Proposed Rule2026-17416
Swap Execution Facility Order Book Requirement for Permitted Transactions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 26, 2026
Issuing agencies
Commodity Futures Trading Commission
Abstract
The Commodity Futures Trading Commission ("Commission" or "CFTC") proposes to amend its regulations for swap execution facilities ("SEFs") to remove the requirement for SEFs to offer an order book for swap transactions that are not subject to trade execution requirement under section 2(h)(8) of the Commodity Exchange Act ("CEA" or "Act"). These types of swap transactions are referred to in the Commission's regulations as "permitted transactions."
Full Text
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<title>Federal Register, Volume 91 Issue 164 (Wednesday, August 26, 2026)</title>
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[Federal Register Volume 91, Number 164 (Wednesday, August 26, 2026)]
[Proposed Rules]
[Pages 55030-55037]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-17416]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 37
RIN 3038-AF79
Swap Execution Facility Order Book Requirement for Permitted
Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') proposes to amend its regulations for swap execution
facilities (``SEFs'') to remove the requirement for SEFs to offer an
order book for swap transactions that are not subject to trade
execution requirement under section 2(h)(8) of the Commodity Exchange
Act (``CEA'' or ``Act''). These types of swap transactions are referred
to in the Commission's regulations as ``permitted transactions.''
DATES: Comments must be received on or before September 25, 2026.
ADDRESSES: You may submit comments, specifically referencing ``Swap
Execution Facility Order Book Requirement for Permitted Transactions''
and RIN 3038-AF79, by any of the following methods:
<bullet> <a href="http://Regulations.gov">Regulations.gov</a>: Go to <a href="https://www.regulations.gov">https://www.regulations.gov</a> and
press the ``Search'' button, then proceed as follows:
1. Under Refine Documents Results--check the box to ``Only show
documents open for comment'';
2. Under Agency--select ``See More'' and check the box for
``Commodity Futures Trading Commission,'' then press the Apply button;
3. Identify this proposal in the list of CFTC documents open for
comment, press the ``Comment'' button to open the submission form, and
follow the instructions on the form.
Alternatively, if you are viewing this proposal on
<a href="http://www.federalregister.gov">www.federalregister.gov</a>, click the ``Submit A Public Comment'' button
at the top of the page to open the comment form. Follow the
instructions on the form to submit your comment to <a href="http://Regulations.gov">Regulations.gov</a>.
<bullet> Mail: Send to--Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
<bullet> Hand Delivery/Courier: Address to--CFTC Comment
Submission, Attn: Christopher Kirkpatrick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through <a href="http://Regulations.gov">Regulations.gov</a> are encouraged.
All comments must be submitted in English or, if not, accompanied
by an English translation. Do not include in your comment text or
attachments any personal identifying information or business
information that you do not want published online. Comments (regardless
of submission method) will be published without review for, and without
removal of, any personal identifying information or information your
business may consider confidential.
If you wish to submit confidential information for the Commission's
consideration, please contact the CFTC personnel listed in this Notice
under FOR FURTHER INFORMATION CONTACT before making any submission.
Please also carefully review the Commission's procedures in 17 CFR
145.9 for requesting confidential treatment under the Freedom of
Information Act (``FOIA'') of information submitted to the Commission.
The CFTC reserves the right, but shall have no obligation, to
review, pre-screen, filter, or redact all or any part of your comment
submission. The CFTC also reserves the right, without further
notification, to refuse to publish or to remove from public view all or
any part of your submission to the extent it contains content
inappropriate for publication in a comment file, such as--without
limitation--obscene language, threats of violence, solicitations for
commercial sales or illegal activity, or obvious spam. If a submission
that is refused for or withdrawn from publication because of
inappropriate
[[Page 55031]]
content also contains comments on the merits of this proposal, such
submission will be retained in the record for the matter and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the FOIA.
Pursuant to the Administrative Procedure Act at 5 U.S.C. 553(b)(4),
a plain language summary of the proposed rule is available at
regulations.gov.
FOR FURTHER INFORMATION CONTACT: Roger Smith, (202) 418-5344,
<a href="/cdn-cgi/l/email-protection#0270716f6b766a42616476612c656d74"><span class="__cf_email__" data-cfemail="9ae8e9f7f3eef2daf9fceef9b4fdf5ec">[email protected]</span></a>, Division of Market Oversight, Commodity Futures
Trading Commission, 77 West Jackson Blvd., Suite 800, Chicago, Illinois
60604.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Part 37 of the Commission's Regulations
B. Summary of Proposed Amendments to Sec. 37.3(a)(2)
C. Consultation With Other U.S. Financial Regulators
II. The Proposed Regulations
A. Swap Execution Facility Order Books for Permitted
Transactions
1. Background
2. Proposed Amendment to Sec. 37.3(a)(2)
3. Request for Comment
III. Effective Date and Transition Period
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Consideration
E. Executive Orders 12866, 13563, and 14192
I. Background
A. Part 37 of the Commission's Regulations
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') amended the CEA by adding section 5h, which
establishes registration requirements and core principles for SEFs.\1\
The Commission implemented CEA section 5h by adopting part 37 of its
regulations,\2\ which sets forth registration and operational
requirements for SEFs, including various trading requirements for swaps
transacted on SEFs.\3\ Among the requirements set forth in part 37 are
those specifying minimum trading functionality that a SEF must offer to
participants for all listed swaps; \4\ those specifying the methods of
execution that a SEF must offer for swaps trading, including for the
trading of swaps that are subject to the trade execution requirement
under CEA section 2(h)(8); \5\ and those implementing the statutory
core principles with which a SEF must comply in order to obtain and
maintain registration with the Commission. The Commission adopted this
framework in part to achieve the SEF statutory goals in CEA section
5h(e) of promoting trading on SEFs and promoting pre-trade transparency
in the swaps market.\6\
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\1\ 7 U.S.C. 7b-3.
