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2011-4707

  • Federal Register, Volume 76 Issue 47 (Thursday, March 10, 2011)[Federal Register Volume 76, Number 47 (Thursday, March 10, 2011)]

    [Proposed Rules]

    [Pages 13101-13111]

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

    [FR Doc No: 2011-4707]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 23, 37, 38, and 39

    RIN 3038-AC98

    Requirements for Processing, Clearing, and Transfer of Customer

    Positions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (Commission) is

    proposing regulations to implement Title VII of the Dodd-Frank Wall

    Street Reform and Consumer Protection Act (Dodd-Frank Act). Proposed

    regulations would establish the time frame for a swap dealer (SD),

    major swap participant (MSP), futures commission merchant (FCM), swap

    execution facility (SEF), and designated contract market (DCM) to

    submit contracts, agreements, or transactions to a derivatives clearing

    organization (DCO) for clearing. Proposed regulations also would

    facilitate compliance with DCO Core Principle C (Participant and

    Product Eligibility) in connection with standards for cleared products

    and the prompt and efficient processing of all contracts, agreements,

    and transactions submitted for clearing. The Commission is further

    proposing related regulations implementing SEF Core Principle 7

    (Financial Integrity of Transactions) and DCM Core Principle 11

    (Financial Integrity of Transactions), requiring coordination with DCOs

    in the

    [[Page 13102]]

    development of rules and procedures to facilitate clearing.

    Additionally, the Commission is proposing a regulation to implement DCO

    Core Principle F (Treatment of Funds), requiring a DCO, upon customer

    request, to promptly transfer customer positions and related funds from

    one clearing member to another, without requiring the close-out and re-

    booking of the positions.

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

    ADDRESSES: You may submit comments, identified by RIN number 3038-AC98,

    by any of the following methods:

    Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

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

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

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

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

    Follow the instructions for submitting comments.

    Please submit comments by 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 (FOIA), a petition for confidential treatment of the

    exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the Commission's regulations.\1\ 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

    FOIA.

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

    CFR Ch. 1 (2010). They are accessible on the Commission's Web site

    at http://www.cftc.gov.

    FOR FURTHER INFORMATION CONTACT: John C. Lawton, Deputy Director, 202-

    418-5480, jlawton@cftc.gov; Phyllis P. Dietz, Associate Director, 202-

    418-5449, pdietz@cftc.gov; Sarah E. Josephson, Associate Director, 202-

    418-5684, sjosephson@cftc.gov, Division of Clearing and Intermediary

    Oversight; Riva Spear Adriance, Associate Director, 202-418-5494,

    radriance@cftc.gov; Nancy Markowitz, Assistant Deputy Director, 202-

    418-5453, nmarkowitz@cftc.gov; Nadia Zakir, Attorney-Advisor, 202-418-

    5720, nzakir@cftc.gov; Mauricio Melara, Attorney-Advisor, 202-418-5719,

    mmelara@cftc.gov; Division of Market Oversight, Commodity Futures

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

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    Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Title VII of the Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\

    Title VII of the Dodd-Frank Act \3\ amended the Commodity Exchange Act

    (CEA) \4\ 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 SDs and MSPs; (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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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection

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

    Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

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

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

    2010.''

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

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    In this notice of proposed rulemaking, the Commission proposes to

    adopt regulations to establish the time frame for an SD, MSP, FCM, SEF,

    or DCM to process and submit contracts, agreements, or transactions to

    a DCO for clearing; to establish certain product standards and a time

    frame for a DCO to clear such contracts, agreements, and transactions;

    and to facilitate a DCO's transfer of open positions from a carrying

    clearing member to another clearing member without unwinding and re-

    booking the position. These supplement proposed regulations that were

    previously published for public comment.\5\

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    \5\ See e.g., 76 FR 6715, Feb. 8, 2011 (proposed rules for SD

    and MSP documentation); 76 FR 3698, Jan. 20, 2011, (proposed rules

    for DCO Core Principles C and F); 76 FR 1214, Jan. 7, 2011 (proposed

    rules for SEF Core Principle 7; 75 FR 81519, Dec. 28, 2010,

    (proposed rules for SD and MSP confirmation, portfolio

    reconciliation, and portfolio compression); 75 FR 80572, Dec. 22,

    2010 (proposed rules for DCM Core Principle 11).

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    B. Existing Swap Clearing Practices

    1. Time Frame for Clearing

    Currently, a significant number of swaps are not cleared and, for

    those that are cleared, there may be a delay in the substitution of a

    DCO as the counterparty to the transaction through a novation of the

    original contract, agreement, or transaction.\6\ In many instances,

    this delay can be up to a week. For example, some clearinghouses accept

    bilateral trades for clearing on a batched basis once a week. This time

    lag potentially presents credit risk to the swap counterparties and the

    DCO because the value of a position may change significantly between

    the time of execution and the time of novation, thereby allowing

    financial exposure to accumulate in the absence of daily mark-to-

    market. Among the purposes of clearing are the reduction of risk and

    the enhancement of financial certainty, and this delay diminishes these

    benefits of clearing swaps that Congress sought to promote in the Dodd-

    Frank Act. Delay in clearing is also inconsistent with other proposed

    regulations concerning product eligibility and financial integrity of

    transactions insofar as the delay constrains liquidity and increases

    risk.

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    \6\ A clearinghouse becomes the counterparty to trades with

    market participants through novation, an open offer system, or an

    analogous legally binding arrangement. Through novation, the

    original contract between the buyer and seller is extinguished and

    replaced by two new contracts, one between the clearinghouse and the

    buyer and the other between the clearinghouse and the seller. In an

    open offer system, a clearinghouse is automatically and immediately

    interposed in a transaction at the moment the buyer and seller agree

    on the terms.

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    The Commission recognizes that there may be instances when a delay

    in acceptance of a transaction by a DCO is unavoidable. For instance,

    when new products are first listed for clearing, existing legacy

    transactions may have to be moved into clearing incrementally. However,

    this process, sometimes referred to as backloading or migration, should

    be accomplished as quickly as possible.

    The swap market infrastructure established by the Dodd-Frank Act

    provides for the trading of swaps on a SEF or DCM. The Dodd-Frank Act

    also

    [[Page 13103]]

    establishes certain parameters for the bilateral execution of swaps

    among entities registered as SDs or MSPs and their counterparties.

    Swaps traded on a SEF or DCM, as well as swaps executed bilaterally,

    that are subject to mandatory clearing (and have not been electively

    excepted from mandatory clearing by an end user under section 2(h)(7)

    of the CEA), must be cleared by a registered DCO. For swaps executed

    bilaterally that are not required to be cleared, if the parties to the

    transaction agree to clear, they may submit the swap to a registered

    DCO for clearing.

    Through this proposed rulemaking, the Commission seeks to expand

    access to, and to strengthen the financial integrity of, the swap

    markets subject to Commission oversight by requiring, and establishing

    uniform standards for, prompt processing, submission, and acceptance of

    swaps eligible for clearing by DCOs. This requires setting an

    appropriate time frame for the processing and submission of swaps for

    clearing, as well as a time frame for the clearing of swaps by the DCO.

