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2011-2643

  • Federal Register, Volume 76 Issue 26 (Tuesday, February 8, 2011)[Federal Register Volume 76, Number 26 (Tuesday, February 8, 2011)]

    [Proposed Rules]

    [Pages 6715-6727]

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

    [FR Doc No: 2011-2643]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 23

    RIN 3038-AC96

    Swap Trading Relationship Documentation Requirements for Swap

    Dealers and Major Swap Participants

    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 regulations to implement new statutory provisions

    established under Title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act (Dodd-Frank Act). Section 731 of the Dodd-Frank

    Act added a new section 4s(i) to the Commodity Exchange Act (CEA),

    which requires the Commission to prescribe standards for swap dealers

    and major swap participants related to the timely and accurate

    confirmation, processing, netting, documentation, and valuation of

    swaps. The proposed rules would establish requirements for swap trading

    relationship documentation for swap dealers and major swap

    participants.

    DATES: Submit comments on or before April 11, 2011.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AC96

    and Swap Trading Relationship Documentation Requirements for Swap

    Dealers and Major Swap Participants, by any of the following methods:

    Agency Web site, via its Comments Online process at 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.

    Please submit your comments using only one method.

    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

    [[Page 6716]]

    under the Freedom of Information Act, a petition for confidential

    treatment of the exempt information may be submitted according to the

    established procedures in Sec. 145.9 of the Commission's regulations,

    17 CFR 145.9.

    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Associate

    Director, 202-418-5684, sjosephson@cftc.gov; Frank N. Fisanich, Special

    Counsel, 202-418-5949, ffisanich@cftc.gov; or Jocelyn Partridge,

    Special Counsel, 202-418-5926, jpartridge@cftc.gov; Division of

    Clearing and Intermediary Oversight, Commodity Futures Trading

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

    DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

    Title VII of the Dodd-Frank Act \2\ amended the Commodity Exchange Act

    (CEA) \3\ to establish a comprehensive regulatory framework 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 all

    registered entities and intermediaries subject to the Commission's

    oversight.

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    \1\ 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.

    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

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

    2010.''

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

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    Section 731 of the Dodd-Frank Act amends the CEA by adding a new

    section 4s, which sets forth a number of requirements for swap dealers

    and major swap participants. Specifically, section 4s(i) of the CEA

    establishes swap documentation standards for those registrants.

    Section 4s(i)(1) requires swap dealers and major swap participants

    to ``conform with such standards as may be prescribed by the Commission

    by rule or regulation that relate to timely and accurate confirmation,

    processing, netting, documentation, and valuation of all swaps.'' Under

    section 4s(i)(2), the Commission is required to adopt rules ``governing

    documentation standards for swap dealers and major swap participants.''

    The Commission is proposing the regulations governing swap

    documentation discussed below, pursuant to the authority granted under

    sections 4s(h)(1)(D), 4s(h)(3)(D), 4s(i), and 8a(5) of the CEA.\4\ The

    Dodd-Frank Act requires the Commission to promulgate these provisions

    by July 15, 2011.\5\

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    \4\ Section 8a(5) of the CEA authorizes the Commission to

    promulgate such regulations as, in the judgment of the Commission,

    are reasonably necessary to effectuate any of the provisions or to

    accomplish any of the purposes of the CEA.

    \5\ This is the sixth rulemaking to be proposed regarding

    internal business conduct standards for swap dealers and major swap

    participants. Prior notices of proposed rulemaking are available on

    the Commission's Web site at http://www.cftc.gov.

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    The proposed regulations reflect consultation with staff of the

    following agencies: (i) The Securities and Exchange Commission; (ii)

    the Board of Governors of the Federal Reserve System; (iii) the Office

    of the Comptroller of the Currency; and (iv) the Federal Deposit

    Insurance Corporation. Staff from each of these agencies has had the

    opportunity to provide oral and/or written comments to the proposal,

    and the proposed regulations incorporate elements of the comments

    provided.

    In designing these rules, the Commission has taken care to minimize

    the burden on those parties that will not be registered with the

    Commission as swap dealers or major swap participants. To the extent

    that market participants believe that additional measures should be

    taken to reduce the burden or increase the benefits of documenting swap

    transactions, the Commission welcomes all comments.

    II. Proposed Regulations

    The proposed regulations would set forth certain requirements for

    documenting the swap trading relationship between swap dealers, major

    swap participants, and their counterparties. Documentation of swaps is

    a critical component of the bilaterally-traded, over-the-counter (OTC)

    derivatives market and has been the focus of significant domestic and

    international attention in recent years.

    A. Background on Documentation and Standardization

    The OTC derivatives markets traditionally have been characterized

    by privately negotiated transactions entered into by two

    counterparties, in which each party assumes and manages the credit risk

    of the other. While OTC derivatives are traded by a diverse set of

    market participants, such as banks, hedge funds, pension funds, and

    other institutional investors, as well as corporate, governmental, and

    other end-users, a relatively few number of dealers are, by far, the

    most significantly active participants. As such, the default of a

    dealer may result in significant losses for the counterparties of that

    dealer, either from the counterparty exposure to the defaulting dealer

    or from the cost of replacing the defaulted trades in times of market

    stress.\6\

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    \6\ See Financial Stability Board, ``Implementing OTC

    Derivatives Market Reforms: Report of the OTC Derivatives Working

    Group,'' (Oct. 10, 2010), available at http://www.financialstabilityboard.org/publications/r_101025.pdf.

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    OTC derivatives market participants typically have relied on the

    use of industry standard legal documentation, including master netting

    agreements, definitions, schedules, and confirmations, to document

    their swap trading relationships. This industry standard documentation,

    such as the widely used ISDA Master Agreement and related definitions,

    schedules, and confirmations specific to particular asset classes,

    offers a framework for documenting the transactions between

    counterparties for OTC derivatives products.\7\ The standard

    documentation is designed to set forth the legal, trading, and credit

    relationship between the parties and to facilitate cross-product

    netting of transactions in the event that parties have to close-out

    their position with one another.

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    \7\ The International Swaps and Derivatives Association (ISDA)

    is a trade association for the OTC derivatives industry (http://www.isda.org).

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    One important method of addressing the credit risk that arises from

    OTC derivatives transactions is the use of bilateral close-out netting.

    Parties seek to achieve enforceable bilateral netting by documenting

    all of their transactions under master netting agreements.\8\ Following

    the occurrence of a default by one of the counterparties (such as

    bankruptcy or insolvency), the

    [[Page 6717]]

    exposures from individual transactions between the two parties are

    netted and consolidated into a single net ``lump sum'' obligation. A

    party's overall exposure is therefore limited to this net sum. That

    exposure then may be offset by the available collateral previously

    provided being applied against the net exposure. As such, it is

    critical that the netting provisions between the parties are legally

    enforceable and that the collateral may be used to meet the net

    exposure. In recognition of the risk-reducing benefits of close-out

    netting, many jurisdictions provide favorable treatment of netting

    arrangements in bankruptcy,\9\ and favorable capital and accounting

    treatment to parties that have enforceable netting agreements in

    place.\10\

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    \8\ Enforceable bilateral netting arrangements are a common

    commercial practice and are an important part of risk management and

    minimization of capital costs.

    \9\ See e.g., 11 U.S.C. 561 (protecting contractual right to

    terminate, liquidate, accelerate, or offset under a master netting

    agreement and across contracts).

    \10\ See 12 CFR 3, Appendix C; 12 CFR 208, Appendix F; 12 CFR

    225, Appendix G; and 12 CFR 325, Appendix D (banking regulations

    regarding qualifying master netting agreements).

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    There is also a risk that inadequate documentation of open swap

    transactions could result in collateral and legal disputes, thereby

    exposing counterparties to significant counterparty credit risk. By way

    of contrast, adequate documentation between counterparties offers a

    framework for establishing the trading relationship between the

    parties. The use of common legal documentation also encourages

    standardization of traded products. This, in turn, may facilitate

    central clearing and trading as sufficient standardization is a

    prerequisite for central clearing and trading on an exchange or

    electronic platform.

    In response to the global economic crisis, in September 2009, G-20

    Leaders agreed in Pittsburgh to critical elements relating to OTC

    derivatives reform, including a provision that ``[a]ll standardized OTC

    derivative contracts should be traded on exchanges or electronic

    trading platforms, where appropriate, and cleared through central

    counterparties. * * *'' \11\ In June 2010 in Toronto, the G-20 Leaders

    reaffirmed this commitment, and expressly stated their objective of

    increasing standardization in the OTC derivatives markets.\12\ With the

    passage of the Dodd-Frank Act in July 2010, Congress expressly

    recognized the link between standardized swaps and clearing, as

    well.\13\

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    \11\ See Group of Twenty, ``Leaders' Statement: The Pittsburgh

    Summit,'' (Sept. 24-25, 2009), available at http://www.pittsburghsummit.gov/mediacenter/129639.htm.

