Post-Trade Name Give-Up on Swap Execution Facilities
| Published date | 31 December 2019 |
| Citation | 84 FR 72262 |
| Record Number | 2019-27895 |
| Section | Proposed rules |
| Court | Commodity Futures Trading Commission |
Federal Register, Volume 84 Issue 250 (Tuesday, December 31, 2019)
[Federal Register Volume 84, Number 250 (Tuesday, December 31, 2019)]
[Proposed Rules]
[Pages 72262-72273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27895]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 37
RIN 3038-AE79
Post-Trade Name Give-Up on Swap Execution Facilities
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing a rule to prohibit ``post-trade name give-up''
practices related to trading on swap execution facilities.
DATES: Comments must be received on or before March 2, 2020.
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\
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\1\ 5 U.S.C. 552.
\2\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I.
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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 proposed rule 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: Alexandros Stamoulis, Special Counsel,
(646) 746-9792, [email protected], Division of Market Oversight,
Commodity Futures Trading Commission, 140 Broadway, 19th Floor, New
York, NY 10005.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission is proposing to amend part 37 of the Commission's
regulations to prohibit ``post-trade name give-up'' practices for swaps
that are anonymously executed on a SEF and are intended to be cleared.
Proposed Sec. 37.9(d) of the Commission's regulations would prohibit a
SEF from directly or indirectly, including through a third-party
service provider, disclosing the identity of a counterparty to a swap
that is executed anonymously and intended to be cleared. The proposed
regulation would also require SEFs to establish and enforce rules that
prohibit any person from effectuating such a disclosure. The Commission
is proposing this prohibition on post-trade name give-up after
considering the comments received in response to its November 2018
request for public comment regarding the practice (the
[[Page 72263]]
``Name Give-Up Release'').\3\ The Commission believes that prohibiting
the practice of post-trade name give-up for cleared swaps would promote
swaps trading and competition on SEFs, as well as promote fair
competition among market participants. Additionally, it would advance
the congressional objectives underlying the prohibition against swap
data repositories disclosing the identity of cleared swap
counterparties. The Commission also preliminarily believes that post-
trade name give-up for cleared swaps may be inconsistent with the
requirement that SEFs provide market participants with impartial access
to trading on SEFs.
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\3\ Post-Trade Name Give-up on Swap Execution Facilities, 83 FR
61571 (Nov. 30, 2018) (``Name Give-Up Release'').
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II. Background
The Commission issued the Name Give-Up Release to seek public
comment on the practice of post-trade name give-up on SEFs for swaps
intended to be cleared. As described in the release, some SEFs
facilitate this practice by disclosing the identities of swap
counterparties to one another after a trade is matched anonymously. A
SEF may effectuate such disclosure through either its own trade
protocols \4\ or through a third-party service provider that it
utilizes to process and route transactions to a derivatives clearing
organization (``DCO'') for clearing.\5\ Prior to the issuance of the
Name Give-Up Release, the Commission had been aware of views that such
disclosure deters some market participants from trading on SEF
platforms that employ the practice. In the Name Give-Up Release, the
Commission questioned the necessity of the practice with respect to
cleared swaps that are anonymously executed on a SEF. While the
Commission acknowledged that the practice may be necessary for trading
in uncleared swaps, i.e., to manage counterparty credit risk,\6\ it
stated that the rationale with respect to cleared swaps is ``less clear
cut.'' \7\ The Commission also summarized some of the general views on
post-trade name give-up of various industry participants and requested
public comment on the merits of the practice and whether the Commission
should prohibit it.\8\
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\4\ For swaps executed anonymously on a SEF electronic order
book, where participants may enter anonymous bids and offers, the
disclosure of a counterparty's identity may occur through an
electronic notification provided by the SEF after the trade is
matched and executed. In certain voice-based SEF trading systems, a
SEF employee who matches bids and offers may provide such
notification to the counterparties.
\5\ Post-trade name give-up may occur through third-party
middleware and associated trade processing 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. The Commission has provided that SEFs may use such third-
party 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) (``SEF Core Principles Final
Rule''). Third-party trade processing services commonly used for SEF
trades include those offered by IHS Markit. IHS Markit submitted a
comment letter in response to the Name Give-Up Release. Although it
did not express a particular view on the merits of post-trade name
give-up practices, IHS Markit did confirm that its derivatives
processing platform supports fully anonymous SEF trading that may be
selected by a SEF for any SEF trade--a so called ``no-name give up
workflow option.'' IHS Markit Letter at 1-2.
\6\ For uncleared swaps, post-trade name give-up enables a
market participant to perform a credit-check on a potential
counterparty prior to finalizing the transaction. Due to the
bilateral nature of an uncleared swap agreement, the practice also
allows counterparties to manage credit exposure and payment
obligations with respect to those transactions.
\7\ Name Give-Up Release at 61571.
\8\ See Name Give-Up Release at 61572.
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The Commission received thirteen comment letters to the Name Give-
Up Release, many of which expounded further on the views summarized in
the release.\9\ The majority of commenters opposed the practice of
post-trade name give-up for anonymously-executed swaps submitted to
clearing, and requested that the Commission adopt an explicit
prohibition.\10\ One comment letter, from the Securities Industry and
Financial Markets Association (``SIFMA'') on behalf of a majority of
its swap dealer members who have expressed a view,\11\ expressed
support for the practice and concern about the effects of a
prohibition.\12\ The Commission has reviewed and considered these
comment letters in issuing this proposed rulemaking.
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\9\ All comment letters submitted in response to the Name Give-
Up Release are available through the Commission's website at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2935.
\10\ The following commenters support a prohibition on post-
trade name give-up: Americans for Financial Reform (``AFR''); Better
Markets; David Blinkly; Federal Home Loans Banks (``FHLBanks''); FIA
Principal Traders Group (``FIA PTG''); Investment Company Institute
(``ICI''); Managed Funds Association (``MFA''); Robert Rutkowski;
SIFMA Asset Management Group (``SIFMA AMG''); UBS Securities
(``UBS''); and Vanguard.
\11\ SIFMA, however, acknowledged in its comment letter that the
views among its swap dealer members on post-trade name give-up are
not uniform. SIFMA Letter at 1.
\12\ The Commission notes that this letter is separate and
distinct from the letter submitted by SIFMA AMG, and the views
espoused by SIFMA in this letter contrast with the views represented
by SIFMA AMG, which supported a prohibition on post-trade name give-
up. SIFMA AMG members represent various U.S. and global asset
management firms. SIFMA AMG Letter at 1, n.1.
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A. Comments Concerning the Necessity of Post-Trade Name Give-Up for
Cleared Swaps
Nearly all of the comment letters to the Name Give-Up Release
asserted that post-trade name give-up is not justified for swaps
submitted to a DCO for clearing.\13\ Some commenters acknowledged that
the practice may be necessary for uncleared swaps, which expose
counterparties to bilateral credit risk,\14\ but noted that the
clearing process mitigates that risk.\15\ Commenters further asserted
that straight-through processing makes post-trade name give-up
unnecessary.\16\ According to commenters, straight-through processing
promotes clearing efficiency, and therefore, obviates the need for
counterparties to fulfill swap-related legal or operational tasks that
would require disclosing their identities.\17\ The Managed Funds
Association (``MFA'') stated that it ``strongly believes that there is
no legitimate commercial, operational, credit or legal justification
for name give-up on SEFs for anonymously-executed cleared swaps.'' \18\
SIFMA, to the contrary, asserted that ``even in connection with cleared
swaps, there are frequently operational, credit/settlement, and legal
considerations that necessitate [post-trade name give-up].'' \19\
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\13\ AFR Letter at 4; Better Markets Letter at 2; Blinkly Letter
at 1; FHLBanks Letter at 2; FIA PTG Letter at 1; ICI Letter at 2-3;
MFA Letter at 2; Rutkowski Letter at 4; SIFMA AMG Letter at 14;
Vanguard Letter at 10. UBS stated that the practice should end
absent a ``compelling'' justification. UBS Letter at 1.
\14\ FHLBanks, for example, stated that the disclosure of
counterparty identity for uncleared swaps is necessary to generate
and update trading records, calculate counterparty credit risk
exposures, issue margin calls, and conduct other related operational
tasks. FHLBanks Letter at 2.
\15\ FHLBanks Letter at 2; FIA PTG Letter at 1; ICI Letter at 2;
MFA Letter at 2; ICI Letter at 3. See also FIA PTG Letter at 1
(stating that clearing leaves no credit, operational or legal
exposures between the counterparties).
\16\ FHLBanks Letter at 2; ICI Letter at 3; MFA Letter at 2-3;
SIFMA AMG Letter at 14.
\17\ FHLBanks Letter at 2 (stating that the clearing process
occurs within ``moments'' after execution); MFA Letter at 2-3
(stating that straight-through processing ensures that the
anonymously-executed swap is quickly submitted to, and accepted or
rejected by, a DCO).
\18\ MFA Letter at 2.
\19\ SIFMA Letter at 6 (furthermore asserting that post-trade
name give up ``helps enable parties to address operational errors
and resulting risks'').
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B. Comments Concerning Effects on Competition and Liquidity
Commenters support prohibiting post-trade name give-up based on
concerns that disclosing a counterparty's identity after a trade is
executed can lead to
[[Page 72264]]
harmful ``information leakage.'' \20\ MFA stated that prior to trading
on a SEF with post-trade name give-up a participant must be comfortable
with any participant on the venue potentially learning of its trading
activity, because the participant has no control over who it will be
matched with.\21\ SIFMA Asset Management Group (``SIFMA AMG'') stated
that information leakage resulting from post-trade name give-up occurs
in an ``uncontrolled'' manner that allows others in the market to
anticipate a participant's objectives.\22\ The Federal Home Loan Banks
(``FHLBanks''), the Investment Company Institute (``ICI''), and
Vanguard similarly commented that such disclosure could expose a
counterparty's trading positions, strategies, and/or objectives.\23\
ICI further asserted that dealers would benefit by using this
information to anticipate a buy-side client's trading intentions and
potentially offer less favorable terms and pricing to that client in
subsequent bilateral swap transactions.\24\ FHLBanks stated that such
disclosure is particularly problematic for end users who use swaps to
hedge their business exposure.\25\
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\20\ Better Markets Letter at 2; FHLBanks Letter at 2; ICI
Letter at 3-4; MFA Letter at 4; SIFMA AMG Letter at 15; Vanguard
Letter at 10.