    2. Transfer of Swaps Positions and Related Funds

    Currently, in the futures industry, a request by a customer to

    transfer its open positions and related funds from its carrying FCM to

    another FCM is accomplished within a reasonable period of time

    (typically within two business days). However, under current practice

    for some cleared swaps, a customer's request to transfer all or a

    portion of its swap positions and related funds may be subject to a

    more significant delay. (A party to a cleared swap may wish to transfer

    its positions from its current clearing member to another clearing

    member because there is concern about the carrying clearing member's

    financial strength or for competitive reasons relating to customer

    service or pricing). In these instances, a party must either enter into

    an offsetting position without terminating its original position,

    thereby creating economically unnecessary trades, or ``unwind'' the

    position with the clearinghouse.

    In proposing a new regulation to implement DCO Core Principle F

    (Treatment of Funds), the Commission seeks to ensure that DCOs do not

    impose economic or operational obstacles to the prompt transfer of

    customer positions and related funds from one clearing member to

    another, upon the request of a customer. The Commission's purpose in

    this regard is to formalize and apply to swaps clearing, the futures

    clearinghouse practice of transferring customer positions and related

    funds without close-out and re-booking of the positions.

    II. Proposed Regulations

    A. Proposed Sec. 23.506--SD and MSP Submission of Swaps for Processing

    and Clearing

    1. Proposed Regulations

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

    section 4s, which sets forth a number of requirements for SDs and MSPs.

    Specifically, section 4s(i) of the CEA establishes swap documentation

    standards for SDs and MSPs and requires them 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.'' Accordingly, the

    Commission is proposing regulations on swap processing and clearing

    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.\7\ These

    proposed regulations for SDs and MSPs are intended to complement the

    proposed regulations for DCOs, which require timely acceptance of swaps

    for clearing.\8\

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    \7\ 7 U.S.C. 6s(h)(1)(D); 7 U.S.C. 6s(h)(3)(D); 7 U.S.C. 6s(i);

    and 7 U.S.C. 12a(5). 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.

    \8\ See discussion in section II.B. of this notice.

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    In order to ensure compliance with any mandatory clearing

    requirement issued pursuant to section 2(h)(1) of the CEA and to

    promote the mitigation of counterparty credit risk through the use of

    central clearing, the Commission is proposing Sec. 23.506(a)(1), which

    would require that SDs and MSPs have the ability to route swaps that

    are not executed on a SEF or DCM to a DCO in a manner that is

    acceptable to the DCO for the purposes of risk management. Under Sec.

    23.506(a)(2), SDs and MSPs would also be required to coordinate with

    DCOs to facilitate prompt and efficient processing in accordance with

    proposed regulations related to the timing of clearing by DCOs.

    Proposed Sec. 23.506(a) does not prescribe the manner by which SDs

    or MSPs route their swaps to DCOs and provide for prompt and efficient

    processing. Indeed, in many instances, it is likely that DCOs will

    enable SDs and MSPs to submit their swaps to clearing via third-party

    platforms and other service providers. In this manner, privately

    negotiated swaps may be submitted to DCOs with minimal burden on market

    participants.

    Proposed Sec. 23.506(b) would set forth timing requirements for

    submitting swaps to DCOs in those instances where the swap is subject

    to a clearing mandate and in those instances when a swap is not subject

    to a mandate. Under Sec. 23.506(b)(1), an SD or MSP would be required

    to submit a swap that is not executed on a SEF or DCM, but is subject

    to a clearing mandate under section 2(h)(1) of the CEA (and has not

    been electively excepted from mandatory clearing by an end user under

    section 2(h)(7) of the CEA) as soon as technologically practicable

    following execution of the swap, but no later than the close of

    business on the day of execution.

    For those swaps that are not subject to a clearing mandate, but

    both counterparties to the swap have elected to clear the swap, under

    proposed Sec. 23.506(b)(2), the SD or MSP would be required to submit

    the swap for clearing not later than the next business day after

    execution of the swap or the agreement to clear, if later than

    execution. This time frame reflects the possibility that, unlike a

    trade that takes place on a DCM, in the case of a bilateral swap, the

    parties may need time to agree to terms that would conform with a DCO's

    template for swaps it will accept for clearing. As noted previously,

    any delay between execution and novation to a clearinghouse potentially

    presents credit risk to the swap counterparties and the DCO because the

    value of the position could change significantly between the time of

    execution and the time of novation, thereby allowing financial exposure

    to accumulate in the absence of daily mark-to-market. The proposed

    regulation would serve to limit this delay as much as reasonably

    possible.

    Proposed Sec. 23.506 is consistent with regulations previously

    proposed for SDs and MSPs, including proposed Sec. 23.501, which

    requires confirmation of all swaps.\9\ In fact, by providing for

    confirmation upon acceptance for clearing pursuant to proposed Sec.

    39.12(b)(7)(v), SDs and MSPs would be able to satisfy proposed Sec.

    23.501.

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    \9\ See 76 FR at 81531.

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    Proposed Sec. 23.506 is consistent with the Commission's proposed

    regulations requiring reporting of swap transaction data to a

    registered swap data repository.\10\ Under these proposed regulations,

    SDs and MSPs are required to report certain information about a

    [[Page 13104]]

    swap that is not executed on a SEF or DCM to a registered swap data

    repository ``promptly following verification of the primary economic

    terms by the counterparties with each other at or immediately following

    execution of the swap, but in no event later than: 30 minutes after

    execution of the swap if verification of primary economic terms occurs

    electronically; or 24 hours after execution of a swap if verification

    of primary economic terms does not occur electronically.'' \11\ One of

    the ``primary economic terms'' required to be reported under such

    proposed regulations is an indication of whether or not the swap will

    be cleared by a DCO.\12\

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    \10\ See 75 FR 76574, Dec. 8, 2010 (proposed rules for swap data

    recordkeeping and reporting requirements).

    \11\ Proposed Sec. 45.3(a)(1)(iii)(A), 75 FR at 76600.

    \12\ Proposed Sec. 45.1(q)(20), 75 FR at 76598.

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    The proposed regulation also is consistent with the Commission's

    proposed regulations requiring real-time public reporting of swap

    transaction and pricing data.\13\ Under these proposed regulations, SDs

    and MSPs are required to report certain information about a swap that

    is not executed on a SEF or DCM to a registered swap data repository

    that accepts and publicly disseminates swap transaction and pricing

    data, as soon as technologically practicable following execution of

    such swap.\14\ The information required to be reported under the

    proposed regulations includes an indication of whether or not a swap is

    cleared by a DCO.\15\

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    \13\ See 75 FR 76140, Dec. 7, 2010 (proposed rules for real-time

    public reporting of swap transaction data).

    \14\ Proposed Sec. 43.3(a)(3), 75 FR at 76172.

    \15\ Proposed Sec. 43.4 and Appendix A to part 43, 75 FR at

    76174 and 76177.

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    2. Solicitation of Comments

    The Commission solicits comment on all aspects of the proposed

    Sec. 23.506. It further requests responses to the following specific

    questions: Should the regulations specify how an SD or MSP must ensure

    that it has the capacity to route swaps to a DCO? Are there any

    systemic obstacles to the DCO, SD, and MSP coordination required under

    the proposed regulation?

