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2010-27532

  • FR Doc 2010-27532[Federal Register: November 2, 2010 (Volume 75, Number 211)]

    [Proposed Rules]

    [Page 67277-67282]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr02no10-14]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 39 and 140

    RIN 3038-AD00

    Process for Review of Swaps for Mandatory Clearing

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

    is proposing rules to implement new statutory provisions enacted by

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

    Act. These proposed rules apply to the review of swaps by the

    Commission to determine whether the swaps are required to be cleared.

    DATES: Submit comments on or before January 3, 2011.

    ADDRESSES: You may submit comments, identified by RIN number, by any of

    the following methods:

    Agency Web Site, via its Comments Online process: http://

    comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that may be exempt from disclosure under the Freedom of

    Information Act, a petition for confidential treatment of the exempt

    information may be submitted according to the established procedures in

    CFTC Regulation 145.9.\1\

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    \1\ Commission regulations referred to herein are found at 17

    CFR Ch. 1.

    FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Special Counsel,

    202-418-5096, edonovan@cftc.gov, Division of Clearing and Intermediary

    Oversight, Commodity Futures Trading Commission, Three Lafayette

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    Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

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

    Reform and Consumer Protection Act (Dodd-Frank Act).\2\ Title VII of

    the

    [[Page 67278]]

    Dodd-Frank Act \3\ amended the Commodity Exchange Act (CEA) \4\ to

    establish a comprehensive new regulatory framework for swaps and

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

    increase transparency, and promote market integrity within the

    financial system by, among other things: (1) Providing for the

    registration and comprehensive regulation of swap dealers and major

    swap participants; (2) imposing clearing and trade execution

    requirements on standardized derivative products; (3) creating rigorous

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    Commission's rulemaking and enforcement authorities with respect to,

    among others, all registered entities and intermediaries subject to the

    Commission's oversight.

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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov./

    LawRegulation/OTCDERIVATIVES/index.htm.

    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \4\ 7 U.S.C. 1 et seq.

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    Section 723(a)(3) of the Dodd-Frank Act amends the CEA to provide

    that ``it shall be unlawful for any person to engage in a swap unless

    that person submits such swap for clearing to a derivatives clearing

    organization [(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.'' \5\ Section 723(a)(3) requires the Commission to adopt

    rules for the review of a swap, or group, category, type, or class of

    swaps (collectively, ``swaps'') to make a determination as to whether

    the swaps should be required to be cleared.

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    \5\ See Section 2(h) of the CEA, 7 U.S.C. 2(h).

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    In addition, Section 745(b) of the Dodd-Frank Act amends the CEA to

    direct the Commission to prescribe criteria, conditions, or rules under

    which the Commission will determine the initial eligibility or the

    continuing qualification of a DCO to clear swaps.\6\

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    \6\ See Section 5c(c)(5)(C)(iii) of the CEA, 7 U.S.C. 7a-

    2(c)(5)(C)(iii).

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    Accordingly, the Commission is proposing to adopt Regulation 39.5

    to implement procedures for determining the eligibility of a DCO to

    clear swaps that it plans to accept for clearing; for DCOs submitting

    swaps to the Commission for review; for Commission-initiated reviews of

    swaps; and for staying a clearing requirement while the clearing of a

    swap is reviewed.

    The Commission requests comment on all aspects of the proposed

    rules, as well as comment on the specific provisions and issues

    highlighted in the discussion below.

    II. Proposed Regulations

    A. Eligibility of a DCO To Clear Swaps

    The Dodd-Frank Act requires the Commission to determine, upon

    request or its own motion, the initial eligibility or continuing

    qualification of a DCO to clear a swap that it plans to accept for

    clearing, under criteria, conditions, or rules determined by the

    Commission. Such criteria, conditions, or rules must consider the

    financial integrity of the DCO and any other factors that the

    Commission determines to be appropriate.\7\

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    \7\ See Section 5c(c)(5)(C)(iii)(II) of the CEA, 7 U.S.C. 7a-

    2(c)(5)(C)(iii)(II).

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    Under proposed Regulation 39.5(a), a DCO would be presumed eligible

    to accept for clearing any swap that is within a group, category, type,

    or class of swaps that the DCO already clears. However, such a

    presumption would be subject to Commission review, and if the

    Commission determines that the swap is not within a group, category,

    type, or class of swaps that the DCO already clears, the DCO would be

    required to request a determination by the Commission of its

    eligibility to clear the swap. A DCO that plans to accept for clearing

    any swap that is not within a group, category, type, or class of swaps

    that the DCO already clears also would be required to make such a

    request.

