Enhancing Competition, Transparency, and Resiliency in U.S. ...

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Policy Recommendations for the U.S. Securities and Exchange Commission

Citadel Securities has a strong interest in the efficiency and stability of U.S. financial markets. U.S. capital markets generally work better today for investors than ever before, and we are proud to consistently advocate for measures designed to enhance competition, transparency and resiliency.1

As the Securities and Exchange Commission reviews financial market regulations, we believe that the preeminent global position of the U.S. capital markets can, and should, be further strengthened. In this white paper, we provide specific policy recommendations to increase competition, transparency, and resiliency in the following important markets: ● Equities, ● U.S. Treasuries, and ● OTC Derivatives.

Across these diverse asset classes, our recommendations are consistently intended to:

1. Increase trading on open, competitive and transparent trading venues; 2. Enhance market competition and reduce trading costs for investors; and 3. Ensure that both market participants and regulators have access to timely and comprehensive post-trade transaction data.

MAY 2021

1 See https://www.citadelsecurities.com/public-policy/.

Enhancing Competition, Transparency, and Resiliency in U.S. Financial Markets

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Summary of Policy RecommendationsI. EQUITIES

A. Competition1. Increase on-exchange trading and drive better prices by reducing the minimum tick size to a half-penny where appropriate.2. Increase on-exchange trading and lower trading costs by reducing the current access fee cap by 50% where appropriate.3. Levelthecompetitiveplayingfieldbyexpandingfair access and public display requirements for dark pools.

B. Transparency4. EnsureeffectivetransparencyofPFOFarrangements by comprehensively reviewing the 606 reports being published pursuant to the recently updated rules. 5. ModernizeRule605toprovidemorerefinedand detailed price improvement statistics by adopting the recommendationsoftheFinancialInformation Forum,includingtakingordersizeintoaccount.

C. Resiliency6. Unlockcapitalandoperationalefficienciesby endorsingandoverseeingindustryeffortstomoveto T+1 settlement.7. Deliver greater transparency and predictability tomarketparticipantsregardingCCPmargin requirements.

II. U.S. TREASURIES

A. Transparency1. Delivergreatertransparency,fairness,andcompetitionby implementing real-time public reporting.2. SupporteffortstoincreasethequalityandtimelinessofU.S. Treasury market data reported to regulators. 3. Collect data on uncleared bilateral repos.

B. Resiliency4. Increasemarketresiliencyandefficiencybytransitioningmore trading activity in both secondary cash market transactions and bilateral U.S. Treasury repos to central clearing. 5. Ensure appropriate oversight of multilateral trading venues byfinalizingtheRegulationATSproposalandincluding multilateralRFQvenuesinscope.

III. OTC DERIVATIVES

A. Competition1. Delivergreatertransparency,fairness,andcompetitionby finalizingtheSB-SEFrules,includingimpartialaccessforall market participants and prohibiting post-trade name give-up.

B. Transparency2. Increase transparency by setting block trade thresholds and eliminating the 24 hour public reporting delay.

C. Resiliency3. Implement straight-through-processing rules that are consistentwithCFTCandEUstandards.4. Adoptaclearingrequirementforsingle-nameCDS.5. Eliminate the exemption from initial margin requirements for uncleared interdealer transactions.6. Ensureappropriateoversightoveroffshoretransactionswith asufficientnexustotheU.S.withrespecttopublicreporting, clearing,andtradingrequirements.

IV. RESEARCH UNBUNDLING

Increasemarkettransparency,fairness,andcompetitionbyexplicitly allowing broker-dealers to unbundle research and execution fees for all clients.

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I. Equities 4 A. Competition 4 1. Tightening Tick Sizes on Exchanges 4 2. Reducing the Access Fee Cap 5 3. Updating Regulation ATS 5 B. Transparency 6 1. PFOF and Price Improvement 6 C. Resiliency 8 1. Moving to T+1 Settlement 8 2. Predictable and Transparent CCP Margin Requirements 8

II. U.S. Treasuries 9 A. Transparency 9 1. Implementing Real-time Public Reporting 9 2. Supporting the Recent FINRA and Federal Reserve Board Proposals to Enhance Regulatory Reporting 11 3. Collecting Data on Uncleared Bilateral Repurchase Agreements 11 B. Resiliency 12 1. Expanding Central Clearing of U.S. Treasury Transactions and Repos 12 2. Regulating Multilateral Trading Venues 13

III. OTC Derivatives 14 A. Competition 14 1. Introducing Multilateral and Competitive Trading Venues 14 B. Transparency 15 1. Implementing Real-time Public Reporting 15 C. Resiliency 17 1. Facilitating Central Clearing 17 2. Reconsidering the Interdealer Exemption From Uncleared Initial Margin Rules 18 3. Preventing Cross-Border Evasion 19

IV. Research Unbundling 20

V. Conclusion 20

Table of Contents

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1 Itisinterestingtonotethatoff-exchangetradinghashoveredaround40%oftotalnotionaltraded.Marketsharestatisticsbasedonlyonsharestradedcanbemisleading given retail trading activity in lower-priced stocks.

I. Equities RegulationNMS,andadvancesintechnology,havehelped to unleash an enormous degree of competition among market centers. This competition and innovation has markedlyimprovedconditionsforallinvestors,whobenefitfrom dramatically lower trading costs and increased market transparency.Nonetheless,furthermeasurescanbetakentosupporton-exchangetrading,enhancetransparencyaroundexecutionquality,andincreasemarketresiliency.

A. COMPETITION

Competitionfororderflowisfierce,withsixteenexchanges and numerous alternative trading systems (“ATSs”or“darkpools”)andindividualmarketmakersvyingto provide the best execution quality to retail investors. This competitivemarketstructurehasenormouslybenefitedretail investors – not only do they frequently get better prices thanthosepubliclyquotedon-exchange,buttheyoftengettheirordersfilledatsuchpricesformoresizethanispubliclydisplayed.However,continuedgrowthinretailtrading1 makes it timely for the Commission to review the current regulatory framework to ensure that exchanges are not operating at a competitive disadvantage. The transparency provided by on-exchange trading is a hallmark of U.S. equities markets,enhancinginvestorconfidenceandprovidinganobjective standard against which investors can measure execution quality and hold their broker-dealers accountable.

1. Tightening Tick Sizes on Exchanges

UnderRegulationNMS,exchangesarenotpermittedto have a tick size of less than one penny. This regulatorily-mandated tick size impedes the ability of exchanges to competefororderflowinsymbolsthatarehighlyliquidandcommonlytradeinsideabid-offerspreadofapenny.Webelievethis“constrained”ticksizedirectlyleadstocomplexitiesandinefficiencies–suchasdrivingorderflowintoalternativevenues,complexexchangepricingstructures,andincreasedoverallmarketfragmentation.Therefore,werecommend that the Commission reduce the minimum tick size to a half-penny for symbols trading above $1.00 per share that are tick constrained (i.e. have a penny spread the overwhelmingmajorityofthetime).

