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2011-31646

  • Federal Register, Volume 76 Issue 240 (Wednesday, December 14, 2011)[Federal Register Volume 76, Number 240 (Wednesday, December 14, 2011)]

    [Proposed Rules]

    [Pages 77728-77738]

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

    [FR Doc No: 2011-31646]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 37 and 38

    RIN 3038-AD18

    Process for a Designated Contract Market or Swap Execution

    Facility To Make a Swap Available To Trade

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Further notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

    proposing regulations that establish a process for a designated

    contract market (``DCM'') or swap execution facility (``SEF'') to make

    a swap ``available to trade'' as set forth in new Section 2(h)(8) of

    the Commodity Exchange Act (``CEA'') pursuant to Section 723 of the

    [[Page 77729]]

    Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank

    Act''). Only comments pertaining to the regulations proposed in this

    document will be considered as part of this further notice of proposed

    rulemaking (``Notice'').

    DATES: Submit comments on or before February 13, 2012.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD18

    and Process for a Designated Contract Market or Swap Execution Facility

    to Make a Swap Available to Trade, 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 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 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: Bella Rozenberg, Associate Director,

    Division of Market Oversight (``DMO''), (202) 418-5119,

    brozenberg@cftc.gov, Amir Zaidi, Special Counsel, DMO, (202) 418-6770,

    azaidi@cftc.gov, or Nhan Nguyen, Attorney Advisor, DMO, (202) 418-5932,

    nnguyen@cftc.gov, Commodity Futures Trading Commission, Three Lafayette

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

    SUPPLEMENTARY INFORMATION:

    I. Background

    The Dodd-Frank Act \1\ requires that swap transactions subject to

    the clearing requirement \2\ must be executed on a DCM or SEF,\3\

    subject to certain exceptions. Under Section 2(h)(8)(B) of the CEA, the

    exceptions to the trade execution requirement are if no board of trade

    \4\ or SEF ``makes the swap available to trade'' or the related

    transaction is subject to the clearing exception under Section 2(h)(7)

    (i.e., the end-user exception).\5\

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

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

    \2\ Section 723(a)(3) of the Dodd-Frank Act amended the CEA to

    add a clearing requirement. This clearing requirement, under new

    Section 2(h)(1)(A) of the CEA, provides that ``[i]t shall be

    unlawful for any person to engage in a swap unless that person

    submits such swap for clearing to a derivatives clearing

    organization that is registered under this Act or a derivatives

    clearing organization that is exempt from registration under this

    Act if the swap is required to be cleared.''

    \3\ Section 723(a)(3) of the Dodd-Frank Act amended the CEA to

    add a trade execution requirement. This trade execution requirement,

    under new Section 2(h)(8)(A) of the CEA, provides that with respect

    to transactions involving swaps subject to the clearing requirement

    of Section 2(h)(1), ``counterparties shall (i) execute the

    transaction on a board of trade designated as a contract market

    under section 5; or (ii) execute the transaction on a swap execution

    facility registered under 5h or a swap execution facility that is

    exempt from registration under section 5h(f) of this Act.''

    \4\ The logical interpretation of the phrase ``board of trade''

    in Section 2(h)(8)(B) means a board of trade designated as a

    contract market given such reference in Section 2(h)(8)(A).

    \5\ Section 2(h)(7) of the CEA provides an exception to the

    clearing requirement (``the end-user exception'') if one of the

    counterparties to a swap (i) is not a financial entity, (ii) is

    using the swap to hedge or mitigate commercial risk, and (iii)

    notifies the Commission how it generally meets its financial

    obligations associated with entering into a non-cleared swap.

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    On January 7, 2011, the Commission published proposed rules,

    guidance, and acceptable practices (``SEF NPRM'') to implement certain

    statutory provisions for SEFs enacted by Title VII of the Dodd-Frank

    Act.\6\ In the SEF NPRM, the Commission proposed, among other rules,

    Sec. 37.10 related to implementation of the available to trade

    provision under Section 2(h)(8) of the CEA.\7\ Proposed Sec. 37.10

    requires each SEF to conduct an annual review and assessment of whether

    it has made a swap available for trading and to provide a report to the

    Commission regarding its assessment.\8\ In its review and assessment,

    the SEF may consider the frequency of transactions, open interest, and

    any other factor requested by the Commission.\9\ Proposed Sec. 37.10

    also requires that all SEFs are required to treat a swap as made

    available for trading, if at least one SEF has made the same or an

    economically equivalent swap available for trading.\10\

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    \6\ Core Principles and Other Requirements for Swap Execution

    Facilities, 76 FR 1214 (Jan. 7, 2011).

    \7\ 76 FR at 1241.

    \8\ Id.

    \9\ Id.

    \10\ Id.

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    The SEF NPRM sought general public comment regarding the meaning of

    the phrase ``made available for trading.'' \11\ The Commission also

    asked for comment on two specific questions: (1) Whether SEFs should

    consider the number of market participants trading a particular swap,

    and, if so, whether there should be a required minimum number of

    participants (e.g., two or three participants); and (2) whether SEFs

    should consider any other factors or processes to make the

    determination that swaps are made available for trading.\12\ The

    Commission received 26 comments on the proposed ``available to trade''

    process.\13\ The Commission has considered these comments, which are

    discussed below in the next section, in developing this Notice.

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    \11\ 76 FR at 1222. Comments on all aspects of the SEF NPRM were

    due by March 8, 2011. On May 4, 2011, the Commission reopened the

    SEF NPRM's comment period through June 3, 2011, as part of the

    global extension of comment periods for various rulemakings

    implementing the Dodd-Frank Act to allow the public additional time

    to comment on the proposed new regulatory framework for swaps. See

    Reopening and Extension of Comment Periods for Rulemakings

    Implementing the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, 76 FR 25274 (May 4, 2011).

    \12\ 76 FR at 1222.

    \13\ These comments are available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=955.

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    On December 22, 2010, the Commission also published proposed rules,

    guidance, and acceptable practices (``DCM NPRM'') to implement certain

    statutory provisions for DCMs enacted by Title VII of the Dodd-Frank

    Act.\14\ The DCM NPRM did not establish any obligation for DCMs under

    Section 2(h)(8) of the CEA, but it did establish certain swap reporting

    obligations.\15\

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    \14\ Core Principles and Other Requirements for Designated

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

    \15\ See e.g., proposed Sections 38.8, 38.10, and 38.451. Core

    Principles and Other Requirements for Designated Contract Markets,

    75 FR 80572 (Dec. 22, 2010).

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    [[Page 77730]]

    II. Notice

    A. Introduction

    In this Notice, the Commission is proposing regulations to

    establish a process for a DCM or SEF to make a swap ``available to

    trade'' under Section 2(h)(8) of the CEA.\16\ The proposed regulations

    would be included in proposed parts 37 and 38 of the Commission's

    regulations to implement the available to trade provision in Section

    2(h)(8) of the CEA.

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    \16\ Sections 5(d)(1) and 5h(f)(1) of the CEA require DCMs and

    SEFs, respectively, to comply with any requirement that the

    Commission may impose by rule or regulation pursuant to Section

    8a(5) of the CEA, 7 U.S.C. 12a(5), which 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. In

    addition, Section 721(b) of the Dodd-Frank Act provides the

    Commission with authority to adopt rules to define ``[any] term

    included in an amendment to the Commodity Exchange Act * * * made by

    [the Dodd-Frank Act].''

