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Rule2025-23953

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

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Published

December 30, 2025

Effective

January 29, 2026

Issuing agencies

Commodity Futures Trading Commission

Abstract

The Commodity Futures Trading Commission ("CFTC" or "Commission") is adopting a final rule (the "Final Rule") amending certain of the Commission's business conduct and documentation requirements applicable to swap dealers and major swap participants. The Final Rule provides 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, and makes certain other changes discussed herein. The adopted amendments supersede certain no-action positions issued by the Commission's Market Participants Division ("MPD"), which the Commission expects MPD to terminate in due course.

Full Text

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[Federal Register Volume 90, Number 246 (Tuesday, December 30, 2025)]
[Rules and Regulations]
[Pages 61226-61259]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-23953]

[[Page 61225]]

Vol. 90

Tuesday,

No. 246

December 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; Final Rule

Federal Register / Vol. 90 , No. 246 / Tuesday, December 30, 2025 /
Rules and Regulations

[[Page 61226]]

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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: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is adopting a final rule (the ``Final Rule'') amending
certain of the Commission's business conduct and documentation
requirements applicable to swap dealers and major swap participants.
The Final Rule provides 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, and makes certain
other changes discussed herein. The adopted amendments supersede
certain no-action positions issued by the Commission's Market
Participants Division (``MPD''), which the Commission expects MPD to
terminate in due course.

DATES: The Final Rule is effective January 29, 2026.

FOR FURTHER INFORMATION CONTACT: Frank N. Fisanich, Deputy Director,
202-418-5949, <a href="/cdn-cgi/l/email-protection#1076767963717e79737850737664733e777f66">[email&#160;protected]</a>; Jacob Chachkin, Associate Director,
202-418-5496, <a href="/cdn-cgi/l/email-protection#7c161f141d1f141715123c1f1a081f521b130a">[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
NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

The Commission is issuing this Final Rule to amend certain business
conduct standards for swap dealers (``SDs'') and major swap
participants (``MSPs'' and, together with SDs, ``Swap Entities'') \1\
contained in subpart H of part 23 of the Commission's regulations,\2\
and to the swap trading relationship documentation rule for Swap
Entities in Sec. 23.504.\3\ These amendments are intended to address
certain long-standing issues with the Commission's external business
conduct standards and swap trading relationship documentation rule, and
are intended to supersede many long-standing no-action positions issued
by MPD (together, the ``Covered Staff Letters'') by codifying such
positions in the Commission's regulations, as explained below.\4\ 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 is amending the external business conduct
standards and the swap trading relationship documentation rule to
provide an outcome comparable to such no-action positions, with certain
modifications discussed below.
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\1\ ``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. 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\ 17 CFR part 23, subpart H.
\3\ 17 CFR 23.504.
\4\ For purposes of the Final Rule, the Covered Staff Letters
are 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 Final Rule refers 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, in due course, MPD will withdraw all of the
no-action positions contained in the Covered Staff Letters necessary to
reflect the amendments to Commission Regulations made by this Final
Rule.\5\
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\5\ 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 \6\ 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.\7\ 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'').\8\
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\6\ 7 U.S.C. 6s(h).
\7\ ``Special Entity'' is currently defined in Sec. 23.401(c),
17 CFR 23.401(c) (redesignated as Sec. 23.401(h), 17 CFR
23.401(h)), in the Final Rule text infra).
\8\ 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'').\9\ 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.\10\
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\9\ 17 CFR 23.431(a)(3)(i).
\10\ 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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[[Page 61227]]

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'').\11\ 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.\12\
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\11\ 17 CFR 23.431(b).
\12\ 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.\13\ Pursuant to this
rulemaking authority, the Commission adopted rules in subpart I of part
23 of its regulations.\14\ 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'').\15\
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\13\ 7 U.S.C. 6s(i).
\14\ See 17 CFR part 23, subpart I.
\15\ Sec. 23.504, 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 \16\ 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''). In support of their request, market
participants informed staff 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. Market participants generally argued
that: (1) because swaps of a type accepted for clearing by a
derivatives clearing organization (``DCO'') \17\ are sufficiently
standardized, (especially if also executed on a designated contract
market (``DCM'') \18\ or swap execution facility (``SEF'')),\19\ 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 with respect to such swaps, 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.\20\
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\16\ CFTC Staff Letter 13-70 (Nov. 15, 2013), Re: No-Action
Relief: Swaps Intended to be Cleared (``CFTC Staff Letter 13-70'').
\17\ ``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.
\18\ ``Designated contract market'' is defined with ``contract
market'' in Sec. 1.3, 17 CFR 1.3.
\19\ ``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.
\20\ 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 by 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
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.'' \21\ To date, the Commission has issued exemptions from
registration to four DCOs: ASX Clear (Futures) Pty Limited (``ASX'');
\22\ Japan Securities Clearing Corporation (``JSCC''); \23\ Korea
Exchange, Inc. (``KRX''); \24\ OTC Clearing Hong Kong Limited (``OTC
Clear''),\25\ and Taiwan Futures Exchange Corporation (``TAIFEX'').\26\
Any DCO that, as of any date of determination, is exempt from
registration as a DCO under section 5b of the CEA,\27\ including,
without limitation, ASX, JSCC, KRX, OTC Clear and TAIFEX, is an
``Exempt DCO'' on such date for purposes of this Final Rule.
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\21\ 7 U.S.C. 7a-1(h).
\22\ 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>.
\23\ 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 September 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 (``DCR'') 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.
\24\ 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>.
\25\ 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>.
\26\ On February 14, 2024, the Commission issued an Order of
Exemption with respect to TAIFEX, which exempts TAIFEX from
registering with the Commission as a DCO, subject to certain terms
and conditions in the order, available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizations/51878">https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizations/51878</a>.
\27\ 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

[[Page 61228]]

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.'' \28\ To date, the Commission has issued exemptions from SEF
registration to facilities for the trading or processing of swaps from
the European Union,\29\ Singapore,\30\ and Japan.\31\ 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,\32\ 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 Final Rule.
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\28\ 7 U.S.C. 7b-3(g).
\29\ 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 (``UK NAL Exchanges''). Under this no-action
position, UK NAL Exchanges 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>. The Commission
expects that MPD will issue a no-action position for ITBC Swaps on
UK NAL Exchanges after the publication of this Final Rule.
\30\ 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.
\31\ 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.
\32\ 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.\33\ 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 its no-action position regarding documentation requirements
under the STRD Requirement.\34\
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\33\ CFTC Staff Letter 23-01 at 1.
\34\ See id. at 7-10.
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The Commission has determined that the standardization that occurs
when a type of swap is made available to trade on a DCM, SEF \35\ or
Exempt SEF and/or accepted for clearing on a DCO \36\ 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 increase in the
information available and additional trade management flexibility, the
Commission has 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 determined that
compliance with such requirements may represent a significant
hinderance to the efficient trading of cleared swaps.
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\35\ 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.
\36\ 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 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.\37\
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\37\ 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 by
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 material economic 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

[[Page 61229]]

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 and terms 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, material economic terms, and a
PTMMM of the swaps as required by Sec. 23.431(a)(3).\38\
---------------------------------------------------------------------------

\38\ 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 the
enumerated External Business Conduct Standards as they relate to
certain covered transactions \39\ executed under PB arrangements where
the PB and trigger swap counterparty were each SDs registered with the
Commission.\40\ 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.\41\
---------------------------------------------------------------------------

\39\ 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''). See also CFTC
Staff Letter 25-10 (Apr. 9, 2025), Re: Staff Interpretation
Regarding Certain Foreign Exchange Products.
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.
\40\ See CFTC Staff Letter 13-11.
\41\ Id. at 6-10.
---------------------------------------------------------------------------

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'') \42\ 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.\43\ 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).\44\
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\42\ 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).
\43\ 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.
\44\ 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)).
---------------------------------------------------------------------------

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) \45\ 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.\46\ 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/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
and other material economic terms of the mirror swap are determined
based on those of the trigger swap 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.\47\
---------------------------------------------------------------------------

\45\ 17 CFR 23.431(a) and (b).
\46\ Sec. 23.431(c), 17 CFR 23.431(c).
\47\ CFTC Staff Letter 19-06 at 3.
---------------------------------------------------------------------------

The Commission has 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).\48\ 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),\49\ and, to the Commission's knowledge,
has not resulted in any adverse consequences.
---------------------------------------------------------------------------

\48\ 17 CFR 23.431(a) and (b).
\49\ 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) \50\ stating that
it would not recommend enforcement action against a Swap Entity for its
failure to disclose an otherwise required PTMMM to a

[[Page 61230]]

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); \51\ (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.\52\ 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.\53\ Swaps executed anonymously on a SEF or DCM are
excepted from the requirement to disclose a PTMMM pursuant to Sec.
23.431(c).\54\
---------------------------------------------------------------------------

\50\ 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.
\51\ 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.
\52\ Id. at 6.
\53\ Id. at 6-7.
\54\ 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 swaps or index credit default
swaps,\55\ 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.\56\
---------------------------------------------------------------------------

\55\ 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.
\56\ 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. CFTC Staff Letter 25-09 stated that it would
remain in effect until the adoption by the Commission of a regulation
addressing the PTMMM Requirement. This Final Rule addresses the PTMMM
Requirement.

