financial Resources) for a description of the Commission’s proposed changes to the Core Principle 13 regulations upon which new Exhibit G is based. 152The Commission also proposes to re-designate existing Exhibit K as a new Exhibit H based on the proposed changes described above. 153The Commission notes that proposed § 37.202(a)(2) would require a SEF to establish and apply fee structures and fee practices to its market participants in a fair and non-discriminatory manner. See infra Section VII.A.1.b.— § 37.202(a)(2)—Fees. 154An applicant is currently required to submit a copy of its rules under existing Exhibit M and a copy of its compliance manual under existing Exhibit O, as currently designated. The Commission is maintaining those requirements under the proposed revisions to Form SEF as a new Exhibit J and a new Exhibit K, respectively. The Commission notes that it proposes to move ‘‘arrangements for alternative dispute resolution’’ under existing Exhibit P to a new Exhibit L described below. See infra note 159. 155Section 37.203 requires a SEF to establish and enforce trading rules that will deter abuses, including prohibitions on abusive trading practices in its markets. 17 CFR 37.203. greater specificity would promote consistency among applications and further assist in evaluating the applicant’s compliance with the Act and the Commission’s regulations, particularly with respect to selfregulatory requirements.148 The Commission also proposes to narrow the scope of information required by existing Exhibit D, which requires a description of the applicant’s organizational structure that includes a list and description of affiliates and relevant divisions, subdivisions, or other separate entities related to the applicant. As proposed, Exhibit D would require an applicant to describe the nature of the business of any affiliated entities which engage in financial services or market activities, including but not limited to, the trading, clearing, or reporting of swaps. The Commission believes that this amendment would more appropriately focus the required information on entities related to the applicant’s swapstrading business and minimize the submission of information that is not related. Further, the Commission proposes non-substantive amendments to the existing exhibit. (2) Form SEF Exhibits—Financial Information The Commission proposes several amendments to the ‘‘Financial Information’’ exhibits—existing Exhibits I through K—of Form SEF. The Commission proposes to adopt several changes to existing Exhibit I.149 This exhibit requires applicants to submit financial information to demonstrate compliance with the financial resources requirements under Core Principle 13. Among other required information, paragraph (a) requires applicants to submit their most recent fiscal-year financial statements 150 and paragraph (b) requires a narrative of how the value of the applicant’s financial resources is sufficient to cover operating
costs of at least one year, on a rolling basis, of which six months’ value of those resources are unencumbered and liquid. Paragraph (c) requires an applicant to submit copies of any agreements (i) establishing or amending a credit facility, (ii) insurance coverage, or (iii) other arrangement that demonstrate compliance with the liquidity requirement. Paragraph (d) requires an applicant to submit representations regarding sources and estimates for future ongoing operational resources. The Commission proposes to amend the requirements of paragraphs (a) through (c) to conform to the proposed amendments to the SEF financial resources requirements under Core Principle 13. In particular, the proposed required documentation would demonstrate an applicant’s ability to maintain resources that exceed one year of operating costs and the existence of resources to meet the liquidity requirement.151 The Commission also proposes to eliminate paragraph (d) because the representation of an applicant’s future ongoing operational resources is not necessary to determine compliance with Core Principle 13. Additionally, the Commission proposes to amend paragraph (a) to incorporate the existing Form SEF instruction for newly-formed applicants who cannot submit the requisite financial statements, but who alternatively seek to provide pro forma financial statements for a six-month period. The Commission also proposes to adopt several changes to Exhibit K.152 This exhibit requires an applicant to provide disclosures related to fees that it would impose upon participants. Paragraph (a) requires a complete list of all of the facility’s dues, fees, and other charges for its services; paragraph (b) requires a description of the basis or methods used to determine those amounts; and paragraph (c) requires a description of any differences in charges between different customers or groups of customers for similar services. The Commission proposes to amend paragraph (a) to require applicants to identify any market maker programs, other incentive programs, or other discounts on dues, fees, or other charges to be imposed. Based on the Commission’s experience, this information is beneficial in evaluating compliance with access requirements pursuant to Core Principle 2.153 Given the Commission’s proposed revisions to the existing impartial access requirements—in particular, the elimination of the ‘‘comparable fees’’ requirement under existing § 37.202(a)(3)—the Commission further proposes to eliminate the requirement for a description of fee differentials under paragraph (c). The Commission also proposes several streamlining changes to the existing language. In addition to the amendments to new Exhibit G (existing Exhibit I) and new Exhibit H (existing Exhibit K), the Commission proposes to eliminate existing Exhibit J, which requires an applicant to disclose the financial resources information for any SEF, DCM, or other swap trading platform affiliates. Based on its experience with
Exhibit J, the Commission recognizes that this information related to an applicant’s affiliates is not particularly useful in demonstrating an applicant’s compliance with Core Principle 13 or the conflicts of interest requirements under Core Principle 12. (3) Form SEF Exhibits—Compliance The Commission proposes several amendments to the ‘‘Compliance’’ exhibits—existing Exhibits L through U—of Form SEF. First, the Commission proposes to eliminate several exhibits including (i) existing Exhibit P, which requires the applicant to provide information on disciplinary and enforcement protocols, tools, and procedures that is generally duplicative to the details contained in an applicant’s rulebook and compliance manual; 154 (ii) existing Exhibit R, which requires a list of the applicant’s prohibited trade practice violations that is duplicative to the rules that an applicant must include in its rulebook pursuant to Core Principle 2 requirements; 155 and (iii) existing Exhibit U, which requires a list of items subject to a request for confidential

156The Commission also proposes to re-designate existing Exhibit L as a new Exhibit I based on the proposed changes described above. 157The Commission also proposes to re-designate existing Exhibit M as a new Exhibit J based on the proposed changes described above. 158See infra Section XI.—Part 37—Subpart G:
Core Principle 6 (Position Limits or Accountability). 159The Commission notes that ‘‘arrangements for alternative dispute resolution’’ are included based on the requirements of existing Exhibit P, which the Commission proposes to eliminate from Form SEF. See supra note 154. 160The Commission notes that it proposes to move the language of existing § 37.7, which generally prohibits a SEF from using a participant’s proprietary data or personal information that it collects or receives for regulatory purposes for business or marketing purposes, to a new § 37.504. See infra Section X.D.—§ 37.504—Prohibited Use of Data Collected for Regulatory Purposes. 161The Commission notes that the reference to a Commission-registered SDR in Exhibit M also includes a provisionally-registered SDR. 162 17 CFR 37.901. 163For a discussion of the relevant proposed amendments to the Core Principle 7 regulations, see infra Section XII.B.—§ 37.702—General Financial Integrity. treatment under § 145.9 of the Commission’s regulations—as described further below, the Commission proposes to instead require SEFs to identify these documents within the Table of Contents to Form SEF. Second, the Commission proposes to streamline the requirements of existing Exhibit L.156 This exhibit currently requires a narrative and documentation that describe the manner in which the applicant complies with each SEF core principle. This documentation includes a regulatory compliance chart that sets forth each core principle and cites the relevant rules, policies, and procedures that describe the manner in which the applicant is able to comply with each core principle. For issues that are novel or for which compliance with a core principle is not evident, this exhibit also requires an applicant to explain how that item and the application satisfy the SEF core principles. The Commission proposes to streamline this exhibit to require that the applicant only submit the regulatory compliance chart and an explanation of novel issues, as is currently required. Based on its experience, the Commission believes that the regulatory compliance chart with citations to relevant rules, policies, and procedures is sufficient to determine an applicant’s compliance with the Act and the Commission’s regulations. The Commission has found that the additional narrative and documentation that describe the manner in which the applicant complies with each SEF core principle creates unnecessary paperwork and does not further the Commission’s review of an application in this regard. The Commission further proposes certain non-substantive amendments to the existing language of Exhibit L. Third, the Commission proposes to simplify the requirements of existing Exhibit M.157 This exhibit currently requires a copy of the applicant’s rules, and any technical manuals, other guides, or instruction for SEF users, including minimum financial standards for members or market participants. The Commission proposes to eliminate the
existing requirement to cite position limits and aggregation standards in part 151 of the Commission’s regulations and any position limit rules set by the facility. As discussed below with respect to Core Principle 6, the Commission intends to address the position limit issue in a separate rulemaking; 158 the Commission also notes that this requirement is redundant to the applicant’s requirement to submit a copy of its rules. Further, the Commission proposes several nonsubstantive amendments to streamline Exhibit M’s existing language. Fourth, the Commission proposes to eliminate the requirements under existing Exhibit N. The exhibit currently requires an applicant to provide executed or executable copies of any agreements or contracts that facilitate the applicant’s compliance with the SEF core principles, including third-party regulatory service provider or member or user agreements. To streamline Form SEF, the Commission would require instead that applicants submit these documents pursuant to other relevant exhibits, as described below. Fifth, the Commission proposes a new Exhibit L, which would continue to require an applicant to submit user agreements. As proposed, the new exhibit would specify that the required agreements would include, but not be limited to, on-boarding documentation, regulatory data use consent agreements, intermediary documentation, and arrangements for alternative dispute resolution.159 The new Exhibit L would also require a narrative of the legal, operational, and technical requirements for users to directly or indirectly access the SEF. This requirement reflects some documents that applicants have previously submitted under existing Exhibit N. The additional specificity, however, reflects the Commission’s experience with different participantrelated agreements that implicate (i) a SEF participant’s ability to access the facility’s trading system or platform pursuant to Core Principle 2; and (ii) the facility’s use of a SEF participant’s proprietary data or personal information under existing § 37.7.160 Sixth, the Commission proposes a new Exhibit M to establish requirements related to an applicant’s swaps reporting capabilities. The new Exhibit M would require the applicant to submit (i) a list of the SDRs to which the applicant will report swaps data, including the respective asset classes; 161 (ii) an executed copy of all agreements between the applicant and those SDRs; and (iii) a representation from each of those SDRs stating that the applicant has satisfactorily completed all requirements, including all necessary testing, that enables the SDR to reliably accept data from the applicant. These requirements reflect some of the documents that the Commission has required applicants to submit under existing Exhibit N and would enable the Commission to determine the applicant’s ability to comply with § 37.901, which requires a SEF to report swap data pursuant to parts 43 and 45 of the Commission’s regulations.162
Seventh, the Commission proposes a new Exhibit N to incorporate the requirements in existing Exhibit T related to an applicant’s ability to submit swaps to a DCO for clearing. New Exhibit N would require the applicant to submit (i) a list of DCOs and exempt DCOs to which the applicant will submit swaps for clearing, including the respective asset classes; (ii) a representation that the clearing members of those DCOs and exempt DCOs will guarantee all trades submitted by the swap execution facility for clearing; (iii) an executed copy of the clearing agreement and any related documentation for each of those DCOs or exempt DCOs; and (iv) a representation from each of those DCOs or exempt DCOs stating that the applicant has satisfactorily completed all requirements, including all necessary testing, that enable its acceptance of swap transactions submitted by the applicant for clearing. These requirements reflect some of the documents that the Commission has required applicants to submit under existing Exhibit N and would enable the Commission to determine an applicant’s ability to comply with proposed § 37.702(b)(1) under Core Principle 7, which requires a SEF to coordinate with each DCO to facilitate ‘‘prompt, efficient, and accurate’’ processing and routing of transactions to the DCO for clearing.163 Eighth, the Commission proposes a new Exhibit O to require an applicant to submit all other agreements or contracts that enable the applicant to comply with the applicable SEF core principles and are not already required to be submitted

164Exhibit Q requires an applicant to complete and submit the Program of Risk Analysis and Oversight Technology Questionnaire. Among other things, the questionnaire requires an applicant to provide any agreements with third-party IT providers. See infra Section XIX.B.—§ 37.1401(g)— Program of Risk Analysis and Oversight Technology Questionnaire. 165 Given this new proposed exhibit, the Commission proposes to re-designate existing Exhibit O as a new Exhibit K. The content of the exhibit would remain the same and require an applicant to submit a copy of a compliance manual and documents that describe how the applicant will conduct trade practice, market, and financial surveillance. 166The Commission also proposes to re-designate existing Exhibit Q as a new Exhibit P based on the proposed changes described above. 167See infra Section IV.I.—§ 37.9—Methods of Execution for Required and Permitted Transactions; § 37.10—Process for a Swap Execution Facility to Make a Swap Available to Trade; § 37.12—Trade Execution Compliance Schedule; § 38.11—Trade Execution Compliance Schedule; § 38.12—Process for a Designated Contract Market to Make a Swap Available to Trade. 168Proposed § 37.201(a) would require a SEF to establish rules that govern the operation of the SEF, including rules that specify (i) the protocols and procedures for trading and execution; (ii) the use of discretion in facilitating trading and execution; and (iii) the sources and methodology for generating any market pricing information. See infra Section VI.A.1.—§ 37.201(a)—Required Swap Execution Facility Rules. 169As discussed below, the Commission is proposing § 37.1401(g) to require a SEF to annually prepare and submit an up-to-date Technology Questionnaire to Commission staff. See infra
Section XIX.B.—§ 37.1401(g)—Program of Risk
Analysis and Oversight Technology Questionnaire. 170See infra Section XIX.B.—§ 37.1401(g)— Program of Risk Analysis and Oversight Technology Questionnaire. 171The Commission also proposes to specify in the Form SEF instructions that an applicant must file a confidentiality request in accordance with § 145.9 of the Commission’s regulations. 172The Commission notes that these ongoing filing requirements include (i) a fiscal year-end financial report that a SEF would be required to file within ninety days after the end of its fourth fiscal quarter under proposed § 37.1306(d), see infra
Section XVIII.F.4.—§ 37.1306(d); (ii) proposed
Exhibit Q of Form SEF, i.e., the Program of Risk Analysis and Oversight Technology Questionnaire that a SEF would be required to file within ninety days after the end of its fiscal year under proposed § 37.1401(g), see infra Section XIX.B.— § 37.1401(g)—Program of Risk Analysis and Oversight Technology Questionnaire; and (iii) an annual compliance report that a SEF would be required to file within ninety days after the end of its fiscal year under proposed § 37.1501(e)(2), see infra Section XX.A.5.—§ 37.1501(e)—Submission of Annual Compliance Report and Related Matters. 173See infra Section IV.C.3.d.—§ 37.3(b)(3)— Amendment of Application for Registration. 174The Commission notes that applicants may obtain an LEI from an LEI-issuing organization that has been accredited by the Global Legal Entity Identifier Foundation (‘‘GLEIF’’). GLEIF, About LEI—Get an LEI: Find LEI Issuing Organizations, https://www.gleif.org/en/about-lei/get-an-lei-findlei-issuing-organizations. under new Exhibits L, M, N, or Q.164 In conjunction with these other exhibits, new Exhibit O matches the scope of documents that an applicant is currently required to submit under existing Exhibit N.165 Ninth, the Commission proposes to adopt several changes to existing Exhibit Q.166 This exhibit currently requires an applicant to provide an explanation of how its trading system(s) or platform(s) satisfy the Commission’s rules, interpretations, and guidelines concerning SEF execution methods. Where applicable, paragraphs (a) and (b) of Exhibit Q specify that the explanation should include various details related to the minimum trade functionality requirement under § 37.3(a)(2), i.e., an Order Book, and the prescribed execution methods for Required Transactions under § 37.9, i.e., an Order Book or an RFQ System. As discussed below, the Commission is proposing to eliminate these requirements and to allow SEFs to offer flexible means of execution,167 subject to certain tradingrelated rules under proposed § 37.201(a).168 Accordingly, the Commission proposes conforming changes to Exhibit Q. In addition to the explanation of the applicant’s trading system(s) or platform(s), the Commission also proposes to require an applicant to provide screenshots of any of its trading system(s) or platform(s). Based on the Commission’s experience, these screenshots provide a useful supplement to evaluate any explanation provided under this exhibit. Finally, the Commission proposes to consolidate existing Exhibit S, which currently requires a discussion of how the applicant will maintain trading data, into new Exhibit K (re-designated from existing Exhibit O). Exhibit K would require an applicant to submit a copy of its compliance manual and documents that describe how the applicant will conduct trade practice, market, and financial surveillance. (4) Form SEF Exhibits—Operational Capability The Commission proposes to redesignate existing Exhibit V, which requires the applicant to provide information
pertaining to its program of risk analysis and oversight via the Technology Questionnaire, as a new Exhibit Q and to adopt non-substantive amendments to the exhibit’s existing language.169 Additionally, the Commission is making certain amendments to update the questionnaire, as described below.170 (5) Other Form SEF Amendments In addition to the proposed amendments to the existing exhibits, the Commission is proposing several changes to the Form SEF instructions. Form SEF currently requires applicants to include a Table of Contents that lists each exhibit submitted as part of the application. In lieu of a separate list provided via existing Exhibit U, the Commission proposes to require that applicants designate, in the Table of Contents, the exhibits that are subject to a request for confidential treatment. The Commission also proposes to require that any such confidential treatment be reflected by some type of identifying number and code on the appropriate exhibit(s), similar to the approach followed for DCO applications and Form DCO.171 Further, the Commission proposes to eliminate the existing instruction for newly-formed applicants regarding pro forma financial statements, which the Commission proposes to incorporate in paragraph (a) of new Exhibit G. The Commission also proposes two minor amendments related to the Form SEF cover sheet. First, to enable the Commission to evaluate a SEF’s compliance with ongoing filing requirements more readily, the Commission proposes to require an applicant to specify its fiscal year-end date.172 Second, the Commission proposes to eliminate the reference to the use of Form SEF to amend an existing order or registration, in conformance with the proposed amendment to § 37.3(b)(3) discussed further below.173 (6) Request for Legal Entity Identifier The Commission proposes to eliminate the requirement that an applicant request a ‘‘unique, extensible, alphanumeric code’’ from the Commission under § 37.3(b)(1)(iii) and to require instead that the applicant obtain a legal entity identifier (‘‘LEI’’). The Commission adopted part 37 prior to the establishment of the technical specification and governance mechanism for a global entity identifier. Since that adoption, a 20-digit alphanumeric LEI has been developed and adopted by many regulatory authorities in other jurisdictions, as well as the Commission, for use in identifying counterparties and other entities pursuant to various regulatory reporting requirements, including part 45 of the Commission’s regulations.174 Request for Comment The Commission requests comments on all aspects of the proposed amendments to § 37.3(b)(1) and
Appendix A to part 37.

175The Commission proposes to retitle § 37.3(b)(3) to ‘‘Amendment of application for registration’’ from ‘‘Amendment of application prior or subsequent to full registration’’ based on the proposed changes described below. 176 17 CFR 37.3(b)(3). Part 40 governs the submission of new products, rules and rule amendments for registered entities, including a process for the voluntary submission of rules for Commission review and approval under § 40.5 and a process for the self-certification of rules under § 40.6. 17 CFR 40.5–6. 177SEF Core Principles Final Rule at 33485. 178See infra Section IV.C.4.—§ 37.3(c)— Amendment to an Order of Registration. 179 ‘‘Rule’’ is defined under § 40.1(i) as any constitutional provision, article of incorporation, bylaw, rule, regulation, resolution, interpretation, stated policy, advisory, terms and conditions, trading protocol, agreement or instrument corresponding thereto, including those that authorize a response or establish standards for responding to a specific emergency, and any amendment or addition thereto or repeal thereof, made or issued by a registered entity or by the governing board thereof or any committee thereof, in whatever form adopted. 17 CFR 40.1(i). The Commission generally interprets the § 40.1(i) rule definition broadly to encompass governance documentation (proposed Exhibit C); fees (proposed Exhibit H); rulebooks (proposed Exhibit J); compliance manuals (proposed Exhibit K); participant agreements (proposed Exhibit L); SDRrelated agreements (proposed Exhibit M); clearingrelated agreements (proposed Exhibit N); other third-party agreements (proposed Exhibit O); and information related to execution methods (proposed Exhibit P). 180 17 CFR 37.5(a). 181See supra Section IV.C.3.d.—§ 37.3(b)(3)— Amendment of Application for Registration. 182The Commission proposes to eliminate existing § 37.3(c), which establishes the temporary SEF registration process that is no longer available to applicants, as described above. See supra Section IV.C.3.a.—Elimination of Temporary Registration.
c. § 37.3(b)(2)—Request for Confidential
Treatment
The Commission is not proposing any amendments to § 37.3(b)(2). d. § 37.3(b)(3)—Amendment of Application for Registration 175
Section 37.3(b)(3) specifies that an
applicant amending a pending application or requesting an amendment to a registration order must file an amended application with the Secretary of the Commission in the manner specified by the Commission. The Form SEF instructions correspond to this requirement and currently specify that requests for amending a registration order and any associated exhibits must be submitted via Form SEF. Section 37.3(b)(3) otherwise specifies that a SEF must file any amendment to its application subsequent to registration as a submission under part 40 of the Commission’s regulations, or as specified by the Commission.176 In the preamble to SEF Core Principles Final Rule, the Commission also stated that if any information provided in a Form SEF is or becomes inaccurate for any reason, even after registration, the SEF ‘‘must promptly make the appropriate corrections with the Commission.’’ 177 The Commission proposes to clarify and amend the requirements regarding post-registration amendments to both Form SEF exhibits and registration orders. First, the Commission proposes to amend § 37.3(b)(3) and Form SEF to eliminate the required use of Form SEF to request an amended order of registration from the Commission.178 Under current practice, SEFs file a request for an amended order with the Commission rather than submitting Form SEF. Commission staff typically will review the request, obtain additional information from the SEF where necessary, and subsequently recommend to the Commission whether to grant or deny the amended order. Given current practice, the Commission believes that an updated Form SEF is not needed to request an amended order of registration. Second, the Commission proposes to eliminate the existing language that specifies the use of part 40 to file application amendments subsequent to registration. The Commission emphasizes that not all of the information from the Form SEF exhibits need to be updated pursuant to part 40 subsequent to registration; certain part 37 provisions already require SEFs to update their information on an ongoing basis. For example, under § 37.1306, a SEF is required to file updated financial reports, including fiscal year-end reports, which precludes the need to amend and file new Exhibit G (existing Exhibit I) through part 40. The Commission clarifies that part 40 only applies to information from application exhibits that constitute a ‘‘rule,’’ as defined under § 40.1(i).179 Therefore, registered SEFs have already been submitting changes to these types of documentation pursuant to the part 40 rule filing procedures. Given that part 40 defines ‘‘rule,’’ the existing language is not required to be included under proposed § 37.3(b)(3). If certain information from the Form SEF exhibits are not required to be updated through other part 37 provisions or part 40, then a SEF does not have to file those amendments subsequent to registration. The Commission notes, however, that it may otherwise request information related to a SEF’s
business pursuant to § 37.5(a).180 Request for Comment The Commission requests comments on all aspects of the proposed amendments to § 37.3(b)(3). e. § 37.3(b)(4)—Effect of Incomplete Application The Commission is not proposing any amendments to § 37.3(b)(4). f. § 37.3(b)(5)—Commission Review Period Based on the elimination of the temporary registration regime under existing § 37.3(c), the Commission proposes to amend the existing provision to eliminate related language and specify that the Commission reviews a SEF registration application pursuant to a 180-day timeframe and the procedures specified in CEA section 6(a). g. § 37.3(b)(6)—Commission Determination The Commission is not proposing any amendments to § 37.3(b)(6).
4. § 37.3(c)—Amendment to an Order of
Registration
Consistent with existing Commission practice and the proposal to eliminate the use of Form SEF to request an amended registration order, the Commission proposes a new § 37.3(c)— ‘‘Amendment to an order of registration’’—to establish a separate process for such requests.181 A SEF would be required to submit its request electronically in the form and manner specified by the Commission.182 Similar to the procedures set forth for the registration application process, a SEF would be required to provide the Commission with any additional information and documentation necessary to review a request. The Commission would issue an amended order if the SEF would continue to maintain compliance with the Act and the Commission’s regulations after such amendment. Further, the Commission may also issue an amended order subject to conditions. The Commission also proposes to specify that it may decline to issue an amended order based upon a determination that the SEF would not continue to maintain compliance with the Act and the Commission’s regulations upon such amendment. Request for Comment The Commission requests comments on all aspects of proposed § 37.3(c).
5. § 37.3(d)—Reinstatement of Dormant
Registration
The Commission is not proposing any amendments to § 37.3(d).

183 17 CFR 37.3(e).
184 17 CFR 37.3(e)(2).
185 17 CFR 37.3(e)(3).
186 17 CFR 37.3(e)(3)(vi).
187 17 CFR 37.3(e)(3)(vii).
188The Commission proposes to adopt this amendment under § 37.3(e)(2). 189The Commission proposes to adopt this amendment under § 37.3(e)(3)(iv). The Commission recognizes that different types of entities are established and governed by different types of documentation. For example, a corporation is formed based on articles of incorporation and operates pursuant to bylaws; a limited liability company is generally established pursuant to articles of organization and operates pursuant to an operating agreement; and a limited partnership is generally formed based on a limited partnership agreement. Based on the proposed amendments to § 37.3(e)(iv), the Commission also proposes to amend § 37.3(e)(3)(i) by changing the word ‘‘agreement’’ to ‘‘documentation.’’ 190The Commission proposes to consolidate existing clauses (B) and (D) into a new proposed clause (B). 191The Commission proposes to eliminate this requirement under existing clause (C) and renumber existing clause (E) as clause (C). 192The Commission proposes to adopt this amendment under subparagraph (3)(vi)(A). 193The Commission proposes to amend the language of existing subparagraph (3)(vii)(B) and renumber the provision to subparagraph (3)(vii)(C) based on the proposed changes described above. The Commission notes that the transferee’s notification obligations would not be limited to those that may affect a market participant’s rights and obligations; the proposed rule would maintain the existing requirement that a transferee represent that it will notify market participants of all changes to the transferor’s rulebook prior to the transfer. 194The Commission proposes to retitle § 37.4 to ‘‘Procedures for implementing rules’’ from ‘‘Procedures for listing products and implementing rules’’ based on the proposed changes described below. 195 17 CFR 37.4(a).
6. § 37.3(e)—Request for Transfer of
Registration
Section 37.3(e) establishes
requirements that a SEF must follow when seeking to transfer its registration from its current legal entity to a new legal entity as a result of a corporate change.183 Among these requirements, § 37.3(e)(2) requires a SEF to file a transfer request no later than three months prior to the anticipated corporate change, or if not possible, as soon as it knows of the change.184
Section 37.3(e)(3) requires a transfer
request to include certain information, such as the transferee’s governing documents under § 37.3(e)(3)(iv).185 Under § 37.3(e)(3)(vi), the request must also include certain representations from a transferee, including representations that it will (i) retain and assume, without limitation, all of the assets and liabilities of the transferor; (ii) assume responsibility for complying with the Act and the Commission’s regulations; (iii) assume, maintain, and enforce all of the transferor’s rules that are applicable to SEFs, including the transferor’s rulebook and any amendments; (iv) comply with all selfregulatory responsibilities, including maintaining and enforcing all selfregulatory programs; and (v) notify market participants of all changes to the rulebook prior to the transfer, as well as the transfer and issuance of a corresponding order by the Commission.186 Under § 37.3(e)(3)(vii), the transfer request must also include a representation from the transferee that upon the transfer, it will assume responsibility for and maintain compliance with the SEF core principles for all swaps previously made available for trading through the transferor; and that none of the proposed rule changes will affect the rights and obligations of any market participant.187 The Commission proposes several non-substantive amendments to streamline the existing requirements under § 37.3(e) for filing a transfer request. First, the Commission proposes to simplify the timeline for filing a request by requiring that a SEF file the request ‘‘as soon as practicable,’’ rather than no later than three months prior to the anticipated corporate change or as soon as it knows of such a change, if less than three months prior to the change.188 Second, with respect to the required information in a transfer request, the Commission also proposes to specifically reference other types of governing documents that would be adopted by transferees, such as a limited liability agreement or an operating agreement.189 This proposed change acknowledges that a transferee of a SEF’s registration may be a noncorporate entity, such as a limited liability company or partnership. Third, the Commission proposes to simplify a transferee’s compliancerelated representations under § 37.3(e)(3)(vi). The Commission proposes to consolidate and eliminate unnecessary language; 190 and eliminate the existing requirement that the transferee attest that it will assume, maintain, and enforce compliance with the SEF core principles, as well as maintain and enforce self-regulatory programs.191 The Commission notes that the language that it proposes to delete is otherwise duplicative to § 37.3(e)(3)(vi)(B), which generally requires the transferee to represent that it will assume responsibility for compliance with all applicable provisions of the Act and the Commission’s regulations. Further, the Commission proposes to eliminate the existing requirement under § 37.3(e)(3)(vii)(A) that a transferee represent that
it will continue to comply with the SEF core principles for all swaps made available for trading through the transferor. The Commission notes that all SEFs, whether or not a transferee, must comply with the Act and Commission regulations, including all requirements applicable to a SEF’s listed swaps. Fourth, the Commission proposes to amend § 37.3(e) to better reflect the practical realities of the transfer process. Rather than require a transferee to represent that it will retain and assume all the assets and liabilities of the transferor without limitation, the Commission proposes to instead require that the transferee state in the request when it would not do so.192 In addition, rather than require a transferee to represent that none of a transferee’s proposed rule changes will affect the rights and obligations of any market participant, the Commission proposes instead to require that the transferee represent that it will notify market participants of changes that may affect their rights and obligations.193 These amendments would eliminate certain pre-emptive restrictions upon businessrelated changes associated with the transfer, but also allow the Commission to continue reviewing whether such changes may be inconsistent with the Act or the Commission’s regulations.
7. § 37.3(f)—Request for Withdrawal of
Application for Registration The Commission is not proposing any amendments to § 37.3(f).
8. § 37.3(g)—Request for Vacation of
Registration
The Commission is not proposing any amendments to § 37.3(g).
9. § 37.3(h)—Delegation of Authority
Given the deletion of the phrase relating to temporary registration in the existing paragraph, the Commission proposes a conforming non-substantive amendment. D. § 37.4—Procedures for Implementing Rules 194
Section 37.4 currently sets forth rules
related to the listing of swap products and the submission of rules on a preand post-registration basis. Section 37.4(a) specifies that a SEF applicant may submit the terms and conditions of swaps that it intends to list for trading as part of its registration application.195
Section 37.4(b) specifies that any swap

196 17 CFR 37.4(b).
197 17 CFR 37.4(c).
198 17 CFR 37.4(d).
199The Commission proposes to renumber subsection (b) to subsection (a) based on the proposed amendment as described above. 200 17 CFR part 40. Although an applicant may not submit swap product terms and conditions for approval as part of the registration process, the Commission notes that SEF applicants may informally discuss any proposed products with Commission staff for informal feedback as part of the registration process. 201The Commission proposes to renumber subsection (d) to subsection (b) based on the proposed amendments as described above. 202The Commission proposes to retitle § 37.5 to ‘‘Provision of information relating to a swap execution facility’’ from ‘‘Information relating to swap execution facility compliance’’ based on the proposed changes described below. 203 17 CFR 37.5(c)(1). 204 17 CFR 37.5(c)(2). 205 17 CFR 37.5(c)(1). In the SEF Core Principles Final Rule, the Commission specified the types of documentation to include, but not be limited to, (i) relevant agreement(s); (ii) associated changes to relevant corporate documents; (iii) a chart outlining any new ownership or corporate or organization structure, if available; and (iv) a brief description of the purpose and any impact of the equity interest transfer. SEF Core Principles Final Rule at 33490. The final rule also stated that a SEF must file a certification regarding its compliance with CEA
section 5h and the Commission’s regulations
thereunder, as set forth in existing § 37.5(c)(4). Id. 206 17 CFR 37.5(c)(3). 207Core Principles and Other Requirements for Swap Execution Facilities, 76 FR 1214, 1217 (Jan. 7, 2011) (‘‘SEF Core Principles Proposed Rule’’). 208 Id. 209 Id. In the SEF Core Principles Final Rule, the Commission raised the provision to 50 percent from 10 percent and maintained a similar policy rationale, SEF Core Principles Final Rule at 33490, i.e., to ‘‘ensure that SEFs remain mindful of their self-regulatory responsibilities when negotiating the terms of significant equity interest transfers.’’ SEF Core Principles Proposed Rule at 1217. terms and conditions or rules submitted as part of the SEF’s application shall be considered for approval by the Commission at the time it issues the SEF’s registration order.196 Section 37.4(c) specifies that after the Commission issues a registration order, the SEF shall submit any proposed swap terms and conditions, including amendments to such terms and conditions, proposed new rules, or proposed rule amendments, pursuant to
part 40 of the Commission’s
regulations.197 Section 37.4(d) specifies that any swap terms and conditions or rules submitted as part of an application to reinstate a dormant SEF shall be considered for approval at the time that the Commission approves the dormant SEF’s reinstatement of registration.198 The Commission proposes to eliminate § 37.4(a) and to adopt conforming amendments to § 37.4(b) to establish that the Commission’s process of reviewing the terms and conditions of a swap product that the applicant intends to list for trading upon registration is separate from the review process of a SEF’s application for registration.199 As amended, § 37.4(b) would specify that rules, except swap product terms and conditions, submitted by the SEF applicant as part of a registration application would be considered for approval at the time the Commission issues an order of registration. Upon obtaining an order of registration, a registered SEF may formally submit product terms and conditions under § 40.2 or § 40.3, which controls the submission of new product terms and conditions by registered entities.200 Given that the submission procedures for rules, including product terms and conditions, are established under part 40, the Commission also proposes to eliminate unnecessary language by deleting § 37.4(c). The Commission believes that separating these two processes would promote efficiency for both Commission staff and SEF applicants. For example, a SEF applicant’s registration order could otherwise be unnecessarily delayed or stayed if the SEF applicant submits for Commission approval, along with its application for registration, a novel or complex product that would require additional consideration or analysis by Commission staff. To conform to the proposed approach for reviewing swap product terms and conditions from SEF applicants described above, the Commission also proposes to amend § 37.4(d) to delete the reference to any ‘‘swap terms and conditions’’ submitted by a dormant SEF that is applying for reinstatement of registration.201 Accordingly, dormant SEFs would not be able to provide proposed swap product terms and conditions for approval as part of the dormant SEF registration reinstatement process. Upon obtaining a reinstatement of registration, a SEF may formally submit product terms and conditions under § 40.2 or § 40.3, which controls the submission of new product terms and conditions by registered entities. Request for Comment The Commission requests comments on all aspects of the proposed amendments to § 37.4. E. § 37.5—Provision of Information Relating to a Swap Execution Facility 202

§ 37.5(a)—Request for Information
The Commission is not proposing any amendments to § 37.5(a).
§ 37.5(b)—Demonstration of
Compliance
The Commission is proposing certain non-substantive amendments to § 37.5(b).
§ 37.5(c)—Equity Interest Transfer
Section 37.5(c) sets forth notification
requirements related to transfers of equity interest in a SEF. Section 37.5(c)(1) requires a SEF to notify the Commission if the SEF enters into a transaction involving the transfer of fifty percent or more of the equity interest in the SEF.203 Section 37.5(c)(2) requires the SEF to file the notice at the earliest possible time, but no later than the open of business ten business days following the date upon which the SEF enters into a firm obligation to transfer the equity interest.204 Upon such a notification, the Commission may request supporting documentation of the transaction.205 Where any aspect of the transfer constitutes a rule as defined under part 40, § 37.5(c)(3) requires a SEF to comply with the requirements of CEA section 5c(c) and part 40.206 The Commission has previously stated that in situations where such an equity transfer occurs, the Commission has an interest in reviewing and considering the implications of the changes in ownership.207 In particular, the Commission seeks to determine whether the change in ownership will adversely impact the operations of the SEF or the SEF’s ability to comply with the core principles and the Commission’s regulations thereunder.208 Further, the Commission intended for § 37.5(c) to enable Commission staff to consider whether any term or condition contained in an equity transfer agreement(s) is inconsistent with the self-regulatory responsibilities of a SEF or with any of the core principles.209 The Commission proposes to amend § 37.5(c)(1) to require a SEF to file a notice with the Commission in the event of any transaction that results in the transfer of direct or indirect ownership of fifty percent or more of the equity interest in the SEF. The Commission notes that indirect ownership may transpire, for example, through a transaction involving a direct or indirect parent company of the SEF. Section 37.5(c), however, only requires a SEF to file a notice where the SEF is a party to a transaction involving a transfer of direct ownership of fifty percent or more of the equity interest in the SEF, but not where the SEF is not a party to the transaction, or where the transaction results in a transfer of indirect ownership of the SEF. The Commission believes that such transfers implicate the same regulatory policies underlying the existing rule and therefore proposes

210The Commission also proposes to renumber paragraph (c)(4) to paragraph (c)(3) based on the proposed elimination of the existing language in paragraph (c)(3) described below. 211 17 CFR 37.6(a). 212The Commission also proposes to add a new title to § 37.6(a)—‘‘Enforceability of transactions.’’ 213See infra Section XXII.—Part 43—§ 43.2— Definition of ‘‘Block Trade.’’ 214 17 CFR 37.6(b). 215 17 CFR 43.2; 17 CFR 45.1. See also 17 CFR
23.500 (similar definition of ‘‘confirmation’’ that
applies to swap dealers (‘‘SDs’’) and major swap participants (‘‘MSPs’’)). 216 17 CFR 43.2; 17 CFR 45.1. 217SEF Core Principles Final Rule at 33491. 218SEF Core Principles Final Rule at 33491 n.195. Swap counterparties have typically relied on the use of industry-standard legal documentation, including master netting agreements, definitions, schedules, and confirmations, to document their swap trading relationships. This documentation, such as the ISDA Master Agreement and related
Schedule and Credit Support Annex (‘‘ISDA
Agreements’’), as well as related documentation specific to particular asset classes, offers a framework for documenting uncleared swap transactions between counterparties. See Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904, 55906 (Sept. 11, 2012). For uncleared swap transactions, § 23.504(b) requires written documentation of all the terms governing the trading relationship between an SD or MSP and its counterparty. 17 CFR 23.504(b). 219SEF Core Principles Final Rule at 33491 n.195. 220To ensure that the SEF confirmation provides legal certainty, the Commission stated that counterparties choosing to execute a swap transaction on or pursuant to the rules of a SEF must have all terms, including possible long-term credit support arrangements, agreed to no later than execution, such that the SEF can provide a written confirmation inclusive of those terms at the time of execution. SEF Core Principles Final Rule at 33491. 221Many of these agreements are maintained in paper form or scanned PDF files that are difficult to quickly digitize in a cost-effective manner. See WMBAA, Request for Extended Relief from Certain Requirements under Parts 37 and 45 Related to Confirmations and Recordkeeping for Swaps Not Required or Intended to be Cleared at 3 (Mar. 1, 2016). Further, some SEFs have cited the considerable resource cost of obtaining the number of different agreements that exist to accommodate the different parties and different asset classes. Id. 222 Id. 223Commission staff provided initial no-action relief in 2014. CFTC Letter No. 14–108, Re: Staff No-Action Position Regarding SEF Confirmations and Recordkeeping Requirements under Certain Provisions Included in Regulations 37.6(b) and 45.2 (Aug. 18, 2014). Commission staff has since extended this no-action relief on several occasions. See CFTC Letter No. 17–17, Re: Extension of NoAction Relief for Swap Execution Facility Confirmation and Recordkeeping Requirements under Commodity Futures Trading Commission Regulations 37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a) (Mar. 24, 2017); CFTC Letter No. 16–25, Re:
Extension of No-Action Relief for Swap Execution Facility Confirmation and Recordkeeping Requirements under Commodity Futures Trading Commission Regulations 37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a) (Mar. 14, 2016); CFTC Letter 15– 25, Re: Extension of No-Action Relief for SEF Confirmation and Recordkeeping Requirements under Commission Regulations 37.6(b), 37.1000, 37.1001, and 45.2, and Additional Relief for Confirmation Data Reporting Requirements under Commission Regulation 45.3(a) (Apr. 22, 2015). amendments to broaden the requirement. Based on the proposed changes described above, the Commission further proposes conforming non-substantive amendments to § 37.5(c)(2)—‘‘Timing of notification’’—and § 37.5(c)(4)— ‘‘Certification.’’ 210 The Commission further proposes to streamline § 37.5(c) by deleting § 37.5(c)(3)—the Commission notes that
part 40 already applies to SEFs with
respect to rule filings, and therefore, a separate provision is not necessary to apply part 40 to SEFs. Request for Comment The Commission requests comments on all aspects of the proposed amendments to § 37.5(c).
4. § 37.5(d)—Delegation of Authority
The Commission is not proposing any amendments to § 37.5(d). F. § 37.6—Enforceability

§ 37.6(a)—Enforceability of
Transactions
Section 37.6(a) is intended to provide
market participants with legal certainty with respect to swap transactions on a SEF and generally clarifies that a swap transaction entered into on or pursuant to the rules of a SEF cannot be void, voidable, subject to recession, otherwise invalidated, or rendered unenforceable due to a violation by the SEF of the Act or applicable Commission regulations or any proceeding that alters or supplements a rule, term or condition that governs such swap or swap transaction.211 The Commission proposes nonsubstantive amendments to § 37.6(a).212 These amendments include (i) amending the phrase ‘‘entered into’’ to ‘‘executed’’ to provide greater clarity; and (ii) eliminating the reference to swaps executed ‘‘pursuant to the rules of’’ a SEF, which conforms to the proposed amendment to the ‘‘block trade’’ definition under § 43.2, discussed further below.213
§ 37.6(b)—Swap Documentation
Section 37.6(b) requires a SEF to
provide each counterparty to a transaction with a written ‘‘confirmation’’ that contains all of the terms of a swap transaction at the time of the swap’s execution for both cleared and uncleared swap transactions, including (i) ‘‘economic terms’’ that are specific to a transaction, e.g., swap product, price, and notional amount; and (ii) non-specific ‘‘relationship terms’’ that generally govern all transactions between two counterparties, e.g., default provisions, margin requirements, and governing law.214 ‘‘Confirmation’’ is defined under parts 43 and 45 of the Commission’s regulations as the consummation (electronically or otherwise) of legally binding documentation that memorializes the agreement of the counterparties to all terms of the swap (emphasis added).215 The definition also states that a confirmation shall be in writing (electronic or otherwise) and legally supersede any previous agreement (electronic or otherwise) relating to the swap.216 The Commission adopted § 37.6(b), in part, to facilitate this process for swaps transactions— both cleared and uncleared—executed on or pursuant to the rules of a SEF.217 For uncleared swap transactions, the Commission is aware that many relationship terms that may govern certain aspects of an uncleared swap transaction are often negotiated and executed between potential counterparties prior to execution.218 The Commission previously provided that SEFs may satisfy § 37.6(b) for uncleared swap transactions by incorporating by reference the relevant terms set forth in such agreements, as long as those agreements have been submitted to the SEF prior to execution.219 As applied, § 37.6(b) requires that the SEF obtain and incorporate this documentation into the issued confirmation, which is intended in part to provide SEF participants with legal certainty with respect to uncleared swap transactions.220 This requirement, however, has created impractical burdens for SEFs. Based upon feedback from SEFs, the Commission understands that SEFs have encountered many issues in trying to comply with the requirement for uncleared swaps, including high financial, administrative, and logistical burdens to collect and maintain bilateral transaction agreements from many individual counterparties. SEFs have stated that they are unable to develop a cost-effective method to request, accept, and maintain a library of every previous agreement between counterparties.221 SEFs have also noted that the potential number of previous agreements is considerable, given that SEF counterparties enter into agreements with many other parties and have multiple agreements for different asset classes.222 Commission staff has acknowledged these technological and operational challenges and has accordingly granted time-limited no-action relief.223 Based on this relief, SEFs have incorporated

