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Proposed Rule2025-18924

Revisions to Business Conduct and Swap Documentation Requirements for Swap Dealers and Major Swap Participants

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Published

September 30, 2025

Issuing agencies

Commodity Futures Trading Commission

Abstract

The Commodity Futures Trading Commission ("CFTC" or "Commission") is proposing amendments to certain of the Commission's business conduct and documentation requirements applicable to swap dealers and major swap participants. These amendments would provide exceptions to compliance with such requirements when executing swaps that are: intended by the parties to be cleared contemporaneously with execution; or subject to prime broker arrangements that meet certain qualifying conditions. The proposed amendments would also make certain other changes discussed herein. The proposed amendments, if adopted, would supersede certain no-action positions issued by the Commission's Market Participants Division ("MPD").

Full Text

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<title>Federal Register, Volume 90 Issue 187 (Tuesday, September 30, 2025)</title>
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[Federal Register Volume 90, Number 187 (Tuesday, September 30, 2025)]
[Proposed Rules]
[Pages 47136-47168]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-18924]

[[Page 47135]]

Vol. 90

Tuesday,

No. 187

September 30, 2025

Part II

Commodity Futures Trading Commission

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17 CFR Part 23

Revisions to Business Conduct and Swap Documentation Requirements for
Swap Dealers and Major Swap Participants; Proposed Rule

Federal Register / Vol. 90, No. 187 / Tuesday, September 30, 2025 /
Proposed Rules

[[Page 47136]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AF38

Revisions to Business Conduct and Swap Documentation Requirements
for Swap Dealers and Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is proposing amendments to certain of the Commission's
business conduct and documentation requirements applicable to swap
dealers and major swap participants. These amendments would provide
exceptions to compliance with such requirements when executing swaps
that are: intended by the parties to be cleared contemporaneously with
execution; or subject to prime broker arrangements that meet certain
qualifying conditions. The proposed amendments would also make certain
other changes discussed herein. The proposed amendments, if adopted,
would supersede certain no-action positions issued by the Commission's
Market Participants Division (``MPD'').

DATES: Comments must be received on or before October 24, 2025.

ADDRESSES: You may submit comments, identified by ``Revisions to
Business Conduct and Swap Documentation Requirements for Swap Dealers
and Major Swap Participants'' and RIN 3038-AF38, by any of the
following methods:
<bullet> CFTC Comments Portal: <a href="https://comments.cftc.gov">https://comments.cftc.gov</a>. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
<bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
<bullet> Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
<a href="https://comments.cftc.gov">https://comments.cftc.gov</a>. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\ The Commission reserves the right, but shall have no
obligation, to review, pre-screen, filter, redact, refuse or remove any
or all of your submission from <a href="https://comments.cftc.gov">https://comments.cftc.gov</a> that it may
deem to be inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act (``APA'') \2\ and other applicable laws, and may be
accessible under FOIA.
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\1\ See 17 CFR 145.9. The Commission's regulations referred to
in this release are found at 17 CFR chapter I (2025) and are
accessible on the Commission's website at <a href="https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm">https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm</a>.
\2\ 5 U.S.C. 500 et seq.

FOR FURTHER INFORMATION CONTACT: Frank N. Fisanich, Deputy Director,
202-418-5949, <a href="/cdn-cgi/l/email-protection#6701010e1406090e040f270401130449000811">[email&#160;protected]</a>; Jacob Chachkin, Associate Director,
202-418-5496, <a href="/cdn-cgi/l/email-protection#3d575e555c5e555654537d5e5b495e135a524b">[email&#160;protected]</a>; or Dina Moussa, Special Counsel, 202-
418-5696, <a href="/cdn-cgi/l/email-protection#5c383133292f2f3d1c3f3a283f723b332a">[email&#160;protected]</a>, Market Participants Division, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
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NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

The Commission is issuing this notice of proposed rulemaking
(``Proposal'') to propose amendments to certain business conduct
standards for swap dealers (``SDs'') and major swap participants
(``MSPs'' and, together with SDs, ``Swap Entities'') \3\ contained in
subpart H of part 23 of the Commission's regulations,\4\ and to the
swap trading relationship documentation rule for Swap Entities in Sec.
23.504.\5\ These proposed amendments are intended to address certain
long-standing issues with the Commission's external business conduct
standards and swap trading relationship documentation rule, as
explained below.\6\ The Commission is aware that various market
participants have argued that certain aspects of the external business
conduct standards and swap trading relationship documentation rule have
impeded the efficient trading of cleared swaps, either executed
bilaterally between a counterparty and an SD or executed on or pursuant
to the rules of a swap execution facility, and that other aspects of
the external business conduct standards make compliance with such rules
either impossible or impracticable in the context of swaps executed
pursuant to prime brokerage arrangements in place prior to the
implementation of the Commission's swap rules. As explained below in
the discussions of the Covered Staff Letters, the Commission has
observed that MPD's long-standing no-action positions set forth in the
Covered Staff Letters appear to have addressed many of the issues
raised by market participants and the Commission is not aware of any
adverse consequences of such MPD no-action positions. Therefore, the
Commission has preliminarily determined to propose that the external
business conduct standards and the swap trading relationship
documentation rule be amended to provide an outcome comparable to such

[[Page 47137]]

no-action positions, with certain modifications discussed below.
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\3\ ``Swap dealer'' is defined in section 1a(49) of the
Commodity Exchange Act (``CEA''), 7 U.S.C. 1a(49); and Sec. 1.3, 17
CFR 1.3. ``Major swap participant'' is defined in section 1a(33) of
the CEA, 7 U.S.C. 1a(33); and Sec. 1.3, 17 CFR 1.3. SDs and MSPs
are collectively referred to as ``Swap Entities'' throughout this
release.
\4\ 17 CFR part 23, subpart H.
\5\ 17 CFR 23.504.
\6\ The proposed amendments are also intended to supersede the
no-action positions of MPD (formerly, the Division of Swap Dealer
and Intermediary Oversight) contained in CFTC Staff Letters 12-58,
13-11, 13-12, 19-06, 23-01, and 25-09 (collectively, the ``Covered
Staff Letters''). To avoid confusion and simplify understanding,
this Proposal will refer to no-action positions issued by the
Division of Swap Dealer and Intermediary Oversight as no-action
positions issued by its successor division, MPD. See CFTC Staff
Letter 12-58 (Dec. 18, 2012), Re: Request for Relief Regarding
Obligation to Provide Pre-Trade Mid-Market Mark for Certain Credit
Default Swaps and Interest Rate Swaps (``CFTC Staff Letter 12-58'');
CFTC Staff Letter 13-11 (April 30, 2013), Re: Time Limited Relief
for Swap Dealers in Connection with Prime Brokerage Arrangements
(``CFTC Staff Letter 13-11''); CFTC Staff Letter 13-12 (May 1,
2013), Re: Relief for Swap Dealers and Major Swap Participants
Regarding the Obligation to Provide Certain Disclosures for Certain
Transactions Under Regulation 23.431 (``CFTC Staff Letter 13-12'');
CFTC Staff Letter 19-06 (March 22, 2019), Re: No-Action Position for
Off-SEF Swaps Executed Pursuant to Prime Brokerage Arrangements
(``CFTC Staff Letter 19-06''); CFTC Staff Letter 23-01 (Feb. 1,
2023), Re: Revised No-Action Positions for Swaps Intended to be
Cleared (``CFTC Staff Letter 23-01''); and CFTC Staff Letter 25-09
(Apr. 4, 2025), Re: No-Action Position for Swap Dealers and Major
Swap Participants Regarding the Obligation to Provide a Pre-Trade
Mid-Market Mark under 17 CFR 23.431(a)(3)(i) (``CFTC Staff Letter
25-09''). CFTC Staff Letters 13-12 and 23-01 are revisions to
previous CFTC Staff Letters, as described in the relevant Covered
Staff Letters. CFTC Staff Letters are available on the Commission's
website at <a href="https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm">https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm</a>.
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Together, the Covered Staff Letters provided no-action positions
regarding compliance with certain external business conduct standards
(including certain required pre-trade disclosures) and documentation
requirements applicable to Swap Entities in the context of: (1) swaps
executed pursuant to prime broker arrangements between SDs acting as
prime brokers and their customers; and (2) swaps executed by Swap
Entities with counterparties where the parties to the swap intend the
swap to be cleared contemporaneously with execution of such swap. The
Commission expects that, upon the adoption of a final rule enacting
this Proposal, MPD will withdraw some or all of the Covered Staff
Letters as necessary to reflect the Commission's final rule.\7\
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\7\ The Commission notes that it is also changing
inconsistencies found with respect to capitalization used throughout
the regulatory text.
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A. Applicable Regulatory Requirements

Section 4s(h) of the CEA \8\ provides the Commission with both
mandatory and discretionary rulemaking authority to impose business
conduct standards on Swap Entities in their dealings with
counterparties, including Special Entities.\9\ Pursuant to this
rulemaking authority, the Commission adopted rules in subpart H of part
23 of its regulations, which set forth business conduct standards for
Swap Entities in their dealings with counterparties (the ``External
Business Conduct Standards'').\10\
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\8\ 7 U.S.C. 6s(h).
\9\ ``Special Entity'' is defined in Sec. 23.401(c), 17 CFR
23.401(c).
\10\ See generally Business Conduct Standards for Swap Dealers
and Major Swap Participants with Counterparties, 77 FR 9734 (Feb.
17, 2012) (``Final EBCS Rulemaking'').
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The External Business Conduct Standards include certain pre-trade
disclosures required to be made by Swap Entities to their
counterparties that are not Swap Entities, security-based swap dealers,
or security-based major swap participants, including a requirement
under Sec. 23.431(a)(3)(i) to disclose the price of the swap and the
so-called ``pre-trade mid-market mark'' (the ``PTMMM''; and such
disclosure requirement, the ``PTMMM Requirement'').\11\ The PTMMM was
intended to be the mid-market mark of the swap, not including any
amount added by the Swap Entity for profit, credit reserve, hedging,
funding, liquidity, or any other costs or adjustments.\12\
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\11\ 17 CFR 23.431(a)(3)(i).
\12\ Sec. 23.431(d)(2), 17 CFR 23.431(d)(2). See Final EBCS
Rulemaking at 77 FR 9766 (where the Commission noted that ``the
spread between the quote and mid-market mark is relevant to
disclosures regarding material incentives; and provides the
counterparty with pricing information that facilitates negotiations
and balances historical information asymmetry regarding swap
prices.'').
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The External Business Conduct Standards also include a requirement
under Sec. 23.431(b) that an SD must provide counterparties that are
not Swap Entities, security-based swap dealers, or security-based major
swap participants with notice that the counterparty may request and
consult on the design of a scenario analysis to allow the counterparty
to assess its potential exposure in connection with a swap (the
``Scenario Analysis Requirement'').\13\ The scenario analysis, if
requested, was required to (1) be completed over a range of
assumptions, including severe downside stress scenarios that would
result in significant loss; (2) disclose all non-proprietary material
assumptions and calculation methodologies; and (3) consider any
relevant analysis that an SD undertakes for its own risk management
purposes.\14\
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\13\ 17 CFR 23.431(b).
\14\ Sec. Sec. 23.431(b)(2)-(4), 17 CFR 23.431(b)(2)-(4).
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Section 4s(i) of the CEA requires the Commission to adopt rules
governing swap documentation for Swap Entities.\15\ Pursuant to this
rulemaking authority, the Commission adopted rules in subpart I of part
23 of its regulations.\16\ These include Sec. 23.504, which mandates
that Swap Entities enter into swap trading relationship documentation
(``STRD'') meeting the requirements of the rule with counterparties
prior to execution of a swap (the ``STRD Requirement'').\17\
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\15\ 7 U.S.C. 6s(i).
\16\ See 17 CFR part 23, subpart I.
\17\ 17 CFR 23.504. See generally Confirmation, Portfolio
Reconciliation, Portfolio Compression, and Swap Trading Relationship
Documentation Requirements for Swap Dealers and Major Swap
Participants, 77 FR 55904 (Sep. 11, 2012).
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B. Staff No-Action Positions

1. Intended To Be Cleared Swaps
In 2013, MPD issued CFTC Staff Letter 13-70 \18\ following a
request to provide a no-action position with respect to compliance with
certain External Business Conduct Standards and the STRD Requirement in
the context of swaps executed by SDs with counterparties where the
parties to the swap intend to clear the swap contemporaneously with
execution (such swaps are herein referred to as ``Intended To Be
Cleared Swaps'' or ``ITBC Swaps''). Market participants argued that the
External Business Conduct Standards and the STRD Requirement
significantly hindered the efficient execution and processing of swaps
that were intended to be cleared (i.e., so-called ``straight-through-
processing'') and that compliance with such regulatory requirements was
unnecessary to achieve the Commission's regulatory goals. In support of
this view, market participants generally argued that: (1) because swaps
of a type accepted for clearing by a derivatives clearing organization
(``DCO'') \19\ are sufficiently standardized, (especially if also
executed on a designated contract market (``DCM'') \20\ or swap
execution facility (``SEF'')) \21\ and information about the risks and
characteristics of such swaps is available from the DCO (or the DCM or
SEF if executed there), the benefits of compliance by an SD with the
disclosure and suitability requirements of the External Business
Conduct Standards are to a large extent moot; and (2) because swaps,
once cleared, are between the DCO and the market participant (not
between the SD and its counterparty), there is no ongoing trading
relationship between the SD and its counterparty and thus there is no
need for the SD to comply with the on-boarding requirements of the
External Business Conduct Standards or the STRD Requirement.\22\
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\18\ CFTC Staff Letter 13-70 (Nov. 15, 2013), Re: No-Action
Relief: Swaps Intended to be Cleared (``CFTC Staff Letter 13-70'').
\19\ ``Derivatives clearing organization'' is defined in section
1a(15) of the CEA, 7 U.S.C. 1a(15); and Sec. 1.3, 17 CFR 1.3.
\20\ ``Designated contract market'' is defined with ``contract
market'' in Sec. 1.3, 17 CFR 1.3.
\21\ ``Swap execution facility'' is defined in section 1a(50) of
the CEA, 7 U.S.C. 1a(50); and Sec. 1.3, 17 CFR 1.3.
\22\ Such compliance issues were not wholly unanticipated. See
CFTC Staff Letter 13-70 at 4; see also Further Definition of ``Swap
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant,'' 77 FR 30596, 30610 n. 201 (May
23, 2012) (where the Commission stated ``[b]y contrast, it may be
appropriate, over time, to tailor the specific requirements imposed
on swap dealers depending on the facility on which the swap dealer
executes swaps. For example, the application of certain business
conduct requirements may vary depending on how the swap is executed,
and it may be appropriate, as the swap markets evolve, to consider
adjusting certain of those requirements for swaps that are executed
on an exchange or through particular modes of execution.'').
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In addition, in 2022, MPD recognized that the Commission had
exempted a number of non-U.S. central clearing counterparties from
registration as a DCO and a number of non-U.S. trading facilities from
registration as a SEF. Specifically, section 5b(h) of the CEA

[[Page 47138]]

authorizes the Commission to exempt, conditionally or unconditionally,
a DCO from registration, if the Commission finds that the DCO is
``subject to comparable, comprehensive supervision and regulation by .
. . the appropriate government authorities in the home country of the
organization.'' \23\ As of the date of this Proposal, the Commission
has issued exemptions from registration to four derivatives clearing
organizations: ASX Clear (Futures) Pty Limited (``ASX''); \24\ Japan
Securities Clearing Corporation (``JSCC''); \25\ Korea Exchange, Inc.
(``KRX''); \26\ and OTC Clearing Hong Kong Limited (``OTC Clear'').\27\
Any DCO that, as of any date of determination, is exempt from
registration as a DCO under section 5b of the CEA,\28\ including,
without limitation, ASX, JSCC, KRX, and OTC Clear, is an ``Exempt DCO''
on such date for purposes of this Proposal.
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\23\ 7 U.S.C. 7a-1(h).
\24\ On August 18, 2015, the Commission issued an Order of
Exemption with respect to ASX, which exempts ASX from registering
with the Commission as a DCO, subject to certain terms and
conditions in the order, available at <a href="https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations">https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations</a>.
\25\ On October 26, 2015, the Commission issued an Order of
Exemption with respect to JSCC, which exempts JSCC from registering
with the Commission as a DCO, subject to certain terms and
conditions in the order, available at <a href="https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations">https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations</a>. The Commission issued an
amended exemptive order on May 15, 2017, which expanded the scope of
products that JSCC is permitted to clear as an Exempt DCO, subject
to several conditions set forth in the order, available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf</a>. The Commission
issued a further amended exemptive order on Sept. 12, 2025, which
permitted JSCC to clear interest rate swaps denominated in Japanese
yen for clearing members of JSCC on behalf of U.S. persons,
available at <a href="https://www.cftc.gov/media/12671/JSCC%20AmendedExemptionOrder_09-12-2025/download">https://www.cftc.gov/media/12671/JSCC%20AmendedExemptionOrder_09-12-2025/download</a>. MPD and the
Commission's Division of Clearing and Risk recently published CFTC
Staff Letter 25-32 (Sept. 12, 2025) which provided JSCC and its
clearing members with a no-action position for clearing certain yen-
denominated interest rate swaps for U.S. persons, subject to certain
terms and conditions set forth in the letter.
\26\ On October 26, 2015, the Commission issued an Order of
Exemption with respect to KRX, which exempts KRX from registering
with the Commission as a DCO, subject to certain terms and
conditions in the order, available at <a href="https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations">https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations</a>.
\27\ On December 21, 2015, the Commission issued an Order of
Exemption with respect to OTC Clear, which exempts OTC Clear from
registering with the Commission as a DCO, subject to certain terms
and conditions in the order, available at <a href="https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations">https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations</a>.
\28\ 7 U.S.C. 7a-1.
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Similarly, section 5h(g) of the CEA authorizes the Commission to
exempt, conditionally or unconditionally, a SEF from registration, if
the Commission finds that the facility is ``subject to comparable,
comprehensive supervision and regulation on a consolidated basis by . .
. the appropriate governmental authorities in the home country of the
facility.'' \29\ As of the date of this Proposal, the Commission has
issued exemptions from SEF registration to facilities for the trading
or processing of swaps from the European Union,\30\ Singapore,\31\ and
Japan.\32\ Any facilities for the trading or processing of swaps that,
as of any date of determination, are exempt from registration as a SEF
under section 5h(g) of the CEA,\33\ including, without limitation, any
Exempt EU Trading Venue, Exempt SG Trading Venue, or Exempt Japan
Trading Venue is an ``Exempt SEF'' on such date for purposes of this
Proposal.
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\29\ 7 U.S.C. 7b-3(g).
\30\ On December 8, 2017, the Commission issued an Order of
Exemption with respect to multilateral trading facilities (``MTFs'')
and organised trading facilities (``OTFs'') authorized in the
European Union (``EU'') (the ``EU Exemptive Order''). See EU
Exemptive Order, as most recently amended by the Third Amendment to
Appendix A to Order of Exemption (October 26, 2022), available at
<a href="https://www.cftc.gov/media/7896/EuropeanUnionThirdAmendmentAppendixA_CEASection5hgOrder/download">https://www.cftc.gov/media/7896/EuropeanUnionThirdAmendmentAppendixA_CEASection5hgOrder/download</a>.
The EU Exemptive Order exempts each of the MTFs and OTFs listed in
Appendix A thereto, as such Appendix A may be amended by the
Commission from time to time (the ``Exempt EU Trading Venues''),
from registration with the Commission as a SEF. In response to the
withdrawal of the United Kingdom (``UK'') from the EU, commonly
referred to as ``Brexit,'' CFTC staff from the Division of Market
Oversight (``DMO'') issued a no-action position addressing certain
UK MTFs and OTFs that had previously benefitted from the EU
Exemptive Order. Under this no-action position, specified UK MTFs
and OTFs may operate on much the same basis as an Exempt EU Trading
Venue, subject to the terms of the letter, without DMO recommending
that the Commission take an enforcement action against them for
failure to register with the CFTC as a SEF. See, most recently, CFTC
Staff Letter No. 24-11 (Aug. 28, 2024), available at <a href="https://www.cftc.gov/csl/24-11/download">https://www.cftc.gov/csl/24-11/download</a>.
\31\ On March 13, 2019, the Commission issued an Order of
Exemption with respect to approved exchanges (``AEs'') and
recognized market operators (``RMOs'') authorized in Singapore (the
``SG Exemptive Order,'' available at <a href="https://www.cftc.gov/sites/default/files/2019-03/SingaporeCEASection5hgOrder.pdf">https://www.cftc.gov/sites/default/files/2019-03/SingaporeCEASection5hgOrder.pdf</a>), as most
recently amended by the ``Third Amendment to Appendix A to Order of
Exemption,'' dated July 31, 2024 (available at <a href="https://www.cftc.gov/media/11046/SingaporeThirdAmendmentAppendixA_CEASection5hgOrder/download">https://www.cftc.gov/media/11046/SingaporeThirdAmendmentAppendixA_CEASection5hgOrder/download</a>). The SG Exemptive Order exempts each of the AEs and RMOs
listed in Appendix A thereto, as such Appendix A may be amended by
the Commission from time to time (the ``Exempt SG Trading Venues''),
from registration with the Commission as a SEF.
\32\ On July 11, 2019, the Commission issued an Order of
Exemption with respect to electronic trading platforms (``ETPs'')
registered in Japan (the ``Japan Exemptive Order'') and, together
with the EU Exemptive Order and the SG Exemptive Order, the ``SEF
Exemptive Orders,'' available at <a href="https://www.cftc.gov/media/2216/JapaneseCEASection5hgOrder/download">https://www.cftc.gov/media/2216/JapaneseCEASection5hgOrder/download</a>. The Japan Exemptive Order
exempts each ETP listed in Appendix A thereto, as such Appendix A
may be amended by the Commission from time to time (the ``Exempt
Japan Trading Venues''), from registration with the Commission as a
SEF.
\33\ 7 U.S.C. 7b-3(g).
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Because Swap Entities that are otherwise subject to the
Commission's External Business Conduct Standards and documentation
requirements are free to execute swaps on Exempt SEFs and clear swaps
on Exempt DCOs pursuant to, and subject to the conditions of, the
foregoing Commission actions, MPD recognized that execution by Swap
Entities of ITBC Swaps on an Exempt SEF and/or clearing of such ITBC
Swaps on an Exempt DCO should be treated the same as swaps executed on
DCMs or SEFs and/or cleared on DCOs. Consequently, MPD issued CFTC
Staff Letter 23-01, which superseded CFTC Staff Letter 13-70 in its
entirety.\34\ CFTC Staff Letter 23-01 provided a revised MPD no-action
position which incorporates, expands on, and refines the MPD no-action
position presented in CFTC Staff Letter 13-70 with regard to compliance
with certain External Business Conduct Standards by Swap Entities and
clarifies the no-action position regarding documentation requirements
under the STRD Requirement.\35\
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\34\ CFTC Staff Letter 23-01 at 1.
\35\ See id. at 7-10.
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The Commission has preliminarily determined that the
standardization that occurs when a type of swap is made available to
trade on a SEF \36\ or Exempt SEF and/or accepted for clearing on a DCO
\37\ or Exempt DCO generally entails a material increase in the amount
of information that is available about that type of swap. Prices, daily
marks, and volume information become available and therefore market
participants are able to research and track how such swaps respond to
changing market conditions, providing insight into the risks and
characteristics of a particular type of swap for non-swap entity
counterparties to evaluate independently. The standardization may also
allow parties to transact in smaller or larger notional amounts to suit
their needs than may be available for an uncleared swap and to more
easily find willing counterparties if they need to increase, decrease,
or exit a certain position. Due to the standardization and concomitant

