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2013-12133

  • Federal Register, Volume 78 Issue 105 (Friday, May 31, 2013)[Federal Register Volume 78, Number 105 (Friday, May 31, 2013)]

    [Rules and Regulations]

    [Pages 32865-32944]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2013-12133]

    [[Page 32865]]

    Vol. 78

    Friday,

    No. 105

    May 31, 2013

    Part III

    Commodity Futures Trading Commission

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    17 CFR Part 43

    Procedures To Establish Appropriate Minimum Block Sizes for Large

    Notional Off-Facility Swaps and Block Trades; Final Rule

    Federal Register / Vol. 78, No. 105 / Friday, May 31, 2013 / Rules

    and Regulations

    [[Page 32866]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 43

    RIN 3038-AD08

    Procedures To Establish Appropriate Minimum Block Sizes for Large

    Notional Off-Facility Swaps and Block Trades

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission is adopting

    regulations to implement certain statutory provisions enacted by Title

    VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

    Specifically, in accordance with section 727 of the Dodd-Frank Act, the

    Commission is adopting regulations that define the criteria for

    grouping swaps into separate swap categories and establish

    methodologies for setting appropriate minimum block sizes for each swap

    category. In addition, the Commission is adopting further measures

    under the Commission's regulations to prevent the public disclosure of

    the identities, business transactions and market positions of swaps

    market participants.

    DATES: Effective date: July 30, 2013.

    FOR FURTHER INFORMATION CONTACT: John W. Dunfee, Assistant General

    Counsel, Office of the General Counsel, 202-418-5396, jdunfee@cftc.gov;

    George Pullen, Economist, 202-418-6709, gpullen@cftc.gov, or Nhan

    Nguyen, Special Counsel, 202-418-5932, nnguyen@cftc.gov, Division of

    Market Oversight; Esen Onur, Economist, Office of the Chief Economist,

    202-418-6146, eonur@cftc.gov; Commodity Futures Trading Commission,

    Three Lafayette Center, 1155 21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. The Dodd-Frank Act

    B. The Initial Proposal

    1. Overview

    2. Public Comments in Response to the Initial Proposal

    C. Issuance of the Real-Time Reporting Final Rule

    D. Further Block Proposal

    1. Policy Goals

    2. Summary of Proposed Approach

    3. Overview of Comments Received

    4. Additional Proposal Regarding Aggregation of Blocks

    II. Procedures To Establish Appropriate Minimum Block Sizes for

    Large Notional Off-Facility Swaps and Block Trades--Final Rules

    A. Criteria for Distinguishing Among Swap Categories in Each

    Asset Class

    1. Interest Rate and Credit Asset Classes

    a. Background

    b. Interest Rate Swap Categories

    i. Interest Rate Swap Data Summary

    ii. Summary of Proposed Rule

    c. Credit Swap Categories

    i. Credit Swap Data Summary

    ii. Credit Swap Data Analysis

    2. Swap Category in the Equity Asset Class

    3. Swap Categories in the FX Asset Class

    4. Swap Categories in the Other Commodity Asset Class

    5. Comments Regarding Swap Categories Across Asset Classes

    B. Appropriate Minimum Block Size Methodologies for the Initial

    and Post-Initial Periods

    1. Phase-in of Appropriate Minimum Block Sizes

    2. Overview of Proposed Approach

    3. The 67-Percent Notional Amount Calculation for Determination

    of Appropriate Minimum Block Sizes

    4. Data for Determination of Appropriate Minimum Block Sizes in

    the Post-Initial Period

    5. Methodology for Determining the Appropriate Minimum Block

    Sizes by Asset Class

    a. Interest Rate and Credit Default Swaps

    b. Equity

    c. FX

    i. Initial Period Methodology

    ii. Post-Initial Period Methodology

    d. Other Commodity

    i. Initial Period Methodology

    ii. Post-Initial Period Methodology

    6. Special Provisions for the Determination of Appropriate

    Minimum Block Sizes for Certain Types of Swaps

    a. Swaps With Optionality

    b. Swaps With Composite Reference Prices

    c. Physical Commodity Swaps

    d. Currency Conversion

    e. Successor Currencies

    C. Procedural Provisions

    1. Sec. 43.6(a) Commission Determination

    2. Sec. 43.6(f)(4) and (5) Publication and Effective Date of

    Post-Initial Appropriate Minimum Block Sizes

    3. Sec. 43.6(g) Notification of Election

    4. Sec. 43.7 Delegation of Authority

    5. Sec. 43.6(h)(6)--Aggregation

    6. Sec. 43.6(i) Eligible Block Trade Participants

    III. Anonymity Protections for the Public Dissemination of Swap

    Transaction and Pricing Data

    A. Policy Goals

    B. Establishing Notional Cap Sizes for Swap Transaction and

    Pricing Data To Be Publicly Disseminated in Real-Time

    1. Policy Goals for Establishing Notional Cap Sizes

    2. Proposed Amendments Related to Cap Sizes--Sec. 43.2

    Definitions and Sec. 43.4 Swap Transaction and Pricing Data To Be

    Publicly Disseminated in Real-Time

    a. Initial Cap Sizes

    b. Post-Initial Cap Sizes and the 75-Percent Notional Amount

    Calculation

    C. Masking the Geographic Detail of Swaps in the Other Commodity

    Asset Class

    1. Policy Goals for Masking the Geographic Detail for Swaps in

    the Other Commodity Asset Class

    2. Proposed Amendments to Sec. 43.4

    3. Application of Proposed Sec. 43.4(d)(4)(iii) and Proposed

    Appendix E to Part 43--Geographic Detail for Delivery or Pricing

    Points

    a. U.S. Delivery or Pricing Points

    i. Natural Gas and Related Products

    ii. Petroleum and Related Products

    iii. Electricity and Sources

    iv. All Remaining Other Commodities

    b. Non-U.S. Delivery or Pricing Points

    c. Basis Swaps

    d. Comments Received and Commission Determination

    4. Further Revisions to Part 43

    a. Additional Contracts Added to Appendix B to Part 43

    b. Technical Revisions to Part 43

    IV. Paperwork Reduction Act

    A. Background

    B. Description of the Collection

    1. Sec. 43.6(g)--Notification of Election

    2. Amendments to Sec. 43.4(d)(4) and 43.4(h)

    V. Cost-Benefit Considerations

    A. Background

    B. The Statutory Mandate To Consider the Costs and Benefits of

    the Commission's Action: Section 15(a) of the CEA

    C. Rules Establishing Determination Criteria and Methodology

    (Sec. 43.6(a)-(f) and (h))

    1. Rule Summary

    a. Rule 43.6(a) Commission Determination

    b. Rule 43.6(b) Swap Category

    c. Rules 43.6(c)-(f) and (h) Methods for Determining Appropriate

    Minimum Block Sizes

    2. Overview of Comments Received

    3. Costs

    a. Direct Costs

    b. Indirect Costs

    4. Benefits

    5. Alternatives

    a. Commission Determination of Minimum Block Sizes

    b. Swap Category Alternatives

    c. Block Methodology Alternatives

    6. CEA Section 15(a) Factors

    a. Protection of Market Participants and the Public

    b. Efficiency, Competitiveness and Financial Integrity of

    Markets

    c. Price Discovery

    d. Sound Risk Management Practices

    e. Other Public Interest Considerations

    D. Cost-Benefit Considerations Relevant to the Block Trade/Large

    Notional Off-Facility Swap Election Process (Sec. 43.6(g))

    1. Costs Relevant to the Election Process (Sec. 43.6(g))

    a. Incremental, Non-Recurring Expenditure to a Non-Financial

    End-user, SEF or DCM To Update Existing Technology

    b. Incremental, Non-Recurring Expenditure to a Non-Financial

    End-User, SEF or DCM To Provide Training to Existing Personnel and

    Update Written Policies and Procedures

    c. Incremental, Recurring Expenses to a Non-Financial End-User,

    DCM or SEF Associated With Incremental Compliance, Maintenance and

    Operational Support in Connection With the Proposed Election Process

    [[Page 32867]]

    d. Incremental, Non-Recurring Expenditure to an SDR To Update

    Existing Technology To Capture and Publicly Disseminate Swap Data

    for Block Trades and Large Notional Off-Facility Swaps

    2. Comments Received

    3. Benefits Relevant to the Election Process (Sec. 43.6(g))

    4. Alternatives

    5. Application of the Section 15(a) Factors to Sec. 43.6(g)

    a. Protection of Market Participants and the Public

    b. Efficiency, Competitiveness and Financial Integrity

    c. Price Discovery

    d. Sound Risk Management Practices

    e. Other Public Interest Considerations

    E. Costs and Benefits Relevant to Anonymity Protections

    (Amendments to Sec. 43.4(d)(4) and (h))

    1. Amendments to Sec. 43.4(d)(4)

    2. Amendments to Sec. 43.4(h)

    3. Costs Relevant to the Amendments to Sec. 43.4(d)(4) and (h)

    4. Benefits Relevant to the Amendments to Sec. 43.4

    5. Alternatives

    6. Application of the Section 15(a) Factors to the Amendments to

    Sec. 43.4

    a. Protection of Market Participants and the Public

    b. Efficiency, Competitiveness and Financial Integrity

    c. Price Discovery

    d. Sound Risk Management Practices

    e. Other Public Interest Considerations

    F. Costs and Benefits Relevant to Sec. 43.6(h)(6)--Aggregation

    1. Overview of Comments Received

    2. Costs

    3. Benefits

    4. Section 15(a) Factors

    a. Protection of Market Participants and the Public

    b. Efficiency, Competitiveness, and Financial Integrity of the

    Futures Markets

    c. Price Discovery

    d. Sound Risk Management Practices

    e. Other Public Interest Considerations

    G. Costs and Benefits Relevant to Sec. 43.6(i)--Eligible Block

    Trade Parties

    1. Overview of Comments Received

    2. Costs

    3. Benefits

    4. Section 15(a) Factors

    a. Protection of Market Participants and the Public

    b. Efficiency, Competitiveness, and Financial Integrity of the

    Futures Markets

    c. Price Discovery

    d. Sound Risk Management Practices

    e. Other Public Interest Considerations

    VI. Regulatory Flexibility Act

    VII. Example of a Post-Initial Appropriate Minimum Block Size

    Determination Using the 67-Percent Notional Amount Calculation

    VIII. List of Commenters Who Responded to the Further Block Proposal

    I. Background

    A. The Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII

    of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'')

    \3\ to establish a comprehensive new regulatory framework for swaps and

    security-based swaps. This legislation was enacted to reduce risk,

    increase transparency and promote market integrity within the financial

    system by, inter alia: (1) Providing for the registration and

    comprehensive regulation of swap dealers (``SDs'') and major swap

    participants (``MSPs''); (2) imposing mandatory clearing and trade

    execution requirements on standardized derivative products; (3)

    creating robust recordkeeping and real-time reporting regimes; and (4)

    enhancing the Commission's rulemaking and enforcement authorities with

    respect to, among others, all registered entities and intermediaries

    subject to the Commission's oversight.

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    \1\ See Public Law 111-203, 124 Stat. 1376 (2010).

    \2\ The short title of Title VII of the Dodd-Frank Act is the

    ``Wall Street Transparency and Accountability Act of 2010.''

    \3\ See 7 U.S.C. 1 et seq.

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    Section 727 of the Dodd-Frank Act created section 2(a)(13) of the

    CEA, which authorizes and requires the Commission to promulgate

    regulations for the real-time public reporting of swap transaction and

    pricing data.\4\ Section 2(a)(13)(A) provides that ``real-time public

    reporting'' means reporting ``data relating to a swap transaction,

    including price and volume, as soon as technologically practicable

    after the time at which the swap transaction has been executed.'' \5\

    Section 2(a)(13)(B) states that the purpose of section 2(a)(13) is ``to

    authorize the Commission to make swap transaction and pricing data

    available to the public in such form and at such times as the

    Commission determines appropriate to enhance price discovery.''

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    \4\ See generally CEA section 2(a)(13), 7 U.S.C. 2(a)(13).

    \5\ CEA section 2(a)(13)(A).

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    In general, section 2(a)(13) of the CEA directs the Commission to

    prescribe regulations providing for the public availability of

    transaction and pricing data for certain swaps. Section 2(a)(13) places

    two other statutory requirements on the Commission that are relevant to

    this final rule. First, sections 2(a)(13)(E)(ii) and (iii) of the CEA

    respectively require the Commission to prescribe regulations specifying

    ``the criteria for determining what constitutes a large notional swap

    transaction (block trade) for particular markets and contracts'' and

    ``the appropriate time delay for reporting large notional swap

    transactions (block trades) to the public.'' \6\ In promulgating

    regulations under section 2(a)(13), section 2(a)(13)(E)(iv) directs the

    Commission to take into account whether public disclosure of swap

    transaction and pricing data ``will materially reduce market

    liquidity.'' \7\

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    \6\ Section 2(a)(13)(E) explicitly refers to the swaps described

    only in sections 2(a)(13)(C)(i) and 2(a)(13)(C)(ii) of the CEA

    (i.e., clearable swaps, including swaps that are exempt from

    clearing). As noted in the Commission's Initial Proposal (as defined

    below), its Real-Time Reporting Final Rule (as defined below), and

    its Further Block Proposal (as defined below), the Commission, in

    exercising its authority under CEA section 2(a)(13)(B) to ``make

    swap transaction and pricing data available to the public in such

    form and at such times as the Commission determines appropriate to

    enhance price discovery,'' is authorized to prescribe rules similar

    to those provisions in section 2(a)(13)(E) to uncleared swaps

    described in section 2(a)(13)(C)(iii) and (iv) of the CEA.

    \7\ CEA section 2(a)(13)(E)(iv). Section 5h(f)(2)(C) of the CEA

    imposes a similar directive upon registered swap execution

    facilities (``SEF'') by requiring that they set forth rules for

    block trades for swap execution purposes.

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    The second statutory requirement relevant to this final rule is

    found in sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the CEA.

    Through these sections, Congress sought to ``ensure that the public

    reporting of swap transaction and pricing data [would] not disclose the

    names or identities of the parties to [swap] transactions.'' \8\

    Accordingly, Sec. 2(a)(13)(E)(i) of the CEA requires the Commission to

    protect the identities of counterparties to mandatorily-cleared swaps,

    swaps excepted from the mandatory clearing requirement, and

    voluntarily-cleared swaps. Section 2(a)(13)(C)(iii) of the CEA requires

    the Commission to prescribe rules that maintain the anonymity of

    business transactions and market positions of the counterparties to an

    uncleared swap.\9\

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    \8\ 156 Cong. Rec. S5921 (daily ed. July 15, 2010) (Statement of

    Sen. Blanche Lincoln).

    \9\ This provision does not cover swaps that are ``determined to

    be required to be cleared but are not cleared.'' See CEA section

    2(a)(13)(C)(iv).

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    In order to carry out the requirements of section 2(a)(13),

    including among other things the two statutory requirements regarding

    blocks and anonymity described above, the Commission issued a notice of

    proposed rulemaking on December 7, 2010 (the ``Initial Proposal''). On

    January 9, 2012, the Commission issued a final rule regarding Real-Time

    Public Reporting of Swap Transaction Data adopting several provisions

    contained in the Initial Proposal (the ``Real-Time Reporting Final

    Rule''). The Real-Time Reporting

    [[Page 32868]]

    Final Rule, however, did not adopt most of the provisions in the

    Initial Proposal pertaining to appropriate block sizes and anonymity.

    Instead, the Commission issued a further notice of proposed rulemaking

    regarding Procedures to Establish Appropriate Minimum Block Sizes for

    Large Notional Off-Facility Swaps and Block Trades on March 15, 2012

    (the ``Further Block Proposal'').\10\ Each of these issuances is

    described more fully below.

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    \10\ See Procedures to Establish Appropriate Minimum Block Sizes

    for Large Notional Off-Facility Swaps and Block Trades, 77 FR

    15,460, Mar. 15, 2012.

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    B. The Initial Proposal

    1. Overview

    On December 7, 2010, the Commission published in the Federal

    Register a notice of proposed rulemaking to implement section 2(a)(13)

    of the CEA, which included specific provisions pursuant to sections

    2(a)(13)(E)(i)-(iv) and 2(a)(13)(C)(iii).\11\ In this Initial Proposal,

    the Commission set out proposed provisions to satisfy, among other

    things, the statutory requirements discussed above regarding minimum

    block sizes and anonymity protections. With respect to the first

    statutory requirement, the Commission proposed: (1) Definitions for the

    terms ``large notional off-facility swap'' and ``block trade''; \12\

    (2) a method for determining the appropriate minimum block sizes for

    large notional off-facility swaps and block trades; \13\ and (3) a

    framework for timely reporting of such transactions and trades.\14\

    Proposed Sec. 43.5(g) provided that registered swap data repositories

    (``SDRs'') would be responsible for calculating the appropriate minimum

    block size for each ``swap instrument'' using the greater result of the

    distribution test \15\ and the multiple test.\16\ Proposed Sec.

    43.2(y) broadly defined ``swap instrument'' as ``a grouping of swaps in

    the same asset class with the same or similar characteristics.''\17\

    Proposed Sec. 43.5(h) provided that for any swap listed on a swap

    execution facility (``SEF'') or designated contract market (``DCM''),

    the SEF or DCM must set the appropriate minimum block trade size at a

    level at or above that established by an SDR for the relevant swap

    instrument.\18\

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    \11\ See Real-Time Public Reporting of Swap Transaction Data, 75

    FR 76139, Dec. 7, 2010, as corrected in Real-Time Public Reporting

    of Swap Transaction Data Correction, 75 FR 76930, Dec. 10, 2010.

    Interested persons are directed to the Initial Proposal for a full

    discussion of each of the proposed part 43 rules.

    \12\ The Initial Proposal defined the term ``large notional

    swap.'' See proposed Sec. 43.2(l), 75 FR 76171. The Real-Time

    Reporting Final Rule finalized the term as ``large notional off-

    facility swap,'' to denote, in relevant part, that the swap is not

    executed pursuant to a SEF or designated contract market's (``DCM'')

    rules and procedures. See Sec. 43.2, 77 FR 1182, 1244, Jan. 9,

    2012. Specifically, the Real-Time Reporting Final Rule defined the

    term as an ``off-facility swap that has a notional or principal

    amount at or above the appropriate minimum block size applicable to

    such publicly reportable swap transaction and is not a block trade

    as defined in Sec. 43.2 of the Commission's regulations.'' Id.

    Throughout this final rulemaking, the Commission uses the term

    ``large notional off-facility swap'' as adopted in the Real-Time

    Reporting Final Rule.

    The Initial Proposal's definition of ``block trade'' was similar

    to the final definition in the Real-Time Reporting Final Rule. See

    proposed Sec. 43.2(f), 75 FR 76171. The Real-Time Reporting Final

    Rule defines the term ``block trade'' as a publicly reportable swap

    transaction that: ``(1) [i]nvolves a swap that is listed on a SEF or

    DCM; (2) [o]ccurs away from the [SEF's or DCM's] trading system or

    platform and is executed pursuant to the [SEF's or DCM's] rules and

    procedures; (3) has a notional or principal amount at or above the

    appropriate minimum block applicable to such swap; and (4) [i]s

    reported subject to the rules and procedures of the [SEF or DCM] and

    the rules described in [part 43], including the appropriate time

    delay requirements set forth in Sec. 43.5.'' See Sec. 43.2, 77 FR

    1243.

    \13\ See proposed Sec. 43.5, 75 FR 76174-76.

    \14\ Proposed Sec. 43.5(k)(1) in the Initial Proposal provided

    that the time delay for the public dissemination of data for a block

    trade or large notional off-facility swap shall commence at the time

    of execution of such trade or swap. See 75 FR 76176. Proposed Sec.

    43.5(k)(2) provided that the time delay for standardized block

    trades and large notional off-facility swaps (i.e., swaps that fall

    under CEA Section 2(a)(13)(C)(i) and (iv)) would be 15 minutes from

    the time of execution. Id. The Initial Proposal did not provide

    specific time delays for large notional off-facility swaps (i.e.,

    swaps that fall under Section 2(a)(13)(C)(ii) and (iii)). Instead,

    proposed Sec. 43.5(k)(3) provided that the time delay for such

    swaps shall be reported subject to a time delay that may be

    prescribed by the Commission. Id.

    The Real-Time Reporting Final Rule established time delays for

    the public dissemination of block trades and large notional off-

    facility swaps in Sec. 43.5. See 77 FR 1247-49.

    \15\ The distribution test, described in proposed Sec.

    43.5(g)(1)(i) of the Initial Proposal, required that an SDR take the

    rounded transaction sizes of all trades executed over a period of

    time for a particular swap instrument and create a distribution of

    those trades. An SDR would then determine the minimum threshold

    amount as an amount that is greater than 95 percent of the notional

    or principal transaction sizes for the swap instrument for an

    applicable period of time. See 75 FR 76175.

    \16\ The multiple test, described in proposed Sec.

    43.5(g)(1)(ii) in the Initial Proposal, required that an SDR

    multiply the block trade multiple by the ``social size'' of a

    particular swap instrument. Proposed Sec. 43.2(x) defined ``social

    size'' as the greatest of the mean, median or mode transaction size

    for a particular swap instrument. The Commission proposed a block

    trade multiple of five. Id.

    \17\ See proposed Sec. 43.2(y), 75 FR 76172.

    \18\ See 75 FR 76176.

    ---------------------------------------------------------------------------

    With respect to anonymity, the Initial Proposal set forth several

    provisions to address issues pertinent to protecting the identities of

    parties to a swap. Essentially, these proposed provisions sought to

    protect the identities of parties to a swap through the limited

    disclosure of information and data relevant to the swap. In particular,

    proposed Sec. 43.4(e)(1) in the Initial Proposal provided that an SDR

    could not publicly report swap transaction and pricing data in a manner

    that discloses or otherwise facilitates the identification of a party

    to a swap. Proposed Sec. 43.4(e)(2) would have placed a requirement on

    SEFs, DCMs and reporting parties to provide an SDR with a specific

    description of the underlying asset and tenor of a swap. This proposed

    section also included a qualification with respect to the reporting of

    the specific description. In particular, this section provided that

    ``[the] description must be general enough to provide anonymity but

    specific enough to provide for a meaningful understanding of the

    economic characteristics of the swap.'' \19\ This qualification would

    have applied to all swaps.

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    \19\ See 75 FR 76174.

    ---------------------------------------------------------------------------

    In the Initial Proposal, the Commission acknowledged that swaps

    that are executed on or pursuant to the rules of a SEF or DCM do not

    raise the same level of concerns in protecting the identities, business

    transactions or market positions of swap counterparties since these

    swaps generally lack customization.\20\ As a result, the Commission

    provided that SEFs and DCMs should tailor the description required by

    proposed Sec. 43.2(e) depending on the asset class and place of

    execution of each swap.

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    \20\ See 75 FR 76151 (``In contrast, for those swaps that are

    executed on a swap market, the Commission believes that since such

    contracts will be listed on a particular trading platform or

    facility, it will be unlikely that a party to a swap could be

    inferred based on the reporting of the underlying asset and

    therefore parties to swaps executed on swap markets must report the

    specific underlying assets and tenor of the swap.'').

    ---------------------------------------------------------------------------

    In contrast, the Commission acknowledged that the public

    dissemination of a description of the specific underlying asset and

    tenor of swaps that are not executed on or pursuant to the rules of a

    SEF or DCM (i.e., swaps that are executed bilaterally) may result in

    the unintended disclosure of the identities, business transactions or

    market positions of swap counterparties, particularly for swaps in the

    other commodity asset class.\21\ To address this issue, the Commission

    proposed in Sec. 43.4(e)(2) that an SDR publicly disseminate a more

    general description of the specific underlying asset and tenor.\22\ In

    the Initial Proposal, the Commission provided a hypothetical example of

    how an SDR could mask or otherwise protect the underlying asset from

    public disclosure

    [[Page 32869]]

    in a manner too specific so as to divulge the identity of a swap

    counterparty. The Commission, however, did not set forth a specific

    manner in which SDRs should carry out this requirement.\23\

    ---------------------------------------------------------------------------

    \21\ See 75 FR 76150-51.

    \22\ See 75 FR 76174.

    \23\ See 75 FR 76150. The Initial Proposal further provided that

    the requirement in proposed Sec. 43.4(e)(2) was separate from the

    requirement that a reporting party report swap data to an SDR

    pursuant to section 2(a)(13)(G) of the CEA. See 75 FR 76174.

    ---------------------------------------------------------------------------

    To further protect the identities, business transactions or market

    positions of swap counterparties, proposed Sec. 43.4(i) of the Initial

    Proposal included a rounding convention for all swaps, which included a

    ``notional cap'' provision. The proposed notional cap provision

    provided, for example, that if the notional size of a swap is greater

    than $250 million, then an SDR only would publicly disseminate a

    notation of ``$250+'' rather than the actual notional size of the

    swap.\24\

    ---------------------------------------------------------------------------

    \24\ See 75 FR 76152.

    ---------------------------------------------------------------------------

    The Commission issued the Initial Proposal for public comment for a

    period of 60 days, but later reopened the comment period for an

    additional 45 days.\25\ After issuing the Initial Proposal, the

    Commission received 105 comment letters and held 40 meetings with

    interested parties regarding the proposed provisions.\26\

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    \25\ The initial comment period for the Initial Proposal closed

    on February 7, 2011. The comment periods for most proposed

    rulemakings implementing the Dodd-Frank Act--including the proposed

    part 43 rules--subsequently were reopened for the period of April 27

    through June 2, 2011.

    \26\ The interested parties who either submitted comment letters

    or met with Commission staff included end-users, potential swap

    dealers, asset managers, industry groups/associations, potential

    SDRs, a potential SEF, multiple law firms on behalf of their clients

    and a DCM. Of the 105 comment letters submitted in response to the

    Initial Proposal, 42 letters focused on various issues relating to

    block trades and large notional off-facility swaps. Of the 40

    meetings, five meetings focused on various issues relating to block

    trades and large notional off-facility swaps. All comment letters

    received in response to the Initial Proposal may be found on the

    Commission's Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.

    ---------------------------------------------------------------------------

    2. Public Comments in Response to the Initial Proposal

    The commenters to the Initial Proposal provided general and

    specific comments relating to the proposed provisions regarding the

    determination of appropriate minimum block sizes and anonymity

    protections for the identities, business transactions and market

    positions of swap counterparties.\27\ The comments submitted regarding

    the Initial Proposal's provisions regarding appropriate minimum block

    sizes and anonymity protections are summarized in detail in the Further

    Block Proposal.\28\

    ---------------------------------------------------------------------------

    \27\ A list of the full names and abbreviations of commenters

    who responded to the Initial Proposal and who the Commission refers

    to in the Further Block Proposal is included in section VI below. As

    noted above, letters from these commenters and others submitted in

    response to the Initial Proposal are available through the

    Commission's Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.

    \28\ See Further Block Proposal at 77 FR 15463-66.

    ---------------------------------------------------------------------------

    Following the close of the comment period for the Initial Proposal,

    the Commission took several actions in consideration of the comments

    received regarding the proposed methodology to determine appropriate

    minimum block sizes, the proposed anonymity protections and the

    proposed implementation approach.\29\ A discussion of the Commission's

    actions and their impact on the Further Block Proposal is set out

    immediately below.

    ---------------------------------------------------------------------------

    \29\ Commission staff also consulted with the staffs of several

    other federal financial regulators in connection with the issuance

    of the Further Block Proposal.

    ---------------------------------------------------------------------------

    C. Issuance of the Real-Time Reporting Final Rule

    In consideration of the public comments submitted in response to

    the Initial Proposal, the Commission obtained and analyzed swap data in

    order to better understand the trading activity of swaps in certain

    asset classes.\30\ The Commission also reviewed additional information,

    including a study pertaining to the mandatory trade execution

    requirement and post-trade transparency concerns that arose out of two

    of the Commission's proposed rulemakings,\31\ as well as a report

    issued by two industry trade associations on block trade reporting in

    the swaps market.\32\ In addition, the Commission and the Securities

    and Exchange Commission (``SEC'') held a two-day public roundtable on

    Dodd-Frank Act implementation on May 2-3, 2011 (``Public

    Roundtable'').\33\ During the Public Roundtable and in comment letters

    submitted in support thereof, interested parties recommended that the

    Commission adopt a phased-in approach with respect to establishing

    block trade rules.

    ---------------------------------------------------------------------------

    \30\ A detailed discussion of Commission staff's review and

    analysis process is set out below in sections II.A.1.b.i. and c.i.

    \31\ See ISDA, Costs and Benefits of Mandatory Electronic

    Execution Requirements for Interest Rate Products, 24 (ISDA

    Discussion Paper No. 2, Nov. 2011), available at http://www2.isda.org/attachment/Mzc0NA==/ISDA%20Mandatory%20Electronic%20Execution%20Discussion%20Paper.pdf.

    This paper cited the Commission's notice of proposed rulemaking with

    respect to SEFs (Core Principles and Other Requirements for Swap

    Execution Facilities, 76 FR 1214, 1220, Jan. 7, 2011) and the

    Initial Proposal.

    \32\ See ISDA and SIFMA, Block trade reporting over-the-counter

    derivatives markets, 6 (Jan. 2011), available at http://www.isda.org/speeches/pdf/Block-Trade-Reporting.pdf.

    \33\ See Joint Public Roundtable on Issues Related to the

    Schedule for Implementing Final Rules for Swaps and Security-Based

    Swaps Under the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, 76 FR 23211, Apr. 26, 2011. A copy of the transcript

    is accessible at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/csjac_transcript050211.pdf.

    ---------------------------------------------------------------------------

    On January 9, 2012, the Commission issued the Real-Time Reporting

    Final Rule, finalizing several provisions that were proposed in the

    Initial Proposal.\34\ Those provisions implement, among other things:

    (1) Several definitions proposed in the Initial Proposal relevant to

    this final rule, including ``asset class''; \35\ (2) the scope of part

    43; (3) the reporting responsibilities of the parties to each swap; (4)

    the requirement that SDRs publicly disseminate swap transaction and

    pricing data; (5) the data fields that SDRs will publicly disseminate;

    (6) the time-stamping and recordkeeping requirements of SDRs, SEFs,

    DCMs and the ``reporting party'' to each swap; \36\ (7) the interim

    time delays for public dissemination and the time delays for public

    dissemination of large notional off-facility swaps and block trades;

    and (8) interim notional cap sizes for all swaps that are publicly

    disseminated.\37\ Based on commenters' recommendations, however, the

    Commission did not adopt proposed Sec. 43.5 and stated its intent to

    re-propose a calculation methodology for appropriate minimum block

    sizes based on additional data and analysis in a separate

    rulemaking.\38\

    ---------------------------------------------------------------------------

    \34\ See 77 FR 1182.

    \35\ The Real-Time Reporting Final Rule includes final

    definitions for the following terms: (1) block trade; (2) large

    notional off-facility swap; (3) appropriate minimum block size; and

    (4) asset class. As noted above, the Real-Time Reporting Final Rule

    did not define the term swap instrument. This final rule adopts a

    new term, swap category, which groups swaps for the purpose of

    determining whether a swap transaction qualifies as a large notional

    off-facility swap or block trade. See note 17 supra.

    \36\ See Sec. 43.2 of the Commission's regulations. 77 FR 1244.

    The Real-Time Reporting Final Rule finalized the definition of

    ``reporting party'' as a ``party to a swap with the duty to report a

    publicly reportable swap transaction in accordance with this part

    [43] and section 2(a)(13)(F) of the [CEA].'' 77 FR 1244.

    \37\ See 77 FR 1244.

    \38\ See 77 FR 1185.

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    D. Further Block Proposal

    On March 15, 2012, the Commission issued for comment the Further

    Block Proposal.\39\ Based on the public comments received in response

    to the Initial Proposal, and in order to successfully implement the

    real-time public reporting regulatory framework

    [[Page 32870]]

    established in the Real-Time Reporting Final Rule, the Commission

    proposed provisions in the Further Block Proposal that: (1) Specify the

    criteria for determining swap categories and methodologies for

    determining the appropriate minimum block sizes for large notional off-

    facility swaps and block trades; and (2) provide increased protections

    to the identities of swap counterparties to large swap transactions and

    certain other commodity swaps, which were not fully addressed in the

    Real-Time Reporting Final Rule.\40\

    ---------------------------------------------------------------------------

    \39\ See 77 FR 15460.

    \40\ In several places in the Real-Time Reporting Final Rule,

    the Commission stated that it planned to address these requirements

    in a separate, forthcoming release. See, e.g., 77 FR 1185, 1191,

    1193 and 1217. The Further Block Proposal was that release.

    ---------------------------------------------------------------------------

    1. Policy Goals

    In section 2(a)(13) of the CEA, Congress intended that the

    Commission consider both the benefits of enhanced market transparency

    and the effects such transparency would have on market liquidity.\41\

    Section 2(a)(13)(E)(iv) of the CEA places constraints on the

    requirements for the real-time public reporting of swap transaction and

    pricing data by mandating that the Commission shall ``take into account

    whether the public disclosure [of swap transaction and pricing data]

    will materially reduce market liquidity.''\42\ While the Commission

    anticipates that the public dissemination of swap transaction and

    pricing data will generally reduce costs associated with price

    discovery and prevent information asymmetries between market makers and

    end-users,\43\ it also believes that the benefits of enhanced market

    transparency are not boundless, particularly in swap markets with

    limited liquidity.

    ---------------------------------------------------------------------------

    \41\ In considering the benefits and effects of enhanced market

    transparency, the Commission notes that the ``guiding principle in

    setting appropriate block trade levels [is that] the vast majority

    of swap transactions should be exposed to the public market through

    exchange trading.'' Congressional Record--Senate, S5902, S5922 (July

    15, 2010).

    \42\ CEA section 2(a)(13)(E)(iv). See also CEA section

    5h(f)(2)(C) (concerning the treatment of block trades on SEFs for

    trade execution purposes).

    \43\ See e.g., CEA section 2(a)(13)(B) (``The purpose of this

    section is to authorize the Commission to make swap transaction and

    pricing data available to the public in such form and at such times

    as the Commission determines appropriate to enhance price

    discovery.'').

    ---------------------------------------------------------------------------

    The Commission understands that the publication of detailed

    information regarding ``outsize swap transactions'' \44\ could expose

    swap counterparties to higher trading costs.\45\ In this regard, the

    publication of detailed information about an outsize swap transaction

    may alert the market to the possibility that the original liquidity

    provider to the outsize swap transaction will be re-entering the market

    to offset that transaction.\46\ Other market participants might be

    alerted to the liquidity provider's need to offset risk and therefore

    would have a strong incentive to exact a premium from the liquidity

    provider. As a result, liquidity providers possibly could be deterred

    from becoming counterparties to outsize swap transactions if swap

    transaction and pricing data is publicly disseminated before liquidity

    providers can offset their positions. The Commission anticipates that,

    in turn, this result could negatively affect liquidity in the swaps

    market.

    ---------------------------------------------------------------------------

    \44\ As used in the Further Block Proposal and this final rule,

    an ``outsize swap transaction'' is a transaction that, as a function

    of its size and the depth of the liquidity of the relevant market

    (and equivalent markets), leaves one or both parties to such

    transaction unlikely to transact at a competitive price.

    \45\ Consistent with this final rule, the Commission clarified

    in the SEF final rule that a swap transaction qualifies as a block

    trade based on the size of the swap transaction, not based on

    whether the swap is subject to the trade execution requirement under

    section 2(h)(8) of the CEA. See Core Principles and Other

    Requirements for Swap Execution Facilities, p. 72 (May 16, 2013)].

    In Sec. 37.200 of the Commission's regulations, the Commission has

    codified the statutory text of SEF Core Principle 2 under section

    5h(f)(2)(C) of the CEA, which requires a SEF to establish rules

    governing the operation of its trading facility, including trading

    procedures for block trades. 17 CFR 37.200(c). Similarly, the

    Commission's proposed rulemaking regarding core principles and other

    requirements for DCMs under Sec. 38.504 of the Commission's

    regulations, the Commission requires DCMs to adopt rules that comply

    with all of the provisions of part 43, including the block trade

    provisions finalized herein. Core Principles and Other Requirements

    for Designated Contract Markets, 75 FR 80572, 80617 (Dec. 22, 2010).

    \46\ The price of such a transaction would reflect market

    conditions for the underlying commodity or reference index and the

    liquidity premium for executing the swap transaction. The time

    delays in part 43 of the Commission's regulations will protect end-

    users and liquidity providers from the expected price impact of the

    disclosure of publicly reportable swap transactions. Trading that

    exploits the need of traders to reduce or offset their positions has

    been defined in financial economics literature as ``predatory

    trading.'' See e.g., Markus Brunnermeier and Lasse Heje Pedersen,

    Predatory Trading, Journal of Finance LX 4, Aug. 2005, available at

    http://pages.stern.nyu.edu/~lpederse/papers/predatory_trading.pdf.

    ---------------------------------------------------------------------------

    In consideration of these potential outcomes, the Further Block

    Proposal sought to provide maximum public transparency, while taking

    into account the concerns of liquidity providers regarding possible

    reductions in market liquidity. To do so, the Further Block Proposal

    established the following more detailed criteria: (1) Swap categories

    (relative to the definition of swap instrument in the Initial

    Proposal); (2) a phased-in approach to determining appropriate minimum

    block sizes for block trades and large notional off-facility swaps; and

    (3) anonymity provisions for the public reporting of transaction data.

    A summary of the Commission's proposed approach is provided below.

    2. Summary of Proposed Approach

    The Commission proposed a two-period, phased-in approach to

    implement regulations for determining appropriate minimum block

    sizes.\47\ Specifically, the Commission proposed phasing-in minimum

    block sizes during an initial period and setting them thereafter on an

    ongoing basis (i.e., the post-initial period) so that market

    participants could better adjust their swap trading strategies to

    manage risk, secure new technologies and make necessary arrangements in

    order to comply with part 43 reporting requirements. The Commission

    proposed two provisions relating to the Commission's determination of

    appropriate minimum block sizes: (1) Initial appropriate minimum block

    sizes under proposed Sec. 43.6(e); and (2) post-initial appropriate

    minimum block sizes under proposed Sec. 43.6(f).

    ---------------------------------------------------------------------------

    \47\ The Commission proposed the same phased-in approach for

    determining cap sizes, which help to protect the anonymity of

    counterparties' market positions and business transactions as

    required in the CEA. For a more detailed discussion of the

    Commission's proposed approach with respect to cap sizes, see

    section III.B.

    The two-period, phased-in approach would become effective after

    the implementation of the part 43 provisions in the Real-Time

    Reporting Final Rule. Until the date on which the proposed

    provisions in the Further Block Proposal become effective, all swaps

    would be subject to a time delay pursuant to the provisions in part

    43.

    ---------------------------------------------------------------------------

    In proposed Sec. 43.6(e), the Commission proposed establishing

    initial appropriate minimum block sizes for each category of swaps

    within the interest rate, credit, foreign exchange (``FX'') and other

    commodity asset classes.\48\ The Commission listed the prescribed

    initial appropriate minimum block sizes in proposed appendix F to part

    43 based on these swap categories.\49\ For interest rate and credit

    swaps, the Commission reviewed actual market data and prescribed

    initial appropriate minimum block sizes for swap categories in these

    asset classes

    [[Page 32871]]

    based on that data. For the other asset classes, the Commission did not

    have access to relevant market data. As such, during the initial

    period, the Commission proposed using a methodology based on whether a

    swap or swap category is ``economically related'' to a futures

    contract.\50\ Swaps and swap categories that are not economically

    related to a futures contract would remain subject to a time delay

    (i.e., treated as block trades or large notional off-facility swaps, as

    applicable, regardless of notional amount) during the initial period.

    ---------------------------------------------------------------------------

    \48\ The Commission proposed that swaps in the equity asset

    class do not qualify as block trades and large notional off-facility

    swaps. See proposed Sec. 43.6(d). Otherwise, the Commission

    proposed prescribing swap categories for each asset class as set

    forth in proposed Sec. 43.6(b). These swap categories would remain

    the same during the initial and post-initial periods.

    \49\ The Commission notes SEFs and DCMs would not be prohibited

    under the Further Block Proposal from setting block sizes for swaps

    at levels that are higher than the appropriate minimum block sizes

    as determined by the Commission.

    \50\ See infra notes 169-174 and accompanying text.

    ---------------------------------------------------------------------------

    In proposed Sec. 43.6(f)(1), the Commission provided that the

    duration of this initial period would be no less than one year after an

    SDR started collecting reliable data for a particular asset class as

    determined by the Commission. During the initial period, the Commission

    would review reliable data for each asset class. For the purposes of

    this proposed provision, reliable data would include all data collected

    by an SDR for each asset class in accordance with the compliance chart

    in the adopting release to part 45 of the Commission's regulations.\51\

    ---------------------------------------------------------------------------

    \51\ See Swap Data Recordkeeping and Reporting Requirements, 77

    FR 2136, 2196, Jan. 13, 2012.

    ---------------------------------------------------------------------------

    The Commission stated in the Further Block Proposal and is

    currently of the view that data is per se reliable if it is collected

    by an SDR for an asset class after the respective compliance date for

    such asset class as set forth in part 45 of the Commission's

    regulations or by other Commission action. The Commission notes that

    SDRs have been collecting data pursuant to the compliance dates for

    certain market participants and asset classes since December 2012. DCMs

    and Swap Dealers (``SDs'') began reporting swap transactions in the

    interest rate and credit default swap asset classes on December 31,

    2012.\52\ DCMs and SDs began reporting swap transactions in the FX,

    equity, and other commodity asset classes on February 28, 2013.\53\

    Major Swap Participants (``MSPs'') began reporting swap transactions in

    all five asset classes on February 28, 2013.\54\ Financial Entities

    began reporting swap transactions in the interest rate and credit

    default swap asset classes on April 10, 2013.\55\ Financial Entities

    begin reporting swap transactions for swaps executed starting April 10,

    2013, in the FX, equity, and other commodity asset classes on May 29,

    2013.\56\ Non-SDs, non-MSPs, and non-Financial Entities begin reporting

    swap transactions for swaps executed starting April 10, 2013, in the

    interest rate and credit default swap asset classes on July 1,

    2013.\57\ Non-SDs, non-MSPs, and non-Financial Entities begin reporting

    swap transactions for swaps executed starting April 10, 2013, in the

    FX, equity, and other commodity asset classes on August 19, 2013.\58\

    Accordingly, the Commission and SDRs will have one year of reliable

    data as of April 10, 2014.

    ---------------------------------------------------------------------------

    \52\ See ``Commission Q & A--On the Start of Swap Data

    Reporting'' (Oct. 9, 2012).

    \53\ See ``No-Action Relief for Swap Dealers from Certain Swap

    Data Reporting Requirements of Part 43, Part 45, and Part 46 of the

    Commission's Regulations Due to Effects of Hurricane Sandy,''

    Commission Letter No. 12-41 (Dec. 5, 2012).

    \54\ See id.

    \55\ See ``Time-Limited No-Action Relief for Swap Counterparties

    that are not Swap Dealers or Major Swap Participants, from Certain

    Swap Data Reporting Requirements of Parts 43, 45 and 46 of the

    Commission's Regulations,'' Commission Letter No. 13-10 (Apr. 9,

    2013).

    \56\ See id.

    \57\ See id.

    \58\ See id.

    ---------------------------------------------------------------------------

    The proposed initial period would expire following the publication

    of a Commission determination of post-initial appropriate minimum block

    sizes in accordance with the publication process set forth in proposed

    Sec. 43.6(f)(4) and (5). Thereafter, the Commission would set post-

    initial appropriate minimum block sizes for swap categories no less

    than once each calendar year using the calculation methodology set

    forth in proposed Sec. 43.6(c)(1).\59\

    ---------------------------------------------------------------------------

    \59\ In particular, the Commission proposed a 67-percent

    notional amount calculation, which is discussed in more detail in

    section II.B.3.

    ---------------------------------------------------------------------------

    The Commission also proposed special rules for determining

    appropriate minimum block sizes in certain instances. In particular, in

    proposed Sec. 43.6(d), the Commission prescribed special rules for

    swaps in the equity asset class. In proposed Sec. 43.6(h), the

    Commission proposed establishing special rules for determining

    appropriate minimum block sizes in certain circumstances including, for

    example, rules for converting currencies and rules for determining

    whether a swap with optionality qualifies for block trade or large

    notional off-facility swap treatment.\60\

    ---------------------------------------------------------------------------

    \60\ See infra Section II.B.6. for a discussion of the special

    rules.

    ---------------------------------------------------------------------------

    In the Further Block Proposal's proposed amendments to Sec.

    43.4(h) and 43.4(d)(4), the Commission also prescribed measures to

    fulfill the CEA's anonymity requirements in connection with the public

    dissemination of publicly reportable swap transactions. The Commission

    proposed adopting the practices used by most federal agencies when

    releasing to the public company-specific information--by removing

    obvious identifiers, limiting geographic detail (e.g., disclosing

    general, non-specific geographical information about the delivery and

    pricing points) and masking high-risk variables by truncating extreme

    values for certain variables (e.g., capping notional values).\61\

    ---------------------------------------------------------------------------

    \61\ The Commission proposed to follow the necessary procedures

    for releasing microdata files as outlined by the Federal Committee

    on Statistical Methodology: (i) Removal of all direct personal and

    institutional identifiers, (ii) limiting geographic detail, and

    (iii) top-coding high-risk variables which are continuous. See

    Federal Committee on Statistical Methodology, Report on Statistical

    Disclosure Limitation Methodology 94 (Statistical Policy Working

    Paper 22, 2d ed. 2005), http://www.fcsm.gov/working-papers/totalreport.pdf. The report was originally prepared by the

    Subcommittee on Disclosure Limitation Methodology in 1994 and was

    revised by the Confidentiality and Data Access Committee in 2005.

    ---------------------------------------------------------------------------

    3. Overview of Comments Received

    The Commission received comments from 35 interested parties

    representing a broad range of interests including: financial end-users,

    swap dealers, asset managers, industry groups/associations, potential

    SEFs, and a DCM.\62\ Some commenters expressed general support for the

    Further Block Proposal's provisions regarding minimum block sizes and

    anonymity; others objected to particular aspects of the Further Block

    Proposal and/or offered recommendations for clarification or

    modification of specific proposed regulations.

    ---------------------------------------------------------------------------

    \62\ A list of the full names and abbreviations of commenters

    who responded to the Further Block Proposal is included in section

    VIII below. As noted above, letters from these commenters and others

    submitted in response to the Initial Proposal are available through

    the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.

    ---------------------------------------------------------------------------

    In addition to a general solicitation for comment on all aspects of

    the Further Block Proposal, the Commission requested comment on a

    number of specific, focused questions related to particular provisions.

    For example, commenters were asked to address issues related to: (i)

    The appropriate criteria for determining swap categories in the five

    asset classes; (ii) the appropriate methodology for determining

    appropriate minimum block sizes for swaps in the five asset classes;

    (iii) whether and how a phase-in of block thresholds should be

    implemented; (iv) special rules with respect to swaps with optionality,

    swaps with composite reference prices, physical commodity swaps,

    currency conversions, and successor currencies; (v) the role of SEFs

    and DCMs in

    [[Page 32872]]

    determining appropriate minimum block sizes for swaps that they list;

    (vi) the process by which the Commission would notify the public of

    appropriate minimum block sizes; (vii) the process through which a

    qualifying swap transaction would be treated as a block trade or large

    notional off-facility swap; (viii) the appropriate methodology for

    determining the maximum limit of the principal, notional amount of a

    swap that is publicly disseminated; (ix) appropriate anonymity

    protections for the public dissemination of publicly reportable swap

    transactions in the other commodity asset class.

    The Commission also requested comment with respect to the cost-

    benefit considerations in the Further Block Proposal and specifically

    requested commenters to provide a feasible alternative approach to

    establishing minimum block sizes that would impose less regulatory

    burden on swap market participants and the general public. Commenters

    also were expressly invited to provide data regarding the direct and

    indirect quantifiable costs with the proposed criteria for establishing

    minimum block thresholds.

    4. Additional Proposal Regarding Aggregation of Blocks

    Among the requirements contained in the Initial Proposal, proposed

    Sec. 43.5(b)(1) provided that eligible parties to a block trade (or

    large notional swap) must be Eligible Contract Participants (``ECPs''),

    except that a DCM may allow a Commodity Trading Advisor (``CTA''),

    investment advisor, or foreign person meeting certain criteria to

    transact block trades for customers who are not ECPs. Further, proposed

    Sec. 43.5(m) prohibited aggregation of orders for different trading

    accounts in order to satisfy the appropriate minimum block size

    requirement, except if done so on a DCM by a CTA, investment adviser,

    or foreign person meeting certain criteria.

    After it issued its Further Block Proposal, the Commission

    determined that the aggregation provision and the provision that

    specified the eligible parties to a block trade, including the proposed

    requirement that persons transacting block trades on behalf of

    customers must receive prior written consent to do so, were

    inadvertently omitted from the Further Block Proposal. These provisions

    were then the subject of a separate notice of proposed rulemaking

    issued on June 27, 2012 (``Proposed Aggregation Rule'').\63\

    ---------------------------------------------------------------------------

    \63\ Rules Prohibiting the Aggregation of Orders to Satisfy

    Minimum Block Sizes or Cap Size Requirements, and Establishing

    Eligibility Requirements for Parties to Block Trades, 77 FR 38229,

    June 27, 2012.

    ---------------------------------------------------------------------------

    The Commission received a total of nine comment letters in response

    to the proposed rules regarding eligible parties to a block trade and

    aggregation of orders. Four of the letters responded to the Initial

    Proposal and five letters responded to the Proposed Aggregation Rule.

    Many of the comments received applied equally to the same provisions

    contained in both proposed Sec. 43.6(h)(6) and 43.6(i), which address

    the aggregation of orders and the eligible parties to a block trade.

    II. Procedures To Establish Appropriate Minimum Block Sizes for Large

    Notional Off-Facility Swaps and Block Trades--Final Rules

    A. Criteria for Distinguishing Among Swap Categories in Each Asset

    Class

    In the Further Block Proposal, the Commission proposed to use the

    term ``swap category'' to convey the concept of a grouping of swap

    contracts that would be subject to a common appropriate minimum block

    size.\64\ Specifically, the Commission proposed specific criteria for

    defining swap categories in each asset class. As adopted in the Real-

    Time Reporting Final Rule, Sec. 43.2 of the Commission's regulations

    defines ``asset class'' as ``a broad category of commodities,

    including, without limitation, any `excluded commodity' as defined in

    section 1a(19) of the [CEA], with common characteristics underlying a

    swap.'' \65\ Section 43.2 also identifies the following five swap asset

    classes: Interest rates; \66\ equity; credit; FX; \67\ and other

    commodities.\68\

    ---------------------------------------------------------------------------

    \64\ Proposed Sec. 43.6(b) does not set out a definition for

    the term ``swap category.'' Instead, proposed Sec. 43.6(b) sets out

    the provisions that group swaps within each asset class with common

    risk and liquidity profiles, as determined by the Commission.

    \65\ See Sec. 43.2, 77 FR 1243.

    \66\ In the Real-Time Reporting Final Rule, the Commission

    determined that cross-currency swaps are a part of the interest rate

    asset class. See 77 FR 1193. The Commission noted that this

    determination is consistent with industry practice.

    \67\ The U.S. Department of the Treasury (``Treasury'') has

    issued a Final Determination, pursuant to sections 1a(47)(E)(i) and

    1b of the CEA, that exempts FX swaps and FX forwards from the

    definition of ``swap'' under the CEA. Therefore, the requirements of

    section 2(a)(13) of the CEA would not apply to those transactions,

    and such transactions would not be subject to part 43 of the

    Commission's regulations. See Determination of Foreign Exchange

    Swaps and Foreign Exchange Forwards under the Commodity Exchange

    Act, 77 FR 69694, Nov. 20, 2012. Nevertheless, section

    1a(47)(E)(iii) of the CEA provides that FX swaps and FX forwards

    transactions still are not excluded from regulatory reporting

    requirements to an SDR. Further, the Commission notes that

    Treasury's final determination excludes FX swaps and FX forwards,

    but does not apply to FX options or non-deliverable FX forwards. As

    such, FX instruments that are not covered by Treasury's final

    determination are subject to part 43 of the Commission's

    regulations.

    \68\ The Real-Time Reporting Final Rule defines the term ``other

    commodity'' to mean any commodity that is not categorized in the

    other asset classes as may be determined by the Commission. See 77

    FR 1244. The definition of asset class in Sec. 43.2 also provides

    that the Commission may later determine that there are other asset

    classes not identified currently in that section. See 77 FR 1243.

    ---------------------------------------------------------------------------

    The proposed swap category criteria are intended to address the

    following two policy objectives: (1) Categorizing together swaps with

    similar quantitative or qualitative characteristics that warrant being

    subject to the same appropriate minimum block size; and (2) minimizing

    the number of the swap categories within an asset class in order to

    avoid unnecessary complexity in the determination process.\69\ In the

    Commission's view, balancing these policy objectives and considering

    the characteristics of different types of swaps within an asset class

    are necessary in establishing appropriate criteria for determining swap

    categories within each asset class. The five asset classes established

    by the Commission in the Real-Time Reporting Final Rule are discussed

    briefly in the paragraph below, followed by a discussion of the

    proposed swap category criteria for each asset class.

    ---------------------------------------------------------------------------

    \69\ These objectives are specific to the determination of

    appropriate swap category criteria and are intended to promote the

    general policy goals described above in section I.D.1.

    ---------------------------------------------------------------------------

    In the Further Block Proposal, the Commission proposed breaking

    down each asset class into separate swap categories to determine

    appropriate minimum block sizes for such categories. During the initial

    and post-initial periods, the Commission would group swaps in the five

    asset classes into the prescribed swap categories as set forth in

    proposed Sec. 43.6(b).

    [[Page 32873]]

    Twenty-one commenters addressed the Further Block Proposal's use of

    swap categories.\70\ The vast majority of the comments did not question

    the use of swap categories generally, and focused on the specific

    criteria proposed for determining swap categories within each asset

    class instead. Better Markets and ICI expressly supported the

    Commission's proposed use of swap categories.\71\ Better Markets stated

    that ``the concept of a `swap category' is useful, in that it allows

    greater granularity than the far broader notion of `asset class.' ''

    \72\ ICI ``support[ed] the CFTC's proposal to establish categories of

    swaps within different asset classes that would be subject to a common

    appropriate minimum block size to better calibrate the block thresholds

    to the relative liquidity of the swap categories in each asset class.''

    \73\ ICAP, however, disagreed with the Commission's use of swap

    categories and stated that ``the Commission's proposal is mistaken in

    its use of `swap categories' . . . as opposed to using the standard

    liquid tenors of swap contracts.'' \74\

    ---------------------------------------------------------------------------

    \70\ See generally CL-AFR; CL-AII; CL-Barclays; CL-Better

    Markets; CL-CME; CL-FIA; CL-GFMA; CL-ICAP; CL-ICAP Energy; CL-ICI;

    CL-ISDA/SIFMA; CL-Kinetix; CL-MFA; CL-Morgan Stanley; CL-

    Parascandola; CL-Parity; CL-Pierpont; CL-SDMA; CL-SIFMA; CL-WMBAA;

    CL-Vanguard.

    \71\ CL-Better Markets at 5; CL-ICI at 4.

    \72\ CL-Better Markets at 5.

    \73\ CL-ICI at 4.

    \74\ CL-ICAP at 8.

    ---------------------------------------------------------------------------

    After consideration of the comments related to the use of swap

    categories, the Commission is adopting swap categories as proposed in

    Sec. 43.6, with certain modifications based upon both general concerns

    expressed by commenters in regard to the use of swap categories,

    specific concerns raised in regard to the criteria for determining swap

    categories within each asset class, and other relevant market

    developments.\75\ The following sections address the comments regarding

    specific asset classes and set out, where appropriate, the Commission's

    responsive modifications of the swap categories approach.

    ---------------------------------------------------------------------------

    \75\ The Commission is using the term ``swap category'' instead

    of ``swap instrument'' in this final rule. Although the Commission

    is not adopting a definition of ``swap category,'' the Commission

    believes that this term groups swap contracts that would be subject

    to the same appropriate minimum block size based on asset class with

    common quantitative or qualitative characteristics, i.e., risk and

    liquidity profiles.

    ---------------------------------------------------------------------------

    1. Interest Rate and Credit Asset Classes

    a. Background

    The Commission was able to obtain and review non-public swap data

    to make inferences about patterns of trading activity, price impact and

    liquidity in the markets for swaps in the interest rate and credit

    asset classes. Based on that review, the Commission proposed criteria

    for determining swap categories in these two asset classes.

    Specifically, the Commission proposed defining swap categories for: (1)

    Interest rate swaps based on unique combinations of tenor \76\ and

    currency; and (2) credit default swaps (``CDS'') based on unique

    combinations of tenor and conventional spread.\77\

    ---------------------------------------------------------------------------

    \76\ As used in the Further Block Proposal, the tenor of a swap

    refers to the amount of time from the effective or start date of a

    swap to the end date of such swap. In circumstances where the

    effective or start date of the swap was different from the trade

    date of the swap, the Commission used the later occurring of the two

    dates to determine tenor.

    Two commenters addressed how the Commission should determine

    tenor for backdated swaps. AFR stated that backdating a swap is the

    equivalent of a swap with a date of its inception, but with a price

    that includes an adjustment for the backdating feature of the

    transaction; AFR wrote that tenor should be determined accordingly.

    CL-AFR at 5-6. Similarly, ISDA/SIFMA requested that the Commission

    determine the tenor of a back dated swap as the time from the date

    of execution of the swap (as opposed to the start date) to the

    maturity date of the swap. CL-ISDA/SIFMA at 10. After consideration

    of these comments, the Commission maintains the same approach from

    the Further Block Proposal.

    \77\ As generally used in the industry, the term ``conventional

    spread'' represents the equivalent of a swap dealer's quoted spread

    (i.e., an upfront fee based on a fixed coupon and using standard

    assumptions such as auctions and recovery rates). More information

    regarding the use of this term can be found at Markit, The CDS Big

    Bang: Understanding the Changes to the Global CDS Contract and North

    American Conventions, at http://www.markit.com/cds/announcements/resource/cds_big_bang.pdf, (Mar. 2009), at 19.

    ---------------------------------------------------------------------------

    The Commission obtained transaction-level data for these asset

    classes from two third-party service providers with the assistance of

    the Over-the-Counter Derivatives Supervisors Group (``ODSG'').\78\

    Established in 2005, the ODSG is chaired by the Federal Reserve Bank of

    New York and is comprised of domestic and international supervisors of

    representatives from major OTC derivatives market participants.\79\ In

    particular, the ODSG coordinated with the ``G-14 banks'' in order to

    gain written permission to access the non-public swap data.\80\

    ---------------------------------------------------------------------------

    \78\ Section 8(a) of the CEA protects non-public, transaction-

    level data from public disclosure. Section 8(a)(1) provides, in

    relevant part, that ``the Commission may not publish data and

    information that would separately disclose the business transactions

    or market positions of any person and trade secrets or names of

    customers . . . .'' To assist commenters, the Further Block Proposal

    included various tables and summary statistics depicting the ODSG

    data in aggregate forms. In the discussion that follows, the

    Commission additionally has described the methodology it employed in

    reviewing, analyzing and drawing conclusions based on the ODSG data.

    \79\ See OTC Derivatives Supervisors Group--Federal Reserve Bank

    of New York, http://www.ny.frb.org/markets/otc_derivatives_supervisors_group.html (last visited May 6, 2013). The ODSG was

    formed ``in order to address the emerging risks of inadequate

    infrastructure for the rapidly growing market in the credit

    derivatives . . . .'' The ODSG works directly with market

    participants to plan, monitor and coordinate industry progress

    toward collective commitments made by firms.

    \80\ The G-14 banks are Bank of America-Merrill Lynch; Barclays

    Capital; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank AG;

    Goldman Sachs & Co.; HSBC Group; J.P. Morgan; Morgan Stanley; The

    Royal Bank of Scotland Group; Societe Generale; UBS AG; and Wells

    Fargo Bank, N.A.

    ---------------------------------------------------------------------------

    MarkitSERV \81\ provided the interest rate swap data set. The

    interest rate swap data set covered transactions confirmed on the

    MarkitWire platform between June 1, 2010 and August 31, 2010 where at

    least one party was a G-14 Bank.\82\

    ---------------------------------------------------------------------------

    \81\ MarkitSERV is a post-trade processing company wholly owned

    by Markit. From its formation in 2009 until April 2013, MarkitSERV

    was jointly owned by Markit and The Depository Trust & Clearing

    Corporation (``DTCC'').

    \82\ The interest rate swap data was limited to transactions and

    events submitted to the MarkitWire platform. MarkitWire is a trade

    confirmation service offered by MarkitSERV.

    ---------------------------------------------------------------------------

    The Warehouse Trust Company LLC (``The Warehouse Trust'') provided

    the CDS data set.\83\ The CDS data set covered CDS transactions for a

    three-month period beginning on May 1, 2010 and ending on July 31,

    2010.\84\

    ---------------------------------------------------------------------------

    \83\ The Warehouse Trust, a subsidiary of DTCC DerivSERV LLC, is

    regulated as a member of the U.S. Federal Reserve System and as a

    limited purpose trust company by the New York State Banking

    Department. The Warehouse Trust provides the market with a trade

    database and centralized electronic infrastructure for post-trade

    processing of OTC credit derivatives contracts over their entire

    lifecycle. See DTCC, The Warehouse Trust Company, About the

    Warehouse Trust Company, http://www.dtcc.com/about/subs/derivserv/warehousetrustco.php.

    \84\ The Warehouse Trust data contained ``allocation-level

    data,'' which refers to transactional data that does not distinguish

    between isolated transactions and transactions that, although

    documented separately, comprise part of a larger transaction.

    The Commission notes the work of other regulators in aggregating

    observations believed to be part of a single transaction. See

    Kathryn Chen, et al., Federal Reserve Bank of New York Staff Report,

    An Analysis of CDS Transactions: Implications for Public Reporting,

    (Sept. 2011), at 25, http://www.newyorkfed.org/research/staff_reports/sr517.html. The Commission notes that this allocation-level

    information could produce a downward bias in the notional amounts of

    the swap transactions in the data sets provided by the ODSG. In

    turn, this downward bias would produce smaller appropriate minimum

    block trade sizes relative to a data set that, if available with

    appropriate execution time stamps, would reflect the aggregate

    notional amount of swaps completed in a single transaction.

    ---------------------------------------------------------------------------

    The Commission filtered both data sets in order to analyze only

    transaction-level data corresponding to ``publicly reportable swap

    transactions,'' as defined in Sec. 43.2 of the Real-Time

    [[Page 32874]]

    Reporting Final Rule.\85\ As such, the Commission excluded from its

    analysis duplicate and non-price forming transactions.\86\ The

    Commission also converted the notional amount of each swap transaction

    into a common currency denominator, the U.S. dollar.\87\

    ---------------------------------------------------------------------------

    \85\ ``Publicly reportable swap transaction'' means, unless

    otherwise provided in part 43: (1) Any executed swap that is an

    arm's-length transaction between two parties that results in a

    corresponding change in the market risk position between the two

    parties; or (2) any termination, assignment, novation, exchange,

    transfer, amendment, conveyance, or extinguishing of rights or

    obligations of a swap that changes the pricing of the swap. Examples

    of an executed swap that do not fall within the definition of

    publicly reportable swap transaction may include: (1) Certain

    internal swaps between 100-percent-owned subsidiaries of the same

    parent entity; and (2) portfolio compression exercises. These

    examples represent swaps that are not transacted at arm's length,

    but that do result in a corresponding change in the market risk

    position between two parties. See 77 FR 1244.

    \86\ The excluded records represented activities such as option

    exercises or assignments for physical, risk optimization or

    compression transactions, and amendments or cancellations that were

    assumed to be mis-confirmed. A transaction was assumed to be mis-

    confirmed when it was canceled without a fee, which the Commission

    has inferred was the result of a confirmation correction. The

    Commission also excluded interest rate transactions that were

    indicated as assignments, terminations, and structurally excluded

    records since the Commission was unable to determine if these

    records were price-forming. The Commission also excluded CDS

    transactions that were notated as single name transactions. The data

    sets also included transaction records created for workflow purposes

    (and therefore redundant), duplicates and transaction records

    resulting from name changes or mergers.

    \87\ The Commission calculated the average daily exchange rates

    between relevant currencies and the U.S. dollar for the three-month

    period covered by the data. This average daily exchange rate was

    then applied to the notional amounts for non-U.S. dollar denominated

    swap transactions.

    ---------------------------------------------------------------------------

    b. Interest Rate Swap Categories

    i. Interest Rate Swap Data Summary

    The filtered transaction records in the interest rate swap data set

    contained 166,847 transactions with a combined notional value of

    approximately $45.4 trillion dollars.\88\ These transactions included

    trades with a wide range of notional amounts, 28 different currencies,

    eight product types, 57 different floating rate indexes and tenors

    ranging from under one week to 55 years. Summary statistics of the

    filtered interest rate swap data set are presented in Table 1.\89\

    ---------------------------------------------------------------------------

    \88\ The Commission only reviewed relevant transaction records

    in the interest rate swap data set. As noted above, the Commission

    excluded duplicate and non-price forming transactions from its

    review. See supra note 86 for a list of excluded transaction

    records.

    \89\ See the International Organization for Standardization

    (ISO) standard ISO 4217 for information on the currency codes used

    by the Commission. For information on floating rate indexes, see

    also ISDA, 2006 Definitions (2006), and supplements.

