Font Size: AAA // Print // Bookmark

2013-19945

  • Federal Register, Volume 78 Issue 163 (Thursday, August 22, 2013)[Federal Register Volume 78, Number 163 (Thursday, August 22, 2013)]

    [Rules and Regulations]

    [Pages 52285-52308]

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

    [FR Doc No: 2013-19945]

    [[Page 52285]]

    Vol. 78

    Thursday,

    No. 163

    August 22, 2013

    Part III

    Commodity Futures Trading Commission

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

    17 CFR Parts 4 and 50

    Clearing Exemption for Certain Swaps Entered Into by Cooperatives;

    Harmonization of Compliance Obligations for Registered Investment

    Companies Required To Register as Commodity Pool Operators; Final Rules

    Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 /

    Rules and Regulations

    [[Page 52286]]

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

    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 50

    RIN 3038-AD47

    Clearing Exemption for Certain Swaps Entered Into by Cooperatives

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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

    SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') is adopting final regulations pursuant to its authority

    under section 4(c) of the Commodity Exchange Act (``CEA'') allowing

    cooperatives meeting certain conditions to elect not to submit for

    clearing certain swaps that such cooperatives would otherwise be

    required to submit for clearing in accordance with section 2(h)(1) of

    the CEA.

    DATES: Effective September 23, 2013.

    FOR FURTHER INFORMATION CONTACT: Brian O'Keefe, Deputy Director, 202-

    418-5658, bokeefe@cftc.gov, Division of Clearing and Risk, or Erik F.

    Remmler, Deputy Director, 202-418-7630, eremmler@cftc.gov, Division of

    Swap Dealer and Intermediary Oversight, Commodity Futures Trading

    Commission, Three Lafayette Centre, 1155 21st Street NW., Washington,

    DC 20581.

    I. Background

    The CEA, as amended by Title VII of the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (the ``Dodd-Frank Act''),\1\

    establishes a comprehensive new regulatory framework for swaps. The CEA

    requires a swap: (1) To be submitted for clearing through a derivatives

    clearing organization (``DCO'') if the Commission has determined that

    the swap is required to be cleared, unless an exception or exemption to

    the clearing requirement applies; (2) to be reported to a swap data

    repository (``SDR'') or the Commission; and (3) if such swap is subject

    to a clearing requirement, to be executed on a designated contract

    market (``DCM'') or swap execution facility (``SEF''), unless no DCM or

    SEF has made the swap available to trade.

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

    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010).

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

    Section 2(h)(1)(A) of the CEA establishes a clearing requirement

    for swaps, providing that ``[i]t shall be unlawful for any person to

    engage in a swap unless that person submits such swap for clearing to a

    [DCO] that is registered under [the CEA] or a [DCO] that is exempt from

    registration under [the CEA] if the swap is required to be cleared.''

    \2\ However, section 2(h)(7)(A) of the CEA provides that the clearing

    requirement of section 2(h)(1)(A) shall not apply to a swap if one of

    the counterparties to the swap: ``(i) is not a financial entity; (ii)

    is using swaps to hedge or mitigate commercial risk; and (iii) notifies

    the Commission, in a manner set forth by the Commission, how it

    generally meets its financial obligations associated with entering into

    non-cleared swaps'' (referred to hereinafter as the ``end-user

    exception'').\3\ The Commission has adopted Sec. 39.6 (now recodified

    as Sec. 50.50 \4\) to implement certain provisions of section 2(h)(7).

    Accordingly, any swap that is required to be cleared by the Commission

    pursuant to section 2(h)(2) of the CEA must be submitted to a DCO for

    clearing by the counterparties unless the conditions of Sec. 50.50 are

    satisfied or another exemption adopted by the Commission applies.

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

    \2\ See section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A).

    \3\ See section 2(h)(7)(A) of the CEA, 7 U.S.C. 2(h)(7)(A).

    \4\ 77 FR 74284 (Dec. 13, 2012). The Commission re-codified the

    end-user exception regulations as Sec. 50.50 so that market

    participants are able to locate all rules related to the clearing

    requirement in one part of the Code of Federal Regulations. Because

    of this re-codification, all citations thereto in this final release

    will be to the sections as renumbered.

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

    Congress adopted the end-user exception in section 2(h)(7) of the

    CEA to permit certain non-financial entities to continue using non-

    cleared swaps to hedge or mitigate risks associated with their

    underlying businesses, such as manufacturing, energy exploration,

    farming, transportation, or other commercial activities. Additionally,

    in section 2(h)(7)(C)(ii) of the CEA, the Commission was directed to

    ``consider whether to exempt [from the definition of `financial

    entity'] small banks, savings associations, farm credit system

    institutions, and credit unions, including:

    (I) Depository institutions with total assets of $10,000,000,000 or

    less;

    (II) farm credit system institutions with total assets of

    $10,000,000,000 or less; or

    (III) credit unions with total assets of $10,000,000,000 or less.''

    In Sec. 50.50(d), the Commission identifies which financial

    entities are small financial institutions and establishes an exemption

    from the definition of ``financial entity'' for these small financial

    institutions pursuant to section 2(h)(7)(C)(ii) (the ``small financial

    institution exemption''). The small financial institution exemption

    largely adopts the language of section 2(h)(7)(C)(ii) in providing for

    an exemption from the definition of ``financial entity'' for the types

    of section 2(h)(7)(C)(ii) institutions having total assets of $10

    billion or less.

    On December 23, 2010, the Commission published for public comment a

    notice of proposed rulemaking (``end-user exception NPRM'') to

    implement the end-user exception.\5\ Several parties that commented on

    the end-user exception NPRM recommended that the Commission extend

    relief from clearing to cooperatives.\6\ These commenters primarily

    reasoned \7\ that the member ownership nature of cooperatives and the

    fact that cooperatives act in the interests of members that are non-

    financial entities or cooperatives whose members are non-financial

    entities, justified allowing the cooperatives to also elect the end-

    user exception. In effect, they proposed that because a cooperative

    acts in the interests of its members when facing the larger financial

    markets, the end-user exception that would be available to a

    cooperative's members should also be available to the cooperative.

    Accordingly, commenters asserted, if the members themselves could elect

    the end-user exception, then the Commission should permit the

    cooperatives to do so as well.\8\

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

    \5\ See 75 FR 80747 (Dec. 23, 2010).

    \6\ See, e.g., comments received on the end-user exception NPRM

    from: Agricultural Leaders of Michigan (ALM), The Farm Credit

    Council (FCC), Allegheny Electric Cooperative, Inc. (AEC), Garkane

    Energy Cooperative, Inc. (GEC), National Council of Farmer

    Cooperatives, Dairy Farmers of America, and National Rural Utilities

    Cooperative Finance Corporation (CFC). Comments received on the end-

    user exception NPRM can be found on the Commission's Web site at

    http://comments.cftc.gov/PublicComments/CommentList.aspx?id=937.

    \7\ Other reasons given for providing an exemption from clearing

    to cooperatives, including risk considerations, are discussed below.

    \8\ In addition to the comments received on the end-user

    exception NPRM, the Commission notes that several Senators and

    members of the House of Representatives have expressed similar

    support in committee hearings for ensuring that the implementation

    of the Dodd-Frank Act does not change the way financial cooperatives

    operate in relation to their members. See, e.g., Oversight Hearing:

    Implementation of Title VII of the Wall St. Reform and Consumer

    Prot. Act Before the S. Comm. on Agric., 112th Cong. 18 (2011)

    (statement of Sen. Debbie Stabenow, Chairwoman, S. Comm. on Agric.)

    (``I just want to make sure that . . . you're saying or that you're

    going to guarantee that the relationship between farmers and co-ops

    will be preserved and that farmers will continue to have affordable

    access to risk management tools.''); One Year Later--The Wall St.

    Reform and Consumer Prot. Act: Hearing Before the S. Comm. on

    Agric., 112th Cong. 14 (statement of Sen. Amy Klobuchar, Member, S.

    Comm. on Agric.) (``I hope there is a way to uniquely define farmer

    co-ops so they can continue to do the kinds of things that they

    do.''); Derivatives Reform: the View from Main St.: Hearing Before

    the H. Comm. on Agric., 112th Cong. 12 (2011) (statement of Rep.

    Timothy Johnson, Member, H. Comm. on Agric.) (``I'm also concerned,

    real concerned, representing an area, as a lot of us do, where rural

    electric cooperatives, agricultural cooperatives, and all that are

    an essential part of our being, critical, positive entities that

    really do a whole lot for the infrastructure of this country. . . .

    And I'm very concerned that we're treating, in many ways, and you

    are, those cooperatives in a way almost identical to Goldman Sachs,

    and I think that's--frankly, I think that fall[s] of its own

    weight.''); The Commodity Futures Trading Comm'n 2012 Agenda:

    Hearing Before the H. Comm. on Agric., 112th Cong. 13 (2012)

    (statement of Rep. Rick Crawford, Member, H. Comm. on Agric.)

    (``[Agricultural cooperatives provide] swaps to their members and

    then enter into [another swap to offset that risk]. This is critical

    to their ability to continue [to provide] hedging tools to member[s]

    of their coops. . . . '').

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

    [[Page 52287]]

    However, section 2(h)(7) of the CEA does not differentiate

    cooperatives from other types of entities and therefore, cooperatives

    that are ``financial entities,'' as defined in section 2(h)(7)(i) of

    the CEA, are unable to elect the end-user exception unless they qualify

    for the small financial institution exemption. Some commenters

    recommended including cooperatives that are ``financial entities'' with

    total assets in excess of $10 billion in the small financial

    institution exemption.\9\ However, as explained in greater detail in

    the final release for Sec. 50.50, section 2(h)(7)(C)(ii) of the CEA

    focused on asset size and not on the structure of the financial entity.

    Accordingly, only cooperatives that are financial entities with total

    assets of $10 billion or less can qualify as small financial

    institutions under the small financial institution exemption.

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

    \9\ See, e.g., comments received on the end-user exception NPRM

    from: FCC, CFC, AEC, ALM, and GEC.

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

    Notwithstanding the foregoing, the Commission recognized that the

    member-owner structure of cooperatives and the merits of effectively

    allowing cooperatives to also use the end-user exception when acting in

    the interests of their members, warranted consideration. Accordingly,

    the Commission is using the authority provided in section 4(c) of the

    CEA to finalize Sec. 50.51 (proposed as Sec. 39.6(f) \10\), to permit

    cooperatives that meet certain qualifications to elect not to clear

    certain swaps that are otherwise required to be cleared pursuant to

    section 2(h)(1)(A) of the CEA (hereinafter referred to as the

    ``cooperative exemption''). Under section 4(c) of the CEA, the

    Commission can subject such exemptive relief to appropriate terms and

    conditions.\11\

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

    \10\ For ease of reference, the Commission is re-codifying

    proposed Sec. 39.6(f) as Sec. 50.51 so that market participants

    are able to locate all rules related to the clearing requirement in

    one part of the Code of Federal Regulations.

    \11\ 7 U.S.C. 6(c)(1).

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

    On July 17, 2012, the Commission published for public comment a

    notice of proposed rulemaking (``NPRM'') proposing the cooperative

    exemption as Sec. 39.6(f) (now Sec. 50.51).\12\ The Commission

    explained that cooperatives have a unique legal structure that

    differentiates them from other legal business structures in terms of

    how they are operated and who benefits from their activities. In a

    cooperative, the members of the cooperative are the principal customers

    of the cooperative and are also the owners of the cooperative.

    Accordingly, the cooperatives exist to serve their member-owners and do

    not act for their own profit.\13\ The member-owners of the cooperative

    collectively have full control over the governance of the cooperative.

    In a real sense, a cooperative is not separable from its member-owners.

    The cooperative exists to act in the mutual interests of its member-

    owners in the marketplace.

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

    \12\ 77 FR 41940 (July 17, 2012).

    \13\ For example, the CFC was formed as a nonprofit corporation

    under the District of Columbia Cooperative Association Act of 1940

    to arrange financing for its members and their patrons and for the

    ``primary and mutual benefit of the patrons of the Association and

    their patrons, as ultimate consumers.'' CFC Articles of

    Incorporation and Bylaws, Art. I, (last amended Mar. 1, 2005),

    available at https://www.nrucfc.coop/content/dam/cfc_assets/public_tier/publicDocs/governance/CFCbylaws_3_11.pdf.

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

    As described in greater detail below in section II, some

    cooperatives provide financial services to their members including

    lending and providing swaps, and the cooperatives sometimes hedge or

    mitigate risks associated with those lending activities with other

    financial entities such as swap dealers (``SDs''). The memberships of

    some of these cooperatives consist of entities that can each elect the

    end-user exception when entering into a swap. However, the end-user

    exception is unavailable to some of those cooperatives because they

    fall within the definition of ``financial entity'' and have assets in

    excess of $10 billion. Accordingly, if the cooperative members continue

    to enter into loans and swaps with their cooperative, they would not

    receive the full benefits of the end-user exception because the

    cooperative would have to clear its swaps even though it is entering

    into the swaps to offset the risks associated with financial activities

    with its members or to hedge risks associated with wholesale borrowing

    activities, the proceeds of which are used to fund member loans. In

    effect, absent an exception from the clearing requirement for a

    cooperative that is providing certain swap services to its members, the

    cooperative structure would be unable--solely because the cooperative

    is large and has substantial assets--to achieve the intended benefits

    for its members who can elect the end-user exception. In light of the

    foregoing, the Commission is exercising its authority under section

    4(c) of the CEA to establish the cooperative exemption.

    The Commission received approximately 25 comment letters and

    Commission staff participated in approximately two ex parte meetings

    concerning the cooperative exemption NPRM.\14\ The Commission

    considered these comments in formulating the final regulations, as

    discussed below.

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

    \14\ All comments received in response to the cooperative

    exemption NPRM can be viewed on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1237.

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

    II. Financial Entity Cooperatives

    In the NPRM, the Commission described the structure of cooperatives

    that provide financial services to their members to provide context for

    the underlying rationale for the proposed cooperative exemption. The

    description provided in the NPRM is summarized below to facilitate an

    understanding of the comments received and the Commission's responses

    thereto.

    Cooperatives that are ``financial entities,'' as defined in section

    2(h)(7)(C)(i) of the CEA, generally serve as collective asset and

    liability managers for their members. In this role, the cooperatives,

    in effect, face the financial markets as intermediaries for their

    members. These cooperatives sometimes enter into swaps with members and

    with non-member counterparties, typically SDs or other financial

    entities, to hedge the risks associated with the swaps or loans they

    execute with their members, or to hedge risks associated with their

    wholesale borrowing activities, the proceeds of which are used to fund

    member loans. If these financial entity cooperatives have total assets

    in excess of $10 billion, then the cooperatives do not qualify for the

    small financial institution exemption and thus cannot elect the end-

    user exception.

    Some cooperatives with more than $10 billion in total assets have

    members that are non-financial entities, small financial institutions,

    or other cooperatives whose members consist of such entities.\15\ For

    example, there are four Farm Credit System (``FCS'') banks chartered

    under Federal law, each of which has total assets in excess of $10

    billion.\16\ The FCS banks are

    [[Page 52288]]

    cooperatives primarily owned by their cooperative associations.\17\ The

    FCS banks are regulated and prudentially supervised by the Farm Credit

    Administration (``FCA''), an independent agency of the Federal

    government.\18\ The Farm Credit Act authorizes the banks ``to make

    loans and commitments to eligible cooperative associations.'' \19\ The

    FCS association members are, in turn, cooperatives authorized to make

    loans to farmers and ranchers, rural residents, and persons furnishing

    farm-related services.\20\ In effect, FCS bank cooperatives primarily

    make loans to FCS association cooperatives, which lend to farmers and

    ranchers, rural residents, and persons furnishing farm-related

    services, and these borrowers are member-owners of the FCS

    associations, which are member-owners of the FCS banks. In addition to

    the example of the FCS banks, other cooperatives formed under federal

    and state laws also have a similar entity structure in that they are

    owned and governed by their members and they exist to serve those

    members.

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

    \15\ See, e.g., comments received on the end-user exception NPRM

    from FCC, CFC, AEC, ALM, and GEC.

    \16\ See FCA, 2011 Annual Report on the Farm Credit System, at

    11, available at http://www.fca.gov/Download/AnnualReports/2011AnnualReport.pdf.

    \17\ See 12 U.S.C. 2124(c) (providing that ``[v]oting stock may

    be issued or transferred to and held only by . . . cooperative

    associations eligible to borrow from the banks.'').

    \18\ See id. at 2241.

    \19\ Id. at 2128(a).

    \20\ See id. at 2075.

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

    The cooperative exemption, in effect, provides the end-user

    exception created in section 2(h)(7) of the CEA to financial entity

    cooperatives when acting in the interests of their members and in

    connection with loans to members. The exemption benefits the members

    that qualify for the end-user exception (or members that are

    cooperatives whose own members qualify for the end-user exception)

    because they own and control the cooperatives, which exist for the

    mutual benefit of its members. As described in greater detail

    below,\21\ in the laws that establish financial cooperatives as legal

    entities distinct from other business structures, Congress and state

    legislatures made a policy determination to facilitate the formation of

    cooperatives in order to provide the cooperative members with the

    unique benefits of accessing markets on a cooperative basis. In this

    way, financial cooperatives were created to serve as an alternative

    source of capital for their members. Some of the laws establishing

    cooperatives acknowledge that cooperatives will compete with other

    market participants and may have certain benefits or advantages that

    are acceptable for promoting the benefits that members achieve through

    their cooperatives.\22\ Because the cooperatives are established to

    serve their members and the net earnings they generate through their

    activities are returned to those members, the benefits of the

    cooperative exemption ultimately inure to the members of the

    cooperative. In the context of required clearing and the end-user

    exception, the cooperative exemption furthers the purpose for which

    financial cooperatives were established, i.e., to act for the mutual

    benefit of their members.

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

    \21\ See section IV.

    \22\ Id.

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

    III. Comments on the Proposed Cooperative Exemption Rule

    A. Introduction

    In proposing an exemption for certain swaps entered into by certain

    cooperatives that are financial entities, the Commission acknowledged

    in the NPRM that central clearing of swaps is a primary focus of Title

    VII of the Dodd-Frank Act. Central clearing mitigates financial system

    risks that could result from swaps and any exemption from central

    clearing should be narrowly drawn to minimize the impact on the risk

    mitigation benefits of clearing and should also be in line with the

    end-user exception requirements of section 2(h)(7) of the CEA.

