Swap Execution Facilities Regulation - Core Principles - Comment Letters

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Gavel.png FINAL RULE: This page refers to the proposed rulemaking on core principles for swap execution facilities. For a summary of the final rule, click here.
Dodd-Frank Timeline, Core Principles for SEFs, CFTC
Final Rule Issue Effective Date Compliance Date
June 4, 2013 August 5, 2013 October 2, 2013 (one-year phase-in of RFQ minimum); Also see No-action relief note
Dodd-Frank Timeline, DCO,DCM, SEF Governance Standards, Additional Requirements
Proposal Date Comment Deadline Final Rule Issue
January 6, 2011 June 3, 2011 TBA
Dodd-Frank Timeline, Registration and Regulation of Security-Based Swap Execution Facilities, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
February 28, 2011 April 4, 2011 July 22, 2013
Timeline, Made Available to Trade Provisions
Final Rule Issue First MAT Determination First Compliance Date
June 4, 2013 January 16, 2014 February 15, 2014

This page contains letters submitted by the public to the CFTC regarding the proposed rule on the core principles and other requirements for swap execution facilities (SEFs).

For letters on a subsequent rule proposal on the process for a designated contract market or swap execution facility to make a swap available to trade, click HERE.

For letters to the SEC on the registration and regulation of security-based swap execution facilities (SB-SEFs), click HERE.

WMBA Americas - April 11, 2013[edit]

Core Principles for SEFs
April 11, 2013

From the comment letter:

"As the WMBAA has previously explained, the enforcement of position limits by individual SEFs would be virtually impossible as SEFs are singular execution facilities that do not possess the legal or commercial control over the positions of market participants. In other words, a SEF can and should be required to enforce rules for trading activity on their respective platforms alone, but not for other market activity away from its trading system or platform.

Similarly, SEFs will not be able to realistically access position data related to trading activity beyond their respective platforms. Accordingly, we respectfully request that the Commission either withdraw the requirement in § 37.404(b) or clarify in the final rules the limited responsibility of SEFs with respect to obtaining data."

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Principal Traders Group - February 28, 2013[edit]

Request for Quote
February 28, 2013

From the comment letter:

"...a minimum requirement of one RFQ will not change the way swaps are traded today, but rather will maintain the status quo. Additionally, such a requirement would, effectively, allow one lot block trades and undermine efforts to create pre-trade price transparency, a fundamental reform in Dodd-Frank. Therefore, we urge the Commission to finalize the RFQ requirement as proposed."

"...We emphasize that there are important differences between a market in swaps cleared through a central counterparty (“CCP”) and a market in bilateral swaps. When swaps are uncleared, as most continue to be today, it is reasonable for a swap participant to restrict the number of counterparties with which it is willing to deal because of potential concerns about the creditworthiness of possible counterparties. However, that concern does not apply to swaps cleared through a CCP, registered and regulated by the Commission..."

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Morgan Stanley - March 2, 2011[edit]

Core Principles for SEFs
March 2, 2011

From the comment letter:

Morgan Stanley "recommends that the determination of the number of market participants to which an RFQ should be sent be left to the discretion of market participants; we strongly urge the CFTC to adopt objective criteria for the determination that swaps are “made available for trade” on a SEF. An individual SEF’s determination to list an illiquid swap, combined with the mandatory execution requirement, could result in that SEF having a monopoly in the trading of that instrument to the detriment of market liquidity and functionality; we submit that the CFTC Proposed Rules, along with other proposed rules, will critically undermine the ability of market participants to efficiently execute large non- block trades at reasonable price."

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MarketAxess - June 3, 2011[edit]

Reopening and Extension of Comment Periods for Dodd-Frank Rulemakings
Core Principles for SEFs
June 3, 2011

Summary of key points from the comment letter:

  1. The same regulatory standards should apply for all credit default swaps (CDS).
  2. SEF regulations should be among the first to be finalized (with an adequate lead time for implementation).
  3. Effective temporary SEF registration is essential to moving swaps onto regulated markets as soon as possible.
  4. A platform that only operates a request for quote (RFQ) should be allowed to register and operate as a SEF.
  5. SEF regulations must promote fair and open competition.
  6. The CFTC should consider the SEC's cost estimates, subject to adjustments.
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MarketAxess - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

From the comment letter:

MarketAxess argues that "flexibility should be central to SEF regulation and the CFTC's administration of the SEF Core Principles. In respect to trade execution, we prefer the maximum flexibility allowing an RFQ to be submitted to one other market participant, as reflected in Commissioner Sommers' proposed language and the SEC's proposal." Among others, they provide the following suggestions:

  • Annual market participant audits by SEFs should not be required; auditing SEF market participants instead should be shifted to NFA or to FINRA
  • SEFs should be permitted to rely on representations from their market participants on status as an eligible contract participant; eligibility to qualify for the commercial end user exemptions from the clearing and execution mandates; compliance with the clearing mandate; existence of credit documentation and ability to post collateral for uncleared swaps
  • SEFs should be able to list new swaps not only on an individual basis, but as a class of transactions
  • A SEF should have a duty to monitor only activity on its market, not those operated by its competitors.
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Deutsche Bank AG - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

From the comment letter:

Deutsche Bank AG requests that the Commission:

  • allow SEFs that provide request for quote (“RFQ”) services (“RFQ SEFs”) to permit a participant to request a quote from the number of dealers that it chooses, rather than mandating a particular minimum number;
  • clarify that responses to an RFQ do not need to be made public;
  • clarify that RFQ participants may select the parties to whom streaming indicative or firm quotes are disseminated;
  • not include a fifteen-second pause requirement;
  • clarify that swaps that are not subject to the clearing and execution requirements are not required to be executed on a SEF and may be executed through any modality (including voice, electronic, and others); and
  • allow the terms of a block trade to be agreed through any modality (e.g., voice-based, single dealer or other systems) so long as it is promptly reported to the relevant SEF or swap data repository (“SDR”).
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Global Foreign Exchange Division (SIFMA, AFME, and ASIFMA) - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

The Global Foreign Exchange Division provides suggestions regarding the proposed swap execution facility rules to the foreign exchange market. Among their suggestions, they ask for "greater clarity on the scope of the legislation with regard to FX instruments." They argue that "in addition to deteriorating liquidity, end-clients forced to execute FX products on a SEF under the Commission’s proposals are likely to suffer cost and pricing implications. The multi-RFQ structure will break the dealer-client link and the ability to offer relationship pricing, thereby pushing up costs." The Global Foreign Exchange Division further states that they believe "the Commission should therefore state what steps it proposes to take to recognize foreign SEFs and should pursue harmonization with other regulators across jurisdictions. Given the long lead time required to set up a cross-border SEF, it is critical that the Commission and other regulators start this process as soon as possible."

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Swaps and Derivatives Market Association - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

From the comment letter:

"The mandate of the Dodd-Frank Act is to reduce risk, improve market integrity and provide price transparency. To comply with that mandate the method of trade execution should appropriately test markets and provide real time pricing reporting on block trading. It is critical that trade certainty is enhanced through the following:

  • use of pre-trade and post trade risk controls;
  • best practices regarding the give up of trades for clearing; [and]
  • uniform handling of errors trades.

Swaps subject to mandatory clearing must be either cleared or broken. SEFs must be adequately capitalized. Lastly, SEFs should be granted regulatory relief in connection with the execution of certain spread transactions."

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Tradeweb - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

From the comment letter:

Tradeweb stresses the importance of flexibility in regard to SEFs and states that "while we are supportive of the goals of the Dodd-Frank Act and believe increased regulatory oversight is appropriate for the derivatives market, we want to emphasize that flexibility in trading models for execution platforms is critically important to maintain flexibility in market structure so that end-users can in turn manage their risks in a flexible manner." They suggest further that "a SEF should have reasonable discretion to choose the manner in which it meets the varying needs of its participants and maintains the integrity of its markets."

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CBOE Futures Exchange - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

From the comment letter:

CFE suggests that "it is crucial that there be a level playing field between both DCMs and SEFs and that there be no regulatory disparities that would make it more advantageous to list a swap on a SEF as opposed to a DCM. Otherwise, the result will be regulatory arbitrage and the goal of promoting competition between DCMs and SEFs will not be realized." In addition, CFE believes "a DCM should not have to create a separate entity, board, board committees, membership application and approval process, complete rule set, and all of the many overlapping processes, policies, and procedures that are required for SEFs when a DCM already has all of these components in place and can simply add any incremental additional required components for swaps."