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    B. Process for a Designated Contract Market or Swap Execution Facility

    To Make a Swap Available To Trade Under Section 2(h)(8) of the CEA

    1. Procedure To Make a Swap Available to Trade--Proposed Sec. Sec.

    37.10(a) and 38.12(a)

    a. Comments Regarding Available To Trade Process

    A key theme to emerge from the SEF NPRM comments is that the

    Commission should establish a process for determining when a swap is

    available to trade that includes greater Commission involvement.\17\

    For example, one commenter suggested that a SEF certify to the

    Commission those swaps that qualify as available to trade and that,

    following a public notice and comment period, the Commission confirm

    (or reject) the SEF's certification.\18\ Similarly, another commenter

    recommended that a SEF submit to the Commission those swaps it

    determines to be available to trade and that the Commission review the

    submission and provide at least a thirty-day public comment period

    regarding its decision.\19\ Another commenter encouraged the Commission

    to institute a process through which market participants could petition

    the Commission to review the appropriateness of a SEF's determination

    that a swap is available to trade.\20\

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    \17\ E.g., Letter from Edward Rosen, Cleary Gottlieb Steen &

    Hamilton LLP, on behalf of certain dealers, dated Apr. 5, 2011 at

    18-19; Letter from Kevin Gould, Markit, dated Mar. 8, 2011 at 3;

    Letter from Andrew Ertel, Evolution Markets Inc., dated Mar. 8, 2011

    at 9; Letter from Wholesale Market Brokers' Association, Americas,

    dated Mar. 8, 2011 at 17-18.

    \18\ Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

    LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 19.

    \19\ Letter from Kevin Gould, Markit, dated Mar. 8, 2011 at 3.

    \20\ Letter from Andrew Ertel, Evolution Markets Inc., dated

    Mar. 8, 2011 at 9.

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    Some commenters requested that the Commission determine whether a

    particular swap is available to trade \21\ while other commenters

    requested that SEFs make this determination.\22\ Many commenters that

    supported a Commission determination noted that SEFs may have

    incentives to prematurely make certain swaps available to trade in

    order to mandate trading in these instruments on or through SEFs.\23\

    The commenters that supported a SEF determination stated that SEFs

    should have some discretion whether a swap is made available to

    trade.\24\

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    \21\ E.g., Letter from Craig Donohue, CME Group Inc., dated Mar.

    8, 2011 at 10; Letter from Patrick Durkin, Barclays Capital, dated

    Mar. 8, 2011 at 11; Letter from Kevin Budd and Todd Lurie, MetLife,

    dated Mar. 8, 2011 at 4; Letter from Richard McVey, MarketAxess

    Corporation, dated Mar. 8, 2011 at 27; Letter from Timothy Cameron,

    Securities Industry and Financial Markets Association Asset

    Management Group, dated Mar. 8, 2011 at 11; Letter from Richard

    Whiting, Financial Services Roundtable, dated Mar. 8, 2011 at 8;

    Letter from R. Martin Chavez, Goldman, Sachs & Co., dated Mar. 8,

    2011 at 3; Letter from Warren Davis, Sutherland Asbill & Brennan

    LLP, on behalf of the Federal Home Loan Banks, dated Jun. 3, 2011 at

    14; Letter from Wayne Pestone, FX Alliance Inc., dated Nov. 4, 2011

    at 9-10.

    \22\ E.g., Letter from Wholesale Market Brokers' Association,

    Americas, dated Mar. 8, 2011 at 17-18; Letter from Lee Olesky and

    Douglas Friedman, Tradeweb Markets LLC, dated Mar. 8, 2011 at 8-9;

    Letter from Coalition for Derivatives End-Users, dated Mar. 8, 2011

    at 7-8.

    \23\ E.g., Letter from Craig Donohue, CME Group Inc., dated Mar.

    8, 2011 at 10; Letter from Patrick Durkin, Barclays Capital, dated

    Mar. 8, 2011 at 11; Letter from Kevin Budd and Todd Lurie, MetLife,

    dated Mar. 8, 2011 at 4; Letter from Timothy Cameron, Securities

    Industry and Financial Markets Association Asset Management Group,

    dated Mar. 8, 2011 at 11; Letter from Wayne Pestone, FX Alliance

    Inc., dated Nov. 4, 2011 at 9-10.

    \24\ E.g., Letter from Wholesale Market Brokers' Association,

    Americas, dated Mar. 8, 2011 at 17-18; Letter from Lee Olesky and

    Douglas Friedman, Tradeweb Markets LLC, dated Mar. 8, 2011 at 8-9;

    Letter from Coalition for Derivatives End-Users, dated Mar. 8, 2011

    at 7-8.

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    In light of these comments and the fact that the DCM NPRM did not

    establish any obligation for DCMs under Section 2(h)(8) of the CEA, the

    Commission has determined to issue this Notice.

    b. Rule Submission Filing Procedure--Proposed Sec. Sec. 37.10(a) and

    38.12(a)

    Proposed Sec. Sec. 37.10(a) and 38.12(a) set forth the filing

    procedure that SEFs and DCMs would utilize in order to demonstrate that

    a swap is available to trade. Under this proposed procedure, a DCM or

    SEF would initially determine that a swap is available to trade. The

    Commission views such determination as a trading protocol issued by a

    DCM or SEF. Such trading protocol falls under the definition of a rule

    under Sec. 40.1 of the Commission's regulations.\25\ Therefore,

    pursuant to Section 5c(c) of the CEA, DCMs and SEFs would be required

    as ``registered entities'' \26\ to submit make available to trade

    determinations to the Commission, either for approval or self-

    certification, pursuant to the filing procedures of part 40 of the

    Commission's regulations.\27\

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    \25\ Section 40.1(i) defines rule as ``any constitutional

    provision, article of incorporation, bylaw, rule, regulation,

    resolution, interpretation, stated policy, advisory, terms and

    conditions, trading protocol, agreement or instrument corresponding

    thereto, including those that authorize a response or establish

    standards for responding to a specific emergency, and any amendment

    or addition thereto or repeal thereof, made or issued by a

    registered entity or by the governing board thereof or any committee

    thereof, in whatever form adopted.''

    \26\ The term ``registered entity'' is defined in the CEA to

    include both DCMs and SEFs. See Section 1a(40) of the CEA, 7 U.S.C.

    1a(40).

    \27\ See Sections 40.5 and 40.6 and Provisions Common to

    Registered Entities, 76 FR 44776 (Jul. 27, 2011). The Commission

    notes that the proposed procedures to make a swap available to trade

    are different than the procedures to list a swap for trading. A DCM

    or SEF may list a swap for trading by complying with the

    certification or approval procedures under Sec. Sec. 40.2 or 40.3

    of the Commission's regulations. Under the certification procedures

    of Sec. 40.2, a DCM or SEF may list a product on the business day

    following the Commission's receipt of the submission, if received by

    the open of business. Under the approval procedures of Sec. 40.3, a

    product is deemed approved by the Commission 45 days after receipt

    by the Commission or at the conclusion of an extended review period.

    A DCM or SEF may list the submitted product at that time. The

    Commission notes, however, the mere listing or trading of a swap on

    a DCM or SEF would not mean that the swap is available to trade

    within the meaning of Section 2(h)(8) of the CEA. The Commission

    further notes that a DCM or SEF must submit an available to trade

    filing at the same time or after submitting a filing under Sections

    40.2 or 40.3.

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    Specifically, under this proposal, a DCM or SEF would be required

    to submit its determination that a swap is available to trade under

    Sec. 40.5 or Sec. 40.6 of the Commission's regulations. Under Sec.

    40.5, a registered entity may request Commission approval of a new rule

    prior to its implementation.\28\ Section 40.5(a) requires, among other

    things,\29\ that a registered entity that requests Commission prior

    approval provide an explanation and analysis of that

    [[Page 77731]]

    proposed rule and its compliance with applicable provisions of the CEA,

    including core principles, and the Commission's regulations

    thereunder.\30\ This explanation and analysis would detail the manner

    in which the SEF or DCM considered the factors under proposed

    Sec. Sec. 37.10(b) or 38.12(b). Sections 40.5(c) and (d) provide the

    Commission a 45-day review period, which may be extended for an

    additional 45 days in specified circumstances.\31\ At any time during

    its review, the Commission may notify the registered entity that it

    will not, or is unable to, approve a rule because it is inconsistent or

    appears to be inconsistent with the CEA or the Commission's

    regulations.\32\

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    \28\ Section 40.5(a).

