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2013-12242

2013-12242

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Vol. 78 Tuesday,No. 107 June 4, 2013Part II
Commodity Futures Trading Commission
17 CFR Part 37Core Principles and Other Requirements for Swap Execution Facilities;Final Rule
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33476
Federal Register
/Vol. 78, No. 107/Tuesday, June 4, 2013/Rules and Regulations
1
See
Commodity Futures Modernization Act of 2000, Public Law 106–554, 114 Stat. 2763 (2000).
2
See
The Financial Crisis Inquiry Commission,The Financial Crisis Inquiry Report: Final Report of 
COMMODITY FUTURES TRADINGCOMMISSION17 CFR Part 37
RIN 3038–AD18
Core Principles and OtherRequirements for Swap ExecutionFacilities
AGENCY
:
Commodity Futures TradingCommission.
ACTION
:
Final rule.
SUMMARY
:
The Commodity FuturesTrading Commission (‘‘Commission’’ or‘‘CFTC’’) is adopting new rules,guidance, and acceptable practices toimplement certain statutory provisionsenacted by Title VII of the Dodd-FrankWall Street Reform and ConsumerProtection Act (‘‘Dodd-Frank Act’’). Thefinal rules, guidance, and acceptablepractices, which apply to theregistration and operation of a new typeof regulated entity named a swapexecution facility (‘‘SEF’’), implementthe Dodd-Frank Act’s new statutoryframework that, among otherrequirements, adds a new section 5h tothe Commodity Exchange Act (‘‘CEA’’ or‘‘Act’’) concerning the registration andoperation of SEFs, and adds a newsection 2(h)(8) to the CEA concerningthe execution of swaps on SEFs.
DATES
:
The rules will become effectiveAugust 5, 2013, with the exception of regulation 37.3(b)(5) (17 CFR 37.3(b)(5)),which shall become effective August 5,2015.
Compliance date: 
October 2, 2013,except that: (a) From August 5, 2013until October 2, 2014 marketparticipants may comply with theminimum market participantrequirement in regulation 37.9(a)(3) (17CFR 37.9(a)(3)) by transmitting a requestfor a quote to no less than two marketparticipants; and (b) each affected entityshall comply with the warning letterrequirement in regulation 37.206(f) (17CFR 37.206(f)) no later than August 5,2014.
FOR FURTHER INFORMATION CONTACT
:
Amir Zaidi, Special Counsel, 202–418–6770,
,Alexis Hall-Bugg,Special Counsel, 202–418–6711,
,or David VanWagner, Chief Counsel, 202–418–5481,
,Division of Market Oversight; Michael Penick,Senior Economist, 202–418–5279,
,or Sayee Srinivasan,Research Analyst, 202–418–5309,
,Office of the Chief Economist, Commodity Futures TradingCommission, Three Lafayette Centre,1155 21st Street NW., Washington, DC20581.
SUPPLEMENTARY INFORMATION
:
Table of Contents
I. BackgroundA. Swaps and Title VII of the Dodd-FrankActB. SEF Notice of Proposed RulemakingII. Part 37 of the Commission’s Regulations—Final RulesA. Adoption of Regulations, Guidance, andAcceptable PracticesB. General Regulations (Subpart A)1. §37.1—Scope2. §37.2—Applicable Provisions3. §37.3—Requirements for Registration4. §37.4—Procedures for Listing Productsand Implementing Rules5. §37.5—Information Relating to SwapExecution Facility Compliance6. §37.6—Enforceability7. §37.7—Prohibited Use of Data Collectedfor Regulatory Purposes8. §37.8—Boards of Trade Operating Botha Designated Contract Market and aSwap Execution Facility9. §37.9—Permitted Execution Methods10. §37.10—Swaps Made Available forTrading11. §37.11—Identification of Non-ClearedSwaps or Swaps Not Made Available ToTradeC. Regulations, Guidance, and AcceptablePractices for Compliance With the CorePrinciples1. Subpart B—Core Principle 1(Compliance With Core Principles)2. Subpart C—Core Principle 2(Compliance With Rules)(a) §37.200—Core Principle 2—Compliance With Rules(b) §37.201—Operation of Swap ExecutionFacility and Compliance With Rules(c) §37.202—Access Requirements(d) §37.203—Rule Enforcement Program(e) §37.204—Regulatory Services Provided by a Third Party(f) §37.205—Audit Trail(g) §37.206—Disciplinary Procedures andSanctions(h) §37.207—Swaps Subject to MandatoryClearing3. Subpart D—Core Principle 3 (Swaps NotReadily Susceptible to Manipulation)4. Subpart E—Core Principle 4 (Monitoringof Trading and Trade Processing)(a) §37.401—General Requirements(b) §37.402—Additional Requirements forPhysical-Delivery Swaps(c) §37.403—Additional Requirements forCash-Settled Swaps(d) §37.404—Ability To ObtainInformation(e) §37.405—Risk Controls for Trading(f) §37.406—Trade Reconstruction(g) §37.407—Additional Rules Required5. Subpart F—Core Principle 5 (Ability ToObtain Information)(a) §37.501—Establish and Enforce Rules(b) §37.502—Collection