    Accordingly, the Commission sought to narrowly tailor the cooperative

    exemption by limiting the types of entities that could elect the

    cooperative exemption and the types of swaps for which the exemption

    could be elected.

    The Commission received a number of comment letters both supporting

    and opposing the proposed cooperative exemption. Fourteen rural

    electric cooperatives (``Rural Electric Cooperatives'') \23\ and their

    trade association, the National Rural Electric Cooperative Association

    (``NRECA'') submitted substantially similar comment letters supporting

    the rulemaking. The FCC, the National Rural Utilities Cooperative

    Finance Corporation (``CFC''),\24\ the Credit Union National

    Association (``CUNA''), the American Farm Bureau Federation (``AFBF''),

    Chris Barnard (``Mr. Barnard''), and the National Council of Farmer

    Cooperatives (``NCFC'') similarly supported the proposed cooperative

    exemption. Eleven of the twelve Federal Home Loan Banks (``FHL Banks'')

    submitted a comment letter supporting the concept of a cooperative

    exemption generally, but requested certain changes to the rule as

    described below.

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

    \23\ See Allegheny Electric Cooperative, Inc., Coast Electric

    Power Association, Choptank Electric Cooperative, Claiborne Electric

    Cooperative, Inc., Deaf Smith Electric Cooperative Inc., Dixie

    Electric Cooperative, First Electric Cooperative Inc., Garkane

    Energy, Hoosier Energy Rural Electric Cooperative, Inc., Mountain

    View Electric Association, Inc., Pioneer Rural Electric Cooperative,

    Inc., Sullivan County Rural Electric Cooperative, Inc., Sumter

    Electric Cooperative, Inc., and Sunflower Electric Power

    Corporation.

    \24\ The comment letter from the CFC incorporates, as an

    attachment, the signatures of approximately 500 individuals

    associated with nonprofit rural electric cooperatives supporting the

    cooperative exemption.

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

    The American Bankers Association (``ABA''), Lake City Bank, and the

    Independent Community Bankers of America (``ICBA'') submitted comments

    opposing the cooperative exemption on several grounds. All three

    opposed the rule on the grounds that it provides cooperatives with

    advantages at the expense of certain banks. The ABA and ICBA generally

    objected to the rule because they believe the reasoning behind the

    proposed rule was faulty and that the rule making did not comply with

    the requirements of section 4(c) of the CEA and the Administrative

    Procedure Act (``APA''). They also commented on the efficacy of the

    cost-benefit analysis in the NPRM.

    The following discussion first addresses comments on each paragraph

    of the proposed rule followed by a discussion of the comments

    addressing compliance of the proposed rule with the legal parameters

    applicable to the rulemaking under section 4(c) of the CEA.

    B. Regulation 39.6(f)(1) (now Sec. 50.51(a)): Definition of Exempt

    Cooperative

    The end-user exception is generally available to entities,

    including cooperatives, that are not ``financial entities,'' as defined

    in section 2(h)(7)(C)(i) of the CEA, and entities that would be

    financial entities, including cooperatives, but for the fact that they

    meet the requirements of the small financial institution exemption in

    Sec. 50.50(d). The proposed cooperative exemption would add an

    exemption from required clearing for cooperatives that do not fall into

    these two categories if they meet the definition of ``exempt

    cooperative.'' Proposed Sec. 39.6(f)(1) (now Sec. 50.51(a)) defines

    ``exempt cooperative'' to mean a cooperative that is a ``financial

    entity'' solely as defined in section 2(h)(7)(C)(i)(VIII) of the CEA

    for which each member of the cooperative is either (1) a non-financial

    entity, (2) a financial institution to which the small financial

    institution exemption applies, or (3) itself a cooperative each of

    whose members fall into either of the first two categories.

    The Commission received a number of comment letters in support of

    the Commission's rationale provided in the

    [[Page 52289]]

    NPRM for the proposed definition of exempt cooperative. The Rural

    Electric Cooperatives and NRECA agreed with the Commission's proposed

    definition of ``exempt cooperative'' and the Commission's reasons for

    establishing the exemption. The Rural Electric Cooperatives commented

    that the exempt cooperative definition is appropriate because members

    of exempt cooperatives would be eligible for the end-user exception if

    entering into swaps on their own. In their view, effectively extending

    the end-user exception available to the members of an exempt

    cooperative to the exempt cooperative itself is appropriate because the

    members act in the financial markets through the cooperatives that they

    own.

    The FCC, the CFC, CUNA, Mr. Barnard, and the NCFC similarly

    supported the Commission's definition of exempt cooperative. Like the

    Rural Electric Cooperatives, the FCC suggested that the ``unique

    structure of cooperatives and their relationship to their member-

    owners'' warrants the cooperative exemption. The CFC and Mr. Barnard

    supported the ``pass-through concept'' embodied in the cooperative

    exemption. The FHL Banks commented that the unique ownership structure

    of cooperatives and the fact that cooperatives act on behalf of

    ``members that are non-financial institutions or small financial

    institutions'' justify the Commission issuing the cooperative

    exemption.

    The ABA and the ICBA submitted comments opposing the definition of

    exempt cooperative because they believe there is no policy

    justification for the exemption and that the Commission's reasons for

    the exemption are not analytically appropriate. They commented that

    cooperatives do not play a unique role and are not themselves unique.

    The ABA suggested the Commission ignored the ``fact that banks perform

    the same functions for customers that cooperatives perform for their

    members.'' Similarly, the ICBA commented that the Commission has not

    described how exempt cooperatives differ from commercial banks.

    According to ICBA, ``community banks play the same role on behalf of

    their customers'' that cooperatives play when facing the larger

    financial markets on behalf of their members. Both the ABA and the ICBA

    also noted that banks enter into swaps to hedge risks. The ABA noted

    that almost one-third of all the loans made by the FCS did not involve

    individual farmers or ranchers.

    According to the ICBA, smaller ``community'' banks should be given

    the ``same exemption as any financial cooperative of the same or larger

    size.'' The ICBA and the ABA requested that ``smaller'' banks, with

    assets above the $10 billion threshold in the end-user exception, be

    exempted from mandatory clearing along with cooperatives.

    In response, the Commission does not disagree with these comments

    to the extent that banks often provide the same services to their

    customers that exempt cooperatives provide to their members. However,

    the nature of the services provided by cooperatives to their members is

    not the rationale for the cooperative exemption. The Commission's

    rationale is based in large part on the relationship between a

    cooperative and its members, which is different from the relationship

    between banks and their customers. The cooperative exemption in effect

    provides the end-user exception created in section 2(h)(7) of the CEA

    to entities whose members themselves qualify for the end-user

    exception, but would otherwise not be able to realize the full effects

    of the exception when those members act in the financial markets

    through their member-owned exempt cooperatives that do not qualify for

    the small financial institution exemption. The rule benefits the

    members who qualify for the end-user exception through the cooperatives

    that they own and control and exist for their mutual benefit. Because

    the cooperatives are established to serve their members and the net

    earnings they generate through their activities are returned to those

    members, the benefits of the cooperative exemption ultimately inure to

    the members of the cooperative.

    The Commission notes that the definition of ``exempt cooperative''

    is narrowly tailored so that only a cooperative for which each of its

    members individually, or if it has members that are cooperatives, each

    of the members of those cooperatives individually, would qualify for

    the end-user exception would qualify for the cooperative exemption.

    Furthermore, Sec. 39.6(f)(2) (now Sec. 50.51(b)) provides that the

    exemption is only available for swaps executed in connection with

    originating member loans and swaps that hedge or mitigate risk related

    to loans to members or arising from certain swaps with members. As

    such, under the final rule, an exempt cooperative shall not elect the

    exemption for swaps related to non-member activity of the cooperative.

    Exempt cooperatives are distinct from banks not because of the

    services they offer, but because they exist to serve their members'

    interests and act as intermediaries for their members in the

    marketplace. The member-owners generally are the customers of the

    cooperatives and the Commission drafted the proposed rule to be

    available only to the extent the cooperative exemption is used in

    connection with member-related activities. Cooperatives are owned by

    their members and as such, their governing bodies generally consist of

    members. Their net earnings are returned to their members either

    through rebates or distributions, often referred to as ``patronage,''

    or are retained by the cooperatives as capital to be used to provide

    services to members. For example, the FCC noted in its comments that

    FCS cooperatives were established by federal law to operate for the

    benefit of farmer-owners.\25\ The FCC further noted that by law, each

    cooperative association in the FCS has a board of directors comprised

    of voting members of the association, and as required by law, at least

    one ``outside'' director.\26\ Furthermore, voting stock may only be

    held by farmers, ranchers, producers of aquatic products, and

    cooperative associations eligible to borrow from FCS institutions.\27\

    Each owner of association voting stock is entitled to one vote in the

    affairs of the association, regardless of the amount of the stock

    held.\28\ FCS additionally commented that each year FCS cooperatives

    pay patronage to their members, both in cash and allocated equity.\29\

    Furthermore, unlike for-profit entities that generally pay out

    dividends based on the amount of stock purchased by each investor, as

    discussed in greater detail below, cooperatives generally pay out or

    allocate earnings to the member-owners based on the amount of business

    [[Page 52290]]

    undertaken by each member with the cooperative.\30\

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

    \25\ The FCC cited Section 1.1(a) of the Farm Credit Act (12

    U.S.C. 2001) (``farmer-owned cooperative Farm Credit System'') and

    Section 1.1(b) thereof (``It is the objective of this chapter to

    continue to encourage farmer- and rancher-borrowers participation in

    the management, control, and ownership of a permanent system of

    credit for agriculture which will be responsive to the credit needs

    of all types of agricultural producers having a basis for credit,

    and to modernize and improve the authorizations and means for

    furnishing such credit and credit for housing in rural areas made

    available through the institutions constituting the Farm Credit

    System as herein provided.'').

    \26\ 12 U.S.C. 2072.

    \27\ 12 U.S.C. 2154a(c)(1)(D)(i).

    \28\ 12 CFR 611.350.

    \29\ For example, in 2011, FCS institutions distributed about

    $903 million in cash patronage and $243 million in stock patronage

    to the approximately 489,000 system shareholders. Farm Credit

    Admin., 2011 Annual Report on the Farm Credit System, 18 (2011);

    Press Release, Fed. Farm Credit Banks Funding Corp., Farm Credit

    System Reports Net Income of $3.940 Billion for 2011, 5 (Feb. 17,

    2012), available at https://www.farmcreditfunding.com/farmcredit/serve/public/pressre/finin/report.pdf?assetId=198426.

    \30\ See 18 a.m. Jur. 2d Cooperative Associations Sec. 19

    (2012) (``Ordinarily, the profits of a cooperative association are

    distributed to its members in the form of patronage refunds or

    dividends in amounts determined by the use made of the association

    facilities by the patrons, and statutes frequently so provide.'').

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

    On the other hand, banks generally are for-profit, publicly or

    privately held corporations whose investor-owners are not required to

    be the users of the bank's services, and often are not. The governing

    bodies of banks, like other for-profit entities, are typically elected

    by the shareholders whose voting power is determined by the amount of

    common stock each investor owns. A board of directors of a corporation

    has a legal duty to the corporation and the shareholders and,

    accordingly, must consider shareholder value in its actions.\31\ As

    such, unlike the member-focused purposes of exempt cooperatives, a

    primary purpose of banks is to generate value for their owners, who

    generally are not their customers. The mission of a cooperative is to

    act in the interests of its members, while the goal of a for-profit

    business, whatever its size, is to benefit the owners of that business,

    which are not necessarily its customers. Unlike a cooperative, which is

    an extension of its members as a business matter, a bank is not an

    extension of its customers. Accordingly, the Commission believes the

    rationale for extending the end-user exception to cooperatives does not

    apply to banks in the same way.

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

    \31\ See, e.g., 18B Am. Jur. 2d Corporations 1460 (2012).

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

    The ICBA further questioned whether ``members'' are any different

    from ``customers,'' because, in the case of the FCS, borrowers can be

    considered owners or members even if they do not put their own capital

    into the organization. For example, according to the ICBA, an FCS

    borrower can become a member by paying an additional $1,000 on a loan

    or one percent of the loan value, whichever is less.

    The FCC commented that the Farm Credit Act and related regulations

    prescribe minimum stock purchase requirements for FCS borrowers and

    also require that FCS institutions meet minimum capital standards well

    in excess of the amount of purchased stock, citing 12 U.S.C. 2151. The

    FCC noted that as of December 31, 2011, combined FCS association

    capital was over $24 billion dollars, or 19% of outstanding loans.

    Furthermore, the FCS noted that ``[v]irtually all that capital is the

    result of income earned and retained.''

    The Commission believes that the comments of the ICBA and FCC on

    this issue further demonstrate the uniqueness of the member-owner

    relationship between exempt cooperatives and their members and how the

    cooperatives are, in effect, extensions of their members acting in the

    interests of their members in a way that is not the case for the

    relationship between other types of financial institutions and their

    customers. The earnings retained by FCS cooperatives would otherwise be

    paid out to members pro rata based on the amount of borrowing from the

    cooperatives. As such, a cooperative member has a vested, pro rata

    interest in its cooperative based on the amount of business the member

    does with the cooperative. While a for-profit entity such as a bank

    also may retain capital, the capital, if paid out to the owners, would

    be paid to the equity investors, not the customers of the entity and

    not based on the amount of business the customers do with the entity.

    The ICBA and the ABA further commented that some of the entities

    that the cooperatives are ``standing in the marketplace on behalf of''

    are sophisticated entities and are capable of entering into the swap

    marketplace on their own and do not need a cooperative to face the

    market. The ICBA also commented that all of the component entities of

    cooperatives would have ``no trouble arranging financing from private

    sector sources.''

    The Commission did not assert in the NPRM that the members of

    cooperatives could only access financial markets through the

    cooperatives or that sole access through cooperatives was a reason for

    the proposed rule. Rather, the Commission recognized that certain

    entities for which the end-user exception is available have

    traditionally accessed the markets through financial cooperatives that

    they own and which exist for their benefit. For example, this

    relationship is well established and is codified into the federal law

    that created the FCS.\32\ If the cooperative exemption were not adopted

    by the Commission, these entities would not be able to both continue to

    use their cooperatives and receive the full benefit of the end-user

    exception created in the Dodd-Frank Act.

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

    \32\ ``It is declared to be the policy of the Congress . . .

    that the farmer-owned cooperative [FCS] be designed to accomplish

    the objective of improving the income and well-being of American

    farmers and ranchers by furnishing sound, adequate, and constructive

    credit and closely related services to them, their cooperatives, and

    to selected farm-related businesses necessary for efficient farm

    operations.'' 12 U.S.C. 2001(a).

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

    The ICBA questioned the Commission's statement in the preamble to

    the proposed cooperative exemption that ``cooperatives exist to serve

    their member-owners and do not act for their own profit.'' The ICBA

    commented that the FCS, credit unions and other cooperatives ``pay

    their executives millions of dollars each year.''

    The ICBA, Lake City Bank, and ABA also noted that the FCS and

    credit unions and other cooperatives that would be able to use the

    cooperative exemption already enjoy a number of significant advantages,

    such as low-cost funding, tax exemptions, and, in some cases,

    government sponsored enterprise (``GSE'') status. They expressed

    concern that providing credit unions, FCS cooperatives, and other

    cooperatives with an exemption from mandatory clearing would

    ``exacerbate their competitive advantage over banks.'' Furthermore, the

    ICBA stated that ``FCS lenders have in recent years positioned

    themselves to act almost identically to banks through deposit taking

    arrangements, credit card offerings, check writing capabilities and

    outright illegitimate activities granted by their permissive

    regulator.''

    The Commission is not responsible for the creation, administration,

    or implementation of those legal characteristics of cooperatives

    referred to in the comments as being ``competitive advantages.'' These

    characteristics, by and large, flow from policies enacted by Congress

    or state legislatures. Further, the Commission is not the regulator

    responsible for the laws and regulations referred to by commenters that

    govern cooperatives. The Commission has determined without regard to

    such other asserted benefits for cooperatives, to offer an elective

    clearing exemption to entities qualifying as exempt cooperatives to

    extend the full benefits of the end-user exception established in the

    Dodd-Frank Act to entities that would qualify for that exception, but

    which choose to act through their cooperatives in the financial

    marketplace.\33\

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

    \33\ For a discussion of the related ``fair competition''

    provision in section 4(c), see section IV herein.

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

    Comments regarding the compensation of executives are outside the

    scope of this rulemaking. The rationale for the cooperative exemption

    is based on the member-owner structure of cooperatives, not on how much

    executives are paid or whether that pay is fair. The Commission defers

    to the regulators who enforce those regulations

    [[Page 52291]]

    for issues related to executive compensation.

    With respect to swaps, the ICBA noted that cooperatives and

    community banks both enter into swaps to hedge the interest rate risk

    of loans to their customers or members. The ICBA suggested that swaps

    hedging the underlying risks of loans to customers pose the same lower

    risk to the financial system that the FCC claims regarding swaps

    hedging the risks of loans to its cooperative members.

    The Commission notes that it is not relying on the assertion by the

    FCC that swaps related to hedging loans to cooperative members may be

    less risky than other types of swaps that financial entities may

    undertake as a primary reason for distinguishing exempt cooperatives

    from other types of lending entities.\34\ As explained in the NPRM, the

    potential lower risk of such swaps is, however, one of the reasons why

    the Commission is restricting the cooperative exemption to swaps

    related to member loans.

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

    \34\ The Commission believes, however, that because exempt

    cooperatives serve their members and are controlled by their

    members, it can be expected that cooperatives will focus their swap

    activity on member loan-related activities.

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

    The National Association of Federal Credit Unions requested that

    the Commission specify that the cooperative exemption applies to ``all

    credit unions.'' The Commission clarifies that the exemption applies to

    all cooperatives, including credit unions that meet the definition of

    ``exempt cooperative'' in the final rule. The Commission does not have

    enough information to determine whether ``all credit unions'' are

    eligible for the exemption. Whether any particular credit union meets

    the definition of an exempt cooperative will depend on the relevant

    facts and circumstances for that credit union.