    [[Page 32875]]

    Table 1--Summary Statistics for the Interest Rate Swap Data Set by Product Type, Currency, Floating Index and

    Tenor

    ----------------------------------------------------------------------------------------------------------------

    Percentage of Notional

    Number of total amount Percentage of

    transactions transactions (billions of total notional

    \90\ USD) amount (%)

    ----------------------------------------------------------------------------------------------------------------

    Product Type:

    Single Currency Interest Rate Swap.......... 128,658 77 16,276 36

    Over Night Index Swap (OIS)................. 12,816 8 16,878 37

    Forward Rate Agreement (FRA)................ 5,936 4 7,071 16

    Swaption.................................... 11,042 7 2,256 5

    Other....................................... 8,395 5 2,909 6

    Currency:

    European Union Euro Area euro (EUR)......... 46,412 28 18,648 41

    United States dollar (USD).................. 50,917 31 11,377 25

    United Kingdom pound sterling (GBP)......... 16,715 10 7,560 17

    Japan yen (JPY)............................. 19,502 12 4,253 9

    Other....................................... 33,301 20 3,553 8

    Floating Index:

    USD-LIBOR-BBA............................... 48,651 29 9,411 21

    EUR-EURIBOR-Reuters......................... 39,446 24 9,495 21

    EUR-EONIA-OIS-COMPOUND...................... 6,517 4 9,122 20

    JPY-LIBOR-BBA............................... 19,194 12 4,010 9

    GBP-LIBOR-BBA............................... 12,835 8 2,419 5

    GBP-WMBA-SONIA-COMPOUND..................... 2,014 1 5,123 11

    Other....................................... 38,190 23 5,809 13

    Tenor: \91\

    1 Month..................................... 3,171 2 11,859 26

    3 Month..................................... 10,229 6 11,660 26

    6 Month..................................... 2,822 2 1,701 4

    1 Year...................................... 9,522 6 3,484 8

    2 Year...................................... 16,450 10 3,347 7

    3 Year...................................... 9,628 6 1,488 3

    5 Year...................................... 26,139 16 2,712 6

    7 Year...................................... 6,599 4 661 1

    10 Year..................................... 34,000 20 2,746 6

    30 Year..................................... 9,616 6 448 1

    Other....................................... 38,671 23 5,284 12

    ---------------------------------------------------------------

    Sample Totals........................... 166,847 100 45,390 100

    ----------------------------------------------------------------------------------------------------------------

    ---------------------------------------------------------------------------

    \90\ The percentages were rounded to the nearest whole number.

    Due to the rounding, the total percentages for the listed categories

    do not add up to exactly 100%.

    \91\ In producing Table 1, the Commission counted tenors for

    swaps with an end date within four calendar days of a complete month

    relative to the swap's start date as ending on the nearest complete

    month.

    ---------------------------------------------------------------------------

    Table 2 below sets out the notional amounts of the interest rate

    swap data set organized by product type, currency, floating index and

    tenor. The table also includes the notional amounts in each percentile

    of a distribution of the data set.

    Table 2--Notional Amounts of Interest Rate Swap Data Set Organized by Product Type, Currency, Floating Index and Tenor

    [In millions of USD]

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Mean Percentiles

    notional ----------------------------------------------------------------------------

    amount 5th 10th 25th 50th 75th 90th 95th

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Product Type:

    Single Currency Interest Rate Swap.......................... 127 4 9 23 52 117 252 438

    OIS......................................................... 1,293 6 13 63 341 1,261 3,784 5,282

    FRA......................................................... 1,168 90 133 266 631 1,039 2,000 3,018

    Swaption.................................................... 204 3 20 50 100 226 500 642

    Other....................................................... 346 * 1 23 89 250 631 1,132

    Currency:

    EUR......................................................... 400 6 15 38 91 249 631 1,617

    USD......................................................... 221 5 12 31 89 200 500 1,000

    GBP......................................................... 435 1 1 15 57 167 755 1,698

    JPY......................................................... 221 11 13 28 57 124 339 790

    Other....................................................... 108 4 6 13 30 78 175 308

    Floating Index:

    USD-LIBOR-BBA............................................... 192 5 12 30 76 180 500 803

    [[Page 32876]]

    EUR-EURIBOR-Reuters......................................... 241 8 17 38 79 189 416 757

    EUR-EONIA-OIS-COMPOUND...................................... 1,385 4 10 61 315 1,261 3,784 6,306

    JPY-LIBOR-BBA............................................... 211 11 12 28 57 113 339 658

    GBP-LIBOR-BBA............................................... 181 1 4 23 54 151 377 755

    GBP-WMBA-SONIA-COMPOUND..................................... 2,450 75 113 283 1,509 3,018 6,037 9,055

    Other....................................................... 152 2 4 12 31 88 264 500

    Tenor: \92\

    1 Month..................................................... 3,523 37 252 1,251 2,522 3,784 7,546 12,074

    3 Month..................................................... 1,081 11 38 208 604 1,250 2,000 3,018

    6 Month..................................................... 581 19 49 150 377 747 1,261 1,892

    1 Year...................................................... 348 20 31 70 151 341 755 1,261

    2 Year...................................................... 205 10 16 39 111 243 453 631

    3 Year...................................................... 154 10 16 44 95 169 315 500

    5 Year...................................................... 107 5 9 25 63 113 226 316

    7 Year...................................................... 105 7 13 29 57 113 221 315

    10 Year..................................................... 83 5 10 23 50 95 175 252

    30 Year..................................................... 47 4 7 18 26 50 95 132

    Other....................................................... 249 2 4 15 50 126 340 883

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    ---------------------------------------------------------------------------

    \92\ In producing Table 2, the Commission counted tenors for

    swaps with an end date within four calendar days of a complete month

    relative to the swap's start date as ending on the nearest complete

    month.

    ---------------------------------------------------------------------------

    The Commission also analyzed the interest rate swap data set to

    classify the counterparties into broad groups.\93\ The Commission's

    analysis of the interest rate swap data set revealed that approximately

    50 percent of the transactions were between buyers and sellers who were

    both identified as G-14 banks and that these transactions represented a

    combined notional amount of approximately $22.85 trillion, or 50

    percent of the relevant IRS data set's total combined notional amount.

    ---------------------------------------------------------------------------

    \93\ MarkitSERV anonymized the identities of the counterparties

    and indicated whether a G-14 bank was a party to the swap

    transaction. Summary statistics relating to these anonymous numbers

    included the following: (1) The total count of unique counterparties

    was approximately 300; (2) the average notional size of transactions

    involving two G-14 banks was approximately $280 million; (3) the

    average notional size of transactions involving both a G-14 bank and

    a non G-14 bank (which traded at least 100 swap transactions) was

    approximately $260 million.

    ---------------------------------------------------------------------------

    ii. Summary of Proposed Rule

    Based upon the data described above, the Commission proposed Sec.

    43.6(b)(1) establishing swap categories in the interest rate asset

    class based on tenor and underlying currency.

    The Commission proposed interest rate swap tenor groupings based on

    two observations regarding the data in the interest rate swap data set.

    First, the Commission observed that points of concentrated transaction

    activity along the yield curve correspond with specific tenors (e.g.,

    three months, six months, one year, two years, etc.). Second, the

    Commission observed a tendency for the transacted notional amounts to

    decrease as tenor increased (e.g., longer-dated tenors in the data set

    generally had lower average notional sizes). Based on these

    observations, table 3 below details the eight proposed tenor groups for

    the interest rate asset class.

    Table 3--Proposed Tenor Groups for Interest Rates Asset Class \94\

    ----------------------------------------------------------------------------------------------------------------

    Tenor group Tenor greater than And tenor less than or equal to

    ----------------------------------------------------------------------------------------------------------------

    1.................................... ............................. Three months (107 days).

    2.................................... Three months (107 days)...... Six months (198 days).

    3.................................... Six months (198 days)........ One year (381 days).

    4.................................... One year (381 days).......... Two years (746 days).

    5.................................... Two years (746 days)......... Five years (1,842 days).

    6.................................... Five years (1,842 days)...... Ten years (3,668 days).

    7.................................... Ten years (3,668 days)....... 30 years (10,973 days).

    8.................................... 30 years (10,973 days) ..........................................

    ----------------------------------------------------------------------------------------------------------------

    Similarly, through its analysis of the interest rate swap data set,

    the Commission found that the currency referenced in a swap explains a

    significant amount of variation in notional size and, hence, can be

    used to categorize interest rate swaps \95\ The

    [[Page 32877]]

    Commission proposed currency groupings after considering: (1) The swap

    transaction total notional amounts and transaction volumes of currency

    groups based on the number of transactions; and (2) the average

    transaction notional amounts and lack of evidence of large transacted

    notional amounts or substantial volume of currency groups. After

    considering these factors, the Commission proposed three currency

    categories for the interest rate asset class: (1) Super-major

    currencies, which are currencies with large volume and total notional

    amounts; \96\ (2) major currencies, which generally exhibit moderate

    volume and total notional amounts; \97\ and (3) non-major currencies,

    which generally exhibit moderate to very low volume and total notional

    amounts.\98\

    ---------------------------------------------------------------------------

    \94\ The Commission chose to extend the tenor groups about one-

    half month beyond the commonly observed tenors to group similar

    tenors together and capture variations in day counts. The Commission

    added an additional 15 days beyond a multiple of one year to the

    number of days in each group to avoid ending each group on specific

    years.

    \95\ The Commission considered alternative approaches of using

    the individual floating rate indexes or currencies to determine swap

    categories in the interest rate asset class. These alternative

    approaches would have the benefit of being more correlated to an

    underlying curve than the adopted currency and tenor groupings. The

    data contained 57 floating rate indexes and 28 currencies, which

    would result in 456 and 224 categories respectively, after sorting

    by the eight identified tenor groups. The Commission anticipates,

    however, that grouping swaps using individual rates or currencies

    would not substantially increase the explanation of variations in

    notional amounts, while it could result in cells with relatively few

    observations in some currency-tenor categories. Hence, the

    Commission does not believe there would be a significant benefit to

    offset the additional compliance burden that a more granular

    approach would impose on market participants.

    \96\ Super-major currencies represent over 92 percent of the

    total notional amounts and 80 percent of the total transactions in

    the data set. It is noteworthy that these currencies have well-

    developed, i.e., liquid futures markets for general interest rates

    and FX rates.

    \97\ Major currencies represent about 6 percent of the total

    notional amount and about 10 percent of the total transactions in

    the data set. Some of these currencies host liquid futures markets

    for interest rates, and all exhibit liquid FX markets.

    \98\ Non-major currencies represent less than two percent of the

    total notional amount and about 10 percent of the transactions in

    the data set. These currencies typically do not have corresponding

    interest rate and FX futures markets.

    ---------------------------------------------------------------------------

    Table 4 below summarizes the Commission's three proposed currency

    swap categories.

    Table 4--Proposed Currency Categories for Interest Rates Asset Class

    ------------------------------------------------------------------------

    Currency category Component currencies

    ------------------------------------------------------------------------

    Super-Major Currencies............ United States dollar (USD), European

    Union Euro Area euro (EUR), United

    Kingdom pound sterling (GBP), and

    Japan yen (JPY).

    Major Currencies \99\............. Australia dollar (AUD), Switzerland

    franc (CHF), Canada dollar (CAD),

    Republic of South Africa rand

    (ZAR), Republic of Korea won (KRW),

    Kingdom of Sweden krona (SEK), New

    Zealand dollar (NZD), Kingdom of

    Norway krone (NOK) and Denmark

    krone (DKK).

    Non-Major Currencies.............. All other currencies.

    ------------------------------------------------------------------------

    Table 5 below presents details on the sample characteristics of the

    interest rate swap data set organized by currency and tenor swap

    categories.

    ---------------------------------------------------------------------------

    \99\ The Commission selected these currencies for inclusion in

    the definition of major currencies based on the relative liquidity

    of these currencies in the interest rate and FX futures markets. The

    Commission is of the view that this list of currencies is

    consistent, in part, with the Commission's existing regulations in

    Sec. 15.03(a), which defines ``major foreign currency'' as ``the

    currency, and the cross-rates between the currencies, of Japan, the

    United Kingdom, Canada, Australia, Switzerland, Sweden and the

    European Monetary Union.'' 17 CFR 15.03(a).

    Table 5--Sample Characteristics of Proposed Interest Rate Swap Categories \100\

    ----------------------------------------------------------------------------------------------------------------

    Percent of Notional Percent of

    Currency category Tenor group Number of transactions (billions of total notional

    transactions (%) USD) (%)

    ----------------------------------------------------------------------------------------------------------------

    Super-major..................... 1 11,394 7 22,347 50

    Super-major..................... 2 2,563 2 1,813 4

    Super-major..................... 3 6,277 4 3,302 7

    Super-major..................... 4 12,395 7 3,420 8

    Super-major..................... 5 32,148 19 4,818 11

    Super-major..................... 6 42,675 26 4,220 9

    Super-major..................... 7 24,237 15 1,433 3

    Super-major..................... 8 1,857 1 56 0

    Major........................... 1 2,305 1 1,818 4

    Major........................... 2 445 0 124 0

    Major........................... 3 2,113 1 302 1

    Major........................... 4 2,639 2 226 1

    Major........................... 5 5,380 3 293 1

    Major........................... 6 3,707 2 129 0

    Major........................... 7 704 0 19 0

    Major........................... 8 <200 .............. .............. ..............

    Non-Major....................... 1 403 0 64 0

    Non-Major....................... 2 247 0 26 0

    Non-Major....................... 3 2,073 1 165 0

    Non-Major....................... 4 3,354 2 256 1

    Non-Major....................... 5 5,873 4 116 0

    Non-Major....................... 6 3,935 2 41 0

    Non-Major....................... 7 <200 .............. .............. ..............

    Non-Major....................... 8 <200 .............. .............. ..............

    ----------------------------------------------------------------------------------------------------------------

    ---------------------------------------------------------------------------

    \100\ Tables 5 and 6 do not include sample characteristics for

    swap categories with less than 200 transactions in order to preserve

    the anonymity of the parties to these transactions.

    ---------------------------------------------------------------------------

    Table 6 below sets out the notional amounts of the interest rate

    swap data set organized by currency and tenor categories. The table

    includes the mean notional amount of each currency and tenor category,

    as well as the notional amounts in each percentile of a distribution of

    the data set.

    [[Page 32878]]

    Table 6--Notional Amounts of Interest Rate Swap Data Set Organized by the Proposed Interest Rate Swap Categories

    [In millions of USD]

    ----------------------------------------------------------------------------------------------------------------

    Transactions Percentiles

    Currency group Tenor Mean --------------------------------------------------------------

    group 5th 10th 25th 50th 75th 90th 95th

    ----------------------------------------------------------------------------------------------------------------

    Super-major.................... 1 1,961 10 36 500 1,000 2,260 4,000 6,306

    Super-major.................... 2 708 13 41 200 500 883 1,500 2,260

    Super-major.................... 3 526 47 75 150 272 565 1,179 1,809

    Super-major.................... 4 276 19 43 100 176 304 565 848

    Super-major.................... 5 150 9 21 50 100 158 301 482

    Super-major.................... 6 99 6 12 30 54 100 204 305

    Super-major.................... 7 59 1 5 14 31 63 126 200

    Super-major.................... 8 30 0 0 1 13 37 65 118

    Major.......................... 1 789 80 133 175 312 573 921 1,313

    Major.......................... 2 279 50 70 120 210 350 480 921

    Major.......................... 3 143 13 26 52 97 175 264 438

    Major.......................... 4 86 9 16 33 66 104 184 240

    Major.......................... 5 54 4 8 19 44 72 109 145

    Major.......................... 6 35 4 7 13 23 46 72 96

    Major.......................... 7 27 5 7 11 20 31 49 75

    Major.......................... 8 <200 ....... ....... ....... ....... ....... ....... .......

    Non-major...................... 1 160 19 37 64 129 225 315 450

    Non-major...................... 2 106 16 23 39 72 145 233 311

    Non-major...................... 3 79 8 22 31 56 102 157 224

    Non-major...................... 4 76 6 9 16 27 50 78 108

    Non-major...................... 5 20 2 4 8 14 23 39 54

    Non-major...................... 6 10 2 2 4 8 13 21 29

    Non-major...................... 7 <200 ....... ....... ....... ....... ....... ....... .......

    Non-major...................... 8 <200 ....... ....... ....... ....... ....... ....... .......

    ----------------------------------------------------------------------------------------------------------------

    The Commission received twelve comments regarding the use of tenor

    to establish swap categories in the interest rate swap asset class.

    Five commenters expressed support for the Further Block Proposal's

    suggested tenor buckets.\101\ Five other commenters recommended nine

    tenor buckets straddling the most liquid tenor points as follows: 0-3

    months, 3-6 months, 6-18 months, 18 months-3 years, 3-7 years, 7-12

    years, 12-20 years, 20-30 years, and more than 30 years.\102\ These

    commenters suggested that these nine tenor groupings would provide

    greater granularity and avoid grouping together swaps with different

    levels of liquidity. Similarly, ICI suggested that narrower tenor

    groupings would provide greater granularity.\103\ Kinetix also

    expressed concern with the proposed tenor buckets, stating that they

    grouped together products with sharply different trading volumes.\104\

    ---------------------------------------------------------------------------

    \101\ CL-AFR at 5; CL-Better Markets at 5; CL-MFA at 4; CL-

    Pierpont at 3; CL-SDMA at 8 (``The CFTC categories are . . .

    appropriate and accurate in terms of currency, index, and tenor.'')

    \102\ CL-AII at 8; CL-Barclays at 7; CL-ISDA/SIFMA at 10; CL-

    SIFMA at 7; CL-Vanguard at 5.

    \103\ See CL-ICI at 5.

    \104\ Kinetix stated that ``[t]he major flaw comes from

    including in a bucket products with sharply different trading

    volumes.'' Kinetix recommended bucketing products by average trade

    volume, product type, and tenor, but did not suggest specific tenor

    buckets. CL-Kinetix at 2.

    ---------------------------------------------------------------------------

    In addition to the comments received regarding the Further Block

    Proposal, the Commission also considered the research in the Federal

    Reserve Bank of New York's March 2012 staff report entitled ``An

    Analysis of OTC Interest Rate Derivatives Transactions: Implications

    for Public Reporting'' (the ``Federal Reserve Staff Analysis''). In

    that report, Federal Reserve staff tested for a relationship between

    tenor and trade size. The Federal Reserve staff identified nine tenor

    buckets, as opposed to the eight identified by the Commission. The

    tenor buckets identified by the Federal Reserve staff were the same as

    those proposed by the Commission in the Further Block Proposal, with a

    further division of the Commission's 0-3 month bucket into a 0-1 month

    bucket and a 1-3 month bucket.\105\

    ---------------------------------------------------------------------------

    \105\ The Federal Reserve staff specifically found that ``when

    [they] reduced the number of buckets at the short end of the trading

    curve (by merging the 0-1 month and 1-3 month buckets into a 0-3

    month bucket), the explanatory power of [their] regression declined

    24%.'' Federal Reserve Staff Analysis at 16.

    ---------------------------------------------------------------------------

    After consideration of the comments received and the Federal

    Reserve Staff Analysis, the Commission is adopting Sec. 43.6(b)(1)

    with one modification--the addition of another tenor grouping at the

    shorter end of the interest rate yield curve. The Commission notes, as

    an initial matter, that commenters generally supported the use of tenor

    buckets to establish swap categories in the interest rate asset class.

    Commenters, however, disagreed with the proposed tenor buckets.

    In the Further Block Proposal, tenor buckets were proposed based on

    observations of the distributions of notional sizes and volume with the

    objectives of grouping swaps with similar characteristics while

    maintaining a manageable number of swap categories. The tenor buckets

    proposed by the Commission were associated with concentrations of

    liquidity at commonly recognized points along the interest rate yield

    curve. In general, the Commission observed that transactions in the

    data set (and presumed market liquidity) tended to cluster at certain

    tenors.

    In establishing the categories, the Commission proposed groupings

    that placed actively traded tenors at the upper boundary of the

    category groupings because the calculation of the minimum block

    threshold in a category will be most influenced by the notional amounts

    of the most heavily traded swaps in a category, i.e., those at the

    active tenor points. Hence, the minimum block thresholds for shorter

    dated swaps in a category will tend to be set based on the typical

    notional value of longer dated swaps. Since the longer dated swaps tend

    to trade in smaller notional amounts, establishing

    [[Page 32879]]

    the categories in this manner will tend to result in a more

    conservative (i.e., smaller) minimum block threshold for shorter

    tenored swaps within the category. In addition, because the shorter-

    dated swaps within an established swap category may experience less

    liquidity, due to smaller trading volumes, these swaps may also benefit

    from the setting of a lower minimum block threshold.

    The narrower tenor buckets recommended by commenters, in contrast,

    tend to straddle the liquid tenor points. If the Commission were to

    establish tenor buckets straddling the liquid tenor points (rather than

    having a liquid tenor point be the upper boundary of a tenor bucket),

    then the minimum block threshold for swaps within a category would be

    more heavily influenced by swaps centrally located in the category.

    Thus, longer dated swaps in a category, which tend to trade in smaller

    notional sizes, would be subject to higher minimum block thresholds,

    meaning fewer would be eligible for the block trade exemption.

    To illustrate the impact of placing the liquid tenor point at the

    top of the category, consider the impact on a seven-year interest rate

    swap that is proposed to be grouped in a tenor bucket with swaps having

    a tenor greater than 5 years and less than or equal to 10 years. The

    most liquid tenor point (i.e., the tenor point with the greatest number

    of observations) within this bucket would be the 10-year interest rate

    swap; thus, the 10-year interest rate swap would be the primary driver

    in determining the minimum block threshold for swaps in the 5 to 10-

    year tenor bucket. Table 7 is a subset of the information from Table 1

    that illustrates this point. Specifically, there are 6,599 swaps with a

    tenor of seven years, yielding an average notional amount of $100

    million (USD) and 34,000 swaps with a tenor of ten years yielding an

    average notional size of $81 million (USD). By combining these into the

    same category, the Commission is adopting a conservative approach in

    setting block sizes for the less liquid tenors.

    Under the commenters' approach, however, the seven-year interest

    rate swap is grouped in the same tenor bucket with the 5-year tenor

    interest rate swaps. In this scenario, the liquid tenor point within

    the bucket is the 5-year interest rate swap; thus, the 5-year interest

    rate swap, with more than 26,000 transactions yielding an average

    notional amount of $104 million (USD), is the primary driver in

    determining the minimum block threshold for the tenor bucket and

    results in a larger block size for the 7-year tenor interest rate swaps

    than under the currently proposed swap category.

    The Commission is of the view that the tenor with the most

    transactions in the swap category, and thus having the most weight in

    the block calculations, should be at the high end of the tenor grouping

    for the swap category. Given the tendency for average notional size to

    decrease as tenor increases as shown in Table 7 below, the Commission

    views this as a more conservative approach to setting minimum block

    thresholds, which results in lower block sizes for swap transactions at

    tenors that may experience less liquidity.

    Table 7--Summary Statistics for the Interest Rate Swap Data Set by Tenor \106\

    ----------------------------------------------------------------------------------------------------------------

    Average notional

    Tenor \107\ Number of Notional amount amount (billions

    transactions (billions of USD) of USD)

    ----------------------------------------------------------------------------------------------------------------

    1 Month............................................. 3,171 11,859 3.740

    3 Month............................................. 10,229 11,660 1.140

    6 Month............................................. 2,822 1,701 0.603

    1 Year.............................................. 9,522 3,484 0.366

    2 Year.............................................. 16,450 3,347 0.203

    3 Year.............................................. 9,628 1,488 0.155

    5 Year.............................................. 26,139 2,712 0.104

    7 Year.............................................. 6,599 661 0.100

    10 Year............................................. 34,000 2,746 0.081

    30 Year............................................. 9,616 448 0.047

    Other............................................... 38,671 5,284 0.137

    ----------------------------------------------------------------------------------------------------------------

    ---------------------------------------------------------------------------

    \106\ In producing Table 7, the Commission counted tenors for

    swaps with an end date within four calendar days of a complete month

    relative to the swap's start date as ending on the nearest complete

    month.

    \107\ Tenor groups include swaps having tenors within 4 calendar

    days of a complete month, plus or minus, of the stated tenor. All

    other swaps are included in the ``Other'' category.

    ---------------------------------------------------------------------------

    In response to comments generally calling for narrower tenor

    buckets, the Commission is adopting an additional tenor bucket in order

    to provide greater granularity as requested by commenters. The

    Commission is splitting the first tenor group in the Further Block

    Proposal (0-3 months) into two tenor groups (0-46 days, and greater

    than 46 days to less than or equal to 3 months). While the Commission

    did not receive any comments specifically discussing the less than 46

    day tenor, the Commission received numerous comments recommending

    greater granularity. Based upon the comments received requesting nine

    tenor buckets and the Federal Reserve Staff Analysis identifying nine

    tenor buckets, the Commission has determined to add a less than 46 day

    tenor group. This would provide greater granularity and establish

    notional swap groupings that account more precisely for the effects of

    increased transparency on liquidity for swaps of a shorter tenor.

    Accordingly, the Commission is adopting the following tenor

    buckets:

    [[Page 32880]]

    Table 8--Tenor Groups for Interest Rates Asset Class \108\

    ----------------------------------------------------------------------------------------------------------------

    Tenor group Tenor greater than And tenor less than or equal to

    ----------------------------------------------------------------------------------------------------------------

    1.................................... ............................. 46 days.

    2.................................... 46 days...................... Three months (107 days).

    3.................................... Three months (107 days)...... Six months (198 days).

    4.................................... Six months (198 days)........ One year (381 days).

    5.................................... One year (381 days).......... Two years (746 days).

    6.................................... Two years (746 days)......... Five years (1,842 days).

    7.................................... Five years (1,842 days)...... Ten years (3,668 days).

    8.................................... Ten years (3,668 days)....... 30 years (10,973 days).

    9.................................... 30 years (10,973 days)....... ..........................................

    ----------------------------------------------------------------------------------------------------------------

    ---------------------------------------------------------------------------

    \108\ As in the Further Block Proposal, the Commission chose to

    extend the tenor groups about one-half month beyond the commonly

    observed tenors to group similar tenors together and capture

    variations in day counts. The Commission added an additional 15 days

    beyond a multiple of one year to the number of days in each group to

    avoid ending each group on specific months or years.

    ---------------------------------------------------------------------------

    The Commission received eleven comments regarding whether interest

    rate swaps should be categorized into the super-major, major, and non-

    major currency groupings as proposed. Five commenters supported the

    currency groupings proposed in the Further Block Proposal.\109\ Four

    commenters urged the Commission to establish a separate swap category

    for each individual currency in determining block thresholds.\110\ Two

    more commenters specifically recommended that each of the four super-

    major currencies should be categorized separately, rather than as a

    group, in determining block thresholds.\111\

    ---------------------------------------------------------------------------

    \109\ CL-AFR at 5; CL-Better Markets at 5; CL-MFA at 4; CL-

    Pierpont at 3; CL-SDMA at 8 (``The CFTC categories are . . .

    appropriate and accurate in terms of currency, index, and tenor.'')

    \110\ CL-AII at 8; CL-ICI at 5; CL-SIFMA at 8-9; CL-Vanguard at

    6.

    \111\ CL-Barclays at 7; CL-ISDA/SIFMA at 7-8. While ISDA/SIFMA

    supported separate categories for super-major currencies, their

    comment also suggests separate categorization for each individual

    currency. Similarly, SIFMA's comment, while requesting separate

    categorization generally, states that dividing the four proposed

    super-major currencies is most important. CL-SIFMA at 8-9.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(b)(1)(i) as proposed in regard to currency

    categories. The currencies were grouped into the three categories in

    the Further Block Proposal based upon the swap transaction total

    notional amounts and transaction volumes of currency groups based on

    the number of transactions, and the average transaction notional

    amounts of currency groups. The commenters who requested that all

    currencies be categorized by individual currency mainly focused on

    differences in liquidity among the four super-major currencies,

    particularly when comparing interest rate swaps in USD and EUR to those

    in JPY and GBP. Similarly, the commenters who specifically requested

    that the Commission establish separate swap categories for each of the

    super-major currencies focused on perceived differences in liquidity.

    While USD and EUR interest rate swaps feature the highest liquidity,

    the Commission is of the view that, based upon all of the criteria

    mentioned above, the super-major currencies are most similar to each

    other (and different from major \112\ and non-major currencies) to

    warrant treatment as a group, rather than separately.

    ---------------------------------------------------------------------------

    \112\ The Commission notes that the difference between the total

    notional and transactional volume of swaps referencing Japanese

    yen--the lowest among those swaps in the super-major currency

    category--and of swaps referencing the Australian Dollar--the

    highest among those swaps in the major currency category--is

    significantly larger than such differences between swaps within each

    adopted currency category. This observation supports adopting the

    Commission's approach in assigning certain swaps in the super-major

    currency category against the major currency category.

    ---------------------------------------------------------------------------

    The Commission considered alternative approaches of using the

    individual currencies to determine swap categories in the interest rate

    asset class. While these alternative approaches would have provided

    greater correlation to an underlying curve than the adopted groupings,

    the Commission believes that this would not substantially increase the

    explanation of variations in notional amounts, but rather would result

    in categories with too few observations. Hence, the Commission does not

    believe that there would be a significant benefit to offset the

    additional compliance burden that a more granular approach would impose

    on market participants. The Commission notes that adoption of the

    proposed currency categories establishes 27 separate swap categories

    for interest rate swaps. Separate categorization of all currencies

    would result in nearly 200 separate swap categories. Separate

    categorization of the super-major currencies alone would result in 54

    swap categories. The Commission believes that the 27 separate swap

    categories contained in the rule achieves the objectives of grouping

    swaps with similar characteristics while maintaining a manageable

    number of swap categories.

    The Commission also received a number of comments recommending that

    interest rate swaps should be categorized based on criteria other than

    tenor and currency. Four commenters suggested a range of additional

    interest rate swap categories for the purposes of establishing block

    thresholds.\113\ Two other commenters suggested grouping swaps by

    product type in addition to tenor and currency groupings.\114\ Another

    commenter, Kinetix, recommended grouping products by average trade

    volume, as well as by product type and tenor.\115\ Of the four

    commenters who expressed support for the proposed tenor and currency

    groupings,\116\ two of them argued that further granularity would cause

    some swaps to be subject to lower block thresholds than are

    appropriate.\117\

    ---------------------------------------------------------------------------

    \113\ Barclays suggested unique block levels for each of the

    following swap categories: each super major currency, swaps against

    standard floating rate indices, basis swaps, inflation swaps,

    swaptions, caps and floors, cross-currency swaps, and structured

    swaps. CL-Barclays at 7-8. ISDA/SIFMA suggested the following

    additional swap categories: fixed versus non-benchmark floating rate

    indexes and basis swaps, inflation swaps (a specified inflation rate

    index), options (swaption and cap/floor markets); cross-currency

    swaps (each leg denominated by different currency), and exotics. CL-

    ISDA/SIFMA at 9. SIFMA and Vanguard suggested swap categorization

    based on optionality or other characteristics such as distinctions

    between ``plain vanilla,'' ``interest rate options,'' and ``other,''

    as well as separate categories for major floating rate indices. CL-

    SIFMA at 8-9; CL-Vanguard at 5-6.

    \114\ CL-ICI at 5; CL-MFA at 5.

    \115\ CL-Kinetix at 2.

    \116\ CL-AFR at 5; CL-Better Markets at 5; CL-Pierpont at 3; CL-

    SDMA at 8 (``The CFTC categories are . . . appropriate and accurate

    in terms of currency, index, and tenor.'')

    \117\ CL-AFR at 5; CL-Better Markets at 5.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(b)(1)(i) as proposed and Sec. 43. 6(b)(1)(ii) with

    the modifications discussed above. Although some level of

    [[Page 32881]]

    categorization of swaps is useful to capture different levels of

    trading activity and hedging potential, where a number of different

    swaps could be used to hedge the same risk, the over-identification of

    swap categories will eventually lead to a dilution of observations

    within categories. Categories having small numbers of observations

    could be subject to highly volatile minimum block sizes over time.

    Over-identification also would be expected to lead to underestimations

    of the ability to offset risks using related swap instruments. The

    Commission believes that it has struck a balance between over- and

    under-categorizing swaps that will result in more stable minimum block

    sizes and allow for adequate risk offsets using instruments within a

    category. The modification described above in regard to tenor will

    provide some further granularity at the short end of the yield curve,

    as suggested by commenters above, while still achieving the objectives

    of grouping swaps with similar characteristics and reducing unnecessary

    complexity for market participants in determining whether their swaps

    are classified within a particular swap category.

    c. Credit Swap Categories

    i. Credit Swap Data Summary

    The CDS data set contained 98,931 CDS index records that would fall

    within the definition of publicly reportable swap transactions,\118\

    with a combined notional value of approximately $4.6 trillion

    dollars.\119\ The CDS data set contained transactions based on 26 broad

    credit indexes.\120\ Of those indexes, both the iTraxx Europe Series

    and the Dow Jones North America investment grade CDS indexes

    (``CDX.NA.IG'') served as the basis for over 20 percent of the total

    number of transactions and over 33 percent of the total notional value

    in the relevant CDS data set. Table 9 sets out summary statistics of

    the CDS data set for CDS indexes with greater than five transactions

    per day on average.

    ---------------------------------------------------------------------------

    \118\ See note 85 supra.

    \119\ The CDS index transactions in the data set made up

    approximately 33 percent of the total filtered records and 75

    percent of the CDS markets' notional amount for the three months of

    data provided. The data set contained over 250 different reference

    indexes; 400 reference index and tenor combinations; and 450

    reference index, tenor, and tranche combinations. The data set also

    contained three different currencies: USD (53%), EUR (46%), and JPY

    (1%). The Commission notes that in all but a handful of records,

    each reference index transaction was denoted in a single currency.

    \120\ Those indexes were: (1) ABX.HE; (2) CDX.EM; (3) CDX.NA.HY;

    (4) CDX.NA.IG; (5) CDX.NA.IG.HVOL; (6) CDX.NA.XO; (7) CMBX.NA; (8)

    IOS.FN30; (9) iTRAXX Asia ex-Japan HY; (10) iTRAXX Asia ex-Japan IG;

    (11) iTRAXX Australia; (12) iTRAXX Europe Series; (13) iTRAXX Europe

    Subs; (14) iTRAXX Japan 80; (15) iTRAXX Japan HiVol; (16) iTRAXX

    Japan Series; (17) iTRAXX LEVX Senior; (18) iTRAXX SOVX Asia; (19)

    iTRAXX SOVX CEEMA; (20) iTRAXX Western Europe; (21) LCDX.NA; (22)

    MCDX.NA; (23) PO.FN30; (24) PRIMEX.ARM; (25) PRIMEX.FRM; and (26)

    TRX.NA.

    Table 9--Summary Statistics by CDS Index Name

    ----------------------------------------------------------------------------------------------------------------

    Percentage of Notional

    Number of total amount (in Percentage of

    Names transactions transactions millions of total notional

    (%) USD) amount (%)

    ----------------------------------------------------------------------------------------------------------------

    ITRAXX EUROPE SERIES 13 V1...................... 18,287 18.48 1,138,362 24.83

    CDX.NA.IG.14.................................... 12,611 12.75 1,083,974 23.64

    ITRAXX EUROPE XO SERIES 13 V1................... 8,713 8.81 153,365 3.34

    CDX.NA.HY.14.................................... 7,984 8.07 172,599 3.76

    ITRAXX EUROPE SENIOR FINANCIALS SERIES 13 V1.... 4,774 4.83 187,978 4.10

    CDX.NA.IG.9..................................... 4,134 4.18 388,650 8.48

    ITRAXX EUROPE XO SERIES 13 V2................... 3,959 4.00 66,894 1.46

    CDX.NA.IG.9 TRANCHE............................. 3,357 3.39 112,411 2.45

    ITRAXX SOVX CEEMEA SERIES 3 V1.................. 3,252 3.29 32,291 0.70

    CDX.EM.13....................................... 3,052 3.08 34,952 0.76

    ITRAXX SOVX WESTERN EUROPE SERIES 3 V1.......... 2,377 2.40 74,068 1.62

    ITRAXX AUSTRALIA SERIES NUMBER 13 V1............ 2,138 2.16 31,540 0.69

    ITRAXX EUROPE SERIES 9 V1....................... 1,893 1.91 188,364 4.11

    ITRAXX EUROPE SUB FINANCIALS SERIES 13 V1....... 1,779 1.80 50,241 1.10

    ITRAXX EUROPE SERIES 9 V1 TRANCHE............... 1,577 1.59 50,269 1.10

    ITRAXX JAPAN SERIES NUMBER 13 V1................ 1,406 1.42 19,100 0.42

    ITRAXX ASIA EX-JAPAN IG SERIES NUMBER 13 V1..... 1,319 1.33 15,856 0.35

    ITRAXX SOVX ASIA PACIFIC SERIES 3 V1............ 1,001 1.01 11,666 0.25

    ITRAXX EUROPE HIVOL SERIES 13 V1................ 788 0.80 30,585 0.67

    CMBX.NA.AAA.1................................... 463 0.47 13,384 0.29

    ITRAXX EUROPE SERIES 12 V1...................... 452 0.46 71,161 1.55

    CMBX.NA.AJ.3.................................... 392 0.40 6,332 0.14

    CMBX.NA.AAA.2................................... 381 0.39 8,433 0.18

    LCDX.NA.14...................................... 380 0.38 7,063 0.15

    MCDX.NA.14...................................... 350 0.35 2,798 0.06

    CMBX.NA.AAA.4................................... 337 0.34 6,024 0.13

    CMBX.NA.A.1..................................... 332 0.34 3,834 0.08

    IOS.FN30.500.09................................. 317 0.32 7,836 0.17

    ---------------------------------------------------------------

    Total....................................... 87,805 88.75 3,970,029 86.59

    ----------------------------------------------------------------------------------------------------------------

    ii. Credit Swap Data Analysis

    As noted above, the Commission proposed using tenor and

    conventional spread criteria to define swap categories for CDS indexes.

    The Commission proposed the following six broad tenor groups in the

    credit asset class: (1) Zero to two years (0-746 days); (2) over two to

    four years (747-1,476 days); (3) over four to six years (1,477-2,207

    days) (which include the five-year tenor); (4) over six to eight-and-a-

    half years (2,208-3,120 days); (5) over eight-and-a-half to

    [[Page 32882]]

    12.5 years (3,121-4,581 days) and (6) greater than 12.5 years (4,581

    days).\121\

    ---------------------------------------------------------------------------

    \121\ The Commission assessed the possibility of applying the

    tenor categories proposed for swaps in the interest rate asset class

    to the distribution of notional sizes in the CDS indexes and

    anticipates the level of granularity proposed to categorize swaps in

    the interest rate asset class by tenor would be inappropriate for

    the CDS index market. The Commission anticipates that this level of

    granularity would be inappropriate because the vast majority of CDS

    index transactions in the data set had a tenor of five years (or

    approximately 1,825 days). Based on the concentration of CDS index

    transactions in five-year tenors, the Commission proposed six tenor

    bands for CDS indexes.

    The Commission chose to extend the tenor groups about one-half

    month beyond the commonly observed tenors to group similar tenors

    together and capture variations in day counts. The Commission added

    an additional 15 days beyond a multiple of one year to the number of

    days in each group to avoid ending each group on specific years.

    ---------------------------------------------------------------------------

    With respect to the conventional spread criterion, the Commission

    determined ranges of spread values based on a review of the

    distribution of spreads in the entire CDS data set.\122\ In particular,

    the Commission observed that the relevant CDS data set partitioned at

    the 175 basis points (``bps'') and 350 bps levels.\123\ The Commission

    found that significant differences existed in the CDS data set between

    CDS indexes with spread values under 175 bps and those in the other two

    CDS categories (spread values between 175 to 350 bps; spread values

    above 350 bps). Accordingly, the Commission proposed three separate

    conventional spread levels: (1) CDS indexes with spread values under

    175 bps; (2) CDS indexes with spread values between 175 and 350 bps;

    and (3) CDS indexes with spread values above 350 bps. Table 9 shows the

    summary statistics of the proposed criteria to determine swap

    categories for swaps in the credit asset class.\124\

    ---------------------------------------------------------------------------

    \122\ See supra note 77 for a definition of ``conventional

    spread.''

    \123\ The Commission proposed partition levels by a qualitative

    examination of multiple histogram distributions of the traded and

    fixed spreads from the CDS data set. This qualitative examination

    was confirmed through a partition test (using JMP software),

    including both before and after controlling for the effects of tenor

    on the distribution. The Commission observed that 175 bps explained

    the greatest difference in means of the two data sets resulting from

    a single partition of the data. The Commission also observed that

    350 bps was an appropriate partition for CDS index transactions with

    spreads over 175 bps.

    \124\ The Commission found that these categories were good

    predictors of notional size. This finding was based on an analysis

    which used the tenor and spread categories in Table 9 as explanatory

    variables in a least squares regression, where the logged value of

    the notional amount of the swap was the dependent variable.

    Table 9--CDS Index Sample Statistics by Proposed Swap Category Criteria

    ------------------------------------------------------------------------

    Sum of notional

    Spread amounts (in Number of trades

    billions of USD)

    ------------------------------------------------------------------------

    <=175........................... 3,761 59,887

    175-to-350...................... 233 11,045

    350>............................ 577 27,998

    ------------------------------------------------------------------------

    Sum of notional

    Tenor (in calendar days) amounts Number of trades

    ------------------------------------------------------------------------

    0-746........................... 146 1,421

    747-1,476....................... 569 6,774

    1,477-2,207..................... 3,490 79,357

    2,208-3,120..................... 159 2,724

    3,121-4,581..................... 18 497

    4,582+.......................... 190 8,157

    ------------------------------------------------------------------------

    The Commission sought comment on this proposed approach, a series

    of alternative criteria to be used, and alternative categories. The

    Commission received eight comments regarding the proposed swap

    categories for CDS. Five of the comments focused on the proposed tenor

    buckets in the Further Block Proposal. SIFMA and Vanguard suggested

    that the 4-6 year tenor bucket be divided into four buckets: 4 to 4.5

    years, 4.5 to 5 years, 5 to 5.5 years, and 5.5 to 6 years.\125\ AII and

    ICI also recommended narrowing the tenor categories for CDS.\126\ MFA

    generally supported the Commission's proposed grouping by tenor.\127\

    ---------------------------------------------------------------------------

    \125\ CL-SIFMA at 7-8 (``We believe that such groupings would

    better approximate sets of swaps with similar liquidity

    characteristics''); CL-Vanguard at 5.

    \126\ CL-AII at 8; CL-ICI at 5.

    \127\ CL-MFA at 5.

    ---------------------------------------------------------------------------

    Two of the comments focused on the proposed conventional spread

    criteria. ISDA/SIFMA expressed support for the proposed use of spread

    criteria, but also suggested that the Commission should clarify that

    the spread for a CDS transaction will be based on the traded spread,

    rather than on the fixed coupon.\128\ Barclays, however, commented that

    traded spreads should not be used for categorizing CDS because swaps

    may move daily between threshold buckets as spreads can move

    substantially over short periods, which would create an unacceptable

    level of operational risk for market participants in trying to achieve

    compliance.\129\

    ---------------------------------------------------------------------------

    \128\ CL-ISDA/SIFMA at 6 (``swap categories should be based on

    the current spread of a transaction in order to reflect . . .

    changes in liquidity'').

    \129\ CL-Barclays at 8.

    ---------------------------------------------------------------------------

    In addition to the comments regarding the tenor and conventional

    spread criteria proposed, commenters also provided a number of

    recommendations regarding other potential swap categories for CDS.

    Three commenters suggested separate swap categories for individual CDX

    index series.\130\ Better Markets, however, argued that using

    individual CDX index series to create swap categories would be too

    granular and recommended that CDS be divided into single-name and index

    categories, with indexes further subdivided into five groups:

    sovereign, corporate, municipal, mortgage-backed securities, and

    other.\131\ Four commenters recommended that tranches of indices

    receive their own unique swap category.\132\ Two commenters suggested

    grouping CDS by different product type.\133\ MFA recommended separate

    swap categories for indexes and options (as well as tranches).\134\

    Finally, eight commenters suggested differentiating between on-the-run

    and off-the-run CDS

    [[Page 32883]]

    indices.\135\ MFA specifically suggested separate minimum block sizes

    for the current 5-year on-the-run CDS indices for CDX.NA.IG, CDX.NA.HY,

    iTraxx Europe, and iTraxx Europe Crossover.\136\

    ---------------------------------------------------------------------------

    \130\ CL-AII at 8; CL-Barclays at 8; CL-ISDA/SIFMA at 6.

    \131\ CL-Better Markets at 6.

    \132\ CL-AII at 8; CL-Barclays at 8; CL-ISDA/SIFMA at 6; MFA at

    5.

    \133\ CL-ICI at 5; CL-ISDA/SIFMA at 6.

    \134\ CL-MFA at 5.

    \135\ MFA specifically suggested separate minimum block sizes

    for the current 5-year on-the-run CDS indices for CDX.NA.IG,

    CDX.NA.HY, iTraxx Europe, and iTraxx Europe Crossover. CL-MFA at 5;

    CL-AII at 8; CL-Barclays at 8; CL-ICAP at 7; CL-ISDA/SIFMA at 5-6;

    CL-SIFMA at 8; CL-Vanguard at 5.

    \136\ CL-MFA at 5.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(b)(2) as proposed. In general, the Commission

    believes that the proposed criteria--tenor and conventional spread--

    provide an appropriate way to group swaps with economic similarities

    and to reduce unnecessary complexity for market participants in

    determining whether a particular swap is classified within a particular

    swap category. In regard to ISDA/SIFMA's suggested clarification, the

    Commission clarifies that the spread for a CDS transaction will be

    based on the traded spread, rather than on the fixed coupon.

    Specifically, the Commission believes that the proposed tenor and

    conventional spread categories sufficiently capture the variation in

    notional size that is necessary for setting appropriate minimum block

    sizes and that refining these categories as suggested by commenters

    will not improve the clustering of swaps in order to better set

    appropriate minimum block sizes. For example, the Commission notes that

    the tenor buckets contained in the adopted rule generally result in

    separate categorization for on-the-run and off-the-run indexes for

    swaps in the CDS data set. On-the-run indexes, for example, comprised

    the vast majority of swaps in the 4-6 year tenor bucket, while off-the-

    run indexes were the vast majority of swaps in the 0-2, 2-4, and 6-8.5

    year tenor buckets.

    The Commission determined these swap categories based on the way

    activity in the CDS data set clustered towards the center of each tenor

    band. While the majority of transactions in the CDS data set consisted

    of on-the-run corporate credit default index swaps with a five-year

    tenor, the Commission found that significant trading of corporate

    credit default index swaps also occurred in other tenor ranges.\137\

    The Commission believes that its approach is appropriate since CDS on

    indexes other than corporate indexes (e.g., asset backed indexes,

    municipal indexes, sovereign indexes) also trade at tenors other than

    five years.\138\

    ---------------------------------------------------------------------------

    \137\ For example, based on the observed CDS data set, corporate

    CDS indexes traded in all but the longest of the tenor groups. The

    vast majority of transactions outside of the 4-6 year tenor group

    were off-the-run series.

    \138\ For example, based on the observed CDS data set, the

    majority of municipal credit default index swaps traded with tenors

    of around 10 years.

    ---------------------------------------------------------------------------

    The Commission, however, decided not to use ``on-the-run'' or

    ``off-the-run'' designations for grouping CDS indexes into categories

    for the following reasons: (i) The underlying components of swaps with

    differing versions or series based on the same named index are broadly

    similar, if not the same, and are indicative of economic

    substitutability across versions or series; (ii) differences in the

    average notional amount across differing versions or series were

    explained by differences in tenor; and (iii) using versions or series

    as the criterion for defining CDS swap categories may result in an

    unnecessary level of complexity.\139\ Hence, the Commission believes

    that while on-the-run and off-the-run indexes may differ in terms of

    available liquidity, they nonetheless are economically related to each

    other within the categories proposed by the Commission; therefore, on-

    the-run indexes could be used to offset much of the risk associated

    with off-the-run indices. Moreover, while the off-the-run swaps

    generally had less trading activity, and presumably less liquidity,

    than the on-the-run swaps, off-the-run index swaps had larger notional

    sizes, on average, than on-the run swaps in the same category. Hence,

    the more liquid, on-the-run swaps will drive the block size in a

    category and will result in lower block sizes for the less liquid swaps

    in the category.\140\ The Commission feels that this is a more

    conservative approach to setting block sizes for less liquid swaps.

    ---------------------------------------------------------------------------

    \139\ An on-the-run CDS index represents the most recently

    issued version of an index. For example, every six months, Dow Jones

    selects 125 investment grade entities domiciled in North America to

    make up the Dow Jones North American investment grade index

    (``CDX.NA.IG''). Each new CDX.NA.IG index is given a new series

    number while market participants continue to trade the old or ``off-

    the-run'' CDX.NA.IG series. The index provider determines the

    composition of each index through a defined list of reference

    entities. The index provider has discretion to change the

    composition of the list of reference entities for each new version

    or series of an index. In its analysis of the CDS data set, the

    Commission generally observed either no change or a small change

    (ranging from one percent to ten percent) of existing composition in

    the reference entities underlying a new version or series of an

    index. Because of these two dynamics (tenor and index composition),

    the CDS data set contained transactions within a given index with

    different versions and series that were, in some instances,

    identical, and in others, not identical, across varying tenors.

    \140\ This is similar to the example provided for the tenor

    groupings in interest rate swaps in Section II.A.1.

    ---------------------------------------------------------------------------

    In response to the commenters that specifically requested a

    differentiation between on-the-run and off-the-run CDS indexes, the

    Commission believes that while on-the-run and off-the-run indexes may

    differ in terms of available liquidity, they nonetheless are

    economically related to each other within the categories proposed by

    the Commission such that on-the-run indexes could be used to offset

    much of the risk associated with off-the-run indexes. The Commission

    also notes that the tenor buckets contained in the adopted rule

    generally result in separate categorization for on-the-run and off-the-

    run indexes. For the CDS data set, the vast majority of swaps in the 4-

    6 year tenor bucket were on-the-run indexes, while the vast majority of

    swaps in the 0-2, 2-4, and 6-8.5 year tenor buckets were off-the-run.

    In response to commenters that specifically recommended separate

    swap categorization for tranches, the Commission believes that the

    proposed swap categorization based upon conventional spread criteria

    will result in separate categorizations related to tranches where

    appropriate.\141\ For example, tranches having significantly different

    levels of risk will potentially have spreads traded at levels that

    differ enough from the underlying index so as to be placed in

    categories that would receive a different block trade size. The

    conventional spread reflects the risk of the underlying transaction and

    the Commission believes that the risk associated with the transaction

    will be the primary determinant of how difficult a transaction is to

    hedge. Thus, the Commission believes that categorization of CDS by

    conventional spread will capture differences related to tranches where

    appropriate.

    ---------------------------------------------------------------------------

    \141\ In the CDS market, a ``tranche'' means a particular

    segment of the loss distribution of the underlying CDS index. For

    example, tranches may be specified by the loss distribution for

    equity, mezzanine (junior) debt, and senior debt on the referenced

    entities. The Commission found that the tranche-level data was even

    more granular than index-level data. Similarly, the Commission

    anticipates that grouping the relevant CDS data set in tranche

    criterion may not be practicable because it may produce too many

    swap categories and as a result would impose unnecessary complexity

    on market participants.

    ---------------------------------------------------------------------------

    The Commission notes that the adopted Sec. 43.6(b)(2) establishes

    18 separate swap categories for CDS swaps. While none of the commenters

    provided suggestions as to precisely how to categorize CDS by tranche,

    the Commission believes that creating additional swap categories for

    tranches would result in swap categories totaling a multiple of the

    proposed 18 swap categories, as each CDS index has multiple tranches.

    Establishing swap categories based upon tenor and

    [[Page 32884]]

    conventional spread criterion as in adopted Sec. 43.6(b)(2) meets the

    objectives of grouping swaps with economic similarity and reducing

    confusion for market participants in determining whether their swaps

    are classified within a particular swap category.

    The Commission believes that this approach will mitigate the

    administrative burden to both market participants and to the Commission

    by limiting the number of swap categories for which appropriate minimum

    block sizes need to be calculated. In regard to Barclay's concern that

    swaps would move between categories, the Commission believes that

    instances where a given swap will move daily between spread levels will

    be limited given the small number of spread categories and the observed

    distribution of trades. Additionally, the quantitative nature of the

    block category calculation should limit the operational risk by

    providing clarity and ease of notice to market participants as to what

    the minimum block sizes are, even if they are subject to change.

    If market participants reach the conclusion that the Commission has

    determined specific swap categories in a way that will materially

    reduce market liquidity, then those participants are encouraged to

    submit data to support their conclusion. If, through its own

    surveillance of swaps market activity, the Commission becomes aware

    that a specific swap categorization for determination of appropriate

    minimum block levels would reduce market liquidity, then the Commission

    may exercise its legal authority to take action by rule or order to

    mitigate the potential effects on market liquidity with respect to

    swaps in that swap category.

    2. Swap Category in the Equity Asset Class

    The Commission proposed a single swap category for swaps in the

    equity asset class. The Commission proposed this approach based on: (1)

    The existence of a highly liquid underlying cash market for equities;

    (2) the absence of time delays for reporting block trades in the

    underlying equity cash market; (3) the small relative size of the

    equity index swaps market relative to the futures, options, and cash

    equity index markets; and (4) the Commission's goal to protect the

    price discovery function of the underlying equity cash market and

    futures market.

    The Commission received six comments regarding swap categories in

    the equity asset class. AFR supported the single swap category proposed

    for the equity asset class.\142\ Five other commenters recommended that

    the Commission treat equity swaps similarly to the other asset classes

    and establish swap categories based upon a range of criteria.\143\ AII

    recommended that equity swaps should be treated as blocks based on

    liquidity, and urged the Commission to consider linking equity swap

    categories to the liquidity of the underlying index.\144\ Barclays

    recommended that swap categories should be established for equity swaps

    taking into account transaction volume by index and equity asset class

    type, and that broad-based indices should have separate block levels

    based upon futures market levels.\145\ ICI recommended closer study of

    data on equity swap transactions due to potential differences in

    liquidity in the underlying equity cash market.\146\ ISDA/SIFMA

    recommended categorizing equity swaps on the basis of underlying index

    or basket, product type, notional size, and tenor.\147\ SIFMA stated

    that the Commission should establish equity swap block categories based

    upon liquidity of the underlying indices.\148\

    ---------------------------------------------------------------------------

    \142\ CL-AFR at 6.

    \143\ CL-AII at 9; CL-Barclays at 9; CL-ICI at; ISDA/SIFMA at

    10-11; SIFMA at 5.

    \144\ CL-AII at 9.

    \145\ CL-Barclays at 9.

    \146\ CL-ICI at 5.

    \147\ CL-ISDA/SIFMA at 10-11.

    \148\ CL-SIFMA at 5.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(b)(3) as proposed. While a number of the commenters

    point out differences in liquidity in the underlying equity indices to

    support separate swap categories within the equity asset class and

    establishment of block sizes in equities, these differences do not

    undermine the premises underlying the Commission's proposal. Even

    taking into account differences in liquidity, (1) there is still a

    highly liquid underlying cash market for equities; and (2) the equity

    index swaps market is small relative to the futures, options, and cash

    equity index markets. These characteristics, combined with the fact

    that there are no time delays for reporting block trades in the

    underlying equity cash market, makes establishment of swap categories,

    and therefore minimum block thresholds, for equity swaps

    inappropriate.\149\ The Commission notes that establishing time delays

    for reporting block trades in the swaps market when no time delays

    exist could negatively impact the price discovery function of the

    underlying equity cash market and futures market. Accordingly, the

    Commission is adopting Sec. 43.6(b)(3) as proposed.\150\

    ---------------------------------------------------------------------------

    \149\ See infra Section II.B(5)(b). In the event that time

    delays are established for reporting block trades in the underlying

    equity cash market, the Commission may consider establishing swap

    categories and minimum block thresholds for equity swaps.

    \150\ The Securities and Exchange Commission (``SEC'') has

    proposed general criteria that it would consider to set appropriate

    minimum block trade sizes for security-based swaps. The SEC,

    however, has not proposed specific numerical thresholds at this

    time, but rather intends to propose such thresholds upon the

    adoption of Regulation SBSR--Reporting and Dissemination of

    Security-Based Swap Information. 75 FR 75208, 75228 (Dec. 2, 2010).

    On May 1, 2013, the SEC reopened the comment period regarding this

    proposed rule. See Reopening of Comment Periods for Certain

    Rulemaking Releases and Policy Statement Applicable to Security-

    Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934

    and the Dodd-Frank Wall Street Reform and Consumer Protection Act

    (May 1, 2013).

    ---------------------------------------------------------------------------

    3. Swap Categories in the FX Asset Class

    The Commission proposed establishing swap categories for the FX

    asset class based on unique currency combinations, with Sec.

    43.6(b)(4)(i) distinguishing futures-related swaps \151\ from swaps

    that are not futures-related (covered under proposed Sec.

    43.6(b)(4)(ii)). Distinguishing futures-related swaps from other swaps

    would allow the Commission to set initial appropriate minimum block

    sizes for certain swaps based on DCM block sizes for FX futures

    contracts.

    ---------------------------------------------------------------------------

    \151\ Under Sec. 43.2, a futures-related swap is defined as a

    swap (as defined in section 1a(47) of the Act and as further defined

    by the Commission in implementing regulations) that is economically

    related to a futures contract. See infra notes 169-174 and

    accompanying text. Under Sec. 43.6(b)(4)(i), a futures-related swap

    is a swap where one of the underlying currencies of the swap is the

    subject of a futures contract listed on a DCM.

    ---------------------------------------------------------------------------

    The Commission based its approach on the assumption that FX swaps

    and futures contracts based upon the same currency draw upon the same

    liquidity pools. The Commission proposed in Sec. Sec. 43.6(b)(4)(i)

    and (b)(4)(ii) to distinguish FX swaps and instruments based on the

    existence of a related futures contract. Liquidity in the underlying

    futures market for the currency combinations established in proposed

    Sec. 43.6(b)(4)(i) suggested sufficient liquidity in the swaps market

    for these currency combinations.

    The Commission proposed establishing swap categories for futures-

    related swaps under proposed Sec. 43.6(b)(4)(i) based on the unique

    currency combinations between the currency of each of the following:

    the United States, European Union, United Kingdom, Japan, Australia,

    Switzerland, Canada, Republic of South Africa, Republic of Korea,

    Kingdom of Sweden, New Zealand, Kingdom of Norway, Denmark, Brazil,

    China, Czech Republic, Hungary, Israel, Mexico, New

    [[Page 32885]]

    Zealand, Poland, Russia, and Turkey.\152\ Hence, proposed Sec.

    43.6(b)(4)(i) would establish a separate swap category for each of the

    231 unique currency combinations between these currencies. In proposed

    Sec. 43.6(b)(4)(ii), the Commission would establish an additional swap

    category based on unique currency combinations not included in proposed

    Sec. 43.6(b)(4)(i).\153\

    ---------------------------------------------------------------------------

    \152\ For example, the euro (EUR) and the Canadian dollar (CAD)

    combination would be one swap category; whereas, the Swedish krona

    (SEK) and the Korean won (KRW) combination would be a separate swap

    category.

    \153\ Under proposed Sec. 43.6(e)(2), swaps having currency

    combinations described in Sec. 43.6(b)(4)(ii) would all be eligible

    to be treated as a block trade or large notional off-facility swap.

    Only in the post-initial period would the proposed rules set an

    appropriate minimum block size for this category of FX swaps. See

    infra Section II.B(5)(c)(ii).

    ---------------------------------------------------------------------------

    The Commission received six comments regarding the proposed swap

    categories for the FX asset class based on unique currency

    combinations. Two commenters recommended additional swap categories for

    the FX asset class.\154\ Barclays suggested that EUR- and USD-

    denominated transactions should be categorized separately from less

    liquid transactions and that distinct block levels should apply to the

    following product categories: Forwards, non-deliverable forwards, non-

    deliverable options, vanilla options, and other more complex

    options.\155\ GFMA recommended more granular swap categories that would

    group specific instruments according to similarity of liquidity

    profile.\156\ AFR, however, commented that the governing principle in

    establishing swap categories should be the reasonable relationship of

    swaps within a category to a liquid class of swaps or futures that are

    potential hedges for that category and expressed concern that adding

    any additional granularity might violate this principle.\157\ AII and

    ICI urged the Commission to remove block trading thresholds so that all

    transactions would be treated as blocks for the FX asset class during

    the initial period, and allow for collection and analysis of SDR data

    during this period to determine appropriate swap categories for the

    post-initial period.\158\

    ---------------------------------------------------------------------------

    \154\ CL-Barclays at 10; CL-GFMA at 2-3.

    \155\ CL-Barclays at 10.

    \156\ CL-GFMA at 2-3. GFMA also suggested that (1) FX swaps

    should be distinguished by tenor, and that (2) block size thresholds

    should vary based on time of day, in order to take into account

    liquidity across time zones.

    \157\ CL-AFR at 6.

    \158\ CL-AII at 3; CL-ICI at 5.

    ---------------------------------------------------------------------------

    The Commission notes that, since the Further Block Proposal,

    Treasury has issued a Final Determination, pursuant to sections

    1a(47)(E)(i) and 1b of the CEA, that exempts FX swaps and FX forwards

    from the definition of ``swap'' under the CEA. Therefore, the

    requirements of section 2(a)(13) of the CEA would not apply to those

    transactions, and such transactions would not be subject to part 43 of

    the Commission's regulations.\159\ Nevertheless, section 1a(47)(E)(iii)

    of the CEA provides that FX swaps and FX forwards transactions still

    are not excluded from regulatory reporting requirements to an SDR.

    Further, the Commission notes that Treasury's final determination

    excludes FX swaps and FX forwards, but does not apply to FX options or

    non-deliverable FX forwards. As such, FX instruments that are not

    covered by Treasury's final determination are subject to part 43 of the

    Commission's regulations.

    ---------------------------------------------------------------------------

    \159\ See Determination of Foreign Exchange Swaps and Foreign

    Exchange Forwards under the Commodity Exchange Act, 77 FR 69,694,

    Nov. 20, 2012.

    ---------------------------------------------------------------------------

    After consideration of the comments received and the complexity of

    the proposed approach, the Commission is adopting Sec. 43.6(b)(4) with

    modifications. The Commission is modifying proposed Sec. 43.6(b)(4)(i)

    to establish swap categories based on the unique currency combinations

    between one super-major currency paired with one of the following: (1)

    Another super major currency \160\; (2) a major currency \161\; or (3)

    a currency of Brazil, China, Czech Republic, Hungary, Israel, Mexico,

    New Zealand, Poland, Russia, or Turkey. This approach differs from the

    proposal in that the adopted swap categories will not include the

    unique currency combinations between major currencies and other major

    currencies, between major currencies and each of the ten additional

    enumerated non-major currencies, and between the ten additional

    enumerated non-major currencies. Under Sec. 43.6(b)(4) as adopted, all

    swap transactions subject to part 43 \162\ in these unique currency

    combinations may be treated as blocks.\163\

    ---------------------------------------------------------------------------

    \160\ As set out in Section II.A.1., the super-major currencies

    are the United States dollar (USD), European Union Euro Area euro

    (EUR), United Kingdom pound sterling (GBP), and Japan yen (JPY).

    \161\ As set out in Section II.A.1., the major currencies are

    the Australia dollar (AUD), Switzerland franc (CHF), Canada dollar

    (CAD), Republic of South Africa rand (ZAR), Republic of Korea won

    (KRW), Kingdom of Sweden krona (SEK), New Zealand dollar (NZD),

    Kingdom of Norway krone (NOK) and Denmark krone (DKK).

    \162\ As stated above, this section only applies to FX options

    and non-deliverable FX forwards. Treasury has exempted FX swaps and

    FX forwards from the definition of ``swap'' under the CEA. See

    Determination of Foreign Exchange Swaps and Foreign Exchange

    Forwards under the Commodity Exchange Act, 77 FR 69,694, Nov. 20,

    2012.

    \163\ See Table 10 for the enumerated swap categories

    established by Sec. 43.6(b)(4)(i).

    ---------------------------------------------------------------------------

    The changes to Sec. 43.6(b)(4) will significantly reduce the

    number of swap categories, hence reducing complexity, but will still

    ensure coverage of the most liquid currency combinations.\164\

    ---------------------------------------------------------------------------

    \164\ According to the BIS Triennial Central Bank Survey:

    Foreign Exchange and Derivatives Market Activity in April 2010

    (preliminary results, dated September 2010), the currency

    combinations enumerated under adopted Sec. 43.6(b)(4)(i) comprise

    more than 80% of global FX market turnover.

    According to the Survey of North American Foreign Exchange

    Volume in October 2012, the proposed categories established by Sec.

    43.6(b)(4)(i) cover more than 86% of the notional value of total

    monthly volume of FX swaps that are priced or facilitated by traders

    in North America. The Survey of North American Foreign Exchange

    Volume is conducted by the Foreign Exchange Committee, which

    includes representatives of major financial institutions engaged in

    foreign currency trading in the United States and is sponsored by

    the Federal Reserve Bank of New York. The survey is designed to

    measure the level of turnover in the foreign exchange market.

    Turnover is defined as the gross value in U.S. dollar equivalents of

    purchases and sales entered into during the reporting period. The

    data covers a one-month period in order to reduce the likelihood

    that very short-term variations in activity might distort the data

    and include all transactions that are priced or facilitated by

    traders in North America (United States, Canada, and Mexico).

    Transactions concluded by dealers outside of North America are

    excluded even if they are booked to an office within North America.

    The survey also excludes transactions between branches,

    subsidiaries, affiliates, and trading desks of the same firm. The

    October 2012 data can be located at http://www.newyorkfed.org/fxc/2012/octfxsurvey2012.pdf.

    ---------------------------------------------------------------------------

    While not affording block treatment to all swaps in the FX asset

    class subject to part 43, these modifications will increase the number

    of currency combinations which will be eligible to be blocks, many of

    which have limited liquidity.\165\ Yet, this modified approach still

    allows the Commission to set initial appropriate minimum block sizes

    for the most liquid categories based on the block trade size thresholds

    set by DCMs for economically-related futures contracts, as enumerated

    under adopted Sec. 43.6(b)(4)(i). The Commission believes that the

    categories established by proposed Sec. 43.6(b)(4)(i) and kept under

    adopted Sec. 43.6(b)(4)(i) provide the separate classification for

    EUR- and USD-denominated transactions recommended by Barclays.\166\

    ---------------------------------------------------------------------------

    \165\ For example, the unique currency combination of the

    Australian Dollar (AUD) and the Canadian Dollar (CAD) had a minimum

    block threshold of 10,000,000 CAD in the Further Block Proposal.

    Under adopted Sec. 43.6(b)(4), all trades in this unique currency

    combination will be eligible for block treatment.

    \166\ The Commission emphasizes that the swap categories for the

    FX asset class are unique currency combinations between each of the

    super-major currencies, major currencies, and additional currencies

    listed. The classification of EUR and USD as super-major currencies

    simply means that both currencies are individually eligible for

    inclusion among the unique currency combinations used for swap

    categorization. In the FX asset class, there is no separate bucket

    for super-major currencies (such as the buckets in the interest rate

    swap asset class described above).

