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2012-17357

  • Federal Register, Volume 77 Issue 137 (Tuesday, July 17, 2012)[Federal Register Volume 77, Number 137 (Tuesday, July 17, 2012)]

    [Proposed Rules]

    [Pages 41940-41952]

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

    [FR Doc No: 2012-17357]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 39

    RIN 3038-AD47

    Clearing Exemption for Certain Swaps Entered Into by Cooperatives

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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

    ``Commission'') is proposing a rule pursuant to its authority under

    Section 4(c) of the Commodity Exchange Act (CEA) allowing cooperatives

    meeting certain conditions to elect not to submit for clearing certain

    swaps that such cooperatives would otherwise be required to clear in

    accordance with Section 2(h)(1) of the CEA.

    DATES: Comments must be received on or before August 16, 2012.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD47,

    by any of the following methods:

    Commission Web Site: 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. ``Exempt Cooperatives'' must be clearly

    indicated on all comment submissions. Comments will be posted as

    received to http://www.cftc.gov. You should submit only information

    that you wish to make

    [[Page 41941]]

    available publicly. If you wish the Commission to consider information

    that is exempt from disclosure under the Freedom of Information Act, a

    petition for confidential treatment of the exempt information may be

    submitted according to the established procedures in CFTC Regulation

    145.9.\1\

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    \1\ 17 CFR 145.9. Commission regulations may be accessed through

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

    _____________________________________-

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

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

    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: Erik F. Remmler, Associate Director,

    202-418-7630, Division of Clearing and Risk, Commodity Futures Trading

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

    DC 20581.

    I. Background

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

    Reform and Consumer Protection Act (the ``Dodd-Frank Act''),\2\

    establishes a comprehensive new regulatory framework for swaps. The CEA

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

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

    swap is required to be cleared, unless an exception to the clearing

    requirement applies; (2) to be reported to a swap data repository (SDR)

    or the Commission; and (3) if such swap is subject to a clearing

    requirement, to be executed on a designated contract market (DCM) or

    swap execution facility (SEF), unless no DCM or SEF has made the swap

    available to trade.

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

    Act, Pub. L. 111-203, 124 Stat. 1376 (2010), available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

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

    for swaps, providing that ``it shall be unlawful for any person to

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

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

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

    \3\ However, Section 2(h)(7)(A) of the CEA provides that the clearing

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

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

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

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

    generally meets its financial obligations associated with entering into

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

    exception'').\4\ The Commission has promulgated Sec. 39.6 to implement

    certain provisions of Section 2(h)(7). Accordingly, any swap that is

    required to be cleared by the Commission pursuant to Section 2(h)(2) of

    the CEA must be submitted to a DCO for clearing by the counterparties

    unless the conditions of Sec. 39.6 are satisfied.

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    \3\ See Section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A).

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

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

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

    cleared swaps to hedge risks associated with their underlying

    businesses, such as manufacturing, energy exploration, farming,

    transportation, or other commercial activities. Additionally, in

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

    ``consider whether to exempt from the definition of `financial entity'

    small banks, savings associations, farm credit system institutions and

    credit unions including:

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

    less;

    (II) Farm credit system institutions with total assets of

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

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

    In Sec. 39.6(d), the Commission identifies which financial

    entities are small financial institutions and establishes an exemption

    for these small financial institutions pursuant to Section

    2(h)(7)(C)(ii) (the ``small financial institution exemption''). The

    small financial institution exemption largely adopts the language of

    Section 2(h)(7)(C)(ii) providing for an exemption for the types of

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

    or less.

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

    notice of proposed rulemaking (NPRM) for Sec. 39.6.\5\ Several parties

    that commented on the Sec. 39.6 NPRM recommended that the Commission

    provide relief from clearing for cooperatives.\6\ These commenters

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

    and the fact that cooperatives act on behalf of members that are non-

    financial entities or small financial institutions justified an

    extension of the end-user exception to the cooperatives. In effect,

    they proposed that because a cooperative acts in place of its members

    when facing the larger financial markets on behalf of the members, the

    end-user exception that would be available to a cooperative's members

    should pass through to the cooperative. Accordingly, if the members

    themselves could elect the end-user exception, then the Commission

    should permit the cooperatives to do so as well.

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

    \6\ See, e.g., Agricultural Leaders of Michigan (ALM), The Farm

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

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

    Cooperatives, Dairy Farmers of America, and National Rural Utilities

    Cooperative Finance Corporation (CFC). All comments referred to in

    this NPRM were comments received on the Sec. 39.6 NPRM and can be

    found on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=937.

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

    for cooperatives, including risk considerations, are discussed

    below.

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

    cooperatives from other types of entities and therefore, cooperatives

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

    the CEA, would be prohibited from electing the end-user exception

    unless they qualify for the small financial institution exemption. Some

    commenters recommended including cooperatives that are ``financial

    entities'' with total assets in excess of $10 billion in the small

    financial institution exemption.\8\ However, as explained in greater

    detail in the final release for Sec. 39.6, Section 2(h)(7)(C)(ii) of

    the CEA focused on asset size and not on the structure of the financial

    entity. Accordingly, only cooperatives that are financial entities with

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

    institutions.

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    \8\ See, e.g., FCC, CFC, AEC, ALM, and GEC.

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    Notwithstanding the foregoing, the Commission recognizes that the

    member ownership structure of cooperatives and the merits of

    effectively passing through the end-user exception available to members

    to the cooperative warrant consideration. Accordingly, the Commission

    is using the authority provided in Section 4(c) of the CEA to propose

    Sec. 39.6(f), which would permit cooperatives that meet certain

    qualifications to elect not to clear certain swaps that are otherwise

    [[Page 41942]]

    required to be cleared pursuant to Section 2(h)(1)(A) of the CEA

    (hereinafter referred to as the ``cooperative exemption'').

    II. Cooperatives

    Cooperatives that are ``financial entities'' as defined in Section

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

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

    face the financial markets on behalf of their members. For example,

    they borrow money on a wholesale basis and then lend those funds to

    their members to meet their funding needs at a lower cost than would

    otherwise be available to the members individually. The commenters on

    the Sec. 39.6 NPRM noted that financial cooperatives also enter into

    swaps with members primarily in connection with originating loans to

    the members for the purpose of hedging interest rate risk associated

    with the loans.\9\ The cooperatives also enter into swaps with other

    financial entities, typically Swap Dealers (``SDs'') or Major Swap

    Participants (``MSPs''), to hedge the risks associated with the swaps

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

    wholesale borrowing activities. The cooperatives use their size and

    resources on behalf of their members to provide more efficient

    financing and hedging than the members might achieve on their own.

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    \9\ See, e.g., FCC, CFC, AEC, ALM, and GEC.

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    Several commenters also noted that financial cooperative swap

    activities in connection with loans to members pose less risk to the

    financial system.\10\ The cooperatives often enter into swaps with

    other financial institutions, typically on a matched book basis, to

    hedge the underlying risk of those member swaps. According to

    commenters, such matched book swaps pose less risk to the cooperatives

    because the market risk is largely passed through. Similar comments

    were made with respect to small financial institutions and the

    Commission acknowledged this as one reason for adopting the small

    financial institution exemption.

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    \10\ See, e.g., FCC, CFC, AEC, ALM, and GEC.

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    Some cooperatives have more than $10 billion in total assets, but

    act on behalf of members that are non-financial entities, small

    financial institutions, or other cooperatives whose members consist of

    such entities.\11\ For example, there are four Farm Credit System (FCS)

    banks chartered under Federal law, each of which has assets in excess

    of $10 billion. The FCS banks are cooperatives primarily owned by their

    cooperative associations.\12\ The Farm Credit Act authorizes the banks

    ``to make loans and commitments to eligible cooperative associations.''

    \13\ The FCS association members are, in turn, authorized to make loans

    to farmers and ranchers, rural residents, and persons furnishing farm-

    related services.\14\ In effect, FCS bank cooperatives lend to FCS

    associations, which lend to farmers, and farmers own the FCS

    associations, which own the FCS banks. In addition to the example of

    the FCS banks as provided in Federal law, other cooperatives formed

    under Federal and state laws also have a similar entity structure in

    that they are owned by their members and they exist primarily to serve

    those members.

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    \11\ See, e.g., FCC, CFC, AEC, ALM, and GEC.

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

    be issued or transferred and held only by * * * cooperative

    associations eligible to borrow from the banks'').

    \13\ Id. Sec. 2128(a).

    \14\ See id. Sec. 2075.

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    III. The Proposed Cooperative Exemption Rule

    A. Introduction

    In proposing an exemption for certain swaps entered into by

    cooperatives that are financial entities, the Commission is very much

    aware that central clearing of swaps is a primary focus of Title VII of

    the Dodd-Frank Act. Central clearing mitigates financial system risks

    that result from swaps and any exemption therefrom should be narrowly

    drawn to minimize the impact on the risk mitigation benefits of

    clearing and should also be in line with the end-user exception

    requirements of Section 2(h)(7) of the CEA. Accordingly, the Commission

    has sought to narrow the cooperative exemption appropriately.

