A Pro-Reform Reconsideration of the CFTC Swaps Trading Rules

The following post is taken from an address by CFTC Commissioner J. Christopher Giancarlo before the ABA Business Law Section, Derivatives & Futures Law Committee Winter Meeting and is dated January 23, 2015.  Commissioner Giancarlo’s address may be accessed here.

Thank you for the kind introduction.

Let me begin with the disclaimer that my remarks today reflect my own views and do not necessarily reflect the views of the Commodity Futures Trading Commission (CFTC or Commission), my fellow Commissioners or the CFTC staff.

It is an honor to speak to you today. I see so many truly distinguished members of the derivatives bar. This is an impressive gathering.

For those of you who don’t know, I play the banjo. Do you know why playing the banjo is a lot like throwing a javelin blindfolded? It is because you don’t have to be very good to get people’s attention. That probably also applies to being a CFTC Commissioner, at least in my case.

Actually, playing the banjo is probably not the most unusual qualification I have for serving on the CFTC. My most unusual qualification is probably that I may well be the most long-standing advocate of swaps market reform from either political party to serve as a CFTC Commissioner.

In fact, I was pro-reform before most people outside of this room knew the difference between a CLO and CDS or an IB and IDB.

When I first left law practice and entered the swaps industry in 2000, I was struck by the fact that swaps brokerage was a regulatorily recognized activity in most overseas trading markets, but not in the United States. I felt this omission was somewhat detrimental to the ability of U.S. swaps markets to compete against overseas markets.

In the mid-2000s, I became a supporter of central counterparty (CCP) clearing of swaps when I saw how its emergence in the energy swaps market increased trading liquidity and market participation. In 2005, I led an effort to develop a clearing facility for credit default swaps (CDS). That initiative ultimately led to the creation of IceClear Credit, the world’s leading clearer of credit derivative products.

Six years ago, I saw how the lack of regulatory transparency into swaps counterparty credit risk exacerbated the financial crisis. I remember an early morning phone call the second week in September 2008. It was from one of the principal U.S. bank prudential regulators. He was asking about widely gapping credit spreads in bank CDS protection, including Lehman Brothers. The regulator wanted to understand what was going on in trading markets. After a short conversation, the offer was made to explain the current market situation to him face-to-face. He looked in his calendar and suggested a date in mid-October. I thought “sure, but it all may be over by then.” It became clear to me then that regulators needed to have a far more transparent window into bank swap counterparty credit risk.

So, as you can see, by the time Congress began drafting the bills that would become Title VII of the Dodd-Frank Act,[1] I was already a confirmed advocate for its three key pillars of:

  • CCP clearing;
  • Enhanced swaps transparency through data reporting; and
  • Regulated swaps execution.

Upon passage of the Dodd-Frank Act in July 2010, I publicly commended the work of the President and Congress. Since that time, I have been an unwavering supporter of practical and effective implementation of these three major mandates of Title VII of the Dodd-Frank Act.

My support for these reforms is driven by my professional and commercial experience, not academic theory or political ideology. I believe that well-regulated markets are good for American business and job creation. That is why I support swaps market reform. That is why I support clearing more swaps through CCPs, reporting swap trades to trade repositories and executing swaps on regulated trading platforms.

I commend the CFTC for its generally successful implementation of CCP clearing, which was implemented in a measured, gradual fashion. I say, “well done, CFTC.”

I also continue to support successful completion of the CFTC’s data reporting mandate, which remains a work in progress.

I am, however, critical of the CFTC’s swaps trading rules. I am a critic of these rules for a number of reasons:

  • Because they inappropriately adopt a U.S.-centric futures regulatory model that supplants human discretion with overly complex and highly prescriptive rules;
  • Because they are largely incompatible with the distinct liquidity, trading and market structure characteristics of the global swaps markets;
  • Because they fragment swaps trading into numerous artificial market segments and drive global market participants away from transacting with entities subject to CFTC swaps regulation;
  • Because they exacerbate the already inherent challenge in swaps trading – adequate liquidity – and thus increase market fragility and the systemic risk that the Dodd-Frank reforms were predicated on reducing; and
  • Last, but foremost, because they do not do what Dodd-Frank expressly required them to do. They simply do not comply with the clear provisions of the law.