\21\ MFA Letter at 4 (describing post-trade name give-up as ``an
unattractive proposition that undermines the anonymous nature of the
trading protocol'').
\22\ SIFMA AMG Letter at 15.
\23\ FHLBanks Letter at 2; ICI Letter at 3; Vanguard Letter at
10 (stating that counterparty identity disclosure additionally
exposes trading practices and other sensitive information).
\24\ ICI Letter at 4. See also Better Markets Letter at 2
(noting that disclosure confers ``trading advantages'' upon dealers
that collect and analyze this information).
\25\ FHLBanks Letter at 3.
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Commenters who oppose post-trade name give-up asserted that
concerns about information leakage have broadly hindered participation
and competition on SEFs.\26\ MFA stated that post-trade name give-up
has precluded buy-side participants who are concerned with the prospect
of information leakage from accessing the ``unique'' liquidity pools
and trading protocols available on SEFs that practice post-trade name
give-up.\27\ In contrast, according to MFA, dealers have access to all
SEFs, which provides them with certain informational advantages over
other market participants.\28\ Several commenters, including MFA,
believe that ``incumbent'' dealers that are traditional swap liquidity
providers continue to insist that SEFs facilitate the practice of post-
trade name give-up in order to discourage additional competition in the
dealer-to-dealer SEF market.\29\
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\26\ MFA Letter at 2 (identifying post-trade name give-up as a
``significant impediment'' to investors' ability to trade on
anonymous order books where post-trade name give-up is practiced);
FHLBanks Letter at 2-3 (stating that post-trade name give-up has
discouraged buy-side participants from trading on SEFs using the
practice); ICI Letter at 4 (suggesting that buy-side participants
avoid harms caused by information leakage by avoiding SEFs that
require post-trade name give-up of intended-to-be-cleared swaps);
UBS Letter at 1 (stating that post-trade name give-up dis-
incentivizes certain market participants from trading on anonymous
limit order book SEFs);
\27\ MFA Letter at 4.
\28\ Id.
\29\ AFR Letter at 4 (asserting that post-trade name give-up
allows dealers to retaliate against other competing liquidity
providers or otherwise provides additional ways to discourage
competition); Better Markets Letter at 2 (stating that a ``handful''
of dealers have prevented SEFs from eliminating the practice in
order to limit access to liquidity from a small number of dealers);
Blinkly Letter at 1 (stating that the practice helps to preserve
``dealer control'' of profits in the swaps markets); FIA PTG Letter
at 1 (stating that the practice allows incumbent liquidity providers
to monitor the presence of new liquidity providers seeking to enter
the cleared swaps market); MFA Letter at 4 (referring to the
practice as a ``policing mechanism'' to deter buy-side
participation); Rutkowski Letter at 5 (same comment as AFR).
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Many commenters stated that prohibiting post-trade name give-up
would promote greater participation and competition in the swaps
market, thereby potentially improving swap liquidity. FHLBanks, for
example, believes that a prohibition would increase competition, reduce
market fragmentation, and increase participation on central limit order
books, which would lead to deeper liquidity pools and better
pricing.\30\ Better Markets and MFA similarly asserted that a
prohibition would increase swap liquidity by diversifying the pool of
SEF participants to include new liquidity providers.\31\ ICI and SIFMA
AMG also suggested that buy-side participants would be likely to
participate on SEFs they had previously avoided if post-trade name
give-up were prohibited.\32\ Commenters further claim that increasing
competition and participation on SEFs with a post-trade name give-up
prohibition would establish a more efficient swaps trading market \33\
with less information asymmetry among market participants.\34\
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\30\ FHLBanks Letter at 3.
\31\ Better Markets at 2; MFA Letter at 6.
\32\ See ICI Letter at 2, 4; SIFMA AMG Letter at 15.
\33\ ICI Letter at 2; SIFMA AMG Letter at 15.
\34\ MFA Letter at 6.
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SIFMA's letter, on the other hand, argued that prohibiting post-
trade name give-up is unnecessary and would harm liquidity in the swaps
market. SIFMA stated that many market participants trade willingly on a
SEF trading platform with post-trade name give-up.\35\ SIFMA noted that
buy-side participants who are concerned by post-trade name give-up
already have the option of using ``fully anonymous'' central limit
order book platforms that some SEFs currently offer.\36\ SIFMA further
noted, however, that trading on these platforms is currently minimal,
which SIFMA argues reflects a lack of market demand for fully anonymous
trading.\37\ SIFMA argued, therefore, that prohibiting post-trade name
give-up would be ``unfair'' to participants who choose not to trade
fully-anonymously.\38\ SIFMA also argued that a ``bifurcated market''
dynamic with post-trade name give-up is needed to promote liquidity in
the swaps market.\39\ In the dealer-to-dealer market, where dealers
hedge their risks from dealer-to-client trading, SIFMA stated that pre-
trade anonymity allows dealers to stream liquidity without attribution
and observe available liquidity on the SEF, while post-trade name give-
up helps them to price their liquidity based on client relationships,
which involves assessing how that liquidity and underlying capital is
allocated among clients over time and across different liquidity
pools.\40\ Counterparty disclosure, according to SIFMA, allows dealers
to price that liquidity more accurately and offer better pricing.\41\
SIFMA asserted that prohibiting post-trade name give-up would undermine
these benefits, precluding dealers from providing such client-based
pricing, and would limit their ability to choose how to manage
risk.\42\
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\35\ SIFMA Letter at 5 (disputing the belief that participants
who trade anonymously also want to remain anonymous post-execution).
\36\ Id.
\37\ Id. at 3 (asserting that the lack of liquidity on those SEF
platforms demonstrates that ``a substantial cross-segment'' of
participants prefer to trade with post-trade name give-up).
\38\ Id.
\39\ SIFMA Letter at 4-5 (explaining that dealers provide
liquidity to clients and hedge residual risks in the dealer-to-
dealer market).
\40\ Id. at 4.
\41\ Id. at 5 (stating that dealers are ``incentivized and able
to provide their best pricing to clients with whom they have strong
relationships'').
\42\ Id. (noting that dealers are ``comfortable'' trading their
client risks in existing liquidity pools).
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ICI, MFA, and SIFMA AMG disputed SIFMA's claim that capital and
liquidity allocation requires the continued use of post-trade name
give-up.\43\ SIFMA AMG expressed skepticism about the ability of SEF
systems or platforms with anonymous trading to provide that benefit,
given that pre-trade anonymity does not allow dealers to choose their
[[Page 72265]]
counterparty nor allocate their capital or liquidity to a specific
counterparty.\44\ MFA similarly commented that if a dealer wanted to
allocate capital or liquidity to a specific counterparty, then it would
use a disclosed SEF trading platform, not one that facilitates
anonymous execution.\45\ ICI argued that allowing certain participants
to enter into swaps only with counterparties that are ``preferred
customers'' does not promote liquidity, fairness, or competition.\46\
MFA also disagreed with SIFMA's claim that market liquidity would be
adversely impacted by a prohibition. MFA believes that if a dealer
chooses to offer less liquidity, then the increased competition arising
from a prohibition on post-trade give-up would offset that loss.\47\
MFA further noted that a liquidity reduction has not transpired in
other markets that feature fully anonymous trading.\48\
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\43\ ICI Letter at 3 (describing the allocation explanation as
``not a compelling reason''); MFA Letter at 3; SIFMA AMG Letter at
14.
\44\ SIFMA AMG Letter at 14.
\45\ MFA Letter at 3.
\46\ ICI Letter at 3.
\47\ Id.
\48\ Id.
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SIFMA also claimed that dealers may be unwilling or unable to
participate in fully anonymous SEF trading environments without post-
trade name give-up because such environments would allow SEF buy-side
participants to ``game'' the market more successfully.\49\ Several
other commenters, however, stated that such behavior is not only
unlikely,\50\ but is also prohibited under the Commodity Exchange Act
(``CEA'' or ``Act''), Commission regulations, and SEF rules; \51\ and
that post-trade name give-up is, in any case, not an appropriate
mechanism to address such potential market abuse.\52\
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\49\ SIFMA Letter at 3. As described in the Name Give-Up
Release, dealers are reportedly concerned that buy-side clients who
participate on dealer-to-dealer order books may undercut prices from
dealers by posting aggressive bids or offers and then soliciting
dealers through a request for quote on a dealer-to-client platform,
hoping to motivate dealers to provide more favorable quotes based on
those aggressive prices posted in the order book. Name Give-Up
Release at 61572.
\50\ FIA PTG, MFA, and SIFMA AMG asserted that no evidence
exists that this behavior occurs in other markets with fully
anonymous trading. FIA PTG Letter at 1; MFA Letter at 3; SIFMA AMG
Letter at 14-15. FHLBanks and MFA noted that this behavior would
carry reputational risk, and therefore, is unlikely to occur.
FHLBanks Letter at 3, n.7; MFA Letter at 3. See also MFA Letter at 2
(stating that a SEF participant would otherwise defy self-interest
by posting such aggressive bids or offers, given that other order
book participants would quickly execute against those bids or
offers).