    B. Regulation 39.6(f)(1). Definition of Exempt Cooperative

    The proposed rule would apply only to cooperatives that are

    financial entities as defined in Section 2(h)(7)(C)(i) of the CEA. The

    end-user exception is generally available to commercial (i.e. non-

    financial) cooperatives, or financial cooperatives that meet the

    requirements of the small financial institution exemption, that are

    seeking an exception for swaps that hedge or mitigate commercial risk.

    Proposed paragraph (f)(1) would provide that each member of the

    cooperative seeking to elect the cooperative exemption must be a non-

    financial entity, a financial institution to which the small financial

    institution exemption applies, or itself a cooperative each of whose

    members fall into those categories. This provision would limit the

    cooperative exemption to cooperatives whose members are entities that

    could elect the end-user exception themselves. With this provision, the

    Commission is assuring that the cooperative exemption does not become

    overly broad and available to cooperatives with members that are non-

    exempt financial entities as defined in Section 2(h)(7)(C) of the

    CEA.\15\

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    \15\ For example, the cooperative exemption would not be

    available to the Federal Home Loan Banks, whose membership includes

    financial entities that are not small financial institutions.

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    C. Regulation 39.6(f)(2). Swaps to Which the Cooperative Exemption

    Applies

    Proposed paragraph (f)(2)(i) limits application of the cooperative

    exemption to swaps entered into with members of the exempt cooperative

    in connection with originating loans \16\ for members or swaps entered

    into by exempt cooperatives that hedge or mitigate risks associated

    with member loans or member loan-related swaps. This provision assures

    that the cooperative exemption is only used as a pass through for swaps

    with members who would themselves be able to elect the end-user

    exception and for swaps that hedge or mitigate risk in connection with

    member loans and swaps as would be required by Section 2(h)(7)(A)(ii)

    of the CEA for those member swaps. The primary rationale for the

    cooperative exemption is based on the unique relationship between

    cooperatives and their member owners. Expanding this exemption to

    include swaps with non-member entities with which a cooperative may do

    business (other than swaps used to hedge risks related to member loans

    or swaps) would go beyond the purpose of the exemption, which is to

    pass the member's end-user exception through to the cooperative because

    of the unique member-owner structure of cooperatives. Furthermore,

    allowing cooperatives to enter into non-cleared swaps with non-members

    or swaps that serve purposes other than hedging member loans or swaps

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

    market advantage over their competitors that is not justified by their

    cooperative structure or the provisions of the Dodd-Frank Act.

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    \16\ The meaning of ``in connection with originating a loan'' is

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

    the CEA. See 77 FR 30596, 30744 (May 23, 2012). For purposes of

    consistency, that meaning is incorporated in the cooperative

    exception rule.

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    Additionally, for the cooperative exemption to benefit all members

    of cooperatives who would otherwise be able to elect the end-user

    exception themselves, the proposed exemption would be available to all

    qualifying

    [[Page 41943]]

    cooperatives, including those with total assets greater than $10

    billion.\17\ The Commission remains mindful that larger financial

    institutions pose greater risk to the financial system than small

    financial institutions, such as those identified in Section

    2(h)(7)(C)(ii) of the CEA, because larger financial institutions are

    more likely to be interconnected with a greater number of market

    participants and therefore more likely to transfer risk widely. In

    keeping with this concern and in recognition of the larger asset size

    of cooperatives that will be able to use the cooperative exemption, the

    Commission, in its proposal, is limiting the cooperative exemption to

    swaps in connection with member loans. Several commenters who requested

    an exemption for cooperatives justified the request in part on the

    basis that cooperatives principally use swaps in connection with

    originating loans to members. These commenters noted that such swaps

    are relatively low risk. To minimize the risk a cooperative exemption

    might pose to the financial system, the proposed rule would limit the

    exemption to swaps in connection with originating loans to members and

    swaps used by the cooperatives to hedge or mitigate risks related to

    member loans or risks arising from swaps entered into with members

    related to such loans.

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    \17\ Some financial cooperatives such as CoBank, and AgriBank

    FCB, have total assets in excess of $50 billion.

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    D. Regulation 39.6(f)(3). Reporting

    Under Section 4(c) of the CEA, the Commission can subject such

    exemptive relief to appropriate terms and conditions.\18\ To this end,

    the Commission believes it is appropriate to impose certain reporting

    requirements on any entities that may be exempted from the clearing

    requirement by this rule. These reporting requirements are effectively

    identical to the reporting requirements for the end-user exception. For

    the end-user exception, Section 2(h)(7)(A)(iii) of the CEA requires

    that one of the counterparties to the swap must notify ``the Commission

    in a manner set forth by the Commission how it generally meets its

    financial obligations associated with entering into non-cleared

    swaps.'' Regulation 39.6(b) implements Section 2(h)(7)(A)(iii) by

    requiring one of the counterparties (the ``reporting counterparty'') to

    provide, or cause to be provided, to a registered SDR, or if no

    registered SDR is available, to the Commission, information about how

    the counterparty electing the exception generally expects to meet its

    financial obligations associated with non-cleared swaps. In addition,

    Sec. 39.6(b) requires the reporting counterparty to provide certain

    information that the Commission will use to monitor compliance with,

    and prevent abuse of, the end-user exception. The reporting

    counterparty would be required to provide the information at the time

    the electing counterparty elects the end-user exception.

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    \18\ See Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1).

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    Proposed Sec. 39.6(f)(3) would require the same reporting required

    for the end-user exception whenever the cooperative exemption is

    elected for the same reasons. For purposes of regulatory consistency,

    Sec. 39.6(f)(3) incorporates the provisions of Sec. 39.6(b) with only

    those changes needed to apply the provisions to the cooperative

    exemption.

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

    Section 4(c)(1) of the CEA provides that, in order to promote

    responsible economic or financial innovation and fair competition, the

    Commission, by rule, regulation or order, after notice and opportunity

    for hearing, may exempt any agreement, contract, or transaction, or

    class thereof, including any person or class of persons offering,

    entering into, rendering advice or rendering other services with

    respect to the agreement, contract, or transaction, from the contract

    market designation requirement of Section 4(a) of the CEA, or any other

    provision of the CEA other than certain enumerated provisions.\19\

    Through this exemptive regulation, the Commission proposes that

    cooperatives meeting certain conditions are the class of persons that

    should be exempted from the clearing requirement for certain types of

    swaps. As discussed in more detail above, such cooperatives act on

    behalf of their members in certain financial matters and to that

    extent, the proposed rule effectively provides for passing through the

    end-user exception available to such cooperatives' members to the

    cooperatives.

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    \19\ 7 U.S.C. 6(c).

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

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

    Section 2(h)(7)(C)(i) unless such entity is exempt from the definition

    because it is a small financial institution as provided in Section

    2(h)(7)(C)(ii) of the CEA and Sec. 39.6(d). As explained in greater

    detail in the final release for Sec. 39.6, Section 2(h)(7)(C)(ii) of

    the CEA focused exclusively on asset size for determining what

    financial entities could qualify for the small financial institution

    exemption. Furthermore, the $10 billion limit identified in that

    section guides the Commission's consideration of the small financial

    institution exemption absent convincing evidence that a different asset

    level is warranted. Section 2(h)(7)(C)(ii) does not provide special

    consideration for cooperatives that meet the definition of ``financial

    entity'' and therefore the asset size limit applies to them.

    Cooperatives have a member ownership structure in which the

    cooperatives exist to serve their member owners and do not act for

    their own profit.\20\ Furthermore, the member owners of the cooperative

    collectively have full control and governance of the cooperative. In a

    real sense, the cooperative is not separable from its member owners. As

    described above, some cooperatives provide financial services to their

    members including lending and providing swaps to members and hedging

    those activities with other financial entities such as SDs. The

    memberships of some of these cooperatives consist of entities that each

    could elect the end-user exception if acting alone. However, some of

    those cooperatives meet the definition of ``financial entity'' and have

    assets in excess of $10 billion, and therefore the end-user exception

    is unavailable to them. Accordingly, the cooperative members would not

    benefit from the end-user exception if they use their cooperative as

    the preferred vehicle for hedging commercial risks in the greater

    financial marketplace. In light of this, the Commission is exercising

    its authority under Section 4(c) of the CEA to propose Sec. 39.6(f)

    and establish the cooperative exemption.

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    \20\ For example, the CFC was formed as a nonprofit corporation

    under the District of Columbia Cooperative Association Act of 1940

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

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

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

    Incorporation, Art. 1.

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    The Commission believes that there are benefits to having

    cooperatives execute risk hedging or mitigation strategies with, and on

    behalf of, their members. The FCC has commented that ``[t]o provide

    tailored financing products for farmers and farm-related businesses,

    Farm Credit System institutions rely on the safe use of derivatives to

    manage interest rate, liquidity, and balance sheet risk, primarily in

    the form of interest rate swaps.'' The FCS institutions include the

    four FCS cooperative banks, each of which has total assets in excess of

    $10 billion. Using the substantial, finance-focused resources of the

    cooperative to

    [[Page 41944]]

    undertake hedging activities for the numerous members of the

    cooperative promotes greater economic efficiency and lower costs for

    the members. The Commission believes that the use of swaps in this

    manner by cooperatives on behalf of their members constitutes financial

    innovation that is beneficial for the public.