    \12\ See The G-20 Toronto Summit Declaration (Jun. 26-27, 2010),

    available at

    http://www.g20.utoronto.ca/2010/g20_declaration_en.pdf. In

    Annex II, the declaration stated, ``We pledged to work in a

    coordinated manner to accelerate the implementation of over-the-

    counter (OTC) derivatives regulation and supervision and to increase

    transparency and standardization.''

    \13\ ``It is expected that the standardized, plain vanilla, high

    volume swaps contracts--which according to the Treasury Department

    are about 90 percent of the $600 trillion swaps market--will be

    subject to mandatory clearing.'' 156 Cong. Rec. S5921 (daily ed.

    Jul. 15, 2010) (statement of Sen. Lincoln).

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    In addition, increasing standardization of swap documentation

    should improve the market in a number of other ways, including:

    Facilitating automated processing of transactions; increasing the

    fungibility of the contracts, which enables greater market liquidity;

    improving valuation and risk management; increasing the reliability of

    price information; reducing the number of problems in matching trades;

    and facilitating reporting to swap data repositories.\14\

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    \14\ These benefits were articulated by the Financial Stability

    Board's OTC Derivatives Working Group in its report, ``Implementing

    OTC Derivatives Market Reforms,'' (Oct. 10, 2010), available at

    http://www.financialstabilityboard.org/publications/r_101025.pdf.

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    Product and process standardization are also key conditions for

    increased automation and central clearing of OTC derivatives. As a

    result of targeted supervisory encouragement since 2005,\15\ credit

    derivative market participants have standardized CDS product design and

    post-trade processes in tandem, leading to greater operational

    efficiencies, encouraging higher volumes of standardized transactions,

    and most significantly, providing the requisite operational environment

    for the implementation of centralized risk-reducing infrastructure,

    including central counterparty clearing.

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    \15\ Since 2005, the Federal Reserve Bank of New York (FRBNY)

    has led a targeted, supervisory effort to enhance operational

    efficiency and performance in the OTC derivatives market, among

    other things, by increasing standardization. Known as the OTC

    Derivatives Supervisors' Group (ODSG), the FRBNY leads an on-going

    effort with OTC derivatives dealers' primary supervisors, trade

    associations, industry utilities, and private vendors, through which

    market participants (including buy-side participants) regularly set

    goals and commitments to bring infrastructure, market design, and

    risk management improvements to all OTC derivatives asset classes.

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    Many standardized processes have been established for CDS legal

    documentation and trading conventions, and in turn, the standardization

    of product design has enabled market participants to implement

    infrastructure that automates and centralizes trading, recordkeeping,

    trade compression, and clearing. For example, the standardization of

    coupons in the single-name CDS product was largely motivated by the

    desire to create an efficient process for offsetting contracts. The

    market-wide adoption of fixed coupons allowed single-name CDS

    instruments to be centrally cleared, in effect standardizing

    counterparty credit risk management in these products. The ``Big Bang

    Protocol'' further standardized a number of critical operational

    processes.\16\ The protocol: (i) ``Hardwired'' a standard auction

    mechanism into CDS trading documentation, eliminating the need for ad

    hoc protocols; (ii) incorporated the resolutions of the ISDA

    Determinations Committees into the terms of standard CDS documentation;

    and (iii) instituted a common standard effective date for CDS

    transactions. Codifying key standardized processes into CDS products

    has brought greater certainty to managing the risk of CDS transactions

    and has provided the structural foundation for greater automation,

    higher volumes in standardized transactions, and ultimately the

    establishment of centralized risk-reducing infrastructure, such as

    central counterparties.

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    \16\ See 2009 ISDA Credit Derivatives Determinations Committees

    and Auction Settlement CDS Protocol, available at: http://www.isda.org/bigbangprot/docs/Big-Bang-Protocol.pdf.

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    B. Proposed Swap Trading Relationship Documentation Rule

    To promote the ``timely and accurate * * * documentation * * * of

    all swaps'' under Sec. 4s(i)(1) of the CEA, proposed Sec. 23.504(a)

    would require that swap dealers and major swap participants establish,

    maintain, and enforce written policies and procedures reasonably

    designed to ensure that each swap dealer or major swap participant and

    its counterparties have agreed in writing to all of the terms governing

    their swap trading relationship and have executed all agreements

    required by proposed Sec. 23.504.

    Proposed Sec. 23.504(b)(1) would specify that the swap trading

    relationship documentation include written agreement by the parties on

    terms relating to payment obligations, netting of payments, events of

    default or other termination events, netting of obligations upon

    termination, transfer of rights and obligations, governing law,

    valuation, and dispute resolution procedures. Proposed Sec.

    23.504(b)(2) would establish that all confirmations of swap

    transactions, as required under previously proposed Sec. 23.501, would

    be considered to be part of the required swap trading relationship

    documentation.

    [[Page 6718]]

    Swap trading relationship documentation under proposed Sec.

    23.504(b)(3)(i) and (ii) also would include credit support arrangements

    containing initial and variation margin requirements at least as high

    as those set by the Commission (for swap dealers and major swap

    participants that are not banks) and by prudential regulators (for

    entities that are banks). These credit support arrangements also would

    be required to identify the forms of eligible assets that may be used

    as margin and asset valuation haircuts.

    Under proposed Sec. 23.504(b)(3)(iii) and (iv), the credit support

    arrangements between swap dealers and major swap participants would

    include documentation of the treatment of any assets used as margin for

    uncleared swaps. These provisions are intended to work together with

    the rules previously proposed under section 4s(l) of the CEA,\17\ and

    thus require documentation as to whether the funds and other property

    are to be segregated with an independent third party, in accordance

    with Sec. 23.601(e). The provisions also are designed to work together

    with rules to be proposed under section 4s(e) of the CEA that relate to

    margin requirements.

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    \17\ See 75 FR 75432, Notice of Proposed Rulemaking, Protection

    of Collateral of Counterparties to Uncleared Swaps; Treatment of

    Securities in a Portfolio Margining Account in a Commodity Broker

    Bankruptcy, Dec. 3, 2010.

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    Under Sec. 23.601, as previously proposed, swap dealers and major

    swap participants trading uncleared swaps would be required to notify

    each counterparty that the counterparty has the right to require

    segregation of the funds or other property that it supplies as

    ``initial margin,'' a term defined in previously proposed Sec.

    23.600.\18\ At the request of the counterparty, the swap dealer or

    major swap participant would be required to segregate such initial

    margin with an independent third party. Under section 4s(l) of the CEA,

    this segregation requirement would not apply to variation margin

    payments. Proposed Sec. 23.602(a)(2), however, would permit the swap

    dealer or major swap participant and the counterparty to agree that

    variation margin also may be held in a segregated account. Under

    proposed Sec. 23.601(e), swap dealers and major swap participants

    would notify each counterparty of the opportunity to revisit their

    segregation decision once per calendar year.

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    \18\ See 75 FR 75438 (``Initial margin means money, securities,

    or property posted by a party to a swap as performance bond to cover

    potential future exposures arising from changes in the market value

    of the position.'').

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    Swap dealers and major swap participants also must comply with

    proposed Sec. 23.603(a), which would provide that segregated initial

    margin may only be invested consistent with the standards for

    investment of customer funds that the Commission applies to exchange-

    traded futures (see Sec. 1.25 of Commission regulations), and with

    proposed Sec. 23.603(b), which would provide that swap dealers and

    major swap participants and their counterparties may enter into any

    commercial arrangement, in writing, regarding the investment of

    segregated initial margin and the related allocation of the gains and

    losses resulting from such investments. The Commission anticipates that

    documentation of the foregoing matters would be included in the trading

    relationship documentation required pursuant to proposed Sec.

    23.504(b)(3)(iii).

    Swap dealers and major swap participants could maintain standard

    templates for documenting their trading relationships as a way of

    complying with the requirements of Sec. 23.504. The Commission would

    also consider it a sound practice for swap dealers and major swap

    participants to require senior management in the business trading and

    risk management units to approve all templates, and any material

    modifications to them. The Commission recognizes the work that the

    industry has undertaken over the past several years to update and

    standardize the documentation it relies upon for various asset classes,

    and the Commission encourages market participants to adopt standardized

    confirmation templates, standardized master confirmation

    agreements,\19\ standardized product definitions, and other

    standardized documentation developed by the industry. Standardized

    documentation and definitions promote standardized products, which may

    lead to greater liquidity and more efficient pricing. In addition,

    increased product standardization may bring systemic risk-reduction

    benefits as the risks associated with standardized products are better

    understood by the entire marketplace.