\51\ FHLBanks Letter at 3, n.7 (characterizing market ``gaming''
as ``intentional manipulation of the market''); MFA Letter at 3
(noting legal and regulatory risks of ``gaming'' the market); ICI
Letter at 3 (noting that existing CFTC rules and SEF rules regarding
market conduct and trading practices address ``gaming'' concerns).
\52\ SIFMA AMG Letter at 15 (stating that the Commission's rules
on disruptive trading practices and SEF market oversight more
appropriately address such behavior than post-trade name give-up).
The Commission notes that, notwithstanding the concerns articulated
by SIFMA related to potential market ``gaming,'' to the extent that
any such behavior violates the CEA or Commission regulations, it is
subject to investigation and disciplinary action by SEFs and
enforcement action by the Commission. SEFs are required to conduct
ongoing monitoring and surveillance to monitor and detect fictitious
posting of bids and offers on their trading platforms, as well as
prosecute trading violations through established SEF disciplinary
programs.
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III. Discussion
Based on its preliminary consideration of public comments and
experience with implementing the SEF framework over the course of
several years, the Commission proposes to prohibit post-trade name
give-up practices for swaps that are anonymously executed on a SEF and
are intended to be cleared. Proposed Sec. 37.9(d)(1) would prohibit a
SEF from directly or indirectly, including through a third-party
service provider, disclosing the identity of a counterparty to a swap
that is executed anonymously and intended to be cleared. The proposed
rule, however, further specifies that the prohibition would not apply
where such disclosure is otherwise required by the CEA or the
Commission's regulations.\53\ Proposed Sec. 37.9(d)(2) would require a
SEF to establish and enforce rules that prohibit any person, including
through a third-party service provider, from effectuating such a
disclosure. Finally, proposed Sec. 37.9(d)(3) clarifies that the
prohibition would not apply with respect to uncleared swaps, or with
respect to any method of execution whereby the identity of a
counterparty is disclosed prior to execution of the swap.
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\53\ This would include, for example, requirements relating to a
SEF's obligation to disclose counterparty identities to a
derivatives clearing organization or swap data repository.
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The Commission believes that this proposed rule would advance the
statutory objectives of promoting swaps trading on SEFs and promoting
fair competition among market participants. The Commission additionally
believes that it would advance the congressional objectives underlying
the existing prohibition against swap data repositories disclosing the
identities of cleared swap counterparties. Finally, the Commission also
preliminarily believes that post-trade name give-up may impede the
policy objectives underlying the impartial access requirement
applicable to SEFs.
The Commission emphasizes that the prohibition as proposed applies
to a limited scope of trading platforms, i.e., only those that
facilitate anonymous trading of cleared swaps. The Commission views the
practice of post-trade name give-up as an ancillary post-trade
protocol--the prohibition of which limits neither the manner in which
participants post bids and offers, nor how those bids and offers
interact with one another. The prohibition is also not meant to mandate
or favor ``all-to-all'' trading platforms. Rather, it is meant to
encourage more diverse participation and greater competition on
existing pre-trade anonymous SEF platforms for cleared swaps. Under the
proposed rule, name-disclosed execution methods would still be
permitted, and post-trade name give-up would continue to be permitted
for uncleared swaps.
A. Promoting Swaps Trading on SEFs and Fair Competition Among Market
Participants
CEA section 8a(5) authorizes the Commission to make and promulgate
such rules and regulations as, in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of this Act.\54\ Further, CEA section
5h(e) establishes that the goal of the SEF regulatory regime is to
promote swaps trading on SEFs and promote pre-trade price transparency
in the swaps market.\55\ CEA section 3(a) identifies swaps trading to
be part of a ``national public interest'' that, among other things,
provides a means for managing and assuming price risks, discovering
prices, or disseminating pricing information through trading in liquid,
fair and financially secure trading facilities.\56\ CEA section 3(b)
further specifies that the CEA's purpose is to ``foster'' that interest
by promoting fair competition among market participants.\57\ For the
reasons discussed below, the Commission believes that prohibiting the
practice of post-trade name give-up for swaps that are anonymously
executed on a SEF and are intended to be cleared is reasonably
necessary to advance the objectives of the aforementioned provisions of
the Act.
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\54\ 7 U.S.C. 12(a)(5).
\55\ 7 U.S.C. 7b-3(e).
\56\ 7 U.S.C. 5(a) (stating that the transactions subject to the
CEA are affected with a national public interest).
\57\ 7 U.S.C. 5(b).
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The Commission believes that despite available liquidity for
cleared products on certain SEF platforms, the range and number of
active participants on such
[[Page 72266]]
platforms may be limited due to market participants' concerns about
information leakage and anticompetitive behavior made possible by post-
trade name give-up.\58\ The Commission believes that fully anonymous
trading (i.e., without post-trade name give-up) would likely encourage
more participants to trade on those platforms.\59\ Greater
participation, in turn, would advance the goals of promoting trading
and competition on SEFs. The Commission also believes that the proposed
rule may advance the CEA's goal of fostering ``fair competition'' among
market participants by reducing opportunities for information leakage.
Furthermore, the Commission preliminarily believes that encouraging a
greater number, and a more diverse set, of market participants to
anonymously post bids and offers on these affected SEFs may promote
greater interaction and competition between market participants, which
should allow these platforms to act as more efficient mechanisms for
price discovery.
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\58\ See supra notes 26-29 and accompanying text. See also infra
note 73.
\59\ The majority of comment letters submitted in response to
the Name Give-Up Release, as well as prior market participant
commentary, indicate a strong interest among certain market
participants who are not currently trading on these SEF platforms to
do so if post-trade name give-up is prohibited. See, e.g.,
Transcript of CFTC Market Risk Advisory Committee Meeting (Apr. 2,
2015) (``2015 MRAC Meeting Transcript'') at 133 et seq., available
at https://www.cftc.gov/About/CFTCCommittees/MarketRiskAdvisoryCommittee/mrac_meetings.html.
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B. SDR Information Privacy Requirements
CEA section 21(c)(6) requires a swap data repository (``SDR'') to
maintain the privacy of any and all swap transaction information that
it receives from a swap dealer, counterparty, or any other registered
entity. The Commission implemented this requirement under Sec. 49.17
of the Commission's regulations to address the scope of access that
market participants may have to swap transaction data held by an SDR.
For swaps executed anonymously on a SEF and cleared in accordance with
the Commission's straight-through processing requirements, Sec.
49.17(f)(2) explicitly limits this access by prohibiting a counterparty
to a swap from accessing (i) the identity of the other counterparty or
its clearing member; or (ii) the legal entity identifier of the other
counterparty or its clearing member.\60\ In implementing this rule, the
Commission clarified that this swap transaction information is subject
to the statutory privacy protections because, in the Commission's view,
swap counterparties would not know one another's identity if the swap
is submitted to clearing via straight-through processing.\61\
---------------------------------------------------------------------------
\60\ 17 CFR 49.17(f)(2).
\61\ Swap Data Repositories--Access to SDR Data by Market
Participants, 79 FR 16673-16674 (Mar. 26, 2014).
---------------------------------------------------------------------------
The Commission believes that post-trade name give-up undercuts the
intent of this requirement and the congressional objectives underlying
CEA section 21(c)(6).\62\ Allowing a SEF to disclose a counterparty's
identity is contrary to the purpose of prohibiting access to this
information at an SDR under Sec. 49.17(f)(2), given that a
counterparty can obtain this knowledge from another source. Therefore,
prohibiting post-trade name give-up would help to advance the
objectives underlying the statutory privacy protections under CEA
section 21(c)(6) and the Commission's regulations thereunder that apply
to this information.
---------------------------------------------------------------------------
\62\ The congressional objective to maintain the privacy of
trading information, including trader identities, is also apparent
elsewhere in the CEA. See, e.g., CEA Section 8(a), 7 U.S.C. 12(a)
(prohibiting the Commission from publication of data and information
that would disclose the business transactions or market positions of
any person and trade secrets or names of customers). See also Sec.
1.59(b)(1)(ii) of the Commission's regulations prohibiting self-
regulatory organization employees from disclosing material, non-
public information obtained in the course of the employee's
employment. In addition, Sec. 1.59(d)(ii) separately prohibits an
employee, governing board member, committee member or consultant
from disclosing material, non-public information obtained through
special access related to the performance of their duties. The
Commission promulgated Sec. 1.59 based on its stated belief that
the concept underlying CEA section 8(a) should apply with equal
force to employees and governing members of self-regulatory
organizations. See Activities of Self-Regulatory Organization
Employees and Governing Members Who Possess Material, Non-Public
Information, 50 FR 24533, 24535 (June 11, 1985).
---------------------------------------------------------------------------
C. Impartial Access
CEA section 5h(f)(2)(B)--a provision within statutory SEF Core
Principle 2--requires a SEF to establish and enforce trading, trade
processing, and participation rules that, among other things, provide
market participants with impartial access to the market.\63\ The
Commission implemented this statutory requirement by adopting Sec.
37.202. Section 37.202(a) requires a SEF to provide any eligible
contract participant (``ECP'') \64\ with impartial access to its
market(s) and market services, provided that the facility has, among
other things, criteria governing such access that are impartial,
transparent and applied in a fair and non-discriminatory manner.\65\ In
adopting Sec. 37.202, the Commission explained that ``impartial''
means ``fair, unbiased, and unprejudiced.'' \66\ The Commission further
stated the requirement would allow participants to ``compete on a level
playing field'' and allow additional liquidity providers to participate
on SEFs, thereby improving swaps pricing and market efficiency.\67\
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\63\ 7 U.S.C. 7b-3(f)(2)(B).
\64\ CEA section 2(e), 7 U.S.C. 2(e), limits swaps trading on
SEFs to ``eligible contract participants,'' as defined under CEA
section 1a(18), 7 U.S.C. 1a(18).
\65\ 17 CFR 37.202(a). This requirement also applies to any
independent software vendor.
