83 FR 61571 - Post-Trade Name Give-Up on Swap Execution Facilities
COMMODITY FUTURES TRADING COMMISSION Federal Register Volume 83, Issue 231 (November 30, 2018)
Federal Register Volume 83, Issue 231 (November 30, 2018)
| Page Range | 61571-61573 | |
| FR Document | 2018-24643 |
[Federal Register Volume 83, Number 231 (Friday, November 30, 2018)] [Proposed Rules] [Pages 61571-61573] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-24643] ======================================================================== Proposed Rules Federal Register ________________________________________________________________________ This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. ======================================================================== Federal Register / Vol. 83, No. 231 / Friday, November 30, 2018 / Proposed Rules [[Page 61571]] COMMODITY FUTURES TRADING COMMISSION 17 CFR Chapter I RIN Number 3038-AE79 Post-Trade Name Give-Up on Swap Execution Facilities AGENCY: Commodity Futures Trading Commission. ACTION: Request for comment. ----------------------------------------------------------------------- SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) is requesting public comment regarding the practice of ``post-trade name give-up'' on swap execution facilities. DATES: Comments must be received on or before January 29, 2019. ADDRESSES: You may submit comments, identified by ``Post-Trade Name Give-Up on Swap Execution Facilities'' and RIN number 3038-AE79, by any of the following methods:The agency's website: http://comments.cftc.gov. Follow the instructions for submitting comments. Mail: Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st Street NW, Washington, DC 20581. Hand Delivery/Courier: Same as Mail, above. All comments must be submitted in English or, if not, accompanied by an English translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act,\1\ a petition for confidential treatment of the exempt information may be submitted according to the procedures established in Commission Regulation 145.9.\2\ --------------------------------------------------------------------------- \1\ 5 U.S.C. 552. \2\ 17 CFR 145.9. Commission regulations referred to herein are found at 17 CFR chapter I. --------------------------------------------------------------------------- The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from http://www.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of this request for comment will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the Freedom of Information Act. FOR FURTHER INFORMATION CONTACT: Aleko Stamoulis, Special Counsel, (202) 418-5714, astamoulis@cftc.gov; or Nhan Nguyen, Special Counsel, (202) 418-5932, nnguyen@cftc.gov, Division of Market Oversight, Commodity Futures Trading Commission, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: I. Background Historically, swaps traded in over-the-counter (``OTC'') markets rather than on regulated exchanges. Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'') \3\ amended the Commodity Exchange Act (``CEA'' or ``Act'') \4\ to establish a new regulatory framework for swaps. This new framework included, among other reforms, the registration and regulation of swap execution facilities (``SEFs'') \5\ and the mandatory clearing of certain swaps by derivatives clearing organizations (``DCOs'').\6\ SEFs and DCOs have since become a significant part of swaps trading infrastructure and have helped to transition a large portion of swaps trading from unregulated, uncleared OTC markets to regulated trading venues and central clearing. --------------------------------------------------------------------------- \3\ Public Law 111-203, 124 Stat. 1376 (2010). \4\ 7 U.S.C. 1 et seq. \5\ See CEA section 5h, as enacted by section 733 of the Dodd- Frank Act; 7 U.S.C. 7b-3. See also Core Principles and Other Requirements for SEFs, 78 FR 33476 (June 4, 2013). \6\ See Section 2(h)(1)(A) of the CEA, as enacted by section 723 of the Dodd-Frank Act; 7 U.S.C. 2(h)(1)(A). In 2012, the Commission issued final rules to implement the clearing requirement determination under section 723 of the Dodd-Frank Act. The final rules required certain classes of credit default swaps and interest rate swaps to be cleared by DCOs registered with the Commission. Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012). --------------------------------------------------------------------------- Many swaps are traded on SEFs through trading methods and protocols that are electronic, voice-based, or a hybrid of both; and that provide for anonymous trade execution, trade execution on a name-disclosed basis, or a combination thereof. This variety of trading methods and protocols has developed because of the broad and diverse range of products traded in the swaps market that trade mostly episodically rather than on a continuous basis. The decision by a market participant to use one execution method or another depends on considerations such as the type of swap, transaction size, complexity, the swap's liquidity at a given time, the number of potential liquidity providers, and the associated desire to minimize potential information leakage and front- running risks. ``Post-trade name give-up'' is a long-standing market practice in many swaps markets and originated as a necessary practice in OTC markets for uncleared swaps. Post-trade name give-up refers to the practice of disclosing the identity of each swap counterparty to the other after a trade has been matched anonymously. In the case of uncleared swaps, post-trade name give-up enables a market participant to perform a credit-check on its counterparty prior to finalizing a trade. Due to the bilateral counterparty relationship that exists in an uncleared swap agreement, post-trade name give-up is also necessary in order to keep track of credit exposure and payment obligations with respect to individual counterparties. For trades that are cleared, however, the rationale for post-trade name give-up is less clear cut. That is because a DCO enables each party to substitute the credit of the DCO for the credit of the parties, thereby eliminating individual credit risk and counterparty exposure. Swaps that are intended to be cleared are subject to pre- execution credit checks and straight-through processing requirements, effectively eliminating counterparty risk and, presumably, the need for market participants to know the identities of counterparties to anonymously matched trades. Post-trade name give-up continues today in some swaps markets, including with respect to swaps that are anonymously executed and cleared. [[Page 61572]] Such disclosure may be made by a SEF as part of its trading protocols, or through middleware used for trade processing and routing trades to DCOs. For example, when a swap is matched using a voice-based execution method, a SEF employee may verbally disclose to a party the name of the other party to the trade. For swaps executed electronically on an anonymous order book, disclosure of counterparty names can occur through an electronic notification provided by the SEF after the trade is matched. Post-trade name give-up can also occur through third-party middleware and associated trade processing and affirmation services that provide counterparties with various trade details captured from SEF trading systems, including the identity of the party on the other side of a trade.\7\ --------------------------------------------------------------------------- \7\ Trade affirmation refers to a process that occurs after a trade is executed whereby counterparties verify and affirm the details of the trade before submitting it for settlement. Third- party trade processing and affirmation services commonly used for SEF trades include MarkitWire and ICE Link. The Commission has provided that SEFs may use such services to route trades to DCOs if the routing complies with Sec. 37.702(b). See Core Principles and Other Requirements for SEFs, 78 FR 33476, 33535 (June 4, 2013). --------------------------------------------------------------------------- As the swaps market increasingly becomes a cleared market, the Commission believes that it is reasonable to ask whether the post-trade name give-up practice continues to serve a valid industry purpose in facilitating swaps trading. A variety of views exist on both sides of this issue, depending on one's position in the market. Some industry participants have criticized the continued practice of post-trade name give-up in cleared swaps markets. During a meeting of the Commission's Market Risk Advisory Committee held in April 2015, several participants in a panel on SEFs identified post-trade name give-up as a concern with respect to SEF trading.\8\ Post-trade name give-up is said to deter buy-side participation on some SEFs due to the prospect of information leakage, whereby disclosing the identity of a market participant could potentially expose the participant's trading intentions, strategies, positions, or other sensitive information to competitors or dealers.\9\ Some industry participants have also alleged that post-trade name give- up serves as a policing mechanism used by swaps dealers to retaliate against non-dealer firms that attempt to trade on interdealer markets.\10\ Such interdealer markets provide for competitive execution of large-sized trades at wholesale prices. Buy-side participants that have interest in trading on interdealer markets and otherwise meet participation criteria to join these platforms are said to be deterred because of post-trade name give-up.\11\ Based on these concerns, critics of post-trade name give-up have argued that the practice is anticompetitive, hinders liquidity, and lacks credible justification in cleared swaps markets where participants are not exposed to counterparty credit risk.