Permittingahalf-pennyticksizeforthesehighlyliquidsymbols will allow exchanges to display more aggressive pricing,withoutmovingtofullsub-pennyquoting,whichcould raise other concerns. This change will improve on-exchange execution quality and increase the overall competitiveness of exchanges.

EQUITIES RECOMMENDATION #1: The Commission should reduce the minimum tick size to a half-penny for symbols trading above $1.00 per share that are tick constrained (i.e. haveapennyspreadtheoverwhelmingmajorityofthetime)

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2. Reducing the Access Fee Cap

To the extent the Commission reduces the minimum ticksizeforcertainsymbols,theaccessfeecapshouldbecommensuratelyreducedtoreflectthereductioninbid-offerspreads. Regulation NMS establishes a maximum access fee of30centsper100shares,alongsidethecurrentminimumtick-sizeregimeofapenny,andexchangesarepermittedtoshare these access fees with liquidity providers in the form of exchangerebates.Ameaningfulreductioninthemaximumaccessfeewouldmateriallyreduceexchangerebates,while still acknowledging that exchange rebates reward and encouragedisplayedliquidity,whichgreatlybenefitsthepricediscovery process. We recommend that the current access fee cap be reduced by 50% to 15 cents per 100 shares for symbols captured by our previous recommendation to reduce the minimumticksizetoahalf-penny.Thiswouldeffectareduction in access fees that is proportionate to the tick sizereductionrecommendedforthesesymbols,therebyreducing trading costs and increasing the competitiveness of on-exchange trading.

EQUITIES RECOMMENDATION #2: The Commission should reduce the current access fee cap by 50% to 15 cents per 100 shares for symbols trading above $1.00 per share that are tick constrained (i.e. have a penny spread the overwhelming majorityofthetime).

3. Updating Regulation ATS

ExchangesdirectlycompetefororderflowwithdarkpoolsthatareregisteredasATSs.WhenadoptingRegulationATS,theCommissionnotedthatitwasinthepublicinterestto ensure fair competition “between exchange markets and marketsotherthanexchangemarkets.”2 In the more than twentyyearssinceRegulationATSwasadopted,darkpoolshaveincreasedinsignificanceandhavebecomeanintegralpartofU.S.equitymarkets.TherecentadoptionofATS-Nbrought increased transparency to the operation of these venues. It is therefore appropriate for the Commission to now re-examineRegulationATSwithaviewtoensuringthatdarkpools do not have inappropriate competitive advantages over exchangeswhencompetingfororderflow.

Forexample,ATSsareonlysubjecttofairaccessand public display requirements if certain volume-based thresholdsaremet.Inpractice,ATSsrigorouslymanagetothese thresholds in order to ensure that they remain exempt. Asaresult,ATSquotesarenotincludedinpublicquotedataandATSsoftendiscriminateamongmarketparticipantswithrespecttoaccess,functionality,orderinteractionandfees.Giventhatthevolume-basedthresholdsinRegulationATShavenotbeenupdatedsince2005,werecommendthattheCommission consider eliminating or substantially reducing thesethresholdsaspartofitsreviewofRegulationATS.

EQUITIES RECOMMENDATION #3: The Commission should re-examineRegulationATSwithaviewtoensuringthatdarkpools do not have inappropriate competitive advantages over exchangeswhencompetingfororderflow,includingexpandingthe application of fair access and public display requirements.

2 See63FR70844(Dec.22,1998)at70858FN113,availableat:https://www.govinfo.gov/content/pkg/FR-1998-12-22/pdf/98-33299.pdf.

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3 See83FR58338(Nov.19,2018),availableat:https://www.govinfo.gov/content/pkg/FR-2018-11-19/pdf/2018-24423.pdf and https://www.sec.gov/comments/s7-14-16/s71416-29.pdf.

B. TRANSPARENCY

1. PFOF and Price Improvement

PFOF

WehaveconsistentlysupportedeffortsbytheCommissionto ensure that market participants publicly disclose all payment fororderflow(“PFOF”)arrangements.Forexample,westronglysupported the Commission’s recent revisions to Rule 606 that wereimplementedin2019toprovidemoregranularinformationtomarketparticipantsregardingPFOF,includingdetailingthe terms of any such arrangements and disclosing the net aggregateamountofanyPFOFreceived,aswellaspaymentsfromprofit-sharingrelationshipsandtransactionfeesandrebates,bothasatotaldollaramountandonapersharebasis.3 These revisions also require Rule 606 reports to be publicly available for at least three years so that market participants can better evaluate performance and trends over time.

Inourview,inamarketwithmanycompetingmarketcenters (as opposed to the U.S. options market where orderflowmustbeexecutedon-exchange),permittingtransparentandfullydisclosedPFOFarrangementsisfarpreferabletoattemptingtoeffectuateacompleteprohibition.ProhibitingPFOFwouldnotonlysignificantlychangetheunderlyingeconomicsforretailbroker-dealers,creatinga revenue gap that likely would be closed by increasing trading costs for retail investors (including through higher commissions),butwouldalsoriskareturntotheopaque,anti-competitive reciprocal business practices that

flourishedpriortotheimplementationofRegulationNMSthat allowed intermediaries to extract disproportionate rents frominvestors.Inaddition,currentexchangerebatesareinextricablylinkedtoPFOFarrangements,andthereforewould also need to be covered by any regulatory review.

We strongly believe that the Commission should remain focused on ensuring that retail investors have access to all relevant information regarding the order routing decisions madebytheirbroker-dealers,sothattheycanmakeinformedinvestmentdecisionsanddirectorderflowonthemerits. We recommend that the Commission perform a comprehensive review of the 606 reports being published pursuant to the recently updated rules and propose any necessary enhancements to further increase the transparencyofPFOFarrangements.

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Price Improvement

It is clear that the intense competition between exchanges,ATSs,andmarketmakersdirectlybenefitsretailinvestors – not only do they frequently get better prices than thosepubliclyquotedon-exchange,buttheyoftengettheirordersfilledatsuchpricesformoresizethanispubliclydisplayed,withgreatercertaintyofexecutionandoftenwithoutbeingsubjecttoexchangetradingfees.Accordingto publicly disclosed statistics calculated pursuant to the Commission’sprescribedmethodology,approximately$3.7billion in price improvement was provided by market makers to retail investors in 2020.4

In response to those who question the accuracy of these statistics,wehighlightthefollowing:

● First,weagreethattheCommission’sprescribedmethodology for calculating the price improvement achieved byretailinvestorscanbeimproved.Infact,wehavebeenaleadingvoiceinindustryeffortstodetailnecessaryenhancements to Rule 605 and have consistently urged the Commission to adopt these recommendations.5 We reiterate this recommendation here – it is critically important that there areaccurate,transparent,andstandardizedexecutionqualitymetricsthatalloworderflowtobedirectedonthemerits.