II. Summary of the Proposal and Comments Received

On September 30, 2025, the Commission approved and subsequently
published in the Federal Register a Notice of Proposed Rulemaking (the
``Proposal'' or ``Proposed Rule'') \57\ proposing amendments to the
External Business Conduct Standards and the STRD Requirement to provide
exceptions to compliance with such requirements when executing swaps
that are: (1) ITBC Swaps; or (2) subject to prime broker arrangements
that meet certain qualifying conditions. The Proposal also proposed
certain other changes discussed herein, including eliminating the PTMMM
Requirement and the Scenario Analysis Requirement, and proposed a
simplifying amendment 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 in Sec.
23.401 \58\ to mean ``a swap dealer or major swap participant.''
---------------------------------------------------------------------------

\57\ Notice of Proposed Rulemaking, Revisions to Business
Conduct Requirements for Swap Dealers and Major Swap Participants,
90 FR 47136 (Sept. 30, 2025).
\58\ 17 CFR 23.401.
---------------------------------------------------------------------------

The Commission requested comments on all aspects of the Proposed
Rule and on many specific questions listed in the Proposal. The comment
period for the Proposal closed on November 14, 2025.\59\ The Commission
received a total of four comment letters, all of which were relevant to
the Proposal.\60\ All of these letters supported the Proposal broadly
but only the ISDA/SIFMA Letter and the Citadel Letter suggested
specific changes to portions of the Proposal, which are discussed in
the relevant sections below.
---------------------------------------------------------------------------

\59\ The comment period was originally scheduled to end on
October 24, 2025, but was extended as a result of a lapse in
appropriations. See Order of the Commodity Futures Trading
Commission Relating to the Continuation, Shutdown, and Resumption of
Certain Commission Operations in the Event of a Lapse in
Appropriations, 90 FR 47556, 47558 (Oct. 2, 2025).
\60\ All comments on the Proposal are available at <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7624&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7624&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1</a>. The four comment letters are from Citadel
Securities (``Citadel'') (the ``Citadel Letter''); Immutifi Inc.;
the International Swaps and Derivatives Association, Inc. (``ISDA'')
and the Securities Industry and Financial Markets Association
(``SIFMA'') (the ``ISDA/SIFMA Letter''); and Kelly Moore.
---------------------------------------------------------------------------

A. Pre-Trade Mid-Market Mark Disclosure Requirement

As discussed above, Commission Regulation Sec. 23.431(a)(3)(i)
currently requires pre-trade disclosures by Swap Entities to their
counterparties that are not Swap Entities, security-based swap dealers,
or security-based major swap participants, including the PTMMM.
1. Proposal
In the Proposal, the Commission proposed to eliminate the Swap
Entity PTMMM Requirement set forth in Sec. 23.431(a)(3)(i) \61\ in its
entirety. The Commission cited several reasons for proposing this
change based on its experience since 2013 when it first required Swap
Entity compliance with the External Business Conduct Standards. First,
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,'' \62\ it received suggestions from several commenters,
in their responses to a request for comments and recommendations under
the Commission's ``Project KISS'' in 2017,\63\ requesting that the
Commission eliminate or revise the PTMMM Requirement, arguing that,
among other things, the requirement: (1) creates

[[Page 61231]]

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''),\64\ which are deemed sufficiently sophisticated to enter
into over-the-counter swaps.\65\
---------------------------------------------------------------------------

\61\ 17 CFR 23.431(a)(3)(i).
\62\ Final EBCS Rulemaking at 77 FR 9766.
\63\ See generally Project KISS, 82 FR 23765 (May 24, 2017).
\64\ ``Eligible contract participant'' is defined in section
1a(18) of the CEA, 7 U.S.C. 1a(18).
\65\ 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>.
---------------------------------------------------------------------------

Second, MPD's issuance of the no-action positions 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 or other material economic terms 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.\66\
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.\67\
---------------------------------------------------------------------------

\66\ See CFTC Staff Letters 12-58 and 13-12.
\67\ 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 light of these circumstances, the Commission noted its
preliminary belief in the Proposal that the PTMMM Requirement provides
no utility to counterparties and may delay execution to the
disadvantage of counterparties, and that the elimination of the PTMMM
Requirement supports the Commission's goal of increasing the efficiency
of the swaps market.
In addition to the foregoing, the Commission noted in the Proposal
that the PTMMM Requirement, unlike the uncleared swap daily mark
disclosure requirement promulgated in Sec. 23.431(d)(2),\68\ was not
required by the amendments to the CEA contained in the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\69\
Thus, elimination of the PTMMM disclosure requirement would not
contradict any counterparty protection otherwise required by the Dodd-
Frank Act. Further, the Commission noted that elimination of the PTMMM
disclosure requirement would serve to harmonize the Commission's rules
governing swap dealing with those of the SEC because 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.\70\
---------------------------------------------------------------------------

\68\ 17 CFR 23.431(d)(2).
\69\ 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
the amendments to the daily mark disclosure requirement in the Final
Rule.
\70\ 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).
---------------------------------------------------------------------------

2. Comments Received and Final Rule
Only the ISDA/SIFMA Letter specifically addressed the proposed
elimination of the PTMMM Requirement. It supported elimination
unequivocally, agreeing with the Commission's reasoning for elimination
in the Proposal, and noting that the PTMMM Requirement presumes an
imbalance of information that does not exist in practice. After
considering this comment, and having received no comments in support of
the positive utility of receiving a PTMMM, the Commission has
determined that elimination of the PTMMM Requirement will support the
Commission's goal of increasing the efficiency of the swaps market by:
(1) reducing unnecessary burdens and cost, (2) allowing for more timely
trade execution, and (3) harmonizing the Commission's rules governing
swap dealing with those of the SEC. Thus, the Commission is eliminating
the PTMMM Requirement in its entirety as proposed 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 final rule text infra.
The Commission notes that its repeal of the PTMMM Requirement
herein renders the MPD no-action positions in CFTC Staff Letters 12-58,
13-12, and 25-09 moot; it therefore expects that MPD will withdraw such
positions in due course.

B. Scenario Analysis Requirement

As discussed above, Sec. 23.431(b) currently requires Swap
Entities to provide certain disclosures related to scenario analysis
prior to entering into a swap with a counterparty (other than a swap
dealer, major swap participant, security-based swap dealer, or major
security-based swap participant) that is not made available for trading
on a DCM or SEF. Such disclosures include that a Swap Entity must (1)
notify the counterparty that it can request and consult on the design
of a scenario analysis to allow the counterparty to assess its
potential exposure in connection with the swap; (2) upon request of the
counterparty, provide a scenario analysis, which is designed in
consultation with the counterparty and done over a range of
assumptions, including severe downside stress scenarios that would
result in a significant loss; (3) disclose all material assumptions and
explain the calculation methodologies used to perform any requested
scenario analysis (a swap dealer, however, is not required to disclose
confidential, proprietary information about any model it may use to
prepare the scenario analysis); and (4) in designing any requested
scenario analysis, consider any relevant analyses that the swap dealer
undertakes for its own risk management purposes, including analyses
performed as part of its ``New Product Policy'' specified in Sec.
23.600(c)(3).
1. Proposal
In the Proposal, the Commission proposed to eliminate the Scenario
Analysis Requirement set forth in Sec. 23.431(b) \71\ in its entirety
based on its experience over the last decade since Swap Entity
compliance with the External Business Conduct Standards was required,
noting its belief that it provides no utility to counterparties.
---------------------------------------------------------------------------

\71\ 17 CFR 23.431(b).
---------------------------------------------------------------------------

In adopting the Scenario Analysis Requirement in 2012, the
Commission 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.'' \72\ However,
the Commission learned from several market participants, in responding
to a request for comments and

[[Page 61232]]

recommendations under the Commission's ``Project KISS'' in 2017,\73\
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 and thus advocated that the Commission eliminate the
Scenario Analysis Requirement or restrict the availability of scenario
analysis.\74\
---------------------------------------------------------------------------

\72\ Final EBCS Rulemaking at 77 FR 9743, n. 125.
\73\ See generally Project KISS at 82 FR 23765.
\74\ 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>.
---------------------------------------------------------------------------

In the Proposal, the Commission also stated that elimination of the
Scenario Analysis Requirement would serve to harmonize the Commission's
rules governing swap dealing with those of the SEC noting 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. Further, the Commission noted that scenario analysis was not
required by the amendments to the CEA made by the Dodd-Frank Act and
thus was wholly the product of Commission rulemaking.\75\
---------------------------------------------------------------------------

\75\ See e.g., Final EBCS Rulemaking at 77 FR 9762 (where the
Commission discusses that the rule is discretionary and not
mandatory).
---------------------------------------------------------------------------

2. Comments Received and Final Rule
Only the ISDA/SIFMA Letter specifically addressed the proposed
elimination of the Scenario Analysis Requirement.\76\ It supported
elimination unequivocally, agreeing with the Commission's reasoning for
elimination in the Proposal, noting that it is extremely rare for
scenario analysis to be requested and stating the associations' view
that scenario analysis is of little utility to buy-side
counterparties.\77\ Having considered this comment and having received
no comments opposed to the elimination of the Scenario Analysis
Requirement, the Commission agrees with commenters that the Scenario
Analysis Requirement has proven to have little utility to
counterparties. Thus, the Commission is adopting the elimination of the
Scenario Analysis Requirement as proposed by replacing paragraph (b) of
Sec. 23.431 with ``[RESERVED],'' as reflected in the final rule text
infra.
---------------------------------------------------------------------------

\76\ See ISDA/SIFMA Letter at 1-3.
\77\ Id. at 3.
---------------------------------------------------------------------------

C. Daily Mark Disclosure Requirement

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 the term ``daily mark'' or
describe how it was to be calculated.\78\ Thus, the Commission
promulgated 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\
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\85\ Sec. Sec. 23.150-23.161, 17 CFR 23.150 through 23.161.
\86\ See Sec. 23.153, 17 CFR 23.153 (collection and posting of
variation margin); and Sec. 23.155, 17 CFR 23.155 (calculation 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 the
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.).
---------------------------------------------------------------------------

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.
1. Proposal
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 proposed to reorganize Sec.
23.431(d) such that paragraphs (d)(1) and (d)(2) would address the
requirements for, and cover the exceptions from, respectively, the
daily mark requirement for cleared swaps (as discussed in Section II.C
below), and paragraph (d)(3) would address the

