/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.
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.
Dodd-Frank Wall Street Reform and ConsumerProtection Act, Public Law 111–203, 124 Stat. 1376(2010).
Pursuant to section 701 of the Dodd-Frank Act,Title VII may be cited as the ‘‘Wall StreetTransparency and Accountability Act of 2010.’’
7 U.S.C. 1
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),
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.
CEA section 5h(a)(1), as enacted by section 733of the Dodd-Frank Act; 7 U.S.C. 7b–3(a)(1).
CEA section 1a(50), as amended by section 721of the Dodd-Frank Act; 7 U.S.C. 1a(50).
CEA section 2(h)(8), as amended by section 723of the Dodd-Frank Act; 7 U.S.C. 2(h)(8).
CEA section 5h, as enacted by section 733 of the Dodd-Frank Act; 7 U.S.C. 7b–3.
CEA section 5h(f)(1); 7 U.S.C. 7b–3(f)(1).
Core Principles and Other Requirements forSwap Execution Facilities, 76 FR 1214 (proposed Jan. 7, 2011).
CEA section 1a(50); 7 U.S.C. 1a(50).
CEA section 5h(f); 7 U.S.C. 7b–3(f).
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).
Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1241.
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.
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.
Core Principles and Other Requirements forSwap Execution Facilities, 76 FR at 1220.
2010, President Obama signed theDodd-Frank Act,
which tasked theCommission with overseeing a largeportion of the U.S. swaps market.Title VII of the Dodd-Frank Act
amended the CEA
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 (
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.
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.
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.
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).
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.
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.
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’’).
The SEF NPRM provided, amongother requirements, the following:(1) Procedures for temporary and fullSEF registration.
(2) A minimum trading functionalityrequirement that all SEFs must offer,
which took into account the SEFdefinition,
the core principlesapplicable to SEFs,
and the goalsprovided in section 733 of the Dodd-Frank Act.
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.
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.
In addition, the proposal allowed aRequest for Quote (‘‘RFQ’’) System
that operates in conjunction with theSEF’s minimum trading functionality.
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.
(3) The classification of swaptransactions into two categories:Required Transactions (
transactionssubject to the trade execution mandateunder section 2(h)(8) of the CEA and not block trades) and PermittedTransactions (
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