[[Page 47139]]

increase in the information available and additional trade management
flexibility, the Commission has preliminarily determined that the
public policy goals of the disclosure and suitability requirements of
the External Business Conduct Standards have been met by other means,
and thus compliance by a Swap Entity with the disclosure and
suitability requirements are unnecessary for ITBC Swaps. Further, the
Commission has preliminarily determined that compliance with such
requirements may represent a significant hinderance to the efficient
trading of cleared swaps.
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\36\ See, e.g., 17 CFR 40.2(a)(3), which requires a SEF seeking
to list a new product to provide an explanation and analysis of the
new product and the product's terms and conditions.
\37\ See, e.g., 17 CFR 39.5(b), which requires a DCO seeking to
clear a new type of swap to provide information on the outstanding
notional exposures, trading liquidity, and adequate pricing data, as
well as product specifications, legal documentation, contract terms,
and standard practices for managing life cycle events.
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The Commission has also preliminarily determined that because
swaps, once cleared, are between the DCO and the market participant
(not between the Swap Entity and its counterparty) and there is no
ongoing trading relationship between the Swap Entity and its
counterparty, compliance by a Swap Entity with the on-boarding
requirements of the External Business Conduct Standards or the STRD
Requirement represents a significant hinderance to the efficient
trading of cleared swaps.
2. Prime Broker Arrangements
In 2013, MPD recognized that execution of swaps pursuant to long-
standing conditions present in swap prime broker arrangements prevalent
in the swap market made compliance with certain requirements under the
External Business Conduct Standards by SDs operating as prime brokers
(``PBs'') impossible due to the structure and information flows of
these arrangements.\38\
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\38\ Such compliance difficulties were not wholly unanticipated.
See Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' 77 FR 30596,
30610 n. 201 (May 23, 2012) (where the Commission stated ``[b]y
contrast, it may be appropriate, over time, to tailor the specific
requirements imposed on swap dealers depending on the facility on
which the swap dealer executes swaps. For example, the application
of certain business conduct requirements may vary depending on how
the swap is executed, and it may be appropriate, as the swap markets
evolve, to consider adjusting certain of those requirements for
swaps that are executed on an exchange or through particular modes
of execution.'').
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PBs engaging in these swaps provide credit intermediation for their
PB customers while permitting such customers to solicit prices from a
wide variety of swap market participants. The PB customer agrees on a
price and other critical terms of a swap with a potential swap
counterparty, but the swap is actually executed at that price and on
those terms between the PB and the counterparty chosen by the PB's
customer (the ``trigger swap''). The PB, in turn, then enters into a
matching swap with its customer (the ``mirror swap''). Thus, the
customer has the advantage of seeking favorable prices while
maintaining a credit relationship with only its PB, simplifying its
operations and benefiting from collateral netting. The PB enters into
two equal but opposite swaps and thus all but eliminates its market
risk and has only credit risk to its customer and the trigger swap
counterparty (i.e., credit intermediation).
However, because the PB arrangement permits the PB customer to seek
prices from various counterparties, the PB cannot know the price or the
exact terms of the swap before the PB is obligated to execute both the
trigger swap and the mirror swap. This lack of information may prevent
a PB that is an SD from complying with certain pre-trade regulatory
obligations under the External Business Conduct Standards, most notably
the pre-trade disclosure of the price and a PTMMM of the swaps as
required by Sec. 23.431(a)(3).\39\
---------------------------------------------------------------------------

\39\ 17 CFR 23.431(a)(3).
---------------------------------------------------------------------------

Recognizing these structural and informational hurdles to
compliance with the External Business Conduct Standards, MPD issued a
no-action position in CFTC Staff Letter 13-11 with respect to
enumerated External Business Conduct Standards as they relate to
certain covered transactions \40\ executed under PB arrangements where
the PB and trigger swap counterparty were each SDs registered with the
Commission.\41\ Specifically, MPD stated that it would not recommend an
enforcement action against such SDs if the PB allocated its
responsibilities under the relevant External Business Conduct Standards
to the SD that is the trigger swap counterparty, subject to certain
other conditions provided in CFTC Staff Letter 13-11.\42\
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\40\ Pursuant to section 1a(47)(E) of the CEA, the U.S.
Secretary of the Treasury (``Secretary'') was vested with the
authority to determine whether foreign exchange swaps and foreign
exchange forwards should be regulated as swaps under the CEA,
provided that the Secretary made a written determination satisfying
certain criteria specified in section 1b of the CEA. See 7 U.S.C.
1a(47)(E) (citing 7 U.S.C. 1b). On November 16, 2012, the Secretary
issued a written determination that foreign exchange swaps and
forwards should not be regulated as swaps as defined under the CEA.
See U.S. Treasury Determination of Foreign Exchange Swaps and
Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR
69694 (Nov. 20, 2012) (``Treasury Determination''). The term
``covered transaction'' means a swap, as defined in section 1(a)(47)
of the CEA and Sec. 1.3, other than swaps subject to the clearing
requirement of section 2(h)(1)(A) of the CEA and part 50 of the
Commission's regulations, and physically-settled foreign exchange
forwards and swap agreements that have been exempted from the
definition of swap under the Treasury Determination. See CFTC Staff
Letter 13-11 and Treasury Determination.
\41\ See CFTC Staff Letter 13-11.
\42\ Id. at 6-10.
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In addition, MPD recognized that many trigger swap counterparties
transacting in the market for foreign exchange swaps and forwards that
were exempted from the swap definition pursuant to the Treasury
Determination (``Exempt FX Transactions'') \43\ were not SDs. Although
such transactions are exempted from the swap definition, SDs executing
Exempt FX Transactions remain obligated to comply with the External
Business Conduct Standards.\44\ However, where the trigger swap
counterparty is not an SD, such counterparty could not meet the
conditions of CFTC Staff Letter 13-11 regarding allocation of certain
External Business Conduct Standards between SDs. Thus, CFTC Staff
Letter 13-11 presented a more straightforward and limited no-action
position with respect to Exempt FX Transactions executed under a PB
arrangement where the PB is a registered SD and the trigger swap
counterparty is not registered with the Commission as an SD, providing
a no-action position only with respect to a failure to comply with the
disclosure requirements of Sec. Sec. 23.431(a)(3)(i) and
23.431(b).\45\
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\43\ In CFTC Staff Letter 13-11, ``Exempt FX Transactions'' are
defined as physically-settled foreign exchange forwards and swap
agreements that have been exempted from the definition of swap by
the U.S. Department of Treasury. Id. (citing Treasury
Determination).
\44\ Notwithstanding the Treasury Determination, section
1a(47)(E)(iv) of the CEA provides that ``any party to a foreign
exchange swap or forward that is a swap dealer or major swap
participant shall conform to the business conduct standards
contained in section 4s(h) [of the CEA].'' 7 U.S.C. 1a(47)(E)(iv).
Thus, Swap Entities are required to comply with the External
Business Conduct Standards with respect to Exempt FX Transactions.
\45\ See CFTC Staff Letter 13-11 at 10 (stating that no-action
position is only applicable with respect to a failure to comply with
the disclosure requirements of 17 CFR 23.431(a)(3)(i) and
23.431(b)).
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Finally, in 2019, MPD recognized that certain PB transactions
executed anonymously on SEFs raised additional structural and
informational hurdles to compliance with the disclosure requirements of
Sec. Sec. 23.431(a) and (b) \46\ in the context of PB arrangements.
Commission regulation 23.431(c) provides that Sec. Sec. 23.431(a) and
(b) do not apply to swaps executed by an SD on a SEF where the SD does
not know the identity of its counterparty prior to execution.\47\ In
the PB context, this exception from the disclosure requirements of
Sec. Sec. 23.431(a) and (b) would apply to the trigger swap between
the SD acting as a PB (a ``PB/

[[Page 47140]]

SD'') and the trigger swap counterparty that is executed anonymously on
a SEF, but the mirror swap between the PB/SD and its PB customer would
not be executed anonymously or on a SEF, and thus would not qualify for
the exemption. However, the price of the mirror swap is determined
based on the price at which the trigger swap is executed on the SEF,
and therefore, it would be impossible for the PB/SD to provide the
disclosures required by Sec. Sec. 23.431(a) and (b) to its PB customer
prior to being obligated to enter into the mirror swap. Recognizing
this structural obstacle to compliance with Sec. Sec. 23.431(a) and
(b), MPD provided a no-action position in CFTC Staff Letter 19-06
stating that it would not recommend an enforcement action against a PB/
SD for failure to make the disclosures required by Sec. Sec. 23.431(a)
and (b) to its customer in relation to the mirror swap where the
trigger swap is executed anonymously on a SEF.\48\
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\46\ 17 CFR 23.431(a) and (b).
\47\ Sec. 23.431(c), 17 CFR 23.431(c).
\48\ CFTC Staff Letter 19-06 at 3.
---------------------------------------------------------------------------

The Commission has preliminarily determined that PB arrangements
common in the swaps and Exempt FX Transaction markets prior to
promulgation of the External Business Conduct Standards present
significant structural and informational hurdles to compliance with the
disclosure requirements of Sec. Sec. 23.431(a) and (b).\49\ The
Commission has also observed that the long-standing MPD no-action
position set forth in CFTC Staff Letter 13-11 (as extended to off-SEF
swaps in CFTC Staff Letter 19-06) appears to have sufficiently
addressed these significant structural and informational hurdles to
compliance with the disclosure requirements of Sec. Sec. 23.431(a) and
(b),\50\ and, to the Commission's knowledge, has not resulted in any
adverse consequences. Thus, the Commission is proposing to amend its
regulations to provide an outcome comparable to such no-action
position, as discussed below.
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\49\ 17 CFR 23.431(a) and (b).
\50\ 17 CFR 23.431(a) and (b).
---------------------------------------------------------------------------

3. Pre-Trade Mid-Market Mark No-Action Positions
In 2013, MPD provided a no-action position in CFTC Staff Letter 13-
12 (which was a revision of CFTC Staff Letter 12-42) \51\ stating that
it would not recommend enforcement action against a Swap Entity for its
failure to disclose an otherwise required PTMMM to a counterparty so
long as the transaction was a foreign exchange swap, foreign exchange
forward, or vanilla foreign exchange option of six-months or less that
is physically settled, where: (1) each currency is one of the ``BIS 31
Currencies'' (i.e., a specified, widely-traded currency); \52\ (2)
real-time tradeable bid and offer prices for the transaction are
available electronically to the counterparty; and (3) the counterparty
agrees in advance that the Swap Entity need not disclose the PTMMM.\53\
CFTC Staff Letter 13-12 also provided a no-action position regarding
the disclosure of a PTMMM for Exempt FX Transactions entered into by
Swap Entities anonymously on electronic trading facilities that are not
registered with the Commission as SEFs or DCMs, reasoning that because
Exempt FX Transactions are not swaps per the Treasury Determination,
such transactions need not be executed on SEFs or DCMs, but should be
treated the same as swaps executed on SEFs or DCMs.\54\ Swaps executed
anonymously on a SEF or DCM are excepted from the requirement to
disclose a PTMMM pursuant to Sec. 23.431(c).\55\
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\51\ See CFTC Staff Letter 12-42 (Dec. 6, 2022), Re: Request for
Relief Regarding Obligation to Provide Pre-Trade Mid-Market Mark for
Certain Foreign Exchange Transactions.
\52\ Specifically, CFTC Staff Letter 13-12 defined the ``BIS 31
Currencies'' to be the U.S. dollar, Euro, Japanese yen, Pound
sterling, Australian dollar, Swiss franc, Canadian dollar, Hong Kong
dollar, Swedish krona, New Zealand dollar, Korean won, Singapore
dollar, Norwegian krona, Mexican peso, Indian rupee, Russian rouble,
Chinese renminbi, Polish zloty, Turkish lira, South African rand,
Brazilian real, Danish krone, New Taiwan dollar, Hungarian forint,
Malaysian ringgit, Thai baht, Czech koruna, Philippine peso, Chilean
peso, Indonesian rupiah, and Israeli new shekel. Id. at 5, n. 16.
\53\ Id. at 6.
\54\ Id. at 6-7.
\55\ 17 CFR 23.431(c).
---------------------------------------------------------------------------

MPD provided a substantially similar no-action position in CFTC
Staff Letter 12-58, stating that it would not recommend enforcement
action against a Swap Entity for failure to disclose a PTMMM for
certain widely-traded interest rate swap or index credit default
swaps,\56\ provided that real-time tradeable bid and offer prices for
the relevant swap are available electronically to the counterparty on a
DCM or SEF, and the counterparty agrees in advance that the Swap Entity
need not disclose the PTMMM.\57\
---------------------------------------------------------------------------

\56\ Specifically, CFTC Staff Letter 12-58 covered: (1)
untranched credit default swaps referencing the on-the-run and most
recent off-the run series of the following indices: CDX.NA.IG 5Y,
CDX.NA.HY 5Y, iTraxx Europe 5Y and iTraxx Europe Crossover 5yr; and
(2) interest rate swaps (A) in the ``fixed-for-floating swap class''
(as such term is used in Sec. 50.4(a), 17 CFR 50.4(a)) denominated
in USD or EUR, (B) for which the remaining term to the scheduled
termination date is no more than 30 years, and (C) that have the
specifications set out in Sec. 50.4, 17 CFR 50.4. Id. at 1.
\57\ CFTC Staff Letter 12-58 at 4.
---------------------------------------------------------------------------

Finally, MPD provided a no-action position in CFTC Staff Letter 25-
09, stating that it would not recommend that the Commission commence an
enforcement action against a Swap Entity for failure to satisfy the
PTMMM Requirement for its non-Swap Entity counterparties. MPD issued
CFTC Staff Letter 25-09 in response to a request from certain trade
associations representing a wide breadth of swap market participants
who argued that: (1) the PTMMM Requirement does not provide any
significant informational value to a Swap Entity's counterparties; (2)
the PTMMM Requirement imposes significant operational burdens on Swap
Entities and, at worst, impedes the prompt execution of swaps
transactions; and (3) the elimination of the PTMMM Requirement would
further harmonize the Commission's regulations with those of the United
States (``U.S.'') Securities and Exchange Commission (``SEC'')
applicable to security-based swap dealers and major security-based swap
participants, which do not require disclosure of a PTMMM in relation to
security-based swaps. The no-action position in CFTC Staff Letter 25-09
will remain in effect until the adoption by the Commission of a
regulation addressing the PTMMM Requirement, such as this Proposal.
As discussed below, the Commission has preliminarily determined
that the PTMMM Requirement provides no useful information to
counterparties and delays efficient execution; and is, thus, proposing
to eliminate the PTMMM Requirement in its entirety. The Commission
notes that its repeal of the PTMMM Requirement in a final rule would
render the MPD no-action positions in CFTC Staff Letters 12-58, 13-12,
and 25-09 moot; and it would therefore expect that MPD would withdraw
such positions in due course.

II. Proposed Amendments

The Commission is proposing certain amendments to the External
Business Conduct Standards and the STRD Requirement, as described in
this Section, that would provide exceptions to compliance with such
requirements when executing swaps that are: (1) intended by the parties
to be cleared contemporaneously with execution; or (2) subject to prime
broker arrangements that meet certain qualifying conditions. The
proposed amendments would also make certain other changes discussed
herein, including eliminating the PTMMM Requirement. In addition, as a
simplifying amendment as discussed above, the Commission is proposing
to replace each reference in the External Business Conduct Standards to
``swap dealer and major swap participant'' with a reference to ``swap
entity,'' as defined

[[Page 47141]]

in Sec. 23.401 \58\ to mean ``a swap dealer or major swap
participant.''
---------------------------------------------------------------------------

\58\ 17 CFR 23.401.
---------------------------------------------------------------------------

The Commission requests comment on all aspects of the proposed
amendments described below and has inserted more specific questions and
requests for comment in numerical order in the discussion below. The
Commission requests that commenters refer to the specific question
number or request for comment in any response, if applicable.

