The Commodity Futures Trading Commission (the “CFTC”) issued a release (the “SEF Proposing Release”)¹ that would make significant revisions to the regulatory requirements that apply under Part 37 of the CFTC Rules (the “Existing Rules”) to the trading of swaps and to the market‑places that offer “exchange trading” of swaps (referred to as “swap execution facilities” or “SEFs”).² Beyond amending the Existing Rules, the SEF Proposing Release would substantially reinterpret two statutory terms: (i) the definition of a “swap execution facility” in CEA Section 1a(50) and (ii) the meaning of the phrase “makes the swap available to trade” (commonly referred to as “MAT”) in Section 2(h)(8) of the Commodity Exchange Act (the “CEA”).

The proposed amendments to Part 37 and the addition of a new Part 36, taken in combination with the reinterpretation of the two statutory terms (collectively, the “Proposed Rules”) would materially increase (a) the number of entities that would be required to register as SEFs (particularly entities currently registered as introducing brokers) and (b) (at least potentially) the number and types of swaps that would be required to trade through a SEF. At the same time, the Proposed Rules would also decrease (a) the regulatory burdens imposed on registered SEFs and (b) the prescriptive limitations currently imposed as to the manner in which swap transactions may be executed on SEFs.

Consistent with the above, as compared to the Existing Rules, the Proposed Rules cannot be readily categorized as either “regulatory” or “deregulatory.” Rather, the SEF Proposing Release would largely do away with one regulatory scheme and replace it, almost whole cloth, with another. The new regulatory scheme is far broader in scope than the one it would replace; however, the requirements imposed on entities and transactions within that broader scope are generally (although not entirely) less burdensome and are far less prescriptive.³

The SEF Proposing Release should be carefully reviewed by (i) entities currently registered as introducing brokers, particularly those engaged in voice brokerage of swaps, who would likely be required to register as SEFs under the Proposed Rules and (ii) entities that trade cleared swaps, whether as agent or principal. If the Proposed Rules are adopted, cleared swaps: (a) if currently required to be traded on a SEF, will become subject to a different set of trading rules, and (b) if not currently required to be traded on a SEF, are much more likely to become subject to that requirement (albeit under a new set of rules).

Non-U.S. market participants should note that the CFTC has, essentially, punted on questions as to the ultimate regulatory treatment of foreign SEFs. With that said, CFTC Chairman J. Christopher Giancarlo has made clear elsewhere that cross-border regulation of SEFs is something that CFTC will address after revising the rules for U.S. SEFs.⁴

Some Background

CEA Section 2(h)(8) provides that, subject to certain exceptions, swaps that are required to be centrally cleared must be traded on a SEF provided that (i) at least one SEF makes the swap “available to trade” and (ii) no exception is available. The Existing Rules specify (i) what entities are required to register as SEFs, (ii) what it means for a SEF to make a cleared swap “available to trade” and thus a Required Transaction (as well as the exceptions), (iii) the manner in which a Required Transaction may be executed on a SEF (which we will refer to as the “Required Trading Methods”) and (v) the operating rules applicable to SEFs.

In adopting the Existing Rules applicable to SEFs, the CFTC stated that one of its key objectives was to “minimize regulatory differences between SEFs and DCMs [fully regulated futures exchanges].”⁵ On the one hand, this could be viewed as perfectly sensible, creating consistency between different types of regulated entities. On the other hand, this could be viewed as completely wrong-headed: futures contracts that trade on fully-regulated DCMs have very different trading characteristics from swaps, and therefore it was obviously mistaken to presume that futures and swaps should trade under near-identical rules.⁶

In light of these opposing possible approaches to the regulation of SEFs, the Existing Rules have been controversial from inception.⁷ Criticisms generally focused on the following elements of the Existing Rules:

• The power of a SEF to declare a swap “available to trade,” and thus to make it a Required Transaction. The rules governing “MAT” process were criticized, primarily based on a concern that a single SEF could proclaim swaps that were relatively illiquid were being made available to trade and thus were Required Transactions (subject to mandatory trading on a SEF) in the hope of gaining a trading monopoly, or at least picking up market share. Ironically, the criticism in the Proposing Release is the opposite: the Existing Rules are so burdensome that SEF trading has been discouraged and no SEF is motivated to declare a swap available to trade, notwithstanding the possibility of expanding market share.
• That the principal methods by which a Required Transaction could be executed on a SEF were too prescriptive and inconsistent with both the desires of market participants and the manner in which one would expect swaps to be transacted in light of their fundamental trading characteristics.⁸
• That the operational requirements put on SEFs were both unduly burdensome and not tailored to the tasks that SEFs actually perform, or are capable of performing. The operational burdens were most evident in the rules applicable to the maintenance of an audit trail, though other recordkeeping and compliance-related obligations imposed on SEFs were likewise problematic.⁹
• That the Existing Rules, in light of the prescribed trading methods and the operational burdens, did not provide a means for an entity registered as a SEF to offer agency voice brokerage. In the view of the critics of the Existing Rules, the CFTC had “solved” this problem by inappropriately excluding voice brokers from the definition of a SEF, and so ducked the problem of figuring out how to regulate them.
• That the Existing Rules, in light of the prescribed trading methods, were inappropriate for “block” transactions, in which the parties could be materially economically damaged if they were forced to reveal their trading plans to other market participants. In the view of the critics of the Existing Rules, the CFTC had again “solved” this problem by ducking it, essentially allowing block transactions to be executed off-SEF.
• That the Existing Rules were generally inconsistent with the CEA, as modified by Dodd-Frank. Most significantly, (i)the CEA defines a SEF as an entity that offers swaps trading “by any means” (there is nothing in the statute to suggest that Congress intended that it would be mandated that SEFs use the Required Trading Methods); and (ii) nothing in the CEA requires that a SEF “making a swap available to trade” make any determination as to the liquidity of the swap.¹⁰

In the years since the adoption of the Existing Rules, the CFTC has essentially been forced to issue multiple no-action letters to address problems in their operation. From the time that now-Chairman Giancarlo became a Commissioner at the CFTC, he has championed a substantial revisit of the Existing Rules. The Proposed Rules are largely rooted in two “white papers” that Mr. Giancarlo has authored on swaps trading matters while at the CFTC.¹¹

Which Entities Must Register as SEFs under the Existing and Proposed Rules

CEA Section 1a(50) defines the term “swap execution facility” as a “trading system or platform in which multiple participants have the ability to execute trades or 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 (a) facilitates the execution of swaps between persons and (b) is not a designated contract market.” CEA Section 5(h) requires any entity that fits within the above definition, and uses interstate commerce, to register as a SEF with the CFTC, unless the CFTC grants an exemption.

In its proposal and then the adoption of the Existing Rules, the CFTC determined that (i) an agent conducting one-to-one voice brokerage services was not required to register as a SEF because such telephone negotiations do not provide for multiple-to-multiple contact;¹²and (ii) an entity that provides aggregation services that brought together bids and offers from multiple SEFs was not itself required to register as a SEF because the actual execution of any trade would not be conducted on the aggregation service, but on the SEF.¹³ The SEF Proposing Release would reverse both these positions and require both voice brokers and SEF-aggregators to register with the CFTC as SEFs.¹⁴ The effect of this new interpretation is particularly significant as to voice brokers.

Forms of SEF Trading under the Existing and Proposed Rules

Under the Existing Rules, as to Required Transactions, a SEF may provide for execution only by the Required Trading Methods.

It is one of the ironies of the Existing Rules that the CFTC has explicitly acknowledged that the Required Trading Methods are not appropriate for all swaps, not even for all swaps that are required to be cleared. More specifically, the CFTC has acknowledged that swaps with limited liquidity are not appropriately subject to the limitation.¹⁵ Accordingly, the CFTC Rules require that individual SEFs make a liquidity determination before declaring a swap available to trade; see CFTC Rule 37.10 (requiring a SEF to consider factors including trading volume and number of investors before declaring a swap is made available to trade, and that if such a determination were made in an inappropriate manner, the CFTC might, by some as yet undefined method, reverse the determination). The CFTC also provided a broad exception from the Required Trading Methods for block trading (as further discussed below). See CFTC Rule 37.9(a)(2).