    In light of the foregoing, the Commission believes that the

    adoption of proposed Sec. 39.6(f) and its attendant terms and

    conditions would promote responsible economic and financial innovation

    and fair competition.

    The Commission requests public comment on whether the proposed

    regulation satisfies the requirements for exemption under Section 4(c)

    of the CEA and on all aspects of the proposed regulation. The

    Commission welcomes any quantifiable data and analysis that would

    assist the Commission in this rulemaking. In particular, the Commission

    is requesting comment on the following questions:

    Has the Commission correctly limited the exemption to

    cooperatives in which each member is: A non-financial entity, a

    financial entity to which the small financial institution exemption

    applies, or a cooperative each of whose members fall into those

    categories?

    Are there cooperatives in which not all members are a non-

    financial entity, a financial entity to which the small financial

    institution exemption applies, or a cooperative each of whose members

    fall into those categories? If so, should the proposed definition of

    ``exempt cooperative'' be modified to include them? Would such

    inclusion undermine the narrow pass through focus of the rule? Is it

    possible that financial entities that do not currently operate as

    cooperatives and for which the clearing requirement is intended could

    reorganize or create cooperatives to take advantage of the proposed

    cooperative exemption? If so, how could the proposed rule be modified

    to prevent that from happening? Should affiliates of financial entities

    identified in Sections 2(h)(7)(C)(i)(I) through (VII) of the CEA be

    expressly excluded from the definition of exempt cooperative?

    The Commission invites comment on whether the types of

    swaps for which the cooperative exemption may be elected should be

    expanded or further limited and why. If so, please describe such

    expansion or limitation specifically. Is the provision allowing for

    swaps that hedge or mitigate risk ``related to loans to members'' too

    limited or not limited enough? What clarifying language could be added

    to more effectively identify such swaps that would be consistent with

    the rationale used for the proposed rule regarding the cooperative

    standing in place of its members when entering into hedging swaps with

    other financial entities? Are there practical or other considerations

    in identifying which swaps serve to hedge or mitigate the risk of

    member loans or member loan related swaps?

    Are there additional or alternative considerations that

    should be reviewed by the Commission regarding the proposed cooperative

    exemption?

    V. Consideration of Costs and Benefits

    A. Background

    In the wake of the financial crisis of 2008, Congress adopted the

    Dodd-Frank Act, which, among other things, requires the Commission to

    determine whether a particular swap, or group, category, type or class

    of swaps, shall be required to be cleared.\21\ Specifically, Section

    723(a)(3) of the Dodd-Frank Act amended Section 2(h)(1)(A) of the CEA

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

    person submits such swap for clearing to a [DCO] that is registered

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

    CEA] if the swap is required to be cleared.'' This clearing requirement

    is designed to reduce counterparty risk associated with swaps and, in

    turn, mitigate the potential systemic impact of such risk and reduce

    the likelihood for swaps to cause or exacerbate instability in the

    financial system.\22\ It reflects a fundamental premise of the Dodd-

    Frank Act: the use of properly regulated and functioning central

    clearing can reduce systemic risk.

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    \21\ See Section 2(h)(2) of the CEA, 7 U.S.C. 2(h)(2).

    \22\ When a bilateral swap is moved into clearing, the DCO

    becomes the counterparty to each of the original participants in the

    swap. This standardizes counterparty risk for the original swap

    participants in that they each bear the same risk attributable to

    facing the DCO as counterparty. In addition, DCOs exist for the

    primary purpose of managing credit exposure from the swaps being

    cleared and therefore DCOs are effective at mitigating counterparty

    risk through the use of risk management frameworks. These frameworks

    model risk and collect defined levels of initial and variation

    margin from the counterparties that are adjusted for changing market

    conditions and use guarantee funds and other risk management tools

    for the purpose of assuring that, in the event of a member default,

    all other counterparties remain whole. DCOs have demonstrated

    resilience in the face of past market stress. Most recently, they

    remained financially sound and effectively settled positions in the

    midst of turbulent events in 2007-2008 that threatened the financial

    health and stability of many other types of entities.

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    Notwithstanding the benefits of clearing, Section 2(h)(7) of the

    CEA provides the end-user exception if one of the swap counterparties:

    ``(i) is not a financial entity; (ii) is using swaps to hedge or

    mitigate commercial risk; and (iii) notifies the Commission, in a

    manner set forth by the Commission, how it generally meets its

    financial obligations associated with entering into non-cleared

    swaps.'' Section 2(h)(7)(C)(ii) of the CEA directs the Commission to

    consider making the end-user exception available to small banks,

    savings associations, credit unions, and farm credit institutions,

    including those institutions with total assets of $10 billion or less,

    through an exemption from the definition of ``financial entity.'' \23\

    In Sec. 39.6(d), the Commission establishes the small financial

    institution exemption for these institutions. The small financial

    institution exemption largely adopts the language of Section

    2(h)(7)(C)(ii) providing for an exemption for the institutions

    identified in Section 2(h)(7)(C)(ii) that have total assets of $10

    billion or less.

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

    \23\ See CEA 2(h)(7)(C)(ii).

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

    Through proposed Sec. 39.6(f), the Commission would use the

    authority provided in Section 4(c) of the CEA to permit ``exempt

    cooperatives,'' as defined in Sec. 39.6(f)(1), to elect not to clear

    certain swaps that are otherwise required to be cleared pursuant to

    Section 2(h)(1)(A) of the CEA, notwithstanding that these cooperatives

    are financial entities that do not qualify for the small financial

    institution exemption because their assets exceed $10 billion.

    Specifically, an ``exempt cooperative'' is a cooperative under Federal

    or state law that is a financial entity each member of which is

    eligible for the end-user exception, or is another cooperative composed

    of members, each of whom is eligible for the end-user exception. An

    exempt cooperative would not be required to clear swaps with members in

    connection with member loans, or swaps used by the exempt cooperative

    to hedge or mitigate risk arising in connection with such swaps with

    members or loans to members.

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

    an NPRM for Sec. 39.6 proposing the end-user exception.\24\ Several

    parties that commented on the Sec. 39.6 NPRM recommended that the

    Commission provide relief from clearing for cooperatives. These

    commenters reasoned \25\ that the member ownership nature of

    cooperatives and the fact that they act on behalf of members that are

    non-financial entities or small financial

    [[Page 41945]]

    institutions justified an extension of the end-user exception to the

    cooperatives. In effect, the commenters posit that because a

    cooperative takes the place of its members to face the larger financial

    markets on behalf of the members, the end-user exception that would be

    available to a cooperative's members should pass through to the

    cooperative. Accordingly, if the members themselves could elect the

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

    to do so as well.

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

    \24\ See 75 FR 80747.

    \25\ Other reasons given for providing an exemption from

    clearing for cooperatives, including risk considerations, are

    discussed above in this NPRM.

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

    The Commission is proposing such an exemption herein for certain

    cooperatives, and it is the costs and benefits of this exemption that

    the Commission considers in the discussion that follows.

    B. Statutory Requirement To Consider the Costs and Benefits of the

    Commission's Action: CEA Section 15(a)

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

    costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders. Section 15(a) further

    specifies that the costs and benefits shall be evaluated in light of

    the following five broad areas of market and public concern: (1)

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

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

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

    interest considerations. Accordingly, the Commission considers the

    costs and benefits resulting from its own discretionary determinations

    with respect to the Section 15(a) factors.

    The costs and benefits of the Commission's action in this

    rulemaking are measured against the level of costs and benefits that

    would exist absent this rulemaking. Absent this rulemaking, all

    cooperatives that are financial entities as defined in Section

    2(h)(7)(C)(i) of the CEA and which are not otherwise exempt from that

    definition would be unable to elect the end-user exception pursuant to

    Section 2(h)(7)(A)(i) of the CEA, which specifies that to elect the

    end-user exception a counterparty must not be a financial entity. Thus,

    the foundation against which this rulemaking's costs and benefits are

    measured is the statutory requirement that cooperatives within the

    definition of financial entities and with assets exceeding $10 billion,

    remain subject to the clearing requirement of Section 2(h)(1)(A) of the

    CEA. Additionally, the Commission considers the rulemaking's costs and

    benefits relative to alternatives besides that of abstaining from

    action.

    As discussed in more detail below, the Commission is able to

    estimate certain reporting costs. The dollar estimates are offered as

    ranges with upper and lower bounds, which is necessary to accommodate

    the uncertainty that surrounds them. The Commission notes that the most

    likely outcome with respect to each estimate is a cost above the lower

    bound and below the upper bound.

    The discussion below considers the rule's costs and benefits as

    well as alternatives to the rule. The discussion concludes with a

    consideration of the rule's costs and benefits in light of the five

    factors specified in Section 15(a) of the CEA.