A. Proposed Elimination of the Pre-Trade Mid-Market Mark Disclosure
Requirement

The Commission is requesting comment on a proposal that the Swap
Entity PTMMM Requirement set forth in Sec. 23.431(a)(3)(i) \59\ be
eliminated in its entirety. This would be accomplished by deleting
paragraphs (i) and (ii) of Sec. 23.431(a)(3) and moving the price
disclosure requirement currently in such paragraph (i) and the
compensation disclosure requirement currently in such paragraph (ii)
into paragraphs (2) and (3) of Sec. 23.431(a), respectively, as
reflected in the proposed rule text infra.
---------------------------------------------------------------------------

\59\ 17 CFR 23.431(a)(3)(i).
---------------------------------------------------------------------------

The Commission has several reasons for making this proposal based
on its experience since 2013 when Swap Entity compliance with the
External Business Conduct Standards was first required.
Although the Commission believed that the PTMMM Requirement would
provide counterparties with ``pricing information that facilitates
negotiations and balances historical information asymmetry regarding
swap pricing,'' \60\ several commenters, in responding to a request for
comments and recommendations under the Commission's ``Project KISS'' in
2017,\61\ stated that the Commission should eliminate or revise the
PTMMM Requirement, arguing that, among other things, the requirement:
(1) creates unnecessary burdens and costs; (2) is of minimal to no
utility to counterparties; (3) hampers trading flow by delaying
execution; (4) creates confusion; and (5) is unnecessary for
counterparties because such counterparties must be eligible contract
participants (``ECPs,'') \62\ which are deemed sufficiently
sophisticated to enter into over-the-counter swaps.\63\ The Commission
preliminarily believes that the PTMMM Requirement provides no utility
to counterparties and may delay execution to the disadvantage of
counterparties. Accordingly, elimination of the PTMMM Requirement would
support the Commission's goal of increasing the efficiency of the swaps
market. The Commission requests comment on this aspect of the Proposal
as noted below.
---------------------------------------------------------------------------

\60\ Final EBCS Rulemaking at 77 FR 9766.
\61\ See generally Project KISS, 82 FR 23765 (May 24, 2017).
\62\ ``Eligible contract participant'' is defined in section
1a(18) of the CEA, 7 U.S.C. 1a(18).
\63\ See Project KISS comments of the Securities Industry and
Financial Markets Association, the Financial Services Roundtable,
the Foreign Exchange Professionals Association, and State Street
Corporation, available at <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1809">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1809</a>.
---------------------------------------------------------------------------

The Commission also preliminarily believes that the no-action
positions provided by MPD in the Covered Staff Letters show that the
PTMMM Requirement has been unworkable in a wide variety of contexts in
which uncleared swaps are executed between Swap Entities and their non-
Swap Entity counterparties. This includes swaps executed pursuant to PB
arrangements where a PB that is an SD does not know the price of a swap
until after it is obligated to enter into the swap. It also includes,
as discussed above, ITBC Swaps where the Swap Entities do not know the
identity of their counterparty prior to execution, and widely-traded,
highly-liquid swaps where the disclosure of a PTMMM is redundant
because bid/offer prices are readily available to potential
counterparties from trading and price information platforms.\64\
Additionally, MPD has provided a no-action position regarding the
disclosure of PTMMMs in the context of the LIBOR transition (swaps
needing amendment to switch reference rates away from LIBOR) where the
PTMMM Requirement applies, but is not relevant to the subject matter of
the swap amendment.\65\
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\64\ See CFTC Staff Letters 12-58 and 13-12.
\65\ See CFTC Staff Letter 20-23 (Aug. 31, 2020), Re: Revised
No-Action Positions to Facilitate an Orderly Transition of Swaps
from Inter-Bank Offered Rates to Alternative Benchmarks, available
at <a href="https://www.cftc.gov/csl/20-23/download">https://www.cftc.gov/csl/20-23/download</a>.
---------------------------------------------------------------------------

In addition to the foregoing, the Commission notes that the PTMMM
Requirement, unlike the uncleared swap daily mark disclosure
requirement promulgated in Sec. 23.431(d)(2),\66\ was not required by
the amendments to the CEA contained in the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\67\ Thus,
elimination of the PTMMM disclosure requirement would not contradict
any counterparty protection otherwise required by the Dodd-Frank Act.
Further, the Commission also notes that the SEC does not require
security-based swap dealers or security-based major swap participants
to provide a PTMMM when entering into security-based swaps; \68\ thus,
elimination of the PTMMM disclosure requirement would serve to
harmonize the Commission's rules governing swap dealing with those of
the SEC.
---------------------------------------------------------------------------

\66\ 17 CFR 23.431(d)(2).
\67\ See section 4s(h)(3)(B)(iii)(II) of the CEA, 7 U.S.C.
6s(h)(3)(B)(iii)(II). See Section II.C, infra, for a discussion of
proposed amendments to the daily mark disclosure requirement in
Sec. 23.431(d)(2), 17 CFR 23.431(d)(2).
\68\ See Sec. 240.15Fh-3(b), 17 CFR 240.15Fh-3(b); see also
SEC, Business Conduct Standards for Security-Based Swap Dealers and
Major Security-Based Swap Participants, 81 FR 29960, 30145 (May 13,
2016) (``SEC EBCS Final Rulemaking'').
---------------------------------------------------------------------------

Question 01: Should the Commission eliminate the PTMMM disclosure
requirement from Sec. 23.431(a)(3)? \69\ Why or why not?
---------------------------------------------------------------------------

\69\ 17 CFR 23.431(a)(3).
---------------------------------------------------------------------------

Question 02: If the commenter finds the PTMMM beneficial, please
describe in detail the benefits of receiving the PTMMM. Please describe
whether the PTMMM is beneficial for a particular type of swap and why
the PTMMM disclosure requirement should be retained for each type of
swap identified.

B. Proposed Elimination of the Scenario Analysis Requirement

The Commission is requesting comment on a proposal that the
Scenario Analysis Requirement set forth in Sec. 23.431(b) \70\ be
eliminated in its entirety. This would be accomplished by replacing
subparagraph (b) of Sec. 23.431 with ``[RESERVED],'' as reflected in
the proposed rule text infra.
---------------------------------------------------------------------------

\70\ 17 CFR 23.431(b).
---------------------------------------------------------------------------

The Commission is making this proposal to eliminate the Scenario
Analysis Requirement based on its experience since 2013, when Swap
Entity compliance with the External Business Conduct Standards was
first required. The Commission notes that the Scenario Analysis
Requirement was not required by the Dodd-Frank Act amendments to the
CEA.\71\ The Commission also notes that the SEC does not require
security-based swap dealers to provide a scenario analysis, by request
or otherwise, when entering into security-based swaps; thus,
elimination of the Scenario Analysis Requirement would serve to
harmonize the Commission's rules governing swap dealing with those of
the SEC.\72\ In addition to the foregoing, the Commission has several
reasons to propose elimination of the Scenario

[[Page 47142]]

Analysis Requirement based on its experience over the last decade.
---------------------------------------------------------------------------

\71\ See e.g., Final EBCS Rulemaking at 77 FR 9762 (where the
Commission discusses that the rule is discretionary and not
mandatory).
\72\ See Sec. 240.15Fh-3(b), 17 CFR 240.15Fh-3(b); see also SEC
EBCS Final Rulemaking at 81 FR 30145.
---------------------------------------------------------------------------

In adopting the Scenario Analysis Requirement in 2012, the
Commission stated that it believed the requirement would assist to
``materially enhance the ability of counterparties to assess the merits
of entering into any particular swap transaction and reduce information
asymmetries between swap dealers . . . and their counterparties.'' \73\
However, in responding to a request for comments and recommendations
under the Commission's ``Project KISS'' in 2017,\74\ several commenters
stated that the Commission should eliminate the Scenario Analysis
Requirement or restrict the availability of scenario analysis, arguing
that the current requirement provides little to no utility to
counterparties, goes beyond typical risk disclosures, and incorporates
extremely complex and subjective judgments about the probable or
possible future market states and their relevance to a particular
transaction.\75\ The Commission preliminarily believes that the
Scenario Analysis Requirement provides no utility to counterparties,
and the Commission should eliminate it in its entirety. The Commission
requests comment on this aspect of the Proposal as noted below.
---------------------------------------------------------------------------

\73\ Final EBCS Rulemaking at 77 FR 9743, n. 125.
\74\ See generally Project KISS at 82 FR 23765.
\75\ See Project KISS comments of the Securities Industry and
Financial Markets Association, State Street Corporation, and the
Foreign Exchange Professionals Association, available at <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1809">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1809</a>.
---------------------------------------------------------------------------

Question 03: Should the Commission eliminate the Scenario Analysis
Requirement from Sec. 23.431(b)? \76\ Why or why not?
---------------------------------------------------------------------------

\76\ 17 CFR 23.431(b).
---------------------------------------------------------------------------

Question 04: If the commenter finds the Scenario Analysis
Requirement helpful, please describe in detail the benefits of
requesting and receiving a scenario analysis. Please describe whether a
scenario analysis is beneficial for a particular type of swap and why
the Scenario Analysis Requirement should be retained for each type of
swap identified. Please also describe if there are any types of swaps
for which the Commission should mandate scenario analysis, even without
the prior request of the counterparty?
Question 05: Do counterparties to SDs find SDs willing and able to
provide scenario analysis upon request?
Question 06: Do counterparties feel pressured not to request a
scenario analysis as permitted by the Scenario Analysis Requirement? If
so, how is such pressure presented?

C. Proposed Amendment of the Daily Mark Disclosure Requirement

The Commission is proposing to amend the daily mark disclosure
requirement in Sec. 23.431(d)(2) \77\ to harmonize such requirement
with the Commission's uncleared swap margin rules and swap data
reporting rules.
---------------------------------------------------------------------------

\77\ 17 CFR 23.431(d)(2).
---------------------------------------------------------------------------

Section 4s(h)(3)(B) of the CEA required the Commission to adopt
disclosure requirements for Swap Entities, including a requirement that
a Swap Entity disclose a daily mark for uncleared swaps entered into
with non-Swap Entities, but did not define ``daily mark'' or describe
how it was to be calculated.\78\ Thus, the Commission issued Sec.
23.431(d)(2), which currently describes the daily mark as the ``mid-
market mark of the swap [not including] amounts for profit, credit
reserve, hedging, funding, liquidity, or any other costs or
adjustments.'' \79\ The STRD Requirement in Sec. 23.504 also requires
Swap Entities to agree in writing with counterparties that are also
Swap Entities or financial entities (as defined in Sec. 23.500(e))
\80\ regarding the process for determining the value of each swap at
any time from the execution to the termination, maturity, or expiration
of the swap.\81\
---------------------------------------------------------------------------

\78\ 7 U.S.C. 6s(h)(3)(B)(iii)(II).
\79\ 17 CFR 23.431(d)(2).
\80\ 17 CFR 23.500(e).
\81\ Sec. 23.504(b)(4)(i), 17 CFR 23.504(b)(4)(i).
---------------------------------------------------------------------------

However, although the swap data reporting rules in part 45 of the
Commission's regulations define ``valuation data'' by cross-referencing
Sec. 23.431,\82\ appendix 1 to part 45 defines ``valuation amount''
(one of several elements that make up ``valuation data'') to mean the
``[c]urrent value of the outstanding contract. Valuation amount is
expressed as the exit cost of the contract or components of the
contract, i.e., the price that would be received to sell the contract
(in the market in an orderly transaction at the valuation date).'' \83\
Commission regulation 45.4(c)(2)(i) requires current valuation data for
each outstanding swap to be reported to a swap data repository each
business day.\84\
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\82\ See Sec. 45.1, 17 CFR 45.1 (defining ``valuation data'' as
``the data elements necessary to report information about the daily
mark of the transaction, pursuant to section 4s(h)(3)(B)(iii) of the
Act, and to Sec. 23.431 of this chapter, if applicable, as
specified in appendix 1 to this part.'').
\83\ 17 CFR part 45, appendix 1.
\84\ Sec. 45.4(c)(2)(i), 17 CFR 45.4(c)(2)(i).
---------------------------------------------------------------------------

In contrast, the Commission's uncleared margin rules \85\ require
Swap Entities to calculate and to collect or post variation margin from
or to counterparties that are Swap Entities or financial entities each
business day.\86\ ``Variation margin'' is defined in Sec. 23.151 to
mean ``collateral provided by a party to its counterparty to meet the
performance of its obligation under one or more uncleared swaps between
the parties as a result of a change in value of such obligations since
the trade was executed or the last time such collateral was provided,''
\87\ whereas the ``variation margin amount'' is defined in Sec. 23.151
as ``the cumulative mark-to-market change in value to a covered swap
entity of an uncleared swap, as measured from the date it is entered
into (or in the case of an uncleared swap that has a positive or
negative value to a covered swap entity on the date it is entered into,
such positive or negative value plus any cumulative mark-to-market
change in value to the covered swap entity of an uncleared swap after
such date), less the value of all variation margin previously
collected, plus the value of all variation margin previously posted
with respect to such uncleared swap.'' \88\ Swap Entities are required
to calculate the variation margin amount each business day pursuant to
Sec. 23.155 using methods, procedures, rules, and inputs that, to the
maximum extent practicable, rely on recently-executed transactions,
valuations provided by independent third parties, or other objective
criteria.\89\ Such methods are required to be documented in margin
documentation required by Sec. 23.158.\90\
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\85\ Sec. Sec. 23.150-23.161, 17 CFR 23.150 through 23.161.
\86\ See Sec. 23.155, 17 CFR 23.155 (calculation of variation
margin); and Sec. 23.153, 17 CFR 23.153 (collection and posting of
variation margin).
\87\ See 17 CFR 23.151 (providing definitions applicable to
margin requirements).
\88\ Id.
\89\ 17 CFR 23.155.
\90\ See Sec. 23.158(b)(1), 17 CFR 23.158(b)(1) (stating
``[t]he margin documentation shall specify the methods, procedures,
rules, inputs, and data sources to be used for determining the value
of uncleared swaps for purposes of calculating variation margin.'').
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Thus, based on the foregoing, on any business day, a Swap Entity
may be required to calculate the valuation of a swap for three
different purposes using three similar but not identical criteria for
purposes of: (1) providing the daily mark of the swap to its
counterparty under Sec. 23.431(d)(2); (2) reporting valuation data for
the swap to a swap data repository under Sec. 45.4(c)(2); and (3)
calculating the variation margin amount for the swap under Sec.
23.155. To harmonize these similar but not identical calculations so
that a Swap Entity is only required to make a single calculation of the
valuation of the swap, the Commission is proposing to amend Sec.
23.431(d)(2) (renumbered as

[[Page 47143]]

Sec. 23.431(d)(3) in the proposed rule text infra) such that the daily
mark for uncleared swaps will be ``the estimated price that would be
received by the counterparty to sell (expressed as a positive number),
or be paid by the counterparty to transfer (expressed as a negative
number), the uncleared swap in the market in an orderly transaction.''
The proposed rule would also require the daily mark to be calculated in
accordance with the methodology agreed to in the swap trading
relationship documentation required by Sec. 23.504, and if applicable,
Sec. 23.158 of the Commission's uncleared swap margin rules.
The Commission believes that under this formulation non-Swap Entity
counterparties would receive the daily mark required by section
4s(h)(3)(B) of the CEA, but a Swap Entity would only be required to
calculate the valuation of a swap once daily and use the result of such
calculation to provide the daily mark to its counterparty in compliance
with Sec. 23.431, and, if otherwise required, use such result for
reporting valuation data to a swap data repository in compliance with
Sec. 45.4 and for purposes of calculating the variation margin amount
in compliance with Sec. 23.155.
Question 07: Should the Commission revise the daily mark
calculation and disclosure requirement as set forth above? Why or why
not?
Question 08: Will the formulation of the daily mark disclosure
requirement as proposed permit a Swap Entity to perform a single daily
calculation of the valuation of a swap that meets the criteria for
compliance with the daily mark, data reporting, and variation margin
requirements? If not, why not? Could the formulation be adjusted such
that it could achieve the goal of harmonizing the three required
calculations?
Question 09: Are there reasons why the daily mark disclosure
requirement should remain distinct from the calculation of valuation
data for swap reporting purposes or variation margin purposes? Please
explain.

D. New and Amended Definitions in Sec. 23.401

The Commission is proposing to add new definitions to Sec. 23.401
\91\ and to amend a number of existing definitions in such section
solely for the purposes of the subpart. These new and amended
definitions are explained below. Each new definition would be placed in
alphabetical order in Sec. 23.401, as the section is proposed to be
renumbered to account for the new definitions as shown in the proposed
rule text infra.
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\91\ 17 CFR 23.401.
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1. Definition of ITBC Swap
The Commission is proposing to add a new definition of ``ITBC
Swap'' to the definitions in Sec. 23.401 applicable to subpart H of
part 23 of the Commission's regulations.\92\ The definition of ``ITBC
Swap'' is intended to clearly describe the criteria and conditions that
a swap must meet to be eligible for the various exceptions from
disclosure and information collection requirements of the External
Business Conduct Standards proposed in this Proposal that specify that
the exception applies to ITBC Swaps, and the STRD Requirement set forth
in Sec. Sec. 23.402 through 23.451 and Sec. 23.504 (referred to
hereinafter as the ``ITBC Compliance Exceptions'').\93\ Each of the
ITBC Compliance Exceptions is explained below in the discussion of the
proposed amendments to Sec. Sec. 23.402 through 23.451 and Sec.
23.504.\94\ Other than as described below, the criteria and conditions
in the proposed definition are substantially the same as the conditions
necessary to qualify for the MPD no-action position set forth in CFTC
Staff Letter 23-01.
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\92\ 17 CFR 23.401.
\93\ See 17 CFR 23.402-451 and 23.504.
\94\ See Sections II.E through II.L infra.
---------------------------------------------------------------------------

First, under the Proposal, one of the parties to the swap must be a
swap entity, as defined in new Sec. 23.401(j) to mean an SD or MSP.
``Swap entity'' is used throughout the definitions and the proposed
amendments to refer to an SD or MSP. The External Business Conduct
Standards and the STRD Requirement only apply to Swap Entities. Thus,
swaps where no Swap Entity is a counterparty have no need to qualify
for the ITBC Compliance Exceptions.
Second, the swap would be required to be of a type accepted for
clearing by a DCO registered with the Commission or an Exempt DCO.\95\
Only swaps that are of a type accepted for clearing by a DCO or Exempt
DCO qualify for the ITBC Compliance Exceptions. Thus, even if a Swap
Entity and its counterparty enter into a swap that they intend to
clear, but the swap is not of a type accepted for clearing on a DCO or
Exempt DCO, such swap would not qualify for the ITBC Compliance
Exceptions.
---------------------------------------------------------------------------

\95\ See Section I.B.1., supra, for a discussion of Exempt DCOs.
---------------------------------------------------------------------------

Third, the parties to the swap would be required to execute the
swap with the present intention that the swap will be cleared
contemporaneously with execution. The ITBC Compliance Exceptions would
not be available for a swap that is entered bilaterally between two
parties who then decide later that they would like to submit the swap
for clearing. As discussed in the seventh condition below requiring
submission of an ITBC Swap to a DCO or Exempt DCO as soon as
practicable, a swap that is not intended to be cleared
contemporaneously with execution means that there will be a trading
relationship between the Swap Entity and its counterparty for some
material period of time, which would necessitate compliance by the Swap
Entity with the Commission's swap reporting, disclosure, and uncleared
swap margin rules. While parties are free to enter into swaps that they
intend to clear but are not cleared contemporaneously with execution,
such swaps would not be ITBC Swaps and such swaps would not qualify for
the ITBC Swap Compliance Exceptions.
Fourth, if the swap is intended to be cleared on a DCO, the Swap
Entity and its counterparty would be required to either be clearing
members of the DCO or have entered into an agreement with a clearing
member of the DCO (i.e., a futures commission merchant (``FCM'')) for
clearing of swaps of the same type as the swap intended to be cleared.
This condition is necessary to ensure that a swap that the Swap Entity
and its counterparty intend to be cleared contemporaneously with
execution can actually be cleared on the DCO. A Swap Entity or a
counterparty that is not a clearing member of the DCO, or that has not
entered into an agreement with an FCM that is a clearing member of the
DCO covering the type of swap intended to be cleared, cannot actually
clear the swap, no matter the intention of the parties to the swap.
Fifth, if the swap is intended to be cleared on an Exempt DCO, the
Swap Entity and its counterparty would be required to be eligible to
clear the swap on the Exempt DCO in accordance with the terms and
conditions of the Exempt DCO's Order of Exemption from Registration
issued by the Commission. Each Exempt DCO is exempt from registration
pursuant to a unique order issued by the Commission, which may contain
conditions and limitations to the Exempt DCO's ability to clear certain
products for or on behalf of U.S. Persons pursuant to that order.\96\
Most importantly, clearing members of some Exempt DCOs that are U.S.
Persons (as defined in the exemption orders) may only clear swaps for
themselves and those affiliates that meet the definition