    The FHL Banks stated that they would not qualify as exempt

    cooperatives because each FHL Bank has one or more members that are

    financial institutions that do not qualify for the small financial

    institution exemption. The FHL Banks commented that the cooperative

    exemption, as proposed, would ``unfairly and arbitrarily'' penalize

    members of a cooperative that would qualify as small financial

    institutions under the end-user exception if the cooperative also has

    one or more large financial institutions as members. The FHL Banks

    stated that this would result in the inconsistent treatment of two

    similarly situated entities. The FHL Banks also point to the joint

    final rule on the definition of the term ``swap dealer,'' where the

    Securities and Exchange Commission along with the Commission excluded

    all swaps between a cooperative and its members from the analysis of

    whether that cooperative is an SD. This regulatory treatment, according

    to the FHL Banks, would be ``consistent'' with the Commission allowing

    the FHL Banks to elect the cooperative exemption in certain

    circumstances.

    The FHL Banks requested that the Commission remove the limitation

    that bars a cooperative from being an ``exempt cooperative'' if it has

    one or more members that are financial entities that are not themselves

    cooperatives with members that qualify for the end-user exception.

    Instead, the FHL Banks suggested that the Commission allow cooperatives

    to enter into swaps that hedge or mitigate commercial risk related to

    loans to ``qualified members'' or arising from swaps entered into with

    ``qualified members'' that are eligible for the end-user exception. The

    FHL Banks proposed the term ``qualified member'' to mean a member of an

    exempt cooperative that is (1) not a financial entity, (2) a financial

    entity that is exempt from the definition of financial entity under the

    small financial institution exemption in Sec. 50.50(d), or (3) a

    cooperative, each member of which is not a financial entity or is

    exempt from mandatory clearing because it qualifies for the small

    financial institution exemption. The FHL Banks commented that their

    proposed approach is consistent with the Dodd-Frank Act's objective of

    mandating that swaps entered into in connection with or for large

    financial institutions be cleared, without penalizing small financial

    institutions. According to the FHL Banks, their proposed revisions to

    the cooperative exemption would allow FHL Banks to qualify as an

    ``exempt cooperative,'' in appropriate situations. The FHL Banks also

    stated that this revised cooperative exemption would apply to less than

    10% of the outstanding notional amount of the FHL Banks' swaps. The

    ICBA, like the FHL Banks, suggested that the Commission revise the

    definition of exempt cooperative to not exclude the FHL Banks ``to the

    extent that they engage in swaps for the benefit of their members who

    individually qualify as small financial institutions.''

    In response to the FHL Banks' and the ICBA's comments regarding

    cooperatives that are ineligible for the cooperative exemption because

    they have one or more financial entity members, the Commission declines

    to extend the exemption beyond the parameters as proposed. The

    Commission disagrees with the FHL Banks' assertion that the cooperative

    exemption is arbitrary or unfair to financial institutions that qualify

    for the small financial institution exemption. Under Sec.

    39.6(f)(1)(iii)(A) (now Sec. 50.51(a)(3)(i)) of the proposed rule,

    small financial institutions that meet the definition thereof in Sec.

    50.50(d) can be members of exempt cooperatives. These members can

    include banks, savings associations, FCS institutions, or credit

    unions, so long as each of them qualifies as a small financial

    institution under Sec. 50.50(d) (i.e. the institution has total assets

    of $10 billion or less). They would be treated in the same way as all

    other entities that may qualify for the end-user exception, and

    therefore can be members of exempt cooperatives as defined.

    Furthermore, as the Commission acknowledged above and in the NPRM,

    it is concerned that exemptions from the clearing requirement could

    detract from the systemic risk reducing benefits of clearing. This is

    particularly a concern if the exemption could be elected for swaps that

    relate to risks of entities that Congress clearly intended to be

    subject to the clearing requirement--financial entities as defined in

    section 2(h)(7)(C) of the CEA that are not expressly exempted from that

    definition. As such, the Commission narrowed the cooperative exemption

    to apply solely to a cooperative whose members (or if it has members

    that are cooperatives, the members of those cooperatives) could

    themselves elect the end-user exception.

    The importance of a narrow cooperative exemption is apparent when

    considering the possible effect of broadening the exemption in the

    manner requested by the FHL Banks and ICBA. A fundamental

    characteristic of cooperatives is that they distribute or allocate the

    patronage earnings of the cooperative, i.e., the excess of a

    cooperative's revenues over its costs arising from transactions done

    with or for its members,\35\ to each member based on the amount of

    patronage by the member, i.e., proportionally based on the amount of

    business each member does with the cooperative.\36\ Accordingly, even

    if a cooperative with financial entity members only elected

    [[Page 52292]]

    the cooperative exemption for swaps related to loans to members that

    qualify for the end-user exception, a portion of the financial benefits

    from those swaps in the form of higher net income may shift from the

    qualifying small members to the larger members as part of the full

    member pro rata patronage distribution or allocation. Furthermore, the

    risks of such swaps because they are non-cleared could also negatively

    impact the large financial institution members to the extent that the

    net income of the cooperative is negatively impacted.

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

    \35\ See FASB ASC 905-10-05.

    \36\ The distribution or allocation of patronage earnings to the

    members based on the amount of business they do with the cooperative

    is a guiding principle of cooperatives and is a necessary element

    for a cooperative to claim a deduction for taxation purposes under

    federal law. See Donald A. Frederick, Income Tax Treatment of

    Cooperatives: Background, Cooperative Information Report 44, Part 1,

    2005 Ed. (April 2005) at 50, citing, Puget Sound Plywood, Inc. v.

    Commissioner, 44 T.C. 305, 308 (1965).

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

    As an example, consider the relative amounts of lending by the FHL

    Banks to those of their largest members that do not qualify for the

    end-user exception as compared to the FHL Banks' lending to their other

    members. The 12 FHL Banks had 7,774 members as of the end of 2011.\37\

    Each of the 12 FHL Banks reported the amount of lending business they

    did with their five largest members in the 2011 Combined Financial

    Report for the FHL Banks. In 2011, $222.6 billion of the $403.3 billion

    lent by the FHL Banks to their members was lent to the largest five

    members of each of the 12 FHL Banks.\38\ Of those 60 large members,

    approximately 49 had total assets in excess of $10 billion.\39\ The

    amount loaned to those 49 members was about $212.7 billion, or 53% of

    the dollar amount lent by the FHL Banks. Furthermore, those 49 members

    do not include all members of the FHL Banks with assets greater than

    $10 billion. Accordingly, the Commission estimates the percentage of

    lending by the FHL Banks to members that cannot qualify for the end-

    user exception was higher than 53% of total lending in 2011.\40\ If the

    FHL Banks were able to use the cooperative exemption, under the

    cooperative structure in which patronage benefits are allocated pro

    rata based on the amount of business each member does with the

    cooperative, a significant portion of the benefits and risks from the

    election of the exemption could spread to the large financial entity

    members. This would also be the case even if the exemption were only

    available to swaps related to small financial institutions because the

    distribution of patronage to the members is based to a large degree on

    the amount of borrowing by each member.

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

    \37\ FHL Banks, Combined Financial Report for the Year Ended

    December 31, 2011 (issued March 29, 2012) at 43, available at http://www.fhlb-of.com/ofweb_userWeb/resources/11yrend.pdf.

    \38\ Id. at 44-45. The Commission arrived at the $222.6 billion

    amount by adding together the loan values of the 60 individual

    members listed in the Combined Financial Report of the FHL Banks.

    \39\ The Commission estimated this number by reviewing

    publically available information related to the assets of each of

    the 60 members, such as members' annual 10-K financial reports filed

    with the SEC (available on the SEC's Web site and posted on the

    members' Web sites), other annual financial reports and information,

    such as press releases posted on members' Web sites, and reports

    published by the Federal Reserve and Federal Deposit Insurance

    Corporation. As an example, the Commission reviewed the Federal

    Reserve's Statistical Release for Large Banks, which provided

    information regarding the total assets held by 27 of the 60 members.

    See Federal Reserve, Statistical Release for Large Banks, available

    at http://www.federalreserve.gov/releases/lbr/current/default.htm.

    \40\ The FHL Banks Combined Financial Report for the Year Ended

    December 31, 2011, does not break down lending amount for every

    member. The 49 members used in the Commission's calculations do not

    include all members of the FHL Banks with assets greater than $10

    billion. Accordingly, while the total percentage of lending to

    financial entities with total assets greater than $10 billion cannot

    be calculated based on the information available in the financial

    report, it is likely significantly higher than the 53% calculated

    for the 49 members with over $10 billion in total assets for which

    lending information is available.

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

    Similarly, the Commission is concerned that allowing cooperatives

    with members that do not qualify for the end-user exception to elect

    the cooperative exemption could open up avenues for abuse of the

    exemption and evasion of clearing. For example, larger financial

    entities could form cooperatives capitalized by the large financial

    entities, but which also include small affiliates or trading partners

    of the larger financial entities that would qualify as small financial

    institutions. They could then use these cooperatives to shift their

    borrowing and swap needs between the large and small entities to be

    able to take advantage of the cooperative exception in ways that

    benefit the larger institutions. The Commission considers these risks

    of abuse of the exemption and evasion of the clearing requirement

    warrant limiting the definition of exempt cooperative as written. The

    Commission notes that small financial institutions can elect the end-

    user exception themselves.

    The ICBA noted that the Dodd-Frank Act's requirement that the

    Commission consider exempting small financial institutions is not

    necessarily limited to institutions with less than $10 billion in total

    assets. The ICBA commented that there are 36 ``community banks'' \41\

    with assets over $10 billion, and within the category of ``community

    banks,'' the asset sizes of those banks range from $10.5 billion to $50

    billion. The ICBA suggested that the asset size test in the end-user

    exception be increased up to $50 billion or that community banks be

    given a ``ride along'' provision so that community banks that do not

    qualify for the end-user exception could elect the same exemption as

    cooperatives.

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

    \41\ The ICBA did not specifically define the term ``community

    banks'' other than by reference to the $50 billion maximum asset

    level.

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

    With these comments, the ICBA is effectively asking the Commission

    to reopen and revise the end-user exception rule as applied to

    financial institutions generally. The Commission set forth the reasons

    for the $10 billion total asset limit for small financial institutions

    in the end-user exception rulemaking and believes that those reasons

    remain appropriate. This rulemaking addresses the specific issue of

    whether an exemption from clearing should be granted to certain

    cooperatives--including the issue of whether there are relevant

    differences between the covered cooperatives and private banks--and is

    not intended as a vehicle for reopening the end-user exception

    regulations.

    C. Regulation 39.6(f)(2) (now Sec. 50.51(b)): Swaps to Which the

    Cooperative Exemption Applies

    Proposed Sec. 39.6(f)(2) (now 50.51(b)) limits application of the

    cooperative exemption to swaps entered into with members of the exempt

    cooperative in connection with originating loans \42\ for members or

    swaps entered into by exempt cooperatives that hedge or mitigate risks

    related to loans to members or arising from member loan-related swaps.

    This provision assures that the cooperative exemption is used only for

    swaps related to member lending activities. Since the definition of an

    exempt cooperative requires that all members be entities who can elect

    the end-user exception or cooperatives all of whose members can, this

    condition assures that the exemption will benefit entities who could

    themselves elect the end-user exception and can be used for swaps that

    hedge or mitigate risk in connection with member loans and swaps as

    would be required by section 2(h)(7)(A)(ii) of the CEA.

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

    \42\ The phrase ``in connection with originating a loan'' is

    similarly used in the definition of swap dealer in Sec. 1.3(ggg) of

    the Commission's Regulations. See 77 FR 30596, 30744 (May 23, 2012).

    That meaning is incorporated in the final rule.

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

    The primary rationale for the cooperative exemption is based on the

    unique relationship between cooperatives and their member-owners.

    Expanding this exemption to include swaps related to non-member

    activities would extend the exemption beyond its intended purpose.

    Furthermore, allowing cooperatives to enter into non-cleared swaps with

    non-member borrowers, or swaps that serve purposes other than hedging

    member loans or

    [[Page 52293]]

    swaps, would give the cooperatives, which are large financial entities,

    an exception from regulatory requirements that would not be provided to

    other market participants engaging in such similar business with

    respect to non-members that is not justified by their cooperative

    structure or the provisions of the Dodd-Frank Act.

    The CFC commented that it agrees with the types of swaps eligible

    for the cooperative exemption described by the Commission in the

    preamble of the NPRM. The CFC stated that the use of the phrase

    ``related to'' in the rule text is consistent with the ``pass-through

    concept'' that underlies the cooperative exemption. The FCC suggested

    that the Commission provide additional clarity on the ``related to''

    standard. The FCC commented that the ``related to'' standard should be

    broad enough to cover swaps that hedge or mitigate risk related to

    ``interest rate, liquidity, and balance sheet risks'' associated with a

    cooperative's lending business. The FCC pointed to the statement in the

    preamble to the proposed rule that explained that the ``related to''

    test involves hedging or mitigating risks ``associated with'' member

    loans. The FCC supported this interpretation. The FCC requested that

    the Commission clarify that certain types of transactions would be

    covered by the cooperative exemption. Specifically, the FCC suggested

    that the following swaps should be covered by the cooperative

    exemption: (1) Swaps managing interest rate, liquidity, and balance

    sheet risk, (2) swaps qualifying as GAAP hedges of bonds and floating

    rate notes, and (3) swaps hedging FCS banks' liquidity reserves that

    are required by the FCA.

    The AFBF also requested that the Commission clarify that swaps

    mitigating or hedging balance sheet, interest rate, and liquidity risks

    associated with their cooperative lending business are eligible for the

    cooperative exemption.

    The Commission's rationale for the cooperative exemption is based

    on the unique relationship between a cooperative and its members. The

    primary purpose for the cooperative exemption is to, in effect, provide

    the full benefits of the end-user exception created in section 2(h)(7)

    of the CEA to entities that qualify for the end-user exception, but

    otherwise do not receive the full benefits of the exception if they use

    their cooperatives as their intermediary in the markets as they have

    traditionally done. Thus, the Commission will interpret this exemption

    to ensure that the exemption is only used for swaps that are undertaken

    to directly further the interests of the members who are themselves

    eligible for the end-user exception. Accordingly, the Commission

    declines to expand the types of transactions eligible for the exemption

    beyond those swaps that are entered into in connection with originating

    a loan or loans for a member, or swaps that hedge or mitigate

    commercial risk related to loans with members, or hedge or mitigate the

    commercial risk associated with a swap between an exempt cooperative

    and its members in connection with originating loans to members.

    With respect to the comments of the AFBF and the FCC regarding

    swaps that hedge balance sheet, interest rate, and liquidity risks

    associated with their cooperative lending business, the Commission

    reiterates that only those swaps relating to member loans are eligible

    for the exemption, not swaps related to a cooperative's entire lending

    business to the extent that lending business includes loans to non-

    members. Accordingly, the exemption may be used for swaps that hedge

    balance sheet, interest rate, and liquidity risks, but only limited to

    the extent those risks are related to loans made by the cooperative to

    its members. The Commission is concerned that without this limitation,

    cooperatives could use this exemption for risks related to non-member-

    based activities, which would be inconsistent with the general

    rationale for the exemption and could result in a competitive benefit

    to eligible cooperatives that is also inconsistent with the

    Commission's rationale for the exemption.

    As the text of Sec. 39.6(f)(2)(i) (now Sec. 50.51(b)(1))

    provides, the phrase ``swap is entered into with a member of the exempt

    cooperative in connection with originating a loan or loans for the

    member'' should be read consistent with 17 CFR 1.3(ggg)(5). Among other

    things, 17 CFR 1.3(ggg)(5) provides that an acceptable swap includes a

    swap with members for which the rate, asset, liability or other

    notional item underlying such swap is, or is directly related to, a

    financial term of such loan, which includes, without limitation, the

    loan's duration, rate of interest, the currency or currencies in which

    it is made and its principal amount; or the swap is required, as a

    condition of the loan under the exempt cooperative's loan underwriting

    criteria, to be in place in order to hedge price risks incidental to

    the borrower's business and arising from potential changes in the price

    of a commodity (other than an excluded commodity).

    Section 39.6(f)(2)(ii) (now Sec. 50.51(b)(2)) also includes in the

    cooperative exemption swaps that hedge or mitigate risk related to

    loans to members or arising from a swap or swaps with members entered

    into pursuant to Sec. 39.6(f)(2)(i) (now Sec. 50.51(b)(1)). This

    provision includes swaps that the exempt cooperatives may enter into

    with non-members to hedge or mitigate the risks incurred by the

    cooperatives related to their member lending activities. Such swaps can

    include swaps entered into with non-member parties (e.g., SDs) to hedge

    or mitigate risks such as interest rate risk related to funding loans

    to fund member loans, or liquidity or balance sheet risks, so long as

    those liquidity and balance sheet risks arise from activities related

    to member loans.

    As discussed above in this section, the risks must be related to

    member loans only. For example, the Commission understands that

    cooperatives sometimes issue bonds or enter into wholesale funding

    transactions to fund member and non-member loans. The cooperative

    exemption would permit an exemption for swaps, such as interest rate

    swaps or interest rate caps, used to hedge those funding transactions,

    but only to the extent that the interest rate swaps or interest rate

    caps relate to member-associated loans. Only swaps hedging or

    mitigating risk arising from the portion of the bonds or wholesale

    funding proceeds that is related to, or is expected to be related to,

    direct loans to members are eligible for the exemption. Practically

    speaking, this means that for a cooperative borrowing on a wholesale

    basis for both member and non-member-associated loans, the aggregate

    notional amount of any non-cleared swaps hedging the wholesale funding

    loans must not exceed the aggregate principal value of the wholesale

    funding loans less the aggregate principal amount lent or expected to

    be lent to non-members. Cooperatives would need to adjust that

    aggregate notional amount by termination or other means as soon as

    practicable if that aggregate amount is exceeded during the life of any

    such swaps.

    As another example, eligible cooperatives may want to hedge

    interest rate risk associated with a portfolio of loans to multiple

    borrowers with one or more swaps. If the loan portfolio being hedged

    consists solely of loans to members, then the cooperative exemption

    would be available for those hedging swaps if the requirements of Sec.