    \29\ E.g., Section 40.5(a)(6) requires a registered entity to

    post notice and a copy of the rule submission on its Web site,

    Section 40.5(a)(7) requires a registered entity to provide

    additional information which may be beneficial to the Commission in

    analyzing a new rule, and Section 40.5(a)(8) requires a registered

    entity to provide in the rule submission a brief explanation of any

    substantive opposing views.

    \30\ Section 40.5(a)(5). This provision also requires, if

    applicable, a description of the anticipated benefits to market

    participants or others, any potential anticompetitive effects on

    market participants or others, and how the rule fits into the

    registered entity's framework of self-regulation.

    \31\ Sections 40.5(c) and (d). In determining whether to extend

    the review period, the Commission will consider whether the proposed

    rule raises novel or complex issues, the submission is incomplete,

    or the requestor does not respond completely to Commission questions

    in a timely manner. Section 40.5(d)(1).

    \32\ Section 40.5(e).

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    Similar to the approval procedures under Sec. 40.5, if a

    registered entity chooses to submit its available to trade

    determination under the certification procedures of Sec. 40.6, then

    the registered entity must provide to the Commission an explanation and

    analysis of the proposed rule and a certification that the rule

    complies with the CEA and the Commission's regulations thereunder.\33\

    As in Sec. 40.5, the explanation and analysis would detail the manner

    in which the SEF or DCM considered the factors under proposed

    Sec. Sec. 37.10(b) or 38.12(b). Sections 40.6(b) and (c) provide the

    Commission 10 business days to review a rule before it is deemed

    certified and can be made effective, unless the Commission issues a

    stay of the certification for additional 90 days from the date of

    notification to the registered entity.\34\ If the Commission issues a

    stay of certification, then it must provide a 30-day public comment

    period for the proposed rule.\35\ During a stay period, the Commission

    may notify the registered entity that it objects to the proposed

    certification on the grounds that the proposed rule is inconsistent

    with the CEA or the Commission's regulations.\36\

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    \33\ Section 40.6(a). Section 40.6(a)(2) requires a registered

    entity to post notice and a copy of the rule submission on its Web

    site, Section 40.6(a)(7)(vi) requires a registered entity to provide

    in the rule submission a brief explanation of any substantive

    opposing views, and Section 40.6(a)(8) requires a registered entity

    to provide, if requested by Commission staff, additional evidence,

    information, or data that may be beneficial to the Commission in

    conducting due diligence of the filing.

    \34\ Sections 40.6(b) and (c). In determining whether to stay a

    certification, the Commission will consider whether the rule

    presents novel or complex issues, is accompanied by inadequate

    explanation, or is potentially inconsistent with the CEA. Section

    40.6(c)(1).

    \35\ Section 40.6(c)(2).

    \36\ Section 40.6(c)(3).

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    Under this Notice, if the Commission either approves a DCM's or

    SEF's rule providing that a swap is available to trade or permits a

    certified available to trade filing to become effective, then the swap

    involved would be deemed available to trade.\37\ If that swap also is

    subject to the clearing requirement, pursuant to CEA Section 2(h)(8),

    the swap must be executed pursuant to the rules of a DCM or SEF.\38\

    Under this Notice, until such time, the swap is not subject to the CEA

    Section 2(h)(8) trade execution requirement.

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    \37\ See proposed Sec. Sec. 37.10(c) and 38.12(c). Under these

    sections, if a SEF or DCM makes a swap available to trade, all other

    SEFs and DCMs listing or offering for trading such swap and/or any

    economically equivalent swap, shall make those swaps available to

    trade for purposes of the trade execution requirement. The

    Commission notes that if a DCM or SEF makes a swap available to

    trade, these proposed provisions would not require other DCMs and

    SEFs to list or offer that swap, or an economically equivalent swap,

    for trading.

    \38\ See Swap Transaction Compliance and Implementation

    Schedule: Clearing and Trade Execution Requirements under Section

    2(h) of the CEA, 76 FR 58186 (Sep. 20, 2011), for the time frame in

    which a swap would be subject to the trade execution requirement.

    The Commission notes that the available to trade determination may

    precede the clearing requirement and vice versa; however, the trade

    execution requirement would not be in effect until the clearing

    requirement takes effect.

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

    The Commission views the proposed procedure for DCMs and SEFs to

    make a swap available to trade as a balanced approach whereby a DCM or

    SEF--the facilities that may be most familiar with the trading of these

    swaps--has responsibility to make a swap available to trade, while the

    Commission has a role in reviewing such determination. Additionally,

    this proposed procedure is responsive to comments that the Commission

    should establish a process for DCMs and SEFs to make a swap available

    to trade, with Commission involvement in the determination. The

    Commission notes that as it gains experience with its oversight of

    swaps markets, it may decide, in its discretion, to determine that a

    swap is available to trade.

    2. Factors To Consider To Make a Swap Available To Trade--Proposed

    Sec. Sec. 37.10(b) and 38.12(b)

    a. Comments Regarding Factors To Consider

    Many commenters to the SEF NPRM supported a liquidity requirement

    for a determination that a swap is available to trade.\39\ One

    commenter, for example, stated that ``Congress intended for the

    Commission[] to establish a higher liquidity threshold for mandatory

    execution than for mandatory clearing, and that a swap is not

    `available to trade' merely because it is listed on a DCM/exchange or

    SEF.'' \40\ However, other commenters said that a minimum level of

    liquidity should not be required for a determination that a swap is

    available to trade.\41\ One commenter noted that a determination that a

    swap is available to trade should apply to each swap that is subject to

    the clearing requirement and that the determination should not require

    a minimum level of trading activity.\42\

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    \39\ E.g., Letter from Edward Rosen, Cleary Gottlieb Steen &

    Hamilton LLP, on behalf of certain dealers, dated Apr. 5, 2011 at

    18; Letter from Kevin Gould, Markit, dated Mar. 8, 2011 at 2; Letter

    from Jeremy Barnum and Don Thompson, J.P. Morgan, dated Mar. 8, 2011

    at 9; Letter from Robert Pickel and Kenneth Bentsen, International

    Swaps and Derivatives Association and Securities Industry and

    Financial Markets Association, dated Mar. 8, 2011 at 8; Letter from

    R. Martin Chavez, Goldman, Sachs & Co., dated Mar. 8, 2011 at 3;

    Letter from Craig Donohue, CME Group Inc., dated Mar. 8, 2011 at 9.

    \40\ Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

    LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 18.

    \41\ Letter from Dennis Kelleher, Better Markets, Inc., dated

    Mar. 8, 2011 at 10-11; Letter from Wholesale Market Brokers'

    Association, Americas, dated Mar. 8, 2011 at 17-18; Letter from Ian

    K. Shepherd, Alice Corporation, dated May 31, 2011 at 7.

    \42\ Letter from Dennis Kelleher, Better Markets, Inc., dated

    Mar. 8, 2011 at 10-11.

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    Many commenters also recommended specific liquidity factors that a

    SEF should consider in determining whether a swap is available to trade

    such as trade frequency and average transaction size, bid/offer

    spreads, number and types of market participants, and volume.\43\ Some

    commenters further suggested that the Commission set mandatory

    objective and transparent liquidity factors based upon an empirical

    analysis of swap

    [[Page 77732]]

    trading data.\44\ One commenter stated that the Commission should

    undertake empirical analyses of swap market liquidity to set specific

    quantitative thresholds for metrics, such as minimum average daily

    trading volume and number of transactions.\45\ Another commenter

    asserted that objective measures for determining when a swap is

    available to trade will provide for a consistent and meaningful

    assessment.\46\

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    \43\ E.g., Letter from Kevin Gould, Markit, dated Mar. 8, 2011

    at 2; Letter from Craig Donohue, CME Group Inc., dated Mar. 8, 2011

    at 10; Letter from John Gidman, Association of Institutional

    Investors, dated Jun. 10, 2011 at 3; Letter from Mark Vonderheide

    and Robert Creamer, Geneva Energy Markets, LLC, dated Jul. 29, 2011

    at 2; Meeting between Commission staff and Evolution Markets and

    Ogilvy Government Relations, dated Jan. 19, 2011.