    Are the proposed time frames in Sec. 23.506(b) appropriate? Are

    they operationally feasible? What is the operational feasibility of

    same-day clearing for swaps executed bilaterally that are required to

    be cleared and those that will not be required to be cleared? The

    Commission further requests comment on the use of the phrase ``as soon

    as technologically practicable.''

    B. Proposed Sec. 39.12--Acceptance and Clearing of Swaps by a DCO

    1. Recently Proposed Product Eligibility Standards Under Core Principle

    C

    Core Principle C requires each DCO to establish ``appropriate

    standards for determining the eligibility of agreements, contracts, or

    transactions submitted to the [DCO] for clearing.'' \16\ The Commission

    has previously proposed Sec. 39.12(b) to implement this provision,\17\

    pursuant to its rulemaking authority under sections 5b(c)(2)(A) and

    8a(5) of the CEA.\18\

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    \16\ Section 5b(c)(2)(C)(i)(II) of the CEA; 7 U.S.C. 7a-

    1(c)(2)(C)(i)(II).

    \17\ See 76 FR 3698.

    \18\ 7 U.S.C. 7a-1(c)(2)(A); and 7 U.S.C. 12a(5).

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    As previously published for public notice and comment, proposed

    Sec. 39.12(b)(1) would require a DCO to establish appropriate

    requirements for determining the eligibility of agreements, contracts,

    or transactions submitted to the DCO for clearing, taking into account

    the DCO's ability to manage the risks associated with such agreements,

    contracts, or transactions.\19\ Proposed Sec. 39.12(b)(2) would codify

    the requirements of section 2(h)(1)(B) of the CEA regarding a DCO's

    offset of economically equivalent swaps.\20\ Proposed Sec. 39.12(b)(3)

    would require a DCO to select contract unit sizes that maximize

    liquidity, open access, and risk management.\21\ Finally, proposed

    Sec. 39.12(b)(4) would require each DCO that clears swaps to have

    rules stating that upon acceptance of a swap by the DCO for clearing,

    (i) the original swap is extinguished, (ii) it is replaced by equal and

    opposite swaps between clearing members and the DCO, (iii) all terms of

    the cleared swaps must conform to templates established under DCO

    rules, and (iv) if a swap is cleared by a clearing member on behalf of

    a customer, all terms of the swap, as carried in the customer account

    on the books of the clearing member, must conform to the terms of the

    cleared swap established under the DCO's rules.\22\

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    \19\ See 76 FR at 3720.

    \20\ Id. Section 2(h)(1)(B) of the CEA, 7 U.S.C. 2(h)(1)(B),

    requires a DCO to adopt rules providing that all swaps with the same

    terms and conditions submitted to the DCO for clearing are

    economically equivalent within the DCO and may be offset with each

    other within the DCO. Section 2(h)(1)(B) further requires a DCO to

    provide for non-discriminatory clearing of a swap executed

    bilaterally or on or subject to the rules of an unaffiliated SEF or

    DCM.

    \21\ See 76 FR at 3720.

    \22\ Id.

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    2. Re-Proposed and Newly Proposed Regulations

    To refine and supplement the previously proposed regulations

    implementing Core Principle C, the Commission is (1) re-proposing Sec.

    39.12(b)(2) to clarify the role of a DCO in establishing the terms and

    conditions for swaps that it accepts for clearing; \23\ (2) proposing a

    new Sec. 39.12(b)(4) that would prohibit a DCO from refusing to clear

    a product where neither party to the original contract, agreement, or

    transaction is a clearing member; (3) re-proposing Sec. 39.12(b)(3)

    (renumbered as Sec. 39.12(b)(5)) to clarify a DCO's role and

    objectives in selecting contract units for clearing purposes that are

    smaller than the contract units in which trades submitted for clearing

    were executed; and (4) proposing a new Sec. 39.12(b)(7) that would

    clarify the timing of the actions described in previously proposed

    Sec. Sec. 39.12(b)(4)(i) and (ii) (renumbered as paragraph (b)(6)),

    i.e., requirements that upon acceptance of a swap by the DCO for

    clearing, (i) the original swap is extinguished and (ii) it is replaced

    by equal and opposite swaps between clearing members and the DCO.

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    \23\ To provide additional clarity regarding open access to

    clearing, the Commission is proposing to renumber the second

    sentence of proposed Sec. 39.12(b)(2) as Sec. 39.12(b)(3) and to

    insert a new paragraph (b)(4). Accordingly, proposed paragraphs

    (b)(3) and (b)(4) would be renumbered as paragraphs (b)(5) and

    (b)(6), respectively.

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    (a) Section 39.12(b)(2)

    As previously proposed, Sec. 39.12(b)(2) required a DCO to ``adopt

    rules providing that all swaps with the same terms and conditions

    submitted to the derivatives clearing organization for clearing are

    economically equivalent within the derivatives clearing organization

    and may be offset with each other within the derivatives clearing

    organization.'' \24\ It also required that a DCO provide for non-

    discriminatory clearing of a swap executed bilaterally or on or subject

    to the rules of an unaffiliated SEF or DCM.\25\

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    \24\ See 76 FR at 3720.

    \25\ Id.

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    The Commission is proposing to revise the first provision of Sec.

    39.12(b)(2) to clarify that a DCO must adopt rules to establish

    templates for the terms and conditions of swaps that it will clear.

    Accordingly, the proposed provision now reads: ``A derivatives clearing

    organization shall adopt rules providing that all swaps with the same

    terms and conditions, as defined by templates established under

    derivatives clearing organization rules, submitted to the derivatives

    clearing organization for

    [[Page 13105]]

    clearing are economically equivalent within the derivatives clearing

    organization and may be offset with each other within the derivatives

    clearing organization.''

    As noted above, the second provision of previously proposed Sec.

    39.12(b)(2) would be unchanged, and would be renumbered as Sec.

    39.12(b)(3).

    (b) Section 39.12(b)(4)

    Some clearinghouses have indicated that they intend to require

    that, for a transaction to be eligible for clearing, one of the

    executing parties must be a clearing member. This has the effect of

    preventing trades between two parties who are not clearing members from

    being cleared. Such a restriction of open access serves no apparent

    risk management purpose and operates to keep certain trades out of the

    clearing process and to constrain liquidity for cleared trades.

    Moreover, such restrictions also may raise competitive issues under

    Core Principle N (Antitrust Considerations).\26\

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    \26\ See Section 5b(c)(2)(N) of the CEA, which provides that

    ``Unless necessary or appropriate to achieve the purposes of this

    Act, a derivatives clearing organization shall not--

    (i) Adopt any rule or take any action that results in any

    unreasonable restraint of trade; or

    (ii) Impose any material anticompetitive burden.''

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    Accordingly, the Commission is proposing new Sec. 39.12(b)(4) to

    prohibit a DCO from refusing to clear a product where neither party to

    the original contract, agreement, or transaction is a clearing member.

    The Commission notes that parties that are not clearing members would

    still have to submit their bilateral trades for clearing through a

    clearing member of the DCO.