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    \19\ Standard Master Confirmation Agreements that have been

    published include:

    2004 Sovereign Master Credit Derivatives Confirmation Agreement.

    2003 Master Credit Derivatives Confirmation Agreement (Asia-

    Pacific).

    2003 Master Credit Derivatives Confirmation Agreement (European-

    North American).

    2009 Americas Master Equity Derivatives Confirmation Agreement.

    2008 Americas Master Designated/Exchange-Traded Contract Option

    Confirmation Agreement.

    2007 Americas Master Variance Swap Confirmation Agreement.

    2004 Americas Interdealer Master Equity Derivatives Confirmation

    Agreement.

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    C. Proposed Swap Valuation Provisions

    Swap valuation disputes have long been recognized as a significant

    problem in the OTC derivatives market.\20\ The ability to determine

    definitively the value of a swap at any given time lies at the center

    of many of the OTC derivatives market reforms contained in the Dodd-

    Frank Act and is a cornerstone of risk management. Swap valuation is

    also crucial for determining capital and margin requirements applicable

    to swap dealers and major swap participants and therefore plays a

    primary role in risk mitigation for uncleared swaps.

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    \20\ See ISDA Collateral Committee, ``Commentary to the Outline

    of the 2009 ISDA Protocol for Resolution of Disputed Collateral

    Calls,'' June 2, 2009 (stating ``Disputed margin calls have

    increased significantly since late 2007, and especially during 2008

    have been the driver of large (sometimes > $1 billion)

    uncollateralized exposures between professional firms.'').

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    The Commission recognizes that swap valuation is not always an easy

    task. In some instances, there is widespread agreement on valuation

    methodologies and the source of formula inputs for frequently traded

    swaps. These swaps are the proverbial ``low-hanging fruit,'' and many

    have been accepted for clearing (i.e., commonly traded interest rate

    swaps and credit default swaps). However, parties often dispute

    valuations of thinly traded swaps where there is not widespread

    agreement on valuation methodologies or the source for formula inputs.

    Many of these swaps are thinly traded either because of their limited

    use as risk management tools or because they are simply too customized

    to have comparable counterparts in the market. As many of these swaps

    are valued by dealers internally by ``marking-to-model,'' their

    counterparties may dispute the inputs and methodologies used in the

    model. As uncleared swaps are bilateral, privately negotiated

    contracts, on-going swap valuation for purposes of initial and

    variation margin calculation and swap terminations or novations, has

    also been largely a process of on-going negotiation between the

    parties. The inability to agree on the value of a swap became

    especially acute during the 2007-2009 financial crisis when there was

    widespread failure of the market inputs needed to value many swaps.\21\

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    \21\ The failure of the market to set a price for mortgage-

    backed securities led to wide disparities in the valuation of CDS

    referencing mortgage-backed securities (especially collateralized

    debt obligations). Such wide disparities led to large collateral

    calls from dealers on AIG, hastening its downfall. See CBS News,

    ``Calling AIG? Internal Docs Reveal Company Silent About Dozens Of

    Collateral Calls,'' Jun. 23, 2009, available at: http://www.cbsnews.com/stories/2009/06/23/cbsnews_investigates/main5106672.shtml.

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    [[Page 6719]]

    The Commission believes that prudent risk management requires that

    market participants be able to value their own swaps in a predictable

    and objective manner; the failure to do so may lead to systemic risk.

    Accordingly, to promote the ``timely and accurate * * * valuation of

    all swaps'' under Sec. 4s(i)(1) of the CEA, proposed Sec.

    23.504(b)(4) would require that the swap trading documentation include

    written documentation in which the parties agree on the methods,

    procedures, rules and inputs for determining the value of each swap at

    any time from execution to the termination, maturity, or expiration of

    the swap. The agreed methods, procedures, rules and inputs would be

    required to constitute a complete and independently verifiable

    methodology for valuing each swap entered into between the parties.

    Proposed Sec. 23.504(b)(4)(iii) would require that the methodology

    include complete alternative methods for determining the value of the

    swap in the event that one or more inputs to the methodology become

    unavailable or fail, such as during times of market stress or

    illiquidity. All agreements on valuation would be considered part of

    the swap trading relationship documentation.

    This proposed rule is an important complement to previously

    proposed Sec. 23.502 (portfolio reconciliation), which requires swap

    dealers and major swap participants to resolve a dispute over the

    valuation of a swap within one business day. By requiring agreement

    with each counterparty on the methods and inputs for valuation of each

    swap, it is expected that Sec. 23.504(b)(4) will assist swap dealers

    and major swap participants to resolve valuation disputes in a timely

    manner, thereby reducing risk.

    D. Submission of Swaps for Clearing

    Under proposed Sec. 23.504(b)(6), upon acceptance of a swap by a

    registered derivatives clearing organization (DCO), each swap dealer

    and major swap participant would be required to create a record

    containing certain items of information,\22\ along with a statement

    that in accordance with the rules of the DCO, the original swap is

    extinguished and is replaced by equal and opposite swaps between

    clearing members and the DCO. This provision would require that all

    terms of the cleared swap conform to the templates established under

    the DCO's rules, and that all terms of the swap, as carried on the

    books of the clearing member, conform to the terms of the cleared swap

    established under the DCO's rules.

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    \22\ Such information includes the date and time the swap was

    accepted for clearing, the name of the DCO clearing the swap, the

    name of the clearing member clearing the swap for the swap dealer or

    major swap participant, and, if known, the name of the clearing

    member clearing the swap for the counterparty.

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    Proposed Sec. 23.504(b)(6), while addressing the issues prescribed

    under Sec. 4s(i)(1) of the CEA, is intended to correspond to proposed

    Sec. 39.12(b)(4).\23\ The purpose of these provisions is to encourage

    the standardization of swaps and to avoid differences that could

    compromise the benefits of clearing between the terms of a swap as

    carried at the DCO level and at the clearing member level. Any such

    differences would raise both customer protection and systemic risk

    concerns. From a customer protection standpoint, if the terms of the

    swap at the customer level differ from those at the clearing level,

    then the customer will not receive the full transparency and liquidity

    benefits of clearing, and legal and basis risk will be introduced into

    the customer position. Similarly, from a systemic perspective, any

    differences could diminish overall price discovery and liquidity and

    increase uncertainties and unnecessary costs into the insolvency

    resolution process. Standardizing the terms of a swap upon clearing

    would facilitate trading and promote the mitigation of risk for all

    participants in the swap markets.

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    \23\ The proposed Notice of Proposed Rulemaking, Risk Management

    Requirements for Derivatives Clearing Organizations under part 39

    are available on the Commission's Web site at http://www.cftc.gov.

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    Standardization also will impose structure on the general economic

    function of the contract and will facilitate automated processing and

    the ability for participants to replicate the trade easily. This allows

    market participants to trade in and out of contracts easily and lowers

    transaction costs, which in turn enables greater market liquidity and

    expansion of the market to more participants.

    E. Documentation Audit and Recordkeeping

    In keeping with prudent risk management, Sec. 23.504(c) would

    require an annual audit of the swap trading relationship documentation

    required by Sec. 23.504 to ensure compliance with approved

    documentation policies and procedures and Commission regulations.

    Proposed Sec. 23.504(d) would require swap dealers and major swap

    participants to keep records in compliance with this section.

    F. Reporting Swap Valuation Disputes

    Proposed Sec. 23.504(e) would require that swap dealers and major

    swap participants promptly notify the Commission, any applicable

    prudential regulator, and the Securities and Exchange Commission with

    regard to security-based swap agreements if any swap valuation dispute

    is not resolved within one business day, if the dispute is with a

    counterparty that is a swap dealer or major swap participant; or within

    five business days, if the dispute is with a counterparty that is not a

    swap dealer or major swap participant. This proposed rule would

    complement previously proposed Sec. 23.502, which requires portfolio

    reconciliation and resolution of valuation disputes. It also would

    allow authorities to recognize and respond to outstanding swap

    valuation disputes, which if left uncollateralized, may lead to

    systemic risk.

    G. Proposed End User Exception Documentation Rule

    Proposed Sec. 23.505 would work together with the swap data

    recordkeeping and reporting requirements rules and end-user exception

    to mandatory clearing rules, both previously proposed by the

    Commission.\24\ Under these previously proposed rules, ``a swap

    otherwise subject to mandatory clearing is subject to an elective

    exception from clearing if one party to the swap is not a financial

    entity, is using the swaps to hedge or mitigate commercial risk, and

    notifies the Commission * * * how it generally meets its financial

    obligations associated with entering into non-cleared swaps (the `end-

    user clearing exception').'' \25\ Under previously proposed Sec. 39.6,

    the end-user clearing exception is elected by providing ten additional

    items of information to a swap data repository (SDR) through a ``check-

    the-box notification process.'' \26\ As explained in the swap data

    recordkeeping and reporting rules, swap dealers and major swap

    participants will have the responsibility for reporting to SDRs ``with

    respect to the majority of swaps.'' \27\ In order to ensure that swap

    dealers and major swap participants comply with all mandatory clearing

    requirements and in light of their unique reporting obligations, it is

    critical that they possess documentation

    [[Page 6720]]

    sufficient to support a reasonable belief that their counterparties

    meet the statutory requirements for electing an exception from

    mandatory clearing. Accordingly, the Commission is proposing Sec.

