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06 October 2020
The Commodity Futures Trading Commission (CFTC) has adopted a final rule to prohibit the controversial practice of post-trade name give-up for swaps that are executed anonymously through a swap execution facility (SEF) and are intended to be cleared. Although the CFTC rejected requests for various exceptions to the prohibition, it did include an exception for package transactions which include a component transaction that is not a swap intended to be cleared.(1)
In November 2018, in the wake of complaints from some market participants, the CFTC requested comments on the practice of post-trade name give-up on SEFs. The CFTC noted that certain SEFs directly or indirectly disclose swap counterparty identities to the parties after matching trades anonymously and questioned the need for this practice with respect to cleared swaps that are anonymously executed on an SEF.(2) The commission received 13 comment letters in response to the request for comment, with most of them opposing the practice, citing concerns that disclosure could harm competition and liquidity and inappropriately disclose confidential trading information, among other issues. Others, including some swap dealers, supported allowing the practice to continue, expressing a concern that a prohibition would harm liquidity and interfere with dealers' ability to price liquidity and assess how liquidity and underlying capital are allocated to clients over time.
In December 2019 the CFTC issued a proposed rule to prohibit post-trade name give-up for swaps that are both anonymously executed and intended to be cleared.(3) The prohibition would have banned disclosures both directly or indirectly by an SEF, including through a third party, and required SEFs to adopt and enforce their own rules regarding the prohibition of these disclosures. The CFTC noted that the proposal more broadly aimed to:
The CFTC received comments on the proposed rule from a broad spectrum of market participants and consulted other regulators on the proposal.
The CFTC will adopt a new Rule 37.9(d) to prohibit post-trade name give-up for swaps that are anonymously executed on or pursuant to the rules of an SEF and are intended to be cleared. The prohibition also extends to swaps that are pre-arranged or pre-negotiated anonymously, including through a broker, and then submitted to an SEF for execution and clearing.
Specifically, the new Rule 37.9(d):
The CFTC offered a number of justifications for adopting the prohibition.
Promoting trading on SEFs and pre-trade price transparency
The CFTC stated that it believes that the prohibition of post-trade name give-up will promote trading on SEFs. The CFTC has heard from some market participants that they are eager to trade fully anonymously on SEFs and that the practice of post-trade name give-up has deterred a significant segment of market participants from making markets on or otherwise participating in affected SEFs. Accordingly, the CFTC expects that once this practice is prohibited, pre-trade price transparency will benefit from increased market participation. It also believes that post-trade anonymity will level the playing field for market participants of various types and sizes to trade and compete on SEFs without exposing confidential swap transaction information.
Promoting fair competition among market participants
The CFTC noted that many commenters were concerned about information leakage on SEFs contributing to anticompetitive behaviour. With the prohibition of post-trade name give-up, the CFTC expects that greater participation in SEFs will advance the goal of promoting competition in these markets.
While some commentators insisted that banning post-trade name give-up would reduce innovation and competition among markets, the CFTC disagreed, noting that the prohibition will apply to all SEFs equally and should not prevent SEFs from offering existing or new execution methods.
Providing market participants with impartial access to the market
Similarly, the CFTC viewed the prohibition as consistent with the requirements under the Commodity Exchange Act (CEA) for SEFs to provide impartial access to their markets.
The commission found that post-trade name give-up may discriminate against certain market participants and deter participants from trading on SEFs that employ the practice. It further found that the practice has been used to discriminate between market participants to maximise trading with one type of market participant and avoid trading with others, and that it undermines the policy goals of enabling market participants to compete on a level playing field and permitting additional liquidity providers to participate in SEFs.(5)
Information privacy and prohibition against post-trade name give-up at a swap data repository
The CFTC also noted that the prohibition is consistent with CFTC Regulation 49.17(f), which prohibits a swap data repository from disclosing the identity of a swap party or its clearing member to its counterparty for swaps executed anonymously on an SEF and cleared in accordance with the CFTC's straight-through processing requirements. The commission believes that post-trade name give-up undercuts the intent of this regulation and may be inconsistent with congressional intent more generally to protect the privacy of trading information, including trader identities.
Scope of swaps covered
All swaps anonymously executed and intended to be cleared will be subject to new CFTC Regulation 37.9(d). The rule applies whether or not a transaction is subject to mandatory clearing under the CEA, so long as it is intended to be cleared. (As noted below, the compliance deadline for voluntarily cleared swaps is set to a later date.) The commission also clarified that 'intended to be cleared' means intended to be submitted for clearing contemporaneously with execution. The rule does not apply to transactions on an SEF that are not intended to be cleared or that are executed using a non-anonymous manner of execution.
Trades pre-arranged or pre-negotiated by a broker
In response to comments, the commission is clarifying that the prohibition on post-trade name give-up applies to swaps that are anonymously pre-arranged or pre-negotiated, including by a third-party broker or SEF participant, and submitted to an SEF for execution and clearing.
The CFTC provided an exception for so-called 'package transactions' which include a component that is an uncleared swap or a transaction other than a swap. ('Package transactions' are defined as transactions with two or more components, where execution of each component is contingent on execution of the others and the package is priced or quoted together as one economic transaction with simultaneous or near-simultaneous execution of all components.) The CFTC recognised that uncleared components of swap transactions may result in ongoing bilateral credit, operational or legal exposures requiring counterparties to know each other's identities. As such, the commission provided a limited exception to the prohibition on post-trade name give-up. However, the commission stated that it will monitor the development of these markets and encouraged SEFs and market participants to take steps to reduce the need for the exception. The commission also noted that the exception is intended to accommodate existing trading and settlement workflows and not intended to invite the structuring of new package transactions that would evade the prohibition on post-trade name give-up.
Workups and error trades
The CFTC declined to provide exemptions for so-called 'workup' arrangements and error trades on the basis that post-trade name give-up is not necessary to effectuate such arrangements. In the case of error trades in particular, the commission noted that an SEF can intermediate communication if necessary or otherwise facilitate communication without disclosing identities.
The rule will be effective as of 22 September 2020. The CFTC is adopting a phased compliance schedule for its implementation, such that swaps subject to the trade execution requirement must comply by 1 November 2020 and swaps not subject to the trade execution requirement must comply by 5 July 2021. It is expected that some SEFs, and other market participants, will need to modify their trading practices and systems to eliminate the use of post-trade name give-up. Market participants are also expected to closely monitor the effects of the new prohibition on liquidity and other trading conditions on SEFs, as well as competition among SEFs.
For further information on this topic please contact Donna M Parisi, Geoffrey B Goldman, Azam H Aziz or Jennifer Oosterbaan at Shearman & Sterling LLP by telephone (+1 212 848 4000) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Shearman & Sterling LLP website can be accessed at www.shearman.com.
(1) CFTC,"CFTC Approves Two Final Rules and Two Proposed Rules at June 25 Open Meeting," Release Number 8188-20 (25 June 2020).
(2) Post-Trade Name Give-Up on Swap Execution Facilities Request for Comment," 83 FR 61571 (30 November 2018).
(3) "Proposed Rule: Post-Trade Name Give-Up on Swap Execution Facilities," 84 FR 72262 (31 December 2019). See CFTC Approves Proposed Rule on Post-Trade Name Give-Up on Swap Execution Facilities.
(4) Final Rule: Post-Trade Name Give-Up on Swap Execution Facilities" 85 FR 44693 (7 July 2020).
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