The Commodity Futures Trading Commission has published a Notice of Proposed Rulemaking seeking public comments on proposed amendments to remove the order book requirement for permitted swap transactions. According to the CFTC's latest regulatory notice, the proposal would amend Regulation 37.3(a)(2), which sets minimum trading functions that swap execution facilities must provide. Under the new framework, swap execution facilities (SEFs) would no longer have to offer order books for permitted transactions, though platforms could maintain the service when customers request it. As reported by the commission, the proposal continues the agency's commitment to prescribing the minimum effective dose of regulation for market participants.
The CFTC's proposal stems from limited market usage of permitted-transaction order books despite their availability. As reported by the commission, market participants have rarely chosen order books when trading permitted transactions, even though the facilities remain available for all swaps listed on SEF platforms. The current rules require every registered SEF to maintain an order book for all swaps listed on the platform, including products that traders may execute through other methods. The commission noted that this mandate may require platforms to maintain infrastructure that does not match customer trading practices, with order books for permitted transactions being used even less frequently than those for required transactions.
The proposal separates two classes of swap trades with distinct regulatory requirements. Permitted transactions are swaps that are not subject to the trade execution requirement under Section 2(h)(8) of the Commodity Exchange Act, allowing SEFs to offer any execution method for the products. Required transactions fall under separate rules, requiring participants to execute the affected swaps through an order book or request-for-quote system that meets CFTC requirements. The Aug. 20 proposal applies only to the minimum order book function and would not remove the order book framework for required transactions.
The proposal would allow SEFs to allocate staff, technology, and operating resources among execution systems used on their platforms, giving venues flexibility to support trading methods that better fit particular swaps. According to the CFTC, comments will be accepted for 30 days following publication in the Federal Register. The commission has not adopted a final rule, and no immediate compliance change follows from the notice. The proposal must first be published in the Federal Register, which will start the public comment period during which interested parties can address the planned amendment, its costs, potential benefits, and possible effects on SEF trading.
This SEF proposal follows another regulatory package released on Aug. 18, which would create registration relief for some SEC-registered investment advisers and double the small-pool exemption threshold from $400,000 to $800,000. As reported by the CFTC, the commission's Chair Michael Selig stated that removing what he called "excessive requirements" would keep the commission aligned with its principles-based approach to derivatives regulation. The proposals are part of Selig's stated effort to remove requirements the agency considers duplicative or poorly matched to current market activity, with the proposed elimination potentially helping to spur further development and innovation in execution methods better suited to trading products.