\2\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476 (June 4, 2013) (hereinafter ``SEF Core
Principles Final Rule'').
\3\ The Dodd-Frank Act also added to the CEA certain provisions
related to the trading of swaps on designated contract markets
(``DCMs''). Given the statutory requirements under DCM Core
Principle 9 for DCMs to provide a competitive, open, and efficient
market and mechanism for executing transactions that protects the
price discovery process of trading in the centralized market of the
DCM, the Commission is not proposing any changes to regulatory
framework for DCMs. See 7 U.S.C. 7(d)(9).
\4\ 17 CFR 37.3(a)(2).
\5\ CEA section 2(h)(8) requires that transactions involving
swaps subject to the CEA section 2(h)(1) clearing requirement be
executed on or pursuant to the rules of a DCM or SEF, or a SEF that
is exempt from registration, unless no DCM or SEF makes such swaps
available to trade (``MAT'') or such swaps qualify for the clearing
exception under CEA section 2(h)(7) (the ``trade execution
requirement'').
\6\ 7 U.S.C. 7b-3(e).
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Commission regulation 37.3(a)(2) prescribes the minimum trading
functionality that a SEF must provide for all listed swaps, stating
that a SEF ``shall, at a minimum, offer an Order Book'' as defined in
Sec. 37.3(a)(3) (``Order Book Requirement'' or ``Minimum Trading
Functionality''). Commission regulation 37.9(a)(1) defines a ``Required
Transaction'' as a transaction involving a swap that is subject to the
trade execution requirement, and provides that a SEF must offer, for
the execution of a Required Transaction, either (i) an Order Book, or
(ii) a request-for-quote system that sends a request-for-quote to no
less than three unaffiliated market participants and operates in
conjunction with an Order Book for the execution of such transactions
(``RFQ System'').\7\ The Commission's part 37 regulations also specify
additional requirements that correspond to the offering by a SEF of an
Order Book or RFQ System for the execution of Required Transactions.\8\
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\7\ 17 CFR 37.9(a). With the exception of block trades, as
defined under Sec. 43.2, Required Transactions must be executed on
a SEF's Order Book or RFQ System. 17 CFR 37.9(a)(2)(i).
\8\ For example, under Sec. 37.9(b), the Commission implemented
a fifteen-second time-delay requirement for Required Transactions
that are pre-arranged or pre-negotiated by a broker and submitted as
cross trades for execution through the SEF's Order Book. This
requirement allows a broker or dealer to execute a Required
Transaction by trading against a customer's order, or executing two
customers' orders against each other, through pre-negotiation or
pre-arrangement, provided that one side of the transaction is
exposed to the Order Book for fifteen seconds before the other side
of the transaction is submitted for execution.
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Commission regulation 37.9(c)(1) defines a ``Permitted
Transaction'' as a transaction that does not involve a swap that is
subject to the trade execution requirement. A SEF may offer any
execution method for a Permitted Transaction, and market participants
may voluntarily, but are not required to, trade Permitted Transactions
on a SEF.\9\ As noted above, however, all SEFs currently must satisfy
the Order Book Requirement in Sec. 37.3(a)(2) by offering an Order
Book, both with respect to Required Transactions and Permitted
Transactions.
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\9\ 17 CFR 37.9(c).
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B. Summary of Proposed Amendments to Sec. 37.3(a)(2)
After several years observing the offering and operating by SEFs of
Order Books for Permitted Transactions, and taking into consideration
the experience and insights of SEF operators,\10\ it is the
Commission's preliminary view, as discussed in more detail below, that
the Order Book Requirement for Permitted Transactions does not serve to
improve transparency or lead to more liquidity in the swaps market on
SEFs, which are the CEA statutory goals for SEFs.\11\ Further, it is
the Commission's preliminary view that the Order Book Requirement for
Permitted Transactions places a heavy financial burden on the continual
operations of SEFs, which in turn may divert SEF resources away from
other efforts that could achieve transparency and liquidity objectives
more effectively.\12\
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\10\ See LSEG FX SEF, operated by Refinitiv US SEF LLC (``LSEG
SEF''), Request for Relief from Minimum Trading Functionality for
Swap Execution Facilities (June 30, 2025) (``LSEG SEF Request
Letter''). See also Bloomberg SEF LLC (``BSEF''), Order Book and
Annual Compliance Report Data Structuring for Security-Based Swap
Execution Facilities (Feb. 25, 2026) (``BSEF Request Letter'').
While the BSEF Request Letter requested a no-action position from
staff of the Securities and Exchange Commission (``SEC'') for BSEF's
security-based swap execution facility (``SBEF'') operations,
throughout the letter BSEF invokes its experience and insights
operating a Commission-registered SEF to bolster its request and
provide necessary context.
\11\ See 7 U.S.C. 7b-3(e)
\12\ Id.
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To provide the opportunity for the Commission to reconsider the
usefulness and effectiveness of the Order Book Requirement for
Permitted Transactions, in 2025, staff of the Commission's Division of
Market Oversight issued CFTC No-Action Letter No. 25-24 (``NAL No. 25-
24''),\13\ which
[[Page 55032]]
provided a no-action position from such requirement.\14\ The Commission
now seeks public comment on a proposal to codify the staff no-action
position. More specifically, the Commission is proposing to amend Sec.
37.3(a)(2) to allow SEFs not to offer an Order Book for Permitted
Transactions, while maintaining the requirement for SEFs to offer an
Order Book for Required Transactions.\15\
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\13\ CFTC Letter No. 25-24, No-Action Position with Respect to
the Swap Execution Facility Minimum Trading Functionality under
Commission Regulation 37.3(a)(2) (July 30, 2025) (``NAL No. 25-
24''). Shortly after the issuance of NAL No. 25-24, SEC staff
provided an identical no-action position for SBSEFs. See SEC staff,
Order Book and Annual Compliance Report Data Structuring for
Security-Based Swap Execution Facilities (Feb. 27, 2026).
