The 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.
In November of 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 a SEF. 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 of 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. The prohibition would have banned disclosures both directly or indirectly by a 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 was also more broadly intended to:
- advance statutory objectives to promote swap trading on SEFs and fair competition among market participants;
- further objectives underlying the prohibition against swap data repositories disclosing the identity of a counterparty to a swap that is anonymously executed and cleared in accordance with the Commission’s straight-through processing requirements; and
- promote impartial access on SEFs.
The CFTC received comments on the proposed rule from a broad spectrum of market participants and consulted other regulators on the proposal.
The CFTC is adopting 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 a 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 a SEF for execution and clearing.
Specifically, the new Rule 37.9(d):
- prohibits SEFs from directly or indirectly (including through a third-party service provider) disclosing the identity of a counterparty to any such swap;
- requires SEFs to establish and enforce rules prohibiting a person from directly or indirectly (including through a third-party service provider) disclosing the identity of a counterparty to any such swap; and
- incorporates an exception for package transactions that include a component transaction that is not a swap intended to be cleared. This would include components that are swaps not intended to be cleared as well as components that are not swaps (including related securities or other transactions).
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 behavior. 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 commenters 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 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 may 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 maximize 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.
Information Privacy and Prohibition Against Post-Trade Name Give-Up at an SDR
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 a 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 the Rule
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 a 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 a SEF for execution and clearing.
The CFTC provided an exception for so-called “package transactions” that 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 recognized that uncleared components of swap transactions may result in ongoing bilateral credit, operational and/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. The Commission said that it will monitor the development of these markets, however, 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 Commission 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 a SEF can intermediate communication if necessary or otherwise facilitate communication without disclosing identities.
The rule will be effective as of September 22, 2020. The CFTC is adopting a phased compliance schedule for its implementation, such that swaps subject to the trade execution requirement must be compliant by November 1, 2020, and swaps not subject to the trade execution requirement must be compliant by July 5, 2021. It is expected that some SEFs, and other market participants, will need to modify their trading practices and systems to eliminate 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.