[[Page 47144]]

of ``proprietary account'' in Sec. 1.3.\97\ This eligibility condition
is necessary to ensure that a swap that the Swap Entity and its
counterparty intend to be cleared contemporaneously with execution can
actually be cleared on the Exempt DCO. A Swap Entity or a counterparty
that is not eligible to clear a swap on an Exempt DCO or has not
entered into an agreement with a clearing member of the Exempt DCO
covering the type of swap intended to be cleared cannot actually clear
the swap, no matter the intention of the parties to the swap.
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\96\ See Section I.B.1., supra, n. 24-27, and accompanying text.
\97\ See 17 CFR 1.3.
---------------------------------------------------------------------------

Sixth, the Swap Entity would be prohibited from requiring its
counterparty or the counterparty's clearing member (i.e., the
counterparty's FCM) to enter into a breakage agreement or similar
agreement as a condition to executing the swap intended to be cleared,
but would not prohibit a Swap Entity from entering into a breakage or
similar agreement at the request of a counterparty. Generally, this
condition is meant to ensure that the parties to such swap are entering
into the swap with the expectation that the swap will be cleared and
would not enter into the swap absent such expectation. In the
Commission's preliminary view, where a Swap Entity requires a breakage
agreement pursuant to which parties agree in advance that if the swap
does not clear then either the swap will be considered a bilateral swap
between the parties or one party will owe a ``breakage'' payment to the
other party to compensate such party for costs or damages incurred due
to the failure to clear is evidence that the Swap Entity may not be
entering into the swap with the requisite intention that the swap will
be a cleared swap. The Commission has preliminarily determined that the
same is not true where a breakage agreement is requested by the
counterparty. In such case, the Commission believes it is more likely
that the counterparty's main concern is that its intended position be
established by the swap, whether cleared or uncleared. The Commission
recognizes that because this condition would permit a counterparty to a
Swap Entity to request a breakage agreement it is necessary to also
modify the void ab initio condition from the form it was presented in
CFTC Staff Letter 23-01, as detailed below in the discussion of
condition eight.
Seventh, the Swap Entity would be required to ensure that the swap
is submitted for clearing as quickly after execution as would be
technologically practicable if fully automated systems were used. This
proposed condition sets forth a standard for submission of the swap for
clearing to a DCO or Exempt DCO. It would be in addition to the
obligations in Sec. 23.506 (which requires a Swap Entity to coordinate
prompt and efficient swap transaction processing with the DCO) \98\ and
Sec. 23.610 (which requires the Swap Entity to accept or reject each
trade submitted to the DCO for clearing as quickly as would be
technologically practicable if fully automated systems were used).\99\
The Commission preliminarily expects this condition to ensure that a
swap executed with the intention to be cleared is actually submitted
for clearing as soon as possible after execution. The proposed ITBC
Compliance Exceptions are based on the concept that there will be no
contractual or trading relationship between a Swap Entity and its
counterparty with respect to a swap intended to be cleared, so it is
crucial that there be no delay between execution and submission to
clearing. For example, a delay in clearing of even one business day
implicates compliance by the Swap Entity with the Commission's swap
reporting, disclosure, and uncleared swap margin rules.
---------------------------------------------------------------------------

\98\ 17 CFR 23.506.
\99\ 17 CFR 23.610.
---------------------------------------------------------------------------

Eighth, the Commission is proposing to require that if the swap is
executed on a DCM, SEF, or Exempt SEF and is rejected from clearing,
the swap must be void ab initio. This is a modification of the void ab
initio conditions in CFTC Staff Letter 23-01, which stipulated that any
ITBC Swap must be void ab initio if rejected from clearing, whether
executed on a DCM, SEF, or Exempt SEF or executed bilaterally between a
Swap Entity and its counterparty. This modification of the condition in
CFTC Staff Letter 23-01 is necessitated by the Commission's recognition
in condition six, discussed above, that a counterparty may request a
breakage agreement from a Swap Entity while maintaining a prohibition
on Swap Entities requiring breakage agreements as a condition to
entering into a swap.
Compliance with this condition may be accomplished by executing the
swap on a SEF or DCM where such SEF or DCM is required to have rules
requiring swaps submitted for clearing to be void ab initio if not
cleared.\100\ However, if the swap is not executed on a SEF, DCM, or
Exempt SEF that has rules requiring swaps submitted for clearing to be
void ab initio if not cleared, then it would be incumbent on the Swap
Entity to ensure that it has agreed with its counterparty that if such
swap intended to be cleared fails to clear, the swap will be deemed by
the parties to be void ab initio. That is, the swap will be deemed to
have never been executed. The Commission recognizes that Swap Entities
routinely enter into swaps with counterparties that are intended to be
cleared (whether anonymously or otherwise) and therefore may have no
pre-existing relationship with such counterparties where an agreement
regarding the status of swaps rejected from clearing could be
documented. However, the Commission preliminarily believes such an
agreement can be made part of the terms of the swap agreed at execution
and would not require a separate agreement between the parties (i.e.,
the agreement that a swap rejected from clearing shall be void ab
initio may be a term of the swap agreed at execution).
---------------------------------------------------------------------------

\100\ See CFTC Staff Guidance Letter (Sept. 26, 2013), RE: Staff
Guidance on Swaps Straight-Through-Processing, at 6 (stating that
the Commission's Division of Market Oversight and Division of
Clearing and Risk expect DCMs and SEFs to have rules stating that
trades that are rejected from clearing are void ab initio),
available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/stpguidance.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/stpguidance.pdf</a>.
---------------------------------------------------------------------------

Question 10: The Commission intends that a counterparty to a Swap
Entity could request a breakage agreement and thus a swap executed
bilaterally between the parties that is rejected from clearing may not
be void ab initio. For instance, where a counterparty intends to clear
a swap but, if it fails to clear, still desires or needs the swap to
exist to support a trading strategy, such counterparty may request that
the Swap Entity enter into a breakage agreement that provides for an
alternative to clearing if a swap fails to clear (e.g., that the swap
could become a bilateral swap between the Swap Entity and the
counterparty). Thus, the Commission requests comment on whether the
ITBC Swap definition conditions should be adjusted in some way to allow
for a swap to survive a failure to clear pursuant to a breakage
agreement requested by the counterparty (but not required by the Swap
Entity)? The Commission notes that any such adjustment or alternative
would have to account for compliance with the External Business Conduct
Standards and the STRD Requirement.
Question 11: Is the definition of ITBC Swap as proposed
appropriately drafted to capture the conditions for the ITBC Compliance
Exceptions set forth in this Proposal?
Question 12: Should the definition be adjusted in any manner to
better capture the Commission's intentions?
Question 13: Should any prong of the definition be adjusted or
eliminated? Why or why not?

[[Page 47145]]

2. Definition of A-ITBC Swap
The Commission proposes to add a new definition of ``A-ITBC Swap''
to the definitions in Sec. 23.401 \101\ applicable to subpart H of
part 23 of the Commission's regulations. ``A-ITBC Swap'' would define
an ``Anonymous ITBC Swap'' to be an ITBC Swap where the Swap Entity
does not know the identity of the counterparty prior to execution of
the swap. The proposed definition further explains that an A-ITBC Swap
may be executed on or pursuant to the rules of a SEF, DCM, or Exempt
SEF, or may be executed bilaterally between a Swap Entity and a
counterparty (such as where a Swap Entity enters into a ``block trade''
with an asset manager that intends to allocate portions of a swap to
various funds or accounts under management post-clearing). The
Commission preliminarily believes a definition of ``A-ITBC Swap'' will
be helpful to distinguish ITBC Swaps that are executed in circumstances
where the Swap Entity knows the identity of its counterparty prior to
execution from those that it does not for purposes of application of
the proposed ITBC Compliance Exceptions.
---------------------------------------------------------------------------

\101\ 17 CFR 23.401.
---------------------------------------------------------------------------

Question 14: The Commission requests comment on whether the
definition of A-ITBC Swap is accurate and fit for purpose or whether it
should be adjusted or eliminated in favor of some other formulation?
3. Definition of Covered Transaction
The Commission proposes to add a new definition of ``Covered
Transaction'' to the definitions in Sec. 23.401 \102\ applicable to
subpart H of part 23 of the Commission's regulations. The definition of
Covered Transaction is intended to encompass all transaction types that
may be subject to a Prime Broker Arrangement (defined and explained
infra). As such, the proposed Covered Transaction definition
encompasses swaps, as defined in section 1a(47) of the CEA,\103\ but
excludes swaps that are subject to the Commission's swap clearing
requirement in section 2(h)(1)(A) of the CEA \104\ and part 50 of the
Commission's regulations.\105\ In the Commission's preliminary
understanding, swaps subject to Prime Broker Arrangements are
exclusively uncleared swaps. The proposed definition of Covered
Transactions would also include Exempt FX Transactions, which, as
explained above, are not swaps (having been excluded from such
definition by the Treasury Determination), but are nonetheless subject
to the External Business Conduct Standards if entered into by a Swap
Entity with a counterparty that is not a Swap Entity.\106\ The
Commission preliminarily intends for the definition of Covered
Transaction to be substantially the same as the definition of such term
set forth CFTC Staff Letters 13-11 and 19-06.
---------------------------------------------------------------------------

\102\ Id.
\103\ 7 U.S.C. 1a(47).
\104\ 7 U.S.C. 2(h)(1)(A).
\105\ 17 CFR part 50; 17 CFR 50.1-50.79.
\106\ See Section I.B.2., supra, n. 40-42 and accompanying text.
---------------------------------------------------------------------------

Question 15: Does the proposed definition of Covered Transaction
adequately capture the universe of transactions that are currently
subject to swap Prime Broker Arrangements, as defined in this Proposal?
Question 16: Are there types of transactions falling under the
Commission's jurisdiction that should be added to the definition of
Covered Transaction or are there transaction types included in such
definition that should be removed?
Question 17: Should the definition of Covered Transaction include a
catch-all to automatically include types of transactions that may in
the future become subject to Commission jurisdiction?
4. Definition of Prime Broker Arrangement
The Commission proposes to add a new definition of ``Prime Broker
Arrangement'' to the definitions in Sec. 23.401 \107\ applicable to
subpart H of part 23 of the Commission's regulations.\108\ The proposed
definition of Prime Broker Arrangement is intended to universally
encompass the various agreements and arrangements that constitute the
credit intermediation service provided by a PB to their swap PB
customers that allows such PB customers to seek prices on Covered
Transactions from a variety of counterparties while only facing the PB
for its ongoing obligations under Covered Transactions and allowing for
collateral netting, but is also meant to recognize the roles of other
parties, including, without limitation, executing dealers,
intermediaries, and other PBs.
---------------------------------------------------------------------------

\107\ 17 CFR 23.401.
\108\ 17 CFR part 23, subpart H; 17 CFR 23.400-23.451.
---------------------------------------------------------------------------

A Prime Broker Arrangement as proposed to be defined in Sec.
23.401 would include at least one PB/SD and two or more other parties
evidenced by a written agreement or agreements.\109\ Pursuant to such
written agreements, the PB/SD, subject to any applicable pre-
conditions, would be contractually obligated to enter into a Covered
Transaction (as defined in Sec. 23.401 and explained above) that
constitutes a PB trigger transaction (the ``Trigger Transaction'')
\110\ with a counterparty that may or may not be a Swap Entity, may be
a PB customer of the PB/SD, an executing dealer, or another PB (the
``Trigger Counterparty'') and for which the PB/SD has not determined
the price. The execution of the Trigger Transaction must also obligate
the PB/SD to enter into a second Covered Transaction (the ``Mirror
Transaction'') \111\ with another counterparty that is not the Trigger
Counterparty (the ``Mirror Counterparty''), which is a PB customer of
the PB/SD and to whom the PB/SD owes regulatory obligations under the
External Business Conduct Standards. The terms and price of the Mirror
Transaction, from the perspective of the PB/SD, must be substantially
equal but opposite to the terms and price of the Trigger Transaction.
---------------------------------------------------------------------------

\109\ The Commission preliminarily believes that MSPs do not and
would not act as PBs.
\110\ See Sec. 43.2(a) for a definition of ``trigger swap''
used in the context of the Commission's swap reporting rules. 17 CFR
43.2(a).
\111\ See Sec. 43.2(a) for a definition of ``mirror swap'' used
in the context of the Commission's swap reporting rules. 17 CFR
43.2(a).
---------------------------------------------------------------------------

The proposed ``substantially equal but opposite'' requirement is a
recognition by the Commission that the terms and the price of a Mirror
Transaction may be adjusted from those of a Trigger Transaction to
allow for a spread or fee to be paid to the PB/SD, (or to an
intermediary that has arranged the transaction), to compensate the PB/
SD or the intermediary for providing the credit intermediation service
evidenced by the Prime Broker Arrangement or the intermediary's
services. The Commission also recognizes that the designation of a
Trigger Transaction and a Mirror Transaction depends on the perspective
of the parties to the transaction. For example, where two PBs are
involved, the Mirror Transaction for one PB may be a Trigger
Transaction for the second PB. The Commission is also aware that a
single Trigger Transaction may trigger a string of transactions between
various PBs and their PB customers, some of which could be both Trigger
Transactions and Mirror Transactions.
The intention of the proposed definition of Prime Broker
Arrangement is to capture the essence of the concept of credit
intermediation through swap PB arrangements as it relates to compliance
with the External Business Conduct Standards. In the Commission's
preliminary view, such

[[Page 47146]]

essence lies in the fact that a PB/SD, due to its contractual
obligations under the various forms of Prime Broker Arrangements, will,
when certain specified pre-conditions are met, be contractually
obligated to enter into a Covered Transaction for which it has not
determined the price and simultaneously be obligated to enter into a
substantially equal but opposite Covered Transaction, the price of
which is determined based on the price of the first transaction. The
Commission understands that where a PB/SD is entering into transactions
with non-Swap Entity counterparties for which it has not determined the
price prior to execution, it cannot comply with the price and PTMMM
disclosure requirements of the External Business Conduct Standards.
Question 18: Does the proposed definition of Prime Broker
Arrangement adequately encompass the concept of swap PB arrangements as
a credit intermediation service provided by PB/SDs? Why or why not?
Question 19: Please comment on any adjustment or addition to the
proposed definition of Prime Broker Arrangement that would better meet
the Commission's intentions.
5. Definition of Qualified Prime Broker Arrangement
The Commission proposes to add a new definition of ``Qualified
Prime Broker Arrangement'' to the definitions in Sec. 23.401 \112\
applicable to subpart H of part 23 of the Commission's
regulations.\113\ The definition of Qualified Prime Broker Arrangement
incorporates conditions that, if met by a PB/SD's Prime Broker
Arrangement with a particular non-Swap Entity counterparty (each a ``PB
Counterparty''), would permit the PB/SD to qualify for an exception to
the price disclosure requirement in Sec. 23.431(a)(3) \114\ with
respect to Covered Transactions with such PB Counterparty. Depending on
whether the Commission determines to eliminate the PTMMM disclosure
requirement (as discussed above), meeting the conditions to the
definition of Qualified Prime Broker Arrangement would also permit a
PB/SD to qualify for an exception to the PTMMM disclosure requirement
in Sec. 23.431(a)(3).\115\ Such proposed conditions are explained
below.
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\112\ 17 CFR 23.401.
\113\ 17 CFR part 23, subpart H; 17 CFR 23.400-23.451.
\114\ 17 CFR 23.431(a)(3).
\115\ Id.; see Section II.A., supra, for the Commission's
discussion of its proposed elimination of the PTMMM.
---------------------------------------------------------------------------

The Commission has preliminarily determined that providing an
exception from the price disclosure obligation (and, if necessary, the
PTMMM disclosure obligation) of an SD when entering into a swap
pursuant to a Qualified Prime Broker Arrangement is a reasonable
accommodation to the long-standing prime broker arrangements prevalent
in the swaps market prior to promulgation of the External Business
Conduct Standards. The Commission's view is based on the fact that
Prime Broker Arrangements are entered into by swap counterparties
seeking certain benefits, among which are: (1) the ability of swap
counterparties to seek favorable pricing from a wide variety of market
participants, rather than just a handful of SDs with which they may
have trading relationships; (2) the credit intermediation provided by
PBs that permits price shopping by swap counterparties but consolidates
credit risk of the swap counterparty with only their PB(s); and (3) the
consolidation of credit risk with only their PB(s) that permits for
more efficient use of collateral through netting of positions with only
their PB(s). In the Commission's preliminary view, an insistence on
price disclosure (and, if necessary, a PTMMM disclosure) by an SD
acting as a PB, a requirement that was intended to provide a benefit to
non-Swap Entity counterparties, would undermine that very benefit and
eliminate all of the other benefits of Prime Broker Arrangements to
swap counterparties, forcing such counterparties to trade swaps only
with a handful of SDs with the concomitant loss of competitive pricing.
Thus, the Commission has determined to propose the following conditions
for a Qualified Prime Broker Arrangement that would qualify for an
exception to the price disclosure (and, if necessary, the PTMMM
disclosure) requirement.
First, to qualify as a Qualified Prime Broker Arrangement, the
Prime Broker Arrangement between a PB/SD and its PB Counterparty would
be required to contain an agreement in writing on the type, parameters,
and limits of each potential Covered Transaction that may be entered
into by the PB Counterparty with the PB/SD pursuant to the Prime Broker
Arrangement (each, a ``Permitted PB Transaction''). This proposed
condition would require the PB/SD to:
(1) Clearly delineate the types of transactions that the PB/SD will
be obligated to enter into with the PB Counterparty pursuant to the
Prime Broker Arrangement;
(2) To list all of the pre-conditions to the PB/SD's obligation to
enter into each type of Permitted PB Transaction;
(3) To list all acceptable terms for each type of Permitted PB
Transaction (such as tenor, payment terms, payment calculation terms,
termination events, rate fallbacks, etc.); and
(4) To set limits (credit, market, trade volume, etc.) for each
type of Permitted PB Transaction.
The purpose of this proposed condition is to ensure that, before
execution of any Covered Transaction, the parties will know exactly
what the PB/SD is required to execute with the PB Counterparty, thereby
making compliance with the other conditions of the Qualified Prime
Broker Arrangement definition possible. A PB/SD and its PB Counterparty
would, of course, be free to update or adjust the parameters of
Permitted PB Transactions at any time by agreeing to an amendment to
their Prime Broker Arrangement.
Second, the PB/SD, now knowing the types and terms of all possible
Covered Transactions that may be executed with the PB Counterparty
pursuant to their Prime Broker Arrangement, would be required to
provide the PB Counterparty with all disclosures that would be
necessary for the Prime Broker to comply with Sec. 23.431(a) \116\
other than the pre-trade disclosure of the price of any Permitted PB
Transaction (and the PTMMM, if the Commission determines not to
eliminate the PTMMM Requirement). If the Commission determines not to
eliminate the scenario analysis requirement in Sec. 23.431(b) \117\
(as discussed above), the PB/SD would also be required to provide a
scenario analysis of any Permitted PB Transaction if requested by the
PB Counterparty (the Sec. Sec. 23.431(a) and (b) required disclosures
and, if requested, the scenario analysis, are hereinafter referred to
as the ``Regulatory Disclosures''). These Regulatory Disclosures would
include material information concerning a Permitted PB Transaction
provided in a manner reasonably designed to allow the PB Counterparty
to assess:
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\116\ 17 CFR 23.431(a).
\117\ 17 CFR 23.431(b); see Section II.B., supra, for the
Commission's discussion of its proposed elimination of the Scenario
Analysis Requirement in Sec. 23.431(b).
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(1) The material risks of a particular type of Permitted PB
Transaction, which may include market, credit, liquidity, foreign
currency, legal, operational, and any other applicable risks;
(2) The material characteristics of a particular type of Permitted
PB Transaction, which would include the

[[Page 47147]]

material economic terms of the Permitted PB Transaction, the terms
relating to the operation of the Permitted PB Transaction, and the
rights and obligations of the parties during the term of the Permitted
PB Transaction; and
(3) The material incentives and conflicts of interest that the PB/
SD may have in connection with a particular type of Permitted PB
Transaction, which would include any compensation or other incentive
from any source other than the PB Counterparty that the PB/SD may
receive in connection with a particular type of Permitted PB
Transaction.\118\
---------------------------------------------------------------------------

