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Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations
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Rule, again under CEA sections 5hf1 and 8a5, that set forth comprehensive structural reforms to the SEF regulatory regime.9 For example, the Proposed Rule would have removed existing limitations on swap execution methods on SEFs,10 while expanding the categories of swaps that are subject to the trade execution requirement as well as the types of entities that must register as SEFs. In addition to these broad reforms, the Proposed Rule also contained, among other things, more targeted regulatory proposals to codify exemptions from the trade execution requirement, including two such exemptions linked to exceptions to, or exemptions from, the swap clearing requirement.11
Commenters provided limited and generally positive feedback regarding these two proposed exemptions from the trade execution requirement.12 By contrast, the Proposed Rules broader market reforms elicited a number of public comments expressing concerns with the expansive scope of the changes and recommending that the Commission focus on more targeted improvements to the swap trading regulatory regime.13 In 9 Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 Nov. 30, 2018.
10 Under the CFTCs current regulations, swaps subject to the trade execution requirement must be executed via a central limit order book Order Book or a request for quote to no fewer than three unaffiliated market participants in conjunction with an Order Book RFQ. 17 CFR 37.9a.
11 83 FR at 6203662040. The Proposed Rule also included a trade execution exemption for swap components of package transactions that includes both a swap that is otherwise subject to the trade execution requirement and a new bond issuance New Issuance Bonds package transactions. The Commission in a separate proposal, that sought to codify the majority of relief currently provided to package transactions, also proposed an exemption from the trade execution requirement for swap components of New Issuance Bond package transactions. See Swap Execution Facility Requirements and Real-Time Reporting Requirements, 85 FR 9407 Feb. 19, 2020. On November 18, 2020, the Commission adopted that exemption in a separate rulemaking, as 36.1a of its regulations. See Swap Execution Facility Requirements, 85 FR 82313 Dec. 18, 2020.
12 See Comment Letter from Japanese Bankers Association at 4 Mar. 13, 2019 JBA Letter;
Comment Letter from Citadel and Citadel Securities at 4041 Mar. 15, 2019 Citadel Letter. As discussed below, Citadel recommended certain limitations on the applicability of these exemptions.
While the Commission received numerous comments on the Proposed Rule, only the JBA
Letter and Citadel Letter commented directly on the two proposed exemptions addressed in these Final Rules.
13 See, e.g., Comment Letter from the Alternative Investment Management Association at 12 Feb.
25, 2019 urging the CFTC to approach any change to swap execution facilities and trade execution in a phased and targeted manner, rather than adopt a wholesale package of changes in a single rulemaking; Comment Letter from Managed Funds Association at 23 Mar. 15, 2019
expressing concern with the breadth of the
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light of available resources and current priorities, the Commission agrees that it is appropriate to proceed with incremental improvements rather than a wholesale reform package at this time.14
Accordingly, this Final Rule addresses only the two proposed exemptions from the trade execution requirement linked to the swap clearing requirements exemptions and exceptions under part 50, such as the end-user exception under Commission regulation 50.50, the exemption for co-operatives under Commission regulation 50.51, and the inter-affiliate exemption under Commission regulation 50.52.15
Additional targeted improvements to the swap trading regulatory framework have been and will continue to be made via discrete rulemakings.16
B. Summary of the Final Rule The Final Rule establishes two exemptions from the trade execution requirement for swaps, both of which are linked to the Commissions exemptions from, and exceptions to, the swap clearing requirement. The first such trade execution requirement exemption applies to a swap that qualifies for, and meets the associated requirements of, any exception or exemption under part 50 of the Commissions regulations. The second codifies relief provided under CFTC
Letter No. 1767, and prior staff Proposed Rule and recommending targeted rather than comprehensive changes to the swap trading framework; Comment Letter from IATP at 34
Mar. 15, 2019 same; Comment Letter from Securities Industry and Financial Markets Association at 1 Mar. 15, 2019 SIFMA Letter same; Comment Letter from SIFMA Asset Management Group at 1 Mar. 15, 2019 same;
Comment Letter from Tradeweb Markets LLC at 1
2 Mar. 14, 2019 Tradeweb Letter same;
Comment Letter from Wellington Management Company LLP at 1 Mar. 15, 2019 same; see also Comment Letter from Futures Industry Association at 79 Mar. 15, 2019 FIA Letter stating that proposed market reforms would present tall operational challenges and impose substantial costs on all market participants; Comment Letter from Commodity Markets Council at 2 Mar. 15, 2019
same.