Congress got much of Title VII of Dodd-Frank right. Congress laid out a straightforward and flexible swaps trading regulatory framework well-suited to the episodic nature of swaps liquidity and swaps market dynamics. Unfortunately, the CFTC’s implementation of the swaps trading rules widely misses the congressional mark.

Two months ago I announced that I would be issuing a White Paper analyzing the mismatch between the CFTC’s swaps trading regulatory framework and the inherent dynamics of global swaps markets and the adverse consequences that have resulted. That White Paper will soon be available. I would like to provide you today with a preview of the White Paper.

Before I do, however, I want to emphasize that my criticism is of particular CFTC rules and policies. It is not directed at the dedicated CFTC staff, who work diligently under the direction of the CFTC Chairman and Commission. They are undoubtedly committed to implementing and overseeing a successful swaps regulatory framework.

The CFTC’s Flawed Swaps Trading Regulatory Framework

Let me now discuss a few of the key flaws in the swaps rules, starting with: Limits on Methods of Trade Execution.

CFTC rules for swap execution facilities (SEFs) create two categories of swaps transactions: Required Transactions[2] and Permitted Transactions.[3] Required Transactions must be executed in an order book (Order Book)[4] or an RFQ system in which a request for a quote is sent to three participants operating in conjunction with an Order Book (RFQ System).[5] Permitted Transactions allow for any method of execution,[6] but SEFs must also offer an Order Book for such transactions.[7]

Ladies and gentlemen, there is simply no statutory support for the CFTC’s “required” and “permitted” distinctions. There is no support for segmenting swaps into two categories or for limiting one of those categories to two methods of execution. Rather, Congress’s SEF definition encompasses a platform where multiple participants have the ability to execute swaps with multiple participants through any means of interstate commerce, including a trading facility.[8] Congress clearly provided this broad and flexible definition to allow execution methods beyond an Order Book or RFQ System for all swaps, not just some swaps. The statutory language contains a multiple-to-multiple participant trading requirement, not an all-to-all trading requirement. The CFTC Order Book obligation is, simply, unwarranted.

Congress further permitted SEFs to offer swaps trading “through any means of interstate commerce.”[9] The CFTC rules acknowledge this phrase but construe it narrowly to allow for voice and other “means” of execution or communication only within the limited Order Book and RFQ System execution methods.[10] Yet, as lawyers, we know that the phrase “interstate commerce” has a rich and well-developed constitutional history, which U.S. federal courts have interpreted to cover almost an unlimited range of commercial and technological enterprise.[11] The CFTC’s narrow construct is disingenuous and not supported by the plain language of the law and the courts’ long-established interpretation of the Commerce Clause.

Congress could have required SEFs to offer certain limited execution methods, but chose not to do so. Congress could have limited swap execution to the trading facility execution method that designated contract markets (DCMs) provide for futures contracts.[12] Congress did not do so. Congress could have preserved references to “electronic execution” included in early drafts of the Dodd-Frank Act, but decided against it in the final statutory text.[13] And, while the SEF definition includes a trading facility, Congress did not require one, nor did it limit a SEF to an Order Book or to the peculiar RFQ System definition.

Furthermore, while execution methods of DCMs are limited by DCM Core Principle 9, which requires a competitive, open, and efficient market and mechanism that protects the price discovery process of trading in the centralized market, Congress did not adopt a similar core principle for SEFs.[14] The lack of such a principle for SEFs reflects Congress’s understanding that, given swaps’ generally episodic liquidity, a broad variety of execution methods is necessary. Congress did not seek to alter swaps natural market dynamics.

Let me now address Block Transactions. The CFTC block trade definition, specifically, the “occurs away” requirement, is another example of artificial market segmentation. The CFTC defines a block trade as “a publicly reportable swap transaction that: (1) involves a swap that is listed on a registered SEF or DCM; (2) ‘occurs away’ from the registered SEF’s or DCM’s trading system or platform; and (3) has a notional or principal amount at or above the appropriate minimum block size applicable to such swap…”.[15]

The block trade definition is a holdover from the futures model.[16] In the futures market, block trades occur away from the DCM’s trading facility as an exception to the centralized market requirement given the price and liquidity risk of executing these large-sized trades.[17]

In today’s global swaps market, however, there are no “on-platform” and “off-platform” execution distinctions for certain-sized swaps trades. OTC swaps trade in very large sizes. These swaps are not constrained to trading facilities, but trade through one of a variety of execution methods as determined by the product’s liquidity. Thus, the same concern about the market impact of large-sized trades is generally not prevalent in the swaps market.