    ---------------------------------------------------------------------------

    [[Page 32886]]

    The Commission will also modify Sec. 43.6(b)(4)(ii) to establish

    one swap category for the currency combinations not included in Sec.

    43.6(b)(4)(i). This category will encompass the other currency

    combinations proposed, but not adopted, by the Commission, as well as

    other non-futures related currency swaps. With the modifications to

    Sec. 43.6(b)(4), the euro (EUR) and the Canadian dollar (CAD)

    combination will still be one swap category as in the original proposal

    pursuant to Sec. 43.6(b)(4)(i). However, the Swedish krona (SEK) and

    the Korean won (KRW) combination will be grouped with all the other

    swaps covered by Sec. 43.6(b)(4)(ii) into one swap category. As a

    further example, a swap of the Czech koruna (CZK) and the Brazilian

    real (BRL) will be in the same category as the SEK-KRW swap. While the

    swaps grouped into one category by Sec. 43.6(b)(4)(ii) may have

    different liquidity levels, these swaps will all be subject to the time

    delays provided to block trades and large notional off-facility swaps

    in both the initial and post-initial periods.

    The Commission notes that the adopted Sec. 43.6(b)(4)(i)

    establishes 78 unique currency combinations, covering a vast majority

    of the notional value of FX swaps concluded by traders in North

    America. Creating additional swap categories, as suggested by Barclays

    and GFMA,\167\ would result in swap categories totaling a multiple of

    this already large number without drastically increasing the number of

    swaps that will be subject to real-time reporting without a delay.

    Establishing swap categories based upon unique currency combinations as

    in adopted Sec. 43.6(b)(4)(i) meets the objectives of grouping swaps

    with economic similarity and reducing confusion for market participants

    in determining whether their swaps are classified within a particular

    swap category. The Commission believes that these changes will reduce

    the administrative burden to both market participants and to the

    Commission by reducing the number of swap categories for which

    appropriate minimum block sizes need to be calculated.\168\

    ---------------------------------------------------------------------------

    \167\ CL-Barclays at 10; CL-GFMA at 2-3.

    \168\ In the Further Block Proposal, every unique currency

    combination would be considered a unique swap category, which means

    there would be hundreds of different swap categories for the FX

    asset class. Proposed Sec. 43.6(b)(4)(i) alone established 231 swap

    categories. Many additional categories would have been established

    under proposed Sec. 43.6(b)(4)(ii). The adopted Sec. 43.6(b)(4)

    creates 78 categories requiring the calculation of appropriate

    minimum block sizes in the post-initial period.

    Table 10--Swap Categories Established Under Sec. 43.6(b)(4)(i)

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Super-major currencies

    -------------------------------------------------------------------------------------------------------------------

    Euro (EUR) British pound (GBP) Japanese yen (JPY) U.S. dollar (USD)

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    British Pound (GBP)................. EUR-GBP ........................... ........................... ...........................

    Japanese Yen (JPY).................. EUR-JPY GBP-JPY ........................... ...........................

    U.S. Dollar (USD)................... EUR-USD GBP-USD JPY-USD ...........................

    Australian Dollar (AUD)............. AUD-EUR AUD-GBP AUD-JPY AUD-USD

    Canadian Dollar (CAD)............... CAD-EUR CAD-GBP CAD-JPY CAD-USD

    Swiss Francs (CHF).................. CHF-EUR CHF-GBP CHF-JPY CHF-USD

    Denmark Krone (DKK)................. DKK-EUR DKK-GBP DKK-JPY DKK-USD

    Korean Won (KRW).................... KRW-EUR KRW-GBP KRW-JPY KRW-USD

    Swedish Krona (SEK)................. SEK-EUR SEK-GBP SEK-JPY SEK-USD

    Norwegian Krone (NOK)............... NOK-EUR NOK-GBP NOK-JPY NOK-USD

    New Zealand Dollar (NZD)............ NZD-EUR NZD-GBP NZD-JPY NZD-USD

    South African Rand (ZAR)............ ZAR-EUR ZAR-GBP ZAR-JPY ZAR-USD

    Brazilian Real (BRL)................ BRL-EUR BRL-GBP BRL-JPY BRL-USD

    Czech Koruna (CZK).................. CZK-EUR CZK-GBP CZK-JPY CZK-USD

    Hungarian Forint (HUF).............. HUF-EUR HUF-GBP HUF-JPY HUF-USD

    Israeli Shekel (ILS)................ ILS-EUR ILS-GBP ILS-JPY ILS-USD

    Mexican Peso (MXN).................. MXN-EUR MXN-GBP MXN-JPY MXN-USD

    Polish Zloty (PLN).................. PLN-EUR PLN-GBP PLN-JPY PLN-USD

    Chinese Renminbi (RMB).............. RMB-EUR RMB-GBP RMB-JPY RMB-USD

    Russian Ruble (RUB)................. RUB-EUR RUB-GBP RUB-JPY RUB-USD

    Turkish Lira (TRY).................. TRY-EUR TRY-GBP TRY-JPY TRY-USD

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    4. Swap Categories in the Other Commodity Asset Class

    The Commission proposed to determine swap categories in the other

    commodity asset class based on three sets of groupings. The first two

    sets of groupings create categories of swaps which are economically

    related to specific futures contracts (i.e., futures-related swaps

    \169\) or swap contracts under proposed Sec. Sec. 43.6(b)(5)(i) and

    (ii). The third set of groupings creates categories based on swaps

    sharing a common product type under proposed Sec. 43.6(b)(5)(iii).

    ---------------------------------------------------------------------------

    \169\ Proposed Sec. 43.2 defines a futures-related swap as a

    swap (as defined in section 1a(47) of the Act and as further defined

    by the Commission in implementing regulations) that is economically

    related to a futures contract. The Commission is adopting this

    definition as proposed.

    ---------------------------------------------------------------------------

    The Commission proposed defining ``economically related'' \170\ in

    Sec. 43.2 as a direct or indirect reference to the same commodity at

    the same delivery location or locations,\171\ or with the

    [[Page 32887]]

    same or substantially similar cash market price series.\172\ The

    Commission noted that this definition would (1) ensure that swap

    contracts with shared reference price characteristics indicating

    economic substitutability (i.e., swaps in the category can be used to

    offset some or all of the risks associated with positions in the

    underlying commodity) are grouped together within a common swap

    category; \173\ and (2) provide further clarity as to which swaps are

    described in Sec. 43.4(d)(4)(ii)(B), which was previously finalized

    under the Real-Time Reporting Final Rule.\174\

    ---------------------------------------------------------------------------

    \170\ In the Real-Time Reporting Final Rule, the Commission

    explained: ``For the purposes of part 43, swaps are economically

    related, as described in Sec. 43.4(d)(4)(ii)(B), if such contract

    utilizes as its sole floating reference price the prices generated

    directly or indirectly from the price of a single contract described

    in appendix B to part 43.'' 77 FR 1211. Further, the Commission

    explained that ``an `indirect' price link to an Enumerated Physical

    Commodity Contract or an Other Contract described in appendix B to

    part 43 includes situations where the swap reference price is linked

    to prices of a cash-settled contract described in appendix B to part

    43 that itself is cash-settled based on a physical-delivery

    settlement price to such contract.'' Id. at n.289.

    \171\ For example, a swap utilizing the Platts Gas Daily/Platts

    IFERC reference price is economically related to the Henry Hub

    Natural Gas (NYMEX) (futures) contract because it is based on the

    same commodity at the same delivery location as that underlying the

    latter contract.

    \172\ For example, a swap utilizing the Standard and Poor's

    (``S&P'') 500 reference price is economically related to the S&P 500

    Stock Index futures contract because it is based on the same cash

    market price series.

    \173\ The Commission proposed to amend Sec. 43.2 to define

    ``reference price'' as a floating price series (including

    derivatives contract and cash market prices or price indices) used

    by the parties to a swap or swaption to determine payments made,

    exchanged or accrued under the terms of a swap contract. The

    Commission proposed to use this term in connection with the

    establishment of a method through which parties to a swap

    transaction may elect to apply the lowest appropriate minimum block

    size applicable to one component swap category of such swap

    transaction. See infra Section II.B(6)(b). The Commission is

    adopting this definition as proposed.

    \174\ The Real-Time Reporting Final Rule previously finalized

    Sec. 43.4(d)(4)(ii)(B), which requires a registered SDR to publicly

    disseminate any publicly reportable swap transaction in the other

    commodity asset class that is ``economically related'' to one of the

    contracts described in appendix B to part 43, but did not define

    ``economically related.'' This definition, as proposed and to be

    adopted here, would apply to the use of this term throughout all of

    part 43 of the Commission's regulations.

    ---------------------------------------------------------------------------

    The first set of swap categories, covered under proposed Sec.

    43.6(b)(5)(i), would establish separate swap categories for swaps that

    are economically related to one of the contracts listed in appendix B

    to part 43. Therefore, proposed Sec. 43.6(b)(5)(i) would establish one

    swap category for each contract listed in appendix B to part 43. The

    Real-Time Reporting Final Rule previously finalized appendix B to part

    43, which lists 29 Enumerated Physical Commodity Contracts and Other

    Contracts (i.e., Brent Crude Oil (ICE)).\175\ In the Further Block

    Proposal, the Commission proposed to add 13 electricity and natural gas

    swap contracts to appendix B to part 43.\176\ Therefore, proposed Sec.

    43.6(b)(5)(i) would establish 42 swap categories such that each

    contract would be the basis for its own other commodity swap category,

    and all swaps that are economically related to that contract would be

    included in that swap category.

    ---------------------------------------------------------------------------

    \175\ As noted by the Commission in the Real-Time Reporting

    Final Rule, the 28 Enumerated Physical Commodity Contracts are

    traded on U.S. DCMs, while Brent Crude Oil (ICE) futures contracts

    are primarily traded in Europe. 77 FR 1211 n. 288.

    \176\ See infra Section II.B5(d)(i). The Commission had

    previously issued orders deeming these contracts as ``significant

    price discovery contracts'' in connection with trading on exempt

    commercial markets (``ECMs''), based on, among other factors, their

    material liquidity and price discovery function. See infra Section

    III.C(4)(a). These contracts included: AECO Financial Basis Contract

    (``AEC'') traded on the IntercontinentalExchange, Inc. (``ICE'')

    (See 75 FR 23697); NWP Rockies Financial Basis Contract (``NWR'')

    traded on ICE (See 75 FR 23704); PG&E Citygate Financial Basis

    Contract (``PGE'') traded on ICE (See 75 FR 23710); Waha Financial

    Basis Contract (``WAH'') traded on ICE (See 75 FR 24655); Socal

    Border Financial Basis Contract (``SCL'') traded on ICE (See 75 FR

    24648); HSC Financial Basis Contract (``HXS'') traded on ICE (See 75

    FR 24641); ICE Chicago Financial Basis Contract (``DGD'') traded on

    ICE (See 75 FR 24633); SP-15 Financial Day-Ahead LMP Peak Contract

    (``SPM'') traded on ICE (See 75 FR 42380); SP-15 Financial Day-Ahead

    LMP Off-Peak Contract (``OFP'') traded on ICE (See 75 FR 42380); PJM

    WH Real Time Peak Contract (``PJM'') traded on ICE (See 75 FR

    42390); PJM WH Real Time Off-Peak Contract (``OPJ'') traded on ICE

    (See 75 FR 42390); Mid-C Financial Peak Contract (``MDC'') traded on

    ICE (See 75 FR 38469); Mid-C Financial Off-Peak Contract (``OMC'')

    traded on ICE (See 75 FR 38469).

    As discussed further below, as of October 12, 2012, ICE withdrew

    its listing of these contracts as a result of converting its cleared

    OTC swap contracts and related options to futures listed at ICE

    Futures U.S. and ICE Futures Europe. Accordingly, ICE converted

    these contracts into economically equivalent futures contracts and

    has listed them for trading. See ICE--Swaps to Futures Transition,

    https://www.theice.com/S2F.jhtml (last visited May 7, 2013).

    Therefore, as discussed further below, the Commission has determined

    in this final rule to add the converted contracts to appendix B to

    part 43, such that each contract will serve as a basis for an other

    commodity swap category. See infra Section II.A(4).

    ---------------------------------------------------------------------------

    The Commission has separately enumerated these contracts since it

    previously has identified these commodity contracts as: (1) Having high

    levels of open interest and significant cash flow; and (2) serving as a

    reference price for a significant number of cash market transactions.

    Moreover, the Commission has also previously determined that any swap

    that references or is economically related to these contracts (along

    with the Brent Crude Oil (ICE) contract or any contract that is

    economically related to it) has sufficient liquidity to ensure that the

    public dissemination of swap transaction and pricing data for swaps

    based on this reference asset poses little risk of disclosing

    identities of parties, business transactions, or market positions.\177\

    ---------------------------------------------------------------------------

    \177\ 77 FR 1211.

    ---------------------------------------------------------------------------

    The second set of swap categories, covered under proposed Sec.

    43.6(b)(5)(ii), would establish swap categories based on swaps in the

    other commodity asset class that are: (1) Not economically related to

    one of the futures or swap contracts listed in appendix B to part 43;

    and (2) economically related to a relevant futures contract that is

    subject to the block trade rules of a DCM. Proposed Sec.

    43.6(b)(5)(ii) listed the 18 futures contracts to which these swaps are

    economically related, and hence, establishes 18 swap categories.\178\

    These swap categories would include any swap that is economically

    related to such contracts. The swap categories established by proposed

    Sec. 43.6(b)(5)(i) differ from the swap categories established by

    proposed Sec. 43.6(b)(5)(ii) in that the former may be economically

    related to futures or swap contracts that are not subject to the block

    trade rules of a DCM, whereas the latter are economically related to

    futures contracts that are subject to the block trade rules of a

    DCM.\179\

    ---------------------------------------------------------------------------

    \178\ As proposed, these additional other commodity swap

    categories would be based on the following futures contracts: CME

    Cheese; CBOT Distillers' Dried Grain; CBOT Dow Jones-UBS Commodity

    Index Excess Return; CBOT Ethanol; CME Frost Index; CME Goldman

    Sachs Commodity Index (GSCI) (GSCI Excess Return Index); NYMEX Gulf

    Coast Gasoline; NYMEX Gulf Coast Sour Crude Oil; NYMEX Gulf Coast

    Ultra Low Sulfur Diesel; CME Hurricane Index; CME International

    Skimmed Milk Powder; NYMEX New York Harbor Ultra Low Sulfur Diesel;

    CBOT Nonfarm Payroll; CME Rainfall Index; CME Snowfall Index; CME

    Temperature Index; CME U.S. Dollar Cash Settled Crude Palm Oil; and

    CME Wood Pulp.

    \179\ This distinction is noteworthy because proposed Sec.

    43.6(e)(3) provides that ``[p]ublicly reportable swap transactions

    described in Sec. 43.6(b)(5)(i) that are economically related to a

    futures contract in appendix B to this part [43] shall not qualify

    to be treated as block trades or large notional off-facility swaps

    (as applicable) [during the initial period], if such futures

    contract is not subject to a designated contract market's block

    trading rules.''

    ---------------------------------------------------------------------------

    The third set of swap categories, covered under proposed Sec.

    43.6(b)(5)(iii), would establish swap categories for all other

    commodity swaps that are not categorized under proposed Sec.

    43.6(b)(5)(i) or (ii). These swaps are not economically related to any

    of the contracts listed in appendix B to part 43 or any of the

    contracts listed in proposed Sec. 43.6(b)(5)(ii). For these other

    commodity swaps, the Commission would determine the appropriate swap

    category based on the product types described in appendix D to part 43

    to which the underlying asset(s) of the swap would apply or otherwise

    relate. Proposed appendix D to part 43 establishes ``Other Commodity

    Groups'' and certain ``Individual Other Commodities'' within those

    groups. To the extent that there is an ``Individual Other Commodity''

    listed, the Commission would deem the ``Individual Other Commodity'' as

    a separate swap category. For example, regardless of whether the

    underlying asset to an off-facility swap is ``Sugar No. 14'' or ``Sugar

    No. 5,'' the underlying asset would be grouped as ``Sugar.'' The

    Commission thereafter

    [[Page 32888]]

    would set the appropriate minimum block size for each of the swap

    categories listed in appendix D to part 43.

    In circumstances where a swap does not apply or otherwise relate to

    a specific ``Individual Other Commodity'' listed under the ``Other

    Commodity Group'' in appendix D to part 43, the Commission would

    categorize such swap as falling under the respective ``Other'' swap

    categories. For example, an emissions swap would be categorized as

    ``Emissions,'' while a swap in which the underlying asset is aluminum

    would be categorized as ``Base Metals--Other.'' Additionally, in

    circumstances where the underlying asset of swap does not apply or

    otherwise relate to an ``Individual Other Commodity'' or an ``Other''

    swap category, the Commission would categorize such swap as either

    ``Other Agricultural'' or ``Other Non-Agricultural.''

    Comments on the proposed swap categories in the other commodity

    asset class varied. CME Group agreed with the proposed approach to

    establishing swap categories in the other commodity asset class in the

    initial period because it would allow appropriate minimum block level

    sizes to be set based on the minimum block sizes set by DCMs.\180\ ICI,

    however, recommended that the Commission obtain and analyze trading

    data from SDRs first before determining whether the proposed swap

    categories are appropriate.\181\

    ---------------------------------------------------------------------------

    \180\ CL-CME 3-4. Proposed Sec. 43.6(e)(1) established

    appropriate minimum block sizes in the initial period for swap

    categories in proposed Sec. 43.6(b)(5)(i)-(ii) based on the block

    sizes for related futures contracts set by DCMs, except for natural

    gas and electricity swaps proposed to be added to appendix B of part

    43.

    \181\ CL-ICI at 5.

    ---------------------------------------------------------------------------

    Several commenters commented on the granularity of the proposed

    swap categories. Some commenters recommended more granular categories

    to account for the differences in liquidity and execution risk between

    shorter- and longer-dated contracts.\182\ Similarly, Barclays also

    commented that swap categories in the other commodity asset class

    should consider that products typically experience a reduction in

    liquidity beyond the first or second year.\183\ Other commenters,

    however, opposed the proposed categories as too narrow and recommended

    broadening the definition of ``economically related'' and reducing the

    number of swap categories to reflect increasing price correlation

    between different categories of commodities as well as existing hedging

    practices by market participants.\184\

    ---------------------------------------------------------------------------

    \182\ CL-ICAP Energy at 4; CL-fia at 3.

    \183\ CL-Barclays at 9.

    \184\ CL-Better Markets at 6-7; CL-AFR at 6-7.

    ---------------------------------------------------------------------------

    Parity Energy requested that the Commission establish a separate

    category for swaps that are economically related to crude oil options

    because transactions in crude oil options are typically fewer and

    larger in size than transactions in crude oil futures contracts.\185\

    Parity Energy also agreed with the proposed distinction in swap

    categories between swaps that are economically related to natural gas

    swaps and swaps that are economically related to natural gas swap

    options.\186\

    ---------------------------------------------------------------------------

    \185\ CL-Parity at 4-5.

    \186\ Id. As proposed, the initial minimum block size for swaps

    that are economically related to Henry Hub Natural Gas futures was

    set at 1,000,000 mmBtu; the initial minimum block size for Henry Hub

    Natural Gas options was set at 5,500,000 mmBtu.

    ---------------------------------------------------------------------------

    The Commission is adopting the definition of ``economically

    related'' as proposed. The Commission believes that broadening the

    definition, as suggested by some commenters, would reduce the precision

    with which swaps in the other commodity asset class can be properly

    categorized. As proposed, the definition of ``economically related'' is

    sufficient in that it (1) ensures that swap contracts with shared

    reference price characteristics (indicating economic substitutability)

    are grouped together within a common swap category and (2) provides

    further clarity as to which swaps are described in Sec.

    43.4(d)(4)(ii)(B).

    Furthermore, the Commission believes that its general approach to

    establishing swap categories under Sec. 43.6(b)(5)(i)-(iii) is

    appropriate and is adopting the text of Sec. 43.6(b)(5)(i)-(iii)

    largely as proposed, with the exception of some proposed swap

    categories in Sec. 43.6(b)(5)(ii).\187\ With the conversion of the 13

    electricity and natural gas swap contracts proposed to be added to

    appendix B to part 43 into DCM-listed, economically equivalent futures

    contracts,\188\ the Commission is making one modification by

    establishing swap categories and adopting initial appropriate minimum

    block sizes corresponding to those set by a DCM for those futures

    contracts. With respect to the swap categories established under Sec.

    43.6(b)(5)(i), the Commission believes that establishing categories for

    swaps that are economically related to one of the referenced futures

    contracts is appropriate because these contracts have previously been

    identified as (1) having high levels of open interest and significant

    cash flow; and (2) serving as a reference price for a significant

    number of cash market transactions.

    ---------------------------------------------------------------------------

    \187\ The Commission is not adopting separate swap categories

    that it proposed in the Further Block Proposal for swaps that are

    economically related to the following NYMEX futures contracts: Gulf

    Coast Gasoline; Gulf Coast Ultra Low Sulfur Diesel; and New York

    Harbor Ultra Low Sulfur Diesel. As of October 15, 2012, NYMEX

    eliminated block trading in these contracts because they have no

    open interest. The Commission is also removing the swap category for

    swaps that reference or are economically related to Non-Farm Payroll

    futures contract, the International Skimmed Milk Powder, and Wood

    Pulp as these contracts are no longer listed for trading.

    \188\ See supra note 176.

    ---------------------------------------------------------------------------

    With respect to the swap categories established under Sec.

    43.6(b)(5)(i)-(ii), the Commission is establishing swap categories and

    adopting initial appropriate minimum block sizes which correspond with

    those set by a DCM for economically related futures contracts in the

    initial period.\189\ Hence, to the extent possible, the Commission is

    relying upon the DCMs' knowledge of and experience with liquidity in

    related futures markets until additional data becomes available. With

    respect to the swap categories established under Sec. 43.6(b)(5)(iii),

    the Commission believes that setting swap categories by product type

    would allow the Commission to set appropriate minimum block sizes for

    groups of transactions that have similar underlying physical commodity

    market characteristics. Accordingly, the Commission does not believe

    that establishing swap categories that are broader than proposed is

    necessary to enhance market transparency.

    ---------------------------------------------------------------------------

    \189\ See infra Section II.B(5)(d).

    ---------------------------------------------------------------------------

    [[Page 32889]]

    Furthermore, the Commission is not using additional criteria to

    create more granular swap categories in the other commodity asset

    class. While commodity swaps within a particular swap category may

    feature different liquidity and risk profiles based on their tenor, the

    Commission is not aware of any data that would warrant additional swap

    categories. As swaps trading data becomes available, the Commission

    will examine such data to determine whether establishing additional

    swap categories would be appropriate.

    The other main modification to the swap categories established

    under Sec. 43.6(b)(5) is that the Commission is not adopting separate

    swap categories for swaps that are economically related to the options

    contracts listed in appendix F of the Further Block Proposal.\190\

    Consistent with the Commission's definitions of ``economically-

    related'' and ``futures-related swap,'' the Commission considers such

    swaps, which feature an optionality component, to be economically

    related to the corresponding futures contracts adopted in appendix F of

    this final rule for purposes of determining swap categories. This

    approach to categorizing such swaps is consistent with the Commission's

    methodology to establish initial appropriate minimum block size for

    swaps with optionality for all asset classes.\191\ Under this

    methodology, the notional size of swaps with optionality in the initial

    period will be equal to the notional size of the swap component without

    the optional component. As discussed further below, the Commission is

    adopting this methodology as proposed, and therefore will not consider

    optionality in the determination of a swap contract's notional size--

    allowing block sizes to be established based on the block sizes set by

    DCMs for options contracts would contradict this approach.

    ---------------------------------------------------------------------------

    \190\ These options contracts listed in proposed Appendix F,

    which are subject to a minimum DCM block size rule, included Cocoa

    (ICE); Coffee (ICE); Cotton No. 2 (ICE); Frozen Concentrated Orange

    Juice (ICE); Gold (COMEX and NYSE Liffe); New York Harbor No. 2

    Heating Oil (NYMEX); Silver (COMEX and NYSE Liffe); Sugar

    11 (ICE); and Sugar 16 (ICE).

    \191\ See infra Section II.C.

    ---------------------------------------------------------------------------

    5. Comments Regarding Swap Categories Across Asset Classes

    The Commission received a number of comments suggesting that, for

    all asset classes, the Commission establish separate swap categories,

    with separate appropriate minimum block sizes, for infrequently traded

    or illiquid swaps. Javelin and SDMA did not think infrequently-traded

    swaps posed an obstacle and recommended swap categorization that would

    account for hedging for illiquid swaps through synthetic/portfolio

    hedging through liquidity of economically equivalent swaps.\192\

    Barclays suggested that all swaps made available to trade that trade

    less than three times a day should be treated as blocks, as market

    makers otherwise will be reluctant to quote prices.\193\ Alternatively,

    Barclays suggested removing such swaps from the ``available to trade''

    category and thereby exempting them from post-trade reporting.\194\

    ISDA/SIFMA requested block treatment for all infrequently traded swaps

    and suggested a benchmark tied to precise daily trading frequency

    including a time delay for illiquid products generally.\195\ To support

    this approach, ISDA/SIFMA cited a Commission study showing that market

    participants prefer off-exchange bilateral execution for illiquid

    instruments because of liquidity concerns.\196\ ISDA/SIFMA suggested

    that a single transaction, regardless of size, in such infrequently-

    traded or illiquid swaps may move the market.\197\ GFMA suggested

    treating all infrequently-traded swaps as blocks and defines such

    transactions as exhibiting all or some of the following features: (1)

    The constituent swap or swaps to which they are economically related

    are not executed on, or pursuant to the rules of, a SEF or DCM; (2) few

    market participants have transacted in these swaps or in economically-

    related swaps; or (3) few swap transactions are executed during a

    historic period in these swaps or in economically-related swaps.\198\

    Parascandola recommended block treatment for small notional and odd-lot

    trades, particularly in index products where the notional amount is

    below $10 million.\199\ Kinetix suggested that transactions in any

    product with fewer than 250 transactions annually should receive

    treatment as block trades.\200\ Vanguard urged a more granular approach

    to swap categories and thresholds to ``recognize distinct liquidity

    pools.'' \201\ Vanguard and SIFMA suggested that swaps that trade fewer

    than 14 trades per day should be blocks.\202\ AII suggested block

    treatment for swaps that trade less than 5 times per day.\203\

    ---------------------------------------------------------------------------

    \192\ CL-Javelin at 5-6; CL-SDMA at 6.

    \193\ CL-Barclays at 4.

    \194\ Id.

    \195\ ISDA/SIFMA recommended that every transaction (regardless

    of size) in a swap category for which there are no more than 14

    swaps traded per business day receive block treatment for a period

    of 1 year. CL-ISDA/SIFMA at 12.

    \196\ According to ISDA/SIFMA, ``[f]orcing the same transparency

    standards on market participants for both liquid and illiquid

    products will be detrimental. Instantaneous trade disclosure for

    highly illiquid products, combined with the potential for SEF or DCM

    execution, is likely to erode their liquidity further and to do

    severe damage to the safety and soundness of the system as a

    whole.'' Id.

    \197\ Id.

    \198\ CL-GFMA at 3.

    \199\ CL-Parascondola at 1.

    \200\ CL-Kinetix at 1.

    \201\ CL-Vanguard at 5.

    \202\ CL-SIFMA at 10; CL-Vanguard at 7.

    \203\ CL-AII at 6.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting the swap categories described in the sections above. The

    Commission believes that the trade frequency of a single instrument is

    but one measure of liquidity for such a swap and does not factor in the

    pool of instruments that are capable of providing an economically

    equivalent position, either individually or on a portfolio basis.

    B. Appropriate Minimum Block Size Methodologies for the Initial and

    Post-Initial Periods

    The Commission proposed a tailored approach for determining

    appropriate minimum block sizes during the initial and post-initial

    periods for each asset class. In the subsections below, the Commission

    sets out a more detailed discussion of the appropriate minimum block

    size methodologies for swaps within: (1) Swap categories in the

    interest rate and credit asset classes; (2) the single swap category in

    the equity asset class; (3) swap categories in the FX asset class; and

    (4) swap categories in the other commodity asset class. Thereafter, the

    Commission discusses special rules for determining the appropriate

    minimum block sizes across asset classes.

    [[Page 32890]]

    1. Phase-In of Appropriate Minimum Block Sizes

    As discussed in Section I.C.2. above, the Commission proposed a

    phase-in of its regulations regarding appropriate minimum block size

    methodologies so that market participants could better adjust their

    swap trading strategies to manage risk, secure new technologies, and

    make necessary arrangements to comply with part 43. Thus, the

    Commission proposed two provisions relating to the Commission's

    determination of appropriate minimum block sizes: (1) Initial

    appropriate minimum block sizes under proposed Sec. 43.6(e); and (2)

    post-initial appropriate minimum block sizes under proposed Sec.

    43.6(f).

    The Commission received ten comments regarding the proposed phase-

    in of its appropriate minimum block size methodologies. Four

    commenters, AII, EEI, SIFMA, and Vanguard, requested that the

    Commission apply block status to all swaps during the initial

    period.\204\ AII stated that removing (or lowering) block thresholds

    would appropriately transition the market and avoid harming

    liquidity.\205\ SIFMA recommended collecting SDR data during the

    initial period and gradually and iteratively phasing in block

    thresholds.\206\ Vanguard also expressed concern regarding the

    liquidity impacts of setting block thresholds without more data.\207\

    ---------------------------------------------------------------------------

    \204\ CL-AII at 3; CL-EEI at 5; CL-SIFMA at 3; CL-Vanguard at 7.

    \205\ CL-AII at 3.

    \206\ CL-SIFMA at 3.

    \207\ CL-Vanguard at 7.

    ---------------------------------------------------------------------------

    Eight commenters suggested that the Commission establish a more

    conservative threshold during the initial period. AII recommended that

    the Commission either remove block trading thresholds during the

    initial period or lower the thresholds below the proposed levels to

    appropriately transition the market and avoid unnecessarily harming

    liquidity.\208\ Barclays recommended introducing block levels that

    allow for empirical analysis of the transaction data and sequentially

    increasing block sizes until such point as the desired equilibrium

    between transparency and liquidity is reached.\209\ GFMA stated that,

    if the Commission used a percentage notional test, then it should

    introduce it in a phased manner to assess the impact on the market over

    time and ensure it has sufficient flexibility to amend the notional

    percentage.\210\ ICAP Energy proposed specific initial block thresholds

    for PJM at 50 MW/Hr and for SP-15 and Mid-C at 30 MW/Hr, and for

    natural gas basis swaps at 2500 MMBTUs/day.\211\ ICI, while supporting

    a 50 percent notional amount calculation, urged the Commission to

    phase-in the calculation for very illiquid instruments (less than 3 or

    4 trades per week) by first implementing a 25 percent notional amount

    calculation, in order to alleviate potential harmful effects of

    disclosure of large block sizes on liquidity, particularly in illiquid

    swaps markets.\212\ ISDA/SIFMA stated that the Commission should phase

    in the block threshold in order to allow trading on SEFs and DCMs to

    develop and suggested setting the threshold based on a 25-percent

    notional amount calculation.\213\ SIFMA proposed a multi-phase process

    for establishing block levels, starting with a one-year data collection

    phase, followed by an initial period with low block levels.\214\ The

    block levels would then be decreased if the Commission found that

    liquidity significantly decreased or bid-ask spreads significantly

    increased over the quarter for swaps close to, but below, the block

    threshold.\215\ WMBAA encouraged the Commission to implement lower

    block trade thresholds while the post-trade reporting requirements are

    implemented and market participants begin providing data to SDRs for

    cleared and uncleared swaps.\216\

    ---------------------------------------------------------------------------

    \208\ CL-AII at 3.

    \209\ CL-Barclays at 11.

    \210\ CL-GFMA at 3.

    \211\ CL-ICAP Energy at 3.

    \212\ CL-ICI at 7.

    \213\ CL-ISDA/SIFMA at 13.

    \214\ CL-SIFMA at 3.

    \215\ Id.

    \216\ CL-WMBAA at 4.

    ---------------------------------------------------------------------------

    After consideration of the comments above, the Commission is

    adopting a phased-in approach as proposed, but with modifications in

    response to the comments above regarding phasing, as more fully

    described below.

    2. Overview of Proposed Approach

    The chart below summarizes swap categories and calculation

    methodologies that the Commission proposed for each asset class in both

    the initial period and the post-initial period.

    [[Page 32891]]

    Proposed Approach

    ----------------------------------------------------------------------------------------------------------------

    Post-initial

    Asset class Swap category criteria Initial implementation implementation period

    period \217\

    ----------------------------------------------------------------------------------------------------------------

    Interest Rates................... By unique currency and 67-percent notional 67-percent notional

    Credit........................... tenor grouping \218\ amount calculation by amount calculation by

    By tenor and conventional swap category \219\ swap category \220\

    spread grouping \221\.

    FX............................... By numerated FX currency Based on DCM futures

    combinations (i.e., block size by swap

    futures related) \222\ category \223\

    By non-enumerated FX All trades may be

    currency combinations treated as block trades

    (i.e., non-futures \225\

    related) \224\

    Other Commodity.................. By economically-related Based on DCM futures

    Appendix B to part 43 block size by swap

    contract if the swap is category \227\

    (1) futures related and

    (2) the relevant futures

    contract is subject to

    DCM block trade rules

    \226\

    By economically-related No trades may be treated

    Appendix B to part 43 as blocks \229\

    contract if the swap is:

    (1) futures related and

    (2) the relevant futures

    contract is not subject

    to DCM block trade rules

    \228\

    By economically-related Appropriate minimum

    Appendix B to part 43 block size equal to $25

    contract if the swap is million \231\

    (1) a listed natural gas

    or electricity swap

    contract and (2) the

    relevant Appendix B

    contract is not futures

    related \230\

    By swaps that are Based on DCM futures

    economically related to block size by swap

    the list of 18 contracts category \233\

    listed in Sec.

    43.6(b)(5)(ii) \232\

    By Appendix D to part 43 All trades may be

    commodity group, for treated as block trades

    swaps not economically \235\

    related to a contract

    listed in Appendix B to

    part 43 or to the list

    of 18 contracts listed

    in Sec. 43.6(b)(5)(ii)

    \234\

    ---------------------------------------------------

    Equity........................... All equity swaps \236\... No trades may be treated as blocks \237\

    ----------------------------------------------------------------------------------------------------------------

    3. The 67-Percent Notional Amount Calculation for Determination of

    Appropriate Minimum Block Sizes

    The Commission proposed using a 67-percent notional amount

    calculation to determine initial and post-initial appropriate minimum

    block sizes for swaps in the interest rate and credit asset classes

    pursuant to proposed Sec. Sec. 43.6(c)(1), 43.6(e)(1), and

    43.6(f)(1).\238\ The Commission also proposed using a 67-percent

    notional amount calculation to determine post-initial appropriate

    minimum block sizes for swaps in the FX and other commodity asset

    classes pursuant to Sec. 43.6(f)(1).

    ---------------------------------------------------------------------------

    \217\ This post-initial implementation period would commence

    after an initial period, lasting at least one year. Thereafter, the

    Commission would determine appropriate minimum block sizes a minimum

    of once annually. See proposed Sec. 43.6(f)(1).

    \218\ See proposed Sec. 43.6(b)(1).

    \219\ See proposed Sec. 43.6(c)(1).

    \220\ See proposed Sec. 43.6(f)(2).

    \221\ See proposed Sec. 43.6(b)(2).

    \222\ See proposed Sec. 43.6(b)(4)(i).

    \223\ See proposed Sec. 43.6(e)(1).

    \224\ See proposed Sec. 43.6(b)(4)(ii).

    \225\ See proposed Sec. 43.6(e)(2).

    \226\ See proposed Sec. 43.6(b)(5)(i).

    \227\ See proposed Sec. 43.6(e)(1).

    \228\ See proposed Sec. 43.6(b)(5)(i).

    \229\ See proposed Sec. 43.6(e)(3).

    \230\ See proposed Sec. 43.6(b)(5)(i).

    \231\ See proposed Sec. 43.6(e)(3).

    \232\ See proposed Sec. 43.6(b)(5)(ii).

    \233\ See proposed Sec. 43.6(e)(1).

    \234\ See proposed Sec. 43.6(b)(5)(iii) and the product types

    groupings listed in proposed appendix D to part 43.

    \235\ See proposed Sec. 43.6(e)(2).

    \236\ See proposed Sec. 43.6(b)(3).

    \237\ See proposed Sec. 43.6(d).

    \238\ Proposed Sec. 43.6(c)(1) describes the 67-percent

    notional amount calculation. Proposed Sec. 43.6(e)(1) provides the

    provisions relating to the methodology for determining appropriate

    minimum block sizes during the initial period for swaps in the

    interest rate and credit asset classes, inter alia.

    ---------------------------------------------------------------------------

    The 67-percent notional amount calculation as proposed is a

    methodology under which the Commission would: (Step 1) select all of

    the publicly reportable swap transactions within a specific swap

    category using a rolling three-year window of data beginning with a

    minimum of one year's worth of data and adding one year of data for

    each calculation until a total of three years of data is accumulated;

    \239\ (step 2) convert to the same currency or units and use a

    ``trimmed data set''; \240\ (step 3) determine the sum of the notional

    amounts of swaps in the trimmed data set; (step 4) multiply the sum of

    the notional amount by 67 percent; (step 5) rank order the observations

    by notional amount from least to greatest; (step 6) calculate the

    cumulative sum of the observations until the cumulative sum is equal to

    or greater than the 67-percent notional amount calculated in step 4;

    (step 7) select the notional amount associated with that observation;

    (step 8) round the notional amount of that observation to two

    significant digits, or if the notional amount associated with that

    observation is already significant to two digits, increase that

    notional amount to the next highest rounding

    [[Page 32892]]

    point of two significant digits; \241\ and (step 9) set the appropriate

    minimum block size at the amount calculated in step 8. An example of

    how the Commission would apply this proposed methodology is set forth

    in section VII of this final rule.

    ---------------------------------------------------------------------------

    \239\ See note 85 supra for the definition of publicly

    reportable swap transaction. Since the Commission proposed to

    determine all appropriate minimum block sizes based on reliable data

    for all publicly reportable swap transactions within a specific swap

    category, the Commission does not view the fact that more than one

    SDR may collect such data as raising any material concerns.

    \240\ See proposed amendment to Sec. 43.2 and the discussion

    infra in this section.

    \241\ For example, if the observed notional amount is

    $1,250,000, the amount should be increased to $1,300,000. This

    adjustment is made to assure that at least 67 percent of the total

    notional amount of transactions in a trimmed data set are publicly

    disseminated in real time.

    ---------------------------------------------------------------------------

    Twenty-eight commenters provided general comments on the resulting

    proposed block sizes or on the general approach of using a notional

    amount calculation. Out of the 28 commenters, 14 opposed the 67 percent

    notional amount calculation and/or supported lower appropriate minimum

    block sizes,\242\ 12 supported the 67 percent notional amount

    calculation and/or supported higher appropriate minimum block

    sizes,\243\ 1 commenter felt unable to comment on the 67 percent

    notional amount calculation without actual swap data,\244\ and 1

    commenter opposed the 67 percent notional calculation for the other

    commodity asset class, but also felt that the 50 percent notional

    calculation was too low for interest rates.\245\

    ---------------------------------------------------------------------------

    \242\ Commenters in this category include AII, Barclays, CME,

    Freddie Mac, ICAP Energy, ICAP North America, ICI, ISDA/SIFMA, MFA,

    Morgan Stanley, Pierpont, SIFMA, Vanguard, WMBAA.

    \243\ Commenters in this category include Arbor, AFR, Barnard,

    Better Markets, CRT, Currenex, Javelin, Jefferies, ODEX, RJ O'Brien,

    SDMA, Spring Trading.

    \244\ CL-GFMA at 3.

    \245\ CL-FIA at 2-3.

    ---------------------------------------------------------------------------

    Of the 14 commenters who opposed the 67 percent notional amount

    calculation and/or supported lower appropriate minimum block sizes, two

    commenters, CME and Barclays, opposed the notional amount calculation

    generally, but not necessarily the resulting block sizes.\246\ CME

    stated that the rule is arbitrary and unrelated to the explicit goals

    of Dodd-Frank with respect to setting appropriate minimum block

    sizes.\247\ Barclays stated that the calculation is not based on any

    analysis of the impact that these thresholds will have on liquidity or

    on the corresponding costs to market participants.\248\ The other

    commenters in this group generally expressed concern that the

    appropriate minimum block sizes were too large and would reduce

    liquidity and/or disrupt markets. For example, AII stated that ``we

    believe that if the CFTC utilizes the 67 percent notional calculation

    required under the Proposed Rules, the CFTC will sacrifice liquidity

    for certain swap products and alter the proper functioning of the

    marketplace in the name of transparency.'' \249\

    ---------------------------------------------------------------------------

    \246\ CL-CME at 2; CL-Barclays at 10.

    \247\ CL-CME at 2.

    \248\ CL-Barclays at 10.

    \249\ CL-AII at 2.

    ---------------------------------------------------------------------------

    Several of the commenters who opposed the 67 percent notional

    amount calculation and/or supported lower appropriate minimum block

    sizes specifically discussed the 50 percent notional amount

    calculation. These commenters generally expressed concern that the 67

    percent notional amount calculation resulted in appropriate minimum

    block sizes that are too high and would result in reduced liquidity in

    these markets. Freddie Mac and ICI expressly supported a 50 percent

    notional amount calculation.\250\ Pierpont and WMBAA recommended a

    notional amount calculation of no greater than 50 percent.\251\ ICAP

    Energy and SIFMA recommended a notional amount calculation below 50

    percent, but preferred a 50 percent notional amount calculation to a 67

    percent notional amount calculation.\252\ AII and ICAP recommended not

    using a notional amount calculation at all, but preferred a 50 percent

    notional amount calculation to a 67 percent notional amount

    calculation.\253\

    ---------------------------------------------------------------------------

    \250\ CL-Freddie at 2; CL-ICI at 6-7.

    \251\ CL-Pierpont at 3; CL-WMBAA at 3.

    \252\ CL-ICAP Energy at 3; CL-SIFMA at 10.

    \253\ CL-AII at 6; CL-ICAP Energy at 4.

    ---------------------------------------------------------------------------

    Some of the commenters who opposed the 67 percent notional amount

    calculation and/or supported lower appropriate minimum block sizes did

    so conditionally. MFA preferred the 50 percent notional amount

    calculation over the 67 percent primarily in the initial period--``if

    swap categories are not properly distinguished, and the Commission

    cannot ensure a calibration of the initial minimum block sizes to

    current market conditions, we hesitate to endorse the 67 percent

    notional amount calculation in the final rulemaking and prefer instead

    that the Commission use a 50 percent notional amount calculation,

    particularly in the initial period, with a phase-in to a 67 percent

    notional amount calculation over time.'' \254\ Two other commenters

    supported the 50 percent notional amount calculation, but in the

    context of specific asset classes--Freddie Mac for the interest rate

    asset class and ICAP Energy for the other commodity asset class ``for

    year two and beyond.'' \255\

    ---------------------------------------------------------------------------

    \254\ CL-MFA at 3-4.

    \255\ CL-Freddie at 2; CL-ICAP Energy at 3.

    ---------------------------------------------------------------------------

    Of the 12 commenters who supported the 67 percent notional amount

    calculation and/or higher appropriate minimum block sizes, several

    argued that lower appropriate minimum block sizes were inconsistent

    with congressional intent. Barnard and SDMA specifically stated that a

    50 percent notional amount calculation would not constitute a ``vast

    majority'' of swap transactions as intended by Congress.\256\ Moreover,

    commenters also suggested that the 67 percent notional amount

    calculation supported the statutory requirements of section 2(a)(13) of

    the CEA as well as congressional intent. For example, Arbor stated that

    ``the 67% rule and the Market Depth test are consistent with

    [c]ongressional [i]ntent, promotes transparency and trading of SEFs,

    provides better market data, and is a conservative approach given the

    market's size.'' \257\ CRT and Currenex stated that the 67 percent

    notional amount calculation would achieve a proper balance between

    market transparency and market liquidity.\258\ Jefferies stated that

    the 67 percent notional amount calculation was consistent with

    congressional intent.\259\

    ---------------------------------------------------------------------------

    \256\ The ``guiding principle in setting appropriate block trade

    levels [is that] the vast majority of swap transactions should be

    exposed to the public market through exchange trading.''

    Congressional Record--Senate, S5902, S5922 (July 15, 2010); CL-

    Barnard at 3; CL-SDMA at 2.

    \257\ CL-Arbor at 1.

    \258\ CL-CRT at 1-2; CL-Currenex at 2.

    \259\ CL-Jefferies at 1-2.

    ---------------------------------------------------------------------------

    Seven commenters expressed a preference for the 67 percent notional

    amount calculation, but also supported another alternative.\260\ ODEX,

    RJ O'Brien, and Spring Trading expressed support for the 67 percent

    notional amount calculation, but also suggested that a higher notional

    amount calculation would be preferable, particularly in the post-

    initial period.\261\ AFR, Better Markets, Javelin, and SDMA all

    recommended a 75 percent or higher notional amount calculation and a

    market depth and market breadth test.\262\

    ---------------------------------------------------------------------------

    \260\ CL-AFR at 8-9; CL-Better Markets at 7-8; CL-Spring Trading

    at 2; CL-ODEX at 1; CL-RJ O'Brien at 1; CL-AFR at 8-9; CL-Better

    Markets at 7-8; CL-Javelin at 2; CL-SDMA at 2.

    \261\ CL-ODEX at 1; CL-RJ O'Brien at 1; CL-Spring Trading at 2.

    \262\ CL-AFR at 8-9; CL-Better Markets at 7-8; CL-Javelin at 2;

    CL-SDMA at 2. For a discussion of market depth and market breadth,

    see infra note 271 and accompanying text.

    ---------------------------------------------------------------------------

    A number of commenters also expressed concern regarding imposing

    the proposed 67 percent notional amount calculation prior to analysis

    of swap data collected by SDRs. AII recommended lowering or eliminating

    block thresholds until complete data has been reported to SDRs so as

    not to

    [[Page 32893]]

    impair market liquidity.\263\ Barclays recommended introducing block

    levels that allow for empirical analysis of the transaction data and

    sequentially increasing block sizes until such point as the desired

    equilibrium between transparency and liquidity is reached.\264\ Better

    Markets suggested transitioning to a market depth and market breadth

    test after the Commission has collected a year of SDR data.\265\ GFMA

    could not comment on the 67 percent notional amount calculation in the

    absence of swap data.\266\ ICAP Energy stated that once post-

    implementation swap data is obtained, then the Commission and industry

    will be in better position to assess liquidity and propose block

    levels.\267\ ICI stated that, for those asset classes where no data is

    available, it is impossible to determine whether the Commission has

    identified the most relevant criteria for swap categories.\268\ ISDA/

    SIFMA suggested that for new interest rate swap products the Commission

    should allow for block treatment until sufficient data is

    available.\269\ Vanguard stated that block thresholds cannot be

    established absent an adequate data source and time for

    assessment.\270\

    ---------------------------------------------------------------------------

    \263\ CL-AII at 6.

    \264\ CL-Barclays at 11.

    \265\ CL-Better Markets at 9-10.

    \266\ CL-GFMA at 3.

    \267\ CL-ICAP Energy at 2.

    \268\ CL-ICI at 4.

    \269\ CL-ISDA/SIFMA at 14.

    \270\ CL-Vanguard at 7.

    ---------------------------------------------------------------------------

    In the Further Block Proposal, the Commission specifically

    requested comment regarding other potential methods for determining

    appropriate minimum block thresholds. While the Commission received

    numerous comments regarding the efficacy of a notional amount

    calculation and the appropriate percentage to use in making such a

    calculation, the Commission only received significant comments

    regarding one other method. The Commission received a number of

    comments regarding whether the Commission should use a market depth and

    market breadth test, instead of the 67 percent notional amount

    calculation methodology, to calculate the relevant initial minimum

    block sizes and the post-initial minimum block sizes.\271\

    ---------------------------------------------------------------------------

    \271\ Market depth and market breadth was proposed to be

    calculated as follows: (step 1) Identify swap contracts with pre-

    trade price transparency within a swap category; (step 2) calculate

    the total executed notional volumes for each swap contract in the

    set from step 1 and calculate the sum total for the swap category

    over the look back period; (step 3) collect a market depth snapshot

    of all of the bids and offers once each minute for the pre-trade

    price transparency set of contracts identified in step 1; (step 4)

    identify the four 30-minute periods that contain the highest amount

    of executed notional volume each day for each contract of the pre-

    trade price transparency set identified in step 1 and retain 120

    observations related to each 30-minute period for each day of the

    look-back period; (step 5) determine the average bid-ask spread over

    the look-back period of one year by averaging the spreads observed

    between the largest bid and executed offer for all the observations

    identified in step 3; (step 6) for each of the 120 observations

    retained in step 4, calculate the sum of the notional amount of all

    orders collected from step 3 that fall within a range, calculate the

    average of all of these observations for the look-back period and

    divide by two; (step 7) to determine the trimmed market depth,

    calculate the sum of the market depth determined in step 6 for all

    swap contracts within a swap category; (step 8) to determine the

    average trimmed market depth, use the executed notional volumes

    determined in step 2 and calculate a notional volume-weighted

    average of the notional amounts determined in step 6; (step 9) using

    the calculations in steps 7 and 8, calculate the market breadth

    based on the following formula: market breadth = averaged trimmed

    market depth + (trimmed market depth - average trimmed market depth)

    x .75; (step 10) set the appropriate minimum block size equal to the

    lesser of the values from steps 8 and 9. 77 FR 15,482.

    ---------------------------------------------------------------------------

    Many commenters expressed support for adopting the market depth

    test \272\ and other commenters additionally supported utilizing the

    market breadth test.\273\ Several commenters stated that such tests

    would provide a more accurate depiction of overall liquidity in

    specific markets, and thus would produce more appropriate minimum block

    sizes.\274\ Other commenters stated that employing the tests would be

    consistent with congressional intent expressed in the Dodd-Frank

    Act.\275\ MFA, however, cautioned that current market depth may be an

    unreliable indicator because it may vary over time and be subject to

    manipulation.\276\

    ---------------------------------------------------------------------------

    \272\ CL-CME at 2; CL-ODEX at 2; CL-Spring Trading at 2; CL-MFA

    at 7; CL-FIA at 2.

    \273\ CL-Arbor at 1; CL-AFR at 8-9; CL-Jeffries at 2; CL-SDMA at

    3-6; CL-Javelin at 4-6; CL-RJ O'Brien at 1; CL-Better Markets at 9-

    10; CL-CRT at 2; CL-FIA at 2.

    \274\ CL-AFR at 9; CL-Spring Trading at 2; CL-FIA at 2; CL-SDMA

    at 8.

    \275\ CL-Arbor at 1; CL-CME at 2; CL-AFR at 3.

    \276\ CL-MFA at 7.

    ---------------------------------------------------------------------------

    Several commenters supported using the market depth and market

    breadth test in conjunction with the proposed notional amount

    calculation methodology and proposed different approaches. Some

    commenters recommended using the market depth test during the initial

    period as a cross-check against the Commission's notional amount

    calculations.\277\ SDMA and Javelin argued that a market depth and

    market breadth analysis would justify adoption of a 75-percent notional

    amount threshold in the initial period; \278\ AFR suggested, however,

    that such a threshold could be set as a floor, with higher thresholds

    available based on liquidity levels.\279\ Spring Trading suggested

    using the market depth test on a quarterly basis to refine the 67-

    percent threshold during the initial period.\280\ Jefferies recommended

    using the test in the post-initial period to complement the 67-percent

    notional amount calculation in the initial period for interest rate and

    credit swaps.\281\

    ---------------------------------------------------------------------------

    \277\ CL-MFA at 7; CL-SDMA at 7; CL-Spring Trading at 2.

    \278\ CL-SDMA at 5; CL-Javelin at 2.

    \279\ CL-AFR at 9.

    \280\ CL-Spring Trading at 2.

    \281\ CL-Jefferies at 3.

    ---------------------------------------------------------------------------

    Some commenters noted the need for available and sufficient data to

    adopt the market depth and market breadth tests. AFR commented that

    sufficient data was already available based on information provided on

    trading screens of trading venues.\282\ Other commenters, however,

    stated that additional market data would allow the tests to produce a

    more adequate snapshot of liquidity.\283\ For example, SDMA recommended

    adopting the tests after obtaining six months of data; Vanguard and

    Better Markets recommended a year.\284\

    ---------------------------------------------------------------------------

    \282\ CL-AFR at 9.

    \283\ CL-Jefferies at 2; CL-Javelin at 6; CL-Arbor at 1; CL-RJ

    O'Brien at 1; CL-CRT at 2.

    \284\ CL-Better Markets at 10; CL-SDMA at 7; CL-Vanguard at 7.

    ---------------------------------------------------------------------------

    After consideration of the comments received in regard to phasing-

    in the appropriate minimum block size and the 67-percent notional

    amount calculation, the Commission is adopting Sec. 43.6(e)(1) with

    the following modifications. For the initial period, the Commission is

    adopting the 50 percent notional amount calculation to determine

    appropriate minimum block sizes in the interest rate swaps and credit

    asset classes. The Commission is of the view that this approach

    provides for a more gradual phase-in of minimum block sizes as

    recommended by numerous commenters. Moreover, this will allow SDRs to

    collect at least one year of reliable data for each swap category prior

    to the application of the higher 67-percent notional amount calculation

    to determine appropriate minimum block sizes in the post initial

    period, which the Commission is adopting as discussed below.

    For the post-initial period, the Commission is adopting Sec.

    43.6(f)(1) as proposed. The 67-percent notional amount calculation is

    intended to ensure that within a swap category, approximately two-

    thirds of the sum total of all notional amounts are reported on a real-

    time basis. This approach would ensure that market participants have a

    timely view of a substantial portion of swap transaction and pricing

    data to assist them in determining, inter alia, the competitive

    [[Page 32894]]

    price for swaps within a relevant swap category. The Commission

    anticipates that enhanced price transparency would encourage market

    participants to provide liquidity (e.g., through the posting of bids

    and offers), particularly when transaction prices move away from the

    competitive price. The Commission also anticipates that enhanced price

    transparency would improve market integrity and price discovery, while

    reducing information asymmetries enjoyed by market makers in

    predominately opaque swap markets.\285\

    ---------------------------------------------------------------------------

    \285\ The proposed calculation stands in contrast to the

    proposed 95th percentile-based distribution test set out in the

    Initial Proposal. See the discussion in section I.B. of the Further

    Block Proposal.

    ---------------------------------------------------------------------------

    In the Commission's view, using the 67-percent notional amount

    calculation in the post-initial period also would minimize the

    potential impact of real-time public reporting on liquidity risk. The

    Commission views this calculation methodology as an incremental

    approach to achieve real-time price transparency in swaps markets. The

    Commission believes that its methodology, in conjunction with the 50-

    percent notional amount calculation during the initial period,

    represents a tailored approach towards achieving the goal of subjecting

    ``a vast majority'' of swap transactions to real-time public

    reporting.\286\

    ---------------------------------------------------------------------------

    \286\ See note 41 supra. This phased-in approach seeks to

    improve transparency while not having a negative impact on market

    liquidity.

    ---------------------------------------------------------------------------

    As noted above, CEA section 2(a)(13)(E)(iv) directs the Commission

    to take into account whether the public disclosure of swap transaction

    and pricing data ``will materially reduce market liquidity.'' \287\ If

    market participants conclude that the Commission has set appropriate

    minimum block sizes for a specific swap category in a way that will

    materially reduce market liquidity, then those participants are

    encouraged to submit data to support their conclusion. In addition,

    through its own surveillance of swaps market activity, the Commission

    may become aware that an appropriate minimum block size would reduce

    market liquidity for a specific swap category.\288\ In response to

    either a submission or its own surveillance of swaps market activity

    the Commission may exercise its legal authority to take action by rule

    or order to mitigate the potential effects on market liquidity with

    respect to swaps in a particular swap category.

    ---------------------------------------------------------------------------

    \287\ 7 U.S.C. 2(a)(13)(E)(iv).

    \288\ The Commission received two comments supporting the

    Commission's authority to set appropriate minimum block sizes

    outside of the proposed annual look-back period. MFA argued that the

    Commission's goal to balance transparency and liquidity would be

    better achieved with the flexibility to adjust minimum block sizes

    quickly to respond to material market changes. CL-MFA at 8. MFA

    recommended that the Commission should have the authority to update

    post-initial minimum block sizes in extraordinary circumstances and

    on a case-by-case basis, based on SDR data that it receives for

    individual or across multiple swap categories. Id. GFMA stated that

    if the Commission establishes a notional calculation test, then it

    should ensure that it has sufficient flexibility to amend minimum

    block sizes. CL-GFMA at 4. GFMA recommended that the Commission

    should be able to ``swiftly alter'' block trade levels to enable

    some trading to be conducted in a newly illiquid market, without the

    benefit of reference to a data set. Id. The Commission notes that

    Sec. 43.6(f)(1) provides that the Commission shall update post-

    initial appropriate minimum block levels ``[n]o less than once each

    calendar year.'' Accordingly, the Commission notes that it has the

    ability to adjust post-initial minimum block sizes under the types

    of extraordinary circumstances raised by commenters.

    ---------------------------------------------------------------------------

    With respect to the market depth and market breadth test, the

    Commission is declining to adopt this approach to determine appropriate

    minimum block sizes at this time. The Commission considers the test a

    viable alternative to the notional amount calculation methodology, but

    also recognizes several prerequisites to implementing such a test. For

    example, the Commission would need to determine which contracts within

    a swap category offer pre-trade price transparency--electronically

    displayed and executable bids and offers as well as displayed available

    volumes for execution. As noted by commenters, adequate market trading

    data also must be available to collect a market depth snapshot of all

    of the bids and offers for the pre-trade price transparency set of

    applicable contracts. The Commission is also cognizant of MFA's

    concerns regarding the potential for manipulation of market depth.

    Given the time needed for trading infrastructure to develop and the

    significant time and cost considerations involved in collecting such

    data from SEFs and DCMs, the Commission will continue to examine the

    merits of adopting the market depth and market breadth test.

    The Commission is currently of the view that data is per se

    reliable if it is collected by an SDR for an asset class after the

    respective compliance date for such asset class as set forth in part 45

    of the Commission's regulations or by other Commission action. The

    Commission notes that SDRs have been collecting data pursuant to the

    compliance dates for certain market participants and asset classes

    since December 2012. DCMs and Swap Dealers (``SDs'') began reporting

    swap transactions in the interest rate and credit default swap asset

    classes on December 31, 2012.\289\ DCMs and SDs began reporting swap

    transactions in the FX, equity, and other commodity asset classes on

    February 28, 2013.\290\ Major Swap Participants (``MSPs'') began

    reporting swap transactions in all five asset classes on February 28,

    2013.\291\ Financial Entities began reporting swap transactions in the

    interest rate and credit default swap asset classes on April 10,

    2013.\292\ Financial Entities begin reporting swap transactions for

    swaps executed starting April 10, 2013, in the FX, equity, and other

    commodity asset classes on May 29, 2013.\293\ Non-SDs, non-MSPs, and

    non-Financial Entities begin reporting swap transactions for swaps

    executed starting April 10, 2013, in the interest rate and credit

    default swap asset classes on July 1, 2013.\294\ Non-SDs, non-MSPs, and

    non-Financial Entities begin reporting swap transactions for swaps

    executed starting April 10, 2013, in the FX, equity, and other

    commodity asset classes on August 19, 2013.\295\ Accordingly, the

    Commission and SDRs will have one year of reliable data as of April 10,

    2014.

    ---------------------------------------------------------------------------

    \289\ See ``Commission Q & A--On the Start of Swap Data

    Reporting'' (Oct. 9, 2012).

    \290\ See ``No-Action Relief for Swap Dealers from Certain Swap

    Data Reporting Requirements of Part 43, Part 45, and Part 46 of the

    Commission's Regulations Due to Effects of Hurricane Sandy,''

    Commission Letter No. 12-41 (Dec. 5, 2012).

    \291\ See id.

    \292\ See ``Time-Limited No-Action Relief for Swap

    Counterparties that are not Swap Dealers or Major Swap Participants,

    from Certain Swap Data Reporting Requirements of Parts 43, 45 and 46

    of the Commission's Regulations,'' Commission Letter No. 13-10 (Apr.

    9, 2013).

    \293\ See id.

    \294\ See id.

    \295\ See id.

    ---------------------------------------------------------------------------

    The Commission notes that in response to either a submission or its

    own surveillance of swaps market activity, the Commission may exercise

    its legal authority to take action by rule or order to delay the

    imposition of post-initial appropriate minimum block sizes,

    particularly with respect to swap categories in the other commodity

    asset class.

    4. Data for Determination of Appropriate Minimum Block Sizes in the

    Post-Initial Period

    As referenced above in Sec. 43.6(f)(2), the Commission proposed

    determining post-initial appropriate minimum block sizes utilizing a

    three-year rolling window (beginning with a minimum of one year and

    adding one year of data for each calculation until a total of three

    years of data is accumulated) of swap transaction and pricing data.

    The Commission received eight comments regarding the use of a

    three-

    [[Page 32895]]

    year rolling window of data. AII believed it would be more prudent for

    the Commission to base block trading thresholds on a shorter time

    frame, using newer data. AII recommended that the Commission should

    only use the highest of the three-year, one-year, or one-quarter data

    collected in the determinations.\296\ GFMA stated that the three-year

    rolling data set is unlikely to be sensitive enough to shorter term

    changes in market liquidity and therefore risks setting block sizes

    that do not reflect current market conditions.\297\ ICI believed that a

    three-year window may not provide an appropriate data set to calculate

    the block threshold, and encouraged the Commission to look at a one-

    year set of data and a one-quarter set of data to determine whether the

    calculation would produce more accurate results.\298\ ISDA/SIFMA

    recommended a 6-month window for determining appropriate minimum block

    sizes, as a three-year rolling window is over-inclusive, particularly

    in CDS.\299\ Kinetix expressed concern that historical data may not be

    indicative of current market conditions.\300\ MFA was concerned that

    the three-year window would constrain the ability to shorten the look-

    back period if material changes in market conditions warranted a

    smaller data set, and recommended retaining the option to shorten the

    look-back window for the observed data set.\301\ SIFMA believed that

    block reassessments should look to data on swaps executed since the

    previous reassessment, rather than from a three-year data window as

    proposed by the Commission.\302\ Vanguard believed the assessment

    should be made on the basis of data recorded over a rolling three-month

    period for each swaps category.\303\

    ---------------------------------------------------------------------------

    \296\ CL-AII at 11.

    \297\ CL-GFMA at 4.

    \298\ CL-ICI at 7-8.

    \299\ CL-ISDA/SIFMA at 14.

    \300\ CL-Kinetix at 1.

    \301\ CL-MFA at 8.

    \302\ CL-SIFMA at 6-7.

    \303\ CL-Vanguard at 7.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(f)(2) with modifications. Based upon the numerous

    comments recommending a data set covering a shorter time frame, the

    Commission will determine post-initial appropriate minimum block sizes

    under Sec. 43.6(f)(2) utilizing a one-year window of swap transaction

    and pricing data. This approach will allow the Commission to better

    calibrate block thresholds to changes in market liquidity, while at the

    same time providing enough data to smooth out fluctuations in data such

    as those that may result from, for example, seasonality.

    As referenced above, the Commission proposed to amend Sec. 43.2 of

    the Commission's regulations to define the term ``trimmed data set'' as

    a data set that has had extraordinarily large notional transactions

    removed by transforming the data into a logarithm with a base of ten

    (Log10), computing the mean, and excluding transactions that

    are beyond four standard deviations above the mean. Proposed Sec.

    43.6(c) uses this term in connection with the calculations that the

    Commission would undertake in determining appropriate minimum block

    sizes and cap sizes.

    The Commission received five comments regarding the proposed use of

    a trimmed data set. Three commenters supported the use of a trimmed

    data set, but suggested alternative approaches. ISDA/SIFMA opposed the

    proposed methodology and believed that it would establish a threshold

    that is too high to exclude large transactions.\304\ Therefore, ISDA/

    SIFMA recommended that the Commission look instead at the raw block

    size (calculated based on all transactions in the relevant swap

    category) and eliminate any trades more than five times larger than the

    block threshold.\305\ ISDA/SIFMA alternatively recommended that the

    Commission only exclude transactions that are three standard deviations

    beyond the mean because the proposed methodology (excluding

    transactions that are four standard deviations beyond the mean) would

    capture large transactions that would otherwise skew the data.\306\ For

    purposes of applying a market depth and market breadth test, Javelin

    and SDMA recommended trimming each data set to focus only on bids or

    offers at the ``current price''--the Commission would (1) determine the

    mid-point of the bid-offer spread; (2) capture orders between the bid

    and this value; and (3) capture orders between the offer and this

    value.\307\

    ---------------------------------------------------------------------------

    \304\ CL-ISDA/SIFMA at 14.

    \305\ Id.

    \306\ Id.

    \307\ CL-Javelin at 5; CL-SDMA at 8.

    ---------------------------------------------------------------------------

    Two commenters opposed data trimming on the grounds that it is

    irrelevant to the purpose of determining minimum block trade sizes. AFR

    and Better Markets believed that trimming the data set would ultimately

    skew minimum block size calculations, such that certain-sized trades

    would be classified as block trades.\308\ Better Markets stated that

    the Commission should disclose the discrepancies between using a

    trimmed data set versus an unfiltered data set to calculate the block

    size threshold because the public lacks the data to make this

    determination on its own.\309\

    ---------------------------------------------------------------------------

    \308\ CL-AFR at 7; CL-Better Markets at 9.

    \309\ CL-Better Markets at 9.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.2 as proposed and applying the concept of a trimmed

    data set in Sec. 43.6(c) as proposed. The Commission believes that

    removing the largest transactions, but not the smallest transactions,

    may provide a better data set for establishing the appropriate minimum

    block size, given that the smallest transactions may reflect liquidity

    available to offset large transactions. Moreover, in the context of

    setting a block trade level (or large notional off-facility swap

    level), a method to determine relatively large swap transactions should

    be distinguished from a method to determine extraordinarily large

    transactions; the latter may skew measures of the central tendency of

    transaction size (i.e., transactions of usual size) away from a more

    representative value of the center.\310\ Therefore, trimming the data

    set increases the power of these statistical measures. In response to

    the commenters who oppose data trimming, the Commission emphasizes that

    trimming the data set is necessary to avoid the skewing of these

    measures, which could lead to the establishment of inappropriately high

    minimum block sizes.