224 Id.
225See SIFMA Asset Management Group, Re:
Straight-Through Processing, Swap Execution Facility Implementation and Relief Relating to the Aggregation Provision in Final Block Trade Rule at 6 n.14 (Oct. 25, 2013) (stating that ‘‘it is highly impractical for a SEF to familiarize itself with the often complex, bespoke master agreement and trade terms (and the various documents that may be incorporated by reference) in order to produce a customized, potentially complex confirmation on a trade by trade basis.’’). 226The Commission acknowledges that the issuance of a trade evidence record would not alter the other obligations of a SEF or the counterparties under the CEA and the Commission’s regulations. For example, a SEF would still be required to report all required swap creation data under § 45.3(a), as applicable. 17 CFR 45.3(a). Further, a counterparty that is a swap dealer or major swap participant would also still be required to transmit a confirmation pursuant to § 23.501, as applicable. 17 CFR 23.501. 227 17 CFR 37.6(b). applicable relationship terms from previous agreements by reference in the confirmation without obtaining copies of these agreements prior to the execution of a swap.224 SEFs, however, still must memorialize the relationship terms contained in separate, previouslynegotiated agreements that the SEF has not reviewed at the time of incorporation, and would likely not review post-execution. One industry participant, however, noted that a SEF would not be familiar with the terms of the agreements that it is required to incorporate by reference into a confirmation.225 Based on its experience with the part 37 implementation, the Commission acknowledges that cleared and uncleared swaps raise different issues with respect to confirmation requirements and the current SEF requirements create difficulties for the latter type of swap transaction. Therefore, the Commission is proposing a revised approach to § 37.6(b) as described below. a. § 37.6(b)(1)—Legally Binding Documentation The Commission proposes §§ 37.6(b)(1)(i)–(ii) to establish separate swap transaction documentation requirements for cleared and uncleared swaps. Proposed § 37.6(b)(1)(i)(A) would apply the existing confirmation requirement—that a SEF must issue a written confirmation that includes all of the terms of the transaction—to cleared swap transactions. The Commission further proposes to define ‘‘confirmation document’’ under § 37.6(b)(1)(i)(B) as a legally binding written documentation that memorializes the agreement to all terms of a swap transaction and legally supersedes any previous agreement that relates to the swap transaction between the counterparties. With respect to uncleared swap transactions the Commission proposes a revised approach under § 37.6(b)(1)(ii) that would require a SEF to provide the counterparties to an uncleared swap transaction with a ‘‘trade evidence record’’ that memorializes the terms of the swap transaction agreed upon between the counterparties on the SEF. In contrast to a
cleared swap confirmation, the trade evidence record would not be required to include all of the terms of the swap transaction, including relationship terms contained in underlying documentation between the counterparties. As defined under proposed § 37.6(b)(1)(ii)(B), a trade evidence record means a legally binding written documentation that memorializes the terms of a swap transaction agreed upon by the counterparties and legally supersedes any conflicting term in any previous agreement that relates to the swap transaction between the counterparties. The Commission anticipates that these terms would include, at a minimum, the ‘‘economic terms’’ that are agreed upon between the counterparties to a specific SEF transaction, e.g., trade date, notional amount, settlement date, and price. The Commission believes that the proposed rule would provide SEFs with a simplified approach to comply with the legal documentation requirement, but also continue to promote the policy objective of § 37.6(b) by providing SEF participants with legal certainty with respect to both cleared and uncleared swap transactions. Further, the proposed approach accommodates existing counterparty trading practices for uncleared swaps, particularly the use of separate, previously-negotiated underlying agreements to establish relationship terms that generally govern the trading relationship, as opposed to a specific transaction, between two counterparties. To the extent that such terms either are agreed upon between the counterparties in underlying documentation established away from the SEF and continue to govern the transaction post-execution or are not required to establish legal certainty for a specific transaction, a SEF would not be required to incorporate those terms into a trade evidence record. The proposed approach should address the challenges that have prevented SEFs from fully complying with § 37.6(b) by reducing the administrative burdens for SEFs, who would not be required to obtain, incorporate, or reference those previous agreements, and for counterparties, who would not be required to submit all of their relevant documentation with other potential counterparties to the SEF.226 Request for Comment The Commission requests comments on all aspects of proposed § 37.6(b)(1). In particular, the Commission is particularly interested in the prescribed contents and legal import of a trade evidence record and requests comment on the following questions:
(19) Should the Commission allow a SEF to issue a trade evidence record that does not include all the terms of a swap transaction agreed to on the SEF? (20) Should the Commission require a SEF to include a minimum set of terms in a trade evidence record, e.g., material economic terms? Should the Commission specify those terms in the proposed regulation? (21) Should the Commission require a SEF to include any of the ‘‘primary economic terms,’’ as defined under § 45.1, in a trade evidence record? If so, which terms should be included? (22) Should the Commission specify that a trade evidence record (i) serves as evidence of a legally binding agreement upon the counterparties; and (ii) legally supersedes any previous agreement, rather than any conflicting term in any previous agreement, as proposed? With respect to (i), are there terms that are generally contained within previouslynegotiated, underlying agreements between the counterparties that are necessary to make a transaction legally binding, and therefore must be submitted to the SEF? (23) Should the Commission specify in its regulations that notwithstanding the trade evidence record requirement, a SEF is allowed to incorporate by reference underlying, previous agreements containing terms governing a swap transaction into any trade evidence record associated with the transaction? (24) Do proposed §§ 37.6(b)(1)(i)–(ii) provide sufficient legal certainty with respect to any contradictory terms that may be contained within the previous agreements? b. § 37.6(b)(2)—Requirements for Swap Documentation
Section 37.6(b) requires that the
confirmation take place at the same time as execution, except for a limited exception for certain information for bunched orders.227 The Commission proposes § 37.6(b)(2)(i) to amend this requirement and instead require a SEF to provide a confirmation document or trade evidence record to the counterparties to a transaction ‘‘as soon as technologically practicable’’ after the

228The Commission notes that in the context of real-time public reporting, it has defined ‘‘as soon as technologically practicable’’ to mean as soon as possible, taking into consideration the prevalence, implementation and use of technology by comparable market participants. 17 CFR 43.2. The meaning of this term, as proposed in § 37.6(b)(2)(i) herein, would be consistent with this definition. 229The Commission notes that a public commenter previously cited execution and confirmation as two separate processes in the swap transaction process. SEF Core Principles Final Rule at 33491 (comment from the Energy Working Group that execution and confirmation are ‘‘distinct steps’’ in the swap transaction process). 230See infra Section IV.I.—§ 37.9—Methods of Execution for Required and Permitted Transactions; § 37.10—Process for a Swap Execution Facility to Make a Swap Available to Trade; § 37.12—Trade Execution Compliance Schedule; § 38.11—Trade Execution Compliance Schedule; § 38.12—Process for a Designated Contract Market to Make a Swap Available to Trade. 231See infra Section X.D.—§ 37.504—Prohibited Use of Data Collected for Regulatory Purposes. 232The Commission proposes to renumber § 37.8 to § 37.7 based on the proposed changes described above. 233 7 U.S.C. 2(h)(8). Although the trade execution requirement may be satisfied through DCMs, the Commission’s discussion of the trade execution requirement in this proposed rulemaking will generally pertain to SEFs, unless otherwise noted. execution of the swap transaction on the SEF.228 The Commission recognizes that a strict implementation of the existing requirement is not practical from a temporal standpoint, given that a SEF’s issuance of a written confirmation document or trade evidence record would only occur upon execution by counterparties.229 Further, the required issuance of a written confirmation document or trade evidence record simultaneous with execution may become further impracticable for some SEFs from an operational and technological standpoint based on the different trading systems or platforms that SEFs may offer under a more flexible approach to execution methods proposed by the Commission.230 Therefore, proposed § 37.6(b)(2)(i) is intended to establish a more practical approach that accommodates different types of SEF operations. The Commission believes that the proposed standard—‘‘as soon as technologically practicable’’—would also continue to promote the Commission’s goals of providing the swap counterparties with legal certainty in a prompt manner. Based on this proposed amendment to the existing language of § 37.6(b), the Commission also proposes to renumber the existing requirement regarding bunched orders to proposed § 37.6(b)(2)(ii) and adopt nonsubstantive amendments. As noted, § 37.6(b) requires a SEF to provide the written confirmation of a transaction executed on or pursuant to the SEF’s rules to ‘‘each counterparty to [the] transaction.’’ The Commission proposes to add §
37.6(b)(2)(iii) to provide that a SEF may issue a confirmation document or trade evidence record to the intermediary trading on behalf of a counterparty, provided that the SEF establish and enforce rules to require any intermediary to transmit any such document or record to the counterparty as soon as technologically practicable. Based on industry practice, the Commission notes that to the extent that intermediaries, acting on behalf of swap participants, facilitate swap execution on a SEF, the SEF transmits the written confirmation to the intermediary and then requires the intermediary to forward the confirmation to its customer. The Commission understands that participants using intermediaries to trade on a SEF may not establish the appropriate connectivity necessary to receive written confirmations directly from the SEF. Requiring the intermediary to transmit the document or record as soon as technologically practicable would further accommodate current market practices, as discussed above. Request for Comment The Commission requests comments on all aspects of proposed § 37.6(b)(2). In particular, the Commission requests comment on the following questions:
(25) Is the Commission’s proposal, to require a SEF to transmit confirmation documents or trade evidence records to counterparties ‘‘as soon as technologically practicable’’ after the execution of the swap transaction on the SEF an appropriate time frame? Should the Commission require that the SEF issue the confirmation document or trade evidence record within a specified time limit? (26) Is the Commission’s proposal to require a SEF to establish and enforce rules that require an intermediary acting on behalf of a counterparty to transmit a confirmation document or trade evidence record to such counterparty ‘‘as soon as technologically practicable’’ an appropriate time frame? Should the Commission require that the SEF issue the confirmation document or trade evidence record within a specified time limit? (27) Should the Commission define ‘‘as soon as technologically practicable’’ in a similar manner to the definition in
part 43?
G. § 37.7—Prohibited Use of Data Collected for Regulatory Purposes The Commission proposes to move and amend § 37.7, which prohibits a SEF from using proprietary or personal information that it collects or receives to fulfill regulatory obligations for business or marketing purposes, as a new § 37.504 under the Core Principle 5 (Ability to Obtain Information) regulations. The Commission discusses the proposed amendments to the existing requirements further below.231 H. § 37.8—Boards of Trade Operating Both a Designated Contract Market and a Swap Execution Facility 232
Section 37.8(a) requires an entity that
operates as both a DCM and a SEF to separately register with the Commission in accordance with the procedures set forth under part 38 and part 37 of the Commission’s regulations, respectively.
Section 37.8(a) further requires that a
dually-registered entity comply with the respective DCM and SEF core principles and regulations on an ongoing basis. The Commission notes that the language is superfluous to the similar requirements that already exist under § 38.2 and § 37.2 for DCMs and SEFs, respectively, and therefore proposes to delete this latter requirement. The Commission notes, however, that this is not a substantive change and DCMs and SEFs must otherwise comply with the Act and applicable regulations.
I. § 37.9—Methods of Execution for
Required and Permitted Transactions; § 37.10—Process for a Swap Execution Facility To Make a Swap Available to Trade; § 37.12—Trade Execution Compliance Schedule; § 38.11—Trade Execution Compliance Schedule; § 38.12—Process for a Designated Contract Market To Make a Swap Available To Trade The CEA, as amended by the DoddFrank Act, requires the Commission to develop and implement a regulatory framework for trading swaps on registered SEFs and establishes a corresponding trade execution requirement that requires certain swaps to be executed on DCMs, SEFs, or Exempt SEFs.233 The regulatory framework that the Commission developed to implement these provisions prescribes, among other things, (i) a process that allows SEFs and DCMs to initiate determinations of which swaps should be subject to the CEA section 2(h)(8) trade execution requirement, i.e., the MAT process; and (ii) the methods of execution that must be used for swaps that are subject to the trade execution requirement. In addition, the framework permits SEFs to offer any method of execution for swaps

234 7 U.S.C. 2(h)(8). CEA section 2(h)(8) also specifies that swaps that are subject to a clearing exception under section 2(h)(7) are not subject to the trade execution requirement. See infra Section XXI.A.3.—§ 36.1(c)—Exemption for Swap Transactions Excepted or Exempted from the Clearing Requirement under Part 50. The Commission interprets ‘‘swap execution facility’’ in CEA section 2(h)(8)(B) to include a swap execution facility that is exempt from registration pursuant to CEA section 5h(g). See supra note 10. 235 17 CFR 37.10; 17 CFR 38.12. 236The Commission notes that a SEF or DCM may submit a MAT determination pursuant to the rule approval process under § 40.5 or through the rule certification process under § 40.6. 17 CFR 37.10(a)(1) and 38.12(a)(1). 237 17 CFR 37.10(b), 38.12(b). Parts 37 and 38 respectively specify the same six factors: (i) Whether there are ready and willing buyers and sellers for the swap; (ii) the frequency or size of transactions in the swap; (iii) the swap’s trading volume; (iv) the number and types of market participants trading the swap; (v) the swap’s bid/ ask spread; and (vi) the usual number of resting firm or indicative bids and offers in the swap. 17 CFR 37.10(b), 38.12(b). The Commission explained in the preamble to the MAT Final Rule that with respect to factors (ii)–(iii), the submitting DCM or SEF could look to DCM, SEF, or bilateral transactions. MAT Final Rule at 3360. 238Based on part 40, a MAT determination filing applies the trade execution requirement to a particular swap either upon Commission approval (in the case of a filing submitted for approval under § 40.5) or upon the lack of Commission objection (in the case of a filing submitted on a self-certified basis under § 40.6). 239 17 CFR 37.9(a)(1). 240See supra notes 123–125 and accompanying discussion (definition of ‘‘Order Book’’ under § 37.3(a)(3)). 241 17 CFR 37.9(a)(2). 242 17 CFR 37.9(a)(3). The RFQ System definition additionally specifies that the three requesters may not be affiliates or controlled by one another; and the system must provide each of its market participants with equal priority in receiving RFQs and transmitting and displaying for execution responsive orders. 17 CFR 37.9(a)(3); 17 CFR 37.9(a)(3)(iii). 243 17 CFR 37.9(a)(2)(i)(B). In operating an RFQ System in conjunction with an Order Book, a SEF must communicate to a requester any firm bid or offer pertaining to the same instrument resting on any of the SEF’s Order Books; and provide the requester with the ability to execute against such firm resting bids or offers along with any responsive RFQ orders. 17 CFR 37.9(a)(3)(i)–(ii). As discussed above, the Commission is proposing to eliminate the minimum trading functionality under § 37.3(a)(2) and the Order Book definition under § 37.3(a)(3). See supra Section IV.C.2.— §§ 37.3(a)(2)–(3)—Minimum Trading Functionality and Order Book Definition. 244 7 U.S.C. 1a(50). 245SEF Core Principles Final Rule at 33501 n.328. that are not
subject to the trade execution requirement. The Commission adopted this framework in part to achieve the SEF statutory goals in CEA section 5h(e) of promoting trading on SEFs and promoting pre-trade transparency in the swaps market. The Commission acknowledges that the existing framework has transitioned some swaps trading and market participants to SEFs. Since 2013, however, the Commission has gained considerable knowledge and experience with swaps trading dynamics through implementing part 37, particularly with respect to the required use of certain execution methods. Based on that knowledge and experience, the Commission believes that certain aspects of the current SEF regulatory framework should be enhanced to further promote the statutory SEF goals and better maximize the role of SEFs as vibrant and liquid marketplaces for swaps trading. Accordingly, the Commission is proposing two revisions to the current framework. First, the Commission proposes to adopt a revised interpretation of CEA section 2(h)(8) to set the applicability of the trade execution requirement, i.e., swaps subject to the clearing requirement and listed for trading by a SEF or DCM would be subject to the requirement. Instead of maintaining the current MAT determination process, the Commission believes that this proposed approach would be better aligned with the intent of CEA section 2(h)(8) and further the statutory goal of promoting swaps trading on SEFs. As applied to the current scope of swaps that are subject to the clearing requirement and listed for trading by SEFs and DCMs, the Commission anticipates that this approach would significantly expand the scope of swaps that are subject to the trade execution requirement. Second, based on its understanding of swaps trading dynamics and the increased scope of swaps that would become subject to the trade execution requirement, the Commission also proposes to allow greater flexibility in the trading of such swaps by eliminating the prescribed execution methods for swaps subject to the requirement.

Trade Execution Requirement and
MAT Process
The trade execution requirement mandates counterparties to execute swap transactions subject to the clearing requirement on a SEF or DCM, unless no SEF or DCM ‘‘makes the swap available to trade.’’ 234 The Commission adopted § 37.10 and § 38.12 to establish a ‘‘MAT determination’’ process that allows SEFs and DCMs, respectively, to make swaps ‘‘available to trade,’’ and therefore, subject to the trade execution requirement.235 These processes enable a SEF or DCM to make a swap ‘‘available to trade’’ by submitting a determination to the Commission pursuant to the part 40 rule filing procedures.236 A SEF or DCM that submits a MAT determination must include an assessment of whether the subject swap has ‘‘sufficient trading liquidity’’ and must address at least one of six factors that serve as indicia of the swap’s trading liquidity.237 Swaps that become subject to the trade execution requirement pursuant to the approval or certification of a MAT determination must, with the limited exception of block transactions, be executed by counterparties on a SEF or DCM.238
Execution Method Requirements
Section 37.9 defines swaps that are
subject to the trade execution requirement, i.e., those swaps that must be executed on a SEF or DCM, as ‘‘Required Transactions’’ 239 and specifies that a SEF may only offer two methods for executing such swaps. Specifically, Required Transactions must be executed on (i) an Order Book, as defined under § 37.3(a)(3) and discussed above; 240 or (ii) an RFQ System, as defined under § 37.9(a)(3).241 An RFQ System is defined, among other requirements, as a trading system or platform where a market participant transmits a request for a bid or offer to no less than three market participants who are not affiliates of, or controlled by, the requester or each other (‘‘RFQto-3 requirement’’).242 To the extent that a SEF offers an RFQ System for Required Transactions, that system must operate in conjunction with an Order Book, which a SEF is currently required to establish and maintain as a minimum trading functionality.243 Pursuant to the statutory SEF definition, SEFs have been able to offer these methods through ‘‘any means of interstate commerce,’’ 244 which the Commission has interpreted to mean ‘‘a variety of means of execution or communication, including, but not limited to, telephones, internet communications, and electronic transmissions.’’ 245 Accordingly, SEFs have been able to develop and offer an Order Book or RFQ System through various forms, including voice-based systems. In establishing the Order Book and RFQ System requirements, the Commission sought in part to transition swaps trading onto SEFs and achieve the statutory SEF goal of promoting pretrade price transparency in the swaps market. In addition to establishing the Order Book as a minimum trading functionality for all swaps listed for trading by a SEF, the Commission intended for the Order Book requirement to promote such transparency for swaps subject to the trade execution requirement. The Commission did acknowledge, however, that an Order Book lacks the appropriate

246SEF Core Principles Final Rule at 33564–65. In the preamble to the SEF Core Principles Final Rule, the Commission expressed its anticipation that ‘‘the order book method will typically work well for liquid Required Transactions (i.e., transactions involving swaps that are subject to the trade execution requirement in CEA section 2(h)(8)), but for less liquid Required Transactions, RFQ systems are expected to help facilitate trading.’’ Id. 247 17 CFR 37.9(a)(2). The Commission adopted the RFQ System requirement based upon its prevalence in the OTC swaps market. Id. at 33564. The Commission stated that ‘‘RFQ systems are currently used by market participants in the OTC swap market, many in conjunction with order book functionality.’’ In adopting the requirement, the Commission also stated it was ‘‘leveraging best practices from current swaps trading platforms.’’ Id. at 33565. 248SEF Core Principles Final Rule at 33476. 249 In discussing trading of CDX and iTraxx indices, Lynn Riggs, Esen Onur, David Reiffen, and Haoxiang Zhu found that ‘‘[c]ustomers most frequently request quotes from three dealers, which happens in about 45% of the RFQ sessions, followed by five dealers, which happens in just below 30% of the RFQ sessions. In about 18% of the sessions the customer selects four dealers.’’ Lynn Riggs, Esen Onur, David Reiffen, & Haoxiang Zhu, Mechanism Selection and Trade Formation on Swap Execution Facilities: Evidence from Index CDS 10 (2017), https://www.cftc.gov/idc/groups/ public/@economicanalysis/documents/file/oce_ mechanism_selection.pdf (‘‘2017 Riggs Study’’). 250TW SEF LLC—Amendment to SelfCertification for Swaps to be Made Available to Trade (Jan. 26, 2014) (third amended filing from initial submission on October 28, 2013); Javelin SEF, LLC, No. 13–06R(3), Javelin Determination of Made Available to Trade of Certain Interest Rate Swaps made Pursuant to Parts 37 of the Rules of the Commodity Futures Trading Commission (Jan. 8, 2014) (third amended filing from initial submission on October 18, 2013) (‘‘Javelin SEF MAT Determination’’); Bloomberg SEF LLC, No. 2013–R–9, Bloomberg SEF LLC—Made Available to Trade (‘‘MAT’’) Submission of Certain Credit Default Swaps (‘‘CDS’’) and Interest Rate Swaps (‘‘IRS’’) pursuant to Commodity Futures Trading Commission (the ‘‘Commission’’) Regulation 40.6 (submission #2013–R–9) (Dec. 5, 2013) (‘‘Bloomberg SEF MAT Determination’’); MarketAxess SEF Corporation, Made Available to Trade (‘‘MAT’’) Submission of Certain Credit Default Swaps (Oct. 30, 2013) (‘‘MarketAxess SEF MAT Determination’’); trueEX, LLC, Submission 2013– 14, Made Available to Trade (‘‘MAT’’) Submission of Certain Interest Rate Swaps (‘‘IRS’’) pursuant to CFTC Regulation 40.6 (Oct. 21, 2013) (‘‘trueEX MAT Determination’’). 251CFTC, Industry Filings—Swaps Made Available to Trade, https://www.cftc.gov/idc/ groups/public/@otherif/documents/file/swapsmade availablechart.pdf. 252See, e.g., TW SEF LLC—Self-Certification for Swaps to be Made
Available to Trade at 8 (Oct. 28,
2013) (describing the IRS submitted as benchmark
swaps with the most liquidity and the CDS submitted as the most actively traded); Javelin SEF MAT Determination at 11 (noting that the bid-offer spreads for the IRS submitted is tight and characteristic of considerable liquidity); Bloomberg SEF MAT Determination at 3 (stating that the scope of the MAT determination represents IRS and CDS that are the most standardized and liquid); MarketAxess SEF MAT Determination at 1 (stating that the MAT determination consists of the most liquid CDS listed); trueEX MAT Determination at 4 (specifying that the trade frequency of IRS with whole-year tenors is sufficient to support a MAT determination). 253The clearing requirement currently applies to various categories of IRS, including fixed-to-floating swaps denominated in U.S. dollars, pound sterling, and euros with whole- and partial-year tenors that range from 28 days to 50 years; fixed-to-floating swaps in additional currency denominations with whole and partial tenors that range from 28 days up to 30 years; basis swaps, overnight index swaps, and forward rate agreements in varying denominations and tenors; and various CDX and iTraxx index CDS in the current on-the-run series and a broad range of older series (prior to the most recent off-the-run series) with whole-year benchmark tenors. 17 CFR 50.4. 254 ISDA, ISDA Research Note: Actual Cleared Volumes vs. Mandated Cleared Volumes: Analyzing the US Derivatives Market 3 (July 2018), https:// www.isda.org/a/6yYEE/Actual-Cleared-Volumes-vsMandated-Cleared-Volumes.pdf (‘‘2018 ISDA Research Note’’). 255 Id. 256Commission staff conducted data analysis based on publicly available data accessed via Clarus Financial Technology (‘‘Clarus’’). In a separate analysis, ISDA found that only 5 percent of trading volume in IRS during 2015 and the first three quarters of 2016 consisted of IRS subject to the trade execution requirement. ISDA, ISDA Research Note: Trends in IRD Clearing and SEF Trading 1, 3, 11 (December 2016), https://www.isda.org/a/ xVDDE/trends-in-ird-clearing-and-sef-trading1.pdf (‘‘2016 ISDA Research Note’’). flexibility to be suitable for trading many types of swaps, in particular those lacking liquidity.246 The lack of liquidity is a characteristic of broad segments of the swaps market, which trade episodically among a limited number of market participants in large average notional amounts. To address this lack of suitability even within the scope of Required Transactions, the Commission prescribed the RFQ System as an alternative execution method for these transactions.247 At the time, the Commission observed that RFQ systems provide market participants with a certain level of trading flexibility, in particular by allowing them to balance the risks of information leakage and front-running associated with disclosing trading interests against the price competition benefits derived by disseminating a request to a larger number of participants.248 The Commission recognizes that most SEFs currently offer an
RFQ System for most of the respective products that they list for trading; when trading swaps subject to the trade execution requirement, market participants have mostly utilized an RFQ System, transmitting RFQs to more than three unaffiliated market participants in many instances.249
3. Implementation of Existing
Requirements
While the Commission acknowledges that the existing approach has transitioned some swaps trading to SEFs, this transition has stagnated and will not likely increase further without changes to the existing regulatory framework. This stagnation, as discussed further below, is reflected by the limited set of swaps that have become subject to the trade execution requirement, and therefore subject to mandatory trading on SEFs, through the Commission’s MAT process. The lack of additional swaps becoming subject to the requirement over the last several years has been attributable to market participants’ concerns over the Commission’s Order Book and RFQ System requirements for Required Transactions under § 37.9; this concern, in turn, has dissuaded SEFs from submitting additional MAT determinations. Since the Commission’s adoption of the MAT determination process, a small number of swaps that are subject to the clearing requirement have become subject to the trade execution requirement. In the fall of 2013, four SEFs and one DCM submitted a limited number of swaps to the Commission as ‘‘available to trade’’ via the Commission’s § 40.6 self-certification process.250 The swaps submitted consist of the current ‘‘on-the-run’’ and most recent ‘‘off-the-run’’ index CDS with a five-year tenor and fixed-to-floating IRS with benchmark tenors denominated in U.S. dollars, euros, and pound sterling.251 The IRS and CDS that are currently subject to the trade execution requirement represent the most standardized and highly liquid swaps contracts offered by SEFs,252 but also represent a very limited segment of the potential universe of swaps eligible to become subject to the trade execution requirement, i.e., those swaps that are both subject to the clearing requirement and currently listed for trading on a SEF.253 Based on data evaluated by the International Swaps and Derivatives Association (‘‘ISDA’’), approximately 85 percent of total reported IRS traded notional volume (‘‘traded notional’’) in 2017 consisted of swaps subject to the clearing requirement.254 This represents an increase from the approximately 73 to 77 percent of total reported IRS traded notional during 2015 to 2016 that was subject to the clearing requirement.255 Data analysis conducted by Commission staff found that the percentage of trading volume in IRS subject to the trade execution requirement is far lower than the percentage subject to the clearing requirement and has actually declined, from approximately 10 to 12 percent of total reported IRS traded notional in 2015 to approximately 7 to 9 percent of the total reported IRS traded notional in 2017 and the first half of 2018.256 Beyond this limited initial set of selfcertified MAT determinations, however,

257The Commission expanded the list of swaps subject to the clearing requirement in 2016 by adding several new classes of IRS denominated in nine different currencies. See supra note 35. The Commission believes that the expansion likely contributed to the increase noted above in the percentage of total reported IRS traded notional subject to the clearing requirement in 2017 relative to prior years. 258SIFMA AMG noted that these limited methods of execution meant that a MAT determination ‘‘could force the entire swap market to change its practice, disrupting trading and upending the natural evolution of market dynamics.’’ See Letter from the Asset Management Group of the Securities Industry and Financial Markets Association (‘‘SIFMA AMG’’), In re Concerns Regarding the SEF Framework 3 (May 11, 2015) (‘‘2015 SIFMA AMG Letter’’). Further, SIFMA AMG argued that the ‘‘artificial limitation’’ on execution methods for required transactions ‘‘has resulted in reduced liquidity and fewer options for asset managers working to reduce portfolio risk in a cost-effective manner. . . .’’ Id. At a Commission roundtable discussion on the MAT process, one participant noted that market participant aversion to a broad MAT determination by Javelin SEF discouraged other SEFs from submitting determinations, based on the fear that market participants would cease trading or avoid their respective platforms altogether. 2015 MAT Roundtable at 65–67. See also Joe Rennison, Experts split on MAT determinations, Risk.net (Nov. 8, 2013), https:// www.risk.net/infrastructure/trading-platforms/ 2305790/experts-split-mat-determinations (noting market participant resistance to Javelin SEF’s initial MAT submission). 259MAT Final Rule at 33609. 260See 2015 SIFMA AMG Letter at 8 (In re the current approach to required methods of execution:
‘‘this prescriptive approach has negatively impacted market conditions and has caused fragmentation of the U.S. swap market. The unnecessary restriction on modes of execution . . . limits a SEF’s ability to foster liquidity and diminishes the venues that asset managers may access for liquid, competitive pricing.’’). 261The Commission notes that the current SEF regulatory framework allows a SEF to offer flexible methods of execution for swaps that are not subject to the trade execution requirement, i.e., Permitted Transactions; this approach would facilitate trading in bespoke or less liquid swaps on a SEF. 17 CFR 37.9(c). As noted above, only 7 to 9 percent of total reported IRS traded notional has consisted of swaps subject to the trade execution requirement in recent months; however, approximately 57 percent of total reported IRS traded notional has occurred on SEFs in 2018. ISDA, ISDA SwapsInfo Weekly Analysis:
Week Ending October 19, 2018, http:// analysis.swapsinfo.org/2018/10/interest-rate-andcredit-derivatives-weekly-trading-volume-weekending-october-19-2018/ (‘‘2018 ISDA SwapsInfo Weekly Analysis’’). Accordingly, the Commission believes that adopting a more flexible approach to execution methods in the SEF regulatory framework would better reflect the current swaps market environment. 262SEF Core Principles Final Rule at 33562. 263At the Commission’s 2015 MAT Roundtable, one participant expressed concern that a MAT determination would ‘‘cut[ ]off potential modes of execution,’’ rather than promoting new innovative execution methods. See 2015 MAT Roundtable at 165. 264 17 CFR 50.4 (specifying the FRAs that are subject to mandatory clearing). 265 2016 ISDA Research Note at 5. The Commission notes that these statistics include both swaps subject to the clearing requirement and swaps that are voluntarily cleared. In a subsequent analysis, however, ISDA determined that 92 to 98 percent of total reported FRA traded notional from 2014 to 2017 consisted of FRAs subject to the clearing requirement. 2018 ISDA Research Note at
9. Commission staff replicated ISDA’s results and
also found that in 2018, the share of total reported Continued the Commission has not received any additional MAT determinations for the significantly large number of IRS and CDS that are subject to the clearing requirement. This discrepancy has grown even larger as a result of a subsequent expansion of the clearing requirement.257 The Commission believes that the lack of further MAT determinations from SEFs or DCMs is largely attributed to the influence of market participants who believe that applying the trade execution requirement, and therefore the required use of an Order Book or RFQ System, would adversely impact their ability to utilize execution methods that are best suited for the swap they are trading and their individual trading needs.258 To establish which swaps would be sufficiently liquid to be traded via an Order Book or RFQ System, the Commission relied upon the expertise and experience of SEFs and DCMs in the MAT determination process.259 The limited number of MAT determinations that has resulted reflects these execution methods’ lack of suitability in facilitating a broad range of swaps trading. Market participants have stated that the prescriptive requirements under § 37.9 limit their ability to otherwise utilize other execution methods that they believe may be better suited to address their business needs, adapt to quickly-changing market conditions, or achieve some combination thereof.260 Given that many of the swaps that are subject to the clearing requirement are highly customizable and less liquid, continuing to mandate the use of an Order Book and RFQ System is inconsistent with transitioning a broader segment of the swaps market to the SEF regulatory framework. Therefore, the Commission recognizes the need for greater flexibility in execution methods to broaden the scope of the trade execution requirement over additional swaps trading.261 The Commission acknowledges that the Order Book and RFQ System requirements are too prescriptive and limiting to be applied over a broader segment of the swaps market. Specifically, these methods do not account for the swaps products that are highly customized and episodically liquid by nature. The Commission previously acknowledged that market participants take into account factors such as swap product complexity, trade size, and liquidity in deciding how to trade swaps, including the number of market participants to whom a request for quote will be sent.262 Thus, even the RFQ-to-3 requirement, which the Commission adopted to provide more execution flexibility, may hinder market participants from determining the appropriate number of market participants to disseminate an RFQ for the additional swaps that would be subject to the trade execution requirement. Mandating the use of limited methods of execution for swaps subject to the requirement imposes the Commission’s judgment regarding how best to execute different swaps and ultimately inhibits market participants from tailoring their
own trading strategies and decisions based on the swaps involved, their individual business needs, the desired transaction size, and existing market conditions, among other factors. The required methods of execution has also limited SEFs from developing more efficient, transparent, and costeffective methods of trading, as well as impeded their ability to compete with one another using innovative and different methods of execution.263 For example, a SEF may develop a new trading functionality that does not qualify as an Order Book or RFQ System, but is effective and efficient in trading both IRS that are and are not subject to the trade execution requirement. Under the current regulatory framework, participants could not use that new method for IRS that are subject to the trade execution requirement or IRS that would become subject to the requirement in the future. This scenario deprives market participants of a useful execution method and deprives the SEF that developed the method of benefitting from its innovative efforts. The Commission notes that this scenario could occur with respect to forward rate agreements (‘‘FRAs’’), many of which are economically similar to IRS that are currently subject to the trade execution requirement. In spite of this economic similarity, FRAs in several different types of currency denominations and tenor ranges that are currently subject to the clearing requirement, but have not been submitted to the Commission as ‘‘available to trade.’’ 264 Based on an ISDA analysis, over 97 percent of total reported FRA traded notional during the third quarter of 2016 was cleared and approximately 81 percent of which was traded on SEF and accounted for slightly less than 54 percent of total reported IRS traded notional occurring on SEFs.265 The Commission has

FRA traded notional that is cleared has increased to 99 percent, with approximately 81 percent of cleared FRAs continuing to trade on SEF. Commission staff also found that during the first half of 2018, cleared FRAs accounted for approximately 48 percent of IRS volume on SEFs, a somewhat smaller share than the amount that ISDA found during its own review period. 266The Commission notes that market participants have contended that the required methods of execution are unsuitable for allowing SEFs to conduct risk mitigation services for swaps that are subject to the trade execution requirement. See CFTC Letter No. 13–81, Time-Limited NoAction Relief from Required Transaction Execution Methods for Transactions that Result from Basis Risk Mitigation Services (Dec. 23, 2013). See also 2016 WMBAA Letter at app. A (stating that ‘‘[a]dditional methods of execution for Required Transactions should include risk mitigation [platforms]’’). 267The Commission previously determined that risk mitigation services that facilitate swap execution are subject to the SEF registration requirement. SEF Core Principles Final Rule at 33482–83. 268For a description of auction-based platforms, see infra note 313 and accompanying discussion. 269 In a trade work-up session associated with a SEF’s trading system or platform, two participants that execute a particular swap transaction at a particular price have the opportunity to execute additional volume of that swap at that price within a given time period established by the SEF. When that period has lapsed, multiple other buyers and sellers may then seek to execute that particular swap at the established price set by the initial transaction. Interested participants may continue to seek to execute that swap at the established price until the buying and selling interest is exhausted or the work-up session has expired, as set forth by the SEF. The Commission has observed that SEFs offer these sessions within a particular execution method, e.g., an electronic order book, to encourage participants to provide liquidity to the market. 270As discussed above, the Commission acknowledges that market participants take into account factors such as swap product complexity, trade size, liquidity, and the associated desire to minimize potential information leakage and frontrunning risks in deciding how to trade swaps, including the number of market participants to whom a request for quote will be sent. In selecting that number of market participants to whom a request for quote will be sent, the market participant is determining the appropriate level of observed that FRA trading on SEFs occurs through ‘‘permitted’’ execution methods, such as risk mitigation services,266 that assist market participants with managing their exposures to market, credit, and other sources of risk.267 Despite their utility, risk mitigation services do not constitute an Order Book or RFQ System, and therefore, are not available as an execution method for swaps
subject to the trade execution requirement under the current regulatory framework. Given that many FRAs would become subject to the trade execution requirement under the Commission’s proposed regulatory framework, as discussed further below, allowing SEF participants to continue executing these types of swaps would require more flexible execution methods that are appropriate for conducting risk mitigation exercises. Further, the Commission believes that the current approach to required methods of execution may have imposed barriers to entry for entities that seek to offer swaps trading. As noted above, limiting the execution methods that a SEF can provide limits their ability to offer new and innovative trading solutions. As a result, new entrant SEFs have been unable to differentiate themselves from incumbent SEFs on the basis of innovation and development, given that both incumbent platforms and newly-registered entities are otherwise limited to offering an Order Book and an RFQ System. Accordingly, SEFs have been forced to compete with one another on a more ancillary basis, rather than on fundamental operating aspects that provide value to market participants, in particular the available trading system and platform. The Commission’s current approach to required methods of execution has also compelled SEFs to make unintended adjustments and alterations to their execution methods, including auction platforms 268 and work-up trading protocols.269 Given the prescriptive requirements that a SEF execution method must comply with to qualify as an Order Book under § 37.3(a)(3) or as an RFQ System under § 37.9(a)(3), some SEFs have expended time and effort to amend certain aspects of their trading systems or platforms, including trading protocols, prior to allowing participants to use those methods to execute swaps subject to the trade execution requirement. The Commission acknowledges that SEFs have not been able to employ and operate execution methods that are fully developed to facilitate price discovery and more robust participation on the SEF in periods of episodic liquidity. Rather, requiring SEFs to adjust various aspects of their respective systems or platforms to comply with the required methods of execution has likely introduced operating inefficiencies that have not provided corresponding benefits to SEF participants. Therefore, the Commission believes that the prescriptive execution methods have inhibited the effectiveness of execution methods designed and developed by SEFs to promote trading.
4. Proposed Approach
To further promote the SEF statutory goals, the Commission proposes a SEF regulatory framework that would facilitate a more robust application of the trade execution requirement and allow more flexibility in the execution methods that may be offered and used for trading swaps that are subject to the requirement. The Commission believes that this approach would better establish SEFs as vibrant and liquid marketplaces for swaps trading that foster price discovery and liquidity formation. The Commission believes that its proposed approach is consistent with the statutory SEF provisions and would also further the statutory SEF goals, while helping to alleviate the challenges of the existing approach described above. The Commission proposes to adopt a new interpretation of the trade execution requirement that would greatly expand the scope of swaps that are subject to the requirement. Considering the market characteristics and episodic liquidity profiles of these additional swaps, the Commission’s proposed approach would provide needed flexibility to SEFs and market participants to support more trading through SEF trading systems or platforms. In conjunction with an expansion of the trade execution requirement, the Commission also proposes to eliminate the prescriptive execution methods for swaps subject to the requirement. Rather than impose execution method requirements that are limited to an Order Book or RFQ System, the Commission’s proposed approach would allow SEFs to develop and offer—and therefore enable—market participants to choose execution methods that are appropriate to their trading. Providing market participants with greater choice in execution methods allows them to utilize trading systems or platforms that are not constrained by prescriptive regulatory requirements and suit their trading circumstances and the market conditions for those swaps at a given time. This flexibility is necessary to facilitate trading in the broad scope of swaps that would become subject to the trade execution requirement. This flexibility should also allow the swaps market and SEFs to continue to naturally evolve and innovate to more efficient, transparent, and cost effective means of trading, even for swaps currently subject to the trade execution requirement. The Commission believes that this flexibility, in concert with the concentration of trading activity in episodically liquid swaps on SEFs, should help foster price discovery and allow market participants to pursue more appropriate, counterparty and swap-specific levels of pre-trade price transparency through additional methods of execution.270 Accordingly,