Congress recognized these differences by not imposing on SEFs an open and competitive centralized market requirement with corresponding exceptions for certain non-competitive trades as contained in DCM Core Principle 9. Rather, Congress expressly authorized delayed reporting for swap block transactions.[18] Congress got it right.

We at the CFTC have got the swaps block trade definition wrong. There is no statutory support for the “occurs away” requirement. The requirement creates an arbitrary and confusing segmentation between non-block trades “on-SEF” and block trades “off-SEF.” This is especially so given that a SEF may offer any method of execution for Permitted Transactions. The “off-SEF” requirement undermines the legislative goal of encouraging swaps trading on SEFs.[19] It needs to be changed.

Made Available to Trade. Congress included a trade execution requirement in the Commodity Exchange Act that requires SEF execution for swaps subject to the clearing mandate.[20] In a simple exception to this requirement, Congress stated that this trade execution requirement does not apply if no SEF “makes the swap available to trade.”[21]

Based on nothing other than these six words, the CFTC has created an entire regulatory mandate that is now known as the “made available to trade” or (MAT) process.[22] Yet, a plain reading of the trade execution requirement demonstrates that Congress did not intend to create such a regulatory framework around the six words. Unlike the clearing mandate in CEA section 2(h)(1), Congress provided no process for determining whether swaps must be traded on-SEF in section 2(h)(8).[23]

Congress could have instituted a regulatory mandate for the trade execution requirement as it did for the clearing mandate, but chose not to. Congress was aware that, unlike futures that begin life on an exchange where they may or may not attract liquidity, newly developed swaps products are initially traded bilaterally and only move to a platform once trading liquidity is assured. Congress’s trade execution requirement is merely conditioned by the simple logic that a clearing mandated swap must be executed on a SEF provided that the particular swap is sufficiently liquid that some SEF makes it available to trade (i.e., offers the swap for trading). This logical condition was not meant to serve as the basis for a new CFTC regulatory process. Additionally, such a process would not be necessary if SEFs could offer swaps trading through “any means of interstate commerce” as Congress authorized. The MAT process is not supportable by the text of Dodd-Frank and should be withdrawn.

I would like to now discuss Impartial Access. Dodd-Frank requires SEFs to have rules to provide market participants with impartial access to the market and to establish rules regarding any limitation on access.[24] For some reason, agency staff appear to view these provisions as requiring SEFs to serve every type of market participant in an all-to-all market structure. Given the Dodd-Frank Act’s reference to limitations on access and its flexible SEF definition, however, efforts to require SEFs to serve every type of market participant in all-to-all marketplaces are unsupportable.

There is no mandate for an all-to-all swaps market structure in the Dodd-Frank Act. Congress knew that there are separate dealer-to-client and dealer-to-dealer swaps markets, just as there are in many other mature financial markets. This structure is driven by the episodic liquidity characteristics of the underlying swaps products. If dealers cannot effectively hedge their risks from customer trades in dealer-to-dealer markets, hedging would arguably be more expensive for customers or would not be offered to the current extent. This dynamic has not changed post-Dodd-Frank and the impartial access provisions do not give the CFTC authority to re-engineer the market structure of swaps trading.

Impartial access must not be confused with open access. Impartial access, as the Commission noted in the preamble to the final SEF rules, means “fair, unbiased, and unprejudiced” access.[25] This means that a SEF should apply this standard to its participants; it does not mean that a SEF is forced to serve every type of participant in an all-to-all futures-style marketplace. Only Congress could have imposed an all-to-all trading mandate; it chose not to do so.

Void Ab Initio. CFTC staff has issued guidance that states “any [swap] trade that is executed on a SEF … and that is not accepted for clearing should be void ab initio” (i.e., invalid from the beginning).[26] The guidance also states that this result is consistent with CEA section 22(a)(4)(B), which prohibits participants in a swap from voiding a trade, but does not prohibit the Commission or a SEF from declaring a trade to be void.[27]

The CFTC’s void ab initio policy is not supported by the Dodd-Frank Act. Although CEA section 22(a)(4)(B) does not prohibit the Commission or a SEF from voiding a trade, it does not require it if a trade is rejected from clearing. This section also does not prevent a SEF from implementing rules that allow a participant to correct errors and resubmit a trade for clearing.