    \44\ E.g., Letter from Edward Rosen, Cleary Gottlieb Steen &

    Hamilton LLP, on behalf of certain dealers, dated Apr. 5, 2011 at

    18; Letter from Ben Macdonald, Bloomberg L.P., dated Jun. 3, 2011 at

    3; Letter from Stuart Kaswell, Managed Funds Association, dated Mar.

    8, 2011 at 3-4; Letter from American Benefits Council and Committee

    on Investment of Employee Benefit Assets, dated Mar. 8, 2011 at 4-5.

    \45\ Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

    LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 18.

    \46\ Letter from Ben Macdonald, Bloomberg L.P., dated Jun. 3,

    2011 at 3.

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    b. Factors To Consider--Proposed Sec. Sec. 37.10(b) and 38.12(b)

    Proposed Sec. Sec. 37.10(b) and 38.12(b) state that, to make a

    swap available to trade, for purposes of Section 2(h)(8) of the CEA, a

    SEF or DCM shall consider, as appropriate, the following factors with

    respect to such swap: (1) Whether there are ready and willing buyers

    and sellers; (2) The frequency or size of transactions on SEFs, DCMs,

    or of bilateral transactions; (3) The trading volume on SEFs, DCMs, or

    of bilateral transactions; (4) The number and types of market

    participants; (5) The bid/ask spread; (6) The usual number of resting

    firm or indicative bids and offers; (7) Whether a SEF's trading system

    or platform or a DCM's trading facility will support trading in the

    swap; or (8) Any other factor that the SEF or DCM may consider

    relevant.\47\ No single factor would be dispositive, as the DCM or SEF

    may consider any one factor or several factors to make a swap available

    to trade. The Commission notes that, as the swaps markets evolve and

    the Commission gains experience with overseeing these markets, it may

    consider setting objective factors based upon an empirical analysis of

    swap trading data in a future rulemaking.

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

    \47\ As noted above, the mere listing or trading of a swap on a

    DCM or SEF does not mean that the swap is available to trade.

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

    3. Economically Equivalent Swap--Proposed Sec. Sec. 37.10(c) and

    38.12(c)

    a. Comments Regarding Economically Equivalent Swaps

    In the SEF NPRM, the Commission proposed that all SEFs are required

    to treat a swap as ``made available for trading,'' if at least one SEF

    has made the same or an economically equivalent swap available for

    trading.\48\ Many commenters to the SEF NPRM requested that the

    Commission clarify the term economically equivalent swap and some

    commenters provided recommendations as to how it should be defined.\49\

    Several commenters recommended a stringent fungibility test to

    determine whether a particular swap is economically equivalent to one

    made available to trade on another SEF, such that a derivatives

    clearing organization (``DCO'') would recognize the swaps as mutually

    off-settable without residual market risk.\50\ Another commenter

    suggested that only identical swaps should be made available to

    trade.\51\ Furthermore, one commenter cautioned that without a

    stringent fungibility test there may be unintended consequences,

    including unduly concentrating trading volume on a single SEF or

    preventing participants from entering into customized swaps in the same

    general swap category.\52\

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

    \48\ 76 FR 1241.

    \49\ Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

    LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 19; Letter

    from Robert Pickel and Kenneth Bentsen, International Swaps and

    Derivatives Association and Securities Industry and Financial

    Markets Association, dated Mar. 8, 2011 at 9; Letter from Wholesale

    Market Brokers' Association, Americas, dated Mar. 8, 2011 at 18;

    Letter from Richard Whiting, Financial Services Roundtable, dated

    Mar. 8, 2011 at 7; Letter from Patrick Durkin, Barclays Capital,

    dated Mar. 8, 2011 at 11.

    \50\ Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

    LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 19; Letter

    from Robert Pickel and Kenneth Bentsen, International Swaps and

    Derivatives Association and Securities Industry and Financial

    Markets Association, dated Mar. 8, 2011 at 9; Letter from Patrick

    Durkin, Barclays Capital, dated Mar. 8, 2011 at 11.

    \51\ Letter from Richard Whiting, Financial Services Roundtable,

    dated Mar. 8, 2011 at 7.

    \52\ Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

    LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 19.

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

    b. Economically Equivalent Swap--Proposed Sec. Sec. 37.10(c) and

    38.12(c)

    Under proposed Sec. Sec. 37.10(c)(1) and 38.12(c)(1), upon a

    determination that a swap is available to trade, all other SEFs and

    DCMs listing or offering for trading such swap and/or any economically

    equivalent swap, must make those swaps available to trade for purposes

    of the trade execution requirement set forth in Section 2(h)(8) of the

    CEA. The Commission notes that if a DCM or SEF makes a swap available

    to trade, these proposed provisions would not require other DCMs and

    SEFs to list or offer that swap, or an economically equivalent swap,

    for trading.

    In this Notice, the Commission is proposing a definition for the

    term ``economically equivalent swap.'' Proposed Sec. Sec. 37.10(c)(2)

    and 38.12(c)(2) define the term ``economically equivalent swap'' as a

    swap that the SEF or DCM determines to be economically equivalent with

    another swap after consideration of each swap's material pricing terms.

    4. Annual Review of Available To Trade Determinations--Proposed

    Sec. Sec. 37.10(d) and 38.12(d)

    a. Comments Regarding Annual Review

    Several commenters to the SEF NPRM supported a Commission review

    requirement for swaps that have been determined to be available to

    trade.\53\ One commenter asserted that SEF available to trade

    determinations should be revisited and reconsidered because the

    liquidity of swaps can experience significant changes over time and can

    dry up completely in some circumstances.\54\ Similarly, another

    commenter stated that SEFs should revisit available to trade

    determinations on a quarterly basis because the level of liquidity for

    a swap can vary significantly over time.\55\

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

    \53\ E.g., Letter from Kevin Gould, Markit, dated Mar. 8, 2011

    at 2; Letter from Dexter Senft, Morgan Stanley, dated Mar. 2, 2011

    at 4; Letter from Stuart Kaswell, Managed Funds Association, dated

    Mar. 8, 2011 at 4; Letter from Edward Rosen, Cleary Gottlieb Steen &

    Hamilton LLP, on behalf of certain dealers, dated Apr. 5, 2011 at

    18-19.

    \54\ Letter from Kevin Gould, Markit, dated Mar. 8, 2011 at 2.

    \55\ Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

    LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 18-19.

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

    b. Annual Review--Proposed Sec. Sec. 37.10(d) and 38.12(d)

    The Commission is proposing to retain the annual review and

    assessment requirement set forth in the SEF NPRM and also require that

    DCMs perform an annual review and assessment. Regular reviews help

    ensure that DCMs and SEFs routinely evaluate whether swaps previously

    determined to be available to trade should continue to be treated in

    that manner. Thus, in conducting this review and assessment, the

    proposal would require a SEF or DCM to consider the factors in

    Sec. Sec. 37.10(b) or 38.12(b), respectively. The Commission would

    also encourage DCMs and SEFs, in conducting this review and assessment,

    to evaluate their swaps that have not been determined to be available

    to trade and to submit them to the Commission as appropriate. Upon

    completion of the annual review, a DCM or SEF would be required to

    provide electronically to the Commission a report of such review and

    assessment, including any supporting information or data, no later than

    30 days after its fiscal year end.

    [[Page 77733]]

    5. Notice to the Public of Available To Trade Determinations

    a. Comments Regarding Notice to the Public

    Some commenters to the SEF NPRM requested that the Commission

    provide notice to market participants that a swap is available to

    trade.\56\ One commenter, for example, suggested that the Commission

    provide public notice that a swap will be deemed available to trade and

    on which platform(s).\57\ Another commenter stated that ``[w]ithout a

    notification system, market participants may not know to cease over-

    the-counter transactions in these swaps, stifling compliance with

    applicable rules.'' \58\

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

    \56\ E.g., Letter from Dexter Senft, Morgan Stanley, dated Mar.

    2, 2011 at 4; Letter from Timothy Cameron, Securities Industry and

    Financial Markets Association Asset Management Group, dated Mar. 8,

    2011 at 12; Letter from Wayne Pestone, FX Alliance Inc., dated Nov.