    C. Costs and Benefits of the Proposed Rule

    1. Costs and Benefits to Electing Entities

    Without this proposed 4(c) rule, cooperatives meeting the criteria

    of the proposed exemption would have to engage in cleared swaps

    pursuant to Section 2(h)(1)(A) of the CEA when they are either: (1)

    Transacting with a member who does not elect the end-user exception, or

    (2) transacting with another financial entity to hedge or mitigate risk

    related to loans with members or swaps with members related to such

    loans. Extending the end-user exception to such entities in these

    circumstances benefits them in that they will not have to bear the

    costs of clearing that each may incur. These costs include certain

    capital costs and fees associated with clearing.\26\

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

    \26\ Transacting swaps bilaterally is not without cost, of

    course, and the Commission notes that uncleared swaps have

    associated costs as well. For example, when a market participant

    faces a swap dealer or other counterparty in an uncleared swap, the

    uncleared swap contains an implicit line of credit upon which the

    market participant effectively draws when its swap position is out

    of the money. Counterparties charge for this implicit line of credit

    in the spread they offer on uncollateralized, uncleared swaps.

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

    Regarding fees, DCOs typically charge FCMs an initial transaction

    fee for each of the FCM customers' swaps that are cleared, as well as

    an annual maintenance fee for each of their customers' open positions.

    For example, not including customer-specific and volume discounts, the

    transaction fees for interest rate swaps at CME range from $1 to $24

    per million notional amount and the maintenance fees are $2 per year

    per million notional amount for open positions.\27\ LCH transaction

    fees for interest rate swaps range from $1 to $20 per million notional

    amount, and the maintenance fee ranges from $5 to $20 per swap per

    month, depending on the number of outstanding swap positions that an

    entity has with the DCO.\28\

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

    \27\ See CME pricing charts at: http://www.cmegroup.com/trading/cds/files/CDS-Fees.pdf; http://www.cmegroup.com/trading/interest-rates/files/CME-IRS-Customer-Fee.pdf; and http://www.cmegroup.com/trading/interest-rates/files/CME-IRS-Self-Clearing-Fee.pdf.

    \28\ See LCH pricing for clearing services related to OTC

    interest rate swaps at: http://www.lchclearnet.com/swaps/swapclear_for_clearing_members/fees.asp.

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

    It is within the FCM's discretion to determine whether or how to

    pass these fees on to their customers, but the Commission believes that

    FCMs generally pass these fees straight through to their customers. To

    the extent that this is true, allowing exempt cooperatives to elect not

    to clear swaps that meet the requirements of the proposed rule will

    result in the exempt cooperatives not having to pay such clearing

    related fees with respect to those swaps. The Commission requests

    comment on whether and how FCMs pass DCO fees on to their customers,

    and to what extent this creates clearing-related costs for exempt

    cooperatives entering into swaps meeting the conditions proposed in

    this rule. If possible, please provide quantitative information related

    to this issue.

    The proposed rule may also impact the capital that cooperatives

    that are financial entities are required to hold with respect to their

    swap positions pursuant to prudential regulatory capital requirements.

    As stated above, when compared to a situation in which the proposed

    exemption is not available, the proposed exemption will reduce the

    number of swaps that eligible cooperatives are required to clear. The

    Commission anticipates that reducing the number of swaps that such

    cooperatives clear will impact their capital ratios in such a way as to

    reduce the amount of capital that eligible cooperatives are required to

    hold. This creates both benefits and costs. Regarding benefits, this

    increases the cooperative's lending capacity, enabling them to lend

    more to their members without retaining or raising additional capital.

    As for costs, this allows eligible cooperatives to become more highly

    leveraged, which increases the counterparty risk that they pose to

    their members and other market participants with whom they transact.

    The Commission invites comment on the effects of required clearing on

    the capital requirements for financial cooperatives. To the extent

    possible, please quantify the anticipated effect of the proposed

    exemption on relevant capital ratios as well as the costs and benefits

    resulting from changes in the cooperatives' leverage and lending

    capacity.

    [[Page 41946]]

    Clearing swaps creates an obligation for counterparties to the

    cleared swap to post both initial and variation margin related to that

    position. A clearing exemption may reduce the amount of capital that an

    entity has to post in order to cover its positions, particularly if

    that entity does not post margin directly to its counterparties with

    respect to some or all of its uncleared positions.\29\ However, in the

    case of unmargined swaps, dealers typically account for the

    counterparty risk that they face in the absence of margin by adjusting

    the terms of the swap. The additional cost embedded in an unmargined

    swap to account for additional counterparty risk is likely to be

    roughly equivalent to the cost associated with a line of credit that

    would be used to post margin for that position if it were cleared.\30\

    The Commission, therefore, believes that this is an implicit cost in

    unmargined swaps that is made explicit by clearing swaps, rather than a

    new cost created by clearing. Therefore the exemption is not expected

    to significantly alter exempt cooperatives' costs in this area. The

    Commission invites comment regarding the expected effect of this

    proposed exemption on the amount and cost of collateral posted by

    entities eligible for the exemption. Wherever possible, please quantify

    costs and benefits.

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

    \29\ This assessment assumes similar levels of netting and

    compression in both uncleared and cleared portfolios. These

    assumptions are not necessarily valid in all cases. Moving swaps

    into clearing can--depending on the number of counterparties a

    market participant originally faced with uncleared swaps, the margin

    agreements in place with those counterparties, and the number of

    DCOs that eventually clear those positions--reduce the amount of

    margin that an entity has to post.

    \30\ Mello, Antonio S., and John E. Parsons, ``Margins,

    Liquidity, and the Cost of Hedging.'' MIT Center for Energy and

    Environmental Policy Research, May 2012.

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

    Regarding reporting, cooperatives electing the cooperative

    exemption will have some reporting costs. The proposed rule requires

    that exempt cooperatives adhere to the reporting requirements of Sec.

    39.6(b). For each swap where the exemption is elected, either the

    cooperative or its counterparty (if the counterparty is an SD or MSP)

    must report: (1) That the election of the exemption is being made; (2)

    which party is the electing counterparty; and (3) certain information

    specific to the electing counterparty unless that information has

    already been provided by the electing counterparty through an annual

    filing. The third set of information comprises data that is likely to

    remain relatively constant for many, but not all, electing

    counterparties and therefore, does not require swap-by-swap reporting

    and can be reported less frequently. In addition, for entities that are

    registered with the SEC, the reporting party will also be required to

    report: (1) The SEC filer's central index key number; and (2) that an

    appropriate committee of the board of directors has approved the

    decision for that entity to enter into swaps that are exempt from the

    requirements of Sections 2(h)(1) and 2(h)(8) of the Act.

    When entering into swaps with members and electing the exemption,

    exempt cooperatives will be responsible to report this information.

    When cooperatives enter into swaps with SDs or MSPs, the SDs or MSPs

    will be responsible to report this information. Entities would bear

    costs related to the personnel hours committed to reporting the

    required information. As described below in the subsection entitled

    ``Number of Exempt Cooperatives and Swaps'' in the section entitled

    ``Paperwork Reduction Act,'' the Commission estimates that

    approximately ten cooperatives will be eligible for the cooperative

    exemption. For purposes of estimating costs, the Commission assumes

    that each potential exempt cooperative is likely to function as the

    reporting counterparty for at least some of their exempted swaps in any

    given year because they would be responsible for reporting when

    transacting exempted swaps with members.

    A review of information provided for five cooperatives that likely

    would be exempt cooperatives showed a range of swap usage from none to

    as many as approximately 200 swaps a year with most entering into less

    than 50 swaps a year. Using the high end of reported swaps for the five

    cooperatives for which information was available, an estimate of 50

    swaps per year was calculated. The Commission believes this estimate is

    high because some of the reported swaps may not meet the requirements

    of the proposed rule and several cooperatives for which information was

    not available to the Commission likely undertake little if any, swap

    activity. However, for purposes of the cost calculations, the

    Commission assumes that each of the ten potential exempt cooperatives

    will enter into 50 swaps each year. Accordingly, we estimate that

    exempt cooperatives may elect the cooperative exemption for 500 swaps

    each year. The Commission invites comment regarding the estimated

    number of swaps conducted by each cooperative that would be eligible

    under this proposed rule. In addition, the Commission invites comment

    regarding the per cooperative average and total notional value of swaps

    that would be eligible under the cooperative exemption.

    For each exempted swap, to comply with the swap-by-swap reporting

    requirements in Sec. Sec. 39.6(b)(1)(i) and (ii), the reporting

    counterparty will be required to check one box indicating the exemption

    is being elected and complete one field identifying the electing

    counterparty. The Commission expects that this information will be

    entered into the appropriate reporting system concurrently with

    additional information that is required under the CEA and other

    Commission regulations promulgated thereunder. Therefore, each

    reporting counterparty is likely to spend 15 seconds to two minutes per

    transaction in incremental time entering the swap-by-swap information

    into the reporting system, or in the aggregate, 1.5 hours to 17 hours

    per year for all 500 estimated swaps. A financial analyst's average

    salary is $208/hour, which corresponds to approximately $1-$7 per

    transaction or in aggregate, $300-$3,500 per year for all 500 estimated

    swaps.\31\

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

    \31\ Wage estimates are taken from the SIFMA ``Report on

    Management and Professional Earnings in the Securities Industry

    2011.'' Hourly wages are calculated assuming 1,800 hours per year

    and a multiplier of 5.35 to account for overhead and bonuses. In

    light of the challenges of developing precise estimates, the results

    of calculations have been rounded.