    ---------------------------------------------------------------------------

    \310\ A measure of central tendency, also known as a measure of

    location, in a distribution is a single value that represents the

    typical transaction size. Two such measures are the mean and the

    median. For a general discussion of statistical methods, see e.g.,

    Wilcox, R. R., Fundamentals of Modern Statistical Methods (Springer

    2d ed. 2010), (2010).

    ---------------------------------------------------------------------------

    5. Methodology for Determining the Appropriate Minimum Block Sizes by

    Asset Class

    a. Interest Rate and Credit Default Swaps

    As described above, the Commission proposed using a 67-percent

    notional amount calculation to determine appropriate minimum block

    sizes for swaps in the interest rate and credit asset classes in both

    the initial and post-initial periods pursuant to Sec. Sec. 43.6(c)(1),

    43.6(e)(1), and 43.6(f)(1). There was an exception to the use of the

    67-percent notional amount calculation for the initial period in three

    swap categories in the interest rate and credit asset classes which

    contained less than 30 transactions that would meet the definition of

    publicly reportable swap transaction: (1) Interest rate swap

    [[Page 32896]]

    category--major currency/30 years +; (2) interest rate swap category--

    non-major currency/30 years +; and (3) CDScategory--350 bps +/6 to 8.5

    years. If the Commission were to use the proposed 67 percent notional

    calculation method, then two of the three swap categories would have

    resulted in appropriate minimum block sizes higher than those proposed.

    The remaining swap category contained no data. Accordingly, for these

    three swap categories in the initial period, the Commission proposed

    using the lowest appropriate minimum block size for their respective

    asset classes based on the respective data set.\311\ In the interest

    rate asset class, the swap category with the lowest block size was the

    non-major currency/5 to 10 years, with an appropriate minimum block

    size of $22 million (USD). In the credit asset class, the swap category

    with the lowest block size was the category 350 bps +/8.5 to 12.5

    years, with an appropriate minimum block size of $21 million (USD).

    Hence, the appropriate minimum block size was proposed to be set at $22

    million (USD) for the two interest rate swap categories with

    insufficient data and at $21 million (USD) for the corresponding CDS

    category.

    ---------------------------------------------------------------------------

    \311\ 77 FR at 15480.

    ---------------------------------------------------------------------------

    For interest rate swaps specifically, the Commission received eight

    comments regarding the application of the 67 percent notional amount

    calculation to determine initial and post-initial minimum block sizes.

    Jefferies supported the Commission's proposal, stating that the 67

    percent notional amount calculation was consistent with congressional

    intent and observed liquidity.\312\ FIA did not explicitly support the

    67 percent notional amount calculation, but stated that a 50 percent

    notional amount calculation for interest rate swaps would be

    significantly too low.\313\ Javelin, ODEX, SDMA, and Spring Trading all

    recommended that the Commission maintain the proposed 67 percent

    notional amount calculation or raise the threshold higher.\314\ Javelin

    and SDMA both suggested a 75 percent notional amount calculation in

    conjunction with a market breadth and market depth approach.\315\ Other

    commenters, however, suggested lower values for the notional amount

    calculation--Freddie recommended a 50 percent notional calculation in

    the absence of more comprehensive data about liquidity and depth of

    swaps markets.\316\ Pierpont commented that, for instances where one

    counterparty to a swap is not a registered swap dealer, the Commission

    should determine block levels based on a 25 percent notional amount

    calculation.\317\

    ---------------------------------------------------------------------------

    \312\ CL-Javelin at 1-2.

    \313\ CL-FIA at 2.

    \314\ CL-Javelin at 2; CL-ODEX at 1; CL-SDMA at 2; CL-Spring

    Trading at 2.

    \315\ CL-Javelin at 2; CL-SDMA at 2.

    \316\ CL-Freddie at 2.

    \317\ CL-Pierpont at 3.

    ---------------------------------------------------------------------------

    For credit default swaps, the Commission received four comments

    regarding the application of the 67 percent notional amount calculation

    to determine initial and post-initial minimum block sizes. Jefferies

    supported the Commission's proposal, stating that the 67 percent

    notional amount calculation was consistent with congressional intent

    and observed liquidity.\318\ Javelin recommended that the Commission

    maintain the proposed 67 percent notional amount calculation or raise

    the threshold higher, to a 75 percent notional amount calculation.\319\

    Four commenters supported a market depth and market breadth test for

    CDS.\320\

    ---------------------------------------------------------------------------

    \318\ CL-Javelin at 1-2.

    \319\ CL-Javelin at 2.

    \320\ CL-CRT at 1-2; CL-Javelin at 5-6; CL-Jefferies at 2; CL-

    SDMA at 2-7.

    ---------------------------------------------------------------------------

    The Commission also received seven comments specifically regarding

    the interest rate swaps and CDS data sets used for determining swap

    categories and establishing appropriate minimum block thresholds in the

    initial period. AII commented that the data for interest rate swaps and

    CDS is no longer reflective of the market, nor is it reflective of the

    market that will result once the Commission's regulations are

    implemented in full, and urged the Commission not to rely on minimal

    and outdated data.\321\ ICI stated that the historical data on which

    the Commission relies may not be reflective of the swaps market once

    the Dodd-Frank Act requirements are fully implemented.\322\ Freddie

    stated that the interest rate data set may not be comprehensive enough

    to form the basis of the proposed minimum block sizes, particularly

    where the proposed post-initial appropriate minimum block sizes are

    determined after transaction and pricing data has been collected for a

    year.\323\ ICAP recommended that, if the Commission relies on

    historical market data, then it should use data that is more current

    and demonstrated to be representative of the market.\324\ MFA stated

    that, given limitations related to the size, composition, and

    timeliness of the data set that the Commission used for the initial

    period, the Commission should calibrate initial minimum block sizes

    against current market conditions.\325\ Vanguard stated that block

    thresholds cannot be established absent an adequate data source and

    time for assessment.\326\ WMBAA believed that, in basing rules on three

    months of data from over two years ago, the Commission has failed to

    ``examine the relevant data and articulate a satisfactory explanation

    for its action including a rational connection between the facts found

    and the choices made'' as well as ``determine as best it can the

    economic implications of the rule.'' \327\

    ---------------------------------------------------------------------------

    \321\ CL-AII at 7.

    \322\ CL-ICI at 5.

    \323\ CL-Freddie at 2.

    \324\ CL-ICAP at 8.

    \325\ CL-MFA at 6-7.

    \326\ CL-Vanguard at 7.

    \327\ CL-WMBAA at 4-5.

    ---------------------------------------------------------------------------

    As described more fully above, in response to comments regarding

    the data sets used for interest rate and credit default swaps, the use

    of an incremental approach, and the comments regarding phasing and the

    67-percent notional amount calculation regardless of asset class, the

    Commission is adopting a phased-in approach to notional amount

    calculation. The Commission is adopting Sec. 43.6(e)(1) and (f)(1) as

    proposed, with modifications. In the initial period, the Commission is

    adopting the 50-percent notional amount calculation to determine

    appropriate minimum block sizes in the interest rate and credit asset

    classes. The Commission believes that this approach provides for a more

    gradual phase-in of minimum block sizes, as explained more fully

    above.\328\

    ---------------------------------------------------------------------------

    \328\ See supra Section II.B(3).

    ---------------------------------------------------------------------------

    The Commission did not receive any comments regarding the exception

    to the 67 percent notional amount calculation for swap categories

    containing fewer than 30 transactions. Accordingly, the Commission will

    continue to apply this exception in instances where the a Interest Rate

    or Credit swap category contains fewer than 30 transactions in

    calculating appropriate minimum block thresholds for the initial

    period.

    b. Equity

    The Commission proposed under Sec. 43.6(d) that all swaps in the

    equity asset class would not qualify for treatment as a block trade or

    large notional off-facility swap (i.e., these swaps would not be

    subject to a reporting time delay under part 43). As noted above, the

    Commission proposed this approach based on (1) the existence of a

    highly liquid underlying cash market; (2) the absence of time delays

    for reporting block trades in the underlying equity cash market; (3)

    the

    [[Page 32897]]

    small relative size of the equity swaps market relative to the futures,

    options and cash equity index markets; and (4) the Commission's goal to

    protect the price discovery function of the underlying equity cash

    market and futures market.

    The Commission received six comments regarding swap categories in

    the equity asset class. One commenter, AFR, felt that no block trade

    treatment is appropriate as proposed for the equity asset class.\329\

    Five other commenters recommended that the Commission treat equity

    swaps similarly to the other asset classes and establish swap

    categories based upon a range of criteria.\330\

    ---------------------------------------------------------------------------

    \329\ CL-AFR at 6.

    \330\ CL-AII at 9; CL-Barclays at 9; CL-ICI at; ISDA/SIFMA at

    10-11; SIFMA at 5.

    ---------------------------------------------------------------------------

    AII disagreed with the Commission's proposal that no equity swaps

    should be treated as blocks and suggested harmonization with the SEC's

    approach for large equity trades.\331\ Barclays also disagreed with

    disallowing block levels for all equity swaps and recommended that the

    equity asset class should be treated similarly to the other asset

    classes, such that broad based indices should have separate block

    levels based upon futures market levels.\332\ Barclays also suggested

    that the Commission coordinate with the SEC in setting minimum block

    levels.\333\ ICI recommended interim time delays for all equity swaps

    until a closer study of data on equity swap transactions is completed,

    due to potential differences in liquidity in the underlying equity cash

    market.\334\ ISDA/SIFMA requested that the Commission reconsider its

    proposal and suggested that the Commission establish block sizes based

    on the consideration of total trading volume of swaps linked to the

    relevant underlying index or basket of equity securities.\335\ SIFMA

    stated that the Commission should establish appropriate minimum block

    sizes for equity swaps based upon liquidity of the underlying

    indices.\336\

    ---------------------------------------------------------------------------

    \331\ CL-AII at 9.

    \332\ CL-Barclays at 9.

    \333\ Id.

    \334\ CL-ICI at 5.

    \335\ CL-ISDA/SIFMA at 10-11.

    \336\ CL-SIFMA at 5.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(d) as proposed. While a number of the commenters

    pointed out differences in liquidity in the underlying equity indices

    as a justification for swap categorization, these differences do not

    alter the premises underlying the Commission's proposal. Even taking

    these differences into account, there is still (1) a highly liquid

    underlying cash market; and (2) a small equity swaps market relative to

    the futures, options, and cash equity index markets. These

    characteristics, combined with the fact that there are no time delays

    for reporting block trades in the underlying equity cash market, makes

    establishment of swap categories and block thresholds for equity swaps

    inappropriate.\337\ Accordingly, the Commission is adopting Sec.

    43.6(d) as proposed.

    ---------------------------------------------------------------------------

    \337\ In the event that time delays are established for

    reporting block trades in the underlying equity cash market, the

    Commission may consider establishing swap categories and block

    thresholds for equity swaps.

    ---------------------------------------------------------------------------

    c. FX

    The Commission proposed to use different methodologies for the

    initial and post-initial periods to determine appropriate minimum block

    sizes for swaps categories in the FX asset class. The Commission's

    proposed approach is premised on the absence of actual market data on

    which to determine appropriate minimum block sizes in the initial

    period. Subsection a. below includes a discussion of the initial period

    methodology. Subsection ii. below includes a discussion of the post-

    initial period methodology.

    i. Initial Period Methodology

    The Commission proposed under Sec. 43.6(e)(1) to set the

    appropriate minimum block sizes for swaps in the FX asset class during

    the initial period based on whether such swap is economically related

    to a futures contract, i.e., a futures-related swap.\338\ For futures-

    related swaps in the FX asset class, proposed Sec. 43.6(e)(1) provides

    that the Commission would establish the appropriate minimum block sizes

    based on the block trade size thresholds set by DCMs for economically-

    related futures contracts.\339\ The Commission set forth the initial

    appropriate minimum block sizes in proposed appendix F to part 43 of

    the Commission's regulations.\340\ For non-futures related swaps in the

    FX asset class in the initial period, the Commission proposed under

    Sec. 43.6(e)(2) that all such swaps would qualify to be treated as

    block trades or large notional off-facility swaps (i.e., these swaps

    would be subject to a time delay under part 43 of the Commission's

    regulations). The Commission expected that this provision, as provided,

    only would apply to the most illiquid swaps.

    ---------------------------------------------------------------------------

    \338\ See supra note 169.

    \339\ For example, if swap A is economically related to futures

    F, and futures F is subject to the block trade rules of a DCM that

    applies at a notional amount of $1 million, then swap A would

    qualify for treatment as a block trade or large notional off-

    facility swap if the notional amount of swap A exceeds $1 million.

    \340\ In situations when two or more DCMs offer for trading

    futures contracts that are economically related, the Commission has

    selected the lowest applicable non-zero futures block size as the

    initial appropriate minimum block size. The Commission believes that

    this approach would reduce the chance that the appropriate minimum

    block size established by the Commission in the initial period would

    have an unintended adverse effect on market liquidity for the

    relevant swap category.

    ---------------------------------------------------------------------------

    The Commission received three comments specifically related to the

    proposed methodology for determining appropriate minimum block sizes

    for swap categories in the FX asset class during the initial period.

    SDMA supported the Commission's proposed block trade thresholds for the

    FX asset class.\341\ AII, however, urged the Commission to consider

    removing the block trading threshold during the initial period for the

    FX asset class, so as to allow the Commission to use SDR data to

    properly evaluate the market.\342\ ICAP recommended an initial block

    level of $10 million in the 1-month contract on a variety of FX non-

    deliverable forward contracts.\343\

    ---------------------------------------------------------------------------

    \341\ CL-SDMA at 2.

    \342\ CL-AII at 3 n.10.

    \343\ CL-ICAP at 10.

    ---------------------------------------------------------------------------

    The Commission notes that, since the Further Block Proposal,

    Treasury has issued a Final Determination, pursuant to sections

    1a(47)(E)(i) and 1b of the CEA, that exempts FX swaps and FX forwards

    from the definition of ``swap'' under the CEA. Therefore, the

    requirements of section 2(a)(13) of the CEA would not apply to those

    transactions, and such transactions would not be subject to part 43 of

    the Commission's regulations.\344\ Nevertheless, section 1a(47)(E)(iii)

    of the CEA provides that FX swaps and FX forwards transactions still

    are not excluded from regulatory reporting requirements to an SDR.

    Further, the Commission notes that Treasury's final determination

    excludes FX swaps and FX forwards, but does not apply to FX options or

    non-deliverable FX forwards. As such, FX instruments that are not

    covered by Treasury's final determination are subject to part 43 of the

    Commission's regulations.

    ---------------------------------------------------------------------------

    \344\ See Determination of Foreign Exchange Swaps and Foreign

    Exchange Forwards under the Commodity Exchange Act, 77 FR 69694,

    Nov. 20, 2012.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(e)(1) and (2) as proposed. However, given the

    changes to proposed Sec. 43.6(b)(4)(i), which significantly reduce the

    number of swap categories, the Commission believes that this approach

    encompasses the most liquid FX swaps and instruments, including all

    [[Page 32898]]

    super-major currency combinations, as well as all super-major and major

    currency combinations. This approach further encompasses many important

    super-major and non-major currency combinations, many of which already

    have block trade size thresholds set by DCMs for economically-related

    futures contracts.\345\ The Commission believes that this approach is

    appropriate during the initial period in the absence of actual swap

    data. The approach during the initial period would draw upon the

    experience of DCMs in considering the potential impacts on liquidity

    risk that enhanced transparency may cause in connection with futures

    contract execution.\346\ The Commission understands that DCMs have set

    block sizes primarily in consideration of the objectives of enhancing

    pre-trade transparency and reducing liquidity risk.\347\ The Commission

    notes that DCMs are required to set block sizes for futures in

    compliance with relevant core principles (including Core Principle 9)

    \348\ and Commission regulations.\349\

    ---------------------------------------------------------------------------

    \345\ See Q18 of the Further Block Proposal, which sets forth an

    alternative approach to proposed swap categories based on unique

    currency combinations. 77 FR 15476.

    \346\ The Commission notes further that DCMs historically have

    had the appropriate incentive to balance these considerations

    because they benefit from liquidity generally (i.e., commissions

    from transaction volume in block and non-block trades provides DCMs

    with their primary source of revenue).

    \347\ The Commission is of the view that the pre-trade and post-

    trade contexts are sufficiently similar such that policies directed

    at balancing transparency and liquidity concerns in a pre-trade

    context are relevant in considering what an appropriate balance is

    in the post-trade context. In the pre-trade context, block sizes are

    set near or at the point where a trader would be able to offset the

    risk of an equally large transaction without bearing liquidity risk.

    \348\ Core Principle 9 of section 5(d) of the CEA provides that

    a DCM ``shall provide a competitive, open, and efficient market and

    mechanism for executing transactions. . . . '' 7 U.S.C. 7(d)(9).

    Current appendix B to part 38 of the Commission's regulations

    provides that in order to maintain compliance with Core Principle 9,

    DCMs allowing block trading ``should ensure that the block trading

    does not operate in a manner that compromises the integrity of

    prices or price discovery on the relevant market.'' See 17 CFR 38

    app. B.

    \349\ For example, section 40.6 of the Commission's regulations

    include a process by which registered entities may certify rules or

    rule amendments that establish or change block trade sizes for

    futures contracts. See 17 CFR 40.6.

    ---------------------------------------------------------------------------

    ii. Post-Initial Period Methodology

    In the post-initial period, the Commission proposed under Sec.

    43.6(f)(2) to utilize the 67 percent notional amount calculation to

    determine appropriate minimum block sizes for swap categories in the FX

    asset class. The Commission would group all publicly reportable swap

    transactions in the FX asset class into their respective swap

    categories and then apply the 67 percent notional amount calculation to

    determine the appropriate minimum block sizes.

    The Commission received three comments specific to the proposed

    methodology for determining appropriate minimum block sizes for swap

    categories in the FX asset class during the post-initial period. SDMA

    supported the Commission's proposed block trade thresholds for the FX

    asset class.\350\ Barclays and GFMA, however, expressed concern that

    the 67 percent notional amount calculation was proposed without actual

    swap data regarding the FX asset class.\351\

    ---------------------------------------------------------------------------

    \350\ CL-SDMA at 2.

    \351\ CL-Barclays at 10; CL-GFMA at 3.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(f)(2) with the modification that only those swap

    categories established in Sec. 43.6(b)(4)(i) will have minimum block

    sizes set using this methodology in the post-initial period, while the

    remainder of the swaps covered by Sec. 43.6(b)(4)(ii) will continue to

    be treated as blocks. The Commission believes that applying the 67

    percent notional amount calculation will ensure that the vast majority

    of swap transactions are subject to real-time reporting.\352\ In

    addition, applying the 67 percent notional amount calculation to all

    five asset classes in the post-initial period provides a consistent,

    bright-line rule regarding how appropriate minimum block thresholds

    will be calculated, thus providing clarity to market participants

    engaging in swap transactions. By allowing all swaps covered by Sec.

    43.6(b)(4)(ii) to be treated as blocks, the Commission is being

    conservative in its approach in potentially less liquid markets where

    the impacts to market participants of inappropriate block trades could

    be substantial. The Commission believes that this approach provides

    additional time to analyze data in order to establish improved swap

    categories as suggested by commenters.

    ---------------------------------------------------------------------------

    \352\ See supra note 256.

    ---------------------------------------------------------------------------

    d. Other Commodity

    The Commission proposed using different methodologies for the

    initial and post-initial periods to determine appropriate minimum block

    sizes for swaps categories in the other commodity asset class. The

    proposed methodology for determining the appropriate minimum block

    sizes in the initial period differs based on the three types of other

    commodity swap categories: (1) Those swaps based on contracts listed in

    appendix B to part 43 of the Commission's regulations; \353\ (2) swaps

    that are economically related to certain futures contracts; \354\ and

    (3) other swaps.\355\ With regards to (1), the Commission proposed

    setting initial appropriate minimum block sizes for publicly reportable

    swap transactions in which the underlying asset directly references or

    is economically related to the natural gas or electricity swap

    contracts listed in appendix B to part 43 of the Commission's

    regulations.\356\ The proposed methodology for determining the

    appropriate minimum block sizes for other commodity swaps in the post-

    initial period follows the same methodology--the 67 percent notional

    amount methodology--used for determining the post-initial appropriate

    minimum block sizes in the interest rate, credit and FX asset classes.

    A more detailed description of the methodologies during the initial and

    post-initial periods, as well as the rules for the special treatment of

    listed natural gas and electricity swaps are presented in the

    subsections below.

    ---------------------------------------------------------------------------

    \353\ See proposed Sec. 43.6(b)(5)(i). The Commission is

    adopting most of the proposed categories in this final rule, subject

    to some modifications. See supra note 190 and accompanying text.

    \354\ As proposed under Sec. 43.6(b)(5)(ii), these futures

    contracts were: CME Cheese; CBOT Distillers' Dried Grain; CBOT Dow

    Jones-UBS Commodity Index Excess Return; CBOT Ethanol; CME Frost

    Index; CME Goldman Sachs Commodity Index (GSCI) (GSCI Excess Return

    Index); NYMEX Gulf Coast Gasoline; Gulf Coast Sour Crude Oil; NYMEX

    Gulf Coast Ultra Low Sulfur Diesel; CME Hurricane Index; CME

    International Skimmed Milk Powder; NYMEX New York Harbor Ultra Low

    Sulfur Diesel; CBOT Nonfarm Payroll; CME Rainfall Index; CME

    Snowfall Index; CME Temperature Index; CME U.S. Dollar Cash Settled

    Crude Palm Oil; and CME Wood Pulp. The Commission is adopting most

    of the proposed categories in this final rule, subject to some

    modifications. See supra note 187.

    \355\ See proposed Sec. 43.6(b)(5)(iii).

    \356\ The Commission notes that pursuant to proposed Sec.

    43.6(b)(5)(i), each of the listed natural gas and electricity swap

    contracts proposed to be listed in appendix B to part 43 would be

    considered its own swap category. As discussed further above, the

    Commission is adopting these categories in this final rule. See

    supra Section II.A(4).

    ---------------------------------------------------------------------------

    i. Initial Period Methodology

    With respect to swaps that reference or are economically related to

    one of the futures contracts listed in appendix B to part 43 \357\ or

    in Sec. 43.6(b)(5)(ii), the Commission proposed to set the appropriate

    minimum block size based on the block sizes for related futures

    [[Page 32899]]

    contracts set by DCMs.\358\ Similar to its rationale with respect to

    setting initial appropriate minimum block sizes for swaps in the FX

    asset class, the Commission believed that this approach would utilize

    the experience of DCMs in considering liquidity effects of enhancing

    pre-trade transparency in setting block sizes for these contracts. For

    swaps that reference or are economically related to a futures contract

    listed in appendix B to part 43 that is not subject to a DCM block

    trade rule, the Commission proposed in Sec. 43.6(e)(3) to disallow

    treatment as a block trade or large notional off-facility swap. The

    Commission based this approach on an inference that DCMs have not set

    block trade rules for certain futures contracts because of the degree

    of liquidity in those futures markets.

    ---------------------------------------------------------------------------

    \357\ The futures contracts that are currently listed on

    appendix B to part 43 are the 28 Enumerated Reference Contracts plus

    Brent Crude Oil (ICE). The 13 electricity and natural gas swap

    contracts that the Commission had proposed to add to appendix B to

    part 43 of the Commission's regulations were not futures contracts.

    As noted above, however, these contracts have been converted into

    economically equivalent futures contracts that are listed on a DCM.

    See supra note 176.

    \358\ In situations when two or more DCMs offer for trading

    futures contracts that are economically related, the Commission has

    selected the lowest applicable non-zero futures block size among the

    DCMs as the initial appropriate minimum block size. The Commission

    believes that this approach would reduce the chance that the

    appropriate minimum block size established by the Commission in the

    initial period would have an unintended adverse effect on market

    liquidity for the relevant swap category.

    ---------------------------------------------------------------------------

    In the initial period, the Commission proposed in Sec. 43.6(e)(2)

    to treat all non-futures-related swaps \359\ in the other commodity

    asset class as block trades or large notional off-facility swaps (i.e.,

    these swaps would be subject to a reporting time delay under part 43,

    irrespective of notional amount). The Commission believed that non-

    futures-related swaps in the other commodity asset class generally have

    lower liquidity in contrast to the more liquid interest rate, credit

    and equity asset classes, as well as other commodity swaps that are

    economically related to liquid futures contracts (i.e., those futures

    contracts listed in appendix B to part 43).

    ---------------------------------------------------------------------------

    \359\ These non-futures related swaps are not economically

    related to one of the futures contracts listed in proposed appendix

    B to part 43 or in proposed Sec. 43.6(b)(5)(ii). See proposed Sec.

    43.6(b)(5)(iii).

    ---------------------------------------------------------------------------

    The Commission also proposed to amend appendix B to part 43 of the

    Commission's regulations to add 13 natural gas and electricity swap

    contracts, which the Commission previously has determined to be liquid

    contracts serving a price discovery function,\360\ with each contract

    serving as the basis for a swap category in the other commodity asset

    class. The Commission further proposed to set the initial appropriate

    minimum block size for each of these categories to $25 million (USD),

    which would apply to natural gas and electricity swaps that reference

    or are economically related to these natural gas and electricity swap

    contracts.\361\

    ---------------------------------------------------------------------------

    \360\ See supra Section II.A(4).

    \361\ For swaps in which the underlying asset references or is

    economically related to one of the natural gas or electricity swaps,

    the Commission proposed to treat such natural gas and electricity

    swaps differently than other publicly reportable swap transactions

    in the other commodity asset class when setting the initial

    appropriate minimum block sizes. The Commission recognized that

    traders typically offset their positions in the natural gas and

    electricity markets through trading OTC forward contracts, swaps,

    plain vanilla options, non-standard options and other customized

    arrangements since existing futures contracts listed on DCMs only

    cover a limited number of electricity delivery points. The proposed

    $25 million initial minimum block level corresponded to the level of

    the interim and initial cap sizes. For a discussion of interim and

    initial cap sizes, see supra section III.A of the Further Block

    Proposal.

    ---------------------------------------------------------------------------

    SDMA expressed support for the proposed methodology for swaps in

    the other commodity asset class.\362\ With respect to the swaps in

    which the underlying asset references or is economically related to one

    of the natural gas or electricity swaps listed in appendix B to part

    43, EEI also expressed support for denominating the minimum block size

    in U.S. dollars, rather than by a quantity such as Mwh.\363\ EEI argued

    that denominating minimum block sizes in U.S. dollars would promote

    standardization across the various trading hubs in the electricity and

    natural gas markets.\364\

    ---------------------------------------------------------------------------

    \362\ CL-SDMA at 2 n.1.

    \363\ CL-EEI at 11 n. 29.

    \364\ Id.

    ---------------------------------------------------------------------------

    Several commenters, however, objected to certain aspects of the

    proposed $25 million (USD) initial appropriate minimum block size. Two

    commenters recommended setting the block sizes based on mmBtu/day and

    MW/hr for natural gas and electricity swaps, respectively, rather than

    setting the block sizes based on notional amount.\365\ ICAP Energy

    commented in particular that adopting the latter approach would be

    inappropriate, given that prices for such commodities fluctuate due to

    peak season usage or delivery location.\366\ ICAP Energy also commented

    that it was not clear as to how the notional value of swaps with

    optionality would be calculated; calculating notional value based on

    the premium of the option, for example, would adversely affect low-

    premium options such as out-of-the-money calls and puts.\367\

    ---------------------------------------------------------------------------

    \365\ CL-ICAP Energy at 4; CL-Barclays at 9.

    \366\ CL-ICAP Energy at 4.

    \367\ Id.

    ---------------------------------------------------------------------------

    Two commenters opposed the proposed $25 million (USD) initial

    minimum block size with respect to the swap categories for the

    electricity swaps added to appendix B to part 43. ICAP Energy and EEI

    argued that the proposed limits were too high given the relative

    illiquidity of these markets.\368\ ICAP Energy recommended the

    following minimum block sizes: PJM WH (on-peak and off-peak)--50 MW/hr;

    SP-15 Financial Day-Ahead LMP (on-peak and off-peak)--30/MW/hr; Mid-C

    Financial (on-peak and off-peak--30 MW/hr).\369\ EEI requested that the

    Commission treat all electricity swaps transactions as block trades

    during the initial period or, in the alternative, set the initial

    minimum block size at no higher than $3 million.\370\

    ---------------------------------------------------------------------------

    \368\ CL-ICAP Energy at 5; CL-EEI at 5.

    \369\ CL-ICAP Energy at 5.

    \370\ CL-EEI at 8.

    ---------------------------------------------------------------------------

    ICAP Energy and EEI also opposed the proposed $25 million initial

    minimum block size with respect to the swap categories for the natural

    gas swaps proposed to be added to appendix B to part 43. EEI requested

    that the Commission treat all natural gas swaps transactions as block

    trades during the initial period because of their relatively illiquid

    markets.\371\ In the alternative, EEI recommended setting the initial

    minimum block size at no higher than $3 million, which would

    approximately equate the proposed initial block size for the Henry Hub

    Natural Gas futures contract.\372\ ICAP Energy recommended setting the

    initial minimum block size at 2500 mmBtu.\373\

    ---------------------------------------------------------------------------

    \371\ CL-EEI at 8.

    \372\ According to EEI, the proposed initial minimum block size

    of 1,000,000 mmBtu for the Henry Hub Natural Gas futures contract is

    approximately equal to a minimum block size of $3 million. EEI

    Comment Letter at 8-9.

    \373\ CL-ICAP Energy at 5.

    ---------------------------------------------------------------------------

    Parity Energy commented on the ambiguity of the term ``economically

    related'' and requested clarification that natural gas swaps with

    optionality that reference or are economically related to the Henry Hub

    Natural Gas options would be subject to the initial minimum block size

    proposed for that particular swap category (5,500,000 mmBtu), rather

    than the block size for Henry Hub Natural Gas futures (1,000,000

    mmBtu).\374\

    ---------------------------------------------------------------------------

    \374\ CL-Parity at 3.

    ---------------------------------------------------------------------------

    Parity Energy opposed the proposed initial minimum block size of

    100,000 bbl. to crude oil swaps with optionality as too low and

    recommended that the Commission establish a separate initial minimum

    block size for such swaps at 1,000,000 bbl., which would be consistent

    with CME's minimum block size for Light Sweet Crude Oil options.\375\

    ---------------------------------------------------------------------------

    \375\ Id. at 4-5.

    ---------------------------------------------------------------------------

    ICAP Energy commented that swaps that reference or are economically

    [[Page 32900]]

    related to the NYMEX New York Harbor RBOB Gasoline futures contract,

    for which the Commission has not set an initial minimum block size

    under proposed appendix F, should be subject to a block size that is

    consistent with the one set by DCMs for the related futures

    contract.\376\

    ---------------------------------------------------------------------------

    \376\ CL-ICAP Energy at 1-2.

    ---------------------------------------------------------------------------

    The Commission has considered the comments above regarding the

    appropriate unit of measurement and initial appropriate minimum block

    size for the natural gas and electricity swap categories in the other

    commodity asset class. Based on those comments and the other commodity

    swap categories adopted by the Commission in this final rule that are

    based on the converted natural gas and electricity futures

    contracts,\377\ the Commission is setting the appropriate minimum block

    sizes for these categories in the initial period based on the block

    sizes set by DCMs for these futures contracts. The Commission is

    adopting this approach for several reasons. This approach is consistent

    with the Commission's approach for swaps that reference or are

    economically related to one of the futures contracts previously listed

    in appendix B to part 43 or adopted Sec. 43.6(b)(5)(ii), which

    utilizes the experience of DCMs in setting block sizes for these

    contracts. The Commission also believes this approach is more

    conservative than the proposed $25 million initial minimum block size,

    which might adversely affect market liquidity for the electricity and

    natural gas swaps markets. Further, this approach responds to comments

    by setting the initial minimum block sizes based on underlying units,

    rather than notional amount, and would be more appropriate to avoid

    price fluctuations and to establish consistency with post-initial

    calculation methodology.

    ---------------------------------------------------------------------------

    \377\ See supra note 176.

    ---------------------------------------------------------------------------

    In response to Parity Energy and consistent with the Commission's

    adopted approach to swaps categories in the other commodity asset class

    under Sec. 43.6(b)(5)(i)-(ii), the Commission is not establishing

    initial appropriate minimum block sizes based on DCM block sizes for

    swaps that reference or are economically related to the options

    contracts listed in proposed appendix F.\378\ The Commission is

    establishing initial appropriate minimum block size for such swaps

    based on the adopted methodology for swaps with optionality, as

    discussed further below.\379\ The notional size of swaps with

    optionality in the initial period will be equal to the notional size of

    the swap component without the optional component; accordingly, the

    appropriate minimum block size will be based on the block sizes for

    economically related futures contracts set by DCMs.\380\

    ---------------------------------------------------------------------------

    \378\ See supra note 187 and accompanying text.

    \379\ See infra Section II.C.

    \380\ See infra Section II.B.

    ---------------------------------------------------------------------------

    The Commission is otherwise adopting the rule generally as proposed

    under Sec. 43.6(e) with respect to swaps in the other commodity asset

    class, but also is updating initial appropriate minimum block sizes

    proposed in appendix F, consistent with block sizes set by DCMs for the

    relevant related futures contract.\381\ In response to ICAP Energy's

    request, the Commission is also setting an initial minimum block size

    for swaps that reference or are economically related to the NYMEX New

    York Harbor RBOB Gasoline futures contract that is based on the DCM

    block size set for that contract.

    ---------------------------------------------------------------------------

    \381\ The Commission is also amending the initial minimum block

    size for swaps that reference or are economically related to the

    GSCI Excess Return Index, Dow Jones-UBS Commodity Index, Gulf Coast

    Sour Crude Oil, and Palladium futures contract. The Commission is

    also removing the initial minimum block size for swaps that

    reference or are economically related to the Non-Farm Payroll,

    International Skimmed Milk Powder, and Wood Pulp futures contracts,

    as these contracts are no longer listed for trading. See supra note

    187.

    ---------------------------------------------------------------------------

    ii. Post-Initial Period Methodology

    In the post-initial period, the Commission provided in proposed

    Sec. 43.6(f)(3) to determine appropriate minimum block sizes for swaps

    in the other commodity asset class by using the 67-percent notional

    amount calculation set forth in proposed Sec. 43.6(c)(1). The 67-

    percent notional amount calculation would be applied to publicly

    reportable swap transactions in each swap category observed during the

    appropriate time period.

    Several commenters opposed the 67-percent notional amount

    calculation methodology for swaps in the other commodity asset class in

    the post-initial period.\382\ CME and WMBAA characterized the proposed

    methodology as overbroad and recommended a more tailored approach based

    on the trading profiles of each particular market.\383\ Barclays

    commented that the Commission has no data or evidence demonstrating

    that such a notional amount would properly balance liquidity and

    transparency considerations.\384\ ICAP Energy recommended a lower post-

    initial notional amount--either 33 or 50 percent--that would account

    for the illiquid nature of the electricity and natural gas basis swaps

    market.\385\ Based on the non-standardized and bespoke nature of many

    electricity and natural gas swap transactions, EEI recommended that the

    Commission eliminate post-initial minimum block sizes for the

    electricity and natural gas swap categories for the swaps added to

    appendix B to part 43.\386\ EEI also recommended that the Commission

    eliminate minimum post-initial block sizes for the electricity swap

    category under appendix D.\387\ In the alternative, EEI recommended

    that the Commission set the minimum block sizes for each of these

    categories at no greater than $3 million.\388\

    ---------------------------------------------------------------------------

    \382\ CL-Barclays at 10; CL-CME at 2, 4; CL-WMBAA at 2-3.

    \383\ CL-CME at 4; CL-WMBAA at 2-3.

    \384\ CL-Barclays at 10.

    \385\ CL-ICAP Energy at 3.

    \386\ CL-EEI at 8-9.

    \387\ Id. at 9.

    \388\ EEI requested that the Commission delay the adoption of

    minimum block sizes for the swaps in these categories for at least

    one year until it has obtained at least one year of data from an

    SDR; in the interim, all relevant transactions would be eligible for

    block trade treatment. CL-EEI at 11.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(f)(1) as proposed for swap categories in the other

    commodity asset class for the post-initial period. The reasons stated

    by the Commission above in support of this methodology in the post-

    initial period also apply to swaps in this asset class. The Commission

    believes that this methodology will ensure that the vast majority of

    swap transactions are subject to real-time reporting.\389\ In addition,

    applying the same post-initial notional amount calculation to the other

    commodity asset class provides a consistent, bright-line rule regarding

    how appropriate minimum block thresholds will be calculated, thus

    providing clarity to market participants engaging in swap transactions.

    ---------------------------------------------------------------------------

    \389\ See note 41 supra.

    ---------------------------------------------------------------------------

    6. Special Provisions for the Determination of Appropriate Minimum

    Block Sizes for Certain Types of Swaps

    The Commission recognizes the complexity of the swaps market may

    make it difficult to determine appropriate minimum block sizes for

    particular types of swaps under the methodologies discussed above. For

    that reason, the Commission proposed Sec. 43.6(h), which sets out a

    series of special rules that apply to the determination of the

    appropriate minimum block sizes for particular types of swaps. The

    Commission proposed special rules with respect to: (a) Swaps with

    optionality; (b) swaps with composite reference prices \390\; (c)

    [[Page 32901]]

    ``physical commodity swaps'' \391\; (d) currency conversions; and (e)

    successor currencies. Each of these special rules is discussed in the

    subsections below.

    ---------------------------------------------------------------------------

    \390\ In the Further Block Proposal, the Commission proposed

    amending Sec. 43.2 to define ``swaps with composite reference

    prices'' as swaps based on reference prices composed of more than

    one reference price that are in differing swap categories. The

    Commission proposed to use this term in connection with the

    establishment of a method through which parties to a swap

    transaction can determine whether a component to their swap would

    qualify the entire swap as a block trade or large notional off-

    facility swap. The Commission is adopting this definition as

    proposed.

    \391\ In the Further Block Proposal, the Commission proposed to

    amend Sec. 43.2 of the Commission's regulations by defining the

    term ``physical commodity swap'' as a swap in the other commodity

    asset class that is based on a tangible commodity. The Commission is

    adopting this definition as proposed.

    ---------------------------------------------------------------------------

    a. Swaps With Optionality

    A swap with optionality highlights special concerns in terms of

    determining whether the notional size of such swap would be treated as

    a block trade or large notional off-facility swap. Proposed Sec.

    43.6(h)(1) addressed these concerns by providing that the notional size

    of swaps with optionality would equal the notional size of the swap

    component without the optional component. For example, a LIBOR 3-month

    call swaption with a calculated notional size of $9 billion for the

    swap component--regardless of option component, strike price, or the

    appropriate delta factor--would have a notional size of $9 billion for

    the purpose of determining whether the swap would qualify as a block

    trade or large notional off-facility swap.\392\

    ---------------------------------------------------------------------------

    \392\ In essence, this approach would assume a delta factor of

    one with respect to the underlying swap for swaptions.

    ---------------------------------------------------------------------------

    The Commission received two comments regarding proposed Sec.

    43.6(h)(1). FIA stated that the approach failed to recognize potential

    differences in liquidity between the swap and an underlying

    swaption.\393\ FIA also pointed out that the Further Block Proposal did

    not explicitly address how to handle combinations of options.\394\ With

    respect to options transactions involving swaps in the electricity,

    natural gas, and crude oil swap categories that are used to carry out

    complex strategies, ICAP Energy recommended treating all such

    transactions, as well as related swap hedges, as block trades.\395\

    ICAP Energy cited the complex nature of these transactions and the

    common involvement of an intermediary in carrying them out as reasons

    for across-the-board treatment as block trades.\396\ ICAP Energy,

    however, supported the proposed approach of adopting the block sizes

    set by DCMs for natural gas and electricity outright options.\397\

    ---------------------------------------------------------------------------

    \393\ CL-FIA at 3.

    \394\ Id.

    \395\ CL-ICAP Energy at 6.

    \396\ Id.

    \397\ CL-ICAP Energy at 7.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(h)(1) as proposed. In response to ICAP Energy, the

    Commission believes that the proposed approach provides an easily

    calculable method for market participants to ascertain whether their

    swaps with optionality features would qualify as a block trade or large

    notional off-facility swap. The Commission is aware that this approach

    does not take into account the risk profile of a swap with optionality

    compared to that of a ``plain-vanilla swap,'' but believes that this

    approach is reasonable to minimize complexity.

    b. Swaps With Composite Reference Prices

    Swaps with two or more reference prices (i.e., composite reference

    prices) raise concerns as to which reference price market participants

    should use to determine whether such swap qualifies as a block trade or

    large notional off-facility swap.\398\ Proposed Sec. 43.6(h)(2)

    provides that the parties to a swap transaction with composite

    reference prices (i.e., two or more reference prices) may elect to

    apply the lowest appropriate minimum block size applicable to any

    component swap category. This provision also would apply to: (1)

    Locational or grade-basis swaps that reflect differences between two or

    more reference prices; and (2) swaps utilizing a reference price based

    on weighted averages of component reference prices.\399\

    ---------------------------------------------------------------------------

    \398\ Swaps with composite reference prices are composed of

    reference prices that relate to one another based on the difference

    between two or more underlying reference prices--for example, a

    locational basis swap (e.g., a natural gas Rockies Basis swap) that

    utilizes a reference price based on the difference between a price

    of a commodity at one location (e.g., a Henry Hub index price) and a

    price at another location (e.g., a Rock Mountains index price).

    \399\ In other words, swaps with a composite reference price

    composed of reference prices that relate to one another based on an

    additive relationship. This term would include swaps that are priced

    based on a weighted index of reference prices.

    ---------------------------------------------------------------------------

    Under proposed Sec. 43.6(h)(2), market participants would need to

    decompose their composite reference price swap transaction in order to

    determine whether their swap would qualify as a block trade or large

    notional off-facility swap. For example, assume that the appropriate

    minimum block size for futures A-related swaps is $3 million, for

    futures B-related swaps is $800,000, for futures C-related swaps is

    $1.2 million and for futures D-related swaps is $1 million. If a swap

    is based on a composite reference price that itself is based on the

    weighted average of futures price A, futures price B, futures price C,

    and futures price D (25% equal weightings for each), and the notional

    size of the swap is $4 million (i.e., $1 million for each component

    swap), then the swap would qualify as a block trade or large notional

    off-facility swap based on the futures B-related swap appropriate

    minimum block size.

    The Commission received one comment regarding proposed Sec.

    43.6(h)(2). AFR recommended that transactions that are composites of

    swaps that are economically equivalents of futures contracts should be

    disaggregated and separately priced for the purpose of determining

    applicability of the block rules. AFR also recommended that the

    Commission be vigilant of the use of composite swaps by counterparties

    in order to ``evade the purpose of Section 727 and the Proposed

    Rules.'' \400\

    ---------------------------------------------------------------------------

    \400\ CL-AFR at 5.

    ---------------------------------------------------------------------------

    With respect to spread transactions, ICAP Energy recommended that

    the minimum block size limit be based upon the lowest limit leg of the

    transaction, in a manner consistent with the proposed approach to

    setting minimum block size limits for the mixed asset swap class.\401\

    ---------------------------------------------------------------------------

    \401\ CL-ICAP Energy at 6.

    ---------------------------------------------------------------------------

    Based upon the comments received, the Commission is adopting Sec.

    43.6(h)(2) with certain clarifications based upon general concerns

    expressed by commenters regarding the use of composite swaps to evade

    minimum block sizes. The Commission is of the view that this rule

    provides market participants with a straightforward and uncomplicated

    way in which to determine whether such swap would qualify as a block

    trade or large notional off-facility swap, but that a clarification is

    needed to avoid the risk of evasion raised by commenters. In response

    to ICAP Energy's comments, the Commission highlights to provide clarity

    that ``any component swap category'' as used above in the methodology

    applies to swaps with a single Unique Swap Identifier (``USI'') for the

    combination of swaps identified with a single Unique Product Identifier

    (``UPI'') and not to groups of different swaps each with separate USIs

    transacted on or near the same time.\402\ Further, the reference to

    ``any component swap category'' does not

    [[Page 32902]]

    limit the application of this standard to those composite reference

    swaps comprised of only multiple asset classes and instead should be

    understood to apply more broadly to composite swaps of multiple asset

    classes (i.e., a mixed asset swap), intra asset classes, and intra swap

    category composite reference prices.

    ---------------------------------------------------------------------------

    \402\ The real-time public reporting rules would apply to each

    of the separate USIs as previously finalized in part 43. 17 CFR

    45.5.

    ---------------------------------------------------------------------------

    To provide further clarity and clarification in response to AFR's

    comment, the Commission provides the following additional example of

    determining whether a composite reference price swap transaction would

    qualify as a block trade or large notional off-facility swap. For

    example, assume that the appropriate minimum block size for swap

    category E is $50 million and for swap category F is $200 million. If a

    single swap transaction with a corresponding singular reporting

    obligation is based on a composite reference price that itself is based

    on the weighted average of (1) one component in swap category E; (2) a

    second component in swap category E; and (3) a component in swap

    category F (33% equal weightings for each), and the notional size of

    the swap is $75 million (i.e., $25 million for each component swap),

    then the swap would not qualify as a block trade or large notional off-

    facility swap based on either the swap category E or the swap category

    F appropriate minimum block size.

    c. Physical Commodity Swaps

    Block trade sizes for physical commodities are generally expressed

    in terms of notional quantities (e.g., barrels, bushels, gallons,

    metric tons, troy ounces, etc.). The Commission proposed a similar

    convention for determining the appropriate minimum block sizes for

    block trades and large notional off-facility swaps. In particular,

    proposed Sec. 43.6(h)(3) provides that notional sizes for physical

    commodity swaps shall be expressed in terms of notional quantities

    using the notional unit measure utilized in the related futures

    contract market or the predominant notional unit measure used to

    determine notional quantities in the cash market for the relevant,

    underlying physical commodity. This approach ensures that appropriate

    minimum block size thresholds for physical commodities are not subject

    to volatility introduced by fluctuating prices. This approach also

    eliminates complications arising from converting a physical commodity

    transaction in one currency into another currency to determine

    qualification for treatment as a block trade or large notional off-

    facility swap.

    The Commission received no comments regarding proposed Sec.

    43.6(h)(3). The Commission is adopting Sec. 43.6(h)(3) as proposed.

    d. Currency Conversion

    Under proposed Sec. 43.6(h)(4), the Commission provided that when

    determining whether a swap transaction denominated in a currency other

    than U.S. dollars qualifies as a block trade or large notional off-

    facility swap, swap counterparties and registered entities may use a

    currency exchange rate that is widely published within the preceding

    two business days from the date of execution of the swap transaction in

    order to determine such qualification. This proposed approach would

    enable market participants to use a currency exchange rate that they

    deem to be the most appropriate or easiest to obtain.

    The Commission received no comments regarding proposed Sec.

    43.6(h)(4). The Commission is adopting Sec. 43.6(h)(4) as proposed.

    e. Successor Currencies

    As noted above, the Commission proposed using currency as a

    criterion to determine swap categories in the interest rate asset

    class.\403\ The Commission also proposed to classify the euro (EUR) as

    a super-major currency, among other currencies.\404\ Proposed Sec.

    43.6(h)(5) provides that for currencies that succeed a super-major

    currency, the appropriate currency classification for such currency

    would be based on the corresponding nominal gross domestic product

    (``GDP'') classification (in U.S. dollars) as determined in the most

    recent World Bank World Development Indicator at the time of

    succession. This proposed provision is intended to address the possible

    removal of one or more of the 17 EU member states that use the

    euro.\405\

    ---------------------------------------------------------------------------

    \403\ See proposed Sec. 43.6(b)(1)(i) and the related

    discussion in section II.B.1. of the Further Block Proposal.

    \404\ See the proposed amendment to Sec. 43.2, defining

    ``super-major currencies.''

    \405\ The 17 European Union member states that use the euro are:

    Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece,

    Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal,

    Slovakia, Slovenia and Spain.

    ---------------------------------------------------------------------------

    Proposed Sec. 43.6(h)(5)(i)-(iii) further specifies the manner in

    which the Commission would classify a successor currency for each

    country that was once a part of the predecessor currency. Specifically,

    the Commission proposes to use GDP to determine how to classify a

    successor currency. For countries with a GDP greater than $2 trillion,

    the Commission would classify the successor currency to be a super-

    major currency.\406\ For countries with a GDP greater than $500 billion

    but less than $2 trillion, the Commission would classify the successor

    currency as a major currency.\407\ For nations with a GDP less than

    $500 billion, the Commission would classify the successor currency as a

    non-major currency.\408\

    ---------------------------------------------------------------------------

    \406\ See proposed Sec. 43.6(h)(6)(i).

    \407\ See proposed Sec. 43.6(h)(6)(ii).

    \408\ See proposed Sec. 43.6(h)(6)(iii).

    ---------------------------------------------------------------------------

    The Commission received no comments regarding proposed Sec.

    43.6(h)(5). The Commission is adopting Sec. 43.6(h)(5) as proposed.

    C. Procedural Provisions

    1. Sec. 43.6(a) Commission Determination

    The Commission proposed that it determine the appropriate minimum

    block size for any swap listed on a SEF or DCM, and for large notional

    off-facility swaps. Proposed Sec. 43.6(a) specifically provides that

    the Commission would establish the appropriate minimum block sizes for

    publicly reportable swap transactions based on the swap categories set

    forth in proposed Sec. 43.6(b) in accordance with the provisions set

    forth in proposed Sec. Sec. 43.6(c), (d), (e), (f) and (h), as

    applicable.

    The Commission received eight comments regarding determination of

    appropriate minimum block sizes for swaps listed on a SEF or DCM. Four

    commenters favored allowing SEFs and DCMs to set appropriate minimum

    block sizes for the swaps they list. CME stated that the Commission

    would be better served by retaining the ability to set block levels in

    the private, bilateral swaps market and deferring to the expertise of

    SEFs and DCMs to set the levels in their markets.\409\ ICAP suggested

    that the Commission utilize the same approach as for the futures

    markets, where futures exchanges set their own block sizes, and allow

    SEFs to set block sizes since they have an incentive to provide as much

    information about trading interest as possible without hurting

    liquidity.\410\ Morgan Stanley suggested that the Commission could

    allow DCMs and SEFs to set appropriate block sizes, subject to

    Commission approval, as DCMs and SEFs would benefit from setting block

    sizes in a way that maximizes liquidity.\411\ WMBAA stated that the

    Commission should authorize SEFs to analyze ongoing swaps market

    [[Page 32903]]

    trading activity and trade data to determine uniform thresholds that

    distinguish transactions that move markets from those that do not, and

    work to ensure that block trade regimes for swaps executed on SEFs and

    DCMs are as consistent as possible to avoid arbitrage.\412\

    ---------------------------------------------------------------------------

    \409\ CL-CME at 3.

    \410\ CL-ICAP at 5-6.

    \411\ CL-Morgan Stanley at 3.

    \412\ CL-WMBAA at 5.

    ---------------------------------------------------------------------------

    Four commenters supported the Commission's proposal that the

    Commission set minimum block levels. Three of those commenters

    recommended that SEFs and DCMs should not be able to set minimum block

    thresholds above the level mandated by the Commission. Javelin asserted

    that the CFTC should set block trade rules and not SEFs, so as to avoid

    a race to the bottom that would harm transparency and threaten

    competition.\413\ SIFMA stated that the Commission should set minimum

    block trade size thresholds and argued that allowing SEFs and DCMs to

    set a block size threshold above the minimum level mandated by the

    Commission without guidance is inconsistent with the Commission's

    statutory duty ``to specify the criteria for determining what

    constitutes a large notional swap transaction (block trade) for

    particular markets and contracts.'' \414\ AII also stated that SEFs or

    DCMs should not have the ability to set block sizes for swaps at higher

    levels than the appropriate minimum block sizes determined by the

    Commission, as SEFs in particular have interests that may not be

    aligned with buy-side firms and may not be incentivized to ensure that

    market disruption is minimal.\415\

    ---------------------------------------------------------------------------

    \413\ CL-Javelin at 6.

    \414\ CL-SIFMA at 11-12.

    \415\ CL-AII at 10.

    ---------------------------------------------------------------------------

    In addition, ICAP Energy stated that SEF block limits for futures

    equivalent swap contracts should adjust automatically to meet DCM

    contract limits adjustments between annual revisions of SEF block

    limits, so that the Commission does not set SEF block levels at levels

    higher than the block levels set by DCMs.

    Based upon the comments received, the Commission is adopting Sec.

    43.6(a) as proposed. The Commission agrees with the commenters who

    recommended that appropriate minimum block thresholds for swaps be set

    by the Commission, rather than SEFs or DCMs. The Commission concurs

    with SIFMA that it has a statutory duty ``to specify the criteria for

    determining what constitutes a large notional swap transaction (block

    trade) for particular markets and contracts.'' \416\ The Commission

    also agrees with Javelin that allowing SEFs and DCMs to set appropriate

    minimum block thresholds could lead to a race to the bottom that would

    harm transparency and reduce competition. In the Commission's view, the

    Commission's approach is also the least burdensome from a cost-benefit

    perspective because it significantly reduces the direct costs imposed

    on registered entities. Moreover, while Sec. 43.6(a) states that the

    Commission will determine minimum block sizes, as recommended by some

    of the commenters, the Commission notes that SEFs and DCMs nonetheless

    will have the discretion to set block sizes for swaps at levels that

    are higher than the appropriate minimum block sizes determined by the

    Commission.

    ---------------------------------------------------------------------------

    \416\ CL-SIFMA at 11-12; 7 U.S.C. 2(a)(13)(E)(ii).

    ---------------------------------------------------------------------------

    2. 43.6(f)(4) and (5) Publication and Effective Date of Post-Initial

    Appropriate Minimum Block Sizes

    Proposed Sec. 43.6(f)(3) provided that the Commission would

    publish the post-initial appropriate minimum block sizes on its Web

    site. Proposed Sec. 43.6(f)(4) provided that these sizes would become

    effective on the first day of the second month following the date of

    publication. Per proposed Sec. 43.6(f)(1), the Commission would

    publish updated post-initial appropriate minimum block sizes in the

    same manner no less than once each calendar year.

    Several commenters recommended that post-initial appropriate

    minimum block sizes should be updated more frequently than on an annual

    basis.\417\ ICI, AII and SIFMA recommended a quarterly or at least a

    semi-annual calculation in order to account for changes in liquidity in

    the market.\418\ Spring Trading and Vanguard recommended a quarterly

    calculation that would allow block levels to be more responsive to the

    market.\419\ Kinetix, however, recommended that calculations should be

    carried out on a monthly basis.\420\ MFA suggested that the Commission

    maintain the optional ability to update the minimum block size on a

    more frequent basis as well as shorten the look-back window for the

    relevant data set.\421\

    ---------------------------------------------------------------------------

    \417\ CL-GFMA at 3.

    \418\ CL-ICI at 7; CL-AII at 11; CL-SIFMA at 6-7.

    \419\ CL-TeraExchange at 2; CL-Vanguard at 7.

    \420\ CL-Kinetix at 2.

    \421\ CL-MFA at 8.

    ---------------------------------------------------------------------------

    Some commenters asserted that the Commission should have the

    authority to update appropriate minimum block sizes outside of the

    proposed 1-year set look-back period. GFMA believed that the Commission

    should have this authority, without reference to a data set, to respond

    to a market that quickly becomes illiquid.\422\ MFA also supported

    providing this authority, but believed that the Commission should

    exercise this authority based on SDR data received for individual or

    multiple swap categories.\423\

    ---------------------------------------------------------------------------

    \422\ CL-GFMA at 4.

    \423\ CL-MFA at 8.

    ---------------------------------------------------------------------------

    Based on its argument that block levels set by SEFs should not be

    higher than those set by DCMs, ICAP Energy recommended allowing for

    automatic adjustment to occur during the course of the year.\424\

    ---------------------------------------------------------------------------

    \424\ CL-ICAP Energy at 4.

    ---------------------------------------------------------------------------

    The Commission is adopting the rule as proposed, with the one

    modification that proposed Sec. 43.6(f)(3) and (4) will be adopted as

    Sec. 43.6(f)(4) and (5). The rule as adopted only requires that the

    Commission to update post-initial minimum block sizes at least once a

    year and therefore does not preclude the Commission from doing so on a

    more frequent basis. The Commission anticipates that it will examine

    and re-calculate such block sizes at regular intervals, but also

    acknowledges that the liquidity of a swap market may change

    significantly outside of such intervals. Therefore, the Commission

    reserves the authority to update minimum block sizes when warranted and

    as necessary to respond to such circumstances. In response to GFMA and

    MFA, the Commission agrees with MFA and emphasizes that in all

    circumstances, minimum block sizes will be updated based on the

    relevant market data received.

    In response to ICAP Energy's recommendation, the Commission notes

    that adopting such a requirement would potentially create minimum block

    size re-alignment issues for SEFs, particularly during the initial

    period for swaps in the other commodity class. Under this requirement,

    SEFs would be de facto subject to a DCM's own business decisions, i.e.,

    block trade size calculations that are based on trading that does not

    occur on their own facility or platform. Further, the Commission has

    noted that SEFs and DCMs may set minimum block sizes that are higher

    than those prescribed by the Commission; this recommended requirement

    would otherwise preclude such an ability in certain cases. Accordingly,

    the Commission declines to adopt this requirement.

    3. Sec. 43.6(g) Notification of Election

    Proposed Sec. 43.6(g) set forth the election process through which

    a qualifying swap transaction would be treated as a block trade or

    large notional

    [[Page 32904]]

    off-facility swap, as applicable. Proposed Sec. 43.6(g)(1) would

    establish a two-step notification process relating to block trades.

    Proposed Sec. 43.6(g)(2) would establish the notification process

    relating to large notional off-facility swaps.

    Proposed Sec. 43.6(g)(1)(i) contained the first step in the two-

    step notification process relating to block trades. In particular, the

    parties to a publicly reportable swap transaction that has a notional

    amount at or above the appropriate minimum block size would be required

    to notify the SEF or DCM (pursuant to the rules of such SEF or DCM) of

    their election to have their qualifying publicly reportable swap

    transaction treated as a block trade.\425\ With respect to the second

    step, proposed Sec. 43.6(g)(1)(ii) provided that the SEF or DCM that

    receives an election notification would be required to notify the

    relevant SDR of such block trade election when transmitting swap

    transaction and pricing data to the SDR for public dissemination.

    ---------------------------------------------------------------------------

    \425\ In order to qualify as a block trade, a swap must (1) be

    listed on a registered SEF or DCM; (2) occur away from the

    registered SEF's or DCM's trading system or platform and is executed

    pursuant to its rules and procedures; and (3) have a notional or

    principal amount at or above the appropriate minimum block size

    applicable to such swap. See Sec. 43.2. By definition, a block

    trade must occur away from the SEF or DCM's trading system or

    platform and thus cannot be transacted on the SEF or DCM's trading

    system or platform. Moreover, the swap must be at or above the

    appropriate minimum block size at the time that it becomes a

    publicly reportable swap transaction. Any swap that is executed on a

    SEF or DCM's trading system or platform, regardless of whether it is

    for a size at or above the appropriate minimum block size for such

    swap, is not a block trade under this definition, and, thus, is

    required to be publicly disseminated in real-time pursuant to Sec.

    43.4.

    ---------------------------------------------------------------------------

    Similar to the first step set forth in proposed Sec. 43.6(g)(1),

    proposed Sec. 43.6(g)(2) would provide, in part, that a reporting

    party who executes an off-facility swap with a notional amount at or

    above the applicable appropriate minimum block size would be required

    to notify the relevant SDR of its election to treat such swap as a

    large notional off-facility swap. This section provided further that

    the reporting party would be required to notify the relevant SDR in

    connection with the reporting party's transmission of swap transaction

    and pricing data to the SDR pursuant to Sec. 43.3 of the Commission's

    regulations.

    The Commission received no comments regarding proposed Sec.

    43.6(g). The Commission is adopting Sec. 43.6(g) as proposed.

    4. Sec. 43.7 Delegation of Authority

    Under proposed Sec. 43.7(a), the Commission would delegate the

    authority to undertake certain Commission actions to the Director of

    the Division of Market Oversight (``Director'') and to other employees

    as designated by the Director from time to time. In particular, this

    proposed delegation would grant to the Director the authority to

    determine: (1) New swap categories as described in proposed Sec.

    43.6(b); (2) post-initial appropriate minimum block sizes as described

    in proposed Sec. 43.6(f); and (3) post-initial cap sizes as described

    in the proposed amendments to Sec. 43.4(h)(2) of the Commission's

    regulations.\426\ The purpose of the proposed delegation provision

    would be to facilitate the Commission's ability to respond

    expeditiously to ever-changing swap market and technological

    conditions. The Commission is of the view that this delegation would

    help ensure timely and accurate real-time public reporting of swap

    transaction and pricing data and further ensure anonymity in connection

    with the public reporting of such data. Proposed Sec. 43.7(b) provided

    that the Director may submit to the Commission for its consideration

    any matter that has been delegated pursuant to this authority. Proposed

    Sec. 43.7(c) provided that the delegation to the Director would not

    prevent the Commission, at its election, from exercising the delegated

    authority.

    ---------------------------------------------------------------------------

    \426\ See the discussion of post-initial cap sizes in section

    III.B. infra. As noted above, the Commission proposed an amendment

    to Sec. 43.2 to define the term ``cap size'' as the maximum limit

    of the principal, notional amount of a swap that is publicly

    disseminated. This term applies to the cap sizes determined in

    accordance with the proposed amendments to Sec. 43.4(h) of the

    Commission's regulations.

    ---------------------------------------------------------------------------

    The Commission received no comments regarding proposed Sec.

    43.7(a) and therefore is adopting Sec. 43.7(a) as proposed.

    5. Section 43.6(h)(6) Aggregation

    Proposed Sec. 43.6(h)(6) would prohibit the aggregation of orders

    for different trading accounts in order to satisfy the minimum block

    size or cap size requirements, except that aggregation would be

    permissible if done on a DCM or SEF by a person who: (i)(A) Is a CTA

    registered pursuant to Section 4n of the CEA or exempt from such

    registration under the Act, or a principal thereof, and who has

    discretionary trading authority or directs client accounts, (B) is an

    investment adviser who has discretionary trading authority or directs

    client accounts and satisfies the criteria of Sec. 4.7(a)(2)(v) of

    this chapter, or (C) is a foreign person who performs a similar role or

    function as the persons described in (A) or (B) and is subject as such

    to foreign regulation, and (ii) has more than $25 million in total

    assets under management. In the Commission's view, such a prohibition

    would be integral to ensuring the integrity of block trade principles

    and preserving the basis for the anonymity associated with establishing

    cap sizes.

    The Commission received a number of comments on the proposed

    aggregation rule, particularly as to the enumerated persons who would

    otherwise be allowed to aggregate orders from different trading

    accounts. Barnard supported the rule, noting that it would help ensure

    that non-block transactions comply with the exchange trading

    requirements and real-time reporting obligations, thereby increasing

    transparency and price discovery, promoting market integrity, improving

    efficiency and competitiveness in the swap markets, and ultimately

    providing timely information to enable market participants to improve

    their risk management practices.\427\ Barnard suggested that the

    Commission add an additional requirement--that the ``block trade is

    suitable for customers of such persons''--on the basis that such a

    requirement would improve consistency in the rules applicable to swap

    and futures markets.\428\

    ---------------------------------------------------------------------------

    \427\ CL-Barnard at 2.

    \428\ CL-Barnard at 2.

    ---------------------------------------------------------------------------

    ABC and CIEBA stated that qualified investment advisers who are not

    CTAs should be able to aggregate block trade orders for different

    trading accounts.\429\ Tradeweb commented that CTAs who trade on a SEF

    should also be permitted to aggregate trades on behalf of their

    customers for purposes of block trades.\430\ JP Morgan commented that

    this rule appears to reflect a concern that private negotiation affords

    less protection to unsophisticated investors than trading through the

    central markets, and that since all entities that transact in the OTC

    market already must be ECPs, the analogous concern about customer

    protection in the swaps market is already addressed.\431\

    ---------------------------------------------------------------------------

    \429\ CL-ABC/CIEBA at 3.

    \430\ CL-Tradeweb at 5. Tradeweb's comment was received in

    response to the Initial Proposal and not the Aggregation Proposed

    Rule, the latter which allowed for CTAs to aggregate on SEFs. 75 FR

    at 76174.

    \431\ CL-JPM at 9, n.13.

    ---------------------------------------------------------------------------

    ICI opposed the minimum assets under management requirement in

    proposed Sec. 43.6(h)(6)(ii) and argued that the Commission did not

    articulate a rationale or policy reason for this requirement.\432\ ICI

    stated that while advisers to registered funds would typically meet the

    asset requirement, advisers with less than the proposed

    [[Page 32905]]

    minimum would also have a valid need to engage in block trades on

    behalf of the funds they manage.\433\ ICI further stated that no

    relationship exists between the amount of assets managed and the

    legitimacy of aggregating client orders. ICI also disagreed that an

    investment adviser seeking to aggregate orders must satisfy the

    criteria of Sec. 4.7(a)(2)(v) of the Commission's regulations.\434\

    ICI suggested that the Commission only require an investment adviser to

    be registered under Sec. 203 of the Investment Advisers Act of 1940 or

    pursuant to the laws of any state without specifying a minimum

    registration length or location for deposit of client assets.\435\

    ---------------------------------------------------------------------------

    \432\ CL-ICI at 3.

    \433\ Id.

    \434\ Id. at 4. An investment adviser satisfies the criteria of

    Sec. 4.7(a)(2)(v) if the investment adviser registers pursuant to

    Sec. 203 of the Investment Advisers Act of 1940, or pursuant to the

    laws of any state, and the investment adviser has been registered

    and active for two years or provides security investment advice to

    securities accounts which, in the aggregate, have total assets in

    excess of $5,000,000 deposited at one or more registered securities

    brokers. 17 CFR 4.7(a)(2)(v).

    \435\ CL-ICI at 3.