\66\ SEF Core Principles Final Rule at 33508.
\67\ Id.
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Statutory SEF Core Principle 2 allows a SEF to adopt access
limitations, but any such limitations must be consistent with the
impartial access requirements.\68\ For example, the Commission has
stated that certain fee-based limitations would be permissible based on
``legitimate business justifications.'' \69\ While a SEF may impose
different access criteria among different groups of ECPs, the
Commission also stated that ``similarly situated'' ECPs must be treated
in a similar manner.\70\
---------------------------------------------------------------------------
\68\ Id. (a SEF may use its own reasonable discretion to
determine its access criteria, provided that the criteria are
impartial, transparent and applied in a fair and non-discriminatory
manner, and are not anti-competitive).
\69\ Id. at 33509 (stating that a SEF may offer different access
fees under Sec. 37.202(a)(3) pursuant to legitimate business
justifications).
\70\ Id.
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In practice, SEFs have adopted certain access limitations that
affect a participant's ability to utilize a trading platform, such as
prerequisites for trading on certain platforms or interacting with
certain participants. Some of these prerequisites reflect the nature of
the swap involved, such as whether the swap is cleared or
uncleared.\71\ A SEF may apply such access limitations on its
participants based on legitimate business justifications.\72\ In any
case, a SEF's access limitations must be applied in a fair and non-
discriminatory manner,
[[Page 72267]]
and should not be intended to prevent or disincentivize participation
on a SEF.
---------------------------------------------------------------------------
\71\ For example, a SEF may limit trading access for uncleared
swaps to those market participants who have existing underlying
documentation to execute such swaps with other potential
counterparties. Such prerequisites have been found to be in
violation of impartial access requirements when applied to trading
cleared swaps, however. See infra note 75.
\72\ For example, SEFs have been permitted to require
participants to have certain trading enablements in place with a
minimum percentage of other participants on the platform prior to
trading uncleared swaps. This approach allows participants to
appropriately manage bilateral counterparty risk of uncleared swaps,
while also allowing the SEF to promote active and orderly trading by
ensuring that a requisite number of participants can interact with
one another.
---------------------------------------------------------------------------
The practice of post-trade name give-up in isolation may not be
discriminatory because participants would generally be eligible to
onboard to the SEFs and trade on systems or platforms that equally
subject all participants to post-trade identity disclosure. However,
the practice may have resulted in a discriminatory effect against
certain market participants.\73\ The practice, in turn, may have
deterred these participants from joining or trading in a meaningful way
on SEFs that facilitate post-trade name give-up, thereby limiting
competition on these SEFs. The Commission preliminarily believes that
this undermines the policy goals of the impartial access requirement to
ensure that market participants can compete on a level playing field
and to allow additional liquidity providers to participate on SEFs.\74\
Market participants who prefer post-trade name give-up may argue that a
prohibition instead discriminates against them, but the Commission's
preliminary assessment is that promoting a fully anonymous trading
environment would better fulfill the goals of impartial access on SEFs.
---------------------------------------------------------------------------
\73\ See supra notes 26-29 and accompanying text; 2015 MRAC
Meeting Transcript at 133 et seq. The Commission notes that some
market participants have asserted that post-trade name give-up has
enabled anticompetitive behavior and unfair competition. See supra
note 29 and accompanying text; MRAC Meeting Transcript at 133 at
169, 171.
\74\ See supra note 67 and accompanying text.
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The Commission believes that--with respect to operational, credit
and settlement, and legal issues in particular--there is generally no
imperative for post-trade name give-up if a swap is executed on a SEF
and submitted to a DCO for clearing.\75\ The Commission, however,
recognizes that post-trade name give-up could be necessary for certain
cleared swaps that are components of a package transaction that
includes an uncleared component that creates bilateral credit,
operational, or legal exposures that the counterparties must manage on
an ongoing basis.\76\ The Commission is therefore requesting additional
public comment on the necessity and scope of an exception to the
proposed rule for package transactions. With respect to SIFMA's
assertion that certain other circumstances may still arise that would
require counterparty disclosure,\77\ the Commission generally agrees
with other commenters that straight-through processing should obviate
that need.\78\ Nevertheless, the Commission is requesting additional
public comment on whether any operational, credit and settlement,
legal, or similar issues exist that would still require post-trade name
give-up for an intended-to-be-cleared swap, outside of those swaps that
are components of certain package transactions.
---------------------------------------------------------------------------
\75\ The Commission notes that mechanisms or agreements used to
address bilateral counterparty risk have been viewed as inconsistent
with impartial access when applied to cleared swaps because they
limit a participant's ability to trade on SEFs without
justification. For example, Commission staff previously viewed a
SEF's application of such ``enablement mechanisms'' with respect to
cleared swaps as ``prohibited discriminatory treatment'' that is
inconsistent with the impartial access requirements under Sec.
37.202. Division of Clearing and Risk, Division of Market Oversight
and Division of Swap Dealer and Intermediary Oversight Guidance on
Application of Certain Commission Regulations to Swap Execution
Facilities at 1-2 (Nov. 14, 2013).
\76\ See MFA Letter at 6; SIFMA Letter at 6.
\77\ SIFMA Letter at 6.
\78\ See supra notes 16-18 and accompanying text. The Commission
has previously stated that the ``acceptance or rejection for
clearing in close to real time is crucial for both effective risk
management and for the efficient operation of trading venues.''
Customer Clearing Documentation, Timing of Acceptance for Clearing,
and Clearing Member Risk Management, 77 FR 21278, 21285 (Apr. 9,
2012). Commission staff has also issued guidance that discusses
appropriate practices to ensure prompt and efficient clearing. Staff
Guidance on Swaps Straight-Through Processing (Sept. 26, 2013). In
instances where a swap containing an error has been accepted for
clearing, a SEF may facilitate the correction of the error without
disclosing a counterparty's identity, such as by facilitating the
execution and submission of an offsetting swap to clearing. See CFTC
Letter No. 17-27, Re: No-Action Relief for Swap Execution Facilities
and Designated Contract Markets in Connection with Swaps with
Operational or Clerical Errors Executed on a Swap Execution Facility
or Designated Contract Market (May 30, 2017) at 1, n.2.
---------------------------------------------------------------------------
IV. Request for Comment
The Commission requests comment on all aspects of proposed Sec.
37.9(d) including, but not limited to, responses to the comments
provided in the Name Give-Up Release. In particular, the Commission
requests comments on whether the proposed regulation would advance the
statutory and regulatory goals and the requirements discussed in the
previous section. In commenting on the potential effects of the
proposed rule, the Commission requests background information, actual
market examples, best practice principles, and expectations for
possible impacts on competition, market structure, and liquidity. The
Commission encourages commenters to provide supporting data,
statistics, and any other relevant information.
In addition, the Commission requests comment on the following
questions:
(1) Does post-trade name give-up undermine the Commission's stated
goals of impartial access to (i) ensure market participants can compete
on a level playing field, and (ii) allow additional liquidity providers
to participate on SEFs? Please explain why or why not, and include any
supporting data.
(2) Should the Commission narrow the scope of the proposed
prohibition on post-trade name give-up to apply only to swaps that are
required to be cleared under section 2(h)(1) of the Act, or
alternatively, only to swaps that are subject to the trade execution
requirement under section 2(h)(8) of the Act? Why or why not?
(3) How, if at all, would a prohibition on post-trade name give-up
affect pre-trade price transparency on a SEF operating an anonymous
central limit order book?
(4) How would the proposed prohibition on post-trade name give-up
affect existing liquidity on SEFs? How would the proposed prohibition
affect liquidity on central limit order books? Would the proposed
prohibition indirectly affect liquidity on name-disclosed request for
quote systems? If so, how? In particular, please provide substantiating
data, statistics, and any other quantifiable information related to any
such comments.
(5) Please explain the nature of any potential new liquidity on
SEFs that may result from the proposed prohibition. For example, would
liquidity increase due to a greater number of market participants
trading and/or would liquidity increase due to additional market makers
competing on affected SEFs?
(6) How, if at all, would the proposed prohibition on post-trade
name give-up affect trading protocols such as auctions, portfolio
compression, and/or workup sessions?
(7) Is trading on a SEF platform with post-trade name give-up for
anonymously executed, intended-to-be-cleared swaps preferable to a
fully-disclosed platform for a swap dealer's capital allocation
purposes? If so, why?
(8) Please describe how post-trade name give-up currently helps
swap dealers make markets in swaps, if at all.
(9) If the Commission were to prohibit post-trade name give-up as
proposed in this notice, then how might that affect the prices that
swap dealers quote to buy-side participants on SEFs operating name-
disclosed, request for quote platforms?
(10) How does the price for a given swap listed on a SEF operating
an anonymous central limit order book compare to the price for an
equivalent swap listed on a SEF operating a name-disclosed request for
quote system? How does the practice of post-trade name
[[Page 72268]]
give-up relate to any such difference in price?
(11) Are there certain cleared swap classes for which post-trade
name give-up serves a particularly important role for swap dealers for
market-making or hedging purposes that would be adversely affected by a
prohibition?
(12) How many and what types of additional liquidity providers
(e.g., funds, proprietary trading firms, high-frequency traders) might
join affected SEFs if post-trade name give-up were prohibited? Would
these new participants be particularly interested in trading certain
kinds of swap transactions (e.g., spread trades)? Would these new
participants be floor traders, swap dealers, or another type of entity?
(13) What other effects would a prohibition on post-trade name
give-up have on the swap market?
(14) Should the Commission provide an exception to the prohibition
on post-trade name give-up for swaps that are components of package
transactions involving an uncleared swap? To what extent are such
package transactions anonymously traded, given the involvement of an
uncleared swap at the outset?