    4, 2011 at 9-10.

    \57\ Letter from Dexter Senft, Morgan Stanley, dated Mar. 2,

    2011 at 4.

    \58\ Letter from Timothy Cameron, Securities Industry and

    Financial Markets Association Asset Management Group, dated Mar. 8,

    2011 at 12.

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

    b. Public Notice

    In consideration of the comments received, the Commission notes

    that there is a process for notifying the public that a DCM or SEF has

    made a swap available to trade. Sections 40.5 and 40.6 of the

    Commission's regulations require DCMs and SEFs to post a notice and a

    copy of rule submissions on their Web site concurrent with the filing

    of the submissions with the Commission.\59\ The Commission, consistent

    with current practice, will also post DCM and SEF rule submission

    filings on its Web site. The Commission is currently assessing the

    feasibility of posting notices of all swaps that are determined to be

    available to trade on an easily accessible page on its Web site.

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

    \59\ See Sections 40.5(a)(6) and 40.6(a)(2).

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

    6. Effective Date of Available To Trade Determinations

    a. Comments Regarding Effective Date

    Commenters to the SEF NPRM requested a waiting period before the

    effective date of the available to trade determinations or before

    imposing the trade execution requirement under CEA Section 2(h)(8) so

    that other SEFs have adequate time to list or offer the swap or any

    economically equivalent swap for trading.\60\ These commenters stated

    that a reasonable waiting period will promote competition among SEFs by

    reducing a SEF's first-mover advantage.\61\ For example, the waiting

    period would allow other SEFs additional time to build the required

    connectivity.\62\ A waiting period would also allow market participants

    the opportunity to make any related technological and trading strategy

    amendments.\63\

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

    \60\ Letter from Kevin Budd and Todd Lurie, MetLife, dated Mar.

    8, 2011 at 4; Letter from Dexter Senft, Morgan Stanley, dated Mar.

    2, 2011 at 4; Letter from Stuart Kaswell, Managed Funds Association,

    dated Mar. 8, 2011 at 3. Some of these commenters requested that the

    Commission establish a waiting period after the available to trade

    determination and before the trade execution requirement becomes

    effective.

    \61\ Letter from Kevin Budd and Todd Lurie, MetLife, dated Mar.

    8, 2011 at 4; Letter from Dexter Senft, Morgan Stanley, dated Mar.

    2, 2011 at 4; Letter from Stuart Kaswell, Managed Funds Association,

    dated Mar. 8, 2011 at 3.

    \62\ Letter from Stuart Kaswell, Managed Funds Association,

    dated Mar. 8, 2011 at 3.

    \63\ Letter from Kevin Budd and Todd Lurie, MetLife, dated Mar.

    8, 2011 at 4.

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

    b. Effective Date

    In response to commenters who requested a waiting period before the

    effective date of a determination that a swap is available to trade or

    before imposing the trade execution requirement under CEA Section

    2(h)(8), the Commission has issued a notice of proposed rulemaking that

    proposes a schedule to phase in compliance with the trade execution

    requirement under CEA Section 2(h)(8).\64\ Under that proposed

    rulemaking, a swap transaction shall be subject to the CEA Section

    2(h)(8) trade execution requirement upon the later of the following:

    (1) the applicable deadline established under the compliance schedule

    for the clearing requirement or (2) 30 days after the swap is first

    made available to trade on either a SEF or DCM.\65\

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

    \64\ See Swap Transaction Compliance and Implementation

    Schedule: Clearing and Trade Execution Requirements under Section

    2(h) of the CEA, 76 FR 58186 (Sep. 20, 2011). Comments to this

    notice of proposed rulemaking were due by November 4, 2011.

    \65\ Id.

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

    C. Comment Requested

    The Commission requests and will consider comments only on proposed

    regulations Sec. Sec. 37.10 and 38.12. The Commission may consider

    alternatives to the proposed regulations and is requesting comment on

    the following questions:

    Should the Commission allow a SEF or DCM to submit its

    available to trade determination with respect to a group, category,

    type, or class of swaps based on the factors in Sec. Sec. 37.10(b) or

    38.12(b)? How should the Commission define group, category, type, or

    class of swaps?

    Is the Commission's proposed approach in Sec. Sec.

    37.10(b) and 38.12(b) regarding the determination that a swap is

    available to trade appropriate? If not, what approach is appropriate

    and why? Should a SEF or DCM consider total open interest and notional

    outstanding for similar tenors in Sec. Sec. 37.10(b) and 38.12(b)?

    In evaluating the factors under proposed Sec. Sec.

    37.10(b) and 38.12(b), should the Commission allow a SEF or DCM to

    consider the same swap or an economically equivalent swap on another

    SEF or DCM? What are the advantages and disadvantages of such an

    approach? Should a SEF or DCM consider the amount of activity in the

    same swap or an economically equivalent swap available primarily or

    solely in bilateral transactions?

    Should the Commission allow a SEF or DCM to submit an

    available to trade determination under Sec. Sec. 37.10(a) or 38.12(a),

    if such SEF or DCM does not itself list the subject swap for trading?

    If so, in evaluating the factors under Sec. Sec. 37.10(b) or 38.12(b),

    should the Commission allow the SEF or DCM to consider the same swap or

    an economically equivalent swap on another SEF or DCM? What are the

    advantages and disadvantages of such an approach? Should a SEF or DCM

    consider the amount of activity in the same swap or an economically

    equivalent swap available primarily or solely in bilateral

    transactions?

    When a DCM or SEF makes a swap available to trade, should

    all other DCMs and SEFs listing or offering for trading such swap and/

    or any economically equivalent swap be required to make those swaps

    available to trade? What would be the economic impact on those DCMs and

    SEFs that would be required to make same swaps and/or economically

    equivalent swaps available to trade?

    If a SEF or DCM is required to make an economically

    equivalent swap available to trade, should that SEF or DCM be required

    to submit, under part 40 procedures, its reasoning for deciding that a

    certain swap is or is not economically equivalent to another swap?

    Should a SEF or DCM be required to consider the factors under

    Sec. Sec. 37.10(b) or 38.12(b)? Should a SEF or DCM be able to use the

    factors under Sec. Sec. 37.10(b) or 38.12(b) to submit to the

    Commission for consideration that an economically equivalent swap

    should not be subject to the requirement under Sec. Sec. 37.10(c)(1)

    or 38.12(c)(1)? Should a DCM or SEF provide the Commission notice that

    an economically equivalent swap has been made available to trade? If

    so, should the Commission provide notice to the

    [[Page 77734]]

    public? If so, how? How would market participants conducting bilateral

    transactions know that an economically equivalent swap has been made

    available to trade?

    Is the Commission's proposed definition of the term

    ``economically equivalent swap'' appropriate? If not, how should the

    Commission revise the definition as applicable to proposed Sec. Sec.

    37.10 and 38.12 and why? Are there other factors that the Commission

    should consider when defining the term economically equivalent swap?

    Should the Commission require that DCMs and SEFs consider specific

    material pricing terms? If so, what terms and why? For instance, should

    DCMs and SEFs consider same tenor or same underlying instrument? Should

    the Commission or DCMs and SEFs make the determination of which swaps

    are economically equivalent?

    Is the Commission's proposal that DCMs and SEFs conduct

    reviews and assessments appropriate? If not, what is appropriate and

    why?

    Should the Commission specify a process whereby a swap

    that has been determined to be available to trade may be determined to

    no longer be available to trade? If so, should the Commission use the

    rule submission procedure under part 40 for this process and why?

    Please explain the details of this approach, including who would make

    the determination that a swap is no longer available to trade. Should

    such a determination apply to all DCMs and SEFs universally or should

    it only apply to the particular DCM or SEF that seeks to no longer make

    a swap available to trade? What are the advantages and disadvantages of

    such approach? If the Commission should not specify a process to no

    longer make a swap available to trade, please explain why.