    23.505.

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

    \24\ See Swap Data Recordkeeping and Reporting Requirements, 75

    FR 76573, Dec. 8, 2010, and End-User Exception to Mandatory Clearing

    of Swaps, 75 FR 80747, Dec. 23, 2010.

    \25\ 75 FR at 80748.

    \26\ 75 FR at 80749 and 80755.

    \27\ 75 FR at 76593; see also section 4r of the CEA.

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

    Proposed Sec. 23.505 would require swap dealers and major swap

    participants to obtain documentation from any counterparty seeking to

    exercise its rights under the end-user clearing exception from the

    mandatory clearing requirement under section 2h(7) of the CEA. For

    swaps subject to the mandatory clearing requirement, the proposed rule

    would require that swap dealers and major swap participants comply with

    any mandatory clearing requirement by obtaining documentation

    sufficient to provide the swap dealer or major swap participant with a

    reasonable basis to believe that its counterparty meets the statutory

    conditions required for an exception from a mandatory clearing

    requirement, as defined in section 2h(7) of the CEA.

    H. Application of Proposed Regulations to Existing Swap Documentation

    The Commission recognizes that amending all existing trading

    relationship documentation would present a substantial undertaking for

    the market. Therefore, the Commission invites comment on the

    implementation of proposed Sec. 23.504. While much of the existing

    swap documentation among swap dealers, major swap participants, and

    their counterparties likely would be in compliance with Sec.

    23.504(b), the Commission requests comment on an appropriate interval

    following the effective date of the regulations after which to require

    compliance. This interval is expected to be somewhat shorter for swap

    documentation among swap dealers and major swap participants, and

    somewhat longer for swap documentation between swap dealers, major swap

    participants, and counterparties that are not swap dealers or major

    swap participants.

    The Commission also recognizes that many swap dealers and major

    swap participants may have dormant trading relationships with

    counterparties where swap documentation has been executed, but no

    trades are presently in effect thereunder or there are trades that will

    run-off over a short period of time, and there is no intention to enter

    into new trades. Therefore, the Commission invites comment on whether

    to provide a safe harbor for dormant trading relationships.

    I. Comment Requested

    The Commission requests comment on all aspects of proposed

    Sec. Sec. 23.504 and 23.505. The Commission recognizes that there will

    be differences in the size and scope of the business of particular swap

    dealers and major swap participants. Therefore, comments are solicited

    on whether certain provisions of the proposed regulations should be

    modified or adjusted to reflect the differences among swap dealers and

    major swap participants or differences among asset classes. In

    particular, the Commission requests comment on the following questions:

    How long would swap dealers and major swap participants

    require to bring their existing documentation into compliance with

    Sec. 23.504? Will compliance take less time for existing documentation

    between such registrants and longer for existing documentation between

    registrants and non-registrants? Would three months following the

    effective date of the rules be long enough for registrants to bring

    existing documentation among themselves into compliance? Would six

    months following the effective date of the rules be long enough for

    registrants to bring existing documentation with non-registrants into

    compliance?

    Should Sec. 23.504 include a safe harbor for swaps

    entered into on, or subject to the rules of, a board of trade

    designated as a contract market?

    Should Sec. 23.504 require that the governing body of

    each swap dealer or major swap participant approve the policies and

    procedures for agreeing with each counterparty to all the terms

    governing the trading relationship?

    Should any other aspects of the trading relationship be

    required to be included in Sec. 23.504?

    Should the requirement for agreement on events of default

    or termination events be further defined? For example, should parties

    be required to specify all cross default implications and potential

    claims with regard to their respective affiliates and any other present

    or future debt obligations or transactions?

    Should Sec. 23.504 specifically delineate the types of

    payment obligation terms that must be included in the trading

    relationship documentation?

    Should specific requirements for dispute resolution be

    included in Sec. 23.504 (such as time limits), and if so, what

    requirements are appropriate for all swaps?

    Should the valuation agreement in Sec. 23.504(b)(4)

    require greater specificity? If so, what level of detail should be

    required?

    Should the valuation methodology provision in Sec.

    23.504(b)(4) expressly prohibit use of internal and/or proprietary

    inputs and methods and if not, why are inputs and methods developed and

    verifiable only by one party to the swap transaction acceptable given

    the safety and soundness and transparency objectives of the Dodd-Frank

    Act?

    If internal and/or proprietary inputs or procedures are

    permitted under Sec. 23.504(b)(4), should the swap dealer or major

    swap participant be required to disclose such information and the

    sources thereof to the counterparty and regulators in sufficient detail

    for them to undertake comparative analysis of such information and

    verify the valuation calculations?

    Under proposed Sec. 23.504(b)(6)(v), should all the terms

    of the cleared swap be required to conform to the templates established

    by the DCO or are there particular terms or rights under the swap that

    could be retained without prejudice to the need to standardize swaps

    for the purposes of clearing?

    Is the requirement that each swap dealer and major swap

    participant conduct an independent internal or external audit of no

    less than 5% of the swap trading relationship documentation required by

    the rule executed during the previous twelve month period appropriate?

    Would a failure of swap trading relationship documentation

    to comply with the requirements of proposed Sec. 23.504 create

    uncertainty regarding the enforceability of swaps transacted under such

    non-compliant documentation? If so, how should this uncertainty be

    addressed in the rules?

    Are the requirements of proposed Sec. 23.505 appropriate?

    How should swap dealers and major swap participants verify that their

    counterparties are properly claiming an exception from a given

    mandatory clearing requirement?

    Are there any anticompetitive implications to the proposed

    rules? If so, how could the proposed rules be implemented to achieve

    the purposes of the CEA in a less anticompetitive manner?

    III. 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.\28\ The

    Commission previously has established certain definitions of ``small

    entities'' to be used in evaluating the impact of its regulations on

    small entities in accordance with the RFA.\29\

    [[Page 6721]]

    The proposed rules would affect swap dealers and major swap

    participants.

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

    \28\ 5 U.S.C. 601 et seq.

    \29\ 47 FR 18618, Apr. 30, 1982.

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

    Swap dealers and major swap participants are new categories of

    registrants. Accordingly, the Commission has not previously addressed

    the question of whether such persons are, in fact, small entities for

    purposes of the RFA. The Commission previously has determined, however,

    that futures commission merchants should not be considered to be small

    entities for purposes of the RFA.\30\ The Commission's determination

    was based, in part, upon the obligation of futures commission merchants

    to meet the minimum financial requirements established by the

    Commission to enhance the protection of customers' segregated funds and

    protect the financial condition of futures commission merchants

    generally.\31\ Like futures commission merchants, swap dealers will be

    subject to minimum capital and margin requirements and are expected to

    comprise the largest global financial firms. The Commission is required

    to exempt from swap dealer designation any entities that engage in a de

    minimis level of swaps dealing in connection with transactions with or

    on behalf of customers. The Commission anticipates that this exemption

    would tend to exclude small entities from registration. Accordingly,

    for purposes of the RFA for this rulemaking, the Commission is hereby

    proposing that swap dealers not be considered ``small entities'' for

    essentially the same reasons that futures commission merchants have

    previously been determined not to be small entities and in light of the

    exemption from the definition of swap dealer for those engaging in a de

    minimis level of swap dealing.

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

    \30\ Id. at 18619.

    \31\ Id.

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

    The Commission also has previously determined that large traders

    are not ``small entities'' for RFA purposes.\32\ In that determination,

    the Commission considered that a large trading position was indicative

    of the size of the business. Major swap participants, by statutory

    definition, maintain substantial positions in swaps or maintain

    outstanding swap positions that create substantial counterparty

    exposure that could have serious adverse effects on the financial

    stability of the United States banking system or financial markets.

    Accordingly, for purposes of the RFA for this rulemaking, the

    Commission is hereby proposing that major swap participants not be

    considered ``small entities'' for essentially the same reasons that

    large traders have previously been determined not to be small entities.

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

    \32\ Id. at 18620.