    ---------------------------------------------------------------------------

    Two comments requested clarifications to the proposed rule. WMBAA

    sought clarification that the Commission did not intend for the

    Proposed Rule to prevent the use of ``work up'' in over-the-counter

    swaps.\436\ WMBAA stated that a block size calculation should not be

    performed until the work up period ends, but expressed concern that the

    work up trades could be considered aggregation.\437\ SIFMA noted that

    proposed Sec. 43.6(h)(6) does not restrict the aggregation prohibition

    to ``block trades'' and, as a result, ``large notional off-exchange

    swaps'' could be subject to the aggregation prohibition.\438\ SIFMA

    requested that the Commission add language to clarify that the

    aggregation prohibition does not apply to large notional off-exchange

    swaps.\439\

    ---------------------------------------------------------------------------

    \436\ CL-WMBAA at 2. During a work up transaction, a swap price

    is agreed upon for trading and the trade is then reported to market

    participants, who then have the opportunity to ``join the trade'' by

    placing a firm bid or offer to buy or sell a particular quantity.

    Id.

    \437\ Id. at 2-3.

    \438\ Id. at 3.

    \439\ Id.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting proposed Sec. 43.6(h)(6) as proposed. In response to the

    comment by ABC and CIEBA, the Commission notes that qualified

    investment advisers, who are not CTAs, are able to aggregate block

    trade orders from different trading accounts. Under Sec.

    43.6(h)(6)(i)(B) and (ii), investment advisers that satisfy the

    criteria under Sec. 4.7(a)(2)(v) and have more than $25 million in

    total assets under management are able to aggregate orders from

    different accounts. The Commission also agrees that CTAs who trade on a

    SEF should be permitted to aggregate customer trades, which would be

    allowed under the rule as adopted, subject to the enumerated

    conditions.

    With respect to JP Morgan's comment, the Commission notes that

    customers trading swaps on DCMs do not have to be ECPs. As discussed

    further below, adopted Sec. 43.6(i)(1) allows non-ECP customers to be

    parties to block trades through a qualifying CTA, investment adviser,

    or similar foreign person.\440\ It is possible, therefore, that those

    non-ECP DCM customers may not be aware if they received the best terms

    for their individual swap transactions that are aggregated with other

    transactions. Protection for such customers is therefore necessary, as

    it is for unsophisticated customers in other markets.

    ---------------------------------------------------------------------------

    \440\ See infra Section II.C(6).

    ---------------------------------------------------------------------------

    In response to Barnard's suggested additional requirement,\441\ the

    Commission acknowledges that the same or similar phrase appears in the

    rules of many exchanges.\442\ The Commission, however, does not believe

    that it is necessary to incorporate such specific language to the rule

    because persons such as CTAs and investment advisers are already

    subject to broad anti-fraud prohibitions under their governing

    statutes.\443\ Moreover, adopted Sec. 43.6(i)(2), discussed further

    below, also requires that any person transacting a block trade on

    behalf of a customer receive prior written instruction or consent from

    the customer.

    ---------------------------------------------------------------------------

    \441\ CL-Barnard at 2.

    \442\ See, e.g., Chicago Mercantile Exchange Rule 526(I). See

    also Chicago Board of Trade Rule 526(I); Eris Exchange, LLC Rule

    601(b)(10); and New York Mercantile Exchange, Inc. Rule 526(I).

    \443\ See CEA section 4o (CTAs); Investment Advisors Act of 1940

    section 206.

    ---------------------------------------------------------------------------

    In response to ICI's opposition to the minimum asset threshold

    under Sec. 43.6(h)(6)(ii), the Commission notes that this threshold

    reflects common industry practice.\444\ CME, for example, has enforced

    the $25 million threshold in its rules since September 2000.\445\ CME

    has stated that the threshold ``is an effort to establish the

    professionalism and sophistication of the registrant'' \446\ while also

    expanding the number of CTAs and investment advisers eligible to

    aggregate trades.\447\ The Commission believes that the $25 million

    threshold is an appropriate requirement to ensure that persons allowed

    to aggregate trades are appropriately sophisticated with these

    transactions, while at the same time not excluding an unreasonable

    number of CTAs, investment advisers, and similar foreign persons.

    ---------------------------------------------------------------------------

    \444\ See, e.g., CME Rule 526. See also CBOE Futures Exchange

    LLC Rule 415(a)(i); Chicago Board of Trade Rule 526; Eris Exchange,

    LLC Rule 601(b)(10); ICE Futures U.S. Rule 4.07; NASDAQ OMX Futures

    Exchange, Inc. Rule E23; New York Mercantile Exchange, Inc. Rule

    526(I); NYSE Liffe US, LLC Rule 423; and OneChicago LLC Rule 417.

    \445\ See CME Submission 00-99 (Sept. 21, 2000) (modifying CME

    Rule 526 to reduce the threshold from $50,000,000 to $25,000,000).

    CME originally planned to lower the threshold from $50,000,000 to

    $5,000,000, but withdrew the submission and instead proposed to

    lower the threshold to $25,000,000, based on customer suggestions.

    See CME Submission 00-93 (Sept. 1, 2000); CME Submission 00-99 at 5-

    6.

    \446\ Id. at 6 (quoting letter addressed to Jean A. Webb,

    Secretary of the Commission from John G. Gaine, President, Managed

    Funds Association dated April 24, 2000 regarding ``Chicago

    Mercantile Exchange new Proposed Rule 526'').

    \447\ Id. at 4, 6-7. CME also stated in the filing that it

    planned to readdress the threshold amount as it gained experience

    with block trades, but has declined to modify the amount.

    ---------------------------------------------------------------------------

    The Commission also disagrees with ICI's contention that investment

    advisers should not be required to satisfy the criteria under Sec.

    4.7(a)(2)(v), which requires an investment adviser to (1) be registered

    and active as an investment adviser for two years or (2) provide

    securities investment advice to securities accounts which, in the

    aggregate, have total assets in excess of $5 million deposited at one

    or more registered securities brokers.\448\ The Commission first

    adopted provisions similar to current Sec. 4.7(a)(2)(v) in 1992 \449\

    as objective indications that a person had the investment

    sophistication and experience needed to evaluate the risks and benefits

    of investing in commodity pools or a portfolio large enough to indicate

    the same, along with the financial resources to withstand the

    investment risks.\450\ In 2000,\451\ the Commission extended the same

    criteria in current Sec. 4.7(a)(2)(v) to registered investment

    advisers for the same reasons.\452\ The Commission believes that these

    objective criteria, which demonstrate that an investment adviser

    possesses the necessary investment expertise, should also apply with

    respect to allowing such persons to aggregate client orders.

    ---------------------------------------------------------------------------

    \448\ 17 CFR 4.7(a)(2)(v).

    \449\ 57 FR 34853, 34854-55 (Aug. 7, 1992). The final rule

    reduced the amount on deposit threshold to $5 million from the $10

    million required by the proposed rule. See 57 FR 3148, 3152 (Jan.

    28, 1992).

    \450\ See 57 FR at 34854 (quoting 57 FR at 3152).

    \451\ 65 FR 11253, 11257-58 (Mar. 2, 2000).

    \452\ Id. at 11257 (quoting 57 FR at 3152).

    ---------------------------------------------------------------------------

    In response to WMBAA, the Commission clarifies that the aggregation

    prohibition will not affect the work up process. By definition, a block

    trade occurs away from a DCM or

    [[Page 32906]]

    SEF.\453\ The trades that are part of the work up process will occur on

    a DCM or SEF, and therefore are not block trades and are not subject to

    the aggregation prohibition.

    ---------------------------------------------------------------------------

    \453\ Section 43.2 defines a ``block trade'' as a publicly

    reportable swap transaction that ``occurs away from the registered

    swap execution facility's or designated contract market's trading

    system or platform and is executed pursuant to the registered swap

    execution facility's or designated contract market's rules and

    procedures.''

    ---------------------------------------------------------------------------

    Finally, as to SIFMA's requested clarification, the Commission

    notes that that it does intend to include large notional off-facility

    swaps in the aggregation prohibition under Sec. 43.6(h)(6). The

    appropriate minimum block size applies to both block trades and large

    notional off-facility swaps,\454\ and thus the aggregation prohibition

    should be applied to both types of transactions.

    ---------------------------------------------------------------------------

    \454\ Section 43.2 defines a ``large notional off facility

    swap'' as having ``notional or principal amount at or above the

    appropriate minimum block size.''

    ---------------------------------------------------------------------------

    6. Section 43.6(i) Eligible Block Trade Participants

    Proposed Sec. 43.6(i)(1) provided that parties to a block trade

    must be ECPs, as defined under Section 1a(18) of the CEA and the

    Commission's regulations. The proposed rule includes an exception to

    the ECP requirement by providing that a DCM may allow (i) A CTA

    registered pursuant to Section 4n of the CEA, or exempt from

    registration under the CEA, or a principal thereof, who has

    discretionary trading authority or directs client accounts, (ii) an

    investment adviser who has discretionary trading authority or directs

    client accounts and satisfies the criteria the criteria of 4.7(a)(2)(v0

    of the Commission's regulations, or (iii) a foreign person who performs

    a similar role or function to the persons described in (i) or (ii) and

    is subject as such to foreign regulation, to transact block trades for

    customers who are not ECPs, if such CTA, investment adviser or foreign

    person has more than $25 million in total assets under management.

    Proposed Sec. 43.6(i)(2) further provided that a person transacting a

    block trade on behalf of a customer must receive prior written

    instruction or consent from the customer to do so. Such instruction or

    consent may be provided in a power of attorney or similar document, by

    which the customer provides the person with discretionary trading

    authority or the authority to direct the trading in the customer's

    account.

    As discussed above, similar comments regarding the exceptions to

    the prohibitions against aggregation for certain persons were submitted

    with respect to the exception to certain persons transacting blocks on

    a DCM on behalf of non-ECPs. For example, ICI opposed the minimum

    assets under management requirement in proposed Sec. Sec. 43.6(i)(1)

    and similarly argued that the Commission did not articulate a rationale

    or policy reason for this requirement.\455\

    ---------------------------------------------------------------------------

    \455\ CL-ICI at 3.

    ---------------------------------------------------------------------------

    Specific comments were also received on proposed Sec.

    43.6(i)(2).\456\ ICI requested a clarification that only a person

    transacting a block trade on behalf of a customer who is not an ECP

    must receive prior written instruction or consent.\457\ ICI argued that

    written instruction or consent from an ECP is not necessary because

    these customers can engage in block trades and that investment advisers

    with discretionary trading authority registered with the SEC already

    have the ability to aggregate orders on behalf of clients without

    obtaining separate consent.\458\

    ---------------------------------------------------------------------------

    \456\ CL-ICI at 5; CL-SIFMA at 1-2.

    \457\ CL-ICI at 5.

    \458\ Id.

    ---------------------------------------------------------------------------

    SIFMA commented that proposed Sec. 43.6(i)(2) may require asset

    managers to obtain consent from each client for whom they will engage

    in block trades.\459\ SIFMA contended that this requirement would be

    costly and unnecessary, and that notice to the customers \460\ or a

    general grant of investment discretion in the investment management

    agreement, power of attorney, or similar document should be

    sufficient.\461\ SIFMA further commented that proposed Sec. 43.6(i)(2)

    is unlike rules governing DCMs in the futures context.\462\ SIFMA also

    argued that DCM rules requiring consent for block trades only require

    the direct members of the DCM to obtain consent from the members'

    direct customers, not from the customers' customers. Additionally,

    SIFMA contended that a client consent requirement does not apply to

    advisers with respect to futures trades and should not apply to

    advisers with respect to swaps trades.\463\

    ---------------------------------------------------------------------------

    \459\ CL-SIFMA at 1.

    \460\ Id. at 2.

    \461\ Id.

    \462\ Id. at 1 n.4.

    \463\ Id.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.6(i) as proposed. The Commission declines to adopt

    ICI's clarification and notes that Sec. 43.6(i)(2) is intended to

    ensure that all customers of CTAs, investment advisers, and similar

    foreign persons, whether the customers are ECPs or not, are fully

    informed of the use of block trades on their behalf.

    The Commission also disagrees with SIFMA's contention regarding the

    burdens of obtaining consent. This burden consent will be minimal

    because Sec. 43.6(i)(2) states that the instruction or consent may be

    provided through a power of attorney or similar document that provides

    discretionary trading authority or the authority to direct trading in

    the account. The consent may therefore be included in existing and

    future customer agreements. The Commission further disagrees that a

    general grant of investment discretion or notice to the customer should

    satisfy Sec. 43.6(i)(2). A customer's written instruction or consent

    is necessary because a customer potentially may not receive the best

    terms for an individual swap transaction that is part of an

    aggregation. The written instruction or consent makes the customer

    aware that block trades may be used on its behalf, allowing the

    customer to decide whether to allow these transactions.

    The Commission notes that a similar consent requirement was

    included in the Commission's proposed DCM rule.\464\ The Commission

    believes that the customer protection functions of the consent

    requirement apply, regardless of the degree of separation between the

    customer and the DCM or SEF. As discussed above, the consent

    requirement ensures that customers are informed of the use of block

    trades for their accounts. If a CTA, an investment adviser, or a

    similar foreign person plans to aggregate customer orders for block

    trades, then the customers must have the opportunity to evaluate

    whether the customer agrees to the use of aggregation, as evidenced by

    the written instruction or consent, regardless of whether the CTA,

    investment adviser, or similar foreign person is a direct member of a

    DCM or SEF.

    ---------------------------------------------------------------------------

    \464\ Core Principles and Other Requirements for Designated

    Contract Markets. 75 FR 80572, Dec. 22, 2010. The final DCM rule,

    however, did not include this proposed regulation which was

    promulgated, along with various other regulations, to implement Core

    Principle 9. As noted in the final rule, given the number of

    comments received under Core Principle 9, the Commission believed

    that additional time was appropriate before finalizing the proposed

    rules for Core Principle 9; it expects to consider the proposed

    rules at a future date. 77 FR 36643, June 19, 2012.

    ---------------------------------------------------------------------------

    III. Anonymity Protections for the Public Dissemination of Swap

    Transaction and Pricing Data

    A. Policy Goals

    Section 2(a)(13)(E)(i) of the CEA directs the Commission to protect

    the identities of counterparties to swaps subject to the mandatory

    clearing requirement, swaps excepted from the

    [[Page 32907]]

    mandatory clearing requirement, and voluntarily cleared swaps.

    Similarly, section 2(a)(13)(C)(iii) of the CEA requires that the

    Commission prescribe rules that maintain the anonymity of business

    transactions and market positions of the counterparties to an uncleared

    swap.\465\ In proposed amendments to Sec. 43.4(h) and 43.4(d)(4), as

    described further below, the Commission proposed measures to protect

    the identities of counterparties and to maintain the anonymity of their

    business transactions and market positions in connection with the

    public dissemination of publicly reportable swap transactions. The

    Commission proposed to follow the practices used by most federal

    agencies when releasing to the public company-specific information--by

    removing obvious identifiers, limiting geographic detail (e.g.,

    disclosing general, non-specific geographical information about the

    delivery and pricing points) and masking high-risk variables by

    truncating extreme values for certain variables (e.g., capping notional

    values).\466\

    ---------------------------------------------------------------------------

    \465\ This provision does not cover swaps that are ``determined

    to be required to be cleared but are not cleared.'' See 7 U.S.C.

    2(a)(13)(C)(iv).

    \466\ The Commission is following the necessary procedures for

    releasing microdata files as outlined by the Federal Committee on

    Statistical Methodology: (i) Removal of all direct personal and

    institutional identifiers, (ii) limiting geographic detail, and

    (iii) top-coding high-risk variables which are continuous. See

    Federal Committee on Statistical Methodology, Report on Statistical

    Disclosure Limitation Methodology 94 (Statistical Policy Working

    Paper 22, 2d ed. 2005), http://www.fcsm.gov/working-papers/totalreport.pdf. The report was originally prepared by the

    Subcommittee on Disclosure Limitation Methodology in 1994 and was

    revised by the Confidentiality and Data Access Committee in 2005.

    ---------------------------------------------------------------------------

    B. Establishing Notional Cap Sizes for Swap Transaction and Pricing

    Data to Be Publicly Disseminated in Real-Time

    1. Policy Goals for Establishing Notional Cap Sizes

    In addition to establishing appropriate minimum block sizes, the

    Commission also proposed to amend Sec. 43.4(h) to establish cap sizes

    for notional and principal amounts that would mask the total size of a

    swap transaction if it equals or exceeds the appropriate minimum block

    size for a given swap category. For example, if the block size for a

    category of interest rate swaps was $1 billion, the cap size was $1.5

    billion, and the actual transaction had a notional value of $2 billion,

    then this swap transaction would be publicly reported with a delay and

    with a notional value of $1.5+ billion.

    The proposed cap size provisions are consistent with the two

    relevant statutory requirements in section 2(a)(13) of the CEA. First,

    the cap size provisions would help protect the anonymity of

    counterparties' market positions and business transactions as required

    in section 2(a)(13)(C)(iii) of the CEA.\467\ Second, the masking of

    extraordinarily large positions also takes into consideration the

    requirement under section 2(a)(13)(E)(iv) that the Commission take into

    account the impact that real-time public reporting could have in

    reducing market liquidity.\468\

    ---------------------------------------------------------------------------

    \467\ See 7 U.S.C. 2(a)(13)(C)(iii).

    \468\ See 7 U.S.C. 2(a)(13)(E)(iv).

    ---------------------------------------------------------------------------

    2. Proposed Amendments Related to Cap Sizes--Sec. 43.2 Definitions and

    Sec. 43.4 Swap Transaction and Pricing Data To Be Publicly

    Disseminated in Real-Time

    The Commission proposed an amendment to Sec. 43.2 to define the

    term ``cap size'' as the maximum limit of the principal, notional

    amount of a swap that is publicly disseminated. This term applies to

    the cap sizes determined in accordance with the proposed amendments to

    Sec. 43.4(h) of the Commission's regulations.

    Section 43.4(h) of the Commission's regulations currently

    establishes interim cap sizes for rounded notional or principal amounts

    for all publicly reportable swap transactions. In the Real-Time

    Reporting Final Rule, the Commission finalized Sec. 43.4(h) to provide

    that the notional or principal amounts shall be capped in a manner that

    adjusts in accordance with the appropriate minimum block size that

    corresponds to a publicly reportable swap transaction.\469\ Section

    43.4(h) further provides that if no appropriate minimum block size

    exists, then the cap size on the notional or principal amount shall

    correspond to the interim cap sizes that the Commission has established

    for the five asset classes.\470\ In Sec. 43.4(h) and as described in

    the Real-Time Reporting Final Rule, the Commission notes that SDRs will

    apply interim cap sizes until such time as appropriate minimum block

    sizes are established.\471\ The Commission continues to believe that

    the interim cap sizes for each swap category should correspond with the

    applicable appropriate minimum block size, to the extent that an

    appropriate minimum block size exists.\472\

    ---------------------------------------------------------------------------

    \469\ See 77 FR 1247.

    \470\ Sections 43.4(h)(1)-(5) established the following interim

    cap sizes for the corresponding asset classes: (1) Interest rate

    swaps at $250 million for tenors greater than zero up to and

    including two years, $100 million for tenors greater than two years

    up to and including 10 years, and $75 million for tenors greater

    than 10 years; (2) credit swaps at $100 million; (3) equity swaps at

    $250 million; (4) foreign exchange swaps at $250 million; and (5)

    other commodity swaps at $25 million.

    \471\ See 77 FR 1215.

    \472\ Leading industry trade associations agree that cap sizes

    are an appropriate mechanism to ensure that price discovery remains

    intact for block trades, while also protecting post-block trade risk

    management needs from being anticipated by other market

    participants. See ISDA and SIFMA, Block Trade Reporting for Over-

    the-Counter Derivatives Market, Jan. 18, 2011.

    ---------------------------------------------------------------------------

    The Commission proposed to amend Sec. 43.4(h) both to establish

    initial cap sizes for each swap category within the five asset classes

    and also to delineate a process for the post-initial period through

    which the Commission would establish post-initial cap sizes for each

    swap category.\473\ The Commission also proposed changing the term

    ``interim'' as it is used in Sec. 43.4(h) in the Real-Time Reporting

    Rule to ``initial'' in order to correspond with the description of the

    initial period in proposed Sec. 43.6(e).

    ---------------------------------------------------------------------------

    \473\ The Commission does not intend the provisions in this

    final rule to prevent a SEF or DCM from sharing the exact notional

    amounts of a swaps transaction on or pursuant to the rules of its

    platform with market participants on such platform irrespective of

    the cap sizes set by the Commission. To share the exact notional

    amounts of swaps, the SEF or DCM must comply with Sec.

    43.3(b)(3)(i) of the Commission's regulations. See 77 FR 1245.

    ---------------------------------------------------------------------------

    a. Initial Cap Sizes

    In the initial period,\474\ proposed Sec. 43.4(h)(1) would set the

    cap size for each swap category as the greater of the interim cap sizes

    in all five asset classes set forth in the Real-Time Reporting Final

    Rule (Sec. 43.4(h)(1)-(5)) or the appropriate minimum block size for

    the respective swap category.\475\ If such appropriate minimum block

    size does not exist, then the cap sizes shall be set at the interim cap

    sizes set forth in the Real-Time Reporting Final Rule (Sec.

    43.4(h)(1)-(5)).

    ---------------------------------------------------------------------------

    \474\ The initial period is the period prior to the effective

    date of a Commission determination to establish applicable post-

    initial cap sizes. See proposed Sec. 43.4(h)(1).

    \475\ See 77 FR 1249.

    ---------------------------------------------------------------------------

    For the initial period, AII and ISDA/SIFMA argued that the cap size

    should be the lower of block size and the interim cap size in Sec.

    43.4(h)(1).\476\ EEI stated that the cap size of $25 million for both

    the electricity swap contracts proposed to be added to appendix B and

    the electricity swaps in the other commodity swap categories in

    appendix D, which would be based on the interim cap sizes established

    by the Commission in the Real-Time Reporting Final Rule, is too high.

    EEI instead recommended both a fixed cap size and a minimum block size

    of $3 million.\477\

    ---------------------------------------------------------------------------

    \476\ CL-AII at 12; CL-ISDA/SIFMA at 15.

    \477\ CL-EEI at 11-12.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting

    [[Page 32908]]

    Sec. 43.4(h)(1) as proposed. EEI recommends a lower cap size for

    specific swap categories--particularly electricity swaps--but it does

    not recommend any change to the proposed interplay between cap size and

    appropriate minimum block size during the interim period. The cap size

    for the interim period was established by the Real-Time Reporting Final

    Rule, and the Commission considered the appropriate level for these cap

    sizes at that time. The Commission did not propose altering the interim

    cap size in the Further Block Proposal, and thus did not receive

    comments regarding altering the interim cap size beyond that of EEI.

    The Commission does not believe that altering the interim cap size

    would be appropriate under such circumstances.

    AII and ISDA/SIFMA recommended that the cap size be set as the

    lower of the appropriate minimum block size and the interim cap sizes

    set forth in the Real-Time Reporting Rule. The Commission, however,

    disagrees with this view of the relationship between block thresholds

    and cap sizes. All of the information regarding a block trade is

    reported to the market at the end of the block time delay. Cap sizes,

    on the other hand, are never expressed to the market. Because this

    information is not reported to the market in real-time, nor reported to

    the market at all, the Commission believes that cap sizes should be set

    at a higher level than block sizes, in order to minimize the amount of

    information that is never publicly disseminated. Accordingly, the

    Commission is adopting Sec. 43.4(h)(1) as proposed.

    b. Post-Initial Cap Sizes and the 75-Percent Notional Amount

    Calculation

    Pursuant to proposed Sec. 43.4(h)(2)(ii), the Commission would use

    a 75 percent notional amount calculation, as proposed in Sec.

    43.6(c)(2), to determine the appropriate post-initial cap sizes for all

    swap categories for the purpose of reporting block trades or large

    notional off-facility swaps of significant size.\478\ This calculation

    methodology would be different from the 67 percent notional amount

    calculation methodology that the Commission proposed in Sec.

    43.6(c)(1), which would be used to determine appropriate minimum block

    sizes.\479\

    ---------------------------------------------------------------------------

    \478\ See proposed Sec. 43.6(c)(2).

    \479\ See proposed Sec. 43.6(c)(2).

    ---------------------------------------------------------------------------

    For the 75 percent notional amount calculation, the Commission

    would determine the appropriate cap size through the following process,

    pursuant to proposed Sec. 43.6(c)(2): (step 1) select all of the

    publicly reportable swap transactions within a specific swap category

    using a rolling three-year window of data beginning with a minimum of

    one year's worth of data and adding one year of data for each

    calculation until a total of three years of data is accumulated; (step

    2) convert to the same currency or units and use a trimmed data set;

    (step 3) determine the sum of the notional amounts of swaps in the

    trimmed data set; (step 4) multiply the sum of the notional amount by

    75 percent; (step 5) rank order the observations by notional amount

    from least to greatest; (step 6) calculate the cumulative sum of the

    observations until the cumulative sum is equal to or greater than the

    75 percent notional amount calculated in step 4; (step 7) select the

    notional amount associated with that observation; (step 8) round the

    notional amount of that observation to two significant digits, or if

    the notional amount associated with that observation is already

    significant to two digits, increase that notional amount to the next

    highest rounding point of two significant digits; and (step 9) set the

    appropriate minimum block size at the amount calculated in step 8.

    Consistent with the Commission's proposed process to determine the

    appropriate post-initial minimum block sizes, proposed Sec. 43.4(h)(3)

    provided that the Commission would publish post-initial cap sizes on

    its Web site. Proposed Sec. 43.4(h)(4) provided that unless otherwise

    indicated on the Commission's Web site, the post-initial cap sizes

    would become effective on the first day of the second month following

    the date of publication.

    The Commission received 10 comments regarding the 75 percent

    notional amount calculation for determining post-initial cap sizes. One

    commenter, Javelin, supported the 75 percent notional amount

    calculation and stated that it was consistent with the minimum block

    size threshold established by the Commission.\480\

    ---------------------------------------------------------------------------

    \480\ CL-Javelin at 2.

    ---------------------------------------------------------------------------

    Seven commenters, however, recommended that the Commission set

    post-initial cap sizes matching the post-initial minimum block size

    thresholds established by the Commission. AII recommended setting the

    post-initial cap size for each swap category at the same level as the

    post-initial block size threshold and states that the 75 percent

    notional amount calculation is far too high.\481\ GFMA similarly stated

    that the same rationale should apply to cap and block sizes, as both

    have potential negative impacts on liquidity.\482\ ICI stated that the

    75 percent notional amount would be too high for determining cap size

    because the lack of depth and liquidity in the swaps market could cause

    public reporting of block sizes to reveal identities, business

    transactions, and market positions of participants, and recommended a

    67 percent notional amount calculation for determining cap size in the

    post-initial period.\483\ ISDA/SIFMA also stated that the added

    transparency from reporting transaction sizes between 67 percent and 75

    percent would not outweigh the harm to liquidity from additional

    disclosure, and urges the Commission to ensure that the post-initial

    cap size is always equal to the relevant block size.\484\ MFA commented

    that it is unnecessary for the Commission to establish cap sizes that

    differ from minimum block sizes as there is not a meaningful

    transparency benefit that would outweigh the resource burdens on the

    Commission, SDRs, SEFs, and other market participants.\485\ SIFMA

    recommended that the Commission should set the notional cap size at the

    block threshold, as the added public dissemination could harm liquidity

    in the same manner that a higher block trade size threshold might.\486\

    Vanguard believes that it is essential that the cap match the block

    trade threshold, as to do otherwise would compromise the liquidity

    protections afforded by the nuanced assessment of block trade

    thresholds.\487\

    ---------------------------------------------------------------------------

    \481\ CL-AII at 12.

    \482\ CL-GFMA at 5.

    \483\ CL-ICI at 8.

    \484\ CL-ISDA/SIFMA at 15.

    \485\ CL-MFA at 8-9.

    \486\ CL-SIFMA at 12.

    \487\ CL-Vanguard at 7.

    ---------------------------------------------------------------------------

    Two other commenters suggested alterations of the Commission's

    proposed cap sizes. Barclays recommended that the post-initial period

    cap sizes be introduced at more nuanced levels that reflect the

    differences between product's traded volumes.\488\ EEI recommended a

    much lower fixed cap size for Electricity Swap Contracts and the Other

    Commodity Electricity Swap Category.\489\

    ---------------------------------------------------------------------------

    \488\ CL-Barclays at 6.

    \489\ CL-EEI at 11-12.

    ---------------------------------------------------------------------------

    After consideration of the comments above, the Commission is

    adopting Sec. 43.4(h)(2)(ii) as proposed. The Commission is of the

    view that setting post-initial cap sizes above appropriate minimum

    block sizes would provide additional pricing information with respect

    to large swap transactions, which are large enough to be treated as

    block trades (or large notional off-facility swaps), but small enough

    that they do not exceed the applicable post-

    [[Page 32909]]

    initial cap size. This additional information may enhance price

    discovery by publicly disseminating more information relating to market

    depth and the notional sizes of publicly reportable swap transactions,

    while still protecting the anonymity of swap counterparties and their

    ability to lay off risk when executing extraordinarily large swap

    transactions.

    The Commission notes that Section 2(a)(13) tasks the Commission

    with bringing real-time public reporting to the swaps market. Section

    2(a)(13)(E) expressly provides that the Commission determine

    appropriate time delays for block trades and large notional off-

    facility swaps. However, these provisions only call for a time delay--

    they do not provide for information to be kept from the market in

    perpetuity. All of the information regarding a block trade is reported

    to the market at the end of the block time delay. Cap sizes, on the

    other hand, are never expressed to the market. Because this information

    is not reported to the market in real-time, nor reported to the market

    at all, the Commission believes that cap sizes should be set at a

    higher level than block sizes. The 75 percent notional test balances

    the competing interests of providing meaningful real-time public

    reporting to the swaps market and protecting the anonymity of swap

    market participants, while taking into account potential impacts on

    market liquidity.

    If market participants conclude that the Commission has set cap

    sizes for a specific swap category in a way that will materially reduce

    market liquidity, then those participants are encouraged to submit data

    to support their conclusion. In addition, through its own surveillance

    of swaps market activity, the Commission may become aware that a cap

    size would reduce market liquidity for a specific swap category. In

    response to either a submission or its own surveillance of swaps market

    activity, the Commission has the legal authority to take action by rule

    or order to mitigate the potential effects on market liquidity of cap

    sizes with respect to swaps in a particular swap category.

    C. Masking the Geographic Detail of Swaps in the Other Commodity Asset

    Class

    1. Policy Goals for Masking the Geographic Detail for Swaps in the

    Other Commodity Asset Class

    In the Real-Time Reporting Final Rule, the Commission sets forth

    general protections for the identities, market positions and business

    transactions of swap counterparties in Sec. 43.4(d). Section 43.4(d)

    generally prohibits an SDR from publicly disseminating swap transaction

    and pricing data in a manner that discloses or otherwise facilitates

    the identification of a swap counterparty.\490\ Notwithstanding that

    prohibition, Sec. 43.4(d)(3) provides that SDRs are required to

    publicly disseminate data that discloses the underlying asset(s) of

    publicly reportable swap transactions.

    ---------------------------------------------------------------------------

    \490\ See Sec. 43.4(d)(1) of the Commission's regulations.

    ---------------------------------------------------------------------------

    Section 43.4(d)(4) contains special provisions for swaps in the

    other commodity asset class. These swaps raise special concerns because

    the public disclosure of the underlying asset(s) may in turn reveal the

    identities, market positions and business transactions of the swap

    counterparties. To address these concerns, Sec. 43.4(d)(4) limits the

    types of swaps in the other commodity asset class that are subject to

    public dissemination. Specifically, Sec. 43.4(d)(4)(ii) of the

    Commission's regulations provides that, for publicly reportable swap

    transactions in the other commodity asset class, SDRs must publicly

    disseminate the actual underlying assets only for: (1) those swaps

    executed on or pursuant to the rules of a SEF or DCM; (2) those swaps

    referencing one of the contracts described in appendix B to part 43;

    and (3) those swaps that are economically related to one of the

    contracts described in appendix B to part 43.\491\ Essentially, the

    Commission has determined that these three categories of swap have

    sufficient liquidity such that the disclosure of the underlying asset

    would not reveal the identities, market positions and business

    transactions of the swap counterparties.

    ---------------------------------------------------------------------------

    \491\ Appendix B to part 43 provides a list of 28 ``Enumerated

    Physical Commodity Contracts'' as well as 1 contract under the

    ``Other Contracts'' heading. See 77 FR 1182 app. B.

    ---------------------------------------------------------------------------

    In its Real-Time Reporting Final Rule, the Commission included in

    appendix B to part 43 a list of contracts that, if referenced as an

    underlying asset, should be publicly disseminated in full without

    limiting the commodity or geographic detail of the asset. In the

    Further Block Proposal, the Commission proposed adding 13 contracts to

    appendix B to part 43 under the ``Other Contracts'' heading.\492\ The

    Commission believes that since it previously has determined that these

    13 contracts have material liquidity and price references, among other

    things, the public dissemination of the full underlying asset for

    publicly reportable swap transactions that reference such contracts

    (and any underlying assets that are economically related thereto) would

    not disclose the identities, market positions and business transactions

    of swap counterparties.

    ---------------------------------------------------------------------------

    \492\ Appendix B to part 43 currently lists only Brent Crude Oil

    (ICE) under the ``Other Contracts'' heading.

    ---------------------------------------------------------------------------

    Pursuant to the Real-Time Reporting Final Rule, any publicly

    reportable swap transaction in the other commodity asset class that is

    excluded under Sec. 43.4(d)(4)(ii) would not be subject to the

    reporting and public dissemination requirements for part 43 upon the

    effective date of the Real-Time Reporting Final Rule. The Commission

    noted in the Real-Time Reporting Final Rule that it planned to address

    the group of other commodity swaps that were not subject to the rules

    of part 43 in a forthcoming release.\493\ Accordingly, the Commission

    proposed in the Further Block Proposal to address the public

    dissemination of swap transaction and pricing data for the group of

    other commodity swaps that are not covered currently by Sec.

    43.4(d)(4)(ii).

    ---------------------------------------------------------------------------

    \493\ See 77 FR 1211.

    ---------------------------------------------------------------------------

    The Commission is of the view that given the lack of data on the

    liquidity for certain swaps in the other commodity asset class, the

    lack of data on the number of market participants in these other

    commodity swaps markets, and the statutory requirement to protect the

    anonymity of market participants,\494\ the public dissemination of less

    specific information for swaps with specific geographic or pricing

    detail may be appropriate. The Commission believes that the public

    dissemination of the exact underlying assets for swaps in this group of

    the other commodity asset class may subject the identities, market

    positions and business transactions of market participants to

    unwarranted public disclosure if additional protections are not

    established with respect to the geographic detail of the underlying

    asset. For that reason, the Commission proposed that SDRs mask or

    otherwise disguise the geographic details related to the underlying

    assets of a swap in connection with the public dissemination of such

    swap transaction and pricing data.\495\

    ---------------------------------------------------------------------------

    \494\ See sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the

    CEA. 7 U.S.C. 2(a)(13)(C)(iii), (E)(i).

    \495\ Limiting the geographical detail is a typical statistical

    disclosure control used by other federal agencies as described in

    the Report on Statistical Disclosure Limitation Methodology. See

    supra note 61.

    ---------------------------------------------------------------------------

    2. Proposed Amendments to Sec. 43.4

    In order to accommodate the policy goals described above, the

    Commission proposed adding Sec. 43.4(d)(4)(iii) to part 43 to

    establish rules regarding the

    [[Page 32910]]

    public dissemination of the remaining group of swaps in the other

    commodity asset class (i.e., those not described in Sec.

    43.4(d)(4)(ii)). In the Commission's view, proposed Sec.

    43.4(d)(4)(iii) would ensure that the public dissemination of swap

    transaction and pricing data would not unintentionally disclose the

    identities, market positions and business transactions of any swap

    counterparty to a publicly reportable swap transaction in the other

    commodity asset class. In particular, proposed Sec. 43.4(d)(4)(iii)

    provides that SDRs must publicly disseminate the details about the

    geographic location of the underlying assets of the other commodity

    swaps not described in Sec. 43.4(d)(4)(ii) (i.e., other commodity

    swaps that have a specific delivery or pricing point) pursuant to

    proposed appendix E to part 43. Proposed appendix E to part 43 is

    discussed in the next subsection.

    The Commission recognizes that requiring the public dissemination

    of less specific geographic detail for an other commodity swap may, to

    some extent, diminish the price discovery value of swap transaction and

    pricing data for such swap. The Commission believes, however, that the

    public dissemination of such data will still provide the market with

    useful information relating to market depth, trading activity and

    pricing information for similar types of swaps.

    The Commission also proposed making conforming amendments to Sec.

    43.4(d). Specifically, the Commission proposed amending the

    introductory language to Sec. 43.4(d)(4)(i) by deleting ``Sec.

    43.4(d)(4)(ii)'' and adding in its place ``Sec. 43.4(d)(4)(ii) and

    (iii)'' to make clear that SDRs have to publicly disseminate swaps data

    under Sec. 43.4(d)(4)(iii) in accordance with part 43.\496\

    ---------------------------------------------------------------------------

    \496\ In addition to proposing limitations on the geographic

    detail for public dissemination of underlying assets for certain

    swaps in the other commodity asset class, the Commission also

    proposed amending Sec. 43.4(g) and (h) to make conforming changes.

    ---------------------------------------------------------------------------

    The Commission received no comments regarding Sec. 43.4(d)(4)(i)

    and (ii). The Commission is adopting Sec. 43.4(d)(4)(i) and (ii) as

    proposed.

    3. Application of Proposed Sec. 43.4(d)(4)(iii) and Proposed Appendix

    E to Part 43--Geographic Detail for Delivery or Pricing Points

    Proposed appendix E to part 43 includes the system that SDRs would

    be required to use to mask the specific delivery or pricing points that

    are a part of an underlying asset in connection with the public

    dissemination of swap transaction and pricing data for certain swaps in

    the other commodity asset class. To the extent that the underlying

    asset of a publicly reportable swap transaction described in proposed

    Sec. 43.4(d)(4)(iii) does not have a specific delivery or pricing

    point, the provisions of proposed Sec. 43.4(d)(4)(iii) and proposed

    appendix E to part 43 would not apply. Specifically, proposed appendix

    E to part 43 provides top-coding for various geographic regions, both

    in the United States and internationally.

    Subsection (a) below includes a description of the top-coding U.S.

    regions. Subsection (b) below includes a description of the top-coding

    non-U.S. regions. Finally, subsection (c) below outlines the proposed

    system for SDRs to publicly disseminate ``basis swaps.''\497\

    ---------------------------------------------------------------------------

    \497\ For the purposes of the Further Block Proposal and this

    final rule, basis swaps are defined as swap transactions in which

    one leg of the swap references a contract described in appendix B to

    part 43 (or is economically related thereto) and the other leg of

    the swap does not.

    ---------------------------------------------------------------------------

    a. U.S. Delivery or Pricing Points

    Table E1 in proposed appendix E to part 43 lists the geographic

    regions that an SDR would publicly disseminate for an off-facility swap

    in the other commodity asset class that is described in proposed Sec.

    43.4(d)(4)(iii). The Commission proposed that an SDR publicly

    disseminate swap transaction and pricing data for certain energy and

    power swaps in the other commodity asset class, as described in more

    detail below, in a different manner than the remaining other

    commodities. In order to mask the specific delivery or pricing detail

    of these energy and power swaps, the Commission proposed using

    established regions or markets that are associated with these

    underlying assets.

    i. Natural Gas and Related Products

    In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part

    43, the Commission set forth a method to describe the publicly

    reportable swap transactions that have natural gas or related products

    as an underlying asset and have a specific delivery or pricing point in

    the United States. In particular, the proposal required SDRs to

    publicly disseminate a description of the specific delivery or pricing

    point based on one of the five industry specific natural gas markets

    set forth by the Federal Energy Regulatory Commission (``FERC'').\498\

    The FERC Natural Gas Markets reflect natural deviations found in the

    spot prices in different markets.\499\ The Commission anticipates that

    a distinction for natural gas is necessary to enhance price discovery

    while protecting the identities of the parties, business transactions

    and market positions of market participants.

    ---------------------------------------------------------------------------

    \498\ See FERC, National Gas Markets--Overview, http://www.ferc.gov/market-oversight/mkt-gas/overview.asp (last viewed May

    6, 2013).

    \499\ See FERC, Natural Gas Market Overview: Spot Gas Prices,

    http://www.ferc.gov/market-oversight/mkt-gas/overview/ngas-ovr-avg-spt-ng-pr.pdf (updated Jan.10, 2013). In addition, there is evidence

    that the spot prices in these markets and the corresponding futures

    prices are highly correlated. D. Murray, Z. Zhu, ``Asymmetric price

    responses, market integration and market power: A study of the U.S.

    natural gas market,'' Energy Economics, 30 (2008) 748-65.

    ---------------------------------------------------------------------------

    The proposed five markets for public dissemination of delivery or

    pricing points for natural gas swaps are as follows: (i) Midwest

    (including North Dakota, South Dakota, Minnesota, Wisconsin, Michigan,

    Indiana, Illinois, Iowa, Nebraska, Kansas, Oklahoma, Missouri and

    Arkansas); (ii) Northeast (including Maine, New Hampshire, Vermont,

    Massachusetts, Rhode Island, Vermont, Connecticut, New York,

    Pennsylvania, Kentucky, Ohio, West Virginia, New Jersey, Delaware,

    Maryland and Virginia); \500\ (iii) Gulf (including Louisiana and

    Texas); (iv) Southeast (including Tennessee, North Carolina, South

    Carolina, Georgia, Florida, Alabama and Mississippi); and (v) Western

    (including Montana, Wyoming, Colorado, New Mexico, Idaho, Utah,

    Washington, Oregon, California, Nevada and Arizona). For any other

    pricing points in the United States, SDRs would publicly disseminate

    ``Other U.S.'' in place of the actual pricing or delivery point for

    such natural gas swaps.

    ---------------------------------------------------------------------------

    \500\ The District of Columbia would be included in this region,

    if any specific delivery or pricing points existed at the time of

    the Further Block Proposal.

    ---------------------------------------------------------------------------

    ii. Petroleum and Related Products

    In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part

    43, the Commission set forth a method to describe the publicly

    reportable swap transactions that have petroleum or related products as

    an underlying asset and have a specific delivery or pricing point in

    the United States. In particular, the proposal would require SDRs to

    publicly disseminate a description of the specific delivery or pricing

    point based on one of the seven Petroleum Administration for Defense

    Districts (``PADD'') regions.\501\ The PADD regions indicate

    economically and geographically distinct regions for the purposes of

    administering oil allocation.

    [[Page 32911]]

    The Department of Energy's Energy Information Administration (``EIA'')

    collects and publishes oil supply and demand data with respect to the

    PADD regions.\502\ Accordingly, to provide consistency with EIA

    publications and information regarding regional patterns, the

    Commission proposed that specific delivery or pricing points with

    respect to such petroleum product swaps are publicly disseminated based

    on PADD regions.

    ---------------------------------------------------------------------------

    \501\ See PADD Map, Appendix A, Petroleum Administration for

    Defense Districts, http://www.eia.gov/todayinenergy/detail.cfm?id=4890, (last viewed May 6, 2013).

    \502\ See U.S. Energy Information Administration (EIA)--

    Petroleum & Other Liquids, http://www.eia.gov/petroleum/data.cfm

    (last viewed May 6, 2013).

    ---------------------------------------------------------------------------

    The PADD regions for public dissemination of delivery or pricing

    points for such petroleum product swaps are as follows: (i) PADD 1A

    (New England); (ii) PADD 1B (Central Atlantic); (iii) PADD 1C (Lower

    Atlantic); (iv) PADD 2 (Midwest); (v) PADD 3 (Gulf Coast); (vi) PADD 4

    (Rocky Mountains); and (vii) PADD 5 (West Coast).\503\ For any other

    pricing points in the United States, SDRs would publicly disseminate

    the term ``Other U.S.'' in place of the actual pricing or delivery

    point for such petroleum product swaps.

    ---------------------------------------------------------------------------

    \503\ Alternatively, the Commission is considering combining the

    East Coast PADD into one category, such that any oil swap with a

    specific delivery or pricing point as PADD 1A (New England), PADD 1B

    (Central Atlantic) or PADD 1C (Lower Atlantic) would be publicly

    disseminated as PADD 1 (East Coast).

    ---------------------------------------------------------------------------

    iii. Electricity and Sources

    In proposed Sec. 43.4(d)(4)(iii), the Commission also set forth a

    method to describe publicly reportable swap transactions that have

    electricity and sources as an underlying asset and have a specific

    delivery or pricing point in the United States. In particular, the

    proposal would require SDRs to publicly disseminate the specific

    delivery or pricing point based on a description of one of the FERC

    Electric Power Markets.\504\

    ---------------------------------------------------------------------------

    \504\ See FERC, Electric Power Markets--Overview, http://www.ferc.gov/market-oversight/mkt-electric/overview.asp (last viewed

    May 6, 2013).

    ---------------------------------------------------------------------------

    The markets for public dissemination of delivery or pricing points

    for such electricity swaps are as follows: (i) California (CAISO); (ii)

    Midwest (MISO); (iii) New England (ISO-NE); (iv) New York (NYISO); (v)

    Northwest; (vi) Pennsylvania-New Jersey-Maryland (PJM); (vii)

    Southeast; (viii) Southwest; (ix) Southwest Power Pool (SPP); and (x)

    Texas (ERCOT). For any other pricing points in the United States, SDRs

    would publicly disseminate the term ``Other U.S.'' in place of the

    actual pricing or delivery point for such electricity and sources

    swaps.

    iv. All Remaining Other Commodities

    In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part

    43, the Commission set forth a method to describe any swaps in the

    other commodity asset class that do not have oil, natural gas,

    electricity, or petroleum as an underlying asset, but have specific

    delivery or pricing points in the United States. In particular, the

    Commission proposed that SDRs publicly disseminate information with

    respect to these swaps based on the 10 federal regions established by

    the U.S. Energy Information Administration (``EIA''). The Commission

    believed that the use of the 10 federal regions would provide

    consistency among different types of underlying assets in the other

    commodity asset class with respect to delivery and pricing point

    descriptions.

    The 10 federal regions that SDRs would use for public dissemination

    under the proposal for all remaining other commodity swaps are as

    follows: (i) Region I (including Connecticut, Maine, Massachusetts, New

    Hampshire, Rhode Island and Vermont); (ii) Region II (including New

    Jersey and New York); (iii) Region III (including Delaware, District of

    Columbia, Maryland, Pennsylvania, Virginia and West Virginia); (iv)

    Region IV (including Alabama, Florida, Georgia, Kentucky, Mississippi,

    North Carolina, South Carolina and Tennessee); (v) Region V (including

    Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin); (vi)

    Region VI (including Arkansas, Louisiana, New Mexico, Oklahoma and

    Texas); (vii) Region VII (including Iowa, Kansas, Missouri and

    Nebraska); (viii) Region VIII (including Colorado, Montana, North

    Dakota, South Dakota, Utah and Wyoming); (ix) Region IX (including

    Arizona, California, Hawaii and Nevada); and (x) Region X (including

    Alaska, Idaho, Oregon and Washington).\505\

    ---------------------------------------------------------------------------

    \505\ See U.S. Energy Information Administration, U.S. Federal

    Region Map, http://www.eia.gov/electricity/regionsmap/fedregstates.html (last visited May 6, 2013).

    ---------------------------------------------------------------------------

    b. Non-U.S. Delivery or Pricing Points

    Table E2 in proposed appendix E to part 43 provided the appropriate

    manner for SDRs to publicly disseminate non-U.S. delivery or pricing

    points for all publicly reportable swap transactions described in the

    proposed Sec. 43.4(d)(4)(iii). The Commission is of the view that SDRs

    should not publicly disseminate the actual location for these

    international delivery or pricing points since the public disclosure of

    such information may disclose the identities of parties, business

    transactions and market positions of market participants. In Table E2,

    the Commission proposed the countries and regions that an SDR must

    publicly disseminate. In proposing the use of these geographic

    breakdowns for the public reporting of international delivery or

    pricing points, the Commission considered world regions that have

    significant energy consumption, whether ISDA-specific documentation

    exists for a particular country, and whether public disclosure would

    compromise the anonymity of the swap counterparties.

    The Commission proposed the following international regions for

    publicly disseminating specific delivery or pricing points of publicly

    reportable swap transactions described in Sec. 43.4(d)(4)(iii): (i)

    North America (publicly disseminate ``Canada'' or ``Mexico''); (ii)

    Central America (publicly disseminate ``Central America''); (iii) South

    America (publicly disseminate ``Brazil'' or ``Other South America'');

    (iv) Europe (publicly disseminate ``Western Europe,'' ``Northern

    Europe,'' ``Southern Europe,'' or ``Eastern Europe''); (v) Russia

    (publicly disseminate ``Russia''); \506\ (vi) Africa (publicly

    disseminate ``Northern Africa,'' ``Western Africa,'' ``Eastern

    Africa,'' ``Central Africa,'' or ``Southern Africa''); (vii) Asia-

    Pacific (publicly disseminate ``Northern Asia,'' ``Central Asia,''

    ``Eastern Asia,'' ``Western Asia,'' ``Southeast Asia,'' or ``Australia/

    New Zealand/Pacific Islands''). The Commission considered whether a

    more granular approach is necessary for certain regions in order to

    enhance price discovery while still protecting anonymity. For example,

    Mexico, Canada and Russia may benefit from a more granular public

    dissemination of delivery or pricing points given the amount of energy

    production in those regions.

    ---------------------------------------------------------------------------

    \506\ Note that Russia is not included in ``Eastern Europe'' or

    in ``Northern Asia'' and instead should be publicly disseminated as

    ``Russia.''

    ---------------------------------------------------------------------------

    To the extent that a publicly reportable swap transaction described

    in proposed Sec. 43.4(d)(4)(iii) references the United States as a

    whole and not a specific delivery or pricing point, proposed appendix E

    would require an SDR to publicly disseminate that reference. For

    example, an SDR would publicly disseminate a weather swap that

    references ``U.S. Heating Monthly'' as ``U.S. Heating Monthly.''

    c. Basis Swaps

    The Commission proposed requiring SDRs to ensure that specific

    underlying assets are publicly disseminated for basis swaps that

    qualify as publicly

    [[Page 32912]]

    reportable swap transactions. The Commission recognizes that basis

    swaps exist in which one leg of the swap references a contract

    described in appendix B to part 43 (or is economically related to one

    such contract) and the other leg of the swap references an asset or

    pricing point not listed in appendix B to part 43. Currently, Sec.

    43.4(d)(4)(ii)(A)-(B) requires an SDR to publicly disseminate the

    actual underlying asset of the leg of the basis swap that references or

    is economically related to a contract listed in appendix B to part 43.

    To the extent that a basis swap is executed on or pursuant to the rules

    of a SEF or DCM, an SDR would also publicly disseminate the specific

    underlying asset. With respect to the leg of a basis swap that does not

    reference a contract in appendix B to part 43, however, the Commission

    proposed to require SDRs to publicly disseminate the underlying asset

    of that leg pursuant to proposed Sec. 43.4(d)(4)(iii) and proposed

    appendix E to part 43, i.e., with top-coding provisions.

    d. Comments Received and Commission Determination

    The Commission received three comments regarding the masking of

    specific delivery or pricing detail of energy and power swaps. EEI

    recommended that the Commission mask data regarding Other Commodity

    Electricity Swaps according to the North American Electric Reliability

    Corporation eight regions rather than the FERC regions proposed.\507\

    Barclays recommended that the Commission use wider geographic regions

    when publicly disseminating data for commodity swaps with very specific

    underlying assets and/or delivery points and develop an appropriate

    process to avoid identifying issuers of debt.\508\ Spring Trading

    supported further measures to prevent public disclosure of identities,

    business transactions, and market positions of swap market

    participants, and recommended disclosing a subset of data on a

    collective basis at a later date.

    ---------------------------------------------------------------------------

    \507\ CL-EEI at 12-13.

    \508\ CL-Barclays at 6.

    ---------------------------------------------------------------------------

    After consideration of the comments received, the Commission is

    adopting Sec. 43.4(d)(4)(iii) with the following modification. For

    publicly reportable swap transactions that have electricity and sources

    as an underlying asset and have a specific delivery or pricing point in

    the United States, the Commission is requiring SDRs to publicly

    disseminate the specific delivery or pricing point based on a

    description of one of the North American Electric Reliability

    Corporation (``NERC'') regions for publicly disseminating delivery or

    pricing points for electricity swaps described in proposed Sec.

    43.4(d)(4)(iii). The NERC regions are broader than the FERC regions and

    include much of Canada. Specifically, the NERC regions are as follows:

    (i) Florida Reliability Coordinating Council (FRCC); (ii) Midwest

    Reliability Organization (MRO); (iii) Northeast Power Coordinating

    Council (NPCC); (iv) ReliabilityFirst Corporation (RFC); (v) SERC

    Reliability Corporation (SERC); (vi) Southwest Power Pool, RE (SPP);

    (vii) Texas Regional Entity (TRE); (viii) Western Electricity

    Coordinating Council (WECC).\509\ The Commission is of the view that

    using these regions as suggested by EEI will provide further masking of

    specific delivery details and thus further protection against public

    disclosure of identities, business transactions, and market positions

    of swap market participants, as recommended by Barclays and Spring

    Trading.

    ---------------------------------------------------------------------------

    \509\ See NERC, Key Players: Regional Entities, http://www.nerc.com/page.php?cid=1%7C9%7C119 (last visited May 6, 2013).

    ---------------------------------------------------------------------------

    4. Further Revisions to Part 43

    a. Additional Contracts Added to Appendix B to Part 43

    Appendix B to part 43 currently lists contracts that, if referenced

    as an underlying asset, would require SDRs to publicly disseminate the

    full geographic detail of the asset. In the Real-Time Reporting Final

    Rule, the Commission provided that SDRs were required to publicly

    disseminate any underlying asset of a publicly reportable swap

    transaction that references or is economically related to any contract

    or contracts listed in appendix B to part 43 in the same manner.

    As noted above, the Commission proposed adding 13 natural gas and

    electricity contracts under the ``Other Commodity'' heading in appendix

    B to part 43 that have been de-listed and converted into futures

    contracts listed on a DCM.\510\ Nevertheless, the addition of these 13

    contracts to appendix B effectively would require SDRs to publicly

    disseminate these contracts the same way as the other contracts that

    are currently listed in appendix B to part 43. That is, an SDR would

    publicly disseminate the actual underlying asset (and any underlying

    asset(s) that are economically related) without any limitation of the

    geographic detail.

    ---------------------------------------------------------------------------

    \510\ See supra note 176.

    ---------------------------------------------------------------------------

    The Commission had previously determined that these 13 contracts--

    as swaps--were significant price discovery contracts (``SPDCs'') in

    connection with trading on exempt commercial markets (``ECMs'').\511\

    Each of the 13 contracts had undergone an analysis in which the

    Commission considered the following five criteria: (i) Price linkage

    (the extent to which the contract uses or otherwise relies on a daily

    or final settlement price of a contract listed for trade on or subject

    to the rules of a DCM); (ii) arbitrage (the extent to which the price

    of the contract is sufficiently related to the price of a contract

    listed on a DCM to permit market participants to effectively arbitrage

    between the two markets); (iii) material price reference (the extent to

    which, on a frequent and recurring basis, bids, offers or transactions

    in a commodity are directly based on, or are determined by referencing,

    the prices generated by contracts being traded or executed on the ECM);

    (iv) material liquidity (the extent to which volume of the contract is

    sufficient to have a material effect on other contracts listed for

    trading); and (v) other material factors.\512\

    ---------------------------------------------------------------------------

    \511\ Id.

    \512\ The Dodd-Frank Act deleted and replaced CEA section

    2(h)(7), which contained the five criteria for determining a SPDC.

    The Dodd-Frank Act amended CEA section 4a(a) to include CEA section

    4a(a)(4), which contains a similar version of the five criteria for

    determining a SPDC in the context of excessive speculation.

    ---------------------------------------------------------------------------

    To the extent that the SPDC contracts have been de-listed and

    replaced by listed futures contracts, the Commission believes that the

    latter contracts have similar material liquidity and material price

    reference, among other things. Therefore, the Commission anticipates

    that, the public dissemination of the full underlying asset for

    publicly reportable swap transactions that reference such futures

    contracts (and any underlying assets that are economically related

    thereto) would not disclose the identities, market positions and

    business transactions of market participants and would enhance price

    discovery in the related markets.\513\ The Commission did not receive

    any other comments, and accordingly, is adopting these additions to

    appendix B.

    ---------------------------------------------------------------------------

    \513\ The Commission notes that it is not adding ``Henry

    Financial LD1 Fixed Price,'' a listed futures contract that was

    converted from ``Henry Financial LD1 Fixed Price Swap'' (which was

    previously deemed by the Commission to be a SPDC), to appendix B to

    part 43. This contract is economically related to the ``New York

    Mercantile Exchange Henry Hub Natural Gas,'' which is listed under

    ``Enumerated Physical Commodity Contracts'' in appendix B to part

    43. Therefore, listing this contract again would be redundant.

    ---------------------------------------------------------------------------

    b. Technical Revisions to Part 43

    In the Real-Time Reporting Final Rule, the Commission states that

    the

    [[Page 32913]]

    transactions described Sec. 43.4(d)(4)(ii)(A)-(C), i.e., the instances

    in which the actual underlying asset for a publicly reportable swap

    transaction in the other commodity asset class is to be publicly

    disseminated, are meant to be exclusive of one another. Under these

    sections, an SDR is required to publicly disseminate the actual

    underlying asset(s) of a swap in the other commodity asset class, where

    the swap (1) is executed on or pursuant to the rules of a SEF or DCM;

    (2) references a contract listed on appendix B to part 43; or (3) is

    economically related to a contract on appendix B. Accordingly, the

    Commission proposed a technical clarification to Sec.

    43.4(d)(4)(ii)(B) to clarify the intent that these elements are

    exclusive of one another, as articulated in the preamble to the Real-

    Time Reporting Final Rule.

    The Commission did not receive any comments regarding the technical

    clarification to Sec. 43.4(d)(4)(ii)(B). Accordingly, the Commission

    is adopting Sec. 43.4(d)(4)(ii)(B) as proposed.

    IV. Paperwork Reduction Act

    A. Background

    The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501

    et seq. (``PRA'') are, among other things, to minimize the paperwork

    burden to the private sector, ensure that any collection of information

    by a government agency is put to the greatest possible uses, and

    minimize duplicative information collections across the

    government.\514\ The PRA applies with extraordinary breadth to all

    information, ``regardless of form or format,'' whenever the government

    is ``obtaining, causing to be obtained [or] soliciting'' information,

    and includes required ``disclosure to third parties or the public, of

    facts or opinions,'' when the information collection calls for

    ``answers to identical questions posed to, or identical reporting or

    recordkeeping requirements imposed on, ten or more persons.'' \515\ The

    PRA requirements have been determined to include not only mandatory but

    also voluntary information collections, and include both written and

    oral communications.\516\

    ---------------------------------------------------------------------------

    \514\ See 44 U.S.C. 3501.

    \515\ See 44 U.S.C. 3502.

    \516\ See 5 CFR 1320.3(c)(1).

    ---------------------------------------------------------------------------

    To effectuate the purposes of the PRA, Congress requires all

    agencies to quantify and justify the burden of any information

    collection it imposes.\517\ This requirement includes submitting each

    collection, whether or not it is contained in a rulemaking, to the

    Office of Management and Budget (``OMB'') for review. The OMB

    submission process included completing a supporting statement with the

    agency's burden estimate and justification for the collection. The

    information collection established within this rulemaking, which

    included the agency's burden estimate and justification, was subjected

    to the rulemaking's public comment process. No public comments were

    received affecting the information burden and justification.

    ---------------------------------------------------------------------------

    \517\ See 44 U.S.C. 3506.

    ---------------------------------------------------------------------------

    Section 43.6 and amendments to Sec. 43.4 amend an existing

    collection of information within the meaning of the PRA in two

    respects. Accordingly, the Commission submitted the Further Block

    Proposal to the OMB for review pursuant to 44 U.S.C. 3507(d) and 5

    CFR1320.11. OMB has assigned control number 3038-0070 to the existing

    collection of information, which is titled ``Part 43--Real-Time Public

    Reporting.'' The Commission invited the public to comment on any aspect

    of the proposed amendments to existing collections of information. The

    responses to this amended collection of information are mandatory. The

    Commission did not receive any comments regarding the proposed

    amendments. Accordingly, the Commission is not revising the estimates

    contained in the Further Block Proposal, which are described in the

    following sections.

    B. Description of the Collection

    On January 9, 2012, the Commission issued the Real-Time Reporting

    Final Rule, which includes three collections of information

    requirements within the meaning of the PRA. The first collection of

    information requirement under Part 43 imposed a reporting requirement

    on a SEF or DCM when a swap is executed on a trading facility or on the

    parties to a swap transaction when the swap is executed bilaterally.

    The second collection of information requirement under Part 43 created

    a public dissemination requirement on SDRs. The third collection of

    information requirement created a recordkeeping requirement for SEFs,

    DCMs, SDRs and any reporting party (as such term is defined in part 43

    of the Commission's regulations).

    Sections 43.4 and 43.6 amend the first and second collections of

    information within the meaning of the PRA as described below. The

    analysis with respect to the amended collections as a result of Sec.

    43.6 is set out in section 1 below. The analysis with respect to the

    amended collections as a result of amendments to Sec. 43.4 is set out

    in section 2 below.

    1. Sec. 43.6(g)--Notification of Election

    Section 43.6(g) amends the first and second collections of

    information within the meaning of the PRA. In particular, Sec. 43.6(g)

    contains the provisions regarding the election to have a swap

    transaction treated as a block trade or large notional off-facility

    swap, as applicable. Section 43.6(g)(1) establishes a two-step

    notification process relating to block trades. Section 43.6(g)(2)

    establishes the notification process relating to large notional off-

    facility swaps. Section 43.6(g) is an essential part of this rulemaking

    because it provides the mechanism through which market participants

    will be able to elect to treat their qualifying swap transaction as a

    block trade or large notional off-facility swap.

    Section 43.6(g)(1)(i) contains the first step in the two-step

    notification process relating to block trades. In particular, this

    section provides that the parties to a swap that are executed at or

    above the appropriate minimum block size for the applicable swap

    category are required to notify the SEF or DCM (as applicable) of their

    election to have their qualifying swap transaction treated as a block

    trade. The Commission understands that SEFs and DCMs use automated,

    electronic, and in some cases, voice processes to execute swap

    transactions; therefore, the transmission of the notification of a

    block trade election also would either be automated, electronic or

    communicated through voice.

    The Commission estimates that there are 125 SDs and MSPs, and 1,000

    other non-financial end-user parties.\518\ The Commission estimates

    that, on average, SD/MSP reporting parties would likely notify a SEF or

    DCM of a block trade election approximately 1,000 times per year while

    non-SD/MSP reporting parties likely would notify a SEF or DCM of a

    block trade election approximately five times per year.\519\ Thus, the

    Commission estimates that there would be 130,000 notifications of a

    block trade election by reporting parties under Sec. 43.6(g) each

    year.\520\

    ---------------------------------------------------------------------------

    \518\ The Commission has previously estimated that 125 SDs and

    MSPs will register with the Commission and 1,000 non-financial end-

    users (i.e., non-SD/non-MSPs) will be required to report swap

    transactions annually. 77 FR 1229-30.

    \519\ The Commission anticipates that these figures will change

    as a function of changes in the market structure and practices in

    the U.S. swaps markets.

    \520\ The Commission estimates the total number of notifications

    as follows: 125 SDs/MSPs x 1,000 notifications = 125,000

    notifications per year; 1,000 non-SDs/non-MSPs x 5 notifications =

    5,000 notifications per year; therefore, the total across all types

    of entities would be 130,000 notifications per year.

    ---------------------------------------------------------------------------

    [[Page 32914]]

    The Commission estimates that the burden hours associated with

    Sec. 43.6(g)(1)(i) would include: (i) 30 seconds on average for

    parties to a swap to determine whether a particular swap transaction

    qualifies as a block trade based on the appropriate minimum block size

    of the applicable swap category; and (ii) 30 seconds on average for the

    parties to electronically transmit or otherwise communicate their

    notice of election. SDs, MSPs and reporting parties would use existing

    traders (or other professionals earning similar salaries) to

    electronically transmit or otherwise communicate their notice of

    election. Based on the Securities Industry and Financial Market

    Association's 2011 Securities Industry Salary Survey, the Commission

    estimates that these block traders would earn approximately $184.90 per

    hour in total compensation.\521\ Accordingly, the Commission estimates

    that the total annual burden hour costs associated with the first step

    in proposed Sec. 43.6(g)(1)(i) would be 2,167 hours \522\ or $400,678

    in total annual burden hours costs \523\ and $11.8 million in total

    start-up capital costs.\524\

    ---------------------------------------------------------------------------

    \521\ The Commission previously has utilized wage rate estimates

    based on average salary and average prior year bonus information for

    the securities industry compiled by SIFMA. These wage estimates are

    derived from an industry-wide survey of participants and thus

    reflect an average across entities; the Commission notes that the

    actual costs for any individual company or sector may vary from the

    average.

    The Commission estimated the dollar costs of hourly burdens for

    different types of relevant professionals using the following

    calculations:

    (1) [(2010 salary + bonus) * (salary growth per professional

    type, 2010-2011)] = Estimated 2010 total annual compensation. The

    most recent data provided by the SIFMA report describe the 2010

    total compensation (salary + bonus) by professional type, the growth

    in base salary from 2010 to 2011 for each professional type, and the

    2011 base salary for each professional type; therefore, the

    Commission estimated the 2011 total compensation for each

    professional type, but, in the absence of similarly granular data on

    salary growth or compensation from 2011 to 2012 and beyond, did not

    estimate dollar costs beyond 2011. [(Estimated 2011 total annual

    compensation)/(1,800 annual work hours)] = Hourly wage per

    professional type.]

    (2) [(Hourly wage) * (Adjustment factor for overhead and other

    benefits, which the Commission has estimated to be 1.3)] = Adjusted

    hourly wage per professional type.]

    (3) [(Adjusted hourly wage) * (Estimated hour burden for

    compliance)] = Dollar cost of compliance for each hour burden

    estimate per professional type.]

