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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations
v Tax preparation and audit fees;
vi To the extent not covered by paragraphs b1ii or iii of this Core Principle 13 of Section 5h of the Act Financial Resources, the variable commissions that a voice-based swap execution facility may pay to its SEF trading specialists as defined under 37.201c, calculated as a percentage of transaction revenue generated by the voice-based swap execution facility. Unlike fixed salaries or compensation, such variable commissions are not payable unless and until revenue is collected by the swap execution facility; and vii Any non-cash costs, including depreciation and amortization.
2 Prorated expenses. The Commission recognizes that, in the normal course of a swap execution facilitys business, there may be an expense e.g., typically related to overhead that is only partially attributable to a swap execution facilitys ability to comply with the core principles set forth in section 5h of the Act and any applicable Commission regulations; accordingly, such expense may need to be only partially attributed to the swap execution facilitys projected operating costs. For example, if a swap execution facilitys office rental space includes marketing personnel and compliance personnel, the swap execution facility may exclude the prorated office rental expense attributable to the marketing personnel. In order to prorate an expense, a swap execution facility should:
i Maintain sufficient documentation that reasonably shows the extent to which an expense is partially attributable to an excludable expense;
ii Identify any prorated expense in the financial reports that it submits to the Commission pursuant to 37.1306; and iii Sufficiently explain why it prorated any expense. Common allocation methodologies that can be used include actual use, headcount, or square footage. A
swap execution facility may provide documentation, such as copies of service agreements, other legal documents, firm policies, audit statements, or allocation methodologies to support its determination to prorate an expense.
3 Expenses allocated among affiliates.
The Commission recognizes that a swap execution facility may share certain expenses with affiliated entities, such as parent entities or other subsidiaries of the parent. For example, a swap execution facility may share employees including employees on secondment from an affiliate that perform similar tasks for the affiliated entities or may share office space with its affiliated entities.
Accordingly, the Commission believes that it would be reasonable, for purposes of calculating its projected operating costs, for a swap execution facility to prorate any shared expense that the swap execution facility pays for, but only to the extent that such shared expense is actually attributable to the affiliate and for which the swap execution facility is reimbursed. Similarly, a reasonable calculation of a swap execution facilitys projected operating costs must include the prorated amount of any expense paid for by an affiliated entity to the extent that the shared expense is attributable to the
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swap execution facility. In order to prorate a shared expense, the swap execution facility should:
i Maintain sufficient documentation that reasonably shows the extent to which the shared expense is attributable to and paid for by the swap execution facility and/or affiliated entity;
ii Identify any shared expense in the financial reports that it submits to the Commission; and iii Sufficiently explain why it prorated any shared expense. A swap execution facility may provide documentation, such as copies of service agreements, other legal documents, firm policies, audit statements, or allocation methodologies, that reasonably shows how expenses are attributable to, and paid for by, the swap execution facility and/
or its affiliated entities to support its determination to prorate an expense.

Core Principle 15 of Section 5h of the Act Designation of Chief Compliance Officer

b Acceptable Practices1
Qualifications of chief compliance officer. In determining whether the background and skills of a potential chief compliance officer are appropriate for fulfilling the responsibilities of the role of the chief compliance officer, the swap execution facility has the discretion to base its determination on the totality of the qualifications of the potential chief compliance officer, including, but not limited to, compliance experience, related career experience, training, and any other relevant factors to the position. A swap execution facility should be especially vigilant regarding potential conflicts of interest when appointing a chief compliance officer.
2 Reserved Issued in Washington, DC, on December 23, 2020, by the Commission.
Christopher Kirkpatrick, Secretary of the Commission.
Note: The following appendices will not appear in the Code of Federal Regulations.

Appendices To Swap Execution FacilitiesCommission Voting Summary and Commissioners Statements Appendix 1Commission Voting Summary On this matter, Chairman Tarbert and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative.

Appendix 2Statement of Concurrence of Commissioner Rostin Behnam More than two years ago, in November 2018, the Commission voted to propose a comprehensive overhaul of the existing framework for swap execution facilities SEFs.1 Today, the Commission issues two 1 Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 Nov. 30, 2018 the SEF Proposal.

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rules finalizing aspects of the SEF Proposal and a withdrawal of the SEF Proposals unadopted provisions. This is the final step in a long road. Last month, the Commission finalized rules emanating from the SEF
Proposal regarding codification of existing no-action letters regarding, among other things, package transactions.2 Todays final rules and withdrawal complete the Commissions consideration of the SEF
Proposal.
Back in November 2018, I expressed concern that finalization of the SEF Proposal would reduce transparency, increase limitations on access to SEFs, and add significant costs for market participants.3 I
also noted that, while the existing SEF
framework could benefit from targeted changes, particularly the codification of existing no-action relief, the SEF framework has in many ways been a success. I pointed out that the Commissions work to promote swaps trading on SEFs has resulted in increased liquidity, while adding pre-trade price transparency and competition.
Nonetheless, I voted to put the SEF Proposal out for public comment, anticipating that the notice and comment process would guide the Commission in identifying a narrower set of changes that would improve the current SEF
framework and better align it with the statutory mandate and the underling policy objectives shaped after the 2008 financial crisis.4 More than two years and many comment letters later, that is exactly what has happened. The Commission has been precise and targeted in its finalization of specific provisions from the SEF Proposal that provide needed clarity to market participants and promote consistency, competitiveness, and appropriate operational flexibility consistent with the core principles.
In addition to expressing substantive concerns about the overbreadth of the SEF
Proposal, I also voiced concerns that we were rushing by having a comparatively short 75day comment period.5 In the end, the comment period was rightly extended, and the Commission has taken the time necessary to carefully evaluate the appropriateness of the SEF Proposal in consideration of its regulatory and oversight responsibilities and the comments received. I think that the consideration of the SEF Proposal is an example of how the process is supposed to work. When we move too quickly toward the finish line and without due consideration of the surrounding environment, we risk making a mistake that will impact our markets and market participants.
Finally, I would like to address the Commissions separate vote to withdraw the unadopted provisions of the SEF Proposal. In the past, I have expressed concern with such withdrawals by an agency that has historically prided itself on collegiality and 2 Swap Execution Facility Requirements Nov. 18, 2020, https www.cftc.gov/PressRoom/
PressReleases/8313-20.
3 Statement of Concurrence of Commissioner Rostin Behnam Regarding Swap Execution Facilities and Trade Execution Requirement, https www.cftc.gov/PressRoom/
SpeechesTestimony/behnamstatement110518a.
4 Id.
5 Id.

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