pre-trade transparency necessary to efficiently and effectively execute that swap transaction based on the above factors and its individual trading needs. See supra Section I.B.1.b.—Swaps Market Characteristics. 271MAT Final Rule at 33606. 272See supra notes 256 and 261 and accompanying discussion. 273 In addition to DCMs and SEFs, CEA section 2(h)(8) contemplates the ability of Exempt SEFs to list swaps subject to the clearing requirement. As discussed below, the Commission proposes to use its exemptive authority pursuant to CEA section 4(c) to exclude swaps that are exclusively listed by Exempt SEFs from being subject to the trade execution requirement. Accordingly, only a CFTCregistered DCM or SEF would be able to trigger the CEA section 2(h)(8) trade execution requirement by listing a clearing requirement swap. See infra
Section XXI.A.2.—§ 36.1(b)—Exemption For Certain
Swaps Listed Only By Exempt SEFs.
274MAT Final Rule at 33607. These commenters believed that use of the clearing determination process in CEA section 2(h)(2) ‘‘as the exclusive basis for finding that a swap is available to trade would subject more swaps to the trade execution requirement and further the objectives of the DoddFrank Act.’’ SEF Core Principles Final Rule at 33607–08. Some commenters pointed out that the procedure for determining whether a swap was made available to trade was ‘‘duplicative of the mandatory clearing determination process [in CEA
section 2(h)(2)] and accordingly stated that the
Commission should rely on the clearing determination process to also determine whether a swap is available to trade.’’ MAT Final Rule at 33607. 275The Commission also observes that Congress specifically placed the trade execution requirement within the CEA section 2(h) heading of ‘‘clearing requirement.’’ The Commission believes that this placement of the trade execution requirement within the clearing requirement further supports the view that no additional framework was intended by Congress beyond the processes already enumerated within this section. 7 U.S.C. 2(h). 276Specifically, CEA section 2(h)(2) delineates a structured process that outlines a specific set of factors that the Commission must consider in its clearing requirement determination and includes a provision for public comment. Among other things, the Commission must consider outstanding notional exposures; trading liquidity; adequate pricing data; adequate clearing infrastructure; mitigation of systematic risk; effects on competition; and legal certainty surrounding solvency concerns. 7 U.S.C. 2(h)(2). 277CEA section 2(h)(2)(B)(iii)(II). 278As adopted under part 50 of the Commission’s regulations, the Commission has noted that this required analysis of a swap’s trading liquidity is intended for risk management purposes, i.e., pricing and margining of cleared swaps. In this connection, the Commission has noted that higher trading liquidity in swaps would assist DCOs in end-of-day settlement procedures, as well as in managing the risk of CDS portfolios, particularly in mitigating the liquidity risk associated with unwinding a portfolio of a defaulting clearing member. 77 FR 47176. 279 2018 ISDA Research Note at 3, 15–16. 280The Commission believes that further achieving both SEF statutory goals—promoting trading on SEFs and promoting pre-trade price transparency—requires both (i) increasing the number of swaps that are subject to the trade execution requirement, thereby increasing the amount of trading that must occur on SEF; and (ii) concurrently providing flexible execution methods. The Commission believes that requiring market participants to conduct a larger portion of their swaps trading on SEFs would centralize liquidity, foster additional competition among a more concentrated number of market participants, and reduce information asymmetries that would increase market efficiency and decrease transaction costs. While offering flexible methods of execution alone could transition additional swaps trading to SEFs, the Commission believes that maximizing the potential benefits of the proposed approach necessitates an approach that would also lessen fragmentation in trading of swaps on SEFs versus the OTC environment. Accordingly, the Commission’s proposed approach would have a profound impact on the amount of swaps trading that occurs on SEFs. As noted above, Commission staff found that a small and declining percentage of the reported IRS Continued the Commission believes that
more execution flexibility also reduces certain complexity, costs, and burdens that have impeded SEF development and innovation, particularly with more swaps that would be subject to mandatory trading on SEFs. Ultimately, this approach is intended to attract greater liquidity that would promote more trading on SEFs. a. § 36.1(a)—Trade Execution Requirement The Commission has interpreted the trade execution requirement in CEA
Section 2(h)(8)—in particular, the
phrase ‘‘makes the swap available to trade’’—in a manner that has limited the scope of swaps that must be traded on a SEF.271 Initially designed to ensure that the Order Book and RFQ System requirements could support swaps that are sufficiently liquid for trading, the MAT determination process has resulted in a small number of swaps that are currently subject to the trade execution requirement. As noted above, Commission staff has determined that only a small and declining percentage of total reported IRS traded notional over a recent time period is subject to the trade execution requirement, with only
part of overall IRS trading volume
occurring on SEFs.272
Given the current regulatory framework’s limited ability in promoting swaps trading on SEFs, which limits the statutory SEF goals, the Commission is proposing to adopt a revised interpretation of CEA section 2(h)(8). The Commission believes that the phrase ‘‘makes the swap available to trade’’ should be interpreted to mean that once the clearing requirement applies to a swap, then the trade execution requirement applies to that swap upon any single SEF or DCM listing the swap for trading.273 As previously noted by some commenters to the proposed MAT rule, CEA section 2(h)(8) does not mandate the MAT process adopted by the Commission to implement the trade execution requirement.274 The Commission believes that the most straightforward reading of CEA section 2(h)(8) would specify that once the clearing requirement applies to a swap, then the trade execution requirement also applies to that swap unless no SEF or DCM ‘‘makes the swap available to trade.’’ Accordingly, once any single DCM or SEF ‘‘makes available,’’ i.e., lists, a swap that is subject to the clearing requirement for trading on its facility, then the trade execution requirement would apply to that swap, such that market participants may only execute the swap on a SEF, a DCM, or an Exempt SEF. The Commission notes that Congress had the ability to delineate a comprehensive statutory process for determining when a swap should be subject to the trade execution requirement, but did not do so when amending the CEA via the Dodd-Frank Act.275 In contrast, the clearing requirement, established by Congress concurrently with the trade execution requirement under the Dodd-Frank Act, sets forth a formal statutory process for the Commission to follow in determining which swaps must be submitted to a DCO for clearing.276 The Commission notes that the statutory process in CEA section 2(h)(2) establishes that submissions from a DCO for each swap, or any group, category, type, or class of swap that it plans to accept for clearing is automatically subject to a clearing determination by the Commission.277 As part of a clearing requirement determination, the CEA requires the Commission to evaluate submitted swaps based on a prescribed set of factors that includes trading liquidity.278 Given the absence of analogous CEA provisions governing the trade execution requirement and based on its experience since implementing the swaps trading framework, the Commission believes that the proposed interpretation of CEA section 2(h)(8) is consistent both with that statutory provision and with the statutory goal of promoting the trading of swaps on SEFs. As support for its view that the proposed interpretation of CEA section 2(h)(8) would promote the trading of swaps on SEFs, the Commission notes that more than 85 percent of IRS and index CDS trading volume is currently subject to the clearing requirement; 279 many, but not all, of those swaps are currently listed for trading by SEFs. Therefore, the proposed reading
would both promote the statutory SEF goal of swaps trading on SEFs and help to further swaps liquidity on SEFs by requiring all counterparties to trade these swaps on a SEF, which may promote increased pre-trade price transparency.280 A more robust trade

volume in recent months has consisted of swaps subject to the trade execution requirement (currently less than 10 percent). ISDA determined, however, that more than 55 percent of total reported IRS traded notional has been occurring on SEFs since 2015. See supra note 261 (noting that SEFs have facilitated trading of Permitted Transactions). Based on these determinations, the Commission’s proposed interpretation of the trade execution requirement may result in a significantly larger amount of additional IRS trading volume on SEFs, given that the Commission believes that many, but not all, of that 85 percent of IRS that is subject to clearing requirement is currently listed on SEFs. Moreover, it is plausible that adopting this proposed interpretation would induce SEFs to list additional swaps subject to the clearing requirement, which would expand the amount of swaps trading that is subject to the trade execution requirement. 281As noted above, the Commission expects that the proposal would greatly expand the scope of the trade execution requirement. In particular, the Commission expects that the following swaps would become subject to the trade execution requirement based on the fact they are currently subject to the clearing requirement and also listed by at least one SEF or DCM: (i) Various swaps in the interest rate asset class including fixed-to floating swaps denominated in U.S. dollars, pound sterling, and euros with non-benchmark tenors (whole and partial) that range from 28 days to 50 years; fixed-to-floating swaps in additional denominations with whole and partial tenors ranging from 28 days up to 30 years; basis swaps, overnight index swaps (‘‘OIS’’), and FRAs with different denominations and tenors; and (ii) various CDX and iTraxx index CDSs in older series (prior to the most recent off-the-run series) and additional tenors, as well as new CDS indices. 282 7 U.S.C. 2(h)(8)(B). The Commission interprets ‘‘swap execution facility’’ in CEA section 2(h)(8)(B) to include a swap execution facility that is exempt from registration pursuant to CEA section 5h(g). See supra note 10. 283As discussed below, the Commission is proposing an exemption from the requirement for swap transactions involving swaps that are listed for trading only by an Exempt SEF. See infra
Section XXI.A.2.—§ 36.1(b)—Exemption For Certain
Swaps Listed Only By Exempt SEFs.
284See infra Section XXI.A.—§ 36.1—Trade Execution Requirement. 285As discussed above, the Commission is also proposing to eliminate the Order Book definition set forth under § 37.3(a)(3). See supra Section IV.C.2.—§§ 37.3(a)(2)–(3)—Minimum Trading Functionality and Order Book Definition. As discussed below, the Commission is also proposing to eliminate the time delay requirement under § 37.9(b), which applies to Required Transactions executed on an Order Book. See infra Section VI.A.2.—§ 37.203(a)—Pre-Arranged Trading Prohibition; § 37.9(b)—Time Delay Requirement. 286 7 U.S.C. 1a(50). 287 17 CFR 37.9(a)(2)(ii). 288Additionally, market participants may execute such swaps as part of different transaction structures, including package transactions composed of multiple risk-assuming or risk-hedging swap and non-swap components that are priced together. In their review of three months of OTC IRS trading, Federal Reserve Bank of New York (‘‘FRBNY’’) staff found that the swaps traded were ‘‘broad in scope with a wide range of products, currencies, and maturities traded . . . [including] transactions in eight different product types, 28 currencies and maturities ranging from less than one month to 55 years.’’ Michael Fleming, John Jackson, Ada Li, Asani Sarkar, & Patricia Zobel, Federal Reserve Bank of New York Staff Report No. 557, An Analysis of OTC Interest Rate Derivatives Transactions: Implications for Public Reporting 2 execution requirement would help migrate and concentrate additional trading interests to available trading systems or platforms on SEFs.281 The Commission believes that all of these factors can increase activity on SEFs, as well as help improve their efficiency and effectiveness. Given the Commission’s proposed approach to the trade execution requirement, as described above, the Commission proposes to eliminate (i) the MAT process for SEFs under § 37.10; (ii) the associated trade execution compliance schedule under § 37.12; (iii) the MAT process for DCMs under § 38.12; and (iv) the associated trade execution compliance schedule under § 38.11. The Commission further proposes to codify under § 36.1(a) the statutory language of the trade execution requirement in CEA section 2(h)(8), which requires counterparties to execute a swap that is subject to the clearing requirement on a DCM, a SEF, or an exempt SEF unless no such entity ‘‘makes the swap available to trade’’ or the swap is subject to a clearing exception in CEA section 2(h)(7).282 As proposed, § 36.1(a) would specify that counterparties must execute a transaction subject to the clearing requirement on a DCM, a SEF, or an Exempt SEF that lists the swap for trading. As discussed above, the Commission believes that the statutory phrase ‘‘makes the swap available to trade’’ specifies the listing of a swap by a DCM, a SEF, or an exempt SEF on its facility for trading. Accordingly, the trade execution requirement would apply to a swap that is subject to the clearing requirement upon
the listing of that swap by any DCM or SEF.283 As discussed further below, the Commission is also proposing (i) exemptions of various transactions from the trade execution requirement under § 36.1 pursuant to its exemptive authority in CEA section 4(c); (ii) a compliance schedule for market participants with respect to the expanded application of the trade execution requirement to additional swaps; (iii) a public registry with information as to which swaps are subject to the trade execution requirement and the SEFs or DCMs that list them for trading; and (iv) a standardized form to assist the Commission in populating the public registry with relevant information regarding the trade execution requirement.284 Request for Comment The Commission requests comment on all aspects of its proposed approach to the trade execution requirement, including § 36.1(a) as well as any alternative approaches to implementation of the trade execution requirement. b. Elimination of Required Execution Methods To better foster trading on SEFs— particularly with respect to the many episodically liquid swaps that will become subject to the trade execution requirement—the Commission proposes to eliminate the existing execution method requirements under § 37.9. These requirements include the (i) definition of and associated requirements for Required Transactions under § 37.9(a), including the RFQ System definition under § 37.9(a)(3); 285 and (ii) the definition and associated provision for Permitted Transactions under § 37.9(c). Therefore, a SEF would be permitted to offer any method of execution that meets the SEF definition for any swap that it lists for trading, irrespective of whether the particular swap is or is not subject to the trade execution requirement. The Commission believes that this approach is consistent with the statutory SEF definition in CEA section 1a(50), which establishes that a SEF operates a trading system or platform whereby multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants also using the trading system or platform.286 The Commission’s proposed elimination of § 37.9(a) also includes the elimination of subparagraph (a)(2)(ii), which currently specifies that with respect to offering an Order Book or RFQ System for Required Transactions, a SEF may utilize ‘‘any means of interstate commerce’’ for purposes of execution and communication, including, but not limited to, the mail, internet, email and telephone.287 Given the elimination of the Order Book and RFQ System requirements, the Commission notes that this provision is no longer necessary. As noted above, implementing the proposed interpretation of the trade execution requirement would increase the number of swaps that are required to trade on a SEF. Many of these swaps, which are all currently subject to the clearing requirement would have terms and conditions, e.g., partial-year tenors and varying payment terms, that
counterparties customize to address idiosyncratic risks, such as larger and longer duration risk exposures.288 Given

(2012) (‘‘2012 FRBNY Analysis’’). The analysis further identified ‘‘a meaningful degree of customization in contract terms, particularly in payment frequencies and floating rate tenors.’’ Id. at 3. The Commission acknowledges that while some of the swaps that were included in the FRBNY’s analysis would not be subject to the clearing requirement, e.g., any IRS with a 55-year tenor, the Commission nevertheless believes that this analysis captures many of the swaps that are subject to the clearing requirement. 289 In a 2011 Senate hearing related to SEFs, one participant testified that ‘‘[t]rading in [swaps] markets is characterized by variable or non[- ]continuous liquidity. Such liquidity can be episodic, with liquidity peaks and troughs that can be seasonal . . . or more volatile and tied to external market and economic conditions (e.g., many credit, energy and interest rate products).’’ Emergence of Swap Execution Facilities: A Progress Report: Hearing Before the S. Subcomm. on Sec., Ins., and Investment of the S. Comm. on Banking, Hous., and Urban Affairs, 112th Cong. 15 (2011) (statement of Stephen Merkel, Executive Vice President and General Counsel, BGC Partners, Inc.). 290 In their review of three months of OTC IRS swaps, FRBNY staff also ‘‘found over 10,500 combinations of product, currency, tenor and forward tenor traded during [their] three-month sample, with roughly 4,300 combinations traded only once.’’ 2012 FRBNY Analysis at 3. Further, their analysis found that within the data set, even the most commonly traded instruments were not frequently traded. No single instrument in the data set traded more than 150 times per day, on average, and the most frequently traded instruments in OIS and FRA only traded an average of 25 and 4 times per day, respectively. Id. Collin-Dufresne, Junge, and Trolle also made similar observations with respect to index CDS trading on SEFs, noting that the market is generally characterized by relatively few trades in very large sizes. Based on their analysis, the CDX.IG swaps market consists of 114 dealer-to-client trades and 24 dealer-to-dealer trades per day, on average, with a median trade size of USD $50 million in both segments. The average number of trades in the CDX.HY market are greater—164 dealer-to-client trades and 27 dealerto-dealer trades per day, on average—but the median trade size is smaller—USD $10 million in both segments—which they attributed to the significantly higher volatility of high-yield contracts. 2017 Collin-Dufresne Research Paper at 16. 291Those means include, for example, voicebased trading systems or platforms that utilize human trading specialists who exercise discretion and judgment in managing the degree to which trading interests are exposed and how orders are filled. Where pre-trade market information from bids and offers may be limited due to market participants’ caution in displaying trading interests, SEFs often offer session-based execution methods, such as auctions,
to generate trading interest. 292See supra note 130 (explaining that requiring all market participants to use a central limit order book will not necessarily promote price competition among dealers in markets that lack continuous trading or have episodic liquidity). 293SEF Core Principles Final Rule at 33562. See generally 2017 Riggs Study (discussing the ‘‘winner’s curse,’’ which is similar to information leakage in context, in the dealer-to-client CDS market). 294See supra note 270 (discussing appropriate counterparty and swap-specific levels of pre-trade price transparency). 295The Commission notes that other markets— such as bonds, U.S. treasuries, and FX—do not prescribe methods of execution, but rather permit their market participants to determine the best method of execution for the transaction. Swaps markets have historically followed this model. In this respect, the Commission believes that its proposal realigns the swaps market trading characteristics with other fixed income markets. their variable and complex nature, trading in these types of swaps can be punctuated by alternating periods of liquidity and illiquidity.289 The markets for many of these swaps may consist of only a few trades per day or, in some cases, a few trades per month.290 Historically, market participants have had discretion to utilize execution methods tailored to their particular trading motives and needs, the liquidity profile and characteristics of the swap being traded, and current market conditions, among other considerations.291 The existing execution methods for Required Transactions under the current framework, however, has precluded the full use of such discretion and forces participants to trade certain swaps in accordance with an Order Book or an RFQ System. As noted above, the Commission believes that these limited execution methods would not be suitable for the broad swath of the swaps market that would become newly subject to the trade execution requirement. Instead, prescribing those execution methods for this expanded group of swaps would likely impose greater trading risks on market participants, including execution and liquidity risks that negate any benefits associated with the centralized exchange trading of such swaps.292 The Commission also notes that the current execution methods could exacerbate the current information leakage and front running risks as described above.293 The existing framework was designed to promote the SEF statutory goals, in particular to promote pre-trade price transparency, but based on its implementation experience, the Commission believes that a SEF regulatory framework that requires a greater number of swaps to be traded through flexible execution methods on a SEF will better promote both SEF statutory goals. The Commission believes that requiring more swaps to be traded on SEFs would help foster vibrant and liquid SEF markets as liquidity formation and price discovery is centralized on these markets. With more
swaps trading activity occurring in a concentrated SEF environment, the Commission anticipates that a greater number of observable transactions—for example, IRS of varying tenors along a single price curve—would allow for a richer price curve that provides participants with more accurate pricing for economically similar swaps along other points of the curve. For example, auction platforms and work-up sessions—both of which SEFs currently offer under the existing framework—help to maximize participation and trading on the SEF at specific points of time and serve as effective tools for price discovery for market participants in periods of episodic liquidity. By allowing SEFs the flexibility to develop and tailor these types of functionalities to facilitate trading across a wide range of market liquidity conditions, a SEF can effectively promote appropriate counterparty and swap-specific levels of pre-trade price transparency 294 across a broader range of swaps. Further, as discussed above, affording SEFs with greater flexibility with execution methods would avoid forcing them to alter these types of functionalities in a sub-optimal manner simply to conform to certain limited execution methods that are not suitable for trading a broad range of swaps with varying liquidity profiles. By eliminating the existing approach to required methods of execution, the Commission’s proposed regulatory framework is also expected to foster customer choice in a manner that would benefit the swaps markets. The Commission believes that its proposed approach appropriately allows market participants, each of whom is a sophisticated entity trading in a professional market, to determine the execution method that best suits the swap being traded and their trading needs and strategies.295 As noted above, the Commission believes that market participants in a professional market, in
part because of sophistication and selfinterest, will seek the most efficient and
cost-effective method of execution to achieve their business and trading objectives. The Commission believes that providing for customer choice, while also concentrating liquidity and price discovery onto SEFs, may help create an environment for swaps trading that is better able to promote appropriate counterparty and swapspecific levels of pre-trade price transparency than the existing framework and will also do so for a significantly broader segment of the swaps markets than the existing framework. As noted above, execution methods such as auction platforms and work-up sessions may do a better job of maximizing participation and concentrating liquidity than Order Books or RFQ Systems in episodically liquid markets. The proposed approach would allow SEFs to offer varied and innovative execution methods that are best suited to the products they list, as well as the

296Core Principle 1 requires a SEF to comply with the core principles set forth in CEA section 5h(f) and any requirement that the Commission may impose by rule or regulation pursuant to CEA
section 8a(5) as a condition of obtaining and
maintain registration as a SEF. 7 U.S.C. 7b–3(f)(1). Core Principle 1 also provides a SEF with reasonable discretion in establishing the manner in which it complies with the core principles, unless the Commission determines otherwise by rule or regulation. 7 U.S.C. 7b–3(f)(1)(B). 297Core Principle 2 also requires a SEF to (i) establish and enforce compliance with rules, including terms and conditions of swaps traded or processed on or through the SEF and any limitation on access to the SEF; (ii) establish and enforce trading, trade processing, and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules, including means to provide market participants with impartial access to the market and to capture information that may be used in establishing whether rule violations have occurred; and (iii) provide by its rules that when a SD or MSP enters into or facilitates a swap that is subject to the clearing requirement, the SD or MSP will be responsible for compliance with the trade execution requirement. 7 U.S.C. 7b-3(f)(2). The Commission codified Core Principle 2 under § 37.200. 17 CFR 37.200. 298The Commission proposes to retitle § 37.201 to ‘‘Requirements for swap execution facility execution methods’’ from ‘‘Operation of swap execution facility and compliance with rules’’ based on the proposed changes described below. 299 17 CFR 37.201(a). 300 17 CFR 37.201(b). 301SEF Core Principles Final Rule at 33553. 302 Id. 303The Commission notes that this view is analogous to the principles set forth in the FX Global Code. The FX Global Code was developed by a partnership between central banks and participants from 16 jurisdictions. The code does not impose legal or regulatory obligations on participants nor does it act as a substitute for trading needs of their market participants. Rather than being confined to limited execution methods, SEFs would be able to develop more efficient, transparent, and cost-effective means for participants to trade swaps. In turn, the Commission believes that this innovation may serve to promote more competition between SEFs to attract participation through novel trading systems or platforms. The Commission further believes greater execution flexibility may also potentially incentivize new entrant trading venues to enter the SEF marketplace, as they would be able to utilize new and different execution methods than are currently employed by incumbent platforms. Request for Comment The Commission requests comment on all aspects of its proposed approach to execution methods as well as any alternative approaches.
V. Part 37—Subpart B: Core Principle 1
(Compliance With Core Principles) The Commission is not proposing any amendments to § 37.100, which codifies the language of Core Principle 1.296
VI. Part 37—Regulations Related to SEF
Execution Methods—Subpart C: Core Principle 2 (Compliance With Rules) Core Principle 2 requires a SEF to establish and enforce rules that govern its facility, including trading procedures to be followed when entering and executing orders, among other requirements.297 To support the proposed approach of allowing more flexible execution methods on SEFs, which is intended to foster more liquidity formation through trading activity on SEF trading systems and platforms, the Commission is proposing to amend certain rules and adopt new rules under Core Principle 2, as described below. These proposed rules would, among other things, help foster open and transparent markets as well as promote market efficiency and integrity. In particular, the Commission proposes to establish general rules that would apply to any execution method that a SEF offers on its facility. The Commission also proposes to limit the ability of market participants to conduct pre-execution communications and submit resulting pre-negotiated or prearranged trades to a SEF for execution; and eliminate exceptions to the prearranged trading prohibition under § 37.203(a), including the time delay requirement under § 37.9(b). Additionally, the Commission proposes to amend certain existing rules and adopt new rules under Core Principle 2, as described below, that correspond to the Commission’s application of the SEF registration requirement to swap broking entities, including interdealer brokers. Among other goals, these proposed rules would enhance professionalism requirements for certain SEF personnel—‘‘SEF trading specialists’’—that operate as part of a SEF’s trading system or platform, e.g., voice-based trading functionalities, by facilitating trading and execution on the facility. Specifically, the Commission proposes rules under § 37.201(c) that would require SEFs to ensure minimum proficiency and conduct standards for SEF trading specialists. A. § 37.201—Requirements for Swap Execution Facility Execution Methods 298
Section 37.201 implements the Core
Principle 2 requirement that a SEF establish and enforce rules that govern its facility. Section 37.201(a) specifies that these requirements include trading procedures to be followed when entering and executing orders traded or posted on the SEF.299 Section 37.201(b) additionally requires a SEF to establish and impartially enforce rules related to (i) the terms and conditions of swaps traded or processed on the SEF; (ii) access to the SEF; (iii) trade practice requirements; (iv) audit trail requirements; (v) disciplinary requirements; and (vi) mandatory trading requirements.300 The Commission proposes to eliminate these rules, which are largely duplicative of the Core Principle 2 requirements, and adopt the new rules described below.

§ 37.201(a)—Required Swap
Execution Facility Rules Proposed § 37.201(a) would require a SEF to establish rules that govern the operation of the SEF, including rules that specify (i) the protocols and procedures for trading and execution; (ii) the permissible uses of ‘‘discretion’’ in facilitating trading and execution; and (iii) the sources and methodology for generating any market pricing information. Pursuant to a SEF regulatory framework that would allow SEFs to offer flexible execution methods, the Commission believes that such rules would benefit market participants by providing a baseline level of transparency in SEF trading. As the Commission previously noted, one of the central goals of the Dodd-Frank Act is to bring transparency to the opaque OTC swaps market.301 The Commission has further observed that when markets are open and transparent, prices are more competitive and markets are more efficient.302 In this regard, the Commission notes that rather than imposing detailed, prescriptive SEF execution method requirements that do not comport with swaps market characteristics, this proposed rule represents a more balanced approach— a SEF would have the flexibility to develop and offer execution methods designed to foster trading based on the dynamics of the applicable swaps market (e.g., liquidity and product characteristics) and on its market participants’ needs, but also would be required to disclose how these execution methods operate. This disclosure would help to foster open and transparent markets, and promote market efficiency and integrity by establishing a consistent level of disclosure and information across all SEFs, which would allow market participants to make informed decisions regarding whether to onboard to a particular SEF and whether to use a particular execution method offered by a SEF.303 In making such decisions,

regulation, but rather serves as a supplement to local laws by setting forth guidelines for good practices in the FX markets. The code specifies, among other recommendations, that ‘‘Market Participants,’’ which include operators of trading systems or platforms, should provide all relevant disclosures and information to participants to help them make informed decisions about whether to transact or not. See FX Global Code at 13–14 (updated Aug. 2018) (‘‘FX Global Code’’), available at https://www.globalfxc.org/docs/fx_global.pdf. 304See supra note 179 (definition of ‘‘rule’’ in the Commission’s regulations). 305See infra Section VII.B.5.—§ 37.203(e)—Error Trade Policy. 306See FX Global Code at 13–14 (recommending that trading systems or platforms have rules that are transparent, including how orders are handled and transacted). 307As noted above, upon the adoption of part 37, some interdealer brokers have registered their operations or components of their operations, i.e., trading systems or platforms, as SEFs. See supra
Section IV.C.1.c.(1)—Structure and Operations of
Swaps Broking Entities, Including Interdealer Brokers. 308 ‘‘SEF trading specialist’’ refers to a natural person employed by a SEF (or acting in a similar capacity as a SEF employee) to perform various core functions that facilitate trading and execution, including discussing market color with market participants, negotiating trade terms, issuing RFQs, and arranging bids and offers. For the Commission’s proposed definition of ‘‘SEF trading specialist,’’ see infra Section VI.A.3.—§ 37.201(c)—SEF Trading Specialists. 309The Commission’s clarification of the SEF registration requirement, as discussed above, would require swaps broking entities, including interdealer brokers, to register as SEFs. Id. The Commission notes that as a result, a significant number of personnel at these entities would likely meet the definition of ‘‘SEF trading specialist.’’ market participants would be able to understand more fully any differences among those flexible methods across SEFs. Based on the definition of ‘‘rule’’ under § 40.1(a), which encompasses any SEF ‘‘trading protocol,’’ the proposed rule clarifies those features of a SEF’s execution methods that constitute SEF ‘‘rules’’ and must be submitted to the Commission pursuant to part 40 and disclosed to SEF market participants.304 Accordingly, SEFs would be required to disclose such information in their rulebooks. After reviewing SEF rulebooks, the Commission believes that this proposed disclosure requirement is consistent with current market practice and the general level of information already disclosed by many SEFs. Accordingly, the Commission does not anticipate that this proposed rule would require material changes to most SEF rulebooks; rather, the proposed rule would ensure that currently-registered and new SEFs provide a consistent, minimum level of transparency and disclosure to the marketplace. The Commission further notes that SEFs are free to provide additional levels of disclosure beyond that required under proposed § 37.201(a). a. § 37.201(a)(1)—Trading and Execution Protocols and Procedures Proposed § 37.201(a)(1) would require a SEF to establish rules governing the protocols and procedures for trading and execution, including entering, amending, cancelling, or executing orders for each execution method offered by the SEF. The Commission believes that requiring SEFs to provide this level of detail and transparency for each of their execution methods is particularly important given the Commission’s proposal to permit SEFs to offer flexible execution methods for all of their listed swaps. The Commission believes that proposed § 37.201(a)(1) clarifies a SEF’s existing obligations and is consistent with current market practice, in particular the general level of disclosure and information that many SEFs already provide in their rulebooks. This proposed rule is also better aligned with other proposed Core Principle 2 regulations that relate to SEF trading protocols and procedures, such as proposed §
37.203(e), which would require SEFs to promulgate rules and procedures to resolve error trades, including trade amendments or cancellations, as discussed below.305 To comply with this rule, for example, a SEF that offers an RFQ protocol could specify various operational aspects of that protocol in its rulebook. Those aspects could include, among other things, how a requestor could initiate an RFQ; whether the RFQ requestor’s identity is disclosed or anonymous; whether an RFQ request could be made visible to the entire market; whether a responder could offer either indicative or firm bids or offers; the length of time that an RFQ response with a firm bid or firm offer would have to remain executable by the RFQ requestor; or whether RFQ responses are disclosed to the whole market or just the requestor. By specifically requiring a SEF to disclose information regarding how each offered execution method operates, a market participant would have the ability to (i) make an informed decision about whether to trade and execute on that SEF; (ii) determine the type of trading system or platform that best suits its needs; and (iii) conform its trading and execution practices to the SEF’s protocols and procedures.306 b. § 37.201(a)(2)—Discretion Proposed § 37.201(a)(2) would require a SEF, where applicable, to establish rules specifying the manner or circumstances in which the SEF may exercise ‘‘discretion’’ in facilitating trading and execution for each of its execution methods. Many SEFs, in particular those that resemble or are based upon operations of swaps broking entities, including interdealer brokers, feature execution methods that involve the use of discretion.307 SEF trading specialists,308 who have traditionally served as interdealer brokers in the wholesale swaps market, exercise discretion on behalf of market participants in a variety of ways. This discretion includes determining how, when, and with whom to disseminate, arrange, and execute bids and offers; and determining whether and when to amend or cancel those bids and offers in response to market developments. Exercising this type of trading and execution judgment involves taking different factors into account, such as the characteristics and needs of the client, size and nature of the order, likelihood and speed of execution, price and costs of execution, and current market conditions. The use of discretion in trading reflects the market characteristics of the wholesale swaps market, where the wide range of different swaps and transaction sizes results, in some instances, in low liquidity markets with episodic, noncontinuous trading activity. Given the established role of swaps broking entities, including interdealer brokers, in fostering market liquidity through identifying and arranging multiple trading interests—both liquid and illiquid—amidst changing market conditions, the Commission recognizes that the use of discretion is an important element in fostering an efficient market.
Therefore, the Commission’s proposed regulatory framework would further accommodate the use of discretion by SEFs. As described above, SEFs would be allowed to offer flexible execution methods, thereby allowing methods that involve the exercise of discretion by SEF trading specialists.309 Further, the proposed expansion of the trade execution requirement would lead to a greater number of swaps being traded on SEFs. The Commission believes that the proposed broadening of both the SEF registration requirement and the trade execution requirement would increase the level of discretion that SEFs (and their trading specialists) exercise in connection with swaps trading. To address this situation, proposed § 37.201(a)(2) would require SEFs to disclose the manner or circumstances in which they may exercise discretion. The Commission believes that such a disclosure requirement is important to

310See FX Global Code at 13–14 (recommending that trading systems or platforms should make participants aware of where discretion may exist or may be expected, and how it may be exercised, as a way to promote fairness and transparency in trading). 311The Commission notes, however, that if a SEF believes that any such information should be kept confidential, such that it should be provided to market participants but not in a public filing, the SEF may submit a request for confidential treatment with its respective rule submission. 17 CFR 40.8. The Commission’s treatment of such information would be governed by § 145.9, 17 CFR 145.9, and the Freedom of Information Act. 5 U.S.C. 552. 312The Commission notes, for example, that SEF rules have generally specified several areas where discretion may be exercised in facilitating trading, such as determining when to enter orders on behalf of participants; determining when and with which participants to gauge possible trading interest; and determining how to calculate mid-market prices for use in a session-based execution method, i.e., determining the number of factors to consider in the calculation of a mid-market price or the weight of each factor. 313 In a typical SEF auction or matching sessionbased trading functionality, a SEF establishes a price for a listed swap that is determined through a variety of different factors. Participants may submit their trading interest in the swap at the established price, either within an established time session or on a continuous basis, and subsequently execute that swap at the established price, often on a time-priority basis. 314The Commission understands that participants often avoid acting as a ‘‘first-mover’’ for relatively less liquid swaps by exercising caution in displaying their trading interests, i.e., price and size; accordingly, SEFs—similar to historical OTC trading environments—utilize these types of methods to promote trading for particular swaps and pre-trade price transparency. 315See supra note 313 (describing mechanics of a SEF auction or matching session-based trading functionality). inform market participants, facilitate an orderly SEF trading environment, foster open and transparent markets, and promote market integrity while remaining consistent with Core Principle 2.310 Such information would help a market participant have important awareness of how a trading system or platform is designed, thereby allowing them to make informed decisions with respect to swaps trading on a particular SEF. For example, such information would help market participants determine appropriate parameters or instructions in submitting their bids and offers to a particular SEF, as well as inform their expectations about possible trading outcomes or objectives on that SEF. The Commission believes that more informed market participants would promote fairer and more efficient trading on SEFs and, ultimately, make SEFs more robust price discovery mechanisms. Pursuant to
proposed § 37.201(a)(2), the Commission intends to require each SEF to generally disclose the possible areas in which it may use discretion for each execution method, rather than establish exact, pre-determined trading protocols and procedures. In identifying those general areas, a SEF’s rules should disclose sufficient information that a reasonable market participant would consider important in deciding whether to onboard onto the SEF and, once participating on the SEF, in understanding how discretion may affect trading. The proposed rule, however, does not necessarily require a SEF to disclose any proprietary or confidential information in its public rulebook.311 Based on its experience with reviewing SEF rulebooks, the Commission believes that proposed § 37.201(a)(2) is consistent with current market practice and the general level of information that many SEFs already provide in their rulebooks.312 Accordingly, the Commission does not anticipate that existing SEFs will be required to adopt material changes to their rulebooks; rather, the proposed rule would ensure that both currentlyregistered and new SEFs continue to provide sufficient transparency and disclosure.
c. § 37.201(a)(3)—Market Pricing
Information
Proposed § 37.201(a)(3) would require each SEF to adopt rules that disclose the general sources and methodology for generating any market pricing information that the SEF provides to market participants to facilitate trading and execution. The term ‘‘sources’’ would include any general inputs that the SEF may consider when forming a price, such as swaps pricing data, e.g., the last traded price; historical, executable, or indicative bids and offers on the SEF or other trading platforms; or the views of market participants, who the SEF may contact to ascertain interest. The term ‘‘methodology’’ means that a SEF should generally identify the extent to which it may formulate a price on its trading systems or platforms, whether prices generated by SEFs are based on discretion or some type of pre-set approach, and how the information or data sources are generally applied or weighted within the SEF’s methodology. The Commission recognizes that some SEFs provide participants either an indicative or executable ‘‘market price’’ to encourage price discovery and liquidity or otherwise inform trading interest. The use of market prices is particularly prevalent in connection with certain execution methods, such as auctions and similar matching sessions.313 SEFs often generate these prices by considering various sources of data, including prices from executed transactions, prices from executable or indicative bids and offers, publicly reported swaps data, active market participant views, or prices from related instruments in other markets. Based on the availability of this information at a given time, a SEF may take one or more of these factors into account differently in formulating a single price. These pricing mechanisms help to initiate the price discovery process and allow market participants to formulate views about the current state of the market. By relying upon an established price, a market participant may make trading decisions without being exposed to information leakage that might otherwise cause widened bid-offer spreads and impose higher transaction costs.314 Given this unique feature of the swaps market due to its episodic liquidity, the Commission recognizes that SEF pricing practices are an important element in fostering liquidity on SEFs and, therefore, in promoting the Act’s statutory goals of encouraging SEF trading and pre-trade price transparency. Where pricing generated by a SEF in lieu of pricing based on market participant bids and offers help to foster liquidity and price discovery, the Commission believes that requiring SEFs to inform market participants as to their price formation sources and methodology would foster open and transparent markets and promote market integrity and efficiency. Requiring a SEF to disclose the sources of information used to generate a price and the methodology for calculating that price, for example, would allow market participants to be aware of prevailing liquidity and market conditions, thereby
helping them to form views as to whether that price is an appropriate indicator of a particular market. Accordingly, market participants would be able to make informed trading decisions, such as whether to participate in an available trading session, and if so, the level of participation, e.g., whether they would contribute their own information to help establish a trading price in a particular execution method.315 The Commission believes that this information should build confidence among participants in the integrity, fairness, and effectiveness of the SEF as a regulated trading venue. In turn, a greater level of confidence in SEFs should lead to increased swaps trading volume and, ultimately, an increased potential for higher levels of pre-trade price transparency through increased participation. Similar to proposed § 37.201(a)(2), the Commission emphasizes that proposed § 37.201(a)(3) would establish a general

316The Commission further notes, however, that regardless of whether market participants participate in the price-formation process or whether their identities remain anonymous, all market participants remain subject to section 9(a)(2) of the Act. That provision prohibits any attempt to provide false, misleading, or knowingly inaccurate reports concerning market information or conditions that affect or tend to affect the price of any swap. 7 U.S.C. 13(a)(2). 317 In disclosing the general sources and methodologies for generating market pricing information, the Commission notes that such SEF rules have generally specified (i) the SEF’s ability to consider either a single or multiple number of established factors in determining a price; (ii) the various types of factors that it may take into account to determine a price; or (iii) other additional analytical methods that may be used to supplement a price calculated from existing bids and offers on the platform. 318SEF Core Principles Final Rule at 33503. 319The Commission generally considers prearranged trading to be a form of ‘‘fictitious’’ trading that is prohibited pursuant to CEA section 4c(a)(1), which makes it unlawful for any person to offer to enter into, or confirm the execution of a fictitious sale. 7 U.S.C. 6c(a)(1), 6c(a)(2)(A)(ii). Specifically, pre-arranged trading involves ‘‘the use of trading techniques that give the appearance of submitting trades to the open market while negating the risk of price competition incident to such a market.’’ Harold Collins, [1986–1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22982, 31902 (CFTC Apr. 4, 1986). Generally, pre-arranged trading creates a false impression to the market that an executed transaction is indicative of a competitive trading environment. Id. at 31903 (‘‘By determining trade information such as price and quantity outside the pit, then using the market mechanism to shield the private nature of the bargain from public scrutiny, both price competition and market risk are eliminated.’’). 320SEF Core Principles Final Rule at 33503. In light of the Commission’s general prohibition on pre-arranged trading under § 37.203(a), the Commission defined this term to clarify the permissible types of communications in which market participants can pre-arrange or pre-negotiate a transaction consistent with § 37.9(b)(1). The Commission currently requires that SEFs that choose to allow their market participants to engage in pre-execution communications prior to executing such transactions must do so pursuant to their rules. 17 CFR 37.203(a). Such communications may constitute an element of pre-arranged trading, which is an abusive trading practice prohibited under existing § 37.203(a). 321SEF Core Principles Final Rule at 33509. 322 Id. at 33503. The Commission modeled the time delay requirement after similar DCM rules that have imposed time delays on cross trades involving futures and options on futures. Pursuant to these rules, market participants
are permitted to conduct pre-execution communications with respect to orders that are later exposed to the market for a certain period of time prior to execution on the DCM’s trading system or platform. As DCM Core Principle 9 requires DCMs to provide a competitive, open, and efficient market and mechanism for executing transactions that protects the price discovery process of trading in the centralized Continued approach as to the scope of information that a SEF must disclose and does not require the SEF to specify detailed calculations or algorithms used to generate pricing information. The Commission also notes that the proposed rule would not require SEFs to disclose the identities of market participants who provide data used to formulate prices or to disclose proprietary aspects of their pricing methodology.316 Rather, a SEF’s rules should disclose sufficient information that a reasonable market participant would consider important to determine whether to join the SEF and to generally understand the nature of the market pricing information provided by the SEF. In addition, proposed § 37.201(a)(3) would not require a SEF to provide any proprietary or confidential information in its public rulebook. Based on its experience with reviewing SEF rulebooks submitted via the part 40 rule filing process, the Commission believes that proposed § 37.201(a)(3) is consistent with current market practice and the general level of information that many SEFs already include in their rulebooks.317 Request for Comment The Commission requests comment on all aspects of proposed § 37.201(a). In particular, the Commission requests comment on the following question:
(28) Do the requirements under proposed §§ 37.201(a)(1)–(3) set an appropriate level of disclosure by SEFs to market participants? Are the requirements too broad? Should the Commission require additional disclosures that would be material for market participants to make an informed decision to participate on the SEF? If so, what additional disclosures should be required? Please provide specific examples in your responses.
2. § 37.203(a)—Pre-Arranged Trading
Prohibition; § 37.9(b) Time Delay Requirement
Part 37 has permitted market
participants to communicate with one another away from a SEF in connection with the eventual execution of swap transactions via the SEF’s trading systems or platforms.318 The Commission has observed that such communications, which commonly occur on a direct basis between swap dealers and their clients in the dealerto-client market, vary in nature and scope. Such communication may, for example, include communications to discern trading interest prior to trading on the SEF, e.g., obtaining market color, identifying potential trades, and locating interested counterparties. Such communications, however, may also consist of the actual negotiation or arrangement of a swap transaction’s terms and conditions prior to execution on a SEF. Such communications are permitted through several provisions in the current regulatory framework, as described below, based in part on whether the transaction qualifies for an exception to the prohibition on prearranged trading under § 37.203(a); or whether the swap is otherwise not subject to the trade execution requirement. The Commission notes that ‘‘prearranged trading’’ is prohibited as an abusive trading practice under § 37.203(a). This prohibition generally applies to market participants who communicate with one another to prenegotiate the terms of a trade away from a SEF’s trading system or platform, but then execute the trade on such system or platform in a manner that appears competitive and subject to market risk. The Commission has intended for this prohibition to maintain the integrity of price competition and market risk that is incident to trading in the market.319 Notwithstanding this prohibition, SEFs have permitted pre-arranged trading on their facilities in certain instances. For Required Transactions executed via an Order Book, a SEF may permit market participants to communicate with one another and pre-arrange or prenegotiate a swap transaction away from its trading system or platform, subject to a time delay requirement and facility rules on pre-execution communications.
Section 37.9(b)(1) currently permits a
broker or dealer to engage in preexecution communications to prearrange or pre-negotiate a swap, as long as one side of the resulting transaction is entered into the Order Book for a 15- second delay before the second side is entered for execution against the first side (the ‘‘time delay requirement’’). The Commission defined ‘‘preexecution communications’’ as communications between market participants to discern interest in the execution of a transaction prior to the exposure of the market participants’ orders (e.g., price, size, and other terms) to the market; such communications include discussion of the size, side of market, or price of an order, or a potentially forthcoming order.320 To the extent that SEFs would allow their market participants to engage in such pre-execution communications, the Commission required SEFs to adopt associated rules.321 The Commission implemented § 37.9(b) to ensure a minimum level of pre-trade price transparency for orders based on pre-execution communications that occur away from the SEF, and to incentivize price competition between market participants for orders entered into an Order Book.322 The Commission

market of the DCM, 7 U.S.C. 7(d)(9)(A), DCMs have implemented certain time delay procedures that establish a ‘‘safe harbor’’ for orders resulting from pre-execution communications that would otherwise be considered pre-arranged trading. To protect price discovery, such orders must be exposed to the market for a minimum amount of time prior to allowing such orders to match against one another on a DCM. This time delay generally provides other participants with an opportunity to execute against the initial order. See, e.g., CME Group, Rule 539.C (rules on pre-execution communications regarding Globex trades). 323 17 CFR 37.9(b)(1). 324SEF Core Principles Final Rule at 33504. The SEF Core Principles Final Rule did not explicitly require a SEF to adopt pre-execution communication rules for swaps executed using its RFQ System. Nevertheless, the Commission has observed that some SEFs have self-certified rules under § 40.6 to allow their market participants to engage in pre-execution communication prior to transmitting an RFQ through the facility’s RFQ System. 325As defined under § 43.2, a ‘‘block trade’’ involves a SEF-listed swap transaction with a notional amount that meets the corresponding appropriate minimum block size and is executed away from the SEF’s trading system or platform, but pursuant to the SEF’s rules and procedures. 17 CFR
43.2. The Commission is proposing to amend that
definition to specify that block trades must be executed on a SEF. See infra Section XXII.—Part 43—§ 43.2—Definition of ‘‘Block Trade.’’ 326Based on time-limited no-action relief issued by DMO, a SEF may submit pre-arranged Required Transactions for execution on the SEF that resolve error trades, i.e., correct transactions to offset an initial transaction executed on the SEF containing a clerical or operational error, and where necessary, a new transaction that reflects the terms to which the counterparties had originally assented. See infra note 433 and accompanying discussion. 327Based on time-limited no-action relief issued by DMO, a SEF may submit pre-arranged Required Transactions for execution on SEFs that are components of certain categories of package transactions. See infra note 334. 328SEF Core Principles Final Rule at 33504. 329As noted above, several SEFs affiliated with interdealer brokers offer this type of functionality. As participants affiliated with a SEF, interdealer brokers have arranged Permitted Transactions on behalf of dealer clients through ‘‘communications’’ on their trading systems or platforms and submitted those transactions to a SEF for execution without being subject to any corresponding order exposure. See supra note 88 and accompanying discussion. 330See infra Section XXII.—Part 43—§ 43.2— Definition of ‘‘Block Trade.’’ 331With respect interdealer brokers, the Commission believes that their trading systems or platforms facilitate ‘‘trading’’ between multiple participants in conformance with the statutory SEF definition and, therefore, are subject to the SEF registration requirement. See supra Section IV.C.1.c.(2)—SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers. anticipated that disclosing one side of a pre-arranged transaction in the Order Book first would provide other market participants with an opportunity to execute against that side prior to entry of the second side in the Order Book.323 A similar requirement, however, was not applied to Required Transactions executed through a SEF’s RFQ System. The Commission noted that the requirement to send an RFQ to three other market participants already provides pre-trade price transparency, thereby obviating the need for a corresponding time delay.324 In addition to the time delay requirement, § 37.203(a) also specifies that a SEF may choose to permit prearranged trading in other instances. First, a SEF may permit a swap that it lists to be executed as a block trade away from a SEF pursuant to part 43. This exception allows such large-sized transactions to be privately negotiated to avoid potentially significant and adverse price impacts that would occur if traded on trading systems or platforms with pre-trade price transparency.325 Second, a SEF may permit pre-arranged trading for ‘‘other types of transactions’’ through rules that are filed with the Commission pursuant to part 40. These rules permit pre-arranged trading with
respect to Required Transactions that are intended to resolve error trades 326 or are executed as a component of certain categories of package transactions.327 In the preamble to the SEF Core Principles Final Rule, the Commission did not discuss the issue of preexecution communications regarding swaps that are not subject to the trade execution requirement, i.e., Permitted Transactions, but the Commission has permitted SEFs to adopt a more flexible approach to the use of communications away from the SEF. This approach corresponds to the Commission’s approach to Permitted Transactions, which are not required to be executed on a SEF and otherwise may be executed on a SEF through flexible execution methods.328 Under a more flexible approach, the Commission has observed that SEFs—both those that facilitate trading in the dealer-to-client market and those that facilitate trading in the dealer-to-dealer market—have consequently adopted rules to allow their market participants to engage in a variety of pre-execution communications away from their respective trading systems or platforms prior to executing Permitted Transactions on SEFs. The Commission notes in particular that some methods allow counterparties to submit prenegotiated terms and conditions of a transaction to a SEF ‘‘order entry’’ system for execution and related posttrade processing.329 a. § 37.201(b)—Pre-Execution Communications The Commission proposes several amendments under the proposed framework that would broadly apply to pre-execution communications that occur away from a SEF. For swaps subject to the trade execution requirement, proposed § 37.201(b) would require a SEF to prohibit its participants from engaging in preexecution communications away from its facility, including negotiating or arranging the terms and conditions of a swap prior to its execution on the SEF, i.e., via the SEF’s methods of execution. This prohibition would be subject to certain proposed exceptions discussed further below. Given this general prohibition, the Commission also proposes to eliminate the existing exceptions to the pre-arranged trading prohibition, including (i) the time delay requirement under § 37.9(b); (ii) the exception for block trades under § 37.203(a) as part of the Commission’s proposed amendments to the ‘‘block trade’’ definition under § 43.2; 330 and (iii) the exception for ‘‘other types of transactions’’ under § 37.203(a). Proposed § 37.203(a), as discussed below, would continue to require a SEF to prohibit abusive trading practices, including pre-arranged trading, as appropriate to its trading systems or platforms. Therefore, a SEF would not be allowed to provide rules that allow market participants to pre-negotiate or pre-arrange a transaction and submit the sides of the transaction to an order book pursuant to a time delay. In eliminating the prescriptive execution methods and allowing more flexible execution for swaps subject to the trade execution requirement, the Commission
believes that pre-execution communications, including the negotiation or arrangement of those swaps, would be able to occur entirely within a SEF’s trading system or platform. Such negotiation or arrangement, regardless of the method through which they may occur, i.e., among participants themselves or through a swaps broking entity, constitutes ‘‘trading’’ that should occur on a SEF. The Commission notes that ‘‘trading,’’ as discussed above, includes the negotiation or arrangement of transactions through the interaction of bids and offers.331 Based on its experience with implementing part 37, the Commission believes that the broad scope of pre-execution communications that have been allowed to occur away from the SEF under the existing framework has undermined a meaningful role of the SEF in facilitating trading activity and liquidity formation. Accordingly, the Commission believes that these proposed changes are an important element of the proposed SEF regulatory framework and are intended