    (c) Section 39.12(b)(5)

    The Commission previously proposed Sec. 39.12(b)(3), now proposed

    to be renumbered at Sec. 39.12(b)(5), which would require a DCO to

    ``select contract unit sizes that maximize liquidity, open access, and

    risk management.'' \27\ To the extent appropriate to further these

    objectives, a DCO would be further required to select contract units

    for clearing purposes that are smaller than the contract units in which

    trades submitted for clearing were executed.\28\ The purpose of this

    provision is to require the DCO to split a cleared swap into smaller

    units in order to promote liquidity by permitting more parties to trade

    the product, to facilitate open access by permitting more clearing

    members to clear the product, and to aid risk management by enabling a

    DCO, in the event of a default, to have more potential counterparties

    to take on positions during a liquidation.

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    \27\ See 76 FR at 3720.

    \28\ Id.

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    The Commission is now proposing to expand its description of the

    actions to be undertaken by the DCO and the objectives to be served.

    Accordingly, the Commission proposes that the introductory sentence of

    Sec. 39.12(b)(5) read as follows: ``A derivatives clearing

    organization shall select contract unit sizes and other terms and

    conditions that maximize liquidity, facilitate transparency in pricing,

    promote open access, and allow for effective risk management.'' This

    would clarify that, in establishing product templates under its rules,

    the DCO is required to select other terms and conditions in addition to

    unit size, such as termination or maturity period, settlement features,

    and cash flow conventions, to facilitate price transparency in addition

    to liquidity, open access, and risk management.

    (d) Section 39.12(b)(7)

    Proposed Sec. 39.12(b)(7)(i) would establish general standards for

    the adoption of rules that establish a time frame for clearing. The DCO

    would have to coordinate with each SEF and DCM that lists for trading a

    product that is cleared by the DCO, in developing rules and procedures

    to facilitate prompt and efficient processing of all contracts,

    agreements, and transactions submitted to the DCO for clearing.

    For prompt and efficient clearing to occur, the rules, procedures,

    and operational systems of the trading platform and the clearinghouse

    must mesh. Vertically integrated trading and clearing systems currently

    process high volumes of transactions quickly and efficiently. The

    Commission believes that trading platforms and DCOs under separate

    control should be able to coordinate with one another to achieve

    similar results. The Commission also recognizes that there may be

    issues of connectivity between and among trading platforms and

    clearinghouses. The Commission requests comment on how best to

    facilitate the development of infrastructure, systems, and procedures

    to address these issues.

    Proposed paragraph (ii) would require a DCO to have rules that

    provide that the DCO will accept for clearing, immediately upon

    execution, all contracts, agreements, and transactions that are listed

    for clearing by the DCO and (A) that are entered into on or subject to

    the rules of a SEF or DCM; (B) for which the executing parties have

    clearing arrangements in place with clearing members of the DCO; and

    (C) for which the executing parties identify the DCO as the intended

    clearinghouse.

    Rules, procedures, and operational systems along these lines

    currently work well for many exchange-traded futures. Similar

    requirements could be applied across multiple exchanges and

    clearinghouses for swaps. The parties would need to have clearing

    arrangements in place with clearing members in advance of execution. In

    cases where more than one DCO offered clearing services, the parties

    also would need to specify in advance where the trade should be sent

    for clearing.

    Proposed paragraph (iii), which governs swaps subject to mandatory

    clearing, would require a DCO to have rules that provide that the DCO

    will accept for clearing, upon submission, all contracts, agreements,

    and transactions that are listed for clearing by the DCO and (A) That

    are not executed on or subject to the rules of a SEF or DCM; (B) that

    are subject to mandatory clearing pursuant to section 2(h) of the CEA;

    (C) that are submitted by the parties to the DCO, in accordance with

    Sec. 23.506 of the Commission's regulations; (D) for which the

    executing parties have clearing arrangements in place with clearing

    members of the DCO; and (E) for which the executing parties identify

    the DCO as the intended clearinghouse.

    Proposed paragraph (iv) would provide for a longer time frame for

    clearing swaps not executed on or subject to the rules of a SEF or DCM

    and not subject to mandatory clearing. It would require a DCO to have

    rules that provide that the DCO will process for clearing, no later

    than the close of business on the day of submission to the DCO, all

    swaps that are listed for clearing by the DCO and (A) that are not

    executed on a SEF or a DCM; (B) that are not subject to mandatory

    clearing pursuant to section 2(h) of the CEA; (C) that are submitted by

    the parties to the DCO in accordance with proposed Sec. 23.506; (D)

    for which the executing parties have clearing arrangements in place

    with clearing members of the DCO; and (E) for which the executing

    parties identify the DCO as the intended clearinghouse.

    Because the execution of bilateral trades might not be automated

    and because the parties to a trade might not decide that they want to

    clear the trade until some time after execution, immediate clearing

    might not be feasible. However, a DCO should provide sufficient clarity

    about its participant and product eligibility requirements to enable

    swap counterparties to determine whether a bilateral trade would be

    acceptable to be cleared within one day of submission.

    Proposed Sec. 39.12(b)(7)(v) would require that DCOs accepting a

    swap for

    [[Page 13106]]

    clearing provide the counterparties with a definitive written record of

    the terms of their agreement, which will serve as a confirmation of the

    swap. This requirement would facilitate the timely processing and

    confirmation of swaps not executed on a SEF or DCM by allowing parties

    to confirm their transaction by submitting it to a DCO for clearing.

    Swaps executed on a SEF or DCM are confirmed upon execution.\29\ In

    other regulations proposed by the Commission, a swap confirmation is

    defined as the consummation (electronically or otherwise) of legally

    binding documentation (electronic or otherwise) that memorializes the

    agreement of the counterparties to all of the terms of a swap.\30\ By

    providing for confirmation upon acceptance for clearing, SDs and MSPs

    would be able to satisfy proposed Sec. 23.501, which requires timely

    confirmation of all swaps.

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

    \29\ See 76 FR at 1240.

    \30\ See 75 FR 76140; and 75 FR 76574.

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

    (e) Proposed Sec. Sec. 37.702 and 38.601--Reciprocal Requirements for

    SEFs and DCMs

    In connection with proposing that a DCO coordinate the development

    of rules and procedures with each SEF and DCM that lists for trading a

    product that is cleared by the DCO, the Commission is re-proposing

    certain amendments to parts 37 and 38 of the Commission's regulations

    to include reciprocal coordination obligations for SEFs and DCMs.

    The Commission previously proposed Sec. Sec. 37.700 to 703 to

    implement SEF Core Principle 7 (Financial Integrity of Transactions),

    pursuant to its rulemaking authority under sections 5h(h) and 8a(5) of

    the CEA.\31\ Core Principle 7 requires a SEF to ``establish and enforce

    rules and procedures for ensuring the financial integrity of swaps

    entered on or through the facilities of the swap execution facility,

    including the clearing and settlement of the swaps pursuant to section

    2(h)(1) [of the CEA].'' \32\ As previously proposed, Sec. 37.702(b)

    would require a SEF to provide for the financial integrity of its

    transactions cleared by a DCO by ensuring that the SEF has the capacity

    to route transactions to the DCO in a manner acceptable to the DCO for

    purposes of risk management.\33\ In this notice, the Commission

    proposes to renumber previously proposed Sec. 37.702(b) as paragraph

    (b)(1) and add a new paragraph (b)(2) to require the SEF to

    additionally provide for the financial integrity of cleared

    transactions by coordinating with each DCO to which it submits

    transactions for clearing, in the development of rules and procedures

    to facilitate prompt and efficient transaction processing in accordance

    with the requirements of Sec. 39.12(b)(7) of the Commission's

    regulations.