\12\ --------------------------------------------------------------------------- \8\ See Transcript of CFTC Market Risk Advisory Committee Meeting (April 2, 2015) (``MRAC Transcript'') at 133 et seq., available at https://www.cftc.gov/About/CFTCCommittees/MarketRiskAdvisoryCommittee/mrac_meetings.html. \9\ See MRAC Transcript at 142-144, 164. See also Managed Funds Association Position Paper: Why Eliminating Post-Trade Name Disclosure Will Improve the Swaps Market (Mar. 31, 2015) (``MFA Position Paper''), p. 4-5. The Commission notes that other factors, such as the current lack of certain trading features, e.g., the ability to calculate volume-weighted average pricing on an order book may have also deterred buy-side participation on certain SEFs. \10\ See In re: Interest Rate Swaps Antitrust Litigation, 261 F.Supp.3d 430, 458-59 (S.D.N.Y. 2017) (``The compulsory disclosure of swap counterparties, plaintiffs claim, serves as a policing mechanism, allowing the Dealers to retaliate against entities that attempt to trade on all-to-all platforms.''). \11\ The argument is that swap dealers threaten to shun platforms in the interdealer markets that attempt to execute trades between dealers and non-dealers. \12\ See MRAC Transcript at 169-71; MFA Position Paper at 4-5, 8. --------------------------------------------------------------------------- Other industry participants have claimed that post-trade name give- up is an important tool used to mitigate liquidity risk or the risk that traders will game the market.\13\ Some participants argue that as bank market-making capital becomes further constrained by regulations,\14\ liquidity providers need to more precisely allocate their bank capital among their customer base in coordination with their overall bank cross-marketing strategies. Without the information provided by post-trade name give-up, the ability to make such allocations would become more difficult. As a result, liquidity providers would be less willing to provide liquidity to the market, especially in times of crisis, and charge higher prices to customers.\15\ This outcome arguably would hurt all market participants. --------------------------------------------------------------------------- \13\ See, e.g., Tom Osborn, How to game a Sef: Banks fear arrival of arbitrageurs, Risk.net (Mar. 19, 2014). \14\ Such post-financial crisis regulatory reforms include the Volcker Rule, Basel III Accords, capital charges and other bank capital-based restrictions. See Anthony J. Perrotta, Jr., An E- Trading UST Market `Flash Crash'? Not So Fast, TABB Group, Nov. 24, 2014, http://tabbforum.com/opinions/an-e-trading-treasury-market- `flash-crash'-not-so-fast (discussing regulatory capital constraints and declining market liquidity). \15\ Peter Madigan, CFTC to Test Role of Anonymity in Sef Order Book Flop, Risk.net, Nov. 21, 2014, available at http://www.risk.net/risk-magazine/feature/2382497/cftc-to-test-role-of-anonymity-in-sef-order-book-flop. Short of exiting the market entirely, some swaps dealers might become more selective in providing liquidity (holding back in times of market stress and volatility, for example) out of concern that they may not be able to adequately hedge their risk in interdealer markets. --------------------------------------------------------------------------- Another reported concern is that buy-side clients may undercut prices from dealers, for example, by posting aggressive bids or offers on an interdealer order book and then soliciting dealers through a request-for-quote (``RFQ'') on a dealer-to-client platform, hoping to motivate dealers to provide more favorable quotes based on prices posted in the order book.\16\ Post-trade name give-up is said to mitigate these concerns because it can help to identify a client that is attempting to game the market. --------------------------------------------------------------------------- \16\ See id. --------------------------------------------------------------------------- II. Request for Comment The Commission requests comment from the public relating to the practice of post-trade name give-up on SEF markets where trades are anonymously executed and intended to be cleared. The Commission encourages all comments, including relevant background information, actual market examples, best practice principles, expectations for possible impacts on market structure and market liquidity, and estimates of any asserted costs and expenses. The Commission also encourages substantiating data, statistics, and any other information that supports any such comments. In particular, the Commission requests comment on the following questions: Question 1: What utility or benefits (e.g., commercial, operational, legal, or other) does post-trade name give-up provide in SEF markets where trades are anonymously executed and cleared? Is post- trade name give-up a necessary or appropriate means to achieve such benefits? Question 2: Does post-trade name give-up result in any restraint of trade, or impose any anticompetitive burden on swaps trading or clearing? Question 3: Should the Commission intervene to prohibit or otherwise set