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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations
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innovation and fair competition,31 CEA
section 4c provides the Commission with the authority to exempt any agreement, contract, or transaction from any CEA provision, subject to specified factors. Specifically, the Commission must first determine that i the requirement should not be applied to the agreement, contract, or transaction for which the exemption is sought; ii the exemption would be consistent with the public interest and the purposes of the Act; iii the agreement, contract, or transaction at issue will be entered into solely between appropriate persons; 32 and iv the agreement, contract, or transaction at issue will not have a material adverse effect on the ability of the Commission or exchange to discharge its regulatory or selfregulatory duties under the Act.33
For the reasons stated below, the Commission believes that the trade execution requirement should not be applied to a swap transaction that is eligible for a clearing requirement exception or exemption under part 50, and that the exemption from the trade execution requirement is in the public interest and consistent with the CEA in such circumstances.
The Commission has determined to finalize the exemption largely as proposed, renumbered as 36.1b.34 As 31 7 U.S.C. 6c1. CEA section 4c1 is intended to allow the Commission to provide certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.
House Conf. Report No. 102978, 102d Cong. 2d Sess. at 81 Oct. 2, 1992, reprinted in 1992
U.S.C.C.A.N. 3179, 3213.
32 7 U.S.C. 6c3. CEA section 4c3 includes a number of specified categories of persons within appropriate persons that are deemed as appropriate to enter into swaps exempted pursuant to CEA section 4c. This includes persons the Commission determines to be appropriate in light of their financial profile or other qualifications, or the applicability of appropriate regulatory protections. As noted below, for purposes of the Final Rules section 4c exemptions, the Commission has determined that eligible contract participants as defined in CEA section 1a are appropriate persons.
33 7 U.S.C. 6c2. Notwithstanding the adoption of exemptions from the Act, the Commission emphasizes that their use is subject to the Commissions anti-fraud and anti-manipulation enforcement authority. In this connection, 50.10a prohibits any person from knowingly or recklessly evading or participating in, or facilitating, an evasion of CEA section 2h or any Commission rule or regulation adopted thereunder.
17 CFR 50.10a. Further, 50.10c prohibits any person from abusing any exemption or exception to CEA section 2h, including any associated exemption or exception provided by rule, regulation, or order. 17 CFR 50.10c.
34 The Commission recently adopted a final rule which adopted an exemption from the trade execution requirement under 36.1a of the Commissions regulations to establish an exemption to the trade execution requirement for swap transactions that are components of a New
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modified in this adopting release for additional clarity and consistency, 36.1b will apply to any swap transaction that qualifies for the exception under section 2h7 of the Act or an exception or exemption under part 50 of this chapter, and for which the associated requirements are met.35
As discussed below, applying the trade execution requirement to swaps that are eligible for an exception to or exemption from the clearing requirement, or are otherwise not subject to the clearing requirement, is not consistent with section 2h8 of the CEA and would impose additional burdens on market participants that would be required to incur the costs and burdens of SEF or DCM onboarding and execution. For example, a counterparty that determines not to clear a swap pursuant to a part 50 exemption, but otherwise remains subject to the trade execution requirement, may be limited in where it may trade or execute that swap and subsequently incur costs and operational burdens related to SEF or DCM onboarding and trading. Therefore, the Commission believes swaps that are excepted or exempted from the clearing requirement should also be exempted from the trade execution requirement.
In response to Citadels comment that swaps subject to future exemptions from the clearing requirement should not automatically be eligible for an exemption from the trade execution requirement, the Commission notes that Congress expressly chose to link the statutory exemption from the trade execution requirement under CEA
section 2h8 to the 2h7 exemption from the clearing requirement.
Therefore, as explained elsewhere, the Commission considers it appropriate to follow this statutory intent with respect to the trade execution requirement and recognize that any swaps eligible for an exemption from the clearing requirement should qualify for an exemption from the trade execution requirement. The Commission notes that, consistent with the statutory restrictions on the use of its CEA section 4c authority, it has been judicious in issuing clearing exceptions and exemptions, and will continue to be so particularly in light of this linking of clearing exceptions and exemptions with the trade execution exemption.
Issuance Bond package transaction. See supra note 11.
35 For avoidance of doubt, the Commission makes clear that swap transactions that qualify for a swap clearing requirement exception or exemption under subparts C and D of part 50, and for which the associated requirements are met, are eligible for the exemption from the trade execution requirement under renumbered 36.1b.

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Additionally, while the Final Rule automatically makes swaps that are eligible for future exemptions from, and exceptions to, the clearing requirement eligible for this exemption from the trade execution requirement, nothing in the Final Rule limits a future Commissions ability to issue new clearing exemptions or exceptions but still require compliance with CEA
section 2h8 by amending this exemption. Given the limited nature of these part 50 exceptions and exemptions, the Commission does not believe that this approach with regard to the trade execution requirement will diminish swaps market transparency or liquidity in a manner likely to implicate systemic risk concerns.
Commenters requests for additional exemptions from the trade execution requirement are outside the scope of the current rulemaking. However, the Commission will take these requests under advisement for future rulemakings.36
In its comments, Citadel also recommended that participants be required to elect the clearing exemption in order to be eligible for this exemption from the trade execution requirement.
The Commission notes that as proposed, renumbered 36.1b required that the appropriate swap clearing requirement exception or exemption be elected in order to be eligible for this exemption.
However, since the Proposed Rule, the Commission has adopted exemptions from the swap clearing requirement under part 50 that do not to need be elected, but rather apply by virtue of the status of a counterparty to the transaction.37 In particular, the swap clearing requirement exemptions for swaps entered into by central banks, sovereign entities, and IFIs apply by virtue of a counterpartys status as such an entity.
Therefore, the Commission is amending 36.1b to state that section 2h8 of the Act does not apply to a swap transaction that qualifies for an exception under section 2h7 of the Act or one or more of the exceptions or exemptions under part 50 of chapter I of title 17, and for which the associated requirements are met. This amendment will still require, as recommended by Citadel, that, where applicable, the 36 In addition, the Commission notes that Mercaris grounded its exemption requests on a concern that the Proposed Rules expansion of the trade execution and SEF registration requirements would adversely affect small swaps broking entities.
Because the Final Rule would not enact either of the changes that Mercaris cited as likely to adversely affect small swaps broking entities, the Commission assumes that Mercaris exemption requests are inapplicable to the Final Rule.
37 See supra note 24.

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