    The sum of each of these calculations for all professional types

    involved in compliance with a given element of the Further Block

    Proposal represents the total cost for each counterparty, reporting

    party, swap dealer, major swap participant, SEF, DCM, or SDR, as

    applicable to that element of the proposal.

    \522\ To comply with the election process in proposed Sec.

    43.6(g), a market participant likely would need to provide training

    to its existing personnel and update its written policies and

    procedures to account for this new process. The total annual burden

    hours equals the total hours for swap dealers and major swap

    participants plus the total hours for non-swap dealers and non-major

    swap participants.

    \523\ The underlying adjusted labor cost estimate of $184.90 per

    hour used in this estimate is calculated based on the adjusted wages

    of swap traders. See note 521 supra.

    \524\ The estimated costs are based on the Commission's estimate

    of the incremental, non-recurring expenditures to reporting

    entities, including non-SD/non-MSPs (i.e., non-financial end-users)

    to: (1) update existing technology, including updating its OMS

    system ($7,170); and (2) provide training to existing personnel and

    update written policies and procedures ($3,360). See section V.D.1.

    infra. The Commission believes that SDs/MSPs would incur similar

    non-recurring start-up costs. The Commission has previously

    estimated that 125 SDs and MSPs will register with the Commission

    and 1,000 non-financial end-users (i.e., non-SD/non-MSPs) will be

    required to report in a year. See 77 FR 1229-30.

    ---------------------------------------------------------------------------

    With respect to the second step, proposed Sec. 43.6(g)(1)(ii)

    provides that the SEF or DCM, as applicable, that receives an election

    notification is required to notify an SDR of a block trade election

    when transmitting swap transaction and pricing data to such SDR for

    public dissemination. As noted above, the Commission anticipates that

    SEFs and DCMs would use automated, electronic and, in some cases, voice

    processes to execute swap transactions. The Commission estimates that

    there will be approximately 58 SEFs and DCMs. Accordingly, the

    Commission estimates that the total annual burden associated with the

    second step in Sec. 43.6(g)(1)(ii) would be approximately $610,740 in

    non-recurring annualized capital and start-up costs.\525\ The Real-Time

    Reporting Final Rule already has addressed the recurring annualized

    costs for the hour burden.

    ---------------------------------------------------------------------------

    \525\ The Commission bases this estimate on 58 projected SEFs

    and DCMs, each of which will incur costs of investing in update

    technology, including updating its OMS system ($6,761.20); and

    training existing personnel and updating written policies and

    procedures ($3,195.00). See section V.D.1. infra.

    ---------------------------------------------------------------------------

    Section 43.6(g)(2) is similar to the first step set forth in Sec.

    43.6(g)(1). That is, Sec. 43.6(g)(2) provides, in part, that a

    reporting party who executes a bilateral swap transaction that is at or

    above the appropriate minimum block size is required to notify the SDR

    of its election to treat such swap as a large notional off-facility

    swap. This section provides further that the reporting party is

    required to notify the SDR in connection with the reporting party's

    transmission of swap transaction and pricing data to the SDR for public

    dissemination. The Commission anticipates that reporting parties may

    have various methods through which they will transmit information to

    SDRs, which would include a large notional off-facility swap election.

    Most reporting parties would use automated and electronic methods to

    transmit this information; other reporting parties, because of the

    expense associated with building an electronic infrastructure, may

    contract with third parties (including their swap counterparty) to

    transmit the notification of a large notional off-facility swap

    election.

    The Commission estimates that the incremental time and cost burden

    associated with the Sec. 43.6(g)(2) would include: (i) One minute for

    a reporting party to determine whether a particular swap transaction

    qualifies as a large notional off-facility swap based on the

    appropriate minimum block size of the applicable swap category; and

    (ii) one minute for the reporting party (or its designee) to

    electronically transmit or communicate through voice processes its

    notice of election. The Commission estimates that, of the approximately

    2,250 hours incurred by 125 SDs/MSPs and 1,000 non-SD/MSPs, all of

    those hours would be spent by traders and market analysts (or

    designee).\526\ SIFMA's report states that traders and market analysts

    make $184.90 per hour in total compensation.\527\

    ---------------------------------------------------------------------------

    \526\ The economic costs associated with entering into a third

    party service arrangement to transmit an electronic notice to an SDR

    are difficult to determine. There are too many variables that are

    involved in determining those costs. Notwithstanding this

    difficulty, the Commission foresees that, for many reporting parties

    that infrequently trade swaps, the annualized cost of entering into

    a third-party service arrangement of this type would likely be less

    than the total annual cost of building an electronic infrastructure

    to transmit electronic notices directly to an SDR.

    \527\ See note 521 supra.

    ---------------------------------------------------------------------------

    The Commission estimates that, on average, each of the estimated

    125 SD/MSP counterparties would likely notify an SDR of a large

    notional off-facility swap election approximately 500 times per year

    while each of the estimated 1,000 non-SD/MSP counterparties would

    notify an SDR approximately five times per year. Accordingly, the

    Commission estimates that there are, on average, approximately 67,500

    notifications large notional off-facility swaps under Sec. 43.6 each

    year. Accordingly, the Commission estimates that the total annual

    burden associated with Sec. 43.6(g)(2) would be approximately 2,250

    annual labor hours or $416,025 in annual labor costs.\528\

    ---------------------------------------------------------------------------

    \528\ The labor hour estimate is calculated as follows: (125

    SDs/MSPs x 500 notifications) + (1,000 non-SDs/non-MSPs x 5

    notifications) = 67,500 notifications x 2 minutes/notification =

    135,000 minutes/60 minutes/hour = 2,250 hours. The labor cost

    estimate is calculated as follows: 2,250 labor hours x $140.93 per

    hour total compensation = $317,092. The Commission notes that the

    calculation in the Further Block Proposal incorrectly listed the

    labor hour estimate as 2,255 hours (rather than 2,250). The labor

    cost estimate was then incorrectly listed as $317,797 (rather than

    $317,092) due to the incorrect labor hour estimate.

    ---------------------------------------------------------------------------

    [[Page 32915]]

    In addition, the Commission estimates that Sec. 43.6(g)(2) results

    in $11.8 million in non-recurring annualized capital and start-up

    costs.\529\ The Real-Time Reporting Final Rule addressed all ongoing

    operational and maintenance costs.\530\

    ---------------------------------------------------------------------------

    \529\ The estimated costs are based on the Commission's estimate

    of the incremental, non-recurring expenditures to reporting

    entities, including non-SD/non-MSPs (i.e., non-financial end-users)

    to (1) update existing technology, including updating its OMS system

    ($6,761.20); and (2) provide training to existing personnel and

    update written policies and procedures ($3,195.00). See section

    V.D.1. infra. The Commission believes that SDs/MSPs would incur

    similar non-recurring start-up costs. The Commission has previously

    estimated that 125 SDs and MSPs will register with the Commission

    and 1,000 non-financial end-users (i.e., non-SD/non-MSPs) will be

    required to report in a year. 77 FR 1229-30.

    \530\ See 77 FR at 1232.

    ---------------------------------------------------------------------------

    2. Amendments to Sec. 43.4(d)(4) and 43.4(h)

    The Commission addresses the public dissemination of certain swaps

    in the other commodity asset class in Sec. 43.4(d)(4). Section

    43.4(d)(4)(ii) provides that for publicly reportable swaps in the other

    commodity asset class, the actual underlying assets must be publicly

    disseminated for: (1) Those swaps executed on or pursuant to the rules

    of a SEF or DCM; (2) those swaps referencing one of the contracts

    described in appendix B to part 43; and (3) any publicly reportable

    swap transaction that is economically related to one of the contracts

    described in appendix B to part 43. Pursuant to the Real-Time Reporting

    Final Rule, any swap that is in the other commodity asset class that

    does not fall under Sec. 43.4(d)(4)(ii) would not be subject to

    reporting and public dissemination requirements upon the effective date

    of the Real-Time Reporting Final Rule.

    In this final rule, the Commission is promulgating a new provision

    (Sec. 43.4(d)(4)(iii)), which would develop a system for the public

    dissemination of exact underlying assets in the other commodity asset

    class with a ``mask'' based on geographic detail. The Commission is

    adopting a new appendix to part 43, which contains the geographical

    top-codes that SDRs would use in masking certain other commodity swaps

    in connection with such swaps public dissemination of swap transaction

    and pricing data under part 43. The Commission anticipates that there

    will be approximately 50,000 additional swaps reported to an SDR each

    year in the other commodity asset class, which the Commission estimates

    would be $154,021 in annualized hour burden costs.\531\

    ---------------------------------------------------------------------------

    \531\ The Commission estimates that there will be 5 SDRs, which

    will collect swaps data in the other commodity asset class. Each SDR

    would collect swaps data on approximately 10,000 swap transactions

    in the other commodity asset class. The commission estimates that it

    will take each SDR on average approximately 1 minute to publicly

    disseminate swaps data related to these new swap transactions. The

    number of burden hours for these SDRs would be 833 hours. As

    referenced in note 523 supra, the total labor costs for a swap

    trader is $140.93. Thus, the total number of burden hour costs equal

    the total number of burden hours (833 burden hours) x $140.93.

    ---------------------------------------------------------------------------

    The Commission's regulations currently provide a system

    establishing cap sizes. Section 43.4(h) of the Commission's regulations

    provides that cap sizes for swaps in each asset class shall equal the

    appropriate minimum block size corresponding to such publicly

    reportable swap transaction. If no appropriate minimum block size

    exists, then Sec. 43.4(h) sets out specific interim cap sizes for each

    asset class.\532\

    ---------------------------------------------------------------------------

    \532\ The Real-Time Reporting Final Rule calculated and

    addressed the total ongoing burden hours and burden hour costs. See

    77 FR 11232.

    ---------------------------------------------------------------------------

    This final rule amends Sec. 43.4(h) to establish new cap sizes in

    the post-initial period using a 75-percent notional amount calculation.

    Under this amendment, the Commission will perform the calculation;

    however, SDRs will update their technology and other systems at a

    minimum of once per year to publicly disseminate swap transaction and

    pricing data with the cap sizes issued by the Commission.

    The Commission estimates that the incremental start-up costs

    associated with the amendment to Sec. Sec. 43.4(d)(4) and 43.4(h) for

    an SDR would include: (1) Reprograming its technology infrastructure to

    accommodate the masking system and post-initial cap sizes methodology;

    (2) updating its written policies and procedures to ensure compliance

    with Sec. 43.4(d)(4)(iii) and the amendment to Sec. 43.4(h); and (3)

    training staff on the new policies and procedures.\533\

    ---------------------------------------------------------------------------

    \533\ The economic costs associated with entering into a third

    party service arrangement to transmit an electronic notice to an SDR

    are difficult to determine because of too many variables involved in

    determining those costs. Notwithstanding this difficulty, the

    Commission believes that, for many reporting parties that

    infrequently trade swaps, the annualized cost of entering into a

    third-party service arrangement of this type would likely be less

    than the total annual cost of building an electronic infrastructure

    to transmit electronic notices directly to an SDR.

    ---------------------------------------------------------------------------

    V. Cost-Benefit Considerations

    A. Background

    Section 15(a) of the Commodity Exchange Act \534\ (``CEA'')

    mandates that the Commission consider the costs and benefits of this

    rulemaking, which amends portions of part 43 (the Real-Time Reporting

    Final Rule).\535\ Part 43 implements section 727 of the Dodd-Frank

    Act.\536\

    ---------------------------------------------------------------------------

    \534\ 7 U.S.C. 19(a).

    \535\ Real-Time Public Reporting of Swap Transaction Data, 77 FR

    1182, Jan. 9, 2012.

    \536\ Dodd-Frank Wall Street Reform and Consumer Protection Act

    section 727, Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank

    Act'').

    ---------------------------------------------------------------------------

    Enacted in the wake of the 2008 financial crisis with the aim of

    preventing a repeat of the severe harm that crisis caused, Title VII of

    the Dodd-Frank Act establishes a comprehensive new regulatory framework

    for swaps and security-based swaps.\537\ Among other things, the

    legislation seeks to promote market integrity, reduce risk, and

    increase transparency within the financial system as a whole and swaps

    markets in particular. Consistent with the view that the financial

    crisis was not attributable to a single weakness, but a combination of

    several,\538\ Title VII does not provide for a single-dimensional fix.

    Rather, it weaves together a multidimensional regulatory construct

    designed to ``mitigate costs and risks to taxpayers and the financial

    system.'' \539\

    ---------------------------------------------------------------------------

    \537\ Dodd-Frank Act section 701, et seq.

    \538\ See, e.g., Financial Crisis Inquiry Commission, ``The

    Financial Crisis Inquiry Report: Final Report of the National

    Commission on the Causes of the Financial and Economic Crisis in the

    United States,'' Jan. 2011, at xxiv, available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (listing

    uncontrolled leverage; lack of transparency, capital and collateral

    requirements; speculation; interconnection among firms; and

    concentrations of risk in the market as contributing factors).

    \539\ S. Rep. No. 111-176, at 92 (2010).

    ---------------------------------------------------------------------------

    Section 727 concerns a fundamental component in the Dodd-Frank Act

    construct: public swap transaction reporting. This provision adds

    section 2(a)(13) to the CEA ``to authorize the Commission to make swap

    transaction and pricing data available to the public in such form and

    at such times as the Commission determines appropriate to enhance price

    discovery.'' \540\ In addition, the section directs the Commission to

    promulgate certain rules, including rules that:

    ---------------------------------------------------------------------------

    \540\ CEA section 2(a)(13)(B).

    ---------------------------------------------------------------------------

    Require ``real-time public reporting''--i.e., ``reporting

    data related to a swap transaction, including price and volume, as soon

    as technologically practicable after the time at which the swap

    transaction has been executed'' \541\--of swap transactions \542\;

    ---------------------------------------------------------------------------

    \541\ CEA section 2(a)(13)(A).

    \542\ CEA section 2(a)(13)(C).

    ---------------------------------------------------------------------------

    specify ``the criteria for determining what constitutes a

    large notional swap transaction (block trade) for particular markets

    and contracts'' and ``the appropriate time delay for reporting

    [[Page 32916]]

    large notional swap transactions (block trades) to the public;'' \543\

    ---------------------------------------------------------------------------

    \543\ See CEA sections 2(a)(13)(E)(ii) and (iii). Section

    2(a)(13)(E) explicitly refers to the swaps described only in

    sections 2(a)(13)(C)(i) and 2(a)(13)(C)(ii) of the CEA (i.e.,

    clearable swaps, including swaps that are exempt from clearing). The

    Commission, in exercising its authority under CEA section

    2(a)(13)(B) to ``make swap transaction and pricing data available to

    the public in such form and at such times as the Commission

    determines appropriate to enhance price discovery,'' is authorized

    to prescribe rules similar to those provisions in section

    2(a)(13)(E) to uncleared swaps described in section 2(a)(13)(C)(iii)

    and (iv) of the CEA. Thus, the Commission is establishing block

    thresholds for the swaps described in Sections 2(a)(13)(C)(i) and

    2(a)(13)(C)(ii) of the CEA as required by Section 2(a)(13)(E). The

    Commission is establishing large notional off-facility swap

    thresholds for swaps described in Sections 2(a)(13)(C)(iii) and

    2(a)(13)(C)(iv) pursuant to its authority under Section 2(a)(13)(B).

    ---------------------------------------------------------------------------

    take into account whether public disclosure of swap

    transaction and pricing data ``will materially reduce market

    liquidity'' \544\;

    ---------------------------------------------------------------------------

    \544\ CEA section 2(a)(13)(E)(iv).

    ---------------------------------------------------------------------------

    protect the identities of counterparties to swaps and

    maintain the anonymity of business transactions and market positions of

    swap counterparties.\545\

    ---------------------------------------------------------------------------

    \545\ See CEA sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii).

    ---------------------------------------------------------------------------

    In January 2012, the Commission adopted the part 43 Real-Time

    Reporting Final Rule implementing section 2(a)(13)of the CEA.\546\

    Generally summarized, the Real-Time Reporting Final Rule defined the

    terms ``block trade'' and ``large notional off-facility swap,'' \547\

    and established the: (1) Responsibilities of the parties to each swap

    to report swap transaction and pricing data to a swap data repository

    (``SDR'') and the types of data they must report \548\; (2)

    requirements for SDRs to publicly disseminate such data in real-time

    or, in the case of block trades and large-notional off-facility swaps,

    subject to a time delay \549\; (3) applicable time delays for public

    dissemination of block trades and large-notional off-facility swaps

    data according to asset class \550\; and (4) a system to protect the

    anonymity of parties to a swap, including interim notional cap sizes

    for all swaps that are publicly disseminated and the creation of an

    exception from the real-time public reporting requirement for certain

    swaps in the ``other commodity'' asset class.\551\

    ---------------------------------------------------------------------------

    \546\ Real-Time Public Reporting of Swap Transaction Data, 77 FR

    1182, Jan. 9, 2012.

    \547\ The Real-Time Reporting Final Rule defines the term

    ``Block trade'' as a publicly reportable swap transaction that:

    ``(1) [i]nvolves a swap that is listed on a SEF or DCM; (2) [o]ccurs

    away from the [SEF's or DCM's] trading system or platform and is

    executed pursuant to the [SEF's or DCM's] rules and procedures; (3)

    has a notional or principal amount at or above the appropriate

    minimum block applicable to such swap ; and (4) [i]s reported

    subject to the rules and procedures of the [SEF or DCM] and the

    rules described in [part 43], including the appropriate time delay

    requirements set forth in Sec. 43.5.'' See Sec. 43.2, 77 FR 1243.

    The Real-Time Reporting Final Rule defined the term ``Large

    notional off-facility swap as an ``off-facility swap that has a

    notional or principal amount at or above the appropriate minimum

    block size applicable to such publicly reportable swap transaction

    and is not a block trade as defined in Sec. 43.2 of the

    Commission's regulations.'' Id.

    \548\ See Sec. 43.3, 77 FR 1244.

    \549\ See Sec. 43.4, 77 FR 1246.

    \550\ See Sec. 43.5, 77 FR 1247.

    \551\ See Sec. 43.4 (d) and (h), 77 FR 1,246. Section 43.4(h)

    states that ``[t]he rounded notional or principal amount that is

    publicly disseminated for a publicly reportable swap transaction

    shall be capped. . . . '' If the notional or principal amount of a

    publicly reportable swap transaction is greater than the cap size,

    the publicly reported size for the trade will be ``[cap size]+.''

    For example, if the relevant cap size is 250 million, the publicly

    reported size will be ``250+.''

    ---------------------------------------------------------------------------

    The Real-Time Public Reporting Final Rule as adopted in January

    2012, however, deferred its responsibility to promulgate rules that

    ``specify the criteria for determining what constitutes a large

    notional [off-facility] swap transaction [or block trade] for

    particular markets and contracts'' as CEA section 2(a)(13)(E)(ii)

    requires. Pending the adoption of such supplemental part 43 rules, the

    Commission adopted ``interim time delays for all swaps.'' \552\

    Accordingly, at present no swap transaction data is publicly

    disseminated in real-time; interim time delays are in place for all

    swaps.\553\

    ---------------------------------------------------------------------------

    \552\ 77 FR 1217; see also Sec. 43.5(c).

    \553\ See Sec. 43.5(c)(1).

    ---------------------------------------------------------------------------

    The final rules adopted in this release amend part 43 to establish

    appropriate minimum block sizes, lift the blanket interim time-delay

    for all swaps from real-time public reporting, and provide further

    anonymity provisions to protect the identities of swap counterparties

    and transactions. More specifically, and as discussed in more detail

    above, these rules do so by:

    creating ``swap categories'' (i.e., groupings of swaps

    within the same asset class based on underlying characteristics) to

    which a common appropriate minimum block size applies \554\;

    ---------------------------------------------------------------------------

    \554\ See Sec. 43.6(b), which defines swap category by asset

    class.

    ---------------------------------------------------------------------------

    prescribing a two-period, phased in approach to implement

    regulations, comprised of an initial period and an on-going (post-

    initial) period to allow market participants sufficient time for

    compliance \555\;

    ---------------------------------------------------------------------------

    \555\ See Sec. 43.6(e) and (f).

    ---------------------------------------------------------------------------

    establishing initial appropriate minimum block sizes based

    on the Commission's review and analysis of swap market data across

    certain asset classes \556\;

    ---------------------------------------------------------------------------

    \556\ See Sec. 43.6(e) and appendix F to part 43.

    ---------------------------------------------------------------------------

    obligating set forth a methodology for calculating post-

    initial appropriate minimum block sizes \557\;

    ---------------------------------------------------------------------------

    \557\ See Sec. 43.6(c) and (f).

    ---------------------------------------------------------------------------

    providing a procedure that allows parties to a swap to

    elect block trade or large notional off-facility swap treatment for a

    swap transaction; \558\ and

    ---------------------------------------------------------------------------

    \558\ See Sec. 43.6(g).

    ---------------------------------------------------------------------------

    establishing a system to ensure the anonymity of certain

    swaps in the other commodity asset class,\559\ including a methodology

    for the calculation of initial or post-initial cap sizes.\560\

    ---------------------------------------------------------------------------

    \559\ See amendments to Sec. 43.4(d)(4).

    \560\ See Sec. Sec. 43.4(h) and 43.6(c).

    ---------------------------------------------------------------------------

    The rules do not, however, amend part 43 in a manner that alters the

    appropriate time delays for block trades and large notional off-

    facility swaps, nor do they require investment in a completely new

    information infrastructure beyond what is necessary to comply with the

    existing provisions of part 43.\561\ With this release, in conjunction

    with the separate SEF core principles rulemaking \562\ and the made

    available to trade rulemaking,\563\ the Commission is implementing the

    trade execution mandate of CEA Section 2(h)(8). Due to the clearing

    mandate, the Final Rule at this time mainly will affect pre-trade

    transparency only in the interest rate and credit default asset

    classes. In regard to the foreign exchange and other commodity asset

    classes, the Commission notes that there is no clearing mandate for

    foreign exchange swaps and other commodity swaps at this time. Thus,

    the swaps block rule does not currently affect pre-trade transparency

    for these asset classes. As these markets evolve, the Commission will

    continue to monitor developments within each asset class and may

    exercise its legal authority to take action by rule or order if

    necessary to address changes in the markets.

    ---------------------------------------------------------------------------

    \561\ The costs and benefits attendant to the time delay and

    development of an infrastructure for block trades and large notional

    off-facility swaps are discussed in Real-Time Public Reporting of

    Swap Transaction Data, 77 FR 1182, 1232, Jan. 9, 2012.

    \562\ See, the Core Principles and Other Requirements for Swap

    Execution Facilities notice of proposed rulemaking, 76 FR 1214 (Jan.

    7, 2011).

    \563\ The Commission separately proposed rules to determine

    whether a swap is ``made available to trade'' for purposes of the

    trade execution requirement in CEA section 2(h)(8). Process for a

    Designated Contract Market or Swap Execution Facility To Make a Swap

    Available to Trade, 76 FR 77728 (proposed Dec. 14, 2011).

    ---------------------------------------------------------------------------

    This rulemaking requires the Commission to carefully navigate a

    tension that CEA section 2(a)(13) recognizes: while section 2(a)(13)(C)

    requires the Commission to promulgate rules to bring real-time public

    reporting to the swaps market, section 2(a)(13)(E)(iv) requires that in

    doing so

    [[Page 32917]]

    the Commission ``take into account whether the public disclosure will

    materially reduce market liquidity.'' The Commission has followed both

    directives. Accordingly, a central focus of the Commission's

    consideration of costs and benefits of this rulemaking is the interplay

    between the important benefits of enhanced swap transaction

    transparency that real-time public dissemination affords \564\ and the

    potential that, in certain circumstances, transparency could reduce

    swap market liquidity. As evident by commenters' divergent opinions,

    the optimal point in this interplay, and how to set it, defies

    precision.\565\ Given this fact, these rules reflect the Commission's

    reasoned judgment of how best to meaningfully effectuate real-time

    public reporting of swap transactions--and the transparency Congress

    intended--in a manner that takes into account the impact on market

    liquidity. Briefly, the Commission will use a 67% percent notional

    calculation to determine the threshold over which block trades and

    large notional off-facility swaps will be eligible for block trade

    treatment, meaning that most swaps will be reported in real-time.\566\

    At the same time, a phased implementation schedule assures that

    transparency is introduced incrementally, taking into account whether

    public disclosure will ``materially reduce market liquidity.'' For

    example, to cushion potential liquidity impact, the thresholds for

    swaps in the interest rate and credit assets classes will initially

    rest conservatively at 50 percent, thus allowing transactions above 50

    percent of the notional amount to remain shielded from real-time public

    reporting, before transitioning to 67 percent in the post-initial

    period. While this departure from the proposal means that fewer swaps

    will be subject to real-time transparency during the initial period, it

    affords the Commission the opportunity to collect and analyze data on

    the use of block thresholds and to apply that data to its evaluation of

    the risks attendant to a less transparent market. Simultaneously

    introducing a conservative, 50 percent threshold also allows the

    Commission to assess whether there are material reductions in the

    liquidity for some swaps and take any measures to stave off those

    reductions, as the rules allow the Commission to review and refine the

    thresholds as liquidity and transparency needs may warrant in the

    future.\567\

    ---------------------------------------------------------------------------

    \564\ The benefits of public dissemination of swap transaction

    and pricing data are detailed in Real-Time Public Reporting of Swap

    Transaction Data, 77 FR at 1234. As the Commission explained in that

    release and reaffirms here, swap transaction reporting and public

    dissemination benefits market participants and the public in a

    number of respects. Among others discussed in that earlier release,

    and considered by reference herein, these include enhanced: price

    discovery, ability to manage risk as a result of improved visibility

    into swap market risk pricing, and improved swap market price

    competition. Additionally, the transparency afforded through public

    dissemination of swap transaction and pricing data ``will enhance

    the Commission's ability to detect anomalies in the market . . . and

    provide a check against a reoccurrence of the type of systemic risk

    build-up that occurred in 2008 when `the market permitted enormous

    exposure to risk to grow out of the sight of regulators and other

    traders [and d]erivatives exposures that could not be readily

    quantified exacerbated panic and uncertainty about the true

    financial condition of other market participants, contributing to

    the freezing of credit markets.' '' Id. (quoting Congressional

    Research Service Report for Congress, The Dodd-Frank Wall Street

    Reform and Consumer Protection Act: Title VII, Derivatives, by Mark

    Jickling and Kathleen Ann Ruane (August 30, 2010).

    \565\ Indeed, CEA section 2(a)(13)(E)(iv), in simply requiring

    that the Commission ``take into account whether public disclosure

    will materially reduce market liquidity,'' does not require that the

    Commission attempt to determine the precise optimal relationship

    between transparency and liquidity or assure no liquidity loss.

    \566\ Using the Over-the-Counter Derivatives Supervisors Group

    (``ODSG'') data for interest rate swaps, the Commission notes that

    the 67 percent notional amount calculation would result in 94

    percent of trades being reported in real-time. A discussion of the

    ODSG and the data set is set forth in section II.C.1 of this final

    rule.

    \567\ See Sec. 43.6(f).

    ---------------------------------------------------------------------------

    B. The Statutory Mandate To Consider the Costs and Benefits of the

    Commission's Action: Section 15(a) of the CEA

    Section 15(a) of the CEA \568\ requires the Commission to consider

    the costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders. Section 15(a) further

    specifies that the costs and benefits shall be evaluated in light of

    the following five broad areas of market and public concern: (1)

    Protection of market participants and the public; (2) efficiency,

    competitiveness, and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission considers the costs and

    benefits resulting from its discretionary determinations with respect

    to the section 15(a) factors.

    ---------------------------------------------------------------------------

    \568\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    These amending rules become effective in--and their costs and

    benefits are considered relative to--the context of the conditions now

    in place under part 43. That is: all publicly reportable swap

    transactions are currently subject to a time delay and are not publicly

    reported in real-time.569 570 Unless otherwise indicated,

    the Commission has looked to a non-financial end-user that already has

    developed the technical capability and infrastructure necessary to

    comply with the requirements set forth in part 43 as a reference entity

    for estimating this rulemaking's direct costs under the assumption that

    the costs for this particular market participant would represent the

    maximum degree of compliance costs.\571\ The Commission anticipates,

    however, that in many cases the actual costs to established market

    participants (including swap counterparties, SDRs and other registered

    entities) would be lower than for the reference entity--perhaps

    significantly so, depending on the type, flexibility, and scalability

    of systems already in place.

    ---------------------------------------------------------------------------

    \569\ See Sec. 43.5(c).

    \570\ Currently, the part 43 requirements are not applicable to

    swaps in the other commodities asset class that reference underlying

    assets not included in Appendix B to Part 43. The Real-Time

    Reporting Rule provides notice that, until such time as the

    anonymity provisions of this final rule are finalized, those off-

    facility swaps not listed in appendix B to part 43 are not be

    required to comply with the real-time reporting and public

    dissemination requirements under part 43. However, such swaps are

    subject to the regulatory reporting requirements, described in

    proposed part 45. According to the BIS report http://bis.org/publ/qtrpdf/r_qs1209.pdf, commodities (as a whole and not just the

    subset identified above) only represent slightly more than one third

    of one percent (0.36%) of the notional amounts outstanding as a

    percentage of the global OTC derivatives market for the end of

    December 2011. For this small subset of other commodity swaps, the

    starting point for the purposes of the Commission's consideration of

    the costs and benefits is the same as the starting point for the

    Commission's consideration of costs and benefits of the Real-Time

    Reporting Rule. A detailed discussion of the Commission's

    consideration of those costs and benefits is contained in the Real-

    Time Reporting Rule. See 77 FR at 1232-1240.

    \571\ A non-financial end-user is a new market entrant with no

    prior swaps market participation or infrastructure. This reference

    point is different from the reference point(s) used in the PRA

    analysis in section V above for the following two reasons: (1) the

    burdens in the PRA are narrower than the costs discussed in this

    section (i.e., the PRA analysis solely discusses costs relating to

    collections of information, whereas this cost-benefit analysis

    considers all costs relating to the proposed rules); and (2) as

    discussed above, the cost-benefit analysis determines costs relative

    to one market participant that presumably would bear the highest

    burdens in implementing the proposed rules, whereas the PRA analysis

    seeks to estimate the costs of the proposed rules on all market

    participants.

    ---------------------------------------------------------------------------

    Wherever reasonably feasible, the Commission has endeavored to

    quantify the costs and benefits of this rulemaking. In a number of

    instances, the Commission lacks the data and information required to

    precisely estimate costs, owing to the fact that these markets do not

    yet exist or are not yet fully developed. The Commission requested that

    commenters provide any data or other information that would be useful

    in the estimation of the

    [[Page 32918]]

    quantifiable costs and benefits of this rulemaking \572\; no commenters

    supplied such data or other information. Where it was not feasible to

    quantify (e.g., because of the lack of accurate data or appropriate

    metrics), the Commission has considered the costs and benefits of these

    rules in qualitative terms.

    ---------------------------------------------------------------------------

    \572\ Further Block Proposal Q93(a)-(e), 77 FR at 15507.

    ---------------------------------------------------------------------------

    For purposes of considering their costs and benefits, the

    Commission has organized these rules in three groups: (1) Block trade

    rules concerning the criteria for determining swap categories and the

    methodologies to be used to determine the initial and post-initial

    appropriate minimum block sizes for large notional off-facility swaps

    and block trades; (2) block trade rules concerning the method by which

    swap counterparties may elect to treat a qualifying swap transaction as

    a block trade or a large notional off-facility swap, as applicable, and

    SEFs and DCMs notify an SDR of a block trade election; and (3) rules

    concerning anonymity protections. Each group is discussed below.

    C. Rules Establishing Determination Criteria and Methodology (Sec.

    43.6(a)-(f) and (h))

    Rules 43.6(a)-(f) and (h) specify the Commission's criteria for

    establishing swap categories and methodology for determining

    appropriate minimum block sizes. The subsections that follow provide a

    brief contextual summary description of the rules; identify and discuss

    the costs and benefits attributable to the rules in light of comments;

    consider alternatives; and consider costs and benefits relative to

    factors specified in CEA section 15(a).

    1. Rule Summary

    Rules 43.6(a)-(f) and (h) are described previously in this

    release.\573\ A summary of each follows:

    ---------------------------------------------------------------------------

    \573\ See section II, supra.

    ---------------------------------------------------------------------------

    a. Rule 43.6(a) Commission Determination

    Rule 43.6(a) provides that the Commission will determine the

    appropriate minimum block size for any swap on a SEF or DCM, and for

    large notional off-facility swaps. The rule also sets forth a schedule

    whereby the Commission will calculate and publish all appropriate

    minimum block sizes across all asset classes no less than once each

    calendar year, following an initial period (as described below).

    b. Rule 43.6(b) Swap Category

    Rule 43.6(b) specifies the Commission's approach for grouping swaps

    by asset class based on existing liquidity in underlying cash markets,

    relevant economic indicators, the underlying asset class, and the

    Commission's analysis of relevant swap market data supplied to the

    Commission.\574\

    ---------------------------------------------------------------------------

    \574\ Data was supplied to the Commission by MarkitSERV and The

    Warehouse Trust Company LLC. The data is more fully described in

    Section II.A.1.a. of this release.

    ---------------------------------------------------------------------------

    c. Rules 43.6(c)-(f) and (h) Methods for Determining Appropriate

    Minimum Block Sizes

    Rules 43.6(c)-(f) and (h) prescribe a phased-in approach, with an

    initial period and a post-initial period for determining appropriate

    minimum block sizes for each swap category. Appendix F to part 43

    contains a schedule of appropriate minimum block sizes effective during

    the initial period. The schedule reflects a different appropriate

    minimum block size methodology for the interest rate and credit asset

    classes than for the equity, FX and other commodity asset classes. The

    initial appropriate minimum block sizes for the interest rate and

    credit asset class are derived from data supplied by the ODSG.\575\ As

    set forth in Appendix F to this Final Rule, the Commission is

    calculating the appropriate minimum block sizes in interest rate and

    credit asset classes based upon the 50-percent notional amount

    calculation set forth in Sec. 43.6(c)(1) in the initial period.

    ---------------------------------------------------------------------------

    \575\ A discussion of the ODSG and the data set is set forth in

    section II.C.1 of this final rule.

    ---------------------------------------------------------------------------

    Rule 43.6(d) states that swaps in the equity asset class shall not

    be treated as block trades or large notional off-facility swaps (i.e.,

    equity swaps would not be subject to a time delay as provided in part

    43).

    With respect to the FX and other commodity asset classes, the

    appropriate minimum block sizes for swaps during the initial period is

    divided primarily between swaps that are futures-related swaps and

    those that are not futures-related.\576\ Appendix F to part 43 lists

    the proposed initial appropriate minimum block sizes for swap

    categories in the FX and other commodity asset classes. For swaps in

    the FX and other commodity asset classes that are not listed in

    appendix F to part 43, Sec. 43.6(e)(2) generally provides that these

    swaps will be considered block trades or large notional off-facility

    swaps.

    ---------------------------------------------------------------------------

    \576\ As explained above in section II.C., the Commission

    believes that the difference in methodology for determining initial

    appropriate minimum block sizes for swaps in the FX and other

    commodity asset classes is warranted because: (1) Swaps in these

    asset classes are closely linked to futures markets; and (2) DCMs

    have experience in setting block sizes for futures.

    ---------------------------------------------------------------------------

    After an SDR has collected reliable data for a particular asset

    class, Sec. 43.6(f)(1) provides that the Commission shall determine

    post-initial appropriate minimum block sizes for all swaps in the

    interest rate, credit, FX and other commodity asset classes based on

    the 67-percent notional amount calculation. The Commission is also

    adopting special rules for the determination of appropriate minimum

    block sizes that would apply to all asset classes, including rules

    applicable to swaps with optionality, swaps with composite reference

    prices, physical commodity swaps, currency conversion, and successor

    currencies.\577\

    ---------------------------------------------------------------------------

    \577\ See proposed rule Sec. 43.6(h).

    ---------------------------------------------------------------------------

    2. Overview of Comments Received

    The Commission received numerous comments regarding the potential

    costs and benefits to market participants and the public in response to

    the rules establishing the criteria and methodology for determining

    block thresholds. Commenters were divided on whether the Commission

    properly considered costs or misstated or ignored the benefits of the

    rules. Some commenters touched on the cost benefit considerations

    directly by promoting various alternatives to the proposed rules.\578\

    Comments relating to the Commission's consideration of costs and

    benefits are discussed specifically in the sections below.

    ---------------------------------------------------------------------------

    \578\ E.g., CL-AII at 6; CL-SIFMA at 10; CL-WMBAA at 8; CL-CME

    at 2; CL-Vanguard at 3; CL-Morgan Stanley at 3; CL-ICAP Energy at 3;

    CL-Barnard at 1; CL-Freddie at 2; CL-Barclays at 10.

    ---------------------------------------------------------------------------

    3. Costs

    a. Direct Costs

    Rules 43.6(a)-(f) and (h) will impose recurring costs on swap

    market participants and registered entities (i.e., SEFs, DCMs, or SDRs)

    to accommodate the Commission's publication of post-initial appropriate

    minimum block sizes at least once each calendar year following the

    initial period. In the Further Block Proposal, the Commission

    anticipated that in order for registered entities to comply with the

    rule, they would need to update their existing data systems and that

    process would entail approximately 40 initial, non-recurring personnel

    hours at an approximate cost of $2,728 for each registered entity.\579\

    This estimate included the potential number of burden hours required to

    [[Page 32919]]

    make a one-time adjustment to internal procedures, reprogram systems

    and implement processes to segregate the data by swap categories and

    incorporate data on appropriate minimum block sizes as published by the

    Commission at least once each calendar year.

    ---------------------------------------------------------------------------

    \579\ The estimate is calculated as follows: (Senior Programmer

    at 20 hours) + (Systems Analyst at 20 hours). A senior programmer's

    adjusted hourly wage is $81.52. A systems analyst's adjusted hourly

    wage is $54.89. See note 521 supra.

    ---------------------------------------------------------------------------

    Market participants other than registered entities, and

    specifically non-financial end users, expectedly will need to train

    their existing personnel and update their written policies and

    procedures to comply with Sec. 43.6(a)-(f) and (h). The Commission

    estimated that the training and updating of policies and procedures

    will impose an initial non-recurring burden of approximately 15

    personnel hours at an approximate cost of $1,430 for each non-financial

    end-user.\580\ This cost estimate included the number of potential

    burden hours required to produce and design training materials, conduct

    training with existing personnel, and revise and circulate written

    policies and procedures in compliance with the proposed requirements.

    ---------------------------------------------------------------------------

    \580\ This estimate is calculated as follows: (Compliance

    Manager at 10 hours) + (Director of Compliance at 3 hours) +

    (Compliance Attorney at 2 hours) = 15 hours per non-financial end-

    user who is a reporting party. A compliance manager's adjusted

    hourly wage is $77.77. A director of compliance's hourly wage is

    $158.21. A compliance attorney's hourly wage is $89.43. See note 521

    supra.

    ---------------------------------------------------------------------------

    The Commission received one comment specifically addressing direct

    costs. WMBAA disagreed with the Further Block Proposal's projected cost

    estimates and contended that the Commission's approach ``is overly

    simplistic and does not contemplate the actual efforts a SEF will have

    to undertake to implement the block trade regime, including the two-

    step notification process, the technology upgrades, providing training

    to existing personnel and updating written policies and procedures,

    among other necessary actions to comply with the CFTC's proposed

    rule.'' \581\

    ---------------------------------------------------------------------------

    \581\ CL-WMBAA at 8.

    ---------------------------------------------------------------------------

    Because WMBAA did not provide data to support or monetize its cost

    concern, the Commission has considered them qualitatively. Further,

    WMBAA's disagreement with the Further Block Proposal's cost estimates

    does not concern the incremental cost to augment and maintain systems

    and processes that the Commission believes entities need have in place

    to comply with the real time reporting requirement of Section 2(a)(13)

    of the CEA; rather it concerns the cost to comply with that statutory

    requirement as prescribed by the existing part 43 implementation

    regulations. SEFs and DCMs would incur these costs regardless of how

    the Commission determines block thresholds. Accordingly, the Commission

    considers WMBAA's criticism of the cost estimates in this rulemaking

    misplaced. Moreover, the Commission has intentionally structured the

    requirements of Sec. 43.6(a) to mitigate these costs; this rule's

    approach seeks to leverage the existing connectivity, infrastructure

    and arrangements that market participants and registered entities will

    have already established to comply with the part 43 regulations.

    The Commission did not find, nor was it provided, additional

    information that was sufficient to change the cost basis. Therefore,

    the Commission is maintaining the Further Block Proposal's approach to

    calculating the direct costs resulting from the methodology for

    determining block thresholds. However, the Commission is revising its

    estimates to reflect wage rate data updated since the Further Block

    Proposal was published. The Commission estimates that for registered

    entities to update existing technology as necessary will entail

    approximately 40 initial, non-recurring personnel hours at an

    approximate cost of $2,874 for each registered entity.\582\ The

    Commission estimates that training for existing personnel and updating

    written policies and procedures will impose an initial non-recurring

    burden of approximately 15 personnel hours at an approximate cost of

    $1,456 for each non-financial end-user.\583\

    ---------------------------------------------------------------------------

    \582\ The estimate is calculated as follows: (Senior Programmer

    at 20 hours) + (Systems Analyst at 20 hours). A senior programmer's

    adjusted hourly wage is $86.89. A systems analyst's adjusted hourly

    wage is $56.79. See note 521 supra.

    \583\ This estimate is calculated as follows: (Compliance

    Manager at 10 hours) + (Director of Compliance at 3 hours) +

    (Compliance Attorney at 2 hours) = 15 hours per non-financial end-

    user who is a reporting party. A compliance manager's adjusted

    hourly wage is $74.17. A director of compliance's hourly wage is

    $169.16. A compliance attorney's hourly wage is $103.18. See note

    521 supra.

    ---------------------------------------------------------------------------

    b. Indirect Costs

    The Commission received numerous comments regarding indirect costs

    that could result from the establishment of criteria and methodology

    for setting appropriate minimum block thresholds. The majority of these

    comments focused on the issue of market liquidity; and many of the

    comments provided alternatives for either lower notional amount

    calculation thresholds, and extended phase-in or restricting the asset

    classes to which thresholds would apply. Eleven commenters suggested

    that the 67 percent notional amount calculation set forth in proposed

    Sec. 43.6(c)(1) would have a negative impact on market liquidity.\584\

    ---------------------------------------------------------------------------

    \584\ CL-AII at 6; CL-SIFMA at 10; CL-WMBAA at 8; CL-CME at 2;

    CL-Vanguard at 3; CL-Morgan Stanley at 3; CL-ICAP Energy at 3; CL-

    Barnard at 1; CL-Freddie at 2; CL-Barclays at 10.

    ---------------------------------------------------------------------------

    SIFMA and AII asserted that the 67 percent notional amount

    calculation is under inclusive for most swap categories and that the

    Commission should start with low block sizes (or classify all swaps as

    block trades) until data can be accumulated.\585\ Consequences of a

    high threshold, they maintain, would be reduced liquidity,

    fragmentation of trading, higher transaction costs and higher swap

    pricing costs to end users.\586\ AII stated that high block sizes would

    permit front running of swap dealers' hedging activities.\587\ SIFMA

    suggested that the Commission identify minimum liquidity thresholds for

    certain swaps in each swap category below which all swaps should be

    treated as blocks.\588\ SIFMA stated that 67 percent is too high to

    prevent liquidity impact; that 20-33 percent of trades should be

    blocks; and that 50 percent is better than 67 percent.\589\

    ---------------------------------------------------------------------------

    \585\ CL-AII at 6; CL-SIFMA at 10.

    \586\ CL-AII at 6; CL-SIFMA at 10.

    \587\ CL-AII at 6.

    \588\ CL-SIFMA at 10.

    \589\ CL-SIFMA at 10.

    ---------------------------------------------------------------------------

    WMBAA advocated using a 50 percent or lower block level and that

    the Commission rely on more timely and complete data to avoid impairing

    liquidity.\590\ CME asserted that 67 percent is arbitrary, has no

    relationship to the explicit goals of Dodd-Frank with respect to block

    trading of swaps, and would materially reduce market liquidity.\591\

    ---------------------------------------------------------------------------

    \590\ CL-WMBAA at 8.

    \591\ CL-CME at 2.

    ---------------------------------------------------------------------------

    Vanguard commented that block rules bringing transparency may

    ultimately increase liquidity, but an abrupt change could decrease

    liquidity.\592\ Vanguard instead favored a lower, 25 percent initial

    notional calculation methodology or perhaps providing block treatment

    to all swaps for one-year before phasing in notional amount calculation

    thresholds, maintaining that a lack of data compromises the setting of

    blocks and risks a negative liquidity impact.\593\ Vanguard further

    urged more swap category granularity by identifying discrete

    ``liquidity pools'', and asserted that the lack of a sufficient time

    delay would hamper liquidity providers' ability to enter into off-

    setting trades.\594\

    ---------------------------------------------------------------------------

    \592\ CL-Vanguard at 3.

    \593\ CL-Vanguard at 3.

    \594\ CL-Vanguard at 3.

    ---------------------------------------------------------------------------

    [[Page 32920]]

    Morgan Stanley, AII, and CME all stated that the approach in the

    Further Block Proposal would sacrifice liquidity in the name of

    transparency in contravention of the statute.\595\ Specifically, Morgan

    Stanley commented that the proposed rules would diminish liquidity

    because the market would know details of transactions that are about to

    take place; Morgan Stanley also provided examples of IRS swaps under

    the proposed threshold that might move the market and, without

    providing further support, stated that application of the 67 percent

    notional amount calculation in CDS would result in too few trades

    receiving treatment as blocks and reduce liquidity.\596\ Morgan Stanley

    urged the Commission to lower block thresholds and apply them only to

    vanilla structures with standard maturities; Morgan Stanley further

    advocated for DCM/SEFs to set block sizes because they would maximize

    liquidity.\597\

    ---------------------------------------------------------------------------

    \595\ CL-Morgan Stanley at 3; CL-AII at 6; CL-CME at 2.

    \596\ CL-Morgan Stanley at 3.

    \597\ CL-Morgan Stanley at 3.

    ---------------------------------------------------------------------------

    ICAP and Barnard asserted that the Further Block Proposal fails to

    evaluate the effect of the block thresholds on liquidity.\598\ ICAP

    stated that the Commission misconstrued the legislative intent of Dodd-

    Frank Act because the Further Block Proposal 1) proposes a ``results-

    oriented'' approach; 2) does not determine if the 67 percent

    methodology would minimize impact on market liquidity; and 3)

    establishes block size thresholds based on notional size rather than

    number of transactions.\599\ In addition, ICAP stated that the Further

    Block Proposal failed to identify a ``market moving'' transaction for

    certain swaps, as intended by Congress and does not propose a

    methodology.\600\ Freddie stated that, in the absence of data, minimum

    block sizes for Interest Rate swaps are too high and will materially

    reduce market liquidity.\601\

    ---------------------------------------------------------------------------

    \598\ CL-ICAP Energy at 3; CL-Barnard at 1.

    \599\ CL-ICAP Energy at 3.

    \600\ CL-ICAP at Energy at 3.

    \601\ CL-Freddie at 2.

    ---------------------------------------------------------------------------

    The Commission also received comments raising potential indirect

    costs besides market liquidity impact. Barclays stated that mandatory

    clearing and uncleared margin requirements may compound the costs of

    increased transparency created by high block trade thresholds.\602\

    SIFMA stated that the Commission's cost-benefit consideration is

    insufficient and incorrect in the context of mandatory execution under

    the proposed SEF rules.\603\ SIFMA expressed the concern that

    ``liquidity seekers' [sic] could provide other market participants with

    the information needed to front run the successful dealer in the hedge

    market.'' \604\ SIFMA concluded that ``the Commission should implement

    lower block trade size thresholds to avoid significant decreases in

    liquidity or increases in bid-ask spreads.'' \605\

    ---------------------------------------------------------------------------

    \602\ CL-Barclays at 10.

    \603\ CL-SIFMA at 4.

    \604\ CL-SIFMA at 4.

    \605\ CL-SIFMA at 4.

    ---------------------------------------------------------------------------

    Several commenters objected to the Commission's use of data in the

    Further Block Proposal. Five commenters \606\ asserted that the Further

    Block Proposal fails to adequately consider costs and benefits and

    relies upon obsolete data. AII \607\ stated that the Commission relies

    upon inadequate and outdated data, that the rules will impede

    competition and increase costs, and that the Commission should look to

    TRACE as a model for more deliberate disclosure implementation.

    ---------------------------------------------------------------------------

    \606\ CL-Vanguard at 3; CL-ISDA/SIFMA at 11-13; CL-SIFMA at 10;

    CL-WMBAA at 8; and CL-AII at 6.

    \607\ CL-AII at 6.

    ---------------------------------------------------------------------------

    Vanguard \608\ suggested phasing in the requirements because the

    new rules are a ``paradigm shift,'' and issuing final rules on block

    trades requires more data collection before implementation.

    ---------------------------------------------------------------------------

    \608\ CL-Vanguard at 3.

    ---------------------------------------------------------------------------

    Several commenters suggest the Commission collect more and better

    data before setting block levels. They criticize not only the dearth of

    relevant data but how the Commission has interpolated the data through

    trimming mechanism. SIFMA suggests that all swaps should be treated as

    blocks for first year of compliance during which data is collected,

    then the Commission should take a conservative approach to establish

    and iteratively modify thresholds based on liquidity and bid-ask spread

    of swaps that near the established block size threshold.\609\

    ---------------------------------------------------------------------------

    \609\ CL-SIFMA at 4.

    ---------------------------------------------------------------------------

    The Commission also received comments suggesting costs in terms of

    market liquidity or other factors in setting the appropriate minimum

    block thresholds too low (or benefits in setting the appropriate

    minimum block thresholds at 67 percent of notional or higher).

    Conversely, four commenters expressed support for the Further Block

    Proposal's 67 percent notional amount calculation methodology or

    suggested that a lower threshold would result in a decrease in

    liquidity.\610\

    ---------------------------------------------------------------------------

    \610\ CL-ODEX at 2; CL-SDMA at 3-6; CL-Javelin at 4-6; CL-Arbor

    at 1.

    ---------------------------------------------------------------------------

    Specifically, Javelin stated that the Commission should set a

    higher block threshold than the 67 percent notional amount calculation

    ``where the market is protected from disruption and where greater

    transparency, competition and liquidity are ensured.'' \611\ SDMA

    commented that ``[t]oo low a block threshold and fewer trades will be

    executed on SEFs as little structural change in swaps execution occurs,

    increased competition fails to manifest itself and more diverse

    liquidity is impaired.'' \612\ AFR asserted that some drop in liquidity

    was assumed by Congress when it enacted the provision and that ``there

    is no authoritative study supporting the concept that immediate

    disclosure would distort prices because of market liquidity.'' \613\

    Similarly, Better Markets argued that any information embargo should be

    eliminated, stating that ``there is no authoritative study validating

    the notion that market liquidity would be adversely affected if Block

    Trade data were fully disclosed.'' \614\ Better Markets also stated

    that the public benefits of swap data transparency under the Further

    Block Proposal greatly outweigh the private costs to the disclosing

    entities and to the swaps market participants; Better Markets argued

    that Congress' ultimate objective in the Dodd-Frank Act was to prevent

    another crisis and avert the massive costs it would inflict upon the

    public (including all market participants), and that the consideration

    of costs and benefits should focus on this overriding public

    interest.\615\

    ---------------------------------------------------------------------------

    \611\ CL-Javelin at 2.

    \612\ CL-SDMA at 1.

    \613\ CL-AFR at 4.

    \614\ CL-Better Markets at 4.

    \615\ CL-Better Markets at 4.

    ---------------------------------------------------------------------------

    In response to comments advocating for a more gradual phase in of

    appropriate minimum block thresholds, the Commission is adopting rules

    establishing a more conservative 50 percent notional amount calculation

    for determining block thresholds in the Interest Rate Swap and Credit

    Default Swap categories during the initial period. This will allow for

    a more gradual phase-in of the 67 percent notional amount calculation

    for determining block thresholds in the post-initial period than what

    was proposed. The block trade methodology that will be implemented by

    the Commission also allows minimum appropriate block trade amounts to

    change periodically in response to the new data collected in the

    market.

    The Commission believes that this implements the congressional

    directive

    [[Page 32921]]

    for transparency while accounting for possible material reductions in

    liquidity through the phasing-in of real-time reporting of a portion of

    the swaps market. In contrast, SIFMA's suggestion of treating all swaps

    as blocks while the Commission collects data inverts the public policy

    rationale underlying congressional requirements for transparency

    through real-time public reporting. The most useful data for

    determining at what levels blocks would be appropriate is data

    collected for swaps reported in real-time when market participants have

    the ability to execute block trades above minimum block thresholds.

    Data collected prior to the point where real-time reporting and block

    levels are functioning together is useful (and has been used by the

    Commission in fashioning block thresholds in the initial period for

    swaps in the interest rate and credit asset classes), but provides an

    incomplete picture absent implementation of the real-time reporting

    regime. The Commission's 67 percent notional amount calculation in the

    post-initial period is designed to adjust appropriate minimum block

    levels once this data becomes available.

    Notwithstanding the fact that the commenters did not provide data

    to support or monetize their cost concerns, the Commission has

    considered their qualitative comments regarding the potential costs

    that the Commission's appropriate minimum block threshold methodology

    may have on market liquidity.

    The Commission agrees with Vanguard that transparency ultimately

    promotes increased market liquidity. Transparency afforded through the

    publication of swap transaction and pricing data is likely to attract

    more market participants to the market place, thereby increasing market

    liquidity depth. However, the Commission also understands the tension

    between achieving greater swap transaction transparency and liquidity:

    required reporting of large transactions without a time delay (i.e., as

    soon as technologically practicable) presents potential for downside

    cost to certain market participants, most particularly market makers

    providing liquidity. The immediate reporting of swaps that approach,

    but fall shy of the appropriate minimum block size threshold, may in

    certain circumstances increase the difficulty, and thus cost, for

    liquidity providers to lay off attendant price risks in the market. As

    the commenters suggest, market makers ultimately could pass these costs

    on to their end-user clients.

    Recognizing the potential for such indirect costs, the Commission

    believes it has designed the criteria and methodology outlined in the

    rule in a manner that strikes an appropriate balance between the

    importance of price discovery and transparency, and concerns about

    potential costs to market participants. By establishing a 67 percent

    notional amount calculation for appropriate minimum block thresholds in

    the post initial period, the Commission will bring transparency through

    real-time reporting to the vast majority of transactions in the swap

    market.

    The Commission believes that the phase-in approach provides swap

    market participants with adequate time to incrementally adjust their

    trading practices, technology infrastructure and business arrangements

    to comply with the new block trade regime. As a result, the rule's

    approach promotes liquidity since the Commission believes that a

    transparent market with improved pre-trade price transparency is likely

    to attract customers. The Commission expects that indirect costs

    described above will be mitigated through improved price discovery and

    a decrease in the cost of hedging practices for end users due to

    improved transparency and competition in the marketplace.

    The Commission also considered the potential that different swaps

    and futures block criteria and methodology might competitively

    disadvantage SEFs to the extent certain market participants consider

    swaps and futures products competitive substitutes; thus, in turn,

    frustrating public interests that Congress, in authorizing SEFs in the

    Dodd-Frank Act, intended to further. For several reasons, the

    Commission does not believe this will occur. First, as discussed in the

    SEF Rulemaking, the Commission has provided SEFs with various

    functionalities designed to provide flexibility that will promote the

    trading of swaps on SEFs.\616\ Second, by using futures block

    thresholds as a reference for initially setting the criteria for

    economically related swaps, the rule, at a minimum, substantially

    mitigates any such theoretical costs. Further, the Commission has, and

    will use, corrective tools if experience in these newly-regulated

    markets indicates potential for differences in swaps and futures block

    criteria and methodology to harm market users through hindered product

    competition. These tools include periodical recalibration of swap

    criteria as anticipated under this rule as well as the Commission's

    ability to exercise its legal authority to take action by rule or order

    to mitigate any potential harm due to hindered competition.\617\

    ---------------------------------------------------------------------------

    \616\ See, the Core Principles and Other Requirements for Swap

    Execution Facilities notice of proposed rulemaking, 76 FR 1214 (Jan.

    7, 2011), for details of functionalities that provide flexibility to

    promote trading of swaps on SEFs.

    \617\ Historically (and under a rule proposed in a pending

    rulemaking concerning Core Principle 9 for Designated Contract

    Markets (``DCMs'')), DCMs have discretion to set minimum block

    thresholds for futures trading, the Dodd-Frank Act amended the CEA

    to require that the Commission specify criteria to determine swap

    block trades without imposing an equivalent requirement for

    Commission specification of futures block criteria. See Core

    Principles and Other Requirements for Designated Contract Markets,

    75 FR 80572, 80616-17 (Dec. 22, 2010) (Notice of Proposed

    Rulemaking; proposed Sec. 38.503(a) would require that a board of

    trade that permits block trade transactions on futures contracts

    have rules governing such transactions, including rules limiting

    block trades to large transactions and imposing minimum size

    requirements, and that block trade size be certified or approved by

    the Commission); Core Principles and Other Requirements for

    Designated Contract Markets, 77 FR 36612, 36643 (Final Rule;

    announces Commission intent to take additional time to consider the

    proposed rules for block transactions and other aspects of proposed

    rules under Core Principle 9).

    ---------------------------------------------------------------------------

    4. Benefits

    The Commission believes that Sec. 43.6(a)-(f) and (h) will

    generate several overarching benefits to swap market participants,

    registered entities and the general public. Most notably, the

    Commission expects that the criteria and methodologies for setting

    appropriate minimum block sizes will provide greater price transparency

    for a substantial portion of swap transactions in a manner carefully

    calibrated to preserve and promote swaps market liquidity. More

    specifically, the regulations will provide price transparency by

    lifting the current part 43 real-time reporting time delay \618\ in a

    measured manner for swap transactions with notional values under

    specified threshold levels.

    ---------------------------------------------------------------------------

    \618\ See 77 FR 1240.

    ---------------------------------------------------------------------------

    At the same time, the Commission's criteria and methodology--

    including carefully crafted block trade and large-notional off-facility

    swap categories--are designed to retain time-delay status for those

    high-notional-value transactions, where doing otherwise could

    negatively impact market liquidity. In addition to avoiding potential

    negative market liquidity impact associated with transactions that

    remain eligible for a reporting time-delay, the Commission also expects

    the liquidity in the market to increase since a more transparent market

    is likely to attract more customers. The Commission expects improved

    transparency and liquidity to have a positive effect on the prices

    market participants will pay for their swaps as

    [[Page 32922]]

    well as to cause a decrease in the cost of hedging due to improved

    transparency and competition in the market. The Commission also expects

    that lower hedging costs and improved transparency will reduce systemic

    risk potential. A swaps market that is transparent to regulators and

    the public in real-time, without the interim delays for all

    transactions imposed in Part 43, provides for a system that will assist

    the Commission's oversight ability. Finally, the Commission believes

    that this added transparency will ultimately strengthen the swaps

    market by affording academics, the media, public and market

    participants the opportunity to monitor, study, and analyze these

    previously opaque segments of the economy.

    The rules' phased-in implementation will introduce greater

    transparency in an incremental, measured and flexible manner so that

    appropriate minimum block sizes can respond to changing markets.

    Section 43.6(f)(2) permits the Commission to set appropriate minimum

    block sizes no less than once annually during the post-initial period.

    If swap market conditions were to change significantly after the

    implementation of the provisions of this final rule, there is nothing

    that prevents the Commission from reacting to take action further

    improving price transparency or mitigating adverse effects on market

    liquidity. In an effort to add more flexibility to respond to

    continuing swaps market evolution, the methodology in Sec. 43.6(c)-(f)

    and (h) will recalibrate appropriate minimum block sizes regularly to

    ensure that those sizes remain appropriate for, and responsive to,

    these changing markets.

    5. Alternatives

    The Commission considered alternatives to the determination

    criteria and methodology adopted in this rulemaking. The chief

    alternatives raised by commenters or otherwise considered by the

    Commission concerned three topics--Commission's determination of

    minimum block sizes, swap categories, and block methodology--as

    discussed below.

    a. Commission Determination of Minimum Block Sizes

    Under Sec. 43.6(a) the Commission will determine minimum block

    sizes; this approach limits the direct burden on market participants

    and registered entities relative to an alternative that would require

    them to engage a quantitative analysis to ascertain appropriate minimum

    block sizes for themselves. Such an alternative approach is

    inconsistent with the statutory requirement of CEA section

    2(a)(13)(E)(ii) that the Commission ``specify the criteria for

    determining what constitutes a large notional swap transaction (block

    trade) for particular markets and contracts.'' \619\

    ---------------------------------------------------------------------------

    \619\ See also 111 Cong. Rec. S. 5921 (daily ed., July 15, 2010)

    (Statement of Sen Lincoln) (the regulators are given authority to

    establish what constitutes a `block trade' or `large notional' swap

    transaction for particular contracts as well as appropriate time

    delay in reporting transactions to the public'').

    ---------------------------------------------------------------------------

    b. Swap Category Alternatives

    Commenters \620\ noted what they described as a lack of granularity

    in the Commission's choice of swaps categories, which they cautioned

    would result in the grouping of liquid swaps together with illiquid

    swaps in the same swap category. Vanguard \621\ suggested a more

    granular approach to setting swap categories and block sizes according

    to ``distinct liquidity pools.'' ISDA/SIFMA \622\ suggested subjecting

    a swap to block thresholds as long as the swap has sufficient trading

    frequency and trades in such volume that allows full hedging in a short

    period of time and also prevents widening of the spread as a result of

    public reporting. In support of such a test, the comment cited research

    and data to suggest that disclosure does not necessarily lead to

    increased transparency and swaps with varying levels of liquidity will

    be subject to the same block size. Many commenters expressed that the

    Commission's determination of swap categories would result in block

    levels that are insufficiently granular to account for differences

    between swap asset classes and within swap categories, including the

    differences in transaction frequency and volume.\623\ Some commenters

    suggested that all infrequently traded swaps, under a specified level,

    should be treated as block trades.\624\ The various swap category

    alternatives suggested by commenters are more fully discussed and

    considered in Sections II.A.1-5 of this final rule.

    ---------------------------------------------------------------------------

    \620\ CL-Vanguard at 7; CL-ISDA/SIFMA at 14; CL-SIFMA at 10; and

    CL-Better Markets at 4.

    \621\ CL-Vanguard at 7.

    \622\ CL-ISDA/SIFMA at 14; and CL-SIFMA at 10.

    \623\ CL-ISDA/SIFMA at 14; CL-Vanguard at 7.

    \624\ CL-ISDA/SIFMA at 14.

    ---------------------------------------------------------------------------

    The Commission believes that its approach of establishing specific

    criteria for grouping swaps into a finite set of defined swap

    categories is preferable to the alternatives noted; it provides (1)

    appropriate granularity that mitigates the potential for like risks to

    trade differently; and (2) a clear organizational framework that avoids

    administrative burdens for market participants that otherwise could

    arise from more numerous and/or non-uniform swap categories. The

    Commission made use of swaps market data, as well as market convention,

    in making its determination of how best to form swap categories and

    asset classes as well as buckets within each asset class. Ultimately,

    the Commission determined that that the best approach was to allow for

    products with similar characteristics and risk structures to be grouped

    together, given that in certain circumstances market participants view

    similar financial products as close substitutes and use them as such

    for risk mitigating purposes. The Commission has fashioned its swaps

    categories to, where possible, group together swaps that could be used

    to hedge the same risk or otherwise establish an equivalent position.

    Grouping economically-substitutable swaps together makes the

    setting of appropriate minimum block sizes on an individual product

    basis unnecessary and potentially dangerous in that it would allow for

    like risks to trade differently.

    c. Block Methodology Alternatives

    The Commission also considered various alternatives to its proposed

    methodologies for determining appropriate minimum block thresholds in

    both the initial and the post initial periods. As discussed more fully

    in Section II.B., the Commission received various comments suggesting

    alternatives to the phased-in approach contained in the Further Block

    Proposal. Many commenters compared the 67 percent notional amount

    calculation to a 50 percent notional amount calculation, as

    specifically requested by the Commission in Question 33 of the Further

    Block Proposal. Twelve commenters preferred the 67 percent notional

    amount calculation to a 50 percent notional amount calculation;

    whereas, nine commenters preferred the 50 percent notional amount

    calculation to the 67 percent notional amount calculation. ODEX, RJ

    O'Brien, and Spring Trading expressed support for the 67 percent

    notional amount calculation, but also suggested that a higher notional

    amount calculation would be preferable, particularly in the post-

    initial period.\625\ AFR, Better Markets, Javelin, and SDMA all

    recommended a 75 percent or higher notional amount calculation and a

    market depth and market breadth test.\626\

    ---------------------------------------------------------------------------

    \625\ CL-ODEX at 1; CL-RJ O'Brien at 1.

    \626\ CL-AFR at 8-9; CL-Better Markets at 7-8; CL-Javelin at 2;

    CL-SDMA at 2.

    ---------------------------------------------------------------------------

    [[Page 32923]]

    Nine commenters preferred the 50 percent notional amount

    calculation to the 67 percent notional amount calculation.

    Freddie Mac and ICI expressly supported a 50 percent notional

    amount calculation.\627\ Pierpont and WMBAA recommended a notional

    amount calculation of no greater than 50 percent.\628\ ICAP Energy and

    SIFMA recommended a notional amount calculation below 50 percent, but

    preferred a 50 percent notional amount calculation to a 67 percent

    notional amount calculation.\629\ AII and ICAP recommended not using a

    notional amount calculation at all, but preferred a 50 percent notional

    amount calculation to a 67 percent notional amount calculation.\630\

    ---------------------------------------------------------------------------

    \627\ CL-Freddie at 2; CL-ICI at 6-7.

    \628\ CL-Pierpont at 3; CL-WMBAA at 3.

    \629\ CL-ICAP Energy at 3; CL-SIFMA at 10.

    \630\ CL-AII at 6; CL-ICAP Energy at 4.

    ---------------------------------------------------------------------------

    AII recommended lowering or eliminating block thresholds until

    complete data has been reported to SDRs so as not to impair market

    liquidity.\631\ Barclays recommended introducing block levels that

    allow for empirical analysis of the transaction data and sequentially

    increasing block sizes until such point as the desired equilibrium

    between transparency and liquidity is reached.\632\ Better Markets

    suggested transitioning to a market depth/market breadth test after the

    Commission has collected a year of SDR data.\633\

    ---------------------------------------------------------------------------

    \631\ CL-AII at 6.