limitations with respect to post-trade name give-up? If so, what regulatory limitations should be set and how should they be set in a manner that is consistent with the CEA? What would be the potential costs and/or benefits of doing so? What might be the potential impacts on liquidity, pricing, and trading behavior? Would a prohibition cause dealers to remove liquidity from the market or charge higher prices? Would new liquidity makers fully and consistently act in the market to make up any shortfall in liquidity? [[Page 61573]] Question 4: Should post-trade name give-up be subject to customer choice or SEF choice given the flexible execution methods in the Commission's recent SEF notice of proposed rulemaking? Issued in Washington, DC, on November 6, 2018, by the Commission. Christopher Kirkpatrick, Secretary of the Commission. Note: The following appendix will not appear in the Code of Federal Regulations. Appendix to Post-Trade Name Give-Up on Swap Execution Facilities-- Commission Voting Summary On this matter, Chairman Giancarlo and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative. [FR Doc. 2018-24643 Filed 11-29-18; 8:45 am] BILLING CODE 6351-01-P
![Federal Register / Vol. 83, No. 231 / Friday, November 30, 2018 / Proposed Rules 61573
Question 4: Should post-trade name Policy & Valuation, Loan Guaranty payment models to estimate the level of
give-up be subject to customer choice or Service (26), Veterans Benefits pre-payments and any resultant
SEF choice given the flexible execution Administration, Department of Veterans potential losses of revenue expected to
methods in the Commission’s recent Affairs, 810 Vermont Avenue NW, occur in a set period, given possible
SEF notice of proposed rulemaking? Washington, DC 20420, (202) 632–8862. changes in interest rates. These pre-
Issued in Washington, DC, on November 6, (This is not a toll-free number.) payment models tend to drive, at least
2018, by the Commission. SUPPLEMENTARY INFORMATION: On May in significant part, the valuation of
Christopher Kirkpatrick, 24, 2018, the President signed into law Ginnie Mae MBS. Ginnie Mae, buyers of
Secretary of the Commission. the Economic Growth, Regulatory VA-guaranteed loans, and other
Relief, and Consumer Protection Act industry stakeholders have expressed
Note: The following appendix will not (the Act), Public Law 115–174, 132 Stat. serious concerns that early pre-
appear in the Code of Federal Regulations. payments of VA-guaranteed loans are
1296. Section 309 of the Act, codified at
38 U.S.C. 3709, provides new statutory devaluing these investments. See
Appendix to Post-Trade Name Give-Up ‘‘Slowing Down VA Refi Churn Proving
on Swap Execution Facilities— criteria for determining when, in
general, VA may guarantee a refinance More Difficult Than Expected’’,
Commission Voting Summary National Mortgage News (November 12,
loan. The Act also requires, among other
On this matter, Chairman Giancarlo and things, VA to promulgate regulations, 2018), https://
Commissioners Quintenz, Behnam, Stump, within 180 days after the date of the www.nationalmortgagenews.com/news/
and Berkovitz voted in the affirmative. No slowing-down-va-refi-churn-proving-
Commissioner voted in the negative.
enactment of the Act, for cash-out
refinance loans, specifically those where more-difficult-than-expected. If such
[FR Doc. 2018–24643 Filed 11–29–18; 8:45 am]
the principal of the new loan to be VA- stakeholders view MBS investments that
BILLING CODE 6351–01–P guaranteed or insured is larger than the include VA-guaranteed refinance loans
payoff amount of the loan being as less desirable, even prudent lenders
refinanced. Public Law 115–174, 132 could be deprived of the cashflows, i.e.
DEPARTMENT OF VETERANS Stat. 1296. liquidity, necessary to make new VA-
AFFAIRS guaranteed loans to veterans.
Section 309(a)(2) of the Act permits
In a hearing before the House
VA to waive the requirements of the
38 CFR Part 36 Veterans’ Affairs Committee’s
Administrative Procedure Act (APA), 5 Subcommittee on Economic
Loan Guaranty: Revisions to VA- U.S.C. 551 through 559, if the Secretary Opportunity, the Government National
Guaranteed or Insured Cash-Out Home determines that urgent or compelling Mortgage Association (Ginnie Mae)
Loans circumstances make compliance with issued warnings to Congress regarding
such requirements impracticable or the ripple effects that risky refinancing
AGENCY: Department of Veterans Affairs. contrary to public interest. Public Law practices had on the valuing of VA-
ACTION: Advanced notice of rulemaking. 115–174, 132 Stat. 1348–1349. guaranteed loans, as well as Ginnie Mae
VA believes there are several urgent pools at-large. See Hearing on Home
SUMMARY: The Department of Veterans and compelling circumstances that
Affairs (VA) is issuing this document in Loan Churning Practices and How
make advance notice and comment on Veteran Homebuyers are Being Affected
compliance with the Economic Growth, this rule contrary to the public interest.