    To receive a determination of eligibility to clear a swap, a DCO

    would have to file a written request with the Commission that addresses

    its ability to maintain compliance with the core principles for DCOs

    set out in Section 5b(c)(2) of the CEA if it accepts the swap for

    clearing, specifically: (1) The sufficiency of its financial resources;

    and (2) its ability to manage the risks associated with clearing the

    swap, especially if the Commission determines that the swap is required

    to be cleared.

    B. Submission of Swaps to the Commission for Review

    The Dodd-Frank Act requires a DCO that plans to accept a swap (or

    group, category, type, or class of swaps) for clearing to submit the

    swap to the Commission for review.\8\ Proposed Regulation 39.5(b) sets

    out the process for DCOs to follow, including what information a DCO

    must include in its submission to assist the Commission in its review.

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    \8\ See Section 2(h)(2)(B)(i) of the CEA, 7 U.S.C.

    2(h)(2)(B)(i).

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    First, the submission would have to include a statement that the

    DCO is eligible to clear the swap and, if the Commission determines

    that the swap is required to be cleared, the DCO would be able to

    maintain compliance with Section 5b(c)(2) of the CEA. This provision is

    intended to satisfy the Dodd-Frank Act requirement that a swap

    submission be consistent with Section 5b(c)(2).\9\ Regulation

    39.5(b)(1) would require a DCO submitting a swap to be eligible to

    clear the swap under Regulation 39.5(a) and, as noted above, a DCO that

    seeks to be considered eligible to clear a swap must demonstrate its

    ability to maintain compliance with the core principles in Section

    5b(c)(2). Therefore, a DCO submitting a swap under Regulation 39.5(b)

    would have already demonstrated pursuant to Regulation 39.5(a) its

    ability to comply with Section 5b(c)(2). Accordingly, the Commission

    believes it is appropriate to require only a statement to that effect

    in the swap submission itself.

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    \9\ See Section 2(h)(2)(D)(i) of the CEA, 7 U.S.C.

    2(h)(2)(D)(i).

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    A DCO would also have to provide a statement that includes, but is

    not limited to, information that would assist the Commission in the

    quantitative and qualitative assessment of five specific factors that

    the Dodd-Frank Act requires the Commission to take into account when

    reviewing a swap submission,\10\ and additional information that the

    Commission believes is needed for an effective review of the swap

    submission. The proposed regulation would require the DCO to provide

    specific information relating to product specifications; participant

    eligibility standards; pricing sources, models, and procedures; \11\

    risk management procedures; measures of market liquidity and trading

    activity; the effect of a clearing requirement on the market for the

    swap; applicable rules, manuals, policies, or procedures; and terms and

    trading conventions on which the swap is currently traded.

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    \10\ See Section 2(h)(2)(D)(ii) of the CEA, 7 U.S.C.

    2(h)(2)(D)(ii).

    \11\ This would include information about any price reference

    index used, such as the name of the index, the source that

    calculates it, the methodology used to calculate the price reference

    index and how often it is calculated, and when and where it is

    published publicly. For example, the BBA LIBOR 3-Month USD interest

    rate published by the British Bankers Association is calculated

    daily by Thomson Reuters on behalf of BBA. The rate is published

    daily at 11 a.m. London Time via data vendors like Reuters and

    Bloomberg, and is calculated using a survey of 16 major banks. The

    bank quotes are then ranked in order, high four and bottom four

    removed, and the remaining eight quotes are averaged to determine

    the official 3-Month USD LIBOR fixing rate for that day. A DCO would

    be required to provide documentation of the index methodology and

    publication frequency or the relevant hyperlink if it is openly

    available on the Internet.

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    Finally, the swap submission would have to include a description of

    the manner in which the DCO has provided

    [[Page 67279]]

    notice of the submission to its members and a summary of any opposition

    to the submission expressed by members. The Dodd-Frank Act requires a

    DCO to provide notice of the submission to its members in a manner to

    be determined by the Commission.\12\ The Commission recognizes that a

    DCO typically has established procedures for providing notice to its

    members and believes it is appropriate to allow the DCO to provide

    notice of a swap submission in the same manner. The submission to the

    Commission also would have to include a summary of any opposition

    expressed by members, which means that a DCO would be expected to

    notify members before it makes its submission to the Commission. The

    Commission invites comment on whether the regulation should prescribe a

    specific manner in which a DCO must provide notice to its members, and

    whether the regulation should prescribe a specific period of time

    between the notice to members and the submission to the Commission to

    allow time for members to make their views on the submission known.