332As noted above, the Commission recognizes that domestic swaps broking entities and foreign swaps broking entities would be subject to a sixmonth and two-year delayed application of the SEF registration requirement, respectively. These delays would allow them to continue to negotiate or arrange swaps transactions between multiple participants and route them to SEFs or Exempt SEFs for execution. Accordingly, the compliance date of any final rule with respect to the prohibition on pre-execution communication under proposed § 37.201(b) and the pre-arranged trading prohibition under § 37.203(a) for these entities would also be subject to a delay of six months or two years, depending on the entity’s domicile and starting from the effective date of the final rule. See supra
Section IV.C.1.c.—Swaps Broking Entities,
Including Interdealer Brokers and Section IV.C.1.d.—Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps Trading Facilities. 333See supra Section IV.C.1.a.—Footnote 88. For example, the exception would inherently not apply to a swaps broking entity that conducts preexecution communications to facilitate trading activity on behalf of multiple participants in swaps that are not subject to the trade execution requirement. As noted above, such an entity would be subject to the SEF registration requirement and personnel facilitating those communications would likely be designated as SEF trading specialists that constitute part of a SEF’s trading system or platform. See supra notes 308–309. 334The Commission notes that the swap components of different categories of package transactions have been subject to time-limited noaction relief provided by Commission staff from the trade execution requirement and required methods of execution. These categories of package transactions include those where (i) each of the components is a swap subject to the trade execution requirement (‘‘MAT/MAT’’); (ii) at least one of the components is subject to the trade execution requirement and each of the other components is subject to the clearing requirement (‘‘MAT/NonMAT (Cleared)’’); (iii) each of the swap components is subject to the trade execution requirement and all other components are U.S. Treasury securities (‘‘U.S. Dollar Swap Spreads’’); (iv) each of the swap components is subject to the trade execution requirement and all other components are agency mortgage-backed securities (‘‘MAT/Agency MBS’’); (v) at least one individual swap component is subject to the trade execution requirement and at least one individual component is a bond issued and sold in the primary market (‘‘MAT/New Issuance Bond’’); (vi) at least one individual swap component is subject to the trade execution requirement and all other components are futures contracts (‘‘MAT/Futures’’); (vii) at least one of the swap components is subject to the trade execution requirement and at least one of the components is a CFTC swap that is not subject to the clearing requirement (‘‘MAT/Non-MAT (Uncleared)’’); (viii) at least one of the swap components is subject to the trade execution requirement and at least one of the components is not a swap (excluding aforementioned categories) (‘‘MAT/Non-Swap Instruments’’); and (ix) at least one of the swap components is subject to the trade execution requirement and at least one of the components is a swap over which the CFTC does not have exclusive jurisdiction, e.g., a mixed swap (‘‘MAT/ Non-CFTC Swap’’). See CFTC Letter No. 14–12, NoAction Relief from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission Regulation § 37.9 for Swaps Executed as Part of a Package Transaction (Feb. 10, 2014) (‘‘NAL No. 14– 12’’); CFTC Letter No. 14–62, No-Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and from
Commission Regulation § 37.9 for Swaps Executed as Part of Certain Package Transactions and No-Action Relief for Swap Execution Facilities from Compliance with Certain Requirements of Commission Regulations § 37.9(a)(2), § 37.203(a) and § 38.152 for Package Transactions (May 1, 2014) (‘‘NAL No. 14–62’’); CFTC Letter No. 14–121, Extension of No-Action Relief for Swap Execution Facilities and Designated Contract Markets from Compliance with Certain Requirements of Commission Regulations § 37.9(a)(2), § 37.203(a) and § 38.152 for Package Transactions (Sept. 30, 2014) (‘‘NAL No. 14–121’’); CFTC Letter No. 14–137, Extension of No-Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission Regulation § 37.9 and Additional No-Action Relief for Swap Execution Facilities from Commission Regulation § 37.3(a)(2) for Swaps Executed as Part of Certain Package Transactions (Nov. 10, 2014) (‘‘NAL No. 14–137’’); CFTC Letter No. 15–55, Extension of No-Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission Regulation § 37.9 and No-Action Relief for Swap Execution Facilities from Commission Regulation § 37.3(a)(2) for Swaps Executed as Part of Certain Package Transactions (Oct. 15, 2014) (‘‘NAL No. 15–55’’); CFTC Letter No. 16–76, Re:
Extension of No-Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and from Continued to enhance this framework, such that a broader range of swaps trading activity would be occurring on SEFs and creating a vibrant and liquid marketplace for swaps trading. For example, the Commission notes the likely increase in the number of swaps that would become subject to the trade execution requirement under this proposal. Currently, many of those swaps are Permitted Transactions submitted to a SEF for execution after negotiation or arrangement away from the facility, or are negotiated and executed on an OTC basis. With an expanded scope of swaps subject to the trade execution requirement, the Commission is concerned that allowing a disproportionate amount of SEF transactions to be pre-arranged or prenegotiated away from the facility under the pretense of trading flexibility would undercut the import of the expansion of the requirement. Without a limitation on pre-execution communications that occur away from the SEF, the SEF’s role in facilitating swaps trading is also diminished and would undermine the statutory goals of promoting greater swaps trading on SEFs and promoting pre-trade price transparency. The Commission also notes that its proposed approach to pre-execution communications, as applied to SEFs in the dealer-to-dealer market, is consistent with the application of the SEF registration requirement to swaps broking entities, e.g., interdealer brokers that facilitate swaps trading activity between market participants. As discussed above, the Commission believes that brokers, who facilitate trading communications between market participants away from a SEF and subsequently submit pre-negotiated or pre-arranged trades to the SEF for execution, relegate the SEF to a de facto post-trade processing venue. Requiring these entities to register as SEFs would ensure that this type of liquidity formation occurs on a SEF.332 Similarly, the submission of trade terms negotiated or arranged via direct communications between participants, e.g., a swap dealer and a client, away from a SEF allows liquidity formation to occur outside of the SEF regulatory framework, which undermines the statutory SEF goals. Limiting the scope of these communications would also help ensure that this activity occurs on a registered SEF via flexible means of execution, which promotes the statutory goals of promoting trading on SEFs and promoting pre-trade price transparency. (1) Exception for Swaps Not Subject to the Trade Execution Requirement The Commission proposes an exception to the proposed prohibition on pre-execution communications under § 37.201(b) for swaps that are not subject to the trade execution requirement. The Commission’s proposed exception recognizes that market participants do not have to execute such swaps on SEFs. The Commission also acknowledges that two counterparties may initially discuss or negotiate a potential swap transaction on a
bilateral basis away from a SEF with the intent to execute the transaction away from the SEF, but subsequently determine to submit the resulting arranged transaction to be executed on a SEF. The Commission believes that applying the proposed § 37.201(b) prohibition to swaps not subject to the trade execution requirement would not be practical, given that counterparties do not have to execute these swaps on a SEF. The Commission emphasizes, however, that this proposed exception does not affect the SEF registration requirement under proposed § 37.3(a), which would specify that a person operating a facility that meets the statutory SEF definition must register as a SEF without regard to whether the swaps that it lists for trading are subject to the trade execution requirement.333 (2) § 37.201(b)(1)—Exception for Package Transactions The Commission also proposes an exception under § 37.201(b)(1) to the proposed prohibition on pre-execution communications for swaps subject to the trade execution requirement that are components of ‘‘package transactions’’ that also include components that are not subject to the trade execution requirement.334 For purposes of this

Commission Regulation § 37.9 and No-Action Relief for Swap Execution Facilities from Commission Regulation § 37.3(a)(2) for Swaps Executed as Part of Certain Package Transactions (Nov. 1, 2016) (‘‘NAL No. 16–76’’); CFTC Letter No. 17–55, Re:
Extension of No-Action Relief from Sections 2(h)(8) and 5(d)(9) of the Commodity Exchange Act and from Commission Regulations 37.3(a)(2) and 37.9 for Swaps Executed as Part of Certain Package Transactions (Oct. 31, 2017) (‘‘NAL No. 17–55’’). To the extent that counterparties may be facilitating package transactions that involve a ‘‘security,’’ as defined in section 2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the Securities Exchange Act of 1934, or any component agreement, contract, or transaction over which the Commission does not have exclusive jurisdiction, the Commission does not opine on whether such activity complies with other applicable law and regulations. 335The Commission notes that it similarly defines ‘‘package transaction’’ under proposed § 36.1(d)(1) for purposes of providing an exemption to the trade execution requirement for swaps that are executed as part of package that includes a bond issued in a primary market. See infra Section XXI.A.4.— § 36.1(d)—Exemption for Swaps Executed with Bond Issuance. 336Based on time-limited no-action relief issued by DMO, the categories of package transactions that consist of components not subject to the requirement include (i) U.S. Dollar Swap Spreads; (ii) MAT/Agency MBS; (iii) MAT/New Issuance Bond; (iv) MAT/Futures; (v) MAT/Non-MAT (Uncleared); (vi) MAT/Non-Swap Instruments; and (vii) MAT/Non-CFTC Swaps. See supra note 334. 337Package transactions composed entirely of swaps that are subject to the trade execution requirement would be subject to the prohibition of pre-execution communications under proposed § 37.201(b) and are not eligible for this proposed exception. 338The Commission notes that a swaps broking entity that facilitates trading in any swap component on behalf of multiple participants, regardless of whether the swap is subject to the trade execution requirement, would be subject to the SEF registration requirement. See supra note 333. 339Swap components in the following categories of package transactions are currently subject to relief from the required methods of execution under existing § 37.9: (i) MAT/Non-MAT (Uncleared); (ii) MAT/Non-Swap Instruments; and (iii) MAT/NonCFTC Swap. NAL No. 17–55 at app. A. Pursuant to this relief, the Commission notes that SEFs have allowed market participants to negotiate or arrange the swap components away from the SEF and submit them for execution. exception, a ‘‘package transaction’’ involves two or more counterparties and consist of two or more component transactions whose executions are (i) contingent upon one another, (ii) priced or quoted together as one economic transaction, and (iii) executed simultaneous or near simultaneous to each other.335 The Commission recognizes that some package transactions contain both a swap that is subject to the trade execution requirement and other swap or non-swap components that are not subject to the requirement. Components not subject to the requirement include, for example, swaps
not subject to the clearing requirement, e.g., swaptions, and various types of securities.336 The negotiation or arrangement of each of these components generally occurs concurrently or on a singular basis; in particular, negotiations for the pricing of such package transactions may be primarily based on the components that are not subject to the requirement. Further, the swap components in those types of transactions that are subject to the requirement often serve as hedging tools to other components. For those components not subject to the requirement, market participants may negotiate the terms away from a SEF. The Commission believes that imposing a prohibition on swaps subject to the trade execution requirement that are part of a package transaction that includes components not subject to the requirement would inhibit the ability of counterparties to negotiate or arrange the latter components away from the SEF.337 Given that components of package transactions are each priced or quoted together as part of one economic transaction, the Commission recognizes the impracticality of requiring communications related to the negotiation or the arrangement of the swap component that is subject to the trade execution requirement to occur on the SEF. Accordingly, an exception from the prohibition on pre-execution communications away from the SEF for swap components subject to the requirement would be appropriate in such circumstances.338 Consistent with its intent to incorporate existing staff no-action relief into the Commission’s regulations, the Commission notes that the proposed exception would codify some of the relief that currently applies to certain types of package transactions.339 Request for Comment The Commission requests comment on all aspects of proposed § 37.201(b). In particular, the Commission seeks insights regarding market participants’ use of pre-execution communications and requests comment on the following questions:
(29) What are market participants’ current pre-execution communication practices? How often do market participants currently engage in preexecution communication? What level of trade detail is discussed during such pre-execution communications? What role, if any, should pre-execution communications continue to have in the SEF market structure? (30) Is the Commission’s proposal to require a SEF to prohibit market participants from conducting preexecution communications away from a SEF with respect to swaps that are subject to the trade execution requirement appropriate? In light of the Commission’s proposal to allow SEFs to offer flexible execution methods, are there any impediments for market participants to execute those swaps, in particular those that would become subject to the Commission’s proposed approach to the trade execution requirement? (31) With respect to swaps that are not subject to the trade execution requirement, is the Commission’s proposal to allow SEFs to permit market participants to conduct pre-execution communications away from a SEF appropriate? (32) Are there any technical limitations that a SEF would face to accommodate pre-execution communications that would otherwise impede the ability of market participants to trade and execute swaps on a SEF? (33) Should the Commission allow an exception to the proposed prohibition against pre-execution communications for communications involving ‘‘market color’’? If so, how should the Commission define ‘‘market color’’? For example, should such a definition consist of views shared by market participants on the general state of the market or trading information provided on an anonymized and aggregated basis? Should such a definition exclude (i) an express or implied arrangement to execute a specified trade; (ii) non-public information regarding an order; and (iii) information about an individual trading position? Are these elements appropriate and should the Commission consider additional elements? (34) Should the Commission allow an exception to the proposed prohibition against pre-execution communications for communications intended to discern the type of transaction—which may or may not be a swap—that a market participant may ultimately execute on a SEF? The Commission understands that these types of communications are common in the dealer-to-client market and allow a dealer to assist a client with determining which financial instruments may be best suited to manage the client’s risks or to establish certain market positions. If so, please describe the nature and scope of these communications that would support an exception to the proposed prohibition. (35) Should the Commission allow an exception to the proposed prohibition against pre-execution communications for all corrective trades intended to resolve error trades pursuant to the proposed error trade policy rules under § 37.203(e), as discussed further below? Please explain why or why not.

340See supra Section IV.C.1.c.(1)—Structure and Operations of Swaps Broking Entities, Including Interdealer Brokers. 341The Commission notes above that IBs are registered with the Commission pursuant to CEA
section 4f. See supra note 93 and accompanying
discussion. IBs and their associated persons are required to register pursuant to registration procedures set forth by the NFA. 17 CFR 3.10, 3.12.
Section 170.17 requires that each IB becomes and
remains a member of at least one registered futures association, e.g., the NFA. 17 CFR 170.17. Pursuant to CEA sections 4p and 17(p), such entities are subject to, among other requirements administered by the registered futures association, training standards and proficiency testing. 7 U.S.C. 6p, 21(p). Depending on the category of intermediary, registrants may be subject to various financial and reporting requirements, e.g., 17 CFR 1.10 (financial reports of FCMs and IBs), 1.17 (minimum financial requirements for FCMs and IBs), as well as trading standards, e.g., 17 CFR part 155 (trading standards for floor brokers, FCMs, and IBs). Pursuant to CEA
section 6c and part 180, all registrants are subject
to prohibitions against fraud and manipulation. 7 U.S.C. 9; 17 CFR part 180. Applicants for registration are subject to statutory disqualifications from registration pursuant to CEA section 8a(2) based on related past convictions that involve fraud or other acts of malfeasance. 7 U.S.C. 12a(2). 342Section 1.3 defines an ‘‘associated person’’ of an IB as any natural person who is associated with an introducing broker as a partner, officer, employee, or agent (or any natural person occupying a similar status or performing similar functions), in any capacity which involves the solicitation or acceptance of customers’ orders (other than in a clerical capacity) or the supervision of any person or persons so engaged. 17 CFR 1.3. 343See supra note 341. See also NFA Registration Rules part 400 (proficiency requirements established by the NFA for various registered entities and associated person). 344Upon adoption of the SEF Core Principles Final Rule, some swaps broking entities, in particular interdealer brokers, registered their operations or components of their operations, i.e., trading systems or platforms, as SEFs. See supra
Section IV.C.1.c.(1)—Structure and Operations of
Swaps Broking Entities, Including Interdealer Brokers. As part of this process, the Commission understands that some specialists have transitioned to the SEF from affiliated broker entities, in either a permanent capacity or pursuant to a secondment arrangement. (36) The Commission is proposing to allow market participants to engage in pre-execution communications away from a SEF for package transactions in which at least one component is not subject to the trade execution requirement. For the swap components of some of these package transactions that are currently traded and executed on SEFs—for example, those where all other components are U.S. Treasury securities—should they not be subject to this exception? Are there other types of package transactions for which the Commission should provide an exception to the proposed prohibition on pre-execution communications?
3. § 37.201(c)—SEF Trading Specialists
The Commission notes that a number of registered SEFs—in particular, those that operate in the dealer-to-dealer market—offer voice-based or voiceassisted execution platforms that utilize natural persons to facilitate trading in varying degrees. These persons, commonly referred to as ‘‘trading specialists’’ or ‘‘execution specialists,’’ perform core functions that facilitate swaps trading and execution in a multiple-to-multiple participant environment, including disseminating trading interests to the market, e.g., transmitting RFQs provided by participants; matching bids and offers; and negotiating or arranging transaction terms and conditions on behalf of participants. Many individuals currently carry out the same functions away from a SEF as
part of a swaps broking entity, such as
an interdealer broker, prior to execution of the transaction on the SEF.340 These swaps broking entities are often registered with the Commission as IBs 341 and these individuals are registered as associated persons of IBs.342 As associated persons of IBs, these persons are subject to various regulatory requirements for intermediaries aimed at protecting customers.343 As noted above, the Commission has proposed that these swaps broking entities be registered as a SEF, given that they facilitate trading.344 The Commission recognizes, however, that the current regulatory requirements for swaps broking entities do not necessarily fully address the unique functions of trading specialists on a SEF, which are broader in scope than the traditional IB functions of solicitation or acceptance of orders. SEF trading specialists serve an intermediary-type role for each market participant that accesses their SEF by facilitating fair, orderly, and efficient trading and overall market integrity. From a regulatory perspective, the Commission believes that SEF trading specialists—whether operating as part of a fully voice-based system or as a voiceassisted system with electronic-based features—are an integral part of their respective SEF’s trading system or platform. A voice-based or voice-assisted SEF trading system or platform is unique among SEF execution methods. Unlike a trading system or platform that executes orders and facilitates trading through generally automated means, trading specialists that comprise part of the voice-based or voice-assisted systems usually exercise a level of discretion and judgment in facilitating interaction between bids and offers from multiple market participants. That discretion and judgment is informed by their knowledge and understanding of market conditions, which are based upon information obtained from observing historical activity and gauging potential or actual trading interest from communications with participants. By allowing SEFs to offer flexible methods of execution and broadening the trade execution requirement to swaps with more episodic liquidity, the Commission believes that the proposed rulemaking would lead to greater volumes of trading on voice-based trading systems or platforms that utilize discretion and judgment. The use of these methods should increase and enhance the utility of SEFs in a manner consistent with the SEF statutory intent and goals, but the Commission also believes that the expected increased role of discretion in SEF trading operations should be accompanied with a regulatory approach that aims to enhance professionalism among trading specialists and enhance market integrity. The Commission believes in particular that such a regulatory approach should address in particular the integral role that trading specialists play in exercising that discretion in a SEF’s multiple-to-multiple trading environment. Therefore, the Commission proposes to adopt a definition under § 37.201(c) that would
categorize certain persons employed by a SEF as a ‘‘SEF trading specialist’’ and require a SEF to ensure that any such person (i) is not subject to a statutory disqualification under CEA sections 8a(2) or 8a(3); (ii) has met certain proficiency requirements; and (iii) undergoes ethics training on a periodic basis. The proposed regulations would further require a SEF to establish and enforce a code of conduct for its SEF trading specialists, as well as diligently supervise their activities. These proposed rules are intended to enhance professionalism in the swaps market and promote market integrity. a. § 37.201(c)(1)—Definition of ‘‘SEF Trading Specialist’’ The Commission proposes to define a ‘‘SEF trading specialist’’ under § 37.201(c)(1) as any natural person who, acting as an employee (or in a similar capacity) of a SEF, facilitates the trading or execution of swap transactions (other than in a ministerial or clerical capacity), or who is responsible for direct supervision of such persons. This proposed definition would include both persons directly employed by the SEF and persons who are not directly employed, such as independent contractors and persons who are serving as SEF personnel pursuant to an arrangement with an affiliated broker employer, i.e.,

345See supra Section IV.C.1.c.(2)—SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers and Section IV.C.1.d.—Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps Trading Facilities. 346See supra Section IV.C.1.c.(2)—SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers. 347 Id. 348The Commission notes that persons acting in a ministerial or clerical capacity are subject to exceptions from other Commission requirements. For example, the definition of ‘‘associated person’’ under § 1.3 excludes a person who solicits or accepts customer orders in a clerical capacity on behalf of an FCM or IB, or who solicits or accepts swaps in a clerical or ministerial capacity on behalf of an SD or MSP. 17 CFR 1.3. 349The Commission notes that CEA section 4s(b)(6) makes it unlawful for an SD or MSP to permit any person associated with the SD or MSP who is subject to a statutory disqualification to effect or be involved in effecting swaps on behalf of the SD or MSP, if the SD or MSP knew, or in the exercise of reasonable care should have known, of the statutory disqualification. 7 U.S.C. 6s(b)(6). This prohibition applies with respect to an AP of an SD or MSP, but does not include an individual employed in a clerical or ministerial capacity. 17 CFR 23.22(a) (definition of ‘‘person’’ applicable to the prohibition). 350 7 U.S.C. 12a(2)–(3). 351Section 3.10(a)(2) requires each natural person who is a principal of an applicant for registration to execute a Form 8–R to, among other things, be listed as a principal of a registrant. 17 CFR 3.10(a)(2). 352CEA section 8a(10) enables the Commission to authorize any person to perform any portion of the registration functions under the Act. 7 U.S.C. 12(a)(10). The Commission has delegated to the NFA the authority to perform the full range of registration functions, including vetting of applicants for statutory disqualifications. See, e.g., 50 FR 34885 (Aug. 28, 1985); 57 FR 23136 (Jun. 2, 1992). 353As proposed, the swaps proficiency examination would have to be developed and administered by an RFA. The NFA currently requires persons seeking to become members or associate members of the NFA, or persons seeking to register with the Commission as an AP to take and pass the National Commodity Futures Examination (‘‘Series 3 Exam’’), which is administered by FINRA, subject to certain exceptions. The Series 3 Exam does not test for swaps proficiency. As a result, NFA Registration Rule 401(e) currently provides an exception to the NFA’s qualification testing requirement for a person applying for registration with the Commission as an AP, if the applicant’s sole activities subject to regulation by the Commission are swaps-related. NFA Registration Rule 401(e). The Commission is aware that the NFA recently announced that it would develop a swaps proficiency requirements program for all APs engaging in swaps activities, including those of FCMs, IBs,
commodity pool operators (‘‘CPOs’’), commodity trading advisors (‘‘CTAs’’), and individuals who act as APs at SDs. NFA, NFA to Develop Swaps Proficiency Requirements Program,’’ https://www.nfa.futures. org/news/newsRel.asp?ArticleID=5014 (Jun. 5, 2018). 354The Commission clarifies, however, that in the absence of an available examination that meets the Commission’s requirements, SEFs would still be required to ensure that their SEF trading specialists meet the general proficiency requirements set forth under proposed § 37.201(c)(3)(i). ‘‘seconded’’ persons. Based on the Commission’s proposed application of the SEF registration requirement, as described above, the Commission notes that this definition would also apply to those persons who facilitate swaps trading through swaps broking entities, including interdealer brokers, who would be subject to SEF registration.345 As noted above, facilitating the ‘‘trading’’ of swaps means the negotiating or arranging swaps transactions; 346 negotiating or arranging consists of facilitating the interaction of bids and offers.347 The proposed definition, however, would exclude SEF personnel who facilitate trading solely in a ministerial or clerical capacity because the activities of such employees do not involve the level of discretion and judgement as the activities of SEF trading specialists and, thus, do not implicate the same regulatory concerns.348 b. § 37.201(c)(2)—Fitness In light of the activities of SEF trading specialists and the regulatory considerations discussed above, the Commission proposes § 37.201(c)(2)(i) to prohibit a SEF from permitting any person who is subject to a statutory disqualification under CEA sections 8a(2) or 8a(3) to serve as a SEF trading specialist if the SEF knows, or in the exercise of reasonable care should know, of the person’s statutory disqualification.349 CEA sections 8a(2) and 8a(3) set forth numerous bases upon which the Commission may refuse to register a person, including, without limitation, felony convictions, commodities or securities law violations, and bars or other adverse actions taken by financial regulators.350 While SEF trading specialists would not be required to register with the Commission, the Commission believes that given the nature of their interaction with market participants in facilitating swaps trading and execution, as well as the central role they play in maintaining market integrity and orderly trading, a SEF should not be permitted to employ those who are subject to such a statutory disqualification. The Commission, however, also proposes two exceptions to the proposed prohibition. Under proposed § 37.201(c)(2)(ii)(A), the prohibition would not apply where a person is listed as a principal 351 or is registered with the Commission as an AP of a Commission registrant or as a floor trader or floor broker, notwithstanding that the person is subject to a disqualification from registration under sections 8a(2) or 8a(3) of the Act. Pursuant to
authority delegated to it by the Commission,352 the NFA has permitted a person to be listed as a principal or registered with the Commission where, in its discretion, the NFA has determined that the incident giving rise to a statutory disqualification is insufficiently serious, recent, or otherwise relevant to evaluating the person’s fitness. Under proposed § 37.201(c)(2)(ii)(B), the prohibition also would not apply where a person subject to a statutory disqualification is not registered with the Commission, but provides a written notice from a registered futures association (‘‘RFA’’) stating that if the person were to apply for registration as an AP, then the RFA would not deny the application on the basis of the statutory disqualification. The Commission believes that a statutory disqualification that has not or would not prevent a person from being listed as a principal or from registering with the Commission because it is insufficiently serious, recent, or otherwise relevant to evaluating the person’s fitness for registration with the Commission, as determined by an RFA, should not be a basis for prohibiting a SEF from employing the person as a SEF trading specialist.
c. § 37.201(c)(3)—Proficiency
Requirements
The Commission proposes to require a SEF to maintain proficiency standards for SEF trading specialists. Proposed § 37.201(c)(3)(i) would require a SEF to establish and enforce standards and procedures to ensure that its SEF trading specialists have the proficiency and knowledge necessary to fulfill their responsibilities to the SEF and to comply with the Act, applicable Commission regulations, and the SEF’s rules. Further, the Commission proposes under proposed § 37.201(c)(3)(ii) to mandate that a SEF require any person employed as a SEF trading specialist to have taken and passed a swaps proficiency examination as administered by an RFA.353 Accordingly, SEFs would not have to comply with the examination requirement until an RFA, such as the NFA, completes development of the exam and establishes an administration process. Pursuant to proposed § 37.201(c)(3)(iii), a SEF’s compliance with the proficiency examination requirement would constitute compliance with the general proficiency requirements upon establishment of an exam and administration process by the RFA.354 Additionally, a SEF would satisfy the examination requirement if a SEF trading specialist took and passed the examination once without any further testing, unless the person has

355 In addition to the Series 3 Exam, which applies to persons seeking membership with the NFA as an AP of a registered entity with respect to futures and options on futures, see supra note 353, persons who seek registration as a securities professional must also pass various qualification exams to demonstrate competency in particular securities-related areas. See generally FINRA, Registrations and Qualifications, www.finra.org/ industry/registration-qualification. 356The Commission notes that this proposed requirement is analogous to the principles set forth in the FX Global Code regarding ethics. The code specifies, among other recommendations, that operators of trading systems or platforms and their personnel, have sufficient knowledge of, and comply with, applicable law and have sufficient relevant experience, technical knowledge, and qualifications. FX Global Code at 6–7. 357As discussed above, this proposed requirement is similar to one of the leading principles set forth in the Global FX Code regarding ethical standards. The Global FX Code states, in
part, that firms should promote ethical values and
behavior, support efforts to promote such ethical standards in the wider FX market, and encourage involvement by personnel in such efforts. FX Global Code at 6–7. 358 7 U.S.C. 7b–3(f)(12). 359See infra Section XX.A.3.—§ 37.1501(c)— Duties of Chief Compliance Officer (requirement under proposed § 37.1501(c)(6)). 360See infra Section VI.A.3.f.—§ 37.201(c)(6)— Duty to Supervise. 361The Commission proposes to add this guidance as a new paragraph (a)(1) and eliminate existing paragraph (a)(1), which states that a SEF’s rules may authorize its compliance staff to issue warning letters or recommend that a disciplinary panel take such action. See infra note 456 (discussing proposed changes to the existing SEF warning letter requirements). 362 17 CFR part 3 app. B (Statement of Acceptable Practices With Respect to Ethics Training). 363CEA section 2(a)(1)(B) and § 1.2 establish that the act, omission, or failure of any official, agent, or other person acting for a principal within the scope of his employment or office is imputed to the principal. 7 U.S.C. 2(a)(1)(B); 17 CFR 1.2. not served in such a capacity for a continuous two-year period. In that case, the SEF trading specialist would have to retake and pass the examination. Given the level of discretion and judgement that SEF trading specialists exercise in facilitating swaps trading and execution, as well as the size and complexity of the transactions often executed on a SEF, the Commission believes that it is essential that a SEF ensure that its SEF trading specialists possess appropriate skills and knowledge. Accordingly, the Commission believes that demonstrating such skills and knowledge would be best achieved through a swaps proficiency examination regime. The Commission notes that persons who intermediate transactions in the futures markets and securities markets are already subject to proficiency requirements that include examinations.355 The Commission believes that requiring SEFs to ensure that their SEF trading specialists have the necessary skills and proficiency to perform the key functions of a SEF would similarly enhance the level of professionalism and market integrity in the swaps market.356 d. § 37.201(c)(4)—Ethics Training The Commission proposes § 37.201(c)(4) to require a SEF to establish and enforce policies and procedures to ensure that its SEF trading specialists receive ethics training on a periodic basis. Given each trading specialist’s obligation to promote a fair and orderly market in facilitating trading and execution while also using discretion in handling orders on behalf of individual market participants, a SEF must maintain a training program to ensure that its trading specialists are aware of and understand the relevant professional and ethical standards established by the SEF.357 Proposed § 37.201(c)(4) is consistent with and would further a SEF’s existing obligation under Core Principle 12 to establish and enforce rules that minimize conflicts of interest.358
Additionally, the proposed rule corresponds to the existing requirement under § 37.1501 that a SEF CCO establish and administer a written code of ethics for the SEF that is designed to prevent ethical violations and promote honesty and ethical conduct by the SEF’s personnel.359 The Commission also views ethics training as a necessary element of a SEF’s adequate supervision of its trading specialists and, accordingly, proposes to require such supervision under § 37.201(c)(6), as described below.360 The Commission believes that the proposed requirement would enhance professionalism in the overall swaps market and promote swaps market integrity. (1) Guidance to Core Principle 2 in
Appendix B—Ethics Training
The Commission also proposes new guidance to Core Principle 2 in
Appendix B that would provide the
general objectives for an ethics training program and examples of topics that should be addressed.361 The guidance provides SEFs with the latitude to determine the appropriate frequency, duration, and format of ethics training for its trading specialists, including the use of qualified third-party providers and various forms of technology and media. The proposed guidance, however, specifies that an ethics training program is essential to enable SEF trading specialists to remain current with respect to the ethical and regulatory implications of evolving technology, trading practices, products, and other relevant changes. For example, if a SEF’s trading protocols or operations continue to develop, e.g., the SEF adopts a new discretionary approach to prioritizing or managing competing bids on its voice-based or voice-assisted trading system, then the SEF’s ethics training should address how its trading specialists should appropriately conduct themselves under such new protocols. This approach is generally consistent with the Commission’s implementation of the training requirements applicable to Commission registrants under CEA
section 4p(b), as set forth in acceptable
practices established by the Commission for ethics training for registered persons under part 3 of the Commission’s regulations.362 e. § 37.201(c)(5)—Standards of Conduct The Commission proposes to require a SEF to establish and enforce a code of conduct for its SEF trading specialists. Like the proposed ethics training requirement under § 37.201(c)(4), the proposed code of conduct requirement aims to ensure that SEFs foster and maintain a high level of professionalism, integrity, and ethical conduct among their trading specialists when dealing with market participants and facilitating trading and execution. A SEF’s code of conduct may provide that, among other things, a SEF trading specialist should (i) act in an honest and ethical manner and observe high standards of professionalism; (ii) handle orders with fairness and transparency; and (iii) not engage in fraudulent, manipulative, or disruptive conduct. The Commission includes these items for SEF consideration, but a SEF may include different or additional standards as well. These proposed standards of conduct are intended to be general and principles-based, given the many unique aspects of a SEF trading specialist’s role in facilitating trading and execution as part of the SEF’s particular trading system or platform. f. § 37.201(c)(6)—Duty To Supervise To help promote compliance with a SEF’s professionalism requirements, including ethics requirements and standards of conduct, the Commission also proposes § 37.201(c)(6) to require a SEF to diligently supervise the activities of its trading specialists in facilitating trading and execution on the SEF. While a SEF is generally responsible for the actions of its agents pursuant to CEA
section 2(a)(1)(B) and § 1.2,363 proposed
§ 37.201(c)(6) would impose an affirmative duty of supervision on each SEF. Given the dynamic manner in

364 17 CFR 166.3.
365 7 U.S.C. 7b–3(f)(2)(B)(i).
366 7 U.S.C. 7b–3(f)(2)(B)(ii).
367 17 CFR 37.202(a)(1). 368SEF Core Principles Final Rule at 33508. 369 Id. 370 Id. 371 Id. 372 Id. 373 7 U.S.C. 7b–3(f)(2)(A)(ii). 374 17 CFR 37.202(c). which SEF trading specialists may use discretion to facilitate swaps trading and execution on behalf of market participants, a SEF should have an affirmative obligation to supervise its trading specialists. The Commission notes that a similar customer protection rule currently applies to registered entities, including IBs—§ 166.3 requires each Commission registrant to diligently supervise all the activities of its partners, officers, employees and agents (or persons occupying a similar status or performing a similar function) relating to its business as a Commission registrant.364 Therefore, to the extent that some of these SEFs were previously registered with the Commission and operated as IBs, the Commission believes that proposed § 37.201(c)(6) would impose certain analogous requirements. g. § 37.201(c)(7)—Additional Sources for Compliance The Commission is proposing § 37.201(c)(7) to refer SEFs to the new guidance to Core Principle 2 in
Appendix B as discussed above.
Request for Comment
The Commission requests comment on all aspects of proposed § 37.201(c). In particular, the Commission requests comment on the following questions:
(37) Is the proposed definition of the term ‘‘SEF trading specialist’’ overly broad or too narrow? Are there additional activities that SEF trading specialists engage in that should be reflected in the definition? Are there additional natural persons who should be captured by the proposed definition? (38) Are the exceptions to the fitness requirement for SEF trading specialists under proposed § 37.201(c)(2)(ii) appropriate? Should the Commission prohibit a SEF from employing persons other than those subject to a statutory disqualification under CEA sections 8a(2) or 8a(3)? If so, what additional disqualification factors should the Commission use? In this connection, should the Commission not rely on any of the disqualification factors in CEA sections 8a(2) or 8a(3)? (39) Should the qualification testing requirement under proposed § 37.201(c)(3)(ii) be broadened to allow a SEF to employ persons who have taken and passed a swaps proficiency examination developed and administered by parties other than an RFA? If so, should the Commission then adopt standards to ensure that such testing adequately ensures proficiency? How could the Commission ensure that the examination meets appropriate standards and consistency, such that it could be recognized by all SEFs? Should the Commission approve each examination to ensure appropriate standards are met and consistency is achieved across different examinations? (40) Are the ethics training and standards of conduct requirements under proposed §§ 37.201(c)(4)–(5), respectively, overly prescriptive or too flexible? Should the Commission provide greater specificity regarding the standards of conduct that a SEF must enforce? Are there particular subjects that should be specifically required as
part of ethics training?
VII. Additional Part 37 Regulations—
Subpart C: Core Principle 2 (Compliance With Rules) In addition to requiring a SEF to establish and enforce rules that govern its facility, Core Principle 2 requires a SEF to adopt trading, trade processing, and participation rules that provide participants with impartial access to the market and deter abuses; and establish and enforce compliance with any limitation on access.365 Further, Core Principle 2 requires a SEF to have the capacity to detect, investigate, and enforce those rules, including the means to capture information that may be used in identifying rule violations.366 The Commission adopted many detailed regulations in part 37 to further implement these requirements, including impartial access requirements under § 37.202; rule enforcement program requirements under § 37.203; third-party service provider requirements under § 37.204; audit trail requirements under § 37.205; and disciplinary procedures and sanctions requirements under § 37.206. The Commission is proposing several new rules and rule amendments under Core Principle 2, including clarifications of existing rules where appropriate, to implement its proposed swaps regulatory framework. These proposed amendments would streamline the SEF rules and allow SEFs to account for technological developments, existing market practices, and costs in their trading and market operations. Further, the amendments would codify no-action relief that has been provided under several existing Commission staff noaction letters. Among these changes, the Commission is proposing a modification to the impartial access requirements under § 37.202 and several corresponding amendments, which would provide a SEF with the ability to devise its participation criteria based on its own trading operations and market focus. Further, the Commission is proposing several amendments to §§ 37.203–206 that would allow a SEF to better tailor its own compliance and regulatory oversight rules to its trading operations and markets, while still maintaining a robust compliance program. A. § 37.202 Access Requirements The Commission implemented the statutory impartial access requirement by adopting § 37.202. Existing § 37.202(a)(1) requires a SEF to provide any ECP and any independent software vendor (‘‘ISV’’) with impartial access to its market(s) and market services, including indicative quote screens or any similar pricing data displays, provided that the facility has, among other things, criteria governing such access that are ‘‘impartial, transparent, and applied in a fair and nondiscriminatory manner.’’ 367 In the preamble to the SEF Core Principles Final Rule, the Commission stated that ‘‘impartial’’ means ‘‘fair, unbiased, and unprejudiced.’’ 368 The Commission further stated that the impartial access requirement allows ECPs to ‘‘compete on a level playing field’’ 369 and does not allow a SEF to ‘‘limit access . . . to certain types of ECPs or ISVs.’’ 370 The Commission also noted that each similarly situated
group of ECPs and ISVs must be treated similarly.371 The Commission believed that this approach would increase the number of market participants on SEFs, which in turn would increase SEF trading, thereby improving liquidity and price discovery in the swaps market.372 Core Principle 2, however, also allows a SEF to establish and enforce compliance with any rule of the SEF, including any limitation on access to the SEF.373 Accordingly, existing § 37.202(c) requires a SEF to establish and impartially enforce rules that govern the SEF’s decision to allow, deny, suspend, or permanently bar ECPs’ access to the SEF, including when such decisions are made as part of a disciplinary or emergency action by the SEF.374 The Commission further stated that a SEF may establish different access criteria for each of its markets, provided that the criteria are impartial and are not

