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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations
have systemic risk benefits.70 Market participants are currently realizing these benefits pursuant to no-action relief and as discussed below, inter-affiliate volume in cleared swaps executed offexchange appears to be a significant proportion of the overall swap volume that would be subject to the trade execution requirement in fixed-tofloating interest rate swaps IRS.
In an effort to estimate the scope of the Final Rule, Commission staff reviewed swap transaction data for fixed-to-floating IRS for the week ending September 18, 2020. Staff found that approximately $496 billion notional amount was traded in fixed-to-floating IRS subject to the trade execution requirement TER IRS during that week.71 A significant proportion of this volume approximately $176 billion notional or 35% of the total was in swap transactions between eligible affiliate counterparties. Of these interaffiliate trades, approximately $96
billion notional was uncleared and approximately $80 billion notional was cleared. About $3 billion in swap transactions between eligible affiliate counterparties was cleared and executed on-SEF while the remaining $77 billion in cleared inter-affiliate transactions in TER IRS was cleared and traded offexchange pursuant to no-action relief.
The Final Rule also exempts swap transactions that are excepted or exempted from the clearing requirement under part 50 from the trade execution requirement. The Commission believes that swap transactions which are excepted or exempted from the clearing requirement also benefit from exemption from the trade execution requirement, and that the same reasoning that supports the clearing exemptions supports an explicit exemption from the trade execution requirement. The Commission also believes that exempting these transactions from the trade execution requirement is consistent with CEA
section 2h8 and adoption of the Final Rule may reduce transaction costs and may permit some entities to avoid incurring the costs associated with onboarding on a SEF or DCM.
The Commissions staff analysis identified relatively little volume in TER IRS that was marked as being executed by end-users, $760 million notional of which $10 million was traded on-SEF and the rest traded off70 The Commission notes that the Division of Market Oversight previously provided no-action relief that mirrors this Final Rule so these benefits may have already been realized. See NAL No. 17
67.
71 Total volume in fixed-to-floating IRS that week was about $1.37 trillion notional.

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exchange. However, it is unclear whether the data captures all the TER
IRS trades executed by entities that are trading TER IRS off-exchange pursuant to the no-action relief. In a separate analysis for the recently adopted amendments to part 50, adopting additional clearing exemptions, the Commission found that that final rule exempted only a small fraction of IRS
transactions from the clearing requirement.72 Since only a fraction of IRS transactions are subject to the trade execution requirement, the Commission believes that the scope of swaps subject to this Final Rule is significantly smaller than the scope of swaps subject to the recent amendments to part 50.
The Commission notes that some swap transactions that are subject to the trade execution requirement involving entities that are eligible for existing exemptions or existing no-action relief are nevertheless executed on SEFs as permitted transactions without restrictions on execution method and all market participants will continue to have the option to execute on SEFs if they determine that they obtain benefits from trading on a SEF voluntarily.
The Commission believes that the exemptions for certain swaps from the trade execution requirement will not impose new costs on market participants or on SEFs and DCMs and, since they are limited in scope and in some instances involve affiliates and thus are not arms-length transactions, will not significantly detract from price discovery or protection of market participants and the public.

transactions that are exempt under part 50 from the clearing requirement.

4. Section 15a Factors
d. Sound Risk Management Practices
a. Protection of Market Participants and the Public
The Commission anticipates that the exemptions from the trade execution requirement should not significantly impair the furtherance of sound risk management practices because firms using the exemptions should continue to be able to move swap positions between affiliates, and to take advantage of the statutory end-user exception from the clearing requirement as well as the exemptions from the clearing requirement set forth in part 50. The Commission observes that eligible market participants have been engaging in swaps activity consistent with this Final Rule pursuant to statutory provisions or CFTC staff no-action relief and the practice has not been found to impair risk management practices.

The Commission anticipates that the exemptions for certain swaps from the trade execution requirement should not materially affect the protection of market participants and the public. The exemptions finalized today are intended to establish that a limited set of swap transactions which are otherwise subject to the trade execution requirement may occur off-exchange or on-SEF as permitted transactions. These transactions include inter-affiliate swap transactions and other swap 72 Specifically, the Commission found using DCO
data that during calendar year 2018, 16 IFIs entered an estimated notional amount of $220 billion in uncleared interest rate swaps pursuant to existing no-action relief. During the same time period, eligible bank holding companies and other eligible financial institutions entered an estimated notional amount of $235 million in uncleared interest rate swaps pursuant to existing no-action relief. See Swap Clearing Requirement Exemptions, 85 FR
76428, 76435 Nov. 30, 2020.

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b. Efficiency, Competitiveness, and Financial Integrity of the Markets The Commission anticipates that the exemptions from the trade execution requirement, as discussed above, will maintain the current efficiency of those trades and thus maintain the financial integrity of the counterparties consistent with statutory intent. The Commission believes that the exemptions under part 50 are appropriately tailored and thus, should not materially affect the competitiveness of the swap markets.
The Commission does not believe that there would be a benefit to competition in the swap markets if inter-affiliate trades were required to trade on a SEF
or on a DCM since these trades merely transfer positions between different entities within the same corporate group.
c. Price Discovery While, as a general matter, the Commission believes that price discovery in swaps subject to the trade execution requirement should occur on SEFs or DCMs, the Commission nevertheless believes that the exemptions from the trade execution requirement should not materially impact price discovery in the U.S.
swaps markets. Most of the transactions eligible for the exemptions, such as inter-affiliate trades, are not price forming, while others involve end-users and similar entities.

e. Other Public Interest Considerations The Commission has not identified any effects of the rules and the trade execution requirement exemption on other public interest considerations.

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