    \632\ CL-Barclays at 11.

    \633\ CL-Better Markets at 9-10.

    ---------------------------------------------------------------------------

    The Commission also specifically requested comments regarding other

    potential methods for determining appropriate minimum block

    thresholds.\634\ While numerous comments addressed the efficacy of a

    notional amount calculation and the appropriate percentage to use in

    making such a calculation, the comments reveal only one significant

    alternative methodology to calculating relevant initial and post-

    initial minimum block thresholds in place of a notional amount

    calculation: block thresholds based on market depth and market

    breadth.\635\ The Commission received a number of comments regarding

    whether the Commission should use either market depth or market breadth

    criteria, instead of the 67-percent notional amount calculation

    methodology, to calculate the relevant initial minimum block sizes and

    the post-initial minimum block sizes.\636\ Many commenters expressed

    support for adopting the market depth test \637\ and other commenters

    additionally supported utilizing the market breadth test.\638\

    ---------------------------------------------------------------------------

    \634\ See Further Block Proposal, Q32-54.

    \635\ See Note 262 for an in depth description of the market

    depth and market breadth test.

    \636\ Market depth and market breadth was proposed to be

    calculated as follows: (step 1) Identify swap contracts with pre-

    trade price transparency within a swap category; (step 2) calculate

    the total executed notional volumes for each swap contract in the

    set from step 1 and calculate the sum total for the swap category

    over the look back period of one year; (step 3) collect a market

    depth snapshot of all of the bids and offers once each minute for

    the pre-trade price transparency set of contracts identified in step

    1; (step 4) identify the four 30-minute periods that contain the

    highest amount of executed notional volume each day for each

    contract of the pre-trade price transparency set identified in step

    1 and retain 120 observations related to each 30-minute period for

    each day of the look-back period; (step 5) determine the average

    bid-ask spread over the look-back period of one year by averaging

    the spreads observed between the largest bid and executed offer for

    all the observations identified in step 3; (step 6) for each of the

    120 observations retained in step 4, calculate the sum of the

    notional amount of all orders collected from step 3 that fall within

    a range, calculate the average of all of these observations for the

    look-back period and divide by two; (step 7) to determine the

    trimmed market depth, calculate the sum of the market depth

    determined in step 6 for all swap contracts within a swap category;

    (step 8) to determine the average trimmed market depth, use the

    executed notional volumes determined in step 2 and calculate a

    notional volume weighted average of the notional amounts determined

    in step 6; (step 9) using the calculations in steps 7 and 8,

    calculate the market breadth based on the following formula: market

    breadth = averaged trimmed market depth + (trimmed market depth -

    average trimmed market depth) x .75; (step 10) set the appropriate

    minimum block size equal to the lesser of the values from steps 8

    and 9. 77 FR 15482.

    \637\ CME-CL at 2; ODEX-CLetter at 2; Spring Trading-CL at 2;

    MFA-CL at 7; FIA-CL at 2.

    \638\ Arbor-CL at 1; AFR-CL at 8-9; Jeffries-CL at 2; SDMA-CL at

    3-6; Javelin-CL at 4-6; RJ O'Brien-CL at 1; Better Markets-CL at 9-

    10; CRT-CL at 2; FIA-CL at 2.

    ---------------------------------------------------------------------------

    As discussed more fully in Section II.B., for the initial period

    the Commission is adopting the 50 percent notional amount calculation

    to determine appropriate minimum block sizes in the interest rate and

    credit asset classes. This approach provides for a more gradual phase-

    in of minimum block sizes, as recommended by numerous commenters. The

    Commission believes that the phase-in approach should provide swap

    market participants with an adequate amount of time to incrementally

    adjust their trading practices, technology infrastructure and business

    arrangements to comply with the new block trade regime.

    For the post-initial period, the Commission is adopting Sec.

    43.6(f)(1) as proposed. The 67-percent notional amount calculation

    means that, within a swap category, approximately two-thirds of the sum

    total of all notional amounts will be reported on a real-time basis.

    This approach will afford market participants a timely view of a

    substantial portion of swap transaction and pricing data to assist them

    in determining the competitive price for swaps within a relevant swap

    category. The Commission anticipates that this enhanced price

    transparency will encourage market participants to provide liquidity

    (e.g., through the posting of bids and offers), particularly when

    transaction prices move away from the competitive price. The Commission

    also anticipates that enhanced price transparency thereby will improve

    market integrity and price discovery, while also reducing information

    asymmetries enjoyed by market makers in predominately opaque swap

    markets.\639\

    ---------------------------------------------------------------------------

    \639\ The proposed calculation stands in contrast to another

    alternative--the proposed 95th percentile-based distribution test

    set out in the Initial Proposal. See the discussion in section I.B.

    of the Further Block Proposal. No commenters suggested or supported

    the distribution test in response to the Further Block Proposal.

    ---------------------------------------------------------------------------

    In the Commission's view, using the 67-percent notional amount

    calculation also would minimize the potential impact of real-time

    public reporting on liquidity risk compared to other alternatives. The

    67 percent notional amount calculation represents a middle ground

    between the many commenters who supported higher block thresholds and

    the many commenters who preferred much more conservative thresholds.

    The Commission believes that its methodology, in conjunction with the

    50-percent notional amount calculation during the initial period,

    represents a tailored and incremental approach for achieving the goal

    of ``a vast majority'' of swap transactions becoming subject to real-

    time public reporting.\640\

    ---------------------------------------------------------------------------

    \640\ The ``guiding principle in setting appropriate block trade

    levels [is that] the vast majority of swap transactions should be

    exposed to the public market through exchange trading.''

    Congressional Record--Senate, S5902, S5922 (July 15, 2010). As

    discussed above, this phased-in approach seeks to improve

    transparency while not having a negative impact on market liquidity.

    ---------------------------------------------------------------------------

    As noted above, CEA section 2(a)(13)(E)(iv) directs the Commission

    to take into account whether the public disclosure of swap transaction

    and pricing data ``will materially reduce market liquidity.'' \641\ If

    market participants reach the conclusion that the Commission has set

    appropriate minimum block sizes for a specific swap category in a way

    that will materially reduce market liquidity, then those participants

    are encouraged to submit data to support their conclusion. In addition,

    the Commission will conduct its own surveillance of swaps market

    [[Page 32924]]

    activity and how block sizes affect market liquidity in each of the

    specified swap categories.\642\ In response to either a submission or

    its own surveillance of swaps market activity the Commission may

    exercise its legal authority to take action by rule or order to

    mitigate the potential effects on market liquidity with respect to

    swaps in a particular swap category.

    ---------------------------------------------------------------------------

    \641\ 7 U.S.C. 2(a)(13)(E)(iv).

    \642\ The Commission received two comments supporting the

    Commission's authority to set appropriate minimum block sizes

    outside of the proposed annual look-back period. MFA argued that the

    Commission's goal to balance transparency and liquidity would be

    better achieved with the flexibility to adjust minimum block sizes

    quickly to respond to material market changes. MFA recommended that

    the Commission should have the authority to update post-initial

    minimum block sizes in extraordinary circumstances and on a case-by-

    case basis, based on SDR data that it receives for individual or

    across multiple swap categories. GFMA stated that if the Commission

    establishes a notional calculation test, then it should ensure that

    it has sufficient flexibility to amend minimum block sizes. GFMA

    recommended that the Commission should be able to ``swiftly alter''

    block trade levels to enable some trading to be conducted in a newly

    illiquid market, without the benefit of reference to a data set. The

    Commission notes that Sec. 43.6(f)(1) provides that the Commission

    shall update post-initial appropriate minimum block levels ``[n]o

    less than once each calendar year.'' Accordingly, the Commission

    notes that it has the ability to adjust post-initial minimum block

    sizes under the types of extraordinary circumstances raised by

    commenters.

    ---------------------------------------------------------------------------

    The Commission acknowledges that the market depth and market

    breadth test is a viable alternative to the notional amount calculation

    methodology. However, it has several prerequisite conditions that

    complicate the ability to implement it. For example, the Commission

    would need to determine which contracts within a swap category offer

    pre-trade price transparency--electronically displayed and executable

    bids and offers as well as displayed available volumes for execution.

    As noted by commenters, adequate market trading data also must be

    available to collect a market depth snapshot of all of the bids and

    offers for the pre-trade price transparency set of applicable

    contracts. The Commission is also cognizant of MFA's concerns regarding

    the potential for manipulation of market depth. Given the time needed

    for trading infrastructure to develop and the significant time and cost

    considerations involved in collecting such data from SEFs and DCMs, the

    Commission deems it unfeasible to implement at this time; the

    Commission will continue to examine the merits of doing so in the

    future.

    6. CEA Section 15(a) Factors

    a. Protection of Market Participants and the Public

    The Commission believes that the criteria and methodology in Sec.

    43.6(a)-(f) and (h) will protect swap market participants by extending

    the delay for reporting for publicly reportable swap transactions, as

    appropriate, while also accommodating the market participant and public

    interest with enhanced transparency. By setting appropriate minimum

    block sizes in a thoughtful and measured manner as contemplated in the

    final rule, the Commission believes that it has properly balanced the

    tradeoff between transparency and liquidity interests. As a result,

    swap market participants will retain a means to offset risk exposures

    related to their swap transactions at competitive prices. In addition,

    the phased-in implementation scheme outlined in this rulemaking will

    introduce greater transparency in an incremental, measured and flexible

    manner so that appropriate minimum block sizes are responsive to

    changing markets. Specifically, the Commission expects that the

    availability of real-time pricing information for carefully enumerated

    categories of swap transactions will draw increased swap market

    liquidity through the competitive appeal of improved pricing efficiency

    that greater transparency affords. More liquid, competitive swap

    markets, in turn, allow businesses to offset costs more efficiently

    than in completely opaque markets, thus serving the interests of both

    market participants and the public who should benefit through lower

    costs of goods and services.

    Another benefit of increasing swaps market transparency to

    regulators and the public in real-time, without the interim delays for

    all transactions imposed in Part 43, is better protection of market

    participants and the public by improving the Commission's oversight

    ability and by giving academics, the media, public and market

    participants the opportunity to monitor, study, and analyze these

    previously opaque segments of the economy.

    b. Efficiency, Competitiveness and Financial Integrity of Markets \643\

    ---------------------------------------------------------------------------

    \643\ The Commission sees no potential impact to the financial

    integrity of futures markets from the criteria and methodology in

    its consideration of section 15(a)(2)(B) of the CEA. Although by its

    terms, section 15(a)(2)(B) applies to futures, the Commission finds

    this factor useful in analyzing the costs and benefits of swaps

    regulation, as well.

    ---------------------------------------------------------------------------

    The criteria and methodology set out in the rules will promote

    market efficiency, competitiveness and financial integrity of markets

    in several ways. The Commission acknowledges that because

    responsibility for specifying swap categories and determining

    appropriate minimum block sizes is with the Commission rather than

    registered entities, the administrative burden on swap market

    participants is minimized. Further, the rules afford flexibility to

    respond to continuing swaps market evolution, including but not limited

    to changing industry practices and activities that the Commission

    foresees occurring as market participants comply with regulations,

    including part 43, implementing the Dodd-Frank Act regulatory regime.

    More specifically, the methodology in Sec. 43.6(c)-(f) and (h) will

    recalibrate appropriate minimum block sizes regularly to ensure that

    those sizes remain appropriate for, and responsive to, these changing

    markets. This ability, coupled with the potential for the Commission to

    adjust futures block requirements in pending and future rulemakings

    (among other tools) also helps assure that competitive implications

    that could arise between substitutable swaps and futures as markets

    evolve are appropriately addressed. The Commission believes that the

    rules will introduce increased market transparency for swaps in a

    careful, measured manner that the Commission believes will optimize the

    balance between liquidity and transparency concerns.\644\

    ---------------------------------------------------------------------------

    \644\ As noted above, under part 43 of the Commission's

    regulations (as now promulgated in the Real-Time Reporting Final

    Rule), all publicly reportable swap transactions are subject to a

    time delay pending further amending regulation to establish the

    criteria and methodology to distinguish block trades and large

    notional off-facility swaps from those swaps that do not meet those

    definitions. See 77 FR 1217. As a result, SDRs as of now are not

    required to publicly disseminate publicly reportable swap

    transactions as soon as technologically practicable.

    ---------------------------------------------------------------------------

    c. Price Discovery

    The criteria and methodology set out in the rules will enhance swap

    market price discovery by eliminating, to the extent appropriate, the

    time delays for the real-time public reporting. The methodology of this

    final rule will ensure that an SDR will be able to publicly disseminate

    data for certain swaps as soon as technologically practicable and the

    majority of the transactions in the market will be visible to traders

    as well as the public. Since the majority of trades will be published

    and visible in real-time, reported prices are likely to be better

    indicators of competitive pricing. As such, the rules promote improved

    price discovery.

    [[Page 32925]]

    d. Sound Risk Management Practices

    As discussed above, the Commission believes that the criteria and

    methodology set forth in the rules will enhance price discovery since

    SDRs will publicly disseminate price and other data relevant to

    valuation as soon as technologically practicable for the swaps for

    which the time-delay is lifted. This better and more accurate data will

    enable swap market participants, generally, to better measure risk. An

    ability to better manage risk at an entity level should translate to

    improved market participant risk management generally. Improved risk

    measurement and management potential, in turn, mitigates the risk of

    another financial crisis by better equipping market participants to

    value their swap contracts and other assets during times of market

    instability.

    e. Other Public Interest Considerations

    The Commission believes that the criteria and methodology in Sec.

    43.6(a)-(f) and (h) will allow the majority of swap transactions and

    prices to be publicly disseminated, giving academics, the media, public

    and market participants the opportunity to monitor, study, and analyze

    these previously opaque segments of the economy. This would allow the

    public to be better informed about swaps markets and analyze publicly

    available market data disseminated in real-time.

    D. Cost-Benefit Considerations Relevant to the Block Trade/Large

    Notional Off-Facility Swap Election Process (Sec. 43.6(g))

    Section 43.6(g) specifies the process for a market participant to

    elect that a swap transaction be treated as a block trade or large

    notional off-facility swap (``the election process''). Section

    43.6(g)(1) establishes a two-step notification process relating to

    block trades. Section 43.6(g)(2) establishes the notification process

    relating to large notional off-facility swaps.

    Section 43.6(g)(1)(i) sets out the first step in the block trade

    notification process: parties to a swap executed at or above the

    appropriate minimum block size for the applicable swap category are

    required to notify the SEF or DCM, as applicable, of their election to

    have their qualifying swap transaction treated as a block trade.

    Section 43.6(g)(1)(ii) sets out the second step: the SEF or DCM, as

    applicable, that receives an election notification is required to

    notify an SDR of a block trade election when transmitting swap

    transaction and pricing data to such SDR for public dissemination. The

    Commission expects SEFs and DCMs to use automated, electronic--and in

    some cases voice--processes to execute swap transactions; the

    transmission of the notification of a block trade election, which may

    occur separately from the execution process, also will be either

    automated, electronic or communicated through voice processes.

    Section 43.6(g)(1)(ii) sets out the second step: the SEF or DCM, as

    applicable, that receives an election notification is required to

    notify an SDR of a block trade election when transmitting swap

    transaction and pricing data to such SDR for public dissemination.

    1. Costs Relevant to the Election Process (Sec. 43.6(g))

    Non-financial end-users who are reporting parties, as well as SEFs,

    DCMs, and SDRs will likely bear the costs of complying with the

    election process in Sec. 43.6(g). To comply with the real-time

    reporting requirements of part 43 already in place, these entities will

    have already invested in technology and personnel as well as

    established programs for continued systems maintenance, support and

    compliance; the Commission has previously described and considered

    these costs in the Real-Time Reporting Final Rule.\645\ The Commission

    specifically designed the election process so that non-financial end-

    users, SEFs, DCMs, and SDRs would be able to leverage any investments

    made for compliance with part 43 to also comply with Sec. 43.6(g).

    Accordingly, the Commission expects non-financial end-users, SEFs, DCMs

    and SDRs to have the following direct, quantifiable costs: (a) An

    incremental, non-recurring expenditure to update existing technology to

    comply with Sec. 43.6(g); (b) an incremental non-recurring expenditure

    for training existing personnel and updating written policies and

    procedures for compliance with amendments to part 43; (c) incremental

    recurring expenses associated with compliance, maintenance and

    operational support in connection with the election process; and (d)

    additional incremental, non-recurring expenditures to update existing

    technology exclusive to SDRs. SDRs also would have incremental, non-

    recurring expenditures to update existing technology.\646\ The

    Commission also recognizes that the election process in Sec. 43.6(g)

    is voluntary and that eligible entities would not elect block trade

    treatment for a swap transaction in circumstances in which they did not

    perceive a net benefit in doing so. In the paragraphs that follow, the

    Commission discusses each of these costs.

    ---------------------------------------------------------------------------

    \645\ See 77 FR 1237. As noted in the Real-Time Reporting Final

    Rule, non-financial end-users (that do not contract with a third

    party) will have initial costs consisting of: (i) Developing an

    internal order management system capable of capturing all relevant

    data ($26,689 per non-financial end-user) and a recurring annual

    burden of ($27,943 per non-financial end-user); (ii) establishing

    connectivity with an SDR that accepts data ($12,824 per non-

    financial end-user); (iii) developing written policies and

    procedures to ensure compliance with part 43 ($14,793 per non-

    financial end-user); and (iv) compliance with error correction

    procedures ($2,063 per non-financial end-user). See id. With respect

    to recurring costs, a non-financial end-user will have: (i)

    Recurring costs for compliance, maintenance and operational support

    ($13,747 per non-financial end-user); (ii) recurring costs to

    maintain connectivity to an SDR ($100,000 per non-financial end-

    user); and (iii) recurring costs to maintain systems for purposes of

    reporting errors or omissions ($1,366 per non-financial end user).

    See id.

    SDRs (that do not enter into contracts with a third party) would

    have incremental costs related to compliance with part 43 beyond

    those costs identified in the release adopting part 49 of the

    Commission's regulations. See Swap Data Repositories: Registration

    Standards, Duties and Core Principles, 76 FR 54538 (Sept. 1, 2011).

    In the Real-Time Reporting Final Rule, the Commission stated that

    each SDR would have: (i) A recurring burden of approximately

    $856,666 and an annual burden of $666,666 for system maintenance per

    SDR; (ii) non-recurring costs to publicly disseminate ($601,003 per

    SDR); and (iii) recurring cots to publicly disseminate ($360,602 per

    SDR). See id.

    In the Real-Time Reporting Final Rule, the Commission assumed

    that SEFs and DCMs will experience the same or lower costs as a non-

    financial end-user. See id.

    \646\ SDRs that do not enter into contracts with a third party

    would have incremental costs related to compliance with part 43 of

    the Commission's regulations beyond those cost identified in the

    release adopting part 49 of the Commission's regulations. See Swap

    Data Repositories: Registration Standards, Duties and Core

    Principles, 76 FR 54538 (Sept. 1, 2011). In the Real-Time Reporting

    Final Rule, the Commission stated that each SDR would have: (1) A

    recurring burden of approximately $856,666 and an annual burden of

    $666,666 for system maintenance per SDR; (2) non-recurring costs to

    publicly disseminate ($601,003 per SDR); and (3) recurring costs to

    publicly disseminate ($360,602 per SDR). See id.

    ---------------------------------------------------------------------------

    a. Incremental, Non-Recurring Expenditure to a Non-Financial End-User,

    SEF or DCM to Update Existing Technology \647\

    ---------------------------------------------------------------------------

    \647\ For the same reasons stated in the Real-Time Reporting

    Final Rule, the Commission assumes that SEFs and DCMs would

    experience the same or less costs as a non-financial end-user. See

    77 FR 1236. Under Sec. 43.6(g)(1), SEFs or DCMs would be required

    to transmit a block trade election to an SDR only when the SEF or

    DCM receives notice of a block trade election from a reporting

    party.

    ---------------------------------------------------------------------------

    To comply with the election process in Sec. 43.6(g), a non-

    financial end-user, SEF, or DCM likely would need to: (1) Update its

    Order Management System (``OMS'') to capture the election to treat a

    qualifying publicly reportable swap transaction as a block trade or

    large notional off-facility swap. In the Further Block Proposal, the

    Commission

    [[Page 32926]]

    estimated that updating an OMS system to permit notification to an SDR

    of a block trade or large notional off-facility swap election would

    impose an initial non-recurring burden of approximately 80 personnel

    hours at an approximate cost of $6,761 for each non-financial end-user,

    SEF or DCM.\648\ This cost estimate included an estimate of the number

    of potential burden hours required to amend internal procedures,

    reprogram systems and implement processes to permit a non-financial

    end-user to elect to treat their qualifying swap transaction as a block

    trade or large notional off-facility swap in compliance with the

    requirements set forth in Sec. 43.6(g). The Commission is revising its

    estimates based on updated wage rate data. The Commission estimates

    that updating an OMS system to permit notification to an SDR of a block

    trade or large notional off-facility swap election would impose an

    initial non-recurring burden of approximately 80 personnel hours at an

    approximate cost of $7,171 for each non-financial end-user, SEF or

    DCM.\649\

    ---------------------------------------------------------------------------

    \648\ This estimate was calculated as follows: (Compliance

    Manager at 15 hours) + (Director of Compliance at 10 hours) +

    (Compliance Attorney at 5 hours) + (Senior Systems Analyst at 30) +

    (Senior Programmer at 20) = 80 hours per non-financial end-user who

    is a reporting party. A compliance manager has adjusted hourly wages

    of $77.77. A director of compliance has adjusted hourly wages of

    $158.21. A compliance attorney has adjusted hourly wages of $89.43.

    A senior systems analyst has adjusted hourly wages of $64.50. A

    senior programmer has adjusted hourly wages of $81.52.

    \649\ This estimate was calculated as follows: (Compliance

    Manager at 15 hours) + (Director of Compliance at 10 hours) +

    (Compliance Attorney at 5 hours) + (Senior Systems Analyst at 30) +

    (Senior Programmer at 20) = 80 hours per non-financial end-user who

    is a reporting party. A compliance manager has adjusted hourly wages

    of $74.16. A director of compliance adjusted hourly wages of

    $169.16. A compliance attorney has adjusted hourly wages of $103.17.

    A senior systems analyst has adjusted hourly wages of $70.45. A

    senior programmer has adjusted hourly wages of $86.89.

    ---------------------------------------------------------------------------

    b. Incremental, Non-Recurring Expenditure to a Non-Financial End-User

    to Provide Training To Existing Personnel and Update Written Policies

    and Procedures

    To comply with the election process in Sec. 43.6(g), a non-

    financial end-user likely would need to provide training to its

    existing personnel and update its written policies and procedures to

    account for this new process. In the Further Block Proposal, the

    Commission estimated that providing training to existing personnel and

    updating written policies and procedures would impose an initial non-

    recurring burden of approximately 39 personnel hours at an approximate

    cost of $3,200 for each non-financial end-user.\650\ This cost estimate

    included the number of potential burden hours required to produce

    design training materials, conduct training with existing personnel,

    and revise and circulate written policies and procedures in compliance

    with the requirements set forth in Sec. 43.6(g). The Commission is

    revising its estimates based on updated wage rate data. The Commission

    estimates that providing training to existing personnel and updating

    written policies and procedures would impose an initial non-recurring

    burden of approximately 39 personnel hours at an approximate cost of

    $3,360 for each non-financial end-user.\651\

    ---------------------------------------------------------------------------

    \650\ This estimate is calculated as follows: (Compliance

    Manager at 5 hours) + (Director of Compliance at 2 hours) +

    (Compliance Attorney at 2 hours) + (Senior Systems Analyst at 10) +

    (Senior Programmer at 20) = 39 hours per non-financial end-user who

    is a reporting party. A compliance manager has adjusted hourly wages

    of $77.77.

    \651\ This estimate was calculated as follows: (Compliance

    Manager at 5 hours) + (Director of Compliance at 2 hours) +

    (Compliance Attorney at 2 hours) + (Senior Systems Analyst at 10) +

    (Senior Programmer at 20) = 39 hours per non-financial end-user who

    is a reporting party. A compliance manager has adjusted hourly wages

    of $74.16. A director of compliance adjusted hourly wages of

    $169.16. A compliance attorney has adjusted hourly wages of $103.17.

    A senior systems analyst has adjusted hourly wages of $70.45. A

    senior programmer has adjusted hourly wages of $86.89.

    ---------------------------------------------------------------------------

    c. Incremental, Recurring Expenses to a Non-Financial End-User, DCM or

    SEF Associated With Incremental Compliance, Maintenance and Operational

    Support in Connection With the Election Process

    A non-financial end-user, DCM or SEF likely would incur costs on an

    annual basis in order to comply with the election process in Sec.

    43.6(g). In the Further Block Proposal, the Commission estimated that

    annual compliance; maintenance and operation support would impose an

    incremental, recurring burden of approximately five personnel hours at

    an approximate cost of $340 for each non-financial end-user, DCM or

    SEF.\652\ This cost estimate included the number of potential burden

    hours required to design training materials, conduct training with

    existing personnel, and revise and circulate written policies and

    procedures in compliance with the requirements set forth in Sec.

    43.6(g). The Commission is revising its estimates based on updated wage

    rate data. The Commission estimates the updated approximate cost of

    designing training materials, conducting training with existing

    personnel, and revising and circulating written policies and procedures

    in compliance with the requirements set forth in Sec. 43.6(g) to be

    $370 for each non-financial end-user, DCM, or SEF.\653\

    ---------------------------------------------------------------------------

    \652\ This estimate is calculated as follows: (Director of

    Compliance at 1 hour) + (Compliance Clerk at 3 hours) + (Compliance

    Attorney at 1 hour) = 5 hours per year per non-financial end-user

    who is a reporting party. A director of compliance has adjusted

    hourly wages of $158.21. A compliance clerk (junior compliance

    advisor) has adjusted hourly wages of $31.22. A compliance attorney

    has adjusted hourly wages of 89.43.

    \653\ This estimate is calculated as follows: (Director of

    Compliance at 1 hour) + (Compliance Clerk at 3 hours) + (Compliance

    Attorney at 1 hour) = 5 hours per year per non-financial end-user

    who is a reporting party. A director of compliance's adjusted hourly

    wage is $169.16. A compliance clerk (junior compliance advisor) has

    adjusted hourly wages of $33.52. A compliance attorney's adjusted

    hourly wage is $103.17.

    ---------------------------------------------------------------------------

    d. Incremental, Non-Recurring Expenditure to an SDR To Update Existing

    Technology To Capture and Publicly Disseminate Swap Data for Block

    Trades and Large Notional Off-Facility Swaps

    To comply with the election process in Sec. 43.6(g), an SDR likely

    would need to update its existing technology to capture elections and

    disseminate qualifying publicly reportable swap transactions as block

    trades or large notional off-facility swaps. In the Further Block

    Proposal, the Commission estimated that updating existing technology to

    capture elections would impose an initial non-recurring burden of

    approximately 15 personnel hours at an approximate cost of $1,310 for

    each SDR.\654\ This cost estimate included the number of potential

    burden hours required to amend internal procedures, reprogram systems,

    and implement processes to capture and publicly disseminate swap

    transaction and pricing data for block trades and large notional off-

    facility swaps in compliance with the requirements set forth in Sec.

    43.6(g). The Commission is revising its estimates based on updated wage

    rate data. The Commission estimates the updated approximate cost

    required to amend internal procedures, reprogram systems, and implement

    processes to capture and publicly disseminate swap transaction and

    pricing data for block trades and large notional off-facility swaps in

    compliance with the requirements set forth in Sec. 43.6(g) to be

    $1,390 for each SDR.\655\

    ---------------------------------------------------------------------------

    \654\ This estimate is calculated as follows: (Sr. Programmer at

    8 hours) + (Sr. Systems Analyst at 3 hours) + (Compliance Manager at

    2 hours) + (Director of Compliance at 2 hours) = 15 hours per SDR. A

    senior programmer has adjusted hourly wages of $81.52. A senior

    systems analyst has adjusted hourly wages of $64.50. A compliance

    manager has adjusted hourly wages of $77.77. A director of

    compliance has adjusted hourly wages of $158.21.

    \655\ This estimate is calculated as follows: (Senior Programmer

    at 8 hours) + (Senior Systems Analyst at 3 hours) + (Compliance

    Manager at 2 hours) + (Director of Compliance at 2 hours) = 15 hours

    per SDR. A senior programmer has adjusted hourly wages of $86.89. A

    senior systems analyst has adjusted hourly wages of $70.45. A

    compliance manager has adjusted hourly wages of $74.16. A director

    of compliance has adjusted hourly wages of $169.16.

    ---------------------------------------------------------------------------

    [[Page 32927]]

    2. Comments Received

    The Commission received one comment directly related to the costs

    of the election process. As discussed more fully above, WMBAA disagreed

    with the Further Block Proposal projected cost estimates generally and

    contended that the Commission failed to contemplate the actual efforts

    a SEF will have to undertake to implement the block trade regime,

    including the two-step notification process.\656\ In addition to the

    fact that WMBAA did not provide data to support or monetize its

    position, WMBAA's disagreement with the Further Block Proposal's

    election process cost estimates does not concern the incremental cost

    to augment and maintain systems and processes that the Commission

    believes entities need have in place to comply with the real time

    reporting requirement of Section 2(a)(13) of the CEA; rather it

    concerns the cost to comply with that statutory requirement as

    prescribed by the existing part 43 implementation regulations. SEFs and

    DCMs would incur these costs regardless of how the Commission

    determines block thresholds. Accordingly, the Commission considers

    WMBAA's criticism of the cost estimates in this rulemaking misplaced.

    Therefore, the Commission is maintaining the Further Block Proposal's

    approach to calculating the direct costs resulting from the methodology

    for determining block thresholds, but is revising its estimates based

    on updated wage rate data.

    ---------------------------------------------------------------------------

    \656\ CL-WMBAA at 8.

    ---------------------------------------------------------------------------

    3. Benefits Relevant to the Election Process (Sec. 43.6(g))

    The Commission has identified two overarching benefits that the

    election process in Sec. 43.6(g) would confer on swap market

    participants, registered entities and the general public. First,

    although Sec. 43.6(g) sets out a purely administrative process with

    which market participants and registered entities must comply, the

    Commission views this process as an integral component of the block

    trade framework in this rulemaking and in part 43. Consequently, this

    election process will benefit market participants, registered entities

    and the general public by providing greater price transparency in swaps

    markets than currently exists under part 43.\657\ Since this election

    process is optional, entities need avail themselves of the process only

    in circumstances where the attendant benefits warrant.

    ---------------------------------------------------------------------------

    \657\ See the discussion of benefits in section VI.E.1.e above

    with respect to Sec. 43.6(a)-(f) and (h).

    ---------------------------------------------------------------------------

    Second, the Commission believes that the election process will

    promote market efficiency by creating a standardized process in Sec.

    43.6(g) for market participants to designate publicly reportable swap

    transactions that are eligible for block trade or large notional off-

    facility swap treatment. In addition, this standardized process will

    further promote efficiency by allowing market participants and

    registered entities to leverage their existing technology

    infrastructure, connectivity, personnel and other resources required

    under parts 43 and 49 of the Commission's regulations. The Commission

    believes the final rule avoids imposing duplicative or conflicting

    obligations on market participants and registered entities.

    4. Alternatives

    The Commission specifically asked commenters whether there were

    alternative methods through which a reporting party could elect to

    treat its qualifying swap transaction as a block trade or large

    notional off-facility swap. In addition, the Commission asked whether

    it should require a variation on the proposed election process where

    SEFs, DCMs, and reporting parties would be required to indicate under

    which swap category they were claiming block or large notional off-

    facility swap treatment. Finally, the Commission asked whether it

    should establish an alternative approach for small end-users when such

    an end-user is the reporting party to a qualified swap transaction.

    No comments were received either proposing or otherwise supporting

    an alternative approach and as such, the Commission is adopting in

    Sec. 43.6(g) relative to possible alternatives.

    5. Application of the Section 15(a) Factors to Sec. 43.6(g)

    a. Protection of Market Participants and the Public

    Section 43.6(g) is an essential part of this rulemaking because it

    provides the mechanism through which market participants will be able

    to elect to treat their qualifying swap transaction as a block trade or

    large notional off-facility swap. Consequently, this process

    contributes to providing greater swap market transparency than what

    currently exists under part 43 of the Commission's regulations. Market

    participants, registered entities and the general public benefit from

    this enhanced swap market price transparency.

    b. Efficiency, Competitiveness and Financial Integrity.\658\

    ---------------------------------------------------------------------------

    \658\ Although by its terms, section 15(a)(2)(B) of the CEA

    applies to futures and not swaps, the Commission finds this factor

    useful in analyzing the costs and benefits of regulating swaps, as

    well. See 7 U.S.C. 19(a)(2)(B).

    ---------------------------------------------------------------------------

    As noted above, the election process will promote efficiency by

    providing market participants and registered entities with a

    standardized process to delineate which publicly reportable swap

    transactions are block trades or large notional off-facility swaps. The

    voluntary nature of this election process will also add to the

    efficiency of the swaps market since eligible entities will only choose

    to elect if it is financially beneficial for them to do so. In

    addition, the proposed election process will promote efficiency by

    allowing non-financial end-users, SEFs, DCMs and SDRs to leverage their

    existing technology infrastructure, connectivity, personnel and other

    resources required under part 43 and part 49 of the Commission's

    regulations. The use of existing technologies, connectivity, personnel

    and other resources will create efficiencies for these entities and

    mitigate the cost to comply Sec. 43.6(g).

    The Commission has identified no potential impact on

    competitiveness and financial integrity that would result from the

    implementation of the proposed election process.

    c. Price Discovery

    The Commission has identified no potential material impact to price

    discovery that would result from the implementation of the election

    process outside of those discussed in section b. above.

    d. Sound Risk Management Practices

    The Commission has identified no potential impact on sound risk

    management practices that would result from the implementation of the

    election process outside of those discussed in section b. above.

    e. Other Public Interest Considerations

    The Commission has identified no potential impact on other public

    interest considerations (other than those identified above) that would

    result from the implementation of the election process.

    [[Page 32928]]

    E. Costs and Benefits Relevant to Anonymity Protections (Amendments to

    Sec. 43.4(d)(4) and (h))

    This section discusses the two amendments to Sec. 43.4. Section

    43.4 as now promulgated prescribes the manner in which SDRs must

    publicly disseminate swap transaction and pricing data. One amendment

    adds a system for masking the geographical data for certain swaps in

    the other commodity asset class not currently subject to public

    dissemination, which provides limited, but not detailed information on

    the geographic location of the underlying assets of those swaps. The

    other amendment establishes a methodology to establish cap sizes that

    masks the size of swap transactions above a certain threshold, which is

    different from the methodology for determining appropriate minimum

    block sizes. Both amendments seek to protect the anonymity of the

    parties and certain identifying information for swaps while also

    providing increased transparency in swaps markets.

    1. Amendments to Sec. 43.4(d)(4)

    The Commission addresses the public dissemination of information

    regarding certain swaps in the other commodity asset class in Sec.

    43.4(d)(4). Section 43.4(d)(4)(ii) currently provides that for publicly

    reportable swaps in this commodity asset class, information identifying

    the underlying assets of the swap must be publicly disseminated for:

    (a) those swaps executed on or pursuant to the rules of a SEF or DCM;

    (b) those swaps referencing one of the contracts described in appendix

    B to part 43; and (c) any publicly reportable swap transaction that is

    economically related to one of the contracts described in appendix B to

    part 43. Pursuant to the Real-Time Reporting Final Rule, any swap that

    is in the other commodity asset class that falls under Sec.

    43.4(d)(4)(ii) will be subject to reporting and public dissemination

    requirements.

    In this final rule, the Commission is adopting a new provision,

    Sec. 43.4(d)(4)(iii), that prescribes a system for the public

    dissemination of exact underlying assets in the other commodity asset

    class with a ``mask'' for sensitive and potentially revealing

    geographic detail. The Commission also is adopting guidance in the form

    of a new appendix to part 43 that contains the geographical details

    that SDRs will be able to use in masking eligible other commodity swaps

    while maintaining compliance with public dissemination of swap

    transaction and pricing data.

    2. Amendments to Sec. 43.4(h)

    Section 43.4(h) establishes cap sizes for ``rounded notional or

    principal swap amounts'' above which information on swaps transactions

    is publicly reportable, for the purpose of providing anonymity for

    transactions where information on the notional or principal amounts

    alone would likely reveal the identity of the parties to the swap or

    sensitive business information. In doing so, the Commission notes that

    the objective of establishing cap sizes differs from that of

    establishing appropriate minimum block sizes.\659\ With respect to the

    latter, the objective is to ensure that a block trade or large notional

    off-facility swap can be sufficiently offset during a relatively short

    reporting delay. The former is strictly for the protection of the

    counterparties' identity and sensitive business information.

    ---------------------------------------------------------------------------

    \659\ The Commission received numerous comments suggesting that

    the block thresholds and cap sizes established by the Commission

    should be the same. However, block thresholds and cap sizes have

    different statutory mandates and serve different purposes.

    ---------------------------------------------------------------------------

    Section 43.4(h) currently requires SDRs to publicly disseminate the

    notional or principal amounts of a publicly reportable swap transaction

    represented by a cap size (i.e., $XX+) that adjusts in accordance with

    the respective appropriate minimum block size for the relevant swap

    category. Section 43.4(h) further provides that if no appropriate

    minimum block size exists with respect to a swap category, then the cap

    size on the notional or principal amount will correspond with interim

    cap sizes that the Commission has established for the five asset

    classes.\660\

    ---------------------------------------------------------------------------

    \660\ See note 470 supra, which lists the interim cap sizes set

    forth in Sec. 43.4(h)(1)-(5).

    ---------------------------------------------------------------------------

    The amendment to Sec. 43.4(h) will require SDRs to continue to

    publicly disseminate cap sizes that correspond to their respective

    appropriate minimum block sizes during the initial period. However,

    when the Commission publishes the post-initial appropriate minimum

    block sizes in accordance with Sec. 43.6(f), it will also publish

    post-initial cap sizes for each swap category by applying a 75-percent

    notional amount calculation on data collected by SDRs. The Commission

    will apply the 75-percent notional amount calculation to a one-year

    rolling window of such data corresponding to each relevant swap

    category for each calendar year.

    3. Costs Relevant to the Amendments to Sec. 43.4(d)(4) and (h)

    SDRs will bear some costs of complying with the amendments to Sec.

    43.4(d)(4) and (h).\661\ The Commission set forth the potential costs

    of these provisions in the Further Block Proposal and requested

    comments regarding its estimates. The Commission did not receive any

    comments regarding its estimates.

    ---------------------------------------------------------------------------

    \661\ The Commission anticipates that reporting parties, SEFs

    and DCMs would not incur any new costs related to the amendments to

    Sec. 43.4 because this section relates to the data that an SDR must

    publicly disseminate. Section 43.3 of the Commission's regulations

    sets out the requirements for reporting parties, SEFs and DCMs in

    terms of what is transmitted to an SDR.

    ---------------------------------------------------------------------------

    The Commission anticipates that these entities already will have

    made non-recurring expenditures in technology and personnel in

    connection with the requirements set forth in part 43 and part 49

    (which contain rules regarding the registration and regulation of

    SDRs). As such, SDRs already will be required to pay recurring expenses

    associated with systems maintenance, support and compliance as

    described in the cost-benefit discussion in the Real-Time Reporting

    Final Rule.\662\ Notwithstanding these recurring expenses, an SDR will

    have additional non-recurring expenditures associated with the

    amendments to Sec. 43.4. Specifically, the Commission estimated that

    updating existing technology will impose an initial non-recurring

    burden of approximately 34 personnel hours at an approximate cost of

    $3,190 for each SDR.\663\ This cost estimate included an estimate of

    the number of potential burden hours required to amend internal

    procedures, reprogram systems and implement processes to capture and

    publicly disseminate swap transaction and pricing data for block trades

    and large notional off-facility swaps in

    [[Page 32929]]

    compliance with the requirements set forth in Sec. 43.4(d).

    ---------------------------------------------------------------------------

    \662\ See 76 FR 54572-75. As noted in SDR final rule, SDRs (that

    do not enter into contracts with a third party) would have

    incremental costs related to compliance with part 43 beyond those

    costs identified in the release adopting part 49 of the Commission's

    regulations. See 76 FR 54573. In the Real-Time Reporting Final Rule,

    the Commission stated that each SDR would have: (i) A recurring

    burden of approximately $856,666 and an annual burden of $666,666

    for system maintenance per SDR; (ii) non-recurring costs to publicly

    disseminate ($601,003 per SDR); and (iii) recurring cots to publicly

    disseminate ($360,602 per SDR). See 77 FR 1238.

    \663\ This estimate is calculated as follows: (Sr. Programmer at

    20 hours) + (Sr. Systems Analyst at 10 hours) + (Compliance Manager

    at 2 hours) + (Director of Compliance at 2 hours) = 34 hours per

    SDR. A senior programmer has adjusted hourly wages of $81.52. A

    senior systems analyst has adjusted hourly wages of $64.50. A

    compliance manager has adjusted hourly wages of $77.77. A director

    of compliance has adjusted hourly wages of $158.21. The total number

    was calculated incorrectly in the Further Block Proposal. The

    initial cost to an SDR should have been $2,747, rather than $3,190.

    ---------------------------------------------------------------------------

    The Commission is revising its estimates based on updated wage rate

    data. The Commission estimates the updated approximate cost required to

    amend internal procedures, reprogram systems and implement processes to

    capture and publicly disseminate swap transaction and pricing data for

    block trades and large notional off-facility swaps in compliance with

    the requirements set forth in Sec. 43.4(d) to be $2,930 for each

    SDR.\664\

    ---------------------------------------------------------------------------

    \664\ This estimate is calculated as follows: (Sr. Programmer at

    20 hours) + (Sr. Systems Analyst at 10 hours) + (Compliance Manager

    at 2 hours) + (Director of Compliance at 2 hours) = 34 hours per

    SDR. A senior programmer has adjusted hourly wages of $86.89. A

    senior systems analyst has adjusted hourly wages of $70.45. A

    compliance manager has adjusted hourly wages of $74.16. A director

    of compliance has adjusted hourly wages of $169.16.

    ---------------------------------------------------------------------------

    In addition, the Commission believes that Sec. 43.4(d)(4)(iii)

    will result in some incremental, recurring costs for SDRs because they

    will be required to publicly disseminate other commodity swaps data

    that were not previously within the scope of the public dissemination

    requirement in Sec. 43.4. The Commission estimates that there will be

    approximately 50,000 additional swaps reported to an SDR each year in

    the other commodity asset class, which the Commission estimates will be

    $154,021 in annualized costs.\665\

    ---------------------------------------------------------------------------

    \665\ The Commission estimates that there will be 5 SDRs, which

    will collect swaps data in the other commodity asset class. Each SDR

    would collect swaps data on approximately 10,000 swap transactions

    in the other commodity asset class. The commission estimates that it

    will take each SDR on average approximately 1 minute to publicly

    disseminate swaps data related to these new swap transactions. The

    number of burden hours for these SDRs would be 833 hours. As

    referenced in note 523 supra, the total labor costs for a swap

    trader is $184.90. Thus, the total number of burden hour costs equal

    the total number of burden hours (833 burden hours) x $184.90.

    ---------------------------------------------------------------------------

    The Commission also anticipates that Sec. 43.4(d)(4)(iii) will

    result in some indirect costs to the market through reduced

    information, since notional values of transactions beyond the cap size

    limits will not be revealed to the public. The Commission lacks data to

    quantify the costs associated with the reduction of information.

    However, given the statutory mandate to protect market participant

    identities, the Commission believes such costs are warranted and

    contemplated by Congress.

    The Commission also received a number of comments regarding

    potential costs arising from the established level for cap size. GFMA

    stated that the same rationale should apply to cap and block sizes, as

    both have potential negative impacts on liquidity.\666\ ICI stated that

    the 75 percent notional amount would be too high for determining cap

    size because the lack of depth and liquidity in the swaps market could

    cause public reporting of block sizes to reveal identities, business

    transactions, and market positions of participants, and recommends a 67

    percent notional amount calculation for determining cap size in the

    post-initial period.\667\ ISDA/SIFMA stated that the added transparency

    from reporting transaction sizes between 67 percent and 75 percent

    would be outweighed by the harm to liquidity from additional

    disclosure, and urges the Commission to ensure that the post-initial

    cap size is always equal to the relevant block size.\668\ MFA stated

    that it is unnecessary for the Commission to establish cap sizes that

    differ from minimum block sizes as there is not a meaningful

    transparency benefit that would outweigh the resource burdens on the

    Commission, SDRs, SEFs, and other market participants.\669\ SIFMA

    stated that the Commission should set the notional cap size at the

    block threshold, as the added public dissemination could harm liquidity

    in the same manner that a higher block trade size threshold might.\670\

    Vanguard stated that it is essential that the cap match the block trade

    threshold, as to do otherwise would compromise the liquidity

    protections afforded by the nuanced assessment of block trade

    thresholds.\671\

    ---------------------------------------------------------------------------

    \666\ CL-GFMA at 5.

    \667\ CL-ICI at 8.

    \668\ CL-ISDA/SIFMA at 15.

    \669\ CL-MFA at 8-9.

    \670\ CL-SIFMA at 12.

    \671\ CL-Vanguard at 7.

    ---------------------------------------------------------------------------

    The additional information provided to the market regarding the

    size of block trades that are below the cap size may enhance price

    discovery by publicly disseminating more information relating to market

    depth and the notional sizes of publicly reportable swap transactions.

    This, in turn, promotes increased market liquidity.

    In addition, the rule incorporates flexibility to adjust post-

    initial cap sizes in response to changing markets. Section 43.4(h) will

    permit the Commission to set cap sizes no less than once annually

    during the post-initial period. If swap market conditions change

    significantly after the implementation of the provisions of this

    rulemaking, then the Commission can react in a timely manner to further

    improve price transparency or to mitigate adverse effects on market

    liquidity.\672\

    ---------------------------------------------------------------------------

    \672\ This benefit is consistent with one of the considerations

    for implementation identified by ISDA and SIFMA in their January 18,

    2011 report. See Block trade reporting for over-the-counter

    derivatives markets, note 32 supra.

    ---------------------------------------------------------------------------

    4. Benefits Relevant to the Amendments to Sec. 43.4

    The Commission anticipates that the anonymity provisions of Sec.

    43.4 will generate several overarching benefits to swap market

    participants, registered entities and the general public. In the first

    instance, the Commission anticipates that the cap size amendments to

    Sec. 43.4(h) will benefit market participants, registered entities and

    the general public by providing greater price transparency with respect

    to swaps with notional amounts that fall between the post-initial

    appropriate minimum block size and post-initial cap size for a

    particular swap category. During the post-initial period, the

    Commission will set appropriate minimum block sizes based on the 67

    percent notional amount calculation \673\ and cap sizes based on the

    75-percent notional amount calculation.\674\ Although swaps with

    notional amounts that fall between these two sizes will be subject to a

    time delay, the exact notional amounts of these swaps eventually will

    be publicly disclosed. The delayed public disclosure of the notional

    amount of these swaps will provide market participants, registered

    entities and the general public with meaningful price transparency.

    ---------------------------------------------------------------------------

    \673\ See proposed Sec. 43.6(c)(1).

    \674\ See proposed Sec. 43.6(c)(2).

    ---------------------------------------------------------------------------

    The masking provisions in the amendment to Sec. 43.4(d)(4) and

    appendix D to part 43 will further benefit market participants,

    registered entities and the general public by enhancing price discovery

    with respect to swaps that currently are not required to be publicly

    disclosed under part 43. Section 43.4(d)(4) currently requires SDRs to

    publicly disseminate swap transaction and pricing data for publicly

    reportable swap transactions that reference or are economically related

    to the 29 contracts identified in appendix B to part 43. However, the

    Commission believes there are a significant number of swaps in the

    other commodity asset class that are not economically related to the 29

    contracts identified on this appendix to part 43. The amendment

    creating new Sec. 43.4(d)(4)(iii) will require the public

    dissemination of data on these swaps. The real-time public reporting of

    these swaps will enhance price discovery in the other commodity asset

    class.

    [[Page 32930]]

    In addition, the rule incorporates flexibility to adjust post-

    initial cap sizes in response to changing markets. Section 43.4(h) will

    permit the Commission to set cap sizes no less than once annually

    during the post-initial period. If swap market conditions change

    significantly after the implementation of the provisions of this

    rulemaking, then the Commission can react in a timely manner to further

    improve price transparency or to mitigate adverse effects on market

    liquidity.\675\

    ---------------------------------------------------------------------------

    \675\ This benefit is consistent with one of the considerations

    for implementation identified by ISDA and SIFMA in their January 18,

    2011 report. See Block trade reporting for over-the-counter

    derivatives markets, note 32 supra.

    ---------------------------------------------------------------------------

    5. Alternatives

    The Commission received numerous comments supporting alternatives

    to the proposed anonymity provisions in Sec. 43.4(d)(4) and (h). These

    alternatives fall into two basic categories: (1) Post-initial cap size

    level; and (2) preventing public disclosure of swap market participant

    identity. In regard to cap size, seven commenters recommended that the

    Commission set post-initial cap sizes matching the minimum block size

    thresholds established by the Commission. AII supported setting the

    post-initial cap size for each swap category at the same level as the

    block size threshold and states that the 75 percent notional amount

    calculation is far too high.\676\

    ---------------------------------------------------------------------------

    \676\ CL-AII at 12.

    ---------------------------------------------------------------------------

    For the initial period, AII and ISDA/SIFMA argued that the cap size

    should be the lower of block size and the interim cap size in Sec.

    43.4(h)(1).\677\ Barclays recommended that the post initial period cap

    sizes be introduced at more nuanced levels that reflect the differences

    between product's traded volumes.\678\ EEI stated that the initial cap

    size of $25 million for both the Electricity Swap Contracts and the

    Other Commodity Electricity Swap Category is too high, as is the 75

    percent notional amount for the post-initial period. EEI recommended

    that the Commission adopt a fixed cap size of $3 million for both

    periods.\679\

    ---------------------------------------------------------------------------

    \677\ CL-AII at 12; CL-ISDA/SIFMA at 15.

    \678\ CL-Barclays at 6.

    \679\ CL-EEI at 5.

    ---------------------------------------------------------------------------

    The Commission has evaluated these various alternatives concerning

    post-initial cap size levels against the statutory requirements imposed

    upon it by Section 2(a)(13): bring real-time public reporting to the

    swaps market subject to time delays for block trades and large notional

    off-facility swaps that it determines appropriate.\680\ However, the

    statute only calls for a time delay--it does not provide for

    information to be kept from the market in perpetuity. All of the

    information regarding a block trade is reported to the market at the

    end of the block time delay. Notional or principal amount information

    above cap sizes, on the other hand, is never expressed to the market.

    Because the notional amount of the trade is neither reported to the

    market in real-time, nor reported to the market at all, the Commission

    believes that cap sizes should be set at a higher level than block

    sizes. The 75 percent notional test balances the competing interests of

    providing meaningful real-time public reporting to the swaps market and

    protecting the anonymity of swap market participants, while taking into

    account potential impacts on market liquidity.

    ---------------------------------------------------------------------------

    \680\ Section 2(a)(13)(E) of the CEA.

    ---------------------------------------------------------------------------

    The additional information provided to the market regarding the

    size of block trades that are below the cap size may enhance price

    discovery by publicly disseminating more information relating to market

    depth and the notional sizes of publicly reportable swap transactions.

    This, in turn, promotes increased market liquidity.

    In regard to alternatives for preventing the public disclosure of

    the identities of swap market participants, the Commission received

    three comments regarding the masking of specific delivery or pricing

    detail of energy and power swaps. EEI recommended that the Commission

    mask data regarding Other Commodity Electricity Swaps according to the

    North American Electric Reliability Corporation eight regions rather

    than the FERC regions proposed.\681\ Barclays recommended that the

    Commission use wider geographic regions when publicly disseminating

    data for commodity swaps with very specific underlying assets and/or

    delivery points and develop an appropriate process to avoid identifying

    issuers of debt.\682\ Spring Trading supported further measures to

    prevent public disclosure of identities, business transactions, and

    market positions of swap market participants, and recommended

    disclosing a subset of data on a collective basis at a later date.

    ---------------------------------------------------------------------------

    \681\ CL-EEI at 12-13.

    \682\ CL-Barclays at 6.

    ---------------------------------------------------------------------------

    After consideration of the alternatives suggested by commenters,

    the Commission is adopting Sec. 43.4(d)(iii) with the following

    modification that it believes affords greater anonymity protection

    relative to the Further Block Proposal, without adversely impacting

    transparency. The modification is: For publicly reportable swap

    transactions that have electricity and sources as an underlying asset

    and have a specific delivery or pricing point in the United States, the

    Commission is requiring SDRs to public disseminate the specific

    delivery or pricing point based on a description of one of the North

    American Electric Reliability Corporation (``NERC'') regions for

    publicly disseminating delivery or pricing points for electricity swaps

    described in proposed Sec. 43.4(d)(4)(iii). Using the regions

    suggested by EEI further masks specific delivery details and thus

    provides additional protection against public disclosure of identities,

    business transactions, and market positions of swap market

    participants, as recommended by Barclays and Spring Trading.

    The Commission also considered the alternative of having DCMs and

    SEFs set cap sizes. The Commission ultimately chose to determine cap

    sizes itself for the reason that doing so limits the direct burden on

    registered entities to determine and implement appropriate cap sizes

    themselves. As such, the chosen approach will promote market efficiency

    for market participants and registered entities.

    6. Application of the Section 15(a) Factors to the Amendments to Sec.

    43.4

    a. Protection of Market Participants and the Public

    The amendments to Sec. 43.4 protect swap counterparty anonymity on

    an ongoing basis. While cap sizes for some transactions can exceed

    appropriate minimum block sizes in certain circumstances (resulting in

    the public dissemination of notional/principal-amount information after

    a time delay), the Commission believes that for the vast majority of

    impacted swap transactions, the cap-size process and methodology is

    sufficient to distinguish correctly between those for which masking of

    notional or principal amount is required to maintain anonymity and

    those for which it is not.\683\ The Commission believes that setting

    post-initial cap sizes above appropriate minimum block sizes will

    provide additional pricing information with respect to large swap

    transactions, which are large enough to be treated as block trades (or

    large notional off-facility swaps), but small enough that they do not

    exceed the applicable post-

    [[Page 32931]]

    initial cap size. This additional information may enhance price

    discovery by publicly disseminating more information relating to market

    depth and the notional sizes of publicly reportable swap transactions,

    while still protecting the anonymity of swap counterparties and their

    ability to lay off risk when executing extraordinarily large swap

    transactions.

    ---------------------------------------------------------------------------

    \683\ The Commission recognizes that adoption of rules that

    delineate cap sizes insufficient to provide anonymity could cause

    prospective counterparties to forego swap transactions, thus

    adversely impacting market liquidity.

    ---------------------------------------------------------------------------

    b. Efficiency, Competitiveness and Financial Integrity \684\

    ---------------------------------------------------------------------------

    \684\ Although by its terms, section 15(a)(2)(B) applies to

    futures and not swaps, the Commission finds this factor useful in

    analyzing the costs and benefits of swaps regulation, as well. 7

    U.S.C. 19(a)(2)(B).

    ---------------------------------------------------------------------------

    The Commission believes that amendments to Sec. 43.4(h) promote

    market efficiencies and competitiveness since the approach will provide

    market participants with the ability to continue transacting swaps with

    the protection of anonymity, while promoting greater price

    transparency.

    The Commission does not believe that the implementation of the

    anonymity protections established in Sec. 43.4(h) will adversely

    impact the financial integrity of swap markets. The Commission has

    considered the comments provided regarding impacts on liquidity arising

    out of the 75 percent notional cap size. The Commission does not agree

    that the cap size will have a substantial negative impact on market

    liquidity. As stated above, the additional pricing information

    available to the market as a result of the 75 percent notional cap size

    promotes enhanced price discovery by publicly disseminating more

    information relating to market depth and the notional sizes of publicly

    reportable swap transactions, while still protecting the anonymity of

    swap counterparties and their ability to lay off risk when executing

    extraordinarily large swap transactions. This, in turn, promotes market

    liquidity.

    c. Price Discovery

    The cap size amendments to Sec. 43.4(h) should benefit market

    participants, registered entities and the general public by providing

    greater price transparency with respect to swaps with notional amounts

    that fall between the post-initial appropriate minimum block size and

    post-initial cap size for a particular swap category. During the post-

    initial period, the Commission will set appropriate minimum block sizes

    based on the 67 percent notional amount calculation \685\ and cap sizes

    based on the 75-percent notional amount calculation.\686\ Although

    swaps with notional amounts that fall between these two sizes will be

    subject to a time delay, the exact notional amounts of these swaps will

    be publicly disclosed after the established time delay for blocks and

    large notional off-facility swaps.

    ---------------------------------------------------------------------------

    \685\ See proposed Sec. 43.6(c)(1).

    \686\ See proposed Sec. 43.6(c)(2).

    ---------------------------------------------------------------------------

    The masking provisions in the amendment to Sec. 43.4(d)(4) and

    appendix D to part 43 further benefit market participants, registered

    entities and the general public by enhancing price discovery with

    respect to swaps that currently are not required to be publicly

    disclosed under part 43. The amendment creating new Sec.

    43.4(d)(4)(iii) will require the public dissemination of data on these

    swaps. The Commission expects that the real-time public reporting of

    these swaps will enhance price discovery in the other commodity asset

    class.

    d. Sound Risk Management Practices

    To the extent that the amendments to Sec. 43.4 mask the identity,

    business transactions and market positions of swap counterparties, the

    Commission expects that the amendments to Sec. 43.4 provide those

    traders with the anonymity and time delay they require to manage their

    market risk efficiently.

    e. Other Public Interest Considerations

    The Commission does not anticipate that the amendment to Sec.

    43.4(h) will have a material effect on public interest considerations

    other than those identified above.

    F. Costs and Benefits Relevant to Sec. 43.6(h)(6)--Aggregation

    Section 43.6(h)(6) specifies that, except as otherwise provided, it

    is impermissible to aggregate orders for different accounts in order to

    satisfy minimum block trade or cap size requirements. The rule further

    provides that aggregation may be permitted on a DCM or SEF if done by a

    person who: (i)(A) is a CTA who is registered pursuant to Section 4n of

    the Act or is exempt from registration under the Act, or a principal

    thereof, and has discretionary trading authority or directs client

    accounts, (B) is an investment adviser who has discretionary trading

    authority or directs client accounts and satisfies the criteria of

    Sec. 4.7(a)(2)(v) of the Commission's regulations, or (C) is a foreign

    person who performs a role or function similar to the persons described

    in (A) or (B) and is subject as such to foreign regulation, and (ii)

    has more than $25,000,000 in total AUM.

    1. Overview of Comments Received

    The Commission received a number of comments with the proposed

    aggregation rule but none directly addressing the costs and benefits

    considerations of the rule.

    JP Morgan commented that the rule appears to reflect a concern that

    private negotiation affords less protection to unsophisticated

    investors than trading through the central markets, and that since all

    entities that transact in the OTC market already must be ECPs, the

    analogous concern about customer protection in the swaps market is

    already addressed.\687\

    ---------------------------------------------------------------------------

    \687\ CL-JPM at 9, n.13.

    ---------------------------------------------------------------------------

    ICI opposed the minimum assets under management requirement in

    proposed Sec. 43.6(h)(6)(ii) and argued that the Commission did not

    articulate a rationale or policy reason for this requirement.\688\ ICI

    also disagreed that an investment adviser seeking to aggregate orders

    must satisfy the criteria of Sec. 4.7(a)(2)(v) of the Commission's

    regulations.\689\

    ---------------------------------------------------------------------------

    \688\ CL-ICI at 3.

    \689\ Id. at 4. An investment adviser satisfies the criteria of

    Sec. 4.7(a)(2)(v) if the investment adviser registers pursuant to

    Sec. 203 of the Investment Advisers Act of 1940, or pursuant to the

    laws of any state, and the investment adviser has been registered

    and active for two years or provides security investment advice to

    securities accounts which, in the aggregate, have total assets in

    excess of $5,000,000 deposited at one or more registered securities

    brokers. 17 CFR 4.7(a)(2)(v).

    ---------------------------------------------------------------------------

    With respect to JP Morgan's comment, the Commission notes that

    customers trading swaps on DCMs do not have to be ECPs. As discussed

    further below, adopted Sec. 43.6(i)(1) allows non-ECP customers to be

    parties to block trades through a qualifying CTA, investment adviser,

    or similar foreign person.\690\ It is possible, therefore, that those

    non-ECP DCM customers may not be aware if they received the best terms

    for their individual swap transactions that are aggregated with other

    transactions. Protection for such customers is therefore necessary, as

    it is for unsophisticated customers in other markets.

    ---------------------------------------------------------------------------

    \690\ See infra Section II.C.6.

    ---------------------------------------------------------------------------

    In response to ICI's opposition to the minimum asset threshold

    under Sec. 43.6(h)(6)(ii), the Commission notes that this threshold

    reflects common industry practice.\691\ CME, for example, has enforced

    the $25 million threshold

    [[Page 32932]]

    in its rules since September 2000.\692\ CME has stated that the

    threshold ``is an effort to establish the professionalism and

    sophistication of the registrant'' \693\ while also expanding the

    number of CTAs and investment advisers eligible to aggregate

    trades.\694\ The Commission believes that the $25 million threshold is

    an appropriate requirement to ensure that persons allowed to aggregate

    trades are appropriately sophisticated with these transactions, while

    at the same time not excluding an unreasonable number of CTAs,

    investment advisers, and similar foreign persons.

    ---------------------------------------------------------------------------

    \691\ See, e.g., CME Rule 526. See also CBOE Futures Exchange

    LLC Rule 415(a)(i); Chicago Board of Trade Rule 526; Eris Exchange,

    LLC Rule 601(b)(10); ICE Futures U.S. Rule 4.07; NASDAQ OMX Futures

    Exchange, Inc. Rule E23; New York Mercantile Exchange, Inc. Rule

    526(I); NYSE Liffe US, LLC Rule 423; and OneChicago LLC Rule 417.

    \692\ See CME Submission 00-99 (Sept. 21, 2000) (modifying CME

    Rule 526 to reduce the threshold from $50,000,000 to $25,000,000).

    CME originally planned to lower the threshold from $50,000,000 to

    $5,000,000, but withdrew the submission and instead proposed to

    lower the threshold to $25,000,000, based on customer suggestions.

    See CME Submission 00-93 (Sept. 1, 2000); CME Submission 00-99 at 5-

    6.

    \693\ Id. at 6 (quoting letter addressed to Jean A. Webb,

    Secretary of the Commission from John G. Gaine, President, Managed

    Funds Association dated April 24, 2000 regarding ``Chicago

    Mercantile Exchange new Proposed Rule 526'').

    \694\ Id. at 4, 6-7. CME also stated in the filing that it

    planned to readdress the threshold amount as it gained experience

    with block trades, but has declined to modify the amount.

    ---------------------------------------------------------------------------

    The Commission also disagrees with ICI's contention that investment

    advisers should not be required to satisfy the criteria under Sec.

    4.7(a)(2)(v), which requires an investment adviser to (1) be registered

    and active as an investment adviser for two years or (2) provide

    securities investment advice to securities accounts which, in the

    aggregate, have total assets in excess of $5 million deposited at one

    or more registered securities brokers.\695\ The Commission first

    adopted provisions similar to current Sec. 4.7(a)(2)(v) in 1992 \696\

    as objective indications that a person had the investment

    sophistication and experience needed to evaluate the risks and benefits

    of investing in commodity pools or a portfolio large enough to indicate

    the same, along with the financial resources to withstand the

    investment risks.\697\ In 2000,\698\ the Commission extended the same

    criteria in current Sec. 4.7(a)(2)(v) to registered investment

    advisers for the same reasons.\699\ The Commission believes that these

    objective criteria, which demonstrate that an investment adviser

    possesses the necessary investment expertise, should also apply with

    respect to allowing such persons to aggregate client orders.

    ---------------------------------------------------------------------------

    \695\ 17 CFR 4.7(a)(2)(v).

    \696\ 57 FR 34853, 34854-55 (Aug. 7, 1992). The final rule

    reduced the amount on deposit threshold to $5 million from the $10

    million required by the proposed rule. See 57 FR 3148, 3152 (Jan.

    28, 1992).

    \697\ See 57 FR at 34854 (quoting 57 FR at 3152).

    \698\ 65 FR 11253, 11257-58 (Mar. 2, 2000).

    \699\ Id. at 11257 (quoting 57 FR at 3152).

    ---------------------------------------------------------------------------

    The Commission believes that the $25 million threshold, as well as

    requiring investment advisers to satisfy the criteria under Sec.

    4.7(a)(2)(v), are both important for certifying that persons allowed to

    aggregate trades are appropriately sophisticated and important for

    protection of market participants and public.

    2. Costs

    The Commission expects that there will be some incremental cost

    attendant to compliance with Sec. 43.6(h)(6). The Commission believes

    that the overall benefits to the market of allowing for the aggregation

    of orders under certain circumstances (i.e., if done on a designated

    contract market or a swap execution facility by certain CTAs,

    investment advisers or foreign persons) will mitigate costs of reduced

    market liquidity that could result from execution of such transactions

    away from the centralized marketplace. The Commission also expects

    there to be some advisors who will be prohibited from aggregating

    orders for different trading accounts in order to satisfy the minimum

    block size, or cap size requirements. The Commission also believes that

    as a result of some advisers not being allowed to aggregate, there

    might be some minimal unquantifiable cost associated with a decrease in

    competition among such traders in the market.

    3. Benefits

    The rule is designed, in large part, to prevent circumvention of

    the exchange trading requirements and of the real-time reporting

    obligations associated with non-block transactions. Absent this

    prohibition, the goals of the Commission's regulations regarding block

    trading, namely increased transaction transparency, better price

    discovery and improved competitiveness in the markets as well as better

    risk management, could be frustrated by those whose trades individually

    fail to meet the minimum block trade threshold (and cap size threshold

    as a result), but nevertheless achieve the benefits intended for

    extraordinarily large positions by aggregating those individual trades.