    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 and, if so,

    provide a regulatory flexibility analysis respecting the impact.\66\

    The Commission previously determined that DCMs and SEFs are not ``small

    entities'' for purposes of the RFA.\67\ In determining that these

    registered entities are not ``small entities,'' the Commission reasoned

    that it designates a contract market or registers a SEF only if the

    entity meets a number of specific criteria, including the expenditure

    of sufficient resources to establish and maintain an adequate self-

    regulatory program.\68\ Because DCMs and SEFs are required to

    demonstrate compliance with Core Principles, including principles

    concerning the maintenance or expenditure of financial resources, the

    Commission previously determined that SEFs, like DCMs, are not ``small

    entities'' for the purposes of the RFA.

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

    \66\ 5 U.S.C. 601 et seq.

    \67\ See 17 CFR part 40 Provisions Common to Registered

    Entities, 75 FR 67282 (Nov. 2, 2010); see also 47 FR 18618, 18619

    (Apr. 30, 1982) and 66 FR 45604, 45609 (Aug. 29, 2001).

    \68\ See, e.g., Core Principle 2 applicable to DCMs under

    Section 735 of the Dodd-Frank Act and Core Principle 2 applicable to

    SEFs under Section 733 of the Dodd-Frank Act.

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

    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. The Commission invites public comment on this determination.

    B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \69\ imposes certain

    requirements on federal agencies in connection with conducting or

    sponsoring any collection of information as defined by the PRA. The

    Commission may not conduct or sponsor, and a registered entity is not

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

    a currently valid Office of Management and Budget (``OMB'') control

    number. This proposed rulemaking will result in new collection of

    information requirements within the meaning of the PRA. The Commission

    therefore is submitting this proposal to OMB for review in accordance

    with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection

    of information is ``Parts 37 and 38--Process for a Swap Execution

    Facility or Designated Contract Market to Make a Swap Available to

    Trade.'' The OMB has not yet assigned this collection a control number.

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

    \69\ 44 U.S.C. 3501 et seq.

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

    Many of the responses to this new collection of information are

    mandatory. The Commission protects 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.'' \70\ The

    Commission is also required to protect certain information contained in

    a government system of records according to the Privacy Act of

    1974.\71\

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

    \70\ 7 U.S.C. 12(a)(1).

    \71\ 5 U.S.C. 552a.

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

    1. Information Provided by Reporting Entities/Persons

    The proposed regulations require SEFs and DCMs to collect and

    submit to the Commission information concerning available to trade

    determinations pursuant to Sec. Sec. 37.10 and 38.12. For instance,

    SEFs and DCMs must submit available to trade determinations to the

    Commission as rules under part 40 pursuant to proposed Sec. Sec.

    37.10(a) and 38.12(a). SEFs and DCMs must also submit annual reports to

    the Commission pursuant to proposed Sec. Sec. 37.10(d) and 38.12(d).

    The Commission has estimated the final information collection

    burdens on DCMs and SEFs below. These estimates account for the

    following: (1) The number of respondents; and (2) the average hours

    required to produce each response. The Commission estimates that 50

    registered entities will be required to file rule submissions and

    annual reports.

    SEFs and DCMs must submit available to trade determinations to the

    Commission as rules under part 40 pursuant to proposed Sec. Sec.

    37.10(a) and 38.12(a). The Commission previously estimated the hourly

    burdens for DCMs and SEFs to comply with part 40. While the Commission

    has no way of knowing the exact hourly burden upon a registered entity

    prior to implementation of the regulations governing that registered

    entity, the Commission estimates that the burden for a SEF or DCM under

    proposed Sec. Sec. 37.10(a) and 38.12(a) will be similar to the

    previously estimated hours of burden under part 40--2.00 hours.

    However, the Commission notes that DCMs and SEFs would have to review

    certain factors and data (if applicable) to make a swap available to

    trade so these submissions may take additional time. Therefore, the

    Commission estimates that the hourly burden for a SEF or DCM under

    proposed Sec. Sec. 37.10(a) and 38.12(a) will be as follows:

    Estimated number of respondents: 50.

    Estimated average hours per response: 8.00.

    The Commission recognizes that DCMs and SEFs may submit several

    rule submission filings per year. At this time, it is not feasible to

    estimate the number of rule submission filings per year, on average,

    per DCM or SEF as the number

    [[Page 77735]]

    of swap contracts that will be traded on a DCM or SEF and the number of

    those swaps that a DCM or SEF will determine to make available to trade

    is presently unknown.

    Proposed Sec. Sec. 37.10(d) and 38.12(d) require SEFs and DCMs to

    submit annual reports, including any supporting information and data,

    to the Commission of their review and assessment of the swaps they made

    available to trade. The Commission previously estimated the number of

    filings and the hourly burdens for submissions by each DCO regarding

    swaps that they plan to accept for clearing under Section 39.5.\72\ The

    Commission estimated that each DCO will submit to the Commission one

    filing annually for the swaps that they plan to accept for clearing.

    While the Commission has no way of knowing the exact hourly burden upon

    a registered entity prior to implementation of the regulations

    governing that registered entity, the Commission estimates that the

    burden for a SEF or DCM under proposed Sec. Sec. 37.10(d) and 38.12(d)

    will be similar to the previously estimated hours of burden under

    Section 39.5--40.00 hours. The Commission estimates the burden for SEFs

    and DCMs under proposed Sec. Sec. 37.10(d) and 38.12(d) as follows:

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

    \72\ See Process for Review of Swaps for Mandatory Clearing, 76

    FR 44464 (Jul. 26, 2011).

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

    Estimated number of respondents: 50.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 40.

    Aggregate annual reporting burden hours (for all respondents):

    2,000.

    The Commission invites public comment on the accuracy of its

    estimate of the collection requirements that would result from the

    proposed regulations.

    2. Information Collection Comments

    The Commission invites the public and other federal agencies to

    comment on the information collection requirements proposed in this

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

    comments to: (1) Evaluate whether the proposed collections of

    information are necessary for the proper performance of the functions

    of the Commission, including whether the information will have

    practical utility; (2) evaluate the accuracy of the estimated burden of

    the proposed information collection requirements, including the degree

    to which the methodology and the assumptions that the Commission

    employed were valid; (3) determine whether there are ways to enhance

    the quality, utility, or clarity of the information proposed to be

    collected; and (4) minimize the burden of the proposed collections of

    information on DCMs and SEFs, including through the use of appropriate

    automated, electronic, mechanical, or other technological information

    collection techniques, e.g., permitting electronic submission of

    responses.

    The public and other federal agencies may submit comments directly

    to the Office of Information and Regulatory Affairs, OMB, by fax at

    (202) 395-6566 or by email at OIRAsubmission@omb.eop.gov. Please

    provide the Commission with a copy of submitted comments so that they

    can be summarized and addressed in the final rule. Refer to the

    Addresses section of this Notice 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 release.

    Therefore, a comment to OMB is best assured of receiving full

    consideration if OMB (and the Commission) receives it within 30 days of

    publication of this Notice. Nothing in the foregoing affects the

    deadline enumerated above for public comment to the Commission on the

    proposed regulations.

    C. Consideration of Costs and Benefits

    In this section, the Commission addresses the costs and benefits of

    its proposed regulations and also considers the five broad areas of

    market and public concern under Section 15(a) of the CEA\73\ within the

    context of the proposed regulations.

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

    \73\ 7 U.S.C. 19(a).

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

    In this Notice, the Commission considers the costs and benefits

    that result from the regulations proposed herein; these costs and

    benefits are in addition to the costs and benefits associated with the

    SEF NPRM as previously proposed. In other words, the Commission is only

    considering the discrete costs and benefits of the regulations

    specifically proposed in this Notice. To this end, the Commission

    solicits comments only on the costs and benefits of the proposed

    requirements herein; only comments pertaining to these cost and benefit

    issues will be considered as part of this Notice.

    1. Costs of Proposed Regulations

    The Commission anticipates that the proposed regulations will

    result in some additional operational and monitoring costs to DCMs and

    SEFs. The Commission requests commenters provide quantitative estimates

    of the additional costs and benefits to DCMs and SEFs from this Notice.