(15) If the Commission provides an exception with respect to
package transactions, should it include an exception for package
transactions involving any non-swap instrument, including Treasury
securities? Should such an exception apply to the swap components if
such non-swap instrument components are also executed anonymously and
intended to be cleared?
(16) Excluding swaps that are components of certain package
transactions, what, if any, operational, credit and settlement, legal,
or similar issues exist that would still require post-trade name give-
up for a swap that is intended to be cleared?
(17) Are there any alternatives to the proposed prohibition on name
give-up that would better achieve the regulatory objectives stated
above? For example, could these objectives be better accomplished
through additional guidance or enforcement activity to address
applications of post-trade name give-up that are inconsistent with the
impartial access requirement?
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \79\ requires federal
agencies to consider whether the rules they propose will have a
significant economic impact on a substantial number of small entities
and, if so, to provide an analysis regarding the economic impact on
those entities. The regulation proposed herein will affect SEFs. The
Commission has previously determined that SEFs are not ``small
entities'' for the purpose of the RFA.\80\ Therefore, the Chairman, on
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.
605(b), that the regulation proposed herein will not have a significant
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\79\ 5 U.S.C. 601 et seq.
\80\ See SEF Core Principles Final Rule at 33548.
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \81\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. 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. The Commission has previously
received a control number from OMB that includes the collection of
information associated with Part 37 of the Commission's regulations.
The title for this collection of information is ``Core Principles and
Other Requirements for Swap Execution Facilities, OMB control number
3038-0074.'' \82\ Collection 3038-0074 is currently in force with its
control number having been provided by OMB. However, the rule proposed
herein does not impose any new recordkeeping or information collection
requirements, and therefore contains no requirements subject to the
PRA.
---------------------------------------------------------------------------
\81\ 44 U.S.C. 3501 et seq.
\82\ See OMB Control No. 3038-0074, https://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0074.
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C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\83\ 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.
---------------------------------------------------------------------------
\83\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Commission is proposing to amend part 37 of the Commission's
regulations to prohibit ``post-trade name give-up'' practices for swaps
that are anonymously executed on a SEF and are intended to be cleared.
Proposed Sec. 37.9(d) of the Commission's regulations would prohibit a
SEF from directly or indirectly, including through a third-party
service provider, disclosing the identity of a counterparty to a swap
that is executed anonymously and intended to be cleared. The proposed
regulation would also require SEFs to establish and enforce rules that
prohibit any person from effectuating such a disclosure.
The baseline for this consideration of costs and benefits with
respect to the proposal herein is the status quo, which includes the
existing practice of post-trade name give-up for cleared swaps on some
SEFs, and the current regulatory requirements that do not explicitly
prohibit post-trade name give-up for cleared swaps that are executed
anonymously. The Commission emphasizes that the proposed prohibition
will not apply to uncleared swaps or SEF trading systems and platforms
that are not pre-trade anonymous. Proposed Sec. 37.202(d)(3) clarifies
that the prohibition would not apply with respect to uncleared swaps,
or with respect to any method of execution whereby the identity of a
counterparty is disclosed prior to execution of the swap. Some swaps
trading on SEFs today occurs on ``disclosed'' trading systems and
platforms that provide the identities of potential counterparties to
one another before execution occurs. Such is the case, for example,
with certain request for quote systems offered by SEFs.
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
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
[[Page 72269]]
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).\84\
---------------------------------------------------------------------------
\84\ 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.
---------------------------------------------------------------------------
The Commission has endeavored to assess the expected costs and
benefits of the proposed rulemaking in quantitative terms, where
possible. In situations where the Commission is unable to quantify the
costs and benefits, the Commission identifies and considers the costs
and benefits of the proposed rule in qualitative terms. The lack of
data and information to estimate those costs and benefits is
attributable in part to the nature of the proposed rule and uncertainty
about the potential responses of market participants to the
implementation of the proposed rule. The Commission recognizes that
potential indirect costs and benefits of the proposed prohibition on
post-trade name give-up, i.e., those relating to effects on trading
behavior, liquidity, and competition, may be impossible to accurately
predict or quantify prior to implementation of the proposed rule.
1. Costs
The Commission's preliminary assessment is that the direct costs
for SEFs of implementing and complying with proposed Sec. 37.9(d)
would not be material. Proposed Sec. 37.9(d)(1) would prohibit SEFs
from directly or indirectly, including through a third-party service
provider, disclosing the identity of a counterparty to a swap that is
executed anonymously and intended to be cleared. Only SEFs that
currently practice post-trade name give-up for cleared swaps would be
required to take action to comply with proposed Sec. 37.9(d)(1), and
the Commission's preliminary understanding is that the costs of
adjusting affected SEF protocols in order to comply would be
negligible.\85\ However, the Commission requests that SEFs that
presently employ post-trade name give-up for cleared swaps comment on
this proposal and provide estimates of any direct costs they would
incur in complying with proposed Sec. 37.9(d)(1). Proposed Sec.
37.9(d)(2) would require SEFs to establish and enforce rules to
prohibit any person from directly or indirectly, including through a
third-party service provider, disclosing the identity of a counterparty
to a swap that is executed anonymously and intended to be cleared.
Complying with Sec. 37.9(d)(2) would require a SEF to file such rules
with the Commission in accordance with part 40 of the Commission's
regulations. The Commission estimates that filing such rules may take
up to 50 hours which is unlikely to be a major cost burden on SEFs. The
Commission anticipates that the direct cost of complying with proposed
Sec. 37.9(d) for market participants and third-party service providers
should be at or near zero.
---------------------------------------------------------------------------
\85\ See, e.g., Peter Madigan, ``CFTC to Test Role of Anonymity
in SEF Order Book Flop,'' Risk.net (Nov. 21, 2014) (according to one
SEF official, ``the revealing of the name is a legacy behavior and
it's not necessary that we reveal it. Should we be told not to by
the regulators, we will flick a switch and the world will go on. It
will not be a profound change and it's not going to require re-
engineering the system''), available at http://www.risk.net/risk-magazine/feature/2382497/cftc-to-test-role-of-anonymity-in-sef-order-book-flop. See also supra note 5 (SEFs that use IHS Markit
services to route trades can select an already available ``no-name
give up workflow option'').
---------------------------------------------------------------------------
With respect to potential indirect costs of the proposed rule,
SIFMA has suggested that a prohibition on post-trade name give-up may
impair the ability of incumbent liquidity providers to manage risk and
provide liquidity which in turn would be ``likely to worsen pricing
that dealers can offer to clients.'' \86\ Although the Commission is
aware of the concerns raised by SIFMA, it is not, at this time,
convinced that prohibiting post-trade name give up would increase the
costs of trading swaps for end users and other swap dealer clients. The
Commission preliminarily believes that negative pricing effects on SEFs
would be unlikely to result, as competition from new market
participants and incumbent liquidity providers that continue to provide
liquidity should offset this possibility. However, the Commission
requests additional comments relating to the risks and costs of such an
outcome. The Commission also requests public comment regarding any
additional indirect costs of the proposed rule.
---------------------------------------------------------------------------
\86\ SIFMA Letter at 4.
---------------------------------------------------------------------------
2. Benefits
The Commission believes that implementing the proposed rule may
improve liquidity on SEFs, particularly on affected SEF order books.
The practice of post-trade name give-up has reportedly deterred a
significant segment of market participants from making markets on or
otherwise participating on affected SEFs. The Commission expects that
some of these market participants would choose to participate on these
SEFs if the Commission were to prohibit the practice, leading to
increased liquidity. Increased liquidity could benefit market
participants by making it easier to execute transactions, especially
larger transactions, quickly and without undue price impact. As
discussed below, Commission staff has reviewed several empirical event
studies, which focus specifically on the effect of post-trade anonymity
on market liquidity. Most of these studies, such as those discussed
below, document an improvement in liquidity. The Commission notes that
the markets that are the subjects of these studies are not the same as
U.S. swaps markets and are mostly not dealer-oriented markets. Some of
the markets studied are also deeper and more liquid than the U.S. swaps
market. The Commission requests public comment on the validity or
applicability of the papers discussed below, as well as any other
studies that may be instructive.
One of the early empirical studies focused on the implementation of
post-trade anonymity on the London Stock Exchange after the
introduction of a central counterparty to electronic equity trading in
February 2001.\87\ Prior to this change, the market was pre-trade
anonymous, but the two parties involved in a trade were informed about
each other's identities once the transaction was completed. The authors
found that post-trade anonymity resulted in higher market depth and
lower spreads and execution costs. Liquidity improvements were more
pronounced for small stocks and stocks with higher trading
concentration, which are expected to exhibit large exogenous
information asymmetries. Such stocks may be more analogous to swap
markets than larger stocks with less trading concentration. Post-trade
anonymity seemed to benefit mostly those who traded repeatedly and
traded the largest volumes. The authors argue that ``bilateral
disclosure of trader identities harms traders who are known to account
for a sizable portion of total volume and who trade repeatedly in the
same direction because it facilitates anticipation of their orders.''
\88\
---------------------------------------------------------------------------
\87\ Freiderich, S. and R. Payne (2014), ``Trading anonymity and
order anticipation,'' Journal of Financial Markets, 21, 1-24.
\88\ Id.
---------------------------------------------------------------------------
Another study explored a post-trade anonymity reform introduced by
the Oslo Stock Exchange between 2008 and 2010. During this period, the
25 most traded stocks on the Oslo Stock Exchange were periodically
selected to trade fully anonymously, while the broker identities of
traders involved in
[[Page 72270]]
transactions on all other stocks were released to all market
participants after each transaction. This study found that post-trade
anonymity led to lower bid-ask spreads and higher volume. These results
seemed to be driven by increased trading from institutional investors,
who split their orders into multiple smaller transactions potentially
to reduce information leakage and price impact. The author found that
``anonymity increases liquidity in part by reducing the liquidity
providers' adverse selection costs. However, the increase in stock
liquidity is also partly driven by a reduction in liquidity provider
revenues.'' \89\
---------------------------------------------------------------------------
\89\ Meling, T.G., ``Anonymous Trading in Equities'' (2018
working paper), available at https://ssrn.com/abstract=2656161.