375SEF Core Principles Final Rule at 33508. 376 Id. 377 17 CFR 37.202(a)(3). 378SEF Core Principles Final Rule at 33509. 379 Id. 380 Id. 381 17 CFR 37.202(a)(2). 382 17 CFR 37.202(b). 383The Commission proposes to retitle § 37.202(a) to ‘‘Impartial access to markets, market services, and execution methods’’ from ‘‘Impartial access to markets and market services’’ based on the proposed changes described below. 384SEF Core Principles Final Rule at 33508. 385 Id. used as a competitive tool against certain ECPs and ISVs.375 Subject to these requirements, the Commission stated that a SEF may ‘‘use its own reasonable discretion to determine its access criteria, provided that the criteria are impartial, transparent and applied in a fair and non-discriminatory manner, and are not anti-competitive.’’ 376 Existing § 37.202(a)(3) requires a SEF to have a comparable fee structure for ECPs and ISVs receiving comparable access to, or services from, the SEF.377 The Commission clarified that this requirement neither sets nor limits fees that a SEF may charge.378 The Commission further clarified that a SEF may establish different categories of ECPs and ISVs seeking access to, or services from, the SEF, but may not discriminate with respect to fees within a particular category.379 The Commission stated that existing § 37.202(a)(3) is not intended to be a ‘‘rigid requirement that fails to take into account legitimate business justifications for offering different fees to different categories of entities seeking access to the SEF.’’ 380 Finally, existing § 37.202(a)(2) requires SEFs to have procedures for ECPs to provide written or electronic confirmation of their ECP status with the SEF prior to obtaining access.381 Under existing § 37.202(b), an ECP must consent to a SEF’s jurisdiction prior to obtaining access to the SEF.382

§ 37.202(a)—Impartial Access to
Markets, Market Services, and Execution Methods 383 The Commission has applied the impartial access requirements to various areas of a SEF’s operations that concern participant access to the market. These features include (i) eligibility or onboarding criteria; (ii) a participant’s ability to access the SEF’s functionalities, i.e., trade and execute on a SEF’s execution methods; (iii) the manner in which a SEF’s execution methods treat market participants’ bids and offers, in particular the use of discretion; and (iv) participation fee structures. The Commission’s current approach to impartial access in these areas, however, has raised two issues that have led to certain inconsistencies in implementation of the requirement. First, the existing approach has created uncertainty for SEFs seeking to establish and apply access criteria in a consistent manner. The Commission recognizes that SEF Core Principle 2 requires a SEF to provide impartial access, but also allows a SEF to establish limitations on access. Accordingly, the Commission has allowed SEFs to establish different access criteria for different markets, but has also required each ‘‘similarly situated’’ group of ECPs and ISVs to be treated in the same manner.384 The preamble to the SEF Core Principles Final Rule also states that SEFs can use their own reasonable discretion to determine their access criteria, provided that they are impartial. In practice, implementation of the rule has led to some uncertainty by SEFs as to whether different access criteria for their markets, market services, and execution methods would be allowed or not allowed under § 37.202. Second, the manner in which the Commission has implemented the existing approach has often favored the promotion of an ‘‘all-to-all’’ trading environment and has, thus, limited the ability of SEFs to adapt their operations to the characteristics and dynamics of the swaps market.385 All-to-all trading environments, such as futures markets, are generally marked by smaller-sized products with standardized terms and conditions that appeal to a broad range of market participants, including retail customers. These same characteristics are also more conducive to continuous and liquid trading. By contrast, swaps trading often occurs between a limited number of ECPs in a broad array of unique, larger-sized products with more variable terms that are customized to address specific and unique hedging risks. These characteristics result in episodic market liquidity in many swaps markets, in contrast to the continuous liquidity found in all-to-all trading environments. The Commission believes that the imposition of features found in an ‘‘all-to-all’’ trading environment upon swaps markets is at odds with general market characteristics and dynamics of swaps trading. a. § 37.202(a)(1)—Impartial Access Criteria Based on its experience with implementing part 37, the Commission proposes to modify its approach to applying the impartial access requirement.
In doing so, the Commission proposes to streamline and consolidate the existing language and relevant preamble discussion from the SEF Core Principles Final Rule, including the Commission’s view of ‘‘impartial’’ and the concept of ‘‘similarly situated,’’ to establish a revised impartial access requirement. Under proposed § 37.202(a)(1), a SEF would be required to establish rules that set forth impartial access criteria for accessing its markets, market services, and execution methods, including any indicative quote screens or any similar pricing data displays. Such impartial access criteria must be transparent, fair and non-discriminatory and applied to all or similarly situated market participants. In proposing this approach, the Commission believes that criteria that are ‘‘fair and non-discriminatory’’ would inherently be ‘‘fair, unbiased, and unprejudiced,’’ which the Commission previously defined as ‘‘impartial.’’ The Commission also believes that the proposed rule clarifies that this criteria must be applied to market participants in a fair and nondiscriminatory manner, as currently required under the existing requirements of § 37.202(a)(1). Finally, proposed § 37.202(a)(1) would continue to allow each SEF to determine which market participants are ‘‘similarly situated’’ in its market and configure appropriate access criteria, provided that such criteria are transparent, fair, and non-discriminatory to participants. Applying access criteria in a ‘‘fair and non-discriminatory’’ manner means that a SEF should permit or deny access to a market participant on a non-arbitrary basis, based on objective, preestablished requirements or limitations. The Commission emphasizes, however, that this streamlined approach does not mean that a SEF must create an ‘‘all-toall’’ trading environment. The Commission acknowledges that it has often applied the impartial access requirement to promote an ‘‘all-to-all’’ trading environment, which is neither required under Core Principle 2 nor is consistent with swaps market structure. Under the proposed approach, the Commission would not seek to apply the requirement to mandate that all participants have access to all SEFs, which may have circumscribed a SEF’s ability under Core Principle 2 to set access limitations. Rather, to allow SEFs to serve different types of market participants or have different access criteria for different execution methods, the Commission would allow SEFs to apply access limitations, as long as they

386The Commission also notes that such criteria may be inconsistent with Core Principle 11. Core Principle 11 prohibits a SEF from adopting measures that result in any unreasonable restraint of trade or impose any material anticompetitive burdens on trading or clearing, unless they are necessary or appropriate to achieve the purposes of the CEA and are otherwise consistent with the CEA and the Commission’s regulations. 17 CFR 37.1100. 387 17 CFR 40.5–6. 388The Commission previously cited examples of ISVs that included smart order routers, trading software companies that develop front-end trading applications, and aggregator platforms. SEF Core Principles Final Rule at 33508 n.423. 389See supra notes 52–54 (describing the various modes of participation on SEFs by market participants). 390SEF Core Principles Final Rule at 33507–08. 391 Id. 392 Id. at 33507. 393 Id. 394 Id. at 33508. 395These criteria included (i) not providing access to an ECP that is both a liquidity provider and taker; (ii) prohibiting individuals from obtaining access despite their meeting the requirements to be an ECP; (iii) limiting access to ECPs that satisfy minimum transaction volume level requirements; and (iv) requiring an ECP to be a clearing member or to have an agreement with a clearing member to access the SEF, even if only for the purpose of trading swaps that are not intended to be cleared. Commission staff also expressed concern that SEFs allowing only either intermediated access or direct access may impede impartial access in certain instances. Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer and Intermediary Oversight Guidance on Application of Certain Commission Regulations to Swap Execution Facilities (Nov. 14, 2013) (‘‘2013 Staff Impartial Access Guidance’’). are applied in a fair and nondiscriminatory manner. This approach would also align with swaps market characteristics—in particular, the episodic nature of swaps liquidity—that have led to the overall swaps market being made up of both dealer-to-client and dealer-to-dealer markets, as described below. The Commission believes that the structure of the swaps market is a natural outgrowth of certain fundamental features of swaps trading. The Commission further believes that all-toall markets are inimical to these fundamental swaps trading features; therefore, imposing all-to-all, marketderived requirements on swaps markets ultimately detracts from achieving the statutory SEF goals of promoting swaps trading on SEFs and pre-trade price transparency in the swaps market. Accordingly, the Commission believes that each SEF should be able to use access criteria to develop its business in a manner that is both consistent with the characteristics of swaps markets and accommodating of the types of participants that comprise the SEF’s intended market. The Commission still believes that any access criteria intended to prevent or reduce competition among similarly situated market
participants would be unfair and discriminatory and, therefore, inconsistent with proposed § 37.202(a)(1). If a market participant is willing or able to meet the objective, pre-established, and transparent criteria for eligibility to onboard to a SEF or gain additional access to a SEF’s trading mechanisms, then the SEF should not preclude that market participant from onboarding to the SEF or using its functionalities. Accordingly, such a market participant should not be subject to access criteria that are unfair and discriminatory and are intended to prevent or dis-incentivize that market participant’s participation on the SEF.386 The Commission emphasizes that under proposed § 37.202(a)(1), any access criteria—whether it concerns eligibility or onboarding criteria, prerequisites for using certain trading functionalities, or fee schedules— constitutes a ‘‘rule,’’ as that term is defined under § 40.1(i), that would be subject to rule approval or selfcertification procedures under part
40.387 Through the part 40 rule review
process, the Commission would continue to evaluate a SEF’s compliance with the impartial access requirements as proposed. The Commission also proposes to eliminate the reference to ‘‘ISVs,’’ which the Commission notes is not required under Core Principle 2. Given that a SEF should be able to set its access criteria to develop its business based on its desired market and participant needs, the Commission also believes that a SEF should be able to determine an ISV’s level of access to the SEF. The Commission previously applied the impartial access requirement to ISVs on the basis that such types of vendors would provide various benefits to the swaps market and market participants, such as enhanced transparency and trading efficiency through the consolidation of trading data from multiple venues, analytics, and best displayed prices.388 Based on the Commission’s experience and notwithstanding the existing impartial access requirement, ISVs have not established a significant level of participation on SEFs, nor have they achieved a broad level of adoption among market participants. Rather, the Commission has observed that most participants access SEFs through means other than ISV services.389 Therefore, the Commission believes that the impartial access requirement should apply to market participants who are accessing SEF trading systems or platforms to trade swaps, rather than establish requirements for a separate set of entities that are merely providing ancillary market services. (1) Application of Impartial Access Requirement Based on the areas in which the Commission has applied the existing impartial access requirement to various aspects of a SEF’s operation during the
part 37 implementation, the
Commission discusses below how the proposed impartial access approach would apply to these areas to provide further clarity, including (i) eligibility and onboarding; (ii) execution methods; and (iii) SEF use of discretion. (i) Eligibility and Onboarding Criteria The Commission has applied the impartial access requirement to assess a SEF’s eligibility and onboarding criteria. In the preamble to the SEF Core Principles Final Rule, the Commission prospectively identified whether or not certain hypothetical arrangements would comply with the rulemaking’s approach to impartial access. Certain criteria were deemed non-compliant, such as platforms whose participants were limited to wholesale liquidity providers; 390 platforms that imposed participation limits based on maintaining financial integrity and operational safety; 391 platforms that established objective minimum capital or credit requirements; 392 and platforms that limited participation to sophisticated market participants.393 The Commission generally characterized these types of criteria as inconsistent with Core Principle 2 because they would inherently limit access to certain types of ECPs and ISVs.394 Subsequent Commission staff guidance further identified other eligibility criteria that Commission staff viewed as inconsistent with impartial access, based on the view that limiting access to a SEF’s trading systems or platforms to certain types of ECPs or ISVs is inconsistent with Core Principle 2.395 The Commission has realized from experience that certain criteria developed by SEFs reflect fundamental swap market segments. In particular, the swaps market consists of both a dealerto-client market segment and a dealerto-dealer market segment that are related, but also differ in important respects. In the dealer-to-client segment, corporate end-users and other buy-side participants access and utilize the swaps market to manage risk positions

396Such a situation might result in a SEF limiting trading access to uncleared swaps to only those market participants who have existing underlying documentation to execute such swaps with other potential counterparties. 397For example, a SEF could require market participants (or their clearing members) to have membership in a particular clearing organization, e.g., membership with the Fixed Income Clearing Corporation (‘‘FICC’’), in order to access a method of execution in which counterparties execute a package transaction with a non-swap leg that FICC must clear. 398The Commission notes that Commission staff previously used the term ‘‘enablement mechanism’’ in guidance to refer to ‘‘any mechanism, scheme, functionality, counterparty filter, or other arrangement that prevents a market participant from interacting or trading with, or viewing the bids and offers (firm or indicative) displayed by any other market participant on that SEF, whether by means of any condition or restriction on its ability or authority to display a quote to any other market participant or to respond to any quote issued by any other market participant on that SEF, or otherwise.’’ 2013 Staff Impartial Access Guidance at 1. 399The Commission notes that Commission staff previously viewed a SEF’s application or support otherwise for enablement mechanisms with respect to swaps that were intended to be cleared as ‘‘prohibited discriminatory treatment,’’ that is inconsistent with the existing impartial access requirement under § 37.202. Id. at 1–2. that are unique to their particular circumstances. Swap dealers provide liquidity to the participants within this market segment for a fee, which participants are willing to pay, that reflects the risks incurred by dealers from the episodic or relative lack of liquidity in the swaps market for many specific swaps. The swap dealers subsequently offset positions established through the dealer-to-client market segment by hedging their swaps inventories on a portfolio basis in the dealer-to-dealer market, which is wholesale in nature. Those dealer-todealer markets consist of other primary dealers and sophisticated marketmaking participants seeking to fulfill similar objectives through competitive execution of large-sized transactions. In pricing a customer trade, dealers base their prices on the cost of hedging those trades in the dealer-to-dealer markets. The dealer-to-dealer market may provide benefits to the swaps markets, in particular to non-dealer clients, by allowing dealers who provide liquidity to offload risk from clients. Without this market, liquidity in the dealer-to-client market may suffer because the inherent risks of holding swaps inventory could arguably dis-incentivize participation by dealers in the dealer-to-client market or otherwise require dealers to charge their customers higher prices for taking on this risk. Absent the supply of liquidity providers, non-dealers who are liquidity takers would have difficulty
executing swaps at competitive pricing. SEFs that serve the wholesale, dealer-to-dealer market have stated that using eligibility or participation criteria to maintain a dealer-to-dealer market is beneficial, given that it allows participants who share similar profiles and trading interests to interact with each another, thereby helping to promote liquid markets with tight pricing. For the reasons stated above, the Commission believes that SEF eligibility and onboarding criteria that would serve to maintain this market structure would be appropriate and consistent with existing market dynamics and may provide the benefits discussed above. Accordingly, a SEF could premise these criteria in different ways, such as limiting access upon the type of the market participant or the swap product itself. For example, a SEF would be able to calibrate access to serve market participants within a particular market segment, such as dealers trading in a wholesale swaps market, who may be categorized as ‘‘similarly situated.’’ (ii) Access to Execution Methods In addition to assessing SEF onboarding and eligibility, the Commission has also applied the current impartial access standard to evaluate various SEF-established prerequisites for trading on certain platforms or interacting with certain participants. Some of those prerequisites reflect the nature of the swap involved, e.g., whether the swap is submitted for clearing or is uncleared, which determines whether certain market participants are eligible to trade with one another.396 When a SEF lists a swap that is traded as a component of a transaction with other non-swap legs, the SEF might also establish trading eligibility criteria that take account of a participant’s ability to trade the nonswap leg components of such swaps.397 Other prerequisites may be based upon the prior or ongoing level of trading activity generated by a particular participant, e.g., whether the participant has been actively submitting bids and offers. During the implementation of
part 37, the Commission has deemed
appropriate certain criteria based on business or operational justifications, but also deemed other criteria as inconsistent with impartial access. For example, platform access criteria that require a market participant to contribute a certain amount of liquidity, e.g., provide a minimum number of bids and offers, have been prohibited, despite the business or operational justifications offered by SEFs. SEFs have also argued that requiring market participants to meet trading prerequisites or participation criteria to access certain platforms or trade certain products can be beneficial to promoting effective trading markets on SEFs. In implementing part 37, the Commission has acknowledged that such criteria may be beneficial toward maintaining and promoting orderly trading for uncleared swaps on SEFs—for example, where participants must have certain trading enablements in place prior to trading uncleared swaps with other participants on the platform.398 Specifically, the Commission has allowed such types of enablements, e.g., trading relationship documentation with a minimum percentage of trading participants prior to posting bids and offers or trading in certain established minimum sizes, to promote a more dynamic and liquid trading environment for uncleared swaps with active participation.399 The Commission’s current approach to impartial access, however, has led to confusion as to whether these types of criteria are inappropriate because they do not ensure equal participation by all market participants; or as to whether they are appropriate because they reflect a SEF’s ability to impose limitations on access and are consistent with the view that SEFs should have the discretion to determine the most suitable way to promote trading on their platforms. Specifically, the Commission recognizes that requiring impartial access for ‘‘similarly situated’’ groups of market participants has currently been interpreted to require that a SEF allow all participants in that group to be able to interact with one another in the same manner and degree. The Commission clarifies that a SEF must have impartial access criteria, i.e., transparent, fair, and nondiscriminatory, for trading prerequisites or participation criteria prior to accessing certain platforms or trading certain products. As long as these access criteria are impartial, such that any market participant who meets the criteria is able to utilize a certain execution method or trade a certain product, then they would be allowed to do so under the proposed approach. For example, if a SEF established a minimum trade size for its order book that applied to a market participant’s orders, then such criteria would be allowed if any of its market participants who met these criteria could trade on the order book. As noted above, Core Principle 2 does not require a SEF to create an ‘‘all-to-all’’ marketplace, and the Commission believes that SEFs should be allowed to establish criteria that would facilitate
trading based on its products and the intended trading environment. As long as a SEF also

400For the Commission’s previous description of the role of SEF trading specialists, who function as
part of a SEF’s voice-based or voice-assisted trading
system or platform, and their use of discretion, see supra Section VI.A.1.b.—§ 37.201(a)(2)—Discretion and Section VI.A.3.—§ 37.201(c)—SEF Trading Specialists. 401As discussed above, the Commission is clarifying the application of the SEF registration requirement in this notice to specify that these types of entities are subject to SEF registration based on their activity in facilitating trading and execution in swaps on a multiple-to-multiple basis between market participants. See supra Section IV.C.1.c.(2)—SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers. 402See supra Section VI.A.1.b.—§ 37.201(a)(2)— Discretion and Section VI.A.3.—§ 37.201(c)—SEF Trading Specialists. 403To further streamline the other existing impartial access requirements, the Commission proposes to renumber existing paragraph (a)(2), which requires confirmation of a participant’s ECP status, to subsection (c); and to renumber existing paragraph (a)(3), which addresses SEF fee requirements, to paragraph (a)(2). The Commission also proposes to renumber subsection (c)— ‘‘Limitations on access’’—to subsection (b) and to amend that existing language, as described below. Accordingly, the Commission also proposes to renumber existing subsection (b)—‘‘Jurisdiction’’— to subsection (d). 404With respect to trading incentive or discount programs, the Commission has observed various types of arrangements, such as discounts from trading fees that vary in size and scope based on the method of execution utilized and the relative rank of a SEF participant vis a vis other participants in terms of quoting frequency and number of products quoted. 405See supra Section IV.C.1.c.(2)—SEF Registration Requirement for Swaps Broking Entities, Including Interdealer Brokers. 406 In some instances, swap trading fees comprise
part of a larger overall negotiated fee that is agreed
upon between a market participant and a broker for broking services in a broad range of other products, including other fixed income instruments and equities. applies its impartial access criteria in a fair and non-discriminatory manner, as described above, the Commission believes that such criteria would comply with § 37.202(a)(1). (iii) Use of Discretion The Commission has also previously determined whether a SEF complies with the impartial access requirement based on how the SEF’s trading systems or platforms handle participant orders. For example, a SEF’s voice-based or voice-assisted execution methods involve the exercise of ‘‘discretion’’ by a SEF trading specialist in managing the interaction of multiple bids and offers from multiple participants. As described above, SEF trading specialists solicit orders on behalf of the SEF and seek to arrange transactions by matching those orders with reciprocal trading interests.400 Given the variability in how participant orders may be handled through the use of discretion, the Commission has sought to ensure that market participants are receiving ‘‘impartial access’’ in the manner in which their orders are handled while also acknowledging that discretion is inherent to these types of systems or platforms. The Commission also recognizes that its current approach to impartial access may be in tension with its proposal to allow more flexible execution methods on SEFs, particularly those that involve discretion and are prevalent in the dealer-to-dealer market. While some SEF execution methods facilitate trading and execution on a non-discretionary basis, e.g., electronic trading systems, including Order Books and RFQ Systems, some execution methods rely upon the ability of a SEF trading specialist to ascertain liquidity for particular products and manage multiple competing bids and offers, e.g., voice-based platforms. To facilitate trading and execution in such a trading environment, SEF trading specialists must account for a host of changing market conditions, such as available pricing, product complexity, prevailing trade sizes, and market participant needs. The Commission recognizes that SEF trading specialists may apply these factors differently among different participants during different periods of trading. In contrast to prevailing practices among swaps broking entities, such as interdealer brokers that have operated outside of the SEF regulatory framework,401 the Commission has scrutinized similar practices on SEF voice-based platforms against the impartial access requirements. The Commission acknowledges that its application of impartial access at times has constrained the ability of SEFs to establish trading systems or platforms that serve particular segments of the swaps marketplace. The Commission also believes that the trading discretion exercised by SEF trading specialists may affect the manner in which market participants are treated on a facility, but would not necessarily be
inconsistent with the Commission’s proposed approach to impartial access. The Commission believes that to the extent that the exercise of discretion furthers a SEF’s ability to facilitate trading and execution on its system or platform— including identifying trading interest in a discrete manner or managing bids and offers to maintain accurate market pricing—it should be viewed as being consistent with impartial access. The Commission also notes that proposed § 37.201(a)(2) would support the use of discretion in a manner consistent with impartial access; as discussed above, the proposed rule would provide transparency into the use of discretion by requiring each SEF to disclose the general manner and circumstances behind its use within each execution method.402 Notwithstanding proposed § 37.201(a)(2), however, the Commission emphasizes that a SEF would still be required to ensure that any use of trading discretion occurs in a fair and non-discriminatory manner. b. § 37.202(a)(2)—Fees Based on its experience in reviewing fee structures for SEFs, the Commission proposes to eliminate the requirement under § 37.202(a)(3) that a SEF must establish ‘‘comparable fee structures’’ for ECPs and ISVs receiving ‘‘comparable access’’ to the SEF or services from the SEF. In practice, this requirement has not fully accounted for the market practices described above. Instead, the Commission proposes § 37.202(a)(2) to require a SEF to establish and apply fee structures and fee practices in a fair and nondiscriminatory manner to its market participants.403 Currently, SEFs have established different fee levels for different categories of market participants or different types of trading activity, whether imposed directly through a trading fee schedule or indirectly through the use of trading incentive or discount programs.404 The Commission has observed that SEFs have generally based their fees or discounts on a host of different considerations, such as technological costs attributable to facilitating a particular method of accessing the platform or a listed product’s complexity. In particular, feesetting arrangements for swaps trading in the dealer-to-dealer segment, which includes interdealer broker operations that would become subject to the proposed SEF registration requirement,405 may differ, even in instances where market participants are receiving comparable access or services from the SEF. Rather, fee arrangements in the dealer-to-dealer market are often subject to individualized negotiations between a particular market participant and its broker, often involving a combination of different factors and business considerations that can lead to different fees for market participants who could otherwise be characterized as similarly situated.406 The Commission has observed that these factors or considerations may include discounts based on past or current trading volume attributable to the market participant, market maker participation, or pricing
arrangements related to services

407The Commission proposes to renumber existing subsection (c)—‘‘Limitations on access’’— to subsection (b) and amend the requirement as described above. 408The Commission proposes to renumber existing paragraph (a)(2) to subsection (c) and adopt a new title—‘‘Eligibility.’’ 409The Commission proposes to renumber existing subsection (b)—‘‘Jurisdiction’’ to subsection (d). 410 2014 Staff Jurisdiction Guidance at 2. 411 7 U.S.C. 7b–3(f)(2). 412The Commission notes that CEA section 2(e) limits swaps trading to ECPs, as defined by section 1a(18) of the Act. 7 U.S.C. 2(e). 413The Commission proposes to eliminate the introductory sentence under § 37.203, which states that a SEF shall establish and enforce trading, trade processing, and participation rules that will deter abuses and it shall have the capacity to detect, investigate, and enforce those rules. This language is duplicative of the existing requirements under Core Principle 2. provided by a SEF-affiliated entity involving other non-swap products. The confluence of such factors, and the varying degrees to which they help inform swap trading fee determinations, have been difficult to distill into fee structures applicable to categories of market participants. Based on this practical difficulty, the Commission is proposing to allow SEFs and market participants the flexibility to determine fees based on legitimate business negotiations. In this proposal, the Commission does not intend to limit the scope of business-related factors that a SEF may continue to consider in establishing participation fee arrangements. Proposed § 37.202(a)(2) is intended to provide market participants and SEFs with the flexibility to negotiate fee arrangements on an individualized basis based on legitimate business justifications. The Commission emphasizes, however, that consistent with the impartial access requirement under proposed § 37.202(a)(1), a SEF should not use fees to discriminate against certain market participants.
2. § 37.202(b)—Limitations on Access
The Commission proposes to require a SEF to maintain documentation of any decision to deny, suspend, permanently bar, or otherwise limit a market participant’s access to the SEF.407 The Commission believes that such documentation is important to assisting a SEF’s CCO in reviewing the SEF’s adherence to its access criteria rules and determining whether the SEF is applying its access criteria in a manner that meets § 37.202. This documentation can further assist the Commission in reviewing any limitation on access determinations for a market participant during rule enforcement reviews or in the event that a market participant or the Commission challenges a SEF’s access decision. The Commission also proposes nonsubstantive amendments to the existing provision, including amending the existing reference to ‘‘eligible contract participant’’ to ‘‘market participant’’ to provide greater clarity.
3. § 37.202(c)—Eligibility
The Commission proposes under § 37.202(c) to maintain the existing requirement that a SEF must require its market participants to provide a written confirmation (electronic or otherwise) of their ECP status prior to obtaining access to the SEF. The Commission also proposes to make minor non-substantive revisions to the current language.408
4. § 37.202(d)—Jurisdiction
The Commission proposes under § 37.202(d) to maintain the existing requirement that a SEF must require that a market participant consent to its jurisdiction prior to granting any market participant access to its facilities. The Commission also proposes to make minor non-substantive revisions to the current language.409 In addition, the Commission confirms that consistent with prior Commission staff guidance, a SEF does not need to obtain consent to its jurisdiction through an affirmative writing, and a SEF may obtain consent through a notification in its rulebook.410 Request for Comment The Commission requests comment on all aspects of proposed § 37.202. In particular, the Commission requests comment on the following questions:
(41) Should the Commission specify a basis for how it would determine that a SEF’s access criteria are unfair and discriminatory? Should a SEF be limited in the type of justifications that it may provide for its access criteria to demonstrate that they are impartial, e.g., such criteria are intended to promote participation and/or liquidity? If so, what would those justifications be? (42) What should be the bases or factors for determining whether market participants are ‘‘similarly situated’’? (43) Should enablements be allowed as a type of access criteria for cleared swaps, in addition to their usage for uncleared swaps? Is this consistent with the Commission’s proposed approach to impartial access? Why or why not? If so, please provide examples of enablements for cleared swaps that are consistent with the Commission’s proposed approach to impartial access. B. § 37.203—Rule Enforcement Program
Section 37.203 implements certain
aspects of Core Principle 2, which requires a SEF to (i) establish and enforce trading, trade processing, and participation rules to deter abuses; and (ii) have the capacity to detect, investigate, and enforce those rules, including the ability to capture information to identify rule violations.411 The regulation sets forth the requirements of an acceptable SEF rule enforcement program, including requirements related to prohibiting abusive trading practices; detecting and investigating rule violations; maintaining sufficient staffing and resources; maintaining an automated trade surveillance system; conducting real-time market monitoring; and conducting investigations. During the part 37 implementation process, the Commission has acquired greater experience with the swaps markets, in particular related to SEF compliance and regulatory oversight requirements. The Commission acknowledges that the existing swaps regulatory framework was developed based in part on the futures regulatory framework. As a result, the current part 37 regulations do not sufficiently account for differences between futures and swaps markets, in particular the differences in the complexity and size of transactions, the number and sophistication of market participants,412 and the variations in the methods of execution offered. Within the swaps market, the Commission also recognizes that product offerings, execution methods, types of market participants, and liquidity may even vary among SEFs. Accordingly, the Commission believes that instead of prescribing a limited approach to compliance and regulatory oversight requirements, a SEF should be enabled to tailor its compliance and oversight program to fit its respective operations and market.413 Further, the Commission seeks to ensure that SEF rule enforcement requirements are consistent with the ability of a SEF to offer flexible execution methods for any of its listed swaps. Therefore, as described below, the Commission proposes to amend § 37.203 to enable a SEF to establish a rule enforcement program that is best suited to its trading systems and platforms, as well as its market participants, while still ensuring the ability to fulfill its self-regulatory obligations. The Commission believes that these proposed amendments would also reduce certain complexities, costs, and burdens, while still continuing to implement the Core Principle 2 requirements and require a robust compliance program.

414 17 CFR 37.203(a).
415See supra Section IV.B.2.—§ 37.2(b)— Definition of ‘‘Market Participant.’’ 416See supra Section VI.A.2.a.—§ 37.201(b)—PreExecution Communications. 417The Commission proposes to retitle § 37.203(b) to ‘‘Authority to collect information’’ from ‘‘Capacity to detect and investigate rule violations’’ based on the proposed changes described below. 418 17 CFR 37.203(b). 419 17 CFR 37.203(d). The Commission also notes that other part 37 regulations require a SEF to supervise the market and analyze data, including regulations that implement Core Principle 4. As amended, § 37.401(a) would require a SEF to conduct real-time market monitoring of all trading activity on the SEF to identify disorderly trading, any market or system anomalies, and instances or threats of manipulation, price distortion, and disruption. See infra Section IX.A.—§ 37.401— General Requirements. 420A SEF’s recordkeeping rules are established by, among other provisions, § 37.404(b), which requires a SEF to have rules that require its market participants to keep records of their trading. 17 CFR 37.404(b). 421The Commission notes that this lack of clarity existed during the adoption of part 37. For example, one commenter previously requested clarity regarding the scope of the rule. SEF Core Principles Final Rule at 33511. 422 17 CFR 37.203(c). 423The Commission notes that a SEF must, at all times, maintain sufficient internal compliance staff to oversee the quality and effectiveness of the regulatory services provided, as required by § 37.204. As discussed below, the Commission proposes to expand § 37.204(a) to allow a SEF to use a non-registered entity approved by the Commission for the provision of regulatory services.

§ 37.203(a)—Abusive Trading
Practices Prohibited
Section 37.203(a) requires a SEF to
generally prohibit abusive trading practices on its markets by members and market participants, but also enumerates specific practices that a SEF must specifically prohibit, including frontrunning, wash trading, pre-arranged trading (except for block trades or other types of transactions certified or approved by the Commission under part 40), fraudulent trading, money passes, and any other trading practice that the SEF deems to be abusive.414 Section 37.203(a) further requires a SEF to prohibit any other manipulative or disruptive trading practices prohibited by the Act or Commission regulations. SEFs permitting intermediation must also prohibit customer-related abuses, such as trading ahead of customer orders, trading against customer orders, accommodation trading, and improper cross trading. The Commission proposes a nonsubstantive amendment to § 37.203(a) to eliminate the term ‘‘members.’’ The Commission notes that its proposed definition of ‘‘market participant’’ under § 37.2(b) would capture the universe of persons and entities that could engage in abusive trading practices, including a SEF’s members.415 As discussed above in conjunction with the proposed prohibition on preexecution communications under § 37.201(b), the Commission is also proposing to eliminate exceptions to the pre-arranged trading prohibition under § 37.203(a).416 Request for Comment The Commission requests comment on all aspects of proposed § 37.203(a). In particular, the Commission requests comment on the following questions:
(44) Are there any abusive trading practices enumerated under proposed § 37.203(a) that are not applicable to swaps trading on a SEF, on certain SEF markets, or through certain methods of execution? (45) Are there other abusive trading practices that could potentially occur in the swaps markets that the Commission should enumerate as a required prohibition under § 37.203(a), e.g., intradesk and intracompany trading; order flashing; a failure to honor firm prices; attempting to change the general conditions of a swap transaction after price has been agreed upon; or potential abuses at those points in the day when options are settled against swaps levels?
§ 37.203(b)—Authority To Collect
Information 417
Section 37.203(b) currently requires a
SEF to have arrangements and resources for effective enforcement of its rules, which includes the authority to collect information and examine books and records of SEF members and persons under investigation. A SEF must also facilitate direct supervision of the market and analysis of data collected to determine whether a rule violation has occurred.418 The Commission proposes several amendments to the existing requirements. First, the Commission proposes to eliminate the requirement that a SEF’s arrangements and resources must facilitate the direct supervision of the market and the analysis of data collected to determine whether a rule violation has occurred. The Commission views the language of this requirement as superfluous because other regulations already set forth these requirements in greater specificity, such as § 37.203(d), which requires a SEF to maintain an automated trade surveillance system that is capable of detecting and reconstructing potential trade practice violations.419 Second, the Commission proposes to eliminate the requirements that SEFs have the authority to collect documents on a routine and non-routine basis and examine books and records kept by members and persons under investigation. Instead, the Commission proposes to require that each SEF have the authority to collect information required to be kept by persons subject to the SEF’s recordkeeping rules.420 The Commission recognizes that the existing requirement does not provide clarity as to the meaning of collecting of documents on a ‘‘routine and nonroutine’’ basis and how a SEF can collect information from ‘‘persons under investigation.’’ 421 Based on the Commission’s experience in implementing part 37, the Commission believes that SEFs are better suited to determine what recordkeeping rules are appropriate based on the products that it offers for trading and the types of participants on its market, among other considerations. Request for Comment The Commission requests comment on all aspects of proposed § 37.203(b).
§ 37.203(c)—Compliance Staff and
Resources
Section 37.203(c) currently requires a
SEF to establish and maintain sufficient compliance staff and resources to conduct a number of enumerated tasks, such as audit trail reviews, trade practice surveillance, market surveillance, and real-time monitoring. The rule further requires that such staff must be sufficient to address unusual market or trading events and to conduct investigations in a timely manner.422 The Commission proposes to eliminate the enumerated tasks and replace them with the phrase ‘‘selfregulatory obligations under the Act and Commission regulations.’’ The proposed amendment is intended to apply the requirement to all of the SEF’s applicable self-regulatory functions and clarify that the existing requirement is not limited to the enumerated tasks. Similarly, the Commission also proposes to eliminate the language that requires staffing to be sufficient to address unusual market or trading events and to complete investigations in a timely manner, given that these enumerated requirements are an inherent part of a SEF’s existing selfregulation obligations. As the Commission noted in the SEF Core Principles Final Rule, a SEF may also take into account the staff and resources of any third-party entities it uses under § 37.204 to provide regulatory services when evaluating the sufficiency of its compliance staff.423 Further, the Commission reiterates that as stated in the preamble to the SEF Core Principles

424SEF Core Principles Final Rule at 33511. 425 17 CFR 37.203(d). 426The Commission notes that some commenters previously expressed concern about the clarity of the enumerated capabilities. SEF Core Principles Final Rule at 33512. 427See infra Section VII.D.2.a.—§ 37.205(b)(1)— Original Source Documents; § 37.205(b)(2)— Transaction History Database; § 37.205(b)(3)— Electronic Analysis Capability. 428The Commission also proposes to retitle § 37.203(e) to ‘‘Error trade policy’’ from ‘‘Real-time market monitoring’’ based on the proposed changes described below. 429 17 CFR 37.203(e). 430Staff Guidance on Swaps Straight-Through Processing at 5 (Sept. 26, 2013) (‘‘2013 Staff STP Guidance’’). In addition to discussing the void ab initio concept, as discussed below, the 2013 Staff STP Guidance also discussed ‘‘straight-through processing’’ for swap transactions. See infra Section XII.B.2.—§ 37.702(b) and § 39.12(b)(7)—Time Frame for Clearing. The Commission notes that to the extent that error trades leading to a rejection from clearing could be corrected without the execution of a new trade, such methods would depart from the void ab initio concept articulated by the Divisions. 431As previously stated by Commission staff for purposes of granting time-limited no-action relief, an operational or clerical error is any type of error other than a rejection from clearing due to credit reasons. CFTC Letter No. 17–27, Re: No-Action Relief for Swap Execution Facilities and Designated Contract Markets in Connection with Swaps with Operational or Clerical Errors Executed on a Swap Execution Facility or Designated Contract Market (May 30, 2017) at 1 n.2 (‘‘NAL No. 17–27’’). Final Rule, some SEF compliance staff can be shared among affiliated entities as appropriate.424 Request for Comment The Commission requests comment on all aspects of proposed § 37.203(c).
4. § 37.203(d)—Automated Trade
Surveillance System
Section 37.203(d) requires a SEF to
maintain an automated trade surveillance system capable of detecting potential trade practice violations.425 The rule also requires that the system load and process daily orders and trades no later than twenty-four hours after the completion of the trading day. Given that this requirement applies to all orders and trades regardless of the type of execution method, § 37.203(d) requires orders that are not submitted to an electronic trading system, e.g., orders submitted by voice or certain other electronic communications, such as instant messaging and email, also be loaded and processed into an automated trade surveillance system. Such a system, among other requirements, must have the capability to detect and flag specific trade execution patterns and trade anomalies; compute, retain, and compare trading statistics; compute trading gains and losses and swapequivalent positions; and reconstruct the sequence of trading activity. The Commission proposes to eliminate the specific automated trade surveillance system capabilities enumerated under § 37.203(d), except for the ability of a SEF to reconstruct the sequence of market activity. Specifically, the Commission proposes to retain this concept by amending the remaining rule language to require that a SEF’s automated trade surveillance system be capable of detecting potential trade practice violations and reconstructing the sequence of market activity and trading. The Commission believes that an automated trade surveillance system must be able to reconstruct both the sequence of market activity and trading in order to detect such violations. The Commission recognizes based on its experience with implementing the existing requirement that a SEF’s automated trade surveillance system cannot perform all of the enumerated capabilities under the existing rule, such as computing trade gains, losses, and swap equivalent positions. The Commission also acknowledges that it has not clarified the enumerated capabilities, which has led to some confusion.426 As amended, the rule would provide each SEF with the ability to tailor its automated trade surveillance system requirements as needed to fulfill its compliance responsibilities, thereby allowing the SEF to account for the nature of its trading systems or platforms. The Commission believes that this proposed approach is consistent with the reasonable discretion given to a SEF under Core Principle 1 to establish the manner in which it complies with the SEF core principles. The Commission also proposes to amend § 37.203(d) to clarify that all trades executed by voice or by entry into a SEF’s electronic trading system or platform, as well as orders that are ‘‘entered into an electronic trading system or platform,’’ must be loaded and processed into the automated trade surveillance system. This proposed amendment reflects the Commission’s recognition that no cost-effective and efficient means currently exists that would provide a SEF with the capability to load
and process orders that are not initially entered into an electronic trading system or platform, e.g., orders entered by voice or certain other electronic communications, such as instant messaging and email, given that those orders are in different formats. The Commission notes that this proposed change is consistent with the proposed amendments to §§ 37.205(b)(2)–(3), as discussed below, that would similarly limit a SEF’s electronic transaction history database and electronic analysis capability requirements.427 The Commission, however, emphasizes that a SEF must continue to have the capability to load and process all executed trades, including those resulting from orders entered by voice or certain other electronic communications, such as instant messaging and email. The Commission also emphasizes that under proposed § 37.205(a), a SEF must continue to capture all orders entered by voice (i.e., oral communications) or certain other electronic communications, such as instant messaging and email. Finally, the Commission proposes to clarify that the term ‘‘trading day’’—on which such data must be loaded into the automated trade surveillance system— means the day ‘‘on which such trade was executed or such order was entered.’’ Request for Comment The Commission requests comment on all aspects of proposed § 37.203(d).
5. § 37.203(e)—Error Trade Policy 428
Section 37.203(e) currently requires a
SEF to conduct real-time market monitoring of all trading activity on its system(s) or platform(s) to identify disorderly trading and any market or system anomalies.429 The regulation further requires a SEF to have the authority to adjust prices and cancel trades when needed to mitigate ‘‘market disrupting events’’ caused by SEF trading system or platform malfunctions or errors in orders submitted by market participants. Further, any trade price adjustments or trade cancellations must be transparent to the market and subject to standards that are clear, fair, and publicly available. a. Error Trades—Swaps Submitted for Clearing In 2013, the Division of Clearing and Risk (‘‘DCR’’) and DMO (together, the ‘‘Divisions’’) issued guidance (the ‘‘2013 Staff STP Guidance’’) to address ‘‘straight-through processing’’ requirements that, among other things, expressed the view that SEFs should have rules stating that trades that are rejected from clearing are ‘‘void ab initio.’’ 430 According to the Divisions, swap transactions that are executed and subsequently rejected by the DCO from clearing would be considered void, even where the rejection is attributable to an operational or clerical error from the SEF or market participants.431