    39.6(f) (now Sec. 50.51) are met. However, if the cooperative has non-

    member loans in the loan portfolio being hedged, then the swap may be

    hedging risk that is not related to

    [[Page 52294]]

    member loans and, if so, the exemption would not be available for that

    swap. In order to be able to elect the exemption for swaps that hedge a

    portfolio of member loans and non-member loans, the aggregate notional

    amount of any such swaps must not exceed the aggregate principal amount

    of the member loans in the portfolio. Cooperatives would need to adjust

    that notional amount by termination or other means, such as clearing

    certain swaps, as soon as practicable if that amount is exceeded during

    the life of any such swap. The same limitation applies to balance sheet

    risks. The exemption may be elected for swaps hedging balance sheet

    risks only to the extent they arise from member loan related activity.

    For example, balance sheet risks could be hedged with swaps for which

    the cooperative exemption may be available to the extent that the

    aggregate notional amount of such swaps does not exceed the aggregate

    principal amount of member loans.

    With respect to FCC's comments relating to ``liquidity reserves''

    required by the FCA, the Commission believes the same general approach

    described above should apply. That is, swaps hedging risks related to

    liquidity reserves may be eligible for the exemption only to the extent

    that such reserves being hedged are related to member loans. For

    example, if a cooperative makes loans to both members and non-members

    and hedges risks related to liquidity reserves for the combined loan

    portfolio, the cooperative would be permitted to elect the exemption

    for the hedging swaps to the extent that the aggregate notional amount

    of the swaps does not exceed an amount equal to the total liquidity

    reserves multiplied by the proportion of the member loans principal

    amount to the total principal amount of member loans and non-member

    loans in the cooperative's combined loan portfolio.

    The CFC commented that the Commission should modify the language of

    section 39.6(f)(2)(ii) (now Sec. 50.51(b)(2)), which is a cross-

    reference to the definition of hedging or mitigating commercial risk

    for the purposes of the end-user exception, to replace the term

    ``commercial enterprise'' with the term ``exempt cooperative.''

    The requested change is not necessary. As explained in the final

    release for the end-user exception,\43\ the use of the term

    ``commercial enterprise'' is intended to refer to the underlying

    activity to which the risk being hedged or mitigated relates in the

    context of the entity's normal business activities, not simply the type

    of entity claiming the exemption. For example, in the context of the

    cooperative exemption, it would include the risks undertaken by a

    cooperative in the normal course of business of providing loans to

    members.

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

    \43\ 77 FR 42572 (July 19, 2012).

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

    D. Regulation 39.6(f)(3) (now Sec. 50.51(c)): Reporting

    The Commission believes it is appropriate to impose certain

    reporting requirements on any entities that may be exempted from the

    clearing requirement by this regulation. The reporting requirements in

    the final rule are effectively identical to the reporting requirements

    for the end-user exception. For purposes of regulatory consistency,

    Sec. 39.6(f)(3) (now Sec. 50.51(c)) incorporates the provisions of

    Sec. 50.50(b) with only those changes needed to apply the reporting

    provisions in the specific context of the cooperative exemption.

    Regulation 50.50(b) requires one of the counterparties (the ``reporting

    counterparty'') to provide, or cause to be provided, to a registered

    SDR, or if no registered SDR is available, to the Commission,

    information about how the counterparty electing the exception generally

    expects to meet its financial obligations associated with non-cleared

    swaps. In addition, Sec. 50.50(b) requires reporting of certain

    information that the Commission will use to monitor compliance with,

    and prevent abuse of, the exception. The reporting counterparty would

    be required to provide the information at the time the electing

    counterparty elects the cooperative exemption.

    The CUNA requested that the Commission minimize the compliance

    burdens on cooperatives that elect to use the cooperative exemption,

    including the notification requirement. The ICBA requested that the

    Commission modify the reporting requirement when the cooperative

    exemption is elected. The ICBA commented that the aggregate reporting

    requirements of Sec. 50.50(b) do not allow the Commission to ``monitor

    actual risks or swaps usage.'' The ICBA stated that it was concerned

    that FCS members actively seek to lend to a number of entities that are

    not owners of the FCS. Because of this, the Commission, according to

    the ICBA, would not have a way of verifying that the swaps for which an

    FCS bank elected this exemption are actually eligible for the

    cooperative exemption. Neither the ICBA nor the CUNA proposed any

    specific changes to the rule text in connection with their comments.

    The Commission has determined not to change the reporting

    requirements proposed in Sec. 39.6(f)(3) (now Sec. 50.51(c)) and to

    keep them consistent with the reporting requirements of the end-user

    exception. The Commission discussed at length in the final release of

    the end-user exception how the reporting requirements for entities

    electing the clearing requirement exception are simplified through a

    check-the-box approach and can be reported along with the other

    reporting required for all swaps under the Commission's part 45

    regulations.\44\ The Commission believes that the reporting

    requirements will provide the Commission with sufficient information,

    along with the other information to be reported for all swaps and

    information publicly reported by cooperatives, to detect evasion of

    required clearing or abuse of the exemption. For example, every swap

    executed by a cooperative, as is the case with all swaps, must be

    reported to an SDR or to the Commission and the parties to that swap

    will be identified. Accordingly, the Commission will be able to review

    and analyze the economic and other details of all swaps entered into by

    each cooperative. As such, the Commission is able to monitor actual

    swap usage by cooperatives. The swap reporting requirements are not

    intended to monitor the risk levels of individual cooperatives.

    Monitoring the accumulated risk undertaken by financial cooperatives is

    generally the purview of their supervisory regulators.

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

    \44\ 77 FR at 42565-70.

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

    Based on a review of publicly available information and discussions

    with the regulators of financial cooperatives, the Commission believes

    that a large majority of lending by these cooperatives is to their

    members. As such, at present there do not appear to be substantial

    incentives for cooperatives to abuse the exemption with respect to

    swaps that are not member related. Notwithstanding the foregoing, the

    limitations on using the exemption for non-member related activities is

    clearly established in the final rule and the Commission is confident

    that the tools available to the Commission for addressing abuse or

    evasion of the cooperative exemption are sufficient without changing

    the reporting requirements as proposed.

    E. Other Comments on the Proposed Rule

    The ABA and the ICBA commented that the FCS, as a GSE, presents a

    significant risk for the U.S. taxpayer. The ICBA stated that the FCS

    was ``bailed out'' by the government during the farm credit crisis in

    the 1980s. The ABA and the ICBA noted that the FCS,

    [[Page 52295]]

    if viewed as a single financial institution because of the mutual

    support provisions for the FCS institutions, has assets worth more than

    $230 billion. According to the ICBA, the FCS may be systemically

    important under the Dodd-Frank Act because it has assets in excess of

    $50 billion. The ICBA also suggested that the Commission should not

    provide any exemptions for any institution with over $50 billion in

    assets because institutions over $50 billion are considered to be

    potentially systemically important under the Dodd-Frank Act.

    In contrast, the FCC commented that the FCS banks have strong

    protections in place for counterparty default, including, for example,

    collateral posting agreements, which are overseen by the FCA. According

    to the FCC, these protections have been effective throughout the recent

    financial crisis. Accordingly, the FCC suggested that the FCS poses no

    systemic risk to the U.S. financial system.

    The fact that Congress designated the FCS as a GSE does not by

    itself imply the existence of a sufficiently higher level of risk to

    justify rejecting the limited exemption from clearing provided to

    cooperatives. The Commission notes that the FCS is supervised by the

    FCA, an independent Federal agency charged with overseeing the safety

    and soundness of the FCS.\45\ The Commission acknowledged in the NPRM

    that the proposed exemption would be available to cooperatives with

    total assets in excess of $50 billion. However, the Commission believes

    that the exemption, as narrowly drafted, is appropriate given the

    benefits conferred by it to the entities Congress designated for the

    end-user exception who are members of exempt cooperatives. Regarding

    the possible designation of the FCS as systemically important, the

    Commission notes that Congress excluded the possibility of the FCS from

    being designated as systemically important by the Financial Stability

    Oversight Council.\46\

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

    \45\ See 12 U.S.C. 2241 (establishing the FCA); 12 U.S.C. 2252

    (enumerating the powers of the FCA including the power to ensure the

    safety and soundness of FCS institutions).

    \46\ The Financial Stability Oversight Council does not have the

    authority to determine that the FCS be supervised by the Board of

    Governors of the Federal Reserve System as a ``nonbank financial

    company'' pursuant to section 113 of the Dodd-Frank Act. The

    definition of ``nonbank financial company'' includes a ``U.S.

    nonbank financial company'' and a ``U.S. nonbank financial company''

    specifically excludes a ``Farm Credit System institution chartered

    and subject to the provisions of the Farm Credit Act of 1971.'' 12

    U.S.C. 5311(a)(4); section 102(a)(4)(B) of the Dodd-Frank Act.

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

    The CFC requested that the Commission, when coordinating with the

    other prudential regulators working to finalize the margin rules for

    non-cleared swaps, ensure that the final margin requirements for non-

    cleared swaps are consistent with the final cooperative exemption. In

    effect, the CFC requested that the final margin rules for non-cleared

    swaps not require margin for swaps eligible for the cooperative

    exemption.

    The Commission intends to continue to work with the other

    prudential regulators to ensure that the cooperative exemption, along

    with other clearing exceptions or exemptions, are taken into

    consideration when finalizing the margin rules for non-cleared swaps.

    The ICBA suggested that the Commission should review the exemption

    ``every three years to see if the exemption is warranted on an ongoing

    basis'' because cooperatives will have had time to ``adjust to the

    evolving swaps markets and clearing systems.''

    The Commission declines to include an explicit sunset or study

    provision in the final rule. As the Commission's swap regulations are

    new and the market is evolving in response, the Commission anticipates

    evaluating its swap-related regulations on an as-needed basis and will

    modify them as appropriate.

    The ABA requested that the Commission extend the comment period for

    this rule because of the ``impending regulatory deadlines, complexity,

    and economic consequences'' of the cooperative exemption.

    The Commission declines to extend the comment period because the

    public was given an opportunity to, and did, participate in the

    rulemaking process.

    IV. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA states that ``[i]n order to promote

    responsible economic or financial innovation and fair competition'' the

    CFTC may exempt any agreement, contract, or transaction subject to

    section 4(a) from the requirements of that section or any other section

    of the CEA. Section 4(c) authorizes the Commission to grant exemptive

    relief to foster the development or continuance of market practices

    that contribute to market innovation and competition.\47\ Congress, in

    adding section 4(c) to the CEA, intended that the Commission, ``in

    considering fair competition, will implement this provision in a fair

    and even-handed manner.'' \48\ At the same time, Congress expected

    that, in doing so, the Commission ``will apply consistent standards

    based on the underlying facts and circumstances of the transaction and

    markets being considered, and may make distinctions between exchanges

    and other markets taking into account the particular facts and

    circumstances involved, consistent with the public interest and the

    purposes of the Act, where such distinctions are not arbitrary and

    capricious.'' \49\ While this language refers specifically to

    distinctions between exchanges and other markets, it implies that

    Congress more generally expected the Commission, in applying section

    4(c)(1), to draw distinctions among different market participants where

    circumstances justify it.\50\ As discussed in detail elsewhere herein,

    cooperatives are unique in their organizational form, in the way that

    they act in the interests of their members, and in the well-established

    public policies that support the ability of cooperative members to make

    use of their cooperatives for purposes of accessing markets. These

    unique characteristics justify an exemption specifically tailored to

    enable non-financial entity end users that are members of cooperatives

    to realize the full benefits of the end-user exception when they access

    markets through their cooperatives.

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

    \47\ See Conference Report, H.R. Report 102-978 at 8 (Oct. 2,

    1992) (``The goal of providing the Commission with broad exemptive

    powers . . . is to give the Commission a means of providing

    certainty and stability to existing and emerging markets so that

    financial innovation and market development can proceed in an

    effective and competitive manner.'').

    \48\ Id. at 78.

    \49\ Id.

    \50\ Cf., CEA section 4(c)(2)(A), 7 U.S.C. 6(c)(2)(A) (expressly

    requiring a determination that an exemption from CEA section 4(a), 7

    U.S.C. 6, under CEA section 4(c)(1), 7 U.S.C. 6(c)(1), be consistent

    with the public interest and the purposes of the CEA, one of which

    is ``to promote . . . fair competition . . . among . . . market

    participants'').

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

    The end-user exception provided in section 2(h)(7) of the CEA is

    not available to an entity that is a ``financial entity,'' as defined

    in section 2(h)(7)(C)(i), unless the entity is exempt from the

    definition because it is a small financial institution based on total

    assets, as provided in section 2(h)(7)(C)(ii) of the CEA and Sec.

    50.50(d), or it meets one of the narrowly drawn exemptions provided in

    section 2(h)(7) or the Commission regulations. Section 2(h)(7)(C)(ii)

    does not provide special consideration for cooperatives that meet the

    definition of ``financial entity'' and, therefore, the asset size limit

    applies to them.

    As described in the NPRM and above, cooperatives whose member-

    owners consist exclusively of persons or entities

    [[Page 52296]]

    that could elect the end-user exception provide important financial

    services to their members. These cooperatives are, in many respects, an

    extension of their member-owners and are not separable from their

    members in any real sense because their mission is to act in the

    interests of the members. However, some of those cooperatives meet the

    definition of ``financial entity'' and have total assets in excess of

    $10 billion, and therefore the end-user exception is unavailable to

    them. By extension, the full benefits of the end-user exemption would

    be unavailable to their members accessing financial services through

    their cooperatives. Accordingly, absent this exemption, cooperative

    members would lose the ability to use their cooperative for financial

    services and at the same time, realize the full benefits of end-user

    exception. Without the cooperative exemption, when a cooperative

    engages in financial activity that could benefit from the end-user

    exception and that activity is in the interest of the cooperative's

    members, the members would not realize the full benefits of the end-

    user exception because the cooperative cannot elect the exception.

    Although the members of a cooperative may seek out financial services

    from other market participants, some of which may be able to elect the

    end-user exception, such members would not be able to realize the same

    benefits as if they had acted through the cooperative. As previously

    explained, such other market participants were not established solely

    to serve the interests of its customers, and thus do not provide the

    same benefits to its customers as the cooperative structure provides to

    its members, even for similar services. Absent this exception, the

    members of the cooperative would no longer be able to fully realize the

    benefits for which the cooperatives were established of being the

    members' intermediary in the financial markets acting in the mutual

    interests of the members. In light of this, the Commission determined

    to exercise its authority under section 4(c) of the CEA to propose

    Sec. 39.6(f) (now Sec. 50.51) and establish the cooperative

    exemption.

    As noted above, section 4(c) of the CEA authorizes the Commission

    to provide exemptions to classes of persons ``to promote responsible

    economic or financial innovation and fair competition.'' Many of the

    comments focused on this provision. For example, the ICBA commented

    that the cooperative exemption does not promote financial innovation.

    According to the ICBA, the Commission's estimate that the cooperative

    exemption would affect 500 or less swaps a year shows that there is no

    financial innovation by the exempt cooperatives. The ICBA also

    commented that the Commission has not shown financial innovation

    because the proposal excludes the FHL Banks, which, according to the

    ICBA would potentially provide just as much, ``if not more,'' financial

    innovation than an exemption for the FCS and credit unions. In essence,

    the ICBA stated that the cooperative exemption does not promote

    financial innovation because it is narrowly tailored and affects only a

    small number of swaps and institutions. In contrast, the FCC commented

    that ``[t]o provide tailored financing products for farmers and farm-

    related businesses, FCS institutions rely on the safe use of

    derivatives to manage interest rate, liquidity, and balance sheet risk,

    primarily in the form of interest rate swaps.''

    As discussed above in this section IV, Congress contemplated that

    section 4(c) of the CEA would provide the Commission with the ``means

    of providing certainty and stability to existing and emerging markets

    so that financial innovation and market development can proceed in an

    effective and competitive manner.'' \51\ Financial cooperatives have

    existed for over 100 years and were given separate legal status by

    Congress as far back as 1916.\52\ Without these cooperatives, members

    have less choice in where they can borrow capital and hedge risks

    related to those borrowing activities. Swaps are a fairly recent

    innovation in the financial markets that has become an integral part of

    borrowing and lending. The cooperative form has enabled members to

    manage their borrowing activities and to use swaps to hedge risks in

    connection therewith at a lower cost. By pooling member capital in

    financial cooperatives, members are in effect aggregating their

    resources to allow them not only to gain a lower cost of funding, but

    also to be able to hire experienced executives who, as employees of the

    cooperative, are charged with managing the financial activities of the

    cooperative and advising the board of directors of the cooperative for

    the benefit of the member-owners, who often have specific, shared

    purposes that are the mission focus of the cooperative.\53\ Further,

    because the cooperative members elect the board members of the

    cooperative on a democratic, one member, one vote, basis,\54\ and often

    most, if not all, board members are cooperative members,\55\ the

    membership, through the governing board, has a unique opportunity to

    better understand the benefits and risks of swaps used in connection

    with their financial activities and as a group control the thoughtful

    application thereof in a responsible manner and for their mutual

    benefit. The mutual benefit of pooling resources and acting

    cooperatively is one of the principal policy reasons for the

    establishment of cooperative structures.\56\ These are benefits that

    the cooperative member-owners would not have as customers of other

    financial institutions that they do not own or control and that are not

    established with the mission of providing financing and financial

    services to a particular type of customer and for their benefit.

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

    \51\ See Conference Report, H.R. Report 102-978 at 8 (October 2,

    1992).

    \52\ See The Federal Farm Loan Act, Public Law 64-158, 39 Stat.

    360 (1916) (repealed 1923) (a predecessor to the Farm Credit Act).

    \53\ See, e.g., the mission statement of the Farm Credit Bank of

    Texas: ``Other lenders may lend to agriculture and rural America

    only when it is profitable to do so, but at Farm Credit, financing

    rural America is all we do. When Congress created the Farm Credit

    System in 1916, it gave the System a mission to be a competitive,

    reliable source of funds for eligible borrowers in agriculture and

    rural America. Because we specialize in these areas, we have

    expertise that is unparalleled among other lenders.'' http://www.farmcreditbank.com/farm-credit-advantage.aspx; See also CoBank

    2011 Annual Report, 31 (``We are a mission-based lender with

    authority to make loans and provide related financial services to

    eligible borrowers in the agribusiness and rural utility industries,

    and to certain related entities, as defined by the Farm Credit Act.

