Swap Confirmation Requirements for Swap Execution Facilities

<RULE> COMMODITY FUTURES TRADING COMMISSION <CFR>17 CFR Parts 23 and 37</CFR> <RIN>RIN 3038-AF34</RIN> <SUBJECT>Swap Confirmation Requirements for Swap Execution Facilities</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Commodity Futures Trading Commission. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Commodity Futures Trading Commission (Commission or CFTC) is amending its swap execution facility (SEF) regulations related to uncleared swap confirmations, and making associated technical and conforming changes. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This rule is effective May 31, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Roger Smith, Associate Chief Counsel, (202) 418-5344, <E T="03">rsmith@cftc.gov,</E> Division of Market Oversight, Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800, Chicago, Illinois 60604. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Table of Contents</HD> <EXTRACT> <FP SOURCE="FP-2">I. Background</FP> <FP SOURCE="FP1-2">A. Regulatory History: The Part 37 Rules</FP> <FP SOURCE="FP1-2">B. Summary of Amendments to § 37.6</FP> <FP SOURCE="FP1-2">C. Consultation With Other U.S. Financial Regulators</FP> <FP SOURCE="FP-2">II. Final Regulations</FP> <FP SOURCE="FP1-2">A. § 37.6—Enforceability</FP> <FP SOURCE="FP1-2">1. Regulation § 37.6(b)(1)—Uncleared Swap Confirmations: Incorporation by Reference of Underlying Previously Negotiated Agreements</FP> <FP SOURCE="FP1-2">2. Amendment to § 37.6(b)—Timing of Swap Transaction Confirmation</FP> <FP SOURCE="FP1-2">3. Amendment to § 37.6(b)—Conflicting Terms</FP> <FP SOURCE="FP1-2">4. Clarification of § 37.6(b)</FP> <FP SOURCE="FP1-2">5. Clarification of § 37.6(a)</FP> <FP SOURCE="FP1-2">B. Amendments to § 23.501(a)(4)(i)</FP> <FP SOURCE="FP-2">III. Effective Date</FP> <FP SOURCE="FP-2">IV. Related Matters</FP> <FP SOURCE="FP1-2">A. Regulatory Flexibility Act</FP> <FP SOURCE="FP1-2">B. Paperwork Reduction Act</FP> <FP SOURCE="FP1-2">C. Cost-Benefit Considerations</FP> <FP SOURCE="FP1-2">D. Antitrust Considerations</FP> </EXTRACT> <HD SOURCE="HD1">I. Background</HD> <HD SOURCE="HD2">A. Regulatory History: The Part 37 Rules</HD> The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Commodity Exchange Act (CEA or Act) by adding section 5h, which establishes registration requirements and core principles for SEFs. <SU>1</SU> <FTREF/> The Commission implemented CEA section 5h by adopting part 37 of its regulations, which, among other things, sets forth operational requirements for SEFs and establishes various requirements for the trading of swaps on SEFs. <SU>2</SU> <FTREF/> As part of the implementing SEF regulations, the Commission adopted § 37.6(b), which requires a SEF to provide each counterparty to a swap transaction that is entered into on or pursuant to the rules of the SEF—whether cleared or uncleared—with a written record of all of the terms of the transaction, “which shall legally supersede any previous agreement and serve as a confirmation of the transaction.”  <SU>3</SU> <FTREF/> Pursuant to § 37.6(b), the confirmation of all terms of the transaction must take place at the same time as execution, subject to a limited exception for certain information related to accounts included in bunched orders. <SU>4</SU> <FTREF/> <FTNT> <SU>1</SU>  7 U.S.C. 7b-3. </FTNT> <FTNT> <SU>2</SU>  Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476 (June 4, 2013) (SEF Core Principles Final Rule). The SEF Core Principles Final Rule also articulates, where appropriate, guidance and acceptable practices for complying with the SEF core principles set forth in CEA section 5h. </FTNT> <FTNT> <SU>3</SU>  17 CFR 37.6(b). </FTNT> <FTNT> <SU>4</SU>  17 CFR 37.6(b). Specific customer identifiers for accounts included in bunched orders involving swaps need not be included in confirmations provided by a SEF if the applicable requirements of 17 CFR 1.35(b)(5) are met. </FTNT> In November 2018, the Commission issued a comprehensive proposal to amend the SEF regulatory framework. <SU>5</SU> <FTREF/> In the 2018 SEF Proposal, the Commission proposed to amend § 37.6(b) to establish separate swap transaction documentation requirements for cleared and uncleared swaps. <SU>6</SU> <FTREF/> For uncleared swap transactions, the Commission proposed to amend § 37.6(b) to require a SEF to provide the counterparties to the transaction with a “trade evidence record” that would memorialize the terms of the transaction agreed upon between the counterparties on the SEF. <SU>7</SU> <FTREF/> Under the 2018 SEF Proposal, a “trade evidence record” was defined as a legally binding written documentation (electronic or otherwise) that memorializes the terms of a swap transaction agreed upon by the counterparties and legally supersedes any conflicting term in any previous agreement (electronic or otherwise) that relates to the swap transaction between the counterparties. <SU>8</SU> <FTREF/> In 2021, the Commission withdrew the unadopted portions of the 2018 SEF Proposal, <SU>9</SU> <FTREF/> including the proposed amendments to § 37.6, from further consideration. <SU>10</SU> <FTREF/> <FTNT> <SU>5</SU>  Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018) (2018 SEF Proposal). </FTNT> <FTNT> <SU>6</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>7</SU>   <E T="03">Id.