---------------------------------------------------------------------------
Another study examined the 2008 transition of equity trading in
Helsinki, Reykjavik, and the five most traded stocks in Stockholm where
broker codes were removed from all real-time market data feeds. It also
examined the 2009 reversal of this change. The findings suggested that
liquidity, measured by quoted spreads, price impact, and limit order
book depth, ``improves when anonymous post-trade reporting is
introduced, and liquidity worsens when anonymous post-trade reporting
is reversed.'' \90\ However, results were weaker during the reversal,
which the authors attribute to other contemporaneous factors.
---------------------------------------------------------------------------
\90\ Dennis, P.J., and Sandas, P., ``Does Trading Anonymously
Enhance Liquidity?'' (2019 working paper), available at https://ssrn.com/abstract=2516933. The original change in post-trade
transparency was reversed for all stocks, except the five most
traded stocks in Helsinki.
---------------------------------------------------------------------------
A study exploring the effects of post-trade anonymity on the German
electronic trading platform Xetra showed that concealing broker
identities from their counterparties resulted in lower execution
costs.\91\
---------------------------------------------------------------------------
\91\ Hachmeister, A. and Schiereck, D., ``Dancing in the dark:
Post-trade anonymity, liquidity and informed trading'' (2010),
Review of Quantitative Finance and Accounting, 34, 145-177.
---------------------------------------------------------------------------
An empirical study focusing on the information content of broker
identities provided a potential explanation for the improvement in
liquidity documented in many of the aforementioned event studies. It
showed that the disclosure of broker identities allowed information
leakage, even though participants sometimes used multiple brokers and
mixed signal strategies to potentially hide their trading
intentions.\92\ The authors of this study suggested that the documented
improvement in liquidity, associated with greater anonymity, may have
come at the expense of information efficiency, as prices potentially
adjusted to order flow information more slowly under increased
anonymity. Because this study relied on Finnish data during the period
of 2000 to 2001, the authors also conjectured that algorithmic trading
could potentially allow informed investors to hide their orders better,
but it could also enable proprietary traders to uncover informed order
flow.
---------------------------------------------------------------------------
\92\ Linnainmaa, J., Saar, G., ``Lack of anonymity and the
inference from order flow'' (2012), Review of Financial Studies, 25,
1414-1456.
---------------------------------------------------------------------------
Some studies did not find that implementing post-trade anonymity
improved liquidity. One such study, investigating the impact of post-
trade anonymity from the perspective of liquidity providers in a dealer
market, showed that the 2003 introduction of post-trade anonymity on
the Nasdaq platform did not improve best quotes. The author concluded
that ``introducing anonymity on [the] Nasdaq platform did not lead to
an increase in competition between market makers.'' \93\
---------------------------------------------------------------------------
\93\ Benhami, K., ``Liquidity providers' valuation of anonymity:
The Nasdaq Market Makers evidence'' (2006 working paper), available
at https://www.cass.city.ac.uk/__data/assets/pdf_file/0005/78737/2Benhami.pdf.
---------------------------------------------------------------------------
Moreover, a study on the South Korea Exchange argued that revealing
the ex-post order flow of major brokers to the entire market led to an
improvement in liquidity. It investigated the effects of public
disclosure of the identities of the top five brokers and their trades.
Notably, this disclosure occurred just twice per day. Trading volume
was higher in the setting without post-trade anonymity. Moreover, while
realized spreads were lower when broker identities were disclosed,
price impact costs were higher. The authors argued that ``these
findings strongly indicate that providing broker IDs induces more
competition among liquidity providers that lowers the realized spread
and, as indicated by higher market impact costs, provides more rapid
dissemination of information, which in turn provides market
efficiency.'' \94\
---------------------------------------------------------------------------
\94\ Pham, T.P., et al., ``Intra-day Revelation of Counterparty
Identity in the World's Best-Lit Market,'' (2016 working paper),
available at https://ssrn.com/abstract=2644149.
---------------------------------------------------------------------------
Commission staff also reviewed several theoretical studies, which
presented models with various levels of post-trade transparency in
different settings and could offer some insight on post-trade
anonymity, although they did not directly compare it to the case of
bilateral disclosure of counterparty identities right after each trade.
The predictions of these models were mixed. One theoretical study,
focused on the post-trade public disclosure of insiders in equity
markets, argues that public disclosure of insider trades accelerates
the price discovery process and reduces trading costs.\95\ These
predictions suggested that post-trade anonymity could strengthen
asymmetric information in the market, subsequently reducing liquidity
by exacerbating the market maker's adverse selection problem. However,
another study argued that the effect of anonymity on liquidity could
also be positive, if the information acquisition is endogenous, because
then anonymity could potentially bolster market participants'
incentives to acquire information.\96\
---------------------------------------------------------------------------
\95\ Huddhart, S., J., Hughes and Levine, ``Public Disclosure
and Dissimulation of Insider Trades'' (2001), Econometrica, 69, 665-
681.
\96\ Rindi, B., ``Informed Traders as Liquidity Providers:
Anonymity Liquidity and Price Formation,'' (2008), Review of
Finance, 12, 497-532.
---------------------------------------------------------------------------
Another study on the disclosure of insider trades developed a model
where the insider is risk averse and showed that the insider is
encouraged to trade less aggressively on his private information,
weakening both informational efficiency and market liquidity.\97\ This
finding suggests that post-trade anonymity could encourage informed
traders to trade more aggressively on their private information,
facilitating price discovery and improving market liquidity. Another
study suggested that the presence of order anticipation strategies,
often referred to as ``back running,'' alters the trading strategies of
institutional and retail investors, in an effort to avoid being
detected.\98\ The authors predicted that fundamental investors
introduce random noise in their strategies to avoid being detected.
However, surprisingly, when the accuracy of the back runners' signals
is high their profits may be reduced, especially if there are many of
them.
---------------------------------------------------------------------------
\97\ Buffa, A.M., ``Insider Trade Disclosure, Market Efficiency,
and Liquidity'' (2014 working paper), available at https://ssrn.com/abstract=1102126.
\98\ Yang, L. and Zhu, H., ``Back-Running: Seeking and Hiding
Fundamental Information in Order Flows'' (2019), The Review of
Financial studies, forthcoming, available at https://ssrn.com/abstract=2583915.
---------------------------------------------------------------------------
The practice of post-trade name give-up was explicitly addressed in
a theoretical study that was cited in a comment letter to the Name
Give-Up Release from Americans for Financial Reform (``AFR'').\99\ This
study modeled the investor choice between over-the-counter (``OTC'')
markets and electronic order books, and assessed the value of OTC
markets for market quality and total welfare.\100\ The authors showed
[[Page 72271]]
that, although the presence of OTC markets increases total volume and
decreases the average spread, it can still harm total welfare \101\ if
the adverse selection costs are low, i.e., in markets with limited
informed speculators and high trading activity in OTC markets. This is
because ``uninformed'' investors (i.e., profit-indifferent, hedging
traders) are more likely to be offered lower spreads in OTC markets,
while spreads widen for ``informed'' investors (speculators). The
practice of post-trade name give-up allows dealers, who offer liquidity
both through requests for quotes and in the electronic order book, to
detect the trading motives of their counterparties and lower their
adverse selection costs. ``Given low OTC market share in swaps,
eliminating [post-trade name give-up] is predicted to increase welfare,
decrease total volume and widen average spread. Specifically, spreads
on swaps exchanges are predicted to decline while the OTC spreads are
expected to increase.'' \102\
---------------------------------------------------------------------------
\99\ AFR Letter at 4-5.
\100\ Lee, T. and Wang, C., ``Why Trade Over-the-Counter? When
Investors Want Price Discrimination'' (2019 working paper),
available at https://ssrn.com/abstract=3087647.
\101\ Welfare is the expected sum of all market participants'
payoffs.
\102\ Id. at 26-27.
---------------------------------------------------------------------------
The Commission finds these studies potentially instructive, along
with assertions provided by the majority of commenters, to indicate
that overall liquidity may be improved by proposed Sec. 37.9(d).
Moreover the Commission is concerned with assertions that the status
quo facilitates information asymmetries and hinders access and
participation on affected SEF trading systems for many market
participants. The Commission believes that the proposed rule may
benefit market participants by reducing these information asymmetries
and could increase participation on these SEF platforms. The Commission
requests additional public comment regarding potential benefits of the
proposed rule.
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
The proposed rule is intended to protect market participants and
the public by advancing the statutory goals of promoting swaps trading
on SEFs and fostering fair competition among market participants.
Further, the Commission believes the practice of post-trade name give-
up may be inconsistent with the policy goals of the SEF impartial
access requirements which are intended to allow participants to compete
on a level playing field and allow additional liquidity providers to
participate on SEFs.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
The proposed rule is intended to enhance competitiveness in the
swap markets by removing an effective barrier to participation on SEFs
for many market participants who are concerned with the prospect of
information leakage. The Commission expects participation on SEFs to
increase as a result, leading to greater competition.
c. Price Discovery
The Commission believes that the proposed rule may encourage a
greater number of market participants to anonymously post bids and
offers on affected SEFs, which may promote greater interaction and
competition between market participants, thereby allowing these
platforms to act as more efficient mechanisms for price discovery.
d. Sound Risk Management Practices
Similarly, increased participation and competition on SEFs and
decreased information asymmetry among market participants is likely to
enhance SEF trading as a mechanism for risk management.
e. Other Public Interest Considerations
Post-trade name give-up is inconsistent with Commission regulations
intended to protect the privacy of a swap counterparty's trading
information. Prohibiting post-trade name give-up would help to
effectuate the statutory privacy protections under CEA section 21(c)(6)
that apply to this information.