[[Page 61233]]

requirements for, and cover the exceptions from, the daily mark
requirement for uncleared swaps, including a description of the daily
mark for uncleared swaps to 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 goal of this proposed change was to harmonize the daily mark
disclosure requirement in Sec. 23.431(d)(2) with the Commission's
uncleared swap margin rules and swap data reporting rules.
2. Comments Received and Final Rule
Only the ISDA/SIFMA Letter specifically addressed the proposed
change to the daily mark disclosure requirements. ISDA/SIFMA generally
supported the Commission amending its daily mark requirements; however,
rather than revising it as proposed, ISDA/SIFMA suggested that a
better, more streamlined approach would be to (1) amend the definition
of ``daily mark'' to provide Swap Entities with more flexibility in
determining the mark, while still maintaining requirements for Swap
Entities to disclose the methodologies and assumptions used to prepare
the daily mark; and (2) eliminate the daily mark requirement for all
non-cleared swaps that are subject to daily variation margining,
arguing that this approach would better enable firms to align their
daily mark disclosures under Commission Regulations with the
methodologies they use for other purposes, whether for reporting, daily
mark disclosures under SEC rules, internal valuation purposes, or
otherwise. ISDA/SIFMA further argued that, given the institutional
nature of the swap market, disclosure of the daily mark methodologies
and assumptions, as provided in proposed Sec. 23.431(d)(4), should
provide counterparties with sufficient information to understand the
daily marks they receive.
After considering these comments, the Commission has determined to
amend its daily mark requirement under Sec. 23.431(d) with some
modifications from the Proposal. Specifically, at the suggestion of
commenters, the Commission has determined to provide Swap Entities with
greater flexibility in determining how to calculate daily marks for
uncleared swaps, concluding that such flexibility would be a simpler
way of achieving the Commission's goal in the Proposal of harmonizing
the daily mark requirement with the other daily swap valuation
requirements in the Commission's uncleared swap margin and swap
reporting rules. In adopting the amendments to the daily mark
requirement, the Commission notes that ``daily mark'' is not defined in
the CEA and the Commission is persuaded by the comments of ISDA/SIFMA
that disclosure of the methodology and assumptions required under final
Sec. 23.431(d)(4) is sufficient for counterparties to Swap Entities to
determine for themselves the value of the daily mark received. In
addition, the Commission has determined that, with respect to swaps
subject to daily variation margin delivery requirements, whether
subject to the Commission's variation requirements set forth in Sec.
23.150 through Sec. 23.161 or otherwise, notice of variation margin
amounts necessarily entails valuation of each swap and thus such
delivery requirements fulfill the Swap Entity's requirement to provide
a daily mark under section 4s(h)(3)(B) of the CEA. Variation margin
amounts are the change in the net present value of a swap since the
last time the variation margin amount was exchanged between the
parties. The daily mark is essentially the net present value of the
swap, thus notice of variation margin amounts is materially equivalent
to notice of the daily mark.
To effect these changes, the Final Rule excludes swaps subject to
daily variation margining from the requirements of Sec. 23.431(d)(3)
and (4) and removes the requirement that the daily mark be the mid-
market mark of the swap in Sec. 23.431(d)(3) and related text, as
reflected in the final rule text infra.

D. New and Amended Definitions in Sec. 23.401

In the Proposal, the Commission proposed adding several 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 discussed below.
---------------------------------------------------------------------------

\91\ 17 CFR 23.401.
---------------------------------------------------------------------------

1. Definition of ITBC Swap
a. Proposal
The Commission proposed to add a new eight-prong definition of
``ITBC Swap'' to the definitions in Sec. 23.401 applicable to subpart
H of part 23 of the Commission's regulations.\92\
---------------------------------------------------------------------------

\92\ Id.
---------------------------------------------------------------------------

In the Proposal, the Commission explained that defining ``ITBC
Swap'' in Sec. 23.401 was intended to clearly describe the criteria
and conditions that a swap must meet to be eligible for the various
proposed exceptions from the disclosure, information collection, and
documentation requirements of the External Business Conduct Standards
and the STRD Requirement (hereinafter, the ``ITBC Compliance
Exceptions''), each of which are explained in the relevant sections
below.\93\ The Commission noted that, other than what has been
described in the Proposal, the criteria and conditions within 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.
---------------------------------------------------------------------------

\93\ See Sec. Sec. 23.402-23.451 and Sec. 23.594; 17 CFR
23.402-23.451 and 23.504.
---------------------------------------------------------------------------

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.\94\ ``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.
---------------------------------------------------------------------------

\94\ See Proposed Rule, 90 FR at 47143.
---------------------------------------------------------------------------

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 Commission noted in the Proposal
that 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. 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,

[[Page 61234]]

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.
The Commission explained that 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 of
``proprietary account'' in Sec. 1.3.\97\ In the Proposal, the
Commission explained that this proposed 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.\98\ 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.
---------------------------------------------------------------------------

\96\ See Section I.B.1., supra, n. 22-31 and accompanying text.
\97\ See 17 CFR 1.3.
\98\ See Proposed Rule, 90 FR at 47144.
---------------------------------------------------------------------------

Sixth, the Commission proposed that 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 (the ``Breakage Condition'').\99\ The Commission explained
that, generally, this condition, as proposed, was 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.\100\ The Commission noted that, 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. In the
Proposal, the Commission preliminarily determined that the same is not
true where a breakage agreement is requested by the counterparty.\101\
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. Accordingly, the
Commission stated its intent 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.\102\ 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).
---------------------------------------------------------------------------

\99\ Id.
\100\ Id.
\101\ See Proposed Rule, 90 FR at 47144.
\102\ See id.
---------------------------------------------------------------------------

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 (the
``Clearing Submission Condition'').\103\ The Commission explained that
this proposed condition sets forth a standard for submission of the
swap for clearing to a DCO or Exempt DCO and 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) \104\ 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).\105\ The Commission included 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.\106\ 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.\107\ 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.
---------------------------------------------------------------------------

\103\ See id.
\104\ 17 CFR 23.506.
\105\ 17 CFR 23.610.
\106\ See Proposed Rule, 90 FR at 47144.
\107\ See id.
---------------------------------------------------------------------------

Eighth, the Commission proposed 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 (the ``Void Ab Initio
Condition'').\108\ As explained in the Proposal, this was 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.\109\ 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 the Commission maintained a
prohibition on Swap Entities requiring breakage agreements as a
condition to entering into a swap.
---------------------------------------------------------------------------

\108\ See id.
\109\ See Proposed Rule, 90 FR at 47144.
---------------------------------------------------------------------------

The Commission stated that compliance with this condition as
proposed may be accomplished by executing the swap on a SEF or DCM

[[Page 61235]]

where such SEF or DCM is required to have rules requiring swaps
submitted for clearing to be void ab initio if not cleared.\110\
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 (a ``Void Ab Initio Agreement'').\111\ That is, the swap
will be deemed to have never been executed. The Commission recognized
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 a Void Ab Initio Agreement could be
documented.\112\ However, the Commission noted its preliminary belief
that 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., a Void Ab Initio Agreement may be a term of the swap
agreed at execution).\113\
---------------------------------------------------------------------------

\110\ See CFTC Staff Guidance Letter (Sept. 26, 2013), Re: Staff
Guidance on Swaps Straight-Through-Processing, at 6 (stating that
DMO and DCR 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>.
\111\ See Proposed Rule, 90 FR at 47144.
\112\ See id.
\113\ See id.
---------------------------------------------------------------------------

b. Comments Received and Final Rule
Only the ISDA/SIFMA Letter and Citadel Letter specifically
addressed the proposed definition of ``ITBC Swap.''
ISDA/SIFMA firmly supported providing relief for ITBC Swaps and
generally supported the Commission's proposed definition of an ITBC
Swap but noted three specific concerns.
First, ISDA/SIFMA noted that the Breakage Condition could be read
to imply that a Swap Entity may not raise the topic of a breakage or
similar agreement with a counterparty. It argues that a Swap Entity
must be permitted to initiate discussion about how to address ITBC
Swaps with its counterparty as a matter of good risk management, and
such discussions--whether at the request of the Swap Entity or its
counterparty--do not indicate that either party is entering into the
swap without the requisite intention that the swap will not be a
cleared swap.
Second, ISDA/SIFMA stated that the Commission should explicitly
clarify that, under the Clearing Submission Condition, Swap Entities
are not responsible for guaranteeing that their counterparties will
take the necessary steps for submission (outside of reasonably designed
policies and procedures), as Swap Entities are only able to control
their own actions and processes.
Third, ISDA/SIFMA stated that they have practical concerns
regarding the implementation of the Void Ab Initio Condition in the
context of Exempt SEFs that do not impose void ab initio rules. They
note that entering into a Void Ab Initio Agreement at the point of
execution is not practical given actual trading practices on Exempt
SEFs and, therefore, should not be required. Instead, they argue that
the Commission should allow for more flexibility by enabling Swap
Entities to determine how to address such rejected transactions. Under
this approach, for ITBC Swaps executed on Exempt SEFs that do not
impose void ab initio requirements, they ask that a Swap Entity may
choose to either put breakage agreements in place with its
counterparties prior to execution (so long as such breakage agreements
are not a condition to trading), or may otherwise have a Void Ab Initio
Agreement in place, prior to execution. They argue this approach is not
only more operationally-feasible but would also be consistent with the
Commission's position for bilaterally executed ITBC swaps.
With respect to the Void Ab Initio Condition, Citadel, on the other
hand, strongly recommended that the Commission maintain a requirement
that any ITBC Swap executed on a DCM, SEF, or Exempt SEF be deemed void
ab initio if such swap fails to clear. Citadel argued that the
Commission's goal of facilitating exchange trading of cleared swaps
would not be advanced by allowing for ITBC Swaps traded on a DCM, SEF,
or Exempt SEF to be subject to breakage or other types of agreements
that would allow such swaps to survive a failure to clear.
After considering these comments, the Commission has determined to
adopt a definition of ``ITBC Swap'' with certain modifications from the
Proposal.
First, the Commission is revising the Clearing Submission Condition
by replacing the word ``ensures'' in the proposed definition with the
words ``takes reasonable measures to ensure,'' as shown in the final
rule text, infra. This change is meant to clarify that a Swap Entity
does not have to accept liability for a failure of its counterparty to
take the necessary steps for clearing. Further, the Commission intends
that this condition will be satisfied, with respect to a counterparty,
where a Swap Entity has entered into an agreement with such
counterparty that require the counterparty to submit the swap for
clearing to a DCO or Exempt DCO, as applicable, as quickly after
execution as would be technologically practicable if fully automated
systems were used.
Second, the Commission is modifying the Void Ab Initio Condition,
as reflected in paragraph (8) of the ITBC Swap definition in the final
rule text infra, to provide that, where a swap is executed on or
pursuant to the rules of an Exempt SEF and the rules of such Exempt SEF
do not provide for a swap rejected from clearing to be deemed void ab
initio, the condition will be satisfied solely if the parties have
prior to or at execution of the swap (1) entered into a Void Ab Initio
Agreement, or (2) agreed that a breakage agreement or similar
arrangement (as contemplated in the Breakage Condition (condition 6 of
the ITBC Swap definition discussed above)) applies to the swap. The
Commission is adopting additional language (as reflected in the final
rule text infra) in the Void Ab Initio Condition in paragraphs (7) and
(8) to make clear that the terms of any such breakage agreement or
similar arrangement must take into account the Swap Entity's regulatory
obligations under the External Business Conduct Standards and the STRD
Requirement, including those that are required to be completed prior to
execution of a swap with a non-Swap Entity counterparty.
Similarly, the Commission is modifying paragraph (7) of the
definition of ``ITBC Swap'' as reflected in the final rule text, infra,
to require that parties to a bilaterally executed swap have prior to or
at execution of the swap (i) entered into a Void Ab Initio Agreement,
or (ii) agreed that a breakage agreement or similar arrangement (as
contemplated in the Breakage Condition discussed above) applies to the
swap. The Commission noted in the Proposal that it did not include a
void ab initio requirement for bilateral swaps to allow for
counterparties to Swap Entities to request these types of breakage
arrangements under certain circumstances; \114\ however, the Commission
did not include a related condition in the rule text in the Proposal.
As a technical addition, the Commission is now adding that condition,
as it has determined that, as discussed in the Proposal,\115\ either a