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

    Regulation 39.6(b)(1)(iii) allows for certain counterparty specific

    information identified therein to be reported either swap-by-swap by

    the reporting counterparty or annually by the electing counterparty.

    For the end-user exception for which that section also applies, the

    alternative options may be useful in instances where electing

    counterparties enter into very few swaps each year and the reporting

    counterparties will report this information for them on a swap-by-swap

    basis. However, for the cooperative exemption, the exempt cooperative

    is the electing counterparty and will also likely be the reporting

    counterparty for swaps entered into with members. Furthermore, the

    Commission expects that, assuming the cooperative is the reporting

    counterparty, the time burden for the first swap entered into by an

    exempt cooperative in collecting and reporting the information required

    by Sec. 39.6(b)(1)(iii) will be approximately the same as the time

    burden for collecting and reporting the information for the annual

    filing. Given the cost equivalence for annual reporting to reporting a

    single swap if the exempt cooperative is both the electing and

    reporting counterparty, the Commission assumes that all ten exempt

    cooperatives will make an annual filing

    [[Page 41947]]

    of the information required for Sec. 39.6(1)(iii). The Commission

    estimates that it will take an average of 30 minutes to 90 minutes to

    complete and submit the annual filing. The average hourly wage for a

    compliance attorney is $390, which means that the annual per

    cooperative cost for the filing is likely to be between $200 and $590.

    If all ten eligible cooperatives were to undertake an annual filing,

    the aggregate cost would be $2,000 to $5,900.

    Furthermore, when an exempt cooperative is not functioning as the

    reporting counterparty (i.e. when transacting with a SD or MSP), it

    may, at certain times, need to communicate information to its reporting

    counterparties in order to facilitate reporting. That information may

    include, among other things, whether the electing counterparty has

    filed an annual report pursuant to Sec. 39.6(b) and information to

    facilitate any due diligence that the reporting counterparty may

    conduct. These costs will likely vary substantially depending on the

    number of different reporting counterparties with whom an electing

    counterparty conducts transactions, how frequently the electing

    counterparty enters into swaps, whether the electing counterparty

    undertakes an annual filing, and the due diligence that the reporting

    counterparty chooses to conduct. Therefore, the Commission believes

    that it is difficult to estimate these costs reliably at this time.

    Nevertheless, the Commission estimates that non-reporting electing

    counterparties will incur between five minutes and ten hours of annual

    burden hours, or in the aggregate, between approximately one hour and

    100 hours. The hourly wage for a compliance attorney is $390, which

    means that the annual aggregate cost for communicating information to

    the reporting counterparty is likely to be between $400 and $39,000.

    Given the unknowns associated with this cost estimate noted above, the

    Commission does not believe this wide range can be narrowed without

    further information.

    2. Costs and Benefits for Counterparties to Electing Cooperatives

    Reduced clearing of swaps by exempt cooperatives likely will

    increase counterparty risk for both exempt cooperatives and their

    counterparties. Cooperatives will be more exposed to financial

    instability in their counterparties, and conversely, the cooperatives'

    counterparties may be exposed to any instability that might develop

    within the exempt cooperatives. This could be problematic for an exempt

    cooperative if one of the dealers with which the cooperative has large

    uncleared positions experiences financial instability, or if groups of

    members whose financial strength may be highly correlated and whose

    aggregate uncleared positions with the cooperative are large, encounter

    financial challenges. Conversely, if an exempt cooperative becomes

    insolvent and its positions with a SD or MSP are substantial, it is

    possible that its uncleared positions could be large enough to create

    or exacerbate instability at the SD or MSP, and could also create

    significant exposure for the members the cooperative serves. In this

    way, financial instability at one of the cooperative's counterparties

    could adversely impact the other counterparties of that cooperative.

    However, these risks may be mitigated through negotiated collateral

    agreements between exempt cooperatives and their counterparties. The

    Commission understands that many swaps in the uncleared market are

    subject to such agreements.\32\ The Commission invites comment on the

    size of exposures between potential exempt cooperatives and other

    financial entities, the size and number of positions between exempt

    cooperatives and their members, and the extent to which uncleared swaps

    between exempt cooperatives and financial entities, and transactions

    between exempt cooperatives and their members, are currently

    collateralized. Please quantify estimates, where possible.

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

    \32\ The 2012 ISDA Margin Survey indicates that 71% of all OTC

    derivatives transactions were subject to collateral agreements

    during 2011, but notes that the degree of collateralization may vary

    significantly depending on the type of derivative and counterparties

    entering into a transaction.

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

    In a similar vein, some members of exempt cooperatives are

    commercial entities that, in the absence of this exemption, could elect

    not to clear swaps by using the end-user exception. The proposed

    cooperative exemption does not affect the ability of those members to

    elect the end-user exemption, but it does constrain their ability to

    forego the end-user exception when entering into transactions with

    exempt cooperatives that are eligible for the proposed exemption. In

    other words, either the exempt cooperative or the member may elect not

    to clear the swap, and neither party may compel the other to clear the

    swap. To the extent that members are unconstrained in their choice of

    counterparties, this is not problematic. Members could still go to a SD

    or other financial entity, which has no clearing exemption election

    ability, to access the terms and counterparty protection that a cleared

    position provides. However, if members are constrained in their choice

    of counterparties (i.e. if they do not have sufficient size or

    experience to transact with a SD, or if they need the collateral that

    is already pledged with the loan to secure a corresponding swap) they

    will not be able to elect a cleared transaction when using swaps that

    are required to be cleared unless the cooperative agrees to clearing.

    The Commission invites comment regarding the extent to which this

    consideration represents a cost to members of cooperatives that would

    be eligible for the exemption under the criteria proposed in this rule.

    If possible, please quantify any such costs.

    3. Costs and Benefits to the Public

    The public generally has an interest in required clearing because

    of its potential to reduce counterparty risk among large,

    interconnected institutions, and to facilitate rapid resolution of

    outstanding positions held by such institutions in the event of their

    default. By narrowly crafting the proposed cooperative exemption to

    incorporate qualifying criteria limiting both the types of institutions

    and the types of swaps that are eligible, the Commission expects the

    proposed exemption to appropriately conserve this public interest.

    Moreover, for this narrow category of swaps proposed for exemption, the

    potential remains for exempt cooperatives and their counterparties to

    mitigate residual counterparty risk through negotiated collateral

    agreements. The Commission invites comment regarding the extent to

    which this proposed exemption would impose costs or provide benefits on

    the public, including the expected impact of negotiated collateral

    agreements. Please provide quantification where possible.

    D. Costs and Benefits Compared to Alternatives

    The proposed cooperative exemption includes two important limiting

    criteria. First, each member of a cooperative must independently be

    able to elect the end-user exception or be a cooperative whose members

    can elect the end-user exception. Second, the swaps for which exempt

    cooperatives may make use of the proposed rule only includes those

    entered into by the cooperative with its members in connection with

    originating loans or swaps that hedge or mitigate risks associated with

    such swaps or associated with member loans.

    The Commission considered including cooperatives consisting of

    members that could not elect the end-user exception. Such an exemption

    would assist in ensuring that a greater number of cooperatives and

    their members are able to elect not to clear

    [[Page 41948]]

    swaps. However, the Commission believes that such an exemption would

    significantly undermine Congress' intent to promote clearing and be

    inconsistent with the end-user exception provided for in Section

    2(h)(7) of the CEA. This alternative could allow any large financial

    entities such as SDs or MSPs, which Congress clearly intended the

    clearing requirement to apply to without exception, to form

    cooperatives with other entities that would be exempt from the clearing

    requirement. By contrast, with the proposed provision, the Commission

    is assuring that the cooperative exemption does not become overly broad

    and available to cooperatives with members that are financial entities

    as defined in Section 2(h)(7)(C) of the CEA.

    The Commission also considered exempting any swap transacted by an

    exempt cooperative. However, the Commission was concerned that

    financial entities such as SDs, MSPs, or non-member borrowers that are

    financial entities would be able to avoid clearing by entering into

    swaps through an exempt cooperative. For example, from a SD's

    perspective, taking a long position on a swap with another SD would

    require clearing. However, the two parties could have essentially the

    same economic arrangement if the first SD goes long on the swap with an

    exempt cooperative, and the second SD takes a short position on the

    same swap with the same exempt cooperative. The exempt cooperative

    would be even, and the two SDs would have created a synthetic swap that

    avoided the clearing requirement. The proposed provision avoids such a

    scenario by ensuring that the cooperative exemption is only used as a

    pass through for swaps with members who would themselves be able to

    elect the end-user exception and for swaps that hedge or mitigate risk

    in connection member loans or swaps as would be required by Section

    2(h)(7)(A)(ii) of the CEA.