14 In addition, the Proposed Rule addressed a number of SEF operational challenges arising from incongruities between the 2013 SEF Rules and existing technology and market practice. Proposed solutions to these operational challenges also received broad support from commenters. The Commission finalized certain of these proposals in a parallel rulemaking.
15 See infra note 23.
16 For example, the Commission recently codified staff no-action relief related to block trades, error trades, and package transactions. See Real-Time Public Reporting Requirements, 85 FR 75422 Nov.
25, 2020 codifying stat no-action relief related to block trades. The adopting release codifying staff no-action relief related to package transactions and error trades is available on the Commissions website at https www.cftc.gov/media/5276/
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letters,17 and applies to a swap that is entered into by eligible affiliate counterparties and cleared, regardless of the affiliates ability to claim the interaffiliate clearing exemption under 50.52 of the Commissions regulations.
II. Part 36Trade Execution Exemptions Linked to Swap Clearing Requirement Exceptions and Exemptions A. Background and Proposed Rule CEA section 2h8 specifies that swap transactions that are excepted from the clearing requirement pursuant to CEA section 2h7 are not subject to the trade execution requirement.18 CEA
section 2h7Ci, which is codified in Commission regulation 50.50, is known as the end-user exception and provides an exception from the swap clearing requirement if one of the counterparties to the transaction i is not a financial entity; ii is using the swap to hedge or mitigate commercial risk; and iii notifies the Commission as to how it generally meets its financial obligations associated with entering into uncleared swaps.19 The Commission adopted requirements under 50.50 to implement this exception.20 CEA
section 2h7Cii provided the Commission with the authority to consider whether to exempt from the definition of financial entity small banks, savings associations, farm credit system institutions and credit unions.
The Commission exercised this authority at the same time it 17 CFTC Letter No. 1767, Re: Extension of NoAction Relief from Commodity Exchange Act Section 2h8 for Swaps Executed Between Certain Affiliated Entities that Are Not Exempt from Clearing Under Commission Regulation 50.52 Dec.
14, 2017 NAL No. 1767; CFTC Letter No. 16
80, Re: Extension of No-Action Relief from Commodity Exchange Act Section 2h8 for Swaps Executed Between Certain Affiliated Entities that Are Not Exempt from Clearing Under Commission Regulation 50.52 Nov. 28, 2016; CFTC Letter No.
1562, Re: Extension of No-Action Relief from Commodity Exchange Act Section 2h8 for Swaps Executed Between Certain Affiliated Entities that Are Not Exempt from Clearing Under Commission Regulation 50.52 Nov. 17, 2015; CFTC Letter No.
14136, Re: Extension of No-Action Relief from Commodity Exchange Act Section 2h8 for Swaps Executed Between Certain Affiliated Entities that Are Not Exempt from Clearing Under Commission Regulation 50.52 Nov. 7, 2014; CFTC Letter No.
1426, Time-Limited No-Action Relief from the Commodity Exchange Act Section 2h8 for Swaps Executed Between Certain Affiliated Entities Not Electing Commission Regulation 50.52 Mar. 6, 2014.
18 7 U.S.C. 2h8B.
19 7 U.S.C. 2h7.
20 17 CFR 50.50. Among other things, 50.50
establishes when a swap transaction is considered to hedge or mitigate commercial risk; specifies how to satisfy the reporting requirement; and exempts small financial institutions from the definition of financial entity. 17 CFR 50.50.

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