There are legitimate reasons, such as operational or clerical errors, that cause trades to be rejected from clearing. CFTC staff recognized some of these legitimate reasons in their expired no-action letter that allowed certain swaps trades to be resubmitted after being rejected from clearing.[28] The void ab initio policy creates a competitive disadvantage for the U.S. swaps market relative to the U.S. futures market, which does not have such a policy. Further, the void ab initio policy may well introduce additional risk into the system when a participant enters into a series of swaps to hedge its risk, but one or more swaps is declared void ab initio. In this case, the participant will not be correctly hedged, which creates additional market and execution risk.

Lastly, Core Principles. Congress provided a core-principles based framework for SEFs.[29] It based this framework on the CFTC’s historical core principles-based regulatory regime for DCMs.[30] Although the SEF core principles contain certain regulatory obligations, Dodd-Frank did not instruct the CFTC to take a prescriptive rules-based approach. In fact, the statute provides SEFs with reasonable discretion to comply with the core principles.[31] The CFTC’s highly prescriptive rules for SEFs based on futures market practices depart from congressional intent. Rather, the CFTC should draw on its long and successful experience as a principles-based regulator to implement a flexible core principles-based approach for SEFs that aligns with inherent swaps market dynamics.

Adverse Consequences of the CFTC’s Swaps Trading Regulatory Framework

I have reviewed for you some of the chief flaws in the CFTC swaps trading rules. Let me now review some of the adverse consequences for U.S. financial markets.

Foremost among the adverse consequences is the reluctance of global market participants to transact with entities subject to CFTC swaps regulation. Traditionally, users of swaps products chose to do business with global financial institutions based on factors such as quality of service, product expertise, financial resources and professional relationships. Now, those criteria are secondary to the question of the institution’s regulatory profile. Non-U.S. persons are avoiding financial firms bearing the scarlet letters of “U.S. person” in certain swaps products to steer clear of the CFTC’s problematic regulations.

This avoidance by non-U.S. person market participants of the ill-designed U.S. swaps trading rules is fragmenting global swaps markets between U.S. persons and non-U.S. persons and driving away global capital.[32] It is fostering smaller, disconnected liquidity pools and less efficient and more volatile pricing. Market fragmentation is exacerbating the inherent challenge of the swaps market – adequate liquidity.

Divided markets are more brittle, posing a risk of failure in times of economic stress or crisis. Fragmentation increases firms’ operational risks as they structure themselves to avoid U.S. rules and now must manage multiple liquidity pools in different jurisdictions. Fragmentation also increases trading firms’ operational and structural complexity and reduces their efficiency in the markets. In short, market fragmentation caused by the CFTC’s ill-designed trading rules – and the application of those rules abroad – is harming liquidity and increasing the systemic risk that the Dodd-Frank Act was predicated on reducing.

In addition to global market fragmentation, the CFTC’s unwarranted slicing and dicing of swaps trading into a series of novel regulatory categories, such as Required Transactions and Permitted Transactions and block transactions “off-SEF” and non-blocks “on-SEF,” each with their corresponding execution methods, has fragmented domestic swaps trading into an artificial series of smaller and smaller pools of trading liquidity increasing market inefficiencies. So long as such disparate segments remain, U.S. swaps markets face a self-imposed liquidity challenge compared to non-U.S. markets.

The CFTC’s swaps trading regime is also threatening the survival of many SEFs. The CFTC’s prescriptive and burdensome rules have ensured that operating a SEF is an expensive, legally intensive activity.[33] It may drive consolidation in the industry providing trading counterparties with less choice of where and how to execute swaps transactions.

Further, the swaps trading rules are hindering technological innovation. In 1899, U.S. Patent Commissioner Charles H. Duell is said to have pronounced that “everything that can be invented has been invented.”[34] Not to be outdone, the CFTC’s SEF rules pre-suppose that order book and RFQ methodologies are today and will always remain the only suitable technological means for U.S. swaps execution. These restrictive SEF rules close U.S. swaps markets to promising technological development while the rest of the world proceeds ahead in financial market innovation.