The Proposed Rules would simply cut through the Gordian knot of how much liquidity is sufficient to support the Required Trading Methods by eliminating any mandatory requirement as to the required form of trading.¹⁶ A SEF could operate an Order Book in which access was limited or controlled; a market participant could send a request-for-quote (or “RFQ”) to as few other market participants (one or two) as it wanted. Or a SEF could might simply offer telephone brokerage. Beyond further freedom as to those existing types of trading, the SEF Proposing Release suggests that completely different forms of trading might develop on SEFs.¹⁷

Making a Swap Available to Trade under the Existing and Proposed Rules

Under the Existing Rules, a SEF may declare that a swap is available to trade only if the SEF is prepared to effect trading through the Required Trading Methods.¹⁸ The restrictions imposed by the trading methods and the ability of voice brokers to conduct agency intermediation activities without registering as SEFs has, according to the SEF Proposing Release and the Giancarlo White Papers, disincentivized (i) firms from registering as SEFs and (ii) SEFs from declaring a swap available to trade.¹⁹

By contrast, under the SEF Proposing Release, the CFTC would be (i) far more expansive in requiring firms to register as SEFs, (ii) but would greatly lower the bar (more or less eliminating it) for declaring that a swap is available to trade. A SEF would simply “list” a swap as available for trading and, if that swap is subject to mandatory clearing, the swap would also become subject to the mandate that it be traded on a SEF.²⁰ Once this mandate became effective, non-SEFs would be largely excluded from offering brokerage services in the relevant swap, to the benefit of SEFs that made the swap available to trade.

Pre-Trade Communications under the Existing Rules and the Proposed Rules

While the Existing Rules are quite prescriptive as to trading methods, they are liberal as to pre‑trade communications between parties. Parties can arrange the terms of transactions largely bilaterally before they are executed on the SEF. In this regard, Existing Rule 37.9(b)permits parties that are executing trades on a SEF to engage in “some form of pre-arrangement or pre-negotiation” of orders away from the SEF, provided that any such trade is shown before execution to all market participants for at least 15 seconds, so that the trade could be broken up by a market participant willing to offer a better price.²¹

By contrast, the Proposed Rules would require that, where a trade is required to be executed on a SEF, all negotiations as to that trade take place through the facilities of the SEF. (Parties that currently engage in pre-trade communications as to swaps that have been made available to trade should consider what effect this will have on them.)

Block Trades

Under the Existing Rules, Required Transactions may be traded off-SEF if they are of sufficient size.²² For a block trade that occurs away from the SEF, the Existing Rules (i) permit public dissemination of the transaction to be delayed by 15 minutes and (ii) require disclosure of the size of the transaction only up to a capped amount, so that other market participants do not know the full size of the transaction.²³

The current procedure creates several difficulties for conducting block trades involving swaps. First, the fact that the benefits of delayed and capped reporting are available only for blocks executed off-SEF significantly discourages executing blocks on SEFs. Further, the requirement that the pre-execution communications be effected off-SEF makes it difficult or impossible for the SEF to conduct pre-execution credit screening.²⁴

The Proposed Rules would address these issues by significantly redoing the requirements, in some ways by toughening them, in others by liberalizing them. In the way of toughening, the Proposed Rules would eliminate the exemption that allows block trades to be executed away from a SEF.²⁵ As the CFTC states in the release: “allowing SEFs to use flexible means of execution for swap transactions negates the need to allow swap block trade execution to occur away from SEFs.”²⁶ It is also consistent with the CFTC’s desire to promote more swaps trading on SEFs.²⁷ Left unchanged would be the existing 15-minute public reporting delay for block trades under CFTC Rule 43.5(d) and the caps on the size of the reported notional or principal amounts of such trades.²⁸

The prohibitions on executing Required Transactions off SEF would be subject to certain proposed exceptions. Most importantly, there would remain an exemption from the mandate of SEF-trading for certain package transactions (a transaction that is comprised of two related instruments), where one leg of the transaction is not required to be traded on a SEF.²⁹

The Proposed Rules would codify at least some of the existing no-action relief for package transactions] and would also exempt ‘‘package transactions’’ that involve swaps and new issue bonds from the SEF-execution requirement.³⁰

Recordkeeping/Audit Trail

In his concurrence to the adoption of the SEF Rules, Commissioner O’Malia said that the Existing Rules were unclear as to how voice brokerage could be conducted under those rules.³¹ The “antipathy” of the Existing Rules to voice brokerage is most clear in the audit trail requirements.