● Second,morerefinedexecutionqualitystatisticsarelikely to show that price improvement is actually materially understated by current metrics.

› This is because one of the main shortcomings of Rule 605isthatordersizeisnottakenintoaccount,meaningthataretailorderfor1,000sharesisbenchmarkedthesameasan order for 5 shares without any consideration as to whether

theretailorderwasfilledformoresizethanwaspubliclydisplayed.Thistypeof“sizeimprovement”iscommonlyprovided by market makers and is material to overall price improvement.

› Conversely,somehavesuggestedthatcurrentpriceimprovement statistics are overstated due to increased tradingactivityinoddlots(i.e.ordersoflessthan100shares),whicharenotfactoredintoRule605reports.Onthispoint,however,wenote:

■ We support expanding Rule 605 to include odd lot orders and it is appropriate for the Commission to consider the inclusion of odd lot quotes provided that size is taken into account(asdetailedabove);

■ We expect the increase in reported price improvement resulting from accurately taking size into account will significantlyoutweighanychangetopriceimprovementstatisticsresultingfromtheinclusionofoddlotquotes;and

■ It is also important to note that the Commission recently finalized,buthasyettoimplement,arevisedroundlotdefinitionthatistieredbasedonthepriceofastock.6 This revisedroundlotdefinitionwillencompassmanyordersandquotesthatarecurrentlyconsideredtobeoddlots,particularlyforhigherpricedstocks,therebyreducingoveralltrading activity in odd lots. We supported this revised round lotdefinitionandlookforwardtoitbeingimplemented.7

4 https://twitter.com/ltabb/status/1364960155486552073/photo/1. 5 SeetheRule605modificationsrecommendedbytheFinancialInformationForum,availableat:https://www.sec.gov/comments/s7-02-10/s70210-5002077-182848.pdf. 6ExchangeActReleaseNo.34-90610(Dec.9,2020),availableat:https://www.sec.gov/rules/final/2020/34-90610.pdf. 7 https://www.sec.gov/comments/s7-03-20/s70320-7235178-217088.pdf.

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Nothing should be allowed to distract from the inarguable realitythatthefiercecompetitionbetweenexchanges,ATSs,andmarketmakersforretailorderflowdirectlybenefitsretailinvestors(intermsofbetterpricesandlargerfills)andimproves their execution quality. We urge the Commission to continue to prioritize the interests of retail investors when evaluating policy recommendations in this area.

EQUITIES RECOMMENDATION #4: The Commission should perform a comprehensive review of the 606 reports being published pursuant to the recently updated rules and propose any necessary enhancements to further increase the transparencyofPFOFarrangements.

EQUITIES RECOMMENDATION #5: The Commission should perform a comprehensive review designed to modernize Rule 605,similartotheeffortrecentlyundertakenforRule606.

●Ataminimum,adopttherecommendationsputforwardbytheFinancialInformationForumtoimprovethereportingofpriceimprovementachievedbyretailinvestors,suchastaking order size into account and including odd lot orders. ●Inaddition,determineifadditionaldisclosuresordetailwould be helpful in enabling market participants to evaluate execution quality.

C. RESILIENCY

1. Moving to T+1 Settlement

TheDepositoryTrust&ClearingCorporation(“DTCC”)has provided a roadmap for shortening the settlement cycle to one day.8Benefitsincludereducedliquidityrequirementsfor

theclearinghouse,andcapitalandoperationalefficienciesforclearingmembers.Inparticular,DTCChasestimatedthatthevolatility component of its margin requirements could be reduced by 41% by moving from T+2 to T+1 settlement.9 In light of these benefits,werecommendthattheCommissionendorseandoverseeindustryeffortstomovetoT+1settlement.

EQUITIES RECOMMENDATION #6: The Commission should endorseandoverseeindustryeffortstomovetoT+1settlement.

2. Predictable and Transparent CCP Margin Requirements

Clearingagencies(“CCPs”)areintegraltoU.S.equitymarkets,managingthesettlementprocessfortrillionsof dollars of transactions daily and netting transactions andpaymentsinordertoincreaseefficiencyandreduceoperationalandcounterpartyrisk.Aspartoftheirriskmanagementframeworks,CCPsrequiremargincontributionsfrommemberfirms.Itisimportantthatmarginrequirementsare calculated pursuant to a predictable and transparent methodologythatenablesmemberfirmstoaccuratelymodelandforecastmargincalls.Thisassistsmemberfirmsinappropriately managing liquidity requirements and minimizes the risk of market disruptions.

EQUITIES RECOMMENDATION #7: The Commission should assess whether greater predictability and transparency can beprovidedtomarketparticipantsregardingCCPmarginrequirements.

8 SeeDTCC,“AdvancingTogether:LeadingtheIndustrytoAcceleratedSettlement”(Feb.2021),availableat: https://perspectives.dtcc.com/articles/leading-the-industry-to-accelerated-settlement?utm_source=dtcc.com&utm_medium=press-release&utm_campaign=accelerated_settlement. 9 Id. at page 5.

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II. U.S. Treasuries The U.S. Treasury market is the deepest and most liquidgovernmentsecuritiesmarketintheworld,andplaysa fundamental role in the U.S. and global economies. The liquidity,integrityandresiliencyoftheU.S.TreasurymarketsupportboththeefficientfundingoftheU.S.governmentand the widespread use of Treasuries as an investment and hedging instrument. The U.S. Treasury market has undergone significantchangeoverthecourseofthelastdecade,withtechnological innovation spurring a transition to electronic trading.Whilethismarketevolutionhasbenefitedinvestors,ithas also revealed the need to modernize aspects of Treasury market structure.10Recentreformsinotherfixedincomemarkets,suchastheOTCderivativesmarkets,demonstratethe importance of modernizing regulatory frameworks to improve market transparency and resiliency.

A. TRANSPARENCY

1. Implementing Real-time Public Reporting Despite being one of the largest and most liquid markets intheworld,transactionsinU.S.Treasuriesarenotpubliclyreportedpost-trade.Althoughcertaintradingvenuesare

able to provide market participants with information regarding tradingactivityonthatspecificvenue,estimatessuggestthatover 50% of the secondary U.S. Treasury market operates without meaningful post-trade transparency.11 This lack of transparency is in stark contrast to the comprehensive post-trade transparency that is a hallmark of virtually every othermajormarket,includingU.S.equities,options,futures,corporatebond,municipalbond,andOTCderivativesmarkets.