The swaps rules also appear to contain an unstated bias against human discretion in swaps execution. The bias is seen in a range of CFTC positions, such as:

  • Allowing only two specific types of execution methods for Required Transactions;[35]
  • Requiring an RFQ System to operate in conjunction with an Order Book;[36]
  • Requiring an RFQ to be sent to three market participants;[37]
  • Placing various conditions around basis risk mitigation services;[38] and
  • Showing aversion to Dutch Auction systems that utilize professional discretion in setting auction prices.[39]

Yet, there is no legal support in Title VII of Dodd-Frank for restricting human discretion in swaps execution.

In an odd twist, the CFTC’s insistence upon RFQ systems and centralized, order driven markets to execute swaps transactions has the potential to open U.S. swaps markets to algorithmic and high-frequency trading (HF) that are not currently a factor in swaps markets. It is unclear how those who support the CFTC’s impetus for electronic central limit order book (CLOB) execution of swaps, yet decry HFT in today’s equities and futures markets, will reconcile these views when the enormous but humanly-managed swaps markets are launched into unmanned hyperspace by HFT algorithmic trading technologies.

For these reasons and more that I will set out in the White Paper, I am of the firm view that CFTC swaps trading rules do not accord with congressional intent and increase rather than decrease the systemic risk that the Dodd-Frank Act was premised on reducing.

Alternative Swaps Trading Regulatory Framework

I propose an alternative swaps trading regulatory framework that is pro-reform and fully aligned with the express statutory framework of Title VII of the Dodd-Frank Act. My proposed swaps regulatory framework is built upon five key tenets: comprehensiveness, cohesiveness, flexibility, professionalism and transparency.

The first tenet is to subject a comprehensive range of U.S. swaps trading activity to CFTC oversight. In this respect, I acknowledge the CFTC’s broad SEF requirement for registration of “facilities that meet the SEF definition in CEA section 1a(50).”[40] My approach supports that comprehensive requirement, but insists that the scope of regulatory coverage be fully set forth in clear and definitive rule text and not buried in footnotes, staff advisories or no-action letters.

The second tenet is regulatory cohesiveness. My approach would remove the CFTC’s artificial slicing and dicing of swaps markets. It would do away with the categories of Required Transactions and their limited execution methods and Permitted Transactions and their broader execution methods. It would do away with block transactions taking place “off-SEF” and non-blocks “on-SEF.” There is no statutory support for such segmentation. Instead, all CFTC-regulated swaps trading should fall within the same, cohesive and undivided regulatory framework.

The third tenet of my alternative framework is flexibility. The CFTC must adhere to Dodd-Frank’s express prescription for flexibility in swaps trading.[41] That means that swaps market participants must be allowed to choose from the broadest possible array of methods of swaps execution that comply with the statutory SEF definition. Those include:

  • Electronic CLOBs;
  • Simple order books;
  • RFQ systems;
  • Electronic Dutch Auctions;
  • Hybrid electronic and voice execution methods;
  • Full voice-based execution methods; and
  • Work-up.

It also includes any other “means of interstate commerce” that may today or someday in the future satisfy customer swaps trading and liquidity requirements.

Markets, not regulators, must determine the various means of interstate commerce utilized in the swaps market. That is clearly what Congress intended.

My proposal would further do away with the CFTC’s unworkable MAT process that is not authorized by Dodd-Frank. Yet, eliminating the MAT process will only work if SEFs are allowed to offer swaps execution through “any means of interstate commerce.” My proposal would also give a plain reading to the requirement for impartial access that does not confuse it with open access. Dodd-Frank did not call into being any particular swaps market structure, such as existing separate dealer-to-dealer and dealer-to-customer markets or combined all-to-all markets. Therefore, regulators must leave participants in the marketplace to determine the optimal market structure based on their swaps trading needs and objectives.

My approach would also better accommodate established and beneficial swaps market practices. It would allow SEFs to implement clear, workable error trade policies to address the situation where an executed swaps transaction is rejected from clearing. It would end the void ab initio policy that is not statutorily sound. The proposal would further treat the SEF core principles as true principles as Congress intended and not as rigid rule sets.