A SEF is required by the CEA to maintain records of all its activities, including a “complete audit trail,” for five years.³² The Existing Rules copy verbatim most of the DCM rules relevant to audit trails (a feature that the CFTC’s Chair has criticized),³³ and in certain areas add to them.³⁴

Under the Existing Rules, SEFs are required to capture and retain all audit trail data necessary “to detect, investigate, and prevent customer and market abuses.”³⁵ Such data must also be sufficient to reconstruct “all indications of interest, requests for quotes, orders, and trades,” and enable SEFs to track a customer order from the time of receipt through fill, allocation, or other disposition.³⁶ SEFs are required to retain all original source documents; maintain a transaction history database; conduct electronic analysis of such data; and safely store all audit trail data. Finally, SEFs are required to enforce audit trail and recordkeeping requirements through annual reviews, the minimum components of which are prescribed by the rules, and to impose meaningful sanctions against persons and firms where deficiencies are found. While an electronic SEF may readily capture all such inputs, it is not so easy for a voice-broker.

Under the Proposed Rules, a SEF still must capture all audit trail data necessary to reconstruct trading on its facility, detect and investigate customer and market abuses, and take disciplinary action as required by the Existing Rules. However, in recognition of the fact that some of the audit trail requirements are “unfeasible or impose greater information collection burdens than . . . originally . . . estimated,” the Proposed Rules would replace the current all-encompassing data requirements with a requirement that a SEF be able to reconstruct “all trading on its facility.”³⁷ These more limited responsibilities, according to the CFTC, “more accurately reflect the capabilities for which a SEF may use its audit trail data,” and recognize that at an audit trail cannot “prevent” customer and market abuses.³⁸

Second, the Proposed Rules narrow the scope of audit trail data that must be captured, eliminating the requirement that SEFs include “all indications of interest, requests for quotes, and order and trades entered into” a SEF’s trading system or platform. Instead, SEFs would be required to have records only of “trades” executed via voice or by entry into a SEF’s electronic trading system, as well as “orders” that are entered into its electronic trading system (most importantly eliminating the requirement that telephonic quotes or indications of interests be recorded and analyzed).³⁹

Third, the Proposed Rules eliminate prescriptive requirements that specify the nature and content of the original source documents, replacing them with a requirement that such documents be “unalterable and sequentially-identified.”⁴⁰ Fourth, the Proposed Rules eliminate requirements detailing the information that must be included in a transaction history database.⁴¹ Fifth, the Proposed Rules would not require SEFs to capture post-execution allocation information given that SEFs have no involvement in post-execution allocation of trades.⁴²

Treatment of Foreign Entities

The Proposed Rules would define foreign swaps broking entities that are foreign facilities operating a trading system or platform where multiple participants have the ability to execute or trade swaps with multiple market participants, as “foreign multilateral swaps trading facilities.”⁴³ 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 CFTC pursuant to CEA section 2(i). (Activities outside of the United States are not subject to the swap provisions of the CEA unless those activities have a “direct and significant connection” with activities in, or effect on, commerce of the United States; or contravene any Dodd-Frank Act anti-evasion rules / regulation.)⁴⁴ The Proposed Rules would delay the compliance date of the registration requirement 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.⁴⁵

Internal and External Procedures

The statutory and regulatory requirements that are applicable to SEFs go beyond the means of trading that they offer. CEA Section 5h(f) requires registered SEFs to comply with fifteen “core principles.”⁴⁶

For the most part, the Proposed Rules would materially decrease those obligations as compared to the Existing Rules. That said, a significant amount of the liberalization is given for requirements in the Existing Rules that seem largely inappropriate or irrelevant to the specifics of what a SEF actually does. It is probably the case that most of these inappropriate requirements resulted from the fact that the drafters of the Existing Rules were very much working from the presumption that a SEF would resemble a futures exchange, far more than would be the case under the Proposed Rules.