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Managed Funds Association - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

In this comment letter, MFA:

  • recommends that the Commission apply Commission-approved objective, transparent criteria to determine when a SEF can make a swap “available for trading”;
  • requests that the Commission encourage competition among trading venues by expanding temporary grandfather relief for venues that seek to become SEFs;
  • supports permitting SEFs to use both a request for quote (“RFQ”) protocol framework and a variety of order book systems for the trading of cleared swaps, but encourages the Commission to permit the minimum number of recipients to whom a quote-requesting market participant must send an RFQ to be as low as one, provided the SEF offers the option to submit the RFQ to multiple participants;
  • articulates concerns related to the limited number of transactions potentially eligible for treatment as block trades; and
  • comments on the fifteen-second timing delay required for crossing and matching of trades.
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Better Markets - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

In addition to other suggestions, Better Markets comments that:

  • "the available to trade exception to the execution requirement related to the clearing mandate has a plain meaning: the execution requirement should apply to a swap unless there is no legally permissible mechanism to submit the swap for clearing.
  • access to trading and information flows must be completely impartial. Compensation for preferential access must not be permitted.
  • certain practices associate with HFTs must be included as abusive practices which must be prohibited by SEFs
  • risk controls must incorporate not only market pauses and halts based on circumstances which indicate imminent threats, but also "speed limits" which can prevent those threats from arising in the first place.
  • Volumetric fee discounts and rebates are inherently antithetical to fair and impartial access to SEFs. They must be prohibited.
  • Rules relating to equity transfers by SEFs must be tightened."
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Working Group of Commercial Energy Firms - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

The Working Group reminds the Commission that the voice brokers play an integral role in energy markets and asks the Commission to clarify the scope and application of "Permitted Transactions" as well as to clarify and define particular terms (such as traders, members, and other market participants) used in the proposed rule. The Working Group also comments on the proposed rule requiring '[t]he confirmation of all terms of the transaction [to] take place at the same time as execution.' The Working Group argues "that such requirement is impossible, as confirmation and execution are two distinct steps within the swap transaction process-execution occurring before confirmation."

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GFI Group - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

Regarding voice brokerage, GFI "requests that the Commission clarify that qualified SEF employees may act as more than mere order takers, and thus may provide market commentary to SEF participants and work their pending orders to increase the likelihood that these orders will actually be executed... We also believe that it is important for the Commission to recognize that market participants currently permit voice brokers to exercise time and price discretion when matching orders." GFI also provides comments on block transactions stating that the Proposed Rules are unclear and "request that the Commission confirm that block transactions must be effected on a SEF but may be subject to special rules."

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Thomson Reuters - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

From the comment letter:

Thomson Reuters expresses their view "that these new rules should be implemented in a flexible manner as required under Core Principle 1 and that adequate account be taken of the considerable resources which will be required both in applicant SEFs and the CFTC to put this new regime in place and to ensure that it operates effectively. We believe that, in order to ensure the proper operation of these markets, it may be necessary for the CFTC to adopt a phased-in approach and we would urge avoiding over-hasty rulemaking which could result in unintended consequences for the markets and the broader economy."

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Freddie Mac - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

From the comment letter:

"Freddie Mac supports the goals set forth in the Proposal to provide impartial market access, legal certainty and pre-trade price transparency for trade execution of cleared swaps. Freddie Mac is concerned, however, that the proposed methods for execution swaps permitted under the Proposal may significantly raise transaction costs, increase market risks, and have other negative consequences for the market as a whole, and for hedging parties such as Freddie Mac. In addition, we believe that, unless prohibited by the Commission, SEFs may implement rules with adverse negative effects on swap market participants." Accordingly, Freddie Mac proposes the following recommendations:

  • The definition of "Permitted Transactions" not subject to the more restrictive execution requirements under the Proposal should be expanded to include substantially all transactions executed by an "end-user" for hedging purposes
  • No provision in any SEF rule should require the termination or other cancellation of an executed swap based solely on the failure of the swap to be cleared
  • No provision in any SEF rule should assert ownership or other rights over trade information of any transacting party other than permitted use of information for internal business purposes or regulatory compliance.
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Goldman Sachs - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

Goldman Sachs believes that "the Proposed Rules are more restrictive than what is contemplated by the Dodd-Frank Act and are concerned that if they are adopted in the form proposed, these rules will limit the availability of derivatives and constrain liquidity in a manner inconsistent with Congressional intent." More specifically, Goldman Sachs recommends that the Commission "allow different SEF models to evolve to suit the different needs of distinct market segments. Each SEF would have the flexibility to determine its own access criteria, provided that they are impartial, transparent, and applied in a fair and nondiscriminatory manner." In addition, they stress the importance that "market participants need to know which DCO will be used to clear swaps in advance of execution."

