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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations
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benefits shall be evaluated in light of the following five broad areas of market and public concern: 1 Protection of market participants and the public; 2
efficiency, competitiveness, and financial integrity of futures markets; 3
price discovery; 4 sound risk management practices; and 5 other public interest considerations.
2. Background The Commission is amending 36.1
to codify two exemptions from the trade execution requirement for swaps. As noted, the trade execution requirement applies to any swap that is subject to the swap clearing requirement and has been made available to trade by a SEF or DCM pursuant to 37.10 or 38.12. The first trade execution requirement exemption applies to a swap transaction that qualifies for an exception to, or exemption from, the clearing requirement under part 50 of the Commissions regulations, and for which the associated requirements are met. The second applies to a swap that is entered into by eligible affiliate counterparties and cleared, regardless of the affiliates decision not to claim the inter-affiliate clearing exemption under 50.52 of the Commissions regulations and instead clear the swap.
The baseline against which the Commission considers the costs and benefits of this Final Rule is the statutory and regulatory requirements of the CEA and Commission regulations now in effect, in particular CEA section 2h8 and certain rules in part 37 of the Commissions regulations. The Commission, however, notes that as a practical matter certain market participants, such as eligible affiliates and non-financial end-users, have adopted trade execution practices consistent with this Final Rule based upon statutory provisions or no-action relief provided by Commission staff that is time-limited in nature.63 As such, to the extent that market participants have relied on statutory provisions to provide an exception from the trade execution requirement or relevant staff no-action relief, the actual costs and benefits of the Final Rule may not be as significant.
In some instances, it is not reasonably feasible to quantify the costs and benefits with respect to certain factors, for example, price discovery or market integrity. Notwithstanding these types of limitations, however, the Commission otherwise identifies and considers the costs and benefits of these rules in qualitative terms. The Commission did not receive any comments from commenters which quantified or 63 See
NAL No. 1767.

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attempted to quantify the costs and benefits of the Proposed Rule.
The following consideration of costs and benefits is organized according to the rules and rule amendments adopted in this release. For each rule, the Commission summarizes the amendments and identifies and discusses the costs and benefits attributable to such rule. The Commission, where applicable, then considers the costs and benefits of the rules in light of the five public interest considerations set out in section 15a of the CEA.
The Commission notes that this consideration of costs and benefits is based on the understanding that the swaps market functions internationally, with many transactions involving U.S.
firms taking place across international boundaries, with some Commission registrants being organized outside of the United States, with leading industry members typically conducting operations both within and outside the United States, and with industry members commonly following substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the discussion of costs and benefits below refers to the effects of the Final Rule on all swaps activity subject to the new and amended regulations, whether by virtue of the activitys physical location in the United States or by virtue of the activitys connection with activities in, or effect on, U.S. commerce under CEA
section 2i.64
CEA section 2h8 specifies that swap transactions that are excepted from the clearing requirement pursuant to CEA section 2h7 described in more detail above are not subject to the trade execution requirement.65 The Commission adopted requirements under 50.50 to implement the end-user exception under CEA section 2h7.66
The Commission is adopting 36.1b to expressly exempt from the trade execution requirement swaps that are exempt from the clearing requirement 64 Section 2i1 applies the swaps provisions of both the Dodd-Frank Act and Commission regulations promulgated under those provisions to activities outside the United States that have a direct and significant connection with activities in, or effect on, commerce of the United States. 7
U.S.C. 2i. Section 2i2 makes them applicable to activities outside the United States that contravene Commission rules promulgated to prevent evasion of the Dodd-Frank Act.
65 7 U.S.C. 2h8B.
66 17 CFR 50.50. Among other things, 50.50
establishes when a swap is being used to hedge or mitigate commercial risk and specifies how to satisfy the reporting requirement to elect such an exception from the clearing requirement. 17 CFR
50.50.

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pursuant to part 50 of the Commissions regulations. Part 50 exempts from the clearing requirement swaps that have at least one counterparty that is a certain type of entity, including exempt cooperatives, entities that qualify for the statutory end-user exception,67 and eligible affiliate counterparties.68 In addition, the Commission recently adopted amendments to part 50
codifying additional clearing exemptions for swaps entered into with certain central banks, sovereign entities, IFIs, bank holding companies, savings and loan holding companies, and community development financial institutions.69
3. Benefits and Costs The Final Rule exempts from the trade execution requirement swap transactions between eligible affiliate counterparties that elect to clear such transactions, notwithstanding their ability to elect the clearing exemption under 50.52. Under the current rules, inter-affiliate transactions are only exempt from the trade execution requirement if the eligible affiliate counterparties elect not to clear the transaction. However, eligible affiliate counterparties that elect to clear their inter-affiliate transactions are not exempted from the trade execution requirement despite these transactions also not being intended to be price forming or arms length and therefore may not be suitable for trading on SEFs or DCMs.
Therefore, the Final Rule treats cleared and uncleared inter-affiliate swap transactions the same with respect to the trade execution requirement. The Commission believes that this approach will be beneficial because inter-affiliate swap transactions do not change the ultimate ownership and control of swap positions or result in netting, and permitting them to be executed internally provided that they qualify for the clearing exemption under existing 50.52 may reduce costs relative to requiring that they be executed on a SEF
or a DCM. Finally, the Commission believes that this exemption may help ensure that eligible affiliate counterparties are not discouraged from clearing their inter-affiliate swap transactions in order not to have to trade them on SEFs or DCMs subject to the trade execution requirement, which may 67 This includes the exemption for qualifying banks, savings associations, farm credit system institutions, and credit unions in Commission regulation 50.53.
68 See supra note 23 describing requirements for meeting eligible affiliate counterparty status.
69 See Swap Clearing Requirement Exemptions, 85 FR 76428 Nov. 30, 2020.

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