Internal Procedures

• Registration. The Proposed Rules would codify the existing approach to the SEF registration requirement by amending Rule3(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.⁴⁷
• Employee Qualifications. The Proposed Rules would apply qualification requirements on various SEF employees, including as to “fitness” (e., to weed out bad actors); proficiency standards (by requiring testing); and periodic ethics training.
• System Safeguards. The Proposed Rules would require each SEF to annually prepare and submit an up-to-date Questionnaire to CFTC staff not later than 90 calendar days after the SEF’s fiscal year-end.⁴⁸
• Designation of CCO. The Proposed Rules would: (i)allow a chief compliance officer to consult with the board of directors or senior officer of the SEF as the CCO develops the SEF’s policies and procedures;⁴⁹ (ii) allow a CCO to meet with the senior officer of the SEF, in addition to the board of directors, on an annual basis;⁵⁰ (iii) allow a CCO to provide self-regulatory program information to the SEF’s senior officer, in addition to the board of directors;⁵¹ and (iv) make it easier to fire a CCO.⁵²
• Financial Resources. The Existing Rules require that a SEF have adequate financial, operational and managerial resources (financial resources are considered adequate if sufficient to operate for one year) and mandate processes for relevant computations. The Proposed Rules (i)clarify the scope of what the adequate financial resources must cover; (ii) address the discretion that a SEF has when calculating certain projections; (iii) revise the existing six-month liquidity requirement for financial resources held by a SEF; and (iv) streamline financial reporting.⁵³

External Procedures

• Impartial Access. The Existing Rules require that a SEF provide any eligible contract participant (“ECP”) with "impartial access" to its services and that it provide "comparable fee structures" for ECP consistently with the policy of enhancing SEF discretion and having rules align with market practice.

Proposed Rule 37.202 would modify the impartial access requirements to allow each SEF to establish participation criteria based on its own trading operations and market. Specifically, a SEF would be required to establish rules that set forth impartial access criteria for accessing its markets, market services, and execution methods; such impartial access criteria must be transparent, fair, and non-discriminatory and applied to all similarly situated market participants.⁵⁴ SEFs would no longer be required to maintain impartial access in a manner that promotes an “all-to-all” trading environment.

• Comparable Fee Structures. Under Proposed Rule202(a)(2), a SEF would be allowed to establish fee structures in a fair and non-discriminatory manner. This revision would eliminate the existing requirement under Rule 37.202(a)(3), which requires a SEF to set “comparable fees” for “comparable access.”⁵⁵
• Financial Integrity of Transactions. The Proposed Rules would make changes to the “straight-through processing” obligations that apply to SEFs, DCMs, and DCOs.⁵⁶Specifically, the Proposed Rules would implement existing and previously controversial CFTC staff guidance, requiring SEFs to deem any swap submitted for clearing as void ab initio if a swap fails to clear.⁵⁷ The Proposed Rules would revise Rule702(a) to replace the term “member” with “market participant.”⁵⁸ The proposed definition of “market participant” under Rule 37.2(b) would capture the universe of persons and entities that participate on SEFs and would be subject to minimum financial requirements, including SEF members. The Proposed Rule would codify existing no-action relief, generally requiring a SEF to establish baseline procedural requirements for an error trade policy for all swaps executed on its facility and would explicitly permit a SEF to establish its own protocols and procedures regarding error trades with respect to swaps rejected from clearing due to an operational or clerical error or accepted but containing an operational or clerical error.⁵⁹
• Position Limits and Accountability Rules. The Proposed Rules eliminate the requirement that a SEF to have position limits or accountability rules, based on the CFTC’s intent to address this issue in a separate rulemaking.⁶⁰

Commissioner Statements and Public Comments

Chairman Giancarlo (R) and Commissioners Quintenz (R), Behnam (D), and Stump (R) all voted to publish the Proposed Rules for public comment. Chair Giancarlo and Commissioner Quintenz also made statements supporting the proposal. While Commissioner Benham voted to allow the proposal to go forward for comment, he issued a critical statement as to its substance. Commissioner Berkovitz (D) voted against the issuance of the proposal and issued a dissenting statement.⁶¹

In the SEF Proposing Release, the CFTC asks for comment on all of the changes described above, as well as a good many other related issues. Public comments on the release must be submitted to the CFTC by February 13, 2019.

1   83 Fed. Reg. 61946 (Nov. 30, 2018). Footnotes in this memorandum are linked to the Cadwalader Cabinet at findknowdo.com. Nonsubscribers interested in a trial may contact Bill Sadd at 212-993-2818 or at wsadd@cwt.com

2   Swaps subject to the requirement that they be traded on a CFTC-regulated market (such swaps, “Required Transactions”) may be traded on either SEFs or on “designated contract markets” (“DCMs”); i.e., fully-regulated futures exchanges. The majority of swaps trading occurs on SEFs and that is likely to remain the case if the Proposed Rules are adopted. Accordingly, for purposes of this memorandum, we assume swaps trading will take place on SEFs, not on DCMs.