\14\ As defined in Sec. 140.99(a)(2) of the Commission's
regulations, a no-action letter is a written statement issued by a
Commission Division stating that the Division will not recommend
enforcement action to the Commission for failure to comply with a
specific provision of the Act or a Commission rule, regulation, or
order. A no-action letter represents only the issuing Division's
position and binds only that Division. It does not bind the
Commission. 17 CFR 140.99(a)(2).
\15\ In 2018, the Commission issued a comprehensive proposal to
amend the SEF regulatory framework. See Swap Execution Facilities
and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018) (``2018
SEF Proposal''). Among other things, the 2018 SEF Proposal proposed
eliminating the Order Book Requirement as part of a more holistic
approach to amending the SEF regulatory framework.
In 2021, the Commission adopted two final rulemakings related to
the 2018 SEF Proposal. See Exemptions From Swap Trade Execution
Requirement, 86 FR 8993 (Feb. 11, 2021) and Swap Execution
Facilities, 86 FR 9224, (Feb. 11, 2021). Following the adoption of
these two final rulemakings, the Commission voted to withdraw the
unadopted portions of the 2018 SEF Proposal, including the proposed
elimination of the Order Book Requirement. See Swap Execution
Facilities and Trade Execution Requirement, 86 FR 9304 (Feb. 12,
2021).
While the proposal and rationales contained herein with respect
to the Order Book Requirement are, in some cases, identical or
similar to the proposal and rationales included in the 2018 SEF
Proposal, the Commission believes the context surrounding the two
proposals distinguishes them in terms of application and scope.
Further, while the Commission received public comments on the 2018
SEF Proposal, given the withdrawal of the unadopted portions of the
2018 SEF Proposal and the Commission's belief that it is important
for public comments to be provided and considered in light of the
facts and circumstances of the proposal at hand, the Commission
believes that any comments made on the 2018 SEF Proposal that are
relevant to this rule proposal should be resubmitted as comments to
this rule proposal in order to be considered.
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C. Consultation With Other U.S. Financial Regulators
In developing these proposed rules, the Commission has consulted
with the SEC, pursuant to section 712(a)(1) of the Dodd-Frank Act.\16\
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\16\ Dodd-Frank Act, Public Law 111-203, tit. VII, Sec.
712(a)(1), 124 Stat. 1376 (2010).
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II. The Proposed Regulations
A. Swap Execution Facility Order Books for Permitted Transactions
1. Background
In Sec. 37.3(a)(2), the Commission designated an Order Book as the
``minimum trading functionality'' each SEF must maintain and offer for
each swap that it lists for trading. An Order Book is defined under
Sec. 37.3(a)(3) as (i) an electronic trading facility; \17\ (ii) a
trading facility; \18\ or (iii) ``[a] trading system or platform in
which all market participants in the trading system or platform have
the ability to enter multiple bids and offers, observe or receive bids
and offers entered by other market participants, and transact on such
bids and offers.'' \19\
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\17\ CEA section 1a(16) defines ``electronic trading facility''
as a trading facility that (i) operates by means of an electronic or
telecommunications network; and (ii) maintains an automated audit
trail of bids, offers, and the matching of orders or the execution
of transactions on the facility. 7 U.S.C. 1a(16).
\18\ CEA section 1a(51) defines ``trading facility'' as ``a
person or group of persons that constitutes, maintains, or provides
a physical or electronic facility or system in which multiple
participants have the ability to execute or trade agreements,
contracts, or transactions (i) by accepting bids or offers made by
other participants that are open to multiple participants in the
facility or system; or (ii) through the interaction of multiple bids
or multiple offers within a system with a pre-determined non-
discretionary automated trade matching and execution algorithm.'' 7
U.S.C. 1a(51)(A).
\19\ 17 CFR 37.3(a)(3).
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In the SEF Core Principles Final Rule, the Commission stated its
anticipation that an Order Book would typically work well for liquid
Required Transactions, i.e., transactions involving swaps that are
subject to the trade execution requirement.\20\ However, the Commission
also acknowledged that the Order Book functionality does not have the
requisite flexibility to serve as the ideal method of execution for a
variety of swaps, in particular, those swaps that may feature lower
levels of liquidity.\21\ The Commission nevertheless believed that an
Order Book could establish a base level of pre-trade price transparency
to all market participants and, thus, required that each SEF offer an
Order Book for all swaps that it lists for trading, including both
swaps subject to the trade execution requirement and swaps not subject
to the trade execution requirement.\22\
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\20\ SEF Core Principles Final Rule at 33564-65.
\21\ Id. To this end, the Commission acknowledged that for less
liquid Required Transactions, however, it anticipated that RFQ
systems would help facilitate trading. Id.
\22\ SEF Core Principles Final Rule at 33564.
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The Commission has observed that Order Books for Permitted
Transactions, unlike Order Books for Required Transactions, have been
rarely used by market participants for swaps trading on SEFs despite
their availability for all swaps listed by SEFs for trading. Depending
on the product involved, for example, order book trading typically
ranges between ``less than [one percent] to less than [three percent]
of total CDS transactions'' on SEFs, while order book trading
constitutes between ``less than [one percent] to approximately [twenty
percent] of total IRS transactions . . . .'' \23\ In the 2026 BSEF
Request Letter, BSEF stated in its experience that ``since 2015, over
96% of Order Book trading has been in [Required Transactions], and less
than 4% of Order Book trades have been in [Permitted
Transactions]''.\24\ Further to this point, LSEG SEF, which trades only
Permitted Transactions, stated in its 2025 no-action letter request
that ``during the entire time that LSEG SEF's Order Book has been
operational (i.e., prior to obtaining temporary registration status in
2013), not a single trade has been executed on, nor any orders
submitted to, LSEG SEF's Order Book.'' \25\ The Commission
preliminarily believes that this low level of swaps trading activity on
Order Books for Permitted Transactions over more than a decade is
likely attributable to an Order Book's inability to support the broad
and diverse range of Permitted Transactions that trade episodically,
rather than on a continuous basis.\26\
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\23\ J. Christopher Giancarlo and Bruce Tuckman, Swaps
Regulation Version 2.0: An Assessment of the Current Implementation
of Reform and Proposals for Next Steps 49-50 (Apr. 26, 2018),
available at <a href="https://www.cftc.gov/sites/.../oce_chairman_swapregversion2whitepaper_042618.pdf">https://www.cftc.gov/sites/.../oce_chairman_swapregversion2whitepaper_042618.pdf</a>. (``Giancarlo
White Paper'').