\118\ See Sec. 23.431(a), 17 CFR 23.431.
---------------------------------------------------------------------------

As proposed, the disclosure obligation of the PB/SD under this
second condition would be limited to the PB/SD's knowledge and
reasonable belief at the time of disclosure. The Commission would
consider a PB/SD to have met this condition if such disclosure is
substantially the same as its disclosures to non-PB Counterparties for
the same types of Covered Transactions, so long as such disclosures to
non-PB Counterparties are not found deficient. The Commission notes
that this condition would impose an on-going disclosure requirement
that must be updated to the extent the PB/SD becomes aware of
information that would make a previous disclosure incorrect,
incomplete, or misleading.
Third, the PB/SD would be required to receive an acknowledgement
from a PB Counterparty regarding various disclosures. The
acknowledgement would state that: (1) the PB Counterparty has received
the Regulatory Disclosures; and (2) the PB/SD has clarified or
supplemented the Regulatory Disclosures as requested by the PB
Counterparty in its sole discretion. Furthermore, the acknowledgement
would provide that the PB/SD has no obligation to provide additional
disclosures pursuant to section 4s(h)(3)(B)(i) of the CEA \119\ or
Sec. 23.431(a) or (b) with respect to a Permitted PB Transactions so
long as the PB/SD is not aware of information that would make the
disclosure incorrect, incomplete, or misleading. PB Counterparties
would be permitted to request updated disclosures in writing prior to
execution. This proposed condition is not intended to release the PB/SD
from its obligation to update the Regulatory Disclosures as necessary
to meet the standard of the PB/SD's ``knowledge and reasonable
belief.'' Rather, the purpose of the proposed condition is to make
clear that once the PB/SD has met such standard and given the PB
Counterparty an opportunity to request clarifications or supplements,
there is a bright line drawn to show the end of the PB/SDs obligations
for disclosure under Sec. 23.431(a) and (b).\120\
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\119\ 7 U.S.C. 6s(h)(3)(B)(i).
\120\ 17 CFR 23.431(a) and (b).
---------------------------------------------------------------------------

Finally, the PB/SD would be required to make and keep a record of
the Prime Broker Arrangement and the required acknowledgement from its
PB Counterparty until the expiration or termination of all Permitted PB
Transactions executed pursuant to the Prime Broker Arrangement, and for
five years thereafter, in accordance with the SD recordkeeping rule,
Sec. 23.203.\121\
---------------------------------------------------------------------------

\121\ 17 CFR 23.203.
---------------------------------------------------------------------------

The Commission acknowledges that the proposed Qualified Prime
Broker Arrangement set forth in this Proposal differs significantly
from the MPD no-action position set forth in CFTC Staff Letter 13-11.
The no-action position in CFTC Staff Letter 13-11 was conditioned, in
part, on a PB/SD allocating its obligations under certain External
Business Conduct Standards to another SD, effectively limiting some
part of the prime brokerage market in swaps to participation only by
SDs registered with the Commission.\122\ The Commission preliminarily
does not believe that allocation of regulatory responsibilities from
one SD, which is responsible for compliance with such responsibilities,
to another SD appropriately serves the purposes of the External
Business Conduct Standards, which were mandated by the Dodd-Frank Act
to provide counterparties with protections and information not
previously required. In the Commission's preliminary view, the SD that
is the actual counterparty to a swap with a PB Counterparty has the
responsibility for performance of the swap and has the ongoing PB and
trading relationship with the PB counterparty, and is therefore best
incentivized to perform its regulatory responsibilities in compliance
with the Commission's rules. The Commission notes that, absent the MPD
no-action position, which was issued just days before compliance with
the External Business Conduct Standards was required, existing Prime
Broker Arrangements would likely have been significantly disrupted.
However, the stop-gap nature of the MPD no-action position regarding
allocation of responsibilities between SDs is less than ideal when the
Commission is considering a permanent solution to the relationship
between Prime Broker Arrangements and the External Business Conduct
Standards. Thus, the Commission has preliminarily determined not to
permit the allocation of regulatory responsibilities from one SD to
another SD.
---------------------------------------------------------------------------

\122\ CFTC Staff Letter 13-11 at 5.
---------------------------------------------------------------------------

However, the Commission notes that another part of the no-action
position set forth in CFTC Staff Letter 13-11, applicable only to
Exempt FX Transactions, was not conditioned on an allocation of
External Business Conduct Standard obligations from one SD to another,
but rather was predicated on MPD's view that the only obligations
impossible or impracticable for a PB/SD to perform in the context of
swap prime brokerage are the obligations to provide a pre-trade price
and a PTMMM.\123\ That is the view that the Commission is proposing to
adopt in this Proposal. In the Commission's preliminary view, a PB/SD
that has entered into appropriate swap trading relationship
documentation with a potential PB Counterparty in accordance with Sec.
23.504 \124\ and has entered into a Qualified Prime Broker Arrangement
in accordance with this Proposal would only be unable to provide a pre-
trade price (and, if the Commission determines not to eliminate it as
proposed, a PTMMM) to a PB Counterparty prior to entering into a
Permitted PB Transaction as described in this Proposal.
---------------------------------------------------------------------------

\123\ Id. at 9-10.
\124\ 17 CFR 23.504.
---------------------------------------------------------------------------

Question 20: The Commission requests comment on all aspects of the
proposed definition of Qualified Prime Broker Arrangement.
Question 21: Is it possible for a PB/SD and a PB Counterparty to
agree on the type, terms, and limits of each Covered Transaction that
will be permitted to be executed under a Qualified Prime Broker
Arrangement? Why or why not?
Question 22: Would the requirement that the type and terms of
Permitted PB Transactions be clearly delineated unduly limit the range
of transactions that would otherwise be permitted under Prime Broker
Arrangements? Please provide examples of existing Prime Broker
Arrangements that allow for transaction types and terms that could not
be adequately delineated in compliance with the proposed definition of
Qualified Prime Broker Arrangement.
Question 23: Is it possible to modify the terms of the definition
of Qualified Prime Broker Arrangement in a way that would allow the PB/
SD and its PB Counterparties to agree on the range and terms of
Permitted PB Transactions such that a PB/SD could fulfill its
disclosure obligations under Sec. 23.431 (other than

[[Page 47148]]

the pre-trade price and, if required, the PTMMM)?
Question 24: Would the acknowledgement requirement as proposed
provide SD/PB counterparties with adequate notice that an SD/PB has
completed its disclosure requirements under Sec. 23.431? \125\
---------------------------------------------------------------------------

\125\ 17 CFR 23.431.
---------------------------------------------------------------------------

Question 25: Please note that, as explained above, the Commission
does not intend to adopt a rule that would permit allocation of
compliance obligations under the External Business Conduct Standards
between SDs in the prime brokerage context, nor does it intend to
permit the MPD no-action position set forth in CFTC Staff Letters 13-11
and 19-06 to continue indefinitely. Thus, if commenters find the
Qualified Prime Broker Arrangement concept outlined in the Proposal to
be unworkable, please provide a detailed alternative arrangement for
the Commission's consideration.

E. Proposed Amendments to Sec. 23.402

In general, Sec. 23.402 (General provisions) requires or allows
Swap Entities to (a) have written policies and procedures reasonably
designed to ensure compliance with the External Business Conduct
Standards; (b) obtain ``know-your-counterparty'' (``KYC'') information
about their swap counterparties; (c) reasonably rely on representations
obtained from their swap counterparties; (d) agree with counterparties
on how information required to be obtained or disclosed to swap
counterparties will be communicated; and (e) comply with recordkeeping
requirements.\126\
---------------------------------------------------------------------------

\126\ See 17 CFR 23.402.
---------------------------------------------------------------------------

The Commission proposes to amend Sec. 23.402 by adding a new
subparagraph (h) thereto that would state ``Paragraph (b) and (c) of
this section shall not apply to an ITBC Swap.'' This proposed amendment
would make clear that because ITBC Swaps are executed with
counterparties with the intention to be cleared (and are generally void
ab initio if such swaps fail to clear), there is no ongoing
relationship between the Swap Entity and the counterparties for which
the KYC or true name and owner provisions of Sec. 23.402 serve a
regulatory purpose. Specifically, because ITBC Swaps, once cleared,
result in a new swap between the DCO or Exempt DCO and the swap
counterparty, the Commission preliminarily believes that it may
reasonably rely on the rules of such clearinghouses and the regulations
applicable to FCMs to ensure that swap counterparties are adequately
vetted for KYC purposes.\127\ Additionally, because some ITBC Swaps may
be A-ITBC Swaps, Swap Entities will not know, and may never know, the
identity of the swap counterparty, making it impossible to comply with
the requirements in subparagraphs (b) and (c) of Sec. 23.402 that the
Commission proposes to be disapplied.
---------------------------------------------------------------------------

\127\ See 31 CFR part 1026 and 17 CFR 42.2, which together
require FCMs to establish customer identification and anti-money
laundering programs. See also CME Clearing Member Application,
available at: <a href="https://www.cmegroup.com/company/membership/files/application-and-clearing-agreement-writeable.pdf">https://www.cmegroup.com/company/membership/files/application-and-clearing-agreement-writeable.pdf</a>.
---------------------------------------------------------------------------

Question 26: The Commission requests comment on all aspects of the
proposed amendment to Sec. 23.402.

F. Proposed Amendments to Sec. 23.430

In general, Sec. 23.430 (Verification of counterparty eligibility)
requires Swap Entities to (a) verify the ECP status of each swap
counterparty; (b) verify whether a swap counterparty is a Special
Entity (as defined in Sec. 23.401); and (c) notify swap counterparties
of any right to elect to be a Special Entity available under the
definition of Special Entity in Sec. 23.401(c)(6).
Subparagraph (e) of Sec. 23.430 provides that these verifications
and notice requirements will not apply to swaps initiated on a DCM or,
where the Swap Entity does not know the identity of the counterparty
prior to execution, a SEF.\128\
---------------------------------------------------------------------------

\128\ See 17 CFR 23.430.
---------------------------------------------------------------------------

The Commission proposes to amend Sec. 23.430(e) by adding a
further provision stating that the verification and notice requirements
will not apply to A-ITBC Swaps or to ITBC Swaps that are initiated on a
DCM, SEF, or Exempt SEF. This proposed amendment would make clear that
because ITBC Swaps are executed with counterparties with the intention
to be cleared (and are generally void ab initio if such swaps fail to
clear), there is no ongoing relationship between the relevant Swap
Entity and the counterparties. Like for KYC purposes discussed above,
the Commission preliminarily believes that it may reasonably rely on
the rules of relevant clearinghouses, SEFs, and Exempt SEFs and the DCO
rules applicable to FCMs as clearing members to ensure that swap
counterparties are adequately vetted for ECP status.\129\
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\129\ The Commission notes that, pursuant to section 2(e) of the
CEA, non-ECPs may execute swaps that are listed on a DCM, but not on
a SEF, see 7 U.S.C. 2(e). Commission regulation 37.702, 17 CFR
37.702, requires a SEF to verify that its members are ECPs.
Similarly, CME Rule 90005.C requires Clearing Members (e.g., FCMs)
to obtain a representation from each Participant for which it
provides clearing services that such Participant is, and will be, an
ECP at all times clearing services are provided.
---------------------------------------------------------------------------

Additionally, with regard to A-ITBC Swaps, Swap Entities will not
know, and may never know, the identity of the swap counterparty, making
it impossible to comply with the verification and notification
requirements of Sec. 23.430.
Question 27: The Commission requests comment on all aspects of the
proposed amendment to Sec. 23.430.

G. Proposed Amendments to Sec. 23.431

In general, Sec. 23.431 requires Swap Entities to (a) disclose to
non-Swap Entity counterparties the material risks, characteristics,
incentives, and conflicts of interest of any swap prior to entering
into the swap; (b) provide the pre-trade price and the PTMMM of a swap
to a non-Swap Entity counterparty prior to entering into the swap; (c)
provide a scenario analysis of a swap if requested by a non-Swap Entity
counterparty prior to entering into the swap; (d) provide non-Swap
Entity counterparties that enter into cleared swaps with the Swap
Entity with notice of the counterparty's right to receive, upon
request, the daily mark for such cleared swaps from the appropriate
DCO; and (e) provide the daily mark of an executed uncleared swap to a
non-Swap Entity counterparty to such swap as of each business day from
the execution of the swap to its expiration or termination.\130\
---------------------------------------------------------------------------

\130\ See 17 CFR 23.431.
---------------------------------------------------------------------------

Subparagraph (c) of Sec. 23.431 provides that the pre-trade
disclosure obligations of Sec. Sec. 23.431(a) and (b) will not apply
to transactions that are initiated on a DCM or SEF where the Swap
Entity does not know the identity of the counterparty prior to
execution.\131\
---------------------------------------------------------------------------

\131\ 17 CFR 23.431(c).
---------------------------------------------------------------------------

The Commission proposes to amend Sec. 23.431 by:
(1) Eliminating the PTMMM requirement as discussed in Section II.A.
above;
(2) Eliminating the Scenario Analysis Requirement as discussed in
Section II.B. above;
(3) Clarifying that a Swap Entity is not required to disclose to
its counterparty information relating to the material characteristics
of a particular swap to the extent that such characteristics are
reflected in transaction documents that the counterparty has been
provided prior to entering into the swap; \132\
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\132\ For the avoidance of doubt, this exclusion includes only
those material characteristics of a particular swap that are
expressly reflected in such transaction documentation and not, for
example, the material risks or conflicts of interest that the
particular swap may present.
---------------------------------------------------------------------------

(4) Expanding the exception for pre-trade disclosures in
subparagraph (c) to include (i) swaps executed

[[Page 47149]]

anonymously on an Exempt SEF; (ii) A-ITBC Swaps; (iii) ITBC Swaps
executed on a DCM, SEF, or Exempt SEF; and (iv) Permitted PB
Transactions entered into pursuant to a Qualified Prime Broker
Arrangement, as discussed in Section II.D.5. above;
(5) Adding a new subparagraph (2) to Sec. 23.431(d) (Daily mark)
that would disapply the notice required to be given to cleared swap
counterparties of the right to receive a daily mark from the clearing
DCO for ITBC Swaps executed on a DCM, SEF or Exempt SEF and for any A-
ITBC Swap;
(6) Revising the uncleared daily mark requirement in Sec.
23.431(d)(2) (renumbered as proposed to be (d)(3)) as discussed in
Section II.C. above; and
(7) Revising Sec. 23.431(d)(3)(ii) (renumbered as proposed to be
(d)(4)(ii)) to make clear that a Swap Entity may disclose to its non-
Swap Entity counterparties that the daily mark provided to the
counterparty each business day for existing swaps is an estimate only.
These proposed amendments reflect the Commission's preliminary view
that:
(1) ITBC Swaps (including A-ITBC Swaps) are only swaps executed by
a counterparty with the present intention to clear the swap and thus
the counterparty has no need to receive notice of a right to receive a
daily mark from the Swap Entity because the counterparty will face a
clearing house;
(2) Swap Entities do not know the identity of their counterparties
to A-ITBC Swaps prior to execution;
(3) Swaps may be executed by Swap Entities on or pursuant to the
rules of Exempt SEFs and may clear swaps, if eligible, on Exempt DCOs;
(4) Swaps accepted for clearing on a DCO or Exempt DCO (especially
those also listed for trading on DCM, SEF, or Exempt SEF) are
sufficiently standardized and information about the material risks and
characteristics of such swaps are available from the DCO or Exempt DCO
(and/or a DCM, SEF, or Exempt SEF, if traded there); and
(5) The disclosure of information relating to material
characteristics of a particular swap that are reflected in the
transaction documentation for that swap would be duplicative.
Question 28: The Commission requests comment on all aspects of the
proposed amendment to Sec. 23.431.

H. Proposed Amendments to Sec. 23.432

In general, Sec. 23.432 requires Swap Entities to provide notice
to their non-Swap Entity counterparties that the counterparty has the
right to elect to clear a swap executed with the Swap Entity (assuming
the swap is eligible for clearing on a DCO) and has the right to choose
the DCO on which the swap will be cleared, if eligible.\133\
---------------------------------------------------------------------------

\133\ See 17 CFR 23.432.
---------------------------------------------------------------------------

The Commission proposes to amend Sec. Sec. 23.432(a) and (b) by
making clear that the notice must be given prior to entering into a
swap. The Commission further proposes to amend Sec. 23.432 by adding a
new subparagraph (c) that would disapply the notice requirements of
subparagraphs (a) and (b) to ITBC Swaps executed on a DCM, SEF, or
Exempt SEF and to all A-ITBC Swaps. As discussed above, this proposed
amendment reflects the Commission's preliminary view that: (1) ITBC
Swaps are only those where the counterparty has the present intention
to clear the swap prior to execution and thus has no need to receive
notice of a right to clear the swap or choose the clearinghouse; and
(2) Swap Entities do not know the identity of their counterparties to
A-ITBC Swaps prior to execution.
Question 29: The Commission requests comment on all aspects of the
proposed amendment to Sec. 23.432.

I. Proposed Amendments to Sec. 23.434

In general, Sec. 23.434 requires SDs that recommend a swap or a
swap trading strategy to a non-Swap Entity counterparty to have a
reasonable basis to believe that such swap or swap trading strategy is
suitable for the counterparty after engaging in reasonable diligence to
ascertain the counterparty's investment strategy, trading objective,
and ability to absorb potential losses.\134\
---------------------------------------------------------------------------

\134\ See 17 CFR 23.434.
---------------------------------------------------------------------------

However, Sec. 23.434(b) provides a safe harbor, which, if complied
with, deems the SD to have a reasonable basis to believe that the
recommended swap or swap trading strategy is suitable for the
counterparty.\135\ The safe-harbor requires the SD to obtain a
representation from its counterparty stating that the counterparty has
complied in good faith with written policies and procedures that are
reasonably designed to ensure that the persons responsible for
evaluating any recommendation from an SD, and making trading decisions
on behalf of the counterparty, are capable of doing so. This safe-
harbor representation with respect to SD swap recommendations was
incorporated into an industry-wide ISDA protocol in 2012.\136\ By
adherence to the ISDA protocol, counterparties to SDs incorporated the
safe-harbor representation into the swap trading relationship
documentation that such counterparties have entered into with each
other entity that has also adhered to the ISDA protocol. To date, over
32,000 entities have adhered to the ISDA protocol.\137\ Accordingly,
the Commission preliminarily believes that all or nearly all SD
counterparties have made the representation that they will
independently evaluate any recommendation received from an SD and are
capable of doing so.
---------------------------------------------------------------------------

\135\ See 17 CFR 23.434(b).
\136\ See ISDA August 2012 DF Protocol, available at <a href="https://www.isda.org/protocol/isda-august-2012-df-protocol/">https://www.isda.org/protocol/isda-august-2012-df-protocol/</a>.
\137\ See list of Adhering Parties, id.
---------------------------------------------------------------------------

The Commission proposes to amend Sec. 23.434 to add a new
subparagraph (d) that would provide an exception from the requirements
of Sec. 23.434 for A-ITBC Swaps and for ITBC Swaps executed by an SD
with a non-Swap Entity on a DCM, SEF, or Exempt SEF. As stated above,
the Commission has preliminarily determined that swaps listed for
trading on a DCM, SEF, or Exempt SEF, and accepted for clearing on a
DCO or Exempt DCO, are sufficiently standardized, and sufficient
information about the pricing and material risks and characteristics of
such swaps are available from the DCM, SEF, or Exempt SEF and/or the
DCO or Exempt DCO. Because (i) this information is available to
counterparties from sources other than an SD counterparty; (ii) ITBC
Swap counterparties have no on-going relationship with an SD
counterparty with respect to ITBC Swaps; and (iii) the Commission
preliminarily believes that all or nearly all ITBC Swap counterparties
have represented to any potential SD counterparty that they are capable
of independently evaluating any recommendation from the SD, the
Commission has preliminarily determined that ITBC Swap counterparties
will likely look to SDs only for competitive pricing. Thus, the
Commission preliminarily believes that requiring an SD to have a
reasonable basis to believe that a recommended swap or swap trading
strategy is suitable for its ITBC Swap counterparties is unnecessary
where adequate information about the risks and characteristic of an
ITBC Swap is available to the counterparty from sources other than the
SD and the suitability analysis otherwise required is a hinderance to
the efficient trading of ITBC Swaps for both the SD and its
counterparty. Further, SDs that are counterparties to A-ITBC swaps do
not know, and may never know, the identity of their counterparties,
making a suitability analysis impossible.
The Commission considered but rejected the alternative of not
proposing

[[Page 47150]]

an exception from the requirements of Sec. 23.434 for ITBC Swaps,
reasoning that there is no need for such exception if an SD simply
refrains from recommending a swap or swap trading strategy to ITBC Swap
counterparties. If an SD does not recommend a swap or swap trading
strategy to an ITBC Swap counterparty, then there is no need to comply
with the requirement in Sec. 23.434(a)(2) that the SD have a
reasonable basis to believe that the recommended swap or swap trading
strategy is suitable for such counterparty. The Commission has
preliminarily determined, however, that the tremendous uptake of
adherence to the ISDA protocol discussed above is persuasive evidence
that SDs are not willing to enter into swaps with counterparties that
have not made the representation necessary for an SD to rely on the
safe-harbor in Sec. 23.434(b). The Commission preliminarily
understands that SDs are unwilling to take the risk that something
communicated during swap negotiations will be seen as providing a
recommendation despite the best efforts or policies and procedures of
the SD designed to prevent sales and trading personnel from making any
recommendation to swap counterparties. Thus, the Commission is
concerned that not providing an exception from the requirements of
Sec. 23.434 would likely result in SDs refusing to enter into swaps
with ITBC Swap counterparties from whom they have not received the
safe-harbor representation. Such potential decrease in available ITBC
Swap counterparties would frustrate the purposes of this aspect of the
Proposal.
Question 30: The Commission requests comment on all aspects of the
proposed amendment to Sec. 23.434.
Question 31: The Commission requests comment on whether the
Commission's reasoning for rejecting the alternative of not providing
an exception from the requirements Sec. 23.434 for ITBC Swaps is
reasonable or whether the Commission should reconsider such
alternative.