    . . . We are cooperatively owned by our U.S. customers.'').

    \54\ To receive treatment as cooperatives under the Internal

    Revenue Code, an entity must be ``operating on a cooperative

    basis.'' 26 U.S.C. 1381(a). The United States Tax Court has held

    that one of the guiding principles for determining whether an entity

    is operating on a cooperative basis is if it is democratically

    controlled by the members. Puget Sound Plywood, Inc. v.

    Commissioner, 44 T.C. 305, 308 (1965).

    \55\ See, e.g., 12 U.S.C. 2072, 92 (requiring boards for

    production credit associations and federal land bank associations be

    selected from its voting members); 12 CFR 701 app. A (bylaws for

    national credit unions requiring board members be members of the

    credit union); Kan. Stat. Ann. Sec. 17-1510 (West) (requiring board

    members to be selected from the membership); Va. Code Ann. Sec.

    13.1-324 (West) (requiring the board, except for the public

    director, consist of members).

    \56\ See, e.g., the initial statement of Congress in the Farm

    Credit System Act, which authorizes the Farm Credit System that the

    FCS cooperatives are a part of: ``It is the objective of this

    chapter to continue to encourage farmer- and rancher-borrowers

    participation in the management, control, and ownership of a

    permanent system of credit for agriculture which will be responsive

    to the credit needs of all types of agricultural producers having a

    basis for credit, and to modernize and improve the authorizations

    and means for furnishing such credit and credit for housing in rural

    areas made available through the institutions constituting the Farm

    Credit System as herein provided.'' 12 U.S.C. 2001.

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

    In addition, section 4(c) of the CEA does not specify that the

    financial

    [[Page 52297]]

    innovation realized must be of a certain size. Innovation often begins

    on a small scale before becoming widely accepted and implemented, if

    successful. Regarding whether the FHL Banks should be included because

    the exemption would also provide innovation through the FHL Banks, as

    described in detail above in section III.B of this final release, the

    Commission determined to carefully narrow the cooperatives that can

    elect the exemption to those whose members consist exclusively of

    entities that (or other cooperatives whose members) do qualify for the

    end-user exception on their own, given the clear Congressional intent

    in section 2(h)(7) of the CEA to exclude financial entities (the

    definition of which excludes small financial institutions) from the

    end-user exception to the clearing requirement. Given that FHL Banks

    are not made up exclusively of non-financial entities or small

    financial institutions, the cooperative exemption would not be

    available to them.

    The ABA and ICBA also commented that the cooperative exemption does

    not qualify under section 4(c) and is discriminatory because it would

    give cooperatives a competitive advantage over banks and therefore it

    does not promote ``fair competition.'' They also commented that

    cooperatives compete with banks for the same business opportunities,

    and as GSEs and tax-exempt entities, cooperatives can offer more

    competitive pricing than traditional banks. Lake City Bank commented

    that it has difficulty competing with the FCS and credit unions for

    business due to the GSE status of the FCS, the large amount of assets

    the FCS maintains, and the favorable tax status afforded to the FCS and

    credit unions.

    In contrast, the FCC commented that the cooperative exemption

    preserves a ``level field for FCS institutions and commercial banks''

    that qualify for the end-user exception because FCS associations that

    otherwise would qualify as small financial institutions and compete

    with qualifying banks hedge risk at the level of the FCS bank

    cooperatives in which they are members. In effect, the FCC asserts that

    the FCS associations would be unable to use the end-user exception

    because the cooperative structure of the FCS system means that the

    associations act through the FCS bank cooperatives (all of which have

    total assets over $10 billion) for their hedging activities and not

    directly.

    As discussed previously, the essential function of cooperatives is

    to enable their members to access markets through a commonly-owned

    intermediary. The memberships of the cooperatives that would qualify

    for the cooperative exemption consist of entities that can elect the

    end-user exception if acting on their own or other cooperatives the

    members of which can elect the end-user exception. However, these

    cooperatives meet the definition of ``financial entity'' and are too

    large to qualify for the small financial institution exemption, which,

    in turn, renders the end-user exception unavailable to the

    cooperatives. Accordingly, if the cooperative members wish to access

    the markets through their financial cooperative, which has been

    established for that same purpose, they would not receive the full

    benefits of the end-user exception because the cooperative would have

    to clear its swaps even though it is acting in the interests of its

    members in the markets. On the other hand, the members could enter into

    loans and swaps with other financial entities that can elect the end-

    user exception. In effect, the cooperative structure, which is intended

    to give the members the benefit of size by allowing them to pool their

    resources and act together for their mutual benefit, instead would

    frustrate their ability to realize the full benefits of the end-user

    exception when acting through their cooperatives. As such, the

    cooperative exemption seeks to preserve the benefits available to the

    members of cooperatives as intended under the cooperative legal

    structure.

    The Commission's recognition that the cooperatives provide a means

    for its members to access the financial markets in a variety of ways is

    consistent with the intent of Congress and state legislatures in the

    laws establishing cooperative legal structures. As described below,

    some of these laws acknowledge that cooperatives may have certain

    benefits or advantages that other entities do not have, but that any

    such advantages are acceptable for promoting the benefits of

    cooperatives because ultimately the benefits inure to the members of

    the cooperatives. The cooperative exemption is being adopted by the

    Commission in the context of the foregoing policy determinations.\57\

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

    \57\ As an example of these legislative policy determinations,

    the Federal Credit Union Act states:

    The Congress finds the following:

    (1) The American credit union movement began as a cooperative

    effort to serve the productive and provident credit needs of

    individuals of modest means.

    (2) Credit unions continue to fulfill this public purpose, and

    current members and membership groups should not face divestiture

    from the financial services institution of their choice as a result

    of recent court action.

    (3) To promote thrift and credit extension, a meaningful

    affinity and bond among members, manifested by a commonality of

    routine interaction, shared and related work experiences, interests,

    or activities, or the maintenance of an otherwise well understood

    sense of cohesion or identity is essential to the fulfillment of the

    public mission of credit unions.

    (4) Credit unions, unlike many other participants in the

    financial services market, are exempt from Federal and most State

    taxes because they are member-owned, democratically operated, not-

    for-profit organizations generally managed by volunteer boards of

    directors and because they have the specified mission of meeting the

    credit and savings needs of consumers, especially persons of modest

    means.

    (5) Improved credit union safety and soundness provisions will

    enhance the public benefit that citizens receive from these

    cooperative financial services institutions.

    12 U.S.C. 1751. State cooperative laws also acknowledge the

    different status cooperatives are being provided within the

    competitive landscape. See N.Y. Coop. Corp. Law, which states that:

    ``[a] cooperative corporation shall be classed as a non-profit

    corporation, since its primary object is not to make profits for

    itself as such, or to pay dividends on invested capital, but to

    provide service and means whereby its members may have the economic

    advantage of cooperative action, including a reasonable and fair

    return for their product and service.'' N.Y. Coop. Corp. Law 3

    (McKinney) (emphasis added); see also Ky. Rev. Stat. Ann. Sec.

    272.1001(2) (West 2012).

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

    Importantly, the Commission notes that the swaps that are the

    subject of the exemption are limited to those swaps related to member

    loans. Accordingly, the exemption applies only to the swaps related to

    lending services that financial cooperatives have been established to

    provide, and traditionally do provide, to their owner-members.\58\

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

    \58\ For example, with respect to the FCS, the Farm Credit Act

    of 1971 provides, ``It is declared to be the policy of the Congress,

    recognizing that a prosperous, productive agriculture is essential

    to a free nation and recognizing the growing need for credit in

    rural areas, that the farmer-owned cooperative Farm Credit System be

    designed to accomplish the objective of improving the income and

    well-being of American farmers and ranchers by furnishing sound,

    adequate, and constructive credit and closely related services to

    them, their cooperatives, and to selected farm-related businesses

    necessary for efficient farm operations.'' 12 U.S.C. 2001.

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

    The ABA and ICBA also cited to ``preferred tax and funding

    advantages as [GSEs]'' for FCS banks and the tax-exempt status that

    qualifying cooperatives have under Subchapter T of the Federal Internal

    Revenue Code (``Tax Code'') as existing advantages cooperatives have

    over banks. On the other hand, financial cooperatives, such as the FCS

    and credit unions, are subject to other legal restrictions and

    regulated by their own regulators, who may impose restrictions that put

    them at a competitive disadvantage when compared to banks. For example,

    federal statutes and regulations applicable to FCS cooperatives

    restrict lending services to particular classes of borrowers, prohibit

    them from taking deposits (which limits their funding sources as

    compared to banks), and

    [[Page 52298]]

    limit other services that they can provide to members. Similarly, the

    Tax Code, U.S. Tax Court rulings, and other guidance from the Internal

    Revenue Service impose limits on the business structure of cooperatives

    that seek cooperative tax treatment under the Tax Code that may impact

    their competitiveness. Also, cooperatives generally cannot raise equity

    capital from independent, non-customer investors. While the

    Commission's role is not to determine the relative overall competitive

    advantages or disadvantages that cooperatives or other financial

    institutions may have, the Commission believes that any limited

    advantage the cooperative exemption may provide to exempt cooperatives

    is likely to be small when viewed in the context of the complete

    competitive landscape in which financial cooperatives and banks

    operate.

    Given that Sec. 39.6(f) (now Sec. 50.51) and its attendant terms

    and conditions would (1) promote economic and financial innovation for

    the benefit of the members of exempt cooperatives, (2) foster the

    ability of cooperative members to access the financial markets through

    their cooperatives and (3) further Congressional intent by providing a

    limited exemption from clearing that effectively extends the end-user

    exception to cooperatives that have end users for members, the

    Commission concludes that the adoption of Sec. 39.6(f) (now Sec.

    50.51) and its attendant terms and conditions would promote responsible

    economic and financial innovation and fair competition in accordance

    with section 4(c) of the CEA.

    The Commission also concludes that the cooperative exemption will

    be limited to entities that fall within the term ``appropriate

    person,'' as required by section 4(c)(2)(B)(i) of the CEA.\59\ Section

    2(e) of the CEA renders it ``unlawful for any person, other than an

    [eligible contract participant (``ECP'')], to enter into a swap unless

    the swap is entered into on, or subject to the rules of, a board of

    trade designated as a contract market.'' \60\ Since the cooperative

    exemption can only be elected for swaps that are executed bilaterally

    and not on a board of trade or contract market, both the exempt

    cooperatives and their respective counterparties to such swaps must be

    ECPs. Given that the criteria for the ECP definition covering business

    organizations generally is more restrictive than the comparable

    criteria for the appropriate person definition in section 4(c)(3),\61\

    the Commission finds that the class of persons relying on Sec.

    50.51(a) will be limited to appropriate persons for purposes of CEA

    section 4(c)(2)(B)(i).\62\

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

    \59\ 7 U.S.C. 6(c)(2)(B)(i).

    \60\ 7 U.S.C. 2(e).

    \61\ Compare CEA section 4(c)(3)(F) identifying the applicable

    type of appropriate person (a ``corporation, partnership,

    proprietorship, organization, trust, or other business entity with a

    net worth exceeding $1,000,000 or total assets exceeding $5,000,000

    . . .'' and section 1a(18)(A)(v) that identifies a comparable type

    of ECP (a ``corporation, partnership, proprietorship, organization,

    trust, or other entity'' with a net worth exceeding $1,000,000 (and

    that enters into an agreement, contract or transaction for certain

    risk management purposes) or total assets exceeding $10,000,000).

    \62\ Although Sec. 39.6(f) (now Sec. 50.51) is an exemption

    from the clearing requirement of section 2(h)(1)(A) of the CEA and

    section 2(e) of the CEA sets forth a standard for entering into a

    swap, section 4(c)(2)(B)(i) requires that any agreement, contract or

    transaction that is the subject of a CEA section 4(c)(1) exemption

    be ``entered into'' solely between appropriate persons. Therefore,

    focusing on section 2(e), which is an execution standard rather than

    a clearing standard, is appropriate, particularly given that if it

    is unlawful to enter into a swap in the first instance, the clearing

    requirement is moot.

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

    Furthermore, the Commission concludes that the cooperative

    exemption will not have a material adverse effect on the ability of the

    Commission or any contract market or derivatives transaction execution

    facility to discharge their respective regulatory duties under the CEA

    as provided in section 4(c)(2)(B)(ii) of the CEA. The cooperative

    exemption effectively extends the end-user exception established in

    section 2(h)(7) of the CEA to cooperatives acting for non-financial

    entities. Section 39.6(f)(3) (now Sec. 50.51(c)) has the same

    reporting requirement that the end-user exception has with the only

    difference being that the reporting party must report that the

    cooperative exemption has been elected for the swap being reported

    instead of the end-user exception. In this way, the Commission will be

    able to track the swaps for which the cooperative exemption is being

    elected and who is electing the exemption thereby allowing the

    Commission to oversee the use of the cooperative exemption in the same

    manner as the end-user exception. Regarding contract markets and

    derivatives transaction execution facilities, the cooperative exemption

    does not modify their regulatory duties under the CEA. Accordingly,

    those entities will not have any increase or reduction in their

    regulatory duties with regard to the exempted swaps.

    V. Administrative Procedure Act Related Comments

    The ABA and the ICBA submitted a number of comments asserting that

    the rule is discriminatory or violates the arbitrary and capricious

    standard in the APA.\63\ The ABA commented that the Commission did not

    provide a reasonable explanation for why cooperatives with over $10

    billion in total assets were given an exemption while banks with total

    assets over $10 billion were not. According to the ABA, the Commission

    did not take into account the Congressional intent not to exempt banks

    and cooperatives with total assets above $10 billion from mandatory

    clearing.

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

    \63\ See 5 U.S.C. 706(2)(A).

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

    The Commission disagrees with the commenters' assertion that the

    Commission did not provide a reasonable explanation for the rule or

    that it does not fulfill Congressional intent. As discussed throughout

    the NPRM and as reiterated in this final release in response to

    specific comments, the cooperative exemption fulfills Congressional

    intent as expressed in section 2(h)(7) of the CEA by providing the full

    benefits of the end-user exception to the end-user members of

    cooperatives who act in the markets through their cooperatives. The

    limitation on the definition of ``exempt cooperative'' to those

    cooperatives whose members consist exclusively of entities and persons

    who may elect the end-user exception and other cooperatives whose

    members meet that requirement makes that readily apparent and is

    explained in detail in the NPRM.\64\ Furthermore, the Commission

    considered both this element of Congressional intent and Congress'

    clear mandate that the Commission require that certain swaps entered

    into by financial institutions be cleared by carefully and purposefully

    limiting the types of swaps for which the cooperative exemption is

    available.\65\ The Commission's reasoning behind the cooperative

    exemption based on the unique member-owner structure of cooperatives

    and the nature of cooperatives as entities whose primary purpose is to

    act in the interests of their member-owners in the financial

    marketplace is thoroughly discussed throughout the NPRM and reiterated

    in this final release. Commenters' assertions that the cooperative

    exemption rule is inconsistent with Congressional intent or is

    arbitrary and capricious are therefore without merit.

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

    \64\ 77 FR 41942 and 41943, and section III.B above.

    \65\ 77 FR 41942 and 41943, and section III.C above.

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

    [[Page 52299]]

    VI. Consideration of Costs and Benefits

    A. Background

    In the wake of the financial crisis of 2008, Congress adopted the

    Dodd-Frank Act, which, among other things, requires the Commission to

    determine whether a particular swap, or group, category, type or class

    of swaps, shall be required to be cleared.\66\ Specifically, section

    723(a)(3) of the Dodd-Frank Act amended section 2(h)(1)(A) of the CEA

    to make it ``unlawful for any person to engage in a swap unless that

    person submits such swap for clearing to a [DCO] that is registered

    under the CEA or a [DCO] that is exempt from registration under [the

    CEA] if the swap is required to be cleared.'' This clearing requirement

    is designed to reduce counterparty risk associated with swaps and, in

    turn, mitigate the potential systemic impact of such risk and reduce

    the likelihood for swaps to cause or exacerbate instability in the

    financial system.\67\

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

    \66\ See section 2(h)(2) of the CEA, 7 U.S.C. 2(h)(2).

    \67\ When a bilateral swap is moved into clearing, the DCO

    becomes the counterparty to each of the original participants in the

    swap. This standardizes counterparty risk for the original swap

    participants in that they each bear the same risk attributable to

    facing the DCO as counterparty. In addition, DCOs exist for the

    primary purpose of managing credit exposure from the swaps being

    cleared and therefore DCOs are effective at mitigating counterparty

    risk through the use of risk management frameworks. These frameworks

    model risk and collect defined levels of initial and variation

    margin from the counterparties that are adjusted for changing market

    conditions and use guarantee funds and other risk management tools

    for the purpose of assuring that, in the event of a member default,

    all other counterparties remain whole. DCOs have demonstrated

    resilience in the face of past market stress. Most recently, they

    remained financially sound and effectively settled positions in the

    midst of turbulent events in 2007-2008 that threatened the financial

    health and stability of many other types of entities and the

    financial system as a whole. These, and other benefits of clearing,

    are explained more fully at: 77 FR 74284.

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

    Notwithstanding the benefits of clearing, section 2(h)(7) of the

    CEA provides the end-user exception if one of the swap counterparties:

    ``(i) is not a financial entity; (ii) is using swaps to hedge or

    mitigate commercial risk; and (iii) notifies the Commission, in a

    manner set forth by the Commission, how it generally meets its

    financial obligations associated with entering into non-cleared

    swaps.'' Section 2(h)(7)(C)(ii) of the CEA directs the Commission to

    consider making the end-user exception available to small banks,

    savings associations, credit unions, and farm credit institutions,

    including those institutions with total assets of $10 billion or less,

    through an exemption from the definition of ``financial entity.'' \68\

    In Sec. 39.6(d) (now Sec. 50.50(d)), the Commission established the

    small financial institution exemption from the definition of

    ``financial entity'' for these institutions. The small financial

    institution exemption largely adopted the language of section

    2(h)(7)(C)(ii) providing for an exemption for the institutions

    identified in section 2(h)(7)(C)(ii) that have total assets of $10

    billion or less.

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

    \68\ See section 2(h)(7)(C)(ii) of the CEA.