</E> at 62096. </FTNT> <FTNT> <SU>8</SU>   <E T="03">Id.</E> at 61973; 62067. </FTNT> <FTNT> <SU>9</SU>  The following final rulemakings of the Commission adopted certain portions of the 2018 SEF Proposal: (i) Exemptions From Swap Trade Execution Requirement, 86 FR 8993 (Feb. 11, 2021); and (ii) Swap Execution Facilities, 86 FR 9224 (Feb. 11, 2021). </FTNT> <FTNT> <SU>10</SU>   <E T="03">See</E> Swap Execution Facilities and Trade Execution Requirement, 86 FR 9304 (Feb. 12, 2021). </FTNT> Pursuant to section 731 of the Dodd-Frank Act, which added section 4s(i) to the CEA, <SU>11</SU> <FTREF/> the Commission has adopted regulations to prescribe documentation standards for swap dealers (SDs) and major swap participants (MSPs) related to the timely and accurate confirmation, processing, netting, documentation, and valuation of swaps. The Commission adopted § 23.501 to specifically address swap confirmation requirements for SDs and MSPs, including for those swaps executed on a SEF or designated contract market (DCM). <SU>12</SU> <FTREF/> Among other things, § 23.501 provides that any swap transaction executed on a SEF or DCM shall be deemed to satisfy the swap confirmation requirements set forth in § 23.501, provided that the rules of the SEF or DCM establish that confirmation of all terms of the transaction shall take place at the same time as execution. <SU>13</SU> <FTREF/> <FTNT> <SU>11</SU>  7 U.S.C. 6s(i). </FTNT> <FTNT> <SU>12</SU>  17 CFR 23.501(a)(4)(i). </FTNT> <FTNT> <SU>13</SU>   <E T="03">Id.</E> </FTNT> <HD SOURCE="HD2">B. Summary of Amendments to § 37.6</HD> During the implementation of part 37, SEFs informed the Commission that the confirmation requirement for uncleared swaps under § 37.6(b) was operationally and technologically difficult and impractical to implement. As discussed more fully below, Commission staff from the Division of Market Oversight (DMO) acknowledged these technological and operational challenges and provided no-action positions for SEFs with respect to certain provisions of the Commission's regulations related to uncleared swap confirmations. <SU>14</SU> <FTREF/> In particular, DMO most recently issued CFTC No-Action Letter No. 17-17 (NAL No. 17-17), which provides a no-action position with respect to the obligation to obtain copies of underlying, previously negotiated agreements between the counterparties, as discussed in greater detail below, for a SEF that seeks for uncleared swaps to satisfy the confirmation requirement in § 37.6(b) by incorporating by reference terms of such underlying agreements. <SU>15</SU> <FTREF/> <FTNT> <SU>14</SU>  NAL No. 17-17, Re: Extension of No-Action Relief for Swap Execution Facility Confirmation and Recordkeeping Requirements under Commodity Futures Trading Commission Regulations 37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a) (Mar. 24, 2017). NAL No. 17-17 extended the no-action position previously provided by Commission staff. <E T="03">See</E> CFTC Letter No. 16-25, Re: Extension of No-Action Relief for Swap Execution Facility Confirmation and Recordkeeping Requirements under Commodity Futures Trading Commission Regulations 37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a) (Mar. 14, 2016) (NAL No. 16-25); CFTC Letter 15-25, Re: Extension of No-Action Relief for SEF Confirmation and Recordkeeping Requirements under Commission Regulations 37.6(b), 37.1000, 37.1001, and 45.2, and Additional Relief for Confirmation Data Reporting Requirements under Commission Regulation 45.3(a) (Apr. 22, 2015) (NAL No. 15-25); and CFTC Letter No. 14-108, Staff No-Action Position Regarding SEF Confirmations and Recordkeeping Requirements under Certain Provisions Included in Regulations 37.6(b) and 45.2 (Aug. 18, 2014) (NAL No. 14-108). <E T="03">See also</E> CFTC Letter No. 13-58, Time-Limited No-Action Relief to Temporarily Registered Swap Execution Facilities from Commission Regulation 37.6(b) for Non-Cleared Swaps in All Asset Classes (Sept. 30, 2013) (NAL No. 13-58). </FTNT> <FTNT> <SU>15</SU>   <E T="03">See</E> NAL No. 17-17. Upon the effective date of the amendments set forth herein, NAL No. 17-17 will expire pursuant its terms. In particular, NAL No. 17-17 states that the no-action position “shall expire on t ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 108k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━