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

    Moreover, the Commission is carrying out Congressional mandates by

    proposing this regulation. Specifically, the Commission is proposing

    these regulations to comply with the Dodd-Frank Act, the aim of which

    is to reduce systemic risk presented by swap dealers and swap market

    participants through comprehensive regulation. The Commission does not

    believe that there are regulatory alternatives to those being proposed

    that would be consistent with the statutory mandate. 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.

    B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \33\ 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 in accordance with 44 U.S.C. 3507(d) and 5 CFR

    1320.11. The title for this collection of information is ``Swap Trading

    Relationship Documentation Requirements for Swap Dealers and Major Swap

    Participants.'' 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. The OMB has not yet assigned

    this collection a control number.

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

    \33\ 44 U.S.C. 3501 et seq.

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

    The collection of information under these proposed rules is

    necessary to implement new section 4s(i) the CEA, which expressly

    requires the Commission to adopt rules governing documentation

    standards for swap dealers and major swap participants and explicitly

    obligates such registrants to conform to the documentation standards

    established by the Commission. The required recordkeeping is

    particularly essential to ensuring that each swap dealer and major swap

    participant documents all of the terms of its swap trading

    relationships with its counterparties. Obligating certain swap market

    participants to memorialize, in writing, their mutual agreement with

    respect to margin requirements, margin assets, payment and netting,

    termination events, the calculation and netting of obligations upon

    termination, transfer of rights and obligations, governing law,

    valuation methods and inputs, and dispute resolution procedures would

    decrease the likelihood of significant counterparty disputes; promote

    transaction standardization; enhance the parties' abilities to engage

    in risk-reducing exercises such as bilateral offset, portfolio

    reconciliation, and portfolio compression; provide for more timely and

    orderly resolution of events of default; and enhance the stability of

    the market place as a whole. The proposed regulations also would ensure

    that certain important information regarding cleared swaps would be

    preserved and would assist in ensuring compliance with the mandatory

    clearing requirements of the Act and Commission regulations by

    requiring the maintenance of documentation demonstrating that the

    statutory conditions for an exception to those requirements have been

    satisfied. The reporting requirement established by the proposed rules

    would ensure that the Commission is provided with timely notification

    of swap valuation disputes that relevant market participants have been

    unable to resolve promptly.

    The proposed regulation would be an important part of the

    Commission's regulatory program for swap dealers and major swap

    participants. The information required to be preserved would be used by

    representatives of the Commission and any examining authority

    responsible for reviewing the activities of the swap dealer or major

    swap participant to ensure compliance with the CEA and applicable

    Commission regulations.

    If the proposed regulations are 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 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 Provided By Reporting Entities/Persons

    Proposed Sec. 23.504 generally would require swap dealers and

    major swap participants to develop and retain

    [[Page 6722]]

    written swap trading relationship documentation (including the parties'

    agreement with respect to the terms specified in the regulation; credit

    support arrangements; valuation methods, procedures and inputs; records

    of important information regarding their cleared swaps; and written

    policies and procedures for maintaining the documentation required by

    the proposed rule). It also would require swap dealers and major swap

    participants to report to the Commission and, as applicable, to the

    Securities and Exchange Commission or prudential regulators, swap

    valuation disputes that have not been resolved between the parties

    within designated time frames. Proposed Sec. 23.505 would require swap

    dealers and major swap participants to obtain documentation sufficient

    to provide a reasonable basis on which to believe that a counterparty

    meets the statutory conditions necessary for an exception from the

    mandatory clearing requirements, where applicable.

    The information collection burden associated with the proposed

    regulations is estimated to be 6,168 hours per year, at an initial

    annual cost of $684,300 for each swap dealer and major swap

    participant. The aggregate information collection burden is estimated

    to be 1,850,400 hours per year, at an initial annual aggregate cost of

    $205,290,000. Burden means the total time, effort or financial

    resources expended by persons to generate, maintain, retain, disclose,

    or provide information to or for a Federal agency. The Commission has

    characterized the annual costs as initial costs as the Commission

    anticipates that the cost burdens will be reduced dramatically over

    time as the agreements and other records required by the proposed

    regulations become increasingly standardized within the industry.

    The Commission anticipates that the majority of the information

    collection burden would arise from the recordkeeping obligations

    contained in Sec. 23.504(b). Proposed Sec. 23.504(b) would require

    each swap dealer and major swap participant to create and maintain

    written trading relationship documentation that contains the parties'

    agreement with respect to all of the terms of the parties' trading

    relationship including, without limitation, the terms delineated in

    Sec. 23.504(b)(1); the parties' credit support arrangements, including

    the margin-related terms described in Sec. 23.504(b)(3); and the

    parties' agreement with respect to the particular procedures and inputs

    that will be used to determine the value of a swap from execution to

    termination, maturity, or expiration in a manner that can be

    independently replicated as required by Sec. 23.504(b)(4). It also

    requires swap dealers and major swap participants to make and maintain

    records of cleared swaps containing the data contained in proposed

    Sec. 23.504(b)(6).

    Maintenance of written credit support arrangements and other

    trading relationship documentation that contain the terms required to

    be memorialized by the proposed Sec. Sec. 23.504(b)(1) and (3) is

    prudent business practice and the Commission anticipates that swap

    dealers and major swap participants already maintain some form of this

    documentation with each of their counterparties in the ordinary course

    of their business. Moreover, proposed Sec. 23.504(b)(2) provides that

    the swap transaction confirmations described under previously proposed

    Sec. 23.501 would be considered part of the parties' trading

    relationship documentation and thus, pre-existing swap confirmations

    that include the terms required by Sec. 23.504 would obviate the need

    for the parties to develop new documentation with respect to those

    terms.\34\ Accordingly, any additional expenditure related to

    Sec. Sec. 23.504(b)(1) and (3) likely would be limited to the time

    initially required to review and, as needed, to re-negotiate and amend,

    existing trading relationship documentation to ensure that it

    encompasses all of the required terms and to develop a system for

    maintaining any newly created records. Many of the amended provisions

    are likely to apply to multiple counterparties, thereby reducing the

    per counterparty hour burden.

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

    \34\ The information collection burden associated with the

    maintenance of confirmations of swaps transactions was calculated

    and accounted for in previously proposed regulations. See

    Confirmation, Portfolio Reconciliation, and Portfolio Compression

    Requirements for Swap Dealers and Major Swap Participants, 75 FR

    81519, Dec. 28, 2010.

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

    With respect to the valuation agreement requirement established by

    proposed Sec. 23.504(b)(4), the Commission believes that swap dealers

    and major swap participants are likely to have existing, internal

    mechanisms for valuing their swaps transactions and thus, the hour

    burden associated with this obligation would be limited to the time

    needed to negotiate agreements with counterparties on mutually

    acceptable valuation methods, should their individual valuation

    procedures differ, and to commit the agreement to writing as part of

    the parties' swap trading relationship documentation. It is likely that

    the need for new valuation agreements may be limited further to

    instances of complex or highly customized swaps transactions, as the

    valuation methods for ``plain vanilla'' swaps are likely to be somewhat

    standardized.

    The Commission estimates the initial annual hour burden associated

    with negotiating, drafting, and maintaining the swap trading

    relationship documentation described above that is required by proposed

    Sec. 23.504(b) (excluding the cleared swap records required by

    proposed Sec. 23.504(b)(6)), to be 10 hours per counterparty, or an

    average of 5,400 hours per swap dealer or major swap participant. As

    stated above, the Commission expects that this annual per registrant

    burden would be reduced considerably over time as there would be little

    need to modify the swap trading relationship documentation on an

    ongoing basis. Once a swap dealer or major swap participant modifies

    its pre-existing documentation with each of its counterparties, the

    annual burden associated with the swap trading relationship

    documentation would be minimal. In addition, because all swap dealers

    and major swap participants would be required to maintain the swap

    trading relationship documentation established by the proposed

    regulation, the Commission believes that it is likely that many of the

    terms of such documentation would become progressively more

    standardized within the industry, further reducing the bilateral

    negotiation and drafting responsibilities associated with the

    regulation.

    With respect to the required records of cleared swaps, the

    Commission estimates that swap dealers and major swap participants will

    spend an average of 2 hours per trading day, or 504 hours per year,

    maintaining the required data for these transactions. The Commission

    notes that the specific information required for each transaction is

    limited and is of the type that would be maintained in a prudent market

    participant's ordinary course of business. The Commission also notes

    that the statement required to be preserved for each cleared swap

    likely would become common to each derivatives clearing organization.

    In addition to the above, the Commission anticipates that swap

    dealers and major swap participants will spend an average of 16 hours

    per year drafting and, as needed, updating the written policies and

    procedures required by proposed Sec. 23.504(a); 4 hours per year

    maintaining records of the results of the annual documentation

    compliance audits mandated by proposed Sec. 23.504(c); and 220 hours

    per year, or 1 hour per end user, maintaining records of the

    [[Page 6723]]

    documentation required by proposed Sec. 23.505.