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    \12\ See Section 2(h)(2)(B)(i) of the CEA, 7 U.S.C.

    2(h)(2)(B)(i).

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    Upon receiving a DCO's submission, the Commission would begin its

    90-day review by posting the submission on the Commission Web site for

    a 30-day public comment period, as required by the Dodd-Frank Act. The

    Commission invites comment regarding the appropriateness and

    sufficiency of providing notice of the submission on the Commission Web

    site as compared to publishing notice of the submission in the Federal

    Register. The review would not begin until the submission was complete,

    as determined solely in the discretion of the Commission. Due to the

    relatively brief 90-day review period prescribed by the Dodd-Frank Act,

    the Commission must be certain before it begins a review that it has

    the information it needs to reach an appropriate determination.

    The proposed regulation encourages a DCO to submit swaps to the

    Commission, to the extent reasonable and practicable to do so, by

    group, category, type, or class of swaps. The Commission believes this

    will make the review process more efficient. The Commission would be

    able to consolidate multiple submissions from one DCO or subdivide a

    DCO's submission for review as appropriate.

    The Commission would review the submission and make a determination

    as to whether the swap will be required to be cleared not later than 90

    days after receiving the submission, unless the submitting DCO agreed

    to an extension. In making a determination that the swap must be

    cleared, the Commission would impose terms and conditions on the

    requirement as appropriate.

    C. Commission-Initiated Reviews of Swaps

    The Dodd-Frank Act requires the Commission on an ongoing basis to

    review swaps that have not been accepted for clearing by a DCO to make

    a determination as to whether the swaps should be required to be

    cleared.\13\ Under proposed Regulation 39.5(c), the Commission would

    use information obtained pursuant to Commission regulations \14\ from

    swap data repositories, swap dealers, and major swap participants, and

    any other available information, in undertaking such reviews.

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    \13\ See Section 2(h)(2)(A) of the CEA, 7 U.S.C. 2(h)(2)(A).

    \14\ The Commission intends to adopt such regulations before any

    Commission reviews would be initiated.

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    If no DCO has accepted for clearing a particular swap, group,

    category, type, or class of swaps that the Commission finds would

    otherwise be subject to a clearing requirement, the Commission would,

    as required by the Dodd-Frank Act,\15\ investigate the relevant facts

    and circumstances and, within 30 days of the completion of its

    investigation, issue a public report containing the results of the

    investigation. The Commission would take such actions as it determines

    to be necessary and in the public interest, which may include

    establishing margin or capital requirements for parties to the swap,

    group, category, type, or class of swaps.

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    \15\ See Section 2(h)(4)(B) of the CEA, 7 U.S.C. 2(h)(4)(B).

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    D. Stay of Clearing Requirement

    After making a determination that a swap (or group, category, type,

    or class of swaps) is required to be cleared, the Commission, on

    application of a counterparty to a swap or on its own initiative, may

    stay the clearing requirement until it completes a review of the terms

    of the swap and the clearing arrangement.\16\ Proposed Regulation

    39.5(d)(2) sets out the process for a counterparty to a swap to apply

    for a stay of the clearing requirement.

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    \16\ See Section 2(h)(3)(A) of the CEA, 7 U.S.C. 2(h)(3)(A).

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    A counterparty to a swap that wants to apply for a stay of the

    clearing requirement for that swap would be required to submit a

    written request to the Secretary of the Commission that includes

    information that would assist the Commission in its review, including:

    The identity and contact information of the counterparty to the swap;

    the terms of the swap subject to the clearing requirement; the name of

    the DCO that clears the swap; a description of the clearing

    arrangement; and a statement explaining why the swap should not be

    subject to a clearing requirement.

    The Commission also would be able to obtain additional information

    to assist it in its review from the DCO that clears the swap. The

    Commission would complete its review not later than 90 days after

    issuance of the stay, unless the DCO that clears the swap agrees to an

    extension.

    Upon completion of its review, the Commission could determine,

    subject to any terms and conditions as the Commission determines to be

    appropriate, that the swap must be cleared, or that the clearing

    requirement will not apply but clearing may continue on a non-mandatory

    basis.