    Under these proposed regulations, DCMs and SEFs may incur

    additional costs in undertaking evaluations of whether a swap is

    available to trade and submitting to the Commission their

    determinations with respect to such swaps as rule submission filings

    pursuant to the procedures under part 40 of the Commission's

    regulations. Proposed Sec. Sec. 37.10(b) and 38.12(b) require SEFs and

    DCMs to consider certain factors to make a swap available to trade.

    Proposed Sec. Sec. 37.10(a) and 38.12(a) require SEFs and DCMs to

    submit to the Commission their determinations with respect to those

    swaps that they make available to trade as a rule pursuant to the

    procedures under part 40 of the Commission's regulations.

    The above-described assessment and submission may be performed

    internally by one compliance personnel of the DCM or SEF. The

    Commission estimates that it would take the compliance personnel

    approximately eight hours, on average, to assess and submit the

    available to trade determination per rule submission filing. The

    compliance personnel would have to, for example, consider factors to

    make a swap available to trade and write a cover submission to the

    Commission, including a description of the swap or swaps that are

    covered and an explanation and analysis of the available to trade

    determination. The Commission notes that this is a general estimate and

    that it is difficult to determine with reasonable precision the number

    of hours involved given the novelty of this available to trade process.

    The Commission estimates the cost per hour for one compliance personnel

    to be $43.25 per hour.\74\ Therefore, the Commission estimates that it

    would cost each DCM and SEF an additional $346.00 per rule submission

    filing to comply with the proposed requirements.

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

    \74\ See Report on Management & Professional Earnings in the

    Securities Industry 2010, Securities Industry and Financial Markets

    Association at 4 (Sep. 2010). The report lists the average total

    annual compensation for a compliance specialist (intermediate) as

    $59,878. The Commission estimated the personnel's hourly cost by

    assuming an 1,800 hour work year and by multiplying by 1.3 to

    account for overhead and other benefits.

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

    Certain additional factors may affect the cost estimates noted

    above. For example, swaps with complex terms and conditions or requests

    for

    [[Page 77736]]

    additional information or questions from Commission staff regarding the

    available to trade determination may result in higher costs.

    The Commission also recognizes that DCMs and SEFs may submit

    several rule submission filings per year. At this time, it is not

    feasible to estimate the number of rule submission filings per year per

    DCM or SEF as the number of swap contracts that will be traded on a DCM

    or SEF and the number of those swaps that a DCM or SEF will determine

    to make available to trade is presently unknown.

    Under proposed Sec. Sec. 37.10(c) or 38.12(c), if a SEF or DCM

    makes a swap available to trade, all SEFs and DCMs listing or offering

    such swap and/or any economically equivalent swap, shall make those

    swaps available to trade for purposes of Section 2(h)(8) of the CEA.

    Further, such contracts may not be traded on a bilateral basis. In

    order to comply with this requirement, DCMs, SEFs, and market

    participants would have to monitor and identify those contracts that

    are either the same or economically equivalent to that swap made

    available to trade. At this time, it is not feasible to estimate the

    number of hours involved given the novelty of the available to trade

    process.

    The Commission seeks comment on all aspects of the cost estimates

    provided above. Specifically, the Commission seeks comment on the

    period of time, the number and type of personnel, and the cost

    estimates for DCMs and SEFs to comply with the assessment process as

    described above. The Commission also seeks comment on the number of

    hours per year, on average, that a SEF or DCM will spend monitoring and

    evaluating swap contracts in order to comply with proposed Sec. Sec.

    37.10(c) and 38.12(c).

    Proposed Sec. 38.12(d) would require DCMs to incur additional

    costs to conduct an annual review and assessment of each swap it has

    made available to trade and submit its review and assessment to the

    Commission.\75\ This assessment may be performed internally by one

    compliance personnel of the DCM. The Commission estimates that it would

    take the compliance personnel approximately 40 hours, on average, to

    conduct this review and assessment. The Commission notes that this is a

    general estimate and that it is difficult to determine with reasonable

    precision the number of hours involved given the novelty of this

    process. As noted above, the Commission estimates the cost per hour for

    one compliance personnel to be $43.25 per hour. Therefore, the

    Commission estimates that it would cost each DCM an additional

    $1,730.00 per review to comply with the proposed requirements.

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

    \75\ The SEF NPRM imposed a review and assessment process for

    SEFs.

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

    2. Benefits of Proposed Regulations

    The proposed regulations are expected to provide needed certainty

    for DCMs, SEFs, and market participants for the available to trade

    process. The proposed regulations, for example, set forth the procedure

    to make a swap available to trade, the factors to consider in making a

    swap available to trade, and visibility into which swaps are available

    to trade. Additionally, the proposed regulations are expected to

    promote the trading of swaps on DCMs and SEFs and promote competition

    among these entities. DCMs and SEFs, who may be most familiar with the

    trading of swaps, would make swaps available to trade based on factors

    specified by the Commission. DCMs and SEFs have discretion to consider

    any one factor or several factors to make a swap available to trade.

    These aspects of the proposed regulations are intended to facilitate

    DCMs and SEFs to make swaps available to trade, which is expected to

    promote the trading of swaps on DCMs and SEFs and competition among

    these entities. Finally, the proposed regulations are expected to

    promote price discovery because those swaps that DCMs and SEFs make

    available to trade would effectively be subject to the trade execution

    requirement, which would require them to trade solely on DCMs and SEFs.

    The Commission seeks comment on all aspects of the benefits of its

    proposed regulations in this Notice.

    3. Section 15(a) Discussion

    Section 15(a) of the CEA \76\ requires the Commission to consider

    the costs and benefits of its action before promulgating a regulation

    under the CEA. Section 15(a) of the CEA specifies that the costs and

    benefits shall be evaluated in light of five broad areas of market and

    public concern: (a) Protection of market participants and the public;

    (b) efficiency, competitiveness and financial integrity of futures

    markets; (c) price discovery; (d) sound risk management practices; and

    (e) other public interest considerations. The Commission may in its

    discretion give greater weight to any one of the five enumerated areas

    and could in its discretion determine that, notwithstanding its costs,

    a particular regulation is necessary or appropriate to protect the

    public interest or to effectuate any of the provisions or accomplish

    any of the purposes of the CEA.\77\

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

    \76\ 7 U.S.C. 19(a).

    \77\ See, e.g., Fisherman's Doc Co-op., Inc v. Brown, 75 F.3d

    164 (4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336

    (DC Cir. 1985) (noting that an agency has discretion to weigh

    factors in undertaking cost-benefit analysis).

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

    a. Protection of Market Participants and the Public

    The proposed regulations are intended to provide certainty for

    DCMs, SEFs, and market participants for the available to trade process.

    Under the proposed regulations, a SEF or DCM must consider certain

    factors specified by the Commission under Sections 37.10(b) or

    38.12(b), respectively, to make a swap available to trade. A DCM or SEF

    must also submit available to trade determinations to the Commission,

    either for approval or under certification procedures, pursuant to the

    rule filing procedures of part 40 of the Commission's regulations. Part

    40 also requires DCMs and SEFs to post a notice and a copy of rule

    submissions on their Web site concurrent with the filing of the

    submissions with the Commission. The Commission, consistent with

    current practice, will also post DCM and SEF rule submission filings on

    its Web site. Therefore, under the proposed regulations, DCMs, SEFs,

    and market participants would know the factors to consider in making a

    swap available to trade, the procedure to make a swap available to

    trade, and the swaps that are available to trade, which provides

    certainty to the available to trade process. This certainty also

    promotes the protection of market participants by ensuring that there

    is transparency in the available to trade process.