\24\ BSEF Request Letter at 5.
\25\ LSEG SEF Request Letter at 2-3.
\26\ In their study of the index CDS market, Pierre Collin-
Dufresne, Benjamin Junge, and Anders B. Trolle state that
``[p]roponents of bringing all market participants onto one limit
order book typically argue that it would (i) increase quote
competition among dealers and (ii) allow clients to occasionally
supply liquidity via limit orders thereby lowering overall
transaction costs (although at the cost of execution risk). However,
a limit order book arguably works best when trading is continuous
and it is not necessarily optimal when trading is more episodic as
is the case for index CDSs. For instance, Barclay, Hendershott, and
Kotz (2006) document a precipitous drop in electronic trading (via
limit order books) when Treasuries go off-the-run and trading
volumes decline.'' Pierre Collin-Dufresne, Benjamin Junge, & Anders
B. Trolle, Market Structure and Transaction Costs of Index CDSs 6
n.10 (Swiss Fin. Inst. Res. Paper No. 18-40, 2017) (``2017 Collin-
Dufresne Research Paper''), citing Michael J. Barclay, Terrence
Hendershott, & Kenneth Kotz, Automation Versus Intermediation:
Evidence from Treasuries Going Off the Run, 61 J. Fin. 2395, 2395-
2414 (2006).
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The Commission understands that mandating that a SEF provide an
Order Book for Permitted Transactions has imposed significant
operational and
[[Page 55033]]
financial costs and burdens, particularly from a technological
standpoint, with little benefit to most market participants who choose
not to utilize them.\27\ For example, LSEG SEF, in its 2025 request for
a no-action letter, explained that establishing and maintaining an
Order Book incurs substantial financial and staffing costs.\28\ LSEG
SEF emphasized that it invests significant resources annually to keep
its Order Book operational and must periodically upgrade its systems
and hardware, which adds further expenses.\29\ As such, LSEG SEF argued
that the requirement to maintain a rarely used Order Book forces
participants to pay for systems they seldom use and hinders SEFs from
developing new offerings that could increase new participants and
trading activity.\30\
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\27\ The Commission understands that these costs include
regularly occurring software updates to electronic order book
systems and other ongoing technology-related maintenance.
\28\ LSEG SEF Request Letter at 3. Similarly, BSEF noted that
``[b]uilding and maintaining an Order Book imposes significant
initial and ongoing costs--engineering, infrastructure, market-
surveillance integration, and periodic upgrades . . . .'' BSEF
Request Letter at 6.
\29\ Id.
\30\ Id. Similarly, BSEF argues that the resources used to
operate and maintain an Order Book ``could otherwise be directed to
protocols SBSEF participants actually use and to innovations that
promote transparency and enhanced execution quality.'' BSEF Request
Letter at 6. While BSEF's statement is related to SBSEF participants
and its operation of an SBSEF, the Commission believes the statement
is equally applicable to SEF participants and the operation of a
SEF, which BSEF is also.
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2. Proposed Amendment of Sec. 37.3(a)(2)
Therefore, based in part on its experience, the Commission proposes
to amend Sec. 37.3(a)(2) to allow SEFs not to offer an Order Book for
Permitted Transactions. However, this proposal would not alter the
Order Book Requirement as applicable to Required Transactions. The
Commission believes that eliminating the Order Book Requirement for
Permitted Transactions would help reduce operating costs for SEFs as
they would no longer be required to operate and maintain order book
systems that may be poorly suited for trading in less liquid swaps,
such as Permitted Transactions, and therefore, do not attract
significant pools of liquidity. The Commission acknowledges that some
Permitted Transactions may have adequate liquidity to be listed on an
Order Book; however, the Commission believes that as a category of
swaps, the number of Permitted Transactions that may meet this
criterion does not justify a requirement to build out, operate, and
maintain an Order Book for all Permitted Transactions. The Commission
believes that instead of employing resources to build and support a
dormant trading system or platform, the proposed elimination of the
Order Book Requirement for Permitted Transactions provides a SEF with
the flexibility to determine how to allocate its resources,
particularly as it relates to developing methods of execution that are
better suited to trading the products that it lists.\31\ The Commission
preliminarily believes that the Order Book Requirement has not achieved
the CEA section 5h(e) statutory goal of promoting more liquidity in the
swaps market on SEFs. To this end, the Commission preliminary believes
that other execution methods may be better suited to maximizing
participation and concentrating liquidity formation on SEFs for
Permitted Transactions.\32\ Therefore, the Commission preliminary
believes that removing this requirement may help spur further
development and innovation in execution methods and bring in more
market participants, as this barrier to entry is removed, spurring
competition.\33\ The Commission also preliminarily believes that
eliminating this requirement may encourage SEFs to list new and
different types of swaps, given that they would no longer have to incur
the costs of operating and supporting Order Books for Permitted
Transactions. The Commission notes, however, that a SEF would be free
to continue to offer an order book, if it chooses.