432The Commission understands that when a swap trade that is intended to be cleared has an operational or clerical error, a DCO will reject that trade, even if it otherwise complies with the riskbased limits established for the respective counterparties. As DCOs do not distinguish clearing rejections for credit reasons from clearing rejections due to clerical or operational errors, error trades are treated as void ab initio. 433CFTC Letter No. 13–66, Time-Limited NoAction Relief for Swap Execution Facilities from Compliance With Certain Requirements of Commission Regulation 37.9(a)(2) and 37.203(a) (Oct. 25, 2013) (‘‘NAL No. 13–66’’). In April 2015, staff issued additional no-action relief, which reinstated the previous time-limited no-action relief from NAL No. 13–66 for SEFs from § 37.9(a)(2) and § 37.203(a) for swaps rejected from clearing due to an operational or clerical error. Under the expanded no-action relief, SEF market participants have resolved error trades accepted for clearing at the DCO, among other types of transaction. CFTC Letter No. 15–24, Re: No-Action Relief for Swap Execution Facilities and Designated Contract Markets in Connection with Swaps with Operational or Clerical Errors Executed on a Swap Execution Facility or Designated Contract Market (Apr. 22,
2015) (‘‘NAL No. 15–24’’). Commission staff
subsequently extended the relief provided in NAL No. 15–24 in June 2016. CFTC Letter No. 16–58, Re:
No-Action Relief for Swap Execution Facilities and Designated Contract Markets in Connection with Swaps with Operational or Clerical Errors Executed on a Swap Execution Facility or Designated Contract Market (June 12, 2016). This relief has been most recently extended by NAL No. 17–27 in May 2017. 434The Commission notes that it is also proposing certain clarifications and amendments related to the 2013 Staff STP Guidance with respect to straightthrough processing of swaps. See infra Section XII.B.2.b.—Proposed Approach to Straight-Through Processing. 435 2013 Staff STP Guidance at 5. 436The Commission notes that the guidance to Core Principle 4 in Appendix B cites ‘‘clear errortrade and order-cancellation’’ policies as a type of trading risk control that could be part of an acceptable program for preventing market disruptions. 17 CFR part 37 app. B (guidance to Core Principle 4—paragraph (a)(5)—‘‘Risk controls for trading’’). 437The Commission proposes to retitle § 37.203(e) to ‘‘Error trade policy’’ from ‘‘Real-time market monitoring.’’ 438The Commission notes that the real-time market monitoring requirement is duplicative of Core Principle 4, which requires a SEF to conduct real-time monitoring of trading and comprehensive and accurate trade reconstructions. To account for the minor difference between the real-time monitoring requirements under § 37.203(e), which requires a SEF’s monitoring to ‘‘identify disorderly trading,’’ and § 37.401, which currently does not specify that requirement, the Commission is proposing to amend § 37.401 to incorporate this requirement. See infra Section IX.A.—§ 37.401— General Requirements. SEFs and market participants raised concerns that considering such transactions to be void ab initio under the guidance would impede their ability to correct trades that were rejected from clearing at the DCO on the basis of such errors. For example, some transactions submitted for clearing may fail to match a specified term due to a clerical error, e.g., counterparty names; as a result, the trades would be rejected from clearing and deemed void ab initio, even though the error would be readily correctable.432 The Divisions’ view on void ab initio would compel counterparties to execute a new trade with the corrected terms, rather than allow a SEF to identify and correct the error through other established protocols and procedures. For those SEFs that apply the concept of void ab initio, however, the Commission’s current execution method requirements have inhibited the ability to correct errors through subsequent trades, where a swap has been rejected from clearing due to the error or where a swap containing an error has been accepted for clearing by a DCO. For swaps that are Required Transactions, market participants have been otherwise prohibited from determining how to resolve the error between themselves by entering into an offsetting trade or a new trade with the correct terms due to (i) the execution method
requirements under § 37.9(a)(2), which requires that all Required Transactions be traded via either an Order Book or RFQ System; and (ii) the corresponding prohibition on pre-arranged trading under § 37.203(a). In response to these concerns related to void ab initio, Commission staff has provided timelimited no-action relief.433 Based on this no-action relief, SEFs have allowed market participants to prearrange corrective trades for execution and submission to a DCO for clearing through means not prescribed under § 37.9 for Required Transactions. Such trades include a new trade with the corrected terms, where an error trade has been rejected from clearing. Such trades also include a new trade to offset an error trade accepted for clearing and a second subsequent trade with the corrected terms, as originally intended between the counterparties. This relief has enabled counterparties to address error trades, but has required SEFs to adopt mechanisms to identify these corrective trades and additional related rules and procedures for their respective market participants. In light of the challenges described above, the Commission proposes clarifications and amendments to address the role of void ab initio with respect to error trades for SEFs as described below.434 The Commission notes that void ab initio is a determination made by a SEF, and not by a DCO, which merely accepts or rejects a trade from clearing. Additionally, consistent with the 2013 Staff STP Guidance,435 the Commission notes that void ab initio does not apply to back-loaded trades, i.e., trades originally executed without an intent to clear, which the parties subsequently decided to clear. b. Current SEF Error Trade Policies SEFs have adopted rules and protocols to address other general aspects of correcting an error trade. These factors, among the many specified across all SEFs, include a definition of ‘‘error trade’’; the circumstances to which the SEF’s error trade rules would apply; the process for a market participant to report an alleged error trade; the process through which a SEF may review and determine that an error trade has occurred; notification procedures; and the possible courses of action that a SEF may take (or allow its market participants to take) to correct the error trade. The Commission believes that the adoption of such error trade policies by SEFs reflects their understanding that such policies are a beneficial practice that promotes a fair and orderly trading market for their market participants.436 Notwithstanding the existence of error trade rules and protocols across different SEFs, market participants have stated that those rules and protocols, and the manner in which they are applied, have been inconsistent in some respects. Participants have cited a number of such examples, including inconsistent approaches to notifying SEFs of alleged error trades; the varying factors that SEFs consider in evaluating alleged error trades; and the level of notification
provided to other market participants regarding alleged errors. Therefore, some market participants— particularly those that are participants of multiple SEFs—have recommended that the Commission adopt some general error trade policy requirements to promote a more consistent approach. Based on the feedback received and its own observations during the part 37 implementation, the Commission proposes to refine its approach to SEF error trade policies in a manner that would benefit market participants.
c. § 37.203(e)—Error Trade Policy 437
The Commission proposes to eliminate the real-time market monitoring requirement, which is duplicative of Core Principle 4, and adopt a refined approach to SEF error trade policies under proposed § 37.203(e) that would allow a SEF to implement its own protocols and processes to correct error trades with respect to swaps (i) rejected by a DCO due to an operational or clerical error or (ii) accepted for clearing by a DCO that contains an operational or clerical error.438 Therefore, the Commission’s

439The Commission proposes to renumber § 37.702(b)(2) to § 37.702(b)(1). See infra Section XII.B.2.b.(1)—§ 37.702(b)(1) and § 39.12(b)(7)(i)(A)—‘‘Prompt, Efficient, and Accurate’’ Standard. 440 In some cases, clearing members and the DCO may not be able to resolve an outstanding credit issue, but the swap nevertheless remains void ab initio. 441See 17 CFR part 37 app. B (guidance to Core Principle 4—paragraph (a)(5)—‘‘Risk controls for trading’’) (noting that risk controls such as error trade policies should be adapted to the unique characteristics of the trading platform and of the markets to which they apply). The Commission notes that based on its proposal to adopt separate error trade policy rules under § 37.205(e), it also proposes to eliminate the guidance to Core Principle 4 in Appendix B that specifies error trade policies as a type of risk control that a SEF may adopt. See infra Section IX.E.—§ 37.405—Risk Controls for Trading. 442The Commission notes, however, that to the extent that a DCO has its own protocols and policies for resolving error trades—both for error trades that are rejected for clearing due to noncredit related errors and for error trades that have been accepted for clearing—a SEF should coordinate its own approach with the DCO, pursuant to the requirements of proposed § 37.702(b)(1) (existing § 37.702(b)(2)), which requires a SEF to coordinate with a DCO, to which it submits transactions for clearing, to develop rules and procedures to facilitate prompt and efficient transaction processing in accordance with § 39.12(b)(7). 443NAL No. 17–27. 444To the extent that a SEF currently maintains a similar approach as set forth in the no-action relief, however, the Commission clarifies that a SEF could maintain those protocols and procedures, notwithstanding the adoption of the proposed version of § 37.203(e). 445See infra note 319 and accompanying discussion (noting that the pre-arranged trading prohibition is intended to maintain the integrity of price competition and market risk that is incident to trading in the market). 446This definition, however, would not include a swap trade that is rejected from clearing for credit reasons, as discussed above. Therefore, the Commission notes that proposed § 37.203(e) would not apply to such trades. proposal would explicitly permit a SEF to establish its own rules regarding error trades rejected from clearing, which the Commission believes would facilitate a SEF’s ability to establish its own error trade procedures that it believes is best suited to its particular market, including whether to maintain an approach based on the void ab initio concept for trades rejected from clearing due to non-credit related errors. Consistent with proposed § 37.702(b)(1),439 however, the Commission notes that SEFs would now be required to deem any swap submitted for clearing as void ab initio if a DCO rejects the trade from clearing due to credit reasons. Under this scenario, clearing members for the
executing counterparties to the rejected trade must resolve the outstanding credit issue that prevented a DCO from accepting the trade for clearing. The ability for a clearing member to resolve credit issues, a process which is outside of a SEF’s purview, is inconsistent with the SEF’s ability to provide for the financial integrity of swaps entered into on the SEF in contravention of Core Principle 7 and proposed § 37.702(b)(1), which would require a SEF to coordinate with a DCO to facilitate prompt, efficient, and accurate processing and routing of transactions to the DCO.440 In contrast, a SEF’s role in this context is limited to controlling the process of correcting an operational or clerical error within the terms of a swap using the SEF’s error trade-related rules and procedures. Therefore, a SEF should not rely upon a clearing member to resolve such credit issues, but instead must declare a swap that is rejected from clearing for credit reasons as void ab initio. In addition to allowing a SEF to configure an approach to correcting non-credit related error trade swaps submitted to a DCO for clearing, however, the Commission emphasizes that proposed § 37.203(e) would generally require a SEF to establish baseline procedural requirements for an error trade policy for all swaps executed on its facility. The proposed approach would permit a SEF to develop and adopt a more efficient approach based on the nature of the transaction and error, as well as the SEF’s own operational and technological capabilities.441 Given that market participants often execute subsequent swaps to hedge the risk of an initial transaction, this approach would help mitigate the potential exposure to market and execution risk that arises if such hedge positions are established against a swap that has been deemed void ab initio. Accordingly, a SEF may reduce that risk by facilitating a more targeted and timely correction of errors in the initial transaction that would not necessitate the resubmission of an entire transaction that has been voided.442 The proposed approach, in conjunction with the proposed adoption of more flexible methods of execution, would also render the current no-action relief unnecessary for those SEFs that choose to deem error trades as void ab initio.443 For example, if a SEF maintains an approach similar to the current no-action relief, then the elimination of the prescriptive execution methods under § 37.9 would allow counterparties to execute a corrective trade via flexible methods of execution offered by the SEF.444 Under the proposed approach, however, a SEF also may not choose to follow the void ab initio approach for non-credit related errors and instead adopt operational protocols or procedures to resolve an error trade that do not require the execution or resubmission of a corrective trade. Relief from the prearranged trading prohibition under § 37.203(a) would also be unnecessary; under the proposed approach, a SEF could allow
counterparties to use flexible means of execution to execute a corrective trade.445 In conjunction with the proposed flexibility to correcting error trades, § 37.203 would also set forth general requirements that are intended to create a baseline consistency among SEF error trade policies. Proposed § 37.203(e)(1) defines an ‘‘error trade’’ as any swap transaction executed on a SEF that contains an error in any term, including price, size, or direction.446 Proposed § 37.203(e)(2) would require a SEF to establish and maintain rules and procedures to help resolve error trades in a ‘‘fair, transparent, consistent, and timely manner.’’ At a minimum, such rules would be required to provide the SEF with the authority to adjust trade terms and cancel trades; and specify the rules and procedures for market participants to notify the SEF of an error trade, including any time limits for notification. While the Commission is providing SEFs with flexibility in designing their error trade policies, the Commission believes that fairness, transparency, consistency, and timeliness should be key principles in a SEF’s error trade policy. Further, proposed § 37.203(e)(3) would establish a minimum set of notification requirements for a SEF. A SEF would be required to notify all of its market participants, as soon as practicable, of (i) any swap transaction that is under review pursuant to the SEF’s error trade rules and procedures; (ii) a determination that the trade under review is or is not an error trade; and (iii) the resolution of any error trade, including any trade term adjustment or cancellation. The Commission proposes an ‘‘as soon as practicable’’ standard based on competing considerations, such as the need to maintain orderly trading versus the need for timely transparency. Under this proposed approach, a SEF may determine that making error trade information available at a particular point in time is not practicable, given the countervailing concerns of potential market disruptions caused by the announcement of a potentially erroneous trade that has been disseminated to the SEF’s participants. Proposed § 37.203(e)(4) would allow a SEF to establish non-reviewable ranges.

447The Commission proposes to retitle § 37.203(f) to ‘‘Investigations’’ from ‘‘Investigations and investigation reports’’ based on the proposed changes described below. 448 17 CFR 37.203(f). 449 17 CFR 37.203(f)(1). 450 17 CFR 37.203(f)(2). 451 17 CFR 37.203(f)(2). 452 17 CFR 37.203(f)(4). The Commission has observed that in the interests of minimizing market disruption and maintaining orderly trading, many SEFs have established non-reviewable ranges during the course of trading. Therefore, the Commission believes that to allow SEFs to maintain existing beneficial market practices, a SEF should continue to be able to establish such ranges, which may be adjusted based on market conditions. Pursuant to proposed § 37.203(e)(2), however, the Commission emphasizes that such ranges must be established and administered in a fair, transparent, consistent, and timely manner. The Commission recognizes that identifying and resolving error trades in a timely manner is important to promote market integrity and efficiency and ensure that trade data, which market participants rely upon to inform their swaps trading decisions, accurately reflects prevailing market pricing at any given time. The Commission believes that proposed § 37.203(e) would accomplish these goals for market participants and the market as a whole. Request for Comment The Commission requests comments on all aspects of proposed § 37.203(e). The Commission may consider alternatives to its proposed error trade policy requirements and requests comment on the following questions:
(46) Does the lack of a void ab initio requirement for non-credit related errors create concerns about market risk with respect to error trades that have been executed, but have not been voided despite the rejection from clearing? If so, should a SEF be limited in the types of errors that may be corrected without void ab initio, e.g., errors that do not create market risk? Should the Commission adopt a mandatory void ab initio requirement that certain types of errors, e.g., those that do cause market risk, must be resolved via a corrective trade approach? Or should counterparties otherwise have the ability to maintain breakage agreements to address such risks? (47) Is the Commission’s proposed definition of ‘‘error trade’’ overly broad or narrow? Should the definition or requirement specifically address certain types of errors, such as the wrong affiliate counterparty or the wrong product identified? (48) Is the Commission’s proposed definition of ‘‘error trade’’ sufficient to include those trades where an incorrect term (e.g., incorrect notional amount) results in a rejection by a DCO ostensibly due to credit reasons, but where the DCO otherwise would have accepted the trade had the trade included the correct terms? If not, then how should the term ‘‘error trade’’ be defined to better discern this situation from a situation where a true rejection for credit reasons has occurred? Similarly, is the Commission’s proposed definition of ‘‘error trade’’ sufficiently clear so that the SEF knows which errors are required to be treated as error trades and which errors are required to be treated as void ab initio? If not, please explain. Should the Commission’s definition of ‘‘error trade’’ specifically state that it does not include rejections from clearing for credit reasons? (49) Should trades that are rejected by a DCO for insufficient credit be required to be deemed to be void ab initio by SEFs? If so, should the Commission codify such a requirement under proposed § 37.203(e) or elsewhere in the Commission’s regulations? (50) Are SEFs and DCOs able to distinguish between trades that are rejected from clearing due to insufficient credit from those trades that are rejected because they are error trades? Why or why not? (51) The proposed regulations require that error trades be resolved in a timely manner, recognizing that a SEF may not be in a position to resolve every error trade within a specific time frame. Would requiring resolution of an error trade ‘‘as soon as practicable’’ or within a specific time frame lead to quicker resolutions and reduce risk for market participants? If so, what time frame would be appropriate and should it vary based on other factors, such as the nature of the product or transaction type, whether the error was a participant error or system error, or whether the error was discovered before or after the trade was cleared? (52) Should a SEF be permitted to adjust or cancel an error trade without consulting with the parties
to the trade in some or all circumstances, or should the Commission require a SEF to consult with or obtain the consent of the parties to an error trade in some or all circumstances? (53) Should market participants be required to report all errors to a SEF or are there certain errors that are immaterial and do not otherwise require correction? (54) What type of error trade policy should a SEF be required to adopt for swap transactions that are subject to an exception to the prohibition on preexecution communications under proposed § 37.201(b), given that such swaps may be negotiated or arranged away from the SEF’s trading system or platform? (55) Should a SEF be required to specify who may request a review of a trade as a potential error trade? Should the ability to request a review be limited to the parties to a trade or should market participants affected by the trade also have the ability to request a review? (56) Are there alternative requirements that would enhance efficiency and transparency in the error trade resolution process? (57) Should the Commission require SEFs to notify all market participants of an error trade and the resolution of such trade or only a smaller subset of participants? Should the Commission provide any time frame for such notice? (58) Should a DCO be required to notify a SEF of the reason why a trade was rejected from clearing? If so, what type of information should the Commission require the DCO to provide to the SEF in such a circumstance?
6. § 37.203(f)—Investigations 447
Existing § 37.203(f) currently sets forth requirements for SEFs with respect to conducting investigations of their market participants for potential rule violations.448 Existing § 37.203(f)(1) requires a SEF to have procedures that require its compliance staff to conduct investigations of possible rule violations.449 The rule further requires that an investigation be commenced upon Commission staff’s request or upon discovery of information by a SEF that indicates a reasonable basis for finding that a violation has occurred or will occur. Existing § 37.203(f)(2) requires that investigations be completed in a timely manner, defined as twelve months after an investigation is opened, absent enumerated mitigating circumstances.450 Existing § 37.203(f)(3) requires a SEF’s compliance staff to submit an investigation report for disciplinary action any time staff determines that a reasonable basis exists for finding a rule violation,451 while existing § 37.203(f)(4) requires compliance staff to prepare an investigation report upon concluding an investigation and determining that no reasonable basis exists for finding a rule violation.452 Existing §§ 37.203(f)(3)–(4) enumerate the items that must be included in the investigation report. Finally, existing § 37.203(f)(5) prohibits a SEF from issuing more than one

453 17 CFR 37.203(f)(5).
454The Commission proposes to add this guidance as paragraph (a)(2) to Core Principle 2 in
Appendix B and eliminate the existing guidance,
which currently states that a SEF should adopt and enforce any additional rules it believes are necessary to comply with § 37.203. The Commission views this guidance as unnecessary based on the proposed changes to § 37.203(f). 455The Commission proposes to add this guidance as paragraph (a)(3) to Core Principle 2 in
Appendix B. The Commission notes that it
provided similar clarification in the preamble to the SEF Core Principles Final Rule. SEF Core Principles Final Rule at 33515. As discussed below, the Commission proposes to renumber the existing language in paragraph (a)(3) to paragraph (a)(6), see infra Section VII.E.1.—§ 37.206(a)—Enforcement Staff; and eliminate the existing language in paragraph (a)(6), see infra Section VII.E.2.— § 37.206(b)—Disciplinary Program. 456The Commission proposes to streamline and consolidate multiple existing provisions that address the SEF’s use of warning letters—under existing § 37.203(f)(5), existing § 37.205(c)(2) with respect to audit trail violations, and existing § 36.206(f) with respect to rule violations—into a single provision under proposed § 37.206(c)(2), as discussed below. See infra Section VII.E.3.— § 37.206(c)—Hearings. Further, the Commission proposes to eliminate the existing language under paragraph (a)(1) of the guidance to Core Principle 2 in Appendix B, which states that a SEF’s rules may authorize its compliance staff to issues warning letters or recommend that a disciplinary panel take such action. The Commission views this guidance as unnecessary based on the proposed changes to § 37.203(f). 457 17 CFR 37.204(a). 458 Id. 459 Id. 460The Commission proposes to amend ‘‘Financial Industry Regulatory Authority’’ in the text of § 37.204(a) to ‘‘any non-registered entity.’’ warning letter to the same person or entity for the same rule violation during a rolling twelve-month period.453 The Commission proposes to amend existing § 37.203(f) to simplify and streamline the procedures for SEFs to conduct investigations and prepare investigation reports. First, the Commission proposes to amend § 37.203(f)(1) to state that each SEF must establish and maintain procedures requiring compliance staff to conduct investigations, including the commencement of an investigation upon the receipt of a request from Commission staff or upon the discovery or receipt of information by the SEF that indicates the existence of a reasonable basis for finding that a violation may have occurred or will occur (emphasis added). This proposed amendment reflects the Commission’s view that SEFs may, and should have the right to, choose to initiate investigations under broader circumstances than the two instances identified in the existing provision. Second, the Commission proposes to amend § 37.203(f)(2) to eliminate the twelve-month requirement for completing investigations and instead provide SEFs with the ability to complete investigations in a timely manner taking into account the facts and circumstances of the investigation. Based on its experience, the Commission recognizes that each investigation raises unique issues, facts, and circumstances that affect the time that it takes to complete the investigation. A SEF may complete some investigations in less than twelve months and complete some investigations in more than twelve months. The Commission also recognizes that the
list of mitigating factors in the existing rule is not comprehensive, and other factors may affect the time of an investigation. Rather than prescribe a singular requirement, the Commission believes that it is more appropriate to establish general parameters for completing investigations. In conjunction with this amendment, the Commission also proposes guidance to Core Principle 2 in
Appendix B to provide SEFs with
reasonable discretion to determine that time frame.454 Third, the Commission proposes to streamline the requirements that apply to all SEF investigation reports, regardless of whether a reasonable basis exists for finding a violation, by consolidating the provisions under existing § 37.203(f)(4) into a new proposed § 37.203(f)(3). Accordingly, proposed § 37.203(f)(3) would require a SEF’s compliance staff to prepare a written investigation report to document the conclusion of each investigation. The proposed rule would maintain the existing requirement that each investigation report contain the following information: (i) The reason the investigation was initiated; (ii) a summary of the complaint, if any; (iii) the relevant facts; (iv) the compliance staff’s analysis and conclusions; and (v) a recommendation as to whether disciplinary action should be pursued. To provide further clarity regarding the actions that a SEF may take once the investigation report is completed, the Commission proposes adding guidance to Core Principle 2 in Appendix B to provide that compliance staff should submit all investigation reports to the CCO or other compliance department staff responsible for reviewing such reports and determining next steps in the process; and the CCO or other responsible staff should have reasonable discretion to decide whether to take any action, such as presenting the investigation report to a disciplinary panel for disciplinary action.455 As part of the Commission’s proposal to consolidate multiple existing warning letter requirements into a single provision under proposed § 37.206(c)(2), the Commission also proposes to eliminate the warning letter requirement under existing § 37.203(f)(5).456 Request for Comment The Commission requests comment on all aspects of proposed § 37.203(f) and the associated guidance to Core Principle 2 in Appendix B.
7. § 37.203(g)—Additional Sources for
Compliance
The Commission is not proposing any amendments to § 37.203(g).
C. § 37.204—Regulatory Services
Provided by a Third Party
Section 37.204, among other things,
permits a SEF to contract with an RFA, another registered entity, or the Financial Industry Regulatory Authority (‘‘FINRA’’) for the provision of regulatory services, subject to the requirement that the SEF supervises its regulatory service provider and retains exclusive authority over substantive decisions. As described below, the Commission proposes a series of amendments that would provide a SEF with further options in choosing and utilizing a regulatory service provider to assist with fulfilling its regulatory obligations, while still maintaining regulatory protections that relate to the use of an external services provider.

§ 37.204(a)—Use of Regulatory
Service Provider Permitted
Section 37.204(a) permits a SEF to
contract with an RFA, another registered entity, or FINRA to assist the SEF in complying with the Act and Commission regulations, as approved by the Commission.457 A SEF that elects to use the services of a regulatory service provider must ensure that the provider has the capacity and resources to provide timely and effective regulatory services.458 A SEF remains responsible at all times for the performance of any regulatory services received, compliance with its obligations under the Act and Commission regulations, and the regulatory service provider’s performance on its behalf.459 Based upon its experience with implementing part 37, the Commission is proposing to expand the scope of entities that may provide regulatory services under § 37.204(a) to include any non-registered entity approved by the Commission.460 The Commission believes that this proposed expansion would be appropriate and notes that the Act does not address or proscribe the

461The Commission would evaluate a provider with respect to these requirements prior to approving any arrangement between a SEF and the provider, or during the course of conducting routine oversight of a SEFs self-regulatory program. 462 17 CFR 37.204(b). 463 17 CFR 37.204(c). 464 Id. 465 7 U.S.C. 7b–3(f)(1)(B). 466The Commission notes that a commenter to the SEF Core Principles Final Rule stated that entrusting greater discretion to a regulatory service provider would provide for prompt decisionmaking. SEF Core Principles Final Rule at 33517. types of entities that SEFs may use for the provision of regulatory services; for example, the Commission used this basis originally to include FINRA among the list of entities that could provide regulatory services. Therefore, consistent with the statute, SEFs would be allowed to choose from a greater number of potential third-party providers. The Commission believes that this change would potentially increase competition among existing and potential regulatory service providers and, thus, reduce operating costs for SEFs, encourage innovation and technological developments, and mitigate barriers to entry for new SEFs.
Section 37.204(a), however, would
also continue to be subject to important protections to ensure that a regulatory service provider provides effective regulatory services. To ensure each SEF’s compliance with §§ 37.203(c)–(d), among other provisions, the Commission would continue to evaluate the sufficiency of a provider’s compliance staff and resources and the capabilities of its automated trade surveillance system, and other capabilities.461 Section 37.204(a) would still require each SEF to be responsible at all times for the performance of the regulatory services received, for compliance with the SEF’s obligations under the Act and Commission regulations, and for the provider’s performance on its behalf. Further, as discussed below, § 37.204(b) would still impose a duty to supervise the provider. Accordingly, the Commission believes that these protections, combined with the Commission’s prior evaluation of any provider, support the ability of a SEF to consider an entity outside of an RFA, a registered entity, or FINRA. Request for Comment The Commission requests comment on all aspects of proposed § 37.204(a).
2. § 37.204(b)—Duty To Supervise
Regulatory Service Provider Existing §§ 37.204(b)–(c) generally set forth a SEF’s oversight responsibilities with respect to a regulatory service provider. Existing § 37.204(b) requires a SEF to retain sufficient compliance staff to supervise the quality and effectiveness of the services performed by a regulatory service provider; hold regular meetings with the regulatory service provider to discuss ongoing investigations, trading patterns, market participants, and any other matters of regulatory concern; and conduct and document periodic reviews of the adequacy and effectiveness of services provided on its behalf.462 Existing § 37.204(c), however, requires a SEF to retain exclusive authority over all substantive decisions made by its regulatory service provider, such as decisions involving trade cancellations, issuance of disciplinary charges, and access denials.463 A SEF is also required to document any instance where its actions differ from those recommended by its regulatory service provider, including the reasons for the course of action recommended by the regulatory service provider and the reasons why the SEF chose a different course of action.464 The Commission proposes to combine and streamline the requirements of existing §§ 37.204(b)–(c) into a new proposed § 37.204(b). The Commission further proposes to maintain a SEF’s duty to supervise its regulatory service provider, but to eliminate the requirement that the SEF hold regular meetings and conduct periodic reviews of the provider. Instead, the Commission proposes that a SEF be able to determine the necessary processes for supervising their regulatory service providers. Consistent with this proposed change, the Commission also proposes to provide each SEF with the option to allow its regulatory service provider to make substantive decisions, provided that, at a minimum, the SEF is involved in such decisions. Therefore, a SEF would have the discretion to determine how they are involved in such decisions. The proposed rule would keep the existing examples of substantive decisions, including the adjustment or cancellation of trades, the issuance of disciplinary charges, and denials of access to the SEF for disciplinary reasons. Finally, the Commission proposes to eliminate the requirement that a SEF document where its actions differ from the regulatory service provider’s recommendations, deferring instead to the SEF and its regulatory service provider to mutually agree on the method that they will use to document substantive decisions. Based on its experience implementing the SEF regulatory framework, the Commission believes that some of the specific requirements currently prescribed under existing §§ 37.204(b)– (c) are unnecessary and overly prescriptive because SEFs, consistent with their position as self-regulatory organizations, remain ultimately responsible for the performance of any regulatory services received, for compliance with their obligations under the Act and Commission
regulations, and for the regulatory service providers’ performance on their behalf. Given a SEF’s ultimate responsibility, the Commission believes that the SEF should be allowed to determine how best to supervise its regulatory service provider based on the services it receives and the nature of the SEF’s operations and markets. The Commission also notes that this proposed approach is consistent with a SEF’s discretion under Core Principle
1.465 The Commission further believes
that the discretion that SEFs and their regulatory service providers would have under § 37.204(b) to determine a mutually acceptable process may enable more timely decision making regarding substantive matters.466 Request for Comment The Commission requests comment on all aspects of proposed § 37.204(b).
3. § 37.204(c)—Delegation of Authority
The Commission proposes a new § 37.204(c) to delegate to DMO the authority to approve any regulatory service provider chosen by a SEF. This does not, however, prohibit the Commission from exercising authority to approve any third party regulatory service provider. The Commission anticipates that expanding the scope of entities that may provide regulatory services under proposed § 37.204(a) may lead to a greater number of approval requests for such entities. Therefore, the Commission proposes to delegate this authority to ensure that such a review is conducted in an efficient manner. Such approval would require, at a minimum, that each regulatory service provider demonstrate that it has the capabilities and resources necessary to provide timely and effective regulatory services on behalf of the SEF, including adequate staff and automated surveillance systems, as required under proposed § 37.204(a). Request for Comment The Commission requests comment on all aspects of proposed § 37.204(c). D. § 37.205—Audit Trail
Section 37.205 sets forth a SEF’s audit
trail requirements and generally requires a SEF to establish procedures to

467 17 CFR 37.205(a)–(c).
468 7 U.S.C. 7b–3(f)(2).
469 17 CFR 37.205(a).
470 Id.
471 Id.
472The Commission proposes to eliminate the introductory sentence under § 37.205, which states that a SEF shall establish procedures to capture and retain information that may be used in establishing whether rule violations have occurred, given that this language is duplicative of the audit trail requirements under § 37.205(a). 473The Commission proposes to add this guidance to paragraph (a)(4) to Core Principle 2 in
Appendix B. As discussed below, the Commission
proposes to eliminate the existing language in paragraph (a)(4), see infra Section VII.E.2.— § 37.206(b)—Disciplinary Program. 474CFTC Letter No. 17–54, Re: No-Action Relief for Swap Execution Facilities from Certain Audit Trail Requirements in Commission Regulation
37.205 Related to Post-Execution Allocation
Information at 2 (Oct. 31, 2017).
475 Id.
476The Commission notes that § 37.205(b)(2) also requires a SEF’s audit trail to include an electronic transaction history database that captures, among other elements, the identity of each account to which fills are allocated. 17 CFR 37.205(b)(2). As discussed below, the Commission proposes to eliminate this requirement. See infra note 484 and accompanying discussion. capture and retain information that may be used in establishing whether rule violations have occurred. Specifically, § 37.205(a) requires a SEF to have an audit trail; § 37.205(b) prescribes the elements of an acceptable audit trail program; and § 37.205(c) requires a SEF to enforce its audit trail requirements.467 Based on the Commission’s experience with implementing part 37, including the SEF registration process, the Commission has observed that technology limitations have impacted SEFs’ ability to comply with all of the audit trail requirements, particularly for orders submitted by voice and certain electronic communications that include instant messages and emails. Based on these observations, as well as the proposed ability for a SEF to offer flexible execution methods, the Commission proposes amendments to the audit trail requirements that seek to strike the appropriate balance between offering SEFs the ability to adopt such requirements that are best suited to their respective trading systems or platforms, while also ensuring that such programs enable SEFs to fulfill their selfregulatory obligations. The Commission believes that the proposed changes are consistent with Core Principle 2, which generally requires a SEF to capture information that may be used in establishing whether rule violations have occurred.468

§ 37.205(a)—Audit Trail Required
Section 37.205(a) requires a SEF to
capture and retain all audit trail data necessary to detect, investigate, and prevent customer and market abuses.469 Such audit trail data must be sufficient to reconstruct all indications of interest, requests for quotes, orders, and trades.470 The audit trail must also permit a SEF to track a customer order from the time of receipt through fill, allocation, or other disposition.471 The Commission proposes several amendments to streamline the existing requirements, account for different execution methods and swaps market practices, and eliminate redundancies with other part 37 requirements. Notwithstanding the proposed changes described above, the Commission emphasizes that the type of execution method offered by a SEF does not alter the obligation to capture all audit trail data necessary to detect, investigate, and enforce its rules pursuant to Core Principle 2. First, the Commission proposes to clarify the existing language to specify that a SEF must capture and retain all audit trail data necessary to reconstruct all trading on its facility, detect and investigate customer and market abuses, and take appropriate disciplinary action (emphasis added).472 By replacing the requirement to ‘‘prevent’’ customer and market abuses with the requirement to ‘‘take appropriate disciplinary action’’ and specifying that the data must enable the SEF to reconstruct all trading on its facility, the Commission believes that § 37.205(a) would more accurately reflect the capabilities for which a SEF may use its audit trail data. The Commission notes that an audit trail cannot ‘‘prevent’’ customer and market abuses and the ability to ‘‘reconstruct’’ trading is already required under existing § 37.205(a), as described below. Second, the Commission proposes to move the requirement that audit trail data shall be sufficient to reconstruct all indications of interest, requests for quotes, orders, and trades to the guidance to Core Principle 2 in
Appendix B.473 Given the proposal to
allow each SEF to offer flexible methods of execution, as well as continuing advances in technology, the Commission believes that enumerating specific audit trail data in the regulatory language may unnecessarily limit the universe of data relevant to a SEF’s audit trail. The Commission emphasizes that a SEF must capture all audit trail data related to each offered execution method that is necessary to reconstruct all trading on its facility, detect and investigate customer and market abuses, and take disciplinary action as noted above. The Commission also believes that SEFs must capture such a data set to be able to detect, investigate and enforce its rules under Core Principle 2, to reconstruct all trading under Core Principle 4, and to comply with the audit trail reconstruction program under proposed 37.205(c), as described below. Third, the Commission proposes to eliminate the requirement that a SEF capture post-execution allocation information in its audit trail data. During the SEF registration process, numerous SEFs indicated that postexecution allocations normally occur between the clearing firm or the customer and the DCO, or at the middleware provider.474 Therefore, these SEFs represented that they typically do not have access to postexecution allocation information, and are unable to obtain such data from third parties, such as DCOs and SDRs, due to confidentiality concerns. Based on these representations, Commission staff has issued continuing no-action relief to SEFs from this requirement.475 Based on its experience, the Commission understands that SEFs are still routinely unable to obtain this information pursuant to the requirements of §§ 37.205(a) and (b)(2).476 Accordingly, in lieu of requiring that the audit trail track a customer order through ‘‘fill, allocation, or other disposition,’’ the Commission proposes to require SEFs to capture the audit trail data only through execution on the SEF. The Commission understands that this proposed change is consistent with current swap market practices. Request for Comment The Commission requests comment on all aspects of proposed § 37.205(a). In particular, the Commission requests comment on the following questions:
(59) Is the scope of the proposed audit trail requirements sufficiently clear? If not, then please explain. Is the scope overly broad or narrow to enable a SEF to comply with its obligations under the Act? If so, please explain. Would a SEF’s audit trail obligations be impacted by the Commission’s proposed approach to pre-execution communications? If so, then how? (60) What challenges, if any, do SEFs encounter in capturing or retaining audit trail data? (61) Are there any specific audit trail data points that are too costly or burdensome for a SEF to capture or maintain? (62) Is the proposed guidance to this
section appropriate? Are SEFs currently
capturing all indications of interest, requests for quotes, orders, and trades? Is the meaning of ‘‘indications of

477 17 CFR 37.205(b).
478 17 CFR 37.205(b)(1).
479 17 CFR 37.205(b)(2).
480 17 CFR 37.205(b)(3).
481 17 CFR 37.205(b)(4).
482Section 37.205(b)(1) requires, among other things, that records for customer orders (whether filled, unfilled, or cancelled, each of which shall be retained or electronically captured) shall reflect the terms of the order, an account identifier that relates back to the account(s) owner(s), the time of order entry, and the time of trade execution. A SEF must also require that all orders, indications of interest, and requests for quotes be immediately captured in the audit trail. 17 CFR 37.205(b)(1). 483See supra Section VII.B.4.—§ 37.203(d)— Automated Trade Surveillance System. 484For example, customer type indicator code (‘‘CTI’’) is used in futures trading to designate the capacity in which the person was executing a trade—for the person’s own account; for a proprietary account; on behalf of another member; or for a customer. Many DCM-based automated trade surveillance systems are programmed to detect aberrations in CTI code usage that may indicate potential rule violations. The Commission understands, however, that a SEF’s automated trade surveillance system does not use CTI codes to detect potential rule violations. Therefore, the Commission proposes to eliminate this requirement. Further, as discussed above, since SEFs cannot routinely obtain post-execution allocation information, it is not possible to identify ‘‘each account to which fills are allocated.’’ See supra note 476 and accompanying discussion. Therefore, the proposed amendment to § 37.205(b)(2) would also eliminate the requirement to include post-execution allocation information in a SEF’s transaction history database. interest’’ sufficiently clear? If not, please provide suggestions on how to clarify this term. Should a SEF be required to capture all indications of interest and requests for quotes to enable it to comply with its obligations under the Act? Are there other data points that should be added to the guidance?
2. § 37.205(b)—Elements of an
Acceptable Audit Trail Program
Section 37.205(b) requires, among
other things, that SEFs retain all original source documents; maintain a transaction history database; conduct electronic analysis; and safely store all audit trail data.477 Section 37.205(b)(1) requires that a SEF’s audit trail include original source documents and specifies the nature and content of such documents.478 Section 37.205(b)(2) requires a SEF’s audit trail program to include an electronic transaction history database and specifies the required elements of an adequate database.479
Section 37.205(b)(3) requires a SEF’s
audit trail program to include electronic analysis capability with respect to all audit trail data in the transaction history database.480 Section 37.205(b)(4) requires a SEF’s audit trail program to safely store all audit trail data retained in the transaction history database.481 a. § 37.205(b)(1)—Original Source Documents; § 37.205(b)(2)—Transaction History Database; § 37.205(b)(3)— Electronic Analysis Capability The Commission proposes to eliminate certain elements of the original source documents requirement under § 37.205(b)(1) that specify the nature and content of the original source documents,482 as such requirements may not capture the appropriate universe of content. The Commission also believes that the detailed requirements are not necessary; as discussed above, the general requirement that a SEF must capture all audit trail data necessary to reconstruct all trading on its facility, detect and investigate customer and market abuses, and take disciplinary action is sufficient to guide a SEF as to the content of its original source documents, which would be based on the SEF’s execution methods, trading operations, and markets. Section 37.205(b)(1), however, would maintain that the SEF’s audit trail must include original source documents, including unalterable, sequentially-identified records on which trade execution information is originally recorded, whether recorded manually or electronically. The Commission further proposes to amend § 37.205(b)(2) to revise the scope of audit trail data that must be captured in a SEF’s electronic transaction history database. Specifically, the Commission proposes to eliminate the requirement that the database include all indications of interest, requests for quotes, orders, and trades entered into a SEF’s trading system or platform. Instead, the SEFs would be required to include (i) trades executed by voice or by entry into a SEF’s electronic trading system or platform; and (ii) orders that are entered into its electronic trading system or platform. Similar to proposed § 37.203(d), this proposed amendment recognizes that a SEF may not have a cost-effective and efficient method for inputting orders submitted by voice or certain other electronic communications, such as instant messaging and email, into an electronic transaction history database, given that they are not in the same format as orders and trades that are entered into a SEF’s electronic trading system or platform.483 As noted above, the Commission emphasizes that a SEF must continue to keep a record of all orders entered by voice (i.e., oral communications) or certain other electronic communications, such as instant messaging and email. Such a record, however, would not need to be included in the SEF’s electronic transaction history database given the formatting challenges. The Commission additionally proposes to eliminate the remaining requirements of § 37.205(b)(2) that detail the information that must be included in transaction history
database, given that these requirements are already captured in other audit trail requirements or do not comport with existing swaps market practices.484 Consistent with the proposed amendments to § 37.205(b)(2), the Commission further proposes to amend § 37.205(b)(3) to clarify that a SEF’s electronic analysis capability must enable the SEF to reconstruct ‘‘any trade executed by voice or by entry into a swap execution facility’s electronic trading system or platform and any order entered into its electronic trading system or platform’’ rather than ‘‘indications of interest, requests for quotes, orders, and trades.’’ These proposed amendments are consistent with feedback received regarding the audit trail requirements during the SEF registration process. Some SEFs that offer voice-based trading systems or platforms stated that they do not have the requisite technology to conduct an electronic analysis of audit trail data that is not entered into a SEF’s electronic trading system or platform, such as oral communications, electronic instant messages, and emails. The Commission understands that during that time, such technology, if available, would have been costly for SEFs to adopt and would not have been fully capable of digitizing oral communications in a sufficiently accurate manner to conduct effective surveillance. While the Commission is aware that promising technologies are developing in this area, it does not believe that a viable, cost-effective automated technology solution currently exists. Currently, SEFs that offer any form of voice-based trading system or platform are required, as a condition to their registration, to establish voice audit trail surveillance programs to ensure that they can reconstruct a sample of voice trades and review such trades for possible trading violations. The proposed amendments to §§ 37.205(b)(2)–(3) would relieve a SEF from establishing or maintaining such a program, but the proposed audit trail reconstruction requirement under § 37.205(c), as discussed below, would apply instead. Nonetheless, a SEF must continue to conduct electronic analysis, using an automated trade surveillance system that meets the requirements of proposed § 37.203(d).