    The only reporting requirement contained in the proposed rules is

    the obligation of swap dealers and major swap participants to report

    swap valuation disputes that are not resolved between the participants

    within designated time periods. The Commission expects that swap

    dealers and major swap participants will spend an average of 24 hours

    per year satisfying this requirement.

    The hour burden calculations below are based upon a number of

    variables such as the number of swap dealers and major swap

    participants in the marketplace, the average number of counterparties

    of each of these registrants, and the average hourly wage of the

    employees of these registrants that would be responsible for satisfying

    the obligations established by the proposed regulation. Swap dealers

    and major swap participants are new categories of registrants.

    Accordingly, it is not currently known how many swap dealers and major

    swap participants will become subject to these rules, and this will not

    be known to the Commission until the registration requirements for

    these entities become effective after July 16, 2011, the date on which

    the Dodd-Frank Act becomes effective. While the Commission believes

    there will be approximately 200 swap dealers and 50 major swap

    participants, it has taken a conservative approach, for PRA purposes,

    in estimating that there will be a combined number of 300 swap dealers

    and major swap participants who will be required to comply with the

    recordkeeping requirements of the proposed rules. The Commission

    estimated the number of affected entities based on industry data.

    Similarly, due to the absence of prior experience in regulating

    swap dealers and major swap participants and with regulations similar

    to the proposed rules, the actual, average number of counterparties

    that a swap dealer or major swap participant is likely to have and the

    average size of its portfolio with particular counterparties is

    uncertain. Consistent with other proposed rulemakings, the Commission

    has estimated that each of the 14 major swap dealers has an average

    7,500 counterparties and the other 286 swap dealers and major swap

    participants have an average of 200 counterparties per year, for an

    average of 540 total counterparties per registrant.

    The Commission anticipates that the written policies and procedures

    required by the proposed regulations, along with the recordkeeping and

    reporting requirements, typically would be drafted and maintained by

    in-house counsel and financial or operational managers within the

    firm.\35\ According to the Bureau of Labor Statistics findings, the

    mean hourly wage of an employee under occupation code 23-1011,

    ``Lawyers,'' that is employed by the ``Securities and Commodity

    Contracts Intermediation and Brokerage Industry'' is $82.22.\36\ The

    mean hourly wage of an employee under occupation code 11-3031,

    ``Financial Managers,'' (which includes operations managers) in the

    same industry is $74.41.\37\ Because swap dealers and major swap

    participants include large financial institutions whose employees'

    salaries may exceed the mean wage provided, however, the Commission

    generally has estimated the cost burden of the proposed regulations

    based upon an average salary of $100 per hour. To account for the

    possibility that the services of outside counsel may be required to

    satisfy the requirements associated with negotiating, drafting, and

    maintaining the required trading relationship documentation (except the

    cleared swap records), the Commission has used an average salary of

    $125 per hour to calculate this burden for one half of the necessary

    hours.

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

    \35\ The written policies and procedures also may be drafted and

    maintained by the chief compliance officer of the swap dealer or

    major swap participant. According to recent Bureau of Labor

    Statistics findings, the mean hourly wage of any employee under

    occupation code 13-1401, ``Compliance Officers, Except Agriculture,

    Construction, Health and Safety, and Transportation,'' that is

    employed by the ``Securities and Commodity Contracts Intermediation

    and Brokerage Industry is $38.77. http://www.bls.gov/oes/current/oes131041.htm.

    \36\ http://www.bls.gov/oes/2099/mayowe23.1011.htm.

    \37\ http://www.bls.gov/oes/current/oes113031.htm.

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

    Based upon the above, the estimated hour burden was calculated as

    follows:

    Drafting and Updating Policies and Procedures. This hour burden

    arises from the time necessary to develop and periodically update the

    policies and procedures required by the proposed regulations.

    Number of registrants: 300.

    Frequency of collection: Initial drafting, updating as needed.

    Estimated number of annual responses per registrant: 1.

    Estimated aggregate number of annual responses: 300.

    Estimated annual hour burden per registrant: 16 hours.

    Estimated aggregate annual hour burden: 4,800 burden hours [300

    registrants x 16 hours per registrant].

    Swap Trading Relationship Documentation (excluding cleared swaps

    records). This hour burden arises from the proposed obligation that

    swap dealers and major swap participants execute and maintain swap

    trading relationship documentation.

    Number of registrants: 300.

    Frequency of collection: At least once per counterparty.

    Estimated number of annual responses per registrant: 540 [one set

    of agreements per counterparty].

    Estimated aggregate number of annual responses: 162,000 [300

    registrants x 540 counterparties].

    Estimated annual hour burden per registrant: 5,400 [540

    counterparties x 10 hours per counterparty].

    Estimated aggregate annual hour burden: 1,620,000 [300 registrants

    x 5,400 hours per registrant].

    Cleared Swap Recordkeeping. This hourly burden arises from the

    proposed requirement that swap dealers and major swap participants make

    and maintain records of specified information related to each swap

    accepted for clearing by a derivatives clearing organization.

    Number of registrants: 300.

    Frequency of collection: Daily.

    Estimated number of annual responses per registrant: 252 [252

    trading days per year].\38\

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

    \38\ Consistent with the Commission's proposed regulations that

    would require swap dealers and major swap participants to compile

    and maintain certain transaction records (including daily trading

    records), the Commission has estimated the hour burden associated

    with the cleared swap recordkeeping requirement by approximating the

    number of hours per trading day that an employee of a swap dealer or

    major swap participant likely would spend compiling and retaining

    the relevant records. See Reporting, Recordkeeping, and Daily

    Trading Record Requirements for Swap Dealers and Major Swap

    Participants, 75 FR 76666, Dec. 9, 2010.

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

    Estimated aggregate number of annual responses: 75,600 [300

    registrants x 252 trading days].

    Estimated annual hour burden per registrant: 504 [252 trading days

    x 2 hours per trading day].

    Estimated aggregate hour burden: 151,200 [300 registrants x 504

    hours].

    Audit Recordkeeping. This hourly burden arises from the proposed

    requirement that swap dealers and major swap participants make and

    maintain records of the results of their annual internal or external

    audits to examine for compliance with the requirements of the proposed

    regulations.

    Number of registrants: 300.

    Frequency of collection: Annually.

    Estimated number of annual responses per registrant: 1.

    Estimated aggregate number of annual responses: 300 [300

    registrants x 1].

    Estimated annual hour burden per registrant: 4.

    [[Page 6724]]

    Estimated aggregate annual hour burden: 1,200 [300 registrants x 4

    hours].

    Valuation Dispute Reporting. This hourly burden arises from the

    proposed requirement that swap dealers and major swap participants

    submit reports of certain unresolved valuation disputes.

    Number of registrants: 300.

    Frequency of collection: As applicable.

    Estimated number of annual responses per registrant: 240.

    Estimated aggregate number of annual responses: 72,000 [300

    registrants x 240 responses].

    Estimated annual hour burden per registrant: 24.

    Estimated aggregate annual hour burden: 7,200 [300 registrants x 24

    hours].

    End user Exception Documentation Recordkeeping. This hourly burden

    arises from the proposed requirement that swap dealers and major swap

    participants make and maintain records of its end user exception

    documentation. x

    Number of registrants: 300.

    Frequency of collection: Once per applicable counterparty.

    Estimated number of annual responses per registrant: 220.\39\

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

    \39\ The Commission estimates that half of the counterparties

    that are not swap dealers or major swap participants may claim the

    end user exception on an annual basis.

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

    Estimated aggregate number of annual responses: 66,000 [300

    registrants x 220 responses].

    Estimated annual hour burden per registrant: 220 [220 responses x 1

    hour per response].

    Estimated aggregate annual hour burden: 66,000 [300 registrants x

    220 responses].

    In addition to the per hour burden discussed above, the Commission

    anticipates that swap dealers and major swap participants may incur

    certain start-up costs in connection with the proposed recordkeeping

    obligations. Such costs would include the expenditures related to

    developing and installing new recordkeeping technology or re-

    programming or updating existing recordkeeping technology and systems

    to enable the swap dealer or major swap participant to collect,

    maintain, and re-produce any newly required records. The Commission

    believes that swap dealers and major swap participants generally could

    adapt their current infrastructure to accommodate the new or amended

    technology and thus, no significant infrastructure expenditures would

    be needed. The Commission estimates the programming burden hours

    associated with technology improvements to be 40 hours.