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\31\ See LSEG Request Letter at 3-4 stating that offering and
maintaining an Order Book for Permitted Transactions ``restricts
SEFs' ability to develop new offerings that would attract additional
participants and actually encourage more trading on SEFs . . .
imposes significant costs on SEFs that divert time and resources
away from efforts that could be much more effective at accomplishing
[greater transparency and increased liquidity].'' See also BSEF
Request Letter at 5-6 stating ``[g]iven the costs associated with
the operation and maintenance of an Order Book, and the lack of any
meaningful benefit to the SBS market, we believe the Order Book
requirement for Permitted Transactions should be removed. SBSEF
resources could be better deployed elsewhere to provide services
that are more useful, innovative, and responsive to customer needs .
. . . These resources could otherwise be directed to protocols SBSEF
participants actually use and to innovations that promote
transparency and enhanced execution quality.''
\32\ See BSEF Request Letter at 4 referring to statistics
regarding the low level of Order Book trading on SEFs, ``[w]hile
this statistic pertains to the CFTC-regulated market, it illustrates
the broader reality that over-the-counter derivatives liquidity
generally coalesces around request-for-quote and voice-intermediated
workflows and not Order Books.''
\33\ See supra note 29.
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The Commission adopted the Order Book Requirement based in part on
the statutory goal of promoting pre-trade price transparency,\34\ but
the Commission acknowledges that the CEA does not explicitly prescribe
the Order Book as a SEF minimum trading functionality. In addition, as
noted above, Order Books for Permitted Transactions are seldom
utilized. Therefore, although they were implemented in part to promote
pre-trade price transparency, the Commission preliminarily believes
that the Order Book Requirement for Permitted Transactions does not
achieve the statutory goal of promoting pre-trade transparency for
Permitted Transactions due to their limited usage.
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\34\ 7 U.S.C.7b-3(e).
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Accordingly, with the proposed elimination of this requirement for
Permitted Transactions under Sec. 37.3(a)(2), SEFs would be free to
offer any method of execution under Sec. 37.9(c)(2).\35\
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\35\ For avoidance of doubt, the Commission emphasizes that this
proposal does not change the SEF registration requirements under CEA
section 1a(50) and Commission Regulations 37.3(a)(1).
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Request for Comment
The Commission requests comment on all aspects of the proposed
amendments to Sec. 37.3(a)(2). The Commission also invites comments
specifically on the following:
(1) Are the proposed amendments to Sec. 37.3(a)(2) appropriate?
(2) Should the Commission still require SEFs to offer an Order Book
for all Permitted Transactions, as defined in Sec. 37.9(c)(1) or
should the Commission use another method, such as trading volume in a
certain swap, to require the use of an Order Book for some Permitted
Transactions?
(3) Should the Commission eliminate the requirement for SEFs to
offer an Order Book for Required Transactions, as defined in Sec.
37.9(a)(1)?
(4) Are the Commission's preliminary views regarding the usage of
Order Books for Permitted Transactions accurate? Do the Commission's
assumptions based on the data provided still stand?
III. Effective Date and Transition Period
The Commission proposes that the effective date for the proposed
regulations be 30 days after publication of final regulations in the
Federal Register. The Commission preliminarily believes that such an
effective date would allow SEFs and market participants sufficient time
to adapt to the amended rules in an efficient and orderly manner.
[[Page 55034]]
Request for Comment
The Commission requests comment on whether the proposed effective
date is appropriate and, if not, the Commission further requests
comment on possible alternative effective dates and the basis for any
such alternative dates.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \36\ requires Federal
agencies, in promulgating regulations, to consider the impact of those
regulations on small businesses. The regulations adopted herein will
affect SEFs and their market participants. The Commission has
previously established certain definitions of ``small entities'' to be
used by the Commission in evaluating the impact of its regulations on
small entities in accordance with the RFA.\37\ The Commission
previously concluded that SEFs are not small entities for the purpose
of the RFA.\38\ The Commission has also previously stated its belief in
the context of relevant rulemakings that SEFs' market participants,
which are all required to be eligible contract participants (``ECPs'')
\39\ as defined in section 1a(18) of the CEA,\40\ are not small
entities for purposes of the RFA.\41\ Therefore, the Chairman, on
behalf of the Commission, hereby preliminarily certifies, pursuant to 5
U.S.C. 605(b), that the regulations will not have a significant
economic impact on a substantial number of small entities. The
Commission invites the public to comment on whether SEFs and SEF market
participants covered by these proposed rules should be considered small
entities for the purpose of the RFA.
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\36\ 5 U.S.C. 601 et seq.
\37\ 47 FR at 18618-21 (Apr. 30, 1982).
\38\ SEF Core Principles Final Rule, 78 FR 33476, 33548 (June 4,
2013) (citing 47 FR 18618, 18621 (Apr. 30, 1982) (discussing DCMs);
66 FR 42256, 42268 (Aug. 10, 2001) (discussing DTFs, ECMs, and
EBOTs); and 66 FR 45604, 45609 (Aug. 29, 2001) (discussing
registered DCOs)).
\39\ 17 CFR 37.703.
\40\ 7 U.S.C. 1(a)(18).
\41\ 66 FR 20740, 20743 (Apr. 25, 2001) (stating that ECPs by
the nature of their definition in the CEA should not be considered
small entities).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq.
(``PRA'') imposes certain requirements on Federal agencies (including
the Commission) in connection with conducting or sponsoring any
``collection of information,'' \42\ as defined by the PRA. Among its
purposes, the PRA is intended to minimize the paperwork burden to the
private sector, to ensure that any collection of information by a
government agency is put to the greatest possible uses, and to minimize
duplicative information collections across the government.\43\
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\42\ See 44 U.S.C. 3502(3)(A).
\43\ See 44 U.S.C. 3501.
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The PRA applies to all information, ``regardless of form or
format,'' whenever the government is ``obtaining, causing to be
obtained, [or] soliciting'' information, and includes required
``disclosure to third parties or the public, of facts or opinions,''
when the information collection calls for ``answers to identical
questions posed to, or identical reporting or recordkeeping
requirements imposed on, ten or more persons.'' \44\ The PRA
requirements have been determined to include not only mandatory, but
also voluntary information collections, and include both written and
oral communications.\45\ The Commission may not conduct or sponsor, and
a person is not required to respond to, a collection of information
unless it displays a currently valid Office of Management and Budget
(``OMB'') control number.