3   The CEA provisions providing for the creation and regulation of SEFs, and the related requirements mandating certain transactions occur on SEFs, are primarily intended to increase pre-trade transparency. The Existing Rules and the Proposed Rule both seek to achieve this objective. The Existing Rules attempt this, by mandating as to transactions that fall within their scope, that they be effected by methods that force a material degree of transparency. The Proposed Rules attempt the same objective in an almost opposite manner: by significantly increasing the number of transactions required to be executed on a SEF, but then allowing a far greater degree of flexibility in the form of transactions on the theory that having more transactions on the SEF will result in greater transparency, even though there may be less transparency as to a particular transaction.

4   See J. Christopher Giancarlo, Cross-Border Swaps Regulation Version 2.0 (Oct. 1, 2018) at 47 and 70.

5   78 FR 33476 (June 4, 2013) (the “SEF Core Principles Adopting Release”) at 33478.

6   Speaking very generally, a Required Transaction may be executed on a SEF in one of three ways (the Required Trading Methods): (i) a firm bid or offer may be placed into a central order book that is available to be accessed by all participants in the SEF; (ii) a SEF participants may send a “request for quote” to at least three other unaffiliated SEF participants; or (iii) two SEF participants may discuss entry into a trade privately, off the SEF, but may not execute the trade between them unless it is first exposed to all SEF participants in the order book for at least fifteen seconds, so that other participants may break up the trade with a better price.

7   For example, at the time the CFTC issued its interpretation of the term “makes available to trade,” then CFTC Commissioner Scott O’Malia issued a dissenting statement reporting that virtually all of the commenters on the interpretation would have “rejected the proposal” and that the CFTC “would be hard pressed to point to one comment letter that supported” the CFTC’s approach. Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade …, 78 Fed. Reg. 33606, 33631 (June 4, 2013) (“MAT Adopting Release”).

8   By way of example from a different regulatory scheme (the securities law), equities commonly trade on fully-regulated national securities exchanges – the securities-law equivalent of DCMs – subject to fairly prescriptive requirements of “Regulation NMS.” However, debt securities, many of which are illiquid and so trade only “by appointment,” do not trade on national securities exchanges and no one would suggest that they do so. To put this more generally, the way in which any particular financial instrument trades (at least in the absence of legislation) will differ depending on factors such as the size of trades and the number of investors interested in the instrument. Accordingly, forcing all instruments to trade by effectively the same means is, at least from an economic perspective, counter-intuitive. For a brief discussion of this issue, see SEF Proposing Release at 61951 (“Swap Market Characteristics”).

9   For a brief discussion of this issue, see SEF Proposing Release at 61951 (“Operational Complexities and Costs”).

10 Then CFTC-Commissioner Scott O’Malia described the Existing Rules as “not supported by Law.” SEF Core Principles Adopting Release at 33603. Chair Giancarlo was particularly critical of the made available to trade process, saying in his 2015 White Paper that it “is not supported by the statutory language and has no sound policy basis.”

11 J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank, (January 29, 2015), (the “2015 White Paper”) and J. Christopher Giancarlo, Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps, (April 26, 2018), (the “2018 White Paper”; and collectively with the 2015 White Paper, the “Giancarlo White Papers”).

12 76 Fed. Reg. 1214, 1219 (Jan. 7, 2011).

13 SEF Core Principles Adopting Release at 33482.

14 See SEF Proposing Release at 61952 and 61959.

15 See generally MAT Adopting Release.

16 SEF Proposing Release at 61952 (“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.”)

17 See SEF Proposing Release at 61977 (“The required methods of execution has also limited SEFs from developing more efficient, transparent, and cost-effective methods of trading ...”)

18 As the SEF Proposing Release points out, nothing in the CEA imposes any liquidity standard on a SEF making a swap available to trade or authorizes the CFTC to make such a determination, and it is not clear what standards would or should apply to any such determination; nor would any sanction apply to a SEF that had made an inappropriate or incorrect determination. See generally SEF Proposing Release at fn. 25 and related text.