Academicresearchhasfoundthatreal-timepublicreportingimplementedinotherfixedincomeassetclasseshasdeliveredtangiblebenefitstoinvestors.Thesebenefitsinclude:

● Reducing transaction costs.Post-tradetransparencyreducestransactioncosts,transferringwealthfromdealerstocustomers,ascustomerbargainingpowerincreasesandliquidity providers can be held more accountable.12

10 See, e.g.,JointStaffReport:TheU.S.TreasuryMarketonOctober15,2014at https://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2014.pdf. 11 See“PrimaryDealerParticipationintheSecondaryU.S.TreasuryMarket”,MichaelFleming,FrankKeane,andErnstSchaumburg,LibertyStreetEconomics(February12,2016),availableat:http://libertystreeteconomics.newyorkfed.org/2016/02/primary-dealer-participation-in-the-secondary-us-treasury-market.html. Thereislittlepubliclyavailableinformationregardingthe“dealer-to-customer”segmentofthemarket.12 See, e.g.,Asquith,P.,etal.,“TheEffectsofMandatoryTransparencyinFinancialMarketDesign:EvidencefromtheCorporateBondMarket”(April2019)atpage29,availableat:https://www.nber.org/papers/w19417;andJacobsen,S.,etal.,“Doestradereportingimprovemarketqualityinaninstitutionalmarket?Evidencefrom144Acorporatebonds”(2018)atpages1and7,availableat:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3171056.

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13 See, e.g.,Loon,Y.C.,Zhong,Z.K.Theimpactofcentralclearingoncounterpartyrisk,liquidity,andtrading:Evidencefromthecreditdefaultswapmarket.JournalofFinancialEconomics(2013),availableat:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2176561.;andLoon,Y.C.,Zhong,Z.K.DoesDodd-FrankaffectOTCtransactioncostsandliquidity?Evidencefromreal-timeCDStradereports.JournalofFinancialEconomics,(2015),availableat: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2443654.SeealsoAsquith,P.,etal.,“TheEffectsofMandatoryTransparencyinFinancialMarketDesign:EvidencefromtheCorporateBondMarket”(April2019),availableat:https://www.nber.org/papers/w19417;Edwards,A.K.,etal.,“Corporatebondmarkettransactioncostsandtransparency”(2007)TheJournalofFinance,availableat:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=593823;andGoldstein,M.A.,etal.,“Transparencyandliquidity:Acontrolledexperimentoncorporatebonds”(2007)ReviewofFinancialStudies,availableat: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=686324. 14Jacobsen,S.,etal.,“Doestradereportingimprovemarketqualityinaninstitutionalmarket?Evidencefrom144Acorporatebonds”(2018)atpages1and7,available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3171056.15 See generally id.16Availableat:https://www.regulations.gov/docket?D=TREAS-DO-2015-0013

● Improving liquidity conditions and increasing competition. Post-tradetransparencyimprovesliquidityconditionsandcompetitioninfixedincomemarkets.13Inparticular,academic research has found that post-trade transparency canevenimproveliquidityconditionsforlargeblocktrades,which is a concern frequently cited by those opposed to greater transparency.14

● Increasingefficiencyandresiliency.Alackofpost-tradetransparency means that certain counterparties have more information than the rest of the market regarding the fair valueofaparticularinstrument,whichcanimpairend-of-day valuations and best execution assessments.15 These inefficienciesareparticularlyacuteforlessliquidoff-the-runTreasuriesandduringperiodsofmarketvolatility,andcanimpairliquidityincorrelatedproducts,suchasTreasuryETFs.

● Enhancedinvestorconfidence. Removing information asymmetriesandlevelingtheplayingfieldallowsmarketparticipantstobettermanagerisk,andmoreconfidentlyquoteprices,commitcapital,andwarehouseriskacrossallmarket conditions.

ThesesamebenefitsshouldbeexpectedtoaccruetoTreasurymarketparticipants,andultimatelytheU.S.government as issuer. The responses to the 2016 Treasury RFIdemonstratethatadiversegroupofmarketparticipantssupport increasing post-trade transparency in the Treasury market,includingbuysidefirms,agencybrokers,tradingvenues,clearingvenues,electronicmarketmakers,andacademics.16 With the successful implementation of regulatoryreportingtoFINRA,theoperationalinfrastructureis in place to introduce post-trade transparency in the U.S. Treasury market.

U.S. TREASURIES RECOMMENDATION #1: The Commission should work with other relevant U.S. policymakers to implement real-time public reporting in the U.S. Treasury market.

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2. Supporting the Recent FINRA and Federal Reserve Board Proposals to Enhance Regulatory Reporting

It is important to increase the quality of U.S. Treasury market data that is made available to regulators in order to improvemonitoring,surveillance,andanalyticalcapabilities.Inaddition,withcomprehensivedata,regulatorsandpolicymakers are better equipped to evaluate additional policy proposals to modernize the regulatory framework applicabletoTreasuries.FINRArecentlyproposedtoenhance the current regulatory reporting regime by improving thetimelinessofreporteddataandbyspecificallyidentifying,amongothers,whetheratransaction(a)isexecutedonamultilateraltradingvenuethatisnotregisteredasanATSand/or(b)isintendedtocentrallyclear.17 These aspects of the Proposal,inparticular,directlysupportandbetterinformtheongoing evaluation of policy proposals designed to enhance transparencyandresiliencyintheU.S.Treasurymarket,includingintroducingreal-timepublicreporting,rationalizingtheoversightofmultilateraltradingvenues,andexpandingcentral clearing in both the cash and repo markets.

Separately,theFederalReserveBoardrecentlyproposedto require certain banking institutions to report Treasury transactionsthroughFINRA’sTRACEsystem,makingtheregulatory reporting regime more comprehensive.18

U.S. TREASURIES RECOMMENDATION #2: The Commission shouldsupporteffortstoincreasethequalityandtimelinessofU.S. Treasury market data that is being reported to regulators.

3. Collecting Data on Uncleared Bilateral Repurchase Agreements

Therepurchaseagreement(“repo”)marketisthelargestshort-term wholesale funding market in the U.S. and its stabilityiscriticaltoU.S.financialmarkets.Whiledataiscollected on centrally cleared repo transactions and tri-party repos,comprehensivedataisnotcollectedbyregulatorsonunclearedbilateralrepos,whichaccountforapproximately50% of the U.S. repo market.19 We recommend that regulatorscollectdataonunclearedbilateralreposaswell,as access to comprehensive data covering the entire repo market is critical to monitoring overall market stability. Comprehensive,market-widedataalsoenablesregulatorstomonitormarkettrends,suchasrecenteffortsbymarketparticipantstoincreaseclearingforbilateralrepos,andtoevaluate the expected impact of subsequent policy decisions.

