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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations relevant swap clearing requirement exception or exemption be elected in order to be eligible for this exemption.
In addition, the amendment also reflects, as discussed above, that there are certain swap clearing requirement exemptions that are not required to be elected. However, the Commission notes that consistent with Citadels comment, this amendment would still require that all associated requirements of the relevant swap clearing requirement exception or exemption be met in order to be eligible for this exemption.
Under 36.1b, swap transactions would still be entered into solely between eligible contract participants ECPs,38 whom the Commission believes, for purposes of this Final Rule, to be appropriate persons. The scope of this exemption is limited and applies to transactions that are already excepted or exempted from the swap clearing requirement. Further, transactions subject to this exemption are still subject to the Commissions reporting requirements under parts 43 and 45.
Therefore, the Commission will still be able to conduct oversight and surveillance of the transactions covered by the exemption. For these reasons, the Commission believes that the exemption would not have a material adverse effect on the ability of the Commission or any SEF or DCM to discharge its regulatory or self-regulatory responsibilities under the CEA and the Commissions regulations.
C. Trade Execution Exemption for Swaps Between Eligible Affiliate Counterparties
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1. Proposed Rule The Proposed Rule proposed to create a new 36.1e to establish an exemption from the trade execution requirement for swaps between certain affiliates that are submitted for clearing.
Counterparties are eligible to elect the exemption if they meet the conditions set forth under 50.52a for eligible affiliate counterparty status.39
The Commission has previously stated that transactions subject to the inter-affiliate exemption from the swap clearing requirement are exempt from the trade execution requirement.40 In accordance with time-limited no-action relief granted by Commission staff, counterparties that meet the eligible 38 7 U.S.C. 2e providing that it shall be unlawful for any person, other than an eligible contract participant, to enter into a swap unless the swap is entered into on, or subject to the rules of, a board of trade designated as a contract market.
39 See supra note 23 describing requirements for meeting eligible affiliate counterparty status.
40 MAT Final Rule, 78 FR 33606, 33606 n. 1 June 4, 2013.

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affiliate counterparty definition under 50.52a, but do not claim the interaffiliate clearing requirement exemption may execute swaps away from a SEF or DCM that are otherwise subject to the trade execution requirement.41 CFTC
staff has granted relief to address the difficulty cited by market participants in executing inter-affiliate swap transactions through the required methods of execution prescribed for swaps subject to the trade execution requirement under 37.9, i.e., Order Book and RFQ, and subpart J of part 38
of the Commissions regulations. In particular, executing these transactions via competitive means of execution would be difficult because inter-affiliate swaps generally are not intended to be executed on an arms-length basis or based on fully competitive pricing.42
Rather, such swaps are used to manage risk among and between affiliates and are subject to internal accounting processes.
In the 2013 rulemaking adopting the inter-affiliate exemption from the clearing requirement, commenters explained that corporate groups often use a single affiliate to face the swap market on behalf of multiple affiliates within the group, which permits the corporate group to net affiliates trades.
This netting effectively reduces the overall risk of the corporate group and the number of open swap positions with external market participants, which in turn reduces operational, market, counterparty credit, and settlement risk.43 Market participants have asserted that requiring these swap transactions to be executed through a SEF or DCM
would impose unnecessary costs and inefficiencies without any of the related benefits associated with competitive means of execution.44 Accordingly, the Commission sought through the Proposed Rule to provide permanent relief from the trade execution requirement for eligible affiliate counterparties.
2. Summary of Comments JBA expressed support for the proposed exemption on the grounds that inter-affiliate transactions do not necessarily seek competitive pricing, but are generally based on intra-group risk management and trading strategies. 45 Citadel generally supported the proposed exemption but recommended that participants be 41 See
supra note 17.
NAL No. 1767 at 2.
43 Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, 2175354 Apr. 11, 2013.
44 NAL No. 1767 at 2.
45 JBA Letter at 4.
42 See
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required to actually elect the clearing exemption in order to be eligible for the corresponding exemption from the trade execution requirement.46
3. Final Rule: CEA Section 4c Authority and Standard The Commission believes that exempting an inter-affiliate swap from the trade execution requirement is consistent with the objectives of CEA
section 4c regardless of whether or not it has been submitted for clearing. For the reasons discussed below, the Commission has determined to finalize this exemption as proposed, renumbered as 36.1c.
As noted above, these transactions are not intended to be arms-length, marketfacing, or competitively executed under any circumstance, irrespective of the type of swap involved. Therefore, these transactions would not contribute to the price discovery process if executed on a SEF or a DCM. The statutory purposes of the swaps trading regulatory regime are to promote the trading of swaps on swap execution facilities and to promote pre-trade price transparency in the swaps market. 47 The Commission does not believe that these dual purposes are served by requiring on-SEF
trading of swaps that will not contribute to the price discovery process. The Commission therefore agrees with commenters that subjecting these types of transactions to the trade execution requirement confers little if any benefit to the overall swaps market.
The Commission recognizes the efficiency benefits associated with entering into inter-affiliate swaps via internal processes and acknowledges that applying the trade execution requirement to such transactions could inhibit affiliated counterparties from efficiently executing these types of transactions for risk management, operational, and accounting purposes.
The Commission therefore believes this trade execution requirement exemption would promote economic and financial innovation by allowing affiliated counterparties to efficiently utilize the risk management approach that best suits their specific needs, including with respect to decisions regarding whether to clear inter-affiliate swaps, without being unduly influenced by whether that choice would require them to execute swaps on a SEF or DCM.
In response to Citadels comment, the Commission has determined not to require affiliate counterparties to elect the inter-affiliate exemption under 50.52 in order to claim the 46 Citadel 47 7

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Letter at 41.
U.S.C. 7b3e emphasis added.

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