4. Request for Comment
The Commission invites public comment on all aspects of the cost-
benefit considerations herein, 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 rule are reasonably quantifiable, the Commission requests that
they provide data, statistics and any other information that will
assist the Commission in quantification. Finally, the Commission
requests comment on the academic literature related to post-trade
anonymity, including comments on the validity or applicability of the
papers the Commission has discussed herein and any other studies the
Commission should review.
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
purposes of this Act, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of this Act.\103\
---------------------------------------------------------------------------
\103\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether the proposed rule implicates any other
specific public interest to be protected by the antitrust laws.
The Commission has considered the proposed rule to determine
whether it is anticompetitive and has preliminarily identified no
anticompetitive effects. In particular, the Commission preliminarily
believes that the proposed amendments to part 37 will promote
competition on SEFs. The Commission requests comment on whether the
proposed rule is anticompetitive and, if it is, what the
anticompetitive effects are.
Because the Commission has preliminarily determined that the
proposed rule is not anticompetitive and has no anticompetitive
effects, the Commission has not identified any less anticompetitive
means of achieving the purposes of the Act. The Commission requests
comment on whether there are less anticompetitive means of achieving
the relevant purposes of the Act that would otherwise be served by
adopting the proposed rule.
List of Subjects in 17 CFR Part 37
Swaps, Swap execution facilities.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR 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, 6c, 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, Pub. L. 111-203, 124 Stat. 1376.
0
2. In Sec. 37.9, add paragraph (d) to read as follows:
[[Page 72272]]
Sec. 37.9 Methods of execution for required and permitted
transactions.
* * * * *
(d) Counterparty anonymity. (1) Except as otherwise required under
the Act or the Commission's regulations, a swap execution facility
shall not directly or indirectly, including through a third-party
service provider, disclose the identity of a counterparty to a swap
that is executed anonymously and intended to be cleared.
(2) A swap execution facility shall establish and enforce rules
that prohibit any person from directly or indirectly, including through
a third-party service provider, disclosing the identity of a
counterparty to a swap that is executed anonymously and intended to be
cleared.
(3) The provisions in paragraphs (d)(1) and (d)(2) of this section
shall not apply with respect to uncleared swaps, or with respect to any
method of execution whereby the identity of a counterparty is disclosed
prior to execution of the swap.
Issued in Washington, DC, on December 20, 2019, by the
Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Post-Trade Name Give-Up on Swap Execution--Commission
Voting Summary and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Joint Statement of Chairman Heath Tarbert, Commissioner
Rostin Behnam, and Commissioner Dan M. Berkovitz
It is a hallmark of American exchange-style trading systems that
the buyer and seller of a given financial instrument have no reason
to know--and do not know--the identity of one another.\1\ Trading
anonymity can be viewed as a great equalizer, leveling the playing
field for counterparties of all sizes and types by allowing traders
to enter and exit the market without exposing their trading
positions and strategies.\2\ As a result, markets with pre- and
post-trade anonymity are generally not only fairer, but also feature
greater liquidity and greater competition between market
participants.\3\
---------------------------------------------------------------------------
\1\ See, e.g., Peter A. McKay, CME and CBOT to Close Loophole,
Wall St. J. (Apr. 15, 2006) (``When stocks are traded on public
exchanges, investors generally don't know who they are buying from
or selling to. On futures exchanges, most investors expect the same
thing when trading electronically.'').
\2\ See, e.g., Peter Madigan, CFTC to Test Role of Anonymity in
SEF Order Book Flop, Risk (Nov. 21, 2014) (noting arguments that
anonymity creates a more egalitarian market); Managed Funds
Association (``MFA''), Position Paper: Why Eliminating Post-Trade
Name Disclosure Will Improve the Swaps Market 8 (Mar. 31, 2015)
(arguing that ``markets should remain anonymous to create a level
playing field for all participants''); CFTC Market Risk Advisory
Committee, Panel Discussion: Market's Response to the Introduction
of SEFs 139 (Apr. 2, 2015) (``MRAC Meeting Transcript'') (noting
buy-side reticence to use SEF order books with name give-up because
of potential uncontrolled information leakage); see also Testimony
of Stephen Berger, Citadel LLC, Before the Subcomm. on Commodity
Exchanges, Energy, & Credit of the H. Comm. on Ag., Hearing to
Review the Impact of G-20 Clearing and Trade Execution Requirements
(June 14, 2016) (testifying on behalf of MFA) (asserting that lack
of post-trade anonymity ``creates an uneven playing field and
impairs competition'').
\3\ See, e.g., MRAC Meeting Transcript, supra note 2, at 154
(explaining that anonymous order books have facilitated liquidity
and diverse participation in markets for other instruments, such as
equities and futures); S. Freiderich & R. Payne, Trading Anonymity
and Order Anticipation, 21 Journal of Financial Markets 1-24 (2014)
(finding that post-trade anonymity improved market liquidity,
particularly for small stocks and stocks with concentrated trading,
which may be more analogous to swaps); T.G. Meling, Anonymous
Trading in Equities (2018 working paper) (also finding that post-
trade anonymity improved market liquidity); P. J Dennis & P. Sandas,
Does Trading Anonymously Enhance Liquidity? (2019 working paper)
(same); A. Hachmeister & D. Schiereck, Dancing in the Dark: Post-
Trade Anonymity, Liquidity, and Informed Trading, 34 Review of
Quantitative Finance and Accounting 145-177 (2010) (same); J.
Linnainmaa & G. Saar, Lack of Anonymity and the Inference from Order
Flow, 25 Review of Financial Studies 1,414-1,456 (2012) (same).
---------------------------------------------------------------------------
Before the adoption of central clearing for standardized swaps,
post-trade disclosure of counterparty identities was the norm in
swaps markets because of the need to manage counterparty credit
risk. For example, Party A would ask its broker to enter into a
five-year interest rate swap to exchange a fixed payment for a
floating rate. The broker would find (often through another broker)
Party B, who would be willing to take the other side of the swap.
Post-trade, the identities of Party A and B would be revealed to one
another. A five-year bilateral relationship would thus ensue,
wherein both parties would need to monitor their counterparty's
respective ability to make good on their obligations. But times have
now changed.
The Dodd-Frank Act has encouraged--and in some instances
required--centralized clearing for classes of swaps that are
sufficiently standardized and liquid to be cleared through a central
counterparty, i.e., a derivatives clearinghouse.\4\ As is the case
for exchange-listed products, a cleared swap no longer exposes the
respective parties to the risk of non-performance. Rather than Party
A and Party B being obligated to one another under the terms of the
swap, the clearinghouse steps in between the parties to the trade
and takes on the counterparty credit risk of both sides.\5\
Consequently, anonymous trading is now possible for large swaths of
the U.S. swaps markets.
---------------------------------------------------------------------------
\4\ Commodity Exchange Act (``CEA'') section 2(h)(8), 7 U.S.C.
2(h)(8); see also Committee on Capital Markets Regulation, The
Global Financial Crisis: A Plan for Regulatory Reform iii (May
2009), https://www.capmktsreg.org/wp-content/uploads/2018/10/The-Global-FInancial-Crisis-A-Plan-for-Regulatory-Reform.pdf (``If
clearinghouses were to clear CDS contracts and other standardized
derivatives, like foreign exchange and interest rate swaps, systemic
risk could be substantially reduced by more netting, centralized
information on the exposures of counterparties, and the
collectivization of losses.'').
\5\ See Robert S. Steigerwald, Federal Reserve Bank of Chicago,
Central Counterparty Clearing, in Understanding Derivatives: Markets
and Infrastructure (2013) (explaining that through novation, the
original contract is replaced by two contracts, with the central
counterparty becoming buyer to the seller and seller to the buyer).
---------------------------------------------------------------------------
Yet a number of swap execution facilities (``SEFs'') still
retain a vestige of the old bilateral over-the-counter markets, even
for transactions that are centrally cleared: The practice of ``post-
trade name give-up.'' That is, the SEF will provide the identity of
each swap counterparty to the other after a trade has been executed
anonymously. Given the advent of clearing, many have reasonably
questioned the policy rationale for post-trade name give-up for
cleared swaps, and still others have gone further, criticizing the
practice as anticompetitive and an obstacle to broad and diverse
participation on SEFs.
We support today's proposed rule (``Proposal'') to prohibit
post-trade name give-up for swaps that are executed anonymously via
a SEF and intended to be cleared.\6\ We believe that the Proposal
serves two key objectives of the Commission's governing statute: (1)
Promoting swaps trading on SEFs \7\ and (2) promoting fair
competition among market participants, including through impartial
access to a SEF's trading platform.\8\ The Proposal could also help
attract a diverse set of additional market participants who have
been deterred from trading on these platforms by the practice of
post-trade name give-up, but remain interested in bringing liquidity
and competition to SEFs if there is a level playing field.
---------------------------------------------------------------------------
\6\ Of note, the proposed prohibition would not apply to trading
protocols that involve pre-trade counterparty disclosure, such as a
typical request-for-quote process.
\7\ CEA section 5h(e), 7 U.S.C. 7b-3(e).
\8\ CEA section 3(b), 7 U.S.C. 5(b) (listing fair competition
among market participants as a goal of the CEA); CEA section
5h(f)(2)(B)(i) (requiring a SEF to establish and enforce rules to
provide participants impartial access to the market).
---------------------------------------------------------------------------
The Proposal is in large part based upon responses to the
Commission's November 2018 request for comment on post-trade name
give-up.\9\ A large majority of commenters saw no sufficient
justification for the practice with respect to cleared swaps, given
the absence of counterparty credit risk attending such swaps.\10\
These
[[Page 72273]]
commenters acknowledged arguments that dealers use the practice to
allocate capital to preferred customers as part of an overall cross-
marketing strategy. However, they either did not find this rationale
legitimate or believed that it does not justify potential harms
resulting from name give-up.\11\
---------------------------------------------------------------------------
\9\ CFTC Request for Comment on Post-Trade Name Give-Up on Swap
Execution Facilities, 83 FR 61,571, 61,572 (Nov. 30, 2018).