U.S. TREASURIES RECOMMENDATION #3: The Commission should work with other relevant U.S. policymakers to collect data on uncleared bilateral repos.

17 See https://www.finra.org/rules-guidance/notices/20-43.18 See https://www.federalreserve.gov/boarddocs/press/foiadocs/2021/20210121/foia20210121.pdf. 19 See83FR31896(July10,2018)at31901,availableat:https://www.govinfo.gov/content/pkg/FR-2018-07-10/pdf/2018-14706.pdf.

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20 See“DealerswarnoftroubleaheadasTreasuryissuanceswells,”Risk.net(Mar.16,2020),availableat: https://www.risk.net/investing/markets/7808816/dealers-warn-of-trouble-ahead-as-treasury-issuance-swells?utm_source=signal&utm_medium=syndication and “StilltheWorld’sSafeHaven?RedesigningtheU.S.TreasuryMarketAftertheCOVID-19Crisis,”Duffie,D.,(June2020),availableat: https://www.brookings.edu/wp-content/uploads/2020/05/WP62_Duffie_v2.pdf.Seealso“EnhancingliquidityoftheU.S.Treasurymarketunderstress,” Liang,N.andParkinson,P.,(Dec.2020),availableat:https://www.brookings.edu/research/enhancing-liquidity-of-the-u-s-treasury-market-under-stress/; and“TheNettingEfficienciesofMarketwideCentralClearing,”Fleming,M.andKeane,F.(April2021),availableat: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr964.pdf21 See https://apps.newyorkfed.org/markets/autorates/SOFR. 22 See“StilltheWorld’sSafeHaven?RedesigningtheU.S.TreasuryMarketAftertheCOVID-19Crisis,”Duffie,D.,(June2020)atpage14,availableat: https://www.brookings.edu/wp-content/uploads/2020/05/WP62_Duffie_v2.pdf.23 See supranote19.

B. RESILIENCY

1. Expanding Central Clearing of U.S. Treasury Transactions and Repos

U.S. Treasury market resiliency can be improved by expanding central clearing of both secondary cash market transactions and bilateral U.S. Treasury repos. Transitioning more secondary market trading activity in U.S. Treasuries to central clearing is recommended given the projected increases in total issuance and constrained dealer balance sheets.20Inaddition,centralclearingstandardizessettlementworkflows,establishesgreatervaluationandmargindiscipline,andmitigatescounterpartycreditandsettlementrisk through the elimination of bilateral exposures.

Inturn,amarket-wideclearingsolutionforbilateralreposwouldincreasetheavailabilityofstableandefficientlypricedfinancingforinventoryandreducetransactioncoststotradeU.S. Treasuries. There is a trend of declining availability and risingcostsforU.S.Treasuryrepos,withdealersreducingthe amount of balance sheet allocated to this segment of themarket.ThereducedavailabilityofstableandefficientlypricedfinancingincreasestransactioncoststotradeU.S.Treasuries,particularlyimpactingtheabilityofmarketparticipants to maintain directional positions or to correct price dislocations.

Amarket-widerepoclearingsolutionwouldalleviatemanyoftheseconstraints,asdealerbalancesheetswouldbenefitfromnettingandmorefavorableregulatorytreatmentforexposurestoaqualifyingCCP.Inadditiontoincreasingliquidityinthesesecuritiesfinancingtransactions,amarket-wide clearing solution for Treasury repos would enhance market resiliency by eliminating the current interconnected web of counterparty credit exposures and bilateral settlements,andbyreducingdealerconcentrationandthenumberoffails.Finally,transitioningmorebilateralrepostocentral clearing would increase the number of transactions supportingthecalculationoftheSecuredOvernightFinancingRate(“SOFR”).21

The Commission should work with other relevant policymakers to exercise a leadership role in transitioning more trading activity in both secondary cash market transactions and bilateral U.S. Treasury repos to central clearing. Estimates indicate that less than 25% of secondary cashmarketTreasurytransactionsarecentrallycleared,22 while uncleared bilateral repos account for approximately 50% of the U.S. repo market.23 To the extent voluntary initiativesarenoteffectiveinincreasingmarket-wideclearingrates,U.S.policymakersshouldconsiderothertools,suchas a clearing mandate or increased margin requirements for uncleared transactions.

U.S. Treasuries Recommendation #4: The Commission should work with other relevant U.S. policymakers to transition more trading activity in both secondary cash market transactions and bilateral U.S. Treasury repos to central clearing.

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2. Regulating Multilateral Trading Venues

In light of the rapid growth of electronic trading in the U.S. Treasurymarket,itiscriticalthatmultilateraltradingvenuesbe subject to appropriate regulatory oversight. We support the Commission’s recent proposal to require multilateral U.S. TreasurytradingvenuesthatmeetthedefinitionofanATStoformally register and comply with a number of requirements designed to increase market resiliency and transparency.

However,theCommission’scurrentdefinitionofanATShasbeeninterpretedtoexcludemultilateraltradingvenuesutilizingrequest-for-quote(“RFQ”)tradingprotocols,whicharesomeofthemostsignificantmultilateraltradingvenuesoperatinginfixedincomemarketsregulatedbytheCommission,includingtheU.S.Treasurymarket.24 We recommendtheCommissionaddressthissignificantgapinconnectionwithfinalizingtheproposalbyclarifyingthescopeof,oramending,Rule3b-16toincludemultilateralRFQtrading venues.

24 See alsoU.S.SecuritiesandExchangeCommission,FixedIncomeMarketStructureAdvisoryCommittee,PreliminaryRecommendationRegardingDefining“ElectronicTrading”forRegulatoryPurposes(October2020)atFN2,availableat: https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-preliminary-recommendation-re-definition-of-electronic-trading.pdf and RemarksatU.S.TreasuryMarketConference,CommissionerEladL.Roisman(Sept.29,2020),availableat: https://www.sec.gov/news/speech/roisman-us-treasury-conference-2020-09-29.

U.S. Treasuries Recommendation #5: The Commission shouldfinalizetheRegulationATSproposalformultilateralTreasurytradingvenuesandincludemultilateralRFQvenuesin scope.