The fourth tenet of my alternative framework is to enhance professionalism in the swaps market by setting standards of conduct for swaps market personnel. This is consistent with the current approach of advanced overseas regulators such as the UK’s Financial Conduct Authority that look to supervise professional behavior in overseas financial markets. Rather than implementing highly prescriptive swaps trading rules here in the U.S. that limit intermediaries’ discretion through certain, ill-suited execution methods, my approach is to establish standards that would enhance the knowledge, professionalism and ethics of personnel in the U.S. swaps markets who exercise discretion in facilitating swaps execution, as well as certain supporting compliance and operations personnel. My White Paper will lay out a practical and proven approach to enhancing professional standards in the execution of swaps transactions.

Yet, enhancing the professionalism of swaps brokers only serves a purpose if personnel are allowed to exercise discretion in flexible methods of swaps execution as Congress intended. It is pointless otherwise.

The last tenet of my alternative framework focuses on promoting swaps trading and market liquidity as a prerequisite to increased transparency. To date, pre-trade price transparency has been greatly emphasized to the detriment of liquidity in the swaps trading rules. That was not how Congress balanced the goals of SEF trading. The right way to promote price transparency is through a proportioned focus on promoting swaps trading and market transparency as Congress intended. Instead of taking a prescriptive approach to swaps execution that drives away participants, my framework would allow the market to innovate and provide execution through “any means of interstate commerce.” That way, participants could choose the execution method that meets their needs based upon a swap’s liquidity characteristics, which in turn, promotes trading on SEFs and liquidity. In other words, promoting swaps trading and market liquidity will lead to enhanced price transparency; stifling trading liquidity will degrade it.

Conclusion

In drawing to a close, let me say that I believe that many of the adverse consequences of the CFTC’s swaps rules could be reversed if the rules were redesigned in a much simpler and effective manner and if the rules were in accord with the clear spirit of Title VII of the Dodd-Frank Act.

I propose an alternative, pro-reform approach to regulating swaps trading. It encompasses a comprehensive, yet flexible regulatory framework that is true to congressional intent and aligns with swaps market dynamics. The framework is built upon five broad tenets: comprehensiveness, cohesiveness, flexibility, professionalism and transparency.

A smarter and more flexible swaps regulatory approach would eschew the artificial slicing and dicing of U.S. trading liquidity and unwarranted restrictions on means of execution that are unsupported by the law.

Rather, it would enable the U.S. to take the global lead in measured and smart regulation of swaps trading. It would allow American businesses to more efficiently hedge commercial risks, promoting economic growth. It would stimulate the American economy and job creation. For decades the CFTC has been a competent and effective regulator of U.S. exchange-traded derivatives. The opportunity is at hand to continue that excellence in regulating swaps markets. It is time to seize that opportunity.

Thank you very much for your time.

I will be happy to take a few questions.

[1] Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

[2] 17 C.F.R. 37.9(a)(1).

[3] 17 C.F.R. 37.9(c)(1).

[4] 17 C.F.R. 37.3(a)(2), 37.3(a)(3), and 37.9(a)(2).

[5] 17 C.F.R. 37.9(a)(2) and 37.9(a)(3).

[6] 17 C.F.R. 37.9(c)(2).

[7] 17 C.F.R. 37.3(a)(2); Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33,476, 33,504 (Jun. 4, 2013) (SEF Rule).

[8] CEA section 1a(50); 7 U.S.C. 1a(50).

[9] Id.

[10] 17 C.F.R. 37.9(a)(2)(ii); SEF Rule at 33,501-502. The Commission states that “in providing either one of the execution methods for Required Transactions in § 37.9(a)(2)(i)(A) or (B) of this final rulemaking (i.e., Order Book or RFQ System that operates in conjunction with an Order Book), a SEF may for purposes of execution and communication use ‘any means of interstate commerce,’ including, but not limited to, the mail, internet, email, and telephone, provided that the chosen execution method satisfies the requirements provided in § 37.3(a)(3) for Order Books or in § 37.9(a)(3) for Request for Quote Systems.” SEF Rule at 33,501.

[11] See, e.g., Gonzales v. Raich, 545 U.S. 1, 17 (2005); Katzenbach v. McClung, 379 U.S. 294, 302 (1964); Wickard v. Filburn, 317 U.S. 111, 125 (1942).