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

    \31\ See 76 FR 1214; 7 U.S.C. 7b-3(h); and 7 U.S.C. 12a(5).

    \32\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).

    \33\ See 76 FR at 1248. Section 37.702(b), as originally

    proposed, referred to ``ongoing'' risk management. In renumbering

    and re-proposing this provision herein, the Commission is deleting

    the term ``ongoing'' because it is superfluous and could create

    confusion when read in conjunction with other Commission regulations

    that refer to ``risk management.'' See, e.g., proposed Sec. 39.13

    relating to risk management for DCOs, 76 FR at 3720.

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

    Similarly, the Commission previously proposed Sec. Sec. 38.600 to

    607 to implement DCM Core Principle 11 (Financial Integrity of

    Transactions) pursuant to its rulemaking authority under sections

    5(d)(1) and 8a(5) of the CEA.\34\ Core Principle 11 requires a DCM to

    ``establish and enforce--(A) rules and procedures for ensuring the

    financial integrity of transactions entered into on or through the

    facilities of the contract market (including the clearance and

    settlement of the transactions with a derivatives clearing

    organization); and (B) rules to ensure--(i) the financial integrity of

    any--(I) futures commission merchant; and (II) introducing broker; and

    (ii) the protection of customer funds.'' \35\ As previously proposed,

    Sec. 38.601 would require that transactions executed on or through a

    DCM, other than transactions in security futures products, must be

    cleared through a registered DCO in accordance with the provisions of

    part 39 of the Commission's regulations.\36\ In this notice, the

    Commission proposes to renumber this provision as paragraph (a) of

    proposed Sec. 38.601 and add a new paragraph (b) to specifically

    require the DCM to coordinate with each DCO to which it submits

    transactions for clearing, in the development of DCO rules and

    procedures to facilitate prompt and efficient transaction processing in

    accordance with the requirements of Sec. 39.12(b)(7) of the

    Commission's regulations.

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

    \34\ See 75 FR 80572; 7 U.S.C. 7(d)(1); and 7.U.S.C. 12a(5).

    \35\ Section 5(d)(11) of the CEA, 7 U.S.C. 7(d)(11).

    \36\ See 75 FR at 80618.

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

    3. Solicitation of Comments

    The Commission solicits comment on all aspects of the proposed

    regulations. It further requests responses to the following specific

    questions: Are there any systemic or legal obstacles to the DCO, SEF,

    and DCM coordination required under the proposed regulation? Are the

    proposed time frames appropriate? Are they operationally feasible? More

    specifically, for futures traded on a DCM, rules and procedures are in

    place under which bunched orders are accepted for clearing immediately

    upon execution, with allocation to individual customer accounts

    occurring before the end of the day. Are similar procedures

    operationally feasible for swaps executed as block trades? What amount

    of time is necessary for asset managers to allocate block trades to the

    individual entities on whose behalf they manage money, prior to the

    allocated trades being sent to clearing (i.e. end of day, two hours,

    etc.)? Should the submission of block trades to a DCO be treated

    differently than other trades executed on or subject to the rules of a

    SEF or DCM? What is the operational feasibility of same-day clearing

    for bilateral swaps that are not required to be cleared?

    C. Proposed Sec. 39.15--Transfer of Customer Positions and Related

    Funds

    1. Recently Proposed Treatment of Funds Standards Under Core Principle

    F

    Core Principle F, as amended by the Dodd-Frank Act,\37\ requires a

    DCO to: (a) Establish standards and procedures that are designed to

    protect and ensure the safety of its clearing members' funds and

    assets; (b) hold such funds and assets in a manner by which to minimize

    the risk of loss or of delay in the DCO's access to the assets and

    funds; and (c) only invest such funds and assets in instruments with

    minimal credit, market, and liquidity risks.\38\ The Commission has

    proposed Sec. 39.15 to establish standards for compliance with Core

    Principle F.\39\

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

    \37\ Section 5b(c)(2)(F) of the CEA; 7 U.S.C. 7a-1(c)(2)(F)

    (Core Principle F).

    \38\ Prior to amendment by the Dodd-Frank Act, Core Principle F

    provided that ``[t]he applicant shall have standards and procedures

    designed to protect and ensure the safety of member and participant

    funds.''

    \39\ See 76 FR at 3723.

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

    2. Newly-Proposed Regulations

    To supplement the previously proposed regulations implementing Core

    Principle F, the Commission is proposing a new Sec. 39.15(d) to

    require a DCO to facilitate the prompt transfer of customer positions

    from one clearing member of the DCO to another clearing member of the

    DCO.\40\

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

    \40\ In connection with the proposed addition of new paragraph

    (d), the Commission also proposes to renumber previously proposed

    paragraph (d) as paragraph (e).

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

    Efficient and complete portability of customer positions and the

    funds

    [[Page 13107]]

    related to those positions is important in both pre-default and post-

    default scenarios. A DCO should therefore structure its portability

    arrangements in a way that facilitates the prompt and efficient

    transfer of all or a portion of a customer's positions and funds from

    one clearing member to one or more other clearing members. A DCO's

    rules and procedures should require clearing members to facilitate the

    transfer of customer positions and funds upon the customer's request,

    subject to any notice or other contractual requirements.

    Proposed Sec. 39.15(d) would require a DCO to have rules providing

    that, upon the request of a customer and subject to the consent of the

    receiving clearing member, the DCO will promptly transfer all or a

    portion of such customer's portfolio of positions and related funds

    from the carrying clearing member of the DCO to another clearing member

    of the DCO, without requiring the close-out and re-booking of the

    positions prior to the requested transfer. The term ``promptly,'' as

    used in this provision is intended to mean as soon as possible and

    within a reasonable period of time. Based on current futures industry

    standards, this time frame is typically no more than two business days.

    The requirement that a DCO not require close-out and re-booking of

    positions eliminates a source of unnecessary delay and market

    disruption, and conforms with current futures industry practice.\41\

    The Commission is unaware of any reason that the transfer of cleared

    swaps positions cannot be accomplished by means of the same process

    that has been used for futures positions.

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

    \41\ See, e.g., National Futures Association Rule 2-27

    ``Transfer of Customer Accounts'' (requiring that in response to a

    customer's request to transfer its account, the carrying member must

    confirm the account balances and positions to the receiving member

    and then effect the requested transfer); and Chicago Mercantile

    Exchange Rule 853 ``Transfer of Trades'' (permitting existing trades

    to be transferred either on the books of a clearing member or from

    one clearing member to another clearing member provided 1. the

    transfer merely constitutes a change from one account to another

    account where the underlying beneficial ownership in the accounts

    remains the same; or 2. an error has been made in the clearing of a

    trade and the error is discovered and the transfer is completed

    within two business days after the trade date).