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III. OTC Derivatives TheOTCderivativesmarketswerenotoriouslyconcentrated,opaque,interconnected,andunder-collateralizedintheyearsprecedingthe2008financialcrisis.ThelegacystructureoftheOTCderivativesmarketswasasignificantsourceofsystemicriskandleddirectlytotaxpayer-fundedbailouts.PoliciesimplementedbytheCFTChavesubstantially improved safety and stability and have made thesemarketsmorefair,open,competitive,andtransparent.However,theCommissionhasyettoimplementmanyoftheOTCderivativesreformssetforthintheDodd-FrankAct,eventhough credit default swaps regulated by the Commission playedanimportantroleinexacerbatingthefinancialcrisis.25 Below,wedetailseveralpriorityissuestoincreasecompetition,transparency,andresiliencyinthewiderangeofinstrumentsclassifiedassecurity-basedswaps,includingsingle-namecredit default swaps and equity total return swaps.

A. COMPETITION

1. Introducing Multilateral and Competitive Trading Venues

TheCommissionhasyettofinalizerulestoestablishsecurity-basedswapexecutionfacilities(“SB-SEFs”),whichare intended to provide multilateral and competitive execution

forOTCderivativesmarketparticipants.SEFsestablishedunderCFTCruleshaveincreasedmarketcompetition,improvedliquidityconditions,reducedtransactioncosts,and facilitated execution quality analysis.26 It is important todeliversimilarbenefitstomarketparticipantsinOTCderivativesmarketsregulatedbytheCommissionbyfinalizingrules that address the topics below.

a. Trading Venue Scope

SimilartoCFTCrules,alltypesofmultilateraltradingvenuesoperatingintheOTCderivativesmarketshouldbesubjecttoregistrationandoversight,regardlessofthespecifictradingprotocolused(e.g.electronic,voice,orderbook,RFQ,auction).Thiswillensurealevelplayingfieldacross multilateral trading venues.

b. Impartial Access

SB-SEFsarerequiredtoprovideimpartialaccesstoall market participants.27Toimplementthisrequirement,allmarketparticipantsmeetingthedefinitionofan“eligiblecontractparticipant”shouldbepermittedtojoinandfullyparticipateonthesemultilateralvenues.However,theCommission’sproposedrulesforSB-SEFswouldallowatrading venue to deny access to market participants that arenotregisteredasasecurity-basedswapdealer,majorsecurity-basedswapparticipant,orbroker.28Inpractice,thiswouldpermitaSB-SEFtodenyaccesstothevastmajority

25 See generally“CreditDefaultSwapsandCounterpartyRisk”,EuropeanCentralBank(August2009),availableat: https://www.ecb.europa.eu/pub/pdf/other/creditdefaultswapsandcounterpartyrisk2009en.pdf.26 See, e.g.,Benos,E.,Payne,R.,andVasios,M.,Centralizedtrading,transparencyandinterestrateswapmarketliquidity:evidencefromtheimplementationoftheDodd-FrankAct,BankofEnglandStaffWorkingPaper,May2018,availableat: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/centralized-trading-transparency-and-interest-rate-swap-market-liquidity-update;andJunge,J.,EssaysontheMarketStructureandPricingofCreditDerivatives,November2016,availableat:https://infoscience.epfl.ch/record/222511/files/EPFL_TH7322.pdf.27 SeeExchangeActSection3DatCorePrinciple2.28SeeProposedRuleonRegistrationandRegulationofSecurity-BasedSwapExecutionFacilities,76Fed.Reg.10948(Feb.28,2011)at11060,availableat: http://www.gpo.gov/fdsys/pkg/FR-2011-02-28/pdf/2011-2696.pdf

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ofmarketparticipantsandwouldallowsomeSB-SEFstoremainclosed,dealer-onlytradingvenues,indirectcontradiction to the statutory impartial access requirement. Importantly,theCommission’sproposedapproachisinconsistentwithCFTCrulesandguidancethathaveinterpreted the same statutory impartial access requirement as mandating the dismantling of barriers that serve to limit access to only dealers.29Furthermore,theCommission’sproposed approach is inconsistent with international standards,asMiFIDIIrequiresMTFsandOTFstoestablishnon-discriminatoryrulesgoverningaccessandESMAhasissued additional guidance to clearly prohibit the same accessbarriersprohibitedbytheCFTC.30

WeurgetheCommissiontoappropriatelyreflectthestatutory mandate that impartial access be provided to all marketparticipantswhenfinalizingtheSB-SEFrules.

c. Post-trade Name Give-up

SB-SEFsmayelecttooffermarketparticipantspre-tradeanonymoustradingprotocols,suchasorderbooktrading.Forclearedsecurity-basedswaps,ifatransactionisexecutedanonymouslyonaSB-SEF,thenitshouldremainanonymous.However,manydealer-onlyvenuescontinuetodisclose counterparty identities post-trade in order to impede customer access.31TheCFTCconcludedthatthepracticeof post-trade name give-up is inconsistent with the statutory impartial access requirement and should be prohibited.32 We recommend the Commission reach the same conclusion whenfinalizingtheSB-SEFrules.

OTC DERIVATIVES RECOMMENDATION #1: The CommissionshouldfinalizeitsSB-SEFrulesandapplythemtoallmultilateraltradingvenues,requireimpartialaccessbeprovidedtoallmarketparticipants,andprohibitpost-tradename give-up.

B. TRANSPARENCY

1. Implementing Real-time Public Reporting

In order to increase market transparency for end investors,CommissionRegulationSBSRprovidesthatpublicreporting of security-based swap transaction data will begin threemonthsafterthestartofregulatoryreporting,whichisexpected to begin in November 2021.33 The implementation of both regulatory and public reporting will provide much-needed transparency regarding trading activity in the wide rangeofinstrumentsclassifiedassecurity-basedswaps,including single-name credit default swaps and equity total return swaps.

29 See78FR33476(June4,2013)at33508,availableat:https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-12242a.pdf andStaffGuidanceonSwapExecutionFacilitiesImpartialAccess(November14,2013),availableat http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf30 MiFIDIIArticle18(3)andESMAQ&AonMiFIDIIandMiFIRmarketstructuretopics,Section5.1,Question3,availableat:https://www.esma.europa.eu/sites/default/files/library/70-872942901-38_qas_on_mifid_ii_and_mifir_market_structures_topics.pdf31 See https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62420&SearchText=. 32 85FR44693(July24,2020),availableat:https://www.cftc.gov/sites/default/files/2020/07/2020-14343a.pdf. 33 RegulationSBSR—ReportingandDisseminationofSecurity-BasedSwapInformation,81FR53546(Aug.12,2016)at53608,availableat: https://www.govinfo.gov/content/pkg/FR-2016-08-12/pdf/2016-17032.pdf.