J. Proposed Amendments to Sec. Sec. 23.440 and 23.450

In general, Sec. Sec. 23.440 and 23.450 concern requirements that
SDs must comply with when acting as advisors to, and Swap Entities must
comply with when entering into swaps with, Special Entities.\138\
``Special Entity'' is defined in Sec. 23.401(c) \139\ to be (1) a
Federal agency; (2) a State, State agency, city, county, municipality,
other political subdivision of a State, or any instrumentality,
department, or a corporation of or established by a State or political
subdivision of a State; (3) any employee benefit plan subject to Title
I of the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1002); (4) any governmental plan, as defined in Section 3 of the
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002); (5)
any endowment, including an endowment that is an organization described
in Section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C.
501(c)(3)); or (6) any employee benefit plan defined in Section 3 of
the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002),
not otherwise defined as a Special Entity, that elects to be a Special
Entity by notifying a swap entity of its election prior to entering
into a swap with the particular swap entity.
---------------------------------------------------------------------------

\138\ See 17 CFR 23.440 and 450.
\139\ 17 CFR 23.401(c).
---------------------------------------------------------------------------

Pursuant to Sec. Sec. 23.440 and 23.450,\140\ Swap Entities that
enter into swaps with, or that advise, Special Entities owe heightened
duties to the Special Entity intended to ensure that swaps or swap
trading strategies recommended by an SD to the Special Entity are in
the best interests of the Special Entity; \141\ or that, in acting as a
counterparty to the Special Entity, the Swap Entity has a reasonable
basis to believe that the Special Entity has a representative that
satisfies the requirements of Sec. 23.450(b) (a ``Qualified
Independent Representative'' or ``QIR'').\142\
---------------------------------------------------------------------------

\140\ 17 CFR 23.440 and 23.450.
\141\ See 17 CFR 23.440(c).
\142\ See 17 CFR 23.450(b).
---------------------------------------------------------------------------

However, each of Sec. Sec. 23.440 and 23.450 provides a safe
harbor, which, if complied with, deems the SD to not be acting as an
advisor to a Special Entity and/or have a reasonable basis to believe
that the Special Entity has a QIR.\143\ The safe-harbors require the SD
to obtain certain representations from its Special Entity
counterparties that were incorporated into an industry-wide ISDA
protocol in 2012.\144\ By adherence to the ISDA protocol, Special
Entity counterparties to SDs incorporated the safe-harbor
representations into the swap trading relationship documentation that
such counterparties may have with each other entity that has also
adhered to the ISDA protocol. As noted above, over 32,000 entities have
adhered to the ISDA protocol,\145\ so the Commission preliminarily
believes that all or nearly all SD Special Entity counterparties have
made the representations that allow SDs to rely on the safe-harbors
under Sec. Sec. 23.440 and 23.450.
---------------------------------------------------------------------------

\143\ See 17 CFR 23.440(b) and 17 CFR 23.450(d).
\144\ See ISDA August 2012 DF Protocol, available at <a href="https://www.isda.org/protocol/isda-august-2012-df-protocol/">https://www.isda.org/protocol/isda-august-2012-df-protocol/</a>.
\145\ See list of Adhering Parties, id.
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The Commission proposes to amend Sec. 23.440 to add a new
subparagraph (e), which would provide an exception from the
requirements of Sec. 23.440 in two circumstances. First, the proposed
amendment would provide an exception from the requirements of Sec.
23.440 for A-ITBC Swaps (i.e., ITBC Swaps executed with a Special
Entity whose identity is not known to an SD prior to execution).
Second, the proposed amendment would provide an exception from the
requirements of Sec. 23.440 only for ITBC Swaps initiated by a Special
Entity on a DCM, SEF, or Exempt SEF whose identity is known to an SD
prior to execution, but whose status as a Special Entity is not known
to the SD.
Section 4s(h)(4)(B) of the CEA provides that an SD that acts as an
advisor to a Special Entity shall have a duty to act in the best
interests of the Special Entity.\146\ However, section 4s(h)(7) of the
CEA provides an exception to this duty where a swap is initiated by a
Special Entity on a DCM or a SEF and the SD does not know the identity
of the counterparty to the transaction.\147\ The Commission believes
that this exception reflects Congressional intent to facilitate trading
of cleared swaps on DCMs and SEFs in keeping with the G20 Leaders'
Statement from the 2009 Pittsburgh Summit, committing its members to
improving the OTC derivatives markets by, among other things, ensuring
that standardized derivative contracts are traded on exchanges or
electronic trading platforms, where appropriate, and cleared through
central counterparties. Although section 4s(h)(7) of the CEA does not
refer to clearing, it would be almost impossible for an SD to comply
with its post-trade risk management and regulatory obligations for
uncleared swaps if it does not know the identity of its counterparty
prior to execution.\148\ For example, the SD would need to ensure that
it had appropriate documentation with the counterparty in place to
comply with the STRD Requirement \149\

[[Page 47151]]

and appropriate documentation and information about its counterparty to
comply with the Commission's uncleared swap margin requirements.\150\
Thus by default, any swap executed under the statutory exception would
likely be intended to be cleared because the swap is anonymous.
---------------------------------------------------------------------------

\146\ See 7 U.S.C. 6s(h)(4)(B).
\147\ See 7 U.S.C. 6s(h)(7).
\148\ In addition to needing to know the identity of the
counterparty to comply with regulatory requirements, an SD would not
likely execute a swap on an anonymous basis unless the swap is
intended to be cleared because the SD would not know the credit
quality of the anonymous counterparty and therefore would not know
how to price the swap or set other material terms for the uncleared,
bilateral swap, such as margin levels or default provisions.
\149\ Commission regulation 23.504(a)(2), 17 CFR 23.504(a)(2),
requires an SD to execute documentation meeting the requirements of
the section prior to or contemporaneously with entering into a swap
transaction with any counterparty.
\150\ See 17 CFR 23.158(a).
---------------------------------------------------------------------------

In applying this interpretation of the exception in section
4s(h)(7) of the CEA, the Commission incorporated a similar exception
from certain External Business Conduct Standards for swaps initiated on
a DCM or SEF where a Swap Entity does not know the identity of its
counterparty prior to execution,\151\ again to facilitate the trading
of cleared swaps on DCMs and SEFs. This exception allows counterparties
to seek competitive pricing on standardized swaps that will be cleared
from any willing counterparty on exchanges or electronic trading
platforms without being tied to seeking pricing only from SDs with whom
such counterparties have established a trading relationship.
---------------------------------------------------------------------------

\151\ See 17 CFR 23.402(b) and (c), 23.430(e), 23.431(c),
23.450(h), and 23.451(b). See also Final EBCS Rulemaking at 77 FR
9756, n. 307, 77 FR 9789, n. 746, 77 FR 9744, and 77 FR 9757.
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Thus, to further facilitate the trading of cleared swaps on DCMs,
SEFs, and Exempt SEFs, in the context of ITBC Swaps initiated by a
Special Entity on a DCM, SEF, or Exempt SEF, the Commission
preliminarily interprets the condition in section 4s(h)(7) that the SD
does not know the identity of the counterparty to be met not only where
the SD is unaware of the name of the counterparty (i.e., anonymous
trading), but also where the SD is unaware of the status of the
counterparty as a Special Entity, even if it knows the name of the
counterparty. The Commission preliminarily considers this
interpretation of ``identity'' as reasonable in the context of ITBC
Swaps initiated by a Special Entity on a DCM, SEF, or Exempt SEF
because the Commission preliminarily believes that this exception will
facilitate trading of cleared swaps on exchanges or electronic
platforms both generally and by Special Entities. In addition, for the
reasons discussed above regarding the availability of information
regarding the risks and characteristics of ITBC Swaps from sources
other than an SD counterparty and the lack of any ongoing relationship
with a counterparty to a cleared swap, the Commission preliminarily
believes that Special Entities initiating swaps on a DCM, SEF, or
Exempt SEF that are intended to be cleared would only be seeking
competitive pricing from any willing counterparty. The initiating
Special Entity cannot be entering into the ITBC Swap in reliance on the
advice or recommendation of a particular SD that may be the willing
counterparty providing the most competitive price if the SD does not
even know the counterparty is a Special Entity. In other words, where a
Special Entity is initiating an ITBC Swap on a DCM, SEF, or Exempt SEF,
it is not concerned with the identity of its counterparty, and, in
turn, its counterparty cannot possibly be providing advice to the
Special Entity if it does not know the nature of the counterparty as a
Special Entity. Thus, for purposes of the application of the duty
imposed on SDs under section 4s(h)(4)(B) of the CEA to act in the best
interests of a Special Entity when providing trading advice or a swap
trading recommendation, the only salient aspect of the identity of a
counterparty that initiates an ITBC Swap on a DCM, SEF, or Exempt SEF
is whether the counterparty is in fact a known Special Entity. Where an
SD has no actual knowledge that an ITBC Swap counterparty that
initiates an ITBC Swap on a DCM, SEF, or Exempt SEF is, in fact, a
Special Entity, the Commission preliminarily believes that such SD
should not be deemed to know the ``identity'' of the counterparty to
the transaction.
The Commission notes that the exception in 4s(h)(7) applies only to
swaps ``initiated by a Special Entity'' on a DCM or SEF. This language
is incorporated into the exception in the proposed amendment to Sec.
23.440(e)(3) to better track the exception provided in the CEA, but the
Commission has preliminarily determined that ``initiated by'' has no
special meaning in this context and is synonymous with ``entered into
by'' or ``executed by.'' The Commission understands that taking the
active step of trading swaps on DCMs, SEFs, or Exempt SEFs may take
many forms such as posting a request-for-quote, submitting a bid or
offer to a central limit order book, or accepting a standing or resting
bid or offer submitted by another market participant to a central limit
order book. The Commission has preliminarily determined that limiting
the proposed exception in proposed Sec. 23.440(e)(3) to only a subset
of the variety of available trading methodologies (i.e., only those
trading methodologies that the Commission has determined would
constitute ``initiation by'' a Special Entity) would unnecessarily
introduce complex trading limitations that may require material and
costly changes to exchange trading programming or processes. The
Commission preliminarily believes, therefore, that ``initiated by''
only means that a market participant is conducting trading on a DCM,
SEF, or Exempt SEF for its own account or through a duly authorized
agent.
The Commission notes that where an SD knows the name of its
counterparty, there may be situations where actual knowledge of the
counterparty's status as a Special Entity could be reasonably inferred
by the name of the counterparty alone. For example, a counterparty
known to an SD as ``City of New York'' or ``State of New York,'' alone,
without more information, should put an SD on notice that its
counterparty is a governmental Special Entity. In such situations, the
Commission is aware that the SD may have actual knowledge of both the
counterparty's name and its status as a Special Entity (and therefore
will be deemed to have actual knowledge of the counterparty's
``identity'' as that term is used in section 4s(h)(7) of the CEA) and,
thus, the SD will not qualify for the exception in proposed Sec.
23.440(e)(3). While the Commission is aware that this may limit the
trading of ITBC Swaps by Special Entities with names that readily
identify them as Special Entities, the Commission believes it is
restrained by the language in section 4s(h) of the CEA from providing
any further exceptions. As noted below, the Commission seeks comment
from Special Entities and their current or potential SD counterparties
on the effect of the limited exception the Commission has proposed.
With respect to Special Entities that are not readily identifiable
as Special Entities from their name alone, in the Commission's
preliminary view, an SD would only have actual knowledge of whether a
counterparty is a Special Entity if it has entered into a trading
relationship with such counterparty and has, for example, entered into
documentation in compliance with the STRD Requirement.\152\ The
Commission understands that such documentation, as entered into after
promulgation of Sec. 23.440, may specifically require counterparties
to SDs to specify whether or not such counterparty is a Special

[[Page 47152]]

Entity and exactly which prong of the Special Entity definition set
forth in Sec. 23.401(c) describes the counterparty. Thus, in the
Commission's preliminary view, an SD, absent other evidence to the
contrary, will be deemed not to have actual knowledge of whether a
counterparty is a Special Entity unless it has entered into a trading
relationship with the counterparty that includes identification of the
counterparty as a Special Entity or not a Special Entity. Evidence that
an SD has actual knowledge of a counterparty's Special Entity status
absent a trading relationship could, for example, include a
counterparty name that readily identifies the counterparty as a Special
Entity or a trading relationship between the counterparty and an
affiliate of the SD where the counterparty has self-identified as a
Special Entity.
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\152\ The Commission notes that while compliance by an SD with
the STRD Requirement would almost certainly entail a counterparty's
self-identification as a Special Entity, the Commission believes
that it is possible that some SDs may have entered into a trading
relationship with a Special Entity that does not entail
documentation that meets the STRD Requirement but still requires the
counterparty to self-identify as a Special Entity, such as where the
SD and Special Entity have agreed to only enter into cleared swaps.
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The Commission also proposes to amend Sec. 23.450 to add a new
subparagraph (h) to Sec. 23.450, which would provide an exception from
the requirements of Sec. 23.450 for A-ITBC Swaps (i.e., swaps with a
counterparty whose identity is not known to the Swap Entity prior to
execution), and also provide an exception from the requirements of the
section for any ITBC Swaps entered into by a Swap Entity with a Special
Entity initiated on a DCM, SEF, or Exempt SEF.
The Commission preliminarily believes that the proposed amendments
to Sec. Sec. 23.440 and 23.450 better serve the intent of the CEA than
the rules now in effect. As discussed above, the Commission has
preliminarily determined that swaps listed for trading on a DCM, SEF,
or Exempt SEF, and accepted for clearing on a DCO or Exempt DCO, are
sufficiently standardized and information about the material risks and
characteristics of such swaps are available from the DCM, SEF, or
Exempt SEF and/or the DCO or Exempt DCO. Because (i) this information
is available to counterparties from sources other than a Swap Entity
counterparty, (ii) ITBC Swap counterparties have no on-going
relationship with a Swap Entity counterparty with respect to ITBC
Swaps, and (iii) the Commission preliminarily believes that all or
nearly all ITBC Swap counterparties have represented to any Swap Entity
counterparty that they will not rely on recommendations from a Swap
Entity and/or that any such recommendation will be independently
evaluated by a fiduciary or a QIR, the Commission has preliminarily
determined that ITBC Swap counterparties will likely be entering into
ITBC Swaps on DCMs, SEFs, or Exempt SEFs on their own initiative rather
than looking to SDs for trading advice or disclosures and likely
looking to SDs only for competitive pricing. Because information about
the material risks and characteristics of ITBC Swaps is available to
Special Entity counterparties from a source other than a Swap Entity,
the Commission has also preliminarily determined that it is likely that
there may be no material regulatory purpose served by requiring an SD
to determine that a Special Entity counterparty has a QIR. Further,
Swap Entities that are counterparties to A-ITBC swaps or ITBC Swaps
with counterparties where the Swap Entity does not know the Special
Entity status of the counterparty do not know, and may never know, the
``identity'' (as interpreted by the Commission as discussed above) of
their counterparties, making a suitability analysis or determination
that a Special Entity has a QIR impossible.
The Commission considered but rejected the alternative of not
proposing any exception from the requirements of Sec. 23.440 for ITBC
Swaps, reasoning that there is no need for such exception if an SD
simply refrains from recommending a swap or trading strategy involving
a swap that is tailored to the particular needs or characteristics of a
Special Entity that is an ITBC Swap counterparty. If an SD does not
recommend a swap or swap trading strategy that is tailored to the
particular needs of a Special Entity, then there is no need to comply
with the requirement in Sec. 23.440(c)(1) that the SD make a
reasonable determination that any swap or trading strategy involving a
swap recommended by the SD is in the best interests of the Special
Entity. The Commission has preliminarily determined, however, that the
tremendous uptake of adherence to the ISDA protocol discussed above is
persuasive evidence that SDs are not willing to enter into swaps with
Special Entities that have not made the representation necessary for an
SD to rely on the safe-harbor in Sec. 23.440(b). The Commission
preliminarily understands that SDs are unwilling to take the risk that
something communicated during swap negotiations will be seen as
providing a recommendation despite the best efforts or policies and
procedures of the SD designed to prevent sales and trading personnel
from making any recommendation to Special Entity counterparties. The
Commission also preliminarily understands that SDs often do not know
whether a counterparty is a Special Entity even when the SD knows the
identity of the counterparty prior to execution of a swap.\153\ Thus,
the Commission is concerned that not providing an exception from the
requirements of Sec. 23.440 would likely result in SDs refusing to
enter into swaps with ITBC Swap counterparties that are Special
Entities (and potentially curbing trading with any counterparty if they
don't know whether or not the counterparty is a Special Entity) unless
they have received the safe-harbor representation. Such potential
decrease in available ITBC Swap counterparties, especially SD
counterparties willing to trade with Special Entities, would frustrate
the purposes of this aspect of the Proposal.
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\153\ The Commission is aware that where SDs are matched with
counterparties when executing ITBC Swaps on a SEF, the SD may be
aware of the counterparty's identity, but the SEF does not ``flag''
those market participants that are Special Entities. Thus, absent
the exception, SDs would be limited to entering into ITBC Swaps on
SEFs anonymously or only with counterparties that they recognize as
Special Entities from whom they have received the requisite safe-
harbor representations.
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The Commission did not consider the alternative of not providing an
exception from compliance with Sec. 23.450 because the requirements of
Sec. 23.450 apply to a Swap Entity whenever it enters into a swap with
a Special Entity. Thus, whenever a Swap Entity offers to enter into or
enters into a swap with a counterparty that it knows is a Special
Entity, the Swap Entity, absent the exception, would be required by
Sec. 23.450(b)(1) to have a reasonable basis to believe that the
Special Entity has a QIR. The Commission has preliminarily determined
that the burden of obtaining the information or representations
necessary for a Swap Entity to establish that a Special Entity has a
QIR would likely result in a significant decrease in the number of Swap
Entities willing to enter into ITBC Swaps with Special Entities. As
noted above, the Commission also preliminarily understands that Swap
Entities often don't know whether an ITBC Swap counterparty is a
Special Entity even when the Swap Entity knows the identity of the
counterparty prior to execution.
As reflected in the proposed amended rule text infra, the
Commission is also proposing to amend the definition of the term
``statutory disqualification'' in Sec. 23.450(a)(2).\154\ This
definition constitutes a condition to a person acting as a QIR for a
Special Entity pursuant to Sec. 23.450(b)(1)(ii).\155\ The Commission
proposes to amend the definition of ``statutory disqualification,'' and
therefore the