of Information(c) §37.503—Provide Information to theCommission(d) §37.504—Information-SharingAgreements6. Subpart G—Core Principle 6 (PositionLimits or Accountability)7. Subpart H—Core Principle 7 (FinancialIntegrity of Transactions)(a) §37.701—Mandatory Clearing(b) §37.702—General Financial Integrity(c) §37.703—Monitoring for FinancialSoundness8. Subpart I—Core Principle 8 (EmergencyAuthority)(a) §37.801—Additional Sources forCompliance9. Subpart J—Core Principle 9 (TimelyPublication of Trading Information)10. Subpart K—Core Principle 10(Recordkeeping and Reporting)11. Subpart L—Core Principle 11 (AntitrustConsiderations)12. Subpart M—Core Principle 12(Conflicts of Interest)13. Subpart N—Core Principle 13(Financial Resources)(a) §37.1301—General Requirements(b) §37.1302—Types of FinancialResources(c) §37.1303—Computation of FinancialResource Requirement(d) §37.1304—Valuation of FinancialResources(e) §37.1305—Liquidity of FinancialResources(f) §37.1306—Reporting Requirements14. Subpart O—Core Principle 14 (SystemSafeguards)(a) §37.1401—Requirements15. Subpart P—Core Principle 15(Designation of Chief ComplianceOfficer)(a) §37.1501—Chief Compliance OfficerIII. Related MattersA. Regulatory Flexibility ActB. Paperwork Reduction ActC. Cost Benefit Considerations1. Introduction2. SEF Market Structure3. Registration4. Recordkeeping and Reporting5. Compliance6. Monitoring and Surveillance7. Financial Resources8. Emergency Operations and SystemSafeguardsIV. List of CommentersV. Text of Final Regulations, Guidance, andAcceptable Practices
I. Background
A. Swaps and Title VII of the Dodd-Frank Act 
Historically, swaps have traded inover-the-counter (‘‘OTC’’) markets,rather than on regulated exchangesgiven their exemption from regulation.
1
 The OTC swaps market is lesstransparent than exchange-tradedfutures and securities markets. This lackof transparency was a major contributorto the 2008 financial crisis becauseregulators and market participantslacked visibility to identify and assessthe implications of swaps marketexposures and counterpartyrelationships.
2
As a result, on July 21,
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33477
Federal Register
/Vol. 78, No. 107/Tuesday, June 4, 2013/Rules and Regulations
the National Commission on the Causes of theFinancial and Economic Crisis in the United States(Official Government Edition), at 299, 352, 363–364,386, 621 n. 56 (2011),
The Commission hasacknowledged, however, that the benefits of enhanced market transparency are not boundless,particularly in swap markets with limited liquidity.
See
Procedures to Establish Appropriate MinimumBlock Sizes for Large Notional Off-Facility Swapsand Block Trades, 77 FR 15460, 15466 (proposedMar. 15, 2012). In implementing these regulations,the Commission has taken into account the benefitsand concerns related to market transparency.
3
Dodd-Frank Wall Street Reform and ConsumerProtection Act, Public Law 111–203, 124 Stat. 1376(2010).
4
Pursuant to section 701 of the Dodd-Frank Act,Title VII may be cited as the ‘‘Wall StreetTransparency and Accountability Act of 2010.’’
5
7 U.S.C. 1
et seq.
6
See
Financial Stability Board, ImplementingOTC Derivatives Market Reforms, at 41 (Oct. 25,2010),
TechnicalCommittee of the International Organization of Securities Commissions, Transparency of Structured Finance Products Final Report, at 17, 21(Jul. 2010),
7
See
CEA section 5h, as enacted by section 733of the Dodd-Frank Act; 7 U.S.C. 7b–3. Thisregulatory framework includes: (i) Registration,operation, and compliance requirements for SEFsand (ii) fifteen core principles. Applicants andregistered SEFs are required to comply with thecore principles as a condition of obtaining andmaintaining their registration as a SEF.
8
CEA section 5h(a)(1), as enacted by section 733of the Dodd-Frank Act; 7 U.S.C. 7b–3(a)(1).
9
CEA section 1a(50), as amended by section 721of the Dodd-Frank Act; 7 U.S.C. 1a(50).
10
CEA section 2(h)(8), as amended by section 723of the Dodd-Frank Act; 7 U.S.C. 2(h)(8).
11
CEA section 5h, as enacted by section 733 of the Dodd-Frank Act; 7 U.S.C. 7b–3.
12
CEA section 5h(f)(1); 7 U.S.C. 7b–3(f)(1).
13
Core Principles and Other Requirements forSwap Execution Facilities, 76 FR 1214 (proposed Jan. 7, 2011).
14
Id.
at 1238.
15
Id.
at 1241.
16
CEA section 1a(50); 7 U.S.C. 1a(50).
17
CEA section 5h(f); 7 U.S.C. 7b–3(f).
18
The goals of section 733 of the Dodd-Frank Actare to promote the trading of swaps on SEFs andto promote pre-trade price transparency in theswaps market. CEA section 5h(e); 7 U.S.C. 7b–3(e).