[[Page 61236]]

Void Ab Initio Agreement or such breakage arrangement or similar
arrangement must exist for a bilateral swap to be an ITBC Swap eligible
for the exceptions for ITBC Swaps provided in this Final Rule.
---------------------------------------------------------------------------

\114\ See Proposed Rule, 90 FR at 47144.
\115\ See Proposed Rule, 90 FR at 47144, questions 10, 11, and
12.
---------------------------------------------------------------------------

The additional flexibility the Commission is providing around the
Void Ab Initio Condition is intended to address practical concerns
raised by ISDA/SIFMA with respect to the operation of the Void Ab
Initio Condition on Exempt SEFs, as initially proposed. With respect to
the comment of Citadel discussed above, the Commission has determined
that because (1) it would be impractical for the Commission to revisit
the various orders that it has previously granted to Exempt SEFs to
impose conditions that would require such Exempt SEFs to have rules
requiring that swaps that fail to clear are void ab initio, and (2) it
would likely be impracticable for a Swap Entity to enter into a Void Ab
Initio Agreement at the point of execution for swaps executed on an
Exempt SEF, the Commission will not make the Void Ab Initio Condition
applicable to ITBC Swaps executed on an Exempt SEF to the same extent
that such condition in paragraph (8) applies to swaps executed on a DCM
or SEF, provided, however, that in any case and as required by the
Breakage Condition, a Swap Entity does not make entering into a
breakage agreement a pre-condition to entering into an ITBC Swap.\116\
---------------------------------------------------------------------------

\116\ See paragraph 8 of the definition of ITBC Swap in the
final rule text infra, which states that provided that if the swap
is executed on or pursuant to the rules of an Exempt SEF and the
rules of the Exempt SEF do not provide for a swap rejected from
clearing to be deemed void ab initio, the parties have agreed prior
to or at execution that if such swap is rejected from clearing, the
swap is deemed to be void ab initio, or the parties, prior to
execution, have entered into a breakage agreement or similar
arrangement that addresses the disposition of such rejected swap and
includes arrangements that will permit a Swap Entity to comply with
the requirements of subparts H and I of part 23 of chapter I with
respect to the rejected swap.
---------------------------------------------------------------------------

In addition, the Commission is clarifying that that it does not
intend the Breakage Condition to limit the ability of Swap Entities to
discuss breakage agreements with their counterparties, either at their
own behest or at that of their counterparty. Rather, the Breakage
Condition solely prohibits Swap Entities from requiring a counterparty
to enter into a breakage agreement as a condition to trading.
2. Definition of A-ITBC Swap
a. Proposal
The Commission proposed to add a new definition of ``A-ITBC Swap''
to the definitions in Sec. 23.401 \117\ applicable to subpart H of
part 23 of the Commission's regulations.\118\ The Proposal defined an
``A-ITBC Swap'' or ``Anonymous ITBC Swap'' to mean an ITBC Swap (as
defined in new Sec. 23.401(d)) where the Swap Entity does not know the
identity of the counterparty prior to execution of the swap.\119\ The
proposed definition 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).\120\ In the Proposal, the Commission
stated that a definition of ``A-ITBC Swap'' in Sec. 23.401 will help
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.\121\
---------------------------------------------------------------------------

\117\ 17 CFR 23.401.
\118\ See Proposed Rule, 90 FR at 47145.
\119\ See id.
\120\ See id.
\121\ See Proposed Rule, 90 FR at 47145.
---------------------------------------------------------------------------

b. Comments Received and Final Rule
The Commission received no comments relating specifically to this
definition and is adopting this term as proposed, as shown in the final
rule text, infra.
3. Definition of Covered Transaction
a. Proposal
The Commission proposed to add a new definition of ``Covered
Transaction'' to the definitions in Sec. 23.401 \122\ applicable to
subpart H of part 23 of the Commission's regulations. The Proposal
defined the term ``Covered Transaction'' to mean a swap, as defined in
section 1a(47) of the Act and Sec. 1.3 of chapter I (other than swaps
subject to the clearing requirement of section 2(h)(1)(A) of the Act
and part 50 of chapter I), and physically-settled foreign exchange
forwards and swaps that have been exempted from the definition of swap
by the U.S. Department of the Treasury.\123\ The definition was
intended to encompass all transaction types that may be subject to a
Prime Broker Arrangement (defined and explained infra). As such, the
proposed definition encompasses swaps, as defined in section 1a(47) of
the CEA,\124\ but excludes swaps that are subject to the Commission's
swap clearing requirement in section 2(h)(1)(A) of the CEA \125\ and
part 50 of the Commission's regulations.\126\ Based on the Commission's
understanding, swaps subject to Prime Broker Arrangements are
exclusively uncleared swaps. The proposed definition of Covered
Transactions also included 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.\127\ The Proposal explained
that the Commission 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.\128\
---------------------------------------------------------------------------

\122\ 17 CFR 23.401.
\123\ See Proposed Rule, 90 FR at 47162.
\124\ 7 U.S.C. 1a(47).
\125\ 7 U.S.C. 2(h)(1)(A).
\126\ 17 CFR part 50; 17 CFR 50.1-50.79.
\127\ See Proposed Rule, 90 FR at 47145. See Section I.B.2.,
supra, n. 42-44 and accompanying text.
\128\ Id.
---------------------------------------------------------------------------

\129\ 17 CFR 23.401.
\130\ 17 CFR part 23, subpart H; 17 CFR 23.400-23.451.
\131\ See Proposed Rule, 90 FR at 47145.

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

[[Page 61237]]

A Prime Broker Arrangement, as proposed, included at least one PB/
SD and two or more other parties evidenced by a written agreement or
agreements.\132\ 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'') \133\ 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'') \134\ 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.
---------------------------------------------------------------------------

\132\ Proposed Rule, 90 FR at 47145, n. 109 (stating that
``[t]he Commission preliminarily believed that MSPs do not and would
not act as PBs.'').
\133\ 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).
\134\ 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 in
the Proposal was in 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.\135\ In the Proposal, the Commission also
recognized that the designation of a Trigger Transaction and a Mirror
Transaction depends on the perspective of the parties to the
transaction.\136\ For example, where two PBs are involved, the Mirror
Transaction for one PB may be a Trigger Transaction for the second PB.
The Commission also acknowledged 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.\137\
---------------------------------------------------------------------------

\135\ See Proposed Rule, 90 FR at 47145.
\136\ See id.
\137\ See id.
---------------------------------------------------------------------------

The intention of the proposed definition of ``Prime Broker
Arrangement'' was 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.\138\ The Commission
stated its preliminary view that such 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.\139\ The Commission acknowledged 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.\140\
---------------------------------------------------------------------------