    According to recent Bureau of Labor Statistics findings, the mean

    hourly wages of computer programmers under occupation code 15-1021 and

    computer software engineers under program codes 15-1031 and 1032 are

    between $34.10 and $44.94.\40\ Because swap dealers and major swap

    participants generally will be large entities that may engage employees

    with wages above the mean, the Commission has conservatively chosen to

    use a mean hourly programming wage of $60 per hour. Accordingly, the

    start-up burden associated with the required technological improvements

    would be $2,400 [$60 x 40 hours per affected registrant] or $720,000 in

    the aggregate.

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    \40\ http://www.bls.gov/oes/current/oes113031.htm.

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    2. Information Collection Comments

    The Commission invites the public and other Federal agencies to

    comment on any aspect of the recordkeeping burdens discussed above. The

    Commission specifically requests comment on the variables used in the

    above-referenced hourly burden calculations. For example, the

    Commission requests comment on the following:

    What is the total number of swap dealers and major swap

    participants in the marketplace?

    What is the average number of counterparties that a swap

    dealer or major swap participant is likely to have?

    What percentage of those counterparties are other swap

    dealers or major swap participants?

    What percentage of those counterparties is likely to meet

    the statutory qualifications required for an exception from the

    mandatory clearing requirement, as defined in section 2h(7) of the CEA

    and Sec. 39.6?

    What is the average size (number of swaps) of a portfolio

    that a swap dealer or major swap participant is likely to have with a

    particular type of counterparty?

    To what extent do swap dealers and major swap participants

    currently enter into agreements that would satisfy the requirements of

    proposed Sec. 23.504?

    To what extent would swap dealers and major swap

    participants be able to standardize the swap trading relationship

    documentation required by Sec. 23.504?

    To what extent would swap dealers and major swap

    participants be required to utilize the services of outside counsel in

    negotiating and drafting the swap trading relationship documentation

    and valuation and termination rights agreements that would be required

    by proposed Sec. 23.504?

    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 \41\ 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 new regulation or to determine

    whether the benefits of the rule outweigh its costs; rather, it

    requires that the Commission ``consider'' the costs and benefits of its

    actions.

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

    \41\ 7 U.S.C. 19(a).

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

    Section 15(a) further specifies that costs and benefits of a

    proposed rulemaking 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

    [[Page 6725]]

    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 considerations and could, in

    its discretion, determine that, notwithstanding its costs, a particular

    regulation was necessary or appropriate to protect the public interest

    or to effectuate any of the provisions or to accomplish any of the

    purposes of the CEA.

    Summary of proposed requirements. The proposed regulations would

    implement new section 4s(i) of the CEA, which was added by section 731

    of the Dodd-Frank Act. The proposed regulations would establish certain

    documentation requirements applicable to swap dealers and major swap

    participants and related recordkeeping and reporting obligations.

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

    the cost that would be borne by swap dealers and major swap

    participants to institute the policies and procedures, make and

    maintain the records, and perform the event-based reporting necessary

    to satisfy the new regulatory requirements are far outweighed by the

    benefits that would accrue to the financial system as a whole as a

    result of the implementation of the rules.

    For example, memorializing the specific terms of the swap trading

    relationship and swap transactions between counterparties is prudent

    business practice and, in fact, many market participants already use

    standardized documentation. Accordingly, it is believed that many, if

    not most, swap dealers and major swap participants currently execute

    and maintain trading relationship documentation of the type required by

    proposed Sec. 23.504 in the ordinary course of their businesses,

    including documentation that contains several of the terms that would

    be required by the proposed rules. Thus, the hour and dollar burdens

    associated with the swap trading relationship documentation

    requirements may be limited to amending existing documentation to

    expressly include any additional terms required by the proposed rules.

    The Commission recognizes that swap dealers and major swap

    participants may face certain costs, such as the legal fees associated

    with negotiating and drafting the required documentation modifications,

    as they and their counterparties come into compliance with the new

    regulations. However, the Commission also believes that, to the extent

    that any substantial amendments or additions to existing documentation

    would be needed, such revisions would likely apply to multiple

    counterparties, thereby reducing the per counterparty burden imposed

    upon swap dealers and major swap participants. The Commission further

    expects the per hour and dollar burdens to be incurred predominantly in

    the first year or two after the effective date of the final

    regulations. Once a swap dealer or major swap participant has changed

    its pre-existing documentation with each of its counterparties to

    comply with the proposed rules, there likely will be little need to

    further modify such documentation on an ongoing basis. In addition, the

    Commission anticipates that standardized swap trading relationship

    documentation will develop quickly and progressively within the

    industry, dramatically reducing the cost to individual participants.

    The Commission expects the per hour burden associated with the

    remaining requirements of Sec. Sec. 23.504 and 23.505 to be relatively

    minimal. The same is true of the sole reporting requirement contained

    in Sec. 23.504. Such reporting is event-based and the Commission

    expects that instances of valuation disputes will decrease over time as

    valuation agreements are committed to writing pursuant to the proposed

    regulations.

    Finally, the Commission notes that most swap dealers and major swap

    participants have back office personnel, operational systems, and

    resources capable of maintaining the required records, performing the

    periodic reporting, and otherwise adjusting to the new regulatory

    framework without material diversion of resources away from commercial

    operations or substantial capital investment.

    Benefits. With respect to benefits, the Commission has determined

    that the proposed regulations that would require a swap dealer or major

    swap participant to document its swap trading relationship with each of

    its counterparties will promote standardization of documents and

    transactions, facilitate central trading and clearing, promote legal

    and financial certainty, decrease the number and scope of counterparty

    disputes, promote the timely resolution of disputes when they occur,

    and enhance the parties' abilities to engage in risk-reducing

    activities and will result in reduced risk, increased transparency, and

    greater liquidity and market integrity in the swaps marketplace.

    Moreover, the cleared swap records that are required to be preserved

    and the mandatory reporting of unresolved valuation disputes will be

    valuable tools in the Commission's oversight of the affected

    registrants. Therefore, the Commission believes it is prudent to

    prescribe these proposed regulations.

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

    benefit considerations. Commentators are also invited to submit any

    data or other information that they may have quantifying or qualifying

    the costs and benefits of the proposed rules with their comment

    letters.

    List of Subjects in 17 CFR Part 23

    Antitrust, Commodity futures, Conduct standards, Conflict of

    Interests, Major swap participants, Reporting and recordkeeping, Swap

    dealers, Swaps.

    For the reasons stated in this release, the Commission proposes to

    amend 17 CFR part 23, as proposed to be added in FR Doc. 2010-29024,

    published in the Federal Register on November 23, 2010 (75 FR 71379),

    and as proposed to be amended in FR Doc. 2010-32264, published in the

    Federal Register on December 28, 2010 (75 FR 81519) as follows:

    PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

    1. The authority citation for part 23 is revised to read as

    follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,

    9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

    2. Revise the table of contents for part 23, subpart I to read as

    follows:

    Subpart I--Swap Documentation

    Sec.

    23.500 Definitions.

    23.501 Swap confirmation.

    23.502 Portfolio reconciliation.

    23.503 Portfolio compression.

    23.504 Swap trading relationship documentation.

    23.505 End user exception documentation.

    3. Add Sec. 23.504 and Sec. 23.505 to part 23, subpart I, to read

    as follows:

    Sec. 23.504 Swap trading relationship documentation.

    (a) Policies and procedures. Each swap dealer and major swap

    participant shall establish, maintain, and enforce written policies and

    procedures reasonably designed to ensure that, prior to or

    contemporaneously with entering into a swap transaction with any

    counterparty, other than a derivatives clearing organization, the swap

    dealer or major swap participant executes written swap trading

    relationship documentation with its counterparty that complies with the

    requirements of this section. The

    [[Page 6726]]

    policies and procedures shall be approved in writing by senior

    management of the swap dealer and major swap participant, and a record

    of the approval shall be retained.

    (b) Swap trading relationship documentation. (1) The swap trading

    relationship documentation shall be in writing and shall include all

    terms governing the trading relationship between the swap dealer or

    major swap participant and its counterparty, including, without

    limitation, terms addressing payment obligations, netting of payments,

    events of default or other termination events, calculation and netting

    of obligations upon termination, transfer of rights and obligations,

    governing law, valuation, and dispute resolution procedures.

    (2) The swap trading relationship documentation shall include all

    confirmations of swap transactions under Sec. 23.501.

    (3) The swap trading relationship documentation shall include

    credit support arrangements, which shall contain, in accordance with

    applicable requirements under Commission regulations or regulations

    adopted by prudential regulators and without limitation, the following:

    (i) Initial and variation margin requirements;

    (ii) Types of assets that may be used as margin and asset valuation

    haircuts;

    (iii) Investment and rehypothecation terms for assets used as

    margin for uncleared swaps; and

    (iv) Custodial arrangements for margin assets, including whether

    margin assets are to be segregated with an independent third party, in

    accordance with Sec. 23.601(e).