    The Commission invites comment regarding the extent to which the

    requirements in the definition of exempt cooperative may be too

    restrictive for cooperatives that the commenter believes should have

    the benefit of the proposed cooperative exemption or are not

    restrictive enough to protect the public interest in requiring clearing

    of certain swaps. Similarly, the Commission invites comment on whether

    the limitation on the types of swaps for which the cooperative

    exemption may be elected should be expanded or further limited and why.

    Please describe such specific expansion or further limitation

    contemplated and the costs and benefits that could result therefrom.

    E. Section 15(a) Factors

    1. Protection of Market Participants and the Public

    As described above, allowing exempt cooperatives to exempt certain

    swaps from required clearing will reduce the DCO and FCM clearing fees

    that such entities may otherwise bear. This, in turn, provides benefits

    to the members of exempt cooperatives, who would otherwise absorb such

    costs as they are passed through by the cooperatives to their members

    in the form of fees or less desirable spreads on swaps or loans

    conducted with the cooperative. In addition, the exemption may reduce

    the amount of capital that exempt cooperatives must allocate to margin

    accounts with their FCM.

    The proposed rule is narrowly tailored to exempt only swaps that

    are associated with positions established in connection with loans made

    to customers, or that hedge or mitigate risk arising in connection with

    such member loans or swaps. Further, it is otherwise generally

    consistent with the requirements for the end-user exception as provided

    in Section 2(h)(7) of the CEA and Sec. 39.6. Given the proposed

    cooperative exemption's limited scope and the remaining potential for

    exempt cooperatives and their counterparties to mitigate residual

    counterparty risk through negotiated collateral agreements, the

    Commission does not anticipate that the proposed rule would materially

    compromise protection of market participants and the public. The

    Commission requests comment on the extent to which the limitations on

    the entities and transactions eligible for the proposed exemption will

    limit risk to market participants and the public. If possible, please

    quantify relevant estimates.

    2. Efficiency, Competitiveness, and Financial Integrity of Swap Markets

    While the proposed rule would take swaps out of clearing, it limits

    any compromise of the financial integrity of the swap markets insomuch

    as it is narrowly tailored to include only cooperatives that are made

    up entirely of entities that could elect the end-user exception, and

    only swaps related to originating loans between the cooperative and

    such members. The Commission invites comment on the effects of the

    proposed rule on efficiency, competitiveness, and financial integrity

    of swap markets.

    3. Price Discovery

    Clearing, in general, encourages better price discovery because it

    eliminates the importance of counterparty creditworthiness in pricing

    swaps cleared through a given DCO. That is, by making the counterparty

    creditworthiness of all swaps of a certain type essentially the same,

    prices should reflect factors related to the terms of the swap, rather

    than the idiosyncratic risk posed by the entities trading it.\33\ To

    the extent that the cooperative exemption reduces the number of swaps

    subject to required clearing, it will lessen the beneficial effects of

    required clearing for price discovery. However, the Commission assumes

    that the number of swaps eligible for this exemption, estimated above

    at 500 a year, will be a de minimis fraction of all those that are

    otherwise required to be cleared. The Commission invites comment on the

    effects of the proposed rule on price discovery.

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

    \33\ See Chen, K., et al. ``An Analysis of CDS Transactions:

    Implications for Public Reporting,'' September 2011, Federal Reserve

    Bank of New York Staff Reports, at 14.

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

    4. Sound Risk Management Practices

    To the extent that a swap is removed from clearing, all other

    things being constant, it is a detriment to a sound risk management

    regime. To the extent that exempt cooperatives enter into uncleared

    swaps on the basis of this proposed rule, it likely increases the

    amount of counterparty risk that exempt cooperatives and their

    counterparties face. For the public, it increases the risk that

    financial distress at one or more cooperatives could spread to other

    financial institutions with which those cooperatives have concentrated

    positions. However, as discussed above, this additional risk may be

    reduced by the presence of bilateral margin agreements, which the

    Commission believes are often used in the absence of clearing.

    Furthermore, the Commission believes that, given the small number of

    swaps that will be exempted from clearing as a result of the proposed

    rule, estimated above to be 500 each year, these risks to the public

    will be minimized. The Commission invites comment regarding the effect

    of the proposed rule on the risk exposure of the cooperatives meeting

    the criteria proposed in this rule, their counterparties, and the

    public. Where possible, please quantify any costs or benefits that are

    relevant.

    [[Page 41949]]

    5. Other Public Interest Considerations

    The Commission has not identified any public interest

    considerations relevant to this proposed rule beyond those already

    noted above.

    F. Public Comment on the Cost-Benefit Considerations

    The Commission invites public comment on all aspects of the cost-

    benefit considerations. More specifically, the Commission also requests

    comment on the following.

    Would a cooperative exemption have any adverse impact on

    competition?

    Would a cooperative exemption have an impact on fees or other

    charges for any products and/or services?

    Would a cooperative exemption result in efficiencies or other

    benefits not described in this NPRM?

    Commenters are also invited to submit any data or other information

    that they may have quantifying or qualifying the costs and benefits of

    the proposal with their comment letters.

    VI. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \34\ (``RFA'') requires that

    agencies consider whether proposed rules will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis on the impact.

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

    \34\ See 5 U.S.C. 601 et seq.

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

    The proposed rule will not have a significant economic impact on a

    substantial number of small entities. The proposed rule would affect

    cooperatives, their members, and potentially the counterparties with

    whom they trade. These entities could be SDs, MSPs, and eligible

    contract participants (ECPs).\35\ The Commission has previously

    established certain definitions of ``small entities'' to be used by the

    Commission in evaluating the impact of its rules on small entities in

    accordance with the RFA. In that regard, the Commission has certified

    previously that SDs and MSPs are not small entities for purposes of the

    RFA.\36\ The Commission is making a similar determination for purposes

    of this proposal. The proposed rules would also affect SDRs, which the

    Commission has similarly determined not to be small entities for

    purposes of the RFA. The Commission is making the same determination

    with respect to the proposed rules.

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

    \35\ It is possible that a cooperative or members thereof may

    not be ECPs. However, pursuant to Section 2(e) of the CEA, if a

    counterparty to a swap is not an ECP, then such swap must be entered

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

    a contract market under Section 5 of the CEA. All such swaps are

    required to be cleared by the board of trade. In effect all swaps

    entered into by a cooperative or a member that is not an ECP will

    need to be executed on a board of trade and therefore will be

    cleared.

    \36\ See 77 FR 30596, 30701 (May 23, 2012).

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

    The Commission has previously determined that ECPs are not small

    entities for purposes of the RFA.\37\ However, in its proposal of rule

    Sec. 39.6, the Commission received a joint comment (``Electric

    Associations Letter'') from the National Rural Electric Cooperative

    Association, the American Public Power Association and the Large Public

    Power Council (the ``Associations'') asserting that certain members of

    the Associations may both be ECPs under the CEA and small businesses

    under the RFA.\38\ These members of the Associations, as the Commission

    understands, have been determined to be small entities by the Small

    Business Administration (``SBA'') because they are ``primarily engaged

    in the generation, transmission, and/or distribution of electric energy

    for sale and [their] total electric output for the preceding fiscal

    year did not exceed 4 million megawatt hours.'' \39\ The Electric

    Associations Letter states that the Associations' members are ``not

    financial entities'' and ``engage in swaps only to mitigate or hedge

    commercial risks.'' \40\ Because the Associations' members that have

    been determined by the SBA to be small entities would be using swaps to

    hedge commercial risk, the Commission expects that they would be able

    to use the end-user exception from the clearing requirement and

    therefore would not be affected to any significant extent by this

    proposed exemption.

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

    \37\ See 66 FR 20740, 20743 (Apr. 25, 2001).

    \38\ See joint letter from EEI, NRECA, and ESPA, dated Nov. 4,

    2011, (Electric Associations Letter), commenting on Swap Transaction

    Compliance and Implementation Schedule: Clearing and Trade Execution

    Requirements under Section 2(h) of the CEA, 76 FR 58186 (Sept. 20,

    2011).

    \39\ Small Business Administration, Table of Small Business Size

    Standards, Nov. 5, 2010.

    \40\ See Electric Associations Letter, at 2.

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

    Accordingly, because nearly all of the entities that may be

    affected by the proposed cooperative exemption are not small entities,

    and because the few ECPs that have been determined by the SBA to be

    small entities are unlikely to be affected to any significant extent by

    the proposed exemption, the Chairman, on behalf of the Commission,

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

    regulation would 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

    1. Overview

    The Paperwork Reduction Act (PRA) \41\ imposes certain requirements

    on Federal agencies in connection with their conducting or sponsoring

    any collection of information as defined by 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 issued by the Office of Management and Budget (OMB). Certain

    provisions of this proposed rule would result in new collection of

    information requirements, within the meaning of the PRA, for exempt

    cooperatives. These new reporting requirements for exempt cooperatives

    are not currently covered by any existing OMB control number and OMB

    has not yet assigned a control number for this new collection. The

    Commission therefore is submitting this proposal to the OMB for review

    in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.