485 7 U.S.C. 7b–3(f)(14); 17 CFR 37.1401. 486See infra Section XIX.A.—§ 37.1401(c). 487The Commission proposes to retitle § 37.205(c) to ‘‘Audit trail reconstruction’’ from ‘‘Enforcement of audit trail requirements’’ based on the proposed changes described below. 488 17 CFR 37.205(c). 489 17 CFR 37.205(c)(1). 490 17 CFR 37.205(c)(2). The Commission notes that § 37.205(c)(2) also imposes a warning letter requirement for audit trail violations. As discussed below, the Commission proposes to streamline and consolidate this provision into proposed § 37.206(c)(2). See infra Section VII.E.6.— § 37.206(f)—Warning Letters. 491Notwithstanding these proposed changes, the Commission notes that to comply with the general audit trail requirement under proposed § 37.205(a), which requires a SEF to capture all audit trail data related to each offered execution method that is necessary to reconstruct all trading on its facility, detect and investigate customer and market abuses, and take disciplinary action, the SEF must ensure that market participants are submitting accurate and complete audit trail data. 492The Commission proposes to add this guidance to paragraph (a)(5) to Core Principle 2 in
Appendix B. 17 CFR part 37 app. B. As discussed
below, the Commission proposes to eliminate the existing language in paragraph (a)(5). See infra
Section VII.E.2.—–§ 37.206(b)—Disciplinary
Program.
The Commission further proposes to eliminate the safe storage requirement under § 37.205(b)(4), given that it is generally duplicative of the requirements under Core Principle 14 and related regulations.485 As discussed below, however, the Commission proposes a non-substantive amendment to move the requirement that a SEF must protect audit trail data from unauthorized alteration, accidental erasure, or other loss to § 37.1401(c), which addresses system safeguard requirements.486 Request for Comment The Commission requests comment on all aspects of proposed §§ 37.205(b)(1)–(3).
3. § 37.205(c)—Audit Trail
Reconstruction 487
Section 37.205(c) generally requires a
SEF to enforce its audit trail and recordkeeping requirements.488 Section 37.205(c)(1) requires enforcement through annual reviews and prescribes the minimum components that must be included in such reviews.489 Section 37.205(c)(2) requires that a SEF establish an enforcement program and to impose meaningful sanctions against persons and firms where deficiencies are found.490 The Commission proposes to eliminate the existing audit trail enforcement requirements under § 37.205(c) and adopt an audit trail reconstruction requirement instead.491 The Commission believes that the primary goal of audit trail enforcement is to ensure that a SEF’s audit trail enables it to reconstruct trading and conduct effective surveillance to fulfill its Core Principle 2 obligations. To that end, audit trail enforcement focuses on reviewing certain components of the audit trail data to ensure that a SEF’s audit trail data is complete and accurate. Existing audit trail reviews include a (1) review of randomly selected samples of front-end audit trail data; (2) review of the process by which user identifications are assigned and records relating to user identifications are maintained; (3) review of the usage patterns of user identifications to identify violations of user identification rules; and (4) review of account numbers and CTI codes for accuracy and proper use. The Commission understands that these reviews focus on components of the audit trail that are generally not relevant to SEFs. For example, SEFs have represented that there is little, if any, ‘‘front-end audit trail data’’ that is not already captured by the SEF, and that many of the data points for review, such as user identifications, account numbers, and CTI codes, are not used in the same manner as they are for DCMs. Therefore, the Commission believes that requiring SEFs to conduct an audit trail enforcement program based on the requirements of existing § 37.205(c) serves a limited purpose. The Commission believes that ensuring a SEF’s audit trail is accurate and sufficient to conduct effective surveillance—the primary goals of audit trail enforcement—would be better served through an audit trail reconstruction program that focuses on verifying the accuracy of audit trail data and a SEF’s ability to comprehensively and accurately reconstruct all trading on its facility in a timely manner. As discussed above, the Commission is aware that SEFs that offer any form of a voice-based trading system or platform do not currently have cost-effective solutions for consolidating certain types of data, such as oral communications, electronic instant messages, and emails, inputting them into an electronic transaction history database, and loading and processing them into an automated system to reconstruct trading. Given that the ability to reconstruct all trading is an essential component to conducting effective surveillance and is currently not being conducted in a routine, automated manner for certain key data,
the Commission proposes to require that a SEF establish a program to verify its ability to comprehensively and accurately reconstruct all trading on its facility in a timely manner. The Commission also proposes to adopt guidance to Core Principle 2 in
Appendix B specifying that an effective
audit trail reconstruction program should annually review an adequate sample of executed and unexecuted orders and trades from each execution method offered to verify compliance with § 37.205(c).492 Since SEFs that offer only electronic trading systems or platforms can use their automated trade surveillance systems to reconstruct trading, the reconstructions under proposed § 37.205(c) would serve to verify the accuracy of their audit trail data. A SEF that offers any form of voice-based trading could comply with proposed § 37.205(c) by conducting manual reconstructions, including orders entered by oral communications, instant messages, and email, and trades executed by voice that are captured by the SEF’s electronic transaction history database. In addition to verifying the accuracy of the audit trail data for SEFs that offer electronic trading systems or platforms, these reconstructions would help ensure that in the absence of such an automated solution, a SEF that offers voice-based trading is able to reconstruct trading as necessary, including when they are investigating problematic trading activity. Request for Comment The Commission requests comment on all aspects of proposed § 37.205(c) and the associated guidance to Core Principle 2 in Appendix B. In particular, the Commission requests comment on the following questions:
(63) What factors should a SEF consider in selecting an adequate sample of orders and trades for reconstruction? (64) Should SEFs be required to annually reconstruct a minimum number or orders and trades? If so, what is the minimum number? (65) Should SEFs be required to conduct annual audit trail reviews of their members and firms that are subject to recordkeeping requirements? If so, what should these reviews include? E. § 37.206—Disciplinary Procedures and Sanctions
Section 37.206 generally requires a
SEF to establish rules that deter abuses and have the capacity to enforce those rules though prompt and effective disciplinary action. The disciplinary rules that implement this requirement require a SEF to maintain sufficient enforcement staff, establish disciplinary panels, follow certain disciplinary

493 17 CFR 37.206(a)–(f).
494 17 CFR 37.206(e)–(f).
495 7 U.S.C. 7b–3(f)(2)(B).
496See SEF Core Principles Final Rule at 33520– 21 (noting that the disciplinary procedures in the
part 37 proposed rules paralleled the procedures for
DCMs).
497 7 U.S.C. 7b–3(f)(1)(B).
498The Commission proposes to eliminate the introductory sentence under § 37.206, which states that a SEF shall establish trading, trade processing, and participation rules that will deter abuses and have the capacity to enforce such rules through prompt and effective disciplinary action, including suspension or expulsion of members or market participants who violate the rules of the swap execution facility, given that this language is duplicative of requirements elsewhere in this part, including Core Principle 2 and various provisions under § 37.206. 499 17 CFR 37.206(a). 500The Commission proposes to renumber paragraph (a)(3) to paragraph (a)(6) of the guidance to Core Principle 2 in Appendix B and adopt the amendments described above. 17 CFR part 37 app. B. 501The Commission proposes to retitle § 37.206(b) to ‘‘Disciplinary program’’ from ‘‘Disciplinary panels’’ based on the proposed changes described below. 502 17 CFR 37.206(b). The Commission proposed composition requirements for disciplinary panels, but has not adopted those requirements in a final rule. Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 63732, 63752 (Oct. 18, 2010). 503While the participation of SEF compliance staff could present a possible conflict of interest, the Commission believes that this concern is adequately addressed through the SEF’s CCO. Under proposed § 37.1501(c)(2), a CCO would be required to take reasonable steps to resolve any material conflicts of interest. See infra Section XX.A.3.—§ 37.1501(c)—Duties of Chief Compliance Officer. Further, a CCO would be required to conduct an annual assessment of the SEF’s policies on the handling of conflicts of interest. See infra
Section XX.A.4.—§ 37.1501(d)—Preparation of
Annual Compliance Report. The Commission also notes that the SEF’s disciplinary practices are within the scope of the Commission’s examinations. 504The Commission proposes to amend the panel composition language by replacing the reference to
part 40 with ‘‘applicable Commission regulations.’’
Additionally, paragraph (a)(11)(ii) of the guidance to Core Principle 2 in Appendix B currently specifies that the composition of the appellate panels should be consistent with part 40 and should not include any members of the SEF’s compliance staff or any person involved in adjudicating any other stage of the same proceeding. 17 CFR part 37 app. B. To avoid duplicative language, the Commission proposes to consolidate these provisions under § 37.206(b) to require that any disciplinary panel or appellate panel established by a SEF must meet the composition requirements of applicable Commission regulations, and shall not include any member of the SEF’s compliance staff or any person involved in adjudicating any other stage of the same proceeding (emphasis added). The Commission also proposes to eliminate paragraph (a)(11) of the guidance to Core Principle 2 in Appendix B as noted below. 17 CFR part 37 app. B. 505 17 CFR 1.64. 506Section 1.64(a)(2) defines ‘‘major disciplinary committee’’ as a committee of persons authorized by a self-regulatory organization to conduct disciplinary hearings, settle disciplinary charges, or impose disciplinary sanctions. Such a committee may also hear appeals of cases involving any violation of a SRO’s rules, except for rules related to decorum or attire; financial requirements; reporting or recordkeeping; and violations that do not involve fraud, deceit or conversion. 17 CFR 1.64(a)(2). Under § 37.2, SEFs are subject to all applicable Commission regulations, including § 1.64. procedures that afford respondents procedural safeguards, and impose sanctions that are commensurate to the violations committed.493 The rules prescribe the use of various sanctions, including suspension or expulsion of members or market participants; customer restitution; and issuance of warning letters.494 Since the adoption of § 37.206, the Commission has considered whether alternative cost-effective methods exist for complying with Core Principle 2’s requirement to establish and enforce trading, trade processing, and participation rules that deter abuses, and have the capacity to investigate and enforce such abuses.495 Based on its experience with the part 37 implementation, the Commission believes that alternative disciplinary methods exist that would ensure that SEFs maintain robust disciplinary structures necessary to enforce compliance with their rules and deter abusive trading to promote market integrity. The Commission acknowledges that § 37.206 is a limited approach that is based in many respects on its experience with oversight of DCM disciplinary programs.496 While the Commission believes that all SEFs should be subject to certain threshold requirements, it also believes that SEFs should be able to use their experience and knowledge to establish disciplinary procedures that are appropriate for their own markets and market participants. The Commission notes that this approach is consistent with the reasonable discretion afforded to
SEFs under Core Principle 1.497 Therefore, the Commission proposes to streamline the SEF disciplinary program rules, discussed further below.498

§ 37.206(a)—Enforcement Staff
Section 37.206(a) requires a SEF to
establish and maintain sufficient enforcement staff and resources to effectively and promptly prosecute possible rule violations within the disciplinary jurisdiction of the SEF.499 The Commission proposes to change the word ‘‘prosecute’’ to ‘‘enforce’’ to more accurately describe the requirements under § 37.206(a), given that every rule violation may not lead to a prosecution. The Commission also proposes to amend the guidance to Core Principle 2 in Appendix B that addresses a SEF’s enforcement staff.500 The Commission proposes eliminating the language stating that a SEF’s enforcement staff may operate as part of the SEF’s compliance staff. The Commission no longer believes this language is necessary, given that SEFs should have the option to determine the appropriate structure for their disciplinary programs, including their enforcement staff, discussed further below with respect to § 37.206(b). Request for Comment The Commission requests comment on all aspects of proposed § 37.206(a) and the associated guidance to Core Principle 2 in Appendix B.
§ 37.206(b)—Disciplinary Program 501
Section 37.206(b) currently requires
SEFs to establish one or more disciplinary panels that meet the composition requirements of part 40 and do not include a SEF’s compliance staff or any person involved in adjudicating any other stage of the same proceeding.502 The Commission proposes to amend § 37.206(b) to permit a SEF to administer its disciplinary program through not only one or more disciplinary panels, as currently allowed, but also through its compliance staff. As discussed above, this amendment provides SEFs with the ability to adopt a cost-effective disciplinary structure that best suits their markets and market participants, while still effectuating the requirements and protections of Core Principle 2 through compliance staff, disciplinary panels, or some combination of both.503 The Commission also proposes other amendments to § 37.206(b), including non-substantive revisions, to streamline certain existing composition requirements for disciplinary panels.504 For SEFs that elect to administer their disciplinary program though compliance staff, the Commission proposes to amend § 37.206(b) to exclude compliance staff from the requirements under § 1.64(c)(4). Section 1.64, among other things, prescribes rules that govern the composition of an SRO’s major disciplinary committee.505 The Commission recognizes that a SEF’s compliance staff could qualify as a ‘‘[m]ajor disciplinary committee’’ 506 under § 1.64(a)(2) when imposing sanctions under the proposed rule; therefore, the staff would otherwise be subject to the composition requirement of § 1.64(c)(4), which requires ‘‘sufficient different membership

507Section 1.64(c)(4) requires that each major disciplinary committee, or hearing panel thereof, include sufficient different membership interests so as to ensure fairness and prevent special treatment or preference for any person in the conduct of a committee’s or panel’s responsibilities. 17 CFR 1.64(c)(4). 508The Commission proposes to eliminate paragraphs (a)(4)–(9) of the guidance to Core Principle 2 in Appendix B. 17 CFR part 37 app. B. 509The Commission proposes to add this guidance as paragraph (a)(7) to Core Principle 2 in
Appendix B. 17 CFR part 37 app. B.
510 17 CFR 37.206(c).
511 7 U.S.C. 7b–3(f)(1)(B).
512See supra note 509.
513The Commission proposes to eliminate paragraph (a)(10) of the guidance to Core Principle 2 in Appendix B. 17 CFR part 37 app. B. 514 17 CFR 37.206(d). 515 Id. 516The Commission proposes to add this guidance as part of paragraph (a)(7) to Core Principle 2 in Appendix B. 17 CFR part 37 app. B. 517The Commission proposes to eliminate paragraphs (a)(11)–(12) of the guidance to Core Principle 2 in Appendix B. 17 CFR part 37 app. B. 518 17 CFR 37.206(e). 519 Id. 520 Id. 521Existing § 37.206(f) states that where a rule violation is found to have occurred, no more than one warning letter may be issued per rolling twelvemonth period for the same violation. 522The Commission proposes to retitle § 37.206(c) to ‘‘Warning letters and sanctions’’ from ‘‘Hearings’’ based on the proposed changes described below. interests.’’ 507 Accordingly, the Commission believes these amendments are necessary to effectuate the proposed rule of allowing compliance staff to administer a SEF’s disciplinary program. Consistent with the Commission’s intention to streamline requirements while still effectuating the Core Principle 2 requirements, the Commission proposes to eliminate the guidance to Core Principle 2 in
Appendix B that specifies protocols for
the SEF to handle charges and settlement offers.508 Given that proposed § 37.206(b) would permit SEFs to administer their disciplinary program through compliance staff, the Commission does not believe that this detailed guidance is necessary. Instead, the Commission proposes new guidance to specify that a SEF’s rules governing the adjudication of a matter by the SEF’s disciplinary panel should be fair, equitable, and publicly available.509 Request for Comment The Commission requests comment on all aspects of proposed § 37.206(b) and the associated guidance to Core Principle 2 in Appendix B.
3. § 37.206(c)—Hearings
Section 37.206(c) requires a SEF to
adopt rules that provide certain minimum procedural safeguards for any hearing. In general, the rule requires a fair hearing, promptly convened after reasonable notice to the respondent; and a copy of the hearing to be made and be a part of the record of the proceeding if the respondent requested the hearing.510 The Commission proposes to eliminate § 37.206(c). First, the detailed hearing procedures under existing § 37.206(c) are not necessary, as SEFs that choose to establish a disciplinary panel have reasonable discretion to do so pursuant to Core Principle 1.511 Second, the Commission notes that requirements for hearings under § 37.206(c) would not apply to SEFs that choose to administer their disciplinary program through compliance staff. Third, as noted above, the Commission proposes to add guidance to Core Principle 2 in Appendix B that a SEF’s rules relating to disciplinary panel procedures should be fair, equitable, and publicly available.512 The Commission believes this guidance adequately captures the principal procedural objectives when SEFs are conducting disciplinary hearings and obviates the need for the otherwise prescriptive regulatory requirements. Consistent with the Commission’s elimination of § 37.206(c), the Commission also proposes to eliminate the guidance to Core Principle 2 in
Appendix B that specifies detailed
guidelines for disciplinary hearing protocols.513 Request for Comment The Commission requests comment on all aspects of the proposed elimination of § 37.206(c) and the associated guidance to Core Principle 2 in Appendix B.
4. § 37.206(d)—Decisions
Section 37.206(d) requires a
disciplinary panel to render a written decision promptly following a hearing.514 The rule also provides detailed items to be included in the decision, such as a notice or summary of charges, the answer, and a statement of finding and conclusions with respect to each charge.515 The Commission proposes to eliminate the prescriptive requirements under § 37.206(d). This proposed elimination is consistent with other proposed amendments to § 37.206 that would allow a SEF to exercise discretion in establishing its disciplinary procedures pursuant to Core Principle 2. The Commission, however, also proposes to add guidance to Core Principle 2 in Appendix B to specify that a SEF’s rules should require the disciplinary panel to promptly issue a written decision following a hearing or the acceptance of a settlement offer.516 Consistent with the Commission’s elimination of the requirements under § 37.206(d), the Commission also proposes to eliminate the guidance to Core Principle 2 in Appendix B that specifies guidelines for a SEF’s ability to provide rights of appeal to respondents and issue a final decision.517 Request for Comment The Commission requests comment on all aspects of the proposed elimination of § 37.206(d) and the associated guidance to Core Principle 2 in Appendix B.
5. § 37.206(e)—Disciplinary Sanctions
Existing § 37.206(e) requires that all disciplinary sanctions imposed by a SEF must be commensurate with the violations committed and must be clearly sufficient to deter recidivism or similar violations by other market participants.518 A SEF is also required to consider a respondent’s disciplinary history when evaluating appropriate sanctions.519 In the event of demonstrated customer harm, any disciplinary sanction must include full customer restitution, except where the amount of restitution, or to whom it should be provided, cannot be reasonably determined.520 The Commission proposes to consolidate the requirements that apply to disciplinary sanctions and warning letters, under existing § 37.206(e) and existing § 37.206(f),521 respectively, into a new proposed § 37.206(c).522 Consistent with the Commission’s goal to provide SEFs with a greater ability to develop cost-effective approaches to administer their disciplinary programs based on their markets and market participants, the Commission believes that a SEF should have greater discretion to choose between taking disciplinary action or issuing a warning letter. Accordingly, as discussed below, the Commission proposes under § 37.206(c)(2) to expand the current use of warning letters by allowing a SEF to issue more than one warning letter over a rolling twelve-month period for violations that involve minor recordkeeping or reporting infractions. To balance the expanded authority to issue warning letters and ensure their proper use by SEFs, the Commission also proposes under § 37.206(c)(1) to extend the existing criteria for issuing disciplinary sanctions to warning letters. Specifically, proposed

523The Commission proposes to add the term ‘‘summary fine’’ to clarify that summary fines are among the types of disciplinary sanctions that may be issued and would be subject to the requirements of the proposed rule. 524The Commission proposes to add this guidance as paragraph (a)(9) to Core Principle 2 in
Appendix B. 17 CFR part 37 app. B.
525The Commission proposes to renumber paragraph (a)(14) to paragraph (a)(8) to Core Principle 2 in Appendix B. 17 CFR part 37 app. B. 526 17 CFR 37.206(f). 527The Commission notes, however, that this provision would be evaluated in conjunction proposed § 37.206(c)(1). 528The Commission proposes to eliminate paragraph (a)(13) of the guidance to Core Principle 2 in Appendix B. 17 CFR part 37 app. B. 529The Commission proposes to renumber § 37.206(g) to § 37.206(d) based on the proposed changes described above. 530 17 CFR part 9. For these purposes, the Commission interprets references to ‘‘exchange’’ to
part 9 to mean DCMs and SEFs. 531 Id. 532The Commission also proposes to renumber
§ 9.1(b)(4) to § 9.1(c) and § 9.1(c) to § 9.1(d). 533See supra Section VII.E.—§ 37.206— Disciplinary Procedures and Sanctions. 534See supra note 508 (elimination of paragraph (a)(9)). 535See supra note 513 (elimination of paragraph (a)(10)(vi)). 536See supra note 517 (elimination of in paragraph (a)(11)(iv)). 537See supra note 528 (elimination of paragraph (a)(13)). 538The Commission also proposes to renumber the cross-references under § 9.2(k), § 9.12(a)(1), and § 9.24(a)(2) from paragraph (a)(14) to paragraph (a)(8) of the guidance to Core Principle 2 in
Appendix B. See supra note 525.
§ 37.206(c)(1) would require that all warning letters and sanctions imposed by a SEF must be commensurate with the violations committed and shall be clearly sufficient to deter recidivism or similar violations by other market participants. Further, all warning letters and sanctions, including summary fines and sanctions imposed pursuant to an accepted settlement offer, must take into account the respondent’s disciplinary history.523 The Commission also proposes several amendments to related guidance to Core Principle 2 in Appendix B that are consistent with the proposed changes and are intended to allow a SEF to determine how to issue warning letters and sanctions. First, the Commission proposes to adopt guidance to Core Principle 2 in Appendix B to state that SEFs should have reasonable discretion in determining when to issue warning letters and apply sanctions.524 Second, the Commission also proposes to eliminate detailed guidance regarding the procedures for taking emergency disciplinary action. The guidance, however, would maintain that a SEF may impose a sanction or take summary action as necessary to protect the best interest of the marketplace.525 Request for Comment The Commission requests comment on all aspects of proposed § 37.206(c)(1) and the associated guidance to Core Principle 2 in Appendix B. In particular, the Commission requests comment on the following question:
(66) Should the Commission provide further explanation regarding the meaning of ‘‘minor’’ recordkeeping or reporting infractions?
6. § 37.206(f)—Warning Letters
Existing § 37.206(f) states that where a rule violation is found to have occurred, no more than one warning letter may be issued per rolling twelve-month period for the same violation.526 As part of a new proposed § 37.206(c)(2) noted above, the Commission proposes to amend this provision to establish a more practical approach to the use of warning letters. Under the proposed approach, a SEF would be allowed to issue more than one warning letter over a rolling twelvemonth period for violations that involve minor recordkeeping or reporting infractions. Given the de minimis nature of such infractions, the Commission believes that a SEF should have the ability to determine whether they merit the issuance of a warning letter or sanction. The Commission also proposes to clarify that the twelvemonth limitation on warning letters applies to the same individual who is found to have committed the same rule violation, rather than an entity. The Commission acknowledges that applying the limitation to subject entities is not practical because many of them have hundreds of employees trading on behalf of the entity.527 Further, the Commission notes that the rolling twelve-month period begins tolling once the SEF finds that a violation occurred, rather than the date that the subject activity occurred. The Commission also proposes to eliminate guidance to Core Principle 2 in Appendix B that currently specifies that a SEF may adopt summary fines for violations of rules related to the failure to timely submit accurate records required for clearing or verifying each day’s transactions.528 The Commission notes that § 37.206(c)(1) as proposed would already specify that a SEF may issue summary fines as a sanction. Request for Comment The Commission requests comment on all aspects of proposed § 37.206(c)(2) and the associated guidance to Core Principle 2 in Appendix B. In particular, the Commission requests comment on the following question:
(67) Is the Commission’s approach to warning letters appropriate? Should the Commission allow SEFs to issue more than one warning letter to the same individual within a rolling twelvemonth period for other rule violations in addition to minor recordkeeping or reporting infractions? If so, should the Commission specify which rule violations? If so, identify those rule violations and explain why.
7. § 37.206(g)—Additional Sources for
Compliance
The Commission is not proposing any amendments to § 37.206(g).529 F. Part 9—Rules Relating to Review of Exchange Disciplinary, Access Denial or Other Adverse Actions
Part 9 of the Commission’s regulations
details the process and procedures for the Commission’s review of exchange disciplinary, access denial, or other adverse actions.530 The rules also address the procedures and standards governing filing and service, motions, and settlement; the process that exchanges must follow in providing notice of a final disciplinary action to the subject of the action and to the Commission; and the publication of such notice.531 The Commission is proposing several non-substantive amendments to part 9 that correspond to certain proposed amendments to the Core Principle 2 regulations under part 37.532 As discussed above, the Commission proposes to eliminate various disciplinary procedures under proposed § 37.206 and the applicable guidance to Core Principle 2 in Appendix B to part 37 to streamline existing Core Principle 2 requirements and provide SEFs with discretion in administering their disciplinary programs.533 These proposed changes include eliminating requirements concerning disciplinary decisions under § 37.206(d) and eliminating various procedures detailed in guidance to Core Principle 2 concerning settlement offers; 534 sanctions upon persons who impede the progress of disciplinary hearings; 535 the right to appeal adverse actions; 536 and summary fines for violations of rules regarding the timely submission of records.537 To the extent that the part 9 regulations contain cross-references to these part 37 provisions, the Commission proposes to eliminate those references.538 Specifically, the Commission proposes to eliminate those references under § 9.11(b)(2), which govern the content requirements for SEF

539 17 CFR part 37 app. B (guidance to Core Principle 2—paragraph (a)(9)(iii)—‘‘Settlement offers’’). 540 17 CFR part 37 app. B (guidance to Core Principle 2—paragraph (a)(11)(iv)—‘‘Right to appeal’’). 541Section 9.11(b)(3) requires that the notice of a disciplinary action or access denial action include the following: (i) The name of the person against whom the disciplinary action or access denial action was taken; (ii) a statement of the reasons for the disciplinary action or access denial action, detailing the exchange product which was involved, as applicable, and whether the violation that resulted in the action also resulted in financial harm to any customers together with a listing of any rules which the person who was the subject of the disciplinary action or access denial action was charged with having violated or which otherwise serve as the basis of the exchange action; (iii) a statement of the conclusions and findings made by the exchange with regard to each rule violation charged or, in the event of settlement, a statement specifying those rule violations which the exchange has reason to believe were committed; (iv) the terms of the disciplinary action or access denial action; (v) the date on which the action was taken and the date the exchange intends to make the disciplinary or access denial action effective; and (vi) except as otherwise provided under § 9.1(b), a statement informing the party subject to the disciplinary action or access denial action of the availability of Commission review of the exchange action pursuant to section 8c of the Act and this part. 17 CFR 9.11(b)(3). 542The Commission codified Core Principle 3 under § 37.300. 17 CFR 37.300. 543Appendix C to part 38—‘‘Demonstration of Compliance That a Contract Is Not Readily Susceptible to Manipulation’’—provides guidance regarding (i) the information that a new futures contract submission should include; (ii) estimations of deliverable supplies; (iii) contract terms and conditions that should be specified for physicallydelivered contracts; (iv) demonstration that a cashsettled contract is reflective of the underlying cash market and is not readily subject to manipulation or distortion; (v) contract terms and conditions that should be specified for cash-settled contracts; (vi) requirements for options on futures contracts; (vii) the terms and conditions for non-price based futures contracts; and (vii) the terms and conditions for swap contracts. 17 CFR part 38 app. C (‘‘Appendix C to part 38’’). The Commission amended and updated this guidance to address swap transactions in 2012 as part of a part 38 rulemaking for designated contract markets. Core Principles and Other Requirements for Designated Contract Markets, 77 FR 36612 (Jun. 19, 2012). 544 17 CFR 37.301. 545See generally Appendix C to part 38. 546See paragraph (g)(4) of Appendix C to part 38, which references various provisions related to contract terms and conditions requirements for futures contracts.
547See paragraph (g)(1) of Appendix C to part 38. 548Paragraph (g)(4) of Appendix C to part 38, which applies to swaps, refers to paragraph (b)(2), which specifies contract term and condition requirements for futures contracts settled by physical delivery. Paragraph (b)(2) specifies various criteria related to quality standards of the underlying commodity, delivery point/area specifications, and specification of the delivery period. The Commission notes that paragraph (b)(1) generally specifies that the terms and conditions should be designed to avoid any impediments to delivery so as to promote convergence between the price of the futures contract and the cash market value of the commodity at the expiration of the contract. Paragraph (b)(1)(i)(A) specifies that the terms and conditions should result in a deliverable supply that is sufficient to ensure that the contract is not susceptible to price manipulation or distortion. 549The Commission also proposes a conforming non-substantive amendment to § 37.301 to update the reference to Appendix C to part 37. 550The proposed amendments to Appendix B would eliminate the existing explanatory guidance to Core Principle 3, which the Commission is Continued disciplinary and access denial notices that must be filed with the person subject to the action. Currently, the notice of such actions must be provided as a copy of a written decision, which accords with § 37.206(d) and guidance to Core Principle 2 in Appendix B relating to the use of written decisions where a disciplinary panel accepts a settlement offer; 539 and paragraph (a)(11)(iv), where an appellate panel responds to appeals of adverse decisions by a disciplinary panel.540 Alternatively, § 9.11(b)(2) provides that SEFs may file a written notice that includes the items listed under §§ 9.11(b)(3)(i)–(vi).541 Given the proposed elimination of § 37.206(d) and associated guidance to Core Principle 2, the Commission proposes that the contents of the SEF disciplinary or access denial notice be limited to the information specified under §§ 9.11(b)(3)(i)–(vi). Under § 9.1(b)(2), § 9.2(k), and § 9.12(a)(3), the Commission also proposes to eliminate references to paragraph (a)(13) of the guidance to Core Principle 2 in Appendix B, which addresses the issuance of summary fines for failing to submit certain records in a timely manner. To replace those references, the Commission proposes to add new regulatory language that accounts for summary fines being permitted under the rules of the SEF for recordkeeping or reporting violations. Under § 9.2(k) and § 9.12(a)(2), the Commission further proposes to eliminate references to paragraph (a)(10)(vi) of the guidance to Core Principle 2 in Appendix B, which addresses the use of sanctions for persons who impede the progress of disciplinary hearings. To replace those references, the Commission proposes new regulatory language that accounts for SEFs imposing disciplinary action on a person for impeding the progress of
a hearing under the rules of the SEF.
VIII. Part 37—Subpart D: Core
Principle 3 (Swaps Not Readily Susceptible to Manipulation) Core Principle 3 specifies that a SEF shall permit trading only in swaps that are not readily susceptible to manipulation.542 A. § 37.301—General Requirements
Section 37.301 further implements
Core Principle 3 by requiring a SEF, at the time that it submits a new swap contract to the Commission, to demonstrate that the swap is not readily susceptible to manipulation by providing the information required in
Appendix C to part 38.543 Section
37.301 also states that in addition to
referring to Appendix C to part 38, a SEF may refer to the guidance to Core Principle 3 in Appendix B.544 With respect to swaps, this guidance is similar in scope to the guidance to
Appendix C to part 38.
Appendix C to part 38 for DCMs, as
applied by § 37.301 to SEFs, provides guidance regarding the relevant considerations for evaluating if a new or existing swap contract is readily susceptible to manipulation.545 The objective of this guidance, which applies the guidance for futures contracts to swaps as applicable, is intended to ensure that a given contract is not readily susceptible to manipulation and will provide a reliable pricing basis, as well as promote cash and swaps price convergence. Among other things, the guidance states that a swap contract submitted under part 40 should conform to prevailing commercial practices, such that the settlement or delivery procedures adopted for a swap contract should reflect the underlying cash market.546 For cash-settled swap contracts, the guidance explains that the cash settlement index should be based on a reliable price reference series that accurately reflects the underlying market value, is not readily susceptible to manipulation, and is highly regarded by industry/market participants.547 For physically-settled swap contracts, the guidance explains that the terms and conditions should provide for adequate deliverable supply and be designed to avoid impediments to the delivery of the commodity.548

Appendix C to Part 37—
Demonstration of Compliance That a Swap Contract Is Not Readily Susceptible to Manipulation The Commission proposes to eliminate the existing cross-reference to
Appendix C to part 38 under § 37.301
and establish a separate Appendix C to
part 37 to provide specific guidance to
SEFs for complying with the requirements of Core Principle 3.549 In conjunction with the Commission’s proposal to create a separate Appendix C to part 37, the Commission also proposes to adopt conforming changes to the guidance to Core Principle 3 in
Appendix B.550

proposing to address in the proposed Appendix C to part 37; and replace the existing cross-reference to sections of Appendix C to part 38 with a general reference to Appendix C to part 37. 551 ‘‘Options on physicals’’ refers to option contracts that do not provide for exercise into an underlying futures contract. Upon exercise, options on physicals can be settled via physical delivery of the underlying commodity or by a cash payment. See proposed Appendix C to part 37—paragraph (d)—‘‘Guidance for options on physicals contracts.’’ 552The guidance in Appendix C to this part is based on best practices that were developed over the past three decades by the Commission and other market regulators in their review of product submissions. See Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572, 80582 (proposed Dec. 22, 2010). 553The Commission notes that for purposes of establishing the terms and conditions of a swap that it lists for trading, a SEF has discretion to determine whether the swap is standardized or nonstandardized in nature. For example, the Commission understands that the swaps subject to the current trade execution requirement are generally standardized swaps. See supra notes 33– 34 (describing the characteristics of the swaps that have been submitted as ‘‘available to trade’’). 554 7 U.S.C. 7b–3(f)(4). The Commission codified Core Principle 4 under § 37.400. 17 CFR 37.400. 555 Id. 556 Id. 557See supra Section VIII.A.1.—Appendix C— Demonstration of Compliance that a Swap Contract is Not Readily Susceptible to Manipulation. 558 17 CFR 37.401. 559 17 CFR 37.401(a). 560 17 CFR 37.401(b). 561 17 CFR 37.401(c). The guidance to Core Principle 4 in Appendix B provides that an acceptable program may include some monitoring on a T+1 basis. 17 CFR part 37 app. B (guidance Specifically, proposed Appendix C to
part 37 specifies (1) measures that a SEF
should take to determine that a cashsettled swap contract is reflective of the underlying cash market, is not readily subject to manipulation or distortion, and is based on a cash price series that is reliable, acceptable, publicly available, and timely; (2) terms and conditions that should be specified for cash-settled swap contracts; (3) terms and conditions that should be specified for physically-settled swap contracts; (4) methodologies that should be utilized in estimating deliverable supplies; (5) terms and conditions that should be specified for options on swap contracts; and (6) guidance for options on physicals contracts.551 The Commission believes that the proposed amendments would streamline the guidance to Core Principle 3 in a single appendix that is dedicated to part 37. A separate
appendix for SEFs and swaps trading
from the guidance provided in
Appendix C to part 38, which primarily
applies to DCMs and futures trading, reflects good regulatory practice that provides greater clarity and certainty. The proposed Appendix C to part 37 would serve as a streamlined source of guidance for new and existing SEFs when developing new swap products to list for trading and when monitoring their existing swap products.552 Based on the number of swap contracts that SEFs currently list for trading and will likely submit in the future, the Commission believes that a separate guidance in part 37 is appropriate for SEFs. The Commission believes that the proposed Appendix C to part 37 also clarifies a SEF’s obligations pursuant to Core Principle 3 because the guidance specifically addresses swap contracts and reflects the diverse and nonstandardized nature of the swaps market, including swaps traded on SEFs. In particular, the guidance provides SEFs with additional flexibility for certain terms and conditions for non-standardized swap contracts.553 This flexibility reflects the negotiated nature of non-standardized swap contracts. Similarly, the proposed
Appendix C includes specific guidance
for options on swap contracts. This guidance is not currently included in
Appendix C to part 38, which focuses
primarily on futures products. This proposed guidance, however, is consistent with previous Commission expectations with respect to contract design and transparency of option contract terms. Request for Comment The Commission requests comments on all aspects of the proposed guidance to Core Principle 3 in Appendix C to
part 37. In particular, the Commission
requests comment on the following questions:
(68) Is the scope and content of the proposed guidance appropriately tailored for swap contracts? If not, then please explain any changes. (69) Is the additional flexibility for certain terms and conditions for nonstandardized swap contracts appropriate? If not, please explain why.
IX. Part 37—Subpart E: Core Principle
4 (Monitoring of Trading and Trade Processing) Core Principle 4 requires a SEF to establish and enforce rules or terms and conditions that define, or specifications that detail, the trading procedures to be used in entering and executing orders traded on or through the facilities of the SEF and procedures for trade processing of swaps on or through the facilities of the SEF.554 Core Principle 4 also requires a SEF to monitor trading in swaps to prevent manipulation, price distortion, and disruptions of the delivery or cash settlement process through surveillance, compliance, and disciplinary practices and procedures.555 As part of its monitoring responsibilities, a SEF must establish methods for conducting real-time monitoring of trading and comprehensive and accurate trade reconstructions.556 As described below, §§ 37.401–408 further implement Core Principle 4 by establishing requirements that a SEF monitor trading activity on its facility and beyond its own market in certain circumstances. The Commission received feedback from SEFs during the part 37 implementation that certain Core Principle 4 requirements are unnecessarily broad and create impracticable monitoring burdens upon SEFs, especially those requiring a SEF to monitor activity beyond its own markets. Based on its experience, the Commission has assessed this feedback and proposes amendments that would establish more practical monitoring requirements. These amendments, which in many cases would narrow a SEF’s monitoring obligations to trading activity on its own facility, allow a SEF greater discretion to devise its own monitoring systems and protocols to suit the products that it offers for trading in a manner compliant with Core Principle 4. The Commission also proposes several amendments to the regulations under Core Principle 4 to conform to the proposed Appendix C to
part 37, which sets forth guidance for
SEFs to mitigate a swap contract’s susceptibility to manipulation when developing new products and monitoring existing products.557 A. § 37.401—General Requirements
Section 37.401 currently implements
Core Principle 4 by setting forth requirements for SEFs to monitor market activity for the purpose of detecting manipulation, price distortions, and disruptions.558 Existing § 37.401(a) creates an ongoing obligation for a SEF to collect and evaluate data on its market participants’ market activity to detect and prevent, among other things, disruptions to the physicaldelivery or cash-settlement process where possible.559 Existing § 37.401(b) requires a SEF to examine general market data in order to detect and prevent manipulative activity that would result in the failure of market prices to reflect the normal forces of supply and demand.560 Existing § 37.401(c) requires a SEF to demonstrate an effective program for conducting real-time monitoring of trading for the purpose of detecting and resolving abnormalities.561 Existing

to Core Principle 4—paragraph (a)(1)—‘‘General requirements’’). 562 17 CFR 37.401(d). 563SEF Core Principles Final Rule at 33528, 33530. 564 Id. at 33528. 565 Id. 566 Id. at 33527–28. See also ISDA, Path Forward for Centralized Execution of Swaps 6 (2015) (explaining that a SEF should not be required to monitor other markets for manipulation because SEFs do not have, and cannot be expected to obtain, sufficient information about other marketplaces). 567The Commission also proposes to renumber subsection (c) to subsection (a) and amend the requirement as described. 568The Commission notes that existing § 37.203(e) specifies that a SEF must conduct realtime market monitoring of all trading activity on its system(s) or platform(s) to identify ‘‘disorderly trading and any market or system anomalies.’’ As discussed above, the Commission is proposing to eliminate this provision and establish those requirements under proposed § 37.401(a) to streamline the existing regulations. See supra note 438. 569The Commission proposes to renumber existing subsection (a) to subsection (b) and amend the requirement as described. In the adopting part 37, the Commission also clarified that ‘‘market activity’’ in existing § 37.401(a) means the ‘‘trading activity’’ of a SEF’s market participants. SEF Core Principles Final Rule at 33528. The Commission proposes a non-substantive revision to replace ‘‘market activity’’ with ‘‘trading activity.’’ 570For example, the Commission notes that multiple SEFs offer the same fixed-to-floating USDdenominated IRS in standard benchmark tenors that are currently subject to the trade execution requirement. 571For example, a SEF offering an FX nondeliverable forward cannot reasonably monitor over a dozen SEFs that offer equivalent non-deliverable forward products and the market participants engaging in hundreds of equivalent bilateral transactions away from a SEF. 572The Commission notes that a SEF may collect this data on market participants’ trading activity directly from its market participants pursuant to Core Principle 5, which requires a SEF to establish and enforce rules that provide the authority to obtain information from its participants. 17 CFR
37.501. Further, § 37.503 requires a SEF to share
information, as required by the Commission or as necessary and appropriate, to fulfill its regulatory responsibilities. 17 CFR 37.503. The Commission notes that it is proposing various amendments to the Core Principle 5 regulations, as discussed below, but is maintaining these requirements. See infra Section X.—Part 37—Subpart F: Core Principle 5 (Ability to Obtain Information). § 37.401(d) requires a SEF to demonstrate the ability to comprehensively and accurately reconstruct daily trading activity.562 In the preamble to the SEF Core Principles Final Rule, the Commission clarified that § 37.401(a) requires a SEF to monitor its market participants’ trading activity and reference data beyond its own market on an ongoing basis in certain instances.563 The Commission also clarified that § 37.401(b) requires a SEF to monitor and evaluate ‘‘general market data,’’ such as the pricing of the underlying commodity or a third-party index or instrument used as a reference price of its swaps.564 The Commission further clarified that the requirements with respect to ‘‘general market data’’ means that a SEF shall monitor and evaluate general market conditions related to its swaps.565 Despite commenters’ concerns about the lack of available information to meet the scope of these requirements, the Commission stated that such monitoring would be necessary to comply with Core Principle 4.566 The Commission proposes to amend § 37.401 to establish more practical trade monitoring requirements that are based on information about trading activity that is actually accessible to SEFs and, therefore, are more consistent with current practice in swaps and other derivatives markets. First, the Commission proposes to clarify under proposed § 37.401(a) that a SEF must conduct real-time market monitoring of ‘‘trading activity’’ on its own facility to identify (i) disorderly trading; (ii) any market or system anomalies; and (iii) instances or threats of manipulation, price distortion, and disruption.567 This proposed amendment, among other things, incorporates the existing requirement under § 37.203(e) that requires a SEF to conduct real-time market monitoring.568 Second, the Commission proposes to specify under proposed § 37.401(b) that a SEF has discretion to determine when to collect and evaluate data on its market participants’ trading activity beyond its own market, i.e., as necessary to detect and prevent manipulation, price distortion, and, where possible, disruptions of the physical-delivery or cash-settlement process, rather than on an ‘‘ongoing basis.’’ 569 This data would include market participants’ trading in (i) the index or instrument used as a reference price; (ii) the underlying commodity for the listed swap; and (iii) any related derivatives markets. In proposing these changes, the Commission recognizes that Core Principle 4 does not explicitly mandate the existing requirements under §§ 37.401(a)–(b) and has also learned that requiring a SEF to monitor trading
activity beyond its own market on an ‘‘ongoing basis’’ has imposed impractical burdens, particularly given that many swaps trade both on multiple SEFs and on an OTC basis. For a swap subject to the trade execution requirement, a SEF is currently required to continually monitor trading for the same or similar swap listed on multiple SEFs. For a listed swap not subject to the requirement, the SEF must additionally monitor trading for the same swap or similar swap traded bilaterally away from a SEF.570 Given that many SEFs list the same or similar swaps that are traded bilaterally—with a large amount of related trading activity occurring away from a SEF’s own market—expecting each SEF to maintain an ongoing collection and monitoring program for these elements is impractical and not consistent with current practice in other derivatives markets.571 SEFs have also demonstrated that this scope and frequency of monitoring is difficult because they currently lack the capability to obtain sufficient trading information. Accordingly, the Commission’s proposed changes are intended to align a SEF’s obligation to monitor beyond its own market more closely with current practice and obligations in other derivatives markets, where there is not an ongoing monitoring requirement. Given the practical challenges discussed above in complying with the existing Core Principle 4 monitoring requirements, the Commission believes that a SEF should monitor beyond its own market as necessary to detect and prevent manipulation, price distortion, and, where possible, disruptions of the physical-delivery or cash-settlement processes. Further, such monitoring should be conducted when necessary to detect manipulative activity that would result in the failure of the market price to reflect the normal forces of supply and demand. In such cases, the SEF should be able to determine the instances in which it needs to collect and evaluate data related to that activity. As proposed, the scope of this data corresponds to the existing requirements of § 37.404, which require a SEF to have the ability to obtain this trading information.572 These amendments would ensure that SEFs can still collect additional information based on a legitimate need, but would also reduce the significant and otherwise duplicative effort among SEFs to collect and evaluate trading and other information on an ongoing basis. The Commission believes that these revised monitoring requirements not only reflect current practice in other markets, but also would continue to protect the integrity of the swaps markets. The Commission also proposes to amend § 37.401(c) to establish more practical monitoring requirements with respect to a SEF’s obligation to monitor general market data. The Commission proposes to clarify that a SEF has the discretion to determine when to monitor and evaluate such data beyond its own market, i.e., as necessary to detect and prevent manipulative activity that would result in the failure of the
market