    In other words, such entities would be able to evade the exchange-

    trading and reporting obligations that are integral to price

    transparency.

    4. Section 15(a) Factors

    a. Protection of Market Participants and the Public

    The Commission believes that the rule will protect market

    participants from unfair practices by preventing trades that do not

    meet the minimum block trade threshold from enjoying extended reporting

    times. This means that trades that are not extraordinarily large, and

    hence, that do not need extra reporting time will not qualify as block

    trades and will be made public as soon as technologically practicable.

    Hence, the rule will increase transparency of non-block transactions,

    and thus, would protect market participants by informing their trading

    determinations through increased transparency and price discovery.

    b. Efficiency, Competitiveness, and Financial Integrity of the Futures

    Markets

    The Commission expects the prohibition of aggregation of trades to

    improve efficiency and competitiveness in the markets by allowing more

    trades to be reported without the time delay that is applied to

    qualifying block trades. This means that a higher number of trades will

    be eligible for real time reporting, and that will increase market

    transparency as well as promote competition in the swap markets. The

    rule also will protect the integrity of the derivatives market by

    ensuring that smaller trades, which do not qualify as block

    transactions, are executed on the trading system where there is pre-

    trade and post-trade transparency.

    The Commission also recognizes that advisors who are prohibited

    from aggregating orders in order to satisfy the minimum block size or

    cap size requirements might not trade at the most favorable prices in

    the market, which might have a negative effect on the number of such

    traders in the market. While the Commission expects that competition in

    the market may be negatively affected as a result of prohibiting

    aggregation, the Commission anticipates that the positive effects of

    the rule on competition outweigh its negative effects.

    c. Price Discovery

    The Commission expects the rule to improve price discovery in the

    swap markets by preventing aggregation of trades and as a result

    promoting more trades to be publicly reported as soon as

    technologically practicable. This will result in enhanced swap market

    price discovery, since market participants and the public will be able

    to observe real-time pricing information for a higher

    [[Page 32933]]

    percentage of transactions in the market. In addition, the Commission

    expects that the rule will enhance price discovery by ensuring that

    smaller trades, which do not qualify as block transactions, are

    executed on the trading system where there is pre-trade and post-trade

    transparency and where buyers and sellers may make informed trading

    decisions based on the market's transparency.

    d. Sound Risk Management Practices

    The Commission anticipates that the criteria will likely result in

    enhanced price discovery as discussed above. With better and more

    accurate data, swap market participants will likely be better able to

    measure and manage risk. The Commission believes that if the

    prohibition of aggregation of trades was not adopted, swap transactions

    may not be reported to an SDR ``as soon as technologically

    practicable.'' The Commission also believes that by preventing this

    delay in the reporting period of a swap transaction to an SDR, the

    Commission will possess the information it needs to monitor the

    transfer and positions of risk among counterparties in the swaps

    market.

    e. Other Public Interest Considerations

    The Commission has not identified any other public interest

    considerations regarding the rule.

    G. Costs and Benefits Relevant to Sec. 43.6(i)--Eligible Block Trade

    Parties

    1. Overview of Comments Received

    The Commission received few comments with respect to the eligible

    block trade parties rule. As discussed above, similar comments

    regarding the exceptions to the prohibitions against aggregation for

    certain persons were submitted with respect to the exception to certain

    persons transacting blocks on a DCM on behalf of non-ECPs. For example,

    ICI opposed the minimum assets under management requirement in proposed

    Sec. 43.6(i)(1) and similarly argued that the Commission did not

    articulate a rationale or policy reason for this requirement.\700\

    ---------------------------------------------------------------------------

    \700\ CL-ICI at 3.

    ---------------------------------------------------------------------------

    The Commission received one specific comment related to costs on

    proposed Sec. 43.6(i)(2). SIFMA commented that proposed Sec.

    43.6(i)(2) may require asset managers to obtain consent from each

    client for whom they will engage in block trades.\701\ SIFMA contended

    that this requirement would be costly and unnecessary, and that notice

    to the customers \702\ or a general grant of investment discretion in

    the investment management agreement, power of attorney, or similar

    document should be sufficient.\703\

    ---------------------------------------------------------------------------

    \701\ CL-SIFMA at 1.

    \702\ Id. at 2.

    \703\ Id.

    ---------------------------------------------------------------------------

    The Commission disagrees with SIFMA's contention regarding the

    burdens of obtaining consent. This burden consent will be minimal

    because Sec. 43.6(i)(2) states that the instruction or consent may be

    provided through a power of attorney or similar document that provides

    discretionary trading authority or the authority to direct trading in

    the account. The consent may therefore be included in existing and

    future customer agreements. The Commission further disagrees that a

    general grant of investment discretion or notice to the customer should

    satisfy Sec. 43.6(i)(2). A customer's written instruction or consent

    is necessary because a customer potentially may not receive the best

    terms for an individual swap transaction that is part of an

    aggregation. The written instruction or consent makes the customer

    aware that block trades may be used on its behalf, allowing the

    customer to decide whether to allow these transactions, through which

    the rule has the added benefit of protection of market participants and

    public. The Commission also would like to point out that a cost

    estimate for that burden has already been presented in the proposed

    rule and received no direct comments on that cost estimate.

    2. Costs

    Section 43.6(i)(1) requires that parties to a block trade must be

    eligible contract participants, as defined under the CEA and Commission

    regulations, except that a DCM may allow: (i) A CTA registered pursuant

    to Section 4n of the Act or exempt from registration under the Act, or

    a principal thereof, and who has discretionary trading authority or

    directs client accounts, (ii) an investment adviser who has

    discretionary trading authority or directs client accounts and

    satisfies the criteria of Sec. 4.7(a)(2)(v) of the Commission's

    regulations, or (iii) a foreign person who performs a similar role or

    function to the persons described in (i) or (ii) and is subject as such

    to foreign regulation, to transact block trades for customers who are

    not eligible contract participants, if such CTA, investment adviser or

    foreign person has more than $25,000,000 in total AUM. This rule

    codifies, in part, the requirement under Section 2(e) of the CEA, which

    requires that ``[i]t shall be unlawful for any person, other than an

    eligible contract participant, to enter into a swap unless the swap is

    entered into on, or subject to the rules of[hellip].a designated

    contract market.'' In addition, the provisions allowing certain

    entities (as described in this release) to enter into block trades on

    behalf of their non-ECP customers on DCMs is substantially similar to

    the existing DCM rules that allow block trading in the futures market.

    Section 43.6(i)(2) further provides that no person may conduct a

    block trade on behalf of a customer unless the person receives prior

    written instruction or consent to do so. The rule further provides that

    such instruction or consent may be provided in the power of attorney or

    similar document by which the customer provides the person with

    discretionary trading authority or the authority to direct the trading

    in its account. The Commission is of the view that the cost associated

    with the written instruction or consent is minimal. The Commission

    estimates that a prior written instruction or consent requirement would

    impose an initial non-recurring burden of approximately 2 personnel

    hours at an approximate cost of $155.54 for each CTA, investment

    adviser or foreign person.\704\

    ---------------------------------------------------------------------------

    \704\ The estimate is calculated as follows: Compliance manager

    at 2 hours. A compliance manager's adjusted hourly wage is $77.77.

    See note 521 supra.

    ---------------------------------------------------------------------------

    3. Benefits

    The Commission has determined that the benefits of Sec. 43.6(i)

    are significant. The rule allows customers who are not ECPs to engage

    in block trade transactions through certain entities as outlined in the

    rule. By permitting certain CTAs, investment advisers and foreign

    persons to transact swaps on behalf of non-ECP customers, the rule

    provides important safeguards for non-ECPs when entering into block

    transactions in swaps. The Commission believes that access to block

    trades will allow customers who are not ECPs to diversify their risk or

    improve their investment strategies. In addition, the Commission also

    anticipates the access to block trades for non-ECPs to increase their

    participation in swap markets, increasing liquidity in the markets for

    everyone.

    The Commission acknowledges that Sec. 43.6(i)(2) has the added

    benefit of protection of market participants and public since the

    written instruction or consent required in Sec. 43.6(i)(2) of the rule

    makes the customer aware that block trades may be used on its behalf,

    allowing the customer to decide whether to allow these transactions.

    [[Page 32934]]

    4. Section 15(a) Factors

    a. Protection of Market Participants and the Public

    As discussed above, Sec. 43.6(i)(2), by requiring that no person

    may conduct a block trade on behalf of a customer unless the person

    receives prior written instruction or consent to do so, protects the

    customer by making sure the customer is aware that block trades may be

    used on its behalf. This means better protection for market

    participants and the public since no one will be able to conduct a

    block trade on their behalf without their consent.

    b. Efficiency, Competitiveness, and Financial Integrity of the Futures

    Markets

    The Commission expects the rule to improve competitiveness in the

    markets by allowing customers who are not ECPs to have access to block

    trades through certain CTAs, investment advisers and foreign persons.

    The Commission anticipates an increase in competitiveness due to the

    fact that more customers would use the swap markets as a result of this

    rule. An increased participation in a market will also serve to

    increase liquidity, as well as competition, in that market.

    c. Price Discovery

    The Commission does not anticipate the rule to have any significant

    effect on price discovery in the market.

    d. Sound Risk Management Practices

    The Commission does not anticipate the rule to have any significant

    effect on risk management practices.

    e. Other Public Interest Considerations

    The Commission has not identified any other public interest

    considerations regarding the rule.

    VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies

    to consider the impact of its rules on ``small entities.'' \705\ A

    regulatory flexibility analysis or certification typically is required

    for ``any rule for which the agency publishes a general notice of

    proposed rulemaking pursuant to'' the notice-and-comment provisions of

    the Administrative Procedure Act, 5 U.S.C. 553(b).\706\ With respect to

    the Further Block Proposal, the Commission provided in its RFA

    statement that the proposed rule would have a direct effect on a number

    of entities, specifically DCMs, SEFs, SDs, MSPs, and certain single

    end-users.\707\ In the Further Block Proposal, the Chairman, on behalf

    of the Commission, certified that the rulemaking would not have a

    significant economic effect on a substantial number of small entities.

    Comments on that certification were sought.

    ---------------------------------------------------------------------------

    \705\ See 5 U.S.C. 601 et seq.

    \706\ See 5 U.S.C. 601(2), 603, 604, and 605.

    \707\ As discussed more fully in the Further Block Proposal, the

    Commission is of the view that registered entities such as SDs and

    MSPs are not small businesses.

    ---------------------------------------------------------------------------

    In the Further Block Proposal, the Commission provided that it

    previously had established that certain entities subject to its

    jurisdiction are not small entities for purposes of the RFA.

    Specifically, the Commission stated that it had previously determined

    that SEFs and DCMs are not small businesses.\708\ The Commission also

    stated that it is of the view that SDs and MSPs are not small

    businesses.\709\

    ---------------------------------------------------------------------------

    \708\ 77 FR at 15499. See 17 CFR part 40 Provisions Common to

    Registered Entities, 75 FR 67282 (Nov. 2, 2010); see also 47 FR

    18618, 18619, Apr. 30, 1982 and 66 FR 45604, 45609, Aug. 29, 2001.

    \709\ 77 FR at 15499.

    ---------------------------------------------------------------------------

    The Commission recognized that the proposed rule could impose

    direct burdens on parties to a swap, which the Commission has

    determined previously may include a percentage of small end users that

    are considered small businesses for the purposes of the RFA.\710\

    ---------------------------------------------------------------------------

    \710\ See 77 FR 1240 (``[T]he Commission recognized that the

    proposed rule could have an economic effect on certain single end

    users, in particular those end users that enter into swap

    transactions with another end-user. Unlike the other parties to

    which the proposed rulemaking would apply, these end users are not

    subject to designation or registration with or to comprehensive

    regulation by the Commission. The Commission recognized that some of

    these end users may be small entities.''). The term reporting party

    also includes swap dealers and major swap participants.

    The Commission previously has determined that these entities do

    fall within the definition of small business for the purpose of the

    RFA. See 75 FR at 76170.

    ---------------------------------------------------------------------------

    Notwithstanding the imposition of this burden, however, the

    determination to certify pursuant to Sec. 605(b) of the RFA that the

    proposed rule would not have a significant economic effect on a

    substantial number of small entities was based upon two major

    considerations. First, Section 43.3 of the Commission's regulations

    already requires these entities to report their swap transaction and

    pricing data to an SDR.\711\ The Commission is of the view that

    requiring these entities to include an additional notification or field

    in conjunction with the reporting of such data would impose, at best, a

    marginal and incremental cost. Second, the proposed rule was structured

    so that most swaps that are expected to be executed by an end user

    would not require notification of the election by the end user, but

    rather by a party that is subject to Commission registration and

    regulation.

    ---------------------------------------------------------------------------

    \711\ See 77 FR 1240.

    ---------------------------------------------------------------------------

    The Commission did not receive any comments respecting its RFA

    certification. Accordingly, for the reasons stated in the Further

    Proposal and set forth above, the Commission continues to believe that

    the rulemaking will not have a significant impact on a substantial

    number of small entities. Therefore, the Chairman, on behalf of the

    Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the

    procedure to establish appropriate minimum block sizes adopted herein

    will not have a significant economic impact on a substantial number of

    small entities.

    VII. Example of a Post-initial Appropriate Minimum Block Size

    Determination Using the 67-percent Notional Amount Calculation

    The example below describes the steps necessary for the Commission

    to determine the post-initial appropriate minimum block size based on

    Sec. 43.6(c)(1) for a sample set of data in ``Swap Category Z.'' For

    the purposes of this example, Swap Category Z had 35 transactions over

    the given observation period. The observations are described in table A

    below and are ordered by time of execution (i.e., Transaction

    1 was executed prior to Transaction 2).

    Table A--Swap Category Z Transactions

    ----------------------------------------------------------------------------------------------------------------

    Transaction 1 i>2 i>3 i>4 i>5

    ----------------------------------------------------------------------------------------------------------------

    5,000,000 25,000,000 50,000,000 1.05 3,243,571

    ----------------------------------------------------------------------------------------------------------------

    [[Page 32935]]

    Transaction 6 i>7 i>8 i>9 i>10

    ----------------------------------------------------------------------------------------------------------------

    100,000,000 525,000,000 10,000,000 15,000,000 25,000,000

    ----------------------------------------------------------------------------------------------------------------

    Transaction 11 i>12 i>13 i>14 i>15

    ----------------------------------------------------------------------------------------------------------------

    100,000,000 265,000,000 25,000,000 100,000,000 100,000,000

    ----------------------------------------------------------------------------------------------------------------

    Transaction 16 i>17 i>18 i>19 i>20

    ----------------------------------------------------------------------------------------------------------------

    100,000,000 150,000,000 50,000,000 100,000,000 50,000,000

    ----------------------------------------------------------------------------------------------------------------

    Transaction 21 i>22 i>23 i>24 i>25

    ----------------------------------------------------------------------------------------------------------------

    75,000,000 82,352,124 100,000,000 1,235,726 60,000,000

    ----------------------------------------------------------------------------------------------------------------

    Transaction 26 i>27 i>28 i>29 i>30

    ----------------------------------------------------------------------------------------------------------------

    100,000,000 50,000,000 50,000,000 100,000,000 100,000,000

    ----------------------------------------------------------------------------------------------------------------

    Transaction 31 i>32 i>33 i>34 i>35

    ----------------------------------------------------------------------------------------------------------------

    100,000,000 100,000,000 32,875,000 50,000,000 440,000,000

    ----------------------------------------------------------------------------------------------------------------

    Step 1: Remove the transactions that do not fall within the

    definition of ``publicly reportable swap transactions'' as described in

    Sec. 43.2.

    In this example, assume that five of the 35 transactions in Swap

    Category Z do not fall within the definition of ``publicly reportable

    swap transaction.'' These five transactions, listed in table B below

    would be removed for the data set that will be used to determine the

    post-initial appropriate minimum block size.

    Table B--Transactions That Do Not Fall Within the Definition of ``Publicly Reportable Swap Transaction''

    ----------------------------------------------------------------------------------------------------------------

    Transaction 4 i>13 i>16 i>20 i>21

    ----------------------------------------------------------------------------------------------------------------

    1.05 25,000,000 100,000,000 50,000,000 75,000,000

    ----------------------------------------------------------------------------------------------------------------

    Step 2A: Convert the publicly reportable swap transactions in the

    swap category to the same currency or units.

    In order to accurately compare the transactions in a swap category

    and apply the appropriate minimum block size calculation, the

    transactions must be converted to the same currency or unit.

    In this example, the publicly reportable swap transactions were all

    denominated in U.S. dollars, so no conversion was necessary. If the

    notional amounts of any of the publicly reportable swap transactions in

    Swap Category Z had been denominated in a currency other than U.S.

    dollars, then the notional amounts of such publicly reportable swap

    transactions would have been adjusted by the daily exchange rates for

    the period to arrive at the U.S. dollars equivalent notional amount.

    Step 2B: Examine the remaining data set for any outliers and remove

    any such outliers, resulting in a trimmed data set.

    The publicly reportable swap transactions are examined to identify

    any outliers. If an outlier is discovered, then it would be removed

    from the data set. To conduct this analysis, the notional amounts of

    all of the publicly reportable swap transactions remaining after step 1

    and step 2A are transformed by Log10. The average and

    standard deviation (``STDEV'') of these transformed notional amounts

    would then be calculated. Any transformed notional amount of a publicly

    reportable swap transaction that is larger than the average of all

    transformed notional amounts plus four times the standard deviation

    would be omitted from the data set as an outlier.

    In the data set used in this example, none of the observations were

    large enough to qualify as an outlier, as shown in the calculations

    described in Table C.

    Table C--Testing for Outliers in the Publicly Reportable Swap Transaction Data Set

    ----------------------------------------------------------------------------------------------------------------

    ----------------------------------------------------------------------------------------------------------------

    Log10 Average............................... 7.75 4*STDEV+Average............... 10.2

    Log10 STDEV................................. 0.611359 Omitted Values................ None

    -------------------------------------------------

    4* STDEV.................................... 2.45

    ----------------------------------------------------------------------------------------------------------------

    Step 3: Sum the notional amounts of the remaining publicly

    reportable swap transactions in the data set resulting after step 2B.

    Note: The notional amounts being summed in this step are the original

    amounts following step 2A and not the Log10 transformed

    amounts used for the process in step 2B used to identify and omit any

    outliers.

    Using the equation described immediately below, the notional

    amounts are added to determine the

    [[Page 32936]]

    sum total of all notional amounts remaining in the data set for a

    particular swap category. In this example, the notional amounts of the

    30 remaining publicly reportable swap transactions in Swap Category Z

    are added together to come up with a net value of 2,989,706,421.

    [GRAPHIC] [TIFF OMITTED] TR31MY13.000

    30 = Notional amount of swap transaction

    i = Index variable of summation for the set

    Ti = Indicator for publicly reportable swap transactions

    PRSTNV = Sum total of the notional amounts of all remaining publicly

    reportable swap transactions in the set

    PRSTNV = 2,989,706,421

    Step 4: Calculate the 67 Percent Notional Amount.

    Using the resulting amount from step 2B, a 67-percent notional

    amount value would be calculated by using the equation:

    PRSTNV * 0.67 = G

    G = 67 percent of the sum total of the notional amounts of all

    remaining publicly reportable swap transactions in the set.

    G = 2,003,103,302

    Step 5: Order and rank the observations based on notional amount of

    the publicly reportable swap transaction from least to greatest.

    The remaining publicly reportable swap transactions having

    previously been converted to U.S. dollar equivalents must be ranked,

    based on the notional sizes of such transactions, from least to

    greatest. The resulting ranking yields the PRSTi[squ]. Table D below

    reflects the ranking of the remaining publicly reportable swap

    transactions based on their notional amount sizes for this example.

    PRSTi = a publicly reportable swap transaction in the data set

    ranked from least to greatest based on the notional amounts of such

    transactions.

    Step 6A: Calculate the running sum of all PRSTi.

    A running sum would be calculated by adding together the ranked and

    ordered publicly reportable swap transactions from step 5 (PRSTi) in

    least to greatest order. The calculations of running sum values with

    respect to this example are reflected in Table D below.

    RS Values = Running sum values

    Table D--PRSTi Values and RS Values

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Rank Order 1 i>2 i>3 i>4 i>5

    PRSTi Values........................................ 1,235,726 3,243,571 5,000,000 10,000,000 15,000,000

    RS Values........................................... 1,235,726 4,479,297 9,479,297 19,479,297 34,479,297

    Rank Order 6 i>7 i>8 i>9 i>10

    PRSTi Values........................................ 25,000,000 25,000,000 32,875,000 50,000,000 50,000,000

    RS Values........................................... 59,479,297 84,479,297 117,354,297 167,354,297 217,354,297

    Rank Order 11 i>12 i>13 i>14 i>15

    PRSTi Values........................................ 50,000,000 50,000,000 50,000,000 60,000,000 82,352,124

    RS Values........................................... 267,354,297 317,354,297 367,354,297 427,354,297 509,706,421

    Rank Order 16 i>17 i>18 i>19 i>20

    PRSTi Values........................................ 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000

    RS Values........................................... 609,706,421 709,706,421 809,706,421 909,706,421 1,009,706,421

    Rank Order 21 i>22 i>23 i>24 i>25

    PRSTi Values........................................ 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000

    RS Values........................................... 1,109,706,421 1,209,706,421 1,309,706,421 1,409,706,421 1,509,706,421

    Rank Order 26 i>27 i>28 i>29 i>30

    PRSTi Values........................................ 100,000,000 150,000,000 265,000,000 440,000,000 525,000,000

    RS Values........................................... 1,609,706,421 1,759,706,421 2,024,706,421 2,464,706,421 2,989,706,421

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Step 6B: Select first RS Value that is greater than or equal to G.

    In this example, G is equal to 2,003,103,302, meaning that the RS

    Value that must be selected would have to be greater than that number.

    The first RS Value that is greater than or equal to G can be found in

    the observation that corresponds to Rank Order 28 (see Table

    D). The RS Value of the Rank Order 28 observation is

    2,024,706,421.

    Step 7: Select the PRSTt that corresponds to the observation

    determined in step 6B.

    In this example, the PRSTt that corresponds to the RS Value

    determined in step 6B (Rank Order 28) is 265,000,000.

    Step 8: Determine the rounded notional amount.

    Calculate the rounded notional amount under the process described

    in the proposed amendment to Sec. 43.2. The 265,000,000 amount would

    be rounded to the nearest 10 million for public dissemination, or

    270,000,000.

    Step 9: Set the appropriate minimum block size at the amount

    calculated in step 8.

    In this example, the appropriate minimum block size for swap

    category Z would be 270,000,000 for the observation period.

    Post-Initial Appropriate Minimum Block Size = $270,000,000

    VIII. List of Commenters Who Responded to the Further Block Proposal

    ------------------------------------------------------------------------

    Acronym/Abbreviation Commenter

    ------------------------------------------------------------------------

    Abbott.................................... Abbott, Robert.

    AFR....................................... Americans for Financial

    Reform.

    ABC....................................... American Benefits Counsel.

    Arbor..................................... Arbor Research & Trading,

    Inc.

    AII....................................... Association of Institutional

    Investors.

    Barclays.................................. Barclays Bank PLC.

    Barnard................................... Barnard, Chris.

    Better Markets............................ Better Markets, Inc.

    CIEBA..................................... Committee on the Investment

    of Employee Benefit Assets.

    CME Group................................. CME Group Inc.

    [[Page 32937]]

    CRT....................................... CRT Capital Group LLC.

    Currenex.................................. Currenex, Inc.

    EEI....................................... Edison Electric Institute.

    FIA....................................... Futures Industry Association

    Principle Traders Group.

    Freddie................................... Freddie Mac.

    GFMA...................................... Global Foreign Exchange

    Division of the Global

    Financial Markets

    Association.

    ICAP Energy............................... ICAP Energy LLC.

    ICAP...................................... ICAP North America Inc.

    ISDA/SIFMA................................ International Swaps and

    Derivatives Association and

    the Securities Industry and

    Financial Markets

    Association.

    ICI....................................... Investment Company

    Institute.

    Javelin................................... Javelin Capital Markets,

    LLC.

    Jefferies................................. Jefferies & Co., Inc.

    JPM....................................... J.P. Morgan.

    Kearney................................... Kearney, Timothy.

    Kinetix................................... Kinetix Trading Solutions.

    MFA....................................... Managed Funds Association.

    Morgan Stanley............................ Morgan Stanley.

    ODEX...................................... ODEX Group.

    Parascandola.............................. Parascandola, James.

    Parity.................................... Parity Energy, Inc.

    Pierpont.................................. Pierpont Securities Holdings

    LLC.

    R.J. O'Brien.............................. R.J. O'Brien & Associates,

    Inc.

    SIFMA..................................... Asset Management Group of

    the Securities Industry and

    Financial Markets

    Association.

    SDMA...................................... Swaps & Derivatives Market

    Association.

    Spring Trading............................ Spring Trading, Inc.

    Vanguard.................................. Vanguard.

    WMBAA..................................... Wholesale Market Brokers'

    Association, Americas.

    Wolkoff................................... Wolkoff Consulting Services

    LLC.

    ------------------------------------------------------------------------

    List of Subjects in 17 CFR Part 43

    Real-time public reporting, Block trades, Large notional off-

    facility swaps, Reporting and recordkeeping requirements.

    Accordingly, for the reasons discussed in the preamble, the

    Commodity Futures Trading Commission amends 17 CFR part 43 as follows:

    PART 43--REAL-TIME PUBLIC REPORTING

    0

    1. The authority citation for part 43 is revised to read as follows:

    Authority: 7 U.S.C. 2(a), 12a(5) and 24a, as amended by Pub. L.

    111-203, 124 Stat. 1376 (2010).

    0

    2. Amend Sec. 43.2 by adding the following definitions in alphabetical

    order to read as follows:

    Sec. 43.2 Definitions.

    * * * * *

    Cap size means, for each swap category, the maximum notional or

    principal amount of a publicly reportable swap transaction that is

    publicly disseminated.

    * * * * *

    Economically related means a direct or indirect reference to the

    same commodity at the same delivery location or locations, or with the

    same or a substantially similar cash market price series.

    * * * * *

    Futures-related swap means a swap (as defined in section 1a(47) of

    the Act and as further defined by the Commission in implementing

    regulations) that is economically related to a futures contract.

    * * * * *

    Major currencies means the currencies, and the cross-rates between

    the currencies, of Australia, Canada, Denmark, New Zealand, Norway,

    South Africa, South Korea, Sweden, and Switzerland.

    Non-major currencies means all other currencies that are not super-

    major currencies or major currencies.

    * * * * *

    Physical commodity swap means a swap in the other commodity asset

    class that is based on a tangible commodity.

    * * * * *

    Reference price means a floating price series (including

    derivatives contract prices and cash market prices or price indices)

    used by the parties to a swap or swaption to determine payments made,

    exchanged or accrued under the terms of a swap contract.

    * * * * *

    Super-major currencies means the currencies of the European

    Monetary Union, Japan, the United Kingdom, and United States.

    Swaps with composite reference prices means swaps based on

    reference prices that are composed of more than one reference price

    from more than one swap category.

    * * * * *

    Trimmed data set means a data set that has had extraordinarily

    large notional transactions removed by transforming the data into a

    logarithm with a base of 10, computing the mean, and excluding

    transactions that are beyond four standard deviations above the mean.

    * * * * *

    0

    3. Amend Sec. 43.4 as follows:

    0

    A. Revise paragraph (d)(4)(i);

    0

    B. Revise paragraph (d)(4)(ii)(B);

    0

    C. Add paragraph (d)(4)(iii);

    0

    D. Revise paragraph (h).

    The revisions and addition read as follows:

    Sec. 43.4 Swap transaction and pricing data to be publicly

    disseminated in real-time.

    * * * * *

    (d) * * *

    (4) * * *

    (i) A registered swap data repository shall publicly disseminate

    swap transaction and pricing data for publicly reportable swap

    transactions in the other commodity asset class in the manner described

    in paragraphs (d)(4)(ii) and (d)(4)(iii) of this section.

    (ii) * * *

    (B) Any publicly reportable swap transaction that is economically

    related to one of the contracts described in Appendix B of this part;

    or

    * * * * *

    [[Page 32938]]

    (iii) The underlying assets of swaps in the other commodity asset

    class that are not described in paragraph (d)(4)(ii) of this section

    shall be publicly disseminated by limiting the geographic detail of the

    underlying assets. The identification of any specific delivery point or

    pricing point associated with the underlying asset of such other

    commodity swap shall be publicly disseminated pursuant to Appendix E of

    this part.

    * * * * *

    (h) Cap sizes.

    (1) Initial cap sizes. Prior to the effective date of a Commission

    determination to establish an applicable post-initial cap size for a

    swap category as determined pursuant to paragraph (h)(2) of this

    section, the initial cap sizes for each swap category shall be equal to

    the greater of the initial appropriate minimum block size for the

    respective swap category in Appendix F of this part or the respective

    cap sizes in paragraphs (h)(1)(i) through (h)(1)(v) of this section. If

    Appendix F of this part does not provide an initial appropriate minimum

    block size for a particular swap category, the initial cap size for

    such swap category shall be equal to the appropriate cap size as set

    forth in paragraphs (h)(1)(i) through (h)(1)(v) of this section.

    (i) For swaps in the interest rate asset class, the publicly

    disseminated notional or principal amount for a swap subject to the

    rules in this part shall be:

    (A) USD 250 million for swaps with a tenor greater than zero up to

    and including two years;

    (B) USD 100 million for swaps with a tenor greater than two years

    up to and including ten years; and

    (C) USD 75 million for swaps with a tenor greater than ten years.

    (ii) For swaps in the credit asset class, the publicly disseminated

    notional or principal amount for a swap subject to the rules in this

    part shall be USD 100 million.

    (iii) For swaps in the equity asset class, the publicly

    disseminated notional or principal amount for a swap subject to the

    rules in this part shall be USD 250 million.

    (iv) For swaps in the foreign exchange asset class, the publicly

    disseminated notional or principal amount for a swap subject to the

    rules in this part shall be USD 250 million.

    (v) For swaps in the other commodity asset class, the publicly

    disseminated notional or principal amount for a swap subject to the

    rules in this part shall be USD 25 million.

    (2) Post-initial cap sizes. Pursuant to the process described in

    Sec. 43.6(f)(1), the Commission shall establish post-initial cap sizes

    using reliable data collected by registered swap data repositories, as

    determined by the Commission, based on the following:

    (i) A one-year window of swap transaction and pricing data

    corresponding to each relevant swap category recalculated no less than

    once each calendar year; and

    (ii) The 75-percent notional amount calculation described in Sec.

    43.6(c)(3) applied to the swap transaction and pricing data described

    in paragraph (h)(2)(i) of this section.

    (3) Commission publication of post-initial cap sizes. The

    Commission shall publish post-initial cap sizes on its Web site at

    http://www.cftc.gov.

    (4) Effective date of post-initial cap sizes. Unless otherwise

    indicated on the Commission's Web site, the post-initial cap sizes

    shall be effective on the first day of the second month following the

    date of publication.

    0

    4. Add Sec. 43.6 to read as follows:

    Sec. 43.6 Block trades and large notional off-facility swaps.

    (a) Commission determination. The Commission shall establish the

    appropriate minimum block size for publicly reportable swap

    transactions based on the swap categories set forth in paragraph (b) of

    this section in accordance with the provisions set forth in paragraphs

    (c), (d), (e), (f) or (h) of this section, as applicable.

    (b) Swap categories. Swap categories shall be established for all

    swaps, by asset class, in the following manner:

    (1) Interest rates asset class. Interest rate asset class swap

    categories shall be based on unique combinations of the following:

    (i) Currency by:

    (A) Super-major currency;

    (B) Major currency; or

    (C) Non-major currency; and

    (ii) Tenor of swap as follows:

    (A) Zero to 46 days;

    (B) Greater than 46 days to three months (47 to 107 days);

    (C) Greater than three months to six months (108 to 198 days);

    (D) Greater than six months to one year (199 to 381 days);

    (E) Greater than one to two years (382 to 746 days);

    (F) Greater than two to five years (747 to 1,842 days);

    (G) Greater than five to ten years (1,843 to 3,668 days);

    (H) Greater than ten to 30 years (3,669 to 10,973 days); or

    (I) Greater than 30 years (10,974 days and above).

    (2) Credit asset class. Credit asset class swap categories shall be

    based on unique combinations of the following:

    (i) Traded Spread rounded to the nearest basis point (0.01) as

    follows:

    (A) 0 to 175 points;

    (B) 176 to 350 points; or

    (C) 351 points and above;

    (ii) Tenor of swap as follows:

    (A) Zero to two years (0-746 days);

    (B) Greater than two to four years (747-1,476 days);

    (C) Greater than four to six years (1,477-2,207 days);

    (D) Greater than six to eight-and-a-half years (2,208-3,120 days);

    (E) Greater than eight-and-a-half to 12.5 years (3,121-4,581 days);

    and

    (F) Greater than 12.5 years (4,582 days and above).

    (3) Equity asset class. There shall be one swap category consisting

    of all swaps in the equity asset class.

    (4) Foreign exchange asset class. Swap categories in the foreign

    exchange asset class shall be grouped as follows:

    (i) By the unique currency combinations of one super-major currency

    paired with one of the following:

    (A) Another super major currency;

    (B) A major currency; or

    (C) A currency of Brazil, China, Czech Republic, Hungary, Israel,

    Mexico, Poland, Russia, and Turkey; or

    (ii) By unique currency combinations not included in paragraph

    (b)(4)(i) of this section.

    (5) Other commodity asset class. Swap contracts in the other

    commodity asset class shall be grouped into swap categories as follows:

    (i) For swaps that are economically related to contracts in

    Appendix B of this part, by the relevant contract as referenced in

    Appendix B of this part; or

    (ii) For swaps that are not economically related to contracts in

    Appendix B of this part, by the following futures-related swaps--

    (A) CME Cheese;

    (B) CBOT Distillers' Dried Grain;

    (C) CBOT Dow Jones-UBS Commodity Index;

    (D) CBOT Ethanol;

    (E) CME Frost Index;

    (F) CME Goldman Sachs Commodity Index (GSCI), (GSCI Excess Return

    Index);

    (G) NYMEX Gulf Coast Sour Crude Oil;

    (H) CME Hurricane Index;

    (I) CME Rainfall Index;

    (J) CME Snowfall Index;

    (K) CME Temperature Index;

    (L) CME U.S. Dollar Cash Settled Crude Palm Oil; or

    (iii) For swaps that are not covered in paragraphs (b)(5)(i) and

    (b)(5)(ii) of this section, the relevant product type as referenced in

    Appendix D of this part.

    [[Page 32939]]

    (c) Methodologies to determine appropriate minimum block sizes and

    cap sizes. In determining appropriate minimum block sizes and cap sizes

    for publicly reportable swap transactions, the Commission shall utilize

    the following statistical calculations--

    (1) 50-percent notional amount calculation. The Commission shall

    use the following procedure in determining the 50-percent notional

    amount calculation:

    (i) Select all of the publicly reportable swap transactions within

    a specific swap category using a one-year window of data beginning with

    a minimum of one year's worth of data;

    (ii) Convert to the same currency or units and use a trimmed data

    set;

    (iii) Determine the sum of the notional amounts of swaps in the

    trimmed data set;

    (iv) Multiply the sum of the notional amount by 50 percent;

    (v) Rank order the observations by notional amount from least to

    greatest;

    (vi) Calculate the cumulative sum of the observations until the

    cumulative sum is equal to or greater than the 50-percent notional

    amount calculated in paragraph (c)(1)(iv) of this section;

    (vii) Select the notional amount associated with that observation;

    (viii) Round the notional amount of that observation to two

    significant digits, or if the notional amount associated with that

    observation is already significant to two digits, increase that

    notional amount to the next highest rounding point of two significant

    digits; and

    (ix) Set the appropriate minimum block size at the amount

    calculated in paragraph (c)(1)(viii) of this section.

    (2) 67-percent notional amount calculation. The Commission shall

    use the following procedure in determining the 67-percent notional

    amount calculation:

    (i) Select all of the publicly reportable swap transactions within

    a specific swap category using a one-year window of data beginning with

    a minimum of one year's worth of data;

    (ii) Convert to the same currency or units and use a trimmed data

    set;

    (iii) Determine the sum of the notional amounts of swaps in the

    trimmed data set;

    (iv) Multiply the sum of the notional amount by 67 percent;

    (v) Rank order the observations by notional amount from least to

    greatest;

    (vi) Calculate the cumulative sum of the observations until the

    cumulative sum is equal to or greater than the 67-percent notional

    amount calculated in paragraph (c)(2)(iv) of this section;

    (vii) Select the notional amount associated with that observation;

    (viii) Round the notional amount of that observation to two

    significant digits, or if the notional amount associated with that

    observation is already significant to two digits, increase that

    notional amount to the next highest rounding point of two significant

    digits; and

    (ix) Set the appropriate minimum block size at the amount

    calculated in paragraph (c)(2)(viii) of this section.

    (3) 75-percent notional amount calculation. The Commission shall

    use the following procedure in determining the 75-percent notional

    amount calculation:

    (i) Select all of the publicly reportable swap transactions within

    a specific swap category using a one-year window of data beginning with

    a minimum of one year's worth of data;

    (ii) Convert to the same currency or units and use a trimmed data

    set;

    (iii) Determine the sum of the notional amounts of swaps in the

    trimmed data set;

    (iv) Multiply the sum of the notional amount by 75 percent;

    (v) Rank order the observations by notional amount from least to

    greatest;

    (vi) Calculate the cumulative sum of the observations until the

    cumulative sum is equal to or greater than the 75-percent notional

    amount calculated in paragraph (c)(3)(iv) of this section;

    (vii) Select the notional amount associated with that observation;

    (viii) Round the notional amount of that observation to two

    significant digits, or if the notional amount associated with that

    observation is already significant to two digits, increase that

    notional amount to the next highest rounding point of two significant

    digits; and

    (ix) Set the appropriate minimum block size at the amount

    calculated in paragraph (c)(3)(viii) of this section.

    (d) No appropriate minimum block sizes for swaps in the equity

    asset class. Publicly reportable swap transactions in the equity asset

    class shall not be treated as block trades or large notional off-

    facility swaps.

    (e) Initial appropriate minimum block sizes. Prior to the

    Commission making a determination as described in paragraph (f)(1) of

    this section, the following initial appropriate minimum block sizes

    shall apply:

    (1) Prescribed appropriate minimum block sizes. Except as otherwise

    provided in paragraph (e)(1) of this section, for any publicly

    reportable swap transaction that falls within the swap categories

    described in paragraphs (b)(1), (b)(2), (b)(4)(i), (b)(5)(i) or

    (b)(5)(ii) of this section, the initial appropriate minimum block size

    for such publicly reportable swap transaction shall be the appropriate

    minimum block size that is in Appendix F of this part.

    (2) Certain swaps in the foreign exchange and other commodity asset

    classes. All swaps or instruments in the swap categories described in

    paragraphs (b)(4)(ii) and (b)(5)(iii) of this section shall be eligible

    to be treated as a block trade or large notional off-facility swap, as

    applicable.

    (3) Exception. Publicly reportable swap transactions described in

    paragraph (b)(5)(i) of this section that are economically related to a

    futures contract in Appendix B of this part shall not qualify to be

    treated as block trades or large notional off-facility swaps (as

    applicable), if such futures contract is not subject to a designated

    contract market's block trading rules.

    (f) Post-initial process to determine appropriate minimum block

    sizes.

    (1) Post-initial period. After a registered swap data repository

    has collected at least one year of reliable data for a particular asset

    class, the Commission shall establish, by swap categories, the post-

    initial appropriate minimum block sizes as described in paragraphs

    (f)(2) through (f)(5) of this section. No less than once each calendar

    year thereafter, the Commission shall update the post-initial

    appropriate minimum block sizes.

    (2) Post-initial appropriate minimum block sizes for certain swaps.

    The Commission shall determine post-initial appropriate minimum block

    sizes for the swap categories described in paragraphs (b)(1), (b)(2),

    (b)(4)(i) and (b)(5) of this section by utilizing a one-year window of

    swap transaction and pricing data corresponding to each relevant swap

    category reviewed no less than once each calendar year, and by applying

    the 67-percent notional amount calculation to such data.

    (3) Certain swaps in the foreign exchange asset class. All swaps or

    instruments in the swap category described in paragraph (b)(4)(ii) of

    this section shall be eligible to be treated as a block trade or large

    notional off-facility swap, as applicable.

    (4) Commission publication of post-initial appropriate minimum

    block sizes. The Commission shall publish the appropriate minimum block

    sizes determined pursuant to paragraph (f)(1) of this section on its

    Web site at http://www.cftc.gov.

    (5) Effective date of post-initial appropriate minimum block sizes.

    Unless otherwise indicated on the Commission's Web site, the post-

    initial appropriate minimum block sizes described in paragraph (f)(1)

    of this

    [[Page 32940]]

    section shall be effective on the first day of the second month

    following the date of publication.

    (g) Required notification.

    (1) Block trade election.

    (i) The parties to a publicly reportable swap transaction that has

    a notional amount at or above the appropriate minimum block size shall

    notify the registered swap execution facility or designated contract

    market, as applicable, pursuant to the rules of such registered swap

    execution facility or designated contract market, of its election to

    have the publicly reportable swap transaction treated as a block trade.

    (ii) The registered swap execution facility or designated contract

    market, as applicable, pursuant to the rules of which a block trade is

    executed shall notify the registered swap data repository of such a

    block trade election when transmitting swap transaction and pricing

    data to such swap data repository in accordance with Sec. 43.3(b)(1).

    (2) Large notional off-facility swap election. A reporting party

    who executes an off-facility swap that has a notional amount at or

    above the appropriate minimum block size shall notify the applicable

    registered swap data repository that such swap transaction qualifies as

    a large notional off-facility swap concurrent with the transmission of

    swap transaction and pricing data in accordance with this part.

    (h) Special provisions relating to appropriate minimum block sizes

    and cap sizes. The following special rules shall apply to the

    determination of appropriate minimum block sizes and cap sizes--

    (1) Swaps with optionality. The notional amount of a swap with

    optionality shall equal the notional amount of the component of the

    swap that does not include the option component.

    (2) Swaps with composite reference prices. The parties to a swap

    transaction with composite reference prices may elect to apply the

    lowest appropriate minimum block size or cap size applicable to one

    component reference price's swap category of such publicly reportable

    swap transaction.

    (3) Notional amounts for physical commodity swaps. Unless otherwise

    specified in this part, the notional amount for a physical commodity

    swap shall be based on the notional unit measure utilized in the

    related futures contract market or the predominant notional unit

    measure used to determine notional quantities in the cash market for

    the relevant, underlying physical commodity.

    (4) Currency conversion. Unless otherwise specified in this part,

    when the appropriate minimum block size or cap size for a publicly

    reportable swap transaction is denominated in a currency other than

    U.S. dollars, parties to a swap and registered entities may use a

    currency exchange rate that is widely published within the preceding

    two business days from the date of execution of the swap transaction in

    order to determine such qualification.

    (5) Successor currencies. For currencies that succeed a super-major

    currency, the appropriate currency classification for such currency

    shall be based on the corresponding nominal gross domestic product

    classification (in U.S. dollars) as determined in the most recent World

    Bank, World Development Indicator at the time of succession. If the

    gross domestic product of the country or nation utilizing the successor

    currency is:

    (i) Greater than $2 trillion, then the successor currency shall be

    included among the super-major currencies;

    (ii) Greater than $500 billion but less than $2 trillion, then the

    successor currency shall be included among the major currencies; or

    (iii) Less than $500 billion, then the successor currency shall be

    included among the non-major currencies.

    (6) Aggregation. Except as otherwise stated in this paragraph, the

    aggregation of orders for different accounts in order to satisfy the

    minimum block trade size or the cap size requirement is prohibited.

    Aggregation is permissible on a designated contract market or swap

    execution facility if done by a person who:

    (i) (A) Is a commodity trading advisor registered pursuant to

    Section 4n of the Act, or exempt from registration under the Act, or a

    principal thereof, who has discretionary trading authority or directs

    client accounts,

    (B) Is an investment adviser who has discretionary trading

    authority or directs client accounts and satisfies the criteria of

    Sec. 4.7(a)(2)(v) of this chapter, or

    (C) Is a foreign person who performs a similar role or function as

    the persons described in paragraphs (h)(6)(i)(A) or (h)(6)(i)(B) of

    this section and is subject as such to foreign regulation; and,

    (ii) Has more than $25,000,000 in total assets under management.

    (i) Eligible Block Trade Parties.

    (1) Parties to a block trade must be ``eligible contract

    participants,'' as defined in Section 1a(18) of the Act and the

    Commission's regulations. However, a designated contract market may

    allow:

    (i) A commodity trading advisor registered pursuant to Section 4n

    of the Act, or exempt from registration under the Act, or a principal

    thereof, who has discretionary trading authority or directs client

    accounts,

    (ii) An investment adviser who has discretionary trading authority

    or directs client accounts and satisfies the criteria of Sec.

    4.7(a)(2)(v) of this chapter, or

    (iii) a foreign person who performs a similar role or function as

    the persons described in paragraphs (i)(1)(i) or (ii) of this section

    and is subject as such to foreign regulation, to transact block trades

    for customers who are not eligible contract participants if such

    commodity trading advisor, investment adviser or foreign person has

    more than $25,000,000 in total assets under management.

    (2) A person transacting a block trade on behalf of a customer must

    receive prior written instruction or consent from the customer to do

    so. Such instruction or consent may be provided in the power of

    attorney or similar document by which the customer provides the person

    with discretionary trading authority or the authority to direct the

    trading in its account.

    0

    5. Add Sec. 43.7 to read as follows:

    Sec. 43.7 Delegation of authority.

    (a) Authority. The Commission hereby delegates, until it orders

    otherwise, to the Director of the Division of Market Oversight or such

    other employee or employees as the Director may designate from time to

    time, the authority:

    (1) To determine whether swaps fall within specific swap categories

    as described in Sec. 43.6(b);

    (2) To determine and publish post-initial, appropriate minimum

    block sizes as described in Sec. 43.6(f); and

    (3) To determine post-initial cap sizes as described in Sec.

    43.4(h).

    (b) Submission for Commission consideration. The Director of the

    Division of Market Oversight may submit to the Commission for its

    consideration any matter that has been delegated pursuant to this

    section.

    (c) Commission reserves authority. Nothing in this section

    prohibits the Commission, at its election, from exercising the

    authority delegated in this section.

    0

    6. Amend Appendix B to Part 43 to add the following contracts under the

    heading ``Energy'' after the existing listing for ``New York Mercantile

    Exchange New York Harbor Heating Oil'':

    Appendix B to Part 43--Enumerated Physical Commodity Contracts and

    Other Contracts

    * * * * *

    [[Page 32941]]

    Energy

    * * * * *

    ICE Futures SP-15 Day-Ahead Peak Fixed Price

    ICE Futures SP-15 Day-Ahead Off-Peak Fixed Price

    ICE Futures PJM Western Hub Real Time Peak Fixed Price

    ICE Futures PJM Western Hub Real Time Off-Peak Fixed Price

    ICE Futures Mid-Columbia Day-Ahead Peak Fixed Price

    ICE Futures Mid-Columbia Day-Ahead Off-Peak Fixed Price

    Chicago Basis

    HSC Basis

    Socal Border Basis

    Waha Basis

    ICE Futures AB NIT Basis

    NWP Rockies Basis

    PG&E Citygate Basis

    * * * * *

    0

    7. Add Appendix D to Part 43 to read as follows:

    Appendix D to Part 43--Other Commodity Swap Categories

    Other Commodity Group

    Individual Other Commodity

    Grains

    Oats

    Wheat

    Corn

    Rice

    Grains--Other

    Livestock/Meat Products

    Live Cattle

    Pork Bellies

    Feeder Cattle

    Lean Hogs

    Livestock/Meat Products--Other

    Dairy Products

    Milk

    Butter

    Cheese

    Dairy Products--Other

    Oilseed and Products

    Soybean Oil

    Soybean Meal

    Soybeans

    Oilseed and Products--Other

    Fiber

    Cotton

    Fiber--Other

    Foodstuffs/Softs

    Coffee

    Frozen Concentrated Orange Juice

    Sugar

    Cocoa

    Foodstuffs/Softs--Other

    Petroleum and Products

    Jet Fuel

    Ethanol

    Biodiesel

    Fuel Oil

    Heating Oil

    Gasoline

    Naphtha

    Crude Oil

    Diesel

    Petroleum and Products--Other

    Natural Gas and Related Products

    Natural Gas Liquids

    Natural Gas

    Natural Gas and Related Products--Other

    Electricity and Sources

    Coal

    Electricity

    Uranium

    Electricity and Sources--Other

    Precious Metals

    Palladium

    Platinum

    Silver

    Gold

    Precious Metals--Other

    Base Metals

    Steel

    Copper

    Base Metals--Other

    Wood Products

    Lumber

    Pulp

    Wood Products--Other

    Real Estate

    Real Estate

    Chemicals

    Chemicals

    Plastics

    Plastics

    Emissions

    Emissions

    Weather

    Weather

    Multiple Commodity Index

    Multiple Commodity Index

    Other Agricultural

    Other Agricultural

    Other Non-Agricultural

    Other Non-Agricultural

    0

    8. Add Appendix E to Part 43 to read as follows:

    Appendix E to Part 43--Other Commodity Geographic Identification for

    Public Dissemination Pursuant to Sec. 43.4(d)(4)(iii)

    Registered swap data repositories are required by Sec.

    43.4(d)(4)(iii) to publicly disseminate any specific delivery point

    or pricing point associated with publicly reportable swap

    transactions in the ``other commodity'' asset class pursuant to

    Tables E1 and E2 in this appendix. If the underlying asset of a

    publicly reportable swap transaction described in Sec.

    43.4(d)(4)(iii) has a delivery or pricing point that is located in

    the United States, such information shall be publicly disseminated

    pursuant to the regions described in Table E1 in this appendix. If

    the underlying asset of a publicly reportable swap transaction

    described in Sec. 43.4(d)(4)(iii) has a delivery or pricing point

    that is not located in the United States, such information shall be

    publicly disseminated pursuant to the countries or sub-regions, or

    if no country or sub-region, by the other commodity region,

    described in Table E2 in this appendix.

    Table E1. U.S. Delivery or Pricing Points

    Other Commodity Group

    Region

    Natural Gas and Related Products

    Midwest

    Northeast

    Gulf

    Southeast

    Western

    Other--U.S.

    Petroleum and Products

    New England (PADD 1A)

    Central Atlantic (PADD 1B)

    Lower Atlantic (PADD 1C)

    Midwest (PADD 2)

    Gulf Coast (PADD 3)

    Rocky Mountains (PADD 4)

    West Coast (PADD 5)

    Other--U.S.

    Electricity and Sources

    Florida Reliability Coordinating Council (FRCC)

    Midwest Reliability Organization (MRO)

    Northeast Power Coordinating Council (NPCC)

    Reliability First Corporation (RFC)

    SERC Reliability Corporation (SERC)

    Southwest Power Pool, RE (SPP)

    Texas Regional Entity (TRE)

    Western Electricity Coordinating Council (WECC)

    Other--U.S.

    All Remaining Other Commodities (Publicly disseminate the region. If

    pricing or delivery point is not region-specific, indicate ``U.S.'')

    Region 1--(Includes Connecticut, Maine, Massachusetts, New

    Hampshire, Rhode Island, Vermont)

    Region 2--(Includes New Jersey, New York)

    Region 3--(Includes Delaware, District of Columbia, Maryland,

    Pennsylvania, Virginia, West Virginia)

    Region 4--(Includes Alabama, Florida, Georgia, Kentucky,

    Mississippi, North Carolina, South Carolina, Tennessee)

    Region 5--(Includes Illinois, Indiana, Michigan, Minnesota,

    Ohio, Wisconsin)

    Region 6--(Includes Arkansas, Louisiana, New Mexico, Oklahoma,

    Texas)

    Region 7--(Includes Iowa, Kansas, Missouri, Nebraska)

    Region 8--(Includes Colorado, Montana, North Dakota, South

    Dakota, Utah, Wyoming)

    Region 9--(Includes Arizona, California, Hawaii, Nevada)

    Region 10--(Includes Alaska, Idaho, Oregon, Washington)

    Table E2. Non-U.S. Delivery or Pricing Points

    Other Commodity Regions

    Country or Sub-Region

    North America (Other than U.S.)

    Canada

    Mexico

    Central America

    South America

    Brazil

    Other South America

    Europe

    Western Europe

    Northern Europe

    Southern Europe

    Eastern Europe (excluding Russia)

    Russia

    Africa

    Northern Africa

    Western Africa

    Eastern Africa

    Central Africa

    Southern Africa

    Asia-Pacific

    Northern Asia (excluding Russia)

    [[Page 32942]]

    Central Asia

    Eastern Asia

    Western Asia

    Southeast Asia

    Australia/New Zealand/Pacific Islands

    0

    9. Add Appendix F to Part 43 to read as follows:

    Appendix F to Part 43--Initial Appropriate Minimum Block Sizes by Asset

    Class for Block Trades and Large Notional Off-Facility Swaps

    ------------------------------------------------------------------------

    Currency group Currencies

    ------------------------------------------------------------------------

    Super-Major Currencies.......................... United States dollar

    (USD), European Union

    Euro Area euro (EUR),

    United Kingdom pound

    sterling (GBP), and

    Japan yen (JPY).

    Major Currencies................................ Australia dollar

    (AUD), Switzerland

    franc (CHF), Canada

    dollar (CAD),

    Republic of South

    Africa rand (ZAR),

    Republic of Korea won

    (KRW), Kingdom of

    Sweden krona (SEK),

    New Zealand dollar

    (NZD), Kingdom of

    Norway krone (NOK),

    and Denmark krone

    (DKK).

    Non-Major Currencies............................ All other currencies.

    ------------------------------------------------------------------------

    INTEREST RATE SWAPS

    ----------------------------------------------------------------------------------------------------------------

    Tenor less than or equal 50% Notional (in

    Currency group Tenor greater than to millions)

    ----------------------------------------------------------------------------------------------------------------

    Super-Major............................ .......................... 46 days.................. 6,400

    Super-Major............................ 46 days................... Three months (107 days).. 2,100

    Super-Major............................ Three months (107 days)... Six months (198 days).... 1,200

    Super-Major............................ Six months (198 days)..... One year (381 days)...... 1,100

    Super-Major............................ One year (381 days)....... Two years (746 days)..... 460

    Super-Major............................ Two years (746 days)...... Five years (1,842 days).. 240

    Super-Major............................ Five years (1,842 days)... Ten years (3,668 days)... 170

    Super-Major............................ Ten years (3,668 days).... 30 years (10,973 days)... 120

    Super-Major............................ 30 years (10,973 days).... ......................... 67

    Major.................................. .......................... 46 days.................. 2,200

    Major.................................. 46 days................... Three months (107 days).. 580

    Major.................................. Three months (107 days)... Six months (198 days).... 440

    Major.................................. Six months (198 days)..... One year (381 days)...... 220

    Major.................................. One year (381 days)....... Two years (746 days)..... 130

    Major.................................. Two years (746 days)...... Five years (1,842 days).. 88

    Major.................................. Five years (1,842 days)... Ten years (3,668 days)... 49

    Major.................................. Ten years (3,668 days).... 30 years (10,973 days)... 37

    Major.................................. 30 years (10,973 days).... ......................... 15

    Non-Major.............................. .......................... 46 days.................. 230

    Non-Major.............................. 46 days................... Three months (107 days).. 230

    Non-Major.............................. Three months (107 days)... Six months (198 days).... 150

    Non-Major.............................. Six months (198 days)..... One year (381 days)...... 110

    Non-Major.............................. One year (381 days)....... Two years (746 days)..... 54

    Non-Major.............................. Two years (746 days)...... Five years (1,842 days).. 27

    Non-Major.............................. Five years (1,842 days)... Ten years (3,668 days)... 15

    Non-Major.............................. Ten years (3,668 days).... 30 years (10,973 days)... 16

    Non-Major.............................. 30 years (10,973 days).... ......................... 15

    ----------------------------------------------------------------------------------------------------------------

    Credit Swaps

    ----------------------------------------------------------------------------------------------------------------

    Traded tenor less than or 50% Notional (in

    Spread group (Basis Points) Traded tenor greater than equal to Millions)

    ----------------------------------------------------------------------------------------------------------------

    Less than or equal to 175.............. .......................... Two years (746 days)..... 320

    Less than or equal to 175.............. Two years (746 days)...... Four years (1,477 days).. 200

    Less than or equal to 175.............. Four years (1,477 days)... Six years (2,207 days)... 110

    Less than or equal to 175.............. Six years (2,207 days).... Eight years and six 110

    months (3,120 days).

    Less than or equal to 175.............. Eight years and six months Twelve years and six 130

    (3,120 days). months (4,581 days).

    Less than or equal to 175.............. Twelve years and six ......................... 46

    months (4,581 days).

    Greater than 175 and less than or equal .......................... Two years (746 days)..... 140

    to 350.

    Greater than 175 and less than or equal Two years (746 days)...... Four years (1,477 days).. 82

    to 350.

    Greater than 175 and less than or equal Four years (1,477 days)... Six years (2,207 days)... 32

    to 350.

    Greater than 175 and less than or equal Six years (2,207 days).... Eight years and six 20

    to 350. months (3,120 days).

    Greater than 175 and less than or equal Eight years and six months Twelve years and six 26

    to 350. (3,120 days). months (4,581 days).

    Greater than 175 and less than or equal Twelve years and six ......................... 63

    to 350. months (4,581 days).

    Greater than 350....................... .......................... Two years (746 days)..... 66

    [[Page 32943]]

    Greater than 350....................... Two years (746 days)...... Four years (1,477 days).. 41

    Greater than 350....................... Four years (1,477 days)... Six years (2,207 days)... 26

    Greater than 350....................... Six years (2,207 days).... Eight years and six 13

    months (3,120 days).

    Greater than 350....................... Eight years and six months Twelve years and six 13

    (3,120 days). months (4,581 days).

    Greater than 350....................... Twelve years and six ......................... 41

    months (4,581 days).

    ----------------------------------------------------------------------------------------------------------------

    Foreign Exchange Swaps

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Super-major currencies

    -----------------------------------------------------------------------

    GBP (British JPY (Japanese USD (U.S.

    EUR (Euro) pound) yen) dollar)

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Super-major currencies......................... EUR............................ 6,250,000 6,250,000 18,750,000

    GBP............................ 6,250,000* 6,250,000 6,250,000

    JPY............................ 6,250,000* 6,250,000* 1,875,000,000

    USD............................ 18,750,000* 6,250,000* 1,875,000,000*

    Major currencies............................... AUD............................ 6,250,000* 0 10,000,000 10,000,000

    CAD............................ 6,250,000* 0 10,000,000 10,000,000

    CHF............................ 6,250,000* 6,250,000* 12,500,000 12,500,000

    DKK............................ 0 0 0 0

    KRW............................ 0 0 0 6,250,000,000

    SEK............................ 6,250,000* 0 0 10,000,000

    NOK............................ 6,250,000* 0 0 10,000,000

    NZD............................ 0 0 0 5,000,000

    ZAR............................ 0 0 0 25,000,000

    Non-major currencies........................... BRL............................ 0 0 0 5,000,000

    CZK............................ 200,000,000 0 0 200,000,000

    HUF............................ 1,500,000,000 0 0 1,500,000,000

    ILS............................ 0 0 0 50,000,000

    MXN............................ 0 0 0 50,000,000

    PLN............................ 25,000,000 0 0 25,000,000

    RMB............................ 50,000,000 0 50,000,000 50,000,000

    RUB............................ 0 0 0 125,000,000

    TRY............................ 6,250,000* 0 0 10,000,000*

    --------------------------------------------------------------------------------------------------------------------------------------------------------

    All values that do not have an asterisk are denominated in the currency of the left hand side.

    All values that have an asterisk (*) are denominated in the currency indicated on the top of the table.

    Other Commodity Swaps

    ----------------------------------------------------------------------------------------------------------------

    Initial appropriate minimum

    Related futures contract block size Units

    ----------------------------------------------------------------------------------------------------------------

    ............................ .......................................

    AB NIT Basis (ICE)....................... 62,500...................... MMBtu

    Brent Crude (ICE and NYMEX).............. 25,000...................... bbl.

    Cheese (CME)............................. 400,000..................... lbs.

    Class III Milk (CME)..................... NO BLOCKS................... .......................................

    Cocoa (ICE and NYSE LIFFE and NYMEX)..... 1,000....................... metric tons

    Coffee (ICE and NYMEX)................... 3,750,000................... lbs.

    Copper (COMEX)........................... 625,000..................... lbs.

    Corn (CBOT).............................. NO BLOCKS................... bushels

    Cotton No. 2 (ICE and NYMEX)............. 5,000,000................... lbs.

    Distillers' Dried Grain (CBOT)........... 1,000....................... short tons

    Dow Jones-UBS Commodity Index (CBOT)..... 30,000 times index.......... dollars

    Ethanol (CBOT)........................... 290,000..................... gallons

    Feeder Cattle (CME)...................... NO BLOCKS................... .......................................

    Frost Index (CME)........................ 200,000 times index......... euros

    Frozen Concentrated Orange Juice (ICE)... NO BLOCKS................... .......................................

    Gold (COMEX and NYSE Liffe).............. 2,500....................... troy oz.

    Goldman Sachs Commodity Index (GSCI), 5,000 times index........... dollars

    GSCI Excess Return Index (CME).

    Gulf Coast Sour Crude Oil (NYMEX)........ 5,000....................... bbl.

    Hard Red Spring Wheat (MGEX)............. NO BLOCKS................... .......................................

    Hard Winter Wheat (KCBT)................. NO BLOCKS................... .......................................

    Henry Hub Natural Gas (NYMEX)............ 500,000..................... MMBtu

    HSC Basis (ICE and NYMEX)................ 62,500...................... MMBtu

    Hurricane Index (CME).................... 20,000 times index.......... dollars

    Chicago Basis (ICE and NYMEX)............ 62,500...................... MMBtu

    [[Page 32944]]

    ............................ .......................................

    Lean Hogs (CME).......................... NO BLOCKS................... .......................................

    Light Sweet Crude Oil (NYMEX)............ 50,000...................... bbl.

    Live Cattle (CME)........................ NO BLOCKS................... .......................................

    Mid-Columbia Day-Ahead Off-Peak Fixed 250......................... MW/Hr.

    Price (ICE).

    Mid-Columbia Day-Ahead Peak Fixed Price 4,000....................... MW/Hr.

    (ICE).

    New York Harbor RBOB (Blendstock) 1,050,000................... gallons

    Gasoline (NYMEX).

    New York Harbor No. 2 Heating Oil (NYMEX) 1,050,000................... bbl.

    NWP Rockies Basis (ICE and NYMEX)........ 62,500...................... MMBtu

    Oats (CBOT).............................. NO BLOCKS................... .......................................

    Palladium (NYMEX)........................ 1,000....................... troy oz.

    PG&E Citygate Basis (ICE and NYMEX)...... 62,500...................... MMBtu

    PJM Western Hub Real Time Off-Peak Fixed 3,900....................... MW/Hr.

    Price (ICE).

    PJM Western Hub Real Time Peak Fixed 8,000....................... MW/Hr.

    Price (ICE).

    Platinum (NYMEX)......................... 500......................... troy oz.

    Rainfall Index (CME)..................... 10,000 times index.......... dollars

    Rough Rice (CBOT)........................ NO BLOCKS................... .......................................

    Silver (COMEX and NYSE Liffe)............ 125,000..................... troy oz.

    Snowfall Index (CME)..................... 10,000 times index.......... dollars

    Socal Border Basis (ICE and NYMEX)....... 62,500...................... MMBtu

    Soybean (CBOT)........................... NO BLOCKS................... .......................................

    Soybean Meal (CBOT)...................... NO BLOCKS................... .......................................

    Soybean Oil (CBOT)....................... NO BLOCKS................... .......................................

    SP-15 Day-Ahead Peak Fixed Price (ICE)... 4,000....................... MW/Hr.

    SP-15 Day-Ahead Off-Peak Fixed Price 250......................... MW/Hr.

    (ICE).

    Sugar 11 (ICE and NYMEX) 5,000....................... metric tons

    (futures).

    Sugar 16 (ICE) (futures)........ NO BLOCKS................... .......................................

    Temperature Index (CME).................. 400 times index............. currency units

    U.S. Dollar Cash Settled Crude Palm Oil 250......................... metrics tons

    (CME).

    Waha Basis (ICE and NYMEX)............... 62,500...................... MMBtu

    Wheat (CBOT)............................. NO BLOCKS................... .......................................

    ----------------------------------------------------------------------------------------------------------------

    Issued in Washington, DC, on May 16, 2013, by the Commission.

    Christopher J. Kirkpatrick,

    Deputy Secretary of the Commission.

    Appendices to Procedures To Establish Appropriate Minimum Block Sizes

    for Large Notional Off-Facility Swaps and Block Trades--Commission

    Voting Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and

    Wetjen voted in the affirmative; Commissioners Sommers and O'Malia

    voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final block rule for swaps, which is critical to

    promoting transparency in this once opaque market. With this rule,

    the public will benefit from seeing the price and volume of the

    majority of swaps transactions in real time--as soon as

    technologically practicable--after a trade is executed. Further,

    with this rule the public will benefit from the competition that

    will arise as buyers and sellers must transact on transparent

    trading platforms.

    The methodology for determining block sizes is appropriately

    tailored to vary by asset class and by underlying referenced product

    or rate.

    The Commission also has established a phased-in approach for

    setting and implementing appropriate minimum block sizes. During an

    initial one-year period, block sizes in the interest rate and credit

    asset classes will be set such that 50 percent of the notional

    amount of a particular swap category will benefit from pre-trade and

    post-trade transparency. Also during this initial period, the block

    sizes for foreign exchange and other commodity asset classes will be

    based upon the block sizes that designated contract markets have set

    for economically related futures contracts.

    After the initial period, the Commission will determine block

    sizes using a methodology that relies on the data collected by swap

    data repositories. Block sizes will be set such that 67 percent of

    the notional amount of a particular swap category will benefit from

    pre-trade transparency and enhanced post-trade transparency.

    The rule also includes measures to protect the identities,

    market positions and business transactions of swap counterparties

    when their swap transactions and pricing are reported to the public.

    [FR Doc. 2013-12133 Filed 5-30-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: May 31, 2013



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