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\44\ See 44 U.S.C. 3502(3).
\45\ See 5 CFR 1320.3(c)(1).
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This proposed rulemaking affects regulations that contain
collections of information for which the Commission has previously
received control numbers from OMB. The titles for these collections of
information are ``Core Principles and Other Requirements for Swap
Execution Facilities, OMB control number 3038-0074.'' This proposed
rulemaking would not, however, alter or revise any existing information
collections or impose any new information collection requirements from
any persons or entities that require approval of OMB under the PRA.
Accordingly, it will create no new paperwork burdens or modifications
to existing burdens that are subject to review by the Office of
Management and Budget under the PRA.
C. Cost-Benefit Considerations
Section 15(a) of the CEA \46\ requires the Commission to ``consider
the costs and benefits'' of its actions before promulgating a
regulation under the CEA or issuing certain orders. Section 15(a)
further specifies that the costs and benefits shall be evaluated in
light of 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. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
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\46\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
1. Background
The Commission is proposing to amend Sec. 37.3(a)(2) to limit its
requirement of offering an Order Book to only Required Transactions.
The baseline against which the Commission considers the costs and
benefits of these proposed rules is the statutory and regulatory
requirements of the CEA and Commission regulations now in effect, in
particular Sec. 37.3(a)(2) of the Commission's regulations. The
Commission, however, notes that as a practical matter SEFs and market
participants have adopted some current practices based upon the no-
action letter provided by Commission staff.\47\ As such, to the extent
that SEFs have relied on the relevant staff no-action letter, the
actual costs and benefits discussed below of the proposed rules may not
be fully realized.
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\47\ In its discussion of alternatives, the Commission believes
it is also relevant to consider the costs and benefits of the
proposed regulations in comparison to circumstances in which such
no-action letter is no longer available.
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To the extent possible, the Commission has endeavored to quantify
the costs and benefits of this proposal; However, in some instances, it
is not reasonably feasible to quantify the costs and benefits to SEFs
and certain market participants with respect to, for example, market
integrity. Notwithstanding these types of limitations, however, the
Commission otherwise identifies and considers the costs and benefits of
these rules in qualitative terms.
In the following consideration of costs and benefits, the
Commission first identifies and discusses the benefits and costs
attributable to the proposed rule amendments. The Commission, where
applicable, then considers the costs and benefits of the proposed rules
in light of the five public interest considerations set out in Sec.
15(a) of the CEA.
The Commission notes that this consideration of costs and benefits
is based on the understanding that the swaps market functions
internationally, with many transactions involving U.S. firms taking
place across international boundaries, with some Commission registrants
being organized outside of the United States, with leading industry
members typically conducting operations both within and outside the
[[Page 55035]]
United States, and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of the
proposed rules on all swaps activity subject to the proposed and
amended regulations, whether by virtue of the activity's physical
location in the United States or by virtue of the activity's connection
with or effect on U.S. commerce under CEA section 2(i).\48\
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\48\ Section 2(i)(1) applies the swaps provisions of both the
Dodd-Frank Act and Commission regulations promulgated under those
provisions to activities outside the United States that ``have a
direct and significant connection with activities in, or effect on,
commerce of the United States[.]'' 7 U.S.C. 2(i). Section 2(i)(2)
makes them applicable to activities outside the United States that
contravene Commission rules promulgated to prevent evasion of Dodd-
Frank.
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2. Permitted Transaction Order Books
The Commission is proposing to amend Sec. 37.3(a)(2) to eliminate
the requirement that SEFs offer an Order Book for Permitted
Transactions, while maintaining the requirement to offer an Order Book
for Required Transactions.
a. Benefits
The Commission preliminarily believes that not requiring SEFs to
offer an Order Book for Permitted Transactions would benefit SEFs by
helping them reduce operating costs, as they would no longer be
required to operate and maintain an Order Book for trading Permitted
Transactions. In addition, for those SEFs that may enter the market,
these savings would extend to the development and design of an Order
Book, as it is no longer required, if they did not list Required
Transactions on their SEF. The Commission notes that these benefits are
currently available to market participants through the existing no-
action letter.
Further, as discussed above, the Commission preliminarily believes
that by eliminating the Order Book requirement for Permitted
Transactions, SEFs will be able to more effectively employ their
resources, and no longer face the prospect of being required to provide
Order Books that will not be utilized.
The Commission preliminarily believes that eliminating the Order
Book Requirement for Permitted Transactions would provide several other
benefits. Based on its experience, the Commission has observed that
market participants have generally not used Order Books for swaps
trading on SEFs despite their availability for all Permitted
Transactions.\49\ The Commission recognizes that market participants
view Order Books as unsuitable for trading in a large segment of the
swaps market and believes that eliminating this requirement would
reduce costs by enabling SEFs to discontinue their use as a method of
execution or limit their availability, based on their own discretion,
to Permitted Transactions that are liquid enough to support such
trading. Moreover, new SEFs would be able to register without setting
up an Order Book for Permitted Transactions, which should significantly
reduce the cost of establishing a SEF, especially for SEFs that plan to
offer only Permitted Transactions. In removing this barrier of entry,
the Commission believes that it may result in a more competitive
marketplace, as more SEFs vie for trading activity.