[[Page 47153]]

condition to acting as a QIR, to read as follows, with proposed new
language italicized:
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\154\ 17 CFR 23.450(a)(2).
\155\ 17 CFR 23.450(b)(1)(ii).
---------------------------------------------------------------------------

The term ``statutory disqualification'' means, with respect to a
person that is not a registrant with the Commission, grounds for
refusal to register or to revoke, condition, or restrict the
registration of any registrant or applicant for registration as set
forth in sections 8a(2) and 8a(3) of the Act, and, with respect to a
person that is a registrant or an applicant for registration with the
Commission, the Commission has refused registration or revoked,
conditioned, or restricted the registration of such registrant or
applicant for registration pursuant to sections 8a(2) or 8a(3) of the
Act.
The foregoing proposed amendment to Sec. 23.450(a)(2) \156\ is
intended by the Commission to address the fact that many entities
acting as QIRs for Special Entities are registered with the Commission
as commodity trading advisors (and possibly other types of
registrants).\157\ In the Commission's experience, a minor compliance
violation by such a person that does not result in the Commission
taking any action to revoke the registration of the person may
nonetheless result in such person being disqualified from acting as a
QIR for Special Entities because the definition of ``statutory
disqualification'' in Sec. 23.451(a)(2) only requires that there be
``grounds'' for such disqualification.\158\ The Commission has
preliminarily determined that unless a person that is a registrant with
the Commission has in fact had their registration revoked, refused,
conditioned, or restricted by the Commission, then such registrant
should continue to qualify as a QIR for Special Entities, thereby
providing the Commission discretion similar to that under sections
8a(2) and (3) of the CEA.\159\ Thus, for example, a violation of SEC
rules or the securities laws by a dual-registrant of both the
Commission and SEC would not constitute a statutory disqualification
under this section unless the Commission determined to revoke, refuse,
condition, or restrict the registration of such dual-registrant.\160\
The Commission has preliminarily determined to propose this amendment
because the current definition of ``statutory disqualification''
subjects QIRs to a higher standard of conduct than that applied to
Commission registrants. With respect to regulatory violations by
Commission registrants, the Commission has discretion whether to order
revocation of registration or some other lesser penalty. If however,
that same registrant is also acting as a QIR, the current definition of
``statutory disqualification'' provides no discretion because the mere
existence of grounds for statutory disqualification disqualifies the
person from acting as a QIR. The Commission has preliminarily
determined that where a Commission registrant is also acting as a QIR
and the Commission has determined not to revoke the registration of the
registrant, the person should also be permitted to continue to act as a
QIR.
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\156\ 17 CFR 23.450(a)(2).
\157\ QIRs may also be registered with the SEC and/or other
domestic or foreign regulators or otherwise subject to other
regulation and subject to disqualification as a result of violations
thereof. See 7 U.S.C. 12a(2) and (3). Of note, the Commission is not
required to disqualify any person from registration under these
provisions, but is rather given the discretion to do so when grounds
for disqualification are present. Id.
\158\ See 17 CFR 23.450(a)(2).
\159\ 7 U.S.C. 12a(2) and (3).
\160\ Or such determination was made by the National Futures
Association, a registered futures association and self-regulatory
organization to which the Commission has delegated registration
functions.
---------------------------------------------------------------------------

Question 32: The Commission requests comment on all aspects of the
proposed amendments to Sec. Sec. 23.440 and 23.450.
Question 33: The Commission requests comment on whether the
Commission's reasoning for rejecting the alternative of not providing
an exception from the requirements Sec. 23.440 for ITBC Swaps is
reasonable or whether the Commission should reconsider such
alternative.
Question 34: The Commission requests comment on whether its
preliminary interpretation of ``identity'' in the context of CEA,
sections 4s(h)(4)(B) and 4s(h)(7) (as described above) is reasonable.
Why or why not?
Question 35: The Commission requests comment on whether its
requirement that an SD not know the Special Entity status of a
counterparty to qualify for the proposed exception in Sec.
23.440(e)(3) is likely to result in the exclusion (in whole or in part)
of Special Entities from the cleared swap markets executed on DCMs,
SEFs, or Exempt SEFs. Do adequate avenues for anonymous trading of
cleared swaps by Special Entities exist now or are such anonymous
trading venues likely to be developed in response to the Proposal?
Question 36: The Commission requests comment on whether the
Commission's reasoning for providing an exception from the requirements
Sec. 23.450 for ITBC Swaps is reasonable.
Question 37: Does the proposed amendment to the definition of
``statutory disqualification'' in Sec. 23.450(a)(2) adequately address
the issue of disqualifying persons from acting as QIRs for Special
Entities based on minor compliance violations that do not result in
Commission registration actions?

K. Proposed Amendments to Sec. 23.451

In general, Sec. 23.451, subject to certain conditions and
exceptions, prohibits SDs from entering into swaps with a governmental
Special Entity (as defined in Sec. 23.451(a)(3)) within two years
after any political contribution to an official of such governmental
Special Entity was made by the SD or a covered associate (as defined in
Sec. 23.451(a)(2)) of the SD.\161\ Pursuant to Sec.
23.451(b)(2)(iii), however, this prohibition does not apply to swaps
that are initiated on a DCM or SEF where the SD does not know the
identity of the counterparty prior to execution.\162\
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\161\ See generally Sec. 23.451, 17 CFR 23.451.
\162\ 17 CFR 23.451(b)(2)(iii).
---------------------------------------------------------------------------

The Commission proposes to amend Sec. 23.451 by revising
subparagraph (b)(2)(iii) to provide that the prohibition will not apply
to: (1) swaps that are initiated on a DCM, SEF, or Exempt SEF; and (2)
A-ITBC Swaps.\163\ This proposed amendment adds Exempt SEFs to the list
of trading facilities that qualify for the exception, but does not
maintain the anonymous execution condition for swaps that are executed
on a DCM, SEF, or Exempt SEF. This change makes the Proposal different
from MPD's no-action position in CFTC Staff Letter 23-01, which
excluded Commission regulation 23.451 from the ITBC Compliance
Exceptions. This exclusion by MPD in CFTC Staff Letter 23-01 was a
change from its prior no-action position in CFTC Staff Letter 13-07
where Commission regulation 23.451 was not excluded. For the reasons
detailed below, the Commission has preliminarily determined that MPD's
reasoning for that change may have been incomplete or misinformed.
---------------------------------------------------------------------------

\163\ Id.
---------------------------------------------------------------------------

In proposing to include Commission regulation 23.451 in the ITBC
Swap Compliance Exceptions for ITBC Swaps executed on a DCM, SEF, or
Exempt SEF where the SD knows the identity of the counterparty, the
Commission has preliminarily determined that the risk of political
contributions inappropriately influencing governmental Special
Entities' swaps trading decisions are substantially mitigated by the
nature of trading on a DCM, SEF, or Exempt SEF. Such facilities, by
definition, provide access to liquidity from multiple liquidity
providers, not a single SD.

[[Page 47154]]

Execution also takes place through competitive processes such as order
books, multi-dealer requests for quote, or similar multilateral trading
protocols. In addition, the Commission understands that many DCMs,
SEFs, and Exempt SEFs prohibit pre-arranged trading and limit the
extent of pre-execution communications. As a result, the Commission
preliminarily believes that, unlike with off-facility, bilateral
trading, DCMs, SEFs, and Exempt SEFs would not enable the sort of
collusion between officials of a governmental Special Entity and SDs
that have made contributions to those officials that Commission
regulation 23.451 is designed to prevent.
In addition, the Commission understands from market participants
that MPD's observations in CFTC Staff Letter 23-01 regarding ``no-
trade'' lists and other internal requirements designed to prevent or
mitigate violations of Commission regulation 23.451 are not implemented
as simply as MPD may have surmised in the context of trading on DCMs,
SEFs, or Exempt SEFs. The Commission is aware that staff guidance has,
since 2013, discouraged SEFs from permitting ``enablement mechanisms''
such as those that, according to market participants, would allow an SD
to enforce a ``no-trade'' list when trading on a SEF.\164\ The
Commission understands that DCMs and Exempt SEFs are generally subject
to similar impartial access obligations. As a result, the Commission
preliminarily believes that there may be significant impediments to SDs
enforcing measures to comply with Commission regulation 23.451 when
trading on DCMs, SEFs, and Exempt SEFs and thus has preliminarily
determined to include Commission regulation 23.451 in the ITBC Swap
Compliance Exceptions pursuant to this Proposal.
---------------------------------------------------------------------------

\164\ See Guidance on Application of Certain Commission
Regulations to [SEFs] (Nov. 14, 2013) at p. 1-3, available at
<a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf</a>.
---------------------------------------------------------------------------

The proposed amendment to Sec. 23.451 to exclude A-ITBC Swaps is
intended to ensure that all swaps executed anonymously, including those
not initiated, on a DCM, SEF, or Exempt SEF, will not be subject to
Sec. 23.451. The Commission has preliminarily determined that it is
not possible for an SD to comply with Sec. 23.451 where an SD does not
know the identity of the counterparty prior to execution, regardless of
whether the swap is executed bilaterally or on or pursuant to the rules
of a DCM, SEF, or Exempt SEF.
The Commission is also proposing to delete the word ``Federal''
from Sec. 23.451(a)(1)(iii) \165\ which defines the term
``contribution'' in relation to transition or inaugural expenses for a
successful candidate for office. Commission regulation 23.451 was
promulgated using the Commission's discretionary rulemaking authority
under section 4s(h) of the CEA \166\ to impose business conduct
requirements in the public interest, and thus the Dodd-Frank Act
neither required the Commission to adopt that regulation nor to include
Federal inaugural expenses within the meaning of ``contribution.''
\167\ Further, the Commission intended the rule, among other things, to
complement existing pay-to-play prohibitions imposed by Federal
securities regulators to deter undue influence and other fraudulent
practices that harm the public and promote consistency in the business
conduct standards that apply to financial market professionals dealing
with municipal entities.\168\ However, neither of the substantially
similar rules promulgated by the SEC for security-based swap dealers
and the Municipal Securities Rulemaking Board (``MSRB'') for brokers,
dealers, and municipal securities dealers include Federal election
transition or inaugural expenses in their definitions of
``contribution.'' \169\ Thus, the Commission is proposing to delete
``Federal'' from Sec. 23.451(a)(1)(iii) to better align the rule with
the intention of the Commission stated in the initial rulemaking, which
was to complement the rules of the SEC and the MSRB.
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\165\ See 17 CFR 23.451(a)(1)(iii).
\166\ 7 U.S.C. 6s(h).
\167\ See generally 17 CFR 23.451; see also Proposed Rules for
Business Conduct Standards for Swap Dealers and Major Swap
Participants With Counterparties, 75 FR 80638, 80653-54 (Dec. 22,
2010).
\168\ Id.; see Final EBCS Rulemaking at 77 FR 9799 (noting that
Sec. 23.451 was adopted pursuant to the Commission's discretionary
rulemaking authority under section 4s(h) of the CEA).
\169\ See 17 CFR 240.15fh-6(a)(1)(iii) and MSRB Rule G-37(g)(vi)
(demonstrating that neither the SEC nor the MSRB apply their ``pay-
to-play'' prohibition to transition or inaugural expenses incurred
by successful candidates for Federal offices).
---------------------------------------------------------------------------

Question 38: Is it appropriate for the Commission to harmonize its
requirements with those of the SEC and MSRB by deleting the word
``Federal'' as proposed above?
Question 39: The Commission requests comment on all aspects of the
proposed amendment to Sec. 23.451.

L. Proposed Amendment to Sec. 23.504

In general, Sec. 23.504 requires Swap Entities to enter into swap
trading relationship documentation covering certain enumerated topics
with each swap counterparty prior to entering into a swap with such
counterparty \170\ (previously defined as the ``STRD
Requirement'').\171\ The Commission proposes to amend Sec.
23.504(a)(1) by adding a new subsection (iii).
---------------------------------------------------------------------------

\170\ 17 CFR 23.504.
\171\ See Section I.A. supra.
---------------------------------------------------------------------------

The revised section would read as follows: (1) Applicability. The
requirements of this section shall not apply to: (i) swaps executed
prior to the date on which a swap dealer or major swap participant is
required to be in compliance with this section; (ii) swaps that have
been cleared on a derivatives clearing organization or cleared on a
clearing organization that is currently exempted from registration by
the Commission pursuant to section 5b(h) of the Act; and (iii) an ITBC
Swap as defined in Sec. 23.401(d) of this chapter.
These proposed changes recognize that the clearing of swaps between
a Swap Entity and a counterparty involves two stages: (1) the execution
of a swap between a Swap Entity and its counterparty; and (2) the
novation of that swap to a clearing organization that results in two
swaps: (i) a swap between the clearing organization and the Swap
Entity; and (ii) a swap between the clearing organization and its
counterparty. The proposed changes to the applicability of the STRD
Requirement in Sec. 23.504(a)(1) therefore recognize that the STRD
Requirement should not apply to an ITBC Swap as defined in Sec.
23.401(d),\172\ which is the swap between a Swap Entity and its
counterparty that is intended to be cleared contemporaneously with
execution (i.e., Sec. 23.504(a)(1)(iii)) because no documentation is
needed if the swap will either be cleared promptly or if not cleared,
void ab initio. For the same reason, the STRD Requirement need not
apply to the swaps that result from the novation of such swap to a
clearing organization (i.e., Sec. 23.504(a)(1)(ii)). The proposed
amendment to Sec. 23.504(a)(1)(ii) also recognizes that a swap may be
cleared on a DCO or on an Exempt DCO.
---------------------------------------------------------------------------

\172\ 17 CFR 23.401(d).
---------------------------------------------------------------------------

Question 40: The Commission requests comment on all aspects of the
proposed amendment to Sec. 23.504.
Question 41: Does the Commission's proposed amendment to Sec.
23.504(a)(1) adequately cover the exceptions for ITBC Swaps that have
been proposed to be added to the External Business Conduct Standards
proposed above? Why or why not?

[[Page 47155]]

Question 42: Should the Commission's proposed amendment to Sec.
23.504(a)(1) be phrased differently to cover the exceptions for ITBC
Swaps that have been proposed to be added to the External Business
Conduct standards proposed above? How should such proposed amendment to
Sec. 23.504(a)(1) be differently phrased to fulfill the Commission's
intent that both swaps cleared on a DCO or Exempt DCO and ITBC Swaps be
excepted from the STRD Requirement?

III. Cost Benefit Considerations

A. Statutory and Regulatory Background

As discussed above, section 4s(h) of the CEA \173\ provides the
Commission with both mandatory and discretionary rulemaking authority
to impose business conduct standards on Swap Entities in their dealings
with counterparties, including Special Entities.\174\ Pursuant to this
rulemaking authority, the Commission adopted the External Business
Conduct Standards. In addition, section 4s(i) of the CEA requires the
Commission to adopt rules governing swap documentation for Swap
Entities.\175\ Pursuant to this rulemaking authority, the Commission
adopted the STRD Requirement.
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\173\ 7 U.S.C. 6s(h).
\174\ ``Special Entity'' is defined in Sec. 23.401(c), 17 CFR
23.401(c).
\175\ 7 U.S.C. 6s(i).
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B. Consideration of the Costs and Benefits of the Commission's Action

1. Section 15(a) of the CEA
Section 15(a) of the CEA requires the Commission to ``consider the
costs and benefits'' of its actions before promulgating a regulation
under the CEA or issuing certain orders.\176\ Section 15(a) further
specifies that the costs and 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 (collectively, the ``Section 15(a)
Factors'').\177\ In conducting its analysis, the Commission may, in its
discretion, give greater weight to any one of the five enumerated areas
of concern and may determine that, notwithstanding its costs, a
particular rule is necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
---------------------------------------------------------------------------

\176\ 7 U.S.C. 19(a).
\177\ Id.
---------------------------------------------------------------------------

The Commission notes that this cost-benefit consideration is based
on its understanding that the derivatives market regulated by the
Commission functions internationally with: (1) transactions that
involve U.S. entities occurring across different international
jurisdictions; (2) some entities organized outside of the United States
that are registered with the Commission; and (3) some entities that
typically operate both within and outside the United States and that
follow 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
proposed regulations on all relevant derivatives activity, whether
based on their actual occurrence in the United States or on their
connection with, or effect on U.S. commerce.\178\
---------------------------------------------------------------------------

\178\ See, e.g. 7 U.S.C. 2(i).
---------------------------------------------------------------------------

2. Costs and Benefits of the Proposed Regulation
The baseline for the Commission's consideration of the costs and
benefits of the Proposal are: (1) the Commission's rules governing
business conduct standards for Swap Entities in the dealings with
counterparties, adopted by the Commission as subpart H of part 23 of
its regulations (Sec. Sec. 23.400-23.451) pursuant to rulemaking
authority granted under section 4s(h) of the CEA (the ``External
Business Conduct Standards''); \179\ and (2) Commission regulation
23.504, which mandate, respectively, that Swap Entities (i) comply with
certain requirements when entering into swaps with counterparties,
including Special Entities, and (ii) enter into swap trading
relationship documentation (``STRD'') with counterparties prior to
execution of a swap (the ``STRD Requirement''), adopted by the
Commission pursuant to rulemaking authority granted in Section 4s(i) of
the CEA \180\ The Commission recognizes, however, that to the extent
that SDs \181\ have arranged their business in reliance on MPD no-
action positions in the Covered Staff Letters, the actual costs and
benefits of the Proposal may not be as significant. In situations where
the Commission is unable to quantify the costs and benefits, the
Commission identifies and considers the costs and benefits of these
proposed rules in qualitative terms.
---------------------------------------------------------------------------

\179\ 7 U.S.C. 6s(h).
\180\ 7 U.S.C. 6s(i).
\181\ Currently, there are no MSPs registered with the
Commission and there have not been any MSPs registered with the
Commission for several years. Thus, this Section regarding the
Commission's consideration of the costs and benefits of the Proposal
will only refer to SDs that may have relied on the Covered Staff
Letters and may benefit from the compliance exceptions set forth
herein.
---------------------------------------------------------------------------

a. Benefits
Compliance with the conditions set forth in the definition of ITBC
Swap in proposed Sec. 23.401 \182\ would permit SDs to qualify for
exceptions to compliance with regulatory requirements set forth in the
proposed amendments to Sec. Sec. 23.402 through 23.451 and Sec.
23.504.\183\ The Commission preliminarily believes these exceptions
would benefit SDs by reducing compliance obligations, and thereby
lowering compliance costs, as well as reducing operational costs for
SDs because such SDs would no longer have to agree on disclosure
methodologies with their ITBC Swap counterparties, nor prepare and
maintain the actual written disclosures. Specifically, the Commission
preliminarily believes that the adoption of the ITBC Swap definition
and the compliance exceptions in the Proposal as final rules by the
Commission would, without materially disadvantaging their non-Swap
Entity counterparties, significantly reduce the number of required
disclosures an SD would otherwise be required to make, including
disclosure pursuant to Sec. 23.431(a) of the material risks and
characteristics of particular swaps, disclosure of material incentives
and conflicts of interest that an SD may have in connection with a
particular swap, and disclosure of the PTMMM of a particular swap.\184\
The SD may also benefit from an exception that would eliminate the
scenario-analysis-upon-request requirement in Sec. 23.431(b).\185\
Similarly, an SD may benefit from the disapplication of the disclosure
requirements regarding a counterparty's right to request clearing and
choose the DCO on which a swap will be cleared under Sec. 23.432.\186\
Because an SD's ITBC Swap counterparties would not have to make
arrangements to receive and process the various disclosures, such
counterparties may also benefit from lower legal and operational costs.
---------------------------------------------------------------------------

\182\ 17 CFR 23.401.
\183\ See 17 CFR 23.401-23.451 and 23.504.
\184\ 17 CFR 23.431(a).
\185\ 17 CFR 23.431(b).
\186\ 17 CFR 23.432.
---------------------------------------------------------------------------

Compliance with the conditions set forth in the definition of ITBC
Swap in proposed Sec. 23.401 would also benefit SDs by permitting SDs
to qualify for exceptions to compliance with regulatory requirements
that would otherwise require the SD to obtain information and
representations from