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

    On December 23, 2010, the Commission published for public comment

    an NPRM for Sec. 39.6 (now Sec. 50.50) proposing the end-user

    exception.\69\ As discussed in section I hereof, several parties that

    commented on the end-user exception NPRM recommended that the

    Commission provide extend the end-user exception to cooperatives. These

    commenters reasoned \70\ that the member ownership structure of

    cooperatives and the fact that they act in the interests of members

    that are non-financial entities justified an extension of the end-user

    exception to the cooperatives. In effect, the commenters posited that

    because a cooperative effectively acts as an intermediary for its

    members when facing the larger financial markets with its interests

    being effectively the same as its members' interests, the end-user

    exception that would be available to a cooperative's members should

    also be available to the cooperative. If the members themselves could

    elect the end-user exception, then, according to the commenters, the

    Commission should permit the cooperatives to do so as well.

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

    \69\ See 75 FR 80747.

    \70\ Other reasons given for providing an exemption from

    clearing for cooperatives are discussed above in this final rule.

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

    The Commission is adopting the cooperative exemption herein as

    described in this release. Through Sec. 39.6(f) (now Sec. 50.51), the

    Commission uses the authority provided in section 4(c) of the CEA to

    permit ``exempt cooperatives,'' as defined in Sec. 39.6(f)(1) (now

    Sec. 50.51(a)) to elect not to clear certain swaps that are otherwise

    required to be cleared pursuant to section 2(h)(1)(A) of the CEA. In

    effect, the cooperative exemption makes available to exempt

    cooperatives the end-user exception that is available to their members,

    as described in greater detail above.\71\ It is the costs and benefits

    of this exemption that the Commission considered in the discussion that

    follows.

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

    \71\ Exempt cooperatives can be financial entities that do not

    qualify for the small financial institution exemption because their

    assets exceed $10 billion. As provided in Sec. 39.6(f)(2) (now

    Sec. 50.51(b)) of the rule, an exempt cooperative would not be

    required to clear swaps with members in connection with originating

    member loans, or swaps used by the exempt cooperative to hedge or

    mitigate commercial risk arising in connection with such swaps with

    members or loans to members.

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

    B. Statutory Requirement To Consider the Costs and Benefits of the

    Commission's Action: CEA Section 15(a)

    Section 15(a) of the CEA 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. Accordingly, the Commission considers the

    costs and benefits resulting from its own discretionary determinations

    with respect to the section 15(a) factors.

    Absent this rulemaking, all cooperatives that are financial

    entities as defined in section 2(h)(7)(C)(i) of the CEA and which are

    not otherwise exempt from that definition would be subject to the

    clearing requirement under section 2(h)(7)(A)(i) of the CEA. Thus, the

    scenario against which this rulemaking's costs and benefits are

    considered is cooperatives within the definition of financial entity in

    Section 2(h)(7)(C)(i) with assets exceeding $10 billion, which remain

    subject to the clearing requirement of section 2(h)(1)(A) of the CEA.

    Additionally, the Commission considers the rulemaking's costs and

    benefits relative to alternatives considered by the Commission.

    As discussed in more detail below, the Commission is able to

    estimate certain reporting costs. The dollar estimates are offered as

    ranges with upper and lower bounds, which is necessary to accommodate

    the uncertainty that surrounds them. The discussion below considers the

    rule's costs and benefits as well as alternatives to the rule. The

    discussion concludes with a consideration of the rule's costs and

    benefits in light of the five factors specified in section 15(a) of the

    CEA.

    C. Costs and Benefits of the Final Rule

    1. Costs and Benefits to Electing Cooperatives and Their Members

    Providing an exemption from required clearing to cooperatives that

    meet the criteria described in the final rule will benefit them and

    their members in that they will not have to bear the costs of

    [[Page 52300]]

    clearing that they would otherwise incur. Without the cooperative

    exemption rule, cooperatives meeting the criteria of the exemption

    would have to clear swaps pursuant to section 2(h)(1)(A) of the CEA

    when they are either: (1) Entering into a swap with a member that is

    subject to required clearing, or (2) transacting with another financial

    entity to hedge or mitigate risk related to loans with members or swaps

    with members related to such loans. Required clearing would introduce

    additional costs for cooperatives, including fees associated with

    clearing as well as costs associated with margin and capital

    requirements.

    Regarding fees, DCOs typically charge Futures Commission Merchants

    (``FCMs'') an initial transaction fee for each of the FCM customers'

    swaps that are cleared, as well as an annual maintenance fee for each

    of their customers' open positions.\72\ As a result, cooperatives

    eligible for the exemption will bear lower costs related to swaps and

    would likely pass along these costs savings to their members either by

    providing swaps at more attractive rates or through larger patronage

    distributions or allocations.\73\

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

    \72\ For example, not including customer-specific and volume

    discounts, the transaction fees for interest rate swaps at CME range

    from $1 to $24 per million notional amount and the maintenance fees

    are $2 per year per million notional amount for open positions. LCH

    transaction fees for interest rate swaps range from $1 to $20 per

    million notional amount, and the maintenance fee ranges from $5 to

    $20 per swap per month, depending on the number of outstanding swap

    positions that an entity has with the DCO. See LCH pricing for

    clearing services related to OTC interest rate swaps at: http://www.lchclearnet.com/swaps/swapclear_for_clearing_members/fees.asp.

    \73\ The CUNA stated that the exemption ``would help minimize

    the additional costs and fees associated with mandatory clearing.''

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

    The ABA questioned whether the exemption would have benefits that

    accrue to members of exempt cooperatives. The ABA stated that in the

    absence of the proposed exemption, cooperative members can still exempt

    their swaps from clearing. Therefore, the ABA believes that ``the

    proposed clearing exemption would solely benefit cooperatives larger

    than $10 billion.''

    The Commission, however, anticipates that benefits will accrue to

    members of exempt cooperatives. Generally, as discussed in section IV,

    the mission of the cooperatives is to provide loans and other financial

    services to particular types of borrowers and the cooperatives operate

    for the mutual benefit of their respective members. As such, in keeping

    with its mission and purpose, a cooperative is likely to elect the

    exemption only if the election thereof benefits its members. As

    discussed further in this section VI, the exemption is likely to lower

    operational costs for exempt cooperatives and to reduce their margin

    requirements. As a consequence, exempt cooperatives will be able to

    provide lower-cost funding to their members, to retain more member

    allocable capital, or to pay out higher patronage distributions to

    their members. Ultimately, the members, as owners of the cooperatives,

    will benefit.

    Regarding margin requirements, by allowing cooperatives to exempt

    certain swaps from clearing, the final rule may reduce the amount of

    margin that exempt cooperatives and their counterparties are required

    to post for swaps used to hedge or mitigate risk associated with loans

    to eligible members and for swaps related to those loans.\74\ Reduced

    margin requirements will reduce the amount of capital that exempt

    cooperatives must allocate to margin, which will increase the amount of

    capital that exempt cooperatives may distribute or allocate to members.

    On the other hand, to the extent that the exemption results in exempt

    cooperatives and their counterparties holding less margin against

    exempt swap positions, each will be exposed to greater counterparty

    risk.

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

    \74\ The Commission notes that regulations addressing margin and

    capital requirements for non-cleared swaps have not yet been

    finalized. Accordingly, the Commission cannot determine, quantify,

    or estimate what margin, if any, may be required for the swaps

    exempted from clearing under the cooperative exemption.

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

    The final rule may also affect the capital that cooperatives that

    are financial entities are required to hold with respect to their swap

    positions pursuant to prudential regulatory capital requirements. As

    stated above, when compared to a situation in which the cooperative

    exemption is not available, the cooperative exemption will reduce the

    number of swaps that exempt cooperatives are required to clear. The

    Commission anticipates that reducing the number of swaps that such

    cooperatives clear may impact the amount of capital that exempt

    cooperatives are required to hold. This creates both benefits and

    costs. If reduced clearing lowers the amount of capital that exempt

    cooperatives must hold, that would increase the cooperative's lending

    capacity, enabling them to lend more to their members without retaining

    or raising additional capital. As for costs, this allows exempt

    cooperatives to become more highly leveraged, which increases the

    counterparty risk that they pose to their members and other market

    participants with whom they transact. On the other hand, if reduced

    clearing increases the amount of capital that exempt cooperatives must

    hold, that would have the opposite effect.

    Cooperatives that elect the exemption will be required to report,

    or to cause to be reported, additional information to an SDR or to the

    Commission, which will create incremental costs for the reporting

    party. The final rule requires that exempt cooperatives adhere to the

    reporting requirements of Sec. 50.50(b). For each swap where the

    exemption is elected, either the exempt cooperative or its counterparty

    (likely if the counterparty is an SD or MSP) must report: (1) That the

    election of the exemption is being made; (2) which party is the

    electing counterparty; and (3) certain information specific to the

    electing counterparty unless that information has already been provided

    by the electing counterparty through an annual filing.\75\ In addition,

    for entities that are registered with the SEC, the reporting party will

    also be required to report with respect to the electing counterparty:

    (1) The SEC filer's central index key number; and (2) that an

    appropriate committee of the board of directors has approved the

    decision for that entity to enter into swaps that are exempt from the

    requirements of sections 2(h)(1) and 2(h)(8) of the Act.

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

    \75\ The third set of information comprises data that is likely

    to remain relatively constant and therefore, does not require swap-

    by-swap reporting and can be reported less frequently.

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

    For each exempted swap, to comply with the swap-by-swap reporting

    requirements in Sec. Sec. 50.50(b)(1)(i) and (ii), the reporting

    counterparty will be required to check one box indicating the exemption

    is being elected and complete one field identifying the electing

    counterparty. The Commission expects that this information will be

    entered into the appropriate reporting system concurrently with

    additional information that is required by the CEA and part 45 of the

    Commission's regulations. Furthermore, the Commission estimates that

    there will be approximately 500 swaps per year that are exempted from

    clearing pursuant to this rule.\76\ Therefore, each reporting

    [[Page 52301]]

    counterparty is likely to spend 15 seconds to 2 minutes per transaction

    in incremental time entering the swap-by-swap information into the

    reporting system, or in the aggregate, 1.5 hours to 17 hours per year

    for all 500 estimated swaps. A financial analyst's average salary is

    $208/hour, which corresponds to approximately $1-$7 per transaction or

    in aggregate, $300-$3,500 per year for all 500 estimated swaps.\77\

    While the above information must be reported on a swap-by-swap basis,

    some information may be reported annually. Regulation Sec.

    50.50(b)(1)(iii) allows for certain counterparty specific information

    identified therein to be reported either swap-by-swap by the reporting

    counterparty or annually by the electing counterparty. When exempt

    cooperatives enter into exempt swaps with members, the cooperative is

    likely to be the reporting counterparty. Furthermore, assuming the

    cooperative is the reporting counterparty, the time burden for the

    first swap entered into by an exempt cooperative in collecting and

    reporting the information required by Sec. 50.50(b)(1)(iii) will be

    approximately the same as the time burden for collecting and reporting

    the information for the annual filing. Given the cost equivalence for

    annual reporting to reporting a single swap if the exempt cooperative

    is both the electing and reporting counterparty, the Commission assumes

    that all ten exempt cooperatives will make an annual filing of the

    information required for Sec. 50.50(b)(1)(iii). The Commission

    estimates that it will take an average of 30 minutes to 90 minutes to

    complete and submit the annual filing. The average hourly wage for a

    compliance attorney is $300, which means that the annual per

    cooperative cost for the filing is likely to be between $150 and $450.

    If all ten exempt cooperatives were to undertake an annual filing, the

    aggregate cost would be $1,500 to $4,500.\78\

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

    \76\ A review of information provided for five cooperatives that

    likely would be exempt cooperatives showed a range of swap usage

    from none to as many as approximately 200 swaps a year with most

    entering into less than 50 swaps a year. Using the high end of

    reported swaps for the five cooperatives for which information was

    available, an estimate of 50 swaps per year was calculated. The

    Commission believes this estimate is high because some of the

    reported swaps may not meet the requirements of the final rule and,

    based on discussions with other regulators, several cooperatives for

    which detailed information was not available to the Commission

    likely undertake little, if any, swap activity. However, for

    purposes of the cost calculations, the Commission assumes that each

    of the 10 potential exempt cooperatives will enter into 50 swaps

    each year. Accordingly, it is estimated that exempt cooperatives may

    elect the cooperative exemption for 500 swaps each year.

    \77\ Wage estimates are taken from the SIFMA ``Report on

    Management and Professional Earnings in the Securities Industry

    2011.'' Hourly wages are calculated assuming 1,800 hours per year

    and a multiplier of 5.35 to account for overhead and bonuses. In

    light of the challenges of developing precise estimates, the results

    of calculations have been rounded.

    \78\ The average wage for a compliance attorney is $300.95

    [($112,505 per year)/(2,000 hours per year) * 5.35 = $300.95]. For

    the purposes of the Cost Benefit Considerations section, the

    Commission has used wage estimates that are taken from the SIFMA

    ``Report on Management and Professional Earnings in the Securities

    Industry 2011'' because industry participants are likely to be more

    familiar with them. Hourly costs are calculated assuming 2,000 hours

    per year and a multiplier of 5.35 to account for overhead and

    bonuses. All totals calculated on the basis of cost estimates are

    rounded to two significant digits.

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

    Furthermore, when an exempt cooperative is not functioning as the

    reporting counterparty (i.e., when transacting with a SD or MSP), it

    may, at certain times, need to communicate information to its reporting

    counterparties in order to facilitate reporting. That information may

    include, among other things, whether the electing counterparty has

    filed an annual report pursuant to Sec. 50.50(b) and information to

    facilitate any due diligence that the reporting counterparty may

    conduct. These costs will likely vary substantially depending on the

    number of different reporting counterparties with whom an electing

    counterparty conducts transactions, how frequently the electing

    counterparty enters into swaps, whether the electing counterparty

    undertakes an annual filing, and the due diligence that the reporting

    counterparty chooses to conduct. The Commission estimates that non-

    reporting electing counterparties will incur between 5 minutes and 10

    hours of annual burden hours, or in the aggregate, between

    approximately 1 hour and 100 hours. The hourly wage for a compliance

    attorney is $300, which means that the annual aggregate cost for

    communicating information to the reporting counterparty is likely to be

    between $300 and $30,000. Given the unknowns associated with this cost

    estimate noted above, the Commission does not believe this wide range

    can be narrowed without further information.\79\

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

    \79\ As noted above, the average wage for a compliance attorney

    is $300.95 per hour [($112,505 per year)/(2,000 hours per year) *

    5.35 = $300.95].

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

    The ABA and the ICBA suggested that the Commission's assumption

    that each potentially exempt cooperative engages in 50 swaps a year

    does not take into account the fact that the number of swaps entered

    into by the exempt cooperatives may change or increase over time. The

    ABA also commented that the Commission underestimated the number of

    cooperatives eligible and assumes that the number of cooperatives would

    not increase by either reorganization or growth.

    The Commission contacted the FCA and National Credit Union

    Administration for further assistance in assessing whether the

    estimates used in the NPRM are reasonable. These regulators discussed

    generally the observed level of swap activity of the cooperatives they

    regulate. Based on these discussions, the Commission concluded that the

    estimates in the NPRM are reasonable and appropriate for this

    rulemaking. The Commission recognizes that the number of entities

    eligible for the exemption and the number of swaps per eligible

    cooperative is likely to change in the future and that the benefits of

    this exemption for exempt cooperatives could encourage the number or

    size of exempt cooperatives and of swaps used by those cooperatives to

    grow. However, the Commission notes that the extent to which such

    growth is realized also depends on several additional factors that the

    Commission does not have adequate information to evaluate, including:

    (1) Subsequent changes to laws or regulations affecting one or more

    types of cooperatives; (2) increases or decreases in the size of the

    industries served by those cooperatives; and (3) the frequency with

    which exempt cooperatives make loans or experience other changes that

    require rebalancing of their hedging strategies. Because the Commission

    does not have sufficient information to estimate the direction or

    magnitude of the effect that these forces will have on the number of

    exempt cooperatives and exempt swaps per cooperative, it is not

    possible to evaluate how future changes in either are likely to affect

    the costs or benefits related to the exemption.

    2. Costs and Benefits for Counterparties to Electing Cooperatives

    The benefits of the exemption for counterparties to electing exempt

    cooperatives differ depending on whether they are members of the

    cooperatives. For entities that are members of the electing

    cooperative, they will likely benefit from the reduced operational

    costs the exempt cooperative achieves through reduced clearing fees

    associated with the cooperative's swaps with the market. The benefit

    may be passed on in the form of better terms on swaps between members

    and the cooperative and through the cooperative's patronage

    distributions to members. For entities that are not members of the

    cooperative (i.e. market makers entering into swaps with the

    cooperative), the benefits are different. Market makers entering into

    swaps with cooperatives that are subject to the exemption do not

    participate in the pro rata patronage distributions, but may benefit

    from reduced clearing costs associated with non-cleared swaps.

    Reduced clearing of swaps by exempt cooperatives will increase

    counterparty risk for both exempt cooperatives and their

    counterparties. Cooperatives will be more exposed to the credit risk of

    their counterparties, and conversely, the cooperatives' counterparties

    will be more exposed to the credit risk of the exempt cooperatives.

    This could be

    [[Page 52302]]

    problematic for an exempt cooperative if one of the dealers with which

    the cooperative has large non-cleared positions defaults, or if groups

    of members whose financial strength may be highly correlated and whose

    aggregate non-cleared positions with the cooperative are large,

    encounter financial challenges. In this way, the credit risk of one of

    the cooperative's counterparties could adversely impact the other

    counterparties of that cooperative.

    Conversely, if an exempt cooperative becomes insolvent and its

    positions with a SD or MSP are substantial, it is possible that its

    non-cleared positions could be large enough to exacerbate instability

    at the SD or MSP or could create greater risk exposure for the members

    with which the cooperative entered into swaps.

    The FCC stated that because FCS institutions have collateral

    agreements in place, ``clearing offers very little additional

    protection to FCS institutions.'' The Commission acknowledges that

    counterparty risk can be mitigated through collateral arrangements, but

    also notes that the extent to which counterparty risk is reduced

    through collateral agreements depends on the amount of collateral

    required from each party to the swap, the liquidity of that collateral

    in stressed market conditions, the frequency with which the amount of

    collateral is adjusted to account for variations in the value of the

    swap or the collateral, and the ability of the non-defaulting party to

    claim the collateral quickly in the event that their counterparty

    defaults.\80\ The Commission does not have adequate information to

    determine how effectively collateral arrangements may mitigate

    counterparty risk born by exempt cooperatives and their counterparties

    in the absence of central clearing.