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

    \41\ 44 U.S.C. 3501 et seq.

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

    The title for this collection of information is ``Rule 39.6(f)

    Cooperative Clearing Exemption Notification.'' If adopted, this new

    collection of information would be mandatory for those parties availing

    themselves of the cooperative exemption. The Commission will protect

    proprietary information according to the Freedom of Information Act and

    17 CFR Part 145, ``Commission Records and Information.'' In addition,

    Section 8(a)(1) of the CEA strictly prohibits the Commission, unless

    specifically authorized by the CEA, from making public ``data and

    information that would separately disclose the business transactions or

    market positions of any person and trade secrets or names of

    customers.'' The Commission is also required to protect certain

    information contained in a government system of records according to

    the Privacy Act of 1974, 5 U.S.C. 552a.

    2. Information Provided by Reporting Entities

    This proposed cooperative exemption rule would trigger certain

    reporting conditions under proposed Sec. 39.6(f)(3) that must be

    satisfied for exempt cooperatives. These conditions are designed to

    notify the Commission when the exemption from the clearing requirements

    in Section 2(h)(1)(A) of the CEA is being elected, address Commission

    concerns regarding exempt cooperative swap risk, and provide the

    Commission with information necessary to regulate swap markets. In

    particular,

    [[Page 41950]]

    the reporting conditions in proposed Sec. 39.6(f)(3), which requires

    compliance with reporting requirements under Sec. 39.6(b) for swaps

    for which the cooperative exemption is elected, would establish new

    collection of information requirements within the meaning of the PRA.

    Additionally, exempt cooperatives may be required to supplement their

    reporting systems for purposes of complying with the proposed reporting

    requirements.

    For each swap where the exemption is elected, either the

    cooperative or its counterparty (if the counterparty is an SD or MSP)

    must report: (1) That the election of the exemption is being made; (2)

    which party is the electing counterparty; and (3) certain information

    specific to the electing counterparty unless that information has

    already been provided by the electing counterparty through an annual

    filing. The third set of information comprises data that is likely to

    remain relatively constant for many, but not all, electing

    counterparties and therefore, does not require swap-by-swap reporting

    and can be reported less frequently. In addition, for entities that are

    registered with the SEC, the reporting party will also be required to

    report: (1) The SEC filer's central index key number; and (2) that an

    appropriate committee of the board of directors has approved the

    decision for that entity to enter into swaps that are exempt from the

    requirements of Section 2(h)(1)(A) of the CEA.

    When entering into swaps with members and electing the exemption,

    exempt cooperatives will likely be responsible to report this

    information. When cooperatives enter into swaps with SDs or MSPs, the

    SDs or MSPs will be responsible to report this information. However,

    the cooperatives would bear costs related to the personnel hours

    committed to reporting the required information.

    The Commission provides estimates of the time burden required for

    exempt cooperatives to comply with the proposed requirements below.\42\

    The estimates include quantifiable costs, including one-time and annual

    burden hours and costs per cooperative, and costs that are incurred on

    a swap-by-swap basis. The dollar estimates are offered as ranges with

    upper and lower bounds, which is necessary to accommodate uncertainty

    regarding the estimates.

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

    \42\ See 5 CFR 1320.3(b) for the definition of the term

    ``burden.''

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

    3. Number of Exempt Cooperatives and Swaps

    The total reporting related costs of the cooperative exemption

    would depend on the number of cooperatives electing the cooperative

    exemption, as well as the number of swaps for which cooperatives would

    elect to use the exemption. In addition, as described in more detail

    below, the cost will also depend on whether the cooperatives choose the

    annual reporting option permitted by the proposed rule.

    To identify the number of cooperatives that could elect the

    cooperative exemption, the Commission first considered what types of

    cooperatives may be financial entities with total assets in excess of

    $10 billion since non-financial cooperatives or cooperatives that are

    financial entities with assets of $10 billion or less can use the end-

    user exception in the alternative and the costs of reporting thereunder

    have already been addressed in the end-user exception rulemaking. Given

    the comments received for the end-user exception NPRM regarding

    cooperatives and consideration of other financial cooperatives the

    Commission is aware of, the Commission believes that cooperatives that

    may meet the definition of exempt cooperative could be farm credit

    system cooperatives, credit unions, and financial cooperatives that

    provide financing in the rural electric space. Based on a review of

    data available from the regulators for these entities and information

    provided by commenters, the Commission believes there are approximately

    ten cooperatives that will meet the definition of ``financial entity''

    in Section 2(h)(7)(C)(i)(VIII) of the CEA and which will not be exempt

    from that definition as small financial institutions because they have

    total assets in excess of $10 billion. Each of these is likely to

    function as the reporting counterparty for at least some of their

    exempted swaps in any given year since they would likely be responsible

    for reporting when transacting exempted swaps with members.

    A review of information provided for five cooperatives that likely

    would be exempt cooperatives showed a range of swap usage from none to

    as many as approximately 200 swaps a year with most entering into less

    than 50 swaps a year. Using the high end of reported swaps for the five

    cooperatives for which information was available, an estimate of 50

    swaps per year was calculated. The Commission believes this estimate is

    high because some of the reported swaps may not meet the requirements

    of the proposed rule and several cooperatives for which information was

    not available to the Commission likely undertake little, if any, swap

    activity. However, for purposes of the cost calculations, we will

    assume that each of the ten potential exempt cooperatives will enter

    into 50 swaps per year. Accordingly, we estimate that exempt

    cooperatives may elect the cooperative exemption for 500 swaps each

    year.

    4. Proposed Sec. 39.6(f)(3) Reporting Requirements Cost Estimate

    a. Ongoing Reporting Burden Hours and Costs

    Proposed Sec. 39.6(f)(3) would require exempt cooperatives that

    are reporting counterparties to comply with the reporting requirements

    in paragraph (b) of Sec. 39.6, which require delivering specified

    information to a registered SDR or, if no registered SDR is available,

    the Commission. Counterparties must also undertake reporting pursuant

    to Sec. 39.6(b) if the end-user exception is elected.

    Assuming that the exempt cooperative is the reporting counterparty,

    it would have to report the information required in Sec. 39.6(b)(1)(i)

    and (ii) for each swap for which it elects the cooperative exemption.

    To comply with Sec. 39.6(b)(1)(i) and (ii), each reporting

    counterparty would be required to check one box in the SDR or

    Commission reporting data fields indicating that the exempt cooperative

    is electing not to clear the swap. The Commission expects that each

    reporting counterparty would likely spend 15 seconds to two minutes per

    transaction entering this information into the reporting system, or in

    the aggregate, 1.5 hours to 17 hours per year for all 500 estimated

    swaps. Using a financial analyst's average salary of $208/hour, these

    burden hour costs would equal between less than $1 and $7 for each

    transaction, or approximately $300 to $3,500 per year for all 500

    transactions.\43\

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

    \43\ Wage estimates are taken from the SIFMA ``Report on

    Management and Professional Earnings in the Securities Industry

    2011.'' Hourly wages are calculated assuming 1,800 hours per year

    and a multiplier of 5.35 to account for overhead and bonuses. In

    light of the challenges of developing precise estimates, the results

    of all calculations have been rounded.

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

    Regulation 39.6(b)(1)(iii) allows for certain counterparty specific

    information identified therein to be reported either swap-by-swap by

    the reporting counterparty or annually by the electing counterparty.

    For the end-user exception, the alternative options may be useful in

    instances where electing counterparties enter into very

    [[Page 41951]]

    few swaps each year and the reporting counterparties will report this

    information for them on a swap-by-swap basis. However, for the

    cooperative exemption, the exempt cooperative is the electing

    counterparty and will also likely be the reporting counterparty for

    swaps entered into with members. Furthermore, the Commission expects

    that, assuming the cooperative is the reporting counterparty, the time

    burden for the first swap entered into by an exempt cooperative in

    collecting and reporting the information required by Sec.

    39.6(b)(1)(iii) will be approximately the same as the time burden for

    collecting and reporting the information for the annual filing. Given

    the cost equivalence for annual reporting to reporting a single swap if

    the exempt cooperative is the electing counterparty and the reporting

    counterparty, the Commission assumes that all ten exempt cooperatives

    will make an annual filing of the information required for Sec.

    39.6(1)(iii). The Commission estimates that it will take an average of

    30 minutes to 90 minutes to complete and submit the annual filing. The

    average hourly wage for a compliance attorney is $390, which means that

    the annual per cooperative cost for the filing is likely to be between

    $200 and $590. If all ten eligible cooperatives were to undertake an

    annual filing, the aggregate cost would be $2,000 to $5,900.

    b. Other Costs

    i. Updating Reporting Procedures

    The Commission believes that cooperatives electing the cooperative

    exemption would have established reporting systems to comply with other

    Commission rules regarding swap reporting generally. Reporting

    counterparties may need to modify their reporting systems in order to

    accommodate the additional data fields required by this rule. The

    Commission estimates that those modifications would create a one-time

    expense of approximately one to ten burden hours per reporting

    counterparty. The Commission estimates that the hourly wage for a

    senior programmer is $341, which means that the one-time, per entity

    cost for modifying reporting systems to comply with proposed Sec.