573The Commission proposes to renumber existing subsection (b) to subsection (c) and amend the requirement as described. 574See infra Section IX.C.—§ 37.403—Additional Requirements for Cash-Settled Swaps (discussing the proposed elimination of the requirement to monitor the pricing of the reference price where a third-party index or instrument is used). 575 17 CFR 37.5(b). 576The Commission proposes these changes in paragraph (a)(1) to the guidance to Core Principle 4 in Appendix B. 17 CFR part 37 app. B. 577 17 CFR 37.402. 578 17 CFR part 37 app. B (guidance to Core Principle 4—paragraph (a)(2)—‘‘Physical-delivery swaps’’). 579See SEF Core Principles Final Rule at 33529 (explaining the Commission’s revision of the proposed requirement that a SEF monitor whether the supply is ‘‘adequate’’ to the ‘‘availability’’ of the supply; and replacing detailed proposed requirements to monitor the supply, marketing, and ownership of the commodity to be physically delivered with similar guidance in Appendix B). 580Proposed Appendix C to part 37, among other things, provides related guidance on the design of physically-settled swap contracts that should be adopted by a SEF to minimize their susceptibility to manipulation. See paragraph (b) of the proposed
Appendix C to part 37—‘‘Guidance for physicallysettled swaps.’’ 17 CFR part 37 app. C.
581Proposed Appendix C to part 37 specifies that a SEF should estimate the deliverable supply for which the swap is not readily susceptible to price manipulation. To assure the availability of adequate deliverable supplies, the swap contract terms and conditions, in particular, should be designed based upon an adequate assessment of the potential range of deliverable supplies and should account for variations in the patterns of production, consumption, and supply over a period of at least three years. See id. (paragraph (b)(iii)—‘‘Accounting for variations in deliverable supplies’’). 582The Commission also proposes to (i) amend the guidance to Core Principle 4 in Appendix B to define ‘‘price convergence’’ as the process whereby the price of a physically-delivered swap converges to the spot price of the underlying commodity as the swap nears expiration; and (ii) make conforming changes. 17 CFR part 37 app. B. 583A SEF should provide electronic notification to the Commission at submissions@cftc.gov and DMO at DMOSubmissions@cftc.gov. price to reflect the normal forces of supply and demand.573 The Commission notes that the existing provision does not specify the required scope or frequency of monitoring such data, which is used to evaluate market conditions and includes, among other things, pricing in a third-party index or instrument used as a reference price. As noted further below with respect to monitoring requirements for cashsettled swaps, the Commission has observed that SEFs do not have full access to certain types of data, such as the pricing of proprietary third-party indexes.574 Therefore, providing a SEF with the discretion to monitor and evaluate general market data on an asneeded basis would align the requirement to SEF capabilities and current market practices. Finally, the Commission proposes to consolidate the trade reconstruction requirements under existing § 37.401(d) and existing § 37.406 into a new proposed § 37.401(d), which would require a SEF to have the ability to comprehensively and accurately reconstruct all trading activity on its facility for the purpose of detecting instances or threats of manipulation, price distortion, and disruptions. The Commission also proposes certain non-substantive changes to eliminate demonstration-based requirements under existing §§ 37.401(c)–(d). As noted above, the Commission proposes to set forth an affirmative monitoring requirement, rather than a demonstration requirement. The Commission notes that demonstration of compliance could otherwise be required upon Commission request under § 37.5(b), which requires a SEF to provide a written demonstration that it is in compliance with its obligations under the Act.575 The Commission further proposes to eliminate duplicative language and adopt various conforming changes to the guidance to Core Principle 4 in
Appendix B.576
Request for Comment
The Commission requests comment on all aspects of proposed § 37.401 and the associated guidance to Core Principle 4 in Appendix B. In particular, the Commission requests comment on the following question:
(70) The Commission has observed that SEFs may provide input into market pricing information, such as third-party indexes, that is available to market participants, which includes executed prices, prices from executable or indicative bids and offers, views of trading specialists, or prices from related instruments in other markets. Should the Commission’s general market monitoring requirements require SEFs to monitor this type of information—for example, pricing provided by its own trading specialists? B. § 37.402—Additional Requirements for Physical-Delivery Swaps For swaps settled by physical delivery, § 37.402 requires that a SEF monitor each swap’s terms and conditions as they relate to the underlying commodity market and monitor the ‘‘availability of supply’’ of the underlying commodity, as specified by the swap’s delivery requirements.577 The Commission also provided additional guidance to Core Principle 4 in Appendix B to specify that a SEF should monitor the general ‘‘availability’’ of the commodity specified by the swap; the commodity’s characteristics; the delivery locations; and if available, information related to the size and ownership of deliverable supplies.578 In the SEF Core Principles Final Rule, the Commission explained that using the phrase ‘‘availability of supply’’ and providing the associated guidance was intended to provide a SEF with additional flexibility in response to commenter feedback that the proposed regulation was, among other things, duplicative, unmanageable, and created the risk of conflicting conclusions.579 The Commission proposes to clarify a SEF’s monitoring obligations with respect to physical-delivery swaps under § 37.402 to be consistent with the guidance in proposed Appendix C to
part 37 and ensure that the SEF can
comply with Core Principles 3 and 4.580 Among other things, a swap contract’s terms and conditions should assure the availability of adequate deliverable supplies, such that the contract is not readily susceptible to price manipulation.581 To ensure that a swap contract’s terms and conditions remain appropriately designed, § 37.402 would require a SEF to (i) monitor the swap’s terms and conditions as they relate to the underlying commodity market by reviewing the convergence between the swap’s price and the price of the underlying commodity, and make a good-faith effort to resolve conditions that are interfering with convergence or notify the Commission of such conditions; and (ii) monitor the availability of the supply of the commodity specified by the delivery requirements of the swap, and make a good-faith effort to resolve conditions that threaten the adequacy of supplies or the delivery process or notify the Commission of such conditions.582 The Commission notes that Core Principles 3 and 4 place affirmative obligations on SEFs to permit trading only in swaps that are not readily susceptible to manipulation and prevent manipulation, price distortion, and disruptions of the delivery or cashsettlement process, respectively. As such, proposed § 37.402 places affirmative obligations on a SEF to make a good-faith effort to resolve conditions that are interfering with convergence or that threaten the adequacy of supplies or the delivery process. The Commission recognizes, however, that a SEF may not always be able to resolve these conditions; therefore, proposed § 37.402 allows the SEF to notify the Commission of such conditions.583 The Commission further proposes corresponding amendments to the associated guidance to Core Principle 4

584 17 CFR part 37 app. B (guidance to Core Principle 4—paragraph (a)(2)—‘‘Physical-delivery swaps’’). 585 Id. 586See 17 CFR part 37 app. C (paragraph (b)(iv) of the proposed Appendix C to part 37—‘‘Contract terms and conditions’’). 587 17 CFR 37.5(b). 588 17 CFR 37.403(a). 589 17 CFR 37.403(b). 590 17 CFR 37.403(c). 591 17 CFR part 37 app. B (guidance to Core Principle 4—paragraph (a)(3)—‘‘Cash-settled swaps’’). See SEF Core Principles Final Rule at 33529 (stating that market participants may have incentives to disrupt or manipulate reference prices for cash-settled swaps and stating that SEFs must monitor the pricing of the reference price in order to comply with Core Principle 4’s requirement to prevent manipulation, price distortion, and disruptions of the cash settlement process). 592 Id. 593 ICE serves as the current administrator for ICE Swap Rate (formerly known as ISDAFix), which serves as a benchmark for swap rates and spreads for IRS. ICE, About ICE Swap Rate, https:// www.theice.com/iba/ice-swap-rate. ICE also serves as the current administrator for ICE LIBOR (formerly known as BBA LIBOR), which is a widely-adopted benchmark for short-term interest rates that is used to specify the floating rate for fixed-to-floating IRS. ICE, ICE Libor-Overview, https://www.theice.com/iba/libor. 594 IHS Markit owns and operates several tradeable CDS indices that are based on a basket of single-name CDS. IHS Markit, Indices, https:// ihsmarkit.com/products/indices.html. 595EMMI, a non-profit making association whose members are national banking associations in the EU-member states, serves as the current administrator for Euribor and EONIA, which are widely-adopted benchmarks for euro-denominated IRS. EMMI, 2 Benchmarks, https://www.emmibenchmarks.eu. 596The Commission notes, however, that ICE and EMMI offer general information on the methodologies for calculating their respective benchmarks. For example, ICE states that it determines the ICE Swap Rate benchmark, which represents the mid-price for the fixed leg of IRS, based on tradeable quotes from regulated, electronic, multilateral trading venues. See ICE, Calculation of ICE Swap Rate from Tradeable Quotes, available at https://www.theice.com/ publicdocs/ICE_Swap_Rate_Full_Calculation_ Methodology.pdf; see also EMMI, Euribor Code of Conduct, available at https://www.emmibenchmarks.eu/assets/files/D2712J-2014-Euribor% 20Code%20of%20Conduct%2001Oct2013%20- %20Revised%201%20June%202016-% 20final%20new.pdf. 597 ICE maintains an oversight committee for LIBOR, which is responsible for reviewing the methodology, scope, and definition of the benchmark (including assessing its underlying market and usage); overseeing any changes to the benchmark; and overseeing and reviewing an associated code of conduct. ICE, Governance & Oversight, https://www.theice.com/iba/libor# methodology. EMMI maintains a Steering Committee, which is responsible for similar functions with respect to Euribor. EMMI, Steering
Committee, https://www.emmi-benchmarks.eu/ euribor-org/steering-committee.html. 598The Commission notes, however, that a SEF would be required under proposed § 37.401(b) to monitor trading in the index or instrument used as a reference price. in Appendix B.584 The Commission proposes a non-substantive revision to clarify that a SEF should monitor physical-delivery swaps listed on its facility. To conform to Core Principle 4, the Commission also proposes to clarify that a SEF should monitor for conditions that may cause a swap to become susceptible to manipulation, price distortion, or disruptions; 585 such conditions would include those that influence the convergence between the swap’s price and the price of the underlying commodity. This proposed language would conform to the proposed guidance for physicallysettled swaps in the proposed Appendix C to part 37, which states that a physically-settled swap contract’s terms and conditions should be designed to avoid any impediments to the delivery of the commodity so as to promote convergence between the value of the swap contract and the cash market value of the commodity at the expiration of the swap contract.586 The Commission also proposes a nonsubstantive change to eliminate the demonstration-based requirement under § 37.402. As noted above, the Commission proposes to set forth an affirmative monitoring requirement for SEFs, rather than a demonstration requirement. The Commission notes that demonstration of compliance could otherwise be required upon Commission request under § 37.5(b), which requires a SEF to provide a written demonstration that it is in compliance with its obligations under the Act.587 Request for Comment The Commission requests comment on all aspects of proposed § 37.402 and the associated guidance to Core Principle 4 in Appendix B.
C. § 37.403—Additional Requirements
for Cash-Settled Swaps
For cash-settled swaps, § 37.403(a) requires that a SEF monitor the pricing of the reference price used to determine cash flows or settlement of a swap.588 Where the reference price is formulated or computed by the SEF, § 37.403(b) requires a SEF to demonstrate that it monitors the continued appropriateness of its methodology for deriving that price.589 Where the reference price relies on a third-party index or instrument, § 37.403(c) requires a SEF to demonstrate that it monitors the continued appropriateness of the index or instrument.590 The Commission provided additional guidance to Core Principle 4 in Appendix B to specify that a SEF should monitor pricing abnormalities in the index or instrument used to calculate the reference price to avoid manipulation, price disruptions, or market distortions.591 For selfformulated or self-computed reference prices, the SEF should amend the existing methodology or impose new methodologies where such threats exist. For pricing based on a third-party index or instrument, a SEF should conduct due diligence to ensure that the contract is not susceptible to manipulation.592 Based on its experience, the Commission acknowledges that the requirement imposed by § 37.403(a) to monitor the methodologies behind third-party indexes or instruments is not realistic due to the proprietary nature of these indexes and instruments. The Commission has observed that many SEFs offer swaps for which pricing is based on benchmark prices or benchmark indices owned or administered by third parties, such as the Intercontinental Exchange, Inc. (‘‘ICE’’),593 IHS Markit Ltd. (‘‘IHS Markit’’),594 and the European Money Markets Institute (‘‘EMMI’’).595 For example, many SEFs offer IRS for trading that rely on LIBOR or EURIBOR as the underlying benchmark, which are based upon submissions from panel banks. The Commission believes that requiring a SEF to monitor the inputs and calculations involved in ICE’s or EMMI’s methodologies when calculating their respective benchmarks on an ongoing basis is impractical.596 The Commission understands that as a general matter, certain aspects of these benchmarks remain proprietary in nature. Therefore, the Commission acknowledges that SEFs do not necessarily have full access to the information to monitor trading to detect disruptions or manipulations of indexes or reference rates administered by other industry participants. Further, the Commission notes that these entities are subject to their own monitoring and oversight mechanisms.597 Based on these considerations, the Commission proposes to eliminate the requirement under § 37.403(a) that SEFs monitor the ‘‘pricing’’ of the reference price used to determine cash flows or settlement.598 Where the reference price relies on a third-party index or instrument, a SEF would continue to be required under proposed § 37.403(b) (existing § 37.403(c)) to monitor the ‘‘appropriateness’’ of the index or instrument; the Commission, however, proposes to amend
this requirement to additionally require a SEF to take appropriate action, including selecting an alternate index or instrument for deriving the reference price, where there is a threat of manipulation, price

599The Commission proposes to renumber existing subsection (c) to subsection (b) and amend the language as described. 600The Commission proposes to renumber existing subsection (b) to subsection (a) and amend the language as described. 601See 17 CFR part 37 app. C (paragraph (a)(ii) of the proposed Appendix C to part 37—‘‘Reference price susceptibility to manipulation’’). 602 17 CFR 37.5(b). 603The Commission proposes to eliminate paragraph (a)(3). 604 17 CFR 37.404(a). 605 17 CFR 37.404(b). 606 17 CFR part 37 app. B (guidance to Core Principle 4—paragraph (a)(4)—‘‘Ability to obtain information’’). 607The Commission notes, however, that the scope of this requirement would be based on the proposed definition of ‘‘market participant’’ under § 37.2(b), which would limit § 37.404 to persons who access the SEF directly or through a third-party functionality, or otherwise direct an intermediary to trade on their behalf. See supra Section IV.B.2.a.— Applicability of § 37.404(b) to Market Participants. 608The Commission proposes to streamline and move the guidance that currently specifies that a SEF can adopt information-sharing agreements with other trading venues or a third-party regulatory service provider where position and trading information is not available directly from market participants. The Commission proposes to move this guidance to paragraph (a) of the guidance to Core Principle 5 because the applicable requirements for a SEF to adopt information-sharing practices are addressed under proposed § 37.503, as discussed below. 609The Commission also proposes to eliminate similar associated guidance to Core Principle 4 in
Appendix B.
610 17 CFR 37.5(b).
611 17 CFR 37.405. distortion, or market disruption.599 The Commission believes that sufficient information is generally available to SEFs to comply with this proposed requirement. Based on this proposed requirement, the Commission expects that a SEF would take action with respect to its use of a third-party index or instrument for a listed swap contract that would inhibit the SEF’s ability to prevent manipulation pursuant to Core Principles 3 and 4. Where a SEF formulates and computes the reference price, the Commission proposes to amend § 37.403(b) to require a SEF to take appropriate action, including amending the methodology, where there is a threat of manipulation, price distortion, or market disruption.600 In contrast to the circumstances where a SEF relies on a third-party index or instrument, the SEF could monitor its own methodology for deriving the reference price. The Commission believes that these proposed amendments would provide greater clarity and establish more practical requirements for SEFs to monitor the reference prices, including the index or instrument used to calculate them, in a manner that is consistent with Core Principle 4. Further, the Commission believes that these proposed amendments are consistent with the proposed guidance in Appendix C to part 37 regarding the design of cash-settled swap contracts. Among other things, that guidance specifies that the SEF should ensure that the reference price used for its contract is not readily susceptible to manipulation by assessing its reliability as an indicator of cash market values in the underlying commercial market.601 The Commission also proposes a nonsubstantive change to eliminate the demonstration-based requirements under § 37.403. As noted above, the Commission proposes to set forth an affirmative monitoring requirement, rather than a demonstration requirement. The Commission notes that demonstration of compliance could otherwise be required upon Commission request under § 37.5(b), which requires a SEF to provide a written demonstration that it is in compliance with its obligations under the Act.602 Given the changes to § 37.403 proposed above, the Commission proposes to delete the existing associated guidance in Core Principle 4 in Appendix B.603 Request for Comment The Commission requests comment on all aspects of proposed § 37.403 and the elimination of the associated guidance to Core Principle 4 in
Appendix B.
D. § 37.404—Ability To Obtain Information
Section 37.404(a) provides that a SEF
must demonstrate that it has access to sufficient information to assess whether trading in swaps listed on its market, in the index or instrument used as a reference price, or in the underlying commodity for its listed swaps is being used to affect prices on its market.604
Section 37.404(b) requires a SEF to have
rules that require its market participants to keep records of their trading, including records of their activity in the index or instrument used as a reference price, the underlying commodity, and related derivatives markets; and make those records available to the SEF, its regulatory service provider if applicable, and the Commission.605 The Commission specified in the guidance to Core Principle 4 in Appendix B that a SEF may limit the application of these requirements to market participants who conduct ‘‘substantial trading’’ on its facility.606 The Commission proposes several amendments to the associated guidance to Core Principle 4 in Appendix B. In particular, the Commission proposes to eliminate a SEF’s ability to limit the application of proposed § 37.404(a) and proposed § 37.404(b) to only those market participants who conduct ‘‘substantial trading’’ on its facility. The Commission notes that it has not provided SEFs with any additional guidance, e.g., volume-based metrics or similar factors, as to what constitutes ‘‘substantial trading’’ by a market participant. Eliminating this guidance would not only remove an ambiguity as to whom § 37.404 applies, but also promote a more comprehensive and effective monitoring requirement that would require a SEF to have the ability to obtain information from all of its market participants, thereby better fulfilling the objectives of Core Principle
4.607 In addition, based on its
experience, the Commission believes that market participants are keeping records of their related trading, so eliminating the ‘‘substantial’’ requirement should not impose additional burdens. In addition to this amendment, the Commission also proposes several non-substantive amendments to the guidance.608 The Commission also proposes a nonsubstantive change to eliminate the demonstration-based requirement under § 37.404(a).609 As noted above, the Commission proposes to set forth an affirmative monitoring requirement, rather than a demonstration requirement. The Commission notes that demonstration of compliance could otherwise be required upon Commission request under § 37.5(b), which requires a SEF to provide a written demonstration that it is in compliance with its obligations under the Act.610 Request for Comment The Commission requests comment on all aspects of proposed § 37.404 and the associated guidance to Core Principle 4 in Appendix B. E. § 37.405—Risk Controls for Trading
Section 37.405 requires that a SEF
establish and maintain risk control mechanisms to prevent and reduce the potential risk of market disruptions, including, but not limited to, market restrictions that pause or halt trading in market conditions prescribed by the SEF.611 The associated guidance to Core Principle 4 in Appendix B, among other things, provides examples of the different types of risk controls that a SEF may adopt based on whether or not they are appropriate to the characteristics of the trading platform or

612 17 CFR part 37 app. B (guidance to Core Principle 4—paragraph (a)(5)—‘‘Risk controls for trading’’). 613 7 U.S.C. 7b–3(f)(4)(b). 614See supra Section VIII.A.1.—Appendix C— Demonstration of Compliance that a Swap Contract is Not Readily Susceptible to Manipulation. 615 17 CFR 37.406. 616As discussed above, proposed § 37.401(d) would require a SEF to have the ability to comprehensively and accurately reconstruct all trading activity on its facility for the purpose of detecting instances or threats of manipulation, price distortion, and disruptions. 617See infra Section X.B.—§ 37.502—Provide Information to the Commission. 618The Commission proposes to renumber §§ 37.407–408 to §§ 37.406–407, given the proposed elimination of existing § 37.406. 619 7 U.S.C. 7b–3(f)(5). The Commission codified Core Principle 5 under § 37.500. 17 CFR 37.500. 620 17 CFR 37.501. 621 17 CFR 37.502. 622The Commission proposes to renumber existing § 37.503 to § 37.502 and retitle the provision to ‘‘Provide information to the Commission’’ from ‘‘Collection of information’’ based on the proposed changes described below. 623See supra Section VII.B.2.—§ 37.203(b)— Authority to Collect Information (proposing an amendment to require that a SEF have the authority to collect information required to be kept by persons subject to the SEF’s recordkeeping rules). 624The Commission proposes to renumber existing § 37.504 to § 37.503 and retitle the provision to ‘‘Information-sharing’’ from ‘‘Provide information to the Commission’’ based on the proposed changes described below. market offered by the SEF.612 Among those types of controls, the guidance specifies that a SEF may establish clear error-trade and order cancellation policies. The Commission proposes two amendments to § 37.405 to align the existing requirement with the proposed amendments to other Core Principle 4 regulations. First, the Commission proposes to clarify that a SEF is required to have risk control mechanisms to prevent and reduce market disruptions, as well as price distortions on their facility. This proposed change is consistent with Core Principle 4, which requires a SEF to monitor trading to prevent price distortions and disruptions to the delivery or cash settlement process.613 Second, the Commission proposes to limit this requirement to swaps trading activity occurring on a SEF’s own facility, which would be consistent with the proposed changes to § 37.401(a). The Commission also proposes several amendments to the associated guidance to Core Principle 4 in
Appendix B. First, the Commission
proposes to eliminate the reference to intraday position limit risk controls, which generally do not apply to a SEF because the Commission has yet to establish position limit rules for swaps. Second, the Commission proposes to clarify that a SEF’s risk controls should be adapted to the swap contracts that it lists for trading; this amendment does not reflect a substantive change, but rather would be consistent with the proposed guidance in Appendix C to
part 37, which provides that a SEF may
adapt certain risk controls for swap contracts based on whether they are standardized or non-standardized.614 Third, the Commission proposes to eliminate the language specifying that a SEF may adopt an error trade policy; the Commission notes that, as described above, proposed § 37.203(e) would require a SEF to adopt an error trade policy for trading on its facility. The Commission also proposes to make several other non-substantive conforming and clarifying amendments to the guidance. Request for Comment The Commission requests comment on all aspects of proposed § 37.405 and the associated guidance to Core Principle 4 in Appendix B. F. § 37.406—Trade Reconstruction
Section 37.406 requires that a SEF
have the ability to comprehensively and accurately reconstruct all trading on its facility, and that audit-trail data and reconstructions be made available to the Commission in a form, manner, and time that is acceptable to the Commission.615 Given the proposed consolidation with § 37.401(d), as described above, the Commission proposes to eliminate § 37.406.616 The Commission also notes that the requirement to make information available to the Commission is already addressed under Core Principle 5 regulations, discussed further below.617 Request for Comment The Commission requests comment on all aspects of the proposed elimination of § 37.406. G. § 37.407—Regulatory Service Provider; § 37.408—Additional Sources for Compliance 618 The Commission is not proposing any amendments to §§ 37.407–408.
X. Part 37—Subpart F: Core Principle 5
(Ability To Obtain Information) Core Principle 5 requires a SEF to establish and enforce rules that allow the facility to obtain any ‘‘necessary information’’ to perform any of the functions described in CEA section 5h; provide the information to the Commission upon request; and have the capacity to carry out international information-sharing agreements as the Commission may require.619 The Commission further implemented Core Principle 5 under §§ 37.501–504. Based on the Commission’s understanding of current SEF operational practices, the Commission is proposing several amendments, including non-substantive changes, to these implementing regulations, as described below. A. § 37.501—Establish and Enforce Rules
Section 37.501 specifies that a SEF’s
rules must allow it to obtain sufficient information to fulfill its functions and obligations under part 37, including the capacity to carry out such international information-sharing agreements as the Commission may require.620 The Commission proposes a non-substantive amendment to eliminate the duplicative language under § 37.501 regarding a SEF’s capacity to carry out international information-sharing agreements. The Commission notes that this requirement is already established under Core Principle 5. B. § 37.502—Provide Information to the Commission Existing § 37.502 requires a SEF to adopt rules that allow it to collect information on a routine basis, allow for the collection of non-routine data from its market participants, and allow for its examination of books and records kept by its market participants.621 The Commission proposes to eliminate existing § 37.502.622 The Commission notes that the language of this requirement is duplicative of the general requirement that SEFs have the ability to obtain information from their market participants, as already set forth in Core Principle 5 and § 37.501. Eliminating the requirement that a SEF must have rules to allow it to examine books and records is also consistent with the Commission’s proposed amendment to § 37.203(b), which would replace a similar existing requirement with a more general rule that would allow a SEF to tailor its rules for collecting books and records from market participants.623 Request for Comment The Commission requests comment on all aspects of the proposed elimination of existing § 37.502.
C. § 37.503—Information-Sharing 624
Existing § 37.504 requires a SEF to share information with other regulatory organizations, data repositories, and third-party data reporting services as required by the Commission or as otherwise necessary and appropriate to fulfill its self-regulatory and reporting

625 17 CFR 37.504.
626The Commission proposes to move this guidance from paragraph (a)(4) to Core Principle 4 to paragraph (a) to Core Principle 5 in Appendix B. 627The Commission proposes to retitle § 37.504 to ‘‘Prohibited use of data collected for regulatory purposes’’ from ‘‘Information-sharing agreements’’ based on the proposed changes described below. 628 17 CFR 37.7. 629SEF Core Principles Final Rule at 33492. 630 17 CFR 37.7. 631 In this regard, the Commission notes that under its proposed amendments to § 37.204, a SEF would be permitted to contract with any entity for the provision of services to assist in complying with the Act and Commission regulations, subject to Commission approval. See supra Section VII.C.1.— § 37.204(a)—Use of Regulatory Service Provider Permitted. 632 7 U.S.C. 7b–3(f)(6). The Commission codified Core Principle 6 under § 37.600. 17 CFR 37.600. 633 Id. 634 17 CFR 37.601. 635 17 CFR part 37 app. B (guidance to Core Principle 6—paragraph (a)—‘‘Guidance’’). responsibilities.625 Section 37.504 also states that appropriate informationsharing agreements can be established with the specified entities or the Commission can act in conjunction with the SEF to carry out such information sharing. The Commission proposes to establish a more straightforward and streamlined information-sharing requirement by eliminating the specifically enumerated list of entities with which a SEF must share information and adopting conforming amendments. Instead, a SEF would be required to generally share information, as required by the Commission, or as appropriate to fulfill its self-regulatory and reporting responsibilities. Rather than limiting the types of entities that a SEF may share information with, however, a SEF would have the flexibility to share information with third parties that it may utilize to carry out those responsibilities, including affiliated entities. This broader and more adaptive approach to information-sharing practices would better accommodate, for example, a SEF’s ability to use different types of regulatory service providers pursuant to the proposed amendments under § 37.204. The Commission emphasizes, however, that SEFs would not be required to share information with competitor entities. In relevant situations where information or data may need to be shared across different markets to help identify manipulation, price distortions or other disruptions, for example, the Commission anticipates that it will continue working in conjunction with SEFs to help establish such information-sharing arrangements. The Commission also proposes a nonsubstantive revision by moving certain provisions from the existing guidance to Core Principle 4 to the guidance to Core Principle 5 in Appendix B.626 This proposed guidance would specify that if position and trading information is available through information-sharing agreements with other trading venues or a third-party regulatory service provider, then the SEF should cooperate, to the extent
practicable, in such information-sharing agreements. Request for Comment The Commission requests comment on all aspects of proposed § 37.503 and the associated guidance to Core Principle 5 in Appendix B. D. § 37.504—Prohibited Use of Data Collected for Regulatory Purposes 627
Section 37.7—‘‘Prohibited use of data
collected for regulatory purposes’’— prohibits a SEF from using, for business or marketing purposes, any proprietary data or personal information it collects or receives, from or on behalf of any person, for the purpose of fulfilling its regulatory obligations, unless the person clearly consents to the SEF’s use of such data or information in such manner.628 The purpose of this provision is to protect customer privacy and prevent a SEF from using information, obtained for compliance purposes, to otherwise advance its commercial interests.629
Section 37.7 also provides that a SEF,
where necessary for regulatory purposes, may share such data or information with one or more SEFs or DCMs registered with the Commission.630 The Commission proposes to create a more cohesive rule with respect to information-sharing practices under Core Principle 5 by moving existing § 37.7 to a new proposed § 37.504 and amending the current language of the requirement. Consistent with the existing prohibition, the Commission proposes that a SEF that shares such proprietary data or personal information with a third party shall ensure that that third party does not use the data or information for business or marketing purposes, unless the person from whom such data or information was obtained clearly consents to its use for business or marketing purposes (including consent to use by those third parties with whom the SEF may share such information). This proposed amendment corresponds to the Commission’s other proposed amendments that would expand the scope of entities with whom a SEF may share information, including § 37.503, which would provide a SEF with greater flexibility in selecting a third-party provider to fulfill its selfregulatory and reporting responsibilities; and § 37.204, which would allow the SEF to utilize a broader scope of third-party entities, including non-registered affiliates to provide regulatory services, subject to Commission approval.631 In the course of using such a provider, a SEF may need to share proprietary data or personal information with that third party. To the extent that § 37.504 would continue to limit SEFs from using this type of information for nonregulatory purposes, the Commission believes that the objective of protecting customer privacy and preventing the use of data for commercial purposes should also equally apply to third parties that obtain access to such data or information from a SEF for regulatory purposes. The Commission believes that the proposed amendments achieve this objective. Request for Comment The Commission requests comments on all aspects of proposed § 37.504.
XI. Part 37—Subpart G: Core Principle
6 (Position Limits or Accountability) Core Principle 6 requires a SEF that is a trading facility to adopt, as is necessary and appropriate, position limits or position accountability levels for each swap contract to reduce the potential threat of market manipulation or congestion.632 For contracts that are subject to a federal position limit under CEA section 4a(a), the SEF must set its position limits at a level that is no higher than the limit established by the Commission; and monitor positions established on or through the SEF for compliance with the Commission’s limit and the limit, if any, set by the SEF.633 A. § 37.601—Additional Sources for Compliance; Guidance to Core Principle 6 in Appendix B
Section 37.601 further implements
Core Principle 6 and specifies that until such time that compliance is required under part 151 of the Commission’s regulations, a SEF may refer to the associated guidance and/or acceptable practices set forth in Appendix B to part
37.634 The guidance to Core Principle 6
in Appendix B provides a SEF with reasonable discretion to comply with Core Principle 6 and sets forth how a SEF may demonstrate compliance for trading that occurs on its own market.635 The Commission notes that it has proposed new language for § 37.601 and new corresponding guidance to Core Principle 6 in Appendix B in a reproposal of a position limits

636Position Limits for Derivatives, 81 FR 96704 (proposed Dec. 30, 2016). 637 7 U.S.C. 7b–3(f)(1). 638The Commission codified Core Principle 7 under § 37.700. 17 CFR 37.700. 639 17 CFR 39.12(b)(7). Core Principle C for DCOs, among other things, requires that each DCO establish appropriate standards for determining the eligibility of agreements, contracts, or transactions submitted to the DCO for clearing. 7 U.S.C. 7a– 1(c)(2)(C)(i)(II). Section 39.12(b) implements Core Principle C for DCOs by setting forth product eligibility requirements. 17 CFR 39.12(b). 640The Commission notes that § 39.12(b)(7) also applies to the acceptance or rejection for clearing by a DCO of (i) futures and options on futures transactions and (ii) swaps submitted by a DCM. Accordingly, the Commission’s proposed amendments to § 39.12(b)(7) would also apply to those transactions. See infra Section XII.B.2.b.(2)— § 39.12(b)(7)(ii)—AQATP Standard for Registered DCOs. 641 17 CFR 37.701. 642The Commission proposes to renumber the existing requirement under § 37.701 as subsection (a) based on a new requirement proposed under subsection (b), described below. 643Section 39.12(b)(7)(i)(A) requires each DCO to coordinate with DCMs and SEFs to develop rules and procedures to facilitate prompt, efficient, and accurate processing of transactions to the DCO for clearing. 17 CFR 39.12(b)(7)(i)(A). As discussed below, § 39.12(b)(7)(i)(A), as amended, would apply to both the processing and routing of transactions to the DCO for clearing. See infra Section XII.B.2.b.(1)—§ 37.702(b)(1) and § 39.12(b)(7)(i)(A)—‘‘Prompt, Efficient, and Accurate’’ Standard. 644The Commission notes that Core Principle 7 refers to swaps ‘‘entered on or through’’ the SEF, but notes that the existing requirement under § 37.701 specifically applies to ‘‘executed’’ transactions, which are submitted for clearing. 645 17 CFR 37.702(a). 646See supra Section IV.B.2.—§ 37.2(b)— Definition of ‘‘Market Participant.’’ The Commission notes that CEA section 2(e) limits swaps trading to ECPs, as defined by section 1a(18) of the Act. 7 U.S.C. 2(e). 647The Commission notes that part 39 only applies to registered DCOs and does not apply to exempt DCOs. Accordingly, the Commission notes that § 37.702(b) only refers to registered DCOs. rulemaking, pending further Commission action.636 The Commission proposes to eliminate the language of § 37.601 and the existing corresponding guidance to Core Principle 6, based on its intent to address this issue in a separate rulemaking. Until that time, the Commission clarifies that SEFs have reasonable discretion to determine how to comply with Core Principle 6 pursuant to Core Principle 1.637 This approach is consistent with the existing approach under § 37.601 and the associated guidance to Core Principle 6. Request for Comment The Commission requests comment on all aspects of the proposed elimination of § 37.601 and the associated guidance to Core Principle 6 in Appendix B.
XII. Part 37—Subpart H: Core Principle
7 (Financial Integrity of Transactions); § 39.12—Participant and Product Eligibility Core Principle 7 requires a SEF to establish and enforce rules and procedures for ensuring the financial integrity of swaps entered on or through the facilities of the SEF, including the clearance and settlement of the swaps pursuant to CEA section 2(h)(1).638 As described further below, §§ 37.700–703 implement Core Principle 7 by establishing requirements for SEFs to facilitate the processing and routing of swap transactions to a DCO for clearing.
Section 39.12(b)(7), which implements
Core Principle C for DCOs, sets forth corresponding requirements for registered DCOs that specify the time frame for acceptance or rejection of transactions submitted to the registered DCO from DCMs and SEFs.639 As described further below, the Commission is proposing several amendments to the implementing regulations and § 39.12(b)(7), including amendments to certain ‘‘straightthrough processing’’ obligations that apply to SEFs, DCMs, and DCOs.640 A. § 37.701—Required Clearing
Section 37.701 requires that
transactions executed on or through a SEF that are subject to the clearing requirement, or are voluntarily cleared by the counterparties, must be cleared through a registered DCO or an exempt DCO.641 The Commission proposes to amend § 37.701 to require a SEF to establish a direct and independent clearing agreement with each registered DCO or exempt DCO to which the SEF submits swap transactions for clearing.642 During the part 37 implementation, the Commission observed that some SEFs would route swap transactions to certain exempt DCOs for clearing without having established a direct clearing agreement with those DCOs. Rather than enter a direct agreement with the exempt DCO, the SEF would establish the capacity to route transactions through the use of a thirdparty service provider. Such routing arrangements occurred pursuant to a services agreement between the SEF and the provider; the provider, in turn, maintained a separate agreement with the exempt DCO. A SEF’s use of a third-party service provider to route swap transactions to a DCO for clearing may generally be appropriate, but the Commission believes that the indirect routing of transactions for clearing must occur pursuant to a direct and independent clearing services agreement between the SEF and each DCO utilized by the SEF. The Commission believes that maintaining a direct agreement between a SEF and DCO, notwithstanding the use of a third-party provider, is consistent with § 37.702(b), which requires each SEF to coordinate with a DCO to develop rules and procedures to facilitate prompt and efficient processing of transactions in accordance with the DCO’s obligations under § 39.12(b)(7)(i)(A).643 Such an agreement would provide greater certainty to market participants that the SEF has the appropriate processes to facilitate swaps clearing. The Commission also believes that the terms established in a direct clearing agreement between the SEF and DCO would help the SEF and DCO resolve any problems that arise at the DCO that could diminish the SEF’s ability to submit transactions for clearing. The Commission also proposes a nonsubstantive amendment to § 37.701 to eliminate ‘‘or through’’ from the language of the existing requirement. The Commission notes that this proposed amendment is a conforming change to other part 37 regulations and does not affect the scope of transactions that are required to be cleared pursuant to the clearing requirement in CEA
section 2(h)(1)(A).644
Request for Comment
The Commission requests comment on all aspects of proposed § 37.701. B. § 37.702—General Financial Integrity

§ 37.702(a)
Section 37.702(a) requires a SEF to
establish minimum financial standards for its members, which include at a minimum a requirement that each member qualifies as an ECP pursuant to CEA section 1a(18).645 The Commission proposes a non-substantive amendment to § 37.702(a) to replace the term ‘‘member’’ with ‘‘market participant.’’ The Commission notes that its proposed definition of ‘‘market participant’’ under § 37.2(b) would capture the universe of persons and entities that participate on SEFs and would be subject to minimum financial requirements, including a SEF’s members.646
§ 37.702(b) and § 39.12(b)(7)—Time
Frame for Clearing
Existing § 37.702(b) and § 39.12(b)(7) require SEFs and registered DCOs, respectively, to coordinate with one another to facilitate the clearing of swap transactions executed on or through the SEF.647 The two provisions are intended to ensure that SEFs and registered DCOs coordinate and work together to

648Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management, 77 FR 21278, 21283 (Apr. 9, 2012) (‘‘Timing of Acceptance for Clearing Final Rule’’). 649 2013 Staff STP Guidance at 2. See also infra notes 658–659 and accompanying discussion. The Commission has previously stated that the ‘‘acceptance or rejection for clearing in close to real time is crucial for both effective risk management and for the efficient operation of trading venues.’’ Timing of Acceptance for Clearing Final Rule at
21285. The Commission notes that § 39.12(b)(7)
applies to a DCO with respect to (i) futures and options on futures transactions and (ii) swaps submitted by a DCM for clearing. To the extent that the Commission is addressing the proposed amendments to § 39.12(b)(7), as discussed further below, in conjunction with proposed amendments to § 37.702(b)(2), the discussion focuses on swaps routed by a SEF to a DCO for clearing. See also infra note 673 (noting that at this time the Commission is not proposing corresponding amendments to § 38.601(b), which establishes analogous processing and routing requirements for DCMs). As discussed below, however, the proposed amendments to § 39.12(b)(7) would also apply to those transactions, including swaps, futures, and options on futures, submitted by a DCM to a DCO for clearing. See infra
Section XII.B.2.b.(2)—§ 39.12(b)(7)(ii)—AQATP
Standard for Registered DCOs.
650 17 CFR 37.702(b)(1).
651 17 CFR 37.702(b)(2).
652 17 CFR 39.12(b)(7)(i)(A). The Commission notes that ‘‘transactions’’ refers to swaps submitted by a SEF or DCM, as well as futures and options on futures submitted by a DCM. 653 17 CFR 39.12(b)(7). 654 17 CFR 39.12(b)(7)(ii). 655 17 CFR 39.12(b)(7)(iii). 656Timing of Acceptance for Clearing Final Rule at 21285–86. 657Section 38.601(b) applies to DCMs and establishes processing and routing requirements that are analogous to § 37.702(b) for SEFs. 17 CFR 38.601. 658 2013 Staff STP Guidance at 2. The 2013 Staff STP Guidance also specified straight-through processing requirements for FCMs under § 1.74. Id. at 2–3. See infra note 660. 659 2013 Staff STP Guidance at 2. 660 2013 Staff STP Guidance at 3. Section 1.74 applies similar straight-through processing requirements to FCMs, including the requirement that a FCM to coordinate with any DCO to which it is a clearing member to establish systems that enable the FCM, or the DCO acting on its behalf, to accept or reject each trade submitted to the DCO for clearing as quickly as would be technologically practicable if fully automated systems were used. 17 CFR 1.74. 661 2013 Staff STP Guidance at 5. 662 Id. 663 Id. at 4. 664 Id. 665Straight Through Processing and Affirmation of SEF Cleared Swaps, CFTC Letter No. 15–67 (Dec. 21, 2015) (‘‘2015 Supplementary Staff Letter’’). 666 Id. at 2. 667The Divisions noted that if an erroneous swap is cleared immediately after execution, the counterparties would have to address the errors after clearing, which may be difficult and costly. Additionally, counterparties may have to bear significant margin costs until an error is corrected because the swap may have been cleared at the wrong DCO; the swap terms may contain the wrong counterparty; or the swap may contain incorrect economic terms. Id. facilitate the ‘‘straight-through processing’’ of transactions from execution through clearing,648 which the Divisions have described as the ‘‘near[-]instantaneous acceptance or rejection of each trade. . . .’’ 649 In order for a DCO to clear a SEF swap transaction, existing § 37.702(b)(1) requires a SEF to ensure that it has the capacity to route transactions to the DCO in a manner acceptable to the registered DCO for purposes of clearing.650 Existing § 37.702(b)(2) requires a SEF to coordinate with each registered DCO to which it submits transactions for clearing to develop rules and procedures to facilitate ‘‘prompt and efficient’’ transaction processing in accordance with the requirements of § 39.12(b)(7).651 Section 39.12(b)(7)(i)(A) requires each registered DCO to coordinate with a relevant SEF or DCM to develop rules and procedures to facilitate ‘‘prompt, efficient, and accurate’’ processing of all transactions, including swaps submitted to the registered DCO for clearing by the SEF or DCM (emphasis added).652 Sections 39.12(b)(7)(ii)–(iii) each further require a registered DCO to establish standards to accept or reject transactions for clearing as quickly as would be
technologically practicable as if fully automated systems were used (the ‘‘AQATP’’ standard).653 Section 39.12(b)(7)(ii) applies this standard to registered DCOs for transactions, including swaps, that are ‘‘executed competitively on or subject to the rules’’ of a SEF or DCM and requires the registered DCO to accept or reject a transaction for clearing pursuant to the AQATP standard ‘‘after execution’’ of the transaction.654 For swaps ‘‘not executed on or subject to the rules’’ of a SEF or DCM or ‘‘executed noncompetitively on or subject to the rules’’ of a SEF or DCM, § 39.12(b)(7)(iii) requires a registered DCO to accept or reject a swap for clearing pursuant to the AQATP standard ‘‘after submission’’ of the swap to the DCO.655 In adopting the AQATP standard, the Commission noted that it intended for the requirement to track the evolving industry standard, based on technological developments.656 The Divisions subsequently issued the 2013 Staff STP Guidance to further clarify the application of ‘‘straightthrough processing’’ obligations for swaps that apply to SEFs, DCMs, and DCOs under § 37.702(b), § 38.601(b),657 and § 39.12(b)(7), respectively.658 The Divisions stated that the standard for straight-through processing, i.e., the ‘‘near instantaneous acceptance or rejection’’ of a transaction by a DCO, is critical to providing certainty of execution and clearing, which in turn would reduce costs and reduce risk.659 To achieve that standard, the guidance expressed the view that SEFs, DCMs, and registered DCOs must facilitate swap transaction processing through several requirements. With respect to SEFs, the guidance expressed the view that a SEF must ensure that a clearing FCM has been identified in advance for each party on an order-by-order basis; and facilitate the mandatory preexecution screening of orders by each clearing FCM for compliance with riskbased limits, i.e., ‘‘pre-execution credit screening,’’ in accordance with a clearing FCM’s obligations under § 1.73.660 The guidance also expressed the view that a DCO must meet a specific time frame, i.e., ten seconds, to satisfy its obligation under the AQATP standard.661 a. ‘‘Prompt and Efficient’’ Standard and AQATP Standard Based on data received by DCR, the 2013 Staff STP Guidance expressed the view that compliance with the AQATP standard under § 39.12(b)(7)(ii) means that a registered DCO must accept or reject such trades for clearing within ten seconds after submission to the DCO.662 Given that existing § 37.702(b)(2) and § 38.601(b) require SEFs and DCMs, respectively, to coordinate with DCOs in processing transactions for clearing, the 2013 Staff STP Guidance accordingly expressed the view that a SEF or DCM must route swaps to a DCO in compliance with the AQATP standard.663 The 2013 Staff STP Guidance also expressed the view that the AQATP standard applies to swap transactions that are routed to a DCO through a SEF’s or DCM’s use of a post-execution, thirdparty manual affirmation
hub (‘‘affirmation hub’’).664 The Divisions further explained in a follow-up letter to the 2013 Staff STP Guidance (the ‘‘2015 Supplementary Staff Letter’’) that a SEF or DCM may send executed trade terms to such a hub to be manually affirmed by the counterparties prior to routing the transaction to the DCO for clearing.665 According to market participants, this process may take minutes or hours, or occasionally may occur overnight.666 The Divisions acknowledged that such affirmation hubs can promote prompt and efficient processing by helping counterparties identify and correct potential errors in a transaction’s terms prior to routing to a DCO for clearing.667 The Divisions also stated their belief, however, that the Commission intended the AQATP standard to account for the need to