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

    \80\ The 2012 ISDA Margin Survey indicates that 71% of all OTC

    derivatives transactions were subject to collateral agreements

    during 2011, but notes that the degree of collateralization may vary

    significantly depending on the type of derivative and counterparties

    entering into a transaction.

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

    3. Costs and Benefits for Other Market Participants

    The ABA commented that the Commission did not consider competitive

    harm to banks when analyzing the costs and benefits of the cooperative

    exemption. The ABA and ICBA commented that cooperatives compete with

    banks for the same business opportunities and provide similar services.

    They further stated that the exemption would provide cooperatives with

    a competitive advantage because they ``would have more liquidity

    available for lending than comparable banks would and be able to

    provide lower cost funding.'' Further, the ABA stated that ``the

    competitive impact of the proposed exemption would grow as more

    cooperatives increase their swaps portfolios to take advantage of the

    pricing and other economic benefits it affords.''

    The Commission recognizes that the cooperative exemption may

    provide clearing cost savings related benefits to eligible cooperatives

    with assets in excess of $10 billion.\81\ However, in assessing the

    competitive costs and benefits of the cooperative exemption the

    Commission believes the policy considerations for establishing

    cooperatives also need to be taken into account. As described section

    IV, Congress and the states have established the cooperative legal

    structure distinct from other corporate forms to facilitate the

    economic advantage of cooperative action for the mutual benefit of a

    cooperative's members. The cooperative exemption provides the members

    with the benefits of the end-user exception, both directly and

    indirectly through their cooperatives, without having to switch from

    doing business with their existing cooperatives to doing business with

    small financial institutions or other entities that can elect to exempt

    their swaps from clearing, but which are not organized for the specific

    purpose of benefitting those members. The cooperative exemption

    furthers these benefits by recognizing that the cooperatives were

    established to act on behalf of their members in the marketplace and

    providing an exemption from clearing to eligible cooperatives. In

    effect, the cooperative exemption ensures that the existing members of

    exempt cooperatives can achieve the full benefits of both cooperative

    action and of the end-user exception.

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

    \81\ The Commission notes, however, that most small banks are

    also eligible for the end-user exception, which can be elected for a

    wider range of swaps than the cooperative exemption. Section

    50.50(d) of the Commission's regulations provides that banks, FCS

    institutions, and credit unions that have total assets of $10

    billion or less are eligible for the end-user exception with certain

    exceptions--primarily that they not be SDs or MSPs.

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

    4. Costs and Benefits to the Public

    The public generally has an interest in mandatory clearing because

    of its potential to reduce counterparty risk among large,

    interconnected institutions, and to facilitate rapid resolution of

    outstanding positions held by such institutions in the event of their

    default. By narrowly crafting the proposed cooperative exemption to

    incorporate qualifying criteria limiting both the types of institutions

    and the types of swaps that are eligible, the Commission has sought to

    conserve this public interest.

    The ABA and the ICBA commented that the four FCS banks and FCS

    lending associations are jointly and severally liable for one another,

    and that ``the aggregated asset size of these institutions is $230

    billion and growing rapidly.'' The ICBA also stated that the financial

    cooperatives affected by the exemption will grow larger over time and

    may present a systemic risk in the future. The ABA stated that because

    the FCS is a GSE, it is a potential liability to U.S. taxpayers. The

    CUNA, on the other hand, asserted that the exemption would not have

    significant impact on the overall swap market because of the small

    number of entities eligible for the exemption. Similarly, the FCC

    stated that because of collateral agreements that FCS institutions have

    in place that ``the FCS poses no systemic risk to the U.S. financial

    system.''

    The Commission acknowledges that the magnitude of risk and

    potential costs to the public created by an exemption from clearing

    depends on several factors including: The number and size of the exempt

    cooperatives electing the exemption; the size, number, and type of

    exempt swaps held by each institution; the risks inherent in their

    outstanding swaps; the concentration of swaps with individual

    counterparties; the financial strength of counterparties to exempt

    swaps; and the presence of collateral agreements related to the exempt

    swaps.\82\ The Commission has limited data with which to evaluate these

    factors. Commenters provided limited data, noting the size of the four

    farm credit banks \83\ and the number and size of certain credit unions

    with more than $10 billion in assets.\84\ However, commenters did not

    provide, and the Commission does not have, detailed data regarding the

    size of exempt cooperatives' non-cleared swaps, information regarding

    the concentration

    [[Page 52303]]

    of non-cleared positions with particular counterparties, or information

    regarding the financial strength of those counterparties. In addition,

    while commenters noted the potential for collateral agreements to

    mitigate counterparty risk in the absence of clearing, they did not

    provide data or additional information regarding the agreements that

    they anticipate will be used. Each of these factors could have a

    significant bearing on how much risk is created for the public by

    exempting eligible counterparties from the clearing requirement.

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

    \82\ As noted above, the ability of collateral agreements to

    mitigate counterparty risk and risk to the public depends on the

    details of those agreements with regard to the amount and quality of

    collateral required, the frequency with which it is adjusted to

    reflect changing valuations, and the speed with which the non-

    defaulting party can claim the collateral in the event that their

    counterparty defaults.

    \83\ ABA stated that the four Farm Credit banks have

    approximately $15 billion, $29 billion, $76 billion, and $90 billion

    in assets.

    \84\ ABA stated that there are four credit unions with more than

    $10 billion in assets and are likely to be several more within the

    next year. They also stated that one credit union has nearly $50

    billion in assets and another has more than $25 billion.

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

    Notwithstanding the limited data available, the Commission

    considered the potential risks that could arise from cooperatives

    entering into non-cleared swaps and the Commission believes it has

    mitigated these risks with the conditions imposed in the rule that

    limit the number of entities and types of swaps eligible for the

    cooperative exemption. These conditions are described in sections I, II

    and II above.

    In addition, the Commission notes that cooperatives that may

    qualify as exempt cooperatives are supervised by other regulators that

    have access to more detailed information regarding the swaps executed

    by the cooperatives and that are likely to have additional information

    regarding the risk factors discussed above. These regulators can

    monitor the use of swaps by these cooperatives and the risk factors

    related to that swap activity. Using this information, these regulators

    can assess the risks related to the non-cleared swaps in the context of

    the overall regulatory framework applicable to the cooperatives and the

    changing financial condition of the cooperatives and in that context

    address the potential systemic risk with the cooperatives using their

    regulatory authority.

    Finally, while it is important to consider the potential risks

    noted above, it is also important to assess the benefits provided by

    the cooperative exemption. The Commission believes ensuring that the

    members of exempt cooperatives can continue to use their cooperatives

    in the manner intended and also realize the full benefits of the end-

    user exception through their cooperatives is appropriate given the

    unique nature of cooperatives and the statutory and policy

    considerations discussed above in section III.

    D. Costs and Benefits Compared to Alternatives

    There were several alternatives proposed by commenters that the

    Commission considered including: Providing a ``ride along'' exemption

    for community banks larger than $10 billion; and including cooperatives

    with members that are financial entities, either with or without

    additional restrictions on the eligibility of swaps conducted by such

    cooperatives.

    The Commission considered a ``ride-along'' provision, proposed by

    the ICBA, which would provide a clearing exemption for community banks

    that exceed the $10 billion total assets threshold. Providing a ``ride-

    along'' provision could mitigate the potential competitive effects of

    the exception, as alleged by the ICBA, but would also increase the

    potential risk to the public by increasing the number of large

    financial entities eligible for an exemption from clearing.

    Moreover, expanding the exemption in this way could also make it

    possible for SDs, MSPs, and other large financial institutions to avoid

    clearing by using exempt community banks as an intermediary for their

    swap transactions. Finally, allowing non-cooperatives to use the

    exemption would not reflect the unique structure of cooperatives that

    is the basis for the exemption and result in an expansion of the small

    financial institution exemption beyond the parameters detailed in the

    final release for the Commissions regulations implementing the end-user

    exception.\85\ For these reasons, the Commission has determined not to

    include the suggested ``ride-along'' provision.

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

    \85\ 77 FR 42559 (Jul. 19, 2012).

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

    The ICBA also stated that the cooperative exemption does not

    include the FHL Banks, and that thousands of small banks that are

    members of the FHL Bank system will be disadvantaged by the cooperative

    exemption because the FHL Banks will not be able to provide the same or

    similar low cost financing to community banks as FCS lenders do for

    their cooperative associations. The ICBA and the FHL Banks commented

    that the FHL Banks should be included as exempt cooperatives either

    generally, or to the extent they provide services to their members that

    qualify for the small financial institution exemption from the

    definition of financial entity.

    In the NPRM, the Commission considered including cooperatives

    consisting of members that could not elect the end-user exception, as

    suggested by the FHL Banks. Such an exemption would assist in ensuring

    that a greater number of cooperatives are able to elect not to clear

    swaps. However, as described in greater detail in section III, if the

    cooperatives elected the exemption when transacting with or for the

    benefit of members that are not eligible for the end-user exception

    (i.e. financial institutions with total assets greater than $10

    billion) it could significantly increase the number of swaps that are

    exempt from the clearing requirement and result in exemptions for

    entities that Congress has not provided any indication should be exempt

    from the clearing requirement.\86\ If the cooperative exemption were

    expanded in this way, it would reduce the benefits derived from

    required clearing. By contrast, with the limiting conditions included

    in the cooperative exemption rule, the Commission is ensuring that the

    exemption is only available to cooperatives whose members can elect the

    end-user exception or are themselves cooperatives whose members can

    elect the end-user exception.\87\

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

    \86\ Note, for example, that while the FHL Banks have thousands

    of members that qualify for the small financial institution

    exemption and who therefor can elect the end-user exception, over

    one hundred members of the FHL Banks would not qualify because they

    are financial entities with total assets in excess of $10 billion.

    These members include some of the largest financial entities in the

    United States. In addition, as described above in section III,

    financial entities with assets in excess of $10 billion have

    borrowed more than half the amount lent by the FHL banks to members.

    \87\ The Commission notes that banks and other entities that

    qualify for the small financial institution exemption from the

    financial entity definition are not excluded under the regulation

    from being members of exempt cooperatives.

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

    The FHL Banks suggested that this problem could be addressed by

    limiting the exemption to swaps that hedge risks associated with loans

    to eligible members. However, allowing new or existing cooperatives

    with financial entity members to elect not to clear swaps related to

    activities with members that are eligible for the end-user exception

    would dilute the benefits that qualifying members achieve through the

    exemption thereby undermining the purpose for the exemption. For

    example, as described above in section III, if the FHL Banks elect the

    cooperative exemption only for swaps related to members who qualify as

    small financial institutions, the decision not to clear those swaps

    could create clearing cost savings for the FHL Banks. Those savings

    would increase the capital that the FHL Banks distribute or allocate to

    their members as part of the full member pro rata patronage

    distribution. If larger members hold a large ownership stake in the

    cooperative, those members would also receive a proportionately large

    share of the distributions, including a proportionately large share of

    the savings that result from the cooperative

    [[Page 52304]]

    exemption.\88\ In other words, members that are eligible for the end-

    user exception would not receive the full benefits of the exemption

    that is extended to the cooperative. By contrast, with the limiting

    conditions included in the cooperative exemption rule, the Commission

    is ensuring that the exemption is only available to cooperatives whose

    members could all elect the end-user exception or are themselves

    cooperatives whose members could elect the end-user exception, and thus

    the additional pro-rata patronage distributions that an exempt

    cooperative makes because of the cooperative exemption will only go to

    such entities.

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

    \88\ See section II above for a full discussion of the relative

    benefits available to different sized members of the FHL Banks.

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

    The FCC requested clarification with respect to the Commission's

    view on what swaps are ``related to'' a cooperative's loans to its

    members, and advocated a broad interpretation. They also stated that

    ``clarification of these items will serve to increase the likelihood

    that the System's farmer and rancher member borrowers will be able to

    benefit from this proposed exemption from clearing.'' The broader

    interpretation requested by the FCC could increase the number of swaps

    that are eligible for the exemption by including swaps that serve non-

    member related purposes, which would further reduce clearing-related

    costs for eligible cooperatives, but would also increase the

    counterparty risk that eligible cooperatives and their counterparties

    bear due to decreased clearing. In the Commission's view, this broader

    exemption is not justified given the rationale behind the cooperative

    exemption. As stated above, the term ``related to'' is intended to

    include swaps that the exempt cooperatives may enter into with non-

    members to hedge or mitigate the risks incurred by the cooperatives

    related to their member lending activities. For example, where

    cooperatives obtain wholesale funding, only the portion of funding that

    is not used to make non-member loans may be hedged with exempt

    swaps.\89\ By limiting the eligibility of exempt cooperatives' swaps in

    this way, the Commission reduces the counterparty risk that exempt

    cooperatives and their counterparties could experience due to decreased

    clearing.

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

    \89\ See section III.C above.

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

    E. Section 15(a) Factors

    1. Protection of Market Participants and the Public

    As described above, if exempt cooperatives elect to exempt certain

    swaps from required clearing, these cooperatives may not need to pay

    DCO and FCM clearing fees for clearing those swaps. In addition, the

    exemption may reduce the amount of capital that exempt cooperatives

    must allocate to margin accounts with their FCM. This, in turn,

    provides benefits to the members of exempt cooperatives, that may

    otherwise absorb such costs as they are passed on by the cooperatives

    to their members in the form of fees, less desirable spreads on swaps

    or loans conducted with the cooperative, or lower member allocated

    capital or patronage distributions.

    The exemption will create certain reporting costs for eligible

    entities. However, as described in the rulemaking for the end-user

    exception where the specific reporting requirements were addressed, the

    reporting required uses a simple check-the-box approach and elective

    annual reporting of certain information that should minimize per swap

    reporting costs, particularly for cooperatives that enter into multiple

    swaps.

    The exemption is narrowly tailored to exempt only a relatively

    small number of institutions and to include only swaps that are

    associated with positions established in connection with originating

    loans made to customers, or that hedge or mitigate risk arising in

    connection with such member loans or swaps. These limitations will tend

    to mitigate the risk to the public that could result from the

    exemption.

    In addition, this exemption is likely to increase counterparty risk

    for counterparties to exempted swaps as well as for the exempted

    cooperatives. However, as described above, exempted cooperatives and

    their counterparties may use collateral agreements with exempted swaps

    to mitigate counterparty risk.

    2. Efficiency, Competitiveness, and Financial Integrity of Swap Markets

    While the cooperative exemption would take swaps out of clearing,

    it mitigates the impact on the financial integrity of the swap markets

    by limiting the types of entities and swaps that are eligible. As

    discussed above, the exemption is designed to include only cooperatives

    that are made up entirely of entities that could elect the end-user

    exception, and only swaps associated with loans between the cooperative

    and such members.

    The exemption may have competitive effects by allowing the members

    of exempt cooperatives to achieve additional benefits from the actions

    of their cooperatives. The Commission believes such benefits are

    consistent with the intended public interests served by the

    establishment of cooperative structures as a separate legal form by

    Congress and the states. The Commission addresses these issues in

    section IV and VI.C.3. Commenters did not provide, and the Commission

    does not have, information that is sufficient to quantify the

    competitive effects that will result from the exemption.

    3. Price Discovery

    Clearing, in general, encourages better price discovery because it

    eliminates the importance of counterparty creditworthiness in pricing

    swaps cleared through a given DCO. That is, by making the counterparty

    creditworthiness of all swaps of a certain type essentially the same,

    prices should reflect factors related to the terms of the swap, rather

    than the idiosyncratic risk posed by the entities trading it.\90\ To

    the extent that the cooperative exemption reduces the number of swaps

    subject to required clearing, it will lessen the beneficial effects of

    required clearing for price discovery. However, the Commission

    anticipates that the number of swaps eligible for this exemption,

    currently estimated at approximately 500 a year, will be a de minimis

    fraction of all those that are otherwise required to be cleared.

    Therefore, the Commission believes that there will not be a material

    impact on price discovery.

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

    \90\ See Chen, K., et al. ``An Analysis of CDS Transactions:

    Implications for Public Reporting,'' September 2011, Federal Reserve

    Bank of New York Staff Reports, at 14.

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

    4. Sound Risk Management Practices

    To the extent that a swap is removed from clearing, all other

    things being constant, it is a detriment to a sound risk management

    regime. To the extent that exempt cooperatives enter into non-cleared

    swaps on the basis of this rule, it likely increases the exposure of

    exempt cooperatives and their counterparties to counterparty credit

    risk. For the public, it increases the risk that financial distress at

    one or more cooperatives could spread to other financial institutions

    with which those cooperatives have concentrated positions. However, as

    discussed above, this additional risk may be reduced by the presence of

    bilateral margin agreements, which the Commission

    [[Page 52305]]

    believes are often used in the absence of clearing.

    5. Other Public Interest Considerations

    The Commission believes that the cooperative exemption serves the

    public interest by furthering the public benefits cited by Congress and

    state legislatures in legislation authorizing cooperative business

    forms as discussed in section IV above. The cooperative structure

    allows the members to pool their resources, achieve economies of scale,

    and realize the benefits of acting in markets through larger entities.

    However, absent the cooperative exemption, the exempt cooperatives

    would be unable to elect the end-user exception because the amount of

    their assets precludes them from qualifying as small financial

    institutions. In effect, the cooperative structure, which is intended

    to provide advantages to its member-owners by creating a large entity

    whose mission is to serve their interests, instead prevents the members

    from receiving the full benefits of the end-user exception when using

    their large cooperatives. The cooperative exemption therefor is in the

    public interest because it resolves a conflict between the small

    financial institution language of section 2(h)(7) of the CEA and the

    general policy behind establishing cooperatives of creating large

    financial institutions with the mission of serving the mutual interests

    of their member-owners.