19 See SEF Proposing Release at 61950 (“Beyond [the initial set of made available to trade determinations], the Commission has not received any filings for additional swaps [to be made available to trade] despite the subsequent expansion of the clearing requirement. The lack of additional determinations is partly attributable to market participants’ concerns over the Commissions’ required methods of execution of Required Transactions.”)

20 See generally SEF Proposing Release at 61980.

21 What makes the fifteen-seconds notable, is that it seems particularly arbitrary: too long a period of delay for swaps that can trade by automation and too short for swaps that require any degree of analysis. There is no Goldilocks-swap for which the fifteen-second rule is just the right fit.

22 SEF Proposing Release at 61986.

23 See CFTC Rule 43.5. Under the Existing Rules, a “block trade” is a “publicly reportable swap transaction” that: (1) involves a SEF-listed swap; (2) “occurs away” from the SEF’s trading system, but is executed pursuant to the SEF’s rules and procedures; (3) has a notional size above an amount specified by regulation; and (4) Is reported subject to the rules of the SEF and the CFTC, including the appropriate time delay requirements set forth under such rules. This definition closely tracks the definition for block trades in the futures markets, where such trades occur away from the trading facility as an exception to the centralized market requirement.

24 SEF Proposing Release at 62043.

25 SEF Proposing Release at 62043 and 62059.

26 SEF Proposing Release at 62044.

27 SEF Proposing Release at 61987 (noting that “the Commission is concerned that allowing a disproportionate amount of SEF transactions to be pre-arranged or pre-negotiated away from the facility under the pretense of trading flexibility would undercut the import of the expansion of the [trade execution] requirement.”).

28 SEF Proposing Release at 62044. The reporting delay and the cap size requirements are designed to protect the anonymity of counterparties’ market positions and business transactions, and to mitigate the potential impact that real-time public reporting of extraordinarily large positions could have in reducing market liquidity. See 78 FR 32865, 32907 (May 31, 2013).

29 SEF Proposing Release at 62056.

30 See SEF Proposing Release at 61988; SEF Proposing Release at 62059.

31 MAT Adopting Release at 33604 (Concurring Statement, Commissioner Scott O’Malia).

32 CEA Section 5h(f)(10)(A)(i).

33 2015 White Paper at 41.

34 CFTC Rule 37.205.

35 CFTC Rule 37.205(a). (Emphasis added.)

36 CFTC Rule 37.205(a).

37 SEF Proposing Release at 62005.

38 SEF Proposing Release at 62005.

39 SEF Proposing Release at 62006.

40 SEF Proposing Release at 62006.

41 SEF Proposing Release at 62006 and 62048.

42 SEF Proposing Release at 62048.

43 SEF Proposing Release at 61961.

44 SEF Proposing Release at 61961 (citing CEA Section 2(i)). The CFTC also said that it “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 . . . ” Id.

45 SEF Proposing Release at 61961-62. Also note 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. 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.

46 Interestingly, none of these Core Principles specifies or limits the procedures by which participants on a SEF can effect transactions. The CFTC’s Existing Rules in this regard are derived from its discretionary rulemaking authority in CEA Section 5h(f)(1), which, cross-references CEA Section 8a(5), which in turn gives the CFTC authority to adopt rules that the CFTC believes are “reasonable necessary to effect any of the . . . purposes” of the CEA.

47 SEF Proposing Release at 61956. This codifies footnote 88 to the SEF Core Principles Adopting Release.

48 SEF Proposing Release at 62031.

49 SEF Proposing Release at 62033.

50 SEF Proposing Release at 62033.

51 SEF Proposing Release at 62033.

52 SEF Proposing Release at 62033.

53 SEF Proposing Release at 62026.

54 SEF Proposing Release at 61993.

55 SEF Proposing Release at 61996.

56 SEF Proposing Release at 61999.

57 See Staff Guidance on Swaps Straight-Through Processing (Sept. 26, 2013).

58 SEF Proposing Release at 61961.

59 SEF Proposing Release at 62001. This essentially codifies the no-action relief granted by the CFTC staff in letter No. 17-27.

60 SEF Proposing Release at 62019.

61 SEF Proposing Release at 62140.