    (4) The swap trading relationship documentation shall include

    written documentation in which the parties agree on the methods,

    procedures, rules, and inputs for determining the value of each swap at

    any time from execution to the termination, maturity, or expiration of

    such swap. To the maximum extent practicable, the valuation of each

    swap shall be based on objective criteria, such as recently-executed

    transactions or valuations provided by independent third parties such

    as derivatives clearing organizations.

    (i) Such methods, procedures, rules, and inputs shall be agreed for

    each swap prior to or contemporaneously with execution and shall be

    stated with the specificity necessary to allow the swap dealer, major

    swap participant, counterparty, the Commission, and any applicable

    prudential regulator to determine the value of the swap independently

    in a substantially comparable manner.

    (ii) Such methods, procedures, and rules shall include alternative

    methods for determining the value of the swap in the event of the

    unavailability or other failure of any input required to value the

    swap, provided that the alternative methods for valuing the swap comply

    with the requirements of this section.

    (iii) Provided that the requirements of this paragraph, including

    the independent valuation requirement of paragraph (b)(4)(i) of this

    section, are satisfied, a swap dealer or major swap participant is not

    required to disclose to the counterparty confidential, proprietary

    information about any model it may use internally to value a swap for

    its own purposes.

    (5) [Reserved]

    (6) Upon acceptance of a swap by a derivatives clearing

    organization, the swap trading relationship documentation shall include

    a record of the following information:

    (i) The date and time the swap was accepted for clearing;

    (ii) The name of the derivatives clearing organization;

    (iii) The name of the clearing member clearing for the swap dealer

    or major swap participant;

    (iv) The name of the clearing member clearing for the counterparty,

    if known; and

    (v) A statement that in accordance with the rules of the

    derivatives clearing organization:

    (A) The original swap is extinguished;

    (B) The original swap is replaced by equal and opposite swaps

    between clearing members and the derivatives clearing organization;

    (C) All terms of the cleared swap conform to templates established

    under the derivatives clearing organization's rules; and

    (D) All terms of the swap, as carried on the books of the clearing

    member, conform to the terms of the cleared swap established under the

    derivatives clearing organization's rules.

    (c) Audit of swap trading relationship documentation. At least once

    during each calendar year, each swap dealer and major swap participant

    shall have an independent internal or external auditor examine no less

    than 5% of the swap trading relationship documentation required by this

    section created during the previous twelve month period to ensure

    compliance with Commission regulations and the written policies and

    procedures established pursuant to this section. A record of the

    results of each audit shall be retained.

    (d) Recordkeeping. Each swap dealer and major swap participant

    shall maintain all documents required to be created pursuant to this

    section in accordance with Sec. 1.31 of this chapter and shall make

    them available promptly upon request to any representative of the

    Commission or any applicable prudential regulator, or with regard to

    swaps defined in section 1a(47)(A)(v) of the Act, to any representative

    of the Commission, the Securities and Exchange Commission, or any

    applicable prudential regulator.

    (e) Reporting. Each swap dealer and major swap participant shall

    promptly notify the Commission and any applicable prudential regulator,

    or with regard to swaps defined in section 1a(47)(A)(v) of the Act, the

    Commission, the Securities and Exchange Commission, and any applicable

    prudential regulator, of any swap valuation dispute not resolved

    within:

    (1) One (1) business day, if the dispute is with a counterparty

    that is a swap dealer or major swap participant; or

    (2) Five (5) business days, if the dispute is with a counterparty

    that is not a swap dealer or major swap participant.

    Sec. 23.505 End user exception documentation.

    (a) For swaps excepted from a mandatory clearing requirement. Each

    swap dealer and major swap participant shall obtain documentation

    sufficient to provide a reasonable basis on which to believe that its

    counterparty meets the statutory conditions required for an exception

    from a mandatory clearing requirement, as defined in section 2h(7) of

    the Act and Sec. 39.6 of this chapter. Such documentation shall

    include:

    (1) The identity of the counterparty;

    (2) That the counterparty has elected not to clear a particular

    swap under section 2h(7) of the Act and Sec. 39.6 of this chapter;

    (3) That the counterparty is a non-financial entity, as defined in

    section 2h(7)(C) of the Act;

    (4) That the counterparty is hedging or mitigating a commercial

    risk; and

    (5) That the counterparty generally meets its financial obligations

    associated with non-cleared swaps.

    (b) Recordkeeping. Each swap dealer and major swap participant

    shall maintain all documents required to be obtained pursuant to this

    section in accordance with Sec. 1.31 of this chapter and shall make

    them available promptly upon request to any representative of the

    Commission or any applicable prudential regulator, or with regard to

    swaps defined in section 1a(47)(A)(v) of

    [[Page 6727]]

    the Act, to any representative of the Commission, the Securities and

    Exchange Commission, or any applicable prudential regulator.

    Issued in Washington, DC on January 13, 2011 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Swap Trading Relationship Documentation Requirements for

    Swap Dealers and Major Swap Participants--Commissioners Voting Summary

    and Statements of Commissioners

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

    Federal Regulations.

    Appendix 1--Commissioners Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn,

    Sommers, Chilton and O'Malia voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking that establishes swap trading

    relationship documentation requirements for swap dealers and major

    swap participants. The proposed regulations are consistent with the

    express mandate of the Dodd-Frank Act to prescribe standards for the

    timely and accurate confirmation, processing, netting, documentation

    and valuation of swap transactions. One of the primary goals of the

    Dodd-Frank Act was to establish a comprehensive regulatory framework

    that would reduce risk, increase transparency and promote market

    integrity within the financial system. The proposed regulations

    accomplish this objective by establishing procedures that will

    promote legal certainty regarding terms of swap transactions, early

    resolutions of valuation disputes, enhanced understanding of one

    counterparty's risk exposure to another, reduced operational risk

    and increased operational efficiency. One of the key chapters from

    the 2008 financial crisis was when large financial players,

    including AIG, had valuation disputes and other problems regarding

    documentation standards. These rules will directly address many of

    these issues, highlighting issues for senior management and

    regulators earlier and lowering risk to the public.

    Appendix 3--Commissioner Scott D. O'Malia

    I respectfully dissent from the Commission's decision to propose

    requirements regarding the inclusion of Title II of the Dodd-Frank

    Act (Title II) and the Federal Deposit Insurance Act (FDIA) in the

    swap documentation used by swap dealers (Dealers) and major swap

    participants (MSP). This proposal would require Dealers and MSP to

    include a provision in their swap documentation which will prevent

    their counterparties from exercising certain private, contractual

    rights in the event that a swap becomes subject to the processes of

    either Title II or FDIA. In particular, the proposal requires

    counterparties to explicitly consent to the resolution processes set

    forth in Title II or FDIA, which includes a one-day stay on the

    termination, liquidation or netting of swaps with a ``covered

    financial company'' as that term is defined under Title II. Title II

    also provides the Federal Deposit Insurance Company (FDIC) with an

    unchecked authority to repudiate contracts and preference which

    creditors receive payments. Finally, the proposal asks whether swap

    agreements which contain cross default provisions should also

    subject counterparty affiliates to a ``covered financial company''

    designation or treat them as an insured depository institution under

    FDIA.

    The Commission's proposal relies on its authorities in Title VII

    of the Dodd-Frank Act regarding swap documentation. Asking parties

    to agree upon and include valuation language in their swap

    agreements under this authority is one thing, but dictating that one

    party forego its legal contractual rights simply because its

    counterparty becomes subject to an overly vague and far reaching

    statute intended to address ``systemic risk to the financial

    system'' is quite another. If the FDIC authority to require this

    provision under Title II was clear, then there would be no need for

    the Commission to prop up the banking regulator's ability to

    exercise its resolution authority. In its best attempt to justify

    the proposal, the Commission claims that it is merely trying to put

    counterparties on notice of the already existing requirements of

    Title II and FDIA, but neither the proposal regarding an explicit

    consent to transfer, nor the discussion regarding affiliates and

    cross default agreements is a reflection of language already

    included in Title II or FDIA. At the very least, if the CFTC had any

    specific role under Title II or FDIA, then it would be clear how we

    would inform the treatment of the market participants that we

    regulate and their transactions in the case of a default. We do not.

    By raising these objections, I hope that market participants

    will become fully aware of the legal regime that they will be

    subject to by virtue of entering into a swap agreement. I don't

    believe it is in our best interest to adopt seemingly redundant and

    unnecessary requirements into our regulations or to adopt

    requirements under the guise of our Title VII authorities that

    clearly exceeds the already broad statutory authority Congress

    decided to provide the FDIC under both Title II and FDIA. As a

    result, I cannot support this proposal.

    [FR Doc. 2011-2643 Filed 2-7-11; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: February 8, 2011