\138\ See Proposed Rule, 90 FR at 47145.
\139\ See id., 90 FR at 47145-47146.
\140\ See id., 90 FR at 47145.
---------------------------------------------------------------------------

b. Comments Received and Final Rule
Only the ISDA/SIFMA Letter specifically addressed the proposed
definition of ``Prime Broker Arrangement.''
First, ISDA/SIFMA requested certain changes to the definition to
account for a situation where a PB customer determines that the
execution desk of its SD/PB provides better pricing than other
executing dealers. Such customers may, in their own discretion, choose
to price/execute with that desk for give-up to its SD/PB. ISDA/SIFMA
argue that market practice is for PBs to maintain an appropriate level
of separation between their sales and trading business (i.e., the
executing desk), including information barriers. Thus, in practice, the
pricing and execution mechanics between a PB customer and the execution
desk of that SD/PB is similar to pricing and execution with an external
SD. The Commission considered this comment but declines to make the
change requested by ISDA/SIFMA to the definition of ``Prime Broker
Arrangement.'' In the scenario explained by ISDA/SIFMA, the same legal
entity is both the executing dealer entering into the Trigger
Transaction and the PB entering into the Mirror Transaction with the PB
customer. Because the executing dealer and PB are both parts of the
same legal entity, and that legal entity is a registered SD, the
executing dealer is required under Sec. 23.431(a) to disclose the
material economic terms and the price of the swap prior to execution.
Having made such disclosure, the legal entity that is the PB/SD has
fulfilled the regulatory obligations that would otherwise be excepted
by the Final Rule. Thus, the Commission has determined that there is no
reason to include the change requested by ISDA/SIFMA to the definition
of Prime Broker Arrangement because there is no need to provide an
exception from the regulatory obligations of an SD/PB that acts as both
the executing dealer and the PB. Further, the Commission does not
believe that a Commission regulation is the appropriate place to
account for the purely internal arrangements that an SD/PB may have
between its PB desk and its swap trading desks.
Second, ISDA/SIFMA requested changes to the definition of Prime
Broker Arrangement to clearly recognize in the rule text that a Mirror
Transaction may include a spread or fees to compensate a Prime Broker
for providing the credit intermediation services. In the Proposal, as
discussed above, the Commission had proposed that, from the perspective
of the PB/SD, the Mirror Transaction must be ``substantially'' equal
but opposite to the terms and price of the Trigger Transaction (but not
identical), recognizing 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 an intermediary for providing the credit intermediation service
evidenced by the Prime Broker Arrangement or the intermediary's
services. ISDA/SIFMA request that the ``substantially equal'' language
be replaced with an explicit recognition that a Mirror Transaction may
contain a spread or fee that makes it somewhat different from the
Trigger Transaction. The Commission has concluded that such explicit
recognition would better address any ambiguity that may have existed in
the Proposal on this point and has thus added clarifying language to
the definition of ``Prime Broker Arrangement,'' as shown in the final
rule text infra.

[[Page 61238]]

5. Definition of Qualified Prime Broker Arrangement
a. Proposal
The Commission proposed to add a new definition of ``Qualified
Prime Broker Arrangement'' \141\ to the definitions in Sec. 23.401
\142\ applicable to subpart H of part 23 of the Commission's
regulations.\143\ The definition incorporated 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 (and PTMMM
Requirement, if applicable) in Sec. 23.431(a)(3) \144\ with respect to
Covered Transactions with such PB Counterparty.\145\ In the Proposal,
the Commission 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.\146\ This
view was 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).\147\ In the
Proposal, the Commission expressed its view that an insistence on price
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.\148\ Thus, the Commission proposed the following
conditions for a Qualified Prime Broker Arrangement that would qualify
for an exception to the price disclosure.
---------------------------------------------------------------------------

\141\ See Proposed Rule, 90 FR at 47146.
\142\ 17 CFR 23.401.
\143\ 17 CFR part 23, subpart H; 17 CFR 23.400-23.451.
\144\ 17 CFR 23.431(a)(3).
\145\ See Proposed Rule, 90 FR at 47146.
\146\ See id.
\147\ See id.
\148\ See Proposed Rule, 90 FR at 47146.
---------------------------------------------------------------------------

First, to qualify as a Qualified Prime Broker Arrangement under the
Proposed Rule, 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'').\149\ This proposed condition would require the PB/SD
to:
---------------------------------------------------------------------------

\149\ See id.
---------------------------------------------------------------------------

(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.\150\
---------------------------------------------------------------------------

\150\ Id.
---------------------------------------------------------------------------

As discussed in the Proposal, the purpose of this proposed
condition was 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.\151\ 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.\152\
---------------------------------------------------------------------------

\151\ See id.
\152\ See Proposed Rule, 90 FR at 47146.
---------------------------------------------------------------------------

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) \153\
other than the pre-trade disclosure of the price of any Permitted PB
Transaction (and the PTMMM, if applicable).\154\ The Proposal also
noted that if the Commission determined not to eliminate the scenario
analysis requirement in Sec. 23.431(b) \155\ (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'').\156\ 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:
---------------------------------------------------------------------------

\153\ 17 CFR 23.431(a).
\154\ See Proposed Rule, 90 FR at 47146.
\155\ 17 CFR 23.431(b); see Section II.B., supra, for the
Commission's discussion of its elimination of the Scenario Analysis
Requirement.
\156\ See Proposed Rule, 90 FR at 47146.
---------------------------------------------------------------------------

(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 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.\157\
---------------------------------------------------------------------------

\157\ 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.\158\ In the Proposal, the
Commission also stated that it 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 noted that this proposed 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.
---------------------------------------------------------------------------

\158\ See Proposed Rule, 90 FR at 47147.

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[[Page 61239]]

Third, the PB/SD would be required under the Proposed Rule to
receive an acknowledgement from a PB Counterparty regarding various
disclosures.\159\ 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.\160\ Furthermore, under
the Proposal, 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 \161\ 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.\162\ PB Counterparties would be permitted to request
updated disclosures in writing prior to execution. This proposed
condition was 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.'' \163\ Rather, the
Commission explained that 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).\164\
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\159\ See id.
\160\ See id.
\161\ 7 U.S.C. 6s(h)(3)(B)(i).
\162\ See Proposed Rule, 90 FR at 47147.
\163\ See id.
\164\ See id. (citing 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.\165\
---------------------------------------------------------------------------

\165\ 17 CFR 23.203.
---------------------------------------------------------------------------

b. Comments Received and Final Rule
Only the ISDA/SIFMA Letter specifically addressed the proposed
definition of ``Qualified Prime Broker Arrangement.'' ISDA/SIFMA
recommended two changes to the definition as discussed below.
First, ISDA/SIFMA recommended that the definition be changed to
clarify that the pre-trade disclosures required by the definition would
not include the price of a swap (as proposed by the Commission) but
also would not include the material economic terms of a swap, arguing
that, like the price, the material economic terms of a particular swap
are negotiated by the PB customer with its executing counterparty
without the knowledge of the SD/PB. The Commission agrees that an SD/PB
would not know the exact economic terms of a swap prior to execution,
even if it has agreed with a PB customer on all of the possible
permutations of the terms that could be agreed and provided all
required disclosures, to the best of the SD/PBs knowledge and
reasonable belief.\166\ Thus, the Commission has determined to make the
recommended change to the definition of Qualified Prime Broker
Arrangement, as reflected in the final rule text infra.
---------------------------------------------------------------------------

\166\ See paragraph (2) of the definition of Qualified Prime
Broker Arrangement.
---------------------------------------------------------------------------

Second, ISDA/SIFMA recommended that the Commission delete the
requirement that an SD/PB obtain an acknowledgement from its PB
customers acknowledging receipt of the Regulatory Disclosures and also
delete the requirement that an SD/PB retain a record of such
acknowledgement and the Qualified Prime Broker Arrangement with each PB
customer. ISDA/SIFMA argued that an SD/PB is already required by the
Commission's SD recordkeeping rules to keep records of all of
agreements entered into as part of its business of dealing in swaps and
thus the recordkeeping proposal was redundant.\167\ The Commission
agrees that the recordkeeping proposal would be redundant with the
Commission's recordkeeping rules for SDs and has thus determined to
delete that portion of the Proposal, as reflected in the final rule
text infra. For similar reasons, the Commission has determined to
accept ISDA/SIFMA's recommendation that the Commission delete the
requirement that an SD/PB obtain an acknowledgement from its PB
Customers regarding the delivery of the Regulatory Disclosures and the
SD/PBs obligations related thereto. As explained by ISDA/SIFMA, the
acknowledgement requirement would entail a costly and burdensome
exercise to amend or supplement existing documentation with each PB
Customer without any concomitant benefit. ISDA/SIFMA argue that SDs are
already required to keep full and complete records of its business of
dealing in swaps, including all correspondence with customers and
counterparties.\168\ Thus, the Commission is confident that an SD/PB is
required to keep adequate records of providing its PB customers with
the Regulatory Disclosures required under the definition of Qualified
Prime Broker Arrangement and of the Prime Broker Arrangement itself
under currently existing recordkeeping requirements in the Commission's
Regulations and has determined to delete the acknowledgement
requirement as reflected in the final rule text infra.
---------------------------------------------------------------------------

\167\ See e.g., 17 CFR 23.201 and 17 CFR 23.202.
\168\ See e.g., 17 CFR 23.201(a)(1)(i).
---------------------------------------------------------------------------

E. 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.\169\
---------------------------------------------------------------------------

\169\ See 17 CFR 23.402.
---------------------------------------------------------------------------

1. Proposal
The Commission proposed to amend Sec. 23.402 by adding a new
paragraph (h) thereto that would state ``Paragraph (b) and (c) of this
section shall not apply to an ITBC Swap.'' \170\ This proposed
amendment makes 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.\171\ Specifically, because ITBC Swaps, once
cleared, result in a new swap between the DCO or Exempt DCO and the
swap counterparty, the Commission stated in the Proposed Rule that it
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.\172\
Additionally, because some ITBC Swaps may be A-ITBC Swaps, Swap
Entities will not know,

[[Page 61240]]

and may never know, the identity of the swap counterparty, making it
impossible to comply with the requirements in paragraphs (b) and (c) of
Sec. 23.402 that the Commission proposed to be disapplied.\173\
---------------------------------------------------------------------------

\170\ See Proposed Rule, 90 FR at 47148.
\171\ See id.
\172\ 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>.
\173\ See Proposed Rule, 90 FR at 47148.
---------------------------------------------------------------------------

2. Comments Received and Final Rule
The Commission received no specific comments with respect to the
proposed amendment to Sec. 23.402. Thus, the Commission is adopting
this amendment as proposed as shown in the final rule text, infra.