\10\ See, e.g., Investment Company Institute (``ICI'') Letter at
3; FHLBanks Letter at 2; Futures Industry Association Principal
Traders Group (``FIA PTG'') Letter at 1; MFA Letter at 2; SIFMA AMG
Letter at 14; Vanguard Letter at 2; Better Markets Letter at 2, 66.
This seems particularly to be the case in light of pre-trade credit
check and straight-through processing requirements that minimize the
time between trade execution and acceptance for clearing.
\11\ E.g., ICI Letter at 3; MFA Letter at 3; SIFMA AMG Letter at
14.
---------------------------------------------------------------------------
Commenters identified several such harms. A principal concern
was the risk of information leakage allowing counterparties to glean
a SEF participant's trading positions and strategies.\12\ Commenters
also expressed concern that disclosure of counterparty identities
could run counter to the ``impartial access'' requirement for SEFs.
Under this view, SEF participants can (and purportedly do) use name
give-up to discriminate against counterparties whose trading
practices they believe are harmful.\13\ A large majority of
commenters stated that the concerns discussed above have inhibited
buy-side participation on SEFs employing name give-up.\14\ In their
view, prohibiting the practice would enhance liquidity on SEFs.
Empirical studies on the effects of post-trade anonymity--in U.S.
securities markets and in a wide range of foreign financial
markets--bolster this view.\15\
---------------------------------------------------------------------------
\12\ E.g., FHLBanks Letter at 3; ICI Letter at 3-4; MFA Letter
at 4; Vanguard Letter at 10.
\13\ E.g., FIA PTG Letter at 1; ICI Letter at 3; MFA Letter at
4.
\14\ E.g., ICI Letter at 3-4; MFA Letter at 4; SIFMA AMG Letter
at 15; see also MRAC Meeting Transcript, supra note 2 (multiple
panelists and committee members arguing that name give-up impairs
buy-side SEF participation).
\15\ See supra note 3. We note that at least one study of a U.S.
securities trading platform found that post-trade anonymity had no
impact on the quality of price quotes on the platform. K. Benhami,
Liquidity Providers' Valuation of Anonymity: The Nasdaq Market
Makers Evidence (2006 working paper). Another study on the South
Korea Exchange found that post-trade disclosure of the order flow of
major brokers to the entire market improved liquidity. T.P. Pham et
al., Intra-day Revelation of Counterparty Identity in the World's
Best-Lit Market (2016 working paper). On balance, however, the
liquidity and other benefits of anonymous trading in financial
markets appear well established.
---------------------------------------------------------------------------
We note that one response to the request for comment argued that
post-trade anonymity could prompt dealers to withdraw from SEFs. The
comment expressed concerns that the prohibition could on net reduce
liquidity on SEFs.\16\ Yet we have seen predictions of a drought in
liquidity time and time again with respect to swaps regulatory
reform. For example, it was used to oppose the clearing requirement
of the Dodd-Frank Act and the Commission's 2013 SEF trading
rules.\17\ Such predictions have not proven accurate thus far.\18\
---------------------------------------------------------------------------
\16\ See Securities Industry & Financial Markets Ass'n
(``SIFMA'') Letter at 1, 3-4. We also note the argument that post-
trade anonymity allows participants to ``game'' the market. Under
this scenario, a buy-side customer may undercut prices from dealers
by posting aggressive orders to a dealer-to-dealer SEF's order book,
then soliciting dealers through a request for quote on a dealer-to-
client SEF in the hope that the dealers will provide more favorable
quotes based on the order book pricing. See, e.g., Request for
Comment, 83 FR at 61,572; Tom Osborn, How to Game a SEF: Banks Fear
Arrival of Arbitrageurs, Risk (Mar. 19, 2014); Madigan, supra note
2. We urge commenters to submit any evidence or indicia that such
gaming is in fact occurring in other fully anonymous markets or
would occur on SEFs if the proposed prohibition were implemented. We
preliminarily believe that such conduct could constitute a
disruptive trading practice or market manipulation prohibited by the
CEA and potentially also subject to SEF disciplinary action. Such
conduct may be best addressed by regulatory or self-regulatory
authorities as appropriate, rather than via SEF participant ``self-
help'' effectuated via name give-up.
\17\ See, e.g., International Swaps & Derivatives Ass'n
(``ISDA''), Swap Execution Facilities: Can They Improve the
Structure of OTC Derivatives Markets? 14-15 (Mar. 2011) (arguing
that proposed SEF rules would reduce liquidity); SIFMA, SIFMA
Strongly Disagrees with CFTC's Final SEF Rules (May 29, 2013)
(same); Terry Flanagan, Wholesale Brokers Criticize CFTC, Markets
Media (Oct. 3, 2011) (same).
\18\ See, e.g., Lynn Riggs et al., CFTC, Swap Trading after
Dodd-Frank: Evidence from Index CDS, at 6, 52 (Aug. 17, 2019)
(finding that SEF-traded index credit default swap markets are
working relatively well following the Dodd-Frank reforms, though
there is always room for improvement); Evangelos Benos, Richard
Payne, & Michalis Vasios, Centralized Trading, Transparency, and
Interest Rate Swap Market Liquidity: Evidence from the
Implementation of the Dodd-Frank Act, Bank of England Staff Working
Paper No. 580, at 31 (May 2018) (finding liquidity improvement for
swaps subject to the SEF trading mandate); ISDA Comment Letter on
2018 SEF Proposed Rule, at 2 (``Certain aspects of the current swaps
trading framework work well, and there have been some enhancements
in market functioning, including improved liquidity and pre- and
post-trade price transparency.''); ISDA, SwapsInfo (Sept. 30, 2019)
(finding that SEF-traded credit derivatives represented 78.4% of
total traded notional and 79.7% of trade count, and SEF-traded
interest rate derivatives represented 55.4% of total traded notional
and 60.9% of trade count).
---------------------------------------------------------------------------
Thus, to be persuaded that the Proposal would have net
liquidity-reducing effects, we will need convincing evidence. While
we remain open to all commenters' viewpoints, we currently believe
that SEF trading that starts anonymous should remain anonymous. This
belief is consistent with the Commission's past views regarding a
swap that is executed anonymously on a SEF.\19\ Demonstrating
otherwise will require more than hypothetical scenarios or anecdotal
statements.
---------------------------------------------------------------------------
\19\ Swap Data Repositories--Access to SDR Data by Market
Participants, 79 FR 16,673 (Mar. 26, 2014).
---------------------------------------------------------------------------
We look forward to reviewing comments on the Proposal and
working with all external stakeholders to address this issue in a
way that enhances SEF liquidity, ensures impartial access, and
promotes increased and fair competition.\20\
---------------------------------------------------------------------------
\20\ Our thanks to the staff of the Commission's Division of
Market Oversight (``DMO''), Office of the General Counsel, and
Office of the Chief Economist who drafted and reviewed this
proposal, particularly Aleko Stamoulis and Vince McGonagle of DMO.
---------------------------------------------------------------------------
Appendix 3--Supporting Statement of Commissioner Brian Quintenz
I will vote in favor of today's proposal to prohibit post-trade
name give-up practices for swaps that are anonymously executed on a
swap execution facility (``SEF'') and cleared (``Proposal'') in
order for the Commission to receive further comment on the
Proposal's potential market structure impact.
In November 2018, the Commission issued a request for public
comment regarding the practice of post-trade name give-up.\1\ The
overwhelming majority of comment letters to that release opposed
post-trade name give-up and requested that the Commission explicitly
prohibit the practice. The Proposal before us today was heavily
informed by those commenters' perspectives.
---------------------------------------------------------------------------
\1\ Post-Trade Name Give-up on Swap Execution Facilities, 83 FR
61571 (Nov. 30, 2018).
---------------------------------------------------------------------------
The Proposal rightly notes that for anonymously executed and
cleared trades, the need for market participants to know the
identity of their counterparties for credit risk, legal, or
operational purposes was obviated by the central clearing of swaps.
However, I have concerns about the government banning an established
trading practice that supports liquidity in the dealer-to-dealer
swaps market. Post-trade name give-up serves an important market
function in enhancing swap dealers' own risk management needs
resulting from their client exposures. The Commission should
understand how banning post-trade name give-up could impact dealers'
ability to hedge efficiently.
The Proposal assumes, without the benefit of a fulsome analysis
of CFTC swap data, that banning post-trade name give-up would
promote greater participation, liquidity, and fair competition on
SEFs. Hoping to confirm if these assumptions are correct, the
Proposal asks a series of basic questions about the differences
between SEFs that are predominantly dealer-to-client platforms
versus inter-dealer SEFs, including differences regarding liquidity
providers, types of products actively traded, and pricing. Mandating
changes to market structure in the hopes of increasing competition
and liquidity, but without a full understanding of how these changes
may implicate fundamental market dynamics, is a path that gives me
great pause.
I encourage all interested parties to provide written comments
and data wherever possible in order to further the Commission's
understanding of how banning this trading practice may positively or
negatively impact the liquidity on these two historically different
types of trading platforms and on the dealer-driven liquidity
provision of swaps trading generally. I also encourage commenters to
consider if there are alternatives to a government-imposed ban that
could achieve the same regulatory objectives.
I would like to thank staff of the Division of Market Oversight
for including several additional questions at my request designed to
solicit targeted feedback on the potential effects of this Proposal.
[FR Doc. 2019-27895 Filed 12-30-19; 8:45 am]
BILLING CODE 6351-01-P