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\49\ A research study by Lynn Riggs, Esen Onur, David Reiffen,
and Haoxiang Zhu finds that for index CDS, a minimal amount of
trading activity on the two highest-volume SEFs occurs via an order
book. Lynn Riggs, Esen Onur, David Reiffen & Haoxian Zhu, Mechanism
Selection and Trade Formation on Swap Execution Facilities: Evidence
from Index CDS 10 (2017),available at <a href="https://www.cftc.gov/idc/groups/public/@economicanalysis/documents/file/oce_mechanism_selection.pdf">https://www.cftc.gov/idc/groups/public/@economicanalysis/documents/file/oce_mechanism_selection.pdf</a> (``2017 Riggs Study''). Similarly, in
the BSEF Request Letter, BSEF stated in its experience that ``since
2015, over 96% of Order Book trading has been in [Required
Transactions], and less than 4% of Order Book trades have been in
[Permitted Transactions]''. BSEF Request Letter at 5. Further to
this point, LSEG SEF, which trades only Permitted Transactions,
stated in its no-action letter request that ``during the entire time
that LSEG SEF's Order Book has been operational (i.e., prior to
obtaining temporary registration status in 2013), not a single trade
has been executed on, nor any orders submitted to, LSEG SEF's Order
Book.'' LSEG SEF Request Letter at 2-3
---------------------------------------------------------------------------
Accordingly, the Commission preliminarily believes that the
proposed elimination of the one size fits all Order Book Requirement
for Permitted Transactions would free up resources that could enable
SEFs to innovate and develop new and different methods of execution
tailored to their markets, which may be more efficient, transparent,
and cost-effective means for participants to trade Permitted
Transactions. Such methods could be more efficient for a broader range
of swaps and various market liquidity conditions, which may allow SEFs
to effectively promote appropriate counterparty and swap-specific
levels of pre-trade price transparency. This potential innovation of
efficient, transparent, and cost-effective means of trading Permitted
Transactions would facilitate natural market evolution by SEFs, which
may ultimately lower transaction costs and increase trading
efficiency.\50\
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\50\ Darrell Duffie and Haoxiang Zhu suggest that work-ups can
sometimes be a more efficient means of transacting than a limit
order book. See Darrell Duffie & Haoxiang Zhu, Size Discovery, 30
Rev. Fin. Stud. 1095-1150 (2017).
---------------------------------------------------------------------------
As the Commission is not prohibiting the use of an Order Book for
Permitted Transactions, the Commission anticipates that SEFs that
already are listing Permitted Transactions on their Order Book, will
continue to offer them for some or all of these Permitted Transactions
if they believe they are appropriate, such that customers who wish to
transact Permitted Transactions on Order Books would continue to be
able to do so. The Commission also notes that swap transactions on SEFs
will continue to be subject to the part 43 real-time reporting
requirements, so market participants would continue to benefit from the
post-trade transparency associated with access to information about the
most recent transaction price.
b. Costs
As noted above, not requiring SEFs to offer an Order Book for
Permitted Transactions should enable SEFs to reduce operating costs.
Since any existing Order Books for Permitted Transactions are not
actively used, the Commission preliminarily believes that removing the
Order Book Requirement (and not requiring SEFs to create such Order
Books) should not impose significant costs on market participants.
The Commission notes that some market participants may not perceive
a significant cost from the lack of availability of an Order Book for
Permitted Transactions because the Order Books for Permitted
Transactions on many SEFs exhibit little or no trading activity and
contain few or no bids and offers, despite SEFs maintaining them over
the past decade. The original intent of the Order Book Requirement was
to provide market participants price transparency; however, since
market participants are not currently using the available Order Books
for Permitted Transactions, the Commission preliminarily believes that
the cost related to removing the requirement would be de minimis.\51\
As
[[Page 55036]]
noted above, the Commission anticipates that SEFs that believe Order
Books are appropriate for Permitted Transactions would continue to
offer them, so in that case, there would be no loss of the perceived
benefit of an Order Book for Permitted Transactions.
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\51\ To the extent that requiring SEFs to offer Order Books for
Permitted Transactions facilitates their eventual use, the proposed
elimination of the Order Book Requirement under Sec. 37.3 creates a
potential decrease in future pre-trade price transparency. If SEFs
decide to stop offering Order Books for Permitted Transactions
pursuant to this proposal, some swaps markets may not be able to
move onto an Order Book even if there is future interest from some
market participants. This cost would be mitigated to the extent that
SEFs can always reinstate their Order Books for Permitted
Transactions in response to customer demand or offer other execution
methods that provide similar pre-trade price transparency benefits.
---------------------------------------------------------------------------
Further, the Commission notes that to the extent that SEFs respond
to the proposed approach by focusing the cost-savings and freed up
resources from eliminating Order Books for Permitted Transactions into
offering additional flexible execution methods, market participants
should benefit by having the opportunity to choose an execution method
with a more appropriate level of pre-trade transparency for their
transactions and their swap trading needs.
c. Consideration of Alternatives
The relevant no-action position set forth in NAL No. 25-24, upon
which the proposal is based, is subject to withdrawal by Commission
staff. In addressing alternatives to adopting the proposed amendments
to Sec. 37.3(a)(2), the Commission considered the costs and benefits
associated with withdrawal of the no-action position in NAL No. 25-24,
which would obligate SEFs to satisfy the requirements of existing Sec.
37.3(a)(2). The Commission preliminarily believes that adopting the
proposed amendments to Sec. 37.3(a)(2) would help reduce related costs
for SEFs with respect to offering Order Books for Permitted
Transactions.