F. 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).\174\ Paragraph (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.\175\
---------------------------------------------------------------------------

\174\ 17 CFR 23.401(c)(6) (redesignated as Sec. 23.401(h)(6) in
the Final Rule text infra).
\175\ See 17 CFR 23.430.
---------------------------------------------------------------------------

1. Proposal
The Commission proposed to amend Sec. 23.430(e) by adding an
additional 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.\176\ As discussed in the
Proposal, this 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.\177\ Like for KYC purposes discussed above, the
Commission stated its preliminary belief 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.\178\ The
Commission also added that, 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.
---------------------------------------------------------------------------

\176\ See Proposed Rule, 90 FR at 47148.
\177\ See id.
\178\ 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.
---------------------------------------------------------------------------

2. Comments Received and Final Rule
The Commission received no specific comments with respect to the
proposed amendment to Sec. 23.430. Thus, the Commission is adopting
this amendment as proposed as shown in the rule text, infra.

G. 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.\179\
Paragraph (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.\180\
---------------------------------------------------------------------------

\179\ See 17 CFR 23.431.
\180\ 17 CFR 23.431(c).
---------------------------------------------------------------------------

1. Proposal
The Commission proposed 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; \181\
(4) expanding the exception for pre-trade disclosures in paragraph (c)
to include: (i) swaps executed 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 paragraph (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.\182\
---------------------------------------------------------------------------

\181\ 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.
\182\ See Proposed Rule, 90 FR at 47147-47148.
---------------------------------------------------------------------------

The Proposal stated that these proposed amendments reflected 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.\183\
---------------------------------------------------------------------------

\183\ Id. at 47149.

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[[Page 61241]]

2. Comments Received & Final Rule
Other than comments regarding the elimination of the PTMMM
Requirement, the Scenario Analysis Requirement, the daily mark
requirement, and the exceptions for ITBC Swaps and Qualified Prime
Broker Arrangements discussed in Section II A, B, C, and D above, the
Commission did not receive any substantive comments on the proposed
amendments to Commission Regulation Sec. 23.431. Thus, other than the
changes discussed in Section II A, B, C, and D above, the Commission is
adopting the Proposed amendments to Sec. 23.431 as proposed as
reflected in the final rule text infra.

H. Amendments to Sec. 23.432

In general, Sec. 23.432 currently 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.\184\
---------------------------------------------------------------------------

\184\ See 17 CFR 23.432.
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1. Proposal
In the Proposal, the Commission proposed to amend Sec. 23.432(a)
and (b) by making clear that the notice must be given prior to entering
into a swap. The Commission further proposed to amend Sec. 23.432 by
adding a new paragraph (c) that would disapply the notice requirements
of paragraphs (a) and (b) to ITBC Swaps executed on a DCM, SEF, or
Exempt SEF and to all A-ITBC Swaps.\185\
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\185\ See Proposed Rule, 90 FR at 47149.
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The Proposed Rule noted that this proposed amendment reflected 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.\186\
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\186\ Id.
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2. Comments Received & Final Rule
The Commission received no comments with respect to the proposed
amendment. Thus, the Commission is adopting the proposed amendments to
Sec. 23.432(a) and (b) to clarify that the notice must be given prior
to entering into a swap; and is adding a new paragraph (c) that
disapplies the notice requirements of paragraphs (a) and (b) to ITBC
Swaps executed on a DCM, SEF, or Exempt SEF and to all A-ITBC Swaps as
reflected in the final rule text infra.

I. Amendments to Sec. 23.434

In general, Sec. 23.434 currently 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.\187\
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\187\ See 17 CFR 23.434.
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However, Sec. 23.434(b) currently also 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.\188\ 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.\189\ 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.\190\
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\188\ See 17 CFR 23.434(b).
\189\ 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>.
\190\ See id. for list of Adhering Parties.
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1. Proposal
The Commission proposed to amend Sec. 23.434 to add a new
paragraph (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.\191\ In making the
Proposal, the Commission noted its preliminary determinations that (i)
in light of the tremendous uptake of the ISDA protocol reference above,
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; (ii) 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; (iii) because (x) this information is available to counterparties
from sources other than an SD counterparty; (y) ITBC Swap
counterparties have no on-going relationship with an SD counterparty
with respect to ITBC Swaps; and (z) the Commission's view 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, ITBC Swap counterparties will likely look
to SDs only for competitive pricing.\192\ Thus, the Proposed Rule
expressed the Commission's belief 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, the Proposal noted that 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.\193\
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\191\ Proposed Rule, 90 FR at 47149.
\192\ Id.
\193\ Id.
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2. Comments Received & Final Rule
The Commission received no comments with respect to the proposed
amendments to Sec. 23.434. Therefore, the Commission is adopting the
proposed amendments to Sec. 23.434 by adding a new paragraph (d) that
provides an exception from the requirements of Sec. 23.434 for A-ITBC
Swaps and for ITBC Swaps executed on a DCM, SEF, or Exempt SEF as
reflected in the final rule text infra.

J. Amendments to Sec. 23.440 and 23.450

In general, Sec. Sec. 23.440 and 23.450 currently 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.\194\ ``Special

[[Page 61242]]

Entity'' is defined in Sec. 23.401(c) \195\ 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.
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\194\ See 17 CFR 23.440 and 23.450.
\195\ 17 CFR 23.401(c) (redesignated as 17 CFR 23.401(h) in the
Final Rule text infra).
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Pursuant to Sec. Sec. 23.440 and 23.450,\196\ 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; \197\ 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'').\198\
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\196\ 17 CFR 23.440 and 23.450.
\197\ See 17 CFR 23.440(c).
\198\ See 17 CFR 23.450(b).
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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.\199\ 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.\200\ 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,\201\ so the Commission 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.
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\199\ See 17 CFR 23.440(b) and 17 CFR 23.450(d).
\200\ 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>.
\201\ See id. for list of Adhering Parties.
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1. Sec. 23.440 Proposal, Comments Received, and Final Rule
The Commission proposed to amend Sec. 23.440 by adding a new
paragraph (e), which would provide an exception from the requirements
of Sec. 23.440 in two circumstances.\202\ 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).\203\
Second, the proposed amendment provided 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.\204\
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\202\ See Proposed Rule, 90 FR at 47150.
\203\ See id.
\204\ See id.
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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.\205\ 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.\206\ In the Proposal, the
Commission stated 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.\207\ 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.\208\ For example, the SD would need to
ensure that it had appropriate documentation with the counterparty in
place to comply with the STRD Requirement \209\ and appropriate
documentation and information about its counterparty to comply with the
Commission's uncleared swap margin requirements.\210\ Thus by default,
any swap executed under the statutory exception would likely be
intended to be cleared because the swap is anonymous.\211\
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\205\ See 7 U.S.C. 6s(h)(4)(B).
\206\ See 7 U.S.C. 6s(h)(7).
\207\ See Proposed Rule, 90 FR at 47150.
\208\ 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.
\209\ See Commission regulation 23.504(a)(2), 17 CFR
23.504(a)(2) (requiring an SD to execute documentation meeting the
requirements of the section prior to or contemporaneously with
entering into a swap transaction with any counterparty).
\210\ See 17 CFR 23.158(a).
\211\ Proposed Rule, 90 FR at 47151.
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In applying this interpretation of the exception in section
4s(h)(7) of the CEA, the Commission incorporated a similar exception to
certain other 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,\212\ again to facilitate the trading
of cleared swaps on DCMs and SEFs.\213\ 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.\214\
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\212\ 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.
\213\ See Proposed Rule, 90 FR at 47151.
\214\ See id.
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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, in the Proposal the
Commission preliminarily interpreted 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 is adopting that interpretation in this
Final Rule and considers that interpretation of ``identity'' as
reasonable in the context of ITBC Swaps initiated by a Special Entity
on a DCM, SEF, or Exempt SEF

[[Page 61243]]

because the Commission 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 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 believes that
such SD should not be deemed to know the ``identity'' of the
counterparty to the transaction.
In the Proposal, the Commission noted that the exception in section
4s(h)(7) of the CEA applies only to swaps ``initiated by a Special
Entity'' on a DCM or SEF.\215\ This language is incorporated into the
exception in the amendment to Sec. 23.440(e)(3) to better track the
exception provided in the CEA, but the Commission has determined that
``initiated by'' has no special meaning in this context and is
synonymous with ``entered into by'' or ``executed by.'' \216\ 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.\217\ The
Commission has 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 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.
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\215\ Proposed Rule, 90 FR at 47151.
\216\ Id.
\217\ Id.
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In the Proposal, the Commission also noted certain limited
situations where actual knowledge of a counterparty's status as a
Special Entity could be imputed to an SD under certain circumstances.
The Commission received one comment from ISDA/SIFMA arguing that
imputing knowledge of a counterparty's Special Entity status was
neither reasonable nor practical given that trading on a DCM, SEF, or
Exempt SEF, by definition, is intended to provide access to liquidity
from multiple liquidity providers through competitive processes to
arrive at the best pricing available without regard to the ``identity''
of the counterparty. ISDA/SIFMA further argued that counterparties
initiating a trade for an ITBC Swap are often represented through an
abbreviated identifier (rather than a full, legal name) and that
transactions can take place within seconds or less, making
identification of a counterparty's Special Entity status impracticable
if not impossible. Given these circumstances and the fact that trading
venues do not offer special flags for Special Entities, ISDA/SIFMA's
comment letter supported the Commission providing an exception from
Sec. 23.440 for all ITBC Swaps executed on a DCM, SEF, or Exempt SEF
without regard to a counterparty's status as a Special Entity to
further the Commission's goal of facilitating the trading of cleared
swaps.
While mindful of commenters' views that the Commission should seek
to facilitate the competitive trading of cleared swaps on DCMs, SEFs,
and Exempt SEFs to the maximum extent possible, the Commission is also
mindful of the requirement in section 4s(h)(7) of the CEA that an
exception to the duty to act in the best interests of a Special Entity
only be provided where an SD does not know the identity of its
counterparty. Thus, in keeping with the Commission's interpretation of
``identity'' discussed above, the Commission has determined that a
broad exception from the requirements of Sec. 23.440 should be
provided so long as an SD has no actual knowledge of whether a
counterparty is a Special Entity. The Commission has also determined
that such actual knowledge will not be imputed and, in the Commission's
view, an SD will only have such actual knowledge if it has entered into
a trading relationship with such counterparty and has, for example,
entered into documentation in compliance with the STRD
Requirement.\218\ For the avoidance of doubt, in no event will an SD be
deemed to have actual knowledge of a counterparty's status as a Special
Entity where an SD's knowledge of a counterparty's identity is solely
based on a trading venue's use of an abbreviated identifier to
represent the counterparty.
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\218\ In the Proposal, the Commission noted 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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Where an SD has entered into trading relationship documentation
with a Special Entity, the Commission believes that the tremendous
uptake of adherence to the ISDA protocol discussed above means that it
is almost impossible that such Special Entity has not made the
representations necessary for an SD to rely on the safe-harbor in Sec.
23.440(b). Because in almost all cases the requirements for reliance on
the safe-harbor in Sec. 23.440(b) will have been met, an SD would be
free to trade with any Special Entity participating on any DCM, SEF, or
Exempt SEF without concern that the SD will be found to be acting as an
advisor to such Special Entity and thus no exception from the
requirements of Sec. 23.440 is needed.
Other than the comments from ISDA/SIFMA discussed above, the
Commission received no comments with respect to the proposed amendments
to Sec. 23.440 and is adopting

