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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations costs, especially during periods of market instability. Accordingly, the Commission believes a SEFs liquid financial assets, which the Commission addresses in amended 37.1303 below, is more important for sustaining a SEFs financial health and continuing operations.
Amended 37.1303 may require some SEFs to maintain additional liquid financial assets, compared to the current liquidity requirement, where a SEFs wind-down costs exceed six months of operating costs. However, as explained above in the discussion of benefits, the Commission believes most SEFs do not have wind-down costs that exceed six months of operating costs. Accordingly, amended 37.1303 should not increase the liquidity requirement for most SEFs.
Amended 37.1304 requires a SEF to incur an additional marginal cost to calculate its wind-down costs, in addition to its projected operating costs as currently required, in order to determine its financial resources obligations under 37.1301 and 37.1303. The Commission estimates this change will impose an initial, minimal, one-time cost for each SEF related to determining the length of time and associated costs associated with an orderly wind down.
The Commission anticipates amended 37.1306a will impose greater costs on a SEF. Specifically, amended 37.1306a requires a SEF to submit U.S. GAAP-compliant quarterly reports.
Because U.S. GAAP-compliant financial statements generally require additional effort compared to financial statements that are not U.S. GAAP-compliant, the Commission estimates the proposed change will increase annual costs for each SEF required to create U.S. GAAPcompliant financial reports.
The Commission does not believe amended 37.1306c will increase costs. Under existing 37.1306c, a SEF
must provide sufficient documentation explaining the methodology it used to compute its financial resources requirements; accordingly, amended 37.1306c is merely clarifying the type of information that is already required.248 Similarly, the Commission does not believe amended 37.1306e will materially increase costs since a SEF currently is required to maintain continuous compliance with its financial resources obligations. By requiring a SEF to notify the Commission within 48 hours of noncompliance, rather than informing the Commission through a SEFs quarterly financial submission, amended 37.1306e could impose a de minimis 248 See
37.1306c.

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cost to prepare a notice from a noncompliant SEF.
iv. Section 15a Factors 1 Protection of Market Participants and the Public The Commission previously noted that the financial resources requirements protect market participants and the public by establishing uniform standards and a system of Commission oversight that ensures trading occurs on a financially stable facility, which in turn, mitigates the risk of market disruptions, financial losses, and system problems that could arise from a SEFs failure to maintain adequate financial resources.249 In the event that a SEF must wind down its operations, amended 37.1303
explicitly requires a SEF to maintain sufficient liquid financial resources to conduct an orderly wind down of its operations, or three months of operating costs if greater than the SEFs winddown costs.250 The Commission believes the amended SEF financial requirements are better calibrated to the inherent risks of a SEF, and should result in greater efficiencies, but should not diminish the financial integrity of the SEF.
Moreover, under amended 37.1306e, a SEF is required to provide notice no later than 48 hours after it knows or reasonably should know that it no longer satisfies its financial resources obligations, ensuring that the Commission can take prompt action to protect market participants and the public. In contrast, the Commission currently is notified of non-compliance in a SEFs quarterly financial statements. Lastly, a SEF is required to submit U.S. GAAPcompliant quarterly financial submissions under amended 37.1306c that explicitly identify the costs a SEF has excluded or prorated in determining its projected operating costs. As a result, the Commission will more easily be able to compare SEFs financial health and take proactive steps to protect market participants and the public if the Commission identifies a SEF with weak financial health or the development of negative financial trends among SEFs that could endanger market participants or the public.
249 See
Core Principles Final Rule at 33580.
the Commission previously noted, a SEF
with sufficient amounts of liquid financial resources would be better positioned to close out trading in a manner not disruptive to market participants or to members of the public who rely on SEF prices. See Core Principles Final Rule at 33580.
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2 Efficiency, Competitiveness, and Financial Integrity of the Markets Amended 37.1301a and 37.1303, as further supplemented through the acceptable practices, together should benefit market efficiency by reducing capital costs since SEFs are no longer required to maintain an excessive amount of financial resources.
Accordingly, a SEF should be able to more efficiently allocate its financial resources, which in turn should encourage market growth and innovation. For example, as noted above, in the case of amended 37.1303, the Commission expects most SEFs will need to hold approximately 50 percent less liquid financial assets as reserve capital to cover operating costs. The existing financial resources requirements can pose a burden to a SEF that wishes to innovate, because they will impose higher capital requirements if the SEF wishes to offer new or experimental technology, execution methods, or related products and services. This is especially so if such business lines, products, or services are not expected to be immediately profitable or would have low margins.
The existing regulations may also discourage a SEF from offering more capital intensive activities, such as execution methods that involve human brokers compared to fully electronic trading that is less capital intensive.
Accordingly, the Commission believes the amended financial resources requirements will be more neutral with respect to a SEFs chosen technology and business model, and therefore should encourage a greater variety of execution methods and related services and products in the market place.
Reducing capital costs may promote the entry of new entrants into the market by reducing start-up costs and initial capital requirements, thereby further encouraging competition and innovation. The increase in competition and innovation would depend on the extent to which potential new entrants respond to this encouragement.
Amended 37.1306e should improve the financial integrity of markets by requiring a SEF to notify the Commission within 48 hours after it knows or reasonably should know that it no longer satisfies its financial resources obligations, ensuring that the Commission can take prompt action to protect market integrity. Lastly, amended 37.1306c improves SEF
financial submissions by requiring U.S.
GAAP-compliant statements as well as clarifying that a SEF must explicitly identify any costs that it has excluded
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