19
Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1241.
20
Id.
21
Id.
22
By ‘‘in conjunction with the SEF’s minimumtrading functionality,’’ the Commission means thatthe SEF NPRM required a SEF to offer the minimumtrading functionality, and if that SEF also offered anRFQ System, it was required to communicate any bids or offers resting on the minimum tradingfunctionality to the RFQ requester along with theresponsive quotes.
See
the discussion belowregarding ‘‘Taken Into Account andCommunicated’’ Language in the RFQ SystemDefinition under §37.9(a)(1)(ii)—Request for QuoteSystem in the preamble for further details.
23
Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1220.
2010, President Obama signed theDodd-Frank Act,
3
which tasked theCommission with overseeing a largeportion of the U.S. swaps market.Title VII of the Dodd-Frank Act
4
 amended the CEA
5
to establish acomprehensive new regulatoryframework for swaps and security-basedswaps (‘‘SB-swaps’’). A key goal of theDodd-Frank Act is to bring greater pre-trade and post-trade transparency to theswaps market. Pre-trade transparencywith respect to the swaps market refersto making information about a swapavailable to the market, including bid(offers to buy) and offer (offers to sell)prices, quantity available at thoseprices, and other relevant information before the execution of a transaction.Such transparency lowers costs forinvestors, consumers, and businesses;lowers the risks of the swaps market tothe economy; and enhances marketintegrity to protect market participantsand the public. The Dodd-Frank Actalso ensures that a broader universe of market participants receive pricing andvolume information by providing suchinformation upon the completion of every swap transaction (
i.e.,
post-tradetransparency).
6
By requiring the tradingof swaps on SEFs and designatedcontract markets (‘‘DCMs’’), all marketparticipants will benefit from viewingthe prices of available bids and offersand from having access to transparentand competitive trading systems orplatforms.In addition to facilitating greatertransparency and trading of swaps onSEFs, Title VII of the Dodd-Frank Actestablishes a comprehensive regulatoryframework, including registration,operation, and compliance requirementsfor SEFs.
7
For example, section 733 of the Dodd-Frank Act sets forth a broadregistration provision that requires anyperson who operates a facility for thetrading of swaps to register as a SEF oras a DCM.
8
In addition, section 721 of the Dodd-Frank Act amended the CEAto define SEF as a trading platformwhere multiple participants have theability to execute swaps by accepting bids and offers made by multipleparticipants in the platform.
9
 Furthermore, section 723 of the Dodd-Frank Act set forth a trade executionrequirement, which states that swaptransactions subject to the clearingrequirement must be executed on aDCM or SEF, unless no DCM or SEFmakes the swap available to trade or forswap transactions subject to the clearingexception under CEA section 2(h)(7).
10
 Section 733 of the Dodd-Frank Actprovided that to be registered andmaintain registration, a SEF mustcomply with fifteen enumerated coreprinciples and any requirement that theCommission may impose by rule orregulation.
11
 
B. SEF Notice of Proposed Rulemaking 
The Dodd-Frank Act amended theCEA to provide that, under new section5h, the Commission may in itsdiscretion determine by rule orregulation the manner in which SEFscomply with the core principles.
12
Inconsideration of both the novel natureof SEFs and its experience in overseeingDCMs’ compliance with core principles,the Commission carefully assessedwhich SEF core principles would benefit from regulations, providing legalcertainty and clarity to the marketplace,and which core principles would benefit from guidance or acceptablepractices, where flexibility is moreappropriate. Based on that evaluation,on January 7, 2011, the Commissionproposed a combination of regulations,guidance, and acceptable practices forthe registration, oversight, andregulation of SEFs (‘‘SEF NPRM’’).
13
 The SEF NPRM provided, amongother requirements, the following:(1) Procedures for temporary and fullSEF registration.
14
 (2) A minimum trading functionalityrequirement that all SEFs must offer,
15
 which took into account the SEFdefinition,
16
the core principlesapplicable to SEFs,
17
and the goalsprovided in section 733 of the Dodd-Frank Act.
18
The minimum tradingfunctionality required a SEF to providea centralized electronic trading screenupon which any market participant canpost both executable and non-executable bids and offers that aretransparent to all other marketparticipants of the SEF.
19
For a traderwho has the ability to execute against itscustomer’s order or to execute twocustomers’ orders against each other, theSEF NPRM also required the trader besubject to a 15 second time delay between the entry of those two orders.
20
 In addition, the proposal allowed aRequest for Quote (‘‘RFQ’’) System
21
 that operates in conjunction with theSEF’s minimum trading functionality.
22
 Finally, the SEF NPRM stated that a SEFmay offer other functionalities inconjunction with the minimum tradingfunctionality, as long as thosefunctionalities meet the SEF definitionand comply with the core principles.
23
 (3) The classification of swaptransactions into two categories:Required Transactions (
i.e.,
transactionssubject to the trade execution mandateunder section 2(h)(8) of the CEA and not block trades) and PermittedTransactions (
i.e.,
transactions not
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