    The proposed regulations are also expected to promote the

    protection of market participants and the public by providing for

    Commission review and oversight and public participation. Under the

    proposed regulations, the Commission would either approve or review the

    DCM's or SEF's available to trade determination. To facilitate this

    approval or review, the proposed regulations require DCMs and SEFs to

    provide the Commission with a brief explanation of any substantive

    opposing views in rule filings and, if the Commission extends the rule

    review period under the self-certification procedure, then there will

    be a 30-day public comment period. These aspects of the proposed

    regulations are expected to provide appropriate oversight, and may

    increase the transparency, of DCM and SEF available to trade

    [[Page 77737]]

    determinations. This oversight and transparency is expected to increase

    the likelihood that all important issues will be identified and weighed

    by the Commission, which may protect market participants and the

    public.

    b. Efficiency, Competitiveness, and Financial Integrity of the Markets

    The proposed regulations are expected to promote the trading of

    swaps on DCMs and SEFs and promote competition among these entities.

    DCMs and SEFs, who may be most familiar with the trading of swaps,

    would make swaps available to trade based on factors specified by the

    Commission. DCMs and SEFs would have discretion to consider any one

    factor or several factors to make a swap available to trade. These

    aspects of the proposed regulations are intended to facilitate DCMs and

    SEFs to make swaps available to trade, which is expected to promote the

    trading of swaps on DCMs and SEFs and competition among these entities.

    Additionally, the requirement that DCMs and SEFs must make the same

    swap and any economically equivalent swap available to trade may

    increase the number of swaps trading on DCMs and SEFs, which is

    expected to promote the trading of swaps on DCMs and SEFs.

    c. Price Discovery

    As mentioned above, the proposed regulations are expected to

    promote the trading of swaps on DCMs and SEFs. Those swaps that DCMs

    and SEFs make available to trade could be subject to the trade

    execution requirement. These swaps would be required to trade solely on

    DCMs and SEFs, which would promote price discovery.

    d. Sound Risk Management Practices

    The proposed regulations are not expected to affect sound risk

    management practices.

    e. Other Public Interest Considerations

    The proposed regulations are not expected to affect public interest

    considerations other than those identified above.

    The Commission specifically invites public comment on its

    application of the criteria contained in Section 15(a) of the CEA and

    further invites interested parties to submit any data, quantitative or

    qualitative, that they may have concerning the costs and benefits of

    the proposed regulations.

    List of Subjects

    17 CFR Part 37

    Registered entities, Reporting and recordkeeping requirements, Swap

    execution facilities, Swaps.

    17 CFR Part 38

    Designated contract markets, Registered entities, Reporting and

    recordkeeping requirements, Swaps.

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

    amend 17 CFR parts 37 and 38 as follows:

    PART 37--SWAP EXECUTION FACILITIES

    1. The authority citation for part 37 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as

    amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform

    and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    2. The heading of part 37 is revised to read as set forth above.

    3. Add new Sec. 37.10 to read as follows:

    Sec. 37.10 Process for a swap execution facility to make a swap

    available to trade.

    (a) Required submission. A swap execution facility that makes a

    swap available to trade in accordance with paragraph (b) of this

    section, shall submit to the Commission its determination with respect

    to such swap pursuant to the procedures under part 40 of this chapter.

    (b) Factors to consider. To make a swap available to trade, for

    purposes of Section 2(h)(8) of the Commodity Exchange Act, a swap

    execution facility shall consider, as appropriate, the following

    factors with respect to such swap:

    (1) Whether there are ready and willing buyers and sellers;

    (2) The frequency or size of transactions on swap execution

    facilities, designated contract markets, or of bilateral transactions;

    (3) The trading volume on swap execution facilities, designated

    contract markets, or of bilateral transactions;

    (4) The number and types of market participants;

    (5) The bid/ask spread;

    (6) The usual number of resting firm or indicative bids and offers;

    (7) Whether a swap execution facility's trading system or platform

    will support trading in the swap; or

    (8) Any other factor that the swap execution facility may consider

    relevant.

    (c) Economically equivalent swap. (1) Upon a determination that a

    swap is available to trade, all other swap execution facilities and

    designated contract markets listing or offering for trading such swap

    and/or any economically equivalent swap, shall make those swaps

    available to trade for purposes of Section 2(h)(8) of the Commodity

    Exchange Act.

    (2) For purposes of this section, the term ``economically

    equivalent swap'' means a swap that the swap execution facility or

    designated contract market determines to be economically equivalent

    with another swap after consideration of each swap's material pricing

    terms.

    (d) Annual review. (1) A swap execution facility shall conduct an

    annual review and assessment of each swap it has made available to

    trade to determine whether or not each swap should continue to be

    available to trade. The annual review shall be conducted at the swap

    execution facility's fiscal year end.

    (2) When conducting its review and assessment pursuant to paragraph

    (d)(1) of this section, a swap execution facility shall consider the

    factors specified in paragraph (b) of this section.

    (3) The swap execution facility shall provide electronically to the

    Commission a report of its review and assessment, including any

    supporting information or data, not more than 30 days after the swap

    execution facility's fiscal year end.

    PART 38--DESIGNATED CONTRACT MARKETS

    4. The authority citation for part 38 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,

    6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as

    amended by the Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    5. Add new Sec. 38.12 to read as follows:

    Sec. 38.12 Process for a designated contract market to make a swap

    available to trade.

    (a) Required submission. A designated contract market that makes a

    swap available to trade in accordance with paragraph (b) of this

    section, shall submit to the Commission its determination with respect

    to such swap pursuant to the procedures under part 40 of this chapter.

    (b) Factors to consider. To make a swap available to trade, for

    purposes of Section 2(h)(8) of the Commodity Exchange Act, a designated

    contract market shall consider, as appropriate, the following factors

    with respect to such swap:

    (1) Whether there are ready and willing buyers and sellers;

    (2) The frequency or size of transactions on designated contract

    markets, swap execution facilities, or of bilateral transactions;

    (3) The trading volume on designated contract markets, swap

    execution facilities, or of bilateral transactions;

    [[Page 77738]]

    (4) The number and types of market participants;

    (5) The bid/ask spread;

    (6) The usual number of resting firm or indicative bids and offers;

    (7) Whether a designated contract market's trading facility will

    support trading in the swap; or

    (8) Any other factor that the designated contract market may

    consider relevant.

    (c) Economically equivalent swap. (1) Upon a determination that a

    swap is available to trade, all other designated contract markets and

    swap execution facilities listing or offering for trading such swap

    and/or any economically equivalent swap, shall make those swaps

    available to trade for purposes of Section 2(h)(8) of the Commodity

    Exchange Act.

    (2) For purposes of this section, the term ``economically

    equivalent swap'' means a swap that the designated contract market or

    swap execution facility determines to be economically equivalent with

    another swap after consideration of each swap's material pricing terms.

    (d) Annual review. (1) A designated contract market shall conduct

    an annual review and assessment of each swap it has made available to

    trade to determine whether or not each swap should continue to be

    available to trade. The annual review shall be conducted at the

    designated contract market's fiscal year end.

    (2) When conducting its review and assessment pursuant to paragraph

    (d)(1) of this section, a designated contract market shall consider the

    factors specified in paragraph (b) of this section.

    (3) The designated contract market shall provide electronically to

    the Commission a report of its review and assessment, including any

    supporting information or data, not more than 30 days after the

    designated contract market's fiscal year end.

    Issued in Washington, DC, on December 5, 2011, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

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

    Federal Regulations

    Appendices to Process for a Designated Contract Market or Swap

    Execution Facility To Make a Swap Available To Trade--Commissioners

    Voting Summary and Statements of Commissioners

    Appendix 1--Commissioners Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia and Wetjen voted in the affirmative; Commissioner Sommers

    voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule to implement a process for

    designated contract markets (DCMs) and swap execution facilities

    (SEFs) to make a swap ``available to trade.'' The Dodd-Frank Wall

    Street Reform and Consumer Protection Act requires that swaps

    subject to the clearing requirement be traded on a DCM or SEF,

    unless no DCM or SEF makes the swap available to trade or the swap

    transaction is subject to the end-user exception. This proposal will

    bring transparency to the process for making a swap available to

    trade on a DCM or SEF. It also will provide appropriate oversight of

    the process through Commodity Futures Trading Commission review.

    [FR Doc. 2011-31646 Filed 12-13-11; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 14, 2011



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