Section 15(a) Factors
a. Protection of Market Participants and the Public
Allowing SEFs to eliminate the Order Book for Permitted
Transactions should not impact protection of market participants. While
protecting market participants also benefits the public, the Commission
has not identified any further effect of the proposal on protection of
the public.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
The proposed elimination of the Order Book Requirement would
enhance efficiency by enabling SEFs to free up resources that were
previously required for operating, maintaining, and updating seldomly
used Order Books for Permitted Transactions. Freeing up these resources
could enable SEFs to innovate and develop new and different methods of
execution tailored to their markets, which may be more efficient,
transparent, and cost-effective means for participants to trade
Permitted Transactions. Such methods could be more efficient for a
broader range of swaps and various market liquidity conditions, which
may allow SEFs to effectively promote appropriate counterparty and
swap-specific levels of pre-trade price transparency. This potential
innovation of efficient, transparent, and cost-effective means of
trading Permitted Transactions would facilitate natural market
evolution by SEFs, which may ultimately lower transaction costs and
increase trading efficiency. In addition, the Commission preliminarily
believes that removing this requirement may result in more competition
in the SEF space. As noted above, designing and developing an Order
Book is a significant barrier of entry into this space, so by removing
this barrier, it is possible that more SEFs may enter the market, which
may result in a more efficient market for Permitted Transactions. The
Commission has not identified any likely effects of the proposed
amendments on financial integrity in the swap markets. The Commission
preliminarily believes expects that, since there are few, if any,
active Order Books for Permitted Transactions, SEFs will not use the
proposed amendment to Sec. 37.3(a)(2) to remove active Order Books
that are providing competitive markets.
c. Price Discovery
The Commission preliminarily believes that the proposed amendment
to Sec. 37.3(a)(2), which would allow SEFs to choose not offer an
Order Book for Permitted Transactions, would not materially inhibit
price discovery since the Commission anticipates that SEFs would retain
Order Books for Permitted Transactions where price discovery is
occurring but to that point, the Commission preliminarily believes that
currently price discovery is not occurring in Order Books for Permitted
Transactions as addressed within this proposal.
d. Sound Risk Management Practices
The Commission has not identified any likely effects of the
proposed amendments on sound risk management practices in the swap
markets.
e. Other Public Interest Considerations
The Commission is identifying a public interest benefit in
codifying the no-action position in NAL 25-24, where the efficacy of
that position has been demonstrated. In such a situation, the
Commission believes it serves the public interest to engage in notice-
and-comment rulemaking, where it seeks and considers the views of the
public in amending its regulations, rather than for SEFs to continue to
rely on a staff provided no-action position that does not bind the
Commission, provides less long-term certainty, and offers a more
limited opportunity for public input.
Request for Comment
The Commission invites public comment on all aspects of its cost
benefit considerations, including the discussion of the section 15(a)
factors. Commenters are requested to provide data and any other
information or statistics to support their position. To the extent
commenters believe that the costs or benefits of any aspect of the
proposed rules are reasonably quantifiable, the Commission requests
that they provide data and any other information or statistics to
assist the Commission in quantification.
(5) The Commission preliminarily believes that SEFs are relying on
the no action position in NAL 25-24 and are not currently offering
Order Books for Permitted Transactions. Is the Commission's
understanding correct?
(6) If a SEF applicant was required to comply with existing Sec.
37.3(a)(2) and build an Order Book for Permitted Transactions, what
costs and expenses would the SEF applicant incur? To the extent
possible, please quantify the costs and expenses in U.S. Dollars.
(7) What costs and expenses have SEFs typically incurred in
operating, maintaining, and updating an Order Book for Permitted
Transactions? To the extent possible, please quantify the costs and
expenses in U.S. Dollars.
(8) Is there a viable alternative to a total removal of the
requirement of an Order Book for Permitted Transactions? If so, how
should the Commission implement it and what costs and benefits would be
incurred?
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
objectives of the CEA, in issuing any order or adopting any Commission
rule or regulation. The Commission does not anticipate that the
proposed amendments to parts 37 would promote or result in anti-
competitive consequences or behavior. On the contrary, as described in
its analysis of Cost-Benefit Considerations, the Commission anticipates
that the proposed amendments will afford SEFs additional flexibility to
innovate and develop new methods of execution tailored to their
markets, which may be
[[Page 55037]]
more efficient, transparent, and cost-effective and thereby promote
competition. The Commission requests comments on this preliminary
analysis and on the potential impact of the proposed amendments on
competition.
E. Executive Orders 12866, 13563, and 14192
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select those regulatory approaches that
maximize net benefits (including potential economic, environmental,
public health and safety, and other advantages; and distributive
impacts). Section 3(f) of Executive Order 12866 defines a ``significant
regulatory action'' as any regulatory action that is likely to result
in a rule that may: (1) have an annual effect on the economy of $100
million or more or adversely affect in a material way the economy, a
sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, or tribal
governments or communities; (2) create a serious inconsistency or
otherwise interfere with an action taken or planned by another agency;
(3) materially alter the budgetary impact of entitlements, grants, user
fees, or loan programs or the rights and obligations of recipients
thereof; or (4) raise novel legal or policy issues arising out of legal
mandates, or the President's priorities.
The Office of Management and Budget has determined that this action
is not a significant regulatory action as defined in Executive Order
12866, as amended, and therefore it was not subject to Executive Order
12866 review.
This Proposal, if finalized as proposed, is expected to be an
Executive Order 14192 deregulatory action.
List of Subjects in 17 CFR Part 37
Order Books, Permitted transactions, Swaps, Swap execution
facilities, Minimum trading functionality.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend part 37 of title 17 of the Code of
Federal Regulations as follows:
Revise part 37 to read as follows:
PART 37--SWAP EXECUTION FACILITIES
0
1. The authority citation for part 37 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a-2, 7b-3, and 12a, as
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376.
0
2. Revise Sec. 37.3(a)(2) to read as follows:
Sec. 37.3 Requirements and procedures for registration.
(a) * * *
(2) Minimum trading functionality. A swap execution facility shall,
at a minimum, offer an Order Book as defined in paragraph (a)(3) of
this section for Required Transactions as defined in Sec. 37.9(a)(1).
* * * * *
Issued in Washington, DC, on August 24, 2026, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Swap Execution Facility Order Book Requirement for Permitted
Transactions--Voting Summary
On this matter, Chairman Selig voted in the affirmative. No
Commissioner voted in the negative.
[FR Doc. 2026-17416 Filed 8-25-26; 8:45 am]
BILLING CODE 6351-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.