[12] CEA section 1a(51); 7 U.S.C. 1a(51).

[13] Compare S. 3217, 111th Cong. § 720 (as reported by S. Comm. on Banking, Housing, and Urban Affairs, Apr. 15, 2010) (defining a SEF as “an electronic trading system” and discussing electronic execution of trades), with 7 U.S.C. 1a(50) (defining a SEF as “a trading system or platform” without reference to electronic execution).

[14] 17 C.F.R. 38.500.

[15] 17 C.F.R. 43.2.

[16] See Alternative Executive, or Block Trading, Procedures for the Futures Industry, 64 FR 31195 (Jun. 10, 1999); Chicago Board of Trade’s Proposal To Adopt Block Trading Procedures, 65 FR 58051 (Sep. 27, 2000).

[17] 17 C.F.R. 38.500; Execution of Transactions: Regulation 1.38 and Guidance on Core Principle 9, 73 FR 54097, 54099 (proposed Sep. 18, 2008).

[18] CEA section 2(a)(13)(E); 7 U.S.C. 2(a)(13)(E).

[19] CEA section 5h(e); 7 U.S.C. 7b-3(e).

[20] CEA section 2(h)(8); 7 U.S.C. 2(h)(8).

[21] Id.

[22] CEA section 2(h)(8); 7 U.S.C. 2(h)(8); 17 C.F.R. 37.10, 37.12, 38.11 and 38.12; Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act, 78 FR 33,606 (Jun. 4, 2013).

[23] Compare CEA section 2(h)(1), 2(h)(2) and 2(h)(3); 7 U.S.C. 2(h)(1), 2(h)(2) and 2(h)(3), with CEA section 2(h)(8); 7 U.S.C. 2(h)(8).

[24] CEA section 5h(f)(2); 7 U.S.C. 7b-3(f)(2).

[25] SEF Rule at 33,508.

[26] Staff Guidance on Swaps Straight-Through-Processing (Sep. 26, 2013), available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/stpguidance.pdf.

[27] Id.

[28] CFTC Letter No. 13-66, Time-Limited No-Action Relief for Swap Execution Facilities from Compliance with Certain Requirements of Commission Regulation 37.9(a)(2) and 37.203(a) (Oct. 25, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-66.pdf.

[29] CEA section 5h(f); 7 U.S.C. 7b-3(f).

[30] CEA section 5(d); 7 U.S.C. 7(d) (2009); 17 C.F.R. part 38 (2009).

[31] CEA section 5h(f)(1)(B); 7 U.S.C. 7b-3(f)(1)(B).

[32] See Audrey Costabile Blater, Revisiting Cross-Border Fragmentation of Global OTC Derivatives: Mid-year 2014 Update, ISDA Research Note (Jul. 24, 2014), available at http://www2.isda.org/functional-areas/research/research-notes/. See also Amir Khwaja, A Review of 2014 US Swap Volumes and SEF Market Share, TABB Forum (Jan. 16, 2015), available at http://tabbforum.com/opinions/a-review-of-2014-us-swap-volumes-and-sef-market-share.

[33] Catherine Contiguglia, Sef Boss Spends His Days ‘Worrying About Costs,’ Risk.net, Sep. 24, 2014, available at http://www.risk.net/risk-magazine/news/2371788/sef-boss-spends-his-days-worrying-about-costs.

[34] Charles Holland Duell, Wikipedia, available at http://en.wikipedia.org/wiki/Charles_Holland_Duell. The statement has been debunked as apocryphal.

[35] 17 C.F.R. 37.9(a)(2).

[36] Id. and 17. C.F.R. 37.9(a)(3).

[37] 17 C.F.R. 37.9(a)(3).

[38] See CFTC Letter No. 13-81, Time-Limited No-Action Relief from Required Transaction Execution Methods for Transactions that Result from Basis Risk Mitigation Services (Dec. 23, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-81.pdf.

[39] Apparently, an objection of the CFTC staff for Dutch Auction swap execution is that brokers have discretion in finding price points at which to commence an auction.

[40] 17 C.F.R. 37.3(a)(1); SEF Rule at 33,481-483.

[41] CEA section 1a(50); 7 U.S.C. 1a(50).