    III. Technical Amendments

    The Commission is proposing to amend Regulation 140.94 \17\ to

    delegate authority to the Director of the Division of Clearing and

    Intermediary Oversight to consolidate or subdivide swap submissions as

    appropriate for review under proposed Regulation 39.5(b)(2) and to

    request information from a derivatives clearing organization in

    connection with the stay of a clearing requirement under proposed

    Regulation 39.5(d)(3).

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    \17\ See 75 FR 55410 (Sep. 10, 2010). The Commission previously

    proposed to amend Regulation 140.94 in connection with the proposal

    of Regulation 39.11 (75 FR 63113 (Oct. 14, 2010)). The Commission

    intends to place all delegations to the Director of the Division of

    Clearing and Intermediary Oversight for Part 39 under this

    regulation.

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    IV. 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 and, if so,

    provide a regulatory flexibility analysis respecting the impact.\18\

    The rules proposed by the Commission shall affect only DCOs. The

    Commission has previously established certain definitions of ``small

    entities'' to be used by the Commission in evaluating the impact of its

    regulations on small entities in accordance with the RFA.\19\ The

    Commission has previously determined that DCOs are not small entities

    for the purpose of the RFA.\20\

    [[Page 67280]]

    Accordingly, the Chairman, on behalf of the Commission, hereby

    certifies pursuant to 5 U.S.C. 605(b) that the proposed rules will not

    have a significant economic impact on a substantial number of small

    entities.

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    \18\ 5 U.S.C. 601 et seq.

    \19\ 47 FR 18618 (Apr. 30, 1982).

    \20\ See 66 FR 45605, 45609 (August 29, 2001).

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    B. Paperwork Reduction Act

    An agency may not conduct or sponsor, and a person is not required

    to respond to, a collection of information unless it displays a

    currently valid control number. OMB has not yet assigned a control

    number to the new collection. The Paperwork Reduction Act of 1995 (PRA)

    \21\ imposes certain requirements on Federal agencies (including the

    Commission) in connection with their conducting or sponsoring any

    collection of information as defined by the PRA. This proposed

    rulemaking would result in new collection of information requirements

    within the meaning of the PRA. The Commission therefore is submitting

    this proposal to the Office of Management and Budget (OMB) for review.

    If adopted, responses to this collection of information would be

    mandatory. 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 CEA strictly prohibits the Commission, unless specifically

    authorized by the CEA, 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

    is also required to protect certain information contained in a

    government system of records according to the Privacy Act of 1974, 5

    U.S.C. 552a.

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    \21\ 44 U.S.C. 3501 et seq.

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    1. Information Provided by Reporting Entities/Persons

    The proposed regulations require each respondent to file

    information with the Commission on an occasional basis, which would

    result in one annual response per respondent. Commission staff

    estimates that each respondent would expend 40 hours to prepare each

    filing required under the proposed regulations, which was estimated

    based on the Commission's prior experience with DCOs and their

    preparation of filings for the Commission's review. Commission staff

    estimates that it would receive filings from up to 12 respondents

    annually, which assumes that each DCO would make an average of one

    filing per year. Accordingly the burden in terms of hours would in the

    aggregate be 40 hours annually per respondent and 480 hours annually

    for all respondents.

    Commission staff estimates that each respondent could expend up to

    $4000 annually, based on an hourly wage rate of $100, to comply with

    the proposed regulations. This would result in an aggregated cost of

    $48,000 per annum (12 respondents x $4000). The Commission invites

    public comment on the accuracy of its estimate regarding the collection

    requirements that would result from the proposed regulations.

    2. Information Collection Comments

    The Commission invites the public and other federal agencies to

    comment on any aspect of the reporting and recordkeeping burdens

    discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission

    solicits comments in order to: (i) Evaluate whether the proposed

    collection of information is necessary for the proper performance of

    the functions of the Commission, including whether the information will

    have practical utility; (ii) evaluate the accuracy of the Commission's

    estimate of the burden of the proposed collection of information; (iii)

    determine whether there are ways to enhance the quality, utility, and

    clarity of the information to be collected; and (iv) minimize the

    burden of the collection of information on those who are to respond,

    including through the use of automated collection techniques or other

    forms of information technology.