    VII. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies

    consider whether the rules they propose will have a significant

    economic impact on a substantial number of small entities \91\ and, if

    so, provide a regulatory flexibility analysis respecting the

    impact.\92\ Regulation Sec. 39.6(f) (now Sec. 50.51) would affect

    cooperatives, their members, and potentially the counterparties with

    whom they trade. These entities could be SDs, MSPs, and eligible

    contract participants (``ECPs'').\93\ Regulation Sec. 39.6(f) (now

    Sec. 50.51) would additionally affect SDRs. As noted in the NPRM, the

    Commission has previously determined that SDs, MSPs, and SDRs are not

    small entities for purposes of the RFA.\94\

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

    \91\ The Small Business Administration identifies (by North

    American Industry Classification System codes) a small business size

    standard of $7 million or less in annual receipts for Subsector

    523--Securities, Commodity Contracts, and Other Financial

    Investments and Related Activities. 13 CFR parts 1, 121.201.

    \92\ 5 U.S.C. 601 et seq.

    \93\ It is possible that a cooperative or members thereof may

    not be ECPs. However, pursuant to Section 2(e) of the CEA, if a

    counterparty to a swap is not an ECP, then such swap must be entered

    into on, or subject to the rules of, a board of trade designated as

    a contract market under Section 5 of the CEA. All such swaps must be

    cleared by the board of trade. See section 5(d)(11) of the CEA, 7

    U.S.C. 7(d)(11). In effect all swaps entered into by a cooperative

    or a member that is not an ECP will need to be executed on a board

    of trade and therefore will be cleared.

    \94\ See 77 FR 30596, 30701 (May 23, 2012); see also 75 FR

    80898, 80926 (Dec. 23, 2010).

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

    It is possible that some members of cooperatives may be small

    entities under the RFA. For these members to be impacted by the

    cooperative exemption compliance requirements they would have to be

    entering into swaps with the exempt cooperative and the exemption would

    need to be elected. In order for two counterparties to a swap to enter

    into a swap bilaterally, both parties must be ECPs.\95\ Based on the

    definition of ECP in the Commodity Futures Modernization Act of 2000,

    and the legislative history underlying that definition, the Commission

    has previously determined that ECPs should not be small entities for

    purposes of the RFA.\96\ The Commission has been made aware in other

    contexts that some ECPs, specifically those that do not fall within a

    category of ECP that is subject to a dollar threshold, may be small

    entities. If there are cooperative members that are both ECPs as

    defined in the CEA and small entities for purposes of the RFA, the

    exemption is nevertheless most likely to provide an economic benefit to

    the cooperative member. Furthermore, if elected, the cooperative

    exemption would impose the same or similar costs of compliance on

    members that the previously adopted end-user exception from the

    clearing requirement imposes. The end-user exception provides

    effectively the same type of relief from clearing. Accordingly, the

    cooperative exemption does not create any materially new or different

    compliance costs than similar regulations that were previously adopted.

    Finally, the cooperative exemption is elective. If a member that is a

    small entity wanted to clear its swap, the cooperative exemption does

    not require them to enter into swaps with their cooperatives and they

    could execute swaps with other parties that would agree to clearing.

    Accordingly, the cooperative exemption would not cause any new

    significant economic impact on these members.

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

    \95\ 7 U.S.C. 2(e).

    \96\ See 66 FR 20740, 20743 (Apr. 25, 2001).

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

    The Chairman, on behalf of the Commission, certified in the NPRM,

    pursuant to 5 U.S.C. 605(b), that Sec. 39.6(f) (now Sec. 50.51(a))

    will not have a significant impact on a substantial number of small

    entities. The Commission requested comment on this decision in the

    NPRM.

    The ICBA commented that the proposal impacts a substantial number

    of small community banks because they are members of the FHL banks and

    the FHL banks are not exempt cooperatives. According to the ICBA, the

    small bank members of the FHL bank system would be disadvantaged

    because the FHL banks will not be able to provide the same or similar

    low cost financing to community banks as FCS lenders will for their

    cooperatives.

    The Commission also received two comments regarding the impact of

    Regulation Sec. 39.6(f) (now Sec. 50.51(a)) on the competition

    between banks that are small entities and cooperatives that elect the

    cooperative exemption. According to the ABA, the Commission's analysis

    of the economic impact on small entities did not consider that economic

    impact on the ``hundreds of end-user banks that are competing with

    cooperatives for the same business opportunities.'' Similarly, the ICBA

    commented that the ``competitive advantages afforded to large credit

    unions and large FCS funding banks . . . would allow these institutions

    advantages in competing directly against small community banks even if

    they have a small financial institution exemption.'' The ICBA then

    referenced CoBank as an example of an FCS funding bank with a wide

    geographic footprint over two dozen states that could grow larger.

    The ABA and the ICBA asserted that the Commission is obliged under

    the RFA to consider the impact of the regulation on small banks,

    including small banks that are members of the FHL bank system.

    Specifically, commenters asserted that the Commission should consider

    the competitive benefit the cooperative exemption might give to exempt

    cooperatives as compared to small banks that might be small entities

    for purposes of the RFA both on their own and because small banks are

    members of the FHL bank system.\97\ The Commission has applied the RFA

    to entities that are cooperatives who may elect the cooperative

    exemption and their members. Small community banks that are not members

    of exempt cooperatives are not subject to the cooperative exemption.

    The Commission also notes that, as discussed above, to the extent a

    small

    [[Page 52306]]

    community bank is or becomes a member of an exempt cooperative and

    enters into a swap bilaterally with an exempt cooperative for which the

    cooperative exemption is elected, that member would have to be an ECP,

    in order to enter into the swap bilaterally, and also an entity that

    could elect the end-user exception. Accordingly, the Commission

    continues to believe that the cooperative exemption will not have a

    significant economic impact on small entities.

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

    \97\ The FHL banks would not qualify for the cooperative

    exemption because they have large financial entity members. See

    section IV above.

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

    Therefore, the Chairman, on behalf of the Commission, hereby

    certifies, pursuant to 5 U.S.C. 605(b), that the final regulation would

    not have a significant economic impact on a substantial number of small

    entities.

    B. Paperwork Reduction Act

    Regulation Sec. 39.6(f)(3) (now Sec. 50.51(c)) requires a

    cooperative to conform with certain reporting conditions if it elects

    the cooperative exemption. These new requirements constitute a

    collection of information within the meaning of the Paperwork Reduction

    Act of 1995 (``PRA'').\98\ Under the PRA, an agency may not conduct or

    sponsor, and a person is not required to respond to, a collection of

    information unless it has been approved by the Office of Management and

    Budget (``OMB'') and displays a currently valid control number.\99\

    This rulemaking contains new collections of information for which the

    Commission must seek a valid control number. The Commission therefore

    requested that OMB assign a control number and OMB assigned control

    number 3038-0102 for this new collection of information. The Commission

    has also submitted the proposed rulemaking, this final rule release,

    and supporting documentation to OMB for review in accordance with 44

    U.S.C. 3507(d) and 5 CFR 1320.11. The title for these new collections

    of information is ``Rule 39.6(f) Cooperative Clearing Exemption

    Notification.'' Responses to these information collections will be

    mandatory if the cooperative exemption is elected.

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

    \98\ 44 U.S.C. 3501 et seq.

    \99\ Id.

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

    With respect to all of the Commission's collections, the Commission

    will protect proprietary information according to the Freedom of

    Information Act and 17 CFR part 145, ``Commission Records and

    Information.'' In addition, section 8(a)(1) of the Act strictly

    prohibits the Commission, unless specifically authorized by the Act,

    from making public ``data and information that would separately

    disclose the business transactions or market positions of any person

    and trade secrets or names of customers.'' The Commission also is

    required to protect certain information contained in a government

    system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.

    1. Information To Be Provided by Reporting Parties

    For each swap where the exemption is elected, either the

    cooperative, or its counterparty if the counterparty is an SD or MSP,

    must report: (1) That the election of the exemption is being made; (2)

    which party is the electing counterparty; and (3) certain information

    specific to the electing counterparty unless that information has

    already been provided by the electing counterparty through an annual

    filing. As noted in the NPRM, the third set of information comprises

    data that is likely to remain relatively constant for many, but not

    all, electing counterparties and therefore, does not require swap-by-

    swap reporting and can be reported less frequently. In addition, for

    entities registered with the SEC, the reporting party will also be

    required to report: (1) The SEC filer's central index key number; and

    (2) that an appropriate committee of the board of directors has

    approved the decision for that entity to enter into swaps that are

    exempt from the requirements of section 2(h)(1)(A) of the CEA.

    Exempt cooperatives entering into swaps with members and electing

    the exemption will likely be responsible to report this information.

    When cooperatives enter into swaps with SDs or MSPs, the SDs or MSPs

    will be responsible for reporting the information, but cooperatives

    would bear some costs related to the personnel hours committed to

    reporting the required information.

    As discussed in the NPRM, for purposes of estimating the cost of

    reporting in connection with the cooperative exemption, the Commission

    estimated that each of the ten exempt cooperatives would enter into 50

    swaps per year on average. Accordingly, the Commission estimated that

    exempt cooperatives would elect the cooperative exemption for 500 swaps

    each year. The reporting cost estimates are discussed separately below

    according to each requirement.

    The Commission invited public comment on any aspect of the

    reporting burdens discussed in the NPRM. The Commission received two

    comments on the Commission's approach to calculating the estimated cost

    burdens. The ABA questioned whether the Commission had underestimated

    its estimations of the number of cooperatives eligible for the

    exemption, and the number of swaps each eligible cooperative engages in

    per year. The ABA also commented that the figures used are static and

    as such do not allow for potential future growth in the number of

    potential exempt cooperatives and number of swaps in which they may

    transact. The ICBA similarly commented on the static nature

    Commission's approach, and noted that the approach does not account for

    future growth when the use of swaps in the OTC market has grown

    significantly in recent years. Furthermore, the ICBA noted that the

    CFTC looked at information from five of the ten estimated cooperatives

    that may be eligible for the cooperative exemption, but did not

    indicate which of the five cooperatives it considered or what the

    reason was for not reviewing information from the other five

    cooperatives.

    In response to the comments received, the Commission notes that the

    commenters provided no data or other information to support their

    assertions that the number of cooperatives and the number of swaps that

    may be eligible for the cooperative exemption may be low or inaccurate.

    The summary information regarding swap activities of five prospective

    exempt cooperatives was provided to the Commission on a voluntary basis

    through the FCC and CFC. Based on discussions with these entities, the

    Commission believes that these five cooperatives were more active than

    the other potential exempt cooperatives in using swaps and therefore

    this sampling of information was appropriate for estimating the number

    of swaps executed by the ten potential exempt cooperatives identified

    by the Commission. Subsequent to receipt of the comments on the NPRM,

    the Commission contacted the regulators for FCS cooperatives and

    federal credit unions and these regulators expressed a view that the

    Commission's estimates were not inappropriate.

    In response to the comments that the estimates represent only a

    current snap shot of activity, the Commission recognizes that the

    number of entities eligible for the exemption and the number of swaps

    per eligible cooperative is likely to change in the future and that the

    benefits of this exemption for exempt cooperatives could encourage more

    exempt cooperatives to use swaps and could increase the number of swaps

    used by those cooperatives. However, the Commission notes that whether

    such growth is realized also depends on

    [[Page 52307]]

    additional factors that the Commission does not have adequate

    information to evaluate such as: (1) Subsequent changes to laws or

    regulations affecting one or more types of cooperatives and the extent

    to which they may use swaps; (2) increases or decreases in the total

    amount of borrowing undertaken by the members of those cooperatives;

    and (3) the frequency with which exempt cooperatives make the types of

    loans or experience other business changes that might increase or

    decrease the use of swaps. It is not possible to evaluate how future

    changes in these factors are likely to affect the number of swaps for

    which the cooperative exemption may be elected. Accordingly, the

    Commission believes using a static estimate is reasonable.

    a. Regulation Sec. 39.6(f)(3) (now Sec. 50.51(c)): Reporting

    Requirements

    Regulation Sec. 39.6(f)(3) (now Sec. 50.51(c)) requires exempt

    cooperatives that are reporting counterparties to comply with the

    reporting requirements of Sec. 50.50(b), which require delivering

    specific information to a registered SDR or, if no SDR is available,

    the Commission. An exempt cooperative that is the reporting

    counterparty would have to report the information required in Sec.

    50.50(b)(1)(i) and (ii) for each swap for which it elects the

    cooperative exemption.

    As discussed in the NPRM, the Commission anticipates that to comply

    with Sec. 50.50(b)(1)(i) and (ii), each reporting counterparty would

    be required to check one box in the SDR or Commission reporting data

    fields indicating that the exempt cooperative is electing not to clear

    the swap. The Commission estimated that the cost of complying with this

    requirement for each reporting counterparty to be between less than $1

    and $7 for each transaction, or approximately $300 to $3,500 per year

    for all transactions.

    The Commission did not receive any comments concerning the cost to

    exempt cooperatives from complying with Sec. 50.50(b)(1)(i) and (ii).

    b. Regulation Sec. 50.50(b)(1)(iii): Annual Reporting Option

    Regulation 50.50(b)(1)(iii) allows for certain counterparty

    specific information identified therein to be reported either swap-by-

    swap by the reporting counterparty or annually by the electing

    counterparty. As discussed in the NPRM, the Commission anticipates that

    the exempt cooperatives will make annual filings of the information

    required. The Commission estimated the annual per cooperative cost for

    the filing to be between $200 and $590, or $2,000 to $5,900 as the

    aggregate cost for all exempt cooperatives.

    The Commission did not receive any comments concerning the cost to

    exempt cooperatives for electing the annual reporting option under

    Sec. 50.50(b)(1)(iii).

    c. Updating Reporting Procedures

    As discussed in the NPRM, the Commission anticipates that

    cooperatives electing the exemption that are reporting counterparties

    may need to modify their reporting systems to accommodate the

    additional data fields required by the rule. The Commission estimated

    that the modifications to comply with Sec. 39.6(f)(3) (now Sec.

    50.51(c)) would likely cost each reporting counterparty between $340

    and $3,400, with the aggregate one-time cost for all potential exempt

    cooperatives to be $3,400 to $34,100.

    The Commission did not receive any comments concerning the cost to

    exempt cooperatives in updating their reporting systems to comply with

    Sec. 39.6(f)(3) (now Sec. 50.51(c)).

    d. Burden on Non-Reporting Cooperatives

    As discussed in the NPRM, when an exempt cooperative is not

    functioning as the reporting counterparty (i.e., when transacting with

    an SD or MSP), the Commission anticipated that it may, at certain

    times, need to communicate information to its reporting counterparties

    in order to facilitate reporting. This information might include

    whether the exempt cooperative has filed an annual report pursuant to

    Sec. 50.50(b), and information to facilitate any due diligence that

    the reporting counterparty may conduct. The Commission estimated that a

    non-reporting exempt cooperative would incur an annual aggregate cost

    for communicating information to the reporting counterparty between

    $400 and $39,000.\100\

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

    \100\ The Commission noted the wide range in this estimation,

    but explained the range could not be narrowed given the unknowns

    associated with the cost estimate.

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

    The Commission did not receive any comments concerning the cost a

    non-reporting exempt cooperative will incur in communicating

    information to the reporting counterparty.

    List of Subjects in 17 CFR Part 50

    Business and industry, Clearing, Cooperatives, Reporting

    requirements, Swaps.

    Accordingly, the CFTC amends 17 CFR part 50 as follows:

    PART 50--CLEARING REQUIREMENT AND RELATED RULES

    0

    1. The authority citation for part 50 continues to read as follows:

    Authority: 7 U.S.C. 2 and 7a-1 as amended by Pub. L. 111-203,

    124 Stat. 1376.

    0

    2. Add Sec. 50.51 to read as follows:

    Sec. 50.51 Exemption for Cooperatives.

    Exemption for cooperatives. Exempt cooperatives may elect not to

    clear certain swaps identified in paragraph (b) of this section that

    are otherwise subject to the clearing requirement of section 2(h)(1)(A)

    of the Act if the following requirements are satisfied.

    (a) For the purposes of this paragraph, an exempt cooperative means

    a cooperative:

    (1) Formed and existing pursuant to Federal or state law as a

    cooperative;

    (2) That is a ``financial entity,'' as defined in section

    2(h)(7)(C)(i) of the Act, solely because of section 2(h)(7)(C)(i)(VIII)

    of the Act; and

    (3) Each member of which is not a ``financial entity,'' as defined

    in section 2(h)(7)(C)(i) of the Act, or if any member is a financial

    entity solely because of section 2(h)(7)(C)(i)(VIII) of the Act, such

    member is:

    (i) Exempt from the definition of ``financial entity'' pursuant to

    Sec. 50.50(d); or

    (ii) A cooperative formed under Federal or state law as a

    cooperative and each member thereof is either not a ``financial

    entity,'' as defined in section 2(h)(7)(C)(i) of the Act, or is exempt

    from the definition of ``financial entity'' pursuant to Sec. 50.50(d).

    (b) An exempt cooperative may elect not to clear a swap that is

    subject to the clearing requirement of section 2(h)(1)(A) of the Act if

    the swap:

    (1) Is entered into with a member of the exempt cooperative in

    connection with originating a loan or loans for the member, which means

    the requirements of Sec. 1.3(ggg)(5)(i), (ii), and (iii) are

    satisfied; provided that, for this purpose, the term ``insured

    depository institution'' as used in those sections is replaced with the

    term ``exempt cooperative'' and the word ``customer'' is replaced with

    the word ``member;'' or

    (2) Hedges or mitigates commercial risk, in accordance with Sec.

    50.50(c), related to loans to members or arising from a swap or swaps

    that meet the requirements of paragraph (b)(1) of this section.

    (c) An exempt cooperative that elects the exemption provided in

    this section shall comply with the requirements of Sec. 50.50(b). For

    this purpose, the exempt cooperative shall be the ``electing

    [[Page 52308]]

    counterparty,'' as such term is used in Sec. 50.50(b), and for

    purposes of Sec. 50.50(b)(1)(iii)(A), the reporting counterparty, as

    determined pursuant to Sec. 45.8, shall report that an exemption is

    being elected in accordance with this section.

    Issued in Washington, DC, on August 13, 2013, by the Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Note: The following appendix will not appear in the Code of

    Federal Regulations.

    Appendix to Clearing Exemption for Certain Swaps Entered Into by

    Cooperatives--Commission Voting Summary

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia, and Wetjen voted in the affirmative.

    [FR Doc. 2013-19945 Filed 8-21-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: August 22, 2013



See Also:

OpenGov Logo

CFTC's Commitment to Open Government

Gavel and Book

Follow the Status of Enforcement Actions