    39.6(f)(3) would likely be between $340 and $3,400, and the aggregate

    one-time cost for all ten potential exempt cooperatives is estimated to

    be $3,400 to $34,100.

    ii. Burden on Non-Reporting Cooperatives

    When an exempt cooperative is not functioning as the reporting

    counterparty (i.e. when transacting with a SD or MSP), it may, at

    certain times, need to communicate information to its reporting

    counterparties in order to facilitate reporting. That information may

    include, among other things, whether the exempt cooperative has filed

    an annual report pursuant to Sec. 39.6(b) and information to

    facilitate any due diligence that the reporting counterparty may

    conduct. These costs will likely vary substantially depending on the

    number of different reporting counterparties with whom an exempt

    cooperative conducts transactions, how frequently the exempt

    cooperative enters into swaps, whether the exempt cooperative

    undertakes an annual filing, and the due diligence that the reporting

    counterparty chooses to conduct. Therefore, the Commission believes

    that it is difficult to estimate these costs reliably at this time.

    Nevertheless, the Commission estimates that a non-reporting exempt

    cooperative will incur between five minutes and ten hours of annual

    burden hours. The hourly wage for a compliance attorney is $390, which

    means that the annual aggregate cost for communicating information to

    the reporting counterparty is likely to be between $400 and $39,000.

    Given the unknowns associated with this cost estimate noted above, the

    Commission does not believe this wide range can be narrowed without

    further information.

    c. Reporting Cost Summary

    The reporting costs described above are summarized in the following

    table.

    Summary of Reporting-Related Costs

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

    Aggregate hours per annum

    Reporting \44\ Cost range \45\ Notes

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

    (1) Swap-by-Swap Reporting to 1.5-17....................... $300 to $3,500............... This assumes that

    SDR or Commission (Sec. Sec. ($208/hour).................. all exempt

    39.6(b)(1)(i) and (ii)). cooperatives

    will be

    reporting

    counterparties.

    (2) Electing Counterparty 5-15......................... $2,000-$5,900................ This assumes that

    Annual Reporting (Sec. ($390/hour).................. all exempt

    39.6(b)(1)(iii)). cooperatives

    will be

    reporting

    counterparties

    and will elect

    annual reporting

    for Sec.

    39.6(b)(1)(iii)

    information.

    (3) Updating Reporting 10-100....................... $3,400-$34,100............... This assumes that

    Procedures (Sec. 39.6(f)(3)). ($341/hour).................. all exempt

    cooperatives

    will have to

    update reporting

    procedures. This

    is a one-time

    cost in the

    first year.

    (4) Non-Reporting 1.0-100...................... $400-$39,000................. This estimate

    Counterparties (Sec. ($390/hour).................. assumes all

    39.6(f)(3)). exempt

    cooperatives are

    non-reporting

    counterparties

    for some swaps

    and each spends

    between five

    minutes to ten

    hours each year

    on this task.

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

    Estimated Reporting Total.. 18-232....................... $6,100-$82,500............... Sum of rows (1)

    (125 midpoint)............... ($44,300 midpoint)........... through (4).

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

    3. Information Collection Comments

    The Commission invites public comment on any aspect of the

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

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

    proposed collection of information is necessary for the proper

    performance of the functions of the Commission, including whether the

    information will have practical utility; (ii) evaluate the accuracy of

    the Commission's estimate of the burden of the proposed collection of

    information; (iii) determine whether there are ways to enhance the

    quality, utility, and clarity of the information to be collected; and

    (iv) minimize the burden of the collection of information on those who

    are to respond, including through the use of automated collection

    techniques or other forms of information technology.

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

    \44\ Hours estimates reflect total burden hours for the ten

    exempt cooperatives, rounded to nearest half-hour.

    \45\ The total burden costs are aggregate costs for the ten

    exempt cooperatives, rounded to nearest hundred dollars.

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

    [[Page 41952]]

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs (``OIRA'') in OMB, by fax at (202) 395-6566, or by

    email at OIRAsubmissions@omb.eop.gov. Please provide the Commission

    with a copy of submitted comments so that they can be considered in

    connection with a final rule. Refer to the Addresses section of this

    release 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 www.RegInfo.gov. OMB is

    required to make a decision concerning the collection of information

    between 30 and 60 days after publication of this release in the Federal

    Register. Consequently, a comment to OMB is most assured of being fully

    effective if received by OMB (and the Commission) within 30 days after

    publication.

    List of Subjects in 17 CFR Part 39

    Business and industry, Clearing, Commodity futures, Cooperatives,

    Reporting requirements, Swaps.

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

    amend 17 CFR part 39 as follows:

    PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    1. The authority citation for part 39 continues to read as follows:

    Authority: 7 U.S.C. 2 and 7a-1 as amended by Pub. L. 111-203,

    124 Stat. 1376.

    2. Amend Sec. 39.6, to add paragraph (f) to read as follows:

    Sec. 39.6 Exceptions to the clearing requirement.

    * * * * *

    (f) Exemption for cooperatives. Exempt cooperatives may elect not

    to clear certain swaps identified in paragraph (f)(2) of this section

    that are otherwise subject to the clearing requirement of section

    2(h)(1)(A) of the Act if the following requirements are satisfied.

    (1) For the purposes of this paragraph, an exempt cooperative means

    a cooperative:

    (i) Formed and existing pursuant to Federal or state law as a

    cooperative;

    (ii) That is a ``financial entity,'' as defined in section

    2(h)(7)(C)(i) of the Act, solely because of section 2(h)(7)(C)(i)(VIII)

    of the Act; and

    (iii) Each member of which is not a ``financial entity,'' as

    defined in section 2(h)(7)(C)(i) of the Act, or if any member is a

    financial entity solely because of section 2(h)(7)(C)(i)(VIII) of the

    Act, such member is:

    (A) Exempt from the definition of ``financial entity'' pursuant to

    paragraph (d) of this section; or

    (B) A cooperative formed under Federal or state law as a

    cooperative and each member thereof is either not a ``financial

    entity,'' as defined in section 2(h)(7)(C)(i) of the Act, or is exempt

    from the definition of ``financial entity'' pursuant to paragraph (d)

    of this section.

    (2) An exempt cooperative may elect not to clear a swap that is

    subject to the clearing requirement of section 2(h)(1)(A) of the Act if

    the swap:

    (i) Is entered into with a member of the exempt cooperative in

    connection with originating a loan or loans for the member, which means

    the requirements of Sec. 1.3(ggg)(5)(i), (ii), and (iii) are

    satisfied; provided that, for this purpose, the term ``insured

    depository institution'' as used in those sections is replaced with the

    term ``exempt cooperative'' and the word ``customer'' is replaced with

    the word ``member;'' or

    (ii) Hedges or mitigates commercial risk, in accordance with

    paragraph (c) of this section, related to loans to members or arising

    from a swap or swaps that meet the requirements of paragraph (f)(2)(i)

    of this section.

    (3) An exempt cooperative that elects the exemption provided in

    paragraph (f) of this section shall comply with the requirements of

    paragraph (b) of this section. For this purpose, the exempt cooperative

    shall be the ``electing counterparty,'' as such term is used in

    paragraph (b), and for purposes of paragraph (b)(1)(iii)(A), the

    reporting counterparty shall report that an exemption is being elected

    in accordance with paragraph (f) of this section.

    Issued in Washington, DC, on July 10, 2012, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Clearing Exemption for Certain Swaps Entered Into by

    Cooperatives--Commission Voting Summary and Statements of Commissioners

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

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers,

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

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule that would permit certain

    cooperatives to choose not to clear member-related swaps.

    One of the primary goals of the Dodd-Frank Wall Street Reform

    and Consumer Protection Act (Dodd-Frank Act) was to lower risk to

    the financial system by requiring standardized swaps between

    financial entities to be cleared.

    Congress provided that non-financial entities, such as farmers,

    ranchers, manufacturers and other end users, should be able to

    choose whether or not to clear those swaps that hedge or mitigate

    commercial risks.

    Cooperatives act on behalf of and are an extension of their

    members. Thus, I believe it is appropriate that those cooperatives

    made up entirely of members that could individually qualify for the

    end-user exception should qualify as well themselves as end users in

    certain circumstances.

    The proposed cooperative exemption is narrowly tailored, and

    extends only to:

    Swaps entered into with members of the cooperative in

    connection with originating loans for members; and

    Swaps entered into by a cooperative to hedge or

    mitigate risks associated with member loans or member loan related

    swaps.

    [FR Doc. 2012-17357 Filed 7-16-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: July 17, 2012