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at

    OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy

    of submitted comments so that all comments can be summarized and

    addressed in the final rule preamble. Refer to the Addresses section of

    this notice of proposed rulemaking for comment submission instructions

    to the Commission. A copy of the supporting statements for the

    collections of information discussed above may be obtained by visiting

    RegInfo.gov. OMB is required to make a decision concerning the

    collection of information between 30 and 60 days after publication of

    this document in the Federal Register. Therefore, a comment is best

    assured of having its full effect if OMB receives it within 30 days of

    publication.

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA \22\ requires the Commission to consider

    the costs and benefits of its actions before issuing a rulemaking under

    the CEA. By its terms, Section 15(a) does not require the Commission to

    quantify the costs and benefits of a rule or to determine whether the

    benefits of the rulemaking outweigh its costs; rather, it requires that

    the Commission ``consider'' the costs and benefits of its actions.

    Section 15(a) further specifies that the costs and benefits shall be

    evaluated in light of five broad areas of market and public concern:

    (1) Protection of market participants and the public; (2) efficiency,

    competitiveness, and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding its costs, a particular rule

    is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or accomplish any of the purposes of

    the CEA.

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    \22\ 7 U.S.C. 19(a).

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    Summary of proposed requirements. The proposed rule would implement

    processes for determining the eligibility of a DCO to clear swaps that

    it wishes to accept for clearing; for DCOs submitting swaps to the

    Commission for review; for Commission-initiated reviews of swaps; and

    for staying a clearing requirement while the clearing of a swap is

    reviewed.

    Costs. With respect to costs, the Commission has determined that

    the rule results in minimal costs. The rule only requires DCOs and swap

    counterparties to provide sufficient information for the Commission to

    carry out its responsibilities under the Dodd-Frank Act in an efficient

    manner. The rule itself does not require the clearing of any swap, so

    the Commission did not consider the potential costs of mandatory

    clearing in its analysis.

    Benefits. With respect to benefits, the Commission has determined

    that the rule will benefit the public by making information publicly

    available and by providing opportunity for comment. The rule also takes

    into account the risk management practices of a DCO in making a

    determination on the DCO's eligibility to clear swaps. The rule itself

    does not require the clearing of any swap, so the Commission did not

    [[Page 67281]]

    consider the potential benefits of mandatory clearing in its analysis.

    Public Comment. The Commission invites public comment on its cost-

    benefit considerations. Commenters are also invited to submit any data

    or other information that they may have quantifying or qualifying the

    costs and benefits of the proposal with their comment letters.

    List of Subjects

    17 CFR Part 39

    Business and industry, Commodity futures, Reporting and

    recordkeeping requirements.

    17 CFR Part 140

    Authority delegations (Government agencies), Conflict of interests,

    Organization and functions (Government agencies).

    For the reasons stated in the preamble, the Commission proposes to

    amend 17 CFR parts 39 and 140 as follows:

    PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    1. The authority citation for part 39 is revised to read as

    follows:

    Authority: 7 U.S.C. 7a-1 as amended by Pub. L. 111-203, 124

    Stat. 1376.

    2. Redesignate Sec. Sec. 39.5 through 39.7 as Sec. Sec. 39.6

    through 39.8 and add new Sec. 39.5 to read as follows:

    Sec. 39.5 Review of swaps for Commission determination on clearing

    requirement.

    (a) Eligibility to clear swaps. (1) A derivatives clearing

    organization shall be presumed eligible to accept for clearing any swap

    that is within a group, category, type, or class of swaps that the

    derivatives clearing organization already clears. Such presumption of

    eligibility, however, is subject to review by the Commission.

    (2) A derivatives clearing organization that wishes to accept for

    clearing any swap that is not within a group, category, type, or class

    of swaps that the derivatives clearing organization already clears

    shall request a determination by the Commission of the derivatives

    clearing organization's eligibility to clear such a swap before

    accepting the swap for clearing. The request, which shall be filed

    electronically with the Secretary of the Commission, shall address the

    derivatives clearing organization's ability, if it accepts the swap for

    clearing, to maintain compliance with section 5b(c)(2) of the Act,

    specifically:

    (i) The sufficiency of the derivatives clearing organization's

    financial resources; and

    (ii) The derivative clearing organization's ability to manage the

    risks associated with clearing the swap, especially if the Commission

    determines that the swap is required to be cleared.

    (b) Swap submissions. (1) A derivatives clearing organization shall

    submit to the Commission each swap, or any group, category, type, or

    class of swaps that it plans to accept for clearing. The derivatives

    clearing organization making the submission must be eligible under

    paragraph (a) of this section to accept for clearing the submitted

    swap, or group, category, type, or class of swaps.