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However,theCommissionstatedthatitlackedthenecessarydatatoestablishblocktradethresholdswhenfinalizingRegulationSBSR,andthereforeestablishedaninterimapproach that permits market participants to delay the reporting of all security-based swap transactions for up to 24 hours.34Permittingallsecurity-basedswaptransactionsto be reported with a 24 hour delay undermines the intended benefitsofpost-tradetransparency,suchasenablinginvestors to understand current market dynamics and compare liquidity provider prices with concurrent trading activityacrossthemarket,whichnotonlyimprovesexecutionquality assessments but also incentivizes price competition as investors are able to demand more accountability from their liquidity providers. This delay also sharply contrasts with currentFINRArulesforreportingcorporateandmunicipalbondsandCFTCrulesforreportingswaps,where,ineachcase,ashort15minutedelayisallowedforblocktrades.35 Inaddition,bothFINRAandtheCFTCrecentlyconsultedonextendingthese15minutedelaysforblocktrades,andshelved the proposals after the overwhelming majority of market participants expressed strong support for the current real-time public reporting regimes.36

We recommend the Commission set interim block trade thresholdsasquicklyaspossible.Onesolutionistosetforth an objective formula for calculating the thresholds in

RegulationSBSR(forexample,theCFTCusesa“67percentnotionalamountcalculation”thatisintendedtoensurethatapproximately two-thirds of the sum total of all notional amounts is reported on a real-time basis37).Then,followingtheintroductionofregulatoryreporting,theCommissioncouldusethefirst3monthsor6monthsofcollecteddatatosettheactualthresholdspursuanttotheagreedformula,andthesethresholds could be updated on an annual basis to ensure they remain representative of current market conditions.

OTC DERIVATIVES RECOMMENDATION #2: The Commission should set block trade thresholds as quickly as possible and eliminate the current 24 hour public reporting delay for security-based swaps.

34 Id.at§242.901(j)35 See§43.5(a)inReal-TimePublicReportingofSwapTransactionData,77FR1182(Jan.9,2012),availableat: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2011-33173a.pdfandFINRARule6730,availableat: https://www.finra.org/rules-guidance/rulebooks/finra-rules/6730. 36 See https://www.finra.org/rules-guidance/notices/19-12#comments and https://www.cftc.gov/sites/default/files/2020/11/2020-21568a.pdf. 37 SeeProceduresToEstablishAppropriateMinimumBlockSizesforLargeNotionalOff-FacilitySwapsandBlockTrades,78FR32866(May31,2013)at32893,available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-12133a.pdf.

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C. RESILIENCY

1. Facilitating Central Clearing

ThecommitmenttoclearingallstandardizedOTCderivativecontractsisacentralpillarofthe2009G20OTCderivativesreformsandacornerstoneofTitleVIIoftheDodd-FrankAct.38 Central clearing of derivatives mitigates systemic risk and improves conditions for all market participants by protectingcustomersandenhancingpricing,liquidity,andtransparency.39 We recommend the Commission take the following steps to facilitate greater central clearing.

a. STP Rules

Inordertomaximizetheriskmitigationbenefitsofcentralclearing,itiscriticaltoensurethatrobuststandardsgoverntheoperationalworkflowfromtradeexecutiontoclearingsubmissionandacceptance.BothCFTCrulesandEUrulesunderMiFIDIIcontainnearlyidenticalstraight-through-processing(“STP”)requirementsforclearedOTCderivatives,40including(a)pre-executioncreditchecks,(b)shortclearingsubmissiontimeframes,and(c)certaintyintheevent a trade is rejected from clearing.

TheseSTPrequirementshavebeencriticalinestablishingglobalstandardsthatreducemarketrisk,creditrisk,andoperational risk through a robust execution-to-clearing workflowforclearedOTCderivatives.Unfortunately,thesestandards are not being applied when market participants voluntarily clear security-based swaps regulated by the Commission,despitetheavailabilityofthenecessarymarketinfrastructure. It is therefore important that the Commission implementSTPrulestogoverntheexecution-to-clearingworkflowthatareconsistentwithCFTCandEUstandards.

OTC DERIVATIVES RECOMMENDATION #3: The Commission should implement straight-through-processing rulestogoverntheexecution-to-clearingworkflowthatareconsistentwithCFTCandEUstandards.

b. Clearing Mandate

Alargenumberofcommonlytradedreferenceentities(including,mostimportantly,theconstituentnamesoftheprimaryCDSindexes)aresuitableformandatoryclearing,demonstratedbythecurrentclientclearingofferingsandthelarge amount of voluntary clearing that already occurs. We recommend the Commission adopt a mandatory clearing requirement for single-name CDS instruments.

OTC DERIVATIVES RECOMMENDATION #4: The Commission should adopt a mandatory clearing requirement for single-name CDS.

38See“G20LeadersStatement:ThePittsburghSummit,”Sept.25,2009,availableat:http://www.g20.utoronto.ca/2009/2009communique0925.html.39 SeeLoon,Y.C.,Zhong,Z.K.DoesDodd-FrankaffectOTCtransactioncostsandliquidity?Evidencefromreal-timeCDStradereports.JournalofFinancialEconomics,119(3),645–672(2016)atpage4,availableat:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2443654.40 US:“StaffGuidanceonSwapsStraight-ThroughProcessing”(Sept.26,2013),availableat: https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/stpguidance.pdf;andCFTCLetterNo.15-67(Dec.21,2015),availableat: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/15-67.pdf.EU:CommissionDelegatedRegulation(EU)2017/582,availableat:http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0582&from=EN

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2. Reconsidering the Interdealer Exemption From Uncleared Initial Margin Rules

WhiletheCFTCandprudentialregulatorshaveappliedinitialmarginrequirementstointerdealerunclearedOTCderivativestransactions,41 the Commission provided an exemption to this important segment of the security-based swaps market.42 This means that a dealer regulated by the Commission is not required to post or collect initial margin for uncleared security-based swaps entered into with another dealer. Exempting the interdealer portion of the security-based swaps market from uncleared initial margin requirements undermines the regulatory objectives of mitigating systemic risk and promoting central clearing.

TheCFTCandprudentialregulatorsspecificallyconcludedthat,inordertoeffectivelymitigatesystemicrisk,itwasnecessary to apply initial margin requirements to uncleared interdealer transactions 43andtheCommission’sfinalmarginruledoesnotadequatelyexplainhowitreachedadifferentconclusion.Inaddition,datashowsthatvoluntaryclearingrates increased for interdealer transactions following the

implementation of uncleared initial margin requirements by other regulators.44Incontrast,dataalsoshowsthatbilateral trading is less costly than central clearing if there is an available exemption from uncleared initial margin requirements.45Asaresult,theCommission’sinterdealerexemption can be expected to create a disincentive to centrally clear.

Inlightoftheabove,werecommendthattheCommissionreconsider the exemption from initial margin requirements for uncleared interdealer security-based swap transactions.