Regulatory Relief, and Consumer Before the Subcomm. on Econ.
First, VA is concerned about lenders Opportunity of the House Comm. on
Protection Act (the Act). The Act who seem to continue to exploit
requires VA to amend its regulation on Veterans’ Affairs, 115 Cong. (2018).
legislative and regulatory gaps related to Thus, VA believes that, unless VA
VA-guaranteed or insured cash-out seasoning, recoupment, and net tangible
refinance loans and to publish the promulgates rules quickly, a loss of
benefit standards, despite anti-predatory investor optimism in the VA product
amended regulation within a shortened lending actions that VA and Congress
time frame. If VA determines that urgent could further restrict veterans from
have already taken. VA’s regulatory being able to utilize their earned VA
or compelling circumstances make impact analysis for this rule indicates
compliance with the advance public benefits.
that perhaps more than 50 percent of Exacerbating the issue is the lending
notice and comment requirements of the cash-out refinances remain vulnerable industry’s varied interpretation of the
Administrative Procedure Act to predatory terms and conditions until Act, which has led to lender uncertainty
impracticable or contrary to public this rule goes into effect. VA believes in how to implement a responsible cash-
interest and publishes notice of that that VA must immediately seal these out refinance program. VA believes this
determination in the Federal Register, gaps to fulfill its obligation to veterans, uncertainty has caused prudent lenders
the Act permits VA to amend the prudent lenders, and those who invest to employ a high degree of caution, (e.g.
regulation through an interim final rule in securities that include VA-guaranteed refraining from providing veterans with
or final rule. VA has determined that loans. crucial refinance loans that are not
urgent and compelling circumstances do VA is also gravely concerned about predatory or risky). Absent swift
exist and is, therefore, issuing this constraints in the availability of implementation of clear regulatory
Federal Register document announcing program liquidity if VA does not act standards, cautious lenders are less
VA’s intent to promulgate an interim quickly to address early pre-payment likely to make cash-out refinance loans,
final rule implementing the Act. speeds for VA-guaranteed cash-out which means that veterans do not enjoy
amozie on DSK3GDR082PROD with PROPOSALS1
DATES: November 30, 2018. refinance loans. In large part, cashflows the widest range of competitive,
ADDRESSES: Loan Policy & Valuation, derived from investors in mortgage- responsible credit options that can,
Loan Guaranty Service (26), Veterans backed securities (MBS) furnished by when used properly, result in placing
Benefits Administration, Department of the Government National Mortgage the veteran in a better financial position
Veterans Affairs, 810 Vermont Avenue Association (Ginnie Mae) provide than the veteran’s current circumstances
NW, Washington, DC 20420. liquidity for lenders that originate VA- afford. Unfortunately, such caution has
FOR FURTHER INFORMATION CONTACT: Greg guaranteed refinance loans. When the potential to compound the risk of
Nelms, Assistant Director for Loan pricing MBS, investors rely on pre- predatory lending, as irresponsible
VerDate Sep<11>2014 16:23 Nov 29, 2018 Jkt 247001 PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 E:\FR\FM\30NOP1.SGM 30NOP1](https://thefederalregister.org/doc/83_FR_61802/page/3.svg)
Document Created: 2018-11-30 04:36:28
Document Modified: 2018-11-30 04:36:28
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Request for comment. | |
| Dates | Comments must be received on or before January 29, 2019. | |
| Contact | Aleko Stamoulis, Special Counsel, (202) 418-5714, [email protected]; or Nhan Nguyen, Special Counsel, (202) 418-5932, [email protected], Division of Market Oversight, Commodity Futures Trading Commission, 1155 21st Street NW, Washington, DC 20581. | |
| FR Citation | 83 FR 61571 | |
| RIN Number | 3038-AE79 |
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