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ICAP North America - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

ICAP requests that the Commission revise the proposed rules to reflect the following:

  • The SEF definition should be construed more broadly;
  • Each SEF should be permitted to specify its own methods of execution;
  • SEFs should have reasonable discretion in relation to block trades;
  • SEFs should have greater flexibility in establishing governance structures;
  • SEFs should be permitted to establish their own rule enforcement mechanisms, disciplinary procedures and sanctions; [and]
  • SEFs should have a significant time period to comply with the final rules.
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Bloomberg - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

Bloomberg comments that while the Commission has defined the execution methods for swaps appropriately, they "do not believe the Commission should mandate the quote and trade protocols associated with these execution methods. Instead, providing guidance and acceptable practices for trade protocols would be more beneficial to our U.S. markets."

Additionally, Bloomberg urges that the Commission take an expansive view of the functions that a third-party regulatory service provider could perform. "The ability of SEFs to broadly avail themselves of a third-party regulatory service provider with an established and credible infrastructure would allow SEFs to meet the proposed aggressive effective dates as well as allow SEFs to more efficiently focus on integrating the entire gamut of new rules and policies imposed on SEFs."

Bloomberg argues further that "a SEF should be able to determine a market participant's ability to meet any minimum financial standards by virtue of confirming that participants have access to a DCO either as members or through an intermediary."

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MetLife - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

MetLife expresses their concern that "the restrictions on RFQ platforms, difficulties associated with swap-related determinations that will be required of each SEF, and the increased reporting, oversight, and enforcement obligations imposed on SEFs in the Proposed Rules will:

  1. increase market risk and intermediation costs to market participants;
  2. materially decrease market liquidity in various derivative products; and
  3. fail to protect anonymity of customer proprietary product information and hedging strategies."

Further:

  • "Swap data reporting requirements should be standardized and that the DCOs should be the primary reporting entities;
  • SEFs should be required to offer non-dealers limited access membership arrangements, which relieve such members of the burden of SEF compliance and enforcement;
  • SEFs should be required to share market surveillance information on a real-time basis with other SEFs; [and]
  • There must be a clear distinction between a SEF's commercial operations and its regulatory function."
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BlackRock - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

Concerned that the Commission is "focusing primarily on price transparency, with less focus on liquidity transparency", BlackRock "urges the Commission to promulgate flexible SEF rules that will allow for confidence and liquidity to build in these new trading platforms... We specifically request that the CFTC:

  • allow transparency of price and liquidity in the swap markets to develop gradually rather than trying to encourage transparency through mandating execution methods;
  • allow SEFs to establish flexible trade execution options;
  • clarify the post execution responsibilities of SEFs;
  • ensure that all market participants have a meaningful voice on SEF operating committees; [and]
  • harmonize SEF regulation with regulation of security-based swap execution facilities."
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IntercontinentalExchange - March 8, 2011[edit]

Core Principles for SEFs
March 8, 2011

From the comment letter:

ICE applauds the Commission for its effort in creating a regulatory structure for swap execution facilities but believes that "in the final rulemaking, the Commission should:

  • clarify that all compliance rules apply to SEFs that allow market participants to post indicative prices;
  • not require the real-time monitoring of intraday position limit rules by SEFs until the technology is readily available;
  • not require SEFs to monitor trading on other SEFs;
  • mandate pre-trade clearing checks for SEFs;
  • clarify that SEFs can use certain non-confidential data for business or marketing purposes; [and]
  • not prohibit Chief Compliance Officers from serving in the legal department."
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International Swaps and Derivatives Association & Securities Industry and Financial Markets Association - March 8, 2011[edit]

Core Principles for SEFs
Registration and Regulation of Security-Based Swap Execution Facilities
March 8, 2011

This comment letter addresses both the CFTC and SEC rule proposals on SEFs in the following manner:

  • "Required Transactions," which discusses rules applicable to transactions that must be executed through a SEF (or a designated contract market, a "DCM");
  • "Permitted Transactions," discusses rules that are applicable to transactions that may be executed through SEFs (or DCMs); and
  • "Exemptions," discusses exemptions to the rules that require execution of swaps through SEFs (or DCMs).
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References[edit]

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