    (2) A derivatives clearing organization shall submit swaps to the

    Commission, to the extent reasonable and practicable to do so, by

    group, category, type, or class of swaps. The Commission may in its

    reasonable discretion consolidate multiple submissions from one

    derivatives clearing organization or subdivide a derivatives clearing

    organization's submission as appropriate for review.

    (3) The submission shall be filed electronically with the Secretary

    of the Commission and shall include:

    (i) A statement that the derivatives clearing organization is

    eligible to accept the swap, or group, category, type, or class of

    swaps for clearing and, if the Commission determines that the swap, or

    group, category, type, or class of swaps is required to be cleared, the

    derivatives clearing organization will be able to maintain compliance

    with section 5b(c)(2) of the Act;

    (ii) A statement that includes, but is not limited to, information

    regarding the swap, or group, category, type, or class of swaps that is

    sufficient to provide the Commission a reasonable basis to make a

    quantitative and qualitative assessment of the following factors:

    (A) The existence of significant outstanding notional exposures,

    trading liquidity, and adequate pricing data;

    (B) The availability of rule framework, capacity, operational

    expertise and resources, and credit support infrastructure to clear the

    contract on terms that are consistent with the material terms and

    trading conventions on which the contract is then traded;

    (C) The effect on the mitigation of systemic risk, taking into

    account the size of the market for such contract and the resources of

    the DCO available to clear the contract;

    (D) The effect on competition, including appropriate fees and

    charges applied to clearing; and

    (E) The existence of reasonable legal certainty in the event of the

    insolvency of the relevant DCO or one or more of its clearing members

    with regard to the treatment of customer and swap counterparty

    positions, funds, and property;

    (iii) Product specifications, including copies of any standardized

    legal documentation, generally accepted contract terms, standard

    practices for managing any life cycle events associated with the swap,

    and the extent to which the swap is electronically confirmable;

    (iv) Participant eligibility standards, if different from the

    derivatives clearing organization's general participant eligibility

    standards;

    (v) Pricing sources, models, and procedures, demonstrating an

    ability to obtain sufficient price data to measure credit exposures in

    a timely and accurate manner, including any agreements with clearing

    members to provide price data and copies of executed agreements with

    third-party price vendors, and information about any price reference

    index used, such as the name of the index, the source that calculates

    it, the methodology used to calculate the price reference index and how

    often it is calculated, and when and where it is published publicly;

    (vi) Risk management procedures, including measurement and

    monitoring of credit exposures, initial and variation margin

    methodology, methodologies for stress testing and back testing,

    settlement procedures, default management procedures, and an

    independent validation of the scalability of the derivatives clearing

    organization's risk management policies, systems, and procedures,

    including the margin methodology, settlement procedures, and default

    management procedures;

    (vii) Measures of market liquidity and trading activity, including

    information on the sources of such measures;

    (viii) An analysis of the effect of a clearing requirement on the

    market for the group, category, type, or class of swaps, both

    domestically and globally, including the potential effect on market

    liquidity, trading activity, use of swaps by direct and indirect market

    participants, and any potential market disruption;

    (ix) Applicable rules, manuals, policies, or procedures;

    (x) Terms and trading conventions on which the swap is currently

    traded;

    (xi) A description of the manner in which the derivatives clearing

    organization has provided notice of the submission to its members and a

    summary of any opposition to the submission expressed by the members. A

    copy of the notice to members shall be included with the submission.

    (4) The submission will be made available to the public and posted

    on

    [[Page 67282]]

    the Commission Web site for a 30-day public comment period. A

    derivatives clearing organization that wishes to request confidential

    treatment for portions of its submission may do so in accordance with

    the procedures set out in Sec. 145.9(d).

    (5) The Commission will review the submission and determine whether

    the swap, or group, category, type, or class of swaps described in the

    submission is required to be cleared. The Commission will make its

    determination not later than 90 days after a complete submission has

    been received, unless the submitting derivatives clearing organization

    agrees to an extension. The determination of when such submission is

    complete shall be at the sole discretion of the Commission. In making a

    determination that a clearing requirement shall apply, the Commission

    may require such terms and conditions to the requirement as the

    Commission determines to be appropriate.