[[Page 47156]]

their non-Swap Entity counterparties, including the KYC, ECP, and
Special Entity status information and representations under Sec. Sec.
23.402 and 23.430 \187\ and due diligence information regarding a
Special Entity's QIR under Sec. Sec. 23.440 and 23.450.\188\ These
provisions of the Proposal would lower compliance and operational costs
for SDs. Because, where the exception is available, an SD's ITBC Swap
counterparties would not have to respond to SD requests for information
and representations, such counterparties may also benefit from lower
legal and operational costs.
---------------------------------------------------------------------------

\187\ 17 CFR 23.402 and 430.
\188\ 17 CFR 23.440 and 450.
---------------------------------------------------------------------------

If the Commission determines to eliminate the PTMMM disclosure
requirement, as proposed above, SDs would benefit from a reduction in
costs that would otherwise be incurred in preparing and disclosing the
PTMMM. Not being required to source mid-market prices for certain swaps
solely for disclosure of a PTMMM to non-Swap Entity counterparties may
cause a cost savings for SDs.
Further, the Commission notes that, as a result of the no-action
positions provided by MPD in CFTC Staff Letter 23-01 pertaining to ITBC
Swaps, CFTC Staff Letter 13-12 pertaining to certain foreign exchange
transactions (e.g., swaps and Exempt FX Transactions for the 31 most
widely-traded currencies), and, most recently, CFTC Staff Letter 25-09,
the PTMMM is probably not being provided by some SDs to some
counterparties to cleared and uncleared swaps and such foreign exchange
transactions. Therefore, elimination of the PTMMM requirement may not
be significant to the costs of or benefits to such SDs or their
counterparties.
Similarly, the Commission notes that as a result of the no-action
position provided by MPD in CFTC Staff Letter 23-01 pertaining to ITBC
Swaps, scenario analysis is probably not being provided by some SDs to
some cleared swaps counterparties and, therefore, elimination of the
Scenario Analysis Requirement may not be significant to the costs of or
benefits to such SDs or their counterparties.
Finally, compliance with the ITBC Swap conditions would benefit
some SDs and their counterparties by providing an exception to the
expensive and time-consuming process of negotiating and executing swap
trading relationship documentation under the STRD Requirement in cases
where the documentation is unnecessary because the subject swaps will
either be cleared or void ab initio.\189\ As a whole, the proposed
exceptions from the documentation, onboarding, disclosure, and
information collection requirements may potentially benefit ITBC Swap
counterparties by allowing more SDs to act as potential counterparties
to a particular ITBC Swap counterparty, providing more liquidity to the
cleared swaps market as a whole.
---------------------------------------------------------------------------

\189\ See 17 CFR 23.504.
---------------------------------------------------------------------------

Compliance with the conditions set forth in the proposed definition
of a Qualified Prime Broker Arrangement in proposed Sec. 23.401 \190\
would also benefit SDs by disapplying the price disclosure requirement
(and, if it remains applicable, the PTMMM disclosure requirement) under
Sec. 23.431(a).\191\ Further, compliance with the proposed Qualified
Prime Broker Arrangement conditions may permit PB/SDs to engage in
transactions where counterparties to the Trigger Transaction and/or
Mirror Transaction would not be required to only be other SDs (unlike
under MPD's no-action position in CFTC Staff Letter 13-11), thereby
potentially benefiting PB Counterparties and PB/SDs by increasing the
number of participants in the markets for prime brokerage transactions.
---------------------------------------------------------------------------

\190\ 17 CFR 23.401.
\191\ 17 CFR 23.431(a).
---------------------------------------------------------------------------

Regarding the other miscellaneous proposed amendments, the proposed
amendment to the daily mark disclosure requirement in Sec. 23.431 may
benefit SDs by harmonizing the calculation of the daily mark with the
calculation of valuation data for SDR reporting and the calculation of
variation margin, thereby reducing SDs' operational burdens. The
proposed amendment of the definition of ``statutory disqualification''
in Sec. 23.450 would benefit those persons not automatically barred
from being a QIR and may benefit certain Special Entities if they are
not required to find a new QIR in the event their existing QIR is
subject to a regulatory action that would have previously constituted a
statutory disqualification. Finally, certain Swap Entities may benefit
from the proposed amendment to Sec. 23.451 that would remove
``Federal'' from the definition of ``contributions'' under the rule,
thereby not prohibiting the Swap Entity from entering into swaps with
Federal governmental Special Entities if the Swap Entity makes a
contribution to the transition or inaugural expenses of a successful
candidate for Federal public office.
b. Costs
As compared to the baseline of full compliance with the External
Business Conduct Standards and the STRD Requirement, compliance with
the conditions set forth in the proposed definition of ITBC Swap in
Sec. 23.401 may entail the following costs:
1. Costs incurred by an SD and its ITBC Swap counterparty in
determining whether counterparties are eligible to clear an ITBC Swap
on a particular DCO or Exempt DCO, likely would require a written
inquiry and receipt of a written response and attendant recordkeeping
processes or entry of response in trading systems;
2. Costs incurred by an SD and its ITBC Swap counterparty in
ensuring that swaps are submitted to clearing on a DCO or Exempt DCO as
quickly after execution as would be technologically practicable if
fully automated systems were used, likely would require on-boarding to
DCO and/or Exempt DCO swap submission systems, or to their respective
client clearing service providers, with attendant applications and
other paperwork as well as recordkeeping processes; and
3. Costs incurred by SDs and their ITBC Swap counterparties in
adjusting execution documentation to ensure agreement that swaps not
executed on a DCM, SEF, or Exempt SEF that fail to clear would be
deemed by the SD and its counterparty to be void ab initio.
The Commission notes that many, if not all, of the foregoing costs
may have already been incurred by SDs to meet the conditions to the MPD
no-action position in CFTC Staff Letter 23-01, though the Commission
acknowledges that at least some additional costs would likely be
incurred by SDs and their ITBC Swap counterparties due to minor
variations between the Proposal and the conditions set forth in CFTC
Staff Letter 23-01.
As compared to the baseline of full compliance with the External
Business Conduct Standards, compliance with the conditions set forth in
the proposed definition of Qualified Prime Broker Arrangement in
proposed Sec. 23.401 may entail costs incurred by PB/SDs and their new
PB Counterparties to negotiate and enter into Prime Broker
Arrangements, and costs incurred by PB/SDs and their existing PB
Counterparties to negotiate and amend existing Prime Broker
Arrangements, that meet the conditions of the definition of Qualified
Prime Broker Arrangement, including:
1. Costs incurred to ensure that the parties have agreed on the
type, parameters, and limits of each potential

[[Page 47157]]

Covered Transaction (as defined in proposed Sec. 23.401) \192\ that
may be entered pursuant to the Prime Broker Arrangement;
---------------------------------------------------------------------------

\192\ Id.
---------------------------------------------------------------------------

2. Costs incurred in producing and maintaining records of all
Regulatory Disclosures necessary to comply with the Sec. 23.431(a) and
(b),\193\ other than pre-trade disclosure of price information;
---------------------------------------------------------------------------

\193\ 17 CFR 23.431(a) and (b).
---------------------------------------------------------------------------

3. Costs incurred in producing, delivering, and maintaining the
required acknowledgement from PB Counterparties regarding receipt of
the Regulatory Disclosures and the disapplication of the requirement
that PB/SDs provide any further disclosures; and
4. Costs incurred for recordkeeping processes to maintain records
of each Qualified Prime Broker Arrangement.
The Commission requests additional public comment regarding
potential costs of the Proposal.
3. Costs and Benefits of the Commission's Proposal as Compared to
Alternatives
The Commission considered several alternatives to the Proposal. On
one hand, the Commission, for analytical completeness, considered
terminating the no-action positions in the Covered Staff Letters or
allowing them to expire. When compared only to the existing External
Business Conduct Standards and STRD Requirement, which is the baseline
for the cost and benefit considerations, this alternative imposes
neither costs nor benefits because this approach would effectively
constitute a reversion to the Commissions regulations prior to issuance
of the Covered Staff Letters. However, the Commission does not
anticipate that there would be any significant benefit to this approach
relative to the approach contemplated by the Proposal, and indeed,
preliminarily believes that there would be significant costs to market
participants when compared to the Proposal, particularly in
consideration of market participants' probable reliance on the no-
action letters, which the Proposal would have the effect of codifying,
with the modifications described herein. Terminating or allowing the
no-action positions to expire without amending the regulations as
discussed herein would, as noted above, preclude swap market
participants from achieving or maintaining significant benefits and
would likely require incursion of significant costs to unwind trading
relationships and Prime Broker Arrangements entered into in reliance on
the no-action positions or enter into new documentation and trading
relationships, or implement new counterparty vetting procedures to
ensure compliance with the External Business Conduct Standards and STRD
Requirement.
Alternatively, the Commission considered, in the ITBC Swaps
context, limiting the ITBC Swap Compliance Exceptions only to those
swaps executed anonymously on a DCM, SEF, or Exempt SEF and cleared on
a DCO or Exempt DCO. The Commission considered this as a less complex
alternative to the Proposal, relying on the ``straight-through-
processing'' rules applicable to Swap Entities, SEFs, and DCOs \194\ to
incentivize the trading of cleared swaps to be more like the trading of
futures on DCMs. However, the Commission preliminarily believes that
the swaps market has already made strides in this direction with the
significant growth in the clearing of swaps noted above \195\ and
believes it would be less costly and disruptive to not interfere in the
ongoing progression of swaps to execution on SEFs and clearing on DCOs.
---------------------------------------------------------------------------

\194\ In 2013, the Commission's Division of Clearing and Risk
and its Division of Market Oversight issued staff guidance on the
Commission's swaps straight-through-processing requirements (the
``STP Guidance''). The STP Guidance reiterates the requirements of
Commission regulation 39.12(b)(7), 17 CFR 39.12(b)(7), that a SEF
must route trades to a DCO ``as quickly after execution as would be
technologically practicable if fully automated systems were used.''
Commission regulation 39.12(b)(7)(i)(B), 17 CFR 39.12(b)(7)(i)(B)
also requires each FCM, SD, and MSP to ``establish systems that
enable the clearing member, or the DCO acting on its behalf, to
accept or reject each trade submitted to the DCO for clearing by or
for the clearing member or a customer of the clearing member as
quickly as would be technologically practicable if fully automated
systems were used.'' The STP Guidance is available on the
Commission's website: <a href="http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/stpguidance.pdf">http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/stpguidance.pdf</a>.
\195\ See Section II.A and B. supra.
---------------------------------------------------------------------------

Similarly, the Commission considered, in the Prime Broker context,
whether eliminating the compliance exceptions for swaps executed under
a Qualified Prime Broker Arrangement as set forth in the Proposal would
incentivize SDs and their prime brokerage customers to seek clearing of
swaps and Exempt FX Transactions as an alternative to the credit
intermediation and other services provided by PBs. However, as noted
above, the Commission preliminarily believes that the swaps market has
already made strides in this direction and has determined that
interference at this stage would require significant time and effort
and may prove more disruptive than to allow the clearing of swaps to
develop at its own pace.
Because the Commission is not aware of any adverse consequences
resulting from the no-action positions in the Covered Staff Letters
that have been in place for as long as a decade or more, the Commission
preliminarily believes that the proposed amendments, which would have
the effect of codifying the no-action positions with certain revisions,
would be the most appropriate and beneficial approach for Swap Entities
and their counterparties.
4. Section 15(a) Factors
Section 15(a) of the CEA \196\ requires the Commission to consider
the effects of its actions in light of the following five factors
discussed below: (a) the protection of market participants and the
public; (b) the efficiency, competitiveness, and financial integrity of
futures markets; (c) price discovery considerations; (d) sound risk
management practices; and (e) other public interest considerations.
---------------------------------------------------------------------------

\196\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

a. Protection of Market Participants and the Public
Section 15(a)(2)(A) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of
considerations of protection of market participants and the
public.\197\ The Commission preliminarily believes that the amendments
proposed herein would maintain the efficacy of protections for
customers and the broader financial system already contained in the
External Business Conduct Standards and the STRD Requirement.
---------------------------------------------------------------------------

\197\ 7 U.S.C. 19(a)(2)(A).
---------------------------------------------------------------------------

In general, the External Business Conduct Standards were adopted by
the Commission as directed by the Dodd-Frank Act to increase
protections for counterparties to Swap Entities by requiring additional
disclosures about the material risks and characteristics of swaps and
the material incentives and conflicts of interest that a Swap Entity
may have to recommend or enter into swaps with such counterparties. One
goal of the External Business Conduct Standards was to attempt to
balance the historical asymmetry of information about swaps and the
swap markets that had existed prior to the Dodd-Frank Act, leaving
counterparties much less informed about the material risks and
characteristics of swaps and the pricing of swaps, and the compensation
being earned by Swap Entities when entering into swaps. The Proposal
would provide regulatory compliance exceptions from

[[Page 47158]]

some of the required disclosures that counterparties to Swap Entities
would otherwise receive. However, the context in which the compliance
exceptions would apply provide a sound basis for the Commission to
recognize the benefit of the disclosures and other competing regulatory
interests.
In the context of Prime Broker Arrangements, the price (and, if
required by a final rule, the PTMMM) \198\ disclosures are proposed to
be disapplied, but such disapplication of the disclosures would be
necessary to allow PB Counterparties to seek prices for transactions
from a variety of potential counterparties while maintaining only one
or two trading relationships with PBs, serving the Commission's
interest in robust price discovery processes and allowing
counterparties to benefit from operational and collateral netting
efficiencies. Without the disclosure exception for Qualified Prime
Broker Arrangements, PB Counterparties seeking prices from a variety of
potential counterparties would be required to forego the credit
intermediation services provided by PB/SDs and would be required to
have multiple trading relationships with SDs and perhaps non-SDs, with
an attendant decrease in operational and collateral efficiencies.
---------------------------------------------------------------------------

\198\ See Section II.A., supra, for a discussion of the
Commission's proposed elimination of the PTMMM disclosure
requirements.
---------------------------------------------------------------------------

In the context of ITBC Swaps, many more disclosure requirements and
relationship-based requirements are proposed to be disapplied when Swap
Entities enter into ITBC Swaps with non-Swap Entity counterparties.
However, the Commission preliminarily believes that the disapplication
of these regulatory requirements subject to the conditions provided for
in the Proposal is reasonable when considered in light of the
Commission's regulatory interest in promoting the trading of swaps on
trading facilities and the clearing of swaps generally, two of the
pillars of the reforms Congress intended be implemented for the swap
markets by enactment of the Dodd-Frank Act. The Commission's purpose in
disapplying the disclosure and trading relationship requirements in the
context of ITBC Swaps as set forth in the Proposal \199\ is to remove
impediments to the efficient trading and clearing of swaps. Because a
cleared swap is between a counterparty and the DCO or Exempt DCO and
there is not an ongoing relationship between a Swap Entity and the
counterparty, the Commission preliminarily believes that the
relationship requirements in the External Business Conduct Standards
and the STRD Requirement are of little relevance to the transaction.
Similarly, the Commission preliminarily believes that for a swap to be
listed for trading on a DCM, SEF, or an Exempt SEF and/or cleared by a
DCO or Exempt DCO, information about that swap is necessarily made
available to counterparties from sources independent of Swap Entities,
thereby limiting the necessity for the disclosures otherwise required
by the External Business Conduct Standards.
---------------------------------------------------------------------------

\199\ See Section II.D.1. supra.
---------------------------------------------------------------------------

The elimination of the scenario analysis requirement in Sec.
23.431(b) could also reduce the transparency of swaps transactions to
swap counterparties. However, those analyses are only required when
requested by a counterparty to the Swap Entity, and the Commission
understands that they are requested rarely, if at all, due to their
limited value.
For the foregoing reasons, the Commission preliminarily believes
that the Proposal will not have a material detrimental effect on the
protection of swap market participants or the public.
b. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
Section 15(a)(2)(B) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of
``efficiency, competitiveness, and financial integrity of futures
markets.'' \200\ The Proposal would not directly impact the efficiency,
competitiveness, or financial integrity of futures markets because it
relates solely to business conduct standards and documentation
requirements applicable to swap market participants. However, to the
extent the Proposal would disapply or eliminate certain requirements
otherwise applicable to certain swaps, it may encourage some market
participants to engage in swaps rather than futures market
transactions, thereby potentially reducing the competition in futures
markets.
---------------------------------------------------------------------------

\200\ 7 U.S.C. 19(a)(2)(B).
---------------------------------------------------------------------------

c. Price Discovery
Section 15(a)(2)(C) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of price
discovery considerations.\201\ As discussed above, the Proposal's
provision of regulatory compliance exceptions for ITBC Swaps and PB/SDs
in Qualified Prime Broker Arrangements would permit counterparties to
seek swap prices from a wider variety of market participants (SDs with
whom counterparties have trading relationships and those with whom they
do not, PBs, executing dealers, other PB Counterparties, etc.) and thus
the Commission preliminarily believes that the Proposal would
facilitate more efficient swap price discovery for swaps intended to be
cleared and swaps in the markets served by PBs. However, to the extent
that eliminating the PTMMM disclosures imposes higher information
processing costs on some market participants, the proposal could hinder
competition and price discovery.
---------------------------------------------------------------------------

\201\ 7 U.S.C. 19(a)(2)(C).
---------------------------------------------------------------------------

d. Sound Risk Management Practices
Section 15(a)(2)(D) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of sound risk
management practices.\202\ The Commission preliminarily believes that
the Proposal would not have a significant effect on risk management
practices. Specifically, the Swap Entity risk management requirements
under Sec. 23.600 \203\ and other Commission regulations would not
change under the Proposal as it relates to ITBC Swaps because, absent
this Proposal, a Swap Entity's risks would still relate to cleared
swaps (and not uncleared swaps) even if the Swap Entity were required
to make all of the required disclosures and comply with the
relationship, suitability, and advisory rules of the External Business
Conduct Standards. Similarly, the proposed relief from disclosure of
the price (and, if required, the PTMMM) in the context of Prime Broker
Arrangements would not change the required risk management processes
applicable to PB/SDs.
---------------------------------------------------------------------------

\202\ 7 U.S.C. 19(a)(2)(D).
\203\ 17 CFR 23.600.
---------------------------------------------------------------------------

However, to the extent that the Proposal promotes trading on DCMs,
SEFs, and Exempt SEFs and clearing through a DCO or Exempt DCO, the
Commission preliminarily believes that the Proposal may further sound
risk management practices. The trades executed on DCMs, SEFs, and
Exempt SEFs are subject to the rules of these entities' platforms and
receive the associated protections. Also, the trades cleared on a DCO
or Exempt DCO are subject to the rules of these entities, which helps
to ensure market participants adequately address credit risks.\204\
---------------------------------------------------------------------------

\204\ See Derivatives Clearing Organization General Provisions
and Core Principles, 85 FR 4800, 4843 (Jan 27, 2020) (stating that
the amendments to Commission regulation 39.13 will strengthen and
promote sound risk management practices across DCOs, their clearing
members, and clearing members' customers.)

---------------------------------------------------------------------------

[[Page 47159]]

e. Other Public Interest Considerations
Section 15(a)(2)(E) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of other
public interest considerations.\205\ The Commission is identifying a
public interest benefit in its codification of the MPD no-action
positions in the Covered Staff Letters, as noted herein, where the
efficacy of those positions has been demonstrated. In such a situation,
the Commission preliminarily believes it serves the public interest
and, in particular, the interests of market participants, to engage in
notice-and-comment rulemaking and to seek and consider the views of the
public in amending its regulations, rather than for it to allow market
participants to continue to rely on no-action positions that could be
easily withdrawn or modified by MPD at any time, providing less long-
term certainty for market participants and offering a more limited
opportunity for public input.
---------------------------------------------------------------------------

\205\ 7 U.S.C. 19(a)(2)(E).
---------------------------------------------------------------------------

Question 43: The Commission requests comment on all aspects of its
consideration of the costs and benefits of the Proposal.
Question 44: The Commission requests comment, including any
available quantifiable data and analysis, concerning the costs and
benefits of the Proposal for Swap Entities and any other market
participant(s), including regarding the extent to which market
participants already enjoy any such benefits or incur any such costs.
Q

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