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

    3. Solicitation of Comments

    The Commission requests comment on whether the use of the term

    ``promptly'' provides adequate guidance or whether another descriptive

    term or phrase, such as ``within a reasonable period of time'' or ``as

    soon as practicable'' would better convey the intended meaning. The

    Commission is not proposing that a specific time frame be included in

    Sec. 39.15(d) because as technology evolves, it is likely that the

    transfer of customer positions and related funds can be accomplished

    more quickly and with greater operational efficiency. The Commission

    requests comment on the proposed time frame and possible alternative

    standards that could be applied.

    As noted above, the Commission believes that the transfer of

    cleared customer swap positions can be processed in the same manner as

    futures positions. The Commission requests comment on whether there are

    distinctions between futures and cleared swaps positions that would

    require a different type of processing such that the cleared swaps

    positions would have to be closed out and re-booked prior to transfer

    from the carrying clearing member to another clearing member.

    The proposed regulation places an obligation on the DCO to promptly

    transfer customer positions and related funds, and the Commission

    requests comment on whether the regulation also should require that a

    DCO adopt rules that would require its clearing members to facilitate

    prompt transfer of customer accounts.

    III. Related Matters

    A. Regulatory Flexibility Act

    1. Swap Dealers and Major Swap Participants

    The Regulatory Flexibility Act (RFA) requires that agencies

    consider whether the regulations they propose will have a significant

    economic impact on a substantial number of small entities.\42\ 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.\43\ The proposed regulations

    would affect SDs and MSPs.

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

    \42\ 5 U.S.C. 601 et seq.

    \43\ 47 FR 18618, Apr. 30, 1982.

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

    SDs and MSPs 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 (FCMs) should not be considered to be small entities for

    purposes of the RFA.\44\ The Commission's determination was based, in

    part, upon the obligation of FCMs to meet the minimum financial

    requirements established by the Commission to enhance the protection of

    customers' segregated funds and protect the financial condition of FCMs

    generally.\45\ Like FCMs, SDs 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 SD

    registration 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 SDs not be

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

    FCMs have previously been determined not to be small entities and in

    light of the exemption from the definition of SD for those engaging in

    a de minimis level of swap dealing.

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

    \44\ Id. at 18619.

    \45\ Id.

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

    The Commission also has previously determined that large traders

    are not ``small entities'' for RFA purposes.\46\ In that determination,

    the Commission considered that a large trading position was indicative

    of the size of the business. MSPs, 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 MSPs not be

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

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

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

    \46\ 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 SDs and MSPs 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 regulations will not have a significant economic

    impact on a substantial number of small entities.

    The Commission invites the public to comment on whether SDs and

    MSPs should be considered small entities for purposes of the RFA.

    [[Page 13108]]

    2. Swap Execution Facilities

    As noted above, the RFA requires that agencies consider whether the

    regulations they propose will have a significant economic impact on a

    substantial number of small entities. 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.

    The regulations adopted herein will affect SEFs. While SEFs are new

    entities to be regulated by the Commission pursuant to the Dodd-Frank

    Act, in a recent rulemaking proposal,\47\ the Commission proposed that

    SEFs should not be considered as small entities for the purpose of the

    RFA. The Dodd-Frank Act defines a SEF to mean ``a trading system or

    platform in which multiple participants have the ability to execute or

    trade swaps by accepting bids and offers made by multiple participants

    in the facility or system, through any means of interstate commerce,

    including any trading facility, that--(A) facilitates the execution of

    swaps between persons; and (B) is not a designated contract market.''

    \48\

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

    \47\ 75 FR 63745-46 (Oct. 18, 2010).

    \48\ See section 1a(50) of the CEA. In addition, the Commission

    proposed regulations regarding the types of entities that must

    register as SEFs. See 76 FR 1214. The Commission does not believe

    that such proposals would alter its determination that a SEF is not

    a ``small entity'' for purposes of the RFA.

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

    In such rulemaking, the Commission proposed that SEFs not be

    considered to be ``small entities'' for essentially the same reasons

    that DCMs and DCOs have previously been determined not to be small

    entities. These reasons include the fact that the Commission designates

    a DCM or registers a DCO only when it meets specific criteria including

    the expenditure of sufficient resources to establish and maintain

    adequate self-regulatory programs. Likewise, the Commission will

    register an entity as a SEF only after it has met specific criteria

    including the expenditure of sufficient resources to establish and

    maintain an adequate self-regulatory program.\49\ Once registered, a

    SEF will be required to comply with the additional requirements set

    forth in the final form of the proposed Part 37 rulemaking.\50\ Under

    such rulemaking, the Commission proposed that SEFs should also not be

    considered small entities based on, among other things, the central

    role SEFs will play in the national regulatory scheme overseeing the

    trading of swaps.\51\ Not only will SEFs play a vital role in the

    national economy, but they will be subject to Commission oversight with

    statutory duties to enforce the regulations adopted by their own

    governing bodies.

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

    \49\ See 76 FR 1214.

    \50\ Id.

    \51\ Id. at 1235.

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

    Accordingly, the Commission does not expect the regulations, as

    proposed herein, to have a significant economic impact on a substantial

    number of small entities. Therefore, the Chairman, on behalf of the

    Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the

    proposed regulations will not have a significant economic impact on a

    substantial number of small entities.

    The Commission invites the public to comment on whether SEFs should

    be considered small entities for purposes of the RFA.

    3. Designated Contract Markets and Derivatives Clearing Organizations

    The regulations proposed by the Commission will affect DCMs and

    DCOs (some of which will be designated as systemically important DCOs).

    As noted above, the Commission has previously established certain

    definitions of ``small entities'' to be used by the Commission in

    evaluating the impact of its regulations on small entities in

    accordance with the RFA. The Commission has previously determined that

    DCMs and DCOs are not small entities for the purpose of the RFA.\52\

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

    certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations

    will not have a significant economic impact on a substantial number of

    small entities.

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

    \52\ See 47 FR 18618, 18621, Apr. 30, 1982 (DCM determination);

    66 FR 45605, 45609, Aug. 29, 2001 (DCO determination).

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

    B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \53\ imposes certain requirements

    on Federal agencies in connection with their conducting or sponsoring

    any collection of information as defined by the PRA. Under the PRA, an

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

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

    valid control number from the Office of Management and Budget (OMB).

    The Commission believes that these proposed regulations will not impose

    any new information collection requirements that require approval of

    OMB under the PRA.

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

    \53\ 44 U.S.C. 3501 et seq.

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

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA 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 regulation or to determine whether

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

    that the Commission ``consider'' the costs and benefits of its action.

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

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

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

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

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

    interest considerations. The Commission may in its discretion give

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

    discretion determine that, notwithstanding its costs, a particular

    regulation is 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

    establish the time frame for SDs, MSPs, FCMs, DCMs, and SEFs to submit

    contracts, agreements, or transactions to a DCO for clearing. The

    proposed regulations would implement new section 4s(i) of the CEA by

    establishing standards for SDs and MSPs related to the timely

    processing and clearing of swaps. The proposed regulations also would

    implement SEF Core Principle 7 (Financial Integrity of Transactions)

    and DCM Core Principle 11 (Financial Integrity of Transactions),

    requiring coordination with DCOs in the development of rules and

    procedures to facilitate clearing. Additionally, the proposed

    regulations would facilitate compliance with DCO Core Principle C

    (Participant and Product Eligibility) in connection with the prompt and

    efficient processing of all contracts, agreements, and transactions

    submitted for clearing. Finally, the proposed regulations would

    implement DCO Core Principle F (Treatment of Funds), requiring a DCO,

    upon customer request, to promptly transfer customer positions and

    related funds from one clearing member to another, without requiring

    the close-out and re-booking of the positions.