    (c) Commission-initiated reviews. (1) The Commission on an ongoing

    basis will review swaps that have not been accepted for clearing by a

    derivatives clearing organization to make a determination as to whether

    the swaps should be required to be cleared. In undertaking such

    reviews, the Commission will use information obtained pursuant to

    Commission regulations from swap data repositories, swap dealers, and

    major swap participants, and any other available information.

    (2) Notice regarding any determination made under paragraph (c)(1)

    of this section will be posted on the Commission Web site for a 30-day

    public comment period.

    (3) If no derivatives clearing organization has accepted for

    clearing a particular swap, group, category, type, or class of swaps

    that the Commission finds would otherwise be subject to a clearing

    requirement, the Commission will:

    (i) Investigate the relevant facts and circumstances;

    (ii) Within 30 days of the completion of its investigation, issue a

    public report containing the results of the investigation; and

    (iii) Take such actions as the Commission determines to be

    necessary and in the public interest, which may include requiring the

    retaining of adequate margin or capital by parties to the swap, group,

    category, type, or class of swaps.

    (d) Stay of clearing requirement. (1) After making a determination

    that a swap, or group, category, type, or class of swaps is required to

    be cleared, the Commission, on application of a counterparty to a swap

    or on its own initiative, may stay the clearing requirement until the

    Commission completes a review of the terms of the swap, or group,

    category, type, or class of swaps and the clearing arrangement.

    (2) A counterparty to a swap that wishes to apply for a stay of the

    clearing requirement for that swap shall submit a written request to

    the Secretary of the Commission that includes:

    (i) The identity and contact information of the counterparty to the

    swap;

    (ii) The terms of the swap subject to the clearing requirement;

    (iii) The name of the derivatives clearing organization clearing

    the swap;

    (iv) A description of the clearing arrangement; and

    (v) A statement explaining why the swap should not be subject to a

    clearing requirement.

    (3) A derivatives clearing organization that has accepted for

    clearing a swap, or group, category, type, or class of swaps that is

    subject to a stay of the clearing requirement shall provide any

    information requested by the Commission in the course of its review.

    (4) The Commission will complete its review not later than 90 days

    after issuance of the stay, unless the derivatives clearing

    organization that clears the swap, or group, category, type, or class

    of swaps agrees to an extension.

    (5) Upon completion of its review, the Commission may:

    (i) Determine, subject to any terms and conditions as the

    Commission determines to be appropriate, that the swap, or group,

    category, type, or class of swaps must be cleared; or

    (ii) Determine that the clearing requirement will not apply to the

    swap, or group, category, type, or class of swaps, but clearing may

    continue on a non-mandatory basis.

    PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    3. The authority citation for part 140 continues to read as

    follows:

    Authority: 7 U.S.C. 2 and 12a.

    4. In Sec. 140.94, revise paragraph (a)(5) and add new paragraphs

    (a)(6) and (a)(7) to read as follows:

    Sec. 140.94 Delegation of authority to the Director of the Division

    of Clearing and Intermediary Oversight.

    (a) * * *

    (5) All functions reserved to the Commission in Sec. 5.14 of this

    chapter;

    (6) All functions reserved to the Commission in Sec. Sec.

    39.5(b)(2) and (d)(3) of this chapter; and

    (7) All functions reserved to the Commission in Sec. Sec. 39.11

    (b)(1)(vi), (b)(2)(ii), (c)(1), (c)(2), (f)(1), and (f)(4) of this

    chapter.

    * * * * *

    Issued in Washington, DC, on October 26, 2010, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note: The following attachment will not appear in the Code of

    Federal Regulations:

    Statement of Chairman Gary Gensler Process for Review of Swaps for

    Mandatory Clearing October 26, 2010

    I support the proposed rulemaking to establish a process for the

    review and designation of swaps for mandatory clearing. One of the

    primary goals of the Dodd-Frank Act was to lower risk by requiring

    standardized swaps to be centrally cleared. The process set out in the

    proposed rule is consistent with the Congressional requirement that

    derivatives clearing organizations (DCOs) be eligible to clear the

    swaps and that before a swap becomes subject to mandatory clearing the

    public get to provide input on the contract or class of contracts.

    Though we have until July to finalize this rulemaking, it is my hope

    that we can finish by April. This would allow us to begin reviewing the

    contracts that are already being cleared by DCOs and under Dodd-Frank

    have already been deemed submitted to the Commission for consideration.

    [FR Doc. 2010-27532 Filed 11-1-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: November 2, 2010