[[Page 61244]]

the amendments as proposed as reflected in the final rule text infra.
2. Sec. 23.450 Proposal, Comments Received, and Final Rule
The Commission also proposed to amend Sec. 23.450 to add a new
paragraph (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.\219\
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\219\ See Proposed Rule, 90 FR at 47152.
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As discussed in the Proposal, the Commission believes that the
proposed amendments to Sec. 23.450 better serve the intent of the CEA
than the rules now in effect.\220\ As discussed above in relation to
Sec. 23.434, the Commission has 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) 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 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 determined that it is likely that there is 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.\221\
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\220\ Id.
\221\ See id.
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In the Proposal, the Commission also proposed to amend the
definition of the term ``statutory disqualification'' in Sec.
23.450(a)(2).\222\ This definition constitutes a condition to a person
acting as a QIR for a Special Entity pursuant to Sec.
23.450(b)(1)(ii).\223\ The Commission proposed to amend the definition
of ``statutory disqualification,'' and therefore the condition to
acting as a QIR, as follows, with proposed new language italicized: 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.
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\222\ See Proposed Rule, 90 FR at 47152-47153. 17 CFR
23.450(a)(2).
\223\ 17 CFR 23.450(b)(1)(ii).
---------------------------------------------------------------------------

In the Proposal, the Commission stated that the foregoing proposed
amendment to Sec. 23.450(a)(2) \224\ was intended 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).\225\ 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.\226\ The Commission has
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.\227\ 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.\228\
The Commission proposed this amendment because the current definition
of ``statutory disqualification'' subjects QIRs to a higher standard of
conduct than that applied to Commission registrants.\229\ 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.\230\ The
Commission has 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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\224\ See Proposed Rule, 90 FR at 47153. 17 CFR 23.450(a)(2).
\225\ 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.
\226\ See 17 CFR 23.450(a)(2).
\227\ 7 U.S.C. 12a(2) and (3).
\228\ 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.
\229\ See Proposed Rule, 90 FR at 47153.
\230\ Id.
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The Commission received no comments on its proposed amendments to
Sec. 23.450 and is adopting them as proposed as reflected in the final
rule text infra.

K. Amendments to Sec. 23.451

In general, Sec. 23.451 currently, 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.\231\ Pursuant to Sec.
23.451(b)(2)(iii),

[[Page 61245]]

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.\232\
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\231\ See generally Sec. 23.451, 17 CFR 23.451.
\232\ 17 CFR 23.451(b)(2)(iii).
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1. Proposal
The Commission proposed to amend Sec. 23.451 by revising paragraph
(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.\233\ 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 made the Proposal different
from MPD's no-action position in CFTC Staff Letter 23-01, which
excluded Sec. 23.451 from the ITBC Compliance Exceptions.\234\ This
exclusion by MPD in CFTC Staff Letter 23-01 was a change from its prior
no-action position in CFTC Staff Letter 13-70 where Sec. 23.451 was
not excluded.\235\ For the reasons detailed below, the Commission has
determined that MPD's reasoning for that change may have been
incomplete or misinformed.
---------------------------------------------------------------------------

\233\ Id.
\234\ See Proposed Rule, 90 FR at 47153.
\235\ Id.
---------------------------------------------------------------------------

In proposing to include Sec. 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
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.\236\ Such facilities, by definition, provide access to
liquidity from multiple liquidity providers, not a single SD.\237\
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 (and as stated in
the Proposal), the Commission 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 Sec.
23.451 is designed to prevent.\238\
---------------------------------------------------------------------------

\236\ Id.
\237\ Proposed Rule, 90 FR at 47153.
\238\ Id. at 47154.
---------------------------------------------------------------------------

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 Sec. 23.451 are not implemented as simply as
MPD may have surmised in the context of trading on DCMs, SEFs, or
Exempt SEFs.\239\ 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.\240\ The
Commission understands that DCMs and Exempt SEFs are generally subject
to similar impartial access obligations. As a result, the Commission
believes that there may be significant impediments to SDs enforcing
measures to comply with Sec. 23.451 when trading on DCMs, SEFs, and
Exempt SEFs and thus has determined to include Sec. 23.451 in the ITBC
Swap Compliance Exceptions.
---------------------------------------------------------------------------

\239\ Id.
\240\ Id.; see also Guidance on Application of Certain
Commission Regulations to [SEFs] (Nov. 14, 2013), at 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 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.\241\ The Commission has 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.
---------------------------------------------------------------------------

\241\ Proposed Rule, 90 FR at 47154.
---------------------------------------------------------------------------

The Commission also proposed to delete the word ``Federal'' from
Sec. 23.451(a)(1)(iii),\242\ which defines the term ``contribution''
in relation to transition or inaugural expenses for a successful
candidate for office.\243\ Commission regulation 23.451 was promulgated
using the Commission's discretionary rulemaking authority under section
4s(h) of the CEA \244\ 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.'' \245\ 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.\246\ 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.'' \247\
Thus, the Commission proposed 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.\248\
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\242\ See 17 CFR 23.451(a)(1)(iii).
\243\ Proposed Rule, 90 FR at 47154.
\244\ 7 U.S.C. 6s(h).
\245\ Proposed Rule, 90 FR at 47154. 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, 80653-80654 (Dec. 22, 2010).
\246\ 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).
\247\ 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).
\248\ See Proposed Rule, 90 FR at 47154.
---------------------------------------------------------------------------

2. Comments Received and Final Rule
The Commission received no comments with respect to the proposed
amendments to Sec. 23.451. Therefore, the Commission is adopting the
amendments as proposed as reflected in the final rule text infra.

L. Amendment to Sec. 23.504

In general, Sec. 23.504 currently 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 \249\ (previously defined as the ``STRD
Requirement'').\250\
---------------------------------------------------------------------------

\249\ 17 CFR 23.504.
\250\ See Section I.A. supra.
---------------------------------------------------------------------------

1. Proposal
The Commission proposed to amend Sec. 23.504(a)(1) by adding a new
paragraph (iii). The revised section would include the following
provisions--as to applicability, the requirements of the section shall
not

[[Page 61246]]

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 17
CFR chapter I.
As stated in the Proposal, 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.\251\ 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 proposed Sec. 23.401(d),\252\ 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.\253\ 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.\254\
---------------------------------------------------------------------------

\251\ See Proposed Rule, 90 FR at 47154.
\252\ 17 CFR 23.401(d).
\253\ See Proposed Rule, 90 FR at 47154.
\254\ Id.
---------------------------------------------------------------------------

2. Comments Received and Final Rule
The Commission received no comments with respect to the proposed
amendments to Sec. 23.504. As such, the Commission is adopting the
amendments to Sec. 23.504(a)(1) as proposed by adding a new subsection
(iii) as reflected in the final rule text infra.