    Costs. The Commission has determined that the costs borne by SDs,

    MSPs, FCMs, SEFs, DCMs, and DCOs to implement the new timing

    requirements for processing and clearing positions and for transferring

    customer positions and related funds, may be limited and far outweighed

    by the accrual of benefits to the financial system as a result of the

    [[Page 13109]]

    regulations' implementation. Indeed, as discussed in Section I.B.2.,

    the timely transfer of futures positions and funds is currently

    practiced; thus, the additional costs of similar processes for swaps

    may not be too significant. Rather, timely transfers of positions and

    funds between clearing members would reduce economic and operational

    obstacles. Moreover, the Commission has determined that the costs of

    implementing new timing requirements for clearing would not be

    significantly burdensome to a DCO given that immediate processing and

    clearing of futures contracts is the current industry standard.

    Furthermore, the clearing delays in the swaps market (as discussed in

    Sections I.B.1, above) creates a credit risk because the value of

    position may change between execution and novation, thereby allowing

    financial exposure to accumulate in the absence of daily mark-to-

    market, and additionally can have negative effects on liquidity and the

    market's price discovery function.

    Benefits. The Commission has determined that the benefits of the

    proposed regulations are considerable. Through this proposed

    rulemaking, market access will be expanded by requiring and

    establishing uniform standards for, prompt processing and clearing of

    swaps eligible for clearing by DCOs. Other benefits of timely clearing

    include the promotion of centralized trading and clearing; increased

    financial and legal certainty; and the timely notice of information so

    that parties and market participants can gauge risk exposure,

    liquidity, and market integrity. Timely clearing increases liquidity,

    enhances price discovery for traders, and reduces risk to markets by

    informing market participants of margin concerns and whether safeguards

    should be triggered. Significantly, the Commission notes that these

    regulations would aid market participants in fully complying with Dodd-

    Frank's overarching mandate to promote clearing of swaps. The proposed

    new regulation regarding a DCO's timely transfer of swaps positions and

    related funds would benefit market participants by eliminating economic

    or operational obstacles to customer transfers between clearing

    members. In addition, the standardization of swaps clearing and

    procedures for customer account transfer will be more akin to valuable

    practices used in the futures market. The Commission believes it is

    prudent to employ similar practices in the swaps markets.

    List of Subjects

    17 CFR Part 23

    Antitrust, Commodity futures, Conduct standards, Conflicts of

    interests, Major swap participants, Reporting and recordkeeping, Swap

    dealers, Swaps.

    17 CFR Part 37

    Swaps, Swap execution facilities, Registration application,

    Registered entities, Reporting and recordkeeping requirements.

    17 CFR Part 38

    Block transaction, Commodity futures, Designated contract markets,

    Reporting and recordkeeping requirements, Transactions off the

    centralized market.

    17 CFR Part 39

    Commodity futures, Participant and product eligibility, Risk

    management, Swaps.

    In light of the foregoing, the Commission hereby proposes to amend

    part 23, as proposed to be added at 75 FR 71390, November 23, 2010, and

    further amended at 75 FR 81530, December 28, 2010; part 37, as proposed

    to be revised at 76 FR 1237, January 7, 2011; part 38, as proposed to

    be amended at 75 FR 80606, December 22, 2010; and part 39, as proposed

    to be amended at 76 FR 3717, January 20, 2011, of Title 17 of the Code

    of Federal Regulations 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.

    23.506 Swap processing and clearing.

    3. Add Sec. 23.506 to part 23, subpart I, to read as follows:

    Sec. 23.506 Swap processing and clearing.

    (a) Swap processing. (1) Each swap dealer and major swap

    participant shall ensure that it has the capacity to route swap

    transactions not executed on a swap execution facility or designated

    contract market to a derivatives clearing organization in a manner

    acceptable to the derivatives clearing organization for the purposes of

    risk management; and

    (2) Each swap dealer and major swap participant shall coordinate

    with each derivatives clearing organization to which the swap dealer,

    major swap participant, or its clearing member, submits transactions

    for clearing, to facilitate prompt and efficient swap transaction

    processing in accordance with the requirements of Sec. 39.12(b)(7) of

    this chapter.

    (b) Swap clearing. With respect to each swap that is not executed

    on a swap execution facility or a designated contract market, each swap

    dealer and major swap participant shall:

    (1) If such swap is subject to a mandatory clearing requirement

    pursuant to section 2(h)(1) of the Act and an exception pursuant to

    2(h)(7) is not applicable, submit such swap for clearing to a

    derivatives clearing organization as soon as technologically

    practicable after execution of the swap, but no later than the close of

    business on the day of execution; or

    (2) If such swap is not subject to a mandatory clearing requirement

    pursuant to section 2(h)(1) of the Act but is accepted for clearing by

    any derivatives clearing organization and the swap dealer or major swap

    participant and its counterparty agree that such swap will be submitted

    for clearing, submit such swap for clearing not later than the next

    business day after execution of the swap, or the agreement to clear, if

    later than execution.

    PART 37--SWAP EXECUTION FACILITIES

    4. Revise the authority citation for part 37 to read as follows:

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

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

    Act, Pub. L. 111-203, 124 Stat. 1376.

    Subpart H--Financial Integrity of Transactions

    5. Amend Sec. 37.702 by revising paragraph (b) to read as follows:

    Sec. 37.702 General financial integrity.

    * * * * *

    (b) For transactions cleared by a derivatives clearing

    organization:

    (1) By ensuring that the swap execution facility has the capacity

    to route transactions to the derivative clearing organization in a

    manner acceptable to the derivatives clearing organization for purposes

    of risk management; and

    [[Page 13110]]

    (2) By coordinating with each derivatives clearing organization to

    which it submits transactions for clearing, in the development of rules

    and procedures to facilitate prompt and efficient transaction

    processing in accordance with the requirements of Sec. 39.12(b)(7) of

    this chapter.

    * * * * *

    PART 38--DESIGNATED CONTRACT MARKETS

    6. Revise the authority citation for part 38 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.

    Subpart L--Financial Integrity of Transactions

    7. Revise Sec. 38.601 to read as follows:

    Sec. 38.601 Mandatory clearing.

    (a) Transactions executed on or through the designated contract

    market, other than transactions in security futures products, must be

    cleared through a Commission-registered derivatives clearing

    organization, in accordance with the provisions of part 39 of this

    chapter.

    (b) A designated contract market must coordinate with each

    derivatives clearing organization to which it submits transactions for

    clearing, in the development of rules and procedures to facilitate

    prompt and efficient transaction processing in accordance with the

    requirements of Sec. 39.12(b)(7) of this chapter.

    PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    8. Revise the authority citation for part 39 to read as follows:

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

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

    Act, Pub. L. 111-203, 124 Stat. 1376.