OTC DERIVATIVES RECOMMENDATION #5: The Commission should reconsider the exemption from initial margin requirements for uncleared interdealer security-based swap transactions.

41 See79FR59898(Oct.3,2014)at59907,availableat:https://www.govinfo.gov/content/pkg/FR-2014-10-03/pdf/2014-22962.pdfand76FR27564(May11,2011)at27571,availableat:https://www.govinfo.gov/content/pkg/FR-2011-05-11/pdf/2011-10432.pdf. 42 84FR43872(Aug.22,2019),availableat:https://www.govinfo.gov/content/pkg/FR-2019-08-22/pdf/2019-13609.pdf.43 See supra note 41.44 Incentivestocentrallyclearover-the-counter(OTC)derivatives:Apost-implementationevaluationoftheeffectsoftheG20financialregulatoryreforms(Nov.19,2018)atFigureC.7(page21),availableat:http://www.fsb.org/wp-content/uploads/R191118-1-1.pdf.45 Id. at pages 36-37.

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3. Preventing Cross-Border Evasion

The Commission has correctly concluded that security-basedswaptransactionsarranged,negotiatedor executed using personnel located in the United States (“ANETransactions”)fallsquarelywithintheCommission’sjurisdiction,evenifthetransactionsarebookedtonon-U.S. entities.46TheCommissionhasestimatedthatANETransactionsaccountforasignificantportionoftotalsecurity-based swap dealing activity in the U.S.47 Given the Commission’ssupervisoryinterestsandpolicyobjectives,we recommend the Commission exercise its jurisdiction over ANETransactionswithrespecttopublicreporting,clearing,and trading requirements.

Since no foreign jurisdiction has implemented comparablepublicreportingrequirementsforOTCderivatives,48 the Commission was correct to apply public reportingrequirementstoANETransactions.49However,initsfinalrules,theCommissiongrantedabroadexceptionthat permits U.S.-based personnel to provide “market color”withoutbeingconsideredtohaveengagedinANETransactions.50Asaresult,oncepublicreportingbegins,werecommend that the Commission closely monitor the extent towhichANETransactionsarebeingreportedandmakeany

necessary rule revisions to ensure that U.S. investors are being provided with comprehensive transparency regarding security-based swap activity occurring in the United States.

To the extent the Commission imposes mandatory clearingortradingrequirements,werecommendthattheCommissionalsoapplytheserequirementstoANETransactions.Itisinterestingtonotethat,followingtheCFTCgrantingno-actionrelieffromtradingrequirementsforANETransactions,interdealertradingactivityinEURinterestrateswaps began to be booked almost exclusively to non-U.S. entities,afactpatternthatacademicresearchfoundwas“consistentwith(althoughnotdirectproofof)swapdealersstrategically choosing the location of the desk executing a particular trade in order to avoid trading in a more transparent andcompetitivesetting.”51

OTC DERIVATIVES RECOMMENDATION #6: The CommissionshouldexerciseitsjurisdictionoveroffshoretransactionswithasufficientnexustotheU.S.withrespecttopublicreporting,clearing,andtradingrequirements.

46 See Security-BasedSwapTransactionsConnectedWithaNon-U.S.Person’sDealingActivityThatAreArranged,Negotiated,orExecutedbyPersonnelLocatedinaU.S.BranchorOfficeorinaU.S.BranchorOfficeofanAgent;Security-BasedSwapDealerDeMinimisException,81Fed.Reg.8598(Feb.19,2016)at8615-17,available at: https://www.govinfo.gov/content/pkg/FR-2016-02-19/pdf/2016-03178.pdf.47 Id.at8616.48WenotethattheEUMiFIDIIframeworkwasintendedtobecomparable,butimplementationanddataqualityissueshaveresultedinnearlyallOTCderivativesbeing subject to a 4-week public reporting delay.4985FR6270(Feb.4,2020),availableat:https://www.govinfo.gov/content/pkg/FR-2020-02-04/pdf/2019-27760.pdf. 50 Id. 51 Benos,E.,Payne,R.,andVasios,M.,Centralizedtrading,transparencyandinterestrateswapmarketliquidity:evidencefromtheimplementationofthe Dodd-FrankAct,BankofEnglandStaffWorkingPaper(May2018)atpage30,availableat: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/centralized-trading-transparency-and-interest-rate-swap-market-liquidity-update

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IV. Research UnbundlingThe EU has unbundled research and execution fees since 2018.AccordingtoareviewbyESMA,thischangehasimprovedthequalityofresearch,loweredthecostsofbothexecutionandresearch,enhancedtransparency,andpromoted competition.52 The Commission has provided limited no-action relief from registration under the Investment AdvisersActof1940(“AdvisersAct”)tobroker-dealersproviding research to investment managers subject to EU MiFIDIIrequirements,53andhasalsoclarifiedthatclientcommissionarrangements(“CCAs”)canbeusedtopurchaseresearch from a broker-dealer even if the broker-dealer does not have a trading relationship with the client acquiring the research.54

We recommend that the Commission go further to explicitly allow broker-dealers to unbundle research and execution feesforallclients,forexample,byclarifyingthatabroker-dealer accepting hard dollars for research does not constitute “specialcompensation”thatdisqualifiesabroker-dealerfromtheexceptiontothe“investmentadviser”definitionunderSection202(a)(ll)(C)oftheAdvisersAct.Unbundlingof research and execution will allow competitive market forcestogoverntheprovisionofresearchbybroker-dealers,with clients able to select the research that genuinely adds

value with full transparency regarding associated costs.55 Unbundling will also empower clients to shift their trading to moretransparentandcompetitivetradingvenues,includinginmoretraditionally“hightouch”marketssuchastheETFandfixedincomemarkets.

V. ConclusionCompetition,innovationandsmartregulationhavecontributed to the global success of U.S. capital markets. Well-functioningcapitalmarketsfacilitatetheefficientallocationofcapitalandstrengthentheU.S.economy.AstheCommissionreviewsfinancialregulation,webelievethatthepreeminentglobalpositionofU.S.capitalmarketscan,andshould,befurtherstrengthenedbymakingmarketsmorecompetitive,transparent,andresilient.

52 SeeESMA“ReportonTrends,RisksandVulnerabilities”No.2,2020atpages81-92,availableat: https://www.esma.europa.eu/sites/default/files/library/esma_50-165-1287_report_on_trends_risks_and_vulnerabilities_no.2_2020.pdf. 53 https://www.sec.gov/investment/sifma-110419. 54 Id.atFN8.55 Wenotethebroadanddiversesupportforthisprincipleinfiledcommentslettersathttps://www.sec.gov/comments/mifidii/mifidii.htm.