III. Cost Benefit Considerations

A. Statutory and Regulatory Background

As discussed above, section 4s(h) of the CEA \255\ 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.\256\ Pursuant to this
rulemaking authority, the Commission adopted the External Business
Conduct Standards.\257\ In addition, section 4s(i) of the CEA requires
the Commission to adopt rules governing swap documentation for Swap
Entities.\258\ Pursuant to this rulemaking authority, the Commission
adopted the STRD Requirement.\259\
---------------------------------------------------------------------------

\255\ 7 U.S.C. 6s(h).
\256\ ``Special Entity'' is defined in Sec. 23.401(c), 17 CFR
23.401(c) (redesignated as Sec. 23.401(h), 17 CFR 23.401(h), in the
Final Rule text infra).
\257\ See 17 CFR subpart H. See also Business Conduct Standards
for Swap Dealers and Major Swap Participants with Counterparties, 77
FR 9734 (Feb. 17, 2012).
\258\ 7 U.S.C. 6s(i).
\259\ See Sec. 23.504, 17 CFR 23.504.
---------------------------------------------------------------------------

Under this same authority and as discussed above, this Final Rule
makes certain amendments to the External Business Conduct Standards and
STRD Requirement to, among other things, 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. In addition, the Commission is eliminating the
PTMMM Requirement and the Scenario Analysis Requirement in their
entirety, amending the daily mark requirement under Sec. 23.431(d) to
provide Swap Entities greater flexibility in determining how to
calculate daily marks for uncleared swaps, and making certain other
changes discussed above.
As explained in Section I above, the Commission is issuing this
Final Rule to amend certain business conduct standards for Swap
Entities contained in subpart H of part 23 of the Commission's
regulations,\260\ and to the swap trading relationship documentation
rule for Swap Entities in Sec. 23.504.\261\ As explained in detail in
Section II.A. through Section II.L. above, the amendments are intended
to address certain long-standing issues with the Commission's external
business conduct standards and swap trading relationship documentation
rule, and are intended to supersede many long-standing no-action
positions issued by MPD (i.e., the Covered Staff Letters described in
detail in Section II.B. above), by codifying such positions in the
Commission's regulations.
---------------------------------------------------------------------------

\260\ 17 CFR part 23, subpart H.
\261\ 17 CFR 23.504.
---------------------------------------------------------------------------

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.\262\ 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'').\263\ 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.
---------------------------------------------------------------------------

\262\ 7 U.S.C. 19(a).
\263\ 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.\264\
---------------------------------------------------------------------------

\264\ See, e.g. 7 U.S.C. 2(i).
---------------------------------------------------------------------------

Where reasonably feasible, the Commission has endeavored to
estimate quantifiable costs and benefits. Where quantification is not
feasible, the Commission identifies and describes costs and benefits
qualitatively. The Commission acknowledges that it is limited in
estimating the actual cost of the Final Rule. The initial and recurring
costs for any particular Swap Entity, or a counterparty to a Swap
Entity, will

[[Page 61247]]

depend on, among other things, its size, organizational structure,
extent of swap dealing activity, other business activities, practices,
and cost structure. The Commission did not receive any data or comments
specifically or generally addressing the Commission's cost-benefit
analysis in the Proposal.
2. Costs and Benefits of This Final Rule
As in the Proposal, the Commission identifies and considers the
benefits and costs of the changes made by this Final Rule relative to
the baseline of those generated by the current statutory and regulatory
framework applicable to the issues addressed by this Final Rule, i.e.,
the current status quo. Specifically, the baseline for the Commission's
consideration of the costs and benefits are those the Commission
believes are (or would be) realized by Swap Entity compliance with: (1)
the External Business Conduct Standards and (2) the STRD
Requirement.\265\ The Commission recognizes, however, that to the
extent that SDs \266\ have arranged their business in reliance on MPD
no-action positions in the Covered Staff Letters, the actual costs and
benefits may not be as significant.
---------------------------------------------------------------------------

\265\ The Commission notes that, although the Commission is
adopting amendments that add various new definitions and changes to
existing definitions in 17 CFR 23.401, the costs and benefits of
those definitions are discussed in the substantive rules in which
the new or changed definitions appear.
\266\ 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 Final
Rule will only refer to SDs (not MSPs), a portion of which may have
relied on the Covered Staff Letters.
---------------------------------------------------------------------------

The Commission requested, both generally and with respect to
specific proposed amendments, and did not receive any comments from
commenters on the baseline. No commenter quantified nor attempted to
quantify the costs and benefits of any part of the Proposal.
a. Benefits
Compliance with the conditions set forth in the definition of ITBC
Swap in Sec. 23.401 \267\ of this Final Rule will permit SDs to
qualify for exceptions to compliance with regulatory requirements set
forth in final Sec. Sec. 23.402 through 23.451 and Sec. 23.504.\268\
The Commission requested but received no information on the number of
SDs that are currently relying on the MPD no-action position for ITBC
Swaps in CFTC Staff Letter 23-01, although the Commission believes that
a significant number of SDs are participating in the market for ITBC
Swaps. The Commission believes these exceptions will benefit such SDs
by reducing compliance obligations, and thereby lowering compliance
costs, as well as reducing operational costs for SDs because such SDs
will no longer have to agree on disclosure methodologies with their
ITBC Swap counterparties, nor prepare and maintain the actual written
disclosures. Specifically, the Commission believes that its adoption of
the compliance exceptions in this Final Rule for swaps meeting the ITBC
Swap definition will, without materially disadvantaging their non-Swap
Entity counterparties,\269\ significantly reduce the number of required
disclosures an SD is required to make, including disclosure pursuant to
Sec. 23.431(a) of the material risks and characteristics of a
particular swap, 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.\270\ The SD may also
similarly benefit from the elimination of the Scenario Analysis
Requirement and 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.\271\ Because an
SD's ITBC Swap counterparties will not have to make arrangements to
receive and process the various disclosures, such counterparties may
also benefit from lower legal and operational costs.
---------------------------------------------------------------------------

\267\ 17 CFR 23.401.
\268\ See 17 CFR 23.401-23.451 and 23.504.
\269\ See Section II.D.1 for why the Commission has determined
that counterparties will not be materially disadvantaged.
\270\ 17 CFR 23.431(a).
\271\ 17 CFR 23.432.
---------------------------------------------------------------------------

The Commission also believes that compliance with the conditions
set forth in the definition of ITBC Swap in final Sec. 23.401 will
benefit SDs by permitting them to qualify for exceptions to compliance
with regulatory requirements that would otherwise require the SD to
obtain information and representations from their non-Swap Entity
counterparties, including the KYC, ECP, and Special Entity status
information and representations under Sec. Sec. 23.402 and 23.430
\272\ and due diligence information regarding a Special Entity's QIR
under Sec. Sec. 23.440 and 23.450.\273\ The Commission believes these
provisions of this Final Rule will lower compliance and operational
costs for SDs. For example, with respect to the elimination of the
PTMMM Requirement, the Commission believes that SDs will 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 result in cost savings for SDs. Further, SDs' ITBC
Swap counterparties may benefit from lower legal and operational costs
to the extent they no longer need to respond to requests for
information and representations from SDs that avail themselves of the
exception.
---------------------------------------------------------------------------

\272\ 17 CFR 23.402 and 430.
\273\ 17 CFR 23.440 and 450.
---------------------------------------------------------------------------

However, as noted in the Proposal, 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 cost savings of, or benefits to, such SDs or
their counterparties.
Similarly, with respect to the elimination of the Scenario Analysis
Requirement, the Commission notes that because 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. Therefore, the Commission believes
that 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 in the Final Rule
will 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. As a
whole, the 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.
The Commission believes that compliance with the conditions set
forth in the definition of a Qualified Prime

[[Page 61248]]

Broker Arrangement in Sec. 23.401 \274\ of the Final Rule will also
benefit SDs by disapplying the price and other material economic terms
disclosure requirement under Sec. 23.431(a).\275\ Further, compliance
with the 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 limited to other SDs
as is the case under MPD's no-action position in CFTC Staff Letter 13-
11. The Commission expects PB Counterparties from the ability to obtain
competitive pricing from this widened pool of potential participants in
the markets for prime brokerage transactions.
---------------------------------------------------------------------------

\274\ 17 CFR 23.401.
\275\ 17 CFR 23.431(a).
---------------------------------------------------------------------------

Regarding the other miscellaneous amendments, the amendment to the
daily mark disclosure requirement in Sec. 23.431 to provide additional
flexibility to SDs may benefit SDs by reducing their operational
burdens. The amended definition of ``statutory disqualification'' in
Sec. 23.450 of the Final Rule will 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 adopted amendment to Sec. 23.451
that removes ``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 current
External Business Conduct Standards and the STRD Requirement prior to
adoption of the Final Rule, compliance with the conditions set forth in
the 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 because determining eligibility
likely will 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 because doing so likely will 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;
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 will either
(i) be deemed by the SD and its counterparty to be void ab initio, or
(ii) be subject to a breakage agreement or similar arrangement;
4. Costs incurred by SDs and their ITBC Swap counterparties in
adjusting execution documentation to ensure agreement that a swap
executed on or pursuant to the rules of an Exempt SEF where the rules
of the Exempt SEF do not provide for a swap rejected from clearing to
be deemed void ab initio will either (i) be deemed by the SD and its
counterparty to be void ab initio, or (ii) be subject to a breakage
agreement or similar arrangement.
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 will likely be
incurred by SDs and their ITBC Swap counterparties due to minor
variations between the Final Rule 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 definition of Qualified Prime Broker Arrangement in Sec. 23.401 of
the Final Rule 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, costs incurred to ensure that the parties have agreed on the
type, parameters, and limits of each potential Covered Transaction (as
defined in Sec. 23.401) \276\ that may be entered pursuant to the
Prime Broker Arrangement.
---------------------------------------------------------------------------

\276\ Id.
---------------------------------------------------------------------------

3. Costs and Benefits of the Commission's Final Rule as Compared to
Alternatives
In addition to the alternatives discussed in the Proposal, the
Commission considered several alternatives to portions of this Final
Rule, which are discussed in detail throughout this release.\277\ In
each instance, the Commission considered the costs and burdens of this
Final Rule and the regulatory benefits that the Final Rule seeks to
achieve in finalizing this Final Rule.
---------------------------------------------------------------------------

\277\ See supra Sections II.A.-II.L.
---------------------------------------------------------------------------

4. Section 15(a) Factors
Section 15(a) of the CEA \278\ 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.
---------------------------------------------------------------------------

\278\ 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.\279\ The Commission believes that the amendments adopted herein
will maintain the efficacy of protections for customers and the broader
financial system already contained in the External Business Conduct
Standards and the STRD Requirement.
---------------------------------------------------------------------------

\279\ 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

[[Page 61249]]

earned by Swap Entities when entering into swaps. This Final Rule
provides regulatory compliance exceptions from some of the required
disclosures that counterparties to Swap Entities would otherwise
receive. However, for reasons described below, the Commission believes
that it has crafted the exceptions in a way to realize important
benefits while largely preserving the level of pricing-information
symmetry for counterparties.
In the context of Prime Broker Arrangements, the price and other
material economic terms disclosures are disapplied, but such
disapplication is 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 process

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