    Subpart B--Compliance With Core Principles

    9. Amend Sec. 39.12 by revising paragraphs (b)(2) through (b)(4),

    and adding paragraphs (b)(5) through (b)(7), to read as follows:

    Sec. 39.12 Participant and product eligibility.

    (a) * * *

    (b) * * *

    (2) A derivatives clearing organization shall adopt rules providing

    that all swaps with the same terms and conditions, as defined by

    templates established under derivatives clearing organization rules,

    submitted to the derivatives clearing organization for clearing are

    economically equivalent within the derivatives clearing organization

    and may be offset with each other within the derivatives clearing

    organization.

    (3) A derivatives clearing organization shall provide for non-

    discriminatory clearing of a swap executed bilaterally or on or subject

    to the rules of an unaffiliated swap execution facility or designated

    contract market.

    (4) A derivatives clearing organization shall not require that one

    of the original executing parties must be a clearing member in order

    for a contract, agreement, or transaction to be eligible for clearing.

    (5) A derivatives clearing organization shall select contract unit

    sizes and other terms and conditions that maximize liquidity,

    facilitate transparency in pricing, promote open access, and allow for

    effective risk management. To the extent appropriate to further these

    objectives, a derivatives clearing organization shall select contract

    units for clearing purposes that are smaller than the contract units in

    which trades submitted for clearing were executed.

    (6) A derivatives clearing organization that clears swaps shall

    have rules providing that, upon acceptance of a swap by the derivatives

    clearing organization for clearing:

    (i) The original swap is extinguished;

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

    between clearing members and the derivatives clearing organization;

    (iii) All terms of the cleared swaps must conform to templates

    established under derivatives clearing organization rules; and

    (iv) If a swap is cleared by a clearing member on behalf of a

    customer, all terms of the swap, as carried in the customer account on

    the books of the clearing member, must conform to the terms of the

    cleared swap established under the derivatives clearing organization's

    rules.

    (7) Time frame for clearing. (i) General. Each derivatives clearing

    organization shall coordinate with each swap execution facility and

    designated contract market that lists for trading a product that is

    cleared by the derivatives clearing organization, in developing rules

    and procedures to facilitate prompt and efficient processing of all

    contracts, agreements, and transactions submitted to the derivatives

    clearing organization for clearing.

    (ii) Transactions executed on or subject to the rules of a swap

    execution facility or designated contract market. A derivatives

    clearing organization shall have rules that provide that the

    derivatives clearing organization will accept for clearing, immediately

    upon execution, all contracts, agreements, and transactions that are

    listed for clearing by the derivatives clearing organization and

    (A) That are entered into on a swap execution facility or

    designated contract market;

    (B) For which the executing parties have clearing arrangements in

    place with clearing members of the derivatives clearing organization;

    and

    (C) For which the executing parties identify the derivatives

    clearing organization as the intended clearinghouse.

    (iii) Swaps not executed on or subject to the rules of a swap

    execution facility or a designated contract market and subject to

    mandatory clearing. A derivatives clearing organization shall have

    rules that provide that the derivatives clearing organization will

    accept for clearing, upon submission to the derivatives clearing

    organization, all swaps that are listed for clearing by the derivatives

    clearing organization and

    (A) That are not executed on a swap execution facility or a

    designated contract market;

    (B) That are subject to mandatory clearing pursuant to section 2(h)

    of the Act;

    (C) That are submitted by the parties to the derivatives clearing

    organization, in accordance with Sec. 23.506 of this chapter;

    (D) For which the executing parties have clearing arrangements in

    place with clearing members of the derivatives clearing organization;

    and

    (E) For which the executing parties identify the derivatives

    clearing organization as the intended clearinghouse.

    (iv) Swaps not executed on or subject to the rules of a swap

    execution facility or a designated contract market and not subject to

    mandatory clearing. A derivatives clearing organization shall have

    rules that provide that the derivatives clearing organization will

    accept for clearing, no later than the close of business on the day of

    submission to the derivatives clearing organization, all swaps that are

    listed for clearing by the derivatives clearing organization and

    (A) That are not executed on a swap execution facility or a

    designated contract market;

    (B) That are not subject to mandatory clearing pursuant to section

    2(h) of the Act;

    [[Page 13111]]

    (C) That are submitted by the parties to the derivatives clearing

    organization, in accordance with Sec. 23.506 of this chapter;

    (D) For which the executing parties have clearing arrangements in

    place with clearing members of the derivatives clearing organization;

    and

    (E) For which the executing parties identify the derivatives

    clearing organization as the intended clearinghouse.

    (v) All swaps not executed on a swap execution facility or a

    designated contract market and submitted for clearing. A derivatives

    clearing organization shall have rules that provide that all swaps

    submitted to the derivatives clearing organization for clearing shall

    include written documentation that memorializes all of the terms of the

    transaction and legally supersedes any previous agreement. The

    confirmation of all terms of the transaction shall take place at the

    same time as the swap is accepted for clearing.

    10. Amend Sec. 39.15 by revising paragraph (d) and adding

    paragraph (e) to read as follows:

    Sec. 39.15 Treatment of funds.

    * * * * *

    (d) Transfer of customer positions. A derivatives clearing

    organization shall have rules providing that, upon the request of a

    customer and subject to the consent of the receiving clearing member,

    the derivatives clearing organization will promptly transfer all or a

    portion of such customer's portfolio of positions and related funds

    from the carrying clearing member of the derivatives clearing

    organization to another clearing member of the derivatives clearing

    organization, without requiring the close-out and re-booking of the

    positions prior to the requested transfer.

    (e) Permitted investments. Funds and assets belonging to clearing

    members and their customers that are invested by a derivatives clearing

    organization shall be held in instruments with minimal credit, market,

    and liquidity risks. Any investment of customer funds or assets by a

    derivatives clearing organization shall comply with Sec. 1.25 of this

    part, as if all such funds and assets comprise customer funds subject

    to segregation pursuant to section 4d(a) of the Act and Commission

    regulations thereunder.

    Issued in Washington, DC, on February 24, 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 Requirements for Processing, Clearing and Transfer of

    Customer Positions--Commission Voting Summary and Statements of

    Commissioners

    Appendix 1--Commission 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 regarding straight-through

    processing because it furthers the goal of expanding access to and

    strengthening the financial integrity of the swap markets. These

    proposed regulations would require and establish uniform standards

    for prompt processing, submission and acceptance for clearing of

    swaps eligible for clearing. Such uniform standards, similar to the

    practices in the futures markets, lower risk because they allow

    market participants to get the prompt benefit of clearing rather

    than having to first enter into a bilateral transaction that would

    subsequently be moved into a clearinghouse.

    In addition, I support the requirement for prompt and efficient

    transfer of customer positions from a carrying clearing member of a

    clearinghouse to another clearing member of the clearinghouse, upon

    a customer's request. This would promote efficiency and avoid

    unnecessary delay and market disruption. Furthermore, users of

    derivatives could get the benefit of greater competition amongst

    clearing members.

    [FR Doc. 2011-4707 Filed 3-9-11; 8:45 am]

    BILLING CODE P

    Last Updated: March 10, 2011



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