ISDA appreciates the opportunity to submit these comments on the proposed revisions to the regulations of swap execution facilities (SEFs) and the trade execution requirement published by the US Commodity Futures Trading Commission (CFTC) on November 30, 2018.

We commend the Commission’s efforts to further improve swaps trading on SEFs. We agree with the Commission that certain amendments are needed to better reflect the intent and goals of Congress, reverse certain negative market consequences that have resulted from the current regulations, and provide market participants with a choice in terms of the manner of trade execution that best suits their business needs. We believe that refining specific areas of existing swaps trading regulations and practices will foster innovation and the efficient operations of derivatives markets. The net result will be improved competition, liquidity, and transparency.

We strongly support the Commission’s decision to revise existing trading protocols to better reflect the unique nature of the swaps market and to accommodate a diverse range of swaps contracts. We also support the Commission’s proposal to offer permanent solutions to longstanding compliance challenges associated with certain trade execution practices that are currently subject to Staff no-action relief. In addition, we agree with the Commission’s proposed changes to allow for more flexibility in the regulatory oversight of SEFs in order to reduce unnecessary and costly compliance burdens.

Notwithstanding the foregoing, we are concerned with three key aspects of the Proposal, which are explained in more detail below:

• Off-SEF Pre-Execution Communications. We strongly disagree with the Proposal’s approach to eliminate off-SEF pre-execution communications for swaps subject to the trade execution requirement. We believe that other aspects of the Proposal achieve the goal of encouraging more trading on-SEF, and the elimination of off-SEF pre-execution communications will decrease trading efficiency.
• Trade Execution Requirement. While the changes to the trade execution requirement may improve trading liquidity, such expansion should be done in a measured fashion (specifically where the liquidity, maturity, or technological readiness of a market will not support such an expansion and with due consideration of cross-border impacts). The Proposal should also take into account input from market participants and provide an opportunity for exemptions where necessary.
• Block Trade Transactions. We disagree with the Proposal’s prohibition on off- SEF pre-execution communications and pre-arranged trading for block transactions. The proposed approach is a major shift from the current regulatory treatment of these transactions (and longstanding market practices), which will result in market participants receiving less competitive pricing without commensurate regulatory benefit.

We also provide recommendations with respect to the proposed changes to certain trading protocols, including confirmation requirements for both cleared and non-cleared swaps, error trade policies, straight through processing requirements, and trade monitoring requirements. We have organized our comments based on the aspects of the Proposal that are of particular interest to our membership.

Click on the PDF below to read the full comment letter.